So, very high demand for aircraft. And yet, we’re here in a very supply-constrained environment. And it’s really important for the entire aerospace industry value chain to be financially healthy during this period, particularly as we go up in production rates. And so the way we see it is that suppliers, including Spirit, are experiencing inflation in materials, in logistics, in utilities, in labor, you just saw our increased labor costs, which are going to add about $80 million of cost per year. And on top of that, there’s heightened expectations on quality, on fluctuating schedules. So, all of these things are driving higher costs and programs, including on our Airbus programs, the A350 and A220, but also on our 787 program with Boeing. And these are important issues that the OEMs will need to address in the long-term and these are important conversations that we are having right now with our customers.
Seth Seifman: Thanks very much.
Operator: Thank you. Our next question comes from Robert Spingarn of Melius Research. Robert, please go ahead.
Rob Spingarn: Hi, good morning. Just a clarification and then a question on margins. But Tom, when you — just in terms of the vertical fin issues and the installed fleet, I think you and Mark have said, you haven’t establish that exposure? Is it because there isn’t any or we’re not there yet, the inspections haven’t occurred and you don’t have a way to do that. So that’s the clarification. And then, Mark, since March 2022, if we go back to the Investor Day back then, you talked about a 16.5% segment margin, free cash conversion is 7% to 9% of sales. When the 737 gets to 42, Tom, you just said you’ll exit the year at that level, but a lot of things have changed since then, interest rates, higher inflation and now this new IAM deal that’s $80 million more expensive. So, when we bake all that in, how do we think about your margins factoring those various things in?
Tom Gentile: Yes. So, on the vertical fin, let me say it this way, so it’s very clear. Based on the disposition as we understand it for the fleet, we do not expect that there will be any material financial impact to Spirit based on that disposition, okay. So, we don’t expect any material financial [Indiscernible]
Rob Spingarn: Because they don’t need to–
Tom Gentile: The way the disposition will work, we don’t expect there to be a financial impact, a material financial impact for Spirit. And that disposition is still being finalized, but that is our understanding of it as of right now, and that’s how we are communicating it. Okay. So, with regard to the second part of your question, the 16.5% margins, 7% to 9% free cash flow conversion when we get to 42 aircraft per month. Obviously, those were made before this hyperinflationary environment, before our new labor contract, before a lot of schedule changes, before a lot of different expectations in terms of how we build the aircraft. And so what we would say now is, yes, there’s more pressure. Once we get stabilized, we’ll revisit and determine what those projections will be for the future. But obviously, right now, there’s more pressure because those estimates were made before a lot of what we know today occurred.
Rob Spingarn: Okay. And then just on the $80 million, what size business does that contemplate? Is that where you are now? Is that a cost when things stabilize, what production volume will flex that $80 million?
Tom Gentile: It’s based on what we are currently at and what we project over the next four years of the term of the contract.
Mark Suchinski: Yes. So, Rob, that — it’s an average. Obviously, it’s a little lower today. We’ll be hiring more people over the next couple of years as rates go up, but that is an average over the four-year period. So, a little lower today, higher in year three, four.
Rob Spingarn: Okay. Thanks for clarifying. Appreciate it.
Mark Suchinski: Okay. Thanks Rob.
Operator: Our next question comes from Sheila Kahyaoglu of Jefferies. Sheila, please go ahead.
Sheila Kahyaoglu: Good morning guys and thank you. I just wanted to step back from the cash outflows today and maybe specifically focusing on the MAX contribution in 2023, 2024 and 2025. Obviously, work stoppages, pauses and IAM agreements change the free cash flow profile of the MAX in 2023. How do you think about that in 2024 and 2025 and how does the rate and inventory depletion progress?
Tom Gentile: Sheila, I’ll answer first and then let Mark provide a little bit of detail. But the first thing is, you’re right, in 2023, the work stoppage did impact us, and we lowered our guidance in terms of the deliveries for the MAX as a result. But the good news is that we do now have our contract in place with the IAM, and it’s for four years, and we’re satisfied with that. It’s a very competitive contract and it reflects the gratitude that we have to our IAM colleagues for their contributions. So, it impacted 2023 but as we go into 2024 and 2025, we have stability now on that front and we will be able to execute on our rate increases and the rates that we expect to be delivering. And those will be higher. So, as I said, we are already moving to 42 aircraft per month in terms of what where we’re cycling.
We’ll end the year at that and that will be the starting point for next year. And we do expect that we’ll have at least one rate increase in 2024 as well over the 42. So, if you lay that out, because the MAX is our biggest program, and deliveries are going to be going up is that will drive more free cash flow. And now we have a more stable environment with the contract in our rearview mirror.
