Surely, a direct flight between China’s third-largest city and the United States’ third-largest city must be highly profitable. Right? As it turns out: no. American Airlines is pulling its daily Beijing-Chicago route due to lacking profitability at a point where the Chinese tourism market has never been bigger. Despite being a flight that “should” essentially print money for American Airlines, the rapidly changing Chinese tourism market and a complex aviation market in China have made that difficult.
China is the home to 11 of the 20 fastest-growing airports in the world, and it’s poised to overtake the United States as the biggest aviation market by 2022, two years earlier than previously expected.
Meanwhile, Chinese outbound tourism has never been bigger, and (despite fears of a trade war) demand for travel to the United States seem all but sustained for the time being.
It would appear as if the time has never been better to continue to service routes between major cities in China and the United States. Moreover, the number of flights between major cities in both countries is further limited by regulation, and in the case of Beijing, also due to capacity constraints at its airport. Maintaining existing routes that have space allocated to them seems like a wise choice.
Yet, under these seemingly favorable market conditions, American Airlines decided to pull its Beijing-Chicago flight that it has operated since Chinese outbound tourism’s much humbler times back in 2010. Back then, 57.4 million Chinese tourists ventured abroad (and mostly to Hong Kong and Macau), a number that has more than doubled to 130 million in 2017.
“The current fare environment severely limits our ability to successfully compete between Chicago and Beijing,” American Airlines VP network and schedule planning Vasu Raja said in a statement.
However, more things have changed than 2010 than the total number of Chinese outbound travelers. Most important, perhaps, is the quick rise in travel from China’s second and third-tier cities. Before, airports in such cities were by far and large used for domestic travel, and they eventually evolved to become important source markets for short-haul destinations in East and Southeast Asia. Today, many of China’s second and third-tier cities are connected with international long-haul destinations with direct flights.
Consequentially, the traditional cash cows are now less important to Sino-American travel than ever. Why go to Beijing or Shanghai to travel to the United States when I can go straight there from the local airport in my second-tier city?
So, while American Airlines obvious competition in the China market may be the state-owned trio of Air China, China Eastern, and China Southern, as well as U.S. peers United and Delta, they aren’t necessarily the reason American Airlines is facing turbulence. Rather, it’s airlines like Hainan Airlines, Xiamen Airlines, and Sichuan Airlines that are mounting competition with new routes out of lower-tier cities.
And it’s not only American that suffers. Flag carrier Air China reported a 5 percent drop in revenue on its North American routes in 2017, and United Airlines has announced that it won’t be adding more capacity in the short term. Meanwhile, China’s still lesser-known airlines are adding capacity on full speed.
Unfortunately, that’s just one of many problems that American Airlines is facing in the Chinese market. The airline previously blasted Beijing over alleged protectionist measures that prevented it from operating new Sino-American routes. Now, Chinese authorities are attempting to force American Airlines (and its peers) to adapt the language on its online platforms to further Chinese foreign policy goals. If it chooses to not comply, it may face disruptions to its business in China.
Indeed, American Airlines struggles in China is a microcosm of Chinese outbound tourism in 2018. There’s more at stake and more competition than ever before, and now tourism is more political to boot. At the same time, the China market isn’t going anywhere.