David Fickling is a Bloomberg Gadfly columnist covering commodities, as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times and the Guardian.

Being a Chinese airline can seem pretty sweet.

The country's major carriers have what's soon to be the world's biggest aviation market to themselves. Operating costs are often on a par with budget carriers elsewhere. Thanks to their lack of fuel hedges, Chinese airlines have even pocketed an outsized benefit from the slump in oil prices.

Sooner or later a tax has to be paid, though -- and in this case, it's got wings.

The C919 -- a bid by state-owned Commercial Aircraft Corp. of China Ltd., or Comac, to take on Boeing Co.'s 737 and Airbus SE's A320 in the single-aisle, short-haul jet market -- is scheduled to take its maiden test flight Friday. Buyers are hardly queuing out the door.

Follow the Leaders
Orders for the Comac C919 trail far behind the market leaders
Source: Bloomberg, company order books

Airbus has received 5,056 orders for new fuel-efficient variants of its A320 family, while Boeing has 3,714 for the rival 737 MAX range. Comac's backlog of 570 aircraft is barely better than the 360 that Bombardier Inc. has chalked up for its CSeries, another touted 737/A320-killer that's turned into an almost fatal own-goal for its manufacturer.

Even that total almost certainly overstates the enthusiasm for the C919 among its prospective customers. Almost all announced so far are Chinese airlines and lessors, which are expected to do their patriotic duty in a project of national importance. The only foreign buyers are Thai airline City Airways Co., which lost its operating certificate last year, and lessor GECAS, whose parent General Electric Co. has a stake in the venture making the C919's engines.

Hedging Their Bets
The C919's customers seem pretty keen on its Boeing and Airbus rivals, too
Source: Company reports, news reports, Airbus and Boeing order books.
Note: A320neo family includes A319neo and A321neo. Doesn't include figures for airlines and lessors that are buying the 737 or A320 but not the C919.

The composition of the Chinese customers is a little odd, too. About three-quarters of orders are going to leasing companies, compared with about one-fifth for a competitor such as the A320neo.

Stick It On My Tab
Comac has been raising about as much cash from financing as Airbus -- and far more than Boeing
Source: Bloomberg, Gadfly calculations
Note: Shows trailing 12-month cash flows from financing.

That makes most sense if you consider orders from lessors -- many of them units of state-owned banks -- as a form of soft finance to support the C919's development costs and give comfort to potential lenders.

Designing a new plane isn't cheap: Comac has been raising about as much cash from financing as Airbus in recent years, according to data compiled by Bloomberg, but the free cash flow left after operating costs and capital spending has remained in persistently negative territory.

Not Free
Comac's free cash flow has remained in persistently negative territory
Source: Bloomberg, Gadfly calculations

Even those heroic levels of spending don't look sufficient to make the C919 competitive. Its aluminum airframe is decades behind the composite structures being used on next-generation Airbus and Boeing planes like the A320neo and 737 MAX, and fuel efficiency is likely to be compromised as a result.

Based on a very approximate calculation of the plane's fuel capacity, passenger numbers and maximum range, the longest-range version of the C919 will use about 35 percent more fuel to fly a passenger one kilometer than the A320neo.  Even at a discount price, it would be hard to make those economics stack up in a market suffering from falling passenger yields as China's big three carriers fight for share.

Meanwhile, the prospect of getting buyers outside China could be years away. The C919 will need to be issued with type certificates by major air-safety agencies in Europe and the U.S. before it's even allowed to fly to most places outside of China. The European Air Safety Agency has only just started work on that uncertain, often years-long process, Aviation Week reported last month.

Eight years after it completed its maiden flight, Comac's smaller ARJ-21 jet received its first foreign type certificate only in December, allowing it a foothold in the mighty aviation market of, um, the Republic of Congo.

Ironically, the C919's weak economics and its shortage of global customers could be the silver lining for the Chinese airlines that will end up flying it. They'll ensure that there's a lot more supply of the aircraft from lessors than demand from carriers. That in turn might drive down the cost of operating leases to levels where even with higher fuel consumption its economics can stack up next to foreign rivals.

Of course, that would likely force the lessors to write down their fleets. But in a country with 1.5 trillion yuan ($219 billion) in nonperforming loans, who's going to notice a few impairments on aircraft?

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. The 737 MAX comes out using about 9.6 percent more fuel on the same calculation, although most analysts argue the Airbus and Boeing planes are roughly level-pegging. Aerospace manufacturers argue endlessly about such comparisons, and it's hard to do perfect apples-to-apples comparisons due to variations in model design and the differences between design capacities and actual usage.

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