Venerable 105-year-old The Boeing Company has been having a tough time lately due in no small part to 21-year-old Airbus SE – the culmination of various historic European aircraft manufacturers who consolidated after the Second World War and with about 25% of its stock held by the governments of France, Germany and Spain. The latter surpassed the former as the world’s largest planemaker by the end of 2019 and is intent on maintaining its lead.
In order to analyze the value propositions inherent, lets break down the scenario on market type: civilian versus military.
By the end of 2021, Reuters reported that while Airbus had delivered more aircraft than Boeing, the latter had recovered by the end of 2021 in terms of gross orders.
In terms of net orders (gross orders minus cancellations or conversions), Boeing remains a little behind. This metric improves after Boeing adjusts the net orders as per ASC 606 (an accounting mechanism that filters out past orders of aircraft deemed unlikely to be delivered, due to the financial condition of the buyers).
Boeing’s highest production capability remains the problematic 737 – which is also its largest backlog as of end of 2021.
Meanwhile, as of end of February, Airbus’ reports on its net total in terms of orders and deliveries indicate prevailing strength.
2021 witnessed a massive increase in Airbus’ orders, a slight increase in deliveries and a slight decrease in backlog when compared to 2020. This indicates that the European manufacturer has gone from strength to strength during the pandemic.
However, both titans have new rivals that are steadily building competing product offerings. Over the past couple of years, the Commercial Aircraft Corporation of China (COMAC) – a corporation owned predominantly by the Chinese government – has been working on the C919 which, as of late 2021, has been reported to be ready to commence deliveries later this year, with China Eastern Airlines being its launch customer.
Like most commercial aircraft manufacturers, COMAC is heavily dependent on Western suppliers. It has been reported that up to
60% of its parts come from the likes of Honeywell and General Electric.
Like the C919, the MC-21 is also dependent on Western suppliers such as Raytheon’s Collins Aerospace and Honeywell. As Russia’s “special military action” in Ukraine continues, most of these suppliers have complied with sanctions and are pulling out of assisting in development of UNAC’s civilian aircraft initiative. This is expected to create significant delays of at least a few years for a large-scale rollout of the MC-21. In June 2016, both UNAC and COMAC initiated a joint venture company named the “China-Russia Aircraft International Co, Ltd.” (CRAIC) in Shanghai with the intention of producing long-range 250- to 320-seat widebody airliners by 2028. Given the problems faced by Russian companies, it’s likely that this timeline will suffer as well.
The military market is much more complicated. After the Cold War ended and the Soviet Union dissolved, the military aircraft market is now open to competition from all quarters as opposed to being limited within geopolitical silos. Russian arms manufacturers have found markets in over 45 countries as of 2020.
It’s largest military market, by far, was the Republic of India which has the world’s 2nd largest military and is the 3rd largest military spender. At the time of the Soviet Union’s breakup, over 70% of the country’s army armaments, 80% of its aviation systems and 85% of its naval platforms were of Soviet origin. However, over this past decade, Russia’s share of Indian arms imports fell from 70% in 2012-17 to 46% in 2017-21.
This has primarily been of benefit to manufacturers in France, Israel and the U.S. Boeing benefited enormously too: of the various military products made by the company, the Indian military operates the world’s 2nd largest fleet of P8I submarine hunters after the U.S., 22 Apache helicopter gunships built with India-specific requirements, several Chinook transport helicopters as well as C-17 Globemaster III heavy transport aircraft. But the outlook for future orders looks cloudy on account of an increasing push on foreign manufacturers to either set up base in India by themselves to produce a substantial proportion of the systems being purchased or initiate joint ventures with Indian companies with Indian employees and facilities.
Most of Boeing’s purchased were made under the previous military imports regulations which required an “offset”, i.e ,for every weapon system being introduced via a foreign manufacturer, said manufacturer must set up a certain number of localized production-related facilities in India and must select a certain number of system or sub-system suppliers from among India’s high-tech enterprises. However, a key component of U.S. government policy is the leveraging of arms exports to maintain its industrial base and — through economies of scale — reduce costs to the U.S. armed forces. Thus, Boeing has been unable to comply with offsets under the previous law and faces difficulties in maintaining sizeable production work under the current law.
