Podcast: What's Holding Back China's International Aviation Recovery?

Traffic in China’s domestic market has continued to surge since Beijing began to ease pandemic-related restrictions in January. However, recovery of the country’s international market has been steady rather than spectacular, with capacity still down by about 50% on 2019 levels.

Tune in as Routes Editor-in-Chief David Casey is joined by ATW Southeast Asia and China Editor Chen Chuanren, in Singapore, and ASM Consultant Hang Zhao, in Shanghai, to discuss the reasons behind China's slower-than-expected recovery.

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Rush Transcript

David Casey:  Hello everyone and thank you for joining us for Window Seat, our Aviation Week transport podcast. I'm David Casey, editor-in-chief of Routes. Thanks for being with us today and welcome on board.

On this week's episode, we'll be discussing China's recovering aviation market. And to do that I'm delighted to be joined by my colleagues ATW Asia Pacific and China senior editor, Chen Chuanren, who is based in Singapore, and ASM consultant Hang Zhao, who's in Shanghai. Thanks for being here today. As I'm sure everyone listening to this podcast knows, China's zero COVID approach during the pandemic effectively cut the country off from the rest of the world for the best parts of three years. And as recently as December, 2022, capacity to and from mainland China was about 90% down on pre-pandemic levels. However, in January this year everything changed and China reopened its borders to international visitors for the first time since March, 2020. This move meant that income travelers no longer needed to quarantine, marking a significant shift in China's policy after pursuing such a restrictive approach prior to that decision.

Now the last time the three of us got together on this podcast was shortly after those restrictions were lifted in early January, 2023, and at that time we'd started to see a further acceleration of the domestic market which had remained relatively robust throughout the pandemic and we were also starting to see some Chinese and foreign carriers taking tentative first steps in adding back international service. Now, Hang, I know in your role at ASM you track changes in capacity and traffic. Can you just give us some context on what has happened in those nine months since the borders reopened and where the domestic and international markets are at at the present time?

Hang Zhao:  Thanks, Dave. So as you mentioned, actually we've been pursuing the increasing recovery of the entire market, including 100% recovery of the domestic market in China. And you also mentioned about international. Yes, the recovery is too on the way and we've been tracking from the data saying that they have 40% international capacity has recovered to 2019 level until now. The demand for both travelling internationally is still under recovered as well, it's only achieved about 30% of 2019 level from up to date at the moment. So if you look at the travelling behavior entirely in China, the domestic travelling has fully recovered and people have a lot of confidence travelling around internally within different purposes including business and leisure and VFRs as well, but international, due to a lot of reasons, we're not going too deep to some deeper reasons for further discussion later. But it's still on the way to be recovered.

David Casey:  Absolutely. I think I was looking at some capacity data for August and the domestic market now in China we're up to about 17.1 million seats a week, which is I think 16% up on 2019 levels. But if you look at the international, we're hovering around a million seats a week, which is down by about 50%. So there's clearly a massive way to go for that international market to recover. So let's talk then about some of those reasons why it has been slower. I'd say it's been rather steady rather than spectacular in terms of the capacity growth that we've seen over the last nine months. Chuanren, did you expect to see a sharper increase in that international capacity?

Chen Chuanren: Yes, Dave, so one of the interesting data that came up from China was from the Ministry of Culture and Tourism, which gave a sense of what happened over the first six months of 2023. So over the combined six months, the passenger volume has returned to only 23% of pre-pandemic levels, but just in June alone it has returned to 41.6%. And some may ask why it takes such a long time for China to ramp up capacity and some of the reasons could include, number one, they haven't been able to take the aircraft out of storage as quickly. That's one of the reasons. And of course, even though China has committed to restoring capacity and approving air rights, that hasn't been the case, especially between China and the U.S., which we will probably speak about later. This is a whole gamut of reasons why China hasn't been able to ramp up capacity, but data have seen just in June, the numbers have rebounded quite quickly and I think it's just gaining momentum. I believe the numbers will recover more sharply in the remaining months.

David Casey: It's interesting what you're saying actually about, particularly with foreign airlines, I think we saw during the pandemic there was a lot of widebody retirement. There's also a lot of aircraft that have gone into storage, and as well as a lot of aircraft have been deployed on other routes and I suppose it's not easy then to recover the aircraft needed to operate the Chinese network that was present before the pandemic. What's the sense among Chinese carriers, Hang? Are you seeing them try to recover capacity quicker than international carriers, perhaps?

Hang Zhao: Yes, but the challenge is not only for the foreign carriers, also for the Chinese carriers on the market. We're talking about the market on the number is only 40% recovery, but behind the number is actually a lot of different challenges and factors to influence on the recovery take on really slower than we expected even before.

