Turbulence in mainland air cargo market

When it comes to freight forwarding, mainland airlines are their own worst enemies.

Over the years they have acquired a reputation for being unreliable and unethical which has resulted in foreign carriers securing a lion's share of the mainland's international air cargo market.

In an attempt to redress this imbalance the government wants the cargo divisions of its major carriers - Air China, China Eastern Airlines and China Southern Airlines - to merge.

However, international freight forwarders who employ carriers on behalf of major western importers, say the move is unlikely to persuade them to stop shunning the mainland's cargo airlines.

'I doubt whether it will be a success putting inefficient airlines together,' said Arthur 'Archie' Da Silva, chairman of Jet-Speed Air Cargo, a Hong Kong-based international freight forwarder.

'Their services are not competitive as there are more damages reported, delays, and longer transit times,' he said. Instead, he suggested mainland carriers could improve their service by partnering with foreign cargo airlines to take advantage of their expertise.

Several such air cargo joint ventures have been set up over the past few years, including Jade Cargo Airlines, a venture between Shenzhen Airlines and Lufthansa; Great Wall Airlines formed by Singapore Airlines and China Aerospace Science & Technology Corporation; and Galaxy International, a venture between Sinotrans Air and Korean Air.

Meanwhile, Cathay Pacific Airways and Air China are awaiting approval from mainland government to set up their cargo joint venture.

Da Silva said his company uses either foreign carriers or Sino-foreign joint venture when shipping in and out of China.

Freight forwarders have had to learn some hard lessons when dealing with mainland carriers.

'It is impossible to totally avoid mainland airlines when shipping our goods out of China,' said Kelly King, managing director of Toll Global Forwarding (HK). 'But the way that they treated us has left us in misery.'

The normal procedure is for airlines to sign annual contracts in which freight forwarders commit to handling a certain amount of cargo during low seasons in return for guaranteed cargo space from the carriers during peak seasons, in a bid to smooth out fluctuations in rates. The contracts are built on mutual trust, but King complained that they were being abused by mainland carriers who slash rates during the low season to below the contracted levels.

This results in the freight forwarders being unable to sell their committed cargo volume at a profit, King said. Adding to their woes, the carriers would usually have a penalty clause for freight forwarders who fall short of their committed tonnage.

'It's like being stabbed in the back,' King said.

There are no official figures on how the market share of air cargo among mainland and foreign carriers but a publicly-accepted ratio is 70/30 per cent in favour of the foreigners.

Beijing wants the mainland carriers to increase their market share by consolidating their resources and injecting capital into the new joint venture to beef up their freighter fleets.

Having limited fleets has curbed the development of the big three mainland airlines' cargo units in the past five years.

The Hong Kong-Shanghai cargo route serves as an example. Before Cathay Pacific and Dragonair were allowed to fly freighter services between the two cities in January 2005, China Eastern offered two daily flights using an MD-11 aircraft, which has 80 tonnes of capacity per trip. That capacity has now been halved as the Shanghai-based carrier is now using an A300 BCF, which can handle only 40 tonnes of cargo. Meanwhile, Cathay and Dragonair have tripled their freighter capacity and now have 20 Boeing 747 flights a week compared with seven in 2005.

The reason China Eastern had to scale back its freighter service is two-fold. First, the introduction of direct flights to Taiwan diverted some of the cargo which used to cross the strait via Hong Kong. And second, the lack of new freighters on order which meant having to retire older aircraft such as the MD-11, a China Eastern official said.

Other areas where mainland carriers lag behind their international peers are management, on-time performance and logistics.

Lack of comprehensive networks and local distribution services have lengthened delivery times. Because mainland carriers only fly to a few major cities in Europe such as Frankfurt, London and Paris, shipments bound for secondary cities such as Leon or Nice, have to rely on local trucking services which are fraught with delays and heighten the chances of damage occurring.

The consolidation of the mainland carriers' cargo units would enable them to improve resources and strengthen their ground distribution networks, said K.M. Liu, senior vice president, transportation at UPS Asia Pacific Region.

'The big three carriers operate fewer than 30 freighters at present which is far from enough,' he said. The consolidation would enable them to boost their freighter fleet and payloads.

In addition to investment on hardware, Liu also suggested the mainland carriers invest more in software. 'Investment in technology, especially cargo tracking is an important issue in transportation,' he said.

'If the mainland's main carriers just consolidate among themselves the political issue remains unchanged,' said one freight forwarding executive.