Watch: CFC presents its 20-year freighter forecast

This is the full recording of Session 4 at this year’s Cargo Facts Asia, held last week, in which Frederic Horst, managing director of Cargo Facts Consulting, presented the latest edition of the annual twenty-year freighter aircraft forecast. Against the backdrop of its longer-term forecast, this year’s presentation centered around recent fleet developments with a focus on CFC’s near-term outlook through 2023. A transcript is available below. This transcript has been generated by software and is being presented as is. Some transcription errors may remain. Jeff Lee Hello and welcome back to cargo facts Asia, given the rise in interest and demand for dedicated freighter aircraft, I'm sure we're all excited about this next presentation, which is Cargo facts consulting's annual 20 year freighter forecast. Before we begin, here's just a quick message from C cubed aerospace, which is very kindly sponsoring this session. Now, for those who don't know him Frederic Horst joined cargo facts consulting in March 2019 as its Managing Director, he has a wealth of experience in the air cargo Express, aviation and transportation infrastructure businesses and has held senior positions at airbridgecargo, air cargo Germany, DHL aviation and cargolux, as well as the state government in New South Wales. We're always interested to hear what he has to say. So Frederic, I'll let you dive in. Frederic Horst All right, thank you very much. So welcome, everybody. So we've just actually, we're just putting the finishing touches on our 20 year fighter forecast. At the moment, I would rather have not done a forecast this year or last year for that matter with everything that's going on in the industry. But anyway, it's going to be released next week. And it has a 20 year forecast of retirements and additions as both conversions and production, freighters as well as our view on individual aircraft types and how successful these may maybe covers everything all the way from feeders right through to large wide bodies. And we have some extra chapters on pandemic impacts, ecommerce and the conversion market overall, which which is going through quite a hot face at the moment. And then there's some interactive tools which which add to that. So that can be purchased either via an insight subscription or as an individual report directly. So today, I wanted to really talk about three things. One, just to take a historical view of how the freighter fleet has evolved and where we are today, then dive into our long term forecast and the things that we expect to see over the next 20 years. And then a bit more discussion about the short to medium term outlook, which is probably really the thing that's that's most in people's minds at the moment. So in the long term, if we look at the picture last year, the jet freighter fleet grew by about 5%. With some differences across categories, I'll get to that in a sec. As freighter demand stayed high thanks primarily to a massive loss of building capacity, but also additional Express and e commerce volumes moving in in domestic moving in domestic networks. It's worth realizing that the size of the freighter fleet as it as it is now really only surpassed the the levels from the mid 2000s around 2018 2019. And another thing that's that's obviously not shown here is that retirements have been at historical lows for a number of years now. So not just because of extra freighter demand last year, but retirements were exceptionally low in 2019. And in 2018 is as well. In 2019, the freighter the biggest growth in the Frazier fleet was in the large wide body segment in 2020. The largest growth was in the narrow body segments. So the narrow body segment which consists of everything through from from ba 140 sixes and DC nines all the way up to 320 ones and seven five sevens. Now grew by about 7% in in aircraft numbers last year. The other segments the medium wide body grew by about 4% and the large wide body segment grew by about 5%. So there's not a lot of Park capacity that can be reactivated anymore in the in the large, wide body segment. And that's really what's putting a limit on on growth in that segment as well. In the narrow body segment the the dominant aircraft. There are the 737 classics at this stage and the seven five Seven still, but we've really seen a surge in in 737, energy deliveries and a few 321 start to trickle into the market. So we're, we're really getting into this phase now where we're starting to see a transition from, from classics into, into into energy aircraft. And last we looked at the backlog on the known backlog on 737. NGS was was somewhere in the order of 7075. aircraft, and there's probably some additional ones in there. And that's just over the next two, two years, which is a lot more than we'd normally expected to deliveries in, in a single year. Medium wide body segments dominated very much by the a 300, the 767, and to a degree, also the a 330. Those are the dominant aircraft in that, in that segment, the large wide body segment is very much split between the 747, the triple seven, and there's still quite a few emulators that are in operation then and obviously that will change over time as as, as the aircraft mix in there changes and we see MD elevens and older simple sevens retired. So that by way of background, our forecast our long term forecast this year we've we've changed or the central assumptions that we have in the forecast are somewhat different to last year. And in terms of traffic growth, we're assuming a 4.3 cent baseline of 2020 numbers. Now that long term growth is seen as much higher than what we previously were assuming in our last forecast, the baseline growth rate over the 20 year period was 3.9%. But obviously, with the declines that we had last year, in the market, the growth rates are going to be