ACW Market Forecast Supplement December 22

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MARKET FORECAST

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AIR CARG O WEEK SUPPLEMENT
AIR CARG O WEEK SUPPLEMENT MARKET FORECAST Your guide to the latest developments in the international airfreight industry December 2022 OPTIMISM FOR YEAR AHEAD ABOUNDS AT WESTJET CARGO CHALLENGE GROUP: NEW OPPORTUNITIES IN THE NEW YEAR SETTLING THE BELLY ACHE

WHAT IS COMING UP IN 2023?

It is traditional in December for publications such as Air Cargo Week to polish off their crystal balls and attempt to peer into the coming year to work out what it might hold. We do this by looking back at what happened in the previous 12 months and using that as a basis for our predictions.

Unsurprisingly, it is easy to see that there are positive and negative trends in our look at market trends in the New Year. But these are not our thoughts. We have questioned many in the airfreight industry to see what they are thinking.

However, there are some positives and negatives that we will consider. On the plus side, 2023 will not be 2022. This year started with Omicron which won’t be case at the start of 2023. In many respects, much of the world has moved on from Coronavirus. Business is returning as has demand for many goods that require airfreight.

Holidaymakers are beginning to return in volumes that are help -

ing to mask the downturn in business travel. This will help create availability of bellyhold on some of the busiest routes.

But as in every year, there are clouds on the aviation industry horizon. Growing volumes of industrial unrest in key markets will affect supply chain elements such as warehousing and distribution. At the same time, has Coronavirus really gone away? It hasn’t in China.

Then there is the crisis in Ukraine. Will it escalate or will peace break out?

Closer to most people’s homes, and their pockets, are the nightmares associated with global inflation. The spending power of consumer and businesses will fall, perhaps hitting on cargo tonnages. Such inflationary pressures will impact on aviation fuel costs as are likely salary hikes for personnel throughout the supply chain.

This supplement will outline the expectations of many in the airfreight industry. How close are they to yours?

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Editor: James Graham Associate Editor: Chris Lewis Director of Operations: Kim Smith International Sales Director: Rosa Bellanca International Sales Executive: Zainab Khalid Finance Manager: Rachel Burns Video Director: Michael Sales Design & Production Manager: Alex Brown Website Consultant: Tim Brocklehurst Directors: Norman Bamford • William Carr • Dawn Jolley The views and opinions expressed in this publication are not necessarily those of the publishers. Whilst every care is taken, the publishers cannot be held legally responsible for any errors in articles or advertisements. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by electronic, mechanical, photographic or other means without the prior consent of the publishers. USA: The publishers shall not be liable for losses, claims, damages or expenses arising out of or attributed to the contents of Air Cargo Week, insofar as they are based on information, presentations, reports or data that have been publicly disseminated, furnished or otherwise communicated to Air Cargo Week. INTERNATIONAL AZ URA

SETTLING THE BELLY ACHE

Market shifts are on the horizon as the global economy meets headwinds

Oslo-based transport industry infodata creator Xeneta has taken a series of judgements on what might lie ahead in the next 12 months for airfreight. Analysis by Xeneta’s Patrik Berglund suggests that there are few reasons to be cheerful. He has blogged that “dark clouds are ahead for the global economy as falling demand is going to affect business for shippers and carriers. The cost-of-living crisis will decide the destiny of changing consumer demand over time.

“With a lot of uncertainty still looming in the supply chain industry, we are happy to share key takeaways from our recently published customer report for what seems to be a rocky start to the New Year in terms of declining demand, volumes and freight rates.

“With more and more services coming back after the pandemic, the share of wallet, the spend on goods, should return to pre-COVID-19 levels, falling from the elevated share during the COVID-19 years.”

What is needed

For volumes to remain unchanged from 2022, Berglund considers a fast normalisation of energy prices, a swift decline in European inflation and a China without a zero-COVID-19 policy must occur. At their very best, transported volumes will be on par with the 2022 level, with most being to the downside. Volumes for 2023 could fall by up to 2.5% points. “Some expect that we can see even larger volume drops than that,” he blogged.

Shippers will see their volumes reduced and will have less leverage to negotiate with carriers. However, this will overlap with carriers becoming desperate for any volume. In between, freight forwarders may find a “sweet spot”, catering to the SMEs while playing the short market against the carriers.

In addition to the above, geopolitical turmoil and too much stimulation of the economy through the COVID-19 crisis might push the global economy into an extended period of low economic growth.

