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Malfunctions Plague the 787 Dreamliner

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All eyes have been on Boeing (NYSE: BA  ) in recent weeks, after technical malfunctions have afflicted its flagship 787 Dreamliner, the most advanced passenger jet ever. Problems with the plane's power systems and electronics have led to forced early landings, fires, even an explosion. On Friday, the Federal Aviation Administration launched a full-scale investigation into the safety of the 787, casting doubt on the reliability of the plane and threatening its success. It would be an exaggeration to say that Boeing's future rests solely on the success of the 787, but only barely.

The 787 Dreamliner is Boeing's most technologically advanced commercial plane, made up of lightweight and fuel-efficient carbon composites and using cutting-edge avionics, electronics and power systems, as well as custom-designed engines from industry leaders General Electric (NYSE: GE  ) and Rolls-Royce. Orders for the futuristic jet make up nearly two-thirds of the dollar value of Boeing's total $378 billion order backlog. Not only that, but the company also plans to adapt systems and components, including the GEnx jet engine, pioneered for the 787, into other jet models, in a bid to leverage the Dreamliner's massive development costs across multiple platforms.

Boeing CEO James McNerney has pointed to the advanced technology of the jet in explaining both the plane's troubled development program -- the first Dreamliner was delivered in 2011, three and a half years late and billions of dollars over budget -- and the recent technical malfunctions, which McNerney has referred to as "squawks." Recently, 787 customers Qatar Air and United Air Lines (NYSE: UAL  ) both complained of electrical problems in auxiliary flight systems that forced the airlines to ground flights prematurely. Other customers, including the Dreamliner's inaugural customer, All Nippon Airways, have noted more mundane problems such as oil leaks, cracks in a cockpit window, and cracked engine casings over the past several months.

The incident that probably sparked the FAA investigation occurred Monday, when a 787 operated by Japan Airlines reportedly caught fire while on the tarmac at Boston's Logan Airport. The problem was traced to a battery that had exploded, filling the cabin with smoke and causing a fire in the belly of the plane. All passengers and crew were already off the plane when the fire was discovered.

The battery is used only as an auxiliary power source when the jet engines are powered down and therefore presented no known danger to a 787 in flight. Like all the recent problems, therefore, this malfunction didn't seriously endanger passenger safety. However, having the words "smoke," "fire," "explosion," and "787 Dreamliner" all in the same sentence are bad for Boeing.

The FAA investigation is thought to be partially aimed at reassuring the public that the 787 is, in fact, safe, and that no 787s have been grounded from flight. However, if the investigation does turn up serious flaws with the component sourcing or manufacture of the Dreamliner, Boeing will have to rethink how it produces the planes. That would be a very unwelcome hurdle to overcome for a company already struggling to safely ramp up production quickly enough to meet demand. At Boeing's current production rate, it would take the company more than a decade just to deliver the Dreamliners that customers have already ordered. Boeing needs to be figuring out how to produce planes faster, not going back to the drawing board on how to produce them at all.

The news has depressed Boeing's share price, and that leaves investors at a crossroads. For those who believe that Boeing's technical malfunctions are just distracting glitches and don't represent a serious obstacle to the production ramp-up of the 787, this unpleasant news for Boeing creates a nice buying opportunity. Even though Boeing stock is near a three-year high, shares still look cheap, at only 13 times earnings compared with 15 times earnings for the S&P 500. If Boeing can resolve current malfunctions with the 787 and continue to increase production output, the sky's the limit for this planemaker.

As for me? I'm staying away. Boeing's current goal of nearly tripling 787 production from 3.5 per month in 2012 to 10 per month by the end of 2013 is already not ambitious enough to seriously make a dent in the company's 800-plus backlog for the jet. Worse, I'm not optimistic that the current slate of problems will be solved quickly and painlessly. The checkered past of the 787 development program makes me skeptical that these are small, isolated incidents: The test flight program of the 787 was fraught with major events including an engine blowout during ground testing and the emergency landing of a test plane after it caught fire mid-flight, leading to the grounding of the entire test fleet for nearly two months.

Boeing should be commended for blazing a trail in aeronautic innovation, but investors need a lot of faith to buy Boeing today. The FAA investigation will not only cast some short-term doubts about the safety of the program with Boeing's crucial airline customers, but it also may reveal more serious long-term problems in the company's supply chain and manufacturing process, which have long been serious concerns.

