Podcast: Cargo Demand Is Up, But Did The Market Get P2F Capacity Right?

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Transcript:

Lee Ann Shay:

Welcome to the MRO Podcast. I'm Lee Ann Shay, Executive Editor for MRO and Business Aviation for Aviation Week. Today, we're going to be discussing the passenger-to-freighter conversion market because cargo demand is climbing. Recent data from IATA shows that the air cargo demand during the first half of the year is up. Cargo tonne-kilometers grew 13.4% compared to the same period last year, and cargo tonne-kilometers have grown by double digits for seven months in a row. Asia Pacific Airlines in particular are seeing a surge. To discuss this market, I've got two experts with me, my colleagues James Pozzi, Aviation Week's MRO Editor for Europe, the Middle East, and Africa. Welcome, James.

James Pozzi:

Hi, Lee Ann. Thank you.

Lee Ann Shay:

And Dan Williams, our Director of Fleet Data Services. Welcome, Dan.

Dan Williams:

Thank you for having me again.

Lee Ann Shay:

Absolutely. Dan, let's start off by talking about available aircraft bead stock and demand for cargo conversions in each class of the market.

Dan Williams:

Yeah. Well, as you rightly mentioned, cargo has had a resurgence. Now, it's ebbed and flowed if you go back to 2019, which is its last constant year, because 2019 still is quasi the benchmark for most of the industry, not necessarily the cargo market, but let's pretend. The cargo market has seen a huge boost. Obviously, during COVID, there was a massive lack of belly capacity in regular scheduled traffic to carry cargo so it got shifted to aircraft and ships, then somebody parks a massive ship in the Suez Canal, which led to other issues, and then you'd fast-forward with increasing e-commerce in parts of the world, certainly China for example, and then you fast-forward and keep coming forward to where we are today. There's still a slight lack of international belly cargo because operators are pivoting away, and this was a pre-pandemic thing as well from wide-body aircraft doing long legs.

The A321LR and the XLR, when it comes into service real soon, they've got no belly capacity but they're great for transporting passengers with very low seat costs, but that still leaves the capacity in the cargo market, and then we have other issues with shipping currently, with the Houthi rebels and things like that. There's lots of outside factors completely not related to aviation that are impacting the aviation industry. Go back to 2019, passengers-to-freighter conversions, 73 of them. In our fleet discovery database, 73 the whole of 2019. That was actually quite a good year by then. Last year alone, 2023, there was more 737 Next Gens, 737-800s converted. Well, there was 73. There was this exact same number converted last year, just 737-800s, than there was the whole at 2019, so we've seen a shift. Now, going back to the question about available aircraft, during the pandemic, there was hundreds of aircraft available for these passengers-to-freighter conversions, and everybody was opening passengers-to-freighter conversion facility. We saw [inaudible 00:03:29] that were just being handed back aircraft hand over fist. Go, "What do I do with this aircraft?"

Saw the gap in e-commerce, saw the gap in belly cargo. We're like, "Let's get it on a passengers-to-freighter conversion program. Great," so they booked the slots. We have all these announcements, brilliant. The problem is, we fast-forward to where we are today, we're still lingering supply chain workforce. The ability for OEMs to deliver new aircraft is an issue. All of a sudden, these 737-800s, and that predominantly is the key one of this. There are others as well I wanted as passenger. The most recent legacy passengers-to-freighter aircraft conversions that were wanted in the system with the 767 and the 757. Boeing owned the market. There's not that many 757 airframes left. There's not that man 767 airframes left. We are getting to the point where these maturer platforms, that were the traditional [inaudible 00:04:25] passenger-to-freighters, are running dry, and we're seeing a shift.

We are moving to the 777s coming online, the A320 families becoming more prominent. The 321 is a quasi natural successor to the 757. The A330 is coming online. We've seen more and more of those have been done over recent years. Last year, the 330, if you combine the twos and the 300s, there was a dozen of them. Already this year, we have had a dozen conversions, so that's a program that's growing. We have all these programs together getting turned on and so there's plenty of feedstock of aircraft. It's quite difficult right now because the right size aircraft are not always available, because the 737 Next Gens, the A320, let's call them Classics, and 321 classics are what people want, but people want to keep them in passenger service right now. That's where we are in terms of feedstock. There's not many 757s, there's not many 767s, and those that kind of still are, chances are they've already got in bid earmarks if they're going to be converted to freighter to be converted in the coming couple of years. That's where we're at in terms of feedstock.

