AerCap could once again play a major role in launching new conversion programs, too.
AerCap’s portfolio does not currently contain many freighters — only around 2%, according to Lindsey Webster, vice president of asset valuations at mba Aviation. In recent years, the lessor has not publicly announced large orders for passenger-to-freighter conversions. This contrasts with the lessor’s greater involvement in past programs and even new-program launches. In 2008, the company had signed on as the launch customer for a failed attempt at an A320/21 passenger-to-freighter conversion program offered by Airbus Freighter Conversions (AFC), EFW and other partners. GECAS was the launch customer for Boeing’s 737-800BCF conversion program, AEI’s 737-800SF program, and is playing a large role in the development of Israel Aerospace Industries’ 777-300ERSF.
Both lessors have large portfolios of passenger aircraft that could be suitable candidates for freighter conversion. GECAS has now secured up to around seventy 737-800BCF conversion slots with Boeing, so the proposed merger could represent a pathway for AerCap to move into freighter conversion of 737NGs. AerCap had 271 owned and managed 737NGs in its portfolio as of Dec. 31, along with 318 A320 Family aircraft, according to the company’s 2020 annual report. Around 100 737NGs and 180 A320 Family frames are scheduled to come off lease between 2021 and 2025.
“There could also be significant competition in the A321P2F space, which would drive down lease rates, if AerCap leans into GECAS’ freighter grab, but GECAS has mainly been focused on Boeing freighters,” said mba Aviation’s Webster.
There was little shock value in GECAS potentially being spun out from General Electric (GE), industry observers told Cargo Facts. A source with commercial links to AerCap, however, was surprised to see the Dublin-headquartered lessor surface as the potential suitor, while Webster said it was surprising for the deal to move forward now.
Subject to regulatory approval, GE stands to receive proceeds currently valued at more than $30 billion, including $24 billion in cash and $1 billion in AerCap notes and cash, according to an investor update from GE. GECAS’ parent would also retain a 46% stake in the combined lessor currently valued at approximately $6 billion. In exchange, GECAS will transfer $34 billion of assets, and its current purchase obligations to AerCap, creating a portfolio which today numbers more than 3,200 aircraft, engine and helicopter assets.
AerCap is no stranger to large acquisitions. In May 2014, the company completed the acquisition of ILFC from American International Group in a cash and stock deal valued at $7.6 billion.
As for lease rates, one source told Cargo Facts that the integration of the two largest lessors may have marginal impact on freighter lease rates, given that there will be one less competitor, and AerCap will occupy almost a 25% share of the overall aircraft lease market.
“There has never been a merger this large in the aircraft leasing space, with most major M&A activity happening between top twenty lessors rather than the top two,” said Webster. However, a meaningful impact on freighter lease rates is not expected because the total number of freighters in the combined portfolio remains relatively small. “Heightened interest from lessors who have parked passenger aircraft and are looking for secondary opportunities have been the biggest detriment to lease rates over the last year, which is likely to continue in the near future,” said Webster.
Amazon’s investment in ATSG reflects ‘lead operator’ status Amazon took industry observers by surprise this week when it elected to exercise cash warrants for 13.6 million shares of ATSG stock valued at $132 million. Only 866,000 shares were converted in a cashless exchange, the method which had been expected for the bulk of Amazon’s warrants with ATSG.
The transaction, subject to regulatory approval, will increase Amazon’s stake in ATSG from 4.99% to 19.5%, making the company eligible to appoint a member to ATSG’s board. According to equity analysts, this signals the relative importance Amazon places on its relationship with ATSG, compared to its other air logistics subcontractors.
ATSG has issued Amazon three tranches of warrants for the acquisition of up to 35.2 million shares since its original 2016 agreement with the e-tailer, which was widely expected to exercise these warrants as they mature — but on a cashless basis, where the shares are acquired and then immediately sold. Unlike warrants recently exercised on a cashless basis with Atlas Air Worldwide Holdings, however, Amazon is investing its own cash in ATSG.
Amazon’s cash transaction “stands in contrast to a number of its other service partners who it has utilized to build out its global logistics network,” said Jack Atkins, managing director of transportation at financial services firm Stephens, in a note to its clients.
As warrants with Atlas Air Worldwide mature under a similar arrangement, Amazon has been selling shares as it exercises vested warrants, keeping its stake in Atlas at under 5% and foregoing the right to appoint a board member.
Amazon’s willingness to hold ATSG shares reflects a more prominent role for the company in its domestic air cargo operation. “Our sense is that Amazon views ATSG as its lead operator in the United States,” Christopher Stathoulopoulos, an analyst at global trading firm Susquehanna, told Cargo Facts.
From a fleet perspective, ATSG’s affiliates Cargo Aircraft Management (CAM) and operators ABX Air and ATI lease and operate more aircraft for Amazon than its other partners. ATSG airlines are on track to operate at least forty-two 767 freighters on behalf of Amazon by the end of 2021, with all but two leased to Amazon by CAM. The number of aircraft ATSG operates on a CMI basis for Amazon could grow further if its airlines are awarded contracts to operate Amazon’s owned-freighters, which is not unexpected. “We might have a shot to fly a couple of the Amazon-owned planes,” said Quint Turner, CFO of ATSG, during the company’s recent earnings call.
