Cargo traffic tumbles, some cargo conversion lines stumble, but cargo maintenance and conversion shops press on. The long-term outlook is still decent, but it may be different from that of past decades. For one thing, the historical relationship between growth in cargo demand and GDP seems to be shifting downward.

Cargo markets are vulnerable to the same economic and fuel upsets as all air transport, but cargo markets are even more ferociously competitive than passenger travel. Heavy-check shops need to be extremely lean and conversions must be tailored to exact market demands, which are changing.

Cargo traffic barely grew at all in 2011, and TeamSAI Chairman and CEO Chris Doan looks for it to be “suppressed, but not down,” in 2012, mainly due to the economy. U.S. carriers cut their freighter fleets ruthlessly since 2009, but fleets in other regions have been roughly stable.

Doan expects cargo capacity to grow 4% a year in the next decade, with the average fleet size increasing. “They are retiring small aircraft like Boeing 727s, 737s and DC-9s, and fuel-hungry widebodies like DC-10s, MD-11s and old 747s.” For replacement and additional capacity, TeamSAI forecasts 750 cargo conversions, about two-thirds of them of narrowbody passenger jets, plus 500 new widebody freighters. The key, for both conversions and new freighters, will be fuel efficiency, in Doan's view.

Gert-Jan Jansen, executive director of the Cargo Advisory at Seabury Aviation and Aerospace, notes cargo growth has steadily slowed down, from 8-12% in the 1970s, to 7-8% in the 1980s, to 6-7% in the 1990s to 2-7% in the last decade. Cargo forecasts by Boeing and Airbus have consistently exaggerated prospects. Instead of growing at a multiple of world GDP growth, he thinks ton-miles are likely to grow at the same pace as GDP, 4-4.5% over the next five years.

Jansen notes that deliveries of large new freighters, the 747-8F, 777F and A330F, will peak in the next 2-3 years, and there are plenty of passenger aircraft whose age makes them suitable conversion prospects. “There is a real risk that capacity growth will continue to exceed demand growth in the next few years.”

But the Seabury consultant sees differences in cost of cargo capacity among specific aircraft types as smaller than expected. The least expensive widebody is only about 20% more economic than the most expensive one, and a similar range prevails for medium-capacity freighters (see chart). Most freighters bunch in the middle. “The key is to develop a clear network and fleet strategy based on sound market data,” Jansen stresses. “Utilization and load factors make or break each aircraft choice.” In other words, which aircraft a cargo carrier flies may count less than how well these aircraft match the network and cargo demand.

Shops that depend on cargo maintenance or conversions must jump though similar hoops: picking the right aircraft to work on, sizing capacity to meet demand and then keeping hangars full.

Flightstar Aircraft Services, which does both C checks and conversions, has seen no slowdown in its workload, according to Chief Operating Officer Tucker Morrison. He attributes 18 months of growth to the addition of a new hangar in January 2011, which gave Flightstar 10 heavy lines, enough to attract new customers.

One or two of these lines are typically dedicated to conversions. The rest do heavy checks on mostly Boeing narrowbodies. Morrison says the number of checks on cargo aircraft has held steady, but is now about 25% of heavy work, down from 50% before, due to the capacity expansion.

The company is doing its 35th 757 conversion under a supplemental type certificate (STC) from Precision Conversions. This work has been steady at 3-4 passenger to freighter conversions per year, for six years, but the next two may go to combis. Flightstar also does touch labor on 737 conversions under an STC from Aeronautical Engineers Inc. (AEI).

Morrison says his company is similar to competitors, but now has more floor space and fresh capital from Moelis Capital Partners. Although Morrison has heard that widebody cargo work is down, Flightstar's narrowbody cargo checks and conversions have not suffered.

