the future of air cargo in the middle east: the region is ideally located by nature and the...

3nd Annual Aviation Asset Management in the Middle East - Novotel World Trade Centre Dubai, UAE

0© 2011 1BlueHorizon Group - www.1bluehorizon.com Al l r ights reserved1BHG | Aeropodium Conference AAMME Dubai 10.11.11

‘JOIN THE DEBATE’

AIR CARGO IN THE MIDDLE EASTTHE MIDDLE EAST REGION IS IDEALLY LOCATED BY NATURE

November 2011


1 BHG, the ‘ idea factory ’ th ink ing ahead st rategies www.1bluehorizon.com



O Firstly I would like to thanks Aero podium and especially his Chairman ’Taki’ for organizing such interesting conference and not only in the Middle East: ‘Mabrouk’...

O The ambition of the following couple of slides is very modest: It is just a matter to share a couple of thoughts regarding the air cargo business, from a Middle East perspective…

O Crisis in the airline industry led to the emergence of LCC´s (Low Cost Carriers) – The crisis has not been caused, but deepened by terrorist attacks on September 11, 2001. Originally, the root cause was the decline of the historically unequalled high yield level in the late 90s and, in parallel, considerable cost increase…

O LCCs capitalize on their simple and efficient business model and their extremely lean cost structure (up to 60% lower unit costs in comparison with network carriers). A sort of Low Cost Air Cargo business models might emerge for the Air Freight industry, from the Middle East by creating (one) ‘1BlueHorizon’…

O Today’s air cargo supply chain requires reliability, speed and flexibility. Sometimes a scheduled belly flight might not be enough. Be it for the shipment size or weight, or a routing that is not offered by passenger flights…

O Last but not least, the Middle East is ideally located with over 1/3 of the world’s population living 3 hours flight from here… definitely a competitive advantage to consider!

FOREWORD



SHORT-HAUL

MEDIUM-HAUL

LONG-HAUL

The United Arab Emirates are strategically located within eight hours flight away from 2/3 of the world’s population – A Global Aviation Hub

ULTRA LONG-HAUL

Note: Short-Haul are flights taking less than three hours to complete, or a flight distance under 2000 milesMedium-Haul are flights lasts from three and six hoursLong-Haul involves long distances typically requiring over six and a half hours to cover, and are often non-stop flightsUltra Long-Haul considers the longest distances flown by commercial aircraft, requiring over 12 hours to cover, and are also often non-stop flights

Source: 1BlueHorizon Group Research & Analysis



North America and Asia are the two fastest growing air cargo traffic markets (cargo traffic flows between regions in 2005 – 2010)

North America2.0%

Latin America0.8%

Europe8.4%

Africa0.5%

Middle East1.0%

Asia15.0%

South Pacific0.4%

5.4%

14.5%

15.7%

2.3%

3.7%

2.8%

16.8%

1.9%

4%

4.1%4.8%

4.8%7%

3.4%

Note: Traffic flows of less than 1% between regions are not shown, hence total sum accounts only for 93% of total cargo trafficColumn indicates growth in the 2005 – 2009 for transcontinental traffic

Source: World Air Transport Statistics, 50th Edition



The strongest growth in air freight cargo was expected for major routes to and from Asia and within Asia…

It was a forecast… unfortunately! The reality is a bit different… closer to 1 %

Source: IATA, Passenger and Freight Forecasts 2007 - 2011 . 1BlueHorizon Group Research & Analysis



Cargo rates have come under downward pressure from weak demand and falling utilization and the overall rates are 4% down

Source: IATA, International freight growth by major routes: Jan-2009 to Aug-2011



Overall, cargo profitability has declined further this year, and revenues are weak (Airlines are expected to carry 46.4 million tones of cargo in 2011)

It ‘appears unlikely that a revival in air freight will begin before 2013’



If Worldwide the cargo business is particularly challenging, what way to go from a Middle East perspective?

Belly holdcapacity

Costlyfreighters

The forward-looking indicators for demand point to further weakness in the months ahead, while declining sea freight rates and strong increased twin aisle capacity (Belly hold) are further pressuring the competitive environment. Coupled with still high jet fuel

prices these developments are putting “downward pressure on cargo profitability”.

