the air cargo market between china and the united states ...exhibit.carnoc.com/gis/ppt/china-u.s....

The Air Cargo Market between China and the United States: Demand, Developments and Competition

May 2007

Reed H. Tanger

Kellogg School of Management

Northwestern University

Contents Introduction ................................................................................................4 Section 1: Overview of the Air Cargo Industry........................................7

Air Freight Services................................................................................................... 7 Dedicated Freighters versus Combination Flights ................................................. 9

Section 2: Growth Drivers in Chinese Air Cargo Traffic ......................11 Section 3: Trade Imbalance.....................................................................13 Section 4: Regulatory Changes ..............................................................17 Section 5: Geography of Chinese Exports and Air Cargo Hubs..........21

Yangtze River Delta: Shanghai ............................................................................... 22 Bo Hai Bay: Beijing.................................................................................................. 24 Pearl River Delta: Guangzhou ................................................................................ 25 Further Hub Developments..................................................................................... 26

Section 6: Air Cargo Carriers..................................................................30

U.S. Carriers............................................................................................................. 30 Federal Express ..................................................................................................... 30 United Parcel Service............................................................................................. 32 Northwest Airlines .................................................................................................. 34 Polar Air Cargo....................................................................................................... 36

Chinese Carriers...................................................................................................... 39 Air China Cargo...................................................................................................... 39 China Cargo........................................................................................................... 40 China Southern ...................................................................................................... 40 Yangtze River Express........................................................................................... 41 Shanghai Air Cargo................................................................................................ 41 Jade Cargo International........................................................................................ 42 Chinese Carriers Summary.................................................................................... 42

Third Country Carriers ............................................................................................ 43 Charter & Aircraft-Crew-Maintenance-Insurance (ACMI) Operators ................... 45 Competition and Growth......................................................................................... 46

Conclusion................................................................................................49 References................................................................................................51

of 53

Figures Figure 1: Total Trade between China and the U.S. ......................................................... 4 Figure 2: Exporter Shares of Asia to North America Freight ........................................... 5 Figure 3: Trade Imbalance between China and the U.S................................................ 14 Figure 4: Available China/U.S. All-Cargo Frequencies.................................................. 20 Figure 5: Key Chinese Regions for Air Cargo Operations ............................................. 22 Figure 6: Freight Growth at Shanghai’s Pudong International Airport ........................... 24 Figure 7: Geographic Concentration of China’s Air Cargo by Region ........................... 26 Figure 8: China’s Three Primary Cargo Hub Facilities .................................................. 29 Figure 9: Scheduled All-Cargo China Frequencies of U.S. Carriers.............................. 38 Figure 10: Scheduled All-Cargo Operations between Chinese & U.S. Cities in 2006 ... 47

of 53

Introduction

With increasing globalization, the transport of cargo by air has become

increasingly important. One market in particular is driving air cargo demand more than

any other: China. China’s development into a leading global manufacturer and global

consumer has been staggering. China’s worldwide trade was valued at $281 billion in

1995; it had increased to $1.77 trillion by 2006.1 Trade growth between China and the

United States has been equally impressive. Trade of $57 billion between the two

nations in 1995 has grown to $343 billion in 2006 (see Figure 1), with the U.S. as

China’s top trade partner.

0

50

100

150

200

250

300

350

400

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Ann

ual T

rade

($ b

illion

)

$343 billion

$57 billion

Figure 1: Total Trade between China and the U.S.2

China has been the primary driver of global air freight flows and is expected to

become the world’s largest air cargo market based on projected domestic and

international traffic. The fastest growing air cargo market is that between China and

North America with an annual growth rate of 18% in air freight traffic since 1995.3 The

of 53

U.S. is responsible for nearly all of this North America trade with China. In 2000, China

had already overtaken Japan as the leading shareholder of Asia/North America air

freight tons with 28%; it is predicted to account for a 53% share in 2010 (see Figure 2).4

28%44%

53%

21%

17%13%

11%

6%4%

7%5% 5%

4%5% 5%

29% 23% 20%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2000 2005 2010F

Sha

re o

f Asi

a-N

orth

Am

eric

an A

ir Fr

eigh

t

Rest of AsiaKoreaIndiaTaiwanJapanChina

Asia to North America Air Freight (millions of metric tons) 1.7 2.1 3.1

Figure 2: Exporter Shares of Asia to North America Freight5

The explosive growth in traffic between China and North America is expected to

continue, with forecasted annual growth rates around 10% over the next 20 years.6

Tonnage of air cargo will grow significantly as a result. The 2005 level of 11 billion

freight-ton kilometers (FTKs), the standard measure of air cargo, is predicted to be 75

billion FTKs in 2025.7 The China/U.S. segment of the industry will hold a prominent

share of this growth.i By 2025, air cargo traffic between China and North America alone

will account for 17% of the world’s FTKs.8

i Notation: The use of ‘China/U.S.’ in this report refers to both countries combined and is bidirectional.

of 53

A number of factors have impacted the air cargo industry’s growth in the

China/U.S. market. The growth in certain types of Chinese exports has fueled the

industry’s profits, while the continued trade imbalance represents a persistent

challenge. Regulatory policies have limited expansion opportunities; however, gradual

liberalization of the industry continues. Meanwhile, development of airport infrastructure

on mainland China continues with hub facilities emerging in key manufacturing regions.

Finally, a large number of air cargo carriers from the U.S., China and other nations are

competing fiercely in the China/U.S. air cargo market, where profitability is assured for

only the strongest carriers.

This report examines these and other factors to produce an overall summary and

evaluation of the current demand, developments and competition in the China/U.S. air

cargo industry.

of 53

Section 1: Overview of the Air Cargo Industry

Air shipments move 40% of the value of world trade, but only 1% of the total

weight.9 Only the most time-sensitive and high-value commodities require the premium

service of air transport. With costs seven to ten times higher than surface transport, air

freight offers speed, security and reliability that complement not only high-value, low-

weight items, but also products that are perishable or threatened by theft.10 Air cargo is

also favored for time-sensitive products that suffer from obsolescence, such as

computers, MP3 music players and cell phones, which are in high demand and have a

short marketing life. In addition, products with high inventory carrying costs, such as

medical devices and jet engines, are more likely to utilize air freight to avoid critical

time-in-transit. Growth in the use of just-in-time (JIT) manufacturing processes, where

particular parts must arrive for assembly at specific times, has also increased demand

for air cargo. Indeed, auto manufacturers often transport critical components by air, to

ensure their availability for final assembly.

Air Freight Services

The air cargo offering generally falls into two categories: express and general

freight. Express services typically cover the shipment of high-priority documents and

materials as well as small packages. Companies operating in this market are often

fully-integrated, meaning they provide not only the air service, but also the sorting and

ground transportation that allows them to offer door-to-door services. Examples of

worldwide integrated express service providers are well known, including Federal

Express (FedEx), United Parcel Service (UPS) and DHL. General freight typically

of 53

encompasses heavy cargo, including larger volumes of product, larger-sized product or

freight that is less-time sensitive than express freight. Large loads of electronics,

automobiles parts and items such as the medical devices and jet engines would be

typically considered general freight. General air freight services are most often provided

by direct air carriers that specialize in only the air transportation portion of the product’s

journey.ii In this case, ‘freight forwarders’ provide the remaining services, including

ground transportation to and from final destinations. Freight forwarders contract directly

with the air carriers and directly with shippers. Part of their function includes

maintaining relationships with a number of air carriers and routinely consolidating

various shipper loads for particular flights. As of 2005, freight forwarders handled more

than 80% of all intercontinental freight tons.11

Integrated express carriers, direct air carriers and freight forwarders, therefore,

share in the overall revenue from air freight services. The Air Cargo Management

Group estimated that in 2003 the share of global air freight revenues was 31%

integrated express carriers, 48% direct air carriers and 21% freight forwarders.12 While

carriers debate the relative demand for express versus general freight in the China

market, it is clear that both have important roles for the competitiveness of the air cargo

industry.iii

ii Express carriers also typically transport a percentage of general freight as part of their air cargo operations. iii In their 2004 submissions to the U.S. DOT, FedEx and Northwest Cargo debated the relative importance of express and general freight. NWA argued that general freight was underserved by the current capacity of cargo service, while FedEx argued it was overserved.

of 53

Dedicated Freighters versus Combination Flights

Air freight is handled in one of two ways: (1) dedicated freighter aircraft or (2) the

available belly capacity on passenger flights. Dedicated freighter aircraft transport only

cargo, with freight generating all revenue. Freighter (all-cargo) carriers flying in the

trans-Pacific market typically utilize long-haul widebody aircraft that can provide

maximum capacity for freight. Typical aircraft include the Boeing 747 (B747) and the

McDonnell Douglas MD-11. Express carriers, which typically fly shorter distances

between stops, often utilize smaller freight aircraft such as the Airbus A300/310 and the

Boeing 767.

Combination flights are typically scheduled passenger flights with a percentage

of belly capacity made available for express and/or general freight. Aircraft type vary

significantly with airlines’ individual fleets and comprise both narrowbody and widebody

aircraft. In most cases, a passenger airline’s ability to generate revenues from freight

carried aboard scheduled combination flights is critical to profitability. Projected belly

freight revenues are carefully examined when a carrier is considering an expansion of

long-haul passenger service, especially for the trans-Pacific markets.

