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787 dreamliner at o'hare

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A Boeing 787 lands at O'Hare International Airport in November. By mid-January the company's next-generation aircraft was grounded world-wide due to battery problems. 

Boeing's 'Dreamliner' fiasco a nightmare, but stock soars

by Aubrey Pringle
March 07, 2013

Bowing Dow graph

Graph courtesy of YahooFinance

After dragging on the Dow Jones Industrial Average in early February, Boeing shares helped pull the Dow to record highs this week.

It’s been a rough month for Boeing Co. in terms of public relations. The company’s newest, most high tech aircraft design was grounded due to overheating batteries, and the investigation to pinpoint the problem drags on as Boeing's airline customers – who can’t use the planes until the problem gets fixed - grow impatient.

Meanwhile, potential future passengers of the more fuel-efficient aircraft are being treated to a steady diet of news stories about the so-called ‘Dreamliner’ 787 jet.

Given the flood of bad press, it may seem surprising that financial indicators paint the picture of a company standing on solid ground. Boeing shares established 52-week highs three days in a row this week, including Thursday, when the stock closed up $1.97 at $81.05.

The rising stock indicates that investors do not believe Boeing’s Dreamliner issues will make a serious dent in the company’s overall direction and profitability. The majority of analysts surveyed by Yahoo Finance list Boeing shares as a buy.

Boeing posted a strong full-year profit in January, reporting a net income that slipped 3 percent in 2012 to $3.9 billion, or $5.11 per diluted share. The company currently forecasts its 2013 earnings per share at between $5.00 to $5.20, roughly matching last year’s results. Boeing’s price-earnings ratio, which was 15.87 as of Thursday afternoon, sits below the S&P 500 Index’s P/E ratio of 17.56, but is higher than other companies within the industry.

Although the company is best known for producing commercial jetliners, it also designs and manufactures military aircraft, satellites, missile defense products and space flight launch systems.

In a conference call on Jan. 30, CEO Jim McNerney first lauded the company’s excellent year, then acknowledged the elephant in the room: the grounded Dreamliner fleet.

“Our first order of business for 2013," he said, "is to resolve the battery issue on the 787 and return the airplanes safely to service.”

Company officials went on to assure analysts and investors that the Federal Aviation Administration’s 787 probe will have “no significant financial impact” in 2013.

That was weeks ago. And while the company's share price is up, Boeing continues to keep the 787 a top priority, sending commercial airplanes CEO Ray Conner to Japan and New York in an effort to restore the Dreamliner's image.

Although the Dreamliner crisis has already cost Boeing many millions of dollars in sales, the company expects to make that money back when it resumes delivery of the jet.

Boeing continues producing about one 787 a week, and is on track to be pumping out 10 a month by the end of the year. It costs more than $200 million to produce just one Dreamliner. The company has at least 800 orders in the pipeline, and finding parking spaces for the grounded jets has become difficult.

Analysts agree that getting 787s back in the air is critical to Boeing’s future.

“Should the 787 not be allowed to fly again, we would lower our fair value estimate, as the program does have a long-term positive impact on Boeing shares,” said Morningstar Inc. analyst Neal Dihora in an online report.

However, like most industry experts, Dihora assumes “an eventually positive outcome” for Boeing.

After two incidents in January involving a battery fire on one plane and a smoking battery on another, the Dreamliner fleet was grounded world-wide. This was the first large-scale jetliner grounding since 1979.

The lithium-ion batteries in the 787, which are common in cell phones and laptops, have a tendency to overcharge and overheat. Boeing chose to use them in the 787 to make the plane lighter and 20 percent more fuel-efficient.

At the time of the Jan. 16 grounding, there were only 50 787s in service, a relatively small percentage of the Boeing fleet. The 787 made up less than 8 percent of Boeing’s revenue from commercial aircraft in 2012.

Still, experts said fixing the planes won’t be cheap.

“There will be a very significant cost to fix the planes already delivered,” said Seth Kaplan, managing editor of Airline Weekly. “Aircraft engineering is a very precise art.”

It is also worth noting that the defense, space and security side of Boeing contributes to nearly 40 percent of the company’s overall revenue. Defense income remains consistent and reliable. Experts say sequester budget cuts in defense spending should not have a dramatic short-term impact on Boeing’s financial condition because most of the money Boeing receives for defense was appropriated years ago.

“As America's largest military-industrial asset, Boeing's defense science, engineering and technology interests in the national security interest will proceed unabated, as it generally has in the immediate past,” said Oliver McGee, an aerospace engineer who served as Deputy Assistant Secretary of Transportation during the Clinton administration.

The company is far and away the most profitable aircraft manufacturer in the world, with European Airbus its only serious competitor. The two are often depicted as neck-and-neck companies in terms of the number of planes ordered. While this is true, Boeing planes typically cost more than Airbus planes, so Boeing is worth significantly more as a company. Airlines are willing to pay the higher price for Boeing aircraft because the planes are generally cheaper to operate.

Boeing reported a record backlog of $390 billion as of year-end 2012, which equates to years of future production. The vast majority of the company's profits come from the steady production of its long-standing aircraft, not the 787. That being said, Boeing's future depends on the next-generation Dreamliner.

Boeing’s relationship with airlines is under some stress. The eight airlines that were operating 787s had to adjust flight schedules and remove routes as a result of the 787 grounding. Even before that, the Dreamliner was three years late when it entered service in 2011. The plane that was supposed to save airlines money has so far not lived up to the promise.

This week LOT Polish Airlines SA filed compensation claims against Boeing for the airline’s losses tied to the grounding. Experts said other airlines are likely to seek compensation as well.

“Publicly they have to show their shareholders that they’re upset and will demand compensation from Boeing,” Kaplan said. “But on the other hand they don’t want to worry their passengers who will soon fly this airplane.”

United Airlines is the only U.S. carrier that was flying the 787s. But disruption from the ground has been minimal: Its fleet of six Dreamliners makes up only 1 percent of the airline’s total carrying capacity.

Boeing presented its proposed battery fixes to the FAA and Japanese regulators two weeks ago. The agencies are in the process of evaluating the proposal and the FAA is expected to release an initial response within a week.

“We won’t allow the 787 to return to commercial service until we’re confident that any proposed solution has addressed the battery failure risks,” FAA officials said in a statement.

The proposed fix includes a heavy-duty containment box for the battery, which would have a vent system to release hot gases should the battery overheat. It would also place more distance between cells and add insulation to reduce the risk of short-circuiting.

Pending FAA approval, the company said it hopes to begin test flights soon.

Many experts attribute the 787 battery issue to “growing pains” that are typical of new technology. Boeing and other aircraft manufacturers have been through similar crises before.

“Boeing and Airbus trade issues every couple years,” said Kaplan.

McGee agreed that with innovative engineering, technical bugs are inevitable. He said investors recognize that and will continue to support the company because of the “future economic value” that can be gained from “technological leaps.”

Analysts surveyed by Yahoo Finance estimate the company’s revenue and sales growth will steadily rise from $81.7 billion in 2012 to $84.2 billion 2013 and $91.8 billion in 2014.

Boeing officials are no doubt eager to put the Dreamliner saga behind them. But even in the near-term, the company remains financially solid with steady support from investors.