Boeing Tanker Continues To Disappoint

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About: The Boeing Company (BA), Includes: EADSF, EADSY, ERJ, LMT
by: Dhierin Bechai
Summary

Boeing shares lost 7% due to continued trade and political turmoil.

Boeing received 2 big commitments for up to 150 Boeing 737 MAX jets.

Tanker program continues to disappoint.

Every month, AeroAnalysis International covers the orders and deliveries for Boeing (NYSE:BA) and Airbus (OTCPK:EADSY, OTCPK:EADSF). Now, there's a lot more than just orders and deliveries. Some subjects are worthy of more detailed analysis and some are not. The subjects that are not are not necessarily unimportant. Therefore, AeroAnalysis has been running a monthly series that bundles some of the most interesting news items that do not justify a separate article or deserve to be mentioned again. You can read the November report here. In this report, some news items from December will be highlighted.

Source: YCharts

In December, Boeing's shares lost 7% compared to a 4.5% loss a month earlier. Boeing shares performed slightly better than the Dow Jones, which lost almost 10%.

Currently, the markets are very volatile and December was no exception. While the long-term demand for aircraft remains unchanged, the short term is looking more challenging where trade and politics could contribute to cooling economies, which will result in lower price multiples on the broader markets. Although Boeing is a company with unique size and capabilities, it will not be able to dodge the negative market sentiment.

During the month, Boeing announced a 20% increase in dividends falling in the range AeroAnalysis International had been expecting.

A look at some price target announcements in December:

  • Just like last month, Cowen reiterated its Buy rating for Boeing with a $445 price target.
  • Credit Suisse reiterated its Buy rating from October with a $456 price target.
  • JPMorgan Chase & Co. reiterated its Buy Rating from April with a $400 price target.

There wasn't a lot of analyst coverage during the month, but we continue to see that despite trade tensions, negative market sentiment and supply chain challenges analysts remain positive on Boeing.

Commercial Airplanes News

https://pbs.twimg.com/media/DuOBgovWkAAL9UW.jpg

Source: Boeing

During the month Boeing announced some new customers and operators for the Boeing 737 MAX. Eastar Jet became the first airline in Korea to operate the Boeing 737 MAX. It is the first out of over 70 aircraft to be delivered to various Korean airlines.

Boeing also delivered the first Boeing 787-9 to Royal Air Maroc. The airline already operated the Boeing 787-8 and expects at least 3 more -9 Dreamliners to be added to the fleet in the future.

In December, Boeing launched the Boeing 777X Business Jet which is a milestone for an extremely small market. More meaningful was the first delivery from Boeing’s completion center in China. The completion center is a key element in Boeing’s ability to increase Boeing 737 MAX production in the future.

The US jet maker announced 2 major commitments. The first one was with Green Africa Airways for 100 Boeing 737 MAX. The commitment is not final and we expect it might take years before the commitment is firmed up and fully delivered, if that ever will happen. The second commitment was from flyadeal, which intends to purchase 30 Boeing 737 MAX jets with an option for 20 more building on demand for domestic travel in Saudi Arabia.

Investments News

Afbeeldingsresultaat voor boeing global services

Source: The Boeing Company

The proposed joint venture between Boeing and Embraer (ERJ) of which the Memorandum of Understanding would expire in December saw some action from Brazilian judges who blocked the agreement but the blocks were lifted each time. With the joint venture, which likely will be finalized in 2019, Boeing tries to strengthen its product lineup at the lower end of its single-aisle portfolio. The agreement still requires the approval of the Brazilian government.

During the month, Boeing partnered with ELG Carbon Fibre and announced a partnership to recycle excess aerospace-grade composite material, which will be used by other companies to make products such as electronic accessories and automotive equipment.

Global services

Afbeeldingsresultaat voor aircraft maintenance

Source: Aviation Jobs and Aviation Employment - AviationCV.com

During the month, there wasn’t a lot of news for Boeing’s Global Services unit. The only noteworthy item was the completion of the AWAC upgrade program. The process of upgrading the 14 aircraft started in November 2016, primarily carried out in Germany, and included the installation of full color displays on the flightdeck.

Defense News

Source: The Boeing Company

In December, Boeing completed Phase II receiver certification flight testing on the KC-46 Tanker program following three weeks of flights with F-15E aircraft and received an additional order for 1 KC-46 for Japan. That really is all the positive things that could be said about the program. Reality is that the schedule has slipped and Boeing has not been able to deliver the first tanker in December as expected earlier. The exact reason remains unclear, some media cite glitches on the product to be the reason for the slip of the first delivery while other media said the slip can be attributed to the departure of Mattis' which resulted in the delivery plan for the KC-46 not being finalized.

During the month, Lockheed Martin (LMT) and Boeing provided the first look at the SB>1 DEFIANT™ helicopter the companies have developed for the U.S. Army’s Joint Multi-Role technology demonstrator program. The SB>1 DEFIANT™ is designed to fly at twice the speed and range of today’s conventional helicopters and offers advanced agility and maneuverability. It will help inform the next generation of military helicopters as part of the U.S. Army’s Future Vertical Lift program.

The helicopter is participating in the Army’s Joint Multi-Role-Medium Technology Demonstrator program. Data from SB>1 DEFIANT™ will help the Army develop requirements for new utility helicopters expected to enter service in the early 2030s.

Conclusion

December wasn’t a very good month for Boeing. Markets ended the month lower and Boeing was no exception despite an appreciable hike in its dividend and replacing its existing share repurchase program.

The highlight probably was the first delivery from the completion center in China, which is a key element for Boeing to increase single-aisle production. The commitments for up to 150 Boeing 737 MAX was a nice touch too, but it remains to be seen when these will be firmed and how much of these aircraft will eventually be delivered.

Disappointing but somewhat expected was the absence of the first tanker delivery which clearly is a pain point for Boeing. It seems that Boeing overpromised on either price, schedule or capability or a combination of all and that is hurting the jet maker to this day. Boeing continues to believe in the long-term strength of the project, but there is little doubt that from an engineering and project management point of view, the tanker program is an example on how things shouldn’t go. Boeing will be two steps behind financially speaking when it will finally start delivering the first tankers.

Update 01/09/2019: The report has been updated reflecting two possible reasons for the first KC-46A tanker delivery to slip instead of the one reason provided in the previous version of this report.

Disclosure: I am/we are long BA, EADSF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.