China looks like being a make-it-or-break-it country for Boeing, now officially the world's second-ranked aircraft builder and sponsor of the 7E7 Dreamliner. The company is initially targeting China sales of 80 for its super high tech, fuel-efficient 217-seater, and contends that mainland airlines are excited about it. But Boeing's latest star forward has yet to score, and until it gets enough firm orders, the 7E7 won't see production.
It has often been said that without soaring aircraft demand in Asia, there would be no Airbus 380, the double-decker plane that next year will become the largest commercial airliner in service, ending the 35-year reign of the 747.
China has yet to put in an order for a 380, but Asia accounts for nearly two-thirds of the 88 ordered so far. And since China is set to be Asia's biggest aviation market, orders would seem to be inevitable.
Both Airbus Industrie and The Boeing Company are counting heavily on the China market to serve as a pillar of growth long into the future. While civil aviation globally grows at 2% to 3%, China's commercial aviation sector has been barreling along at over 7% and is expected to continue to do so.
But the figure needs to be put in context: when China reorganized its airlines in late 2001 into three main groups – putting clusters of regional carriers under Air China, China Southern and China Eastern – the total fleet of the newly created three main carriers amounted to fewer planes than what Lufthansa or British Airways then had in the air.
That was the situation on the eve of China's accession to the World Trade Organization, but accelerating business and trade activity is expected to change that equation fast. But by exactly how much is anyone's guess – and guesses have been colliding all over China's skies.
Boeing, for instance, says that in less than 20 years, China will be the world's second largest commercial aviation market after the United States, flying 2,800 planes by then. To get there, the company projects Mainland carriers will need 2,300 new planes by 2023, spending US$183bn to quadruple their fleets. (According to the US Department of Transportation, America's "large carriers" had an estimated 4,125 two-, three- and four-engine jets in service this year, and by 2015 will have about 5,700, roughly double Boeing's projection for China in 2023.
Dismissed by the competition
Those numbers are dismissed by Airbus, which says the figure is closer to 1,600. Fewer larger aircraft seems the gist of their argument, but Boeing's estimate agrees pretty nearly exactly with China Aviation Industry Corporation I (AVIC I) projections. They say 2,194 new planes will be needed by then.
One Mainland airline executive said even AVIC's more conservative estimate was off base. "Given that the average per capita disposable income of China's urban residents amounts to US$800 per year, compared with US$40,000 for the average US citizen, it is hard for me to imagine that China will need 2,000 more aircraft over the next 20 years," he told a Hong Kong daily last month.
China's carriers have around 600 planes operating now, although even that number is disputed. Boeing, for instance, claims its badge is on 483 planes of 774 in service.
In the event, Liao Quanwang, vice-director of the Aviation Industry Development Research Centre of China, said China's civil fleet will need to add "at least 1,000" new planes in the next 10 years to meet growing demand for air travel.
Air traffic on the Mainland has swelled threefold between 1980 and 2004, according to Boeing, which spent its early days in China cornering 62% of the market. Now the market is set to grow by 7.3% annually over the next decade, said Randy Tinseth, Boeing's director of product and service marketing. "We see a great deal of traffic growth here."
"To get the kind of economies of scale you need today, an airline should be looking at running two models maximum," said Claudia Chaplin, chief editor at London-based Airline Fleet & Network Management. "Boeing had the new growth sector, low-cost travel, cornered with the 737. But now Airbus is eating into that market with the 319 and 320," she said. "There's really good cross-family synergy [and] cabin and cockpit compatibility so [Airbus planes] are now being bought by the airlines looking at expanding regional routes."
That trend certainly applies to China as Beijing tries to spread the booming coastal economy inland. Chaplin also says Airbus is fast gaining popularity just as airlines start looking at the one-aircraft model now popular in developed markets where carriers outsource more and more ground services. "This is all possible when you've only got one kind of craft to fix and service."
No doubt about that. But how much of the traveling public will be flying in Boeings?
Airbus is catching up fast, as its A320s and A319s make inroads in the shuttle segment where the 737 once ruled, and its larger planes – like China Eastern's later-model 340s, sporting laptop power points even in Economy – have started to outpace Boeing in the higher value twin-aisle segment.
Airbus is also more closely aligned with China's larger and faster-growing carriers, China Southern Airlines and China Eastern Airlines, both increasingly opting for Airbus as they simplify their fleet structures. Of China Eastern's current 170 aircraft, for example, 90 are now Airbus planes. Boeing must hope that Air China, its staunchest customer, starts to grow more aggressively. Thirty of the 68 aircraft in its main fleet are 737s, another 12 are 747s, and its 777 count now stands at 10. It also has another nine 767s, five of them now 17 years old.
