Airbus and Boeing’s China-fueled order bonanza that saw worldwide civilian aircraft orders climb to a record 1,622 in 2005, beating the previous high 1,600 set in 1989, looked far from likely at the start of the year. Boeing’s share price was sent tumbling by news that airline industry regulator the Civil Aviation Administration of China (CAAC) planned to freeze aircraft purchases to curb growth in the overheating sector.
Whether the announcement was genuine or not, it was followed by, in the words of Center for Asia Pacific Aviation General Manager Derek Sadubin, "the most extraordinary procession of orders for new and leased aircraft from mainland carriers."
Airbus closed out the year more or less even with Boeing as it secured a late order for 150 A320 aircraft, valued at US$9.1 billion in current list prices. The announcement came hot on the heels of a similar deal struck in November for 70 Boeing 737s, and options to buy 80 more.
However, appearances can be deceiving, with big announcements couched in flexible terms and timed for the biggest political mileage. Sadubin explained the December order for 150 A320s was made up of an undisclosed number of firm orders plus options to buy more, which essentially does little more than book space on the production line.
"According to our figures Boeing is slightly ahead but it really does depend on which options are exercised," he said.
Even if all orders were to come through, aviation analyst and Teal Group Vice President Richard Aboulafia argues that dollar value is more important than numbers, and profit margin more important still.
"Right now it’s heading for 60/40 in Boeings favor [in dollar terms] but I would also argue that the part of the market that Boeing is dominating is the more profitable part," he said. "The planes [Boeing] have sold in China are bigger higher value aircraft, most notably the 787."
Where the money is
Airbus will need to move quickly if it is to regain ground in the lucrative end of the world’s fastest growing aviation market. Boeing predicts annual growth of 8.8% in China’s domestic market over the next two decades and 7.3% in its international market, compared to the global average of 5.2%. China is expected to require 2,600 new aircraft worth about US$213 billion in current list prices by 2024, by which point it will have become the largest commercial airline market outside of the US with a fleet of 3,200 aircraft.
Airbus figures are a little more conservative, citing potential sales to China of 1,800 aircraft over the same period, while the CAAC forecasts Chinese airlines will take delivery of 100-150 aircraft each year between 2006 and 2010, with the total fleet rising to 1,600 by 2010. After making inroads into Boeing’s market share in recent years with its A330 mid-capacity offering, Airbus appears to have backtracked by pushing the giant A380.
In contrast, Boeing stayed small, pouring resources into the mid-sized and fuel-efficient B787 on the basis that more frequent, non-stop flights between city-pair destinations would fuel industry growth. The paltry five A380s ordered by China Southern Airlines is a clear indication that mid-size is the way forward in China.
"What’s kind of intriguing is that Airbus has always done well in exactly that market," said Aboulafia. "They’ve sold A330s, which are in the 787 class, to China and all the rest of the Asian market, doing fantastically well with that and then with victory in sight they decided to snatch defeat. It’s just bizarre ? a bizarre tactic.
"The real question is how quickly Airbus can get its act together and come up with a direct competitor [to the B787]. They’ve got the A350 on the drawing board; they are just a bit behind but will do well with it."
The A350 is expected to be available for commercial service from 2010, two years after Boeing’s 787. Sadubin is optimistic about its prospects, despite the 787 headstart. "I think Airbus will still be confident about the prospects for that aircraft. We really just need to wait and see."
Price and performance
Ultimately, the manufacturers will compete on price and performance. Aboulafia believes the much touted production line deals in exchange for sales are a red herring, not least because the WTO’s Agreement on Trade in Civil Aircraft prohibits any airline purchase preference for aircraft with local content. "If you want into the WTO and are an export-led economy like China, you kind of want to listen to that," he said.
Pointing out that Airbus and Boeing together do about US$100 million in China business a year, or around a fifth of 1% of the total world jetliner value chain, he added: "It’s tiny and it’s easily overstated and it’s in everybody’s interest to overstate it. If there’s a Chinese official mandating industrial work in exchange for orders, he fell asleep at the switch long ago."
Boeing spokesperson George Liu agrees. "Placement of work is based on the capabilities of the supplier and their ability to provide high quality components when required and within budget," he said. "[Supplier contracts are] smart business but [are] not a guarantee of sales."
Sadubin said China had a strategy of treating the manufacturers more or less evenly to keep each competitive and drive down prices. "It’s in the commercial interests of airlines to keep both manufacturers hungry for their orders and the Chinese government has certainly done that in the past 10 years," he said. "Airbus, after a slow start in China, has really caught up. They are achieving around 50% of the orders there now and I think the balance will stay like that for the foreseeable future."
With China holding all the cards and seemingly content to back both horses, the question then is not whether Airbus will survive but how quickly can it get back into the game by getting its 350 to market, and how well can it compete with the 787 when it does. For the European company, the opportunity is there to bounce back from a 2005 that was not quite as rosy as the order picture paints.