Development of Airfreight Hubs in the Southern Chinese Pearl River Delta - A Comparative Analysis

TABLE OF CONTENTS

Table of Abbreviations

I. Executive Summary

II. Acknowledgement

1.1. Administration
1.2. Airlines
1.2.1. The first airlines
1.2.2. Market Consolidation and the emergence of the “Big Three”
1.2.3. Recent Developments
1.3. Airports and supporting Infrastructure
1.3.1. Change in ownership structure
1.3.2. Chinese airports income structure
1.3.3. Foreign participation
1.4. Air traffic rights policy
1.4.1. Air traffic rights in China
1.4.2. Air traffic rights in Hong Kong

2. The air cargo market in China
2.1. General characteristics of air cargo
2.2. Types of air cargo
2.3. Air cargo growth trends
2.4. Air cargo in China
2.4.1. Emergence of an industry
2.4.2. Air cargo market structure
2.4.3. Major cargo airlines
2.4.4. Major cargo airports

3. The Greater Pearl River Delta
3.1. Basic facts
3.2. Administration
3.3. Economy
3.3.1. Economic structure
3.3.2. Rise of the GPRD’s economyIn the 1960s and 70s Hong Kong had built up substantial manufacturing industries exporting to world markets, while Guangdong and the PRD were still dominated by arable farming and small rural villages. The start of China’s economic reforms in 1978 lead to a relocation of large parts of production processes from Hong Kong to the southern part of the Mainland. While Hong Kong provided capital, management, high-end business and financial services, logistics and technology, the PRD contributed its land resources and huge amounts of cheap labour
3.3.3. Regional breakdown
3.3.3.1. Guangdong
3.3.3.2. PRD Economic Zone
3.3.3.2.1. Eastern PRD
3.3.3.2.2. Central PRD
3.3.3.2.3. Eastern PRD
3.3.3.3. Hong Kong
3.3.3.3.1. Hong Kong's trade pattern
3.3.3.4. Macao
3.3.4. Regional comparison - GPRD and YRD
3.3.5. Economic outlook
3.4. Logistics structure
3.4.1. Regional breakdown
3.4.1.1. Guangzhou
3.4.1.2. Shenzhen
3.4.1.3. Hong Kong

4.1. Regional distribution
4.2. Major commodities
4.3. Major air cargo markets
4.4. Air cargo in Hong Kong
4.4.1. Structure of air cargo flows in Hong Kong
4.5. Airports in the GPRD

5. Guangzhou Baiyun International Airport
5.1. Location
5.2. Administration
5.3. Financing
5.4. Facilities
5.5. Customs
5.6. Principal Carrier
5.7. Route network
5.8. Air cargo market structure
5.9. Other

6. Hong Kong Chek Lap Kok International Airport
6.1. Location
6.2. Administration
6.3. Financing
6.4. Facilities
6.4.1. Cargo handling facilities – 1st tier
6.4.1.1. SuperTerminal 1 – HACTL
6.4.1.2. Asian Airfreight Terminal – AAT
6.4.1.3. Express Cargo Terminal – ECT
6.4.2. Cargo handling facilities – 2nd tier
6.4.2.1. Airport Freight Forwarding Center
6.4.2.2. Tradeport Logistics Centre
6.4.2.3. Marine Cargo Terminal
6.5. Intermodal infrastructure
6.6. Customs
6.7. Principal carrier
6.8. Route network
6.9. Air cargo market structure
6.10. Other

7. The air cargo industry dynamics
7.1. Demand side
7.1.1. Air cargo volume potential
7.1.2. The air cargo community
7.1.2.1. Cargo agents/ freight forwarders
7.1.2.2. Airlines
7.1.2.3. Government/ Regulatory body
7.1.2.4. Service Providers
7.2. Supply side

8. GBIA and HKIA – Analysis of competitive factors
8.1. Air cargo potential of the GPRD
8.2. Catchment area of GBIA and HKIA
8.3. Costs
8.4. Geographical location
8.5. Capacity
8.6. Connectivity, Frequency and Network
8.7. Customs
8.8. Infrastructure
8.9. Intermodal connectivity
8.10. Company’s aviation policy
8.11. Cargo Agent’s use of GPRD airports
8.12. Influential factors on the development of GPRD airport landscape
8.12.1. Political Factors
8.12.2. China’s WTO entry
8.12.3. Closer Economic Partnership Arrangement – CEPA
8.12.4. Improvement of soft factors
8.12.5. The Taiwan issue
8.13. Competitive Landscape
8.13.1. Competing airports for origin/destination traffic
8.13.1.1. Shenzhen (SZX)
8.13.1.2. Macao (MFM)
8.13.1.3. Zhuhai
8.13.2. PRD A5 Forum
8.13.3. Competing airports for transshipment traffic
8.13.3.1. Shanghai Pudong (PVG)
8.13.3.2. Beijing (PKG)
8.13.3.3. Taipei (TPE)
8.13.3.4. Singapore (SIN)
8.13.3.5. Seoul Incheon (ICN)
8.13.3.6. Bangkok (BKK)

9. Conclusion - Future role of GBIA and HKIA in the GPRD air cargo market

Appendix I: Explanatory Notes

Appendix III: Field study questionnaire – English

Appendix IV: Field study - Airport competitive rating outcome

References I – Field STudy: Interview Partners
Domestic logistics companies:
International logistics corporations:
Other interview partners:

References II – Literature and Publications

References III – Online Ressources

Table of Abbreviations

illustration not visible in this excerpt

I. Executive Summary

"Everything has beauty, but not everyone sees it" goes a famous saying by Confucius^[1]. My wish in writing this paper is to convince readers of the peculiar beauty and importance of the highly dynamic aviation landscape of the southern Chinese Pearl River Delta.

