Latest 787 Developments Unfavorable for Boeing

Within the last 24 hours, three major stories have broken on the Boeing 787 that put Boeing in an unfavorable light.  These reports support our conclusion that this will not be either a quick or easy fix for Boeing, and that a delay of nine months to a year may be realistic with respect to when the 787 is returned to service with a new battery system.

The New York Times reported that Boeing knew of previous battery problems, but because these failures were not safety of flight related, they did not have to be reported to regulators.  In this article, they cited 10 incidents at ANA in which battery replacements were required, with a negative tone towards Boeing.

The Seattle Times expounded on the problems in this article, citing between 100 and 150 battery failures in the short operating life of the small 787 fleet.  This new data indicates the depth of problems with the battery system on the aircraft, as airlines should not need to replace $18,000 batteries with anywhere near that frequency.  Apparently, batteries are discharging past the level at which they could be safely recharged, and that triggers a safety mechanism that requires replacement.

And perhaps most importantly, Elon Musk, founder of Tesla automobiles, which uses Lithium-ion batteries, stated that the 787 batteries are fundamentally dangerous in this article at Flight Global.  He indicated that “unfortunately, the pack architecture supplied to Boeing is inherently unsafe.  Large cells without enough space between them to isolate against the cell-to-cell thermal domino effect means it is simply a matter of time before there are more incidents of this nature.”   That assessment was confirmed by professor Donald Sadoway, an electrical engineering professor at MIT, who stated he was glad that “somebody with a big reputation put it on the line.”

His companies chose to utilize small cell rather than large cell technologies to reduce the risk of thermal runaway by placing smaller cells farther apart, with additional protective materials between them to ensure that the failure of one cell does not spread to another.   Musk’s offer to help Boeing fix the battery problem has been rebuffed.

The Bottom Line:

These articles imply a serious safety problem, and that Boeing is not being as forthcoming on the high frequency of battery replacements with regulators.  Boeing CEO Jim McNerney indicated, on an earnings conference call this morning, that the rate of battery replacements is “slightly higher” than expectations.  We believe the allegations of unsafe battery design have captured public opinion, particularly with a high profile individual commenting on the dangers of thermal runaway, that will likely force regulators to mandate a change.  When asked about the Lithium-ion batteries, McNerney indicated that nothing they have seen, so far, would change their mind that they made the right choice for the 787.  Most independent observers now seem to disagree, and are waiting for the regulators to uncover the root cause that will force a change in the 787 battery system.

The scenario that a few weeks ago we would have described as a worst case outcome now appears to be an expected outcome – a minimum six month, and more likely a nine to 12 month time frame for redesign of the battery system and FAA certification of those changes.  The key question for Boeing is whether the FAA will enable the airplane to resume service after finding the root cause of the problems, which is still eluding investigators and Boeing engineers.  Our expectation is that they will not, given the volatile nature of the batteries installed on the 787, and mandate changes that will also impact Airbus, Gulfstream and other aircraft manufacturers that use or plan to use Lithium-ion batteries in the future.  If technologies are available that minimize the threat of thermal runaway and an on-board fire, they should be seriously considered by regulatory authorities and, if appropriate, mandated.

The impact of this worst case scenario to Boeing will likely be quite significant, particularly since Boeing can’t deliver the airplanes that cannot be flight tested and remain work in process, rather than finished goods.  With production scheduled at 60 787s for this year, with the rate ramping up to 10 per month by the end of the year, the continued grounding would cause a seven to nine billion dollar revenue drop (over $12 billion at list prices) if they cannot be delivered in 2013, not counting the additional costs for design, testing and replacement of the batteries and compensatory payments to airlines for failing to deliver aircraft on time.  Even with Boeing’s strong cash position and liquidity, that would be a huge financial drain, and will certainly materially impact 2013 earnings.

We sincerely hope that a root cause and resolution to the problem can be found quickly, and the aircraft returned to service.  But from everything we are learning, the problem may extend further into the aircraft’s electronics system, which will be more difficult to diagnose and cure.  The 787 will eventually be a good airplane – modern, fuel efficient, comfortable, and environmentally friendly – once the problems are sorted out.  The question now is whether public perception has turned, and whether the traveling public will embrace or avoid the Dreamliner (or to some, Screamliner).  In today’s world, social media can make or break reputations much faster than in prior generations.  While only time will tell, the news media reports today are not helping either the 787 or Boeing’s reputation.

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