Looking at various indicators, the commercial aerospace industry looks to be on quite the upswing. Since its lows during the financial crisis of 2007-2009, Boeing stock (BA) has more than quadrupled in price. This owes much, we think, to the headline-generating rollout of its Dreamliner 787 aircraft, but also rebounding deliveries of the company’s legacy models. Boeing’s biggest rival, the European Airbus, has shown similar strength.
Meanwhile, Boeing looks on track to break an airplane delivery record set in 1999. Deliveries of its most prolific 737 model continue at a fast pace (330 deliveries were made in the first three quarters this year so far versus 310 last year), while a flush backlog of Dreamliners remains. Similarly, deliveries of the Airbus A320 continue at a record pace. Besides record-pace deliveries, both Airbus and Boeing are seeing order levels not seen since 2007. These developments are having a positive effect on earnings, indeed.
What is driving demand? Part of it is the replacement cycle. While airline fleets age, carriers are expected to modernize their aircraft fleets to remain competitive. Another part is that increasing profits at airlines, as passenger traffic picks up, are helping to facilitate new investments. Delta Airlines (DAL), for example, has been profitable since 2010; it has ordered 18 Dreamliners so far.
Behind the demand from airlines are several positive trends. Revenue passenger kilometers have been growing, as developing countries begin to see their citizens travel more. Long-term secular trends backing this global growth include urbanization and the growth of a middle-income group.
The Asia Pacific region is an increasingly important driver of air traffic growth. In fact, Asian airlines have been important to both Boeing’s and Airbus’ development plans. All Nippon Airways of Japan was the first to fly a Dreamliner, with its first flight taking place from Narita airport of Tokyo to Hong Kong in late 2011. The launch customer for Airbus’ forthcoming A350 (expected to be delivered in 2014) is Qatar Airways.
Can the growth continue? Backlogs at Boeing and Airbus seem to suggest that both companies have a lot more planes to deliver. For one, Boeing has about $350 billion in commercial aircraft backlog. The backlog of its Dreamliners stands at about 900 planes.
The boom in output at Boeing and Airbus has sent ripples throughout the industry. Suppliers to these big companies also stand to benefit. Spirit AeroSystems (SPR), spun off from Boeing in 2005, supplies fuselage for both the Dreamliner and Airbus’ A350. AAR Corp. (AIR) provides parts to airplanes through their core Aviation Supply Chain segment. Both of these companies have seen their stocks go up considerably from lows set in 2012, despite choppy profit performances. B/E Aerospace (BEAV), which helps outfit the interior of airplane cabins, has seen better execution. The stock is priced around $80 a share now, compared with a low of $6.50 in 2009.
The upswing, however, hasn’t penetrated everywhere in the commercial aerospace world. For example, business jets are still well below the delivery rate heights seen before the recession, as more cost-conscious clients look to business jet sharing services like NetJets, a subsidiary of Berkshire Hathaway (BRK/B).
Deliveries of midsize planes from the likes of Embraer, Bombardier, and Mitsubishi have been less lively lately. That hasn’t stopped investment in this space by the aforementioned. For example, Bombardier looks to compete in the mid-sized market more effectively with its new CSeries jet, which achieved a successful maiden flight recently.
In conclusion, the commercial aerospace upswing looks primed to continue. The savvy investor may be able to still cash in. For more information on the industry and the investment merits of the individual companies mentioned above, please consult The Value Line Investment Survey.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.