1. Introduction

In 2022, Roland Berger released the first version of white paper on cross-border air cargo in China , establishing a Cross-border Air Cargo Navigator with the mission to lead the industry.

2023 witnesses the ease of anti-COVID controls in China, global economic slowdown, and the increasingly complex and ever-changing international situations. In response, Roland Berger releases an updated version of the report "China Cross-border Air Cargo White Paper (2023)" to provide an in-depth analysis of the air cargo market trends, with a view to help logistics players better understand industry opportunities and provide input for future business decisions.

2. Historical review based on the navigator (Year 2022)

2.1. Overall Review

The industry still faces a complex and uncertain situation: International situation in 2022 remained complex and volatile. In the first half of 2022, the Russia-Ukraine conflict, COVID lockdown and other black swan events led to capacity constraints, airport shutdowns, and the air cargo market continued to adjust in the turmoil. In the second half of 2022, the bottlenecks were gradually clarified, and the air cargo capacity slowly increased. However, the economic downturn, the drop in anti-epidemic materials demand and the sluggish consumption in EU and US led to a rapid decline in demand. The volume and price of the air cargo market had both declined, the overall market remained sluggish.

2.2. Historical Review of Core Navigator Parameters

a) Volume- experienced an overall decline and differentiated in specific routes: Volume showcased an overall decline compared to 2021 and maintained the same level as 2020. Production capacity significantly decreased due to COVID lockdown in the first half of the year, coupled with ongoing geopolitical conflicts and significant stagflation in EU and US, resulting in a sharp decline in personal consumption demand mainly for consumer electronics and clothing. In addition, the demand for anti-epidemic materials declined continuously, strongly impacting air cargo volume.

• Volume via traditional freight routes had dropped by nearly 20%. Inflation in US, coupled with China-US trade friction, had led to a decline in both industrial and consumer products. Consumption in EU remained weak, but industrial sectors served as a hedge. Northeast Asia showed a similar decline as North America, while Southeast Asia was hedging consumption declines with support from cross-border e-commerce, supply chain transfer, and RCEP.
• Decline of the niche market was limited. South America demonstrated a continuous growth in industry and a rapid increase in cross-border e-commerce to prevent the volume from huge drop. Russia and the Middle East had intensified their trade to hedge against demand decline from consumption.

b) Price- fluctuated downward and slowed to a moderate level: Price fluctuated from the high point at the beginning of 2022, and basically returned to the pre-epidemic level by the end of the year. Weak demand and the release of full freighter capacity have led to a faster increase in supply than demand. Ocean freight rates have plummeted significantly, seizing demand for economic air cargo, exacerbating the loss of cargo volume, and further puts prices under downward pressure.

c) Timeliness- significantly improved to a stable level: At the beginning of 2022, congestion and backlog frequently occurred due to COVID lockdown, led to short-term volatility. In the second half of the year, domestic epidemic control had been streamlined, transportation capacity had gradually recovered, checkpoints in customs clearance were cleared, and the timeliness had stabilized. With continuous upgrade of infrastructure, last mile connectivity, and customs clearance efficiency, overseas logistic efficiency had also demonstrated a steady improvement.

• Case: Aiming at the Spanish market, Cainiao has started building terminal distribution network since 2022, which currently covers more than 30 local cities. Core cities such as Madrid and Barcelona have successively launched weekend delivery and intra-city delivery services, realizing the next-day delivery and late delivery must pay guarantee.

d) Richness- air cargo capacity recovered and diversified: At the beginning of 2022, shipping capacity and freight rates fluctuated significantly, affecting economic air cargo products. In the second half of the year, the proportion of economic products had rebounded with the gradual recovery of capacity, and forwarders had also launched a richer product portfolio to improve product timeliness.

e) Delivery rate- solved bottleneck problems and achieved stable improvement: Increased automation level of node facilities, standardized loading and unloading operations, and reduced unpacking frequency had led to continuous optimization of the quality of China's export processes. With stronger end-to-end capabilities of leading players, the control over core bottlenecks such as custom clearance and enhanced last-mile delivery capability, the delivery rate had been steadily improved.

• Case: In 2023, Cainiao partnered with DHL, Cainiao invested 60 million euro in deploying smart self-pickup lockers in Poland, with the aim of building the largest self-pickup network in this country and continuously optimizing last-mile logistics.

f) Green- promoted excellent examples and maintained long-term growth: Under the guidance of policies such as the 14th Five-Year Plan for Green Development of Civil Aviation, China's air cargo industry was accelerating its green transformation process. For example, China Cargo Airlines and Cainiao Network completed China’s first international flight of the Hangzhou Xiaoshan to Belgium Liege route using sustainable aviation fuel, and promoted the construction of aviation logistics carbon asset management system.

g) Intelligence- all parties stepped up efforts and introduced policies to accelerate intelligence: All parties were actively advancing the goal of reaching 80% penetration rate of electronic waybills by 2025. In addition, airlines and node facilities were actively adopting a digital intelligence transformation. For example, Zhengzhou Airport had introduced automated equipment such as unmanned forklifts and breaking the information barriers between the WMS and the airport freight platform, and continued to promote the process of intelligence.

