October 1, 2005
enroute | Air Freight

A whole new world

a whole new world

China's burgeoning economy is sparking huge investments in the region by air carriers eager to gain the first-mover advantage.

By John R. Johnson

The heady growth reports out of China just keep coming. One week, it's the steel industry reporting that the sector is expanding even more rapidly than analysts had predicted just months earlier. The next week, analysts are hailing the emergence of a Chinese middle class—a middle class of more than 250 million with both disposable income and an appetite for American-made products. And all the while, Chinese factories continue to pump out low-cost consumer goods: clothing, shoes, toys, consumer electronics and even cars for export. Although some economists predict that China will find itself dealing with deflation within the next six months, the economy is not expected to cool much from its current 9-percent growth rate.

With all those goods to be moved between the two nations, it should come as no surprise that air freight between the United States and China is burgeoning. In fact, air freight from China to the United States is expected to grow at an average of 9.6 percent a year over the next 20 years (while traffic to Europe is predicted to grow almost as quickly at 9.3 percent over the same period). "The output from the two major airports [Shanghai and Beijing] into the United States and Europe is tremendous," says Charles Kaufman, vice president and head of air freight, Asia-Pacific, for DHL's Danzas Air & Ocean division. "Airlines are increasing their flights out of China rapidly."

Kaufman isn't alone in his assessment. "China is growing tremendously and I think many of the people that play in this market have seen similar phenomenal growth, especially out of Shanghai," says Rick Whitaker, vice president of international services at BAX Global, a freight forwarder with a significant presence in Asia. "The good news is that there [are] significant [numbers] of new carriers coming into the market."

That's due partly to the fact that the General Administration of Civil Aviation of China recently granted foreign carriers "freedom rights," which means they can pick up cargo on the Chinese mainland en route to other destinations. Previously, an aircraft picking up freight in Shanghai, for example, was required to fly directly to its end destination without making stops in between. Whitaker says the move is expected to further develop the aircargo market between China and the United States, which had been stifled by a shortage of flight rights.

The China syndrome
While the airfreight carriers jockey for a share of the growing U.S.-China trade, the air express carriers are embroiled in a battle of their own. UPS, FedEx Express, DHL Express and even the U.S. Postal Service are making big investments in hopes of capturing market share in the China region.

"We see nothing but growth coming from China and going into China, too," says John Wheeler, a representative of UPS International."The biggest issue right now is that there is a lack of capacity in and out of China and everybody is feeling the pinch."

To help ease the crunch, UPS announced in August that it will add eight new Boeing 747-400 freighters to its fleet, starting in June 2007. The aircraft will be delivered to UPS through 2008, helping UPS increase capacity on its most important international "trunk" routes connecting Asia, Europe and North America.

UPS also has placed an order for an A380 freighter that will be able to fly non-stop from China to the UPS Worldport air hub in Louisville, Ky. UPS expects to take delivery of the plane in 2009. Its primary benefit would be faster transit time from Asia to the U.S. East Coast, while allowing UPS to handle more cargo and larger individual items. Today, all shipments headed to the United States must stop in Anchorage first.

Earlier this year, UPS won permission from the U.S. Department of Transportation to expand air operations in China and was granted three more air routes in China. In the last year, the company has expanded to 18 weekly jet flights to and from China. And in a major public relations coup, UPS has also been chosen as the official Logistics and Express Delivery Sponsor of the Beijing 2008 Olympic Games.

But UPS isn't the only express carrier on the move. After an exhaustive series of feasibility studies that included projections for manufacturing and trading trends both within Asia and internationally for the next 30 years, FedEx announced this summer that it is building a new Asia Pacific hub at the Guangzhou Baiyun International Airport in Southern China. The facility, which represents a $150 million capital investment, will allow FedEx to double its capacity in China by sorting up to 24,000 packages per hour. It will employ 1,200 people when it opens in December 2008.

Although the new hub will undoubtedly rev up FedEx's operations, it's the Chinese economy that really stands to benefit. A joint study by China's Development Research Commission and the U.S.-based Campbell-Hill Aviation Group estimated the direct output impact of a FedEx hub on China's economy at $11 billion in 2010, increasing to $63 billion by 2020, with the majority of the gains resulting from industrial expansion.

Not to be outdone, DHL is investing $273 million in a five-year China expansion plan that calls for the company to develop and launch China Domestic, a door-to-door express delivery service in China; establish Express Logistics Centers (ELCs) in Shanghai, Guangzhou and Beijing; and establish 16 spare-parts centers across China. As part of its financial commitment, DHL will spend $12 million to double DHL Danzas Air & Ocean's presence from 20 cities to 37 by 2007, and will invest $3 million in two DHL Danzas Air & Ocean Logistics Centers in the Shanghai/Pudong region.

DHL cautions, however, that concentrating solely on China would be short-sighted. There are other "Asian tigers" out there with the potential to emerge as economic powerhouses. "We are investing a lot in China but we should not underestimate other countries," says DHL's Kaufman."The growth in China is still the strongest that we see, but there is still very excellent growth in Singapore, Japan and Malaysia, and what's coming up is India."

About the Author

John R. Johnson
Editor
John Johnson joined the DC Velocity team in March 2004. A veteran business journalist, John has over a dozen years of experience covering the supply chain field, including time as chief editor of Warehousing Management. In addition, he has covered the venture capital community and previously was a sports reporter covering professional and collegiate sports in the Boston area. John served as senior editor and chief editor of DC Velocity until April 2008.

More articles by John R. Johnson

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