Listen: CFC Freighter Forecast and market outlook

We end this week productively on a good note as we wrap up the panel discussions from Cargo Facts EMEA in Dubai with a closer look at Cargo Facts Consulting’s 2022-2041 Freighter Forecast. In this episode of “Cargo Facts Connect,” Cargo Facts Associate Editor Andrew Crider and Cargo Facts Consulting Managing Director Frederic Horst discuss the post-pandemic outlook for the freighter market, the economic impact on the industry’s growth, the strength of international express, and the growth of the narrowbody and widebody segments. A transcript is available below. This transcript has been generated by software and is being presented as is. Some transcription errors may remain. Andrew Crider Hello and welcome to this episode of Cargo Facts Connect, the podcast of cargo facts, the newsletter of record for the air cargo and freight or aircraft industries for over 40 years. I'm your host Andrew Crider, associate editor of cargo facts. We're just two weeks out from our last EMEA in Dubai, which we feel was a resounding success. And we all have fantastic takeaways. For those of you who were not able to join us in Dubai, we are giving an update for the freighter forecast from cargo facts consulting. So today on the podcast, I've invited Frederic Horst, from cargo facts consulting, to give us a little update on that further forecast and to walk us through it. So Frederic, What do you feel are the highlights from this iteration of the free to forecast? Frederic Horst Um, yeah, good question on the highlights of the Freighter forecast. So what we're really seeing is that because of the current global economic situation that we're going to have a long term impact in terms of growth. So, our growth rates at 20 year growth rates are coming out a little bit lower than they were last year, at about 3.3% per annum overall for global air cargo growth, obviously, with regional differences in there, and also differences between segments. One thing that we really noticed in the last few years is that in 2020, the decline wasn't as big as we expected. And in 2021, the level of growth that we saw in the industry was much more than expected. And that has a lot of reasons for different things coming together. Part of it was the huge amount of stimulus that was taking place in 2020. But also much more PVE traffic moving than we would have previously anticipated. And the thing that really drove air cargo volumes in 2021 was rebounded demand, but also supply chain disruptions around the world, and particularly capacity issues on the maritime side that drove quite a lot of air cargo, turned a lot of maritime cargo into aircraft. Andrew Crider So we're expecting more growth, which is fantastic news. Is there a breakdown or a differential between sectors and where we expect to grow as far as what regions we might see, more or less growth and maybe different growth rates between wide body and narrow body adoption. Frederic Horst Well, in terms of the different sectors, we do think, at least in the medium term, the Express business will continue to grow faster than the overall air cargo business. So medium term forecasts for the Express business for the International Express business policies growth of about 5.4 - 5.5% Over the next five, six years. So that's definitely higher than we're seeing, you know, overall air cargo. In terms of regional growth, I mean, our forecasts that we use for our freighter forecast is a global forecast. And we don't really do a regional forecast as part of this one. So the expectation is obviously that in less mature markets, we'll see higher levels of growth, I think we'll see some more differentiated growth within Asia as well. So traditionally, over the last 5 to 10 years, the main motor of growth has been China, and with the Chinese economy being largely closed, we think that there's going to be more growth in Southeast Asia and in other parts of Asia and not necessarily in China. Andrew Crider So you mentioned the Express market, what's driving the growth specifically for the Express freighters? Frederic Horst In 2020, there was very much a surge in business to consumer e-commerce that was moving through Express networks, both international Express networks and also Domestic Express networks. So if we look at international Express growth, it was roughly 9% growth in 2020, which is much higher than the historical average, over the last 10 years, which was around the 5% mark. In 2021, the growth levels were even higher, they're about 11% Compared to 2020, and part of that was continued business to consumer traffic going in there. But the biggest driver of growth in 2021 was the comeback of business to business traffic. So traditionally, pre pandemic Global Express traffic, just under half of Global Express traffic would have been related to business to consumer e-commerce, this number went up to about 65% industry wide in 2020, and came back down a little bit in 2021. Andrew Crider I see. And for us on the outside, what goes into developing this type of forecast, what were you looking for? Frederic Horst Right at the start is really to come up with a really realistic traffic growth rate over a long, longer period. Now, obviously, this is a long term forecast. So we don't do it as part of a long term forecast. We're not forecasting recessions or, or black swans or anything like that. So really, we look at the correlation between air freight growth and different indicators being industrial production base global GDP per capita. And we develop a statistical baseline forecast with some range of scenarios in there. And that really gives us the amount of traffic that needs to be carried. The next thing we do is look at how this traffic is going to be carried. Is it going to be carried at the bellies of passenger aircraft? Or is it going to be carried on freighter aircraft? Now traditionally, the belly freighter share was about 50/50. During the last two years, that's been completely out of whack just because passenger capacity hasn't been, their numbers have been close to about 70%; we obviously see that they're coming down again. And our long term forecast assumes that will be converging to this 50/50 share as well. Then we look at the Freighter traffic within each one of these segments. What kind of aircraft is going to carry them now? Obviously, with belly freight traffic in domestic networks or intra regional networks, daily capacity doesn't play a huge role. So if you look at the US domestic market, more than 95% of traffic in the US domestic market is carried on freighters. So belly capacity doesn't have a huge impact in that particular market. So then we were looking at each in each segment. What that means for aircraft demand, we make some assumptions with regard to aircraft productivity going forward. We also make some assumptions with regard to how the existing fleet is going to be retired over time. So if you look at our forecast, across all segments, roughly half of the fleet additions are going to be for growth and roughly half to replace retired aircraft. Andrew Crider Those sound like pretty impressive numbers. Do you have any estimates on what we