Watch: Latin American freighters power e-commerce growth

Over the past year and a half, Latin America has transformed into one of the fastest-growing e-commerce markets. With that, naturally, comes freighter fleet growth. One notable development in 2020 was the emergence of Argentine e-commerce giant Mercado Libre’s full branding on several aircraft and the e-commerce platform’s own-controlled Meli Air network. But other carriers are implementing expansion plans of their own and are set to add a total of more than forty freighters in the next couple of years. In fact, Latin America will undergo double-digit growth in the medium-widebody, narrowbody and regional segments through 2023, according to Cargo Facts Consulting . In this episode of Cargo Facts Industry Pulse, Cargo Facts Consulting Analyst Guillermo Ochovo discusses the e-commerce boom in Latin America; how the region’s freighter fleet changed in 2020; and how the continuing rise in cross-border business-to-consumer shipments might affect the fleet going forward. A transcript is available below. This transcript has been generated by software, and may contain transcription errors. Jeff Lee Hello, and welcome to this installment of Cargo Facts industry pulse. I'm Jeff Lee, Associate Editor of cargo facts and it's my pleasure to welcome our guest presenter today, Guillermo Ochovo, analyst at Cargo Facts Consulting, who has been taking a closer look at the freighter fleets in Latin America and the growth of e commerce there. Hey Guillermo, thanks for joining us. Guillermo Ochovo Hi, Jeff. Thank you for having me today. We're going to start, so following global trends, the corona virus pandemic led to a rapid increase in online payment activity in Latin America over 2020, turning this region into one of the fastest growing e commerce markets in the world. Today we're taking a look at how air transport is driving the e commerce expansion in Latin America. So prior to the outbreak of the virus, e commerce penetration in this region of the world was very low. When when we compare that to other regions, and obviously we we saw or we have seen some challenges such as infrastructure and lack of online payment methods in the region that do that we don't see in other regions of the world. Retail ecommerce sales in these regions in Latin America grew about 63% in 2020, and they reached about 100 billion. And they position this region into one of the world's fastest growing regions of the of the world in terms of e commerce ahead of Asia, Pacific, Europe, and Africa. Now, when you look at Latin America, Brazil, Mexico and Argentina account for about 70% of all the e commerce sales in the region. Before the pandemic the e commerce penetration in in Latin America was around 5%. But this doubled by the end of 2020. However, this rate is still far below the figures that we see in more developed digital economies such as the European Union, the US and China that account for about 15 or that were ecommerce accounts for about 15 to 20% of all transactions. When we take a closer look at the challenges in in Latin America and in the e commerce growth, we see that most of the e commerce platforms withdrew their financial guidance for fiscal year 2020 due to the volatility in the in the economic environment and the market brought by by COVID-19. So, the length of lockdowns in the different countries consumer confidence and the scale of the economic stimulus actually reflect a decent certainty surrounding the different financial performance of the companies. So we took a closer look last year and realized that those platforms that that were able to deliver on their brand promise and adapt to the to the quickly changing environment were actually better positioned for this access for pulse pandemic. So COVID-19 obviously highlighted the strengths and weaknesses of these e commerce platforms. And many of them became an essential essential tool in Latin America. So, most of the of the popular e commerce sites actually operates in areas that that are within emerging markets. So the expansion and level of information in Communications and Technology is unequal. In developed and developing countries, and the barriers that we see in this part of the world are, for instance, the poor domestic and regional infrastructure such as airports, roads, or seaports, the lack of experience with import duties and sales taxes, and also their restrictions and difficulties with internet Payment transactions. So, those are some of the challenges that we see in these region of the world and across some of the less developed e commerce markets in the world. So, if we take a closer look at the air traffic figures, we we understand, we see that these continues to improve despite the lack of international wide body passenger traffic. So, according to most of the regions, except actually all the regions except Latin America, contributed to a positive growth rate of 10% in the month of June of 2021. However, Latin America was the only region that displayed a flat trend over the first half of 2021. And, and they actually or they actually reported figures of about 11% below pre pandemic levels. So, cargo cargo load factors across Latin America were also down in despite an improvement in in demand. And this trend is actually opposite to the record highs that we have seen across all the regions in the world. However, the projected freight or growth