Air Canada has removed two new cargo jets from its fleet, furthering a strategic reversal in ambitious growth plans for dedicated freighter operations after less than three years even as the air cargo market experiences a robust recovery in 2024.
A management analysis published alongside the company’s second-quarter earnings report on Wednesday showed the size of the freighter fleet had fallen from eight to six Boeing 767-300 aircraft. A footnote indicated the two planes were sidelined in April.
Executive Vice President Mike Galardo mentioned on a call with analysts later that two freighters were pulled from the operating fleet early in the second quarter.
An Air Canada (TO: AC) spokesperson declined to provide additional details about the status of the two freighter aircraft or why they have been grounded, but indicated in the response that they were “temporarily” removed from service.
Air Canada Cargo’s fleet at the start of the year consisted of six used 767-300 passenger aircraft, ranging from 23 to 35 years of age, that were modified to carry heavy cargo containers on the main deck, and two production freighters bought from Boeing that entered service in the first half of 2023.
Data from aircraft tracking sites and databases shows that the two grounded 767 cargo jets were the new aircraft delivered by Boeing. The two planes made their last flights in mid-April to Kansas City International Airport, according to flight data provider FlightAware. A person who was at the airport on Wednesday confirmed seeing the two aircraft on the ramp of Aviation Technical Services, a provider of airframe and component maintenance services.
One possible scenario for Air Canada is to market the aircraft for sale in the secondary market because they have high value and would reinforce the company’s balance sheet. The converted freighters are fully depreciated while the production freighters likely carry ongoing financing costs. Cirium, an aviation analytics firm, appraises the value of the two 767 production freighters at $55.3 million each. The value of each of the converted freighters is about $19 million – less than half of the new model.
Air Canada’s profit of CA$410 million ($298 million) was cut in half in the second quarter from the prior year as slower passenger demand and rising competition from low-fare carriers cooled off airfares, while maintenance and labor expenses increased. Cargo revenue ticked up 1% to $167 million on higher volumes charged by distance flown and higher freighter revenues in the Americas, but was down 4% for the first six months.
FedEx and UPS are the largest operators of factory-built 767 freighters, but spokespersons at both companies said neither airline is pursuing the Air Canada planes.
In fact, the high value of the 767 freighters is likely to drive away potential buyers who likely can pick up a new plane from Boeing for less money than Air Canada paid when shipping demand was higher. A more likely scenario, said an aviation industry source that regularly deals with the airline, is that Air Canada will keep the 767 production freighters and reintroduce them when demand picks up and they can be operated at a higher frequency.
In May, Canada’s flag carrier canceled orders with an aerospace firm to convert two aircraft to freighters, citing the drop in demand as the primary reason. The move followed last September’s cancellation of an order with Boeing for two production 777 cargo jets, which are much larger than the 767.
Air Canada’s latest decision to downsize the cargo fleet is at odds with the current surge in air cargo demand. The airfreight market turned the corner a year ago from an 18-month downturn, and the recovery has picked up steam ever since. Volumes have grown 12% year over year for eight consecutive months since December, according to research services.
Reverse pivot
The news represents a significant course correction from Air Canada’s aggressive plan to expand cargo business by operating all-cargo aircraft in addition to carrying shipments in the belly of passenger aircraft.
Two years ago, Air Canada CEO Michael Rousseau talked about having 12 freighter aircraft and doubling cargo revenue by 2025. Sources familiar with the company’s thinking at the time said Air Canada was also exploring the possibility of adding several Boeing 777 converted freighters.
It was quite a pivot for an airline that divested its freighter fleet 20 years ago because the economics didn’t work out in a feast-or-famine cargo market.
Air Canada decided to restart a freighter division in 2021 to capitalize on unparalleled interest in airfreight shipping fueled by the COVID crisis. Air Canada was one of the first airlines at the start of the COVID crisis to quickly repurpose idle passenger aircraft for dedicated cargo service, including seven large aircraft that had seats temporarily removed to make room for light shipments.
The surge in cargo business during the pandemic along with growing shipper concerns about the reliability of passenger flights and the rise of e-commerce led Air Canada executives to believe there was an opportunity to grow and diversify revenue even after cargo demand normalized.
Management repeatedly said freighters allow the airline to provide more consistent capacity and cargo-focused routes than by simply relying on the passenger network, where routes and frequencies fluctuate by season and often don’t include industrial destinations with heavy cargo activity.
“We didn’t look at this purely through the lens of high yield during the pandemic. We knew that that is really not sustainable long term. So we looked at this as yields during normal times. And it still made business sense,” then-CFO Amos Kazazz said at an aviation conference in September 2022.
But Air Canada overextended itself considering the unique operating challenges in Canada.
The 767 is too expensive to operate in most long-haul situations unless an airline can keep it constantly busy and with high load factors. The aircraft type is best suited to flying parcels and documents in domestic or regional express networks where contract carriers can receive a guaranteed rate per block hour supporting regular shuttle routes. Air cargo experts point to the 777 as the ideal freighter for long-haul routes because it has nearly twice the capacity of a 767 and better economics based on the cost to carry per kilogram.
Canada’s population isn’t big enough to support an extensive international freighter network, especially since most people live within 100 miles of the U.S. border. Plus, there are no domestic Canadian routes available to Air Canada because all-cargo operator Cargojet has cornered the market.
Cargojet has a fleet of more than 40 Boeing 757 and 767 freighters that fly in a domestic overnight network that supports express customers such as Amazon, Canada Post, FedEx and UPS. Cargojet also has tied up cross-border business between the U.S. and Canada hauling parcels for the integrated package carriers, as well as DHL Express. And it provides ad hoc and long-term charter service to a variety of customers on international routes.
An air cargo veteran familiar with Air Canada’s workings, who asked for anonymity to speak candidly, said the only markets really available for Air Canada Cargo are Central America and South America. Demand is decent between Canada and those Southern markets, but not enough to justify more than a few medium-size widebody freighters, he said.
Many freighter operators have adjusted investment strategies in the past year in response to the freight recession that gripped the industry until last fall. Cargojet, for example, scrapped plans to acquire eight used Boeing 777s and convert them to freighters. Miami-based charter operator Global Crossing Airlines paused plans to add Airbus A321 narrowbody freighters to concentrate on the passenger business. And Amerijet, another cargo airline in Miami, this year returned six newly leased Boeing 757-200 freighters.
More FreightWaves/American Shipper stories by Eric Kulisch.
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