Wednesday, April 4, 2018

Why China's new aircraft tariff doesn't affect Boeing's best-selling jets — for now

China's decision to slap 25 percent tariffs on passenger jets from the U.S. won't hurt Boeing or smaller jet makers like Gulfstream, two top aerospace analysts said Wednesday.

The threat to aerospace supply-chain companies looks similarly small, at least for now, the industry analysts added.

"Bottom line: This tariff's threat to Boeing looks minimal," said Cai von Rumohr of Cowen, an investment firm.

Analyst Sam Pearlstein of Wells Fargo Securities agrees. "It would appear to have limited impact on Boeing," Pearlstein said.

Von Rumohr and Pearlstein, veteran Boeing watchers who've followed the company's China business growth for years, shared their assessments in separate notes to clients.

The analysts said the China tariff appears to target older model 737 Next Generation (NG) jets, made in Renton, not Boeing's best-selling newer 737 Max family of jets, nor its 777 and 787 Dreamliner wide-bodies.

Von Rumohr and Pearlstein noted the 737 Max, the fastest-selling jet in Boeing's history, has a backlog of 4,200 jet orders. Buyers include China's biggest airlines.

Pearlstein said Boeing has just over 300 737 NGs in its order backlog. He estimated only 40 percent of those orders are from Chinese airlines, representing three percent of 2018-2019 Boeing company revenue and three or four percent of its profit.

Von Ruhmor drilled deeper, suggesting the tariff also actually might exclude some 737-800 and 737 900 Extended Range NG models, making the tariff — based on aircraft weight, technology, and fuel efficiency — largely symbolic.

Most Chinese customers can easily avoid the tariff, the analysts argued.

"We suspect that Chinese buyers would convert many of their 737 Next Generation orders to the 737 Max to avoid the 25 percent tariff, suggesting the impact would be even less," Pearlstein wrote.

"Also, since substantial deposits have been made on 2018 deliveries, we suspect few (orders) near-term would be canceled," Pearlstein added.

Von Ruhmor agreed, noting air traffic is rising at explosive rates in China, a country enjoying an airport development boom.

"Because Asia Pacific traffic rose by more than eight percent in 2017, China likely needs the planes," von Ruhmor wrote. "The larger issue is whether a negotiated settlement can be reached or the dispute escalates."

Boeing said the U.S. and China have "outlined positions" that could harm the global aerospace industry. Boeing said it hopes that "productive trade talks" between the countries will continue.

Boeing invested $33 million in a joint venture 737 completion center in China, where it will paint jets and install interiors for Chinese clients.

China is also developing the C919 jet, which it wants to one day be a Boeing 737 rival.

(Andrew McIntosh - Puget Sound Business Journal)

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