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Minor role

The relative cost difference between air and ocean will play a minor role here, but a key factor that pops up more and more in conversations with shippers/BCOs is the focus on reducing their carbon footprint.

This could dampen the growth of the general air cargo market. These developments are insignificant for the ocean market, but the tiniest move from ocean to air can significantly impact the air market.

Berglund notes: “The long-awaited airfreight belly capacity is expected to recover further on East Asia-associated routes. However, there is still some caution surrounding current COVID-19 lockdowns in China, Hong Kong, South Korea and Japan, and a potential surge of COVID-19 infections during the winter season may postpone/set back any recovery of passenger traffic.

“Supply will continue to recover/grow because of more intercontinental passengers travelling the world, resulting in more belly capacity. Secondly, the conversion and freighter orders placed during the air cargo peak will start hitting the market.”

However, in many markets, this increase in capacity is unlikely to be supported by a similar growth in demand, therefore putting downward pressure on load factors. One element in the supply chain that could still cause congestion is the lack of operational staff at airports, airlines and forwarders. The level of automation in the general air cargo market, as opposed to the small parcel business, is very low.

Pressure will squeeze rates

The current economic turmoil indicates that rates will continue to go down, Berglund considers. Rates are expected to reduce significantly. Carriers will try to fight this fall as best as they can, but it’s a tough fight to win with too much capacity expected on most trade lanes. In spite of the high consolidation of the capacity within the alliances, carriers are still not aligning or adjusting their capacity to prevent falling rates. This is why air cargo rates are expected to continue their downward trajectory, which has been much more gradual than on the ocean side. However, there will be regional differences, depend-

ing on how much capacity expansion will exceed growth in demand.

Coming relatively quickly into the New Year, after the Chinese lunar New Year, on January 22, 2023, air cargo demand and freight rates are set to fall. Short-term rates will fall below long-term rates due to imbalances in supply and demand.

Airlines are expected to reduce freighter cargo operations (cargo in cabin) and move oversupplied freighters to East Asia, Europe and the Americas routes to chase higher margins. Airfreight rates are unlikely to fall to pre-COVID-19 levels in the first half of 2023.

This is impacted by the slow recovery of air cargo belly capacity in East Asia, labour shortages, re-routed European flights due to the war in Ukraine, elevated jet fuel prices and high inflation.

During an air market downturn, freight rate validities are expected to be shorter as freight buyers are reluctant to fix rates on a falling freight rate market. There is increasing interest in vertical integration, and so carriers are taking more business within traditional air cargo and freight forwarder territory.

Forewarned is forearmed

As China’s President Xi Jinping begins his third term in office, the policy of rolling COVID-19 lockdowns across the country remains but will become less relevant as China will deliver the goods despite any obstacles. However, if China occupies Taiwan, we will have trouble. If Russia’s invasion of Ukraine involves using tactical nukes, we will have trouble.

But we must be on our toes for potential curveballs.

What happens if the Ukraine - Russia war comes to an end sooner rather than later? This could give consumers a positive boost as the costs of many goods can decrease. On the flip side, it’s important that we are not too optimistic too soon.

“If we’ve learned anything in the past couple of years, planning for the unthinkable and the “what ifs” must be top of mind. There is a lot that can be debated on these topics - and much can be made of why rates could go back up. But 2023 is set to be a year of geopolitical headwinds either way,” he concludes.

SUPPLEMENT 5
“Shippers will see their volumes reduced and will have less leverage to negotiate with carriers”

NEW OPPORTUNITIES IN THE NEW YEAR

When Yossi Shoukroun, CEO of Challenge Group surveys prospects for his airline operation in 2023, he refuses to be down-hearted. He says: “Despite the predictable recession, we remain positive, ready to face any challenge. After all, 2023 will mark the first 767 flights of Challenge Group with the opening of new routes and with them, new opportunities.”

What gives him this confidence is very much how the airline’s “expertise” is acknowledged within the sector. “Our expertise is well recognised and our reputation in handling complex verticals has been proven several times,” says Shoukroun. “More than 65% of the cargo carried by Challenge Group is non-standard and requires special handling. The same will be true in 2023. Finally, our approach to business is based on partnership, in line with the concept of the shared economy and our mission is focused on our customers’ success. This is why we trust the constant support of our business partners, as we have been able to create strong and lasting relationships over time.”

Challenges ahead

According to many industry observers, there are a number of challenges to the industry coming up: growing industrial and manufacturing strikes; biohazards; a return of Covid; escalation of war in Ukraine; hiring issues; global inflation; continued high aviation fuel prices. Which one, if any, is keeping Shoukroun awake at night?

