As an investor, I am wondering how concerned I should be about the Lithium-ion battery problems with Boeing (BA) 787 Dreamliner. As I consider the ramifications this might have on the stock in 2013, I am also looking at the company from a long-term perspective past 2013. With a modest dividend and strong sales, what can I expect from this setback to the Dreamliner?
787- Compensation
Something that may have an adverse affect upon Boeing's stock in 2013/2014 will be a call for compensation by present customers of the 787 Dreamliner. There are presently 50 Dreamliners in service, and they have all been temporarily grounded following the battery problems. Customers have already stated they will seek compensation from Boeing. All Nippon Airways, the largest carrier of the Dreamliner, has already said it will address Boeing on compensation; I do not believe this will have a long term impact, though. Indian National, Air India, has already ordered 21 more airliners. Expect "behind closed door" negotiations with each carrier that we may not be privy to.
787- Return Complicated?
The research into the fire, smell of smoke and warning light that came on in Japan Airlines Dreamliner may suggest that Boeing will have to redesign the lithium-ion batteries. While Boeing expressed to the FAA that the lithium-ion batteries should produce smoke once in 10 million hours of flying, the fact that it produced it in fewer than 100,000 hours raised questions as to the proper certification procedure for the battery. This means the FAA might look at how the original certification process for the battery takes place.
These batteries are very important for the Dreamliner. The plane uses more electricity than similar jets, but also conserves the use of fuel. Certification came as "special conditions" because the design was new and there was no focused allowance for the use of lithium-ion batteries. What are some possible causes that are being investigated?
- The recharging process
- Contamination in folds within the cell
- Battery design
- Manufacturing process
Interestingly enough, the FAA barred passenger planes from carrying non-rechargeable versions of these types of batteries three years before it gave "special" consent to Boeing because of fire concerns. Boeing said the batteries were designed so that if one cell failed, it wouldn't cascade to the others, but this is exactly what happened. Boeing's plight may ground planes for an undisclosed period of time. Redesigning the battery may not take that long, or Boeing may find a temporary solution that the FAA could approve to get the planes flying again while Boeing continues to research a long term and permanent solution.
How much will the Dreamliner Battery-Gate Affect Boeing?
I am not sure if it will be of any consequence other than a bump in the road. If January is any indication of what it will do, then I do not think investors have anything to worry about. When we look at the two biggest rivals, Boeing and Airbus, Boeing clearly has jump out of the gate ahead of its rival. In January, Airbus reported sales of 140 aircraft, with an adjusted total of 121 after cancellations. It also delivered 35 passenger jets. Boeing also recorded 145 sales, with no cancellations, and delivered 39 aircraft.
So far, the company has not missed a beat. But this does not mean we won't feel an affect later this year. Not only would 787 groundings cause compensation losses, but it appears that delayed deliveries will also come into play later this year. With the groundings, deliveries are also postponed. There are no delivery dates being given to some large European clients. Norwegian Air out of Oslo has not been given any new date for handing over its order of Dreamliners, and British Airways would receive its Dreamliners in May of 2013. But from a long term investor's standpoint, this is all short term. Companies are still committed to the 787. British Airways ordered 30 and still says it is committed to the design.
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Technically Speaking
Boeing is prone to some wide daily swings. The stock continued to move up in a bullish peak and valley pattern from November until the New Year began as it used the middle Bollinger band as basic support. The news about the lithium-ion battery problems sent the stock down most of January, helping define the first leg of a bullish trend the stock is in. The recent deep (before the stock recovered), saw the RSI indicator barely move below the bullish '50' line. This signifies continued strength to me. And although the MACD MAs did dip below the '0' line, they are rebounding well and did not go to far down. If the stock can push above the resistance level of '78,' I believe it will continue to move up and the battery mess with just be a bounce in the stock move up.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
