China’s Slowdown Turns It Into 'Normal Big Market'
September was a big month for relations between China and the U.S.: Apple shares dropped 4% after the Chinese government told state officials not to bring their iPhones to the office; Taiwan’s defense ministry reported 103 Chinese military aircraft and six vessels in the Taiwan Strait; U.S. National Security Advisor Jake Sullivan met Chinese Foreign Minister Wang Yi on the island of Malta, discussing foreign policy “red lines” and exploring potential common ground for November’s Asia-Pacific Economic Cooperation summit meeting between Presidents Xi Jinping and Joe Biden.
On a positive note, communication lines between the U.S. and China remain open for the time being.
In aviation, China has been the industry’s biggest growth market for decades. As the country developed into the world’s workbench across a wide variety of business sectors, so grew its airlines. Now the Big Three in the U.S.—American Airlines, Delta Air Lines and United Airlines—and the Big Three in Europe—Lufthansa Group, Air France-KLM and International Airlines Group—have been joined by the Big Three in Asia—China Eastern Airlines, China Southern Airlines and Air China. At peak times, up to a quarter of Western aircraft production went to China. Longtime industry heavyweights, such as Cathay Pacific and Singapore Airlines, have been overshadowed by their peers.
While headlines about heightened geopolitical tensions are common, others tell of China’s economic troubles: lower economic growth, high youth unemployment and the late and slow recovery from the COVID-19 pandemic. What will China’s role be in the future of commercial aviation? Will the country’s airlines become a major factor again for Airbus’ and Boeing’s production planning in support of Chinese growth ambitions? And will suppliers continue to use the country as a lower-cost base for component manufacturing?
“China will become a normal big market like the U.S.,” says Andrea Luebke, senior vice president for corporate strategy at MTU Aero Engines. “We expect China to make up 18-22% of the world market, on a stable level.” Adam Pilarski, senior vice president at consultancy Avitas and a China expert, concurs: “China will not disappear as an economic powerhouse.” He says it is only a matter of time until the airlines return to making major orders, including for Boeing aircraft.
The country has been developing into a major aviation market since the early 1970s. Pilarski notes that domestic traffic grew twentyfold from 1972 to 1985, and international traffic was up 200 times in the same period. And while annual growth rates of well above 20% for domestic aviation began slowly decreasing later, the sector still expanded by double-digit percentages until the COVID-19 pandemic. In 2019, China counted 660 million passengers, second in the world only to the U.S. (1.1 billion).
More recently, China has experienced economic woes not previously seen. But Pilarski contends that the slowdown has been “unavoidable.” The country’s period of very fast growth lasted much longer than in other Asian economies, such as Japan, Singapore, South Korea or Taiwan. “They all managed to do it. China managed to do it for a very long time,” he says. The slowdown, however, is about more than high growth rates naturally coming down over time. “The West realized it has been outsourcing too much to countries like China. The trend against outsourcing will affect China, and China is moving the same way for its own reasons,” Pilarski says. “The outcome will be that the economy will grow much less. It is fairly straightforward.”
In spite of the issues affecting the economy at large, in their domestic system Chinese airlines are operating significantly above 2019 levels. In July, traffic was also 72% above last year in terms of revenue passenger kilometers (RPK), according to Aviation Week Network’s CAPA – Centre for Aviation data. Chinese airlines carried 59 million passengers on domestic routes, compared to 51.6 million four years earlier. The global picture is different: 3.3 million international passengers flew to and from China in July, about half of the 6.6 million counted in July 2019.
The aircraft orderbooks at Airbus and Boeing do not seem to reflect the size of the market. China Eastern, China Southern and Air China have a combined order backlog of 365 aircraft with the two Western manufacturers. Compare that to India, seen by many as the next big thing in aviation: The Chinese orders represent little more than one-third of the commitment of IndiGo alone for Airbus A320neo--family aircraft and three-quarters the size of the latest Air India order.
In fact, Boeing recently reallocated 55 737 MAXs to Air India originally destined for China. According to the Aviation Week Network Fleet Discovery database, an order for 83 MAXs remains, and there are signs that deliveries of the type to China could resume shortly.
Even taking into account Chinese lessors, the numbers are not impressive (see chart): Boeing has a backlog of 494 aircraft on order by Chinese airlines and lessors; Airbus has 452. Combined, that is fewer than the 1,077 commitments on record for the Comac ARJ21 and C919.
