Boeing’s 737 MAX Closes The Gap With Airbus’ A320 neo With A Large Order From SMBC Aviation

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Boeing (NYSE:BA) has received an order for 80 737 MAX-8s from SMBC Aviation Capital of Japan. [1] This is the largest single order for the 737 MAX from a leasing company since the plane’s launch in late 2011. At a list price of $107 million per 737 MAX-8, this order translates to a deal worth $8.5 billion for Boeing, however, large orders typically come with significant discount. Importantly, this order allows 737 MAX to close the gap with Airbus A320 neo, which has obtained firm orders for 3,124 airplanes since its launch in 2010. [2] In comparison, Boeing 737 MAX has obtained orders for about 2,400 airplanes, including this latest one from SMBC Aviation Capital. [1] We figure orders for the 737 MAX lag behind those for the A320 neo as the latter was launched by Airbus a full year before Boeing launched the 737 MAX. Gains from that launch lead are still accruing to Airbus, positioning its A320 neo in lead in terms of total orders. However, 737 MAX’s steadily growing order book will likely play a key role in allowing Boeing to retain its share of the global commercial airplane market in the coming years.

The order from SMBC Aviation Capital also reflects the growing demand for single-aisle airplanes from Asia, which is witnessing strong growth in airline passenger traffic. Additionally, the expansion of low-cost airlines, which fly single-aisle airplanes, in Asia is providing a further boost to demand for single-aisle airplanes from the region. These trends in Asia will help grow the global commercial airplane market, especially the single-aisle airplane segment, in which both the 737 MAX and A320 neo compete. Currently, this segment is the largest in the global commercial airplane market, constituting nearly half of the global market in dollar terms.

We currently have a stock price estimate of $136 for Boeing, around 10% ahead of its current market price.

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737 MAX Is Key To Boeing Retaining Its Share In The Single-Aisle Segment

The 737 MAX has constituted the backbone of Boeing’s order book for the past 2-3 years. Even in the current year, nearly three-fourth of Boeing’s total airplane orders have come for 737’s, of which the 737 MAX has constituted the lions share. The 737 MAX has been promised by Boeing to be nearly 14% more fuel-efficient than current generation 737’s. From the point of view of airlines, this higher fuel efficiency is a big draw as fuel costs constitute nearly a third of an airline’s total operating costs. Airbus’ A320 neo has also been promised to be significantly more fuel efficient than current generation A320’s. In our view, the improved fuel efficiency of the 737 MAX and the A320 neo is the primary factor behind their steadily growing order books.

Together, 737 MAX and A320 neo will dominate the single-aisle airplane segment in the coming years. This segment is forecasted by Boeing to constitute nearly half of the $5.2 trillion global commercial airplane deliveries over the next 20 years. [3] Thus, retaining and growing market share in this segment will be crucial for the overall success of both Boeing and Airbus. In this context, the 737 MAX’s growing order book inspires confidence in Boeing’s future.

Separately,  the company is set to raise its 737 production rate to 47 airplanes per month in 2017 and then to 52 per month in 2018, from 42 per month currently. This indicates that Boeing is confident of generating more orders for its 737s, including the 737 MAX in coming months. Through October this year, Boeing is leading Airbus in total airplane orders. Boeing has received orders for 1,046 airplanes net of cancellations, while Airbus has received 794 net orders in the same period. [4] [5]

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Notes:
  1. Boeing, SMBC Aviation Capital Announce Order for 80 737 MAXs, November 10 2014, www.boeing.com [] []
  2. Airbus A320neo’s orders, November 10 2014, www.wikipedia.com []
  3. Boeing’s current market outlook 2014-2033, November 10 2014, www.boeing.com []
  4. Boeing’s 2014 orders through October 31, November 10 2014, www.boeing.com []
  5. Airbus’ 2014 orders through October 31 2014, November 11 2014, www.airbus.com []