Bloomberg News

Dreamliner’s Lure Keeps Airline CEOs Wedded to Plane

January 18, 2013

Dreamliner’s Lure Keeps Airline CEOs Wedded to Troubled Jet a

The tailfin of a Boeing Co. 787 Dreamliner aircraft. Photographer: Duncan Chard/Bloomberg

Airlines that bought Boeing Co. (BA:US)’s 787 Dreamliner for its long range and industry-leading fuel savings are rallying behind the grounded plane whose fate is bound up with their own.

From AMR Corp. (AAMRQ:US)’s American Airlines to lessor CIT Group Inc. (CIT:US) and billionaire Richard Branson’s Virgin Atlantic Airways Ltd., customers say they expect a fix for the battery faults keeping the world’s most technologically advanced jet on tarmacs instead of in the skies. The 787 has about 800 unfilled orders.

At stake are the airlines’ bets on a plane whose list price starts at about $207 million. Carriers view their fleets as investments stretching across decades, with business plans built on Boeing’s promises of Dreamliner performance gains that include a 20 percent boost in fuel economy over comparable jets.

“These are 30-year decisions airlines are making, and they studied it long and hard before buying,” Michael Derchin, an analyst at CRT Capital Group in Stamford, Connecticut, said in a telephone interview. “It’s one of the biggest decisions airlines and boards make, and you don’t just casually change airplane orders.”

The U.S. Federal Aviation Administration ordered that U.S Dreamliners be grounded on Jan. 16, and foreign regulators followed. The FAA cited fire risk from lithium-ion batteries after a blaze on a parked Japan Airlines Co. (9201) 787 last week and an in-flight warning on an All Nippon Airways Co. (9202) plane this week. There are 50 of the jets flying worldwide, the FAA said.

‘Good Airplane’

Support came from carriers such as United Continental Holdings Inc. (UAL:US), the only U.S. airline now flying 787s, and those whose Dreamliners are months or years away.

“I have confidence the Boeing Co. will work through the issues with the 787 and that it will be a good airplane,” American Chief Executive Officer Tom Horton said in an interview yesterday, a day after the FAA acted.

The third-largest U.S. airline expects to complete all of its 100 orders and options for the plastic-composite jet, with deliveries starting in 2014, Horton said. Fort Worth, Texas-based AMR is reorganizing in bankruptcy and studying a possible merger with US Airways Group Inc. (LCC:US), which doesn’t have any 787s.

Jeff Knittel, CIT’s jet-leasing chief, echoed Horton’s support. New York-based CIT has 10 Dreamliners on order, with the first ones due in about two years.

Compensation Question

“We believe the 787 is a solid aircraft and have every confidence that Boeing will have resolved the issues in advance of our scheduled deliveries in 2015,” Knittel, president of CIT Transportation Finance, said in an e-mail.

Some endorsements came with reservations. LOT Polish Airlines SA, whose first trans-Atlantic flight with a 787 ended with the jet marooned in Chicago by the grounding, said it’s reviewing whether it can seek compensation from Boeing.

That stranding creates a “significant” cost, Tomasz Balcerzak, a member of the management board, said at a briefing in Warsaw, where LOT is based. The carrier will take its next 787, its third, on the condition that the Dreamliner’s faults are resolved, he said.

Boeing must pay Air India Ltd. for losses the state-run carrier is incurring from grounding its 787 fleet, Civil Aviation Minister Ajit Singh told reporters in New Delhi today.

“We have to understand the scale of the problem, the delays it will cause and what impact it’ll have overall,” Singh said. The Indian airline will wait for the U.S. safety review to be completed before seeking damages, he said.

Financial Risks

Financial risks to Boeing include possible compensation to buyers under warranty, design and manufacturing expense, and delivery disruptions, Howard Rubel, a Jefferies Group Inc. analyst in New York, told clients in a note.

The most likely outcome may be a cost of about $550 million, according to Rubel, whose buy rating on Boeing is one of 23 such recommendations in a Bloomberg survey (BA:US) of analysts, along with five holds and one sell.

Boeing fell 0.3 percent to $75.04 at the close in New York, leaving the stock down 0.2 percent for the week. The weekly drop was tempered by a rally yesterday after Bloomberg News reported that Boeing and U.S. officials are investigating whether defective batteries from the same batch caused the incidents in the Japan Airlines and ANA planes.

Electricity Usage

Dreamliner production continues, though Boeing is working with the FAA on a “go-forward plan” for deliveries and production test flights, said Marc Birtel, a spokesman at the company’s commercial headquarters in Seattle. He declined to comment further on delivery schedules.

The batteries under review are vital to the 787, whose power system uses five times more electricity than other jets. Its features include electronically dimmable windows instead of pull-down shades and cabins that can pressurized to mimic a lower elevation, minimizing passenger fatigue.

Boeing says the 787-8 model, the first to enter service, has a range of 8,200 nautical miles (15,200 kilometers). That opens up long-haul routes without carriers having to use a bigger 777 or a 747 jumbo jet. The Boeing 767, which the 787 replaces, has a top range of 5,625 nautical miles.

A carrier that’s tempted to unwind a Dreamliner purchase would risk the financial penalties that typically come with such a move and a struggle to find a different plane when there isn’t an immediate replacement. Airbus SAS’s new A350 isn’t due until 2014, and early delivery slots are taken.

Reconsidering Orders

“Is there a risk some airlines might rethink their 787 orders? There is, but I think at this point they won’t act on it,” said Henry Harteveldt, an analyst at Hudson Crossing in San Francisco. “Everything that drew them to the 787 in the first place is still there.”

John Leahy, Airbus’s sales chief, agreed. “I don’t believe that anyone’s going to switch from one airplane type to another because there’s a maintenance issue,” he said. “Boeing will get this sorted out.”

Virgin Atlantic, whose fleet includes Boeing and Airbus jets, is set to take delivery of 16 787s starting next year.

“We have every confidence that Boeing and the relevant authorities will ensure sufficient oversight is maintained and that corrective action will be taken if problems are identified,” Anna Catchpole, a spokeswoman, said in an e-mail.

Grupo Aeromexico SAB has “absolute confidence in Boeing and all of its products” as it prepares to take 19 Dreamliners, according to an e-mailed statement. CEO Andres Conesa said last year that the Mexico City-based airline would take advantage of the 787’s range to seek clearance to serve London’s Heathrow, the busiest airport in Europe.

Deutsche Lufthansa AG (LHA), which flies Boeing 747 jumbos and hasn’t bought any Dreamliners, said the jet remains attractive because of its advances.

“An aircraft such as the 787 represents a leap in innovation,” CEO Christoph Franz said yesterday in a speech in Berlin. “What we are witnessing now is that such a major project can cause a bumpy ride here and there during its early phase.”

To contact the reporters on this story: Mary Jane Credeur in Atlanta at mcredeur@bloomberg.net.

To contact the editor responsible for this story: Ed Dufner at edufner@bloomberg.net


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