The opening of the US express company’s US$150 million "superhub" at southern China’s Guangzhou Baiyun International Airport later this year will replace its current Asian hub located in Subic Bay, Philippines which was no longer large enough to handle thesurging Asian volumes.
Fedex has a 30-year lease on the Guangzhou facility with an option for an additional 20 years and with 155 acres in total, Fedex has the ability to nearly double its capacity ifneeded.
Surging Asian volumes
The new hub was necessary for a number of reasons, according to FedEx Asia Pacific president David L. Cunningham, Jr. This was driven primarily by express demand growth in China, forecast to grow at 10.8 per cent over the next 20 years, along with intra-Asian trade growth – currently growing at 8.6 per cent per year – faster thanany other area in the world.
The intra-Asian air cargo market is currently the 2nd largest market in the world today. In a nutshell, Fedex has simply outgrown its ability to park planes at Subic, Cunningham said, speaking to business leaders in Singapore recently. "If you look at trade patterns in Asia, 10 years ago the top three trade partners of every Association of Southeast Asian Nations (Asean) countrywere the US, Europe and Japan.
"Now, China is in the top three of every single Asean country," he said, adding that now products made in Asia are also consumed in Asia. And with most of this coming out of China, and a full 40 per cent of exports originating from the Pearl River Delta area, "we aregoing to the very heart of that export area with our new hub," he said.
The other key China development was the move last year to buy out its Chinese joint venture partner following China’s entry into the World Trade Organisation regime which allowed it to operate on itsown.
Although flying is still the dominant mode for Fedex in Asia, it does have a small trucking operation in China which Cunningham highlighted has a reliability rate as good or better than many otherparts of the world.
India beckons
On the opportunities in the rapidly expanding Indian market, Cunningham said that while both China and India were very important markets, they were alsovery different.
"India offers many of the same opportunities as China – rapid economic growth, large population and the ability to transform itself with new business models – what India does not have compared withChina, is infrastructure."
"But we are continuing to invest there because we see potential," he added. In January, Fedex acquired its Indian service provider, Prakash Air Freight Pvt. Ltd. (PAFEX) which has been working withFedex since 2002.
PAFEX, formerly a privately held company, is one of the largest domestic express companies operating in India, with more than 384 offices and depots serving nearly 4,400 destinations and its nationwide network covering every cityin India.
Although he acknowledges that the infrastructure and regulatory issues can be daunting, "it would be wrong to assume that India won’t get it right at some point,"he said.
The promise of Vietnam
Vietnam is another promising market, with Cunningham describing it as "one of the most exciting developing markets in the region." Currently the carrierhas one
flight a day into the country, where just three to four years ago the market was too small to warrant it.
The country is gradually liberalising its air services and is currently in transition to enter the WTO in 2012. "But our hands are tied until then in termsof what we can do," he said.
But the market is growing he said, with the semi-conductor industry growing – in part from a shift from China – and the volume of goods exported is rising by the day, he said. This combined with a "young, dynamic population," will mean plenty of futureopportunities.
"Someday soon Vietnam is going to have a very big role to play in the globaleconomy," observed Cunningham.
A challenging environment
The air freight industry in generalis facing a number of key challenges,and spiraling oil prices for instancecontinue to put severe pressure onevery carrier’s bottom line. "We cannotabsorb those costs," Cunninghamsaid, "so we’ve put in place a ¡®dynamicfuel surcharge’ which consists of thebase cost of fuel and then surchargesare added as necessary."
But what’s different this time from the last oil crisis in the 1970s, is that this time it is not a supply issue, it’s a demand issue being driven by China’svoracious thirst for energy, he said.
Security is another key issue, but Cunningham noted that unlike the non-express air freight players, Fedex has had a significant level of security in place for some time, which includes "one of the largest private security divisionsof any company."
Fleet planning
Already the largest aircraft operator in the world with a fleet of over 650 aircraft, Fedex is constantly looking at its fleet planning which Cunningham said normally is pegged at about a 5-10year forward view.
"Not enough planes and you cannot grow. Too many and it’s too costly,” he noted. While the carrier was set to be the launch customer for the A380 freighter, delays and eventual cold storage for the freighter variant necessitated a change in plans. Ultimately Fedex opted for B777 freighters which, "quite frankly are going to be a betterproduct for the express segment."
Currently Fedex relies on MD11s and DC10s as the backbone of its fleet, along with A300/310s and increasingly B737s which it is buying to replace its ageing B727-100/200s for shorter haulroutes.
