A few months ago, Mexicana MRO Services rolled the first Boeing 767-300 freighter off its recently established conversion line. A joint venture with Israel Aerospace Industries (IAI) subsidiary and passenger-to-freighter (P2F) conversion specialist Bedek Aviation Group, the collaboration is representative of both micro and big-picture trends that are driving the air-freight market.
Demand for 767 conversions—a Bedek specialty—has helped fill the Israeli’s company’s hangars at Tel Aviv’s Ben Gurion Airport well into the future. Rather than cede market share or push delivery slots back, IAI turned to Mexicana. “We are experiencing a period of increased demand for conversion into freighters, and Bedek is up to its neck in work,” explained Bedek Executive Vice President and General Manager Yosi Melamed when the venture was unveiled last summer.
While 767s have long been a favorite among air cargo operators—notably express carriers such as FedEx and UPS—the recent surge can largely be attributed to Amazon Air. Recently rebranded to free up the Prime Air moniker for a drone-focused, warehouse-to-door delivery service, the two-year-old Amazon Air had 32 aircraft in service at the end of 2017 and was on its way to 40—at least. All are converted freighters, sourced from Air Transport Services Group (ATSG) and Atlas Air, both of which are—not coincidentally—part-owned by Amazon.
The e-commerce giant’s strategy bodes well for the 767 freighter market, even triggering whispers of possible factory-freighter orders if the deal is right and the P2F feedstock dries up. Amazon’s approach also could be a bigger-picture harbinger for air freight’s role in the supply chain.
“We’re getting calls not only from airlines but from non-airline companies that are looking to put up aircraft in a network situation that we’ve never got calls from before—some logistics companies,” says Rich Corrado, chief operations officer (COO) of ATSG, which has a deal to operate 20 of Amazon’s 767s.
Speaking to analysts during a late 2017 earnings call, Corrado was quick to rein in expectations that there are more Amazon-sized operations poised to spring up.
“These are companies that are in businesses that have specific supply chain flows and needs in a much smaller portfolio, where they’re looking for a captive solution as opposed to relying on your traditional belly space or trying to buy space on main deck freighters,” Corrado says. “So [they are] looking for more of a dedicated solution, mainly to pick up service dedicated to a manufacturing or distribution environment.”
Underpinning macro shifts such as demand for a certain aircraft type or emerging business strategies is the most important trend of all: Air freight traffic is on the upswing. Through the first 10 months of 2017, global freight ton kilometers (FTK) were up 9.7% year-over-year, International Air Transportation Association (IATA) data show. While monthly year-over-year figures declined steadily as the year went on—March 2017’s increase was 13.4%, for example, compared to 5.9% in October—the aggregate figure was a marked improvement over the rolling five- and 10-year averages of 4.6% and 3.2%, respectively.
Even better news for dedicated air-cargo operators: Capacity trends are finally moving in their favor. Widebody passenger airline belly capacity, which provides the majority of air cargo lift, was on track to fall in 2017—the first calendar-year decline since 2010, IATA figures show. Add to this a third consecutive decline in annual dedicated freighter capacity added as well as 15 straight months of RTK growth out-pacing new capacity, and operators are seeing their magic numbers—load factors and yields—improve.
These market trends are priming the pump for conversions, and suppliers are positioning themselves for the uptick. In the narrowbody space, all eyes are on the Boeing 737NG and Airbus A320 families. GECAS is converting more than 50 of its 737-800s to freighters, using services offered by AEI Aeronautical Engineers and Boeing. AEI has more than 80 orders and commitments for its 737-800 conversion. Despite this activity, the -800s’ market values are still too high to make them viable conversion candidates, says David Tokoph, COO of consultancy Mba and a former cargo airline executive. GECAS, which counts some 220 737-800s in its portfolio, is simply investing in existing assets, making the math work.
The 737-400 conversion remains a more sought-after target, Tokoph says, costing about $8 million all-in, assuming a $3 million purchase price. An -800 conversion would cost twice as much, assuming an aircraft purchase price of $14 million. The difference in trip costs between the two models, which Tokoph says is about 5.5%, hardly justifies doubling the total cost, especially at current fuel prices.
The challenge, however, is finding viable -400 conversion candidates. “The target used to be 30,000 cycles for a conversion candidate,” he explains. “Now people are pushing it to 35,000 because the feedstock is drying up. I don’t see it going much higher, and this is helping to create the -800 market.”
The -700 is a viable conversion candidate, Tokoph notes, pointing to the few but well-regarded factory-built -700 freighters in service. But the -800 is seen as the 737 P2F market’s future.
Meanwhile, the long-discussed A320-family conversion market could become a reality this year. Singapore Technologies Aerospace (ST Aero) executives are confident that they will soon land initial customers for its A320/A321P2F conversion program, launched as a joint venture with EFW in 2015.
“Our product offering is finding traction in the market,” says ST Aero President Serh Ghee Lim. “I am confident that [you] will see aircraft inducted into our facility for conversion in third quarter of 2018.”
Tokoph is particularly bullish on the A320 family’s freighter potential, thanks to its wider fuselage cross-section compared to the 737. Within the family, the A321 is seen as the better bet for high conversion numbers thanks to its longer fuselage. While more room means more capacity, the A321’s greater length gives it another key advantage over the A320. Each model has angle-of-attack probes just behind the L1 door, the prime spot where a side cargo door would go. The A321’s stretched fuselage means the door can fit behind the sensors, while an A320 conversion would likely mean moving them.
One factor that is not expected to drive 737NG and A320 conversions is the introduction of their replacements, the 737 MAX and A320neo. “It will be natural aging and depreciation which causes the feedstock to become affordable, rather than any near-term impact from the A320neo and 737 MAX,” says John Mowry, Alton Aviation Consultancy managing director.
Alton is bullish on another new Airbus freighter program—the A330-300P2F from EFW that DHL Airways put into service in late December. “We anticipate additional customer interest as the type gains experience in operation,” Mowry says.
Tokoph is more skeptical, pointing to the “not well-accepted” A330-200 factory freighter as an indicator of the market’s appetite. The factory offering, which includes a nose-gear modification that levels the passenger version’s naturally forward-sloping fuselage for easier cargo loading, has generated 42 orders. Boeing has sold 167 and 192 of its closest factory-built competitors, the larger 777F and smaller 767F, respectively.
Aviation Week’s Commercial Fleet and MRO forecast sees the 737-800 as the decade’s most-converted aircraft, with 83, followed by the 767, with 59. The venerable 757’s feedstock will produce about 40 more freighters, while the A321 market will generate 36 P2F jobs. The forecast sees 26 A320s being converted as well, giving the A320 family the second-highest aggregate total.
Top replacement candidates through 2027 are the 737 Classic freighter, with nearly 200 projected retirements, and the 757, with about 160 projected retirements. Among widebody freighters, 100 MD-11s are expected to be parked, as are more than 80 A300-600s.