Airbus bags mega China order

Xi Jinping’s French visit yields a massive Airbus narrow-body aircraft order, amidst the ongoing issues of concerns over Boeing’s safety record, US-China trade tensions and European concerns over Beijing’s intentions in the region.

Background

China is the second largest economy in the world after the USA. According to certain forecasts, China’s GDP growth is slated to overtake USA’s in 10 years. A hub for the manufacturing industry, China is the fastest growing economy posting a growth rate of 10% for over 30 years. In recent years, China’s exponential growth has been great, but has come at the cost of increased debt. According to statistics, its debt is more than 250% of the GDP and is much higher than the US. Experts have warned that if the trend continues China could face an economic slump. Hence, it is imperative for China to engage in trade talks with its strategic partners, amid the growing clamour over its trade practices that have resulted in a trade war with the US.

US President Donald Trump has previously been a critic of China. He blamed the country for loss of jobs within the US and has often criticised the US trade deficit with China. China's trade surplus with the United States widened in 2017 while total foreign trade volume maintained rapid growth.

The Boeing 737 MAX is an American narrow-body aircraft series designed and produced by Boeing Commercial Airplanes as the fourth generation of the Boeing 737, succeeding the Boeing 737 Next Generation (NG). On October 29, 2018, Lion Air Flight 610, Boeing 737 MAX 8 crashed into the Java Sea 13 minutes after take-off. All 189 onboard died. On March 10, 2019, Ethiopian Airlines Flight 302, 737 MAX 8 crashed six minutes after takeoff. All 157 onboard died. The resulting fall out resulted in the grounding of all Boeing 737 MAX’s worldwide, casting doubt over Boeing’s capacity to sell the airplane.

Analysis

French producer Airbus secured a US$35 billion deal from China during a recent state visit by Chinese President Xi Jinping. The order includes 290 A320-series narrow-body aircraft and 10 A350 wide-body airplanes, French President Emmanuel Macron said during a briefing. The majority of the jets in the deal will feature Airbus’ ‘NEO’ engine option. China has typically purchased large batches of airplanes before allocating them to airlines at a later time.

The Toulouse-based company has sought a large deal from China in recent years, although a firm order failed to materialise during a French state visit to the country in June 2018, and a follow-up visit by Airbus executives in September of the same year.

China’s expanding domestic and international market is of significant importance to Airbus and its main rival, Boeing. Airbus’ offer to expand its existing production line in Tianjin, in addition to Boeing’s recent safety worries, seems to have clinched the lucrative market of narrow-body airliners. Boeing’s 737 MAX has faced a number of order cancellations in recent days, at a time when a US-China trade war has resulted in economic struggles on both sides of the aisle. A thorough scrutiny of Boeing’s safety features is expected. In addition, it is likely that some order cancellations of Boeing’s 737 MAX will occur, with customers seeking other narrow-body options such as Airbus’ A320-series.

The move to buy Airbus’ airlines come during Chinese and American negotiations over a trade dispute that has escalated into a trade war. European powers, sensing an opportunity for greater engagement with China, while it remained in a relatively weak negotiating position during its trade war with the US, intend to deal with China on their own terms. For these powers, this means growing cognizance of the threat that Beijing’s policies may pose. For France, the contracts signed with China resulted in 15 major business deals, in a significant boost to its economy amidst populist protests over Macron’s economic policies. The deals also featured a US$1.1 billion contract for a French company to build an offshore wind farm in China.

Assessment

Our assessment is that China’s recent Airbus order for narrow-body airplanes comes amidst growing concern over Boeing 737 MAX’s safety record and the looming US-China trade war. We believe Boeing will continue to miss out on future narrow-body business opportunities, while potentially losing out on existing orders. We also believe that President Xi’s push in Europe is aimed at negating fears over Beijing’s intentions in the region, while European powers seek a more cohesive policy towards China.

Image Courtesy: Ercan Karakas [GFDL (http://www.gnu.org/copyleft/fdl.html) or GFDL (http://www.gnu.org/copyleft/fdl.html)]