Carrying the load

China’s cargo carriers eye freight rate profits


Alibaba buys into Air China Cargo

In more typical times Cathay Pacific’s cargo numbers for October would be chastening. A drop of nearly 38% in tonnage terms versus the same period last year is pretty catastrophic, in fact. But perhaps the Hong Kong carrier could be forgiven for classing the collapse as something of an achievement this year, compared to passenger numbers that have plummeted nearly 99%.

Like other airlines with a strong freight franchise, Cathay’s cargo business is a slightly sweeter spot in a sector that has soured in spectacular fashion. Cancellation of so many scheduled flights means fewer opportunities to fill the bellies of passenger planes, which account for about half of cargo-carrying capacity. That is already forcing up freight rates and with passenger schedules expected to take years to recover to pre-pandemic levels, freighters will be transporting more of the world’s goods, especially on longer-haul routes.

Maybe that’s a reason why the cargo units of China’s three largest carriers are said to be keen on going public, as well as a factor in why a group of new investors has just bought almost a third of Air China Cargo, which operates 15 freighters and manages the cargo space in its parent company’s passenger fleet.

The Air China Cargo deal values the company at Rmb15.7 billion ($2.4 billion). Best known of the new shareholders is Cainiao, which is Alibaba Group’s logistics arm. It came to prominence as a platform that coordinates deliveries of goods by third parties but it has been investing more directly over the last 18 months in its own network of warehousing, trucking and airfreight capacity.

Dedicated charter capacity is a major component of the newer approach, with Cainiao planning to operate over 700 charters this month alone to ship goods bought by international shoppers during Alibaba’s Singles’ Day sales.

The longer-term goal is to reduce cross-border delivery times dramatically. Atlas Air is launching three services a week to Brazil and Chile on Cainiao’s behalf, for instance, and Cainiao has already paired up with Air China Cargo to introduce three freight flights a week between Hangzhou and Belgium, also dedicated to shipments of e-commerce orders.

Another of the new shareholders in the cargo unit is Hong Kong-listed property and infrastructure player Shenzhen International, which has investments in logistics parks across China. Perhaps it sees an opportunity to push for commercial collaboration with Shenzhen Airlines as well, in which it holds a 49% stake.

A third new investor is the Shuangbai Development Fund, a government-backed entity tasked with restructuring some of the country’s largest state-owned enterprises. It has a mandate to push for ‘mixed-ownership’ reform in which state enterprises bring in expertise and much-needed capital from outsiders. Five years ago there was speculation that the government was pushing China’s big three airlines to come together to create a super cargo carrier on the scale of Fedex or DHL. But these efforts seem to have failed, presumably because the carriers couldn’t agree on how to work together. Policymakers then gave up on the consolidation mission, ordering the airlines to separate their cargo units and sell shares to outside investors instead.

Eastern Air Logistics was the first of the new units to be created from China Eastern, with Air China and China Southern later following suit – spinning out standalone businesses managing their freighter fleets, selling belly-hold space and operating their cargo terminals. The first phase of the restructuring effort has been a success in reducing debt and improving operational performance, with all three cargo units reporting profits last year. Now they have plans to IPO, buoyed by expectations that freight rates could rise higher as demand outstrips supply, starting with the lead-up to Christmas.

Elsewhere in the industry the prospects still look bleak: for 2021 Cathay Pacific is talking about offering less than a quarter of the passenger flights that it operated last year, rising higher only if a vaccine is deployed in key markets. “Among the multiple scenarios studied, this one is already the most optimistic that we can responsibly adopt at this moment,” said Ronald Lam, the airline’s chief commercial officer.

© ChinTell Ltd. All rights reserved.

Sponsored by HSBC.

The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.