Oversized Ambition

The outsized air cargo market is growing rapidly,
but are more aircraft needed to carry the loads?

Douglas Nelms

hen Alexey Isaikin, president of Russia's Volga-Dnepr Group, told the International Air Cargo Forum last fall that he expects the market for outsized air freight to reach $7.2 billion in the next quarter century, the forecast by some measures was a rare understatement of the growing profile of the business.

Many industry experts forecast the project air cargo business will grow at a roughly 7 percent annual rate over the next 20 years, well ahead of the 6.1 percent average annual growth for the overall air cargo indsutry forecast by Boeing. Isaikin says the expansion will push the niche business from some 1.5 percent of the overall air cargo market today to around 7 percent of global air freight by 2030.

And by other measures, including the value of the goods being shipped, the operations now largely built around the hulking AN-124s built in what was then the Soviet Union, the larger economic impact around the world may be far greater.

Myron Stokes, managing member of Florida-based Global HeavyLift Holdings, notes studies conducted by Boeing and the U.S. Air Force of 17 projects showed a total value of $400 billion for operators of outsized air cargo aircraft. "And when you add in those (projects) that were not studied, the aggregate value exceeds $1 trillion," he said.

It's a different way of valuing the market, and in some ways the difference is at the heart of the varying attempts to build the project cargo business, efforts being undertaken in the United States and in Russia, where the outsized commercial cargo market was nurtured.

Formed in 2002 as a "strategic air transport solutions entity," Global HeavyLift Holdings is trying to acquire a fleet of C-17s, either 30 new from manufacturer Boeing or 60 used from the U.S. Air Force, or a combination of both. The idea is to push the military aircraft into commercial use as what would be called the BC-17.

"If we were flying today with the C-17, there would be $3 billion worth of business per annum. Just the diamond mines in the north of Canada alone can support a fleet of 10 C-17s for the next 20 years," he said. "Right now the (worldwide) heavy and outsized market will support up to 100 BC-17s."

The idea for the BC-17 has arisen several times over the past decade as the project cargo market has grown at a fast pace.

Many air cargo experts remain skeptical the U.S. aircraft can push into the Russian plane's airspace, however. One official says the case studies that seek to prove the C-17's commercial potential are basically white paper exercises rather than rigorous project analysis. The paper tatters, says David Pulk, president of EP-Team, a Dallas-based company focused on the oversized cargo market, when price and availability are figured in.

Where it used to be axiomatic that shipping by land or sea was most cost effective, Pulk says many of the industrial manufacturers, oil and gas companies that depend on project cargo believe getting a project up and running is more economically viable. This includes the cost due to penalties for delays, disruption of project schedule and the cost of goods and the money involved.

"Generally speaking, the outsized market is growing because we are seeing more volume of big things that do not make sense to take apart to move around the globe - power projects, telecom projects, whatever it might be," said David Hoppin, managing director of MergeGlobal, an Arlington, Va.-based consulting company.

This is particularly true in the oil and gas industry. Due to worldwide increasing energy security concerns, and increased oil prices, the industry anticipates a $1 trillion investment in exploration and production over the next 10 years merely to meet anticipated global demand.

"Oil companies carefully weigh costs of transporting a project in a built and ready to use and install form, versus more traditional methods of moving equipment by disassembling the unit, loading it into containers and re-assembling at site," said Neil Johnson, EP-Team's Singapore-based vice president and director. "By shipping the cargo at full-scale size, many customers realize they can in fact save time and, consequently, money.

"If a drilling contractor can get to site and in operation in days rather than weeks, or a refinery built in five years rather than eight transportation costs are mitigated by the 'time is money' concept," he said.

Although many businesses make significant use of project air cargo transport, Pulk said, "Firms involved in engineering and construction, power generation, mining, aerospace and communications are expected to increase their requirements, and need to utilize the same finite transport capabilities across the global supply chain."

The very nature of the transport is causing the biggest problem in over-sized air cargo. This market is defined by size, not weight, negating the ability of large freighter operators to just pull one off the line for an ad hoc charter.

"The limiting factor is the door," Hoppin said. The side door of the 747 restricts loading outsized cargo, either too high or too wide or too long to fit in the side door, or too high for nose loading.

And that's the conundrum. Outsized cargo is an on-demand, ad hoc business with virtually no guarantees for capital investors.

"The outsized air cargo market is a business looking for capital," said Don Berry, vice president, strategic development and planning for Expeditionary Global Logistics, a Frisco, Texas-based logistics company. "The capital is going to come when investors see there is enough business there for them to get their return on investment. The market is going to be driven by investors who have the confidence that there is enough business in the day-to-day realm to cross it from an ad hoc solution to more of a systemic solution."

This was seen several years ago when Antonov Airlines dropped its agreement with Air Foyle HeavyLift, leaving it with no aircraft to market, and no investors. Air Foyle HeavyLift went out of business.

