Tariff truce boosts region’s freight prospects
The U.S./Sino trade deal, signed in January, is easing global economic tensions and boosting business prospects for hard-hit Asia-Pacific air cargo operators. Associate editor and chief correspondent, Tom Ballantyne, reports.
New Boeing boss, David Calhoun, needed some good news when he took charge of the crisis hit aircraft manufacturer last month. Read More » He certainly got it when the U.S. and China reached a truce in their two-year trade war mid-month. More surprisingly, as he has been a critic of Boeing, U.S. president Trump gave Calhoun and Boeing a shoutout at the trade deal’s signing ceremony.
Calling Boeing “a great company”, he identified Calhoun among guests at the White House announcement of the Phase One deal. Calhoun was a board director of the company from 2009 and acting chairman of Boeing in the final months of 2019, but had only been CEO for a few days before the Washington D. C. reception.
Trump said: “He has a very easy company to run. He just took over Boeing. Where’s David. Stand up David. Let me tell you it’s not your fault. You just got here. You will straighten it out quickly please.” “We will,” said Calhoun.
Under the Phase One agreement, China must buy US$200 billion additional U.S. goods over two years compared with 2017, the year the trade war started. It also must include $78 billion in manufactured goods such as aircraft.
The International Air Transport Association (IATA) told Orient Aviation the agreement between the U.S. and China represented a “welcome thawing” in trade relations between the two countries and removes some of the uncertainty that has weighed upon businesses and financial markets globally.
“The Phase One agreement is consistent with that. However, we should not lose sight of the fact a significant level of trade restrictions remain in place between the two countries,” IATA said.
The question is when and how the new deal will translate into an order boost not only for airlines but for Boeing. The U.S. manufacturer has significant businesses in China ranging from training and maintenance to manufacturing and aircraft completion.
Boeing has delivered nearly 1,600 planes to Chinese carriers and has scores of unfilled orders for aircraft, including B737 MAXs.
The Phase One agreement preserves the bulk of the tariffs the U.S. president has placed on $360 billion of Chinese goods. It retains the option of additional punishment if Beijing does not live up to the deal.
China’s leader, Xi Jinping, conveyed to Trump the deal was “beneficial to China, the U.S. and the world”. Xi said it showed the two countries, “based on equality and mutual respect, through dialogue and consultations”, could find proper and effective solutions to problems.
Trump declared at the White House: “Today we take a momentous step, one that has never been taken with China towards a future of fair and reciprocal trade with China. Together we are righting the wrongs of the past.”
For Asian airlines the deal could improve consumer confidence and re-boot Asia-Pacific air cargo, which is responsible for carrying 35% of the world’s air freight traffic. The latest IATA data, for November, revealed demand measured in freight tonne kilometers (FTKs) decreased by 1.1% for the month compared with the same period in 2018.
The figures marked the thirteenth consecutive month of year-on-year declines in air freight volumes. For Asia-Pacific airlines the news was worse. Air cargo custom contracted 3.7% for the month over November 2018, the sharpest drop in freight business of any region in the world for the month.
|'The Sino-U.S. agreement is good news for air transport, especially air cargo operators. It is particularly good news for airlines in the Asia-Pacific, one of the world’s leading manufacturing and distribution hubs and where air cargo generally accounts for a larger share of airline operations than elsewhere'
|International Air Transport Association
The U.S./Sino trade war cut demand between the large Asia-North America market by 6.5% year-on-year in October, the latest available data shows.
It was a “big disappointment” considering the fourth quarter typically is the peak of the air cargo cycle, said IATA director general, Alexandre de Juniac, when the figures were released. Looking forward, signs of a thawing in U.S.-China trade tensions were good news, he added, but cautioned trading conditions remained “very challenging”.
While the Phase One deal is a breakthrough, it is by no means the end of the matter. It halves tariff rates on $120 billion worth of goods, but most of the higher duties remain in place.
Economists have calculated the trade dispute has cost American companies and consumers more than $40 billion, a figure that does not attempt to measure lost business from retaliatory action. U.S. manufacturers exposed to tariffs have been hurt, with the dispute shaving 0.3% off U.S. economic growth and reducing household income by an average of $580 a year since 2018.
The U.S. Federal Reserve estimated China’s economy has taken a 0.25% hit, as U.S. demand for its goods fell about a third. Analysts said it was unlikely the new deal would produce gains sufficient to outweigh the losses suffered by both sides.
But some countries have benefited from the fight, which is estimated to have diverted an estimated $165 billion in trade from China. Nomura analysts identified Vietnam as the country most likely to benefit from the trade war. The United Nations said U.S. orders for goods from Mexico, Taiwan and Vietnam increased last year.
Boeing has reported a decline in commercial airplane orders in 2019 and much lower deliveries going forward as the protracted MAX crisis weighed heavily on operations. It reported a net drop of 87 orders for the year after cancellations and a few new orders for the MAX. Besides cancellations, some of the fall-off was the result of conversions by customers from the MAX to a smaller number of the 787 family.
Boeing delivered 380 aircraft in 2019, less than half the number of the previous year. It has halted production of the MAX but still has to maintain an estimated 400 MAXs that cannot be delivered to customers because of the grounding.
It has been widely reported Boeing is in discussions with several banks for loans of $10 billion amid rising costs at the manufacturer. CNBC said Boeing has secured $6 million in new loans and was seeking more funds.
Ballpark figures from analysts calculate Boeing has lost $1 billion a month since the MAX was grounded last March.
|Boeing boss promises to open MAX production line “slowly, steadily” before the aircraft is cleared to fly
Boeing CEO, David Calhoun, told reporters in the third week of January the manufacturer would resume production of the MAX well before the type’s expected clearance to fly in June.
BCA halted MAX output last December. Calhoun gave no date for the re-opening of the MAX production line.
“I am all in on it and the company is all in on it,” Calhoun said in a Reuters report of the January media briefing. He added Boeing believed the plane would continue to fly for a generation.
He said BCA would “slowly, steadily bring our production rate up a few months before that date in the middle of the year” and conceded the manufacturer should not have repeatedly revised the plane’s forecast return. “It was hard for anybody to trust us,” he said.
Earlier in the same week, Boeing said it did not expect the U.S. Federal Aviation Administration (FAA) to approve the ungrounding of the MAX until mid-year, 15 months after the type was banned from flying worldwide following two fatal crashes.
“The updated estimate is informed by our experience to date with the certification process,” Boeing said.
“It is subject to our ongoing attempts to address known schedule risks and further developments that may arise in the certification process.
“It also accounts for the rigorous scrutiny regulatory authorities are rightly applying at every step of their review of the 737 MAX’s flight control system and the Joint Operations Evaluation Board process which determines pilot training requirements.”
A critical factor in setting a new date to begin returning MAXs to the skies is BCA’s recent agreement that pilots must undergo simulator training on the upgraded MAX, a reversal of company policy.