much higher. If we look at this on a on a 21 year basis off the off the back of 2019. Were estimating a growth of roughly 3.5% over over a 21 year period in terms of overall underlying traffic growth. Previously, in our forecast, we assumed productivity improvements on freighters of about 1% per year doesn't sound like a lot. But over a 20 year period, we're looking at sort of 20 to 23% productivity improvements. And we just found that wasn't particularly realistic, particularly in the large wide body segments where aircraft tend to operate at high utilization levels, we do think we're going to see more productivity going forward in the in the narrow body and the medium wide body segment. And that's driven to to a large part by move from from typical sort of five and a half day to seven day operations because of the seven day delivery commitments that express companies and ecommerce companies that account for most of the capacity in in that segment. So if we look at medium wide body segment, almost 80% of capacity is operated by by seven companies. And, and in the narrow body segment. It's it's around men 60 65%. That's, that's operated by all four, seven companies being the big Express companies in the US, Europe, China, and also Amazon them. Previously, we also assumed that we would see the belly, the Fraser share of total traffic move, decline as more capable belly capacity was hitting the market. But that we found is really we've never really had a strong conviction about that. But we found the first of all the historical trends don't support that the 50 more or less 5050 freighter share has actually remained pretty consistent. Over time, and going forward, we think that this will also hold but we do have in the forecast some sensitivities and what that actually means for aircraft demand. So because particularly in the large wide body segment, this has huge, huge impacts. And then we have some other assumptions with regard to the age profile, the economics, the type of operators that are in their utilization, and so on that it helps us to determine what aircraft requirements are and also what the retirement schedule on an aircraft is going to be. so this this presents in a nutshell, what our 20 year fighter forecast looks like, we expect the world's freighter fleet to grow by roughly 70% over the next 20 years from from about just under 2000 active units at the moment to about 3400 units. In 2014. The biggest growth we actually think is going to be in the large wide body segment which we expect to grow by about 2.8% per year followed by the the medium wide body and the the narrow body segments. What that means specifically in terms of number of aircraft required and retirements varies a little bit across the, across the each of the each of the segments. So in the narrowbody segment, we expect additions of roughly 11 150 aircraft splits are 5050 between growth and retirement and replacement of retirements of of older generation aircraft. In the medium wide body segment, we expect about 700 additions over a 20 year period with the majority actually been to cover growth as opposed to retirements. And we have a similar picture in the large white white body segment where we're expecting conditions of 770 aircraft over that period. And particularly with the large, the large, wide body segment is is one that causes me a great deal of concern, I have to say, because there's not a lot of aircraft choice in that segment. Going forward. I mean, at the moment, we have really only one active production freighter program in the triple seven 200 freighter, we have a VA sitting on the fence with regard to an A 350, we have Boeing sitting on the fence with regard to a triple seven, replacement, the 747 program, unfortunately, it's obviously got its sunset date, sometime next year when the when the remaining backlog is delivered. And we obviously have a number of triple seven conversion programs that are in the that are in the pipeline, obviously the big cast one and this is the mammoth one and also the the the Wichita Kansas one, that's that's in there. But that's really what the what the choice is going to be going going forward in that in that segment, potentially. But I'm sure you'll have some questions on that on that particular topic afterwards, as well. So I'm glad happy to dive into that in more detail as well. With regard to conversions versus new builds, conversions will obviously dominate the narrowbody segment, because they're effectively you know, production bill freighter options there, we generally going forward assume roughly a 5050 split in simple terms between between a 320 family, aircraft and an 737 and Jays in that segment, but obviously at the moment, the market is skewed very much towards the seven, three sevens just because we don't have a full palette of a 328 321 conversion programs that are actually active at the moment. On the medium wide body side, we think conversions will dominate in that segment, for the next next years, at least until probably 2023 24. Or maybe a little bit beyond that. But at least up to 24. We think seven six sevens are going to be dominant in this segment and after that 1767 feedstock runs out then then obviously the a 330 is the only game in town. Now we are assuming for the production freighter deliveries in that segment, we still have a healthy backlog of seven six sevens. Obviously, we also in our longtime forecasts do make the assumption that Airbus is going to come with with some sort of a 330 production freighter program. But that, you know, there's a big question mark against that. I mean, the last one wasn't particularly wasn't particularly successful as a as a program. Ultimately, we say we have a certain amount of demand in that in that segment. And if one program doesn't materialize, then that will lead to extra demand for some of the other