Air cargo at full throttle again
With the global economic crisis now having mostly receded, optimism has returned to the commercial aviation market. That positive outlook, tinged with what is perhaps a wise degree of cautiousness can be seen in the detailed forecasts of the global aircraft market by duopolists, Boeing and Airbus. By Donald Urquhart.
February 1, 2011
After the worst global economic downturn in decades – a ‘perfect storm’as economic pundits like to call it – world trade has made a dramatic return to its previous growth track, exceeding its pre-crisis levels in many cases. Along with this resurgent global trade moved the world’s air cargo markets. “In August 2009, industrial activity began to recover, particularly in Asia,” notes Boeing in its latest market forecast released in November. “The pace of air cargo traffic contraction, which had approached 30 per cent in the first half of 2009, began to ease”. Overall for 2009 world air cargo traffic declined 11.3 per cent. In 2008, which saw the beginnings of the decline, cargo was down 1.8 per cent for the year, over 2007. November 2009 marked the point where air cargo traffic statistics turned positive which continued to build strength resulting in the first eight months of 2010 seeing an unprecedented 24 per cent growth in air cargo traffic compared to the same time period in 2009, which arguably was at rock bottom. This significant up-swing in cargo growth is expected to bring the industry back to the levels seen in 2007 (pre-economic crisis) of 3.3 per cent growth, by the end of 2010. The recovery in traffic in the first quarter was encouraging and produced some lusty figures and appears, at least during 2010, to be fairly broad based, with Asian carriers up 35.9 per cent in the first quarter, North American airlines up by 31.6 per cent and Middle Eastern carriers up 34 per cent. Only European carriers have lagged with a rise of just 10.3 per cent. Greater industry self-awareness Among the many visceral lessons learned in the crisis was the very demonstrative link between air cargo and world trade. This was not especially news to the air cargo industry, but did help to underscore for the benefit of the consuming public and government officials the world-over of not just how important air cargo supply chains are to global commerce, but also how accurate they are as a leading indicator of global economic health. This is of course all very good news for the long term longevity and health of the industry, but it does also underscore inherent weaknesses because of this very integral link. The industry is vulnerable, not only to the impact from the day-to-day ups and downs of the market including fuel prices, but greater cyclical market trends, traffic imbalances, the rising environmental costs of air transport and mismatches between supply and demand that are exacerbated by surges in capacity introduction. And as recent headline events have shown, air cargo has emerged as the soft underbelly in aviation security — a situation recognised by many for some time, but now apparently by terrorists themselves. This for the near future will be the challenge that preoccupies regulators and the industry as they grapple to ensure supply chains remain safe, but unimpeded lest commerce be choked and the industry flat-lined once again. Positive macro-trends Over the next two decades, world air cargo is, according to the Boeing forecast, to expand at a 5.9 per cent annual rate and by 2030 will have tripled. “Economic activity — world gross domestic product — is the key driver of the air cargo market,” said Jerry Allyne, vice president strategic planning and analysis, at Boeing Commercial Airplanes. “Following the recession and a year of recovery, world economic growth is forecast to average 3.2 per cent over the next two decades.” Airbus similarly sees freight traffic recovering at around 5.9 per cent with the rebound hitting about 18 per cent growth in 2010 before levelling off at more typical levels by the end of 2011 and a trebling of freight demand over a 20-year period to 2029. This will fuel a growth in aircraft demand of nearly 26,000 new aircraft worth US$3.2 trillion between 2010 and 2029. Of this, Airbus sees a 20-year demand for almost 3,000 freighters including 670 small freighters (B727, B737, A320, BAe146, DC9 and Tu204s) that will all be conversions; 1,380 regional and long range freighters (B707, B757, B767-200, A300, A310, A321, DC8, DC10, A330, B767-300, B747Combi and DC10-30s), with nearly 1,000 of these being conversions; along with 910 large freighters (B747F, B777, A350, MD11 and A380s) of which 420 will be conversions and the remainder new builds. As Boeing sees it, the freighter fleet will increase by more than two-thirds, from 1,755 to 2,967 aircraft over the period 2010-2029. Although 1,282 aircraft will be retired, 2,490 aircraft will be added to the freighter fleet by 2029. A shift toward widebody freighters will result in a fleet-wide increase in average freighter payload, according to Boeing. Well over half of all additions to the fleet will be in the widebody categories (medium and large freighters with capacities of 40-80 tonnes and over 80 tonnes respectively). Some 1,750 of these – nearly seventy per cent – will come from passenger and combination aircraft conversions, with 740 new production freighters entering the fleet during the forecast period. These newbuilds include 520 of the total 770 large freighters; 210 of the total 640 medium-sized freighters; and only 10 of the total 1,080 standard size (less than 45 tonnes) freighters will be newbuilds, Boeing says. New production freighters predominate in the large freighter category, with many airlines preferring the technical advantages, reliability, fuel efficiency, and overall low unit costs of new aircraft, something that was underscored by the severe downturn and earlier record-high oil prices. “In the large freighter segment, more than half of the deliveries will be for new airplanes,” Boeing says in its forecast. “Although the purchase price of converted large freighters is very attractive and conversion will continue to play an important supporting role, the performance and reliability advantages of new, purpose-built freighters are significant for intercontinental cargo operations, where larger, heavier payloads and range are crucial.” The medium widebody market, on the other hand, will be driven by the express carriers whose cargo tends to be