2023-07-30 20:55:34
DUBLIN, Ireland, July 30, 2023 (GLOBE NEWSWIRE) — The pandemic years have brought unprecedented air freight revenue. With supply limited due to the grounding of passenger planes and demand on the rise thanks to the growth of e-commerce, prices per kilogram of cargo soared. According to the TAC Yields figures of the Trade and Transport Group, in 2019, air freight from Hong Kong to North America cost US$3.80/kg, while the price from Europe to North America was US$ $2.10/kg. In 2022, these same services cost US$9.00/kg and US$4.50/kg, respectively.
As expected, this situation changed the position of air cargo carriers. Cargo revenue more than doubled, from US$100 billion in 2019 to US$210 in 2021 (these are the IATA numbers), while passenger revenue plummeted from US$607 billion annually to US$239 billion. Cargolux’s annual revenue grew from $2.2 billion to $5.1 billion during the pandemic, and Silkway more than doubled its revenue and saw its margin increase from -10% to +30%. These huge gains, in addition to the long-term potential of e-commerce (which led Airbus and Boeing to make optimistic forecasts for the growth of air freight), have led many airlines to focus more on freight.
However, the increase in cargo capacity has caused freight prices to plummet once again. IATA predicts that annual cargo yields will decline by 28.6% this year. This means that air freight, a notoriously cyclical industry, is once again entering a period of turmoil. This is the context in which airlines are deciding whether to buy new cargo planes.
New freighters versus converting passenger aircraft into freighters
Airlines and air cargo carriers are adopting different strategies when it comes to increasing their freighter fleets. According to KPMG’s latest report, last year, 35 orders were placed for new 777-200Fs, 33 orders for new 777-8Fs, and 20 suppliers purchased new A350Fs. These orders were placed by both dedicated air cargo carriers (Cargolux, Silkway West, DHL, FedEx) and airlines (Lufthansa Cargo, Qatar, Air Canada, China Airlines, EVA, Air France, Etihad, SIA and Western Global). Meanwhile, annual passenger-to-freighter (P2F) conversions reached historic records, with an estimated volume of 180 aircraft per year through 2025, to then stabilize at around 160 aircraft per year. This compares with 70 units per year before the COVID-19 pandemic.
Several factors are affecting the choice of buying new freighters or converting passenger aircraft to freighters. Naturally, cost is one of the most important factors, taking into account variables such as total number of orders, fuel consumption and maintenance, as well as initial production costs. Production lead times are another important factor, as is load volume and flexibility.
Factor 1: Leasing costs
There is a huge difference in start-up costs for new versus converted freighters. The starting price for a brand-new 777-200F or A350F is approximately $170-$185 million, or a monthly lease fee of between $1.2-$1.3 million. Analyzing the backlog of companies that made purchases in the last year, most of these airlines have a significant amount of these types of aircraft in their fleet, especially the combined cargo. In these cases, it is very likely that the actual cost of the purchase was much less than the $170-$185 million range. Positive economies of scale will also be a plus to keep costs low for these airlines. Yet, despite these savings, they will still have to pay monthly leasing fees of $1 million.
On the other hand, leasing a passenger-to-cargo 777-300 conversion will cost US$0.6 million per month, or about US$65 million for the outright acquisition. This aircraft is likely to match its original factory rivals well, but at a fraction of the cost.
Factor 2: MRO and operating costs
Airlines will save on P2Fs conversions with respect to MRO (Maintenance, Repair and Operations). With access to the second-hand parts market, maintaining these aircraft will be considerably cheaper than keeping new aircraft in service.
Of course, in addition to cost savings, access to second-hand parts can also speed up and simplify the maintenance process for airlines.
Fuel consumption is another issue to consider. Historically, we have seen significant improvements in fuel consumption when new aircraft enter service. When the 777F was introduced as a replacement for the 747-400F, its fuel consumption of 6,800 kg/h was a huge improvement over the 10,230 kg/h offered by the 747-400F. However, with the new 777X and A350, it is unlikely that we will see improvements in fuel consumption that match the 30% reduction seen from the 747-400F to the 777F. A difference of 10% to 15% is the most we can realistically expect.