First of all, you mentioned of the carriers. Yes, of course carriers are facing a lot of challenges. First of all, the demand is not as usual before the entire economic performance is not really well. The willing of travelling internationally is not comparing to the pre-pandemic level at the current stage because past three years entire society is facing a challenge with a lot of economic damages and that's taking a lot of things from the travel market at the moment. And also yes, Chuanren mentioned about some limitations on the policies. Traffic rights is one of them that says they just released another round of new policies to distribute the traffic rights.

So it seems like even the government and the authorities are trying to encourage the increase of international market and recovery of the international market, but spoken to the individual players such as individual Chinese carriers, they are facing a lot of challenges to obtain the traffic rights as well. And talking back to a couple of months even before when the Chinese carriers were trying to restore their capacity back, the first challenge they were facing is the challenge coming from the destination side. When the destination airports is lacking of employees to maintenance of their recovery of the flight. That is one of the challenges as well.

 And also we're talking about geopolitical issues, we're talking about military issues. Some of the countries are talking about North American issues, which is only 10% in recovery at the moment, but considering before the pandemic it's over 300 frequencies per week and now it's reduced to less than 100. Even we have just released a new round of increase between China and the US and also the Canada side is not performing really well at the moment. So yes, the challenge is coming overall from different part of the factors. It's challenging to both the international carriers and the Chinese carrier as well.

Talking back to traveling internationally, the majority drive of the traffic at the moment is not coming from a strong business flow, it's just coming from the VFs. Even the tourism flow is not coming back very much at the moment. VFR and also educational is a majority contribution on the traffic flow to international travelling at the moment and to some smaller regional marketing including such as Africa is recovered really well. That is also because of some of the individual and the smaller scale business activities happening overseas from the Chinese business sectors. So that's giving some contributions on the recovery but the majority of the flow we could say is not coming back on that wheel at the moment.

David Casey: Thanks for that, Hang. Interesting to hear how the traffic is recovering. Let's talk then about some of those traffic rights that you just touched on there and you did mention the U.S. market. Now I know, Chuanren, you've been writing about this. Now we have seen some positive signs there. I think at the minute, at the time of recording, the Chinese and U.S. authorities are permitting 12 frequencies per week between the two countries. But that is going to change over the coming weeks, isn't it, Chuanren?

Chen Chuanren:  Yes, that's right. So as of, let me see, August 14th, the announcement came out that the Department of Transport and the Chinese authorities have agreed to ramp up capacity from 12 a week to 18 times a week starting from 1st of September. That is to allow students to fly over to the States and this will be doubled to 24 times weekly from October 29th. So it is still of course a long way to go from pre-pandemic levels, but it is a good sign that the freezing of relations, especially within the transport departments of both countries is starting to thaw in some ways and hopefully we can see this momentum carry on again in the coming months.

David Casey:  And we did see some more positive news as well recently. In early August China's Ministry of Culture and Tourism ended some COVID-19 restrictions on group tours for 78 more countries. Now, before the lift, I think Chinese travel agencies were banned from selling outbound group or package travel to countries like the U.S. Hang, perhaps can you explain a little bit more about what's happened there and why that's so significant for some countries that are dependent on tourists from China?

Hang Zhao:  Thanks, Dave. You mentioned about how important is the travelling segments on the international traffic from China's international market, which is true. And before pandemic, China is number one among resource market for entire international travel markets. So that is quite a significant sign that we can gather up tourism operators and activities to those destination countries. Now it's 78, which is in total 150 plus means more like an entire international travelling group market is coming back. So that's definitely going to increase and stimulate the recovery of the international market from China.

But another factor I mentioned already in your talk is the demand is not recovered yet and also the travel market and the total industry has been damaged for the past three years. A lot of companies need to pick up where they were before and some of them cannot survive during the past three years. So that's a challenge. But a positive signal is we just have seen that the first number of group tours landed in Australia just yesterday, which is another good sign. We will probably expand some better performance for the tourism market in future such as the national holidays incoming. But now as I mentioned, the majority segment of the traffic is coming from the way VFRs, from educational, and from small scale individual business travelings. The big enterprise travelling is not coming back, the inbound flow is not coming back. I think that's major reason for damage on the traffic of international haven't been coming back at the moment.

David Casey:  Has the dynamics of the Chinese traveller perhaps changed then during the pandemic? Obviously there's difficulties of obtaining visas, there's lower flight capacity, there's higher airfares, people have got more accustomed to travelling domestically and taking leisure trips and vacations domestically. Is there maybe more of a hesitancy for Chinese tourists to travel internationally than what there was?

Hang Zhao:   I think yes. One of the reasons is people are getting used to these three years of the behavior of the travelling. And another major reason I think behind it is the entire economic performance is not well compared to the pre-pandemic level and most people at the moment in China are getting really bad employee performance on the working market at the moment. So that's one of the reasons. People have less disposable income. They need to plan for short-term travelling and just as the summer is coming back.

