Pax freighters deliver capacity ‘lifeline’ to secondary markets

Passenger freighters emerged as a band-aid fix to hemorrhaging capacity lost to flight cancellations and restrictions at the start of the pandemic. While early economic calculus made passenger freighter operations difficult to justify over the long term, they continue to play a significant role, particularly in secondary markets that have seen a decline in both all-cargo and bellyhold capacity. “For some regions, passenger freighters have really been a bit of a lifeline,” said Frederic Horst, managing director of Cargo Facts Consulting, in a Cargo Facts Industry Pulse webinar. As of mid-January, 200 airlines have operated at least one cargo-only flight using an aircraft configured for passenger transportation. At least sixty-three of those airlines have removed seats or reconfigured the aircraft to increase cargo capacity on the main deck, Horst estimated, based on Cargo Facts ’ Passenger-Freighter Database . The economics of passenger freighters are “very tricky,” said Horst while delivering a high-level overview of operating costs for some of the common passenger-freighter types. “In a nutshell, they only tend to really work when somebody else is footing the bill.” Some regions, however, have seen a significant decline in freighter flights over the past nine months. In many cases, freighters have gravitated toward higher-yield missions on trans-Pacific and trans-Atlantic trade lanes. “We do expect to see some more passenger-freighter operations taking place because passenger capacity just isn’t coming back in the way that we probably would have expected last year,” said Horst. In this Industry Pulse video, Horst offers a comprehensive analysis of the passenger freighter situation in today’s dynamic air cargo market. Charles Kauffman Hello everyone and welcome to Cargo Facts Industry Pulse Webinar. The Cargo Facts team is proud to deliver actionable insights and information through our premier aircraft symposiums presented regularly throughout the year. We don't want the conversation to end at the close of an event. Each monthly webinar is designed to give you keen insights into crucial industry trends and developments and to be a reference for you as you move your business forward. I'm Charles Kauffman, your host and senior editor of cargo facts. Is that my pleasure to welcome our guest speaker for today Frederick Horst, who is managing director of cargo packs consulting. As many of you know, Frederick is a longtime Air Cargo industry participant and is among its most creative thinkers on new business trends and opportunities. He's worked at Qantas Cargolux, DHL and AirBridgeCargo, among others. And Frederic will be revisiting the topic of passenger freighters, which is a topic that few would have expected the market to be able to justify in in early 2020 that has persisted in as we move into 2021. That's protocol. I'll hand it over to you. Frederic Horst Yeah, thanks. Yeah, it's definitely a topic that doesn't seem to go away in 2020 introduce a lot of freighter haters to the concept of a freighter in the form of passenger freight. So really what we've seen in the in the last year, has been about 200 Airlines worldwide operating passenger aircraft in cargo-only configuration and if you go on to Cargo Facts, you’ll find an interactive map as well, that shows you who's actually been doing it. I mean, first and first and foremost, some of the biggest carriers in there, has been doing the most got Emirates and Qatar Airways, we've had in North America, we've had United Airlines pretty active in in that field. And that's also reflected in their revenue results as well, they really seem to be increasing in, in Canada Revenue over overtime. And in Asia, we've seen most of the major carriers can engage in passenger freight type operations, like cafe and China, eastern China, southern China, Japanese carriers, as well, um, not everybody has gone as far as taking the seats out of out of their aircraft, but there's still about 63 or so airlines by our count that have actually taken the seats out of the aircraft and, and Ethiopian is really top that list, taking a seat out of anything from a from a Dash-8 to a 777-300 er to even 787 nines and a three a 357. What we're seeing at the moment is that there's still quite a level of passenger freight or activity. I mean, it did peak around May, June, last year when when rates were sky high, where capacity was particularly tight. And it dropped off after that pretty much in line with PPE traffic crop at the time. But actually started picking up again in the in the latter half of the year and before Christmas as well. So the moment we're in this situation where on most major trade lines China to Europe, we're looking at about 150-200 flights a week on passenger freight is China's North America, about 100-150. and Europe to move America around 100 to 150. Housing obviously dropped off in the new year, but we're actually seeing things pick up again as well. And rates are quite high levels. They're almost in December peak season rates were we're pretty much at the kind of levels that we were seeing in May in June last year. So that's provided some incentive to do that. Now the economics of passenger freight is a very, very tricky and in a nutshell, they only tend to really work when somebody else is footing the bill. And this is this is a slide that we actually put together an analysis that we put together way back middle of last year when fuel was about 70 cents a gallon was about a $1.40 a gallon now. rates were about six seven bucks a kilo they were rates that why but we're really looking at average market rights. And what we found at the time at fuel at 70 cents a gallon if someone's paying Your crew costs and you're treating your aircraft leasing costs is something you can actually make a decent profit on. Rates are at a pretty high level at the moment, but fuel isn't. So I still struggle to find, to figure out how the economics of passenger freight is actually passenger freight is actually with. That being said, I mean, for some regions, passenger freighters have really been a bit of lifeline. And what we saw throughout the last nine months is that the carriers have particularly pulled capacity, cargo capacity, freighter capacity out of out of Latin America, out of Africa to a degree also out of the Middle East and deploy them on East West routes. So China to China, US, China, to the Europe and also transatlantic, just because the rates justify them if you take a carrier like cargo, us that had a had a very long list of destinations in in Africa, they're pretty much only serving Joburg and Nairobi at the moment. And you see that in the numbers here. So what this chart here shows