China's faltering volumes prove too tricky for freighter operators

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Freight forwarders are in a bind trying to serve China’s new promised land. The emerging centres of production in the country’s interior require freighter services  – but are not yet turning out sufficient volumes to sustain longhaul all-cargo activities.

Things looked much brighter 12 months ago. As volumes elsewhere were dropping alarmingly, international carriers were eager to deploy freighters in the up and coming manufacturing areas around Chongqing, Chengdu and Zhengzhou, marching in the wake of electronics giants such as Foxconn. Lufthansa, Cargolux, AirBridge and Cathay Pacific were among a host of carriers that mounted flights to these points.

With the start of the winter schedule Lufthansa cancelled its twice-weekly MD-11F run serving Chongqing. By that time, Cargolux had quietly shifted its 747-400F flight from Chongqing and was serving the Chinese city by truck from Shanghai. A spokesman for the German carrier commented that demand was below expectations and overcapacity had depressed rates and yields.

It is not just demand per se in China’s emerging gateways, but also its unsteady nature that is frustrating carriers. “We find volumes fluctuate significantly. Some days you go out with a good load, but the next flight can be very light. It is very hard to plan,” remarked Nick Rhodes, director and general manager of cargo of Cathay Pacific.

Ram Menen, senior vice president of cargo at Emirates, attributes this to the fact that the new production bases are still in their infancy and need a larger pool of manufacturers to stabilise volumes.

“They need a lot more manufacturing activity there to have consistent loads. Forwarders usually have multiple customers. If one goes down, another goes up, so they can balance, but at the moment they rely too much on a small number of producers,” he said.

Sources at the logistics park in Chongqing last year confirmed to The Loadstar that although the factories know in advance the amount of goods that will be produced, lean inventories and volatile demand mean that they don’t know where the goods will be going until the last moment.

Gerhard Blumensaat, director of airfreight for Central China at DB Schenker, was not surprised by the decisions of Lufthansa and Cargolux for another reason: “What is lacking there is import cargo. They could not make the rotation work,” he remarked.

There is broad agreement that the days when airlines could base China freighters on Chinese export volumes alone are long over. “You may get spikes where you can charge $5 per kilo, but these rates last for a couple of weeks only,” said Stan Wraight, managing partner in Strategic Aviation Solutions International.

According to Mr Menen, the situation is something of a Catch 22. Since the new destinations do not attract large enough passenger numbers to produce a significant boost in bellyhold capacity, they need freighter service. However, freighters need consistent loads, which forwarders cannot commit to at this point, he said. IAG, however, has just announced it will serve Chengdu with a thrice-weekly 777 service, revealing that it believes the passenger market has sufficient volumes to service the Sichuanese capital.

DB Schenker saw record exports out of Chongqing in November, both in terms of volume and shipment count, and finding lift has been a challenge at times. “Not at all times can you get transit times (to Europe) as required,” said Mr Blumensaat, adding that his company has been able to overcome these issues, thanks to close co-operation with Chinese airlines.

Airlines based in the Asia-Pacific region have enjoyed an advantage over their rivals from overseas, as they can – and do – combine the emerging markets in China’s interior with other points in the region, notably their respective hubs.

“If you fly two hours to Hong Kong with a poor load, you lose money, but not your shirt. If you fly longhaul, that’s a different situation,” remarked Mr Rhodes.

This echoes reflections of Robert van de Weg, senior vice president of sales and marketing at Cargolux, two years ago. Looking at the viability of mounting flights to the new production centres in China, he emphasised that for a freighter operator, this was very much a matter of timing – if you entered too late, you missed the party, if you entered too soon, you would lose your shirt. At a time when airlines cannot afford to maintain a route that does not produce adequate returns, China’s emerging markets are not far enough down the road of evolution to jump in.

For his part, Mr Blumensaat does not expect to see a surge in exports from China’s interior in the year ahead. “I think it will be more or less the same as in 2012,” he reflected. Demand for the items that dominate output in Chongqing and Chengdu looks unlikely to generate a large surge in export traffic, he continued. “Everybody has a notebook, half of the people have a tablet,” he said.

He added that tablets are replacing consumer notebooks, and 2.5 tablets make one notebook in weight and volume, “so where would the growth possibly come from?”