Is Boeing Too Expensive?

Are you the kind of consumer who insists on owning the best product available? Are you willing -- put bluntly -- to pay up for quality? Boeing (NYSE: BA  ) hopes you are. Because if you're not ... then Boeing could be in trouble.

In a pair of news items released earlier this week, the nations of China and Russia took direct aim at Boeing's biggest markets, with China targeting the firm's lucrative defense franchise, while Russia took aim at the firm's near-duopoly (with EADS) in the market for international commercial aircraft. Let's take these threats in order.

How much does that cost?
According to Adm. Mike Mullen, chairman of the U.S. Joint Chiefs of Staff, Lockheed Martin's (NYSE: LMT  ) F-35 Lightning II fighter jet could very well be the "last manned fighter" jet the U.S. ever builds. (The future, you see, belongs to unmanned aerial vehicles.) But at a global price tag that some analysts project could top a trillion dollars over the program's lifetime, the F-35 is also undeniably the most expensive fighter program ever. The fear, therefore, is that developing nations looking to upgrade their Cold War-era rides may look at the plane's price tag and decide they're locked out of the luxury market and will begin looking for alternatives.

Enter China. Enter rock-bottom pricing.

No reasonable offer refused
Over at the Farnborough International Airshow in England, China showcased its new JF-17 fighter jet this week as an "econobox" alternative to Lockheed's aerial Cadillac. The JF-17 may not carry all the bells and whistles of a full-fledged F-35 superfighter (or it may, seeing as the Chinese apparently stole most of the F-35 specs last year), but with a sticker price of just $15 million, the plane easily has the F-35 fighter beat on affordability.

Fact is, if the $8.6 billion Canada just laid down for a few dozen F-35s is any indication of what Lockheed is charging its international customers (roughly $132 million apiece), the JF-17 will easily beat the F-35's asking price in China's targeted defense markets of Sri Lanka, Sudan, and Venezuela (and countries even less friendly to the U.S., such as Iran and North Korea). More important to Boeing, the JF-17 could eat into Boeing's own sales in wealthier, more advanced nations as well.

You see, as Adm. Mullen's pronouncement sounded the death knell to Boeing's hopes of building fifth-generation fighter jets in future decades, the company has made a strategic shift toward emphasizing the cost-effectiveness of its own fourth-generation fighters such as the F-18 in markets such as Brazil and Pakistan -- markets historically open to buying weapons systems not made in the USA. Indeed, Pakistani press sources are already reporting about the country's interest in buying the JF-17 to replace some of its older Chinese F-7 fighters.

As China gains traction is smaller markets, it's not just Lockheed that could find its defense markets shrink. Crumbs falling from Lockheed's table will increasingly elude makers of sub-fifth-gen aircraft such as Goldman Sachs' (NYSE: GS  ) Onex, L-3 Communications (NYSE: LLL  ) , and Boeing.

Of course, "defense" is just one part of the Boeing equation. Even if opportunities contract in the market for weaponized aircraft, the company still has its duopoly position in the commercial market to fall back on, right?

Right -- but perhaps not forever.

The best defense is good ... commercial
No sooner had the JF-17 flown onto Boeing's competitive scene then another bit of bad news for Boeing touched down en route from Russia: "Superjet International" is gaining traction. Over in England, Russian-Italian (majority-owned by Sukhoi, with Finmeccanica owning 25% and providing marketing muscle to the JV) SI just inked a $900 million deal to sell 30 Superjet 100s to Bermuda-based airplane-lessor "Pearl," with an option to buy 15 more aircraft. This comes on top of a 10-plane order from Gazpromavia, 30 additional orders earlier this week, and a monster 50-plane deal from Malaysia's Crecom to purchase MC-21 passenger planes from the firm.

Granted, Superjet's success poses a more direct threat to other up-and-coming regional jet makers such as Brazil's Embraer (NYSE: ERJ  ) , Canada's Bombardier, and the new jets being designed in Japan and China, as well as smaller, business jet makers such as Textron (NYSE: TXT  ) and General Dynamics (NYSE: GD  ) . But the surprising sales success at Superjet does pose a long-term threat to Boeing. For one thing, the Superjet's near-100-passenger capacity makes it a viable alternative to Boeing's larger 737 series of aircraft (in particular, the 737-600). And at an apparent price of just $30 million apiece, the Superjet undercuts Boeing's list prices on the 737-600 by nearly 50%.

Foolish takeaway
So is this a reason to sell Boeing? No, or at least, not yet. For the time being, most of the regional jet makers -- Superjet included -- are playing in a sandbox that Boeing has outgrown. They pose no immediate threat to the company's profits.

