Latest numbers show solid performances across the air cargo sector, but economic headwinds are slowing down demand. Has the cargo surge peaked?

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Rush transcript

Karen Walker:

Hello everyone. And thank you for joining us for Window Seat, our Aviation Week, air transport podcast. I'm air transport world and group air transport editor in chief, Karen Walker. Welcome on board. This week I'm joined by my colleagues, Aaron Karp, ATW senior editor, and Helen Massy-Beresford, Aviation Week, European air transport editor. Thank you both so much for joining me. Aaron who's based in DC and Helen based in Paris, both track the air cargo market among their beats. And that's our topic today, The Status of the World's Air Cargo Market. As the pandemic brought passenger flying to almost a standstill, many airlines understandably pivoted to cargo operations as a crucial source of revenue and way to keep their planes in the air. In 2021, air cargo revenue reached a record $204 billion, more than double that of 2019. And it accounted for some 40% of total airline revenue. A strong growing global eCommerce market, as well as the urgent demand for medical equipment and vaccines boosted this sector, leading to a surge in passenger to freighter aircraft conversions and new freighter orders.

            So what we'll talk about today is how that market is holding up as passenger demand returns, and also the key issues that are now shaping this particular sector of the industry. So Helen, I'd like to start with you please. This morning, IATA, the International Air Transport Association, released in its most recent analysis the latest stats and outlook for the air cargo market. And in fact, all three of us were on that briefing, I know you were tracking that closely. Willie Walsh, the IATA director general led that briefing. What were some of the key points that struck you from that?

Helen Massy-Beresford:

Thanks, Karen. Hi everyone. Yes, we just heard from Willie Walsh the first time for a few months because of the kind of summer break. And so it was interesting to get an update and the item is presenting the figures for July. Willie Walsh described it as a solid performance tracking near 2019 levels. So a step back from the extraordinary levels of the pandemic years, if we can call them that. So I think one of the comments he made was the air cargo was holding its own, but of course there's plenty of factors that can affect that now. The demand was 3.5% below 2019 in July and 9.7% below in 2021 and capacity work was similar, capacity was 3.6% above July 2021 and 7.8% below 2019. Within that there was huge regional variation that was quite interesting. And I'm sure we'll talk about that a bit more. But Asia-Pacific volumes were down compared to 2021, perhaps explained by things like ongoing COVID restrictions.

            Europe was the worst performer for the third month in a row, which IATA attributed to the war in Ukraine. And conversely, Latin America seemed to be done quite well with sort of investment in new aircraft and services, so that was up 9%. So quite a varied performance within that tracking 2019 overall picture.

Karen Walker:

So yeah, thank you. That's a really nice summary of some of the key numbers that came out from that briefing. The interesting thing there is, yes, those figures are still good. And as you said, Willie Walsh called it a solid performance and I thought he was perhaps talking it up a little bit maybe too loosely, and just saying it's still a really good side of the industry. And of course, it is. But seeing those numbers and some of them were significantly down from 2021. One of the interesting points I think is that for the longest time of course, IATA has been making all those comparisons with 2019, i.e before the pandemic. So again, if you look back through since 2019, yes, looking good. But even though when you compare with '21 and 2020, the numbers are coming down and those were sort of like surge years. Aaron, you again follow this industry, I guess my big question here is, has that peak surged for the cargo industry?

Aaron Karp:

I think it has. I think one of the things going on here is there's a modal shift. So during the pandemic, the ocean freight business became very unreliable. The ports were shut down. The prices were very high. And so it became very unreliable and very expensive to move things by boat. And so as a result, a lot of the things that had traditionally been moved by boats started moving by air. And that created this surge of demand for air cargo. It sent prices going up for air cargo operators, but I think that has changed and we're seeing ports open up. We're seeing the ocean shipping companies become more reliable again. And it is less expensive to move goods by ocean instead of air. And if you can have the reliability, you can say, well, I don't mind it taking three weeks and paying a lot less than getting it there in a day or two, when I didn't really need it there in a day or two but I flew it anyway because I couldn't get it there by ocean.

            And so I think that's a structural change that's not going away. And the air cargo industry will have to adjust and take on its more traditional share of the cargo moving, and understand that a lot of that ocean cargo moving... A good example was the Christmas season last year, where all these retailers had to get product on their shelves. Someone in the cargo industry described it to me as a reputational risk for the retailers. And so they would spend the money to get the goods there on their shelves by air. Even though it may cost them so much money, they may might not make money on the sales because they wanted to maintain their reputations for the following holiday season. I think this year it will be safe enough for most of those retailers to move a lot of that cargo by boat. And I think that's an underlying factor against describing a lot of these numbers.

Karen Walker:

Good points. And in fact, historically I think we've often seen this sort of up down curve where depending on the background and economic circumstances, the air side of freight is on and up versus shipping and then it reverses and the shipping takes over as you say. So it may be that a part of that is happening. But what about some of the other factors just in general, fears of recession, and the war in Ukraine, oil prices? The high price of jet fuel of course is affecting cargo operators just as much as the passenger side. In some cases it maybe more so because they tend to off often have older, less efficient aircraft. Helen, was there anything mentioned about that in terms of sort of the outlook?

