Boeing is counting on China's need for thousands of narrow-body planes like its 737 Max to bolster production over the next two decades. Image source: Boeing.
What slowing Chinese economy and tumbling stock market?
Boeing ignored the upheaval in Asia by brashly releasing its annual long-term forecast for the Chinese aircraft market last month, predicting the country's aircraft needs will nearly triple in size and be worth nearly a trillion dollars by 2034.
Citing the "incredibly dynamic" nature of the Chinese aviation market, Boeing says the country will need 6,330 new planes over the next two decades -- or 310 more planes than it forecast last year -- a near threefold increase from its current size of 2,570, a total that will absorb about 17% of global demand.
Boeing vice president of commercial airplane marketing Randy Tinseth said, "Despite the current volatility in China's financial market, we see strong growth in the country's aviation sector over the long term."
As Boeing provides China with more than half its airplane needs -- suggesting it will be the biggest beneficiary of the $950 billion opportunity if it materializes -- is this a case of wishful thinking, or does Boeing see something the market is apparently missing?
Even a slowing China is a growing ChinaChina's transformation over the next two decades into the world's biggest domestic air travel market is predicated on the rise of low-cost carriers (LCCs) that will triple their impact on the market.
- LCCs will account for between 25% to 30% of demand in 2034, up from just 8% now.
- They will be primarily looking for narrow-body planes like Boeing's Next-Generation 737-800 and new 737 MAX 8 with 90- to 230-passenger capacity.
- Such planes will represent almost three-quarters of all deliveries, or some 4,630 planes.
- Total value is estimated at $490 billion.
Wide-bodies will be responsible for nearly another quarter of demand as the expansion of Chinese international carriers will account for another 1,510 planes expected to enter the fleet.
Source: Boeing, Long-Term Market, Current Market Outlook 2015-2034.
Check your blind spotHowever, Boeing may be blinded by its current order volume. Both it and rival Airbus have accelerated their production as record demand has bolstered their capabilities. A recent Financial Times articles indicated that sales following the Paris Air Show in June were ahead of both expectations and last year's orders, with Boeing and Airbus announcing combined orders and commitments of 752 aircraft. But the $107.2 billion total value of the deals was actually below that from last year's show, as well as the one in 2013.
Last year, Boeing delivered 155 aircraft to China, or 21% of its global deliveries, and so far in 2015, it has accounted for a similar percentage. Having won orders for 400 planes from China last year, Boeing is looking for an equally robust performance this year.
However, Boeing is counting on the emergence of a more affluent China to upend traditional growth models to support its outlook, meaning the risk of a financial contagion could seriously undermine the forecast.
Flying the friendly skies. Boeing hopes to reap a windfall of business despite the headwinds from economic turbulence in China. Image source: Boeing.
House of cardsThe Wall Street Journal notes thatBank of America analysts worry the collapse in oil prices raises the possibility of deferrals on aircraft orders in 2017 and beyond, along with higher financing costs that will make such sustained growth projections a dicey proposition. China may be the straw that stirs the drink for the industry (and much of the rest of the world's economy), but by ignoring the warning signs present in the Chinese economy, Boeing is setting itself up for a big shock if it comes crashing down.
Boeing's Tinseth is quoted in its market outlook: "Enabled by China's growing middle-class population, new visa policies and the underlying strength of its economic growth, this expansion is expected to continue, and in fact accelerate."
It's a damn-the-torpedoes mind-set, and though there's truth in the view that China will likely accelerate in the years ahead, it also ignores Beijing's determination to have its domestic industry play a role in and benefit from the growth.
The government-backed Commercial Aircraft Corp of China, or COMAC, is developing its C919 to compete with Boeing's 737 Max and Airbus' A320, and most of the 500 or so orders it's received for new aircraft have come from local carriers. As it builds out the plane and improves on it, it may be COMAC that receives the orders, not Boeing or Airbus.
The aircraft maker may not be crazy for expecting China to need so many airplanes, but Boeing can still be grounded for thinking it will necessarily be the beneficiary of it.
The article Is Boeing Off Course in Thinking China Needs So Many Airplanes? originally appeared on Fool.com.
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