Airfreight is an essential and highly sophisticated part of an economy’s logistics infrastructure. A functioning infrastructure is vital for the development of an economy, in particular for its international trade. As trade is a key component in China’s economic success formula, demand for an efficient infrastructure is high. Air transportation has become one of the most effective tools to explore and serve world markets. In today’s highly competitive business world, just-in-time delivery and good customer service are absolutely crucial. The overall trend towards fast reliable delivery and the transformation of China’s economy along with the value chain of production, have boosted demand for air transportation. Due to these developments, the air cargo market, which is still at low levels particularly in domestic transportation, is one of the fastest growing markets in China.

The regional focus of this study is on the economic powerhouse of China, the Pearl River Delta (PRD) located in the southern province of Guangdong. Everyone who knows the highly industrialised landscape of the PRD would probably agree, that the region’s nickname “factory of the world” is more than appropriate. The PRD has the highest per capita output in China and generates about one third of national exports. The Greater Pearl River Delta (GPRD) consists of the PRD and the Special Administrative Zones Hong Kong and Macao. In many respects, it is one of the most interesting economic entities of the world. Economy and infrastructure are integrated on a very high level. The GPRD features many extremes: its strong economic power, its rapid growth that has been the highest in China for many years, its population density and last but not least, its aviation landscape. Within radial distance of about 100 km, five international airports are at service, creating the highest airport density in the world. Three of these airports are among China’s top five airports.

The clear leader among them is Hong Kong International Airport (HKIA), which has established itself as a major hub in Asia and has been the airport with the highest international air cargo throughput of the world for many years. Its dominant counterpart for domestic traffic is located some 100 km north in the very heart of the PRD, Guangzhou Baiyun International Airport (GBIA).

The strong air cargo business of HKIA, that is largely fed by PRD freight has been watched closely by Mainland administrations. Liberalised air traffic policy in recent years has rapidly expanded China’s own international air cargo traffic. To support this expansive strategy, a completely new airport was built to replace the old GBIA, featuring the biggest and most modern air cargo facilities in China. This new airport might take substantial business away from HKIA in the future.

The focus of this paper is to examine the competitive position of the two airports and to forecast their future role in the southern Chinese and Asian air cargo market. GBIA’s potential ability to catch up with HKIA as major air cargo hub in Southern China brings important implications for the region. While macroeconomic factors will also be taken into account, the emphasis of this paper is on the microeconomic approach of the two airports’ competitive perspectives.

Little literature has been written about the topic. This analysis is founded on available resources such as logistics literature and journals as well as studies and publications by HKIA, which has a very pro-active information policy. A large share of data used was gathered through a field study conducted in late spring 2005 in Guangzhou. Eleven branch and airfreight managers of both local and international cargo agents were extensively interviewed about the PRD air cargo market and the regional airport landscape. Much additional information was gathered by minutes of meeting with airline representatives in Guangzhou and Shenzhen.

The paper is structured in nine sections: While the first part gives a short introduction to the aviation industry in China, section two takes a closer look at the Chinese airfreight market. Part three examines the macroeconomic structure of the GPRD and provides a detailed economic and logistics analysis of the region, while part four analyses the local air cargo market. The two sections give a comprehensive description of the two airports in the focus of this paper. Section seven of the paper highlights the air cargo industry dynamics and the following part provides an in-depth comparative analysis of the two airports based on the fundamental data and additional information provided by the field study. This section also takes a closer look at external factors affecting the overall GPRD air cargo market. Moreover, an introduction to other competing airports in the region is given. Finally, part nine evaluates the two airport’s future development prospects, based on the outcome of this study.

II. Acknowledgement

First of all, I deeply thank Eric Guo of Lufthansa Cargo Guangzhou, who has been incredible supportive. Without Eric’s help it would have been much harder to conduct the field study. Moreover, his excellent knowledge of the Guangzhou airfreight market was a unique source of information.

Phoebe Chan of Lufthansa Cargo has equally been very supportive – my warmest thanks to her, too.

I also thank Wu Qi of ICCS in Shenzhen for his great help and information about the local air cargo market.

Further thanks to Echo Wang and Katie Gou in Guangzhou, which were extremely helpful in my efforts for the field study.

In Germany, Dr. Michael Holzschneider of Dornier Consulting provided me with his expert knowledge of airport development and airfreight business dynamics – my deepest thanks to him, too.

I am also much obliged to my professor and mentor Professor Erling v. Mende, who has been very supportive from the very beginning.

Finally, I thank all interviewed cargo agents for devoting their time and taking part in the study – their knowledge and comments have been invaluable for my research.

Jana Schebera

01.01.2006, Berlin

Introduction to China’s aviation industry

In the early years of the People’s Republic, China’s aviation industry was merely viewed as a matter of national defence with most resources being channelled into military areas. Air transport was considered less important than other more immediately necessary modes of transport such as road, rail and waterways and therefore received only limited attention of the government^[2].

With the increasing drive to promote economic modernisation starting with the reform and opening period from the late 1970s, civil air transport gradually assumed a more important role. Observing that air transport represents an infrastructural key component of highly developed economies, the Central Government realised that substantial air transport facilities were required for the Chinese economy’s sustainable development. Since the late 1970s, the government has put a much greater emphasis on civil air transport and adopted numerous strategies and policies aimed at bringing about the development of the industry.^[3] The government is well aware of the strong challenge to meet China’s explosive demand for air services with new and expanded airport projects and aviation infrastructure.

1.1. Administration

The most important organisation in civil aviation in China is the Civil Aviation Administration of China^[4] (CAAC). In the past, CAAC’s role in the industry had a dual structure: it was the peak administrative body in charge of air transport and at the same time the only operating entity running the air service system at the grassroot operational level. CAAC was the only regulatory authority, airline and airport operator all in one^[5].

Initially the CAAC was under the administrative authority of the Central Military Commission at first, but in 1985 it was shifted over to the State Council and assumed a quasi ministerial rank, becoming a purely civilian organisation. Management of air transport was carried out through a vertically integrated bureaucratic system with its central level in Beijing. Below the central level were six regional bureaus throughout the country supervising a number of municipal departments and some smaller operational sites^[6].

