from South China Morning Post, Jan. 7, 2002:

Freedom calls in the air
DAVID DODWELL
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With air-services negotiators from the United States about to meet their Hong Kong counterparts for a new round of negotiations on behalf of US airlines using the Hong Kong hub, it is not surprising that US cargo carriers are campaigning fiercely to advance their cause.

Air-cargo liberalisation is high on the negotiators' agenda, and the carriers have much at stake as they compete not just against other dedicated cargo carriers, but also the many passenger airlines in Asia that run cargo businesses.

Most vocal of the carriers has been FedEx, whose basic argument was summarised recently by its executive vice-president, Michael Ducker: "[Hong Kong] continues to insulate its flag airline from innovative 21st century air cargo/express competition to the detriment of Hong Kong's local industry, consumers and taxpayers.

"If Hong Kong does not liberalise by permitting foreign flag carriers, especially US integrated carriers like FedEx, to have access to all its international markets, it runs the grave risk of losing future business to emerging gateways like Shenzhen and Guangzhou in southern China, and Singapore, Malaysia, Taiwan and the Philippines."

These are grave charges, which the Hong Kong Government must take seriously. Mr Ducker is right to be proud of the business FedEx has built inside the US and globally, but it is arguable whether his company's distinctive business model is indispensable to all markets, or superior to other models developed by competitors in Asia.

The claim that Hong Kong's "flag airline" - by which he presumably means Cathay Pacific - is "insulated" is preposterous and contradicted by facts. Among domestic carriers, both Dragonair and Air Hong Kong have built substantial air-cargo businesses from their Hong Kong base. So too have DHL Worldwide Express, United Parcel Service (UPS), TNT and other dedicated air-cargo operators competing with FedEx.

Many Asian passenger airlines - China Airlines, Thai Airways, Singapore Airlines, Lufthansa and JAL - manage massive air-cargo businesses through Hong Kong by using the cargo space in the bellies of their passenger planes. Many passenger routes around Asia would not be viable without income from air cargo.

Mr Ducker is not talking about air cargo in general, but about "innovative 21st-century air cargo/express competition" - by which he presumably means FedEx's services.

Mr Ducker is wrong to imply that innovative services are FedEx's distinctive prerogative. Innovators based in Hong Kong have begun to build sophisticated multi-modal logistics services, linking land and river-based transport through the Pearl River Delta, recognising that it will be many years before significant volumes of air cargo are transported internally across the mainland of China.

The reality is that Hong Kong's hub is distinctive, with a large proportion of cargoes originating in, or destined for, its immediate hinterland. The principal challenge is to weave multi-modal supply-chain services rather than simple air-to-air links.

Companies operating through Hong Kong have wider choice than their counterparts in the US and are keen to nurture that choice. Goods transported to the US can go by sea, or in the bellies of passenger aircraft, as well as by dedicated cargo carriers, or (the most expensive option) with self-handlers such as FedEx.

If cargoes are urgently needed in the US, then exporters are willing to swallow the very high cost of time-definite one- or two-day delivery by express operators such as FedEx, DHL or UPS. But if they can avoid this extraordinary cost by careful supply-chain management, they will prefer to send cargo more cheaply in the belly of a passenger aircraft, which may take up to four or five days, or by sea, which may take four or five weeks, but is less than one-tenth of the price of air-cargo charges. These savings allow exporters to offer lower prices and allow their customers to sell products more cheaply.

The reality is that dedicated self-handling air-cargo operators face severe challenges from regional competitors. Because FedEx has a distinctive business model, in which it strives to self-handle cargo from the factory gate to the supermarket storeroom, and uses its own fleet of aircraft to carry this cargo, it faces severe competitive pressures from express operators such as DHL, which uses the bellies of passenger aircraft for their cargoes.

In short, if FedEx wants to take a cargo to Frankfurt, it must get that cargo on to its last FedEx flight out of Hong Kong, currently about 7pm. By contrast, DHL can put that cargo on any Frankfurt-bound flight, including Lufthansa, leaving at just before midnight. In the world of just-in-time delivery, that three-to-four-hour advantage is important.

Similarly, since FedEx and UPS operate their own aircraft, they need to fill them if they are to operate profitably. This makes them heavily reliant on hub operations that bring all possible cargo into a single location to ensure planes are as full as possible. For FedEx in Asia, this hub is in Subic Bay, Philippines. For UPS, it is going to be the former Clark Air Base, also in the Philippines.

But as long as export industries continue to grow in Hong Kong's hinterland, Subic and Clark are not ideally situated, and a subsidiary hub in Hong Kong would be valuable. For DHL, there is no such pressure. It simply uses any available space on the most suitable outgoing passenger flight.

Once it is recognised that Mr Ducker is arguing perfectly reasonably in the interests of FedEx in a fiercely competitive environment in Hong Kong, it is reasonable for the Hong Kong air-services negotiators to step back and ask the one essential question: to what extent do FedEx's interests - and those of other cargo operators - coincide with Hong Kong's?

Since FedEx is committed to building its Subic hub, Hong Kong can not expect to be more than a subsidiary feeder hub for its aircraft. Similarly, UPS is keen to feed its hub operations at Clark Air Base and in Cologne. The one dedicated express cargo operator seemingly intent on building Hong Kong as its Asia-wide hub is DHL - and because of DHL's business model in Asia, it does not have any need for, or interest in fifth freedoms (the right for an international carrier to pick up passengers and cargo at an intermediate stop in one country en route to its final destination in another).

This does not mean that FedEx's or UPS's interests should be ignored. Hong Kong needs their competitive stimulus. UPS is asking for fifth-freedom rights to transport cargo to and from Clark and Cologne, and this seems a reasonable demand that both helps its business model and helps to build Hong Kong's value as a hub.

In asking for unfettered fifth freedoms to all Asia destinations, FedEx appears unfocused, however. Perhaps if FedEx provided a stronger indication of the precise rights it seeks, and the benefits this will deliver to Hong Kong in terms of investment and jobs, Hong Kong's air-services negotiators might be better placed to respond positively.

Then Hong Kong's economy would gain, and not just an air-cargo operator.
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David Dodwell is executive director of Golin/harris Forrest. He has worked as a consultant to Cathay Pacific, HactL and the Hong Kong Airport Authority.