Boeing (NYSE:BA) and Airbus (OTC:EADSY) have been waging a global battle for commercial air superiority for decades, and shareholders of both companies have benefited. Boeing and Airbus enjoy a global duopoly on large and midsize jets, and an unprecedented, decade-long buying spree by airlines has swelled the order books of both companies.
The COVID-19 pandemic, and the travel slump that has followed, is threatening to upend that success. Airlines that three months ago couldn't get their hands on new planes fast enough are suddenly grounding aircraft and taking an ax to their growth plans. Even after the pandemic is behind us, it's likely to leave a recession in its wake, and airlines seem certain to be more focused on survival than on expansion.
That's going to be a blow for Boeing and Airbus. Both have smaller and underappreciated defense businesses to fall back on, but commercial has dominated the headlines, and the income statement, for years. Investors have taken notice, with shares of both Boeing and Airbus down more than 50% year to date.
Which company is better prepared to weather the storm and reward shareholders? Here's a look at the two aerospace giants to determine which, if either, is the better buy today.
Boeing's bad run gets worse
Boeing was a mess even before the pandemic, troubled by issues with its 737 MAX and other signature programs. The 737 MAX at launch was expected to be one of the top-selling aircraft of all time, but it was grounded in March 2019 after a pair of fatal crashes. The company has struggled to return it to service.
The investigation into the MAX revealed embarrassing details about Boeing's culture that raised fresh questions about its commitment to safety. It also led to the firing of CEO Dennis Muilenburg in December, but his replacement, David Calhoun, helped oversee the company as a Boeing board member since 2009.
Boeing has targeted mid-year 2020 to return the MAX to service, but it is debatable whether customers will care. The company reported the cancellation of 150 orders for the 737 MAX in March, and ended the first quarter with net cancellations across the portfolio of 119 planes. Boeing has sounded the alarm, suspending its dividend, temporarily halting aircraft manufacturing, and lobbying for government assistance CEO Calhoun claims the company doesn't really need.
Elsewhere in the portfolio there are issues as well. Boeing had already planned to decrease production rates for its larger 787 Dreamliner in 2021, and its 777X has been plagued by development delays and risks entering service as demand for large planes is waning.
Boeing can use its defense business, which accounted for about one-third of 2019 revenue, to help cushion the blow of a commercial slowdown. The defense business has largely been brushed out of the spotlight in recent years, in part because one of its flagship programs, the KC-46 tanker, has suffered delays and cost overruns that led to a rare public rebuke from Pentagon officials.
There are some bright spots in defense. In the last 18 months, Boeing has scored a series of wins, including a $9.2 billion contract to build the Air Force's trainer jet, a $2 billion-plus deal to replace the UH-1N Huey helicopters, an $805 million contract to design and build a new Navy refueling drone, and a contract to design and build an autonomous submarine for the Navy. But all those awards are early stage and will not offset the near-term revenue losses caused by a commercial slump.
Airbus: Less drama, but fewer highs
Airbus, like Boeing, has in recent years leaned heavily on its swelling commercial order book. Its A320 was a beneficiary of the 737 MAX's woes, although Airbus' wait list for the A320 was so long already that airlines found it hard to switch on the fly. It too has had less success with larger, wide-body aircraft, developing the massive, but ultimately commercially unsuccessful, A380 double-decker behemoth.
The company arguably has the more complete lineup of commercial aircraft, thanks in part to its 2017 acquisition of a controlling stake in Bombardier's CSeries jet family. It also has a larger backlog than Boeing. But Airbus too has been afflicted by production problems that have caused it to miss delivery targets and burn cash. Some of the fault lies with suppliers, including Raytheon Technologies' Pratt & Whitney engines, but delays were also due to internal design changes and backed-up assembly lines.
Airbus too has a defense business, with defense, space, and helicopters accounting for about 26% of total revenue. Its space business and helicopters are the crown jewels of its non-passenger aircraft portfolio and are steady revenue generators. But unlike Boeing, Airbus Defence doesn't have a lot of potentially needle-moving innovative programs on the horizon.
Airbus historically has been a bit of an enigma to U.S. investors. The company is an amalgamation of European aerospace companies pushed together in the 1970s to better compete against U.S. giants. The company, once known as European Aeronautic Defence and Space, has in recent years asserted its independence after years of criticism that it acted at the whim of European governments. But investors should be aware that the German, French, and Spanish governments still control about 25%, combined, of the company's stock.
And the better buy is...
To be honest, I have no desire to invest my money in either of these stocks right now. Both management teams are going to be talking up their defense businesses in the quarters to come, but both companies rise and fall with the commercial aerospace cycle. For those interested in adding aerospace exposure, there are a lot of defense pure plays that look like much better values today.
Of the two, it's hard to say which stock will perform better over the next year or two. Boeing is the more dynamic company, with better franchises on the defense side. It also will likely have more freedom to right-size its business as necessary compared to its European rival.
On the other hand, Boeing (due to the 737 MAX fiasco) has limited leverage with its customers who want to defer deliveries or negotiate new terms. Airbus' order book is also less exposed to financial buyers like airline leasing specialists and should hold up better through the downturn. And Boeing's balance sheet is badly bruised after the company spent most of 2019 supporting its supply chain as the 737 MAX drama played out.
Boeing strikes me as the higher-risk, but potentially higher-reward, stock over the coming years. Investors who put money into Boeing today and are patient through an extended cycle will probably come out significantly ahead. They'll just have to sit out a prolonged slump, and perhaps a broader market recovery, to realize those gains.