Air China announced yesterday (Wednesday) that it will buy 45 The Boeing Company (BA) jets to help cover increased domestic demand at a time when many Western airlines are struggling to overcome high fuel prices and declining traffic.

Air China will buy 15 Boeing 777s and 30 Boeing 737s at a cost of $6.3 billion, the company said on its website. The purchase will increase Air China’s fleet by 35%, as the company competes with other Chinese carries for a dominant share of a market that is expected to grow 9% annually over the next several years, The Associated Press reported.

Whereas commercial airlines in developed markets have been struggling, with some even collapsing under the weight of high fuel costs and sluggish demand, airplane manufacturers have been buoyed by strong demand in emerging markets such as the Middle East and China. 

In fact, a report released earlier this month predicted $3.2 trillion in aircraft sales over the next 20 years, as air travel picks up despite current price pressures.

Boeing’s annual Current Market Outlook estimates that passenger travel will grow at a 5% rate, and cargo will grow at a 5.8% rate over the next several years. Despite record fuel costs, air travel and shipping have become an integral part of daily life for many consumers and businesses. Boeing says that demand will only grow.

"During 40 years of producing the Current Market Outlook, we have learned that the resilience of air transport growth comes from its intrinsic importance to the livelihood of people around the world," the report read.

Over one-third of the projected $3.2 trillion market is set to come from the Asia-Pacific region, which is expected to have $1.19 trillion in future airplane deliveries, according to Boeing data. North America and Europe are both projected to have $740 billion, while the Middle East region clocks in at $260 billion. Latin American demand is forecast at $140 billion.

In order to meet the upsurge in demand, Boeing estimates that planemakers will deliver 29,400 planes during the period, up from the 28,600 predicted last year.

Boeing Profits Soar on Emerging Market Growth

The news of Air China’s purchase came one day after Boeing announced Sheik Ahmed bin Saeed Al-Maktoum of Dubai would pay $3.78 billion for 54 Boeing 737-800 series jets.  The sheik announced he plans to use the planes to start his own low-fare airline, FlyDubai, itself an indication of demand for air travel in emerging markets.

As a member of the United Arab Emirates, Dubai is part of one of the world’s fastest growing regions. That means it is flush with petrodollars and geographically speaking at the center of the developing world.

"They have a geographic advantage that no one else has," Diogenis Papiomytis, a commercial-aviation consultant with Frost & Sullivan, told MarketWatch.com. "Within 8,000 miles, they can reach something like 80% of the world."

In addition to the upstart FlyDubai, the Middle East nation also is home to Emirates Airlines, currently the world’s fastest-growing carrier.

With 180 jetliners, worth an estimated $58 billion, on order, Emirates has become an industry heavyweight – especially when other top carriers are cutting their fleets. Last year, its profits soared 54%, reaching $1.45 billion. Sales jumped 32% as the airline carried more than 21 million passengers – an increase of 21% from the year before.

However, Emirates isn’t the only company profiting from the surge in air traffic. Boeing is reaping huge rewards as a supplier to emerging markets even as demand slackens in the United States and Europe, which have traditionally been the company’s lifeline.

Boeing’s first-quarter profit soared 38%, easily eclipsing Wall Street expectations, despite hang-ups with its 787 Dreamliner. Profit from continuing operations rose to $1.21 billion, or $1.61 a share, from $873 million, or $1.12, a year earlier, the Chicago-based Boeing reported. Sales advanced 4.1% to reach $16 billion.

Profit for 2009 will be $6.80 to $7 a share on sales of as much as $73 billion, Boeing said in its first forecast for 2009. That projection also exceeded expectations.

The company’s defense business is sound, and it just won a favorable ruling from the U.S. General Accountability Office on a protest it lodged over the loss of a U.S. Air Force aerial tanker deal worth an initial $35 billion – and with a potential ultimate value of $100 billion.

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The Boeing Co. (BA) got some hard won good news yesterday (Wednesday) when Secretary of Defense Robert Gates announced the U.S. Air Force would reopen bidding on a disputed $35 billion contract based on findings of the Government Accountability Office.

"I’ve concluded the contract cannot be awarded at present" because of flaws found by the Government Accountability Office, Gates said at a press conference at the Pentagon yesterday, Bloomberg News reported. The new bidding process will reexamine eight of Boeing’s complaints that were upheld by the GAO, out of more than 100 concerns it had initially raised, by seeking "revised proposals from the industry," he said.