During the mid-1980s a fundamental change occurred to the CAAC itself. Before the launch of the reform and opening policy only high ranking government officials used air transportation, but since the early 1980s the aviation market began to open up for paying passengers. These developments and the growing number of foreign visitors, most of them arriving by plane resulted in annual growth rates of more than 50% for both passengers and air freight. This placed tremendous pressure on the CAAC, which on top of that had been running at an ever increasing loss. To deal with the situation, the government decided to break up CAAC’s operations into a governmental and a commercial sphere. The central level in Beijing remained in charge of the hands-on operational control of the industry whereas the regional units carrying out the day-to-day air transport activities were given independent commercial status separate from the CAAC. The CAAC’s six regional bureaus were transformed into financial entities as SOEs. These regional bureaus became the roots of the major airlines operating in China today. The central level CAAC in effect became the “Ministry of Civil Air Transport”, a status that it is maintaining to the present day^[7].

Apart from the CAAC, a number of other state organisations is involved in administration of air transport, such as MOFTEC and State Development and Planning Commission (SDCP), which plays a key role in decisions regarding new airport construction projects, airline regulations, airfare pricing and route allocation^[8].

SDCP, MOFCOM and CAAC all have recognised the need for a major restructuring of the aviation sector and for foreign capital and know-how, if China wants to tap the chance of meeting the burgeoning demand for air transportation. From 1994 foreign investment in civilian air transport was officially welcomed in large parts of the industry in the form of joint ventures with Chinese partners, share purchase and cross-equity holdings with domestic airlines^[9]. In a move to catch up with the soaring demand for both air cargo services and passenger transport in recent years, Beijing started further opening up its aviation infrastructure sector in 2002 to foreign and domestic money in an effort to propel an industry overhaul and therefore requiring money and international expertise. To promote air cargo the CAAC has also simplified the process of approval on freighter importation and lease and relaxed the limitations for the setup of new cargo airlines^[10].

1.2. Airlines

1.2.1. The first airlines

In addition to the airlines formed out of the six regional bureaus of the CAAC, the Central Government and the CAAC invited local governments to independently invest in new air transport enterprises from the late 1980s. Provincial and Municipal Governments as well as private business interests became heavily involved in establishing new airline companies^[11]. China Postal Airlines, the first dedicated mail and cargo airline in China was established as a joint venture between the Tianjin Municipal Government and the former Ministry of Posts and Communications. The sector flourished and the number of airlines was continuously increasing.

1.2.2. Market Consolidation and the emergence of the “Big Three”

In the late 1990s revenues began to plummet partly due to the Asian Financial Crisis but also to the ongoing undercutting of ticket prices aimed at gaining market share caused by the intense competition. This led to a continuing loss of profitability that is still prevailing among Chinese airlines^[12]. CAAC estimated that the sector suffered a combined loss of up to two billion RMB in the first half of 2001^[13]. As a reaction to these developments CAAC’s resumed stronger price control and encouraged airlines to merge with one another, putting various small airlines out of business. The move led to sustained market consolidation and resulted in the emergence of the “Big Three” airline groups: China Southern, Air China and China Eastern that have been dominating the market since^[14].

1.2.3. Recent Developments

CAAC showed its commitment to further liberalise China’s aviation industry and encourages private and foreign investment in Chinese airlines. At present, about 48 domestically registered airlines are operating in China. Four Chinese airlines hold foreign capital through domestic and international stock markets. Okay Airways, the first 100% privately owned airline started business in March 2005. Three other private airlines and two joint-venture all cargo-carriers are all set to take off soon after receiving clearance from CAAC^[15].

1.3. Airports and supporting Infrastructure

In China airports had been run by the CAAC since 1949^[16]. At first mainly for military use they gradually shifted towards commercial aviation. Since the 1990s the government is pushing for a rapid development of China’s aviation industry with airports being a vital part. In recent years, enormous efforts have been made in the airport sector. From 1996 to 2000 17 new airports were built and 33 were upgraded. In 2004, China had a total of 143 commercial airports^[17].

1.3.1. Change in ownership structure

In most economies airports are traditionally government business largely due to high fixed asset costs and long payback periods and their importance for the regional economy. Airport privatisation is a rather modern concept.

Industry reforms in the 1980s in China aimed at shifting a greater part of airport business to municipalities. Because of the crucial role airports play in town planning and regional development, municipally funded and managed airports are directly linked to a more aggressive and progressive approach of airport management^[18].

In 2002 the State Council released a plan that gradually provides the complete transfer of 129 civil airports that have been directly managed by the CAAC to local governments. That puts China’s airports in direct competition with each other and allowed them to plan and finance their own projects. The only exceptions from that transfer are Beijing Capital International Airport, GBIA and civil airports in Tibet^[19]. Local authorities realised that the aviation sector is a key component in their strive for growth, so a China-wide building boom at airports could be observed^[20].

Municipalities were encouraged to seek airport funding from capital markets, strategic investors and partnerships. Some of Chinas airports have been transformed into limited liability companies and obtained legal person status^[21]. Some airports such as Xiamen, Shenzhen and Shanghai’s Hongqiao Airport have made A-share offerings on the Shanghai Stock Exchange, GBIA is listed on the Shenzhen stock exchange^[22].

The change in airport ownership structure has placed significant financial pressure on Chinese airports to develop new business models to enhance profitability.

1.3.2. Chinese airports income structure

In contrast to many airports in developed countries, Chinese airports generate the major share of income from aeronautical fees. Airport aviation fees are set by the Chinese authorities. Fees for international flights are roughly the same as those charged by airports in developed countries, but those for domestic flights are way below what foreign airports charge their domestic airlines^[23]. The common Airport Construction fee which Chinese airports levy on domestic and foreign passengers does in contrast to the other service fees applied not contribute to the airports revenues but is directly submitted to the CAAC^[24].

The current fee structure used by airports was established in 1992 and is liked to the massive problems the domestic aviation industry has been facing in the early 1990s. The State Council has since rejected appeals made by airports to be allowed to raise the domestic prices to function on a more commercial basis^[25]. Moreover, China’s airports have a very low proportion of non-aeronautical income such as retail, car rental and hotel business. which often constitutes more than 50% of the income of foreign airports^[26].

