Air cargo booms: 747 freighters needed, but conversions unlikely

Summary

• The rebound in air cargo coincides with passenger 747 retirements.
• Converting passenger 747s to cargo aircraft is expensive and inefficient.
• There are only 13 non-converted 747-400 freighters in storage.
• Current cargo up-cycle may not be structural. Risk management is cautioned.

These are general costs and not related to converted 747s being unable to have a swing nose door, which is required for only a minority of freight.
Although converting 747s may not be ideal, the pool of available freighters is small: CAPA's Fleet Database logs only 13 747-400 freighters (non-conversions) that are in storage, and some of these are already being prepared to resume service.

Passenger 747s available; Qantas latest to accelerate retirement
Despite the low fuel prices of mid-decade, airlines have continued or accelerated retirement of their passenger 747-400s. United Airlines attributed its 747 phase-out as being due to maintenance costs (regular, and as aircraft and their engines neared heavy checks) and lower reliability. Also in the US, Delta Air Lines ended 747 operations.
Most recently, Qantas announced plans to accelerate retirement of its remaining 747-400s. Qantas now plans for its 747-400s to exit its fleet by 2020. The accelerated retirement is made possible by exercising 787-9 options, the result of Qantas being satisfied it can ensure a consistent sustainable financial position.
British Airways is the world's largest passenger 747-400 operator and expects to have a fleet of 22 in 2020, but this represents a decrease from 2017's 36 aircraft and 2018's projected 747 fleet of 34. BA expects to retire the 747 in 2024, but an optional accelerated retirement plan could mean that the aircraft exit in 2022.

747-400 Freighters*

Source: CAPA Fleet Database

Passenger 747s are being retired, but are they right for cargo conversion?
The planned and accelerated retirements of 747-400 passenger aircraft puts a substantial number of 747-400 aircraft on the market. The CAPA Fleet Database tracks 71 passenger -400 aircraft that are not in service.
The chart adjacent plots the age and airframe market value (valuation from CAPA partner Oriel) of parked passenger 747-400s. This includes a handful of VIP-configured aircraft. The parked aircraft are all at least 16 years old, with an average parked age of 23 years.
Market valuations generally follow age, with the youngest parked 747-400 (but still 16 years old) having a market valuation of USD8.0 million. Valuations generally go as low as USD2 million for aircraft older than 25 years.
A handful - which are not the oldest - are valued at USD500,000.
It has been suggested these aircraft could be cheaply acquired, stripped of interiors and used to become part of the freight renaissance. It appears that without a significant - and improbable - change in market conditions of freight demand and oil price, these passenger 747-400s are unlikely to be converted to freighters.
The airframe could be acquired for a small sum. However, conversion costs are not insignificant. The bigger drawback is the inefficiency of converted freighters. Some operators have found the inefficiencies make converted freighters ill-suited for anything but short haul flying.
Of the all-freight 747-400s (excluding combis) that are in flying condition, either in service or parked, converted freighters have the highest availability share. Nearly one third - 32% - of converted freighters are available.
In comparison, 6% of 747-400Fs that were built as freighters are in storage, and 13% of 747-400ERFs, also built as freighters, are in storage. The availability of the -400F and -400ERF is slightly lower than the "in storage" categorisation suggests, since a few aircraft are being prepared, or are expected to be prepared, to resume service.

Parked Passenger 747-400FS by age*

Source: CAPA Fleet Database

There is a small pool of adequate 747 freighters available.
Operators seeking used lift will most likely consider existing freighters. Of the -400 freighters built (or converted), most - 84% - are in service. An operator could consider taking an existing in-service freighter.
Of the parked freighters, there is a small pool to choose from. There are 36 parked -400 freighters, but most of these are converted -400 freighters from passenger aircraft. These are likely to be considered last, or not at all, owing to higher operating costs compared to factory line freighters.
There are 13 factory line -400 freighters in storage, comprising eight -400Fs and five of the more capable -400ERF. However, this figure of 13 includes a few frames that are believed to be resuming service in the near future, thereby reducing even more the available pool of ideal freighters.

British Airways Widebody Fleet Composition*

Source: IAG

Freight's improvement may not be structural
Converting passenger 747-400s to freighters was popular a decade ago when markets were booming and fuel was manageable. Since then, the industry has adjusted to operating at higher fuel prices, and this rubric typically means foregoing converted freighters on long haul flying. The operating performance of a converted freighter is better understood and less desirable, especially in a high fuel price environment.
Although an air frame becomes cheaper with age, the conversion cost does not. As airframes age there is a shorter lifespan for acquisition, and conversion costs to be amortised. Operating an older aircraft brings higher maintenance costs.
These are characteristics generally well understood by freight operators. Less understood is the outlook for freight. While operators are buoyant with current conditions, they quietly acknowledge - and fear - that the current boom is not structural, and could recede almost as quickly as it appeared. Almost no operator foresaw the current cargo rebound; equally, they do not want to predict future strength. The freighter situation is further complicated with high passenger growth as routes and capacity proliferate, offering larger amounts of bellyhold space.
With an uncertain outlook and limited options to acquire used freight supply, risk management is critical. But opportunities are apparent.