Future predictions by Boeing of the global air freight market

18.2.2008     (International Freighting Weekly)

High fuel prices and increased competition could be starting to threaten the
longstanding relationship between GDP growth and the increase in air cargo volumes.

The world air cargo market has grown at 7% a year since 1970, compared with a
5% growth in passenger traffic, according to Boeing (graph 1).

In a recent presentation on future demand trends, Thomas Hoang, regional director
of cargo marketing for Boeing’s commercial airplanes division, said air cargo
traffic growth would continue to outpace passenger growth in every major world

Boeing’s least optimistic expectation is for 5.3% annual growth, which will take
the sector from 200bn revenue tonne-km (RTK) today to 500bn RTK by 2025.

On a more optimistic assessment of 6.9%, following the trend of the last 35 years,
the figure could be nearer 700bn RTK by that time.

Yet the close correlation between air cargo growth and GDP growth, with air cargo
operating close to a multiple of 2.3 times over the last 20 years, shows signs
of departing from that pattern since 2004 (graph 2).

“The shipping industry has improved its reliability, ” said Hoang. “New time-sensitive,
high-value products will still go by air.  But some commodities are on the border
between modes, for example, plasma TVs.  It will be interesting to see what variables
we will see.”

Periodic slumps in the air cargo market have been followed by phases of rapid
expansion, restoring the sector to its steady 7% growth track. The decrease commonly
attributed to the terrorist attacks in September 2001, for example, had already
been visible from the fourth quarter of 2000 when the IT sector collapsed and
the US, Japanese and European economies went into reverse.

But there was strong growth through 2002, helped, at least on the transpacific
lane, by the US west coast ports strike.

Likewise, the Sars outbreak had a depressive effect in 2003.

“Demand was still there but passenger capacity was down, ” said Hoang.

That slowdown was followed by a solid year of 10-15% growth through 2004. But
the new trend apparent since then is that, while GDP growth has remained relatively
robust, air freight has failed to keep pace. If the soaring cost of fuel is solely
to blame, Boeing and its customers may have to adjust their expectations.

World GDP is projected by market researcher Global Insight, backed by Boeing’s
own economists, to grow at 3.1% a year through to 2025. North America and Europe,
with their large existing economic base, will come in below the global average,
outgrown by Asia, Latin America, the Middle East and Africa (graph 3).

Despite recent questions over its ability to maintain its role as workshop to
the world, China’s GDP is predicted to increase at 6.8% a year. Whether the traditional
correlation with GDP holds or not, it is obvious which will be the best performing
air routes.

Anything that touches Asia will exceed the world average, ” said Hoang.

The China-Europe, ChinaNorth America and intra-Asia markets are predicted to
grow the most rapidly (graph 4), as the share of world air trade connected to
Asia increases from 51% in 2005 to 63% by 2025. Europe-North America and intra-North
American markets will expand, but at a more modest rate.

Five countries account for more than two-thirds of the 2.6m tonne Europe-US air
trade (Germany 22%, the UK 20%, France 11%, and the Netherlands and Italy 9%).  
But growth is slow in this relatively mature market, with UK-US traffic averaging
only 1.3% growth from 2001 to 2006.

This compares with 7.4% growth in the market between the UK and the leading 12
AsiaPacific countries.   And Asian business comes at a more lucrative rate for
the airlines, with exports from the UK typically yielding US$1-1.10 per kilo and
imports $2.00-$3.00.

The growth to and from China has been 33.5%, though Hoang pointed out that this
was “very directional”, with imports topping 220,000 tonnes while exports were
a little over 20,000 tonnes.

European carriers account for only 22% of the China-Europe air cargo market,
thanks to the emergence of strong Asian competition – although Hoang suggested
the new players’ business models may not all be sustainable.

“A lot of start-ups you think shouldn’t even be in the industry, ” he said. “They
are wet-leasing B747-200s because there is no availability [of alternative aircraft].”
Hoang did not believe longhaul rail routes such as the planned Schenker service
from Asia to Europe would have an immediate impact, but accepted that improvements
in both trucking and rail services had hit domestic European and intra-European
air freight markets. “The domestic Chinese market will go that way long term,
” he said.

Cargo represents a sizeable revenue source for most major passenger airlines
(graph 5).

Asian carriers are at the top end of the scale, with freight accounting for 20%
or more of revenue – and 50% in the case of Eva Air. European airlines are in
the middle ground, with cargo’s contribution in the teens, while for North American
carriers, it makes only a single-digit contribution.

How will aircraft manufacurers and airlines meet future cargo demand?   Boeing
sees the global freighter fleet growing from 1,980 aircraft in 2006 to 3,980 by
2025, with the widebody component growing from 58% to 64%, reflecting the higher-than-average
growth of longhaul routes out of China.

Freighters will continue to account for 10-11% of the world’s aircraft fleet
by number, but the rush to widebody will see freighters’ proportion of cargo capacity

A factor in new freighter deliveries will be the ability to handle large and
awkward freight.   Taking revenues for standard cargo as $2-2.25 per kilo, Hoang
said outsize freight could yield $3.50-4.00 – “so you command a premium for a
nose door”.

Within Boeing’s own equipment line-up, Hoang said there were 166 orders from
24 customers for B747-400 freighters, a full sell-out of the type which the manufacturer
expects to bridge the gap until the arrival of the B747-8.

This is scheduled to enter service in the third quarter of next year, and so
far has attracted 78 firm orders from nine customers. Trip costs are the same
as the B747-400, Boeing claims, but payload will be 134 tonnes compared with 109

The B777 freighter, scheduled to enter service by the end of this year, would
offer 103 tonnes payload but with “twinengine economics”, Hoang said.

It would take 3-metre high pallets and customers would therefore be able to interline
with the B747-8. He said Korean Air and Emirates were buying both types and “matching
the right aircraft to the right market”.

Hoang said the British Airways incident in January, in which a passenger B777
from Beijing came down short of the runway at Heathrow, had not raised any new
issues and would not delay Boeing’s introduction of the freighter version.

The B777 freighter, scheduled to enter service by the end of this year, will
combine 103 tonnes payload with twin-engine economics


Widebody rush as  freighters take off