Boeing inventory increased on Friday despite reports of new problems with the MAX jet. It’s a curious stock market action. But the increase, despite seemingly bad news, demonstrates two things: the airlines still want the MAX and the MAX is close to returning to service.
To begin with, the Wall Street Journal reported that American Airlines (ticker: AAL) was considering canceling some of its orders for 737 MAX. A major cancellation by an American air carrier seems to be a blow to the troubled jet program. However, the title rose 3% on Friday. The Dow Jones Industrial Average and the S&P 500, for comparison, rose 1.4% and 1.1% respectively.
Taken together, the stories could indicate that what is really going on is frantic negotiations between an airline and an aircraft market with the Americans pressuring Boeing for better terms. It makes sense for Americans to keep cash and try to take advantage of current demand and the interest rate environment.
The American declined to comment on Friday. Boeing said Barron’s in a comment sent by e-mail: “Our goal remains to work with global regulators on the rigorous process they have put in place to safely return the 737 MAX to commercial service”, adding “we continue to work in close collaboration with our customers to support their operations, while balancing supply and demand with market realities. “
Airlines can use the media. American, for example, spent $ 1 billion in cash in the first quarter. An additional $ 4.8 billion is expected to be spent in the second and third quarters of 2020. The industry is draining cash.
Conserving and generating cash is a priority for airlines. One way an airline can do both is with airplanes. Aircraft owned can be sold and leased. Facilitating this type of transaction is what Boeing is bothering about.
Buying a plane is a bit like buying a car. Airlines can buy a plane with available cash, borrow money from a bank, or rent it from a plane rental company. These are essentially the same options for car buyers.
And an airline’s decision is based on similar factors that influence car buyers, including available cash, interest rates, and whether the buyers want to be responsible for the maintenance and disposal of the cars. planes.
Aircraft rental is a relatively popular option. About 40% of the global airline fleet – in a world before Covid – was owned by aircraft rental companies. In 2019, Boeing expected that around 26% of aircraft would be purchased with available cash, 34% to be financed by aircraft loans and 30% to be financed, essentially, by lessors. (The remaining 10% comes from other sources such as export banks.)
Boeing did not make a market outlook for 2020 for an obvious reason: Covid-19. The virus will likely change the numbers. Donors are likely to do less business. That is to say that the share of donors will increase even if the total amount of business decreases because people do not fly.
Commercial air transport in the United States fell about 74% year over year in the past week. The coronavirus has hit travel demand hard.
And when a lessor buys an airplane from an airline, in today’s reduced demand environment, he does not need to order a new airplane from Airbus (AIR.France) or Boeing . This dynamic is behind some of MAX’s recent cancellations.
But the willingness of donors to buy MAX planes shows that MAX planes are still desirable. MAX jets are cheaper to use and the industry remains confident that MAX problems can and will be resolved. This confidence is positive for the Boeing action.
The actions of the United States – alignment of funding – can also be interpreted as another sign that the jet recertification process for commercial flights is almost complete. The American is about to take jets. This is another positive point for the stock.
It is not really surprising that American or Boeing do not comment on the details of what is going on. Nobody likes to negotiate in public.
While inventory has increased on reports, Covid-19 remains a much bigger deal for Boeing than even the struggling MAX. Boeing’s stock has dropped more than 20% since mid-March 2019, after MAX’s second fatal crash, until the end of the year. Boeing inventory has dropped by more than 45% since the start of 2020. In addition, the entire aerospace value chain, from suppliers to airlines, has dropped by around 40% to 60% since the beginning of the year.
The MAX wiped out tens of billions of market value in 2019. Covid-19 wiped out hundreds of billions of aerospace market value in 2020.
Write to Al Root at [email protected]