China's Aviation Dream: Compete With Boeing and Airbus

Mish

China has thoughts of directly competing with Boeing and Airbus. Are Boeing's woes an opening?

Boeing Reports Record Annual Loss

Boeing Flight to Recovery

Boeing is hobbled by collapse in plane deliveries. And the new 777X is delayed until 2023.

Add it up and you have a Record Annual Loss.

Boeing reported its largest-ever annual loss and took a big financial hit on its newest jetliner, signs that the Covid-19 pandemic is compounding the aerospace giant’s problems.

The plane maker said the new 777X, its largest passenger jet, would be at least three years late for airline customers, the latest Boeing plane to hit trouble following the grounding of the 737 MAX after two fatal accidents. Quality problems with its popular 787 Dreamliner jet have halted deliveries since October.

The delay leaves Boeing even more reliant on its defense business and other troubled commercial-aircraft programs to reverse heavy losses, as the pandemic has sapped demand for new planes. Executives said Wednesday they didn’t expect Boeing would stop bleeding cash until next year.

Opening for Comac?

As the pandemic continues to weigh on the aviation industry, Chinese aircraft manufacturer Comac has been pushing ahead with testing a new passenger jet. If successful, the C919 could rival Boeing and Airbus in the largest aviation market in the world.

Will Comac Suceed?

I asked my aviation contact, an industry consultant what he thought about China's chances. 

Selling an airplane alone is the small part. Supporting the fleet world wide will take China decades, if ever and is a key factor in a sale.  

Boeing has engineers in every major airport in the world. They have what is called an AOG ( Airplane On Ground) team in Seattle. It took 75+ years to perfect this system. They are good at it. They have a huge warehouse full of spares. When an airplane is out of service, Boeing teams converge from all over the world. 

For example, a few years back, an Air France 747 on takeoff from New Delhi, ran off the runway, severely damaging the undercarriage. Boeing flew in engineers and mechanics from Everett, WA. They worked in 110 degree weather for 3 weeks round the clock to assess the damage, temporarily fixed the aircraft making it airworthy to fly back to Seattle where it was fully repaired to the required safety standards and returned to Air France. A $250 mill product salvaged. 

Boeing has done this dozens of times all over the world in hostile conditions. I doubt China can support a big fleet as Boeing did above. 

No Fear of C919 for a Generation

This Leeham News article is a bit dated but please consider No Fear of C919 for a Generation

The first COMAC C919 was rolled out of the factory over the weekend, China’s mainline entry into the fiercely competitive arena now “owned” by the Airbus-Boeing duopoly.

The C919 will still have lower capital costs, but the Chinese have little experience at a global product support system for its military or commercial aircraft. Competing with Airbus and Boeing on this scale is, well, no competition at all.

Developing a commercial aerospace industry is a national goal of the Chinese. They’ve developed a space program and a blue water Navy. Anyone who thinks that the Chinese won’t develop a viable commercial aviation industry is sniffing kerosene. But it will take time.

The culture is a patient one. The leaders waited 99 years to reclaim Hong Kong and Macau. Waiting 26 years—a generation—is a piece of cake.

The first Airbus airplane, the A300B2, entered service in 1974. The A320 followed in 1988. By 2000, 26 years after the A300, Airbus captured 50% of the market.

The above article is from 2015 and is thus a bit dated. But it echoes what my contact stated about service.

If a generation is 26 years, China still has another 20 to go. 

Here is an interesting comment on the Leeham site.

”My skepticism comes from Comac’s methods in designing and building the C919 . First, it is using engineers, mid-level managers and executives who have virtually no commercial aircraft experience. Second, it is outsourcing almost everything: parts, systems, subsystems and testing.”  

“What is more disturbing is that Comac engineers and managers are not interested in understanding the engineering issues and problems. Rather, they only want the answers. Because of pressure from the top, they will outsource the answers and solutions from Western companies and simply implement them without understanding the “whys.”

My contact offered these final thoughts:

Airbus' A321 is a formidable airplane. Even Boeing cannot compete against it, let alone China.

Boeing has huge holes in its product line and Airbus has exploited it effectively. This is the single aisle market that Boeing, Airbus and China are eyeing.

Three Things

  1. Designing an aircraft, assembling them, and servicing them are three different things.
  2. Neither Boeing nor Airbus made critical components in China and wisely so. 
  3. Within China, Comac may have some forced success. But externally, Boeing and Airbus are not threatened by China yet and perhaps never will be.

