North American airlines are accelerating their return to Asia-Pacific flights, anticipating high-margin revenue in the region despite soaring costs. For airlines with more revenue generated by long-haul travel, Asia's rebound is especially crucial. Last summer, airlines capitalized on pent-up demand with high fares to Europe, but this may not be the case with capacity increases next year. Nevertheless, business travel, which is a cash cow for airlines, is also rebounding in Asia. According to data from the Global Business Travel Association, travel spending in Asia Pacific will increase by 41% this year to $567 billion and rise to $800 billion by 2027. Air Canada expects its traffic to Asia next year to be "closer to 80-something percent" of 2019 levels, according to the carrier's vice president of network planning. In contrast, the carrier's traffic to Asia-Pacific was only 33% of 2019 levels in 2022. United Airlines, American Airlines, and Delta Air Lines have reduced the number of seats in Asia Pacific in the current quarter compared to 2019, but the numbers are up 75% on an annual basis, according to aviation analytics company Cirium. By the first three months of 2024, the numbers will be up approximately 79% year-on-year. In contrast, seats on the flights of the three U.S. carriers to Europe will only grow by an annual 6%.
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Travel to Asia is a crucial source of high-margin revenue, particularly as labor and fuel costs continue to soar and domestic fares decrease. "The market here in the United States is more mature," said United's chief commercial officer, Andrew Nocella, "The growth rates of 7% or 8% or 9% for the industry are just not going to be possible, but growing overseas, we think there's just a lot more opportunity." Asia-Pacific has lagged behind the U.S. and Europe in global travel demand recovery after the pandemic. While passenger traffic in the region has surged since the reopening of borders, international airline capacity remains below 2019 levels.
The supply-demand mismatch is driving up profit margins for carriers. Asia-Pacific was the second-best market for passenger earnings after transatlantic for both United and Delta in the third quarter. Delta is shifting capacity to international leisure destinations as domestic flights grow more modestly. The Atlanta-based carrier will increase capacity to Asia-Pacific by as much as 50% in the December quarter and expects the new flying to be "profit-accretive." Rival United also plans to ramp up capacity in Asia Pacific at the cost of domestic growth, as it bets on flights like the U.S. to Manila, Philippines, and San Francisco to New Zealand to deliver the "strongest short-term results."
Chicago-based United has almost doubled the number of seats on flights to Asia in the current quarter from a year ago, according to Cirium. Air Canada also said that the increase in Asia Pacific capacity would more than double its overall system growth. Demand for increasing flights to Asia out of Air Canada's Vancouver hub is expected to come partly from growing Asian immigration to Canada, along with U.S. passengers, according to Mark Galardo, vice president for network planning. Canada's largest carrier has a strategy of flying Americans from U.S. cities that connect through its Canadian hubs toward overseas destinations. About 80% of that traffic now goes to Europe, compared with 20% to Asia, but it would shift as Asian travel grows, Galardo said. "Our forecast is that... it would shift within a range of 5 to 10 percentage points," said Galardo, adding it was too early to give a specific number for next year. However, closed Russian airspace as well as depressed Chinese travel to North America remain hurdles. Since the war with Ukraine, North American carriers have found it challenging to fly to destinations like Hong Kong from East Coast hubs Newark, New Jersey, Atlanta, and Toronto, as they need to avoid Russian airspace. Similarly, Chinese tourists are still not back in full force. In 2019, 2.8 million tourists from China came to the U.S., but research group Tourism Economics expects only 991,000 to arrive this year. Uneven recovery in Chinese travel demand is an unknown for the carriers, but tight supply should help profit, said Raymond James analyst Savanthi Syth. "I feel like Asia-Pacific is six-to-12 months behind what you've seen on the transatlantic – China being the wild card in all this," she said.
