Turboprop freighter aircraft: Cebu Pacific becomes first cargo LCC

Summary

• Cebu Pacific plans to convert at least two ATR 72-500s from passenger aircraft to freighters.
• Cebu Pacific will become only the second ATR 72-500 freighter operator globally and the first operator in Asia of any ATR freighter variant.
• Cebu Pacific will also become the first LCC globally to operate freighters - of any type.
• ATR is projecting rapid growth in its freighter fleet following the launch of the ATR 72-600F programme and a more active conversion market.
• There are currently more than 500 large turboprops freighters in service, but only 100 are ATRs.

ATR 72 freighters boost Cebu Pacific's already strong cargo position

In early Jul-2018 Cebu Pacific announced an agreement with Switzerland-based IPR Conversions to convert two of its ATR 72-500 passenger aircraft to freighters. The aircraft are currently in France, where they are being converted by MRO provider Sabena Technics, and are slated to be redelivered to Cebu Pacific in 4Q2018.

The ATR 72 freighters will significantly improve Cebu Pacific's position in the domestic Philippines cargo market as the airline will be able to transport LD3 containers to regional airports. Cebu Pacific already has a large domestic and international cargo operation, using the bellies of its narrowbody and widebody fleets. However, it is not currently able to provide a cargo service to smaller airports in the Philippines because ATR 72 passenger aircraft have limited cargo capacity.

Cebu Pacific already has approximately a 50% share of the domestic cargo market in the Philippines, which will grow further as it adds ATR 72 freighters.

Cebu Pacific cargo revenue contribution to grow further

Cebu Pacific's cargo revenues are also expected to grow significantly as it adds turboprop freighters and palletised A321s. The group generated PHP4.6 billion (USD86 million) in cargo revenues in 2017, which represented a 29% increase compared to 2017.

Cargo accounted for 6.8% of revenues at Cebu Pacific Group in 2017. The group's cargo revenue contribution has consistently been 6% or higher for the past decade - even before it introduced widebody aircraft.

See related report: Cargo and LCCs: Cebu Pacific case study shows cargo can pay

Cebu Pacific has the highest cargo contribution figure among all publicly traded LCCs. It is currently generating a higher proportion of cargo revenues than LCCs operating larger proportions of widebodies - and even LCCs operating all-widebody fleets (such as AirAsia X).

Cebu Pacific Group cargo revenues contribution (% of total revenue): 2009 to 1Q2018

2009	2010	2011	2012	2013	2014	2015	2016	2017	1Q2018
7.2%	7.2%	6.5%	6.3%	6.4%	6.1%	6.2%	5.8%	6.8%	7.0%

Source: CAPA - Centre for Aviation and company reports.

Palletised A321s will also drive increase in cargo revenues

Cebu Pacific currently operates eight A330-300s. Until earlier this year these were the only aircraft in its fleet carrying pallets.

Cebu Pacific took delivery of its first palletised narrowbody in Mar-2018, when it added its first A321ceo, then taking another four A321ceos with palletised floors in 2Q2018, and the airline is slated to take a final two A321ceos by the end of 3Q2018.

Airbus offers palletised floors as an option on A320 family aircraft. However, it is very unusual for an LCC to take the option.

The palletised A321s have been very successful for Cebu Pacific in the first four months, exceeding expectations in terms of cargo volume and yield. Cebu Pacific has also not had to sacrifice turnaround times, an important component of the LCC model, to accommodate LD3 containers.

LCCs often only carry parcels and are reluctant to carry heavier cargo, fearing it will impact turnaround times. However, Cebu Pacific has been able to achieve 30min to 35min turnaround times on the palletised A321s since they were introduced.

Majority of Cebu Pacific fleet to be capable of carrying pallets by 2022

Cebu Pacific has also opted for palletised floors on it is future A321neo fleet. The group has 32 A321neos on order, which will mainly be used to replace A320ceos that do not have palletised floors, and those are for delivery from late 2018 to 2022.

IPT offers palletised floors as an option on its ATR passenger-to-freighter conversion programme. The ability to carry pallets was a key driver in Cebu Pacific's decision to convert ATR 72-500s as the IPT conversion enables Cebu Pacific to transfer LD3s directly between A330s, A321s and the converted ATR 72s.

Cebu Pacific's five-year fleet plan now includes 49 aircraft by the end of 2022 capable of carrying pallets - consisting of seven A321ceos, 32 A320ceos, eight A330-300s and two ATR 72-500 converted freighters. This compares to only eight aircraft capable of carrying pallets (the A330-300s) at the beginning of the five-year plan in Jan-2018.

By the end of 2022, Cebu Pacific plans to have just 34 aircraft capable of only carrying loose cargo - 18 A320ceos and 16 ATR 72-600s. Cebu Pacific will still need to break up cargo when transferring cargo to flights operated by A320s, but as the A320 fleet is reduced a majority of its aircraft will be able to carry pallets.

