CFS: Boeing perspective on air cargo market and freighters

This is a recording of a presentation on e-commerce at this year’s virtual Cargo Facts Symposium, featuring Gregg Gildemann, regional marketing director in Boeing Commercial Airplane’s Market Analysis group. See all our previous coverage of this year’s Symposium. A transcript is available below. This transcript has been generated by software and is being presented as is. Some transcription errors may remain. Charles Kauffman Welcome back, everyone. Before we get started, I would like to take this opportunity to thank Boeing for their support of cargo pack symposium 2020 as one of our longtime diamond sponsors. Attendees joining this live session will automatically be entered into a drawing to win a Boeing 737 800 BCF freighter model. We will announce the lucky winner toward the end of this session. It is now my pleasure to introduce Greg Gilman Regional Director of market analysis of Boeing commercial airplanes who will present Boeing's views on the current industry dynamics and trends. Greg's career with Boeing Vance 30 years and stretches across multiple geographies and functions, including regional marketing and economic analysis. his current role, Greg specializes in passenger traffic forecasting for the China and South Asia market, as well as air cargo market forecasting for the North American market. Additionally, Greg is responsible for understanding commercial passenger and air cargo market trends and their impact on Boeing and industry. We'll have time for q&a towards the end. If you have a question for Greg, please share it in the back and we'll make sure he has a chance to answer it. Greg, I'll hand it over to you.Gregg Gildemann Thank you, Charles. Greetings to everybody. Thank you all for joining this session today. As I share Boeing's perspective on the air cargo market, we really appreciate the opportunity for these kinds of information exchanges with other folks in the industry. And particularly in times like this when we're facing big challenges in the industry. I also want to thank you think cargo facts for this invitation. Today, I'd like to present to you the market dynamics and key parameters we track in understanding the air cargo industry, the pandemic has imposed upon commercial aviation, new market dynamics and realities that are unprecedented. So let's take a look at some of the key data elements that we track in understanding the industry. Now. One thing that we like to remind everybody and I preaching to the choir here a little bit, I think, is the critical nature of air cargo in the world economy. And only Air Cargo can deliver the speed and reliability and security that are that that is unique in this particular sector sector of world trade. And as you can see here, the air cargo carries less than 1% of world trade tonnage, but about 35% of world trade value. And so it has a huge impact as we've seen this year and it's been underscored by the the pandemic crisis and the necessity to deliver all kinds of peepee and medical supplies around the world. So it is really a critical thing that we're all part of. and Boeing is proud to be contributing as we do with our products. So there's really three market trends I'm going to focus around today. One of them is belly company. cassity and the near the high near term pressure demand that's resulted. The second one, the Express carriers, their growth has been above the general freight market growth. And then finally, the issue of efficiency, unit cost sustainability, that driving up caging. So those are the three themes I'd like to focus on today. And I think, you know, we've had a lot of conversation, good conversation yesterday, and today, people are quite familiar with what happened earlier this year. But we've used flight Raider, radar 24, to track the effects of the loss of wide Better Body passenger belly capacity. And then also look at what's happened in the dedicated freighter, market, or sector. So you can see from the beginning of the year, wide body, passenger belly capacity dropped 85% from January to April as the pandemic gripped the world. And there was, of course, the law of loss of the long haul, wide body, passenger flights. And then we've seen over time just kind of a gentle increase a gradual increase in the dedicated freighters, AF t case. So, if we look at what's happened, year over year, dedicated traders are operating plus 13% in terms of capacity. And the wide body passenger belly is still down 60% year over year. And we'll talk a little bit more about that in the coming slides. And then if we shift over to the air cargo performance, through August, you can see that traffic is down 14% capacity overall is down 25%. And yields are averaging up 40% load factors are still are good, they're solid up 7%. And then overall, we've seen in the industry revenue increase of 14%. So the market has been very strange, very unusual in terms of how it's behaving. But this is, you know, a result of the huge loss in the passenger belly cargo capacity.Now, if we look back a little bit over the last few years 2019 was actually a year in which there was some struggles in the market that was showing themselves. We had some trade tensions, obviously with, you know, various countries, US and China. In particular, we also had the Chinese GDP slowdown that started taking place, we had some struggles in some emerging markets, Argentina and Turkey as two examples. And also, we had weakness in the European Auto automotive automotive market in 2019. So you can see as we had a very strong 2017 2018 started out pretty well. But then the tariffs started kicking in halfway through 2018. And then we started to see some weakness into 2019. As 2020 began, there was some optimism as the forecasts were showing some uptick in global GDP, world trade and industrial