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4:13 pm
Tue December 31, 2013

Boeing Soars Despite A Turbulent 2013

Originally published on Tue December 31, 2013 6:56 pm

On the very first Monday of 2013, Boeing got some bad news: There was a catastrophic battery fire on a 787 parked at Boston's Logan International Airport. Less than two weeks later, a second battery meltdown on another 787 prompted an emergency landing in Japan.

Government regulators responded quickly. The Federal Aviation Administration ordered the entire fleet of 787s grounded indefinitely.

The planes sat on the ground for more than three months while investigators and engineers figured out how to fix their overheating lithium ion batteries. Deliveries of new 787s were halted, too.

But Boeing's stock never really faltered. In fact, the airplane manufacturer's stock price grew 80 percent over 2013, one of the market's best performers.

As Carter Leake, an investment banker at BB&T Capital Markets and a longtime industry observer, puts it, Wall Street "shrugged off" the 787 battery problem "because they made the correct bet that Boeing would be able to get through this."

But beyond that, Leake says, investors were focused on the company's large and growing backlog of orders for its other airplanes.

"The smart money saw that the 737, the 777 — the aircraft that had the highest margins and the highest cash flow — were on track. Demand was at all-time high and production rates were likely to go even higher, which they did," he says.

Keep in mind that Boeing has just one real competitor for large commercial jets: Europe's Airbus.

Boeing launched its newest line of planes, the 777X, at the Dubai air show in November. The redesigned version of the existing 777 model won a record number of orders, totaling $95 billion at list prices.

But where Boeing will build that plane is still being decided, and it's an extremely contentious issue.

Union Dispute Could Give Airbus A Bump

Just about everyone, including industry analyst Richard Aboulafia, assumed Boeing would build the plane at its existing 777 factory near Seattle.

"Experience plays a very big role in the manufacturing of any commercial jetliner, but particularly a major derivative of an existing jet," he says.

But this fall, Boeing told its union machinists that if they did not approve a new contract, the company might well build the 777X somewhere else.

"It's not going to happen," says union machinist Thomas Campbell. "It would be a complete fiasco. It would be corporate suicide for them to attempt that."

Campbell was among those who essentially called Boeing's bluff. The union overwhelmingly rejected the contract, with its scaled-back pension and other benefits. Boeing wasted no time soliciting bids from other potential sites.

But building the planes in a new place carries risks, like production problems or extended delays. Given the uncertainty about where the plane will be built, Aboulafia says that some airlines considering or buying 777Xs are also looking at Airbus planes.

"These are core Boeing customers saying, 'Even though we like the 777X, we feel more comfortable with at least hedging our bets and buying some Airbuses too,' " he says.

Meanwhile, Boeing has sweetened its contract offer to the machinists. Their vote is planned for Jan. 3. What happens if the union once again rejects the deal is far from certain.

Copyright 2014 NPR. To see more, visit http://www.npr.org/.

Transcript

ROBERT SIEGEL, HOST:

One of the best performing stocks this year was Boeing. It's up about 80%. That may seems surprising since the company began 213 with the grounding of its flagship 787 Dreamliner. NPR's Wendy Kaufman explains.

WENDY KAUFMAN, BYLINE: On the very first Monday of 2013, Boeing got some bad news. There was a catastrophic battery fire on a 787 parked at the Boston Airport. Less than two weeks later, there was a second battery meltdown on another 787. That one prompted an emergency landing. Government regulators responded quickly.

(SOUNDBITE OF NEWSCAST)

UNIDENTIFIED MAN: There is breaking news in the air tonight. The FAA has ordered all the new 787 Dreamliners grounded for the time being.

KAUFMAN: Indeed, the entire worldwide fleet of 787s would sit on the ground for more than three months while Investigators and engineers figured out how to fix the planes overheating lithium ion batteries. Deliveries of new 787 were halted too. But Boeing's stock never really faltered. As Carter Leake, an investment banker at BB&T Capital Markets puts it, Wall Street shrugged off the 787's battery problems.

CARTER LEAKE: The market shrugged it off because they made the correct bet that Boeing would be able to get through this.

KAUFMAN: But beyond that, says Leake, a longtime industry observer, investors were focused on Boeing's large and growing backlog of orders for its other airplanes.

LEAKE: The smart money saw that the 737, the 777, the aircraft that, you know, have the highest margins and the highest cash flow, were on track. Demand was at all-time high and production rates were likely to go even higher, which they did.

KAUFMAN: And keep in mind that Boeing has only one real competitor for large commercial jets, Europe's Airbus. Last month at the Dubai air show, Boeing launched its newest plane, the 777X. The redesigned version of the existing model won a record number of orders, totaling $95 billion at list prices. But where Boeing will build that new plane is still being decided. It's an extremely contentious issue.

Just about everyone, including industry analyst Richard Aboulafia, assumed that Boeing would build it at its existing 777 factory near Seattle.

RICHARD ABOULAFIA: Experience plays a very big role in the manufacture of any commercial jetliner, but particularly a major derivative of an existing jet.

KAUFMAN: But this past fall, Boeing told its union machinists that if they did not approve a new contract, the company might well build the 777X somewhere else.

THOMAS CAMPBELL: It's not gong to happen. It would be a complete fiasco. It would be corporate suicide for them to attempt that.

KAUFMAN: Union machinist Thomas Campbell was among those who essentially called Boeing' bluff. The union overwhelmingly rejected the contract with its scaled back pension and other benefits. Boeing wasted no time in soliciting bids from other potential sites. But building in a new place carries risk, like production problems or extended delays. And analyst Aboulafia says, given the uncertainty about where the plane will be built, some airlines considering or buying triple 777Xs are also looking at Airbus jets.

ABOULAFIA: These are core Boeing customers saying, even though we like the 777X, we feel more comfortable with at least hedging our bets and buying some Airbuses, too.

KAUFMAN: Meanwhile, Boeing has sweetened its contract offer to the machinists. They will vote again on January 3rd. But what happens if the union once again rejects the deal is far from certain. Wendy Kaufman, NPR News, Seattle. Transcript provided by NPR, Copyright NPR.