Vietnam Airlines to start cargo unit and convert jets to freighter

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Vietnam Airlines plans to send second-hand passenger planes to Air Transport Services Group for conversion into freighter planes as it prepares to establish a freighter division and further capture intra-Asian freight growth, it said. revealed the US-based company on Friday.

The small business is remarkable on two levels. It’s another example of passenger airlines acting more aggressively to take advantage of cargo opportunities triggered by the pandemic. And it reinforces how ATSG, the largest cargo aircraft lessor, is rapidly expanding its customer base beyond US shores due to demand from express delivery providers with strong e-commerce activity.

Vietnam Airlines will retire two narrow-body Airbus A321s from its passenger fleet and sell them to Air Transport Services Group (NASDAQ: ATSG), which will send them to a specialized facility to transform them into pure freighters capable of carrying large containers on the main deck. Once the modifications are complete, the ATSG will lease the planes to Vietnam Airlines, CEO Rich Corrado said during the company’s earnings call with analysts.

The sale-leaseback agreement is similar to last year’s between Air Canada and ATSG’s leasing arm, Cargo Aircraft Management. Air Canada is also building an all-cargo airline from scratch, initially using eight Boeing 767 medium wide-body aircraft that it retired from passenger service. CAM purchased the first two planes, contracted the modernization work to Israel Aircraft Industries and leased the planes to Air Canada. These 767 converted freighters entered service in the past eight months.

For Vietnam Airlines reconfigurations, ATSG will use a government-certified design and installation kit developed by a joint venture between ATSG and Precision Aircraft Solutions in Beaverton, Oregon. The company has five production lines in the United States and China operated by cell reviewers, but no decision on a conversion site has yet been made, according to ATSG spokesman Kym Parks.

ATSG will likely deliver the A321s to Vietnam Airlines in 2023, said ATSG Chief Commercial Officer Mike Berger.

New Combined Carriers

More and more passenger airlines are realizing the value of dedicated cargo transportation after successfully operating cargo-only passenger flights during the pandemic when travel has shrunk. Freighters allow them to capture more business and diversify their income as the demand for transport increases. Other airlines that have recently become combination carriers include WestJet in Canada, Indigo in India and Gol in Brazil.

“Some of these passenger carriers. . . when they faced the pandemic, they had to reduce a number of resources, but they could have remained more effectively engaged on the freight side if they had freighters,” Corrado said. “And so they now want to enter the cargo market. And we have been the beneficiaries.

The deal with Vietnam Airlines underscores how ATSG is extending its international reach by expanding its fleet beyond Boeing 767 freighters.

Wilmington, Ohio-based ATSG, which also operates two cargo airlines and one charter passenger airline, currently has 121 planes in service, including 103 freighters. It posted adjusted operating profit of $158 million in the second quarter, a 23% gain over the same period last year.

Of the 10 new aircraft scheduled for placement this year, eight are for customers in Asia, Europe and Canada that are expanding their networks to support e-commerce execution. The majority of ATSG’s lease deliveries in 2023 will also be directed overseas, Corrado told analysts.

Many of the new international contracts are for Airbus aircraft that the ATSG is adopting for the first time. Dublin-based ASL Aviation Holdings, which owns several airlines that fly Amazon (NASDAQ: AMZN) and integrated transportation providers such as FedEx (NYSE: FDX) and DHL, is set to receive the first two A321-200 narrow-body freighters from ATSG before the end of the year.

The converted A321 freighter is a new aircraft type that has only been on the market for two years. It is rapidly gaining adherents as a formidable competitor to the Boeing 737-800 and replacing older 757s in the standard body segment. Elbe Flugzeugwerke (EFW), a subsidiary of Airbus, also has a program to convert the passenger A321 into freighter and a year ahead of sales.

CAM subcontracts ASL retrofit work to Pemco, a sister overhaul company and one of the facilities used by the 321 Precision Conversions joint venture.

The lessor plans to convert and lease at least three more A321s next year. Malaysia-based Raya Airways, which operates in the Asia-Pacific region, has secured two of the upcoming conversion slots.

ASL has also ordered two wide-body Airbus A330-300s, comparable to the 767. ATSG says it has customer orders for the first 20 of 29 A330s it will begin converting next year and delivering in 2024. The A330 conversions are outsourced to EFW.

ATSG, which primarily uses its cash flow to fund its substantial growth, holds options to purchase more A330, 767-300 and A321 passenger aircraft as feedstock for freighter conversions.

Resilient e-commerce business

E-commerce continues to be a huge tailwind for ATSG and other freight carriers aligned with the express parcel industry.

“Consumers still prefer to shop online and not just for convenience. They also look for lower prices which they often find online to stretch their own budgets to cover inflation. We remain direct beneficiaries of the fast delivery that online shopping demands, and we will continue to reinvest the majority of our strong cash flow to meet this demand,” Corrado said.

His comments echoed those of Cargojet executive Ajay Virmani, who said a week earlier that consumers could lose value but did not reduce the amount of goods purchased.

Cross-border e-commerce is particularly robust, as evidenced by the international double-digit growth in the most recent earnings of FedEx and UPS.

Berger of the ATSG noted that e-commerce is still in its infancy in many major economies and has a huge upside.

Online sales in Brazil, for example, represent only 5% of total retail sales. The ratio in India is below 10%. And in Mexico, e-commerce accounts for 11% of total retail sales, compared to more than 14% in the United States and nearly 20% for the global share, according to the US Census Bureau and other research.

Forecasts indicate that by 2025, the online segment will account for almost a quarter of total global retail sales

“So the engine is still excellent as we look ahead to the next few years,” the commercial director said. “We have everything in place with diversification in terms of conversion houses as well as raw materials to meet this customer demand.”

Despite uncertain economic conditions and easing consumer spending, analysts agree with management that investment in more equipment is weak because the bulk of business comes from express carriers or contractors, who run daily commuter networks with fixed-term usage requirements and commitments, regardless of whether volumes soften. ATSG has minimal exposure to general airfreight, which tends to be more cyclical and challenging for carriers that rely on short-term charters.

The airline services conglomerate has depots for most of the 18 freighters it plans to deploy in 2023 and long-standing customer commitments for the others. Of the more than 80 passenger-to-cargo conversion slots that CAM holds for production from 2022 to 2026, more than 50 are already reserved by customers.

“We haven’t seen any weakness in demand at all. We’ve talked at length about the backlog not only for this year but also for the years to come. And we haven’t seen any indication from none of our existing customers indicating there was any hesitation,” Berger said. “In fact, all of them communicated quite clearly that if it was possible to get the new plane, the new deliveries sooner, they would definitely.”

Boeing (NYSE: BA) and Airbus last month slightly raised their 20-year outlook for the cargo market. Boeing projects that the global freighter fleet will be 80% larger in 2041 than today and the market will grow at a solid compound annual rate of 4.1%. Airbus’ overall estimate of 3.2% demand growth was lower, but it said express cargo would grow at a rate of 4.7% and the express share of global cargo volume would drop. 17% to 25% before the pandemic.

Berger noted that two-thirds of freight fleet growth will come from the top five integrators – Amazon, DHL, FedEx, UPS (NYSE: UPS) and SF Express — and partners who complement their regional networks.

“Either these people are our direct customers or they are our customers’ customers,” he said. “We are extremely optimistic about this and we are certainly ready to supply raw materials to meet this demand.”

If demand or growth wanes, the ATSG could forgo acquiring aircraft and use the money for stock buybacks or other activities, executives said.

Click here for more FreightWaves/American Shipper stories by Eric Kulisch.

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