Why the Aircraft Market Seems Set to Surge

Perhaps one of the biggest stories in the last few years has been the resurgence of airlines. After years of struggle, the industry's gained a much-needed boost from a burgeoning world population, the explosion of global trade, low fuel prices, and synergy-related advantages.

At the same time, this has increased demand for commercial aircraft across the board, especially in Asia. A recent statement from the European aircraft manufacturer formerly known as EADS (NASDAQOTH: EADSY  ) predicts a surge in demand over the next few decades.

Demand picking up
EADS, which is in the process of changing its name to Airbus, released a statement on Tuesday revising its long-term forecast for the market up 3.7% from previous estimates. The company now expects the industry to need jets worth $4.4 trillion over the next 20 years -- some 29,226 passenger and freight airplanes in all.

Domestic air travel is expected to grow in India and China especially. According to EADS, the Asia-Pacific region will have overtaken Europe and North America in terms of traffic by 2032, with the region accounting for around 36% of new passenger planes. Low-fare airlines are expected to account for the majority of sales, with single-aisle jets making up around 71% of orders.

So who is buying all these jets? Deutsche Lufthansa (NASDAQOTH: DLAKY  ) , for one. The largest European carrier by passengers carried, and still EADS' largest customer, Lufthansa recently signed a deal to purchase 34 Boeing (NYSE: BA  ) and 25 Airbus planes worth around $19 billion in total.

Of this amount -- the largest investment in Lufthansa's history -- EADS will net about $8 billion. Lufthansa claims the new fuel-efficient jets will boost efficiency while making its fleet more environmentally friendly.

China is also driving demand. Boeing earlier this month estimated that the world's most populous country will need 5,580 new jets costing $780 billion by 2032. Boeing alone expects to more than double its deliveries in the region this year. Orders are also streaming in for Airbus' A320s, with a recently announced Chinese commitment for 100 of the fuel-efficient jets. The deal is currently awaiting approval from the Chinese government.

Clash of the titans
As the two largest producers of airplanes in the world, Boeing and EADS are locked in a perpetual struggle for world domination. Last year, Boeing overtook EADS to reclaim the No. 1 spot for the first time in a decade, despite problems surrounding the launch of its much-discussed 787 Dreamliner. The race is fairly tight, with Boeing delivering 537 jets for the period versus Airbus' 516.

For its part, Boeing has forecasted global sales of $4.8 trillion by 2032, although this figure includes some 2,020 regional jets that were not incorporated into Airbus' expectations. In any case, looking at earnings, one can't fault the company for a lack of consistency, quarterly EPS having beaten expectations for at least 14 consecutive quarters, while Airbus has beaten for six consecutive quarters. All in all, things look fairly bright for aircraft makers.

Boeing does seem to have a bit of an edge over Airbus in the twin-aisle segment. Year to date, the American company received 124 orders for its 777s and 787s, whereas Airbus received 112. With single-aisles still making up the majority of sales though, Airbus' leading position in this segment is a fairly important indicator of its competitiveness going forward, having received 2,179 orders for its A320neo series through August versus Boeing's 1,498 orders for its 737MAX series.

Valuations and metrics
Looking at trailing P/E, Boeing is clearly the cheaper of the two at 21.49 times trailing earnings and Airbus trading at 27.86. Price-to-sales ratio paints quite a different picture though, with EADS' 0.65 considerably lower than Boeing's 1.07.

Boeing does have a substantially higher return on equity though, as well as higher margins. For the rest, there isn't much to separate the two, although EADS seems to have the slightly better balance sheet.

The bottom line
The recovery of the global airline industry has led, and will probably continue to lead, to increased demand for new jets. Aircraft makers clearly stand to benefit from this development, and have raised their long-term forecasts accordingly. Both companies seem well positioned to profit from this surging market, and despite Boeing's lower valuation, Airbus' solid position in single-aisle jets may lead to higher growth.

Fly these friendlier skies
Warren Buffett has claimed that investing in airlines is a surefire way to lose your hard-earned cash. But two airlines are breaking all the rules by keeping costs low and avoiding direct competition -- leading to enviable profits. Click here to learn how these two airlines are leading a revolution in the industry, and discover whether they can keep delivering big gains for shareholders!


Read/Post Comments (0) | Recommend This Article (1)

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.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2663694, ~/Articles/ArticleHandler.aspx, 9/2/2014 7:56:43 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement