A boost for Boeing – what does it mean for bondholders?
Insights

A boost for Boeing – what does it mean for bondholders?

On 9 May Ryanair announced it had placed an order of up to 300 737-Max airplanes with Boeing. Before the deal Boeing had reported firm orders for more than 3,500 737-Max planes, as at the end of Q1.

It delivered fewer than 400 during the entirety of 2022. Following the announcement, Boeing bonds outperformed the investment grade corporate market by 5-6 basis points; its equity outperformed the S&P 500 by about 2.5%, and its nearest peer Airbus by about 2.25%, from 8 May until 11 May.

 

Are the market moves a rational reaction to the news? At this point in time, yes. Boeing already has an enormous backlog to deal with. It is struggling to keep up with demand and Ryanair’s order won’t convert to revenue for years to come.

 

The order, however, has multiple benefits for Boeing. Equity markets should see it as affirmation that Boeing is not losing all its market share to Airbus and its future certainly looks brighter than it seemed pre- announcement. Bond markets, meanwhile, should see this as an increase in the firm’s asset base – future revenue is an asset and could support liquidity if it is ever required. The orders will eventually convert to cash and enhance Boeing’s ability to reduce leverage. This is good news for bondholders.

 

Orders turn into revenue over time – in this case when the aircraft are delivered to the customer. Of course, 737-Max’s are complex machines, and the planes aren’t expected to land with Ryanair until 2027. That is some way off but does allow Boeing to plan production, which is important for any manufacturer, particularly one of large ticket items dependent on complex supply chains. Eventually, however, Boeing will report higher revenue because of this order.

 

Cash typically comes at the outset of the order and then in several lump sums throughout the order’s life. This is subject to negotiation and although the exact details are hard to accurately gauge, we can be sure it is cashflow positive for Boeing.

 

A place in the order book has value

 

When order books are as full as they are now, they become an asset for airline customers too. There is an ecosystem of airlines, airplane leasing companies, air-framers like Boeing, and the suppliers to the air-framers. As order books grow relative to production rates, it supports the planning of the air-framers and their suppliers. Scarcity relative to demand helps leasing companies and orders already made become more valuable to the customer as waiting times grow.

 

Think about when you order a car. If the car was available in two to three weeks, the order would have a particular value. If the car was so popular that it would only be received in two years’ time, one would expect that order to become more valuable to the customer. And if there were only two car companies and the wait for a new car was several years at each of those companies, that’s akin to the situation now for buyers of commercial airplanes. As a result, the likes of Ryanair will be very reluctant to give up their spot in the queue and have a real source of value in that order.

 

Positive accounting impact: it shouldn’t matter, but it probably will…

 

Lastly, there is an accounting benefit to Boeing if it increases the defined production lot. If Boeing expects to produce more planes, it will decrease the per-unit accounting cost and increase the reported margin. Financial markets do seem to react to accounting measures, regardless of how many times people are reminded that, at the end of the day, cash is king.

 

The large order from Ryanair was good news in many ways and, along with the quarterly commentary from an array of firms involved in engines, aviation electronics and the airframers like Boeing, it provides fundamental support for the commercial aviation sector. We continue to see select opportunities here. 

1 June 2023
Gregory Turnbull Schwartz
Senior Analyst, Fixed Income
Share article
Share on linkedin
Share on email
Key topics
Related topics
Listen on Stitcher badge
Share article
Share on linkedin
Share on email
Key topics
Related topics

PDF

A boost for Boeing – what does it mean for bondholders?

Important information

The research and analysis included on this website has been produced by Columbia Threadneedle Investments for its own investment management activities, may have been acted upon prior to publication and is made available here incidentally. Any opinions expressed are made as at the date of publication but are subject to change without notice and should not be seen as investment advice. Information obtained from external sources is believed to be reliable but its accuracy or completeness cannot be guaranteed.

Related Insights

16 April 2024

Fixed Income Desk

In Credit - Weekly Snapshot

In Credit Weekly Snapshot – April 2024

Our fixed income team provide their weekly snapshot of market events.
Read time - 5 min
10 April 2024

Roman Gaiser

Head of High Yield, EMEA

High yield bonds: focus on maturity over duration

The CT (Lux) European Short-term High Yield Bond strategy focuses on maturity over duration to manage risk. This means lower interest rate sensitivity and less volatility growth.
Read time - 3 min
8 April 2024

Arabella Duckworth

Investment Grade Credit Research

Sector spotlight: Dialling up the positivity on telecoms

European telecoms have turned a corner operationally and are in the best financial health for many years, which has led us to upgrade the sector.
Read time - 3 min
17 April 2024

In search of sustainability – following Highway 101

Travelling down the US west coast we met 25 companies in five days. Learn more about the tech and healthcare businesses shaping our future.
Read time - 3 min
16 April 2024

Fixed Income Desk

In Credit - Weekly Snapshot

In Credit Weekly Snapshot – April 2024

Our fixed income team provide their weekly snapshot of market events.
Read time - 5 min
15 April 2024

Steven Bell

Chief Economist, EMEA

Is interest rate pessimism overdone?

The European Central Bank looks set to cut in June and there are reasons to believe the US and UK won’t be too far behind.
Watch time - 6 min
true
true

Important information

The research and analysis included on this website has been produced by Columbia Threadneedle Investments for its own investment management activities, may have been acted upon prior to publication and is made available here incidentally. Any opinions expressed are made as at the date of publication but are subject to change without notice and should not be seen as investment advice. Information obtained from external sources is believed to be reliable but its accuracy or completeness cannot be guaranteed.

You may also like

Investment approach

Teamwork defines us and is fundamental to our investment approach, which is structured to facilitate the generation, assessment and implementation of good, strong investment ideas for our portfolios.

Funds and Prices

Columbia Threadneedle Investments has a comprehensive range of investment funds catering for a broad range of objectives.

Investment Capabilities

We offer a broad range of actively managed investment strategies and solutions covering global, regional and domestic markets and asset classes.