The air freight market has continued to be a major bright spot in the commercial aviation market. Fuelled by the growth of e-commerce (boosted by the necessity for online shopping during lockdowns), supply chain disruptions, and the decline in passenger flights, the demand for air cargo has risen in line with the pandemic period. The shortage of belly cargo capacity in passenger aircraft sent freight rates soaring and led to the creation of the so-called preighter aircraft as airlines tried to recoup any revenue from transporting cargo, including PPE and vaccines around the world. 

The increased demand for cargo aircraft also delayed retirements of some aircraft models and encouraged lessors to convert passenger aircraft into freighters. Later in the pandemic period, supply chain delays only added to the demand for air freight. 

Cargo market analysis

Data from the International Air Transport Association (IATA) Air Cargo Market Analysis shows that after a strong 2017, early 2018 exhibited signs of growth softening. Later data showed that the market went from slowed growth to a continuous decline, as Cargo Tonne Kilometres (CTK) measures dropped nearly every month in the second half of 2018 and for all of 2019.

While CTKs plummeted at the onset of the pandemic in March and April 2020, the cargo sector had seen a robust resurgence each month since. Monthly 2021 CTK levels were higher than those for 2019. Air cargo revenue has been crucial for all airlines with total revenues from cargo increasing to 35.0% in 2020 and 37.0% in 2021, according to IATA’s Economic Outlook. 

The latest monthly figures from IATA show that global demand, measured in CTKs , rose 3.7% in November 2021 compared to 2019 (4.2% for international operations). This was significantly lower than the 8.2% growth seen in October 2021 (9.2% for international operations) and in previous months.

Capacity was 7.6% below November 2019 (-7.9% for international operations). This was relatively unchanged from October. Capacity remains constrained with bottlenecks at key hubs.

Global supply chains

Despite the softening in demand, IATA maintains that economic conditions continue to support air cargo growth, even though numbers are currently impacted by supply chain disruptions.

“Air cargo growth was halved in November compared to October because of supply chain disruptions. All economic indicators pointed towards continued strong demand, but the pressures of labour shortages and constraints across the logistics system unexpectedly resulted in lost growth opportunities.

Manufacturers, for example, were unable to get vital goods to where they were needed, including PPE. Governments must act quickly to relieve pressure on global supply chains before it permanently dents the shape of the economic recovery from COVID-19,” said Willie Walsh, IATA’s Director General. 

Traditionally, the cargo market has been an extremely volatile space, easily impacted by economic shocks around the world. After two years of growth, the aviation world is desperate to know if this growth is now stable and growth will continue even as the passenger market recovers, opening up belly cargo space once more. 

Doubts

Some lessors are convinced that this is the case. A good example is Air Lease Corporation placing a small order for a freighter aircraft for the very first time. “Typically the freight marketplace has fluctuated a lot more than the passenger market,” says ALC’s John Plueger.

“The advent of e-commerce has been a great stabiliser, which is what influenced our decision to enter the freight marketplace. E-commerce is a growth engine that is here to stay, but it’s also provided tremendous stabilisation in that marketplace, which wasn’t there before.” 

Air cargo growth was halved in November compared to October because of supply chain disruptions. All economic indicators pointed towards continued strong demand, but the pressures of labour shortages and constraints across the logistics system unexpectedly resulted in lost growth opportunities.

Willie Walsh
IATA

Plueger expects all of the widebodies that have been grounded as capacity demand remains low – especially for international routes – to be reintegrated back into service within the next two to four years, which will provide additional freight capacity. But he still believes there is sufficient demand to warrant a separate investment in new dedicated cargo aircraft.

Airbus A350f

“New aircraft is at the centre of our business model, which is why we went for the A350 freighter but that’s not to say we wouldn’t do some conversions. We may, but our widebodies are not that old since we have a very young fleet. So we’ll see how the market develops. We have a lot of confidence in the cargo market going forward.” 

For ALC, the decision to enter the new freighter market was made easier since the A350F is currently the only new freighter in current production. “Although it may change if Boeing decides to go ahead with a 777X freighter, the A350F is currently the only new airplane that will meet the upcoming noise and environmental standards in 2027,” explains Plueger. “The A350F checks those boxes but it also has a great payload range and some unique attributes including placing the cargo loading door behind instead of forward of the wing, which makes good sense.” 

