As the first hit by COVID-19, China is also a step ahead of Europe and the United States in the recovery. In this article, we will analyse the recovery of the Chinese aviation market, compare it to Europe and the United States, and investigate the changes since our previous analysis in April 2020.
Since early March, China has recorded fewer than 5,000 new COVID-19 cases, allowing a gradual restart of the aviation industry, and domestic flights have recovered to a level similar to the end of 2019. However international traffic is still very suppressed, and despite an easing of restrictions on the 17 September, with some foreign nationals allowed entry, international traffic is just a fifth of what it was at the start of the year. As other countries follow China in the gradual recovery from the pandemic, what can we learn from the evolution of the Chinese aviation market?
Using aircraft tracking data from Flightradar24, we found three broad phases to the recovery so far:
- Following the steep decline in traffic to just 20% of previous levels, the first phase of the recovery saw a sharp up-tick in domestic flights back to 40% as essential connectivity was re-established. However, international traffic remained suppressed and ongoing travel restrictions greatly limited demand, resulting in no recovery beyond this level.
- Then on the 8th April the quarantine in Wuhan was lifted, and the number of flights started to gradually increase as people became able to travel again. The domestic traffic recovered at a steady pace of ~10% per month, with the LCCs recovering astonishingly quickly – by May, Spring (the largest Chinese LCC) was already flying over 100% of flights on a Year-on-Year (YoY) comparison. International traffic made a small resurgence, particularly leading up to the labour day celebrations at the start of May. Government intervention was also put in place to support international connectivity through this period. This resurgence ended as Beijing saw a COVID-19 flare-up in mid-June, and a number of travel restrictions were put in place.
- In the third phase, beginning in July, the domestic flights began to increase again, perhaps driven by the relaxation of the Beijing restrictions and the start of the summer school holidays. Domestic flights increased by 36% from July 1st to August 31st, while international flights remained at the same (low) level.
Figure 1: China International and Domestic Change in daily flights, Index 100: 1st January 2020 flights
While flights have rapidly recovered, the recovery of load factors is less clear, and likely somewhat trailing the resumption of flights. For example, while the number of flights had recovered to 105% by the end of August (compared to last year), the CAAC reported just 45.1 million domestic passengers in the same month, representing a year-on-year decrease of 16%.
This recovery has also highlighted differences between the airline operating models, with LCC flights both decreasing less than full-service carriers (FSC) and recovering faster. The LCC recovery is led by Spring airlines, which the end of August was flying more than 150% compared to last year, facilitated by pulling aircraft from international routes back into the domestic market. Spring Airlines is followed by Beijing Capital and Lucky Air, operating 106% and 97% of flights respectively.
While the FSCs have also seen a consistent recovery, reaching 100% by the end of August, this has trailed the LCCs. Interestingly, this gap has widened most during decreases in traffic, suggesting the FSCs are faster to reduce schedules than LCCs. This could be due to their higher requirement for break-even revenues, or the greater flexibility LCCs have to redeploy aircraft across a point-to-point network compared to FSCs’ hub-and-spoke networks.
Figure 2: Change in domestic flights 2020 compare to 2019 for the top 3 Chinese full-service carriers (China Southern, China Eastern, Air China) and top three low-cost carriers (Spring Airlines, Lucky Air and Beijing Capital)
On the international market, the Chinese government has taken a direct – and restrictive – role managing routes to foreign countries. From 12 March each Chinese airline has only been allowed to operate 1 weekly flight to each foreign country, and each foreign airline only allowed one route to China with no more than one weekly flight with a capped load factor of 75%. From 28 March, China suspended the entry of most foreign nationals.
Since June, China eased the restrictions on international passenger flights under the “reward and circuit breaker” policy. This specifies that if 5 passengers test positive for Covid-19 on a route, airlines must suspend flights on this route for a week, and for four weeks if the number of positive tests exceeds 10. As a reward, if no passengers test positive on a route for three consecutive weeks, carriers are allowed to increase the number of international flights to 2 per week. This policy resulted in the suspension of 31 flights and cancelation of 52 inbound flights by the Chinese administration, from June to August.
Additionally, Chinese airports are transforming their terminal infrastructure and updating the passenger journey with new processes. Beijing Capital International Airport restored direct international flights to Beijing on September 3rd after remodelling the T3-D terminal and optimizing the passenger handling procedures through a health declaration card completion, epidemiological investigation and sample collection, border formalities, and baggage collection.
