The air cargo industry in the Pearl River Delta (PRD) is in a state of flux, fuelled by the growth of Hong Kong International Airport that has witnessed an explosion in its cargo handling capabilities.

This month saw the groundbreaking ceremony for the new Cathay Pacific cargo terminal, set to open in 2011, as well as a doubling of capacity at DHL's central Asia hub.

The expansion of terminals looks to the future, but it is the present that worries terminal operators as the industry feels the effects of a slowdown in consumer demand across the US and Europe.

Lilian Chan, Hong Kong Air Cargo Terminal's (Hactl) general manager of marketing and customer service, said: "The situation is worse than 9/11 and SARS (Severe Acute Respiratory Syndrome) put together."

"This is not a very glamorous time for the industry," Chan said. "The current business situation is not very favourable to the entire aviation sector, particularly because of rising fuel prices, and the softening of economies elsewhere. I imagine next year we will be lucky if we get a two to three percent increase. Anything above that would be a real bonus."

Simon Yiend, acting managing director at Menzies Macau, said cargo volumes had been dropping in the past few years.

"They've fallen through the floor in America. We saw that happening last year," he said. "Old hands in the industry will tell you that the first indicator of bad times on the horizon is when cargo dries up, and there have been some old sages in America saying a recession is on the way.

"The peak time for cargo in Macau was 2004-2005. Since then it's been in decline. It's quite difficult to put your finger on what caused the decline, but there are a number of factors."

These factors include the close proximity of Hong Kong, an attractive destination for the big carriers, as well as an increase in capacity at Guangzhou and Shenzhen. The slow shift of the PRD's manufacturing base either northwards or to Southeast Asia is also being felt.

"A lot of the key international brands and a lot of the electronic and high-value appliance companies have plants in the PRD region, but with all those plants relocated elsewhere in places such as Vietnam and Indonesia taking advantage of cheaper labour, it's natural that the finished products do not pass through Hong Kong," Chan said.

"We have to remember that a lot of the high-value products have a short shelf life. As soon as they are manufactured they have to reach consumers in the shortest possible time frame. In that regard, Hong Kong still enjoys a very obvious competitor advantage because of its international connectivity with over 400 international flights per day, an enviable record compared to other regional airports."

Hong Kong's other main cargo handler, Asia Airfreight Terminals (AAT), declined to comment for this article.

Yiend noted that the northward migration of factories essentially meant that the Shenzhen and Guangzhou airports were closer than Macau, which used to receive a greater share of the cargo barged down the Pearl River.

The resumption of direct flights between the mainland and Taiwan in July was another important factor for Menzies, Yiend said. Macau's trade with Taipei was 55.1 percent of total import volumes and 56.3 percent of total export volumes so far this year.

"At the moment, no cargo can be carried on cross-strait flights but belly cargo is an inevitability," Yiend said.

"It's all part of the same spectrum. Macau needs to position itself as a destination in its own right and as a springboard for other parts of Asia. It doesn't have its own massive industrial heartland, but we can offer this as a relatively cheap operating base in the vicinity of a large industrial heartland that can provide point-to-point service."

To this end, Menzies is planning to extend its trucking services, and according to Yiend they are looking at ways in which they can set up a direct trucking link into the PRD heartland, similar to what Hong Kong is doing with its SuperLink China Direct truck service.

Yiend said this puts Macau in a niche position. Although Menzies cannot compete with the larger operators in the PRD region, its relatively small size allows for a fast turnaround. "In less than one hour we can take cargo out and through," Yiend said. "It's like anything: the bigger you get the more processes are involved."

Asked whether Menzies had cut rates in order to stay competitive, Yiend declined to comment. Chan, however, stressed that Hactl would not use lower prices to attract customers in order to compete with other terminals. Instead, they try to offer more value-added services.