Freighter markets adapt to a new era

posted on 9th June 2021
Freighter markets adapt to a new era

The current soaring demand for all-cargo aircraft comes as the first 777-300ERSF aircraft prepare to make their debut, 747 production ends, and e-commerce fulfilment demand exerts an ever-greater influence, reports Will Waters

The Covid-19 pandemic has clearly changed the air freight market enormously since last year, with the well-known collapse in bellyhold capacity massively driving up demand for freighter aircraft and the prices paid for cargo capacity.

But the potential long-term effects on freighter markets is a more complex picture requiring an understanding of the dynamics going back several years.

Starting with more-recent trends, Tom Crabtree, Boeing’s regional director for air cargo airline market analysis, highlights in particular the loss last year of 777, 787, A330 and A350 widebody passenger capacity, supply chain disruption from the various lockdowns, “coupled with accelerated demand for e-commerce”, leading to the current high demand for freighter aircraft.

Josh Collingwood, fellow regional director for air cargo airline market analysis at Boeing, says the near term “has really been defined by the supply side”, with belly capacity providing around half of global capacity prior to the pandemic. “But throughout 2020, freighters were taking on the lion’s share – around 70% – and really working overtime. We saw a lot of aircraft come out of early retirement or pulled out of storage, and things like regular maintenance pushed off. And the overall utilisation has been up significantly.”
IATA estimates air freight showed a 9% decline in 2020, although Boeing estimates traffic was down about 7.2% in 2020 versus 2019, “which was already down about 3%” compared with 2018.

“So, overall, 2020 was a poor year – and that’s coupled with the previous trade tensions between 2018 into the shutdown of 2020,” Collingwood notes. “But then, PPE needed to get moved and e-commerce started accelerating; and then industrial production and other trade picked up.

“But it really only benefited cargo carriers that had dedicated freighters, with all-cargo carriers seeing year-on-year (YoY) gains and express carriers doing well – and helping mitigate some of the downturn on the combination carriers.”

Near-term future
Collingwood continues: “As we look to the future, most don’t really expect the international market to get back to 2019 levels until somewhere between 2023 and 2024. That’s not saying that cargo capacity won’t be the same until then; I think as more passenger aircraft get operating, they’ll be able to start carrying more cargo, even if passenger loads aren’t quite the same level.

“But I think, nonetheless, it’s going to lead to these volatile yields this year and into the next. And I think we’ll start to see that stabilise and then eventually go back into some of the more fundamental growth.”

Lasting legacy for freighters
Collingwood believes there is going to be “definitely a lasting legacy – the spotlight remaining on freighters and the flexibility and utilisation that they allow and provide”.

But whether that translates into higher orders for freighters in the longer term is less clear.
In terms of orders since the start of the pandemic, Crabtree notes: “We have seen a heightened demand for freighters. The best year we ever had in freighter sales was 2018 – we sold 125; and then another 65 in 2019 during a weak growth period. And we sold 91 freighters last year in 2020. And in the first quarter of this year, we’ve already got roughly half that number – 44 freighters ordered just in Q1 2021.”

Smaller-gauge freighter boom
Breaking those figures down, he says “the smaller-gauge freighter has driven a big part of our order book over the last 18 months or so”.

Boeing has sold 247 production 777Fs since the programme was launched in 2005, and its order base for 767 freighters – launched in 1993 – stands at 320, with 232 production freighters and 88 BCF conversions.

“But what has really been big in the last year or so, and cumulatively since the launch of the programme in 2015, we’ve sold 183 737-800 Boeing Converted Freighters in the standard-body space,” highlights Crabtree.

Strong interest in Airbus freighters
Meanwhile, rival manufacturer Airbus reports “a lot of interest even before the pandemic and since the start of the pandemic” for its freighter aircraft since it formed a strategic partnership with ST Aerospace (Singapore) and EFW (Dresden) to design a new range of passenger to freighter (P2F) converted aircraft. Key recent developments include the launch in June 2015 of its A320P2F, with a prototype inducted in 2021 for conversion. And its A321P2F conversion programme last October saw the delivery and entry-into-service of the first converted aircraft – leased by aircraft asset manager Vallair to Qantas, to operate services on behalf of Australia Post. Meanwhile, its A330-300P2F and A330-200P2F programmes have made further progress, with recent orders and deliveries for DHL, Egyptair, and lessors CDB and Altavair.