programs. In the large white body segment, we think roughly 20% of the market will be covered by conversions and the remainder by production, freighters. But that's really going to depend what happens with the with the production freighter programs both on both on the a 350. And on the and on the on on the triple seven. So small changes to Samsung have big impacts. If we drop the growth rate down by a half a percent, that means 300 planes less in terms of demand. If we increase the growth rate over a 20 year period, it means another 340 points on on top of that so little things have had a huge impact. If we go to a 4060 frames a share rather than a 5051. That means we're going to need 400 planes less primarily in the large wide body segment, which is the segment that's really affected by the by by the availability of belly capacity because most medium wide body and narrow body capacity operates and express networks and that's kind of outside normal commercial networks. If we play around with the productivity assumptions and say, well, there's not going to be any productivity gain on freighters, then that's going to lead to an extra 360 points in terms of in terms of the requirements. So that's the long term in the short to medium term. I thought I did that what we said last year at this conference in terms of what was going to drive 2020 and 21. So we're talking about lockdowns and virus case numbers and hospitalizations and deaths. We're talking about economic stimulus, what effect that was going to have spending both consumer and government spending, we didn't think there was going to be a lot of business investment. We were expecting to see a acceleration of business to consumer volumes. While brick and mortar retail was closed, we did see that we saw the growth in in, in ecommerce in Europe of about 25%. Last year in the US it was a little bit less than 22%. In in, in China, the growth was massive as well. And SF Express moving 70% more packages in 2020 than they did in the previous year. Supply Chain disruptions were a topic and the whole topic of passenger capacity and the speed of the speed of recovery. So what happened? Well, demand didn't decline as much as we anticipated. In 2020, we were expecting about 15% decline. We did a forecast, that's what we were expecting in May. We did a forecast later in the year where we're actually expecting close to 17% decline. But in the end, we landed at around we landed around 10% down year on year. There were big regional differences. So we saw huge declines on the transatlantic we saw huge declines on Latin America on on on African lines, but Asia to to the US and Asia to Europe was was very very strong and a lot of it was PPA that was that was moving. industrial production numbers were in growth territory. really soon. It's about May, June last year in most major economies worldwide which was which was quite surprising given given the scale of lockdowns in in various economies. Even the automotive business started doing okay against last year. But then again, 2019 was rock bottom for the automotive business Anyway, after a high end in 2018. Freight operators were really kissed by the fairies and did extremely well due to lack of capacity and super high rates. And that's something that we see the going into into 2021 as well. There are lots of passenger freight operations. Jeff, you and Charles we're tracking tracking the number of operators doing that, at the moment, we're probably at a level of about about 20 passenger freight operations a week between Europe and Asia, about 160 or so across the across the Trans Pacific, Europe to South America probably about 50 a week. And in Europe to North America, it's actually picked up quite a fair bit again, we're seeing about 300 passenger freight operations per week. So there's still a large amount of that capacity there and in the market. And don't don't don't ask me too much about the economics of these operations because I I still struggled to make that work. Express market was operating at peak season levels pretty much throughout the year courtesy of business to consumer ecommerce. But what all the Express companies has said is that their b2b volumes are actually up at pre pandemic levels, as well, but the share of b2c moving and express networks has definitely increased last year. So this is what we're what we're forecasting at the moment. So at this stage, we're saying that by the end of this year, or by early next year, traffic will be enough to pay terms back at 2019 levels. That would mean a roll percent growth this year and 4% 4.7% next year, and then we see the growth rates coming down a bit there's there's obviously a lot of question marks about that, particularly with regard to to spending and how the economies are developing on in vaccination campaigns that are going very slowly and everywhere except everywhere in the world except the US and and, and Israel and a few other in the UK and a few other countries. But Europe is definitely a worry going going forward. So to finish up, this is what we think is going to be driving Air Cargo market prospects in 2021 and 2022. And then potentially beyond there as well. Obviously lockdowns and vaccination rates because it affects how people are spending and whether they're able to spend Whether they have jobs or not the level of stimulus in the in the market demand and capacity imbalances going forward, particularly with regard to passenger capacity, it seems to be that that's moving further and further out to the right, particularly with dealing with intercontinental travel. And trade tensions with China have had also reemerged as a as a major issue going going forward. So that wasn't such a big deal. Last year, it was obviously a big deal in 2018, and 2019. But that's back on the table as well. And that will create some uncertainty in the in the market