June 1, 2010 / 8:30 AM / 9 years ago

China spurs Boeing plane orders, but risks loom

CHICAGO (Reuters) - Explosive economic growth in China and massive government investment in its transportation systems will generate thousands of airplane orders for Boeing Co, but also may expose the company to new competition and an overheated economy.

These are risks that Boeing (BA.N), the world’s second-largest plane-maker, is willing to take as other nations and their struggling airlines recover from an economic downturn.

China has emerged in recent years as an economic pillar and Boeing’s biggest export market. The nation saw its economy expand by nearly 12 percent in the first three months of 2010.

Boeing is betting that new Chinese wealth and government spending on infrastructure will bolster travel within China and extend a boom in plane orders for the foreseeable future.

“A growing middle class in China is dramatically reshaping the country’s domestic economy and having a major global economic impact as well,” Boeing Chief Executive James McNerney said at an event in Chicago on Wednesday.

“China is indeed Boeing’s largest export market,” he said. “Not by a little, but by a lot.”

McNerney noted that China’s aviation authority plans to add 97 new airports by 2020, bringing the total to 244. Such expansion would dramatically open China’s airways for domestic travel and increase demand for aircraft.

Boeing forecasts Chinese demand over the next 20 years of about 3,800 airplanes, valued at $400 billion, making it Boeing’s largest potential commercial airplane customer.

Most of those planes would be small or single-aisle like the Boeing 737 or the Airbus EAD.PA A320, which are appropriate for domestic flying.

Boeing said in September that it expects Asia Pacific — the region that includes China, Japan, Korea, Australia and India — to be the largest aviation market in the world over the next 20 years.

This year, Boeing assigned a new sales leader to the region and has bolstered marketing efforts out of its China office. Boeing has had a relationship with Chinese airlines, the Civil Aviation Administration of China and the Chinese government since 1972.

BUDDING COMPETITION

Boeing says that over the last decade, China has bought more commercial airplanes than any country in the world except the United States. Boeing says it sold China a little more than half of its current fleet of 1,560 planes.

But experts believe it is a matter of time before China develops commercial aircraft that compete with those made by Boeing and Airbus.

“I’m not concerned about the Chinese economy. I’m concerned about Chinese competition,” said Alex Hamilton, an aerospace analyst with CK Cooper & Co. “You see the train coming.”

“It’s a viable threat that cannot be ignored,” he said.

Chinese plane-makers, which have government backing, already are building smaller regional planes that could compete with those sold by Brazil’s Embraer (EMBR3.SA) and Canada’s Bombardier (BBDb.TO).

Chinese media have said aircraft manufacturer Commercial Aircraft Corporation of China aims to conduct its first test flight of a domestically developed large commercial jetliner by 2014 and to begin deliveries in 2016.

McNerney acknowledged on Wednesday the potential competition, saying that within the next 10 to 20 years, the Chinese aerospace industry could compete directly with Boeing and Airbus.

“Rather than retreat from this challenge or attempt to delay the inevitable, we have opted to accept the reality of both partnering and competing with China,” he said.

“And we intend to be their supplier of choice.”

RISK OF AN OVERHEATING ECONOMY

China posted unexpectedly strong annual growth in its first-quarter gross domestic product of 11.9 percent, prompting renewed calls for tighter policies to prevent the economy from overheating. It was the fastest expansion since 2007.

Randy Tinseth, vice president of marketing for Boeing Commercial Airplanes, said Boeing expects GDP over the next 20 years in China to increase 7.2 percent annually while airline passenger traffic grows at 7.8 percent and cargo traffic rises 6.5 percent. The effect would be a near-tripling of the Chinese airplane fleet.

Boeing has seen enormous growth in business in China in the last 40 years. The company took 17 airplane orders from Chinese buyers and made 11 deliveries from 1970 to 1979. The numbers rose to 514 orders and 294 deliveries from 2000 to 2009.

By contrast, Boeing took orders from U.S. buyers for 1,730 planes and made 1,883 deliveries from 2000 to 2009. Demand from U.S. buyers was higher in the 1980s and 1990s.

“(China) is a market that even in the last five years has seen great growth considering the economic downturn,” Tinseth said. “We’ve seen the GDP in China grow about 10 percent per year over the last five years and passenger traffic has grown close to 14 percent.”

Other data on the world’s third-largest economy behind the United States and Japan, however, suggests growth may have peaked and that a hard landing is in store. But if slower growth means airplane order deferrals or cancellations, aviation experts seem unconcerned.

“There is risk, but there is not much that can be done about it,” said Richard Aboulafia, an aerospace analyst at the Teal Group.

“If there is an overheating, there is a good chance that the rest of the world will recover by then,” Aboulafia said.

Hamilton agrees. He further noted that Chinese airlines are backed by the government and are therefore less vulnerable to economic shocks and strain than foreign rivals.

“I think the drivers for the Chinese market are a little different than other markets. Remember it’s subsidized by the government,” Hamilton said.

“They’re in a vacuum,” he said. “It’s completely different than anywhere else.”

Reporting by Kyle Peterson, editing by Matthew Lewis

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