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Air cargo traffic is growing. How is it affecting the demand for narrowbody freighters?

Jun 13, 2019 10 MIN. READ

From converting older aircraft to placing new orders, the global market for air cargo is pursuing significant fleet expansions to meet the needs of e-commerce.

Recent trends notwithstanding, the resurgence in global airfreight volumes over the past five years has created a need to address the current and future demand for narrowbody freighter conversion programs. The Boeing 737NG and A320 aircraft families have been produced in high numbers and represent natural passenger-to-freighter (PTF) feedstock candidates not only for replacement of aging aircraft but also to satisfy significant forecasted air cargo growth, particularly in e-commerce markets.

However, PTF conversion processes are costly, time-consuming, and complex from a technical management perspective. Thus, a critical review of the various programs is important for both a better understanding of the relative operating performance of the aircraft to be acquired and the technical and product support merits of each program.

Air cargo market growth

According to the International Air Transport Association (IATA), in alignment with global economic and trade growth, air cargo grew by more than 9% in 2017, which was the highest rate of growth since 2010. Based upon the association’s March 2019 freight analysis report, volumes continued to grow 3.3% year-on-year, with freight ton kilometers growing 4.1% in December 2018 over the previous 12 months on a seasonally-adjusted basis.

This is a steep increase compared to previous years when the air cargo market was shrinking. Stronger economic growth and global trade have supported the strength of airfreight. However, growth remains cyclical, and forecasters expect around 4-5% growth in 2019. Boeing estimates air cargo traffic, measured in revenue ton-kilometers, to grow at an average of 4.2% per year over the next 20 years, while IATA, in its March 2019 air freight forecast for the next five years, predicts average growth at 4.4%.

This growth will be driven by emerging markets, predominantly located in Asia Pacific, and will be dominated by underlying expansion in express services and e-commerce, whereby goods are ordered online and delivered directly to the consumer.

Data cited by Shanghai Pudong’s International Airport Cargo Terminal suggest that cross border e-commerce represented 11% of the total market in 2017 and may become 20% of the market by 2022 with a gross market value of roughly $627 billion. International cross-border e-commerce fulfillment activities, along with a general growth in express and high-value goods shipments, represent the most promising opportunities for express freighter operations.

To meet this demand over the next 20 years, both Airbus and Boeing forecast healthy growth, with Airbus noting a requirement for 2,386 freighter aircraft for growth and replacement of 826 new aircraft and 1,560 converted aircraft in its global market forecast for 2018-2037. In its current market outlook for the same time period, Boeing sees a need for 980 new and 1,670 converted aircraft to meet those needs.

Narrowbody aircraft freighter conversion demand

The narrowbody (or standard body) aircraft segment generally comprises those aircraft carrying 45 metric tons or less. With the exception of Boeing’s 737-700C (convertible), of which only five aircraft have been delivered, there are no dedicated new-build narrowbody commercial freighters available. So, future capacity will need to be provided by aircraft that have undergone PTF conversion. Indeed, Boeing’s current market outlook for 2018-2037 estimates that about 63% of all freighters entering the market in the next 20 years will be PTF conversions.

The narrowbody segment represents an important element of the global airfreight fleet, carrying an estimated 50% of express market freight. Of the current base freighter fleet, the Boeing 757-200SF comprises 44% and the Boeing 737-400SF comprises 19%. In the future, up to 70% of narrowbody conversion demand is expected to come from the express and e-commerce sector, with general freight and airmail operators accounting for around 15% of demand each. Boeing, in its 2018 world air cargo forecast, estimates that the population of standard body freighter aircraft will grow from a base of 700 in 2017 to 1,280 in 2037.