Last month, the Government Accountability Office backed a petition brought by Boeing that the U.S. Air Force altered the auction for a $35 billion aerial-tanker contract – a bid that went to a joint-venture of rivals Northrop Grumman Corp. (NOC) and Europe’s EADS NV (PINK: EADSY), and in turn, helped push Boeing’s stock down more than 11% at the time.

Boeing filed the complaint in early March, claiming that the Air Force misled the company and modified its specifications to accommodate models made by Northrop and Airbus S.A.S.

The GAO found that there were discrepancies in the bidding process and recommended the Air Force re-conduct the bidding. However, GAO rulings are only advisory in nature, and the Air Force did not have to comply.

The Air Force was given 60 days to respond to the GAO’s ruling, and the speedy decision is seen as a good sign for Boeing.

With an initial contract value of $35 billion that could easily grow to $100 billion or more over time, both sides have fiercely contested the bidding process.

"EADs feels very raw over this," Alexandra Ashbourne, who heads Ashbourne Strategic Consulting in London, an aerospace analysis firm, told The New York Times. "There was a lot of effort expended for no return. You cannot underestimate how raw and burnt they feel as a result of all this."

But its partner, Northrop Grumman, remains confident of eventual success, despite the delays.

Northrop Grumman is "reviewing the decision to ensure the re-competition will provide both companies a fair opportunity," company spokesman Randy Belote said in a statement, Bloomberg News reported.

"The United States Air Force has already picked the best tanker, and we are confident that it will do so again," Belote added.

[Editors Note: To read a related story on Boeing's recent prediction that aircraft sales will exceed $3.2 trillion over the next 20 years, click here.]

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• The New York Times:
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• Money Morning:
  Boeing’s Air Force Petition Sustained, Back in Running for $35 Billion Contract

• Money Morning:
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The Boeing Co. (BA), one of Money Morning’s “Global Titans,” yesterday (Wednesday) released a report that predicted $3.2 trillion in aircraft sales over the next 20 years, as air travel picks up despite current price pressures.

“During 40 years of producing the Current Market Outlook, we have learned that the resilience of air transport growth comes from its intrinsic importance to the livelihood of people around the world,” the report from Boeing reads.

Boeing’s annual Current Market Outlook estimates that passenger travel will grow at a 5% rate, and cargo will grow at a 5.8% over the next several years. Despite record fuel costs, air travel and shipping has become an integral part of daily life for many consumers and businesses. Boeing says that demand will only grow.

A lot of that growth is expected to come from the BRIC nations.

“Long-term, you have to assume that the emerging countries of Brazil, China, India and Russia are going to continue to grow as a larger percentage of the world’s fleet, and they’re growing at a faster rate,” Peter Arment, Greenwich, Connecticut- based analyst with American Technology Research, told Bloomberg News.

Over one-third of the projected $3.2 trillion market is set to come from the Asia-Pacific region, which is expected to have $1.19 trillion in future airplane deliveries, according to Boeing data. North America and Europe are both projected to have $740 billion, while the Middle East region clocks in at $260 billion. Latin American demand is forecast at $140 billion.

In order to meet the upsurge in demand, Boeing estimates that planemakers will deliver 29,400 planes during the period, up from the 28,600 predicted last year.

The effects of the high cost of jet fuel was made apparent in Boeing’s upward revision to 43% from 38% for replacement aircraft as older, less fuel-efficient planes are retired in the face of soaring oil prices.

“We assume that fuel over the near term will continue to be high and volatile and then at some point in the future supply and demand should align and fuel will be priced more at the marginal rate of production,” Boeing Commercial Airplanes Vice President, Marketing Randy Tinseth said at a London press conference.

European rival Airbus SAS, a subsidiary of European Aeronautic, Defence & Space Co. (PINK: EADSY), released its own forecast in February, which was slightly lower than Boeing’s. Airbus expects airlines to buy 24,300 planes worth $2.8 trillion during the next 20 years, Bloomberg reported.

News and Related Story Links:

• Bloomberg News:
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• The Boeing Co. Website:
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The Government Accountability Office backed The Boeing Co.’s (BA) petition that the U.S. Air Force altered the auction for a $35 billion aerial-tanker contract – a bid that went to rivals Northrop Grumman Corp. (NOC), and in turn, helped push Boeing’s stock down more than 11%.

Boeing filed the complaint in early March, claiming that the Air Force misled the company and modified its specifications to accommodate models made by Northrop and Airbus S.A.S.

The GAO agreed.

“The Air Force conducted misleading and unequal discussions with Boeing by informing Boeing that it had fully satisfied a key performance parameter objective relating to operational utility, but later determined that Boeing had only partially met this objective,” according to the GAO, as reported by MarketWatch.

