Is The Global Commercial Aviation Upcycle Nearing Its End?

The global commercial aviation market has witnessed solid growth since the financial crisis of 2008-09. As the global economy began to recover from the crisis, airlines worldwide saw their passenger traffic and profits rise. As a result, airlines began ordering new airplanes; those from the developed countries such as the U.S. ordered new airplanes primarily to replace the older ones in their fleet, while airlines from the emerging countries ordered new airplanes primarily to expand their fleet sizes. During 2010-2013, major global airplane makers including Boeing (NYSE:BA) and Airbus saw their annual new airplane orders climb steadily. For Boeing, new airplane orders rose from a mere 142 in 2009 to 1,355 last year, and for Airbus, new airplane orders rose from 271 in 2009 to 1,503 in 2013. This significant surge in new airplane orders from airlines around the world compelled both Boeing and Airbus to hike the production rates of their best-selling airplane models. These higher production rates in turn led to higher airplanes deliveries, revenues and profits for both Boeing and Airbus. But in recent months, there have been increasing concerns that this upcycle in commercial aviation could be nearing its end. We don’t think so.

New airplane orders continue to remain strong. Through September this year, Boeing has received orders for 1,013 airplanes, indicating that the airplane maker will likely see another solid year. A similar phenomena can be observed at Airbus. Order cancellations remain low except for one big order cancellation which Airbus faced earlier in the year. That cancellation was a result of the airline in question reevaluating its fleet plans. Overall, new airplane orders continue to remain strong to the extent that despite production rate hikes, Boeing’s backlog is growing. The company started 2013 with a backlog of 5,080 commercial airplanes, and through August-end, this backlog had increased to 5,540 airplanes. ^{[1] [2]} Going forward, Boeing plans to further hike its 737 production rate to 47 airplanes per month in 2017, from 42 per month currently. ^[3] The airplane manufacturer also plans to raise its 787 production rate to 12 airplanes per month in 2016 and to 14 per month by the end of this decade, from 10 per month currently. ^[4] These future production rate hikes indicate that Boeing on its part is not seeing demand fall off.

All in all, in our view, concerns around the commercial aviation upcycle having run its ground are not on strong footing. We see no convincing data on new airplane orders and order cancellation rates that indicate that demand for new airplanes is waning. Current long term forecasts from Boeing also show that about 36,000 new airplanes will likely be delivered to airlines worldwide in the next 20 years, compared to about 19,000 airplanes which were delivered to airlines in the last 20 years. ^[5]

We currently have a stock price estimate of $136 for Boeing, around 5% ahead of its current market price.

See our complete analysis of Boeing here

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1. Boeing’s 2013 10-K, February 2014, www.boeing.com [↩]
2. Boeing’s unfilled orders through August, October 1 2014, www.boeing.com [↩]
3. Boeing to Increase 737 Production Rate in 2017, October 31 2014, www.boeing.com [↩]
4. Boeing to Assemble 787-10 Dreamliner in South Carolina, July 30 2014, www.boeing.com [↩]
5. Boeing’s current long term market outlook, October 1 2014, www.boeing.com [↩]