China regional jet market remains on slow simmer

Singapore Air Show » 2006
November 30, 2006, 9:18 AM

Last month’s order for five ERJ 145s placed by China Eastern Airlines no doubt came as welcome news to the management of the Brazilian-Chinese joint manufacturing venture known as Harbin-Embraer Aircraft, but it certainly didn’t overwhelm anyone hoping to fully engage an assembly line capable of building 24 airplanes a year. After all, at the time of the January 18 order announcement, only two airplanes remained on back order; the latest sale, placed on behalf of China Eastern subsidiary Wuhan Airlines, doesn’t call for first delivery until November.

Fortunately for Embraer, every time it looks as though the factory might run out of work, a modest order surfaces to keep the 180 employees at the Harbin plant busy. But this is hardly a business pattern that has inspired much enthusiasm from those who expected more from a booming economy like China’s.

Conventional wisdom over the past decade has held that China’s growing middle class and need for a modern air transport network in its central and western hinterlands will result in a demand for small commercial airplanes not seen since the so-called regional jet revolution spread across North America and Europe in the late 1990s. For Embraer, the prospect of getting in on the ground floor of a market projected to yield sales in the hundreds of airplanes surely looked worth risking a relatively paltry $21 million on a new factory. Still, after selling 16 airplanes over the course of three years, it seemed fair to say that the project hadn’t met expectations.

“[China’s regional air transport system] has indeed developed over the last few years with less intensity than expected…,” conceded Embraer executive vice president Fred Curado to Aviation International News. Curado, however, stressed that “the fundamentals are still there,” and wouldn’t admit to any second thoughts about the wisdom of the company’s commitment to the market.

“It is of public domain that the Chinese government remains firm in its strategic vision about fostering regional air service as an important means for the growth and integration of the country. There are studies under way on how to further incentivate [sic] regional air travel, which clearly reassures [us of] their seriousness about this matter… We plan our presence in the country [with] a long-term perspective and will keep working hard to solidify it,” said Curado.

Of course, even though Chinese airlines ostensibly run on a commercial basis and under independent management structures, the timing ultimately will depend on the government. In fact, Harbin-Embraer Aircraft exists only because the Chinese government used its ultimate control over airlines that had already ordered Brazilian ERJ 145s to effectively halt deliveries. For all practical purposes, if Embraer wanted to do business in China, it would have to enter into the partnership.

By the time the Chinese effectively suspended all regional jet imports in late 2001, the country had begun to realize some of the potential Embraer, Bombardier and the West’s third major player in the regional jet market at the time, Germany’s Fairchild Dornier, had forecast. Embraer, for its part, had delivered five ERJ 145s to Sichuan Airlines and won firm orders for 20 of the 50-seat jets from China Southern and another 10 from Wuhan Airlines.

But more than five years later, Embraer’s investment has yet to yield commitments even equal to its 2001 total. Including the five Brazilian-built ERJ 145s operated by Sichuan, it had delivered a total of 18 airplanes in China by the start of this year. Three Hong Kong Express Embraer 170s, six Chinese-built ERJ 145s flown by China Southern, another three by China Eastern and a single Legacy business jet accounted for the rest.

Happily for Embraer, it can afford to wait. Less able to absorb cash-flow disruptions than its firmly established competitor from Brazil, the now defunct Fairchild Dornier couldn’t and it blamed the Chinese delivery freeze at least in part for its descent into bankruptcy in April 2002. By that time the company had signed a deal with the very same Harbin Aircraft involved with Embraer to build wing fairings for the 32-seat 328Jet. Not coincidentally, China’s Hainan Airlines had taken delivery of all but one of 19 of the 328Jets on which it placed firm orders, and had just converted options on another 20.

However, before Hainan took delivery of its 19th airplane, the Chinese delivery freeze suddenly cut off one of Fairchild Dornier’s few sources of regular revenue, just as New York investment house and principal owner Clayton, Dubilier & Rice grew increasingly impatient with the over-budget and underperforming 728 project. Although the airline eventually took another eight airplanes from Clayton, Dubilier & Rice’s successor, the now bankrupt AvCraft GmbH, it once again refused deliveries of a new firm order for 20, leading again, at least in part, to the demise of yet another Fairchild Dornier incarnation.

Unfortunately for Hainan, the range of profitable uses for the 328Jet has proven far narrower than it anticipated, particularly given China’s low fare structure. And, unfortunately for the likes of Embraer and Bombardier, potentially higher-yielding business centers such as Beijing, Kunming and Shanghai simply don’t have the capacity to lift restrictions on commuter operations, while network development planned for central and western population centers remain slow to materialize.

Other Priorities

Only the Chinese know exactly why, but Bombardier Aerospace vice president of marketing and communications Trung Ngo suspects the comparatively slow progress has more to do with preoccupation with more immediate priorities than any shift in policy. The Civil Aviation Administration of China (CAAC) has acknowledged that the explosive growth in mainline networks has resulted in a shortage of pilots and other technical personnel along with “inadequate management and control.” Before it shifts its attention to developing regional networks with 50- and 70-seat jets, perhaps China’s air transport authorities need to address the structural deficiencies of the network already in existence.

Still, as Chinese state airframe builder AVIC I projects a 20-year demand for 900 airplanes in the under-90-seat category, both Curado and Trung believe the operative interrogative remains “when” rather than “if” for Western RJ builders, notwithstanding AVIC’s plans to certify an 85-seat regional jet of its own by 2009. “It’s a very valid question and we ourselves are struggling with it,” said Trung. “We are certainly of the view with the [projected demand] numbers being as big as they are, clearly there is opportunity for imports as well as locally built [airplanes.]”

Bombardier now counts seven Chinese airline customers that together fly 36 CRJ series regional jets and a pair of Q400 turboprops, while CR Airways of Hong Kong flies a pair each of CRJ200s and CRJ700s it recently bought used. In anticipation of perhaps a much bigger presence, Bombardier built a spares depot in Beijing, a customer support organization in Shanghai and a CRJ training center in Qindao. Meanwhile, Shenyang and Xian Aircraft make landing gear doors for the CRJ and Q Series and, said Trung, Bombardier “certainly [has] the intent to see if we could look at additional work.”

For the time being, Bombardier will have to remain patient because, as Embraer has found, the Chinese will not feel pressured into acting until ready. “I guess we all felt that, really, because this is a very top-down sort of decision-making process [in China], maybe there is a backlog of decision that needed to happen,” said Trung. “Now that [the Boeing 737 and Airbus A320 tenders are] out of the way, we hope they will turn their attention to…the smaller markets. Clearly, [patience] is what it takes. Like they said, you know, China wasn’t built overnight.”  

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