Cash in29 June 2018
Earlier this year, Sydney and Heathrow airports independently reported huge financial benefits from offering direct routes into China. This comes a year after China and the UK signed a deal to boost the number of flights permitted between the two countries by 50%. But how exactly do such flights translate into profit?
Over the past few years, the aviation industry’s centre of gravity has started to shift eastwards, particularly towards China. The number of flights into the country has grown exponentially in the past 20 years. In 1982, there were less than four million air passenger journeys into China, according to the Civil Aviation Administration of China; by 2016, that number had reached 487 million.
Part of this huge increase can be put down to the general opening up of the aviation sector, which quickly turned from a luxury experience of the privileged few to a much more affordable means of travel.
But this is not the whole picture. Tapping into the Chinese travel market is proving to be incredibly profitable. An economic superpower worth $11.2 trillion, China ranks second in the world in terms of passenger and cargo turnover by air, behind the US. By 2024, the International Air Transport Association (IATA) predicts it will finally overtake the US to become the world’s largest aviation market.
More airports are realising the opportunities to be derived from opening up direct flight routes into China’s biggest cities – as long as those routes are mostly served by household Chinese carriers.
The China dividend
In the midst of Heathrow’s battle to get approval for its third runway, the airport commissioned Frontier Economics to research the economic impact of direct air connections to China, which are expected to grow in number if the expansion project gets the green light.
The study revealed that just one additional flight per week on each existing connection (the airport currently offers routes to Hong Kong, Beijing, Shanghai, Guangzhou and Qingdao) could generate an additional £16 million in GDP to the UK economy over a year. At present, there are more than 100 direct flights from Heathrow to China every week, contributing £510 million annually and creating 14,550 jobs.
Of the five routes, Hong Kong is by far the most profitable, bringing in £315 million per year in GDP. Just one additional weekly connection to the city would bring an extra £5 million per year.
“Heathrow is proud of its role as a gateway to these vital Chinese markets,” the airport’s chief executive John Holland-Kaye said. “As the country prepares to leave the EU, and China’s economy continues to grow exponentially, this is an opportunity the UK cannot afford to miss.”
Australia’s Sydney Airport recently reported equally impressive gains from its Chinese routes. Announcing its latest Tianjin Airlines service from Zhengzhou, to depart twice-weekly starting March this year, the airport’s CEO, Geoff Culbert, said the route will bring an extra 14,000 Chinese visitors to Australia and will drive an estimated A$60 million (US$ 44.3 million) into New South Wales’ economy each year.
China is one of Australia’s fastestgrowing inbound tourism markets; local airlines have been adding new non-stop services from primary and secondary cities to Australia in recent years. Sydney Airport has been pushing to attract more Chinese visitors through a range of measures, including becoming the first organisation outside greater China to use Baidu Maps, a popular mobile navigation service.
The two airports’ eagerness to expand mirrors a wider trend, which indicates that opening up more routes to the Asian superpower equals guaranteed economic gain.
China made a landmark agreement allowing the total number of flights between the two countries to increase by 50%, from a maximum of 100 passenger flights per week to 150 under the new deal. Commenting on the agreement, UK Transport Secretary Chris Grayling said it would allow huge expansion in routes from regional airports, potentially boosting local economies by opening up new business and tourism opportunities.
Grayling’s comments are supported by the findings of a report undertaken by experts at Steer Davies Gleave, titled ‘The China Dividend’. A year after the opening of the UK’s first ever direct service to mainland China (outside of London) – a new Hainan Airline service at Manchester Airport – the route carried 90,000 passengers between Manchester and Beijing, 15% higher than originally planned for. The list of accrued benefits from the service is hefty, including increases in inward investment projects, a total visitor contribution of £138 million annually and a spike in Chinese interests in Manchester property.
– John Holland-Kaye, Heathrow Airport
Chinese travellers: time to explore
‘Increased connectivity’ is a hot concept and a favourite term among industry insiders. It is invariably used as a synonym for economic profit, but how do more direct connections actually drive an influx of cash into the economy?
“Improved connectivity gives Chinesebased businesses greater access to foreign markets, encouraging exports, and at the same time increases competition and choice in the home market from foreign-based producers,” IATA explains. “It can also enhance an economy’s performance by making it easier for firms to invest outside their home country, which is known as foreign direct investment (FDI).”
Experts behind the Heathrow study offer further insight into how the expected benefits of increased direct routes into China were calculated. Simply put, direct flights are far quicker, cheaper and more convenient than flying indirectly, meaning it’s easy to assume that passengers who would not otherwise travel will choose to do so once a direct connection becomes available.
Apart from the obvious tourism spend, attracting these new passengers increases the ease of face-to-face meetings, which are seen as crucial in building a solid business relationship and increases the likelihood of closing deals and reaching new trade and FDI arrangements. These new business investments and opportunities are the building blocks of an open economy, which is likely to be more productive in the long term and will contribute more to a country’s GDP.
Automatic success? Not exactly
However, opening up a new route into China does not automatically equal success, as some airlines have learned.
In 2016, a number of European airlines were forced to close certain secondary Chinese routes because they were unprofitable. British Airways closed its route from Heathrow to Chengdu because it was “not commercially viable”, while German carrier Lufthansa axed its Frankfurt to Shenyang route due to low passenger demand and declining forward bookings. (Lufthansa revived the route in March this year, with three flights a week to the Chinese city.)
In the US, United Airlines faced a similar fate when it was forced to quit its services to Hangzhou. The reason was because Chinese travellers prefer to fly with Chinese airlines, due to comfort, trust and familiarity.
The country’s “big three” carriers – China Southern, China Eastern and Air China – each reported more than 100 million passengers in 2017 and there is plenty of room for growth.
According to transport intelligence platform Skift, the three airlines are increasingly flying passengers from the mainland to Europe and the US without stopovers in Hong Kong or Singapore.
When it comes to profitable routes, the numbers speak for themselves. Airports, and the wider economy of a country, can do a lot worse than branching out directly to China, as interest in travel, investment and exploration booms on all sides. However, finding the smart way to tap into that potential is crucial.