While China received about 20% of production in past years, it will likely be far below that level in the medium term, Fleet Discovery forecasts show: Just 26 new aircraft are expected to go to China this year, rising to 218 and 220 in 2024 and 2025, respectively, then falling to much lower levels, assuming no new orders come in.
There are several factors to consider. “At the moment, there are clear instructions by the Chinese government to order less from Western manufacturers,” says MTU’s Luebke. “There is a lot more focus on ordering the C919.” While political interference has always been present in support of domestic products, it is becoming visible elsewhere, too. China Aircraft Leasing Group (CALC) recently struck a deal to sell a portfolio of 64 Boeing 737 MAXs to Dubai Aerospace Enterprise. CALC said the sale was “a good opportunity” to adjust its Boeing fleet portfolio, create flexibility in its existing operations and support the group’s “long-term sustainable development.”
CALC added that it “will continue to consider, from time to time, the acquisition of further aircraft from Boeing (pursuant to any future agreements or otherwise), or other aircraft manufacturers.” But Pilarski points out that “in China everything is political.” Reducing exposure to Boeing is politically wise for Chinese entities these days, given the growing tensions with the U.S. Notably, the CALC aircraft were due to be delivered in 2023-26, which is short-term in the context of current long waiting times and makes them valuable assets.
Moreover, Chinese airlines simply do not seem to need additional aircraft at the moment. Visa regulations make it difficult for Chinese travelers to fly abroad, and bilateral air service agreements have not been fully reinstated in major markets. Airbus placed many A330s in China in the 2010s. The relatively young fleet was largely used on intercontinental routes to Europe until 2019, but those aircraft could be reallocated to domestic flights in the absence of long-haul missions. In addition, the 737 MAXs delivered before the Civil Aviation Administration of China grounded them in 2019 have largely returned to flying, providing another capacity reserve.
China has meanwhile resumed ordering Airbus narrowbodies, and the OEM subsequently decided to double the capacity of its Tianjin-based A320neo final assembly line. However, the backlog of 456 A320neo-family aircraft represents less than 7% of the total narrowbody backlog of 6,768 units, well below where forecasts have placed China in market rankings. Separately, Airbus has gone public with statements that the country needs to order widebodies as soon as possible to avoid being locked out of fleet renewal, simply because there are no production slots available for years to come.
The Aviation Week Network’s delivery forecast for the next 10 years (see chart) projects that China will take 804 aircraft from Airbus, 773 from Boeing and 594 from Comac. Not included in the forecast is the CR929, China’s planned widebody, which has hit serious delays and is now dealing with the exit of joint-venture partner Russia. Western suppliers are limited in what they can provide to Comac due to U.S. sanctions on dual-use cases.
Boeing is confident that the historic patterns and shares will resume over time. “Domestic air traffic in China has already surpassed pre-pandemic levels, and international traffic is recovering steadily,” says Darren Hulst, vice president for commercial marketing. The company expects China to take delivery of 20% of all commercial aircraft over the next 20 years—8,560 units, a number slightly but not much below previous forecasts. Boeing predicts the Chinese in-service fleet will double over the next 20 years to about 9,600. The Airbus numbers are similar.
The average age of the Chinese commercial aircraft fleet is still relatively low, so retirements are not a pressing issue for many types. According to CAPA’s fleet database, the A320/A320neo fleet is 8.4 years old on average, and the A330s are at 9.7 years. The Boeing 737 is at 10.5 years, but that age is likely to decrease as more of the previously ordered MAXs are delivered and the grounded fleet fully returns to flying. The only outliers are the Boeing 757 and 767 fleets at 26.2 and 23.5 years, respectively. Only 65 757s and 23 767s are left to be replaced by Chinese carriers.
The C919 factor must be considered as well. Chinese airlines have been ordering significant quantities of the locally made narrowbody, two of which have been delivered to China Eastern and are in regular—though low-utilization—commercial service; they tallied 5.5 daily block hours this past summer on average.
Assumptions differ about how fast production can grow. Some believe a rate of 20 aircraft per year is realistic by 2028. Comac itself is apparently targeting 70 by the end of the decade. Even if that number is achieved, it would be equivalent to less than one month of A320neo production. In other words, China’s airlines will likely continue to depend on large-scale Western aircraft imports over time.
