Corona Daily 167: The Sixth Continent Slumps

Yesterday, Lotte duty-free and Shilla duty-free shut their stores in Seoul’s terminal one. Seoul’s Incheon airport is known as the biggest airport shop in the world. DF2, an ever busy section before the pandemic, stopped selling perfumes and cosmetics. In 2020, the renowned Seoul airport held three auctions to sell empty store space. Not a single buyer came forward. With an 83% fall in passengers, the airport incurred a net loss of $384 million.  

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Duty-free, also known as the sixth continent, was an $86 billion industry in 2019. Even before the pandemic, certain trends were noticeable. It was moving away from cigarettes and booze. Perfumes and cosmetics accounted for two thirds of the sales. Duty-free sales were rapidly moving in the direction of China and its wealthy customers.

Worldwide duty-free sales collapsed by 70% in 2020.

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In the old days, passengers travelled by international ships for weeks, sometimes months. “Duty-free” was an allowance for whatever they “consumed” on the ship. Because during the international voyage they were not taxable in any land. During the journey, they actually could smoke 200 cigarettes and drink two liters of whiskey. As a matter of historical inertia, the same quotas continued even after people began flying.

Modern airport duty-free began in 1950. International travel had just started after WWII. Shannon airport in Ireland was one of the hubs. Brendon O’Regan, a catering accountant, noticed people liked to shop at the airport. Why not incentivize them by making the shopping tax-free, he thought. The Irish government found a way to do it by declaring Shannon airport to be not part of Ireland. That was the beginning of airport duty-free.

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In 2020, China did something similar by declaring Hainan, an island, as a duty-free port. Hainan is called China’s Hawaii, and is looked at as a potential substitute for Hong Kong. Hainan has beaches for swimming and surfing, but its bigger attraction is shopping. Chinese shoppers are now allowed to buy up to $15,500 worth of tax-free goods. This is three times the allowance pre-pandemic. China is wooing its rich citizens, who unfortunately can’t travel abroad, to visit Hainan and experience international travel. The initiative was vastly successful. Visitor numbers were down 22% due to the pandemic, but the duty-free sales went up by 127% year-on-year.

Last year, China managed to overtake Dufry (Switzerland) as the largest seller of tax-free luxury goods. Dufry sold a stake to Alibaba to acknowledge this.

China Duty Free is focusing on merging online and offline duty free. The idea is that the passenger “window-shops” online (before), off-line (at the airport), online (after reaching home). Fancy videos and livestreaming programmes have been a great success.

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“Flights to nowhere” are a pandemic special. Last October, a seven-hour flight took off from Sydney, and after flying all over Australia, reached… Sydney. Day before yesterday, Korea started a two-hour flight that enters Japanese airspace, but returns to Korea. Japan, Singapore, India and Ukraine are selling tickets for flights to nowhere. The scenic flights fly low, at 3000 feet or whatever is the legal minimum, allowing passengers to watch the scenery (new term flightseeing). Dining is an attraction on some flights. Ukraine has the cheapest flights at $95, probably because the route shows Chernobyl.

One key purpose of these flights is to promote duty-free sales. Different governments have prescribed tax-free allowances as part of the flying experience.    

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Duty-free has been criticized as immoral. It promotes consumption of high excise items like cigarettes and booze. It is a tax-avoidance scheme for the rich. When you look at the original concept of consumption on the ship, duty-free on arrival, and duty-free online are nonsensical.

With international travel reeling from pandemic shock, it is likely the duty-free concept will be re-defined in the future.

Ravi