Podcast: Why Asia-Pacific Carriers Are Upbeat Despite China’s Prolonged Closure

Even though China’s borders remain largely closed, the recovery in Southeast Asia is in full swing—that’s the view from airline and airport executives from the region who this week gathered at the Routes Asia event in Vietnam.

Listen in as Routes Editor-in-Chief David Casey, ASM consultant Tony Griffin and Chen Chuanren, ATW’s Southeast Asia and China Editor, share what they’ve been hearing.

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Rush transcript

David Casey:

Hello everyone and thank you for joining us for Window Seat. I'm Routes Editor-In-Chief David Casey. Welcome on board. Today we are recording in the Vietnamese coastal city of Danang, where we're attending the 16th edition of Routes Asia, the route development forum that brings together airlines, airports, and tourism authorities from across the region. I'm joined by my colleagues, Tony Griffin, senior vice president at Aviation Consultancy, ASM, and Chen Chuanren, the Southeast Asia and China editor at Transport World. So welcome.

Given that we're here in Vietnam, it seems appropriate to discuss how the aviation market is recovering in the Asia Pacific region. Although the region as a whole continues to lag the global rate of recovery from the pandemic, there have been more positive signs in recent months. As vaccination rates are high, the progressive relaxation of border restrictions has unleashed pent up demand with international passenger numbers really starting to pick up and forward booking patterns looking much healthier. However, with China still pursuing a zero-COVID policy, Beijing's approach will continue to hold back the full recovery of traffic in the region.

Tony, would you agree with that assessment? How are things looking at the moment in the region? We have seen some improvement, obviously some countries are opening up, like Japan now, starting to welcome back international visitors. How is the recovery looking from your perspective?

Tony Griffin:

Hi, David. I think for me, the two key things I've picked up, so I've talked to a lot of airlines over the past two days here at Routes Asia, and the two takeaways for me are momentum and positivity. I know Asia Pacific, as you said, David is lagging behind, but I think we need to put that into context. This is the most populous region in the world. There is huge pent up demand. And I think the issue for AsiaPac relative to Europe and the US is it's just been that little bit later in terms of the key markets or the big markets opening up. Vietnam only opened up really in the past month, but the message I'm getting from the airlines, particularly the LCCs in the region is that growth is going to come back very quickly. The momentum is there, the demand is there, the issue really is about making sure that the capacity is going to meet that demand.

For example, I spoke to the Vietjet today and they've got 200 aircraft on order, they've got a hundred in the fleet. That in itself just gives scale of where we're at. If we're talking numbers, I did a presentation this morning where it's forecasted that by August the AsiaPac region will be about 12% down on where it was in 2019. I know China accounts for a lot of that in terms of domestic, but we are talking about huge markets here, China, Vietnam, Thailand, Malaysia, Australia, and so on. So yeah, the mood here is great. It's probably true to say it is a little bit later in the day for AsiaPac compared to Europe. We were at Routes Europe two weeks ago and I think Europe's one step ahead of AsiaPac, but I don't think AsiaPac will be very long before it's it hits that kind of momentum and feel good factor.

David Casey:

Thanks for that, Tony. It does feel that airlines in Europe when we were at Routes Europe are starting to plan further ahead now so maybe look to summer 23 and summer 24, where the feeling here at the moment is that it is still quite short term. Would you agree with that assessment?

Chen Chuanren:

I think even in Southeast Asia like Tony, I've spoken to a number of LCCs, local LCCs such as Vietjet, AirAsia, and most of the capacity, or should I say the domestic capacity has almost risen to a hundred percent and some even in excess of a hundred percent, even for carriers like Singapore Airlines who doesn't have any domestic network, it's somewhere between 60 to 70% right now, international capacity. But what Singapore and ASA is doing is that they are engaging almost 98% of their crew so that they're always really and current to mount any flights as long as the market open up.

As for China, even though it is a very important market for many countries, such as Vietnam, even Singapore, most of the executives that we spoke to say that they're not too worried about China not opening in the near term because there's enough growth and enough catching up for them to explore. And again, there's a new emerging markets that they want to capture, in this case India. And of course we hear from Vietjet that they will be mounting flights from Vietnam to India. Vietnam Airlines has also announced that they will be increasing flights to India, Delhi and Mumbai. The sentiment is that they're not worried about China in near term. Their worry should come when it's about 2023, 2024. And that's where they should start looking at China again.

David Casey:

It's interesting you say that because obviously pre-pandemic, China was such a rapidly growing market and it was a second largest market predicted to overtake the US. But obviously the domestic market there has remained robust, but in terms of international travel, it's still absolutely nowhere near where we were two, two and a half years ago. When will we start to see international travel coming back? Will it be this year? What are airlines telling you?

Chen Chuanren:

Actually, I'd like to differ what you said David about China is that their zero-COVID policy is so strict that they'll impose flash lockdowns in some cities. So even domestic traffic and recovery is hindered. Even the central government knows that and they are even doing subsidies to help airlines to tide through this period. Some of the airlines has mentioned that they are closely watching China reopening. They do not speculate when, but there's some chatter that it could be end of the year or early next year.

Tony Griffin:

Yeah, I agree with that. One thing to mention as well, we're at Routes Asia here, but we shouldn't forget as well the Middle East big four, Emirates, Etihad, Qatar and Turkish Airlines are all pretty much back in the Asian region apart from China, of course. And also the European carriers are back. BA have reintroduced Sydney. Qantas have I think just announced that they're going to restart their Perth-London flight. So the momentum’s there. The big four are back providing the capacity that they did pre-COVID. Obviously China is the exception to that.

