Aviation sector outlook: 2020 and Beyond

Global Aviation Industry: Current scenario

On a global scale, passenger air travel was expected to maintain positive growth rates in 2020, despite a number of challenges faced by the industry: airlines around the world are struggling with high jet fuel prices and sluggish economic growth. However, the outbreak of the novel coronavirus (COVID-19) put everyone’s plans on hold. These difficult economic conditions are predicted to offset the aviation industry by a 54.2 per cent drop in passenger figures, which in turn is projected to translate into the first negative financial performance of the airline sector since 2009. It is believed that the global aviation industry will experience an astounding 84.3 billion U.S. dollars in net profit loss in 2020 from 26.4 billion US dollars in 2019.

The outlook of the industry is delicate. Aviation demand was set to be fueled by the rising affluence of the middle classes in emerging markets. Air traffic was forecast to grow most significantly in Latin America and Africa, but these regions are also most likely to suffer from health crisis caused by the outbreak.

According to industry bodies

• The value of international trade shipped by air this year will be $5.5 trillion, around 15% lower compared to 2019. Tourists travelling by air in 2020 are forecast to spend $457 billion, 49% less than the previous year.
• The global airline industry will lose $314bn in 2020, representing a 55 per cent reduction from 2019 revenue.
• For 2020, commercial airlines currently have around 960 new aircraft scheduled for delivery. This is approximately 40% lower than the number originally planned at the beginning of this year. In light of the very challenging industry outlook, airlines might consider further cancellations or postponements over the second half of the year. As at the end of May, just 235 new aircraft had been delivered, well down on the usual level.
• This year, the industry fuel bill might decline to $78 billion, which will represent around 15% of average operating costs.
• The industry seems to be “slowly getting back up on its feet” as volumes in the first four weeks of June climbed 6.0 per cent versus the full four weeks of May.
• Volumes in the last week of June were 12 per cent higher than in the final week of May. The year-on-year performance gap further closed with global volumes at -25 per cent versus June 2019, compared to the -31 per cent annual disparity for May.
• Available capacity in this reporting period remained flat, but the last two weeks of June saw capacity creeping up slowly week-over-week by around 1.5 per cent per week.
• The dynamic load factor measurement of 71 per cent in June – based on both the volume and weight perspectives of cargo flown and capacity available – recorded its highest level.
• June suggests the first steps towards a structural market recovery. Despite the decreasing demand for PPE in June, the volumes increased over May. A more recognisable airfreight market following more logical economic principles and more logical rates is being witnessed.

Short-term outlook

• The pandemic slowdown has given a subtle yet timely alert to the air cargo industry to realign its product basket and network route planning.
• Until very recently cargo divisions of many legacy airlines were a sidekick for extra revenue, now cargo is an indispensable part of airlines. Air cargo will draw a lot of investment and re-organisation. Airlines are trying to change their passenger aircraft orders with freighters, modifying their old passenger aircraft to freighters to gain a stronger position in the air cargo industry.
• Air cargo continues to operate in full capacity and was more important than ever to ensure the supply.
• While global passenger traffic has almost completely evaporated, global air cargo volumes declined by only 47 per cent by the end of March 2020 vs March 2019, and there has been a rebound since with volumes down only 32 per cent by the end of April 2020.
• As the relaxations are further enhanced in the coming period especially with respect to passenger aircraft movements, opening up of manufacturing industries, cross-border movements, etc. the air cargo volumes are also slated to move up towards normal in a phased manner.
• The industry players are of the opinion that the normalcy of flights will take a longer time, a minimum of 1-1.5 years to come to the pre-COVID-19 levels.
• Thereon, recovery to be no more than five percent a month. We may see pre-COVID levels of business activity by the end of Q4 2021.
• Digitalisation will get a big shot in the arm from selling to execution.
• A lot of consolidation is expected, and some acquisitions are reported to be around the corner.

Ground Report- India

South Asia’s leading economy, India became the third-largest domestic aviation market across the globe and is estimated to overtake the United Kingdom to become the third-largest overall air passenger market in 2024.

