China’s air travel market has been hit harder than most during the pandemic. In this in-depth analysis, Tony Harrington examines how the country is recovering on the domestic and international fronts
In Wuhan, China, Covid’s ground zero, the airport is buzzing again.
Just before the pandemic was declared, local officials had proudly pronounced that Wuhan Tianhe International Airport was the country’s fastest-growing air hub, exceeding 27 million passenger journeys in 2019, a nation-high annual increase of almost 11%.
Their jubilation was short-lived, for with confirmation not just of a ‘novel coronavirus’, but an outbreak centred on and radiating from Wuhan, the city soon became the first in the world to be locked down, a measure which would be replicated globally to help prevent the virus spreading.
The impact was swift and seismic. In the first quarter of 2020, domestic passenger journeys starting or finishing in Wuhan nose-dived by 95%, with aviation data group OAG recording a plunge from 1.15 million in January to just 59,844 in March, the month that the World Health Organisation declared a pandemic.
Now, three years on, China’s air travel market has taken off again, initially via a bumpy return of domestic traffic, and now, incrementally, on international routes, following the central government’s new year abandonment of its ‘zero Covid’ strategy. There’s still a long way to go. But things are looking up.
Wuhan, like the rest of China, is experiencing the aviation resurgence.
More than any other airport in the country, its continuing recovery from Covid is richly symbolic of the turnaround occurring in the world’s second-largest air transport market. If Wuhan, the epidemic’s epicentre, is back on track, then surely the same is true of China, the last big market to reopen. A big corner has been turned, and optimism is rising.
Wuhan’s air traffic chart is a cardiograph of steady progress back to its pre-Covid ranking of China’s 13th-busiest domestic airport by airline seats deployed, and 14th busiest by flight frequencies.
The rise of congestion (again)
Even though the country’s air transport market is still far from fully recovered, Wuhan and 21 other major airports in mainland China and Hong Kong have been designated by IATA as ‘level three’ hubs, the most severe category of airport congestion, with “demand significantly exceeding airport capacity”.
That means that off the back of resurgent domestic travel alone, those airports have pretty much run out of slots for aircraft arrivals and departures, the opposite problem of three years ago when internal flights were suddenly depleted and patchy, depending on the scale and location of Covid flare-ups, while international passenger movements were reduced to emergency evacuations of foreign nationals or homecomings by repatriated Chinese citizens.
They were dark days in that first month or two, when nobody quite knew, understood, or was revealing, the scale of the evolving problem – let alone the scale or structure of the response it would need, evoking the Business 101 mantra ‘If you can’t measure it, you can’t manage it.’
With apologies to the aviation executive who coined the expression to describe another crisis, the early responses to Covid represented “a great example of the Ministry of Good Ideas failing to consult with the Ministry of Unintended Consequences”.
Like many after it, China’s initial containment initiatives were clumsy, clunky and confusing, driven not by science or expert advice, but by fear and knee-jerk inventiveness, with convoluted and changing procedures imposed at airports, and the sudden loss or critical constriction of vital air connectivity.
Even evacuation and repatriation flights were impacted as international aircrews were trapped by quarantine mandates, making many early missions unworkable.
Tracking Covid’s impact
Adam Cowburn and Mabel Kwan, both Singapore-based managing directors of Alton Aviation Consultancy, have closely tracked the impact of China’s Covid restrictions, and the changes resulting from their easing.
“China’s aviation sector has recovered in part, with domestic traffic remaining remarkably robust throughout most of the pandemic while international traffic is just now beginning what we expect to be a slow recovery,” said Cowburn.
“On the supply side,” added Kwan, “Chinese airlines and airports are in a good position to resume a high level of operations. Many Chinese operators kept their planes flying domestically, which means crews were kept current.
“Chinese operators also have a lower proportion of their fleet that has been parked compared to the average in the rest of the world, and major Chinese airports have kept most of their employee count over the last three years. At Beijing, Shanghai, and Guangzhou airports, staffing levels in 2022 were comparable to pre-Covid, with 81% to 99% of 2019 numbers.”
In January this year, when the country dumped its zero Covid policy, there was not just an immediate surge in Chinese domestic air journeys, but also a corresponding spike in industry-wide traffic volumes, reflected in IATA’s global data on revenue passenger kilometres (the number of paying passengers multiplied by the distance flown).
China’s domestic traffic suddenly soared by 37.2% compared to January 2022, also exceeding the global growth rate of 32.7% for the same period.
The trend has continued.
In its April assessment of the mainland China market, OAG said the nation’s domestic airline capacity now exceeded that of April 2019 by 18%, with the three biggest airlines – China Southern, China Eastern and Air China – increasing their own deployed seats by 25%, 18% and 43% respectively.