3. Vision for the future (Year 2023)

3.1. Near-term outlook for 2023 - influencing factors

At the beginning of 2023, the cross-border air cargo market is at a low point and is expecting a turning point. At present, the global economic growth remains sluggish. All the factors including the redivision of industry supply chain, the export of high-end manufacturing, the recovery of air cargo capacity, centralized delivery of freighters, and the drop in ocean freight prices, as well as the strategic alliance of leading players all affect the future development of the air cargo market, and the long-term market trend remains positive.

a) Economic base- global economy declines, stagnation in EU and the US has not yet eased, and the sluggish demand for air freight has led to a downturn in prices. In 2023, there are various unfavorable factors in the global economic development, such as cyclical downturn, intensifiedcontinuous inflation, and weakened consumer confidence. China's exports continue to decline, and the overall trend is expected to "decline before ascending". Replenishment demand from US and EU is expected to occur by the next half of the year. Weak air freight demand will also put pressure on prices.

b) International situations- China-US-EU’s triangle relations evolve dynamically, emerging economies deepen their bonding with China, affecting cargo volume via specific routes: Frequent meetings between leaders of China and EU signal positive cooperation. The continuous trade frictions between China and US have led to the decoupling of the US’s supply chain with China, resulting in the drop of cargo volume, and long-term restrictions on high-tech exports will reverse the structure of cargo. China’s relation with the Middle East has upgraded, and close cooperation has led to a steady increase in cargo volume.

c) Industry layout- industry chain is being transferred to SEA, the export of high-end manufacturing is accelerating, reshaping of trade flows: Supply chains are being transferred to SEA. Upstream components’ transportation needs boost the volume of cargo, yet impacted the trade with destination countries. The accelerated export of China high-end manufacturing such as photovoltaics, electric vehicles, and lithium batteries, leads to a steady increase in air cargo volume in the long term.

d) Trade structure- the slowdown in cross-border e-commerce growth, coupled with the substitution effect of overseas warehouses, will contribute to a declining growth in air freight: The overall growth of China's cross-border e-commerce has declined, but niche markets have experienced rapid development, with most of the growth coming from emerging independent platforms, such as SheIn and Temu. The plummeting ocean freight prices and the widespread adoption of overseas warehouses have resulted in the drop of air freight volume. However, due to the fast-turnaround model and the challenge of wide SKUs management, leading players like SheIn, Temu continue to rely primarily on air cargo as their main transportation mode. Today’s Cross-border e-commerce heavily rely on China’s local supply chains, while tax policies and other contributors have prompted SheIn to consider establishing factories in Brazil. While the trend of supply chain relocation may not have an immediate impact on logistics patterns, it is crucial to anticipate its long-term effects on volume in specific routes.

e) Government policies- recovery in productivity and increase in air cargo capacity are expected to improve timeliness and increase cargo volume: Policy relaxation is beneficial for steady increase of international passenger flights, leading to the air cargo capacity recovery. Processing efficiency is improved because of labor force recovery and ease of COVID prevention.

f) Impact of sea cargo- price has plummeted, and shipping capacity is expected to be released, impacting air cargo volume and price: Ocean freight prices have plummeted significantly, and orders for freighters during the epidemic are expected to be delivered to the market consecutively, with an expected capacity growth of over 10%. Express shipping of US West coast and Asia Pacific routes will compete directly with air cargo.

g) Mainline capacity- bellyhold capacity is expected to recover gradually, full freighter will be delivered centrally, further releasing cargo capacity: International passenger flights have resumed their 2019 level of 25%. At present, the resumption of flights is concentrated on Southeast Asian routes, with the steady recovery of the China-EU route, while the negotiation between China and the US remains slow. The total number of freighters has increased by 31 compared to last year, and the orders placed during the epidemic are expected to be delivered in 2023 and 2024. Continued increase in air cargo capacity poses a risk of oversupply, and freight rates are expected to decline.

h) Logistics node infrastructure- improving infrastructure construction, improving operational efficiency, binding industrial resources, and comprehensively improving shipping capacity guarantee: Construction upgrade of freight hubs such as Ezhou Huahu Airport and Zhengzhou Airport North Freight Area, leading to the launch of smart cargo terminals, and improving support capabilities. Nanning Airport is deep binding of with ASEAN trade resources to ensure air cargo volume under RCEP policy. The improvement of node facilities and ground processing capacity, and favorable time resources contribute to the improvement of logistics quality.

i) Consigner demand- demand for decentralized supply chain remains prominent, and the transformation of consigners leads the digital and green transformation. Stable demand in the supply chain drives a decentralized layout, transforming from a lean efficiency-oriented JIT (Just In Time) to a safety and resilience oriented JIC (Just In Case), and continuously promoting the green and intelligent development of the supply chain.

