Ordering flights. (Picture by Jessica Silva)
Madness, as defined by Merriam-Webster, is behavior or thinking that is very foolish or dangerous. Lately, no better word describes investors' approach to the aviation industry. Shockingly, Wall Street has had a bullish view on the industry that has now come to bite them.
On June 8 Boeing (BA) hit its highest price per share (230.50 dollars) since March 10 – widely recognized as one of the final days before a global quarantine. What has investors scratching their heads is the looming question: What has changed at Boeing since the 737 MAX disasters to spark such an outlook? The answer appears to largely be: nothing positive at least. The key drivers of the price were market speculators such as Miller Value Partners noting the substantial free cash flow of the company and projecting its valuation could double. Riding this report, investors spiked the price – however that did not last long.
By June 11, Boeing had experienced a three day slide almost to levels of early quarantine averages. As of this date, reports are emerging that Boeing has asked a key fuselage supplier to halt production. Obviously, Boeing would like to have the MAX Federal Aviation Administration-approved; however, at this stage that still looks like a distant goal or conjecture more than anything else. However, investors have shown that any positive news regarding the MAX program will be received warmly and empathically reflected in the market. Perhaps solid steps towards approval could spark a return to prior levels?
In the meantime, Airbus (AIR.PA) is a more intriguing stock to monitor having followed a six-month trend almost identical to Boeing. The question many should be asking is why?
Obviously COVID-19 has affected the airline industry and in all honesty may have put the final nail in the coffin for the Airbus A380. Airbus itself has already begun production on the final ever A380. With Emirates being the final outstanding order, speculation that they may cancel their order as the company looks increasingly likely to join the likes of Air France in cutting their A380 program and laying off their staff by up to 30 percent. The reason behind this trend is layered. At its simplest, passengers no longer prefer long-haul flights between two or three major cities per entire countries. The A380 is an exceptional plane for fully filled long-haul flights. However, as these flights get emptier the fuel usage of the A380 suddenly becomes a burden versus a comparative benefit. Add to this the fact that few airports have the facilities to handle A380’s and none seem too keen to pour investment into a dying program and the A380 is clearly on its way out.
However, Airbus not only topped Boeing in the superjumbo market but may have also found their new crown jewel almost by luck. The A220 is distinct for many reasons, to begin with the A220 does not follow the traditional A3XX naming pattern of Airbus, tracing back to the fact that the plane is not designed by Airbus. Originally the Bombardier C-Series, the plane is everything the aviation industry has been looking for: it is fuel efficient, sufficient range, smooth ride, modern and relatively inexpensive for purchase. How Airbus managed to acquire this aircraft for FREE(!) comes down to business politics explained in a very effective and engaging manner by YouTube Channel Wendover Productions in this video. Moving past the acquisition are the facts: the A220 is the right size, fuel economy, and comfort for almost every airline today. And, it one-ups its competitor the 737 MAX by being available and safely operating the entire time the MAX has been grounded.
By all accounts the A220 should be viewed as the plane of the future with Swiss Airlines, Air Baltic and Delta Airlines some of the largest carriers to fly the plane. With Delta Airlines eager to accept more and JetBlue Airways recently entering the list of A220 orders.
Ultimately, it will be interesting to see if Boeing can right its capsized 737 MAX program and mount a challenge to the seemingly superior A220, or if Airbus is set to dominate in every market Boeing once gripped.