China is the world’s fastest growing commercial aviation market. Chinese carriers are projected to buy 1700 to 1900 aircraft – one-third of them smaller turboprops – over the next 20 years, making it second only to the U.S. in size. Dr. Charles Chartier ’78, associate director of Thunderbird Corporate Consulting, discusses the background and future of China's ARJ-21 regional jet program.

China has an ideal market for regional jets, with 70 to 80% of China’s city-pair routes having fewer than 100 passengers and routes from 600-2200 km. Development of regional aviation and an indigenous regional jet are two of China’s top four civil aviation priorities. Thirty new regional airports are under construction and US$600 million has been allocated for the “ARJ-21” program to develop a 70-85 seat regional jet.

While there have been previous unsuccessful attempts to build aircraft in collaboration with Western manufacturers, the new aircraft will be built by AVIC I Commercial Aircraft Company (ACAC), a cooperative joint venture among seven state-owned industrial enterprises and research institutes. It is scheduled to be in service by 2008 in time for the Beijing Olympics.

The ARJ-21 draws on the experience gained from the unsuccessful MD-82/90 and AE-100 programs but avoids going head-to-head with Boeing and Airbus. The aircraft design is largely Chinese with some support from the Ukraine’s Antonov Design Bureau for the super-critical wing design. Operational constraints in Western China drive a design that is capable of hot weather and high altitude take-offs on rugged runways. The maximum payload of the standard version is 7892 kg, its range 1200 nautical miles and speed 0.76 Mach. The aircraft’s operational characteristics will be similar to the B737s and A320s to reduce operating cost and crew training. Western-supplied components include the GE CF-34-10A engine, Honeywell fly-by-wire flight control system, and Rockwell Collins Pro Line 21 avionics. Production of a projected 500 aircraft in various configurations is scheduled to begin this year.

The question facing everyone is of course: What’s different this time? Why this should attempt at building an aircraft in China be any more successful than previous efforts? Challenges to this program are significant: (1) established competition from Embraer in Brazil and Bombardier in Canada, (2) integrating a dispersed organization of state-owned-enterprises, (3) controlling cost and schedule, (4) building a customer-oriented organization and support network, (5) obtaining FAA certification, and (6) securing a large order to launch the program.

Competitors Embraer and Bombardier have beaten the ARJ-21 to market by at least five years and bring along well-established global customer support organizations. However, China’s low labor rates should yield a modest savings in airframe construction and Beijing applies 23% in value-added taxes (VAT) and import duties on foreign-built regional jets to protect their domestic market. While the VAT is theoretically applicable to Chinese-built aircraft and import duties contravene WTO objectives, pursuing “justice” through international courts is a long process, particularly when the U.S. and EU protect their own markets. China will find ways to protect and subsidize development of this priority initiative.

The biggest challenge may well be managing the integration of seven state-owned enterprises that historically have been concerned more with keeping people employed than satisfying the customer or making a profit. However, ACAC’s top management benefits from experience with the MD-82/90 and AE-100 programs and many mid-level managers have been trained at Airbus.

Still, convincing Chinese airlines to buy smaller regional jets rather than B737s or A320s will be difficult. The shortage of qualified pilots and higher operating costs of regional jets cause the airlines to favor larger transports. The acquisition cost per revenue-generating seat of regional jets is 50-75% higher than larger aircraft. This suggests that the success of regional jets in markets like the U.S. may well be context-specific. While regional jets are key components in the hub-and-spoke systems of developed economies, this kind of network has yet not developed in China. There’s little need for frequent connections; most business activity takes place in a few large coastal cities. More importantly, cheaper road, rail and river alternatives are readily available.

In time, China will need many regional jets. The country certainly has the critical mass to justify an indigenous manufacturing capability. The ARJ-21 program will undoubtedly encounter schedule delays that will jeopardize ability to capture projected market share. Only time will tell whether ACAC has the management capabilities and market orientation to achieve financial success, but this writer believes the program will be a technical success and a source of national pride.

In the course of providing consulting services to its clients, the Thunderbird Corporate Consulting organization is frequently asked to assess the viability of indigeneous development programs. This article briefly describes an assessment that was performed by the author on China's ARJ-21 regional jet program in the summer of 2003.

Charles Chartier, DBA, has over ten years experience in the aerospace industry, as former director of Asia Pacific for AlliedSignal Aerospace and vice president – Asia for Lucas Aerospace. He can be contacted at chartiec@t-bird.edu.

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