Literature Review on air freight growth

Client: Sustainable Development Commission

31 March 2007

Draft Report

Dr John Gardiner and Dr Stephen

Ison

Loughborough University

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Dr John Gardiner and Dr Stephen Ison,
Transport Studies Group
Department of Civil and Building Engineering,
Loughborough University
Leicestershire LE11 3TU
United Kingdom.
Tel: +44 (0)1509 222605.
Fax: +44 (0)1509 223981.
Email: s.g.ison|@lboro.ac.uk.

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Table of Contents Page

List of Figures 4

1. Introduction 5

2. Drivers for Growth 6

3. The constraints to growth 8

4. Historic Air Freight Growth 10

5. Future Growth Forecasts 13

6. Conclusions 15

7. References 16

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Figures Page

Figure 1 Actual global freight tonne kilometres and real world GDP growth 6

Figure 2 Air cargo growth over the period 1999 - 2007 10

Figure 3 UK Airfreight by Airport 1996 and 2006 11

Figure 4 World air cargo traffic growth 13

Figure 5 The growth in air cargo markets 14

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1. Introduction
The air cargo industry has shown consistent and at times phenomenal growth. The industry
has played an increasingly important role in world trade and has doubled in volume every 10
years since 1970 (Chang et al., 2007). Goods transported by air now account for 5% by
volume of all goods traded globally but 36% by value (IATA, 2006).

The total amount of international freight tonnage that passed through UK airports increased
by 41% over the period 1995-2005 (DfT 2006). It in fact fell in 2001 following the terrorist
attacks in the USA, but has subsequently recovered to its year 2000 levels.

The three main segments of the air freight industry are passenger belly hold which makes use
of the available cargo carrying capacity of passenger aircraft, express carriers who operate
dedicated freighter aircraft on a time-definite basis, often carrying smaller packages, and the
heavy freight, all cargo sector which offers dedicated cargo carrying capacity (often for larger
items) either on a scheduled or charter basis. In the UK the majority of air freight, which was
64% in 2005, is transported in the holds of passenger aircraft. This does however vary
between airports, for example 94% travels in passenger aircraft at Heathrow whilst at East
Midlands Airport this figure is very small (DfT 2006).

In the UK, London Heathrow is the dominant freight airport, handling 57% of all freight that
passed through UK airports in 2005. The second and third most important are East Midlands
Airport and Stansted. Both have grown rapidly developing as centres for dedicated air freight
carriers (DfT 2006) – see Figure 3.

Air freight is intrinsically international in nature, much more so than the passenger airline
market. For example international flights account for over 50% of the cargo industry’s total
Revenue Tonne Kilometres (RTK), compared with just 28% of Revenue Passenger
Kilometres (RPK) (Schreindorfer, 2006). In the UK the air freight market was estimated to be
worth £726.1m in 2004 yet the vast majority of this was attributed to international services
(Key Note, 2005).

Therefore this review, whilst attempting to assess the growth of air cargo in the UK, inevitably
discusses the issue in a global context.

Clearly growth in air cargo has sustainability implications and as stated by the UK
Government in the 2003 White Paper on The Future of Air Transport they wish “to ensure that
there are airports in the UK able to accommodate the anticipated growth in demand …
subject to the satisfactory resolution of environmental concerns, especially in respect of night
noise” (DfT 2003).

The academic community has to a large extent avoided assessing air freight growth and
much of the research in this area has been compiled for or on behalf of the industry
stakeholders themselves, whose futures depend on the continuing success of the industry.

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2. Drivers for growth
The air cargo industry is pro-cyclical, expanding with strong economic conditions and slowing
when the economy weakens (Schreindorfer, 2006). Indeed the key influence on air freight
demand is world economic and trade growth (IATA, 2006; Boeing 2006). Kasarda and Green
(2005) identify that there is an established statistical relationship between levels of air cargo
volume and both GDP and GDP per capita which means that as economic activity and trade
increases so the demand for the transportation of goods increases.

An examination of prospects for world trade is therefore a good indicator of how the air cargo
industry will fare.

Oxford Economic Forecasting (OEF, 2004) calculate that world trade will increase by over
90% over the next decade, with a 40% rise in world GDP, which in turn suggests substantial
air freight growth.

Following growth in 2004 and 2005 of 4% and 3.5%, respectively, world economic activity, as
measured by GDP, is forecast to average 3.1% per year through 2025 (Boeing, 2006). As
Figure 1 shows, this major driver of international trade growth will help stimulate an air freight
growth rate that is nearly double the GDP growth rate.

