(BRK.A), (BRK.B)
Berkshire Hathaway’s Precision Castparts will have reduced demand over the next decade for its aerospace parts that it supplies to the commercial airline industry, according to a new report issued by Boeing.
Precision Castparts manufactures parts for both Boeing and its rival Airbus, and in February the company laid off 150 Oregon workers as the production Boeing’s 737 MAX was halted. Boeing’s market projections show that its troubles are broader than just the issues it has faced with the 737 Max.
The 2020 Boeing Market Outlook projects that the commercial aviation and services markets will continue to face significant challenges due to the COVID-19 pandemic, while global defense and government services markets remain more stable.
Airlines globally have begun to recover from a greater than 90% decline in passenger traffic and revenue early this year, but a full recovery will take years, according to the Boeing outlook.
As it relates to Precision Castparts’ revenues, the 2020 Boeing Market Outlook projects an overall demand for 18,350 commercial airplanes in the next decade – 11% lower than Boeing’s 2019 forecast.
On the positive side, in the longer term, with key industry drivers expected to remain stable, the commercial fleet is forecasted to return to its growth trend, generating demand for more than 43,000 new airplanes in the 20-year forecast time period.
The BMO also projects a $2.6 trillion market opportunity for defense and space during the next decade. This spending projection reflects the ongoing importance of military aircraft, autonomous systems, satellites, spacecraft and other products to national and international defense. This demand continues to be global in nature with 40 percent of expenditures expected to originate outside of the United States.
In addition to the 2020 Boeing Market Outlook, Boeing also released its 2020 Commercial Market Outlook. Its Commercial Market Outlook is the longest-running jet forecast and is regarded as the most comprehensive analysis of the commercial aviation industry. The Commercial Market Outlook forecast projects:
• Over the next 20 years, passenger traffic growth is projected to increase by an average of 4% per year.
• The global commercial fleet is expected to reach 48,400 by 2039, up from 25,900 airplanes today. During this period, Asia will continue to expand its share of the world’s fleet, accounting for nearly 40% of the fleet compared to about 30% today.
• Single-aisle airplanes such as the 737 MAX will continue to be the largest market segment, with operators projected to need 32,270 new airplanes in the next 20 years. Single-aisle demand will recover sooner due to its key role in short-haul routes and domestic markets as well as passenger preference for point-to-point service.
• In the widebody market, Boeing forecasts demand for 7,480 new passenger airplanes by 2039. Widebody demand will be affected by a slower recovery in long-haul markets – typical after air-travel shocks – as well as uncertainties from COVID-19’s impact on international travel.
• Air cargo demand, a relative bright spot in 2020, is expected to grow 4% annually and generate further demand for 930 new widebody production freighters and 1,500 converted freighters over the forecast period.
In summary, the 43,110 projected airplane types projected by Boeing are:
Regional jets 90 and below 2,430
Single-aisle 90 and above 32,270
Widebody 7,480
Freighter widebody 930
Lastly, as it impacts Precision Castparts, the 11% projected decline in demand for commercial airplanes in the next decade does not take into account competition from China’s budding commercial aviation industry. While only in its infancy at this time, it is not clear what threat it will pose to established manufacturers Boeing and Airbus, and whether Chinese commercial planes will use parts manufactured by Precision Castparts, or instead use parts from domestic suppliers.
© 2020 David Mazor
Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.