Story continues below…

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The ruling is critical because the contract in question could be decades-long and grow to $100 billion in value. Obviously, Boeing is thrilled with the GAO’s decision.

“We welcome and support today’s ruling by the GAO fully supporting the grounds of our protest,” Mark McGraw, vice president of Boeing’s Tanker Programs, said in a statement. “We appreciate the professionalism and diligence the GAO showed in its review of the KC-X acquisition process. We look forward to working with the Air Force on next steps in this critical procurement for our warfighters.”

As for what’s next, that answer lies somewhere between nothing and everything because GAO rulings are only advisory. The Air Force isn’t required to follow the recommendation to change its flight plan. But if it chooses not to, it would have to explain to Congress why, Bloomberg reported.

The Air Force has 60 days to respond to the GAO’s ruling, and even if accepted, Boeing is far from being a shoe-in for the contract.

“To be successful in any potential re-competition, Boeing must demonstrate that it is either technically superior at a reasonable cost/price-premium, or that it is significantly lowest-evaluated-cost,” Jim McAleese of McAleese & Associates, a government contracting and national-security law firm unaffiliated with the protest, told Bloomberg.

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The Boeing Co. (BA) has filed a formal protest with the Government Accountability Office hoping to overturn a $35 billion contract awarded to its rivals by the U.S. Air Force, which Boeing is accusing of modifying its specifications to accommodate a larger plane.

"This competition was seriously flawed and resulted in the selection of the wrong airplane," Mark McGraw, head of Boeing’s tanker program, said in a statement. "We were deliberate in this process and we think we were not treated fairly."

Boeing executives said Tuesday, that they were misled into believing the Air Force wanted a medium-size tanker and the larger plane, co-constructed by Northrop Grunman Corp. (NOC) and Airbus S.A.S., benefited from changes to the evaluation criteria. 

This is just the first step in what will likely devolve into a protracted legal battle. The contract win by Northrop and Airbus, a subsidiary of European Aeronautic Defense & Space Co., also rouses pro-American labor sentiments – particularly from unions and lawmakers in states where Boeing has big payrolls.

Sen. Patty Murray (D-Wash.) has already scolded Air Force officials for their decision, saying that after telling Boeing it wanted to buy a "pickup truck," the Air Force bought a "semi-truck" from Airbus.

Most analysts agree the Air Force changed its criteria for the tanker, but the question lingers as to whether it did so fairly.

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"It appears, over time, Northrop Grunman was able to change the Air Force’s mind about what it wanted," Loren Thompson, a military analyst at the Lexington Institute, told the International Herald Tribune.

Thompson said that early in the competition the Air Force was only interested in a tanker, but it warmed up to the idea of a more versatile plane that could transport cargo and personnel as well. The plane that won the bid is based on the Airbus A-330 passenger jet, which is substantially larger than the Boeing 767, the basis for that company’s losing proposal.

In its defense, the Air Force said it "followed a carefully structured process, designed to provide transparency, maintain integrity and promote fair competition."

The contract in question could be in effect for decades to come and grow to $100 billion in value, making it worth fighting over.

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U.S. aerospace giant Boeing Co. (BA) said that it’s "actively pursuing" the sale of the advanced F/A-18 Super Hornet attack aircraft to India, hoping to strengthen business relations with a country that’s planning to spend $30 billion on defense wares over the next five years.

"We are actively pursuing the sale of F-18 Super Hornets," Boeing Senior Vice President Rick Stephens said at the Federation of Indian Chambers of Commerce and Industry-U.S. Indian Business Council summit in Chicago late this week.

The Super Hornets are competing with the Lockheed Martin (LMT) F-16 Fighting Falcon, the Eurofighter Typhoon, the Russian MiG-35 and the French Dassault Rafale jet fighters to fill the Indian Air Force requirement for 126 medium-range multi-role combat aircraft.

The Super Hornet, a supersonic, carrer-based jet fighter-bomber, is a larger and more advanced derivative of the F/A-18C/D Hornet, and entered service in 1999 with the U.S. Navy. It’s a larger, modernized, more-powerful version of the F/A-18 Hornet jet fighter.

It military parlance, the "F" prefix stands for "Fighter," while the "A" prefix stands for "Attack." The Super Hornet is one of the few modern jet aircraft designed to fill both roles.

The Hornet is an all-weather carrier designed to attack both ground and aerial targets. Designed in the 1970s for U.S. Navy and U.S. Marine Corps, the Hornet has since been adopted by the air forces of several other nations around the world.

