Embraer Boosts Outlook for China

 - January 1, 2013, 4:05 AM
One of Embraer’s biggest customers in China, China Southern flew 16 E190s as of December, still not enough to generate “true” economies of scale.

Embraer appears ever more bullish on the prospects for its products in China, judging by its most recent market forecast for the country. Released during November’s Airshow China international aerospace exhibition held in Shanghai, the forecast predicts that the number of aircraft holding between 30 and 120 passenger seats will grow more than eight-fold, from 125 today to 1,005 in 2031.

Only a year ago a similar forecast from Embraer projected an increase from 130 airplanes in the same category to 990 by 2030, suggesting a fairly significant boost in enthusiasm for the market over the past year.

Embraer’s optimism appears well founded, and based on empirical evidence of the Chinese airline industry’s ability to withstand global financial crises, as it did in 2011. In that year, Chinese airlines and airports posted profits of 27.8 billion renminbi ($4.4 billion) and 4.3 billion renminbi ($684 million), respectively–slightly lower than a year earlier but still robust compared with the performance of their counterparts throughout the rest of the world.

While the nation’s projected GDP growth of no less than 5.5 percent annually over the next 20 years bodes well for the entire airline industry, the market segment covering 30 to 120 seats will perhaps benefit most from infrastructure investment on the part of both the central and local governments, according to the report. An imbalance in the development of trunk and regional routes has long posed a problem in China, and recent analysis shows that 69 percent of all flights last year carried fewer than 120 passengers. Yet by the middle of last year, only 8 percent of the 1,820 airplanes in service held fewer than 120 seats. In fact, aircraft carrying fewer than 120 seats accounted for just 3.2 percent of all seat capacity and 2.9 percent of all passenger volume.

Largely as a result of the domestic airline fleet profile, point-to-point(non-hub) services account for the majority of flights within China, notwithstanding encouraging developments in Xingjiang and Inner Mongolia, where efforts to improve the situation have given rise to the regional aviation hubs of Unumqi and Hohhot.

To encourage still more development, the Chinese government’s “twelfth five-year plan” calls for more regional airport construction and operation in the central and western regions in particular. Over the next five years, China plans to spend 425 billion renminbi ($68 billion) on the construction of 56 new airports, relocation of 19 and reconstruction and/or expansion of 91. Most of the investment will go to the development of regional airports, according to the Embraer report.

Government policy will also play a role in encouraging further development of regional aviation, said the forecast. Examples it cites include an exemption on import duties and value added tax for spare parts for regional aircraft, and a waiver of airport construction fees on regional flights.

Meanwhile, accelerating urbanization, rising fuel prices and increasingly fierce competition among airlines serving the largely saturated markets in the eastern part of the country will all encourage the development of regional service. “Carriers are shifting their attention to remote areas and seeing the development of regional aviation as a new source of profit,” said the report.