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2008 FREIGHTER OPERATORS’ GUIDE

Freighter market review: “The real growth is on the SPONSORED BY: widebody side” The Airbus approach: from the A300 to the A350F Trends in the air cargo market: a DVB analysis The : a growing hub for air cargo? Boeing’s freighter strategy explained

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2008 FREIGHTER OPERATORS’ GUIDE

Air cargo market trends: 2008 and beyond

Prof. Dr Borislav Bjelicic, an this would entail — first and foremost — a by demographic developments. By this we SVP at transport finance drop in air cargo imports from . On the mean not so much the increase in population, specialists DVB Bank, shares other hand, the weakening of the US dollar has which will rise only slightly in the period to his predictions on future caused prices of US exports to decline 2030, but growing urbanisation. While a third developments in the air significantly and is therefore likely to ensure of China’s population resided in urban areas in cargo market. that the economic slowdown will not be too 2000, the proportion will increase to roughly drastic or necessarily lead to recession. 60 per cent by 2030. By implication, there will Chinese exports would decline, but this need be a strong increase in the demand for new not bring about a pronounced reduction of housing and related consumer goods. THE MAJOR TRENDS IN GLOBAL AIR CARGO economic growth in China. Instead, one may Thus, China’s general economic development transport remain essentially unchanged for expect that lower capacity utilisation in the will become less dependent on its main export 2008 and beyond, leaving aside disruptions export sector will be partially compensated by markets of and Europe. The from exceptional events such as pandemics, increased production aiming at domestic continuing advance of prosperity will also bring political unrest, wars, acts of terrorism, etc. In demand, as large sections of the Chinese about an increasing demand for non-domestic the short term, the global business climate will consumer population have become more consumer goods, predominantly premium be driven by developments in the US economy prosperous over recent years. On these grounds, brand products. Accordingly, China’s air cargo and the euro zone. However, in the long run, one would assume that global commodity imports are going to rise steadily. This is a China is likely to assume the role of a driving markets will see demand persisting at much the pattern previously witnessed in the Gulf region, force of the world economy. same levels during 2008. By the same token, oil and in . Therefore, the persistent problem The crisis that emerged in the US mortgage prices should remain at high levels. of unmatched air cargo traffic flows on routes and real estate markets in 2007 aggravated In the past years, China has enjoyed economic to and from China should gradually diminish. fears of a severe slowdown in US economic growth primarily due to buoyant exports to Since Chinese consumers will over the next 10 activity. While the Federal Reserve reduced key North America and Europe; this has been years direct expenditure not only toward rates to thwart the danger of an economic helped not only by low wages but also by education, housing, cars and health care, but downturn, the threat has certainly not quite China’s currency being kept artificially low. As a also toward travel, the number of passengers disappeared. consequence, China was able to accumulate flying out of China is likely to rise substantially, What are the implications of this for the air enormous currency reserves. In the coming entailing an expansion of belly capacity in the cargo market? If in 2008 economic activity in years, however, China will experience growth long run. In this way, air cargo traffic will North America were to decline significantly in chiefly due to the expansion of the country’s achieve a more balanced ratio of belly and the wake of reduced US consumer demand, huge domestic market. Growth will be driven freighter capacity.