his passenger move about passenger numbers, cargo tons and movement numbers for different regions around the world. Obviously, passenger numbers have dropped off everywhere. But there's quite some big differences in the in the cargo numbers. So while you have North America, there's actually not down at all, in terms of cargo numbers, partially driven by us domestic but also by by a surgeon in imports, because imports are up between 20 and Europe not bound as much Asia not bound as much but really Africa, Latin America Middle East, down quite substantially in terms of volumes. And that's not necessarily just because demand has disappeared. There has been some demand, it's disappeared. But it's also been driven very much by capacity. So yeah, that's really in a nutshell, what we what we see happening, we do see more, we do expect to see some more passenger freighter operations taking place because passenger capacity just isn't coming back in the way that we probably would have expected more of last year, just because international travel remains so restricted. And until then I think that will play a role, but the economics of passenger freight is still rather questionable. Charles Kauffman All right, Frederick, thank you very much for that overview. And I guess one of the questions that is on everybody's mind as we look ahead, and I apologize, I'm going to ask you to, to pull out your crystal ball here. But you know, what, what do you see as some of the factors that are going to have to align in terms of passenger aviation recovery? In order for us to really see passenger trader operations move out of out of the picture? Frederic Horst Yeah, I mean, I think there's an underlying willingness to, to travel in the market, I'd be pretty happy to hop on a plane if I had the chance to do it at the moment, but the big problem of travel restrictions at the moment, and you know, the risk of ending up in quarantine when you arrive at your destination. And that's quite problematic once we find a mechanism for that then that will provide some stimulus for international travel is business international travel, leisure travel might be mind in that sense. So that's going to be a key factor on intercontinental markets. And that's where a lot of the passions are frayed capacity has been being operated as well. And there's no much of a safety valve in terms of in terms of extra freight capacity out there in the market. I mean, we're in a we're in a situation whether the share of the pop fleet is at historical lows, aircraft retirements have actually been very, very low for a number of years now. There's, there's not a lot of there's not a lot of extra capacity in the system, unless you're looking for, you know, on DC 10s 747 277 and so on. But that's not really that's not really going to help us out. Now. Charles Kauffman That's fair. And I you know, one other thing when I look at the variety of airlines that have taken the plunge and many have removed seats, we see carriers that have not previously taken much of an interest in in cargo and logistics and some have started to warm up to the fact that, you know, maybe it's time to move forward with a full conversion and add dedicated freighters. Do you see this? I mean, I mean, to what extent do you see this potentially happening? Or, you know, is this, this phenomenon going to seed some additional freight or crater growth? Frederic Horst We all like solving business, we're getting a lot of requests from airlines that have previously not been in the freight of business to start booking business cases for the for the freight of business and the conversion houses, although the same story that they're getting a lot of customers that potential customers that wouldn't normally be looking at failures looking for it. So particularly in, in the narrow body in the medium wide body space, which is traditionally kept the customers on one hand being the big integrators, but you have actually some combination carriers that are going into that market. I mean, take care Canada, for example. Right? I mean, they're getting into 767. We talked about it before Sri Lankan. There's some smaller carriers as well, I mean, if the expectation is that, that passenger capacity is really not going to, or I should say passive assays there, I bet that the demand is not going to be there for the next two to three years, then there's countries that actually really need and want this connectivity. And if you have a narrow body or medium wide body in your fleet, and you can do the business case, and get a payback over two, three years on that, then that actually makes economic sense to do that. So I do think we're going to see more carriers getting into the kind of business what happens with all this capacity, one son, and once demand comes back as a different question. But if you can make the business case on a two to three year time horizon, in, then I think you're in in safe territory with getting into freighters. Charles Kauffman Alright, and that's it. It's a great point. And, you know, based on based on your, your analysis and where we've ended up today and your thoughts on the future, you know, how would you summarize, you know, maybe three key takeaways from your understanding of passenger freighter operations. Yeah, Frederic Horst With passenger-freighter operations, I still struggling to make the economics work unless someone else is paying the bill. But there are enough cases where other people are paying the bill. And that's why it's here to stay. And we've also seen a situation where this there's such a shortage of cargo capacity in the market, that the rates do actually sometimes justify doing this, not just for moving people up. But actually just normal, traditional air cargo, cargo commodities be automotive, be another supply chain, type, bam, type carrier. three takeaways was it but Charles Kauffman we were we were close. So we were we were discussing the topic last year. We're going be discussing it next year. Well, we'll see where we're at. But Frederick, thank you for joining us this afternoon. Appreciate your time and research. All right. Thank you. Charles Kauffman And to those of you joining us today. Thank you for tuning in to this episode of industry pools. With this video you will also see a full transcript of our conversation as well as Frederick's presentation. In the meantime, Frederick and other members of the Cargo Facts Consulting team will be joining us on a regular basis to share their insights and analysis. You can learn more about cargo facts consulting at CFCinsights.com and until next time, we will see you online as well at cargofacts.com. Presentation slides are also available for download .

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