And since 1986, the Hornet is the aircraft used by the U.S. Navy Blue Angels flight-demonstration team.

Stephens said Boeing was also quite keen to sell its P-8 Poseidon sub-hunter aircraft, CH-47 Chinook and Boeing AH-64 Apache helicopters, and C-17 Globemaster III heavy-lifting transport jet to India.

India has jumped to the forefront as a country of key strategic importance to Boeing – and not just because of the potential sales.

"We want to see India become a critical link in our global supply chain," Stephens told journalists at the summit.

Here’s an example: Boeing, in partnership with Air India, would build a $75 million Alteon pilot training center in India. Alteon, a wholly owned subsidiary of Boeing, supports airline training needs by offering flight and maintenance training in the 100-plus seat aircraft category.

Boeing entered into an agreement last month with Indian conglomerate Tata Group to build floor beams for the airliner-maker’s new 787 Dreamliner using new technology that utilizes both advanced titanium and composite materials. These advancements would help reduce the weight of the airplane.

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• Wikipedia:
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• Wikipedia:
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• Web Site:
  Indian Air Force.

Boeing Co. (BA), the world’s second-largest maker of commercial jetliners, announced a fourth-quarter profit gain of 4% that eclipsed Wall Street estimates – despite ongoing problems with its next-generation airliner, the 787 Dreamliner.

Boeing shares jumped $1.88 each, or 2.32%, to close at $82.84 yesterday (Wednesday). The stock remains 23% below its 52-week trading high of $107.83, reached last fall. Boeing’s stock is now trading at about 12% above its 52-week low of  $74.12 per share.

The Chicago-based Boeing said net income for the final three months of last year was $1.03 billion, or $1.36 a share, up from net income of $989 million, or $1.29 per share, for the fourth quarter of 2006. The per-share earnings for the just-completed quarter represented an increase of 5%, and were 4 cents a share better than the Wall Street consensus, according to a survey of analysts conducted by Thomson Financial.

Boeing net income of $1.03 billion was 4% better than last year.

Revenue was $17.5 billion, flat with a year earlier but still slightly ahead of Wall Street’s forecast of  $17.3 billion.

"It was a strong quarter," JSA Research analyst Paul Nisbet told The Associated Press. "They’ve been just knocking the cover off the ball as far as orders, with 520 for the quarter, and with a [companywide] backlog of $327 billion. Those are just unheard-of numbers."

The company increased its earnings guidance for this year to a range of $5.70 to $5.85 a share. That’s up from an earlier range of $5.55 to $5.75, but still was short of the Wall Street consensus estimate of $5.95.

Boeing is looking for other ways to enhance shareholder value, too: The company spent $890 million for some 9.4 million shares in the fourth quarter as part of its expanded share buyback plan.

Because of Dreamliner delays, Boeing also lowered its estimate of 2008 revenue by $500 million, dropping it to a range of $67 billion to $68 billion.

Fixing the Dreamliner

Boeing said it continues to address assembly problems with the initial 787s and slightly reduced its estimate for both 2008 revenue and deliveries because of the previously announced production glitches. However, the aerospace firm said it remains on the revised schedule for the new airliner that it announced earlier this month.

The Dreamliner’s delivery date has now been pushed back three times; the innovative jet won’t enter service until next year. Boeing declined to assess the potential impact of this new schedule on its financial results for 2009 until April.

The company characterized the outlook for its military contracting business and commercial airplane programs next year as "very strong," with robust profit growth expected.

Boeing Chief Executive Officer W. James "Jim" McNerney Jr. said that – despite the delays in the Dreamliner – the innovative technology and basic design remains sound. He declined to discuss specific timeframes for the development program.

"We believe in both the business case and the technology of the 787," he told reporters during a conference call. "And we look forward to getting the airplane in the hands of our customers as soon as possible."

Despite soaring energy costs and worries of a U.S. recession that could trim orders from airlines based in America, McNerney was upbeat about Boeing’s near-term outlook, underscoring that U.S. carriers account for only 11% of the company’s order backlog.

"Notwithstanding some recent events and market volatility, we continue to forecast an extended commercial aerospace cycle driven by strong economic growth and solid traffic demand in much of the world," McNerney said. "Even if we encounter a more significant economic downturn in the future, I believe the industry is better positioned than in past cycles and Boeing is even better positioned within the industry to weather any storms."

To understand Boeing’s long-term strength, a look at its order backlog is a must. Boeing’s stated backlog is $327 billion, an amount roughly equal to five times its revenue for 2007.

