Podcast: Can Boeing Rebound In China?

Deliveries have plummeted and Airbus is doubling down with a new assembly line. Analysts Sash Tusa and Richard Aboulafia join Aviation Week editors to discuss—and debate.

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Rush Transcript

Joe Anselmo: 

Welcome to this week's Check 6 podcast. I'm Joe Anselmo, Aviation Week's editorial director and editor-in-chief of Aviation Week magazine.

Boeing's deliveries in China have plummeted since 2019, putting the company in third place in the gargantuan airliner market behind Airbus and China's own COMAC. And while Chinese air traffic is roaring back to life after the COVID crisis, bitter geopolitical tensions between Beijing and Washington are raising concerns that Boeing sales in China may never get back to where they were.

Sensing an opportunity, Airbus is moving to reinforce its position in China by adding a second assembly line in Tianjin, doubling capacity at the Chinese plant. The expansion was announced during French President Emmanuel Macron's recent state visit to China.

Here to help unpack all of this are Aviation Week editors, Jens Flottau and Guy Norris, and joining them are two analysts who closely follow Boeing and Airbus, Sash Tusa of Agency Partners and Richard Aboulafia of Aerodynamic Advisory.

Sash, let's kick off with you. You wrote a column for Aviation Week earlier this year, noting that Boeing was the leader in the Chinese market. As recently as 2019, it held more than 50% of the market, so this has been a big downfall there for them so far.

Sash Tusa:

Yeah, it has been. I mean, Boeing's loss of market leadership has been a longer term issue than that. I really think that this has been one of those extraordinary situations where Airbus was very, very wise in setting up a final assembly line at Tianjin. It delivered its first aircraft in 2009. The statistics are fascinating. Before Airbus set this final assembly line up at the start of the century, Airbus's market share in China was 10% to 15%. Boeing owned the market. They owned the market for the first decade, and as Airbus opened the Tianjin assembly lineup in 2009, their market share started to rise. These are the stats. I think they're fascinating.

 2000 to 2009, Airbus delivered 60 to 65 aircraft a year into China. Now, that was about 15% of their output because Airbus was a much smaller company then, but China was a very, very junior market for Airbus compared to the big markets in Europe, North America, and even the Middle East and the rest of Asia. Open that fine assembly line up and it all changed.

 Since 2009, Airbus delivered slightly over 2,000 aircraft to China, which the vast majority have been A320 family Aircraft. About 30% of all those aircraft have come from the Tianjin line.

The average deliveries of 160 aircraft a year, it's been a quarter of their entire output over that period. That gain in market share has been entirely at Boeing's loss. Airbus has gone from, let's say, 15% to over 50% and still rising. Boeing has gone from market dominance to second stroke, third position, depending on quite how bad a year we've had in the last couple years. It's very hard to escape the conclusion that if you manufacture, if you assemble aircraft in China, you have a stronger market position than if you fly aircraft into China for delivery. Or even if you fly them to a completion center like the Boeing Zhoushan Center, paint them, put some seats in, and then hand them over.

This is an industrial policy issue that Airbus seems to have got very right and Boeing seems to have got very wrong. Boeing's unwillingness to set up assembly lines outside the U.S. has cost it badly in China. There's no evidence at the moment that the Zhoushan Completion Center for the 737 Max is doing anything to turn this around at the moment.

So why is Airbus putting a second final assembly line in Tianjin? I mean, there's a variety of reasons. One, I think that even delivering one third of your output from Chinese lines is probably not enough politically, and they see that they should be delivering more. Second issue, Airbus has got very ambitious plans for its ramp, as they call it, of production for the A320 up to 75 aircraft a month from current 50-plus. To do that, they need more final assembly lines. Each final assembly line is probably about six aircraft a month if they're working really well. Then the final issue is as they move to delivering more A321s as opposed to the vanilla A320neo, those aircraft physically take up more space on an assembly line and they can deliver fewer of them per assembly line and therefore they need to duplicate those.

But it's a very, very interesting example of how the two companies with very, very strong products, very strong technologically, but have taken a radically different direction in terms of how they approach what is now the largest single market in aviation. It seems to have done Airbus astonishingly well and Boeing seems to be floundering here. As you say, it's now lagging compared to Comac. If you think the C919 is going to be a success, that might be a very difficult position to get back since Chinese airlines will almost certainly be forced to take C919s almost, whether they like it or not, as part of Chinese political policy. Aviation is always political, China double say.

Joe Anselmo:

Richard Aboulafia, where do you stand on all this? Are your views aligned with Sash or are you a little bit more optimistic that Boeing will come back from these really low levels in China?

