Investment Outlook: Commercial Aerospace: There is light at the end of the tunnel
Based on the data, commercial aerospace should be a great business and investment opportunity. It’s a duopoly with Boeing and Airbus being the only two major producers of commercial aircraft. Both companies have a delivery backlog in excess of 7 years – meaning if you ordered a plane now, you could expect to receive it about 7 years from now. This may change as both companies are ramping up production in the coming months, but it will be years before a new order is delivered. Long-term forecasts project commercial aircraft demand to grow faster than global GDP.
Finally, the barriers to entry are nearly insurmountable. In a recent attempt to compete with Boeing and Airbus, the Chinese government spent an estimated $50 billion to produce the C919. To the chagrin of Chinese officials, it’s been revealed that more than 80% of the major components of the C919 are from north America and Europe.
On the other hand, the recent years have not been great for either company, especially Boeing. After two 737 MAX crashes, in late 2018 and early 2019, Boeings most popular plane was grounded. Roughly a year later, both Airbus and Boeing woke up to COVID-19 and a virtual halt to commercial aviation. After surviving the worst air travels collapse, both companies have been forced to deal with prolonged supply chain issues which slowed deliveries. The 737 MAX is back in the air around the globe and China is set to begin taking deliveries of the plane in early 2024.
The story around commercial aerospace has had some violent swings over the last five years for Boeing and Airbus but also the engine makers – Raytheon, General Electric, Rolls Royce, and other companies involved in the industry. There is a compelling case to be made that the problems are in the rearview mirror and positive news awaits. The story going forward is all about increased monthly production and deliveries driving free cash flow growth. While there is always potential for supply chain disruptions it seems far less likely going forward. The current backlog of orders helps to insulate any demand disruptions that could be caused by pandemic, global conflict or other unforeseen issues. This leads us to believe there is an attractive risk reward opportunity in the industry.