9th Caspian Air Cargo Summit review

Russia & CIS
The government of the Republic of Azerbaijan is investing heavily in infrastructure, exploiting the country's location between Europe and Asia.

Picture copyright: Air Logistics International

Located on the shores of the Caspian Sea, Baku is the largest city in the Caucasus and Azerbaijan is the largest country in the region.

The name Azerbaijan comes from ancient languages roughly translating to land of fire.

An advantageous location and infrastructure investments has turned Azerbaijan into an important logistics hub. The 9th Caspian Air Cargo Summit, organised by Euroavia International, was held at the JW Marriott Absheron from 24-25 October to discuss air cargo in the region and other industry topics.

After a hiatus of four years, Lars- Gunnar Comen, Director of Euroavia International said this year’s summit had almost 400 delegates from 42 countries, which was a record.

When the first summit was held in 2006, Comen said Baku was a very different city and Silk Way Group was a smaller and less well-known company, which has grown considerably and shows no signs of stopping.

Comen said the industry is being challenged and in order to stay profitable and prosperous, it needs to overcome legacy mentality, embrace digital transformation and improve collaboration.

The welcome keynote speaker was Rahman Hummadov, Deputy Minister of Digital Development and Transport for the Republic of Azerbaijan, who said it was an honour for Baku to be hosting the event and to welcome distinguished guests to the city.

Azerbaijan’s location makes it a vital transport hub on east-west and north-south routes.

Hummadov said, “During the past two decades, thanks to the foresight and policies of the Azerbaijani government, oil revenue has been used to foster the physical connectivity of our country. These infrastructure projects, exceeding domestic requirements, have been strategically designed to bolster regional collaboration and expand the capacity of transit corridors transversing the nation.”

Geopolitical issues have created demand for alternative transport routes, making Azerbaijan more attractive, with transit cargo increasing by 75% last year.

Air cargo is an important part of Azerbaijan’s strategy, with Hummadov saying, “Silk Way Group’s annual cargo turnover sits around 500,000 tonnes and it has a route network of more than 40 destinations. Over 95% of cargo traffic at Heydar Aliyev International Airport is transit cargo, giving it substantial market share across crucial trade routes.”

Silk Way West Airlines is one of the world's leading cargo airlines and Hummadov highlighted Azerbaijan’s location, political stability, favourable investment climate and success in delivering infrastructure projects making it an attractive country for foreign investment.

Special economic zones have been created, offered tax incentives and created partnerships with international organisations to encourage foreign investment in infrastructure, he said.

“Foreign businesses view Azerbaijan’s transport infrastructure as a valuable investment opportunity, given the nation’s focus on enhancing capacity and operational effectiveness and its commitment to international cooperation,” said Hummadov.

Fleet development
The conference started with discussions about freighter aircraft. Conference chairman Glenn Wicks, Attorney of Law and Founder and Managing Director of The Wicks Group welcomed Michael Sinnett, Vice President & General Manager Product Development of Boeing Commercial Airplanes, and Wolfgang Meier, President and CEO of Silk Way West Airlines on stage to talk about the cargo market and how the freighter fleet will develop.

Highlighting changes since the conference was last held, Sinnett said people in the industry knew the value of air cargo in 2019, now the world knows the value of air cargo.

He praised the hard work during the pandemic to keep the world connected and functioning.

Cargo is in Boeing’s DNA, said Sinnett, pointing out that its first aircraft carried mail before passengers and it is permanently trying to improve its equipment.

Sinnett started his career over 30 years ago as an engineer on the Boeing 747-400 then on the freighter version, and he found it fascinating seeing how Boeing was using the most advanced technologies to make the B747-400F the most capable freighter aircraft in its day.

Around the same time, a team was developing the Boeing 777-200, and Sinnett noted that while the 777 was being designed to replace three- and four-engine aircraft, it was also being designed to be a freighter from the beginning.

The same is happening with the B777-8F, which is scheduled to enter service around 2027.

“When we look at the B777-8F, we continue to focus on how we can help you solve your problems better than you do today and it is by focusing on your business and the business of your customers that we are coming up with unique and creative technologies to make it better,” said Sinnett.

