Printed headline: 767 Converts
The continued forecast growth in air cargo traffic is spiking interest in both narrowbody and widebody main deck freighters, with retired passenger jets prime candidates for cargo conversions. In the medium freighter segment, the focus appears to be on the Boeing 767.
“With an increasing number of 767-300ERs being phased out of passenger service, a strong supply of feedstock for cargo conversions is becoming available,” says Ken Herbert, managing director of Canaccord Genuity in San Francisco. “In fact, the air cargo carriers have emerged as the largest market for retired passenger 767s, starting with the overall resurgence of air freight shipments in 2017.”
He cites the 767-300ER as the leading candidate for freighter conversion in the medium class, given both its regional and international range capability. “The 767-300ER occupies a very special niche in the air freighter market because it fits nicely between large freighters, such as the 747-400 and 777-300F, and the narrowbody 737 Classic and 737 NG—many of which are also being converted to freighters,” he says.
Herbert reports that since the 767-300ER remains in production as a freighter, and now a military tanker, the converted older models will continue to benefit from an active and competitive supply chain and good parts availability.
Stephen Fortune, principal of Fortune Aviation Services, a commercial aircraft consultancy, reports that in both 2017 and 2018, 24 passenger 767s were reconfigured as cargo carriers—up from 14 767s in 2016. “Based on market demand, I would estimate another 12-15 767 conversions for 2019,” says Fortune, citing data from Ascend.
As a medium-size freighter, the 767 competes with the Airbus A330-200 and -300 and, to a lesser extent, the A300-600. “Today, the 767-300ER, specifically, is becoming the regional widebody market leader, with over 100 aircraft in service and almost 400 remaining in passenger service, which are potential conversion candidates,” notes Fortune.
Asked if the new-production 767-300ER freighters are serious competitors with the converted models, Fortune concedes that there has, in fact, been a substantial increase in demand for the newly built freighters over the past five years—largely driven by FedEx and UPS.
“FedEx is largely responsible for keeping the 767-300 freighter production line going,” he says. “Although there is still considerable feedstock of passenger 767s, new freighters offer greater reliability and, of course, the maintenance honeymoon. Companies like FedEx and UPS, which offer a premium service, prefer the reliability of new aircraft and are willing to pay for it.” In June 2018, Boeing announced an order for 24 freighters from FedEx, including 12 767s and 12 777s.
At the same time, Fortune raises one cautionary note with respect to freighter conversions. “There is a severe shortage of ‘green time’ CF6-80C2 engines. When you look at the 767 conversion market and other programs, that’s the biggest headache right now.”
Scott Brensike, GE Aviation’s CF6 product line general manager, acknowledges that the supply of used serviceable material (USM) for the CF6-80C2 is being affected by both high demand and delayed retirement of older fleets.
“The strong demand for CF6-powered aircraft has led to a somewhat paradoxical situation: The longer the engines stay in service, the fewer used engine parts are available. Used serviceable material contributes to mature fleet cost savings; but USM availability, including life-limited parts, is dependent to a certain degree on engine retirements,” he explains.
For cargo carriers looking for comparatively inexpensive aircraft, however, the used-767 market continues to boom. Rich Corrado, chief operating officer of Wilmington, Ohio-based Air Transport Services Group (ATSG), reports that a converted 767 freighter averages about $28 million—on the ramp—compared to a new-production model at two to three times that cost. “On the operational side, a new freighter provides better fuel burn because you’re getting new engines. Plus there’s the maintenance holiday,” he says. “But even with a converted 767, you’re looking at an aircraft that averages about 98.5% dispatch reliability.”
Corrado says ATSG is the world’s largest lessor of converted 767 freighters, with 68 in its portfolio as of year-end 2018. These included 34 767-300s and 34 767-200s. Through ATSG’s leasing subsidiary, Cargo Aircraft Management, 58 are dry-leased to external customers globally, while the remainder are leased to ATSG’s wholly owned air cargo carriers, specifically ABX Air and Air Transport International. Corrado notes that 67 of those aircraft were converted to freighters by Israel Aerospace Industries’ Bedek Aviation Group, under its 767-300 BDSF program, with the remaining models converted by a company he says is no longer in that business. Another five former passenger 767-300s were being converted by Bedek at the end of 2018 for delivery this year.
