THE GROWING IMPORTANCE OF DEDICATED AIR FREIGHT CARRIERS TO GLOBAL SUPPLY CHAINS - Ameya Gore | March 2022
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THE GROWING
IMPORTANCE
OF DEDICATED
AIR FREIGHT
CARRIERS TO
GLOBAL SUPPLY
CHAINS
Ameya Gore | March 2022
SYNOPSIS
The recent events of sea-port
closures around the world have
exposed the vulnerability of bulk cargo
shipping using traditional sea routes.
The pandemic’s catastrophic global impact
on commercial passenger flights also
highlighted the often-neglected role of
dedicated air freight carriers.
Whilst the two situations are interconnected in more ways than one, the
visible after effect of both is the spotlight on dedicated freighter aircraft and
the role that they play or will be expected to play in the future.
Let us compare the air freight sector alongside the maritime sector and examine the
Ameyachallenges that potentially
joined Acumen limit the
in 2009 and, as viability
Ameya of maritime freight his
has, within transport. Let us also
considerable
examine
Chief Technical the opportunity
Officer for dedicated
(CTO) – Digital, tenureair freight
with options
Acumen, to flourish
held and boost
senior
he is responsible for the continued positions within the demand
various for freighters.
departments,
successful development of Acumen’s including technical & asset management
digital business offering,
INTRODUCTION: RECENT both in terms
EVENTS and data management. In addition,
of available products and services. Ameya But ahasglobal been event – COVID
a certified ISTAT19 –
“Supply chain chaos is already hitting exposed the vulnerability
appraiser for over four years and is a of such supply
global
Ameya growth. And used
has adeptly it’s about to get
the knowledge memberchainsofand has shown
the valuation team.the extent to
worse”
and (CNBC
experience- Economy,
he 2021);gained
has this which they can be thrown off-course.
was the headline
throughout in CNBC’s
his time Economy
with Acumen to Ameya With the holds lockdowns
an BSc;being an implemented
MBA in
section on 18th Oct 2021. The
inform key decisions he and his team backdrop almost overnight
aerospace and aviation, and certificates on a global scale, the
being
havethe under-preparedness
needed to take in orderoftoglobalgrow in maritime
general and tradeproduct had to adjust very rapidly.
management,
supply chains to appropriately
Acumen’s digital footprint. respond From shipping
awarded by the variety IIMB and of consumer
Duke
to rebounding worldwide customer goods, the focus
Corporate Education, respectively. immediately shifted to
demand
In responseonce totheAcumen’s
markets continued
started protective equipment, medical supplies
opening
growth,up. andSeveral
the fact ports
thatacross USA,
the level of and associated raw materials. With
China, Africa, Middle East and South
digital activities continues to accelerate,East airlines being grounded, the option of
Asia
Ameyawereprovides impacted the due to
necessary using belly cargo capacity was
compounding
dedicated issues such focus
leadership, as drastic
and eliminated which placed a larger onus on
changes in consumer behaviour,
strategic direction to the digital changes the maritime players to garner the added
in business,
maritime laws,
makingbureaucratic
sure that issues
Acumen andis load on its resources. "Global maritime
sub-optimal
found readyroad able and rail transport
and willing to meet trade dipped sharply in early 2020, while
connections with the ports.
the anticipated future digital demands millions of shipping containers delivering
made on it by the sector. protective equipment were sent round
The evolution of Just In Time (JIT) supply the world. Then, when consumer
chains changed the landscape of cargo demand surged back faster than
shipping
Disclaimer and has proved to be efficient expected later in the year, a large
in This
pre-pandemic times.contained in or accompanying this document (collectively,backlog
document and any other information soon
the “Information") built
are provided up" information
for general
purposes only. The Information is provided without any guarantee, condition, representation or warranty (express or implied) as to their adequacy,
(The Week, 2021).
correctness or completeness. Any opinions, estimates, commentary or conclusions contained in the Information represent the judgement of Acumen as at the
date of the Information and are subject to change without notice. The Information is not intended to amount to advice on which any reliance should be placed
and Acumen disclaims all liability and responsibility arising from any reliance placed on the Information.