Lee Ann Shay:

Sounds good. Well, thank you for that overview. A slightly different market, Embraer launched the 190 and 190 a few years ago, and the 190 was at Farnborough. Embraer is taking a slightly different tactic instead of the longer point-to-point markets. They're arguing that a smaller aircraft could really best serve some of that cargo market in smaller communities and then being able to serve those point-to-point. Dan and James, what do you think about that market?

James Pozzi:

Well, I can start. I'm sure Dan's got some interesting views on this one as well. From where I'm standing, of course, obviously, it was introduced in 2022. As you mentioned Lee Ann, it was a response to growing cargo capacity, which we've seen, and those smaller markets that you mentioned. It's interesting, this is Embraer's first big step into the cargo segment, and they seem really confident there's a market for this too. Of course, last month, at Farnborough, they announced the certification by Brazil's regulator, and the E-Freighter is going to... For both of those E190 and E195 freighter options are going to get EASA and FAA certification later this year, and also for the cargo loading system on the aircraft shortly after. Very interesting. I mean, the maximum payload of the E190 is 13,500 kilograms, while the E195 is slightly bigger at 14,300 kilograms. I'm really just wondering where this can fit into the market.

Of course, as Dan mentioned, the feedstock on some of those older options has dried up and there's obviously new aircraft or there are options that are becoming more dominant in that space. Now, Embraer stated actually, which I found quite interesting, they've stressed the points or really championed them that has, for example, 50% more volume capacity than large turboprops and 30% lower operating costs than large narrow-bodies. Are they going to try and compete maybe in that space and will they find a foothold there? As mentioned before, the 737-800 has become really popular. It's replaced the 737-400. Of course, as mentioned, there's the A320 and A321 options, converted freighters, which have really emerged as a 757-200 replacement long term.

Yeah. I mean, the first conversions are beginning on the E195 next year, and the E190, the first one of those has already undergone its first conversion. At this stage, I don't know. I just think it's a very interesting proposition in terms of a new market entrance, but I'd be interested to see actually who it competes with, who are they going to take market share away from, and how do they see that playing out over the long term, because there are more dominant programs in the market increasingly so by the year now so it could be quite a tricky one for a new player to get into.

Dan Williams:

It is interesting. I think Embraer, it goes back to feedstock. The advantage of Embraer launching a P2F program gives them the ability to own and manage the whole life cycle of an aircraft, because they may wish to try and upsell, A, an operator with an E2 and trade in parts, exchange as it were their legacy 190s and 195s. I think the 190 and 195s can serve a purpose in the market. You look at a possibility to replace some of the old 737 Classics, of which there are still quite a few 737 Classics flying around in certain parts of the world. Also, some of the MD-80s of this world, you could replace some of those. If you look in Mexico, for example, they're taking about a handful of CRJ200 P2Fs every year and have done quite consistently.

Brazil, which is the home market, it's perfect. The infrastructure lends itself to flying cargo better, and these aircraft are much more efficient than some of, let's say, the 737 Classics. You might not need a 737 Next Gen or an A320 to operate those slightly nicher, narrower, thinner routes, in which case, the 190s and 195 could fill that gap. Are they going to convert 73 in a year like they did the 737-800 last year? No. Will the program bring in 73 aircraft passengers-to-freighter conversions overall? Well, quite possibly. I think we have to be realistic. But then look at the in-service fleet of the 737 Next Gens and look at the in-service fleet of the 190s and the 195s. They're different scales as well. They are there to fill a pocket, to fill a gap, especially for existing operators who have the Embraer fleet, because then it keeps costs down its commonality with pilots.

There are certain, those markets, that it will do well and it will find itself in some of the slightly secondary markets. Africa has become a nice home for Embraer fleets. Africa's a general, takes quite a lot of 145s. South Africa Airlink are a big operator of the ERJ family, so why couldn't it find a home there? Australia as well, they've got a big fleet. Where you find these pockets of big fleets of the ERJs, the larger ones, 190s, 195s, then you can also find some pockets that they can fit in nicely as well.

