After my post yesterday, which quoted an unnamed source who estimates that fixing the Boeing 787's problems could take two years, another insider approached me with details of problems with the 787's electrical system (ES). This source, also anonymous, says he worked as a software engineer at Boeing for a decade and is close to the 787 program.
This source claims that the 787's ES failed Federal Aviation Administration (FAA) inspection last year so the FAA ordered the firm responsible for the ES's software to rewrite the code. In my reporting yesterday on potential delays, Boeing spokespeople denied knowledge of any serious problems with the 787's systems.
As claims of problems increase, in my mind, this raises some serious questions about Boeing's board.
A company's board of directors is supposed to keep an eye on the store on behalf of the shareholders. But the ongoing delays of Boeing's (BA) 787 are raising questions about whether its board is fulfilling its obligations. After all, one of the most basic jobs of a public company is to disclose market-moving information to the public on a timely basis. And shareholders are beginning to wonder whether Boeing is holding back such information.
This suggests that Boeing's board does not know about the problems with the 787 or if it does, it has decided that the details of these problems do not need to be released to shareholders. But the 787 is a huge program -- it has 850 orders amounting to a $154 billion backlog. Therefore, a delay in its delivery schedule can cost Boeing billions in late fees, delayed revenues, and potentially canceled orders.
First here's some background to explain why the ES is so important for the 787. The ES is critical to aircraft operation -- it distributes power around the aircraft from the engines and the Auxiliary Power Unit (APU) -- which provides the power to operate the air conditioning and to start the engines at the gate -- to all the systems requiring electricity.
My source told me that the ES is a so-called level A system (highest level of certification) -- which must pass stringent testing. Such certification Includes evidence of following processes in development and passing thousands of tests. Almost everything on the aircraft is electrical -- even the brakes -- so "it is very critical the system works flawlessly."
This source told me that the software that controls the ES was developed by HCL Technologies -- a $2 billion (2008 revenues) Indian software company that works with Boeing and its partners on the 787 and won Boeing's Gold Performance Excellence Award this February. He spoke with colleagues at United Technologies (UTX) division -- Hamilton Sundstrand (HS) -- which is the ES's primary contractor.
His ES colleagues told him that the Designated Engineering Representative (DER) -- a SWAT team of top engineers that tests aircraft software against rigorous standards -- and the FAA refused to certify the work HCL did and told HS to start over -- without HCL. Several of my source's colleagues joined HS at the end of 2008 in an effort to rewrite the software.
My source says the HCL was chosen for the software in response to Boeing's order that its suppliers outsource at least 25 percent of the work to overseas sub-contractors. And if this information about HCL is true, perhaps HS did not do the best job of picking a qualified supplier. But now that HS is re-doing the software itself, my source can't estimate when it will complete the job to the FAA's satisfaction.
I am surprised that Boeing has not disclosed this problem because it would seem difficult to fly the 787 without a functioning ES. The failure to disclose this suggests that Boeing's board was not aware of the problem or it decided that it was not in the board's interest to disclose it.
I think the SEC may need to look into whether Boeing's board is fulfilling its obligations to shareholders.