Boeing's 787 Dreamliner could bring a very profitable future but is currently dealing out headaches. Photo: Boeing.
Boeing (BA -1.02%) has dominated Japan's commercial aviation industry for decades, a stranglehold that can be traced back to the country's post-World War II rebuilding effort. In the years following the war, Japanese companies became healthier from large agreements to make parts for Boeing; Japan, in turn, purchased Boeing aircraft and became a very important market for the company.
Today that dominance took a blow, as Japan Airlines, or JAL, announced its decision to buy Airbus planes instead of Boeing's -- delivering a shock to its long-standing relationship with Boeing.
Decades of dominance
The contract for 31 of Airbus' A350s is valued at more than $9 billion at today's list prices. It's a shocking move, considering Boeing had claimed every other long-distance aircraft order from JAL.
Airbus' A350 was selected over Boeing's 777X, which hasn't been released yet. While JAL's management denies that the 787 Dreamliner issues had anything to do with the decision, the 777X is having some delays similar to the 787 and "should have been launched long ago," says Richard Aboulafia, vice president of the Teal Group aerospace consultancy, according to Businessweek. "A key customer like Japan would have been inclined to let Boeing be slow and passive if it weren't for the 787 experience, which has been a disaster. This is a day that really shouldn't have happened."
In today's ultra-competitive and globalized market, Japan airlines are doing the right thing by using Boeing's rival Airbus to help bring pricing competition into an industry that needs all the profitability it can create. There's no doubt this is a punch to the gut of Boeing, but as years went on, it was only a matter of time before Boeing's stranglehold on the Japanese market was loosened.
"We have had a long-standing relationship -- it's a heartbreak," said Kostya Zolotusky, managing director of capital markets and leasing at Boeing Capital, according to The Wall Street Journal.
Today's announcement is even more frustrating after Boeing's bid for South Korea's contract of 60 fighter jets was turned down, even though it was the only remaining bid under the initial budget figure. Now that South Korea has reopened the bidding, that probably moves rival Lockheed Martin into the front-runner position for the $7.7 billion contract. While the two losses are disappointing, all is not lost for Boeing.
Think long-term
While losing market dominance isn't something Boeing investors want to hear, it's important to keep a long-term perspective on these developments. Contracts are won and lost daily, and Boeing has won plenty of its fair share.
In fact, Boeing's claimed enough contracts to amass a $410 billion backlog of orders, which provides an incredible chunk of revenue safety -- an amount 4.5 times larger than Boeing's 2013 sales estimate. However, Boeing needs to ramp up production so that the backlog doesn't turn into a hindrance by extending delivery times to current and potential customers.
Ultimately, Boeing's long-term prospects are almost completely unaffected by today's announcement, especially as the company recently raised its 20-year forecast for global commercial aircraft demand. That said, investors need to be fully aware if Airbus continues to string together contract victories in enough volume to gain market share. For now, the market duopoly of Airbus and Boeing looks impenetrable and the global aviation market has enough growth for the two aviation juggernauts.
