Cargo Facts Symposium 2023: Addressing short-term challenges with a long-term view

Industry leaders shared their insights on how to overcome hurdles in the transitioning freighter market as they came together from around the world to discuss the latest developments at Cargo Facts Symposium 2023 on Oct. 25-27 in San Diego. Highlights from the symposium included the latest intel on trends impacting freighter market conditions, updates about the conversion market and developments in alternative aircraft, along with these additional highlights from the conference. The 2024 market In a world finding its new normal after the pandemic, the freighter market continues to slowly adjust, although stakeholders are still uncertain about what changes lie ahead in 2024 — with regard to demand, for one. “What the industry does not know is what’s going to happen to demand,” Michael Steen, chief executive of Atlas Air Worldwide, said during the opening panel. “That’s a bigger, more difficult question [than supply].” [caption id="attachment_56866018" align="aligncenter" width="2560"] Michael Steen, chief executive of Atlas Air Worldwide, speaking at CFS 2023. (Photo/Cargo Facts)[/caption] Passenger widebody capacity is back to 93% compared with 2019 and it plays a big role in the cargo sector for Latin America, which has a strong market for perishables. But the challenge is returning strong loads, Avianca Cargo Senior Vice President Diogo Elias said. “When you evaluate the load factors and yields, I agree with the rest of the panelists here that we need to be much more responsible and concerned with what kind of network we’re building with widebody aircraft, not only from the passenger side of operations, but cargo,” Elias said. Although belly capacity is almost back to full capacity, only 45% to 50% of the belly space is used for moving airfreight for multiple reasons. And when cargo growth returns, belly space will not provide enough capacity to offset demand, Steen said. LATAM Cargo CEO Andres Bianchi shared a broader perspective, saying that operators have to be able to look five to seven years ahead into the industry cycles and remain focused on their goals. Meanwhile, e-commerce growth continues to be a driving force for many freighter operators. “E-commerce demand is not negative, it's still positive,” Rich Corrado, former CEO of ATSG, said. “The rate of growth may have been reduced by a few points but it will continue to get stronger.” E-commerce out of China and Southeast Asia has grown exponentially, driven by markets around the world, Steen noted, adding that the projected annual growth in e-commerce is as high as 3.5%. “But even if we look at a 2.5% growth scenario for e-commerce, lift capacity will be very tight going forward, as the market is driven by consumer demand for express freight,” he said. Labor, supply chain challenges Supply chain issues and staffing shortages have hindered industry growth and, while there has been some positive momentum this year, these challenges continue to affect the freighter conversion market. In some cases, delays have been longer than expected, C Cubed Aerospace CEO Michael McConnell said during a panel on conversions, adding that issues shift between supply chain delays and reduced staffing. “One day it’s that I don’t have the parts, and the next day not enough people are showing up for work,” McConnell said. C Cubed is nearing completion of its prototype A320-200CCF conversion , but he gave no precise timeline for its first test flight. At Boeing, workforce changes brought on by the pandemic have resulted in a lack of staffing, said Brian Hermesmeyer, senior director of product marketing and freighter customer leader at Boeing Commercial Airplanes. In addition to contending with labor shortages, Boeing is working with suppliers to minimize delays, as many other companies also look to adapt by altering their strategies, he added. [caption id="attachment_56866020" align="aligncenter" width="2560"] Zach Young, director of sales and marketing at Precision, speaking at CFS 2023. (Photo/Cargo Facts)[/caption] When 321 Precision Conversions started its A321-200PCF program in 2017, the company had good infrastructure for parts procurement and kit production. But from the end of 2021 to mid-2022, supply chain issues drove the company to tighten its procurement plans, Director of Sales and Marketing Zach Young said. Although supply chain delays are widespread, most of the labor shortages are in the United States, Young said. For example, the company recently completed its first A321 conversion at the SMECO facility in Chengdu (CTU) in record time. Meanwhile, IAI’s conversion business was severely impacted by supply chain delays during the pandemic but the company has learned some “good lessons” and now produces some of its components in Israel, said Rafi Matalon, vice president and general manager of marketing at IAI Aviation Group. More recently, IAI began its test flight program for the 777-300ERSF and hopes to achieve certification by early 2024. The company will also send its second 777 conversion to the Dubai Airshow this month, Matalon said. When it comes to headcount, Embraer in Brazil is fully staffed, Gustavo Ribeiro, head of business management and contracts at Embraer Services and Support, said. However, the company is not immune to supply chain delays like the rest of the industry. Embraer recently installed the 9G barrier on its prototype E190F conversion and will soon install the cargo door, Ribeiro said. The converted freighter could take its