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The Challenges Facing China’s Cargo Industry

The Challenges Facing China’s Cargo Industry. China Cargo Airlines LTD. Catalog. 1.Development Summary of China Cargo Airlines. 2.Main problems and reasons 3.Challlenges and opportunities of the international air cargo market

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The Challenges Facing China’s Cargo Industry

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  1. The Challenges Facing China’s Cargo Industry China Cargo Airlines LTD.

  2. Catalog 1.Development Summary of China Cargo Airlines. 2.Main problems and reasons 3.Challlenges and opportunities of the international air cargo market 4.Development planning and business strategy of China Cargo Airlines 5.Suggestion and advice for the future development

  3. 1.Development Summary of China Cargo Airlines China Cargo Airlines Ltd.(CK) is the first airlines engaged in cargo and mail operation exclusively. It is established on 18th Aug.,1998, and co-invested by China Eastern Airlines (MU) and China Ocean Shipping (Group) Company (COSCO). The former holds 70% share, and the later holds 30%. It’s registered capital is RMB0.95bn.

  4. 2005 2006 2007 2008 MD11F 6 6 6 6 B747-200F 1 1 1 0 B747-400ERF 0 1 2 2 A300F 0 0 2 3 Total 7 8 11 11 1.Flight Fleet Development

  5. 2.State of Operation 2005-2007 The whole state of operation of China Cargo Airlines is bad between 2005 and 2007.The revenue rises continuously with the increase of flight Fleet, but it still can not offset the higher cost, resulting in loss in three straight year. Looking at the details, the loss is the biggest in 2006, and has been reduced in 2007.

  6. （1）Main Problems A. Declining Market Share With the domestic competitors growing, Market access loosening, water and land transportation developing, our freight rate system faces threat now. Since 2004,some international logistics giants, such as UPS, FEDEX, have expanded aggressively in Shanghai, offer multi leg flights on Japan Airline, and weigh down freight rate. Korean Airlines transports the cargo source in Shanghai to Soul, and take the later as a hub for transfer. After succeeding in deep cooperation with Air China, Cathay gets all of the Shanghai traffic rights originally hold by Dragon Air, and fights aggressively for Shanghai market. At the same time, our transport capability expansion is laggard relatively, so the share of market decreases, and the dominant status in short-line market is weakening. As such, our freight rate on Japan and Korean airline declines every year, resulting in our lower operating revenue. 2.Main Problems And Reasons

  7. 2005 2006 2007 export 17% 15% 14% import 16% 13% 10% 20% 17% 16% 15% 14% 15% 13% 10% 10% 5% 0% 2005 2006 2007 export import linear(export) linear(import) Change of Our Shanghai Market Share

  8. （2）Main Reasons A. Sky opening, and the increasing transport capability input from foreign airways. B. Our growth rate of transport capability is lower than that of cargo market, and the flight fleet size is small. C. The unbalanced front haul and back haul, low back haul load factor, and shortage of oversea network. D. The base has not become a cargo hub, so it can not use the domestic network source. E. The imperfect information system can not offer ideal cargo tracking and enquiry, result in affecting service quality. 6、Homogeneous operation among domestic airlines, and intensified competition.

  9. A. Sky Opening And Increasing Transport Capability Input From Foreign Airways Being increase of market developing force, the transport capability input accelerates. According to the statistics, in 2005, the cargo and passenger throughput of foreign airways in China grow 19.5% and 23.7% respectively, while that of domestic airlines’ international routes only grow 13.7% and 9.5% respectively, which is lower 5.8 and 4.2 percentage point than the former. By 2006, the cargo and passenger throughput of foreign airways in China grow 13.1% and 7.8% respectively, while that of domestic airlines’ international routes only grow 15.5% and119.5% respectively, which is higher 2.4 and 11.7 percentage point than the former. The Shanghai cargo market is more severe, and the market share of China Cargo Airlines has continued to contract in 2005-2007. In 2008, the Market share rises due to some domestic airlines (such as Air China)shrinking their transport capacity , but that of foreign airlines stays rising. The main reason is the growth rate of our transport capacity is lower than that of the whole transport capacity.