Helen Massy-Beresford:

Yeah. Willie Walsh and Marie Owens Thomsen as chief economist, spoke a lot about all these factors that are affecting this global industry. Inevitably, jet fuel was a big focus. IATA was talking about passenger statistics and cargo but I think as you said, jet fuel prices affect cargo operators just as much as passenger operators. And jet fuels upped 74% versus a year ago. And Willie Walsh talked a few times about the crack spread being the most elevated level he's ever seen. That's the difference between the classic Brent crude price and the jet fuel price. And he put that down to a lack of supply, so refineries turning to other products when jet fuel wasn't needed and that not coming back fast enough. So that seems to be a real worry for operators, I think. They spoke about the economic outlook. I was a little bit surprised at how optimistic the chief economist was about sort of global economic picture.

            She said that, of course there are concerns about inflation, but that's offset by the low unemployment rate. And IATA has dubbed this the job rich economic slowdown, which they say, okay, so inflation is going to harm spending power but that's offset by the fact that people are in work, so that's good news. Looking further ahead, one of the reasons that people have been so optimistic about cargo, sort of even beyond the immediate need to get things places during the pandemic has been eCommerce. And that doesn't seem to be changing. I saw a report a couple of months ago from Morgan Stanley, which is talking about the eCommerce market growing to $5.4 trillion in 2026. So it seems as if the online shopping boom during the pandemic, wasn't just a one off. It seems as if that is going to continue, which is good news for express operators. We'll see whether the current economic woes will have any impact on this, but for now that's one of the sort of growth drivers.

Karen Walker:

Absolutely. And Helen, you also mentioned there about the regional differences. There's a couple of areas that I'd like to just sort of highlight here. The biggest decrease in cargo volumes from July this year versus July 2021 was among European carriers. That was a 17% decrease and it was also the worst performance of all regions for the third month in a row. Would you say that European performance is tied to Ukraine war, the labor issues, et cetera, and concerns about recession?

Helen Massy-Beresford:

Yeah, that's certainly what I attributed it to and it makes a lot of sense, because the situation in Ukraine has simply removed some important operators from the markets, like AirBridgeCargo. So logically that takes away some of the capacity and some of the volumes. And of course, we've all heard a lot about the sort of labor problems in Europe over the summer. And if problems are affecting passengers at airports, then I think it's safe to say that there will be an impact on cargo operations as well. So yes, I think that's all linked.

Karen Walker:

And Aaron, the one region that had an increase year over year was among Latin American carriers who reported 9.2% increase in cargo volumes, so that was by far the strongest performance because it was the only one that actually did better than last year. You also track the Latin American market quite closely. Again, do you see that tied into sort of a different set of economics and optimism in that region?

Aaron Karp:

I think part of it is there's a lot more free flow between North and South America now. And I think that Latin America is pretty much opened up now. And you see it on the passenger side too, that the traffic between North and South America really cratered during the pandemic. And now you have a lot of flights moving back in both directions, a lot of belly capacity for cargo. Air Canada for example, is operating a dedicated 767 freighter fleet now. And they've got flights going down to Mexico and Peru and are committed to serving Latin America. So I think you're just seeing the overall Americas open up. And North America and South America perhaps opening up to each other faster than many of the other regions around the world.

Karen Walker:

And as the world reopens and restrictions are lifted, of course, what we're seeing is every time the restrictions are lifted there's a surge of demand for passenger flights. So those airlines that either didn't do cargo or didn't do it in much of a way, if they had some belly space they might use that but not in a big way, that did then pivot quite big to cargo during the pandemic. Now that the passenger service is coming back, what are you seeing in terms of are they going right back to where they were, back to being predominantly passenger airlines? Or are any of them choosing to hedge their bets if you like and stay in that cargo market? Helen, what are you seeing?

Helen Massy-Beresford:

Well, I think it's interesting to see that there's been quite a lot of momentum and interest in freighter orders in the last few months. Boeing and Airbus have each launched a really exciting new product, the A350 freighter and the 777XF over the past year, I think. And orders seem to be coming in sick and fast for those, Qatar has ordered up to 50 of the Boeing 777XF and Airbus has got plenty of orders, Etihad in Singapore I think, for the A350 freighter. And so it seems like there's certainly ongoing interest in freighter orders and in the cargo business. Speaking to a lot of executives in the cargo world, I think it seems as if people have left on this opportunity of cargo coming into the spotlight and they have no intention of letting it fade back into the background again. And I think that's one thing that the pandemic has helped with, is that people have realized the importance of this side of the business and perhaps decided to keep giving it this extra waiting going forward. So we'll see.

Karen Walker:

And Aaron, I think Air Canada's probably a good example of that. They famously or infamously, the Canadian Airlines got almost no government financial support during the pandemic. And their borders stayed closed not just externally but within Canada, so it made it incredibly difficult for them. Air Canada really went big into cargo and I believe are going to continue to put a focus on that business. Is that right?

