As China's economy slows, new factors emerge in its commercial aircraft market
For years, the story of Chinese commercial aircraft demand has been mainly about enormous growth, especially in the domestic arena, with a subplot about sizes creeping higher to mitigate shortages of airspace and skilled workers.
Now things are becoming more complicated. For a start, the economy has slowed. Over the past year, the airlines have found themselves with too much capacity and even when balance is restored, the carriers will not be able to grow as fast as previously. But concurrently the authorities are promoting budget airlines, which should stimulate traffic demand. A five-year-old and growing trend to set up small local-government airlines is creating an opportunity for regional aircraft manufacturers.
The major Chinese airlines, traditionally weak in international business, are trying to remedy that old shortcoming; their attempts should boost their demand for long-range widebodies, especially if they succeed. And there is still a shortage of pilots, technicians, runway slots and airspace capacity. So aircraft sizes continue to creep up.
In the first 11 months of 2013, Chinese airlines carried 12.7% more passenger traffic than a year before. But the seemingly healthy figure was evidently driven quite as much by capacity as by demand, since yields were weak. Moreover, annual growth rates for the first decade of the century were typically around 15%. We are unlikely to again see such powerful expansion over a prolonged period, because the Chinese economy's days of 10-11% annual economic growth are almost certainly over.
Still, there can be no suggestion that the Chinese market will be anything but enormous. China will be growing more slowly but now from a very high base; it already has more commercial aircraft than any country except the U.S. “We don't have double-digit economic growth, but 7 or 8 percent [the current rate] remains spectacular compared with other parts of the world,” notes Eric Chen, president of's commercial aircraft business in China. Whether even that growth rate will continue is much debated, however; the Chinese cabinet's Development Research Council predicted last year that the economy would be growing at 6% by 2020.
Chen predicts the current Chinese fleet of about 2,000 mainline commercial aircraft will double by 2020. That implies about 10% annual fleet growth, and a little more traffic growth if average aircraft sizes keep edging higher.
Average aircraft capacity per domestic departure has grown 5% since 2004, from 142 seats to 150, says. “It is likely this trend will continue through the decade as the market continues to grow and mature and as airlines look to match the best combination of capacity and efficiency for their markets,” says Ihssane Mounir, Boeing's senior vice president of sales for Northeast Asia.
One driver of aircraft size has been maturing markets. Another has been immature infrastructure. When more slots cannot be had at Beijing Capital International and Shanghai Hongqiao airports, for example, the airlines can feed growth only by substituting larger aircraft. The route between those two critical airports is dominated by the Airbus-300. Constraints are increasing at other airports, notably Guangzhou Baiyun, Shenzhen Baoan, Chengdu Shuangliu and Shanghai Pudong.
Those airport constraints largely explain the proliferation of A330-300s on domestic routes here. China's seemingly endless problem in attracting enough technicians and pilots, especially qualified captains, tends to push up sizes everywhere, hence the carriers' current tendency to orderand A320s instead of A320s and A319s, the usual combination 10 years ago. Boeing has seen a similar upward drift, with the gaining share at the expense of the 737-700.
That is about as far as the two manufacturers will agree on larger aircraft, however. Airbus sees an increase in use of widebodies and is trying to reinforce its Chinese success, offering to certify A330-300s at lower weights and squeeze in more seats to further reduce operating costs. Boeing, on the other hand, denies that a widebody on domestic markets can “currently offer the same level of per-seat operating costs as single-aisle aircraft.”
Though Boeing does not elaborate on the point, the obvious argument is that even with paperwork for a maximum takeoff weight of 199 metric tons, the A330-300 is still a 242-ton aircraft with far more range than an A321 or 737-900. If Boeing is correct, then the A330-300 should be largely restricted to Chinese domestic routes with at least one congested airport; for other routes, we should see only a progressive substitution of longer versions of the standard narrowbodies for the shorter ones.
The 787-10 is Boeing's offer as an A330 alternative. Chinese airlines are showing “very strong interest” in it as a complement for theand 787-9 and as an A330 replacement, says Mounir. But Airbus is hardly giving up on the A330 in China. The manufacturer is offering to build an A330 completion center in China, probably in Tianjin, if the country's airlines order a large number of the type, possibly 200, says a manufacturing industry official.
A completion center equips a flyable but unfinished aircraft with interior fittings. While its work is not of the technological level of Avic's manufacturing of A320-family wings in Xian, completing twin-aisle aircraft with customized interiors is something the Chinese industry will have to perform properly if it is to build its proposedwidebody. A completion center also offers some of the prestige of delivering complete aircraft from a Chinese factory. A factory at Tianjin owned by Airbus and Avic assembles A320s.
