- Boeing's current market outlook projects sale of 6,000 aircraft in China over the next 20 years.
- But this market outlook could significantly be altered because of the introduction of the C919 by COMAC
- This is because COMAC has better competitive advantages that will allow the company to profit from China's growing aircraft demand.
Boeing (NYSE:BA) and Airbus Group (OTC:EADSY) currently have a duopoly in the narrow body aircraft market with the 737 and A320 respectively. This large market share has given birth to high expectations for Boeing's sales potential in China.
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Introduction Of COMAC C919 And Its Advantages
I believe that the emergence of COMAC's C919 undercuts Boeing's sales prospects. This is because COMAC has better competitive advantages in China than both Boeing and Airbus. These competitive advantages include:
- Being state-owned gives COMAC a better chance to be the supplier for China's state-owned airlines
- Because most parts for the C919 are manufactured in China, it can be argued that COMAC has a manufacturing cost-advantage in relation to rivals.
- The Yuan devaluation will give COMAC a pricing advantage over its rivals if it decides to start international sales.
- COMAC is a state-owned company, meaning that it has the capital needed to compete effectively and expand based on demand.
- The home advantage. The company has the full support of the Chinese government. It is a symbol of pride and an embodiment of the Made in China 2025 (MiC2025) initiatives.
It is a combination of these factors that makes the C919 Boeing's worst headache as it could impede Boeing's growth potential in China.
During the Sanford C. Bernstein Strategic Decisions Conference, the Vice Chairman, President and Chief Operating Office of Boeing, Dennis A. Muilenburg said:
"Narrow body tends to be a more competitive marketplace roughly 50%-50% today with Airbus. We're working hard to sustain and grow market leadership in that area but narrow body is where we expect to see additional entrants coming in. Traditional entrants in the forms of Bombardier, Embraer as you've noted. And also we know China will be a competitor in that space. COMAC rolling out the C919 in the near term as an example. And we understand that in China, we will both cooperate and compete with the aerospace industry there. "
The long-term sustained growth for companies like Boeing stems from the idea that half of the demand generation now is for replacement demand. Meaning that they are offering operating value propositions that would allow their customers to achieve 10%, 15%, 20% operating cost advantages with new airplanes. Therefore, if you combined this operating value proposition stemming from traffic growth and the aforementioned replacement demand, you will notice that Boeing is expecting China to be a huge, stable long-term sustainable growth market.
Why the C919 is a threat to Boeing?
But all this projected market opportunity has been threatened by the introduction of the C919, manufactured by Commercial Aircraft Corp of China (COMAC). The C919 is a threat to both Boeing and Airbus because:
- The C919 is intended to compete with Airbus' A320 and Boeing's 737: The C919 is a strategic move to eat into the Airbus-Boeing duopoly. As China's civil aviation chief Li Jiaxiang said:"a great nation must have its own large commercial aircraft...China's air transport industry cannot completely rely on imports." The C919 will eat into Boeing's projections as it grabs market share from both Boeing and Airbus.
- It is a state-owned aircraft manufacturer: China's major airlines are state-owned, which gives COMAC a captive pool of potential customers that can be ordered to buy the C919. This gives the C919 a huge competitive advantage over Airbus' A320 and Boeing's 737.
- The currency advantage: As long as the Yuan continues being lower relative to the dollar, the C919 - manufactured in China - is likely to have a cost-advantage over its rivals.
Why Boeing Stock investors should worry?
- The C919 threatens the rate of Boeing's growth. According to an article in the Indian Express, China is the world's largest civil aviation market, with its 21 largest airports seeing annual passengers exceeding 10 million. From the same article, China is expected to add 6,330 new aircrafts worth ~$950 billion to its commercial fleet by 2034, representing 17% of the world's total demand for over 31,000 new aircrafts in the next 20 years. Having a strong competitor in one of its biggest growth markets will threaten its growth potential in the long-term.
- The selling of aircrafts is a zero sum game - COMAC's gain is Boeing's loss: The future demand of aircraft's will not skyrocket because there are more players - it will remain constant. Therefore, COMAC's gain is either Airbus' or Boeing's loss. Assuming that the test flights are successful, the C919 is due to enter the commercial service in about 2019. COMAC expects to sell 2,000 aircrafts in the coming 20 years.
- Boeing's expected projections for the next 20 years are now Questionable: Boeing's projections of being able to supply ~6,000 aircrafts to China in the next 20 years should be put into question. Boeing is up against a competitor owned by the state and whose clients are also owned by the state. More so, Boeing's operating cost advantages will be less lucrative if viewed under the same lens as a competitor with a huge manufacturing cost advantage.
- The C919 might just be the beginning: China's decision to limit the outflow of cash from the selling of aircraft's, might encourage new small aircraft manufacturers to increase productions and take advantage of the governments full support. These will be in direct competition with Boeing's other aircraft's and thus increase competition.
Conclusion: Adjusting expectations for the worse
A state-owned company is better positioned to disrupt the profit flow to Boeing and Airbus because it has the clientele, capital and it is in the most lucrative aircraft market in the world. These cost advantages exhibited by COMAC makes it harder for the Airbus-Boeing duopoly to achieve their projected goals in the next 20 years. Hence, the C919 could be a cause of worry for Boeing stock investors.