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China Urges Its Airlines To Curb Plane Orders

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In a move that could accelerate the global aviation industry’s downturn, China on Tuesday urged its airlines to cancel or postpone aircraft deliveries in 2009 to counter weakening travel demand amid a global slowdown.

If enough carriers heed the government’s requests, the consequences for Airbus and Boeing Co. could be significant. China has been one of the fastest-growing markets for both plane makers in recent years. During the last downturn, after the Sept. 11 terrorist attacks, Chinese airlines ordered hundreds of planes, offsetting cancellations elsewhere.

Without this business today, Airbus and Boeing could both be pressed to cut production rates since both plane makers are already facing a slump in orders.

The Chinese government’s appeal is a reaction to the dramatic slowdown in airline traffic following the summer Olympics in Beijing. The Civil Aviation Administration of China urged domestic airlines to take other actions, such as allowing airplane leases to expire, grounding or selling planes and converting older jets into cargo haulers. The government also banned new airline start-ups and said it would cut fees and taxes that airlines have to pay.

Across the world, record-high fuel prices and plunging passenger demand have whipsawed airlines. Even relatively strong carriers such as Air France-KLM SA and Australia’s Qantas Airways Ltd. are choosing not to exercise options to buy planes and canceling aircraft-lease agreements. Weaker carriers, including several startups in India, have been negotiating with Airbus and Boeing to reschedule or terminate planned deliveries. Airbus is a unit of European Aeronautic Defence & Space Co.

World-wide, the number of parked old jets has surged this year, initially because aging models use more fuel and more recently because of dropping passenger demand. U.S. carriers, which have relatively few new jetliners on order, have been retiring old planes at higher rates.

“For the next 18 months, airlines will be looking to reduce capacity,” said Brian Pearce, chief economist at the International Air Transport Association, a global trade group. “There’s been a huge reduction in market expectations since orders were placed.”

A Boeing spokeswoman said on Tuesday that the company has “had no specific request” to defer or cancel airplanes. “We continue to work closely with our airline customers in China and the government agencies involved to ensure we are in complete alignment on airplane requirements,” she said. An Airbus spokesman declined to comment.

It may be difficult or impossible for Chinese airlines to cancel many of next year’s deliveries, particularly of those planes that are scheduled to come off the assembly lines during the first three or four months of the year. The planes have already been in production for several months, and the airlines have paid millions of dollars in progress payments that would be forfeited, according to a person familiar with the situation.

In a partial reflection of China’s cooling passenger market, Boeing’s delivery to Chinese airlines tapered off this year to 19 out of the company’s 338 total deliveries through the end of November.

In recent years, Airbus has tried to break what was a near monopoly by Boeing in China. It even built a factory in Tianjin to assemble planes. In return, the European plane maker has landed big orders from Chinese carriers and expects to win more. The Tianjin factory opened in September but is only slowly starting production of A320-family single-aisle planes.

So far this year, Chinese carriers accounted for 69 of the 437 planes Airbus delivered through Nov. 30, according to the company’s Web site.

Overall, Chinese carriers make up around 11% of the 3,705 planes Airbus had on order to build at the end of November.

According to Boeing’s Web site, Chinese airlines have outstanding orders for 210 airplanes, the bulk of which are single-aisle 737s. Chinese airlines also account for 42 of the almost 900 pending orders for Boeing’s 787 Dreamliner, which is running two years late.

During the post -9/11 downturn, both manufacturers relied heavily on China and other parts of the world to take up the slack left by U.S. airlines that canceled or deferred hundreds of deliveries.

In its statement on Tuesday, the Chinese government also outlined how it would reduce the fees and taxes that airlines have to pay. Chinese airlines will have some infrastructure fees from the second half of 2008 refunded, and they are exempt from infrastructure fees and some business taxes for the first half of 2009, the Chinese civil aviation authority said.

Even before the global financial crisis, China’s beleaguered airline industry had been buffeted by natural disasters, fluctuating jet fuel prices and disruption from the Beijing Olympics earlier this year.

The parent company of China Southern Airlines Co., the country’s largest carrier by fleet size, received a CNY3 billion ($439 million) subsidy from the government last month, and other airlines are also seeking assistance.

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