Very recently it was revealed that Boeing had entered into a $4.3 billion deal with Shenzhen Airlines where the Beijing-based passenger carrier will purchase 46 737 models. This could potentially be a game changer for the American Airline manufacturer especially given how its European rival Airbus Group’s stock has offered investors better returns. Where Airbus stock has seen a rise of more than 37% since the beginning of the year, Boeing stock has only experienced an 8% appreciation.
This new contract with the Chinese airline is bound to be lucrative for both companies. Boeing’s price list shows that its 737 Family models range from $78.3 million to $113.3 million, however it is important to note that bulk orders in the airline industry are often complemented with discounts. Either way this offers a wonderful boost to the Chicago-based airplane manufacturer. Up until the second half of last year Boeing’s earnings were backed by a record backlog of more than 4000 units which needed to be delivered to its clients all across the world. Around that time if Boeing continued production at that very rate then it would have taken them 7-10 years to clear the massive backlog.
However when you compare that to Airbus’ order book at the end of the first quarter you can see a much different picture. Boeing’s European rival’s order book was worth €954.56 billion, which was 11% higher since the start of the year. However the total takes into account a positive revaluation of the US Dollar’s recent strength and is given at list prices which mean that at the current exchange rate the number stands at just above $1 trillion. On the other hand Boeing’s backlog in the same period consists of just over 5,700 planes and according to its financial report the company’s backlog stood at $495 billion, down by 1.39% since the start of the year. By the end of April of this year Airbus reportedly had a backlog of 6,399 aircrafts which the company believes more than ensures a steady stream of production from the upcoming decade.
Now just maintaining a backlog is not what drives growth and Boeing seems to realize that. The airplane manufacturing giant began to assemble the wings of its upgraded 737s using automation designed to boost factory output far beyond the current record pace. The start of this factory’s operation to produce the wings of 737 Max marks the meeting of a schedule which the company set years ago as well as increasing much needed efficiency in the production process. In fact the new automated process reduces manufacturing time by 30% while at the same time taking up less than half the floor space of the system it replaced and all of this without any downsizing in sight till fiscal 2018. Now the 737 Max was launched as a response to the Airbus’ A320neo. In other words this factory upgrade is going to streamline the expenses in the financials and will most likely have a direct impact on Boeing’s bottom line. There are about 2,700 orders for the new 737 Max as compared to the nearly 3,800 orders for the A320neo models. The upgraded factory in Seattle, Washington is expected to churn out the first 737 Max wing by this summer and should help the company maintain its schedule to begin test flights by early 2016 with the first aircraft to be delivered to Southwest Airlines Co. in the third quarter of fiscal 2017. The upgrades at the plant are going to continue to the point where the company expects to increase aircraft production to 52 per month by the end of fiscal 2018. Not to be left behind, Airbus plans to increase production of its A320neo to 50 aircrafts a month by the end of fiscal 2016 and are mulling over options to further increase the production capacity.
When we take a look at Airbus’ financials we realize that the top line actually shrunk by €570 million to €12.078 billion in the first quarter of fiscal 2015 as compared to the same period last year however profit for the period rose by more than 82% to its current position of €795 million, leaving EPS €1.01 per share. A large part of this gain in earnings was driven by the sale of 17.5% of Airbus’ stake in Dassault Aviation, the French fighter jet maker. The sale raised around $1.8 billion which ultimately had positive effect of about €700 million on its earnings before interest and taxes. EBIT for the first quarter of the fiscal year of 2015 grew by 73.76% to its current position of €1.232 billion and repeating such a feat might not be feasible for the European aircraft manufacturer might not be so simple in the coming quarters. In the same period Boeing saw its EBIT grow by 30.93% to $2.019 billion while its EPS grew by 46% to $1.87 per share. The Chicago-based aircraft manufacturer saw its operating margins improve by 1.6 point to 9.1% and it is likely that this number will continue to improve given its recent improvements in its plant in Seattle. Not surprisingly Airbus’ operating margin stood at 4.1% showing how much more efficient Boeing is at managing its costs in comparison to the Blagnac, France based company.
With commercial aircraft sales making up more than 60% of both Boeing and Airbus’ total revenues it only makes sense to pursue the segment. Right now more than 40% of Boeing’s total revenue is generated within the US and with the US economy expected to make a recovery which will be signaled by a rise in interest rates by the Federal Reserve we can be optimistic about Boeing’s chances of maintaining growth. However a report published in October last year by the International Air Transport Association (IATA) forecasts that in the next 20 years the fastest increasing markets in terms of additional passengers per year will be lead by China and followed by the US, India, Indonesia , and Brazil in that order. This is where Airbus has the upper hand as it generated nearly 32% of its revenue last year from the Asia Pacific region, with only 16% being generated in North America.