Things With Wings

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  • Owning your customer
    Posted by Bradley Perrett 3:30 PM on Nov 02, 2009

    There were probably a few sniggers in the Western industry at the news that the Chinese commercial jet maker Comac is virtually paying a customer to buy its aircraft.

    Specifically, Comac is part of a group of investors that are recapitalizing the formerly privately held airline United Eagle. The airline in turn will buy 30 ARJ21-700 regional jets from Comac, presumably spending about the same as the value of its recapitalization, 7 billion yuan ($1 billion).

    blog post photo

    (Credit GE)

    At least two of the investors -- Comac and Sichuan Airlines -- are state companies. Comac is effectively part of the central government, and Sichuan Airlines is a Sichuan provincial business. I'm not familiar with the third investor, Chengdu Communications Investment Group, but it is probably an arm of the Chengdu city government.

    The carrier will expand and change its name to Chengdu Airlines, bringing a bit of glory to the city, the capital of Sichuan. And what's good for Chengdu is good for Sichuan, hence the availability of provincial funds through Sichuan Airlines.

    So, as is increasingly usual in China these days, the state is taking over economic activity from private capital and using business to promote state objectives.

    For Comac, the state objective is to promote the ARJ21.

    That's a cue for the Western sniggers: 'An aircraft can hardly be much good if you pay your buyer to buy it.'

    But this transaction is also a partial answer to the Catch 22 problem of being unable to sell aircraft when you have no reputation or experience in supporting them, and being unable to get that reputation until you sell aircraft and get them into service.

    Comac is an inexperienced company under pressure and in a hurry. It has not yet certified its first product but has already begun working on its second, nothing less than a 150-seater that would compete with Airbus and Boeing.

    It needs to learn as quickly as possible how to keep customers happy and to get the word out that it has happy customers. If it has enough capital thanks to generous state funding, then why not use some of it to finance an order for ARJ21s? The maneuver is even more attractive if provincial and municipal money helps pay for it.

    Without this order, Comac would still build up experience and a reputation from its other customers, but adding Chengdu Airlines' 30 ARJ21s to the operational fleet will shorten the process.

    Avic has done something similar with its update of the Antonov An-26, the MA60. Avic is an investor in Joy Air, which has bought MA60s from Avic.

    One last point: the ARJ21-700 is really built for provinces such as Sichuan, which has hot and high airports and connections to adjacent provinces with similar geography. The aircraft has a large wing and lots of thrust -- and the uneconomically high weight and cost that comes with those features.


    Tags: tw99, Comac, ARJ21, C919, Chengdu

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