Flying Low: Economic Impacts of the Covid-19 Crisis on China’s Domestic Aviation Market

The coronavirus pandemic continues to hamper the travel industry all over the world. The aviation industry in particular is grappling with the economic fallout from the sharp drop in demand after many countries reverted to stringent containment measures to limit the spread of the virus. Although expected to eventually become the world’s largest domestic aviation market by as early as 2028 (displacing the U.S.), China’s air travel industry continues on an economic nosedive. Recent reports have touted how it is recovering much faster than other domestic aviation markets, however, these numbers gloss over the fact that the pandemic is in no way over. Moreover, China’s aviation industry is far from making a speedy recovery.

Apart from slowly rebounding passenger numbers, the pandemic has shed light on problems than run far deeper than mere economic profit or airplanes returning to the skies. China’s three largest airlines – Air China, China Eastern and China Southern – were not making profit even before the coronavirus struck. A flurry of government subsidies has helped weather the initial storm but have yet to instil hope that demand for air travel will similarly increase in the long run.

Pre-Covid Domestic Air Travel

China’s domestic air travel market has been booming, both since the country started opening up economically and as strict market access regulations were gradually phased out to allow for greater competition. Coupled with a rise in disposable household income as well as greater appetite for travelling, this sparked a rapid increase in demand for air travel. Significantly, the commercial air travel market is both fuelled by, and driving, China’s fast-paced economic expansion, further expounding the importance of Chinese domestic air travel.

From a global perspective, U.S. aircraft manufacturer Boeing, in its annual Commercial Market Outlook, projected China’s domestic air travel industry to grow steadily until 2038, eventually becoming the world’s largest domestic aviation market. Apart from increasing passenger numbers, the report highlighted a concomitant need for aircrafts, airport facilities as well as staff and surrounding infrastructure.

In line with this path to turn China into a domestic air travel powerhouse, the government in Beijing rolled out billion-dollar investment plans for new airports, permitting new routes, and spending heavily on surrounding infrastructure projects.

Covid-19’s Impact on Domestic Air Travel

As a result of stringent lockdown measures imposed to curb the spread of the coronavirus, the Chinese aviation market fell by over 80 percent in the first half of the year, ensuing a RMB 74 billion loss in revenues, according to Civil Aviation Administration of China (CAAC) data. The Lunar New Year (or Spring Festival) travel period is usually the busiest travel period in China. This year, the CAAC had anticipated a turnout of around 79 million air passengers for this occasion. However, the civil aviation industry ended up handling 38.39 million passengers, representing a 47.5 percent drop compared to the holiday period in 2019.

The cancellation of several thousand flights, that forced airlines to issue reimbursements to customers, added considerable financial pressure on the sector. In February alone, the industry registered a record loss of 24,59 billion RMB. In the second quarter of the year, the downward trend has continued despite a slight recovery resulting from a relaxing of lockdown measures by the government around May.

In comparison, during the 2003 SARS epidemic the aviation industry managed to return to its pre-crisis level within eight months once the crisis was contained. However, a combination of factors suggest that the Covid-19 will prove more difficult to navigate. Moreover, since 2003 China’s air transport market and civil aviation industry have matured considerably as fleet sizes of major airlines were expanded, therefore, shocks affecting this sector will inevitably have deeper financial and economic impacts now than during the 2003 epidemic.

Finally, while at the beginning of the 2000s the Chinese economy was thriving, the current economic outlook remains bleak, with stalled GDP growth and accumulating financial debt representing a “new normal”. Affected by factors such as increasing downward pressure on the economy and frequent Sino-U.S. trade frictions, the civil aviation’s growth rate has declined significantly. The financial market has also reacted strongly to changes in the civil aviation industry. As a result of the outbreak, airline stock prices have fallen by nearly 25 percent, which is about 21 percent higher than during the SARS crisis.

Implications & Outlook

In an attempt to salvage the struggling aviation industry, China has implemented several measures aiming at deflecting the shock waves of the epidemic on this core sector of its economy. The CAAC rolled out a large-scale bail-out program, mainly aimed at supporting the three state-owned airlines. The package, which includes subsidies as well as reduced operation fees, was set to reinvigorate low demand through financial incentives. Airlines were promised a fixed amount for every passenger and kilometre flown, an amount which would increase to more than double when an airline were to operate a route all by itself.

Furthermore, even before China’s domestic air travel market rebounded slowly by mid-2020, Chinese airlines had been offering low airfares to spur their own recovery. Both private low-cost as well as the three state-owned carriers started offering unlimited travel packages redeemable until the end of the year or started selling individual seats at far below the average market price. For instance in June 2020, China Eastern airlines launched a “fly as you wish” (随心飞, sui xin fei) offer allowing airline customers unlimited flights during weekends for a price of around 3000-3500 RMB. The measures appear to have been effective in enticing consumers to spend on domestic air travels.

However, subsidized air fares or flight passes will only provide temporary relief for China’s domestic aviation market. Current subsidy levels will likely prolong the process of protracted or even declining domestic passenger numbers for the big three airlines, without meaningful reform of their business models. Meanwhile, private low-cost carriers have been able to return to marginal profits despite Covid-19 also wreaking havoc on their existence. Spring Airlines, which operates from its hub in Shanghai, is said to benefit from offering non-subsidized low fares as new data shows it was recovering faster than its state-owned competitors.

In the long run, the launch of new investment projects could be more viable to recover the industry. In that context, China Eastern has recently announced the launch of a new airline to facilitate travels to the city of Hainan, a popular holiday destination which is growing in importance both as a new economic and financial artery for the country. The creation of a free trade zone and the development of the new Hainan port fit in Xi Jinping’s strategy of remodelling Hainan into an alternative free trade hub. This rebalancing is crucial given that the traditional economic and financial centre of Hong Kong, remains in such an uncertain political situation. Incentives such as preferential treatments for individuals and companies that travel or operate in Hainan are to be put in place and the development of new projects and business opportunities around that free trade area will likely be a catalyst for reviving the Chinese aviation and travel industries.