The future of China's international market

Transcript

Karen Walker:Hello again, everybody, and thank you for staying with us to the end. It's going to be worth it, I absolutely promise you. And remember, there's a drink at the end of this. So I'm absolutely delighted to be joined as we talk a bit more in depth about China's international market.

Vivian Cheung:Hello.

Karen Walker:couple of real experts here. I'm joined by Vivian Cheung, COO at Hong Kong International Airport, and Paul Carroll, Chief Revenue and Network Officer at AirAsia Group. So we have fans as well in the audience. That's Vivian's fan club, not mine. Okay, and so just briefly here, you know, it's clear how important that market is, the China market. We've already heard so many of the panelists touch on this, and, you know, there's nobody in this room that doesn't know what happened there specifically within the pandemic, that it's, you know, a very, very big, important market that essentially completely stopped and stopped for longer than it did in other areas. So that was a big impact. Paul, I'm going to start with you. Like I said, We've got this fantastic perspective now from an airport and an airline. Paul, can you just talk to us a little bit about the importance of that market to AirAsia? Sure.

Paul Carroll:First of all, thanks for having us. Great to be here. Look, from the AirAsia perspective, pre-COVID, we were carrying about 7 million passengers annually in and out of China, represented 15% of our ASKs and about 22% of our global revenue. So you can imagine one-fifth of our business is, is in China. So massively important market, and we are committed to recovering in that market. We operated 21 destinations in mainland China pre-COVID, and that represented about 60 routes across the business. So big market for us, some headwinds, but we are confident they're short-term. And we're looking forward to continuing to invest in that market and recovering it over the next couple of months and years.

Karen Walker:So yeah, the important thing you're noting there, it's a big market, not just in the numbers of people, but in the revenue as well.

Paul Carroll:Yes, absolutely. And it's, look, it's not just that point-to-point traffic AirAsia relies on. So you can imagine 60 routes, 21 destinations, And it's not just coming into our hubs, that's going onwards. It's coming in via Bangkok, via KL, and onwards to our network of over 100 destinations. So it's that connectivity that supports the wider network.

Karen Walker:Vivian, Hong Kong Airport. As I was sort of thinking about coming to this panel, I have to say that one thing that suddenly occurred to me, I can't believe 25 years ago. I mean, where's that time gone? But 25 years ago, actually 26 years ago, I stood on a— what was still a construction site, wearing the hard hat, helmet, and everything like that. And people said the new airport would be opening next year, and everybody was shaking their heads. And of course, yes, it did. Can't believe that it's a quarter of a century ago, right? And a lot has happened in Hong Kong.

Vivian Cheung:Yeah.

Karen Walker:And at the airport. to Cathay Pacific in that time. Right now, I think you're at a very exciting point in that you've got these announcements of this big investment and this big vision that really looks at Hong Kong Airport as a center of a hub for that Greater Bay Area. Talk a little bit about that, please.

Vivian Cheung:Yes, okay. Paul just mentioned about their big market in mainland China. I think that in addition to mainland China, Asia also has have a large operation into Hong Kong. Hong Kong, sitting very close to the southern part of mainland, we greatly benefit from the growing market in mainland. Mainland, very close to Hong Kong, we call it GBA, Greater Bay Area. 87 million people live there, where Hong Kong is only 7 million. Now, 7 million people, although Hong Kong only have 7 million people, Back in 2019, before pandemic, we have annually, we have 73 million passengers and 5 million tons of cargo. Cargo have been continued to be number one in the world. We attract quite a lot of airline operate out of Hong Kong. Not only that, it's a good hub in that part of the world. Also, it can carry for each airline, for each aircraft, not only full loaded with passenger, Cargo is additional revenue out of Hong Kong. Of course, that's one attraction to the airline. You talk about our big plan, but back in 2019, our biggest challenge was capacity. A lot of airlines want to come to Hong Kong, but we don't have slots at all. That's why we invest quite a lot to build another runway. That will add another 50% capacity. To that, back to 2019, or to current capacity. Ultimately, we'll be able to run 120 million passengers and 1,000 million tons of cargo. That's quite a lot of capacity. Right now, after pandemic, our challenge is how to recover and also continue to grow. Right now, we are at a point that we grow back already 65% to 75%. By end of this year, we see about another 80%, and end of next year, 100%. We see 100% will come back. Definitely, mainland— this morning, we heard about a lot about mainland market coming back much slower. 25% of all our flights connect to mainland. 75% of our flights connect to rest of the world. So bringing mainland people and cargo through us to the world is quite an important connection. So we eagerly to see that mainland to come back, you know, as rest of the world as soon as possible. That actually also affect our business.

