Monday, November 14, 2016

Will Donald Trump Torpedo Boeing and Spirit Aerosystems?

A global trade war could be bad news for America's largest manufacturing exporter and its top supplier.

Donald Trump rode a protectionist ideology to the U.S. presidency last week. While some aspects of his platform are business-friendly, such as lower corporate taxes and less regulation, his vehement opposition to various trade deals could be bad news for export-oriented companies.

Boeing, as the largest manufacturing exporter in the U.S., clearly has a lot to lose. So does Spirit Aerosystems, its largest supplier. Let's take a look at the potential risks a Trump presidency poses to these two companies.

Trump could spark trade wars

The biggest target of president-elect Trump's protectionist rhetoric has been the NAFTA treaty. Trump believes that free trade with Mexico in particular has cost the U.S. many jobs.

If the U.S. withdraws from NAFTA, it could spark a trade war between the U.S. and Mexico. But this might not impact Boeing and Spirit Aerosystems much. Aeromexico is the only major Boeing customer in Mexico. While it has dozens of planes on order, even a complete loss of that business to Airbus -- the worst-case scenario -- wouldn't have a material impact on Boeing's output.

By contrast, a trade war with China, Donald Trump's other main rhetorical target, could have a severe impact on Boeing's business. Trump has said that as president, he will declare China a currency manipulator and penalize it for depressing the value of the yuan to boost Chinese exports.

This accusation has no basis in fact. The yuan is losing value against the dollar due to market forces, and China's government is actually intervening to try to stabilize its value. Be that as it may, if the U.S. imposes big tariffs on imports from China, it would be natural for China to retaliate by slapping tariffs on imports from the U.S.

That would be bad news for Boeing, given that China is expected to need more than 6,800 new commercial airplanes over the next 20 years, 17% of the global total. In addition to the usual competition from Airbus, Boeing will also face off against COMAC (a homegrown Chinese aircraft manufacturer) in the coming years. COMAC's C919, a direct competitor to the Boeing 737, is just a few years from entering service.

Will Trump back the major airlines?

Another risk for Boeing and Spirit Aerosystems is that the Trump administration will crack down on foreign airlines that are expanding rapidly in the U.S. The Partnership for Open and Fair Skies -- a lobbying group for the three largest U.S. airlines -- has already asked Trump to crack down on state-owned Middle Eastern airlines Emirates, Qatar Airways, and Etihad Airways.

There's a fair amount of evidence that Qatar Airways and Etihad Airways are state-subsidized airlines. However, that doesn't necessarily mean it's in the national interest to block them from expanding. The Middle Eastern airline giants have hundreds of Boeing airplanes on order, worth more than $100 billion at list prices.

It's not clear if Trump's administration will side with the U.S. airlines and prevent the Middle Eastern airline giants from expanding further. But if it does, those airlines may retaliate by canceling some of their orders with Boeing and buying more Airbus planes.

What it means for Boeing

The good news for Boeing is that in the short run, airlines may not have any alternatives. Airbus is a fierce competitor, but it has a massive order backlog, especially for its most popular models: the A320neo single-aisle family and the A350 wide-body family.

Airbus is in the midst of dramatically increasing production of both aircraft families. It could probably raise output further in 2020 and beyond if there were enough demand. But Airbus can't steal much business from Boeing over the next three to five years because it doesn't have many open delivery slots and doesn't have much near-term production flexibility.

Smaller upstarts like Bombardier and COMAC could also steal some business from Boeing, but those are even longer-term threats.

In short, the Boeing-Airbus duopoly is so firmly entrenched that rapid market share swings are nearly impossible. That said, in the long run, a return to protectionism in the U.S. could lead to permanent market share losses and a big decrease in profitability for Boeing.

What it means for Spirit Aerosystems

Bad news for Boeing is almost certainly bad news for Spirit Aerosystems, which is a spinoff of Boeing Commercial Airplanes. Boeing aircraft programs represented 84% of Spirit's revenue last year.

Spirit Aerosystems has been gradually gaining work on various Airbus aircraft programs and other programs at smaller aircraft manufacturers. It is even making a push to get more involved in defense programs. However, none of these growth opportunities would be enough to offset big production cuts at Boeing over the next 10 years.

Donald Trump has said that he wants to bring manufacturing jobs back to the U.S. Sparking trade wars that could hurt Boeing and Spirit Aerosystems -- two key U.S. manufacturers -- would be inconsistent with that agenda. Nevertheless, shareholders of both companies need to watch carefully after inauguration day to see how Donald Trump's actions as president compare to his rhetoric as a candidate.

(Adam Levine-Weinberg - The Motley Fool)

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