In 2004, freight forwarders estimated that belly capacity of passenger aircraft

through combination flights was up to half the global capacity available to them.13

MergeGlobal confirmed this figure in 2005, stating slightly less than half of all

intercontinental cargo capacity was supplied by the belly compartments of combination

flights.14 For Asian air cargo, in particular, belly capacity has a significant role. Even for

Hong Kong, a hub with extensive freighter service, up to 60% of air freight is carried in

the belly compartments of passenger aircraft.15 The situation, however, is changing in

of 53

the favor of dedicated freighter service. With Asian growth in freight volumes forecast to

exceed the growth in passenger volumes in the years to come, the proportion of

combination flight belly capacity will continue to decline.16 The inadequacy of belly

capacity to support air cargo demand demonstrates the importance of dedicated freight

service and will lead to an increase in the required number of freighter aircraft.

of 53

Section 2: Growth Drivers in Chinese Air Cargo Traffic

China’s dramatic increase in international air cargo traffic results from the

explosive growth in China as a world manufacturing base. Between 1978 and 2002,

China’s Gross Domestic Product (GDP) grew at an annual rate of 9.4%.17 Over the

same period, air FTKs grew annually at 18%.18 China’s GDP annual growth rate has

hovered between 7% and 11% for 2001-2005, and is expected to remain (though with a

slight decline) above 7% through 2010 – outpacing North America, Europe and the rest

of Asia.19 Additional factors in air cargo demand growth result from China’s status as

the top destination - exceeding the U.S. - for foreign direct investment as well as its

designation as host of the 2008 Olympics and the 2010 World Exposition.

However, it is not just the growth in China’s economy that demands freight

service by air; it is the type of manufactured product. China’s manufacturing growth has

included the types of sophisticated electronics and industrial products that match the air

freight offering. Chinese exports of high-tech goods, including computers, cell phones

and flat-screen televisions have surged. These high-tech exports have surpassed all

other consumer goods, such as textiles, in value shipped. In 2005, they represented

58% of China’s exports to North America and Europe as compared to a 38% share in

1995.20 In addition, Chinese manufacturing now includes more final assembly and

component integration, rather than simply the fabrication of individual components. For

example, the number of computers assembled annually in China has grown from

840,000 in 1995 to more than 45 million.21

Typical eastbound air shipments from China to the U.S. are dominated by

consumer goods and include electronics, industrial machinery, power generation

of 53

equipment, apparel and games. It should be noted that the growth in China’s economy

has also increased its demand and consumption of foreign products, and thus, overall

imports to China. Exported air shipments westbound from the U.S. to China more

typically include small packages and items needed for manufacturing, such as

electronics, machinery, power generation equipment, medical equipment and

semiconductor machines. The fastest growing commodities for westbound air cargo are

the intermediate materials and capital equipment that support Chinese industries.

Using these items, Chinese manufacturing is able to supply finished products for the

industrialized world.

of 53

Section 3: Trade Imbalance

The imbalance in trade between China and the U.S. poses a significant

challenge to the air cargo industry. Eastbound traffic flows are substantial, a result of

strong Chinese export flows. Northwest Cargo reported load factors from China to the

U.S. of 95.6% in 2003 and 96.2% in 2004, and continues to assert 95% is a reasonable

target.22 Similarly, eastbound load factors exceeding 90% were reported by UPS in

2004 between Shanghai and the U.S.23 FedEx reported in 2004 that eastbound

Shanghai-U.S. and Shenzhen-U.S. flights were operating with load factors of 98.1% and

96.5%, respectively.24 However, a significant and expanding trade imbalance between

China and the U.S. continues to challenge the air cargo industry. In 2006, Chinese

exports to the U.S. exceeded its imports from the U.S. by over $200 billion (see Figure

3). The air cargo industry is forced to accommodate this imbalance. In 2003, with

207,537 tons of cargo transported between China and the U.S., 148,067 tons were

eastbound to the U.S. (71%), while only 59,470 tons were westbound to China (29%).25

The difference expanded in 2005. In that year, approximately 12 billion FTKs (80%) of

cargo were flown eastbound from China to North America, while only around 3 billion

FTKs (20%) were flown westbound.26 The trend is expected to continue. The ratio of

China-U.S. air exports to U.S.-China air exports stood at 4.1x in 2005 and is forecast to

be 4.3x in 2010.27 Air freight carriers serving the China/U.S. market, therefore, face an

eastbound demand for service that is more than four times greater than westbound

demand. Since a carrier’s costs are round-trip, and revenues are predominantly one-

way (eastbound), the industry’s profitability is increasingly challenged.

of 53

0

50

100

150

200

250

300

350

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

Ann

ual T

rade

($ b

illio

n

U.S. ExportsChina Exports

$288 billion

$55 billion

Figure 3: Trade Imbalance between China and the U.S.28

The trade imbalance is handled by the industry in several ways. One method is

pricing. With strong eastbound demand and relatively weak westbound demand,

profitability rests with strong yields on shipments from China. Eastbound traffic must

effectively subsidize the westbound flights, with carriers charging significantly higher

rates to serve the strong eastbound demand. Westbound rates are greatly reduced, as

carriers battle to generate whatever revenue they can from limited traffic. Andreas Otto,

Executive Board Member of Lufthansa Cargo, noted if air rates are $3/kg out of China,

they might be only $0.10/kg into China, and stated the imbalance is a “real danger and

limitation on the industry’s growth.”29 According to one freight carrier executive, flights

from the U.S. to China in 2005 averaged only about 10 tons of cargo.30 Such loads

would hardly fill a B747 freighter aircraft, which has a cargo capacity well over 100 tons.

Another executive indicated a 35% westbound load factor is a reasonable expectation.

of 53

Carriers’ reported westbound load factors are difficult to compare effectively, however,

as pricing to secure the more limited cargo to China can fluctuate significantly. Some

carriers, for example, may charge unprofitably low prices to gain additional shipments

and a higher westbound load factor.

A second method for dealing with the trade imbalance is the implementation of

westbound stops enroute to China. A number of carriers, for example, may fly routes in

the eastbound direction direct from China to the U.S., but may add stops in Japan for

westbound routes. Thus, westbound shipments between the U.S., Japan and China are

pooled, sharing aircraft capacity that might otherwise be underutilized. FedEx pools

demand through its use of round-the-world flights. Instead of only flying westbound

from the U.S. to China, FedEx also offers eastbound service from the U.S. with several

intermediate stops. Cargo is thus aggregated among the various regions served, thus

ensuring the maximum possible loads into China. Continued eastbound service from

China back to the U.S. completes the round-the-world flights with the strong loads of

Chinese exports.

A third tactic for managing the trade imbalance is leveraging hubs and networks.

Operating an Asian hub allows China-bound traffic to be consolidated from different

regions of Asia and the rest of the world, thus improving capacity utilization. The

connecting flight into China could therefore include exports from multiple nations.

Carriers based in the U.S. are able to leverage their U.S. hubs and North American

networks. By first directing any North American China-bound traffic to the U.S. hub city,

they are able to maximize the loads sent on connecting westbound flights to China. It is

for this reason that Chinese carriers often suffer the most from the China/U.S. traffic

of 53

imbalance. While they may fly strong loads eastbound from China, they lack the

extensive North American networks of the U.S. carriers to aggregate westbound cargo.

Guo Dongmou, aviation analyst with CITIC Securities noted, “The freighters of Air China

Cargo and China Cargo Airlines often fly empty into China.”31 Such carriers are forced

to survive from revenue gained through outbound cargo from China. To mitigate such

positions, Chinese carriers have sought foreign partnerships to leverage networks and

help ensure return flights are more fully loaded.32

It is worth noting that though the trade imbalance remains significant, exports

from the U.S. to China are increasing. From 1998 to 2002, exports of goods and

services from the U.S. to China grew 55%, compared to 5% growth for U.S. exports to

the rest of the world.33 North America to China air cargo traffic is expected to grow

annually at over 8% through 2025, though still outpaced by the forecasted 10% annual

growth in the eastbound direction over the same period.34 While U.S. exports are

clearly rebounding, the trade imbalance remains.

of 53

Section 4: Regulatory Changes

The ability of the international air cargo industry to grow in the China/U.S. market

has been dependent on necessary regulatory changes in recent years. Through the

1980s and 1990s, the air cargo industry was limited by Chinese regulation and policy

constraints effectively serving as barriers to entry for foreign carriers.

Barriers to foreign entry in China have been both hard and soft. For years, hard

barriers have been the limited infrastructure available to aviation operations. Soft

barriers have been policy constraints including domestic regulations, guidelines,

institutions and administrative mechanisms. Institutional barriers included the conflict of

interest created by Chinese domestic airlines’ ownership of major international cargo

terminals. Time-consuming customs processes have also hampered air cargo growth

at many Chinese terminals.

