Boeing Reports Improvement Marred by Reach-Forward Loss

Wide-moat-rated Boeing BA reported a quarterly improvement that was marred by a reach-forward loss on the 777X program. The decrease in 777X program quantities, as well as low guidance in defense and global services more than offset the time value of money increases in our fair value. We’re lowering our fair value estimate to $257 per share from $260 per share to reflect these difficulties. Our fair value implies that Boeing’s commercial deliveries do not sustainably reach 2018 levels until 2025.

Boeing commercial reported a quarter-over-quarter sales increase of about 31.5% on 31 additional deliveries. The driving factor behind this was the 737 MAX return to service and the subsequent delivery of 27 737 MAXes to U.S. and Panamanian airlines as well as a single delivery to a European lessor. To date, the MAX has received approval from four of the five major aviation regulators: the United States, the European Union, Canada, and Brazil. Notably, this excludes China. The company hopes to deliver roughly half of the 410 MAXes in storage during 2021, which we think is a reasonable goal, given that we anticipate the COVID-19 vaccine will dramatically improve airline operations, which would allow them to take delivery of aircraft.

We think the most optimistic news is that airlines have retired about 1,300 aircraft since the start of the COVID-19 crisis, which would represent roughly 6% of the total pre-COVID fleet and around 25% of roughly 5,400 pre-COVID aircraft older than 15 years old. While we expect airlines will primarily focus on deleveraging after the pandemic, we think they will be able to use sale-leaseback transactions to take delivery of the aircraft. Aircraft deliveries are obligations to the customer, so airlines may take delivery even if they would prefer to focus on their balance sheets. As evidence, Boeing and Airbus delivered 749 aircraft in 2020, which was the worst year in aviation history.

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