Caixin
Jun 06, 2019 03:01 PM
BUSINESS & TECH

Boeing in Talks for 100-Jet China Deal Despite Worsening Trade Tensions

The inside of a Boeing Co. factory. Photo: Bloomberg
The inside of a Boeing Co. factory. Photo: Bloomberg

(Bloomberg) — Boeing Co. has been negotiating one of the largest orders ever of wide-body jetliners with Chinese airlines even as tensions between Washington and Beijing escalate, say people familiar with the talks.

The discussions center on about 100 twin-aisle jets: 787 Dreamliners as well as 777X planes, the newest long-range aircraft in Boeing’s lineup, said one of the people, who asked not to be named as the talks are private. Negotiations have focused in particular on the 777-9 variant, the plane-maker’s costliest jet with a $442.2 million sticker price, ahead of the model’s expected first flight later this month.

No deal is imminent, the people cautioned, and the trade war is a major complication for all involved. The Chinese side is waiting for guidance from the government before pushing forward with the discussions, according to some of the people, as the tit-for-tat fight between the U.S. and China intensifies.

Trade fight

The battle over trade and technology between the world’s two biggest economies has entered a new phase, with allegations China reneged on commitments made at the negotiating table triggering a fresh round of tariffs and smashing a months-long detente.

Companies are being caught in the fray, with President Donald Trump blocking telecommunications giant Huawei Technologies Co. Ltd. from buying U.S. technology, and looking to extend the ban to five Chinese video-surveillance firms. Beijing vowed to retaliate, issuing a travel warning for the U.S. and threatening to blacklist foreign firms. It launched a probe into FedEx Corp. for “wrongful” deliveries and Ford Motor Co.’s main joint venture in China was fined for antitrust violations on Wednesday.

Still, the airplane negotiations underscore the overlapping interests between the two nations in aviation. Boeing, under pressure over the worldwide grounding of its 737 Max plane, is the largest U.S. exporter and the deal would help reduce its home country’s trade deficit with China. The potential order would be worth more than $30 billion before customary discounts, depending on the mix of aircraft.

Boeing shares rose less than 1% to $347.40 at 11:15 a.m. in New York after climbing as much 2.5% on the report of the negotiations in China. Through the close Tuesday, the shares had tumbled 18% since the March 10 crash of an Ethiopian Airlines 737 Max plunged the company into crisis.

Boeing declined to comment, while China’s Civil Aviation Administration didn’t immediately respond to a request for comment from Bloomberg News.

Emerging superpower

China is an emerging aviation superpower, on pace to become the world’s largest aviation market in the 2020s. It has ambitions of eventually joining Boeing and Airbus SE as a dominant global plane-maker, but the first locally developed wide-body jet is at least eight years away. That leaves the country’s airlines reliant on the duopoly for large jetliners to cruise over oceans and sate demand for travel by Chinese consumers.

“China’s not going to poke themselves in the eye. I don’t see them canceling Boeing airplanes,” said David Pritchard, associate professor and aerospace researcher for the State University of New York, Empire State College. Instead, China over time will probably shift from its strategy of carefully dividing orders between Airbus and Boeing. “Will that eventually move to Airbus’s advantage? Probably,” he said.

The new planes would help replace an earlier generation of 777 jetliners, one of the people said. Boeing has sold 101 of those aircraft to Chinese airlines, according to its website. While the 777-9 would make up a significant portion of the deal, there is also interest in the smaller -8, whose size is comparable to the 777-300ER, another of the people said.

Boeing has long predicted healthy sales for the 777X in China, where airlines have yet to order the hulking model, the first twin-engine aircraft designed to haul more than 400 travelers. But the timing of the plane’s 2020 commercial debut is uncertain amid a controversy over the U.S. aircraft certification process in the wake of two deadly crashes for Boeing’s narrow-body 737 Max.

Cash boost

With the Max grounded indefinitely, Boeing is looking to orders of larger wide-body jets to help bolster its cash. Despite the forbidding trade backdrop, the Chicago-based company is still working to reach a commercial agreement that its customers in China can take to the government for approval, the people said.

Under the country’s complex airplane tender process, deals must also pass muster with regulators before they are handed off to the China Aviation Supplies Holding Co., which purchases all aircraft. The sales are often recorded as coming from unidentified customers by Boeing and Airbus, and may be unveiled at various stages of the approvals process — and again during visits by heads of state.

Boeing is “very engaged” in the U.S.-China trade talks, Chief Executive Officer Dennis Muilenburg said at a Bernstein conference May 29. China initially considered putting the 737 Max on a draft list of American products the country would buy to reduce its trade surplus with the U.S., but then changed its mind amid safety concerns over the aircraft, people familiar with the matter said in March.

China was the first country globally to ground the 737 Max, Boeing’s fastest-selling jet. The move attracted attention as it disregarded the position of U.S. aviation authorities at the time. The FAA eventually joined regulators around the world in grounding the single-aisle model.

Contact editor Yang Ge (geyang@caixin.com)

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