Atlas, in comparison, leases nineteen 767Fs to Amazon, and operates seventeen on a CMI basis. Atlas affiliate Southern Air also operates eight 737-800BCFs on a CMI basis.
While Amazon has gradually funneled additional 767s to ATSG, Amazon transferred two 767Fs previously operated by Atlas to ATI, and has since kept the Atlas-operated 767 fleet stable.
Amazon’s stake in ATSG “speaks to the strong service that ATSG has been providing,” said Atkins.
ATSG’s core business is built around leasing and operating 767 freighters, whereas Atlas Air Worldwide has a more diversified fleet and is the largest operator of larger 747 freighters. Sun Country Airlines, Amazon’s newest CMI operator, traces its roots to low-cost passenger travel utilizing the 737-800 and currently operates twelve 737-800BCFs on Amazon’s behalf.
Amazon’s gravitation toward ATSG will not immediately impact its other service partners. The majority of Amazon’s CMI contracts do not begin to expire until 2027. Amazon leases twelve 767-200BDSFs from CAM that are operated by ATSG affiliate carriers under a deal set to expire in 2023, if a three-year option is not exercised.
Whether Amazon will further increase its stake in ATSG also remains to be seen. The majority of Amazon’s remaining 21.8 million warrants with ATSG are vested, and don’t begin to expire until 2025, so an immediate decision is not required. If exercised, Amazon’s stake in ATSG could grow to between 38% and 39.9%, analysts estimate. “It’s unclear to us whether a full-scale acquisition of ATSG makes sense while competing lessors AAWW and Sun Country remain independent,” said Stathoulopoulos.
“We view this as a positive for ATSG as it shows Amazon’s commitment to their partnership and highlights just how strategic it is for Amazon, both currently and over the long term,” said Atkins.
YTO Cargo Airlines nabs 767s, moves into widebody freighters Hangzhou-based YTO Cargo Airlines has acquired a pair of sister 767-300ERs (33423 and 33424, ex-Air Canada) and will have them converted to freighter configuration by Israel Aerospace Industries (IAI) [FATs 006023-6026].
The freighter redeliveries are expected by the third quarter this year, YTO confirmed to Cargo Facts. Once the twenty-four-pallet-capacity freighters enter service with YTO Cargo, the carrier will become only the second China-based operator of 767 freighters, joining SF Airlines.
According to Aircraft Asset Management (AAM), which managed the transition of unit 33423 from Air Canada to YTO, the 767 will depart Marana (MZJ) in late March for conversion with IAI. AAM kicked off the transition around January this year, and conducted a review of the digital records as well as physical inspections at MZJ. AAM told Cargo Facts that it also expects to complete the transition for unit 33424 by the end of March.
Both frames were manufactured in 2003, and joined Air Canada in 2011 from Hawaiian Airlines, and were then transferred to Air Canada’s Rouge subsidiary. Both are fitted with winglets and equipped with Pratt & Whitney’s PW4060 engine.
For now, YTO’s active fleet consists of three 737-300Fs and five 757-200Fs. The airline removed three 737-300Fs toward the end of 2020; one (27520) went to affiliate Northwestern Cargo International Airlines, while two (24902 and 24916) were acquired by Serve Air Cargo in the Democratic Republic of Congo.
YTO was a launch customer for Boeing’s 737-800BCF conversion program and has orders for ten conversions, with options for up to ten more. While YTO had originally intended to start adding 737-800BCFs by 2020, the lack of affordable feedstock delayed the carrier’s progress.
As early as 2016, Bruce Li, chief executive of YTO Cargo Airlines, told Cargo Facts the carrier had a long-term requirement for freighter-converted 767s. Since then, 767-300ER conversion feedstock has remained a hot commodity, with Amazon, Cargo Aircraft Management, DHL Express and SF Express securing the majority of the frames coming out of passenger service.
Alibaba increased its stake in YTO Express from 10.5% to 22.5% with a $970 million investment in September 2020, with the objective of supporting international expansion, according to our affiliate publication, Air Cargo World.
In parallel with YTO’s fleet expansion, parent YTO Express is constructing a new air hub at Jiaxing Airport (JXS). Once completed, the airport will assume Hangzhou Xiaoshan (HGH) Airport’s current role as the main domestic hub for YTO Cargo Airlines.
Icelandair 767 sale-leaseback deal grows Titan-Bain JV portfolio Icelandair Group and Titan Aircraft Investments (TAI), the joint venture between Titan Aviation Holdings and Bain Capital Credit, have signed a deal for the sale, conversion and leaseback of two 767-300ERs [FATs 006027-6032].
This deal represents the second major deal for TAI, which acquired a 777F from Atlas in November 2020 and dry leased it back to the group for an eight-year term.