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Number of freighter aircraft ordered period global crude oil consumption is expected to increase from 84 million barrels per Aircraft type as of as of as of as of day to 116 million barrels per day. This trend, in 11/2004 11/2005 11/2006 11/2007 conjunction with the growing difficulties in A300-600F 3 8 6 expanding worldwide output from conventional A300-620F 50 44 1 oil sources, will keep crude oil prices — and thus kerosene prices — at high levels. This is of A330-200F 66 twofold significance for air traffic. A380F 17 17 25 Persistently high energy prices are already hurting 747-400ERF 3 18 22 13 consumers. In addition, consumer prices in B747-400F 19 19 18 12 industrialised countries are burdened with energy B747-8F 44 73 taxes (that are equally soaring). Higher energy B767-300ERF 3 9 4 34 prices may induce consumers, especially in North America and Europe, to cut back on consumption B777-200LRF 11 38 81 expenditure in other areas. Less consumption Ilyushin Il-76 TD90 3 7 6 11 implies a reduction in air cargo imports. Ilyushin Il-96-400T 4 4 15 Conversely, at present many developing countries Tupolev Tu-204-100C 10 1 2 in South America and Africa benefit from rising Tupolev Tu-204-120CE (RR) 15 15 15 15 global commodity prices. In these regions, Tupolev Tu-204-214C 1 1 1 1 stronger growth in air cargo traffic would seem to be in the offing. As a consequence, new air cargo Total 124 153 185 323 providers will be attracted to these regions; for source: Airclaims instance, those redirecting capacity away from the more competitive Chinese market. However, the most important requirement for a countries such as India, international air cargo On the supply side there are a number of marked increase in domestic demand in China traffic will continue to grapple with high interesting developments. In the past two is a decline in the savings rate. Presently, the kerosene prices. Fundamental data does not years, new providers have entered the air cargo savings rate is still very high, which — amongst support expectations of a significant easing. traffic arena, mainly in , where they have other things — is related to a lack of social Whether China’s growth in the coming years been particularly focused on China. security systems. Chinese consumers feel a will be export-driven or mostly due to domestic Furthermore, demand for new freighter aircraft need to rely on personal savings to provide for consumption, either way the result will be a has picked up considerably, and in the coming old age. In addition, a high proportion of rise of commodity imports into China. After all, years capacity expansion is to be expected. savings is earmarked for the education of China is a country rather poorly endowed with Special note should be taken of the strong fleet offspring. However, Chinese politics is natural resources, excepting coal. This is of growth observed among carriers from the Gulf committed to the expansion of social security particular importance regarding crude oil, region, and the attendant expansion of airport systems and education, as a result of which the which is predominantly needed to sustain the capacities. savings rate will decline and consumption will growth in traffic. According to the most recent Overall, a large number of investors take a grow. The growing popularity of equity ‘World Energy Outlook 2007’ (published by the positive view of the air cargo market; i.e., they speculation among the population poses Energy Information Administration), the period are willing to provide equity for start-ups. There additional risks that threaten domestic demand. from 2006 to 2030 will see China’s net crude is no other explanation for recent market entry Owing to the persistent strong economic oil imports soar from 3.5 million barrels per day activity by new providers. In Belgium, Cargo B growth in China as well as other developing to 13.1 million barrels per day. In the same joined the race. In , two new air cargo carriers were founded: and Transactions relating to . In the summer of 2007 the air joint ventures and mergers cargo carrier Jett8, newly established in Singapore, commenced flight operations. Start- and acquisitions are going up activities are especially buoyant in China to become increasingly and India. Whilst capacity growth in cargo attractive. For example, the traffic to and from China has been driven Air France-KLM group chiefly by European and North American carriers in recent years, Chinese carriers are intends to strengthen its now becoming very active. Foreign carriers are position in the air freight trying to participate in this growth by way of segment by acquiring a 100 minority shareholdings. In China, Singapore per cent stake in Martinair. Airlines Cargo took a stake in the newly founded freight carrier Great Wall Airlines. Another leading cargo carrier, Korean Air Cargo, collaborated with Sinotrans to form the

