As the world cargo market continues to stabilise (reaching a degree of what Simon Clements, executive vice president of Novus Aviation, describes as a “should we call it normality coming back into play in 2024”), the threat of ongoing global conflict continues to drive growth within the sector.
Following the “almost abnormal spike” at the end of last year (driven by e-commerce deliveries originating from the China and East Asian regions), Clements believes the market has almost reached “a kind of normalisation”. However, “the e-commerce phenomenon – which is no longer really a phenomenon – still has tremendous legs for growth in certain regions,” he elaborated, citing the Middle Eastern and Latin American areas (which are yet to experience the full “e-commerce boost”) as key areas for development. In Q3 2023, exports from China and Hong Kong rose from 6% of total volume in 2022 to 9% in 2023. “E-commerce still has a lot of potential going forward,” agreed Maxim Straus, executive vice president and CFO of Cargolux. However, Tom Crabtree, manging director of Trade and Transport Group, added that industrial traffic remains the “bread and butter” of the market.
“Europe – which was a big funk in 2023 – is projected to moderately recover in 2024,” added Crabtree, noting that “sadly, North America [has not recovered] as much as Europe in terms of recovery, so that’s a big concern.” Overall, he predicts that “overall global industrial production should be quite a bit stronger in 2024”.
As the threat of global conflict continues to impact regions across the globe, an “interesting situation” is unfolding regarding ongoing implications for air freight, highlighted Christian Sutter, CEO of Avensis Aviation. With ship-borne cargo affected by unrest in the Red Sea and historical water levels in the Panama Canal being too low, “we could see a transforming capacity to the aerospace cargo sector within the next two to three years,” he added, which is likely to continue “driving demand [for air freight] forward”. Clements confirmed this view, noting that “ironically, air cargo is now the reliable source.”
In terms of the aircraft deployed to meet these growing needs, Crabtree believes that the threat recovering belly capacity poses to dedicated freighters is “overhyped”, especially given that the world’s total freighter fleet totals just 10% of all commercial platforms in service. Although the return to ‘normality’ post-Covid has increased belly capacity, dedicated freighters provide around 60% of all total global capacity.
Two new dedicated freighters are projected to enter service relatively soon – the A350F (in 2026) and the 777-8 – will not only increase capacity but also provide an attractive option for meeting ESG targets for those who can afford them, said Sutter. Clements added that Novus Aviation had “no immediate preference” as to which aircraft they might opt for. However, Crabtree added a cautionary note that the recent 737-9 MAX issue “does create a little bit of tension” regarding the FAA granting supplemental type certificates, adding that he hopes Boeing's projected in-service date of 2025 is still achievable.
The market for passenger-to-freighter conversions also remains strong, with Crabtree saying that the freighter industry continues to rely “heavily” on older conversions. There are around 600 widebody conversions in service, he pointed out, around 50% more than 25 years ago. Eammon Forbes, chief commercial officer of Titan Aviation Leasing, described 747-400 freighters as “almost invaluable” to “a small number of operators” despite their increasing age. This is predominately due to the type's nose-loading configuration and its unique ability to accommodate heavy industrial items.
In the beginning, lessors saw the 747 conversion as lower value, highlights Straus; representative of a trend that saw appraisers assess an aircraft on its age rather than its capabilities. With freighters representing less than 10% of overall commercial facing, “inevitably we’re not going to get the same focus,” agreed Forbes. “The tricky bit apart from the capability side is.. the conversion cost and the valuation around it. And it’s complicated further by the naturally occurring escalation that happens around conversions, just like it happens with new aircraft.” He added that this perceived “bridge in the middle with the conversion” represents something of a grey area, concluding that “I think it’s incumbent on us… to actually educate the appraisers”.
Sutter believes that portfolio diversification is a positive step for lessors, allowing them more options to position assets and tackle fluctuations of the market; describing the next two to three years as the most “difficult step”. However, with freighter conversions traditionally older than their passenger-carrying counterparts, might financing freighters become more complicated as organisations look to optimise their ESG strategies? As Sutter describes his core business as “essentially prolonging the life of an asset which belongs to previous generations’ technology,” it's inevitable that that may be “frowned upon in the next few years”. However, he added that Avensis Aviation makes every effort to implement sustainable strategies elsewhere in its way of working, “regardless of the operational emissions” the company is going to create in the next 10 years. “Everything we can do from day one to offset those emissions will facilitate our survival in the market,” he concluded.
E-commerce and global conflict continues to drive strong demand for air freight