Figure 1: Actual global freight tonne kilometres and real world GDP growth both actual (to
2006) and forecasted.

Source: BACK Aviation Solutions Analysis (Graham, 2006).

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The UK economy buoyed by the global backdrop and a healthy housing market is forecasted
to grow at an average of 2.25% over the period from 2006 to 2015 (Graham, 2006).

According to Key Note (2005), other major influences on the market include:

• The opening up of new markets.

• A reduction in air freight rates as a result of competition between airlines.
• The requirement to move component parts around the world faster and more reliably
and changes in manufacturing processes that require the widespread adoption of
just-in-time (JIT) working practices.
• The service provided by air freight operators has become such an integral part of the
efficient operation of today's economy that it is less vulnerable than some other
markets to the effects of recession.

Air freight growth is also largely dependent on the growth of the passenger sector, particularly
on long haul routes, since increased passenger capacity increases the amount of cargo
capacity available as a by-product (Key Note, 2005). With this sector set to increase by 4.8%
per annum internationally (Airbus, 2006), this is another main indicator for growth.

A further key driver of growth is the continuing success of e-commerce. Schreindorfer (2006)
suggests that the projected growth in online retail sales will benefit the air cargo industry as a
whole, but particularly the integrated carriers.

As a counter to the drivers for growth in the UK, Turney (2005) reports that whilst the
economy is in reasonably good shape, the air cargo market is in decline. Turney quotes the
Managing Director of a leading UK freight forwarder who states that “Never before has the
British market been in such a steep nose dive” which has been mainly due to the decline in
exports. This view would however not appear to be typical.

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3. The constraints to growth
Key Note (2005) finds that negative influences on air freight growth include:

• Increasing congestion, both at airports and for air-traffic control, and general
concerns about the civil aviation sector's impact on the environment in terms of noise
and atmospheric pollution.
• Threats from the low-cost carriers targeting the passenger market. As they gain
market share at the expense of the traditional (passenger-carrying) providers of by-
product belly-hold capacity, the proportion of total cargo-carrying capacity could be
reduced.
• Legislative and regulatory developments at national, EU and international level
remain of concern to many industry leaders; for example, the burden imposed on
airlines by the need to take responsibility for war risk insurance and security, and the
costs of inefficient infrastructure.

Air Cargo News (2007) reports a slowing in air freight growth to 3% for January 2007, and
suggests this is due to the increasing effects of high fuel prices and competition from other
modes of transport.

This is reinforced by IATA (2006) who suggest that higher freight rates due to fuel surcharging
has acted as a constraint on the growth in demand and possibly a loss of competitiveness
against surface modes. IATA (2007a) reiterates this stating that high fuel costs and strong
competition from other modes are other important constraints on air freight growth.

One of the key constraints on growth in Europe and particularly the UK is the availability of
sufficient airport capacity (DfT, 2004). UK airports are becoming increasingly congested as a
result of continued passenger growth.

In the UK a higher than average growth is concentrated on airports that do not have capacity
constraints (DETR, 2000). This is likely to have regional implications in terms of the
environmental impact and issues of surface access.

The possibility of more stringent security controls could impact on the growth of air freight,
particularly in terms of passenger belly hold freight. Schreindorfer (2006) describes security
regulations as having “the highest potential for adverse impact on the industry because they
could lead to severe cost increases”.

As MacDonald (2006) finds in his report for Oxford Economic Forecasting into the economic
impact of express carriers in the UK, the express industry is dependent upon flying at night
from a limited number of airports to deliver the significant economic benefits it generates for
UK plc. MacDonald finds that with competition from airports in mainland Europe, the closure
at night of specific airports with a strategic express freight function (such as East Midlands
and London-Stansted) would have a serious economic impact on the UK, not to mention air
freight growth.

Worldwide almost 50% of airport movements by the express sector take place at night
representing a significant proportion of their business, whilst in the UK some 60% of flights at
the major express hubs operated by the four main integrators (FedEx, UPS, DHL and TNT)
occur at night (A&TC and OEF 2002). Therefore restrictions on night time operations at
airports is likely to impact on the growth of the express sector in particular but also on the
whole of the air freight industry. As described in Gardiner and Ison (2007), such legislation is
leading to a redistribution of cargo capacity which could impact on its location in the UK.