Lee Ann Shay:

Excellent points. I think right now is such an interesting fleet planning time. We've got lots of aircraft orders, we've got lots of aircraft delays, we've got increased traffic projections over the next decade. It is just a really dynamic time, so are you expecting any other new conversion programs in the near future?

James Pozzi:

Again, I'm sure Dan will have some views on this as well. I'm quite interested in the possibility that's been mooted for a while now for 787 becoming a freighter option and where that could potentially fit into the market. I know Boeing are exploring that. I was told that by them at Farnborough last month. They are looking at that possibility. Of course, Israel Aerospace Industries, a huge player in this market. All of the PTF conversions were reported to be considering a role in the 787 PTF conversion program as well. Just last month, it was reported. This could be an interesting proposition for the market perhaps. I think the payload would be around 60,000 kilogram range, meaning it would compete in the medium wide-body sector against the likes of the A330 and the Boeing 767, which of course, as we've mentioned

before, is aging as a program and is being replaced more so by the A330-300, and the 767s will decrease as the feedstock dries up.

Although interestingly, IAI did tell me they are looking for more partners for that just to convert. Particularly in Europe, they're talking to someone, so that's quite interesting there. But anyway, the 777 is also increasing in numbers as we mentioned. I mean, the 787, it did enter service in 2011 and was flying to varying degrees as far back as 2009 in the testing phase and the certification phase, so there will be aircraft reaching maturity that could be options for PTF conversions, but whether or not this program has legs or not is I can't really say. I mean, there is skepticism about it and whether that will actually happen or whether it does happen and it makes any sort of dent in the market. Yeah. I hate to say it now, but I'm sitting on the fence with this one at the moment because it will be interesting just to see if this does ever come to fruition for a start, although it is under consideration by some people in the market.

Dan Williams:

Yeah. The 787, it's the size of aircraft that could replace early 767s that were converted, because obviously, new build 767 freighters are still quite very new, but there's lots of A300s and the like that are still in the system. The 787 would kind of be a quasi natural successor. My issue, I'm not quite as on the fence of view. I'm kind of on one side of a fence. Purely, from a technicality point of view, the 787 is a carbon tube [inaudible 00:14:05] ultimately. Getting round the logistics of cutting a large cargo door in an existing cargo tube, I don't have the technical capabilities. I guess if Boeing is talking about it, it must be doable. However, if you look in the market, there are 777s and there are existing STCs or ongoing STCs for those programs. Yes, it's a little bit bigger, but buying a 777 will be a lot cheaper than buying a 787, likewise for an A330.

Now, the 787 would give you an advantage in terms of operating costs because it is latest gen engine technology, but even just replacing the legacy wide-body aircraft that we already have in the system with an A330 or a 777 conversion, that alone will increase the sustainability, let's say, of that market. It's a trickle-down effect, is that the cargo market's always the dirtiest because it gets all the old aircraft. The 787 is ripe, it's the time to start thinking about this. They always get the generation of engine technology that's worn down. An A330-300 is better than, let's say, a really old A300. You're going to make gains in terms of sustainability in that respect.

I'm on the side of the fence of, probably, do we really need it? Probably not, purely because Boeing are pushing the 777X freighter. They are looking to get the waiver for the 767 freighter to continue new build production of that, which ultimately will have a knock on effect to P2Fs, because if you can buy a brand new 767, why would you go through the rigmarole of something else that you have to wait for an STC for for conversion. I think, probably, the 787 freighter as a P2F will not happen. I don't think it'll happen as a new build either, but I don't think it'll happen as a P2F either.

Lee Ann Shay:

You're right. I'm glad you brought up fuel costs, because if fuel costs would spike, that could change a lot of the thinking, so that's one big variable. The uptick in the cargo market during the pandemic spurred the Emerald cargo conversion capacity. Do you think the market ramped up too much as far as capacity goes?

James Pozzi:

I think there's no secret that demand is very strong. Some PTF lines are booked solid for the next three to five years depending on who you speak to, particularly in some areas like the wide-body segment. Of

course, there's the narrow-body dominant programs too. Demand might level out a bit this year for PTF conversions for some of the reasons we spoke about, but it will be sustained. Seemingly, MRO shops have looked to be involved in PTF work despite obvious capacity constraints in other parts of the market. I think this has been reflected in recent years by the number of MRO partnerships that have been teaming up with the likes of IAI, for example, and Boeing. I, for example, have had partnerships announced in the last three years in Korea, Ethiopia, UAE, USA, to name but a few, and they're on the lookout for more with rumors or reports, sorry, that India could be the next destination for a PTF partnership.

