A Slim Fit: E-commerce and the narrowbody conversion boom

Express workhorses

While there is a need for replacement of older freighters, Bob Convey, senior vice president of sales and marketing for AEI, said the replacement market is “minimal” compared with the demand for new conversions in the global express fleets. Companies such as DHL, UPS and FedEx are responsible for about 75 to 80 percent of narrowbody conversion orders, he said.

The rapid growth of the middle class, worldwide, is driving much of this express demand, said George Fedeanis, director of sales for aviation MRO PEMCO World Air Services. Numbering roughly 2.2 billion people today, the global middle class, he said, is expected to reach about 5.5 billion people over the next 20 years – people who will have more money to spend on online purchases with the expectation of express delivery. What’s different about the rising middle class in places like China, India, Brazil and many emerging nations in Africa is that infrastructure improvements, such as modern highways, are not keeping up with the pace of wealth, forcing companies to ship more products by air than is the case in Europe or North America.

As with most aviation trends these days, much of the narrowbody boom is led by China, which recently passed the United States in e-commerce sales revenue. China’s Alibaba online retail empire leads the world in sales dollars spent per second, so it’s no surprise that the country’s consumers have developed an “I want it now” mentality. To cater to this need, domestic Chinese couriers such as YTO Express, China Post and SF Express have launched their own airlines and are seeking converted narrowbodies at a rapid clip, with some demand estimates as high as 1,000 freighters in the next 10 years. “They’re not just replacing old planes, this is real growth,” McCarthy said. “It’s just exploding over there.”

For many years, the coastal cities and factories along China’s Eastern Seaboard were the main hives of activity for intra-China express service. Today, however, as companies seek cheaper land and labor, they are moving their factories much farther inland, to the central and western provinces. Because of the remoteness of these locations, the 757 is gaining in popularity, as it can cross the vast interior of the country with fewer stops than a 737F requires. “The 757 will be the racehorse until they can get more air hubs set up in the western part of the country,” McCarthy added.

While China is expected to continue to be a thriving P-to-F market, Steve Rimmer, CEO of aircraft lessor Guggenheim Aviation Partners, cautioned that China may show a slight preference toward conversion programs run by the original equipment manufacturer (OEM). For many years, he said, Boeing had helped instill an attitude in China that older planes weren’t a good investment. “As a result there is an in-built reluctance about non-OEM products,” he said. “It doesn’t mean that conversions won’t be a big market, but it’s a factor. With China, it’s always ‘be careful what you wish for.’”