Boeing (NYSE:BA) has had a lot to celebrate in recent weeks.� It beat out Dutch rival EADS for a $30 billion deal to build the U.S. Air Force�s next-generation aerial refueling tankers, and last week marked the second successful launch of its ultra-secret X37B mini-shuttle.�
But while those contracts are certainly good news for Boeing, the stock has already had a decent run (a little more than 10% in 2011) and may not gain much more altitude in 2011. In addition, competitive challenges remain for Boeing, particularly in the commercial aircraft sector.
One of those challenges was the expressed confidence by rival EADS� Airbus unit that it would retain a 45%-50% share of global commercial aircraft sales over the next decade.� That�s a tough act for any manufacturer given burgeoning competition from Embraer (NYSE:ERJ), Bombardier, and Commercial Aircraft Corporation of China (Comac) and likely could only be attained by putting a significant dent in Boeing�s sales.�
Airbus is proving itself to be a tough competitor, posting 574 net aircraft orders in 2010 — beating out Boeing�s 530.�
Granted, some of the Chicago-based Boeing�s slippage stems from well-publicized challenges with its 787 Dreamliner.� The 787, which is constructed using mostly carbon-composite material rather than the traditional aluminum, has been bedeviled by delays and is nearly three years behind schedule.� An electrical fire onboard a 787 aircraft last November grounded flight tests until January, further delaying the aircraft�s certification. Boeing officials said Monday that the Federal Aviation Administration-required changes were back on track and that the FAA would certify the plane in 2011.
A potentially bigger competitive challenge for Boeing revolves around the next generation of its workhorse 737 narrow-body jet.� As more airlines seek the greater fuel efficiency offered by these smaller planes, this market niche is likely to post substantial growth over the next decade.� For example, Delta Air Lines (NYSE:DAL) already has requested bids from aircraft manufacturers for 100-200 new narrowbodies (with deliveries beginning as early as 2013).� The airline also floated the possibility of buying an additional 200 down the road.
Initial speculation pointed to Boeing adding new engines and other upgrades to its existing 737s to meet the requirements of Delta and other potential airline customers to boost fuel efficiency.� But after reportedly receiving an �underwhelming� response to this plan by potential customers, the company now is considering designing a completely new aircraft for market delivery around 2019.��
There are two potential problems with this strategy should Boeing decide to pursue it: 1. Airlines may view the extensive 787 delays as an omen that the manufacturer�s delivery timetable is overly optimistic.� 2.� Competitors may have workable options that meet many of these criteria sooner � notable among them are the Airbus A320neo and Bombardier�s Cseries � both of which boast increased fuel efficiency over today�s narrow-body jets.
Bottom Line: No doubt about it, on the defense side of the house, Boeing�s got game. But with the drive to cut federal spending gaining momentum on both sides of the aisle in Congress, something�s got to give.� And potentially more significant challenges persist for Boeing on the commercial aircraft side.� Delays in the 787 Dreamliner hammered Boeing�s earnings down to $1.87 a share in 2009. And while earnings rebounded to $3.95 a share last year, the company�s R&D costs for the 787 and the lengthened 747-8 will rise in 2011 � and could total as much as $3.9 billion.�
The company also faces higher pension spending this year.� Combined, these factors could drag down 2011 earnings under $4/share on expected revenue of more than $70 billion.� While Boeing is likely to find a way to fly through the turbulence, the stock may lose altitude in the short term.�
As of this writing, Susan J. Aluise did not hold an interest in any of the stocks mentioned here.���
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