Al Root

Boeing is caught in middle of the U.S.-China trade war, and Chinese airlines are sending back planes instead of paying a 125% import tariff.

It is a challenging situation for Boeing and an obvious response from any airline looking to add capacity. The impact on airfares of a tariff that high creates big problems for airlines and fliers.

The trade war has escalated quickly. After a couple of rounds of retaliation following President Donald Trump's April 2 Rose Garden tariff announcement, the rate the U.S. is charging on most Chinese imports is 145%. The rate at which China charges U.S. imports is 125%.

Those eye-popping rates are starting to have an effect. China reportedly returned three 737 MAX jets from the Zhoushan completion center to Seattle, according to the Air Current. Boeing declined to comment on the report.

China might have returned the planes as an act of defiance. It's just as likely to have been an economic decision. No airline can make money paying more than double the price for a plane.

Roughly speaking, aircraft costs, including rent, depreciation, and maintenance, account for 10% to 20% of an airline's total operating costs. (People and fuel account for closer to 50%.)

If the cost of a plane doubles, or more, then the cost of an average ticket to get from New York to L.A. would go from roughly 10% to just under $700 from the low $600s -- all else being equal. That would ensure an airline's profit margins are roughly unaffected.

That's a rough guide, and the problem is the airline business is competitive, and fliers are price-sensitive.

Price elasticity refers to the change in demand resulting from price moves. An elasticity of one means that if the price goes up 1% then demand goes down 1%.

At the route level -- such as New York to L.A. -- the International Air Transport Association, or IATA, found that the elasticity is greater than one. So a 10% airfare increase would lead to an airline seeing a demand drop greater than 10%.

The problem for the airline charging more is that it then has to raise prices even further to offset the lost traffic. A 10% cost increase and a 15% drop in traffic means the average price of that ticket from New York to L.A. is now closer to $800, up almost 30% from competitors' fares.

It becomes a death spiral.

At the national level, the elasticity is closer to 0ne. So if all plane tickets went up 10% en masse, there would be roughly 10% fewer people taking a trip. Again, that is only a rule of thumb. Business travel is less sensitive to price, and people's income and habits change over time. As people get more disposable income they tend to fly more. The IATA estimates the number of people on planes will grow about 2% a year on average from 2019 to 2025. That includes the effect of the Covid-19 pandemic that resulted in a brutal 60% travel drop in 2020.

Boeing's peer Airbus doesn't face the same tariff headwind. It also can't step in and supply more planes. There is no inventory sitting around. Planes are typically ordered years in advance, and both aircraft makers are struggling to increase productions to fulfill order backlogs that stretch out for years.

Boeing's China problem doesn't appear to be an existential threat, but it's an illustration of how tariff policies can hurt a large U.S. exporter. Some 70% of Boeing's commercial airplane revenue in 2024 was generated outside of America.

Write to Al Root at allen.root@dowjones.com

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April 18, 2025 11:35 ET (15:35 GMT)

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