Where 5 Giants Battle, Only 2 Can Win...

by: Dhierin Bechai

In my first article I wrote about the battle between Boeing (NYSE:BA) and Airbus (OTCPK:EADSF) and mainly looked at passenger transport, but it is also worth to look at the cargo market.

At the moment the world economy is facing a difficult time, which puts heavy pressure on the demand for air cargo and therefore also on the demand for air freighters. Although demand for air cargo transport is low, the battle between the airplane manufacturers and the cargo airlines at this moment will be important for the cargo market in the coming decades, when demand for air cargo will rise again.

What I will do in this article:

  1. Look at the fleet composition for the Top 3 cargo airlines in detail
  2. Look at different planes and their capabilities and orders and deliveries
  3. Describe the future cargo market

As a conclusion I will not only provide information about the battle between Boeing and Airbus, but also about the battle between the top 3 cargo airlines, which pretty much steal the show on the cargo market. A nice article comparing all company segments of the 3 competitors has been written by James Sand and can be found here.

Top 3 Cargo Airlines

The top 3 cargo airlines (based on fleet size) are formed by:

  1. FedEx Express (NYSE:FDX)
  2. DHL Aviation (OTCPK:DPSGY)
  3. UPS Airlines (NYSE:UPS)

In terms of tonne-kilometer the top 3 is formed by:

  1. FedEx Express
  2. UPS Airlines
  3. Cathay Pacific (OTCPK:CPCAF)

The top 3 airlines posses 87% of the cargo fleet relative to the top 10 cargo airlines (by fleet).

As I am more interested in mid and long range fleet I will not take into account the 244 Cessna Caravans owned by FedEx, this brings the share of the top 3 to 84%. The top 3 operators have a share of 42% of all 1730 cargo airplanes flying around today.

One should be aware of the fact that a lot of cargo airlines are operating airplanes that are quite old like the DC-10, MD-11 and the Boeing 727. To reduce stress on the environment chances are big that by introducing airport fees for polluting planes these older aircraft will be forced to be phased out and replaced by more environment friendly planes. Additionally it should be taken into account that a lot of cargo airlines buy planes from airlines instead of buying from the manufacturer, meaning that they do not operate the most advanced airplanes available at that moment.

There are not many aircraft types in the cargo market, the major cargo aircraft are the Boeing 747, Boeing 757, Boeing 767, Boeing 777, Boeing 727, Airbus A300 and ATR 42/72.

FedEx Express

FedEx Express is the air freight department of FedEx (FDX) and is the biggest cargo airline in the world.

The fleet is composed as follows:

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As can be seen the short range fleet is totally taken by ATR. For the long range McDonnell Douglas (merged with Boeing) dominates the market, closely followed by Boeing and Airbus.

With this fleet FedEx Express reported the following quarter results:

  • Revenue: $6.70 billion (+4% compared to last year)
  • Operating income: $118 million (-66% compared to last year)

FedEx announced that it will lower the capacity to and from Asia due to lower demand, this might ease the company's announced early retirement of 86 aircraft.

FedEx decided to start phasing out the Airbus 310 in favor of the Boeing 757 (converted 757 passenger airplanes). In fact FedEx' entire Airbus fleet is becoming obsolete, same counts for the McDonnell Douglas aircraft. The old Airbus aircraft are being replaced by the used Boeing 757. Despite the Boeing 757, being a dated aircraft, it is an inexpensive replacement for the Airbus A300/A310 and Boeing 727 as many passenger airlines are phasing out their 757s at the moment. To replace the McDonnell Douglas fleet FedEx ordered 50 Boeing 767-300Fs and added the 777F to the fleet. The process of out phasing might take until 2020-2025 as FedEx has a lot of aircraft and only has 99 unfilled orders. I expect that 230 aircraft (Airbus + McDonnell Douglas fleet) will be out phased (by retiring and replacing) steadily in the coming decade.

In total 100-150 have to be retired or replaced. FedEx might decide to take over some 757s or order the Boeing 777F and 767F. In 2011 FedEx looked at the possibility to order the Airbus A330F or the 767F and eventually chose for the 767F. I think that FedEx will favor Boeing aircraft over Airbus aircraft and will order Boeing planes for out phasing the old planes and eventually also for growing the fleet again in the coming decades.

DHL Aviation

DHL Aviation, part of Deutsche Post DHL, is the second largest cargo operator. Rather than being 1 airline DHL Aviation consists of several airlines that operate under the DHL brand.

The DHL fleet is composed as follows:

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As can be seen the DHL fleet is dominated by Boeing, doubling Airbus' share. Similar to FedEx, DHL also operates the 757, 767 and the 777. Unlike FedEx, DHL does operate the newer Boeing 747-400 and the 747-8.

Contrary to FedEx, DHL does not seem to have started phasing out the older aircraft. 39% of the total fleet (the total Airbus fleet and some Boeings) is becoming quite old by now, yet DHL decided to order 8 more of the older Airbus A300.

Whereas FedEx has outstanding orders as big as 25% of the current fleet size and as big as 40% of the fleet that needs to be phased out, DHL only has orders (for old airplanes) as big as 8% of the current fleet size and as big as 19% of the fleet that needs to be phased out. I think it is harder for DHL Aviation, being a set of combined airlines, to renew the current fleet. Given the fact that DHL didn't start out phasing the older planes might give them a disadvantage in the coming decades when demand for air cargo will rise.

