By William Patalon III
When Europe's Airbus SAS picked off nearly $50 billion worth of airliner orders from Middle East air carriers at the opening of the Dubai Aerospace Air Show this past weekend, analysts portrayed it as a huge victory over U.S. rival Boeing Co., (BA).
Once again, the gloom-and-doomers got it wrong.
Don't misunderstand: A series of orders worth nearly $50 billion at "list prices" [before the inevitable discounts] is a weekend's work well done, especially when those orders come from some of that region's leading airlines. But anyone who portrayed this as some sort of decisive victory for Airbus – and a devastating loss for Boeing – has missed the big picture.
The reason: They forgot to factor in China.
The China Flight Connection
China alone will require 3,400 new airplanes worth about $340 billion over the next 20 years, Boeing projected in its recently updated annual forecast for the commercial airplane market. And that – which will also need to outfit their air fleets as their economies make the leap from "emerging" to mainstream.
Indeed, over the next 20 years, Boeing is forecasting that air carriers worldwide will need to acquire 28,600 commercial aircraft with a value of $2.8 trillion. The Boeing forecast is generally viewed as the world's best analysis of the global market for commercial airliners and cargo aircraft.
The huge revenue potential of the global airliner market – combined with the low number of viable competitors and the high barriers faced by new potential entrants – is a big reason that Money Morning's investment gurus all view Boeing as a promising global investment for years to come.
During that same 20-year stretch addressed by Boeing's market forecast, China would have the fastest-growing airliner market in the world, making it the biggest market outside the United States for new commercial airliners. In fact, if you average it out, from China alone you're talking about sales of $17 billion a year.
Compare that to the $50 billion in Middle East airline orders scooped up by Airbus. Most of those are for versions of the new Airbus A350, a controversial aircraft-development program that's undergone five revisions and won't be delivered until five years after the new Boeing 787 Dreamliner first flies in commercial service.
One reason the Middle East orders have grabbed so much attention is that – over the past couple of years – the Dubai Air Show has joined the Paris Air Show and the United Kingdom's famed Farnborough affair to comprise the three major international aerial battlegrounds for Boeing and Airbus. Rapidly expanding Gulf-based airlines such as Emirates, Etihad and Qatar Airways have heightened the focus on the Dubai Air Show, which analysts say is in its third year of record demand – spurred by new aircraft and the expansion of budget airlines.
Even so, if you figure those $50 billion worth of Airbus orders will be stretched out over 10 years, you're talking only $5 billion or so a year from the entire Middle East [while it's true that more Middle East orders are expected before the air show ends later this week, and that those orders may go largely to Airbus, there will be substantial discounting from the "list" prices, lowering the actual dollar value of the contracts].
Boeing already has more than 700 orders for the Dreamliner, with a total value of about $120 billion. On Oct. 10, the Dreamliner's first delivery was pushed back by six months after supply problems and parts shortages made it clear the original schedule was unrealistic. Even so, Japan's All Nippon Airways Co. will get the first plane in November or December 2008.
If you want a better indication of how this airliner dogfight is shaping up, watch China in the next couple of months and years. It'll start with the Summer Olympics in Beijing next year; that event will cause a huge upsurge in airline-passenger traffic, an increase that will fuel an upswing in tourism and business traffic to mainland China.
In fact, according to Boeing, following the anticipated increase in passenger traffic for the Olympics, China's market for domestic air travel will grow nearly five-fold by 2026 – making it slightly bigger than the same market for air travel on the North American continent. And with that rocketing growth for China's air-travel and air-cargo markets, China's commercial airplane fleet will nearly quadruple to 4,460 aircraft by the end of 2026.
With China's cargo markets leading the global industry, that nation's air carriers also will have to add about 300 air-freighter airplanes by 2026. That nation's total fleet of freighter airplanes will more than quadruple in size, Boeing forecasts.
Air-travel growth between China and North America as well as between China and Europe will more than double in size during the next 20 years, and the number of city pairs will more than triple, according to Boeing. [This MGM)].and the Middle East is yet another reason to favor another top Money Market recommendation: MGM Mirage (
Other Key Markets – Such as Vietnam
Boeing and Airbus are now competing to sell their latest jet airliners to Vietnam, and Bombardier of Canada is also angling for a piece of this super-fast-growing market. This communist-ruled nation, which means that there's an emerging middle class of consumers with the time, money and desire to travel by air.
The state-owned and operated Vietnam airlines is going to be privatized, meaning there will be a need to upgrade its flying fleet of nearly 50 airplanes. And, as Bach Quoc Thang, a Vietnam Airlines general manager says, the carrier wants to position itself as "one of the leading regional carriers … Singapore Airlines and Cathay Pacific are the examples we want to follow."
Vietnam Air Service Co., into a low-cost carrier that can take on Pacific Airlines, which is part owned by the highly regarded Qantas of Australia, as well as Malaysia's Air Asia, which is a partnership with shipbuilder Vinashin.
The bottom line: Vietnam Airlines' emergence means billions of dollars in possible additional sales for the manufacturers able to land the contracts.
News and Related Story Links:
Airbus Snares $50 billion in Orders at Dubai Air Show.
- Money Morning News Analysis:
Boeing Refurbishes 500th Super Hornet Fighter Jet, Makes Plans for Looming Dubai Air Show.
- Money Morning Investment Research Report:
Boeing Announces $7 Billion Stock Buyback, Declares Dividend.
Boeing Net Rises; Cuts '08 Sales View on 787 Delay.
- The Boeing Co:
Boeing Delivers 500th Modified F/A-18.
- The Boeing Co:
Boeing to Showcase Advanced Range of Products, Services at Dubai Airshow 2007.
- The Dubai Air Show:
Boeing delivers 500th modified F/A-18.
- Money Morning Investment Analysis:
Investments for a Weak Dollar World.
- Money Morning Investment Analysis:
DP World's IPO May Trigger Billions in Investments of State-Controlled Companies.
About the Author
Before he moved into the investment-research business in 2005, William (Bill) Patalon III spent 22 years as an award-winning financial reporter, columnist, and editor. Today he is the Executive Editor and Senior Research Analyst for Money Morning at Money Map Press. With his latest project, Private Briefing, Bill takes you "behind the scenes" of his established investment news website for a closer look at the action. Members get all the expert analysis and exclusive scoops he can't publish... and some of the most valuable picks that turn up in Bill's closed-door sessions with editors and experts.