Boeing (NYSE:$BA) expects that around 34,000 new planes will be purchased worldwide in the next two decades, and out of that one-third will land in Asia Pacific region and remaining in Europe and North America. It is also projecting a 5% increase in air traffic and 5.2% increase in cargo traffic over the next two decades. Demand for airplanes will also be boosted as airlines, mainly those in Europe, US and Russia, will replace around 41% of their older planes with new leaner ones.  

The increase in air traffic in China, India and the rest of Southeast Asia in particular is where the growth is coming from. Revenue Passenger Miles (RPM) for U.S. carriers is expected to grow the most in the Pacific Region over the next 20 years, according to the U.S. Federal Aviation Administration.  Boeing, therefore, expects a huge market for its single-aisle next generation 737 and the 737 Max, which are due in 2016 due to the changes in behavior of air travelers.  It is becoming more regional as fuel costs are driving costs of moving people around and bandwidth is dropping in cost making it easier and cheaper for people to do business from home. 

Singapore Air, a major component of the iShares MCSI Singapore Index ETF (AMEX:$EWS), is struggling with this because they had set themselves up as the luxury business class airline connecting SE Asia with the West. They are now struggling with breakeven capacity ratios of 78-82%; flying 747’s nearly empty around the world.  They just placed a $4.1 billion order with Boeing for 54 single aisle, 94 passenger, 737’s; 31 737-MAXs and 23 Next-Generation 737-800s for their regional carrier SilkAir.

Boeing's 787 Dreamliner, Boeing’s fuel efficient replacement for the 747, having two passenger aisles, is expected to account for nearly $2.5 trillion worth of new airplane deliveries; 40% of which coming from Asia. Cargo plane sales estimates have fallen due to sluggish growth but it expects the world freight fleet to double in two decades from currently 1,740 aircraft to 3,200. Aero Mexico is looking to purchase of 100 planes worth around $11 billion, most of them 737 Max.

Not surprising then, given the recovery of air miles flown and the growth rates coming out of Asia and Latin America that Boeing’s most recent earnings were strong.   It surprised both in bottom line and by upping forward guidance.  It looks to be winning the war with Airbus with new orders (net of cancellations) coming in more than 2.5 times faster than their closest rival.  Boeing reported net income of $US967 million, or $1.27 per share, for the April-June quarter compared with $941 million, or $1.25 per share, a year earlier. The 3% rise in earnings beat due to an over-estimate of defense spending changes in the U.S. and the E.U.  Revenue for the quarter rose 21% to $20 billion year over year. Wall St.’s estimates for both of Boeing’s divisions were way off with Defense rising 7% and Commercial Airline sales up 34%.

While Boeing and Airbus have both been aggressive in their pricing for new aircraft, Boeing’s launch of the single-aisle B-737MAX in response to A-320Neo of Airbus, has been an unmitigated success, turning the sales order tables on Airbus from 2011.  The problem is that it’s killing their margins.  Net margins year over year collapsed from 6.8% to 4.8%.

To maintain the lead Boeing has to convert the orders to delivery, and its order of 787’s to India are on hold after the engine built by GE (NYSE:$GE) shards of metal out of it during a test in late July.   There are more than 40 of these engines currently in service on 787’s around the world and they have not been taken out of service.  Rolls-Royce makes the only competitive engine the GE ones.  If this is a design error and not a one-time problem, Boeing has a serious problem on their hands.

Boeing has significantly underperformed the SPDR S&P 500 ETF (AMEX:$SPY) up just 1.16% year to date versus 12.2% for SPY as investors want better return than sub-5% net margins.  Trading at a multiple 14.9 and paying a 2.4% yield, the increased guidance at this quarter’s earnings have not stoked investors’ passions because of rising oil prices and weaker margins.  Boeing is still struggling with the S&P above 1400 to break through $75, while Exxon-Mobil (NYSE:$XOM) has pushed through a technical breakout above $88 per share even with natural gas prices in the U.S. unable to maintain $3 per mmcf.