Reimagining Air Travel Makes Boeing Co Stock a Great Long Term Bet

Boeing stock - Reimagining Air Travel Makes Boeing Co Stock a Great Long Term Bet

Two months ago I made the case that Boeing Co (NYSE:BA) was a better investment than Airbus SE (OTCMKTS:EADSY). The case for Boeing stock wasn’t necessarily rooted in a higher-quality product than the planes Airbus makes.

Indeed, there’s an arguable case that Airbus actually makes the higher-quality planes. The crux of the argument is that Boeing makes the two passenger jets that airlines want and need the most going forward, the smallish 787 and the 737-MAX.

Consider this the next chapter of that story, or perhaps the next evolution in the passenger jet industry. While the 787 and the 737-MAX are still important planes for Boeing. The former has a massive range of about 9000 miles. Moreover, there’s a so-far-unnamed that will seek to introduce a slightly bigger aircraft to carriers without crimping operating efficiency.

It also will rewrite the passenger jet business model. It’s called the NMA for the time being, short for ‘new midsized aircraft.’

The new model will turn replacement parts and maintenance of aircraft into a profit center in and of itself for Boeing.

Boeing Stock Going Forward

In some circles, however, the NMA is being referred to as the 797. Whatever it’s going to be called, the company said last year when the project was first announced that the plane would be ready for its initial deliveries in 2025.

The aircraft, which will come in a handful of variants, will seat between 220 and 270 passengers and sport a maximum range of somewhere around 5000 miles.

As such, it will be able to do the job the 757 and 767 are currently doing, including crossing the Atlantic Ocean. It will be able to do so about 30% cheaper though, following in the footsteps of the relatively new 787 (which is called the Dreamliner for good reason).

It’s an idea seemingly in contrast with my January thesis on Boeing Stock, which was: “[T]he 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.”

That is, the NMA appears to be a move in the opposite direction, towards the midsize market where neither the benefits of large scale nor the flexibility of being small can be realized. This isn’t a mutually exclusive arrangement though.

While Delta Air Lines, Inc. (NYSE:DAL), United Continental Holdings Inc (NYSE:UAL) and all their peers love smaller jets, they all also know they need midsized jets to fill an important gap that will become all too evident as air travel demand more than doubles over the next 20 years.

That’s not the detail that should leave owners of Boeing stock excited though.

It’s All About the Aftermarket for Noeing and Boeing Stock

It’s been the understated nuance of the nascent NMA program, possibly because it’s not even entirely clear to Boeing what it will mean. But, broadly speaking, the aircraft company is looking to take a bigger role in supplying the parts needed to keep the NMA jets in the air after the initial sale is made.

CEO Dennis Muilenburg recently pointed out:

“We do take the majority of the risk in developing new products, and we think that would cause us to want to gain the financial benefit of that risk-taking for the long term.” He also clarified as to the intent: “So you can imagine we would want to look at this airplane through the lens of lifecycle value as we are growing our services business.”

The airplane aftermarket is a $180 billion market, per year. Muilenburg isn’t crazy for wanting to take aim at a bigger piece of it, after it will spend several billion dollars just to design the new jet and then set up production facilities to build it.

For the record, Boeing rival Airbus is similarly consolidating and streamlining maintenance operations (even if not as aggressively as Boeing) by bringing them under one umbrella, underscoring the idea that this is the future.

Bottom Line for Boeing Stock

Any investors looking for this paradigm shift to translate into an immediate boost to the bottom line need not hold their breath; it’s not going to happen. The NMA won’t be commercially available until 2025, and some observers have doubts about that lofty timeframe goal. And even if the plan comes together, it’s just one plane. Boeing makes several others.

Still, to investors truly willing to commit to stocks for the long haul, this paradigm shift to something more holistic is one that could be replicated for all future aircraft, bolstering profits and smoothing out any cyclical rough edges owners of Boeing stock see from time to time.

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.

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