  10. There is total 51 international airlines capable of cargo operation in Shanghai, 5 more than Mar. 2007 (taking the transport capability of cooperated by Lufthansa, Japan Airlines and Air China as a single airlines). The weekly total of market transport capacity is 39498 tons, among which China Eastern Airlines reaches 6151 ton, or 15.6%(14% in 2007), and continue to be No.1.

  11. 33 Airlines compete in European direction, 4 more than in Mar. 2007. Because most of new transport capacity be put to European Lines, it makes its market share in European lines reaches 9.5%, and rise to the first from the third.

  12. 12 Airlines compete in America direction, 1 less than in Mar. 2007. Because Air China shrinks its transport capacity to America in Shanghai market, it makes the market share of China Eastern Airlines reach 17.3% and also is at the first place (it and Air China are both at the first place in Mar. 2007).

  13. 11 Airlines compete in Japan direction, 1 more than in Mar. 2007. The whole transport capacity of China Eastern Airlines grows somewhat than a year earlier, but its growth rate is lower than Japan Airlines, so the former market share is still lower than the later, and at the second place. The former market share is 16.5%.

  14. 9 Airlines compete in Korean direction, 1 more than in Mar. 2007. Because we replace the M1F with ABF, The whole transport capacity of China Eastern Airlines declines somewhat than a year earlier. At the same time, the transport capacity of Asiana Airways grows more than a year ago, so it makes that of China Eastern Airlines decline to the third from the second in previous year, and its market share is 17.7%, which is lower than Korean Air and Asiana Airways.

  15. 4 Airlines compete in Hong Kong direction, same as in Mar. 2007. The whole transport capacity of China Eastern Airlines increases much than a year earlier (the wet leased KUZU’s ABF was grounding due to examining and repairing in Mar. 2007), but it is sill lower than Cathy and Dragon Air, and at the third place. The market share of China Eastern Airlines 24%.

  16. 18 Airlines compete in the direction of Singapore, Thailand, India, Australia and Southeast Asia, 6 more than in Mar. 2007. Excluding the connecting flight of Korean and Cathy, The whole transport capacity share of China Eastern Airlines remains at the third place, same as last year. The market share of China Eastern Airlines 10.8%.

  17. （Ton） 2005 2006 2007 06/05 07/06 Weekly export transport capability 26388 32044 36809 21% 15% Weekly export transport capability of China Cargo Airlines 5386 5472 5158 2% -6% B. Small Flight Fleet Size, Slow Development According to the transport capability data in 2005-2007, the growth rate of total weekly export transport capability in Shanghai is higher than that of China Cargo Airlines. As such, our flight fleet size grows slowly against Shanghai market.

  18. C. Unbalanced Front Haul And Back Haul Considering of the long time trade surplus in China, insufficient and instable transport capability, and limited sales network in the international market, the back haul of China Cargo Airlines in China-America and China-Europe routes is always not enough. Historically, the load factor of front haul is 1.5 times than that of back haul.

  19. Intl turn inland inland Turn inland Intl turn Intl total Total cargo ratio Year （ton） （ton） （ton） （ton） （ton） （％） 2005 —— —— —— 10760 273377 3.9% 2006 11730 2007 1414 15151 280212 5.4% 2007 17408 5450 4228 27086 283443 9.6% D. Base Advantage weakening Gradually China Cargo Airlines is a base airlines in Shanghai, but if looking at transport capability, related guarantee, flight time and network design, etc., the so-called base advantage has not existed.The long time point-to-point transport form has not changed entirely, and the base has not become a hub, although the transshipment increased some, but the total number is still small, and the effective availability of domestic network sources is low.

  20. E. Information System China Cargo Airlines and Air China are renting the sita freight system, but this system can not applied to the localized operation entirely. In addition, the system application is imperfect, and can not offer perfect cargo tracking and enquiry, resulting in adverse impact on service quality.

