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Boeing And Airbus: The Bubble Burst

Jun. 10, 2020 1:00 PM ETThe Boeing Company (BA), EADSY58 Comments


  • Jet maker shares have significantly increased in value as COVID-19 measures are easing.
  • This marks the first step in the recovery trajectory.
  • Production cuts are steeper due to the nature and size of the disruptor and the delivery mix.
  • Despite the bubble bursting, I believe the commercial airplane industry remains investable though Boeing faces a more complex road to recovery.
  • Looking for a helping hand in the market? Members of The Aerospace Forum get exclusive ideas and guidance to navigate any climate. Get started today »

Following the COVID-19 crisis, Boeing (NYSE:BA) but also Airbus (OTCPK:EADSF) decided to dial down production on commercial aircraft programs. Over the past trading sessions Boeing shares, but also shares of Airbus, have significantly gained, consistent with my view shared in early March. In this analysis, we look at why steep changes to production were introduced and why they could remain for the foreseeable future.

Boeing Bubble Burst

Source: Aerocontact

The only programs on Boeing’s side that are not seeing reductions in production are the Boeing 767 and Boeing 747, since these programs depend on freighter sales. You could say the Boeing 737 MAX dodges the bullet, since production was halted prior to COVID-19 becoming problematic, but we are seeing that the production ramp up will be slower than initially anticipated. Airbus aimed to keep production steady for the Airbus A380, which is not a sign of strength as the program is in its final days, but we also are seeing Emirates and All Nippon Airways push back the final deliveries. On the Airbus A220 program, planned production rate increases have been postponed while the A320, A330 and A350 outputs have all been reduced.

Commercial aircraft deliveries: Near record highs

Boeing Airbus cyclical deliveries

Figure 1: Commercial aircraft deliveries Airbus and Boeing (Source: AeroAnalysis)

There are a couple of reasons why very steep reductions in production were needed. Figure 1 shows that Boeing and Airbus were producing aircraft at record levels before the Boeing 737 MAX and COVID-19 crisis hit. Putting it simple, if you are cycling and someone puts a branch in your wheel while you are at full speed, you will fall harder than when you don’t cycle as fast. With production and the global economy at record highs and high demand, COVID-19 has disturbed demand quite significantly. COVID-19 was the branch that has been put between the wheels (aircraft production). The momentum loss was

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This article was written by

Dhierin Bechai profile picture

Dhierin-Perkash Bechai is an aerospace, defense and airline analyst.

Dhierin runs the investing group The Aerospace Forum, whose goal is to discover investment opportunities in the aerospace, defense and airline industry. With a background in aerospace engineering, he provides analysis of a complex industry with significant growth prospects, and offers context to developments as they occur, describing how they might affect investment theses. His investing ideas are driven by data informed analysis. The investing group also provides direct access to data analytics monitors. Learn more.

Analyst’s 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.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (57)

interesting charts
I believe the commercial side of Boeing will be difficult to value until a 737MAX replacement strategy is revealed. The overall collapse in the 737/A320 market size allows airbus the opportunity to capture some large defections over the next 2-3 years. Deep discounts would allow airbus to buy market share and finish off the MAX.
new Airbus customers would have to get to the end of a very long line. Despite scattered cancellations, Airbus still has a huge A320/321 backlog

The 737MAX backlog has shrunk, but it is far from having vanished.
The bubble already burst in 2019, 23% overall decline in deliveries, just happens it was ALL on the Boeing side.
The mostly US-centric readers for whom you write are mainly focused on Boeing, I understand that.
But even for the sake of proper investment insight, this crisis may firm Airbus leadership position for a long time.
lshiang profile picture
It appears that Boeing faces a more complex and bumpy road to recovery than airline industry.
@Dhierin Bechai