Saying that though, there's a lot of MOUs signed, of course during the pandemic and through to now. Some of these PTF MOUs that were supposed to come online one or two years ago have yet to materialize and may never will, so that's quite an interesting point really. There is [inaudible 00:17:35] this clamor, and this will for partnerships and for fresh PTF lines everywhere, but some of these agreements that were released or discussed haven't actually materialized over time. I can think of several in Europe actually where that's been the case. An interesting one though is who definitely have got a strong foot now in this is STS Aviation of course, a U.S.-based company who have made a real inroads into Europe over the last five years. I think they've got three MRO sites in the UK alone. They're working with Mammoth Freighters, of course, on their 777-200 and 300 freighter conversion programs.

Now, they're a good case in point, because once there's a steady state of production at STS's Manchester facility, I think in around 2026 that's expected to be, one conversion on that 777 will take around just under six months. I know they're converting a former Delta 777 right now, but when it gets to that steady state, that will be nearly six months per program. This is a long-term work commitment with a lot of manpower being used and a lot of investment in tooling and equipment, but that is a steady line of work and they can do that in the facility and use other parts of the facility to carry on with the day-to-day stuff, the base maintenance, et cetera as well. The Mammoth program is very interesting because there's five lines at Aspire, MRO in Fort Worth and there's two in STS Aviation in Manchester. They are looking for partners, I think I read, in Asia Pacific as well. That could grow further I think.

While they're doing the design engineering and assembly of the cargo door and the door surrounds structure will be done in America, all that modifications work will be subcontracted to the likes of other vendors and the likes of STS will be taking a lead on that too, so there could be a real good opportunity. I think MROs will still be attracted to work on this, particularly on the modification side. I think there's going to be a lot of future work taking place there. There are some real opportunities, but juggling that capacity correctly in order to participate in this while doing the other services around base maintenance, whatever it else will be, that could be quite tricky, and also the manpower issue as well. These projects, they're a huge undertaking and they do take a lot of people turning wrenches or working on the aircraft. Yeah, it's a big, big commitment. Yeah, there are opportunities and there's upsides. There is also some caution from the MRO side too.

Dan Williams:

I'm just going to quickly jump in, if I may, on that. Ultimately, a 777 just takes longer to convert. IAI, this is the back of an envelope type numbers, they had roughly six lines in Tel Aviv. You could churn out three 767s per line per year, give or take. They could produce 18 PTF 767s a year. They've taken a line out because they're working on the 777. They're going to take another line out to work on A330s. When they pivot away from the dwindling 767 feedstock, 330s take a bit longer, they're a bit bigger. The reason some of these big programs are looking for assistance from outside is because they need help. Just like in new aircraft build production, an A321 takes longer to build than an A320 because it's bigger.

The same principles apply to these freighter conversions, that they're looking for extra capacity, not necessarily to produce more, but to keep at the same level.

In terms of the smaller stuff, I think that you could argue a case, that probably for the 737 Next Gen line, almost every hangar facility anywhere in the world was like, "Yeah, we can do it." Because yes, you need tooling and you need people, but you need nothing more than tooling people in a hangar. You don't need super sophisticated final assembly line type facilities. You just need tools, people, and somewhere to try to do it because... Gatwick has one for example. It's one of these things that probably for the narrow-bodies, we probably... As there is a bit of overcapacity. I think for the wide-bodies, I think there's a little bit of overcapacity as well, but there's also a need to bring down capacity just to keep up with what they want to carry currently do.

Lee Ann Shay:

As long as they have parts.

Dan Williams:

As long as they have parts and people somewhere dry. The somewhere dry is almost an easiest bit to do right now.

James Pozzi:

Easy said than done regarding parts and workforce, no doubt.

Lee Ann Shay:

Absolutely. Well, that is a note to end on, gentlemen. Thank you for your insights. That's a wrap for this MRO Podcast. Don't miss the next episode by subscribing to the MRO Podcast wherever you listen to them. One last request, if you're listening an Apple podcast, please consider leaving us a star rating or writing a review. Thank you so much and have a fantastic day.