Boeing stock has come a long way since early March. After crashing to a four-year low beneath $90, BA shares have recovered by about 100%.
Shareholders are obviously optimistic about the slight recovery in air travel – arguably too confident.
At least three airline industry trends should spook anyone bullish on Boeing stock. Until there is a reversal, investors should proceed with caution.
Air travel may be recovering, but not quickly enough to prevent debt-riddled companies from going belly up.
Globally, several airlines have already filed for bankruptcy:
While not household names in the U.S., just about all of these bankrupt airlines are Boeing customers. And they may just be the beginning.
These bankruptcies will cost Boeing more than just its customers. Affected airlines will inevitably liquidate assets – including planes.
This will exacerbate an aircraft supply glut and potentially depress demand for years.
Boeing’s order book was already ugly due to its long-running 737 MAX issues. Then the pandemic struck, giving airlines another excuse to renege on purchase agreements.
While all aircraft manufacturers have been affected, Boeing has taken a bigger hit than its chief rival. Airbus has added 298 new orders in 2020; Boeing has suffered a net cancellation of 602 planes.
The situation is unlikely to improve soon. In April, Boeing CEO Dave Calhoun warned that the aviation industry would take years to recover .
Under the CARES Act , the U.S. government gave domestic airlines fiscal support to help them protect jobs. The measure will expire on September 30.
As October approaches, some U.S. airlines have already warned they will lay off employees. United Airlines (NASDAQ: UAL) has notified about 45% of its employees that they could lose their jobs after September.
About 20,000 employees at American Airlines (NASDAQ: AAL), or around 20% of its workforce, will likely be furloughed.
Layoffs are likely a leading indicator that airlines will begin grounding excess planes. Beyond the implications for demand, groundings directly threaten Boeing’s services business, which comes from post-purchase transactions like maintenance, training, and software modifications.
Given that the company was targeting $50 billion in yearly aircraft services revenue by 2027, this is a severe setback for anyone bullish on Boeing stock.