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Air cargo is often directionally imbalanced and therefore direct return journeys can be loss
making with one leg having little demand. It is therefore commonplace for scheduled freighter
services to operate triangular routes to avoid this imbalance. For international services
though this requires fifth freedom1 rights in order to pick up cargo in another country. The
Canadian Airports Council (CAC, 2000) highlights the problems this causes for cargo carriers.
They recognize that the exchange of fifth freedom rights is typically caught up in passenger
service issues rather than cargo. With passenger flows more directionally balanced the
agreements are often developed to suit these carriers. This is a hindrance to international
cargo carriers and their growth strategies.

Consumers’ are becoming increasingly concerned about where their food comes from and
how far it has travelled (the concept of “food miles”, which presents an argument to buy goods
which have travelled the shortest distance) and this could eventually impact on air freight
growth. As the International Institute for Environment and Development (MacGregor and
Vorley, 2006) explain, the long-distance transport of food is associated with additional
emissions due to increased transportation and encapsulates the climate change debate in the
UK.

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Fifth freedom is the right to load freight in one country and then fly on to another country (e.g.
on a flight from the UK to Hong Kong, a British carrier can pick up cargo in Amsterdam and
take it on to Hong Kong.

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4. Historic Air Freight Growth
For the last decade or so streamlining business supply chains has made air cargo in general
and air express in particular, the fastest growing area in the dynamic cargo sector (Zhang and
Zhang, 2002). International express has grown at more than twice the rate of total worldwide
air cargo traffic, averaging 12.9% annually over the past decade (Boeing, 2006). In the UK
the express industry has been one of the fastest growing sectors in the economy. Its share in
total UK gross output has doubled since 1991 (MacDonald, 2006).

This growth trend is maintained by the emergence of globally integrated just-in-time

production and logistics networks (Zhang, 2003), and the rapid development of e-commerce
(Zhang and Zhang, 2002).

International air freight volume growth slowed significantly in 2005, falling from 13.4% in 2004
to 3.2% (IATA, 2007b). However, as Figure 2 shows, air cargo has continued to grow during
the past six years.

A major contributor to the slowdown in 2005 was the high cost of jet fuel (IATA, 2007b). The
spot jet fuel price increased 42% in 2005, ending at an average of $1.69 per gallon. During
the first six months of 2006, the spot jet fuel price averaged $1.96 per gallon. This fuel price
increase diverted some traffic that otherwise would have moved by air cargo channels to less
expensive maritime trade lanes (Boeing 2006).

Figure 2 Air cargo growth over the period 1999 to 2007

Source: (IATA, 2007b)

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 UK Air Freight by Airport

Freight handled tonnes 1996 tonnes 2006

Total London Airports 1,427,764 1,717,360

Heathrow 1,040,486 1263,129

Gatwick 266,975 211,857

Stansted 103,341 224,312

East Midlands 104,287 272,303

Manchester 78,628 148,957

Prestwick 21,742 28,537

Liverpool 27,301 5,724

Luton 16,250 17,993

Birmingham 19,420 14,681

Coventry 21,532 7,785

Edinburgh 7,334 36,389

Glasgow 11,081 6,289

Southend 708 70

Newcastle 1,184 306

Leeds/Bradford 331 101

Humberside 109 144

Kent International 1,918 20,841

London City 3 -

Belfast International 26,929 38,417

Total All Reporting UK Airports 1,771,504 2,315,438

Figure 3 UK Air freight by Airport 1996 and 2006.

Source: CAA 2006

Figure 3 details the growth in air cargo at selected UK airports over the period 1996-2006.
Over that 10 year period the air freight tonnage handled at all reporting airports has increased
by over 30%. This figure is however somewhat misleading since certain airports have

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experienced substantial growth, most notably East Midlands 161%, Stansted 117% and
Manchester 89%. Others have experienced rapid growth from a very low base, namely Kent
International and Edinburgh whereas others has experienced a decline such as Birmingham,
Coventry, Newcastle and Glasgow. Growth is therefore variable regionally and in likely to
remain so for the foreseeable future as spare regional capacity is utilised by the air cargo
industry across the UK.

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5. Future Growth Forecasts
Forecasts for air freight growth over the next two decades vary somewhat in the detail, but
there is universal agreement that air freight will continue to grow at a substantial rate. ACI
(2007) estimate worldwide air freight at 76 million tonnes in 2006 and expect it to reach about
214 million tonnes by 2025 at an average growth of 5.4% per annum. Boeing (2006) on the
other hand forecast a higher growth rate at 6.1% per annum over the same period, a view
mirrored by rivals Airbus (2006) who predict a 6% average annual rate over the 2006-2025
period.

Overall, world air cargo traffic will more than triple during the next 20 years, demonstrated in
Figure 4, increasing from 178.1 billion RTKs in 2005 to more than 582.8 RTKs in 2025
(Boeing, 2006).

