China's ARJ21 Is Ready to Take Off, but Will the Country's Regional Airline Industry Follow?

In late June, in a factory near Shanghai, AVIC 1 Commercial Aircraft Company (ACAC) completed final assembly of its first "Advanced Regional Jet for the 21st Century," or ARJ21 -- a 90-seat regional plane that represents China's first attempt to build a world-class passenger aircraft. The ARJ21 will be ready for test flights in March 2008, and the jet will be delivered to its launch customer, Shandong Airlines, later next year. But the ARJ21 is more than just a new airplane: It also represents China's high-tech ambitions, and its success or failure will be a key indicator of the country's technological prowess.

Currently, only the U.S., the EU, Canada, Brazil, and Russia have proven their ability to successfully design, build, market and service large passenger jets, which are among the most prestigious and visible high-tech products in the world. China is eager to join that select list of countries, first with the ARJ21, and later, with a 250-seat wide-body aircraft.

Taking the Lead

As a brand-new design, the ARJ21 has a chance to seize the technological lead from its competitors. Because it is so expensive to design and build brand-new planes, aircraft manufacturers always prefer to stretch and improve existing models, rather than building new ones. The best examples are the Boeing 747 and 737 models, which were designed in the 1960s and have since been upgraded many times. But in upgrading planes, manufacturers forego the technological advances that a new design can offer.

The ARJ21 was the first aircraft in China to be designed entirely on computer, but according to Zheng Zhenya, designer of First Aircraft Institute, a subsidiary of ACAC, the Chinese jet does not boast any technological breakthroughs, such as Boeing unveiled with the all-composite fuselage on the new Boeing 787. However, ACAC has hired more than 10 of the world's best aircraft parts suppliers, including industry heavyweights like Honeywell, Rockwell Collins, and GE, to supply parts for the ARJ21.

"Our suppliers are world famous, and they are using all their latest technologies in the Advanced Regional Jet," says Xu Pei, marketing manager at ACAC. "Our engines, the GE 34s, are also used in the (Embraer) ERJ series, and this engine program has been improved for the ARJ21, so we will gain that technical advantage."

Another advantage for the ARJ21 is the low price of its planes. ACAC is selling the ARJ21 at a discount compared with the competing Bombardier and Embraer models. Canada's Bombardier, which builds Canadair Regional Jets, and Brazil's Embraer, which builds the state-of-the-art E170 and E190 regional jets, are two experienced competitors for ACAC. Actual prices paid for new planes are hard to determine, because manufacturers are reluctant to reveal the steep discounts they often give, especially for launch orders or for large orders.

The list price of a new ARJ21 is $30.5 million, according to Xu, but the company is offering the planes for much less, he says. That compares to the approximate $38 million list price for an Embraer 190, which is a 114-seat jet, and $30 million for the 80-seat Embraer 170. However, both Xu of ACAC, and Guan Dong Yuan, managing director and chief representative of Embraer China, agree that the ARJ21 will sell for a lower price after discounts.

"The [Bombardier] and Embraer prices are higher than ours," Xu says. The ARJ21's price advantage is partly due to a 5% import tax in China on aircraft under 25 tons, which increases the price of the Bombardier and Embraer planes -- manufactured in Canada and Brazil, respectively -- and partly due to an efficient production process located in a country with a low-cost manufacturing base. Embraer also makes aircraft in China, assembling some 50-seat ERJ 145s in a plant in Harbin, but those planes are still subject to the 5% import tax.

Meeting the Challenges

However, to become a commercial success, says Xu, the company will have to build and sell 500 ARJ21 aircrafts. In an industry that has seen the number of successful manufacturers decline rapidly over the decades - currently just four companies build passenger jets of 70 seats or more, and sell them globally - that is an extremely lofty goal, because the success of the ARJ21 is far from guaranteed.

