Navigating the winds of change: Cathay Pacific's pivotal role in Asia-Pacific air cargo

The air cargo industry is experiencing divergent growth trajectories in the Asia-Pacific and North American regions, shaped by distinct economic drivers, regulatory changes and strategic investments. In Asia-Pacific, robust manufacturing activities and expanding consumer markets are fueling a resurgence in air cargo demand, while North America sees growth primarily driven by the e-commerce boom and the strength of the U.S. dollar.

However, regulatory headwinds, such as the U.S. crackdown on low-value imports from China and diplomatic tensions leading to reduced passenger flight quotas between the U.S. and China, are influencing the trade dynamics between these regions. Within this context, Cathay Pacific emerges as a pivotal player in Asia-Pacific’s air cargo sector, leveraging strategic fleet expansions and investments in digital transformation to enhance its competitive position, especially in the transpacific trade lanes. Asia-Pacific vs. North America: A s napshot of a ir c argo g rowth

The Asia-Pacific region remains a critical hub for global trade, driven by its manufacturing capabilities and growing consumer markets. Post-pandemic, this region's air cargo market has been rejuvenated by strong trade flows and the resurgence of supply chain activities. Meanwhile, in North America, airfreight growth has been largely propelled by the e-commerce boom, necessitating efficient and reliable air solutions to meet increasing consumer demands. The strength of the U . S . dollar has also influenced the market, making certain commodities more expensive , in local currency terms. IATA’s 2023 annual review compared the pre-pandemic period to 2022 , industry cargo tonne-kilometers (CTK) in 2022 tracked close to their 2019 levels, contracting by only 1.6%. One data point of note is that North America and Africa were the only regions with CTKs above 2019 levels throughout 2022. In June 2024 , IATA reported that trade between Asia and North America saw significant growth, with a recorded annual increase of 12.8% in CTK s — the largest annual increase in five months. The Bureau of Transportation Statistics ’ air cargo data shows similar trends : U . S . -Pacific air cargo has experienced significant fluctuations over the past five years. A ccording to the data , 2023 ended on a high note with a total of 12 ,1 ,060.20 b illion c argo r evenue t on- m iles, up 7.98% from 2022. However, 2024 is off to a slower start, down 10.15% year to date as of May 2024. Figure 1 -Summary Table of Cargo Revenue Ton-Miles (in millions) - Pacific Region

[caption id="attachment_57285698" align="aligncenter" width="2695"] Source: Cargo Facts analysis of Bureau of Transportation Statistics data[/caption] Regulatory c hanges and t heir i mpact on e - c ommerce

A headwind to Asia-North American trade is the U.S. Customs and Border Protection (CBP) crackdown on e-commerce deliveries from China, particularly on platforms like Shein and Temu. In June 2024, CBP suspended several customs brokers from participating in Entry Type 86, a program that streamlines the processing of low-value e-commerce imports. Introduced in 2019 as a voluntary test, Entry Type 86 allows goods valued at $800 or less to enter the U.S. without formal entry requirements or the payment of duties, under Section 321. This program was designed to improve import safety by providing greater visibility into low-value shipments, which have surged following a 2016 regulation that raised the de minimis threshold from $200 to $800. However, the exponential increase in such imports, especially from China, has overwhelmed CBP's capacity to enforce trade regulations and detect illicit products. Non-compliance issues, such as improper classification and untimely filing of shipment data, led to the recent suspensions as CBP intensified its enforcement efforts. Lawmakers are now debating the need for tighter controls on these imports, citing concerns over unfair competition and national security, while trade experts warn that significant changes could negatively impact small businesses and provoke retaliatory actions against U.S. exports. The situation underscores the need for enhanced data, resources and technology to protect the U.S. trade system and ensure compliance amidst the ongoing e-commerce boom. Diplomatic t ensions

