Why Boeing had to buy back a supplier it sold off in 2001
In 2000, just three years after acquiring St. Louis defense contractor McDonnell Douglas, Boeing announced plans to spin off its local fabrication business – and about 1,500 jobs – to a British company called GKN PLC.
Analysts at the time applauded the decision to outsource the work, saying it would free Boeing to focus on its “core competencies” – and become more competitive.
On April 26, that costcutting strategy appeared to come full circle when Boeing announced it was buying back GKN’s St. Louis-area operations and saving 550 jobs, nearly all of the 600 employees who remain.
Boeing had little choice but to work out a deal.
In February 2022, GKN Aerospace – the sole supplier of key parts for Boeing’s F-15 and F/A-18 fighters – announced it would close its Hazelwood plant by the end of 2023, saying it was unprofitable.
Soon after the announcement, GKN proposed a sale, but Boeing passed on a deal.
Then Boeing sued.
Its lawsuit, which ended up in federal court, accused GKN’s parent company, Melrose Industries, of inadequately capitalizing GKN and trying to gouge it on a sale price, knowing that the plant produces parts for fighters that Boeing can’t get anywhere else. GKN had agreed to produce certain parts for Boeing’s fighters, and it had to honor those contracts, the planemaker argued.
While the companies were battling in court, Boeing was lining up new
business for the latest versions of the F-15 and F/A-18.
A new U.S. order and a major pending one from a key ally may have added urgency to Boeing’s attempt to come to terms with GKN.
In March, Boeing secured a $1.3 billion contract from the U.S. Navy for 17 new F/A-18s. Rather than winding down next year, the order extended the life of the St. Louis County manufacturing line into 2027.
Meanwhile, President Joe Biden’s administration is pushing an $18 billion deal with Israel for up to 50 F-15EX fighter jets, one of the largest arms deals with the country in years.
“It shows that Boeing expects it will be selling more F-15EXs,” Loren Thompson, a longtime defense analyst, said of the potential GKN sale. “It’s clear that Boeing thinks there’s an ongoing international market, and
therefore this could be a long-term business.”
With those orders lining up, Boeing couldn’t afford the supply chain complications of a GKN plant closure in Hazelwood.
Delivery of its F-15EXs to the U.S. military are already running at least a year behind, according to a U.S. Government Accountability Office report. Continued delays could breach a military procurement law, triggering the need for special certifications from the Secretary of Defense to continue the program, according to a report from Air & Space Forces Magazine.
Plus, Boeing is beginning a $1.8 billion expansion of its facilities surrounding St. Louis Lambert International Airport as competition between it and rival Lockheed Martin heats up to build the U.S. military’s next generation fighter. A major disruption on the military side of Boeing’s operations
could have hampered those efforts and drawn more unwelcome publicity for the company, which is already struggling to manage the fallout from equipment failures on its commercial planes.
GKN knew it had leverage over Boeing. And it was willing to use it, according to Boeing’s lawsuit.
GKN makes more than 1,000 kinds of parts for Boeing’s fighter jets, some of them highly complex. For certain components, it may take years to line up other suppliers, Boeing’s attorneys wrote. For some materials, such as “superplastics” and “flightcontrol surfaces” used in the F-15 and F/A-18 fighters, GKN was the only manufacturer, Boeing claimed in legal filings.
A few months after Boeing leaders first learned of the closure plans, according to its lawsuit, a GKN executive approached Boeing in May 2022 about acquiring the factory. Boeing’s attorneys cast the discussions as an attempt by Melrose to use the facility’s insolvency to “force Boeing to acquire the company on unfavorable terms.”
GKN even brought other Boeing plants into the fight.
When it filed its lawsuit in December 2022, Boeing said GKN threatened to cut investment in another factory outside Wichita, Kansas, that supplied parts for Boeing’s commercial 787 and 737 planes if Boeing took legal action over GKN’s St. Louis fighter contracts. Boeing said former GKN Aerospace CEO David Paja warned that legal action from Boeing over the Hazelwood plant would “leave no option but to cease any further funding into the (Kansas) site.”
The litigation between the two companies dragged on for more than a year. The risk to Boeing seemed to heighten in March, when Boeing requested an emergency hearing to stop GKN from scrapping essential parts for F/A-18 and F-15 production. GKN ultimately backed down.
Had Boeing not spun off the fabrication unit a generation ago (the deal was announced in 2000 and closed in early 2001), it may have avoided this scenario.
Still, there’s a logic to outsourcing in order to cut back on costs and manufacturing footprint, said Jeff Windau, an analyst with Edward Jones.
“There’s just a lot of cost associated with having all of that under your roof,” he said.
But Boeing’s recent problems with suppliers may be forcing the company to reassess.
Boeing’s dependence on GKN is similar to the more headline-grabbing problems its commercial operation has with supplier Spirit AeroSystems, said Richard Aboulafia, a longtime aerospace analyst and managing director of AeroDynamic Advisory. Boeing is now in talks to acquire Spirit, another former subsidiary, while propping it up with advance payments for orders.
“Basically 20 years ago some genius at Boeing decided that it should all be about outsourcing and return on net assets, which means more outsourcing, and return on invested capital, which means, oh let me think, more outsourcing,” Aboulafia said. “So you sell off factories, and it works fine until it didn’t.”
GKN, meanwhile, faced its own internal changes. Melrose, a British turnaround firm, took control of the company through an $11 billion hostile takeover in 2018. It set about breaking up the old British manufacturing conglomerate, completing the separation of GKN Aerospace from GKN’s automotive unit last year.
Melrose planned to shut down some U.S. factories and consolidate operations in Texas. GKN and Melrose said in court filings that business at its Hazelwood plant was “unsustainable” and “the unforeseen loss of two major programs with non-Boeing related customers” also impacted the factory’s viability.
Boeing is being forced to take some essential manufacturing functions back in house in part because aerospace suppliers are in a tough business themselves, Aboulafia said. Spirit’s financial problems are well documented, and Aboulafia said GKN Aerospace appears to be “retrenching.”
Outsourcing the work to GKN “doesn’t look like a good move in the rearview mirror,” Aboulafia said. And from the supplier’s standpoint, “it’s also very, very hard to make a go of it.”
Retrenching or not, GKN and Melrose had the leverage they needed to bring Boeing to the table on the Hazelwood plant.
The companies didn’t disclose financial terms.