Karen Walker:And some of the interesting aspects of that is that it's really a multi-transport vision, correct? You know, where they— where you're looking to Not just think of the planes as a connector and how you transit cargo and people through that, but looking at ferries, etc.?

Vivian Cheung:Yes, what we call a multi-model for transportation. It's really port city next to us that we have been always putting our mind to help our airlines to expand their markets. 7 million people definitely is not enough for port, But then, because we are so nearby to the GBA, Greater Bay Area, just a river away, so we've been using ferry and also bridge to bring people or cargo into Hong Kong without— land into Hong Kong without going through the formality on immigration and border control. For example, we have 9 ports from GBA that they can travel from 30 minutes 90 minutes, or it's baggage already checking in upstream ports. You don't need to see your baggage until you arrive Malaysia, KL, or England. That's to the passenger that's already arrived at the airport. Now with the Long Bridge, Hong Kong-Macau-Zhuhai Bridge completed, we have the bonded bus to take people from the West GBA into our airport without landing Hong Kong. In addition, we have just started another project, do the similar for the cargo. We have identified a piece of land in Dongguan. Dongguan is a logistic— it's a big city that famous in logistics, gathering all the goods to Dongguan. We build a Dongguan Logistics Park. We receive goods and package goods, secure the goods, secure screening, and go through customer everything and ship them to the ferry and come to our airside. That actually saved the logistics at least 1/3 of the cost and 1/3 of the time. That really benefited our airline and the shippers. We will continue to do that to help our airline to gain more market and gain more revenue and to save cost. Hong Kong is an expensive place to do business, especially hiring people, but we're trying to improve all processes and we invest some logistics to reduce airlines' effort.

Karen Walker:It's a grand vision that's air, land, sea, people, and packages. Yes, that all-encompassing. Very exciting. Paul, again, from the airline perspective, as you said, you know, you've, you've, you've talked about how, how important China is. What we've also heard a lot of people say is, as the, as the conference day has, has progressed, is that, you know, what they're now, you know, there's a lot of focus now on, they, they needed to look at other markets, so they were like looking at it, you know, India, Vietnam, etc. Where do you see that play out as a balance in terms of where you're, you know, as you're bringing back the China market, but there's also these other growing markets? Where's the balance on that when you're developing your network?

