Is the Dreamliner Becoming a Financial Nightmare for Boeing?

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Asahi Shimbun via Getty Images

All Nippon Airways flight 692, departing from Yamaguchi Ube airport at 8:10 detected smoke inside the aircraft, made an emergency landing at Takamatsu Airport, all 137 passengers and crews evacuated from the plane on the runway of Takamatsu Airport on Jan. 16, 2013 in Takamatsu, Kagawa, Japan.

The Federal Aviation Administration issued an “emergency airworthiness directive” late Wednesday following a string of incidents with Boeing’s precocious problem child, the 787, grounding the plane indefinitely until the reason behind two recent fires — attributed to faulty batteries — could be determined and the problem solved. The 787, also called the Dreamliner, is already a hugely expensive project for Boeing. The F.A.A.’s action increases the challenges that the manufacturer faces in trying to recoup its investment.

Following an unscheduled landing in New Orleans in December and a fire in Boston earlier this month, an All Nippon Airways flight had to make an emergency landing yesterday after a battery malfunction and reports of smoke in the cabin. Both ANA and Japan Airlines, the other carrier that has the most 787s in service, grounded their fleets voluntarily on Thursday ahead of the F.A.A. action while they attempt to figure out what went wrong.

Industry analysts and watchers — including TIME’s Bill Saporito in this article — have been quick to point out that there are always hiccups when rolling out new plane models. But as the mishaps continue to multiply, some are starting to wonder if this time is different.“This is in a class by itself,” says Richard Aboulafia, vice president at aerospace and defense industry market analysis firm the Teal Group.

“We will be taking every necessary step in the coming days to assure our customers and the traveling public of the 787’s safety and to return the airplanes to service,” Boeing president and CEO Jim McNerney said in a statement Wednesday evening.

(MORE: How Safe Is the Boeing 787?)

Still, experts say the F.A.A.’s review could take months. Hans Weber, president of aviation consulting firm TECOP International Inc., says that if the agency requires replacing the batteries, resolving the issue “could take upwards of a year.”

It wasn’t supposed to go down like this. The Dreamliner was supposed to be Boeing’s iPhone: an innovative game changer that customers would line up to get their hands on. An they did line up. The plane debuted in 2007 with a record-breaking 677 orders. Its popularity was driven by the promise of a 20% reduction in fuel consumption, thanks to body parts made out of lightweight composites, a more aerodynamic design, and a souped-up electrical system that supplemented the plane’s energy needs with rechargeable lithium-ion batteries.

It is those batteries — the same kind used in cell phones and other devices — that many suspect are at the root of the problem that led to the plane’s grounding, since they can overheat and catch fire. These fires are almost impossible to extinguish because the material produces oxygen as it burns.

The economic fallout of the grounding will hit carriers that already have the aircraft in service, as well as the manufacturer. Around 50 of the 787s are in use now. It makes up a tiny portion of carriers’ fleets — United, for instance, has six 787s out of a fleet of roughly 700 — but the plane’s lower fuel consumption and superior long-haul capability will make it hard to replace. George Hamlin, president of Hamlin Transportation Consulting, says more than 100 flights a day will be canceled initially, since regulators in other countries with carriers that fly the Dreamliner followed the F.A.A.’s recommendation and issued grounding orders of their own.

Airlines will have to use older, less energy-efficient planes to service the 787’s routes, or redraw their route maps. Right now, many of the 787s in service are flying routes that could be served by other models. “There may be some ability to use older planes,” Hamlin says. “It won’t be as efficient, you may lose money on it.”

On the other hand, says industry analyst Robert Mann, “On some of the 787 nonstop routes there is no adequate substitute aircraft, so there would be revenue loss associated with canceling or re-routing service for some or all of the affected passengers over the duration of the grounding.”

Mann estimates that airlines flying the Dreamliner will lose $2.5 million per aircraft for every month the model is out of service. ANA, which has the largest 787 fleet, with 17 currently in service, will be more severely affected. Here’s one projection, courtesy Reuters: “Keeping the 787s on the ground could cost ANA alone more than $1.1 million a day, Mizuho Securities calculated, noting the Dreamliner was key to the airline’s growth strategy.”

(MOREMore Turbulence for American Airlines)

It will fall on Boeing to pick up part of the tab. Polish airline LOT has already called for compensation from the manufacturer and stipulated it will take delivery of three more planes it ordered only if the problems are resolved, Reuters said.

Mann estimates Boeing could wind up paying up to $125 million to placate angry customers, and its total costs could be much higher. “Add Boeing’s losses from not being able to deliver aircraft for the duration, plus re-work of aircraft on the production line and in the global sourcing pipeline.” This doesn’t even include the as-yet-unknown cost of actually finding and fixing the problem.

Analyst David Strauss at UBS says Boeing was already losing money on every plane it sells. In a research note last month, he predicted that the Dreamliner program will cost Boeing $4 billion to $5 billion a year through 2014, and that the manufacturer won’t turn a profit on the planes until 2021 — and that was before the planes were ordered out of service indefinitely. Strauss estimated the planes, which have a list price of $207 million, cost Boeing $232 million apiece to make — even though its “average unit price” is $117 million each. Boeing’s stock price fell nearly 4% on Wednesday, but the F.A.A.’s order came after the close of the trading day.

The Dreamliner has been a cash sinkhole for Boeing almost from the get-go. When the first planes were delivered in 2011, the Seattle Times estimated that Boeing already had spent $32 billion on the Dreamliner — half on development, half on manufacturing — after initially anticipating development costs of less than $6 billion. “Profitability for the plane won’t come before well into the 2020s — if ever,” the paper said. With this grounding, that prospect looks even more remote.

