Hutong Cat | In China, an aviation deal sends multiple messages
Bigger aircraft deals have been struck in the history of civil aviation but here's why there’s been a sharp focus on this one — of China's $37 billion agreement to buy nearly 300 passenger jets from Europe’s Airbus
It’s news when a government pays billions to buy commercial jets from one of the two companies controlling what we fly in. Or how. And when China, the world’s second largest civil aviation market after the US, firmed up a $37 billion agreement to buy nearly 300 passenger jets from Europe’s Airbus, it was no exception.
The C919 is expected to get an airworthiness license from the Civil Aviation Administration of China (CAAC) this year and begin commercial operation next year. (Reuters)
Bigger aircraft deals have been struck in the history of civil aviation but there are number of reasons why there’s been a sharp focus on this one: The other giant in the sky, US’s Boeing, losing out (and making no effort to hide its disappointment), the political factors in the backdrop of sour China-US ties including the ongoing trade and tariff war, the debilitating Covid-19 pandemic with aviation watchers saying that this deal is a sign of a sectoral turnaround, and, generally, for the amount of money involved given that the economies of some countries are sinking for want of much less.
On July 1, China’s “Big Three” state-owned airlines along with Shenzhen Airlines said they will buy a total of 292 Airbus aircraft — the biggest order by Chinese carriers in recent years, and a windfall for Airbus and an example of pragmatic cooperation between China and Europe despite sharp differences on several issues.
The country’s national carrier, Air China, and China Southern Airlines announced they would each buy 96 A320 neo-family jets worth $12.2 billion; China Eastern Airlines simultaneously said it would buy 100 jets of the same type, worth $12.8 billion. (Air China is the parent company of Shenzhen Airlines).
It was the culmination of a framework agreement first signed in March, 2019, between Airbus and the China Aviation Supplies Holding Company (CASHC) in the presence of visiting Chinese President Xi Jinping and his French counterpart Emmanuel Macron in Paris.
A recovery in civil aviation
The timing of the latest announcement was interesting: Beijing recently revised Covid-19 quarantine protocols for passengers entering China, shortening the number of days in isolation, and has said that flights on a number of international air routes will soon be resumed.
It was also time for Chinese airlines to replenish their fleet with new passenger aircraft.
If the two are put together, it indicates that Beijing is preparing for the post-pandemic era recovery and resurgence of the civil aviation sector.
It was a also good time to seal the deal because the Chinese companies would have driven a hard bargain for “pandemic-era prices”.
“Indeed, airlines in China were always planning for growth post-pandemic and as noted above this commitment provides a pipeline for both growth and also replacement of existing A320 family aircraft,” Rob Morris, global head of consultancy at UK-based Ascend by Cirium, which tracks the aviation sector and collates related data, said.
Experts in China believe that the global aviation market is on the fast path to recovery.
In the US, Europe and Australia, the recovery of the sector has been rapid while in China it is happening comparatively gradually because of Covid-related containment protocols.
While global air passenger traffic in 2021 was about 25% of that in 2019, it increased by 42% in the first quarter of 2022.
In the first half of 2022, while passenger traffic growth was gradual in China, the number of domestic daily flights increased from 1000 in April to 10,000 in July.
The geopolitics behind the decision
In terms of geopolitical factors, the reasons why the deal was scrutinised minutely are clear.
“Obviously, from 2017, the US government has introduced several restrictive policies against Chinese enterprises, which have brought great non-economic risks to both Chinese airlines and American aircraft manufacturers,” Li Xiaojin, a professor of aviation economics at Civil Aviation University of China (CAUC) in Tianjin, said.
Li added that in order to avoid risks related to disturbed ties – and despite economic links — it was necessary for Chinese airlines to purchase aircraft from the European company.
The response from Boeing was sullen.
A spokesperson for Boeing told Bloomberg: “It is disappointing that geopolitical differences continued to constrain US aircraft exports.”
“In fact, Airbus has been outselling Boeing in recent years, and its advantage has been growing, thanks to US government policies that restrict trade with many foreign countries, including China,” Li added.
Beijing’s dependence
The China-Airbus deal was also analysed in the backdrop of China’s own foray into manufacturing passenger jets domestically. Beijing, as it turns out, will have to depend on foreign aircraft manufacturers for the foreseeable future.
China’s aviation market is large and requires different types of commercial aircraft, and the requirements are growing.
A report by COMAC or Commercial Aircraft Corporation of China, the country’s domestic aircraft manufacturer, forecasts where the country’s civil aviation sector is expected to be in two decades.
Over the next 20 years, China's aviation market will receive 9,084 passenger aircraft with more than 50 seats, with a value of about $1.4 trillion (based on the list price of the aircraft in 2020), the 2021 COMAC report said.
“Among which, 953 turbofan regional jets with more than 50 seats, 6,295 single-aisle jets with more than 120 seats, and 1,836 dual-aisle jets with more than 250 seats will be received.”
“By 2040, the number of aircraft in Chinese aircraft fleets will increase to 9,957 aircraft, and its share in global aircraft fleets will increase to 22%, becoming the largest single aviation market in the world,” the report added.
A 2021 report by Boeing forecasts that China's airlines will require 8,700 new airplanes by 2040, valued at $1.47 trillion, to meet expanding commercial air travel demand.
So the demand for new aircraft will be high and it will not be possible to satiate it locally.
“The same-class commercial aircraft produced by COMAC, the C919, will not be enough,” Li said.
The C919 is expected to get an airworthiness license from the Civil Aviation Administration of China (CAAC) this year and begin commercial operation next year.
However, the production capacity of C919 will be low for a long time after it is put into operation; it will take time to build production lines and expand production capacity.
Taking the domestically built regional aircraft ARJ21 as an example, it was put into commercial operation in 2016, and, according to the paper.cn, the annual deliveries so far have been: 1 in 2016, 2 in 2017, 6 in 2018, 12 in 2019 and 22 in 2020.
The current production capacity of ARJ21 has reached the level of 50 aircraft per year, an improvement no doubt compared to the initial stage of operation.
Production of the C919 is expected to ramp up at a similar rate to 150 a year after it goes into operation, but that may not happen until around 2030. At the same time, the fleet replacement needs of the three major domestic airlines – and that of many other domestic airlines companies – will keep rising in the years ahead.
Morris from Cirium agreed.
“The C919 remains in development but is already several years late based upon its original certification timetable. Even once the aircraft is certificated and delivered into service, it is likely that the performance and economics of the aircraft will not match those of the A320 (and Boeing’s Max) and there will also be questions around unproven customer support,” Morris said.
It is this combination of a message about the larger state of aviation sector in the wake of the pandemic, the geopolitics driving the decision, and the medium-term dependence that China will continue to have that explains why the Airbus deal is more than just a commercial transaction.
Sutirtho Patranobis, HT’s experienced China hand, writes a weekly column from Beijing, exclusively for HT Premium readers. He was previously posted in Colombo, Sri Lanka, where he covered the final phase of the civil war and its aftermath, and was based in Delhi for several years before that
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