ANALYSIS: Cargo slump's impact on 747

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IATA's latest 2012 forecast gives a poor outlook for cargo traffic, reversing predictions of a slight expansion and pointing out that the rise in capacity exceeded demand over the first eight months of this year.

Excess capacity is noticeable, according to Flightglobal's Ascend Online database, with the stored fleet rising by 10% so far in 2012, writes Ascend director of valuations and appraisals Les Weal.

This includes 30 aircraft, or 7%, which could broadly be termed "current generation long-haul freighter aircraft", comprising Boeing 747-400Fs and MD-11Fs - including the last 747-400ERF built. This spare capacity has been worsened by the fall in utilisation of the active fleet.

Demand for early-generation freighters is likely to weaken further because of high fuel prices and weak cargo demand, which undermines their economics. In addition, the market is being dampened by the entry of new and more fuel-efficient Boeing 747-8Fs and 777Fs, and the popular 777-300ER which offers additional belly capacity.

Parting out of a 747-400BCF only four years after its conversion, while a one-off event, indicates the weakness of this market. Lessor Aircastle has also decided not to convert a passenger aircraft it had acquired, suggesting that the 747-400 conversion programme might be coming to an end. About 82 aircraft, some 12% of those delivered, have been converted and the backlog can be counted on one hand. Converted 747-400s make up a third of the -400F fleet.

It is difficult to build a demand scenario, especially with the structural changes that are taking place in the cargo industry in terms of both demand and supply, which would suggest a renewed appetite for either of the two 747 conversion programmes in the near term.

The 747-400 conversion market is likely to fall short of earlier expectations. However, one of the few positive outcomes is that there might be a re-balancing of supply and demand, which will provide a better chance for a recovery in values of aircraft already converted.

Ascend data indicates market values of a 10-year old 747-400F and a 15-year old MD-11F have declined substantially since around 2008, respectively to around $60 million and $20 million. For converted 747-400SF aircraft, with a 1990 vintage, the trend since conversion puts current values at some $35 million.

Signs from the market point to further real downward pressure in the short term across these three variants.

Airbus A330 and Boeing 777 families are likely to benefit from the shift away from the 747-400 and MD-11 conversions. These conversion lines could be up and running by the time the air freight market recovers and returns to normality. There is already an A330 passenger-to-freighter conversion programme and modification centres are considering similar schemes for the 777.