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By Herman Tse, Valuations manager at Cirium Ascend Consultancy
China’s international market is the missing piece of the puzzle for the recovery of the global aviation industry. China lifted a ban on group tours to more than 70 locations, announced by China’s culture and tourism ministry on 10 August 2023, effective immediately. Travel agents are allowed to sell group tours to 138 countries in total. The lifting of the ban on group tours is a game-changer, as it opens up new possibilities for airlines, travel agents, and destinations worldwide. Cirium Ascend Consultancy’s recovery Scenario 7 (rebased in September 2022) projects that global RPKs would return to the 2019 level in October 2023. With the Chinese government lifting travel restrictions, this is likely to happen.
According to Cirium data, many key markets are still operating well below pre-pandemic levels in terms of departing seat capacity, as shown in Chart 1. The lifting of the ban on tour groups from China to major tourism markets could potentially trigger a substantial increase in passenger traffic.
The growing middle class and rising disposable income of Chinese citizens have paved the way for an exponential growth in outbound tourism.
This surge in demand for air travel will undoubtedly impact the aviation industry, both regionally and globally. To tap into this increasing demand, airlines from the USA, Japan, Australia, and South Korea will increase their flight routes, offering more direct flights to Chinese cities. However, the pace of recovery varies by market. For example, China and the USA will approve 24 round trips per week between the countries starting 29 October. It is still far below over 150 round trips before the Covid-19 pandemic. On the other hand, the capacity to the UK has already exceeded the 2019 levels driven by the individual travel and the return of students.
Chart 1: China departing seat capacity to key markets
Some twin-aisle aircraft were deployed in domestic routes to support the strong recovery due to the constrained supply of single-aisle aircraft. With the re-opening of international travel since the beginning of this year, more twin-aisle aircraft have been redeployed in regional and international routes because of more attractive yield in these markets. Both tracked twin-aisle passenger aircraft and daily utilisation in China have increased according to Cirium tracked-utilisation data as shown in Chart 2. The return of international group tours is expected to further drive the demand of twin-aisle passenger aircraft.
Chart 2: Chinese twin-aisle aircraft tracked and daily utilisation trends
The number of parked aircraft has almost returned to the pre-pandemic levels. The new-generation twin-aisle aircraft including the Airbus A350 and Boeing 787 are more popular in the market because of their fuel efficiency. The storage rate of mid-generation aircraft such as A330-200/-300 and 777-300ER have also reduced to a single-digit percentage. It proves that the demand of twin-aisle aircraft is rebounding in China.
Chart 3: Twin-aisle aircraft storage trend (Chinese operators)
Ascend’s values also reflect the increased demand of twin-aisle aircraft. The values of the A350-900 and 787-9 are leading the twin-aisle aircraft market, as they are not only fuel efficient but also versatile enough to serve both short- and long-haul routes. In the past three years, there were concerns among investors about the values of the A330-200/-300 and 777-300ER due to the pandemic’s impact.
These aircraft types have shown remarkable improvement over the past year, although it is unlikely they will fully return to pre-pandemic levels even with a complete market recovery.
Nevertheless, the lifting of the ban and the subsequent surge in passenger and aircraft demands could potentially drive the values of twin-aisle aircraft even higher. Rest assured, the Ascend team is closely monitoring market developments and will promptly review and update the values to ensure accurate and timely information. We understand the importance of staying up to date with the evolving market trends, and we are committed to providing valuable insights to our clients.
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