Boeing has recently adjusted it's backlog on the Max to around 3800 units. You have previously mentioned that those 400 or so jets sitting on the ground in the employee car park will be heavily discounted when delivered. If the general consensus of the grounding costing Boeing $5 billion a quarter, in your opinion - does the margin on the backlog cover the $25 billion this has cost them?
Dhierin Bechai profile picture
Subject of one of my upcoming reports, I think it should cover... just need to get a full view of the costs ;)
Looking forward to it!
SmartStops profile picture
Boeing has sure been on a tear. Now that its at $023.41 having dropped over $13 today, make sure you have a Smart Trailing stop approach that can intelligently adjust both up & down to protect those profits. SmartStops had already saved over $194 per share (!) with the drop starting back on 2/24/20 with BA then at $322.
Doctor_ECE_Prof profile picture
@Dhierin Bechai
The dividend rate on BA is 0% and it is not going to go up in the near future. This makes it unattractive to those who do interest arbitrage (get loans at 0% and invest in companies like AAPL which are all going to moon). So, it looks like only folks investing (or shorting) are the speculators, buy the dip mentality and quant traders. Do you have any thoughts along these lines? TIA
Dhierin Bechai profile picture
Got 1-2 reports on this coming. There really is a lot of ways to view this
Allivest Capital Management, LLC profile picture
I am still waitng for the whole crazy market's bubble to pop, let alone BA! And,,,BUY!
I got in BA right after the battery explosion and my estimate showed that BA intrinsic value is $436. It took 10 years but boy did I enjoy the dividend. With the global economy in a recession now and a long walk to recovery since the trade war will likely get worsen, I would put a value of $200-$250. I would get in right around $100-$140. Whatever your entry is, make sure you get paid while you wait.
Traderboe profile picture
Nice article. Curious to see why you believe BA to be a bubble after 2 days of the market tanking? Is this a forward or backward looking analysis?
With high volatility going both ways, why not buy penny puts and calls going both ways? A 8% drop can equate to a few hundred dollars per option play, but with a risk of $10-$50usd. In the current market you might as well buy out of the money options to make a 50-50 risk have greater than 100% upside.
Dhierin Bechai profile picture
Uhm... actually bit of both. Two days of tanking really don’t mean much to the analysis. This report was written when Boeing was gaining roughly 10% daily, but it doesn’t matter whether the price would go up or down of the day of publication... as you can see the analysis is built on multi-year figures, so one or two day moves don’t invalidate the analysis.
BA stock is still quite undervalued relative to its long-term intrinsic value but will most likely "cool off" a bit after the recent runup and as investors gain a deeper appreciation of how long the industry order recovery will take, my guesstimate is 2-3 years before any significant industry-wide order recovery. That will most likely keep BA stock in a "trading range" for some time. The economic recovery will be slower than many expect. The recovery for the airline/leisure/travel industry will be even slower unless and until there is a viable vaccine introduced.
The bubble has not burst, Wait until Qatar and Emirates really begin to defer or cancel their large orders. Qatar has hinted such but is still negotiating with both companies. Emirates is already mothballing the Airbus Albatross (Aka A380). Air traffic wont rise for main years.
Dhierin Bechai profile picture
They are already deferring, @radarman123.
You mean many years?
Rabbit1960 profile picture
Emirates' dependence on the A380 make it less likely to defer orders. In a world with substantially lower passenger volumes they will need those smaller aircraft to replace the A380's, else they must give up on some routes altogether.
Is it possible to increase the cabin width of the Boeing 787 from the 5.49 to 5.59 M(216-220 IN)??.
ThE 777x gained 4 inches in cabin width,
Dhierin Bechai profile picture
Unlikely @Richard Sullivan, as far as I know the sculpting technique used on the Dreamliner was used to increase the 777X cabin width.
As Dhierin said, the 777X increase is mostly optical, due to sidewall sculpturing
Once set, it is impossible to increase fuselage cross section without a completely new fuselage.
Jacobin777 profile picture
@mitch60 It is NOT "optical" as you incorrectly put it. There is an ACTUAL physical 4 inch increase in seating width of the plane due to change of materials used in the manufacture of the plane. Yes, the overall width hasn't changed but the interior width certainly has!
You shorts could have went long when it was in the 90s and have more than doubled your money. Please don't cry.
haha good one
or you just could have bought Nikola couple days ago when I when it went up 100% in one day of course I sold it. yeah I think Boeing got a little ahead of itself.$300 stock yes but not now maybe in the next year,I think we're still going to see another 10 15% whole back at least and then it will probably stabilize. unfortunately I think every time they are lines go down Boeing is affected along with them. seeing how their lines have run so high so fast please a lot of downside possibilities in my opinion.I'm trimming my belly exposure letting half ride will look for another entry level at a lower price. PS great article
Jacobin777 profile picture
Excellent article. I was fortunate to pick up Airbus before the recent run-up. It is one of my "core holdings" which I intend to hold for many, many moons. Boeing IMHO will do well too however I think its gone up a bit too much.