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freight airline Grandstar Cargo International. Total number and capacity of freighter aircraft ordered This development was pioneered by Jade Cargo 350 35000 International, in whose foundation Lufthansa 323 Cargo and Shenzen Airlines participated. 300 30000 Meanwhile, the start-up boom has reached India, too. In India, Flyington Freighters and 250 25000 others have started flight operations. In Russia, 185 after a long period of calm, the market is 200 20000 picking up. AirBridge Cargo, part of the Volga- 153 Dnepr Group, is expanding, and so is Polet Air 150 15000 Cargo. Atlant Soyuz is a recent newcomer. And 124 Aeroflot itself accorded cargo services 100 10000 independent status, as Aeroflot Cargo. Transactions relating to joint ventures and 50 5000 mergers and acquisitions are going to become 8850 12260 20050 29850 increasingly attractive. Pertinent examples are 0 0 provided by the recent establishment of a joint 2004 2005 2006 2007 air cargo company (headquartered in Leipzig) Total capacity ordered (tons payload) Total number of aircraft ordered by DHL Express and Lufthansa Cargo, and the stake taken by DHL in Polar Air Cargo. In 2006, the Japanese Post Office and All Nippon business, which will cause air freight networks November 2004. And, as documented in the Airways (ANA) established their jointly owned to become even more independent from order books, total payload capacity actually cargo carrier: ANA & JP Express (AJV). The Air networks used in passenger flight traffic. increased threefold in the same period (see table). France-KLM group intends to strengthen its Conceivably, pure cargo networks will be used All indications suggest that competition position in the air freight segment by acquiring to transport classic standard freight, while the amongst airlines for air cargo will grow still a 100 per cent stake in Martinair. denser passenger flight networks are going to keener in 2008 and beyond. Furthermore, as a Another important development is the be utilised for delivery of premium air cargo result of the expanding supply of time-definite expansion of air cargo capacities by the products. This development is facilitated by services offered by container shipping following airlines from the Gulf region: airports, like Leipzig, that place strategic companies — and because rising fuel costs Emirates (Dubai), Etihad (), Qatar emphasis cargo handling. affect air traffic to a larger extent than they do Airways (Qatar) and Gulf Air (Bahrain). In New aircraft models are available to expedite shipping — maritime traffic is becoming more addition to new orders of freighter aircraft, the the further advancement of the global freighter attractive regarding certain goods. envisioned expansion of passenger traffic will fleet. Delivery of the first A330-200F by Airbus However, supply and demand are not the only bring about a dramatic increase in commercial is scheduled for end of 2009. The resumption factors affecting air cargo traffic. Issues in cargo on passenger planes. What’s more, of programmes for the development of the transport policy, especially traffic rights and additional providers can be expected to enter Airbus 380 freighter version is under security, remain momentous. The temporary (such as Empost Air, a subsidiary of Emirates consideration. Boeing has come up with two revocation of Lufthansa Cargo’s overflight Post Office) intending to set up their own new models: the 747-8F and the 777-200LRF. rights by Russian air traffic authorities in 2007 freighter fleets. In Russia, production and modernisation of An brought home the fact that air traffic is still not The build-up of capacities in the Gulf States 124-100 aircraft are to be taken up again. entirely free from state interference. carries problems in the long run, because the Moreover, Russia has brought a modernised Nonetheless, liberalisation continues to make region — with its present buoyant demand for freighter aircraft to market: the IL-76TD-90VD. progress, creating new opportunities. The US- high-value consumer goods — represents an This demonstrates that Russian aircraft EU Open Skies Agreement, as well as the air important stopover for cargo carriers en route manufacturing is likely to play a more active traffic agreement signed by the US and China, to Asia, alleviating (at least partially) the role, primarily in the freighter segment. In the point in the right direction. Security continues problem of unmatched cargo traffic flows on long term, new options for cooperation will to be on the agenda. According to a new law, Asian routes. ensue. Concerning the A320 freighter all air shipments on passenger flights must Another long-term trend results from the split- conversion programme, EADS has already undergo screening from 2010 on. This will up of air cargo carriers into two large groups. initiated collaboration with Russian aircraft drive costs up, and may be a new source of There will be a group of network carriers that manufacturers, under the umbrella of United delays. Air cargo carriers, especially integrators, rely on large hubs, carriers which will further Aircraft Corporation. are likely to benefit. Incidentally, this provides buttress their position through alliances and In view of the recent strong increase in orders for another pointer supporting expectations that takeovers. Then there will be a group of low- new freighter aircraft, it appears somewhat passenger flight and air cargo networks will cost cargo carriers that offer their services on doubtful whether all rate-of-return projections experience further decoupling. heavily frequented point-to-point routes or act envisioned by air cargo providers will in fact as subcontractors to network carriers. materialise. Thus, in November 2007 Borislav Bjelicic is an SVP at DVB Bank and an Large combination carriers will continue to spin manufacturers registered two and half times as Honorary Professor for Business Administration off subsidiaries dedicated to the air cargo many cargo aircraft in their order books as in at the University of Mannheim, Germany.

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