China’s uneven travel recovery: Long road to international travel furthers domestic opportunities

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China’s travel industry remains on an uneven recovery path. The domestic market has weathered disruptions and resumed pre-COVID-19 growth while China’s outbound travel is still extremely limited and has not seen any meaningful recovery to date. As outbound travel is likely to remain muted for the next 12 to 18 months, it is imperative that travel companies double down on opportunities in the domestic travel market.

Chinese travelers are looking to experience local destinations and new travel offerings, particularly as higher-end travelers “re-shore” overseas demand. Trends indicate that there is significant demand for outdoor experiences as well as integrated luxury offerings that act as alternatives to a traditional packaged tour. Travel companies that have adapted their products, and the ways they market them, to cater to domestic demand have pulled ahead of the competition.

Domestic travel has made a strong recovery

Chinese domestic travel has seen a world-leading post-pandemic recovery, rebounding to surpass 2019 peaks. Travel companies are still adjusting capacity and offerings to cater for pent-up demand, but the outlook across the sector is clearly positive, with demand passing pre-COVID-19 levels coming out of the May national holiday. In fact, major online travel agencies have noted domestic travel’s great momentum in April and May and describe a full recovery in long-distance travel across provinces.

Increases in air and rail travel, and hotel bookings, clearly illustrate the rebound in domestic travel. Domestic air travel passenger numbers have seen an 8 percent increase compared to 2019 figures, and seat capacity is consistently 15 percent above 2019 figures as airlines have redeployed fleets from international routes to service the domestic market. Rail travel is also on the increase, with passenger numbers at approximately 95 percent of pre-COVID-19 levels. This slightly slower recovery compared to air travel may be due to rail prices remaining constant, while air travel prices decreased due to deeper discounts. Hotel bookings are up 6 percent compared to 2019 during the May holiday (Exhibit 1).

Mainland China travel recovery remains a two-sided story.

Domestic recovery is still exposed to public-health setbacks as government responses to COVID-19 outbreaks temporarily disrupt travel. For instance, in January 2021, COVID-19 cases in Hebei province prompted government travel guidance which dented nationwide demand over the peak Chinese New Year period. Consequently, air and rail passenger numbers both fell 40 percent compared to pre-COVID-19 levels, and our Chinese-traveler sentiment survey showed a drop in traveler safety confidence at this time.1China’s travel sector is undergoing a nonlinear recovery: What should companies do?,” McKinsey & Company, March 2021, Similarly, a June 2021 outbreak in Guangdong significantly impacted the travel industry in the province—hotel occupancy in Guangzhou and Shenzhen was down 75 percent by mid-June, and flight seats booked to the province fell by 50 percent.

But there are signs that the impact from single province outbreaks is becoming more contained as the national market appears to be more resilient. For instance, data show stable hotel occupancy in June for the greater Shanghai and greater Beijing areas, with Guangdong flight seat capacity surpassing 2019 levels (Exhibits 2 and 3).

Hotel: Lockdown in Guangdong showed limited national impact.
Summer 2021 Guangdong outbreak also showed limited air travel impact on the national level.

There is also the macroeconomic dimension to consider. China is leading the global economic recovery, reporting 2.3 percent GDP growth in 2020, and 12.7 percent GDP growth in the first half of 2021.

Consumers may want to travel abroad, but re-orienting outbound travel to the domestic market can bring economic benefits. Pent-up consumer demand is clearly present—our January 2021 survey revealed that the share of respondents who want to travel abroad on their next holiday (43 percent) exceeded those who had domestic travel plans. But shifting tourism spend to the domestic market represents meaningful stimulus. Chinese travelers spent $255 billion internationally in 2019, approximately 1.5 percent of GDP. This stimulus is in line with policymakers’ rebalancing goal to boost ‘domestic circulation’.

And limiting inbound travel has limited economic impact. International tourism receipts represented less than 0.3 percent of China’s GDP in 2018.2

China’s outbound travel is likely to remain muted for 12 to 18 months

Outbound travel is still extremely limited and has not seen any meaningful recovery to date: international flight seat capacity and passenger numbers remain down by 95 percent compared to pre-COVID-19 levels. Furthermore, stringent public health measures for international travel remain in place. Government guidance is that all nonessential outbound travel should be avoided. For inbound or return travel, passengers require predeparture negative antibody and PCR tests, and the “14+7+7” quarantine system (14-day centralized hotel quarantine; one-week at-home isolation; one-week health monitoring) has been in place since January 2021.

