9 January 2018, Global – Happy New Year! We are bullish on the global air cargo outlook in 2018 and forecast the global air cargo industry capacity to grow only 3%-4% per annum from 2018 to 2022 while demand will surpass this, growing at 5%-6% in 2018, supported by favourable leading economic indicators and expanding E-commerce trade flows. This will lift the industry’s profitability. The Asian airlines are the key beneficiaries as they carry the lion’s share of global air freight, with a market share of nearly 40%. In fact, half of the world’s largest air cargo carriers are Asian or partially Asian-owned. Notably, global air cargo yields surged 17% y/y in November 2017 following five years of decline since 2012. Asian airlines with the largest exposure to cargo are China Airlines, Korean Air, Cathay Pacific and EVA Airways. The stronger air cargo market will also lift demand for passenger-to-freighter conversions. This will benefit Asian MRO players ST Engineering, SIA Engineering and HAECO.
2018 GLOBAL AIR CARGO OUTLOOK
LEADING ECONOMIC INDICATORS POINT TO STRONG GLOBAL AIR CARGO DEMAND IN 2018
There has historically been a strong positive correlation between the global air cargo traffic growth and the global Purchasing Managers Index PMI. The PMI has strengthened further to a high of 54.5 which should support continued growth in air cargo demand in 2018.
Chart: Global air cargo traffic growth versus Global PMI (2015 to 2017)
As predicted by our earlier report on 6th September 2017 that the y/y growth rates will moderate in 4Q17 due to the high base last year following the bankruptcy of Hanjin Shipping which diverted some cargo from sea to air transportation, the global air cargo traffic growth on international routes has moderated from 11% in 9M17 to around 8% in November 2017. However, this is still a strong performance considering the high base last year and the growth momentum is likely to continue, supported by the favourable leading economic indicators.
Chart: Global air cargo traffic growth (2007 to 2017)
EAST-WEST TRADE LANES ARE THE KEY GROWTH DRIVERS
This is mainly driven by improving US and European consumption demand as well as inventory re-stocking. The Asia-North America and Asia-Europe air cargo trade lanes are the most important routes in the global air cargo market, accounting for 21% and 20% of global air cargo traffic. Electronics, Telecommunications-related products, high-value products, high-value food & other perishables and express packages given the rising E-commerce demand are fuelling this demand growth.
Chart: Distribution of global air cargo traffic flows (2016)
NEARLY 40% OF THE WORLD’S CARGO TRAFFIC IS CARRIED BY ASIAN AIRLINES
The Asian airlines carry the lion’s share of global air freight, with a market share of 37%. This is followed by European carriers (24%), North American (21%) and Middle Eastern airlines (14%).
Cathay Pacific Airways is the fourth largest air cargo carrier globally in terms of cargo traffic (FTK), followed by Korean Air in 5th position. Cargolux is partially Chinese owned and ranks 8th largest while Singapore Airlines and Air China rank 9th and 10th largest globally. Cargolux is 35% owned by the Henan Civil Aviation Development and Investment (HNCA).
Chart: Global air cargo market share broken down by region (2017)
Chart: Global market share of the top 10 air cargo carriers in the world (2016) – half of which are Asian airlines or partially Asian-owned
ON THE SUPPLY SIDE, GLOBAL FREIGHTER ORDERBOOK IS SMALL IN NEXT 5 YEARS
Due to the prolonged global air cargo industry downturn, carriers have placed a limited number of new freighter aircraft orders in recent years. As such, the global freighter fleet is expected to grow only marginally by 1-2% per annum from 2018 to 2022 based on the existing aircraft orders, which is positive.
Chart: Global freighter fleet growth (2016 to 2022)
PASSENGER AIRCRAFT BELLYHOLD WILL BE THE MAIN DRIVER OF GLOBAL CARGO CAPACITY GROWTH
Around half of the global air cargo is carried in the bellyhold of passenger planes. The global passenger fleet is expected to grow by 7% per annum on a gross basis from 2018 to 2022 based on the existing aircraft orders and 5%-6% per annum net of aircraft retirement.
Chart: Global passenger fleet growth (2016 to 2022)
WE FORECAST GLOBAL AIR CARGO CAPACITY TO GROW ONLY 3%-4% PER YEAR IN 2018 to 2022 WHICH WILL LIFT LOAD FACTORS AND YIELDS
This raises the overall global air cargo capacity growth to 3%-4% per annum from 2018 to 2022 based on our estimates, with room to expand capacity further if the airlines increase their freighter aircraft daily utilisation rate (in terms of the number of flying hours) and increased passenger-to-freighter conversions.
This moderate level of cargo capacity expansion will result in a favourable 2018 air cargo outlook as we expect the global air cargo demand to grow faster than the industry’s capacity increase. We forecast the global air cargo demand to grow at a healthy pace of 5%-6% which will surpass the global airline sector’s cargo capacity growth of 3%-4%. This will help lift global cargo load factors and keep cargo yields firm or higher.
SURGING AIR FREIGHT RATES WILL SIGNIFICANTLY LIFT AIRLINES’ CARGO PROFITS IN 4Q17 AND 2018 AFTER FIVE YEARS OF DECLINING YIELDS
The stronger traffic growth and benign supply environment will lift air cargo yields further. Notably, cargo yields surged 17% y/y in November 2017 which will more than offset the higher fuel costs incurred by airlines. This is a marked turnaround from the 13% y/y decline in global air cargo yields in 2016 and 17% decline in 2015. Global air cargo yields have been on the decline since 2012.
Chart: Global air cargo yield trends (2004 to 2016)
Specifically, air freight rates from Asia to US surged 18% y/y and the back-haul rates from US to Asia have also risen 6% y/y in November 2017.
Two major cargo operators on the Asia-US and Asia-Europe routes China Airlines (2610:TT) and EVA Airways (2618:TT) achieved cargo yield improvement of 15% y/y and 16% y/y in November 2017 respectively.
The favourable 2018 air cargo outlook is a positive read-through for the other Asian and global cargo airlines and should help improve the profitability of airlines with larger cargo revenue exposure.
PROFITABILITY OF AIRLINES WITH LARGER CARGO REVENUE EXPOSURE WILL GROW SIGNIFICANTLY
Key beneficiaries among listed Asia Pacific airlines:
- China Airlines (2610:TT) which derives 30% of its total revenue from cargo.
- Korean Air (003490:KS) which derives 22% of its total revenue from cargo
- Cathay Pacific (293:HK) which derives 23% of its total revenue from cargo.
- EVA Airways (2618:TT) which derives 20% of its total revenue from cargo.
DEMAND FOR PASSENGER-TO-FREIGHTER CONVERSION WORK WILL RISE, BENEFITTING MRO PLAYERS
In addition, the stronger 2018 air cargo outlook could drive a revival of interest in converting the older passenger aircraft into freighters. This will benefit the listed Asian maintenance, repair & overhaul (MRO) service providers ST Engineering (STE:SP), SIA Engineering (SIE:SP) and HAECO (44:HK).
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