When it comes to the outlook for commercial airlines, there's not too much to get excited about. Year to date, the Dow Jones Airline index is down 35%, almost triple the overall market's decline of 13%.

A contrarian investor might think these depressed stocks represent great values. Maybe. In fact, although the airline business remains in a funk, the worst may be over. Even so, that doesn't mean I'd be willing to load up on airline shares, especially when there are less risky ways of betting on a turn in the commercial airline cycle: namely, Boeing (BA - commentary - Cramer's Take).

Toys 'R' Us Tim Arango and Glenn Curtis J.C. Penney Odette Galli and Glenn Curtis L-3 Communications Jim Cramer and Arne Alsin Gillette Glenn Curtis and Odette Galli

Combined, Boeing's military aircraft/missiles and space/communications businesses are expected to rise to 55% to 60% of profits by 2004, up from more than 40% now. The company has won a surprising number of big contracts, in some cases beating out the incumbent program leader. For example, it unseated defense electronics leader Raytheon (RTN - commentary - Cramer's Take) with its Joint Tactical Radar System, a totally new area of Army radios and communications for Boeing.

That follows Boeing's earlier win on its Future Combat System, which bumped out that program's well-established leader for combat vehicles, General Dynamics (GD - commentary - Cramer's Take). These wins come on top of steady multiyear programs already in the works, such as the C-17. Its defense business could become a much larger driver of not only earnings at Boeing, but also its stock price.

But clearly, the commercial aerospace cycle is what dictates the stock's performance in the near term. Uncertainty about the pace of economic recovery makes the outlook there even more challenging.

While it's difficult to predict when airlines will regain profitability, given the extraordinarily tough travel environment they've faced over the past year, it's hard to believe conditions could get much worse. Airline traffic is expected to plunge 12% this year from 2001, the worst decline in aviation history. During the last down cycle in the early 1990s, traffic fell just 2% in 1991.

But one closely watched measure of industry performance, revenue per available seat mile, or RASM, has been declining at a decelerating pace. Since plunging 29% last September, the decline in RASM improved to about -9% between February and April and has since stabilized between -6% and -7% in May and June. This by no means suggests that a recovery is at hand, but it does signal that the industry could bottom sometime next year.

Many analysts expect Boeing's aircraft deliveries to bottom at around 275 planes in 2003 (down from 375 this year) and recover slowly to 325 in 2004. How Boeing performs relative to Airbus on new order wins will also be important. Airbus' market share has doubled to about 46% since 1995 (according to a July 28 article in The New York Times), and the company is aiming at 50% of the market.

Also, Boeing's contract with its machinists union, the International Association of Machinists and Aerospace Workers, expires on Sept. 1. A prolonged strike, which is a possibility, would be bad news for the stock.

Boeing's free cash flow this year is expected to reach $2.5 billion to $3 billion, a very high level compared to its market capitalization of $34 billion. Although per-share earnings are likely to drop from $3.11 this year to $2.85 next year, even a modest uptick in the aircraft cycle could boost earnings to between $3.50 and $4 in 2004, given the strength of the company's defense business. On that basis, the shares are trading at a price-to-earnings ratio of just between 10 and 11.

Because of the potential strike and market-share risks, there could be downside in the shares to the low- to mid-$30s, which would be an even more ideal entry point than its current level. Boeing closed Tuesday at $41.52. Even so, the best time to buy Boeing shares is typically at the trough of the cycle, which could be sometime in the next six to 12 months.

To read Glenn Curtis' take on Boeing, please click here.

Face-Off: Aug. 1
Who won this FaceOff?
	Odette
	Glenn