Commentary: Hong Kong and Singapore air travel bubble could be a game-changer
The air travel bubble between both countries is a landmark agreement that signals the start of a gradual recovery for Asia’s international passenger traffic, says Brendan Sobie.
SINGAPORE: The air travel bubble announced by Hong Kong and Singapore on Oct 15 marks the first significant positive development in several months for both aviation hubs, Singapore Airlines (SIA) as well as Cathay Pacific.
Both the Changi Airport and Hong Kong International Airport (HKIA) are currently at about 1.5 per cent of normal passenger traffic levels.
Passenger traffic at SIA Group and Cathay Pacific Group are at even lower levels – down almost 99 per cent in recent months.
Traffic has been essentially stalled at the current paltry level for the last three months, following a very slight uptick in June and July driven by the resumption of transit traffic at both hubs.
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In early June, Singapore and Hong Kong both started accepting transit passengers in select markets. While more markets have been gradually added, transit volumes still remain extremely low.
Changi, for example, is currently only handling about 2,500 transit passengers per week.
CURRENT ARRANGEMENTS NOT YIELDING RESULTS
Singapore has been more aggressive than Hong Kong at trying to kickstart a recovery, opening bilateral green lanes with five other countries and unilaterally opening with four countries by waiving quarantine requirements.
However, none of these steps have had a significant impact and combined have generated even less additional traffic than the resumption of transit.
The requirements associated with the five green lanes – which started in June with China followed by Malaysia in August and Brunei, South Korea and Japan in September – are onerous, limiting demand to a trickle.
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A sixth green lane, with Indonesia, was recently announced and will be opened in late October.
The unilateral openings – which included Brunei and New Zealand from early September followed by Australia (except Victoria) and Vietnam from early October – have been less meaningful as restrictions on the other end remain, limiting demand to a trickle.
Only with Hong Kong does the agreement permit all types of travel, including leisure, while the six green lanes only allow essential business travel.
HIGH FARES FOR THE TIME BEING
Opening up leisure and removing quarantine, which will be replaced by a yet to be announced COVID-19 testing scheme at both ends, will lead to huge demand from the moment the bubble begins.
The start date and number of initial flights will be decided over the next few weeks but the bubble will start small – not due to demand but because the two governments will be cautious initially.
The number of flights will build up gradually over the next several months if the virus remains contained in both destinations, potentially reaching and perhaps even surpassing pre-COVID-19 levels in 2021.
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Demand will likely remain above supply for at least a few months, which in theory will lead to very high fares.
However, the governments could put a cap on fares, which is not normal for either but these are not normal times.
WHO GETS A SHARE OF THE PIE?
How the flights, which will be dedicated to the air travel bubble with no passengers permitted to transit beyond either hub, will be allocated to airlines and how they are sold could become controversial.
Prior to the pandemic, there were up to 21 daily flights between Hong Kong and Singapore including up to nine from Singapore Airlines, eight from Cathay Pacific, three from SIA Group budget subsidiary Scoot and one from Singapore-based budget airline Jetstar Asia.
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It would be logical for authorities to follow a similar ratio when allocating flights for the air travel bubble or, to be even fairer, seat capacity could be used given the wide range of seating capacities for different aircraft types.
According to OAG Aviation’s schedules data, in 2019 there were 3.8 million seats between Hong Kong and Singapore with Cathay Pacific accounting for 48.2 per cent followed by SIA with 39.4 per cent, Scoot with 9 per cent and Jetstar Asia with 3.4 per cent.
According to OAG Aviation’s traffic data, there were 2.9 million passengers on flights between Hong Kong and Singapore in 2019, with 70 per cent or 2 million local passengers.
The remaining 30 per cent consisted of transit passengers that connected on a single ticket beyond Hong Kong, Singapore or both hubs.
As the flights in the bubble will be dedicated to the local market, fewer flights would be needed than the average of 18 per day from 2019 to carry the same number of passengers.
HOW BIG WILL THE BUBBLE BE?
However, local traffic could increase beyond 2019 levels, which was down compared to 2018 due to the protests in Hong Kong and has been declining steadily since 2014.
According to Hong Kong Tourism Board data, Singaporean visitors to Hong Kong slipped by 26 per cent from 610,000 in 2018, including 431,000 that arrived at HKIA, to 453,000 in 2019, including 311,000 that arrived at HKIA.
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According to Singapore Tourism Board data, there were 488,000 Hong Kong citizen visitor numbers to Singapore in 2019, including 417,00 that arrived at Changi Airport, compared to 473,000 in 2018, including 397,000 that arrived at Changi.
