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Air China’s unusual GE aircraft deal coincides with Alaska talks

  • March 19, 2021
  • , Nikkei Asia , 10:12 p.m.
  • English Press

KENJI KAWASE, Nikkei Asia chief business news correspondent


HONG KONG — High-level meetings between Chinese leaders and their American counterparts have often been accompanied in the past by news of orders of new aircraft from the U.S.


Friday’s debut meeting in Anchorage, Alaska between China’s top two diplomats and representatives of the new administration of President Joe Biden was no different: a few hours before the foursome sat down together, state-owned flag carrier Air China announced an American deal for 18 planes worth $2.24 billion at catalog prices.


But this transaction came with a number of twists. The jets are not being made by Boeing, but by Europe’s Airbus. Though the planes — five A320-200N jets and 13 A321-200NXs — will be factory-fresh, the seller is GE Capital Aviation Services, the jet-leasing arm of General Electric. Delivery is expected to take place “before 2022.”


The sale of new planes by a lessor, rather than their maker, raised eyebrows with industry figures on Friday.


“It is different. You don’t see it very often,” said David Yu, chairman of Asia Aviation Valuation Advisors and a finance professor at New York University Shanghai.


“There may be several reasons for the timing of this [deal] and the Anchorage meeting could be one,” said Peter Huijbers, director of aircraft investment advisory company PH Aviation Asia in Hong Kong. “I was more surprised by the fact that GECAS can actually sell these aircraft pre-delivery.”


Zhou Feng, company secretary of Air China, said in a filing to the Hong Kong Stock Exchange that “the quoted price and comprehensive cost are competitive.”


The carrier secured an undisclosed discount, the company said, “comparable with the price concessions that the company had obtained in the previous aircraft purchase entered into between the company and Airbus,” adding that the yuan’s strength against the dollar and low interest rates also were factors.


The price, however, was apparently high enough to trigger the Hong Kong exchange’s requirement to disclose the transaction, a threshold tied to a range of company financial metrics, including revenues, profits and assets. By Nikkei Asia’s calculation, this implies the deal was worth at least $625 million.


Last year, amid the coronavirus pandemic, Air China took delivery of 22 fewer Airbus and two fewer Boeing jets than it had originally scheduled. China’s big three state airline groups overall took 111 fewer planes from the two manufacturers than planned.


But Zhou highlighted the relative recovery of Air China and the country’s aviation market since the country’s hard lockdown a year ago.


Air China carried 7.82 million total domestic passengers during the first two months of 2021, 8.8% lower than a year before and a much smaller gap than most of its international peers.

“Utilization of narrow-body aircraft in the domestic market has also recovered to some extent,” Zhou said.


PH Aviation’s Huijbers said that in shopping for new narrow-body planes like the A320 and A321 with quick delivery, Air China may have had few options other than Airbus planes because Chinese regulators have not yet reauthorized Boeing’s counterpart line, the 737 Max series.


Boeing halted 737 Max deliveries in 2019 after two fatal crashes but has revived the program recently after winning Washington’s approval. During the suspension, China’s big three airline groups sought compensation for losses on 737 Max orders they had earlier placed.


Air China is majority-owned by China National Aviation Holding, an elite state conglomerate directly controlled by the national government. Another Beijing-controlled company usually handles new plane orders for all three major airline groups, consolidating China’s purchasing power as the world’s biggest market for new aircraft.


China National Aviation was blacklisted by the U.S. Department of Defense in the final days of Donald Trump’s presidency in January as a “military-linked” company, making it ineligible for investment by American companies and residents. Ahead of the Alaska meeting, Beijing urged Washington to withdraw Trump-era sanctions on its companies.


On the other hand, GE has been put in a position of seeking Beijing’s favor after agreeing to sell GECAS to rival AerCap for $30 billion last week. The deal, which would unite the two largest global jet lessors, will likely have to pass muster with Beijing competition regulators, given that both lessors have many Chinese clients.


“We expect antitrust approval in about, say, 20 countries or so,” AerCap Chief Executive Aengus Kelly said on a call with analysts after the deal’s announcement. “We are confident that we should be able to get those approvals.”


In the wake of the deal, some analysts suggested the lessors might pare their portfolios of aircraft — around 3,000 combined — to reduce debt and the age of their fleets. GECAS could have been motivated to seek a buyer for the new A320s and A321s as a first step in this process.


“We expect the merged company to first prioritize streamlining of its fleet in the next few years in order to obtain operational synergy, lower gearing and reduce fleet age,” wrote Kelvin Lau, aviation analyst at Daiwa Capital Markets in Hong Kong last week.


Neither Air China nor GECAS responded to questions from Nikkei Asia about the timing and other details of their deal.

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