Boeing Walks Fine Line With China After Big Win (NYSE:BA)

For Boeing (NYSE:BA) things are finally looking better, but I find myself repeating that the path forward will be long and challenging for the US jet maker and that is a view that likely won’t change any time soon. Boeing is facing challenges in the supply chain and geopolitical challenges are also affecting the jet maker’s order inflow and deliveries, and those issues come on top of a debt pile that Boeing grew during the Boeing 737 MAX crisis. We are seeing improvement in some areas but at times not at the pace we’d like to see those improvements materialize.

Geopolitics is one of the areas where I see the biggest problem for Boeing as the geopolitical landscape is currently stalling hundreds of commercial aircraft sales. In a recent report, I explained that the tension between China and the US over Pelosi’s visit to Taiwan is a setback to Boeing where it has extremely little to win and more to lose. Boeing did win some business and it is a rather big win if you view the current state of the market segment where Boeing booked the win. In this report, I will discuss that win and also discuss how Boeing is walking a fine line with China.

Boeing Is Missing Out On Big Sales in China

The aircraft purchasing mechanism in China is completely state-owned as are most of the airlines. Behind that goes a net of Chinese interests that is not limited to supporting their airline fleets and operations. So, when political tension occurs, China has a very powerful tool to hit the US, which on any normal day is the biggest exporter of the US. The mechanism and scale make that losing out on sales in China cannot be compensated.

China is an aviation market with a fleet of nearly 4,000 aircraft and that is set to grow to nearly 10,000 aircraft by 2041 with an estimated delivery total of nearly 8,500 aircraft. Boeing is currently not gaining any of those sales or deliveries and there is no market that can step up and absorb those sales. So, Boeing is losing out on those sales at least for now and the area where it could gain some sales would be Taiwan, which sees strong support from the US. The aviation market in Taiwan, however, is significantly smaller. A quick look at the numbers taught us that the aircraft fleet in Taiwan is just 230 units. That means that the Taiwanese market, being 17-18 times smaller than the Chinese market, offers a significantly smaller sales potential to aircraft manufacturers.

Boeing Wins Sales In Taiwan

Boeing ended up winning sales in Taiwan, and while those are not offsetting the lost value in China for the time being, it is most definitely a big win. China Airlines, the flag carrier of Taiwan, has selected the purchase of 16 Boeing 787-9 jets with first deliveries scheduled for 2025. At list prices, the purchase is valued at $4.7 billion, but after customary discounts, this would likely be closer to $2.4 billion. The carrier also holds options for 8 Boeing 787-9s with options to convert to the bigger -10 variant, which could boost the combined value to $3.6 billion.

For Boeing this is a big boost. Since the Boeing 787 deliveries were put on hold, the jet maker had major challenges collecting sales for its next generation wide body jet and production was dialed back to just two aircraft per month. That means that measured against the current production rate the purchase would provide Boeing with 8 months of work and another 4 months when options are exercised. More importantly, those 16 jets also will be taken into the production skyline on which Boeing can recalibrate production rates which could hit 6 per month by 2025 providing roughly 3 months of production or 4 months when the options are exercised. So, this is an important win for Boeing.

What sweetens the win for Boeing is that the Dreamliners are ordered as replacements to the Airbus A330. China Airlines currently operates a fleet of 22 Airbus A330-300s of which 10 aircraft will near or exceed the age of 20 years by 2025. Additionally, there are options and flexibility to convert to the bigger Dreamliner variant, which has not been a fast seller to date.

Boeing Is Rather Mute On Selection

Normally when an airline selects an aircraft, we see Boeing and Airbus coming up with announcements and fancy renders of the aircraft in the airline’s colors. Nothing of that this time. One major reason is likely that Boeing does not want to anger China. While the US jet maker has de-risked China from their Boeing 737 MAX production, it continues to aim to recommence operations and deliveries to China soon and it also intends to deliver Dreamliners to China and collect more orders for the type. So, instead of putting the fleet decision of China Airlines out in a press release and giving it a lot of attention, Boeing has opted for the silent road.

However, it also might be the case that Boeing did not put out a fancy statement because the deal has yet to be finalized as reported by Reuters:

We are pleased that China Airlines has selected the 787 Dreamliner to modernize their world-class fleet and look forward to working with the airline to finalize the order.

In the past we have seen Boeing releasing statements on order selections or orders that have yet to be finalized, so that Boeing doesn’t give a lot of attention to this major win is more than likely related to not wanting to disturb China.

Conclusion: Things Are Getting Better For Boeing And Its Stock Potential

While individual orders are unlikely to swing the prospects of a complete stock or company, the selection of the Dreamliner by China Airlines is big as it shows continued strength and confidence in the Boeing 787 platform and it is one of the orders that Boeing will take into future assessments to increase Dreamliner production rate which still is a cash positive platform for the US jet maker. So, slowly but surely we are seeing that things are improving for Boeing and the jet maker is showing that even with a dented reputation it is able to effectively compete with Airbus (OTCPK:EADSF) (OTCPK:EADSY).

Boeing has not given the selection as much attention as it deserves and that is very much related to the strained relation between the US and China where Boeing is caught in the middle seeing its sales and delivery momentum evaporate in what is the most important market for any jet maker.