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Boeing Is Unlikely To Win Much From The U.S.-China Trade Pact

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This week’s “phase one” trade agreement between the United States and China has been held up as great news for the U.S. commercial aviation industry. The pact calls for China to buy an additional $35 billion in U.S. manufactured products in 2020 and $45 billion next year. Since jetliners are the biggest U.S. manufactured export to China, a high-profile jet purchase would certainly be involved.

 Unsurprisingly, Boeing issued a statement by incoming CEO Dave Calhoun stating, “Boeing applauds Presidents Trump and Xi as well as Vice Premier Liu, Secretary Mnuchin and Ambassador Lighthizer for their leadership in building a fair and mutually-beneficial trading relationship between the United States and China.” 

 Yet there are three big problems with any jetliner industry optimism related to this deal.

 The first problem relates to the structure of the Chinese jetliner market. Typically, Chinese airlines order jets, but need to wait for a final approval from the PRC government before going public with these orders. This way, the Chinese government gets credit for managing the economy and gets to use jetliner orders as a form of leverage in trade negotiations.

 Boeing currently has 931 unfilled airliner orders on its books marked as for “unidentified customers.” Many of these are said to be for Chinese customers. As part of the agreement, the PRC government will announce large-sounding orders, but many of these, and perhaps all, will merely be approval agreements for those existing orders. These final approval agreements have been held up due to the trade fight, and for exactly this contingency: the inevitable trade dispute settlement.

 Thus, it is entirely possible that a China trade deal jetliner order package will have little or no impact on Boeing’s total existing order book. Instead, many of those “unidentified” orders will merely be transferred to their actual airline customers. That’s still good for Boeing, but not really the same as market growth.

 The second problem, inevitably, relates to the 737 MAX, which is the single biggest U.S. export product. The Chinese aircraft market is heavily weighted towards single-aisle jets, which represent around 85% of Chinese airline demand (of those 931 Boeing orders for undisclosed customers, 867 are for the 737).

 Yet Boeing’s sole single-aisle product is the 737 MAX, which remains grounded. Even when the U.S. FAA and other international regulators clear it, the Civil Aviation Administration of China will likely be the last to follow. Even then, 737 MAX production has been suspended for an indefinite period. When it resumes, output will be slow, since there are already 387 grounded jets that will need to be modified and another 400 or so that have been built and need modification and airline acceptance. Thus, it will take years for new Chinese demand, if any, to have a positive impact on the U.S. aerospace industry.

The third problem concerns air transport demand in China. Something bad has happened here. According to the International Air Transport Association, Chinese passenger numbers had been growing at double-digit rates for decades. As recently as October 2018, China domestic traffic grew 12.2% year-over-year. But last year saw a serious and steady growth decline. By October growth was 5.3%, and November was the same. Either the usual multiplier between GDP and air travel has broken for some reason, or, as many economists opine, the PRC government is simply fabricating its GDP numbers.

 This air travel growth slump also explains a China jetliner market drop. Due to the MAX grounding, Boeing deliveries to China collapsed from 192 in 2018 to just 45 last year. But Airbus didn’t fill the gap. In fact, Airbus deliveries to China also fell, by about 12%.

 Despite these three caveats, any kind of trade deal is good for Boeing and the entire jetliner industry, since China is easily the single biggest export market, and because the industry depends on free trade for growth. But for an industry beset by the MAX crisis and falling orders, the China trade pact offers no short-term relief.