Source: © 1BlueHorizon Group Research & Analysis,



As long-haul passenger flights increase with growing twin aisle fleet, belly hold capacity drives structural changes in the air cargo industry

The impact from increasing long-haul passenger flights on the Asia-North America cargo market facilitates a comprehensive analysis, unlike Asia-Europe where significant passenger and freight traffic is diverted through the Middle East with Dubai’s new Al Maktoum International Airport (DWC) expecting to be the world’s largest cargo hub*.

The implications are greater on Asian carriers as they, unlike their North American counterparts, operate dedicated freighter aircraft.

The largest Cargo Markets by FTKs (billions): 2011 baseline and 2031F

Source Airbus

* For years, Dubai has arguably led the way for aviation growth in the Middle East, and with Dubai World Central–Al Maktoum International Airport (DWC) starting cargo operations recently, its phenomenal growth over the last decade shows no sign of slowing down. Even Dubai International Airport (DXB) has seen record growth in passenger and cargo figures year-on-year, an even bigger international airport is under development, tipped to handle more than 160 million passengers and 12 million tones of cargo annually once fully operational by 2030




The leading change in the air cargo market is the long-range wide-body twin-engine Boeing B777-300ER with a belly-hold capacity of 23 tones

In 2006, the B777 was accounted for less than 1% of frequencies but in 2011 is at 20% – more than the B747-400. While airlines are expanding with the 777-300ER, they are also using it as a B747-400 replacement.

The implication for the cargo industry is that the 777-300ER carries about 18% more cargo volume than the 747-400. So not only are airlines growing frequencies and thus belly space, replacing a 747-400 with a 777-300ER leads to a significant increase in cargo capacity too.

More than 30% of B777-300ERs on order are destined for Asia! Emirates Airline (EK) operates more than 90 B777-300ER and a few days back at Dubai Air Show (2011) EK announce a historic order for 50 777-300ERs… EtihadAirways (EY) out of Abu Dhabi is operating around 20 B777-300ER and the neighbor Qatar Airways (QR) more than 25…

For sure, on top of the Middle East Big 3 (MEB3) appetite, the region is ideally located by nature!

Source: © 1BlueHorizon Group Analysis,



MENA Region has a very high density of airport infrastructures with for most of them impressive ongoing improvements to meet future demand

EGYPT

K.S.A.

JORDAN

U.A.E

Bahrain(8.8)

(329,938)

LEBANONBeirut

(5.5)92,098)

OMAN

Kuwait(8.3)

208,295) QATARDoha (15.7)

(707,831)

2

Major AirportBubble represents airports size (in terms of Passenger Traffic

and total Cargo volume)All figures in million PAX and

Metric Tonnes (in 2009/10)

Jeddah (17.8)

(231,730)

Riyadh(10.9)

Dammam(3.2)

Muscat(4.5)

(64,452)

Dubai Int. (50.7)

(2,270,498)

Abu Dhabi(9.2)

(353,820)

Cairo(16.2)

(274,550)

Luxor(1.8)

Sharm el Sheikh

(7.4)

Hurghada(6.7)

SYRIADamascus

(5.2)Sharjah

(5.7)(501,824)

Amman(5.4)

Selected Countries

Most major airports in the region are continuously expanding capacity to keep pace with increasing passenger and cargo traffic. The K.S.A., Qatar and the

U.A.E. are clearly developing ambitious plan for air cargo. Dubai World Central (DWC)

Airport is far away the more impressive one (the future world’s largest commercial airport). Once fully completed in 2015, it will have six parallel runways, three passenger terminals and 16 cargo terminals.

Marsa Alam(5.8)

Ras Al Khaimah(0.0)

(000,000)

Fujairah(0.2)

(120,000)




Most of the Middle east carriers are considering cargo activities as part of the expansion plans, with different approaches and ambitionsAir carriers can principally be decomposed into three classes: freight carriers, combination carriers, and integrators.Freight carriers are devoted solely to freight, while the combination carriers include airlines or subsidiaries of largeair carriers who carry passengers while storing freight in the belly of aircraft. Integrators oversee the entire processand act as the forward and the carrier.

Freight carriers - Combination carriers - Integrators




Worldwide, one of the Top five carrier by schedules freight-tonnescarried is Emirates Airline (with a fleet of eight pure freighters…)



… and further Qatar Airways (& Cargolux), Etihad Airways and Saudi Arabian Airlines



The overall economic situation don’t encourage to invest in the fleet (asset management) especially for dedicated freighters

A300-600RF

23 mio$B747-400BCF

30-60 mio$A330-200F

90 mio$B777LRF

170 mio$B747-8F

220 mio$

Converted – second handB747-400F

50-90 mio$B777ERF

65-80 mio$

46 Tones 108 Tones 82 Tones 113 Tones 69 Tones 103 Tones 134 Tones

For carriers looking for dedicated freighters, new aircraft are very expensive and conversion programs need to be considered very carefully as a credible alternate. The aircraft financing model needs also to be analyzed carefully and it is a place for ACMI providers based in the MENA region to support this particular industry. On the second hand market we will see the freighters prices dropping...

