ISTAT News | 25 January 2022

Jetrader: Air Cargo Developments and Outlook

By: Mark Diamond

The Demand Side

Air cargo demand has shown itself to be considerably more resilient than passenger demand since the onset of COVID-19. Cargo volumes fell more than 25% in the early days of the pandemic — in large part due to a sudden shortage of belly capacity on passenger aircraft rather than underlying demand issues — then rebounded quickly. As of August 2021, global cargo tonne-kilometers (CTKs) were about 8% higher than in August 2019. In contrast, global passenger traffic fell as much as 94% at the beginning of the pandemic and was still 56% below pre-pandemic levels in August 2021.¹

Air cargo’s importance to the global airline industry, therefore, has increased dramatically. In 2021, cargo revenues are expected to account for a third of global airline industry revenues, compared to about 10%-15% pre-pandemic.²

A number of factors have driven air cargo’s resilience and growth during the pandemic, including demand for shipment of medical supplies and personal protective equipment, as well as a temporary shift of volumes from surface to air modes, caused by supply chain disruptions in maritime shipping. However, a more fundamental and long-lasting driver of air cargo demand growth has been the exceptional growth of e-commerce. Even before the pandemic, worldwide e-commerce sales were growing at more than 20% per year, but COVID-19 has greatly stimulated online buying: In 2020, global e-commerce revenue increased by 26%. While this growth rate is expected to taper off somewhat over time, online buying growth is expected to remain strong well into the future, and online sales are projected to capture a 25% share of worldwide retail sales by 2025 — up from 14% in 2019.³

The Supply Side

Air cargo’s fortunes are inextricably linked to developments in the passenger market: Prior to the pandemic, nearly half of global air cargo volumes were carried in passenger aircraft bellies. However, as passenger demand plummeted during the early days of the pandemic, airlines responded quickly by withdrawing aircraft from service with global available seat-kilometers (ASKs) falling by nearly 90% in the spring of 2020. While passenger capacity has been added since then, ASKs were still 46% below 2019 levels in August 2021.⁴

Passenger airlines have also downgauged aircraft in some markets. The recent popularity of long-haul-capable narrowbodies such as the A321LR, A321XLR and some versions of the 737 MAX is of particular note; these aircraft types have sufficient range to operate efficiently on routes between the eastern U.S. and Europe yet offer only a fraction of the belly cargo capacity of widebodies that have heretofore dominated these markets.

The reduction in passenger capacity worldwide has caused an enormous and continuing loss in belly capacity for cargo, with more than 40% of global air cargo capacity disappearing early in the COVID-19 crisis. Total available cargo tonne-kilometers (ACTK) were still 12% below 2019 levels as of August 2021.⁵

FIGURE 1: CHANGE IN GLOBAL AIR CARGO VOLUMES (CTK) VS. CAPACITY (ACTK) VS. 2019

Source: SASI analysis based on data from IATA Air Cargo Market Analysis

Impact on Cargo Load Factors and Yields

With burgeoning demand and a continuing capacity shortage, cargo load factors and yields skyrocketed and remain elevated. Global load factors jumped from 45% in January 2020 to 58% in April 2020 (cargo load factors are typically below passenger load factors).⁶ Global cargo yields in 2020 were about 56% above 2019 levels on average and were much higher on certain trade lanes; freight rates more than doubled from Europe and Asia to North America.⁷

The spread of the COVID-19 delta variant in 2021 has meant that the supply-demand trends first seen in the first half of 2020 continue unabated. Cargo demand continues to grow, but capacity remains insufficient, resulting in stubbornly elevated load factors and yields (see Figure 2).