Low-cost carriers surge
Low-cost carriers (LCCs) also pumped up their capacity, with the largest LCC, Spring Airlines, increasing seats by 30% over April 2019, Sichuan Airlines by 26%, and Juneyao Airlines by 18%.
The top 10 of 40 Chinese domestic airlines accounted for 73% of April capacity, said OAG, with China Southern and China Eastern alone providing almost one third of total departing seats.
And while all airports recorded solid growth, the busiest was China Southern’s hub, with 4.9% of total domestic capacity, 540,000 more seats than second-ranked Beijing Capital Airport, a rise equal in scale to 3,600 additional Airbus A320 flights in a month.
China is also cautiously rebuilding its international air transport market, now that borders have reopened and travel constraints have eased.
AerCap, the world’s largest lessor of commercial aircraft, called China’s reopening “the last leg in global air travel recovery”, while BOC Aviation, the Singapore-based lessor majority owned by the Bank of China, expects the change to “substantially boost airline traffic volumes in the year ahead”, particularly for Asian carriers.
Uneven international return
Still, reactivation of China’s international air routes is slow and uneven.
“For most of 2020, 2021 and 2022, China’s international capacity varied between 4% and 10% of 2019 levels,” said Cowburn.
“We’re just now starting to see the early stages of a rebuild in international traffic, with March 2023 international capacity at 24% of March 2019 levels.”
Alton Aviation Consultancy expects international recovery initially to be powered by regional destinations popular with Chinese travellers. In March, said Cowburn, travel to Singapore was at 37% of 2019 levels, while Cambodia was at 24%, the Philippines 23%, Thailand 22%, and Malaysia 20%.
“Historically popular destinations including Japan, at 11% of 2019 levels, and South Korea, at 17%, have been slower to recover,” he added, “owing to near-term spats over Covid testing and visa processing, and longer-term political tensions.”
“However, forward schedules indicate that all these destinations will see a very meaningful ramp-up in capacity over the coming 12 months. Barring any major unexpected macroeconomic or geopolitical event, Alton expects that China’s recovery in international traffic will be largely complete by the end of 2024,” said Cowburn.
That, of course, assumes no worsening of other simmering issues such as multiple ongoing trade disputes, particularly with the US, increasing tensions over Chinese military expansion in the South China Sea, or the biggest potential issue of all, escalation of recent military exercises by China to an attack on Taiwan, the shockwaves from which would be both global and dire.
OAG’s April data shows a 44% increase in the international capacity deployed by Chinese airlines between March and April, with 935,000 additional seats scheduled, for a monthly flown total of 3 million. That’s 37% of April 2019 levels, and 4% of total airline capacity scheduled in China for the month.
Hong Kong’s revival
And then, just over the border in the special administrative region of Hong Kong, there’s Cathay Pacific Airways, 45% held by Swire Pacific, and 29.99% by the state-owned Air China, in which Cathay has an 18% crossholding of its own.
Cathay has historically operated outside of the state controls applying to mainland carriers, behaving in effect as a national carrier for Hong Kong.
But when Beijing moved to squash pro-democracy protests in the streets of Hong Kong, and to apply the mainland’s zero Covid policies, everything changed for Cathay with the shutdown of its hub to passenger flights, though it did maintain strong freight operations.
In March last year, its worst month since the pandemic was declared, Cathay reported carrying just 58 passengers, equivalent to one occupied seat for every three of its 161 passenger jets.
Since the January easing of Covid restrictions, the airline has steeply and rapidly ramped up its monthly passenger journeys, exceeding 1.1 million in February and 1.3 million in March, and is confident of even greater growth as it expands its home market from Hong Kong into the neighbouring Greater Bay Area of China, centred on the trade hub of Shenzhen.
“We are focused on reconnecting,” said the Group’s chair, Patrick Healy, when recently announcing the company’s 2022 financial results. “This means reconnecting Cathay Pacific with Hong Kong, the Greater Bay Area, and the Chinese Mainland, as well as reconnecting Hong Kong with the world.
“Hong Kong has an important role to play in the overall development of the country under the 14th Five-Year Plan, which notably reinforces the importance of strengthening Hong Kong’s status as an international aviation hub,” added Healy, clearly spelling out greater integration of the new Cathay Pacific into mainland China’s aviation establishment and ecosystem.
“We anticipate that the Group, comprising passenger airlines Cathay Pacific and HK Express, will be operating about 70% of its pre-pandemic passenger flight capacity by the end of 2023,” he said, “with an aim to return to pre-pandemic levels by the end of 2024.”
