Boeing Expects China's Aircraft Demand to Stay Strong
August 25 2015 - 7:27PM
Dow Jones News
By Jon Ostrower And Robert Wall
Boeing Co. said it expects that China's cooling economy won't
dent its demand for jetliners despite concerns from some analysts
about the medium-term outlook there for the aerospace giant and
rival Airbus Group SE.
The recent plunge in China's stock market is adding to fears
about slowing economic growth in the world's No. 2 economy, and
could damp air travel by crimping wallets of the country's fliers.
Meanwhile, China's weaker currency strains its airlines, which
carry U.S. dollar-denominated debt to finance jet purchases.
On Tuesday, Boeing largely dismissed the recent tumult in its
annual long-term forecast for the aircraft market, predicting China
will need around 6,330 new planes over the next two decades worth
nearly a trillion dollars at list prices. That is about 300 more
planes than in its prior-year forecast and 16.6% of the global
demand expected through 2034.
"Despite the current volatility in China's financial market, we
see strong growth in the country's aviation sector over the long
term," said Randy Tinseth, vice president of marketing for Boeing
Commercial Airplanes.
Airbus is similarly optimistic about long-term prospects and
argues its production system is nimble enough to adjust to any
near-term bumps in Chinese purchases.
"The near-term turmoil has not weakened Airbus's belief in the
high growth rates for Chinese air travel," a spokesman for the
Toulouse, France-based plane maker said. Airbus has a backlog of
6,400 planes ordered and, he said, is overbooked on many of its
plane models, giving it flexibility even if demand in some markets
weakens.
But some analysts say China's economic uncertainty is adding to
clouds on the horizon for Boeing and Airbus at a time when both
have ramped up jet production to record levels.
"There is risk in China and there is risk in a lot of other
countries in Asia as well," said Rob Morris, head of advisory at
aviation consultancy Ascend Worldwide. Other risky markets in the
region include Thailand and Malaysia. "And if there is a genuine
slowdown in that region then there could be a surplus of capacity
starting to build."
Meanwhile, Bank of America analysts recently wrote that
continued low oil prices and higher financing costs will
"weaken...significantly" the case for new airplanes and is a
"recipe for deferrals" for aircraft earmarked in 2017 and
beyond.
Record jet buying has pushed Boeing and Airbus to accelerate
production. By the end of 2018, more than one hundred single-aisle
737 and A320 jets are slated to be built by the pair each month,
not including new offerings from Canada, Brazil, Russia and China's
own homegrown competitor.
Chinese airlines have taken 17% of all Airbus deliveries from
2003 through 2014 and are poised to take at least 13% through 2017,
said Sash Tusa, an aerospace analyst at Agency Partners LLP. "No
other single nation comes close," he said. For Boeing that figure
is around 12% during the same period. Through July this year,
roughly one in five jets that have departed Boeing factories were
sent to China.
Boeing and Airbus in the past have proven adept at sustaining
output even in difficult economic conditions. The manufacturers
could switch jets being produced for customers under strain to
those wanting them sooner. However, the pair avoided deep
production cuts through the global financial crisis that began in
2008, in part by holding down output amid record buying, whereas
rates are climbing today.
Plane makers see huge potential for further growth in China.
With three times the population of the U.S., China's commercial
aircraft fleet is roughly one-third the size and boasts a middle
class population roughly as large as the entire U.S.
population.
While most of the jets going to U.S. and European carriers are
replacement buys, 70% of those heading to China will go toward
expanding the nation's fleet. That will make it the largest air
travel market on Earth before 2034, Boeing estimates.
"There's a huge pent up demand in China," said a senior industry
official. "They're not yet at a mature level to be stable to apply
the standard methodology that air traffic growth follows GDP growth
very tightly."
"I think you're going to have a disconnect between GDP moves and
air traffic growth until they reach that scale that is commensurate
with the size of the population and the size of the purchasing
power of China," he said.
Jet deals still carry significant political weight, and analysts
expect Chinese President Xi Jinping's visit to the U.S. next month
to include deals between Boeing and Chinese airlines. The huge
numbers for its fast growing carriers will grab headlines, though
Boeing has already booked the orders and classified them to
undisclosed carriers.
The Chinese government in October is slated to release its next
five-year plan for economic performance and investments, which
could have a bigger impact on long-term demand from the plane
makers than near-term economic volatility.
(END) Dow Jones Newswires
August 25, 2015 19:12 ET (23:12 GMT)
Copyright (c) 2015 Dow Jones & Company, Inc.
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