China’s travel sector is undergoing a nonlinear recovery: What should companies do?

| Survey

After being battered by COVID-19 at the start of 2020, China’s travel industry has been—slowly but steadily—on the mend. That is until an uptick in virus cases at the turn of the year set off a fresh wave of restrictions and precautionary measures. What does this mean for China’s travel industry?

Since last April, McKinsey has been tracking traveler sentiment in China. We’ve conducted four rounds of surveys, polling 1,600 respondents each time in eight Chinese cities. Our latest survey, conducted this past January, indicates that China’s travel industry is in the midst of a nonlinear recovery—that is to say, setbacks can stall the return to prepandemic levels, and some subsectors will do better than others. Despite encouraging trends in the domestic travel sector 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 traveler confidence. The likelihood that China will remain closed to international tourists until 2022 also means that domestic travel will be an important engine of value for the industry.

The travel sector’s path to recovery is not likely to be a straightforward one. Recent cases of COVID-19 reflect the immense difficulty of keeping the disease out of China, despite the government’s best efforts. This article provides a comparative analysis of our surveys and recommends three areas that travel companies in China can focus on to prepare themselves for possible turbulence in a nonlinear recovery.

The main takeaway: Despite short-term concerns, respondents remain positive about long-term domestic travel

After a confidence peak last August, an uptick of COVID-19 cases arising from new coronavirus variants led respondents to feel less certain about travel safety this past January (Exhibit 1). The percentage of people who said they planned to go on vacation in the next four months fell from about 70 percent in August to about 50 percent in January.

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Domestic travel in China fell to a ‘somewhat unsafe’ level due to a recent resurgence of cases.

This sentiment was reflected in the decline in domestic travel over Chinese New Year in early February. Traditionally, hundreds of millions of people make the annual pilgrimage back home to visit family during the weeklong holiday. This year, however, air traffic in China fell 45 percent compared with the previous year, and flights were only 58 percent full on average. Nationwide, hotels were on average only half full. That said, traveler confidence levels are still higher than in May 2020, and travelers believe wearing personal protective equipment such as face masks is sufficient to protect their health when traveling. Swift action from the government has kept the coronavirus mostly at bay.

Differences in confidence levels across all forms of domestic travel—including business and leisure travel, as well as trips of all distances—are narrowing, continuing a trend from our previous survey in August. This fluctuation in confidence is a change from the first two surveys we conducted, which showed significantly lower confidence levels for domestic long-distance and business travels compared with short-distance and intracity leisure trips. The change suggests that as long as people feel sufficiently safe, domestic travel would be the main driver of the travel industry’s recovery in China.

International travel, however, is different. Even though 43 percent of respondents are eager to go overseas for vacation, most people feel that international travel, be it for business or leisure, remains completely unsafe. Most take a dim view of other countries’ management of the pandemic and are concerned about the dangers of infection from overseas travel. In addition to the risks of contracting COVID-19 abroad, the long, mandatory quarantines required after returning to China are also a major deterrent.

More so than traveler confidence, restrictions imposed by the government, companies, and other institutions of authority are what will ultimately determine how fast China’s travel sector bounces back. We expect that continued restrictions will cause outbound travel to take more time to return to pre-COVID-19 levels in China than domestic travel. Because of its large population of nearly 1.4 billion, the country is expected to take longer to roll out widespread vaccinations; projections indicate that it’ll take until the third quarter of 2022 to vaccinate more than 60 percent of Chinese residents.1 Having such a large population also makes it more challenging to contain possible resurgences of COVID-19, and rigorous mandatory pretravel testing requirements have not prevented the sporadic handfuls of imported cases. We project China will reach herd immunity only in the third quarter of 2022, a year later than Europe and the United States. As such, restrictions in the Western Hemisphere are likely to be relaxed before China, where the authorities will likely continue a more conservative approach to manage the spread of the coronavirus and will not risk reopening borders until late 2022 (see sidebar, “Travel bubbles: Can they work?”).

More so than traveler confidence, restrictions imposed by the government, companies, and other institutions of authority are what will ultimately determine how fast China’s travel sector bounces back.

These reasons help explain why China’s domestic market recovered more than 80 percent in the last quarter of 2020, while international travel has remained low and stagnant (Exhibit 2).

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A two-sides recovery story still holds in China.