going forward. And also for the demand for for freight capacity. Jeff, thank you. Any, any questions? Jeff Lee Thank you, Frederic. Yes. For the interesting presentation. And yes, if I may I do have a couple questions. Firstly, just going back to what you were saying that you expect the highest growth rate to be in the large wide body segment. Why is that? And can you just go into sort of the the reasoning behind that? Frederic Horst Yeah, I mean, the the biggest, the biggest driver there really in in that terms of growth is what happens to the freighter share of overall overall traffic, movement moving through through network. So if we drop, if we assume belly capacity is going to take more of the overall capacity, then that's going to have a big impact and actually have a real downward pressure on on growth. Previously, we'd always assumed that that more barely capable aircraft would be replacing seven, four sevens and a 380s, operating on two continents. So I mean, if we're looking at the larger, triple sevens, larger a 350s, the amount of belly capacity in those aircraft is, is massive. At the moment, we think the direction may go towards more of a smaller aircraft Point to Point type development. And that's not really conducive for freight volumes, I mean, freight tends to gravitate around major forwarder gateways, where they have their facilities and the secondary airports, they just struggled to attract, to attract freight traffic, and that's going to need more more freight volumes as well. We do think that we might start to see some larger wide bodies moving to move into sort of a medium wide body space as well. I mean, we saw this development in the US, particularly where there was actually a transition from from more narrow bodies in the, in the, in the, in the US networks, to more medium wide bodies in those networks. So 15 years ago, 40% of the traffic in the in the US domestic was on medium wide bodies, now it's closer to 50%. And so there can be some of those effects as well. You know, obviously, we've we've got this hole, and I'm, you know, I don't drink the e commerce Kool Aid, at least not all the time. But with a change in in purchasing patterns, where people are buying more stuff directly effectively from the factory and from the producer through through platforms, that's going to lead to more a requirement for more for more capacity on intercontinental lanes, as well. But the biggest driver is definitely the belly prior to split assumptions. Jeff Lee And actually, that shift to medium wide bodies is interesting, because in talking with a number of operators, we have seen just recently, actually, we've seen some turning to the Seven, six sevens partly because of challenges in securing larger freighters. So it does seem like this segment is seeing the second mix of operators in this segment is it's changing and we're seeing offerings as other than ecommerce and express players. You know, coming into this segment. Frederic Horst Yeah, it is becoming more diverse. I mean, traditionally, both the narrow body and the medium wide body sectors are not that diverse. I mean, there's a lot of operators but they're all operating for the same customers for DHL for ups for FedEx, or in whatever order you want to name those. for Amazon. Obviously, we've got 100 planes operating for Amazon at the moment. And most of the Chinese operators they pretty much operate their equipment directly. And whereas in the in the large wide body segments you have all the combination carriers with their freighter fleets that complement their passenger fleet. So you've got all cargo carriers, cargo locks, obviously in there as well. And we are seeing carriers that are actually getting into medium combination carriers that are getting to medium wide body or net, or even narrow body capacity, although that's still a bit of a bit of a niche thing outside, outside North America, now what could actually happen as well is and this depends on on aircraft availability and in the large wide body segment, and we might actually start seeing some, some more free 30s that are kind of operating as you were alluding to in more of the Intercontinental routines on a UBS operates a lot of Seven, six sevens across the Pacific, particularly set for Central Asian carriers that have their, their hubs in Central Asia, obviously 767 or 330 can can make sense in there. But generally, the unit costs are not competitive with with larger white bodies, but but at the moment, it's really, you know, beggars can't be choosers, right? Just for lack of choice, and the right levels in the market are at levels where levels similar to the peaks of last year as well. So pretty much anything, guys, I mean, we're seeing samples in classics that, you know, should be turned into, into airport hotels, like the one in in in Stockholm, and actually flying freight missions at the moment. So it's, that's obviously not going to last these aircraft are going to get flushed out of the system, as soon as rates come back down to normal levels soon as passenger capacity comes back. Jeff Lee Right. But in the large wind bodies like me, like you were saying, I mean, the there really aren't that many choices for operators. So where is this growth gonna, gonna come from? Frederic Horst Well, it needs to come from somewhere. I mean, want to want to, you know, both Boeing and Airbus really need to step up to the plate and, and, and, you know, put an aircraft on the table. I mean, this this, these delays are creating problems for, for operators and for world trade, to be quite honest. I mean, obviously, we I think we'll see, because of the unique capabilities, I think we'll see some some life extension type stuff on on the seven, four sevens. But, I mean, you're operating in a 2530 plus year old aircraft, that it just becomes untenable and then economical at some point. Time. Jeff