China's air cargo industry has never been so busy.

One can easily reel off a dizzying list of cargo start-ups in the pipeline.

Jade Cargo, a joint venture between Shenzhen Airlines and Lufthansa Cargo, will take off next month.

Shanghai Airlines Cargo, in which the subsidiaries of Taiwan's Evergreen Group hold a 45 per cent stake, was established last month and will launch cargo flights between Shanghai and Frankfurt in October.

China Southern Airlines, one of the mainland's three largest aviation groups, is looking for a foreign partner to establish a cargo joint venture.

And don't forget Great Wall Airlines, in which Singapore Airlines Cargo has a 25 per cent stake, that just launched its maiden flight in June. Yangtze River Express, the cargo unit of Hainan Airlines, has attracted investment from Taiwan's largest carrier China Airlines.

With an annual growth rate of 17 per cent in the past decade, China is one of the world's fastest growing air cargo markets. So it is not surprising to see it become the leading focus for the world's air cargo industry.

And with the Chinese Government giving priority to the development of the air cargo industry, the market will continue to see dazzling growth in the future.

But in the short term, the country's trade imbalance is putting pressure on the economics of freighter operations in the country. Some people are even worried about early signs of short-term overcapacity in the market.

The General Administration of Civil Aviation of China (CAAC), the nation's aviation industry watchdog, said in March that the government would adopt "effective policies" to speed up the development of air cargo transportation in the 11th Five-Year Plan period (2006-10).

"Air cargo transportation is a new growth point in the Chinese civil aviation industry," said Sha Hongjiang, deputy director of the CAAC's department of planning, development and finance.

"The government encourages foreign capital and private capital to develop air cargo transportation and encourages the establishment of all cargo airlines," Sha told an air cargo summit recently.

Under Chinese regulations, a foreign company is allowed to buy a stake of up to 25 per cent in a Chinese airline, while the combined stakes held by foreign investors are limited to 49 per cent.

The government has issued a series of policies to encourage the growth of the air cargo industry over the past two years. They include simplifying the process required to buy or lease imported freighters, allowing newly established domestic cargo carriers to launch international routes, and encouraging airports to adopt preferential policies when charging cargo airlines.

Liu Shaocheng, director of the CAAC's policy research department, attributed those encouraging policies to the role air cargo transportation plays in China's economy.

"An efficient aviation logistics system will enhance the competitiveness of China as the world's manufacturing centre," Liu said.

China is the fastest growing trans-Pacific air cargo market, according to Boeing's statistics. With an annual growth rate of nearly 18 per cent since 1995, the China-North America air cargo market has surpassed the Japan-North America market. Boeing suggests China's air cargo market will see above average growth for the next 20 years.

"By any measure, this is an exciting market," said Andreas Otto, a member of the executive board of Lufthansa Cargo.

But China's continuing trade imbalance is a challenge faced by the entire air cargo industry, Otto said.

The country's trade surplus reached US$102 billion in 2005, nearly tripling that in the previous year. The Sino-US trade surplus amounted to US$114 billion last year while China's trade surplus with the European Union reached US$70 billion.

The trade imbalance results in an air cargo traffic imbalance and airlines having to chase after limited inbound cargo.

"You can fly more cargo out of China, but the problem is what you do with the flight coming into China," Otto said.

"The plane is half empty," Otto added. "It is very difficult for airlines to make profits."

For example, Otto said, if the average price is US$3 per kilogram to carry cargo out of China, the inbound price could be only 10 US cents.

"That's the real danger and limitation on the industry's growth," Otto said.

China's domestic airlines suffer the most from the imbalanced traffic on the Sino-US and Sino-EU routes. Due to a limited overseas sales network and small-scale cargo fleet, China's domestic airlines exist on outbound cargo.

"The freighters of Air China Cargo and China Cargo Airlines often fly empty into China," said Guo Dongmou, an aviation analyst with CITIC Securities.

Air China Cargo and China Cargo Airlines are the country's two largest cargo carriers, respectively owned by Air China and China Eastern Airlines.

China has only 36 freighters, while Korean Air alone has a fleet of 19.

Besides the imbalanced traffic there is concern that a big increase in air cargo transportation capacity into Shanghai since last year might upset the yields of cargo airlines.

Stan Wraight, vice-president of scheduled operations for Volga-Dnepr, owner of AirBridge Cargo, cited Osaka's Kansai International Airport as a similar example, when a rush of capacity entered the then booming Japanese market.

"Yields went down the tubes and with all the additional capacity coming into Shanghai later this year, I think the same will happen," Wraight was quoted as saying in Airline Cargo Management magazine.

The increased capacity in Shanghai comes from not only start-up joint venture carriers such as Great Wall, Shanghai Airlines Cargo and Yangtze River Express, but also from global express delivery giants.

UPS ramped up its services out of Shanghai last April by launching five times a week flights to Cologne and adding three new services to its Shanghai-US route. The company now operates nine weekly non-stop flights between Shanghai and the United States.

"It is something that the market regulates. If there is too much capacity, the yields go down and some carriers will lose out and that will cut capacity again," Otto said.

(China Daily July 11, 2006)