OAG’s Head of Asia Pacific, Mayur Patel, described China’s aviation rebuild as a critical piece of Hong Kong’s and Cathay’s recovery.
“Hong Kong’s success is tied to China’s capacity rebuilding, and the Cathay Pacific Group’s fortunes are tied to the rise of China’s aviation sector,” he said.
“With the reopening of China’s borders, Hong Kong’s aviation hub will benefit significantly on the back of pent-up demand, and infrastructure development of the three-runway system that will cater to the city’s long-term air traffic.
“Today, the airline has expanded codeshare agreements with 25 airlines to feed traffic from Hong Kong and beyond, whilst expanding group activities across its dual-brand strategy with low-cost subsidiary HK Express, to service under-served destinations for added reach across its network.”
Cathay was also preparing to announce a significant order for new aircraft, to help accommodate its next phase of growth, said Patel, adding: “It’s the one to watch.”
China’s traffic rebuild
Parash Jain, Head of Transport Research, Asia Pacific for HSBC, expects the total air passenger market for the three major carriers to reach 81% of 2019 levels on average for 2023, and full recovery in 2024.
Although domestic traffic now exceeds April 2019 levels, international capacity remains well below pre-Covid levels, impeded by factors including slow reactivation of bilateral air traffic agreements, uneven restoration of visa approvals by both China and other countries, and operational constraints in some markets.
“For instance,” said Jain, “China Eastern Airlines thinks it may take three months to restore ground handling services in Japan and Thailand, two of the most preferred foreign destinations for Chinese tourists.”
Despite these barriers, HSBC is confident that China Southern, China Eastern and Air China are again profit-bound following solid losses during the pandemic, and residual impacts on domestic operations of on-off local lockdowns.
“We expect the big three to generate profits this year due to the rapid ramp-up of domestic flight capacity and the return of international flights,” said Jain. “Given a rigid cost base, we expect any incremental recovery in revenue will have direct and significant impacts on the bottom line.
“Separately, we estimate that a stronger RMB (Renminbi, the official currency of mainland China) versus the US dollar will translate into a RMB 17 billion (US$2.48 billion) positive swing in 2023 versus 2022. Our profit forecast for the big three is RMB 13.4 billion ($1.95 billion).
“The big three Chinese airlines are state owned and well capitalised, which positions them to also gain more market share, particularly in international routes as regional players try to mend their balance sheets by rationalising routes,” Jain considered.
Airline consolidation
HSBC anticipates fresh consolidation within the Chinese airline sector, with some weaker carriers struggling to regroup after Covid. Air China, for one, recently upped its stake in Shandong Airlines Group, the parent of struggling Shandong Airlines, to 65%. Previously, it owned 23% of the airline.
But what of the longer-term prospects for China’s air transport sector? Given the lag in its recovery compared to other markets, will China rebound to meet pre-Covid expectations of ascension to market leadership? There seems little doubt.
Both major airframers, Airbus and Boeing, have long forecast that China will overtake the US as the largest single market for commercial aviation, and they continue to hold to that view in their respective market outlooks to 2041. Each assumes compound annual growth rates exceeding 5%, with Boeing predicting that within a decade China will overtake the US as the largest air transport market.
Regional aircraft maker Embraer also sees significant focus by China not only on its own burgeoning domestic market, but also on the wider Asia Pacific region, the world’s fastest-growing air transport ecosystem.
“China is focused on expanding connectivity across Asia rather than its intercontinental reach,” said the Brazilian manufacturer in its latest global market outlook. “Exploration of both domestic and international thin routes using right-sized aircraft could develop air connectivity exponentially and bring China closer to the efficiency levels of North America and Europe.”
James Hogan, the former CEO of both Etihad Airways and Gulf Air, and now chairman of the aviation advisory group Knighthood Capital, has an even greater expectation of China’s air transport sector.
He is firmly of the view that it will not just recover but become the engine room for “a new Silk Roads” market, a vast multinational territory bordered by dual paths between China and Europe: one an arc via central Asia, the other looping through southeast Asia, southern and eastern India, and Africa.
“There’s a fundamental shift in global markets and trade patterns,” Hogan told a recent business conference in Dubai. “Where road and rail go, aviation follows.
“The Asian powerhouse is finally back on track after a long lockdown but has to catch up. The African continent is also a huge growth catalyst. The China–central Asia–Africa axis will create new trading blocs.
“Aviation has always faced challenges, but we are in a new phase of opportunity,” said Hogan. “China, with its neighbours, will be the driving force in air traffic growth for the remainder of the 2020s.”
So long, Covid.
