Recovery of Chinese air travel bodes well for Asean airport operators: analysts

DATA for airports in China and South-east Asia shows demand rebounding rapidly. Investors looking to ride the recovery have not yet missed the flight, as analysts see traffic at some of the region’s airport operators taking off this year and next. The key demand driver remains the still-elusive Chinese international tourist.

China’s residents had been landbound for months, as the country’s government tried to contain the spread of Covid-19. They are now taking to the skies, although the recovery for international travel has been slower than initially anticipated.

Among Asian destinations popular with Chinese tourists, the initial beneficiaries of demand will likely be Singapore, Thailand, Malaysia, the Philippines and Cambodia, said Mabel Kwan, managing director of Alton Aviation Consultancy.

She expects historically popular destinations Japan and South Korea to experience a slower recovery owing to earlier political spats over Covid testing, visa processing and longer-term political tensions.

Before the pandemic, Chinese travellers accounted for more than 40 per cent of the Asia-Pacific’s revenue passenger kilometres – the number of kilometres travelled by paying passengers.

They have yet to return in full force, partly due to limited international flight capacity in China. But equity research analysts from JPMorgan Asia Pacific expect capacity to rise from 30 per cent of pre-pandemic levels as at Mar 27 to about 60 per cent over the next six months.

Meanwhile, domestic demand is underpinning the recovery of China’s airports.

Nancy Dai, market analyst at global air travel analytics provider ForwardKeys, said there has been strong domestic traffic out of Shanghai Pudong International Airport, Shanghai Hongqiao International Airport and Shenzhen Baoan International Airport.

At Shanghai Hongqiao International Airport, a dominant airport for domestic travel to and from Shanghai, forward air ticket bookings for domestic flights between April and August 2023 had hit 103 per cent of pre-pandemic levels as at Apr 7. The corresponding bookings for international outbound travel were 39 per cent of pre-pandemic numbers.

Shanghai Pudong International Airport, the major gateway for international traffic, had forward air ticket bookings for domestic flights at 99 per cent of pre-pandemic bookings. The corresponding bookings for international travel were 29 per cent of the numbers before the pandemic closed national borders.

In other parts of Asia, flight activity has also picked up – led by domestic travel.

Based on forward schedules of seat capacity available as at March 2023, domestic capacity for many airports – Bangkok’s Suvarnabhumi Airport, Hanoi’s Noi Bai International Airport, Ho Chi Minh City’s Tan Son Nhat International, Tokyo’s Haneda Airport and Narita Airport, Pudong International Airport, Hongqiao International Airport and Shenzhen Baoan International Airport – would be more than 90 per cent of pre-pandemic levels, with airports in Vietnam and China even exceeding pre-pandemic capacity, said Alton’s Kwan.

Noi Bai International Airport, Tan Son Nhat International and Haneda Airport are expected to see a full resumption of international capacity this year, with the remaining airports below the 90 per cent level.

There is still some way to go before international capacity at major Asia-Pacific airports reaches pre-pandemic levels, though. This is in line with the forecast that recovery in international traffic for Asia-Pacific is only expected in early 2025, said Kwan.

Meanwhile, airport operators will be looking for opportunities to raise fees.

Volodymyr Bilotkach, an associate professor in aviation management at Purdue University, said a return to pre-pandemic profitability levels for airports will depend on their ability to adjust the fees that they charge airlines.

“Inflation over the last couple of years has created cost pressures on the airports; now we will have to see whether the regulators will allow the airports to adjust their rates in line with the recent inflation,” said Prof Bilotkach.

Rico Merkert, a professor of transport at the University of Sydney, said airports are not able to increase these tariffs at will. Sydney airport, for instance, has attributed its slower recovery to airlines “artificially inflating” air fares, which in turn has kept some demand suppressed, Prof Merkert said.

Typically, airport charges constitute less than 10 per cent of an airline’s expenses. But increases in airline-related charges by airports can be sensitive and generate much attention from media, as well as resistance from airlines and their industry groups. Airports try to keep airline-related charges competitive to facilitate network development too, said Alton’s Kwan.

Still, Prof Bilotkach said large airports usually earn as much revenue from non-aeronautical sources such as space rentals, duty-free sales, and parking fees as they do from the aeronautical side. Recovery in travel demand can help these airports earn more on the non-aeronautical side, and in turn expedite the airports’ return to profitability – even if they are constrained by the regulated rates they charge the airlines.

The return of Chinese travellers is important, as they were one of the most important revenue sources for airports’ commercial and duty-free businesses – key segments of airports’ non-aeronautical revenue – pre-pandemic.

International flights and passengers typically also attract higher airport charges, representing higher yield for the airport. In the near term, airport revenues will continue to be impacted until the full return of higher yielding international passengers, said Kwan.