Australia’s Qantas Airways is scheduled this month to receive the world’s first Airbus A321 converted from a passenger configuration into a freighter. Aviation engineering firms are gearing up to produce more A321 converted freighters, which experts say is ideal for domestic and regional express carriers that fly e-commerce shipments.
The arrival of the freighter — the first narrowbody aircraft with space for containers in the lower deck — comes at an opportune time. The coronavirus greatly constrained air cargo capacity by decimating airline passenger networks that carry the majority of the world’s air shipments and spurred a surge in online shopping as people protect themselves from infection by avoiding brick-and-mortar stores.
Airlines, lessors and conversion houses say the A321 is an attractive airframe for a converted freighter because of a 20% advantage in fuel efficiency for its class, lower operating costs and the available feedstock of aircraft. It beats the Boeing 737 converted freighter with 50% more capacity — or 9 more tons — and is viewed by all-cargo operators as the best replacement for older Boeing 757s.
It is also the first narrowbody freighter able to carry small containers and pallets on the lower deck. The 737 and 757 only take bulk cargo below because their doors are smaller. Overall, the A320 family can accommodate 14 containers on the main deck and 10 more in the belly hold.
“The A321 passenger-to-freighter has the potential to be the game changer for any hub-and-spoke or point-to-point cargo operation,” Steve Zissis, CEO of BBAM Aircraft Leasing and Management, said in February after his company placed two firm orders for the planes from Elbe Flugzeugwerke GmbH (EFW). “For this reason, we made the decision to offer this conversion solution to our customers.”
Qantas’ freight division plans to take up to three A321 converted freighters. Vallair, a Luxembourg-based aviation leasing company, is delivering the first one. Vallair has acquired 10 of the planes and hired EFW to convert most of them over two years. The Dresden, Germany, engineering house is a joint venture between Airbus and ST Engineering in Singapore. Qantas has also ordered a converted A321 from Keystone Holdings, an ST Engineering leasing joint venture.
Qantas Freight will operate the converted narrowbody planes for Australia Post, which is experiencing consistent strong growth each year in parcels tendered by e-commerce retailers.
The U.S. Federal Aviation Administration and the European Aviation Safety Agency certified EFW’s conversion design for the A321 in late July and February, respectively. Modifications include adding a large cargo door in the forward fuselage area and a reinforced barrier wall in the upper deck to protect the crew cabin from shifting cargo. Seats and other features designed specifically for passengers must also be removed.
Air Transport Services Group (NASDAQ: ATSG), which operates all-cargo aircraft for Amazon and DHL Express, is also developing an A321-200 converted freighter through a joint venture with Precision Aircraft Solutions in Portland, Oregon. Vallair is the launch customer for 321 Precision Conversions, the joint venture, and has placed the aircraft with an unnamed European operator.
The initial test flight is scheduled for the first week of October in Florida. FAA approval for a supplemental certificate allowing the modification is likely to spill into early 2021 because COVID-related precautions have delayed some inspections, Brian McCarthy, Precision’s vice president of sales and marketing, said in an interview.
ATSG’s strategy is to convert the A321s itself and then place them with its two biggest customers, but 321 Precision Conversions is set up to serve the broader industry. The narrowbody Airbus aircraft will complement the B767 currently operated by ATSG’s charter providers ABX Air and Air Transport International.
“The A321 will be the base of an express network freighter,” providing linehaul service along with the medium-size Boeing 767, ATSG CEO Rich Corrado said in an interview for the summer issue of “Air Cargo Focus,” the in-house magazine of Cargo Network Services Corp. “The A321’s cubic volume is very close to the B757 freighter, which with its installed base of over 300 aircraft, is getting long in the tooth. This should create a great market” for the Airbus product.”
ATSG disclosed in financial reports that it has contributed $6.8 million so far to the joint venture with Precision to develop the A321 converted freighter.
Precision does the design and engineering, manufactures the cargo doors and surround structures, manages installation and airworthiness certification, and handles product support, warehousing and logistics.
Avocet Aviation Services in Sanford, Florida, near Orlando, is building the prototype and likely will get the initial orders, McCarthy said. A network of authorized installation facilities is being planned for when volume increases, which could include ATSG subsidiary Pemco Conversions in Tampa, Florida, as well as sites in Europe and China.
Precision Aircraft currently converts other planes in Chengdu, China, through a company called Ameco.
