he problems and concerns of air cargo operators in Hong Kong today might have a familiar ring to the early 19th century traders who helped turn the city into the epitome of the modern metropolis. As Hong Kong was turning into the world's ultimate global trading post 165 years ago, trade between China and the Western powers was only just turning into a two-way affair.
Before Western traders realized they could sell opium to the Middle Kingdom, their business had been frustratingly lopsided. Their home markets clamored for Chinese goods - mostly tea and silk - but the Chinese showed no interest in Western products, so ships left the Pearl River estuary loaded to the rafters with Chinese exports and returned with little beyond provisions for the Western traders stationed in Guangzhou and silver to pay for Chinese exports.
Today, doubts about Hong Kong's air trading future in light of rising competition from Chinese airports may have been laid to rest, but airlines are struggling despite the growing volume of cargo they are lifting out of Chek Lap Kok. Costs and the imbalance in traffic flows are eroding their margins.
On the face of it, for instance, Cathay Pacific Cargo had another banner year in 2005. Cargo ton-kilometers climbed 10.2 percent to 6,618,261 and freight tonnage surged a resounding 15 percent to 1,118,047 tons. Ron Mathison, director and general manager of cargo, sees no occasion for celebration, however, because yields and load factors have been under pressure.
The reason is that the freighters that serve Hong Kong International Airport show the same pattern as those trading clippers sailing up the Pearl River to Guangzhou before 1840 - they are full heading out to North America and Europe but carry scant cargo on their way in. Last year, some 3.4 million tonnes of cargo moved through Hong Kong International, but the weight was nearly two-to-one in favor exports. As recently as 2001, the imbalance was more like 60-40 for exports.
The viability of the operation hinges squarely on the rates carriers can charge for the headhaul, as prices into Hong Kong are at best close to cost level, if not below.
Hence the paradoxical results for Cathay and other airlines. "The more we grow, the more pressure we feel on load factors and yields," Mathison said.
Carrier executives harbor no illusions that the lopsided traffic pattern is going to change any time soon. "There is nothing we can do about the imbalance. The only cure is pricing. Carriers have to charge right for the headhaul," said Jim Friedel, president of Northwest Airlines Cargo.
It's not only the poor loads into Hong Kong that are hurting the airlines. Kersti Krepp, vice president for the Asia-Pacific at Polar Air Cargo, cited two common headaches - the imbalance and costs.
Costs tend to become more painful as stage lengths increase, given the cost of fuel and the way the surcharge is levied on a per kilo basis regardless of distance flown. Polar added two flights from Hong Kong via Korea to Los Angeles last year, taking advantage of fifth freedom rights between the two Asian points. Still, 70 to 80 percent of its lift out of Hong Kong is longhaul, Krepp said.The twin pains of structural imbalances in traffic flows and costs have replaced earlier concerns about Hong Kong's future as a cargo gateway in the face of rising competition from airports across the border. Those fears are not an issue today.
"If people had the mentality a few years ago that Hong Kong was going to lose to airports in Southern China, that's not the case any more," Friedel said.
In part, this confidence is rooted in the realization that the likes of Baiyun Guangzhou International and Shenzhen International airports have a ways to go yet to match the cargo infrastructure of Hong Kong. In terms of cargo facilities, customs clearance, handling and other processes, HKIA still has a clear edge over its upstart rivals in the Pearl River Delta, plus it has critical mass and a strong forwarder base, many of which have consolidation facilities in Hong Kong, carrier executives stressed.
Hong Kong is also holding its own against competition from further away. Albert Yau, head of cargo at Dragonair, said even cargo from the Yangtze River Delta is flowing through Hong Kong due to capacity constraints at Shanghai's Pudong airport. About 50 to 60 percent of Dragonair's longhaul exports from Hong Kong come at its home base but the rest is fed through flights from China. Yau is looking forward to expanding this traffic as Dragonair replaces A320s and 321s with A330s, loading in some 15 tonnes of capacity for cargo from China to Hong Kong.
Hong Kong authorities have been pushing for initiatives to ease cargo flows across the border.
The Western Corridor, a new road into Shenzhen to be completed by the fourth quarter of this year, should help alleviate congestion and speed up cross-border truck flows, carrier executives say. HACTL, which handles the lion's share of Hong Kong's cargo throughput, runs bonded trucks to Shenzhen through its HACIS subsidiary to catch Chinese export cargo at the source.
Mathison views such initiatives as key planks in Hong Kong's play to maintain its long-term status as the leading gateway for the Pearl River Delta.
