Boeing Is Facing Rising Competition In The Fast-Growing China Airplane Market

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The Boeing Company

Boeing (NYSE:BA) recently raised its long term demand forecast for new commercial airplanes from China. Last year, the airplane maker had predicted that 5,580 commercial airplanes would be delivered in China over the next 20 years. [1] But driven by rapid expansion of low-cost carriers in the country, along side the Chinese government’s push to expand flight services in the country’s interiors, Boeing earlier this month forecast that 6,020 commercial airplanes valued at $870 billion would be delivered in China over the next 20 years [2] China will then lead the Asia-Pacific region in new airplane deliveries, accounting for nearly 45% of the total deliveries in this region over the next two decades. [2]

Demand for new airplanes in China is being driven by rapid expansion of the low-cost model, which has been employed with great success by many airlines in North America and Europe. During the 1980s and 1990s, low-cost carriers such as Southwest and Ryan Air played a key role in growing air passenger traffic. Lower fares offered by these carriers made air travel more affordable for a larger population, fueling growth in air passenger traffic. In turn, this higher passenger traffic required a larger airplane fleet. This phenomena is now beginning to take effect in China, accelerating demand for new airplanes from the country as low-cost carriers are expanding aggressively. Additionally, unlike North America and Europe, where new airplane orders from airlines are being placed primarily to replace older airplanes, in China airplane orders are being driven by the need to expand fleet. Thus, Boeing has a huge potential market in China to drive growth in its airplane sales, but the company faces growing competition. China’s state-run Commercial Aircraft Corporation of China (Comac) is developing a single-aisle airplane named Comac C919, and global regional airplane makers such as Bombardier and Embraer are building larger jets to enter the market segments, which until now were dominated by Boeing and Airbus.

We currently have a stock price estimate of $136 for Boeing, around 7% ahead of its current market price.

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State-Run Comac Will Likely Weigh On Boeing’s Market Share In China

Currently, more than 50% of all commercial jetliners flying in China are Boeing airplanes. [2] We figure Boeing’s high market share in China is a result of its historic lead over Airbus in development of commercial airplanes. However, Boeing’s China market share in coming years will likely see a greater challenge, especially from China’s state-run Comac, which is developing a single-aisle C919 airplane. Single-aisle airplanes with a seating capacity of approximately 90-230 passengers form the mainstay of low-cost carriers’ fleet. Thus, China’s Comac is introducing a challenger in the most important airplane segment. Boeing on its part also forecasts that nearly three-fourth of the 6,020 airplane deliveries in China over the next 20 years will be single-aisle airplanes. In this segment, Boeing has its highly successful 737 series and Airbus has its A320 series. So, Comac faces a tough  challenge in establishing itself against such successful airplane models. However, in our view, the Chinese airplane maker will likely benefit from the state ownership of many Chinese airlines. This is also evident from C919’s current order book in which 380 of its 400 orders have come from either Chinese airlines or Chinese aircraft leasing companies. [3] In effect, Comac’s C919 could weigh on Boeing’s market share in China, and thus prevent Boeing from fully benefiting from the huge growth anticipated in this market in coming years.

Larger Airplanes From Embraer & Bombardier Could Also Weigh On Boeing’s Market Share

Additionally, airplane makers Embraer and Bombardier which were focused on developing smaller regional jets are now developing larger commercial airplanes in the single-aisle segment. This will further pressurize Boeing’s market share in not just China but also the rest of the world. Embraer’s second generation of E-jet, which is being designed to seat more than 110 passengers, will enter service with airlines in 2018. Also, Bombardier’s new CSeries airplane whose first delivery is scheduled for next year will seat around 110-140 passengers. These airplanes will thus compete directly with the smaller models in Boeing’s 737 series. We figure, initially these Embraer and Bombardier airplanes will occupy a small share of the global market, but if airlines find these new planes to be as fuel and cost efficient as promised, then they will likely emerge as stronger contenders. This challenge from Embraer and Bombardier could also weigh on Boeing’s market share in China.

However, the impact on Boeing’s profits from these new entrants will likely not be as significant, as the global market for new commercial airplanes is steadily growing. Driven by rising trade, growing global economy and globalization, global air passenger traffic is expected to continue to grow in the coming years, forcing airlines to expand their fleets and place more orders for airplanes.

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Notes:
  1. Boeing’s 2013 forecast for the China airplane market, September 5 2013, www.boeing.com []
  2. Boeing’s 2014 forecast for the China airplane market, September 4 2014, www.boeing.com [] [] []
  3. Comac C919 orders, September 15 2014, www.wikipedia.com []