Though the novel coronavirus pandemic imposed a headwind on every sector of the economy, the suffering was not equally distributed. Among the hardest-hit segments were the airlines, which saw air passenger volume drop to single digits in April relative to pre-pandemic levels. That wasn’t good news for Boeing (NYSE:BA). Despite its military exposure, Boeing stock is largely a commercial-enterprise-related investment.
However, it takes more than any one negative event – no matter how terrible it is – to permanently disrupt an economic supply chain. Encouragingly, since the April bottom, passenger volume has increased substantially.
To be fair, we’ve got a long way to go. However, with a generally improving labor market, the prospects for a gradual airline recovery appears within reason, lifting the contrarian narrative for Boeing stock.
As a result, Morgan Stanley analyst Kristine Liwag upgraded BA from “underweight” to “overweight.” Liwag also raised the price target from $165 to $230. In a research note, the analyst noted that Boeing stock is a Covid-19 “recovery play with upside.”
The beleaguered company has made the most of a bad situation, writing down 10% of its backlog, reducing production rates for the 737 Max and 787 jetliners and delaying the 777X, one of Boeing’s long-range, wide-body airplanes. Plus, without any more additional headwinds to account for and very low expectations, Liwag believes that Boeing stock should be good for takeoff.
Of course, we can’t forget the impact that the coronavirus vaccine rollout will potentially have for Boeing stock and all airline-related businesses. As I mentioned multiple times recently, a consumer survey by Deloitte revealed that most Americans are unwilling to see a movie in-person during the first half of 2021.
Movies often last around two hours. Flights can be five or six hours for cross-continental journeys and much longer for international routes. Therefore, the vaccine represents a huge perceptional lift for Boeing stock. But is it a substantive one?
The Best Possible Outcome for Boeing Stock
I don’t want to speak too forcefully since the coronavirus outbreak has been one of the most unpredictable variables we’ve seen. But if all we were worried about is the pandemic, then yes, the vaccine rollout should be net beneficial for Boeing stock.
True, I did mention the Pfizer (NYSE:PFE) risk in that people may not trust its solution based on rumors and social media posts. However, Novavax (NASDAQ:NVAX) released some very encouraging results with its subunit vaccine. Also, because subunits are proven platforms, Novavax has far greater credibility.
Again, this should be net positive for Boeing stock. But the problem I have is that the pandemic is the least of this airplane manufacturer’s concerns.
Indeed, it’s the economy that’s the real headwind blocking BA’s upside narrative. Although we don’t have extensive evidence, the impact of the 9/11 attacks and the Great Recession suggest that lack of discretionary funds overrules consumer fears of flying.
According to the U.S. Bureau of Transportation Statistics, air travel demand fell 33% after the 9/11 terror attacks. It took nearly three years for demand to return to pre-attack levels.
Granted, that’s a long time. It also implies that at the very least, the pandemic will impose a similar time penalty on air travel. Unlike terrorism, contracting a respiratory illness represents a much higher probability than a hijacking.
However, the impact of the housing crisis and the ensuing Great Recession was much worse. Enplanements peaked in October 2007. From November 2007 onward, it took 87 months – seven years and a quarter – for demand to return to pre-housing bubble/recession levels.
You don’t have to have an MBA to know that a penalty of seven-plus years is much more favorable than a penalty of less than three years.
You’ll Need to Watch Economic Indicators Carefully
Of course, there is an argument to be made that Boeing stock could theoretically rise even if both the pandemic and the present economic recession lasts longer than anyone anticipates. Certainly, we’ve seen some wild trading from activist retail investors, so anything is possible.
But for me, I’m going to stick with historical airliner demand trends and adopt a cautious attitude toward Boeing stock. Here’s the thing about consumer fears of flying – the human mind is a wonderful thing. You can trick yourself into bravery. And if that doesn’t work, you have your two friends, Jack and Daniels.
On the other hand, you can’t fake having money if you don’t. Check that – you can to a certain extent. However, most households will not spend money that they don’t have.
This spendthrift is further exacerbated by the facts. According to a Cinch Home Services survey, since the onset of the pandemic, emergency savings decreased on average by 36%. Therefore, until the economy improves, I don’t see a full-scale return to flying anytime soon. Obviously, until people start taking to the air again, it’s not a great look for Boeing stock.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.
