Destination Unknown: What the future may hold for freighters

DestinationUnknown_LeadGraphicBy its very nature, airfreight logistics is a global, macro-economic industry, but it’s sometimes easy to fall into the habit of short-range thinking.

Take freighter aircraft, for example: Earlier this year, much of the buzz in the industry was about the coming decline of maindeck cargo. With the rise of belly capacity in today’s widebody passenger jets, legacy carriers such as Air France-KLM and IAG Cargo were shedding freighters as fast as they could. Scores of 747-400Fs, with decades of life still left in them, were being parked in the desert in favor of more fuel-efficient, new-build freighters and twin-engined passenger aircraft, with cavernous belly holds.

The rumors of the death of freighters, of course, were wildly exaggerated, as can be seen by the latest long-range freighter forecast reports released from Boeing, Airbus and Air Cargo Management Group (ACMG, a consultancy affiliated with Air Cargo World). “There has been no slowdown in production freighter deliveries in the first half of this year, but orders have, for the first time in a several years, outpaced deliveries, and the backlog for the four freighter types currently in production [A330-200F, 767-300F, 777F, and 747-8F] has risen, at least temporarily reversing a downward trend,” said Alan Hedge, senior director of ACMG.

In July, FedEx placed an order with Boeing for fifty 767-300 freighters, plus options for fifty more, Hedge said. The order specifies that the fifty firm orders will be delivered beginning in FedEx’s 2018 fiscal year, with delivery of all fifty by FY2023. FedEx also has thirty-five 767-300Fs and seventeen 777Fs still to be delivered from previous orders with Boeing, as well as fifteen 757-200s awaiting conversion to freighter configuration by ST Aero. That same month, AirBridgeCargo announced its plan to increase its existing 747-8F fleet with an MoU for twenty more -8F units from Boeing, to be added to the airline’s fleet over the next seven years.

Taking the long view – up to 20 years into the future – it’s clear from these forecasts that freighters will not only survive but thrive in many parts of the world, as global demand for airfreight and express delivery rise, e-commerce continues its rapid growth, and aging freighters get replaced with newer, more efficient models.

Earlier this year, Airbus released its “Global Market Forecast: Flying By Numbers, 2015-2034” report, and ACMG published its “Twenty-Year Freighter Aircraft Forecast – 2015 Through 2034.” Boeing also released its “Current Market Outlook: 2015-2034” (CMO), which followed Boeing’s biennial “World Air Cargo Forecast” (WACF) that was released last year, providing added insight into underlying air cargo trends. Although each forecast used its own methods and came up with somewhat different conclusions, each agreed that freighters will be a part of the airfreight logistics universe indefinitely.

By taking a deeper dive into the statistics reported in these four forecast reports, freight forwarders and logistics companies can also reach some conclusions about the current health and possible future of the air cargo industry.

Three views from 2034

To get an idea of what the future will look like, the three forecasts first established a firm baseline and made their own assumptions about the rate of growth over the next 20 years, based on various external factors. Here are the basic methodologies established by each of the organizations, listed from most pessimistic to most optimistic:

Overall results of the ACMG forecast are presented in greater detail in Figure 1, and divided into five-year increments over the 20-year forecast period. The chart shows the predicted growth of the freighter fleet in three size categories – narrowbodies, medium widebodies and large widebodies. ACMG’s forecast takes into account new-build freighter production, passenger-to-freighter (P-to-F) conversion activity, and the retirement of freighters from the existing freighter fleet.

Rather than basing forecasts on a continuation of annual growth in the range of 6 percent per year, which had been the long-term historic average before the 9/11 terrorist attacks, ACMG has taken into account other factors that affect the strength of the global economy, including globalization trends that drive airfreight demand, fuel price fluctuations and modal shift. The assumed 4.5 percent annual growth in demand acknowledges the correlation between the demand for air freight services and the strength of the global economy. “Historically, each 1 percent increase in global GDP produced about a 2 percent increase in both global trade and global airfreight demand, but use of a lower multiplier now seems appropriate,” the report said. “ACMG now considers a 1.2-1.6 ratio to GDP a more accurate predictor of airfreight demand.”

Sensitivity analyses

In order to add some interactivity into its forecasting model, ACMG has enhanced this year’s freighter report, by providing a “Freighter Forecast Analysis Tool.” This tool, in interactive spreadsheet form, allows users to input their own combinations of assumptions into the freighter forecast, and analyze the resulting fleets by size category in five-year increments over the 20-year forecast horizon. Users can vary simultaneously annual air cargo traffic demand growth, freighter aircraft productivity shifts, and changes in freighter-to-belly ratio.

To illustrate the affects of the above sensitivity factors, ACMG provides in Figures 2 and 3 the results of sensitivity analyses that address variations from the baseline assumptions of growth rate and freighter productivity.

Figure 2 shows the significance of underlying growth in demand for air freight services as a determinant of freighter fleet size. A demand shift of 1.5 percentage points results in roughly a one-third change in the size of the freighter fleet in 2034. “Even under the extreme case where there is assumed to be no growth in air cargo demand over the next 20 years, there would be a need for about 60 added freighters per year to offset the capacity of freighters retired from the existing fleet,” ACMG said.

