Boeing's Dreamliner Looks More and More Like a Nightmare

After placing a big bet on airlines' demand for fuel-sipping planes, Boeing (NYSE: BA  ) has had trouble executing on its vision. The 787 Dreamliner was designed to consume 20% less fuel than similarly sized planes, while offering extra range to support longer routes. Yet the company delivered the first Dreamliner three years behind schedule due to difficulties with development and organizing a global supply chain.

However, once the Dreamliner successfully entered service in late 2011, most investors thought Boeing was in the clear. While some airlines complained about the delays, most were just glad to get their hands on this revolutionary plane. After a long period of underperformance, Boeing stock has beaten the market handily since the Dreamliner was introduced in September 2011.

BA Chart

Boeing Stock Chart, 9/26/11-present, data by YCharts

However, quality issues are starting to seriously threaten Boeing's reputation. There have been multiple unexplained fires on board Dreamliners this year, including one just last week. While regulators have had a measured reaction to the most recent Dreamliner fire, the model's poor track record is becoming a cause for concern. With top rival Airbus soon releasing its own new fuel-efficient widebody -- the A350 -- Boeing needs to repair its reputation for reliability right away.

Fire on board
In January, two different Dreamliner aircraft experienced fire-related incidents. On Jan. 7, a Japan Airlines airplane caught fire while sitting empty on the tarmac at Logan Airport in Boston. Then, on Jan. 16, people on board an ANA flight in Japan caught the smell of smoke, forcing an emergency landing. In both cases, the problems were traced to the Dreamliner's advanced lithium-ion batteries, but the exact cause of the malfunctions could not be determined.

As a result of these safety issues, regulators grounded the 787 worldwide for four months in order to investigate the incidents and ensure that they would not recur. Boeing ultimately had to redesign the battery compartment in a number of ways. However, while having the plane out of commission for months was a big inconvenience, most of Boeing's 787 customers were not too concerned. For example, United Continental (NYSE: UAL  ) CEO Jeff Smisek extolled the 787's virtues on the day the plane reentered service in May.

Deja vu
On Friday, Boeing and its customers experienced a deja vu moment. An Ethiopian Airlines plane mysteriously caught fire while parked in a remote area at London's Heathrow Airport. Shortly thereafter, a Dreamliner operated by Thomson Airways and bound for Florida was forced to return to Manchester Airport due to "a technical issue".

The Thomson Airways incident appeared to be a relatively routine precautionary diversion, and was unsettling primarily because of the coincidence that it came on the same day as the Ethiopian Airlines fire. By contrast, the fire is of more concern for Boeing investors and customers like United.

First, while the fire appears to be unrelated to the previous battery issue, it points to the risks of using an aircraft that relies on so many new technologies. Second, the fire caused a considerable amount of damage to the plane. If similar incidents continue to occur, airlines could easily be scared off both by the potential cost of having an aircraft out of service and the cost of repairs.

Third, the occurrence of so many separate incidents casts doubt on the thoroughness of Boeing's quality control process. This could cause more cautious fliers to avoid booking flights on Dreamliners, which would obviously hurt operators like United.

What now?
I still think that Boeing will recover from its Dreamliner woes and make this aircraft one of the staples of future international travel. The Dreamliner's more comfortable cabin and superior fuel efficiency are two major advances compared to previous generation aircraft. Moreover, Boeing's strong order backlog mitigates the risk of demand drying up.

However, last week's fire incident was definitely troubling. With Boeing stock trading for around 15 times forward earnings, much of the upside from the Dreamliner is already reflected in the stock price. While Boeing will probably overcome this latest setback, investors should still be cautious about this stock in light of the potential risks.

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Read/Post Comments (11) | Recommend This Article (1)

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 July 16, 2013, at 2:00 PM, cg98292 wrote:

    I am sure Boeing will fix it. What are all those negative comments?

    Americans need to see these negative comments as an attack on the nation.

  • Report this Comment On July 16, 2013, at 2:29 PM, Y2KPONY13 wrote:

    Adam Levine-Weinberg is just another ignorant "fool" who has no business being published.

    How is a fire from an emergency locator transmitter, which has been installed on hundreds of aircraft since 2005, a nightmare?

    I'm dumber just for reading this article. Adam Levine-Weinberg can't get any dumber...

