33,500 Reasons to Like Aircraft Suppliers

“The center of aviation has now moved officially from Europe and North America to the Asian markets. It’s the biggest market today and it’s going to grow at the fastest rate, and unless something very unusual happens, it will continue to be the largest market.” — Vice President of Marketing for Boeing, Randy Tinseth

You know how high oil prices tend to create boomlets in certain businesses?

Alternative energy, small car manufacturers and the like get a boost. Aircraft suppliers may also see a boost.

Fuel is the largest expense for the airline industry — at 30% of operating costs. And the airline industry faces pressures to cut costs. Recently, the Air Transport Association forecast that the airline industry would make $4 billion this year, down 78% from last year. So there is pressure (again) to cut costs.

Airlines have already cut staffing costs. You can see this in labor costs as a percentage of operating costs. They now stand at about a quarter of costs compared to 35% in 2001. Airlines have also been smarter about pricing and routes, as airfare rates have stayed up.

The big opportunity for the airline industry, though, is to cut into that fuel cost number. The way to do that is with more fuel-efficient aircraft. A new A320, for instance, saves more than 25% on fuel costs compared with the older MD-80.

The old workhorses of the fleet, such as the 737s an 757s, also are lacking in fuel-efficiency.

What’s also interesting here is that the airline industry also has scrimped on investing in new planes. In fact, the world’s 50 largest airlines spent only 8% of sales on new aircrafts. That is the lowest total in a decade. I’d bet that number climbs in the next few years.

But there is an even more compelling reason to like aircraft suppliers. Actually, there are 33,500 reasons…

Boeing recently put out its long-term forecast for aircraft for the next two decades. This is a much-watched and commented-on forecast, as Boeing has as good an insight into the backlog of the industry as anyone.

They project that passenger traffic will triple by 2030 and the number of commercial aircraft will double. They estimate this will create a market need for 33,500 new planes.

The tab: $4 trillion.

Where is the growth coming from? I’m sure you could guess, and it fits well into our World Right Side Up thesis.

The idea behind the World Right Side Up is that the very large gap between emerging markets and developed markets is closing and will continue to close.

Twenty years ago, 72% of all air traffic was on carriers from North America or Europe. Today, only 55% is. Boeing forecasts that figure will fall to 40% by 2030. It’s a different world than the one we knew in the 20th century. It will also create new and different opportunity sets for investors.

Boeing’s forecast is still a forecast and it could be wrong, as all such forecasts can be. But if it is wrong in the particulars, I think it will prove directionally accurate. Meaning, we’re going to need a lot more planes, and that creates a nice tailwind for a certain flock of businesses.

I tend to favor the suppliers over the manufacturers, as some of suppliers have better growth prospects and upside potential.

I continue to follow a group of aerospace-related stocks. I think it’s an attractive lot…and if the projections pan out, investors that take action could see large profits in the future.


Chris Mayer,
for The Daily Reckoning