The Boeing Company (BA), while one of the largest U.S. defense contractors, is also one of the two major manufacturers of commercial airliners in the world. It primarily faces competition from European consortium EADSF (EADSF.PK) in this market with some smaller regional jet companies as well that make similar products. While EADS through its Airbus products has sold more aircraft over the last 20 years, Boeing has been having a good 2012 with 385 orders so far compared with Airbus's 91.
Even so the next few months could be tumultuous for the Chicago based Boeing. Because it competes for the world market it is reliant on a level playing field with EADS when it comes to subsidies and prices. It also gets aid from the U.S. government through export loan guarantees. Both of these issues are being reviewed and they have the potential to have a negative effect on earnings and revenue for the next few years.
Boeing, EADS and their respective government supporters have been having a long- term fight through the World Trade Organization (WTO) over illegal loans and subsidies allowing the companies to offer lower prices and undercut each other. The WTO has ruled once against EADS and Boeing regarding these issues. Now it is expected this week to announce another ruling regarding Boeing and the U.S. government support for its products.
The first ruling was against EADS in 2010. This said the company had through the concept of "launch aid" loans received illegal aid while other types of benefit such as direct loans, tax breaks and infrastructure support was legal. Since then the WTO also ruled that Boeing benefited from indirect support due to research contracts issued by the U.S. Department of Defense and the National Air & Space Administration (NASA). EADS has also filed a complaint about loans and other aid Boeing has received. This is the one that will reportedly be ruled on this week.
There is also an ongoing fight in Congress over renewing the Export-Import Bank, which Boeing has received extensive loan support from. The Ex-Im bank provides loan guarantees to foreign buyers of U.S. products. Because Boeing is basically the largest exporter of goods to the world its customers have received the lion share of such aid. There are those in Congress though who are arguing that through this program U.S. companies, especially airlines, are losing business as the foreign carrier uses the Ex-Im loans to offer cheaper service.
President Obama has called for reauthorizing of the bank touting the jobs it creates. This is especially true for Boeing and other aerospace companies. Not only is there criticism of the plan for its affect on U.S. companies but also good government and spending critics consider the plan just "corporate welfare" for Boeing. They would prefer more general support for U.S. exports not just ones targeting individual companies. There have also been concerns raised that the Obama Administration would give Boeing more favorable terms than allowed by agreements with other countries restricting loan terms to aircraft producers. Canada for one believes that this would violate recent agreements related to the industry and government aid.
It may take several years to settle the WTO case. Boeing might face severe financial penalties once this is done. The ruling could also make it more difficult to offer competitive prices on their aircraft. These might be a drag on revenue and earnings. This would be compounded by preventing some orders not being signed, further reducing sales. The loss of the Ex-Im support if Congress so decides would be more immediate and again reduce sales, revenue and earnings.
Boeing's stock price has remained trading below its 52-week high of $80 but has run up about $20 from its low of $56.00. Like many defense contractors Boeing reported better earnings for 2011 but on flat revenue. This was mainly due to commercial sales. Some analysts are confident that 2012 will be a good year due to increased airline sales. Certainly the first few months illustrate this. The upcoming fights over the WTO and Ex-Im may be a drag on this potential growth, which will affect stock performance.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.