  21. F. Cut-Throat Competition Among Domestic Airlines The Homogeneous operation is among domestic airlines, and competition has intensified. On the current routes operated by China Cargo Airlines, some domestic airlines are also on operation. Los Angeles：China Cargo Airlines, Shanghai Airlines Cargo, Yangtze River Express Chicago:China Cargo Airlines, Shanghai Airlines Cargo, China Southern Airlines Dallas:China Cargo Airlines, Shanghai Airlines Cargo, Great Airlines, Jade Cargo West Europe: China Cargo Airlines, Shanghai Airlines Cargo, Great Airlines, Jade Cargo Yangtze River Express

  22. 3.Opportunies And Challenges In International Air Cargo Market The CAAC “11th five-year” freight development target：By 2010, the cargo and mail transport volume will reach 57 million tons, and the average annual growth rate will be 13%. In order to realize such target, the General Administration of Civil Aviation of China is devoting to reform air cargo policy, loosen economical control, open further the air service market including cargo market, give full play to the fundamental role of the market in resource allocation, enhance and improve the macroeconomic control, strengthen market management, and drive the air cargo market to a new step. Under such circumstances, there are so many opportunities and challenges in the international air cargo market.

  23. Opportunities 1.China economy grows strongly, and the air cargo grows rapidly. Asia has led the global air cargo market for many years, and will be on dominant status in the future. According to the authority research, the average annual growth rate of inside market in China and Asia will be 10.8% and 8.6% respectively. 2.The government encourages to step up the air cargo development The General Administration of Civil Aviation of China will establish a public information system for air cargo, improve freight transfer facility, raise the informatization and automatization level of cargo and luggage transportation, support China airways to exploit some domestic and international flight routes, and set up freight hub. In addition, it will grant the operation permit priority of the time international cargo flight to the domestic air transport enterprises which establish freight hub to operate the time international cargo flight. 3. Each airway pays more attention to the freight, and establishes cargo airlines. Excluding China Cargo Airlines and CAO, some quasi cargo airlines appear, such as Great Airlines, Jade Cargo Yangtze River Express.

  24. Challenges The competition has intensified, and foreign airways are eager to take part in China rapid growing freight market , and will put in more transport capability. Small size, and no scale and network advantage Low operating level, including: flight routes arrangement, hub construction, aircraft maintenance guarantee, operation flow, jet fuel futures and settlement system.

  25. 4. Development Planning And Business Strategy of China Cargo Airlines Overall Strategy With the advance of Shanghai aviation hub construction, 2008 Beijing Olympic Games and 2010 Shanghai Expo, it will continue the growth trend in Shanghai aviation market. According to the functional position and overall target of Shanghai aviation hub construction, combined with Shanghai air traffic forecast, the preparation progress of base airways hub operating transformation, airport facility planning and implementation scheduling, and the international hub constructing experience, our future hub construction strategy will be three-stage.

  26. First Stage: In 2005-2007, the preparation and starting stage, setting up solid base for the hub construction. Main working target: make the complete network framework matched with Shanghai market sources come into being basically, among which the emphasis is international market expansion, the construction and forming of inland turn international, international turn inland.

  27. Second Stage: In 2007-2010: the adjustment and increase stage, and the cargo hub centered around Shanghai will be built up basically. Main working target: the first is to improve the quality of airline network structure in Shanghai hub; second is to continue expanding the network scale. The covered range of hub airline network and flight density get near to the world advanced level.

  28. Third Stage: In 2010-2015: Mature and expansion Stage， establishing our major status in Shanghai aviation hub. Main working target: 6th traffic rights network structure will be improved, and become a major part of Shanghai hub structure system, while continue to raise each technical indicator.

  29. 2008 2009 2010 2011 2012 2013 2014 2015 B747-400ERF 2 2 2 2 2 2 2 2 A300F 3 5 5 5 5 5 8 10 B777F 0 1 4 6 8 10 13 16 MD11F 6 6 3 0 0 0 0 0 11 14 13 13 15 17 23 28 total Flight Fleet Planning Combined the developing strategy of China Eastern Airlines with real development of China Cargo Airlines, and according to the strategic target, that is full freighter of China Cargo Airlines occupied 15% total amount of import & export of Shanghai airports in 2005, at that time it will need transport capability about two 747-400ERF, ten A300F and sixteen 777F. The schedule as below: 747-400ERF and 777F will be mainly used for Europe and America long flight routes, and A300F for regional and domestic shuttle flights.

