Though Boeing Acts Calm, 787 Safety Concerns Could Hurt Earnings

by Trefis Team
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Safety concerns over 787 Dreamliner threaten to spill over to Boeing‘s (NYSE:BA) financial performance. The model which was introduced in to service in late 2011, after a delay of three years has witnessed a host of problems lately. In the most recent incident, an All Nippon Airways’ (ANA) Dreamliner pilot received battery-fault warning and detected smoke in the cockpit, forcing him to make an emergency landing. Though no passengers were hurt in the incident, ANA grounded its entire fleet of 17 787 Dreamliners. This Japanese airline was the launch customer of 787 Dreamliner.

This incident comes barely a week after a battery on board a Japan Airlines’ (JAL) Dreamliner caught fire at Boston Airport, and another of JAL’s Dreamliner was found to have a fuel leak. These events have prompted the U.S. Federal Aviation Administration (FAA) to order a review of the critical systems of 787, including design, manufacture and assembly.

These incidences come at a very crucial time for Boeing as it is in the process of increasing the 787 production rate to cope with their huge backlog. At the end of 2012, Boeing had 799 unfilled orders for the Dreamliner. [1] The company was set to raise the production rate under the 787 program from 5 per month at present, to 10 per month by the end of 2013. However, if safety issues prevent the planned hike in 787 production rates, then it will mean fewer 787 deliveries in the near-term. This in turn will impact earnings of the company.

We currently have a stock price estimate of $75.16 for Boeing, marginally below its current market price.

See our complete analysis of Boeing here

Precautionary measures by 787 operators

Up until now, Boeing has delivered around 50 787 Dreamliners to eight airlines – All Nippon Airways, Japan Airlines, Air India, Ethiopian Airlines, Chile’s LAN Airlines, LOT Polish Airlines, United and Qatar Airways. [2] In response to recent malfunctions which have included battery trouble, cracked windshield and fuel leakage, several 787 operators have taken precautionary steps. Japan Airlines suspended operations of all 7 Dreamliners in its fleet. India’s aviation regulator – Director General of Civil Aviation (DGCA), said that it will check the six Dreamliners in Air India’s fleet.

Boeing’s response

Boeing on its part has said that it is working with all the operators of 787 to resolve issues and that it has full confidence in the air worthiness of the 787 Dreamliner. In a statement on Jan. 11, the company said that it will fully cooperate with FAA to review the recent issues and critical systems of the Dreamliner.

It must be further mentioned that in general, new airplane models witness issues in their first year or two of service. Boeing’s 777 and Airbus’ A380 that were launched in the recent past, also witnessed problems during their initial days. Boeing echoed this by saying, “Like the 777, at 15 months of service, we are seeing the 787′s fleet wide dispatch reliability well above 90 percent.” [3]

However, such incidents when followed by a FAA review, erode customers’ (airlines) confidence in Boeing and threaten to pull down 787 delivery rates in the near-term. Further, reduced delivery rates could potentially bring Boeing down from its top position in annual airplane deliveries. A position it was able to occupy after a decade by replacing Airbus.

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Notes:
  1. Boeing completes 2012 with record-setting performance, January 3 2013, www.boeing.com []
  2. Boeing 787 Orders and Deliveries, January 18 2013, www.wikipedia.com []
  3. Boeing statement of FAA joint review of 787, January 11 2013, www.boeing.com []
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