What happened
Shares of Boeing (BA +1.71%) gained nearly 5% on Tuesday after the aerospace giant got news about its 787 Dreamliner from the Federal Aviation Administration (FAA). Boeing is going to have to comply with new rules, but it should lead to deliveries resuming in the months to come.
So what
Boeing's commercial operations have had a rough couple of years, impacted first by an 18-month grounding of its 737 MAX following a pair of fatal crashes and more recently by airline cost-cutting due to the pandemic. The 737 MAX ordeal cast the company's quality control in an unfavorable light and has led to calls by lawmakers for regulators to clamp down on plane certifications.
Image source: Boeing.
The Dreamliner has also run into issues relating to wear and tear on its carbon fiber skin. Boeing suspended deliveries last May after the FAA raised concerns about Boeing's proposed inspection method for the plane, meaning the company has missed out on months of revenue-generating deliveries.
On Tuesday, the FAA said it would no longer allow Boeing to self-certify the Dreamliner, meaning it will be up to in-house FAA personnel to issue an airworthiness certificate. Although this will add an extra step to the process, that step was expected, and the FAA in outlining its plans has at least provided a path to get Dreamliner deliveries moving again.
Airlines have said they hope Dreamliner deliveries will resume this spring. It is unclear whether that timetable is still feasible as the FAA would have to ramp up its internal inspection operation.
Now what
Part of the market reaction today comes from the fact that given the issues with the 737 MAX and the criticism that followed, many had assumed the FAA was heading in this direction. While the move is somewhat of a repudiation of Boeing's in-house capabilities, the important thing for investors is to get Dreamliners moving off the lines and converted to free cash flow as soon as possible.
Boeing still has significant challenges out ahead of it. The company is well-below its pre-pandemic production plans for both the 787 and 737 MAX, and had to take on a lot of debt during the pandemic. There are also questions about whether the fixes needed to the 787 production process will be so costly that it could eat into the profitability of the entire program.
Add in the continued uncertainty surrounding the airlines given the stubbornness of the pandemic, and investors shouldn't rush to climb on board Boeing even if the Dreamliner gets the green light in the months to come.
