Persistent problems with Boeing's new 787 Dreamliner could represent a sharp, unanticipated descent for Boeing's stock price—or it might be a great opportunity to get in cheap before the shares regain altitude.
The 787, which began flying commercially in 2011, has been plagued by start-up snafus, most of them routine, but a couple of them serious. After two incidents involving overheated battery packs—including one that caused a ground fire on a Japan Airlines 787, and another that set off warning lights on an ANA flight, leading to an emergency landing—the Federal Aviation Administration took the unusual step of ordering all 787s flown in the United States grounded until the problem is resolved.
United Airlines is the only U.S.-based carrier with any 787s so far, but foreign airlines with 787s in their fleets say they plan to follow the FAA's guidelines and park the jets. In addition to Japan Airlines and ANA, other carriers flying the 787 include Air India, Ethiopian Airlines, Qatar Airways, Chile's LAN and Poland's LOT.
The situation is becoming a worst-case scenario for Boeing, which now has to prove to the FAA that its lithium-ion battery packs—a novel element of the 787's design—are safe, or else come up with a new design that solves whatever the problem is. Lithium-ion batteries generate more energy than other batteries, which is why they're popular in cell phones and laptops. Boeing uses them in the 787 because the plane relies much more heavily on electric power and electronics than prior models.
But lithium-ion batteries also tend to get very hot, making them prone to "thermal events," including fires. Manufacturers have generally worked out the kinks with the smaller batteries used for everyday devices, but a jetliner requires much more powerful batteries. For that reason, the FAA paid special attention to the 787's two lithium-ion battery packs as Boeing was developing the plane. What may make the problem especially serious is that Boeing has already built special safeguards into the 787 to prevent fires related to the batteries, and contain them if they do occur. If those safeguards turn out to be inadequate, fixing them could be costly and time-consuming.
Boeing's stock has lost about 2.5 percent of its value since the start of the year, with some investors confident that Boeing will quickly fix the problem and go on to enjoy handsome profits from a highly efficient plane that allows airlines to serve lucrative long-haul markets at a cost that can be about 20 percent lower than with other jets. Boeing has a huge backlog of more than 800 orders for the 787, which could allow it to overtake Europe's Airbus as the world's biggest manufacturer of commercial jets.
But the 787's problems have now become more serious than anybody anticipated. Just five days before the FAA grounded the 787, Transportation Secretary Ray LaHood said, "I believe this plane is safe, and I would have absolutely no reservations about boarding one of these planes and taking a flight."
Some Wall Street analysts are changing their outlook on Boeing as well. S&P Capital IQ recently downgraded Boeing stock from buy to hold, based more on the bad publicity surrounding the 787 than on worries about its safety. "We are concerned that public relations concerns will overwhelm technical realities until a fix is identified or the FAA completes its review satisfactorily," S&P said.
In a statement, Boeing said it's working with the FAA to fix the problem quickly. "We are confident the 787 is safe and we stand behind its overall integrity," CEO Jim McNerney said.
Yet Boeing could still be on the hook for compensation if airlines can demand if the 787 turns out to be less reliable than promised, causing costly delays or a higher-than-expected rate of cancellations. Already one carrier, Poland's LOT Airlines, has said it will seek remuneration from Boeing for having to ground the two 787s in its fleet—and will pay for three other 787s on order only if technical problems have been resolved by the time those planes are due for delivery. Other airlines could do the same, denting Boeing's profitability.
Airlines are used to working out the bugs on new airliners, which usually entails non-critical issues that don't affect safety. With many redundancies meant to assure the airworthiness of modern jets, it's far more unusual for regulators to call a plane's safety into question. The 787 may still turn out to be a terrific plane, but at the moment it faces an uphill climb.
Rick Newman is the author of Rebounders: How Winners Pivot From Setback to Success. Follow him on Twitter: @rickjnewman.