Fight for freighters

What sort of trends are you seeing in the freighter financing market for the short and medium terms?

Financing for cargo operators

We have yet to see anyone suffering as a result of lack of finance in the cargo industry. However, it is inevitable, in the wake of declining cargo traffic over a number of months and the largest international monthly drop since 2001.

On the other hand, airfreight activity was up 5.6% in Middle East and has followed a similar trend over the past few months. As long as cargo traffic remains strong, the air cargo operators are less likely to face cash flow problems and banks will have no issues financing their ambitions.

Airbus models in danger

With its older engines and relatively high fuel burn, plus a general move to A310-300Fs/A300-600 Freighter models, there is likely to be declining demand for the A300BF-100/200F. Former passenger A300-600/600R aircraft have been converted to freighters and the market has moved away from the older model B4-100/200 series to the 600 series.

In 2006/2007, there were few available passenger A300-600R, but the effects of the economic crisis resulted in the announcement that American Airlines would be offloading a large fleet of A300-600Rs, a move followed by China Southern. This has meant there is now some oversupply of passenger units in the market.

What this means to our school of thought is that some of these aircraft should be freighter conversion candidates, but with more aircraft to choose from, the freight operators are likely to be able to "cherry pick" with some room for discount. This will inevitably lead to a degree of slippage in value and lease rate behaviour.

Focussing on Boeing

The MD-11 did not work as well as anticipated as a passenger aircraft and found itself a new role as a freighter with most of the passenger fleet being converted to this role.

Nobody can deny its strong capability but in an era of high fuel prices (though at least they have come down a little recently), new products such as the 777F/A330-200F on the horizon, and the increasing presence of twin-engine freighters in the smaller size segments IBA cannot help but think that if anyone is looking to acquire used MD-11/MD-11Fs, some negotiation for discount can be factored in.

IBA expects to see Boeing 747-200/300Fs continuing for the foreseeable future yet, but the operator base is changing rapidly as some more established players accelerate exit strategies and aircraft are placed into a more fragile secondary/tertiary market operator base.

This, combined with crippling fuel prices is, for many, making the model more and more difficult to operate and these circumstances are very conducive towards value and lease rate pressure. The 747-8F continues to suffer from delays; failing to meet its previous deadlines has changed the industry's view on Boeing's ability to meet its targets.

On the other hand 777F, which is derived from 777-200LR passenger model, kept to schedule until its first flight in May 2008. With the passenger version already in service, one would expect the freighter version to be on schedule; however, it also has delays of up to six months, which is minor in comparison with other Boeing projects.

The future of the Middle East market

In terms of the freight market, the Middle East only accounts for less than 2% of total orders, all scheduled for delivery to established customers, who are able to finance their expansions or replacements.

In addition, the demand remains strong and constant growth in the cargo sector represents considerable gains for existing and new entrants. Out of six regions, five are showing signs of slowdown and decline in traffic, with the exception of the Middle East where growth was witnessed.

The Asia Pacific region, which represents 44% of world airfreight traffic, is likely to suffer the most and the signs also support this view. It has recorded its worst-ever cargo traffic figures, roughly a 17% decrease in November 2008 alone. Small operators suffering from cashflow issues will have to hold back on expansion plans as the banks will be apathetic to commit their finances.

As far as the passenger sector is considered, we may see cancellations and deference. Even though the Middle East only accounts for roughly 4% of all orders, a sum of just over 1700 aircraft on order does seem a very large figure.

What IBA offers the region

IBA's many services cover aircraft valuations, airline start-up support services, due diligence for banks and investors, mergers and acquisitions support, aircraft and engine asset management, aircraft selection, technical surveys, airline operational and regulatory compliance audits. We have been privileged to work for many Middle East investors, banks and leasing companies, as well as airlines in the region.

By way of example, IBA has recently provided independent advice to Silver Air, a start-up Middle East airline. We also provide banks and investors with impartial advice on aircraft values, business plan development and review competitor analysis.

This month's column was written by Usman Ahmed, aviation analyst, IBA Group Ltd.

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READERS' COMMENTS

Freighters and their fumes
Posted by Geriant, Dubai, UAE on Wednesday 18 February 2009 at 12:46 UAE time


With all the airlines being forced to take carbon-reducing steps it would be interesting to see what, if any, the freighter operators are doing to cut their carbon footprint. They fly many of the crumbling old stinkpots that are not fuel-efficient or in the slightest bit green. Air freight customers should be forced to pay a tax to cover the emissions, and to buy carbon credits. We would never see another Antonov again!

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