But even Air China is starting to crack. It will start taking deliveries of A319s, the first of eight Airbus planes on order, next year. Until fairly recently, the carrier was almost considered an Airbus-free zone, with only three A340s in service.
Airbus, which overtook Boeing in global commercial plane deliveries in 2003, aims to do the same in China within five years, or at least intends to own half the market by then. At the end of August 2004, Airbus had a total of 250 aircraft in service on the Mainland, Hong Kong and Macau, giving it a 31% market share.
"Airbus has been very good at responding to market demands and it's been innovative," said Wang Mei, an industry veteran turned analyst after 30 years spent at CAAC and Air China. "Boeing has relied too much on its 747 model – Chinese buyers like new things [and] Airbus is seen as more fashionable."
She pointed out that Airbus comes without the political baggage Boeing is weighed down with. The US aerospace industry's close ties to Taiwan have not helped Boeing's case, she said.
Boeing is hoping, of course, to address everyone's penchant for dazzling newness with its 7E7 Dreamliner, which is still more dream than reality at the moment.
"We have received a great deal of interest in the 7E7," asserted Tinseth. "We are engaging with all airlines in China." David Wang, president of Boeing China, went further, telling a skeptical media scrum at last month's Zhuhai air show that the 7E7 would be in service in China before the 2008 Olympics.
Talking up tech and localization
Both aircraft builders have been talking up their technological advances – and of localizing more component production. Airbus, for instance, promises to set up an engineering center in China by the end of 2008, possibly in Beijing. (One Airbus executive based in Shenyang in Northern Liaoning province recently confided that local operations like his were established only to advance sales prospects, not to tap into local skills, save money or improve efficiency. "That's the only reason you ever do it," he said.)
An Airbus official based in the capital modestly suggested that Chinese carriers would buy perhaps 400 jets (with more than 100 seats) before the 2008 Olympics. Of that number, he said, Airbus could expect to sell 150 – starting with China Eastern and China Southern, both seen as safest bets for Airbus orders.
Airbus isn't shy about turning on all the bells and whistles, getting French President Jacques Chirac to participate in signing ceremonies during his October state visit. That event formalized several done deals, including China Eastern's order for 20 A330-300s and Air China orders for A319s.
China Eastern will take delivery of the planes between 2006 and 2008, and the point bears mentioning because Boeing promises that its 7E7 will appear in China within that window, and the plane isn't even in production – or on order in China.
Boeing could end up securing pole position again, but not necessarily by dint of advanced technology or grand off-shoring schemes. In fact, industry preferences may have little to do with it: as Americans flood into Wal-Mart and keep driving up the US trade deficit buying more China-made consumer goods, pressure builds to right the trade imbalance.
"China can do this in one sweep with a big aircraft order," said analyst John Keitz of BK Associates in New York. "Boeing has been lucky to be in the right place when China wants to demonstrate it's fixing the trade deficit with the US. If you take that away, Boeing would be in a much worse position in China." On paper anyway, Airbus has the market covered, with new large, medium and smaller aircraft all in production – while Boeing's new planes (the 7E7 and a new redesigned and expanded 747 Advanced) both sit on the drawing board. Boeing claims both aircraft offer unparalleled fuel economies and other advantages, which of course Airbus disputes – which is easy to do since Boeing can't put anything in the sky to verify its claims.
The last time America and Europe had a good air battle was over supersonic transport – and America won, but not for its prowess in the skies. The Soviet Union's Tupolev Tu-144 was the first in the air in 1968, followed months later by the joint British-French Concorde. Then came Boeing, but it only produced a mock-up.
It had won a US government competition to be the lead contractor and take America's traveling public into the supersonic age. But subsequent number-crunching pointed to the project being unsustainable commercially and the project was scrapped. The Tupolev was scrapped on technical and cost grounds, too, but the Concorde, which survived, ran into bigger trouble: American policy banned it from flying over the continental US on environmental grounds, thus killing off any serious sales potential.
Now that China and Asia are an aviation market to be reckoned with, and Japan and China hold over US$400bn in US treasury notes between them, naked policy maneuvers of that order look unlikely to threaten Airbus today.
China, of course, is a battleground for other aircraft builders, too. As air travel expands and regulators deliberate over new patterns and routes, and airlines rethink hubs and satellites, a lively regional market for commuter aircraft has sprung up.
Bombardier Aerospace's CRJ700 was the first 70-seat regional jet into China when Shandong Airlines took delivery of two of the Canadian-made aircraft a year ago. "The CRJ700 has low seat-mile costs," asserted Shandong Airlines Vice-President Yu Haitian when the first one arrived for duty. Shandong operates 10 50-passenger CRJ200 regional jets, five of them from Bombardier.
