Boeing (BA) got some bad news this week, as Japan Airlines (JAL) decided to buy jets — 31 next-generation A350s at a cool $9.5 billion list price — from rival Airbus (EADSY) for the first time.
It’s difficult to view the announcement as anything other than a shot across Boeing’s bow. After all, Airbus is positioning the A350 — which took its maiden flight days before the Paris Air Show in June — as a head-to-head competitor with Boeing’s 787 Dreamliner and the smaller versions of its 777.
Plus, the deal signals that Airbus is gaining a foothold in a region that is not just traditionally counted on to be “Boeing Country,” but that is also the hottest commercial aircraft market in the world. Boeing’s own 2013 Current Market Outlook forecasts the Asia-Pacific region will lead the world in new commercial airplane deliveries over the next 20 years.
In the wake of frugal U.S defense spending and the recent loss of a slam-dunk fighter jet contract to South Korea, Boeing simply can’t can’t afford to leave that money on the table.
On top of that, the deal’s most ominous signals go beyond the money — although its hardly chump change. Instead, they stem from the perception surrounding Boeing’s flagship 787 Dreamliner. The persistent impression seems to be that it is not quite up to scratch — and that the time and attention needed to get the revolutionary carbon-composite jet’s reliability record up to industry standards may disrupt production and delivery targets on other new aircraft launches.
Besides, no one can blame Japan Airlines for evaluating other options considering a fire onboard a JAL 787 in January was the first of two lithium-ion battery problems that led to the model’s four-month grounding a week later.
And although Boeing installed a fix for the battery problem and the planes were allowed to return to service in late April, unrelated glitches have kept coming. To start, a fire apparently sparked by an emergency locator beacon onboard a parked Ethiopian Airlines 787 at London’s Heathrow Airport in July poses a major (and costly) repair challenge for the jet’s innovative carbon-composite fuselage.
On top of that, Norwegian Air Shuttle summoned BA’s senior management to Oslo to explain recent glitches with its two new Dreamliners. One of the planes was grounded due to cockpit oxygen supply problems, while another Dreamliner had to leave behind 70 ticketed passengers in New York because a hydraulic pump problem caused a weight limitation.
Oh, and LOT Polish Airlines is clamoring for compensation for a raft of 787 glitches this year, including a recent antenna malfunction that caused a 787 en route from Toronto to Warsaw to divert to Iceland.
As a result, Randy Tinseth — VP of Marketing for Boeing’s Commercial Airplanes Group — recently admitted that his company was working to make the Dreamliner more reliable. “Today, the reliability of the 787 is better than 95 percent,” he said at a news conference in Chile. “It’s not as good as we’d like to see it. It’s not as good as our customers would like to see it.”
That’s an understatement. All new aircraft models have “teething problems” at the beginning, but the problem-plagued 787 program must move past these challenges fast, or risk a serious erosion in customer goodwill — and eventually, shareholder value.
For the cherry on top, the federal government’s shutdown could create further 787 delivery delays for Boeing in the short run. While the Federal Aviation Administration allows Boeing to perform many pre-delivery certification activities on aircraft produced in its union plant Washington, that is not the case for the 787s produced in the company’s non-union plant in South Carolina.
And the FAA employees who perform those certification functions — as well as the employees who would be certifying the new 787-9 model being tested in Washington State — are furloughed for the most part. Only 15% of roughly 5,000 agency safety inspectors have been recalled.
It’s no secret Boeing has delivered a winning year for investors. Year-to-date, Boeing stock is up a sizzling 51% despite defense cuts, the federal government’s sequester and the four-month grounding of its flagship 787 Dreamliner after a pair of battery-related fires in January.
And shares have been hanging in there lately because the company’s fundamentals are solid and the global aircraft demand forecast looks amazing in Asia.
But the bottom line is that the Dreamliner’s persistent problems — combined with airline demands (or defections) — are like ice on an airplane wing. It doesn’t add much weight and it may not be visible, but it can disrupt airflow enough to make the plane drop like a rock.
Investors with big profits in the books would be smart to takes some now.
As of this writing, Susan J. Aluise did not hold a position in any of the aforementioned stocks.