production. So that was something that we were keeping an eye on. And yet, then we were hit with the covid 19 pandemic and the result from that. So you can see in 2020, quarter one we had minus 7.5% in terms of SDKs year over year, and then going all the way down to 20.5% in second quarter. But then in third quarter of 2020 we started to see some of the recovery down 11.4%. So, you know the trend obviously is in a in a much better place. Heading upward. In September, we have some preliminary numbers that have come in and the numbers are negative 7.9%. So there is some reason to feel some optimism and so on. You know, hopefully we're hoping that the worst is behind us. As far as the fourth quarter of 2020 will cut, what will that bring? The all cargo operators have their experience, including the passenger airlines operating cargo only aircraft, they're seeing record load factors, and they're booked solid in the fourth quarter. We also have some positive things happening in terms of manufacturing. In China, it's back at full strength. And we talked a lot about e commerce and e commerce is growing at a faster rate than it was before. So this has been bullish in terms of the market, tech companies preparing to release some popular devices. And, you know, it's notable that the apple 12, the iPhone 12 is has a little bit of a compressed holiday flow time as they've delayed that rollout by about a month. And then we also see retailers building up inventories in preparation for the holiday season. So that on top of a potential COVID-19 vaccine or vaccines are also thrown into the mix. And that will also be another dynamic that will boost air cargo. So we'll also be keeping an eye on the craters, the passenger airplanes that are used for freight cargo operations only. And those have kind of stabilized in the last three months. But it's a watch item in the fourth quarter as we see how those will be utilized to take up some of the demand that we expect.Now one thing this, this chart has a lot of information. But what we look at also is some of the major trade flows. And so on the bars that you see, you see the improvement over the last three months for major trade flows, in terms of capacity. I think what's notable in these bars is how deep and poorly performing some of the flows are Europe, Latin America for one, North America, Europe is not doing well. But if you look at some major flow Asia, North America, it's actually heading in the right direction. And it's now only negative 4% in September. So there's some good news, as we see some of the trends increase. also notable is domestic, US and Canada are the only the only flow that's on the positive side that we see on this on the major flows. across the bottom, you can see the 2019 passenger wide body percentage of AF TK. So you can see for example, Asia, North America, the second one over from the left, not so much passenger, wide body, Air Cargo dependent, it's more dependent on the dedicated freighters. And so, you know, this is a this is gives us a little bit of an idea of where the freighters are really concentrated in in terms of their operations. And speaking of the paraders nearly 200 passenger airlines are adding cargo only flights. And this is courtesy of our friends at cargo facts as they are tracking this. And so, you know, we had an environment with high yields due to lack of capacity. And passenger airlines are operating almost 2500 aircraft for cargo operations only. And you can see about half of that is concentrated in Asia Pacific. And then you can see Europe and Middle East and North America, Africa and Latin America following. So it's been quite a significant trend that we've seen in the market. The capacity meeting demand that that that really was attractive because of high yields, also the necessity for airlines to generate some cash flow. And then on top of that, earlier this year, we saw oil prices down to very low levels which also helped in in terms of making profitable flights. And then if we dig a little bit into the Prater makeup, we can also see that the 777 and 787 makeup half of those craters use since March. And another point to look at is that a majority of the aircraft are left intact and only 7% have seats removed in the main cabin. So, the bars show on the bar, so the count of the air aircraft by model and then you see the percent seats removed on the right hand side of the graph. Another thing that is very interesting to in terms of utilizations you see the passenger twin aisle utilizations including craters start started the year with about 4300 passenger twin aisle airplanes dropped all the way down to about 1600 1700 in April. And then you can see slowly the number of fleet, the numbers in the fleets are gradually going up. You see utilizations down, however.And so overall, what we see is a utilization of about 46% for the passenger twin isle airplanes. And of course, this is something that we it's very interesting in terms of tracking and understanding when this capacity will come back into the market. In terms of the freighters they're operating at higher than normal levels, you can see the numbers of freighters has gone up just slightly. And then you can see the overall in terms of daily flights 2.1 daily flights in the beginning of the year, and now about 2.3. So that's edged up a little bit. But overall, the fleet utilization for the freighters to dedicated freighters is about at 118% of normal. Now, if we take the the various air cargo, business sectors, the business models, we can see also the Express carriers year to date are performing at plus 14%. In terms of traffic, the air cargo carriers are up about 6%. And then you can see no surprise the combination carriers the low cost carriers, and the passenger belly only carriers are down significantly. So again, you can see some of