This past week Boeing announced they would be cutting their 747-800 production down to .5 frames per month. For many analysts this came as no surprise – the latest jumbo jet has failed to gain traction since its EIS in 2011. Even in the cargo market where it seemed to have a sweet spot with its adaptable cargo capabilities, adoption has not been anywhere near where Boeing would like. In their press release Boeing cited a cooling cargo market for the lack of demand. According to the Bureau of Transportation Statistics, cargo volumes are up by 1.35% YTD since October 2015. Additionally the GFC FedEx Cargo index shows high utilization over this past holiday season and continued robust aircraft utilization into early this year. Although this doesn’t suggest significant growth in the air cargo market it suggests there might be more reasons for the 747-800’s poor sales performance.
Existing cargo aircraft and low oil prices
This is easily the largest contributor to Boeing’s woes. Although Boeing won’t admit it, with oil at ~$30bbl levels, cargo airlines are flying with their existing fleet longer and foregoing costly upgrades. Furthermore, there is ample market for used frames, including 747-400F and other variants. Cargo airlines like Kalitta are even keeping their 747-200s in service longer, along with 747-400BCFs of which there are plenty of used frames available. As passenger airlines upgrade their fleet, used aircraft such as 767s and 757s are also becoming increasingly abundant. Boeing recently announced a program for conversion of 737-800 passenger aircraft as well. Freighter conversion programs allow cargo airlines to take advantage of these used aircraft and provide options for lower capital costs as opposed to newly-built aircraft. Declining oil prices make this option even more attractive. With a list price of $378.5 million for a new 747-800F and interest rates now rising, the choice to purchase used aircraft is logical.
Belly cargo is taking up cargo slack
Over the past decade, many passenger airlines which historically had separate cargo operations have consolidated their cargo operations and mostly reduced or eliminated cargo-specific aircraft from their fleet. A good example of this model was Northwest Airlines, which at its peak had a fleet of 15 747-200Fs. After Delta merged with Northwest, Delta eliminated these aircraft in 2009 and consolidated all cargo operation to lower deck cargo on passenger aircraft. Japan Airlines has gone through a similar process and eliminated its dedicated cargo aircraft in 2010.
The reason for this shift is in part due to the increasing capacity of lower level cargo on new airliners. Aircraft of the 60s, 70s and 80s were not as adept as aircraft are today for carrying ancillary cargo. The Boeing 707 and DC-8, popular narrow body aircraft of the time, did not have the cargo capacity of today’s long haul aircraft. These aircraft were designed in a way which did not facilitate the use of Unit Load Device (ULDs) that had been standardized for new larger wide body aircraft such as the 747. Even as wide body aircraft started to take hold, their cargo capacities were limited and not optimized for carrying additional cargo. Some airlines did opt for “combi” versions which could carry cargo on the main deck of the aircraft, however none of these aircraft gained wide adoption. Compounded by the scheduling requirements of passenger aircraft and the cheap price of oil a the time, it was easier for airlines to augment their cargo capabilities with additional cargo specific aircraft.
As demand for air freight picked up in the late 80s and 90s, dedicated cargo airlines utilizing jet aircraft started to spring up and passenger airlines continued to add cargo aircraft to their fleet, sometimes using their old passenger aircraft and converting them to freighter use. The shift to consolidate cargo operations for passenger airlines started with the introduction of aircraft like the 777 in the mid 90s. The 777-300, the largest twin engine passenger aircraft to date, has the capability to transport 44 LD3 containers in its lower holds. Compare this to the L-1011, an early wide body aircraft, the 777-300 can carry nearly three times as much cargo. This capability came with the advantage of only using two engines and a much greater fuel efficiency. Increased range and other efficiencies also allowed passenger airlines to more fully utilize the aircraft they had by adding more cargo to existing flights. Today it’s estimated nearly 50% of air cargo is from lower hold cargo.
Air freight is unique
Coinciding with the increased capabilities of newer passenger aircraft was older passenger aircraft that were being replaced. Aircraft like the MD-11 and the A300 became a popular conversion with cargo airlines as the aircraft were modern and relatively cheap on the used market and provided incredible cargo capabilities.
Large newly-built freighter aircraft like the Boeing 747 did find their niche in the market. Dedicated cargo carriers like UPS, Fedex, TNT, and DHL found roles for large wide body aircraft hub to hub routes. The Boeing 747 especially has dominated the cargo market, with over 200 in service carrying nearly half of the world’s air freight. Airbus wanted to break into this market of larger freighters and launched the A380F as an option to usurp the 747, promising 7% greater payload capacity over its competitor. Although the A380F gained 27 orders, they were all canceled or converted by 2007. This lack of expected growth shows the market for large freighter aircraft simply isn’t that large and highlights the issues with aircraft of this size.
As air freight evolved so did the competition. Cargo carriers started competing not only on price but also on delivery time, especially as sea cargo drove price down. Because of this, frequency has become a priority over capacity for most air freight routes. Air cargo operators can’t afford to sit around and wait until they have enough cargo to fill an aircraft, or only provide air freight services a few days out of the week. They benefit much more from the flexibility to dynamically route aircraft based on demand than fly half empty aircraft part of the time. Few point-to-point destinations are large enough in cargo volume to justify volumes that fill a 747 on a daily basis. Furthermore, new freighter aircraft like the 777F have the same cargo capacity of the older 747-200F. The dynamics of the air cargo markets today simply doesn’t fit well with large aircraft such as the 747-800F except on very select routes.
The future of air cargo demand still remains unclear, however in the short term its apparent aircraft like the 747-800F have limited application. With no other large freighter on the drawing board it might be a while until we start to see a “clean sheet” designed cargo aircraft. As current passenger A380s start being retired it is possible we’ll see a freighter conversion program which involves strengthening the cabin floors for greater cargo flexibility. But the future for air cargo seems to be centered around medium narrow body aircraft conversions like the 737 and other wide body aircraft like the 767 or 777.