Dreamliner Delays at Boeing: This Too Shall Pass

As a follow up to my recent post on Boeing which dealt more with the technical analysis of its support and resistance levels, I wanted to share the following article from the Economist to help view the Dreamliner nightmare from the perspective of the process of innovation.

"…The worrying things about the latest delay are that it comes so late in the process of development and that it relates to stresses where the wings join the fuselage. The stresses appeared in routine testing of wing flexibility. The wings are made in Japan and the fuselage comes mostly from Italy, to be pinned together in Seattle, thus the scope for confusion is immense. All new aircraft face delays as they become technically more complex and as manufacturing methods change in search of greater efficiency. Airbus’s A380 super-jumbo was severely delayed mainly because of wiring problems. At first Boeing seemed to think that it had a quick fix for its latest problem—which would have limited the aircraft’s ability to manoeuvre—but subsequently the firm decided to postpone test flying until a more comprehensive solution is found.

Boeing (BA) has pushed innovation in both technology and manufacturing to the limit, with its choice of a structure made of carbon fibre reinforced with resin and its decision to outsource much of the aircraft’s construction to distant partners. Earlier delays to the 787 were already turning the production of the Dreamliner into an anxious experience. Now it is becoming a nightmare. Getting the global chain of various suppliers to run smoothly has been a difficult task, as parts failed to arrive in a fit state in Seattle for final assembly. A two-month strike by machinists at Boeing added to the delays. Late last year it was discovered that thousands of fasteners on the early test aircraft had been installed incorrectly.

The 787 has been a huge sales success with orders for more than 860 planes—the most Boeing has ever had for a new plane before it even takes off. But the delays have allowed Airbus to notch up sales for its competitor product, the A350, which itself was delayed in its launch by arguments over design size and finance. As for airlines, some might be happy to see their new Boeings delivered later than planned, when the air-travel market might have recovered from its current slump. On the other hand, the new Boeing promises better fuel economy and so great operating savings in an era of high oil prices. Either way, Boeing will have to compensate the airlines. That is what will put a strain on the company’s finances, which explains why the share price—after a steep climb since March—took such a tumble on Tuesday."

(For the complete story at the Economist.com, please click here.)

Part of innovation involves taking risks but it also offers the competitive advantage of being first to market. Delays and both major and minor glitches will occur in this process. Airbus experienced likewise in the development of its A350.

Boeing will overcome its current obstacles and is positioned to meet strong demand for lighter and more fuel efficient aircraft. I would also reiterate the duopolistic nature of its industry. Furthermore, it is not even logistically possible for Airbus to meet the demand for these 860 planes with specs comparable to the Dreamliner. In the big picture, concerning the delay, this too shall pass away.

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Comments

[Old Trader:]

I don't have a position in BA, but I think they've really managed to shoot themselves in the foot with this latest delay, although it would argueably criminally negligent to go ahead with the roll-out of a commercial aircraft with such a structural issue as described.

While I heartily commend Boeing for "pushing the envelope" in aircraft design, they might do well to remember that the earliest pioneers often ended up with a back riddled with arrows for their efforts.

Jun 27 03:40 PM

[PizzaMan:]

The long case for BA and the 787 is compelling. An airliner that is 20% more fuel efficient must be bought. Even struggling airlines must buy these things, as their competition will.

I also believe that you can't develop an airliner without delays. There is bound to be some suprises. Boeing is not only building their first composite aircraft, they are also changing the way in which aircraft are going to be built.

The problem is that their management and Dreamliner development team has no credibility left at this point.

This latest delay is just another indication of how management is at
Boeing. The week before the delay they were breaking open sake casks with All Nippon Airways of Japan telling their first customer that the first flight was here. I've listened to earlier conference calls with the development team assuring me as an investor that things will be delayed, but we are on track now. Only to have more delays. A 2 month machinist strike turns into a 6 month delay. I heard that the engineers will be able to straighten out the production lines during the strike so that the Dreamliner schedule will not be affected that much. The endless fastener stories are starting to sound like fish stories to me.

The real problem is in management. Either in the Dreamliner developemnt team, or in Boeing senior management. They are either incompetent, or lying to shareholders with these delay stories that don't add up.

Even with a major jump in stock price with the release of the 787, I don't know if it will get back to the level I bought it at.

Jun 28 02:59 PM

[BeachRider:]

BA mgt should be horsewhipped for creating so much optimism so close to a poor result. I hope the SEC checks out the insider stock transactions to be sure that this doesn't have a dark side. If there is none, then I hope one of the marketing 'big, giant brains' on these forums looks into this to explain how BA balances the loss of credibility against some corporate gain.

Jun 28 08:55 PM