The Dreamliner has become the Nightmareliner for Boeing (BA), a company struggling to regain its top place as the world's leading airplane manufacturer since the days of the 747.
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 F.A.A.'s action increases the challenges that the manufacturer faces in trying to recoup its investment.
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.
Boeing's problems have spanned a decade. Sept. 11 2001 was a hard hit for the entire aerospace industry, which saw both a decrease in air travel and big questions about the design of security. Before that, Boeing was still sorting through the details of its acquisition of McDonnell Douglas Corp. in 1997.
Experts are in agreement that this is more than a simple fix for Boeing, because of the trend of problems, and because regarding the Dreamliner, it has been one problem after another.
Boyd, chairman of The Boyd Group, made a comparison to past new plane rollouts. "Is it going to be like [Boeing's] 747 40 years ago, where they had major problems and they worked it out," Boyd asked, "or is it going to be on the other end like a Lockheed (LMT) Electra that basically put the company out of the passenger airplane business?"
CFO Michael Sears left in 2003 in a procurement scandal -- he later went to jail -- and Boeing CEO Phil Condit quit. Stonecipher resigned in 2005 over an affair with a subordinate. Problems of a HR nature continued, settling cases involving sexual discrimination.
On October 10, 2001, Boeing lost to its rival Lockheed Martin in the fierce competition for the multi-billion dollar Joint Strike Fighter contract. Boeing's entry, the X-32, was rejected in favor of Lockheed's X-35 entrant. Boeing continues to serve as the prime contractor on the International Space Station and has built several of the major components.
After several decades of success, Boeing lost ground to Airbus and subsequently lost its lead in the airliner market in 2003. Multiple Boeing projects were pursued and then canceled, notably the Sonic Cruiser, a proposed jetliner that would travel just under the speed of sound, cutting intercontinental travel times by as much as 20 percent. It was launched in 2001 along with a new advertising campaign to promote the company's new motto, "Forever New Frontiers", and to rehabilitate its image. However, the plane's fate was sealed by the changes in the commercial aviation market following the September 11 attacks and the subsequent weak economy and increase in fuel prices.
The continued problems, with the focus being in the Dreamliner, indicate a deeper problem than a battery. This should be the concern of investors, not so much how they will get around the recent battery issue, but that this is a structural design flaw both in the product, and in the company.
The obvious trade to capitalize on the trend of the Dreamliner's problems is to sell.
Selling a blue chip like Boeing may not be a great short term trading strategy. However, over time, as the problems with Dreamliner continue, it may accelerate a long term decline, where Boeing may reorganize their business, or possibly be acquired by another company. What is a more solid approach that if you already own Boeing you may sell and seek better opportunities elsewhere. For the short term the company is too big to decline rapidly, with the exception of a game changer event like Sept. 11, 2001.
Definitely this is not a good time to buy Boeing as the effects of this problem will not be seen shortly.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.