Record year for global air cargo market to benefit Asian airlines and MRO players

6 September 2017, Global – The global air cargo market is still running at full steam even after a strong 1H 2017, with consecutive months of double-digit traffic growth rates not seen since 2010. We expect this trend to continue for the rest of this year although the y/y growth rates could moderate due to the high base in 4Q16. This should help to sustain further cargo yield improvements and better profitability in 2H 2017. Asia Pacific airlines with the largest exposure to cargo are China Airlines, Korean Air, Cathay Pacific and EVA Airways.

On the supply side, we expect the global cargo capacity growth to be moderate at 3-4% per annum in the next 5 years which is favourable for the market as long as global trade demand continues to grow slightly ahead of the world real GDP growth. The stronger air cargo market, coupled with low fuel prices, could revive passenger-to-freighter conversions which will benefit MRO players ST Engineering, SIA Engineering and HAECO.

GLOBAL AIR CARGO MARKET TO END THE YEAR WITH A STRONG FINISH

The global air cargo traffic grew 12% y/y on international routes and 11% system-wide (including domestic and international routes) in January-July 2017, a marked improvement from the industry’s 4% growth (both international and system-wide) in full year 2016. Growth momentum remained strong in July, with cargo traffic rising 13% y/y on international routes and 12% y/y system-wide. We have not seen such strong growth since 2010 when the market recovered from the global financial crisis.

We expect the global air cargo demand to remain strong as we enter the traditional peak season in 4Q. There is a strong positive correlation between the global air cargo traffic growth and the global Purchasing Managers Index PMI which is still on an uptrend. The upcoming launch of iphone 8 will help boost air freight volume.

However, the y/y growth rates could moderate in the coming months due to the high base last year following the bankruptcy of Hanjin Shipping which diverted some cargo from sea to air transportation.

Chart: Global air cargo traffic growth versus Global PMI (2015 to 2017)

Chart: Global air cargo traffic growth versus Global PMI (2015 to 2017)

Chart: Global air cargo traffic growth (2007 to 2017)

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 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.

Chart: Distribution of global air cargo traffic flows (2016)

Chart: Distribution of global air cargo traffic flows (2016)

SURGE IN CARGO RATES POSITIVE FOR ASIA PACIFIC AIRLINES

The stronger traffic growth is helping to lift air cargo yields this year, 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.

Notably, air freight rates from Asia to US surged 28% y/y and the back-haul rates from US to Asia have also risen 9% y/y in July 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 12% y/y and 11% y/y in July 2017 respectively.

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

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

OPERATING PROFITABILITY OF AIRLINES WITH LARGER CARGO REVENUE EXPOSURE WILL IMPROVE

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 24% 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 19% of its total revenue from cargo.

FOUR OF THE WORLD’S LARGEST AIR CARGO CARRIERS ARE ASIAN

The Asia Pacific 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. Singapore Airlines and Air China rank 9th and 10th largest globally.

Chart: Global air cargo market share broken down by region (2017)

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) – 4 of which are Asian airlines

Chart: Global market share of the top 10 air cargo carriers in the world (2016) – 4 of which are Asian airlines

FUTURE CARGO MARKET SUPPLY GROWTH IS MODERATE

The global air cargo capacity is still under-utilised. Although the global cargo load factors have improved by 4ppts y/y ytd, they are still reflecting low aircraft utilization. Globally, the global airline sector’s average cargo load factor (CLF) on international routes is only 49% in Jan-July 2017. The Asia Pacific airline sector is doing better with cargo load factors averaging 59%, +4ppts y/y. Higher aircraft utilization is needed to improve the long-term profitability of the air cargo business. 

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 2017 to 2021 based on the existing aircraft orders, which is positive.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 freighter fleet growth (2016 to 2021)

Chart: Global freighter fleet growth (2016 to 2021)

Chart: Global commercial passenger aircraft fleet growth (2016 to 2021)

Chart: Global commercial passenger aircraft 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). This moderate level of cargo capacity expansion is favourable for the airline sector as long as the global trade demand continues to grow slightly ahead of the world’s real GDP growth.

DEMAND FOR PASSENGER-TO-FREIGHTER CONVERSION WORK COULD RISE, BENEFITTING MRO PLAYERS

The stronger air cargo market and low fuel price environment 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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