Betting on Boeing: 3 Headwinds, 3 Tailwinds

by Susan J. Aluise | June 13, 2013 4:00 pm

Betting on Boeing: 3 Headwinds, 3 Tailwinds

Looks like Boeing has been grounded just before takeoff.

After moving past the battery woes that grounded its 787 for more than three months, Boeing’s (BA[1]) stock was on a tear. Now, the aerospace giant hopes to showcase a pair of its flagship Dreamliners at next week’s critically important Paris Air Show. Reports of three new 787 incidents in as many days — glitches that apparently are unrelated to the original battery problem — could drag down the jet’s image at the worst possible time.

On Monday, ANA cancelled a flight when cockpit sensors indicated an engine problem. The next day, a Japan Airlines flight bound for Singapore returned to Tokyo’s Haneda airport after instruments suggested there was a problem with the aircraft’s de-icing system. And on Wednesday, an All Nippon Airways flight had to be cancelled after one of the 787’s two Rolls Royce Trent 1000 engines failed to start.

The new round of glitches this week is bad news — both for Boeing and the two Japanese airlines, which together operate 27 of the 50 Dreamliners currently in service. The planes are just beginning to get back into revenue service after a pair of battery fires grounded the global fleet from Jan. 16 to April 26.

Are the latest glitches simple “teething problems,” or could they threaten Boeing’s altitude? Here are three tailwinds and three headwinds:

Tailwinds

Stronger Commercial Aircraft Growth Forecast: Boeing this week revised its jetliner demand forecast upward to $4.8 trillion worth of aircraft over the next two decades — despite a softer air cargo market and weaker demand for jumbo jets. BA believes there will be global demand for some 35,280 new aircraft between now and the end of 2032 — the lion’s share of which will be for single-aisle, narrow-body jets.

Defense Deals Keep Coming: Despite a new era of frugality at the Pentagon, BA should continue to benefit from defense deals. Boeing got a big boost from this week’s announcement of a CH-47F Chinook helicopter contract with the U.S. Army worth $4 billion. And BA and Textron’s (NYSE:TXT[2]) Bell Helicopters unit on Tuesday announced a $6.5 billion deal[3] to build 99 V-22 Osprey tilt-rotor helicopters for the U.S. Navy.

Stock Momentum: Despite the triple turmoil of Dreamliner groundings, defense cuts and sequestration, Boeing shares have defied gravity in 2013 — the stock is up more than 32% since Jan. 1. Sometimes, it’s best not to fight the tape.

Headwinds

New 787 Troubles: Odds are good that this week’s Dreamliner glitches are simply minor, teething troubles as Boeing executives have explained occurs with every new model aircraft. But remember, perception can be a bigger problem than the problem itself. As the McDonnell Douglas DC-10’s trials proved more than 30 years ago, if the public perceives an aircraft to be less safe than other models, they might book away from that plane — and the airlines that operate it. Even worse, Japan’s pilots’ union[4] last week said some of its members are worried that they might not have sufficient warning to land the 787 safely if the lithium ion batteries were to overheat despite Boeing’s fix.

Hotter Airbus Competition: Make no mistake: Airbus has Boeing in its crosshairs right now. EADS’ (EADSY[5]) Airbus A350 XWB — competitor to both the Dreamliner and the 777 — will make its maiden flight on Friday. That means you can virtually count on the new jet to make a flyby at the Paris Air Show. Airbus rubbed a little salt into BA’s Dreamliner wounds back in February by dropping plans to use lithium ion batteries in the next-generation jet, opting instead for traditional nickel-cadmium technology. Construction also started this spring on Airbus’ massive new $600 million manufacturing facility in Mobile, Ala., which is expected to begin producing A320 narrow-body jets in 2015. EADS, which lost out to Boeing on an Air Force refueling tanker contract in 2011, believes having a major assembly line presence in the U.S. will help it win American defense business.

Tougher Regulatory Oversight: A Congressional aviation subcommittee on Wednesday held a hearing on the FAA’s certification process for the 787 with an eye toward boosting oversight of subcontractors and increasing overall accountability. Boeing’s chief 787 engineer and FAA’s associate administrator for aviation safety told the panel that the agency’s certification process worked as designed because no one was injured. But because the FAA has not yet determined the precise cause of January’s battery fires, the agency likely will be on the hot seat to make the certification process is tougher in the future.

Bottom Line

Next week’s Paris Air Show will give us some good intelligence on the effect of Dreamliner perceptions on Boeing’s operations. BA has already downplayed[6] the possibility of major sales announcements during the show – potentially making it easier to get a stock bounce if a big deal is announced. In recent years, Airbus has racked up scads of narrowbody jet sales, while wide-body models like the 777 have been Boeing’s bread and butter — giving BA a boost even with the Dreamliner’s delays.

Boeing is looking for a big hit with its next-generation 777X, so keep an eye out for wide-body orders in particular next week — a big week for the A350 XWB could be an early sign of turbulence for Boeing.

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

Endnotes:
  1. BA: http://studio-5.financialcontent.com/investplace/quote?Symbol=BA
  2. TXT: http://studio-5.financialcontent.com/investplace/quote?Symbol=TXT
  3. announced a $6.5 billion deal: http://www.bizjournals.com/philadelphia/news/2013/06/11/report-boeing-bell-land-65b-osprey.html
  4. Japan’s pilots’ union: http://www.nytimes.com/2013/06/05/business/japanese-pilots-worry-about-repaired-boeing-787-jets.html?_r=0
  5. EADSY: http://studio-5.financialcontent.com/investplace/quote?Symbol=EADSY
  6. already downplayed: http://online.wsj.com/article/BT-CO-20130611-703501.html

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