the impact of how the Express carriers have benefited in this environment. In terms of some of the dynamics that are going on in the economy, we've talked in earlier sessions, they've talked about e commerce and how it's driving some of this growth. So that's definitely benefited the Express carriers and driven up their, their their traffic during this time. So one of the other things that we have looked at over the last 20 years and and noted is the freighter fleet up gauging as continued, if you go all the way back to 1999 and compare it to 2019, the market share of the large wide bodies has doubled. And, you know, we'll see, efficiency gains win with lowering the unit costs. As you get to the larger gauge, we'll see a transition from some of the old 737 classics to 7378 hundreds BCS over the coming years. And that will also be a lowering of unit costs. So this is part of the industry trend that we've observed this up gauging phenomenon and the large wide bodies have really been a big beneficiary of that.One thing is interesting to note, if you look at global the past when we've had a major marked market downturn like the global financial crisis, we saw how the world trade during that time declined 12% back in 2009. And then in 2010, we saw a strong bounce back global trade it grew 14%. So, in this in this current crisis, we already were seeing some weakness in the air cargo market, as I had mentioned earlier, with the trade tensions in the automotive downturn, and then we threw COVID into the mix. And we've seen a significant decrease in world trade. In projected for 2020, we see WTO, Oxford economics and IMF projecting eight to 10% decline in global trade, and then a pretty significant bounce back next year. So some of the things that we look at are the global trade, the world GDP and industrial production. And some of the signs point to a better year and improved picture next year. We've already seen some confidence in the future of the producer, I'm sorry, the the PMI projections for next year, they're above 50. Now, so that that number is whenever it's a number above 50, you have a growth scenario. So I think this is something that we will keep a close eye on and, and even though this year is difficult, it points the data points to a bounce back that that will occur next year. And if we look at our our forecast for the next 20 years, as you can see from this, we have 2430 deliveries that we're expecting in the next 20 years. And about 400 and 450 of those will be large freighters. 480 of those will be medium wide bodies. And then we'll have 1500 conversions with 1080 being the standard body and 420 being the medium wide body traders. So we've downgraded our projections in terms of total deliveries by about 4%. And the reasons for this are some a decrease in the air cargo traffic from 4.2% to 4%. There's also some lower projections in terms of industrial production, and world GDP. Despite all of this, we expect the fleet to grow from 2010 to 3260 units, which is about 60% 62% growth over the next 20 years. We also have in our in our forecast a consideration that there's some adjustments and some of the retirement assumptions. In the post COVID. Environment we've made more airplanes eligible for passenger to freighter conversion sooner from an age to conversion perspective. In the large segment segment, in particular the 747 production freighter retirement assumptions were lengthened due to its unique nose store capability. And the end of production announcement we made since the last forecast. These airplanes are expected to main remain in the market longer, which necessitates less replacement within the forecast period. So we have a few different things that are going a few different levers that are moving that have caused us to adjust our forecast accordingly.And we offer a Boeing a complete family of freighters. Many of you are well aware of the the span across the market from the 737 800 BCF all the way up into the 7478 freighter. We've had a lot of success with the 767 in production as production freighter and as a conversion. As this is the airplane that's favored by the the the Express carriers, and then the triple seven freighter, which has twin isle economics and range and payload that are very attractive to the marketplace. And one thing we like to talk about is the fact that Boeing has more than 90% of the world's freighter capacity. That's that's Boeing aircraft. So, this is a market, that we've really enjoyed our dominance. And we know also that there will be, you know, more competition, as you know other airplanes like the a 321, enter into the market space. So, to summary summarize here, Air Cargo market performance has been uneven. We've seen major reduction in the capacity in 2020. The impact has varied by business model with the Express carriers in the all cargo carriers benefiting the most. We've seen medical supplies, pharmaceuticals and e commerce are driving up cargo demand and bolstering the freighter operations, we're confident that the market will recover. We've seen previous downturns before even though this one has some different characteristics. We believe it will be followed by a strong market rebound, the fourth quarter, we're seeing some capacity improving and industrial production and trade rebounding in 2021, to drive improved Air Cargo growth. And then longer term fundamentals remain we always want to keep that in mind Air Cargo is critical to the world economy. And the market will require 20 430 freighter deliveries during the next 20 years. And finally, next month, we will have the 2020 lakh of world Air Cargo forecast released. This is our by any old forecast. And we put in countless hours with this forecast, in terms of drilling down on a regional basis. So please keep your eye open for public announcement of when this will be