Aaron Karp:

Yes. So like many other airlines, they used cargo as a bit of a lifeline during the pandemic and they made a lot of their passenger aircraft into temporary freighters by stripping out seats, and just using the bellies and basically turning many of their passenger aircraft into freighters. Like most other airlines, the passenger planes are back in passenger service. But Air Canada at the beginning of the pandemic, just before the pandemic had started, had announced they were going to convert some of their 767-300s into permanent freighters. When the pandemic started they sped that up. And so by the end of this year they'll have five, 767-300ERs freighters, and by the end of next year they'll have eight. And so as I said before, they're flying to Latin America, Mexico, Peru, Ecuador. And in May they started flying transatlantic with the 767 freighters to Cologne, Frankfurt, Istanbul and Madrid.

            And they see this as a very stable growing business. Jason Barry, who's their cargo head said to me, "This is not an ad hoc business. This is not a charter business. This is a permanent part of our business and we see it as a steady growth business." And I think one of the appeals of cargo for passenger airlines is that it provides a steady stream of income that's less volatile than the passenger side, where you can see big shifts in demand even from one month to the other and cargo's more stable. And so I think that's what attracted Air Canada. There's an airline in the US, Sun Country, that is operating 12, 737-800 freighters for Amazon. And when I talked to Jude Bricker, their CEO, one of the things he said that this is a constant, it's very predictable in a way that the passenger business is just not.

            And so they're dedicating about a quarter of their flying to freighters for Amazon. And he said it helped them immensely during the pandemic. And he said, you can just see this very steady line that doesn't go up too much, but doesn't go down too much and we know that revenue is there. So those are two airlines in North America that have decided to have dedicated freighter businesses. I don't expect that the other majors in North America will go that route with dedicated freighters, but they're very committed to their belly cargo businesses. And I think even more so now than what they experienced in the pandemic. So you are seeing some more focus on cargo by passenger airlines.

Karen Walker:

Yeah, sort of anything that gives some stability and diversity to the revenue stream is obviously important in the airline industry. And so I think it's probably a lesson learned for some airlines to sort keep that revenue going. The other thing I'd just like to touch on that's got into the news the last few days, an interesting announcement from the country of Israel saying that... I think it's from March 2023, that they are going to ban all four engine aircraft from essentially operating in or out of Israel. And so as far as we understand at this stage is that it really only affects LO and it only really affects LO's cargo operations because that's what they use 747 for. But that's an interesting announcement. Again, Willie Walsh made a reference to that in the briefing and called it surprising. And he said he didn't think other countries would follow, but he did agree that it would be very disruptive to Israel's cargo supply. But I'm just wondering about that. The reason Israel is doing it they say is for environmental concerns about the emissions and noise of four engine aircraft.

            And so it just sparked a little bit of interest to me as to whether that might start to open up a sort of flight shaming movement, like we saw out of Sweden which was really targeting the people who flew, the passengers. And didn't really get into the cargo side. I'm just curious, Helen, what was your thought on?

Helen Massy-Beresford:

Yeah, it's interesting. I wonder if as you say, it could be something that is applied to the cargo sector and hasn't been up until now. There's quite some momentum in terms of the sort of the media buzz about things like this at the moment in France. It's nothing to do with cargo, but there's a polemic about football team taking an internal flight. There was Amsterdam airport is facing the possibility of flight caps for noise and emission reasons I think from 2024, I'm not quite sure. So certainly, I suppose in some ways it's not surprising but like you said, it's interesting that this is being directed at the cargo sector. I guess the challenge for the cargo operators will be to show that, or to make it known that other forms of getting goods from one place to another also emit emissions and have an impact on the environment. So I guess maybe it will be time for them to sort of start that messaging.

Karen Walker:

Absolutely. Aaron, what's your thoughts on that?

Aaron Karp:

Yeah. I think one thing that's worth noting and Willie Walsh pointed this out today, that in both freighters and passenger aircraft, 747s and A380s are being retired. And we talked about the new freighter orders for A350s and 777s, which are smaller than the four engine aircraft, the 747s and the 380s. And so we're going to have smaller freighters and passenger aircraft with less belly space. And so I think whether for environmental reasons, the economics of operating the aircraft, we're moving away from the super large freighters. And I think long term that will have an impact on the cargo business and cargo airlines. And the global freight forwarding industry will have to figure out how that shift in capacity to smaller bellies and smaller freighters will affect the cargo business.

Karen Walker:

Interesting. Aaron, Helen, thank you so much for joining us today. This is a really fascinating aspect to the business and clearly continues to be of great importance. But there's nothing like realizing the urgent need for vaccines, et cetera, to get around the world. There's no other industry that compares with that, like the air cargo industry. So I think it's been an interesting sector that will continue to be interesting. So thank you for joining me today and thank you to our podcast producer, Guy Ferneyhough, and thank you to our listeners for joining us. Please tune into us next week on apple podcasts or wherever you listen. This is Karen Walker signing off from Window Seat.