Boeing: Beijing Retaliates

Boeing

As the Chinese protests continue to grow and take up most of the news, another major event happened that will almost certainly hurt The Boeing Company (NYSE:BA), the American plane maker. After giving it approval in September, China’s aviation authority recently gave its national company COMAC a production licence to start making its narrow-body airliner C919 in large quantities. This is a significant setback for Boeing, which still has 138 737 MAXs in its inventory that it can’t sell to Chinese customers because the Chinese government agency that grounded the plane in 2019 hasn’t recertified it yet.

Also, the worsening of Sino-American relations and China’s decision to give a big contract to Airbus SE (OTCPK:EADSY) to deliver more than 300 planes to its state-run airlines over the next few years show that Boeing is about to lose its dominant position in one of the largest aviation markets in the world because of geopolitics. Worse, it looks like Boeing has yet to sell any of its planes made for Chinese customers to customers from other countries. With each passing year, their hopes of getting back into the Chinese market are fading. So, it’s safe to say that Boeing will continue to struggle to change since the safety problems that caused the 737 MAX to be grounded still haunt the company.

Hope Isn’t a Choice

Late in October, Boeing reported its earnings for the third quarter, which saddened many investors. Even though the company’s sales went up 4.5% from last year to $15.96 billion, they were $1.95 billion less than what was expected. At the same time, the company’s non-GAAP earnings per share (EPS) was -$6.18 instead of the $0.07 that was expected. This was primarily because of losses from defence development programmes. Also, despite having a record backlog of $381 billion at the end of September, Boeing has a fairly weak balance sheet. At the end of Q3, the company had $50.6 billion in long-term debt and only $14.3 billion in cash reserves.

Even worse, Boeing hasn’t made any progress in China, and its performance in the last quarter wasn’t excellent. Since 2017, Boeing has not made any big deals with Chinese airlines. This is partly because of the Sino-American trade war that started in 2018. At the same time, things got much worse in 2019 after China was the first country in the world to ground its 737 MAX planes for safety reasons. Because of this, its sales in China will drop by 68.3% from 2019 to 2020 to $1.8 billion.

More than a year ago, Boeing’s management asked the Biden administration to work on improving Sino-American relations. They did this because they thought that orders from China would be essential to the company’s growth. This is partly true because China is a profitable market that is expected to buy one-fifth of the world’s aeroplanes in the next few decades. If things get better, Boeing could retain its leading position in the area, which would hurt its growth prospects in the long run. Even though Boeing executives and Chinese officials met in September to talk about recertifying the 737 MAX in China, the plane has not yet been recertified.

Another big problem for Boeing is that at the end of Q3, 138 of the 270 planes in stock were 737 MAXs going to clients in China. 

There needs to be a guarantee that the Chinese regulatory agency will recertify those planes. According to the conference call, the company’s management is hoping things will improve, and they are still determining what will happen to the 737 MAX in China. 

The problem is that hoping is never a good plan, but Boeing’s CEO Dave Calhoun said when asked if any of the 737 MAX planes had already been sold to customers in other countries:

“Well, there’s active discussions with customers about that topic. More to come in terms of things getting finalized, but it’s an active discussion, so that we can no longer defer that decision and actually start to think about how we liquidate that in terms of working capital improvement and cash flow. More to come, and we’ll keep you updated.”

Given this, it’s safe to say those planes will stay on Boeing’s books for a long time. None of them have been sold to other customers, and China is the only country that hasn’t recertified the planes, so there’s less chance of them being sent there daily.

Beijing Sends Messages

Boeing’s future in China is uncertain, even though it can’t send the 737 MAXs it already has. Not to mention that the largest state-run Chinese airlines signed a $37 billion deal with Airbus in July to buy 292 planes from them over the next five years. Then, in September, Airbus announced a deal worth $4.8 billion to sell more aircraft to Xiamen Airlines and China Southern, which had only been using Boeing planes before. Both of these things ended the era of split jet deals, in which China gave contracts to both Boeing and Airbus to build almost the same number of planes.

Since Sino-American relations have gotten worse since US House Speaker Nancy Pelosi went to Taiwan earlier this year and the Biden administration put new restrictions on chip exports in September and October, it doesn’t look like Boeing will be making big deals with Chinese companies any time soon.

Also, the Chinese government approved COMAC’s narrow-body airliner C919 in September. This plane has been in development for more than a decade. Then, on Tuesday, COMAC got a licence to make a lot of C919 planes. China Eastern Airlines and other airlines are planning to start using the C919 next year. It still needs to be determined if C919 will succeed since it will likely only be used on domestic routes at first. But Beijing wants to depend less on the U.S., which will almost certainly hurt Boeing for many years.

At this point, Boeing’s only significant advantage is that it is an essential part of the American military-industrial complex. So, it could stay in business and help the Department of Defense build up its air and space capabilities. At the same time, Boeing is likely to do well at home when demand for air travel goes back to what it was before the pandemic while domestic airlines expand their reach.

But that’s the end of the significant benefits. Boeing is likely to take advantage of opportunities in its own country. Still, the company’s recent poor performance and the possibility of losing one of the world’s best aviation markets suggest that the company’s global goals are limited. So, it’s hard to justify a long position in the company right now, especially since Wall Street thinks the company’s shares don’t have much room to go up right now, and the bad feelings about its Chinese business may keep Boeing stock from going up much in the near future.

Bottom Line

In conclusion, globalization has benefited Boeing in the last few decades. Airbus made a global duopoly that ruled the commercial aviation market for a long time. Both companies have previously significantly benefited from the expansion of the Chinese aviation market by expanding their presence and supplying their planes to state-run airlines. But it looks like that time is coming to an end.

Boeing is already a victim of the changing political landscape. Sino-American relations are getting worse because of a trade war that has been going on for years. As Beijing and Washington move away from each other, Boeing’s future in China is uncertain because it is getting harder and harder to recertify the company’s 737 MAX planes there. This will likely keep hurting Boeing stock performance in the future since there has yet to be a deal made to sell the stored planes to customers in other countries.

Featured Image – Pexels © Jeffry Surianto

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About the author: Stephanie Bedard-Chateauneuf has over four years of experience writing financial content for various websites. Over the years, Stephanie has covered various industries, with a primary focus on consumer stocks, cannabis stocks, tech stocks, and personal finance. This stock lover likes to invest for the long-term. Stephanie has an MBA in finance.