Regarding productivity, ACMG expects that future freighter models will exhibit enhanced capability over the forecast period, due to increasing freighter size and incremental increases in freighter load factor (percent of space used per flight) and utilization rate (hours flown). “Increasing productivity means that, on average, each freighter in the future fleet can do more work than a freighter in the current fleet,” the report stated. “Our baseline scenario uses a productivity enhancement factor of 1.5 percent, per year… On a compound basis over 20 years, this factor reduces the number of freighters needed by 35 percent” compared to the quantity needed if there was no productivity improvement.

Figure 3 shows the significance of shifts in freighter productivity. A 0.5 percentage- point change in productivity results in roughly a 10 percent change in the size of the freighter fleet in 2034.

Finally, the analysis tool predicts how changes in the freighter:belly ratio will cause shifts in future freighter demand.

Today, about one-half of air cargo is carried in freighters; the other half moves in the belly compartments of passenger aircraft. Increasing quantities of widebody passenger aircraft with large belly capacity suggests a shift away from freighters is taking place. Using the analysis tool, increasing the belly share by five percentage points over the 20-year period results in roughly a 10 percent reduction in the size of the 2034 freighter fleet. This data point, along with the information from Figures 2 and 3, shows that even a relatively small change in input assumptions can have a large impact on the size of the predicted freighter fleet twenty years from now.

Freighters added over the next 20 years will be a mix of newly produced units and aircraft converted to freighter configuration after serving in a passenger-carrying role, ACMG added. About two-thirds of the units in the existing freighter fleet are converted aircraft, and that relationship is expected to continue in the future. Conversions are especially popular in the small-capacity freighter market, while the use of new-build freighters is common in the large freighter market.

Regional trends

Of particular interest to forwarders and logistics companies are some of the latest regional trends, which can provide guidance in determining where the most airfreight demand will come from in the next two decades.

Asia – Traffic has dipped in Asia of late, but the continent will continue to lead the world in average annual air cargo growth, with domestic China and intra-Asia markets expanding 6.7 percent and 6.5 percent, per year, respectively, Boeing predicted in its 2014 WACF report. More than 40 percent of all freighter deliveries during the 20- year forecast period will be to carriers in the Asia-Pacific region, the report said. Asia Pacific-based carriers will continue to receive a high proportion of large production freighters to serve their long-haul, intercontinental routes.

Air cargo markets linked to Asia – especially to the Pacific Rim countries – will lead all other international markets in average annual growth between 2013 and 2033, Boeing added. “Growth continues to strengthen and is now starting to return to the long-term trend,” the report said. The Asia-North

America and Europe-Asia markets will grow at an average 5.4 percent and 5.3 percent, per year, respectively.

Intra-Asia traffic is currently the fifth-largest air cargo market, forecast to grow faster than any other international world market, averaging 6.5 percent growth per year over the next 20 years. By 2033 this market will likely be the third largest air cargo market, according to Boeing’s WACF. The share of world air cargo traffic associated with Asia, including the domestic markets of China and Japan and all international markets connected to Asia, will increase from 51.3 percent in 2013 to 61.1 percent in 2033.

North America – According to Airbus, the freighter fleet demand in North America is mainly a replacement market, while the Asia-Pacific fleet is set to triple. But North America is expected to receive 30 percent of freighter deliveries over the next 20 years, said Boeing’s WACF report; most of those deliveries, of course, will go to express carriers FedEx and UPS. Historically, up to three-quarters of medium widebodies have supported express operations, in which relatively low airplane utilization makes converted freighters economically attractive.

Europe – Markets between this well-established region and Asia are projected to grow the fastest, at 5.3 percent, per year, between 2013 and 2033, which is faster than the predicted global average of 4.7 percent, per year, according to Boeing’s WACF report. The Europe to Latin America region is expected to grow at slightly above the global average (4.8 percent), while South-Asia to Europe is forecast to keep the same 4.7 percent pace. Growth for the next 20 years between Europe and the rest of the world, Boeing said, will be below average, including Africa-Europe (4.3 percent); the Middle East-Europe (4.0 percent); and Europe-North America (3.1 percent). Intra-Europe traffic will grow the least, at 2.0 percent, the report stated.

Latin America – Finally, currently sluggish air cargo growth in Latin America-North America flows is forecast to exceed the world average at 5.2 percent, said Boeing’s WACF.

Maindeck vs. belly

Regarding the freighter:belly ratio, ACMG’s baseline assumes that the 50/50 historical balance between the two won’t change much. However, the fleet of passenger jets currently operating today outnumber freighters by roughly a 10:1 margin, which is putting “downward pressure on the demand for freighters,” ACMG says.

