LONDON/SEATTLE/WASHINGTON (Reuters) - British aviation investigators identified an emergency beacon made by Honeywell International Inc (HON.N) as a likely source of last week's blaze on a Boeing Co (BA.N) 787 Dreamliner and called for it to be turned off, spurring a rally in Boeing shares by relieved investors.
The Air Accidents Investigation Branch (AAIB) said the locator beacon and its battery was the only system on a parked Ethiopian Airlines plane at Heathrow that was near the fire and had the power to start it.
Boeing said the beacon could be removed in about an hour from its newest model plane, which was grounded for more than three months earlier this year because of overheating of lithium-ion backup batteries in two January incidents.
Shares of Boeing closed 2.7 percent higher at $107.63, near the high of $108.15 reached a week ago before the fire.
The AAIB said it remained unclear whether the fire was triggered by a malfunction in the beacon's lithium-manganese battery or some external force - such as an electrical short circuit - and said the probe would continue.
In its report, the AAIB also called on the U.S. Federal Aviation Administration and other regulators to review use of such emergency beacons that use lithium-based batteries on all other aircraft.
UK officials said last week's fire was unrelated to the January incidents that grounded the 787. Investigators never determined what prompted the batteries involved in those cases to melt down, but Boeing resolved the issue by fireproofing the box they come in, and finding a way to vent any possible fire outside the plane.
While the UK report focused on the beacon made by U.S. conglomerate Honeywell, aviation experts said there could also be issues with the 787's higher humidity or other environmental factors. Water can conduct electricity, so high moisture levels could increase the likelihood of short circuits.
"The investigators are looking at everything, humidity, condensation and ... how things are installed. It's a comprehensive effort," said one industry source.
Boeing's new plane has a relatively high humidity, which helps keeps passengers more comfortable, and investigators are now looking at whether there is enough insulation to prevent moisture from condensing and short circuiting systems such as the beacon, said the source, who was not authorized to speak publicly.
A source close to Boeing, speaking on condition that he not be named, said the 787 may need better isolation of electrical components from the plane's high humidity, something industry people refer to as "rain in the plane."
Analysts said they were watching for further developments.
"There's nothing about this finding that indicates a lack of safety with the plane, but on the other hand there's no conclusive proof that a system unrelated to the plane is to blame," said Richard Aboulafia, an analyst with the Teal Group.
Analyst Yan Derocles of Paris-based Oddo Securities agreed. "We have to wait for the conclusions and at that point it could be a problem for Boeing, because the succession of incidents could chip away at confidence in the 787," he said.
Boeing said the locator beacon is not required by U.S. Federal Aviation Administration regulations, although some other nations do mandate their use.
"If the AAIB recommendation is adopted by regulators, 787 operators would operate their airplanes without a functioning ELT. ELTs are not required as part of the airplane design. There was no requirement to operate the ELTs during 787 flight test," said Boeing spokesman Marc Birtel.
The beacons, also called emergency locator transmitters (ELTs) are positioned in the upper rear of the 787, and can lead rescuers to a downed aircraft. They are powered by non-rechargeable, lithium-manganese batteries used for decades in products like digital cameras, walkie-talkies and pacemakers.
Honeywell said it would help Boeing and the airlines as needed, but cautioned that it was premature to jump to conclusions about the fire. It said it did not expect any financial impact from the AAIB's recommended action.
Honeywell shares rose 0.6 percent on Thursday to close at $82.97.
The AAIB report said the fire broke out in the upper portion of the 787's rear fuselage where the ELT devices are located. "There are no other aircraft systems in this vicinity which, with the aircraft unpowered, contain stored energy capable of initiating a fire in the area of head damage," it said.
It said large transport aircraft do not have fire detection or suppression in the space above the cabin ceiling, "had this event occurred in flight it could pose a significant safety concern."
Boeing said it supported the AAIB's recommendations and reiterated its confidence in the Dreamliner's safety.
In Washington, the FAA said it was reviewing the report.
The battery linked to the London fire is made by Newark, New York-based Ultralife Corp (ULBI.O), according to an industry source. Ultralife did not return calls or emails seeking comment. Its shares fell 1.8 percent to $3.76.
The AAIB said Honeywell had produced some 6,000 ELTs of the same design, which are fitted to a wide range of aircraft, and this had been the only significant "thermal incident."
The battery cells in the beacon showed signs of "disruption" the AAIB report said. "It is not clear however, whether the combustion in the area of the ELT was initiated by a release of energy within the batteries or by an external mechanism such as an electrical short."
(Additional reporting by Tim Hepher, Cyril Altmeyer, and Brenda Goh; Editing by Peter Henderson, Leslie Gevirtz and Tim Dobbyn)
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