Boeing Stock: Mythical China Shock Offset With India Win (NYSE:BA)

Rumors of a big aircraft order from Air India have been swelling for some months now, and I do expect that before the year ends, an order will be announced. In a recent report, fellow Seeking Alpha contributor Bohdan Kucheriavyi suggested that with debacle with China fresh in memory, Boeing (NYSE:BA) might be more inclined to sell aircraft to India.

I’ve been following the aircraft market for over a decade now and have been covering the Indian aircraft market more closely for the past 5 years here on Seeking Alpha and in printed magazines. I believe that the notion that Boeing would be more inclined to sell India now is one that misses the context of the global market. In this report, I will attempt to provide that missing context or the other half of the story.

Air India Rumored To Purchase Up To 500 Aircraft

The rumor is that Air India is on the verge of buying up to 500 jets from Airbus and Boeing. The deal likely includes 150-190 Boeing 737 MAX aircraft, 30 Boeing 787s and there are rumors that there will be orders for the Boeing 777X as well. Altogether, there we see order for up to 240-250 aircraft for Boeing for single aisle as well as wide body aircraft. It is already important to point out the other half of the story here. So, if there are approximately 250 aircraft to be going Boeing’s way, that means the other half without doubt is going to Airbus (OTCPK:EADSF) (OTCPK:EADSY).

Today, Airbus CEO, Guillaume Faury, sent a tweet to the world with a photo of him meeting Prime Minister Narendra Modi of India. One thing is certain, they were not talking about the weather. A scale model of the Airbus A350 was put on a table in front of the two, so we can all guess where this is going. If you just focus on a Sino-American context for orders, you are missing that Airbus and Boeing go head-to-head for every order, and the Indian aircraft market is no exception. In other words, Boeing does not need the order to offset China. It needs the order to remain in the race in India. More on that later in this report.

Boeing most likely has pitched selling some aircraft from inventory to Air India. It is the only logical thing to do given the potential order quantity and the constraints in the aircraft production supply chain. There currently are 138 aircraft in Boeing’s inventory that should have gone to China and an order to Air India would be welcome to burn that inventory down. However, this is not really anything new. Over the course of the Boeing 737 MAX crisis, Boeing has tried to sell already built jets from which customers walked away, also called white tails, to other airlines including Delta Air Lines. So, even in unusual times like we are witnessing, now this is a standard practice.

Chinese Market Is Magnitudes Bigger

What should also be kept in mind is that forecast demand for China is magnitudes bigger. So, there is literally no chance that Boeing could truly pivot in a successful way. Putting it differently: if hypothetically Boeing were able to capture just a third of the Chinese market in an unrestricted scenario and we should now consider that to be lost, it would to capture the entire Indian market to make up for that.

Airline Group	Boeing 737 fleet
China Southern Airlines	397
China Eastern Airlines	286
Air China	396
Hainan Airlines	241
Total	1,320

Click to enlarge

To provide additional scope, I have looked up the numbers of Boeing 737 aircraft that have a place with the big Chinese airline groups. These numbers include the younger Boeing 737 MAX but the bulk of these aircraft are the older Boeing 737 Next Generation which need to be replaced in the coming years. Just that replacement potential covers 60% of the demand that comes from India. If you have to share that market with a competitor, namely Airbus, there is no way in which you can offset China and that just assumes the replacement requirement. Replacements generally cover 51% of demand for aircraft but in China this is 58%. So, incorporation growth with the current installed base in mind there Boeing sales in China should be 3,150 aircraft in the single aisle market. In other words, India with its full demand forecast of 2,200 can never offset what Boeing would be losing over the longer term in China… not even if it would magically capture a 100% market share in India.

Boeing Is Fighting Its Own Battle In India

If you are overly focused on China, you would forget that Boeing is fighting a big battle in India and it is actually losing that battle. Boeing has been increasing the total market outlook for the Indian commercial aircraft market for years now. Reality is that they have been losing the battle. Their main customers in India used to be SpiceJet and Jet Airways. Jet Airways went belly up and it remains to be seen whether and when, in what form and with which aircraft the airline will restart operations. The airline used to be a Boeing stronghold with up to 225 Boeing 737 MAX aircraft on order, as I explained in a report in 2019. SpiceJet is the other operator with a predominantly Boeing fleet, but with just 78 aircraft in the fleet inclusive of the cargo aircraft, it is just a small operator as compared to the low-cost carriers in India that have opted for Airbus. Indigo has a fleet of 290 aircraft including over 250 Airbus aircraft and Go First, previously Go Air, has a fleet of 60 Airbus A320 family aircraft while Vistara with 52 aircraft in the fleet primarily operates Airbus A320 family aircraft. Air India has an Airbus single aisle fleet and Boeing wide body fleet while its subsidiary Air India Express has a Boeing single aisle fleet.

