Boeing’s good fortune will create ripple effect

Defense Market Report
By James Smith
June 16, 2006

While Boeing is not a Small Cap company by a long shot, investors may give heed to the company’s recent good fortune.

As the US aerospace and defense company outpaces European rival Airbus in the commercial jet sector, suppliers to Boeing have good reason to ice up the bubbly.

Airbus, controlled by European Aeronautic Defense and Space Co (EADS), announced on 14 June a second delivery delay for its new mega-jet A380. Customers that have committed to this aircraft are not happy. Some operators are seeking delay-related financial compensation. And it is possible that some orders may be cancelled.

Shares in EADS, which owns 80 per cent of Airbus, took a big hit, dropping by over 26 per cent on 14 June on the news; Boeing shares jumped 5 per cent on the same news, coupled with an order from Singapore Airlines for 20 Boeing B-787 aircraft.

The Singapore carrier, which placed a firm order for 10 aircraft, with options on an additional 15 of the aircraft, is still scheduled to receive its first A380 delivery by the end of this year. But deliveries from 2007 onward would be delayed due to production problems.

In opting for the B-787 rather than the Airbus A350 for its mid-range needs, Singapore Airlines may have been demonstrating its displeasure with the second delay. On top of that, Airbus has pushed back the launch by up to two years of its A350.

Emirates Airlines is also reconsidering its order of 45 A380s. Qantas Airways is in discussions with Airbus about its order for 12 A380s. Qantas is seeking financial compensation for the delay. Malaysia Airlines is also reviewing terms of its deal for six of the aircraft.

Let’s look at the numbers.

Last year, Boeing received 1034 aircraft orders and commitments against 815 for Airbus.

So far this year, Boeing has far outpaced its European rival on orders and commitments for new aircraft, 318 to 97.

Airbus has garnered 159 orders for the A380.

While no airline has cancelled its orders, it is only a few days since the latest delay was announced. And the requests for compensation from the airlines because of the delays could be costly. Airbus has estimated that the delays will cost the company US$2.5 billion from 2007.

It would be difficult for the European plane maker to make up for any lost orders as the size of the A380, with limited access to all by perhaps three dozen airports, mitigates against sale to other than a small number of carriers.

The A350 has been a disaster. Faced with complaints from potential customers that have placed orders and commitments for 182 A350s, Airbus is returning to the drawing board. A redesigned A350 will put that program back several years. Boeing’s competing product, the B-787 has generated 402 orders.

Some of A350 orders will fall by the wayside as carriers opt for the Boeing product.

In general, Airbus has experienced the perfect storm of delayed delivery schedules and the need to redesign.

Airbus has also placed its faith in the US$300 million super-jumbo A380, believing that the market would favor the larger aircraft while Boeing has bet on a fuel-efficient mid-range model with an estimated 15 per cent to 20 per cent fuel savings over currently available aircraft.

With fuel at a premium, it would be foolhardy to assume that fuel-efficiency plays a minor role in the contest.

Earlier this month, Giovanni Bisignani, director general and chief executive officer of the International Air Transport Association (IATA), said: “Oil is the wild card. Prices are racing ahead of efficiency gains and robbing our profitability. The industry fuel bill will top US$112 billion this year -- US$21 billion more than 2005”.

Bearing this in mind, I would look to invest my money in people in companies supplying to Boeing.

Disclaimer
James Smith is an independent columnist for this web site. James Smith may hold long or short positions in any of the stocks mentioned in this article and those positions can change at any moment. InvestorIdeas.com Disclaimer: www.InvestorIdeas.com/About/Disclaimer.asp, InvestorIdeas is not affiliated or compensated by the companies mentioned in this article. James Smith is a freelance writer. Nothing in the articles should be construed as an offer or solicitation or recommendation to buy or sell any specific products or securities. Past performance does not guarantee future results.