Aviation policy provided perhaps the most significant soft barriers to the air cargo

industry. Until recent years, all aspects of commercial air transport were governed by

the restrictive bilateral air service agreements mandated at the Chicago Convention of

1944.35 China, as part of the bilateral agreement structure, has maintained

conservative international aviation policies that have limited rights for air service

between China and other nations. China’s policies had also created an imbalance in

operations since the limited international traffic rights were biased toward Beijing,

despite Shanghai’s dominance in international trade in the late 1990s.36 As a result, air

cargo that could not be accommodated in Shanghai had to be shipped to Beijing or

Hong Kong for outbound transport (and vice versa). Overall, aviation policy resulted in

a less than optimal network that limited the growth of the air cargo industry in China.

of 53

China was accepted as a member of the World Trade Organization (WTO) in

2001 after years of negotiations. WTO acceptance required that China eliminate

barriers to market entry in various service sectors by 2005.37 For the air cargo industry

in particular, two major effects of China’s WTO accession would relax previous barriers

and facilitate growth. First, opportunities for foreign direct investment have greatly

increased with more liberal ownership restrictions for freight transport providers. Since

2002, foreign investors have been allowed up to a 49% stake in a Chinese company, as

long as no one investor holds more than a 25% stake; previously, foreign investors were

limited to a total of 35% ownership.38 The new limits have facilitated partnerships

between Chinese air cargo carriers and foreign companies, in addition to joint ventures

between foreign air cargo carriers and Chinese ground transportation companies.

The second significant effect of China’s WTO accession for the air cargo industry

has been more liberal policies towards air operations. In 1999, China and the U.S.

implemented an expanded air services agreement (ASA) that increased available

weekly frequencies for each country’s air carriers from 27 to 54 (of which 20 were for

all-cargo operations), and also allowed the designation of one additional air carrier from

each side.39 The move further enhanced competition in China’s air cargo market. A

much more liberal ASA was signed in July 2004, representing a significant move by

China to further accommodate competition in the industry. The agreement stipulated a

phased increase in weekly frequencies from the previous 54 to 249 per country through

2010, and allowed for the entry of five more carriers to the China/U.S. bilateral market

over this period.40 Over half of the newly available frequencies, 128 for each side, were

designated for cargo flights. Consistent with WTO requirements, the 2004 ASA was a

of 53

major Chinese policy shift from a position of protecting relatively weak Chinese carriers

toward liberalization of the air cargo industry to promote trade, foreign direct investment

and economic development.41

A further development in China/U.S. aviation policies was announced by U.S.

Transportation Secretary Mary Peters and Chinese Minister of Civil Aviation Yang

Yuanyuan in May 2007. In addition to growth in the number of passenger flights, the

new agreement includes elimination of all Chinese government limits on cargo flights

and cargo carriers serving the two countries by 2011.42 The agreement will give U.S. air

cargo carriers virtually unlimited access to China (and vice versa), fully liberalizing the

China/U.S. air cargo industry. As part of a phased approach, up to three new air cargo

carriers will be designated to serve the market between 2007 and 2010.43 The two

sides agreed to begin additional talks in 2010 to negotiate a full “open-skies” accord that

would effectively remove all limits from passenger operations, in addition to cargo

operations, between the two nations.

In summary, significant regulatory changes since the late 1990s have removed

previous barriers for the air cargo industry in the China/U.S. market, including significant

increases in service rights (see Figure 4). With significant policy liberalization by China,

the industry is now poised for considerable growth to accommodate the continually

increasing levels of demand.

of 53

4 4 4

12 12

20 20 20

41

59

71

86

00

10

20

30

40

50

60

70

80

90W

eekl

y Fr

eque

ncie

s

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2011

Unl

imite

d

Note: Represents number of frequencies available to each country

Figure 4: Available China/U.S. All-Cargo Frequencies44

of 53

Section 5: Geography of Chinese Exports and Air Cargo Hubs

The geography of Chinese manufacturing and location of Chinese infrastructure

and hubs are critical to air cargo operations between the U.S. and China. Prior to the

bilateral agreements that today allow direct air cargo service between the U.S. and

mainland China, Hong Kong served as the primary Asian gateway for Chinese exports

and imports. Shipments from the mainland would be consolidated in Hong Kong for

transport overseas. As a result of the bilateral agreements and ensuing direct service to

new mainland hubs, in addition to Hong Kong’s own capacity constraints, Hong Kong’s

status as a China hub was reduced to serving the southern region of the mainland.

However, as recent as 2004, Hong Kong remained a dominant air cargo gateway

accounting for 36% of China’s total air cargo throughput despite the rapid growth of the

mainland direct service.45 As of 2004, over 202,000 metric tons was trucked annually to

Hong Kong for air freighter service to the U.S.46 In arguing for more direct service to

mainland facilities, carriers have noted excess delays - especially in the express freight

business - resulting from the necessary Hong Kong transfer for freight in and out of

southern China areas such as Guangzhou (Pearl River Delta) and Shenzhen. UPS in

2004 used the Hong Kong situation to argue for more direct air service to Guangzhou,

thus bypassing the time-intensive transfer to the mainland.47

As a result of China’s booming manufacturing and export growth, the regulatory

changes including bilateral agreements with the U.S, and the resulting demand for

direct air cargo service to the mainland, there has been significant growth in air cargo

hub facilities in mainland China. Geographic distribution of manufacturing and foreign

direct investment have been key factors in the location of air hub facilities. For the air

of 53

cargo carriers, these locations and the ability to serve them directly become integral to

the success of China/U.S. operations. The three primary areas for direct air cargo

service from the U.S. are the Yangtze River Delta (Shanghai), Bo Hai Bay (Beijing) and

Pearl River Delta (Guangzhou) (see Figure 5).

Bo Hai Bay

Yangtze River Delta

Pearl River Delta

Figure 5: Key Chinese Regions for Air Cargo Operations48

Yangtze River Delta: Shanghai

Shanghai has established itself as the dominant hub for China/U.S. air cargo. In

2004, the Yangtze River Delta region accounted for 11% of China’s population, 20% of

the GDP, 35% of foreign direct investment, and 30% of international trade.49 Shanghai

is the largest air cargo market in China. It is a large manufacturing base for industries

that typically ship by air including electronics, equipment parts and biomedical supplies,

of 53

and is also a retail, financial and distribution center for other regions across China.50

The increase in business by foreign companies, including establishment of Shanghai

offices, also drives demand for express freight service.

The growth in Shanghai’s air cargo movement has been staggering, especially

with the completion in recent years of Pudong International Airport. In 1980, Shanghai’s

international cargo and mail throughput stood at 14,000 metric tons; by 2003, it had

grown to 510,000 metric tons.51 In that year, air cargo tons through Pudong

International Airport grew by 87.5%.52 In 2004, Shanghai accounted for 53% of total

Chinese air cargo.53 Figure 6 displays Shanghai’s growth for domestic and international

freight combined, where tonnage tripled between 2002 and 2006. Carriers tend to

agree on the importance of Shanghai and forecast it will remain the fastest growing

Chinese hub for the foreseeable future. FedEx, which in 2004 routed nearly half its

traffic via Shanghai, called that city’s region the “most important mainland Chinese

market for imports and exports,” and noted average growth of 18% annually as of

2004.54

of 53

0 500,000 1,000,000 1,500,000 2,000,000

Annual Freight Tonnage

2002

2003

2004

2005

2006

Figure 6: Freight Growth at Shanghai’s Pudong International Airport55

The commercial growth in the Shanghai area has not always been easily handled

by the cargo carriers. Landing slots at Pudong Airport are scarce and overall

infrastructure remains fairly limited. While infrastructure expansion continues, the

constraints have forced operating costs to rise sharply in recent years. Northwest

Cargo President Jim Friedel noted in 2005, “Pudong is more expensive than Tokyo.”56

Shanghai will most certainly remain the hub for eastern and central China. While it will

also remain a significant gateway for all of mainland China, this role will likely be

reduced in coming years with the development of other mainland hubs and further

distribution of manufacturing throughout China.

Bo Hai Bay: Beijing

Beijing has served as the air cargo hub for the Bo Hai Bay region and northern

China. The Bo Hai Bay region in 2004 comprised 12% of China’s population, 18% of

of 53

GDP, 21% of foreign direct investment, and 19% of international trade.57 Since 1992,

the area has been part of the Tianjin Economic and Technology Development Zone,

which has fostered developments by major international investors.58 Motorola is one

such example for the region and remains the largest foreign investor in China.59

While they serve as an important air cargo hub for China, Beijing and the Bo Hai

Bay region do not have nearly the manufacturing base of Shanghai. In justifying its

initial China service to Shanghai rather than Beijing, Polar Air Cargo noted that Beijing’s

air cargo demand was already well-served by belly capacity on passenger flights.60

Nonetheless, Beijing remains one of China’s three primary mainland hubs, and has

undergone recent expansion to accommodate the broadening geographic expansion of

manufacturing in China.

