Boeing Still Flying Despite 787's on the Ground

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The share price of Boeing (NYSE:BA) rose $0.94 today to $74.59, a change of 1.28%, on news of the company’s 14% increase in revenue for 2012.

The company turned a profit of $978 million, which is lower than 2011’s earnings by $412 million.  The profit numbers are somewhat misleading and not at all unexpected as compared year-on-year as last year’s core operating earnings were somewhat inflated by the inclusion of a one-off favorable tax settlement.

Total revenue came in at $22.3 billion.  Revenue and profits from Boeing’s commercial airliner business both grew by 29%.  Growth in its military aircraft business was offset by a decline in the space systems and global services & support division.

The widely publicized problems following the roll-out of the long-anticipated 787 airliner has probably garnered more public concern than any numbers Boeing could post.  It is likely that any prolonged doubt or investigation into the failure of the 787’s batteries could bring the share price down to earth for awhile.  Perception is most often a greater motivating factor than factual information is in the decision-making process of most people.

The company line is that it still expects to deliver 60 or more 787’s in 2013.  Boeing President and CEO Jim McNerney said that “Our first order of business is to resolve the battery issue on the 787 and return the airplanes safely to service with our customers.”  I think we can believe him when he frames his statement in terms of Boeing’s customers, but he has also got to be concerned about the impact on Boeing’s suppliers.

In a corporation of this size, any production stoppage can have a massive impact on many suppliers.  At times like these we need to remember that this is an airplane assembly company.  Materials from wings to wallpaper and from seats to sensors are manufactured by subcontractors around the globe.  The annual business plan of each of those companies can be impacted severely by what is perceived as “Boeing’s 787 problem.”  It really becomes “Boeing’s suppliers’ 787 problem.”

McNerney added that “Nothing that we have learned has told us that we have made the wrong choice on the battery technology.  We feel good about the battery technology and its fit for the airplane.  We have just got to get to the root cause of these incidents.  We will take a look at the data as it evolves, but there is nothing that we have learned that causes us to question it at this stage.”  Speaking, as we were, about suppliers, the root cause of failures of this type is often not in the technology, as McNerney so carefully stated.  This is especially true with new technologies where the problem is typically in the design, the materials, or the production process.  Since Boeing does not manufacture the batteries, nor is it likely that they designed them, you can bet that a good deal of the investigation is taking place at the sites where those functions took place.

So far, Boeing has said that 787 production will continue during the investigation process, but deliveries will be suspended until the FAA has cleared the planes for flight again.  The longer that takes, the less tenable McNerney’s current statements become.  There are 50 787’s currently considered in service.

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