At a recent air cargo summit in Beijing, one sentiment was repeated speaker-after-speaker, that being the fact that Chinese cargo carriers were losing out to foreign players when it comes to moving international cargo in China. Pointing out that the entire cargo capacity of Chinese carriers amounted to only 58 per cent of the total cargo capacity of just one European carrier – Lufthansa in this example – Professor Cao Yunchun of the Tianjin Civil Aviation University said foreign carriers were “swallowing up” the cargo market share in the country.

Prof Cao said that while the integrators – UPS, DHL, TNT and FedEx – were rapidly extending their reach in China combination and all-cargo carriers were also increasing their marketshare. Korean Air for instance, was experiencing its greatest growth in theChina market for the last few yearsrunning. “In Guangzhou Korean andMas Kargo have increasing flights outwhile Chinese carriers have seen theirmarket share decline,” he said.

He noted that the two carriers are also major players in the Hangzhou market, attracting cargo from Hangzhou, Ningbo and surrounding areas that used to be carried by Chinese carriers out of Beijing. “It is a big challenge to the Chinese air cargo industry,” Prof Cao lamented.

Within China there are 70 full freighters, added Wei Zhengzhong, secretary general of the China Air Transport Association (CATA), but full air cargo companies are only small scale with limited capacity. With no economy of scale they are unable to compete with international carriers leading to a situation such as Shanghai’s Pudong airport, in which a full 80 per cent of the cargo market share is held by foreign carriers.

Cargo by numbers
Indeed the figures speak for themselves. According to the deputy director of the Department of Policy & Regulations at the CAAC, Sha Hongjiang, China’s home-grown carriers handle about 66 per cent of domestic volumes and only about 33 per cent of international volumes into and out of the country.

Explaining China’s air cargo distribution further, the CAAC’s director of the Policy Research Department, Liu Shaocheng noted the rapid growth of the country’s air cargo market. Some 165 cargo capable airports across the country handled 9.5 million tonnes of cargo in 2009, up seven per cent over 2008, according to Liu.

Across the country there are 45 airports with an annual throughput of 10,000 tonnes or greater, which together handle 98.8 per cent of all cargo volume. But just three – Shanghai, Beijing and Guangzhou – handle the lion’s share of cargo at – 58 per cent.

Liu noted that with the crisis last year and pulling out of capacity by foreign carriers, Chinese carriers saw a 9.3 per cent rise in volumes to 4.45 million tonnes. “The scale and scope of air cargo companies in China is very small and their logistics management is far from perfect and the infrastructure is lacking,” and this will continue to limit the ability of domestic players to fully tap the ongoing growth, which in the first quarter of 2010 saw China’s total cargo throughput reaching 2.49 million tonnes, up 33.2 per cent over the same period last year. By the end of this year the Chinese aircraft fleet will amount to 1,417 passenger aircraft with a cargo capacity of 13,123 tonnes and 77 full freighters with a capacity of 4,966 tonnes, Liu said.

Currently there are 60 international air cargo companies in China, including dedicated cargo carriers, bellyhold carriers and integrators. “The Chinesecarriers do not have a very large market share – only 30 per cent of internationalair cargo – compared to the foreigncarriers which have a 70 per cent marketshare.”

Need for inter-modal hubs
While lack of competitiveness of domestic air cargo carriers compared to the international carriers is one problem identified by Sha, the lack of domestic cargo network within the country is another. “Freighter and bellyhold capacity is not fully utilised,” he said. “In future we will take measures to boost the development of air cargo,” he said adding that the government will implement policies in nine key areas to put domestic players on a better footing.

For Wei, attaching greater importance to the air cargo industry in China is one important step. “From 2000 the importance of the industry was first recognised and freighters were introduced, but we lack hubs and links to international hubs,” he said, adding there was a crucial need to develop intermodal hubs.

As a result he said, “we haven’t achieved very good growth – it’s not efficient. Air cargo is a kind of stand alone cargo, we must have an integrated approach and policies.” Currently there is very little integration between the various sectors, like forwarders, carriers, etc.

If the current situation persists, Wei warns, foreign air cargo players are going to dominate the market, particularly in the high value electronics and other high yield sectors. “There is a risk of being marginalised,” he says unless the integration of air cargo sectors is promoted, because when it comes to international air cargo, “the stand-alone approach doesn’t work,” he adds.

The solution, according to Wei is to marshal the vast resources available in China and with government support, develop one or two large companies in China that lay the foundation for further growth in the sector. These “back-bone” companies will be large-scale, formed through mergers and acquisitions “in order to strengthen the air cargo capacity in China”.

Another important step according to Wei, is for the domestic cargo market to see the industry as a complete logistics service – a complete chain of air cargo transportation from end-to-end. Because it involves so many components the IT aspect is vital he said. “We must try to extricate ourselves from labour intensive model and move to an IT intensivemodel,” he said.