Pearl River Delta: Guangzhou

The Pearl River Delta accounted in 2004 for 6% of China’s population, 10% of

GDP, 21% of foreign direct investment, and 35% of international trade.61 The region is

not only significant for its machinery manufacturing, electronics and textiles, but is also

the largest consumer market in China.62 Until recent years, nearly 90% of air cargo

exports from the region were sent via Hong Kong, due to a lack of nearby airport

capacity.63 The development in 2003 of the new Baiyun International Airport in

Guangzhou has changed this situation for the Pearl River Delta. The airport is home to

the largest cargo facility in China, second largest in Asia and third largest in the world,

as of 2005.64 In terms of international air cargo tonnage, the airport now ranks third

behind Shanghai and Beijing, with continued growth expected.

of 53

Further Hub Developments

Combined, the Yangtze River Delta (Shanghai), Bo Hai Bay (Beijing), and Pearl

River Delta (Guangzhou) regions in 2004 comprised 80% of China’s export volumes,

84% of its international trade, 75% of foreign direct investment, and 48% of China’s

GDP.65 Further, all three regions are expected to have annual growth rates of

approximately 12-13% for air express and approximately 9-11% for general freight

through 2008.66 Because of their commercial and economic importance, in addition to

geographic location, it is expected China will continue development of these three major

air cargo hubs – effectively splitting air cargo service for the north, east and south

portions of mainland China. Figure 7 shows the concentration of China’s air cargo

volume in these three key regions, which in 2004 comprised 89% of total air cargo

volume and by 2024 are forecast by Airbus to comprise 92% of air cargo volume.

0%10%20%30%40%50%60%70%80%90%

100%

Sha

re o

f Int

erna

tiona

lC

argo

Vol

ume

1996 2004 2024

OtherPearlBo HaiYangtze

Figure 7: Geographic Concentration of China’s Air Cargo by Region67

of 53

While the role of the Shanghai, Beijing and Guangzhou hubs remains clear, the

Chinese government continues plans for the development of additional air cargo hubs.

The government announced in June 2004 that the General Administration of Civil

Aviation (CAAC) would designate six air cargo hubs that would be operational in 2010.68

The first four would be Shanghai, Beijing, Guangzhou and a new operation at Wuhan

Tianhe Airport serving central China.69 Two additional hubs would be located to serve

northwest China, at either Xian or Urumqi Airports, and southwest China, at either

Chengdu or Kunming Airports.70

The designation of new hub airports was intended to complement the central

government’s “Go West” campaign, which was launched to encourage growth in the

interior of mainland China and provide a better balance of economics between the

affluent coastal provinces and the rest of China.71 It continues to be debated whether

this campaign will ultimately be successful in enticing investment and manufacturing to

these other more remote regions of China. While there are a few early successes such

as a new Intel factory in Chengdu, many remain skeptical. Wang Shouren, Secretary

General of the China Shippers Association, remarked “‘Go West’ is only a slogan,” and

cited lack of transportation infrastructure in the interior as the main reason for shippers’

reluctance to establish facilities in the less developed areas away from the coastal

provinces.72 UPS President International David Abney noted, “Moving west drives up

the logistics costs. The infrastructure looks nice near the coast, but in the interior,

there’s still a lot of investment necessary.”73

of 53

With the degree of manufacturing and investment in China’s interior regions

uncertain, the establishment of major air cargo hubs beyond those at Shanghai, Beijing

and Guangzhou remains unclear. Nonetheless, China has continued to make

significant investments to improve air cargo-related infrastructure. Airports have been

recently built in Shanghai, Guangzhou, Hangzhou, Zhuhai and Shenzhen (which hosts

direct U.S. service by FedEx).74 Major expansions have occurred at Beijing, and also at

Shanghai’s older airport, Hongqiao.75 A $2.16 billion expansion is underway at

Guangzhou’s Baiyun International, an airport only a few years old.76 Clearly, the

Chinese government has demonstrated its commitment to improving air cargo

infrastructure for the three major hubs and beyond. Such continued investment in

infrastructure will be critical in China’s ability to accommodate growth in China/U.S. air

traffic as a result of the May 2007 bilateral agreement to increase air services. Carriers

have also recognized the importance of serving or at least being prepared to serve

locations beyond Shanghai, Beijing and Guangzhou. In 2004, FedEx suggested direct

service to Qingdao, which serves as the gateway to Shandong Province in eastern

China.77 Designated as a Foreign Trade Zone, the region in 2003 attracted $4 billion of

foreign investment by companies such as Hewlett-Packard, Coca Cola, Nike, Dupont

and Lucent, which built a $200 million facility in the area.78

In summary, air cargo carriers operations continue to focus on the three key

regions represented by hub airports of Shanghai, Beijing and Guangzhou. While

Shanghai has already shown capacity constraints, continued expansion of facilities

there will accommodate significant growth in the years to come. Beijing and

Guangzhou both clearly have capacity for large cargo volume growth. Combining

of 53

capacity with the geography of commercial activity in China, it may be a number of

years before an additional air cargo hub would be established on the mainland. It will

remain important, however, for the industry to closely monitor continued geographic

distribution of manufacturing and economic development including the government’s

efforts toward this distribution. Even if the additional major hubs are not developed in

the short-term, the potential development of sub-hubs may be warranted by new

commercial activity in these other regions. These smaller volume demands could be

served with smaller capacity aircraft by carriers operating from hubs elseware in Asia.

Figure 8: China’s Three Primary Cargo Hub Facilities79

of 53

Section 6: Air Cargo Carriers

While a limited number of air cargo carriers have the operational authority to

serve the China/U.S. market, the degree of competition is very strong. Four U.S.-based

air cargo carriers hold the rights to operate direct scheduled service into mainland

China: FedEx, UPS, Northwest Airlines and Polar Air Cargo. Several Chinese carriers

hold similar rights for direct operations from China to the U.S. In addition to these

“home country” carriers, a number of other foreign flag or “third country carriers” also

operate directly and indirectly in the China/U.S. market. Both the home country carriers

and third country carriers also serve the China/U.S. air cargo market with a percentage

of aircraft belly capacity on scheduled passenger flights. Finally, additional cargo

carriers operate on a charter basis. Altogether the various operators produce a very

competitive environment for the China/U.S. air cargo market.

U.S. Carriers

Federal Express

Based in Memphis, Tennessee, FedEx is the world’s largest express

transportation company, providing express services to 215 countries and regions

throughout the world, including every U.S. address.80 An integrated shipping provider,

the company offers door-to-door delivery service utilizing its extensive air and ground

transportation capabilities. In 2004, FedEx had the ability to connect 90% of the world’s

GDP in 24 to 48 hours.81

FedEx began service to China in 1984, operating in Shanghai and Beijing using

air transport capacity from other carriers. The company had to wait a number of years

of 53

before operating its own air cargo flights to the mainland. In 1995, FedEx acquired all

four of the original U.S. air cargo frequencies to China, having purchased these initial

rights from Evergreen International.82 It began operating its own aircraft into China in

1996, connecting from its Pacific hub in Subic Bay, Philippines. Six additional China

frequencies were acquired in 1999, and one additional flight was acquired in 2001,

bringing FedEx’s total to 11 weekly frequencies.83

In 2004, when FedEx was proposing to be awarded additional China frequencies

from the U.S. Department of Transportation (DOT), the carrier was serving Shanghai,

Beijing and Shenzhen with MD-11 and A300/310 aircraft. In that year, FedEx reported

China volume growth of 50% with an integrated delivery network serving 220 cities in

the mainland.84 The DOT awarded FedEx with 12 additional frequencies in 2004,

allowing the carrier to begin round-the-world service between the U.S. and China. With

three more frequencies acquired for operation in 2006 and four additional frequencies

for early 2007, FedEx now held rights for 30 weekly China frequencies, with direct

service to Shanghai, Beijing, and Shenzhen.85

In addition to its core express business, FedEx air operations also accommodate

general freight. The company estimated in 2004 that general freight accounted for

approximately 20-percent of its total China/U.S. traffic.86

FedEx utilizes a number of hub facilities to support its Asian operations. Since

1995, the Subic Bay hub has allowed FedEx to effectively link North America and

Europe with both North and South Asia.87 FedEx also operates a hub at Anchorage,

where it began operations in 1989. The facility includes 258,000 square feet of floor

space and room for 10 aircraft, and provides customs clearance for approximately 80%

of 53

of flights from China to the U.S.88 FedEx also notes that the Anchorage hub is

strategically located nine hours or less from 90% of the industrialized world, and allows

connections with all major airports in the Asian markets within eight hours.89 Shanghai

became the headquarters of FedEx China in December 2003 with a 65,000 square-foot

sorting facility at Pudong International Airport.90 In January 2006, FedEx broke ground

on a $150 million, 880,000 square-foot facility for an operating hub at Guangzhou’s

Baiyun International Airport, planned to open in 2009.91 The facility will serve as the

company’s China operating hub. Finally, FedEx currently has an operating hub in

Tokyo and its Asia-Pacific headquarters in Hong Kong.

Notably, FedEx operates the world’s largest fleet of freighter aircraft. Though

many aircraft are narrowbody models utilized for U.S. domestic operations, FedEx has

over 200 widebody aircraft available for international operations.

United Parcel Service

UPS is a worldwide integrated express services and logistics provider based in

Atlanta, Georgia. It is the world’s largest package delivery company, delivering nearly

16 million packages with 1,200 daily flights to 200 countries each business day.92 UPS

provides door-to-door delivery service with extensive ground transportation

infrastructure and air operations based from its Louisville, Kentucky hub.

UPS first established a presence in China in 1988 through its partnership with

Chinese delivery provider Sinotrans, a relationship that expanded in scope through the

late 1990s.93 UPS commenced direct air service to China in 2001 with six weekly

frequencies that it used to serve Shanghai from Anchorage. At Shanghai, UPS has

of 53

enjoyed ‘change-of-gauge’ rights, which allow connections from U.S. flights. For

example, an arriving MD-11 flight from the U.S. terminating in Shanghai can connect

with a Boeing 757 flight serving additional destinations beyond Shanghai. Rights for

change-of-gauge frequencies allowed UPS to offer continuing service to its Asian hub in

Clark, Philippines and also serve Beijing on the returning flights from Clark.94 In 2003,

UPS established a partnership with the Chinese cargo carrier Yangtze River Express,

which provided additional connections on the mainland.

