Where have all the orders gone?

What has happened to the market for production freighter aircraft?

The conversion houses can hardly keep up with demand for narrowbody and medium widebody freighters, the news is full of stories of e-commerce driving big increases in demand for air freight, and airlines the world over are reporting increasing traffic and yields. But new orders for production freighters have dried up to almost nothing.

Today we begin a two-part analysis of the production freighter business with a look at the state of the order books at Boeing and Airbus, and how that relates to the state of the industry in general. Tomorrow, we will take a look at the available production freighter aircraft on a type-by-type basis, and then peer into our crystal ball (see part II here) .

In 2016, the air freight tide began to turn. It was hardly the best year ever, but, after years of stagnant or falling demand, a 3.8% increase over 2015 seemed like a return to the good old days – particularly since year-over-year demand growth accelerated steadily through the year.

But, in reality, 3.8% annual growth is hardly spectacular, and there was a worry that the higher growth in the latter part of the year would not last – that 2017 might well be a return to the recent pattern of stagnation. So it was not surprising that carriers and lessors worldwide ordered just twenty production freighters in 2016 – almost one-third fewer than their average over the previous five years – and that most of these were 767-300Fs for FedEx’s Express network.

However, as we approach the end of the third quarter of 2017, not only has demand growth not fallen off, it has continued to accelerate – to the point that, year-to-date, we are now in double-digit territory, with all signs pointing to continued strong demand. In the past, this would have had airlines and lessors breaking down the doors at Boeing and Airbus, elbowing one another out of the way in a mad rush to order more freighters. But now?

Through the first eight months of 2017, net total orders for production freighters stand at… two.

That is correct, just two net orders this year.

It is easy to say that, with all the news about the explosive growth of e-commerce driving demand for express shipments, we should look to the express companies for fleet growth. And, yes, FedEx does have sixty-three 767-300Fs and sixteen 777Fs still on order with Boeing. And passenger-to-freighter conversions, of both narrowbodies and medium widebodies, are being ordered and redelivered almost faster than we can report them. But demand for air freight is not confined to express. A quick look at the July and year-to-date numbers shows clearly that general freight carriers are also seeing demand increasing significantly.

So why aren’t we seeing a corresponding increase in orders for 777Fs and 747-8Fs? There are several reasons:

• First, there was far too much capacity in the system when demand started increasing. Some of the increasing demand has been accommodated on aircraft already in operation, whether freighters or widebody passenger jets.

• Where existing capacity is insufficient, parked freighters can be reactivated. We have seen a few 747-400Fs/ERFs come back into service, although not many. And the trend seems to be limited to production freighters – Boeing- and Bedek-converted 747-400s are staying in the desert.

• Some carriers, particularly those based in Asia, have turned to the ACMI market. For example, in the last year, Atlas Air Worldwide Holdings has placed two 747-8Fs with Cathay Pacific, three 747-400Fs with Hong Kong Air Cargo, and one 747-400F each with Asiana and Suparna Airlines.

• Some of the increased demand will be accommodated by freighters currently on order, but not yet delivered. But this on-order capacity is less than it seems – partly because the bulk of the production freighter backlog is destined for FedEx and UPS, and partly because it will be balanced by the retirement of older freighters.

But, if demand continues to increase, we will soon reach the point at which available capacity, and capacity in the current backlog, will no longer be able to meet it. The most desirable older parked freighters will have come out of the desert, the usable space in the bellies of passenger aircraft will be full, and the fleets of Atlas and other ACMI lessors will be fully committed.

Carriers and lessors, having been burned in the past by ordering too many freighters when times were good, are understandably reluctant to commit to new orders now. But what if the current environment of demand growth continues much longer?

Tomorrow, in part II we will look at the order and backlog situation of each of the freighters currently in production, and conclude with a look ahead.

Those interested in learning more about where air freight is headed in the fourth quarter, and into 2018 and beyond, are invited to join us at Cargo Facts Symposium in Miami at the Ritz-Carlton South Beach 2-4 October.  To register, or for more information, go to CargoFactsSymposium.com.