No matter how the A330 fares when it comes to domestic service, major Chinese airlines should be shifting more of their aircraft demand to long-range widebodies to feed their international ambitions. Although they have generally found it easier to compete against each other domestically, they are under pressure now to try to snare more of the foreign business that has mostly been left to international rivals.
China has an unfilled requirement for several hundred aircraft for the next five-year planning period, 2016-20. On that point Chen will say only that he is tasked with ensuring that Airbus's share of the Chinese fleet is more than half by the end of the period, meaning he cannot be satisfied unless the carriers have 2,000 aircraft from Airbus by 2020.
China's Comac is unlikely to make much of a dent in market share with its C919, a delayed 158-seat narrowbody that cannot enter service before 2017 and could well need yet more time in development. But's will be a more serious competitor—if the manufacturer can persuade airlines to accept a new type and allocate precious pilots and technicians to the relatively small aircraft.
For orders for the 2011-15 planning period, Boeing made the mistake of holding open too few production slots as the Chinese bureaucracy moved slowly toward making its decisions, say industry officials. Airbus benefited from having more patience. Boeing has learned from the mistake, says an executive with the company, meaning it is holding open plenty of slots this time. It is doubtful that China will be able to buy many units of the reengined versions of either manufacturers' narrowbodies for delivery by 2020, however, sinceand 737 MAXs have been selling so well.
Regional aircraft makers see several reasons to be optimistic about the Chinese market. Philip Wang of's Beijing office points out that 75% of Chinese air routes have fewer than two flights a day, averaged over the week. While more than 30% of commercial aircraft in North America and Europe have fewer than 120 seats, in China the figure is just 9%.
In principle, Bombardier and Embraer should find a good market among new Chinese airlines, especially those that have been set up to boost local economic growth and therefore have city or provincial subsidies and capital. Such carriers have been a growing phenomenon since 2009. Because they must be subsidized, they should want to hold down trip costs by flying the smallest practical aircraft. Yet, in general, they are starting with 737s or A320s; one reason may simply be officials' desire for the prestige of standard narrowbody operations.
Instead of attracting many new buyers, Embraer seems to be benefiting through customer Tianjin Airlines, because that carrier can and does provide subsidizedservices as an economical alternative to a locality bankrolling an entire airline. Also, progress in regional aviation appeared last December when privately owned China Express, which flies 13 Bombardier and CRJ900s, announced an order for eight more CRJ900s and took options on a further eight.
In buying such equipment, airlines must pay a 17% tax on regional aircraft. Separate from other taxes paid on all aircraft, this levy is designed to protect domestic products, especially the.
Still, there are more signs that regional aircraft are making headway in China, propelled by economic growth and those subsidies. The owner of a new airline to be based in eastern China said in December it would order 30 Bombardier, with the aim of setting up a regional network for the province of Jiangsu. Operations by Sutong Airlines are to begin in 2015. The aircraft deal has not progressed past a letter of intent, but it will be a breakthrough for Bombardier—and, indeed, the foreign turboprop industry—if it comes to fruition. Bombardier's head of sales in China and North Asia, Andy Solem, says Sutong intends to eventually operate 100 aircraft, all turboprops, though he adds that plans can change as an airline develops.
Avic may also benefit with sales of the MA60 (and its MA600 update). Although the type obviously lacks competitiveness against the Q400 and, Chinese buyers do not have to pay the 17% tax to get it.
Previously unenthusiastic, the Civil Aviation Administration of China () last year began encouraging development of budget aviation, even urging the major carriers to try the low-cost model. The A320 and 737 families can only benefit from this, although Solem suggests the CSeries is also a suitable candidate for a budget carrier. Chen points out the increasing difficulty of defining a low-cost airline. The CAAC seems not to have set out a specification.
According to Mounir, “We will likely see a near-term increase in demand for aircraft as these airlines develop their markets and build up the mass needed to compete in domestic and regional markets. As these airlines stimulate additional growth via lower fares and new market development, this will continue to bolster demand for single-aisle aircraft that can facilitate this growth.”
Chen also notes that budget airlines elsewhere have stimulated commercial air traffic, so in China they could make up for some of the growth lost to the slowing of the economy. He expects the CAAC will back its policy objective by giving budget airlines access to resources, such as favorable routes and slot times.
Budget and regional airlines will need plenty of pilots if they are to thrive, and there is no sign that the shortage is about to ease. Chen says he has been told the supply should be much better in about five years, but he adds: “I hear conflicting messages.”