Will Online Sales Boom Reshape Cargo Conversion Market?

Air cargo markets are under stress because the collapse in passenger flights with belly cargo leaves a shortage of cargo capacity even with plunging cargo demand. This gap in capacity will be filled eventually by flying belly freight without passengers or by temporary conversions of passenger aircraft into auxiliary freighters, such as proposed by Lufthansa Technik.

Longer term, the question is what are the prospects for permanent conversion of passenger aircraft to freighters, given some powerful crosswinds. Favoring conversions are the dramatically lower price of feedstock jets, but pushing against conversion is the severe trade recession caused by the COVID-19 virus and attempts to deal with it. And further confusing prospects is a big switch by home-bound consumers to online purchases. If sustained, this switch might influence what sort of aircraft will be converted to cargo duties.

Feedstock prices have been dropping fast. Mike Yeomans, head of valuations at IBA, estimates the market value of 2002-vintage Airbus A321-200s has dropped 16% to $12.9 million post pandemic. Another desirable conversion candidate, a 2002 Being 737-800, has seen its value decline 17% to $12 million.

For older widebodies like 767-300ERs and A330-200s and -300s, value declines can be even sharper, as the cross-border routes these aircraft generally fly are expected to recover more slowly than the domestic markets served by narrowbodies.

But will there be enough demand for conversions? The World Trade Organization forecasts that international trade will decline 13-32% in 2020 and may or may not fully recover even in 2021-22.

However, one form of commerce is doing very well precisely because of the virus crisis. Market watchers at PowerReviews report that digital sales increased 210% from February-April 2020 during self-quarantine and stay-at-home orders. The giant online retailer Amazon has seen its stock rise nearly 30% since the beginning of the year, versus a 10% drop in the S&P 500 over the same period. Investors apparently believe at least some of the increase in e-commerce will be sustained after the lockdowns end as more consumers become familiar with and fond of online buying.

E-commerce does not necessarily add to trade volumes, but it can change the nature of shipments. First, emphasis on speedy delivery favors air carriage over other modes. Second, instead of bulk shipments to brick-and-mortar stores, there are many smaller shipments to more dispersed locations and ultimately consumers. Direct delivery may require cargo services to small communities whose volume does not justify daily service by a mainline freighter. That could mean a shift in cargo conversions toward smaller aircraft.

That would be fine with Worldwide Aircraft Services, which concentrates on converting smaller aircraft. Worldwide’s administrative director David Vorbeck does not know whether the short-term boost in online sales is significant. “But a long-term increase seems likely based on our continued increase in on-line purchasing and continuing demand for immediate satisfaction, wanting it now.”

Worldwide converts regional aircraft, suitable for smaller volumes in dispersed markets. In the 4,000-8,000-lb. market it has been very active converting Embraer 120s and Saab 340s.”We are excited about the potential for Saab 340s, with the addition of the B model approval from the Saab service bulletin and recent approval of a 1,000-lb. increase in maximum takeoff weight,” Vorbeck says. “We are also developing a new program to convert Embraer 145s to all cargo. This will be a natural progression based on our Embraer 120 program.”

Despite the trade slowdown, Worldwide has not seen any decline yet in its cargo-conversion business and hopes for a steady future.

At the same time, Israel Aerospace Industries continues to see increasing business in converting larger Boeing models, according to Noam Sharoni, director of 767 conversions. “We foresee more conversions as the cost of the passenger aircraft feedstock declines due to increased retirements or expected bankruptcy in some cases,” he says. Sharoni predicts conversions will increase for 737NGs, 767-200s and 300s, and 747-400.

IAI has slots available for all these models at is conversion facilities in China and Mexico. The company operates a half dozen conversion lines for 767s and 1-2 lines for 737NGs. Sharoni expects to do 777-300 conversions in two years after receiving a supplemental type certificate. IBA’s Yeomans estimates mid-life widebodies like the 777-200ER, -300ER and A330-300s have lost 11-25% of their value in today’s market.

The IAI exec also thinks that online retail with demands for same-day delivery boosts his business as well. “Operators have to work fast using air freight to shorten the supply chain. Take Amazon, for example, which operates more than 40 aircraft converted by IAI and expects to receive more capacity from ATSG,” he says.

Indicating strong demand, Sharoni says IAI is still receiving daily requests for cargo-conversion slots.