time sensitive, Boeing said. “The larger capacity of medium widebody versus standard-body freighters provides operating cost advantages in this market. Though large freighters hold an even greater advantage in range and tonnekm economics, the lower trip costs of medium widebody freighters provide flexibility to optimise frequencies.” While the freighter share of the total global aircraft fleet will decrease slightly from nine to eight per cent, the growth in the large freighter segment will more than compensate for this drop. As a result, both airframe manufacturers anticipate the bellyhold versus maindeck cargo ratio of 60:40 to more or less remain stable, although the increasing proliferation of Airbus’super jumbo A380 with virtually no belly cargo space – something akin to the single aisle A320 – due to passenger’s baggage, will have some impact on the belly side. Lingering fallout But it is crucial to acknowledge that the severities of the economic crisis of 2008-2009 period on air freight cannot be overstated. For the first time, world-wide freight traffic contracted for two consecutive years, aircraft were parked and containerships laid up in unprecedented number and with unheard of speed. For both Boeing and Airbus the timing could not have been worse, as both were launching new freighter products into the market. Boeing’s line-up in the very large freighter airplane market was heavily impacted in terms of securing new orders for both in-production and converted freighters. While there were some order cancellations for both the 747-8F and 777F, they were surprisingly minimal. “Remarkably, there was little erosion of the huge backlog, even when air cargo traffic was at its lowest point during the slowdown in 2008 and 2009,” Boeing in its forecast. Perhaps more damaging for both Airbus and Boeing was the impact on its current order books. Boeing clearly acknowledges this by noting that despite the long-term appeal of the 777F and 747-8F, the immediate market for new orders will be weak as the “fleet absorbs the capacity currently on order.” This is evidenced by the fact that the US airframer’s new, advanced and highlyefficient 747-8F has not secured any additional firm orders for over 36 months and has even lost four orders from US-based leasing giant, Guggenheim Aviation Partners, which reduced its commitment for the 747-8F from four to two aircraft as the harsh impact of the freight-market contraction took its toll. More recently Guggenheim also cancelled its remaining order for two 747-8Fs in late 2010 due to the continuing delays resulting from issues arising in flight tests that pushed deliveries to launch customer Cargolux to mid-2011. The last firm order for the B747-8F was booked on 31 December, 2007 by Dubai Aerospace Enterprise (DAE) for five units, with DAE now the sole leasing company with orders for the re-engineered jumbo. But remaining customers appear to remain steadfast in their faith in the B747F with 74 firm orders from DAE and eight carriers – four of which are Asian domiciled. Boeing’s other all-new freighter programme, the 777F, also sustained order cancellations and delivery deferrals, as well as a complete dearth of new orders in 2009. At present Boeing has 79 firm orders for the 777F. Boeing conversions Boeing’s freighter conversion programmes were also hit hard by the downturn with not a single order booked for either the large freighter 747-400BCF, or the medium wide-body freighter 767- 300ER BCF for more than two years. But, Boeing’s BCF programme manager, Ralph Kramer, is optimistic that the markets are recovering and that orders for the BCF programmes will pick up shortly “We have seen an uptick in demand and interest,” said Kramer. Indeed, Boeing logged a single order from an unidentified customer for a 747- 400BCF in late 2010 and market interest for further 747-400BCFs and 767-300ER BCFs is building. Additionally, Israel Aerospace Industries – the other key B747 conversion specialist – also started booking new orders for their 747- 400BDSF programme late last year, after also facing a 2008-2009 order drought. Next on the cards for Boeing is the much talked about 777 passenger to freighter conversion, something that has moved from informal discussion with potential customers to full-blown ‘product development studies’for both the 777-200 Boeing Converted Freighter (BCF) and a 777-200ER BCF for potential launch early next decade. According to Boeing Commercial Aviation Services vice president freighter conversions, Dennis Floyd the 777-200ER BCF will offer cargo carriers a revenue payload of roughly 82 tonnes and the shorter-range 777-200 BCF a payload of about 66 tonnes. In the long-run Boeing sees the 777 conversion as a replacement for 747-400s. But converting 777s will be far more complicated than converting 747-400s given the substantial new technology that debuted in the 777, particularly in the cockpit. There are also structural issues to overcome, in part because the passenger variant uses graphite floor beams while the freighter uses aluminium beams. “It’s like converting a convertible into a pick-up truck. It will be a challenge,” Floyd says. But with all of these new and upcoming options, the B747-400F and B747-400ERFs – the bedrock of the large freighter segment – will likely remain the kingpins for some time to come. “The 747 freighter represents only 18 per cent of the global freighter fleet, with more than 250 purpose built and conversion freighters flying, yet its size, high utilisation and high load factors allow the 747 freighter to provide more than 50 per cent of the world’s total freighter capacity,” Boeing notes. Their relatively young age, noseloading capability, huge range/payload capability and lower cost than a 747- 8F, coupled to the fact that they don’t have direct competition, means they will remain the backbone of the large freighter category for some time. Airbus still in the game With its recent launch last year of the A330-200F, Airbus has shown it has no intention of letting its rival clean-up on the freighter market, although orders for the mid-sized, medium range freighter have been slow to take off, in part due to the market downturn. The first of the A330-200Fs are now in revenue service with Etihad Crystal Cargo and may well become a popular choice to replace Boeing’s well established 767 family and the now out of production A300-600 and A310 freighters. Airbus has 66 firm orders on its books for the A330-200F.