As global travel and tourism braces for a long slump, can Hong Kong overcome this existential challenge?

With no quick recovery in sight, Hong Kong’s massive hospitality sector is in peril. Economies with a big domestic tourism sector can hope for some respite – but will Hong Kong roll out the welcome mat for mainlanders?

David Dodwell

Published: 6:30am, 9 May 2020

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International tourism as we know it has disappeared, and that will be the case for the coming six months – maybe a year. With it have gone millions of jobs worldwide, thousands of companies, and billions in earnings spread across almost every segment of our economies.

What is plain in Hong Kong, as the daily influx of 200,000 mainland tourists has dwindled to a dribble, is just as evident worldwide. While big economies such as the United States are expected to lose the most in dollar terms (according to the World Travel and Tourism Council about US$214 billion this year), the biggest casualties are actually small island economies such as the British Virgin Islands, which get 92 per cent of its gross domestic product from tourism, and the Maldives (75 per cent) and Seychelles (64 per cent).

Other larger Asian casualties in dollar terms include Thailand, which earned about US$63 billion from tourism in 2018, or about 22 per cent of its GDP – but its economy is expected to fall by 6.7 per cent this year as tourism crashes.

But again, it is our smaller Asian economies that look likely to be hardest hit: Macau’s mainland-driven gambling business earned over US$40 billion in 2018, accounting for almost 59 per cent of its GDP, but has reported a 97 per cent revenue drop this year. Even Hong Kong, which the United Nations World Tourism Organisation says earns US$36.8 billion directly from tourism, is set to be a big casualty.

With over 270,000 deaths from the pandemic and the early, innocent expectations of a quick V-shaped recovery long forgotten, governments worldwide have grimly recognised that the travel and tourism sector, and all the trade fairs, restaurants, hotels and retail shops that are driven by it, are looking deep into 2021 before any kind of recovery is possible.

Until quarantines and other barriers to cross-border travel are dismantled – 209 destinations have such measures in place – and until airlines can agree on how to resume business as usual, the process of recovery cannot even begin. Meanwhile, thousands of companies are staring at a cliff, with millions facing unemployment.

Foremost among them are the airlines and tourism-related companies. The International Air Transport Association (IATA), surveying 122 airlines, reported last week that just four would break even with social distancing on aircraft. With 16,000 of the world’s 26,000 passenger aircraft grounded, airlines worldwide have seen all revenues evaporate, with most costs stubbornly intact.

IATA estimates as much as a 19 per cent fall in passenger revenues worldwide this year – about US$113 billion. Brian Pearce, IATA’s chief economist, is grim: “It’s tricky to understand how many airlines will be able to operate profitably. It will be a much smaller industry.”

Just how much smaller – and how rapidly it contracts – is likely to depend on the government bailouts being negotiated around the world. After initial furloughs and unpaid leave deals, more and more airlines are biting the bullet of redundancies and a painfully long, slow recovery.

As British Airways lays off up to 12,000 staff, Virgin Atlantic has cut 3,000 and abandoned its base at London’s Gatwick airport, while Virgin Australia is in administration.

Lufthansa, with 700 of its 763 fleet mothballed, has permanently phased out about 40 of its aircraft and warned that it has 10,000 “excess” jobs with no expectation of recovery until 2023. Its pilots have offered to take a 45 per cent pay cut until 2022.

In mainland China, Air China, China Southern Airlines and China Eastern Airlines have reported combined losses of more than US$2 billion for the first quarter, while here in Hong Kong, Cathay Pacific said this week that it is looking at “structural change” – cutting routes, fleet and jobs. Like Lufthansa, it sees no prospect of a turnaround until 2023.

These dramatic cuts have put Boeing and Airbus in crisis, with aircraft production cut by 50 and 35 per cent respectively. Behind them, companies such as Rolls-Royce and General Electric (GE) which provide the aircraft engines are in disarray. GE is cutting 10,000 aerospace jobs, while Rolls-Royce is cutting 8,000.

Watching this carnage, iconic investor Warren Buffett has dumped his entire stake in aviation shares, worth billions. “The airline business [has] changed in a very major way,” he said.

Behind this brutal data, the message is clear that airlines see no prospect of recovery for an uncomfortably long time. And if they are right, then it is surely also true that all those businesses driven by travel and tourism are facing a similarly long haul – with no clear means of managing their costs in the meantime.

Government-funded schemes to support staff salaries might work for a few months, but is any government seriously planning to underwrite salaries into 2022?

What does that say in Hong Kong for the tens of thousands of jobs that have for decades been driven not just directly by aviation and the airport, but by our massive trade fair and exhibition businesses, by our abandoned Ocean Park and Disneyland, by hotels and luxury retail outlets built around mainland tourism, and of course, our thousands of bars and restaurants.

If this does not amount to an existential challenge, I do not know what does. And if it is an existential challenge for Hong Kong, then what lucky economies worldwide are not in the same boat? If the World Travel and Tourism Council is right that travel and tourism account for 10.4 per cent of global GDP, and over 319 million jobs worldwide, where is there safe haven?

A few threads provide hope. Airlines such as Cathay Pacific that carry large amounts of cargo might conjure up a recovery sooner than the passenger-only, low-cost carriers such as AirAsia or Ryanair.

And while international travel might stall for the next two years, this will perhaps provide a marvellous opportunity for those economies with substantial domestic tourism opportunities – principally the US, continental Europe and China.

Note that mainland China recorded 2.38 billion domestic trips last year. The long Labour Day weekend in China provided an encouraging recovery in domestic travel, even though tourism revenue was far short of a year ago.

If domestic tourism suddenly blooms in mainland China, then perhaps Hong Kong can be a beneficiary – though for this, we will not only need an end to the pandemic but an end to street protests, and the semblance of a welcome mat. Sadly, I am not holding my breath.

David Dodwell researches and writes about global, regional and Hong Kong challenges from a Hong Kong point of view

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