Richard Aboulafia, vice president of analysis for the Fairfax, Va.-based Teal Group, said it is "a speculative and heavily subsidized market." Although "you can point to very high growth rates for outsized cargo," he said, "a lot of that is because of the availability of cheap AN-124s. The dilemma is how to translate this into cargo pricing that accounts for real cargo costs."

There are just over 20 commercial AN-124-100s in operation, operated by three carriers: Volga-Dnepr Airlines, the Antonov Design Bureau, or Antonov Airlines, and Polet Airlines. The only other operating commercial aircraft meeting outsized needs are the six-engine AN-225 - just one of those exists - and the IL-76.

Aircraft that are waiting in the wings, but are somewhat doubtful, are the advanced version AN-124, the re-engined IL-76TD-90VD, and the BC-17.

There are constant announcements of a relaunch of the AN-124, to be called the AN-124-100M-150, with two initially to be built from airframes left over when production was halted in the early 1990s. A joint venture, Cargo Aircraft Managing, was announced last December between Volga Dnepr Group and Motor Sich of the Ukraine to manage the relaunch of the AN-124. The improved aircraft would have an increased payload from 120 tons to about 165 tons. One -150 has been delivered, with a second reportedly to be put into service later this year.

The first IL-76TD-90VD, refitted to meet European environmental standards, was delivered back to Volga Dnepr and made its first commercial flight last February. A second is planned, although there is some question as to whether it, or additional AN-124-100M-150s, will ever see the light of day.

The primary problem with both of those aircraft they are expensive to upgrade. The Antonov production facilities in Kiev are reported to be antiquated in both production ability and techniques, with new AN-124 costs cited at around $120 million per copy.

As for the necessity of an upgraded IL-76, the sole purpose is to allow it to meet Stage 3/Chapter 3 noise limitations. The International Civil Aviation Organization noise standards basically relate only to North America and Western Europe, so there are still a lot of places in the world where the older, noisier aircraft can operate. This obviously greatly reduces the need to spend millions of dollars on new engines.

But since greater availability means lower pricing, and since the people who would be building the added aircraft also operate them, they have a strong incentive to keep a cap on availability.

"If you own the capacity through one of those three operators, and you are able to control the market pricing based on the premium that you are able to gain because of the capability of your aircraft, why are you going to want to create more availability in the face of ad hoc work?" said Berry.

The viability of the commercialized C-17, or BC-17, is a matter of open dispute.

Boeing has said a commercial version is not economically viable without additional military orders - and authorization for additional USAF aircraft has not been approved beyond the 193 already on the books. Boeing also has said it is stopping procurement of parts for the C-17 pending confirmation of any future order beyond those currently authorized by the USAF.

Executives in the air cargo industry also question its commercial viability. The payload and range compare poorly to the AN-124. Backers insist its ability to handle rough landing strips outweighs those comparisons but that belies the project cargo's push toward greater acceptance, and more operations, in the developed world.

However, Boeing also said it has received "significant interest in the BC-17" from civilian companies, although it is keeping the names of potential customers confidential.

Two companies which interested in the BC-17 are Global HeavyLift and Cargo Force.

Stokes said Global HeavyLift has a letter of intent from the investment banking firm Oppenheimer and Company allowing it to pursue a needed $10.8 billion through a consortium of investors in the U.S., Europe and Asia. Under the Global HeavyLift proposal, the aircraft would be acquired through hoped-for U.S. congressional legislation allowing resale of used C-17s through what is called transformational recapitalization. This would allow Global HeavyLift to buy the used aircraft, with the money from the purchase going back into the USAF budget to buy newer model C-17s.

To reduce the cost of the aircraft, they would be listed as military surplus, with an exemption to federal regulations that requires the aircraft have civil certification.

"The aircraft would have a dual role," Stokes said. "In the event of a national emergency, especially if the aircraft were going into a hostile area, our crews would come out and Air Force crews would go in. But if there is emergency air or disaster relief, our crews would be called on to address those missions. So the de-militarization of the aircraft is going to be very modest. The commercial version of the aircraft is still 98.5 percent C-17."

Stokes said if Congress approves the resale of the Air Force C-17s, Global HeavyLift could start operating early next year. However, Boeing has said a civilian version of the C-17 could not be available until 2010.

Dale Hedrick, acting chief operating officer of Cargo Force, said the "combat expediency" of the aircraft makes it a valuable commercial aircraft. "The aircraft was designed for combat expediency, to land on runways close to the battle front, offload cargo quickly, and then be gone. By applying those same features to the commercial air freight industry, (the BC-17) becomes very capable."

Their plan is to develop a scheduled "less-than-truckload" concept, which "radically reduces the cost to each user," Hedrick said.