Therefore, at present more than 70% of China’s domestic airports, in particular the smaller ones in central and western China do not operate on a economically sustainable basis^[27].

1.3.3. Foreign participation

CAAC and the Central Government have welcomed foreign investment in the airport sector from the mid 1990s and raised the maximum foreign ownership share to 49% of registered capital. CAAC has announced, that further liberalisation for foreign investors will take place in the future^[28].

Due to the fact that most Chinese airports do not operate profitable, only few foreign strategic investors have started to engage in the Chinese airport sector. HKIA has recently bought a 35% stake worth 240 mn USD in Hangzhou airport, aiming to expand its cargo facilities while Singapore’s Changi Airport has signed an agreement to buy 45% of Nanjing Airport^[29].

Chengdu Shuangliu Airport, the major hub in western China that aims to raise funding for its expansion plans for a second runway and a new terminal will be the first Chinese airport to plan an overseas stock listing to attract capital^[30].

1.4. Air traffic rights policy

1.4.1. Air traffic rights in China

The politics of air movements are governed by International Air Services Agreements which countries negotiate to exchange air freedom rights with each other. Thus, air traffic rights are absolutely essential for the establishment of an international route network^[31].

In the past, China had taken a rather conservative approach to international capacity supply, which has resulted in limited air traffic rights between China and the rest of the world. Moreover, the route and flight frequency allocation within China used to be biased towards Beijing and Shanghai^[32].

International air traffic rights are indispensable for the development of an route network and crucial for the promotion of air traffic. In accordance with the government’s objective to heavily promote the aviation sector, China’s policy on international air traffic rights have become much more liberal since 2000^[33]. This has lead to a series of bilateral agreements in recent years^[34]. China has signed Open Skies agreements with Australia, New Zealand and Thailand that provide no limitations on 3rd, 4th and 5th traffic rights^[35]. Bilateral Agreements for cargo and combination services were also made with the UK and Singapore, particularly supporting the air cargo sector. More liberal cargo rights were also re-negotiated in agreements with Germany, France, Japan, Korea, Malaysia, India the UAE and Canada^[36]. Hong Kong, too, has recently been granted extensive additional capacities connecting the SAR and 12 Mainland cities, including Hangzhou, Changsha and Nanjing^[37]

Of particularly high importance is the Sino-US bilateral agreement signed in June 2004. The agreement has the potential to alter freight markets and flows in the region dramatically^[38]. The agreement permits a nearly five-fold increase in weekly frequencies between the two countries over the next six years, approaching the current frequency between the US and Japan^[39]. By 2010, airlines of both country’s will be able to serve any point in either country, moreover unlimited code sharing between US and Chinese airlines will be permitted. This will have implications for several hubs in the region that have built up significant transit operations for US-China passengers and freight, due to the capacity constraints in the past^[40].

Hubs are a key part of the US-China agreement, that allows carriers to establish cargo hubs in the other country by 2007 if they meet certain minimum-service requirements.

1.4.2. Air traffic rights in Hong Kong

Hong Kong has been rather liberal in negotiating air traffic rights which resulted in the establishment of HKIA’s excellent route network.

However, the change of sovereignty of Hong Kong had a great impact on the Hong Kong aviation sector in terms of legal and regulatory status. The first change relates to the changing freedom identity of Hong Kong related carriages. When Hong Kong was still a British colony, the London – Hong Kong route for instance was considered as domestic route. After 1 July 1997 the British government lost control over this route. All international air services to, from or through Hong Kong which do not operate to, from or through Mainland China are now governed by the Government of the Hong Kong SAR under specific authorisations from the Central Government in Beijing^[41]

Similarly, the freedom identity of Hong Kong – Mainland China carriages was affected by the change of sovereignty. These routes were before recognised as international traffic. Starting from 1 July 1997, however, they have become cabotage routes. As a consequence, they have been reserved for airlines incorporated and having their principal place of business in the Hong Kong SAR and other airlines of the PRC^[42].

In practice, routes to and from Hong Kong from international cities hubbed through Hong Kong are controlled by Hong Kong’s own aviation authorities, but routes starting or ending in Mainland cities, hubbed through Hong Kong, are controlled by the CAAC in Beijing^[43].

2. The air cargo market in China

2.1. General characteristics of air cargo

Air cargo volume throughout the world has been strongly linked to trade growth. In effect, it has grown slightly faster than international trade volume, which in turn has grown at between 1.5 and 2 times the rate of world GDP^[44].

Air cargo flows consist of general cargo and air express, priority shipments that are transported with maximum speed.

There are two principal reasons for shippers to select the air mode as opposed to surface transportation such as road, sea and rail: First, the speed of air transportation of goods, especially over long distances, which is becoming increasingly important due to supply chain pressures that require just-in-time delivery and short life span products such as high-technology products and fashion goods. Moreover, its highly reliable security of delivery time is a crucial factor for modern supply chain management. Equally. for time sensitive products such as newspapers and perishables subject to spoilage airfreight presents the only feasible choice of transportation on long distances.

Second, air transportation’s high security standard regarding losing or damaging shipments makes it the best option for valuables.

For these reasons, air cargo usually has a high value-to-size ratio and is often time sensitive.

2.2. Types of air cargo

Air cargo can be divided into different types of cargo flows: domestic traffic and international traffic. The speed advantage of air cargo against other modes of transportation is increasing with the distance of transportation, thus international air cargo is economically much more important than domestic cargo. In a large country like China, however, potential of domestic air cargo is also huge.

Moreover, air cargo flows can either be origin/destination or transshipment traffic. O/d cargo is generated at the airports catchment area and flown out to other destinations and vice versa, whereas transshipment cargo is arriving from international destinations and continuing to other international destinations.

2.3. Air cargo growth trends

Currently, there are two major events driving the strong growth of the air cargo industry. The first is the ongoing global production fragmentation, which has lead to increasing trade flows growing much faster than global GDP. The second is the emergence of information technology, which has lead to the rise in relative importance of air transportation.