ATSG continues to expand its 767 freighter fleet, announcing last December its intent to acquire 20 767-300s being retired by American Airlines. Delivery of those aircraft by Bedek in a cargo configuration will occur in 2019-21.
ATSG’s expanded 767 freighter fleet is largely attributable to Amazon’s growth; 20 are leased from the ATSG fleet by the retail distribution giant under an aircraft plus crew, maintenance and insurance (ACMI) contract, plus a separate agreement covering flying services. Amazon has committed to another five aircraft this year and five more in 2020.
The procurement process used by ATSG for the 767-300 involves multifaceted due diligence, starting with a preference for purchase of an entire fleet from a single operator where possible.
“The aircraft’s pedigree—its maintenance history—is very important. Many aviation authorities want to see as few owners as possible, because there is generally greater stability in terms of maintenance,” he explains. “In addition to the number of operators, where it was flown and how it was flown, we want to be sure that the airframe is upgradable to its highest available maximum takeoff weight, as well as the green time remaining on the engine and the level of sophistication with the avionics. All of this determines what we think the aircraft is worth and what we are willing to pay for it.”
While Corrado agrees with other industry observers who estimate the 767-300 feedstock at a couple of hundred, that does not mean they will all become available for freighter conversions tomorrow.
“One of the reasons for the available 767 feedstock was production delays with the Boeing 787. That kept the 767-300 in service a lot longer, and because of this, the airlines continued to maintain them well,” he remarks. “The real question is how much longer the airlines will hold onto them.”
Kin Chong, executive vice president of the business coordination division of Evergreen Aviation Technologies (EGAT) in Taiwan, is optimistic that used 767s will continue flowing through the cargo conversion pipeline. “As more replacement airframes such as Boeing 787s and Airbus A350s are delivered to airlines currently operating 767-300ER passenger jets, used 767s more than a decade old will increasingly be released into the secondary market to become feedstock for conversions,” he says.
Chong reports that integrated freight operators, airlines with independent cargo operational units and leasing companies are “the observed buyers” of widebody conversions. To date, EGAT has performed seven 767 conversions at its hangar near Taipei under the 767 Boeing Converted Freighter (BCF) supplemental type certificate (STC).
“The 767 converted freighter is the best widebody airframe and most adept to meet the current market demands, especially in the Asia-Pacific region,” says Chong. “Demand is being driven by burgeoning intraregional e-commerce growth, an increasing appetite for imported perishables and high-value, time-sensitive-to-market consumer products due to a mushrooming middle class.”
Boeing chose not to talk about specific regional market opportunities for the 767 BCF program, citing the ongoing investigation into the crash of an Atlas Air 767 converted freighter near Houston in February.
For MROs with widebody airframe expertise, freighter 767 conversions could continue to assure a revenue stream.
“For the year ahead, we anticipate approximately 100 767 maintenance visits, of which 80% will be freighters,” says Greg Colgan, CEO of MRO Holdings, which performs 767 maintenance and modifications at its Flightstar facility in Jacksonville, Florida. “We anticipate an increase of 767 volume at Flightstar, and as a result we are evaluating capacity [for that aircraft] at our sister facilities—Aeroman in El Salvador and TechOps Mexico.” The company is well into its own market study on the 767 and sees increasing demand for shop capacity as the fleet transitions from passenger to freighter.
The Boeing World Air Cargo Forecast for 2018-37 estimates 2,650 freighters will be delivered over the next 20 years, of which 63% will be freighter conversions. Taking aircraft retirements into account, the forecast predicts a total freighter fleet by 2037 of 3,260, with the medium-size group totaling 1,150, nearly double its size of 620 in 2017, when the total freighter fleet numbered 1,870.