Seeking Alpha
Profile| Send Message| ()  

In 2012, America's aircraft manufacturing behemoth Boeing (BA) sold more than 600 planes, earned record revenues, had an impressive backlog of orders and a fourth quarter earnings that beat analysts' estimates as the company increased its dividend by 10% and resumed its $3.6 billion share buyback program, but all of these achievements, including the company capturing the crown as the world's largest aircraft manufacturer in 2012 from its European rival Airbus (OTCPK:EADSY), were overshadowed by the grounding of its new 787 Dreamliner due to battery failures.

Boeing announced its fourth quarter results on 30th January. Boeing's quarterly deliveries for commercial aircrafts rose by 29% to 165 units. The company delivered 601 aircrafts in 2012, up 26% from last year and earned record segment revenues of $49.13 billion. In the same period, Airbus's deliveries rose by 10.1% to a record level of 588 units.

In mid-January, the crew aboard ANA All Nippon Airways 787 Dreamliner, which uses the GEnx engine from General Electric (GE) - also found to have issues back in September -- and GS Yuasa batteries, discovered the charred lithium-ion battery and about a week later, a battery on a Japan Airlines 787 jet caught fire. The 787 is Boeing's ticket to the future of commercial aviation which will stress better fuel economy and smaller cargoes because of structurally higher energy prices. It is the company's most sophisticated aircraft; the first one to ever use the relatively lighter and quickly rechargeable lithium-ion batteries and a number of new composite materials. The 787 is now grounded and looks to be so for the foreseeable future.

Boeing however, insists that its "business as usual" and the grounding won't have any impact on its 2013 earnings. Boeing itself is not slowing down either and will continue with production of 787s; increasing to seven per month by H1-2013 and 10 per month by the end of the year. All of Boeing's suppliers are in damage control mode with shareholders. Rolls Royce was quick to pat the back of their prized client by calling it an "excellent company" and "are confident that Boeing will fix [the current issues]."

That's nice but it still has to spend money building, maintaining and insuring planes it has built but cannot bill for. Cash flow effects for the grounding could wind up being as high as $250 million per month that the 787s stay out of the skies. This is a real drain on the balance sheet and no amount of jawboning in the press will stop the money from going out the door.

Boeing has built 125 787s so far that are now grounded. Nothing about this story has been settled as new developments emerge every week. First, the actual problems were much bigger than the company had admitted, and then we find out that 787 batteries were repeatedly replaced, even by the Japanese carriers who witnessed the damage. The two Japanese airlines are the biggest 787 customers and represent almost half of the total in-service 787 aircraft.

Air travel scares are like food scares and affect people at a visceral and irrational level. To think this is not going to have long-term effects on Boeing's ability to close 787 delivery deals while the A320 tools along with no bad press is silly. Boeing is expected to ship just 60 787s this year versus the more than 100 that analysts were expecting and the company has guided for. But, that is simply unrealistic since there has not been a credible estimate on either the cost or the timeline for the needed fixes.

Despite the current woes, Boeing has deep enough pockets to keep up appearances but until and unless the 787 is cleared for business again, one has to think they may be whistling past the graveyard. Investigations into the fire are currently underway but the Japanese authorities have completed their on-site inspection of the GS Yuasa plant and found no faults there. The 787 Dreamliner is Boeing's highest outsourced aircraft that has an extraordinary supply chain therefore the probe will take some time to finish.

The FAA is notorious for being incredibly slow in its deliberations. If this mess is cleaned up quickly it will be over internal FAA objections and will smack of politics. Boeing, like GE, is not only well-connected politically. It is extremely important piece of the foreign policy puzzle; wherever the State Department goes so goes its main military contractors. It is not like Airbus doesn't get the same treatment from the European Commission. However, since no one has died or planes have fallen out of the sky any improprieties will be overlooked in the final FAA report.

At this point Boeing is looking very expensive as is the rest of the market. The stock has not suffered at all because of this issue and that is likely as much a function of the extremely liquid environment the equity markets find themselves in more than a vote of investor confidence.

Boeing

EADS*

P/E

14.62

19.79

EPS

5.11

2.48**

Yield

2.60%

N/A

ROA

4.47%

1.35%

ROE

81.53%

16.45%

*EADS (EPA:EAD)

** converted using €1 = $1.34

Source: Boeing Whistles Past The Clogged Runways