In the financial year (FY) 2019, the total freight tonnage handled at the Indian airports was 3.56 million metric tonnes. This was the highest volume handled over the last six financial years. There was a surge in both the domestic and international freight traffic. International freight traffic with 2.2 million metric tonnes was higher than domestic freight traffic which was at 1.36 million metric tonnes.

In FY2020, Indian airports reported around 2.59 million aircraft movements, which were lower than that of the financial year 2019. This included the lockdown period due to coronavirus pandemic that began in the second half of March 2020. There was a drop in the number of international flights. However, the domestic sector had recorded an increase in the aircraft moment.

At the end of the FY2020, Indira Gandhi International Airport, serving the national capital region of New Delhi in India, was the leading airport with over 450 thousand aircraft movements across India. The airport was also the leading in terms of total freight handled, with more than 955 thousand metric tonnes,out of which approximately 353 thousand metric tonnes of freight were handled on domestic flights. The capital’s international airport was also the leading airport in terms of the number of passengers handled. Mumbai which once had the top spot fell on the second spot with around 581 thousand metric tonnes, out of which 282.51 thousand metric tonnes of freight were handled on domestic flights.

The volume of domestic air freight dropped by around seven percent on a year-over-year basis while there was a drop of nine percent in the amount of international freight handled by Indian airports.

Indian Aviation Industry: Current scenario

India has over 460 airports, of which 125 are owned by the Airport Authority of India. Total passenger traffic across the country was around 345 million in 2019. Aircraft movements also increased during last year. There were more than 2.6 million total aircraft movements in 2019. However, since the shutdown of Jet Airways, the growth rate in the industry has reduced significantly. Even though the departure of formerly one of the biggest private airline companies has opened growth opportunities for other competitors in the domestic market, the pressure on one of the two full-service carriers, Air India, to start international operations has presumably increased.

The number of international passenger arrivals in the country has increased gradually over the past few years. Rise in the working group and middle-class incomes have accelerated air travel. Domestic as well as international passenger and freight traffic has increased gradually. Rising demand in the sector has also created a need for an increase in the number of airplanes and airports alike.

Anticipated developments

• Being a large country with a sizeable population, India is a large consumer of smartphones, automobiles, medicines and garments.
• India has been strongly positioned in terms of Pharma manufacturing while the rest of the above segments like automobiles, electronics and garments manufacturing has been gradually picking up over the years.
• There is a huge scope for both local and foreign companies to enhance their manufacturing setup and increase the production of goods that will further boost international exports and domestic consumption.
• The rising e-commerce trade expanding its footprint into all the business segments, the low-cost production capabilities of our country due to cost advantage and robust air/ocean connectivity will complement India’s manufacturing potential and distribution with affordability and last-mile supply chain to the country’s remote areas and global destinations.
• A few developing cargo hubs in the Asian and Middle-Eastern region (Almaty International Airport Kazakhsthan; Islam Karimov Tashkent International Airport, Taskkent, Uzbekistan; Manas International Airport, Bishkek, Kyrgyzstan) could be upcoming cargo gateways to cater to India’s local needs.

Situation at top Indian airports

Chhatrapati Shivaji Maharaj International Airport (CSMIA) aggressively functioned to connect India and the global supply chain and successfully processed a total of 48000 tonnes of cargo which included 28000 tonnes of exports and over 20000 tonnes of imports. The airport has also transported 3500 tonnes of medical supplies such as PPE, masks, gloves, and COVID-19 diagnostic kits, which have been airlifted by over 900 flights including scheduled freighters and non-scheduled charters. The essentials were distributed to the states of Maharashtra, Gujarat, Chennai, Hyderabad as well as the remote areas of the country where these are scarce.

Having handled approximately 4464, 16500 and 27391 tonnes in the months of March, April and May respectively, CSMIA registered a month-on-month growth of 19 per cent and 66 per cent in April and May respectively. This includes the transportation of a total of approximately 16000 tonnes of EXIM Pharma, 4000 tonnes of agro exports and 400 tonnes of live animal exports between March-May.

