Bloomberg News

China Eastern Drops 787 Order for 737s on Delay, Economy

October 18, 2011

(Updates with China Southern may change order in ninth paragraph.)

Oct. 18 (Bloomberg) -- China Eastern Airlines Corp. dropped an order for 24 Boeing Co. 787 Dreamliners in favor of 45 smaller 737s after the larger jet’s delivery was delayed and a weakening economy hurt demand for long-haul air travel.

The carrier will pay “significantly” less than the 2008 catalog price of $3.3 billion for the 737s and it will get a “certain amount of indemnity” from Boeing, the airline said in a statement yesterday, without elaboration. The basic prices for the 737 and 787 orders are “comparable,” it said. The Shanghai-based airline is also returning five A340-300s to Airbus SAS in exchange for 15 smaller wide-body A330s.

“Airlines worldwide are adjusting their fleet expansion strategies as the weakening global economy hurts air travel,” Luo Zhuping, China Eastern’s board secretary, said by phone. “We are making swift moves to serve domestic demand that is still robust at the moment.”

China’s second-biggest carrier cited delays to the 787, which was delivered to its first customer three years late, as a reason for canceling the orders. The airline is also curtailing international expansion after struggling to compete with Air China Ltd. and China Southern Airlines Co. on overseas routes.

“The change to smaller aircraft will be good for China Eastern if the carrier’s domestic market can absorb the additional capacity,” said Shirley Lam, an analyst with Nomura International Hong Kong Ltd. “Still, China Eastern will be affected if China’s economic growth slows.”

Passenger Growth

The airline’s passenger numbers on international routes rose 10 percent to 5.4 million in the first nine months of the year, trailing a 16 percent increase to 4.4 million at China Southern, the nation’s biggest domestic carrier. Both tallies exclude regional routes, such as flights to Hong Kong and Macau.

China Eastern filled 79.2 percent of seats across its network in the period. That compares with 81.5 percent for China Southern and 82.5 percent for Air China, the nation’s biggest international airline.

The carrier declined 8.8 percent to HK$2.60 in Hong Kong today. China Southern fell 8.5 percent and Air China dropped 6.2 percent. China Eastern and Beijing-based Air China have both tumbled 34 percent this year. China Southern has declined 9.9 percent.

China Southern Chief Financial Officer Xu Jiebo also said today that the Guangzhou-based carrier may cancel or amend its 10 Dreamliner orders after the first delivery was postponed to July because of certification issues.

787 Delays

Boeing delivered the 787 to its first customer Sept. 25, more than three years late, after struggling with new materials and manufacturing processes. Maiden operator All Nippon Airways Co. is yet to begin commercial services with the plane.

“Airlines are generally reluctant to take early deliveries of the 787, given the well-publicized problems with weight and the usual entry-into-service challenges,” said Rob Stallard, an analyst with RBC Capital Markets in New York. “On the flip side, Boeing could have some open delivery slots for the 737NG around the middle of the decade, as it gets ready for initial shipments of the MAX.”

Boeing’s 737NGs are the current version of the world’s most widely flown plane, a narrow-body used mostly on short-haul and domestic routes. The company plans to offer a variant with new, more fuel-efficient engines in 2017, called the 737 MAX.

Boeing said the carrier made the decision based on “operational considerations.” Marc Birtel, a spokesman in Seattle, declined to comment on the financial terms of the swap.

Airlines generally have to pay penalties if they cancel orders, while planemakers face extra charges if they don’t deliver planes on time or if the jets don’t perform as expected.

‘Swapping Wide-Bodies’

Demand for wide-body planes “continues to be exceptionally strong,” Birtel said, and 2011 is the second-best year ever for sales of the 777, which is larger than the 787.

China Eastern will return the five Airbus A340-300s next year and receive the A330s from 2013 to 2015.

China Eastern chose the A330, which carries 250 to 300 passengers, as the “near-term solution compared to the 787,” which seats up to 290, said Stefan Schaffrath, a spokesman for Airbus in Toulouse, France.

The switch doesn’t seem to indicate shifting demand or travel patterns, especially since the carrier is “just swapping wide-bodies” instead of canceling, Stallard said. A340s aren’t as efficient as the A330s because they have four engines instead of two, he said.

The Boeing 737-800s, to be delivered from 2014 to 2016, will boost China Eastern’s flight capacity by 8.7 percent, the carrier said. The 787 orders were placed in 2005 and include purchase contracts by Shanghai Airlines, which China Eastern bought last year.

--With assistance from Irene Shen in Shanghai, Andrea Rothman in Toulouse, France and Jasmine Wang in Hong Kong. Editors: James Langford, Joshua Fellman

To contact the reporter on this story: Susanna Ray in Seattle at sray7@bloomberg.net

To contact the editors responsible for this story: James Langford at jlangford2@bloomberg.net; Neil Denslow at ndenslow@bloomberg.net


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