Tuesday, March 24, 2009

Bets on China demand will pay off with time

There is no end to the gloomy news, it seems. Take China's air cargo business: Last year, the mainland aviation industry posted its biggest loss in 30 years as the oil price soared to OPEC-pleasing levels and demand for exports from the world's engine room collapsed.

So far this year, freight volumes have continued to plummet and freighter operators and cargo divisions of the big airlines have long since said goodbye to profitability.

But the problem with dwelling on the current troubles is that it becomes too easy to forget predictions that China's air cargo market will grow by up to 10 percent a year for the next 20 years or more.

Okay, that prediction was made before 2008 ended in a dead stop and this year, and possibly the next few after that, is unlikely to produce any growth in the double digits. But don't forget that China remains the fastest growing air freight market in Asia, recession or no recession. If you have an airline, Asia is where you want to be based come the rebound.

There is good news around and it comes in the shape of China's economic arousal package to stimulate spending on transport infrastructure, with 10 percent - US$8.5 billion - being shunted (as it were) into airports. The big hubs of Guangzhou, Shanghai and Beijing will be strengthened and regional airports, mainly built in China's central and western regions, will see aviation networks being improved, encouraging further local economic development.

This economic Viagra certainly won't be a quick fix but by adding runways and terminal capacity the industry will have in place the infrastructure needed to support the kind of steady long-term growth that is expected.

Of course, there is plenty of short-term pain in store for anyone involved in China's export market. If you are searching for sobering reminders, look no further than February's stunning 25 percent plunge in year-on-year exports.

So how does a mainland airline stay in the black in this volatile and profit-unfriendly environment? It doesn't.
The Big Three - China Eastern, China Southern and Air China - have all lost money in 2008, as has the fourth-largest carrier, Hainan Airlines.

Nevertheless, despite what you read or see on television news, the world has not come to an end. What will end, however, is the current economic crisis, and when it does China's aviation sector will resume its rapid growth.

Because there is no better developed, manufacturing-ready nation on Earth. The country has an unlimited supply of low cost labour, an enormous economy and years spent fine-tuning the efficiency of its production lines.

Once consumer demand returns, all those retailers in China's biggest export markets in the US, Europe and Japan will once again have to place orders and the supply chain will rumble into life once again. The real question is how fast will it come back.

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