Global air cargo traffic & yields trending up but low utilization could persist

15 June 2017, Global – The global air cargo traffic grew 11% y/y on international routes and 9% system-wide (including domestic and international routes) in January-April 2017, a marked improvement from the industry’s 4% growth (both international and system-wide) in full year 2016.

This is mainly driven by improving US and European consumption demand. The Asia-US and Asia-Europe air cargo trade lanes are the most important routes in the global air cargo market, accounting for 20% and 21% of global air cargo traffic.

Electronics and telecommunications-related products, pharmaceuticals, high-value luxury items, high-value food & other perishables, and express packages given the rising E-commerce demand are helping to fuel this growth. The bankruptcy of Hanjin Shipping also drove some exporters to shift their more urgent cargo from sea freight to air freight earlier this year.

OPERATING PROFITABILITY OF AIRLINES WITH LARGER CARGO REVENUE EXPOSURE WILL IMPROVE

The stronger traffic growth is helping to lift air cargo yields recently, partly to cover the higher fuel costs as well this year. 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)

Chart: Global air cargo yield trends (2004 to 2016)

Notably, air freight rates from Asia to US rose 10% y/y but the back-haul rates are still down 3% y/y in April 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 16% y/y and 9% y/y in May 2017 respectively.

This 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.

Key beneficiaries among listed Asia Pacific airlines:

  • China Airlines (2610 TT) which derives 28% of its total revenue from cargo.
  • Korean Air (003490:KS) which derives 23% of its total revenue from cargo
  • Cathay Pacific (293:HK) which derives 22% of its total revenue from cargo.
  • EVA Airways (2618 TT) which derives 20% of its total revenue from cargo.

HOWEVER, WE ARE NOT COMPLETELY OUT OF THE WOODS YET AS HALF THE GLOBAL AIR CARGO CAPACITY REMAINS EMPTY

Although the global cargo load factors have improved, they are still reflecting low industry utilization. Globally, the global airline sector’s average cargo load factor (CLF) on international routes is only 49% in Jan-April 2017. The Asia Pacific airline sector is doing better with cargo load factors averaging 58%. Higher aircraft utilization is needed to improve the long-term profitability of the air cargo business.

BELLYHOLD CARGO CAPACITY IS THE MAIN DRAG

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 less than 1% per annum from 2017 to 2021 based on the existing aircraft orders, which is positive.

Chart: Global freighter fleet growth (2016 to 2021)

Chart: Global freighter fleet growth (2016 to 2021)

However, 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 2017 to 2021 based on the existing aircraft orders and 5%-6% per annum net of aircraft retirement.

Chart: Global passenger fleet growth (2016 to 2021)

Chart: Global passenger fleet growth (2016 to 2021)

This raises the overall global air cargo capacity growth to 3%-4% per annum from 2017 to 2021 based on our estimates, with room to expand capacity further if the airlines increase their freighter aircraft daily utilisation rate (in terms of flying hours).

In addition, the low fuel prices and stronger air cargo market could drive a revival of interest in converting the older passenger aircraft into freighters. This would, however, 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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