Orders for new commercial aircraft had been falling even before 2008 but the financial crisis made matters worse before they improved in 2009. The stock price of Boeing Co. (BA, Financial) has risen by almost 400% since 2009, the year when both stock prices and new orders were in a slump. Curiously, the shapes of the graphs of new orders for Boeing in absolute numbers since 2006 and the company’s stock price from that year look almost identical.
The 787 factor
However, there have been a lot of production and delivery delays that have led to both deferrals and cancellations from many airlines. The new Dreamliner 787 specifically saw more cancellations than new orders in the period from 2009 to 2012. Going in to 2009 with 900 orders for the 787, it won 180 more in 2013, mostly on account of the 787-10, but slumped to only 41 in 2014.
In a boost this year, though, according to news reports that haven’t been officially confirmed, Hainan Airlines of China is about to order 30 of the 787 Dreamliner with deliveries scheduled to start before 2021, amounting to $7.7 billion at list prices.
The huge backlog on the deliveries of the Dreamliner also makes it hard to sell. Few airlines will have the patience to wait for 6-7 years to get hold of an aircraft, especially if they are looking to expand operations quickly. As of now, between various models, Boeing doesn’t have any free delivery slots before 2018. There are a lot of possibilities of juggling things around though, based on cancellations and deferrals that keep coming up from time to time. For instance, United Airlines (UAL, Financial) may benefit from Air France-KLM (AFLYY, Financial) deferring the delivery of 10 Boeing 777-300ER.
The company, along with European competitor Airbus (EADSY, Financial), has been increasing its production rate steadily since the last few years. However, since it relies on other suppliers for components such as seats, it has to still put up with delivery delays despite finishing its own part of the production. Right now, there are two spanking new 787 Dreamliners, meant for American Airlines (AAL, Financial), parked in the California desert, waiting for seats to arrive from a French manufacturer.
A defense boost
An almost done deal with The Netherlands for 17 CH-47F Chinook helicopters and related equipment and support, amounting to a total of $1.05 billion. The deal still has to be approved by the U.S. Congress (and it is unlikely to be rejected) but once done, will bring in close to $100 million in profits for the company. At over 9% of the transaction value, it is much better than profits from sale of commercial aircraft that typically see discounts of over 25% from the list price, going up to over 50% for select customers.
Closer home, the U.S. Navy has asked the Congress to approve the purchase of 12 Boeing-built F/A-18 Super Hornet jets, as well as eight Lockheed Martin (LMT, Financial)-made F-35c. If the approval comes through, the $1 billion deal will mean close to another $100 million in profits for Boeing.
The main hitch in the company’s performance is the cancellations of existing orders of its commercial aircraft, but it is not much of a worry since the freed up delivery slots quickly get absorbed by other airlines. Its existing order book, along with orders from defence establishments both at home and abroad, should keep Boeing in good shape and its stock performing well. We recommend a BUY on the stock.