Update: Air China Deal Encouraging For Boeing After Air France-KLM Deferred Delivery

| About: The Boeing (BA)
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Summary

Air China signed an agreement with Boeing for the purchase of 60 Boeing 737s.

The news came on the heels of Air France-KLM’s plan to defer delivery of 10 Boeing 777s.

We feel Boeing’s growth story may get negatively impacted due to depressed oil price.

Air China (OTCPK:AIRYY) signed an agreement with Boeing (NYSE:BA) for the purchase of 60 Boeing 737s, including Next-Generation 737 and 737 MAX airplanes, for $6 billion, reports BBC News. Earlier, Boeing said it expects China to need more than 6,020 aircraft in the next 20 years, and overtake the U.S. as the world's largest airplane market by 2033. The planes will be delivered between 2016 and 2020 per the agreement, according to a regulatory filing by Air China. Boeing's Northeast Asia vice president of sales and marketing, Ihssane Mounir, said, "We are excited to see that the 737 family will play a significant role in Air China's continued success."

The Air China news came on the heels of Air France-KLM's (OTCPK:AFLYY) plan to defer delivery of 10 Boeing 777s in view of lower oil prices, as reported by Reuters. Based on its current production rate of 100 777s per year, the American plane manufacturer is on track to build about 500 such aircraft before its successor 777X arrives in 2020. Although Boeing received orders for 267 of those planes, and is confident it will win orders for the additional 233 planes, analysts are concerned that Boeing may struggle to get those orders. The plane manufacturer may need to drastically cut the Boeing 777 price in order to avoid production cut, which might hurt its revenue and profitability significantly.

If lower oil prices continue to sustain for a prolonged period of time, we believe Boeing, along with its archrival Airbus (OTCPK:EADSY), may see more such deferrals for their latest versions of fuel-efficient aircraft. In our original article, we mentioned that Boeing started developing revolutionary long-range aircraft using carbon-fiber composite material to satisfy the carriers in terms of fuel efficiency, and lost a huge amount of money in its widebody twin-aisle project. It's noteworthy here that Boeing just delivered Azerbaijan Airlines' first 787 Dreamliner, with which Azerbaijan Airlines becomes the first airline in the Commonwealth of Independent States to operate the 787. Boeing continues to lose as much as $30 million on each 787 it produces even three years after its launch, according to Richard Aboulafia, an analyst at Teal Group.

However, despite the losses we were optimistic on Boeing's long-term growth prospects due to rising demand for its fuel-efficient aircraft, including the Next-Generation 737 and 737 MAX airplanes. Although the Air China deal to purchase 60 such aircraft is encouraging for Boeing, we believe depressed oil prices may hurt Boeing in the long run. Oil prices may continue to remain soft due to Saudi Arabia's effort not to prop up oil threatened by the American shale boom. Now it remains to be seen if American shale producers can pump oil prices higher. Amid this difficult scenario, we feel Boeing's growth story may get negatively impacted. We're now cautiously bullish on Boeing.

Business relationship disclosure: The update has been written by a BB Research stock analyst. BB Research is not receiving compensation for it (other than from Seeking Alpha). BB Research has no business relationship with any company whose stock is mentioned in this article.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

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