Boeing's Vulnerability

Yesterday's Wall Street Journal carried an article discussing Boeing's newly-vulnerable single-aisle airplanes. If only because this type of piece has become a vanishing breed in the Journal, it was welcome.

The piece noted an unanticipated consequence of the expensive, overdue, over-budget Dreamliner project. That is, Boeing is being pressured by airlines to replace its 737 with a new airplane. But, according to the Journal piece, Boeing can't afford the cost of such a new development project at this time.

Meanwhile, Canada's Bombardier has developed an all-new plane, the CSeries, which can service the lower end of the 737's market.

Now, Boeing faces erosion of a very profitable, old cash cow when it still needs those profits to offset the Dreamliner woes.

The nearby price chart for Boeing and the S&P500 Index for the last five years shows that the company has squandered whatever outperformance it managed to effect by 2007. Now, Boeing is barely positive and outperforming the index over the period.

This can't bode well for the firm, as one would expect Dreamliner sales to already be factored into its equity price.

Whether losses of volume on its 737 are also already "in" the equity price is unclear, but quite possibly not yet fully understood.

Who would have guessed that Jim McNerny's failure to get the Dreamliner on track and budget earlier would end up complicating the company's defense of a bread and butter segment, the short haul, single-aisle jet market?

The article contends that neither Boeing, nor Airbus can easily design a brand new plane just now. Allegedly, needed technological breakthroughs are a few years away. Thus, in what has been a duopoly since Boeing bought McDonnell-Douglas 13 years ago, the multi-line Canadian transportation manufacturer seems to be sneaking into the big leagues of jet airplane production.

Could it be that the scope of larger, longer-range jet design and manufacture is changing the nature of competition in the sector, leaving smaller, simpler jets to be profitably built by smaller, newer entrants? Is a full-scale Schumpeterian evolution afoot in airplane design and manufacture? Will we soon see Asian entrants, as well?

The nearby chart, stretching back to the early 1960s, illustrates that Boeing's period of significant, consistent outperformance of the S&P500 primarily occurred between 1971 and 1980. After that decade, while Boeing has enjoyed a slightly steeper slope in its equity price curve, compared with that of the index, the observed volatility certainly has substantially offset that slight advantage.

Given Boeing's struggles to offer shareholders a reason to buy the company's equity over the past half decade, or even the past thirty years, one wonders if its seen its best days already.