  30. Flight Routes Layout According to our planning, with the increase of flight fleet scale and transport capability, China Cargo Airlines will see an essential breakthrough on the operating concept and mode. Utilizing the opportunity of recent started Xiamen shuttle flights and AB6F mid-short range freighter, we will gradually open the shuttle flights to Qingdao, Kunming, Chengdu/Chongqing, Wuhan, Northeast, even Guangzhou/Shenzhen in 2-3 years based on the market condition in main domestic economic areas, and Shanghai will be a central hub linked to domestic and international transport network. By 2015, 20% of the transport capability of international flight routes started from Shanghai will be domestic transfer goods, reducing our operating risk on international flights. Meanwhile, in the domestic points concentrated with flight routes (such as Beijing, Guangzhou, Kunming, Xi’an), some second grade transfer hubs with different radiation area will be constructed, resulting in a transport network with primary and secondary complement and broad radiation，and establishing the advantage of flight routes and transporting for the improvement of our overall operating benefit.

  31. Network Planning Future Flight Routes Planning as below: By 2015,the navigation points of China Eastern Airlines full freighterDomestic（11 points）: Beijing, Qingdao, Xiamen, Shenzhen, Chengdu, Wuhan, Dalian, Xi’an, Yunnan, Urumqi. HK，Macau and Taiwan（1 point）:HK International（19 point）: Tokyo, Osaka, Seoul, Singapore, Bangkok, Paris, Copenhagen, Los angles, Luxemburg, London, Milan, Dubai, Bombay, ANC, San Francisco, Dallas, Chicago, New York and Atlanta.

  32. International and Regional Airline Plan

  33. 5. Suggestion And Advice for The Future Development • Orientation of Air Freight In Feb. 2007, in the <State-Owned Assets Working Main Point Adjustment of the Industry Layout in 2007>, State-Owned Assets Supervision and Administration Commission takes civil aviation as one of seven major developing industries in China. The government must take holding and control absolutely. The international airfreightindustry is facing the competition from foreign airfreight giant, we should improve domestic airfreight companies’ competitiveness on the level of state strategy, to make airfreight company stronger and larger.

  34. 2. Although air freight economics proves that the economy of scale is not reflected clearly in the air transport industry, but as a network industry, the air freight has the features of economies of scope and density, proper scale is the necessary conditions of economics of scope and density. At present, due to small domestic airline’s scope of flight fleet, it can not form effective network in Europe & American and south-east Asia airline, and is difficult to get the advantage of economies ofscope and density. As such, need continue to increase competitiveness, and to be larger and stronger is the main goal in the future development. To be larger: scope and network advantage. To be stronger: improve operation management level.

  35. 3. Approach To Be Larger and Stronger (1) Increase Investment The civil aviation is a capital intensified industry, to grow rapidly to reach the advanced international level, it not only needs enterprise’s effort itself, but also needs increase investment by state and every parties. one is to loose investment subject and scope, allowing all kinds of subject of ownership to invest civil aviation, including non-public subject. The other is to ensure state-owned economy at the dominant status. Keeping state owned or state holding in the important public air transportationenterprises and civil airports. The state investment is suggested to be a main method, and supplemented with other methods.

  36. (2) Industry Reconstruction Merger & acquisition and reconstruction is the re-creation and rediscover process of enterprise’s value, and it becomes an important approach for enterprise to reach leap-forward growth on achievement presently,<Working Main Points of State Department in 2007> indicates: promote state-owned capital to focus on important industries and key fields, drive enterprise to reconstruct, and support conditional enterprises to be larger and stronger. Only in this way, it can form one or two super carriers rapidly to counter against international carrier on transport capability and network etc.But the precondition and key point is that the management skill needs to improved actually, otherwise, it can become larger but cannot become stronger.

  37. (3) Introduction of Foreign Capital The economy of scale is not reflected clearly in the air transport industry. If an airlines expands only on the scale, the rapid expansion will let itself be in the mire on the contrary, it has precedent in the Occident. At present,foreign airlines has a higher management level than domestic airlines generally. So, during the introduction of foreign capital, it also brings the management experience, sales network and modes of business operation at the same time.The important symbol of being larger and stronger is that the domestic airlines management skills, sales network and operating efficiency shall reach the advanced international level.

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