actually tells us a very different story. When we look at the carriers in the region, we see that all of them are planning to add about 40 freighters throughout the end of 2022. So, in the next year and a half, that So, these, these study, when we look at these numbers closely, they make us think how the aeroexpress segment in Latin America has actually grown faster than the air cargo volumes and these shift in traffic to more business to consumer is is actually due to the expansion of e commerce. So, when we think of when we think about the addition of about 40 freighters across the different operators in Latin America, we see growth in in the three segments in the medium wide body in the narrow body and and in the feeder segment. And these chart that that we actually have here shows the growth by segment and when we put together on when we analyze the new additions by type, so, in the medium wide body, the plan fleet by by 2023 will actually grow about 48% Well, he will grow about 27% in the narrow body and 22% in the feeder segment, when we turn to the the medium wide body segment latam cargo is actually one of the largest contributors of these and in in early 2021 they actually announced the conversion of up to 10, Boeing 7673 hundreds and these actually results in the increase of about 80% of the of the cargo capacity for these carrier. So the last time cargo wanted to take advantage of having an operating or having an operating a single fleet type and it will have a total of 19 767 freighters by the end of 2023. These aircraft is actually the preferred choice for for the operator because he combines the right payload to arrange to serve the markets that that they have in their network. We look at the narrow body segment. Most operators in Latin America are actually Introducing 737 classics, or MDA DS in the case of iron Navis TSM in Mexico. The exception in the region is a zoo was the first carrier to actually transition to the newer a 321 platform. Another comment about a zoo cargo is how they have grown their network and tonnage carrier significantly over the past two years thanks to the implementation of the smart cargoes cloud management system which allows for optimization of, of the available cargo capacity in the freighter and in the in the freighter aircraft and in the in the bellies of the passenger aircraft as well. In the feeder segment, the growth is still significant, but of a much smaller base. So, we see two crjs being converted with two microcarpa and one ATR 72 with modern logistics. But the quick key question is is whether these these growth is actually matching the expansion of, of e commerce in in the region. And, if if we go back to to this slide, we we understand that we wanted to share how ecommerce is taking off in Latin America. So, well, we saw a number of multinational platforms experiencing growth across all all the developing countries in the developed countries in the world. There's a number of local e commerce retailers that established themselves as the leaders in these marketing in Latin America. Mercado Libre is that is the largest Latin American e commerce platform and eat expanded the shipping business and logistic network as well as their digital payment solutions over the last couple of years, and they actually doubled their value in 2020. Now, Mercado Libre is actually worth almost $90 billion. There's other emerging platforms such as kms, that was seen in Mexico in the new vein in Argentina or ropey in Colombia that have also posted record sales and revenues. But they're too small to compete with with Mercado Libre, in terms of their service offering and the logistics and logistics network. So actually, the Financial Times included Mercado Libre, a on one of its list of 100 companies that prosper during the pandemic. And they highlighted the implementation of different and new electronic payment methods during the streak lock downs that were undergoing in in the region. Amazon is not a huge player in in Latin America, at the moment, but when they entered the Latin America in in 2015, they were able to grow their market share. And they in the end, in the past six years, they have reached about four to 5% of the entire market share in Latin America. So they're their main competitor, Mercado Libre is not is not letting them grow faster in this region of the world. So when we looked at Latin America e commerce expansion last year, we wonder if the if the pandemic would provide an opportunity for America Lieber, to expand the operations in Latin America and and position itself as one of the e commerce leaders. And these year we can actually confirm that that was the case and these company continues to invest in the growth of its own network and logistics and one of the of the evidence behind this actually, the recently launched maley air fleet of four aircraft that are operating for Mercado Libra and we have also taken a closer look at the utilisation for these major carriers. And this chart over here shows the daily utilization of the of the major cargo carrier seen in Latin America during the pandemic, and we have compared that to the YouTube station in 2019 for each fleet type. So here in this figure, you can see the main operators in in Latin America and the the utilization for for each of their fleet types. Now, most ecommerce shipments are currently being transported in in narrowbodies. And that's why we