Belly-full of cargo
Belly-full of cargo
Passenger planes take on more freight below deck as freighter fleets shrink.
In the late 1970s and early 1980s, when a dominant Boeing and a nascent Airbus were busy designing the passenger planes of today, engineers didn’t pay much attention to the cargo equation.
The goal of the Boeing 747 and 767, the MD-11 and the DC-10 was quite simply to ferry passengers from one point to the other; belly space was to be used for passenger baggage.
As the next generation of passenger planes continues to come online, and carriers worldwide replace these first-generation planes, belly cargo is now at the forefront of the conversation. The challenging freighter market, and the rise of passenger-only cargo carriers, has thrust these new planes into the spotlight. As freighters become less popular, passenger planes may very well change the face of air cargo.
Neel Shah, chief commercial officer at Able Freight, gives an example of how much of a game-changer next-generation passenger planes have become. United Airlines flies a 747 between Chicago and Tokyo, but if the carrier switched to a 777-300ER, it could generate three-times as much cargo capacity as the current plane, he said.
“That’s a mini-freighter without freighter-like economics,” Shah said. “The new passenger airplanes are revolutionizing belly capacity. People have underestimated the impact that these sorts of airplanes are going to have on the industry. There are hundreds of these airplanes coming.”
So far in 2013, Boeing has recorded 36 global orders for its 777-family aircraft and has delivered 73 of the planes. There are currently 131 outstanding orders for the 787 this year, and the manufacturer delivered 40 through September. And the hunger for these additional planes is certainly present, at least on the passenger side.
The International Air Transport Association measured a 6.8 percent jump in passenger demand for August compared to the same period a year ago, while cargo demand showed a rare increase of 3.6 percent over the same period.
Not every new-generation passenger plane offers huge cargo space though. The cavernous belly in the two-deck Airbus 380, for instance, has only a small amount of room for cargo because of the large number of passenger bags handled per flight.
The yield equation is currently a bit challenging for passenger cargo operators, Shah said, because of the way these planes operate. He said carriers tend to negotiate more on rates for passenger cargo because of the lack of added freighter costs. This is a big pro for shippers, but because of where passenger planes are routed, and as belly cargo becomes more the norm throughout the market, shippers may need to rethink their shipping patterns.
“Passenger airplanes don’t go to remote locations where there just happens to be an Apple factory,” Shah said.
As the prominence of belly cargo is elevated, Shah thinks more operators will continue the trend of ditching freighters because the operating expenses will make flying them uneconomical. He estimated that in a decade, 10 freighter operators will remain worldwide and that list will likely consist of large combination carriers such as Cathay Pacific, Lufthansa and a Middle Eastern-based carrier or two.
Shah doesn’t mean to imply freighters are leaving the market completely. There will always be a need to fly goods that can’t fit in the bellyholds of passenger planes, and freighters also play an important role during new product releases and the peak season.
Air Cargo Management Group’s Alan Hedge agreed freighters aren’t leaving the market. However, he said, the actions of freighter carriers parking planes is causing a bit of worry in the market. When carriers have retired planes recently, instead of the plane being remarketed to a smaller carrier, it has been sent directly to the desert. In addition to this loss of capacity, no one really knows how underutilized the current freighter fleet is, he said.
“The order of the day, if you look at the big carriers, is shedding capacity when they have to, reducing utilization,” and they’re putting freight in bellies where they can, Hedge said.
At American Airlines, these larger passenger planes are giving the cargo-side of the business more capacity on international routes. The carrier has started placing its 777-300ER planes, which can carry 38 percent more cargo than previous-generation 777-200s, into international service. Kenji Hashimoto, American Cargo’s president, is also optimistic about the cargo possibilities of Boeing’s new 787 Dreamliner; American will take delivery of its first Dreamliner late next year.
Passenger planes are purchased to serve passenger requirements, but that doesn’t mean American officials don’t consult the cargo side of the business when making plans. Hashimoto said his cargo team had a say in the carrier’s new route between Dallas and Seoul. As more passenger planes come online, though, he expects to see cargo capacity keep up with the growth rate he’s witnessed so far in 2013.
“Cargo continues to be an important and vital sector of our business,” he said. “Cargo contributes nearly 3 percent of AMR’s revenue, but has a substantially higher contribution to the bottom line largely due to utilizing existing routes and assets.”
In bringing more belly capacity to American, Hashimoto said his goal is to provide shippers with additional options across a global network. He pointed out that in 2013 the carrier added cargo capacity to Latin American, Asia and European destinations. How these additions may change rates, and how shippers can prepare for capacity in the future, however, is difficult to predict.
“Our rates remain competitive, and similar to other industries; our rates are a reflection of regional demand and the
state of the global economy,” he said. “It’s hard to say what that will look like in the future.”
In September, Delta Air Lines announced it is ordering 10 A330-300s as part of a 40-aircraft order with Airbus, with an expected delivery between 2015 and 2017. According to Andy Kirschner, director of Delta cargo sales in the Americas, each of these new planes can handle up to 9,000 kilos of cargo.