Silk Way West Airlines took delivery of its first B777F three weeks earlier; Meier and the team are delighted with it and are looking forward to receiving the second one, which was due to arrive the following week.

The 747 ended production at the start of the year, but will still be in service for many years to come.

The B777-8F was designed seven feet longer than the B777 to give it the same volume as the B747-400F, admittedly, without the nose loading, so Boeing will have to work on utilising the volume.

When the 777 was designed, cargo was a consideration, so Sinnett said it was not unreasonable to assume there could be a Boeing 787 Freighter at some point.

Expressing his love for the B747-8F, Meier said its demise demonstrated the volatility of the air cargo market, saying it is the industry’s fault for not supporting the B747-8F, leaving Boeing with no option but to end production.

“This is a problem of our industry because sometimes we charge investments of next generation on whether this is a good cargo season or a bad one. The end of the B747-8F has fallen into this pattern where everyone was hesitating to sign up for additional planes,” he said.

In the coming years, Silk Way West Airlines will replace 60-70% of its fleet and it has picked the B777F and it has Airbus A350Fs and B777-8Fs on order. Meier said decisions made today are for the next generation.

Boeing has 55 firm orders for the B777-8F with the 20% lower fuel demand per tonne proving attractive for customers.

The pandemic changed cargo demand, which caused a mode shift among consumers in the C2C and B2C sectors, said Sinnett, which may impact the express carriers more.

People are less willing to wait for goods and services to arrive and sea freight costs have risen, so Sinnett believes some mode shift is permanent and some is temporary.

Yields are still high and Boeing predicts that annual growth will average 4% and 1,000 new production freighters will be needed over the next 20 years so air cargo is a robust industry.

Silk Way West Airlines has obligations to shareholders, with Meier commenting operating nice aircraft is good but making money is better.

He told the audience that the same people who last year said the boom will last for five years are now saying everything will go down over the next five years.

Meier thinks it will be somewhere in the middle with the pandemic showing the world the importance of air cargo and supply chains.

He said Silk Way West Airlines is in a good way, noting that the team see fluctuations within the week with weaker days and stronger days.

The market will not be like the boom days, he said, but it will not be as gloomy as some predict.

Picture copyright: Air Logistics International

The value of air cargo
An often repeated statistic is that air cargo transports less than 1% of global trade by volume but 35% by value, making it the premium service providing speed, efficiency, flexibility, security and traceability.

The Global Market Outlook heard from Cagkan Torunlar, Director Cargo Sales Eastern Europe at Turkish Airlines, Glyn Hughes, Director General of TIACA, and Thomas Crabtree, Managing Director of Trade and Transport Group.

Torunlar admitted there are short-term challenges and geopolitical issues such as the wars in Israel and Ukraine.

He shared GDP growth predictions with the IMF estimating around 3% per annum until 2027, the World Bank predicting a fall from 3.1% in 2022 to 2.1% this year before rising again and the OECD Economic Outlook falling from 3.3% in 2022 to 3% in 2023 and 2.7% in 2024.

The IMF predicts world trade volume growth will fall from 5.2% in 2022 to 2% this year and the World Trade Organization predicts a fall from 2.7% last year to 1.7% this year before floating around 3% until 2027.

Talking about Turkish Cargo, Tornular said Istanbul is at the centre of air cargo and the SMARTIST hub at IGA Istanbul Airport has considerable capacity and can serve as an intermodal hub due to links with other transport methods.

SMARTIST is the largest cargo facility in Europe and the third largest in the world. It has 2.2 million tons of capacity, which will exceed four million tons in the second phase and over six million tons when the third phase is complete.

As an airline, Turkish Cargo has grown rapidly having moved from the 33rd largest cargo airline in 2010, measured in cargo tonne kilometres.

By 2015, Turkish Cargo was in 22nd position and in sixth by 2020. In 2021, Turkish Cargo was in fifth position and it is targeting the top three in the near future.

Hughes was next on stage to answer the question of whether the slump has ended, highlighting the global challenges of conflicts and economic issues.

