Boeing shakes off scandal as shares hit all-time high

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The Independent Online

As Britain's BAE Systems decides it is time to sell out of the European aerospace giant Airbus, investors on the other side of the Atlantic are piling into its rival Boeing.

Shares in Boeing have hit record highs in the past few days, representing a rocket-fuelled turnaround for a company that less than three years ago was mired in scandal. There are two main reasons. The commercial aerospace industry is back in boom conditions, with orders for planes pouring in from around the world. And for the future, there is a sense that Boeing is about to pull back the market leadership it lost to Airbus in 2003. New shareholders bet the company will finally put behind it the ethics scandals that claimed the jobs of two chief executives.

Boeing was plunged into turmoil by revelations that it used trade secrets to beat Lockheed Martin to a US contract. Then the former finance chief was jailed for illegally recruiting a US defence official while she was in charge of allocating vital contracts. Phil Conduit quit as chief executive in the wake of these scandals. His replacement, Harry Stonecipher, was fired after an affair with a colleague.

The new boss, Jim McNerney, has waged a high-profile campaign to repair the company's image, and hopefully to limit the legal fallout to a limited financial settlement. Talks with prosecutors are ongoing, and Wall Street has become increasingly optimistic a fine might be about $500m (£285m).

That looks manageable given Boeing's record cash flows. Look at the numbers. Boeing posted net income of a record $2.6bn in 2005, up 37 per cent, thanks to a job-cutting reorganisation and the 5 per cent growth in revenues. Earnings are projected to grow one-third over the next two years, much faster than anyone was predicting even a year ago.

The fundamentals driving the growth in air travel remain intact, from globalisation and economic growth, to the emergence of low-cost airlines and the additional demand from emerging economies. And in an era of permanently expensive oil, when jet fuel prices have been pushed sky high, airlines have been bounced into buying newer, more fuel-efficient aircraft.

For these reasons, the outlook for aircraft production looks robust, says Richard Aboulafia, at Teal Group. Boeing and Airbus took orders for an unprecedented 2,057 new aircraft last year, and if this cannot be repeated, Mr Aboulafia predicts the value of deliveries should continue to rise until 2008, plateauing at a historically high level that endures for the next decade.

Boeing's shares moved above $83 for the first time this week, more than three times its nadir in 2003, and still many aviation analysts remain bullish. Much of Wall Street's delight has come not just at the industry's good fortune, but at Airbus's misfortune. In an industry that is basically a duopoly, this is great news for Boeing.

Airbus delivered 378 planes last year, to Boeing's 290, but in new orders they were neck and neck. By the end of the decade, Boeing deliveries are expected to account for 60 per cent of the market.

Why the turnaround? Sales of Airbus's super-jumbo A380 have been good rather than stellar, but it is in the mid-size market where Boeing looks to have edged ahead with fast sales of its new 787 Dreamliner. This mid-size market could, Boeing bulls say, be more lucrative in the longer term, since super-jumbos are limited to the old-style artery routes between major airports.

News of BAE's sale plan leaked just as Airbus hinted it might rethink the design of its much criticised rival mid-size plane, the A350. This would mean further delays while the Dreamliner stretches its lead - and it will be expensive. Boeing bulls were quick to read between the lines when BAE said that, while Airbus is well positioned in its market, it will need significant investment to maintain that position and BAE would rather spend the money in the US defence market. Airbus's woes are Boeing's opportunity.