Airbus says “the P2F business is very healthy at the moment”, with “high levels of interest”. But Airbus marketing executive Crawford Hamilton notes: “As a P2F is a long-term commitment, the demand is not short-term driven by the crisis but the larger long-term requirements of a growing market – and one that will continue to grow with such things as our now-familiar on-line purchasing habits.”

Recent order patterns in context
To see the patterns in their full context requires an understanding of the history of freighter orders since the global financial crisis (GFC), Boeing points out. Crabtree explains that Boeing’s record 125 freighters sold in 2018 “to a large degree was a product of a long period of stagnation following the GFC in 2008 and 2009”. Demand “started to continuously grow again in 2014 and 2015”, before the oil price downturn meant “people held back again. And in 2016, a tentative recovery; and in 2017, we saw a 10% growth rate in cargo worldwide. And that led to our banner year of freighter sales in 2018.”
Then, just as the freighter market seemed to be recovering, there was an industrial slowdown in 2019, “paired with some of the global trade tensions that really just halted air cargo trade”, followed in 2020 by the pandemic.

Measured approach to new orders
In terms of whether there is now a clear sense that the pandemic has accelerated demand for newbuild freighter orders or conversions, Crabtree responds: “Airlines and leasing companies have upped their inquiries about freighter aircraft, but they are taking a measured approach to making acquisition decisions as they know that airplane purchases are a long-term asset play decision.

“The effects of the current passenger airplane lower hold capacity deficit, coupled with accelerated e-commerce demand, has clearly moved some order decisions forward; but on the whole, airlines and leasing companies have done their utmost to make prudent, long-term decisions. They know that passenger airplane lower hold capacity will return, and that they need to plan for that eventuality.”

Younger 777s available
There has been speculation that with the downturn in demand for passenger air services making available some younger widebody aircraft – such as 777s – for conversion at relatively affordable prices, this may reduce the mid-term need for newbuild widebody freighter aircraft, leading Boeing to adjust its forecasts.

Crabtree responds: “Our long-term forecast for cargo traffic is a 4% average annual growth rate through 2039 for the world, and that will lead to a more than doubling of our cargo traffic levels, both on pax bellies and freighters. And that will result in a more than 60% (62%) growth in the freighter fleet, from roughly 2,000 in-service freighters at year-end 2019 to 3,260 in-service airplanes by the year 2039.

Production vs conversion freighters
“Only about 830 or so airplanes flying at year-end 2019 will be flying 20 years hence, due to age obsolescence and lesser efficiency. That will require the addition of 2,400 – both conversions and production factory-built freighters to the world fleet. And typically, the bigger the gauge of equipment the more likely you’ll see a production freighter solution.”

He explains: “The express sector is the predominant user of freighters. Out of 2,000 freighters, roughly 1,100 to 1,200 of them fly either directly or in some service to the big names in the industry like FedEx, UPS, DHL and SF, or e-commerce networks like Alibaba. As a consequence, your small and medium widebody freighters are usually flying hub and spoke for express carriers where the utilisation isn’t as high as the large widebodies, which fly long haul and over 10 hours a day.

“So, you have to have a lower capital-cost asset to make that revenue-cost equation work. And that’s why you see conversions predominate in the single and medium widebody space – not totally, but in the standard-body space, we don’t see any production freighters of big numbers going forward.”

Historical indicators
Crabtree continues: “There’s a bit of an ebb and flow, but looking at 20 years of history of additions to the large widebody fleet, roughly 75% to 77% have been production freighters like the 777 freighter, the 747-8 freighter, the 747-400 freighter and the ERF freighter, and conversions make up the balance – somewhere between 20% and 25%. That has to do with the advantages of payload range capability that production freighters have, as well as their ability for utilisation at heightened levels beyond 10, 12, sometimes 14, 15 hours per day.”

But he acknowledges that some 777s becoming available for conversion a bit younger and a bit more cheaply than previously expected “will be a factor, and that will probably reinvigorate the conversion wide-body space, which is about two years old at this time”.

