This Could Be Big for Boeing Stock
Boeing Co (NYSE:BA) has experienced a rowdy start to 2016. BA stock has fallen 22% since the beginning of the year. The company has faced concerns over the outlook for the commercial aerospace market. Boeing has also had a failing strategy in winning defense sector contracts.
The Pentagon delivered the latest such blow. It rejected Boeing’s complaints about losing the next-generation strategic bomber contract to Northrop Grumman.
Yet Boeing stock gained 2.21% on February 22 alone. BA stock continued a trend that started after CEO Dennis Muilenburg reassured the market that Boeing remains a major force in the aerospace sector. Based on the CEO’s tiptoeing on defense, during a speech on February 19, Boeing appears ready to accept that commercial aviation is the key to its future.
Boeing has lost some orders through cancellations and deferments.
Predictably, depreciating currencies and recessionary pressures have hurt Russian and Brazilian airlines. Likewise, with Brazil and Russia being major oil producers, the economies and its businesses have suffered from the current slump in this energy resource. As such, it is not surprising that Russian and Brazilian airlines have been among the first to call off the renewal of their commercial fleets.
Yet Boeing can still rely on the fact that passenger traffic and plane demand will continue to rise sharply in many emerging countries. Despite the gloomy expectations on global growth, in which even Moody’s chimed last week, average citizens in most so-called emerging market countries have seen living standards improve.
The point that investors of Boeing stock cannot ignore is Boeing’s backlog. Even if Boeing were to win no more orders in the next year, it still has to complete seven years of production. This suggests that the current cycle for commercial aviation is not under threat.
The other aspect that Boeing stock has going for it is that the company is making progress cutting production costs. Muilenburg also assured that Boeing’s efforts to reduce the costs of its “737NG” and “777-300ER” models will help make these more profitable. Boeing plans to re-invest the savings in research and development and reward those owning Boeing stock.
Boeing is looking ahead to deliver 900 civil aircraft a year, compared to 762 aircraft delivered in 2015. That’s roughly a 20% increase.
Boeing is also mulling the development of a new mid-range aircraft to go head-to-head with the Airbus “A321.” It will decide within 12 to 18 months.
The latest bullish development is that Boeing has received the green light from the U.S. government to reach out to Iranian airlines. This should certainly worry executives at Airbus headquarters in Toulouse, France. However, it is a path that looks even complicated to Boeing, while its European rival, Airbus, has sold 118 to Iran in late January.
Boeing asked for and obtained a license to assess the Iranian air carriers’ needs. This limited scope license authorizes Boeing to hold talks with air carriers that are recognized by the United States and are wishing to renew their fleets. This notice is hopeful for aircraft sales contracts, even if the U.S. still concedes that the situation in the region is “complicated.” Washington still enforces some economic sanctions against Iran.
Iran is perhaps the biggest single market opportunity for airplane makers. Since the start of the year, U.S. sanctions have blocked Boeing from billions in potential contracts. Airbus has a free hand and just signed a memorandum of understanding (MOU) during a visit from Iranian President Rohani to France in late January. Rohani’s delegation ordered 118 aircraft worth $25.0 billion at list prices (21 “A320ceo” family aircraft, 24 of the “A320neo” family, 27 of the “A330ceo” family, 18 “A330-900neo,” 16 “A350-1000,” and 12 “A380”).
For its part, the Italian-French manufacturer ATR is preparing to sell 40 turboprops (with Canadian-made Pratt & Whitney engines) to Iran. Canada cleared the plane manufacturer Bombardier to do business with Iran. Smaller Iranian airlines have already contacted by Brazil’s Embraer and Russia’s Sukhoi.
Iran needs 400 long and medium, and 100 short-haul airliners, according to its transportation minister Abbas Akhoundi. Iran, a country of 80 million, has seen surging air travel demand. Congress’ first step, releasing Boeing from any restrictions on talks, is a useful first step. On February 26, Iran will hold elections and there are suggestions that reformist candidates will make some gains. President Rohani will push ahead with reforms, allowing U.S.-Iranian relations to improve further. Boeing would then have clearance to sell to Iran.