In early 2018 — two months after Boeing (NYSE:BA) announced a deal to sell 300 jets to China — French President Emmanuel Macron announced that China was close to finalizing orders for 184 Airbus (NASDAQOTH:EADSY) A320-family planes. He also said that France was hoping to strike additional deals to sell A350 or A380 widebody jets to China.
However, 2018 came and went with no order. But on Monday, in conjunction with a state visit to France by China’s President Xi Jinping, China placed an even bigger order for Airbus jets than the one discussed last year.
More orders coming Airbus’ way
While there are numerous different state-owned and private airlines in China, the government has ultimate authority over aircraft orders. China periodically places large orders with Boeing and Airbus, and it tends to use these orders as a “carrot” in political and economic negotiations with those aircraft manufacturers’ home countries.
Under the deal announced this week, China plans to buy 300 Airbus aircraft — 290 A320-family planes and 10 A350s. Neither party specified which variants of these aircraft families will be acquired. In all likelihood, details like that are still being hammered out: The two sides have only reached a “general terms agreement” thus far, not a binding firm order.
Airbus and China have announced an order for 290 A320-family jets. Image source: Airbus.
The deal with China should help the European aerospace giant get its order backlog moving in the right direction again. In the first two months of 2019, Airbus’ backlog shrank, as it booked new orders for just four aircraft, offset by 103 cancellations.
That said, the 300 orders announced this week are not necessarily all new, as Flightglobal noted recently. Airbus has a substantial number of orders from undisclosed customers in its official backlog already, including nearly 600 A320-family orders and two dozen A350-family orders.
Bad news for the 737 MAX? Not necessarily…
China’s big Airbus deal comes in the shadow of the worldwide grounding of Boeing’s 737 MAX jets, following two fatal crashes in the span of five months. Aviation regulators in China have been among the most aggressive in addressing this safety crisis. China was the first country to ground the 737 MAX, and it has stopped taking applications for airworthiness certifications of new 737 MAX aircraft. Chinese regulators have also made it clear that they will independently evaluate any design changes proposed by Boeing, rather than just following the FAA’s lead.
The combination of the big Airbus order and China’s response to the Boeing 737 MAX crashes might make it seem like Boeing is in trouble in the fast-growing Chinese market. But here as elsewhere, any dip in orders for the Boeing 737 MAX is likely to be temporary.
First, China’s aviation market is massive and growing rapidly. Airbus expects China to need an additional 7,400 aircraft over the next 20 years, including more than 6,000 single-aisle planes (like the A320neo and 737 MAX families). Boeing’s estimates are even more bullish. Airbus alone cannot meet all of that demand. While a homegrown Chinese jet will soon be available as a third option, it will take a while for production to ramp up — and in any case, it’s not as technologically advanced as the 737 MAX and A320neo families.
Second, Boeing opened a 737 MAX completion center in China just a few months ago. This new facility currently installs interiors for the numerous 737s destined for Chinese airlines. In the future, the jets will also be painted there. If China stops ordering 737 MAX aircraft, this work will go away.
Third, as noted above, aircraft orders are often used by China as a bargaining chip. With China eager to roll back U.S. tariffs on various Chinese imports, a long-term move away from Boeing jets — and the 737 MAX in particular — would be hard to pull off. Thus, once Boeing demonstrates that it has addressed any safety vulnerabilities for the 737 MAX, it could be in line for another big order from China.
Airbus should be pleased about landing a big order from China. But the deal announced this week doesn’t reflect a change in the balance of power in the aircraft manufacturing industry.
Adam Levine-Weinberg has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.