inaugural flight by the end of the year and is on track for certification in 2024, he said. Widebodies in it for long haul With the return of passenger service, the air cargo industry is realigning its widebody capacity and increasing the rate of retirement on tri- and quad-engine freighters as it awaits the new 777 conversion programs and the A350F and 777-8F production freighters' entry into the market. Before introducing a new aircraft, several factors — including retirement profiles — must be weighed, Airbus Head of Freighter Marketing Crawford Hamilton said during a session on widebody freighters. It is not easy to integrate a new production freighter into the industry, as the manufacturer must consider the operators’ investment and demand for the type while maintaining a pulse on market conditions, he said. [caption id="attachment_56866021" align="aligncenter" width="2560"] Crawford Hamilton, head of freighter marketing at Airbus, speaking at CFS 2023. (Photo/Cargo Facts)[/caption] Airbus garnered just four unidentified orders for the A350F in the first nine months of 2023. The manufacturer expects to begin assembling its prototype in 2024 and start deliveries in 2026, while Boeing plans to deliver its first 777-8F in 2027. Meanwhile, the IAI, Mammoth and KMC 777 conversion programs are on track for certification by 2025 and will fill the gap created by the retirement of older aircraft like MD-11Fs and converted 747-400Fs. Wichita State University’s National Institute for Aviation Research is in the engineering phase of the KMC 777-300ERCF program , and expects to begin modifying the prototype in 2024, Program Manager Eric Kivett said at the event. Mammoth inducted its 777-300ERMF prototype for conversion last month after removing cabin components and told Cargo Facts it expects to cut metal early next year. In the medium-widebody segment, A330 conversions continue to gain momentum as 767 feedstock dwindles and 767-300F production comes to an end in 2027. Most of the demand ATSG has seen to lease its A330P2Fs comes from operators that are looking toward the future, have operated 767 freighters or are operating A321Fs, Corrado said. Engine, manufacturer issues hurt feedstock Engine manufacturers are working to resolve issues with engine production units while also seeking solutions for the new powerplants that will propel next-generation passenger and cargo aircraft. CFM International, a joint venture between General Electric and Safran, discovered last month that 145 of its CFM56 engines were fitted with unapproved parts. In another ongoing engine problem, Pratt & Whitney’s GTFs and IAE’s V2500s will have to undergo additional tests and inspections after contaminated powdered metal was discovered in main engine components. The engine inspections only scratch the surface and are not exhaustive enough, Les Cronin, vice president of marketing and sales at MTU Aero Engines, said during a panel on engines and valuations. Calling the Pratt & Whitney issue a “black-swan event,” he said he expects more problems to come since many engine manufacturers purchased the powdered coating from the same supplier. Cronin said there will be increased backlog in engine shops as the MROs try to squeeze in engines while supporting their existing customer base. The knock-on effect will be that operators and lessors hold onto older 737NGs and A321s for passenger service. Disruptions and demand The recent callbacks on engines, coupled with supply chain delays, have driven up demand in the passenger segment for powerplants and airframes that would have been suitable feedstock for conversion. “Passenger traffic is still quite strong and we’re at pre-pandemic levels,” David Ellis, senior vice president and global head of leasing and trading at the asset transaction group at GA Telesis, said. “Anytime you have disruptions in the new aircraft deliveries — whether it’s new technology, engine issues or just overall delivery issues — the demand for the powerplants is there.” Those factors have all driven demand and lease rates for passenger 737NGs and A321s to high levels, to the detriment of the freighter sector. [caption id="attachment_56866019" align="aligncenter" width="2560"] Lindsey Webster, senior vice president of asset valuations mba Aviation, speaking at CFS 2023. (Photo/Cargo Facts)[/caption] “This is the first time in a long time that we’re seeing part-out companies, freighter converters and operators all competing equally aggressively for the same assets,” George Dimitroff, head of valuations at Cirium Ascend, said. The elevated values of feedstock 737NGs and A321s could persist for a few more years. “We’re looking at what’s coming down the pipeline,” mba Aviation Senior Vice President of Asset Valuations Lindsey Webster said. “So we have the GTF issues that are supposed to be fixed in 2025 to 2026. Production rates are supposed to be increasing for Boeing and Airbus. “And then we have all of these lease extensions that are going to be coming off around the same time in that 2026 to 2027 time frame,” she added. “Not expecting the values to fall off a cliff, but I really think that that is sort of the time when we’ll actually start to see the supply and demand balance back in favor of current-generation aircraft falling closer to their base values and potentially going under them.” For more coverage of Cargo Facts Symposium 2023, please see our dedicated page.

Cargo Facts Symposium 2023: Addressing short-term challenges with a long-term view

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