Emirates signed a sales agreement Monday making it the second customer for Israel Aerospace Industries’ Boeing 777 large-freighter conversion program currently under development, just as fledgling U.S. rival Mammoth Freighters announced its first order. IAI also struck a deal with a leasing company to structurally modify 10 standard-size Boeing 737-800s for dedicated cargo transport.
The flurry of contracts are a reflection of the booming air cargo market, the need for more dedicated freighters as airlines limit passenger flights and access to belly space remains uncertain, and long-term growth projections driven by e-commerce shipments.
IAI said it will reconstruct four 777-300 passenger aircraft to carry heavy cargo containers on the main deck, with Emirates having the option to convert more aircraft. The work will be done by Etihad Engineering, part of the Etihad Aviation Group in Abu Dhabi and the largest maintenance center in the Middle East, under license to IAI. Emirates said retrofitting is expected to commence in early 2023 and conclude in 2024.
Industry experts say a conversion of that size aircraft can cost more than $30 million, but Emirates won’t incur any acquisition costs because it is using planes from its own fleet of 777 aircraft.
The deal was made possible by the normalization of relations two years ago between Israel and the United Arab Emirates.
Dubai-based Emirates is the largest operator of 777-300 Extended Range aircraft in the world and the fourth-largest cargo hauler in the world. In addition to carrying cargo in its international passenger network, it operates 10 pure 777 freighters. Since March 2020, the SkyCargo division has operated more than 27,800 cargo-only flights with passenger aircraft.
Emirates also announced it is buying two 777 production freighters from Boeing, with delivery scheduled for April and June. List price for the planes is more than $700 million, but the carrier likely will pay less as a major Boeing (NYSE: BA) customer. The airline said its total investment in new and converted freighter aircraft is $1 billion.
IAI is the first aviation engineering company to offer a passenger-to-freighter conversion for the Boeing 777-300, nicknamed the “Big Twin” because it will be the largest twin-engine converted freighter in the market. IAI has been designing the technical requirements and modification kit in partnership with GE Capital Aviation Services. This summer it began structural work on the prototype that will be presented to regulators next year for certification that the modified plane is safe to operate. In late October, IAI technicians cut an opening in the hull to install a cargo door.
Aer Cap Holdings, the largest owner of commercial aircraft in the world, completed its acquisition of GECAS on Nov. 1. It is supplying IAI with 777s from its portfolio that have reached the end of their useful lives as passenger aircraft. Many airlines have retired widebody aircraft such as the 777 during the pandemic as they downsize and modernize fleets to reduce fuel burn and emissions.
The 777-300 is considered a top candidate to replace four-engine 747 freighters that are beginning to age out. IAI and AerCap say it will burn 21% less fuel per ton than the 747-400.
The 777-300 converted freighters will provide up to 25% more cargo volume than the Boeing 777-200 production freighter allowing for transport of 10 additional pallet positions and more low-density cargo, such as e-commerce parcels. It also offers 15% more volume than the 747-400, with payload weights close to both aircraft, according to Emirates and IAI.
U.S. cargo airline Kalitta Air has ordered three “Big Twins” and is scheduled to receive the first converted freighter in 2023.
Reconstructing a passenger plane to carry cargo is a major undertaking that requires years of engineering design and technical expertise. The conversion process includes removing seats, plugging windows, adding a rigid barrier behind the cockpit, installing a wide door for large containers and reinforcing the floor and fuselage.
The IAI and Mammoth orders signal that there is market interest in a new long-haul heavy cargo aircraft and that the investment in engineering and production capacity will pay off. Conversion houses are heavily booked into next year and beyond for medium widebody aircraft like the Boeing 767-300 and the Airbus A330-300, the narrowbody 737-800 and the Airbus A321, and even the large narrowbody 757.
Last week, IAI said aircraft lessor World Star Aviation placed an order to convert 10 737-800 to cargo configuration, with an option for an additional 10 conversions. IAI will outsource the actual production to Bedek Lingyun Aircraft Maintenance Engineering, a partially owned subsidiary in Yichang, China, and other licensed partners.
World Star, a portfolio company of Oaktree Capital Management, has been expanding its cargo fleet and said the 737-800s will help support growth in e-commerce shipments.
“We see the 737-800 as the backbone of the short-haul and feeder freight services. This agreement with IAI compounds our plans to grow our narrow body fleet and complements our widebody freight strategy,” said Yoram Allalouf, a partner at World Star.
Business-to-consumer and B2B digital sales have been growing at a double-digit clip for several years, but exploded as the pandemic spurred stay-at-home shopping. Global e-commerce sales surged 27.5% in 2020 and are expected to climb another 16.8% to $4.9 trillion, according to research firm eMarketer.
California-based AllTheResearch recently forecast that cross-border e-commerce will reach a market value of $2.3 trillion by the end of 2026, on the strength of 17.4% annual growth.
Towards that end, Emirates SkyCargo and Emirates Post, the UAE’s official postal operator, said they will work together to develop an e-commerce end-to-end logistics platform, focused on serving markets in the Middle East, Africa and West Asia. The partners will encourage e-commerce businesses to take advantage of Dubai’s central location and set up operations in the city. Nearly two-thirds of the global population can be reached within an eight-hour flight from Dubai.
(Correction: An earlier version of this story low-balled the estimated cost for a 777 passenger-to-freighter conversion at $10 million. The figure is actually more than $30 million.)