China in transition

  • May 28, 2014
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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.”

Shanghai, China’s premier airfreight gateway, suffered a slight decline of 0.3 percent in throughput last year to 2,928,527 metric tonnes, but business picked up in the first quarter. Handling firm Shanghai Pudong International Airport Cargo Terminal Co., Ltd. (PACTL) clocked up 14.4 percent growth in the first quarter to register its best result for the first quarter.

Predictably, the migration of manufacturing to the interior has brought new gateways to the fore, notably Zhengzhou, Chongqing and Chengdu. Xian is another promising candidate, thanks to the construction of a large manufacturing plant for Samsung, Diu notes. For the moment, this means large volumes of inbound cargo but no exports, which is the reverse of the situation at the three top contenders. Woodrow says inbound flows there are on the rise, but the imbalance is adding to the costs for carriers operating to these points.

Unlike their international rivals, the Chinese carriers have the advantage of being able to combine these points with other gateways on their long-haul freighter routes. Air China typically makes a stop on one of the three interior points en route between a European destination and Shanghai.

The carrier has shed its 747-400BCFs as it brings in 777s and fielded the first three on its European sectors. Diu expresses huge satisfaction with the new type – not only because of its operating economics, but also because it has the range to bypass the interior points if output there is low, and fly direct between Shanghai and its European gateways in Frankfurt and Amsterdam.

When it got rid of its 747-400BCFs and got its first 777s, Air China whittled down its transpacific all-cargo routes to a mere six weekly frequencies, supplemented with belly capacity on the main passenger routes, while the new freighters plied the routes to Europe. With more 777s due to arrive, the airline is now working to get its U.S. extended range twin operations (ETOPS) approval to launch freighter flights to North America. Diu hopes to have this in the bag before the end of June to kick off flights in July.

The routing has yet to be determined. One big question mark is over the return leg to China. Given sluggish demand westbound across the Pacific and good volumes from Europe to China, Diu is examining the viability of going for a round-the-world routing.

Cathay has already ramped up its main-deck capacity to North America.

“We are waiting for an acceleration in consumer spending in the U.S. and the corporate re-investment that this will stimulate. We have added frequency to Los Angeles and Chicago and also now service to Mexico City and Guadalajara three times per week. Transpacific is now serviced by a base schedule of 32 747-8 freighters per week,” Woodrow says.

Like Air China and Cathay, China Southern has moved to sideline its 747-400Fs and now relies on a fleet of eight 777Fs, with four more on order, which will come on stream in 2015. At this point, the carrier is boosting its transpacific lift with belly-hold capacity. In February, it mounted flights from Guangzhou to Vancouver with B787 equipment, and in July, it will deploy newly delivered B777-300ER aircraft on the Guangzhou-New York route.

The cargo division is tinkering with its portfolio.

“For our international products, we will extend our Equation and Variation-Pharma service gradually to more international routes,” a spokesperson for China Southern declares, adding that another focus is on the improvement of ULD transits at its home base.

Air China is tackling an overhaul of its product line-up, based on a new IT platform that was installed last September. This year, the focus is on the development of time-sensitive products, including a deferred service.

“Next year, we will spend time on the cold chain. Pharmaceutical traffic is showing strong growth in China,” Diu says.

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