Freight Outlook and the Airfreight Industry

The COVID-19 pandemic has led to enormous changes in the global air cargo industry, with significantly higher revenues and returns than ever before.  The future outlook for air cargo remains strong. 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.

Air Cargo Demand Continues to Grow Above Pre-Pandemic Levels

Air cargo demand has been much more resilient than passenger demand since the onset of COVID-19. Cargo volumes fell more than 25% in the early days of the pandemic — largely due to a sudden shortage of belly capacity on passenger aircraft rather than underlying demand issues — then rebounded quickly.  As of September 2021, global cargo tonne-kilometers (CTKs) were about 9% higher than in September 2019.  In contrast, global passenger traffic fell as much as 94% at the beginning of the pandemic and was still 53% below pre-pandemic levels in September 2021.

As a result, air cargo’s importance to the global airline industry has increased dramatically.  Cargo revenues are expected to account for a third of global airline industry revenues in 2021, compared to about 10%-15% pre-pandemic.

A number of factors have driven air cargo’s growth during the pandemic, including supply chain disruptions in surface shipping causing a temporary shift of cargo volumes from surface to air transport.  However, a more long-lasting driver of air cargo demand growth has been the exceptional increase in e-commerce shipments.  Even before the pandemic, e-commerce sales were growing at more than 20% per year worldwide, but COVID-19 has greatly stimulated online buying:  in 2020, global e-commerce revenue increased by 26%.  Online buying is expected to grow robustly well into the future, with e-commerce projected to capture a 25% share of global retail sales by 2025, up from 14% in 2019.

Air Cargo Capacity Remains Well Below Pre-Pandemic Levels

Prior to the pandemic, nearly half of global air cargo was carried in passenger aircraft bellies.  However, as passenger demand plummeted during the pandemic, airlines responded quickly by parking their aircraft.  Global passenger capacity, in terms of available seat-kilometers (ASKs), fell by nearly 90% in the spring of 2020.  While passenger capacity has been added back since the early days of the pandemic, ASKs were still 44% below 2019 levels as of September 2021.   

The reduction in passenger capacity 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 cargo capacity, in terms of available cargo tonne-kilometers (ACTKs), was still 9% below 2019 levels as of September 2021.

With burgeoning demand and a continuing capacity shortage, cargo load factors and yields have skyrocketed and remain elevated.  Global cargo load factors increased from 46% in September 2019 to 55% as of September 2021.   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.

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.

Demand for Freighters is Booming

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.

Not surprisingly, there has been a boom in conversions of passenger aircraft to 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.  There are now three separate announced programs to convert 777-300ERs into freighters, with multiple conversion lines being established to meet demand.

In addition, numerous airlines have temporarily converted their underutilized passenger aircraft into cargo-carrying “preighters”, in some cases removing some or all of their seats in order to accommodate more cargo on the main deck.  However, these aircraft 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 volumetric and weight payload restrictions, and no ability to accept full-size pallets on the main deck.   Preighters also cannot accommodate certain types of high-value cargo, such as hazardous items.

Industry Outlook

Boeing projects that global passenger demand will not return to 2019 levels until 2024.   While domestic travel has recovered considerably, long-haul international passenger travel continues to lag, constrained by the slow pace of reopening borders, increased business sensitivity to controllable travel expenses and the widespread use of online videoconferencing as a substitute for business travel during the pandemic.

As long as passenger traffic remains below pre-pandemic levels and passenger aircraft remain underutilized, there will be a continued capacity squeeze in air cargo.  The recent popularity of new long-haul-capable narrowbodies may have an additional impact:  aircraft types such as the A321LR, A321XLR and 737 MAX can operate efficiently on long-haul routes between the eastern US and Europe, but offer only a fraction of the belly cargo capacity of widebodies that have dominated such markets to date.

The bottlenecks in global supply chains and soaring container shipping rates look likely to continue well into the future, with some cargo volumes continuing to migrate from surface shipping to air, putting further pressure on air cargo capacity.

We project that cargo load factors and yields will remain elevated as a consequence, and demand for freighters will continue to be strong for years to come.

Air cargo 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.  Amazon Air’s growth shows no signs of stopping, with its own-controlled freighter fleet increasing to more than 80 aircraft since its launch in 2015, and other global e-retailers are expected to build own-controlled capacity as well.  JD.com has announced plans to operate at least 100 freighters by 2030.   Smaller e-retailers are expected to continue to increase demand for shipments on passenger and all-cargo airlines as well as on integrated express carriers.

Other developments bode well for future freighter demand, with traditional participants in the air cargo industry modifying their business models to include freighter operations.  A number of passenger airlines, including WestJet, Air Canada, LATAM, S7, IndiGo and AirAsia, are adding freighters to their fleets to take advantage of growing cargo demand, reversing a decades-long trend of passenger airlines divesting their freighters.  Several large global freight forwarders, including DHL Global Forwarding, DSV, CEVA, Geodis and Flexport, have launched own-controlled air freighter operations.  Container shipping company CMA CGM, the parent of forwarder CEVA Logistics, has ordered 777 freighters and plans to secure its own air operator’s certificate in 2022.  The container shipping giant AP Moeller-Maersk is expanding its footprint in air logistics with the acquisition of air freight forwarder Senator International and an order for 777 freighters.

While the overall outlook for air cargo demand is healthy, there are some longer-term threats, including the potential for some lower value, less time-sensitive air cargo to migrate eventually to surface modes.  One example is the Asia-Europe trade lane, where China’s Belt and Road Initiative is stimulating investment in rail, road and maritime infrastructure, increasing the long-term potential for modal shift from air to surface.

Conclusion

The air cargo industry developments described here are durable and will continue as long as there is strong consumer demand for e-commerce. Passenger demand will return eventually once the pandemic ends, bringing with it an increase in belly capacity.  Nonetheless, cargo’s share of total airline revenue likely will remain more important than before the pandemic.  We expect air cargo to play a more significant role in passenger airline strategic decisions going forward and it will attract additional investment across all elements of the service chain, in the air and on the ground.

ABOUT THE AUTHOR

Mark Diamond is a vice president with Strategic Aviation Solutions International (SASI), an air transport advisory 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. For more information check out the website: www.sasiworld.com / mark.diamond@sasiworld.com

Mark Diamond