  • Report this Comment On July 16, 2013, at 3:09 PM, thanlannt wrote:

    @cg98292...Wow...so is it mean that Uncle Sam is going to bomb them ALL...Calm down mate...LOL :)

  • Report this Comment On July 16, 2013, at 3:12 PM, RHO1953 wrote:

    I wouldn't put my loved ones on one of those planes. No way. I don't trust the composite construction. I don't want to risk my life or that of my family in experimental aircraft technology. No thank you.

  • Report this Comment On July 16, 2013, at 3:27 PM, Budmeister58 wrote:

    The 787 will be just fine. As one who has been in aviation my whole life, (I just turned 55), new platforms always have teething problems. Heck, two 727's were lost incrashes when it first came out. They're still flying. I could list a whole laundry list of problems new, very successful planes have had. The only negative about the 787 is that I think they rushed cerification. They're paying for it now. However, companies are not cancelling orders, and pilots are still getting on board. That's the real measure. I'd fly it.

  • Report this Comment On July 16, 2013, at 3:43 PM, hunter3203 wrote:

    The problem with the author is he has no historical context for his opinions. New aircraft programs almost always have some initial problems and in today's 24 hr news cycle any problem is magnified in intensity. The important thing to remember is no one has been hurt in any of these instances nor have there been any crashes. The other thing to realize is the very large backlog that still exists for the 787. They'll be making that aircraft for years to come and are still trying to figure out how to increase the production rate. The 787 will be one of Boeing's most successful aircraft both from a sales and profit standpoint.

  • Report this Comment On July 16, 2013, at 4:14 PM, bluejay1220 wrote:

    The 787 is the most advanced commercial aircraft flying. There will be pain with innovation. The A350 is not as advanced. Check it out.

  • Report this Comment On July 16, 2013, at 4:44 PM, gmcleod752 wrote:

    when we read articles about cell and smart phones catching on fire (often after being dropped) makes me wonder how the battery technology is going to survive when used on an air plane to replace proven hydraulic systems. Seems like the a savings in weight is offset by the costs associate with the new technology.

  • Report this Comment On July 16, 2013, at 5:21 PM, gerryh100 wrote:

    The author obviously does not know anything about the aviation industry. I suggest a subscription to Aviation Daily. He will then learn about all the aircraft incidents that occur around the world without coverage by the popular media. In any given day, you have tire blowouts, hatches that open in flight, sensors that don’t work properly, and yes, smells/smoke /fires in flight. When several hundred 787 are in service, the popular media will get tired covering incidents related to the 787.

    To the writer (RHO1953) that does not trust composite construction, you better start taking the bus because every commercial aircraft in service has composite construction parts. Typical composite construction parts include the flaps, rudders, elevators, nacelles, thrust reversers and many others. These type of parts have been used for over 30 years so calling them experimental is a bit of a stretch. Typical failure of aluminum parts is fatigue cracks. Fatigue in general is not an issue with composite parts.

  • Report this Comment On July 16, 2013, at 9:00 PM, TMFGemHunter wrote:

    Thanks for the comments, everybody.

    I don't dispute that there are lots of aircraft "incidents" every day. What's unusual about the Dreamliner is that there are very few in service compared to the thousands of 737s and A320s. The rate of accidents/incidents per flight hour is definitely higher for the 787 than for other aircraft. I don't have any systematic way to compare the 787's teething problems to those of other recent aircraft programs.

    Anyway, if you read the whole article, you'll see that I concluded that this probably wasn't going to be a big problem for Boeing over the long-term. My biggest argument against owning BA stock right now is valuation, which I think has already accounted for most of the upside.

    Adam

  • Report this Comment On July 16, 2013, at 11:55 PM, uartComm wrote:

    The revolutionary aspects of the 787 are a strong selling point... but the life cycle costs - long term repair and maintenance of this design is being established every day.

    It will be interesting to see the repair costs of this latest incident. I imagine thousands of aviation experts could nail the repair cost and schedule (and certification) if this was a conventional aluminum aircraft.

    Yes composite aircraft have been around for years - but not as a deployed commercial airliner tasked to wring every cent of profit from its operation.

    Sure new aircraft designs have had teething problems but this is a different breed and future history is being written every day.

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