A “blueprint” for growth
But the challenge is clearly well understood by the two senior CAAC officials. Also speaking at the summit the duo outlined the government’s strategy for making the Chinese logistics and air cargo sector more competitive.

One of the ultimate, and perhaps most ambitious, goals of the various strategies contained in what the two officials attending the summit described as the government’s logistics “blueprint”, is the stated aim for China to have one key international air cargo carrier in the ranks of the global players. “Before 2013 China should have one international air cargo carrier within the top five carriers internationally,” said Sha.

Excluding the integrators, this would mean moving up into the ranks of carriers the likes of Korean Air, Cathay Pacific, Lufthansa, Singapore Airlines and Emirates. Currently the only Chinese carrier in the top ten in terms of volume is China Airlines which comes in around 10th.

“China is going all out to upgrade its model of economic development and as the economy is restructured there will be more value added goods to be transported,” Liu says. “Currently the logistics chain in China is dominated by point-to-point which is only 20 per cent of the value chain. The CAAC is working to promote door-to-door which gives more value. “If we can have the whole chain, if we can link up the whole chain, we get full value.”

Consolidation is key
A key element of the blueprint will be a continued focus on encouraging consolidation within the industry, something that is already well underway. Indeed recent shareholding changes havebeen significant and far-reaching, with most within the industry seeing it as afirst round of consolidation.

In the latest round of China’s aviation sector consolidation China Eastern Airlines said it would purchase the assets of rivals Yunnan Airlines and China Northwest Airlines. This followed an earlier takeover of Shenzhen Airlines by Air China and China Eastern Airlines’ majority stake in Great Wall Airlines. With that purchase China Eastern operates three cargo airlines now along with Shanghai Airline Cargo International and China Cargo Airlines.

The government is also going to focus on encouraging domestic carriers to develop international networks by taking full advantage of available fifth freedom rights, as well as fostering the development of air cargo hubs that are also multi-modal hubs, Sha said. Liu added that should carriers not make full use of the fifth freedom rights they’ve been granted, the CAAC will take them back and reissue to another carrier.

“We will also examine market access policies to expand the air cargo market.” This includes incentives for landing slots for air cargo carriers and air cargo warehousing. Routes that are developed to the western, less developed, regions of China will be given greater incentives/ subsidies,” Liu said.

“We will also loosen control over air cargo and cancel unneccesary policies,” Sha said. Chinese authorities will also establish better regulation over the cargo agency business. Cooperation between various players in the logistics chain will also be promoted.

And in a move that may unsettle foreign carriers operating in China, Sha said the government will also review the current international air cargo market and “enhance regulation of international players operating in China.” While unclear as to what this may entail, Sha added that the regulation would be to “ensure fairness and order.”

With a clear nod in the direction of IATA’s e-freight initiative, the use of IT will be heavily promoted to streamline cargo processes and move away from efficiency-stealing paperwork. “The use of IT systems for cargo are very important. We must accelerate the adoption of IT systems for the development of logistics in China.

Enhancing the efficiency of Customs clearance, including an increase in service levels, especially at night is also a key area, Sha said. As part of a intensified focus on safety and security the CAAC will also tighten up the rules and regulations around dangerous goodsand the monitoring of them, Liu added.

The ground handling sector in China will also be opened up to enable thirdparty handlers to operate at China’s airports.

View from the inside
As to what this might mean for foreign carriers, CEO of Jade Cargo Int’l, Kay Kratky said it was too early to say, but as a “Chinese carrier” the “expectation I would say is that we benefit along with our shareholders out of this process so that at the end of the day Jade also has a better and much stronger business perspective than we maybe had in the past. Jade is co-owned by Shenzhen Airlines, which has a 51 per cent stake, Lufthansa Cargo with 25 per cent and DEG, a subsidiary of German stateowned bank KfW, with 24 per cent.

Also speaking at the summit, Kratky noted that in this year alone, the Chinese central government has indicated it will spend about two trillion CNY (US$293 billion) on infrastructure, of which CNY60 billion will be on aviation.

“Infrastructure is a basic requirement, but it alone will not make a logistics hub or network. Disordered development structures and processes endanger a systematic and nation wide coordinated growth. As it seems, many cities and provinces are competing, even if they are close neighbours and the catchment areas are rather identical.” He added that Jade welcomed competition, but that it should be “clear rules and regulative principles”.

Other problems include air traffic control delays, and customs regulations are another major hurdle. “Complex and from city to city, airport to airport, province to province differing customs regulations cool down potential business opportunities and worst case benefit the neighbouring and competing regions around China,” he said.

But overall Kratky was encouraged by the comments from the two CAAC officials, with one caveat, that things are very dynamic in China. “This situation is very dynamic. The target might be clear but the blueprint about how to get there or what this means in more detail, I think this has to be adjusted and analysed day-by-day. What gives me some confidence about this is that CAAC officials are aware of the problems.”

“But there will be a lot of questions and I guess there are a lot of discussions and today I wouldn’t be able to have a final expectation as to what will be the situation at the end of the year, it’s tooearly to say.”