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Boeing sets 787 tests, analysts encouraged but cautious

The Boeing logo is seen on a Boeing 787 Dreamliner airplane in Long Beach, California March 14, 2012. REUTERS/Lucy Nicholson
The Boeing logo is seen on a Boeing 787 Dreamliner airplane in Long Beach, California March 14, 2012. REUTERS/Lucy Nicholson

By Alwyn Scott

NEW YORK (Reuters) - As Boeing prepared to start testing a redesigned battery system aimed at preventing fires on its flagship 787 Dreamliner, analysts upgraded the company's rating and lifted their targets for the stock price.

Some analysts said the high-tech plane, which was grounded worldwide in January, might be flying passengers again as early as May, after the Federal Aviation Administration on Tuesday approved Boeing's plan to certify the battery system.

Although the carbon-composite jet is only at the beginning of what could be a rigorous testing regimen, and still faces public hearings in April on the safety of its lithium-ion batteries, the FAA's approval of testing appeared to dispel clouds of uncertainty.

Investors have realized that "the 787 isn't the end of the world," said Ken Herbert, an analyst at Imperial Capital in San Francisco.

Instead, they are focusing on potential orders for Boeing and Airbus, including a $15 billion deal for Boeing 737s by Ryanair , that sources told Reuters the budget Irish carrier is close to signing.

"Investors are thinking there's more juice to this order cycle than people thought three months ago, and the 787 is not going to blow me up," he added. Herbert kept his "in-line" rating on the stock.

Among the upgrades, Stifel Nicolaus & Co raised its target on Boeing's stock price to $100 from $85. Peter Arment, analyst at Sterne Agee & Leach Inc, upped his target to $100 from $87.

Boeing shares rose 59 cents, or 0.7 percent, to close at $84.75 in New York Wednesday, after climbing 1.5 percent on Tuesday after the FAA news.

But risks remain for Boeing, which must prove it has fixed the battery system after batteries burned on two planes in January. In one instance, the battery ignited into a hissing, smoking blaze inside a 787 parked in Boston. Smoke entered the cabin and the battery burned for 1 hour and 40 minutes, while firefighters shot it with flame suppressant, investigators said. In a separate incident nine days later, a battery overheated on a plane flying in Japan, prompting an emergency landing and evacuation.

Last week, the National Transportation Safety Board, the top U.S. safety investigator, said it would hold public hearings next month to examine Boeing's proposed fix for the battery system, and about lithium-ion technology in general.

"You're taking Boeing at their word that they have complete confidence that this is the permanent solution," said Carter Leake, analyst at BB&T Capital Markets, who raised Boeing's rating to a hold from an underweight. "It is from their confidence that I drew my conclusion."

But he said he stopped short of issuing a buy recommendation because the series of tests proposed by the FAA to assess the battery contains unknowns that are impossible to overlook.

"You've got these series of pass-fail tests," he said. "Well, what if we fail? Then where are we? I have to believe there's risk in these tests."

The NTSB still has not determined what caused the batteries to overheat, and Boeing has pressed ahead with a solution, knowing that as further facts emerge, they could require shifts in the approach, though a wholesale change in the new proposed system is not expected.

Boeing said its proposed changes to the battery system and its testing plans are a final fix, and that if it completes each step in the plan, the FAA will approve the 787 to resume commercial operation.

"We have proposed a comprehensive set of solutions designed to significantly minimize the potential for battery failure while ensuring that no battery event affects the continued safe operation of the airplane," Boeing Commercial Airplanes CEO Ray Conner said in a statement on Tuesday.

Still, it remains unknown what effect the 787 fires have had on public perception of the plane's safety. It's also not known whether other issues might arise in the jet, which is packed with new technology: not just a new, lighter body made of carbon-fiber plastic, but a new electrical system that replaces heavier hydraulic systems standard on older-style aircraft.

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Link to Reuters video interview with NTSB Chairman Hersman:

http://reut.rs/XYTXvj

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NTSB Chairman Hersman told Reuters in an interview that she was most surprised that Boeing and the FAA did not anticipate battery problems.

"What stands out to me is that they really didn't expect to see what we have seen in service on the 787," she said. "So (the NTSB is) trying to understand what assumptions were made in the design and certification process and why those didn't bear out in service."

Arment, analyst at Stern Agee, said he expected airlines will remain barred from flying the 787 until June, and that Boeing won't be able to deliver new jets to customers until late in the third quarter. Boeing had to stop delivering jets when the fleet was grounded, though it is still making five of them per month.

Howard Rubel, an analyst at Jefferies, said the Dreamliner could be carrying customers again before the end of May, which might prompt him to reevaluate his estimate of costs of around $550 million for the battery problems. Other analysts have put the cost closer of the grounding, now in its eighth week, at $400 million and rising about $50 million a week.

Both Rubel and Arment cited the Ryanair order as a sign of more potential growth than had been expected even a few months ago, and also that profit margins can be maintained.

(Reporting by Alwyn Scott; Editing by Jan Paschal, Bernard Orr and David Gregorio)

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