j) Co-operation- cross border players enter the market to increase market vitality and air cargo capacity: The three major shipping giants have increased their air cargo volume. JD Airlines was established, and Jiacheng Airlines was jointly ventured by CTS International and Jiacheng International Logistics. The investment in the air cargo market remains strong, fully releasing transportation supply and stimulating market vitality.

k) Co-operation- top logistics companies are interconnected, with multiple parties forming a smooth one-stop solution: China Eastern Airlines, China Southern Airlines, and China Cargo Airlines rely on mixed-ownership reforms to introduce JD, Sinotrans, and Cainiao. SF Express, JD, and YTO Express have invested in the construction of Huahu, Nantong, and Jiaxing airports, linking them with base airports. CTS International, China Post and China Eastern Airlines have strategic cooperation in logistics, and YTO Express and Türkiye have cooperated in air-to-air docking. The top logistics organization continues to leverage its resource integration advantages, providing customers with smooth and efficient one-stop solutions through various and in-depth integration.

• Case: In 2023, Cainiao entered a cooperation agreement with Shenzhen Airport to establish the first national air cargo center for Cainiao International Express. Together with Atlas, they launched a freight charter flight route from Shenzhen to São Paulo, Brazil, making it the first all cargo-aircraft international freight route from Shenzhen to South America.

l) Regulatory laws and regulations- multiple policies have been introduced, highlighting the strategic position of air cargo market: Policies have been successively introduced in favor of aviation resources such as flight rights, ground support, and cargo layout, promoting the shift from heavy passenger and light cargo to simultaneous development of passenger and cargo.

3.2. 2023 forecast of navigator parameters

Recovery expected in 2023 in the air cargo market despite of short-term pressure. Seeking development during the recovery is expected to become the main tone of the air cargo market in 2023. The downturn of the global economy is expected to lead to low cargo volume in short term. The growth of fleet size, the increasing capacity due to the resumption of international passenger routes may lead to low air cargo price. The market has shifted from freighters-dominated to cargo-dominated. LogisticsLeading logistics players like Cainiao are expected to actively improve their capabilities, in terms of timeliness, stability and product, and increase service differentiation to enhance market competitiveness.

a) Volume- at a low level and demonstrates different trends by routes: The air cargo market is expected to perform at a low level throughout 2023 with a possible recovery at the end of the year. Ocean freight price is expected to plummet, resulting in a certain loss of cargo volume. The replenishment cycle may come at the end of the 2023 or early 2024 to increase the volume of cargo. As for US route, friction between China and the US expects to continue, and the volume of goods shall remain low, with a possibility to plummet. Cargo to EU is expected to remain at a low level for the short term and shall rebound by the end of the year. Intra-Asian trade is expected to strengthen, and the volume of cargo is expected to recover. Logistics cooperation, cross-border e-commerce, and high-end manufacturing export shall provide a stable growth in China’s cargo export to Russia, South America, and the Middle East.

b) Price- the expected increasing supply may lead to low price in short-term: At the beginning of the new year, air freight prices came under pressure and declined. It is expected that there will be an excess capacity supply in 2023, which may lead to the potential price competition.

c) Timeliness- takes multiple measures to improve timeliness: Capacity has recovered to the pre-epidemic level. Direct flight routes shall be increasingly opened in overseas cities. Innovative measures such as customs declaration in advance, differentiated security inspection, and freight forwarder tiered management shall be continuously promoted. Regional cooperation regulations such as RCEP shall further shorten the time needed for customs clearance, and multiple efforts shall be joint to improve timeliness.

d) Variety- achieves competitive differentiation through product diversification: The air cargo market is transitioning from a seller's market to a buyer's market. On the demand side, cross-border e-commerce B2C relies more on all-cargo aircraft capacity to reach specialized freight hubs, rather than relying on bellyhold capacity to traditional passenger destinations. With the increase in all-cargo aircraft deployment and the backdrop of " cargo-dominated," industry players are expected to tap into opportunities in niche markets to compete for stable cargo orders. They develop differentiated products in terms of cargo categories, routes, modes, cost efficiency, etc., actively catering to the increasingly complex and diverse demands of customers by profoundly enhancing product variety.

• Case: Cainiao is expected to officially launch the "global 5-day delivery" international express product by cooperating with AliExpress in 2023, allowing cross-border parcels to be delivered within 5 working days starting from key regional markets.

e) Delivery rate- improves last-mile services and achieves stable development: The facilities in China shall continue to expand and upgrade. Leading logistics forwarders are expected to continue improving their last-mile services, deepen cooperation with overseas airport customs. The rapid development of last-mile infrastructure of cross-border e-commerce niche routes to the Middle East, South America, and other regions is expected to see significant improvement in quality.

f) Green- government policies shall set the focus of going green: All airlines and airports are expected to promote the green process continuously, by introducing new energy-saving aircrafts, optimizing the route network, using sustainable aviation fuel and other measures, to achieve aviation decarbonization.

g) Intelligence- all parties shall step up efforts to create synergy for the pursuit of win-win results: Future intelligent developments shall focus on breaking the information barriers between airports, airlines, customs, joint inspection units, cargo owners, agents and other aviation entities to achieve efficient information integration.