(Reprinted from HKCER Letters, Vol. 21, July 1993) 


Can Hong Kong Be an Express Cargo Hub?

Joseph P. Schwieterman


Hong Kong, Manila, Shenzhen, Singapore, and Taipei are locked in a battle for a rich prize: the Pacific Rim's dominant airline hub for express cargo. The winner could reap a bounty worth $100 million through lower prices and enhanced airport revenues and enjoy abundant new commercial opportunities as well. The entire region will share the spoils. Shippers throughout the Pacific Rim, for example, will receive improved overnight cargo delivery service between major destinations.

Hong Kong is the leading contender to win the contest for a new regional air cargo hub. It boasts a central location, convenient highway access to China's Pearl River Delta, and the world's third largest air cargo market. It also is the site of a new airport, scheduled to open in 1997. However, Hong Kong risks losing its bid to become the cargo hub because it has not yet taken the appropriate steps to enhance its viability.

Express Cargo Takes Off

Express cargo airlines are carving a growing niche in the freight market by providing faster, more convenient service than traditional air cargo operators. Called "integrators" because they vertically integrate air and ground services, they offer shippers guaranteed overnight delivery, door-to-door convenience, and computerized information systems -- for which Asian shippers pay substantial premiums. Although express shipments account for only 5 percent of total tonnage in the Pacific Rim, they generate nearly 20 percent of air cargo revenues.

Two types of express carriers serve the Pacific Rim: direct carriers, which operate their own aircraft; and indirect carriers, which lease space on the scheduled flights of other carriers. Federal Express Airlines (FedEx) and United Parcel Service (UPS), both based in the United States, and TNT Express Worldwide, based in Australia, operate as direct carriers in the region. The region's largest indirect carrier, Hong Kong-based DHL International Ltd., transports most of its Far East cargo on passenger flights, even though DHL freighters directly serve many overseas markets.

The Asian market urgently needs improved air cargo express services. Express shipments are growing by 25 percent annually in the Pacific Rim and doubling each year in China's Special Economic Zones. Express shipments are expected to grow tenfold by the year 2010, as the region's service industry expands and manufacturers adopt just-in-time inventory systems. The integrators' current system, shipping most intra-Asian cargo on passenger flights, is becoming woefully inadequate. Because of the daytime scheduling of these flights, many shippers seeking overnight package delivery must drop off packages as early as 8 a.m. the preceding day. This denies them the fast service they often need for documents, spare parts, and other time-sensitive freight. It also affects reliability.

"Because the major airports are so congested, it's difficult to move that traffic on passenger airplanes and get it through the airport and moving on the road," said U.S. cargo consultant Edwin Laird in a recent edition of Traffic World.

The possibilities for a Pacific Rim express hub are almost unlimited, as exemplified in North America, where integrators now earn more than 60 percent of air cargo revenues. Since launching the first hub-and-spoke cargo system in 1973, FedEx has expanded its operation to encompass more than 400 flights and 1.7 million packages daily -- making it the world's largest express carrier. Aircraft depart from outlying destinations so that they all arrive at FedEx's Memphis "superhub" around midnight. Within two hours, cargo is sorted in a specially designed terminal and reloaded onto planes bound for the shipments' final destinations. A fleet of 31,000 vehicles is available to deliver packages and other freight to the customers' doors.

The development of a Far Eastern hub will hinge on the ability of integrators to overcome start-up problems such as airport curfews, restrictive air service agreements, and poor airport facilities. However, integrators already are gearing up for major expansion:

Geographically, Hong Kong has the best location for an Asian air cargo hub and would offer immense savings in fuel and labor costs. (Figure 1). For example, carriers using a Hong Kong hub could serve Asia's 15 largest markets with 6 percent fewer flight miles than Taipei hub, 10 percent fewer flight miles than a Manila hub, and 37 percent fewer flight miles than a Singapore hub. A Hong Kong hub would save at least $2.5 million in fuel cost annually and reduce travel time by more than 90 minutes per shipment relative to most other potential hubs. However, Hong Kong currently is not a feasible hub site due to restrictive air service agreements, inadequate terminal service, and capacity shortages at Hong Kong International Airport ("Kai Tak"). In fact, Hong Kong appears to be losing the battle to retain its status as the region's dominant express center as other countries give integrators the freedom they need to expand.

