Should Airplane Manufacturers Worry About China's Airplane Industry?

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Includes: BA, BDRBF, BOMBF, EADSF, EADSY, ERJ
by: Dhierin Bechai

Summary

FAA certification is key for COMAC to break the duopoly.

The Chinese aerospace industry is making steps, but still has a long road to break the Airbus/Boeing duopoly.

Partnerships with other aircraft manufacturers can break the duopoly over the long term.

Airbus (OTCPK:EADSF/OTCPK:EADSY) and Boeing (NYSE:BA) have a duopoly on the aircraft market. Big order inflow comes from the Chinese market which is expected to boom in the coming decades. In this article, I will look at the demand for aircraft from Chinese airlines and will have a look at COMAC's (upcoming) product line and see whether COMAC can play a meaningful role in the market in the coming years.

COMAC is a Chinese, state-owned, manufacturer of aerospace products founded in 2008 with the long term goal of breaking the duopoly Boeing and Airbus have on the aircraft market.

The (future) product line of COMAC:

  • ARJ21
  • C919

COMAC ARJ21 (Regional jet)

One of the aircrafts that COMAC will produce is the regional jet ARJ21, which comes in 2 variants:

  1. ARJ21-700
  2. ARJ21-900

ARJ21-700

The ARJ21-700 will carry up to 78-90 passengers and will have a range of 1200-2000 nautical miles and should be able to compete with the current and upcoming Embraer (NYSE:ERJ) E175, as well as the MRJ90 and the Bombardier (OTC:BOMBF/OTCQX:BDRBF) CRJ900. At the moment only the E-175 and CRJ900 are in production, the other competitors will enter service in the coming years.

Table 1: Capabilities of various competitors colored by strength

Looking at the green colored cells it seems that the E-175/E-175-E2 is still one of the best regional jets, shortly followed by the ARJ21-700. At current list prices the ARJ21-700 is one the cheapest aircrafts on offer, which is caused by COMAC being state-owned as well as the low production costs (low wages for employees). This potentially makes the ARJ21-700 a very attractive aircraft to have in the fleet.

To date the ARJ21-700 accumulated 258 orders. It has to be noted though, that the ARJ21-700 has primarily been ordered by Chinese airlines and companies.

What puts the ARJ21-700 in a difficult spot is the huge delays, which are caused by the manufacturer's inexperience. Currently COMAC plans to have the ARJ21-700 in service by early 2015, 8 years after its scheduled EIS (Entry Into Service).

What does not bode well for the ARJ21 program is the fact that delays have been so huge that the technology used on the aircraft is already dated, which puts it at a disadvantage when comparing it with the E-175-E2 and the MRJ90-LR.

Currently COMAC is looking to improve the ARJ21-700 without having to re-engine the airplane. The company hopes to ramp up production to 50 aircrafts per year after service entry.

ARJ21-900

The ARJ21-900 has a similar range capability as the ARJ21-700, but can transport up to 15-20 passengers more. To date the ARJ21-900 has received no orders and I am not expecting this to change until the ARJ21 concept has been brought up to today's technology standard.

COMAC definitely can be a threat to other manufacturers of regional jets, but has to be able to bring its products up to par with the newer aircraft that will enter service in the coming years. Additionally, the company should try to access markets other than the Chinese aircraft market to become more meaningful in the international market for regional jets.

COMAC C919 (Narrow body)

One of the aircrafts that COMAC will produce is the C919, which comes in (at least) 3 variants:

  1. C919-Mixed
  2. C919-All ECO
  3. C919-High Density

The C919 is a first attempt to break the duopoly Boeing and Airbus have on the narrow body market. To date, the C919 has accumulated 430 orders, primarily from Chinese airlines and lessors.

The aircraft is scheduled to enter service in 2018, 1 year after the Boeing 737MAX EIS and 3 years after the Airbus A320neo EIS. Additionally, C919 finds its competitor in the Irkut MC 21-200 and the Bombardier CSeries.

The C919 will seat up to 174 passengers with a range of 3000 nm, where capacity as well as range depend on the aircraft model. The C919 will primarily consist of aluminum alloys, but CFRP (Carbon Fiber Reinforced Polymers) will be applied on the central wing box.

The C919 will be powered by CFM International Leap 1-C engines, the same engine family that also powers the Airbus A320neo and the Boeing 737MAX.

What limits C919's ability to compete is its limited range, shown in Figure 1, compared to its Airbus and Boeing counterparts. For airlines that require the range the C919 is not a good option; for airlines that do not need this range the C919 might be a good option.

Figure 1: Payload-range diagram for various narrow body aircraft (Source: Dhierin-Perkash Bechai)

Where the ARJ21 looked extremely cheap compared to its competitors, the C919 does not. No figures for the C919 list prices have been released yet, but a list price of $68 million has been estimated, which is $20 million below Boeing's cheapest 737 MAX member.