The summer holidays of the domestic travel improvements are quite well. A lot of Chinese carriers used to worry about their fleet utilization about the aircraft widebodies don't know where to fly judging from the currently international situation. But in the end they digested really well in the domestic market, especially during the summer. So that's a good sign for the recovery of the tourism market and also that's a good sign for the future, but it just didn't reach to that good expectation than we were estimating before. Because yes, this is not a quite good year on also a period on the economic performance in overall globally. I think that's one of the ways the demand is still under our expectation to be recovered at the moment.

David Casey:  In terms of international demand into China, is there still a perception do you think, among international travelers, Chuanren, that China is difficult to enter and that it's still seen as being quite restrictive and there are those barriers so people are taking maybe leisure holidays to other destinations?

Chen Chuanren:  Yes, David, I think before I answer your question, I just want to add on to Hang's comments. So even though demand has kind of, or shall I say capacity hasn't quite recovered, we have seen these Chinese travelers in fact going through another hub, which in this case usually is Hong Kong, Tokyo for long-haul flights, because these hubs have already established routes to, say, London, San Francisco, Los Angeles. And Hong Kong for example, has seen a surge in numbers of transit passengers come in from China to a destination.

And again, following up to Hang's comment on economic figures. Those could also give the reason why most of Chinese are also travelling within Asia Pacific. Again, based on the same report, I think around 94% of all outbound travelers are flying within Asia Pacific, mainly to Thailand, Japan, and Korea, for example. But back to your question, whether international passengers are hesitant to fly to China. Probably, because at one point China is still refusing to allow visa free entry to certain countries.

For example, I'll give for my country, Singapore, it took only I think last month or the month before only when they waived the visa free entry into China. Other than that, you have to apply for a visa to enter China, which is unheard of for a long time for Singaporeans. So that's one of the reasons why people tend to avoid travelling for leisure into China because you have to go to the embassy, you have to apply for papers and that definitely has put off a lot of leisure travel into China especially.

David Casey:  Okay, thank you for that. Hang, then just before we finish then, what's the long-term outlook then for China's market, particularly on the international side? Have you got any indication of when we might start seeing capacity and the number of routes and frequencies ramp up? When can we expect to see those 2019 levels again?

Hang Zhao: Now, the entire recovery, we saw that we have huge damage on the North American traffic. The demand is really high. We still got a number one indirect demand destination country US, which is reaching to one million and in demand demands now to the U.S. at the moment. Most of the travelers trying to mention about taking transit in Hong Kong, in somewhere like Japan and South Korea as a traditional way to get to the U.S. and sometimes they take into even European destinations such as Dublin to take to the eastern coast region of the U.S.

Yes, this whole picture is being impacted by a lot of factors on the recovery, but we saw some significant country markets and destination markets recovering really well. For example, just because China and North America got damaged, the European country markets in general recovered quite well. We have Hungary on the Eastern European market recovery fully. We have Italy frequency side is recovered fully and the capacity is almost 80% recovered, and also UK as well as one of the big links in between China and Europe. That's one of things.

Chuanren mentioned about regional travelling, but judging from the capacity the Southeast Asia and the Far East Asia reaching the capacities haven't come back that well. Probably the demand is higher, but the capacities haven't reaching to that light. It's just basically around the average 40% of recovery at the moment. Yeah, we're talking about those numbers. We saw some good recovery reaching the country destinations, but talking back to the 2019 level, is 2019 level that achievable? We'll be talking about this a lot of times. Before pandemic, 2019 was the best year, but I'm not really sure, maybe probably 2019 will be the best year also for the future five years on the international market of China as well. Because just even without the pandemic, 2019 was the first year Chinese carriers lost money on international long hauls. That year is giving a lot of challenges already. Before the pandemic, even some of the long haul routes had been cancelled.

So talking about 2019 levels, how do we achieve that result without any concerns in the future? And now everything has been changed, the entire global market has been changed. Hopefully it's going to be a real challenge to get that onto 2019 level, but however, we are still on the way to be recovered for the China international market. It's not going to be like this. And we have the huge demand to North America. We have the fleet recovered on some of the European destinations. So probably after some of the stimulating factors, including the opening of the group tours coming up we'll be achieving some good results at the end of this year or probably the summer season of next year.

David Casey:  Sounds like then the demand is there, but it is going to take some time before we see that recovery to kick in. Well, we are just about out of time for this week's episode. So Chuanren and Hang, thank you for joining me on Window Seat. It's been really interesting to hear your thoughts on China's market at the present time. Thanks to you, our listeners, and to our producer, Cory Hitt. If you enjoyed this podcast, make sure you don't miss us each week by subscribing to Window Seat on Apple Podcasts or wherever you listen. This is David Casey signing off from Window Seat.