That said, Foolish investors would be ill-advised to ignore the longer-term threat. Once Superjet gains a toehold in the "regionals" market -- as it's now poised to do -- Superjet will be in a position to make the next logical leap to building longer-haul aircraft, selling them internationally, and stealing share from Boeing (and Airbus.)

Beware, Boeing bulls. This bear won't hibernate forever.

General Dynamics is a Motley Fool Inside Value recommendation and Embraer is a Motley Fool Stock Advisor pick, but Fool contributor Rich Smith does not own shares of any company named above. The Motley Fool has a disclosure policy.


Read/Post Comments (10) | Recommend This Article (14)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 23, 2010, at 6:50 PM, plange01 wrote:

    boeing is a very cheap stock selling at close to a 50% discount! boeings high before the economy began to colapse was close to $110.if obama can be replaced fairly quickly this company and the economy could easily be set back on track...

  • Report this Comment On July 23, 2010, at 10:54 PM, baldheadeddork wrote:

    Rich, responding to your BA posts is like debating a pinata by taping your argument cards to the end of a Louisville Slugger. I'm almost starting to feel sorry for you.

    Almost.

    Your section about military spending flirted with being coherent. Lockheed is selling the F-35 for $132m per, China has a totally unproven new design they're giving away at $15m each, there might not be a fifth gen manned fighter around 2030 that Boeing may or may not get - and this means what? If Lockheed is selling the F-35 for $132m on export deals, then Boeing should put them on commission because that's the best salesman the $50m F/A-18 is ever going to have. China? No country buying a $15m fighter with totally unproven radar and weapons systems is going to be able or wealthy enough to buy either the F/A-18 or F-35.

    Losing both the F-22 and the F-35 contracts may not be the best thing that ever happened to Boeing, but what seemed disastrous five years ago is looking like a dodged bullet now. It wasn't by choice, but Boeing got out of the fighter market at the perfect time. Had they won either or both, financial and engineering resources would have been tied up on shrinking programs instead of being put to work on the 777 and 787.

    Speaking of commercial planes...your take on the SuperJet contradicts every aviation analyst I've read. Sukkoi has yet to win a sale to an established non-Russian airline or leasing company. It hasn't been for want of trying, they're promoting the hell out of the thing and offering it at fire-sale prices. But everyone expects the <120 seat market to shrink dramatically as oil prices stay north of $70 a barrel. The economics just don't work.

    But that can't be good news for Boeing, right? If Bombardier can't sell C-Series, it must be hell for the 737-600, like you said. Yeah, about that. The last order for a -600 came in five years ago, and the last one built left Everett in 2006. Boeing doesn't even include the 600 on its list of current 737 models. From the launch, just 69 737-600's were built.

    Like losing the fighter competitions, the failure of the 600 against commuter jets was seen as a large blow against Boeing at the time, but with a few years it has turned out to be a fortuitous loss. While Bombardier, Embraier, Sukkoi and others compete for sales in a shrinking market, Boeing has pushed the 737 up in size and range when that is what the market is looking for.

  • Report this Comment On July 23, 2010, at 11:49 PM, yosemitebean wrote:

    "Fact is, if the $8.6 billion Canada just laid down for a few dozen F-35s is any indication of what Lockheed is charging its international customers (roughly $132 million apiece), the JF-17 will easily beat the F-35's asking price in China's targeted defense markets of Sri Lanka, Sudan, and Venezuela (and countries even less friendly to the U.S., such as Iran and NorthKorea)" Boeing-Made in the USA ******* Sounds good to me. Let the countries less than friendly to the U.S. buy up all of China's JF-17's and reserve the F-35's for the U.S., Canada, and countries that are friendly to the U.S. - Everyone knows that you usually get what you pay for.

  • Report this Comment On July 24, 2010, at 12:27 AM, TMFDitty wrote:

    @baldheadeddork: Not that I don't appreciate the feedback, but... you're wrong on just about every alleged fact you cite.

    Fact: Boeing does include the 737-600 on its public price list: http://www.boeing.com/commercial/prices/

    Fact: Bombardier has recorded close to 100 CSeries orders from multiple airlines, including Republic and Lufthansa.

    Fact: As I stated above, Sukhoi/Superjet just signed two non-Russian customers for its planes, namely, Malaysia and Bermuda. This is in addition to previous, smaller orders from companies in Switzerland, Italy, Hungary, and elsewhere.

