Bloomberg News

Boeing Risks $5 Billion in Revenue on 787 Probe’s Outcome

January 28, 2013

Boeing Risks Revenue of $5 Billion on Dreamliner Probe’s Outcome

A Boeing Co. 787 Dreamliner sits on display during its global Dream Tour at Reagan National Airport in Washington, D.C., U.S., on Tuesday, May 8, 2012. Photographer: Andrew Harrer/Bloomberg

As government regulators investigate Boeing Co.’s (BA:US) 787 Dreamliner and company engineers search for solutions, investors and analysts are grappling with the bottom- line question: How much will the plane’s grounding cost?

The answer depends on what probes in the U.S. and Japan uncover, with scenarios ranging from a quick resolution if a few defective parts have to be swapped out to a drawn-out inquiry that requires a fundamental redesign. The worst case scenario: The Dreamliner’s problems run so deep that Chief Executive Officer Jim McNerney has to write off about $5 billion in anticipated revenue, said Howard Rubel, a Jefferies & Co. analyst who puts the odds of that at about 4 percent.

The costs are likely to be much less, in the hundreds of millions of dollars, say investors and analysts, including New York-based Rubel. That would let Boeing, which reports 2012 earnings (BA:US) on Jan. 30, reap the rewards of what he estimates was a $25 billion investment in the plane, clearing the way for a profit surge and more money for investors.

“As far as dividend growth, cash flow and share buybacks, I think that’s still intact,” said Gary Bradshaw, a fund manager at Hodges Capital Management in Dallas, who added to his Boeing stake after a fire broke out on a Dreamliner on Jan. 7.

U.S. investigators are still searching for what caused the fire in the lithium-ion batteries on a Japan Airlines Co. 787 in Boston that day as well as a fault that forced an All Nippon Airways Co. plane to make an emergency landing in Japan on Jan. 16. The jet debuted commercially in 2011, and 50 have been delivered so far.

FAA Probe

The grounding will most likely cost Boeing $550 million, Rubel wrote in a report with a range of potential expenses, from $125 million to reimburse carriers that lease replacement jets to the $5 billion write-off. Doug Harned, a Sanford C. Bernstein & Co. analyst in New York, estimated Boeing’s expense at less than $350 million.

With probes still under way by the U.S. Federal Aviation Administration and the National Transportation Safety Board, McNerney will face questions on this week’s earnings call that he won’t be able to answer. Chicago-based Boeing is due to give its 2013 financial forecast and delivery plans.

“We are working this issue tirelessly,” Chaz Bickers, a spokesman, said of the 787. “At the same time, we are keeping our other teams keenly focused on their own program performance and customer commitments.”

Sales Estimate

Earnings per share may rise more than 50 percent to $7.69 by 2015 from $5 in 2012, the average estimate (BA:US) of four analysts surveyed by Bloomberg. Analysts project that Boeing garnered $81.7 billion in sales last year, which may grow to $87.9 billion in 2013.

The planemaker has said it plans to double 787 output to 10 a month this year as it pares a backlog of about 800 unfilled orders. That’s one piece of the company’s 60 percent production boost in the four years through 2014 to meet demand from airlines for more fuel-efficient planes.

“You look out a couple of years and they could be earning $8 a share, and then you really have a cheap stock,” said Bradshaw, at Hodges Capital Management.

On a price-earnings basis (BA:US), Boeing’s discount to Airbus parent European Aeronautic Defence & Space Co. widened to about 22 percent last week from about 8 percent at the end of 2012. Boeing fell 1.4 percent to $74 at the close of trading in New York today, about 4.7 percent below its 52-week high on Jan. 4.

Dreamliner Woes

Bernstein’s Harned estimated that Boeing had set a 787 delivery target of 93 jets for 2013. The planemaker gets a big chunk of the price before delivery, so even if 20 jets push into 2014, only about $1 billion in cash flow would be delayed, and that would be quickly made up, Harned said in a Jan. 22 note.

The shares haven’t fallen further in part because investors are used to Dreamliner woes after seven delays pushed back its entry into service by more than three years, according to Carter Leake, a BB&T Capital Markets analyst in Richmond, Virginia.

In a worst-case scenario, the model may be grounded more than three months, which could force a production slowdown, said Leake, a former pilot who also worked for Canadian planemaker Bombardier Inc. (BBD/B) While Boeing continues to assemble 787s, the grounding has forced a halt in deliveries, because buyers couldn’t fly away in their new planes.

“The market is in a period of disbelief that it could be anything other than a quick fix, despite the fact that we’re in an open investigation,” Leake said.

Development Plans

Boeing already felt the weight of investors’ 787 dismay before the grounding. Through last week, the shares had slumped 26 percent (BA:US) since the day before the planemaker disclosed the first Dreamliner delay, in October 2007.

Any reworking of the Dreamliner would come alongside the development this year of the 787-9, a stretched version of the plane, and the upgraded 737 Max, which is scheduled to enter airline fleets in 2017. The planemaker is also working to develop a 787-10 variant and a revamp of the 777.

Concurrent projects have proved a risk in the past, with the Dreamliner’s struggles spilling onto the 747-8 jumbo jet program. Its 2011 debut came two years late after Boeing shifted engineers to help on the 787.

The Dreamliner has long been pivotal to Boeing’s product strategy. With the plane’s promise of a 20 percent gain in fuel economy over comparable wide-bodies, Boeing markets the 787 as a way for airlines to fly long-haul routes without larger 777s or 747 jumbo jets. The 787-8, the only model in service, seats as many as 250 people and lists for about $207 million, although buyers typically get a discount.

‘Teething’ Pains

The Dreamliner’s early setbacks echo the “teething” pains common to new jet models, said Gary Flam, a partner at Bel Air Investment Advisors LLC in Los Angeles, whose holdings include Boeing.

“The market in general is telling you there’s some caution, but not tremendous concern yet,” Flam said. “I’ve actually been surprised how well the stock has acted given the news.”

In the 1990s, Boeing’s 777 encountered delays in getting FAA approval for its engines, and some planes were temporarily pulled from trans-Atlantic flights because of power-plant issues.

Among additional early glitches was the delay of the 747’s first commercial flight, two decades previously, also for engine troubles. Later, the planemaker had to redesign a rudder-control part on the 737 and replace it on all the jets.

‘Strong Record’

“Boeing has a very strong record of being able to surmount these issues,” said Peter Jankovskis, who helps manage $3 billion of assets including Boeing stock as chief investment officer for Oakbrook Investments LLC in Lisle, Illinois. “We remain confident in Boeing and their management and technical teams’ ability to solve these issues.”

Shareholders hoping for clues about the progress of that effort didn’t get much when the National Transportation Safety Board gave a briefing last week on its “methodical” inquiry. The agency said yesterday that investigators found no evidence of flaws in the battery charger that would have caused the Boston fire. No problems were found in the auxiliary power unit, which contains the battery, either, the NTSB said.

Investors’ support for Boeing and the 787 remains tied to the idea that the faults are in the lithium-ion battery packs, not a fundamental defect in the planemaker’s most technologically advanced jet ever, according to Leake, the BB&T analyst.

“If, as this unfolds, it’s anything more than a defective battery, then that confidence will start to wane,” he said.

To contact the reporters on this story: Thomas Black in Dallas at tblack@bloomberg.net; Susanna Ray in Seattle at sray7@bloomberg.net;

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


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