The express industry is expected to grow at a slightly greater than average pace at 6.7% pa
to 2016, nearly three times as fast as GDP (MacDonald, 2006).

In the “Future Development of Air Transport in the UK: South East” consultation document
(July 2002), cited in the EMA Master Plan (2006), it was stated that “the express sector of the
air cargo market is expected to increase its share of the overall UK air cargo market from 20%
in 1998 to 42% by 2010 and to 52% by 2030.

Figure 4 World air cargo traffic growth

Source: Boeing (2006).

As figure 5 shows, Asia’s air cargo markets will continue to lead the world air cargo industry in
average annual growth rates, with domestic China and intra-Asia markets expanding 10.8%
and 8.6% per year, respectively (Boeing, 2006), whilst growth in Europe and North America
lags significantly behind.

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Figure 5 The growth in air cargo markets

Source: Boeing (2006).

With globalisation continuing at an increasing pace, Schreindorfer (2006) expects a global air
freight growth rate that is “at least double the world GDP growth rate over the next two
decades”.

In the UK it is the all cargo operators that are showing the fastest growth, although the
scheduled passenger airlines, which offer air freight as a by-product of their passenger
operations, still provide the most air freight capacity (Key Note, 2005).

Over the years to 2025 the worldwide freighter fleet size is forecast to nearly double, from
1,789 in 2005 to 3,563 in 2025. Medium-widebody and large freighter aircraft will lead fleet
additions, growing from an overall share of 50% to 64% as traffic continues to build on long-
haul, international trade lanes (Boeing, 2006)

As revealed in the previous section East Midlands Airport has experienced rapid growth over
the period 1996-2006 and it expects this growth to continue. In the Airports Master Plan
published in December 2006 it comments that total air cargo volume is predicted to grow in
the UK significantly and that EMA can be expected to “command an increasing share of this
growth”. The reason given for this is that runway space in the South-East will become
increasingly difficult to access and given its central location EMA is ideally placed as an ideal
alternative.

A high proportion of the freight which accesses EMA is express freight, carried by operators
such as DHL and UPS and since it is expected to grow rapidly it is this sector that EMA
expects to gain from. Overall, the forecasts for EMA cargo tonnage is 723,000 in 2010 and
1,207,000 in 2016 – dramatic increases on the 1996 and 2006 figures given in Figure 3. In
terms of air transport movements by cargo aircraft for EMA the actual number for 2004 was
18,700 and this is forecast to increase to 35,200 in 2010 and 38,100 in 2016 (EMA 2006).

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6. Conclusions
The world and more specifically the UK economy would appear to be growing and with this
increased growth comes the increased demand for the services of the air cargo industry. This
growth is fuelled by influences such as: new markets, reduced air freight rates as a result of
competition, the move towards JIT working practices, the increase in passenger growth and
thus joint supply with passenger belly hold, and the growth of e-commerce.

There are however potential constraints to that growth not least the increased demand for
runway capacity primarily from the low cost operators, the environmental concerns particularly,
although not exclusively noise, and night time flying which is all important for the air cargo
sector, stringent security controls and the increasing effects of high fuel prices.

Analysis of the present structure of the industry and its likely development as part of the UK
Air Freight Study Report (DETR, 2000), concludes that the specific drivers which could affect
the future development of the UK air freight market are:

• The development of freight-only aircraft; and

• The existing or future environmental constraints which could be placed upon the
development or use of airport facilities.

Notwithstanding the constraints the total tonnage of air freight handled at UK airports has
increased over the past 10 years. The overall increase has been 30% but this figure masks
regional variations. For example, all London airports have experienced a 20% increase (within
which Gatwick has seen a 20% fall and Stansted a 117% rise), and regional airports most
notably East Midlands Nottingham.Leicester.Derby a 161% increase.

The evidence would seem to suggest that the air freight market will continue to grow over the
next two decades both worldwide and in the UK. This is particularly likely to be the case with
the express industry. Overall growth rates in excess of 5% are forecast.

As stated, this is likely to have a regional dimension given that runway capacity in the South-
East is at a premium and the central location of a number of UK airports.

The key to the sustainable growth of air freight is to meet the growing demand by maintaining
an optimal balance between economic progress, social development and environmental
responsibility.

As the UK Department for Transport states, the challenge is to balance the economic benefits
of providing for the growth in air freight against the environmental impacts on a local and
global level (DfT, 2004).