Narrowbody aircraft freighter conversion supply

The narrowbody freighter market is currently very active and driven largely by PTF aircraft conversions in the absence of any current original equipment manufacturer production programs. Historically, freighter conversions were performed on older-generation aircraft such as the Boeing 727-200. However, since the Great Recession, the models of choice for conversion have shifted to the Boeing 737 Classic series, the Boeing 757-200, and, to a lesser extent, the McDonnell Douglas MD-80 series. Values for these aircraft with suitably converted freighter operating performance have fallen to levels low enough to make the conversion economical, depending on the vintage of the model.

A reasonably wide range of narrowbody conversion options are currently available, including Boeing 737-300 and 737-400 aircraft, the Boeing 757-200 aircraft, and, to some extent given unique fuselage dimensions, the McDonnell Douglas MD-80 series aircraft. Typical main deck capacity is between seven and 15 pallets. Conversion programs are being developed for—or are awaiting supplemental type certificates (STC) for—the Boeing 737-700 and 737-800, and the Airbus A320 and A321.

Narrowbody aircraft freighter conversion providers

There are now 17 active and developing PTF conversion programs for eight aircraft types: the Boeing 737-300, 737-400, 737-700, 737-800, 757-200, Airbus A320, Airbus A321, and McDonnell Douglas MD-80. The main conversion providers with demonstrable conversion track records and global conversion reach are summarized below.

  • Aeronautical Engineers Inc. (AEI) has active freighter conversion programs for the 737-300, 737-400, and the MD-80 family. Launched in 2014, AEI is presently developing a 737-800SF (special freighter) program for which it has recently received Federal Aviation Administration (FAA) STC approval. AEI has a data licensing agreement in place with Boeing for the 737-800 and has received 111 orders and commitments for the type, including PTF and passenger-to-combi variants. Conversions will take place in Miami and Asia.

  • Boeing has developed its 737-800BCF (Boeing converted freighter) conversion program, receiving FAA and European Aviation Safety Agency certification in April 2018. Thus far, Boeing has received 44 orders and commitments from six customers. Boeing conversions will occur at two maintenance, repair, and overhaul (MRO) facilities in China, including Taikoo (Shandong) Aircraft Engineering Co. Ltd. in Jinan and Boeing Shanghai Aviation Services.

  • Elbe Flugzeugwerke GmBH (EFW) is developing a PTF conversion for the Airbus A320 and A321 models in association with its major shareholders, Airbus and ST Aerospace. Upon FAA and European Aviation Safety Agency approval—anticipated in 2019 for the A321PTF and 2020 for the A320PTF—the STC will be held by EFW, albeit developed by ST Aerospace. EFW has received a 10-aircraft A321-PTF launch order from Vallair Capital S.A. (Vallair). Conversion activities will commence in Dresden, followed by Singapore, and potentially in Guangzhou, China, and the United States.

  • Israel Aircraft Industries Bedek has joined with China’s Tianjin Aircraft Engineering Co. Ltd. to develop BDSF (Bedek special freighter) conversion programs for the Boeing 737-700 and 737-800. Bedek has a long history in the PTF conversion of both widebody and narrowbody Boeing aircraft, including over 60 Boeing 737-300 and 737-400 aircraft. Initial 737-700BDSF and 737-800BDSF conversions will occur at two China locations—Tianjin Aircraft Engineering and Bedek Lingyun (Yichang) Aircraft Maintenance Engineering Company Ltd. (Belinco) in Yichang.

  • Pemco, an Air Transport Services Group subsidiary, has active Boeing 737-300 and 737-400 programs, including Combi, Quick Change, and Combi modifications, with over 150 conversions to date. In 2017, Pemco launched a 737-700 PTF conversion program including flexible Combi and full-freighter variants.

  • Precision Aircraft Solutions dominates the Boeing 757-200 conversion market, offering full-freight and Combi solutions, having converted around 100 aircraft in association with MRO conversion partners HAECO and China Techniques in Xiamen and Chengdu, China, respectively, and Flightstar in Jacksonville, Florida. Although its conversion pipeline is expected to result in a further 60 conversions over five years, Precision launched an Airbus A321 conversion program in 2016 with joint venture partner Air Transport Services Group, securing Vallair as a launch customer in April 2017. Certification is expected in the second half of 2019.

