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Published On: Sun, Jan 20th, 2013

Flying or Investing – Is the Boeing 787 actually safe?

Boeing Commercial Airlines (BA) and the aviation world in general suffered a major setback last week when the national aviation authority of the United States, the Federal Aviation Administration (FAA) red flagged all Boeing 787 Dreamliners within its jurisdiction. This happened after a Japan Airlines 787 landed in Boston after having flown in from Tokyo and reported a fire in its lithium ion battery compartments.

Later in the week, an All Nippon Airlines 787 flight was grounded before its scheduled flight after the warning system reported battery errors. In the same flight, the ground staff at the airport also reported smoke. This chain of events which was preceded earlier by technical concerns and delivery issues prompted the leading airliners to call off their 787 planes from active service immediately pending an investigation.

The news comes as a shock especially because over the last couple years, the Boeing 787 was being touted as the next evolutionary benchmark of commercial aviation. It is supposedly Boeing’s most fuel efficient plane, consuming 20% less fuel than its predecessor, the Boeing 777. Also, it is the first major airliner to use composite materials for the major part of its construction, which makes it lighter in weight than some of the other airliners of its time.

The announcement for the 787 began way back in 2004 which was the same year orders started pouring in for it. In 2011, the first delivery was made to All Nippon Airways and as of now, there are about forty-four 787s currently owned by major airlines. The highest among these is All Nippon Airlines, which owns seventeen of these. This is followed by United Airlines, which owns seven Boeing 787s and Japan Airlines, which own six. These figures are important especially considering the current events. The Japanese airport authority and the Federal Aviation Administration’s red-flagging of the 787 affected more than half of these planes in service. It was only natural for other airlines to follow suit and cancel their 787 flights.

Now this begs two very important questions that immediately need to be addressed – How safe is the Boeing 787 for flying, and how safe is investing in Boeing as of now?

To answer the first question, we would need to wait for the investigation to take its proper course and wait for the verdict. Until then, there will be no Boeing 787 planes in the air and the question of safety does not arise if the flight itself does not exist. Having said that, I would rather not be sitting in one of its seats as things stand.

Moving onto the second question that affects investors – this too depends a whole lot on the ongoing investigations.

The major concern for investors was actually the late deliveries of the earliest orders. In lieu of the current events, Boeing should hope that the results of the investigation rule in favour of this battery issue being a one off incident rather than a design fault. If the former is true, a dedicated team of experts remodelling the battery components immediately should keep any long term investment concerns at bay.  However, it there is seen to be a fundamental design fault, Boeing would need to return to the drawing board and concentrate all its efforts on coming up with a new design starting from scratch. In a year that still has twelve more deliveries to be made, that would be a genuine financial fiasco.

Apart from the favourable results from the investigation, Boeing should also hope that no airlines actually cancel their orders. As of now, only Qantas has cancelled their Boeing 787 order. If it were to steam roll into other cancellations, that could seriously spell doom for Boeing investors who are looking for short term gains.

Boeing (BA:NYE) closed on Friday at $75.04.

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About the Author

- Marcus Holland has been trading the financial markets since 2007 with a particular focus on soft commodities. He graduated in 2004 from the University of Plymouth with a BA (Hons) in Business and Finance.

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