Buffeted by battery failures and the vagaries of politics, Boeing’s (NYSE:BA) troubled 787 Dreamliner faces powerful near-term headwinds — despite a fix the manufacturer submitted to the Federal Aviation Administration on Friday.
Monday marked the 40th day since the FAA grounded the airliner in the wake of lithium-ion battery failures on two 787s in January, leading to the worldwide grounding of the aircraft on Jan. 16. The 787 has now been grounded longer than any aircraft type in U.S. history, eclipsing the 37 days imposed on the McDonnell-Douglas DC-10 in 1979.
Boeing’s proposal is said to include ceramic insulation around the battery cells to guard against overheating, and placing the battery in a steel or titanium container and venting tubes to channel fumes outside the aircraft in the event of fire. If the FAA approves the fix, Boeing is optimistic that the 787 could be airborne as early as mid-April.
But that timetable is more dream than reality. Here’s why:
1. Lingering uncertainty. The U.S. and Japan are still investigating the cause of the battery fires on the Japan Airlines 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. It doesn’t help matters that rival EADS Airbus (PINK:EADSY) recently announced it would drop plans to use a lithium-ion battery on its new A350.
2. Other pervasive glitches. Days before the battery fires, the FAA kicked off a comprehensive review of all the 787’s critical systems with an eye toward resolving myriad glitches that had bedeviled the program in recent months. Most significantly, the FAA is reexamining the agency’s certification process — a potentially time-consuming review of federal safety and reliability checks.
3. There’s a lot on the line. Because the FAA is charged with promoting and regulating air travel, it sometimes struggles to balance those competing interests. In 1972, a design flaw caused the rear cargo door to blow off a McDonnell Douglas DC-10 operated by American Airlines (PINK:AAMRQ), collapsing part of the cabin floor and slicing through control surfaces. No one was killed in that event, but the National Transportation Safety Board asked FAA to require a redesign of the door so that it opened inward, not outward. Rather than requiring an immediate fix, then FAA administrator John Shaffer and McDonnell Douglas President Jackson McGowen agreed to inform airlines of the problem in routine service bulletins. In 1974, Turkish Airlines Flight 981 experienced exactly the same problem and crashed, killing all 346 passengers and crew. Given that history — and the potential for catastrophe if a plane catches fire in flight — I’d take the FAA at its word when it says the 787 won’t fly until the problem is fixed.
4. A pivotal power shuffle. NTSB Chairwoman Deborah Hersman is on the short list to replace departing Transportation Secretary Ray LaHood. In a news conference on the status of the 787 investigation earlier this month, Hersman said NTSB is looking at a number of potential causes including battery charging, the design and construction of the battery, and possible defects introduced during the manufacturing process. An FAA reporting to Hersman — known for her laser focus on safety issues — could be more likely to hold Boeing’s feet to the fire on a comprehensive Dreamliner fix.
5. Airlines are making other plans. United Continental (NYSE:UAL) last week removed the 787 from its schedule until at least May 12, while Poland’s LOT has scrapped Dreamliner service through this summer. On Monday, All Nippon Airways said it has canceled 1,700 flights scheduled to be serviced by the 787s throughout April and May.
Bottom line? When it comes to getting the Dreamliner back in the air, the stakes are high for Boeing and its shareholders. Regardless of what happens with sequestration, BA will take a hit from defense cuts; the stock has been such a stellar performer of late because of the rising fortunes of its commercial airplanes business.
At least 14 Dreamliners currently are parked near BA’s plants in Washington State and South Carolina, and 787s are rolling off the assembly lines at a rate of five planes a month. For every month the Dreamliner is grounded, Boeing is losing about $200 million in payments from airline customers. After three years of delays on the 787 program, BA is keeping its production lines running at a cost of about $1 billion a month.
Airlines are sure to demand millions in compensation for having to pull the planes out of service. In a worst-case scenario, BA could lose up to $5 billion in revenue, Jeffries analyst Howard Rubel said last month.
The turbulence is severe, but if Boeing can do a good job of taking care of all the Dreamliner’s problems now, the stock should avoid a crash landing. Airlines — in public, and at least for now — are standing behind Boeing, and the company has a cash cushion of about $13.5 billion to fall back on.
The biggest danger to Boeing is the next glitch … or the one after that. Once and for all, Boeing needs to convince airlines — and the flying public — that the Dreamliner has left all the production delays and “teething” troubles in its wake and is ready to soar into service.
As of this writing, Susan J. Aluise did not hold a position in any of the aforementioned stocks.