Overall, CSMIA has handled over 2700 cargo Air Transport Movements (ATMs) from March 25 to May 31. Furthermore, CSMIA has witnessed approximately 460 ATMs of all-cargo passenger aircrafts, i.e. passenger aircrafts that were modified to use for the transportation of cargo, which contributed 14 per cent to the overall freight processed during the lockdown. The airport has also registered considerable movement of cargo charters transporting the essential commodities and COVID supplies. CSMIA also set a record for the highest number of cargo movements witnessed at the airport during these difficult times of the pandemic and lockdown conditions. It registered admittance exports of 725 tonnes and received 518 tonnes of import as well as additionally made import delivery of 486 tonnes approximately, marking the highest number of imports and exports of cargo managed in a single day despite limited resources amongst other challenges.

Amid the COVID-19 crisis, Delhi International Airport Ltd (DIAL) has been actively managing domestic and international cargo operations and handled all types of cargo, primarily essential medical commodities, pharmaceuticals and other critical goods.

The Airport recorded 1449 freighter movements in the month of May 2020, which is the highest ever witnessed. This was possible only with the collaborative efforts of all the stakeholders working together. The corona warriors at Delhi Airport are tirelessly working round the clock 24×7 ensuring continuous efficient passenger and cargo operations.

Delhi Airport has been designated as the ‘major hub’ by the Ministry of Civil Aviation under the ‘Lifeline Udan’ initiative for handling and facilitating the distribution of medical essentials cargo in several cities and far off regions. A dedicated warehouse facility of 3,800 sq mt was created within a record 7 days to handle these imported medical supplies such as personal protective equipment (PPE) kits extending full support and commitment to the nation. So far, over 1200 metric tonnes cargo comprising more than 2.5 million medical PPE kits have been handled from this facility.

The airport is currently handling approximately 30 cargo freighter flights a day which includes non-scheduled operations. These freighters also bring in essential commodities and medical cargo from places such as Hong Kong, Shenzhen, Shanghai, Guangzhou, Incheon, etc.

GMR Hyderabad International Airport Limited (GHIAL) is working round the clock in close coordination with the customs, ground handlers, forwarders, customs house agents (CHAs), regulators, state police, and cargo trade associations to keep rolling the critical chain of essential supplies.

Currently, GMR Hyderabad Air Cargo is witnessing over 100 tonnes of export and import cargo daily, out of which more than 70% is pharma and other essential products. Every week, it is handling some 11 key scheduled freighters of Cathay Pacific Cargo, Turkish Cargo, Qatar Cargo, Lufthansa Cargo, SpiceXpress (domestic and international) and BlueDart along with some special cargo charters connecting Hyderabad with all major international destinations in the US, Europe, Middle East, Africa, and Far East. Based on fuel requirements, the freighters also uplift fuel from GHIAL fuel farm which is available 24×7.

The import cargo is catering mainly to Telangana, Andhra Pradesh, Karnataka, Maharashtra, Tamil Nadu, Kerala, Madhya Pradesh, Uttar Pradesh and Odisha for vital supplies.

Around 40-50 (bonded, temp-controlled and general cargo) trucks are also coming to the airport for consignment delivery and lift-off daily.

Global Aviation Sector: Present demographics

Between 2009 and 2019, revenue in the global aviation industry grew at a compound annual growth rate of around 5.3 percent, reaching 838 billion US dollars in 2019. The sector’s improved financial performance is the result of a rising number of air cargo and passenger figures, which in turn are driven by a world that is increasingly becoming more and more affluent and interconnected.

The United States, Brazil, China and the European Union are ranked among the most important markets for air travel. The world’s busiest airports are Hartsfield–Jackson Atlanta International Airport (ATL), handling around 110 million passengers annually, and Hong Kong International Airport (HKG), where about 4.7 million tons of freight is loaded and unloaded per year. In terms of revenue, the leading airlines worldwide include American Airlines, Delta Air Lines and United Continental Holdings. The evolution of ancillary revenue streams and automated ticketing technologies, as well as the ongoing deregulation of civil aviation in many markets worldwide has given rise to the emergence of low-cost airlines. Ryanair – the Irish airline that may even be dubbed an ultra-low-cost carrier – and Southwest Airlines are the main players in the low-cost category, which is attracting a growing customer base. In this segment, many carriers have taken to charging their customers for ancillary services to boost revenue. Low-cost carriers are so successful that upstart airlines such as WOW Air, La Compagnie or Norwegian are trying to enter the market.