Table 2: Order numbers for narrow body members

Figure 2: Order division narrow body market (Source: Dhierin-Perkash Bechai)

The C919 acquired a 6% share of today's orders in the narrow body segment, but as can be seen it is not big enough to break the duopoly in the market segment.

Figure 3: Order division narrow body market South-East Asia (Source: Dhierin-Perkash Bechai)

On the South-East Asian market this seems to be somewhat different. The C919 has an order share of 22%, which is almost as big as Boeing's share in the market. It has to be noted though that orders for the 737MAX might grow, while for the C919 this probably will not be the case.

In order to play a role in the international wide body segment the C919 has to be certified not only by the Civil Aviation Administration of China (CAAC), but also by the Federal Aviation Administration (FAA). The FAA at this point is not yet recognizing the certification work done by the CAAC on the ARJ21 as well as the C919, which limits the C919's prospects in the Chinese market.

Even if COMAC receives FAA certification it has very little to offer its customers. The COMAC C919 is cheaper but has limited delivery slots. While Airbus and Boeing are bringing their production of narrow body aircraft to 50+ per month, COMAC will only be able to produce 4 aircraft per month, which means that airlines probably have to wait longer for their aircraft to be delivered (even when taking into account the huge backlogs Airbus and Boeing have).

Although the C919's list price is way lower than that of its Boeing and Airbus counterparts it does not mean costs are effectively lower. The development of COMAC aircraft is being paid for by the Chinese government, which reduces the pressure on the C919 as a means to acquire money to finance future developments. Additionally, COMAC is dependent on foreign suppliers for avionic systems and engines, which to a large extent determine the price of an aircraft. Due to the fact that China does not have its own suppliers for jet engines and avionics it is not able to slash the sales price.

Although the C919 is a big step up for the Chinese aerospace industry the C919 will not be able to play a big role in the international narrow body market yet. In the absence of a FAA certification the C919 will only play a role in the Chinese aircraft market, which still is being dominated by Airbus (and Boeing). Additionally, the C919 depends on the avionics and jet engines from foreign suppliers.

In order for the C919 to play a role in the international narrow body market, it needs to obtain FAA certification and market the airplane to airlines outside of China as well. Similar to the ARJ21-700 the C919 is being ordered by Chinese airlines and lessors.

COMAC C929/C939

COMAC is already talking to suppliers to develop a 290-seater and in the long term a 390-seater is also being planned. Taking into account the added complexity of a bigger aircraft and the fact that there are 8 years between COMAC applying for type certification for the C919 and EIS, it probably will take over a decade before COMAC will be able to play a role in the wide body market. There also is no point in developing a wide body if chances of FAA certification are slim.

For COMAC to play a role in the wide body market it has to acquire FAA certification. At the moment, obtaining FAA certification for its smaller aircraft seems to be a struggle. Additionally, designing, certifying and manufacturing will be a process that will stretch over a number of years.

While some people expect the Chinese aircraft industry to play a significant role once the C919 enters service I do not expect COMAC to play a big role for a while for the following reasons:

  • Inexperience as a manufacturer: Inexperience on the ARJ21-700 caused delays in its service entry, eventually leading to an aircraft that will already be outdated upon service entry. Over time COMAC will learn lessons and this inexperience will fade.
  • Inexperience of CAAC could affect the destiny of Chinese aircraft. In order to have a potential international success the Chinese aircraft should be certified by the FAA. Certification processes usually take years; with inexperienced certification agencies, this takes even longer.
  • Order numbers are primarily being kept high by Chinese airlines and lessors; there seems to be no firm interest from airlines or lessors outside of China (except for GE's leasing company, but that company merely ordered the ARJ21 because GE is involved in the project).
  • COMAC is dependent on foreign suppliers. Those suppliers also supply to Boeing and Airbus, who at this moment are the bigger players in the field.

Why COMAC could play a more prominent role in the future:

  • Over time certification work should achieve a standard that is also accepted by the FAA.
  • Being state-owned removes some pricing pressure on the airframe. Sales prices can be lowered since the aircraft does not need to generate income to finance development of a future aircraft family per se.
  • Chinese employees, such as engineers, are much cheaper than American and European engineers.
  • Over time China should develop a chain of suppliers in China itself. Assuming it is cheaper having Chinese engineers develop a product and produce components, the component costs as well as the sales prices of the aircraft will be lower.

So although the designs by COMAC look promising, not all components are present yet for COMAC to break the duopoly that Boeing and Airbus have in the coming 1-2 decades. I think COMAC will eventually play a role in the aircraft market, but I do not think that will happen before 2030-2035. COMAC will force Boeing and Airbus to offer lower prices (for the same quality), but other than that one can question the importance of a state-owned manufacturer competing with commercial manufacturers. COMAC's order book has been filled by Chinese companies so far and the costs of the programs are fully covered by the Chinese government. In the short term this a good way to start up an industry. In the longer term this is not a sustainable and beneficial way to operate, not even as a state-owned company.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

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