Air cargo contracted but Hughes said the rate of contraction has reduced and comments from members suggests the shopping season as he called it is looking buoyant, which was unexpected so that is good news.

Current data may not look good but Hughes pointed out that 2018/2019 was not a good time with trade wars.

Projections from organisations such as the IMF and the World Bank expect some markets such as Europe to experience lower growth than markets such as the US.

A year ago, projections were not good but had picked up by the middle of this year, which is good for logistics and means the outlook for 2024 is good.

Consumer behaviour impacts air cargo demand with Hughes presenting a graph showing household disposable income was much higher in 2021 than today.

Passenger load factors are at record highs because people are spending their money on flying, which means capacity has increased while consumer activity has decreased.

Pre-pandemic, cargo contributed 12-14% to industry revenue, which rose to 40% during the pandemic. It has fallen post-pandemic but is still 40% higher than before the pandemic.

One measure for economic activity is smartphone subscriptions, which have grown strongly every year since 2016 but smartphone sales have plateaued and contracted during the pandemic with potentially the lowest sales figures for a decade.

“The good news for us is that this is pent-up demand so when consumer activity resumes, people will be buying again so this bodes very well for future growth,” said Hughes.

E-commerce will continue to grow with Hughes joking his children have a medical condition where they must constantly buy stuff online, and when you select the shipping option, who picks the slow option taking over 60 days by ship?

For Hughes’ children, if they could not have their package by yesterday, that would be the end of their lives.

De-risking of supply chains bodes well for air cargo as companies look at additional manufacturing hubs to China.

“China will continue to be the manufacturing base of the global economy but as members of the G7 have said, they wish to de-risk supply chains, which means a proliferation of production sites and we know with the proliferation of global consumer markets, this bodes well for the air cargo industry connecting production sites with consumer locations,” said Hughes.

Crabtree, who joined the Trade and Transport Group having retired from Boeing at the start of the year, summed up his presentation in the words “cautious optimism”.

He started by saying that the IMF’s projected growth through to 2028 is lower than the 20 years leading up to the pandemic with worries including war, economic weakness and inflation, highlighting that fuel prices are up 25% since June.

Capacity is proving interesting, with Crabtree saying many have been told by their customers belly capacity is back.

However, the US is not allowing Chinese airlines to restart services so transpacific belly capacity is down, added to the fallout of the Russia-Ukraine war closing Russian airspace limiting East Asia-Europe services.

This means freighters are being used much more extensively, which Crabtree says is why airfreight rates remain elevated even though total capacity is higher than it was pre-pandemic.

The majority of freight goes in a shipping container, carrying two billion tonnes of freight annually, much more than airfreight.

Having made enormous profits during the pandemic, container shipping rates are below pre-pandemic levels but they have large war chests so can withstand an economic downturn, said Crabtree.

Reliability is a major reason for the strength of airfreight, with Crabtree saying it proved much more reliable than container shipping during the pandemic, so did the arrival of new aircraft compared to new vessels.

He said, “Many think airfreight is built on speed, the more conversations I have with shippers, they say it is built on reliability. Our shipper customers, the people who ultimately pay our salaries, are paying for reliability, not necessarily speed.”

Imbalanced market
The session Focus: Europe – Asia Tradelane looked at trade between the regions with Marco Bloemen, Managing Director, Accenture – Cargo Advisory Lead telling the audience that the market is out of balance with airspace closures going to affect business between north east Asia and Europe for some time.

As everyone knows, 2023 has been a difficult year with Bloemen saying 1.7 million tonnes of airfreight being lost so far, with the Asia-Europe lane, which represents 60% of global volumes, doing better than other lanes.

Unsurprisingly, Covid-related shipments are gone while high-tech products, particularly laptops have moved to ocean freight for cost reasons combined with lower demand.

Telecoms has also been down though the new iPhone 16 may help, and semiconductor demand has been weaker. Perishables have done better with products such as salmon in demand.

Tonnage between Europe and Asia is very imbalanced with Bloemen saying 1.5 million tonnes headed eastbound and 2.3 million tonnes went the other way.