In 2004, when UPS proposed being awarded additional China frequencies from

the U.S. DOT, it operated 24 all-cargo movements at Shanghai from its China/U.S.

frequencies and corresponding change-of-gauge rights.95 The company noted traffic

growth of 60% since U.S.-Shanghai service had begun in 2001.96

The U.S. DOT awarded UPS in 2004 with all 12 frequencies the company had

proposed. This enabled UPS to bolster its Shanghai service to twice-daily (via

Anchorage or Osaka) and also begin the first non-stop service between the U.S. and

Guangzhou (via Anchorage).97 UPS secured three additional weekly frequencies

effective March 2006, bringing its total to 21. With those frequencies, the carrier has

provided nine weekly flights for U.S.-Shanghai service and seven for U.S.-Guangzhou

service; it also has been serving Shanghai from Cologne, Germany five times weekly.98

To date, UPS has integrated its Asian network through an operating hub in Clark,

Philippines. The company is now focused, however, on developing a new international

air hub at Shanghai’s Pudong International Airport. As defined in the 2004 bilateral

agreement between the U.S. and China, a U.S. carrier can secure specific hub rights in

China, effective in 2007, if the requirement of 72 weekly aircraft movements is met.

of 53

From its 21 China/U.S. weekly frequencies and complementing change-of-gauge

service at Shanghai, UPS has been operating 76 takeoffs and landings per week in

Shanghai.iv UPS will gain new flexibility through its hub qualification, including unlimited

frequencies to and from the hub, from the U.S. and other locations. The new UPS

facility in Shanghai is planned to open in 2008 and will link China’s mainland with the

rest of UPS’s international network with direct service to the Americas, Europe and

Asia.99 The facility will be built on nearly 1 million square feet of land and will

accommodate UPS’s planned “up-sizing” of aircraft from MD-11s to B747-400s.100 The

hub will continue to facilitate UPS’s successful ventures in China, including operations

that now cover more than 330 cities. 101 To highlight its continued commitment to China,

UPS is the Official Logistics and Express Delivery Sponsor for the Beijing 2008 Olympic

Games.

Northwest Airlines

Northwest Airlines is the only U.S.-based passenger airline to also operate

dedicated cargo aircraft. A passenger airline with a history of extensive service in Asia,

Northwest began service to Shanghai in 1947, carrying cargo in the belly compartments

of passenger aircraft.102 The service was suspended in 1948 and resumed in 1984.

In 1999, Northwest began its first scheduled freighter service to China with twice

weekly service between Chicago and Shanghai (via Anchorage and Tokyo-Narita), and

added a third weekly freighter flight in 2001, borrowed from its passenger operations.103

iv In 2005, newly liberalized rules allowed for 2-for-1 change-of-gauge rights, meaning that for every one U.S.-China frequency, two connecting flights can be operated. These change-of-gauges rights have allowed UPS to establish a high number of aircraft movements at Shanghai.

of 53

In 2001, these three freighter frequencies complemented the belly capacity available on

Northwest’s twelve weekly B747 passenger flights.104

In 2001, the company established Northwest Cargo as a separate entity focusing

on the operation of its freighter aircraft. While Northwest Cargo focuses on general

freight through relationships with freight forwarders, Northwest has also flown express

freight under contract with DHL.

As part of the U.S. DOT’s 2004 offering for China cargo rights, Northwest

received an additional six weekly frequencies which allowed the carrier to bolster its

freighter service to Shanghai and also inaugurate new direct service into Guangzhou

(from Los Angeles via Tokyo-Narita westbound and Osaka eastbound). Three

additional frequencies were secured effective March 2006, and Northwest was awarded

four more weekly flights, effective March 2007, allowing the carrier to make its

Guangzhou service daily. The carrier has been operating B747 freighter service daily to

both Shanghai (from Chicago via Anchorage and Tokyo-Narita) and Guangzhou, with a

total of 16 China frequencies for cargo use. These cargo operations are in addition to

the belly capacity used for cargo on Northwest’s passenger flights, which were

operating with 21 additional weekly frequencies in 2007. In recent years, Northwest has

employed the flexibility to shift frequencies between cargo and combination flight use.

Northwest’s Asia service has been anchored by both its Tokyo-Narita hub,

through which the airline enjoys unlimited Japan access for both passenger and

freighter flights, and its Anchorage hub. The two major hub operations have allowed

Northwest to establish a strong Pacific cargo network that includes service to points

across Asia, including Tokyo, Osaka, Seoul, Hong Kong, Taipei, Bangkok, Singapore

of 53

and Manila, as well as mainland China.105 The Anchorage hub has been a key facility

for Northwest in interchanging trans-Pacific cargo. Fully expanded, the facility allows

Northwest Cargo to handle up to eight B747 freighters simultaneously, and cross-load

cargo among up to 40 freighter connections per day.106 In 2004, the Anchorage hub

allowed interchange service to or from gateway cities comprising approximately 80% of

China/U.S. cargo flows.107 On the U.S. side, Northwest Cargo operates from gateways

including Chicago, Los Angeles, Cincinnati and New York.108

In February 2005, Northwest announced a codeshare agreement with Korean

Airlines under a modified U.S. law that allows U.S. and foreign carriers serving Alaska

to transfer international cargo.109 As a result, the two carriers have been able to engage

in “tail-to-tail” transfers among Northwest’s and Korean Airline’s Anchorage operations

of 48 and 80 weekly departures, respectively, as of February 2005. The cooperation

effectively expands the frequencies and Asian networks of both carriers, providing

additional options to shippers.

Polar Air Cargo

Established in 1993, Polar Air Cargo was purchased by General Electric in the

late 1990s. In November 2001, it was acquired by Atlas Air Worldwide Holdings

(AAWH) and became the scheduled service provider for AAWH, while Atlas Air focused

on contract flying.v Together with Atlas Air and Polar Air Cargo, AAWH operates the

world’s largest fleet of B747 freighter aircraft.110

v Contact flying includes the common practice of ACMI, whereby a cargo operator offers an airline Aircraft, Crew, Maintenance and Insurance for specific flights on a contract basis.

of 53

A general freight carrier, Polar has operated uninterrupted Asian service since

1994 and was awarded the authority to operate between the U.S. and Japan in 1996.111

In 2001, the U.S. DOT awarded Polar three weekly frequencies for service between

Hong Kong and Korea. Coinciding with the establishment of an operating hub at

Incheon, Korea, this enabled Polar to serve the Hong Kong – U.S. market via Incheon.

By 2004, Polar had experience serving China directly on a charter basis and also

indirectly via Hong Kong and the Incheon hub. At the time, its gateway cities included in

the U.S., Chicago, Los Angeles, Anchorage, New York, Atlanta and Miami, and in

Europe, Amsterdam. Polar’s network included not only North America, Asia and Europe

connections, but also service to Australia, the Middle East and South America. The

carrier was therefore well-positioned in its proposal to the U.S. DOT in mid-2004 to

pursue direct scheduled frequencies into mainland China.

In its 2004 proposal, Polar proposed serving Shanghai with nine weekly

frequencies from both Chicago (ORD) and Los Angeles (LAX), including connections at

Anchorage and Incheon. Polar’s campaign was successful. The U.S. DOT designated

Polar as the single additional carrier authorized for scheduled service to mainland

China. Polar therefore became the fourth U.S. carrier – after FedEx, UPS and

Northwest – to secure this authority. The DOT also awarded Polar with the full slate of

nine weekly frequencies the carrier had proposed for its initial Shanghai service. The

first six of Polar’s new China frequencies was made available in August 2004.

In late 2006, Polar’s China service was further bolstered with a U.S. DOT award

of three additional weekly frequencies beginning March 2006 and four additional

frequencies, to be made available in March 2007. With these additional rights, Polar

of 53

launched service to Beijing, complementing its Shanghai service.112 Altogether, Polar

now held rights to 16 weekly China flights. The previous indirect China service via

Hong Kong has been all but replaced by the new direct service to the mainland. Polar

estimated that 95% of its China traffic was routed through Shanghai by April 2007.113

By all indications, Polar’s performance in China has been strong. The

operational hub at Incheon has helped Polar to leverage against directional imbalances

and season fluctuations through pooling of cargo shipments and flexibility for changing

demand.114 The established Incheon hub also allowed Polar to quickly integrate its new

China service into its existing network. As a result, the carrier was able to initiate

service quickly and better compete with foreign carriers by expanding options to

shippers. Edward Hernandez, Senior Vice President of Sales & Marketing, noted for

Polar’s initial quarter of scheduled operations, “China exceeded all our expectations.”115

Weekly Frequencies

FedEx: 30

UPS: 21

Northwest: 16

Polar: 16

* Northwest also holds 21 combination flight frequencies

Figure 9: Scheduled All-Cargo China Frequencies of U.S. Carriers in 2007116

of 53

Chinese Carriers

The CAAC has taken recent steps to increase the competitiveness of the

Chinese air carriers. As already discussed, ownership restrictions on Chinese

companies were eased so that foreign companies could now purchase up to a 25%

stake in a Chinese airline, with combined foreign stakes of up to 49%. This has helped

to foster valuable partnerships for Chinese carriers. In October 2002, three new

aviation groups were launched by consolidating the ten carriers under CAAC control.117

The resulting three anchor carriers – Air China, China Eastern and China Southern –

accounted for 80% of domestic flights in 2007. The three airlines have flown cargo on

passenger flights and have also structured the primary all-cargo carriers established in

recent years. In addition, a number of new Chinese all-cargo start-up airlines have

begun operations.

