The Year of the Rat overshadowed by COVID-19

Trang Tran-Sutherland, APAC Investment Manager, PSI
February 2020

Chinese New Year is one of the most important events celebrated by Chinese people worldwide. It is China’s biggest and longest national holiday which brings much of the country’s economy to a halt and strains transport systems. The scale of the migration is striking; while an estimated 116 million Americans were on the move around the Christmas and New Year’s holidays, typically, Chinese citizens will rack up about 3 billion trips during the Spring Festival, living up to its status as the largest human migration on earth.

However, the widening outbreak of Coronavirus that began in late 2019 has added some complications this year. At least 10 cities, and up to 50 million people, had been put on lockdown on the eve of the Lunar New Year. As of the first Monday of the Year of the Metal Rat, the Chinese Government had placed a ban on all international group travel in order to contain the outbreak of Coronavirus which now has spread to multiple countries in Asia, the US, Canada, Germany, France, the UK and Australia.  The Chinese Government also had to extend its Lunar New Year holiday until 2 February from 30 January to help deal with the outbreak as the country’s death toll rose.

Since China’s outbound travel market is the largest in the world with 150 million international trips being made by the Chinese in 2018, the travel and tourism industry are taking big dips. More than 400mn Chinese were expected to travel over the Lunar New Year. Instead, flights and hotels are being cancelled as people face travel restrictions or choose to stay at home. On the first day of the New Year, rail and air passenger figures were down around 41% from the year before.

Some airlines are allowing passengers to reschedule for free if they have flights to or from Wuhan (Hong Kong’s national carrier Cathay Pacific was among the first). Several companies have cancelled cruises that originate in China. The country’s biggest online travel agency, Trip.com, is also waiving cancellation fees on all hotels, car rentals and tickets for tourist attractions to Wuhan.

The latest statistics from our data partner Forward Keys, based on global aviation capacity, flight searches and over 17 million flight booking transactions each day, reveals a substantial setback to the travel industry. As of 26 January, when Wuhan airport closed, outbound travel bookings for the Chinese Holiday period were 6.8% behind.  At the same date, inbound bookings for the Chinese New Year period were 7.2% behind the equivalent point last year, having been up 4.5% only the week before.

Hotel groups are also paying out refunds to tourists who want to cancel trips to Wuhan and other parts of China. Both InterContinental Hotels Group (IHG) and Hyatt will allow guests to change or cancel stays at most of their Chinese hotels over the Lunar New Year holiday.

Macau, the world’s largest gambling hub and a popular destination for travellers from China has also experienced an immediate impact. It relies predominantly on Chinese visitors for its tourism revenue. On the third day of the Chinese New Year, the number of tourists from mainland China fell 80%, compared to the same day last year. Overall inbound tourist numbers were down 60% over the 3 days of the holiday so far.

Traditionally this is the period of high spending amongst the Chinese. Domestically in 2019, Chinese New Year spend contributed close to $150bn in spending and consumption. The equivalent of as much as 1.5% of GDP.

Chinese consumers also increase spend overseas during this time. In 2018, the total spend accounts for $130bn which is more than a third of the value of luxury goods purchases made worldwide.

So far, luxury brands have weathered a dip in sales since the political protests in Hong Kong, but with the Coronavirus recently added into the equation the industry’s conglomerates such as LVMH, Kering and Richemont are likely to experience a decline in sales, after seeing record high share prices in the past month. . According to the BBC, the British luxury fashion brand Burberry makes about 16% of its sales in China – this has seen a fall of 4.79% in sales following recent events.

There is no doubt the current outbreak reminds many of the fears and uncertainty that was prevalent at the peak of the 2003 SARS crisis, especially alongside the fact that China’s stock market is currently in decline. It’s too early to scale the wider economic impact but looking back at the historic events can give us an indication of the likely outcomes.  The travel restrictions will certainly have an immediate impact on domestic and international airlines and travel companies, the speed of their recovery will ultimately depend on how quickly the epidemic is brought under control and how quickly consumer confidence returns.  Subsequently, those brands that count Chinese travellers as a significant audience are also likely to take a hit as traveller numbers to and from the region drop off.  For now, it’s a watch and wait brief.