IN FOCUS: Rating the prospects of the 747-8 Freighter

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In November 2005 when it was launched, with 13 orders from Cargolux and 14 from Nippon Cargo Airlines, the 747-8 Freighter looked like a no-brainer. In a cargo industry growing at 6% a year - and whose workhorse for more than 30 years had been the 747-200F, and later the -400F - the 747-8 seemed the logical next step.

With a payload of 134t and near-equivalent trip costs to the -400F translating into 16% lower tonne-mile costs, the 747-8F was enthusiastically greeted by the industry as the new paradigm for air cargo transport. Customers as prestigious as Cathay Pacific, Korean Air, Atlas Air and AirBridge Cargo queued up to express their impatience to start operating the new aircraft.

korean air cargo 747-8f and 777f, boeing

 Boeing

Korean Air took delivery of its first 747-8F, pictured with a 777F, earlier this year

Fast-forward seven years - two of them involving production- and flight-testing delays - and it is the 747-8F's misfortune to burst onto the air-cargo scene at a time of serious doubt about the future of the global economy. After the dramatic dip of 2008-9, when air cargo volumes plunged by 20-30% and many older freighters were retired, a classic bounceback in 2010, and then a softening again in late 2011, those gleaming new 747-8Fs look to some like white elephants.

Neel Shah, senior vice-president and chief cargo officer for Delta, questions the very rationale for combination (combined passenger and freight) carriers to be operating long-haul freighters at all. His argument is that manufacturers and exporters are now extremely smart in their use of logistics, and have lots of information from the internet that enables them to pin airlines down on rates.

"So we are not driving the margins that we did in the past, the kind of margins that are needed for these freighters to be successful," he says. "Volatility has increased to a point where owning these assets is difficult."

TREMENDOUS SWINGS

Bruno Sidler, chief operating officer of CEVA Logistics, agrees. "For me the mega-trend is volatility. The swings in the market are now tremendous," he says. "Of course, the 747-8 is more efficient, providing better unit costs if full. But these are very, very expensive aircraft, and I think we will see fewer and fewer carriers with large freighter fleets."

So is the 747-8F doomed to be a bad investment, or is all of this just recession talk? Will the ending of the global downturn soon produce a classic sharp bounceback in air freight volumes?

The latter view is certainly taken by Michael Steen, executive vice-president and chief commercial officer at Atlas Air, which has three B747-8Fs deployed at British Airways through subsidiary Global Supply Systems, and which has six more on order plus 14 options.

He points to very low inventory levels in a range of different industries at present, reflecting business uncertainty about the global economy. But he expects that to produce a big demand for air freight when consumer confidence returns. Longer term, Atlas calculates that current freighter orders will produce fleet growth of 3.2% annually, not enough to keep up with the 4.5% annual growth in global air freight. If these calculations are correct, the larger, more fuel-efficient 747-8 will be a winner.

Cargolux, too, remains confident in its choice of 747-8s, which will ultimately replace its entire 747-400 fleet. "The industry will always experience downswings, so when investment decisions for new aircraft are made you need to take a long-term view," says the carrier, which points in particular to the 747-8F's nose door, something no other next-generation freighter has.

Last September, both Cargolux and Atlas appeared to waver in their commitment to the 747-8F, however, when Cargolux abruptly postponed delivery of the first two freighters off the production line, only relenting three weeks later. Atlas also reduced its order from 12 to nine.

At the time the problem was widely reported to be a 2.7% shortfall in the performance of the freighters' GE engines, though both Boeing and Cargolux said the delay was purely over "contractural issues". All Cargolux would say for this article on the topic was: "We have come to a mutually satisfactory arrangement with Boeing and GE."

In the meantime, GE and Boeing have been working on improving fuel burn, and by March had announced a 1% improvement. Deliveries after April have also been certified at 6t more maximum take-off weight - 448 tonnes versus 442 tonnes - though Boeing insists all aircraft have had the same cargo payload.

IMPROVED VERSIONS

Despite this, Atlas's cancellation of three of its orders appears to been motivated by a desire to get the later improved versions. Steen certainly denies it has anything to do with market softness. "As prudent asset managers we exercised our contractual termination right with respect to the first three early product 747-8 Freighters after lengthy delays and aircraft performance considerations," he says. "The aircraft that we have, and will take delivery of, will deliver better performance and value to Atlas and our customers."

There have been rumours of other airlines requesting deferrals, but Boeing denies this. However, Cathay - which ordered 10 B747-8Fs, and is in the somewhat unhappy position of having secured many of the early slots for the freighter - says it has deferred two until April and July 2013. That still leaves the carrier with five in its fleet already, a sixth due in July and two more due in September and November.

When it ordered the aircraft in November 2007, Cathay clearly had its eye on expanding in a booming Chinese market, but earlier this year, Nick Rhodes, its director of cargo, was talking of a "perfect storm of falling yields and rising fuel prices" and saying the carrier was struggling to cover direct operating costs on many long-haul freighter flights.

Its response was to cut freighter capacity by 25% to Europe and 15-20% to North America. To accommodate the new 747-8Fs, it has been getting rid of 747-400 passenger to freighter conversions that only joined its fleet a few years ago. Four were already destined for Air China as part of a joint venture, but this year three more have been leased to Air Hong Kong.

However, Rhodes still strikes an upbeat note about the 747-8Fs, which are all deployed on transpacific routes. "As a result of the capacity cuts we are managing to maintain reasonably good load factors out of Asia," he says. "Like all large aircraft, the operating economics are good if you can fill the aircraft, and the 747-8F is no exception, producing much improved operating costs per tonne."

He insists the freighters are performing well "even though they are operating below the original design specification". Typical transpacific uplifts are 124t, though on shorter sectors Cathay has achieved the promised 133t. Cargolux says its loads usually max out volumetrically before the maximum payload is reached.

HUGE STEP

AirBridge Cargo - which has taken delivery of two 747-8Fs and has a third coming in September with two more next year - is also upbeat, talking of the freighters as a "quantum leap" and "the next huge step for our company". Waiting in the wings are Korean Air, which has one 747-8F with six more to come, and Nippon Cargo Airlines, which still has 14 on order. Lessors Dubai Aerospace and GECAS have 10 and two orders, respectively.

And so with 14 aircraft delivered and 56 still to come, one might say that the 747-8 is having a difficult birth, but whether it proves a longer term success depends on the global economy. Boeing executives with longer memories might comfort themselves with the thought that the 747-400F was similarly derided as a white elephant when it first entered service in 1993 with Cargolux, but went on to have a very successful 20 years.