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ANALYSIS: Cargo operators foresee e-commerce uplift

This year's Farnborough air show dawns on an air freight sector suffering a bit of a hangover following a banner year in 2017.

Not to say the business is in downturn – far from it.

But air cargo did not arrive in 2018 with momentum anywhere near that which recently buoyed the business out of a years-long downturn.

Though the sector has returned to single-digit growth, cargo players still see significant opportunity ahead, particularly thanks to e-commerce.

At the air show they are highlighting some of the world's largest cargo aircraft and discussing, at an on-site symposium, the future of the air freight industry.

The symposium runs on 17-18 July, and gives attendees an opportunity to hear from industry watchers and executives from several cargo airlines.

On static display at Farnborough's "Cargo Village" will be an Antonov An-124 operated by Russian cargo carrier Volga-Dnepr Airlines (below) and a Boeing 747-8F operated by CargoLogicAir (second photo), a UK-based carrier with ownership links to Volga-Dnepr.

"This is a great opportunity, with both the air show and the conference... to profile our capabilities," says David Kerr, chief executive of CargoLogicAir. "We are a relatively new carrier. Our emergence represents a positive sign in the investment in the wider cargo industry, and particularly in the UK."

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Volga-Dnepr's vice-president of sales and marketing Robert van de Weg declares the group to be "bullish", adding: "We believe there will be continuous opportunity in general because the supply and demand dynamics in the last 10 years have been out of whack."

Indeed, the air freight market suffered during most of the last decade, with the slowdown starting around 2007 at the dawn of the global economic downturn. Between then and 2015, world air cargo traffic grew an average of just 1.5% annually, according to Boeing's World Air Cargo Forecast.

Then 2017 brought a major turnaround, with demand, as measured in freight tonne-kilometres (FTKs), surging 9% year-over-year, according to IATA's economic reports. Yields also climbed.

But demand has since slowed, climbing 5.1% year-over-year in 2018 through April, IATA's most-recent report indicates. Growth in March slipped to just 1.7%, the slowest rate in 22 months.

IATA projects that full-year 2018 demand will be up about 4% from 2017.

"It's not as if things are going to fall off a cliff," says IATA senior economist David Oxley. Growth of 4% is not inconsequential, especially considering that it comes atop last year's expansion, he adds.

Passenger airlines have reported a similar slowdown.

After a strong 2017 and admirable start to 2018, United Airlines reported that cargo volume, as measured in cargo tonne-miles, grew only 1.6% year-over-year in May. Delta Air Lines' cargo volume slowed to 2.3% the same month, the carrier reported.

The strength of 2017 partly reflected a decline in the inventory-to-sales ratio, which indicates how many months' worth of stock companies have on their shelves. A declining ratio reflects a pick-up in sales, which results in more orders and greater demand for air freight, says Oxley.

But the inventory-to-sales ratio in the USA increased early this year, IATA notes. In addition, new export orders declined in April to the lowest level since October 2016, suggesting a weakening in world trade growth, it adds.

"Certainly, the very strong tailwinds that are propelling the industry seem to have weakened a lot," Oxley says.

CargoLogicAir's Kerr says demand this year has not been across the board but, rather, "fragmented" across industries and geographies. Shipping demand has declined for some items, like retail products, but increased for others, like some high-tech products, Kerr says.

Despite mixed results, freight airlines worldwide see big upside in shipments of e-commerce products.

E-commerce is "clearly driving demand in general, particularly in the last three to four months of the year," van de Weg says. "The change of consumer behavior has increased the need for speed, and air freight has benefited."

That view has proponents across the Atlantic.

"E-commerce is by far the fastest-growing segment globally," Michael Steen, chief commercial officer at US-based Atlas Air Worldwide Holdings, said on 25 June.

Atlas has been at the forefront of the e-commerce boom, having signed a deal to operate 20 767 Freighters for Amazon. Fifteen of those aircraft were in service in late June, and Atlas expects to deploy all 20 by year-end.

It projects that e-commerce sales will grow at an average rate of 22.5% annually between 2011 and 2021.

"We are engaged in discussions with several other e-commerce customers, and I am confident we will be able to expand on other opportunities," Steen says.

But executives warn that longer-term expansion could be hindered by a lack of aircraft. Cargo carriers worldwide have in recent years been snapping up used 767s and converting those aircraft to freighters, while Boeing has landed some sales for new 767Fs, 777Fs and 747-8Fs.

But insiders say demand for additional freighters is outstripping supply, and the future of the 747-8F – seen by many airlines as the reigning king of long-distance heavy lifting – remains in question.

"We are concerned about the continuation of the -8 production line because it's a very good airplane," says Kerr. "It's doing a great job for us and we are concerned about the supply of large cargo freighters in general."

A CargoLogicAir Boeing 747-8 Freighter

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Boeing currently has back orders for 24 747-8s, nearly all being freighter versions destined for UPS Airlines. The backlog brings production only into 2022, Flight Fleets Analyzer shows.

"The ultimate question is: how long will the production line still be open for, and how many orders can Boeing still accommodate?" van de Weg says. "We believe still there's a long-term requirement for the 747-8."

Atlas estimates that airlines worldwide will need an average 25 large-body freighters and 22 medium-body freighters annually for the next 19 years.

That equates to about 920 aircraft by 2036, or 47 new aircraft annually – roughly double the current freighter production rate.

"If you look at the current freight production capabilities at the large OEMs, it will be impossible to reach such levels unless there is a significant increase in production capacity," says Atlas's Steen.

The cargo industry sees other threats, such as a protectionist sentiment in many countries (the USA and UK, notably) and trade tariffs.

But executives remain optimistic.

"There are always clouds on the horizon," says van de Weg. "The fundamentals are currently very strong."

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