The sentiments I'm getting here is that the airlines anticipate that China will be more liberal, more open by the end of the year, possibly before. We're already starting to see relaxation of restrictions in Shanghai. So the indications are good. And as I said, I don't think there's any issue about the latent demand for travel within Asia. It's just a case of when the restrictions are relaxed, the traffic will flood in. We've seen that to some extent with Australia, the international traffic is starting to really gather pace and momentum.

David Casey:

It's interesting then you say that it might be the end of the year that international traffic will return to China, but from the airlines that you're speaking to now, are they looking to other markets to put that capacity? What countries are you seeing might witness a really strong bounce back in activity?

Tony Griffin:

Chen said about Singapore Airlines who traditionally, you'd meet Singapore Airlines, they'd say, "Look, we know what we're doing in the next five to 10 years." I've just met them today and they said, "Our planning horizons are as short term as the next six months." Airlines are being very nimble. One of the byproducts of the COVID crisis is that airlines have consolidated not only their networks, but their teams. And I think they are much more nimble now in terms of reacting to short term opportunities where they're going to generate cash. Because as we know, cash flow is the lifeblood of the airlines.

Chen Chuanren:

Yeah, I agree with that, Tony. Nimble is favorite word for Singapore Airlines CEO, Goh Choon Phong. And he said opening a route used to take months or if not years, but right now he said such decisions can be made as short as days and weeks.

David Casey:

Given though that we're seeing rising inflation and a massive spike in fuel prices, I know when we were at Routes Asia, sorry, Routes Europe a few weeks ago, a lot of the carriers there were expecting a really good summer season, but there was a lot of nervousness going into winter. Many of the airlines are hedged towards the fourth quarter of the year, but then after that, they don't know where demand will be and what fares will be like. Do you think that will be an issue here in the Asia Pacific region?

Tony Griffin:

I think there's some fundamental differences between Asia Pacific and Europe. Firstly, the price of fuel given the cost base of European airlines is going to impact more. There's a real problem of resources in Europe as we're seeing at airports where we're having horrendous pictures of bad experiences for passengers. That is going to have a detrimental impact. We're being warned about an economic hurricane from the US. And to some extent we're already starting to see that in Europe with energy prices going through the roof and inflation and uncertainty. That is going to impact travel because conversely airlines are going to have to look at putting their prices up for flights, which conversely is probably going to create a self-fulfilling prophecy here that you put prices up, consumers don't have as much income, therefore travel demand will decrease. I don't think that is the same in Asia.

Asia does not have the same resource problem. Fares in Asia are traditionally lower anyway, and it looks like the LCCs in Asia are going to maintain those very low fares. I don't think the impact on demand is going to be as affected in Asia. If anything, I think actually we're going to see a surge in demand as we've seen initially in Europe and the US as people are able to fly. And the first thing they want to do is go and see relatives, friends, and go on vacations that they have not been able to do so for, we're probably getting on close to three years now.

David Casey:

Is that the sentiment you are getting in China when you're speaking to airline CEOs? I know you obviously speak to a lot of airline CEOs in the region. Are they nervous about what's to come at the end of the year? Or is there more positivity than perhaps there is in other parts of the world?

Chen Chuanren:

Yes. In fact, I had a chat with the director general of Association of Asia Pacific Airlines, AAPA, and he said sometimes all this inflation, even supply chain disruption, there's always a substitute, there is always a alternative. But what he's most concerned about is in fact, the Ukraine-Russia conflict. He's worried that should the conflict be spun out of control and become a global one, it'll be more detrimental than any of the problems that we will have today.

So for example, he give example like supply chain, you can say that China's closed, but a lot of companies are moving up China into markets like Philippines and Vietnam. And therefore they're not too worried about the supply chain disruption. That is also the thing about transport minister, he's also quite cautious about setting high targets. I think it was about two, three weeks ago he said, "No, the thing to do now is to make sure that you reopen in a steady manner and make sure that you have enough capability and capacity to handle the surge in the passenger demand in the near future."

Tony Griffin:

Just to add one final point on that. Talking to the airlines, the three things that keep them awake at night are resource shortages, particularly pilot shortages which is causing enormous problems in Europe with airlines. Also, the instability that the Ukraine, Russia crisis is causing. But I think the other big issue which has been around, but I think is going to be something that is going to dominate route development for the foreseeable future is the whole issue around sustainability. And how do you as an industry, or how do we as an industry develop routes in the context of trying to accommodate the demands of sustainability?

David Casey:

Thanks for that, Tony. It's probably a wider topic that we need another podcast for, but I think on the whole then it seems to be there's a sense of optimism that travel is really recovering in the Asia Pacific region, that we're going to see levels of demand really returning. And hopefully we won't see some of the problems that we've encountered in Europe in terms of scaling up activities if it feels like airports and airlines in the region are ready for that bounce back in activity.

I'd just like to say Tony and Chuanren, thank you for your insights and thank you to you, our listeners, and hope you'll join us again next week for our next episode. Make sure you don't miss it by subscribing to the Window Seat Podcast on Apple Podcast or wherever you listen. Until then, this is David Casey disembarking from Window Seat.