Last week, Boeing Co (NYSE:BA) CEO Dennis Muilenburg acknowledged to BA stock owners that China was an increasingly important market for the aircraft maker.
“When we look at the global aerospace market, it’s a growing market—a $7.5 trillion marketplace over the next ten years,” he explained. “We see a world that needs 41,000 new airplanes, and more than 7000 of those are in China.”
In the context of being in response to President Trump’s trip to eastern Asia, it would have been easy to chalk Muilenburg’s thoughts up to simply being relevant, topical filler dished out more for publicity purposes than as a look at the company’s long-term plans. As it turns out, however, Muilenburg may have been dropping a critical hint as to how current and prospective owners of BA stock might want to judge the company.
China is the Key
Muilenburg went on to say in his discussion with Fox’s Maria Bartiromo:
“We’re 7% growth, year over year, in passenger traffic around the globe… every year, 100 million people travel for the first time by airplane in Asia alone…. as a result, we plan to continue ramping up production. For example, our 737 production line, we ramped it up to 47 airplanes per month this year. Next year we’ll step to 52 a month and go to 57 a month in 2019, and a good portion of this growth is being driven in China.”
Almost as if on cue, Boeing just announced it has delivered Air China’s first 737 Max 8 passenger jet. By the end of next year, China’s carriers are expected to take delivery of nearly 100 more of the same plane by the end of 2018.
It’s just a sampling of the growth Boeing has enjoyed in China of late, and only a fraction of the revenue BA stockholders can expect to see in China for the foreseeable future.
The specifics are buried within the documents Boeing posts for all BA stock holders to see, though most rarely do. Namely, on page four of Boeing’s 84-page outlook for how the aircraft market will change between 2017 and 2036, the aircraft company believes the Asia Pacific region, mostly China, will take delivery of more than 16,000 new passenger jets between now and then. That’s almost more than twice the next-biggest forecast; Boeing believes North America will need 8,640 new planes over the course of the next 20 years.
The image on page 19 of the report illustrates why demand in the region should explode over the next couple of decades. Passenger traffic in Asia is projected to swell by 5.7% not counting China’s part of the mix, while China’s passenger traffic is projected to grow at a 6.1% clip for the same timeframe. No other market is expected to see even comparable traffic growth.
And Boeing is already winning the hearts and minds of Chinese airlines. In addition to the delivery of Air China’s first 737 Max 8, Hainan Airlines has tapped Boeing’s 787 as the first plane to directly connect New York and China’s interior cities Chengdu and Chongqing. Previous aircraft only had the range to reach China’s coastal cities Beijing and Shanghai.
The Hainan and Air China deals are just a couple of several such deals that have taken shape despite the advent of China’s own efforts to supply its carriers with home-grown passenger jets. The C-919 from the Commercial Aircraft Corporation of China (or Comac) was built to compete with the aforementioned 737 as well as the 320 plane from Airbus SE (OTCMKTS:EADSY).
First taking flight in May of this year, the C-919 has promise, but Comac doesn’t have the multi-decade history of quality Boeing has, nor is China’s first passenger jet as proven as the 737 already is.
Bottom Line for BA Stock
Broadly speaking, most investors know China’s growth translates into a significant opportunity for United States’ corporations that sell goods overseas. This, by default, includes Boeing.
What most investors may not have recognized, though, is just how big of a deal China is to Boeing, and by extension to BA stock. It’s huge; huge enough to suggest if it is doing well there, it is doing well overall. Conversely, if Boeing hits a headwind in China, it may not be able offset that weakness through other markets.
Ergo, if you’re a current or future owner of BA stock, pay particularly close attention to headlines about Boeing’s Chinese business and about Chinese airline industry as a whole.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter.