Boeing’s in the Spotlight: Any Cause for Concern?

“In light of a series of recent events, the FAA will conduct a comprehensive review of the Boeing 787 critical systems, including the design, manufacture and assembly,” reported the Federal Aviation Administration in a statement on Friday. “The purpose of the review is to validate the work conducted during the certification process and further ensure that the aircraft meets the FAA’s high level of safety.”

The aircraft in question, of course, is Boeing’s (NYSE:BA) 787 Dreamliner. For those in the dark, the Dreamliner is widely seen as a huge step forward in the evolution of aircraft. The plane is composed of light-weight composite materials and is built using advanced manufacturing practices that not only eliminate inefficiencies, but make the plane stronger — supposedly. The aircraft is up to 20 percent more fuel efficient than comparable models.

Start 2013 better than ever by saving time and making money with your Limited Time Offer for our highly-acclaimed Stock Picker Newsletter. Get our fresh Feature Stock Pick now!

But a series of unfortunate events has plagued the aircraft. What began as regular growing pains has turned into an investigation by the FAA, as five separate incidents in the past week alone have either grounded Dreamliner flights or otherwise raised alarms. Mishaps this week include: a battery fire, a fuel leak, brake issues, a cracked cockpit windshield, and an oil leak.

Boeing’s status as a leading aerospace company and Dow component, and the fact that the Dreamliner is in many ways a flagship aircraft, has brought the heat of the spotlight on the company, the aircraft, and the FAA. One glance at the stock chart and you can see market psychology at work.

Boeing Company (The) Common Sto Stock Chart - BA Interactive Chart - Yahoo! Finance

First, let’s take stock

As of January 4, Boeing had 848 total orders for the 787 Dreamliner, 49 of which have been delivered, leaving 799 unfilled. At about $225.2 million per plane ($206.8 million for the 787-8, $243.6 million for the 787-9), it doesn’t take a quant to figure out that there is nearly $200 billion sitting on the table here. (Fun fact, Boeing invested about $32 billion to develop the Dreamliner.)

Here are the airlines that have received deliveries so far:

Airline Ordered Delivered
Air India 27 5
All Nippon Airways 66 17
Ethiopian Airlines 10 4
Japan Airlines 45 7
LAN Airlines 26 3
LOT Polish Airlines 8 2
Qatar Airways 30 5
United Air Lines 50 6

This week’s problems occurred on planes owned by All Nippon Airways and Japan Airlines. Previously, issues with electric panels grounded two United Air Lines (NYSE:UAL). Before that, Qatar Airways found a fault with the engines — which are all either made by General Electric (NYSE:GE) or Rolls Royce — that could potentially lead to a fire.

These mishaps not only tarnish Boeing’s reputation, but could also negatively impact the airlines. If customers lose confidence in the plane and decide not to fly on a Dreamliner, ticket sales could drop. But in the wake of this week’s ordeals, airlines around the world have come out reiterating their support for the plane. Consensus among experts remains that the Dreamliner lives up to its name, and growing pains are to be expected in any new aircraft, particularly one as advanced as the 787.

Akbar al Baker, the CEO of Qatar Airways, said that the string of mishaps “doesn’t mean we are going to cancel our orders. It’s a revolutionary airplane.” An Air India spokesman commented, “It’s a new plane, and some minor glitches do happen. It’s not a cause of concern.”

But five incidents in five days intense media coverage has raised concern among the public, prompting the FAA to open a formal review of the aircraft…

Boeing Annual MeetingIn a statement issued Friday, Boeing said that it is “confident in the design and performance of the 787. It is a safe and efficient airplane that brings tremendous value to our customers and an improved flying experience to their passengers.”

The review comes at the same time that Boeing is trying to ramp up production of the aircraft. Recently hitting a rate of 5 per month, the company aims to be rolling out 10 aircraft a month by the end of 2013. This increase in the rate of production has been questioned as a possible reason for the mishaps. The question at large: is Boeing sacrificing quality for quantity?

Transportation Secretary Ray LaHood answers that question with a resounding no. At a press conference on Friday, a frustrated-looking LaHood responded to questions about the quality of the FAA’s certification process with nothing but support for both his administration and Boeing’s quality checks.

“We are confident that the aircraft is safe. But we need to have a complete understanding of what is happening,” said FAA Administrator Michael Huetra in a statement, echoing LaHood’s sentiments. “We are conducting the review to further ensure that the aircraft meets our high safety standards.” Specifically, they made it clear that they are just double-checking their work.

Investing Insights: Can General Motors Re-Take the Title of Top Global Automaker?