Air Freight Forum 1: Air Cargo Trends From Hong Kong To The World: Opportunities In Asian Air Freight Moderator: JJ Hornblass, CEO, Air Cargo Management Group Panel Speakers: Mr Rupert Hogg, Chief Operating Officer, Cathay Pacific Airways Mr Willy Lin, SBS, MBE, JP, Chairman, Hong Kong Shippers Council Mr Andrew Herdman, Director General, Association of Asia Pacific Airlines Mr Lars Winkelbauer, Vice President, Aviation, Network Planning & Control, Asia Pacific, DHL Express OPENING REMARKS: Mr Hornblass thanked the HKTDC and Airport Authority Hong Kong for hosting the forum. He introduced the discussion as a partnership between Air Cargo World and Airport Authority Hong Kong. The goal of the ALMC s air freight forum was broadly stated as providing a valuable insiders look into today s air freight market, particularly in Hong Kong. He noted, this session is to focus on regional opportunities and trends. Mr Hornblass shared that, at present, air freight posts reasonable performance. FTK (measure of traffic volume) was 2.4% year-on-year through end of September, compared to the same period in 2014. Meanwhile, APAC (Asia-Pacific) FTK growth was higher, but below the 5% annual growth rate of years past. Mr Herdman set the scene by sharing insights into the global air cargo industry from an APAC perspective. Aviation in APAC In 2015, flying is part of everyday life, with 3.3 billion passengers heading into the air every day. The air cargo sector isn t a very big percentage of overall volume of the cargo business, but it carries a lot of value. Aviation is widely considered a key contributor to economic and social development. BUT it s a tough competitive business, APAC airlines only broke even last year despite taking 38% of global cargo traffic. Middle Eastern carriers are gaining market share, but Asian carriers are by far the leaders. Cargo had a very significant drop in 2008 and 2009, but passenger volumes have steadily risen over the years. Cargo is flat compared to a year ago. This reflects the slowdown in emerging market. Air Cargo Industry Passenger and freight businesses are aligned. Cargo is also carried on passenger planes (belly loads), so passenger jets serve as cargo
carriers too. As passenger fleets grow across the region, this means more usable belly space for cargo, diminishing requirements for freighters. Cargo is also directional passengers go back and forth but cargo goes one way. Add the increase of empty bellies to this, and we have a high cargo capacity that can be empty. Fuel prices are falling, with lower prices for longer than was expected. This is significant because fuel is the biggest cost for all airlines. Profitability The industry is on an upswing and has been profitable for some years. Most of that profit upswing is from the US sector, not the APAC sector. In Asia we have a mixed picture. Long term demand the market is still good. Belly space is gaining share. The industry will grow and add many more freighters - more than doubling in the next 20 years. Mr Herdman said, Asia is no longer a factory, it s a set of consumer markets. When we look at the logistics flow, it s not just outbound it s inbound too. But the industry is inflicted with uncertainty. It s a tough time to be an operator. We have to look ahead, to look to the future. Mr Hogg shared his insight into Growing the Hong Kong Hub from Cathay Pacific s perspective, including: Cathay has a positive and interdependent relationship around the success of the Hong Kong hub as a logistic and air freight hub. The Hong Kong International Airport (HKIA) is the third-busiest passenger hub in the world, with 63 million passengers carried. As highlighted by Mr Herdman, there is a link between passengers and cargo that can t be separated. Hong Kong rests at a southerly, point in Asia, perfectly and uniquely positioned to be able to fly to both coasts of the US. This is a significant geographical edge for Hong Kong as a hub for passengers and cargo. Beyond the US, half of the world s population lives within a five hour flight of Hong Kong, placing us at the centre of both people movements and a key port for the transportation of goods of all kinds. This is particularly relevant as Asia becomes more affluent and interested in goods from abroad. The shift in the world is coming to this region, so it s clear that if passenger and freight are linked, then Hong Kong is the place to be. It s no surprise then that Hong Kong is the world s #1 freight hub. But more than this, it s also a knowledge hub. The business of logistics has its centre here and the Hong Kong government is very supportive of the industry. But it s not all good news. There are a number of challenges facing the industry. He said operational issues are a challenge, e-commerce is driving growth for air freight and it s important to see that imports are growing. This presents its own challenge because it s not just about shipping out of China,