Boeing has more to fear from Airbus than China. 

Mish

Comments (19)
No. 1-12
cudmeister
cudmeister

That's comforting.

goldguy
goldguy

LOL, OMG, please, Boeing is best in class period..thinking otherwise is downright stupid...

Johnson1
Johnson1

Crazy stock market action today. So many stocks saw crazy jumps in option volume which created huge gains of30% to 400% in some stocks.

Call option volume broke all types of records. Maybe all the bears are finally flushed out and we can see some type of healthy correction.

I am not sure what is going on but all these new platforms signing up newby investors and giving them the ability to trade options is disrupting the market.

I don't know all the details but supposedly when the traders buy options, the market makers have to hedge the option call they write and buy the stock.

So you can buy so many more options than required to buy stock.

I took a look at Gamestop option activity today and the option volume was unbelievable. I saw some 1/29 strike had call volume of 40k and it was only noon. Many other strikes had volume of 20k or 30k. Apple does not even see that kind of action.

Felix_Mish
Felix_Mish

Cue the old joke about how McDonnell Douglas bought Boeing with Boeing's money.

And, hey, this is a company that moved their HQ to shy-town from Seattle. Don't accuse Boeing of following the crowd!

Democritus
Democritus

Should be noted that Airbus could build upon the experience of plane builders all over Europe... I mean they didn't have the fresh start China has.

Sechel
Sechel

When we look back economists and historian won't say the 737-max was boeing's downfall but being allowed to consolidate and buying out its competitors such as mcdonnell douglas. boeing stopped having to compete domestically and a duopoly with airbus simply meant a carving up and sharing of business.

Eddie_T
Eddie_T

My crystal ball is pretty hazy of the future of air travel in general.....in a post-carbon world.

Airlines can’t make money if people stop flying because they perceive air travel as environmentally disastrous. Younger consumers care about such things, evidently.

Realist
Realist

This is one of the reasons why I keep coming back to your site Mish; articles and feedback that stimulate a wide range of big picture thinking.

In five minutes of reading I have thought about:

Short term vs long term planning

Chinese vs Russian Communism

The pros and cons of isolating China

Global warming and it's effects

How the mighty (or best in class) eventually fall, to the surprise of many

How markets can stay irrational longer than you can stay luquid

How the internet and social media can bring hedge funds and the wall street club to their knees

Thanks so much to all for keeping me thinking about the big picture!

Neoliberal Elitist
Neoliberal Elitist

I am skeptical when an argument is made that an upstart cannot disrupt a market. BlackBerry made similar claims about Apple when the iPhone came around.

China already dominates markets that were American strongholds just a few years ago. Take personal computers — Lenovo is now dominant. Or smartphones — Huawei, Oppo/Vivo, ZTE and OnePlus are dominant players while onetime western powerhouses like Palm, BlackBerry, Motorola and Nokia have disappeared from the market.

frozeninthenorth
frozeninthenorth

Everyone in the industry is skeptical of the Chinese's ability to enter the commercial aircraft business. Contrary to what most people think, Airbus and Boeing also "outsource" a substantial percentage of the aircraft manufacturing process (engines, avionics, landing system -- they account for a good portion of total aircraft costs), if memory serves on the B777 Boeing had 200 primary suppliers. So the Chinese are following a well know path, and it makes sense to outsource many of those components (designing an engine is more an art than anything else).

However, the support system that Boeing or Airbus have is complex and took a long time to develop. There is no doubt that Chinese carriers will be incentivized to purchase Chinese Aircraft -- it will be an excellent testing ground for that process. The Boeing example of the Air France accident is an excellent example of the challenges that the manufacturer faces -- and one that is difficult, time-consuming, and expensive to replicate.

timing is not great for a new aircraft type with the Covid issue, but it's never a great time. I would guess that the Chinese have orders for 100 to 150 of this aircraft (launch customers).

anoop
anoop

I don't think it's wise to dismiss China as a competitor. At some point, because of economics, smaller airlines will start to buy them and as they build credibility larger airlines will make the shift as well.

Mr. Purple
Mr. Purple

Having experience with Chinese manufacturing, it will be interesting when 1 out of 2 Chinese planes falls from the sky.


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