Freighter aircraft leasing: Portfolios full of narrowbodies – part I

Today we begin our annual analysis of the increasingly complex world of freighter aircraft leasing. In this multi-part series, we start with an overview of the lessors involved in freighter aircraft leasing. In part II, we look at the leased freighter fleet by carrier. 

The process a carrier must undergo to expand its fleet is far more time-consuming and takes a greater degree of planning than moving a pallet of fidget spinners across the globe. After all, purchase agreements for both new-build freighters and freighter conversions are made years in advance of asset delivery. Forecasting fleet requirements years into the future, meanwhile, is no easy task; in fact, carriers serving some of the more dynamic markets find it nearly impossible. This is particularly evident with carriers targeting the e-commerce-fueled express markets. Such carriers admit to occasionally finding themselves with few options when it comes to aircraft delivery timelines and fleet types.

Renting an aircraft under the terms of an operational, or “dry,” lease has proved to be a useful mechanism for overcoming many of these challenges. Aircraft lessors that specialize in freighter aircraft are acutely aware of how costly a planning misstep can be when choosing an aircraft type or sourcing feedstock for a conversion. However, such lessors are playing an increasingly large role, especially for narrowbody aircraft.

Around 50% of passenger aircraft in operation today are on lease. Although leased freighters are still lagging behind, the ratio of leased-to-owned freighters in carrier fleets is edging upward. Excluding regional jets and turboprop aircraft, approximately 30% of the global freighter fleet is leased (based on estimates that 495 out of the world’s freighter fleet of 1,689 narrowbody and widebody freighters currently in service are leased).
The chart at right, based primarily on information from ch-aviation, shows our best judgment at the freighter aircraft portfolios of lessors worldwide. Of course, to get to these numbers, we had to make some assumptions.

First, just what is a “lessor”? For purposes of this analysis, we include those companies that own jet freighter aircraft, and dry-lease them to airlines (the lessee), usually under a long-term “operating lease” agreement for a fixed fee. The airline is then responsible for putting that aircraft on its own operating certificate; providing crew and ground staff; and insuring, maintaining, and fueling the aircraft – or finding another entity to handle those functions. Capital leases, on the other hand, appear on a carrier’s balance sheet and not in a lessor portfolio, and are excluded from this analysis. These types of agreements more closely resemble a secured debt loan.

Quite a few lessors own aircraft and manage aircraft for others, while others have some of their aircraft managed by other companies. Another common practice is the creation of special-purpose vehicles (SPVs) to handle the financing and leasing of small groups of aircraft. Whenever possible, we exclude SPVs.

Second, regarding the lessors’ portfolios, there are choices to be made. We count only commercial jet aircraft currently owned, in freighter configuration, either on lease or available for lease. We have chosen not to include: turboprop aircraft (of which there around 67 leased); older airframe types, such as 727Fs, DC-9Fs, 747-200Fs, and several others; lesser-known specialist types, like the 747-400LCF and Tu-204C, which do not play a significant role in the commercial leasing market, or, in the case of the 737-800BCF, are not yet leased in large numbers.

Unlike the older and specialist airframe types, however, the 737-800BCF and other NG narrowbody conversions will certainly play an increasingly important role in the lessor market in years to come. GECAS, the largest aircraft lessor in the world (and by far, the largest lessor of 737 airframes and engines) was the launch customer for Boeing’s newest narrowbody conversion program. Following redelivery of the first freighter-converted 737-800BCF to Air Algérie, GECAS has thirty-four firm orders and options for fifteen additional 737-800BCF conversions outstanding with Boeing.

We also exclude aircraft in storage that are unlikely to fly again. This criterion thus removes from our list leasing companies like Air Mobility, which has a portfolio of four 747-200Fs and a 747-300SF, all of which are stored and unlikely to be returned to service. It also has the effect of reducing the size of freighter portfolios for lessors that also have freighters in more limited numbers, or aircraft slated for conversion to freighter configuration. Turning to parked 747-400Fs, these are judgments that have to be made on a case-by-case basis; not all currently stored 747- 400 freighters are going to fly again, but some will. We chose to include 747-400 production freighters and to omit freighter-converted -400Fs.

Consider, for example, Frontera Flight Holdings, for which the chart shows a count of nine aircraft. Frontera’s portfolio also includes a number of larger DC-9-30Fs, which are almost certainly not going to fly again, and a handful of smaller CRJ 200Fs that we do not include in our total.

Finally, lessors are generally averse to publicity and do not publish detailed fleet information. In addition, country registries do not provide much clarity, as often ownership will be held by a fiduciary trustee – usually a bank. Likewise, carriers often choose to keep ownership of their aircraft under wraps. So, the original data from ch-aviation and other sources – and our interpretation of it – will almost certainly be less than 100% accurate.

At first glance, several things are clear:
• More than half of the eighty-one lessors with jet freighters have three or fewer, and 50% of the total freighter portfolio is held by just ten lessors, each with twelve or more freighters in their portfolios. The list includes a number of lessors that were established as captives – leasing companies that were set up by an airline or parent company to lease aircraft to an airline subsidiary. LATAM, DHL, and West Atlantic are a few clear examples, but there are also less obvious captives, like Arctic One, which leases only to Everts Air Cargo. Although some of these companies continue to serve just a single customer, they are lessors nonetheless.

• Another familiar name is Boeing. Manufacturers, like Airbus and other OEMs, often take older aircraft in trade as part of a deal with a customer ordering new aircraft and set up leasing affiliates to remarket these aircraft.

• Finally, if you compare the number of freighters in the lessors’ portfolios to the total number of freighters leased by carriers, you will notice a significant difference. This is because, of the 495 freighters owned by the lessors, twenty-five are currently in storage (but have a chance of returning to service). Subtracting twenty-five stored units from the 520 in the lessors’ portfolios gives a total of 495 in the operators’ fleets.

Although some of the lessors with just a few freighters in their portfolios likely acquired them opportunistically, or to satisfy the demands of a close customer, it is a fallacy to judge a lessor’s involvement in the freighter segment solely on the number of freighter aircraft in their portfolios.

There are a number of other active players that acquire freighters, or feedstock for freighter conversions, and then opportunistically sell the freighters when the chance arises, either with or without a lease attached. So, while a company like Altavair might not have many freighters in its portfolio at any given time, it is still very involved in the freighter market.

In part II, we continue our analysis with a look at the leased freighter fleet by carrier.