Boeing Stock: India Overshadows China Fiasco (NYSE:BA)

After failing to figure out a plan on how to remarket the existing 737 MAXs to other customers from other countries due to the inability to sell them in China, Boeing (NYSE:BA) is about to strike a deal with Air India, which has the intention to place an order for the significant number of new planes. The deal is likely to help Air India, which is in the middle of a major transformation under new management, to restore the former glory of its brand and ensure the global expansion of the airline in the future.

As for Boeing, the upcoming order not only would help the company to ease the pain caused mostly by the geopolitical issues that prevent it to sell its latest planes to its Chinese customers, but also could encourage the management to look for other opportunities within the Indian market. With the worsening of Sino-American relations, pivoting to India could be the only option for the management in order to execute their transformation goals as globalization, from which Boeing arguably benefited the most among its peers, unravels.

Forget About China

Earlier this month, I wrote an article on Boeing in which I highlighted how the company’s inability to sell 138 737 MAXs that are already in its inventory to Chinese customers such as China Southern due to geopolitical issues are limiting the company’s ability to grow its business. At the same time, as Beijing aims to become more self-reliant in the aviation industry in the foreseeable future while the country’s state-owned manufacturer COMAC recently delivered the first passenger jet for commercial use, it becomes obvious that Boeing no longer could count on the Chinese market to generate a steady income stream for years to come.

The good news though is that as Boeing was looking for the possibility to remarket the planes that previously were produced for its Chinese customers to other markets, it managed to find a potential client from an unexpected place.

Air India Is About To Save The Day

At the beginning of this year, the government of India approved the deal to sell the state-owned airline Air India to the famous conglomerate Tata Group. The plan to sell the airline was on the list of things that Indian Prime Minister Narendra Modi wanted to do a long time ago due to the fact that Air India burned $2.6 million of Indian taxpayers’ money each day and was staying afloat solely thanks to the government’s decision to continue to inject more funds into it.

The deal not only handed Air India into private hands, but it also kicked off the biggest consolidation of airliners in India’s history. The purchase of the state-owned airline has allowed Tata Group to begin a process of merging its stakes in other airliners such as AirAsia India and Vistara under a single brand of Air India, which in the end would become one of the biggest Indian airliners. The merger is expected to be completed in 2024, as the consolidation process is about to get started.

As part of the consolidation and expansion plan, Air India’s CEO last month stated the desire to buy new planes from Boeing and Airbus (OTCPK:EADSY). Then at the beginning of last week, news come out that Air India is interested in significantly expanding its fleet by ordering up to 500 new commercial jets. All of this was concluded last Friday when Bloomberg reported that Boeing and Air India are ready to sign the deal until the end of this month to purchase up to 200 737 MAXs, out of which 40 to 50 planes will be those that were expected to be delivered to Chinese customers but are currently stuck in Boeing’s inventory.

This deal without a doubt is great news for Boeing, which has been struggling to find a footing after the grounding of 737 MAXs three years ago due to safety issues. At the same time, it would help it to mitigate some of the downsides caused by the geopolitical issues that blocked the recertification of the company’s latest planes in China.

Considering that some of the estimates earlier this year suggested that close to $5 billion are tied to 737 MAXs that Boeing isn’t able to send to China, the ability to remarket around one-third of them to Air India already would be able to improve the company’s financial performance in the coming years. Thanks to this, the street already positively reacted to the upcoming deal with Air India.

Let’s not forget that at the beginning of this month, when there were questions about whether Boeing would be able to remarket any of its planes, the consensus on the street was that the company’s upside would be minimal, and its consensus price target was $192.25 per share. When the possibility of a deal with Air India exponentially increased in the last week, the street updated its models to reflect a new reality and already gives Boeing’s stock a consensus price target of $203.41 per share, which represents ~10% upside from the current market levels. If somehow Boeing managed to sell two-thirds of the remaining 737 MAXs that are stuck in storage, then it would be safe to assume that the upside then could be greater than it’s today.

The Bigger Picture

It’s safe to say that Boeing was one of the biggest beneficiaries of globalization in recent decades. As new markets opened, the company managed to quickly expand to other regions and strengthen its commercial business there, due to the fact that there were no local alternatives to Boeing and Airbus commercial jets. With China going all-in on supporting its own passenger jet manufacturer, while Russia is being cut off from the global aviation market, Boeing urgently needs to look for new markets to secure additional income streams that would support its growth story. India could become that market.

To counter China’s influence in the Southeast Asian region and the Indian Ocean, the Biden administration has been working on strengthening the bilateral ties with India by executing various common projects and initiatives. At the same time, the passage of the National Defense Authorization Act last week gives the Department of Defense and State Department additional funds to help India decrease its reliance on unreliable Russian weapons and military equipment. This should also help Washington to improve its relations with New Delhi over the long term.

India, on the other hand, can’t fully rely on Russia or China when it comes to ordering new commercial jets. Let’s not forget that Russia failed to secure its own supply chains before the invasion of Ukraine and as a result, it’s now required to use second-hand engines for its flagship passenger jet that doesn’t have a very good safety record. At the same time, exposing itself to China is also not an option due to the difference on various major issues such as the demarcation of the border with each other, which constantly leads to confrontation between their soldiers. That’s why it appears that relying on the U.S. manufacturers such as Boeing is the only viable option for India if it wants to securely grow its aviation market. As a result, the upcoming deal between Boeing and Air India could be only the beginning of a long-term partnership.

Another thing that’s important to mention is that India is also expected to grow its economy in the following years at a greater rate than China and significantly above the global average rate. At the same time, its population is forecasted to continue to grow at a decent rate for years to come at a time when China has already reached its peak last year and is about to lose more than half of its current population by the end of the century.

Considering this, it’s safe to assume that India’s aviation market is more than likely to continue to grow at an aggressive rate in the following decades. The latest estimates suggest that the country’s annual passenger traffic would be 520 million by 2037, up from 158 million in 2017. Boeing is also optimistic about the future of India, as it expects the country to have the fastest-growing aviation market in the world, with an average annual growth rate of 6.9% by 2040. Thanks to this, it’s likely that we’ll see Boeing looking for additional opportunities there, as geopolitics is more than likely to continue to limit its growth in China.

The Bottom Line

Even though it’s too soon to talk about a full pivot to India, the country itself could become a lucrative market for Boeing. At the same time, as India attempts to become a global superpower of its own, it needs to continue to expand its aviation market and expand its transportation infrastructure. By not having its own successful commercial jet manufacturer, Boeing could play a vital role in helping the country along with its airliners such as Air India to expand their horizons and at the same time decrease its own Chinese-related risks in the long run.

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