Boeing Credit Risk Is Slight but Equity Risk Mounts

CHICAGO (TheStreet) -- As long as Boeing (BA) can resolve its 787 battery issues within six months, its credit concerns are minimal, Moody's said. But equity analysts have concerns.

Moody's has an A2 stable rating on Boeing. Although lithium-ion battery issues have grounded the world's 787 fleet as regulators investigate recent problems, Moody's analyst Russell Solomon said he doesn't foresee a credit problem as long as planes are flying again by mid-year.

"I don't see much of an impact in a three-month time frame," Solomon said, in an interview. "But out six months, the company would be burning more cash, eating into its liquidity cushion, reputational issues would come to the forefront, and we would get more nervous.

"If we did anything beyond that time frame, we might look to a shift towards a negative outlook if we thought it was going to be more expensive than we first thought," he said.

Japanese carrier All Nippon Airways , the biggest 787 customer with 17 of the 50 jets delivered in its fleet, said Thursday that it has so far lost about $15 million in revenue by cancelling 459 flights this month. It said it will negotiate with Boeing for damages. United (UAL), the only U.S. 787 customer, flies six 787s and has not disclosed the financial impact of grounding them.

Said Solomon, "It is a closely guarded secret who is on the hook" for airline losses. "It could be one of the suppliers, if they find negligence of any kind," he said. As far as Boeing's total loss for the 787 grounding, he said, "I don't think anybody thinks it is going to be billions, but it will be more than tens of millions and could ramp up to hundreds of millions."

In general, however, the 787 battery issues affect equity, not debt. "Much of the 787 story is future growth, so it has more of an equity impact than a credit impact," Solomon said.

In late morning trading Thursday, Boeing shares were down 59 cents to $74. UBS analyst David Straus, who has a neutral rating on Boeing, said in a report issued Thursday that "our updated learning curve analysis continues to indicate that 787 costs are not declining rapidly enough for Boeing to be able to hit its target for breakeven 787 cash flow by early 2015.

"Instead, at Boeing's current pace of cost improvement, we see the 787 cash burn worsening from $5 billion in 2012 to $6 billion a year in 2013-2014," said Strauss, who has a $72 price target.

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