The HKIA and Changi arrival figures are key as they show how big the travel bubble could become while the total visitor figures are less relevant as they include Singaporeans that entered Hong Kong for a second time after side trips to Macau or mainland China and Hong Kong citizens that entered Singapore a second time after side trips to Malaysia or Indonesia.
The visitor arrivals by air data indicate that of the 2 million local passengers that flew between Hong Kong and Singapore in 2019, there were roughly 900,000 Hong Kong citizens and 600,000 Singapore citizens.
The remaining 500,000 passengers would consist mainly of expats who live in Hong Kong or Singapore, including permanent residents and work pass holders, as they would be counted in visitor data based on the country of their passport.
There would also be some passengers that do not live in Hong Kong or Singapore but are travelling between the two as part of multi-destination trips.
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These passengers, as well as self-connecting passengers, which are counted in the visitor numbers as they clear immigration before boarding their next flight, have to be excluded from the 2 million figure when considering traffic that would be part of the air bubble.
Therefore, the air travel bubble would generate around 1.8 million annual passengers if a similar level of local market traffic as 2019 is achieved.
Based on 2018 levels, the bubble would generate about 2 million passengers and based on the peak 2014 levels 2.5 million passengers would be generated.
WHY THIS BUBBLE MATTERS
The 1.8 million figure would represent nearly 3 per cent of total traffic for each airport prior to the pandemic while the 2.5 million figure would represent nearly 4 percent.
This does not sound too significant but compared to the current level of traffic at Changi and HKIA the impact is huge.
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With 150,000 to 210,000 passengers per month, the Hong Kong-Singapore air travel bubble would more than double and could even triple traffic compared to the current roughly 100,000 passengers per month for each airport.
These kind of monthly figures would not be reached until at least early 2021 as initially the bubble will start small.
The economic impact for 2021 is potentially very significant, resulting in revenues that could approach US$1 billion for the airline industry and several billion dollars for the overall travel industry.
This is a real tangible impact for airlines – unlike any of the recent airline initiatives in Hong Kong or Singapore such as the upcoming flights to nowhere for Cathay Pacific budget subsidiary Hong Kong Express and the A380 restaurant, training centre tours and home delivery meals for SIA.
None of these initiatives generate significant revenues or profits but are being pursued mainly for marketing and to keep the community engaged while virtually everyone is grounded.
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Cathay Pacific Group and SIA Group – and their shareholders – are eager for borders to reopen, which is crucial given their lack of a domestic market, so they can mount more flights and carry more passengers.
Both groups are currently operating about 10 per cent of normal capacity with load factors of roughly 20 per cent.
The Hong Kong-Singapore bubble would only increase total capacity, which is measured by available seat kilometres, by a few percentage points given the relatively short distance of the route.
But load factors would improve significantly as the dedicated flights to the bubble would likely operate at full, or nearly full, capacity and total passenger revenues could double.
THE BUBBLE COULD BURST
However, the up to US$1 billion in possible airline revenues the bubble could generate in 2021 – which could roughly be split by the Cathay Pacific and SIA groups with Jetstar Asia also accounting for a small share – is hardly assured.
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This figure assumes successful long-term containment of the virus, which is hardly a certainty given the new waves in so many countries.
It also assumes the pandemic will continue for some time with a vaccination not arriving until at least late 2021.
Demand for the Hong Kong-Singapore bubble will also hinge on how many other travel bubbles each government opens up.
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If there are no other or only a few other options, then the Hong Kong-Singapore traffic could increase even well beyond prior record levels.
However, both governments are in discussions with several other countries over possible travel bubbles that would similarly allow all types of travel, including leisure, without quarantine.
If several bubbles are established, Changi and HKIA may both be able to recover 20 per cent or even 30 per cent of passenger traffic without a vaccination.
A 50 per cent recovery for either hub, SIA or Cathay Pacific is not likely without a vaccination and a full 100 per cent recovery would likely take another two to three years following a vaccination.
However, if successfully implemented, the Hong Kong-Singapore air travel bubble is the start of a long road to recovery.
It represents the light at the end of the tunnel, particularly if followed by several other travel bubbles in Asia Pacific – not only involving Hong Kong or Singapore but between other countries as this would help boost transit traffic for both hubs.
Brendan Sobie is the founder of Singapore-based independent aviation consulting and analysis firm Sobie Aviation. He was previously chief analyst for CAPA – Centre for Aviation.