0202
TECH DEBT importance
the growing – THE OFT-IGNORED
of dedicated air freight
carriers
GAP to global
IN THE supply
DIGITAL chains CHAIN
VALUE
According to the National Retail This places an extreme downward
Synopsis:
Federation, sales in November and pressure on profits and likely to result in
counter-measures being employed
December 2021 averaged about 19
percent of annual revenue. "Failure to throughout the supply chain. Mega
meet demand may dent profits for the corporations and multi-national retailers
large, big-box stores, but missing the with manufacturing units in Far East,
holiday season for a smaller retailer China or South America may be able to
could be catastrophic" (Forbes , 2021). weather these challenges through the
At the same time, the cost of shipping adoption of alternate means. Ship
started to rise due to high demand and leasing and chartering is a pricey yet
limited supply. The Baltic Dry Index (BDI) viable option. Considering the negative
, an index of average prices paid for the effects of revenue loss and consumer
transport of dry bulk materials across 20 backlash, the costs associated with
maritime routes, reached its highest leasing or chartering their own fleet of
point within the past 5 years at 5516 maritime vessels may provide a suitable
USD, as shown in the graph immediately solution. For example, Target is
below. In comparison to pre-pandemic spending an estimated $1-2 million per
time – Jan 2020 to be exact – the BDI month to charter a container ship to
was ~5x greater in Oct 2021. Despite the bring merchandise from overseas ports
steep fall in BDI in late Oct 2021 and all to the U.S. This allows them to avoid
through November, it was still close to delays from additional stops and to
2x of that in Jan 2020. steer clear of particularly backed-up
ports (Forbes , 2021).
Source: Trading Economics (https://tradingeconomics.com/commodity/baltic)
03
TECH DEBT –importance
The growing THE OFT-IGNORED
of dedicated air freight
carriers
GAP to global
IN THE supply
DIGITAL chains CHAIN
VALUE
But maritime port closures are only one During COVID and the months that
Synopsis:
of the issues plaguing the supply chain.
The issues with road transportation,
followed, the deficiencies of the belly
cargo capacities were exposed. Whilst
especially trucking, have dramatically one cannot still anticipate that the
impacted the recovery. Supply will likely freighters will replace the belly cargo
play catch up for some time, particularly option entirely, the focus has certainly
as there are bottlenecks in every link of shifted towards covering the risk of
the supply chain, such as labour certainly having that capacity suddenly
,containers, shipping, ports, trucks, decimated due to an unforeseen event.
railroads, air and warehouses. Amid DHL has consistently focussed on
higher consumer demand for goods renewing and expanding its freighter
which have been in short supply, freight fleets. Similar measures were also taken
rates for merchandise coming from by some other players in the air cargo
China to the U.S. and Europe have market. During the Dubai Air Show, It
soared. At the same time a shortage of (Boeing) also announced orders for 11 of
truck drivers across both the latter its 737-800BCF cargo planes from
regions has exacerbated the problem of aircraft leasing company Icelease; nine
getting goods to their final destinations, converted 767-300BCF freighters from
and has led to high prices once those DHL, and orders for two of its long-
products hit store shelves (CNBC - range 777F freighters from Emirates
Economy, 2021). SkyCargo (Dubai Air Show News , 2021).
AIR FREIGHT AND
IMPORTANT ROLE OF
DEDICATED FREIGHTERS
FOR SUPPLY CHAIN
EFFECTIVITY:
Freighter aircraft have long been in
existence due to their payload
capabilities and efficiency, achievable by
An example of the strategic application
using them on key trade routes. But the
of freighter aircraft for overcoming (to an
emergence of large widebody aircraft
extent) supply chain hurdles is Amazon
has expanded the belly cargo capacities,
Air, or Prime Air, as it is branded. (Then)
relegating the freighters to carrying a
the pandemic dealt a logistical blow to
specific segment of loads; livestock,
Amazon’s supply chains. Firstly, it
perishables and hazardous materials.
prompted locked down consumers to
The majority of over-the-counter e-
spend more than ever on e-commerce,
commerce products, mail, and other
raising demand for Amazon to quickly
similar shipment classes were addressed
ship packages.
using belly cargo capacities.
