Insight Monday 30 November 2020 – COMAC C919 gains TIA – the next moves are tricky

News:

COMAC has received the type inspection authorization (TIA) for its C919 aircraft, enabling final flight testing and certification. Typically, issuance of a TIA means that the program is nearing completion, the design is finalized and verified, and issuance of a type certificate and entry into service are about a year away.

The company currently has six test aircraft in its fleet, spread around China to accomplish the required certification testing in different environments prior to certification.

China Eastern Airlines subsidiary OTT is the launch customer for the C919, and the Shanghai-based carrier should receive its first aircraft in late 2021. Currently, there are 305 firm orders for the C919 from Chinese carriers and leasing companies.

Analysis:

Recently proposed trade sanctions against COMAC by the Trump administration could impact the delivery of additional CFM Leap 1-C engines in the future, but six aircraft are currently engaged in the flight test program and will be able to complete the certification process. It is a possibility that a Biden administration might reverse that process, but this entails political risk as it is difficult to remove a company from a prohibited list once it is on such a list, as those actions make for future political attack commercials.

In addition, COMAC is also planning to utilize ACAE CJ-1000A turbofan engines as a locally built alternative to the CFM Leap 1-C. The first Yangtze (Chang Jiang) model was assembled in 2018 and was originally scheduled for certification in 2021. Our sources indicate that planned timing may be several years too optimistic. That would effectively leave the aircraft without engines until the transition to locally developed engines can be made. This could be quite a while after the baseline airplane with western components is certified.  COMAC could see the same type of sanctions as Huawei electronics and phones.

Given the deteriorating trade relationship with the United States, COMAC is planning to shift to locally build components wherever possible to avoid potential future delays, but this cannot happen overnight. Ensuring the capability for China to independently build the aircraft cannot be done instantaneously, as an entire supply chain for multiple components will be needed.

While a Biden election could ease time pressure on that goal, China is firmly moving towards self-sufficiency in aviation, which has been a long-term goal that is now showing light at the end of the tunnel. A version of the Yangtze engine family is also targeted for the ARJ-21 for similar reasons.

Insight:

The C919 will become a solid competitor for the Boeing 737 MAX and Airbus A320 in China, and as production ramps up will cut into new orders for the big two western manufacturers. With a surplus of used aircraft now readily available in the secondary market, we would minimal new orders for Boeing from China for the next three to four years, at a minimum.

While China will require some widebody aircraft, the bankruptcy of Norwegian will likely result in some young 787s becoming available at attractive pricing from leasing companies. In addition, other models, including young 777-300ERs, are also available in the market at prices we haven’t seen in recent years.

The impact of the sanctions on China could see potential retaliation on the MAX. The Chinese were the first to ground the MAX, and maybe the last to return it to service, despite several Chinese carriers with MAX fleets and orders. There are several requirements that EASA and Transport Canada will likely require at a later date, including synthetic airspeed and a cut-off switch for an errant stick shaker that goes beyond the FAA requirements. China could be the first to require those in addition to the FAA requirements and assert itself from a regulatory standpoint to retaliate if access to US engines and components are blocked for the C919.

It is our belief that an escalating trade war in aerospace with China (and Russia) makes little sense. China can certainly reverse-engineer technologies, as can any nation with an abundance of engineering talent. All they need to do is buy an aircraft to have an example.  But if we are trying to balance trade, it makes little sense to cut off the single most important US export to China – aircraft – from the equation. The residual benefits of a trade war do not, in our opinion, compensate for the losses in exports in the near-term. Free trade in aircraft would certainly not prevent Boeing or other US companies from leveraging their technological advantages in new designs that would render the C919 economically obsolete.

As we enter an era of potential changes in propulsion technologies by the mid-2040s, the next generation of aircraft may be an interim model with a 20 or 25-year production run rather than a 50-60 year production run as is the case with the 737. As technologies migrate, product strategy decisions become more critical and can be “bet the company” decisions. But that’s always been the name of the game in aerospace. If Boeing doesn’t innovate, China will catch-up. But doing so means Boeing had better get it right the first time. Boeing can’t afford another 787 cost-overrun or 737 MAX safety problem for its next-generation aircraft.

The key here may not be whether COMAC can be stopped over the long-term because that isn’t a feasible option. COMAC might be delayed a few years, but the caged dragon may be more dangerous than the one in the wild. Boeing will need to leapfrog COMAC and leverage new technologies to do so. The questions now are which technologies and when.

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