China Tariffs Could Hurt More Than First Thought

 - April 6, 2018, 2:38 PM
Air China became the first Chinese carrier to take delivery of a Boeing 737 Max, receiving its first 737 Max 8 on Nov. 3, 2017. As of April 2018 Chinese customers had outstanding orders for 188 737 Max 8s, according to IBA Group.

The 25 percent tariff on imports proposed by China on new U.S.-built aircraft with empty weights from 15,000 kg (33,069 pounds) to 45,000 kg (99,208 pounds) as part of an escalating potential trade war with the Trump Administration could prove more problematic for Boeing than most aerospace industry observers believe, according to UK aviation technical consulting firm IBA Group.

While various U.S. OEMs and aviation trade associations have pointed out that U.S.-China bilateral trade negotiations on the tariffs each side has proposed remain at an embryonic stage, most industry analysts have assumed that China will not levy the tariff on imports of the strong-selling Boeing 737 Max 8. Analysts have pointed to the fact that Boeing’s specified empty weight for the 737 Max 8 totals 45,070 kg (99,362 pounds), at first glance a weight that would put the new model just above the aircraft empty-weight limit covered by China’s proposed tariff.

That specification has led to assumptions that the only Boeing commercial aircraft to definitely feel the effects of the tariff would be the 737NG family (up to and including the 737-900ER) and the 737-700-based BBJ business jet. Since Chinese customers await delivery of only a relatively small number of 737NGs and BBJs, many have assumed that the potential effect of the tariffs on Boeing and on the Chinese customers themselves would prove relatively small.

But Phil Seymour, CEO of IBA Group, noted to AIN that China’s proposed tariff does not specify whether the upper empty-weight limit refers to the manufacturer’s specified empty weight of the aircraft or the aircraft’s actual empty weight in the operator’s seat configuration. Although the manufacturer empty weight (MEW) is usually lower than the operator empty weight (OEW), any given operator’s OEW for an aircraft can be lower than its specified MEW, particularly if the operator installs low-weight, single-class seating.

As a result, said Seymour, the 737 Max 8’s MEW is “quite marginal” in terms of potentially being affected by China’s proposed tariff, because in any given operator’s configuration a Max 8’s OEW could be slightly below 45,000 kg. The initial uncertainty has led Seymour to suspect that the Chinese government announced the tariff-affected aircraft weight limits without fully analyzing them.

“Most regulators choose an arbitrary number” when announcing limits affecting aircraft and aviation, such as age restrictions for aircraft that can be imported,” said Seymour. “I don’t think the Chinese government did a hell of a lot of analysis—someone just came up with a figure that would be generally inconvenient for all 737s. If the intent of China was to put a [more exact] number on that, it would have a big impact. I don’t think we should be looking at this positively.”

The Chinese government might move the tariff goalposts at any time by re-specifying the weight limits for affected aircraft, said Seymour. He cautions U.S. aircraft manufacturers such as Boeing not to assume they could circumvent China’s proposed tariff easily by adjusting aircraft weight slightly, as regional-jet manufacturers managed to do to mitigate the effects of U.S. pilot-union scope clauses.

A decision by China to levy tariffs on 737 Max 8 imports could have profound implications for Boeing and the Chinese airline industry. IBA Group’s IBA.iQ database of forthcoming commercial aircraft deliveries shows that Chinese airlines, banks, and leasing companies hold outstanding firm orders for about 270 Boeing 737s—including 188 Max 8s, thirty-seven 737-800s, one 737-700-based Boeing BBJ, and more than forty 737s of unspecified model. The net delivery prices of those aircraft would total some $18 billion and their list prices about $36 billion, said Seymour. Furthermore, IBA Group’s database shows another 160 Boeing 737s that the manufacturer lists as ordered but for which it hasn’t yet identified model or customer. Many or all of those aircraft could be going to Chinese customers, though Seymour pointed out that Chinese banks and leasing companies might lease many of their 737s to airlines outside China.