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One of the themes that I regularly repeat is that the key to making money in the next decade is to get ‘long’ whatever the Chinese are buying. A country with 1.4 billion consumers and $1.9 trillion in its government’s cash reserves is one that you better pay attention to.
I have not, however, spent much time talking about the corollary to that strategy, which is to get the heck out of any companies that are competing against China.
Let me give you an example …
China Launches Its First Jet …
Last Friday, China successfully completed the first test flight of its domestically produced jet, the ARJ21-700. After flying for an hour, the 90-seat jet landed safely at an airport in Shanghai.
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| China’s ARJ21-700 made its first test flight last Friday. |
ARJ21, by the way, is an acronym for “Advanced Regional Jet for the 21st Century.” Regional jets are smaller than the large commercial airplanes and only have a range of around 2,000 miles.
By starting with smaller regional jets, China is avoiding head-to-head competition with Boeing and Airbus. But that doesn’t mean China isn’t competing!
China has already sold 208 jets, including five firm orders from General Electric’s aircraft leasing arm, GE Commercial Aviation Services.
And it is directly competing against Canada’s Bombardier (Toronto: BBD.B) and Brazil’s Empresa Brasileira de Aeronautica (NYSE:ERJ).
So if you own either of those two, think long and hard about whether you want to invest in a company that will be competing against The Civil Aviation Administration of China (CAAC), the manufacturer of the ARJ21. After all:
Unfriendly Skies Ahead …
Bombardier and Brasileira aren’t the only companies that should be worried. I say that because Boeing has been idiotically subcontracting the manufacturing of many of its airline parts to Chinese companies.
Yeah, Boeing has saved a few bucks. But it is effectively training Chinese engineers and factories to compete against it down the road.
In fact, while the aviation world is focusing on the ARJ21, China is also developing large passenger and cargo aircraft and expects to offer its own jumbo jets by 2020.
Jin Zhuanglong, the general manager of Commercial Aircraft Corporation of China, called the launch of the ARJ21 flight “a breakthrough for Chinese civil aviation” that will “especially promote the China-made jumbo jet plan”.
Boeing may enjoy a few more years of strong sales to Asian airlines. But its best years are absolutely behind it. And I expect business to get real ugly, real fast at Boeing.
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Here are a few reasons why …
The Unfriendly Skies #1: The Civil Aviation Administration of China (CAAC) has notified Chinese airlines to negotiate postponements of delivery of jets from Boeing and Airbus. And it is recommending a delay of about 3-5 months to balance supply and demand.
The Unfriendly Skies #2: Cathay Pacific Airways (Hong Kong: 0293.HK) announced last Friday:
- It will defer construction of a new cargo terminal at Hong Kong International Airport because of falling demand,
- It forecasts that passenger traffic would fall by 1% in 2009,
- It will ask cabin crews and pilots to take unpaid voluntary leave beginning in January,
- It will park two Boeing planes in California for a year, and
- It will ask Boeing to delay delivery of previously ordered airplanes.
Cathay Pacific Chief Executive Tony Tyler said, “This is a very difficult time for our airline and for the aviation industry as a whole, and we cannot see light at the end of the tunnel at this point.”
The Unfriendly Skies #3: The International Air Transport Association said that the number of Asia-Pacific passengers fell by 6.1% in October.
The Unfriendly Skies #4: Business at China Southern Airlines, China’s largest carrier by fleet size, is so bad that it is getting a $440 million infusion from the Chinese government to keep it afloat.
The Unfriendly Skies #5: Air China, China Eastern and China Southern all posted losses in the third-quarter. And the entire Chinese airline industry will likely end 2008 in the red, the first time since the SAR crisis in 2003.
And even though oil prices have dropped, I would not be jumping on board any Chinese airlines, such as China Eastern (NYSE:CEA), Cathay Pacific (Hong Kong: 0293.HK), or China Southern (NYSE:ZNH).
The One Bright Spot for Investors …
Are there any bright spots in the travel industry, Chinese or otherwise? Only one that I can tell — Ctrip.com, the largest travel agency in China.
I’ve traveled all around China, and I’ve only seen a small fraction of its wonderful sites. The same is true for the Chinese themselves.
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| Prior to 1978, the Chinese couldn’t simply visit the Great Wall, even if they had the money. |
Prior to the great economic reforms of Deng Xiaoping in 1978, the Chinese did not have the political freedom (or the money) to travel within China, let alone beyond its borders. Someone in Guangzhou couldn’t just hop on a train and visit the Great Wall of China in Beijing, even if they had the money to do so.
Times have changed. And thanks to China’s breakneck economic growth that has raised incomes and new personal freedoms, the Chinese are visiting all the natural, religious, and historical wonders of their fantastic country as well as venturing out to the rest of Asia, Europe, Africa, and the Americas.
The Chinese Ministry of Public Security estimates that in 2006, 34.5 million Chinese traveled outside of China. To put that into perspective, only 4.5 million Chinese made it overseas in 1995.
Ctrip (Nasdaq:CTRP) is a lot like Orbitz or Expedia in that it provides online travel services such as hotel reservation, air-ticketing, and packaged-tour services.
There is one huge difference though: Ctrip has a semi-monopoly grip on the Chinese travel business!
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| Ctrip books 57% of the hotel and airline business in China. |
Ctrip books more hotel and airline tickets than anybody else in China. And it has a whopping 57% market share.
It gets even better…
According to iResearch, only 1% of travel reservations were booked online in 2006. But that amount is expected to grow by 35% a year for the next several years.
Talk about being in the right place at the right time!
I am not suggesting that you rush out and buy Ctrip tomorrow. But I absolutely believe in its long-term story and strong fundamentals.
Best wishes,
Tony
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