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Air Freight - Shining Light

Led by China, cargo markets out of Asia are helping to fuel the industry recovery. For the rest of the world, keeping pace could be a challenge

IATA’s latest forecast shows a 12% increase for cargo in 2010. The figure is driven largely by a strong rebound in Asia-Pacific. International freight growth for the region is up nearly 35% year-on-year as of the end of 2009.

China is the local powerhouse, the third largest trading nation after the US and Germany, and destined to hit the top spot by the end of the decade. Chinese international cargo is estimated to grow 4.6% in 2010, followed by a 6.6% rise in 2011. It has now overtaken Japan as the region’s biggest aviation market. And the fact that it still lags some way behind the US in terms of seats per head of population illustrates its enormous potential. In aviation terms China is big, and it’s going to get bigger.

This will have a knock-on effect throughout the region. “China is an economic engine for the region,” says Brian Pearce, IATA Chief Economist. “Its importance is growing and will feed into intra-Asian and global trade.”

Economic signs for China are very positive. According to the Economist Intelligence Unit, its Gross Domestic Product (GDP) will rise 9.6% in 2010 on the back of strong stimulus packages. As their impact fades, the GDP is expected to achieve a more modest growth of 8.1% in 2011. However, Chinese economic stimulus concentrated on investment in infrastructure, which will have longer-term benefits than the short-term bailouts favored in the West. The country has also benefited from the huge investment made by a number of global companies in Chinese facilities. Combined with cheap production costs in comparison with Western nations, it will keep exports moving along at a good rate.
The renminbi remains fixed to the dollar and expert analysis suggests the government is unlikely to revalue to any degree. However, it will probably allow a slight rise as part of a return to tighter economic policy, and this will affect exporters. In all, even though imports will grow far faster than exports in value terms, there will remain a huge trade surplus.

Tan Tiow Kor, Senior Vice President, Sales and Marketing for Singapore Airlines Cargo, also references the 1 January 2010 launch of the China-ASEAN Free Trade Area. “Trade between China and the ASEAN countries is likely to increase significantly,” says Tan. “We expect that this development will cascade and lead to more cross-border air cargo movements between China and the Asia-Pacific region.”

Capacity shortfalls

The trading conditions are such that there is actually a shortfall in capacity coming out of China, and Asia-Pacific in general. This is in contrast to air freight in 2009, when global industry figures showed a 25% drop in revenue—the worst in 50 years—with volumes down 10% and yields down 15%. Even in China, international cargo volume was down 13.4%.

MASKargo reports that it will increase capacity into China by 15% for 2010, as compared to 2009. The growth will come mainly from Shanghai Pudong services. Its optimism is based on pick-up in intra-Asian trade and the Chinese Government’s desire for a better balance between imports and exports.
Peter Ullmayer, General Manager Greater China, Lufthansa Cargo, confirms the market has bounced back and the first two months were especially good compared with last year. “However, it is still a long way to go to speak about growth rates that we saw in 2007 or the first three quarters of 2008,” he says. “Where exactly we will stand at the end of 2010 is still a crystal ball question. But it will be better than 2009 for sure.”

Ullmayer believes the market is still fragile and the latest figures are still not where they should be. “Therefore any additional capacity will be very carefully evaluated,” he notes.

The difficulty of the capacity question is compounded by the distinctive trade imbalance. Ullmayer admits there isn’t really a solution, but expects imports to slowly, but surely, improve. “The number of well off customers is increasing daily on the Mainland, and it is safe to assume that this kind of consumer will ask more and more for imported products,” he notes.

China traditionally prefers higher savings, and consumer spending is more muted than in the debt-based Western model. Nevertheless, Robert van de Weg, Senior Vice President for Sales and Marketing at Cargolux, agrees that Chinese imports are growing strongly. The carrier tries to partially alleviate the trade imbalance through network planning—for example, stopping off in the Middle East prior to flying on to China. “We expect 2010 to be a very strong year compared with 2009 and we may even see growth versus 2008,” he says.

The rise in volume has been mirrored by a rise in rates, up 50% from the 2008 low. Into Asia, the recovery is less impressive, with rates up 20%. “Cargo rates are obviously dependent on the trading conditions, and especially capacity,” says IATA’s Pearce. “Airlines have learned the lesson that costs cannot be ignored either, even during a period of strong growth.”

Leading role

China will have an increasingly important role in world aviation—and in air freight in particular. Its manufacturing base will drive exports for some time to come. Aleks Popovich, IATA Senior Vice President for Industry Distribution and Financial Services, and interim Global Head of Cargo, says that with leadership comes responsibility.

“China is crucial to world trade, so it is important that China takes a leading role in industry discussions and initiatives,” he says. “Connecting the Mainland with global programs will facilitate more efficient processes, providing a stimulus for economies at the local, regional and global level, as well as the revenues of cargo carriers.”

E-freight Hong Kong was launched in 2007, and IATA is working on implementation at Tianjin airport. The gateway is also home to a Cargo 2000 certified ground handler, and interest in quality standards is growing.

Forecasts expect global cargo growth will return to “normal” in due course. The strong bounce back means it is outstripping world trade, indicative of a shift from maritime to air transport, but this cycle is likely short-lived. Growth rates will drop to average 5-6%, in line with world trade projections.
Nevertheless, China is expected to continue its strong performance. Trade flows will remain heavily biased towards Asia-Europe routes, though, and dealing with this imbalance will be critical.

Korean Air Cargo - Case Study

Korean Air Cargo sees the Chinese market as core to its future strategy. The carrier is considering increasing capacity through a series of regional gateways. Three strategic points have been identified: Shanghai, Hong Kong and Tianjin. The latter has already been selected by China to be a north-east Asian economic and logistics centre. Korean Air Cargo is exploiting the potential with a new cargo terminal, which, when completed, will handle about 200,000 tonnes annually.
The imbalance in trade doesn’t concern the carrier too much. It believes the Chinese market is on the point of changing its status from a producer to a consumer. It notes that, according to China’s General Administration of Customs, January inbound volume was valued at $95.31 billion, a sharp growth of 85.5% year-on-year
The newly instigated China-ASEAN Free Trade Area (CAFTA) will also provide a welcome boost to long-term prospects. Some 7,000 items, or 90% of the traded goods between China and ASEAN countries, will be exempt from tariffs. China has become ASEAN’s third largest trading partner, up from its former sixth ranking. Korean Air Cargo expects trade to increase even further as China’s economy grows.

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