  • ST Aerospace, based in Singapore, offers Boeing 757-200 full-freight and Combi conversions undertaken at its MRO facilities there. ST Aerospace has converted approximately 145 aircraft. ST Aerospace will gain a presence in the A320 freighter conversion market through its subsidiary, EFW, and plans additional MRO conversion facilities in China.

The data in the following exhibit provide a cargo lift comparison between existing and proposed new freighters with respect to the available payload, range, and unit load device (ULD) carriage capability.

Current and future narrowbody freighter specifications

Aircraft type and model Maximum takeoff weight (lbs) Structural payload (lbs) Main deck ULD positions Lower deck ULD positions Range at structural payload (nm) Program status
B737-300SF 139,500 42,900 8.5 Bulk 1,900 Active
B737-400SF 143,500 44,100 10.5 Bulk 1,900 Active
B737-700SF 154,500 44,500 8.5 Bulk 2,000 Active
B737-800SF 174,200 54,800 11.5 Bulk 2,100 Active
B757-200SF 250,000 68,350 15 Bulk 2,300 Active
A320-200SF 169,750 46,501 10.5 7 2,000 Development
A321-200SF 196,210 54,670 14 10 2,000 Development

Conversion programs can extend aircraft economic life by up to 20 years and are typically undertaken initially when an aircraft reaches 12-15 years of age and continues for up to 15 years. This range is not absolute but bounded on the younger side, where passenger demand for a given type remains strong, and at the older end of the conversion spectrum, where there is insufficient remaining economic life to offset the cost of conversion.

The following table provides comparison acquisition and conversion costs for existing and proposed new PTF aircraft conversion candidates. The estimated economic acquisition cost at conversion represents current market value for legacy PTF program feedstock and, for new programs, the estimated value where PTF feedstock enters the zone of economic convertibility.

Current and future indicative narrowbody acquisition and conversion costs (USD $ mm)

Aircraft type and model Estimated economic acquisition cost at conversion Estimated conversion cost Converted aircraft value
B737-300SF $2.55 $2.45 $5.00
B737-400SF $3.85 $2.75 $6.60
B737-700SF $7.50 $3.25 $10.75
B737-800SF $10.50 $3.85 $14.35
B757-200SF $8.75 $5.00 $13.75
A320-200SF $10.50 $5.25 $15.75
A321-200SF $11.50 $6.30 $17.80

Future trends

ICF experts believe that the narrowbody freighter category will continue to increase over the next 20 years, with conversions driven by growth and replacement needs. Transition to the younger 737NG and A320 family PTF freighters will occur as age importation restrictions are more aggressively applied in many jurisdictions, and the supply of suitable, newer, and lower utilization feedstock wanes for all types.

Given that the converted 737-300 and 737-400 Classic series dominates the small narrowbody freighter, and that no new original equipment manufacturer aircraft is economically feasible, the comparable 737-700 and 737-800 will be converted in large numbers to replace and supplement the aging 737 Classic freighters, both providing additional payload and range over predecessor models. Current order books clearly favor the 737-800 over the 737-700.

The A320 PTF will offer some competition, particularly in Asian markets where many A320 passenger aircraft operate, but it provides less volumetric capacity than the 737-800, and slightly more than the 737-700. The larger A321PTF is anticipated to be more successful as a logical successor to the popular Boeing 757-200SF.

That said, near-term conversion demand is tempered by the continued popularity of replacement types in passenger service, which drives up PTF feedstock prices and, when added to higher conversion costs, militates economically against early adoption when suitable Classic feedstock remains. ICF expects that wider adoption is not likely to occur until 2020 and beyond, once the 737 MAX series aircraft gains traction in the market and supplants earlier-generation 737NG equivalents.