Paul Carroll:Yeah, so I look, when borders really reopened in China, we took a very bullish view in terms of capacity deployment. Initially, that demand was very, very strong, very high-yielding demand. Obviously, that's an industry perspective I think you've heard. One thing we noticed during the buildup phase on that capacity recovery into China, we had a very, very strong July and August. We built up a capacity base versus pre-COVID about 80%. So we were, we were quite confident, you know, and we were seeing very resilient demand, 85% load factors, the yield environment was high. But then we saw that fall off pretty aggressively post the China holiday period. We've had to moderate down, and I think that's what various members across panels have said this morning. So I think what we're observing is the peaks are very peak, but the troughs, as we would determine them, seem to have become weaker. Our belief is a lot of that demand is traveling locally, domestically, and it's staying closer to home. And we've had to moderate down. We have other, you know, we have other priorities in other markets. But we're hoping that this is a short-term friction. I think panelists did not mention this this morning. There is still some friction in terms of outbound travel. I think Thailand have recently taken a view of opening up visa-free for mainland China. To be honest, we have not seen demand go gangbusters. We were expecting to see a surge, has not happened, which leads me to believe that there's other friction at play. You know, the economy, people are still reluctant to travel outside of peaks. And I still think there's some friction on passports and other factors as well. So we've had to adapt. We've had to reallocate capacity, moderate down our plans. But we're constantly keeping that under review. Like, our expectation is come Chinese New Year, we're going to see another peak and we're going to have to adapt to that. And we'll see, we will see after that. We're having to manage the business in a 3 to 6 month cycle, and that's just the reality. The other thing we've noticed structurally, FIT is extremely resilient, that segment, but a real, real softening of group's business. You know, the group segment has really weakened, and that's something I think structurally may have changed forever. I don't know how many of these major travel agencies have managed to survive COVID, but we're seeing, you know, routes that were very strong pre-COVID really, really soft on the groups business side. We've had to adapt, we've had to work with, you know, OTAs who seem to have taken the share in China, but I think, you know, we are mindful that this, this play may be short-term, and once we see that demand coming back, we'll be ready to, uh, we'll be ready to capture that.

Karen Walker:So is the majority of, of that, the demand that you are seeing sort of, um, going out and into China, is the majority of that, um, leisure and family and friends, etc.?

Paul Carroll:Predominantly, um, yes, um, and it's, it's predominantly inbound demand. So it's about 70% inbound for us in terms of our business from China.

Karen Walker:Yeah, great. And therefore that may also speak a little bit to, you know, an economic situation as well, you know, but people sort of like maybe thinking, you know, it's discretionary. Do I need to spend there? That's still an area to watch?

Paul Carroll:Yeah, I mean, look, that's correct. I think if you look at the, you know, the the domestic recovery in China. I think for this winter schedule period, domestic capacity in China will be 35% above pre-COVID. Having been there recently and looking at airfares in that country, I think the incentive for the Chinese carriers to deploy capacity into this region and beyond at the moment is low because the demand domestically is so strong. I think that's also having a factor in terms of the recovery. I think aircraft is still limited. With yields being so strong locally, I think there's a lack of incentive to deploy that capacity into international markets.

Karen Walker:I agree. That makes sense to you?

Vivian Cheung:I do want to add on that. We do associate with mainland carriers a lot. According to them, profitable still domestically for them. And we see that they redeploy their aircraft in the domestic market rather than taking the international as priority. Yeah, I do agree with Paul.

Karen Walker:From the airport perspective as well, you know, with this sort of long gap, etc., and now we're seeing this movement, are you seeing changes in in what the passenger wants from their airport experience and what their expectations are?

Vivian Cheung:Yes, certainly. I think that, as Paul also mentioned, that we see that less group tour and more FIT, and passengers get much more smarter, and they like to self-help, and they go around the airport themselves. It doesn't need tour guides to guide them around. Certainly, we are investing more on this kind of facility to cater for a smarter traveler. We do see that right now, a K-shaped type of passenger behavior. One is that the premium passengers are asking for even more of premium services, and the lower-end market, self-help market, is also growing. We put a lot of investment on this K-shaped type of services and a lot of premium, high-class, high-end type of service or shops, and also a lot of self-help to make the airport even more efficient. They can come and go faster, and they don't want to bother too much to stay in the airports. That will actually facilitate quite a lot of the low-cost carrier, and their passengers to have a very quick turnaround time in our airports. Certainly, we'll see a change. Even with mainland travelers' behavior, we'll also see the change. I think that right now, majority of the travelers in mainland prefer to stay domestically. But people with— there's still a large group of people, looking at the population mainland, just a small percentage of people want to travel abroad. That's already a large amount of people. Those people are usually highly educated, and then they are willing to spend more, and they're willing to travel and try new places they had never been. These are all the areas we're trying to explore, especially southern part of the mainland. They don't need to go through their airport. They can come to—

Karen Walker:Hainan.

