China-U.S. Air Cargo - Tanger
Transcript of China-U.S. Air Cargo - Tanger
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The Air Cargo Market between China and the United States:Demand, Developments and Competition
May 2007
Reed H. Tanger
Kellogg School of ManagementNorthwestern University
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Contents
Introduction ................................................................................................4Section 1: Overview of the Air Cargo Industry........................................7
Air Freight Services................................................................................................... 7Dedicated Freighters versus Combination Flights.................................................9
Section 2: Growth Drivers in Chinese Air Cargo Traffic ......................11Section 3: Trade Imbalance.....................................................................13Section 4: Regulatory Changes..............................................................17
Section 5: Geography of Chinese Exports and Air Cargo Hubs..........21Yangtze River Delta: Shanghai ............................................................................... 22Bo Hai Bay: Beijing..................................................................................................24Pearl River Delta: Guangzhou ................................................................................ 25Further Hub Developments..................................................................................... 26
Section 6: Air Cargo Carriers..................................................................30U.S. Carriers............................................................................................................. 30
Federal Express.....................................................................................................30United Parcel Service............................................................................................. 32Northwest Airlines ..................................................................................................34Polar Air Cargo....................................................................................................... 36
Chinese Carriers......................................................................................................39Air China Cargo...................................................................................................... 39China Cargo........................................................................................................... 40China Southern......................................................................................................40Yangtze River Express...........................................................................................41Shanghai Air Cargo................................................................................................41Jade Cargo International........................................................................................ 42Chinese Carriers Summary.................................................................................... 42
Third Country Carriers ............................................................................................ 43Charter & Aircraft-Crew-Maintenance-Insurance (ACMI) Operators ................... 45Competition and Growth......................................................................................... 46
Conclusion................................................................................................49References................................................................................................51
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Figures
Figure 1: Total Trade between China and the U.S. ......................................................... 4Figure 2: Exporter Shares of Asia to North America Freight ...........................................5Figure 3: Trade Imbalance between China and the U.S................................................ 14
Figure 4: Available China/U.S. All-Cargo Frequencies.................................................. 20Figure 5: Key Chinese Regions for Air Cargo Operations .............................................22Figure 6: Freight Growth at Shanghais Pudong International Airport ........................... 24Figure 7: Geographic Concentration of Chinas Air Cargo by Region ........................... 26Figure 8: Chinas Three Primary Cargo Hub Facilities .................................................. 29Figure 9: Scheduled All-Cargo China Frequencies of U.S. Carriers.............................. 38Figure 10: Scheduled All-Cargo Operations between Chinese & U.S. Cities in 2006 ... 47
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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. Chinas development into a leading global manufacturer and global
consumer has been staggering. Chinas 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 $343 billion in 2006 (see Figure 1), with the U.S. as
Chinas top trade partner.
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1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Annu
alTrade($billion)
$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 worlds 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
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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%
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ShareofAsia-NorthAmericanAirFreight
Rest of Asia
Korea
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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 worlds FTKs.8
iNotation: The use of China/U.S. in this report refers to both countries combined and is bidirectional.
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A number of factors have impacted the air cargo industrys growth in the
China/U.S. market. The growth in certain types of Chinese exports has fueled the
industrys 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.
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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
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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 products
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
iiExpress carriers also typically transport a percentage of general freight as part of their air cargo operations.
iiiIn 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, whileFedEx argued it was overserved.
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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 airlines 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
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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.
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Section 2: Growth Drivers in Chinese Air Cargo Traffic
Chinas dramatic increase in international air cargo traffic results from the
explosive growth in China as a world manufacturing base. Between 1978 and 2002,
Chinas Gross Domestic Product (GDP) grew at an annual rate of 9.4%.17 Over the
same period, air FTKs grew annually at 18%.18 Chinas 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 Chinas 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 Chinas economy that demands freight
service by air; it is the type of manufactured product. Chinas 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 Chinas 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
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equipment, apparel and games. It should be noted that the growth in Chinas economy
has also increased its demand and consumption of foreign products, and thus, overall
imports toChina. 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.
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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 4.1xin 2005 and is forecast to
be 4.3xin 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 carriers costs are round-trip, and revenues are predominantly one-
way (eastbound), the industrys profitability is increasingly challenged.
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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 industrys 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.
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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
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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.
