Boeing (BA) Takes Off On Reports That China Southern Airlines Conducted Test Flights With A 737 MAX

2:33 pm Thursday, June 16th, 2022

Shares of Boeing (BA) are ascending today after reports show that China Southern Airlines (ZNH) performed test flights using BA’s 737 MAX jet for the first time since March. BA suffered a setback in China after a fatal crash by an earlier-generation 737 from ZNH in March. As such, today’s reports signal that the plane could be returning to China shortly.

The timing would work out nicely for BA, as its 737 comeback would coincide with a rebound in travel as COVID restrictions begin to ease.

Lockdowns, as well as the looming threat of lockdowns in other parts of the region, persist as China’s zero-COVID strategy is still ongoing. However, some companies like Estee Lauder (EL), which commands a sizeable presence in the travel retail industry, are optimistic that travel is beginning to return to the region. BA also noted in late April that it is hopeful that China will continue expanding its fleet once it comes out of current COVID restrictions.

Also, global travel data provider OAG noted that global airline capacity in June is expected to hit just over 423 mln, only 14.2% below June 2019 levels. The data provider attributed the uptick primarily to increasing capacity in China.

It is also worth noting that China reported better-than-expected retail sales and industrial production numbers today for the month of May, another sign that economic activity is picking up steam. A general uptick in economic activity bodes well for the travel industry.

With China representing a significant component of BA’s commercial airplanes backlog, further delivery delays would have a material impact on the company’s financials. During BA’s Q1 earnings call, CFO Brian West noted that the company’s performance is tied to several critical items, a return to delivery for the 787 and 737 MAX in China being one of them.

Therefore, today’s reports are being followed by meaningful investor enthusiasm. Still, as rival Airbus SE (EADSY) noted in early May, domestic air travel in China has “deteriorated sharply,” hovering around 20-30% of pre-COVID levels. Airbus also commented that the COVID restrictions were negatively impacting the short-term ability of China airlines to take delivery, which was extending into Q3. As such, it is important to temper enthusiasm for BA to be able to take advantage of a speedy recovery in China.