could see as far as breakdown for conversion rates? Frederic Horst Yeah, so that depends very much on the segment. So obviously, within the narrowbody segment, at this point in time, there is no production rate option. And we're assuming that over the 20 year forecast period, that there won't be a production freighter option available. So 100% of that segment will be met by PTF conversions. We think roughly 1200 aircraft over the next 20 years. And I guess it's about 60 aircraft additions a year, which incidentally is much lower than the numbers we're seeing at the moment in the market. Within the medium wide body segment, it's going to depend very much on the availability for the production freighter program at the moment with the sunset of the 777-300 production freighter program at the end of 2027. There is no production freighter program announced right now and we're assuming that one of the manufacturers will have a program in there and most likely get an order from a large Express operator, or maybe maybe Amazon as well. So there'll be a mix of factory built freighters and conversions in there, so overall, right now over the 20 years, we're assuming of the 700 odd additions in that particular segment, roughly 430 are going to come from conversions and the remaining from production phase. If these production phases and programs don't materialize, then conversions are again a bigger market and there's sufficient feedstock, particularly of the Airbus A330s. To provide the capacity needed in that particular segment, with a large widebody segment, we think about 20% of the fleet issues will come from conversion, so about 160 737 aircraft from that segment. The reason why we're assuming such a low conversion share in that particular segment is because the operator makes it also different and the type of operations are different in that segment. So, there's a lot of long haul general cargo type operations and efficiency is key, dispatch reliability is key. So if you look at traditionally, the productivity of converted aircraft versus production fighter aircraft, production freighter aircraft get much higher productivity, and that's why operators are more geared towards production traders in that segment. Andrew Crider Sure that makes sense. I guess I'm a little interested to see how that will play out certainly for the triple seven because as you're aware, we have what promises to be the next generation freighter that the new triple seven that Boeing is coming out with. And we also see if it will compete with the Airbus A350. But we've also seen a number of new STC’s. So IAI just started converting the 777-300ERF, and we also have two new 777 STCs coming from the United States, whether from NIAR are from Mammoth. Is that too little too late? Would that have to be if you build it, they will come scenario? Frederic Horst I mean, you know, the big question there is, I let's break it down into two parts. Okay, it's the production phase. So we've got two products in the triple seven, eight F and the A 350. F, which both seem like they'll be good products. And that's great for operators, because for the first time in forever, don't really have a choice between two manufacturers. And that's going to be great for pricing and new aircraft as well. It's a pity that there's not a nosed or capable aircraft available anymore. But that's, that's a different story. Now, on the conversion side, the big question in my mind is, is there enough demand in the market to justify three conversion programs? And it really depends on how many units each of these conversion programs are going to need to break even and recoup their development costs. It looks like at least AI, based on the commitments that they've received, have reached that point. The question is, will these other programs actually reach that? reach that point as well? Andrew Crider Certainly, that's a difficult question to answer and only time will tell. Just lastly, we can wrap up here. You mentioned that the forecast doesn't really account for black swan events or session and we're dealing we're seeing a lot of inflation, at least in the United States. unstable economic environment. We know there was recent lockdowns and Shanghai, China, from COVID. Where production wasn't affected that time, but certainly was a concern. Suez Canal spent a couple of weeks offline not too long ago, and there's a new war with the Russian invasion in Ukraine. If not accounting for the number of what seems like more common black swan events. When do you think we would see bellwethers for this forecast, just know if we're getting close to accurate truth as far as what will come out? Frederic Horst Well, I mean, we're definitely in a situation right now. Where we're airfreight demand is is very, very high. And obviously the Ukraine war is having more of a potential downward impact on demand. Supply Chain disruptions on the maritime side a beneficial Fair, fair freight demand. I guess the big question is whether the Maritimes supply environment will change fundamentally and fundamentally in such a way that we'll actually see a much higher level of air freight and a much higher share of air freight as a percentage of overall world trade. Now, the container shipping business is much more concentrated today than it was 1020 years ago. Right now, the top 10 shipping lines account for about 90 Almost 90% of total capacity. Back 1015 years ago, it was about 55-60%. So that's a huge increase in level of concentration, they've become much more disciplined in terms of their pricing. If that has a fundamental change that the cost ratio between air freight and ocean freight becomes more favorable, with a view towards air freight. And then that could change the game and the demand overall. Now in our forecasts, we do little changes have a big impact over time. I mean, if we changed the growth rate by half a percent, it easily means an extra an extra 350 390 aircraft over the forecast period. So that's something to realize that, you know, forecast is ultimately it's scenario. But the things can really change the fundamental things that but at the moment in our long term forecasts, we're assuming that we will see a degree of convergence to actually what we had before. Andrew Crider Over time. I see. Well, Frederic, I want to thank you so much for joining me today on this podcast to break down what is really a fascinating study and fantastic work on your part for preparing it for our EMEA guests. So thank you for joining. That is all we have time for today. To those of you listening, thank you for tuning in to this episode of cargo Facts Connect. For more multimedia content like this, check out cargofacts.com and search cargo facts connect on iTunes and Spotify. Join us again next time. Subscribe to Cargo Facts Connect on iTunes or Spotify , or download the episode on Transistor . Join Air Cargo World and Cargo Facts as we put technology in focus at the 2022 Air Cargo Tech Summit. Taking place June 6-7 in Miami, this new event will provide participants with the foundation for technological improvement in airfreight logistics. Learn more and register .

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