Xi’s government had earlier defined the building of the country’s aircraft leasing and finance industry as a priority in financial services, and a host of banks and institutions invested in airline fleets and new orders under the government’s auspices. But as the CALC case shows, that attitude has changed, and leasing is apparently no longer a priority, with the exception of Singapore-based BOC Aviation, a subsidiary of the Bank of China.
The current megatrends are not conducive to resuming the fast growth in air travel that China saw in the past. Yet Pilarski cautions that observers should not assume that Xi’s government will not change course. He points to the sudden reversal of the COVID-19 policies that went from frequent and brutal lockdowns to a complete opening almost overnight. “[Xi] does listen to his people, though there is no public discussion,” he notes.
The Western aerospace industry has not only been delivering aircraft to China, it has also been producing parts there using local suppliers and—in the case of Airbus—assembling aircraft in-country. Some Western OEMs and Tier 1 suppliers are more dependent on Chinese partners than others. The geopolitical paradigm shift may have the most impact in the supply chain.
“Suppliers will be much more cautious; politics are back alive,” Pilarski says. MTU’s Luebke comments: “In general, we see that a lot of OEM suppliers tend to pull back or have built up dual sources as alternatives to their Chinese suppliers.”
Another senior industry source with long experience in the country concurs: For those still invested in the country, double sourcing of parts produced in China would have to be the new norm. That is not going to be such a huge problem economically on the 737 MAX and A320neo because production rates are high enough to justify the exercise. It is becoming more difficult, and likely a multiyear process, for widebody parts. “They will have to be brought back,” the source says.
Suppliers with significant exposure in China include Alestis Aerospace and Aernnova building components for the A350 in Harbin. Others include Collins, Diehl, FACC, GE, Liebherr and Safran—among others supplying the C919’s powerplants. Of course, Airbus has the biggest presence with its final assembly line in Tianjin, whose capacity is set to double over the next few years to eight aircraft per month.
MTU decided long ago to pull out of parts production, but it does have a large—and growing—presence in maintenance, repair and overhaul (MRO) through its joint venture in Zhuhai. “We don’t need China as a basis for cost-efficient suppliers in the OEM business,” Luebke says. “In MRO, we want to be close to the customer. Therefore, [we take] the two different approaches.”
The Zhuhai facility is being expanded, but no new money is flowing into the country. The joint venture is financing the investment locally. MTU’s China strategy also includes the possible scenario of a full decoupling, should that become unavoidable.
Airbus’ final assembly line is one of the few success stories. Customers say the quality of aircraft delivered from that facility is no different from those coming out of Toulouse or Hamburg, Germany. Tianjin has become an integral part of the Airbus production system to the extent that the OEM’s narrowbody ramp-up hinges on, among other things, the doubling of aircraft output in Tianjin. Politically, of course, the investment has also helped Airbus tremendously in its efforts to grow its once small market share in China and overtake Boeing.
In spite of the disappointing production run for the Embraer ERJ145/Legacy in Harbin that ended in 2014 with only 35 aircraft produced, Airbus’s example appears to be leading Embraer to try again. The OEM has been struggling to find enough customers for its E2 series in traditional markets for a variety of reasons: the installed fleet is too young, scope clauses in the U.S. are not going away, and airlines continue to upgauge rather than “right-size,” as Embraer likes to put it. China looks to be a promising alternative market, along with India.
Embraer has been engaged in talked in China for some time. The airframer wants commitments for a relatively large number of E2 orders or at least an initial commitment big enough to justify opening a final assembly line in addition to the one at its headquarters in Sao Jose dos Campos, Brazil.
Embraer CEO Francisco Gomes Neto hopes China will not perceive the E2 as a threat to the smaller ARJ21 and larger C919 and instead use it to develop secondary markets. Brazil and China are also part of the BRICS (Brazil, Russia, India, China and South Africa) group of countries that is trying to establish itself as a stronger alternative to the West, so closer economic ties make political sense. Industry sources say the basic parameters of a significant E2 order have been agreed to, but the industrial side of the deal remains to be finalized.
Many in the industry are skeptical, not just because of the failed earlier Embraer venture in Harbin. “The Brazilians are too optimistic,” Pilarski says. “Harbin was a huge flop,” says another industry source. “I’m surprised that they even want to try again.”