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Is The Boeing Company’s Dream Still Intact?

Boeing's (NYSE: BA  ) 787 Dreamliner jet with unparalleled fuel efficiency, speed similar to the fastest twin-aisle airplanes, and superior flying comfort was a dream come true. No surprises that when Boeing launched the program in April 2004, it received a record number of orders. There were 60 customers from six continents who booked more than 1,000 airplanes for an astronomical $240 billion. Boeing set a target of selling 3,300 Dreamliners by 2030.

The dream run soon turned into a nightmare with the first delivery delayed by more than three years to September 2011 , owing to recurring issues with parts. Since then there's been a series of problems -- sometimes with brakes, electrical fire, fuel leaks, or hydraulics, and most recently with the wings. The costly repairs and delays have put the program's profitability at risk. Meanwhile, rival Airbus (NASDAQOTH: EADSY  ) is looking to catch up while Boeing's busy repairing faulty batteries. Can Boeing overcome the glitches?

Testing times
In the past 15 months, the Dreamliner has suffered several embarrassments, including a three-month grounding after the lithium-ion batteries of two planes overheated in January 2013 . A couple of months back, Japan Airlines' Dreamliner's power cell was found to be releasing smoke at the Tokyo airport.

ANA Boeing 787 Dreamliner. Source: Wikimedia Commons

Last month, an Air India Dreamliner had to make emergency landing due to a technical snag in the cockpit panel. The plane was said to have issues with the engine. However, General Electric, which exclusively designs 787 engines for the Air India fleet, disagreed. A GE spokesperson said that the GEnx Engine was operating perfectly; it was the ram air turbine that caused the emergency.

The latest in the series of setbacks is the discovery of cracks in the wings of 40 Dreamliners . Mitsubishi makes these wings for Boeing, and the cracks could have resulted from changes in the manufacturing process. Boeing has saved face to some extent as none of the faulty wings have gone to customers, but it still has to foot the repair bill .

Much at stake
Boeing expected margins to be in the low single digits on the first 1,300 Dreamliners that it delivers. With the wing cracks, this will get stiffer. There's a twist, however: Boeing follows "program accounting" whereby it calculates future profits as a differential of total costs incurred and total revenue earned over the entire program period, and apportions the same over the contract period.  

A recent Wall Street Journal report  stated that if Boeing booked profits as the differential between current revenue and current costs, the Dreamliner program would have incurred a loss of $69 million in the first nine months of 2013. In the same report, Joseph Nadol, analyst at JPMorgan Chase, said his estimates show that Boeing lost $45 million per 787 Dreamliner shipped in the third quarter on an average selling price of $115 million.

Apart from the cash drain, the Dreamliner woes could mean that rival Airbus may land some deals for its widebody aircraft. The A330 and the A350-800 that Airbus will start delivering from 2015 are designed to contend with Boeing's 787 Dreamliners. The A330 can accommodate more passengers than 787, but it lags the latter in range. The A350-800 will chip in with range and give Dreamliners a solid contest.

Finnair Airbus A330-302E. Source: Wikimedia Commons

Boeing's dream is alive!
The Dreamliner's problems may look overwhelming, but all is not lost. In a positive development , the Federal Aviation Administration has pronounced that the 787 "meets its intended level of design safety" following a review that it jointly undertook with Boeing after the battery overheating incident last year. This announcement could make a big difference in carriers' choice of aircraft makers for new orders.

With a backlog of over 900 planes and $150 billion in future revenue at stake, Boeing realizes that the 787 program is too big to be unprofitable. The company is coming up with new strategies to cut costs and boost productivity. Boeing estimates that for the profits to be in the league of 777s, it has to sell approximately 2,500 787s, and in order to do that, it has to increase the production rate. Boeing hopes to make 12 Dreamliners a month by 2016, up from the current 10, and increase this to 14 a month by 2020.

The company's also accepted that earlier it didn't monitor its suppliers that strictly, but it's tightened the monitoring process, and plans to increase the ratio of in-house work to outsourcing. 

Boeing is now asking for big concessions from its suppliers and the company has made it clear that if they don't agree then they could end up on the company's "no fly" list. In this context, it would be interesting to see how the upcoming price talks between Boeing and Spirit Aerosystems (NYSE: SPR  ) go. The latter provides the Dreamliner's forward fuselage and leading edges, and negotiations will soon start for the 787-9 and -10 models. Spirit has recently written off losses of $700 million owing to the disruptions in the 787 program.

Foolish last words
There's no denying that the Dreamliner program is one of Boeing's most critical missions, and the progress has been bumpy so far. But the FAA verdict and the company's new strategies could be a turning point. If that happens, Boeing's dreams could take off again soon.

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Read/Post Comments (6) | Recommend This Article (6)

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 March 31, 2014, at 11:23 PM, djj711 wrote:

    Nicely written and researched article. It would be interesting to have feedback directly from the airlines to see if Boeing is actually delivering the "dream" they ordered. Are the planes performing correctly and saving money and fuel, despite the number of maintenance issues? That is an important question that may determine how competitive the 787 really is against the new Airbus jets being developed.

  • Report this Comment On April 01, 2014, at 6:42 AM, A310 wrote:

    I guess it will be far more difficult for Boeing now

    to sell their,so far problematic 787 against the so far trouble free A350.

  • Report this Comment On April 01, 2014, at 1:43 PM, CathalMac wrote:

    It's easy to be trouble free when your not in service.....

  • Report this Comment On April 01, 2014, at 3:41 PM, JhonAndro wrote:

    The Boeing Company’s growth has been led by record orders for its commercial planes. The company received orders exceeding $90 billion from the Dubai Air Show in November, which had followed a great response at the Paris Air Show earlier in the summer.

  • Report this Comment On April 01, 2014, at 3:53 PM, ICanFool wrote:

    " the battery overheating incident last year." Boeing has been testing Hydrogen fuel cells for aero application successfully with Ballard's (BLDP) help. Instead of using heavy duty, giga batteries for powering motors for actuator systems, (instead of old hydraulic systems) Boeing should use HFC's for reliability and no fire. Phantom Eys experience is already there flying at 42000 ft altitude. Wonder when they will announce the replacement for battery fire problem. If I was on the design team, I would not let those batteries getting charged while in flight. I wonder how Boeing qualified the solution?!

  • Report this Comment On April 01, 2014, at 3:56 PM, ICanFool wrote:

    Every airplane launch had some problems and penalties associated with failure of fuel efficiencies. Boeing learned to overcome all those problems successfully. CFM56 engines with Boeing planes are awesome when they matured. Same thing will will happen again. These technical problems are minor challenges..

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ICRA Online provides data, research, and analytics solutions. Our research team of accountants, management graduates, and media specialists, does in-depth company analyses, going beyond news, and diving deep into numbers. We write on industrial sectors like automotive, aerospace, and machinery, making it our business to take a 360 degree view of every company we cover.

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8/31/2015 4:04 PM
BA $130.68 Down -2.56 -1.92%
The Boeing Company CAPS Rating: ****
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Airbus CAPS Rating: No stars
SPR $51.11 Down -0.63 -1.22%
Spirit AeroSystems… CAPS Rating: ***