Air Cargo Industry Overview – Air cargo markets have recovered

By Udo Bartsch

After several years of weak demand and a lagging recovery of the global economy, the air cargo traffic has fully recovered in 2017. It grew by more than 10%. This is more than twice the rate of the long-term average. This was due to three factors:

  1. Global economic expansion
  2. Increasing industrial production
  3. World trade growth

As you will remember, the air cargo traffic greatly outpaced the capacity growth in the last two years, absorbing the excess capacity. The results were rising load factors and improved profitability.

After the strong growth in 2017, the global freight growth has moderated in 2018. Many indicators show that the air cargo market is fundamentally well positioned to maintain the growth momentum. Strong growth is expected to come from e-commerce, time-sensitive perishables as well as high-value commodities including computers, consumer electronics, and pharmaceuticals which are the fastest growing trade sectors around the world.

In 2018 the air cargo transport measured in revenue tonne-kilometres is estimated to grow by about 4 percent. The cargo revenue is expected exceed $100 billion.

In the last two decades, the evolution of Internet technology has led to the explosive growth of e-commerce. E-commerce takes a growing share of the air cargo market. The market size varies by country. It is driven by China, with approximately €1.1 trillion, the Asia-Pacific region, defined as South Asia and East Asia, which is the largest e-commerce in the world.

The second largest e-commerce market in the world is the United States. Sales reached to more than $ 450 billion in e-commerce sales in 2017, i.e. 16% RTK more than in 2016. (RTK: revenue tonne-kilometre)

World air cargo outlook

The world air cargo traffic is expected to grow in the next years by 4 – 4,5% for the next 20 years, Asia will continue to lead the world in average annual air cargo growth.

Expected growth

China: 6,3%

intra-East Asia: 5,8%

This is supported by fast growing economies and growing middle classes. The East Asia-North America and Europe-East Asia markets will grow slightly faster than the world average growth rate. The Latin America and Middle East markets connected to Europe and North America will grow slightly faster than the world average growth rate. Less optimistic is the outlook for the trade flows between North America and Europe with expected growth rate below the world average.

Importance of freighters

Air cargo represents just about 1% of global trade by tonnage. Looking at the value of the traded goods using air freight transport, the picture looks quite different. Air cargo represents more than 35% of the global trade by value. This is because air cargo is transporting goods which are desperately required at the destination, e.g. machinery, computing account, spare parts, perishable goods. Also computing equipment and electrical equipment as well as account for the highest share of air borne trade tonnage.

There are 2 options for air cargo transport: a) dedicated freighters and b) passenger aircraft lower holds. Each alternative has its advantage. Freighters are particularly well suited for transporting high value goods, because they provide highly controlled transport, direct routing, reliability and a unique capacity consideration.

With the introduction of a new generation of widebody passenger aeroplanes with larger lower-hold capacity quite a number of airlines are combining cargo transportation with passenger operation to capitalize on additional revenue opportunities. Belly cargo space offers unique value on non-cargo routes by feeding dedicated freighter networks and providing new business opportunities.

However, while lower-hold capacity in widebody airplanes serving long-haul missions has increased by nearly 6 percent in the last 5 years, several parameters can limit the cargo operations in passenger aircraft. The reduced height of the lower deck can limit the volumes. From the network standpoint, freighter routes are highly concentrated on relatively few trade lanes, especially in the world´s two largest trade routes, East Asia-North America and East Asia-Europe. In contrast, passenger networks are much broader and often include destinations where cargo demand is minimal. The difference in passenger and cargo traffic distribution explains the considerable load factor difference in belly space and freighters, which average approximately 30 percent and 70 percent respectively. In addition, range restrictions on fully loaded passenger aircraft and limited service to major cargo airports make freighter operations essential. For these structural reasons, freighters are forecast to carry more than half of the world´s air cargo for the next 20 years.

Express carriers continue to operate substantial freighter fleets, flying more than half of the widebody freighters and generating 43 percent of air cargo industry revenues in 2017.

Low-cost carriers (LCC) have increased their share of air cargo traffic, particularly in Southeast Asia. However, even with fast growth in the passenger markets and the recent surge in low-cost long-haul development, LCCs are still estimated to carry less than 2 percent of air cargo traffic.

Freighter fleet outlook

The air cargo traffic is expected to double in the next 20 years and the world freighter fleet will grow by more than 70 percent, from the current 1,870 to 3,260 airplanes. Growing demand for regional express services in fast-developing economies will boost the standard-body share of the freighter fleet from 37 percent today to 39 percent. Like the current fleet, the 1,170 standard-body freighter deliveries forecast in the next two decades will be converted passenger airplanes.

In the next 20 years, 2,650 freighters are forecast to be delivered, with approximately half replacing retiring airplanes and the reminder expanding the fleet to meet projected growth. More than 63 percent of deliveries will be freighter conversions, of which nearly 70 percent will be standard-body passenger airplanes. A projected 980 new production freighters, valued at $280 billion, will be delivered, of which more than 50 percent will be in the large-freighter category, such as the 747 Freighter and 777 Freighter. The competition between Airbus and Boeing has been characterized as a duopoly in the large jets, however, all orders for the A380 freighter variant have been canceled.