On the surface, Boeing (NYSE: BA) looks as though it has all the ingredients of a potential millionaire-maker investment. The aircraft market is growing, competition is minimal, and government contracts are plentiful. But despite its many advantages, this aerospace leader has lost 60% of its value in half a decade. Has that decline created a buying opportunity for this once-stellar business, or should it be viewed as a warning to investors to stay far away?
The phrase “economic moat” — popularized by investing legend Warren Buffett — refers to certain types of durable competitive advantages a company can possess that make it difficult for potential rivals to make inroads against it. Boeing’s moat is as deep as they come. In the large passenger aircraft market, it competes in a duopoly with European rival Airbus, with a market share of around 40% for large passenger aircraft (compared to Airbus’s 60%). It also plays a notable role in U.S. defense contracting, supplying weapons systems like the iconic Apache helicopter.
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Investors shouldn’t expect the duopoly to end anytime soon. The large passenger jet manufacturing industry has an incredibly high barrier to entry because of the capital investments required, intense regulatory oversight, and the business relationships between manufacturers and major airlines that may be unwilling to experiment with new suppliers.
Over the very long term, a Chinese rival like COMAC could leverage lower labor costs and support from the Beijing government to claw its way into the industry. But the International Bureau of Aviation (IBA) expects the upstart to capture only around 1% of the opportunity by 2030. With industry disruption potentially decades away, Boeing’s biggest threat might be itself.
In the third quarter, Boeing’s revenue dipped by around 1% year over year to $17.8 billion, with results dragged down by its commercial airplane segment, where sales dropped by 5% to $7.44 billion. This core business was grappling with a host of problems, including a seven-week labor strike by the International Association of Machinists and Aerospace Workers (IAM) that ended this month.
The new contract stipulates a 38% pay rise for workers over the next four years, along with more generous retirement benefits, putting even more pressure on this loss-making business. For context, Boeing’s commercial Airplane segment generated a third-quarter operating loss of $4 billion, so higher labor costs are likely the last thing shareholders want to see right now.