He says: “If I had to pick one, it would be the inflation that is about to hit us, but we don’t know exactly on what scale. What is certain is that our agility allows us to be always ready to adapt to changes; we know that we live in an era full of uncertainties, that’s why our structure is flexible to respond quickly to the needs of customers.”

Challenge Group is in the midst of expanding its fleet, with its ex-

pansion plan including the addition of four B767Fs. This will be an important step towards future growth.

Like many industries worldwide, recruitment of staff has become very difficult in the aviation world. This does not faze Challenge Group.

Shoukroun says: “It is true that recruiting new pilots is a real challenge, especially for B747s. But the differentiation of the fleet might help us to face this challenge and open a new pool of pilots to join our group. Moreover, Challenge Group offers an attractive working environment in which everyone is part of a big family, and we want to keep this spirit even if we grow.”

Maltese advantage

Challenge Group is talking about being ready to operate regular flights between Liège (LGG), Tel Aviv (TLV), Sharjah (SHJ), New York (JFK), and Indian Sub-Continent (ISC), in the coming future. Are any of these likely to happen in 2023?

Building on well established routes with regular flights between Liège (LGG), Tel Aviv (TLV), Sharjah (SHJ), New York (JFK), 2023 may see developments on Indian Sub-Continent (ISC).

“As far as ISC is concerned, we have been actively working for several months to make it a regular operation as soon as the first B767 is converted” says Shoukroun. “We consider Malta as an excellent environment for the aviation business for three main reasons. The Maltese authorities are very professional, supportive and flexible. Malta is a strategic location and a natural gateway to Africa and the Middle East and the country has highly professionalised human capital.

“Being registered in Malta gives us the flexibility to manage different traffic rights to fly where our customers need us to do so,” he concludes.

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MARKET FORECAST “What gives him this confidence is very much how the airline’s “expertise” is acknowledged within the sector”

A POSITIVE YEAR FOR AIR CARGO AHEAD

Nathanaël De Tarade, CEO of Wiremind Cargo, is an air cargo philosopher. He considers the prospects for the coming year in light of the Chinese calendar. He reveals that 2023 is “the year of the Rabbit”. De Tarade notes people born in a year of the Rabbit are believed to be vigilant, witty, quick-minded and ingenious. “I think those qualities would be great to have for everyone in our industry. So I wish 2023 makes us all more ingenious!” he says.

“We are approaching three full years into the pandemic, and while each of those three years have been very different, there has probably been some “mild addiction” to much higher volumes and yields than in 2019 and before. So, if we look at 2023 through the eyes of the last few years, we might feel concerned, particularly for yields, but in a more long-term vision, I think demand is still set to remain strong, so it should be a positive year for air cargo.”

Digital solutions

As a provider of digital solutions to airlines, De Tarade feels that Wiremind’s solutions are definitely responding to needs that hold an increasingly significant part of customer agendas. “A large number of players are becoming more mature in their approach, and I believe this benefits the entire industry. You need to have frontrunners, because they help drive the momentum that the industry needs, and I do feel that the airlines and forwarders “step up” in the right direction,” he says.

“We expect steady growth, and in particular we are excited to announce major partnerships in the coming weeks and months. I think 2023 will be the busiest year for Wiremind Cargo so far! We are growing in terms of revenue, number of customers and staff.

“On the development side, our performance in 2022 has been excellent, although as CEO I always wish things would go even faster! But if I look at where we were a year ago and where we are now, we have achieved a lot. Our team has worked hard to make sure that our products are competitive and innovative. From a customer acquisition perspective, it has also been a very promising period, with new customers such as Tap Air Portugal, Air Europa, Kuehne +Nagel and many others. We have renewed our partnerships with our existing customers as well, so things look good!”

Morale boosting

De Tarade would describe the factors that will impact on morale in the industry as we go into 2023 as varied. He says: “I think that morale has a lot to do with market demand. In fact, I sometimes feel that in the air cargo industry, we tend to overreact to shortterm cycles, in both directions! I have seen large smiles on the faces of executives because they had a good month, and suddenly the same person becomes very concerned about the market because the load factor is down five points. I think we should look a bit more long-term sometimes and evaluate strategies and outcomes with a more holistic perspective.”

A portfolio of issues, including growing industrial and manufacturing strikes and continued high aviation fuel prices are causing nightmares to freight planners. Which one, if any, is making De Tarade lose sleep?

