What Is The Role Of Passenger Airlines In The Air Cargo Industry?

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Comprised of air freight, air express, and airmail, air cargo plays a key role in economic development and growth, by enabling transport of goods and promoting connectivity. It represents a relatively small percentage of world trade by volume (< 10%), but by value accounts for more than 30% of international trade. In 2014, airlines transported 51.3 million metric tons (mmt) of goods, representing more than 35% of global trade by value, but less than 1% of world trade by volume. This indicates that air cargo is used mostly for high value and time sensitive products.

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Demand for Air Cargo

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Demand for air cargo is dependent on economic growth, and more specifically world trade. By requiring less stock on hand and short delivery time, air cargo prevents inventory build-up at recessionary times and retail stock-outs. Further, increasing globalization and integration of economies has resulted in 7%-10% growth in air freight since the 1990s.

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Since air cargo is relatively more expensive, its demand has been seen shifting towards rail, road, or water, which are more cost effective and environment friendly. Having said that, demand for air cargo will continue to be driven by high value, time-sensitive and perishable goods, which require the fastest and safest delivery option. According to a report by Boeing, cargo is expected to grow at 4.7% through 2033, with freight leading the way at 4.8%. Further, it also forecasts the world freighter fleet to increase to 3,198 airplanes from 1,738 by 2031. Of this, large freighters will represent 36% of the fleet.

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Air Cargo Routes

Most Asian markets connected to America and Europe failed to see growth as a result of a the slowdown in the two economies.

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However, the intra-Asia route remained strong. It remained the largest air freight market, even at the time of the Asian financial crisis. It is predicted to grow at 6.5% per annum over the next two decades, owing to the presence of China in the region, and the expected strength in the U.S. dollar.

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Role Played By Passenger Airlines

Passenger airlines have emerged as leaders in air cargo, with 60% share of the total air freight market. This is due to the use of wide-bodied aircraft operated by the airlines, allowing them to carry cargo in the unused belly capacity of the aircraft. This capacity is virtually cost-less for the airlines, allowing them to transport cargo at much lower tariffs then pure cargo carriers.

Of the six airlines under Trefis coverage, United has the highest revenues from cargo. Trailing close behind are Delta and American Airlines, earning $813 million and $760 million from cargo revenues, respectively. As we can see from the table below, for most airlines, cargo revenues were seen growing at a slower pace during 2013-2015, as compared 2010-2013. This is likely due to the impact of lower fuel prices on freight yields, which were negatively impacted by increased capacity.

30However, passenger airlines face competition from all-cargo airlines (FedEx, UPS) and alternative transportation modes (trucks, rail cars, container ships). Due to the growing competition among cargo carriers and increased trip lengths, along with lower tariffs, the average yield earned by carriers has declined over the years.

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Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com

2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Alaska Air Group

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