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Boeing: A Smaller Piece Of A Slower-Growth Market

Jun. 12, 2020 7:47 AM ETThe Boeing Company (BA)EADSF, EADSY39 Comments


  • Boeing's position as one member of a virtual duopoly (along with Airbus) doesn't provide as much protection as many investors think.
  • Aircraft demand over the next decade is likely to be significantly lower than previous projections and is shifting from widebodies towards narrowbodies.
  • Airbus is well positioned to achieve big market share gains in the narrowbody market, as production capacity becomes less of a constraint on deliveries.
  • Even if global annual deliveries of mainline jets reach a new record by the mid-2020s, Boeing's narrowbody and widebody deliveries could remain significantly below 2018 levels.
  • Boeing stock remains overvalued relative to its likely cash generation potential over the next 15 years.

There were two big themes in the comments on my recent article arguing that Boeing (NYSE:BA) stock had rallied too far in recent weeks. First, many readers commented that air travel will bounce back from the COVID-19 crisis and eventually return to long-term growth, even if it may take a few years. Second, many noted that Boeing and Airbus (OTCPK:EADSY) hold an effective duopoly in the market for large commercial jets, ensuring strong long-term profits for Boeing.

I don't dispute that global air travel will continue to grow over the long term. However, it is not likely to grow as quickly as it did over the past few years.

Similarly, I expect Boeing and Airbus to retain their effective duopoly for the next decade at a minimum. (In the long run, China's COMAC could become a significant challenger.) However, Boeing's market share within the duopoly could decline significantly.

As a result, even though air travel will grow and Airbus and Boeing will remain a duopoly, it does not follow that Boeing will return to its historical level of aircraft production or cash flow generation, even looking out 5-10 years. Analyses that assume everything goes "back to normal" within a few years underestimate the long-term pain Boeing may be facing.

Slower air travel growth ahead

The decade ending in 2019 was one of astounding growth in air travel. Global passenger air travel grew at least 5.5% annually for every year from 2010 to 2018, before slowing to 4.2% growth last year. This long stretch of rapid growth drove a production boom for Boeing and Airbus. Between 2015 and 2018, nearly 70% of all new aircraft delivered were for growth rather than replacement.

A chart comparing the number of aircraft deliveries for growth vs. replacement by year(Source: Boeing 2019 Commercial Market Outlook, p. 21)

However, the recent pace of growth wasn't sustainable. Even before the COVID-19 pandemic

This article was written by

Adam Levine-Weinberg is a value investor who has been researching and writing about stocks for Seeking Alpha and The Motley Fool since 2011. He graduated from Swarthmore College in 2007, received an M.A. in Political Science from the University of Chicago in 2009, and received his CFA charter in 2017. He is always on the hunt for irrationally beaten-down stocks, particularly in the aerospace, retail, real estate, and auto sectors.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.

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Comments (39)

Great article, and for diehard BA "fans" (like me), it gives pause for deep thought. But I feel the analyses is still in need of deeper dive into the following factors:
- what is BA's revenue and profit stream outlook for its non-civilian businesses, i.e. defence;
- what is BA's revenue and profit stream outlook from its increasing presence in servicing and maintaining its own aircraft, esp. if airlines are wont to keep current fleets to a longer life 'run';
- the € has started appreciating again, in the past, everytime this has happened for a sustainable period, BA seems to gain an edge in winning new orders.

To me, the big driver for BA's stock price over the next 2 years is whether it retains or, in a dream scenario, earns customer goodwill in buckets when the 737 MAX starts flying again, and passengers who have always been fans of BA aircraft (vs AB's, like me) come back in droves to "stretch" its and BA's overall fortunes for another 20 years. It is not impossible to imagine so, as the MAX was a huge gamble, and if it works, eventually, it may enable BA to continue versions that stretch its limits technologically either as a 737 or who knows, under a new model, likely melding the best of 737 and 787 features.....that's why I'm also a great fan of ADSK, even if it seems BA currently mainly uses Catia, owned by DASTY! Does anyone have any inputs on this question?
Adam Levine-Weinberg CFA profile picture
@alpine Thanks for the thoughtful comments.

I'm not seeing any particular trend in the euro/dollar exchange rate, and certainly nothing that could be projected forward with any certainty. I don't think this is likely to be a game changer.

As for the defense/space business, it's simply not that big, and I don't view it as a likely secular growth driver. The next few years will probably be pretty weak from a cash flow perspective, as Boeing has to spend to fix up the KC-46 tankers. After that, there could be some good years, but in the long run it's mostly a wash.

Services will probably provide a decent amount of growth over the long run, but could be quite weak in the near term. Aircraft demand is so low right now that I think a lot of airlines will retire jets that otherwise might have gotten modifications that would have benefited Boeing.

It's pretty hard to make a bullish case for Boeing that isn't built primarily on the commercial jets division reaching new record highs in terms of deliveries and margins. I think that's unlikely to happen with the current product portfolio over the next 10 years.
GameBuzz profile picture
I'd be happy with $250 again, LOL.
Oh look, all these boeing basher people are back on the forum. Where did you all disappeared to when Boeing was at 230 few days ago?
Cylontymany profile picture
Finally someone has the guts to tell it like it should! Bravo!!! Just think if the two crashes never occurred! But still the reality that we are all in is where we are at today! The sooner people get over the Boeing hangover the better for all! This stock will not return to all time highs for a very long time.
I think that’s exactly why people are thinking about long-term versus short-term.i dunno. I’m no expert. But it is plain obvious that most are not for short term but long. Obvious comment and a good comment
Just minus the reality part. I think the consensus is is that people understand the risks. It’s the RobinHood rookies
More like drop to 10$/share to be attractive
Nice work. Thanks.
JimmyJS profile picture
1. These lockdowns and social distancing are a huge over-reaction and required for less than 5% of the population. This will become more and more clear in a month or two. Get ready for a massive bounce back in air travel.

