An incredible amount of dealmaking at the recent Paris Air Show has confirmed that the aviation industry is back in business after the Covid pandemic.
The Paris air show also confirmed that the world’s two dominant airplane manufacturers – despite having to navigate a supply chain that retains the scars (such as labor shortages) of the pandemic – still rule the skies.
Boeing (BA) and Airbus SE (EADSY) together announced orders for more than 1,200 aircraft by the end of the third day of the event, according to analysis by consultancy IBA.
The European company snagged most (846) of the total, including the largest single commercial jet deal in civil aviation history --- Indian low-cost carrier IndiGo’s order for 500 aircraft. This follows other large deals: a 470-plane order split between Airbus and Boeing by Air India in February 2023 and a 300-plane deal between Boeing and Ryanair signed in May 2023.
The majority of the orders placed during the Paris Air Show — 1,070 — were for single-aisle planes such as the Airbus A320 and Boeing 737 Max. These planes fly the short to medium-haul routes, which have led the travel industry’s robust recovery from the pandemic. Order backlogs for the two plane makers now stretch out almost a decade!
The Future: Fair Skies
The forecast for these two aerospace behemoths is for sunny skies.
Both Airbus and Boeing raised their forecast for aircraft demand for the next 20 years. They have forecast the need for more than 40,000 new jets over the next 20 years. About half of the demand comes from growth and the rest for replacement, as airlines seek to buy more fuel-efficient aircraft to reduce their carbon emissions.
Growth will continue to be strongest in Asia, with a wave of demand for new aircraft coming from the Asian giants, India and China. And executives from both companies said they expected demand to remain significantly ahead of supply for years to come.
That makes sense. A lot of the recent airplane orders being placed were for aircraft to be delivered out into the 2030s. It seems that many of the airlines are getting back to a growth story after the pandemic. They are trying to make sure they have the passenger-carrying capacity locked up for the expected growth in the coming years.
Boeing's stock is up 53% over the past year, but just 8% year-to-date. Airbus' stock is up 55% over the past year and nearly 20% year-to-date.
Good times for these aerospace giants also means others in the industry prosper as well.
Engines Need Service
AAR Corporation (AIR) is a diversified provider of services and products to the commercial
aviation, and government and defense markets. Its Aviation Services division consists of aftermarket support and services offerings that provide spare parts and maintenance support for aircraft operated by both commercial and government/defense customers.
The company provides customized inventory supply chain management, customer fleet management and operations and aircraft component repair management services. It also offers eMRO, an internet-based enterprise software solution for managing aircraft maintenance and fleet management.
AIR stock is up 42% over the past year and nearly 30% year-to-date.
Another company in this segment of the aerospace market is the UK's Rolls-Royce Holdings PLC (RYCEY). Its stock is up over 88% over the past year and more than 65% year-to-date, as a new CEO (Tufan Erginbilgic) seems to be turning around the long struggling company.
Rolls-Royce has a significant portion of its revenues linked to engine flying hours, which should continue to rebound regardless of plane manufacturers build rates.
The company's finances are finally perking up. The outlook for this year reasonably assumes flying hours returning to 80% to 90% of 2019 levels. Expected group free cash flow of $760 million to $1 billion will go some way to reducing net debts of about $4.2 billion.
Its revenue increased 15.9% year-over-year to $16.15 billion for the fiscal year 2022. The company’s gross profit increased 24.1% year-over-year to $3.15 billion. And its operating profit soared 57.5% year-over-year to $829.5 million.
I like the potential for stock appreciation in Rolls-Royce more than the others. The stock receives a POWR Rating of B – a Buy. It would not surprise me to see its stock double over the next 18 months.
The other three stocks all received a POWR Rating of C or Neutral.
Runners-up would be AAR, whose stock has broken out to all-time highs and Airbus, which has less problems than problem child Boeing.
But I would stick with Rolls-Royce and its – so far – very impressive turnaround story.
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BA shares fell $0.22 (-0.10%) in after-hours trading Wednesday. Year-to-date, BA has gained 11.98%, versus a 16.75% rise in the benchmark S&P 500 index during the same period.
About the Author: Tony Daltorio
Tony is a seasoned veteran of nearly all aspects of investing. From running his own advisory services to developing education materials to working with investors directly to help them achieve their long-term financial goals.
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