Wednesday, March 07, 2012

Airbus Attacks Boeing Cargo Dominance by Converting Jet: Freight

Airbus SAS (EAD) research that predicted a surge in demand for cheaper mid-sized cargo jets presented the company with a conundrum: it had no model to match Boeing Co. (BA)’s offering in the class and faced a steep bill for producing one.

The solution, an alliance with Singapore Technologies Engineering Ltd. (STE) to convert redundant A330 passenger planes for cargo use, aims to boost Airbus’s efforts to win a bigger slice of a freighter market dominated by Boeing while limiting the European company’s exposure to the project’s development costs.

“This makes good sense,” said Yan Derocles, an analyst at Oddo Securities in Paris. “Given the size of its order backlog Airbus is in no position to do something like this on its own, so partnering with Singapore Technologies avoids cannibalizing its own resources. Plus a freighter conversion extends the life of the A330 passenger model and protects residual values.”

Airbus estimates a need for 2,731 cargo jets through 2030, according to the company’s first ever market forecast solely for that sector, published last month and obtained by Bloomberg. While the mid-size bracket served by its only dedicated freighter, the $211 million A330 200F, is the biggest with a predicted 49 percent of sales, the survey says two-thirds of demand in that division will be for less-costly converted jets.

The European company, the world’s biggest maker of civil aircraft, is seeking to narrow Boeing’s lead in an air-cargo market where its rival claims a 90 percent share of dedicated capacity, or that provided by new and converted freighters rather than in the holds of passenger planes. The revamped A330 would compete with converted versions of Boeing’s 767.

Different Markets

Airbus Chief Executive Officer Tom Enders, who opted to go ahead with the project last month following pressure from A330 operators including Qatar Airways Ltd., has said the converted plane -- known as the A330P2F, or “passenger to freight” -- won’t hurt sales of the new-build A330. Andreas Hermann, who heads the Toulouse-based company’s freighter unit, reckons the two models will appeal to very different buyers.

New-build planes tend to be used by carriers with high- intensity cargo operations and minimal downtime, Hermann said in a telephone interview, citing a 99.6 percent reliability figure for the A330F, whereas converted aircraft are generally preferred by airlines which require lower utilization and therefore aren’t prepared to pay top dollar for a mint model.

Extra Value

Higher oil prices have complicated the equation, with kerosene that once accounted for 25 percent of airline operating costs now making up about 50 percent. While that’s accelerating retirement of cargo stalwarts such as the Boeing 727 and Douglas DC-10, dating to the 1960s, the A330, which first flew in 1992, is modern enough for fuel thirst not to be an issue, he said.

“The A330P2F offers an opportunity to provide a modern- technology, fuel-efficient aircraft at a relatively low price, while airlines with well-developed networks and high utilization can afford a new-build A330-200F,” Hermann said. The plan should also allow airlines to wring extra value out of the more than 830 A330s operating worldwide today, he said.

The price of so-called feedstock for the conversion program will vary according to the condition of available planes and levels of demand, with a 15-year-old A330 likely to cost from $30 million to $40 million, the executive said.

According to the agreement with Singapore Technologies the Asian company’s ST Aero unit will take the lead in developing the new model, with EFW, an existing Airbus conversion business in Dresden, Germany, heading up the industrial phase.

Conversion work will be split between the two, with the majority being performed at in Germany, Hermann said.

Behind Boeing

The EFW facility, owned by Airbus parent European Aeronautic, Defence & Space Co., currently offers conversions of A300 and A310 planes, which though similar in size to the A330 are 40 and 30 years old respectively and more expensive to fly.

Airbus abandoned plans for a venture with Russia’s United Aircraft Corp. to convert A320-series narrow-body jets to carry goods last June, saying cargo demand had dropped and that used jets were being bought for passenger deployment. It also aimed to build a freighter version of the A380 superjumbo before a series of delays forced the project’s indefinite postponement.

Boeing offers a far wider range, producing new-build cargo versions of the 737, 767, 777 and 747-400, as well as of the 747-8, its most recent model. The Chicago-based company also oversees passenger-to-freighter conversions in every category of plane, including defunct types such as the 757 and MD-80.

There are 1,274 Boeing freighters in service, including conversions, compared with 263 Airbus planes, according to data compiled by aviation consultancy Ascend. The U.S. company has 175 outstanding orders and its European rival has 52.

Qatar Negotiations

Airbus’s decision to go ahead with A330 project was colored by Qatar Air CEO Akbar Al Baker’s announcement last year that he planned to switch a batch of the planes to cargo use by 2016 and would buy converted 767s if the planemaker wouldn’t do the work.

The third-biggest Middle Eastern airline is now in talks with EFW about the specifics of the project, Al Baker said yesterday in an interview, adding that he’s pushing for the installation of a mechanism to allow pallets to be shifted around under power within the aircraft. While the technology is available, it would add weight and complexity, he said.

Qatar Air, which is building up its cargo business after last year buying a 35 percent stake in Luxemburg-based Cargolux Airlines International SA, Europe’s No. 1 freight-only carrier, is interested in the conversion of as many as 20 A330s and would contribute an aircraft for certification purposes, the executive said in an interview in Berlin. The carrier is also looking at the potential for a converted version of Boeing’s 777-200ER.

“We will not buy new freighters,” he said. “The cost of ownership is so high that there’s no way we’d make any money.”

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