Boeing's Fate: Foreign Affair - TheStreet

Boeing (BA) - Get Report finds itself looking across the water for commercial airplane orders, as most major U.S. airlines are struggling to stem huge losses while carriers elsewhere expand.

The requests coming into the aerospace giant so far this year bear this out: Of the 42 firm orders in which Boeing has identified purchasers, none came from U.S. airlines. The tally includes Tuesday's announcement that Air France had ordered four 777-300 Extended Range jets.

More telling, though, are this year's less-finalized orders, which include a 70-plane deal with Irish discount carrier

Ryanair

(RYAAY) - Get Report

, 60 next-generation 787 Dreamliners for six Chinese airlines and a 30-plane deal with

Japan Airlines

.

What happens with overseas orders is crucial for the company's share price. Expectations that commercial plane demand is recovering -- coupled with rumors Boeing would notch a 40-plane order from Indonesian airline Lion Air -- helped lift the stock to its highest level in 3 1/2 years last week. (The stock has retreated somewhat in the past two sessions, following news Boeing

had ousted CEO Harry Stonecipher because of his affair with another company executive.)

Last month, Boeing itself inspired optimism about a recovery, when it unveiled expectations for 375 to 385 airplane deliveries in 2006, well in excess of most analysts' expectations and a solid increase from 320 expected deliveries this year.

"Because of the increasing rate of orders so far this year, it's apparent that there's a beginning of a recovery here in the cycle," said Paul Nisbet, an analyst at JSA Research, an independent aerospace research company. (Nisbet owns no shares of Boeing, and JSA does no business with companies it covers.)

Demand is most pronounced in Asia, Nisbet noted. Economies like China's are booming, as is demand for air travel. Airlines that reduced their fleets to match lower demand in the wake of the Sept. 11 terrorist attacks and the SARS outbreak are now hungry for new planes.

"Their fleets were heavily populated with

larger 747s, which were just unusable when traffic went down," Nisbet said. "Now that traffic has gone up, they're replacing them with smaller planes for more flexibility."

The rise of start-up airlines in Asia is also fueling demand. Among Boeing's firm orders this year is one for 10 737s from New Delhi-based SpiceJet, which plans to begin service in May.

Europe is also seeing demand for new planes as no-frills, low-cost carriers like Ryanair and

easyJet

(EASYJET)

expand and steal market share from legacy carriers, in much the same way

Southwest

(LUV) - Get Report

and

JetBlue

(JBLU) - Get Report

have done in the U.S.

Still, demand for new planes from Europe could suffer if the current competitive environment there yields casualties and floods the market with used planes.

"Europe is wild and woolly," said Michael Boyd, president of the Boyd Group, a Colorado-based aviation consultancy. "In the Wild West environment we're seeing there, you could see some players get shot, and if you see that happen, you could see some planes come available."

In the U.S., Boeing is unlikely to see significant new orders, observers said. Network carriers are trying to cut costs in an environment of overcapacity and fierce price competition that has yielded lots of red ink. Among the discount carriers, JetBlue operates only planes from Boeing arch rival

Airbus

, and Southwest, which operates a fleet of Boeing 737s, has likely already satisfied its near-term airplane needs, analysts say.

Nevertheless, Boeing could score the odd U.S. order here and there. JSA's Nisbet noted that

Continental

(CAL) - Get Report

announced in December a preliminary agreement to purchase 10 Boeing 787 Dreamliners that was partly contingent on the airline's meeting its goal of securing $500 million in labor savings by the end of February. Having achieved that goal, Continental may finalize the deal.

A Competitive Edge

As Boeing squares off with Airbus to notch overseas orders, the 787 -- which goes into service in 2008 -- could give it an edge, according to Nisbet. Boeing will use composite materials extensively in the plane, which will make it more fuel-efficient and require less maintenance. That makes it attractive to airlines that are eager to reduce fuel costs at a time of soaring oil prices. Although Airbus is targeting the same market with its recently launched A350 program, Nisbet said the A350 design relies heavily on the older A330.

"There's no way they're going to be able to compete on the lower lifecycle costs with the 787, unless they start with an all-new airplane," Nisbet said.

One factor that could also favor Boeing over Airbus is the dollar's weakness vs. the European currency, but not because it automatically makes Boeing's sticker prices lower than its rival's. Like most of the world's aviation companies, Airbus prices its planes in dollars. Nevertheless, it must pay most costs in more valuable euros. Airbus officials have recently said they're taking steps to change that, including buying parts priced in dollars.

Some analysts believe Boeing stock could gyrate higher on an emerging recovery in jet orders over the next few years. For example, Nisbet has a price target of $94 by the end of 2006, and believes the stock could hit $100 sometime in 2007. He rates the shares, which are trading around $58, a buy.

Others are decidedly bearish. "We believe a sustained recovery in commercial aircraft orders is unlikely until at least 2007, with deliveries not improving until 2008," wrote Citigroup Smith Barney analyst George Shapiro in a recent research note. "This is a year later than our previous analysis, as it now appears the bubble may not burst until the third quarter of 2005. While traffic has recovered, airline profitability has not, as yields continue to be depressed due to excess capacity. Low-cost carriers will eventually defer deliveries to improve profitability, which will cause industry weakness to recur." Shapiro rates Boeing sell and has a $40 target price on its stock. Citigroup Smith Barney does and seeks to do business with companies covered in its research reports.