Boeing May Risk More Penalties After Sixth 787 Delay

Boeing Postpones 787 Delivery on Rolls-Royce Delay
The Boeing 787 Dreamliner, seen here, made its first appearance in Europe last month for the Farnborough Air Show in the U.K. Photographer: Simon Dawson/Bloomberg

Boeing Co.’s sixth postponement of its 787 Dreamliner puts the planemaker at greater risk for paying penalties to customers frustrated by more than 2 1/2 years of delays, analysts said.

Airlines braced for today’s move after Boeing signaled in July that the jet might not enter service until early 2011 instead of 2010, said Richard Aboulafia, an analyst at consultant Teal Group in Fairfax, Virginia. Demands for compensation may rise should the timetable slip again, he said.

“Are there now more unknowns that can trigger another unexpected delay? That is the question,” Aboulafia said in an interview.

Boeing has struggled with new materials, parts shortages, redesign work and a greater reliance on suppliers to build the plastic-composite plane. The latest postponement, to the middle of the first quarter, stems from Rolls-Royce Group Plc’s inability to supply an engine for flight tests, Boeing said.

All Nippon Airways Co., the Dreamliner’s maiden customer, said the holdup was “regrettable.” Rolls-Royce said the delay wasn’t related to a 787 engine blowout on a test bed in Derby, England, this month that forced the site to be shut for repairs.

Boeing, based in Chicago, rose $1.84, or 3 percent, to $63.16 at 4:15 p.m. in New York Stock Exchange composite trading. Rolls-Royce fell 3.5 pence to 555.5 pence in London.

‘Swim Funny’

While bullish investors may see today’s step as “the final disappointment to the 787 saga,” the track record “suggests otherwise,” said Heidi Wood, an analyst at Morgan Stanley in New York who has an “equal-weight” rating on Boeing.

“Experience shows that programs that ‘swim funny’ do so for much longer than most, especially the bulls, ever expect,” Woods wrote in a note to clients. “We do not expect this is the last setback.”

Initially set to enter service in 2008, the 787 is the first jetliner to be built mostly from composite plastics instead of aluminum, and is designed to carry 210 to 290 people. Boeing is using a new assembly process, with partners making sections to be snapped together at the company’s factory in Everett, Washington.

Boeing already faces compensation claims for late 787s. National Aviation Co. of India Ltd., Air India’s state-owned parent, said this month it plans to seek about $840 million for the delays in its order.

‘Slippery Slope’

“There’s a slippery slope here,” said George Hamlin, president of Hamlin Transportation Consulting in Fairfax, Virginia, and a former Airbus SAS executive. “If some carriers start receiving penalties, all will want them. It’s unfortunate that this is coming piled on top of the earlier delays.”

Penalty payments to 787 buyers may reach about $5 billion, Myles Walton, a Deutsche Bank AG analyst in New York, said before today’s delay. Boeing will probably try to use discounts, maintenance agreements, options, purchase rights, delivery-slot availability and other means instead of cash payments, he said.

Through July, Boeing had 847 orders for the Dreamliner, according to the company’s website. Japan Airlines Corp., due to receive its first 787 in March, hasn’t been told of any postponement, said spokesman Satoru Tanaka.

Continental Airlines Inc. is “disappointed” by the latest delay, Christen David, a spokeswoman, said in an e-mail. The carrier expected to begin receiving its 25 Dreamliners in February 2009, a schedule that has slipped to 2011. She said the Houston-based airline hasn’t received an updated timetable.

Delta, American

Delta Air Lines Inc., the world’s largest carrier, is in discussions with Boeing on its 18-plane order, said Trebor Banstetter, a spokesman, who declined to say whether the Atlanta-based airline is seeking penalties.

Tim Smith, a spokesman for AMR Corp.’s American Airlines, declined to immediately comment on the carrier’s orders for 42 787-9s with options for 58 more. UAL Corp.’s United Airlines, which ordered 25 of the jets in December and has future purchase rights for 50 more, said it expects “to be on track” for 2016 deliveries.

“Airlines just keep waiting and waiting,” said Ryota Himeno, an analyst at Mitsubishi UFJ Morgan Stanley Securities Co. in Tokyo. “This new delay will force some tough changes to carriers’ operations.”

Boeing broached the subject of a fresh delay on July 15, saying the handover could come a few weeks into next year because of delays related to instrumentation and the horizontal stabilizers that keep the jet level. The latest postponement won’t affect financial guidance, Boeing said today.

Flight Tests

“The delivery-date revision follows an assessment of the availability of an engine needed for the final phases of flight test this fall,” the company said. “While Boeing works closely with Rolls-Royce to expedite engine availability, flight testing across the test fleet continues as planned.”

A Boeing spokeswoman, Yvonne Leach, said Boeing had no further comment beyond the statement.

A Rolls-Royce spokesman, Craig Taylor, said on Aug. 17 that the engine failure in testing would have no effect on the 787’s entry into service, and that a modification was already in place for later Dreamliners that would resolve the issue.

Airbus, which is developing the A350 as a response to the Dreamliner, may benefit from the new delay, said Howard Rubel, a New York-based analyst for Jefferies & Co. While the A350 isn’t on the market, Boeing faces competition from the A330.

“The inability to hit delivery targets may well cost the company some sales to the A330,” Rubel said today in a note to investors. He recommends buying Boeing shares.

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