CAPA Chairman’s Update - Travelling Again: Outlook for Asia as China stays on the international travel sidelines

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CAPA Chairman Update - Travelling Again Outlook for Asia as Chin…l travel sidelines.docx

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Speaker 1:

Progress [inaudible 00:00:11]. Welcome to CAPA live this 10th of November. Today, I want to talk about

China in particular. The reason for that is there have been a number of references I've made to China

over recent presentations, and there

are a number of things that are coming together, which really sort

of put China very much into focus as perhaps a critical issue in recovery from the pandemic, the aviation

recovery from it. So I'll call this one a China special, and with the subheading th

at it's China's aviation is

crucial for Asia Pacific countries, but what's going to happen next. In terms of overview, the critical thing

really that prompted this was that IATA has forecast for Asia Pacific, Internal Asia Pacific, a level of

capacity in 2

022 of about 12%. 12% of 2019 levels. Now, after two years of very poor numbers and lots

of losses by airlines, the prospect of 12% of 2019 levels next year, is really something that's going to shift

the universe.

Speaker 1:

I don't think it's really come home to people yet, but it really is critically important. And in that process,

China inevitably is important. Across the region, the sort of issues that do influence things include

vaccina

tion levels, but also the readiness of different states to open up. And it is a region it's recognised

as being fairly conservative in its approach, very risk averse in terms of COVID, and consequently, it is

going to be difficult, it is complex as we grad

ually start to open up. I'll talk also about the dependence of

many countries in region on China tourism travel, something that's grown very much over the last 20

years. Have a little bit of look at how China's airline system compares with in particular wi

th the US. And

then repeat of something I've talked about before, but the demography of China and the Northern Asia

region and its impact on travel potentially. And then finally, a quick look at what China's international

airline policy might look like.

Speaker 1:

So the first slide I have here is again, repeating the dramatic level that IATA is forecasting or projecting.

It's very difficult, obviously of very little information and lots of

uncertainty, but to be talking about a

10th of 2019 levels, which is a red bar is suggesting, is a forecast in 2022 is earth shattering. If you look

across to the left within Europe is expected to get back to about 75%, the North Atlantic to about 65%

goin

g across the red bars, but anything involving Asia is going to be right down at very low levels, except

perhaps for Asia Middle East and much of that higher level of the red virus due to India, not to east Asia.

So, that's the starting point. It's not a pr

etty picture in prospect. Domestically though, as we've seen,

China's domestic capacity has actually recovered fairly well.

Speaker 1:

It's been a little bit up and down, and that's a refle

ction of what's been going on in the COVID front. But

at the same time, most of the busiest airports in the region, and this is a reflection in the rest of the

region as well. Most of the airports, the busiest airports are actually in China, again, based e

ssentially on

domestic operations, because international is pretty much closed. The other side of that coin though, is

that [inaudible 00:04:34] numbers have tended to lag. And we can see from this slide after the recovery

for most of 2020, a big slump ear

lier in this year, 2021 around about the time of the Chinese New Year,

when there was something of an outbreak and the government pretty much insisted that people stay at

home rather than spreading the disease around the pandemic.

Speaker 1:

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And so we saw that slump in February, but then back to the Heights in the middle of the year, and then

towards the recent months, we've seen the latest number here we have for [inaudible 00:05:14]

number

s is September a pretty big slump, again, as some of the provinces in China. So a relatively small

number, certainly by US standards or European standards. But with this total protection from covered

policy adopted by China, it did create a very substantia

l slump down to about 40% below the 2019 levels

in recent months. We put in a perspective kick up again, but I suspect that that might not occur. We

might stay down about 60% in terms of passenger numbers for a month or two, as these small

outbreaks have t

ended to close doors. International of course is pretty much nonexistent, and that's

likely to remain the same, the green dotted line down the bottom, compared with the yellow line, which

is 2019 way, way above it. Really reflects that massive gap and the

lack of international activity to and

from China while the mandatory and very strictly enforced to WIC quarantine requirement is in place.

Speaker 1:

Back in 2019, there were over 200 milli

on seats [inaudible 00:06:34] from China and this just show in a

different way really, but the very steep drop there we see down to 2021 and a little bit more in 2022

forecast projected. The absence of China internationally is, as I said, I'm going to have

a pretty

substantially impact, particularly in Northeast Asia, but also across the region. And that risk aversion of

the region is a contributor to that. It's not just China, who's taking that approach, but the other

countries are in most cases now starti

ng to look towards opening up. That's said, like the rest of the

world, and probably to a greater extent, there's very limited coordination of border access rules. And

that's largely due perhaps to the great discrepancy in vaccination levels across the reg

ion. So for

example, a large country like Indonesia with many, many islands where demographics is difficult, but

also been slow to get to rolling it out less than 30% of Indonesians are fully vaccinated, so you can

understand if there is some reluctance th

ere.

