Boeing Could Still Benefit From the Covid-19 Disruption. Here’s How.

A huge swath of the global commercial aviation fleet is grounded because of the Covid-19 coronavirus . The aviation industry—airlines as well as Boeing and its aerospace suppliers —have been hammered by the outbreak. But there is one potential reason for optimism resulting from all the recent industry turmoil: Much of the grounded fleet isn’t coming back.

“With the latest data showing that airlines have grounded more than 8,500 planes…we think it is likely that a large number of old planes do not return to passenger service,” Vertical Research Partners analyst Rob Stallard said in a Monday research report. “In previous downturns we have seen a spike in old aircraft retirements, and after a period of unusually low retirements in 2018-19, this could occur again.”

About one-third of the global commercial jet fleet is parked. It is an incredible number. It is hard to predict, of course, what will happen when air travel returns to some normalcy. An aircraft’s useful life “varies wildly by all of the usual variables,” Teal Group aerospace consultant Richard Aboulafia said in an interview. The variables include, among other things, fuel prices and interest rates.

Fuel prices are a big part of a plane’s operating costs. When fuel is cheap, the absolute dollar savings from more-efficient, new engine technology is lower. That can reduce pressure on airlines to upgrade aircraft fleets.

Stallard, for his part, thinks air travel will fall 40% in 2020, recover some in 2021 and 2022 and then resume the 5% growth it has averaged for about a generation. Under this scenario, it would take roughly seven years get back to 2019 traffic levels. It is looking like a lost decade for commercial aerospace.

Accelerated aircraft retirement would help the demand situation for Boeing (ticker: BA) and suppliers, but it can’t fix everything. “Having put the lower [capacity] growth numbers and increased retirement rate through our [plane] supply/demand model, we come up with a requirement for about 6,300 new aircraft over the next 5 years,” Stallard said. “This compares with our previous forecast of about 8,300 aircraft.”

That is down about 25% and is a big cut to demand. Now the question, as always, for investors is what is in the stocks?

U.S. airline shares are down about 53% on average. At their nadir, sector stocks were down more than 60% on average.

Aerospace suppliers Barron’s tracks are down about 46% year to date, worse than the comparable drops of the S&P 500 and Dow Jones Industrial Average. At their nadir, supplier stocks were down more than 53% on average.

And Boeing shares started the year at more than $320, then hit roughly $90 before rebounding to $152 a share. Shares are still off more than % year to date.

“We are now in the zone of trough on trough,” Stallard said. He is saying aerospace-related shares are trading for below-average valuation multiples on deeply discounted earnings. That is a recipe for opportunity.

There is a risk that earnings-estimate cuts spook investors when first-quarter numbers are reported. But investors should know that cuts are coming, given all that has happened because of the virus. “Hopefully we’ll get some more clarity on that issue in coming weeks and months.”

Everyone would like more clarity.

Stallard is still cautious on Boeing shares, rating them Hold with a $124 price target. He prefers companies with more defense exposure, including General Dynamics (GD), Lockheed Martin (LMT) and Northrop Grumman (NOC).

Boeing and its European peer Airbus (AIR.France) publish long-term demand forecasts. Boeing’s peer sees a global need for more than 39,000 new jets over the next 20 years.

The global fleet is about 22,000 jets and would rise to about 45,000 jets, over the forecast period. The difference between the 23,000 fleet increase and the 39,000 deliveries is plane retirements.

Boeing is more bullish than Airbus, expecting about 44,000 deliveries over a similar span.

Boeing stock remains volatile. After rising roughly 100% from intraday lows last week, shares closed down 6% Monday at $152.28.