When a new cargo handling facility opens at an airport, there is inevitably a period of overcapacity until volumes, hopefully, grow and begin to catch up with the new capacity available. But adding a new facility that alone has a capacity of 2.6 million tonnes – more capacity than most airports have in total – would seem to be an extraordinary challenge. However, Hong Kong is not most airports, and with the local government recently giving the go-ahead for a third runway, the world’s busiest international cargo airport and its home carrier Cathay Pacific could now be seen as preparing sensibly for the future. Even if those preparations cost Cathay HK$5.9 billion.
Indeed, Cathay Pacific Cargo Terminal (CPCT) has hardly sat idle since opening in 2013, handling 1.45 million tonnes of cargo in 2014, its first full year of operations. Of course, most of this tonnage has come from the cargo businesses of the Cathay Pacific group – Air Hong Kong, Cathay Pacific Airways itself, and Dragonair – with a small contribution from third-party carriers AirAsia, Thai AirAsia, and Royal Brunei Airlines. But late last year the group’s Cathay Pacific Services Limited (CPSL) subsidiary, which was tasked with designing, building and operating the terminal under a 20-year franchise from the Airport Authority, also secured a contract to handle its first major third-party cargo customer at CPCT: Taiwan’s Eva Air.
CPSL CEO Kelvin Ko believes the Eva win sends a strong signal to the market that the organisation is willing and able to handle any of the world’s major cargo carriers. “At the very beginning, lots of people maybe got the impression that we are here to handle the Cathay group only, but obviously this is not quite true. The situation in Hong Kong is that we are one of the three common cargo terminals and we have to open our business and our terminal for any business, basically. And we are in the situation where we still have capacity because this is new, and so we are obviously trying to get business from the market.”
He believes the signs are positive. Indeed, Hong Kong International Airport had a record-breaking year in 2014. “When new terminals come into operation, there can obviously be overcapacity for a period of time, when you bring a few million tonnes into the market,” observes Ko. “But the investment decision is for the long-term, and we still think it is healthy, especially as we see cargo picking up.”
The terminal has been fully operational since the end of 2013, and Ko says the transition of Cathay from neighbouring Hactl was “very smooth”, as was the start of handling for Eva. “In January, our first month of operations for Eva, we satisfied all of their KPIs and they have given us a very high rating in terms of performance,” Ko reports.
Ko says performance for Cathay has also been good, with some noticeable improvements in key performance measures – as had been one of the aims in creating CPCT – particularly on imports.
“We have been doing quite well in terms of service. We come from an airline background, so we do understand the concerns – for example, not to upset the whole supply chain just for the sake of pennies. The cost of handling obviously is important, but more important is that you provide a good service to the customer. And Cathy is considered a premium carrier.”
For import shipments going into Hong Kong, including breaking them down, Ko says cargo is now ready for collection three hours after flight arrival for a passenger flight and five hours for a freighter – “which could obviously be 100 tonnes, and which is an improvement from previous terminals. Obviously, some customers are extremely happy about that because they can get the shipments sooner and they can send it over to China or they can sort it and then deliver the same day. So that has been very welcome in terms of the import side.”
For exports, handling times are similar to Cathay’s previous handler. “On the export side, to be honest Hactl was doing very well, and we are maintaining the same standard – and maybe a little bit more reliable, but I wouldn’t say it was too much difference,” says Ko. “But the truck waiting times have been significantly improved. So in the past the truck came in and had to wait some time before it can get in the terminal, but we seldom see people waiting – they can just go straight to the terminal, because we have more capacity.”
Transshipments are particularly important for Hong Kong and Cathay. “As a hub it is very important you get minimum connection times, to make your product as competitive as possible against other hubs or carriers. And for our shareholder, Cathay Pacific, obviously this is their hub, and so in our design, we set aside certain facilities so that we can do transshipments with the minimum connection time reduced to 5 hours – and if they have made some pre arrangement we can actually do up to 3 hours. This is for shipments that require breakdown and build up; otherwise, tail-to-tail in one hour is standard.”
Having bedded in and fine-tuned its operations for Cathay, the focus has now turned to attracting additional customers, and Ko believes the addition of CPCT has added to the “healthy competition in the market”. Some had feared that the adding so much new capacity would put significant downward pressure on pricing, but not so, it appears.
“We can’t discuss too much on the details of pricing, but there has been difficulty in Hong Kong getting Labour, for example, so I would not expect to see too much opportunity to lower prices in a significant way, because the cost of operating is actually increasing,” says Ko. “Also, we have put in investments of HK$5.9 billion, and someone has to pay for that.” In fact, there have been some adjustments on the upward side, observers say.
“I think we are competing more on service,” says Ko. “There has to be value for money and you have to be reasonable in how you deal with things, but, everything being equal, we would try to compete on service.”
Although LCCs such as Air Asia have only limited cargo volumes, their requirements have been a good opportunity for CPSL to demonstrate its flexibility and ability to adapt and tailor its services to particular customers and customer segments.
“We are working with a relatively small customer base, and so that enables us to tailor to the individual airlines’ requirements,” says Ko. “For example, Air Asia is a low-cost carrier, and so they turn around the aircraft in 25 minutes, and so their needs and priorities for cargo are different from some other airlines. Their priority is to get on-time departure of the plane, even sometimes at the expense of the cargo, where they will hold that for the next flight, for example. So operationally, we need to get everything ready so that cargo loading won’t be a bottleneck. We need to make everything available in the right priority, so it can easily be handled. And if they need to make a decision to cut some cargo, they know which cargo should go and which to hold, and so we can transfer that to the next aircraft.”