released. And we look forward to interacting with the industry and talking about our forecast. We take a lot of pride in it. And that concludes what I have. We have a short video we'd like to show if you would like to start that up, please.Charles Kauffman Thanks, Greg, the very informative presentation and for the shout outs to the Carfax passenger figure database. We do have a number of questions from the audience. And we have just a few moments left. thing on the topic of passenger freighters in European is that a response to the lack of passenger lower hold capacity or rather pretend to exhilarated demand for freighter aircraft? Gregg Gildemann I'm sorry, I didn't hear that last part, Charles. Charles Kauffman Yeah, of course, I'm speaking of passenger freighters in the trends of the combination carriers to utilize some of their pasture aircrafts in cargo only configuration. Is that a response to going to be the lack of passenger lower boot capacity? Or does that signal exhilarated demand for freighter aircraft? Gregg Gildemann Okay, so if I heard you, right, the lack of I mean, the market dynamics that worked into this was we lost all the passenger wide body belly capacity. Right. So we lost most all of that. And then we had a combination of high yields, along with the necessity for airlines generate some cash flow and low fuel prices all work together to create a demand for those traders. So that, you know, that was really just a market response to to that need. Not sure if that's answering your question, but maybe you could clarify if not Charles Kauffman that wasn't it. question and I am sure that if that sounds appropriate, and they can always follow up with you directly afterwards, we can have another question referring to a figure you cited on on load factors, so noting that they were up 77%. And this some, you know, to me this strikes me as a bit low considering the uptick in in freighter utilization. In your opinion, does this indicate shortcoming in our methodology for measuring aircraft factories? In recent weeks, we have seen some outfits including yaka called for alternative measures such as dynamic load factors over traditional weight based measurements. Do you agree? Gregg Gildemann Do I agree? Was that the question? Yeah, Charles Kauffman I agree. Or how do you how do you how would you assess the current methodology for your, the way our industry takes pulse of below tractors? Gregg Gildemann Yeah, so I don't, you know, I don't necessarily have a lot of visibility to that. I know that that's been somewhat of a an issue, I guess, you could say, in terms of understanding that. So I think, you know, I think there, there is no doubt in my mind that the load factors have increased, whether it's 7% or 9%, or whatever the number is, you know, I think, because of the capacity crunch and the demand, whether or not that number is is completely accurate. You know, I think the trend is definitely I have great confidence that the trend is correct. So I can't really comment particularly on that, on that issue, in terms of methodology, though. Charles Kauffman Right, but certainly they they are up and then your your presentation also mentioned this, this trend that Boeing has been being of the upstaging from from narrow body to medium wide body and large, wide body freighters? What about new, smaller aircraft? In the size category below the narrow body freighters? Do you see any occasion from from regional to the regional faders to be the narrow body size? category? Yeah, so Gregg Gildemann your question is on the the airplanes that are smaller than the the single aisle or the narrow body airplanes, right, correct. Yes. Yeah. So um, I mean, that's, we actually put most of our efforts in terms of tracking the market on the jet airplanes, only the jet freighters. So I think, you know, it's, it's possible that certainly there could be some up gauging in terms of the airplanes that are smaller than that. But it's not something that we normally track very closely. Charles Kauffman Alright, and how about one final question from the audience? And then we'll get into the the crime within North America, what are your thoughts, Greg, on how the use of freighters will, will change? I guess, a continuation of some of the long term trends we're seeing Gregg Gildemann in terms of the north in terms of a region or on a world basis, in terms of the region? North America in particular, correct? Charles Kauffman Yes. North America. Gregg Gildemann Yeah. So um, you know, some of the trends that we're seeing really are related to some of the build out of networks for e commerce. You know, that's a big trend, obviously, with Amazon, building out their network in in North America. There's still some growth for that. And then, of course, you have the the Express guys also benefiting from the e commerce phenomenon. But a lot of the growth that we saw in our recent analysis for for this year, and next year for North America was related to you know, the e commerce explosion, if you if you will, and Amazon building up their networks FedEx, also increasing their footprint in, in in Canada, for example. So that's been sort of the the trends that we've seen most recently. Charles Kauffman All right, and we are running low on time. How about we give away that model, and for those who haven't seen it yet, there is a photo of Henry seven 800 BC. In the session, but our winner I'm pleased to announce is Tina Knight from Hawaiian Airlines. Congratulations. Gregg Gildemann Great. Charles Kauffman Alright, and this does conclude our session. Thank you again to Greg and keep going for for their support. Our next session will begin in about 10 minutes at 2:15pm for our last panel discussion, and aircraft valuation market influx, so see you over there shortly.

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