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Between the Boeing 777 being shot down in Ukraine and the Farnborough International Airshow ending, there has been a lot of news in the aerospace industry of late. Overall, Boeing (NYSE:BA) did well at the six-day, biannual international aerospace exhibition. They’ve racked up substantial orders and commitments worth almost $63 billion.
Amongst the newest orders, Qatar Airlines has finalized an $18.9 billion order for 50 777-9Xs and four 777 freighters valued at $2.4 billion. It also secured additional purchase rights for another 50 planes. Also announced at the air show was a deal with China’s Hainan Airlines for 50 737 MAX 8s. The commitment is valued at $5.1 billion and would keep Boeing as the sole supplier for its single-aisle fleet.
But the Farnborough Airshow is just icing on the cake after Boeing’s recent finalization of a $56 billion order for 150 777x series passenger jets with Emirates.
That order was a follow through on the commitment Emirates Airlines made at the Dubai air show in 2013. The deal also includes new purchase rights for 50 additional planes. If that option is exercised, it could add another $19 billion in orders to Boeing’s bookings.
It highlights the difference between commitments and firm orders. Airbus may have narrowly won for total commitments during the show, but it looks like Boeing is winning the more important order game.
Competitor Airbus Group NV (EPA:AIR) lost out big when Emirates announced last month that that it would drop its 2007 orders for 50 A350-900s and 20 larger 1000s. This new option is merely the replacement of those planes.
But the move could signal that Emirates airlines has decided to standardize its fleet around Boeing’s 777x series. A move other national carriers are making.
The thing to understand is that unlike other industries, jet production is a zero sum game with the duopoly of Boeing and Airbus. There are only a handful of additional, smaller manufacturers globally. So when someone wins, someone else loses – lately, Boeing has been winning.
But it’s more than the loss of just a few plane orders.
You see it’s also about the infrastructure – the parts, the people, the equipment specially designed to maintain these planes, and the technical expertise to do it. It takes investment and infrastructure, which becomes easier and more cost effective if you have a single plane type or manufacturer.
When Boeing planes fill the hangars, it becomes harder for Airbus to compete on subsequent orders. Think of it like computer operating systems. You either go with Apple or Microsoft, but rarely both because it’s simply easier to keep everything standardized.
Boeing’s delivered plane count for 2014 is 342, compared to 303 at Airbus. Boeing’s 777x series to date has a backlog of 300 plane orders and is expecting more – perhaps in just the next few days as Farnborough winds down .
Boeing Stock: Fear of the Export-Import Bank
The interesting thing is that one might think order wins like these would translate immediately to investors in America’s greatest plane builder. But you wouldn’t know it by looking at the Boeing stock price. It’s currently trading in a sideways pattern, and is still down almost 6.5% for the year.
So what gives? Why has Boeing been ignored as the broader markets have climbed higher?
The Ukraine tragedy has had nothing to do with it. Boeing’s stock has been ignored for a long time prior to that. It also hasn’t been the loss of Malaysia Airlines Flight 17, which had nothing to do with the aircraft.
The real answer why Boeing’s stock price hasn’t moved is that markets have been significantly worried about the Export-Import Bank’s future. It’s potential impact is far greater than a plane being shot down in Ukraine.
Unknown by many, the Export-Import Bank was created by President Franklin D. Roosevelt to lend money to foreign buyers to help them buy American airplanes, computers, goods and services. The bank doesn’t compete with private lenders and takes higher risk loans that cannot be financed anywhere else.
Boeing is a big beneficiary of the financing by this bank.
The bank’s charter requires it to be periodically renewed by Congress or it runs out. The danger is that politicians have it in their sights as an example of government overreach. But unlike a large portion of the federal government that seems not to work, the Export-Import Bank does.
As a credit to its success, the bank earned $1.06 billion for the U.S. Treasury last year alone and had a default rate of just 0.2%. If subprime lenders had that kind of default rate, the 2008-2009 financial collapse would have never happened.
Ultimately, I believe cooler heads will prevail, and this money-making bank will be saved simply because it is so profitable for Uncle Sam.
But if it doesn’t, Boeing may be forced to hold the notes on its planes. And that might not be a bad thing either. Like General Motors learned with its credit division, financing arms can earn substantial returns for their parent company.
Cutting through the fog created by war zones and the bank’s struggles, the short of it is that Boeing has been increasing its lead over Airbus. The current price depression provided by the Export-Import Bank fears should give investors some time to pick up some cheaper shares of Boeing while the markets are distracted.
Shareholders could be very pleased as the markets begin to truly recognize the backlog and long-term value represented at Boeing. The nice thing is that they’re going to get paid to wait. Boeing delivers a respectable and sustainable 2.3% dividend.
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