There would appear to a dearth of literature both academic and otherwise in the area of the
air cargo industry. Given this situation there are various areas where further research would
be advantageous, namely:

• A UK national survey of air cargo operators ascertaining their perceptions as to the state
of the industry dealing with issues such as projected growth, the likely inhibitors to that
growth, its regional dimension, legislative influences and issues of environmental and
sustainable concern.

• A survey of major air freight shippers and forwarders in the UK to ascertain whether other
modes such as shipping are a realistic alternative to moving goods by air as suggested in
the literature, and at what point they would consider this.

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• A study into the viability of developing an air cargo “super hub” in the UK – an airport that
would handle only air cargo flights and that would be protected from restrictions on night
time flying but considering the environmental implications.

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7. References
ACI (2007). Global traffic forecast 2006-2025. Airports Council International, Geneva

Air Cargo News (2007). IATA reports a three per cent air freight rise. Air Cargo News, 8
March 2007. Available at: http://www.aircargonews.net/article.asp?art_id=1729. Last
Accessed: 26 March 2007.

Airbus, (2006). Air Cargo Forecast. Global Market Forecast 2006-2025. Toulouse: Airbus
Industrie.

A&TC and OEF (2002). The economic impact of express carriers for UK plc. A report by The
Aviation & Travel Consultancy and Oxford Economic Forecasting for the CBI. Confederation
of British Industry, London.

Boeing, (2006). World Air Cargo Forecast 2006-2007. Seattle, WA: The Boeing Company.

CAC (2000). Air Cargo Issues: A Discussion Paper. Canadian Airports Council.

Chang, Y., Yeh, C., and Wang, S. (2007). A survey and optimization-based evaluation of
development strategies for the air cargo industry. International Journal of Production
Economics, 106, pp550-562

Civil Aviation Authority, CAA, (2006). UK Airport Statistics 2006, Table 13, CAA.

Department for Transport, (2003). The Future of Air Transport, Cm 6046, London: The
Stationery Office.

Department for Transport, (2004). The Future of Transport, Cm 6234, London: The Stationery
Office.

Department for Transport, (2006). Focus on Freight, December 2006, London. Available at:
http://www.dft.gov.uk/pgr/statistics/datatablespublications/freight/focusonfreight/pagefocusfrei
ght06?version=1, Last Accessed: 26 March 2007.

DETR (2000). UK Airfreight Study Report. Department of the Environment, Transport and
the Regions, London.

East Midlands Airport Nottingham.Leicester.Derby, (2006). Master Plan, December 2006.

Gardiner, J, and Ison, S.G, (2007). The geography of non-integrated cargo airlines: an
international study, Journal of Transport Geography, Article in Press.

Graham, M. (2006). Emerging markets drive growth: BACK Aviation’s 2006 world air freight
forecast. Air Cargo World, May. Available at
http://www.aircargoworld.com/archives/features/1_may06.htm. Last accessed: 26 March 2007.

IATA (2006). IATA economics briefing, air freight 2006 – brighter skies ahead. The
International Air Transport Association, Montreal. February.

IATA (2007a). Monthly traffic analysis, January 2007. IATA Economics. The International Air
Transport Association, Montreal.

IATA (2007b). International scheduled operations traffic analysis. IATA Economics. The
International Air Transport Association, Montreal. January.

MacDonald, M. (2006). The economic impact of express carriers for UK Plc., Oxford
Economic Forecasting, Oxford, UK.

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MacGregor, J. and Vorley, B. (2006). Fair miles? The concept of “food miles” through a
sustainable development lens. Sustainable Development Opinion, 2006. International
Institute for Environment and Development, London.

Kasards, J. D., and Green, J. D. (2005). Air cargo as an engine for economic development: A
note on opportunities and constraints. Journal of Air Transport Management 11, pp459-462.

Key Note (2005). Air freight market report 2005. Key Note Publications Ltd, Hampton, UK.

OEF (2004). The economic impact of express carriers in Europe. A report by Oxford
Economic Forecasting, Oxford, UK.

Schreindorfer, D. (2006). Air cargo industry investment thesis. Henry B. Tipple School of
Management, University of Iowa, Iowa City, IA.

Turney. R. (2005). Britain’s broader view. Air Cargo World, October. Available at:
http://www.aircargoworld.com/archives/features/3_oct05.htm. Last accessed: 26 March 2007

Zhang, A. (2003). Analysis of an international air-cargo hub: the case of Hong Kong. Journal
of Air Transport Management 9(2), pp123-138.

Zhang, A. and Zhang, Y., (2002). Issues on liberalisation of air cargo services in international
aviation. Journal of Air Transport Management. 8, 275-287.

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