The Future of Air Cargo in the Middle East: The region is ideally located by nature and the B777-300ER and its belly-hold…

3nd Annual Aviation Asset Management in the Middle East - Novotel World Trade Centre Dubai, UAE
0© 2011 1BlueHorizon Group - www.1bluehorizon.com All rights reserved1BHG | Aeropodium Conference AAMME Dubai 10.11.11
‘JOIN THE DEBATE’
AIR CARGO IN THE MIDDLE EAST
THE MIDDLE EAST REGION IS IDEALLY LOCATED BY NATURE
November 2011
1BHG, the ‘idea factory’ thinking ahead strategies www.1bluehorizon.com
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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 miles
Medium-Haul are flights lasts from three and six hours
Long-Haul involves long distances typically requiring over six and a half hours to cover, and are often non-stop flights
Ultra 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 America
2.0%
Latin America
0.8%
Europe
8.4%
Africa
0.5%
Middle East
1.0%
Asia
15.0%
South Pacific
0.4%
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 traffic
Column 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 hold
capacity
Costly
freighters
 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… Etihad
Airways (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)
LEBANON
Beirut
(5.5)
92,098)
OMAN
Kuwait
(8.3)
208,295) QATAR
Doha
(15.7)
(707,831)
2
Major Airport
Bubble 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)
SYRIA
Damascus
(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 ambitions
Air 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 large
air carriers who carry passengers while storing freight in the belly of aircraft. Integrators oversee the entire process
and act as the forward and the carrier.
Freight carriers - Combination carriers - Integrators

Worldwide, one of the Top five carrier by schedules freight-tonnes
carried 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 hand
B747-400F
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 YOU
leo@1bluehorizon.com
LEONARD FAVRE, 1BlueHorizon Group® Managing Director
Leonard Favre is an experienced senior management advisor with over 10 years experience in
the aviation industry, having started his involvement in this particular field of business when the
Swiss 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 from
IDHEAP Lausanne and in management from INSEAD Fontainebleau (close to Paris, France). He
participated 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 people
management skills and motivational leadership qualities to archive results (ex Booz & co). While
working for two prestigious management consulting boutiques, the last one as Principal Regional
Head of aviation - transportation for the Middle East and South East Asia, he has worked on a
wide range of issues at clients with significant experience in Europe and the Middle
East, including several successful Low Cost Airlines (LCC) set-up or air carriers (passengers and
cargo) restructuring and operational revitalization (CRO), due diligence screenings, strategic
sourcing negotiations, mergers & acquisitions advisory, financial advisory, program
office management, and strategic reviews. Until recently, he was vice-president Business
development & 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 always
a 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 FAVRE
Partner, Group Managing Director
1BlueHorizon Group
P.O. Box 34154 M +971 50 6164007 (U.A.E.)
Abu Dhabi M +41 79 2080256 (Switzerland)
United Arab Emirates leof007
leo@1bluehorizon.com
www.1bluehorizon.com
Abu Dhabi | Bern | Montreal | Moscow | Paris
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