China Economy.jpg

Fuel, Yuan Movements May Be More Important Than Trade Conflicts for Chinese Aviation

Long-term still looks solid for aircraft demand and concentrated MRO sector.

Chinese aviation is now subject not only to increasing fuel prices, denominated in U.S. dollars, but to higher Chinese currency costs, due to the current weakening of the Yuan against the dollar, notes Art Abel, director of consulting at PGA Aviation, which remarkets aircraft into and out of China. Jet fuel prices are now about 34% above their 2017 average, in dollars. Furthermore, the Yuan has lost about 6% of its dollar value since 2017. This depreciation affects many purchases from abroad, not just fuel. “Such impact would likely be even more pronounced for the major Chinese airlines with extensive international networks,” Abel notes.

Passed through to fares and shipping costs, these cost increases could slow the rapid growth of Chinese traffic. And fuel-price increases also affect aircraft values, especially for aircraft with the least efficient engines and older rather than newer models.

In contrast, Abel says the effect of trade conflicts between Washington and Beijing may matter, but “not nearly to the extent that many in the general media and Wall Street seem to think.” This view applies especially to Chinese fleet growth.

“Commercial airframe and engine markets are not nearly as susceptible to trade wars as other products are,” Abel says. This is because trade conflicts are usually temporary, and aircraft order times are lengthy. “Commercial aircraft are typically ordered in significant quantities, despite their high prices, to obtain the best possible discounts from catalog price. The first unit isn't available for delivery until two years after ordering, and the last may not be available until ten years after.”

Periodic payments for aircraft orders are another reason temporary trade disputes do not heavily influence orders. Finally, Abel stresses the fact that China is the fastest growing aviation market in the world and well on its way to becoming the largest.

Taken together, these long-term factors mean aircraft markets in China are not much affected by temporarily shifting trade winds. 

But Abel admits one issue unique to China could be affected by bilateral trade relationships: the requirement that the government individually approve every foreign-purchased aircraft imported into China. “This approval -- and it's availability on schedule -- can be a concern during periods of heightened bilateral tensions.” However, he judges China would not let approvals significantly reduce the steady flow of airplanes demanded by China’s booming demand.

On maintenance, Abel is confident China will continue to support most of its needs internally, and with a fairly concentrated infrastructure. While there are an increasing number of independent Chinese airlines, the bulk of commercial flying is still done by groups of regional airlines centered on the three major carriers: Air China, China Eastern Airlines and China Southern Airlines. “Each major has a very robust and capable central maintenance organization that conducts maintenance for the major and oversees it throughout the rest of the group, in some cases partnered with major western airlines for maintenance.”

TAGS: Asia Pacific
Hide comments

Comments

  • Allowed HTML tags: <em> <strong> <blockquote> <br> <p>

Plain text

  • No HTML tags allowed.
  • Web page addresses and e-mail addresses turn into links automatically.
  • Lines and paragraphs break automatically.
Publish