At the beginning of 2022, several black swan events exposed air cargo to huge challenges. Besides, all industry parties need to work together to drive the low-carbon and digital transformation.

Roland Berger releases "China Cross-Border Air Cargo White Paper (2022)", which establishes China Cross-border Air Cargo Navigator to share the latest market trend and help industry players better seize development opportunities under uncertainties.

1. China Cross-border Air Cargo Navigator

1.1. Core parameters of the navigator

Compared with the basic volume and price monitoring, Roland Berger has selected seven critical navigator parameters based on three major dimensions to comprehensively assess the development trend of China cross-border air cargo market:

a) Volume: Reflects the prosperity of the air cargo market by tracking the volume of import and export air cargo volume

b) Price: Reflects supply and demand of the air cargo market by monitoring air cargo price

c) Timeliness: Reflects changes in timeliness by tracking end-to-end shipping time

d) Delivery rate: Reflects the arrival of air cargo in good condition by monitoring the delivery rate

e) Richness: Reflects the richness of air cargo options by monitoring the product mix

f) Green: Reflect the degree of carbon neutrality of air cargo market by tracking the carbon governance process

g) Intelligence: Reflects the extent of air cargo smart infrastructure development by tracking e-AWB penetration

1.2. Influencing factors of the navigator

The navigator also summarizes the critical influencing factors of the parameters in terms of Demand, Supply and Black swan.

2. Historical review based on the navigator (Year 2019-2021)

2.1. Overall Review

From 2019-2021, China cross-border air cargo market went through three stages "Moderate growth", "Fluctuating adjustment", "Redevelopment".

a) Volume- gradually increased: During Year 19-20, the strong demand for epidemic prevention materials boosted the export volume. In Year 20-21, as China recovered production and work before most of the countries and sea freight price rose rapidly, air freight volume went up gradually. There were differences in the B2B/B2C ratio, cargo structure and development trend of each route's volume, as shown in the figure.

b) Price- fluctuated at high level: Price soared with the outbreak of COVID-19 in Y20 and maintained high level with fluctuation in Y21. Demand exceeded supply due to the tight capacity under COVID-19, driving air cargo price going up with fluctuation.

c) Timeliness- significantly improved: Before the COVID-19 crisis, end-to-end timeliness improved significantly, especially in some unconventional routes. After the outbreak of COVID-19, timeliness became unstable, but it still had some improvement due to the development of charter mode and the investment in capacity. The investment in all-cargo aircraft improved the reliability and flexibility of logistics efficiency; the increase in the charter flights led to more direct flights and reduced transit frequency; multiple industry players established end-to-end capabilities, all driving the continuous improvement of overall timeliness.

• Case – all-cargo aircraft investment: In 2021, Air China Cargo launched "Chongqing-Chicago" all-cargo route to meet the market demand. Additionally, it is continuously launching passenger-to-cargo flights to Frankfurt, Los Angeles, London, Dubai, etc. to guarantee the supply chain stability for foreign trade in the central and western regions of China.
• Case – charter flight mode: Cainiao organizes charter flights to help alleviate the shortage of capacity in South American routes, and also provides transportation services for oversized and overweight cargo in these routes; Besides, Cainiao jointly launches China-America Cargo Air Line with Atlas Cargo and Qatar Airways Cargo, connecting Hong Kong, China with Sao Paulo, Brazil and Santiago, Chile, etc.
• Case – door-to-door: Cainiao builds core logistics infrastructure globally, such as laying out six eHubs and nine distribution centers around the world. Based on the strong network, it provides various B2B products such as international express, supply chain and freight services, and launches cost-effective B2C products such as "5-dollar 10-day delivery".

d) Delivery rate- steadily rose: The delivery rate steadily fueled by the infrastructure improvement in terms of processing efficiency, automation level and cargo handling operation, and logistics providers' effort in enhancing end-to-end service capability via M&A and self-build.

e) Richness- gradually enhanced: The increase in capacity supply drove the overall improvement in product richness; before COVID-19, the share of standard and economic products was similar, but after COVID-19, the proportion of economic products decreased significantly due to the tight capacity.

f) Intelligence- in the pilot stage: As e-AWB helps reduce cost and increase efficiency, and is the foundation for the logistics visualization, infrastructure automated operation and other intelligent applications, China actively participated in the e-AWB pilot project. The penetration rate of the three major airports achieved 30%-45%, but there was still room for improvement; the main difficulty lay in the inconsistency of data requirements between customs and the difficulty of connecting data systems between airlines, freight forwarders and other related parties. Besides, airlines and infrastructure providers were also taking action. Airline companies developed digital tools for lean management and customer service, and airports are committed to improving the facility intelligence level.

• Case: Taking Cainiao Liege eHub as an example, the intelligent cargo station accelerates import and export cargo transfer at the airport; Lemo, PDA, RFID and other warehouse technologies enhances operational efficiency and realizes intelligent tracking, while the digital customs clearance system helps upload the original data to online and accelerates customs clearance.

g) Green- in the initial stage: China didn't set specific emission reduction target, but all the parties were actively promoting the carbon monitoring and accounting. The following were core drivers:

• The EU approved "European Green Deal" in Y20, which proposed a stricter emission reduction policy
• Leading cargo owners requested for low-carbon air cargo
• Airline companies were committed to reducing emission through the improvement of fuel efficiency and development of clean energy
• Infrastructure providers optimized facilities to reduce emission, e.g. European and American airports adopted SAF

