Boeing: History As An Indicator

Summary

• SARS pandemic showed V-shaped recovery. COVID-19 recovery likely will not show this near-perfect rebound.
• SARS pandemic occurred on top difficult years in the industry driven by the 9/11 attacks and the subsequent War in Iraq.
• Boeing deliveries took years to recover.
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In a previous report, I had a look at some of the cost benefits Boeing (NYSE:BA) could be having regarding its liabilities in connection with the Boeing 737 MAX in China. In a subsequent piece I expanded that to map the impact on the Boeing 737 MAX for global operators using an extended model. The bottom line, however, remains that the damage a pandemic does is far greater than the good it can do for Boeing’s >$8B in liabilities related to the grounding of the Boeing 737 MAX. Currently there's a lot of downward pressure on the markets, but we also are seeing revivals. Investing in this environment, especially in airline and commercial aircraft names, is challenging. What's currently happening is unprecedented. The only thing we can do is what happened during previous disease outbreaks. In this report, we have a look at what happened to the markets during the SARS pandemic, but also to orders and deliveries from Boeing and explain why there are big differences between the SARS-outbreak in 2002 and today’s COVID-19 pandemic.

Source: Boeing

History: Recovery takes months

An important starting point is determining the timeframe based on previous outbreaks. IATA already did that part for us showing that it takes 1-3 months for the revenue-passenger-kilometers to bottom and returning to pre-outbreak levels takes 6-7 months or 3-4 months from the bottom. The most important observation when looking at SARS is that it took the Chinese domestic market three months to hit the bottom and another 3-4 months to recover. In other parts of the world the hit to the RPK was less, though it should be noted that SARS was smaller in scale and global spread.

Currently we are seeing that schedules already are recovering in China after 1.5 months while in the US and Europe we see steep cuts. Airline travel has come to a standstill with exception of some key routes, cargo flights and flights to repatriate citizens. Cuts are not just affecting international carriers but also domestic carriers.

What the markets did

What we see is that prior to the SARS outbreak, the S&P 500 was modestly lower. American Airlines (AAL) lost 30 percent of its value. There's no data for Delta Air Lines (DAL) and United Airlines (UAL) since these companies weren’t public at the time. Southwest Airlines (LUV) outperformed the market, while JetBlue (JBLU) showed performance in line with the market performance. Alaska Airlines (ALK) and Cathay Pacific (OTCPK:CPCAY), as an airline close to the breeding ground of SARS, were lower by 8 to 9 percent. We can’t say that prior to the outbreak there was a clear direction among airlines.

Boeing lost 16% of its value. One should be reminded that SARS hit airlines, markets and jet makers at a moment little over a year after 9/11 that landed the airline industry into a transforming crisis.

From the outbreak to the recovery, we see that with exception for Alaska Airlines and Cathay Pacific markets, airline names and Boeing gained. In fact, airlines and Boeing showed market outperforming returns. Going from the start of the SARS epidemic to the full recovered phase, prices showed more than just recovery.

We also can consider the first three months into epidemic (typically the phase for capacity cuts), that shows that there was a decline among airline names with exception for JetBlue. One month (February 2003) after the WHO was notified about SARS, American Airlines and Boeing shares had fallen 15-20 percent. While markets and other airline names showed small losses.

As airlines recovered capacities, we saw all airlines with exception for Cathay Pacific gain strongly. Boeing also benefited from the recovery in capacity. If there's one thing that we could see from the SARS outbreak is that it indeed did pressure the markets, but once there was control over SARS markets recovered strongly and even increased value.

Things to consider amidst the COVID-19 crisis:

• The Chinese economy is much bigger than it was 17 years ago, so any disruption and consequence to the world economy is going to be bigger as well.
• Outside of China, most notably Europe and the US, we haven’t been sufficiently prepared to deal with a virus as much as we would like to claim that we have superior healthcare systems and adequate policy making.
• COVID-19 is bigger than SARS.
• The recovery from SARS was a V-shape recovery, a perfect one. The current projections and spread of COVID-19 make it much more unlikely that we will see a perfect recovery.

