Birth of a Niche: How small freighters can create big cargo opportunities

Bob Convey had just finished booking two more orders for Aeronautical Engineers Inc. (AEI)’s CRJ200 freighter conversion when Air Cargo World rang to talk about the aircraft conversion house’s come-from-behind success story. “We always launch these programs based on a combination of gut feeling and industry knowledge and research,” the senior vice president of sales and marketing explained. And when AEI launched the CRJ200 conversion program in 2013, the industry consensus was that the aircraft was dead in the water. “We got a lot of questions about the CRJ200 from people who thought it was an odd choice,” Convey recalled. “Others said that it would never work.” But Convey and his colleagues pushed on, and shortly after the first press releases went out, the feedback turned positive. Then, the letters of intent started to arrive. “The ‘a-ha’ moment was when AEI quickly racked up 35 letters of intent,” Convey said. “When we started announcing those orders, we got a lot of ‘Are you kidding me?’” But, AEI wasn’t kidding, and over the subsequent months, the orders kept arriving and the company now says it has 54 firm orders and commitments, with more in the works. AEI’s experience stands as a reminder that conditions and accepted wisdom can change fast in this industry, and that the experts aren’t always right. Conventional wisdom also says that freight forwarders and integrators don’t care about planes – that market niches determine the necessary aircraft configurations, not the other way around. But in the case of AEI’s CRJ200 conversion program, the uniqueness of the resulting small freighters – with a longer range, a large door, a faster speed and a decent feedstock for conversions – actually helped forwarders discover a hidden air cargo niche, just waiting for the right kind of plane to come along. [caption id="attachment_20378" align="alignright" width="698"] Interior of passenger-to-freighter converted CRJ200.[/caption] Proving its metal The passenger CRJ200 program was part of Bombardier’s Canadian Regional Jets program, which was launched in 1989 and saw the 200 version enter into service six years later. The program was a commercial success, thanks to the aircraft’s ability to connect regional airports at jet speed, outpacing its turboprop competition. Back then, props ruled the regional skies, and airlines snapped up the regional jet to the tune of around 2,000 total orders. Some passengers groused about the aircraft’s cramped cabin, pilots complained about its sluggish climb rate, but carriers loved the CRJ200’s economics and opened their check books. But every aircraft has a life span, and, as the CRJ200s aged, carriers began moving towards newer and larger regional jets. Bombardier was faced with the challenge of enhancing the value of the 200s that were being retired. Adding a second life to passenger aircraft lowers the costs of upgrading. The most common route is freighter conversions, but while a handful of CRJ200s had been converted to bulk-load configuration, there wasn’t a precedent for converting smaller jets such as the CRJ200 [pictured] to full freighter configuration – that is, a freighter with a large cargo door and an efficient cargo loading system. When Bombardier first approached AEI about the project, the conversion company was of the same mindset as many of its later skeptics. It was hard to envision sufficient demand for such a product to justify a full program. Eventually, AEI and Bombardier agreed to jointly study a conversion program, but by the end of the initial phase, Bombardier had stepped back, leaving it mostly in AEI’s hands. The launch customer for AEI’s CRJ200 conversion program was U.S.-based IFL Group – a Part 135 and Part 121 carrier that flies throughout North and Central America, the Caribbean and South America. Their line of work often entails flying over bad weather and on long charter routes. CRJ aircraft have “made their mark” in the highly-competitive regional airline secetor, said IFL’s president Michael Church in advance of the first delivery. “We’re confident that will continue in our air freight business.” The first conversion has not yet been added to IFL Group’s certificate, but the carrier has already taken redelivery of its second. According to our sister publication, Cargo Facts , IFL plans to add two more CRJ200 freighters in the near future. “The hunt for the CRJ started when we were looking for a ‘bridge airplane’ that would take us between the end of the 737-400 conversions and the beginning of the 737-800s,” Convey explained. “The proposed CRJ200 conversion program was simply a filler to keep the AEI’s conversion lines going.” But well before AEI was doing its homework, Cascade Aerospace had already introduced a CRJ200 “package freighter” that lacked the AEI conversion’s larger door, but nonetheless pointed to the aircraft’s potential as a freighter. First introduced into service in 2006 by West Atlantic (then known as West Air Sweden), the Cascade E-Class conversion featured vertical nets to restrain the cargo and utilized the existing passenger and cargo doors. West Atlantic added the CRJ freighters to its fleet for a very specific customer: Norway Post – the postal service of Norway. “A lot of our business is centered around the transport of mail, and our clients move their mail in trolleys that look like the trolleys that supermarkets use to stock their shelves,” explained the carrier’s chief commercial officer, Russell Ladkin. The trolleys are about 1.5 feet in length, and 1.5 feet wide, and up to five feet tall. “We didn’t need a large cargo door to move our customer’s product,” he said. This worked well with the CRJ because, at three feet wide, the CRJ200 door can accommodate a 31.50-inch × 47.24-inch euro-pallet. What Norway Post needed most