What Boeing Has to Lose in a U.S.-China Trade War: Boeing has become an unofficial proxy for fears about an escalating U.S.-China trade war; Investors are right to be worried

The Wall Street Journal
By Alex Frangos
March 23, 2018 12:44 p.m. ET

Boeing has become an unofficial proxy for fears about an escalating U.S.-China trade war. Investors are right to be worried, even if it seems like China needs 737s as much as Boeing needs to sell them.

Neither the aerospace giant nor the commercial aircraft industry in general have been mentioned in any official tariff pronouncements by the Trump Administration or Beijing. It has been about other things: soy, steel, pigs and pipes. Nevertheless, Boeing has been among the worst-hit stocks because of the trade tensions. Its shares are down more than 12% from their late February peak.

The reason: Slapping tariffs on aircraft, or canceling or deferring deliveries, could be a retaliatory measure that China is saving for later, in case tensions escalate. Aircraft are among the biggest U.S. exports to China.

In the long term, China probably can’t do without Boeing. Its air-traffic demand is expanding too quickly and domestic efforts to build meaningful numbers of passenger planes are years away. China could give more market share to Airbus, but relying solely on Boeing’s European archnemesis removes key pricing leverage. And Airbus, running at full capacity itself, couldn’t produce enough planes to replace canceled Boeings.

That said, in the heat of tit-for-tat trade negotiations, Boeing and its shareholders can be caught in the middle. Beijing, which procures aircraft centrally for its state-owned airlines, could cancel or defer part of its nearly 400 Boeing orders. Boeing has a huge order backlog so, in theory, it could shift demand to non-Chinese customers. But it might need to provide airlines incentives to take aircraft earlier than planned. This could crimp cash flow. If tensions persist, Airbus could boost its current 50% share of the market over the longer term.

What would China do without Boeing? More than 900 narrow-body planes a year are coming off of lease agreements over the next five years. China, which has amassed a formidable air-leasing industry, could scoop up planes that the likes of Middle Eastern carriers and Singapore Airlines are ready to trade in, notes Phil Seymour of IBA Group, an aviation consulting firm.

Air China , China Southern Airlines and China Eastern Airlines —and their passengers—would suffer from operating older planes instead of shiny new Boeings. But geopolitical priorities might supercede such concerns. If that happens, Boeing’s shares, which were trading at historically high valuations, were right to suffer as a result.

Original article can be found here ➤ https://www.wsj.com