Boeing Stock (NYSE:BA)
The Chief Executive Officer of Boeing, Dave Calhoun, is of the opinion that the company does not require the development of a new plane during this decade. If that causes a decline in market share, he can simply lower prices.
It’s possible that this strategy, which involves relying on the same family of aircraft for the foreseeable future, will be successful. In addition, it may be the most viable alternative for a troubled Boeing (NYSE:BA) company. However, it’s possible that this is not what the shareholders want to hear.
In January 2020, Calhoun took over as CEO of Boeing in the midst of the worldwide grounding of 737 MAX aircraft and just before demand for air travel was drastically reduced by Covid-19. “I became CEO at an interesting time,” he says. “My tenure has been quite eventful.” An understatement.
The MAX remains a significant factor for the company. A hole was created in Boeing’s balance sheet as a result of the grounding, which lasted from March 2019 until November 2020 and was caused by the pandemic. On its books, the company is currently carrying long-term debt totaling more than $47 billion at this time. This figure was less than $11 billion at the end of 2018, before the second MAX crash that resulted in fatalities.
This additional $36 billion in debt was taken on by the company to keep it afloat during the twin crises; however, it could have also been used to finance a new medium-size aircraft that would have been able to compete more effectively with the Airbus (AIR. France) A320neo family of aircraft.
A total of approximately 8,800 orders have been placed for airplanes of the A320 model. There is no doubt that Boeing’s MAX family of competing jets has done very well in the market, as evidenced by the nearly 7,000 MAX orders received.
Nevertheless, Boeing has secured approximately 44 percent of all orders, which presents a threat to the company’s financial performance over the long term. The company is concerned about giving its competitor an excessive amount of market share over the course of time. More orders result in higher production, which in turn results in lower costs per unit, which gives the leader in market share a profit advantage.
Calhoun simply does not give off an impression of concern. “I’m not worried about it at the [Boeing] portfolio level,” he says, adding that there are areas of strength for both Boeing and Airbus and that a new aircraft from either company will need substantial technological upgrades. “I’m not worried about it at the [Boeing] portfolio level,” he says. “There is no room for gradual change here.”
This suggests that neither company will produce a major new aircraft until the next decade when new technologies for wings and engines will be ready to be integrated into a commercial airliner.
In addition, Boeing is developing a larger model of the 737 MAX called the MAX10, which will be able to seat approximately 230 passengers and will be able to more effectively compete with the Airbus A321neo.
The certification process for the Boeing MAX 10 is still in its early stages. The company anticipates that it will begin shipping it in 2024. After obtaining approval from the Federal Aviation Administration, Boeing plans to begin shipping the MAX 7 variant with a shorter fuselage in the year 2023.
Although the MAX 10 and the A321neo are roughly the same sizes, Boeing faces significant challenges in the commercial aviation market. Nearly 4,700 orders have been placed with Airbus for the larger A321neo aircraft, which accounts for more than half of the total orders placed for the A320neo family. Recently, approximately 600 orders for Boeing’s MAX 10 aircraft have been received. That amounts to approximately 35 percent of all recent orders placed with MAX.
It is not possible to determine the total quantity of MAX 10 jets that have been ordered. In response to a request for comment regarding MAX 10 orders, Boeing did not provide a prompt response. However, the proportion of A321neo orders to total orders is higher than the level of recent orders, which stands at 35%. (Once the MAX 10 receives its certification, airlines will be able to adjust any existing orders.)
“In the immediate term, [the company] is fine, more than enough demand vs supply, so even with a 60/40 split Boeing should be well placed to make good returns on the MAX,” says Rob Stallard, an analyst with Vertical Research Partners. “The question is what happens when demand eases, as it is obvious that airlines would rather have the A321 than anything else.”
Price is yet another lever that can be pulled by Calhoun to solve the problem of market share. “Either guy can price their way to equilibrium,” he says. “It’s all about finding the right balance.” He does not want to produce a new plane because it will only be marginally superior to aircraft that are already on the market because lowering the price to maintain a market share of 50% is an option.
Although it makes perfect sense, investors probably would prefer to avoid price competition.
A price war in the commercial aerospace industry would not be anything like the significant price reductions that Tesla made to its electric vehicles across the world at the beginning of 2023. Although the company was able to increase its market share during the first quarter as a result of the cuts, the company’s profit margins suffered as a direct result.
There are only two major players in the market for large commercial jets. There are dozens of different automakers out there. A click will get you pricing information for new and used automobiles. There is a lack of clarity regarding the cost of plane tickets. Investors could never be certain that a price war was actually taking place. However, if Boeing were to lower their prices in order to keep their current market share for narrow-body jets, they might see an increase in their profit margin of 1 or 2 percentage points. In the long run, that would be detrimental to the stock and its price.
In 2018, Boeing’s commercial airplane business shipped more than 800 jets while reporting an operating profit margin of almost 14%. It will be quite some time before it returns to that location. According to projections made by Wall Street, the division will report an operating loss in 2023 and will see a profit margin of approximately 7% in 2024.
The primary factor is the overall number of aircraft deliveries. Although price and inflation levels are important considerations, they are not the most important factors. It is anticipated that Boeing will deliver approximately 540 plans in 2023 and 675 plans in 2024, which is a significant decrease from the pre-crisis level of 800 plans delivered annually.
It is anticipated that Airbus will generate an operating profit of approximately 9% in 2023 and 10% in 2024. Investors will just have to sit tight and watch Boeing’s margins to see if they can recover from the rising number of deliveries.
Featured Image: Megapixl
