Delta Air Lines (DAL +2.66%) was the first major company to report results since the tariff war kicked off in early April. What its management said had significant implications for the aerospace sector, particularly for Boeing (BA 2.71%).
Here's what happened and why it matters so much for Boeing investors.
Delta Air Lines' indirect warning to Boeing
First, here's a brief recap of the key takeaways from Delta's first-quarter earnings call:
- Revenue increased by 3.3% year over year, behind management's previous estimate for "closer to 4%" -- a figure already lowered from guidance for 7%-9% given on the fourth-quarter earnings call in January.
- The uncertainty around global growth created by tariff skirmishes hit Delta's bookings in the first quarter, and management declined to update full-year guidance in response to current market conditions.
- Management also announced it would reduce "expected capacity growth" in the second half in response to the slowdown and try to protect margins
Frankly, much of this was expected, as Delta's management had already told investors of a tariff-induced slowdown in March, and the escalation in the trade conflict since then is unlikely to have caused optimism among investors.
NYSE: BA
Key Data Points
The numbers and lack of full-year guidance are one thing, but management said something else that should concern Boeing investors. Quoting Delta CEO Ed Bastian on the earnings call, "We will not be paying tariffs on any aircraft deliveries we take," and "If you start to put a 20% incremental cost on top of an aircraft, it gets very difficult to make that math work."
Bastian is talking about Airbus here (it's the only airplane manufacturer Delta is expecting deliveries from this year).
The implication is clear: Either Airbus will have to at least share part of the tariff cost (in this case, tariffs applied by the U.S. tariffs on European products), or there's a risk the order will be delayed or cancelled.
Why it matters to Boeing investors
While Delta is responding to U.S.-imposed tariffs, the message to Boeing is that non-U.S. airlines could take the same approach to any tariffs imposed by other countries and the E.U. on U.S. products sold in those countries.
Image source: Getty Images.
It gets worse. Airbus and Boeing are subject to increased costs due to tariffs, either directly from an increase in costs from products sourced from the U.S. and the E.U., or from an increase in suppliers' costs due to tariffs.
Moreover, it's important to put Delta's management commentary in context. The tariffs are weakening end demand, and the company is cutting its capacity expansion plans as a result. As such, it's much easier for the airline to justify canceling orders in response to tariff-induced cost increases.
In any case, weakening end demand tends to significantly impact airline ticket pricing, given the industry's sensitivity to fluctuations in demand and supply. This fact has always made it a highly cyclical industry. As such, softer ticket prices and weaker earnings could pressure airlines' ability to order airplanes, let alone their willingness to do so.
An ongoing escalation in the trade conflict looks likely to result in a scenario in which Boeing's costs rise while demand weakens. This could undermine Boeing's ability to compete on cost with Airbus. For example, Boeing could end up paying significantly more for products sourced or with components/materials from, say, the U.K. or China, because the E.U. hasn't imposed tariffs on those countries' goods.
Image source: Getty Images.
Where next for Boeing stock?
Bastian's comments don't read well for Airbus, and, by implication, for Boeing. It's clearly going to be a difficult period, but it may not be lasting. While the warning signs are there, it's important to remember that the tariffs appear to be a precursor to trade deals that could result in more favorable conditions for U.S. exporters. Furthermore, stocks have already priced in a less favorable outlook for earnings this year.
As such, Boeing is definitely a stock to avoid if you are worried about escalating trade wars, but also a stock to buy if you are confident deals will be done.