The A350F is lighter than competitors thanks to its composite airframe, and is designed to carry 109 tonnes of payload and a maximum range of 8,700km. 

“We think that’s a good range profile,” adds Plueger. “It will be lighter than the 777 and the anticipated 777X freighter but in many ways we see that positively. Our order is only for seven units, so it’s a modest exploration that gives us the chance to test our theory that this aircraft will have a great reception.” 

Chart 16: Air cargo demand Jan 2020 - Nov 2021 (% change against 2019 levels)
Chart 17: Cargo load factor Jan 2020 - Nov 2021 (% change against 2019 levels)
Chart 18: Cargo capacity Jan 2020 - Nov 2021 (% change against 2019 levels)

Plueger expects the main customers for this aircraft to be the larger airlines that have established cargo divisions, which he believes have the “most promise to develop, and take advantage of, the freighter marketplace over the next 10 years”. 

Deliveries of the A350F are scheduled for 2026, which gives ALC plenty of time to market the aircraft and cultivate the marketplace. 

Boeing’s Darren Hulst also believes that the growth of air cargo is sustainable but argues that yields are likely to be lower as supply chain issues are resolved. “The one thing that the industry has discovered is that people value the reliability and speed of air cargo,” he says.

“The global economy has fast forwarded three to four years in the shift from normal retail to e-commerce. That movement has accelerated but the demand is sustainable.” 

Building cargo into business operations

Hulst advises those airlines that have added a freight business to their passenger operations during the crisis, to implement a clear plan to embed cargo as a strategic part of their business going forward.

Moving from a preighter operation to a more permanent cargo operation will not be easy due to the long lead times in acquiring the right aircraft. Cargo conversion slots are reported to be booked up for years ahead, exacerbated by the demise of some widebody aircraft, while there is also a significant backlog for OEM orders. 

“There’s no instant gratification,” he says. “There are long lead times for dedicated freighters even though this has been a record year for Boeing in terms of the sale and production of freighters and freighter conversions. And this is a pretty complex equation.

Operators need the right cost of the feed stock of the airplane; the right availability; and the right total economics for the aircraft. We have seen a lot of interest in the near term for conversion but the challenge over longer term is for operators to develop the right network, and the right operation to actually leverage that capability.” 

“It also needs to be sustainable over a long period of time,” he adds. “The e-commerce market has proven itself to be durable, which is where the 737 BCF and the 767 conversions can really play a key role in those short and mediumhaul markets where operators can build logistics networks and then scale it up to the size of these jets.

But you can’t just start a freighter operation. You have to know how to scale the network to actually leverage those air freight capabilities.” 

Passenger vs freighter

Atlas Air Group Worldwide is the world’s largest outsourcing provider of freighter aircraft, which also owns Titan Aviation Leasing, a dedicated freighter leasing company with 35 aircraft.

Michael Steen is president and Chief Executive Officer of Titan Aviation, and has had a long career in the air cargo market. Steen has seen a step change in growth trajectory of the company since the onset of the pandemic. 

“In normal times, up until 2019, about 50% of global air freight transportation was shipped in passenger aircraft and the rest in freighter aircraft and it has been like that for decades, only shifting by a few percentage points up or down,” shares Steen.

“When the pandemic hit us in the early part of 2020 that dynamic changed completely. The industry grounded the entire Intercontinental widebody belly capacity except for the freighters, which took out a large chunk of the global capacity.” 

Steen expects that belly space to come back but it will take time since the international passenger demand has yet to recover substantially.

E-commerce

The capacity constraints have been exacerbated by the supply chain issues such as low inventories, lack of raw material for production at the same time as demand has increased significantly, with e-commerce continuing to drive demand.

Those factors have led e-commerce platforms to invest in their own capacity – Amazon and Alibaba are good examples and have expanded their respective dedicated freighter fleets. 

Demand moderating from peak

From an air freight demand perspective, Steen expects to see good demand continue over the next several years, but he does expect some moderating from the peak levels seen at the height of the pandemic.

Titan, which offers dry leasing services for commercial clients, has added new customers over the past few years and Steen notes that one of the trends has been non-airline demand for freighter aircraft.