In other words, in addition to being inextricably linked to pandemic developments, China’s nonlinear recovery can be seen in the divergence of the trajectories in domestic and international travel. While overall confidence in domestic travel remains generally high (McKinsey projects domestic travel will return to prepandemic levels between 2022 and 2023), people continue to be wary of crossing international borders.

Finding success in a nonlinear recovery: Three areas to focus on

Companies in China’s travel industry are experiencing a transitional year. Travel companies could either find themselves on a fast track to recovery or be derailed by the sector’s nonlinear recovery. We believe that travel companies should double down on digitalization, become more agile in their responses to unpredictable pandemic developments, and decisively capture new opportunities arising from high-end consumption.

The digital imperative for marketing and operations

As we mentioned in our last report, travel companies can invest more ambitiously to develop their digital capabilities—both to reach customers more meaningfully and to deliver better travel experiences. For the majority of people, traveling is a deeply individual experience (58 percent of respondents said their next leisure trip would be self-guided), and digitalization offers the promise of improving the customer experience on a personal level at scale.

Digital marketing. Travel companies can strengthen their digital marketing by optimizing their marketing channels, bolstering private-domain traffic operations, and identifying popular travel ambassadors to capitalize on public attention.

First, they can reevaluate the importance of each social-media channel and the rate of return on investment. One way to catch the attention of potential customers is by tapping into the vast networks of influencers, commonly called key opinion leaders, or KOLs, in China. Livestreaming has shown to be especially effective at cultivating return customers and quickly monetizing traffic. For example, an online travel agency (OTA) generated ¥80 million ($12.4 million) in sales from a KOL-hosted livestreaming session on November 11, 2020 (a major shopping event in China), which contributed to a 135 percent increase in sales from the previous year. Another online brand, a bed-and-breakfast, collaborated with a travel blogger to host a livestreaming session on the theme of “creating desires,” which generated more than ¥2 million in two hours.

Meanwhile, data analytics can offer insights into what will likely resonate with target customers. To increase occupancies at its hotels in Haitang Bay in Sanya, Hainan Province, a large hotel chain launched new promotions specifically tailored to the interests of its multiple core customer groups. For example, families were offered special rates on family suites while luxury sea-view rooms were promoted to couples.

Next, travel companies can actively cultivate a more intimate sense of community by funneling customers from large online ecosystems to smaller online domains. Large online platforms (such as WeChat in China) function similarly to digital “public” ecosystems with vast numbers of users from all backgrounds. Sequestering off a more “private” space, such as through a “miniprogram” on WeChat, helps to consolidate target customers, increasing the efficiency of marketing efforts. For instance, after creating an official account on WeChat, a hotel group amassed more than five million members. It also enjoyed a 300 percent year-on-year increase in transaction volumes, totaling more than ¥100 million, through the account.

Finally, companies can take advantage of viral moments to create travel ambassadors to reach mass audiences and capture their imagination. For instance, Dingzhen, a 20-year-old man from Litang County in the Tibetan region of Sichuan Province, was tapped by local authorities to be a tourism ambassador after he became a viral sensation on a popular social-media app. Within a week, searches for Litang on an OTA surged 620 percent. Travel companies can consider developing the digital capabilities needed to quickly identify (or create) such personalities and design packaged plays around them to convert traffic. As public attention is fickle and can wane as swiftly as it is captured, travel companies should also prepare for contingencies.

Digital operations. As is the case with nearly every other industry, artificial intelligence and advanced data analytics are allowing travel companies to reimagine their business models and operations. Traditional tourism players (including hotels, airlines, and attractions) and OTAs alike can redraw the boundaries of the services they offer. For example, an OTA partnered with the cultural and tourism authorities from different regions during the lockdown to promote and sell agricultural products on its e-commerce platform. The initiative not only opened up a new source of revenue but also generated interest and drove tourism traffic to these regions when domestic travel was permitted again.

Bolstering their operational capabilities is key for travel players to cope with increased demand and competition in the domestic travel sector. For instance, as the Chinese government continues to liberalize shopping policies to allow for more opportunities for domestic tourists to shop duty-free, travel players can expect the entry of cross-regional and even cross-industry disrupters. Keeping up with global standards in customer experience and optimizing supply-chain operations is a critical line of defense. Examples include investing in omnichannel retail by combining e-commerce channels and physical-store experiences with augmented-reality and virtual-reality innovations to enable customers to try on products such as cosmetics and by deploying autonomous vehicles to deliver orders to guests in hotels and airports.