04
TECH DEBT –importance
The growing THE OFT-IGNORED
of dedicated air freight
carriers
GAP to global
IN THE supply
DIGITAL chains CHAIN
VALUE
Next, it wrought havoc on factories and Predictably, from an environmental
Synopsis:
ports, creating massive shipping perspective, the aviation sector is at the
backlogs that made it harder than ever forefront of these innovations with
for Amazon to move goods around the breakthroughs in usage of Sustainable
globe on cargo ships. The ensuing Aviation Fuel (SAF), Electric Propulsion
supply chain chaos prompted the and Bio-Fuels in aircraft.
company to double down on its airplane
dreams. Amazon went on a plane buying
spree in the pandemic summer of 2020,
fuelling the fastest expansion yet of its
air fleet (Quartz, 2021).
With e-commerce booming and
expected to have effected a paradigm
shift in consumer behaviour, supply
chains are perpetually tasked with
meeting and exceeding customer
expectations of hi-speed deliveries. This
is expected to result in increased
demands for faster means of shipment –
and there isn’t anything faster than
aircraft at the moment.
ENVIRONMENTAL, SOCIAL
AND CORPORATE
GOVERNANCE (ESG) GOALS:
But the maritime industry is only now
starting to be pressured to act and
ESG goals have become an integral and meaningfully adopt the ESG criteria. The
critical part of corporates globally with ESG push is coming from financiers,
profitability and sustainability being insurers, regulators and customers:
closely linked with ESG criteria. The powerful companies such as Amazon,
environmental piece of ESG is especially Unilever, HP, IKEA and many others.
important and carbon emissions form a There is no standing still; either ship
primary focus area in manufacturing, owners and operators embrace the
innovation and travel domains. Carbon implementation of effective ESG
neutrality goals are accelerating strategies and the opportunities they
innovation in technology space at an present, or risk getting squeezed out of
unprecedented rate. the industry.
05
The growing importance of dedicated air freight
carriers to global supply chains
And if ESG sounds like greenwashing,
consider this: global ESG assets are on
track to exceed $53 trillion by 2025,
representing more than a third of the
$140.5 trillion in projected total assets
under management, according to
Bloomberg Intelligence (The Maritime
Executive, 2021). When it comes to
sustainable shipping, there are many
opportunities and it is difficult to
distinguish which is more important.
However, decarbonization is seen as a
key priority for everyone at the moment.
Referring to the ambitious targets set
for the decarbonization journey up to
2030, Mr Bjørn Kjærand Haugland, co-
founder and Chief Executive Officer of
SKIFT Business Climate Leaders, noted
that nine years remain for the shipping
industry to reduce its total emissions in
order to stay in the Paris Agreement.
This is a huge opportunity for shipping
to be considered as a competitive
means of transportation. (Safety4Sea,
2021). On the other hand, the aviation
sector has seen a much more concerted
effort towards achieving these goals
with effective participation from airframe
and engine OEMs, airlines and regulators Source: https://www.maritimeissues.org/#overview
to implement solutions. In this context,
freighters of the future present a high
probability of achieving the ESG goals environmental and social issues
set forth compared with the maritime consistently feature in the top 5 high-
industry. impact issues that the maritime industry
will face in the coming decade. Along
The Global Maritime Issues Monitor 2021 the same lines, the likelihood of the
explores the impact, likelihood and issues also ranks highly, as shown in the
preparedness of 19 global issues table on page 07, below. This is
potentially affecting the maritime indicative of the market sentiment
industry in the coming decade. As we around the maritime sector’s overall
can see from the table opposite, senior vulnerability to implementing ESG
leaders around
Copyright the
© 2021 world
Alter opine
Horizon that Limited
Enterprises
measures and achieving the desired
Copyright © 2021 Alter Horizon Enterprises Limited
results.