When Europe’s Airbus SAS picked off nearly $50 billion worth of airliner orders from Middle East air carriers at the opening of the Dubai Aerospace Air Show this past November, analysts portrayed it as a huge victory over U.S. rival Boeing Co.

Once again, the gloom-and-doomers got it wrong.

Don’t misunderstand: A series of orders worth nearly $50 billion at "list prices" [before the inevitable discounts] is a weekend’s work well done, especially when those orders come from some of that region’s leading airlines. But anyone who portrayed this as some sort of decisive victory for Airbus – and a devastating loss for Boeing – has missed the big picture.

The reason: They forgot to factor in China.

The China Flight Connection

According to a Money Morning research report, China alone will require 3,400 new airplanes worth about $340 billion over the next 20 years, Boeing projected in its recently updated annual forecast for the commercial airplane market. And that doesn’t even factor in other white-hot Asian markets – such as Vietnam – which will also need to outfit their air fleets as their economies make the leap from "emerging" to mainstream.

Indeed, over the next 20 years, Boeing is forecasting that air carriers worldwide will need to acquire 28,600 commercial aircraft with a value of $2.8 trillion. The Boeing forecast is generally viewed as the world’s best analysis of the global market for commercial airliners and cargo aircraft.

Underscoring this potential: Boeing recently inked a billion-dollar-deal with Vietnam.

The huge revenue potential of the global airliner market – combined with the low number of viable competitors and the high barriers faced by new potential entrants – is a big reason that Money Morning‘s investment gurus all view Boeing as a promising global investment for years to come.

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The Boeing Company (BA) announced further delays in the production of its 787 Dreamliner yesterday (Wednesday), but there still may be ample opportunity to bury its competition, notably Airbus SAS.

The Dreamliner is Boeing’s most successful new airplane program in terms of sales. It ranked second in commercial orders last year, behind the 737 narrow-body model.

Made almost entirely out of plastic, the plane will use 20% less fuel than today’s similar mid-sized airplanes. It will also travel at speeds equal to the fastest wide-body aircraft and provide airlines with more cargo and revenue capacity according to the company’s web site.

So far, Boeing has landed 817 orders for the model, valued at more than $120 billion.  Unfortunately, production has suffered repeated setbacks. The 787’s first test flight, originally expected to take place in August 2007, has been moved all the back to June 2008.

In September, Boeing assured its customers and shareholders that delays would not affect scheduled deliveries. Boeing reneged on its promise a month later, saying deliveries would be delayed six months. But yesterday, Boeing pushed delivery dates back even further, from December 2008 to early 2009.

“We are deeply disappointed by what this delay means for our customers, and we are committed to working closely with them as we assess the impact on our delivery schedules,” Scott Carson, chief executive of Boeing’s commercial aircraft business, said in a statement.

Boeing shareholders have been disappointed as well, as the stock dropped more than 5% Tuesday, as investors anticipated the announcement.

The company is on the hook for the delivery of 109 Dreamliners in 2009. Continued production delays could smother the expansion plans of major airlines counting on the planes’ delivery and cost Boeing millions of dollars in penalty payments.

“Investors are likely to require clear signs that this is the last of the delays, which will take months to prove out,” Morgan Stanley (MS) analyst Heidi Wood wrote in a research note. “A delay of first flight to June adds to the cost of up-tick in customer penalty payments.”

Meanwhile, Airbus, which suffered setbacks from production and design delays associated with its A380 superjumbo jet and A350 widebody, is regrouping to again challenge the world’s largest airplane manufacturer. And instead of taking advantage of Airbus’ tarnished reputation when it had the chance, Boeing flew nose-first into delays of its own, leaving its competitor an opportunity to fight its way back.

Airbus actually topped Boeing in 2007 deliveries, and it narrowed the disparity between orders as well. Chief Executive Officer Tom Enders announced yesterday that Airbus sold 453 aircraft in 2007, 19 more than the year before and 12 more than Boeing. However, net orders totaled 1,341, short of Boeing’s 1,413.

Regardless of this success however, it may not be too late for Boeing to exploit potential weaknesses within Airbus. While orders for the company are up 80%, Airbus says it will likely post a loss for 2007, resulting from production delays and a weak dollar. [Industry purchases are denominated in dollars, which means the Toulouse, France-based Airbus is hurt by the exchange rate.]

Airbus has already put into action a plan to cut $3 billion from its annual costs by 2010 to improve its bottom line. The company will cut jobs and consider the sale of six manufacturing plants, Bloomberg News reported.

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