Imagine you're a major international airline with a substantial cargo operation. Call it Cathay Pacific Airways Limited. You're bouncing back from a dreadful recession, and you've ordered 10 new aircraft, the latest version of the world's most popular widebody freighter - say, the 747-8F from Boeing Commercial Airplanes. Delivery of the aircraft was supposed to take place over two and a half years, but production delays have disrupted that plan, and now all 10 of them are going to arrive at your doorstep within a 12-month period. Meanwhile, storm clouds are massing on the horizon, in the form of another global economic downturn, turmoil in the European Union and proposed legislation that could trigger a trade war between the U.S. and China. Now you've got to conjure up enough cargo to fill those new planes. Which, by the way, cost around $300m apiece.

Air cargo: not for the faint of heart.

Nick Rhodes, director of cargo with Hong Kong's Cathay Pacific, is a man with a strong constitution. He admits that 2011 has been a pretty lousy year for his industry. The trend has been relentlessly downward since the spring, with exports from China falling by 7-8 percent and freight capacity climbing by 15-20 percent. The drop in demand follows an unusually strong 2010, he notes.

Boeing's own figures bear him out. Jim Edgar, regional director of marketing in the Commercial Airplanes division, chalks up the successes of 2010 to a systemic shift of inventory closer to manufacturing points. The strategy, driven by uncertainties over the availability of inventory financing, caused shippers to rely more heavily on the air cargo mode. The result was a one-time bump for carriers. Negative factors impacting the trade this year include sluggish consumer spending, higher fuel prices and the earthquake and tsunami in Japan.

That's a typical cycle for a capital-intensive industry like transportation. Strong economic activity spurs demand for capacity, so carriers run out and buy more equipment. Then the inevitable downturn leaves them with excess space. They're forced to cut rates, park aircraft in the desert or, in some cases, go out of business.

The airlines can't let those micro-cycles affect their thinking; they have to plan for the long term. (Cathay Pacific depreciates its equipment over 20 to 25 years, Rhodes says.) Still, the decision on whether to operate a particular plane comes down to dollars and cents. Each of those 747-8Fs contains 16 percent more volume than a 747-400 freighter. With any aircraft type, the plane's owner must answer two key questions: Does it cover the cash spent to operate it? And, even more important in the long run, does it cover the cost of the aircraft itself?

Cathay Pacific has no plans to park its brand new 747-8s in the desert anytime soon. But the extra capacity that they bring to the marketplace will affect the airline's operations system-wide. After all, notes Rhodes, about half the 1.8 million tons of freight carried by Cathay Pacific last year went in the bellies of its passenger planes.

The airline is looking beyond what it views as a short-term slump in the market. "We're not so pessimistic that [we think] it's going to last for the next several years," says Rhodes. On the contrary, all indications are that air-cargo volumes will grow between 5 and 7 percent annually over the next 20 years. (The latest figures from Boeing put the average number at 5.6 percent, down from earlier estimates of 5.9 percent.) That's roughly a tripling of global traffic over that period, according to Boeing's most recent World Air Cargo Forecast.

Rhodes predicts growth in all three of Cathay Pacific's major markets: Asia-U.S. (where all 10 of the 747-8s are to be deployed), Asia-Europe and intra-Asia. But it's the last category in which Cathay Pacific sees the greatest promise. Driven in large part by China, the intra-Asia trade will grow at an average annual rate of 7.9 percent between 2009 and 2020, the Boeing forecast says. Rhodes sees a big increase in volumes of cargo flowing into China, as that nation's developing middle class spurs demand for imports of consumer goods.

Now about those 747-8s. Launched in November of 2005, the new aircraft promises more space, quieter engines, fewer carbon emissions and greater fuel efficiency than its predecessors. The freighter version offers 134 metric tons of revenue payload and has an operating range of 4,475 nautical miles. Parts of the wings, nacelles and engines are made of the same innovative composite materials that are being used for much of Boeing's new 787 Dreamliner. ("Literally," says Edgar, "the [747-8] wouldn't have been possible without the 787.")

Like the Dreamliner, however, the 747-8 has suffered numerous production setbacks, due in part to the innovative nature of the design and the way that Boeing has chosen to assemble the plane. In the case of 747-8, the inaugural customer, Cargolux Airlines International SA, cancelled delivery ceremonies in the late summer of this year and delayed acceptance of the first two aircraft over what were described as "contractual issues." News reports suggested that Cargolux was dissatisfied with the initial performance and weight of the aircraft. Boeing and Cathay Pacific officials have also hinted at friction between them in the months leading up to delivery; Cathay Pacific can't be pleased by the compressed period for accepting the 10 planes. But the two parties were all smiles in October, at a celebration in Seattle marking introduction of the 747-8F, and the aircraft appears finally to have surmounted its birth pangs.

Other challenges loom. The biggest, says Rhodes, is the uncertain condition of Europe's economy. The collapse of one or more members of the European Union could cripple one of the largest markets for Asian-made goods. Another wild card is a bill in the U.S. Congress to punish China for intervening in monetary markets to keep its currency weak. Should the bill pass, China will almost certainly retaliate, setting off a full-scale trade war. Additional "pressing" issues, according to Edgar, include fuel-dprice volatility, the threat of modal diversion, and new rules on security and environmental responsibility.

Rhodes expects activity for the rest of 2011 to be "pretty flat," but he's predicting recovery in 2012 and steady growth beyond. For its part, Cathay Pacific is expanding service into promising markets such as India, and even expects renewed economic activity in Japan. The last few years have been rough on carriers and aircraft manufacturers alike, but Rhodes is convinced that the story has a happy ending. The only question is, how long does the industry have to wait for him to be right?

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