In contrast, Airbus has registered significant success recently: in a deal agreed upon in September 2021, the company secured the sale of 56 C-295 tactical transporters to the Indian military. After a outright import of 16 aircraft in fully-prepared condition, the company will be developing an entire industrial ecosystem – from manufacture, assembly, testing and qualification, to delivery and maintenance over the aircraft’s lifecycle – in a joint venture with its partner Tata Advanced Systems Limited (TASL). The company undoubtedly hopes to leverage this new industrial base to drive future sales of other aircraft and thus deepen market penetration.
In previous years, after a deal for 126 Rafale fighter jets by French company Dassault Aviation was watered down to 36 in “fly-away” condition by the Indian government, the French government – also a key stakeholder in Airbus – pitched a proposal to set up a completely indigenous production facility for manufacturing Rafales if the deal size was pushed up to 100. Additionally, French engine manufacturer Safran offered to modernise and co-develop the indigenous Kaveri engine. After 30 years of intensive work which resulted in nine full prototype engines, four core engines and strong capabilities developed in many critical technology domains, this engine was passed over to meet the changing requirements of the Indian Light Combat Aircraft program – which opted for General Electric engines instead. The French government guaranteed that Safran’s proposal will ensure the republic’s complete ‘sovereignty’ in aero-engine technology. Given how seriously both the Indian government and its billion-plus citizens take the notion of sovereignty, this is a very canny offer and, unsurprisingly, is in the final stages of discussion.
These sorts of innovative decision-making by European players (as well as Israeli companies) indicate why the likes of Boeing and UNAC are finding making inroads into this massive market so challenging. The latter, particularly, has floundered in effectively meeting the Indian government’s stringent requirements in areas such as quality, efficiency and timely delivery when it comes to new orders of next-generation aircraft (as opposed to upgrades and spares for Soviet-era acquisitions).
An order placed with Boeing to acquire six additional P8I aircraft in 2019 was cancelled earlier this year in favour of an indigenous platform based on locally-produced Airbus C-295.
The military market is a very complex place, thus making it difficult to take a call on which company will perform best in weapons sales all over the world. In India’s case, however, Airbus is increasingly stronger in terms of positioning over both Boeing and UNAC.
Ratios and Trends
With regard to fiscals, while the strong net cash position shown in a previous article might suggest that Boeing is in a strong position, this was more due to the fact that the reduction in orders on account of problems with the 737 Max had lowered expenses. This supposition is validated by the Price-to-Earnings (PE) Ratios seen for Boeing making it on par with UNAC. While Boeing’s Price-to-Sales (PS) Ratios led over Airbus for a while, both companies’ PS Ratios are now beginning to draw par. UNAC is a laggard in this metric.
Debt is not a huge concern given the sheer size of these companies. Nonetheless, in this metric, UNAC leads the pack, with Boeing being next (which is predominantly long-term debt). Airbus has also recently been packing on long-term debt as well (which now constitutes around 89% of its total debt).
Note: Data services don’t report ratios if they’re deemed meaningless. When earnings go negative, PE Ratios estimated go negative. Given that stock price is always positive, this is considered “meaningless”.
In the time horizons created between the dates shown above, the stock performance has been quite interesting. UNAC’s stock price had been and remains absurdly low – thus aiding in creating solid average daily traded volumes (in units of shares). Airbus is the least-traded in comparison.
Boeing’s stock performance has shown extremely high variance. This is unsurprising; as highlighted in a previous article regarding the constituents of the S&P 500, the U.S. equity market is the most overvalued in the world. Overvaluation leads to volatility. Airbus comes second here, with UNAC running relatively flat across all the windows.
