Boeing seeks 'quickest path to quality' with Spirit AeroSystems buy

Boeing (BA) has confirmed it is in talks to acquire Spirit AeroSystems (SPR) amid its 737 Max safety woes, per the Wall Street Journal.

S&P Global Ratings Director Ben Tsocanos and Bloomberg Intelligence Airline Analyst George Ferguson join Yahoo Finance Live to discuss the potential acquisition.

Ferguson says that if the 737 Max challenges persist, buying Spirit provides the "quickest path to quality" by overhauling Boeing's supply chain oversight. While competitive hurdles arise, he believes integrating Spirit is "absolutely critical" to fixing quality control issues.

However, Tsocanos notes a big "obstacle" regulators may see is from Boeing insourcing key parts it sells to rivals today. Bringing Spirit in-house may "simplify the quality control process," for Boeing's quality control but raises conflicts of interest.

For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.

Editor's note: This article was written by Angel Smith

Video Transcript

BROOKE DIPALMA: We're going to go a little company specific here, because shares of Spirit AeroSystems soaring today at the close here, up 15% after news that Boeing is in talks to buy the parts supplier, that both companies, they're struggling to address persistent quality control issues. So joining us to discuss this, we've got Ben Tsocanos, S&P Global ratings director, and George Ferguson with Bloomberg Intelligence. And George, I want to start with you. Just give me your reaction to this news. What do you think?

GEORGE FERGUSON: Yeah. So I think it's probably, you know, Boeing management looked deep inside Spirit, thought about how they were going to fix the quality problems with the 737. You know, really, the path to higher profitability, higher cash flow of Boeing is driven all through 737 build rates rising. And I think they thought that the quickest path to quality and a higher build rates was through buying Spirit AeroSystems. And so that's what they're in the middle of doing, it sounds like.

JULIE HYMAN: Ben, I want to get your take on this as well. And also, what the chances are that regulators, who are already separately looking into each of these companies, would approve a deal like this?

BEN TSOCANOS: Well, I think it's a little early, but I would say that the biggest obstacle that's been, I think, discussed is the fact that Spirit also makes products for competitor Airbus. So I think they would have to resolve that issue. I would guess that if it's gotten to this point, then some thought has been given to that and that there's some path to resolving that.

BROOKE DIPALMA: What do you make of-- staying with you here. What do you make of Boeing continuing to search for options in terms of partnerships, acquisitions? Is this an effort to shore up their supply chain?

BEN TSOCANOS: Well, I think that the spin-off of Spirit has been part of the-- has been an obstacle, I think, to improving production over the last-- certainly over the last year. So I think that it's an indication of the limits of outsourcing. And I think that by bringing Spirit back into the insourcing of the company, I think that it would certainly simplify the quality control process.

JULIE HYMAN: George, you know, so does this-- it seems like it sort of increases degrees of complexity though, if they're trying to do this deal at the same time that they're trying to solve these issues. So does it, I mean, is it a sort of walking and chewing gum at the same time? Or does it, to the other point, kind of help solve that problem?

GEORGE FERGUSON: So, I don't think Boeing management would undertake this if they didn't think it was absolutely critical to getting quality right in the supply chain. And so, there is, I think, a layer of complexity because they're in the middle of trying to do a deal here. But I do think their ability to go into their major supplier for the 737, and make sure that processes are done correctly, make sure training and oversight is done correctly, outweighs the challenge of having to manage a transaction.

I mean, I agree. I think they'll need to get rid of some of the Airbus business. I think there's probably investment bankers already working on selling some of those businesses off to other companies that may want to add it to their portfolio. But again, I don't think Boeing management would have done it unless they thought this was absolutely the most likely path to get them that higher build rates sooner.