Another factor affecting Asia-North American trade is the decrease in belly capacity due to the U . S . Department of Transportation's ( DOT) reduction in passenger flight quotas for China-based airlines to operate between the U . S . and China. After dropping to as few as eight flights per week, the DOT announced in May 2023 that it would allow Chinese airlines to boost their U . S . weekly round-trip flights from eight to 12, marking the first increase in three years. The number was equal to the number of flights the Civil Aviation Administration of China (CAAC) had permitted for American carriers. After later bumping that number to 35 flights per week, the DOT raised th e number to 50 on March 31 , 2024 . However, this remains significantly lower than the 150 round-trip flights allowed prior to the pandemic . In Canada, we see similar restrictions . T he weekly number of flights between the two countries has dropped drastically, from more than 100 per week in the summer of 2019 to just 10 per week since the summer of 2023. This is a fa r cry from the 162 passenger flights (76 from each country) that the existing Canada-China air transport agreement allows under regular conditions. As part of this political spat, Canada is also restricting direct flights from China’s capital , Beijing, forcing flights like Air China 997/998 to operate via Shenyang Taoxian International (SHE) rather than direct between Vancouver International Airport (YVR) and Beijing Capital International Airport (PEK). While the stop in SHE only adds approximately 60 nautical miles to the journey, the stopover adds significant transit time for cargo and passengers. Avoidance of Russian airspace is hindering North American carrier s ’ ability to operate between China and the eastern portion of North America. In Canada, eight of 10 weekly China flights depart YVR , with only two flights operating out of Canada’s economic center, Toronto. In the U . S . , we see a similar picture , with most flights operating from W est C oast airports Los Angeles International Airport (LAX), San Francisco International Airport (SFO) and Seattle-Tacoma International Airport (SEA). Other countries with Western ties are also seeing an impact due to Russian airspace avoidance . I n August 2024, British Airways announced an October suspension of its flight between London-Heathrow Airport (LHR) and PEK , citing weak demand due to China’s slowing economy and increased operating costs due to avoidance of Russian airspace. Cathay Pacific’s r ole in Asia-Pacific g rowth

Cathay Pacific is a cornerstone of the Asia-Pacific air cargo market, operating freighters to 11 destinations in the Americas, with belly capacity on passenger flights servicing another six destinations . As the airline recovers from the pandemic, its cargo operations have shown significant resilience and growth, thanks to its strategic positioning and robust fleet. Figure 2 - Cathay Pacific freighter route map

In Q1 2023, Cathay Pacific reported a 21.9% increase in cargo revenue compared with the previous year, with cargo tonnage rising by 25.3%. Throughout 2023, Cathay Cargo experienced a transitional period marked by decreased yields as supply increased and demand normalized from the pandemic peak. Despite this adjustment, the company's revenue remained historically robust, with yields continuing to surpass pre-pandemic 2019 levels by 46.5%. For the full year 2023, cargo revenue amounted to $2 . 8 b illion, a decrease of 17.9% compared with 2022, reflecting a weaker global market for air cargo. Capacity, measured in available cargo tonne kilometers (AFTK), increased by 59.7%, while cargo revenue tonne kilometers (RFTK) traffic grew by 40.3%. Total tonnage also saw an increase of 19.7%, reaching 1 .4 million tonnes. However, cargo yield decreased by 41.3% to 35 cents , and the load factor averaged 62.0%, down from 70.6% in 2022. The first half of 2024 exhibited more modest growth for Cathay Pacific's cargo operations. Cargo revenues were up by 1.5%, RFTK increased by 4.6% and cargo carried rose by 10.4% compared with the same period in the previous year. Capacity grew by 11.4% during this time, supported by the continued return of passenger operations servicing more than 80 destinations worldwide. This steady recovery indicates a normalization of the cargo market as global economic conditions continue to stabilize. Along with its significant belly capacity, Cathay Pacific operates a fleet of 20 freighter aircraft, including six 747-400ERFs and 14 747-8Fs. Compared to other operators in the region, Cathay operates a relatively young freighter fleet, with an average age of just over 12 years , and it is set to get younger in 2026 with the addition of six newly built A350Fs . Cathay’s subsidiary, Air Hong Kong, operates an additional 16 freighter aircraft, including A300-600Fs, A330-243Fs and A330-300P2Fs. Strategic m oves and i nvestments