Richard Aboulafia

Well, usually I am well aligned with Sash but not a hundred percent this time. As for Boeing coming back, well, unfortunately there are things above them. First of all, let's take a moment to consider Boeing's position in terms of final assembly lines in China. Their predecessor entity, McDonnell Douglas, put one in China and suffered easily the worst market share of the three back in the ‘80s. They put another line in or tried to with the MD-90 that went even worse. Meanwhile, you had Embraer going into Harbin to create an assembly line. Oh, gee, what happened? They kind of got their asses handed to them.

There's absolutely no historical correlation between putting a line in China and getting any kind of improved market share. Now, having said that, you've got the Tianjin FAL [final assembly line]. It seems to be working out very well, but you could easily make an argument, a Boeing CEO a bunch of years ago made this argument that, "Look, we're the designated hostage in any U.S.-China trade standoff," and they appear to be suffering from that problem. Obviously, in the same exact amount of time that Sash is talking about as Boeing correctly losing market share in China, in addition to the Max shutdown, you also had the Trump Administration effectively starting a trade war, the Biden administration not doing anything to change that, and of course you had a far more muscular U.S. presence in the West Pacific.

One thing Sash does say that I completely agree with is that this gets political fast over there and that appears to be what's happening. I don't think the final assembly line has very much to do with this. That's the good news for Boeing. The bad news is I'm not so sure what they could do because they're the designated hostage here and it isn't going well. We were treated to the extraordinary spectacle of Emanuel Macron going to Beijing last week, and well bending the knee, not sending an aircraft carrier to the Taiwan trades, not clamping down on semiconductor manufacturing technologies exported to China, not doing any of that. What was he there to do? Bend the knee. You're going to get better market share for French and European industrial products in China that way. That's just how the system works.

Joe Anselmo:  

Guy Norris, I just saw today some good news for Boeing. They actually out-delivered Airbus in March, 64 aircraft to 61. Not a huge advantage, but we don't see that very often in recent times. Boeing also just took a big order for 787s in Saudi Arabia. Are we overplaying the importance of China? Can Boeing thrive without China?

Guy Norris:  

Thanks, Joe. First of all, I just have to add something to the end of what Richard was saying about Macron's visit to China. I mean, who else has the secret weapon of being able to take  Jean-Michel Jarre with you as part of your delegation to try and sell more Airbus and other things? Anyway, I think just to... Sorry for being flippant there, but I do think that there's no disguising, obviously, the catastrophic impact that these geopolitical moves have been having on Boeing's position in China. No amount of excuses could obfuscate any of that. Let's just accept that that's the way it is at the moment.

I think that's the position that Boeing senior leadership has taken too recently. They said, "Look, there's just literally nothing we can do globally at the moment. Yes, we could deal with the pandemic, yes, we could deal with the Max. We can do whatever we can in that respect, but when it comes to decisions within inside the Forbidden City and the geopolitical trade between these two giants, we're just a pawn." Like Richard said, "We're the fall guy in all this," so there's nothing you can do about it. Let's just look at the other realities of that situation.

C919, I kind of go all the way back to the late-1970s and early-‘80s. Again, a thing that Richard was mentioning, following from Sash about the importance of establishing a production line in country, the MD-80, MD-90 lessons... You're right. It was a disaster. They were setting up those lines, but at the same time, Boeing was banking it by selling 737s and pushing them out like hotcakes. China was struggling to produce 40 airframes. But underneath it all, that really did establish so much of what we're seeing today, the establishment of CaTECH and Comac and the ability to produce a certified aircraft.

Don't forget, actually, a couple of those MD-80s ended up being delivered to TWA as certified aircraft by the FAA, yet there were produced in Shanghai. It was nothing short of a miracle at the time. It really did establish the fundamental threads of the DNA which led to the C919 ultimately, but the production capabilities of China so far... Let's look at that. The program was launched in 2008. The production began 12 years ago. I think that's right, 2011 anyway, and yet the first delivery was just in December. A few months ago, the first aircraft's yet to enter service. We think there's about 10 on the production line so far. So what's that? That's one week's production at Airbus, and yet that's 10 years worth. If you look at the reality of the threats of the C919, I think we're still years away from anything.

