Boeing Struggles to Maintain Altitude

Editor's Note: This column is a special bonus for TheStreet.com readers. This piece originally appeared on RealMoney Tuesday, and we're giving it to you in its entirety. To sign up for RealMoney, where you can read Odette Galli's commentary regularly, please click here for a free trial.

There's hardly a more troubled area of the market right now than the airlines. With the threat of war and terrorist attacks, and a sluggish economy, United Airlines parent UAL and US Airways have already sought bankruptcy protection, and AMR's (AMR Quote) American Airlines is teetering on the edge. If war actually breaks out, things might even get worse.

Understandably, then, shares of the airlines' main supplier, Boeing (BA Quote), remain grounded. I had once hoped that the company's solid defense business could offset weakness in the commercial aerospace industry. But so far, even Boeing's defense contract wins have been overshadowed by increasing risks in the airline industry. The shares are down 44% over the past 52 weeks, less than the 55% decline in the Dow Jones Airlines Index, but nearly double the 24% drop in the market overall.

Making matters worse, up until the market's rally of the last few days, investors had turned a cold shoulder on the defense sector as well, even as war began appearing more likely. Defense contractors like Lockheed Martin (LMT Quote) are down more than 18% just since the beginning of this year. Boeing's shares look tempting, but there could be little upside until there's more clarity on the length and depth of the current commercial aerospace downturn.

Industry Woes

Boeing Commercial Aircraft Group, which accounts for 45% of the company's total operating profit, is still on the decline. The company's order book fell 25% in 2002 to 251 orders, the lowest level since the 1994 trough, when just 119 planes were ordered. Aircraft deliveries in 2003 are expected to fall to around 265 or 270 from 381 in 2002.

Low Flyer This stock might be parked at the gate for a while

Even that may represent too many new aircraft entering the system. With two and possibly three major U.S. carriers filing for bankruptcy protection, the potential for an order recovery in 2004 is looking bleak. Bankrupt airlines strapped for cash are being forced to reduce capacity, in some cases by at least 10%.