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Boeing’s (BA) Dreamliner Dreams Go Up in a Puff of Smoke

By: , dated January 22nd, 2013

Aircraft manufacturer Boeing’s (BA: Charts, News) suffered a major setback this month, after safety concerns arose regarding its flagship 787 Dreamliner aircraft. The revolutionary, next-generation 787s are manufactured from lightweight composite materials and re-engineered electrical systems, which allow them to be 15-20% more fuel efficient than older aircraft. In these days of unstable gas prices – which often force airlines to hedge futures just to maintain a stable financial outlook – the Dreamliner was the dream aircraft that many airlines had been waiting for. Before the first Dreamliner even took off in 2011, Boeing had a backlog of 753 orders to fill – a record demand for a new aircraft.

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Boeing’s Dreamliner headaches started earlier this month, when a problem with a lithium-ion battery forced an All Nippon Airways flight to make an emergency landing at Takamatsu airport. Later, another battery caught fire in a parked Japan Airlines’ flight at Boston Logan International Airport. Initial tests showed that the battery was not overcharged and was properly maintained.

These incidents forced Japan’s transport ministry and the U.S. Federal Aviation Administration to ground all 50 787 Dreamliners until a joint probe can thoroughly investigate the company that manufactures the Dreamliners’ lithium-ion batteries, GS Yuasa Corp. The investigation officially commenced this Monday. Some of Boeing’s critics have claimed that the troubles were caused by the outsourcing of 70% of the plane’s parts to cut expenses, which caused incongruities in design and execution.

Although analysts don’t expect Boeing’s stock to take much of a long-term hit from the Dreamliner fiasco, several airline companies, dependent on the Dreamliner to revive their lagging fortunes, could suffer greatly. Fort Worth-based American Airlines, which is currently bankrupt, is counting on adding the Dreamliner to its fleet by 2014 as part of its turnaround efforts. American has since ordered 42 Dreamliners.

Boeing’s current problems also represent an opportunity for its primary competitor Airbus, which has since released a larger aircraft, the A380. With the A380, Airbus opted for a larger size over fuel efficiency, believing that it could make up for the extra fuel costs by carrying more passengers. Airbus received 257 orders for the A380 since its release, but only 92 orders have been filled.

Airbus, a subsidiary of EADS (European Aeronautic Defense and Space) (EADSY: Charts, News) has fallen behind Boeing in the number of passenger jets sold over the past five years. Boeing has sold 1,203 jets, compared to Airbus’ 833. In commercial aircraft, Airbus has also lagged Boeing for the past ten years, selling 588 compared to Boeing’s 601. Looking forward, Airbus intends to sell 700 passenger jets this year to pull back ahead of Boeing.

Over the past twelve months, shares of Boeing have gone nowhere, dipping a mere 0.64%. Over the past five years, shares have slid 4.29%. The reason for this stagnation was the long initial wait for the Dreamliner, which was delayed repeatedly due to several mechanical failures. When the Dreamliner finally took off in 2011, Boeing shareholders breathed a sigh of relief. Unfortunately, it looks like shareholders are going to have to wait again.

Boeing trades at 14.6 times forward earnings with a 5-year PEG ratio of 1.25. The stock pays a quarterly dividend of 49 cents per share – a 2.49% yield at current prices.

Other News About BA
Despite Boeing 787 Problems, Company Retakes Top In Sales
Boeing continues to dominate Airbus.
Investigators Look at Battery Problem in Grounded 787s
A joint probe officially starts into Boeing’s Dreamliner problems.

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Leo Sun Leo Sun is a freelance finance writer and position trader. He focuses on a combination of value and momentum investing, with a strong interest in the trading philosophies of Warren Buffett and Peter Lynch. Leo also has experience writing articles to help small business owners acquire loans and manage their finances. He regularly contributes to the Stock of the Day analysis.

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