ANALYSIS: Why small is beautiful in freighter conversions

London
Source: Flightglobal.com
This story is sourced from Flightglobal.com

Depending on which end of the market you are looking at, the freighter conversion sector is going full throttle or resembling a graveyard. While Aeronautical Engineers (AEI) is straining to meet its backlog of Boeing 737 and MD-80 conversion orders and is preparing for the next types to come into the picture, the large freighter segment is hardly moving at all.

"We do not see a 747 conversion or any large freighter conversion this year or next year, and there is a question mark over 2016," says Dan da Silva, vice-president of modification and conversion services at Boeing.

The company completed what was likely the final conversion of an MD-11 into all-cargo configuration last autumn and currently has no backlogs for large freighters. Airbus never embraced a conversion programme for its A340, but there is a concept for a low-cost freighter version that would use internal lifts to move cargo between decks to avoid the cost of installing a cargo door. However, two years of marketing effort have not yielded a single order to date for the A340LCF, which would be able to haul 60t of cargo over distances exceeding 5,000nm (9,260km).

Data from Flightglobal’s Ascend advisory service tells the story. During 2013 the number of 747-400Fs parked in storage jumped from 18 to 42; for MD-11s, the number stored grew from 11 to 20. Between 2012 and 2013, the number of widebody conversions slumped from 29 to just eight; as Ascend’s head of analysis Chris Seymour observes, the 747-400 conversions have effectively gone, leaving just the 767 and Airbus A300 – at “low levels”.

asset image

The 777-300ER offers up to 40t of bellyhold capacity

In such an environment, there is naturally no call for conversions in the bracket above 60t. On the major trunk routes where these planes usually are deployed, available capacity easily outstrips demand. A major factor in this has been the rise of widebody bellyhold capacity, notably in Boeing 777-300s and 787s. Air cargo executives frequently refer to the 777-300ER as a mini freighter, as it can carry up to 40t of cargo.

Despite efforts of freighter airlines to curtail capacity – often by replacing older freighters with newer types rather than expanding their fleet – maindeck lift has also increased, due to the higher payload of newer models (for example, 140t versus 110t where a 747-8F replaces a 747-400F).

As a result, yields are under immense pressure, and passenger airlines can offer very aggressive prices on bellyhold freight, as their prime costs are covered by the passenger business. Also hit by high fuel prices, over the past year, several 747 freighter operators ceased operations, including Evergreen International Aviation, World Airways and Air Cargo Germany.

On the long-haul sectors, this tilts the balance in favour of more fuel-efficient models. “When you fly 16 hours a day, the cost of operating overshadows the cost of ownership,” says da Silva, adding that Boeing has kept shifting its projections for new and converted freighter additions to the global fleet in its 20-year forecast over the past three years in favour of new aircraft. Boeing, he says, does believe there will be demand for 100t freighters over the next decade, including conversions: “Not everybody will be able to afford a new freighter.”

For 747 conversions to resume, the pool of sidelined capacity first has to be absorbed. But in the meantime, more 747-400Fs are going to come out of service. Several carries, including Cathay Pacific, Air France and Eva Air, plan to phase out their 747 contingents and freighter operators continue to shed 747-400Fs as they receive 747-8Fs. Underscoring the challenges facing the conversion market, Ascend’s Seymour notes that Boeing is having to take 747-400BCFs in trade to sell new freighters to Cathay and Air China.

As in passenger aircraft, however, fuel efficiency is driving fleet choices, and four-engine aircraft are being pushed out for models like the 777-200. Wet lessor Air Atlanta expects a few more years of good business with the 747 but ultimately, says vice-president Baldvin Hermannsson: “Twin-engine is definitely where we are going."

Airbus has made a strong case for twin-engined freighters, arguing that intra-regional flows are on the rise as more traffic shifts from the traditional trunk sectors to emerging economies, favouring mid-sized cargo planes carrying between 30t and 80t. Its own contender in this space, the A330-200F, is scheduled to get a conversion equivalent by 2017 – but, says Seymour, it has no customers yet. The manufacturer officially launched the programme in 2012 for a plane that can carry 60t up to 3,600nm or 59t over ranges up to 4,000nm.

At the instigation of a customer, Boeing has a blueprint for a 777 conversion programme, but da Silva does not expect this to get under way in the near future, given the high residual value of 777-200s in passenger service. At the same time, though, the launch of a 777 passenger to freighter conversion “keeps being put back”, says Seymour.

NARROWING THE OPTIONS

In stark contrast to the large widebody scene, there is plenty of activity in the narrowbody segment, particularly with 737-400 conversions. "We cannot turn them out fast enough," says Bob Convey, vice-president of sales and marketing at AEI.

In addition to the 737-400, the company also has MD-80 conversions going on. The acquisition cost of less than $1 million for an aircraft makes this a cheap option with similar payload capabilities to the 737-400 and the Boeing 727F. While it may have strong appeal particularly for 727 operators looking for a new model as 727 maintenance programmes are winding down slowly but surely, there is one stumbling block. Its cross section does not match with the narrowbodies used by the integrators, so none of them has embraced the MD-80SF.

"I think we will do half a dozen conversions a year. If we can do 30 to 50, I think we'll be doing good," Convey says.

He is extremely bullish on AEI's next venture, the 737-800SF. The programme for a 737NG conversion was unveiled by the company at the beginning of April. This will produce a freighter with 12 pallet positions – one more than AEI's 737-400SF – and a cross section in line with the integrators.

In addition, Convey anticipates strong demand for the model in markets like China, Russia or Brazil, where rapidly rising domestic express traffic on the back of growing e-commerce is fuelling demand for freighters.

The same dynamics are fuelling growing interest in converted 757-200 freighters, according to Brian McCarthy, vice-president of sales and marketing at Precision Aircraft Solutions. This was highlighted last year, when Air China – historically a 747 operator in the freighter arena – ordered four converted 757-200s. The airline flies these on an ACMI basis for the Chinese postal service hauling express parcels on major routes to and from China Post's hub in Nanjing. According to Titus Diu, chief operating officer of Air China Cargo, this has been the only segment where the carrier has seen strong growth in recent years.

McCarthy sees the requisite factors for a successful 757 programme align, with demand rising at a time where feedstock becomes available at viable prices, supported by affordable prices for engines and spares.

The demand curve for 737s and 757s extends to the 767, da Silva reckons. After a three-year hiatus, Boeing has been back to converting 767-300s since last autumn. With more 767-300s becoming available as passenger airlines phase in 787s, he anticipates a good balance between demand and feedstock in the years ahead.

Ultimately, the situation for dedicated freighter operators is well summarised by the background market environment. Ascend head of consultancy Rob Morris notes that in 2013, Ascend’s Fleet Forecast predicted annual freight traffic growth of 4.2% over the next 20 years. Morris thinks that may be achievable – IATA figures show first quarter 2014 growth of 4.4% – but while “some semblance of recovery is underway”, main deck cargo demand remains weak.

Morris also notes that much of that 4.4% growth – if it is achieved – will go to the bellyholds of the growing number of twin-aisle passenger aircraft, not to main deck freighters. “Overall,” he says, “the cargo market is not a happy place to be right now.”