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Big Boeing deal announced in China isn't much of a big deal

Dominic Gates, The Seattle Times on

Published in Business News

SEATTLE –– The announcement Tursday by President Donald Trump and President Xi Jinping in China of an order for 300 Boeing jets with a list price of $37 billion is the usual fake news out of state visits to China.

According to a person familiar with Boeing's orders, who spoke on the condition of anonymity because of political sensitivities, most of the jets included in the announcement -- 40 larger twin-aisle aircraft and 260 single-aisle airplanes--are not newly ordered.

As is typical with state visits of foreign leaders to China, the announcement includes jet deals that were either ordered long ago or are not yet firm orders.

Boeing declined to comment, but the absence of any details in its news release suggests that it's more spin than news.

In this case, the puffery is not so much from Trump. It's just the usual way of doing business in China -- the same game whether it's Trump or Barack Obama or the president of France visiting and whether the jetmaker is Boeing or Airbus.

Underlying the stage-managed news is the reality for Boeing that China, the world's largest commercial aircraft market, will take hundreds of its jets in the years ahead. But the order details emerge from China's closed business system only slowly.

A similarly fake announcement, for 200 Boeing airplanes, was trumpeted in 2011 when Xi's predecessor, President Hu Jintao, came to the U.S.

It turned out that none of those 200 planes were new orders; it was just a repackaging of orders placed over the previous four years.

In 2015, on Xi's first state visit to the U.S., when he visited Seattle on his way to the White House, the order announcement was for 300 jets. Again, many of those 300 were orders Boeing had booked previously.

During a visit by Xi to Berlin in July, Airbus touted a $22 billion order for 140 planes from China, including 40 twin-aisle A350s and 100 single-aisle A320jets.

Yet the Airbus order book for the year to date includes only 20 firm orders for A350s from China, and those were ordered by China Southern last April.

The A320 order book contains just one significant Chinese firm order for the year, one for 32 planes by Cathay Pacific.

Behind the stagecraft is this reality: China has been steadily buying Boeing jets and will continue to do so. Already, one third of the all the 737s built in Renton, Wash., go to airlines in China.

But China, as a centrally controlled economy, buys jets in a different way than other nations.

First, the Chinese government approves a large purchase from either Airbus or Boeing -- it has a long-standing policy of buying roughly equal numbers from both manufacturers -- through some centralized entity such as the state-owned China Aviation Supplies Holding company, based on its budget for the latest five-year plan.

That is not a firm order. No money is paid until the second phase, which is when the various Chinese airlines make separate pitches to the government for a piece of the order.

Once an airline gets the go-ahead from the government, funds will be released and the airline will pay the necessary deposit. Only then will Airbus or Boeing book that transaction as a firm order -- though very often it will be booked as an "unidentified" customer.

With this process of multiple approval stages, China orders take a very long time and are often difficult to track.

And Boeing did have some real order news on Thursday, including a significant order from China that had nothing to do with the announcement in Beijing.

Among 69 new firm orders Boeing booked on Thursday was one from China Development Bank for 48 single-aisle 737s and eight widebody 787 Dreamliners.

Boeing said that is a new order that was not included in the 300 jets Trump touted.

According to market pricing data from aircraft valuation firm Avitas, that order is worth about $3.6 billion after standard industry discounts.

Also included among those fresh firm orders on Boeing's order website Thursday were the two 747s bought by the Air Force to be converted into Air Force One aircraft for the president.

Boeing is soaring high above Airbus in sales this year, with net orders for 605 aircraft, compared with 288 for its European rival.

(c)2017 The Seattle Times

Visit The Seattle Times at www.seattletimes.com

Distributed by Tribune Content Agency, LLC.

 

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