Analyst Wang Mei likes Bombardier, which leads in the commuter market segment, having sold 28 CRJ series planes as well as three Q400 70-seat turboprops. But she added a big caveat: "They produce great jets but the price is too high so far."
On the shuttle front
Another aircraft builder making inroads in the commuter market is Embraer of Brazil – and Wang says the Brazilians are more on the mark in pricing.
Certainly, China Southern thought so – in July, it ordered six Chinese-made ERJ 145s from the company's joint venture, Harbin Embraer in northern Heilongjiang province. The 50-seater jets, which will be used for medium-haul routes out of Guangzhou, are "the right aircraft for the right market," said Li Kun, a China Southern vice president.
China Southern plans more shuttle flights between smaller regional airports and its Guangzhou hub – and Embraer is counting on a lot more feeder services opening up. The builder estimates that Chinese airlines could buy 250 small jets over the next decade.
The dark horse of the shuttle race is China's own ARJ21 being developed by China Aviation Industry Corporation (AVIC 1) Commercial Aircraft Co. (ACAC) Ltd. First unveiled at the 2001 Beijing Air Show, the jet will be China's first domestically designed and built aircraft. The ARJ21 series of aircraft will have a capacity ranging from 70 to 90 seats, but won't enter service till 2008. "Everyone's waiting with bated breath to see what the Chinese can come up with," said BK Associates' John Keitz, "But no one's too worried yet about their market share. They'll worry 10 years out."
The giants of the business are both busy trolling the regions for business, too. China's Hainan Airlines, for instance, recently signed deals for 11 planes from Airbus and Boeing, committing to buy eight Airbus A319s and three Boeing 737-800s. That sounds like Airbus wins yet again, but in fact the carrier plans to buy 26 aircraft up to 2010, most of them Boeings.
Meanwhile, the travel business keeps growing in fits and starts. Passenger traffic at China Eastern Airlines for September jumped 20% year on year, but in September 2003, the carrier was still recovering from the SARS epidemic.
September's numbers, in fact, represented a decline of 8% from the preceding August when the airline carried 1.76m passengers. China Southern turned in similar numbers, jumping year on year in August by 17% more passengers but slipping from the previous July.
Like other airlines, China Southern has been hurt by rising fuel charges, tweaking net profit down in the first half of 2004 to RMB479.86m (US$57.8m) – though results were well up on 2003's full-year loss of RMB1.24bn (US$149.4m) loss arising out of the SARS disaster in mid-2003. Chinese carriers actually have had it better for most of 2004 than others in the fuel department, thanks to state-controlled fuel prices lagging the international market. But that was expected to change with the recent surge in oil prices.
The pecking order of China's airline industry looks likely to remain unchanged for the remainder of the decade. At least that is how analyst Wang sees it: "China Southern has proven the most adept at corporate governance and with international strategy," she said, adding that all of the big three are likely to snap up smaller regional airlines in the run-up to 2010. She also predicts mergers between smaller regional groups.
China Eastern plans to increase its fleet from 160 aircraft to 194 to transport 27.55m passengers in 2005. "We are considering ordering more planes," a spokesman said, hinting strongly that they would be Airbus A300-600s.
China Southern, which purchased four Boeing 737-800s and two Airbus 319-100s last year, was scheduled to buy six Boeing 737-700s and one Boeing 777-200 this year, along with another Boeing 737-700 in 2005. China Southern spokesman Yan Zhiqing said the purchases were in line with plans to add more domestic and international flights being negotiated now. Certainly, the carrier has ambitions that could cut into Air China's plans on international sectors: Apart from making plans to be China's first carrier to join an international codeshare alliance – SkyTeam with Delta, Air France, KLM and other airlines – it is negotiating for new routes to, besides Hong Kong, East Asia and Japan, the US and Europe.
In the face of these moves, Air China Group's announced plans to become the world's top airline by 2010 rings a little hollow. But President Li Jiaxiang insists his company, through partnerships with domestic and overseas competitors, will establish a much wider network. "Our business has doubled since the reorganization last October," said Li.
And double and redouble is what it plans to continue doing, to hear Li tell it. Among other things, the carrier plans to build the country's largest air freight company, in partnership with Hong Kong Citic Taifu Company and Beijing Capital Airport Group. The RMB2.2bn (US$265m) joint venture plans to operate four cargo planes to 29 cities worldwide. Cargo brings in US$370m a year, the airline says, a quarter of annual revenue.
For those who remember the China of the old flying days dominated by monopoly carrier CAAC, with flight attendants as friendly as drill sergeants, it is all a bit dizzying.
China's skies today boast younger and younger fleets – staffed by crews who treat the flying public as if they matter. Some carriers have even introduced compensation schemes for flight delays.
The only thing the public might hope for flying over China these days is that analysts doing the industry projections stay away from the control towers.