NOT A-OK… CHINA’S OKAY AIRWAYS ORDERED 15 B737S IN 2017. PIC/BOEING
Aviation

Beware the 25% tariff-ic impact

China signalled it is ready to cut purchases of Boeing aircraft after announcing it is imposing 25% tariffs on single-aisle planes weighing between 15 and 45 tonnes. The immensely popular B737 family of aircraft will be affected.

Beijing revealed its retaliatory plans on April 4, after Washington declared a 25% tariff on about 1,300 Chinese products.

Read our comments on Bloomberg regarding the implications of the dispute.

China’s Ministry of Commerce gave no date for the 25% hike; Chinese officials said it depends on what the US president does and how he reacts to duties placed on Chinese products.

Here’s CNN’s take on the developing story.

Last year Boeing delivered 202 planes to Chinese carriers and half of those were in the narrowbody (B737) category. China is such a huge market for Boeing that B737s sold to Chinese airlines make up a third of Boeing’s production.

In its Current Market Outlook released in Beijing last September 2017, Boeing predicted a demand of 7,240 new aircraft in China over the next two decades. That’s worth some USD1 trillion.

In 2016, the US sold China aircraft worth USD15 billion at list prices.

In May last year Boeing started work on a B737 delivery centre in Zhoushan. It’s slated to deliver its first aircraft end-2018. The plant aims to deliver between eight and 10 planes a month.

It’s unclear if Beijing would actually go ahead with the tariffs, with its trade and airline officials clearly preferring to avoid such a standoff. The CEO of China Eastern Airlines, however, warned it wasn’t afraid of a trade war and is prepared to change aircraft types as well as routes if it comes to that.

But make no mistake: there are no winners in a trade war. In this instance the US stands to lose more, not just Boeing but its airlines. Five US carriers fly directly to mainland China (see the table below).

And according to the US Travel Association, Chinese tourists to the US spend on average almost USD7,000 per trip – more than those of any major inbound market. In 2016 three million Chinese made trips to the US, an increase of 15% year-on-year.

Chinese visitors to US

A lengthy and messy trade war (or any other war) is likely to hurt the appetite for air travel.

Travel exports to China, i.e. spending by Chinese tourists and students in the US, and on US airlines, amounted to over USD33 billion in 2016. That’s more than any other country. This includes USD12.5 billion in education-linked spending by Chinese students.

China can inflict severe pain on its opponent. Beijing’s decision to boycott South Korea’s tourism industry over Seoul’s decision to install a US missile system in 2017 cost the Korean economy USD6.8 billion.

China had been the largest source of foreign tourists to Korea; half of the 17 million foreigners who visited the country in 2017 were Chinese.

As it is, US airlines already struggle to gain more direct flights (a protected market) to China. It’s a government-to-government decision on how many flights are allowed between both countries, and there’s usually more capacity than demand. In 2017, United cut flights to Xi’an and Hangzhou, citing poor demand.

There are 59 direct (non-stop) flights between China and the US at the moment. Imagine the fallout to the US economy if there’s a decline of just 10% in Chinese visitors to the US.

That said, China has to be careful in totally brushing aside Boeing. If Beijing completely stops buying the B737s, China loses its leverage with Airbus. It’s never wise to depend on just the one manufacturer.

Chinese carriers flying direct to the US

Air China China Eastern China Southern Hainan Airlines
IAD-PEK DTW-PEK LAX-CAN LAX-PVG
JFK-PEK SEA-PEK SEA-PEK ORD-PVG
LAX-PEK DTW-PVG DTW-PEK ORD-PEK
ORD-PEK HNL-PVG DTW-PVG SEA-PEK
SFO-PEK JFK-PVG
IAH-PEK LAX-PVG
EWR-PEK SEA-PVG
HNL-PEK SFO-PVG
ORD-PVG
SFO-PVG
LAX-PVG
EWR-PVG

US carriers flying direct to China

American Delta Hawaiian United US Airways
ORD-PEK LAX-CAN HNL-PEK EWR-PEK JFK-PEK
SEA-PEK DTW-PEK IAD-PEK LAX-PEK
LAX-PVG SEA-PEK JFK-PEK ORD-PEK
ORD-PVG DTW-PVG LAX-PEK SFO-PEK
JFK-PVG ORD-PEK ORD-PVG
LAX-PVG SFO-PEK LAX-PVG
SEA-PVG IAH-PEK
SFO-PVG HNL-PEK
EWR-PVG
LAX-PVG
ORD-PVG
SFO-PVG

Airport codes

China

Guangzhou Baiyun International (CAN)

Beijing Capital International (PEK)

Shanghai Pudong International (PVG)

US

Chicago O’Hare (ORD)

Detroit Metropolitan (DTW)

George Bush Intercontinental (IAH)

Honolulu International (HNL)

John F Kennedy (JFK)

Los Angeles (LAX)

Newark Liberty (EWR)

San Francisco (SFO)

Seattle Tacoma (SEA)

Washington Dulles (IAD)

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