Soaring Boeing freight sales won’t last

The grounding of the 737 MAX and the COVID-19 pandemic have combined to crush demand for Boeing‘s (NYSE: BA) commercial aircraft since 2019. Freighters have been a rare bright spot for the company’s commercial aircraft business. Supply chain bottlenecks and a sharp reduction in long-haul passenger flights – which can carry a significant amount of air cargo – have increased demand for dedicated freighters.

However, the recent level of Boeing’s orders and deliveries in the cargo market does not appear to be sustainable. An abundant supply of used aircraft suitable for converting freighters, the growing competition from Airbus (OTC: EADSY), and new emissions regulations will drastically reduce Boeing’s freight business by the end of the 2020s.

Freighters help keep Boeing afloat

The 737 MAX crisis wiped out Boeing’s narrow-body franchise. To be fair, deliveries have resumed and ordering activity has started to pick up over the past year. Nevertheless, Boeing 737 MAX deliveries remain significantly lower than Airbus A320neo family deliveries, and the 737 MAX order book remains significantly lower than it was a few years ago.

This has made Boeing particularly dependent on wide-body aircraft, where it occupies a stronger position in the market compared to Airbus. However, demand for wide-body passengers has plummeted as the pandemic and accompanying international travel restrictions have crushed long-haul travel.

As a result, freighters suddenly became an important part of Boeing’s product line. Between April 2020 and the end of August 2021, Boeing delivered 123 wide-body aircraft, including only 46 passenger models. It also delivered 14 Boeing 767s to its defense unit for conversion to a KC-46A Pegasus military tanker. Freighters accounted for the remaining 63 wide-body deliveries: more than half of the total.

Image source: Boeing.

During this same period, Boeing received 136 gross orders for wide-body aircraft. This included only 33 orders for large passenger carriers, 29 orders for military tankers and 74 orders for freighters. (Additionally, the cancellations far exceeded gross orders for Boeing wide-body passenger aircraft.)

A snack in demand

The recent increase in demand for new freighters will not last more than a few years. First, the pandemic caused temporary disruptions that spurred the use of dedicated cargo ships. As noted above, sharp cuts in passenger services have removed a substantial amount of capacity from the air freight market. Additionally, challenges in the global supply chain have forced some shippers to turn to air freight for goods that would typically be transported by ocean freight. These disruptions will not last forever.

Second, a large number of jumbo jets have been idled due to the pandemic. Many of them will eventually be converted to freighters rather than returning to passenger service. Indeed, Boeing’s long-term market outlook calls for just 890 new cargo deliveries over the next two decades, compared to 1,720 conversions from passengers to cargo.

Third, Boeing will have to stop producing all of its existing cargo models by the end of 2027 under current emissions regulations. This could boost sales in the near term, as some buyers look to purchase discounted 767F and 777F models before Boeing abandons them. But this also means that the industrial giant will soon have to develop a new cargo ship to continue this activity.

Airbus tackles Boeing’s niche

In recent years, Boeing has dominated the new cargo market. Airbus began delivering a cargo version of its A330 in 2010, but the A330-200F only received 38 orders in its lifetime. However, Airbus is looking to change fortunes in the future. It recently launched the sale of a much more fuel-efficient A350-based freighter, with entry into service scheduled for 2025.

An Egyptair Cargo Airbus A330-200F freighter.

Image source: Airbus.

Airbus has yet to announce orders for the A350 freighter, but management has said many freight airlines are interested. Meanwhile, Boeing is considering a cargo version of its next-gen 777X, but has yet to make the decision to go ahead. In the short term, it must prioritize the certification of passenger versions of the 777X.

As a result, Airbus could take a significant leap from Boeing by selling next-generation cargo ships to customers who prioritize low fuel costs and reduced emissions. This will prevent Boeing from replicating its current dominance in the cargo market beyond 2025.

Boeing’s estimate of 890 new cargo deliveries over the next 20 years implies an average of less than 45 deliveries per year. If Airbus manages to capture nearly half of the market, Boeing’s annual cargo shipments could drop to around 25 by the end of the 2020s: well below recent levels. The contraction in cargo activity makes the recovery in demand for large passenger aircraft even more critical for Boeing’s prospects for recovery.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.

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