At first glance, Hong Kong's strength as an airfreight hub for China is remarkable. To go through the city, most of its traffic, goods from mainland China, must clear customs twice. Yet Hong Kong International Airport not only overcomes that disadvantage; it is now also the world's largest freight airport, handling 3.98 million metric tons in 2011, just ahead of Memphis (Tenn.) International Airport's 3.92 million tons. And that was before capacity at Hong Kong grew by half this year, with the opening of a third giant terminal for .
With that new terminal fully operational since last month, the freight business at Hong Kong looks ripe for a price war. It has enormous overcapacity and three competitors, each with high fixed costs and little product differentiation. Hactl, the largest airfreight-handling company at Hong Kong, is determined not to be the first to drive prices lower, however. Instead, it aims to differentiate itself by service standards. That may not be easy. While Chief Executive Mark Whitehead is looking for a unique selling point, neither Hactl nor Cathay Pacific nor Asia Airfreight Terminal (AAT), the third player, has much room to move from the consistently high service quality for which Hong Kong is known.
When completed in 1998, Hactl's terminal could handle 2.6 million tons of freight a year. Since then, improvements to its procedures and computer systems have stretched it to a nominal capacity of 3.5 million tons a year, although Whitehead says the practical limit, because of the ups and downs of freight demand, is probably 3.2 million. Moreover, he does not think process improvements can further increase the capacity. Already, when the facility is very busy, the software that chooses optimal stowage locations is sending goods to quite remote bays. With around 400,000 sq. meters (4.3 million sq. ft.) of floor space, the facility is almost too big, Whitehead notes.
Last year, Hactl handled about half the cargo for Hong Kong's dominant airline, Cathay Pacific, which has taken all of its business to its own new terminal, causing a massive fall in activity at the older facility. Cathay Pacific and affiliates Dragonair and Air Hong Kong are also launch customers for the new terminal, which has opened in phases since February.
The 5.9 billion Hong Kong-dollar ($740 million) terminal of Cathay Pacific Services is rated at 2.6 million tons a year, while AAT's facility is designed for 1.5 million tons year. Cathay Pacific Services Ltd. estimates the airport's total capacity at 7.4 million tons a year, far above last year's demand. Nevertheless, overcapacity may be greater than that. If the new Cathay terminal can stretch as far as Hactl's, then Hong Kong International, even as it handles world-beating volumes, is operating at only about 50% of capacity.
None of the competitors has an interest in starting a price war and so none is likely to do so, says Law Cheung Kwok of the aviation center of the Chinese University of Hong Kong. “None of them would know where it would finish,” he notes. Instead, he expects the companies to try harder to deliver a quality service. That is just what Hactl is proposing, while promoting itself as being free from favoritism toward a shareholding airline, an obvious dig at Cathay Pacific Services.
“It's expected that the Hong Kong market landscape for air freight handling will be increasingly competitive in the short term with the current excess cargo terminal capacities, but it [will] likely be stabilized in the longer term when the market growth comes through steadily,” says AAT General Manager Khaw Hock Eng. “With the current airport expansion plans, we certainly hope to see the growth coming about sooner.” A third runway is proposed for the airport.
Although freight on European routes is not recovering, “the U.S. is coming back, ” says Whitehead, and trade through the Persian Gulf “is going gangbusters.” Hactl has always made a profit, and Whitehead expects it to do so next year, even without Cathay's business, though he will not say what the company's margins have been. Khaw says the current overcapacity was anticipated years ago, and AAT has been preparing for it, with improvements in productivity and product standards. Cathay Pacific Services was unable to comment at press time.
Khaw also hints that AAT is looking elsewhere for expansion. “Our business focus will still be our core business in Hong Kong, but we are open to explore other possible business opportunities or markets where we can leverage on our core competencies,” he says.
The strength of Hong Kong in airfreight is based partly on the efficiency of the customs procedures of the self-governing city, in contrast to those of China. The extra customs clearance is easily offset by the network advantages of the huge hub operation at the airport, not to mention efficient air traffic control. Additionally, the huge Chinese mainland airlines have not yet developed much expertise in air cargo, whereas Cathay Pacific has long been a strong competitor in the market.
Hactl notes, however, that Chinese airports, which rarely seem to be short of government funds, are keen to get into the cargo business; Shanghai is already the third placed globally, with 3.09 million tons in 2011. Moreover, Hong Kong's growth will be stunted if it does not add a third runway, which so far has only in-principle approval.
Labor at Hong Kong's airport is in short supply, partly because young people in the highly developed city increasingly think that work there is not sufficiently prestigious. Whitehead says pay would have to increase considerably to attract enough people, so Hactl is instead forced to find ways of improving labor efficiency. The shift of business to Cathay Pacific Services may not have alleviated the problem decisively, since the new competitor for business is also competing for workers.
Rivalry from shipping lines is also mounting. By controlling container temperatures, for example, shipping lines now have greater scope to carry medicines, which would otherwise go by air. For inbound airfreight at Hong Kong, that is a significant issue, since foreign medicines, which Chinese trust more than those made domestically, support the very weak demand for freight space into China from Europe or North America. Aircraft capacity is set mainly by the enormous outward volumes.
Hactl can keep its concession on its facility for up 30 years, ending in 2028. Whitehead expects the equipment that stows and retrieves containers and pallets will last for the same period. Once the new capacity is filled, there should be room for yet more cargo terminals near the new runway—assuming it is built and that competing mainland airports in southern China have not by then grabbed much of the business.
forecasts that the world's largest airfreight flow in 2032 will be from China to the U.S., at more than double today's U.S. domestic business, which will slip to second place. China will grow 6.4% a year, compared with 2.1% in the U.S. domestic market. The third-biggest flow will be from Europe to China, with the return flow ranking fourth.