Vivian Cheung:Ferry and bridge and use our airport to go around. We certainly think that's an opportunity. You see that either the foreign carrier or China carrier, they have not stopped as many frequency as before, but they still— I think the demand's there. That's why there's a lot of leakage you will see going through Hong Kong, and that's something we're going to focus on to capture this leakage.

Karen Walker:That's interesting. So technology is going to be very much behind that way of connecting, that is going to be a fundamental part of that.

Vivian Cheung:Yes, I'm glad that in the past 3 years during the pandemic, Hong Kong airports have not stopped investing. We see many airport airlines, because the financial situation Pretty much quite a lot of projects on hold. We did not. We continue to push forward the project we planned and also more. You will see that if you have opportunity to go to Hong Kong, we're still in a construction site, not just for the third runway, the system. We also launched many projects, for example, Sky City, and you probably also heard that right now our slogan is to turn the city airport to become an airport city. Within that airport city theme, we are putting a shopping mall, which is going to be the largest in Hong Kong, and there are also quite a lot of technology investment to make it even more efficient. For example, the 3 biggest areas we invest, one is using biometrics to help passengers to go through the entire journey easily. They can go through from checking to security, immigration, to boarding, all using just face. That reduced quite a lot of airlines' resource. Also, second thing is on the operation, we're using a lot of autonomous vehicle. We're probably one of the airport very much willing to invest on the autonomous vehicle. Our vision is that within 5 years, everything inside the airfield, will be autonomous. Less dependency on drivers and on manpower, that again reduces everyone's requirement on resource. The third thing is actually artificial intelligence that helps us to build a control center. We have tracking on all the vehicles with the smart apron, digital apron, using all those data to help us to analyze where are the delays, where are the areas we can further improve. So these are the 3 big areas that we work on that really help us to move further.

Karen Walker:So it leaves people with less time to be stressed about, how am I going to get from here to there and everything.

Vivian Cheung:Then they could shop more.

Karen Walker:I was just going to say that, and more time to enjoy and shop and Exactly, that's right. So as we have an airline and an airport person here, I would also like to ask you about that collaboration, if you like, that partnership. It's— we've heard, we heard a lot about that during the pandemic. It's not unique to, you know, China or Asia. We heard a lot about that. And then, you know, getting through the pandemic, it was essential that everybody worked together, and I think you did see a lot of that. And then not so much in this region, I don't think, but certainly I've heard it from like Europe and other places, a lot of resentment about airport fees being massively hiked, etc., as they're trying to recoup the money, etc. So people have been saying, well, where did the collaboration— I'd love to just hear a little bit from both of you about, you know, the airport airline. Paul?

Paul Carroll:Yeah, I mean, look, if I can talk to the Hong Kong I mean, the team in Hong Kong have been fantastic partners for us coming out of COVID I mean, initially, once things restarted, there was a little bit of friction there around ground handling, but we worked together collaboratively to work through those constraints. And now we've really grown together. We've restored pretty much 90% of our pre-pandemic capacity into Hong Kong. We've launched a new Penang service and we're putting widebody into Hong Kong as well. So the team have supported us with slots. You know, there has been new slot opportunities that have become available coming out of COVID And, you know, through that partnership, we've been enabled to grow our capacity base. So we're expecting by the end of the year, we'll have fully restored our capacity as a business into China. into Hong Kong. But it's not just Hong Kong. I think generally airports around the region have been supportive. We as an airline also understand costs are increasing, but I think it's finding kind of ways, you know, not the unique ways, but, you know, how we can work together, you know, through technology, you know, to drive down those costs together, you know, because, you know, we coexist and we rely on each other. So, you know, we're appreciative not just to Hong Kong, but—

Vivian Cheung:Thank you.

Paul Carroll:Vivian?