Speaker 1:

India, Philippines, Thailand, and Vietnam, also relatively big markets and certain big receivers of Chinese

tourism are also relatively low in vaccinated. But there is some

[inaudible 00:08:07] as other countries

are highly vaccinated. Australia, for example, is looking at almost 90% vaccination level, which is creating

great confidence as things start to open up a little bit. This graph shows dependence of the dark blue bar

dependence of Chinese visitations on tourism for those countries, Hong Kong and Macau inevitably not

as separate countries, but as territories are very heavily reliant on Chinese travel, Chinese tourism and

they've suffered the most. But going across there

you can see that every one of the countries relies to a

fairly significant extent on China for its inbound tourism. And these have a big impact on obviously the

tourism sector, but also on their economies.

Speaker 1:

These aggregate from our website, these aggregate airline capacity levels, which you can see they

slumped in February 2020 and in each of these cases, not just run through them, but Thailand previously

received something like 1

1 million passengers tourist a year from China until that stage, and as you can

see there's nothing after that effectively. Malaysia is down from 3 million, again, that steep cliff,

Singapore three and a half million per annum, a little bit of travel, but

very, very limited and lot of that,

not just casual tourism, but business. South Korea, very near neighbour, which relies very heavily on

China, both tourism and for Chinese travel through travel is down from 6 million a year. Cambodia,

smaller country, bu

t down from 3 million a year. Japan relies also fairly significantly on China for its

inbound tourism down from 10 million. And smaller countries, relatively like Australia and New Zealand

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for whom China is actually still for Australia anyway, the largest

inbound tourism market. These are very

significant developments.

Speaker 1:

Philippines now from two, Vietnam down from 6 million per annum. And to put that in perspective, for

2019, the Ph

ilippines sector was responsible for 13% of GDP. And from the blue line in 2021, it's obvious

that not much of that has been realised. And with the prospects for 2022 Visa, as you can see very, very

serious in terms of their impact on the economies of thos

e countries. Thailand, likewise, it was 22% of

GDP in 2019 and virtually nothing coming from China. There's been almost nothing into Thailand at all

from any market for most of 2022. So the prospect of a very low level for 2022 is not a good one. This is

a

quick flash of the lowly vaccinated countries. Thailand is up above for 40%, which has been a pretty

steep progress since the middle of the year, but the Philippines, Indonesia and Vietnam, I mentioned

Indonesia before, are still way down below 30% or aro

und about 30% level, which doesn't really

facilitate opening up. Not on a national scale anyway, all over us and so called [inaudible 00:11:39]

openings up and restricted areas that allow for some segregation of international tourists.

Speaker 1:

The higher vaxxed countries, these are the ones who are looking at opening up and are opening up. And

even though China is right up there, it's going to retain, I think a very different policy from

most of the

other countries in terms of being ultra conservative and opening up. And jumping now to Chinese Airline

System, just how that looks, it's obviously developed massively over the last two decades, but just

putting it in comparison today, as of to

day's date with the US airline system, it's quite an interesting

comparison as you'll see. Inevitably, the US airline fleet is more than twice as large as China's, and even

those bars on a different scale, the numbers tell you the difference in service, th

ere are eight and a half

thousand aircraft in the US as of today, whereas that number is halved in China as of today, just under

4,000, compared with eight and a half thousand in the US.

Sp

eaker 1:

That said, the [inaudible 00:12:57] profile between the two countries is very, very different. These pie

charts show the darker red orange colour rust colour is narrow body jets and the gold orange colour is

wide body jets. So as you can see from

that, the great majority of Chinese aircraft is narrow body jets.

Whereas in the us, you've got to less than half of the market is narrow bodies. And it does, as you speak

a lot to the nature of those markets and how they've evolved and what stage they're

at at the moment,

it also says a lot about the size of the number or the number of large cities there are in China compared

with the US. Meanwhile, average ages, because the Chinese market to some extent is considerably

younger.

Speaker 1:

There's a smaller range of aircraft types, and a much lower average aircraft age of well under 10 years

average, that's dragged down a little bit by some ancient [inaudible 00:14:08] and evolutions, which

really are not a large part of the market anymore. But the low level is reflected very much in the large

preponderance of narrow body and wide body jets which are all pretty recent. Contrast that with the

US, where the average age is twice that with a much

higher proliferation of older aircraft talking back

there A 300s, some 707s, DC 10s, and 717s, [inaudible 00:14:45] number of 717s, but also that much

larger fleet of smaller aircrafts, two aircrafts, which drags the average age down. But that is somethin

g

that now is becoming very, very important when we think in terms of environmental impact and the

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mission that's because older aircraft obviously are much more environmentally unfriendly than newer

aircraft. In terms of market dominance, the US for majors

account for around about 80% of total

domestic seats as of today, and that varies a bit, but that's pretty much the standard.

