Michael Bruno It is an inconvenient truth that China means a lot to Boeing—and to U.S. foreign trade, manufacturing and employment.
Michael Bruno
Boeing’s long-term growth depends on China ordering and taking delivery of 737 MAXs and 787 widebodies. Credit: Joepriesaviation.net
One of the few issues that unites Democrats and Republicans across the U.S. today is the need to better position America against China, starting with economic and national security. So why is the chief executive of Boeing campaigning for a more cautious approach with Beijing?
It is because China means everything to Boeing, and thus everything to U.S. aerospace, which also means lot to U.S. foreign trade and manufacturing.
From Wall Street to Wichita to Washington state, aerospace executives and advisors are noting how much the future of U.S. aerospace depends on returning relations with China to their pre-pandemic, pre-Trump-administration status—at least in terms of large commercial aircraft orders and deliveries.
“We’ve got to repair—or ‘restore’ is probably a better word—our deliveries in China,” Boeing CEO and President Dave Calhoun told the Bernstein investor conference in June. “We have to have a framework where our governments want to get back together, restore trade in selected areas.
“And I think in the case of the United States, Boeing and commercial aerospace has to be a high priority in light of the number of U.S. jobs that are attached to it and the global leadership position that we’ve enjoyed as an industry for so long,” he continued. “That’s predicated on doing business in China and continuing to do business in China.”
Several financial analysts point out that the continued ramp-up in monthly production of new Boeing 737 MAXs essentially relies on China recertifying it. To forecast beyond the current guidance of producing 31 737s a month starting in “early 2022,” Boeing must have reason to believe its Chinese prospects will brighten.
“Its specific plan for higher rates will depend on how U.S.-China trade relations evolve, since China is the largest source of future growth for the industry,” Bernstein’s Doug Harned and George Zhao wrote after their conference.
China is responsible for about 20% of Boeing’s backlog of undelivered aircraft, around 30% of the 2022 expected “skyline” and 15% of deliveries through 2024, according to a June report from Jefferies analysts. What is more, China’s MAX recertification could trigger a move of as much as 5% in the price of Boeing stock, with China’s total value to Boeing on the MAX worth around $24 per share, roughly 10% of its current share price.
This is neither surprising nor illogical. In 2000, China accounted for just 2% of Western aircraft deliveries; by 2018, it was buying about 25% of Airbus and Boeing backlogs. At the same time, Western aerospace companies were becoming more dependent on increased Chinese market demand. U.S. companies make up almost three-fifths of the Comac C919’s top suppliers, according to a Center for Strategic and International Studies report last year. One-third hail from Europe. Only 14 key suppliers are Chinese, and seven are joint ventures with Western businesses.
The data points go on and on. Over the past decade, China has accounted for more than 25% of all air traffic growth. “China is the world’s second-largest and fastest-growing civil aerospace and aviation services market,” the U.S. Commerce Department says in its latest review, updated in February. It was a $53.3 billion marketplace in 2019. Civil Aviation Administration of China (CAAC) records show that the country had 238 civil airports at the end of 2019. Annual passenger throughput exceeded 1.3 billion, an increase of 6.9% over 2018. Given that post-pandemic passenger travel is expected to continue growing at a similar pace for years, the CAAC plans to construct 216 new airports, for a total of 450 by 2035, the Commerce Department notes.
China was the last new major market for Western commercial aviation to conquer. While the recovery from the COVID-19 crisis is not going fast enough internationally, vaccines at least provide a pathway to normalcy. That leaves China as the leading unresolved issue for Boeing and the aerospace industry.
“The most important thing I’m keeping my eye on is China and the whole geopolitical situation with China,” Bank of America analyst Ron Epstein tells Aviation Week. “That impacts everything from the certification of the MAX, 787 deliveries, [to] future airplane orders. Is the industry on a path [to recovery], or are you going to see a bifurcation? [Is] China [going to retreat] into its own world or not?”
This is an awkward situation for Boeing, for sure. Beyond its dependency on the top U.S. economic rival for future business, Boeing also is the second leading U.S. defense contractor by annual sales, and China remains the leading national security concern under the Biden administration.
But losing the Chinese market would force retrenchment far beyond what COVID-19 caused. Like it or not, expect Boeing and its supporters to continue urging reconciliation with China.