According to the Airbus forecast, the market share for belly capacity is expected to continue growing, especially on inter-continental routes, due to the addition of larger, more cargo-capable passenger aircraft. The need for these additional aircraft, Airbus said, is being driven by passenger traffic growth that is higher than freight traffic growth. This was especially true on the trans-Pacific segment, where additional belly capacity pressured maindeck freighter activity. In addition, new widebody passenger types, such as the A350-1000, will be even more cargo friendly, capable of carrying 21 tonnes from Hong Kong to Los Angeles, while a 747-400 can carry just 8 tonnes, Airbus said.

As a result Airbus assumed that overall cargo traffic demand would grow by 4.4 percent over the 20-year period, while belly traffic would grow at a faster, 4.8 percent rate.

However, there has been some recent anecdotal evidence that freighters are on the rise in some sectors. For example, the European air cargo hubs in Brussels and Munich reported last month that they have seen a rise in freighter-only volumes, compared to pax bellyhold freight. Brussels Airport, the ninth-largest European cargo airport by volume in 2014, reported that maindeck cargo traffic increased sharply, by 8.2 percent in September 2015, compared to September 2014. Munich Airport, meanwhile, said that between January and September 2015 its freight-only traffic carry grew by about 33 percent, year-over-year. “Freighters are essential to all the east-west markets,” said Boeing in its 2014 WACF forecast. “Freighters carry about 72 percent of all air cargo carried between Europe and Asia, as well as 43 percent of all cargo carried between Europe and North America.” Boeing predicted that freighters are projected to carry more than half of the world’s air cargo for the next 20 years, “even as lower-hold cargo capacity expands faster than freighter capacity.”

Dedicated freighter services offer significant advantages, Boeing added, including more predictable and reliable volumes and schedules, greater control over timing and routing, and a variety of services for outsize, hazardous or other special cargo. “The Asia-to-North America market requires about 70 daily freighter flights,” the Boeing report said. “It would take about 150 daily passenger flights to provide service equivalent to 10 daily of those freighter flights.”

The growing influence of express

Another aspect of the freighter market that cannot be ignored is the continuing explosion in interest in express services. Today, 46 percent of all narrowbody freighters are operated by express companies, said ACMG, as are 65 percent of all medium-capacity widebody freighters and 32 percent of the large freighters.

ACMG also estimates that about 55 percent of all freighters are operated in express networks – a share that is expected to grow even larger, as well over half of the order backlog for widebody freighters is made up of 767-300Fs and 777Fs for FedEx. ACMG’s Hedge added, however, that while 117 freighters on order for FedEx will be delivered between now and the end of 2023, the additions will be balanced by retirements of older freighters. “We estimate that the FedEx fleet will have almost the same number of freighters in 2023 as it does now, and, the total maximum payload of the fleet will be almost identical,” he said.

International express traffic is expected to continue growing faster than the average world air cargo growth rate. “The distinction between express and general air cargo continues to blur,” said the Boeing WACF forecast. “Traditional providers are expanding their time-definite offerings, and express carriers, freight airlines, and postal authorities are consolidating.”

Unknown unknowns

To paraphrase a certain former U.S. defense secretary, there are things we know we don’t know about the future of freighter demand, and then there are factors we don’t know that we don’t know.

For instance, the cost of fuel is a major question mark in the 20-year outlook. At the beginning of 2015 oil prices had reached an eight year low at roughly US$50 per barrel and since then have fluctuated in a small range around that price. This is good news for the industry this year, but is it a long-term trend that carriers can count on? That remains to be seen.

ACMG said it’s important to realize that increased demand for airfreight services “may not translate directly into demand for freighters.” The competition from belly space is a significant threat, especially if passenger demand outpaces growth in air freight demand for a significant period, as it did in 2011-2013, and is doing again in 2015. Freight yield (revenue taken in by airlines for each kilogram carried) has been trending down. “This situation is the primary reason that some airlines in the top echelon of air freight suppliers are switching to a belly-first strategy for their cargo operations,” ACMG’s report noted.

As was mentioned earlier, the recent orders of freighters by AirBridgeCargo represent “a massive influx of capacity and a real vote of confidence in the future,” said ACMG’s Hedge. “But before Boeing breaks out the champagne and caviar, it should be noted that ABC’s twenty ‘new’ 747 8Fs orders may include units ‘deferred’ (sometimes indefinitely) by other buyers, or, in the case of Nippon Cargo Airlines, canceled outright,” he added, referring to NCA’s cancellation of four of its remaining six 747-8F orders with Boeing. “While Boeing would obviously prefer the AirBridge order to be firm, the MoU is a positive sign. ACMG will continue to watch 747-8 developments carefully.”

NOTE: A new feature of ACMG’s forecast is an interactive Freighter Forecast Analysis Tool, in the form of an Excel spreadsheet provided to purchasers of the report. This new Analysis Tool allows purchasers to specify their own combination of the key three input variables – demand growth rate, freighter productivity improvements and shifts in the freighter:belly space ratio – and determine how the size of the future freighter fleet will be impacted under various user-defined scenarios. For more information on ordering the report, please visit acmg.aero/freighter-forecast-report.

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