He says: “I don’t think there is one single challenge that holds the number one position on the list. I am more concerned about the fact that there are many at the same time, each of significant importance, with consequences that are global and serious. This goes far beyond the airfreight industry of course, it affects our lives in very concrete ways. If I look at things through the eyes of a solution provider, I am certainly more concerned about fuel costs, which are a direct threat to the financial health of airlines.

“Yet I cannot foresee a situation in the near future where a sustainable transport industry goes hand-in-hand with very low fuel prices, so it is something that we have to anticipate and accept,” he concludes.

SUPPLEMENT 7

OPPORTUNITIES IN ADVERSITY

According to Ismail Durmaz, CEO of Amsterdam-based Global GSA, there is no getting away from the fact that 2023 will not be a walk in the park for the global airfreight market.

He considers: “It’s going to be a difficult year, and the entire industry agrees. Yields are falling, capacity is rising and economic growth is slowing in line with inflation, which has a direct impact on demand. Added to these factors is the uncertainty of potential new challenges that will emerge in the coming months. In this environment, it becomes difficult to make long-term forecasts.”

Fighting pessimism

Considering the year ahead, there are things that are making Durmaz positive for 2023. He says: “Global GSA sees opportunities in adversity, especially in the fact that airlines will surely review their P&L to reduce fixed costs which will of course benefit GSAs. 2023 will also be an opportunity for Global GSA to demonstrate that our slogan “Make the impossible possible” is even more relevant.

“The main objective for Global GSA is to maintain the same results as in 2022 despite the difficult year ahead. We plan to expand our airline portfolio and make some acquisitions to strengthen our global coverage.

The same positivity extends to how Global GSA operated in 2022.

He notes: “Beyond the very good results of 2022, I am pleased to see that we have had strong, dedicated teams who have been able to stand up to adversity. I am also proud to say that once again we have witnessed the loyalty of our customers. Indeed, some airlines have been with us for over 20 years and counting.

“While these are real challenges, they are not the most worrisome to me. Indeed, in some ways, most of them have been overcome. What worries me more are the new challenges that will emerge in the coming months and that no one is able to predict today. However, we are doing everything we can to ensure that we are sustainable and future-proof.

“The insecurity associated with uncertainty is very unpleasant for everyone. But at Global GSA we keep our heads cool and stay focused on our goals. In order to continue to serve our customers in the best possible way and to “make the impossible possible”.

“There is always light even in darkness. That’s where it shows up the most. In spite of the difficulties that lie ahead, we must not forget that there are always advantages in disadvantages. The pandemic has shown us that. We simply have to know how to look for them.

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OPTIMISM FOR YEAR AHEAD ABOUNDS AT WESTJET CARGO

Kirsten de Bruijn, executive vice-president, WestJet Cargo is anticipating a positive year ahead, based on “human qualities, out of the box thinking and strong will power.” She has reasons to be optimistic and clearly relishes the challenges ahead.

She says: “We foresee that 2023 will be a very challenging year with overall volumes expected to drop. However, we still see good demand in the Canadian market, especially with wide-body capacity exiting Canada as the borders have opened internationally. As the carrier of the West, we see great opportunities ahead.”

The Calgary-based airline has an exciting year ahead with the start of freighter operations at the end of March.

De Bruijn says: “We have been preparing for this for a while and we look forward to all of our hard work and plans to come to life. We have hired new talent who will bring their knowledge and competence to ensure that we become a strong player. We have also set up our new wide-body network, with new destinations like Narita.

“We will grow our market share with our new freighter capacity and pursue the development of our capabilities to ensure we achieve this. We will also continue to follow our clear mission of ensuring customer satisfaction through a unique creative approach based on human qualities, out of the box thinking and a strong will power.”

Expressing pride

“I must say that we have achieved a lot this year and I want to express my pride here. We have opened new stations with our belly operations in the USA and started AMS. We have also cutover to SmartKargo, and ensured we better serve our customers digitally. We have continued to work on our product portfolio with a clear vision in mind: to be the up and coming cargo carrier, providing customers with creative, agile and flexible solutions and always committing to reliability.

“As we emerge from the pandemic, the world around us is changing, and new challenges are being faced. Rising inflation and instability from the war in Ukraine are of course part of this and have a direct impact on our industry. We are also facing industry-specific challenges, including spiking oil prices and staffing shortages at airports.”