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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. Chinas policies had also created an imbalance in
operations since the limited international traffic rights were biased toward Beijing,
despite Shanghais 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.
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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 Chinas 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.
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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 Chinas 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 countrys 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 Chinas 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
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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 allChinese 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.
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Figure 4: Available China/U.S. All-Cargo Frequencies44
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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 Kongs own capacity constraints, Hong Kongs
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 Chinas 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 Chinas 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
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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 Chinas 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,
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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 Shanghais air cargo movement has been staggering, especially
with the completion in recent years of Pudong International Airport. In 1980, Shanghais
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.
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Figure 6 displays Shanghais 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 citys region the most important mainland Chinese
market for imports and exports, and noted average growth of 18% annually as of
2004.54
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0 500,000 1,000,000 1,500,000 2,000,000
Annual Freight Tonnage
2002
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Figure 6: Freight Growth at Shanghais 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 Chinas population, 18% of
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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 Beijings
air cargo demand was already well-served by belly capacity on passenger flights.60
Nonetheless, Beijing remains one of Chinas 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 Chinas 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.
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Further Hub Developments
Combined, the Yangtze River Delta (Shanghai), Bo Hai Bay (Beijing), and Pearl
River Delta (Guangzhou) regions in 2004 comprised 80% of Chinas export volumes,
84% of its international trade, 75% of foreign direct investment, and 48% of Chinas
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 Chinas 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%
ShareofInternational
CargoVolume
1996 2004 2024
Other
Pearl
Bo Hai
Yangtze
Figure 7: Geographic Concentration of Chinas Air Cargo by Region67
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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
governments 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,
theres still a lot of investment necessary.73
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With the degree of manufacturing and investment in Chinas 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
Shanghais older airport, Hongqiao.75 A $2.16 billion expansion is underway at
Guangzhous 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 Chinas 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
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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 governments
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: Chinas Three Primary Cargo Hub Facilities79
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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 worlds 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 worlds
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
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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 FedExs 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%
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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 Guangzhous
Baiyun International Airport, planned to open in 2009.91 The facility will serve as the
companys China operating hub. Finally, FedEx currently has an operating hub in
Tokyo and its Asia-Pacific headquarters in Hong Kong.
Notably, FedEx operates the worlds 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 worlds 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
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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 Shanghais 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.
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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 Chinas mainland with the
rest of UPSs 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 UPSs planned up-sizing of aircraft from MD-11s to B747-400s.100 The
hub will continue to facilitate UPSs 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
ivIn 2005, newly liberalized rules allowed for 2-for-1 change-of-gauge rights, meaningthat for every one U.S.-China
frequency, two connecting flights can be operated. These change-of-gauges rights have allowed UPS to establish ahigh number of aircraft movements at Shanghai.
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In 2001, these three freighter frequencies complemented the belly capacity available on
Northwests 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. DOTs 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 Northwests 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.
Northwests 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
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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 Northwests and Korean Airlines 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
worlds 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.
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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. Polars 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. Polars 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 Polars new China frequencies was made available in August 2004.
In late 2006, Polars 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
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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, Polars 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
Polars 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
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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 Chinas 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
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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 Chinas 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
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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 Taiwans Eva Air (25% ownership).137
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Jade Cargo International
Based at Shenzhen in Chinas 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
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consolidation in the industry will remain critical. Despite the challenges, significant
growth is still expected by the Chinese cargo carriers. Airbus expects Chinas 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 5 th 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
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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.
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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 Chinas 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 providers 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,
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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.
