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Why Boeing's Latest Engine Problem Could Attract Heavy Penalties

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Boeing (NYSE: BA  ) investors woke up to a turbulent Monday morning with the airline shares slipping 4% in early trade as yet another issue with the Dreamliner 787 surfaced. Worse yet, the latest problem could affect Boeing's 747-8 jumbo jets as well.

So what: Boeing warned that the GEnx engines from General Electric (NYSE: GE  ) that power some of its 787s and 747-8s may malfunction and lead to loss of thrust (the force that pushes a plane through the air) if they gather ice crystals during thunderstorms. Boeing advised its customers to fly at least 50 nautical miles away from thunderstorm activity area to avoid risk. The warning comes on the heels of six such recent incidents reported by planes that run on GEnx engines.

After Boeing's recommendation, Japan Airlines, the second-largest Dreamliner customer, promptly suspended the 787 services on its Tokyo-Delhi and Tokyo-Singapore routes as a precautionary measure.

Now what: After a series of Dreamliner setbacks, Boeing investors heaved a sigh of relief when the airline booked its 1000th order for the aircraft at the Dubai Airshow last week. The 787 made history as the first widebody plane to reach the four-digit sales mark within nine years of launch. Naturally, today's news was a huge dampener for Boeing lovers.

But the ice issue may not hurt the Dreamliner as much as the 747-8 aircraft. That's because while some Dreamliners are powered by Rolls-Royce engines, all 747-8s run on the GEnx engines. For instance, ANA Holdings, the largest 787 operator, has the Rolls-Royce engines on all its Dreamliners. Since ANA hasn't received any warning from Rolls Royce, the ice problem is a bigger headache for GE than it is for the Dreamliner maker. GE is reportedly working on a solution.

That said, Boeing's latest warning raises another question on the sustainability of Boeing's iconic 747-8 aircraft. Dwindling demand for the jet compelled Boeing to scale back production by 25% this year, a rate it expects to maintain through 2015. If the engine problem isn't fixed soon, 747-8s could be grounded for a longer period of time, raising the risk of airline operators seeking heavy penalties from Boeing. That's the last thing the planemaker, which already has enough Dreamliner problems to deal with, would want to hear. It could be a turbulent ride from here for the 747s, so fasten your seat belts, Boeing investors.

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  • Report this Comment On November 25, 2013, at 8:38 PM, DNMay wrote:

    This really is an overblown issue. The solution is already known, and a fix is scheduled. The problem is temporarily solved by slight reroutings. If Boeing weren't already in the doghouse, few would notice.

  • Report this Comment On November 26, 2013, at 12:35 AM, bphendri wrote:

    Boeings latest engine problem? The problem occurs in General Electrics GEnx engines!! They do not occure in the Rolls Royce engines.

    This is NOT a Boeing issue!

  • Report this Comment On November 26, 2013, at 5:56 AM, DNMay wrote:

    As noted, it is an engine issue, and it's very likely that something similar has or will occur on Airbus installations also. Also remember that engines are unusual in being bought directly by the airline, and guaranteed by them to the airlines. No, you don't have to be smart to write blogs for motley fool, but this writer is in good company.

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