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Cargo capacity takes hit from US retaliation against Chinese airlines

The U.S. government’s suspension of more than three dozen passenger flights operated by Chinese passenger airlines in retaliation against China’s COVID policies restricting U.S. carrier operations will also remove widebody belly capacity for cargo, further stressing supply chains straining to keep up with international trade demand.

Ramifications for shippers extend beyond the U.S., with the Department of Transportation saying the governments of France and Germany have taken similar action against China for unilaterally banning flights into the country. And the situation could worsen if the dispute over China’s zero-COVID policy escalates.

The Biden administration on Friday suspended 44 flights from the U.S. to China beginning Jan. 30 and continuing through the end of March in response to China’s use of so-called “circuit breaker” penalties that automatically trigger inbound flight restrictions when a certain number of arriving passengers test positive for COVID up to seven days after arrival. The Chinese actions have forced American Airlines (NASDAQ: AAL), Delta Air Lines (NYSE: DAL) and United Airlines (NASDAQ: UAL) to cancel a total of 44 flights in recent weeks.

The U.S. is banning five flights operated by Air China from Los Angeles to Shenzhen and four Air China flights to Tianjin; 16 China Eastern Airlines flights from New York’s John F. Kennedy International Airport to Shanghai; six China Southern Airlines flights from Los Angeles to Guangzhou; and 13 flights between Los Angeles and Xiamen operated by Xiamen Airlines.

The DOT said U.S. airlines shouldn’t be punished for following rules issued by the Civil Aviation Authority of China and for passengers subsequently testing positive that presented negative test results prior to boarding and were cleared by the Chinese government.

“Our overriding goal is not the perpetuation of this situation but rather an improved environment wherein the carriers of both parties will be able to exercise fully their bilateral rights. Only then will the department’s actions to maintain a competitive balance and fair and equal opportunity among U.S. and Chinese air carriers in the scheduled passenger service marketplace no longer be necessary. The most recent CAAC action has not created that environment,” the order stated.

“However, should the CAAC adjust its policies to bring about the necessary improved situation for U.S. carriers, the department is fully prepared to once again [lift the suspension]. On the other hand, should the situation worsen or should CAAC impose further circuit-breaker measures … we reserve the right to take additional action as we deem appropriate in the circumstances presented.”

How we got here

The aviation dispute with China goes back to the summer of 2020, when the U.S. objected to what it said were overly harsh COVID prevention measures that unfairly precluded U.S. carriers from operating to China in violation of air services agreements between the countries. The U.S. shelved planned flight suspensions on Chinese carriers after Chinese authorities reversed course to allow a limited number of U.S. flights.

But Chinese authorities last summer imposed trip wires that forced carriers to choose between suspending flights for two weeks or flying four weeks with passenger loads limited to 40% of capacity if more than five passengers from any arriving flight test positive for COVID. The rules reduced available seat capacity on several United Airlines flights.

The DOT said CAAC recently implemented a series of additional circuit breaker actions that denied carriers the option of reducing passenger loads and instead forced them to cancel future flights without four weeks of advanced notice, as previously allowed.

The DOT said that if the selected flights it terminated eventually are subject to CAAC suspension, it will identify alternative flights to suspend.

China says its circuit breaker rules apply to Chinese and foreign carriers alike.

U.S. air exports to China are lower than inbound volumes, but the impact of the DOT order will be felt on the inbound side if the Chinese carriers cancel the U.S.-bound flights because of the expense of operating empty return legs.

The disruption of passenger service to China exacerbates a tight supply of air cargo space in the China-U.S. market as businesses turn to air to get goods out of China before and after the early February production lull expected with the Lunar New Year holiday. And China’s goal of staging the Beijing Winter Olympics next month without any interruption, or having foreigners spread infection in the country, is raising the specter of further aviation restrictions that could hinder freight transportation.

Hundreds of passenger flights have been banned this month from Australia, Canada, France, India, Pakistan, Philippines, Britain and the U.S. because of large omicron waves in those nations, resulting in a significant drop in cargo options on passenger aircraft.

Meanwhile, restrictive COVID measures in Hong Kong have further decimated hometown carrier Cathay Pacific’s cargo capacity. The carrier says it is only operating at 20% of its pre-crisis capacity through March after authorities increased the quarantine period for pilots from three to seven days, making it difficult to schedule crews. Cathay cut 80% of its trans-Pacific freighter flights and all of its westbound flights to Europe.

The U.S.-China aviation dispute adds to overall tensions between the countries over trade, human rights, Hong Kong’s autonomy, and national security, particularly China’s muscle flexing in the South China Sea.

By Eric Kulisch credt American Shipper

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