Air China Cargo

Launched in 2003, Beijing-based Air China Cargo is one of China’s two largest

cargo carriers.118 In 2004, it operated ten B747 frequencies to the U.S., eight from

Shanghai and two from Beijing.119 In 2006, the carrier assumed all dedicated freighter

operations from Air China, the 51% stake-holder in Air China Cargo.120 In the

China/U.S. market, the airline provides freighter service between Beijing, Guangzhou

and Shanghai, and Chicago, Los Angeles, San Francisco, Portland, Dallas-Ft. Worth

and New York.121 This complements combination service from Beijing and Shanghai to

Los Angeles, San Francisco and New York.122 As of June 2006, 35 total flights were

of 53

operated between Asia and the U.S.123 In 2007, Cathay Pacific Airways was planning a

joint venture with Air China and Air China Cargo, whose minority owners were CITIC

Pacific (25%) and Beijing Capital International Airport (24%).124 The joint venture would

likely help Air China Cargo improve load factors and competitiveness in Asia.

China Cargo

Shanghai-based China Cargo is the second of China’s two largest cargo carriers

and the first Chinese company to specialize in air cargo. It was launched in 1998 and is

70% owned by parent China Eastern Airlines.125 In 2004, China Cargo operated with 11

U.S. frequencies, with MD-11 service from Shanghai to U.S. cities including Los

Angeles, New York and Chicago.126 It has since expanded U.S. service, with routes

from Shanghai to Los Angeles, New York, Chicago, San Francisco, Dallas-Ft. Worth

and Seattle.127

China Southern

Guangzhou-based China Southern is the only carrier of the three largest Chinese

airline companies to not have established a dedicated cargo unit. The carrier received

authority from the U.S. DOT to provide all-cargo Shanghai/Shenzhen-Chicago service

(via Anchorage) beginning in August 2004, with its two U.S.-China weekly

frequencies.128 In addition to freighter service to Chicago, the carrier also provides

combination service between Guangzhou and Los Angeles.129 In 2007, China Southern

was actively planning to launch a dedicated cargo unit after establishing foreign

of 53

partnerships.130 In May 2007, the airline confirmed it was in talks with Air France-KLM

to explore cargo joint-venture possibilities.131

Yangtze River Express

Yangtze River Express is the cargo unit of Hainan Airlines and is 49% owned by

three Taiwanese companies, including Taipei-based China Airlines, which holds a 25%

stake in the company.132 The carrier opened an air route to the U.S. with service

between Shanghai and Los Angeles (via Anchorage), and in early 2007 was awarded

rights by the U.S. DOT to operate three weekly freighter flights from Shanghai to

Anchorage, New York and Boston.133 Since the airline previously owned only six

narrowbody Boeing 737 freighter aircraft, the carrier leases B747 aircraft for its U.S.

service from ACMI-leasing providers.134 As already discussed, Yangtze River Express

operates mainland China service in partnership with UPS.

Shanghai Air Cargo

Shanghai Air Cargo was granted its license by the CAAC in June 2006, when it

had three freighter aircraft, including one MD-11.135 The carrier opened a route

between Shanghai and Los Angeles in July 2006 with leased B747 aircraft.136

Shanghai Airlines holds a 55% ownership stake in Shanghai Air Cargo, which it formed

in partnership with Taiwan’s Eva Air (25% ownership).137

of 53

Jade Cargo International

Based at Shenzhen in China’s Pearl River Delta, Jade Cargo International is a

joint venture of Shenzhen Airlines (51% ownership) and Lufthansa Cargo (25%

ownership).138 It began B747 service to Europe in August 2006 and plans twice weekly

service to Houston (via Vancouver).139 With six additional B747 aircraft on order in

2007, Jade Cargo is poised to continue an expansion of U.S. services with scheduled

operations.140

Chinese Carriers Summary

As of 2004, Chinese carriers competed in the China/U.S. market with 23 weekly

frequencies.141 In parallel with U.S. carriers, the Chinese carriers have acquired

additional China/U.S. operating frequencies as part of the 2004 bilateral agreement

between the two nations. However, unlike the U.S. carriers, Chinese carriers have

been unable to utilize all frequencies available to them, as profitability continues to be a

challenge on U.S. routes. The carriers still lack the U.S. networks needed to ease the

directional trade imbalance, resulting in extremely low yields for westbound flights. In

addition, the carriers have been subject to high fuel costs. While Chinese carriers can

purchase on the open market at international destinations, they have been required to

use government-approved suppliers in the domestic market where costs were often

higher than for competing carriers.142 A China Eastern executive acknowledged in 2007

that “for the U.S. routes, we cannot make money. We cannot see any room to reduce

costs.”143 The May 2007 bilateral agreement will allow further opportunities for Chinese

carriers to compete in the China/U.S. market in the coming years, but partnerships and

of 53

consolidation in the industry will remain critical. Despite the challenges, significant

growth is still expected by the Chinese cargo carriers. Airbus expects China’s long-

range freighter fleet to grow from 22 aircraft in 2006 to at least 117 in 2025, mainly as a

result of the new bilateral agreement and continued growth in international cargo

demand.144

Third Country Carriers

Third-country carriers also have a major presence in the China/U.S. air cargo

market, especially in the general freight category. Various “freedom rights” have

allowed a number of carriers to operate either from their home countries via China to

the U.S. (and vice versa) or from China via their home countries to the U.S. (and vice

versa). As a result, these foreign carriers can offer either one-stop or even non-stop

service in the China/U.S. market. In addition to dedicated cargo service, the carriers

can utilize significant amounts of belly capacity on combination passenger flights.

Both Singapore Airlines and Qantas Airways have been granted 5th freedom

rights, allowing them to provide non-stop cargo service between China and the U.S.

Under 5th freedom rights granted in May 2003, Singapore has operated B747 freighter

flights from Singapore to Xiamen and Nanjing, China for continued service to

Anchorage, Los Angeles and Chicago.145 Freighter flights have since been added

between Beijing and Los Angeles. The airline also provides extensive combination

service between China and the U.S. via its Singapore hub. With its 5th freedom rights,

Qantas has been providing freighter service from Shanghai direct to Los Angeles,

Chicago and New York. It has also been operating combination service between China

of 53

and the U.S. via its Australia base. Notably, both Singapore and Qantas have been

providing direct China/U.S. cargo service only in the eastbound direction; westbound

flights have been using different routings to return to the carriers’ hubs, which mitigates

the China/U.S. trade imbalance.146

Both China Airlines and Eva Airways provide all-cargo service between Taipei

and the U.S., employing 6th freedom rights for cargo connecting from China.147 Both

China Airlines’ partnership with Yangtze River Express, and Eva Airways’ partnership

with Shanghai Air Cargo help to provide connecting service between the mainland and

Taipei. China Airlines and Eva Airways also both utilize combination flight belly capacity

between Taipei and the U.S.

Asiana Airlines and Korean Airlines both serve the China/U.S. cargo market

using 6th freedom rights. The carriers provide service between Chinese cities and

Seoul, South Korea, with connecting all-cargo service between Seoul and the U.S.148

Belly capacity is also available on their carriers’ combination flights between Korea and

the U.S.

Japan Airlines (JAL) and Nippon Cargo Airways, the cargo unit of All Nippon

Airways, both serve the China/U.S. market with 6th freedom rights covering flights

between China and Japan, with connecting all-cargo service from Japan to the U.S. In

2007, JAL was providing freighter service between the U.S. and Tokyo-Narita, Sapporo

and Nagoya; Nippon Cargo was operating freighters between the U.S. and Tokyo-

Narita, Nagoya and Osaka.149 Both JAL and Nippon Cargo parent All Nippon have

extensive passenger service between Japan and the U.S., providing additional belly

capacity for cargo.

of 53

Cathay Pacific Airways and wholly-owned subsidiary Hong Kong Dragonair both

operate all-cargo service between Hong Kong and the U.S. In addition to operating

from a hub that is still responsible for a significant amount of southern China’s air cargo,

the airlines both operate combination service between the mainland and Hong Kong.

Charter & Aircraft-Crew-Maintenance-Insurance (ACMI) Operators

In addition to the scheduled air cargo carriers, charter and ACMI providers also

serve the China/U.S. market. As already noted, ACMI operators provide the aircraft,

crew, maintenance and insurance to air carriers on a contract basis. Such an

arrangement allows an airline to quickly add capacity for a particular route and specific

period of time. The ACMI provider’s relationship is with the customer airline rather the

shipper or freight forwarder. ACMI providers are subject to operating restrictions

depending on the customer airline and its home country, but do actively have a role in

the China/U.S. market on behalf of the hiring carriers.