“The fundamentals of leasing whether you’re leasing a freighter or a passenger aircraft remain the same but when we’re looking at it from a freighter perspective, it is very important to understand the underlying network requirement and customer demand in order to determine the appropriate aircraft type,” he says. 

You can really question if the window of opportunity has not already closed for making sense of an investment into the cargo market since there are concerns that too many aircraft are being converted and that over the long term, we may be looking at an oversupply of freight aircraft.

Patrick den Elzen
Arena Aviation Capital

Titan already had a strong capital position but the renewed confidence in the air freight market has assisted the perception of the business with bank counterparties. “Historically, banks would have looked at the freighter market with a relatively narrow lens,” notes Eamonn Forbes, chief commercial officer of Titan. “We have some excellent banking relationships, but there is no doubt that the phone is ringing a lot more than it used to be.” 

“There’s obviously a great excitement around freight now, which gives us some really interesting opportunities to invest further,” adds Steen. 

Competition is increasing in the freighter space as many leasing companies invest in cargo conversion programmes. 

CDB Aviation

In November 2020, CDB Aviation, a wholly owned Irish subsidiary of China Development Bank Financial Leasing (CDB Leasing), formed a new partnership with EFW to conduct the Passenger-to-Freighter (P2F) conversion of two Airbus A330-300 aircraft in 2021, marking the lessors first entry into freighter conversion. The two A330 P2Fs are part of CDB Aviation’s existing fleet of 228 aircraft. 

“We are seeing an increasing interest from our customers for mediumsized freighters, as they look to take advantage of record-high freighter utilisation, rapidly growing e-commerce demand, and higher cargo yields,” said CDB Aviation chief executive officer Patrick Hannigan.

“As a major lessor of passenger A330s, it is a natural evolution of our portfolio to be able to offer our customers the A330-300 P2F. Our belief is that the A330-300 P2F is the exact type of medium widebody aircraft that airlines and cargo operators require to meet cargo demand near-term and into the future.” 

In May 2021, CDB Aviation, announced the long-term lease of the two A330- 300P2F aircraft to Mexico-based MasAir Cargo Airline (MasAir), which are due to be delivered during the first half of 2022. 

Dr. Andreas Sperl, Chief Executive Officer of EFW, commented. “The A330 P2F is considered as very popular especially for the express cargo market, as it is a wide body program with great capacity offering more cargo volume and lower cost-per-ton than other available freighter aircraft types with a similar range.” 

Avolon & IAI

In August 2021, Avolon announced a significant commitment to the global air freighter market to capitalise on the growth in e-commerce. The lessor signed an agreement with Israel Aerospace Industries (IAI), the independent freighter conversion company, to be the launch customer for IAI’s Airbus A330- 300 freighter conversion programme.

The agreement will see Avolon partner with IAI on its STC development and take 30 A330-300 conversion slots with IAI between 2025 and 2028. 

Dómhnal Slattery, Avolon CEO, commented: “We identified IAI as a long-time global leader in the aircraft conversion business and the right partner for Avolon to capitalise on the unparalleled growth in e-commerce.

The global air freight market is worth over US$150 billion annually today and the sector is transforming, with air cargo traffic expected to double over the next 20 years. This agreement signals Avolon’s intention to be a leading player in that expansion. 

Competition in air freight

We believe the IAI A330-300 P2F will be the wide-body freighter of choice this decade and beyond, replacing retiring aircraft and providing the volume capacity required to meet market needs. In partnering with IAI we have identified the most efficient operator in the freight conversion market, guaranteeing more cargo pallet capacity and crucially, faster turnaround times, in a market where every inch and second count.” 

The increase in competition in the air freight market may lead to an oversupply of freighter aircraft, warns Arena Aviation Capital’s den Elzen: “Many people jumped on the cargo conversion bandwagon because they saw that as the only way to avoid having to crystallise very significant losses on their investment, and book values,” he says.

“You can really question whether the window of opportunity has not already closed for making sense of an investment into the cargo market since there are concerns that too many aircraft are being converted and that over the long term, we may be looking at an oversupply of freight aircraft. Short term, markets are seeing lease rentals down by about 20% already relative to what they were a year ago. We see that trend continuing for a little bit longer.”

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