When Pigs Fly – What will the Year of the Pig signal for China airfreight?

As China enters the lunar Year of the Pig, there are many challenges facing the Chinese aviation sector and particularly airfreight. The International Air Transport Association (IATA) has forecast that China will be the world’s largest aviation market by 2022. The People’s Republic of China (PRC) is building airports at an astonishing clip and according to IATA is expected to add 74 new airports by the end of 2020, bringing the nation’s total to 260. The increase is necessary to keep pace with the explosion in air travel by China’s expanding middle class. By 2036 the PRC is forecast to add 921 million new passengers, bringing the forecasted traveling total to 1.5 million passengers – making China’s future air-traveling public larger than the U.S.

Along with China’s many air passengers comes a burgeoning airfreight sector. In a vast country like China, the new airports represent an unprecedented opportunity to connect production in the hinterland with major markets in the predominately coastal reaches. Boeing’s World Air Cargo Forecast (WACF) 2018-2037 has world air cargo traffic growing by 4.2%. This would mean that air freight would “more than double” over the next two decades expanding from 256 billion RTKs in 2017 to 584 billion RTKs in 2037. A big reason for the optimism is the economic performance of Asia and especially China. The WCAF expects to continue to lead the world in average annual air cargo growth, with domestic China and intra–East Asia markets expanding 6.3% and 5.8% per year, respectively.

Nonetheless, the optimism is predicated on a continued economic expansion which is problematical with trade tensions between China and many of the biggest trade partners like the U.S. and the EU. As we enter the Year of the Pig there is genuine uncertainty whether this “Pig” will fly in 2019.

China Airfreight and Tariff Wars

The Sino-U.S. tariff war began to have an impact on the air freight sector late in 2018. How large an impact the Sino-U.S. trade dispute and other geo-political factors will have on the air freight in 2019 is difficult to say. However, there are signs that the trade war is now having an impact on air freight. For the last two years, air freight has been on a nice roll with demand increasing every month since March 2016. But that roll ended late in 2018 when December’s demand decreased by 0.5% while freight capacity increased by 3.8%.

With China and the U.S. being the two main protagonists, a close look at their December volumes (IATA) could be the key to airfreight trends in 2019 and beyond. China and Hong Kong volumes to the U.S. were down -3.6% y-o-y compared to -4.8% globally. Conversely, U.S. volumes to China and Hong Kong were off -8% y-o-y while U.S. volumes globally were down -3.4%.

With China-U.S. trade negotiations in limbo and a March 1 deadline approaching when U.S. tariffs on $200 billion worth of Chinese imports are scheduled to increase from 10% to 25%, are December’s figures an aberration or the beginning of a trend?

There has been a small spike in shipments (both air and ocean) between China and the U.S. Jonathan Gold, National Retail Federation (NRF) Vice President for Supply Chain and Customs Policy suggested, “With trade talks with China still unresolved, retailers appear to be bringing spring merchandise into the country early in case tariffs go up in March.”

Perhaps because of the pre-emptive shipments, early figures would suggest a tentative recovery in airfreight rates from the December swoon but with an important caveat (see Editor’s italics below).

Freight Investor Services (FIS), a global leader in commodity and logistic derivatives markets, in their January and February newsletters reported a strengthening of rates. In the February 11th newsletter commented: “For the most part rates still reflect the uptick in air freight yield found at the end of January. We haven’t seen the drop off in rates beyond 2018 levels that a few market participants expected, perhaps establishing a new baseline for air freight rates dictated by carrier sentiment rather than market demand/supply. Price retraction on China-USA baskets, and a slowdown of growth from China-Europe supports price buoyancy rather than demonstrating any significant decline.”

It’s often said stock markets move more on sentiment and market perception than logic and the same may be true for China’s airfreight rates in 2019.

Intra-China Airfreight

Looking at China’s aviation sector - albeit from a sans tariff war - perspective, the intra-China airfreight system is really in its infancy. According to WACF, scheduled freight accounts for just over 94% of the PRC’s domestic air cargo with mail tallying just under 6%. The intra-China airfreight market has been growing fast – excepting from a low starting point. The PRC’s domestic airfreight grew by over 21% throughout the 1990s largely because the nation’s GDP was still expanding at a rapid clip and new regions were being drawn into the national air traffic system. In recent years, the expansion of China’s domestic airfreight has slowed to under 2% per annum. A number of plausible explanations have been offered up. Certainly, China’s express carrier fleet hasn’t been able to keep pace with demand. Add in the fact there is little cargo space available in scheduled passenger aircraft and there is simply a lack of airports to handle any new services and the ‘choke point’ to expansion is understandable.

A vast majority of China’s airfreight volume is concentrated in the southern and coastal industrialized provinces. Because of the high density of the population and shortage of “greenfield” acreage, airport expansion is restricted. Not surprisingly, a majority of the new airports being built are in the hinterland.

The expansion of e-commerce in China could re-shape the entire airfreight network of the nation. Recently China eclipsed the U.S. as the largest e-commerce nation in the world. Some forecasts have the Chinese e-commerce market expanding bigger by 2020 than the existing e-markets of the U.S., U.K., Japan, Germany and France combined. With Beijing’s emphasis on expanding the consumer segment of the economy – in contrast to decades of an export-oriented economic model – the demand for domestic airfreight could soar, complimenting an already robust airfreight international sector.

But the qualification to such a rosy outlook is will China’s economy keep expanding in the near term with trade wars raging on all sides?