Boeing Could be Affected by Trade War But Values Unaffected

April 16, 2018

The trade spat between the U.S. and China has spilled over to the aerospace sector but the effect on Boeing is relatively limited and will likely be of short duration.

The imposition of a 25 percent duty on Boeing aircraft – yet to come into effect – initially affected Boeings share price but there was subsequently an improvement as the actual details of the tariff were assimilated. The tariff applies to aircraft with an operating weight between 15-45,000 kgs. While this applies to B737-800 it is suggested that this would only apply to new orders. Given the transition to the B737MAX, there are very few extra orders likely to be placed by any operator for the B737-800. In terms of B737-800 orders already placed then China Southern is due to receive 61 -800s in 2018, 45 in 2019 and 51 in 2019. If such a 25 percent tariff were to be applied to existing orders this would seen the price for the large orders placed by Chinese airlines increase from a discounted order price of less than $40 million to nearly $50 million. If the tariff were to be applied to the invoice price (before discounts) or indeed, the list price, then the effect would be particularly onerous. Such orders however, could be switched to the B737-8 which has a higher operating weight empty (OWE) and above the tariff level of 45,000 kgs due to the heavier engines. The aircraft that are destined for Chinese airlines would be welcomed by other operators around the world given the extensive backlog. The effect on business jets manufactured in the U.S. may be more severe but the Chinese market remains in its infancy in terms of new orders. In any event, in all likelihood any imposition of tariffs may be of short duration either in terms of the current or the next U.S. administration. China has ambitions with its new C919 and as a symbolic gesture the U.S. may seek to impose a similar tariff on the aircraft.

The principal effect of a trade war between the U.S. and China would be to see a drop in airfreight demand. Freighters have recently come back into service as a result of considerable growth in the market not least in terms of trade between the U.S. and China. If pursued to include more high cost, low weight items such as electronics rather than steel (which needs surface transport) then load factors will suffer and with it a resurgence in values.

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