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Global developments presenting risks and rewards for the aircraft trading and financing market

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Headline News was last updated: December 23, 2009

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December 2009

Chinese carriers operated 1,399 aircraft as of November 2009.

China's airlines earned $1B in the first 11 months of 2009 vs. $400M in the year-ago period, according to CAAC.

China’s revenues: Total operating revenue was down 3% $29B & expenses fell 3.6% to $28B.

China’s payloads: Passengers carried grew 19.6% to 211.5M as domestic traffic grew 21.8% to 198.2M & international traffic fell 5.5% to 13.3M

CAAC predicted that domestic passenger traffic in China would also grow by double digits in 2010.

Cargo volume in China rose 5.7% to 4M tonnes through November 2009. Domestic cargo grew 8% and international cargo grew 0.2% to 1.1M tones.

CAAC says that steady domestic economic growth & global economic recovery are the basis for the turnaround.

China is targeting economic growth of 8% in 2010, the rate targeted for the last few years, a target it has yet to miss.

China: Manufacturing accounts for about 40% of China's economy and it will grow rapidly in 2010, by as much as 11%.

China is the world's third-largest economy and was boosted by a massive government stimulus in 2009 that will be continued through 2010.

China's manufacturing industry is over-reliant on exports, where economic recovery remained weak.

China’s domestic consumer demand will benefit from current fiscal and monetary stimulus measures, as part of the effort to reduce the dependence on exports.

Inflation is a determining cost factor in the cost of new aircraft.

Inflation was dampened due to sluggish real activity and lower commodity prices says the IMF>

Inflation declined in the advanced economies from 3½% in 2008 to a record low ¼% in 2009 &

headline inflation may edge up to ¾% in 2010.

Inflation in consumer prices:  Some advanced economies are expected to experience a period of very low (or even negative) consumer price increases (IMF).

Inflation is expected to subside to 5¾% in developing economies in 2009 and 5% in 2010; down from 9½% in 2008 says the IMF.

Commodity prices: The slump in global demand has led to a collapse in commodity prices, especially oil, down 60% since its July 2008 peak.

Oil prices remain higher in real terms than during the 1990s.

Oil price baseline: The IMF's baseline petroleum price projection has been revised down to $50 from $68 a barrel for 2009 and $60 from $78 for 2010. (WEO Update, Nov 2009)

Metals prices have been marked down in line with recent developments by the IMF.

Metal price declines dampen growth prospects for a number of commodity-exporting economies but keep aircraft building cost inputs down.

November 2009. (Source NYT)

Chinese industrial output surged in November to its fastest pace since June 2007, underlining brisk recovery from the global downturn.

Chinese output rose 19.2% from a year earlier, picking up from 16.1% in October.

Chinese imports rose 26.7% from a year earlier, marking a turnaround after 12 months of annual declines.

China is keeping its budgetary and monetary stance unchanged for now.

China’s Exports fell 1.2% from a year earlier, whereas analysts had expected them to turn to growth, breaking 12 straight months of falls.

China’s disappointing exports figure for November suggest the central bank may have to tighten policy by strengthening the Yuan.

China’s economy risks inflationary expectations setting in, as well as asset price bubbles in 2010.

Inventories:

China risk is in over expanding the economy and the overextension of unprofitable capital deployment after 30 years of growth.

China fallout: The creation of deflationary pressures and higher interest rates in China, the EU, Japan, and the USA.

China & export subsidies: A weak CNY is effectively a subsidy that aggravates the buildup of surplus export production capacity in most sectors of the economy.

China & FX risk: Pegging the Renminbi (Yuan) (CNY) at low exchange rates to the US$ is enabling the buildup of excess aerospace production capacity.

China’s production: A build up of production is leading to a glut of unsold products where there is limited domestic demand and a weak global economy.

September 2009

China’s COMAC plans to be one of the top three aircraft manufacturers the world after Airbus and Boeing.

Chinese aerospace manufacturers are emerging as a viable long-term challenge to Airbus, ATR, Boeing, Bombardier, and Embraer. They also offer a challenge to emerging manufacturers in Japan and Russia. China is interested in aviation based in part on the contribution aerospace exports can make to the balance of trade but also because of a need to serve the needs of a very large domestic market.

Boeing is projecting that the Chinese domestic commercial aircraft market will generate a demand for 3,700 aircraft over the next 20 years. Several major manufacturers have moved into China including Airbus and Boeing. Embraer and China Aviation Industry Corp (CAIC) have a joint venture to build the ERJ145 aircraft previously built in Brazil. Airbus-Xian Aircraft International is a joint venture to manufacture wings and composite parts for the A320.

Government-owned Commercial Aircraft Corporation of China (COMAC) has been active in the commercial aircraft market for years. More than 210 orders have been received for its ARJ21 regional jet. GECAS has ordered five ARJ21s fitted with GE engines.

Chinese manufacturers had a strong presence at the Asian Aerospace Expo in Hong Kong in September 2009. During that show, China disclosed its goal to manufacture large passenger jets with 150 seats or more and to build cargo aircraft capable of handling over 100 tons of freight. The first flight of the C919 is planned for 2014.

Though the industry has consolidated in the European Union and the USA, and China can move to fill the market space abandoned by Airbus and Boeing; competitors have emerged in Brazil, Canada, Japan and Russia who are selling aircraft that have the same payload-range capabilities as those offered by China.

During the Paris Air Show in June 2009 Irkuk (Russia) proposed a plan to offer the MC-21 150-seat aircraft that matches the COMAC offering. Irkuk is proposing the first flight in 2014 and first delivery in 2016. Irkuk sees a market for 1,000 aircraft in this seat class.

Competitive pricing, reliable residual values, operating cost, global technical support and safety are key requirements that can persuade foreign investors to buy Chinese build aircraft.

Concerns have been raised about the technical ability of Chinese aircraft manufacturers to design a marketable aircraft in a timely and cost effect manner.

The typical commercial aircraft has an operating life of 30 years and that requires considerable technical support on a global basis. Airbus and Boeing have made that investment over a thirty to 50 year period. The return from that outlay is the ability of Airbus and Boeing to assure customers that their aircraft will offer competitive operating costs over the economic life cycle of the asset. 

China’s ability to finance new aircraft designs may be curtailed as a result of the unfavorable World Trade Organization’s ruling on the unfair state subsidies provided to Airbus and similar findings that are expected in a case against Boeing due to be decided in 2010.