Gulfstream, the maker of the G650 business jet, is at risk of losing its dominance in China because of a worsening trade spat with the US.
China’s proposed 25 per cent tariff on US-made aircraft would leave Gulfstream at a disadvantage against competitors from Canada and France. Of the 431 private aircraft based in the country, Gulfstream jets account for 42 per cent followed by 24 per cent for Montreal-based Bombardier and 9 per cent made by France’s Dassault Aviation, consultant Rolland Vincent told Bloomberg.
“They have been the most successful of the manufacturers in penetrating the Chinese market with new aircraft,” Mr Vincent said of Gulfstream, a unit of General Dynamics. “There’s potentially a market-share benefit for Dassault and Bombardier if this tariff goes in.”
The tariffs, outlined by China as part of a $50 billion retaliation against duties on Chinese goods proposed by US President Donald Trump, would add to the hurdles of selling private jets in an already spluttering market, according to Bloomberg. Sales have been under pressure in China in the last couple years after President Xi Jinping began an anti-corruption campaign, said Richard Aboulafia, an aerospace analyst with Teal Group.
“People said, ‘wrong time for a business jet,’ ” Mr Aboulafia said.
The new restrictions on US aircraft have yet to take effect, and there’s a chance they never will if the US and China reach a truce. But tensions have escalated as the nations traded more threats. Mr Trump ordered his administration to consider another $100bn tariffs against China, which prompted the Asian nation to vow it would defend its interests "to the end, and at any cost".
China already has a 17 per cent value-added tax on private aircraft plus a 5 per cent duty on foreign jets, according to the International Trade Administration. The 25 per cent tariff on large Gulfstream models would probably be added to that, said Mr Vincent, who puts out a widely read industry forecast with partner Jetnet called Jetnet iQ.
The duties would be applied to US aircraft weighing between 15,000 kilograms and 45,000 kilograms. All Gulfstream models except for its smallest aircraft, the G280, fit in that weight range.
China deliveries made up 10 per cent of the 80 large aircraft that Gulfstream shipped last year, Mr Vincent said. The company has an even bigger share of planes hit by the tariff. Gulfstream accounts for 112 of those jets, including the G650 and G550, compared with 41 Bombardier jets in the same category and 28 for Dassault.
Gulfstream is expected to begin deliveries this year of two new large aircraft - the G500 and the G600 - that fall in the weight range for the tariff.
The extra levy “would have an immediate effect of curtailing potential sales”, said Steve Varsano, founder of the corporate aircraft brokerage The Jet Business. Although private jets can be registered in one country and used in another, operators in China discovered that authorities frowned on attempts to circumvent the existing 22 per cent tax-and-tariff combination.
“It was a hardship to pay,” Mr Varsano said. “But if you didn’t and were a regular user in China, they made life difficult to get landing slots and parking availability.”
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Business-jet manufacturers will be in Shanghai next week for the annual Asian Business Aviation Conference & Exhibition in Shanghai.
The US' commercial plane maker Boeing, meanwhile, has tamped down fears over the China tariffs threat. After reading the fine print on China’s proposed aircraft tariffs, investors grew less alarmed about the prospect of a trade war.
The threatened 25 per cent levy, based on an aircraft’s weight, targets a generation of Boeing’s 737 jetliners that are nearing the end of their production run. All but one model of Boeing’s newer 737 Max family would be exempt, according to a company document.
"It appears to us that the specific proposals from China this morning are calibrated carefully to avoid a major impact on Boeing and are therefore intended more as a message to the US administration," Seth Seifman, an analyst at JP Morgan, told Reuters.
Separately, Boeing last month ruled out reviving its dormant 767 passenger plane as it continues to ponder options for a potential new niche in the middle of the aircraft market.
"Bringing back the 767 [passenger version] - I just don't see it," said Randy Tinseth, vice-president of commercial marketing.
There has been some speculation Boeing would revive the 767 wide-body passenger line to offer airlines a low-price backstop in case a proposed brand-new mid-market plane suffered delays, or in case Boeing decided not to go ahead with that project.
Boeing continues to target 2024-25 for entry into service of a possible family of jets with 220-270 seats, designed partly to replace single-aisle 757 and some wide-body 767 models.
"If it goes beyond that [date], that would be a challenge as airlines do have to replace those '57s and '67s," Mr Tinseth said.
Boeing says it is examining the business case for such a jet. Mr Tinseth declined to say when it might make a decision, but industry sources say it could start offering the jet this year.
"We continue to make progress on the programme. Things around configuration are coming together," Mr Tinseth said, adding Boeing had not decided whether to offer two engine choices or stick with a single engine maker, as on its 737 and 777.
The mid-market plane would offer 40 per cent lower costs per trip than some wide-bodies - although with shorter range - and it would offer airlines 30 to 40 per cent more revenue than a single-aisle jet "with little or no additional cost".
Airbus says its largest single-aisle, the A321neo, has already scooped up demand in the market above 200 seats.
Mr Tinseth said Boeing was meanwhile making progress in filling a production gap between the current 777 large wide-body model and its proposed 777X replacement, due to enter service in 2020. A contributing factor is a recent surge in cargo demand.
"There are a lot of aircraft in the pipeline right now," he said, adding the wider aircraft market is "very strong".
That strength coincides with a slew of available capital as new investors flood into the aircraft market looking for higher yields, despite the growing prospect of interest rate rises.
"The asset class is real. It's not a niche class any more," said Tim Myers, Boeing Capital president.
"We are in the most liquid financing environment I have ever seen in the industry."
Mr Myers said Boeing was in talks with countries representing some of its suppliers to help provide last-resort export funding. Boeing is discussing potential funding with Australia after Britain and Italy stepped up last year, he said.
Meanwhile, insurance companies could finance 5 per cent of deliveries this year, up from 2 per cent last year, he added.
