The aircraft manufacturing industry is expected to experience fast-paced growth as production levels increase to cater to the increasing airplanes demand coming from Asia Pacific region and Middle East. The strong economic growth, progressive trade agreements among the countries in this region and increased tourism is the driving factor behind this surge in demand for airplanes. The strong outlook for commercial aircrafts is expected to cause a decent appreciation in the stock prices of aircraft manufacturing companies. For my analysis, I have selected Boeing (BA), as it is one of the largest Aerospace and Defense company.
Boeing (BA) principally operates under five segments which include Commercial Airplanes, Boeing Military Aircraft, Network & Space systems, Global Service & Support system and Boeing Capital. The Commercial Airplanes segment manufactures and markets commercial jet aircraft and provides related support services to the global commercial airline industry. It's Defense, Space & Security (BDS) segment is involved in the research, development, production, modification and support of products and services. The US department of Defense is the primary customer of the company's BDS segment and contributed 70% of the company's total revenues generated in 2012. The Boeing Capital (BCC) segment facilitates, arranges and provides financing solutions to its Commercial Airplanes customers. In the space and defense markets, BCC primarily arranges and structures financing solutions for its BDS government customers. BCC's portfolio consists of equipment under operating leases, finance leases, notes and other receivables, assets held for sale or re-lease and investments.
Apart from 2010, the company has shown tremendous growth in its top line with its revenues growing at a CAGR of 7.6% over the last 5 years. Revenues in 2012 increased by 19% or $12.96 billion primarily due to the increased number of new commercial airplane deliveries across all programs compared to last year. BDS revenues increased by $631 million due to the higher revenues generated by the Boeing Military Aircraft (BMA) and Global Service & Support (GS&S) segments which were partially offset by lower revenues in the Network & Space Systems (N&SS) segment.
In 2011, revenues increased by $4.43 billion or 7% compared to the year 2010. Commercial Airplanes revenues had increased due to the higher new airplane deliveries. It also includes the impact of entry into service of the 787-8 and 747-8 Freighter, favorable new airplane delivery mix and higher commercial aviation service revenues.
In the N&SS segment, revenues decreased by 11% primarily due to the lower revenues generated on the Brigade Combat Team Modernization (BCTM) program, which was terminated for convenience during 2011. Moreover, customer funding constraints on the GMD program and conclusion of the Space Shuttle program in 2011 also reduced revenues by a total of $251 million.
BCC segment revenues are principally derived from equipment under operating lease i.e. lease income and interest from financing receivables and notes. BCC's revenues decreased by $79 million in 2012 compared with 2011 primarily due to lower operating and finance lease income. Operating lease income decreased as a result of the early return of leased aircraft which were re-leased at lower lease rates. In addition, lower finance lease income reflects the revised contractual terms of BCC 's leases with AirTran Airways.
The increase in contractual backlog is an indication of the rising demand for company's products. Contractual backlog of unfilled orders excludes purchase options, announced orders for which definitive contracts have not been executed, and unobligated US and non-US government contract funding. The increase in contractual backlog during 2012 was due to the commercial aircraft orders in excess of the deliveries made, partially reduced by the cancellations of commercial airplane orders and changes in projected revenue escalation. The increase in contractual backlog during 2011 was due to commercial airplane orders in excess of deliveries and changes in projected revenue escalation for undelivered commercial airplanes.
Optimistic Long term growth
The long-term outlook for the airline industry is quite optimistic due to the improving economic growth and the increased travel in Asian and Middle East regions. The growth in air travel is led by increased trade, globalization, and improved airline services due to the liberalization of air traffic rights between countries. This is why the company is expecting a higher demand from China and Middle East. According to the Current Market Outlook (CMO) 2013-2032, around half of the world's air traffic growth will be driven from or within the Asia Pacific region in the next two decades. Total traffic for the region is expected to grow at 6.3 percent per year due to strong economic growth and the increasing accessibility of air transport services. Domestic and international travel within the region is expected to grow by 6.5 percent per year.
Air cargo plays a critical role in this region's economic growth. As you know that some of the world's largest and most efficient cargo operators are located in Asia, which will boost the demands for cargo plans in the region. This region's air cargo is expected to increase by 5.8 percent per year for the next 20 years. Carriers within the region are expected to take 370 new freighters, with an additional 490 conversions. Thus, this rising demand poses a great opportunity for Boeing.
Similarly, growth of the Middle Eastern aviation exceeded the global average and this trend will continue in the long run. Further support may come from liberalization of industry regulations. The Kingdom of Saudi Arabia (KSA) took significant steps in 2012 towards opening its markets and granted rights to Gulf Air (Bahrain) and Qatar Airways to operate domestic flights within the KSA. Being a low-cost carrier, the growth opportunities for Boeing are much higher than its competitors.
China: the biggest market for Boeing
China is a key market for Boeing. China is a leading provider of passenger airplanes, projects a demand for 5,580 new airplanes in China over the next 20 years valued at $780 billion. The company's annual China Current Market Outlook forecasted that the China's fleet to triple in size over the next two decades. The increasing flow of tourists in China and intra-Asia travel will generate a strong demand for single aisle airplanes and the company is foreseeing total deliveries to reach 3,900 through 2032. So, it is likely that the demand for Boeing's Next-Generation 737 and the new 737 MAX will be strong due to the of improved capabilities, fuel efficiency and lower maintenance costs, as well as enhanced environmental performance.
Long-haul international traffic to and from China is forecasted to grow at an annual rate of 7.2 percent. The international growth is primarily driven by anticipated passenger traffic between China and North America, Europe, the Middle East, Oceania and Africa. The growth in this segment is expected to increase demand for an additional 1,440 new fuel-efficient widebodies, such as the 787 Dreamliner, 777 and 747-8 Intercontinental.
BDS segment growth
Despite the Defense budget cuts by the US government, the international market continues to be driven by rapidly growing security challenges and the need for countries to update their aging inventories. The strongest growth opportunities for the company's BDS segment will come from the Middle East and Asia Pacific regions where the relative financial strength of these economies, along with the rising threats, will result in higher demand for defense and security systems.
Commercial airplane backlogs indicate growing geographical diversity in the order base. Over the next 20 years, the airline industry will need 35,280 new airplanes, out of which 41 percent will replace older, less efficient airplanes. Nearly 59 percent of the new deliveries will reflect growth in emerging markets and changing business models.
Moreover, the rising fuel cost is one of the biggest concerns for airlines, which represents up to 30% of total operating cost for single-aisle airplanes and up to 50 percent for widebody airplanes. This is why airlines are looking for opportunities to cut costs. Replacing older airplanes with fuel efficient new-technology airplanes, such as the 737 MAX and 787, could be one way of solving this problem. Other ways include increasing airline utilization, which might result in higher maintenance costs in the near future.
To sum up, the demand for fuel efficient airplanes will be very high in the long run and Boeing possesses the necessary skills, expertise and is in a strong financial position to cater to this rising demand. Hence, I recommend buying this stock.