but getting the goods back in to Chinese consumers. Other challenges noted by Mr Hogg include: Infrastructure constraints as the industry grows to meet the demands of consumption, we are faced with infrastructure challenges here in Hong Kong and up on the mainland. The skies are crowded across the region and this is an issue that stretches well beyond Hong Kong. Manufacturing industry changes As China evolves from the world s factory to become more of a consumption-based economy, Hong Kong will be challenged by other hubs looking to compete with the city. Cathay has made a significant investment in aircraft, with a total of 178 aircraft, including 20 freighters and 48 new aircraft coming in the next few years. To support the fleet, they have invested in a cargo terminal and are currently looking for opportunities to automate. Mr Lin shared his insight from the shippers perspective, with a presentation entitled Air Cargo Performance. Economic Trends and the Future of Airfreight. He began by highlighting some factors in force at present, including the change in production patterns in the region. Manufacturing in China is more expensive and so, lots of companies are shifting manufacturing to other parts of the world. On the other hand, Mr Lin said China s locally produced products have not been embraced by Chinese consumers and so there remains a large opportunity for imports. Further, the mainland s customer base is growing rapidly and so the consumption opportunity in China grows. He predicted there will be a change in the trade lane s imbalance as the Chinese Government encourages cross-border e-commerce. Many of the products purchased on e-commerce platforms will be shipped by air. This is crucial for rectifying the trade lane balance e-commerce orders will fill planes coming in to China. Mr Lin then highlighted political factors, specifically citing the Trans-Pacific Partnership (TPP), targeted to exclude the mainland. He highlighted the multiple counteractions from China, including bilateral and regional free trade pacts, the free trade zones and the Belt and Road Initiative. Cost was one of the major considerations for shippers in Hong Kong highlighted by Mr Lin. He listed the multiple additional charges for consignments and noted that for small items, shipping by Express can be more cost effective. He suggested solutions to this issue, including reducing cost and improving infrastructure. Mr Winkelbauer shared information about DHL s Virtual Global Airline proposition.
DHL s Virtual Global Airline serves 500 airports globally and is split into two divisions: Dedicated Air and Purchased Air. The business offers a worldwide network tied into regional networks and serves over 220 countries and territories around the world. DHL has access to a global fleet of 266 aircraft. On doing business in Hong Kong, Mr Winkelbauer shared highlights and commented, Hong Kong is not without its challenges. Those challenges are slot related it s more difficult to get the slots we need in Hong Kong. The second is parking, making quick turnaround times is sometimes not possible. Labour is also a challenge. The moderator posed the question, What do you make of the decline in demand for freighters? Mr Winkelbauer said DHL hasn t seen the sort of declines that have been talked about by other panellists. They haven t seen a decline in the emerging markets, especially on the Express side. DHL believes in this area, and is making investments to set the business up for serving this growth. He noted that in China, we re moving from export economy into a consumption based economy. From the express side, we do not see the same volatility and trend that the traditional air freight sector is seeing. The panel each shared their 2016 predictions: Mr Hogg said: I don't think we re going to see stellar growth. It seems to be the global economy is fragile. We sit in the right place and we run from an extremely efficient facility. Mr Herdman said, Passenger business will keep growing, that trend will continue. On the cargo side, we ll see a return to growth if the GDP predictions are correct. We don t create demand, we take what we re given. Long term, nothing has changed. Mr Winkelbauer said, From the express side, we still see growth for next year. Will it be in double digits? Yet to be seen. The emerging economy will continue to grow, we see great opportunity there. REMARKS: Mr Fred Lam, JP, CEO, Airport Authority Hong Kong Mr Lam s insight into the airport s integral role included: Hong Kong International Airport is one of Hong Kong s most celebrated and important assets. Over the years, it has seen a steady increase in passengers and cargo volume. Building on this continuous and robust growth, HKIA has become the world busiest cargo airport. Air transport has always been crucial to Hong Kong trade and the city s role as a logistics gateway. Air cargo is a driver of growth for Hong
Kong, it has a high value contribution to the city s import-export economy. Mr Lam shared his estimate of a 5% annual growth for air cargo over the next 20 years, due to: 1. Chinese mainland economy. Trans-shipment is a major driver of Hong Kong s growth, driven by the city s reputation for efficiency and status as a free port. 2. Progressively shorter product life-cycles of goods, particularly electronic goods. Businesses must not delay getting products into markets to stay competitive. With this in mind, many businesses are reliant on air freight to stay ahead of competitors. 3. E-commerce continues to drive demand for air freight services. Major markets are reporting 20% growth in e-commerce. This growth is largely fuelled by B2C transactions, many of which rely on air cargo - particularly those looking to expand their customer base. Express shipment is also enjoying growth thanks for e-commerce. This growth is a big opportunity for Hong Kong, reflected in the third runway airport project. This brings new opportunities for businesses and jobs for the city, said Mr Lam. Mr Lam shared, it s not just about a bigger airport, but a smarter airport. We want to stay at the cutting edge of technologies, incorporating technologies and systems that keep us ahead of other markets for logistics, management and customer service.