Are Boeing Dreams Too Big? - Analyst Blog
January 18 2013 - 11:40AM
Zacks
In a sudden twist of fate aviation
regulators round the globe have grounded the entire 50-strong
global fleet of The Boeing Company’s (BA) 787
Dreamliner jet airliners. The global grounding comes in the wake of
concerns over the safety of battery systems of the airliner.
The Boeing 787 Dreamliner is a long-range, mid-size, wide-body,
twin-engine jet airliner. In addition to bringing big-jet ranges to
mid-size airplanes, the 787 provides airlines with superior fuel
efficiency, resulting in exceptional environmental performance. The
airplane as per Boeing uses 20% less fuel than similarly sized
airplanes.
The pile of dominos started tumbling from Japan when on Wednesday a
787 Dreamliner of Japanese airline All Nippon
Airways (ALNPY) made an emergency landing at Takamatsu
airport in Japan. The Dreamliner was forced to land after an
in-flight battery incident of smoke appearing in the plane's
cockpit. The airline attributed the emission of smoke to a battery
malfunction. This prompted the airliner to ground its fleet of 17
Dreamliners for inspection.
Separately another Japanese airline Japan Airlines also announced
the suspension of the flights of its 7 Dreamliner's until further
notice citing safety concerns after the battery system of a parked
787 caught fire at Boston's Logan International Airport.
The Japanese omen precipitated a global grounding of Dreamliners
starting at home with a directive from the U.S. Federal Aviation
Administration (FAA). However FAA’s directive towards U.S. carriers
affected only United Continental Holdings, Inc.
(UAL). As of now United Continental is the only U.S. airliner with
half a dozen Dreamliners in its fleet. Following FAA’s directive
aviation regulators in India and Japan followed suit. The Indian
flag carrier Air India grounded its fleet of 6 Dreamliners. The
trend continued elsewhere with Qatar Airways grounding 5, Chile's
LAN Airlines S.A. (LFL) 3, Ethiopian Airlines 4,
and LOT Polish Airlines 2.
The Dreamliner incubus did not end here, in what may well could be
the inception, Qantas Airways Ltd. trimmed its Dreamliner order
tally of 15 by 1. Boeing at 2012 end had a bulging Dreamliner order
book of 848. We are apprehensive that the battery imbroglio would
likely add to the tally of Dreamliner cancellations. Earlier for
clearing the bulging order backlog Boeing rapidly increased its
Dreamliner monthly production rate from 2.5 to 5 in 2012, with
plans on the anvil to stretch it to 10 by late 2013.
Boeing’s first delivery of the Dreamliner aircraft was more than
three years behind the original schedule. The company completed the
contractual delivery of the first 787 Dreamliner series aircraft to
All Nippon Airways, in September 2011. The delays have forced
Boeing to pay huge compensation to customers which added to the
project's cost.
The question now arises with Dreamliner dreams turning sour, would
Boeing be able to cope with its ambitious growth plan. Rising
possibility of further U.S. defense cutbacks could impact the
stream of orders and eventually slow down the growth of its defense
business. As a result Boeing had pinned its hope on its commercial
airplanes business for future growth.
The company in its 2012 Current Market Outlook estimates a $4.5
trillion market for 34,000 new commercial airplanes over the next
20 years. Boeing’s projection of growth was based on the strength
of the commercial aviation market, recovery witnessed in world
economies and strong demand for fleet addition and replacement.
Of this the twin-aisle airplane segment was the highest valued
segment of the long-term forecast, valued at $2.1 trillion over the
next 20 years. Boeing foresees that over the next 20 years, the
vast majority of twin-aisle airplanes currently flying will be
retired. By 2031, new airplanes will account for 87% of the
twin-aisle fleet. Boeing had relied on the 787 Dreamliner, in this
prized segment, to take on arch rival Airbus’s A350 series
airplane.
Boeing along with experts from U.S. National Transportation Safety
Board, Federal Aviation Administration and Japan Transport Safety
Board has already started investigating the questionable
Dreamliners batteries in Japan. The final outcome of the Dreamliner
imbroglio will not affect Boeing alone but its long-list of
suppliers also. Dreamliner suppliers include among others
Hexcel Corporation (HXL), Rockwell Collins
Inc. (COL) and Precision Castparts
Corporation (PCP).
We currently retain a Zacks Rank #3 (Hold) on Boeing. Considering
the fundamentals, we are maintaining our long-term Neutral
recommendation on the stock.
(ALNPY): ETF Research Reports
BOEING CO (BA): Free Stock Analysis Report
ROCKWELL COLLIN (COL): Free Stock Analysis Report
HEXCEL CORP (HXL): Free Stock Analysis Report
LAN CHILE-ADR (LFL): Free Stock Analysis Report
PRECISION CASTP (PCP): Free Stock Analysis Report
UNITED CONT HLD (UAL): Free Stock Analysis Report
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