Agility for all scenarios: Planning for unpredictability

Even though the overall momentum of controlling the spread of COVID-19 has been encouraging in China, uncertainties remain. Companies in China can develop adequate measures and response mechanisms for two potential scenarios: a recurring pandemic and stable pandemic control.

In a recurring pandemic, focus on safety precautions and local opportunities. A scenario with continuous fluctuations in COVID-19 cases, imported cases from abroad, and the occasional outbreak of locally transmitted cases carries a high level of uncertainty. In this situation, people will be cautious or unwilling to travel, especially over long distances. Travel companies should focus on allaying travel safety concerns and capturing local consumer demands. Having visible protection and sanitation measures helps to assuage hygiene concerns, while allowing for flexibility in travel packages and membership policies can help companies maintain and deepen customer relationships. As nationwide travel falls out of favor, local tourism would become the main driver of value. Local tourists tend to have more exacting expectations, so companies should look at offering high-value services and diversifying the range of experiences on offer. Travel players can combine niche activities, accommodations, and other value-added services to create “staycation” packages that appeal to local residents.

In the case of stable pandemic control, speed up ways to elevate experiences. If imported cases remain low and local transmissions are near zero, a different approach would be more effective. Domestic travel will likely recover quickly, and people will want novel travel concepts.

Speed is the differentiating factor in this scenario. Based on our survey, customers will likely require more rental cars and desire more nature-based experiences (Exhibit 3). Companies should track the next generation of travel needs and focus on developing offerings that meet these needs in a timely manner. As mentioned, digitalization offers the best bet.

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Chinese travelers reported outdoor scenic as the most popular theme of future trips, followed by beach or resort, and family and kids.

Tourism has moved from pure landscape appreciation to a more multifaceted affair, and travel companies have a chance to elevate their travel offerings. For many people, traveling has become an opportunity for personal growth and deepening relationships, as well as to explore new landscapes, cultures, and cuisines. Companies that can fulfill these needs with innovative and appealing travel offerings stand to gain the most. Travel companies can analyze and capitalize on the unique traits of a given destination to identify its competitive advantage and develop high-value travel experiences around these traits.

Seize opportunities in the luxury-travel sector

Deterred from traveling overseas, high-end travelers have been redirecting their attention—and their money—to the domestic travel market. This shift presents a significant opportunity for China’s travel industry, as big spenders have traditionally accounted for the largest segment of China’s outbound travelers.

Because of surging demand, travel companies are able to charge more for luxury experiences. For example, at the time of writing, the price of an eight-person chartered flight from Shanghai to Sanya, Hainan, has increased by 20 percent, now costing ¥600,000. Domestic duty-free consumption has also exploded. Hainan’s duty-free shop sales have soared from ¥14.4 billion in 2019 to ¥32.7 billion in 2020, a 127 percent increase (Exhibit 4).

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Rural destinations are growing against the trend.

One strategy to capture value from this opportunity is to tap into the wanderlust of high-end travelers who are looking for activities they previously had to travel overseas for, such as skiing and diving. This winter, ski resorts in Heilongjiang, Xinjiang, and other snowy destinations were fully booked. And if we look ahead toward the summer, popular diving-training resorts on Hainan island are already fully booked, well in advance of the May Day holiday. The number of people who have reserved diving certification courses and related travel products through a popular OTA for the second half of 2020 has increased nearly four times.

Before travel companies scramble to develop luxury travel experiences to capture a slice of this market, they should bear in mind specific attributes of the Chinese traveler. For instance, while Chinese tourists are eager to hit the ski slopes, many of them lack the experience and training. As such, ski resorts should consider building more support facilities to provide beginner lessons, along with a range of other entertainment options.


While it may take until the latter half of 2022 for most of us to reach for our passports, plenty of opportunities are emerging in China’s domestic travel sector. Our latest survey confirms that despite confidence fluctuations in January, the general trend of China’s travel industry remains positive overall. What’s clear is that recovery is not linear, and by focusing on the three areas that we’ve identified, travel companies in China—and in other countries where domestic tourism has the potential to drive value—can find themselves in a good position to seize opportunities despite the uncertainties caused by the pandemic.

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