2. China’s COMAC will be hit hard with counter-measures, almost Huawei style, and will not emerge as a serious competitor even within China in the next 10 years.

3. There are huge populations in developing countries which will resume feeding massive air travel demand growth once this virus drama ends.
The investors overreacted because of the numbers increased again. Purposely overreacted so they can buy back more shares that they lost. The increased in numbers came from a lot of the protesting and riots. This cant stopped the fact that economy is slowly picking up. Alot of the workers have returned to work already. Once airlines start again, economy will be flying.
Right, because all the new cases that are swamping hospitals in Florida, Texas (check out Houston!), Arizona, etc. are from protestors? Get real. If you think money is more important than human life, you should risk yours by working without a mask. Some of us are just a little more focused on what really matters. You don't get to put your cash in your coffin.
New World. America First.

Maybe you should peruse the Boeing order book to see who they are selling their jets to.
In your dreams. Thanks to Rump, America is done.
Andrew Williams profile picture
Thanks for the article.

COMAC is owned by the Chinese government. Given how sensitive the US and Eurozone are to subsidies, I wonder how COMAC's aircraft will be accepted in these markets. But, I think I read the CR929 is targeting 10% of the widebody market, which doesn't seem like much if it achieves a meaningful share of China's market.
Andrew... - what, U.S. sensitive to subsidies? This story yesterday suggests otherwise: 'The Pentagon plans to grant more awards to subsidise companies hurt by declining commercial business, Will Roper, assistant secretary of the US Air Force for acquisition, said on 10 June.' www.flightglobal.com/... - Hmm. Statements like that can be misunderstood and get BA a bad name, if only abroad.
Adam Levine-Weinberg CFA profile picture
I would expect the vast majority of sales to go to China for the C919 and probably even for the CR929. But as the company gains experience, its products will probably become more competitive and subsidies could become unnecessary. As you say, the Chinese market alone is big enough that Comac can get a fair amount of scale. It's also collaborating with Russia on the CR929, so that's another market (albeit not as big) with some level of guaranteed sales.

Now that Boeing abandoned the Embraer JV, it's also possible that Comac and Embraer link up in some fashion, which would give China access to considerable engineering expertise and commercial relationships.
Cylontymany profile picture
Thats true! Boeing is not as smart as they were. Screwing the Max up was just the beginning! And in time Comac will be the third player and Boeing will be apart of a trio instead of a duopoly!
Spot on, well written
Adam Levine-Weinberg CFA profile picture
Thanks for reading!
Well done analysis. I'm sure the BA bulls will be here to spout specious BS.
Short sighted. BA could touch all time high in less than a decade. Demand for aircraft will rebound as soon as 2021. By then, you wont able to catch the rally. If all american airlines could manage to survive this situation, boeing will do great. And so far no sign of any US airlines going bk anytime soon.market uncertainty creates opportunities; a few dares to take them. I did and i am long BA at $155
Faris... - 'If all [U.S.] airlines could manage to survive this situation, boeing will do great...' Ah, MAGA! First, Only, and Always!
Don't any of them fly the competition, none at all?
Adam Levine-Weinberg CFA profile picture
I don't expect any U.S. airlines to go out of business. But that doesn't mean they're going to be expanding much over the next few years, either. Furthermore, U.S. airlines are in better shape than most foreign airlines, and the domestic market represents a pretty small share of Boeing's sales.
to your 2nd sentence, BA touching all time high in less than a decade... it sells for around $180 now. ATH would be $450 which is 250%. Spreading over 8 years that is an annual yield of 15%, not sure if that is reasonable considering the elevated risks. What I’m saying is anyone who is buying now is probably estimating higher returns than just touching ATH “within less than a decade”
Boeing up big in pre hours + 13
I was so pissed I missed the run up from 120 to 230. It made me sick. I was grateful to have got another chance and went into margin to buy as much as I could. I am avg 171.
Nutty is right.
Rambrian profile picture
While I completely agree, it will take a long time for retail traders to accept this and they're going to quickly run it up above $200; I'm going along for the ride. This is today's market until, like the Tech Bubble, the gamblers pop out.
Adam Levine-Weinberg CFA profile picture
Possible. The market has become a casino in recent weeks. Stocks (including shares of bankrupt companies!!!) moving for absolutely no reason.
@Adam Levine-Weinberg CFA

Wrong! The market has been moving on news. Any news. Good news? Goes up. Bad News? Stock goes up. Indifferent news? Stock goes up. Taking on more debt news? Stock goes up.

There is no rhyme or reason, anymore...
Cylontymany profile picture
Yes! We live in a world today that doesn't make any sense! And what used too doesn't anymore. So its tough to figure where we go from here?
Thoughtful article and it dares to recognise commercial realities for the two key narrow-bodies.

But, prepare to be flamed!
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