Market Trends

Freighter Airlines have increased the number of flights especially for the air-freight of PPE’s and ventilators from China to Europe, the USA, South America and Africa. Most of the freighter airlines have mobilised extra crews to avoid crew quarantine restrictions.

In some cases, freighter operators have re-commissioned freighters from storage to meet the demand for charters, while some operators have re-started freighter operations after having suspended their operations. Low fuel prices have enabled older generation freighters to be mobilised which offers a unique opportunity for such freighters to resume commercial operations.

B747F remains very popular for freighter operators due to its high payload and volume while having a lower operating cost due to the low fuel price.

Additionally, the worldwide grounding of aircraft during the passenger travel downturn has led to a shortage in capacity for air freight delivery, increasing the incentive for airlines to convert Boeing 777s, 737NGs and other newer-generation aircraft to cargo-only flights.

Airlines have started placing their passenger aircraft back into service temporarily as quasi freighters, carrying cargo at first on the seats but more recently removing the seats entirely.

All of a sudden, cargo has changed from a contribution to fixed overhead, to virtually the only source of revenue for many airlines.  It is an island of stability when everything else in the industry is collapsing.

Latest in trend: Aircraft conversions

Passenger to cargo conversions can add years onto an aircraft’s life. This is a huge deal, since used aircraft are often much cheaper than new aircraft. Moreover, a converted aircraft for an aircraft type that is out of production can allow for an airline to grow their capacity without having to sacrifice fleet commonality.

Airlines during this crisis are flying cargo on empty passenger aircraft by fastening boxes to seats with nets or stripping the passenger cabins. These cargo operations are helping to buffer declining passenger revenue for cash-strapped airlines but are a temporary “phenomenon that won’t last longer than a year or two”.

Aircraft most often converted to freighters during recent years, including Airbus A319s and B767s, are getting older and becoming less available for conversion, leading cargo carriers to look ahead at what aircraft could fit their needs in the years to come. Many cargo carriers are eyeing B777s and A330s for future conversions to freighter aircraft as 767 passenger aircraft are expected to become less available.

Currently, there are over 1000 passenger aircrafts that have entered service for cargo. The decreasing values of B777s, B737NGs and A330s have given their attractiveness a boost, making them affordable candidates for freighter conversion. While B737NGs are expected to be “the most predominant converted aircraft over the next five years”, the older model B737-300s and B737-400s are being converted first. The A330-300 is also positioned to become a popular choice for freighter conversion within the next five years. The A330 and B777 are both more fuel efficient than B767s.

Newer narrow body freighters, including B737-800s, are also growing in popularity, in part because they can make more frequent stops than wide body aircraft to meet the shifting consumer expectations of e-commerce. As the more-fuel-efficient B737NGs fall in value due to oversupply during the pandemic, they are increasingly better candidates for conversion because of their ability to meet the needs of the e-commerce market by making those more-frequent shipments.

The conversion process

Cargo conversions of passenger aircraft can take different forms. Typically they involve material changes of a structural nature. For example, freight cargo loading systems may be installed, passenger windows plugged, or the cabin stripped out and a stronger floor laid to cater for pallets. Conversions of this type can take from six to 12 months to be completed. For material modifications, additional certificates are usually required from EASA, the FAA and/or local aviation authorities. As a general rule these kinds of conversions are permanent conversions and the aircraft will not be subsequently returned to passenger service.

However, given the immediate challenges faced by airlines in the context of COVID-19, there have been different and innovative approaches applied by airlines to effect more temporary conversions of passenger aircraft to cargo aircraft. These range from simple and temporary changes whereby cargo is being placed in seat bags strapped to passenger seats, to more robust changes to aircraft whereby seats have been removed, loading zones created and netting introduced.