Cross-border travel may take longer than anticipated to recover. Scaled outbound flows are unlikely to resume before the second half of 2022, or the first half of 2023. Various factors will influence when, and at what pace, international travel is likely to reopen. Given the differences in vaccine rollouts across countries, international travel may resume for different countries at different times. Box 1 details three country archetypes based on different stages of vaccine rollouts and the implications for international travel. Public-health factors will also influence how and when China will be able to lift cross-border travel restrictions, but a gradual re-opening is the most likely scenario.

Public-health factors will influence travel restrictions

All countries face complex choices around lifting cross-border travel restrictions, especially those that have relied on public-health measures, including quarantines, to successfully limit case counts. We view considerations for Mainland China to be weighted toward a cautious reopening with full quarantine roll-back unlikely for at least the next 12 to 18 months.

In terms of public health, China has impressively accelerated its vaccine rollout, with over 1.5 billion doses now administered, up from 5 million noted in our last report in March.3 Some domestic virology experts have suggested that China might be able to reach herd immunity as early as the end of 2021.

However, while an accelerated rollout is necessary, it may not be a sufficient condition for robust reopening as vaccines are not 100 percent effective. Specifically, publicly available efficacy data on the main vaccines used in Mainland China suggest the efficacy of these jabs is lower than some vaccines developed in Western countries, particularly for older adults.4 However, available data remains variable and incomplete.

At the time of writing, China was battling its largest outbreak since 2020, leading to strong lockdowns again and domestic travel restrictions. While this wave of outbreak is still yet to be completed, it is believed that China will continue to see success with its “zero case” playbook—Quarantines for cross-border arrivals play an integral part in reducing transmission. In addition to the “14+7+7” quarantine system, compliance is tracked with QR health codes, for instance when entering residential compounds and offices, or boarding taxis and trains. These codes also support containment measures which can be deployed down to the district or individual residential community level. During outbreaks, authorities continue to deploy mass testing and mandatory home quarantines. For example, in Guangzhou 18 million tests were conducted over three days in June, with home lockdown for residents in affected districts who were required to show three consecutive days of negative nucleic acid tests before being allowed to leave.

Even as China is containing the spread of COVID-19, many key Chinese travel destination markets are seeing a worsening pandemic situation, such as Japan, Korea, most Southeast Asian countries, and Australia. Many of these countries are no longer travel-bubble candidates.

Cross-border travel will reopen gradually

As China cross-border travel does gradually reopen, outbound leisure—especially group travel—is likely to be the last trip type to see restrictions relaxed. Initial stages could see shortened and/or more flexible quarantines paired with testing to facilitate essential business travel and family reunions. Outbound leisure travel will likely only recover in 2023 as this requires quarantine-free travel to a pool of attractive destinations.

We expect the balance of public health and economic incentives for this opening to remain weighted toward caution for policymakers, while demand from Chinese consumers will likely remain limited as long as COVID-19 safety concerns persist.

Meanwhile, despite several false starts, we do still see a role for travel bubbles between China and other ‘case controllers’. However, getting these bubbles off the ground remains challenging and we expect the total impact on Chinese international travel to be limited. Travel bubbles require established trust in public-health management across partners, and extended negotiation timelines. Even once they are in place they remain vulnerable to unexpected shifts in the local COVID-19 situation. For instance, an outbreak in June caused Macau to reimplement 14-day quarantines for Guangdong travelers, as Guangdong accounts for roughly 70 percent of arrivals from Mainland China.

However, the prevalent ‘test-fly-test’ bubble model still limits attractiveness for Chinese travelers—the Macau bubble is a case study that demonstrates a low growth ceiling under these conditions. Mainland tourist arrivals in Macau rebounded in the third quarter of 2020 to between 20 and 30 percent of pre-COVID-19 levels after quarantine-free travel resumed, but had stagnated even before the further shock from the June Guangdong outbreak (Exhibit 4).

Macau visitor arrivals from Mainland China show slow build-up.