The Boeing 777, which is Delta’s mainstay, is “a great aircraft from a cargo perspective,” he said. Kirschner noted an average of between 20,000 kilos and 25,000 kilos of cargo can be loaded on those flights. For international flights, Delta uses the 747, which can handle up to 10,000 kilos for each flight; with multiple flights to one destination each day, he said, a lot of capacity can be had on a single route.
“With these aircraft that we do have, you can see that we have a large amount of capacity on them,” he said. “You don’t have to have a freighter fleet in order to really take advantage of capacity.”
Domestically, the only place Kirschner’s currently seeing cargo overcapacity due to wide-body planes is Chicago, where freighters have come into the airport aggressively to try to take market share. Heavy passenger lift is also present between JFK in New York and London, which has lead to abundant capacity and reduced freight rates.
Kirschner said he doesn’t understand this increase in freighters to Chicago where it’s relatively easy to secure sufficient cargo capacity on passenger planes. Shippers who can use passenger bellies benefit from the consistency of the flight, he said, adding that if a freighter operator doesn’t fill the plane, it might not fly.
“With the economy the way it’s been and the market conditions, to me it makes more sense from a passenger-side to do more passenger aircraft in markets versus so many freighters because I just don’t see how, in some cases, freighter operators can really sustain viability,” he said.
An example of how belly cargo might drive the passenger market can be found at United Cargo, where President Robbie Anderson said the carrier has blocked passenger seats in some markets to accommodate high-yield cargo that needed added weight clearance. He noted, for United, cargo on international flights can account for as much as 30 percent of total flown revenue.
“Many of our international wide-body flights would not be profitable without cargo’s contribution,” he said.
Like all the major U.S. domestic carriers, United only traffics in belly cargo. In the past, a lack of freighters could have been an issue. Anderson cites data finding that the cargo split between passenger and freighter aircraft has stayed at about 30 percent to 70 percent, respectively, but he’s heard that by 2030, due to the rise in passenger growth, the ratio will reverse.
In October, Boeing released a white paper detailing the balance of supply and demand in the commercial jetliner industry and found, contrary to popular belief, passenger supply and demand is in balance; the authors wrote in the paper that “there is no evidence of persistent systemic overcapacity.” Still, as more planes are delivered, the passenger market could shift, and Anderson said that could have an impact on cargo.
“Changes in the passenger market will have a major impact on belly capacity on specific routes or in specific regions,” Anderson said, “and global economic conditions will affect how much of this capacity is available and at what price.”
At United, Anderson characterized the rate environment much as his colleagues do, saying it’s competitive and challenging. In most markets, shippers have a variety of alternatives to air cargo, which isn’t helping costs, but there are signs the rate environment, at least for the time being, might swing back in the carriers’ favor.
“While United does not provide forward-looking statements on specific rates, we can say that, much like the capacity outlook, there are some markets where demand conditions are improving while capacity remains stable or shrinks,” Anderson said. “Rates in these markets may therefore tick upward in response. But, as always, we don’t set rates — the market sets rates.”
In September, United’s cargo revenue-ton-miles were down by 16.2 percent, year over year, to 168,613 tons. Year to date, cargo has fallen by 13.1 percent to 1,858,761 tons. At the same time, passenger revenue miles rose by 0.2 percent in September, but for the year, passenger activity showed a 2.5 percent decline.
United’s cargo activity lags a bit behind that of Delta, which saw a 0.6 percent drop in September’s revenue-ton-miles, year over year, to 201,568 tons. So far this year, tonnage at Delta is down 2.9 percent to 1,743,704 tons. American experienced cargo growth of 7.5 percent in September, ending the month at 146,690 tons. Year-to-date, activity is up by 0.4 percent to 1,330,610 tons.
The overall cargo picture worldwide, however, is not much better than it was in 2008. According to an Air France-KLM-Martinair Cargo spokesman, the past five years have been nothing to get excited about.
“A very slow growth has been noted recently, but not significant enough to be enthusiastic,” he said.
Full-freighter capacity is still available on all continents, but the spokesman noted fuel-thirsty freighters, like DC-10s and 747-200s, have almost been phased out. In September, officials at Air France-KLM announced the airline will start phasing out both passenger and freighter Boeing 747s in its fleet by 2016. Representatives also announced the carrier is deferring deliveries of two A380s to at least 2016.
This follows with Air France Cargo’s strategy from the last few years, which is to focus more on belly-hold capacity because that’s where the greater margins are, the spokesman said. Still, even with this cargo capacity making the cost-effectiveness of flying passenger planes a little easier, low cargo rates have carriers worried.
“Because of the existing overcapacity, rates are low and poor for both modes of transportation, and this is precisely a major object of concern for our activities,” the Air France spokesman said. “Because the levels of the yields are too low, running cargo activity in a profitable way presently is really a big and difficult challenge for our profession.”
An additional effect of the increased passenger cargo business is that pure passenger carriers, once they take delivery of these new planes, may turn an eye to the cargo business. This will ultimately be good news for shippers, since it will add more capacity into the market, ACMG’s Hedge said. And with the existing carriers out there trying desperately to prop up rates, air cargo shippers are currently sitting well and could be for quite a while.
“Carriers are trying to tighten up, but they’re not succeeding because rates are so low,” Hedge said. “I think this is a great time for shippers. Shippers can have whatever they want.”