Air Transport Services Group said Thursday it will begin procuring Airbus A330 passenger jets and convert them into freighters as part of a broader strategy to expand its leasing business in support of express network operators that need bigger fleets to keep up with volume growth. The announcement came in the company’s second-quarter earnings report, which showed 8% revenue growth to $409.9 million driven by strong tailwinds in the air cargo sector.
The provider of bundled transportation services, which includes flying cargo aircraft for e-commerce giant Amazon, said it has paid a deposit to secure 67 coveted production slots for freighter conversions starting in 2022 through the end of 2025. Twenty of those manufacturing appointments are for the A330, beginning in mid-2023, with the remainder for Boeing 767 medium widebodies that currently dominate ATSG’s fleet and the new Airbus A321 narrowbody freighter.
“The A330 converted freighter, like our 767-300s will be a popular midsize option for our leasing customers,” said President and CEO Rich Corrado in a statement. “The addition of an A330 option will provide our leasing business with a third platform for growth and complements the A321 freighter we will also introduce next year.”
Leasing arm Cargo Aircraft Management (CAM) in late June announced the purchase of two A321 aircraft and said sister company PEMCO will reconstruct them to handle containers on the main deck, with delivery to express carriers expected in 2022. ATSG (NASDAQ: ATSG) has another finger in the A321 conversion pie — it is part of a joint venture, 321 Precision Conversions, that designed the conversion kit and makes money selling licenses to engineering shops like PEMCO that do the actual work.
321 Precision Conversions has delivered one plane so far that met European standards for its design and has two other orders underway for non-CAM customers after recently receiving Federal Aviation Administration approval.
Chief Financial Officer Quint Turner told American Shipper that Airbus affiliate Elbe Flugzeugwerke will get the contract for the A330 conversions, most of which likely will take place at its facility in Dresden, Germany. EFW is the chief rival of ATSG’s joint venture for A321 passenger-to-freighter conversions and brought the first plane to market last year.
Newly acquired 767s will be sent to long-standing partner Israel Aircraft Industries for retrofit.
The increased popularity of online shopping during the pandemic has increased interest in airfreight from e-commerce providers looking to satisfy customer expectations for rapid delivery of their orders. Experts say it is a secular trend driving increased investment in all-cargo aircraft, facilitated by the availability of relatively young planes at discounted prices as passenger airlines shed assets to restore balance sheets decimated by the contraction in air travel.
With air cargo capacity still at a 12% deficit compared to pre-crisis levels and the industry moving the most volume since 2018, acquiring quality all-cargo aircraft is a priority for operators of all stripes — not just express carriers. That’s not an easy feat because conversion shops are booked and Boeing, the lone manufacturer of large freighters, is only building a few 777s per year and the last 747-8s coming off the production line are committed to UPS. On Thursday, Atlas Air Worldwide (NASDAQ: AAWW) announced it is buying eight 747-400 jumbo freighters coming off leases rather than returning them so it has enough aircraft to keep serving customers.
“We’re currently stacked with orders for customers who want to lease freighters from us as soon as we can get them,” Corrado said in a call with analysts.
When it comes to the A330, which is not particularly old, analysts view the the stretch version as the more effective pure cargo aircraft. EFW has a passenger-to-freighter conversion program, but so far it has not been accepted to the same degree as the more mature 767 in the same class. The balance is likely to even out, however, as more A330s become available in the secondary market.
During a virtual media briefing in May, Willie Walsh, the director general of the International Air Transport Association, said he “wouldn’t be surprised to see some airlines look at the possibility of doing cargo conversions on aircraft like A330s,” which he described as “very efficient” and having “great cargo capacity.”
The A330-200 freighter has a payload of 71 tons, according to Airbus specifications.
Airbus stopped producing a factory-built A330 freighter because it only had 72 orders and only delivered 40 of them after the rest were canceled. More than half those aircraft have already been sold by their original owners. “The planes are only 5 or 6 years old, so it’s a pretty clear indicator that the airplane was not an effective freighter,” said one aviation consultant who asked not to be named.
