Airlines Fear Tariffs Will Stoke a U.S.-China Trade War

As the Trump Administration prepares to impose strict tariffs on many goods from China, executives at some of the world's largest airlines say they fear the president's decision could spur a trade war and depress demand for travel between the U.S. and China.

"We are concerned," Zhihang Chi, Air China's vice president and general manager for North America, said in an email. "There’s no other way to put it."

President Trump announced Thursday he had directed the U.S. trade representative to assess tariffs on up to $60 billion of Chinese goods. Administration officials have said they seek the tariffs both to punish Chinese companies to for stealing American intellectual property, and to protect American interests. The administration has not yet said exactly what goods will be affected, but details should come within a couple of weeks.

Many experts, investors and business people fear the tariffs may not have the effect Trump envisions, suggesting they could lead to a trade war, with companies on both sides suffering. Airlines could be one of the many industries that lose, as fewer customers many want to travel between the U.S. and China. Boeing may also find the situation problematic, as it sells a significant number of jets to Chinese airlines.

U.S. Airline Woes

In a report earlier this week, Daniel McKenzie, an analyst with Buckingham Research Group, said tariffs, "are an incremental negative for travel demand," and noted United Airlines, which has far more China capacity than American Airlines and Delta Air Lines, with flights to Chengdu, Beijing and Shanghai, could be most at risk among U.S. airlines. Officials at Chicago-based United could not be reached for comment.

U.S. airline stocks took a hit Thursday, though most did not fall as much as the broader Dow Jones Industrial Average, which dropped more than 700 points, or nearly 3 percent. United shares were off 2.13 percent, American's fell 1.78 percent, and Delta's decreased 2.29 percent. Boeing's stock, meanwhile, lost 5.25 percent.

China is already tricky for U.S. airlines. Nonstop routes are a protected market — both governments decide how many flights carriers from each country can fly – but even with restrictions, there's often more capacity in the market than demand. Fares can be low, especially in the off-season, as airlines discount to fill seats.

United last year said it cut routes to Xi'an and Hangzhou, both from San Francisco, citing poor performance.

Beijing and Shanghai tend to perform a little better than secondary cities, but U.S. carriers face challenges in those cities, too. In November, American Airlines began flying from Los Angeles to Beijing, but the market is not yet a winner, Vasu Raja, American's vice president for planning, told Skift last month. Adding capacity in China, he said, is more of a long-term play.

"There's a lot of competition [and] it's a really challenged market," he said. "We recognize LAX to Beijing probably won't be that great in January or February, but in January and February of 2020 we expect it to be pretty good."

Other Airlines at Risk, Too

U.S. and Chinese airlines might not be the only carriers affected from fallout from the proposed tariffs. Korean Air Lines flies to more than 20 destinations in China, and has a robust business shuttling American travelers to places like Shenzhen and Guangzhou, via its Seoul hub.

John Jackson, a Korean Air vice president responsible for the company's operation in the Americas, said travel demand may fall between China and the United States if relations sour.

"I think it could," he said. "In addition to the potential impact on business travel in both directions, look at what happened to Chinese arrivals to Korea," during the THAAD dispute."

That was a dispute that began in mid-2016 over the Terminal High-Altitude Area Defense, a U.S-owned missile defense system designed to help protect South Korea from an attack by the north but opposed by China. According to the Washington Post, Chinese tour groups called off trips to South Korea, and the number of Chinese visitors to South Korea dropped 60 percent in the first nine months of 2017, compared to 2016.

Late last year, the two countries decided to resume normal relations, and the business climate has improved, the Post reported.

If something similar happens with the United States, airline business could be affected, Jackson said.

"I think Chinese make up 5 percent or less of the foreign visitors to the U.S., but are growing fast," he said.