06
TECH DEBT –importance
The growing THE OFT-IGNORED
of dedicated air freight
carriers
GAP to global
IN THE supply
DIGITAL chains CHAIN
VALUE
Synopsis: Although much of the discussion on
ESG seems to circle around the
environmental, it is clear from the EU
position that the societal position is also
relevant and critical.
Shippers and charterers will have to
ensure that the ESG of owners and
carriers also covers the treatment of the
crew onboard and this includes during
the current pandemic. With 300,000
crew over contract it is likely many are
noncompliant at this point. What is more
disturbing is that little action is being
done to relieve the crew. With the EU
taxonomy regulations, banks and
investors should be particularly careful
about the abuse of this part of the ESG
regulation (Splash247.com, 2021).
This presents a unique challenge in the
maritime industry compared with that
of aviation. To be specific, the operation
of a maritime vessel along key trade
routes entails typically harsher
conditions at sea as well as a larger work
force required to resource the vessel
through the entire journey.
Comparatively, to move cargo from
Source: https://www.maritimeissues.org/#overview point A to B on a freighter would entail a
minimum number of flight crew and
therefore presents a much more
This is about the environmental aspect manageable scenario to satisfy the ESG
of ESG that the maritime industry seems rules set out. Furthermore, with the
to be struggling with. But the Social and aviation sector’s stringent flight safety
Corporate Governance aspect of ESG and operating hours rules established,
are also equally relevant to the the implementation mechanism is
shareholders. This is an area where already mature. This is an impediment
maritime industry has been subjected to that may take the maritime industry
scrutiny and, where necessary, significant effort to overcome.
penalised as well for non-compliance to
basic governance measures.
07
The growing
TECH DEBT –importance of dedicated air freight
THE OFT-IGNORED
carriers to global supply chains
GAP IN THE DIGITAL VALUE CHAIN
Once again referring to the
OPERATIONAL
Synopsis: Maritimeissues.org report of 2021, cyber
CHALLENGES IN MARITIME attacks and data theft feature in top 3
INDUSTRY: most likely issues to occur in the next
decade. But even more concerning is
the fact that the data indicates a
significant lack of preparedness to
tackle these threats, as shown in the
The labour constraints of the maritime table below.
industry are one of the major constraints
that certainly need to be addressed.
Deteriorating conditions on maritime
vessels has been the unfortunate reality
of the industry and it continues to
garner its share of attention.
But there are other equally, if not more,
pressing operational challenges that are
affecting the maritime industry. The
pandemic has ensured that digitization
of processes is implemented at scale
across all industries. The maritime sector
is impacted by this move as well which
presents an associated challenge to its
smooth operations.
One of the major concerns experienced
globally has been around cyber security
threats and attacks. While new
technologies disrupt and push the
maritime sector forward at a rapid pace,
cyber security challenges emerge,
altering the global maritime threat
landscape. The omnipresent
interconnectivity exposes the sector’s
infrastructure to ever increasing cyber
vulnerabilities and threats. (KPMG,
Source: https://www.maritimeissues.org/#overview
2021).
Source: https://www.maritimeissues.org/#overview
08
The growing importance of dedicated air freight
carriers to global supply chains
But the likelihood is that cyberattacks in the marine industry will continue to increase. “The
growing reliance of the maritime industry on digitalization and connectivity has
exponentially increased the likelihood of a cyber incident,” says Patrizia Kern, Head Marine,
Swiss Re Corporate Solutions. “Other than the basic safeguards like the training of all
employees and seafarers, establishing robust OT safeguarding procedures and IT
architectures, [and other steps], industries must build up reliable business continuity plans”
and invest more resources in cyber resilience (MaritimeIssues.org, 2021).
It is a known fact that the aviation sector is not completely secure against such incidents
either. But measures already implemented in the aviation industry to warrant against such
threats are more comprehensive. Aviation safety and security has evolved exponentially
since the 9/11 days and continue to evolve rapidly, thanks to advances being made in the
military and defence applications which also find their way into the civil aviation sector.
