Boom time continues for freighter markets

posted on 16th June 2022
Boom time continues for freighter markets

Boeing and Airbus are seeing bulging order books for P2F conversions and production widebody models, as sky-high demand for all-cargo aircraft continues. But while capacity is set to remain tight this year, there are concerns the recent flood of orders could lead to oversupply in the medium term, reports Roger Hailey

Freighters are back in fashion, with converted passenger to freighter (P2F) aircraft and production line widebody models seeing bulging order books for airframe manufacturers Boeing and Airbus.
A quick glance at orders for the first five months of 2022 alone sees a freighter frenzy by established cargo airlines and aircraft lessors, the latter backed by investor funds.
January saw Qatar Airways become the launch customer for Boeing’s B777-8F, with a firm order for 34 planes and options for another 16, with the first delivery due in 2027. The B777-8F will be the world’s largest twin-engine cargo jet with the most payload capacity and a 25% improvement in fuel efficiency, carbon emissions and operating costs on the current B777F model.
Aviation analyst IBA has estimated the B777-8F will offer 118 tonnes of cargo capacity and an unconfirmed price tag of $180m.
Ethiopian Airlines has since signed up for five B777-8Fs, while Lufthansa Cargo has booked seven of the jets, plus three of the current B777F – which has also bagged multiple recent orders from Maersk Cargo, DHL Express and Western Global Airlines.
Europe’s Airbus, for so long the very junior player in production line freighters, stepped up the competition in July 2021 by launching its freighter version of the popular A350 passenger aircraft. IBA suggests a capacity of around 109 tonnes for the A350F and a “low $170m” price tag.
In November, CMA CGM Group ordered four A350Fs, while January saw Singapore Airlines sign a letter of intent (LoI) for seven A350Fs and options for five more, followed by an Etihad Airways LoI for seven freighters. Air France KLM has also booked four A350s, with an option for another four.

P2F conversions booming
Alongside those orders, the passenger to freighter conversions market is also booming, partly fueled by a surging feeder stock of passenger jets grounded by Covid and unlikely to fly again with passengers. Those aircraft have flown far fewer hours than the previous targets for conversion and are now available at a lower cost, the ideal combination for existing and potential freighter airlines looking to expand their fleets with cleaner and cheaper-to-run jets.
The first 777-300 ERSF conversions are expected to enter service in 2023, boasting “twin-engine efficiency that burns 21% less fuel per tonne than 747-400 freighters, and big-cargo capability that sees 25% more volume than the 777-200F production freighter”. Israel Aerospace Industries (IAI), which launched the programme with GECAS – which was acquired last November by AerCap Holdings – says “with the flexibility to be more profitable than the competition at high or low utilisation models”, the aircraft has “the range capability to seamlessly replace aging 747-400 and MD11 freighters”.
Boeing acknowledges that the 777-300 ERSF is a new type entering the market at a time when feedstock is becoming more affordable, but believes three factors – payload, range and utilisation – will favour production freighters in the large wide-body sector. The 777F is Boeing’s best-selling production freighter of all time, selling more than 300 units since the programme began in 2005.

B737-800 P2F conversions buoyant
On the smaller end, IBA says that the Boeing 737-800 P2F conversion programme has “exceeded” its expectations in the past year, noting: “The fleet has almost doubled in size, from 59 aircraft in April 2021 to 113 aircraft in April 2022. This demonstrates the Boeing narrowbody’s sustained appeal for P2F conversion.
“This growth in demand for the 737-800 P2F is illustrated by the increasing number of conversion centres, totalling 15 at the end of April 2022.”
The IBA Insight data platform also indicates that the market values of most freighter types have remained stable overall, especially for younger aircraft: “Looking at this through the lens of the 737, the value of a 2006 build Boeing 737-800BCF has fallen by just 3.7% to $21.23m,” it notes.
Jonathan McDonald, manager for classic and cargo aircraft at IBA, told a webinar that Boeing is no longer the dominant force in either the widebody or narrow body freighter sector, highlighting the recent buildup of the A321 and the A330 P2F programmes which are seeing “really serious traction”.
Another factor is that ‘preighters’ – passenger aircraft with lightweight cargo on passenger seats or with cabin seats stripped out – cannot be flown with cargo in their cabins after July 31 in Europe, although they have until the end of 2022 in the US. A life-saving option for carrying PPE in the early days of Covid, the preighter principle has been proven as safe to regulators and would again be a useful short-term fix if bellyhold capacity collapses in the future during a new pandemic or similar crisis.

Oversupply threat
But is this post-Covid freighter rebirth, driven in part by the rapid growth in e-commerce, creating a bubble that could burst as higher inflation and a possible global recession spoil the party?
Asked whether he expects to see an oversupply of converted aircraft in the coming years, McDonald answers: “There is always a risk, but it has not happened yet. There has been some speculative conversion of aircraft and you can’t rule it [oversupply] out.”
Dan Morgan-Evans, group cargo director at Air Charter Service (ACS), the UK-based global aircraft charter broker, says there are multiple different views on whether there is a looming oversupply of converted and new freighters in the air cargo market. “My initial thoughts would be (that this is) typical of the air freight market: boom and bust,” he says. “Everybody jumps on the bandwagon and then you suddenly get massive overcapacity, prices drop through the floor, and then the industry will struggle to make it work.
“We will also see the passenger side of the business start to pick up to somewhere near pre-Covid levels, which gives you the belly capacity. The negative view would be massive overcapacity and the rates plummet, which is the obvious one. The positive side is maybe we have a more balanced approach between the air freight market and the passenger market.”
Morgan-Evans continues: “Pre-Covid, I would say that scheduled passenger routes were probably oversubscribed with too many services, and I think that maybe airlines will readjust their schedules and not operate pointless frequencies. I hope that the airlines achieve a nice balance that supports the freighters and has less frequent passenger flying so that air freight is pushed towards freighters rather than concentrating on the passenger side.”