The ARJ21 aircraft faces enormous obstacles. First, there is the fierce competition from Bombardier and Embraer. Joining those two manufacturers is Sukhoi, of Russia, which is now building a brand-new regional jet of its own, the 95-seat Sukhoi Superjet 100.

Besides going head-to-head with its competitors, ACAC will also have to overcome a less-than-ideal domestic aviation market. China's regional airlines, which would be the main customers for jets with fewer than 120 seats, operate in a market that is immature and heavily regulated, and that means point-to-point flights serving secondary cities - the main routes for regional airlines in markets like the U.S. and Europe - are still limited in China.

Those two variables - strong competition and an immature domestic market - are beyond the control of ACAC. But the company is directly responsible for overcoming other obstacles. One challenge is creating a network that can deliver spare parts to airlines without delay, a service that airlines demand. Competitors like Bombardier and Embraer have spent decades building efficient spare-parts networks, which besides serving their airline customers, are highly profitable for the manufacturers.

"One of the reasons it's very difficult for new plane-makers to break into the market is the distribution of spare parts afterwards," says Nicholas Ionides, regional managing editor, Asia, for Flight International magazine. "It is not just a question of selling an airplane; it is also a matter of supporting that plane afterwards with spare parts and service. The aviation business is very expensive, and if your plane is on the ground because you haven't got spare parts, every minute that it is delayed costs money."

ACAC is aware of the necessity of establishing a parts network, and it plans to organize and test its network in China first, then set it up overseas. "Right now, all our airline customers are in China, and we can offer better customer service in China, so for local customers the ARJ21 will be very convenient," says Zheng Zhenya. The company plans to sell the ARJ21 overseas eventually, and will launch a global sales network later this year.

Then there is the ARJ21 itself, which presents the biggest question of all: can ACAC design and build an aircraft that is advanced, reliable, comfortable, and efficient enough to compete with the planes made by western companies? Fuel efficiency is the biggest challenge. Fuel comprises more than 40% of an airline's operating costs, and that figure jumps every time world oil prices rise, because aviation fuel prices increase disproportionately when oil appreciates. For that reason, airlines will always buy a plane that can deliver superior gas mileage.

Marketing manager Xu of ACAC believes that the ARJ21 will eventually answer all the questions that surround it. "The ARJ21 will be high performance, it will have lower direct operating costs, and it will be more comfortable," he says. "These will be our advantages."

Airlines measure efficiency using a figure called seat mile cost, which is the cost of flying one seat a distance of one mile. According to Xu, those figures are not yet available for the ARJ21. Still, ACAC has made guarantees to its airline customers - it has sold 71 of the aircraft so far, all to airlines in China - and it must meet those guarantees, or pay penalties.

"They have to stick to their guarantees, because if you are selling an airplane to an airline, you make guarantees on the cost of operations, and if you don’t hit those guarantees, there are clauses in the contract which allow for cancellations, or for penalties to be paid," says Ionides.

An Edge over Competitors

Although the ARJ21 is cheaper than its main competitors, price is not the only consideration, says Beijing-based Guan of Embraer China. "Price is one of the factors, but it is not the only factor," he says. "We should also look at operating costs, performance, comfort and reliability. And there is one more very important issue: customer support. All of these go into the final decision to judge if an aircraft is competitive or not."

The 80-seat Embraer 170 and 114-seat Embraer 190 (called the E Series) are considered the finest regional aircraft in the world today. Both planes feature brand-new designs that first flew just five years ago. "Our E Series is very efficient and very economical, and has very advanced technology," says Guan. Bombardier's competing 78-seat CRJ700 and 86-seat CRJ900, by contrast, are older models that have been stretched to their current limits.

In addition, says Guan, the E Series planes are roomy and passenger-friendly. "For the passenger, the E Series is very comfortable because it has just four seats per row (in economy class)," he says. "Also, the cabin height is two meters, so it feels like a big aircraft." Bombardier's models also have four seats per row in economy class, although the aircraft are narrower, while the ARJ21 has five seats per row in economy.

