The diminishing market for main deck freighters

At the IATA Cargo symposium last month Fred Smith laid it on the line – there is currently over-capacity in the market, the Industry is undergoing what he described as a profound transformation and he warned that the good old days will not return.

This message was supported by IATA that warned its members that the air freight portion of the pie is continuing to shrink and air freight is losing market share to other modes of transport. There needs to be significant improvements in execution and delivery of the air freight offer – transaction costs are too high and  little improved since the 1950’s in terms of a door-to-door transaction.

What is the impact for the freighter business – new builds and conversions? Old fuel inefficient platforms are out and what Fred Smith described as ‘low cost belly space’ is in. Airline cargo managers are moving out of main deck freighters (IAG, JAL, United, American, Delta to name a few) and befriending their passenger colleagues for space below the main deck to accommodate their cargo which they can sell at rates and profit margins not dreamed of before.

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British Air’s exit from dedicated cargo fuels doubt over 747-8F future

The decision by British Airways to exit the dedicated freighter business by returning three Boeing 747-8Fs to ACMI operator Atlas Air demonstrates the continued weakness of the global air freight market.

Boeing is counting on the global freight market to improve this year, and with it, sales of the 747-8F. We’re not so sanguine.

Even if the global freight market improves, we are skeptical that Boeing will see much in the way of orders to boost this faltering program. There remain a large number of 747-400Fs in the desert that can be recalled to service at a cost a lot less than a new-build 747-8F will cost. Likewise, there are still a fair number of 747-400 passenger aircraft in service and in storage ready for conversion.

We recognize that the 747-8F is more fuel efficient and maintenance is less than the 744s, but the much higher capital cost demands high utilization and risks greater financial impacts if the airplane has to be parked during a downturn.

Boeing’s 777F is smaller, less costly and uses less fuel than the 747-8F. While it also carries less, it can be argued that the 777F is “right-sizing” aircraft for the changing market conditions. But Boeing is struggling even with this model. The company sold just one nine 777Fs since late 2011.

Boeing plans a 777-8F, but this will not enter service until well after the 747-8 program is likely terminated.

Airbus hasn’t had much success for its new-build A330-200F. Some customers proved to be unable to take delivery, while another—Intrepid Aviation—changed its entire order of 20 for the passenger version and up-gauging these to the A330-300 in almost all cases. The cost-benefit analysis by some concluded the price of the new-build A330F was too high for the benefit gained through economic efficiencies and payload. Airbus announced a small sale at the Dubai Air Show, but otherwise has seen a steady decline in the backlog over and above deliveries.

Aside from the continued economic weakness and a surplus of available used equipment, the belly cargo-carrying capability of the Boeing 777-300ER and the Airbus A330 enables shippers to take advantage of these aircraft for many flights. Interestingly, when Boeing prepared to ship all the equipment and repair components around the global for its 787 battery repairs, it used belly-freight capacity, not dedicated main-deck freighters.

The proliferation of 777s, A330s and the forthcoming A350 and the 777X may well further spell the demise of the 747-8F as nothing more than a niche aircraft based largely on sales already completed. We certainly expect to see a few more sales, but nothing consequential.

Odds and Ends: Cathay cancels 8 777Fs, takes up 3 747-8Fs; soft cargo market a concern

Cathay cancels 777F order: Cathay Pacific Airways canceled an order for eight Boeing 777Fs. CX will instead acquire three 747-8Fs, trading in four 747-400Fs to Boeing. The cargo market remains soft and Boeing is struggling to sell 747-8Fs. One person close to the program says Boeing is faced with building several white tails this year and a recent aerial photo of Paine Field at Everett did show at least two 747-8Fs with no airline markings on the flight line.

We’re concerned about the continuing soft cargo market–it’s usually a leading indicator about the direction of the passenger market. Boeing forecasts recovery in 2014 but we’re not so sure.

Speaking of 777s, Air Lease Corp picked up an order for 10 777-300ERs.

