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How China Could Challenge the Boeing-Airbus Duopoly
Investors overestimated the competitive chances of Bombardier and Embraer, but now risk underestimating the threat posed by China
The C919, designed by China’s Comac, has about 1,000 orders from Chinese airlines. PHOTO: DING TING/ZUMA PRESS
By
Jon Sindreu
Jan. 6, 2019 10:00 a.m. ET
Boeing and Airbus are very close to neutralizing all threats to their duopoly—with one exception. In time, a Chinese challenger could have the scale necessary to compete in the $190 billion commercial aviation market.
Boeing is in talks to buy an 80% stake in the commercial aircraft division of Brazilian manufacturer Embraer for $4.2 billion. Terms were approved last month, though the deal still needs approval from the Brazilian government. New President Jair Bolsonaro sent mixed messages Friday, telling reporters the merger was good while also expressing concern about losing control.
Boeing’s interest in Embraer is a response to Airbus’ purchase of the 108-to-133 seater CSeries—renamed A220—from Canadian manufacturer Bombardier. If completed, the latest deal would take out the industry’s last small player.
Only five years ago, the dominance of Boeing and Airbus looked shaky. Bombardier and Embraer ruled the under-100 seat regional jet market, and the launch of the CSeries threatened the 100-to-150 seat models of the Boeing 737 and the Airbus A319. This was the duopoly’s first real competition since Boeing merged with McDonnell Douglas in 1997.
Back then, investors overestimated the disruptors’ chances in a market where economies of scale reign supreme. Now they may be underestimating the threat posed by Chinese aviation, which lags behind in technology but has scale.
Through aggressive discounts, Boeing and Airbus created large losses for Bombardier. In 2008, the Canadian company expected demand for planes with 100 to 150 seats to top 6,300 orders by 2027, but the CSeries has only gotten 402 orders so far. Embraer’s E-Jet E2 series was careful to keep a lower profile, but margins also buckled under pressure.
Boeing and Airbus should get more credit from investors for taking out their competition at a reasonable price. Leveraging their heft and service capabilities is key to their dominance. Right after Airbus took over the CSeries a big airline like JetBlue said it would buy 60 of them, and last week confirmed it had placed a firm order. And Embraer’s Brazil-based engineers increase Boeing’s chances of designing a profitable new midsize plane.
For all their growing pains, Bombardier and Embraer could have turned into serious challengers had they been allowed to expand with more time and more government assistance. This should also be a cautionary tale.
The C919, designed by China’s Comac to rival the A320 and 737, started flying last year. The threat looks deceptively distant because the duopoly have better products.
Yet before 1987 Boeing also saw Airbus as an overly subsidized inferior competitor. Then the A320 hit the market: State-fueled growth had turned Airbus into an equal.
China’s pockets are large, too. A conservative estimate for public money spent on the C919 is above $7 billion, according to U.S. think tank Rand Corp. That’s more than the CSeries cost to develop, and on par with the A320 once adjusted for inflation. Unlike Bombardier, Comac has a huge domestic market—the C919 already has about 1,000 orders from Chinese airlines—and could easily expand across Asia, Russia and Africa.
Boeing and Airbus have made the right moves. But competition from China may be knocking on their gates sooner than they expect.
https://www.wsj.com/articles/how-china-could-challenge-the-boeing-airbus-duopoly-11546786800
Investors overestimated the competitive chances of Bombardier and Embraer, but now risk underestimating the threat posed by China
The C919, designed by China’s Comac, has about 1,000 orders from Chinese airlines. PHOTO: DING TING/ZUMA PRESS
By
Jon Sindreu
Jan. 6, 2019 10:00 a.m. ET
Boeing and Airbus are very close to neutralizing all threats to their duopoly—with one exception. In time, a Chinese challenger could have the scale necessary to compete in the $190 billion commercial aviation market.
Boeing is in talks to buy an 80% stake in the commercial aircraft division of Brazilian manufacturer Embraer for $4.2 billion. Terms were approved last month, though the deal still needs approval from the Brazilian government. New President Jair Bolsonaro sent mixed messages Friday, telling reporters the merger was good while also expressing concern about losing control.
Boeing’s interest in Embraer is a response to Airbus’ purchase of the 108-to-133 seater CSeries—renamed A220—from Canadian manufacturer Bombardier. If completed, the latest deal would take out the industry’s last small player.
Only five years ago, the dominance of Boeing and Airbus looked shaky. Bombardier and Embraer ruled the under-100 seat regional jet market, and the launch of the CSeries threatened the 100-to-150 seat models of the Boeing 737 and the Airbus A319. This was the duopoly’s first real competition since Boeing merged with McDonnell Douglas in 1997.
Back then, investors overestimated the disruptors’ chances in a market where economies of scale reign supreme. Now they may be underestimating the threat posed by Chinese aviation, which lags behind in technology but has scale.
Through aggressive discounts, Boeing and Airbus created large losses for Bombardier. In 2008, the Canadian company expected demand for planes with 100 to 150 seats to top 6,300 orders by 2027, but the CSeries has only gotten 402 orders so far. Embraer’s E-Jet E2 series was careful to keep a lower profile, but margins also buckled under pressure.
Boeing and Airbus should get more credit from investors for taking out their competition at a reasonable price. Leveraging their heft and service capabilities is key to their dominance. Right after Airbus took over the CSeries a big airline like JetBlue said it would buy 60 of them, and last week confirmed it had placed a firm order. And Embraer’s Brazil-based engineers increase Boeing’s chances of designing a profitable new midsize plane.
For all their growing pains, Bombardier and Embraer could have turned into serious challengers had they been allowed to expand with more time and more government assistance. This should also be a cautionary tale.
The C919, designed by China’s Comac to rival the A320 and 737, started flying last year. The threat looks deceptively distant because the duopoly have better products.
Yet before 1987 Boeing also saw Airbus as an overly subsidized inferior competitor. Then the A320 hit the market: State-fueled growth had turned Airbus into an equal.
China’s pockets are large, too. A conservative estimate for public money spent on the C919 is above $7 billion, according to U.S. think tank Rand Corp. That’s more than the CSeries cost to develop, and on par with the A320 once adjusted for inflation. Unlike Bombardier, Comac has a huge domestic market—the C919 already has about 1,000 orders from Chinese airlines—and could easily expand across Asia, Russia and Africa.
Boeing and Airbus have made the right moves. But competition from China may be knocking on their gates sooner than they expect.
https://www.wsj.com/articles/how-china-could-challenge-the-boeing-airbus-duopoly-11546786800
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