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.
The main impact will be felt in the Mid-Size and Large freighter segments (the all wide-body territory) where Airbus and Boeing have and are planning to make significant investments in new conversion programs to meet their forecast market demand in these segments – the Airbus forecast calls for over 100 new build and converted aircraft required in the wide-body segment per year for the next 20 years
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In light of the fact that there were actually minus 8 orders received for new build wide-body freighters in 2013 and there were no wide-body conversion orders received in 2013, how realistic are these forecasts? One poor year in terms of order intake does not justify re-calibration of forecasts based on redeliveries. Nevertheless taking into account Fred Smith’s warnings, the alarm bells should probably be ringing
|New Build Freighters||747-8F||777F||767F||A330F||Total|
The demise of the 747 freighter fleet in 2013 has demonstrated how quickly sentiment can now change for a type in the market. The 2013 Industry consensus forecast was that there was still opportunities for more 747 freighter conversions and overall some 90 747
freighters would be retired in the next 20 years. Today, just one year into the 20 year forecast, some 80 747 freighters are either parked or identified for retirement with a limited outlook of returning to service.
Looking forward, the take up of freighters will mean lower lease rates and shorter lease term commitments for investors making for an environment where the appetite for investment in conversions will be limited around scenarios where the investment in a conversion is no more than the cost of a typical interior retrofit cost that would be incurred by lessors in a lease transaction (~$5m) – monthly lease rentals for mid-size conversions in the order of $350,000/mo will in future be the exception not the rule ~ $250,000/mo more the norm.
So what is in the pipeline in the Mid and Large market segments? No more new-build freighter products and no conversions in the Large segment where currently the 747-400 conversion programs are the only conversion programs in this segment. Boeing will now dominate this segment with their new builds (777F and -8F) for the next 20 years, which leaves the ‘mid-size’ segment as the only space there will be new developments. Here there are currently three new conversion programs on the drawing board competing for what is becoming an uncertain market outlook:
The LCF solution is reversible, significantly reduces the program development cost (by a factor of 10) and the ongoing conversion cost (by at least two thirds). LCF is a more attractive and practical investment proposition than conventional conversion programs. Conversion to LCF configuration does not change any of the certified limits of the donor airframe and avoids the expense of undertaking invasive and irreversible modifications on passenger airframes that were not designed for such a role-change.
Unlike a conventional P2F conversion that adds weight to the aircraft, an LCF conversion removes weight from the passenger aircraft resulting in payload / range performance at least as good as the passenger aircraft. The Eolia Group claim that in all cases the LCF product can match or better the payload and/or range where there are (or are anticipated to be) competing freighter conversion programs on offer. LCF brings on stream solutions for fleets (for instance the A340 and the 777-200 fleets) where there are no proposals by the OEMs to develop alternative-use solutions beyond the passenger-only configurations.
The LCF conversion, although based primarily on converting the Main Deck of the aircraft from passenger to freighter configuration, can also be adapted for other bespoke applications on the Main Deck ranging from simplified access (for access of oversize loads/fittings onto the Main Deck) to combi/quick change accommodation.
The LCF concept appears to be more flexible and less capital intensive that the conventional conversion programs. This is a non-intrusive, low capital cost approach to wide body conversions and deserves consideration especially when looking ahead to the fourth generation (787 and A350) wide body composite airframes as it’s very unlikely cutting large main deck freight doors in old passenger composite airframes will make economic sense and a different modus operendi more akin to the LCF approach is likely to be adopted.
The message for lessors and owners is less dedicated freighter lift is required (the forecasts could be wrong), the freight operators have less revenue available for monthly lease rentals and the need for flexibility to adapt to changing market demand means shorter lease commitments.
Traditionally owners have looked to the conversion market for some potential life post passenger operations – some 20% of wide-body passenger fleets have been born-again as converted freighted freighters. The take up of such large a proportion of passenger fleets for conversion are unlikely but the take up will be reduced further if the conversion houses (led by Airbus and Boeing) cannot develop highly competitive conversion solutions for installation in the wide-body donor airframes (akin to the price of a passenger reconfiguration at lease end) then the option of conversion life-line will not be there, part-out on retirement from passenger operations will be the only option.
This is a Guest Column by a contributor who wishes to remain anonymous.