Aviation
CARGOLUX READIES CHINA LAUNCH
March 10, 2016

Cargolux has set the course for the launch of its China-based offshoot at a time when market turbulence is putting pressure on air freight yields.

 

On January 19, the board of directors of the European freighter airline gave the green light for the proposed investment of US$77 million for Cargolux China, a joint venture all-cargo carrier that will be based at Zhengzhou, the Cargolux hub in China.

 

The investment gives the Luxembourg-based carrier a 35% share in the new airline, second only to Henan Civil Aviation Development and Investment, which will hold 49%. The largest shareholder also has a 35% equity position in Cargolux itself.

 

The other shareholders are Xin Gang Investment & Development (developer of the Zhengzhou Airport Comprehensive Economic Experimental Zone), and the Henan Airport Group (the operator of Zhengzhou airport), with 8% holdings each.

 

A launch date for the new airline has yet to be determined, but Cargolux management has stated that the venture will take off in 2017, with the focus on trans-Pacific and intra-Asian operations. The plans for the venture envisage its fleet to grow to five Boeing 747 freighters within the first three years of service. Carglux CEO Dirk Reich hinted last October that the offshoot should kick off with three aircraft, with the lion’s share of activities in the transpacific arena.

 

Cargolux currently operates a fleet of 25 747 freighters. Its management has indicated that more planes will be added both in Luxembourg and in China over the next few years.

 

Last year the carrier registered an 8.8% increase in its block hours over 2014 to a new record level, while tonnage was up 7.4% to 889,746 tons. According to Cargolux management, its global market share increased to 3.8%.

 

Long-term plans in Zhengzhou are upbeat. The airport’s master plan through 2040 foresees five runways, one of which will be solely dedicated to cargo flights, four passenger terminals and expanded cargo facilities. Cargo capacity is planned to reach over 3 million tons per annum.

 

Recent traffic developments give less cause for optimism, though. Instead of a surge in orders for the traditional spike in shipments prior to the Lunar New Year break, shipping lines have met lacklustre demand out of China. In late January, container spot rates to Europe were down almost 60%, and Asia-North America spot rates were largely flat. This does not augur well for air freight demand in February.

 

Pundits and operators have blamed the low demand on the ongoing economic malaise in Europe and on high inventory levels in the US. What exacerbates the situation for airlines is the downward pressure on yields as capacity growth has outpaced demand. According to some carrier executives, the Chinese airlines have been particularly aggressive in their pricing.

 

“The most impactful current trend is the continuing disconnect between demand growth and capacity increases,” said Jan Krems, president of cargo at United Airlines. He adds that the spikes that characterized previous new consumer electronics launches have been absent recently.

 

Krems is also concerned about the migration of production and its likely repercussions for long-haul traffic. “A trend that seems to be accelerating in strength and impact is the shift in manufacturing away from the traditional regions in China toward new growth centres in countries in Southeast Asia. We’re seeing a lot of intra-Asia movement as Samsung moves its smartphone production to Vietnam, Japanese companies relocate to the Philippines, and new factories and production lines are established in Thailand and Indonesia,” he remarked. 

 

Airline cargo executives are not expecting a marked improvement in the market in the coming months. “I don’t think we’ll see any market expansion any time soon,” commented Shawn McWhorter, president for the Americas of Nippon Cargo Airlines.

 

Given the market situation, Cargolux top brass should not be in too great a rush to get their Asian offshoot airborne, although there have been suggestions of some possible mitigation from the host country.

 

According to a recent newspaper report from Luxembourg, Cargolux chairman Paul Helminger has indicated that China would offer subsidies to help the new carrier through its first years of operation.

 

 

By Ian Putzger

Air Freight Correspondent | Toronto