Equally comforting is the growing conviction that demand in the region is large enough to sustain several airports, which makes the rise of Baiyun less threatening than some had initially feared.
Hong Kong's momentum certainly did not suffer last year, with some 3.4 million tonnes of throughput, nearly 10 percent better than the previous year. It is by far the world's largest international cargo airport.
And like rival Cathay, Dragonair also clocked up double-digit growth, with volumes going up 12.5 percent to 385,000 tons. HACTL's tonnage increased 7.5 percent last year to reach 2,432,759 tons.
The Airport Authority of Hong Kong is confident growth will stay on its present trajectory. It anticipates volumes to exceed 4.4 million tons by 2010, with particularly strong increases in the express segment. In January, the authority unveiled plans to invest $4.5 billion in various expansion projects between now and 2010. These include the construction of 10 freighter stands at the airfield, bringing the total number of freighter positions to 35.
The growth in the express sector is reflected by DHL's announcement last October to spend $110 million on the expansion of its Asian hub at HKIA - six years ahead of schedule and just over a year after its establishment. The integrator routes over 70 percent of its China traffic through its Hong Kong hub, which handled an estimated 30 million shipments last year.
Since last December, DHL also has a dedicated freighter link from Hong Kong to the United States in the shape of 10 weekly MD-11 flights operated by Malaysian cargo carrier Transmile.
Dragonair also launched freighter flights to the United States last year, an important step in taking the once-regional carrier to another level as an international player. It was especially important, Dragonair officials have said, that they chose to launch across the Pacific with a freighter rather than a passenger service.
The carrier is not due to get its first converted 747-400 freighter until later this year, so it started the three weekly flights to New York with a 747-400 freighter from China Airlines and gives the Taiwanese carrier some block space on the plane.
Yau keeps an open mind on continuing the partnership beyond the arrival of his first own 747-400 freighter in November. "Nobody can tell what will happen in two or three years, but as long as the flight makes a profit, I don't see why we should not continue the partnership. It depends on the market," he said.
Dragonair will get a second 747-400 freighter in December, with two more scheduled for delivery in 2007 and one in 2008.
While it uses 747-200 freighters on the flights to Europe, the -400 is Yau's preferred beast of burden across the Pacific. This is because of the stage length. And the European freighters are routed over Dubai, which offers commercial opportunities, unlike Anchorage on the United States route, Yau said. "By 2008 we will have daily flights to New York and Los Angeles and maybe to Chicago," he said.
Cathay, which launched freighter flights to Dallas and Atlanta last year, took delivery of its first converted 747-400 in December, the second addition to its freighter fleet in 2005. Two more 747-400BCFs are scheduled to join the line-up this year, but Cathay will not renew leases for two freighters which expire in May and June, so the net growth of the fleet will be just the one freighter rolled out in December. "We'll have little extra capacity. This will be a year of consolidation for us," Mathison said.
Lately he has seen some softening in the market, so the pause in Cathay's fleet growth may prove timely.
In the long run, Mathison is bullish about Hong Kong's growth potential, however. All three 747-400BCFs scheduled for delivery in 2007 will be incremental capacity, and Cathay will not retire any of its older 747-200 freighters before 2009. "We need the capacity," he said.
Cathay holds options on another five 747-400BCFs.
For now, Mathison's focus is more on cost control to compensate for the downward yield pressure from trade imbalances. Much of his effort on this front is on automation. "We see Cargo 2000 and e-freight as key initiatives to improve efficiencies," he said, adding that Ezycargo, the electronic booking portal backed by Cathay and other Australasian carriers, is a key instrument in pushing up e-bookings.
Cathay's overall electronic booking penetration stands at 49 percent, but it is in excess of 90 percent in markets like Japan and Hong Kong, while the adoption rate in Europe and North America is significantly lower, Mathison said.
The cost reduction theme is also high on the agenda at other carriers. There may be abundant cargo to fill all the available capacity out of Hong Kong, but "no carrier can simply price up the headhaul and then declare victory," said Friedel. "We have to cut costs."
As most of its traffic consists of large consolidations, Polar sees less incentive to embrace e-booking and similar undertakings to reduce costs, so optimizing flights is critical. "We have to micromanage our flights and manage business proactively. You can't make a capacity agreement in November and then sit back and wait for the cargo to roll in," said Krepp.
Polar added Miami to its U.S. destinations served out of Hong Kong by through-plane last year. Recently, it has expanded its reach to U.S. points beyond the major gateways by setting up trucking service on routes such as Los Angeles to Dallas/Fort Worth or Chicago-Miami.