787 update: Aviation Week has an updated report on the Boeing plans to begin flight tests for the 787. There seems to be a consensus building that the earliest the aircraft might return to revenue service is late April or in May–the latter a day we forecast earlier.

Odds and Ends: Cargolux, Qatar to split; P-8A and MAX; More on Sequestration; Dodging that depth charge

Cargolux, Qatar Airways to split: Several news stories report that Qatar Airways is going to dump its 35% stake in Cargolux. The stories indicate a disagreement in the direction of Cargolux. This story is the most detailed, although it’s now a month old  and out-of-date.

The day before the news broke last week, we were told that Qatar wanted to set up a Cargolux hub in Doha and decline more deliveries of Boeing 747-8Fs to Cargolux in favor of using Qatar Airways’ Boeing 777Fs. This tracks similarly with the month-old story linked above. Cargolux has eight 748Fs on order.

There is a general softness in global air cargo traffic that is causing some cargo airlines to consider deferring 748Fs as well, complicating Cargolux’s viability.

We were also told there are sharp personality differences between the Qatar and Cargolux board members that aggravated relations between the two companies.

P-8A and MAX: Bloomberg has this story that looks at an angle about the Boeing 737 MAX that hasn’t been discussed before: Boeing will stick with the NG-based P-8A Poseidon and not shift to the MAX.

Sequestration: We had a recent think piece on how sequestration might not be a bad thing in the long run because it would force the Pentagon to truly re-think its global defense strategy. This piece in Defense News, an authoritative trade publication, picks up a similar theme.

Dodging that depth charge: EADS wanted to merge with BAE Systems. BAE is the prime contractor of the UK’s nuclear submarine fleet. Read this story about the HMS Astute. EADS may well have dodged that bullet–er, depth charge.

Caution flags waving as we enter 2012

As 2012 opens, we are concerned about the increasing signs global cargo traffic is softening.

Cargo traffic is typically a leading indicator of passenger traffic, both on the decline and subsequent rise. Cargo traffic fell 25% globally at the start of the Great Recession and passenger traffic soon followed. Cargo traffic began to recover before passenger traffic as the world edged out of recession.

But now, there are several indicators cargo traffic is softening again. IATA figures show traffic is on the decline. Additionally, there have been several developments at individual airlines.

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FedEx orders 27 767-300Fs, defers 11 777Fs

Flight Pro (aka Flight Global) has reported FedEx ordered 27 Boeing 767-300Fs for delivery from 2014 through 2018 but at the same time deferred 11 777Fs within the 2013-2018 period as cargo demand softens.

The 767s will replace MD-10s, which are more than 40 years old.

Airbus had pitched the A330-200F but it was considered “too much airplane” for FDX. FDX also evaluated the potential 767-400F, but a FDX official told us at ISTAT Barcelona Boeing did not want to proceed with this new variant and risk impacting the USAF KC-46A tanker development. The KC-46A is a derivative of the 767-200, called the 767-2C.

Touring 787 line

We had the opportunity last week to tour the 787 production line.

There is optimism that the program is back on track, though there appears to be an emerging hiccup. We toured the line before information began emerging over the weekend that there may be a problem with airplane #4. We know that a major trade writer is also pursuing this event, including detail that is not in the initial report involving Section 44. Although there were elements of airplane 4 on the production floor during our tour, the fuselage barrels weren’t among them. We’re told the information did not begin to emerge from Charleston until after our tour, which was Thursday.

Be that as it may, Boeing tells us that traveled work continues to decline. The company pointed us to information released by Vought recently that Sections 47/48 traveled work was as follows, with the percentages representing the amount of completed work at the time of shipment to Everett:

AP1: 16% structures

AP2: 93% structures

AP3: 98% structures, 37% systems

AP4: 98% structures, 87% systems

Boeing reports that Alenia shipped Section 44 for airplane 5 with 100% of the work completed, “the first partner to ship an assembly with no open jobs.”