AEI has converted 727s and 737s and is close to the first STC for converting an MD-80. Robert Convey, AEI sales vice president, acknowledges that the cargo market is choppy and mixed. “You can see that cargo is dropping, and our cargo customers in Europe say the market is hostile, with competitors cutting rates below cost.” But Convey sees the U.S. market as rebounding a bit and the BRIC countries (Brazil, Russia, India and China) steady or on the upswing. “Russia is picking up, but they don't take that many. Brazil is doing well, Central America is doing very well and southern Africa is stable.”

He views the overall outlook for narrowbody conversions as positive. “The drop in traffic is affecting medium- and widebodies,” Convey says.

He points out that one prominent widebody conversion shop did 8-10 747s last year and may do only two this year. And one of Convey's Asian customers took a widebody for conversion and then decided it did not want a freighter, partly due to slow traffic.

Nevertheless, AEI's three maintenance partners are still seeing steady check work on narrowbody cargo aircraft. “Carriers are slowing down but they are not parking the narrowbodies, as they are parking the widebodies.”

Convey believes one reason for the special vulnerability of widebody freighters is competition from passenger widebodies like the 747, 777 and A380. “They have enormous belly capacity and fly five times per week, unlike freighters that fly twice a week. And they can offer cheap rates, because cargo is an add-on for passenger aircraft.” Belly competition is especially important in and out of markets like China and India, he says.

But that cargo space capacity does not compete with narrowbody freighters, in Convey's view. “Once you get the freight to Mexico City, you have to fly it out to smaller airports, and only narrowbody freighters can do that.”

AEI predicts good prospects for the MD-80 as a narrowbody freighter. “It can do the same volume as, but is less than half the cost of, a 737-400,” Convey says. He puts the cost of maintenance and conversion of an MD-80 at $3.5-$4 million, versus $8-$9 million for a 737-400. And an MD-80 engine with green time costs only $300,000-$400,000, typically less than a CFM56 on the 737.

MD-80s may be inefficient in fuel use, but Convey argues that, if an aircraft flies only 2 hr. per day on feeder routes, it's the purchase cost that count most. AEI has 15 orders for MD-80 conversions. “We never had that kind of backlog before,” Convey notes.

Others also see opportunities by going small. Stan Mounce designed the STC for the cargo version of the Fokker 50, of which there are 14 flying. As manager of Phoenix Aero Solutions, Mounce is working on an STC for the Fokker 100. He sees a market with carriers like FedEx that need a small plane to carry cargo to small airports. “The MD-80 is a good plane, but can't do these airports,” Mounce argues. “The F100 fits into the niche.”

Mounce sees DHL, FedEx and UPS seeking replacements in both the 4-7-ton range and the 7-14-ton range. Carriers also are looking for combis to fly employees and cargo to remote mining sites. ATR 42s and 72s fit the lower range, while the F100 is in the higher. In addition, “ATRs are very expensive, just try to find one,” Mounce says. “They have a limited inside door for cargo. The F100 can take quite a bit and is available.”

Mounce looks for sturdiness in conversion candidates. “CRJs and ERJ 145s are throw-aways,” he says. “F100s are high-engine airplanes with good fuel economy and a long time between broken parts. Fokker went broke building it, but it is a very well-built aircraft.”

Availability at reasonable prices is key to cargo conversions. Mounce notes that plans for A320 conversions failed because there were not enough available to justify the upfront cost of an STC.

Mounce reckons he get can get an F100, with C check, engine work and airworthiness directives complete, for $3 million and spend $1.7 million to do the conversion, including rollers. “That's a $5 million aircraft.”

Phoenix has two F100s in the hangar and is looking at four others. The company estimates it will need to do about 40 F100 conversions to make the STC a success.

As for the cargo slowdown? “We aren't worried. It's mostly a widebody thing.”

Air freight volumes increased in February from a year ago by 5.2%, according to the International Air Transport Association. Growth largely was driven by cargo shipments that were postponed in January due to the Chinese New Year holiday and the comparison to 2011 shipments that were weakened due to the Arab Spring.