Flying with Airline Stocks

The price of the light, sweet crude on the New York Mercantile Exchange surged over $78.00 per barrel on July 31, but has subsequently fallen back to below $73.00 per barrel. The continued high oil prices negatively impact the airlines sector, yet there is hope. Capacity, as measured by the seats sold as a percentage of available seat miles, is steadily rising. Airlines as a group will continue to struggle with the high fuel costs and competitive pricing, but I believe airplane makers show a decent upside trend.

The reality is that we are once again seeing some renewed life in the aerospace stocks. One example is The Boeing Company (NYSE/BA), which has recovered from below $30.00 in early 2003 to the current $103.00, a rise of over 200% in about three years. Boeing is firing on all cylinders as the call for new aircraft steadily gains, due to strong demand out of China and India for planes. China is buying Boeing planes, and there is the potential for thousands more over the next decade as China steadily grows its commercial airline sector and demands new planes.

 If you are looking for an aerospace parts maker, take a look at Florida-based BE Aerospace, Inc. (NASDAQ/BEAV, market cap: $3.62 billion). BE makes cabin interior products for the new and retrofit airline market, including commercial airlines and business jets.

The company continues to benefit from a pick-up in the aerospace industry, especially with the launch of super-sized planes from Boeing and Europe-based “Airbus.” BE announced that it had received supply contracts valued at over $200 million from numerous global airlines. The wins included supply orders for the new jumbo liner “Boeing 787 Dreamliner,” expected to be delivered in May 2008. The deals include 787 orders from nine major global airlines, retrofit orders from North American carriers, and new/retrofit orders for two major Asian airlines.

 China will be a strong market for BE. Bookings from Chinese airlines were about $100 million in 2006, and I expect this number to rise going forward. Given the company’s record backlog, cofounder and CEO Amin Khoury expects to see strong revenue growth and margin expansion through 2009. In all, the high oil prices are a concern, but we like these two aerospace stocks.