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Are Boeing Dreams Too Big?

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In a sudden twist of fate aviation regulators round the globe have grounded the entire 50-strong global fleet of The Boeing Company’s (BA - Free Report) 787 Dreamliner jet airliners. The global grounding comes in the wake of concerns over the safety of battery systems of the airliner.

The Boeing 787 Dreamliner is a long-range, mid-size, wide-body, twin-engine jet airliner. In addition to bringing big-jet ranges to mid-size airplanes, the 787 provides airlines with superior fuel efficiency, resulting in exceptional environmental performance. The airplane as per Boeing uses 20% less fuel than similarly sized airplanes.

The pile of dominos started tumbling from Japan when on Wednesday a 787 Dreamliner of Japanese airline All Nippon Airways made an emergency landing at Takamatsu airport in Japan. The Dreamliner was forced to land after an in-flight battery incident of smoke appearing in the plane's cockpit. The airline attributed the emission of smoke to a battery malfunction. This prompted the airliner to ground its fleet of 17 Dreamliners for inspection.
Separately another Japanese airline Japan Airlines also announced the suspension of the flights of its 7 Dreamliner's until further notice citing safety concerns after the battery system of a parked 787 caught fire at Boston's Logan International Airport.

The Japanese omen precipitated a global grounding of Dreamliners starting at home with a directive from the U.S. Federal Aviation Administration (FAA). However FAA’s directive towards U.S. carriers affected only United Continental Holdings, Inc. (UAL - Free Report) . As of now United Continental is the only U.S. airliner with half a dozen Dreamliners in its fleet. Following FAA’s directive aviation regulators in India and Japan followed suit. The Indian flag carrier Air India grounded its fleet of 6 Dreamliners. The trend continued elsewhere with Qatar Airways grounding 5, Chile's LAN Airlines S.A. 3, Ethiopian Airlines 4, and LOT Polish Airlines 2.

The Dreamliner incubus did not end here, in what may well could be the inception, Qantas Airways Ltd. trimmed its Dreamliner order tally of 15 by 1. Boeing at 2012 end had a bulging Dreamliner order book of 848. We are apprehensive that the battery imbroglio would likely add to the tally of Dreamliner cancellations. Earlier for clearing the bulging order backlog Boeing rapidly increased its Dreamliner monthly production rate from 2.5 to 5 in 2012, with plans on the anvil to stretch it to 10 by late 2013.

Boeing’s first delivery of the Dreamliner aircraft was more than three years behind the original schedule. The company completed the contractual delivery of the first 787 Dreamliner series aircraft to All Nippon Airways, in September 2011. The delays have forced Boeing to pay huge compensation to customers which added to the project's cost.

The question now arises with Dreamliner dreams turning sour, would Boeing be able to cope with its ambitious growth plan. Rising possibility of further U.S. defense cutbacks could impact the stream of orders and eventually slow down the growth of its defense business. As a result Boeing had pinned its hope on its commercial airplanes business for future growth.

The company in its 2012 Current Market Outlook estimates a $4.5 trillion market for 34,000 new commercial airplanes over the next 20 years. Boeing’s projection of growth was based on the strength of the commercial aviation market, recovery witnessed in world economies and strong demand for fleet addition and replacement.

Of this the twin-aisle airplane segment was the highest valued segment of the long-term forecast, valued at $2.1 trillion over the next 20 years. Boeing foresees that over the next 20 years, the vast majority of twin-aisle airplanes currently flying will be retired. By 2031, new airplanes will account for 87% of the twin-aisle fleet. Boeing had relied on the 787 Dreamliner, in this prized segment, to take on arch rival Airbus’s A350 series airplane.

Boeing along with experts from U.S. National Transportation Safety Board, Federal Aviation Administration and Japan Transport Safety Board has already started investigating the questionable Dreamliners batteries in Japan. The final outcome of the Dreamliner imbroglio will not affect Boeing alone but its long-list of suppliers also. Dreamliner suppliers include among others Hexcel Corporation (HXL - Free Report) , Rockwell Collins Inc. (COL - Free Report) and Precision Castparts Corporation .

We currently retain a Zacks Rank #3 (Hold) on Boeing. Considering the fundamentals, we are maintaining our long-term Neutral recommendation on the stock.

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