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Boeing...You're Grounded!

 January 17, 2013 12:49 PM
 


(By Mani) The Federal Aviation Administration (FAA) grounded Boeing Company's (NYSE: BA) 787 fleet pending proof that onboard batteries don't pose a safety threat. The FAA move follows groundings in Japan and India.

This is the culmination of about 2 weeks of electrical woes for the 787, including a fire on an empty JAL aircraft and a recent emergency landing by ANA. The recent ANA incident is now reported having resulted in a 12-foot long, dark streak of hot chemical residue that sprayed from the lithium-ion battery and into the electronics bay.

Whilst the current grounding is indefinite, the FAA and the U.S. Department of Transportation were already investigating the 787's electrical system alongside Boeing. Given that the issue is now more than one week old, Boeing and the FAA are likely to identify both cause and solution in the relatively near term - weeks versus months.

[Related -United Technologies Corporation (NYSE:UTX): How Pension Shift Will Drive EPS?]

"As evidence we consider last summer's issue with corrosion on ANA's Trent 1000 gear boxes, which was dealt with in a matter of weeks by Rolls-Royce. The cost for this electrical fix is also likely to be shared by key suppliers, which could include Thales as the power conversion prime, GS Yuasa as the battery supplier and Securaplane (a Meggitt subsidiary) as the battery charger supplier," RBC Capital Markets analyst Robert Stallard wrote in a note to clients.

However, these incidents are not likely to affect passengers' excitement to fly on a 787. As a reference point, the A380 experienced uncontained engine failures in early operations with Qantas - a far more dangerous scenario. Yet A380 demand has not been materially affected, and passengers continue to rave about the experience, and airlines can charge a premium for the aircraft's routes.

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"If a serious, unfixable problem is found with the 787 design then all bets are off in terms of the 787's 800+ backlog," Stallard said.

Much more likely though is that Boeing will solve the problem and for most customers this will be seamlessly implemented prior to delivery.

A comparable 'worst case' is the wing rib feet issue that Airbus is dealing with on the A380, which slowed production from 2.7 to 2.3 aircraft per month for an interim period. Boeing already has a change line for the 787 suggesting a modest delivery impact

Meanwhile, shares of Boeing fell below their 200-day moving average of $72.88 during Thursday's trading. For the past 52-weeks, they have been trading between $66.82 and $78.02.

"787 sentiment has been impacted and Boeing should sell off again today, but we expect support near $70," Stallard said.

With the market selling off 787 suppliers - effectively pricing in a delivery cut - there is an opportunity in oversold names, especially Precision Castparts Corp. (NYSE:PCP) and Triumph Group, Inc. (NYSE:TGI).

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