So, what we know from the past is not necessarily reflective of what will happen now 17-18 years later but it should be considered, just to get a feel of what the consequences were years ago.

Order and deliveries

Figure 1: Boeing orders (Source: AeroAnalysis)

What we see from the Boeing orders is that 2002 and 2003, the years in which SARS had its impact, were not particularly bad for Boeing’s order inflow, but they were among the weakest performing years. The reason is that coming out of the airline industry crisis sparked by 9/11, recovery wasn’t expected for at least two years. 2003 already was expected to be a “down year” on the back of 9/11 and the War in Iraq. SARS added to that, but it didn’t have a tremendous impact.

Figure 2: Boeing deliveries (Source: AeroAnalysis)

Probably better suited to assess near-term impact would be the delivery numbers. In 2001, Boeing expected 380 deliveries for 2002 and 275 to 300 deliveries for 2003. Actual deliveries were 381 and 281 deliveries. So, again we can’t say that SARS had a huge impact on the figures.

The danger of using SARS as a reference point

While the SARS pandemic seems like an extremely convenient point with just seven months required to drop and recover capacities and revenues to previous levels, the problem is that SARS hit the airline and jet maker industry at a time where there already was a crisis stemming from the 9/11 attacks. So, we already were having down years absent of SARS. That's a big difference between then and now, where the industry was set to boom. If we look at how things went from 2001 to bottom in orders and deliveries, we see it took 28 months for orders and deliveries to increase again. So, you’d be looking at a 2.5-year recovery time when measuring against 9/11 and less than a year when measuring against the actual SARS outbreak. That’s what provides the uncertainty for jet makers at this point. The Boeing 737 MAX crisis caused somewhat of a shortage of aircraft, which is now coming in handy for airlines as it could aid them in recovering capacity faster as the cuts are not as steep as they would have been with the Boeing 737 MAX added to the delivery mix. We already are seeing that in China capacity is recovering after 1.5 months vs. the three months we saw back in 2003. That's not to say that we expect China to be fully recovered within three months, which would be impressive, but the long-term recovery could be less than 2.5 years putting it closer to 1-2 years. Overall, that would provide Boeing and Airbus with an opportunity. We are currently expecting a slower (than earlier anticipated) ramp up in Boeing 737 MAX deliveries and it would not be unexpected if even the Boeing 787 production rate will be dialed back earlier than anticipated.

In a previous report I said that 2020 deliveries are pretty much locked in granted that airlines do not go out of business. However, in the extreme case which is not really that extreme considering the circumstances, I wouldn’t be surprised if we see an almost immediate effect materializing despite my earlier comments. That's due to the imposed travel bans.

Conclusion

If the SARS pandemic would serve as a useful reference, within months the airline industry should be back on its legs. However, it also should be taken into account that in 2003 there were other forces in play as well so the comparison to SARS does not seem valid. The market already was depressed and SARS “only added to that,” while in the past couple of years we were in a clear growth positions though with some concerns on continued economic growth. That’s a big difference. On top of that exposure to China is much bigger and COVID-19 is bigger than SARS. I would consider 6-7 months to be an extremely good scenario for airlines and jet makers, one that is unlikely to materialize. The bad-case scenario of a 2.5 recovery is not unthinkable. If that is the case, we could see a major bump in deferrals and cancellations, something I also expect for the 1.5-year recovery I consider to be likely at this stage. The airline industry went through some consolidation in past years with big airlines and airline groups being formed in the US and Europe. As an effect of the current turmoil, especially in Europe, another round of consolidation or liquidation could be initiated. The coming weeks should give some better direction on how well the virus is being contained and give better indication of how long it will take for recovery will be realized. I believe that we are looking at a recovery profile stretching toward mid or the end of 2021.

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.