Boeing Company (BA), with a steady recovery in the U.S. and Canadian economies, dreams big for its commercial airlines business. The bullishness was reflected in Boeing’s 2010 North America (U.S. and Canada) market outlook forecast on September 2, 2010. Boeing forecasts that air carriers in North America will take delivery of about 7,200 new airplanes over the next 20 years at an investment of $700 billion.
Paradigm Shift
Boeing forecast a paradigm shift to the fortunes of the U.S. and Canadian airliners with the continuing recovery of the global economy leading to a steady improvement in demand for air travel as well as cargo. In the first half of fiscal 2010, the U.S. Gross Domestic Product (GDP) grew 3%. Going forward, we expect above-trend growth and a slowly declining unemployment rate.
In the second half of 2010, our forecast of GDP growth is only slightly lower, at about 2.8%. Earlier, Boeing’s commercial airplane deliveries were badly affected by cancellations and deferments from its airliner customers badly affected by the worldwide recession.
However, the tables have turned now with the International Air Transport Association (IATA) forecasting 2010 global passenger traffic growth of 7%. Also, air cargo traffic is expected to grow 19% in 2010. This will benefit the entire airline industry including Zacks #1 Rank (Strong Buy) companies like Republic Airways Holdings Inc. (RJET) and Ryanair Holdings plc (RYAAY).
To catch up with the expected rise in air traffic, airliners will need to retire older airplanes to maintain capacity. Taking retirements of airplanes into account, Boeing estimates the fleet size of U.S. and Canadian Airliners will grow from the current 6,590 airplanes to about 9,000 airplanes by 2029.
Boeing Flying High
Of the $700 billion pie Boeing expects, airliners’ choice for new airplanes will be skewed towards single-aisle, fuel efficient, environment friendly airlines. Airlines are increasingly focusing on the ages of its airplanes as fuel-thirsty, older planes weigh increasingly on earnings. Increased attention to aviation’s impact on global climate change also will be a factor in selecting airplanes that produce lower carbon emissions.
Boeing forecasts that single-aisle airplanes, currently consisting of 56% of the total U.S. and Canadian airliners fleet, will grow to 71% of the fleet by 2029. The Boeing 737 Next Generation is a short-to-medium range, single-aisle, and narrow body jet airliner pitted against the Airbus A320.
Earlier, Boeing’s Commercial Airplane segment in the second quarter of 2010 saw a stark 9% drop in deliveries to 114 units. A lower number of 737 and 777 airplanes flew out of Boeing without a single 747 during the quarter. As a result, Boeing’s quarter revenue has dropped 12% to $7.4 billion. The segmental operating margin contracted to 9.2% from 9.7% in the year-ago quarter due to lower new airplane deliveries.
Within the North America market, Boeing also sees a demand for 1,180 new, efficient twin-aisle airplanes such as the 787 Dreamliner. Boeing’s 787 is the first passenger jetliner of which the major portion will be manufactured from lightweight and environmentally friendly composite material — a break from traditional materials like aluminum and titanium that were generally used for manufacturing. The new airplane of the company will also be fuel efficient, consuming 20% less fuel than those of its peers.
Outlook
Boeing has a unique position as the largest aircraft manufacturer in the world in terms of revenue, orders and deliveries, and as one of the largest aerospace and defense contractors in the world. Also, its revenue exposure is spread across more than 90 countries around the globe.
However in the near-term, headwinds over 787 delays — along with expected cutbacks in the U.S. Defense budget — looms large over the fortunes of Boeing, similar to its large-cap defense prime peers like Lockheed Martin Corporation (LMT) and Northrop Grumman Corporation (NOC). We are Neutral for the time being on Boeing, currently retaining a Zacks #3 Rank (short-term Hold rating).
BOEING CO (BA): Free Stock Analysis Report
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