Airbus forecasts about 1,000 small freighter conversions will be required during the next 20 years, with the A321 a strong candidate to meet that demand.
More freighers for e-commerce
E-commerce is driving more new investment in cargo aircraft than general air cargo, and smaller planes are becoming more desirable for operators.
The global e-commerce market is expected to grow to $2.4 trillion this year from $1.8 trillion in 2019, according to Research and Markets. It forecasts the market will grow to $3.1 trillion at a compound annual growth rate of 14% through 2023, enabled by rising Internet penetration and growing use of smartphones, before stabilizing.
The U.S. Department of Commerce reported that second-quarter domestic e-commerce sales grew by almost a third from the previous quarter and 44.5% from the same period a year ago, while e-commerce’s share of total retail sales jumped to 16.1% from 10.8% year-over year.
eMarketer estimates e-commerce will make up 14.5% of U.S. retail sales this year, up from 11% last year — the largest year-over-year increase since it began tracking the industry in 2008.
COVID-19 has increased online demand for essential supplies such as food, medicine, hand sanitizer, tissue and disinfectants, as well as electronics, leisure clothing and outdoor sporting goods useful during a period of self-isolation, analysts and logistics providers say.
During the second quarter, the gross merchandise value for e-commerce sales increased 45% from 2019, according to a graph posted on LinkedIn by Jason Goldberg, chief strategist at Retailgeek Consulting. Best Buy experienced a 242% increase in Internet sales, with Ulta, Target and Dick’s Sporting Goods all near 200% growth in the category.
By comparison, aircraft manufacturers and airlines project long-term growth for general air cargo to be in the 3% to 4% range.
Transportation providers are under increased pressure to help online retailers meet customer expectations for faster fulfillment of online orders. Smaller cargo jets can bring packages closer to the end user by using secondary airports outside big cities and are better suited for the shorter routes e-commerce networks need to ship freight more frequently.
Online shipments contributed to ATSG’s strong profit and revenue growth in the second quarter.
Good value for used aircraft
Interest in the A321 converted freighter has increased since the pandemic started, said Alistair Dibisceglia, chief leasing and trading officer at Vallair.
Lower acquisition costs are helping the conversion case. With a glut of passenger planes grounded by anemic travel demand due to the coronavirus, values have decreased, although aircraft consultant Stephen Fortune encouraged investors in a recent note to wait until the market drops closer to its bottom.
Dibisceglia told FreightWaves that Vallair is evaluating more than 20 A321-200s for purchase after market values fell 5% to 14% in the second quarter following an earlier drop in January.
At the start of 2020, there were 65 A321s already parked because of airline failures, including the bankruptcy of Thomas Cook a year ago, which unexpectedly dumped 36 of the planes into the market. Airlines were expected to lease many of those surplus aircraft to meet travel demand during the popular summer season, but the pandemic killed those plans. The number of A321s in circulation is also higher, Dibisceglia explained, because the grounding of the 737 MAX 18 months ago after two fatal crashes led airlines to acquire A321s to fill the capacity void.
“The pandemic has increased the number of available assets which for us is unprecedented. We are focused on increasing our feedstock,” he said.
Rather than be stuck with unusable assets that airlines returned prematurely, many lessors are making the uncomfortable decision to convert planes that are only 10 to 12 years old, McCarthy said. Owners have to spend several million dollars for the conversion and accept lower lease rates than for a passenger aircraft, which pushes back the timeline for depreciation and recouping the initial investment. But that can be preferable to no revenue stream, expensive storage fees and maintenance for returning planes to service, as well as the serious degradation of components associated with inactivity.
Usually passenger aircraft are candidates for conversion when the airframe is close to scrap value, with the overall price dictated by the engine.
“We’re looking at planes with 20,000 flight hours, which is crazy. We never see planes that young,” McCarthy said.
Integrated logistics companies with their own airlines — Amazon, DHL, FedEx, UPS — typically take a much longer view than hedge funds and other aircraft investors because they often pay for aircraft in cash and depreciate them over 15 years or more, he explained.
“They’re fixated on reliability; it’s a different school of thought,” Precision Aircraft’s sales chief said.
Brittain Ladd, a supply chain management and e-commerce fulfillment guru who spent two years at Amazon working on the company’s grocery strategy, agreed: The A321 “will be a step up,” he said