China cargo carriers, which recently have been increasing freighter flights and setting up joint ventures with international carriers to cash in on the global air cargo boom, received a major jolt last month with a sudden and hefty increase in the aviation fuel price.
China's National Development and Reform Commission announced jet fuel price will go up by US$218.62 per tonne, or 25 percent, as of June 20 - the largest price increase. Although China's ex-factory jet fuel price is still $189.47 lower than the price on the international market, carriers were taken by surprise and are now rethinking their flight plans.
While several Asian countries have already bowed to the pressures of near US$145 oil by scaling back subsidies and raising fuel prices, most analysts had expected Beijing to hold out on the price increase until after the Olympics in August.
"As the pressure on cargo carriers mounts, more freight is expected to head for the belly space of passenger flights while freighter flights are rejigged,'' said Li Yu, chief supervisor with Shanghai East Zhongtian Aviation Services. He said fuel accounted for 40 percent of the cost of a freighter carrier, and with the price rise it could account for 60 percent.
The fuel price rise will hit carriers operating freighters particularly hard, and at a time when they are preparing to expand overseas routes. "Those flying international routes will face more difficulties, especially if their cargo load is mostly out-bound and they don't have enough freight on the return trip,'' said Li.
Freighter routes are usually divided into different sectors, where costs can be evened out, said Li. But most Chinese carriers are still struggling to maintain satisfactory loads on routes, especially on home-bound trips, and with the higher cost for the extra fuel burn, their costs could rise sharply, he added.
China cargo carriers have been expanding fast in recent years. China Cargo Airlines, a subsidiary of China Eastern, has started twice-a-week freighter flights to and from Shanghai to Milan while Yangtze Express flies two to three times a week from Shanghai to Moscow and Beijing to Moscow and Ilkutsk.
Jade Cargo raised the frequency of its service between Shenzhen and Amsterdam by adding two further flights to make it seven flights a week. From Amsterdam, the flights return to Shanghai-Pudong and fly onwards to Brescia, Italy and Barcelona, Spain before returning to Shenzhen, Jade's International's hub in Southern China.
Galaxy recently launched a B747-400 freighter flight thrice a week to Anchorage and Chicago from Tianjin and four times a week to Frankfurt.
With the rise in jet fuel prices, analysts expect cargo carriers to rethink their flight strategy and focus only on profitable routes.
Air China is tightening its belt. The carrier has adjusted its freighter capability and increased parcel and express cargo use in the bellyload of passenger aircraft. Overseas sales network are being consolidated and home-bound trips have seen a five percent growth in cargo.
According to chairman Cai Jianjiang, Air China has been using its reserves for hedge operations on the futures market; shortening US flight time with new routes; switching to electrical power at landings; and streamlining management.
The carrier has also shifted its freighter focus on Shanghai-based routes. In Beijing, it uses belly space in passenger aircraft for freight on both domestic and overseas routes.
Chinese airlines have been protected the past few years against the spiralling rise in fuel prices globally by the government's monopoly on the sale of aviation fuel. The Beijing administration has been controlling the price of aviation fuel since 2005, allowing gradual small price increases over the years.
To ease the burden of higher jet fuel prices on domestic carriers, however, the government has allowed carriers to charge passengers a higher surcharge of $11.67, up from $8.75, for flights of 800 km or less, and $21.87, up from $14.58, for longer distances.
The air transport industry has forecast a loss of $2.3 billion this year for China carriers if crude oil averages $107 a barrel. Oil prices rose to about $143 a barrel last week.
With the rise in jet fuel prices, analysts expect cargo carriers to rethink their flight strategies and focus only on profitable routes. The inexorable march of cargo rates recently makes it harder for China freighters to pass on the higher jet fuel costs to shippers, said Li.
The global oil price surge has dragged down cargo turnover. China airlines saw a modest 2.3 percent growth in cargo volume in April compared with the same period last year and was down from 7.4 percent in March, five percent in February, and 24.5 percent in January, according to the Ministry of Transport.
Tang Zhichao, general manager of Shanghai East Yuanhang Logistics, believes the industry could still maintain its positive cycle. "The way out for China carriers is boosting efficiency. They can use new energy-saving facilities to avoid waste."
The Achilles heel for domestic China carriers was poor yield and management, he said, and with _the fuel price hike, it was time for them to strengthen _"the inner self''.
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