Boeing Co. (BA) and U.S. regulators exercised too little quality control over subcontractors during development of the 787 Dreamliner, according to a federal report that made seven recommendations to bolster such oversight.

The 787 is safe, meets design standards and is about as reliable as other Boeing jetliners were after being introduced, the Federal Aviation Administration said in a review following lithium-ion battery failures in planes flown by Japan Airlines Co. and ANA Holdings Inc. (9202) that led to a grounding of the Dreamliner for three months last year.

“The review team identified some problems with the manufacturing process and the way we oversee it, and we are moving quickly to address those problems,” FAA Administrator Michael Huerta said in a statement yesterday. Four of the FAA’s recommendations were aimed at Boeing and three for the regulator itself.

The report details how Boeing and the FAA struggled to adapt to new technologies used on the Dreamliner, the first commercial airplane made from mostly composite-plastic and that used more electrical-based systems to increase fuel efficiency. Boeing also tried to farm out more work to subcontractors, resulting in supply performance problems and a delay of more than three years in the aircraft’s introduction.

NTSB Probe

Boeing, based in Chicago, said yesterday it has been addressing the issues outlined in the report, including plans to bring more work in-house for its new design of the twin-engine 777. The FAA’s review of the 787’s overall certification and manufacturing, announced in January 2013, was separate from an ongoing probe by the U.S. National Transportation Safety Board into what caused the battery incidents.

“We welcomed the opportunity presented by this joint review,” Ray Conner, Boeing commercial airplanes president and chief executive officer, said in a statement. “The findings validate our confidence in both the design of the airplane and the disciplined process used to identify and correct in-service issues as they arise.”

Boeing shares fell 1.5 percent to $122.45 at the close in New York. They have fallen 10 percent this year, compared with a 0.7 percent gain in the Standard & Poor’s 500 Index.

The FAA report will have little impact on operations at Boeing, which already has hundreds of employees assigned to monitoring its supply chain, said Peter Arment, an analyst at Sterne, Agee & Leach Inc. in New York, in a telephone interview.

“It’s a validation of the battery fix and the overall process Boeing went through a year ago,” Arment, who rates the shares buy, said of the report. “Safety is the No. 1 concern at Boeing and it validates all the enormous resources the company puts in to that priority.”

Battery Incidents

Three of the four recommendations for Boeing dealt with managing suppliers, such as improving the flow of information, ensuring standards are met and clearly outlining supplier responsibilities. The remaining recommendation called for implementing “gated” processes to keep the planemaker from jumping ahead on design or production before the aircraft is ready.

For the FAA, the three recommendations centered mostly on changing procedures to address “the changing aircraft manufacturing environment.”

The 787 was ordered grounded on Jan. 16, 2013, after the overheating of lithium-ion batteries on two planes earlier that month. The faulty power cells caused a Japan Airlines 787 to catch fire on Jan. 7 while parked at Boston’s airport and forced an emergency landing by an ANA Holdings jet in Japan nine days later.

Battery Fix

The FAA approved a fix for the lithium-ion batteries on April 19 that included adding protection around the cells to keep overheating from spreading and enclosing the battery in a steel case with a tube that would contain any fire and vent liquids outside the plane.

Investors hadn’t anticipated any impact from the FAA’s findings and aren’t expecting any fallout from a report the NTSB is doing on the technical aspects of the battery failure, Arment said.

“It was assumed that when they got the 787 back flying, the plane was already operating at a safe level,” Arment said.

With the stepped-up subcontracting for the 787, the loss of institutional knowledge and practices was felt as smaller companies struggled to perform to Boeing’s standards and some of the deficiencies went unnoticed by the planemaker.

Unanticipated Challenges

“Boeing’s B787 program was not initially set up to manage unanticipated challenges from suppliers unfamiliar with the new manufacturing environment,” the FAA report said. “Additionally, Boeing did not intervene early enough in the process to assist the suppliers.”

In one instance, Boeing machinists in the Seattle area, the planemaker’s commercial assembly hub, discovered flaws in stabilizers in 2010 and had to fix them as well as check all the jets built to that point. Work also had to be stopped temporarily the year before because of wrinkles in some of the composite-plastic fuselage sections.

While Boeing boosted monthly production of the 787 to 10 from seven at the end of 2013, it has struggled to match deliveries with that schedule. The company handed over only eight planes to airlines this year through February. The Dreamliner was first delivered in September 2011.

The 787 has grappled with other problems, including an Ethiopian Airlines Enterprise Dreamliner that caught fire in July at London’s Heathrow Airport with no one aboard. Investigators are looking at whether faulty wiring on an emergency locator transmitter caused the blaze.

Boeing is also contending with the potential for hairline cracks in wings on about 40 of its Dreamliners after supplier Mitsubishi Heavy Industries Ltd. (7011) changed its manufacturing process, the company announced March 7. All of the affected jets are still in production.(source: http://www.bloomberg.com/news/2014-03-19/boeing-oversight-of-dreamliner-contractors-faulted-by-faa.html)