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Shanghai L.A. Chicago New York Dallas San Francisco Anchorage Other
Eastbound
Air China X X X X Portland
China Cargo X X X X X Seattle
FedEx X X X Memphis, Indianapolis, Oakland
NWA X X X
Polar X X X
Qantas X X X
United X
UPS X Portland
Westbound
Air China X X X X Portland
China Cargo X X X X X Seattle
China Southern X
FedEx X X X X X Memphis, Atlanta, Oakland
NWA X X X Seattle
Polar X
UPS X
Beijing L.A. Chicago New York Dallas San Francisco Anchorage Other
Eastbound
Air China X X X X Portland
FedEx X Memphis
Westbound
Air China X X X X Portland
China Cargo X X X X X Seattle
FedEx X X X X Atlanta, Oakland
Guangzhou L.A. Chicago New York Dallas San Francisco Anchorage Other
Eastbound
UPS X
Westbound
UPS X Honolulu
Nanjing L.A. Chicago New York Dallas San Francisco Anchorage Other
Eastbound
Singapore Airlines X X
Westbound
None
Shenzhen L.A. Chicago New York Dallas San Francisco Anchorage Other
Eastbound
China Southern X
FedEx X X Memphis
Westbound
China Southern X
Tradewinds Airlines X
Tianjin L.A. Chicago New York Dallas San Francisco Anchorage Other
Eastbound
Singapore Airlines X
Westbound
None
Xianmen L.A. Chicago New York Dallas San Francisco Anchorage Other
Eastbound
Singapore Airlines X X
Westbound
None
Hong Kong L.A. Chicago New York Dallas San Francisco Anchorage Other
Eastbound
Cathay Pacific X X X X X Atlanta
FedEx X X X Memphis, Indianapolis, Oakland
Hong Kong Dragon Air X
NWA X Wilmington, OH
Polar Air Cargo X
Singapore Airlines X X X
Transmile Air Service X X
UPS X Portland, Honolulu
Westbound
Cathay Pacific X X X X X Atlanta
FedEx X X X X Memphis
Hong Kong Dragon Air X
NWA X X X Wilmington, OH
Polar Air Cargo X X
Singapore Airlines X X X
Transmile Air Service X X
UPS X Honolulu
Notes: Reflects 2006 all-cargo scheduled operations between China and U.S. cities, as reported to the U.S. DOT
New services added by carriers in 2007 were not yet available in T-100 data
New York service includes both Newark Liberty and JFK Airports
ACMI scheduled operations are included (i.e. Tradewinds Airlines)
Figure 10: Scheduled All-Cargo Operations between Chinese & U.S. Cities in 2006
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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
Chinas manufacturing centers, operations continue to focus on Shanghai, Beijing and
Guangzhou as the three major air cargo centers, with Shanghais 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,
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scheduled all-cargo and combination services between China and the U.S. With the
heightened competition, profitability will depend on a carriers 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]
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References
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2Source of Data: U.S.-China Business Council, 2007.
3Haoting, Lu, Air Cargo Industry Takes Flight, China Daily, July 2006.
4 Clancy, Brian and Hoppin, David, MergeGlobal, Steady Climb, American Shipper, August 2006.5
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Traffic World, China to Lead Air Cargo, December 2006.7
Traffic World, 2006.8
Airbus Global Market Forecast: Air Cargo Forecast 2006.9
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Hoppin, David, MergeGlobal, Why Air Cargo Matters to Airports of All Sizes, March 2005.12
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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 Industryin China: Implications of Globalization and WTO Accession, Transportation Journal, October 2005.16
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Clancy and Hoppin, MergeGlobal, 2006.20
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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
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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, Chinas 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 ofFedEx, UPS, NWA and Polar;
International Freighting Weekly, U.S. hands out extra China air cargo rights, February2005;Discussions with UPS and Northwest Airlines.
45Fung, et al., 2005.
46Northwest Airlines Submission to U.S. DOT, 2004.
47UPS Submission to U.S. DOT, 2004.
48Source of Background Map: www.umf.maine.edu
49UPS Submission to U.S. DOT, 2004.
50Northwest Airlines Submission to U.S. DOT, 2004.
51Polar Flyer, www.polaraircargo.com
52UPS Submission to U.S. DOT, 2004.
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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, 2004.60Polar Air Cargo Submission to U.S. DOT, 2004.
61UPS Submission to U.S. DOT, 2004.
62Northwest Airlines Submission to U.S. DOT, 2004.
63Northwest Airlines Submission to U.S. DOT, 2004.
64International Freighting Weekly, U.S. hands out extra China air cargo rights, February 2005.
65UPS Submission to U.S. DOT, 2004.
66UPS Submission to U.S. DOT, 2004.
67Source of Data: Airbus, 2006.
68China News Digest, China to have six cargo hubs by 2010, June 2004.
69China News Digest, 2004.
70China News Digest, 2004.
71Putzger, Jun. 2005.
72Putzger, Jun. 2005.
73Putzger, 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.
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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 andsubmissions 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, 2004.120Santiago, Annette, Air China Cargo to take over cargo ops for Air China, Aviation Daily, July 2006.
121Santiago, 2006.
122U.S. DOT, Bureau o