In line with such developments, Airbus has recently published a service bulletin detailing a new cargo conversion solution for its A330 and A350 wide-body airliners that, while providing for a temporary conversion, also contemplates the eventual return of the aircraft to passenger operations. The kits use standard equipment which is widely available, and the conversions can be completed by airlines or a local maintenance service provider. The main cost is the manpower involved in removing the seats and installing the pallets, and once the seats are out, the pallets can be completely installed in only two hours. Further, Airbus has announced it will manage the process for obtaining EASA certification. These conversions therefore look to be quick and cost-effective for airlines, involving minimum regulatory interference.

This may pave the way for a similar solution for A380s, although this might prove to be a conversion of a more permanent nature. On May 05, it was announced that maintenance provider Lufthansa Technik is working on the world’s first conversion of an A380 for freight use.

Operational undertakings

Lessees contemplating temporary conversions will want to ensure that the change of use is permitted by their lease agreements, as of course will their lessors. Typically in lease agreements lessees give a number of operational undertakings, and these will need to be considered in the round in the context of converting a passenger aircraft to a dedicated freighter. For example, has the aircraft been made suitable for the purpose of transporting cargo? Are the crew suitably qualified to load and transport cargo? Is the lessee duly authorised to transport cargo? Does the lessee need to obtain any additional licences or permits for this purpose?

Consideration should also be given to the type of cargo, as certain types may be disallowed under lease agreements. For example, as flagged by International Air Transport Association (IATA), medical supplies may contain mercury (in thermometers). Lease agreements may prohibit the carriage of these substances as cargo, as well as cargo which could be expected to damage the aircraft, which is another point for lessees to consider.

Modifications and obligations on redelivery

Where lessees decide to use passenger aircraft for the transportation of cargo, this will entail a number of modifications to the aircraft. Some lease agreements require the lessor’s prior written consent to any modifications, whereas others are less burdensome. It may be that the lessee may make modifications of less than a certain value if the lessee simply notifies the lessor of the same. Indeed, if the modifications are temporary or relate only to cabin or configuration changes, lease agreements often afford more flexibility to permit these without the lessor’s consent. In any event, the relevant lease provisions will need to be studied and, if the lessor’s consent is required, the lessee should engage the lessor in these conversations at an early stage, to avoid delays.

Lease agreements usually include an obligation on the lessee on redelivery to restore the aircraft to its initial configuration, and so any modifications will need to be reversed – but they commonly also include the option to redeliver the aircraft as otherwise acceptable to or agreed with the lessor. It is in the lessee’s interest to start discussions with the lessor at an early stage so that the lessor’s requirements can be factored into the redelivery timeline and potentially unnecessary rectification costs can be avoided.

Insurances

In the context of converting a passenger aircraft to a dedicated freighter, the insurance considerations for lessees include the types of cargo they will be transporting, and how any parts removed from the aircraft will be stored. Lease agreements typically prohibit the carriage of cargo which would not be adequately covered by the insurances, and so lessees should review their insurance policy in the first instance. In terms of storage of parts removed from the aircraft, lease agreements commonly require parts not installed on the aircraft to be properly and safely stored and insured, so lessees will need to provide for this if, for example, seats are removed.

Financing

If there is financing in place, the financing documents should be reviewed before starting the process of converting a passenger aircraft to a dedicated freighter. For example, loan agreements commonly prescribe that the lender’s consent is required before the lessor can amend or grant any waiver or consent under, or agree any mitigation arrangements in respect of, the relevant lease agreement. Here, the lessor would be well-advised to engage the lender in conversations at an early stage, to bring them on board and secure their consent to the lessee’s proposals regarding conversion.

IATA outlines the default position in relation to the carriage of cargo on passenger aircraft: humanitarian supplies/medicines, and general cargo and/or mail may be carried in the overhead lockers, under passenger seats, and in the cargo compartment. However, carrying this kind of cargo on passenger seats requires approval by the relevant aviation authority, and using pallets or containers on the cabin floor with the seats removed requires approval by both the relevant aviation authority and the aircraft manufacturer.