The 767s will be converted next spring, with redelivery estimated for September 2022. Icelandair confirmed to Cargo Facts that the two 767s will be converted by Boeing; one aircraft will be from Icelandair’s current fleet and the other will come from the wider group — the Loftleidir subsidiary that owns two 767-300ERs (25365 and 30341) currently leased to Papua New Guinea-based Air Niugini. Icelandair itself operates four 767-300ERs (26971, 28745, 29388 and 30586), one of which (30586) is leased from GECAS.
With an initial lease term of ten years each, the two newly converted 767 freighters are to replace Icelandair’s two current 757-200Fs, the oldest in the fleet at around thirty-one years old.
The agreement between Icelandair and TAI closely resembles Air Canada’s recent deal with Air Transport Services Group (ATSG), under which ATSG will purchase two 767-300ERs from Air Canada, convert them with Israel Aerospace Industries (IAI) and lease them back to the carrier.
Icelandair had previously told Cargo Facts that its two 757Fs would come off lease in 2023 and 2024. One (24456, ex-Challenge Air Cargo) was delivered as a freighter by Boeing in 1989, while the other (24739) was converted by Precision Aircraft Solutions in 2006.
The carrier said it has not made any decisions on converting any more of its passenger 757-200s — currently ranging from around nineteen to thirty years old — and will continue to monitor market developments to see how passenger operations develop after the pandemic before making further decisions.
Last year, Icelandair reconfigured all four 767-300ERs and two 757-300s for cargo by removing seats from their passenger cabins.
Bogi Nils Bogason, president and CEO of Icelandair Group, said in a release that the 767 freighters will allow the carrier to “maximize new opportunities” and strengthen the Keflavik (KEF) hub. Early last year, Icelandair began carrying all FedEx Express shipments to and from Iceland under a three-year deal.
Memphis Airport surpasses Hong Kong in 2020 cargo throughput FedEx’s Memphis International Airport (MEM) hub has dethroned Hong Kong International (HKG), the longtime largest cargo airport, in terms of 2020 cargo throughput, thanks to MEM's reliance on dedicated freighters.
MEM’s cargo handle in 2020 increased to 4.61 million tonnes in 2020, according to preliminary figures released by Airports Council International during a webinar this week. The 2020 figures represent a 6.7% increase in throughput from 2019 at MEM.
Hubs that typically see substantial cargo volumes moving in the bellies of passenger aircraft, like HKG, were at a disadvantage while passenger traffic remains low, according to ACI. ACI’s current forecast does not expect international passenger traffic to recover to 2019 levels until 2024.
FedEx has not yet released its full 2020 calendar year results, but in its FY2021 Q2 earnings report through Nov. 30, the express operator reported that average daily package volumes in its Express unit increased by 8% for the six months ended Nov. 30. FedEx also attributed the strong 2020 package volumes to an increase in e-commerce that it projected will continue in the years ahead.
HKG, meanwhile, faced headwinds even before the pandemic began due to political unrest in Hong Kong and the negative impact of the trade war between the U.S. and China on Hong Kong-based Cathay Pacific Cargo. The carrier, which implemented mass cuts to passenger capacity, reported its worst-ever financial results for a loss of 21.6 billion Hong Kong dollars (US$2.8 billion) in its 2020 earnings report released earlier this week.
The outlook for HKG to rebound and reclaim the top spot in 2021’s rankings is also unlikely. Cathay Pacific forecasts a challenging 2021 ahead, stating, “We expect to operate at well below a quarter of pre-pandemic passenger flight capacity in the first half of 2021 with improvement in the second half of the year.” Even with Cathay’s freighter fleet operating at full capacity, the loss of belly space on passenger aircraft caused a 35.5% year-over-year drop in available capacity in 2020.
Recent freighter aircraft transactions UPS took delivery of a 747-8F (65781) from Boeing. The aircraft was ferried from Everett (PAE) to Louisville (SDF) [FAT 006034].
CMA CGM placed two A330-200Fs with Air Belgium for CMI operation (1594 and 1584, both ex-Qatar Airways)[FATs 006038-6039].
Cargo Aircraft Management inducted for conversion a 767-300ER (29604, ex-American Airlines). The aircraft was ferried to Tel Aviv (TLV) to be converted by Israel Aerospace Industries (IAI) [FAT 006018].
CAM also acquired a 767-300ER (32975, ex-ANA) [FAT 006036].
Amazon placed a 767-300BDSF (27448, ex-American Airlines) with Air Transport International (ATI) for CMI operation [FAT 006033].
Air Canada ferried a 767-300ER (24306) to TLV, ahead of conversion with IAI under a sale-leaseback deal with CAM [FAT 006035].
ASL Aviation Holdings took redelivery of two 737-800BCFs (33596 and 34178, both ex-Ryanair). The first aircraft will soon enter service with K-Mile Air [FAT 006037], while the second was ferried from Jinan (TNA) to Shannon (SNN) to be painted and will be placed with ASL Airlines France [FAT 006020].
S7 Airlines took redelivery of its second 737-800BCF (29939, ex-Ryanair), on lease from GECAS. The aircraft was ferried from Shanghai (PVG) to Ostrava (OSR) for maintenance [FATs 006021-6022].