In summary, while improved fuel consumption and (in some cases) economies of scale can mitigate the financial impact of buying a new freighter, in terms of costs, P2F conversions are a much more attractive option.
Factor 3: Volume and delivery flexibility
The new cargo aircraft have the potential to offer benefits in terms of capacity and delivery flexibility. Nose loading, in particular, offers a huge advantage. It allows aircraft to deliver large payloads such as large generators, engines, trucks and specialized technology. Most importantly, this oversized load is profitable, offering greater profitability than regular pallet deliveries.
However, the new cargo aircraft being produced, such as the 777X and A350F, do not offer nose loading. This levels the playing field in terms of the advantages a cargo-only aircraft has over a conversion, as both are now restricted to the cargo that can pass through the side doors.
How do conversions behave in terms of volume, package density and gross payload? Let’s consider the 777-300ERCF against the 777F (which currently makes up half of the world’s large cargo aircraft fleet) using data from a 2022 comparison made by Aircraft Commerce.
Although the 777F offers a greater total payload of 106.6 metric tons, in terms of volume, the 777-300ERCF far outperforms the 777F. The 777-300ERCF offers nearly 6,000 cubic feet more total volume than the 777F (28,739 cubic feet compared to 22,971). Revenue per payload is also considerably higher. At 6.5 lbs, that’s 186,804 cubic feet, and at 7.5 lbs, that’s 190,900 cubic feet, compared to the 777F’s 149,312 cubic feet and 172,283 cubic feet, respectively. An important point to note in this comparison is that volume, not raw payload, is what matters most in express e-commerce operations, which are likely to be an important driver of growth in the future. And in this regard, the 777-300ERCF offers a clear advantage.
Avoiding the trap of buying new cargo aircraft
Airbus estimates that it will need to add another 1,040 cargo aircraft to the global cargo fleet by 2041 – Boeing’s predictions are even more confident. Purchasing new cargo aircraft to meet this need entails significant risk for airlines. With cargo prices falling significantly, the CAPEX investment in a new A350 or 777F represents a huge financial outlay at a time when prices are rapidly falling. Investing massively in a new $185 million cargo aircraft may have made sense in 2021 when air cargo prices were at record levels. However, in 2023, this is no longer a prudent policy.
Furthermore, the acquisition of a new cargo aircraft has little to add in terms of performance and capacity. P2F conversions can match new manufactured cargo aircraft in terms of volume, and have notable advantages when it comes to maintenance and production.
Ultimately, the conversions pose a much lower financial risk, allowing airlines to sustainably increase their air cargo capacity. That’s why we’re seeing significant growth in P2F conversions, while deliveries of new cargo aircraft have stalled. Quite rightly, many airlines are unwilling to take the financial risk of a new aircraft at falling prices, and see little benefit compared to refurbished passenger planes.
Meet Gediminas Ziemelis
Gediminas Ziemelis (born April 4, 1977) is a successful Lithuanian businessman, business consultant, founder and current Chairman of the Board of Directors of Avia Solutions Group, one of the largest global providers of ACMI (aircraft, crew, maintenance and insurance), which operates a fleet of 180 aircraft. He has twice been chosen among the 40 Most Talented Young Leaders in the Industry by Aviation Week & Space Technology.
Gediminas is known for his cosmopolitan mindset and exceptional management skills, which have contributed to his success in many areas of business. Over his 26-year career, Gediminas has founded over 100 start-ups, 50% of which are still in operation, led companies through 4 successful IPO/SPO processes and raised over €800 million in global public markets from equity and securities.
As of December 2022, Gediminas Ziemelis was considered the richest Lithuanian by TOP Magazine, with estimated assets worth €1.68 billion.
Gediminas is the biggest donor to the Rimantas Kaukenas Support Group, a charitable and supportive fund that offers help to children with cancer and their families. He is also the largest shareholder in the world’s premier basketball team, the Wolves.
Press contact: Silvija Jakiene Director of Communications Avia Solutions Group
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