Eva Air also has some distinctive needs. “With Eva Air, they have some shipments that are express – mainly driven by e-commerce from China through Taiwan and sometimes beyond, for example to the US. For that, we set aside dedicated space and additional x-ray machines, that kind of thing. Even with a brand-new terminal, we can make an adjustment on the design to suit their requirements.
“So that is the mentality. It is more difficult if we do end up with lots of different customers, but for particular customers we can tailor things. So that is how we are trying to compete in the market: our services are more tailored to the changing requirements, and so far it has been quite successful.”
So how important is it to win third-party business? “There has been a lot of capital investment in the terminal – HK$5.9 billion – and so obviously the shareholders are looking for a payback and return. We have a capital-intensive situation, so the more business we get, the easier it is to pay back. So it was always in the business plan that we will do third-party, and obviously the more the market is growing, everything will be much easier. The market has been tough in the last few years, but it is now coming back a little bit. Obviously we don’t know what will happen in the remainder of 2015, but the starting few months of 2015 have been reasonably good. So it is important to get third-party business; that is what the terminal is designed for, and we do believe we can add to that.”
One area with potential is attracting carriers that have interline or partnerships with Cathay “where it is sometimes easier to co-locate in one terminal; it facilitates a lot of cooperation, and operationally there will be a lot of benefit,” observes Ko. But he stresses that CPCT operates quite independently from Cathay Pacific Cargo, “because we have to maintain independence”. Some airlines were concerned about independence and sharing of information, but it is independent in that sense – I have my obligations and have to be responsible to my customer. I can’t take customer information and pass it on to Cathay.”
Security is another area where he believes CPCT has much to offer. “Security is very important at Hong Kong – and obviously in the wider air freight industry, where companies like Samsung and Apple ship high-value, attractive shipments – and there are some design features in our terminal. First of all, our staging area is within our footprint. In many parts of the world, you will find that people leave some shipments at the ramp, at the parking bay. But we basically have the staging area within our cover. Firstly, that gives weather protection; but it is also under CCTV coverage – and we have more than 1,000 cameras; high-resolution, HD cameras so you can zoom in.”
This meets operational as well as security needs. “First of all we are trying to do a just-in-time concept, so we don’t usually stage shipments outside for longer than necessary,” explains Ko. “And for inbound, we process immediately – otherwise it would not be to meet our service standards. So there won’t be a situation where we, for example, leave it out on the ramp for two hours before we process it because we are too busy. I am promising three hours to finish processing, so I can’t afford to do that.”
He says it is transshipments where the challenge often comes for handlers, both in terms of security and temperature deviation – for example, if a shipment has a four-hour wait and does not require processing. “I think most airports there would put it on the ramp, but we will put it under shelter, within our facilities and under the cover of CCTV.”
He says that when people talk about the challenges of temperature deviation for perishable shipments, usually they are talking about transshipments at the hub, on a tail-to-tail basis. “That could be three or four hours, but if that is Dubai, if they don’t put it into a temperature-controlled environment, three or four hours is a long time at 45°C. And in Hong Kong, it’s a similar situation if it is raining: two or three hours is a very long time.”
Security considerations also play a significant part in Hong Kong’s competitive advantage over airports in mainland China – along with a certain quality gap and customs challenges in some jurisdictions. But the southern Chinese airports are making progress in terms of handling standards.
“I would say they are definitely improving,” says Ko. “We believe Hong Kong last year still maintained the number one position in the world in terms of our cargo throughput, and that has broken the record period set in 2010. A lot of people say that one day will be overtaken by mainland China, but my view is that, if you take for example London, you’ll find that even though it is perhaps not the best airport in the world, it is still growing and people still fly there – just because it has a very good network and frequencies and connectivity. If you have more, more will come – unless you really stand still. Otherwise, just because you have more network, connectivity, frequency, capacity, people will fly into it because you can get more business. So critical mass is very important, and Hong Kong does have advantages in terms of its network.”
But whether it can retain that is an important question, Ko acknowledges.
“One of the threats that we are facing is around security. Hong Kong has been very efficient, particularly if you do a lot of consolidations. Having a green status, the ‘regulated agent’ regime works. That means that we don’t have to x-ray everything, unlike China. People wonder whether that will change one day.”
Ko believes the air freight sector in Hong Kong needs to think carefully about this issue, rather than waiting for change to be forced upon it. “With security, you can always do more; you can’t do enough,” he says. “X-raying 100% of cargo is not 100% safe; the Yemen incident showed that. So, from an industry perspective, we should be doing more on a proactive basis – exceeding the minimum standards. We all know that we can keep lobbying, but if one incident happens…”
With this in mind, CPSL has implemented the security management system ISO 28,000, a standard for the logistics industry. “We are the first in Hong Kong to get the certification. Again, we have taken the initiative, and the reason is because we have state-of-the-art facilities, hardware, and the latest technologies. But it is the people that make the difference.
“So we need to constantly review our risk levels and do things proactively. If there are risks there, we try to do things in advance, and this is the spirit of ISO 28,000: and we find it is in line with our beliefs.”
Proactivity on security
Ko continues: “My hope is for the industry as a whole to take this approach, but in Hong Kong lots of people wait for the regulators and then only do something if they will be out of business otherwise. If more people try to be more proactive and improve security, then maybe we can retain the status longer and be more competitive in the market. Then we still have a distance from other airports in China.”
Ko concludes: “It is a fact that China is getting more developed, and if they have capacity then customers don’t need to go to Hong Kong. It is happening and we can’t ignore that. For example, a lot of air cargo shipments will go direct to Zhengzhou. It’s not an issue to me, as rather a lot of people don’t have full charters, and so they want to go somewhere like Hong Kong where we provide a lot of connectivity, and good service. We still have a role to play.”