by Susan J. Aluise | July 13, 2012 7:30 am
Boeing (NYSE:BA) wrapped up the business part of the U.K.’s biennial Farnborough International Air Show on Thursday with a blockbuster deal from United Continental Holdings (NYSE:UAL). The sale of 150 narrowbody 737s — including 100 of Boeing’s new fuel-efficient 737 MAX 9 jets — is a deal worth $14.7 billion.
All told, BA penned nearly $35 billion worth of orders this week — a big win over European rival EADS Airbus which wrapped up the week with around $17 billion in orders. UAL will begin taking delivery of 50 Boeing 737-900ER jets next year; MAX 9 deliveries are expected to start in 2018. Boeing’s 737 MAX competes head-to-head with the Airbus A320neo.
The United order is the second big vote of confidence for Boeing’s re-engined 737 this week. Air Lease (NYSE:AL) inked a $7.2 billion deal for 75 of the jets at the air show on Monday. Southwest (NYSE:LUV) is the MAX’s designated launch customer, having ordered 150 of the jets in December.
Boeing is very bullish about commercial aircraft demand — particularly for fuel-efficient narrowbodies like the MAX. BA forecast this week that the world’s airlines would need 34,000 new, fuel-efficient aircraft over the next two decades, at a total list price of $4.5 trillion. A whopping 23,240 of those aircraft will be single-aisle planes like the 737 and Airbus A320.
Last year, Boeing forecast only 33,500 planes would be needed over the next two decades at a total list price of $4 trillion.
Conquering Costs, Production Challenges Is Key to Success
But Connecticut-based Forecast International believes aircraft manufacturers’ decisions on whether, how and where to increase aircraft production can be tricky. The researchers also found that high production rates are straining the aircraft manufacturing supply chain.
That means the biggest challenges for both Boeing and Airbus will be keeping the production schedules of all those planes on track — and costs down.
That’s one big reason why Airbus announced plans this month to spend $600 million between now and 2017 to build an A320 assembly line in Mobile, Ala. EADS chose Alabama in part because it’s a nonunion state, and labor costs will be far lower there than they are at assembly lines in France and Germany.
The Mobile plant will be Airbus’ first complete manufacturing facility in the U.S., although it does have parts facilities here. The assembly line will produce the A320 narrowbody jet family. When it reaches full production six years from now, it will turn out up to 50 jets a year.
That value proposition is similar to the one Boeing sought when it broke ground on a South Carolina assembly plant in 2009. BA needed a production solution for its delay-plagued 787 Dreamliner, and like Alabama, South Carolina allows workers to decide for themselves whether or not to join a union.
Boeing’s plan hit a reef, however, when the National Labor Relations Board (NLRB) sued it, alleging that opening the plant in a “right-to-work” state was illegal retaliation against union machinists for their many strikes. The board dropped the suit at the union’s request after BA agreed to build the new 737 MAX at a union plant in Washington state. The first 787 rolled off the South Carolina assembly line in May.
While French unions are reacting to Airbus’ U.S. plant in a manner similar to their American counterparts, U.S. politicians like Washington Gov. Chris Gregoire have lobbied Airbus to bring a new manufacturing plant to her state — even though Boeing is one of its largest employers. Gregoire, who reportedly met with Airbus officials at Farnborough again this week, has highlighted the benefits of the region’s robust aerospace supply chain.
Still, Boeing had a good week at Farnborough, most notably with the UAL and Air Lease deals. Since the battle for the industry’s future likely will be won through cost-efficient, on-time delivery of fuel-efficient narrowbody jets, it’s critical for Boeing to gain an advantage early — and hold it.
So any thought of a Boeing victory lap today would be premature at best for four reasons:
Airbus Was on Top Last Year. It penned a whopping $72 billion in orders at the Paris Air Show (the two aviation events are held on alternate years). Boeing managed only $22 billion at that show. These days, customers are far less likely to stick with a manufacturer out of loyalty. Aircraft companies must earn their stripes every day.
Farnborough Was Universally Described as “Subdued.” With the eurozone crisis, China’s slowdown and looming U.S. defense cuts weighing heavily on sales, there was a “wait-and-see” vibe. The A320neo was the huge star at last year’s energetic forum in Paris; this is the expected breather for Airbus after all that action.
Competition Is About to Get a Lot Tougher. Boeing and Airbus are boosting production rates to levels that stress their supply chains. Any supply chain weaknesses have the potential to dramatically disrupt production and leave either or both manufacturers vulnerable to emerging competitors like China’s COMAC.
Airbus’ Alabama Plant Redefines “Buy American.” Opening this U.S. aircraft assembly plant in a nonunion Southern state is a potential game changer for Airbus and its European parent, EADS. It potentially alters the American vs. “foreign” equation in the eyes of politicians — a shift that eventually could even benefit EADS’ defense sales. Airbus can gain labor efficiencies on the hottest aircraft type, putting pressure on Boeing’s union-built 737 MAX. Airbus also could extend its supply chain and reduce its vulnerability to localized disruptions.
Bottom Line: I still believe Boeing had a good week compared to rival Airbus — and UAL’s blessing of the 737 MAX is an important vote of confidence. But Farnborough was just that: a good week. Airbus’ new Alabama plant could ignite a price war that Boeing could be ill-prepared to win.
Boeing shares barely bumped on the nearly $15 billion UAL announcement Wednesday. I think that’s because investors recognize that it’s great news that won’t have much impact on the stock for the next five years. A lot of other things can — and will — change in this market over that time.
I see no compelling reason to run out and buy BA on the Farnborough news. I rank it a short-term hold.
As of this writing, Susan J. Aluise did not hold a position in any of the stocks named here.
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