ANALYSIS: Tough times for 747-8

Washington DC
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The 747-8 tends to stand apart in Boeing's product line-up, but lately it has been for all the wrong reasons.

As Boeing wonders how much faster it can feasibly build 737s and 787s, it is slashing output of the 747-8 and may need to cut it even more. While Boeing received net orders for 428 aircraft so far this year, the firm order backlog for the 747-8 shrank by two units. Although Boeing overcame the 787 battery issue, it still has not implemented a solution for the year-old wing vibration problem on the 747-8 that renders a range-extending fuel tank inoperative.

Yet, company executives remain gallantly optimistic about the fortunes of its very large aircraft-class freighter and 460-seat passenger jet.

In Boeing's view, demand for the 747-8F is currently low, but the pace of deliveries will pick up again as the company forecasts an unexpected, two-year-old recession for air cargo traffic to expire by the end of the year.

That untimely dip in demand has already prompted Boeing to slash annual deliveries of 747-8s by 13% to 21 units, even as it has parked several built aircraft that have been deferred or refused by customers.

Boeing, however, still believes that air cargo growth will average 5.2% per year through 2031, and it is standing by its analysis.

"We forecast that the demand is going to come back to a more long-term growth forecast in 2014," says Ray Conner, president and chief executive of Boeing Commercial Airplanes.

The Boeing analysis is based on the assumption that overall world trade is down, even as economic conditions have already improved from the nadir of the 2008 global financial crisis. By this reckoning, air cargo traffic will improve as world trade improves and Boeing continues to forecast that this will begin in the second half of 2013.

Some of Conner's customers, however, are not quite as optimistic about the possibility of a sudden reversal of fortunes for air cargo traffic demand. IATA, for example, warned in early May that air cargo carriers face a new, structural challenge for increasing demand.

"Increases in world trade favour sea cargo," IATA wrote in the May analysis. "Shipments of important air-freighted commodities such as semi-conductors have declined."

The IATA warning describes a phenomenon known as "modal shift", in which freight customers seek to lower costs by accepting a slower shipping medium.

Boeing, however, disputes IATA's conclusion that modal shift is occurring at a macro-level in the cargo industry. The decrease in air cargo demand is driven by overall weakness in the freight industry, Boeing says.

"The same percentage is still going on in airplanes as it has before," Conner says. "It's just a smaller amount, but we think that's going to come back."

The 747-8F accounts for 62% total 747-8 orders  including nine for a VIP version  so the future of air cargo demand is crucial to Boeing's business case. But Boeing's customers in the air cargo market are struggling. Atlas Air, for example, is one of the largest 747-8 customers and recently refused delivery of three of the aircraft, forcing Boeing to park them in a storage area in the desert until customers can be found to take them.

"There are some 747-8s parked," William Flynn, chief executive, president and director of Atlas Air, told analysts when he reported first quarter earnings in early May. Atlas is still taking delivery of nine 747-8s overall, and could even exercise its 13 options if demand returns.

"For the 747-8s we that we've taken, they're performing well for our customers," Flynn says. "They're delivering the fuel burns, the efficiency improvement that they expect, [and] they're delivering the tonnage they expect."

The optimistic case for the 747-8 is not helped by Boeing's recent decision to begin offering the 777X to airlines. The 777X consists of two variants - the 400-seat class 777-9X and the long-range 350-seat class 777-8X. Both variants are roughly a 30- to 40-seat step up from the 777-200LR and 777-300ER. Indeed, the 777-9X is widely viewed to be aimed at the 747-400 replacement market, and is the variant that Boeing currently plans to introduce to the market first.

"I think the first one would probably be - based on the conversations that we had with our customers - would be more focused on the -9 first," Conner says. "And then it would be -8 coming after that."

That strategy means the passenger-carrying variant of the 747-8 will have another competitor besides the Airbus A380 in the class above 400 seats. Although Boeing lists the 747-8 with a 467-seat layout, it is operated by Lufthansa with 392 seats, making it a close rival to the 777-9X that will appear around the end of the decade.

Although it is possible that Boeing intends to sunset the passenger-carrying variant of the 747-8 when the 777-9X appears, its actions recently suggest otherwise.

Instead, Boeing has invested heavily to upgrade the performance of the 747-8. While Boeing advertises that the 747-8 is delivering 1% better fuel burn than expected, that performance is based on a lower standard than what the company had originally promised. Development issues not only delayed the aircraft's entry into service for several years, it also debuted in commercial service as several tonnes heavier and several percentage points below Boeing's sales brochure.

Several new upgrades have been rolled out to claw back some of that lost performance.

In December, Boeing added about 5,440kg (12,000lb) to the payload weight of the 747-8, allowing operators to carry heavier loads with no design changes. The extra payload capacity was possible because the structure of the 747-8 is stronger than necessary to carry the planned payload.

At about the same time, Boeing also rolled out an adjustment to the aileron and rudder settings of the 747-8. This relatively simple change to the control surfaces contributed to an improvement in fuel efficiency of a few tenths of a percent. Updates to the flight mission computer will enable required navigation performance approaches and more efficient, "quiet climb" take-off profiles, with each contributing slightly to the widebody's fuel efficiency.

Boeing is also still working to restore the original range target of 8,000nm (14,800km) for the 747-8. Boeing discovered a vibration problem in the wing before the 747-8 was introduced into service. To certificate the aircraft, Boeing had to deactivate a fuel tank in the wing to protect the structure from entering a flutter state. That change allowed the 747-8 to be declared airworthy by the US Federal Aviation Administration, but it reduced the range of the aircraft by 350nm.

If Boeing can reactivate the fuel tank by solving the wing vibration problem, the 747-8 could finally meet its original range target.

The propulsion system - the General Electric GEnx-2B - was also delivered below the performance specification, but that is likely to change. In mid-May, Boeing started a flight test programme for a performance improvement package on the GEnx-2B engine. The new design that optimises the low pressure turbine should improve fuel burn by the GEnx-2B by about 1.8%.

In the end, the 747-8F's fortunes hinge as they always have on the recovery of the air cargo market. If such a recovery gathers strength by the end of the year, and Boeing can find another airline customer for the passenger-carrying variant, the 747-8 programme will be back in good health. In the meantime, Boeing is cleaning up the performance shortfalls that have afflicted the aircraft since it was delivered.