Lee Yeah, I mean, it's really, it's gonna be an interesting, Frederic Horst right becomes more expensive. I mean, the long term trend has been a sort of forget last year, but the long term trend has been a general downward trend in in yields. And new products have come onto the market that have provided unit cost advantages, visibly older products. But the main maybe, maybe we're going to be heading in another direction, at some point in time, just because there's not the availability of reasonably priced capacity anymore. Jeff Lee Just a question from the audience. Do you see any regional disparities in your forecasts between Europe, Asia, US and other regions? Frederic Horst I mean, in terms of our fader forecast, we we do our forecast on a global level. And but, you know, we obviously track what what happens on a on a regional level. Um, I mean, in terms of in terms of overall growth and requirement for aircraft, it's very much dependent on the on the regional economic development. So obviously, Asia, Asia is in a in a better position there. And we see better growth on on we expect better growth on operations on the Trans Pacific, and we would on on Europe to Asia and also for and also compared to the trans Atlantic. So we will see some shift of, of of aircraft that are going from one region to another region. I mean, at the moment Do you have the largest share of medium wide bodies are operating in North America, the biggest share of narrow bodies are in Europe and, and in Europe, and also in North America. But we've already seen a shift, we've seen a shift more narrow bodies in the white body starting to operate in in Asia, the share of large wide body freighters has kind of remained fairly static in terms of terms of the distribution around the world. But that also has to do with the the, the some of the biggest large wide body fleets are actually sitting with the Gulf based carriers that are obviously serving a multitude of markets. Right. Jeff Lee And, obviously, we have, you know, a few potential new programs for freighters and you were alluding to, possibly an MA 330 neo freighter, obviously we have the potentially 350 friends and potential triple 7x free timing with all these potential programs. What what's your take with Shall we likely to see first? Or which are likely to come to fruition at all? And which are we likely to see first? Frederic Horst Um, yeah, that's a good. that's a that's a good question. I'd say that the a 330 neo is probably the furthest down the list. And then with regard to the 350, and the triple seven, Airbus doesn't have a very good history of successful freighter programs. So my main would be I'm on Boeing on that one. But it does seem that there is more activity on the airboss side with regard to the 350, then there is on the on the triple 7x sites, I think that's, that's, that's an area where there's probably enough demand to sustain two programs. But it's an area that both manufacturers should definitely not neglect. Now, of course, if none of them materialize, then then the triple seven 300 converters will be happy, because ultimately, they're the demand for their product is going to be much, much higher. I have a bias towards new traders, if you're flying something 1617 hours a day, it's better if it's new, and it's still got some warranty on it. Jeff Lee Yeah, I was gonna say maybe that, you know, some of our patients do prefer to trade it so and, you know, the sort of relative weakness of the the a 330 200 production, for instance, might be what pushes us to, you know, to launch and get this potentially 350 freighter out there before Boeing. Frederic Horst Yeah, and they can if they can bring an eye if they can bring in a 350 freighter out that that is that is that is lighter than a comparable triple seven freighter than then they've definitely got a winner going on that one because that'll, ultimately one something that works well in both in general cargo networks and and, you know, lighter density networks. And the thing that we see with with with the triple seven conversion program is it's an aircraft that doesn't have the design density of say a triple seven 200 or 747. And it's important to, for an operator, particularly a general cargo operator that operates in multiple markets to actually have these capabilities, you know, it's not, ecommerce is not going to be 100% of of worldwide air cargo. This is not the moment it's effectively maybe about 16% that moves through networks in various forms summonses normal air freight consolidation centers, directly a small packages, but the vast majority of air cargo is still and will remain. Supply Chain tight cargo and perishables. And that's that's something that's important to remember that that's a market that also freight manufacturers need to cater for. Jeff Lee Unfortunately, that's all we have time for. So thank you very much, Frederick. And this concludes our live sessions for today. If you have any questions for Frederick, please connect with them through the virtual event platform. These also note that session five a panel discussion titled The future of freighters in Asian ecommerce logistics sponsored by free 21 precision conversions is now available for on demand viewing. And we will see you tomorrow for session six starting at 9am here in Asia, or 9pm. Eastern. Thank you. Don't miss all of our coverage from Cargo Facts Asia. The 2021 Freighter Forecast Report and analysis tool is now available . The Cargo Facts Consulting Freighter Forecast has been the fundamental resource for strategic analysis of the current and future freighter fleet since 2005. This year’s edition provides an in-depth analysis of recent developments and trends across the feeder, narrowbody , medium and large widebody freighter segments. Order your copy today .

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