19 June 2018, Global – Trade tensions between the United States and China have escalated to a new high with US President Trump’s threat on Monday (18 June 2018) to impose additional tariffs of 10% on US$200 Billion of Chinese imports. There is now an increased likelihood that China may impose curbs on outbound Chinese tourism to the United States, a tactic that has proven highly effective against South Korea and Taiwan in the past. We analyze the implications:
Based on South Korea and Taiwan experiences, the impact of Chinese inbound tourism curbs are swift, far reaching and psychologically effective
While tourism curbs may not be as serious in terms of actual economic impact, they are swift and far reaching. In South Korea and Taiwan, the pain was felt acutely by the hotel, retail and other hospitality-related industries. To make things worse, tourism is a highly seasonal industry with the bulk of profits made during the peak summer and autumn period. Poor earnings during the peak tourist season will essentially ruin the year for these industries. Most laymen can easily understand and relate to the tourism industry which makes curbs a highly effective psychological tool.
Excluding Canada and Mexico, China is the 3rd largest source of visitor arrivals to the United States
The number of China outbound tourists to the United States grew at 17% per annum between 2014 and 2016. In 2017, the growth rate of China outbound tourists to the US moderated to 7%, amounting to 3.2 million visitors.
Excluding Canada and Mexico, China is the 3rd largest source of visitor arrivals to the United States, after United Kingdom and Japan, accounting for 8% of the total visitor arrivals in 9M17.
In contrast, only 1.3 million US residents visit China every year.
Chart: China Outbound Tourists to the United States (2014 to 2017)
Chinese visitors spent US$33 billion in the United States
Chinese visitors spent US$33 billion in the United States in 2016, implying that each Chinese visitor spent an average of US$11,000 in the United States. Note that Education receipts accounted for nearly 40% of this.
The bulk of the Chinese visitors travel to the United States for leisure, which can be rescinded more easily.
If trade tensions escalate, China could potentially restrict the number of approved package tour group travellers to the United States like what it did with South Korea and Taiwan.
Chart: Purpose of travel of Chinese visitors to the United States (9M17)
Chart: China Outbound Tourists to South Korea (3Q16 to 1Q18)
Chart: Outbound Chinese tourists to Taiwan before and after DPP won the elections (4Q15 to 2Q17)
See our previous reports for the details:
Air China, China Eastern Airlines and United Airlines have the largest exposure to China-US routes and will be the most negatively impacted
Air China Group (753:HK) has the largest market share on China-US routes at 22% and will be most negatively impacted, followed by China Eastern Airlines Group (670:HK) at 18%. However, the impact will not be huge because US flights contribute only around 5% of both carriers’ total revenue.
Among the US carriers, United Airlines (UAL:US) has the largest market share on China-US routes at 17% and will be the most negatively impacted, followed by American Airlines (AAL:US) at 9%.
In contrast, the smaller Chinese airlines, Spring Airlines (601021:CH), Juneyao (603885:CH), do not fly to the United States and will therefore not be negatively impacted.
Chart: Airline market share on China-US routes (2018)
Cathay Pacific will feel the pain too
Some of the China-US traffic is carried by Cathay Pacific (293:HK) via Hong Kong so it will also be negatively impacted. The North American market accounts for 26% of Cathay’s total passenger traffic.
Both the Chinese and US carriers as well as Cathay Pacific may need to cut capacity on China-US routes if passenger and cargo traffic demand weaken and divert their excess capacity to other route regions.
Delta Air Lines-China Eastern Airlines and American Airlines-China Southern Airlines’ relationships may be strained
Delta Air Lines and American Airlines have small equity stakes in China Eastern Airlines and China Southern Airlines respectively. The trade tensions could put a strain on their relationships and hamper the two sides’ cooperation.
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