New Entrants Pose A Challenge To Boeing's Share Of The Global Commercial Airplane Market

| About: The Boeing (BA)
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Boeing (NYSE:BA) faces strong competition from international commercial airplane makers who are intent on growing their market shares. Currently, the global commercial airplane market for airplanes with a seating capacity of over 100 passengers is dominated by Boeing and Airbus (OTCPK:EADSF). Last year, Boeing with 648 commercial airplane deliveries occupied around 43% of this market. Airbus with 626 commercial airplane deliveries followed in a close second. However, with Embraer (NYSE:ERJ), Bombardier (OTC:BOMBF) and China’s Comac set to enter this market over the next few years, Boeing and Airbus’s market shares could be impacted.

We currently have a stock price estimate of $135 for Boeing, around 5% ahead of its current market price.

Boeing is currently witnessing strong growth in its sales and profits on higher commercial airplane deliveries driven by strong order inflows from airlines. However, the company’s ability to extract maximum possible gains from the ongoing upcycle in commercial aviation depends on whether it will be able to retain its market share in the coming years. It is here that we see a serious challenge to Boeing from not only Airbus, but also new players that are set to enter this market. In our opinion, the entry of China’s state-run Comac in the global commercial airplane market will especially weigh on Boeing’s position in China, which is fast catching up with the US – currently the largest commercial airplane market in the world.

Embraer & Bombardier Are Building Larger Airplanes That Will Compete With Boeing’s Narrow-Body 737s

Regional jet manufacturers Embraer and Bombardier, which were focused on producing smaller regional airplanes, are now developing larger commercial airplanes. Embraer’s second generation of E-jets, which are being designed to seat more than 110 passengers, will enter service with airlines in 2018. While Bombardier’s new CSeries airplane, whose first delivery is scheduled for the second half of next year, will seat around 110-140 passengers. These airplanes will thus compete directly with the smaller models in Boeing’s 737 series, which has airplanes with a seating capacity of 120-220 passengers. We figure, initially, these new airplanes from Embraer and Bombardier will occupy a small share in the global commercial airplane market. However, if airlines find these new planes to be as fuel and cost efficient as promised, then they will likely emerge as strong contenders.

Additionally, these new airplanes with their significantly lower price points will increase pricing pressure on Boeing. For instance, Bombardier’s largest CSeries model, with a seating capacity of around 130 passengers (in a two-class cabin configuration) comes at a list price of $71 million. In comparison, Boeing 737MAX-7, which has a similar seating capacity, comes at a list price of $85 million. Though airlines also take in to account operating costs while making purchase decisions, if they find these new airplanes from Embraer and Bombardier to be as cost efficient and long lasting as those from Boeing, then they could impact Boeing’s market share. It is important to note here that the narrow-body 737s, which will face direct competition from these new Embraer and Bombardier planes, constitute around three-fourth of Boeing’s total commercial airplane deliveries. Therefore, an adverse impact on 737 sales from these new airplanes will significantly weigh on Boeing’s future market share.

State-Run Comac Will Weigh On Boeing’s Prospects In The Fast Growing China Market

Also, in addition to Embraer and Bombardier’s new jets, Boeing’s market share in the coming years could be impacted by the entry of China’s Comac C919 airplane, which is being designed to seat between 156 and 174 passengers. Comac, a state run company, will benefit from the state ownership of Chinese airlines, which will likely favor a domestically produced airplane over foreign ones. This is also evident from the C919′s current order book, where 380 of its 400 orders have come from either Chinese airlines or Chinese aircraft leasing companies.

We figure that the presence of a Chinese airplane manufacturer will weigh on Boeing’s market share in the coming years, as China will constitute a growing share of the global commercial airplane market. Through 2032, the country is forecast to more than triple its commercial airplane fleet to nearly 6,500 airplanes. During this period, according to Boeing’s forecasts, China will take delivery of approximately 16% of the world’s total airplane deliveries.

On the bright side, the impact on Boeing’s results from the entry of these new players will be moderated by a fast growing commercial airplane market size. Driven by increasing global economic activity and trade, globalization and liberalization of air traffic between countries, demand for air travel and consequently for new airplanes will likely continue to grow for the foreseeable future. Last year, global commercial airplane deliveries driven by these trends grew by 6% annually to 1,493 airplanes, according to the article linked above. We expect this figure to continue to grow in the coming years. However, Boeing’s ability to take full advantage of this growing market size will be restricted by the entry of new airplane makers such as Comac and the expansion of existing airplane makers such as Embraer and Bombardier.

Disclosure: No positions.