Boeing's Commercial Market Outlook Seems Optimistic

Boeing (BA -0.34%) regards its commercial market outlook as "the most comprehensive analysis of the commercial aviation industry." As such, it's widely followed by suppliers, industry observers, and aerospace investors. Unfortunately, the latest outlook, released Oct. 6, raises as many questions as it answers and for aerospace investors it makes sense to be cautious before pricing in some of the assumptions made by Boeing. Here's why.

Boeing's market outlook

To be clear, it's not that the idea of a recovery looks optimistic, rather that Boeing's assumptions appear to be overly optimistic. That matters a lot, at least for original equipment suppliers that gear up production in order to meet Boeing's production schedules. Presumably, Boeing makes its production plans based on its outlook.

Boeing needs airplanes to start flying again. Image source: Getty Images.

Boeing sees a total market opportunity of $8.5 trillion over the next decade, including $2.9 trillion from commercial airplanes, $2.6 trillion from defense and space, and $3 trillion from services. Overall, it's a reduction of $200 billion from the comparable figure of $8.7 trillion made a year ago. 

Boeing's updated outlook projects demand for 18,350 commercial airplanes over the next decade, a figure 11% lower than the comparable forecast made last year.

There are three key talking points around the forecast for Boeing investors in particular:

• The assumptions that air traffic and commercial airplane demand will revert back to its long-term growth trend can be called into question.
• A year ago, Boeing was predicting services market demand to be $3.13 trillion from 2019-2028, making the prediction for $3 trillion from 2020-2029 look optimistic.
• The acknowledgement that the wide-body market will recover later and that it faces ongoing uncertainty is not good news for Boeing.

Optimistic assumptions?

Commercial air traffic is usually measured in revenue passenger kilometers (RPK). The key numbers from Boeing's forecast are that traffic is expected to grow from 8.506 trillion RPK in 2019 to 12.236 trillion RPK in 2029 and then 18.68 trillion RPK in 2039. Another key number to note is the International Air Transport Association (IATA) recently estimated that full-year 2020 traffic would be down by 66% in 2020 compared to 2019, so assume a figure of 2.9 trillion RPK for 2020. Meanwhile, the IATA expects commercial air traffic to return to 2019 levels in 2024.

Using these figures as waypoints, it's possible to piece together the following data. As you can see below, based on IATA figures, the sharp recovery to 2019 levels in 2024 from the low of 2020 implies an annual growth rate of 31%. That's fair enough, but Boeing's 2019-2029 forecast growth rate implies that the 2025-2029 growth rate will be 7.5%.

Frankly, that figure looks optimistic considering the market will already have been in strong recovery mode for four years. Indeed, fellow writer Adam Levine-Weinberg made a similar point when he wrote about Boeing's fleet demand earlier this month.

Data sources: IATA, Boeing, author's analysis.

Services demand assumptions look optimistic too

Boeing Global Services (BGS) is often overlooked when Boeing is discussed, but the segment has been the biggest earnings generator in the last couple of years. BGS' $5.2 billion in earnings is higher than the defense, space, and security segment's $4.3 billion in 2018-2019 and the troubles with the 737 MAX mean Boeing Commercial Airplanes (BCA) generated just $1.2 billion in earnings in the period.

As such, it's concerning that Boeing appears to be giving an optimistic assumption for services demand. Servicing and aftermarket demand is largely a function of flights made, so Boeing's assumptions for services demand is probably based on its rosy-looking estimates for air traffic. All told, an estimate for 10-year services market demand of $3 trillion compared to last year's 10-year forecast for $3.13 trillion -- a mere 4% reduction from last year -- implies some pretty robust services growth rates in the future.

Weak wide-body demand

The recognition that narrow-body demand will recover quicker than wide-body is not great news for Boeing, not least because management had hopes that the new 777X would spur a cycle of wide-body demand to kick in. In addition, Boeing was continuing to reducing costs on the 787 as production improved. Both aspirations look significantly challenged right now.

Furthermore, the issues with the 737 MAX, and the fact that Airbus can better facilitate A320 NEO orders, mean Boeing's narrow-body orders could slow.

What it means for investors

All told, commercial aviation markets will almost certainly recover, but the timing and strength of the recovery may not look as good as Boeing's predictions. There's still a strong case for buying aerospace-related stocks, it just needs to be built with more conservative foundations. As such, investors should keep a close eye on what Boeing is guiding toward in the future, because there's reason to believe management is being too optimistic.