China Airlines steadfast on maindeck fleet
12 / 06 / 2018
In this day and age there are not many carriers — particularly combination carriers — outside of the Middle East with substantial freighter fleets.
High oil prices plus the peaks and extended troughs over the past decade have taken their toll on the appetites of carriers for any large exposure to the maindeck market.
Certainly in Asia, the once mighty fleets of freighters operated by combination carriers have largely diminished, if not disappeared altogether.
There are, of course, some Asian carriers still operating substantial fleets, such as Cathay Pacific Cargo and Korean Air Cargo, but one particular carrier stands contrarian to this view — Taiwan’s China Airlines.
With a fleet of 18 Boeing 747-400 freighters in operation (and three parked), delivering over 91 flights per week, including 35 transpacific, six European and 50 Asian, this Taoyuan International Airport (TPE)-based carrier is clearly no slouch when it comes to cargo.
No doubt this large freighter fleet, like those of China Airlines’ contemporaries across the Asian region, have historical antecedents intricately connected with the era of the Four Asian Tigers: Hong Kong, Singapore, South Korea and Taiwan.
Rapid industrialisation and sustained high growth rates from the early 1960s (mid-1950s for Hong Kong) through to the 1990s drove the export-oriented economies of those regions.
Not surprising then that the airlines of each of these tiger economies spawned large freighter fleets.
But the nature of these economies and hence the cargo uplift has undergone significant change, with electronics and microchip manufacturing shifting one-by-one from each of the tigers to lower cost and developing markets such as Malaysia, Thailand and China.
China Airlines Cargo has successfully transitioned this shift in production and, even if the source market has changed, the key destination markets are largely the same.
“Our key markets are the American, European, Chinese, Japanese and Southeast-Asian routes,” says China Airlines Cargo senior vice president Steve Chang. North America comprises the lion’s share, with the transpacific accounting for 58% of cargo traffic, followed by Southeast Asia at 16% and Europe at 13%.
Key freight sources include consumer electronics, clothing and textiles and precision instruments, as well as specialty cargo such as production machinery, engines and aerospace materials.
This includes high-precision semiconductor manufacturing machinery for ASML, Mitsui, K-LINE, TESLA, TSMC, and UMC, Chang notes.
While the traditional airfreight market — the US — is understandable due to Taiwan’s unique geo-political existence, the Southeast Asian market growth is a more recent development and the result of the cargo division’s specific strategy.
“China Airlines has been actively building a comprehensive intra-Asia freight network (40 flights a week) since 2013,” Chang says. The number of freighter services has been progressively growing each year, he adds.
“Our intra-Asia freight sources are currently growing at a steady rate and the addition of two weekly Taipei-Penang-Singapore-Taipei freighter services in 2017 brings our regional freighter services to 50 a week.”
Noting that in the future, “industries will continue to be highly specialised”, this is having a direct impact on the volume of intra-Asia imports and exports, which have grown significantly in recent years.
Apart from existing traditional industries like textiles and footwear, electronic products such as mobile phones are giving additional impetus to this trend, he says.
The current sub-component manufacturing model for Asian countries — exporting parts and components to China for assembly with the end products being sold back to the Asian market — is expected to be maintained in the future, Chang says.
“China Airlines is continuing to adjust dynamically our policies on freighter networks to increase or reduce services in response to market demand, and to fine-tune our destination combinations.
“We returned to the India market in 2016 and added the Taipei-Penang-Singapore-Taipei service in 2017, after noting how the bulk of the increase in freight volume since the end of 2016 came from intra-Asia requirements,” he says.
“Due to factors such as flight freedoms and intense competition from Middle Eastern and Russian carriers, adjustments to the European routes will be more limited.
“We will continue to concentrate on the market for Asia-North America routes in the future and adjust our capacity and networks as necessary,” he adds.
And then, of course, there is the increasingly ever-present e-commerce element, with cross-border e-commerce business opportunities expected to generate demand for intra-Asia air cargo capacity, he says.
The carrier also focuses on speciality products and, as part of the SkyTeam Cargo alliance, offers the alliance’s speciality portfolio.
“We began promoting high-value cold-chain and aircraft engine products last year. In 2016, we carried 356 engines in total, while in 2017 we carried 485 engines between the first? quarter and third quarter?,” he says.
After signing an agreement with Envirotainer to co-operate on the promotion of temperature-controlled products last year, 189 temperature-controlled containers were carried in 2016, rising to 339 in just the first three quarters of 2017.
Promotion of cold-chain products was expanded in late 2017, with two additional temperature-controlled container vendors signed up: DoKaSch and C-Safe. “Total freight volume will be increased even further in 2018,” Chang adds.
