Boeing (BA) and Airbus are in the enviable position of having to only compete against each other in Asia. Neither one can produce enough planes to satisfy market demand. Airlines in Asia need planes period, no matter who the manufacturer or where they can get them. It all comes down to simple math. The region has over 4 billion people and their incomes are rising. With rising incomes, those people want to travel.
Ability to Cross Sell
The 1997 merger with McDonnell Douglas made Boeing the second-largest aerospace and defense contractor in the world. Countries in Asia are also looking to beef up militarily. This gives Boeing a decided advantage in Asia. Many airlines in Asia are in some way or another connected to the state. Boeing is able to negotiate deals with the government and the airlines and do package deals for commercial airliners and military equipment. This is something that other defense companies like Lockheed Martin (LMT), Raytheon (RTN) or General Dynamics (GD) can't offer.
Airline Growth In Asia
In 2011 there were only 4,710 airplanes among the Asia Pacific carriers. According to Boeing, that number is expected to grow to 13,670 airplanes by 2031. To replace existing aircraft and to expand their fleets, Asia Pacific carriers will likely spend almost $1.7 trillion in purchasing over 12,000 new airplanes. The rise of the low-cost airline in Asia will spur the need for Boeing's single-aisle aircraft that are so popular for short-haul flights.
Fastest Growth Seen In South Asia
Boeing expects to see the fastest growth in South Asia. Growth in the region is expected to grow 8.4 percent annually for the next 20 years. Traffic is likely to remain domestic and within other South Asian nations and the Middle East.
In this region the growth is coming as many of South Asia's population enters the workforce for the first time. Economic activity and incomes are rising in the region. From 2001 to 2011, real Gross Domestic Product (GDP) grew 7.3 percent annually. Incomes grew even faster at 10 percent per year. In this region lies India, which is forecast to be the world's 4th-largest economy by 2031.
Outlook For India
The airline market in India is expected to grow domestically and internationally as the nation's policies are liberalized. This allows airlines to open routes and fly more frequently. As a result, airline travel becomes easier and fares become cheaper.
2011 and 2012 were horrible years for Indian carriers. Most notably Kingfisher Airlines, which faced severe troubles including the repossession of aircraft. However, healthier carriers in India regrouped to take international and domestic market share. What had happened is that Indian carriers engaged in a price war and made many routes unprofitable. With Kingfisher pretty much out of the picture in the Indian marketplace, the remaining carriers were able to increase fares and return to profitability.
A significant problem for Indian carriers has been government policies. The government had granted Air India first right of refusal on international flights. This policy had been extremely damaging to other Indian carriers because they could not expand. Last year the Indian government changed course and is opening up traffic rights to the other Indian carriers.
Another major problem for Indian carriers has been the purchasing of jet fuel. Prior to government reforms, India had some of the highest prices in the world for jet fuel. New government policies toward jet fuel are providing much needed help to Indian airlines.
To further help Indian carriers, the Indian government now allows foreign investors to own up to 49% of an Indian airline. This announcement came on September 14, 2012, and opened up a myriad of possibilities for Indian carriers. This allows strategic investors to come into the sector and strengthen Indian airlines with improved operating practices and global standards.
China's expansion is vital to Boeing's long-term success. China is forecast to have annual GDP growth averaging 6.5 percent over the next 20 years. Airline traffic in China is rising even faster at 12.1 percent, but is expected to moderate toward 7 percent.
The prime driver for this growth in China is a building boom in airports. It is projected that 230 airports will be in commercial service by 2015. Domestic travel that previously was not available will now be. China is so vast that the only way for travelers to travel is via airplane. As the nation's people become wealthier, more and more Chinese will be traveling. This is already starting to be evidenced in other nations with the rise of the Chinese tourist.
Boeing has also benefited from the growing cargo market in China. Since 1990 this segment has grown 15.5 percent annually. Chinese cargo airlines are now some of the largest and most profitable in the world.
Largest Order Ever From Lion Air
Last year Indonesia's Lion Air finalized a deal with Boeing for 230 Boeing 737s for a total price of $22.4 billion. This was Boeing's biggest order ever from a single customer. Deliveries will start next year and continue until 2026. Lion Air also just announced an even bigger order from Airbus to purchase 234 aircraft for a total of $24 billion. The demand for air travel in Indonesia is strong because the nation is made up of over 17,500 islands necessitating the need for air travel.
Boeing Stock At 52-Week High
In hindsight the Dreamliner troubles that caused the sell-off in Boeing stock was a great buying opportunity for investors. Year to date the stock is up over 14 percent. Boeing looks set to resolve the battery issue with the Dreamliner as it conducts flight tests for the FAA.
For longer-term investors the stock is a buy and still trades at an attractive valuation. The forward P/E is only 11.92 and the PEG ratio is below 1 at 0.94. The company has more cash than debt. Total debt is only $10.41 billion. The stock has an annual dividend of $1.94 for a yield of 2.30%. The payout ratio is only 34%, giving the company the ability to increase the dividend or buyback stock.
Once the Dreamliner returns to full service, the one major overhang for the stock will have been lifted. The company remains the largest exporter in the U.S. The demand for the company's planes is expanding and Boeing has a seven-year backlog. The company is doing everything it can to ramp up production, but just cannot make planes fast enough to keep up with growing demand. I'd say that's a good position for a company to be in and good for investors in Boeing stock.