Fresh views on the Air Cargo market

In light of 2019’s year closure data for global air freight markets, it is evident that it has been one of the worst years for the sub-sector since the 2009. Despite YoY increase in the sector’s capacity (AFTK[1]) of 2.1%, demand (FTK[2]) has fallen by 3.3%. This unbalance between offering and demand has certainly been sharpened by the weak growth of global trade during the year and trade tensions between key players, among several other factors.

An increasing efficiency of sea transportation and the lower fares it entails, combined with enhanced supply chain, customs and trading mechanisms around the world, are driving the diminishment of air cargo. Even though air transport retains captive customer at the top-end of high-specific value products, certain segments (such as perishables), are now finding their way into other transport means.

When segmenting the market by region, comparing 2019 with 2018, all market segments signal the same trend: air lifting capacity increased while volumes decreased, with exception of Africa.

Air cargo 01
2019 demand and capacity trends in comparison to 2018 data

According to IATA, lower GDP growth in manufacturing-intensive economies is a major factor behind the trends in the Europe and Asia-Pacific regions, whereas in the Middle East, airline restructuring and global supply chains disruptions were the chief drivers of the weaker freight outcome.

Real growth is only expected to return in 2021, keeping 2020 as a year of rationalization, with expected increase in freight volumes by 2% and cargo yields decline of 3%, as opposed to the 5% decline of 2019. Accordingly, general market expectations are soft, even though interesting opportunities seem to arise with e-commerce. These prospects, however, will foreseeably be harmed by the COVID-19 outbreak; yet it is too early to know to which extent.

The upcoming evolution of the market’s capacity deserves special attention as well. On one hand, the introduction of widebody airplanes with larger belly capacity (e.g., B787 and A350 models) is shifting cargo transportation models in several airlines (it is worth remembering that more than 45% of air cargo traffic is belly cargo). On the other, it is unclear how the reintroduction of the B737 MAX fleet and the arrival of the delayed deliveries will affect the network.

ALG prospects for the Middle East

The Middle East’s privileged geographical position between three major markets is the reason why its business model is based on its condition as a hub, not only for air transport but for multimodal supply chains as well (e.g. goods arrive on ships from South Asia to be subsequently transferred by air to other markets). In fact, two-thirds of the air cargo traffic handled in the Middle East are in transit to other regions.

This privileged location provides the region with two important flows that it can tap into to use as a growth lever: the Europe-Asia Pacific link (which amounts to more than a fifth of the global international scheduled FTKs) and the African inflows. The latter, although modest, are particularly significant because Africa is currently the best performing market in terms of demand growth, due to increased foreign investment in the region and solid growth of the Asian-African trade channels.

Air cargo 02
Traffic by route area (percentage of international scheduled FTKs)

GCC carriers were planning network re-structuring processes in 2020, well before the COVID-19 outbreak. This strategy proved successful during 2019, when the GCC was able to keep its market share of the global freight traffic (13%) despite the decrease of demand; and will be a necessity in the coming months to adjust to the current market outlook.

Air cargo 03
Scheduled freighter route networks in the GCC

The freighter divisions of GCC’s network carriers consistently use GCC airports as hubs to connect the two major originators/consumer markets surrounding them: North-western Europe, including the hinterlands of Amsterdam, Brussels, Cologne-Bonn, Frankfurt, Liège, Luxembourg and Maastricht-Aachen, inbound; and the Pearl River Delta region, including the hinterlands of Guangzhou, Hong Kong, Macau and Shenzhen, outbound.

When looking at traffic patterns, East-African airports are being mainly connected via outbound routes: services that carry out a stop-over in Africa to pick-up cargo, before reaching final destination GCC. This pattern indicates the potential of African markets to increase its indirect connectivity with Europe and Far East via GCC hubs.

Regional cargo routes (intra-Middle East) present a more balanced share of inbound and outbound connections with the hubs, maintaining the trade balance while facing fierce competition from maritime feeder routes.

Finally, it is worth noting that both DXB and BAH hold a significant amount of inbound traffic from the United States, as local bases of global integrated forwarders with centralized operations, namely, DHL, FedEx Express and UPS Airlines.

Our approach to air cargo market development

The air cargo market is globally recognized as a strong contributor to airport’s top-line. Despite a modest contribution of freight and belly cargo to Aero revenues (limited to landing fees and, in some cases, cargo handling fees), the potential lies on real estate developments associated to air cargo terminals, cargo villages, freight forwarding clusters and derived logistics services, thus, non-aeronautical revenue.

Airport operators are becoming aware of the complexity of mapping the air cargo flows in the region, for them to build informed commercial strategies to develop this segment. At the same time, there is a market shortfall for high-end logistic areas that can serve the growing demand for e-commerce, pharma and other high-specific-value goods.

ALG has developed a robust methodology to assess the market potential of air cargo and stablish the value propositions of airports, airlines and freight forwarders that want to develop their logistics infrastructure. Our approach is built upon a deep understanding the industrial value chains and consumption patterns within the catchment areas of each airport. This approach grants our consultants the insights to map the cargo originators and consumers in the region, understanding from where/to where each of them are importing/exporting. At the same time, it enables the identification of products with enough critical mass to trigger product consolidations at global scale, which can eventually be converted into opportunities to establish production/distribution centres near airport facilities.

Complementing the previous, ALG holds a deep understanding of the logistics infrastructure offering in the GCC region, which facilitate the identification of market gaps and collaborative definition of value proposition for new logistics infrastructure for our clients.

Finally, we always keep in mind that air cargo is closely related to other transport modes, either competing or synergizing with them. Thus, the multi-modality dimension must be considered in all assessments around air cargo, establishing the competitive advantage of air cargo per each type of commodity, the ground infrastructure to be developed to support air-to-ground connectivity, and the land & sea transport economics that could jeopardize the market position of air transport.

Based on all the previous, ALG would propose specific business opportunities for our clients to enter and/or to reinforce their position in the air cargo market, planning its market entry strategy and supporting them throughout commercial development and implementation stages. This end-to-end approach has grant us a privileged position in consulting sphere, where we continue building long-term partnerships with our clients.

To know more about ALG and our services in the air cargo market, please do not hesitate to contact the authors of this Newsletter.

[1] AFTK = available freight tonne kilometres. [2] FTK = freight tonne kilometres

About the authors
Pablo Ruiz del Real holds a MSc in Civil Engineering and is a Partner at ALG and Head of Middle East operations.
Xavier Esparrich holds a MSc in Aeronautical Engineering and is a Director at ALG.
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