The Great Fall of China: Demand still growing fast, but overcapacity, pricier fuel sink Q2 profits for Chinese airlines

In a new book about China, Harvard professor Graham Allison provides a list of astonishing facts about the country’s economic development. In 1980, its gross domestic product was less than $300 billion, with 90 out of every 100 citizens living on less than $2 per day. By 2015, GDP was $11 trillion, second only to the U.S., with just three out of every 100 living below the $2- per-day mark. Adjusting for purchasing power, China’s economy is already larger than that of the U.S. In 1980, China’s trade with the outside world was less than $40b. By 2015 it had increased 100-fold to $4t. The country is now the world’s largest producer of automobiles, ships, steel, aluminum, clothing, textiles, cell phones and computers and also the largest consumer of many goods, including automobiles. China has also been the primary engine of global economic growth this decade.

Naturally, China’s spectacular rise is having a profound impact on the global airline industry too. In fact, it’s both an opportunity and threat for carriers throughout the world. Last year, Chinese airlines enplaned 488m passengers, still well below the 823m carried by U.S. airlines but a rise from just 266m at the start of this decade. In 2000, Chinese airlines carried just 62m passengers. In 1990 the number was 17m. In 1980: just 3m. If that doesn’t deserve a “wow” with an exclamation point, nothing does.

This growth reflects surging demand for air travel, which foreign airlines are also capturing. Last year, 122m Chinese nationals traveled abroad, and chasing these new tourists is at the center of many airline growth strategies. Chinese demand is a key reason for the current success of airlines like Qantas, Air New Zealand and AirAsia.

But developments in China can be just as damaging as they are helpful. With Gulf carriers now on the defensive, the wildly bullish international expansion of Chinese carriers is moving to the top of concerns expressed by airlines as diverse as Cathay Pacific, Korean Air and even United. Even carriers without a big presence in China itself are finding their traffic exposed to Chinese carrier connecting options—between northeast Asia and the ASEAN region, for example, or between Europe and Australasia. At the same time, reliance on Chinese demand is subject to geopolitical risk— Korean carriers were the latest to learn this lesson when China’s government restricted outbound tourism to make a foreign policy…

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