I am presently in Florida visiting my brother and his family for the memorial day weekend. So yes I threw another aviation themed post against the wall, LOL. This one also came from my work email from a 3rd party source. I used this one because it did mention some demographic issues that the Chinese have and I thought that was interesting.
A China Eastern Airlines Airbus A320-200 (foreground) and Boeing 737-800.
Credit: Rob Finlayson
Manufacturing
mainline aircraft is a natural monopoly that governments and airlines
prevent from becoming an actual monopoly by sustaining at least two
major OEMs. This approach
preserves competition as well as most of the scale economics that a
monopoly would bring. The result has been a roughly even Airbus-Boeing
contest, now complemented at the low end by Embraer E2s,
and has generally served airlines well.
But
markets shift. The 737 MAX agony left Boeing well behind Airbus in
narrowbody prospects, and a cutback in orders from China’s huge market
has further worsened the prospect
of US OEM sales. In scale industries, size matters because fixed costs
can be spread across more units, giving leaders a further advantage.
But
observers are also questioning how long China will continue its rapid
economic and aviation growth with a declining and aging population.
Combine this question with Boeing’s
slippage, and the aircraft purchasing landscape airlines will face in
the future is looking increasingly blurry.
Boeing’s
problems in China started with the MAX in 2018, well before COVID, with
the first of two fatal crashes. In 2019, after the second crash, the
aircraft was grounded, dramatically
slowing new orders. The pandemic and subsequent design and delivery
problems at Boeing further affected orders, although demand for the MAX
has returned.
Chinese
carriers had taken 125 Boeing aircraft in 2018, but took only 35 in
2019, three in COVID-hit 2020, four in 2021 and 11 in 2022. Airbus’
Chinese business was also hit by
the pandemic but has recovered much more strongly than Boeing’s.
Source:
International Monetary Fund
In an Aviation Week Check 6 podcast,
Sash Tusa, an analyst at the UK’s Agency Partners, attributed much of
Airbus’ strength in China to the opening of its final assembly
line (FAL) in Tianjin country in 2009. The European airframe OEM had
only 10%-15% of the market in 2009.
“Boeing owned the market,” Tusa noted. Airbus’ share has risen steadily since.
Aerodynamic
Advisory’s Richard Aboulafia traces Boeing’s slippage to different
causes: The US-China trade conflict begun under President Trump has
continued and intensified under
the Biden Administration. “Boeing is a hostage to that,” Aboulafia
argues. And tensions over Taiwan could lead to much more disrupted trade
or worse.
In
any case, there are limited prospects for a turnaround. “Assuming that
the current geopolitical environment doesn’t radically improve soon,
then I doubt you’ll see many Chinese
orders for Boeing,” Teal Group senior analyst Bruce McClelland said.
“It may be that China quietly lets undisclosed orders get delivered, but
don’t expect any big public announcements.”
McClelland
too sees China using Boeing as way to show its displeasure at US
policies. “Favoring Airbus helps China pursue its aim of getting Europe
to hew to a more Chinese-friendly
path,” he said.
Opportunties
How
much does this matter to Boeing? It’s significant, but maybe not as
drastic as it appears, especially in light of other fast-growing
markets. For example, India’s economy
was only one-sixth the size of China’s in 2021 but averaged 7% annual
growth before COVID. The International Monetary Fund (IMF) projects that
India will account for 13% of global economic growth in the next five
years, more than half the 23% share expected
from China. US civil aviation exports to the Middle East were growing
7% annually before COVID, a pace that should roughly resume as the virus
passes. South American economies are also expected to grow
significantly.
Source:
World Bank, China Civil Aviation Administration
These other opportunities have a hopeful implication.
“China’s
not a big problem for Boeing,” Aboulafia insists. He judges that
Airbus’ backlog now has about two-thirds of the high-volume, low-margin
narrowbody global market, while
Boeing has two-thirds of the low-volume, high-margin widebody market.
Even
Boeing’s reduced share of narrowbodies should translate eventually into
40-50 737s produced per month, which the Aerodynamic analyst says does
not drive unit costs up too
much. “They produced 30 per month with respectable margins,” Aboulafia
said, adding that he thinks Boeing will still recover at least some
share of the China market as growth resumes.
McClelland essentially agrees, seeing China as a “long but still moderate challenge for Boeing.”
Teal
Group estimates that China, including Hong Kong and some undisclosed
orders, represents only 13%-14% of the global backlog of aircraft
orders. And it estimates that Airbus
and Boeing have similar portions of their own backlogs dedicated to
China, although, “Boeing’s China backlog is probably shakier than
Airbus’.”
