Air cargo 2022: What went right and what went wrong
Turbulence characterized the air cargo industry in 2022 for the third consecutive year.
The easing of COVID conditions in most of the world was positive for reopening trade, but the recovery wasn’t always smooth for airlines, airports and aircraft manufacturers. China continued to maintain a series of lockdowns that constrained air traffic. The biggest shock to the system was Russia’s invasion of Ukraine, which drove up fuel prices and helped send the airfreight market into a steady decline for the remainder of the year.
Here are the highs and lows from a year that was anything but routine:
Thumbs up : Mergers and acquisitions
Air cargo traffic slumped in 2022, but that should have been expected after a historic 2021 heavily influenced by unprecedented supply chain distortions. Experts are bullish about long-term air cargo prospects, with projected compound annual growth of 4%. Express operators can expect even better demand, fueled by the continued shift in online shopping.
An investment group led by Apollo Global Management agreed last summer to buy Atlas Air (NASDAQ: AAWW), a major provider of airfreight transport and leased cargo aircraft, for $5.2 billion, including debt. Atlas Air operates about 100 all-cargo aircraft, including the largest fleet of Boeing 747 freighters in the world.
It was the largest acquisition in the cargo airline sector this year and underscored the confidence large investors are placing in the sector as shippers show increasing interest in dedicated freighters over passenger services.
Meanwhile, the airport services sector witnessed consolidation in ground handling. Alliance Ground International, backed by private equity partners, acquired Airport Terminal Services, adding 49 locations across North America, and Total Airport Services, which processes cargo at Chicago O’Hare International Airport and Rickenbacker International Airport near Columbus, Ohio, among others. The deals follow the late-2021 pickup of MIC Cargo, a local terminal operator at O’Hare.
SATS, a regional airport services provider with limited cargo experience, bought cargo-handling giant Worldwide Flight Services from an affiliate of Cerberus Capital Management for $2.2 billion.
Thumbs down: Ukraine invasion
Russia’s invasion of Ukraine was a major setback for the air cargo sector just as the world began to recover from the pandemic. Western nations blocked access to Russian carriers and outlawed aviation technology exchanges, and Russia retaliated by closing its airspace to many airlines.
The geopolitical actions limited flying for Russian all-cargo carrier Volga-Dnepr to a few Asian and Middle Eastern countries and forced affiliate airlines AirBridgeCargo, CargoLogicAir and CargoLogic Germany out of business.
Ukraine’s Antonov Airlines lost a few freighters to the fighting but was able to escape with five Antonov An-124 extra-large cargo jets that are now operating from a temporary base at Leipzig/Halle airport in Germany. The freighters are flying missions for NATO, the Ukraine government, humanitarian organizations and commercial customers. In recent months it has flown satellites from Europe to Florida for launch by SpaceX at NASA’s Kennedy Space Center at Cape Canaveral. Antonov Airlines officials say they plan to rebuild the An-225, the largest commercial freighter that was destroyed by Russian forces in the initial attack on the Gostomel airfield outside Kyiv.
Aviation data provider Cirium estimates the war knocked 1% of global cargo capacity from the market. But the effects were even more widespread because airlines operating between Europe and Asia had to detour around Russia, increasing flight times by several hours and raising fuel costs. The extra time in the air and need to carry extra fuel or stop to refuel decreased aircraft utilization and effectively reduced cargo capacity.
About 400 aircraft worth $10 billion remain trapped in Russia after airlines there refused to return them to Western leasing companies, according to Reuters. Lessors are now suing insurance companies to recover losses.
Thumbs up: New market entrants
The number of passenger airlines and nontraditional companies starting freighter fleets increased for a second year following a surge in airfreight demand during the pandemic. Airlines realized cargo was more lucrative than previously thought and that diversifying revenue was a good goal. Meanwhile, ocean carriers with burgeoning logistics ambitions and e-commerce companies launched cargo airlines to control capacity and provide more reliable delivery service.
The list of passenger airlines that have added all-cargo operations, or expressed interest in doing so, in 2022 is impressive:
Air Canada — Converted three Boeing 767 jets from its fleet into freighters.
Air Explore — Slovakia airline picked up its first Boeing 737-800 modified freighter and is operating it on behalf of a logistics company.
Amelia International — Slovenian subsidiary of the French Amelia Group began cargo operations with a leased ATR72 turboprop.
CityWings — Lufthansa regional passenger carrier is flying new Airbus A321 converted freighters for Lufthansa Cargo.
Georgia Airlines — Cargo carrier commenced operations in February. Now has three 737-800 converted freighters operating in the Baltics, Caucasus and surrounding areas.
GOL — Started flying 737-800 converted freighters in Brazil for online retailer Mercado Libre.
Indigo — Indian carrier took delivery of its first Airbus A321 converted freighter.
Japan Airlines — Plans to operate three A321 freighters for a parcel delivery company in Japan starting in 2024.
Silver Airways — Small regional passenger carrier, based in Florida, is flying ATR72 turboprops to deliver packages for Amazon.
TAP Air Portugal — Operating two Airbus A330 aircraft with light-duty modification that allows packages to be carried on the main deck without a full conversion.
Vietnam Airlines — Making plans to invest in its first A321 freighter.
Viet Travel — Plans to acquire a 737-800 freighter.
WestJet — Another Canadian carrier betting on cargo. Delayed start with four Boeing 737-800 converted freighters because certification is taking longer than expected.
