Tuesday, November 22, 2005


Boeing just experienced 5 years of double didget declines in airplane sales. According to Morningstar, the decline has been better than 11% componded for 5 years. The good news for BA is that it that the decline is distributed half to defense contractors and half to airplane builders.

Morningstar projections for the next 5 years are for sales increases of 8 or 9% compounded. Based on the announcements coming out of the Dubai Air Show, Boeing is jump starting this growth phase. New sales include 40 planes to Arab Emerants and a total of 157 to China.

In the last cycle, BA stock did extremely well through 1997. The significant down-turn during the recession of 1990-91 was finally washed out by 1997. As with all industry, production grows until demand is saturated and there has to be a digestion period.

BA stock has already done extremely well during this cycle having come from $24 in 2003 to $69 in 2005. The cycle is not nearly over but one must remember that the stock cycle leads the economic cycle. One does not want to wait until earnings peak to buy the stock.

Me nor my family own the stock but as owners of AMR,CAL and LCC we watch as interested parties. We know business travel demand has pushed current capacity to its limits. Load factors around the world are at historic peaks. Demand for flights to and from China continues to grow at double digit rates.

The environment for making money in the airline business is about as good as it will ever get; soaring business demand and rapidly declining costs. The fly in the ointment will eventaully be when capacity overwhelms demand. I know that it will take years to fill the plane orders that Boeing signed this week. For the next three years, fares will rise and load factors will stay high.

Before the peak in airline stock prices, there will be many an article posted about the tremendous turn the airline business has made. Of course, we don't currently know if DAL, NWAC and others will survive bankruptcy court. The more capacity whitled away during court, the more profits will be made over the next sereral years.

Planes sold by DAL and NWAC will go into service with other carriers. Gradually these old planes will be sent to the parts graveyard. Airbus and BA are ready to build new but DAL and NWAC are not the only carriers around that need to retire old stock. Capacity growth will be slow at first. Again, the next three years should be a very profitable time in the airline business. The cycle could last longer and it will take discipline to start scaling out long before the peak is reached.


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