Boeing and Airbus Have a Perception Problem

by Susan J. Aluise | February 13, 2012 11:13 am

Boeing and Airbus Have a Perception Problem

In the wake of design flaw discoveries in the EADS Airbus A380 superjumbo and Boeing’s (NYSE:BA[1]) 787 Dreamliner, questions are emerging about the reliability of the new generation of aircraft that will be airlines’ workhorses of the future. Time will tell how both models hold up against their peers in the important area of safety. But public perceptions are as important as reality, and too much buzz about too many problems could cause these companies’ shares to lose altitude.

European air safety regulators last week ordered new inspections of all of the 68 A380[2] jets in service after new cracks were discovered in critical wing components. EADS officials say the cracks, which were caused by stresses in the wing manufacturing process and the specific aluminum alloy used for the wing, do not create any flight safety issues. Fixing the cracks will cost as much as $100 million euros, according to a report in Sunday’s Der Spiegel[3].

Adding to Airbus’s bad PR week, a Qantas A380 with 435 passengers on board had to abort two attempted takeoffs from London’s Heathrow Airport due to “steering problems” on Sunday. The third time apparently was the charm for the superjumbo jet, which after multiple checks by engineers took off for Singapore without further incident. The most serious glitch in the A380’s short life involved a catastrophic engine failure 15 months ago that forced an emergency landing.

Archrival Boeing has had its share of production snafus. It’s now working to correct improperly applied “shims,” which cover tiny gaps in the support structure of the 787 Dreamliner’s rear fuselage. This has caused sections of the carbon-fiber-based fuselage to delaminate. The problem was discovered in sections assembled in Boeing’s South Carolina plant[4] — the nonunion facility that had been the subject of a National Labor Relations Board complaint that Boeing settled last year.

This most recent 787 glitch follows a December report that a routine FAA inspection of three of the composite-fiber jets discovered incorrectly installed wiring and auxiliary power units (APUs), which wouldn’t start. APUs typically provide startup power to an aircraft’s main engines.

In the white-hot competition for global aircraft manufacturing preeminence, the stakes are high for the two manufacturers’ highest-profile programs. Factory and design flaws have plagued Boeing’s 787 and 747-8 programs, while EADS has had trouble with the A380 and A350. Boeing and EADS are feeling delivery pressure from their airline customers who need these newer, more fuel-efficient aircraft in service in  to boost their competitiveness.

Some observers wonder if the intense competition is pushing design and manufacturing processes too hard and too fast, prioritizing expedited deliveries over exacting attention to detail. And the competition will only get tougher as China’s Comac prepares to launch new single-aisle, narrowbody jets that target Boeing’s 737MAX and Airbus’ A320neo offerings.

But first, a reality check: Commercial airliners are safer today than at any time in history. And many aviation experts have reasonably attributed these myriad A380 and 787 glitches and delays to “teething problems” — the inevitable challenges that every new aircraft must work through as it comes into service. And both Airbus and Boeing have been vigilant in responding quickly and comprehensively to all glitches as they’ve been discovered.

But air safety is as much an issue of reputation and perception as it is of cold, hard engineering. If the traveling public thinks an aircraft model is prone to mechanical glitches — or that it’s less safe than other planes — that perception can alter passenger preferences and airline sales.

The epic test case for this theory was the McDonnell-Douglas DC-10, a three-engine, widebody jet that went head-to-head with Boeing’s 747 and Lockheed’s (NYSE:LMT[5]) L-1011 for airlines’ business back in the 1970s. The DC-10 launched with American Airlines (PINK:AAMRQ[6]) and United (NYSE:UAL[7], now United Continental) in 1971, which fell in love with the new jets because they could carry up to 380 passengers more economically and comfortably than a 747.

But the rush to market resulted in serious design flaws in a cargo door that the company knew about in 1972, but did not fix. Two years later, that glitch caused a Turkish Airlines DC-10 to crash in France, killing 346. After that, public distrust clung to McDonnell Douglas like a shroud of despondency, and when an American Airlines DC-10 lost an engine on takeoff and plunged into a field in Chicago in 1979, the manufacturer bore the full brunt of the blame.

Even though the FAA would later determine that an unauthorized American Airlines maintenance procedure was to blame, McDonnell Douglas stock fell 32% over the 10-day period following the crash. In the ensuing frenzy, passengers refused to fly on DC-10s, airlines canceled pending orders for the aircraft and McDonnell Douglas had to launch an ad campaign aimed getting passengers back. In a 1986 study, economist Andrew Chalk noted that the Chicago crash alone directly cost McDonnell Douglas shareholders $200 million[8].

Bottom Line: While Boeing insists the latest glitch won’t further delay 787 deliveries, its airline customers aren’t convinced. Japan Airlines (PINK:JALFQ[9]), which was expecting to see its first 787 by the end of this month, is now discussing possible delivery in March. Air India last week raised its demand for compensation over extensive 787 delivery delays to $1 billion. Boeing continues to negotiate with both carriers.

United Continental, which counted on getting six Dreamliners this year, likely will feel the impact of further delays. Delta (NYSE:DAL[10]), which also has 787s on order, has pushed back delivery of those jets to 2020.

Don’t expect U.S. legacy carriers like American, United, Delta and US Airways (NYSE:LCC[11]) to embrace the mammoth A380 anytime soon because they just don’t make economic sense for domestic routes. That goes double for budget carriers like Southwest (NYSE:LUV[12]) and JetBlue (NASDAQ:JBLU[13]).

In terms of sheer order volume, Airbus won 2011 with 1,419 orders and 534 deliveries, compared to 805 orders and 477 deliveries for Boeing. Earlier today, as the Singapore air show is about to get underway, Boeing forecast that the world’s airlines would need 33,500 new planes[14] worth $4 trillion by 2030. Even if that forecast turns out to be accurate, too much talk about design flaws, production glitches and new delays would be bad for business — particularly a business that requires public trust to stay airborne.

As of this writing, Susan J. Aluise did not hold a position in any of the stocks named here.

Endnotes:
  1. BA: http://studio-5.financialcontent.com/investplace/quote?Symbol=BA
  2. new inspections of all of the 68 A380: http://investorplace.com/2012/02/wing-cracks-ground-airbus-a380s-worldwide/
  3. Der Spiegel: http://www.manager-magazin.de/unternehmen/industrie/0,2828,814762,00.html
  4. Boeing’s South Carolina plant: http://investorplace.com/2011/11/boeing-big-777-sale-ba-stock/
  5. LMT: http://studio-5.financialcontent.com/investplace/quote?Symbol=LMT
  6. AAMRQ: http://studio-5.financialcontent.com/investplace/quote?Symbol=AAMRQ
  7. UAL: http://studio-5.financialcontent.com/investplace/quote?Symbol=UAL
  8. McDonnell Douglas shareholders $200 million: http://business.highbeam.com/411167/article-1G1-7606823/market-forces-and-aircraft-safety-extension
  9. JALFQ: http://studio-5.financialcontent.com/investplace/quote?Symbol=JALFQ
  10. DAL: http://studio-5.financialcontent.com/investplace/quote?Symbol=DAL
  11. LCC: http://studio-5.financialcontent.com/investplace/quote?Symbol=LCC
  12. LUV: http://studio-5.financialcontent.com/investplace/quote?Symbol=LUV
  13. JBLU: http://studio-5.financialcontent.com/investplace/quote?Symbol=JBLU
  14. airlines would need 33,500 new planes: http://investorplace.com/2012/02/boeing-airlines-will-need-33500-new-planes-by-2030/

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