Boeing Is One of Just Two Commercial Jet Makes. Its 737 Max Woes Won’t Change That.
Boeing’s stock resilience through the 737 MAX crisis, grounded since mid-March following the deadly second crash of the jet in the matter of months, has surprised many investors. Shares, while battered and down about 20% since the second deadly MAX crash in March, are still up year to date and up 7% over the past year.
Through the grounding, investors have come to realize the power of industry structure. There are only two large commercial aircraft producers: Boeing (ticker: BA) and Airbus (AIR.France). And commercial aerospace is a long lead time business with small volumes of highly technical, heavily regulated products ordered years in advance.
But do Boeing’s woes open up the door for another aerospace start up to break the Boeing-Airbus duopoly? Probably not. Some have tried (and failed). It takes tens of billions of dollars and 10 years to design, build and approve a single jet.
Consider the case of Tesla (TSLA), which has tried to do something similar in the auto industry. Enigmatic CEO Elon Musk built a multibillion-dollar car company from scratch. Tesla “only” needed a couple of billion of dollars and a few years to achieve billions in sales.
Some Wall Street analysts may chafe at Tesla’s stock market valuation-it’s the third most valuable car company on the planet-but they also acknowledge his feat is impressive. It is still billions of dollars and many years short of a single plane design. What’s more, Tesla makes three models with three more cars to launch in the near future: the new Roadster, Cybertruck and Model Y. Commercial aerospace is a different scale.
Some have tried to break into Boeing’s business without much success. Canadian private and regional jet maker Bombardier (BBD.Canada) designed its C-Series jet to compete with an A320NEO or a Boeing 737 model jet. It started marketing the C-Series in 2005, almost 15 years ago.
Bombardier has spent almost $15 billion over the past 15 years on plant and equipment. Not all of it was for C-Series development-Bombardier said it doesn’t disclose capital spending by plane program-but a lot of it was. It was a tremendous burden for a company with a market value, including debt, of about $12 billion. In fact, the company received government loan guarantees-a form of bailout-in 2017. The C-Series didn’t work out as Bombardier envisioned to say the least. (Bombardier wasn’t immediately available to comment on total program life to date C-Series spending.)
Bombardier shareholders aren’t happy either. Over the past 15 years, Bombardier shares have dropped, very roughly, from $3 to $2, trailing so far behind the S&P 500 and Dow Jones Industrial Average the precise calculation isn’t helpful.
Now the C-Series is called the Airbus A220 jet, being marketed by the European commercial aerospace giant. A joint venture between Airbus, Bombardier and entities in the Quebec Canadian provincial government went into effect in January 2018. Airbus is the majority owner of the partnership.
China’s COMAC, short for Commercial Aircraft Corporation of China, is building its C919, another 737-size jet. The plane can already fly. The C919 completed a flight test earlier in December. But, it’s taken 10 year for China to get to this point. And total spending isn’t known. COMAC, doesn’t publish financial statements. Still, it has the backing of the government of the world’s second largest economy. Perhaps COMAC is a legitimate competitor.
“New market entrants have almost not chance,” Teal Group aerospace consultant Richard Aboulafia wrote in a blog post reviewing the importance of the Chinese market. China, of course, matters. Passenger traffic in the middle kingdom has grown about tenfold over the past decade. What’s more, Boeing delivered about 192 jets in China in 2018 out of a total of 806 jets. (Last year is a better picture of the market because of 2019 MAX problems.)
Boeing knows China matters too. It announced a new manufacturing facility for China in 2015. Then, in 2018, the 737 finishing facility opened in Shanghai, providing jobs and capital in China. Boeing doesn’t want to cede the market to a technically less advanced plane made in China.
Still not convinced COMAC isn’t a major threat? The C919 has only about 300 firm orders, according to industry data provider FlightGlobal. Boeing and Airbus have more than 10,000 firm orders for similar sized aircraft. And commercial deliveries of the C919 are slated for 2021, about five years behind schedule. COMAC just won’t be a factor for the next generation.
Jet building is hard. Don’t forget true, jet powered commercial flights have only been around since after World War II. Boeing got its start delivering aircraft for mail delivery and then products for the military. And Boeing bought out competitor McDonnell-Douglas in 1996. Airbus, also with roots in defense, is an agglomeration of European aerospace businesses around for decades.
Plane start ups don’t pop-up like, say, electric vehicle start ups.
Investors may not have to deal with existential risks for Boeing or consider major new competition. But Boeing isn’t out of the woods. Investors have to wrestle with questions about long term market share and profitability. Those questions arising from Boeing’s 737 MAX problems.