Boeing Focuses on Aviation Biofuel

The Boeing Company ( BA - Analyst Report ) , along with Airbus and Embraer S.A. ( ERJ - Analyst Report ) , signed a memorandum of understanding to work together on the development of drop-in, affordable aviation biofuels. The three leading airframe manufacturers agreed to seek collaborative opportunities to speak in unity to government, biofuel producers and other key stakeholders to support, promote and accelerate the availability of sustainable new jet fuel sources.

The three companies are of the consensus that the biggest threats to the aviation industry are the price of oil and the impact of commercial air travel on environment. By working with Airbus and Embraer on sustainable biofuels, Boeing hopes to accelerate the availability of aviation biofuel.

The collaboration agreement supports the industry's multi-pronged approach to continuously reduce the industry's carbon emissions. Boeing hopes the partnership would help to meet the European Union target of 4% of biofuel for aviation by 2020.

All three companies are affiliate members of the Sustainable Aviation Fuel Users Group, which includes 23 leading airlines responsible for approximately 25% of annual aviation fuel use. Boeing and Embraer are already collaborating on how to establish a sustainable aviation biofuels industry in Brazil and exploring new technology pathways to broaden biofuel sourcing and availability. Boeing and Airbus are also active around the globe in helping to establish regional supply chains, while the three manufacturers have all supported numerous biofuel flights since global fuel standards bodies granted their approval for commercial use in 2011.

Boeing’s focus on its commercial airplanes business comes when its defense business is shadowed by a volatile defense budget affected by the turbulent Eurozone and rising possibility of U.S Defense cutback which will impact the orders and eventually slow down the growth trajectory of the company.

The positive catalyst for the company is its strong presence in the international commercial airline markets, which will allow it to capitalize on the expected growth in the commercial space. Boeing also caters to international customers and allies with international partners to increase efficiency through exchange of technology. Apart from that, its strong balance sheet and consistent cash flows provide it with necessary financial support to increase shareholders’ value and make strategic acquisitions.

The headwinds for the company in commercial aerospace in 2012 will be the rising cost of fuel and a weak financial outlook in Europe, which will likely make the market turbulent in 2012. Concurring with this view, International Air Transport Association (IATA) said, the profitability of the commercial airline operator will take a dip in 2012 compared to the last two years. The downcast is mainly due to rising oil prices. IATA expects airlines to turn a global profit of $3.0 billion in 2012 for a 0.5% margin. This $500 million downgrade from its December 2011 forecast is primarily because of a rise in the expected average price of oil to $115 per barrel, up from the previously expected $99.

Boeing generates 60% of its defense revenue from fixed price contracts. These contracts always have a risk of margin erosion or run into losses due to escalation in costs. Apart from that rising competition and delay in development and delivery of commercial airplane also impact the future prospects of the company. Boeing delivered its first 787 series airplane after a delay of more than three years, which resulted in a few cancellations of orders.

Chicago-based Boeing Co. has a Zacks #3 Rank, which translates into a short-term Hold rating. Taking into consideration the present scenario we decided to maintain a Neutral stance over the longer run on the company, until we find more positive catalysts driving the results.