are seeing a larger daily average utilization for these For these types, the the wide body fleet is still being used mostly for for general cargo to move general cargo cargo from the US and Europe. And they have all the fleets of latam Avianca and an IRA Union have also increased their daily utilization. But obviously, these, this growth has not been as significant as the one that we observed in the narrowbody fleet. So, all carriers except for our sukra and their fleet of seven to seven, but they have they have actually showed increased utilization in last in the last 18 months. So, with again most narrowbody fleets showing greater utilization than the medium wide body fleets. So, going back to the challenges that that we are facing and that we see in Latin America, for the development of air cargo, we are seeing also needed improvements in our navigation in traffic handling traffic rates, airport infrastructure and connectivity. And actually, there is a new multilateral agreement that aims to liberalize all Air Cargo services in the in the region. And that was signed earlier this year. And these resulted in the expansion of the seventh freedom traffic rights without restrictions for all cargo services in and that would include routes and capacity for a total of 11 countries in in Latin America. All these, all these countries expect that this agreement remains in place until at least the end of the year, with the hope that it could be extended beyond beyond December. So the different carriers and operators across the region are seeing these agreements as an opportunity for a more efficient vaccine distribution. But in the longer term, and these carriers could also benefit from a greater liberalisation in the aviation sector. And therefore these would create potential opportunities for for growth in the e commerce segment. So, Jeff, no, we we have some questions for for these seminar. Happy to answer those. Jeff Lee Yeah. Thanks for the presentation. One thing that is interesting and notable this, the lack of wide freight is based in the region. You know, we obviously have companies like Atlas flying it's it's the US base that importantly, on many routes, connecting Latin America to North America and beyond. And we also have some of the European and Middle Eastern operators flying into the region. But in the region itself, there seems to be a relatively low number of large, wide body freighters and particularly large, wide body freighters. What do you think, is behind that? I mean, what are some of the factors that inhibiting the growth of this segment? And do you see this changing? Guillermo Ochovo So if we look at Latin cargo, they'll learn to use the the newly added freighters to reinforce the network, the current network that they have to strengthen their their intra America routes, including some domestic sectors where e commerce has has been very strong. They're also planning to add some transatlantic capacity for these medium wide bodies and and they also want to boost their footprint in the US at the moment. I believe they're only serving Miami in their freighter network and I think there is some options for Latin to look at Chicago or LA which are major routes for for interline traffic to and from Asia. So if we think of some factors inhibiting the growth of large white bodies in the past, we can think of the lack of cross border e commerce in the region as one of them. However, last time on mass air mass air being the other operator adding medium winds In the next couple of years, have seen stronger demand. And and this is one of the main decisions of all the reasons why they're actually growing their wide body fleets. So inbound volumes are critical in Latin America because of the higher yields they generate. And, and these carriers are seeing stronger yields than what they had projected. So the rise of e commerce flows from Asia, North American Europe will be ETS behind this building these actually behind these high yields and we expect these to to continue. So higher increase of cross border ecommerce activity will actually be one of the factors that that will allow for some growth in this segment in the wide body segment. Jeff Lee Right. It's very interesting you were mentioning Masair. Obviously with latam group, they've got a lot of Seven six sevens coming in but equally masair growth is pretty interesting. They will be adding A330. And actually both 200 and 300 and it sounds like they've got some some ambitious plans too. So we'll see how that plays out. But right when we move to to narrowbodies, we have several operators adding 77 classics and replacing older older seven, three sevens and seven, two sevens. For example, how do you see, you know that age trend for this segment changing going forward? Guillermo Ochovo Is so we currently see other regions in the world and other markets where the 737 in GS are being introduced as freighters. In Latin America, there's only two carriers so far that are bringing the newer types, one of them being COPPA bringing a couple of 737 injuries and a zoo. Bring in the the newer, a 321. And most of the most of the carriers are actually still converting 737 classics, and MDS. So I think we're going to keep seeing some further MDS and classics conversion in this area. And the transition to the NGS is going to take a few more years, the age profile for most operators in the region will actually be will