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.