For Boeing, which operates as a major player in a multitrillion-dollar market, the opportunity is absolutely massive. However, the company's execution problems and emerging competitors have investors wondering whether Boeing will live up to its shareholder responsibilities. In this premium research report, two of the Fool's best industrial minds have collaborated to provide investors with the key must-know issues around Boeing. They'll be updating the report as key news hits, so make sure to claim a copy today by clicking here now.

Read/Post Comments (5) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 13, 2013, at 9:33 AM, flysafe904 wrote:

    On the morning of November 7th, 2006, Securaplane, supplier of the 787 main ship battery, experienced a devastating fire which destroyed an engineering facility. There's a revealing whistleblower lawsuit between them and a former employee who was their lead technician on the 787 battery charger hardware. Boeing executives are now in the position of not only defending the 787, but also defending their manipulation of the certification process while being fully aware of the dangers posed by the high risk path taken in bringing 787 online. It's a brilliant aircraft with a great future, but timely, decisive fixes are unlikely now that Boeing and FAA have locked arms to reassure the public. A safety stand down would be prudent, but would never be acceptable, The executives are betting on layperson's ignorance and they'll allay fears by citing statistics and engineering babblespeak. The Boston 787 battery fire took 40 minutes for a highly trained and well equipped fire crew to knock down-not an option available halfway across the ocean, at 39000 feet.

    Re-engineering the backup battery and main ship's battery lithium ion packs would need to include acceptable means of safeguarding the cargo hold, isolating the hardware and possibly even ejecting said hardware overboard, plus effectively venting combustion products-worse, there would still be a need to supply backup power to critical systems. Boeing is caught in a closed loop here, but there are acceptable workarounds, however, the timing will not be acceptable to anxious executives nor airlines who are on the wait list.

    Here and abroad, investigations are already underway; as more details emerge, criminal investigations are in order. The 'Fasten Seatbelt' sign is ON.

  • Report this Comment On January 13, 2013, at 5:53 PM, luislealq wrote:

    I don't agree with your assessment; all the malfunctions up to now have to do with components of the aircraft, not with the design of the aircraft itself; look at the reports: an engine leaking oil: that is a problem with the engine itself, so GE or RR have to look into that; the fuel leaks, caused by open valves: that is either a problem with the valve actuators (Parker Hannifin / Honeywell / Rockwell) or with the controlling software (Honeywell); and the exploding battery; this has more to do with quality control and testing than with design; they are still problems, at least two of them are major, but all are fixable; what this tells me is that the FAA has a big problem with testing oversight if all these problems were not detected during certification testing.

    I was more concerned about the cracks in the wings on the A380; THAT is a design problem!

  • Report this Comment On January 13, 2013, at 7:05 PM, ENGR4SUR wrote:

    One other thing to consider is the near empass Boeing has with their Engineering Union. Current word is that they are on the edge of a strike. It will be interesting to see how confident the FAA feels when Boeing Chief Engineer Delaney uses "any other Boeing Engineer" to assist with the audit as he (Delaney) has threatened. Also it will be interesting to see how the stock price will be affected when airplanes are not going out the door because certification engineers on strike. Just because you are an Engineer and worked ont eh Space Shuttle or a Missle design doesn't mean you can certify a Commercial Airplane. The Boeing execs need to wake up and settle with the Union before a lot of money and more face is lost at Boeing.

  • Report this Comment On January 14, 2013, at 2:40 PM, TMFCatoMinor wrote:

    Author here.

    flysafe904: That's interesting stuff, thanks for your comment. I'm inclined to agree with you.

    luislealq: To each his own, of course, but part of what has always worried me about the Dreamliner is component compatibility/quality issues. Boeing used to build planes predominantly in their own facilities from the ground up. With a complex machine like the 787, they decided to have component manufacturer provide pre-fabricated subassemblies. Boeing promised this wouldn't harm quality control, but it doesn't look like they're making good on that promise. If a third-party component fails and causes a 787 to go down, it's still a Boeing plane so it's still on Boeing's head.

    ENGR4SUR: I bet we'll ultimately see a deal, but I'd certainly prefer to see a friendlier relationship between Boeing's management and critical employees, yeah.

  • Report this Comment On January 16, 2013, at 10:48 AM, Mathman6577 wrote:

    The 787 field reliability issues are in line (i.e. no worse than) with other aircraft rollouts (including other Boeing and Airbus aircraft). Investors (and the general public) need to take a step back and not pay too much attention to the generally inaccurate media stories and blogosphere hysterics going on.

    Note: I have no ownership interest in Boeing or Airbus stock.

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