China Calling

This past week saw an announcement by China that it had formed a new entity to step into the duopoly arena of large airplane manufacturing, currently comprising Airbus and Boeing.

China Commercial Aircraft Company heralds the culmination of decades of patience and hope for one of the world’s fastest growing economies and with it, a symbol has been born for its desire to reach out across the globe and beyond. The intention to break down the high barriers to entry in this marketplace is echoed by the firm, but equally powerful words of the nations leader.

“We should rely on ourselves to build the large planes’ main technologies, materials and engines,” said Chinese Premier Wen Jiabao.

Aside from the Government holding a stake in the new company, China Aviation Industry Corporation (AVIC 1/2) will also have a considerable investment. Roughly 20bn yuan will be on tap to get the first Chinese 150-seat jet into the air by 2020.

Already AVIC is working toward certification of its ARJ21 regional jet. The intent to compete is not in question by any means.

Image courtesy of Financialpost.com

With oil prices continuing to defy gravity, the expected slowdown for industry orders may not be a bad thing for China’s ambitions. Airbus has a very healthy backlog for the A330, as does Boeing for its 777 - neither of these can be produced fast enough in the wake of the 787 Dreamliner being delayed for a third time.

It is widely expected that Boeing will consider ramping up production on the 777 given that its market appeal, residual value and low operational cost make it a far more attractive long term proposition than the 767 which some commentators have alluded to. The A330 is a victim of EADS’ inept management who only recently announced yet another production slip for the A380, much to the displeasure of some of its biggest customers. Put simply, the company doesn’t have enough resources to throw at the A330 to fulfil demand while the A320 provides a critical source of income while the A380 continues to bleed Airbus.

A plethora of airlines have collapsed in the wake of high fuel costs (and will continue to fail while costs rise), others are talking up mergers while no one seems to be brave enough to pull the plug on capacity. Given the inherent pressures Airbus and Boeing both face in getting their new next generation A350XWB and 787 Dreamliner into the air and in service, China is safe in the knowledge that home grown carriers like Air China and China Southern Airlines may well be amongst the first customers of China Commercial Aircraft Company’s new airplanes.

By far the biggest risk (or threat if you will) is squared directly at Airbus.

The European jet makers plan to set up a final assembly line in Tianjin for the ageing A320 means that the domestic Chinese carriers will switch to a newer narrowbody, produced on home turf that offers better value. At best, the A320 in China will be reverse-engineered - that said, Jiabao’s comment about developing technologies means that there is a good chance that the country could actually be ahead of Airbus in producing a composite narrowbody jet before 2020 and by no means should that prospect be ruled out.

China leads long-term growth in domestic air travel markets. Its capacity growth rate of 8.1 percent will combine with increased load factors to propel its airline traffic from just under a fifth the size of the North American domestic market today to over half the size of the North American market in 20 years’ time.

(Image and quote courtesy of Boeing/Current Market Outlook 2007).

At a frenzied pace, airport and infrastructure development throughout China means that the domestic demand alone will be a huge boost to any locally built airplane. Equally, the new company will have the manpower, resources and capacity to boost production rates far quicker than Airbus or Boeing could. Further, the new Chinese firm has less exposure to junk credit rated airlines meaning that it can push sales to those airlines who will have, by 2015, examined all options to retire older A320 and 737’s in favour of a composite-based airliner solution.

The possibilities are endless - all that China requires is an opportunity outside of Asia - if they can prime their first composite narrowbody airplane right, the world is their oyster.

1 comment May 15th, 2008