Then the other thing is you've mentioned in your introduction, Joe, the fact that we've seen Boeing come into some pretty big sales around the rest of the world. There's a lot of re-fleeting now beginning to kick back in, having been delayed and held up by the pandemic. I think the big turnaround was probably July last year when Delta placed that hundred Max order. That was the first of the good old day type orders are coming in. Then you're united with their 737/787 late in the year. Then this year, Air India, JAL, Saudi... Here's a weird thing. At the moment, you've got Greater Bay, a little airline in Hong Kong ordered 15 Maxes and five 787s. I mean, that's sneaking under the radar a bit. That's a Chinese carrier.

 In Everett right now, you've got an Air China 777 freighter. It's one of 13 that's been ordered. I'm sorry about going on here, but the point is, I think, that ultimately China needs Boeing more than Boeing needs China. That's a pretty big statement to make, but I think it's true in the long term. Even if China wants to fulfill its ambitions and expansion with all its carriers, it's going to... Not even Airbus can fulfill that, particularly on the widebody side of it. Even the freighter market, look at Airbus right now. They're just cutting metal on the first A350 freighter as we speak. That's going to be years, isn't it, before that is a viable producible freighter in the capacity that China needs for its market. Where else can they go? Nowhere. Boeing's the only option out there right now. I think, yes, it's tragic what's happened to market share in China, but I think if you're looking beyond this, take the longer term view, there's still going to be a place for Boeing. It's still going to be out there at some stage.

Joe Anselmo: 

Jens Flottau, I want to bring you into the conversation. First of all, I want to thank you. You are on vacation in the Alps and you came off your vacation to join this podcast. What are your thoughts on what this all means for Airbus? I mean, looking pretty good.

Jens Flottau: 

Yeah. I mean, going a little bit away from China for a moment, and Sash has mentioned this. The bigger picture context of this is obviously big growth that is planned.  Going to 75. That's 75 Airbus a month. That's already been delayed by a year. Now, a second line in China will help, Sash said, six aircraft a month. That obviously depends a lot on what aircraft you'll build there. It'll be much faster to build an A320 than an A321neo. And if it's an XLR, then it's going to take even longer because it's hugely complex. I guess XLRs will not be done in China for the time being.

What Airbus announced a little bit and the people didn't notice so much in the context of this China announcement was also a second new line in Toulouse, which is I think a fairly significant development. Remember, they have this big A380 hangar in Toulouse that they don't need anymore, at least not for the A380 because that program is discontinued. Then they decided to add one new line in Toulouse and put it into that hangar while closing one of the two old lines in Toulouse, which didn't produce A321s, just A320s.

Now, they're saying, "We're actually closing down both old lines in the old hangar in Toulouse and build two new ones in the Lagardere hangar at Toulouse Airport." To me, it makes perfect sense. They have a lot of space there. They have a workforce there that needs to be kept busy. But it's a big picture. Again, it rebalances the Airbus system a little bit. Hamburg is almost the only place in the whole system that didn't get an additional line right now. They got a fourth line a few years ago. Toulouse gets two much more modern lines. Tianjin gets another one and Mobile also gets another one next year. There's big growth and it's all outside the traditional center of excellence for narrowbodies in Airbus. I personally couldn't care less. It makes sense, but I'm just going to mention it because it's relevant politically and industrially.

Joe Anselmo:

Sash and Richard, I couldn't help but hear something that Guy said. "China needs Boeing more than Boeing needs China." Sash, do you buy that?

Sash Tusa:    

I can't make my maths come to that conclusion. China is somewhere between a quarter and a third of the new aircraft market, let's say 30% or something. I absolutely accept that Boeing is going to be delivering aircraft in China for a long time, but to have a permanently weakened position in the largest civil aviation market in the world, the largest individual civil aviation market in the world, one which accounts for somewhere around 30% of total demand. If you are a permanent weak number-two stroke and a joint number three in that market, then you are giving up any hopes of a balanced duopoly. Perhaps a balanced duopoly just makes me feel very old, but for about the first two decades of the century, that was what Boeing and Airbus were really quite good at doing. They were roughly going for a 50/50 market, plus and minus a few percent, and trying to establish the financial outputs that they could get from that.

Boeing really did run their position for profit. Airbus was clearly also doing it to maintain market share for cash, for product development, and so forth. They were never as profitable as Boeing in that period, but it was a balanced duopoly. I don't think we have a balanced duopoly anymore. If Boeing can't recover to something approaching 50% of the China market, we're not going to have one. It's very difficult for a company that falls down to a 40% market share, which I think would be a good result for Boeing, to get back again. Guy took us back to McDonnell Douglas. We all remember what happened about McDonnell Douglas and that's what worries me about Boeing's position now.

Joe Anselmo:  

Richard, your thoughts?