Charter operations for air cargo are typically unscheduled services in the general

freight segment, with a direct interface between the charter carrier and shipper. In

2003, over 50 charter all-cargo China/U.S. flights by U.S. and Chinese carriers were

approved by the CAAC.150 An additional 75 charter flights were authorized by the

CAAC and U.S. DOT for the twelve months commencing with August 2004.151 In

addition, the 2004 bilateral agreements permitted unlimited charters between city pairs

not served by the scheduled all-cargo services of Chinese carriers.152

A number of charter carriers provided direct service between China and the U.S.

in 2006. Air Atlanta, Atlas Air, Evergreen International, Gemini Air Cargo, Kalitta Air,

of 53

Southern Air and World Airways all provided service between Shanghai and U.S.

cities.153 Direct Hong Kong-U.S. service was provided by Atlas Air, Evergreen

International, Gemini Air Cargo, Kalitta Air and Southern Air.154 FedEx also provided

charter services between U.S. cities and both Shanghai and Hong Kong in 2006.155

Competition and Growth

In summary, a large number of air cargo carriers compete in the China/U.S.

market, creating an extremely competitive environment. Examination of the U.S. DOT

T-100 market data allows an overall review of the carriers providing direct (non-stop)

service between China and the U.S. in 2006. Figure 10 provides this summary, which

illustrates not only the extent of direct China/U.S. service, but also the main routes of

commonality between the various carriers. Since it remains a cargo gateway for

southern China, Hong Kong is included in the summary. Los Angeles, Chicago and

New York (Newark and JFK) are clearly the leading U.S. gateway cities for China cargo

service. The three cities are responsible for 64% of air exports to China and 55% of

imports from China.156 Beyond these gateways, Figure 10 displays significant service

between China and Dallas-Ft. Worth, San Francisco, and Anchorage, as expected due

to its strategic interchange location.

of 53

Shanghai L.A. Chicago New York Dallas San Francisco Anchorage OtherEastboundAir China X X X X PortlandChina Cargo X X X X X SeattleFedEx X X X Memphis, Indianapolis, OaklandNWA X X XPolar X X XQantas X X XUnited XUPS X PortlandWestboundAir China X X X X PortlandChina Cargo X X X X X SeattleChina Southern XFedEx X X X X X Memphis, Atlanta, OaklandNWA X X X SeattlePolar XUPS XBeijing L.A. Chicago New York Dallas San Francisco Anchorage OtherEastboundAir China X X X X PortlandFedEx X MemphisWestboundAir China X X X X PortlandChina Cargo X X X X X SeattleFedEx X X X X Atlanta, OaklandGuangzhou L.A. Chicago New York Dallas San Francisco Anchorage OtherEastboundUPS XWestboundUPS X HonoluluNanjing L.A. Chicago New York Dallas San Francisco Anchorage OtherEastboundSingapore Airlines X XWestboundNoneShenzhen L.A. Chicago New York Dallas San Francisco Anchorage OtherEastboundChina Southern XFedEx X X MemphisWestboundChina Southern XTradewinds Airlines XTianjin L.A. Chicago New York Dallas San Francisco Anchorage OtherEastboundSingapore Airlines XWestboundNoneXianmen L.A. Chicago New York Dallas San Francisco Anchorage OtherEastboundSingapore Airlines X XWestboundNoneHong Kong L.A. Chicago New York Dallas San Francisco Anchorage OtherEastboundCathay Pacific X X X X X AtlantaFedEx X X X Memphis, Indianapolis, OaklandHong Kong Dragon Air XNWA X Wilmington, OHPolar Air Cargo XSingapore Airlines X X XTransmile Air Service X XUPS X Portland, HonoluluWestboundCathay Pacific X X X X X AtlantaFedEx X X X X MemphisHong Kong Dragon Air XNWA X X X Wilmington, OHPolar Air Cargo X XSingapore Airlines X X XTransmile Air Service X XUPS X Honolulu

Notes: Reflects 2006 all-cargo scheduled operations between China and U.S. cities, as reported to the U.S. DOTNew services added by carriers in 2007 were not yet available in T-100 dataNew York service includes both Newark Liberty and JFK AirportsACMI scheduled operations are included (i.e. Tradewinds Airlines)

Figure 10: Scheduled All-Cargo Operations between Chinese & U.S. Cities in 2006

of 53

In addition to the direct carrier services summarized with Figure 10, a large

number of carriers provide additional and extensive amounts of cargo capacity through

their operations via Asian hub airports. This includes not only the U.S. carriers

operating over non-China Asian hubs, but also the large number of third country

carriers. Altogether, over 20 carriers are providing extensive air cargo service in the

China/U.S. market through direct or indirect operations. Given the unlimited rights for

China/U.S. air cargo services becoming available in the next several years and

continued increases in China trade, additional cargo carriers are likely to enter the

market. As a result, the potential for excess capacity will continue to be an issue in the

China/U.S. market. Even with the operating limitations prior to the May 2007

agreement, there had already been concerns that new entrants would upset the yields

of cargo carriers, especially as they offer price discounts to gain initial market share.

One example is the rise in capacity for the Shanghai-Los Angeles route. 2002-2003

eastbound prices from Shanghai to Los Angeles were around $5/kg; in October 2005,

after new service had been initiated, prices dropped to $3.10/kg.157 With westbound

flights already financially challenged due to the directional trade imbalance, reductions

in eastbound yields from new capacity will continue to test the industry. It is clear only

the most competitive carriers will be able to operate profitably. Of particular importance

will be a carrier’s ability to leverage airline partnerships and extensive networks on both

sides of the Pacific to generate the highest possible loads, while maintaining cost

efficiencies.

of 53

Conclusion

China has established itself as a global economic power, and is expected to

expand its position in the years to come. Trade between China and the U.S. is at an all-

time high and is expected to maintain strong growth, including the high-tech

commodities and time-sensitive products that require transport by air. The China/U.S.

air cargo industry, which has already sustained record growth, is set for continued

expansion, though in an increasingly competitive environment. Many of the barriers that

once limited the growth of the industry are being removed as a result of significant

policy liberalization by the Chinese government. Infrastructure is being expanded, more

foreign direct investment is permitted, and agreements with the U.S. continue to

increase the service rights for air cargo carriers. As demanded by the geography of

China’s manufacturing centers, operations continue to focus on Shanghai, Beijing and

Guangzhou as the three major air cargo centers, with Shanghai’s Pudong International

Airport the clear leader. Despite government efforts, these three are likely to remain the

dominant hubs until a more significant shift in manufacturing and expansion of suitable

infrastructure occurs. Significant investment in expanded infrastructure continues at the

three major hubs to accommodate increasing operations.

Competition in the industry remains intense. While U.S. exports to China are

increasing, the overall directional trade imbalance requires careful management by air

cargo carriers. The growing number of carriers operating in the China/U.S. market is

also strengthening competition. Over ten carriers already offer scheduled, direct all-

cargo service between China and the U.S. Including the carriers that provide indirect

service through Asian hubs outside China, over twenty carriers are providing extensive,

of 53

scheduled all-cargo and combination services between China and the U.S. With the

heightened competition, profitability will depend on a carrier’s ability to operate

efficiently, raise rates, leverage route networks and hubs, and establish partnerships for

both air and ground operations.

The May 2007 agreement between China and the U.S. will fully liberalize the

China/U.S. air cargo industry by 2011, effectively removing limits from an industry that

remarkably began in earnest just 12 years earlier with the 1999 air services agreement.

The unprecedented economic growth by China has driven unprecedented expansion in

the air cargo industry, an industry that will remain critical for trade between China and

the U.S. for years to come.

Author

Reed H. Tanger can be contacted at [email protected]

of 53

mailto:[email protected]

References

1 U.S.-China Business Council, www.uschina.org/statistics/tradetable.html, 2007. 2 Source of Data: U.S.-China Business Council, 2007. 3 Haoting, Lu, “Air Cargo Industry Takes Flight,” China Daily, July 2006. 4 Clancy, Brian and Hoppin, David, MergeGlobal, “Steady Climb,” American Shipper, August 2006. 5 Source of Data: MergeGlobal World Air Freight Supply & Demand Model, 2006. 6 Traffic World, “China to Lead Air Cargo,” December 2006. 7 Traffic World, 2006. 8 Airbus Global Market Forecast: Air Cargo Forecast 2006. 9 Federal Express 2006 Annual Report. 10 Clancy and Hoppin, MergeGlobal, 2006. 11 Hoppin, David, MergeGlobal, “Why Air Cargo Matters to Airports of All Sizes,” March 2005. 12 Federal Express Submission, U.S. DOT 2004 Cargo Designation, Docket OST-2004-18468. 13 FedEx Submission to U.S. DOT, 2004. 14 Clancy and Hoppin, MergeGlobal, 2006. 15 Fung, Michael Ka-Yiu; Zhang, Anming; Leung, Lawrence Chi-Kin; Law, Japhet Sebastian; “The Air Cargo Industry in China: Implications of Globalization and WTO Accession,” Transportation Journal, October 2005. 16 Hoppin, MergeGlobal, 2005. 17 FedEx Submission to U.S. DOT, 2004. 18 FedEx Submission to U.S. DOT, 2004. 19 Clancy and Hoppin, MergeGlobal, 2006. 20 Airbus, 2006. 21 Airbus, 2006. 22 Northwest Airlines Submission, U.S. DOT 2004 Cargo Designation, Docket OST-2004-18468. 23 United Parcel Service Submission, U.S. DOT 2004 Cargo Designation, Docket OST-2004-18468. 24 FedEx Submission to U.S. DOT, 2004. 25 U.S. DOT T-100 Data, 2003 [as referenced in U.S. DOT Show Cause Order, Docket OST-2004-18468, 2004) 26 Airbus, 2006. 27 MergeGlobal, 2006. 28 Source of Data: U.S.-China Business Council, 2007. 29 Haoting, 2006. 30 Putzer, Ian, “Fearing Fragile China,” Air Cargo World, June 2005. 31 Haoting, 2006. 32 Shanghai Daily, “China’s air cargo leaders talk tieup in battle against foreign competition,” May 2006. 33 FedEx Submission to U.S. DOT, 2004. 34 Airbus, 2006. 35 Fung, et al., 2005. 36 Fung, et al., 2005. 37 Fung, et al., 2005. 38 Fung, et al., 2005. 39 U.S. DOT Order to Show Cause, U.S. DOT 2004 Cargo Designation, Docket OST-2004-18468. 40 Fung, et al., 2005. 41 Fung, et al., 2005. 42 Manor, Robert, “Airlines lining up to add flights,” Chicago Tribune, May 2007. 43 Stanley, Bruce, “Will China gain in air deal?,” Wall Street Journal Asia, May 2007. 44 Author Compilation; Sources of Data:

U.S. DOT 2004 Cargo Designation: U.S. DOT Order to Show Cause and submissions of FedEx, UPS, NWA and Polar; International Freighting Weekly, “U.S. hands out extra China air cargo rights,” February 2005; Discussions with UPS and Northwest Airlines.

45 Fung, et al., 2005. 46 Northwest Airlines Submission to U.S. DOT, 2004. 47 UPS Submission to U.S. DOT, 2004. 48 Source of Background Map: www.umf.maine.edu 49 UPS Submission to U.S. DOT, 2004. 50 Northwest Airlines Submission to U.S. DOT, 2004. 51 Polar Flyer, www.polaraircargo.com 52 UPS Submission to U.S. DOT, 2004.

of 53

53 Polar Air Cargo Submission, U.S. DOT 2004 Cargo Designation, Docket OST-2004-18468. 54 FedEx Submission to U.S. DOT, 2004. 55 Source of Data: Airports Council International, 2007. 56 Putzger, Jun. 2005. 57 UPS Submission to U.S. DOT, 2004. 58 FedEx Submission to U.S. DOT, 2004. 59 FedEx Submission to U.S. DOT, 2004. 60 Polar Air Cargo Submission to U.S. DOT, 2004. 61 UPS Submission to U.S. DOT, 2004. 62 Northwest Airlines Submission to U.S. DOT, 2004. 63 Northwest Airlines Submission to U.S. DOT, 2004. 64 International Freighting Weekly, “U.S. hands out extra China air cargo rights,” February 2005. 65 UPS Submission to U.S. DOT, 2004. 66 UPS Submission to U.S. DOT, 2004. 67 Source of Data: Airbus, 2006. 68 China News Digest, “China to have six cargo hubs by 2010,” June 2004. 69 China News Digest, 2004. 70 China News Digest, 2004. 71 Putzger, Jun. 2005. 72 Putzger, Jun. 2005. 73 Putzger, Jun. 2005. 74 Fung, et al., 2005. 75 Fung, et al., 2005. 76 Putzger, Ian, “Land of the Rising Hubs,” Air Cargo World, April 2007. 77 FedEx Submission to U.S. DOT, 2004. 78 FedEx Submission to U.S. DOT, 2004. 79 Source of Map: Website: www.maps-of-china.com, 2007. 80 FedEx Submission to U.S. DOT, 2004. 81 FedEx Submission to U.S. DOT, 2004. 82 FedEx Submission to U.S. DOT, 2004. 83 FedEx Submission to U.S. DOT, 2004. 84 FedEx Submission to U.S. DOT, 2004. 85 Website: www.fedex.com, 2007. 86 FedEx Submission to U.S. DOT, 2004. 87 FedEx Submission to U.S. DOT, 2004. 88 FedEx Submission to U.S. DOT, 2004. 89 FedEx Submission to U.S. DOT, 2004. 90 FedEx Submission to U.S. DOT, 2004. 91 Roberts, Jane, “FedEx adds trips to China,” Memphis Commercial Appeal, August 2006. 92 Website: www.ups.com, 2007. 93 UPS Company Presentation: “UPS and China – Your Ticket to a Growing Market,” March 2007. 94 UPS Submission to U.S. DOT, 2004. 95 UPS Submission to U.S. DOT, 2004. 96 UPS Submission to U.S. DOT, 2004. 97 UPS Submission to U.S. DOT, 2004. 98 Haoting, 2006. 99 Associated Press, “UPS to open China hub in Shanghai,” April 2007. 100 Associated Press, 2007. 101 UPS Company Presentation, 2007. 102 Northwest Airlines Submission to U.S. DOT, 2004. 103 Northwest Airlines Submission to U.S. DOT, 2004. 104 Polar Air Cargo Submission to U.S. DOT, 2004. 105 Northwest Airlines Submission to U.S. DOT, 2004. 106 Northwest Airlines Submission to U.S. DOT, 2004. 107 Northwest Airlines Submission to U.S. DOT, 2004. 108 Northwest Airlines Submission to U.S. DOT, 2004. 109 IFW, 2005. 110 Website: www.polaraircargo.com, 2007. 111 Polar Air Cargo Submission to U.S. DOT, 2004. 112 Atlas Air Worldwide Holdings, Corporate Overview, September 2006. 113 Polar Air Cargo 10th Anniversary Update, www.polaraircargo.com, 2007.

of 53

114 Polar Air Cargo Submission to U.S. DOT, 2004. 115 Putzger, Jun. 2005. 116 Author Compilation; Sources of Data: U.S. DOT 2004 Cargo Designation: U.S. DOT Order to Show Cause and submissions of FedEx, UPS, NWA and Polar. 117 Fung, et al., 2005. 118 Haoting, Jul. 2006.; and Haoting, Lu, “CITIC planning Air China cargo sale,” China Daily, November 2006. 119 Northwest Airlines Submission to U.S. DOT, 2004. 120 Santiago, Annette, “Air China Cargo to take over cargo ops for Air China,” Aviation Daily, July 2006. 121 Santiago, 2006. 122 U.S. DOT, Bureau of Transportation Statistics (BTS), T-100 Market Data, 2007. 123 Traffic World, “Air China Cargo adds Dallas freighter,” June 2006; and AFX International Focus, “Air China Cargo to launch Beijing-Dallas Fort Worth service,” June 2006. 124 Lloyd’s List, “Cathay Pacific poised to buy out other investors’ stakes in Air China Cargo,” May 2007. 125 Haoting, Nov. 2006. 126 Northwest Airlines Submission to U.S. DOT, 2004. 127 U.S. DOT, BTS, T-100 Data, 2007. 128 Northwest Airlines Submission to U.S. DOT, 2004. 129 U.S. DOT, BTS, T-100 Data, 2007. 130 Shanghai Daily, 2006. 131 Asia Pulse, “China Southern in talks with Air France over JV cargo airline,” May 2007. 132 Haoting, Jul. 2006. 133 Cargo Facts Update, February 15, 2007, www.cargofacts.com 134 Asia in Focus, “Taiwan, China to jointly build air cargo transport enterprise,” January 2006. 135 China Industry Daily News, “Shanghai Air Cargo Starts Operation,” July 2006. 136 China Industry Daily News, 2006. 137 Francis, Leithen, “China special: Set to deliver – the export market,” Flight International, October 2006. 138 Website: www.jadecargo.com, 2007. 139 Website: www.jadecargo.com, 2007. 140 Agence France Presse, “Air cargo traffic soars, fueled by China’s role as world production center,” October 2005. 141 U.S. DOT Order to Show Cause, U.S. DOT 2004 Cargo Designation. 142 Putzger, Ian, “China’s Turn,” Air Cargo World, October 2005. 143 Stanley, Bruce, “Will China gain in air deal?,” Wall Street Journal Asia, May 2007. 144 Airbus, 2006. 145 Fung, et al., 2005. 146 U.S. DOT, BTS, T-100 Data, 2007. 147 U.S. DOT, BTS, T-100 Data, 2007. 148 U.S. DOT, BTS, T-100 Data, 2007. 149 U.S. DOT, BTS, T-100 Data, 2007. 150 Northwest Airlines Submission to U.S. DOT, 2004. 151 Northwest Airlines Submission to U.S. DOT, 2004. 152 FedEx Submission to U.S. DOT, 2004. 153 U.S. DOT, BTS, T-100 Data, 2007. 154 U.S. DOT, BTS, T-100 Data, 2007. 155 U.S. DOT, BTS, T-100 Data, 2007. 156 U.S. DOT Order to Show Cause, U.S. DOT 2004 Cargo Designation. 157 Putzger, Oct. 2005.

of 53

the air cargo market between china and the united states ...exhibit.carnoc.com/gis/ppt/china-u.s....

Documents