Cebgo to operate the ATR 72 freighters

Cebu Pacific's regional subsidiary Cebgo operates the group's ATR 72 passenger fleet and will operate the new fleet of ATR 72 converted freighters.

Cebgo currently operates 16 passenger aircraft, consisting of 10 ATR 72-600s and six ATR 72-500s. Cebu Pacific mainline currently operates 41 A320 family aircraft and eight A330-300s, according to the CAPA Fleet Database.

Cebu Pacific Group fleet: as of 16-Jul-2018

Aircraft	In service	In storage	On order
Airbus A320-200	36	0	0
Airbus A321-200	5	0	2
Airbus A321-200neo	0	0	32
Airbus A330-300E	8	0	0
ATR 72-500	6	2	0
ATR 72-600	10	0	6
Total:	65	2	40

Source: CAPA Fleet Database.

Cebgo's six remaining ATR 72-500s are slated to be phased out as a final six ATR 72-600s are delivered. Cebgo so far has removed two ATR 72-500s from service - these aircraft are now in France undergoing cargo conversion.

The group was initially planning to sell its eight ATR 72-500s, which are all owned. Cebu Pacific was close to selling some of its ATR 72-500s in 2017, but was unable to complete any deals.

Cebu Pacific has been impacted by declining values for secondhand ATR 72-500s, and its inability to sell aircraft at book value (it would have had to take a hit) partially contributed to the decision to pursue freighter conversions. Cebu Pacific believes conversions represent a good investment because the value of ATR 72-500 freighters is currently higher than the value of ATR 72-500 passenger aircraft plus the cost of the conversion.

Cebu Pacific took an initial batch of seven ATR 72-500s in 2008 and early 2009, enabling it to launch operations to small domestic airstrips such as Caticlan. An eighth ATR 72-500 was added in 2011. The current market value of the seven ATR 72-500s that were delivered in 2008 and early 2009 is USD7 million to USD8 million, while the aircraft delivered in 2011 has a slightly higher value of USD8 million to USD9 million, according to the CAPA Fleet Database.

Cebu Pacific will likely convert more than two freighters

Cebu Pacific placed orders for 16 ATR 72-600s in 2015, taking its first two ATR 72-600s in 2H2016, then followed by six aircraft in 2017 and two more in 1Q2018. The initial 10 ATR 72-600s were mainly used to grow its regional operation as Cebgo has so far only removed the two ATR 72-500s that are being converted to freighters.

The last ATR 72-600 is now slated to be delivered in 2022, but Cebu Pacific has been aiming to phasing out its ATR 72-500 passenger fleet by the end of 2018. Under the current fleet plan, the group plans to operate a smaller passenger turboprop fleet of 12 to 14 aircraft for around three years before returning to the current 16 aircraft level in 2022.

Cebu Pacific could still potentially sell the remaining six ATR 72-500s, but more cargo conversions are likely. The group could end up with as many as eight ATR 72-500 freighters, which would boost the total number of palletised aircraft in its fleet to 55.

The current commitment for two conversions is indicative of Cebu Pacific's typical conservative and flexible fleet strategy. Once the first ATR 72-500 freighter is in service, the airline will assess how it is performing and decide on additional conversions.

Cebu Pacific expects strong demand for turboprop freighters

Cebu Pacific believes there is a potential market to support more than two turboprop freighters. Two freighters will not give it nearly enough capacity to build out a regional cargo network fully.

Cebu Pacific plans to use the new turboprop fleet on a mix of domestic trunk and regional routes. On the trunk routes it will supplement A320 passenger aircraft. Given the small size of the A321 fleet, Cebu Pacific is still mainly using non-palletised A320s on trunk routes, and by using the turboprop freighters it will be able to move LD3 containers to more jet-capable domestic airports.

Cebu Pacific also plans to operate the ATR 72-500 freighters to several airports it now only serves with passenger ATR 72s. It has virtually no cargo capacity in these markets currently because its passenger ATR 72s are generally already at full payload with passengers and bags.

Cebu Pacific serves several smaller airports in the Philippines that cannot accommodate jets. Some of these markets have cargo demand, including demand for high yield perishable cargo.

Cebu Pacific also expects to operate the ATR 72-500 freighters to some regional destinations it does not serve at all with passenger aircraft. There are approximately 30 airports in the Philippines that do not have long enough runways for narrowbody jets; although Cebgo serves a majority of these airports, there are several it does not serve. Cebu Pacific expects the ATR 72-500 freighter to carry 7 to 8 tonnes into airports that have runways shorter than 1200m.

Cebu Pacific to offer ATR 72 freighter charters regionally

Cebu Pacific will also offer its new fleet of ATR 72 freighters for charters.

It has already received several expressions of interest for potential charters and capacity commitments. Cebu Pacific expects to support the oil, gas and mining industries in the Philippines - particularly when there is a need to fly heavy cargo into short airstrips.