From Europe to Asia, the market is going down but Asia to Europe has averaged 5% growth per annum since 2013.

As had been said by previous speakers, e-commerce is on the rise with Bloemen presenting low-value data from China as a proxy.

In the last six years, this proxy data has risen tenfold and there are rumours of e-commerce volumes out of China and Hong Kong exceeding two million tonnes.

Making predictions is impossible, with Bloemen saying he feels volatility is here to stay for factors such as fuel prices so he advises companies have a Plan B and C.

Because of trade imbalances, yields from Europe to Asia are at pre-Covid levels but 35% higher than before the pandemic due to e-commerce and high overall demand.

Looking at sales to inventory rates, more inventory means stocking up and lower airfreight demand, and higher sales increases demand for airfreight.

For a long time, the rate favoured inventory until the pandemic struck when it swung quickly to sales until last year.

Bloemen said, “Mid-2022, we came into the inverse relationship with more inventory than sales for 14-15 months. We see it in business with the focus on costs but the good news is that the ratio is finally going down and this should be a boost for airfreight.”

Providing the freight forwarder perspective, Bjorn Eckbauer, SVP Global Operations & Procurement Global Airfreight at DB Schenker said operations have been challenging since the pandemic with sea and rail freight disruption, staff shortages and when you thought it was normal again, Russia invaded Ukraine.

This proved businesses need contingency plans with Eckbauer saying there is no guarantee you can find capacity in the market, as was proved when passenger fleets were grounded.

DB Schenker had to find capacity and look at alternative airports as the traditional hubs were too congested, and this was a global issue.

“Traditionally in China, we worked at Zhengzhou, Beijing, Shanghai and Hong Kong but suddenly you needed to go to Tier 2 and 3 airports because there were airlines providing freighter services, which you needed because there was no passenger capacity,” Eckbauer told the audience.

The lack of capacity was a problem that needed a solution so early 2020, DB Schenker had the bold move of starting its own flight operations.

Initially connecting Germany and China, then the US was added, growing from six to seven flights a week to almost 60 a week.

He said DB Schenker basically became an airline and looking at other airports included opening a hub in Chicago Rockford and using secondary hubs in Europe, which it had never done before.

In 2021, DB Schenker operated almost 3,500 flights and continues to fly but is likely to end the services because the current market conditions do not justify the services.

Passenger services are returning, rates are coming down and there are two markets out of China, the lucrative e-commerce market and the general cargo market, which is weaker, especially in the technology and automotive sectors.

“It is up for discussion and we will see but the tendency is to go back to the traditional model, which worked until the end of 2019 and step back from flight operations,” he said.

Opening the middle corridor
Wolfgang Meier, CEO of Silk Way West Airlines, returned to the stage to explain how the airline will make Azerbaijan an even more important logistics hub.

Silk Way West Airlines is the largest pillar of the Silk Way Group, with Meier saying it is responsible for over 80% of revenue.

The future landed three weeks before the show with the arrival of Silk Way West’s first B777F. It joins a fleet of five B747-8Fs and seven B747-400Fs, all factory built because Meier says the group is not a fan of converted freighters.

The strategic decision is to retire the 747s; the timeline depends on market conditions and customer demands.

Silk Way West Airlines’ network focuses on central Asia and Europe, with connections to North America and as far south as Brazil with weekly services coming back to Europe via Ecuador loaded with flowers.

Meier said the network has been built to focus on areas with the largest GDP and on Asia.

Three more B777Fs are on order then Silk Way West Airlines will welcome next generation aircraft with Airbus A350Fs and B777-8Fs.

The middle corridor of the Belt and Road Initiative was not on people’s radar, Meier told the audience because everything depends on Russia being open for business.

He called the middle corridor the stepchild but now it is the solution as an intermodal hub.

Meier said, “The middle corridor is our corridor, this is where we are going to bank future opportunities and where we are going to be active. Central Asia, it’s us.”

This article was published in the December 2023 issue of Air Logistics International, click here to read the digital edition and click here to subscribe.