The global trend of production fragmentation has been steadily increasing over the last two decades and changed the face of the world economy to a great extent. The internationalisation of production, i.e. outsourcing various blocks to countries that possess a comparative advantage in that productive activity has become a dominant feature of globalisation. This is partly a result of the continuous decline in tariffs and other trade barriers. On the other hand global markets have become highly transparent due to improved communication technologies.

Outsourcing and production fragmentation have been a major source of strongly growing trade flows, that result in demand for international transportation services.

Moreover, globally integrated production activities, the growing importance of e-business and increasing pressures for cost reduction along with highly sophisticated and easily available information technologies have brought major changes to the whole production and distribution process. Major trends in this regard has been Just-in-time production and distribution systems as well as virtual warehousing – keeping goods in transit as a substitute for holding goods in storage – and the emergence of strategically located “fulfillment centers” that enable speedy and economical delivery of goods. All of these trends strive to reduce inventories to a mere minimum and require flexible transportation of goods. Product life-cycles have also been constantly shortening, in particular in industries such as computers, pharmaceuticals and designer clothes.

This calls for faster, more flexible and more reliable transportation solutions and has led to a global shift towards air cargo services that better meet the requirements of modern logistics systems.

Due to these developments, air cargo and within this sector air express has been the fastest-growth area in the global cargo sector for the last 25 years^[45]. The trend towards increasing trade flows and the relative shift in logistics towards air transportation is still going on. Thus, prospects for the global air cargo market continue to look good. Boeing recently forecasted the global freighter fleet to double by 2025 to 3.530 aircraft. The strongest future growth is associated with Asia, the most dynamic and populous region on earth^[46].

2.4. Air cargo in China

2.4.1. Emergence of an industry

Only limited statistics are available on the early years of China’s aviation industry.

Diagram 2.I. shows the average annual growth rate of China’s domestic airlines’ air cargo traffic from 1950 to 2000 compared to the average growth rate of passenger traffic^[47].

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The table shows that growth in both cargo and passenger traffic was brisk in the 1950s when the economy was resuming from the civil war. In the early 1960s it stalled and even showed negative growth rates likely due to the aftermath of the failed Great Leap Forward initiative and the Cultural Revolution. Growth resumed in the 1970 for passenger traffic but only at a lag for cargo traffic. Both grew at similar rates from 1980 to 1995 but then started to slow down and diverge again, with the slowdown of air cargo growth much smaller than that of passenger growth. Airfreight is growing on a somewhat more stable pace than passenger traffic. In the last decade air cargo growth has overtaken growth in passenger traffic.

As China’s enormous foreign trade growth implies, the air cargo market has grown rapidly in recent years. Since the beginning of the Reform and Opening policy that has boosted the economy from the late 1970s, growth has been substantial and stable.

Diagram 2.II. presents the development of air cargo in China in terms of freight tonne-kilometers (FTK) from 1984 – 2002^[48]:

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Growth in FTK has achieved an average rate of 18%. Air cargo growth turned negative for a year in 1989 probably as a result of the Tiananmen incident and the international condemnation of that, which resulted in a decrease in China’s international trade. Another dip in growth occurred in 1997 with the beginning of the Asian Financial Crisis, which hurt major Asian economies, affecting China’s economy and trade.

Although the Chinese economy currently accounts for 12% of world GDP and for 18% of global trade, its share in the global air cargo industry is still small at 4.5%^[49].

Total air cargo transported to and from Chinese airports increased almost fivefold from 0.45 m tonnes in 1991 to 2.2m tonnes in 2003^[50]. This is due to the global trends mentioned above, but also to structural changes in China’s aviation and air cargo industry. With China evolving from a centrally planned economy to one with greater emphasise on free market enterprises, major changes are ahead for both its aviation and air cargo industry.

The development of air cargo business is a major stage in the CAAC’s efforts to build China into an international aviation power. The CAAC wants Chinese companies to tap a bigger piece of the soaring airfreight market and to gain more efficiency in the sector. Its recent policy has been to encourage domestic airlines to run joint ventures or solely funded ventures as they expand in the cargo market^[51]. Furthermore, restrictions on imports of cargo aircraft have been relaxed, i.e. approval procedures have been simplified. Rules to approve cargo air routes and flights have been reformed and local governments are encouraged to establish airfreight hubs^[52]. The liberalising of the sector by the Chinese authorities has also been evident from international agreements such as the China-US air services agreement which is putting much emphasis on dedicated cargo flights.

In keeping with its pledge to open up major sectors of its service industry following accession to WTO, China has also lifted restrictions on international companies in its freight forwarding industry. Due to these developments, a large wave of foreign logistics enterprises is about to enter the Chinese market^[53], boosting the air cargo sector.

Another key aspect is the fact, that China is developing from a low income country to a higher income level country. This is driving the relative importance of air cargo in China’s transportation industries due to the increase in production of high-value goods and to soaring domestic demand which leads to rising imports and higher valued import commodities .

The airfreight industry in China has not yet much become a single industry of itself with the bulk of air cargo still being carried on belly holds of passenger flights. Only very few airlines specialise in the transport of air cargo^[54]. This has started to change in recent years, with “The Big Three’s” announcement to substantially increase the share of air cargo in their sources of revenue. The first Sino-foreign all-cargo airlines will start business in early 2006^[55]. Furthermore, various airports, now competing due to their newly gained independence are determined to position themselves as regional air cargo hubs

Due to the global trends enhancing air cargo, the restructuring and liberalisation of the Chinese air cargo industry and the increase in wealth of its citizens, the air cargo market in China has one of the highest market potentials in the world. This is further propellled by increasing demand for air services in China associated with the mega events Olympia 2008, the 2010 World Exhibition and the Asian Games in 2012 in Beijing, Shanghai and Guangzhou respectively.