Overall,
“Boeing is just going to have to work harder than Airbus to make itself
successful in the rest of the world, McClelland said.
Not
that China will cease playing a major role in aviation as in the rest
of the global economy. GDP drives aviation, especially in less-mature
markets. China’s official real
GDP, sometimes questioned, grew an average of 8% annually in the decade
before COVID, slowing only to 7% annual growth in the last five years
before the virus hit. The latest estimates are that the nation will
achieve 6% real growth in 2023.
This
growth has been achieved despite slowing population growth and, from
around 2014, a flat labor force. Real GDP per worker was rising 8%
annually in the decade before the
virus. Chinese brains, hard work and high savings, not more Chinese,
have chiefly been responsible for the country’s growth.
Now
the country is headed for a long decline in population. The United
Nation’s mid-case estimate puts China’s 2050 population at 1.317
billion, while another private forecaster
puts it even lower, at 1.312 billion. Both figures are well down from
2022’s 1.426 billion. These estimates imply a decline of about 0.3%
annually in the population.
By
itself, that would not slow growth down much, but other factors will.
First, when a country loses population because of declining fertility
rates, it also means the population
is aging, and that means fewer workers. This has already happened to
some degree. China’s labor force participation rate was near 60% early
in the 21st century but decreased to 55% on the eve of COVID.
Chinese
airlines began returning the Boeing 737 MAX to
commercial operations in January, and Boeing has more than 130
China-bound MAXs in storage. Credit: Christopher Wong/S3studio/Getty
Images
By
2050, only 55% of China’s population is expected to even be in the
prime working age group of 20 to 64, according to forecasters at
PopulationPyramid.net. By way of contrast,
India’s expected population of 1.67 billion is predicted to still be
growing and to have 61% of its people in the prime working ages by 2050.
Second,
of course, the richer a country gets, the harder it is to maintain
rapid growth. After China shed Marxist economics, annual growth rates
were often in double digits in
the early 1980s and 1990s. More recently, they have been about half
that rate. A gradual slowing of the growth per highly industrious
Chinese worker is therefore likely.
It
is therefore not surprising that forecasters differ widely on China’s
future economic growth. Many still see 3.5%-5% average annual growth
continuing until mid-century. But
skeptics like researchers at the Lowy Institute see an average of
2%-3%. Small differences in compounding growth rates imply big
differences in the ultimate size of the market.
Bounce-Back
But
short-term, there is no doubt of a strong bounce-back in Chinese
aviation. China’s air traffic was growing even more rapidly than its
economy pre-COVID and took a much sharper
dive during the pandemic.
Air
travel should therefore recover very strongly as restrictions are
lifted in China and across Asia-Pacific nations, as has been the case
this year. China’s February 2023 total
traffic, passenger plus cargo, was up 29% over same month of 2022.
That favors the environment for at least some progress in China by Boeing.
“If
Chinese traffic starts to surge ... then you could see a softening of
China’s stance toward Boeing,” McClelland argues. One early sign may be
Hong Kong’s Greater
Bay Airlines’ recent order for 15 MAXs and five 787s. And in
late April, Chinese regulators published a report viewed as easing
deliveries of new MAXs to China. Boeing has stored more than 130 MAXs
destined for China. Finally, McClelland believes
that Airbus and Boeing each have a significant number of undisclosed
Chinese orders.
Even
under trade and political tensions, the US is not without leverage on
China’s aircraft purchasing policies. Wolfe Research analyst Myles
Walton points out that half the systems
on China’s COMAC C919, intended to compete in the narrowbody market, come from US suppliers.
“Abandonment
by China of Boeing planes would be an untenable outcome for US
policymakers to allow technology sharing to continue,” he said.
So
a disadvantage in, but not an exclusion from, the Chinese market looks
most likely for Boeing. And this market will still be huge, albeit
probably declining in relative importance
in the future.
And,
like China, the US OEM is recovering, with first-quarter revenue up
28%, year-over-year, expecting to produce 38 737s later this year and a
backlog of more than 4,500 commercial
aircraft.
In
Boeing’s first-quarter earnings call, CEO Dave Calhoun noted that
China’s domestic travel was at pre-pandemic levels and would continue to
grow.
“So, they need airplanes,” he noted.
The
company also said all MAX operators in China had returned to flying
their aircraft and 45 of the 95 737 MAXs in China were back in service.