FIGURE 2: AVERAGE GLOBAL CARGO LOAD FACTORS AND AVERAGE HONG KONG-NORTH AMERICA FREIGHT RATES ($/KG)

Source: IATA Air Cargo Market Analysis and Statista

Use of ‘Preighters’

Numerous airlines have temporarily converted underutilized passenger aircraft into cargo-carrying “preighters” during the pandemic, removing some or all of their seats in order to accommodate more cargo on the main deck. There were about 200 such aircraft in operation during the first half of 2021.⁸ Airlines have also employed passenger aircraft with intact seat configurations as pure cargo-carrying aircraft. In 2020, preighters accounted for about 13%-14% of total scheduled CTKs on major trade lanes, including the North Pacific, North Atlantic and Europe-Asia.⁹

These aircraft, however, are expected to be placed back into passenger service as the pandemic wanes and passenger demand returns. Preighters are less efficient than pure freighters, with no ability to accept full-size pallets on the main deck, and therefore are significantly more labor- and time-intensive to load and unload. They also have volumetric and weight payload limitations; even those aircraft that have seats removed typically retain structures such as overhead compartments, lavatories, galleys and even full business- and first-class cabins that limit the utilization of main deck space. Also, unlike pure freighters, preighters lack active fire suppression systems on the main deck and therefore cannot accommodate certain high-value cargo or hazardous items.

Demand for Pure Freighters

There has been extraordinarily high demand for freighters during the pandemic to make up for the lost passenger aircraft belly capacity, and freighters are being used more intensively than ever. During the three months ending July 2021, freighter ACTKs were up 28% compared to the same period in 2019.¹⁰

Not surprisingly, there has been a boom in conversions of passenger aircraft to pure freighters, taking advantage of the current high availability of passenger aircraft feedstock at low acquisition costs and the overall attractiveness of the air cargo market. Between May 2020 and February 2021, nearly 200 narrowbody and widebody freighters were added to the world fleet, including new-build aircraft, new passenger-to-freighter (“P2F”) conversions and existing freighters re-entering service from storage.¹¹ There are now three separate announced programs to convert 777-300ERs into freighters, with multiple conversion lines being established to meet demand.

Outlook Going Forward

It is difficult to predict when the air cargo demand-supply relationship will return to something approaching a “normal” equilibrium, but it is clear that the pandemic has resulted in lasting changes to the air cargo industry. Passenger demand, particularly for long-haul flying, will likely remain suppressed not only until the pandemic is considered truly over but for some time after, resulting in belly capacity for cargo remaining restrained. In addition, other parts of global supply chains, most notably sea freight, are struggling with massive bottlenecks that look likely to continue well into the future, with significant positive implications for air cargo demand.

Boeing projects that global passenger demand will not return to 2019 levels until 2024.¹² While domestic travel has largely recovered, long-haul passenger travel continues to lag, constrained in part by the slow pace of reopening borders. In addition, higher-yield business travel is taking longer to return than leisure and “VFR” (visiting friends and relatives) traffic — hit simultaneously by increased business sensitivity to controllable travel expenses, as well as the widespread use of online videoconferencing as an effective substitute for air travel during the pandemic. It is not at all clear when business travel will fully return to the levels seen prior to COVID-19, putting further pressure on passenger airline revenue.

As long as passenger traffic and revenue remain below pre-pandemic levels, there will continue to be a capacity squeeze in air cargo, leading to continued strong load factors and yields. We project as a consequence that demand for freighters will continue to be strong for years to come.

Air cargo volume demand growth is likely to remain robust through much of this decade, driven by a rebounding global economy as well as continued growth in e-commerce demand. The IMF projects that real GDP will grow 5.9% in 2021 followed by average yearly growth of 3.6% through 2026.¹³

E-commerce will continue to drive much of the future growth in air cargo volumes and the demand for freighter aircraft in particular. E-commerce logistics are predicated upon speed and reliability in end-to-end transport, and therefore are very much dependent upon air cargo. Amazon Air’s freighter fleet is growing in leaps and bounds, growing to more than 80 aircraft since its launch in 2015, and it is further expanding its own-controlled capabilities by acquiring a minority stake in freighter operator ATSG and warrants to buy shares in Atlas Air and Sun Country. Amazon alone is responsible for much of the order backlog for P2F conversions.