    Which is not to say your major theses are incorrect. Perhaps now *is* a good time to be exiting the manned fighter jet market (see article forthcoming, next week.) And perhaps Boeing is right to be focusing on the segment of the commercial market where, for now, competition is limited. Again, thanks for contributing.

    Foolish best,

    TMFDitty

  • Report this Comment On July 24, 2010, at 2:02 PM, yosemitebean wrote:

    Rich - I know that I can always count on you to have the real and up to date facts. Thank you

  • Report this Comment On July 24, 2010, at 2:50 PM, DNMay wrote:

    Rich, I dunno whether Boeing is overpriced or not. What I do know is that your "analysis" is so lacking in accuracy as to prove your point one way or another.

    If the F-35 loses market share to a Chinese competitor, it's Lockheed that would take the hit and not Boeing. But even Lockheed won't lose market share to the JF-17, because it's a different product that basically replaces the MiG-21 as a cheap fighter. Boeing may actually gain from F-35 price escalation as it makes the F-18 more competitive.

    The Sukhoi airplane is in a lower-size category than any current Boeing product except the 737-600. Comments above correctly note that the 737-600 stopped selling years ago. That's because the 120seat-and-below market is a questionable-size market and full of competition. You somewhat bleat that the 737-600 is in Boeing's product catalog. Indeed it is, and for those who want a plane in the 737 family for commonality reasons. If the Sukhoi were to squeeze the 737-600 market, it will be squeezing an already squeezed nothing.

    In any case, there have always been competitors in the bottom end of the market. Their sales have nibbled and never really hurt Boeing (or MDC) or Airbus. The Trident, BAC One-Eleven, Bae-146 and RJ series, the Dassault Mystere 20, etc., had all the credentials with which you imbue the Sukhoi (and others), yet didn't dent Boeing or Airbus at all. The sales that you report for it are with marginal players as far as market-influence.

    Yes, Boeing may face competition. I actually like the prospects for the Bombardier CSeries at the bottom of the market. In larger size airplanes, there is less rather than more competition than there used to be. Boeing is beautifully positioned to make money in it for many years.

    Your analysis adds little, and it mainly tells me not to look to Motley Fool for expertise.

  • Report this Comment On July 24, 2010, at 11:02 PM, TMFDitty wrote:

    @DNMay: Fair points. Now... put yourself in Bombardier's place (or Superjet's, Mitsubishi's, or Aviation Industry Corp's).

    You're making regional jets and facing intense competition from your peers. Meanwhile, you see how the market for larger jets has significantly less competition. What market do you want to target, as soon as you are able?

    *That*, in a nutshell, is why Boeing and Airbus face greater competitive pressure down the road.

    Foolish best,

    TMFDitty

  • Report this Comment On July 25, 2010, at 2:10 PM, DNMay wrote:

    Your logic is that if Bombardier (CSeries) should fail against start-up competitors, they'll just move over and take on the big boys?

    "In a nutshell", there are always threats over the horizon for any company. But if we can't depict the threats accurately, or their timing, or their effect on the Boeing bottom line . . . then what exactly are we offering?

  • Report this Comment On July 25, 2010, at 2:31 PM, DNMay wrote:

    As for a widebody threat against Boeing (or Airbus) from a new competitor - the Russians having singularly failed - let's remember that the cost of entry to the widebody market is so enormous that no one can be a threat without ALL of the following happening:

    (a) Boeing and Airbus fail to launch into a market gap (hardly likely),

    (b) The new entrant has amassed credentials and a customer base with major operators flying his smaller products (an inherent contradiction), and

    (c) They have government money committed for 10-15 years.

    But, yes indeed, this possibility is a potential threat to Boeing, if one wants to exaggerate.

    The real threat to Boeing is Airbus consuming government money with launch aid and to buy market share.

  • Report this Comment On July 29, 2010, at 3:32 AM, FBEditorial wrote:

    Fact: Airlines are all looking at bigger narrowbodies above the 737-600 / A318 size.

    Fact: CSeries has no launch customer as Lufthansa/Swiss and Irish lessor refuse to take first delivery and Republic has also stated it wont be the first either.

    Fact: Superjet is ageing technology, late and will find few homes where A320/737s reside.

    Fact: Qatar Airways made 11th hour deal by Airbus A320 Re-Engine as price to avoid CSeries

    Fact: CSeries has not sold well at all after six years of being pimped on the market.

    Fact: Last success in this 140-below market was the 737-100/200/300. Over 2,200 units sold in three decades as the segment essentially shrank into nothingness.

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