Boeing Flies The Friendly Skies of China

China Eastern Airlines YN022 2357 (CEA) 737-70...

China Eastern Airlines YN022 2357 (CEA) 737-700 Exteriors and Take off (Photo credit: Wikipedia)

On the eve of the May 1 holiday in China, China Eastern Airlines, based in Shanghai, announced that it is buying 20 Boeing 777 jets worth nearly $6 billion, while also selling five Airbus A340s to the U.S. plane maker. China Eastern said it’s selling the Airbus A340-600 airplanes worth $708 million to Boeing because they have high operating costs and “relatively weak route competitiveness.” The new Boeing jets will be delivered in stages from 2014 to 2018. The announcement represents a big win for Boeing, but a huge loss of face for Airbus.

The Boeing Company is traded on the New York Stock Exchange (“NYSE”) under the symbol BA and is an American icon with a great product that appears to be winning everywhere. Last week, Boeing announced that revenues rose 30 percent in the first quarter and that it is raising production rates to meet increased demand. Therefore, it should come as no surprise that China Eastern would select Boeing aircraft for such a large purchase. Other factors may also be at work, though.

China Eastern Airlines Corp. Ltd., is also listed on the NYSE under CEA, but the company is 62 percent owned by China National Aviation Corporation, a large state-owned company in China. With such strong government oversight, the impact of China’s geopolitical objectives  — on the timing of the company’s decisions and on the decisions themselves — cannot be discounted.

In March, the chief executive of EADS, the parent company of Airbus, Boeing’s large European competitor, said that China has blocked purchases of Airbus planes by Chinese companies in reaction to a disputed European carbon tax. EADS Chief Executive Louis Gallois said Airbus is being subjected to “retaliation measures” by Beijing and warned that the European commercial-aircraft maker stands to lose business if the EU fails to heed protests from airlines around the world about the emissions scheme that took effect at the beginning of this year.

“The Chinese government is putting on hold approval” for 35 wide-bodied Airbus aircraft ordered by Chinese airlines, Gallois said. “We are worried that this conflict is becoming a commercial war … and that there is a risk that Airbus will be taken hostage.”

China is among 27 countries that have said they will consider retaliatory steps following the European Union’s extension of its carbon market to aviation. The EU decided in 2008 that aviation should become part of its cap-and-trade carbon program after airline discharges in Europe doubled over two decades.

China is set to become the world’s second-largest air travel market after the United States by 2014, according to a report released by the International Air Transport Association. I could almost hear the cheers that must have gone up in Boeing’s China headquarters across the street from my office in Beijing when the news of China’s decision on Airbus came across the tape. Could the new order that China Eastern announced on April 30 be the first step in the implementation of China’s boycott of Airbus?

Last week, Chen Guangcheng, a Chinese dissident, escaped from house arrest in China and has reportedly sought refuge in the U.S. embassy in Beijing. On Monday, Secretary of State Hillary Clinton and Treasury Secretary Timothy Geithner left Washington to lead a U.S. team to the “strategic and economic dialogue” with China that is a regular annual meeting between the two countries, aimed at broadening ties between the world’s two largest economies.

With the Chen Guangcheng situation threatening to bring human rights issues to the fore and overshadow the talks, the timing of China Eastern’s announcement is interesting, to say the very least. The U.S. economy is still struggling, so such a large export order is very welcome news, particularly in an election year. It’s also noteworthy that Gary Locke, the American ambassador to China, is from the state of Washington where Boeing was once headquartered and still maintains a significant presence. Could the timing of China Eastern’s large order for Boeing aircraft have been designed to take some of the edge off the talks?

As many prominent American companies have found, a company’s business in China can be impacted both positively and negatively by geopolitical considerations. When the U.S. and China are at odds, government approvals come more slowly. When other factors are at work, however, American companies may find themselves on the receiving end of large orders from China. As America’s largest exporter, Boeing may now be benefiting from a strong China tailwind.

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