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Boeing Ups 20-Year Projection for Jet Demand in China by 5.2%

Zacks Equity Research

Per major media sources, The Boeing Company BA recently released its annual China Current Market Outlook (CMO), reflecting a 5.2% increase in total demand for new commercial jets in the country over the next 20 years. 

Notably, this latest outlook once again positions China to become the world’s largest aviation market by 2024 leaving behind the United States, per the International Air Transport Association.

CMO in Details

Per the latest outlook, China will require 8,090 new planes between 2019 and 2038 compared with the previous year's projected demand of 7,690 jets, worth $1.2 trillion, for the 2018-2037 period. This time, the Chinese commercial airplane market is expected to reach a value worth $1.3 trillion, up 8.3% from the prior-year market value.

In terms of demand mix, Boeing continues to expect single-aisle jets to be the key demand driver in the country, comprising 74% of the total projection. This translates into demand for 5,960 single-aisle jets over the next 20 years, reflecting an increase of 4% from the prior projected figures.

A Brief Introspection

Robust demand for air travel remains the key growth driver for China’s commercial jet market. Randy Tinseth, vice president of Commercial Marketing for Boeing Commercial Airplanes, has identified factors like expanding middle class, significant investment in infrastructure, and advanced technologies that make airplanes more capable and efficient to be primary factors behind solid air travel demand in the nation.  

According to Boeing, China’s middle-class households, with average annual income of more than $20,000, are expected to witness a CAGR of 3.6% over the next 20 years surpassing its other Asia-Pacific peer nations. Such uptick in the purchasing power of the middle-class Chinese society has been an added positive for the aviation market, with air tickets becoming affordable. This offers ample growth opportunity for jet makers like Boeing.

As single-aisle jets constitute a principle part of the commercial aviation market and Europe’s Airbus is a strong contender of Boeing in that space, the U.S. plane maker will work hard to exploit the nation’s growing demand for commercial jetliners.

Will 737 Grounding, COMAC Hurt Boeing’s Prospects?

Boeing’s commercial jet business is bearing the brunt of the 737 Max’s grounding since this March. In fact, the grounding and subsequent delay in the return of this fleet to service have been hurting this segment for past couple of quarters. In this line, Boeing’s management feels that the global grounding of 737 MAX fleet has constrained the ability of Chinese airlines to expand capacity, with 737 MAX 8 being at the center of the single-aisle market.

Moreover, the Chinese commercial aircraft market has witnessed a rise of indigenous manufacturers in recent times. In this regard, it is imperative to mention that Chinese jet maker — Commercial Aircraft Corporation of China (COMAC) — is trying to capture larger shares of the commercial jet market with its C919 single-aisle plane, giving a tough fight to the duopolies Boeing and Airbus. Per media sources, C919 will compete Boeing’s 737 series, while COMAC aims to take a fifth of the global narrow-body market and a third of the Chinese market by 2035.

Nevertheless, one should keep in mind that persistent delay in C919 service time indicates that the entry of this indigenous jet in the Chinese jet market is still distant. Even if COMAC successfully enters the market, capturing a notable market share needs some time. So, it is highly unlikely that COMAC will able to capture market shares of Boeing or Airbus anytime soon.

These apart, Boeing recently entered into a strategic alignment with Embraer ERJ, involving both the companies’ commercial jet businesses. This joint venture represents the biggest realignment in the global aerospace market in decades. The deal strengthens Boeing’s commercial businesses against its arch-rival Airbus and the emerging aerospace companies from the Asia-Pacific, with China in focus.

So even in absence of the 737 fleet, Boeing has ample potential to capture larger shares of the Chinese jet market.

Price Performance

Shares of Boeing have surged 4.2% in a year’s time, underperforming the industry’s  6.5% rally.

Zacks Rank & Key Picks

Boeing currently carries a Zacks Rank #3 (Hold). A few other top-ranked stocks in the same space are L3Harris Technology Inc LHX and Leidos Holdings, Inc. LDOS. While L3Harris sports a Zacks Rank #1 (Strong Buy), Leidos Holdings carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

L3Harris’ long-term growth rate is pegged at 8%. The company delivered average positive earnings surprise of 4.21% in the last four quarters.

Leidos Holdings’ long-term growth estimate currently stands at 7.5%. The company delivered average positive earnings surprise of 6.51% in the last four quarters.

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The Boeing Company (BA) : Free Stock Analysis Report
 
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