With the commercial aviation industry about to embark on a multi-year recovery, it makes sense to start thinking about which aerospace stocks would benefit. Given Boeing‘s (NYSE: BA) leading place in the industry, this is probably the first place of call for curious investors. With that in mind, let’s take a look at where Boeing could be in the next five years.
The commercial aerospace industry will recover
The commercial aviation industry is currently attractive. By permission, the pessimists focus on the sexual risk of persistent locks and travel restrictions as a result of the pandemic. However, optimists report that air traffic data is improving. Also, slew management of major aerospace companies such as General Electricity and Raytheon Technologies (NYSE: RTX) a multi-year recovery is expected.
Image source: Getty Images.
The optimists have a point. After all, the industry could hardly have a worse year than it did at the time of the pandemic in 2020. With global vaccination programs in place and travel restrictions easing, It is a question of “when, not if” to overcome.
Boeing revival
To understand Boeing ‘s role in recovery and its profit potential, it’ s a good idea to break out just how the airplane giant is making money. The chart below shows how reliable the company was at Boeing Commercial Airplanes (BCA). Things were going well for the company before two separate crashes of the 737 MAX in 2018 and 2019 caused a worldwide outbreak in 2019. Then in 2020 the pandemic hit.
Boeing’s Defense, Space and Security (BDS) industry may offer some good support, but the outlook is not good enough. For example, Boeing CEO Dave Calhoun, on the last employment call, said, “the scale of government spending on the COVID-19 response has the potential to put pressure on global defense spending in the coming years.”
Meanwhile, Raytheon Technologies CEO Greg Hayes believes his company can grow their defensive revenues. However, this is due to its international strength and openness to “high growth areas,” such as defense systems, missiles, and intelligence rather than the “flat budget environment” it predicts. Eventually, Boeing Global Services (BGS) will recover when flights return, but it is unlikely that they will move the needle in the way that BCA could.
Data source: Boeing demonstrations. Card by the author.
Boeing commercial aircraft
Income growth is the key to future BCA earnings. That might sound like an obvious statement, but consider that BCA’s profit margin is largely dependent on productivity growth. As airline productivity rises, the unit’s production cost falls, resulting in each additional aircraft being taken out at a higher profit margin. Over time, as yield and revenue go up, so will the profit margin.
In the happy days of early 2019, former CEO Dennis Muilenburg believed that the production ramp on the 737 MAX would help BCA reach a 15% margin in 2019 after a BCA 13.6% margin in 2018 .
Data source: Boeing demonstrations. Card by the author.
In turn, the key to order revenue growth is on the narrow 737 MAX group. Boeing had previously hoped that a full-body replay cycle would begin at the beginning of this decade, led by orders for its 777X and 787 wide-angle aircraft. However, domestic air travel is likely to recover sooner than international travel. So it is likely that a slim body will regain demand first.
Am Boeing 737 MAX
Simply put, Boeing needs orders on its slim main body, the 737 MAX. The good news is that orders are starting to come back. The bad news is that they have a long way to go before Boeing can regain its former glory. In addition, the commercial airline market is very different from what it was a year or two ago. In short, it is now a consumer market.
Previously, Boeing and Airbus struggling to ramp up production to meet demand, but now it is a question of keeping existing orders and fighting over all new orders. The following chart shows 737 and 737 MAX net orders compared to the family of Airbus A320 aircraft. It’s been a heavy year or two for Boeing and the 737 MAX in particular. Just in case you were wondering, the decline in net orders in 2019 and 2020 is due to redundancies.
Database: Boeing and Airbus displays. Card by the author.
The question now is what kind of orders can Boeing win for the 737 MAX and at what price? Flight recovery is very likely, and end market demand for slim body planes will return. Airbus, on the other hand, is a real competitor, and there is no guarantee that the 737 MAX will consistently receive orders over the Airbus A320 NEO. In addition, Boeing may receive a big discount to win orders for the 737 MAX.
Where will Boeing be in five years?
All said, there is no doubt that Boeing will be a stronger company in a few years, but the high level of uncertainty surrounding the orders and prices of 737 MAX makes it difficult to predict who it will be. what the image of the BCA fringe will look like in the future. And that makes it difficult to know what Boeing ‘s future level of employment will be. So this is probably not the best way to get past commercial flights.
This article represents the opinion of the writer, who may not agree with the “official” recommendation position of the Motley Fool chief consulting service. We are motley! Questioning an investment dissertation – even one of our own – helps us to think critically about investing and make decisions that will help us become softer, happier and richer.