3. Vision for the future (Year 2022)

3.1. Near-term outlook for 2022 - influencing factors

At the beginning of 2022, the cross-border air cargo market is again experiencing huge challenges due to the frequent occurrence of black swan events. Demand, Supply and Black swan events will have influence in the near future development of the market.

a) Economic base: The global economy is developing at a low speed and trade protection is emerging in some routes. China-US tariff reduction may have a positive effect on China-US cargo volume; the effectiveness of RCEP is expected to steadily improve intra-Asia cargo volume and enhance customs clearance efficiency.

b) Trade structure: The growth rate of China cross-border e-commerce market has slowed. In addition, the development of oversea-location model is more favorable to ocean freight. Thus, the growth of air freight driven by cross-border e-commerce is expected to slow down.

c) Mainline capacity: Increased frequency of all-cargo aircraft is the core to ensure the stability of capacity. On the other hand, China plans to strictly restrict the application of passenger-to-cargo conversion from 2022, and the EU is expected to stop issuing passenger-to-cargo conversion permits in mid-2022. Therefore, the temporary passenger-to-cargo conversion is projected to slow down. As a result, air freight price might probably rise in the short term and the long-term impact still need to be continuously monitored.

d) Infrastructure: Comprehensive air cargo hubs such as Tianjin airport and Chongqing airport continue improving the cargo terminal facilities; As Ezhou HuaHu airport is officially put into operation in 2022, the construction of professional air cargo hubs also has steady progress, further ensuring the capacity stability.

e) Competition & Cooperation - chartered flight mode: At the beginning of this year, chartered flight mode remains the regular solution for capacity supplementation under unstable supply and demand.

f) Competition & Cooperation - new players entering: It is expected that cross-border players will continue entering the air cargo market, either to provide "ocean, land and air" integrated cargo solutions, or to expand the whole chain of service capabilities, or to open the closed loop from business to logistics. The quality of logistics is estimated to improve.

g) Competition & Cooperation – mergers & acquisitions: The integration among freight forwarders is another critical industry trend, Apex and other large freight forwarders establish a full range of product mix, and ensure stable capacity through mergers and acquisitions, which is projected to further improve the service quality. At the same time, logistics organizers are strengthening their whole-chain service capabilities.

• Case: As a dark horse in the field of air cargo, Cainiao has been able to provide "end-to-end, door-to-door" full-chain logistics solutions through accumulation and innovation in recent years, covering different cargo types such as cross-border e-commerce, medical supplies, and oversized cargo. Cainiao is expected to become one of the leading players in the era of digital intelligence shipping.

h) COVID-19 normalization: It has been more than two years since the outbreak of COVID-19, and the world has entered the stage of normalized control of COVID-19. In the short term, air cargo volume is expected to decrease due to Omicron, but it will probably rise again with the control of the epidemic; besides, it has led to a decline in the air cargo capacity and an increase in the price; finally, the ground handling capacity and timeliness stability has decreased. In the long term, COVID-19 might set higher requirements on supply chain stability, forcing logistics providers to improve cargo disinfection, cargo volume forecasting and capacity guarantee.

i) Regional conflicts: The Russia-Ukraine conflict started in February 2022 and the development direction of the war is still unclear until now.The Russia-Ukraine conflict has a significant impact on the navigator parameters in year 2022:

1. Volume: In China-Europe route, the airspace closure and flight bans of EU and Russia lead to capacity shortages and lower volume; while in Russia route, there are structural changes in cargo types and increased fluctuation of the volume.

2. Price: Increase in oil prices, fight detours and capacity constraints in Shanghai are driving up air cargo price in the short term.

3. Timeliness: The ban on flights and the shortage of capacity lead to the time instability in Europe and other route.

3.2. 2022 forecast of navigator parameters

China air cargo market broke the sub-stable state again in the first half of 2022, while the redevelopment is projected to be the major theme of the second half of this year.

a) Volume- Increase in volatility and variance of routes: The resumption of overseas production and the Black Swan events increases the volatility of cargo volume. The variance of each route is significant – The volume of North America route has a small growth potential due to the stable demand base; while Europe route has risk of decline in cargo volume affected by Russia-Ukraine conflict.

b) Price- Fluctuation at high levels: The Black Swan event once again causes capacity constraints, and crude oil price goes up. As a result, air cargo price is expected to fluctuate in high level throughout the year.

c) Timeliness- Overall improvement, but increase in instability: The overall timeliness might be improved driven by the upgrade of infrastructure and the improvement of end-to-end logistics service; However, it is worth noting that the short-term stability might be affected by the black swan events.

d) Delivery rate- Unblocking and steady improvement: With the leading player's increased control over core blockage points such as end distribution and customs clearance, the delivery rate is expected to steadily improve; but the process would be relatively slow due to the limitations of logistics conditions in other countries around the world.

e) Richness- Standard-led, gradual enrichment: In earlier 2022, economic products decreased significantly due to the tight and unpredictable capacity. It is estimated that standard products will remain the mainstream in the rest of the year.

f) Intelligence- Multi-party efforts, speeding-up policies: COVID-19 pushes logistics players to reduce the dependence on manual labor and promote the development of intelligence. At the same time, "The 14th Five-Year Plan of Air logistics" proposes eAWB penetration target (80% before Y25). Consequently, the penetration rate of eAWB is expected to continue growing in 2022.

g) Green- Pilot promotion, long-term improvement: In the short term, the major focus of air cargo emissions reduction will still be monitoring and accounting. In the long term, the implementation of the 3060 carbon strategy and technological breakthroughs might drive significant progress in this area.