China plane maker creates US demand
COMAC's participation in the revival of US carrier Eastern Air Lines looks like a smart bet to help its new passenger jet gain traction in skeptical overseas markets.
If you can't sell your products, then create a customer to buy them. That concept has been practiced for years by companies looking to sell their new products to wary buyers, with Chinese solar panel maker Suntech (NYSE: STP) most recently trying out the strategy to largely disastrous results. Now it seems that aspiring Chinese commercial aircraft maker COMAC is also trying out the strategy, with news that the company will participate in the revival of storied but now defunct US carrier Eastern Air Lines.
Word of the tie-up came out at an airshow this week in the southern city of Zhuhai, although COMAC gave few details of its participation. COMAC is trying to develop a 150-seat commercial aircraft that would eventually compete with rival products from established players Boeing (NYSE: BA) and Airbus (Paris: EAD), and hopes to launch the model's maiden flight in 2014. But so far nearly all of the advance orders for the plane have come from Chinese airlines, which are only placing such orders under strong pressure from the central government to support this new initiative.
The only firm foreign customer for the planes is a unit of General Electric (NYSE: GE), which is designing and building the engine for the model. A handful of foreign firms have shown tentative interest, including European budget carrier Ryanair, but none have made definite orders.
The latest media reports contain no additional information on COMAC's Eastern Air Lines tie-up plans. But I would expect that COMAC would probably provide several of its new planes, known as the C919, to Eastern Air Lines either for very cheap or perhaps for free in exchange for an equity stake in the revived US carrier.
Such a strategy comes with high risk, as Suntech is now discovering, but is hardly unique in the business world. United Airlines (NYSE: UAL), now one of the world's biggest carriers, was partly the creation of Boeing, which used the airline as a customer for its jets. While United has had its own problems in recent years, including several bankruptcies, it remains a solid Boeing customer to this day.
Eastern, meanwhile, is a bit of a legend in US aviation history, and I have to admit that I have fond memories of the airline myself after learning as a child that it owned a stake in the Florida Disneyworld. Led at various times by a World War I flying ace and an Apollo astronaut, Eastern was once one of the biggest names in the US airline industry before eventually succumbing to low-cost competition and going bankrupt in 1991.
COMAC's participation in a relaunch of Easter looks like a relatively smart and interesting bet that could eventually pay off handsomely. If Eastern is a success, then it could become a future strong customer for COMAC's planes. Furthermore, the successful purchase and use of Chinese planes by a US carrier would allow other western airlines to see the C919 in operation and consider their own purchases if the model is well designed and supported by COMAC. But if Eastern has problems with the C919s or is unsuccessful as an airline, then COMAC could easily find itself with not only financial but also marketing headaches as it tries to sell its new plane to skeptical global buyers.
Bottom line: COMAC's participation in the revival of US carrier Eastern Air Lines looks like a smart bet to help its new passenger jet gain traction in skeptical overseas markets.