Boeing Pain Continues as Battery Investigations Commence

The pain for Boeing BA continued Tuesday as investigations were launched by regulators in both the U.S. and Japan into the battery systems of the new 787 Dreamliner. Following reports of multiple fires on aircraft, Boeing and regulators have determined that the problem was the batteries of the planes and investigations have been launched to determine if the damage was caused by a bad batch of batteries, which would alleviate some of the burden from Boeing, or simply from design flaws in the airplane.

Multiple reports of fires on new 787 Dreamliners have surfaced recently, mainly two key reports of fires from Japanese airlines Al-Nippon Airways and Japan Airlines. Following these fires, regulators from Japan to the U.S. grounded the new airplane and launched simultaneous investigations into the plane.

The investigations launched by regulators on both sides of the world center on two distinctly different searches. Japanese regulators are investigating the batteries themselves, whether or not the planes in question received faulty batteries due to a bad batch being made. Japanese battery maker G.S. Yuasa Corp. is the battery supplier to Boeing for the 787's and the investigation in Japan is centered around this company.

Contrarily, U.S. regulators are focusing on the systems in which the batteries operate with other systems in the plane. Many modern planes are made with so-called fly-by-wire systems and other advanced electronic systems, all which allow the plane to operate more efficiently and smoother and make operation easier for pilots. However, the complexity of these systems and their inter-connected-ness means that the problem may not necessarily be the battery itself but rather its interaction with these complex systems.

The results of these two investigations will have profound effects on Boeing. If the problem is simply a bad batch of batteries from the Japanese supplier, Boeing simply needs to replace the defective ones with new ones. However, should the problem be more systemic and be a cause of the interaction of the batteries with other electronic parts of the plane, the costs to Boeing could be tremendous.

Analysts at Credit Suisse defended Boeing last week reiterating an $86 price target and outperform rating, saying that, "The two lithium ion batteries in the 787 incorporate four levels of redundancy, the last of which allows an overheating cell to burn-out and vent smoke outside the aircraft. We think this likely happened as designed, but the crew erred on the side of caution and made an emergency landing at its discretion. We note many new aircraft endured similar (and some seemingly worse) issues in early service."

The analysts see the recent weakness in the stock as a good entry point, saying, "we think the selloff is overdone. Ray Conner, CEO BCA, stated last week the production ramp on the 787 is proceeding better than expected and sees no impact to it from these issues. In sum, with no clear evidence of a systemic issue with the aircraft, we see these issues as within the normal range of new service squawks (albeit unfortunately bunched together) and would see the weakness as an opportunity."

The problems for Boeing do not seem to be going away anytime soon and the stock could see some short-term volatility due to headline risk, at least until the investigations conclude. Boeing shares traded lower by 1.35 percent in early Tuesday trade and are off 5 percent over the past three weeks.