was speed and range, and that’s exactly what the CRJ200 offered over the BAe ATP turboprop freighters already in the West Atlantic fleet. Since most European routes are too short to necessitate jet speed, demand was limited, but those initial acquisitions were an indication of the aircraft’s utility. Unlike most of Europe, Norway has un uncompromising geography with outposts separated by thousands of kilometers. West Atlantic flies from Oslo to Tromsø, near the northern tip of the country, traversing “lots of ugly geography in between,” Ladkin explained. “We even go on into a place called Svalbard which is the northernmost mainstream settlement in the world; it’s in the Arctic Circle. The CRJ was really the only airplane that could do that.” His experience with Cascade’s package freighter version has convinced Ladkin that AEI’s CRJ200 conversion would be successful across emerging markets where cities are often far apart, and infrastructure is minimal. “When I do the economics on a CRJ, it’s really no more expensive than an ATR on anything over 400 miles, and you get that jet speed which is very useful over longer distances,” he said. However, he cautioned that Europe isn’t “ideal CRJ territory.” Ultimately, Cascade’s CRJ package freighter conversion has failed to catch on. Only nine have been delivered to date, including three to West Atlantic, suggesting that it isn’t enough to simply take out the seats and install nets. [caption id="attachment_20376" align="alignright" width="698"] View of larger door installed by Aeronautical Engineers,Inc. (AEI) in a converted CRJ200 freighter.[/caption] Are you converted? So, what was it about AEI’s large-door conversions that made the difference, compared to Cascade’s CRJs? In a word, flexibility. To hear Convey tell it, integrators and other carriers like being able to carry whatever they want. With its smaller door, a package freighter will eventually preclude freight over a certain size. “The words ‘not going’ are death for a package company like FedEx or UPS,” Convey explained. “They don’t like to leave anything behind.” Those integrators have proven critical to the program’s surge in orders. AEI estimates that around 60 percent of its customers are integrators, with the other 40 percent representing general freight and automotive. IFL flies Convair 580s out of Miami into the Caribbean region every night, and the CRJ200 is expected to replace that airplane on the longer routes, as they have similar payloads. Convey said that AEI will also deliver conversions to a customer in Europe that’s planning on using it for UPS, “flying some of the northern feeder routes that the integrators won’t operate directly.” Other customers fly automotive and on-demand, general charter flights, special missions, African routes and routes from South Africa into northern countries. In all cases, Convey says, they chose the CRJ200 for its speed and reliability. It’s worth considering the CRJ200 conversion in the context of its competitors, which is a complicated interaction of economics and engineering. For starters, the CRJ200 is much smaller than its jet competition, placing it in competition with turboprop aircraft. Against the ATR-42F, a popular turboprop freighter of comparable size, AEI’s CRJ200 conversion has a 1.1-tonne payload advantage (6.7 tonnes), and a 650-nautical-mile range advantage (1,100 nautical miles). It also offers the considerable advantage of a large door. The larger ATR-72F has a higher payload capacity, and is available with a similarly large cargo door, but its rage, at just 500 nautical miles, cannot match that of the CRJ. Then there’s the fact that hundreds of CRJ200s are now entering the twilight of their passenger years, which drives down acquisition costs. According to aviation consultants Avitas, the average cost of a post-passenger CRJ200 is US$2 million – about $1 million less than an ATR-72. Then there’s the conversion cost itself: $1.85 million each. All things considered, the CRJ200 is about half the price of an ATR-72, but the engines are critical. The jet’s CF-34 engines are expensive and hard to find. “You are seeing prices between two and three million dollars for these things,” Convey said. But, with only about 50 percent of the fleet still flying passengers, there are still hundreds of used airplanes out there, and hundreds coming off lease or out of service. Compared to the ATR freighters, it’s all about speed. The ATR’s niche is for routes under 500 miles, where speed is not a major concern. The ATRs are cheaper to fly – but more expensive to buy. However, for flights from 500 to 1,000-plus miles, the CRJ, which doesn’t need to stop to refuel, helps with cutoff times. That, Convey explained, “helps with weather by flying further, higher, faster – like Super Man.” What’s next? At this point, demand is outpacing production capability, and Convey expects that, by 2018, AEI will be converting up to 15 CRJ freighters per year. By 2019, if everything else remains constant, that could rise to 20 per year, with AEI eventually converting between 150 and 200 units. Even if Convey is overoptimistic in his estimates, the growth of the program speaks to the importance of thinking outside the box in an industry that is profoundly risk-averse. At this point it’s also safe to make two assumptions. Firstly, that demand for airfreight products is neither static nor predictable. Factors such as e-commerce, supply-chain evolution, and the pilot shortage, to name a few, will continue to impact the size of aircraft and the frequency of routes for years to come. The CRJ200 is an example of this unpredictability. That leads to the second takeaway: The experts aren’t always right. Follow your gut, but do your homework.

Birth of a Niche: How small freighters can create big cargo opportunities

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