Speaker 1:

Contrast that with China, where the four biggest ai

rlines account for only about 60% of total capacity,

and there's a wider range of fairly significant airline capacity at present. That said, there is a

considerable number of cross shareholdings with smaller airlines from the big three in particular. So it

's

not quite as black and white as that, but even so, there's no clear definition of a big four in China as

there is in the US, which arguably leads to a lot more competition. And it's something that's caused

Beijing some concern over the years in terms of

getting a balanced and profitable industry in place.

Today interestingly, the international capacity is considerably larger despite the fact domestic capacities

are very similar. US international, this is going back to 2019, so we've got a decent comparis

on.

Speaker 1:

But in 2019, China international was about 50% smaller than the US. And again, that said, that has to be

qualified by the fact that in a lot of ways, the US has an extended d

omestic market right into the

Southern America, Latin America, and the Caribbean where the US Canada is a very dominant. So then

that does tend to occupy something like almost as large as the difference between China international

and us international. The

n again, qualifying that about half of China's international operations is into the

Northeastern part of Asia. By definition, all of that very much short all which is an interesting contrast

too, with a lot of the US international operations. So just looki

ng at that contrast, the earlier stage of

development of China's market is clearly a factor in that because it's expanded very fast, whereas the US

has it's grown, but by Chinese standards is relatively stagnant, which means you've been importing new

aircr

aft.

Speaker 1:

There is a major impact from high speed rail, which is developed over the last decade. And I'll talk a bit

more about that later on. But that has occupied a lot of the space

that perhaps would be occupied by

shorter haul aircraft, smaller aircraft in as that market has developed. As I said before, demographically,

because China has six cities with over 10 million residents, and over 100 cities with more than 1 million

residen

ts. So, these are not villages that are being served, these are small cities, live cities, rather.

Whereas the US only has 10 cities with over 1 million residents and three or four with as many as, with

over five anyway.

Speaker 1:

So there's quite a difference in demographics, which we tend to suggest you do have a different aircraft

profile. What happens next with that? Well, you would expect, perhaps that you'll have more regional

aircraft coming into the market smaller markets evolve, but at the same time, high speed rail as I'll show

you the numbers and that in the moment, high speed rail is going to occupy a lot of that space with the

anticipated expansion of the rail network, an

d perhaps considered to be much more environmentally

friendly. Over the next 15 years, China plans to effectively to double the high speed rail network. And as

you can see there, it's pretty comprehensive that it caused China Southern a lot of pain initial

ly. And it

now accounts for a considerable amount of the Shanghai Beijing market, which is one of the bigger

ones.

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Speaker 1:

So you can argue quite easily that China's airline fleet would'

ve been much more had it not been for the

high speed rail, which between long and medium and short haul, accounted for over 2 billion trips in last

year alone. And again, rail has probably occupied some of the space that the airlines might have... Some

of

the passengers that the airlines might have carried during COVID, as airline travel was seen, to some

extent, has been less healthfully safe. Some other really interesting factors that look likely to change

China's role international in the market. Demogra

phics is something I mentioned last month, but based

on the recent census, which showed that the birth rate had declined over the last two years to 1.3 per

household on the basis that you need two per household, just to maintain a stable population that

im

plies very steeply, that China's population can decrease significantly.

Speaker 1:

And even if it stays at that 1.3 per household level, China's population will decrease by 750 million

peop

le by 2065, if, and the trend suggests this, if it falls to one, and that's no out of the question,

population will reduce by that amount by 2050. 750 million less Chinese travelling in 2050, or being

available to travel makes a massive difference to the w

hole transport system, and to all of those

countries that do tend to rely on or have anticipated the growth coming out of China. Looking at it from

the inside out, we see that the population will actually be in decline within the next three or four years.

[inaudible 00:22:03] trying to deal with this? Well, there are some obvious things like promoting high

birth rates and raising retirement age because it's the ageing population obviously harms economic

development, but promoting birth rates is complex beca

use there seems to be an inverse correlation

between the price of housing residents, and the number of the size as a families.