Like most in the industry, last year’s peak season brought bountiful cargo China Airlines’ way.
Due to what Chang describes as the “vibrant development of e-commerce cargo in 2017, as well as the growing demand from China’s development of semiconductor industry and electronic products”, the carrier undertook more than 90 long and short-range charter flights between September and December 2017. That was a massive increase over the 10 charter flights in all of 2016.
“With the support from strong economic and trade growth and more favourable supply and demand dynamics, the operational and financial performance of our cargo business improved significantly throughout the year,” Chang says.
This saw cargo revenue climb 21.5% to total TWD?42.97bn ($1.45bn) and yields up over 13%.
“As for the outlook for the first half of 2018, we expect the overall airfreight demand will grow continuously, although the upside momentum may not be as strong as that in 2017,” he observes.
The double-digit growth in cross border e-commerce sent through the postal and express delivery services has become a key driver of growth in air cargo, with Chang saying that this has been particularly apparent on the China-US and China-Europe trade lanes.
“While express delivery and postal freight volumes still account for less than 10% of our monthly freight volume, its growth in the next few years cannot be ignored. China Airlines will continue to monitor this business opportunity and track the demand for shipping products by air,” he says.
The future for freighters
Inevitably, the conversation must turn to the issue of the 18 freighters. Will the carrier be able to sustain such vast capacity on what, arguably, is a great aircraft when fuel prices are reasonable, but less so when they climb?
With the current fleet make-up, the carrier’s cargo uplift sees 81?% transported on maindeck and 19% in its passenger aircraft bellies.
“Our planning division is always evaluating the possibility for replacement of the B747 freighter. We are always looking for a cost-effective solution, but our B747F fleet is still very young, at about 14 years. We always evaluate this, but now is not the time,” Chang says.
Fuel accounts for almost half of the freighters’ operating costs. Fuel price fluctuations affect revenue and may even eat into profits, but “fuel prices are relatively stable now so it is still profitable for us to operate the B747-400F fleet.”
He adds: “Changes in fuel prices nevertheless remain the primary consideration in our company’s decision on network configuration; the B747-400F’s primary advantage is in the transportation of speciality cargo such as large machinery and aerospace materials. Long cargo such as oil pipes can also be loaded using the nose-cargo door. The B747-400F therefore remains our company’s primary freight-carrying aircraft.”
New widebody passenger aircraft have been introduced by China Airlines in recent years, with the carrier’s passenger division currently operating ten B777s and 12 Airbus A350s, with a remaining two on order due for delivery this year.
“We are now using the belly capacity of our passenger aircraft to compete for the international e-commerce and fresh goods market. Freighters, however, do have their own advantages.
“We plan to combine passenger aircraft’s belly cargo and the freighter fleet to develop a cargo network, with Taiwan as the central hub in the future.
“Inter-regional freight destinations and services in Asia will be integrated with European and American trans-oceanic routes to offer a transportation service with optimum transfer times,” he adds.
One of the key pressures on carriers around the world, but increasingly so in Asia due to the non-stop growth in the region, is slot availability.
“The slot issue is not only relevant to China, but you see it for major airports across the whole region including Incheon, Tokyo’s Narita Airport, Hong Kong, Bangkok and even Taiwan’s Taoyuan Airport —? they are very tight on the slot supply. It’s very, very crowded in this region’s airports,” he says.
“It will cause us to think more about future business development, relevant to the network. You have the city pairs where you know the market demand is strong, but unfortunately you cannot get the slot. That is already part of life in Asia.
“We are lucky because we are an? old carrier and we have a lot of grandfather rights everywhere, but for a newcomer it will be a very, very big issue,” Chang says.
Certainly one place the carrier would dearly love to have more slots is in mainland China — but this, for a Taiwanese carrier especially, is not a simple matter.
Alongside a fair number of passenger destinations in mainland China, China Airlines has freighters into Xiamen, the original starting point for cross-straits flights a number of years ago, Shanghai Pudong, Wuxi, Zhengzhou, Chongqing and Guangzhou. Hong Kong figures largely, with 11 daily freighter flights between the two islands.
“On the strategic level, the recent acquisition of Shenzhen flight rights means that we can develop a partnership with UPS to expedite express deliveries.
“As there are insufficient cross-strait flying rights to provide full cargo services, we are also using hold swapping (CI/CK) to satisfy customer requirements on flight scheduling. This makes the best of the limited freedoms available,” he says.
We can still get the business and the truth is that our service between mainland China and Taiwan and the Hong Kong route are always fully booked. But we could do better with more capacity,” he says.