Based on little more than the recent headlines, it would be easy to assume the worst for Boeing Co (NYSE:BA). Airbus SE (OTCMKTS:EADSY), which makes passenger jets as well, managed to secure more individual plane orders in 2017 than Boeing did — 1109 to 912 — prompting at least some owners of BA stock to wonder if the tide had finally turned against the iconic aircraft maker.
Fear not, Boeing stock holders.
While Airbus may be en route to delivering more jets than Boeing by 2020 (selling and delivering aren’t the same thing), Boeing is and remains the king of revenue and of profitability in the passenger jet race. And, its relative strength by that measure may be about to improve even more.
Big Planes Are Bygones
MoneyMorning.com’s D.R. Barton recently explained to CNBC, “For five straight years, Airbus has gotten more orders for numbers of planes, but you have got to remember they’re selling the equivalent of compact cars while Boeing is selling the equivalent of luxury vehicles and SUVs.”
The point is well taken, even if it’s not a perfect characterization of the industry’s changing dynamics. Airbus makes and markets the airline’s equivalent to a luxury SUV in the Airbus A380, which is the largest passenger jet in the world. Problem is, the massive planes airlines thought they wanted a few years ago aren’t the planes they actually want. It has become more cost-effective to utilize more-but-smaller planes traveling around major hubs rather than through them.
BA stock owners who know the company well will know Boeing has a couple of big jets on its menu as well. Namely, the 777 and the 747. While the 747 program has been all but killed except for small-run custom orders, the investment in the newer 777 line has been too great to abandon the plane now.
Indeed, with Airbus mulling a complete cancellation of its A380 program unless Emirates makes a major, long-term purchase commitment, it would behoove Boeing to keep that production line ready to roll, and ramp-up as needed.
Still, with or without the A380 on the landscape, Boeing has only seen tepid interest in planes the size of the 777, which seats around 400 passengers versus the 500 or so the A380 can.
It’s a paradigm shift that favors Boeing stock.
Smaller Is Better for BA Stock
Both aircraft companies make smaller jets too, to be fair. Broadly speaking though, Boeing makes better and more marketable ones. Case in point: Boeing’s 787 ‘Dreamliner.’
Depending on the version, the 787 ferries between 250 and 300 passengers, providing greater scheduling flexibility for operators. They’re also amazingly fuel efficient, consuming 20% less fuel than similarly-sized planes thanks to the use of — among other things — composite materials in their construction.
Better fuel efficiency also means greater range than seen in the past for a plane of its size, upping the flexibility airlines may enjoy with the aircraft.
That’s not to suggest Airbus doesn’t make cost-effective airplanes as well. Indeed, it does exactly that with planes like the A320neo, which technically leads the single-aisle jet market.
By and large though, Airbus aimed at the extreme ends of the market, developing lots of jumbo jets that are now falling out of favor. At the same time, it’s designing low-cost smaller aircraft that are the right size (more or less), but aren’t quite on par with the brilliantly designed 787 — which should sell in record numbers this year — and the more recent versions of the 737 MAX, which seats around 200 travelers.
Ajay Singh, the chairman of India’s value-oriented airline SpiceJet, recently explained of that company’s recent order of 40 737 MAC 10s, “Many airports are running out of capacity and for those airports this is a perfect aircraft,” pointing to the idea that smaller planes rather than larger ones allow for better passenger-management logistics.
Bottom Line for Boeing Stock
Don’t read the wrong message. Airbus isn’t going anywhere anytime soon. In fact, until late last year, Airbus was actually trailing Boeing in terms of orders. Airbus CEO Tom Enders and sales chief John Leahy were able to pull a few levers in December though, pulling ahead of Boeing for the year by taking a huge swath of new orders … particularly for the aforementioned A320neo.
That last-minute surge is also a two-wedged sword though. Barton went on to say, “They [Airbus] booked 76% of their orders for the year in December, but that means there was probably some discounting going on there.” Relatively thin profit margins from Airbus suggests it has been happening for a while, truth be told.
It all ultimately points to the struggle the company is facing in its competition with Boeing, giving owners of BA stock reason to feel good about the future.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter, at @jbrumley.
