Forwarders and shippers say demand for intra-China transport is growing, but capacity is lagging behind

The dragon hasn't been soaring quite as high over the past 18 months. China's seemingly insatiable appetite for air freight capacity to North America and Europe is no longer guaranteeing stellar yields for airlines, as capacity out of the major gateways has grown faster than demand. Several carriers, including notables such as Air Canada or Northwest Airlines, have even pulled capacity out of the market.

By contrast, China's domestic sector appears to be a bonanza waiting to be fully tapped. Growth rates have been strong and are expected to keep their momentum, drawing more carriers into a market with a population estimated at 1.3 billion people.

Jingli Zhang, head of Beijing-based express provider BPS Global said that China's express business grew well in excess of 10 percent last year, "probably close to 20 percent."

By Boeing's measure, China's domestic air freight market has grown 20 percent a year since 1990 and should reach $3.35 billion in 2010. The Civil Aviation Administration of China projects the country's airports will process 11.8 million metric tons in 2010, with an average annual growth rate slightly south of 14 percent.

According to Airbus, China will need some 130 new freighters over the next two decades to cope with the increase in traffic during that period. The plane maker's analysts forecast China's international market to grow 8.5 percent a year on average, while the domestic sector should show annual average growth of 10.5 percent. Boeing predicts 10.8 percent annual growth for China's domestic air cargo market over the next 20 years.

Over the next decade some 48 new major airports are expected to become operational, adding to the existing 130 around China today. The government has ambitious plans to maintain that momentum beyond 2018.

Beijing is looking to spend $64 billon on infrastructure developments focused on building air cargo traffic.

This spring, the central government unveiled its long-term plans to develop air cargo. The document calls for the construction of 97 new airports, consolidation of some smaller airports and upgrading some existing ones - namely the major hubs - between now and 2020.

Under the plan, Guangzhou Baiyun and Shanghai Pudong will be upgraded to fulfill greater their strong potential as international cargo hubs. Beijing should get a second airport, with the capital's existing one to be developed into an international cargo gateway.

In central China, the government intends to upgrade Wuhan and Zhengzhou into regional centers, while Shenyang has been earmarked as the major hub in northeastern China. Other key hubs in the network will be the airports at Chengdu, Chongqing, Urumqi and Kunming.

So far, China's domestic market is dominated by home grown players, but the major multinational operators are finding it increasingly difficult to resist the siren call of the market.

"It's quite a key point in our growth strategy. It's a small number today, probably 4 to 5 percent of our volume, but it is growing," said Andrew Jillings, chief executive officer for China of Schenker.

Armed with domestic air freight licenses for 17 cities, DHL Global Forwarding launched a intra-China forwarding network at the start of last year. This year it added branches in Changsha, Hefei and Changshun. Through partnership agreements, the network now includes 40 cities.

This year, DHL Global Forwarding intends to set up four hubs for domestic air freight transit, according to Steve Huang, country manager for China. By 2013, the company wants to have altogether 30 licenses to cover 70 cities.

FedEx struck an alliance with budget carrier Okay Airways, which had earlier flirted with Korean Air Cargo, and established a hub in Hangzhou last spring. At the end of May 2007, the integrator was ready to launch its own domestic China express service with a next-business-day, time-definite offering and a 48-hour day-definite service available in 30 and over 200 cities respectively. Three 737 freighters operated by Okay are the backbone of the operation.

Airbus estimates China's freighter fleet will grow 11-fold over the next 20 years. Forwarders would love to see this happen, and better tomorrow than the day after, as freighter lift is scant at the moment.

"With the exception of some routes, there is no maindeck capacity available," said Robert Timmerman, regional chief executive for Greater China at Panalpina.

The integrators and their contract airlift providers such as Okay or Yangtze River Express, which flies for UPS, have shown little inclination to make capacity available to the forwarding community, agents reported.

Jade Cargo International and Great Wall Airlines, the joint venture freighter carriers backed by international carriers, are likewise not active in the domestic market at the moment, although they do fly some intra-China sectors. BPS Global uses China Post Airlines on a regular basis. "They have some capacity for the market, and their departure times suit express shipments well," said Zhang.

By his estimate, well over 90 percent of China's domestic air freight moves in bellyholds of passenger planes. The distribution of that lift is rather lopsided, however. There is ample widebody capacity on the trunk routes connecting the major hubs, but on most other sectors the passenger airlines are using narrowbody equipment.

"Capacity constraints are a fact of life," said Timmerman.

He said infrastructure in China's interior needs improvements, and operators face concerns over runway capacity and security issues to cargo terminals and customs clearance capabilities. Outside the major hubs, "many warehouse facilities are still below standard and the security may be considered weak at some airports. However, the airports are currently upgraded in many cities, involving high investments in cargo terminals," he said.

The airlines' service levels also come in for some criticism. For one thing, product diversification is still in its infancy. The airlines offer only standard airfreight service so far, although some have started looking at premium offerings, Zhang said.

He also bemoaned the lack of electronic tracking capabilities. "Domestic track-and-trace is very poor; it's in the early stage. We normally have to call the airlines, again and again," he said.

To some extent, forwarders are filling the gaps in China themselves.

DHL Global Forwarding offers its customers on-line tracking and electronic proof of delivery, but "e-booking still needs time to be worked out in the China market," Huang said.

Due to the lift constraints, international forwarders truck most of their air freight to and from the major gateways. "Unless you put in a freighter - like for Dell in Xiamen - the cargo will be trucked to the likes of Guangzhou or Hong Kong," Jillings said.

Air freight trucking is not exactly free from challenges. Timmerman cites several, from licensing issues to a fragmented market with many local heroes but no provider that covers the entire country. In addition, truckers' service levels are rather patchy, despite improvements in recent years, Jillings said.

DHL Global Forwarding intends to build up its trucking offerings as well as a rail freight service. Panalpina launched a rail-air product from China to Europe last year, which moves freight from Chinese origin points by rail to Urumqi for dedicated freighter flights to Luxembourg.

"Rail solutions become more and more interesting since the railway has a longstanding tradition in China and the government is heavily investing in railway infrastructure," Timmerman said.

International cargo from second- or third-tier points of origin is rarely flown directly, and seldom to an international Chinese gateway. Besides capacity issues, such ambitions are hampered by red tape. "Through masters are not always viable for example from Chengdu to Shanghai because goods are customs cleared in Shanghai for export and need to be deconsolidated in Shanghai," said Timmerman.

For the foreseeable future, forwarders will have to continue to navigate through these issues. The large Chinese carriers have undergone little change over the past year, Huang reported. For the most part, they have been too busy building up their passenger networks to concentrate much on cargo, be it in the domestic or the international arena.

In this situation, many forwarders would welcome new freighter flights.

Zhang sees scope for more freighter activities in China, but he is not expecting any quick solution.

Even if the focus in airline boardrooms and the equipment were there tomorrow, the industry would still have to contend with the shortage of pilots that has been bugging China and derailed the expansion plans of Jade a year ago. It took the Shenzhen-based freighter airline about a year to get enough pilots to fully operate its six 747-400 extended-range freighters.

However, having coped for a long time with only a fraction of its fleet, Jade announced in May it would wet-lease one aircraft for a year to Singapore-based Jett8. Apparently this looked more appealing than boosting Jade's international network or tackling China's domestic market, regardless of its long-term promise.