Richard Aboulafia:

I guess somewhere between the two. I see what Guy is saying and he's right. I mean, this is a duopoly and the last thing you want to do is give too much power to one side, because ultimately that impacts pricing, that impacts your vulnerabilities. On the other hand, I just don't think things are going to stay the same, entropy or something. There'll be some sort of geopolitical shift or something will happen. For purely political reasons, you'll see a shift back towards Boeing for a time. Will it be 50/50? No, I think Sash is probably right. It's going to be more of a 60/40 sort of story in China in favor of Airbus. But at the end of the day, I disagree that China is what it was. Remember that their market slowdown in travel and jetliner intake, it predates the pandemic.

Their air travel growth rate fell from 12% to just 5.3% in late 2019. That was an extraordinary drop. I think a lot of it was the result of the government re-jittering the economy away from markets and towards state-owned enterprise. In other words, nothing is good in terms of the China aviation markets trends. All this to say that I think if you've got 40% of a market that I would actually now peg at 20%, it's not going to be a huge needle mover. If Boeing launched a major initiative to build stuff in India or just be more aggressive in India or wherever else, the most recent Saudi order, I think they could go a long way towards compensating for that setback. It wouldn't be the end of the world.

Sash Tusa:  

I think to the point Richard raises there. Who's going to be the first to put a final assembly line in India? That's the single biggest open market and given that backlogs for India are now greater than backlogs for China. You could argue that's because Chinese airlines have under-ordered in the last couple of years and Indian Airlines probably over-ordered, but the first one to put a final assembly line in India, I think, wins that market. Who's more likely to do that?

Richard Aboulafia:

On top of that, there does seem to be a broader retreat away from what we kind of enjoyed for the past 30 or 40 years, free trade in aviation. If you look at the provision of the GATT Agreement, now WTO, that guarantees that governments don't interfere and demand commercial offsets. The agreement on trade and simple aircraft is what it's called, ATCA. China had observer status, never a signatory. India seems to be intent on completely denying that it exists. In other words, governments are getting back in the game of demanding commercial workshare after decades of staying the heck away from that. And that reinforces what Sash is saying, that basically there's a potential opportunity, a very big opportunity for pursuing India on the basis of exactly that kind of workshare.

Joe Anselmo:

Jens, along those lines, we recorded a podcast earlier this year about India after they placed massive orders for new aircraft. I think you had commented that India would like nothing better than for Airbus to establish a final assembly line there.

Jens Flottau:    

Yeah. But the Indians have said this officially. They have said that, "Ultimately, our goal is to have a final assembly line in India." But going back to Sash's point of who's going to be the first one, is it going to be Airbus or Boeing? My bet is it's going to be Embraer, just because they are so desperate to sell E2s in Asia. They see market. Maybe. They've just paid a visit to China as part of President Lula's delegation. They've offered it apparently to or at least talked about it in China. But if it's India, that's just as good for them, I guess.

Joe Anselmo:   

Guy, take us to the finish line.

Guy Norris:          

Well, I was just going to point from a historical perspective. I do think that Airbus had a leg up when it comes to establishing overseas production of final assembly lines, because of the way the program was historically architected. You've always had it basically meant to be brought in from components all around Europe to the final assembly line in Toulouse and then Hamburg. That's how the airplane was designed in the entire production system to back that up. Boeing, of course, never did that coming from its historical... I mean, Wichita was a pretty far away place to Seattle in terms of bringing together a fuselage with wings. That's about as far as Boeing thought in the old days on international assembly. It's just not an optimized product, which is why the best they could do is establishing that finishing center in China that Sash mentioned at the beginning.

When it comes to where we go from here, I think Boeing's next single aisle product, whatever that's going to be when it comes out, when they announce it later this decade, will be targeted at something that's going to be so much more flexible that you could probably build anywhere on a modular line. They know geopolitically that that's where they've got to stand up towards Airbus in the future and Embraer and all the others. I just thought that from a historical perspective, Boeing's coming from a strange position there and it's going to learn the lessons hugely from what's going on right now.

Joe Anselmo:        

Well, we'll have to end it on that note, but you guys have been a dream team to talk to. Anytime we get the four of you on a call, we could go on for an hour. I want to thank you all for your insights, Jens, Guy, Sash, Richard. That is a wrap for this week's Check 6 podcast. A special thanks to our editor in London, Guy Ferneyhough. Don't miss the next episode by subscribing to Check 6 in your podcast app of choice. One last request of our listeners. If you're listening to us an Apple Podcast and want to support this podcast, please leave us a star rating or a review. Thank you for your time and have a great week.