China’s Comac Is Preparing To Take On Boeing, Airbus In Short To Medium Range Market

Through October 2012, Boeing (NYSE:BA) delivered a total of 486 commercial airplanes to various airlines and leasing companies, of which 342 deliveries were for Boeing 737s. ^[1] These single aisle, narrow bodied, short-to-medium range airplanes together with the competing model from Airbus – the A320 – constitute the highest selling class of airplanes.

This category of airplanes is set to see a new entrant called Comac C919 which is developed by China’s home-grown Commercial Aircraft Corporation of China (Comac). Comac C919 is expected to enter service in 2016 and will increase global competition and break the effective duopoly of Boeing and Airbus in this highly important category. At present, Boeing has an enormous lead over Comac in terms of R&D, past track record and existing customer relationships; however, the company will have to continue investing large sums in research and expand its sales focus in key markets to maintain its lead.

We currently have a stock price estimate of $75 for the company, approximately 5% ahead of its current market price.

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The Comac 919 could take significant market share in key markets in the future

Since Comac is a state-run organization, it will likely benefit at least in the initial stage from the major Chinese airlines that are also state-run. This is reflected in its current order book. Out of 380 orders that Comac 919 has received so far, 360 have come from Chinese airlines and leasing companies. ^[2] The remaining 20 were ordered by GE Captal Aviation Services (GECAS) as GE (NYSE:GE) along with Safran of France is supplying engines for Comac C919; and GE promotes sales of its aviation products through its financing arm GECAS. China has expressed its desire to even design and manufacture its own engines for Comac C919 in the long run.

All in all, Comac C919 is well-positioned to take significant market share in key global markets particularly China. Boeing currently estimates that China will require 5,260 new commercial airplanes over the next 20 years. Of these, approximately 4,070 will be single-aisle, short-to-medium range airplanes that Comac C919 can serve. ^[3] Over the long term, it could also prove to be an important player in markets outside of China. The first flight of Comac 919 is expected to take place in 2014 with deliveries starting in 2016.

The single-aisle, short-to-medium range class of airplanes is an important segment for Boeing

Boeing has received net orders for 1,056 new commercial airplanes in 2012 as of November 13. Out of this 1,031 are for Boeing 737 – a whopping 97% of total net orders. ^[4] The corresponding percentages for 2011 was 68% in 2011, 81% for 2010, 75% for 2009, and 79% for 2008. ^[5] Even though the list price for the B-737 series is lower compared to B-747, B-767, B-777 and B-787, its high percentage of total number of orders makes up for its lower price. Thus, sales of B-737 airplanes constitute a high proportion of the company’s total value.

In addition, over the long term, Comac plans to launch long-range, twin aisle 929 and 939 versions to compete with Boeing and Airbus’ other models. This means Boeing will face increased competition in the single-aisle, short-to-medium range airplane class from the entry of Comac C919 over the next decade and possibly in other airplane categories in the long run.

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1. Total 2012 deliveries, November 19 2012, www.boeing.com [↩]
2. Comac 919 order and deliveries, November 19 2012, www.wikipedia.com [↩]
3. Boeing forecasts China will need 5,260 new airplanes by 2031, September 5 2011, www.boeing.com [↩]
4. Orders through Nov 13th 2012, www.beoing.com [↩]
5. Recent Annual Orders, www.boeing.com [↩]