Re-Post: The Brazilian Job (with update)

In the Hutong

Digging deeper into aerospace in China

0038 hrs.

I get asked now and then what I would consider a case of foreign companies learning to play by Chinese rules in China. There are plenty of good cases, but one I particularly like - because it is a quick one to tell - is something that happened to Brazil's EMBRAER about two years ago.

Kung fu, meet Capoeira 

The Civil Aviation Administration of China, (CAAC, through whom all orders by Chinese airlines for airliners must go) had apparently been sitting on an order for some EMBRAER regional jets. The Brazilians, who had built a factory in Harbin with the expectation that China would be a gigantic market for regional jets, was apparently finding things a bit rough going for its China operations, as the Harbin plant was apparently all but idle. 

So the guys at EMBRAER made it known that they’re going to shut the doors in Harbin due to a lack of orders.

This clearly struck someone in the civil aviation bureaucracy as a bad idea. It would have been a step backwards in China’s efforts to attract foreign airframe manufacturers (and build its own airframe manufacturing industry), and it would have ruined the rationale for local player AVIC to develop its own regional jet, the recently-unveiled ARJ-21. 

So, next thing you know, EMBRAER  scores an order for 100 of its puddle-jumpers from HNA Group, the parent company of Hainan Airlines, Xinhua Airlines, Chang An Airlines, Shanxi Airlines, Yangtze River Express, and bizjet operator Deer Jet.

Without arguing the merits of the deal for HNA (frankly, I think they’d be better off putting their money into larger planes), you have to give EMBRAER credit for playing the game by Chinese rules in China - and winning. 

They're Cute, but do they pay?

I am not a fan of regional jets in China I had planned to write a long piece here excoriating the EMBRAER deal even as I applaud the Brazilians for their innovative tactics. 

My thinking is simple, and perhaps simplistic, but I think it is commons sense. With growing passenger loads, airspace that is limited by both nature and by outdated procedures, and one airport for every 11 million people, China needs bigger aircraft.  

And that's without even broaching the matter of air cargo, which these little planes are completely incapable of carrying in any reasonable quantity (i.e., no pallets or containers.)

It's the juice, stupid.

But I have to confess concern when I see oil prices shooting beyond any presumed cieling. At some point, the oil companies in China are going to get their way, and airlines in the PRC will have to pay global prices for their Jet A. The airlines will have to raise fares in response, stymying growth and keeping volumes down for a while. 

A longer term dislocation in oil prices will hit Chinese airlines even harder, and will either keep people at home or will send them scurrying back to surface transportation. 

For a long time, observers of China's aviation industry have believed that the PRC would follow the US in making air travel the primary means of travel between cities. Now, I'm not sure. I see greater things ahead for rail transportation in China.

And I see Chinese airlines facing a future that, for similar but different reasons, is as uncertain as the horizons that confront U.S. carriers. 

Stick with the little jets for now, guys. In the end, if nothing else, you may be able to lease them to United for their Los Angeles - San Francisco service when oil hits $200 a barrel.