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A nonlinear recovery for China’s travel industry

Chinese traveller sentiment indicates that there will be no straight path to recovery for China’s travel industry
Sunset on the Li River in China as the few remaining cormorant fishermen pack their nets for the night

Like everywhere else, China’s travel industry was severely impacted by COVID-19. Once travel restrictions were eased in April last year—when many other countries were still entering into lockdowns—China’s travel industry started showing encouraging signs, albeit only in the area of domestic travel.

However, according to a recent McKinsey survey, notwithstanding the encouraging trends witnessed from April to August last year, “the spate of new COVID-19 cases and government exhortations for residents to stay home unless necessary over the weeklong Chinese New Year holiday have dampened traveller confidence”.

The travel industry in China is in the midst of a nonlinear recovery, McKinsey notes. And given that China is likely to remain closed for international tourists until 2022, domestic travel will drive whatever growth there will be in the travel sector.

Emerging trends

Any new set of restrictions imposed by the Chinese government to manage fresh cases will dampen traveller confidence further. Only by the third quarter of 2022 will China successfully vaccinate more than 60% of its nearly 1.4 billion population – and this too amid a possible resurgence of COVID-19 cases.

China will need to control the uptick in virus cases to ensure a positive recovery in the travel industry. The resurgence in COVID-19 cases and ensuing restrictions on travel are major hindrances for travel to return to pre-pandemic levels and risks to the travel industry’s growth outlook.

Exhibit 1: A two-sides recovery story

Certain travel and tourism subsectors such as hotel bookings, domestic flight bookings and train bookings have started experiencing growth. Tourism numbers in Macau, for example, saw a sharp rise after the quarantine rules between Macau and mainland China were lifted in August 2020. Meanwhile, unsurprisingly, international travel and cruise bookings remain the worst hit.

Domestic vs international travel

There is a clear rise in Chinese travellers opting for domestic travel rather than travelling to international destinations. Among the key reasons for low demand in international travel are the strict quarantine measures at several international destinations, or that many destination countries have banned the inflow of travellers from China or elsewhere. The spurt of new strains of COVID-19 that have emerged in different countries has also discouraged outbound Chinese travel.

Exhibit 2: Domestic travel in China fell to a ‘somewhat unsafe’ level due to a recent resurgence in cases

The survey found that domestic travel—be it for leisure or business—had recovered somewhat between April-August 2020, and confidence in domestic travelling continued to see a steady rise in the period.

But this confidence has started to dwindle in the face of new strains of the virus, a resurgence in cases and ensuing quarantine measures. This was clearly evident during the Chinese New Year, when millions of Chinese typically travel to visit their families. This time around, there was a sharp drop of 45% in air traffic in the Chinese New Year period as compared to 2020.

Separately, although the Chinese are largely eager to resume international travel, survey results show they were hesitant due to inadequate pandemic management in possible destination countries, the fear of being infected and mandatory quarantine measures being observed by China. Outbound travel for both business or leisure remains completely off-limits for Chinese travellers for now.

What lies ahead?

Chinese companies in the travel industry stand to either recover or be derailed due to the nonlinear recovery, McKinsey says. According to the company, there are three main areas for Chinese travel businesses to focus on – doubling down on digitalisation, responding to pandemic-related developments with agility, and capturing new opportunities resulting from high-end consumption.

Travel companies will need to focus on developing offerings that are novel and timely. As much as 58% of the surveyed respondents desire their next leisure trip to be self-guided. And many are seeking more experiences that are nature-based.

Exhibit 3: Chinese travellers holiday interests

Finally, the luxury travel sector is bound to see an uptick. High-end travellers have now shifted their attention to domestic travel. Rural destinations are emerging as popular spots. Hainan, a small island in China has recorded a surge in duty-free sales, which has grown by 127% between 2019-2020. So has off-the-map locations such as Xinjiang and Tibet. This has presented a sizeable opportunity for China’s travel industry.

Exhibit 4: Rural destinations are growing against the trend

High-end travellers who want to indulge in activities such as skiing and diving are now looking to find these experiences domestically and even pay well for them. Designing tours catering to these specific demands will be crucial for travel companies to recover.

Despite fluctuations in confidence, China’s travel industry looks poised to bounce back from the COVID-19 crisis, the survey suggests. But this recovery will not be linear, and may come in patches.

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