CAAC estimates that, by 2010 cargo volume handled by Mainland airports will rise to more than 10 m tonnes and surge to 30 m tonnes in 2020^[56]. A study by the international express forwarder UPS forecasts, that supply in air cargo services would have to increase by 400% within the next ten years to keep up with the soaring demand^[57]. According to Boeing, China will be the most important aviation market in the world after the US^[58] by 2020. Airbus forecasts that the Chinese air cargo and passenger market will account for up to 18% and 8% of the world market by 2010^[59]. The figures suggest that the air cargo market is of much bigger global importance than the passenger market, mainly due China’s large foreign trade flows as third largest trading nation.

2.4.2. Air cargo market structure

Unlike most other countries, China’s domestic air cargo volume by far exceeds international air cargo volume. This is mainly because of the geographical size of the country and the still prevailing inefficiency in surface transportation.

Diagram 2.III. demonstrates the share distribution of airport cargo throughputs on domestic and international routes. Hong Kong and Macao are hereby counted as domestic routes^[60]:

illustration not visible in this excerpt

Hong Kong’s share in domestic routes is presumably large. If it would be counted as international traffic, the share of international traffic would be much higher. At the moment Hong Kong still is a major hub for international cargo arriving from and destined for the Mainland.

The domestic airfreight market is growing particularly fast, rising from 200,000 tonnes in 1991 this figure to 1.6 m tonnes in 2003, an annual increase of more than 20%. Domestic cargo accounted for 69% of the total air cargo volume carried in 1991. By 2003 it had risen to almost 73% of total air cargo^[61].

China’s largest trading partners are the European Union, the US and Japan^[62]. This implies that international cargo traffic flows are mainly eastbound where the greatest net value to China exists and westbound towards Europe. Another major feature of the Mainland’s air cargo traffic is its predominantly outbound character, which corresponds to China’s huge trading surplus. This is posing severe operational problems to air cargo providers.

Air cargo traffic distribution is linked to regional economic performance and industrial output.

Picture 2.I. presents the regional distribution of air cargo traffic in China (ex Hong Kong)^[63]:

illustration not visible in this excerpt

Airfreight traffic activities are concentrated on the eastern and southern coastal regions, where China’s prospering manufacturing sector is located, and industrial output and GDP are the highest. These coastal areas are strongly export oriented, leading to a high demand for air cargo services.

In the south, the air cargo market is dominated by Hong Kong. The SAR handles a major share of China’s air cargo flows, most of which are generated in its hinterland, the Pearl River Delta. Other regional economies are starting to build up significant air cargo volumes, too. Notably the Yangzi River Delta in China’s East has rapidly developed its air cargo sector, accounting for 42,6% of air cargo traffic in 2003 (ex Hong Kong).

Because of the speed and security advantage of air transport and its high costs relative to surface transport, goods with a high value to size ratio, valuables and time sensitive goods such as products subject to spoilage are conducive to air mode.

Table 2.I. presents major commodities carried on Mainland China’s international and domestic air routes^[64]:

illustration not visible in this excerpt

2.4.3. Major cargo airlines

Airfreight has been much en vogue with airlines all over the world, basically because it is recognised as a form of insulation from the constantly decreasing profits from passenger traffic due to low cost airlines and increasing competition. Asian airlines derive up to 48% of their total revenue from freight^[65]. Moreover, business in the airfreight sector in China is potentially more profitable than in the parallel passenger market because of the fact that CAAC still decides the prices on the passenger traffic market, whereas this is not the case for air cargo^[66].

All big Chinese airlines have started to increasingly focus on air cargo. The “Big Three” control a huge portion of the airfreight market and carry about 62% of total domestic and international freight^[67]. On domestic routes they have a combined market share of more than 80%. The biggest stake accounting for 22.2% of the market is controlled by China Southern (CZ), China’s largest airline in terms of fleet and revenue with its home airport GBIA.

The second biggest player in the market is Air China (CA), that has a market share of 20.6% in the air freight sector. As first airline of the “Big Three” CA launched its own cargo division Air China Cargo as a spin-off in December 2003. CA holds 51% in the venture. Its home base is Beijing although CA is also using other airports for cargo operations.

China Eastern Group with its home base Shanghai accounts for 18% of the market^[68].

Other cargo carriers are China Postal, China Cargo and Yangtze River Express. China Postal was established by the China Postal Bureau in 1996 as dedicated carrier for domestic mail and had been the monopoly express cargo provider for many years. The airline is now facing increasing competition as global express operators are increasingly penetrating the Chinese market. CZ purchased 49% of the carrier as a strategic investment^[69].

The first mostly privately owned dedicated air cargo carrier in China, China Cargo Co. Ltd, was established in 1998 by China Eastern (70%) and Cosco (30%). A possible joint venture of China Cargo Co. with the Taiwanese China Airlines is still pending (2004 presi).

Yangtze River Express, launched by China Changan and Hainan Airlines in 2002 was the first private dedicated airfreight carrier providing only domestic service, such as domestic connection flights for the US integrator UPS.

With Jade Cargo the first Sino-foreign joint venture dedicated cargo carrier will be joining the market. Jade will operate flights on international routes from its home base Shenzhen from 2006.

Domestic airlines still carry almost 100% of domestic airfreight in China. In contrast to that, their share in international traffic is substantially lower. In 2002 Chinese airlines carried merely 39% of China’s international air cargo^[70].

This is mainly because of the low competitiveness of Chinese carriers in the international market. The industry has been struggling in yield and profitability for many years^[71].

As a consequence, Chinese carriers are often unable to exhaust their full route capacities resulting in the existence of so called ghost or zombie rights^[72].

In terms of passengers the share of domestic carriers in international traffic was slightly higher. In 2004, 46.5% of departing scheduled seats were provided by domestic carriers, down from 50% in 1998^[73].

There is a strong correlation between airlines performance of cargo business and the hub development of their “home airport”. Being the preferential choice and centre of an airlines route network, an airports destiny is strongly tied to the performance of its home carrier.

2.4.4. Major cargo airports

Due to China’s strong growth in aviation, demand for airports continues to be strong. In 2005 China had 133 civil airports altogether, a figure that is to rise to 190 in 2010 and 230 by 2020 if CAAC’s current plans come into effect^[74].