Boeing says that Power On airplane 1, which was two weeks earlier than anticipated under the current, revised schedule that had a June 30 target date, had fewer issues than anticipated. With that, Boeing is still planning a fourth quarter first flight with airplane 1. Although Boeing won’t give a more precise target date, word has more-or-less widely circulated that it’s supposed to be in October. This may or may not be correct.

The flight test program is planned for seven months, and with first delivery set for September 2009 (a date that slipped during the Investors Day last month), this suggests that the flight testing won’t begin until February (September, the ninth month, minus seven brings us to February–even we don’t need Excel to do this math). If this schedule seems aggressive, it is, and it’s something Boeing previously acknowledged. As the company also previously acknowledged, flight testing is planned to run 24/7 with six airplanes.

Some analysts have compared the aggressive 787 program with the flight testing of the 777, which ran 11 months. The 777 had nine test airplanes–a bit of a surprise, since it was thought there were fewer planes in that testing than planned for the 787. The 777 also had three engines offered on the airplane, vs. two for the 787, and was pioneering some ETOPS that won’t be necessary for the 787. Accordingly, Boeing believes, the compressed 787 testing is feasible.

There are some within Boeing, and outside of Boeing, who are concerned that the current 787 schedule now conflicts with the flight test program for the 747-8F, stretching resources. This isn’t the first time this concern emerged; originally an earlier 787 delay would have conflicted with the flight test schedule for the 777F. With the 777F due to take off any day now, this conflict is gone but the potential conflict now may overlap the 747-8.

There may be an easy answer, though, if painfully arrived at: with massive layoffs in the US airline industry, Boeing may find a ready pool of pilots available to supplement its own test pilot group of some 40.

Boeing has also created a new flight test center organization, as outlined in this story by Aviation Week magazine.

Update, 500 PM PDT: Here they are–the details of the Section 44 issue.

Update, Tuesday, July 1, 345 PDT: Bloomberg News has this extensive story about this development.

Update, Wednesday, July 2, 700 AM PDT: The Seattle Times writes that production was halted at Charleston after an FAA audit found irregularities. Although it was just for 24 hours, the news is a disturbing indication that all is not well even after Boeing assumed control of the plant.

More A380 delays or not

In a confusing set of stories, reports suggest that there may be a new round of delivery delays for the Airbus A380. These generated from comments made by Airbus CEO Thomas Enders, who said Airbus is engaged in a major review of the A380 production to assess the delivery schedule of 13 A380s this year and more in succeeding years.

This apparently was interpreted to mean that Airbus might not deliver the 13 airplanes promised this year. A spokesman immediately denied that’s what was meant.

We’re told by two sources–one inside Airbus and one a former Airbus executive–that program reviews are normal and there’s much ado about nothing on this one. The former Airbus executive told us he was puzzled why Enders even made the remarks.

Given the A380′s delay history, any hint of delays–whether founded or unfounded–are bound to cause concern and questions such as expressed in the news reports. This is similar to the trials now experienced by Boeing with the 787 program and fears by 777F and 747-8 customers of knock-on effects to these programs.

The 777F program appears to be on track now that there is no conflict in flight testing schedules between the 787 and 777F, as emerged on a previous 787 revised schedule. Some customers remain concerned–and are predicting–delays of several months in the 747 program, however, because of the level of engineering resources previously diverted to the 787. These customers believe Boeing won’t have time to catch up on the 747 to keep this program on track. Boeing previously pushed back roll-out by three months, according to reports, but has vowed to keep to the delivery schedule even if it means initially delivering a plane that’s about 1% overweight, according to Flight International.

New, 2:00 PM PDT: Speaking of A380 delays, Reuters has this report about Airbus penalty payments to Emirates Airlines for the delays. An excerpt: DUBAI (Reuters) – European plane maker Airbus paid Dubai’s Emirates EMAIR.UL as much as $110 million during the last year in compensation for the late delivery of the A380, of which the Arab carrier is the largest customer, Emirates said.