Boeing’s Bottom Line Overcomes the Dreamliner

by Susan J. Aluise | April 24, 2013 4:55 pm

Boeing’s Bottom Line Overcomes the Dreamliner

Boeing (NYSE:BA[1]) shares performed solidly today, bid up 3% on news that the defense and aerospace giant’s net earnings rose 24% in the first quarter — and that’s despite the heavily publicized grounding of  the company’s flagship 787 Dreamliner for most of that period.

That’s particularly good news given last Friday’s Federal Aviation Administration’s approval of Boeing’s battery fix for the troubled aircraft.

Boeing reported core earnings of $1.11 billion ($1.44 a share) in the first quarter, up from $923 million ($1.22 a share) in the year-ago period. Revenue dipped to $18.9 billion from $19.38 billion a year earlier — no surprise given a weaker defense environment and a dip in commercial airplane deliveries. Adjusted earnings of $1.73 per share easily trumped analyst expectations of $1.49, while revenues just skated past projections for $18.8 billion.

BA also reaffirmed its full-year earnings guidance at between $6.10 and $6.30 per share for 2013, which would reflect 5% overall growth. Strong deliveries drove operating cash flow to more than $8 billion before pension contributions; it expects to deliver a total of 635-645 aircraft for the full year, including a total of 60 Dreamliners.

Commercial airplane revenue accounted for $10.7 billion in first-quarter profit, while operating margin grew to 11.4%. On the defense side, Boeing generated $8.1 billion in first-quarter revenue, delivering 44 aircraft and one satellite. Higher deliveries on the Apache C-17 and P-8, as well as growth in satellite volume, boosted revenue in the quarter.

Despite Boeing’s earnings beat, CEO James McNerney spent a lot of time fielding Dreamliner-related questions from analysts and the media during the company’s earnings call. The FAA signed off on Boeing’s multi-faceted fix last Friday, and the company says work on most customer fleets will be completed by mid-May, enabling the jet’s return to service.

McNerney said Boeing was able to “absorb” the research and development, root-cause investigation and the cost to retrofit customer fleets and new production aircraft by re-shifting people and priorities to focus on fixing the Dreamliner. The 787 fleet has been grounded since Jan. 16, far surpassing the 37-day grounding of the McDonnell Douglas DC-10 after the crash of American Airlines Flight 191 in 1979.

He declined to provide specifics when asked how much the Dreamliner problem has cost his company, characterizing it as “ minimal” when spread over the total accounting block of the 787 program’s more than 1,100 planes. BA already has begun installing ceramic insulation around the battery cells to guard against overheating, places the battery in a steel container to contain any potential problem from spreading into the adjacent electrical bay and uses venting tubes that would channel fumes outside the aircraft in the event of fire.

McNerney said that after “200,000 hours of engineering work,” Boeing has begun installation of the new battery system in 10 fleet aircraft and nine production airplanes. BA, which suspended deliveries of the jet on Jan. 17 while continuing production, plans to resume deliveries in mid-May. The company still believes it can meet its target of delivering 60 Dreamliners this year.

BA scored another win on Wednesday when Japan’s safety board approved the 787 fix[2], according to The New York Times. This clears the way for repairs to begin on jets owned by Japan Airlines and All Nippon Airways; the two airlines operate 24 of the 50 Dreamliners that have been delivered to customers worldwide.

However, safety investigators in the U.S. and Japan are still investigating the cause of the battery fires on the JAL and ANA jets — and the investigations are considering factors beyond mechanical flaws in the battery, to broader problems with the charging or electrical systems. It could be months before the investigations are completed.

That’s why BA investors should keep an eye on 3 possible headwinds:

  1. Investigators still don’t know what caused the fires. If the Dreamliner develops further problems with its electrical system now that regulators have given the battery a clean bill of health, the plane’s reputation could take a bigger hit.
  2. Compensation could be costly. McNerney was vague when asked about the impact of potential compensation claims by customers that have had to remove the planes from revenue service for months after the grounding. While he said BA has “no contractual obligations,” he noted there are areas where they can “work with our customers to ensure that the disruption doesn’t hurt their results and their operation more than it needs to.” One way or another, that’s bound to boil down to a chorus among carriers to “show me the money.”
  3. ETOPS Limits Could Dilute Dreamliner’s Value. Although the 787 is virtually back in the air now, it still could face limits on flights that take it more than three hours from a diversion airport. FAA Administrator Michael Huerta told a Senate Commerce panel last week that the agency would address the 787’s extended twin-engine operations (ETOPS) certificate separately from the battery approval. Prior to the grounding, the 787 was cleared to fly 180 minutes from the nearest airport; “the question for us is whether we would return it to that level,” Huerta said. Most customers bought the plane for transoceanic flights and need ETOPS; Boeing had expected that the plane would soon be certified to fly five-and-a-half hours from a diversion airport — something that the FAA is not planning to consider in the immediate future.

Bottom Line

The earnings news — combined with regulators’ approval of the 787-battery fix in the U.S. and Japan — is great for Boeing, and its cost-cutting efforts (including recent layoffs[3]) have kept the company strong.

But while airlines have signaled strong support for the 787, Boeing must ensure going forward that it has worked out all the major glitches in the troubled program to ensure that the Dreamliner — and shareholder returns — keep soaring.

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

Endnotes:
  1. BA: http://studio-5.financialcontent.com/investplace/quote?Symbol=BA
  2. Japan’s safety board approved the 787 fix: http://www.nytimes.com/2013/04/25/business/boeing-earnings-top-estimates.html
  3. including recent layoffs: http://www.bizjournals.com/seattle/news/2013/04/18/boeing-to-lay-off-700-engineers-in-2013.html

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