Deregulation of the US airline industry originally bypassed passenger services and began instead with all-cargo services. As so often happens, this trend has been mirrored internationally, as a study of air services agreements (ASAs) by Seattle-based consultancy Aero-Accords shows .
Since 2001 there has been a striking acceleration in liberalisation. Negotiations that incorporated specific all-cargo routes have increased from just a few percent in the 1980s and 1990s to nearly half of all negotiations over the past few years (see table 1). In addition there has been an increase in negotiations where the traffic rights are specifically applied to the carriage of passengers, freight and mail separately or in combination, where previously the possibility of all-cargo services was only implied in the rights-granted article.
This phenomenon peaked between 1996 and 2000 when 10% of cases involved negotiations limiting designation to a single airline for each state. The absence of such cases between 2001 and 2005 may be due to the increase in general liberalisation and, as such, a much smaller number of negotiations accepting single designation.
Where negotiations may have been initiated only for the selection of intermediate points – such as for other commercial elements or safety and security issues, and not for service-related issues – the increase in the percentage of negotiations addressing cargo issues directly is dramatic.
Not only are recent negotiations providing increased details of all-cargo rights, but air cargo rights are becoming far more liberal than similar rights for passenger and combination services. For example, consider negotiations providing unrestricted fifth-freedom traffic rights, such as the privilege of carrying revenue traffic between two countries as a part of services originating or terminating in a carrier’s home country. The history of fifth-freedom negotiations for all services suggests general increased liberalisation (see table 2). However, these results are not conclusive and it may take a few more years for a clearer picture to appear.
On the other hand, the negotiation history of sixth-freedoms – the privilege of linking revenue traffic between the partner countries of two separate ASAs as part of services through a carrier’s home country for all classes of service – has grown from nothing to over 15% in the past decade. These results are conclusive, and show a striking measure of general liberalisation for all services – passenger, freight and combination.
Equally conclusive is the increase of seventh-freedom traffic rights that apply to all-cargo services only – the privilege to carry revenue cargo between two countries without passing through the carrier’s home country. These cargo rights have grown in one decade from nothing to more than 10% of negotiations. Whereas these apply to all-cargo services, sixth-freedom rights applied equally to both cargo and passenger services. Clearly, air cargo leads in deregulation.
What impact have these changes in historical ASA features made on international, long-haul air-cargo traffic and freighter aircraft demand?
Since the advent of widebody aircraft in 1970, demand for air transport of goods has surged. Between 1970 and 2004, world air cargo traffic levels grew on average 7.1% a year, resulting in a 10-fold increase in traffic volume. Growth has moderated somewhat over the last decade, to about 5.8% average annual growth since 1994. Most of this deceleration has occurred in the US domestic and intra-European markets, where road transport of freight was deregulated; thus diverting shipments to trucks that would have otherwise been air cargo traffic. Indeed, domestic air cargo growth has only averaged 2.7% a year for the past decade. International air cargo traffic, however, has continued to grow at a robust 6.8% per year.
Over the past decade, increasing cargo traffic liberalisation has “enabled” international freighter aircraft operations that were difficult (if not impossible) to conduct prior to the mid-1990s. To understand why cargo has led the liberalisation charge, a comparison of passenger and cargo air transport is necessary. Patterns of international air cargo traffic are distinctly different from those of passenger transport. In general, passengers tend to travel to a destination, then return to their point of origin, giving passenger airlines roughly even per-seat load factors across their systems.
However, air cargo is a key part of the overall international merchandise trade regime, and so is highly directional. For example, in the Asia-North America market during 2004, about three tonnes of air trade moved eastbound to North America while only two tonnes of air trade moved westbound. This “directionality problem” is also a characteristic of other trade lanes, often making it difficult for freighter operators to fill their aircraft profitably over their international route networks. But an intermediate traffic stop in a freighter aircraft network opens the possibility of earning additional revenue, which may often mean the difference between profit and loss on the overall routing. Therefore, freighter aircraft operators need the routing and load-building flexibility provided by fifth, sixth and seventh-freedom rights in ASAs.
In addition to the expansion of “creative” long-haul routings, cargo liberalisation (particularly the increasing number of seventh-freedom rights) has given international express carriers the ability to build hub-and-spoke networks outside their home countries. This trend was particularly characteristic of Asian express networks during past decade, but was even found in the less buoyant growth markets of intra-Europe and the Middle East.
While not all widebody freighters serve international markets, they are more likely to do so due to their, usually, long-range capability and low tonne-kilometre costs compared with standard-body freighters. Therefore, the world widebody freight fleet count makes a good simple measure of capacity added to meet international demand. To carry this increasing international cargo, the number of western-built widebody freighters more than tripled from 245 to 852 from 1994 through 2004.
Boeing forecasts that world air cargo traffic will continue to grow at an average annual rate of 6.2% for the next two decades, which will result in a tripling over current levels. As in the past decade, world air cargo traffic will continue to expand primarily on international trade lanes, particularly those moving to, from and within Asia.
Furthermore, over the next decade, Aero-Accords anticipates that roughly half of all ASAs will provide specific all-cargo routes. Among these will be those ASAs that restrict the number of airlines that may be designated, as well as those that have no such restrictions.
At the same time close to a half of all ASAs may include sixth-freedom rights for all classes of service, and sixth-freedom may well come to be the standard in North Atlantic ASAs. Together with a general acceptance of sixth-freedom rights, the inclusion of change-of-gauge, code sharing and blocked seating rights will be of further benefit to traffic growth. However, as cargo is less impacted by indirect service than passenger service, the availability of sixth freedom may be expected to be more beneficial to air cargo growth than to that of passenger traffic.
The case for expanded seventh-freedom is more tempered. Seventh freedom may be expected to peak at about 15-20% of all ASAs and continue to apply largely to air cargo alone. The expansion of these rights to the passenger markets is not expected, although currently a few cases have been found.
The net result of forecasted increased demand for international air cargo transport and liberalisation of ASA cargo terms will be a pronounced expansion of the world widebody freighter fleet. Boeing forecasts that the world freighter fleet will double in size over the next two decades, expanding from 1,757 aircraft to 3,526 aircraft by 2024.
More significantly, the widebody freighter fleet will expand its share of the overall world freighter fleet from 47% to 64% during this period. The actual number of in-service widebody freighters, both conversions of older passenger aircraft as well as factory-built freighters, will expand from roughly 850 today to nearly 2,300 aircraft in 2024. Approximately 1,800 widebody freighters, both conversions of older passenger aircraft as well as factory-built units, will be added to the world fleet. Of these, 1,500 will represent growth while the other 300 units will be need as replacements for projected retirements of older widebody freighters.
Boeing anticipates that nearly 1,000 large widebody freighters (including 747s, MD-11s, Airbus A380s and 777s) will be added to meet demand primarily on long-haul international traffic lanes. Another 800 medium widebody freighters (such as 767s and A300/310s) will be added to serve intra-regional express carrier networks in North America, Europe and Asia, as well as select long-haul niche general freight markets.
Liberalisation of cargo elements in ASAs has allowed freighter aircraft operators to implement market services that were not possible a decade ago. ASAs with specific provisions for cargo fifth-, sixth- and seventh-traffic freedoms have permitted the development of more economical large widebody freighter routings, as well as the establishment of intra-regional express hub-and-spoke networks. ■
EARL SCOTT AT AERO ACCORDS AND TOM CRABTREE AT BOEING COMMERCIAL AIRPLANES
Source: Airline Business