A whistleblower’s new allegations could mean more trouble for Boeing’s (BA) 787 Dreamliner program. John Barnett, a former Boeing employee, told BBC News that about 25% of the oxygen systems in the 787 Dreamliner might be faulty. Barnett claimed that Boeing deliberately fitted damaged parts to get planes off the production line quicker.
Boeing 787 whistleblower’s accusations
The Boeing whistleblower identified the problems in 2016 when he was a quality control engineer at the company’s South Carolina facility. He told BBC News that he conducted tests on 300 undamaged oxygen systems. During the trial, he found that about one-fourth of the systems didn’t deploy correctly.
Barnett revealed that managers didn’t investigate his complaints about faulty oxygen systems. He claimed that managers compromised safety and put pressure on workers to meet targets and save costs. Barnett also complained to the FAA in 2017. However, the regulator didn’t take any action.
In a reply to BBC News, Boeing rejected Barnett’s allegations. However, the company admitted to discovering problems in some oxygen bottles in 2017 that weren’t deploying correctly. Boeing said, “We removed those bottles from production so that no defective bottles were placed on airplanes.” The company also said, “We addressed the matter with our supplier.”
Boeing 787 faces a series of quality allegations
The latest allegation isn’t the first time that Boeing’s 787 Dreamliner and the South Carolina plant faced criticism for quality issues. In April, the New York Times alleged that there was “shoddy work” and “flawed quality control” at the South Carolina plant. The New York Times accused Boeing managers of putting pressure on employees to finish work quickly to avoid production delays and cost overruns. In late June, the Department of Justice subpoenaed Boeing regarding investigations about the 787 Dreamliner’s safety issues.
Boeing encountered another problem on August 4 after a report by The Post and Courier. The report cited some leaked documents. The news agency revealed that some Dreamliner recipients raised production quality issues with aircraft built at the South Carolina facility. Etihad, Singapore Airlines, KLM Royal Dutch, and Eva Air and pointed out several production loopholes and poor quality.
The latest allegations raised concerns about Boeing’s 787 Dreamliner prospects. The program is already suffering due to declining demands for wide-body planes.
In a report on October 9, Reuters said that the demands for larger aircraft are softening for multiple reasons. According to the report, rising trade tensions and global economic slowdown concerns are the main reasons behind weakening demand. Also, smaller planes’ enhanced capabilities to fly longer distances impact the demand.
Boeing decided to reduce the monthly output of 787 Dreamliners in 2020 due to a declining order backlog. In September, Boeing saw order cancelations for 22 Dreamliners worth $5.5 billion by Russia-based Aeroflot. A month later, the company announced that it reduced the monthly production rate by two units to 12 units by the end of 2020. The company had an order backlog of 556 planes for its 787 Dreamliner at the end of September.
Why is Boeing struggling?
The latest revelations by the whistleblower could make Boeing’s problems worse. The company is already under pressure due to the 737 MAX crisis. Notably, the MAX aircraft has faced a global flying ban since mid-March following two fatal accidents within five months.
During the third-quarter earnings results, Boeing disclosed that the overall cost associated with the MAX crisis has reached $9.2 billion. Among the total, $3.6 billion is related to higher production costs due to MAX’s reduced monthly output. Following the flying ban in mid-March, Boeing reduced MAX’s monthly production rate by 19% to 42 units.
Also, the company has kept aside $5.6 billion as an estimated compensation cost for MAX customers. Due to the MAX grounding, air carriers around the globe are facing thousands of flight cancelations and capacity losses every month.
In the US, Southwest Airlines (LUV), American Airlines (AAL), and United Airlines (UAL) together own 72 Boeing 737 MAX aircraft. The three carriers have recorded over 50,000 flight cancelations and seating capacity loss of more than 6 million. Southwest and American expect that they will suffer nearly $1 billion in revenue losses combined this year due to the MAX grounding.
Apart from the 737 MAX, Boeing faces troubles with its most ambitious 777X program. The program has faced multiple delays due to several factors. The most significant reason behind the delay is operational flaws with the aircraft’s GE9X engines. The GE9X engine, made by General Electric (GE), forms a crucial part of the program due to its fuel-efficiency and less noise.
In September, the program faced another setback when it failed a heavy-load test conducted by the FAA. Last month, considering several developmental issues with the program, Boeing shifted the launch date of the 777X to early 2021 from late 2020.
What’s ahead for the stock?
Once the top performer of the Dow Jones 30 Component, Boeing stock has fallen significantly since the Ethiopian Airlines crash on March 10. The stock’s YTD (year-to-date) return has fallen to 9.2% as of Wednesday from 31% as of March 8. Boeing stock has underperformed broader US indexes and the iShares U.S. Aerospace & Defense ETF (ITA). The S&P 500, the Dow Jones, and ITA have gained 22.7%, 17.9%, and 30.3%, respectively, YTD.
We think that even though the 737 MAX might return to the skies early next year, Boeing stock could remain under pressure due to uncertainty about its wide-body aircraft. Ongoing problems with the 787 Dreamliner and 777X could make customers go to other aircraft manufacturers. Also, Boeing needs to finish its projects in time to avoid cost overruns.