For Boeing, it's now a question of the cost of Dreamliner's glitches

  • Article by: THOMAS BLACK and SUSANNA RAY , Bloomberg News
  • Updated: January 28, 2013 - 8:36 PM

Estimates range from a few hundred million dollars up to $5 billion.

SEATTLE - As government regulators investigate Boeing's 787 Dreamliner and company engineers search for solutions, investors and analysts are grappling with the bottom-line question: How much will the plane's grounding cost?

The answer depends on what probes in the United States and Japan uncover, with scenarios ranging from a quick resolution if a few defective parts have to be swapped out to a drawn-out inquiry that requires a fundamental redesign. The worst case scenario: The Dreamliner's problems run so deep that Chief Executive Officer Jim McNerney has to write off about $5 billion in anticipated revenue, said Howard Rubel, a Jefferies & Co. analyst who puts the odds of that at about 4 percent.

The costs are likely to be much less, in the hundreds of millions of dollars, say investors and analysts, including Rubel. That would let Boeing, which reports 2012 earnings on Jan. 30, reap the rewards of what he estimates was a $25 billion investment, clearing the way for a profit surge.

"As far as dividend growth, cash flow and share buybacks, I think that's still intact," said Gary Bradshaw, a fund manager at Hodges Capital Management, who added to his Boeing stake after a fire broke out on a Dreamliner on Jan. 7.

U.S. investigators are searching for what caused the fire in lithium-ion batteries on a Japan Airlines 787 in Boston that day and a fault that forced an All Nippon Airways Co. plane to make an emergency landing in Japan Jan. 16. The jet debuted commercially in 2011, and 50 have been delivered so far.

The grounding will most likely cost Boeing $550 million, Rubel wrote in a report with a range of potential expenses, from $125 million to reimburse carriers that lease replacement jets to the $5 billion write-off.

With probes still under way by the Federal Aviation Administration and the National Transportation Safety Board, McNerney will face questions on this week's earnings call that he won't be able to answer. Chicago-based Boeing is due to give its 2013 financial forecast and delivery plans.

"We are working this issue tirelessly," Chaz Bickers, a spokesman, said of the 787.

Earnings per share may rise more than 50 percent to $7.69 by 2015 from $5 in 2012, the average estimate of four analysts surveyed by Bloomberg. Analysts project that Boeing garnered $81.7 billion in sales last year, which may grow to $87.9 billion in 2013.

The planemaker said it plans to double 787 output to 10 a month this year as it pares a backlog of about 800 orders. That's one piece of the company's 60 percent production boost through 2014 to meet demand from airlines.

"You look out a couple of years and they could be earning $8 a share, and then you really have a cheap stock," said Bradshaw.

In a worst-case scenario, the model may be grounded more than three months, which could force a production slowdown, said Carter Leake, of BB&T Capital Markets. While Boeing continues to assemble 787s, the grounding has forced a halt in deliveries.

"The market is in a period of disbelief that it could be anything other than a quick fix, despite the fact that we're in an open investigation," said Leake.

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