Is the Dreamliner Becoming a Financial Nightmare for Boeing?
The Federal Aviation Administration issued an “emergency airworthiness directive” late Wednesday following a string of incidents with Boeing’s
precocious problem child, the 787, grounding the plane indefinitely
until the reason behind two recent fires — attributed to faulty
batteries — could be determined and the problem solved. The 787, also
called the Dreamliner, is already a hugely expensive project for Boeing.
The FAA’s action increases the challenges that the manufacturer
faces in trying to recoup its investment.
Following an unscheduled landing in New Orleans in December and a fire in Boston
earlier this month, an All Nippon Airways flight had to make an
emergency landing yesterday after a battery malfunction and reports of
smoke in the cabin. Both ANA and Japan Airlines, the other carrier that
has the most 787s in service, grounded their fleets voluntarily on
Thursday ahead of the FAA action while they attempt to figure out
what went wrong.
Industry analysts and watchers — including TIME’s Bill Saporito in this article
— have been quick to point out that there are always hiccups when
rolling out new plane models. But as the mishaps continue to multiply,
some are starting to wonder if this time is different.“This is in a
class by itself,” says Richard Aboulafia, vice president at aerospace
and defense industry market analysis firm the Teal Group.
“We will be taking every necessary step in the coming days to assure
our customers and the traveling public of the 787′s safety and to return
the airplanes to service,” Boeing president and CEO Jim McNerney said
in a statement Wednesday evening.
Still, experts say the FAA’s review could take months. Hans Weber,
president of aviation consulting firm TECOP International Inc., says
that if the agency requires replacing the batteries, resolving the issue
“could take upwards of a year.”
It wasn’t supposed to go down like this. The Dreamliner was supposed
to be Boeing’s iPhone: an innovative game changer that customers would
line up to get their hands on. An they did line up. The plane debuted in
2007 with a record-breaking 677 orders. Its popularity was driven by
the promise of a 20% reduction in fuel consumption, thanks to body parts
made out of lightweight composites, a more aerodynamic design, and a
souped-up electrical system that supplemented the plane’s energy needs
with rechargeable lithium-ion batteries.
It is those batteries — the same kind used in cell phones and other
devices — that many suspect are at the root of the problem that led to
the plane’s grounding, since they can overheat and catch fire. These
fires are almost impossible to extinguish because the material produces
oxygen as it burns.
The economic fallout of the grounding will hit carriers that already
have the aircraft in service, as well as the manufacturer. Around 50 of
the 787s are in use now. It makes up a tiny portion of carriers’ fleets —
United, for instance, has six 787s out of a fleet of roughly 700 — but
the plane’s lower fuel consumption and superior long-haul capability
will make it hard to replace. George Hamlin, president of Hamlin
Transportation Consulting, says more than 100 flights a day will be
canceled initially, since regulators in other countries with carriers
that fly the Dreamliner followed the FAA’s recommendation and issued
grounding orders of their own.
Airlines will have to use older, less energy-efficient planes to
service the 787′s routes, or redraw their route maps. Right now, many of
the 787s in service are flying routes that could be served by other
models. “There may be some ability to use older planes,” Hamlin says.
“It won’t be as efficient, you may lose money on it.”
On the other hand, says industry analyst Robert Mann, ”On some of the
787 nonstop routes there is no adequate substitute aircraft, so there
would be revenue loss associated with canceling or re-routing service
for some or all of the affected passengers over the duration of the
grounding.”
Mann estimates that airlines flying the Dreamliner will lose $2.5
million per aircraft for every month the model is out of service. ANA,
which has the largest 787 fleet, with 17 currently in service, will be
more severely affected. Here’s one projection, courtesy Reuters: ”Keeping
the 787s on the ground could cost ANA alone more than $1.1 million a
day, Mizuho Securities calculated, noting the Dreamliner was key to the
airline’s growth strategy.”
It will fall on Boeing to pick up part of the tab. Polish airline LOT
has already called for compensation from the manufacturer and
stipulated it will take delivery of three more planes it ordered only if
the problems are resolved, Reuters said.
Mann estimates Boeing could wind up paying up to $125 million to
placate angry customers, and its total costs could be much higher. “Add
Boeing’s losses from not being able to deliver aircraft for the
duration, plus re-work of aircraft on the production line and in the
global sourcing pipeline.” This doesn’t even include the as-yet-unknown
cost of actually finding and fixing the problem.
Analyst David Strauss at UBS says Boeing was already losing money on
every plane it sells. In a research note last month, he predicted that
the Dreamliner program will cost Boeing $4 billion to $5 billion a year
through 2014, and that the manufacturer won’t turn a profit on the
planes until 2021 — and that was before the planes were ordered out of
service indefinitely. Strauss estimated the planes, which have a list
price of $207 million, cost Boeing $232 million apiece to make — even
though its “average unit price” is $117 million each. Boeing’s stock
price fell nearly 4% on Wednesday, but the FAA’s order came after the
close of the trading day.
The Dreamliner has been a cash sinkhole for Boeing almost from the get-go. When the first planes were delivered in 2011, the Seattle Times estimated
that Boeing already had spent $32 billion on the Dreamliner — half on
development, half on manufacturing — after initially anticipating
development costs of less than $6 billion. “Profitability for the plane
won’t come before well into the 2020s — if ever,” the paper said. With
this grounding, that prospect looks even more remote.
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