Premium #185 – China Aviation Market Survey

With data now available through the 2nd quarter of 2015, we took a look at the Chinese civil aviation market. This market is changing rapidly, and the trends are interesting for this growing market. As of 3o June2015, there were 2,834 commercial jet aircraft in the national fleet. Of these 48 are in use as VIP aircraft and 166 are freighters, with the balance in passenger service. Breaking this fleet down by manufacturer generates the following chart. Alternatively presenting this data as numbers results in the following table. Airbus and Boeing are essentially equal and account for over 90% of the market. The big duopoly are likely kept even in order to ensure Chinese airlines get the keenest pricing. Even though Airbus has a final assembly line in Tianjin, this does not seem to have helped its Chinese market share. We wonder if the investment worth it? Boeing certainly has not suffered. The smaller duopoly sees Embraer doing much better, reflecting the lack of smaller regional jets in China. When looking at the engine breakdown, today's fleet translates to the table when examined by manufacturer. We included IAE V2500 engines under the P&W brand. Not surprisingly CFM is way ahead as one would expect with its engines on both the A320 and 737 aircraft. But the breakdown of these numbers into use across the fleet is helpful to identify any patterns. The following tables illustrate the spread of engines across the various aircraft types. As the data suggests, GE is doing well among the widebodies, especially the 787 which is likely to see continued sales in China. China can be expected to be a significant buyer of the 777X and this will further support GE's business in the market. GE also has a compelling lock on the regional jet market with its CF34 - but we will have to see what transpires regarding the PW powered E2 and C Series in the future. Rolls-Royce looks strong on the A330 fleet and can be expected to remain so, as China adds more of these types as well as the A330neo. Rolls also has a lock on Chinese A380s, and we expect to see more A380 orders from China. Even though the economy is going through an adjustment cycle, the sheer volume of people and rising incomes will see travel grow, even as it slows down for now. P&W's future is not in big engines at this stage and it is better to focus on the IAE fleet were the company looks strong. As we have seen elsewhere, A321s typically use V2500s and this suggests A321neo orders are likely to favor the GTF. CFM is a very strong competitor for P&W, and looking at the data we suggest MAX and A320 orders are the future for its LEAP program. Of these MAX looks to be the big driver. The following chart illustrates the market for the major engine OEMs by aircraft program for the existing Chinese fleet. While several aircraft offer no engine choice, China has typically followed world trends in its engine selections. Examining the Fleet by Airline China currently has 79 different airlines, and the top 10 account for 73.3% of the national fleet. Of the top three, China Southern and Air China are nearly equal in their Boeing/Airbus split, while China Eastern seems to favor Airbus. We believe consolidation is likely as the market matures, with the 69 smaller airlines aligning with larger airline groups. The top ten airlines are mainly focused on Airbus, Boeing and Embraer aircraft. Bombardier only get's a "look in" at #10. But the other replaceable fleet types offer Bombardier and Embraer opportunities for replacements and new orders. Breaking down the fleet numbers some more to get a better idea of the replacement opportunity, we split the fleet for the top ten by type and age. The top table is for widebodies and the lower table for single aisles. Among the 737s, the breakdown shows that there are 45 Classics in passenger configuration which are replaceable, plus another 700NGs, 745 800NGs and only six 900NGs. Embraer and Bombardier are no doubt watching for opportunities among the Classics which are aging. The 747 fleet, especially at Cathay, is large. Cathay seems to be focused on 777 sized replacements. Though the company makes use of 747-8 freighters. Cathay is frequently named when the A380 comes up. Air China has selected the 747-8. The A300 serves a market as a medium range people mover and the A330R is a possible replacement, although it has a much greater capacity. Boeing has no "natural" replacement for this aircraft either. The A340 fleet is aging an is due for replacement. One might think Airbus' A350 is a "natural" replacement. Cathay has the largest number in service and we will have to see how this plays out. Cathay has ordered the A350. The 757 is often discussed segment, like the A300, with no n"natural" replacement. China took the final 757 delivery. Can the A321LR suffice? Will growth encourage a look at the A330neo? Currently Boeing's MAX does not look like as attractive to replace the 757. This might be an Airbus turn over opportunity. A318 and A319 are very interesting aircraft because they are facing new comers in the C Series and E2. As with the 737 Classics, these Airbus models are replaceable. But they are about half the age of the 737 Classics. We expect to see the 737s replaced first and these replacements might indicate which will end up replacing the A318 and A319. Bear in mind there are a number of other "drips and drabs" that need replacing in this same size segment. Based on the current footprint one might think Embraer has the advantage - but its E2 will come out in 2018 at the earliest. Bombardier therefore has to strike first but can the company persuade the Chinese to step forward? The market has been waiting for the Chinese to move on the "obvious" C Series for two years now and nothing has happened. Orders and Backlog A look at the Chinese backlog among its airlines for next generation single aisle aircraft produces the following chart. The Chinese airlines have selected a majority of the Airbus aircraft as A320s. But for Boeing, the entire focus at present is on the MAX8. As one considers this chart note that both OEMs have many unannounced customers - many may be for China. Also, Chinese orders are frequently made through the state rather than by an airline directly. But note the volumes - China has already started buying local. This is not a commonly reported issue. In another view of the Chinese backlog, the next chart illustrates the breakdown by OEM and also shows the relative size of the Chinese orders relative to the rest of the world. Airbus is ahead of Boeing on a global basis, but with respect to China, the backlog is more nuanced and balanced. The smallest models barely feature as we have noted numerous times. The middle size is a runaway success for both OEMs. The larger models see Airbus with a distinct advantage. Airbus has a larger MoU too and we expect this might favor the A321. However when note that the number of China-made aircraft on order by Chinese operators dwarf the numbers ordered from Airbus and Boeing. This, in our view, demonstrates that Chinese operators have started a swing towards buying local. The implications for Western OEMs should not to be summarily dismissed. Among Chinese operators, there are 793 Chinese made aircraft on order compared with a combined 667 orders and MoUs from Airbus and Boeing. While Airbus and Boeing are doing a roaring trade outside China, within China it seems the tide may have started to shift. Given the size of the Chinese market today and expected size by 2030, the implications should be clear. The Bottom Line In summary, the Chinese market is rich in opportunities. However, as a planned economy, typical economic and competitive behaviors cannot be expected to play out. China has a fast growing aerospace industry looking for customers. Chinese airlines are going to be encouraged to buy local, even if they don't want to. This means the economically outdated ARJ21 will see service in China as will the much delayed, but more competitive, C919 as well. The ARJ seats under 100 and threatens the CRJ and E190. The C919 seats 150 and that market will pressure Bombardier and Embraer more than Airbus and Boeing, as their focus will be on larger aircraft. Perhaps this is why no Chinese airline has moved on the C Series. Tianjin has 20 E2-190s on order and is the only Chinese airline to have made this selection. In the large aircraft segment, Airbus and Boeing have no threat on the near-term horizon, although COMAC and UAC have discussed working together on a new wide body. These two western OEMs are currently played off against each other by China to ensure both remain on their toes. We anticipate the current economic slowdown in China will be managed - as it was after the US-driven financial crisis. China has the capital to ensure a soft landing and keep its consumers pacified, if not satisfied. Travel is likely to fall off for short range trips but long haul traffic is likely to keep growing. The weaker Yuan means cheaper than ever exports. Business travel therefore should remain strong even as leisure travel softens. China will remain a key aviation market to focus on for the major OEMs, and while it appears that buying local has already begun, production delays and ramp-ups will buy a few more years of western aircraft. But the handwriting is already on the wall.

No results