Thumbs down: Disappointing market
A positive start to the year for air cargo operators began to sour after the invasion of Ukraine, with rates falling steadily since April as the war, high energy prices, inflation, high retail inventories and renewed consumer focus on services undercut demand for goods. Widespread lockdowns in major Chinese manufacturing hubs curtailed factory production and depressed exports moved by air and ocean carriers.
In March, capacity dropped by 20%, load factors reached 84%, and short-term rates increased by 10% within a week.
By August, air rates had sagged by 32%, their lowest level since April 2020.
The semiconductor industry is a microcosm of the lower demand environment for airfreight. Chip manufacturers indicate that demand will decline 10% to 15% year over year in the fourth quarter of 2022. Similarly, Los Angeles International Airport’s cargo tonnage fell 15.5% in November and is down 6.6% compared to 2021.
Cargo volumes toward the end of December, by some accounts, were nearly 20% below last year’s level. Tonnage out of Asia and North America in the past two weeks dropped 25% year over year. Global freight rates are 30% to 40% less than a year ago.
Cargo capacity is still about 8% below 2019 because passenger airlines haven’t fully resumed all the flights they had before the pandemic, according to the International Air Transport Association. And the IATA figures don’t capture all of the express delivery traffic, which is also declining. FedEx, UPS, DHL and Amazon (NASDAQ: AMZN) say they are seeing slower growth too. FedEx (NYSE: FDX) has responded by chopping 40 flights per day and grounding 16 widebody aircraft by the first quarter of 2023. Amazon Air this fall didn’t add as many new routes to its network as it has in previous quarters and is reportedly developing plans to carry third-party cargo for the first time, according to Bloomberg.
It should be noted that the market conditions this year are more a deceleration than a crash. Business is still relatively good. Full-year demand will probably end the year about 6% less than in 2019, but reduced passenger belly space coupled with airport congestion and industry labor shortages have propped up prices. Rates are still about 80% better than pre-COVID.
IATA forecasts air cargo revenues for airlines will reach $201.4 billion. That is an improvement compared with the June forecast, only 1.5% off from 2021, and more than double the $100.8 billion earned in 2019. The airline group, however, projects cargo revenue next year to fall by $50 billion.
There is a great deal of uncertainty as the new year starts, but if the expected global recession is mild and companies draw down inventories early in the year, demand for airfreight could be solid next year, many industry professionals say.
Thumbs up: Boom time for conversions, new orders
Boeing and Airbus experienced a large jump in orders during 2021 and 2022 for new freighters, headlined by the new 777-X and A350 that won’t be available until the second half of the decade. There have been about 115 total freighter orders to date, including for Boeing 767 and 777 aircraft, versus about 95 last year, according to Cirium. With a build rate of about 40 per year, it will take roughly five years to complete a backlog of 220 aircraft.
But the real spike in freighter production involves the aftermarket sector, where used passenger planes are reconstructed to carry heavy-cargo containers on the main deck.
More than 700 passenger-to-freighter conversions have been ordered since the start of the pandemic in early 2020 because of the shortage of cargo capacity, projections for future cargo growth, lower values for some aircraft, and an influx of leasing companies looking for alternatives for surplus passenger aircraft and to maximize returns for investors.
Companies announced nearly 200 orders for converted freighters through the first 10 months of the year after a record 370 orders in 2021, according to Cirium.
Cirium recently forecast about 165 converted freighters would be delivered in 2022, up significantly from the record 120 conversions the prior year. Conversions usually hover at about 65 to 70 per year. The number of rebuilt freighters would have been even higher were it not for supply chain issues with labor and components that slowed production for many overhaul facilities.
The greatest level of activity involves standard, narrowbody conversions for the Boeing 737-800 and the newer Airbus A321, which are being snapped up by airlines to replace aging 737 models and the popular 757, as well as for expansion.
Engineering firms with approved designs for freighter modifications aggressively added new production lines this year to meet demand, with new facilities sprouting up in the U.K., Serbia, Turkey, China and Costa Rica. New conversion programs are coming online: A320 production began last summer, two companies are expected to deliver the first 777 converted freighters in 2023, and Embraer has targeted 2024 for converting small E190/195 jets.
In late December, Elbe Flugzeugwerke GmbH delivered its 10th A330-300 widebody conversion to DHL Express, with eight more firm orders in the pipeline. It is the youngest A330 converted by DHL so far. DHL, along with partner airlines ASL and Air Hong Kong, is operating the A330s between Europe and Asia, as well as from Leipzig, Germany, to the U.S.
Boeing, Airbus and conversion houses such as EFW, 321 Precision Conversions, Aeronautical Engineers, and their suppliers have all suffered production delays because of supply chain challenges. Aerospace companies have trouble filling assembly lines, especially after many older workers retired during COVID, and new hires require extensive training, which takes time. They also are experiencing long lead times for raw materials and critical parts.
Other factors slowing normal production rates include lengthier reviews for Federal Aviation Administration certifications and tensions between the U.S. and China. It appears Boeing and Airbus will produce about 1,150 aircraft this year, 15% fewer than their original target and about 240 units below annual average delivery rates between 2012 and 2019, according to analysts.
Manufacturing CEOs say it could take through 2023 to get past the supply chain hurdles. One risk to watch is the energy situation in Europe during the winter, where some companies could be forced to limit production or temporarily shut down to conserve fuel.
Thumbs up: Drones
Large drones for middle-mile transport made strides toward becoming commercially viable. Sabrewing Aircraft Co. successfully conducted a test flight with its RH-1-A Rhaegal vertical takeoff cargo drone carrying an 825-pound payload. And Dronamics became the first cargo drone company to obtain an operational license in the European Union.