Here is my "analysis".

They both have their strengths and weaknesses. Boeing has of course the B737MAX problem. The B77X, while a great plane isn't what carriers are looking for (right now) and Airbus has the A350-1000XWB which is a phenomenal B777-300ER replacement. The B77X will do well for carriers wishing to replace their A380's/B748's or who want something larger than a B77W. Boeing does have the B787 which is a phenomenal wide-body plane - especially the B789 and the B787-10 which IMHO will be replacing a lot of the A330's in service. Airbus has the A330NEO which is a good plane but IMHO won't gather a lot of sales.

Airbus has of course the A32X series, especially the A321NEO which is eating Boeing's lunch and Boeing so far has nothing to counter it. Airbus also has the A220 which is gaining traction as well (something which Boeing was stupid to not figure out). Airbus also has the A359XWB which is a great plane. The A350-1000XWB as mentioned is a great plane but really hasn't sold well - maybe down the road when carriers need to up-gauge form an A359XWB or replace their B77W's.

Boeing has a much better freighter and military division than Airbus does.

So, in a summary:

Boeing: Strengths: B787, freighter and military sales. Weakness: B737MAX (on the high-end of the B737 series such as the B737MAX-9/10) and B77X.

Airbus: Strengths: A32XNEO (especially the A321NEO), A359XWB, A220. Weakness: No real freighter business and military is quite week. A359XWB is really the only strong wide-body plane they have. The A350-1000XWB just isn't selling well but will in the future and IMHO the A330NEO is vulnerable.
Boeing also has the China problem. Airbus is a safer bet.
Navid, PhD profile picture
Holding Airbus bought at 15. I am willing to sell at 30 though.
Nir Nabar profile picture
@Navid, PhD , sorry a layman question...did you buy EADSY or EADSF?
What do you think the right entry price is for BA?
Sanjay John profile picture
Every day until it hits a new all time high.
Navid, PhD profile picture
@sanjay "John"
That would be achievable if they had a good management.
I will ad to my position below $180
10 Jun. 2020
I dont think that the bubble has bursted. Boeing was sold way too much during the crisis. And almost all stocks have recovered but boeing yet hasnt. I think it can go to 300$
Dhierin Bechai profile picture
The growth bubble then? ;) At least for now.
Boeing will burst way way faster than airbus. I can see it tumble down to $100 in the next year or so. Their revenue is lost. Whoever is a investor ..watch for bankruptcy
marpy profile picture
Boeings problems are that it is a "bean counter" run company in an "engineering heavy" industry. Quality, safety and engineering seem to take a back seat to bean counting. As everyone is well aware, this has now caught up with them in a big way. IMO the problems at Boeing that are now public are just the tip of the iceberg! The smoke has turned to fire with more fire on the horizon.
moblackty profile picture
Thank you for the Excellent Work through all this BS. Looking forward to the next 2-4 yrs
to see how all of this shakes out!!!!!! moblackty
Dhierin Bechai profile picture
Thank you for reading!
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