Between Boeing and Airbus, there is very strong similarity in the extent of variability of stock prices within each horizon, as demonstrated by the coefficient of variation. UNAC has a fairly similar trend as well until Russia’s recent actions in Ukraine pushed up both this metric as well as daily volumes.
The mercurial nature of the global military market means that Boeing will likely have to predominantly rely on its domestic legacy business in the U.S. The trend seen in U.S. military aircraft shipments, which started rising after 2001 after a decade of decline, have been downwards since 2010.
While new orders and shipments have been keeping pace with each other over the past several years, the net value of unfilled orders in the U.S. market continue to balloon upwards.
The sheer size of “Unfilled Orders” needs some context: while new systems are constantly proposed and even approved, the long timelines for system development vis-à-vis changes in strategic needs and changing technologies means that a large proportion of these orders (by value) will be in limbo until they’re replaced by other orders – after which the cycle repeats. This is, by no means, unique to the U.S.; other nations’ spending show similar trends. However, none are quite as massive as in the U.S. This is an additional factor that highlights the complexity of the military market.
Like UNAC, Boeing has a massive legacy business by virtue of its longevity. Unlike UNAC, it has an element of diversification by virtue of the vast fleets of commercial aircraft already sold, which will inevitably lead to at least some repeat business. The latest development – a China Eastern Airlines Boeing 737-800 taking a near-vertical fall into the Guangxi Hills in southern China – will likely raise many questions of the company’s technical competency, which will possibly get more murky in the upcoming months of investigation and will likely have some impact on the company’s stock performance in the near term.
In the current day, Boeing and Airbus are effectively a duopoly in the civilian market, which is quite meaningful in terms of business. Over the mid- to long-term (i.e. around 5-10 years), an investor shouldn’t be surprised if new rivals emerge: be it COMAC, UNAC or even an Indian company or conglomerate that suddenly announces an entry into this space. Until then, while both companies are viable mid- to long-term investments, Airbus is slightly better positioned than Boeing in terms of nimbleness, market prospects, and perceived technical competence. What this picture will look like in a year’s time is, of course, another matter.
Sandeep joined Leverage Shares in September 2020. He leads research on existing and new product lines, asset classes, and strategies, with special emphasis on analysis of recent events and developments.
Sandeep has longstanding experience with financial markets. Starting with a Chicago-based hedge fund as a financial engineer, his career has spanned a variety of domains and organizations over a course of 8 years – from Barclays Capital’s Prime Services Division to (most recently) Nasdaq’s Index Research Team.
Sandeep holds an M.S. in Finance as well as an MBA from Illinois Institute of Technology Chicago.
Violeta joined Leverage Shares in September 2022. She is responsible for conducting technical analysis, macro and equity research, providing valuable insights to help shape investment strategies for clients.
Prior to joining LS, Violeta worked at several high-profile investment firms in Australia, such as Tollhurst and Morgans Financial where she spent the past 12 years of her career.
Violeta is a certified market technician from the Australian Technical Analysts Association and holds a Post Graduate Diploma of Applied Finance and Investment from Kaplan Professional (FINSIA), Australia, where she was a lecturer for a number of years.
Julian joined Leverage Shares in 2018 as part of the company’s premier expansion in Eastern Europe. He is responsible for web content and raising brand awareness.
Julian has been academically involved with economics, psychology, sociology, European politics & linguistics. He has experience in business development and marketing through business ventures of his own.
For Julian, Leverage Shares is an innovator in the field of finance & fintech, and he always looks forward with excitement to share the next big news with investors in the UK & Europe.
Oktay joined Leverage Shares in late 2019. He is responsible for driving business growth by maintaining key relationships and developing sales activity across English-speaking markets.
He joined LS from UniCredit, where he was a corporate relationship manager for multinationals. His previous experience is in corporate finance and fund administration at firms like IBM Bulgaria and DeGiro / FundShare.
Oktay holds a BA in Finance & Accounting and a post-graduate certificate in Entrepreneurship from Babson College. He is also a CFA charterholder.
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