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Jun 5, 2020

Boeing heads for US$35B weekly gain in airline rally's wake

Sector strength: Airlines, casinos and cruise lines

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Boeing Co. is heading for its best week in more than two months as surprise job gains and airline bookings signal that demand for air travel -- and jetliners -- is poised to recover from a historic plunge.

The U.S. planemaker’s status among investors has recently flipped to darling from market pariah, although analysts caution that Boeing still faces formidable challenges. Those range from a festering U.S. trade war with China, a soaring debt load and the long-grounded 737 Max jetliner, which the company is trying to return to service this year.

But with passengers tiptoeing back to airline flights, investors are discarding some of the gloom from earlier this year when the COVID-19 pandemic spurred airlines to park thousands of planes. American Airlines Group Inc. extended gains Friday after a record advance a day earlier spurred by an upbeat July flight schedule. And an unexpected gain in U.S. payrolls is also brightening the outlook.

“Demand has likely hit a bottom,” Jefferies analyst Sheila Kahyaoglu said in a report to clients. U.S. Transportation Security Administration data shows passengers have almost tripled from the low in mid-April, alhtough the daily totals are still down 87 per cent from a year ago, she said.

Boeing surged 13 per cent to US$207.94 at 3:04 p.m. in New York, bringing its weekly gain so far to 42 per cent -- the most on the Dow Jones Industrial Average. That lifted the manufacturer’s market value to US$117.4 billion, up US$35 billion on the week.

‘Long Recovery’

Kahyaoglu cautioned that “there is likely still a long recovery ahead.” A majority of 1,515 consumers surveyed by investment banks in China, the U.S. and U.K., said it would take at least six months before they’d feel comfortable flying again, she said.

Still, investors are no longer fleeing Boeing, Airbus SE and many of their suppliers the way they were when as air travel suffered its sharpest-ever contraction because of the pandemic. With the crisis seemingly easing for much of the globe, and the Max edging closer to gaining reauthorization from regulators, “investors see a good opportunity,” said Bloomberg Intelligence analyst George Ferguson.

Boeing’s 5.04 per cent bonds due 2027 have tightened more than 88 basis points this week, compared to an 18 basis-point contraction for the broader investment-grade index with a similar duration. The cost to protect the company’s debt against default for five years has also dropped more substantially than the high-grade index.

There’s still uncertainty over when the Max will resume flying -- and how long before it returns to a steady source of cash for Boeing. The company has appeared to be on the road to recovery several times -- only to backslide -- since the best-selling jet was grounded in March 2019 after two fatal crashes.

Boeing’s “stock price surge despite the Street’s tepid 25 per cent net buy rating likely reflects signs of air traffic recovery” and the company’s “liquidity-boosting debt raise,” Cai von Rumohr, analyst with Cowen, said in a report Friday.

But he cautioned that there’s “mixed” evidence that cash-strapped airlines will add hundreds of Max to their fleets by the end of next year, as Boeing executives predicted. And consensus cash-flow estimates for the company “look over-optimistic,” he said.