Boeing Dreamliner’s Defects Spur New Cash Risk as Max Woes Fade

Boeing Co. faces a new cash drain from structural flaws on its marquee 787 Dreamliner jets, potentially slowing the company’s recovery from the coronavirus pandemic and the grounding of the 737 Max, said a Bernstein analyst.

The Dreamliner’s woes will sap $7.5 billion from Boeing’s free cash flow for 2020 and 2021, Bernstein’s Douglas Harned said Monday as he cut the planemaker to the equivalent of “sell.” Boeing handed over only one 787 jet in December after none in November, Harned estimated, suggesting delays from repairs to undelivered jets.

“The problem we see is that the 787 situation is getting worse and we are not yet able to fully bound the negative impact,” Harned said in a report. He lowered his price target 10% to $199.

The burgeoning financial impact points to new turmoil for Boeing as it tries to rebound from the sharpest downturn in aviation history. While the Dreamliner’s defects don’t pose an immediate threat to safety, Boeing Chief Financial Officer Greg Smith acknowledged last month that inspections were taking longer than expected. That contrasted with the company’s upbeat message in October, when it predicted a strong fourth quarter for 787 deliveries.

Boeing fell 5.1% to $203.15 at 2:55 p.m. in New York after sliding as much as 5.4% for the the biggest intraday drop in almost three months. Boeing was the worst performer on the Dow Jones Industrial Average, even as rising Covid-19 cases and Tuesday’s runoff elections for two Senate seats in Georgia spurred a broad slump in U.S. stocks.

Stored Jets

The Chicago-based company declined to comment beyond Smith’s warning last month about weak deliveries. The CFO said at the time that Boeing anticipated handing over undelivered Dreamliners throughout 2021.

About 75 completed Dreamliners are stored, Harned said, far more than the 10 to 15 undelivered aircraft that were typical when the program was a cash cow for Boeing. Harned predicted that the number of stored 787 planes would continue to grow during the first quarter.

Boeing’s inventory already stood at a record $75.2 billion at the end of September, swollen by hundreds of undelivered Max jets. Handovers of the single-aisle workhorse are now underway, since U.S. regulators lifted the Max’s grounding in November. The flying ban, the longest in U.S. history, was prompted by two deadly crashes that killed 346 people.

In the eyes of investors, the Max’s return and the rapid introduction of Covid-19 vaccines overshadowed the Dreamliner’s woes in late 2020, and the shares rallied sharply in the fourth quarter. Still, UBS Group AG warned that Boeing could be forced to record a reach-forward loss with its earnings later this month as it slows Dreamliner output and consolidates production in South Carolina.

‘Disassembling’ Interiors

Boeingintends to repair 787 planes for months at its factory in Everett, Washington, after ending production of the model there in March. The inspections require “opening up the airplane by disassembling the interior, floor, ceiling, etc.,” Harned wrote.

Where the two fuselage segments are joined, engineering specifications allow for slight variances, or wrinkles, in the inner surface that are about the width of a human hair.

Boeing and U.S. regulators are determining what course of action is needed for Dreamliners already in service. The potential responses include requiring the company to fix the structural issues or demonstrating that its previous engineering tolerances were overly tight, Harned said.

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