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The competition between Boeing (NYSE: BA ) and EADS's Airbus is like to watching two gladiators in the ring. Whenever one company gains a foothold with a new plane or development, the other counters with its own improvements. This time, Boeing's 737MAX is going head-to-head with Airbus' A320neo -- and the tide is swinging in favor of Boeing.
Let's jump into the way-back machine
In the summer of 2011, Airbus was thrashing Boeing in the narrow-body passenger aircraft market. Airbus had just showcased its A320neo, a revamp of its A320 line that was touting a reduction in fuel consumption of about 15%.
Depending on oil prices, commercial airliners spend about 40% of operating costs on jet fuel. So any marginal fuel savings can go a long way in boosting a carrier's bottom line. Desperate to lower fuel costs, passenger carriers started lining up at the Airbus sales desk. Boeing was caught with its pants down without a comparable alternative.
If there was one market Boeing couldn't lose, it was the narrow-body market. Why? Because the age of a plane is measured in what is known as pressurization cycles, or the amount of times that the cabin is pressurized. Unlike their wide body brothers like the 747, narrow-body planes generally take shorter routes. Therefore, these smaller planes go through multiple pressurization cycles in a day. The average age for a narrow body is about 10 years versus 25-30 years for a wide body. This means that carriers are consistently looking to upgrade their narrow-body fleet.
Boeing needed to act -- and fast.
In December 2011, it unveiled the 737MAX. Similar to Airbus' A320 revamp, Boeing overhauled the 737 family to help maximize fuel efficiency. Utilizing the GE (NYSE: GE ) /Groupe Safran joint project CFM International Leap-1B engine, Boeing is now touting a 13% reduction in fuel consumption over the Airbus models. Boeing estimates that a fleet of 100 737MAX models will result in a reduction of 200 million pounds of carbon dioxide emissions from a traditional fleet and a savings of $100 million in fuel costs per year. This GE/Safran engine will be the only one available on Boeing's new 737s.
It's getting better all the time
Boeing needs any advantage it can get right now because it essentially gave away a one-year monopoly on the narrow-body market to Airbus. That running start meant Airbus was able to secure more than 700 orders before airlines realized they had a choice. Today, Airbus still holds more than 60% of the overall market. The encouraging news for Boeing is that their order total orders for 2012 (608) is almost triple that of Airbus (248).
Orders for the 737MAX family are primarily coming from North America. To overhaul their fleets, Southwest Airlines (NYSE: LUV ) and United Airlines (NYSE: UAL ) have put in orders totaling $19 billion and $14.7 billion, respectively. While some carriers lean toward certain manufacturers, the fuel savings could convince more carriers to start buying Boeing. What is most encouraging for Boeing is the rate of adoption. In less than one year, the order total for 737MAX planes has already surpassed the 838 orders put in for their other prized airliner, the 787 Dreamliner, which received its first order in 2004 .
What this means for investors
From an investor's standpoint, commercial airlines are Boeing's engine for growth. Its Integrated Defense Systems division represents almost 50% of its revenue stream, but this sector has been essentially flat for six years. While governmentwide budget cuts associated with the pending fiscal cliff could change this, they will not show up in the company balance sheets for some time since several contracts with the government are already signed or in progress.
With that in mind, the emergence of a dominant product in the narrow-body market could prove to be a good boost to earnings for Boeing over the next couple of years. Boeing has done a remarkable job managing its debt despite being such a capital-intensive business, and it has a nice stash of cash to boot. It is currently trading at about 12 times earnings -- the lowest since 2008. It also has a nice 2.4% dividend yield at a 30% payout ratio.
Prudent investors will keep their ear to the ground to make sure that Boeing keeps production levels up and that deliveries remain on schedule. Based on the current trends in narrow body sales and the current valuation metrics, though, now might be a good time to think about adding Boeing to your portfolio.
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