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Don Dion (donalddion@gmail.com, @DRDInvestments) is the owner and Chief Investment Officer of DRD Investments, LLC, based in Naples, FL. and Williamstown, MA., a family office focused on managing a long/short hedge fund, real estate assets and various other financial assets for the Dion family.... More
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  • General Electric And Boeing Will Fly In 2014 0 comments
    Nov 25, 2013 9:19 AM | about stocks: BA, UAL, GE

    Boeing Co. (NYSE:BA) has released a warning to its customers that the GE-manufactured GEnx engines (NYSE:GE) used in some of its 787 and 747-8 aircraft are at risk of icing problems when flying near thunderstorms. The maker of the Dreamliner aircraft informed 15 carriers of a potential problem with ice crystals forming on the GEnx engines and causing the engines to reduce or lose thrust at high altitudes. Since April, there have been six instances of aircraft using the GEnx engines losing thrust due to high-altitude icing. In each case, the loss of thrust was temporary and did not endanger the plane involved.

    The affected carriers include Lufthansa, Air India, United Airlines (NYSE:UAL), and Cathay Pacific Airlines; Japan Airlines, the world's second-largest operator of Dreamliners, is thus far the only carrier to ground the affected aircraft, and will replace 787s on its Tokyo-Delhi routes and Tokyo-Singapore routes with 777s and 767s, respectively. Japan Airlines has released a statement to the effect that it has begun work with Boeing and GE to resolve the problem and put its 787s back into operation, while GE released a statement by email that it is in the process of making software modifications to fix the problem in early 2014.

    It should be noted that Dreamliners using other engines are unaffected, including the aircraft employed by the world's largest operator of Dreamliners, ANA Holdings, which use Rolls-Royce engines.

    The problems with GEnx engines have occurred when convective weather-thunderstorms-lifts high concentration of moisture into high altitudes where planes would typically be beyond the threat of icing. Conditions at these altitudes can cause water to form tiny ice crystals the size of grains of flour; these crystals bounce harmlessly off the main body of the aircraft, but can be partially melted by engine heat, allowing them to adhere to engine surfaces and eventually reduce thrust. The issue is compounded by the inability of on-board radar to detect the tiny particles as it would detect snow or hail, leaving pilots with no choice but to evade convective weather entirely.

    Boeing recommends that pilots leave a 50 nautical mile cushion between GEnx aircraft and convective weather. A Japan Airlines spokesman cited concerns about difficulties related to avoiding thunderstorms in its decision to ground its Dreamliners, stating, "There may be cases where we wouldn't be able to go all the way round the cloud formation and we'd have to turn back."

    Impact On Shareholders of GE and Boeing

    Though this problem of course isn't good news for GE or Boeing, the effects on the firms will probably be negligible.

    GE's Financial Upcoming IPO will occur long after this story has blown over, and its excellent management team has weathered far greater crises than this one. See our recent story-seekingalpha.com/article/1857231-general...-ge

    Boeing can hardly be accused of irresponsible behavior, given that the warnings about the aircraft originated from the firm itself and that most of the aircraft are continuing to operate. There has been no headline-grabbing disaster, and the issue seems likely to be resolved entirely through GE's software fix at the beginning of 2014.

    If anything, Boeing may see a temporary dip in its share prices, though even this is doubtful given the firm's recent successful launch of its next-generation 777X aircraft, which has already generated deals worth some $95 billion from European and Middle Eastern customers. GE will also be a beneficiary of that deal as the manufacturer of the engines for the new aircraft. See our recent article- seekingalpha.com/article/1840822-boeing-... our recent story-

    Conclusion

    Given the tremendous run up of the stock market this year and some negative headlines relating to Boeing's union issues and GE's engine challenges, these two companies could face short term headwinds to their stock prices during the balance of 2013.

    However, looking ahead to next year, we are very positive about these two stocks in 2014 for investors who have a least a medium term horizon.

    These two companies must be considered as core holdings in most value and growth oriented portfolios.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

    Themes: long-ideas Stocks: BA, UAL, GE
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