Harriet Lefton

About the Author Harriet Lefton

Harriet originates from the UK where she worked as a journalist specializing in the metal markets. She graduated from the University of Cambridge before becoming a qualified UK lawyer.

Should Boeing Feel Threatened by China’s 1st Rival Plane?

The first large Chinese jet plane has finally hit the skies for a successful 80-minute test flight, thanks to state plane manufacturer Comac (or in other words the Commercial Aircraft Corporation of China). Good news for China and its plans to upgrade to higher-level manufacturing, but what about for the world’s biggest plane maker Boeing (BA)?

The C919 is the fruit of 9 years of labor beset by technical difficulties and delays (the first flight was supposed to be four years ago) at an estimated cost to the Chinese government of over $20 billion. This new jet, which will fit 158 to 174 people in rows of six, has been purposefully designed to compete with other single-aisle double-engine jets most notably the Boeing 737 as well as the Airbus A320. Already China’s Xinhua News Agency has stated that China is “one of the world’s top makers of jumbo aircraft,” after the US, Europe and Russia.

A lucrative opportunity

One of China’s ‘big three’ state-owned airlines, China Eastern Airlines (CEA), is the launch customer for the plane, which Comac says already has 570 orders from 23 different customers. Only two of these orders, for 30 planes, are not from Chinese companies. State-run Comac is likely to benefit from government pressure on other state-owned airline companies to buy the C919 instead of the ubiquitous Boeing and Airbus models. Such pressure could reduce demand for Boeing and Airbus’ Chinese assembly plants that will soon be capable of producing around 60 planes a month.

And it’s a lucrative market to fight over: Boeing has calculated that over the next two decades, Chinese airlines could spend over $1 trillion snapping up about 6,800 new planes. Indeed, by 2024 China is expected to become the world’s largest aviation market by passengers (currently it’s the US) with 904 million annual passengers by 2025. However, if Boeing and Airbus have the capacity to fulfil these orders alone then any planes sold by Comca will be their loss.

And Comca’s plans are not just domestic. The company intends to sell the plane internationally. Chinese officials are currently trying to sign bilateral ‘airworthiness’ agreements with US and Europe by the end of the year that will give Chinese aircraft the go ahead to fly in international aerospace. African and Central Asian markets have more lax regulations and could certify the plane sooner.

Not an immediate threat

Any impact on Boeing, or indeed Airbus, is likely to take a very long time to materialize. Initially Comca plans to make just two planes a year from now until 2019 to test out safety levels. But it will take much much longer- close to a decade- before the impact on Boeing and Airbus can be assessed.

Wide-body jet in the works

At the same time, Boeing will also be tracking the development of the wide-body 280-seat C929 passenger jet that China is currently working on with Russia’s United Aircraft Corporation. “Research and development of wide-body aircraft was launched recently,” said He Dongfeng, vice-chairman and president of Comac on April 28. The plane is expected to be ready in ten years- but given that the C919 was delayed by three years a similar delay could also occur here. However the C929 could ultimately pose a threat to Boeing and further suggests that Comca is serious about becoming the third major aircraft manufacturer.

C919: Good news for US suppliers

While Boeing may see a long term negative impact from the C919, there are other stocks that could benefit given that it incorporates a number of high-tech parts supplied by US companies. The list includes: jet engine supplier CFM International, multinational conglomerate Honeywell (HON), aerospace system designer United Technologies (UTX) and motion/ control tech company Parker Hannifin (PH).

Indeed Parker Hannifin is actually an interesting stock to track- shares have been steadily climbing from about $88 in January 2016 to the current price of just under $160, while Credit Suisse analyst Jamie Cook recently raised his price target $20 to $189 after PH beat expectations for Q3 and raised its EPS.

Buy BA on dips says top Argus analyst

If we look at BA shares then currently they have held steady at $185, but any dip on the news could be actually be seen as a good time to invest. So says top Argus analyst John Eade: following the release of Boeing’s beat-and-raise Q1 results, he said he “would view any headline-related pullbacks as buying opportunities.” Eade reiterated his buy rating on the stock on April 28 while raising his price target significantly from $190 to $220. The five-star analyst has a very strong track record on Boeing stock specifically with a success rate of 75% and an average return of 25.6%.

The overall analyst consensus on TipRanks for Boeing is a cautiously optimistic Moderate Buy rating based on analyst recommendations made in the last 3 months (8 buy, 3 hold, 2 sell), while the average analyst price target suggests a minimal 1.47% upside from the current share price.