Hong Kong, which topped pre-COVID-19 destinations for travelers from Mainland China—at 19 percent of total outbound trips—represents a logical extension of the Macau bubble model. A Mainland China-Hong Kong bubble has been discussed for over a year but tangible progress has remained limited to date. Recent media reports indicate that any bubble would begin with business travel between Hong Kong and Guangdong and not include leisure travel. The Macau case suggests that even once quarantine-free leisure travel is resumed, it would not rapidly recover to pre-pandemic levels.

Most other reasonable candidates for a Mainland China travel bubble are not large-scale travel destinations. Other ‘case controller’ markets are unlikely to move the needle on international travel, for example Australia only accounted for 1 percent of outbound trips in 2019, New Zealand 0.4 percent, and Singapore 3 percent.

Ultimately, decisions about how much and how fast to open travel, across types and destinations, belong to Chinese policymakers.

Sustained tailwinds for the domestic market

The silver lining to China’s international travel remaining restricted is domestic market opportunities, such as new destinations, new experiences and new ways to approach customers. New destination hot spots are emerging, particularly in western China, as the trend toward outdoor experiences gains traction. Solidifying a trend we noted in our last report, the domestic leisure travel heatmap is shifting. This shift is led by higher-end travelers ‘re-shoring’ overseas demand. For example, in a leading online travel agency’s list of top-ten May holiday destinations, five of the ten are new destinations not on previous year’s lists. And four of these five are natural scenery driven destinations; three of them in western China (Exhibit 5).

The hot domestic travel destinations during China's May national holiday tend to be more outdoor driven.

Hainan also remains a popular destination, possibly as a substitution for a Southeast Asian beach holiday or duty-free shopping trip. Duty-free sales in Hainan grew by 226 percent in the year to July 2021, with $1.5 billion spent during the five-day May holiday alone.

Furthermore, Chinese travelers are gravitating toward premium, integrated experiences that move beyond the packaged tour stereotype. Luxury and upscale hotels have outperformed on occupancy and average daily rate in 2021, with a 5 to 15 percent higher occupancy than 2019 during holiday peaks. By comparison, midscale and economy hotels are still between 10 and 15 percent below 2019 levels. Affluent Chinese used to head to Hong Kong or Japan for the weekend for shopping and relaxation—significant amounts of that spend are now being redirected domestically.

Chinese consumers, already the world’s most digital, spend more than 65 percent of their online time on social content, and online time has increased by 20 percent since the pandemic. Chinese consumers now spend over 7 hours a day online. While personal recommendations and mass marketing still matter, social media and streaming are key emerging sources of inspiration for travel destinations. Our survey data indicates that 57 percent of consumers have been inspired by influencers who introduce them to travel destinations online, while 26 percent have been inspired by travel advertisements on video streaming platforms.

Local travel companies are shifting towards direct-to-customer (D2C) distribution models. For instance, some mid-tier hotel chains with strong IP elements now generate 80 percent of their sales from social D2C channels across WeChat and proprietary apps.

Travel players looking to capitalize on these trends could take the following three steps: First, companies could upgrade their brand positioning and portfolio, aligned to growth destinations and emerging re-shoring themes such as increased demand for outdoor experiences and natural scenery. Second, they could refresh or develop new integrated “tourism-plus” products for sophisticated consumers. Finally, travel companies could keep their digital marketing engines well-oiled to match the evolving social landscape.

China’s outbound travel is still extremely limited and has not seen any meaningful recovery to date. Furthermore, stringent public health measures for international travel remain in place and cross-border travel is unlikely to resume at scale before the second half of 2022, or the first half of 2023.

Many travel companies had made plans for ‘hockey stick’ growth in China outbound travel, but the delayed reopening outlook demonstrates a heightened imperative to win domestic customers. And re-orienting outbound travel to the domestic market can bring economic benefits—Chinese travelers spent $255 billion internationally in 2019, and these travelers may now be looking for local travel experiences instead. On the other hand, for companies had been focusing on outbound travel demand, the upcoming 12–18 months remain challenging. Rethinking business focus in short term and more agile preparation for the reopening of international travel in mid-term is equally crucial to sustain relevance in the market.

Trends indicate that opportunities are emerging in the domestic market. Chinese travelers are gravitating toward outdoor experiences as well as luxury integrated offerings. And how consumers choose these offerings is also changing—social media channels are now key sources of inspiration for travel destinations.

It is critical to diversify travel offerings and marketing models to cater to the domestic market. Travel companies that have done so are reaping the benefits.

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