For carriers offering premium air transport solutions through a heavy lift/out-size focus (niche), the fleet management is uncertain with the Russian aircraft (from a maintenance or new type perspective).

Note: At this stage EADS EFW didn’t officially decide if they will launch a P2F conversion program for the A330-200/300



O The Middle East is ideally located between Asia, Africa and Europe and America… The hub-and-spoke distribution strategy work perfectly in the Middle East even the environment is highly competitive…

O The ambition of the major Middle East carriers impacts directly the cargo capacity if we consider the belly hold… and most of them operate the ‘777’ with great (mix) capacity… From my opinion I am not convince about the ‘combination carrier model’ and last week announcement from Saudi to push the privatization might give the opportunity to create a fully dedicated freight carrier. How to understand Qatar Airways taking shares in Cargolux… to create also a fully dedicated freight carrier?

O The fuel price is clearly an advantage for the MENA region carriers, event most of them have to pay for it…

O Within the MENA Region, we might encourage all regulators to be more restrictive in the technical approach (even without carrying Passengers). For those operating Russian fleet (heavy lift/out-size niche) and willing to follow the industry rules it is very difficult to compete against some ‘cow boy’…

O Last but not least, at 1BHG we firmly believe in order to be successful in the cargo business, an airline need to be first successful in the passenger business. The two things are very, very connected. Being able to cross connect, off load freight between the passenger belly with freighters, is the core of the business success…

With such existing infrastructure and successful carriers, the future of Air Cargo in the Middle East is encouraging, mainly for those reasons



SHOUKRAN - THANK [email protected]

LEONARD FAVRE, 1BlueHorizon Group® Managing DirectorLeonard Favre is an experienced senior management advisor with over 10 years experience inthe aviation industry, having started his involvement in this particular field of business when theSwiss National carrier Swissair collapse as one of the Swiss ministry of Economy adviser.He is based in Abu Dhabi (U.A.E.) and Bern (Switzerland). He holds Political Sciences &Economics degree from Lausanne University in Switzerland and two MBA, in Public Sector fromIDHEAP Lausanne and in management from INSEAD Fontainebleau (close to Paris, France). Heparticipated recently in postgraduate programs from the prestigious Harvard Business School(Boston, MA) in the field of Leadership and competitiveness.Leo combines hands-on experience with strategy management abilities, strong peoplemanagement skills and motivational leadership qualities to archive results (ex Booz & co). Whileworking for two prestigious management consulting boutiques, the last one as Principal RegionalHead of aviation - transportation for the Middle East and South East Asia, he has worked on awide range of issues at clients with significant experience in Europe and the MiddleEast, including several successful Low Cost Airlines (LCC) set-up or air carriers (passengers andcargo) restructuring and operational revitalization (CRO), due diligence screenings, strategicsourcing negotiations, mergers & acquisitions advisory, financial advisory, programoffice management, and strategic reviews. Until recently, he was vice-president Businessdevelopment & Strategy for an all cargo company in the UAE and was involved in the lease(ACMI) of dedicated freighters with sound achievements and customer satisfaction.Leo is a regular contributor to conferences and forums and his vision of airline industry is alwaysa valuable and knowledgeable input to create Blue Horizon.Leo is fluent in English, French and German with good command of Italian.

Note: Detailed References upon request



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A short selection of inescapable aviation related books

“Baseline”(Philosophy)

“Low Cost Carriers” “Courier services” “Various”Airlines’

Turnaround“Air Transport Management”

Source: © 1BlueHorizon Group | Recommended bibliography (non exhaustive)


Published books and decisive management theories that facilitate critical dialogue and support 1BlueHorizon creation

Partners Network – Aviation Sector



LEONARD FAVREPartner, Group Managing Director

1BlueHorizon GroupP.O. Box 34154 M +971 50 6164007 (U.A.E.)Abu Dhabi M +41 79 2080256 (Switzerland)United Arab Emirates leof007

[email protected]

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