The year is 2016. Demand for freighters and wide-body, belly-hold cargo, which had been rising at an annual rate of 5 percent, has sucked up all the world’s extra cargo capacity. Carriers have been retiring older planes at a steady pace in order to fill their fleets with new-production aircraft. Passenger-to-freighter conversions continue in this new utopia, but at a low level. Welcome to the perfect scenario.
This ideal, envisioned in “The Freighter Overcapacity Threat,” a report published recently by the Air Cargo Management Group, is one of three situations created to determine whether the world’s airfreight market will face an oversupply of wide-body freighter capacity in the near future. In this high-demand growth situation, there is enough need for cargo space to satisfy the current backlog of 213 wide-body freighters, which includes three sparkling new aircraft types announced in the past three years (Boeing’s 777F and 747-8F; Airbus’ 330-200F).
Alan Hedge, who wrote the report and serves as ACMG’s research director, notes in the study that wide-body freighter aircraft and belly-hold space currently share a 50:50 division of freight movement. If the division shifts even a little bit toward more passenger use, a 10-percent reduction in freighter capacity will be necessary. This would also reduce the needed freighters in the above alternate future from 236 to 110.
As an alternate to the above scenario, Hedge presents additional futures, both focused on low-demand growth. The first situation anticipates a 3-percent annual increase in capacity, which would keep pace with demand and lead to the absorption of the 213 new freighters now on order, but nothing more. Along with increased freighter retirements and a decrease in conversions, capacity would not run wild.
Hedge’s third scenario, though, in which delivery of new freighters continues unchecked at 5 percent annually and growth keeps pace at 3 percent, would force massive cuts to conversion programs (a 60-percent reduction) and a 70-percent increase in plane retirements. In this situation, MD-11s and 747-400s would be taken out of the sky, Hedge writes.
Some of these scenarios — Hedge writes that each one is possible, and a number of factors muddy the prediction process — leave the world with an embarrassment of freighter capacity. This could force cancellations of freighter orders, speed up plane retirements or force carriers to accept smaller load factors. Hedge wrote in the report that a 5-percent demand increase is “more than twice the average rate observed during the last decade.” In the last scenario that foresees 3-percent growth, excess freighter capacity will hit 9 percent by 2016.
There’s a lot up in the air, obviously, but one byproduct of the massive amount of freighters coming online is a shift of the balance between freighters and belly-hold capacity. With new wide-body passenger planes providing ample room for cargo, freighters might actually be passe, if not for the massive backlog of new all-cargo planes on the books at Airbus and Boeing. Capacity, in the current market, is a dangerous game — one that could soon spin out of control.
“We do not believe overcapacity due to new freighter and wide-body passenger aircraft deliveries has yet risen to a critical risk to the air cargo industry, but in today’s fragile world economy, it does pose a significant risk, “ Hedge wrote in the report.
John Lloyd, director of Virgin Atlantic Cargo, admits that the current environment is tough on cargo operators. A decrease in demand from Asian markets, which was spurred on by troubles in the eurozone and the U.S., has hurt carriers around the world. Virgin officials focus on belly capacity instead of using a mixed fleet.
“The danger with a mixed fleet is that you direct your focus on the freighter profitability, which can dilute your belly-hold operation,” he says. Lloyd notes that today’s wide-body passenger planes can stack up against freighters on some routes, even making freighter flying sometimes a bit superfluous. “We can move over 40 tonnes on our Airbus A340-600s, even on long sectors such as Japan-U.K.,” he continues.
Virgin officials are planning to keep cargo capacity at its current level for 2012. Lloyd says the carrier has experienced some changes in its cargo routes and belly-hold fleet, but that no big developments are underway. The carrier recently withdrew from the Kenyan market due to a combination of the lack of business and the bad political climate. But Virgin has also added new frequencies to New York and Mumbai. Services to Vancouver, Cancun and San Francisco are planned.
“The overall picture is one of stability, as far as we’re concerned,” Lloyd says. ”We believe this positions us well in the current market and will give us the opportunity to further improve our capacity and revenue management activities.”
If there is a shift away from freighters toward these new wide-body planes — which Lloyd says offer better advantages — the industry has been moving in this direction for some time, he thinks. One development that turned this change from a nice idea into a possible new reality is the introduction of the A340-600 and the Boeing 777, Lloyd says. The two new planes have a vast cargo capacity, and with high fuel prices, make more sense to operate than some freighters, he thinks.
Jude Winstanley, senior vice president of cargo revenue and optimization for IAG Cargo, looks at the market a little differently. He still sees the current environment as extremely delicate and fragile, but as part of an airline that operates belly-hold and freighter capacity, he’s happy about the current opportunities for freighters. The merger of British Airways and Iberia, which created the new carrier, has also helped strengthen cargo offerings.
“Our upgraded freighter fleet, introduced last year, is complementing our long- and short-haul belly-hold capacity, satisfying customer demand for more route depth, over and above our passenger capacity on key trade lanes,” Winstanley says.
Freighters will always be necessary in some capacity, and though wide-body passenger planes offer increased cargo space, their all-cargo cousins aren’t shrinking back or going away any time soon. Winstanley says that there will always be oversized cargo that needs a specialized airplane, and specific routes will always make more sense when flown only on freighter routings. IAG has a long-term wet lease for freighters with GSS, and these planes offer the carrier additional capacity on proven trade lanes like London Stansted, Chicago, New Delhi and Hong Kong. New lanes like Madrid, Nairobi and Johannesburg are also proving to be good for freighters, he says.
At IAG, the path forward seems to be flat. Winstanley says that the company won’t be buying any new freighters, but also has no plans to downsize its fleet. “Due to the strength of our short- and long-haul belly-hold proposition, we haven’t needed to follow the line of our close competitors and invest in a large freighter fleet,” he says. “But we continue to look at our passenger belly-hold and freighter capacity in combination and with great care.”
Winstanley does concede, however, that challenges from wide-body passenger planes do exist, confirming Lloyd’s view as well. Whether this move away from freighters toward wide-body passenger freight is just talk or an emerging trend is debatable.
In the report, Hedge points out that if demand grows apace with capacity, load factors rise, yields grow and airlines start seeing more money. But wide-body passenger planes could conceivably present a problem. By 2016, Hedge predicts seeing as many as 1,500 new wide-body passenger planes. These aircraft will come with space for five pallets of freight, with eight planes carrying as much as one 777 freighter. In four years, new wide-body passenger capacity will equal nearly 200 777 freighters, he projects.
“It is obvious that the growth of the wide-body passenger fleet will add significant cargo capacity in the years ahead,” Hedge wrote. “Such a capacity increase in the passenger belly segment represents a significant threat to demand for wide-body freighters.”
How the mighty freighter weathers challengers from bigger passenger planes is anybody’s guess.