Air freight from China: Clouds on the horizon

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“Build it and they will come” is the Chinese motto, but things do not always work out as planned.

In 2004, the Communist Party secretary in a poor rural county in the landlocked eastern province of Anhui decided to put his district on the map by building an airport. The county town of around 30,000 people is located 130km from Hefei, the nearest major city, and is endowed with unremarkable scenery, very little industry and limited economic prospects.

The local officials invited a developer from the prosperous eastern city of Hangzhou, wined and dined him and agreed to build an airport in a place where not even China’s extensive rail network reaches.

The original budget of Rmb30m ($4.05m) soon ballooned into Rmb100m but finally the airport was completed and the party secretary and the developer flew into town, to great fanfare and a hero’s welcome. That was the last flight in or out of the new airport, which was marked on Chinese maps for a couple of years but has now been removed.

The international aviation industry estimates that 48 new airports will be built in China over the next decade, increasing the number from the current 130 or so.

The supposed proliferation of inland airports has led to optimism among some analysts and international airlines offering freight services. They argue that rising costs of transporting goods overland to ports on China’s coast will make air cargo from these airports much more viable, particularly to destinations such as Europe.

Intel’s investment in the western Chinese city of Chengdu is an often cited example of air freight customers utilising newly-added facilities and services to send their goods to market along the new “Silk Road in the Sky”.

But it is still a relatively rare example and at present only Korean Air flies a cargo route from Chengdu directly to Europe, after Air China Cargo cancelled its all-freight route from Chengdu to Frankfurt because of lack of demand.

“Exporting industries remain weak in China’s underdeveloped west and most products are still carried to coastal cities and transported by sea,” according to Li Lei, an analyst at Citic Jiantou Securities.

The optimism in the sector has been fuelled by double-digit growth in air freight demand from China’s coastal boomtowns in recent years. Unfortunately, many analysts believe the export bonanza is past its peak, leaving huge overcapacity in its wake.

“The air freight business is not growing as rapidly as it has in the past few years, when export growth exceeded capacity and companies were able to charge decent prices,” says Mr Li.

“Airlines saw the chance and rushed into the sector but now there is overcapacity and with fierce competition, high oil prices and a global export slowdown, prices are falling and air freight operators are making much less profit or even losing money.”

Lufthansa Cargo recently issued a report with a similar message, predicting that annual air freight growth in China will be about 7.7 per cent until 2012, whereas the capacity to carry this freight is expected to expand significantly faster. “This will have further downward pressure on yield,” says Derek Sadubin, chief operating officer at the Centre for Asia Pacific Aviation.

“Just like the Japan boom-bust of the late 1980s, where markets such as Osaka saw massive declines in cargo yields, the signs could be looking ominous for the China market.”

Between 2007 and 2012 Lufthansa expects air freight volumes from China to Europe to grow 6.3 per cent a year but imports coming the other way will rise just 5.5 per cent, exacerbating trade imbalances and further undermining the economics for air freight carriers flying into China.

The clouds are gathering just as many airlines are ramping up their capacity, and Lufthansa now predicts possible overcapacity of 70 aircraft by 2012.

China Eastern Cargo Airlines says it plans to expand freight capacity by a large amount next year, even though it admits that it and most of its competitors are losing money on freight and that competition is based on undercutting rivals on price.

Jade Cargo, a joint venture between Lufthansa and Shenzhen Airlines, also says it has big expansion plans.

“Not long ago all the companies in China were converting passenger aircraft or ordering new freight aircraft,” says Su Xiufeng of Jade Cargo. “These aircraft will begin operating over the next one to two years, which will make this market even more crowded.”

Of course, this profusion of new routes should provide air freight customers with more options and better prices over the next few years. It is also likely to lead to consolidation within the industry itself.

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