Comparing China and Europe
While the number of recorded daily cases in China has fallen close to zero at the end of February, the number of cases around the world increased.
In Europe, the EU imposed a travel ban on the 16 March, from which the number of flights decreased significantly. In contrast to China where domestic flights stayed below 20% for 4 days compared to its 1 Jan 2020 traffic, EU domestic flights stayed below 20% for more than 3 months, between the 1 April and 6 July, with a full month below 6%. This is mainly due to the lockdown and the border closure between EU Member States within the Schengen Area and the slow reduction of new cases in those countries.
Figure 3: Daily flights 2020 and Confirmed cases of Covid-19 in China and Europe
After staying below 20% for 3 months, EU international flights grew by 10 points since the end of June and is now around 30% compare to 1 January 2020 traffic. Meanwhile, the number of Chinese international flights has remained close to 20% since the end of June.
At the end of August, China domestic flights had recovered to 108% compared to the start of the year. In Europe, the recovery of domestic traffic has started and reached 50%, but the outlook is uncertain, as the number of Covid-19 cases has begun to increase again over the past few weeks— reaching record numbers of new daily cases in early September.
After a severe fall in the number of flights with a majority of aircraft grounded in April and May, the Intra-European recovery is led by LCCs which represent a year-on-year change in flights of -31% in August, while FSCs represent -56%.
The fast recovery of Wizz Air, reaching 86% of its 2019 flights traffic in August, is based on their explicit strategy to expand their market share. After being both close to 0% from April to June, Ryanair and easyJet also reached 77% and 53% respectively in August.
Figure 4: Change in monthly Intra-EU flights 2020 compare to 2019 for the top 3 European full-service carriers Group (Lufthansa, IAG, Air France-KLM) and top three low-cost carriers (Ryanair, easyJet and Wizz Air)
Comparing China and the United States
The decline in traffic in the US started in mid-March, as much of the travel between Europe and the US was suspended. Combined with a rapid rise in domestic COVID-19 cases, the number of US flights declined to less than a third compared to the start of the year. As the Chinese market had already started to recover, this meant that by 11 April China became the largest aviation market in the world, several years earlier than any had anticipated.
Figure 5: Daily flights 2020 and Confirmed cases of Covid-19 in China and the United States
For 2 months, from 12 April to 8 June, US domestic flight traffic remained below 40% and international flights represented 20% of 1st January 2020 flights.
Despite the increase of new daily Covid-19 cases, the United States domestic traffic has seen an upswing beginning in July with a 20% capacity increase week on week, driven up by multiple factors, including the 4th of July holiday, the reopening of state economies and the lifting of lockdown orders.
The astounding recovery of flights in China is a reassurance that we may see a relatively rapid recovery in other parts of the world, once the pandemic is more controlled. If we apply the rate of recovery in China to other regions, and imagine the pandemic disappeared overnight, then we might expect domestic traffic next summer to be close to that last year. More pragmatically however, this will depend on the effectiveness of governments to tackle the virus, their willingness to re-open borders, and passengers’ demand to fly. The severity of the economic impact may further delay the recovery.
Analyses suggest that at least part of the rapid recovery in China is due to extreme ticket discounts, with flights sold at just 10%-20% of their usual prices. With their lower cost base and the example set by Chinese traffic, it seems highly likely that LCCs in Europe and the US will seize higher market shares than before the pandemic. The unusual availability of premium airport slots may also enable major structural shifts in the market, as airports look to attract any airlines that will bring in passengers. One example of this might be Gatwick – with BA and Virgin discussing consolidation of the operations into Heathrow, it may allow LCCs that have previously had to limit their LGW operations, such as Wizz, to enter the market. Flights from premium airports can earn significant profits, and in usual times, present a significant barrier to entry with airlines paying astounding prices for slot rights – for example, Flybe sold a series of LGW slots for £4.5m last year, and Air New Zealand sold a single LHR slot pair for $27m earlier this year.
In the longer term, the pandemic has accelerated the Chinese aviation market’s long expected ascendance as the largest aviation market in the world. With a strong domestic market to support their international recovery, and a third of the Commercial Air Transport world fleet forecasted to be in the Asia-Pacific region from 2021, this is likely to represent a permanent shift.