Boeing Still Faces Lots of Headwinds

Boeing (NYSE:BA) is hardly down for the count after Indonesia’s Lion Air inked a record $24 billion with EADS (PINK:EADSY) for 234 narrowbody Airbus jets, but Monday’s news that the low-cost carrier would split its formerly all-Boeing fleet comes at an inopportune time as Boeing seeks to buoy perception in the wake of its 787 Dreamliner troubles.

The lion’s share of Lion Air’s deal is for Airbus’ advanced fuel-efficient “new engine option” (neo) aircraft: the airline ordered 109 A320neo and 64 A321neo jets — 60 current-model A320s make up the difference. Lion Air expects to take delivery between 2014 and 2026.

It would be inaccurate to say that Airbus won the deal as a result of fallout from the battery problems that have kept Boeing’s 787 Dreamliner fleet grounded since Jan. 17. After all, EADS and Lion Air had been negotiating the deal for the past six months. The A320s are comparable to Boeing’s 737 series jets, not the Dreamliner — and Lion Air ordered $22 billion worth of next-generation 737s back in November 2011.

However, the Lion Air deal is a coup for Airbus in the two manufacturers’ battle for air supremacy and comes on the heels of two other major announcements for single-aisle jets last week. On Friday, Turkish Airlines announced plans to buy 117 Airbus narrowbody jets, 92 of them neos.

Last Thursday, Airbus snagged a deal for 102 planes — 100 narrowbodies and two A380 superjumbo jets — from Germany’s Lufthansa. Seventy of the Airbus jets will be the A320neo and A321neo — head-to-head competitors with Boeing’s next-generation 737NG and 737MAX. All told, Airbus has sold more than 2,000 neo jets and demand is surging as airlines seek greater fuel efficiency.

Boeing wasn’t left out entirely; it sold Lufthansa six widebody Boeing 777-ERs for its Swiss International subsidiary. And last week, U.K. low-cost carrier Ryanair (NASDAQ:RYAAY) ordered 170 Boeing 737s at a sticker price of some $15 billion. Although aircraft manufacturers often use discounts to lure buyers, Economist magazine speculates Boeing may have priced the order under $10 billion to win the deal.

But don’t weep for Boeing just yet. With the Federal Aviation Administration’s approval last week of Boeing’s plan to test and recertify its failure-prone lithium-ion battery design — the first step to getting the 787 back in the air — Wall Street is breathing a sigh of relief and the stock is trading near five-year record highs. Boeing is confident that the fix will solve the problems and says the plane could be back in service within weeks.

Boeing’s redesigned battery will insulate the individual cells to reduce overheating, use venting tubes to channel noxious gasses out of the plane and house the battery in a steel container to deny oxygen to any fire that might occur.

But the Chicago-based aerospace giant’s flagship jet is not cleared for takeoff yet. The FAA has said Boeing must conduct “extensive testing and analysis” to ensure that the fix will virtually eliminate the fire risk.

It remains to be seen whether Boeing and the FAA have the same definition of “extensive testing” — the company revealed Friday that it will conduct only a single test flight with the redesigned battery solution. The remainder of the testing will be performed on the ground in Boeing’s lab, company VP Ron Hinderberger told the Chicago Sun Times.

Bottom line? Neither the Airbus deals nor the Dreamliner debacle are likely to deal a death blow to Boeing stock over the long term, but these developments — combined with current high share prices — make this a bad time to initiate a new position.

Truth be told, BA stock has defied gravity since serious battery failures on two of the jets in as many weeks sparked the Dreamliner’s grounding three months ago, gaining more than 14% since then. But what goes up must come down … and the stock price inevitably will adjust to reflect the PR and financial issues associated with the 787 grounding, as well as the more intense competition from Airbus.

The biggest long-term danger to Boeing is not the Dreamliner debacle, but the impact of the 787’s problems on production of the next-generation 737MAX. Boeing is focusing a lot of time and attention on designing and testing the battery fix, which must then be incorporated into all 50 of the jets that have been delivered — and the 787s that are rolling off the assembly lines.

If airlines grow concerned about the possibility of delays in 737NG and 737MAX deliveries, that could throw more orders EADS’ way … or force Boeing to offer bigger discounts. There’s a lot more to play out in this story. If you’re in Boeing now, I think it might be a good time to take profits.

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

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