Wednesday, April 04, 2018

Airlines, Not Boeing, Will Feel China Tariff Threat First: Boeing may seem like the target of China’s tariff ire. But it is those who use the Boeing planes—airlines—that are the most immediately vulnerable

The Wall Street Journal
By Alex Frangos
April 4, 2018 11:59 a.m. ET

Boeing might seem like the target of China’s tariff ire. But it is those who use the Boeing planes—airlines—that are the most immediately vulnerable.

Washington and Beijing’s tariff lists are just proposals for now. Nothing changes right away. The Trump administration has given until May 22 for businesses to chime in with comments and has another 180 days to decide whether to move ahead. China put no timeline on its retaliatory measures, including tariffs on planes. Negotiations seem likely.

Yet even if the tariff proposals never come to fruition, a hit to sentiment—and economic growth in general—could have a direct impact on the trans-Pacific air travel, a fast growing, but highly competitive part of the airline business. Nearly 3 million Chinese visited the U.S. in the year through September 2017, triple the annual rate at the start of the decade. In addition to their air tickets, they spent more than $4,400 on average while in the U.S., according to Nielsen.

The likes of Air China , China Southern, as well as Delta Air Lines’ partner China Eastern , have massively expanded across the Pacific, and last year for the first time flew more flights across to the U.S. than their U.S. peers.

The big U.S. carriers—United, Delta and American Airlines—have added capacity too. Too many seats have made it a tough market to make money. A hit to traffic could make things worse. The tensions may also complicate talks on negotiating increased access to Chinese landing slots.

A previous diplomatic spat involving China could prove instructive. In 2016, tensions erupted between China and South Korea over Seoul’s plans to install U.S.-made Terminal High-Altitude Area Defense, or Thaad, missile-defense battery.

South Korea at the time was a major destination for Chinese tourists eager to snap up consumer goods, especially cosmetics. China never instituted official trade measures, but visitor arrivals from China to South Korea plummeted by 50%. Negative press played a role. And tour agencies, which are heavily used by Chinese travelers, may have steered them to alternative destinations. Airlines scrapped flights between the two countries.

As for Boeing, the effect could be even more limited than previously feared, since China’s current proposal doesn’t affect planes over 45,000 kilograms, which excludes most of what Boeing sells. A 737-8 Max weighs 70 kilograms more than that, notes Bernstein.

But so long as the U.S. and China are in a war of trade words, airlines will feel the brunt.

Original article can be found here ➤

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