Table 2.II. shows the ten busiest cargo airports in China in terms of throughput and growth as of 2003^[75]:

illustration not visible in this excerpt

The three airports of Beijing, Shanghai and Guangzhou handle more than half of China’s total air cargo. All of them are located at the centre of the most important economic and industrial zones of China.

Beijing serves the Beijing and Tianjin economic development zones. An important driver of cargo growth at Beijing Capital International Airport has been the soaring high-tech industry in the region. Beijing International Airport was the leader in air cargo throughput throughout the 1980s as it occupied most of the international airlines and domestic routes. While Beijing has less cargo then Shanghai now, it is still a clear leader in air passenger transport^[76].

Shanghai serves the Yangzi River Delta economic region. Shanghai began to catch up after 1990 and became the Mainland’s most important cargo airport in 1995. The economic strength and export orientation of its catchment area, the extending along the Yangzi to cities as far as Wuhan has been the principal driver for Shanghai’s air cargo market. Shanghai has been developing rapidly in the past years with freight volume growing at stunning rates of almost 80% in 2002, 60% in 2003 and 39.4% in 2004. In particular the opening of its Pudong Airport, that has already positioned itself as the 6th biggest cargo airport in Asia, has boosted Shanghai’s development into a major hub airport. By now, Shanghai is Mainland China’s most important airport for both international and domestic cargo. PVG and Hongqiao account for a third of total air cargo in China and for 66% of all international cargo^[77].

The most important airport in Southern China has been Guangzhou Baiyun International Airport GBIA, China’s third busiest air cargo airport. GBIA serves the Pearl River Delta (PRD), the economic power house of China which is characterised by a strong manufacturing sector in particular for consumer goods and a strong focus on export. The driving force for GBIA’s air cargo growth has been the strength of its industrial base. GBIA’s hub development has been strongly affected by Hong Kong, which handles most of the international air cargo originating in the PRD. Limited capacities at the old airport have equally hampered growth. However, air cargo throughput is expected to rise sharply after the opening of the new airport facilities in 2004. GBIA is now the airport with the largest cargo facilities in China.

The domestic route network of air cargo transport in China may be viewed as a tripod between Beijing, Shanghai and GBIA airports as major legs. The international network may be viewed similarly with Hong Kong replacing GBIA as the third leg^[78].

Since the two different airports GBIA and Hong Kong both perform the third leg role, one domestically and one internationally, a long-run equilibrium has possibly not yet been attained. The functional specialisation between Hong Kong and GBIA is still evolving. The possible outcome of this process is the particular focus of this paper..

Table 2.III. shows a comparison of flight frequency and airlines between major Chinese airports and Hong Kong as of 2003^[79]:

illustration not visible in this excerpt

Beijing and GBIA currently do not generate enough international traffic to reach a critical mass and are still deficient in connectivity and frequency. In spite of its strong growth in recent years, Shanghai equally is still lacking connectivity and network. As of 2003, all three airports had less than 50 weekly routes to international destinations, whereas large foreign hubs such as London, Frankfurt, Bangkok, Seoul, Hong Kong or Singapore all have more than 100^[80]. Thus, a large portion of international cargo traffic is still performed via Hong Kong as entrepot gateway.

CAAC has announced its overall strategy to develop a hub-and-spoke system in China comprising three international hubs, major secondary airports in provincial cities and smaller regional airports^[81]. The three major airports are Shanghai, Beijing and the newly opened GBIA. The Central Government has taken a series of measures to stimulate China’s air cargo business, for instance encouraging local governments to establish air cargo hubs to meet the expansion of cargo transport links. Hereby, CAAC has given priority to the airports of Shanghai PVG, Tianjin, GBIA, Shenzhen, Wuhan and Kunming, with the former three designed to become leading international cargo hubs and the latter three possibly to become major secondary airports. Airlines have also been encouraged by the CAAC to run cargo bases at these airports^[82].

Shanghai PVG has been aggressively trying to boost its reach and cement its status as a hub beyond its immediate catchment area. PVG is a highly sought after destination and has been the prime object of desire for international airline routes. The Shanghai Airport Management Group is closely working together with the government to help take advantage of this demand and turn the airport into a wide-ranging hub. As part of this strategy, Chinese authorities have granted more fifth freedom rights to international carriers for PVG beyond services. This policy unfolded in 2004 and produced various freighter flights from the likes of Quantas Airways, which flies from Australia to Shanghai via Singapore and on to Los Angeles. UPS, FedEx, Northwest Airlines and Polar Air Cargo have also been slotting their freighters through PVG. Thus, Shanghai presently is the Chinese airport du jour for foreign carriers^[83].

China’s former conservative approach to bilateral air service agreements and its international route allocation policy have resulted in limited air traffic rights between China and the rest of the world. Moreover, given the limited traffic rights, the route and flight frequency allocation within China was particular biased towards Beijing in the past - China’s capital, political and cultural center. Nonetheless, Beijing’s air cargo throughput has only grown slowly to a mere 662,000 tonnes in 2004, while Hong Kong, the second busiest cargo airport of the world handled 2.6 m tonnes^[84]. Chinese authorities have announced an equity tie-up of Beijing-based Air China and Hong Kong-based Cathay Pacific. Some observers rate this as an effort by Beijing to bolster the city’s hub status and temper the rapid expansion of Shanghai. The announcement came just one week after Cathay-Pacific was awarded 12 much-sought-after weekly freight services to Shanghai. One might interpret this as showing their commitment to stick to Hong Kong and Beijing as dominant hubs^[85]. Chinese authorities are equally supporting GBIA’s status as cargo hub and have granted a substantial number of 5th freedom rights to foreign carriers flying to GBIA. As a result, Lufthansa, UPS, Air France and Korean Airlines have all started scheduled freighter flights from the southern hub^[86].

