China Freight Transport Report Q2 2008

The battle for control of China Eastern Airlines, and for a share in China's potentially vast aviation market, took a new turn in late 2007 and early 2008, when China National Aviation Corporation (CNAC) made a counter-bid for a 24% stake the airline, designed to thwart the initial offer made by Singapore Airlines (SIA) and its parent group Temasek. The joint SIA-Temasek bid had offered a price of HKD3.80 per share (US$0.49), but CNAC offered a higher HKD5.0 (US$0.64). Whatever the outcome of the bidding war, it was clear that buying into one of the key China mainland airlines remained an attractive long term proposition for other aviation companies. Hong Kong-based Cathay Pacific said it was prepared to team up with Air China and its parent group, CNAC, to form a strategic partnership with China Eastern if the SIA-Temasek bid failed. Cathay and Air China have cross-shareholdings between them, and had initially considered, but eventually dropped a bid for China Eastern in September 2007. Cathay Pacific, a competitor of SIA, would benefit if it were able to prevent its rival gaining a foothold in the mainland aviation market. China Eastern registered losses in three of the past five years, but remains an important 'way in' to a market that has been growing at an annual rate of 16%. It is China's number three airline, after China Southern Airlines and Air China. China Eastern has a fleet of 209 aircraft and operates over 6,000 flights a week. It swung back into profit for the first nine months of 2007, reporting net income of CNT1.03bn (US$142mn) reversing losses of CNY2.78bn in the same period in 2006. In our China Freight Transport Report Q208, BMI predicts that air freight traffic carried will grow at an average annual rate of 11.1% in 2008-12 China's economy continues to power ahead, driving trade and demand for freight transport. Our latest estimates put GDP growth at 10.4% this year, easing a fraction to 9.7% in 2009. China's foreign trade will continue booming: up by 25.7% in 2008 and 21.9% in 2009. This double-digit trade growth continues to create massive demands on the country's transport and infrastructure capacity. Underpinning the optimistic outlook is a supportive operating environment. BMI has given China's freight industry a rating of 69.6 (out of a theoretical maximum of 100), which places it right up at the top of the Asia Pacific region.

Based on available data, we have trimmed down both rail freight and river and sea-cargo growth. Our forecast for freight carried across all modes in 2007-2012 now stands at annual average growth of 13.9%, expressed in bntkm. According to our latest estimates, transport and communications GDP rose by 13.4% in 2007, 1.9 percentage points (pps) faster than overall GDP, which we estimate expanded by 11.5%. For the 2008-2012 forecast period, we expect the transport and communications sector to continue outpacing the economy as a whole. It will achieve average annual growth of 10.7%, versus 9.4% for overall GDP.

The total value of transport and communications GDP will rise to US$481bn in nominal terms by 2012, representing 6.3% of China's GDP. The transport and communications sector employed 22.1mn people, or 2.8% of the labour force, in 2007. We see the figures rising to 23.3mn by 2012.

Prospects for the freight-transport industry are encouraging. As our figures indicate, the freight sector will continue to grow at a significantly faster rate than the economy as a whole, in line with intensifying demand for transport at this stage in the Chinese economy's development. By transport modes, growth will be led by oil and gas pipelines (at an average rate of 17.0% a year), shipping and inland waterways (14.9%), airfreight (11.1%), road haulage (14.1%) and rail freight (11.1%).