Boeing is winning in China (NYSE:BA)

With The Boeing Company (New York Stock Exchange:BA) a new CEO taking over the leadership of the troubled company, things are not going to change overnight, nor do I expect they will. There are still several outstanding issues on the agenda that will require time. There are things that have to be faced, and the lesson that Boeing has learned over the last five or six years is that rushing things eventually comes at a price.

However, that doesn’t mean there is no progress. Boeing 737 MAX production has been ramping up in recent months, and if all goes well, there will be another production increase later this year. One area where Boeing is making progress is reducing its inventory of pre-built Boeing 737 MAX Model 8 aircraft that were produced before this year. The delivery pipeline for aircraft destined for China plays a key role, as I show in this report.

Boeing: China is a key market

Amid Boeing’s woes with single-aisle jets and tensions between China and the United States, there are two recurring elements in some investor commentary. The first is that perhaps Boeing should give up on the single-aisle market, and the second is that Boeing should give up on deliveries to China altogether. Neither of those comments reflect the reality that at least two manufacturers are needed to meet demand. Three out of every four projected aircraft deliveries over the next 20 years are single-aisle jets, while China accounts for one out of every five narrow-body deliveries. So simply giving up on China or the single-aisle market altogether is an unrealistic idea, even with the challenges Boeing faces.

China needs Boeing

While tensions between the U.S. and China are high, which sometimes affects Boeing, the reality is that China has carefully designed its tariffs on aircraft to exclude aircraft that are important to the Chinese travel market. In addition, we see that while deliveries are sometimes halted, which I think is sometimes a function of heightened tensions, we also see that China is trying to get enough aircraft to handle its peak travel seasons. So China is definitely dependent on Boeing to efficiently service air travel.

In the years when David Calhoun was CEO of The Boeing Company, I didn’t see him do many good things. However, by publicly declaring together with CFO Brian West that some planes that were built for China and could not be delivered would be resold, they put pressure on the Chinese regulator to allow the MAX to fly again. The reactivation of the Boeing 737 MAX fleet began in 2023 and was completed by the end of that same year. The reactivation of the nearly 100 planes that had already been delivered to China was a prerequisite for deliveries of new aircraft to begin.

A look at Boeing 737 MAX trends in China

Initially, about 140 aircraft had already been built and were to have been delivered to China. Boeing ended up marketing 55 aircraft, labeling 85 aircraft destined for China by the end of 2023. By June 2024, the number of aircraft destined for China had been reduced to 65, which appears to match our tracked deliveries. By July, another nine aircraft had been delivered but had not yet entered service. Some of these aircraft had already been delivered under contract but had not been physically delivered.

Assuming Boeing does not remove any aircraft from its inventory until it physically delivers them, the number of China-bound aircraft in inventory would drop to 56 aircraft by July. Assuming about 10 aircraft are delivered per month thereafter, it appears Boeing will have delivered its entire fleet of China-bound aircraft by the end of this year.

If we look at flight hours in China, we see that the fleet of aircraft entering service was 122 aircraft at the end of July. This marked a nearly 30% increase in the size of the MAX fleet in China, with another eight aircraft having been delivered but entering service in August. This would indicate that by the end of August we could see fleet growth of at least 37%. Those aircraft have accumulated more than 400,000 flight hours on more than 159,000 flights. Boeing deliveries this year account for 6.4% of total flight hours and 16.1% of hours since Boeing resumed deliveries.

If we look at the utilisation of the reactivated fleet, we see that since January 2024 utilisation has been significantly higher, and that is due to the effect of the reactivation throughout the year. Capacity growth this year was driven by the annualised effect of the reactivation. What this also means is that for further growth, there is little to gain in terms of increases in daily aircraft utilisation. New aircraft deliveries are required, and the conclusion that can be drawn is that to grow its travel market, China needs Boeing aircraft. Even more so when we consider that the Chinese COMAC C919 is not yet being produced in game-changing quantities, and Airbus will produce fewer aircraft this year than initially planned.

Why are deliveries to China important for Boeing's balance sheet?

The reduction in aircraft inventory is significant as it allows Boeing to reduce its $74.5 billion commercial aircraft program inventory. This is partially offset by the increase in inventory on the Boeing 777X program. Also, as the aircraft are delivered, the portion of the advance payments that the customer made for the aircraft is also eliminated. So, a delivery means a reduction in inventories, advances and payments on account on the liability side and can also increase the cash position as a final delivery payment is received. So, some of these levers to improve the balance sheet are not immediately apparent and take time to materialize, but they are definitely there. It also demonstrates the importance of having a smooth production and delivery flow.

Conclusion: Boeing's road will be long, but we see small improvements

I think when looking at certain issues, such as the complexities of Boeing, one should firmly base the analysis or opinion on market information or data, and that is what we did. This certainly demonstrates the need for Boeing aircraft in the Chinese travel market and demonstrates quite well that withdrawing from China or the single-aisle aircraft market is unrealistic at best.

I think China, despite the tensions between the US and China, will be an important market for Boeing for years to come, even if its market share is smaller. Every sale that is made to China is a sale that is not going to Airbus or COMAC and helps Boeing repair its balance sheet and gives it the ability to develop more competitive aircraft in the future. Leaving that unchallenged gives the competition pricing power, but potentially leaves Boeing less competitive in the market. I think that while the challenges for Boeing are still there and will only be resolved slowly, there is still a compelling long-term investment case as Boeing's product remains in demand even in China.