However, perhaps the greatest test of Beijing's regulatory ingenuity will be to navigate the difficult decisions where there is overlap between different airport hubs. The most extreme case is in the PRD region, where the overlap between Hong Kong, Macau, Shenzhen and Guangzhou airports is posing a particularly intense strategic challenge. All have developed through an interlinked combination of internal economic growth and their historic roles in providing access to the Chinese Mainland.

[...]

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^[1] Quoteworld http://www.quoteworld.org/quotes/3107

^[2] Dougan, p.152

^[3] Dougan, p.153

^[4] The Essential China Book: Airports Airlines & Tourism 2001, p.11

^[5] Dougan, p.152

^[6] Dougan, p.153

^[7] Dougan, p.154

^[8] Dougan, p.156

^[9] The Essential China Book: Airports Airlines & Tourism 2001, p.15

^[10] Morrison Foerster Legal Update 06/04

^[11] Dougan, p.159-160

^[12] The Essential China Book: Airports Airlines & Tourism 2001, p.20

^[13] Characterization of Air Cargo Trends in Hong Kong, p.30

^[14] Dougan, p.162

^[15] Wuliushidai, 05/05

^[16] Dougan, p.165

^[17] Payload Asia 11/05

^[18] Dougan, p.187

^[19] Morrison Foerster Legal Update 04/04

^[20] The Essential China Book: Airports Airlines & Tourism 2001, p.37

^[21] faren”, Dougan, p.83

^[22] Wuliushidai 7/05

^[23] Grove, Hu

^[24] Dougan, p.174

^[25] Dougan, p.175

^[26] The Essential China Book: Airports Airlines & Tourism 2001, p.38

^[27] Wuliushidai 05/05, note that these are official sources, the real share of loss-making airports is probably larger than that

^[28] Wuliushidai 05/05

^[29] Payload Asia 11/05

^[30] The Standard, 16.8.2005

^[31] The industry’s response has been to form global airline alliances, where airlines get into another country’s market beyond gateway airports by sharing codes, seats, routes and airport facilities.

^[32] The Essential China Book: Airports Airlines & Tourism 2001, p.22

^[33] The Essential China Book: Airports Airlines & Tourism 2001, p.22

^[34] Presentation: Garfincle & Wang Tear Down the Barriers on Air Cargo Transport: A PRC Perspective”

^[35] See Explanatory Notes

^[36] Presentation: Garfincle & Wang Tear Down the Barriers on Air Cargo Transport: A PRC Perspective”

^[37] Presentation: Sustaining HKIA Cargo Hub, Competitive Advantage – A Hactl Perspective

^[38] Air Transport World 12/04

^[39] Air Transport World 08/04

^[40] Payload Asia, 05/05

^[41] Basic Law, 1991, Sec. 1.4

^[42] Joint Declaration, 1984, Annex I, Sec. IX; Basic Law, 1991, Art. 131

^[43] Characterization of Air Cargo Trends in Hong Kong, 2001 p.36

^[44] Characterization of Air Cargo Trends in Hong Kong, 2001 p.49

^[45] AirCargo Asia-Pacific, 12/04

^[46] Boeing World Cargo Market Outlook

^[47] Analyzing China’s air cargo flows and data, George W.L. Hui, Yer Van Hui, Anming Zhang

^[48] Zhongguo Hangye Fazhan Baogao – Jiaotong Yunshuye 2003, p.98; it has to be noted that the carried freight calculated from the available data comprises freight, passenger freight and letters, thus is does not correspond to IATA standards

^[49] Wuliuguanli 06/04

^[50] Wuliuguanli 06/04

^[51] Renminribao, 8.6.2004

^[52] Renminribao, 8.6.2004

^[53] Wuliu guanli 12/04

^[54] Dougan, p.192

^[55] Jade Cargo Ltd., South China Morning Post 23.4.05

^[56] Wuliuguanli 03/05

^[57] UPS

^[58] Wuliuguanli 08/04

^[59] Grove, Hu

^[60] Market and Infrastructure Analysis of Future Air Cargo Demand in China, Analyzing China’s air cargo flows and data

^[61] Boeing World Air Cargo Forecast 2004/2005

^[62] WTO Trade Statistics 2005

^[63] Presentation: Garfincle & Wang Tear Down the Barriers on Air Cargo Transport: A PRC Perspective”

^[64] Market and Infrastructure Analysis of Future Air Cargo Demand in China; Analyzing China’s air cargo flows and data

^[65] Air Transport World, 12/2004

^[66] The Essential China Book: Airports Airlines & Tourism 2001, p.15

^[67] as of 1998, Dougan, p162

^[68] The Essential China Book: Airports Airlines & Tourism 2001, p.22

^[69] Wuliushidai 7/05

^[70] 425,000 and 669,000 tonnes respectively in 2002; Market and Infrastructure Analysis of Future Air Cargo Demand in China”

^[71] See section 1.2.2.

^[72] i..e. air traffic rights that have been granted to airlines but stay unused;

^[73] Air Cargo Transport World 04/2005

^[74] Zhongguo Hangye Fazhan Baogao – Jiaotong Yunshuye 2003, p.101

^[75] Zhongguo Hangye Fazhan Baogao – Jiaotong Yunshuye 2003, , p.101, Presentation: Garfincle & Wang Tear Down the Barriers on Air Cargo Transport: A PRC Perspective”

^[76] Market and Infrastructure Analysis of Future Air Cargo Demand in China; Analyzing China’s air cargo flows and data

^[77] Zhongguo Hangye Fazhan Baogao – Jiaotong Yunshuye 2003, , p.101, Presentation: Garfincle & Wang Tear Down the Barriers on Air Cargo Transport: A PRC Perspective”

^[78] Analyzing China’s air cargo flows and data

^[79] Presentation Moving forward with you”

^[80] AAHK, Presentation Moving forward with you”,

^[81] A New White Cloud”

^[82] Renminribao 3.1.2004

^[83] International Herald Tribune, 13.7.2005

^[84] Air Transport World, 12/2004

^[85] Monthly Essential China 10/04

^[86] Minutes of meeting, Lufthansa Cargo Guangzhou