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China in transition

By Staff Reports on May 28, 2014

Hangzhou, the capital of Zhejiang Province in Eastern China, is home to a UPS health care facility.

With its economic momentum showing signs of flagging, China has lost some of its luster, but Brian McCarthy is upbeat on the market potential he sees there in the coming years. The vice president of aircraft trading of Precision Aviation Solutions expects strong interest in converted B757-200 freighters, the core of his company's activities

"We see demand for a good 25 planes in this part of the world," says McCarthy, adding that the 757 freighter marks a good stepping stone for intra-China routes on which the volume is insufficient to sustain a wide-body freighter at this point.

Precision Aviation is in the process of completing an order for Air China Cargo, which signed up for four converted 757s last year. Two have already been delivered, and the third was due by early June, with the fourth scheduled to be handed over in August.

Air China, historically an operator of 747 freighters, has not used the 15-pallet freighters to haul its own cargo so far. They are flown for China Post, which uses them for overnight domestic line-haul of its soaring express parcel traffic, which is fueled by the rapid rise of e-commerce in China.

There were 2.6 billion express deliveries in the first quarter of this year, up 51.9 percent from the first three months in 2013, according to Xinhua News Agency. This generated revenues of US$6.64 billion (4.7 billion euros) for express firms, 45.6 percent above last year's level. An estimated 85 percent of this volume moves on the ground, but this leaves a considerable chunk of traffic to be flown between Chinese cities.

Hong Kong-based Kerry Logistics has tagged this traffic as a key focus for growth and is planning to set up an e-commerce platform in Hangzhou, China.

"Beijing wants to shore up the economy through domestic consumption, and e-commerce could facilitate this goal," Edwardo Erni, managing director for Mainland China operations, says.

China Southern Cargo is trying to tap directly into China's express bonanza with a premium service. Since its launch last year, A-Class Express has been extended to 14 cities across the country.

Titus Diu, COO of Air China Cargo, says the carrier may get more 757s, noting that the domestic express market is the only segment where it has seen growth in recent years. Now that staff members are familiar with them, he is looking to utilize the narrow-body freighters in the daytime to feed general cargo to Air China's long-haul wide-body network from points such as Chengdu or Chongqing, China.

"We have a strong foothold there. We can operate the 757s to Shanghai to feed our freighters," he says.

Demand for lift should not be a problem, but there are other challenges for a daytime operation. Airports such as Chengdu allow freighter flights only during the night, owing to congestion from passenger flights during the day, Diu notes.

China's air cargo market is in transition, with the economy having slowed down to 7.4 percent growth in the first quarter amidst predictions of further slowing in the months ahead. Low-end production has been migrating to the interior or countries in Southeast Asia such as Vietnam or Myanmar. Electronics and textiles still dominate airfreight volumes. Aerospace is showing promise but has not generated significant traffic so far, one European carrier executive observes. One segment that is coming on strong is pharmaceuticals, he adds.

UPS sees promise there too. Last year, the integrator opened a 22,000-square-meter (236,806-square-feet) health care facility in Hangzhou, an emerging hub for this traffic.

To the relief of airlines, airfreight demand has picked up in recent months, but this has failed to improve their situation so far.

"Market demand has stabilized and is improving, but the rate is the worst in the past four or five years, so the bottom line is unchanged," Diu says.

"Our business out of China has been improving volume-wise. However, yields remain under pressure," James Woodrow, director of cargo at Cathay Pacific, observes. "All freighter operators continue to suffer from the high fuel price and yields that are too low to cover a fully-costed operation."

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