UPS Airlines (UPS)

The third largest operator is UPS Airlines, which has the following fleet composition:

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As can be seen here as well the fleet is dominated by Boeing, followed by Airbus and McDonnell Douglas. UPS also operates the "older" MD-11 and the Airbus A300, both plane types (39%) should be phased out in the coming 1-2 decades. The company does operate the 747-400, the 757 and 767. With 4 orders for the 767F, UPS does not seem to be thinking about renewing the fleet actively either.

Top 3: FedEx, DHL, UPS

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Looking at the top 3 chart, it can be seen that on the short range ATR dominates the market, while on the long range Boeing dominates, followed by McDonnell Douglas and Airbus.

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Looking at the planes that need to be phased out (380 planes in total) for the top 3, Airbus clearly leads the way, followed by McDonnell Douglas. Only 6% of the planes that need to be taken out of service in the coming decades is a Boeing, mostly 727s and 737s.

Given that FedEx is very dominant on the cargo market and the fact that they seem to make use of the low demand for air cargo to restructure the fleet will probably give them a stronger market position as they will be able to serve customers with more efficient (less costs) aircraft.

Phase out or not ...?

Why I think the Airbus A300/A310 should be phased out:

  • Due to the fact that these planes are already a couple of decades old maintenance costs are high.
  • Lower fuel efficiency compared to new planes.
  • Reliability of the planes is becoming lower.
  • The A310 can only store 33 tons of cargo, compared to the 59 tons for the 767F.
  • The A310 is heavy compared to the cargo it can transport (cargo weight divided by operational empty weight equals 44.7%), compared to 68.5% for the 767F.

Why I think the MD-11 and DC-10 should be phased out:

  • Due to the fact that these planes (especially the DC-10) are already a couple of decades old maintenance costs are high.
  • Lower fuel efficiency compared to new planes.
  • Has 3 engines instead of 2, due to old ETOPS regulations.
  • Reliability of the planes is becoming lower.
  • The MD-11F is not in production anymore and not many MD-11s available to convert to freighters anymore.

I have to say that if there were more MD-11s flying around today and the MD-11F was still in production I expect this plane would dominate the cargo market as it has better range and payload characteristics, but is slightly smaller than the Boeing 747-400F.

Why I think the 747-400(ER)F/BCF (Boeing Converted Freighter) does not need to be phased out yet:

  • Compared to the MD-11F the 747 has increased range and payload.
  • A lot of 747-400s are still flying around that can be converted into freighters.
  • The 747-400F allows loading via the nose.
  • Can be used to replace the MD-11F

The different planes and their capabilities

Although a lot of cargo airlines do not buy directly from the manufacturer it is important for the manufacturer to offer a freighter model to have some presence at the market and make profit from an existing model in a new market.

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As can be seen above Boeing has a better presence on the cargo market with 767, 777 and the 747-8. Airbus only has the Airbus A330 to compete Boeing's firm position on the cargo market.

From the diagram above there can be drawn a couple of relevant conclusions:

  • For the companies that need a freighter that has to take a lot of payload to a destination far away, the Boeing 747-8F is the best option.
  • The 747-8F has the best transport capability (Payload/OEW).
  • The Airbus A330F has increased range, but similar transport capability relative to the 767F.
  • Although the A330F has better characteristics the 767F outsold the A330F.
  • The 777F is able to compete with both the A330F and the 767F and has increased range.

In my opinion Boeing rules the cargo market with the 777F, 747-8F, and the 767F. The Airbus A330F came as answer to Boeing's older 767, but seems to missing the boat completely with poor order numbers. Due to the cancellation of the Airbus A380F, the market for the extremely large freighter, 747-8F, is completely open. With over 5 times more orders than Airbus on a struggling cargo market, I think it is safe to say that Boeing will be dominating the cargo market for at least a decade or two to come, giving Airbus a lesson in 'market awareness'.

Airbus' only chance to win share in the cargo market is to come up with a completely new plane that takes a spot between the 777F and the 748-8F, but it will take over a decade before such a plane could enter service.

Future market

At this moment the cargo market seems to be focused on transport to and from Europe, Asia (especially China) and North America.

Boeing recently published its market view for the period 2013-2032, expecting a 63% increase for freighter aircraft. The manufacturer expects that 850 new aircraft will be needed (to grow the fleet), 510 planes will be needed to renew the fleet and 1450 airplanes will be converted for cargo transport.

Given the fact that Boeing already has a firm position on the cargo market, offers a conversion program for passenger airplanes (carried out by third party companies) and has 3 airplane types on the cargo market I think it is safe to say that they have set a solid foundation for growth in this market segment for the coming years. Competitor Airbus only has the Airbus A330F and a conversion program for the A330 (a conversion program for the A320 was canceled 2 years ago).

For the battle between Boeing and Airbus I think there is a clear winner: Boeing.

On the other hand there also is the battle between the 3 cargo airline giants. I expect that demand for transport to countries like Turkey, Brazil and the African continent will grow tremendously. The company that adjusts its route network to this growing demand will be one step ahead. Given the fact that FedEx Express already started renewing the fleet and that they acquired a couple of companies in Africa, I think that FedEx already made 2 small steps to dominate the cargo market.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.