July 25, 2007 -- In Kunming, dirt is moving. The southwestern capital's new airport is poised to become a strategic transportation node in China's burgeoning aviation network. Destined to become China's gateway to Southeast Asia, Kunming's new airport will complement soon-to-be-completed land links and be a gem in any airfreight carriers network.

All over China dirt is being moved to improve air connectivity outside of the coastal line. The Civil Aviation Administration of China (CAAC) is spending US$17.5 billion on airport expansion and construction under China's eleventh Five Year Plan, which covers 2006 to 2011. Of that, US$6.67 billion is earmarked for airports in the western regions, including the expansion of 31 airports and the relocation of six others.

Some of the beneficiaries of this construction are Western shipping firms -- including DHL, UPS, and FedEx.

"China is the fastest growing market in DHL's global network," Wu Dongming, managing director of DHL-Sinotrans in Beijing, told Emerging China. "Improving logistics infrastructure such as integrating road and rail networks, construction of airports in second tier and third tier cities, and setting up of free trade zones is expected to create better connectivity to link ports and airports."

One of these airports is the Wuhan Tianhe International Airport.

"Infrastructure is the fundamental guarantee for the promotion of air freight," said an airport spokesman who requested that Emerging China withhold his name. "It will help the airport market itself."

Built in 1995, Tianhe International Airport has been buoyed by Wuhan's tremendous GDP growth, 13 percent annually from 2000 to 2005 and projected to continue at 11 percent annually through 2011, according to real estate firm Jones Lang LaSalle, and has been designated China's fourth international hub airport.

Tianhe is expected to complete a second terminal by the end of 2007 and construct a second runway by 2010. The new facilities will accommodate 320,000 tons of airfreight per year and coincide with the development of a new logistics facility in the Dongxihu Bonded Logistics Park near the airport.

And it's not just shipping to and from China that is benefiting from the new construction. International firms are finding a need for better domestic shipping, as well, which the new transportation facilities will support.

"Up to 90 percent of existing FedEx customers in China have expressed the need for a reliable domestic express service," Eddy Chan, Senior Vice President of FedEx China said in a statement. "This is a strong signal to us that many companies view domestic express service in China as a catalyst for growth and competitiveness in this exploding market." When contacted by Emerging China, FedEx declined to comment further.

In May, FedEx began offering its "Absolutely, Positively" express package guarantee within mainland China. Using a fleet of three Okay Airways Boeing 737s based in Hangzhou, FedEx joined UPS and other major airfreight companies in a race to become the leader in China's domestic airfreight industry.

FedEx's entry into China's overnight parcel delivery market coincided with strong growth in the airfreight sector. From January to May 2007, the total volume of goods transported by air within mainland China, grew 14.6 percent over the same period in 2006 according to the National Bureau of Statistics for China. In April 2007 alone, 345,000 tons of goods were transported by air.

Airport Council International (ACI) statistics indicate that ten of the world's 20 fastest growing airports in terms of cargo volume are located in China. Beijing leads, with 31.6 percent growth in 2006, Chengdu and Xi'an make the top 20 with 17.7 percent and 25.8 percent growth respectively. Comparatively, in U.S. airfreight traffic decreased 7 percent from April 2006 to April 2007 while the Chinese market grew 16.4 percent over the same period.

"The logistics market is being primarily driven by the retail market with the effect of greater consumer spending spilling out of tier one and tier two cities to other less advanced and inland areas," Darren Benson, head of Jones Lang LaSalle's Industrial Team for North China, told Emerging China. "Other reasons for the growth in the sector are to compliment industry clustering such as automotive manufacturing and advances in logistics practices through competition and consolidation generated from a greater presence of International logistics operators. This is ensuring a steady spread of operations from the major Port areas to inland distribution points."

According to a report from international consulting firm Deloitte Touche Tohmatsu, inefficient distribution in China can add almost a third to the after-factory costs of goods.

In 2001, China's tenth Five-Year Plan began to address shortcomings in logistics infrastructure, spending over US$123 billion throughout China. In 2006, logistics costs in China totaled 21 percent of GDP, which is in percentage terms double that of the U.S.

China's accession to the WTO stipulated that China deregulate its distribution sector. Deregulation was fully implemented by December 2004, allowing foreign businesses to build distribution and logistics networks throughout China and eliminated the need for a burdensome network of joint ventures or holding companies to participate in domestic Chinese market. These changes opened the door to UPS establishing wholly owned operations in 2004 and FedEx acquiring an express delivery firm, Tianjin's Datian W. Group Co., Ltd., in 2006.

UPS, for example, just annunced a new airfreight hub at the Shanghai Pudong International Airport, and has expanded throughout China with more local services and retail stores.

"As the logistics and express delivery sponsor for the 2008 Beijing Olympics, UPS is committed to China and to bringing the best Olympic Games ever to Beijing," Richard Loi, senior vice-president for UPS China, told Emerging China

Problems still remain, however.

China is far behind on expanding air traffic control capacity to match demand, for example Air traffic control congestion in the Pearl River Delta region costs businesses US$128,461 a day, according to the International Air Transport Association.