Chinese Airlines Elbow Foreign Rivals Out of Major International Routes

Back in 2019, China’s massive market for international air travel was roughly split between native carriers and their better-known rivals dotted across the globe. Not anymore.

After five tumultuous years, the mainland’s largest airlines have brushed past their competitors to seize the lion’s share of air traffic to the world’s second-biggest economy.

China Southern Airlines, China Eastern Airlines and Air China have rapidly rebuilt their foreign networks from Covid-era lows, spurred on by a government eager to kickstart the economy and burnish Beijing’s global standing. This year, Chinese carriers are expected to supply 63% of the seats on flights to the mainland — an about 10-point increase from 2019, based on scheduled capacity tracked by Cirium.

The growth spurt marks a reversal by President Xi Jinping, whose government clamped down hard on travel during the pandemic and kept lockdowns in place longer than other major economies. China’s state-owned Big Three airlines are now tasked with reinvigorating the business and tourism links that were lost during the travel downturn.

The push has stoked tensions with foreign carriers who now find it harder to make a profit in a market estimated at $27 billion by McKinsey & Co. British Airways, Qantas Airways and Virgin Atlantic Airways have withdrawn from routes that have become financially unsustainable, while Deutsche Lufthansa AG blamed Chinese “overcapacity” for its weak performance in Asia. United Airlines Holdings Inc. called its diminished business with the mainland “the new normal.”

“It’s a shrunken market with less competition,” said Joanna Lu, head of consultancy Asia for Cirium Ascend. “Many foreign airlines may be reallocating capacity to markets that have recovered more quickly or where demand is more stable.”

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While the imbalance may prove temporary, European and US airlines face structural obstacles that have made China less attractive. Chinese airlines can fly a shorter path through Russian airspace, which has been off-limits for US-aligned carriers since the invasion of Ukraine in February 2022. As a result, European airlines are disadvantaged by paying more for fuel and labor, and their flights keep customers in the air for longer.

A round-trip economy ticket from London to Shanghai in November costs $843 on British Airways, for example, and the outbound flight alone takes more than one hour longer than a $682 flight from China Eastern.

And fewer customers are interested in traveling to China than before.

“Post-Covid demand for China to visit the world is higher than to visit China,” said Steve Saxon, a McKinsey partner who leads the firm’s Asia travel practice. “The European carriers are re-looking at China routes given the lower profitability, and saying they have better places to deploy scarce aircraft.”

Australia’s Qantas, hit by competition and regulatory setbacks, has exited the market altogether. Chinese carriers have notched gains in all but three of the mainland’s 20 busiest air links. In all, foreign carriers have reduced capacity there by 41% over the five-year span.

The competitive shift can be partly explained by China’s slow recovery from the pandemic. Covid short-circuited a bustling trade powered by a growing middle class that became the planet’s biggest source of outbound travel. At the other end, travelers curious to visit the Asian giant had flocked to bucket-list destinations like the Great Wall and the Forbidden City.

But China’s harsh response to the health crisis proved to be a turn-off to potential visitors when its borders finally reopened. The country’s own cash-strapped consumers, once free of lockdowns, prioritized domestic trips over foreign travel.

Read More: China’s Severed Air Links Drain $130 Billion From Global Tourism

For Chinese airlines, “international flying is in part a national service,” said McKinsey’s Saxon. “If you look at the profit pie, it shrinks and may already be negative.”

Chinese airlines this year have brought back 89% of the international capacity that existed in 2019, according to Cirium.

They have also become more aggressive with pricing, said Jonathan Kao, managing director for Greater China and Japan at BCD Travel agency. “When you have additional capacity at a low price, that is where the foreign carriers struggle.”

In a July 31 call, Lufthansa Chief Executive Officer Carsten Spohr called out Chinese carriers for flooding the market. He said the situation was “abnormal,” causing weakness in the airline’s Asian business despite record German investment in China.

British Airways this month suspended its service to Beijing, citing weak demand and the complications of flying around Russian airspace. From October, Virgin Atlantic will withdraw from China altogether.

“Margins are razor thin, and BA and other western carriers can’t compete with the Chinese carriers,” said Behramjee Ghadially, an independent airline consultant.

The US stands out for taking steps to contain the damage. The industry lobbied against an increase in flights, calling the Chinese government’s practices “anticompetitive.” Flights between the two largest air-travel markets remain at around 25% of pre-Covid levels.

Delta Air Lines Inc. CEO Ed Bastian told Bloomberg News on July 10 that US demand to China was “not very strong,” a view echoed by United.

The changes to the marketplace often leave Chinese carriers as the only remaining non-stop option from abroad. And China’s airlines are offering discounted transit flights, potentially cutting further into their rivals’ revenue.

On flights to the UAE, Chinese carriers now control about 50% of the capacity, up from 37% in 2019. Weak demand led long-haul specialist Emirates to downsize from the Airbus SE A380 superjumbo to the Boeing Co. 777, though it may redeploy the double-decker from its Dubai hub as traffic comes back.

For Qantas, a longstanding agreement for unlimited flights between Australia and China led eight Chinese rivals to enter the fray. With its flights only 68% full in May, and a commercial pact with China Eastern blocked by regulators, the carrier abandoned the market.

One challenge for the Chinese airlines to expand on their gains is drawing in passengers used to flying with more established carriers.

Alex Faulkner, a retired British academic, recently tried Air China for a flight to Shanghai, transfering to Xiamen to see his wife, who is working in the coastal city. He said he was swayed by better departure and arrival times, as well as a faster flight and a cheaper price on the longest leg.

While he had no qualms about flying with Air China, the food wasn’t as good, and inflight entertainment was “not what a European or American flier would expect,” Faulkner said.