De Bruijn knows that the coming years will be challenging, but as always, it is important to keep in mind that air cargo is cyclical.

She says: “The past few years have shown us that we always learn and come out of challenging years better and stronger. That said, we are incredibly optimistic as we move into 2023. With the arrival of our first four freighters, we are entering an exciting new chapter.”

SUPPLEMENT 9

TWO MEN, ONE FORECAST

Adrien Thominet (above left), executive chairman, and Robert Van De Weg (above right), chief commercial officer of Paris-based ECS Group have jointly considered the prospects for the group over the coming year.

What is your forecast for the airfreight market in 2023?

Adrien Thominet

With global growth expected to fall sharply and inflation stabilising at high levels, 2023 is shaping up to be much more complicated than what we have seen in recent years. A slowdown has already been felt for several months. We expect volumes to fall by 15% to 20%, which will of course lead to a similar fall in revenues. These forecasts are confirmed by the analysis of new export orders, which are less dynamic, an indicator that is often relevant for the evolution of the industry.

ECS Group hopes to be able to withstand and get through this period thanks to our commercial dynamics, through the continuous development of our abilities, but also through our technological development. Continuing to reinvent the role of the GSSA to meet new challenges and to be more agile will be a key factor in the coming period.

Robert Van De Weg

We expect quite a subdued start to the year, especially ex Asia. Subject to macro-economic and geopolitical developments, we expect a relatively sharp rebound of Asian exports once ‘restocking’ sets in. Other export markets like Europe and the USA are expected to be flat at best compared to 2022.

What is making you positive for 2023?

Adrien Thominet

2023 looks promising in terms of the transformation of our business in order to cope with traffic returning to pre-covid levels or even slightly below. Whether it’s about technological transformation or service offering, we will all be challenged on our ability to anticipate but also to remain solid by showing creativity. Another key component to consider is the increasingly strong and necessary integration of sustainability. This is a factor which, at ECS Group, is not separated from the business aspect.

ECS Group has already, for some time now, started this necessary transformation both in terms of the technological solutions we offer - within the ECS Group with the Cargo Digital Factory or those developed within CargoTech. ECS Group is a founding member. In terms of the development of our service offer through our abilities, I am truly proud to say that we have given ourselves the means, the tools and the strategies necessary to best face the challenges of 2023.

Robert Van De Weg

From a commercial point of view, the first half of the year looks challenging but the second half should see an improvement.

What is your forecast for the company?

Adrien Thominet

The idea for us this year, particularly through our “Augmented GSSA” strategy, has been to transform, to reinvent the traditional role of a GSSA. We have demonstrated our ability to be one step ahead of the game with a holistic approach to industry issues. 2023 will be the continuation of this vision. We will continue to develop and position our new abilities that are perfectly suited to the transformation of the current market but also to the transformations to come. We also plan to develop new digital tools and to integrate CSR (Corporate Social Responsibility) more and more into our processes. Finally, of course, as this is the foundation of our DNA, we will continue to deploy our commercial dynamics as we did in 2022 with the opening of new offices and new contracts.

Robert Van De Weg

We believe our continued diversification of services as well as the growth of our customer portfolio and our digitalisation drive will allow us to continue to be relatively successful in this market environment. There are a number of challenges to the industry coming up: growing industrial and manufacturing strikes; biohazards; a return of Covid; escalation of war in Ukraine; hiring issues; global inflation; continued high aviation fuel prices. Which one, if any, is keeping you both awake at night?

Adrien Thominet

All the points mentioned are of course particularly worrying, but two points stand out for the industry. Inflation has and will continue to have an inevitable impact on consumer demand and therefore on export orders, all in a context of war in Ukraine that continues to disrupt economic activity and investments. However, the health of our industry is directly correlated to that of the world economy. On top of this, costs have increased, directly impacted by the rise in fuel prices, and the strong appreciation of the dollar, the main currency of our operating costs.

How would you describe morale in the industry as we go into 2023?

Adrien Thominet

We are aware of the challenges that lie ahead and those we will have to face. That is why it is important to equip ourselves with an even stronger fighting spirit. As a GSSA, the hunters within us are all the more awake.

Any other thoughts on 2023 that might be of interest to our readers?

Adrien Thominet

Despite the challenges that lie ahead, it is important to remember that our industry and our business have been very resilient. I believe in the benefits of transforming this same industry and its ability to be agile again. 2023 will require that we keep that fighting spirit.

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SUPPLEMENT
“We are aware of the challenges that lie ahead and those we will have to face”