Europe’s new system of tradable credits for airline carbon emissions is a bold step toward incorporating the cost of carbon emissions into the cost of business. As of the beginning of the year, airlines flying to or from Europe must obtain credit to cover their carbon emissions. They will be issued enough credits for most flights this year, but they must buy or trade for the remainder.
Like many revolutionary measures, Europe’s system has triggered a backlash. Reports in March said that China is blocking at least US$14 billion in orders for planes manufactured by France-based Airbus in protest. Commenting on the new measures, ambassador to the EU Wu Hailong, said, “It makes sense for [Chinese airlines] to go with Boeing.”
This may seem to be merely political theater. The head of the Civil Aviation Administration of China clarified that the Chinese government has not issued any notice forbidding airlines from buying Airbus SAS planes and that it does not dictate carriers’ purchases.
But government relations play an important role in the Chinese market. Wu put it right when he remarked in Brussels that Chinese airplane orders are “largely a commercial decision by the airline, but of course their decision will be influenced by the position of the central government on ETS.”
Almost all customers in the China market are state-connected, whether they are the government-owned airlines or state-owned enterprises. Both Airbus and Boeing recognize this, and engage in technology transfer to cultivate a strong relationship with the state. Why else would Airbus establish a factory to assemble planes in China, when it is likely cheaper to make airplanes at its European base? Why would Boeing announce plans in March to open an R&D center in China with Comac, a competitor with inferior technology?
While Airbus surpassed Boeing to grab a larger share of the global market last year – Airbus delivered 534 aircraft with more than 100 seats last year, compared to 477 for Boeing – the companies are neck and neck in China. Boeing has manufactured 53.4% of the plans currently in service in the country, while Airbus has made 44.6%, according to consultancy Teal Group. But Airbus is catching up, with roughly three unfilled airplane orders for every two of Boeing’s.
The China market is large enough to tip the balance in Boeing’s favor. Chinese companies are buying about 200-300 new airplanes annually to meet rising passenger demand, making China the world’s second-largest airplane market after the US, and the fastest growing.
The extent to which Europe’s new regulations sour China’s relations with Airbus remains to be seen. But if the spat continues, Boeing could gain a valuable foothold in the China market.