We can actually better visualize the fleet:

I have generated two overviews. One takes all single aisle aircraft for the 9 scheduled operators in India and the other takes all passenger aircraft excluding regional jets. There are two reasons to exclude regional jets. The first one is that Boeing nor Airbus is active in the market and the second is that under the UDAN (Ude Desh ka Aam Naagrik (meaning let the common man fly)) development program regional connectivity is subsidized by the Indian government. So, this is not necessarily a viable market.

In the single aisle fleet, Airbus has an 85% market share compared to 15% for Boeing, and overall Boeing has a market share of 23% compared to 23% for Airbus. It is not immediately clear, but on the wide body market, Boeing has a 100% market share in India. So, any widebody sale that Airbus is going to make it will help them gain market share. So, why do I say that Boeing is fighting its own battle in India? There are two reasons for that. The first one is that obviously with an ideal duopoly, the share should be closer to 50% and as can be seen it is nowhere near those levels. Secondly, when analyzing the market share 5 years ago it became clear that Boeing had a 67% share on the single aisle market. So, over the past five years, Boeing has lost market share in India.

Looking at the orders since 2015, we see that Airbus has booked 66% of the orders driven by the success of the Airbus A320neo family in India with Indigo and Go First. The evoX Aircraft Sales Monitor also lets us view the deliveries and backlog for Indian customers and those show an even uglier picture. Due to the Boeing 737 MAX crisis and a later service entry for the MAX, Boeing had a share of just 2% of the deliveries in the past 7 years and has a backlog share of just 20%. That means that Boeing desperately needs orders to maintain market share.

India Is Not A Gem That Was Just Discovered

If you think that Boeing is just now focusing on India or generate that suggestion. You are wrong. What hurt Boeing’s market share in India is the demise of Jet Airways, which had a big number of aircraft on order and while Boeing was a bit more careful in selling aircraft it still got knocked back. Boeing bet on the success of Jet Airways and SpiceJet to maintain market share in India, but Airbus without doubt had better luck spreading its chances more, and their big hit with Indigo gives them a 14 percent point in market share boost for the single aisle market in India.

It is certainly not the case that Boeing just discovered India. The company has significant exposure to India as it aims to generate more sales in the country, and in its market outlooks it has been pointing at India and China as growth drivers. From the 20-year market outlook from 2018 that I have stored on my computer:

Socioeconomic changes in large emerging markets such as China and India have been primary driv­ers of both global GDP growth and demand for air travel. The number of air passengers in China has increased at an average rate of more than 10 per­cent each year since 2011, while India’s emergence as a high-growth economy has fueled more than 20 percent passenger growth per year in its domestic market. With these developments, India is expect­ed to become the third largest commercial aviation market by the early 2020s. The middle classes in both countries have developed as well, expanding from a combined 100 million in 2007 to more than 400 million in 2017. In the next 10 years, another 300 million people are expected to enter the middle class in these economies. These changes are important for air travel demand because as people enter the middle class, their propensity to travel increases dramatically.

What makes China and India so desirable for the single aisle aircraft manufacturer is that the middle class is growing and the population is huge meaning that there is a huge domestic market for those single aisle jets, but that is not something that Boeing noticed today or yesterday. They have been pointing that out in their market outlooks for years. The problem is that while they saw the opportunity, they have bet on the wrong horses in the race.

Conclusion: The Aircraft Market Is More Complex Than You Think

While Boeing might be looking to sell some of its China-destined inventory to India, this is hardly a new practice. We previously saw that Boeing tried to sell almost 10% of its inventory to Delta (DAL), but the airline was more charmed by the MAX 10, and Boeing has steadily remarketed white tails to other customers. While building white tails is not a standard practice, remarketing them when it does happen is a standard practice.

Besides the shorter-term inventory-oriented view on the aircraft built for China potentially going to Air India, there is not a lot of reason to see one as a substitute for the other. The Indian aircraft market is big, and Boeing knows the opportunities there for years and likely even decades. They didn’t recognize the existence of opportunities in India today to pivot away from China. Any sale that Boeing makes in India, it is aimed at recovering the market share there but not aimed at a long term replacement of the potential in China. The Chinese market is simply too big to be offset by the Indian aircraft market. Even if Boeing gets 100% of the sales, they are losing out without China. That is a reality that cannot be denied.

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