Where airlines wish to use or remove seats in connection with the carriage of cargo, IATA directs that, in addition to the approvals detailed above, airlines should undertake a comprehensive safety risk assessment, followed by a full evaluation of cargo restraints connected directly to the seat tracks to ensure structural loads are within design limits and the appropriate restraint system is applied.

Importantly in the context of COVID-19, additional restrictions apply to the carriage of dangerous goods – this includes items such as mercury thermometers and alcohol-based sanitisers, which may be contained in medical supplies. Dangerous goods may only be carried by airlines which hold approval by the relevant aviation authority to carry such goods as cargo.

It is worth noting that lease agreements may explicitly require lessees to comply with any and all carriage regulations or restrictions from time to time issued by IATA, so airlines should pay close attention to these requirements to ensure they are not in default under their lease agreements.

Airlines wishing to pursue temporary conversions of passenger aircraft to cargo aircraft should review their lease agreements to identify whether they need additional authorisations and/or approvals, what type of cargo they can transport, and whether modifications require the consent of the lessor and/or any financiers. The lease agreements should be read in conjunction with IATA’s regulatory guidance, which directs airlines to begin with a comprehensive safety risk assessment.

Limitations in passenger aircraft conversions

• Most converted freighter aircrafts are very old aircrafts after completing their service as passenger air craft (typically 15 years and above), hence the cost/lease cost of the aircraft is very low.
• The conversion of the aircraft from the passenger to cargo is a very complex process, requires complex design and certification generally covered as Supplemental Type Certificate (STC).
• Passenger aircrafts has only small passenger door unlike a large cargo door in full freighter aircraft. So only small packages can be accommodated.
• As there are already seats and fixtures, all the cargo packages have to be small to be strapped to the passenger seat area.
• As there is no Cargo Loading System (CLS) and very limited aisle space in the aircraft, the cargo has to be physically carried hence the weight per package has to be limited 32 kgs as per norms. Further as there is interior paraphernalia, a large volume of cargo cannot be accommodated.
• The cost of converting a B737-800 can range from $4-$5 million, depending on the age of the aircraft and whether the contractor wants to have a heavy maintenance check on the aircraft. While older B737-300 and B737-400 series are less fuel-efficient, they typically have a lower conversion price range of $2.5 to $3 million.
• There are a few aircraft conversion facility globally and the parts required for the conversion having long lead time delivery. For example: the aircraft frame has to be cut, to be built in large cargo door, complete change of electricals, interiors, strengthening of floors, imbedding of Cargo Loading System (CLS), smoke detection, etc.
• To convert passenger to freighter air craft fleet would take a lead time no less than minimum of 3 years today.

Road Ahead

Existing freighter aircrafts are not available today for lease. This summarises the big challenge to increase the dedicated freight capacity in the market for at least the next 3 years. Passenger to cargo-only conversions can help alleviate a cargo aircraft shortage. This is because older passenger aircraft can enter service in a new life as cargo freighters. The process has many steps and requires significant modifications but can be incredibly beneficial to airlines and lessors. All the more, it is cheaper to convert existing aircraft than to buy new ones. As airlines have new aircraft come into their fleet, they often select their oldest aircraft for conversion.

The conversion of passenger aircraft to cargo aircraft may not only provide passenger airlines with an opportunity to exploit alternative revenue streams and avoid costly parking fees, but it will assist in alleviating the current drop in air cargo capacity and assist the global effort to combat COVID-19. The global air freight capacity shortage will eventually fade as economies reopen, air travel recovers and fleets of passenger aircraft with large cargo bellies return to the skies.

Carriers have to decide how fast to add 737NGs and other newer aircraft to their cargo fleets based on the costs of conversion, availability, maintenance, and fuel efficiency. The price of jet fuel as of 12 June was 46% lower year-over-year, according to IATA, but “once fuel prices start to stabilise, the more-fuel-efficient aircraft are going to become more attractive” for freighter conversion.

For the near future, the ready supply of 767 aircraft and their ability to carry more cargo than narrow body 737NGs keeps the older aircraft in demand, especially amid low fuel prices and the global shortage of cargo flights.

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