Monday, 2024 June 17

Air freight – the new battle arena for courier companies

In recent years, the pandemic led to a significant decline in civil aviation, with three state-owned airlines in China witnessing cumulative losses of up to RMB 40 billion (USD 5.7 billion). By contrast, the market demand for global air freight increased sharply by nearly 19% over the previous year, and continues to grow even as the pandemic subsides.

As with any rapidly-growing sector, intense competition has already begun, with courier giants China Post, SF Express, JD.com, and Cainiao vying for the top spot.

Shifting focus from price wars to air freight capabilities

The price wars in 2020, triggered by J&T Express entering the courier industry, forced many delivery companies to lower their prices in order to maintain market share.

When the competition was at its fiercest, goods were delivered at rock-bottom fees, which led to an increase in market volume but stagnation in overall revenue. According to data from the State Post Bureau, from January 2021 to September 2021, the business volume of domestic express service enterprises in China increased by 36.7% year on year to 76.77 billion packages, but the revenue per package dropped by 11% year on year to an average of RMB 9.68 (USD 1.39).

Since price wars are undesirable for all, both the courier companies and authorities attempted to quell the chaos. However, the prices remained low. It was only in 2022 when the industry finally returned to a sustainable state of competition.

The price war proved that the business model of low-price competition and small profit margins was unsuitable. Those in the industry needed to improve their core competitiveness and increase market share by expanding their business scope and improving their quality of service.

This marked a move from price competition to value competition, with more courier companies looking into air freight for faster delivery and greater convenience.

The market demand for global air freight is currently at an all-time high. According to the International Air Transport Association, the market demand for global air freight increased by 6.9% in 2021, 18.7% higher than that of 2020.

In addition, according to the Global Commercial Market Outlook report released by Boeing in July this year, it is estimated that the average annual growth rate of global air freight traffic will be 4.3% in the next ten years and 4.1% in the next 20 years; in 2041, international air freight turnover will reach 600 billion ton-kilometers.

Industry players and their advantages

The positive outlook for the air freight industry makes it an enticing sector for courier companies looking to expand. The industry is currently dominated by China Post, which has 33 planes, 173 trains, and an annual income large enough to put it on the Forbes Fortune Global 500 List every year.

Its subsidiary company, China Postal Airlines, saw a period of rapid growth following its establishment in 1996. It currently has a vast network with the city of Nanjing as the distribution center and 35 cities as nodes, allowing it to make deliveries all over the region.

Competitor SF Express, on the other hand, established an advantage in quite a different way—by setting up its own airport. Its air freight subsidiary, SF Airlines, was founded in 2009. Seven years later, it officially announced plans to build an international airport in Ezhou, Hubei Province, benchmarked against Memphis Airport in the United States.

Image courtesy of Ezhou Airport (EHU), Hubei Province, China

Since then, SF Express has continued to expand its business scope and has laid out plans for fields such as large manned transport aircraft, UAV logistics, and last-mile delivery drones. On July 17, 2022, Ezhou Huahu Airport was officially launched, creating significant savings for the company on air freight costs. It is the first professional cargo hub airport in Asia and the fourth in the world. With access to 35 international and regional sites, 111 routes, and 57,800 flights outside China, both its domestic and international businesses are doing well.

The third courier company to own an airline in China is YTO Express, which began to establish its plans for air freight as early as 2014. YTO Cargo Airlines was established in June of the following year and was officially launched three months later.

Backed by investment from Alibaba, YTO could afford to be more generous with its money. Yu Weijiao, the chairman of YTO’s board of directors, ordered 15 Boeing 737-800BCF aircraft in 2015. Since then, YTO has invested in constructing YTO Express’s Southwest Management Area Headquarters, Guangxi Regional Headquarters, and South China Headquarters.

These placed YTO in good stead for competition in the air freight industry. The company currently has 12 cargo aircraft and is expected to have a capacity equivalent to 100 B737 planes by 2025, including more than 12 wide-body aircraft for intercontinental routes. YTO Airlines has opened more than 100 domestic and international routes, covering Japan, South Korea, Southeast Asia, South Asia, and Central Asia. It has also gradually opened up international cargo flights to Europe and North America, building a global network.

The fourth player, JD Airlines, may have been late to the game, but is a fierce competitor nonetheless. In August 2022, JD announced that its subsidiary Jiangsu Jingdong Cargo Airlines Co., Ltd. had obtained the air carrier operator certificate issued by the Civil Aviation Administration of China, marking the official launch of JD Airlines as an independent cargo airline.

This is an important milestone for JD, which began setting up its air freight business in 2017. The company, which has plenty of capital, grew rapidly by acquiring Kua Yue Express, gaining more than 620 air freight routes. By the beginning of 2022, JD had more than 1,000 air freight routes.

The final noteworthy player is Cainiao. Although the company does not currently have its own airline, it handles over 5 million cross-border packages daily and covers more than 200 countries and regions. By the end of 2021, it was collaborating with nearly 40 airlines, gaining access to 106 air routes worldwide and 225 flights per day.

Air freight and its ties to the future of the courier delivery industry

Expanding into the air freight industry is a strategic move that can significantly boost courier delivery operations. For these companies, their areas of competition are speed, service quality, and price.

For consumers, speed of delivery is the most important, which explains why next-day delivery is still a popular option despite a higher price. Good service quality also helps attract and retain higher-end customers. These two should be balanced by price, though price is no longer such an important factor.

A last-mile delivery staff working evening shift on streets of Beijing

“Having the ability to control their air freight capacity independently helps express companies reduce costs and improve efficiency,” said Zhang Dexin, president of the Institute of Cultural Tourism Innovation and Entrepreneurship. “By doing so, they can make up for the shortcomings of the logistics system. If they solely rely on collaboration with others, they will always face issues such as having to share profits.”

Bai Wenxi, the chief economist of IPG China, is in agreement. “JD, SF, and other express companies are increasing their air freight capacity to improve service efficiency and customer experience, thus enhancing their market competitiveness and sustainable development capabilities,” he said.

Although it is still in a relatively early stage, the competition in the air freight industry is already heating up. In the future, more courier companies will enter the fray, and those that do not plan to or are unable to compete in this sector will undoubtedly be eliminated at a later stage.

KrASIA Connection
KrASIA Connection
KrASIA Connection features translated and adapted high-quality insights published on 36Kr.com, the largest and most influential technology portal in Chinese language with over 150 million readers across the globe.
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