Airbus’ Crawford Hamilton comments: “Affordable aircraft can help boost a market and we are seeing increased demand for our P2F products – with this as one factor.”

The Big Twin
Israel Aerospace Industries (IAI) and GECAS launched the first 777-300ERSF conversion programme in October 2019. Nicknaming it ‘The Big Twin’, the first 777-300ERSF is 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”. IAI 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”.

As launch customer and co-funder of the programme, GECAS has committed to fifteen firm orders – including the prototype aircraft – with Kalitta set to become the first operator of the new passenger-to-freighter type in 2023. Originally a 747 operator, Kalitta’s fleet has grown to a total of four 777F, 24 B747-400F and nine B767-300BDSF aircraft.

Boeing’s Crabtree notes that when IAI launched that programme in 2019, the only existing conversion programme for large widebodies was IAI’s 747-400 programme. Boeing ended its MD-11 conversion programme in 2014 and ended its 747 400 BCF conversion programme in 2016.

“So, the 777 is a new type entering the space at a time when feedstock is becoming more affordable,” notes Crabtree. “But, in our opinion, those three factors – payload, range and utilisation – will favour production freighters, going forward (in the large wide-body sector).

747 production freighter ending
Crabtree confirms that 747 freighter production really is ending, with no possibility of that coming back. “We are sunsetting the programme, finishing production next year,” he says.

“We will have delivered 107 B747-8 freighters. What we noticed over time is that the market has developed a distinct preference for twin-engine aeroplanes – predominantly on the pax side but also on the freighter side. And we are basically aligning our product development efforts and alignment with market needs.”
Out of more than 1,500 B747s built, there are estimated to be 435 still in service, of which more than 300 are in freighter format. Crabtree says Boeing will continue to support operators of 747-400 and -8 aircraft. “So, they’re not going anywhere anytime soon.”

Airbus also highlights how environmental issues are driving some of these changes, noting that “new ICAO CO2 regulations will prevent old-generation aircraft from being manufactured after the end of 2027”, with implications for Boeing’s 767F, 777F and 747F production programmes – although the latter will end in 2022.

“There is then a need for new-built freighters in both the large and mid-size categories,” says Hamilton. “The A330neoF meets the ICAO regulations and can be manufactured after that date. Conversion of existing types for P2Fs can also continue.”

New production freighter types
In terms of new production freighter types, some cargo airlines such as Cargolux have said they are waiting to see what new-generation freighters the aircraft manufacturers will offer – Boeing in terms of a possible B777X-based freighter or 777FX, and Airbus for a potential A350 production freighter. Qatar Airways has offered to serve as a launch customer for a freighter version of Boeing’s 777X aircraft, arguing that “by 2025, our initial freighters will be getting about 10 years old, so we will need to replace them”. QR in January took delivery of three additional new 777 freighters, bringing its total 777 freighter fleet size to 24, plus two 747 freighters.

Boeing says its “focus right now is on the flight test and certification of the 777-9” passenger version, adding: “The current 777 freighter is the world’s largest and most capable twin-engine freighter, with the lowest trip cost and highest reliability of any large freighter. It is our best-selling production freighter and we have sold 80 B777 freighters in the past two years.

“We are also evaluating future freighter needs, including a freighter version of the 777X. We will continue to engage with current and potential future customers on how we can best meet their long-term freighter fleet requirements.”

Airbus options
Although Airbus has struggled in the widebody production freighter market in recent years, with disappointing sales in its A380 and A330 production freighters, there are signs it could soon make a new offer in the widebody freighter market. This could be a medium widebody based on a stretched version of the A330-900 or an A350 freighter, or both.

Airbus recently confirmed it has been “looking carefully” at the large widebody segment, where Boeing currently has a near monopoly. Airbus CEO Guillaume Faury told Bloomberg: “Our customers tell us that our platforms, and the A350 in particular, would be strong candidates for a good freighter version and they would like to see us being a player in that segment.” Faury said Airbus was looking at the life cycle and the business case, although no decision had been made.

Although an A350 production freighter could prove a good aircraft, whether it could compete successfully against a lower-priced but similar capacity converted B777-300ERSF remains to be seen – especially with 777-300 potential conversion candidates now available at discounted prices.