High risk of a bubble
Richard Forson, president and chief executive of Cargolux, Europe’s largest cargo airline with 30 B747 freighters, says: “I think there is a high risk of a bubble developing, because everybody is ordering freighters. Airlines that were exiting the freight market, including combination carriers that were reducing their exposure to cargo markets, have all of a sudden come back and are again buying freighters. Also, there are all kinds of new entrants entering the market for freighters.
“But this is an asset that is going to be with you for 20 to 25 years. The convergence taking place in the narrow body freighters is primarily providing capacity for the e-commerce market, which has shown significant growth in the two years of Covid.”
The ‘queen of the skies’ B747-8F, with its nose loading capability, is no longer in production, and Forson confirms that Cargolux is evaluating the B777-8F and A350F, neither of which have a nose-loading capability.
Forson and the Cargolux board will not make any decision on the two new freighters until their evaluation is complete – and even then, will maintain its younger B747-8F fleet for long into future because of its nose-loading advantage for heavylift pieces of cargo.

Antonov challenges
One of the air cargo outcomes of the Russian invasion of Ukraine was the early destruction of Antonov Airlines’ unique An225 or Mriya, the six-turbofan powered super-freighter with a 250-tonne payload that could transport the heaviest loads for the oil and mining industry, as one example.
The war has also affected operations of the An124 freighter, a four-engine workhorse like the An225 but with a payload of 150 tonnes. Ukrainian carrier Antonov Airlines is still operating a reduced An124 fleet out of Leipzig in Germany, while the An124s of Russian owned Volga-Dnepr are constrained by airspace restrictions and other restrictions in the US and Europe, a ban that has hampered the sizeable B747 fleet of Volga-Dnepr’s AirBridgeCargo subsidiary.
Some commentators believe that these actions have removed an estimated 10% of total freighter capacity from the system.
Says Morgan-Evans: “The An225 was the only one in the world which could take record-breaking loads or pieces and had a unique capability. A broker or a forwarder who has chartered that aircraft will have an emotional attachment to it and it is like having a feather in the cap.”
The opportunity to use An225 was few and far between, says Morgan-Evans, but it had a profile in the market and was chartered many times during the personal protective equipment (PPE) crisis during the first year of Covid.
Heavy and awkward freight transport on the An225 required long-term planning between ACS, Antonov Airlines, the forwarder and shipper. Says Morgan-Evans: “If something had to go by air freight, then most things could fit into the An225, but now we would have to design around what is available in terms of capability.
“It will need a bit more forward thinking. You can’t lumber 160 tonnes on an aircraft anymore, you have got to think about breaking down the load and assembly after transport.
“It is a piece of the armoury that is not available to us anymore.”

Volatile environment
Looking ahead to the end-of-year peak season, Morgan-Evans highlights that US west coast dockworker unions are set to renegotiate their contracts in the summer which could lead to additional disruption to an already stretched ocean freight supply chain if the port workers go on strike. Inventories would be stuck outside port, thus seeing increased demand for and higher rates on air cargo capacity.
The continuing air space restrictions due to the Russian-Ukraine conflict, plus further lockdowns in China, higher fuel prices and inflationary pressures on consumers will only complicate matters.
Says Morgan-Evans: “Traditionally the cargo market is in downtime during the summer between March and September but is really busy from September to February. The real impact of all this will be seen in the final quarter of this year.
He adds: “Demand is a little bit softer than it was last winter, but it will ramp up more towards the end of the year regardless of consumer demand. I still think we’re going to be in a situation where the whole logistics base is in a bit of a mess.
“We are still going to be busy with a capacity crunch and that is when you will really feel the effect of losing an airline like AirBridge with a large amount of B747 capacity. It will be tough for the consumer because prices are going to go up and a part of that is the logistics cost.
“I don’t see an end to that for now and the only thing that will finish that is softer consumer demand. I don’t think that will happen this year and probably not into next year, but it will happen at some point.”
Possible perfect storm
Forson of Cargolux takes a similar view. “Ultimately, we are looking at a perfect storm if the US unions decide to go on strike at US ports – which are already struggling to handle container volumes,” he notes.
“The last two to three years, and possibly for the next two to three years, will be extremely lucrative for those in the logistics business; but beyond that, you have to take into account what happens if there is a global economic decline.”
This is why Cargolux will not make hasty decisions on converted or production line freighters.
Says Forson: “Cargolux has operated conversions before, but they are nowhere near as efficient as production freighters. Everybody is very focused on the next two to three years and basing their fleet decisions on that, but I’m looking out much further.
“My preference is to buy new and to consider the asset value over 20 to 25 years. At the end of the day, two to three years is only a small fraction of the total life of that asset on the balance sheet.”