China’s Comac Gets a Chance to Narrow Gap With Airbus and Boeing
(Bloomberg Businessweek) -- The coronavirus pandemic has upended the boom in global air travel that fueled the fortunes of Boeing Co. and Airbus SE over the past two decades. But as they lose orders and cut staff, the Chinese aerospace company hoping to challenge them is seeing an opening.
On July 10, Air China Flight 1109 took off from Beijing for a city in Inner Mongolia, the first time the country’s flag carrier flew a plane made by Commercial Aircraft Corp. of China (known as Comac), the state-owned manufacturer that until then had only managed to provide planes to third-tier carriers such as Genghis Khan Airlines. China Southern Airlines introduced a Comac aircraft a few days later.
With Covid-19 paralyzing air travel and tensions rising between China and the West over issues including Hong Kong’s democracy movement, state-backed Comac may finally have an opportunity to start narrowing the gap with Western manufacturers, which have seen their finances pummeled during the pandemic.
The coronavirus crisis “could be one of those things that alters the playing field substantially,” says Robert Spingarn, an analyst with Credit Suisse Group AG. “While aerospace companies are busy putting out the fires of today, somebody else who doesn’t have those concerns and is under less pressure may be able to make something happen.”
Comac is part of China’s strategy to become more self-sufficient in everything from semiconductors to satellites. The country will need to buy $1.3 trillion of planes over two decades, according to a 2018 forecast by Comac, which is conducting test flights for its single-aisle C919, designed to rival the Boeing 737 and Airbus A320, and is in early-stage development of a widebody jet with a Russian company.
For now, Comac’s only plane in operation is the ARJ21, a jet that can seat up to 90 passengers. Since introducing it in 2015, the company has managed to deliver fewer than three dozen. But in June it delivered the ARJ21 for the first time to the country’s most important airlines Air China, China Eastern Airlines, and China Southern Airlines—who will receive a combined 105 by 2024. And China Express Airlines, a regional carrier, in June ordered a total of 100 ARJ21s and C919s. “This is the time where a company like Comac that has a bunch of government funding can continue to drive forward even as others are retrenching,” says George Ferguson, a Bloomberg Intelligence analyst.
Belt-tightening is certainly the plan for most aerospace players right now. Airbus received zero orders in June, the third month this year with no new business, and it plans to lay off 15,000 employees, or 11% of its workforce. Chief Executive Officer Guillaume Faury warned in April that the company was “bleeding cash.”
Boeing announced 6,700 layoffs in May, as customers scrapped purchases because of the 737 Max’s safety problems and the Covid-caused travel slowdown. In June, Norwegian Air Shuttle ASA canceled an order for 97 planes, a day after Singapore-based BOC Aviation Ltd. terminated an order for 30. Boeing lost more than 600 orders in the first five months of the year, and the company in April walked away from a $4.2 billion joint venture with Embraer SA, the Brazilian maker of regional jets.
Comac has yet to make inroads with foreign airlines and will face challenges given persistent worries about the safety of Chinese-made aerospace products, says Larry Wortzel, a member of the U.S.-China Economic and Security Review Commission. “Getting certified will be difficult anywhere outside of China,” he says.
One way to jump-start its regional jet program would be an alliance with Embraer, whose debt Fitch Ratings and S&P Global Ratings cut to junk soon after the Boeing deal collapsed. A partnership could address Comac’s shortcomings in both production and its ability to provide post-sales service, says Ferguson. When asked in June about teaming up with a Chinese company, Embraer CEO Francisco Gomes Neto said only that the company is considering potential partnerships. Comac declined to comment.
Over the next two years Chinese aircraft will become more competitive, Embraer's CEO of Commercial Aviation, Arjan Meijer, said in a Farnborough International Airshow webinar on Wednesday.
By pursuing a deal, Comac could take a page from the playbook of another Asian company with aerospace ambitions, Mitsubishi Heavy Industries Ltd. The Japanese company’s money-losing aircraft subsidiary, which has yet to deliver its first plane, in June completed a $550 million deal to buy the regional jet program of Montreal-based Bombardier Inc., Embraer’s major rival.
Yet heightened tensions between the U.S. and China could be an obstacle to Comac’s expansion. The Trump administration in June published a list of 20 companies it says have links to China’s military, including Aviation Industry Corp. of China, which is a Comac shareholder. “As the U.S. government expands sanctions on Chinese companies, this could make a Comac-Embraer deal nonviable,” says Thiago Aragao, a political analyst with Brasilia-based Arko Advice.
Moreover, the industry outlook is very different than what Comac had been expecting before the pandemic. With a recovery of international air travel likely to be painfully slow, some endangered airlines will need to dump unneeded planes, according to Peter Harbison, chairman emeritus of market researcher CAPA-Centre for Aviation in Sydney. That could make it tougher to win sales of new jets. “There are going to be some good deals in the used-aircraft market,” Harbison says.
Still, while coronavirus infections soar in the U.S., China seems to have controlled the pandemic, and Chinese airlines are showing early signs of a rebound. And Sino-American tensions could create more incentives for Chinese airlines to buy local, according to Richard Aboulafia, an analyst with aerospace market researcher Teal Group. That’s what happened during the Cold War, when the USSR produced commercial aircraft that were popular in the Soviet bloc for political reasons. “If you really are thinking of a world where China and the West decide to separate, they may use Comac as a way of replicating the old Soviet experience where they have a parallel aviation industry,” Aboulafia says. “We have seen that movie before, and it doesn’t end well, but China is different than the Soviet Union and might make a go of it.” —With Chunying Zhang and Murilo Fagundes
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