1 November 2017, South Korea – China and South Korea have ended their dispute over the deployment of the Terminal High Altitude Area Defense (THAAD) system and agreed to restore economic cooperation between the two countries . This is a significant positive development for South Korea as the impact of China’s travel curbs has been detrimental to its tourism industry as predicted in our earlier report in March:
The total number of visitor arrivals (from all countries) to South Korea fell 34% y/y in April to September 2017, largely driven by the collapse in the number of Chinese tourists on package tours to South Korea to zero which led airlines on both sides to cut capacity by 31% y/y on China-South Korea routes.
The revival of air travel demand on China-South Korea routes will benefit Asiana, Korean Air, Spring Airlines and China Eastern Airlines the most. We had also earlier highlighted this in our June report:
In light of yesterday’s announcement by China and South Korea of a formal agreement to restore economic ties, we provide further analysis on which airline equities are set to gain the most:
ASIANA, KOREAN AIR, SPRING AIRLINES AND CHINA EASTERN AIRLINES ARE THE KEY BENEFICIARIES
Asiana Airlines (plus its low cost carrier Air Busan), Korean Air (plus its low cost carrier Jin Air) and China Eastern Airlines are the top three most dominant airlines in the China-South Korea route region with 30%, 25% and 14% market shares respectively.
In terms of earnings impact, Asiana Airlines (020560:KS), Korean Air (003490:KS), Spring Airlines (601021:CH) and China Eastern Airlines (670:HK) will be the biggest beneficiaries of the recovery in air travel demand between China and South Korea among all the airlines.
Asiana Airlines (020560:KS) has the largest exposure to China-South Korea routes which contribute 22% of its passenger revenue.
Korean Air (003490:KS)’s Korea-China routes account for 15% of its passenger revenue.
Spring Airlines (601021:CH) has the largest exposure with China-Korea routes accounting for 3% of its total passenger capacity among the Chinese carriers.
China Eastern Airlines (670:HK) has the second largest exposure with China-Korea routes accounting for 1.5% of its total passenger capacity among the Chinese carriers.
On the flipside, other favourite Asian tourist destinations – Japan and South East Asia, could lose some Chinese tourists to South Korea.
Chart: Airline market share on China-South Korea routes (2017)
CHINA-SOUTH KOREA TRAFFIC COLLAPSED FOLLOWING CHINA’S TRAVEL CURBS
Under the previous South Korea President Park Geun-hye, South Korea began the deployment of Terminal High Altitude Area Defense (THAAD) system, a decision long opposed by China that saw THAAD as a joint U.S-South Korean attempt to contain China’s military. Earlier in March this year, China’s government retaliated by imposing travel curbs on South Korea through the halting of South Korean tour packages sales to Chinese tourists. This followed China’s advisory to Chinese travel agencies back in October 2016 to reduce the number of South Korean tour packages by more than 20%.
In an earlier 6th March report, we highlighted the detrimental impact of these travel curbs on China-South Korean air passenger traffic as Chinese tourists account for 41% of South Korea’s total visitor arrivals. We also pointed out that some Chinese visitors would still try to circumvent the China travel curbs on travel to South Korea, most likely by opting for free-and-easy travel to South Korea.
Since then, the number of Chinese outbound tourists to South Korea has fallen 9% y/y in 1Q17 and 66% q/q in 2Q17, a marked contrast from its 35% growth in full year 2016. This was mainly driven by the 22% y/y drop in Chinese visitors on package tours in 1Q17 and by 2Q17, there were no Chinese visitors on package tours to South Korea at all. There are still Chinese visitors on non-package tours to South Korea but the number has fallen 27% y/y in 2Q17 after rising 7% y/y in 1Q17.
The impact of China’s travel curbs has been detrimental to South Korea’s tourism industry. The total number of all visitor arrivals to South Korea has fallen 34% y/y in April to September 2017.
Chart: Chinese outbound tourists to South Korea (2015 to 2017)
Chart: Package tour Chinese outbound tourists to South Korea (2014 to 2017)
Chart: Non-package tour Chinese outbound tourists to South Korea (2014 to 2017)
Chart: South Korea total visitor arrivals (2008 to 2017)