Demand for regional aircraft cargo charters is growing rapidly in the Philippines and Southeast Asia overall. However, supply is very limited. There are currently only 10 turboprop freighters operating in all of Southeast Asia, according to the CAPA Fleet Database.

Cebu Pacific has the opportunity to develop a significant regional cargo business should it be interested in converting more freighters and operating outside the Philippines. Open skies in ASEAN will enable Cebu Pacific to operate freighters anywhere within Southeast Asia if there is demand.

Cebu Pacific to become first LCC operating freighters

Cebu Pacific will become the first ATR freighter operator in Southeast Asia. It will also become the first LCC globally to operate freighters - of any type.

There are approximately 3,000 freighters in active commercial service. None of these freighters are operated by an airline following an LCC model, according to the CAPA Fleet Database.

Approximately two thirds, or 2,000, of these aircraft are operated by dedicated cargo airlines. Of the remaining 1,000 freighters, nearly 600 are operated by airlines following a charter business model. There are also approximately 250 freighters operated by full service network airlines and 150 freighters operated by airlines following the (full service) regional model.

Cebu Pacific to become first ATR freighter operator in Asia

There are currently 102 ATR freighters in operation, according to the CAPA Fleet Database. Slightly over half or 53 of these freighters are operated by cargo airlines, 30 are operated by airlines following charter models and 19 are operated by airlines following regional models.

Cebu Pacific will be the first operator of an ATR freighter in Asia. Nearly the entire ATR freighter fleet is in Europe and North America. There are also a small number of ATR freighters in Latin America, Africa and the Southwest Pacific (Australia).

ATR freighter fleet by operator region: as of Jul-2018

Europe	North America	Africa	Latin America	Southwest Pacific
45	42	8	5	2

Source: CAPA Fleet Database.

There are approximately 550 large turboprops in operation and nearly 700 small turboprops. ATR therefore has less than 20% market share in the large turboprop segment. ATR is the largest player among Western manufacturers.

Large turboprop freighters in service, by original manufacturer: Jul-2018

Rank	Manufacturer	Number of aircraft
1	Antonov	193
2	ATR	102
3	Short	61
4	Saab	37
5	BAe	31
6	Lockheed	30
7	Fokker	23
8	Hawker Siddeley	14
9	Bombardier	7
	Others	48

Source: CAPA Fleet Database.

ATR expects rapid growth in cargo segment

ATR expects huge growth in the global turboprop freighter fleet. The company recently released its 20-year market forecast, which projects the delivery of 460 turboprop freighters by 2028. This includes a mix of converted and factory built freighters.

In late 2017 ATR launched the ATR 72-600F with an order for 30 aircraft from FedEx. The ATR 72-600F represents the first time ATR has offered a production freighter.

ATR is confident that the new freighter variant, which is slated to enter service in 2020, will generate more orders. However, conversions will continue to account for most of the anticipated growth in the ATR freighter fleet.

Conversions of ATR 72-500s are expected to become particularly popular over the next several years. There is growing demand for freighters in this size category, and the recent decline in values makes the ATR 72-500 more attractive for conversion.

There are currently nearly 300 ATR 72-500s in service, according to the CAPA Fleet Database. Approximately one third of that fleet is operated by LCCs, all of which are based in Asia.

Cebu Pacific will become the second ATR 72-500 freighter operator

There are currently only two ATR 72-500 freighters in service globally, according to the CAPA Fleet Database. Both are operated by Ireland's ASL and were converted in late 2015 and early 2016. They are 19-year old aircraft and were initially operated as passenger aircraft by Arkia Israeli Airlines.

Of the other 100 ATR freighters currently in service, 41 are ATR 42-300s and 59 are ATR 72-200s. These are all older model aircraft that will need replacing over the next several years. The ATR 42-300 and -320 freighters are 25 to 32 years old, and the ATR 72-200s are 22 to 27 years old.

The aircraft being converted by Cebu Pacific will be the youngest ATR freighters in operation (excluding the new ATR 72-600s that will later be delivered to FedEx). The two aircraft being converted by Cebu Pacific are 10 years old.

IPT breathes new life into ATR freighter conversions

Most of the ATR freighters that are now in service were converted by Alenia between 2002 and 2010. There were no conversions from 2010 until late 2015, when IPT completed its first ATR conversion. IPT currently has the only STC for ATR freighter conversions, although customers have several alternatives when it comes to selecting a modification shop.

The ATR freighter conversion market could potentially benefit from more competition. However, Cebu Pacific was able to negotiate an attractive deal with IPT and Sabena Technics, helping the group conclude that it had a solid business case for converting its ATR 72-500 fleet.

Cebu Pacific will not be the first passenger airline to pursue ATR 72-500 freighter conversions. It may even be followed by more LCCs.