Speaker 1:

As housing becomes more expensive, Chinese are much

more reluctant to have more children because

of the cost. So there's not a lot of room to move there. And whereas most many countries will deal with

ageing populations by announcing immigration, some exceptions, particularly North Asia, this doesn't

seem

to be on the horizon for Beijing just at this time anyway. That may change if things become

dramatic. There's also been in place some, pardon my poor Chinese, but the [inaudible 00:23:02]

system, which has essentially required agricultural workers to stay

in their regions and continue to be

productive agriculturally, but keeping them from moving into the mostly East Coast wealthier cities

where the high paid jobs are. Changing that policy and allowing more movement to the East Coast

would help to stimulate

economic growth and improve education standards and so forth. But it doesn't

necessarily change the population. I mean, probably in fact quite the reverse based on what I was just

saying.

S

peaker 1:

But the outcome, meanwhile, even by 2030, we're going to start to see a significant decline in working

age citizens as the population ages. And that necessarily has a considerable impact in international

travel numbers. So I mentioned before, it'

s not the only North Asian country to shrink, South Korea has

been reducing for several years, and in 2020, its population was down by 11%. Taiwan, likewise, and

contracting, this is the interesting part of it in many ways, years before the official models

had

predicted. So going back to China in recently as 2019, the IMF had projected Chinese birth rates, but

something like 1.7. In a mere two years, certainly affected by COVID to some extent. Within a mere two

years, that number had actually, according to

the census last year, this year, or last year published this

year, was down to 1.3. So it's that rapid decline it's really quite concerning. Japan's population started

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declining 10 years ago. And last year, the lowest number of children was born since [ina

udible 00:25:03]

began over 140 years ago, 120 years ago.

Speaker 1:

Going back to the airline industry, Beijing's policy previously was to encourage its airlines to go

internationally were

things like [inaudible 00:25:20], which were part of that. But essentially, it was a

matter of flying internationally, expanding the wings of China to use the phrase. And that did stimulate a

lot of international growth. But at the same time, it was mostl

y costly for the airlines. It tended not, for

the Chinese carriers anyway, it tended not to be profitable. They tended to attract the outbound

market, which was mostly tourism, which was low yielding. And they couldn't really attract much in

terms of inbou

nd, which tended to have a higher profile higher of premium travellers including business

travellers. As a result of that, it may well be that given these losses, and these are pretty steep losses.

You can see Air China as the pale blue bar there was into

very significant losses earlier this year. And still

these haven't changed much.

Speaker 1:

The only airlines really that have stayed on or around the mark have been the domestic low cross

carriers, Spring, which is the largest local carrier and [inaudible 00:26:31], and that perhaps does have

some sort of reflection on where their futures might be. But with those losses that have been suffered

by the major Chinese carriers over the last 18

months to two years, there's a quite a possibility or even a

probability that Beijing will be relooking at the nature of its go forth policy. And that is a considerable

concern to those countries that do rely on Chinese international travel. One of the thi

ngs that China has

done while its doors were so tightly closed with heavy quarantine requirements and so forth is to

provide substitute international operations for its citizens. So [inaudible 00:27:24] has been established

as a specific, to some extent, a

n experiment, but it's always been a holiday at Ireland as well as a

business centre, but by creating some very generous provisions for buying so

-

called duty free on the

island.

Speaker 1:

And you can see from the numbers there that these have been quite considerable and in the [inaudible

00:27:49] government's 14th five year plan from the last year, they're anticipating that market, that

duty free market to grow to something around 50 billi

on in the next four years. There is consideration to

other points in China, not necessarily islands, which will also satisfy that the process. So it could, with a

combination of these features, there could really be the opportunity for some renewed attitud

e towards

international aviation policy from the Chinese authorities. Interesting thoughts. So, in conclusion, it may

well be that COVID 19 is providing a watershed for China's international aviation and tourism world, as it

has, of course, for many other

countries and many other airlines. But with that prospect of very, very

lean 2022, we may therefore see that there will be a considerable shift in the way China behaves in

future.

Speaker 1

:

The impact of that being its international significance in the aviation sector being limited. And if that is

due to the financial considerations of the major airlines who've been heavily subsidised, that must be

said over the last few months, is perhaps

something that's going to influence Chinese policy. The

alternative, if there are alternatives like [inaudible 00:29:21] where you can have a substitute

international travel experience that will undoubtedly be leveraged. And then we have the steep

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populati

on decline in the medium to longer term, which will undoubtedly be reflected in its

international travel profile. But as we must, in any consideration of aviation now, as we must look at the

green characteristics of the airline industry, its younger aircra

ft fleet bear in mind that its fleet is less

than half as old as the US fleet, and the high speed rail, which tends to be much greener, China's least air

and surface travel profile should actually be much, much more green than most other countries.

Speaker 1:

So, hopefully that short snapshot of China's outlook will be of some interest and certainly is going to be

very interesting to watch what happens over the coming 12 months in 2022. Than

k you for being with

me, and look forward to any comments you might have on there.

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