still be high. And we don't see significant changes to the average age based on the on the data that we have analyzed so far. Jeff Lee And with Mercado and Libra, it actually it's been pretty impressive to see them building up the GA fleets and we have a few aircraft in their own colors wherever these aircrafts currently flying and how does that relate to the company's hubs and distribution centers? Yep. Guillermo Ochovo So Melly air is actually the airline or yet the airline that he's that he's operating these these freighters or I would say mainly air. He's the airline that was lodged by Mercado Libra. However, these aircraft are being operated by two different airlines, one of them being sideral Linneas areas in in Brazil, that operates to 737 402 freighters to DC nine 330 freighters that are operated by aeronaves TSM in Mexico, these four aircraft are all featuring the the Mercado Libra yellow livery. And the 7374. Hundreds are now flying between Sao Paolo in Guyana and between Sao Paulo and receive it in the northeastern part of Brazil. Sao Paolo being the largest distribution center for mercadolibre in Brazil, and they're distributing these to two different areas in the country. One going out of being there in the middle. And another important point in the northeastern region being received from them from those two cities, Mercado Libra is is delivering or doing their last mile distribution, because because those CDs are actually in an area where they can easily served others in a in a short range. So Fortaleza, Natal job is so it can all be served from from, from Brazil and Ghana has some other CDs medium to large cities around that can be served also from there. If we look at Mexico, DC nine, DC names are actually flying from get a title, which is a few miles north of Mexico City and NBC is actually the hub distribution hub for Mercado libri. In in Mexico, and these planes are actually flying to different parts of the of the country, but mainly Cancun, kuliah con, La Paz and, and medida. However, we have seen some occasional flights to the Juana Monterrey zoo, that wire is annemasse at LAN. So, so they cover a wide range of cities in Mexico as well. Jeff Lee So yeah, it's, I mean, aeronaves TSM, it seems to be growing, it's 737 feet. And it's been fascinating to me, they have, you know, almost 10, seven, three sevens coming in. And you have to wonder whether and how many of those are associated with Mercado Libre. We'll see. But it's interesting to think about how far mega Libra will take this uncontrolled operation in Latin America overall. Guillermo Ochovo And, and also, something to keep in mind is how America Libra will be expanding in other countries in, in Central America. So so the question here is, could we see an increased activity in cross border e commerce, from Mexico to other countries in in Central America? Panama, maybe Guatemala, maybe Billy's so that we will probably, if that happens, we will be seeing it in the in the next few months. But yes, I agree with you, Jeff, it will be interesting to see how how add on Navis deploys their their 737. Fleet when when they start arriving in the next few months. Jeff Lee Yeah, I think we should start seeing the first one pretty soon. But we'll obviously look at what they do with those. And just lastly, in your opinion, we're talking about the growth of e commerce and relate as it relates to the fleet. How do you think is the development of the fleet actually keeping pace with the growth of of e commerce in the region? Guillermo Ochovo So that's, that's a great question, Jeff. We're seeing that across Latin America, ecommerce continues to boom. If we look at Mercado Libre, again, the total number of items that that they sold, Justin in q1 grew by over 100%. So the recent freighter aircraft transaction volumes have shown and that that the planned freighter additions in Latin America over the next couple of years is is likely to grow farther. So we're, we're looking at at 4041 additions but we may be seeing up to 45 or 50 if some of the rumors and plans become or become final or or are finalized. So there's also other carriers, lower profile carriers in the process of finalizing some additional deals that that will add to these new freight or conversions. So even when we look at the air traffic figures that we were describing before in the in the passenger market, these growing ecommerce is clearly translating into opportunities for for the region's freighter operators. And and yes, we we feel like that the freighter additions is actually keeping in pace with with the growth of e commerce in in Latin America. Jeff Lee Great. Well, thank you so much for your for your time and your research. We look forward to seeing how the Latin American fleet develops in the months ahead. Thank you to you, our viewers for tuning into this episode of industry pulse. Guillermo and the cargo facts consultant team will be back regularly to share their insights and analysis. But until then, you can learn more about cargo facts consulting at CFC insights.com Thanks again. And then join us again next time. Guillermo Ochovo Thank you, Jeff. Thank you very much. Cargo Facts Symposium, taking place LIVE October 25-27 at the Wynn Las Vegas, is the essential event for stakeholders in the air cargo industry. Learn more and register at www.cargofactssymposium.com .

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