Another allied operational challenge that the maritime industry has traditionally faced is
piracy. While cyber threats are now becoming a bigger challenge, the trade routes in South-
East Asia and East Africa continue to be a challenge for maritime vessels along key trade
routes. Statistically, hijacking or terrorist activities in air travel have been pretty much non-
existent over the past decade or so. This offers relief as well as comfort for engaging more
freely in use of air routes for freight transport.
Finally, infrastructure constraints in
building ports are compounded due to
exposure to adverse weather conditions
and natural calamities leading to
limitations in expanding capacities. Ports
are located in low-lying coastal and
riverine areas making them prone to the
physical impacts of natural disasters.
The consequential disruptions can
potentially propagate through supply
chains, resulting in widespread
economic losses (Verschuur, 2020).
OPPORTUNITIES FOR
AIR CARGO MARKET
AND FREIGHTER
AIRCRAFT:
09
The growing importance of dedicated air freight
carriers to global supply chains
COVID 19 has, by far, proven to be the Boeing, in its latest 2021-2040
most catastrophic in terms of economic commercial market outlook, has
impact, the aviation sector has remained indicated a need for more than 1400
resilient and flexible despite all the odds. dedicated freighters by 2040. While this
With global vaccination programs is a long-term outlook, with innovation in
reaching critical mass, international the aviation sector accelerating, the
borders starting to reopen again. freighter segment will also benefit
Despite the threat of new variants like simultaneously. Combine that with the
Omicron, there is a general sense of challenges with maritime transport that
buoyancy in the industry. This is a we have discussed previously, air cargo is
positive sign considering that a tool for lead time recovery for delayed
international trade and travel is vital to production when supply chain challenges
economic stability to return. Having said arise.
that the consumer behaviour is believed
to be permanently altered by the (These) maritime challenges and resulting
pandemic and that means that supply lower available capacity have boosted
chain industry’s success will continue to demand for air cargo. In addition, they
be challenged by metrics revolving have caused the price multiple of
around speed and agility of logistics. Air maritime transport versus air cargo
cargo, especially the freighter segment transport to shrink by about 50% of
will heat up even more, as the typical multiples. This has made air cargo
competition to be the fastest and a more attractive transport option, in
cheapest becomes even more intense. relative terms, despite constrained air
cargo capacity (Boeing, 2021).
Source:https://www.boeing.com/resources/boeingdotcom/market/assets/downloads/CMO%202021%20Report_13Sept21.pdf
10The growing importance of dedicated air freight
carriers to global supply chains
Similarly Airbus, in its commercial market outlook, is also depicting robust demand for the
freighters over the long-term horizon.
Source: https://www.airbus.com/en/products-services/commercial-aircraft/market/global-market-forecast
e-commerce will continue to grow , backlit by the pandemic, possibly becoming referred to
as the catalyst for a consumer evolution in the years to come. The volume and variety of
products available to consumers makes it a lucrative option compared with the regular
brick and mortar options. The convenience of getting the item delivered to the doorstep in
record time is a vital added benefit. The smartphone has become a common commodity
now and the access to online payment options such as e-wallets are driving consumers to
access and exploit the benefits of online retail.
The need for speed in delivery is also driving the innovation in unmanned aerial vehicles
(UAVs), drones and advanced robotics to facilitate last mile deliveries. Growth of existing
and new entities in e-commerce transport segments, and their strategies around air and
shipping transport, will be key drivers in the trajectory of air cargo demand supporting
future growth (Boeing, 2021).
11The growing importance of dedicated air freight
carriers to global supply chains
Omnichannel logistics services are emerging as capable support mechanisms to the e-
commerce players by plugging gaps that may exist in the supply chain. Companies like
Flexe, a Seattle based company which specialises in delivering innovative solutions for e-
commerce fulfilment, retail distribution, same-day delivery, and network capacity
programs. Currently, one of the key areas that omnichannel logistics plays a key role in is
providing flexible logistics solutions to retailers who wish to lower their costs and
investments in the supply chain.
