Boeing Will Sustain Its Current Market Share In Commercial Airplane Deliveries

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BA: The Boeing Company logo
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The Boeing Company

Boeing’s (NYSE:BA) August Dreamliner 787 deliveries were higher than its monthly target and the company is surely going to exceed its annual target of 100 airplane deliveries by a wide margin. Given the trend so far, we believe Boeing will be able to maintain its 45% share of global commercial aircraft deliveries in 2015. In fact, we expect it to maintain such high levels throughout the Trefis forecast period. This can primarily be attributed to higher production rates for 737 and 787 airplanes. Having said that, if Boeing’s market share falls to 40%, then there could be a potential downside of around 10% to our price estimate. Below we explain why Boeing should be able to sustain high market share and the potential downside risks.

See our complete analysis of Boeing here

Boeing’s Global Market Share Has Improved In Recent Years 

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Boeing has so far delivered 90 airplanes (787) in 2015, averaging around 11 per month, as compared to its initial target of 10. At this pace, it is likely to deliver more than 130 airplanes this year. This points towards stronger cash flows in 2015, as Boeing receives a significant portion of its payment at the time of airplane delivery.

Boeing has seen a consistent growth in commercial airplanes deliveries in the recent years. It delivered 723 airplanes in 2014, almost double of what it delivered in 2008. [1] This can be attributed to the company’s increased production rates to make deliveries against its huge order backlog. The chart below highlights the growth in Boeing’s airplane deliveries since 2008.

Boeing Deliveries

With the growth in airplane deliveries, Boeing’s global market share also improved from 31% in 2008 to 45% in 2014. We believe that Boeing will be able to sustain these levels in the coming years. Below we explain why.

Market Share Is Likely To Remain High Amid Increased Production

Boeing plans to raise its 737 and 787 production rates in coming years. It plans to raise its 787 production rate to 12 per month in 2016 and then to 14 per month by the end of this decade, from 10 per month currently. Boeing also plans to raise its 737 production rate to 47 per month in 2017 and then to 52 per month in 2018. [2] This hike in production rates can primarily be attributed to its massive backlog of orders. By the end of Q2 2015, Boeing’s backlog stood at $489 billion. [1] At the current pace, it may take more than 7 years for Boeing to clear this backlog. Now this is surely a long waiting time for airlines and it may lead some of them away to other manufacturers. While Airbus also has a massive backlog for airplane deliveries, there are many newer players in commercial airplanes segment, such as China’s new Comac C919. Brazil’s Embraer and Canada’s Bombardier. Boeing’s increased production rates will give some hope of faster delivery for airlines. In turn, these higher production rates will grow Boeing’s deliveries, sustaining its global market share. Furthermore, strong demand for new commercial airplanes should persist as airline profits are rising amid lower fuel costs and growing demand for air travel. With more demand to serve, it makes sense for Boeing to hike its production rates.

Potential Downside Scenario

We expect Boeing’s share of the global commercial airplane market to remain stable through the Trefis forecast period.   If however, Boeing’s market share falls to around 40%, then there could be a potential downside of around 10% to our price estimate for Boeing’s stock. Here, we estimate the total annual commercial airplane delivery to be around 720 by the end of the decade. This is possible due to increased competition from regional jet makers Bombardier and Embraer, and entry of new players such as China’s Comac, Russia’s Irkut and Mitsubishi’s Regional Jet.

For instance, China’s Comac C919 is being designed to seat between 156 and 174 passengers, making it versatile for several routes. Also, since it has an element of state ownership, the regional airlines are likely to place more orders for C919. Comac’s order book currently stands at over 500 airplanes, primarily from various Chinese airlines. There is a similar competition from other players and given a high waiting period with Boeing and Airbus, some of the airlines may place orders with these new entrants. It must be noted that Comac will make its first delivery sometime in 2018. While these factors will surely impact Boeing as well as Airbus in the long run, it is unlikely that Boeing’s market share will fall below 40% over the next five years, especially now when it is increasing its production rate. Accordingly, we estimate Boeing’s commercial airplane deliveries to be around 860 by the end of our forecast period. This will translate into revenues of $74 billion and an estimated EBITDA margin of 11.6% will translate into EBITDA of over $8.6 billion, representing close to 75% of the company wide EBITDA.

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Notes:
  1. Boeing’s SEC Filings [] []
  2. Boeing’s Press Release, October 2, 2014 []