The airline is continuously monitoring and adjusting its network to ensure efficient operations ; in August 2023 Cathay suspended freighter operations to Columbus, Ohio (CMH), redirecting frequency to Toronto (YYZ) instead. Cathay Cargo has also enhanced its integrated mail platform with Cathay Mail, a digital solution that re envisions the mail-shipment process, offering superior service focused on shipment visibility, reliability and speed. The airline’s Cathay Fresh cold chain capabilities were highlighted at the Asia Fruit Logistica 2023, showcasing its service features at the Cathay Cargo Terminal. Cathay Pacific continues to invest in digital transformation with upgrades to its online cargo booking platform, Click & Ship, and the development of API (Application Programming Interface) connections that allow customers to directly access inventory on their platforms. The airline is also working toward meeting the International Air Transport Association’s (IATA) milestone of setting ONE Record API (Application Programming Interface) as the unified effective messaging standard in the air cargo industry by January 2026. Cathay recently committed to investing more than $12.8 billion over the next seven years in its infrastructure at Hong Kong International Airport (HKG) , a clear testament to its dedication to strengthening Hong Kong's status as a premier international aviation hub. This massive investment aims to enhance every facet of its operations, from fleet expansion to customer experience, and the timing aligns with HKG’s Three-Runway System (3RS) coming online. Fleet e xpansion and m odernization

Cathay Pacific's air cargo operations are poised for significant growth and modernization through strategic fleet expansion. The airline's recent order for six Airbus A350F freighters, with an option for 20 more, is central to its long-term strategy. These next-generation freighters, expected to be delivered starting in 2027, will enhance Cathay's cargo capacity, facilitating stronger connections among Hong Kong, the Chinese Mainland, and key long-haul destinations in North and South America and Europe. This expansion supports Cathay's goal of maintaining leadership in the Asia-Pacific air cargo market. Cathay Pacific's purchase of 30 Airbus A330-900 aircraft, with an option for an additional 30, will also bolster its regional belly cargo operations within Asia. These investments not only expand and modernize the fleet but also align with the airline's commitment to achieving carbon net-zero by 2050 through improved fuel efficiency. Comparing Cathay Pacific’s fleet strategy to North American carriers like FedEx and UPS reveals a contrast in approaches. While Cathay is significantly increasing its freighter capacity to cater to high-density intra regional routes and long-haul intercontinental trade, North American carriers are focusing on optimizing their existing fleets and expanding strategically to meet specific transcontinental and transatlantic demands. This difference in strategies underscores the unique market dynamics in the Asia-Pacific region, where Cathay Pacific’s investment in advanced aircraft positions it to capitalize on growing global trade flows and reinforces its competitive edge in transpacific air cargo operations. Conclusion

In conclusion, the air cargo industry presents a complex and dynamic landscape in which the Asia-Pacific and North American regions are navigating distinct growth paths influenced by varied economic, regulatory and geopolitical factors. Asia-Pacific is experiencing a resurgence in air cargo demand driven by its manufacturing strength and expanding consumer markets, bolstered by Cathay Pacific's strategic investments and fleet expansions. In contrast, North America’s growth is propelled by the e-commerce boom and the strength of the U.S. dollar, though it faces challenges from regulatory changes and diplomatic tensions. The U.S. Customs and Border Protection's crackdown on low-value imports and reductions in passenger flight quotas between the U.S. and China are reshaping trade dynamics, while the ongoing geopolitical strains and airspace restrictions further affect cargo operations. Amid these shifts, Cathay Pacific's proactive approach in fleet modernization and digital transformation positions it as a critical player in sustaining Asia-Pacific’s air cargo growth and adapting to global trade trends. As both regions continue to evolve, the strategic moves by key players like Cathay Pacific will be instrumental in shaping the future of the global air cargo industry.

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Navigating the winds of change: Cathay Pacific’s pivotal role in Asia-Pacific air cargo

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