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The passenger-to-freighter conversion market is growing, with Boeing’s World Air Cargo Forecast 2020-2039 projecting roughly 750 conversions over the next 20 years to harness the opportunity presented by the current deficit of new cargo planes and lack of belly capacity. As a result, demand for conversion slots is high, with wait times of up to four years for some programs.
Major industry lessors, including ST Engineering and Temasek JV, KV Aviation backed by volofin Capital Management, Avolon, and Fortress are all backing conversion projects, which can act as a hedge against the potential for passenger volume fluctuations. A number of airlines that had previously exited freighters are re-entering the market, including Air Canada, or entering for the first time like WestJet, while Airbus has launched a new air cargo service using its BelugaST fleet to meet outsized freight transportation needs.
M&A could also come to the fore under the prevailing market conditions. Given that there are only a handful of independent cargo players, deal activity could increase, with these operators becoming highly coveted assets, driving their valuations higher.
Just as with rail and sea, the business of air travel – passenger and freight – has been turned upside-down in the past two years of the pandemic. A near-total halt in passenger travel during global lockdowns dramatically reduced belly cargo capacity, driving increased demand for cargo planes. Disruption to global supply chains further drove demand to air with its speed advantage over other modes.
The air freight market is back on the front foot, though, recovering faster than passenger activity and recording a stellar year in 2021, with demand up 18.7% on 2020. This positive momentum has continued into 2022, with global demand up 2.7% versus January last year, according to IATA. A lack of available capacity has pushed rates up and low inventory-to-sales ratios are also driving demand.
Capacity is likely to be squeezed by the ongoing conflict in Ukraine, as well as the broader geopolitical unease and price volatility of commodities such as oil, which will only serve to push cargo rates higher.
A shortage of suitable aircraft is also driving high fleet utilisation. Although Russia only accounted for 0.6% of global cargo carried in 2021, there are several specialised (especially heavy lift) carriers registered in Russia and Ukraine, and the exact impact of this remains to be seen, although Lufthansa Cargo expects a 10% drop in capacity.
It is highly likely that we are witnessing a demand bubble that will deflate to a degree as belly cargo options coming back on stream with the recovery in passenger demand. However, the expected long-term trend is for growth as ecommerce booms and demand in emerging markets increases.
As a result, players in the same value chains are forming strategic partnerships, as seen with the Temasek and ST Engineering JV and Titan Aviation and Bain Capital’s desire to develop a freighter leasing portfolio. Hong Kong Aircraft Engineering Company and 321 Precision Conversion are also partnering to provide maintenance and conversion services.
Existing players are expanding their fleets, including FedEx and UPS each adding about 20 widebodies to their fleets, and these organisations have signalled their intention to grow through M&A. Global GSA Group is acquiring Aircargo Italia, Worldair and Star Cargo Italy, Cargojet is acquiring a 25% interest in US freight operator 21 Air, and Maersk is expanding into air cargo with the acquisition of Senator International. There has also been activity in the handling sector, with the NAS/Agility bid for Menzies, and PE firms Greenbriar and Audax purchasing cargo-focused handler Alliance Ground International,
Much activity in a market turned on its head by disruptive forces. The big challenge now for passenger and cargo players will be how to strike the delicate balance in determining the right level of freighter capacity to capitalise on current and near-term market conditions, without cannibalising their ability to fully harness the opportunity offered by a wave of post-pandemic pent-up passenger demand and fast-fading travel restrictions.