Other major global e-retailers are expected to follow in developing own-controlled aircraft capacity, further stimulating demand for freighters. JD.com has announced plans to operate at least 100 freighters by 2030.¹⁴ Smaller e-retailers are expected to continue to increase demand for air shipments on passenger and all-cargo airlines as well as on integrated express carriers.

Other developments bode well for future freighter demand. A number of passenger airlines, including Air Canada, WestJet, LATAM, IndiGo, AirAsia and S7, are adding freighters to their fleets to take advantage of burgeoning cargo demand — a major change in direction compared to the previous 10-15 years when combination carriers such as Air France/KLM, Singapore Airlines and EVA Air had been reducing their freighter fleets. Several large, global freight forwarders, including DHL Global Forwarding, DSV, CEVA, Geodis and Flexport, have launched own-controlled freighter operations as well, aimed at securing reliable capacity, as well as capturing high-value/high-yield cargo commodities (“verticals”) and driving that traffic to their most important airport gateways. CMA CGM Group, the parent of forwarder CEVA Logistics, plans to secure its own air operator’s certificate in 2022 and has ordered new-build 777 freighters.

While the outlook for air cargo demand over the next several years is bright, there are some longer-term threats, including the potential for some lower value, less timesensitive air cargo commodities to migrate to surface modes if air cargo yields remain elevated. One example is the Asia- Europe trade lane, where China’s Belt and Road Initiative is stimulating material investment in rail, road and maritime infrastructure, increasing the potential for modal shift from air to surface.

Conclusion

In a nutshell, the outlook for air cargo remains strong overall. There are changes of enormous consequence occurring, with air cargo generating significantly higher revenues and returns than before. These changes are durable and will not abate as long as there is strong consumer demand for e-commerce. Cargo is likely to represent a higher share of revenue for the airline industry as a whole well into the future, and a critical contributor to the profitability of passenger aircraft operations.

As passenger demand returns post-pandemic, cargo’s share of total airline revenue will decline somewhat but will likely remain more important than pre-pandemic. As such, we expect air cargo to play a more significant role in passenger airline strategic decisions going forward, including network and fleet planning, and it will attract additional airline investment across all elements of the service chain — including aircraft as well as infrastructure and services on the ground, end-to-end product offerings tailored to high value commodities, and data and information systems.

References

1. IATA, Air Cargo Market Analysis.
2. IATA, Outlook for the Global Airline Industry, April 2021 update.
3. eMarketer, Global Ecommerce Forecast 2021.
4. IATA, Air Cargo Market Analysis.
5. IATA, Air Cargo Market Analysis.
6. IATA, Air Cargo Market Analysis.
7. Statista, “Air freight rate change since the beginning of COVID-19 outbreak 2019-2021”, August 20, 2021.
8. SimpleFlying, “Preighter Numbers Steady As Cargo Capacity Problems Continue”, Andrew Curran, 28 June 2021.
9. IATA Economics, “Freighters and Preighters – the Agility of Airline Cargo Operations”, 1 April 2021.
10. IATA Cargo Chartbook, Q3 2021.
11. Forbes, “Israel Aerospace Industries And Etihad Tap Into The Booming Market Of Converting Passenger Jets To Cargo Planes”, Cathy Buyck, 29 August 2021; referencing  data from IBA.
12. Barron’s, “Boeing Sees Full Commercial Air Recovery By 2024”, 14 September, 2021.
13. IMF, World Economic Outlook, October 2021.
14. Air Cargo News, JD Logistics eyes a fleet of 100 freighters, Damian Brett, October 19, 2021.

---

Mark Diamond is a vice president with Strategic Aviation Solutions International (SASI), an air transport consulting firm focused on air cargo and logistics, offering a full portfolio of advisory services to a global client base of airlines, airports, manufacturers, financial institutions and governments.