17 comments
islandgirltt21
islandgirltt21

FAA & worldwide grounding all 787, going to cost Boeing about $1 Billion in Losses. Let’s do the maths:

About 50 Boeing 787 delivered thus far All Nippon 17, Japan Airlines 7, United Airlines 6, Qatar Airways 5, Air India 5, Ethiopian Airlines 4, LAN Airlines 3, LOT Polish Airlines 2.

787 seats about 290 passengers , just say an average ticket cost $1,000 

Per 787 Money Earned Per Day= 250 seats x $1,000 x 2 Trips = $500,000 Per Day

Thus, 50 Planes will Cost Boeing Per Day = $500,000 x 50 =$25,000,000 Per Day

And it looks like this matter might take 1 month before 787 in the air again, let say 2 weeks for the engineers to fix problem and manufacturer new batteries, then FAA take 2 weeks to test and approve battery. 

Thus, 50 Planes will Cost Boeing Per Month = $25,000,000 x 30 Days = $750,000,000 Per Month 

All these airlines may sue Boeing for loss of business and compensation, running an airline not cheap you have to pay salaries, airspace etc In addition, this loss revenue will result in these airline with lost profit example united airlines stock dropped 3% and bad for investors & board.

Harwood Feffer LLP  is investigating potential claims against the board of directors of the Boeing Company , concerning whether the board has breached its fiduciary duties to shareholders. Looking at roughly $250,000,000

Thus, TOTAL LOSSES FOR BOEING = $750,000,000 + $250,000,000 = $1 BILLION

quickster007
quickster007

This is going to happen when new technologies are introduced. Just like anything that's new

ALVin1
ALVin1

TOO MANY CHINESE COMPONENTS ME THINKS.... DO NOT FORGET THESE WORDS....MADE IN USA......MADE IN CANADA

PROBLEM SOLVED...

Kafantaris
Kafantaris

Boeing makes solid planes and has been doing so for decades.  Yet despite their wide use, large lithium batteries still lag in safety.  Ironically a safer route for Boeing would have been to use hydrogen batteries. Not only would hydrogen have given the 787 safer, lighter, and longer lasting batteries (weeks on end) but they could have been recharged in minutes every time the plane refueled.  In any event, we should intelligently work through the 787’s battery problem. Either we better isolate the present lithium batteries or we replace them altogether. And as soon as we are done, the planes should get back on the air because they are otherwise sound -- and safe.                                       


ballard2626
ballard2626

I fear the media is becoming a nightmare for Boeing more than anything.

mfkap
mfkap

I love the quote of 2.5 million per plane per month, but that ANA with 17 planes will be more severely affected, at a cost of 1.1 million per day for the company.  This works out to 1.9 million per plane per month.  Math is hard.  Guess ANA is in good shape with these made up numbers.

williamambrosia
williamambrosia

The race to dimishing returns as quality control is sacrificed at the alter of service. It appears Boeing is in alignment with the global Corporate buffoonery so prevalent today.

RobertoFerrari
RobertoFerrari

As a technician, I bet the batteries may have been installed the wrong way.  I see this a lot.  Unsnap the cover on the bottom of the airplane and look to see the (-) and the (+) symbols, then check the same symbols on the batteries.   I bet they were installed backwards.   Or maybe they bought them at the dollar store.   Also, look for expiration date and always use Alkaline type.   If a rabbit pounding a drum marches by, it means you've fixed the problem.

RobertoFerrari
RobertoFerrari

Why do they need these batteries?   Just one 24 volt battery, enough to start a small turbine for power is all you need.   Just like everything today, they try to load this plane with too many features instead of sticking to basics.  Get those batteries out of there or locate them on an ejectable pod under the wing.   Use airport power when parked or the power turbine.   I worked on P3 Orions and all we needed was a turbine generator for power and to start the engines.   A plane is not meant to be a hotel.

notLostInSpace
notLostInSpace

...and who at Boeing set the selling prices, are they crazy?  How will they ever make any money on this plane?

KipSummers
KipSummers

QC is a problem everywhere, even in this article . "AND they did line up" not "An", "BECAUSE they can overheat and catch fire" not "since".

JonathanSwift
JonathanSwift

It was very, very poorly managed (with much emphasis on "Poor Upper-Level Management") from the beginning. Boeing's class-warfare attitude towards labor was and continues to be a big problem, as well. Hopefully, these problems are not fatal. But, even now, Boeing's upper-level management are actively looking for scapegoats instead of effectively addressing the manifold problems with this aircraft. 

ChandraGupt
ChandraGupt

Its called failure of globalization in quality control. If all parts are designed and manufactured in US this would not have being an issue.

Jagmer
Jagmer

@RobertoFerrari A modern fly by wire aircraft needs enough battery power to run its systems, including avionics and hydraulics, should it have a serious fault like running out of fuel, or engine problems. I know they have emergency generators and props, but they still need the juice to they can use other power sources.

Jagmer
Jagmer

@ChandraGupt If all parts were manufactured in the US, then the plane would cost $800M not $200M. Boeing would not have had any orders, and a "made solely in America" tag is not as appealing to much of its market.

notLostInSpace
notLostInSpace

@ChandraGupt I'd call it more a failure in planning and design because they rushed it.  There was the infamous example of not being specific enough for the specifications for the fastener subcontractor, and then they had to re-do the fasteners.  With new technology, you can't expect your suppliers to bail you out of every design flaw because they don't have any experience either.   We can, and should,  pick on globalization for the huge effect it has on jobs but I don't know how rushing it in the US would have been any better!  I agree with JonathanSwift, upper management has been delusional from the beginning on this project....too fast to market, too slow to react to problems.   Hopefully they fix it because we don't need another bailout of a vital industry!