The US travel industry plays a critical role in the economy. Last year, travelers spent more than $1,036 billion on business and leisure trips, generating a total $2.4 trillion in economic output – or 2.7 percent of the country’s gross domestic product (GDP).
This market creates jobs for 15.6 million people, making it the seventh largest industry in terms of employment, and a full 83 percent of travel companies are considered small businesses.
The bottom line is that the health of the US economy depends on travel, and airplanes are crucial to the industry’s continued success.
Pros and Cons of Buying Aircraft Manufacturers
Air travel drives a significant portion of travel-related revenue, and overall, airlines are bringing in a substantial sum each year.
A new crop of no-frills, low-priced airlines are finding success, and the number of people who flew in 2017 increased 6.6 percent over the previous year.
Just this year, a number of airlines from around the world made plans to expand with new routes and more flights. That means increased need for new airplanes, and orders are coming in quickly. For example, Indian airline Vistara committed to the purchase of six Boeing 787 jets and 13 Airbus A320neos, valued at approximately $3.1 billion, and Jet Airways placed an order for 75 Boeing 737 Max aircraft, which are scheduled for delivery over the next ten years.
However, the issues facing airlines grow more complex every year. Global politics, natural disasters, and weather emergencies are just a few of the problems that can derail financials industry-wide.
This uncertainty impacts aircraft manufacturers, who schedule production years in advance. For example, Etihad Airways is expected to defer, transfer, or cancel several billion dollars’ worth of Boeing 777X jets due to a series of financial setbacks. Such a change means considerable disruption for Boeing.
Is Boeing Stock Worth Buying?
Though the Boeing (NYSE: BA) name is best-recognized for its contributions to the commercial aircraft market, the company offers a diverse product line that extends to all facets of the aerospace industry. In addition to commercial jetliners, Boeing manufactures defense, space, and security systems, and provides after-market support for equipment. Boeing is the largest aerospace company in the world, supporting governments and commercial airlines in more than 150 countries.
It is this very diversity that makes Boeing (NYSE: BA) a good investment. The travel industry, and particularly the commercial airline industry, operate cyclically. Companies that rely on commercial travel revenue experience volatility in their earnings and ultimately, their stock prices.
Because Boeing has extended its reach to the service side of the industry, profits are less likely to be impacted by an economic downturn. Better still, Boeing is exploring opportunities to manufacture some of the components used in its aircraft. This offers additional protection against a potential slowing of commercial aircraft orders, because Boeing can increase revenues on each of the jets it builds.
By all appearances, management is creating a long-term strategic plan to expand margins, and many analysts believe the company could hit a 15 percent operating income margin as early as 2020. That’s good news for you if you purchase Boeing stock today.
Is Airbus Stock a Buy or a Sell?
Though Boeing is likely to end 2018 ahead of Airbus in orders, Airbus has historically been able to outsell Boeing when it comes to commercial jets. As a result, Airbus has a larger backlog of unfinished aircraft outstanding.
Despite gains from 2017 to 2018, Airbus appears to struggle historically to profit from its strong sales. Nevertheless, the company was able to double its operating profit in the first three quarters of 2018, but that is still less than half of the amount achieved by Boeing.
Airbus’ free cash flow is also of concern. Year-to-date, the company is the in the negative when it comes to cash flow, with a predicted 2018 total of $3.36 billion. This does not compare favorably with Boeing’s $13 billion.
The main issue that Airbus faces is a lack of diversity in product line. While Boeing has a solid defense business, Airbus has barely tapped into this potential market. As a result, Airbus is caught up in the cyclical nature of the travel industry, which means investors can expect substantial volatility in stock prices.
While it is certainly possible to Airbus will take off, investors take a significant risk when purchasing and/or keeping Airbus stock.
Boeing vs. Airbus Stock: Which Is Best?
In terms of product quality and value, American Airlines may have signaled the industry’s perspective on Boeing vs. Airbus when it cancelled an order for 22 Airbus A 350s and chose, instead, to move forward with 47 new Boeing 787s.
This decision came just after Hawaiian Airlines cancelled its own order for six Airbus A330-800s in favor of 10 Boeing 787-10s.
In general, it appears that Boeing will continue to lead in the widebody aircraft market, though the outcome of the battle for mid-market aircraft is not yet decided.
Airbus has plenty of outstanding orders in its pipeline, but the company has been unable to transform this activity into profits at the same rate as its competitor. Boeing has demonstrated a strong ability to create profitability and maintain cash flow throughout its manufacturing and service processes. This puts Boeing in the lead when it comes to potential for stock performance.
In addition to its domination of the commercial aircraft market, Boeing is better positioned for future profitability than rival Airbus. Boeing’s diversified products and services promise consistent revenue, despite the cyclical nature of the travel market. This reliability is something Airbus simply can’t match.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.