Vivian Cheung:I think that there's many things, many opportunities we can work together. I just want to probably focus on 3 areas. One is how to help each other to save cost and generate more revenue. In terms of pandemic, we came up with funds to help, and during recovery, we have funds to We encourage that airlines who are willing to resume earlier will have some discount, and also that we're trying to reduce process to reduce the airline's cost. In terms of manpower, when we just started, we had a hard time to recruit enough ground handlers. We have 3 ground handlers. They all have manpower issue. Finally, we got help from our government. and allow us to import the labor mainly from mainland. That greatly helped reduce the issue on manpower. We are probably one of the only few airports that have not increased any charges before pandemic, post-pandemic, or now. Second area I see, data sharing or technology sharing. We open up all our data. We share with our airline. We also ask airline to share data with us. For example, our base carrier that we have a system linkage together and share ground data or air data so they can make their operation even more efficient. The third area we can cooperate is the market. We don't see that we're just a tenant. We actually see we're a partner with airline. We need to help them to grow their markets, not only on ground and also on air. That's why we invest quite a lot to make sure the connectivity into the big market, 87 million people, are most efficient, so airlines can recruit their passengers from there. We also have fund to help airlines to do their marketing. There's many area we should be working together.

Karen Walker:Mm-hmm.

Vivian Cheung:Rather than sit on a different side of the table, because it's a win-win. It's a win-win, definitely.

Karen Walker:We are pretty close to ending here, but Paul, can I just— you sound optimistic about this China. We've heard some of the concerns, we know what's going on, but you still sound very optimistic. Is that a fair summary?

Paul Carroll:Look, the population is 1.5 billion. Of course, there's going to be friction in the short term, but it's just too big a market not to recover. We have India one side, China one side, and Southeast Asia. So I think we've got huge opportunity to recover. When that will come, when the full recovery will come, my own view, I think it's probably into the second half of next year, but it will come back. It will definitely come back, and we will hopefully be ready to capture that.

Karen Walker:I think that's a really good point of just the sheer size of it. Yes, we've heard, you know, quite rightly we're hearing, you know, there's these other big markets now that, you know, we're paying attention to, but that doesn't take away from the sheer scale of the China market.

Paul Carroll:Yeah, and look, just the other point I'd like to make, a lot of geopolitical, you know, issues in Europe, in the Middle East. I think that provides Southeast Asia with a big opportunity. I think the Chinese will look to travel closer to home. That's where my positivity comes from. I think we have to be optimistic, right? We've had 3 years of hell, so it's time to be optimistic.

Karen Walker:Clearly, Vivian, again, I mean, this is, like I said at the start, this is a very exciting time when you're looking at big numbers. in terms of what's happening.

Vivian Cheung:Certainly, with BUA, much more capacity after the 3-runway work completed, I really seen a bright future. Looking at current situation, our situation, it's actually we don't have enough capacity in terms of air carrier and/or ground. It's not about demand. We have a lot of demand waiting. When I see our airline operating Out of Hong Kong, the average load factor is 85%, 90-something, some routes like 98%. It's just not enough aircraft or crew. It's not about demand. When I see that all those crew and airlines come back, we will come back 100%. Right now, because some of the airlines could not come back with their full capacity, we already see many replacing airlines there. From middle of this year to now, about, I mean, March till now, 6 months' time, there's already 12 new airlines joined because before pandemic, we just don't have slots to entertain them. I definitely see that demand is there. It's just that see how we're going to facilitate that demand. Excellent.

Karen Walker:Well, I have to say that it's a really nice end to today's conference session on such a positive high notes. Certainly the industry in general deserves that, but I think in this particular area and case at market, I think this is, this is great, a great setup for everybody to be enjoying the cocktails and the dinner this evening.

Vivian Cheung:So thank you.

Karen Walker:Okay, thank you. A big hand for our panelists.

Copyright policy: All transcripts on this site are the copyright of CAPA - Centre for Aviation. Our reproduction policy is as follows: you may quote up to 400 words of any transcript on the condition that you attribute the transcript to CAPA - Centre for Aviation and link to the original video page. All other use is prohibited. While we aim for 100% accuracy in the transcript, there may be some minor transcribing errors.