Previously owned aircraft give cargo operators a good business case for a converted A330 freighter.
Egyptair kicked off the Airbus conversion program with the A330-200 model and DHL Express is taking some of the longer-fuselage A330s, which analysts say will be the more popular version because of its extra volume. DHL has also purchased several used A330 production freighters.
“We see the -300 as the obvious choice in terms of volume capability. It has been a successful program out of EFW and the lower cost of candidates means it is a very viable option,” said Phil Seymour, president of IBA Group, an aviation intelligence and aircraft appraisal firm based in London.
Most of CAM’s leased fleet is committed to North America, so the A330 opens up more international opportunities for ATSG in Europe and Asia, where the A330 is more popular. But ATSG is responding to the needs of its dedicated contract customers who need more aircraft and they likely will be interested in the A330 regardless of geography. Acquisitions often come down to an airlines’ familiarity with Boeing or Airbus products.
The company will consider both -200s and -300s for conversion, depending on availability and other factors, Turner said.
ATSG said its second-quarter growth from the same period in 2020 came from its leasing and ground services businesses, offsetting a decline in passenger and military charter operations. Comparisons were also skewed by last year’s unusually high sales when governments and other entities chartered every available freighter for emergency flights of COVID medical supplies.
A 5% decline in contract airline operations primarily stemmed from a reduction this year in passenger operations for customers of Omni Air, reduced Boeing 757 flying for the U.S. military by Air Transport International and the retirement of four Boeing 757 freighters ATI had operated for DHL. Revenues for cargo operations increased sharply for the quarter.
Aircraft utilization, measured in hours from pullback to parking, for air cargo operations, increased 26% over the second quarter of 2020, with most of the gain coming from express delivery customers such as Amazon and DHL. ATSG said it expects continued growth in express-network flying in 2021, with 46 B767s in service for Amazon by the end of the year, 13 more than at the end of 2020.
Aircraft leasing and related revenue for the quarter increased $16.7 million with ATSG having 17 more Boeing 767 freighters on lease since June of 2020, including five in the second quarter of this year. In the first half, it delivered seven of the 11 additional Boeing 767s it will lease to, and fly for, Amazon this year.
CAM owned 15 Boeing 767 aircraft that were in, or awaiting, conversion to freighters, up from eight at the start of the year. CAM has purchased 12 passenger 767s during the first half for freighter modification, all for lease deployment in 2021 or 2022.
Officials earlier this year said CAM is placing a record number of freighters with customers and those leases will provide a more stable source of long-term revenue than from cargo and passenger airline operations.
ATSG’s adjusted operating profit increased $2.2 million versus the prior year quarter and $22.2 million over the first quarter, putting it on target to reach its goal of increasing adjusted earnings before interest, taxes, depreciation and amortization by 6% to $525 million for the year.
“E-commerce merchandising continues to drive strong demand for freighter aircraft capacity worldwide, and our Boeing 767s are at the center of that global trend. We have orders from companies such as DHL, Star Air, and Amerijet to lease at least 10 more Boeing 767-300 freighters next year, and demand from multiple customers for others starting as late as 2025,” said Corrado.
Locking up aircraft leases one to two years in advance with customers looking for aircraft wouldn’t have happened in the past, but e-commerce has changed market dynamics and there is a long growth runway ahead because e-commerce is still a small portion of overall retail sales, he said during the earnings call. Cross-border e-commerce is in its infancy and will accelerate as barriers such as tight banking rules on payments and inefficient customs processing come down.
The aviation services company will increase capital expenditures by $50 million from previous guidance, to $550 million, to pay for five more passenger aircraft for conversion, including four 767-300s and one A321-200, it said.
ATSG now has 110 aircraft in service, including 91 cargo aircraft, 15 passenger aircraft and four dual-purpose planes. Three of the aircraft are owned and provided by Amazon (NASDAQ: AMZN), with an ATSG subsidiary providing crews, maintenance and insurance.