By aggregating the demand and supply through technology and domain expertise, players
like Flexe are enabling small and medium businesses in achieving their delivery goals. The
possibility of expanding it to an end to end solution covering freighter lease and charter
solution may also possibly emerge. If the end game is to reduce costs for the customer,
omnichannel logistics services may be able to encompass acquiring and operating leased
or owned freighter aircraft to achieve the speed and agility desired by the customers.
With freighter programs being designed for converting latest generation asset types as
well as turbo-prop aircraft, these programs offer superior reliability, fuel economics and
lower operating costs to the operators. This is expected to drive up the demand for the
dedicated freighters, not only from the traditional freighter aircraft operators, but also
from new-age logistics aggregators and service providers.
12The growing importance of dedicated air freight
carriers to global supply chains
CONCLUDING REMARKS:
Maritime transport industry faces an uphill task in maintaining competitive
leverage in the logistics market due the various challenges such as labour
shortage, stringent ESG criteria and cyber threats.
Consumer demands for faster deliveries of goods will accelerate the usage of air
cargo transport and reduce dependencies on maritime options.
Belly cargo option, whilst expected to remain popular, is likely to lose a
significant portion of demand to dedicated freighter options.
Dedicated freighter aircraft will see an uptick in demand globally with newer
generation and turbo-prop freighters potentially gaining traction in the next few
years.
IMPORTANT LINKS:
https://www.cnbc.com/2021/10/18/supply-chain-chaos-is-hitting-global-growth-and-could-get-worse.html
https://www.ft.com/content/13ff5348-24fd-45d2-9fc5-a5ec9a4d7d3f
https://www.ft.com/content/0ff169dd-8876-4044-8dd7-95b2ad6d0dca
https://www.theweek.co.uk/business/economy/954529/the-supply-chain-crisis
https://edition.cnn.com/2021/10/12/business/global-supply-chain-nightmare/index.html
https://www.bloomberg.com/news/newsletters/2021-10-19/supply-chain-latest-air-freight-surges-in-rush-to-ship-holiday-
goods
https://www.forbes.com/sites/garthfriesen/2021/10/13/us-retailers-deploy-creative-tactics-in-battle-to-win-global-supply-
chain-war/?sh=459e0a9f717f
https://www.dubaiairshow.aero/biggest-ever-dubai-airshow-marks-major-turning-point-recovery-and-growth-international-
aerospace
https://qz.com/2076674/the-pandemic-hastened-amazons-plans-to-build-a-freight-airline/
https://www.maritime-executive.com/editorials/the-push-for-esg-data-is-coming-to-the-maritime-industry
https://safety4sea.com/cm-linking-esg-performance-to-the-shipping-industry/
https://splash247.com/will-the-transparent-evidence-requirements-of-esg-disrupt-the-shipping-industry/
https://assets.kpmg/content/dam/kpmg/gr/pdf/2020/11/gr-maritime-cybersecurity-en.pdf
https://www.maritimeissues.org/#global-maritime-issues-tables
https://www.boeing.com/resources/boeingdotcom/market/assets/downloads/CMO%202021%20Report_13Sept21.pdf
https://www.airbus.com/en/products-services/commercial-aircraft/market/global-market-forecast
13About Acumen:
Since 2009, Acumen has successfully and effectively been supporting the
aviation community through the provision of multi-disciplined services.
Acumen currently supports lessors and asset managers globally in each of the
key areas listed in this article. These include the involvement in induction
programs encompassing both large asset acquisitions and individual asset
purchases and contractual review.
Acumen's specialists provide independent MR claim support, fund and asset
utilisation monitoring and has a dedicated training school, offering courses
including Mx fundamentals and finance concepts to the aviation community.
Our operations based learnings in high stakes projects including mergers,
acquisitions, redeliveries, and fleet due diligence projects have informed each
discipline within the organisation.
Due to Acumen's core activity being that of asset management, it has also
invested knowledge, time, money and expertise into the development of a
state of the art asset management and fund forecasting platform , SPARTA.
Contact us to discuss any needs or questions you may have as a result of
reading this article. Our experienced team is ready to help.
14Let's
THEstart theEFFECTIVE
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