The ARJ21, says Xu, will likewise be more comfortable than most of its competitors. "The seat is bigger than the ERJ series (Embraer's smaller 50-seat jets) and bigger than [Bombardier's] CRJ series," he says. "On the ARJ21, the difference between two passengers is 19 inches, so the cabin is large and comfortable, and our cargo layout is bigger as well."

On the all-important question of fuel efficiency, the verdict on the ARJ21 will not be known until the aircraft flies. That is also true of the competing 95-seat Sukhoi Superjet 100, which will make its first flight in September 2007. Sukhoi has already sold 134 Superjets, and is now marketing the plane in China.

Initially, ACAC plans to build two models of its new jet: the Standard Range (SR), which will fly 2,225 kilometers, and the Extended Range (ER), which will fly 3,700km, with fewer passengers. Both will offer 78 seats in a two-class configuration (business and economy) and 90 people in an all-economy layout.

Later, ACAC will build a longer model providing 98 seats in two classes, and 105 seats in an all-economy layout. For this project, ACAC will receive help from Bombardier; in June 2007, the two companies announced that Bombardier will participate in the jet's development. Bombardier will provide technical assistance, and will invest $100 million in the ARJ21-900.

China’s Aviation Market

China, with its huge population and sprawling geography, is a market that appears ripe for regional jets. "The Chinese market has already become the second-biggest aviation market in the world, and the regional market has great potential," says Guan of Embraer. "At this moment, regional aircraft only represent about 7% of the total national fleet, so there is a huge gap to be filled."

As aviation markets mature, demand for smaller aircraft grows, because customers prefer direct, city-to-city flights, rather than taking larger aircraft to big-city hubs, switching planes, and then flying to their destinations. Cities that are not big enough to support regular, frequent flights of 120-seat or larger aircraft are ideal for carriers that operate smaller jets like the ARJ21.

Because passengers prefer them, regional jets sell well in competitive, relatively unregulated airline markets, where the market can determine ticket prices, and customers are free to choose among several airlines. In those markets, passengers will pay a premium for direct flights.

Regional airlines need to charge more for tickets, because smaller planes have higher operating costs per passenger, although the cost of each flight is lower. But in China, says Guan, there is no difference in ticket prices between regional routes and "trunk" routes between big cities. "The price is the same, so the airlines operating these small aircraft cannot offer higher ticket prices, but their cost per seat is higher," he says. "It makes it difficult for airlines that are operating regional aircraft."

In China, there are no restrictions on airlines raising their ticket prices, says Guan, but the operating environment makes it hard to raise prices. The problem is worsened by the fact that airlines in China often use large planes on regional routes, a practice that further drives down ticket prices.

Compounding those problems are airport fees. In China, airport fees are identical for large and small aircraft, which raises the per-seat cost more for carriers operating small planes, because planes with 90 passengers pay the same tax as planes with 300 or more passengers. "So if you're an airline looking at the market in China, with all these difficulties, you might as well buy a large aircraft if you can, which a lot of them have done," says Ionides.

The Chinese government may intervene on behalf of regional airlines, for two reasons: First, it wants to develop the rural west and other unpopulated parts of China, and increasing air traffic is part of that plan. Second, the government presumably wishes to expand the market for its home-grown ARJ21. "I have no doubt that the government recognizes these problems and will try to improve them," says Guan.

The government exercises significant control over which aircraft models the airlines in China can buy, and if it wished, it could exercise this control on behalf of airlines that want to operate smaller aircraft. 

ACAC has staked its reputation on the ARJ21, and the risks - and the rewards - are substantial. If ACAC succeeds with the ARJ21, the sky is the limit. China has stated its desire to build a 250-seat jet, as a result, the ARJ21 has a lot to prove, and the aviation world will be watching closely. "It's only natural that any customer from outside of China would be skeptical until the ARJ21 is flying, and until they get to see real operational numbers, and they can see what sort of support network is going to be set up," says Ionides.


Published : 2007.08.15



 

















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