Boeing Hopes To Return 787s To The Skies Soon With Its Proposed Fix

by Trefis Team
+9.68%
Upside
124
Market
136
Trefis
BA
Boeing
Rate   |   votes   |   Share
    Quick Take
  • Boeing proposes solutions to the Federal Aviation Administration (FAA) regarding 787′s battery troubles
  • The company hopes for an early return of these planes to flight status as the longer the planes remain grounded the higher will be the compensation that it will have to pay to the airlines
  • The FAA will likely not rush through and take time before giving its approval to the proposed solutions

Boeing (NYSE:BA) has submitted a proposal to fix the 787 battery issues to the Federal Aviation Administration (FAA). The company now hopes for a quick return of its 787 Dreamliners to flight status. These planes were grounded by the FAA six weeks back after a battery on board of a 787 caught fire at Boston Airport and another 787 was forced to make an emergency landing in Japan due to smoke.

The FAA on its part will likely not rush through the approval of Boeing’s proposal as the issue relates to passenger safety. The agency issued a statement that said, “The safety of the flying public is our top priority and we won’t allow the 787 to return to commercial service until we’re confident that any proposed solution has addressed the battery failure risks.” [1]

Boeing on the other hand is facing mounting losses as manufactured 787s are not being delivered to their customers. The company had voluntarily ceased delivery of 787s to airlines with the FAA’s grounding directive that came in mid-January. At present, Boeing has 890 unfilled orders for the 787 Dreamliner. [2] Prior to the directive, the company was in the process of increasing the production rate of 787s to meet to their huge order backlog.

We currently have a stock price estimate of $82 for Boeing, approximately 5% above its current market price.

See our complete analysis of Boeing here

Boeing’s proposed solution for 787′s Li-ion battery

Boeing had introduced Li-ion batteries for the first time on any of its aircraft on the 787 in 2007 after getting FAA approval. These batteries which then were known to have fire risks were carefully evaluated by both Boeing and the FAA. But clearly the evaluations proved insufficient as a series of incidents with in-service 787s involved these Li-ion batteries.

The company has now proposed to introduce insulation between cells in the battery so that overheating in one cell does not get transferred to other cells. In addition, it has proposed to enclose the battery within a stronger stainless steel box which will have an exhaust pipe that will vent smoke or fumes outside the aircraft. It is now up to the FAA to verify and accept these changes, but the agency is not likely to approve these fixes before April.

Losses mount from 787′s grounding

In the meantime, the current operators of the 787 are facing huge losses. All Nippon Airways, which was the launch customer of 787, had received 17 of these planes till January and is suffering from an estimated $1.1 million in losses per day. [3] Air India, which currently has six 787s, is waiting to fly these planes on the lucrative India-Europe and India-Middle-East routes which is crucial for the financial turnaround of the carrier. Other current 787 operators – Japan Airlines, Ethiopian Airlines, Chile’s LAN Airlines, LOT Polish Airlines, United and Qatar Airways – too are facing losses from not being able to operate these planes. In all, Boeing delivered 49 787s to eight airlines by mid-January. [2] The company could end up paying compensations to these airlines and others that should have received their 787s by now.

In the first quarter so far, Boeing has been able to deliver only 3 787s compared to 23 787 deliveries in the fourth quarter of 2012. [4] If the flight status for the 787 is not restored by the end of March, Boeing’s first quarter revenues and profits will be severely impacted.

Additionally, this incident has hurt Boeing’s credibility. The seriousness of the incident can be gauged from the fact that the FAA issued a grounding directive for an aircraft type after nearly 34 years.

Airbus drops Li-ion batteries

Last week Airbus, the primary competitor of Boeing, announced that it will not use Li-ion batteries in its forthcoming Airbus A350 due to issues that caused the grounding of the 787. Instead it will use traditional Nickel-Cadmium batteries that are already in use in Airbus A380 and its other models.

Understand How a Company’s Products Impact its Stock Price at Trefis

Notes:
  1. Boeing’s porposed Dreamliner Fix Awaits US FAA Analysis, February 23 2013, www.bloomberg.com []
  2. Boeing’s 787 Orders and deliveries, February 25 2013, www.wikipedia.com [] []
  3. Boeing 787 Groundings, February 25 2013, www.wikipedia.com []
  4. Boeing’s fourth quarter 2012 deliveries, January 2 2013, www.boeing.com []
Rate   |   votes   |   Share

Comments

Name (Required)
Email (Required, but never displayed)
Be the first to comment!