Boeing 787 Dreamliner

It has been widely reported that an Ethiopian Airlines Boeing 787 Dreamliner suffered a fire at a remote gate in London’s Heathrow airport, some 3-4 hours before a scheduled departure after sitting for several hours on the tarmac between flights.  The potential early similarities to prior incidents of problems with the Boeing 787 Dreamliner has heightened concerns around the Boeing 787 Dreamliner’s batteries/electrical system, and as a result many were not surprised to see The Boeing Company (NYSE:BA) shares (as well as those of laterals including PCP and SPR) off sharply in today’s trading.

Carter Copeland analyst at Barclays Research Opines regarding the Boeing 787 Dreamliner Fire

More than anything else, we think investors need more information about the Boeing 787 Dreamliner to make sound decisions about what to do with BA shares following this incident, but initial observations that the fire occurred in an area that wasn’t near the aft APU battery (in the crown of the aircraft) have investors now speculating that a worst case scenario (another battery fire) is a lower probability outcome than initially feared.

Although we would agree with this observation about the Boeing 787 Dreamliner, given the lack of information, we would say our conviction level is low to step in and buy BA shares just yet.  We’d be fine buying BA shares higher with more information that this problem is contained, and should this not be the case we’d be looking to buy shares lower.  Bottom line, we think the best course of action is to wait and see the cause of the Boeing 787 Dreamliner.


Boeing 787 Dreamliner Fire More from Barclays

Remembering how this worked in the initial Boeing 787 Dreamliner incidents, where data/information were somewhat slow to emerge, we think it is reasonable to conclude that we won’t have sufficient information to draw firm conclusions about how to react to what has happened by the end of today’s trading.

As a result, Boeing and the various aviation authorities will have the entire weekend to provide an update on the situation.  We think it is reasonable to assume that all of the basic details about the Boeing 787 Dreamliner fire that will be needed to assess “tail risks” will emerge by Monday’s trading, and we’d expect to get statements from Boeing, Ethiopian, as well as aviation authorities (FAA, EASA, and NTSB) over the weekend.

We think another battery-related incident would represent the worst case scenario for BA shares as it might cause investors to revisit financial consequences associated with another grounding of the aircraft, potential production stoppages, and any sort of redesign.  This is not something that appears to be highly likely based on the information we have so far, but again it’s still early.

A fire related to another cause could have a wide range of assumed “severities” in the eyes of investors, given potential “associations” to the electrical system and the fire on a flight test plane caused by an unexpected arc and short circuit in an electrical panel.

We would assume that the aircraft in question was operating on ground-based power (i.e., APU not running) at the time of the incident, which has us leaning away from the view that this incident is battery related, but again this remains unconfirmed.