Better Cargo Terminals

Several upcoming decisions about Hong Kong's new airport at Chek Lap Kok may determine the province's fate as a cargo hub. Among these are decisions regarding the management of cargo terminal facilities. Before the end of 1993, the Provisional Airport Authority will decide how many cargo terminal licenses to award at the new Chek Lap Kok facility.

Currently, Hong Kong Air Cargo Terminals Limited (HACTL) owns and operates all cargo terminal facilities at Kai Tak under an exclusive license with the Hong Kong government. Although HACTL deserves high marks for consistent and reliable service, awarding HACTL or any other entity an exclusive license at Chek Lap Kok would be a major setback for integrators. By effectively guaranteeing profits through government regulation (profits at Kai Tak are held to 12.5 percent of assets), a monopoly system would dampen the terminal operator's incentive to meet the needs of hub operators. In fact, none of the world's 10 largest express hubs are located at airports where terminals are operated under a monopoly system.

If the Provisional Airport Authority musters the political will to replace the current monopoly system with a competitive one, the chances for a Hong Kong hub would vastly improve.

Five companies have submitted proposals to build and operate terminals at Chek Lap Kok. Express carriers are lobbying strongly for the right to either operate their own terminal or to be able to choose among independent operators. Their experience shows that competition is necessary to provide terminal operators with the impetus to offer specialized terminal services, including "matrix" sorting systems, computer scanners, and automated conveyor systems. The ability to choose terminal operators also gives them the leverage they need to negotiate for special on-site operating procedures and freight warehousing privileges.

Not everyone agrees that competitive terminals are best for Hong Kong. Some local officials, for example, contend that a single operator is necessary to enhance the efficiency of terminal operations through economies of scale. But express carriers are wary of this argument because it assumes that terminal services are a generic, featureless commodity -- a view that is inconsistent with the experience overseas, where integrators are willing to pay substantial premiums for specialized terminal services.

The 22-hectare Chek Lap Kok cargo site is large enough for only two (or possibly three) terminals, The workability of a two-terminal system is being demonstrated at Singapore's Changi Airport, where both terminal operators, Singapore Air Terminal Services (SATS) and Changi International Airport Services (CIAS), are profitable and expanding. Shippers are so pleased with this duopoly arrangement that they consistently rank both operators as among the top three in Asia. Express airlines are also satisfied and are making large investments in the SATS facility, which is equipped with the state-of-the-art Express Courier Center.

Ending the Stalemate

If Hong Kong is to win the prize of an express hub at Chek Lap Kok, express cargo services must be removed from the cumbersome bilateral negotiating process that is hampering growth. At present, the Hong Kong government negotiates with foreign governments for various air service "freedoms" on behalf of passenger and cargo airlines, following the precedent established by the 1946 "Bermuda I" conference. This bilateral process has resulted in air service agreements that control foreign carriers' access into Hong Kong and their flight capacities.

Unfortunately, upcoming negotiations are likely to be dominated by complex passenger-related issues, making new agreements about cargo issues unlikely. Attempts by foreign governments, such as the United States, to negotiate fifth freedom rights for cargo airlines may be destined to fail. (Fifth freedom rights give airlines the authority to carry cargo or passengers between Hong Kong and another foreign country.)

This impasse could end without adversely affecting local passenger airlines if negotiating parties separate all-cargo (i.e., "freighter") services from existing treaties. Other countries have done this with great success. The Philippines, Singapore, South Korea, and Taiwan, for example, have given foreign cargo carriers relatively free access to their airports; Greece, Italy, Spain, and the United States have taken steps to remove cargo services from treaties governing passenger services; and only recently, the European Community has given the airlines of its member countries unlimited authority to carry cargo between any two points within the Community's borders.

To facilitate hub development, Hong Kong's government must take similar actions. It should:

These actions would strengthen cargo operations at Chek Lap Kok. Research I have conducted shows that they would reduce air cargo rates by 5 percent and increase aeronautical revenues, thus contributing up to $100 million annually to the Hong Kong economy. Additional benefits would spill over into the Guangdong Province.

Hong Kong's decisions will play a decisive role in the battle for Asia's dominant express hub. The stakes are high. Neighboring airports with bold hubdevelopment strategies of their own anxiously await the outcome. May the best airport win.

Dr. Joseph P. Schwieterman is an assistant professor at DePaul University in Chicago. His recently completed book, Air Cargo and the Opening of China: New Opportunities for Hong Kong, is available through the Hong Kong Centre for Economic Research.


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