CFA 2020: Industry nuances to limit new entrants to freighter leasing

[caption id="attachment_413728" align="alignright" width="460"] Michael Steen, president and CEO of Titan Aviation Leasing and chief commercial officer of Atlas Air Worldwide.[/caption] Ongoing growth in the air cargo industry and freighter operations amid the COVID-19 pandemic may not extend to new entrants to the leasing and operating spaces, according to speakers at this week’s Cargo Facts Asia 2020. Lead times for conversions, and other barriers to entry for this unique segment of the market pose challenges that cannot be overcome overnight. “It’s a space where you need a lot of knowledge and expertise, both with regard to how you operate the aircraft, getting efficiency out of it, and putting it into a network,” said Michael Steen, president and CEO of Titan Aviation Leasing and chief commercial officer of Atlas Air Worldwide . “It’s not as liquid as the passenger investment market is, and you don’t reinvest in new assets for your portfolio every four or five years.” Still, with thousands of aircraft parked around the world, lessors will be keen to place their assets and get them generating revenue, so there could be a new or renewed interest in cargo conversions. “We expect there to be additional lessors and banks exploring this space increasingly,” said Stefan Kageman, senior vice president and head of aircraft marketing at Vx Capital . “It remains to be seen how many of those choose to do so in significant volume as opposed to one or two aircraft here and there.” [caption id="attachment_413729" align="alignleft" width="460"] Stefan Kageman, senior vice president and head of aircraft marketing at Vx Capital.[/caption] The learning curve related to freighter conversions, and the pressure on margins because of the conversion work could be another deterrent to lessors not yet active in the space. “There’s extra time and monetary investment required to convert aircraft into cargo configuration, compared to putting the aircraft out on a passenger lease that doesn’t have that additional investment or downtime, even if it’s at significantly lower rents,” said Kageman. “It’s surprising how compelling it is just to keep the aircraft in passenger configuration. The premium that a lessor gets in lease rates for a freighter compared to a passenger aircraft is not as large as one would think.” Some high-growth markets, such as China, will likely accommodate additional entrants. Xiamen Aircraft Leasing, which so far has only acquired and leased mid-life passenger aircraft, sees narrowbody freighters as a good opportunity, particularly given the growth of e-commerce in China and Southeast Asia. “We’ve been trying to launch our own 737NG freighter portfolio, but we need to wait for the right time,” said COO Jerry Duan. That time comes when an aircraft approaches twenty years in age and the residual value approaches that of a 737 Classic, he said. The 737-800F is a good candidate to replace older 737 Classics, but the airlines Xiamen Aircraft Leasing works with are also very interested in the A321F because of its additional volume, according to Duan. “We believe there will be around 300-400 freighters in China but today there are only around 100, so there is growth potential in the next five to ten years,” he said. Apart from Xiamen Aircraft Leasing, other Chinese lessors are also considering freighters but are similarly still in the evaluation phase rather than the action phase, according to David Yu, chairman of China Aviation Valuation Advisors. “It’s just not a traditional aspect that they have looked at,” he said. “Something new always takes time to digest. Also, from a maintenance and tech point of view, they need to really understand how the conversion process works and the impacts, and so on.” Regardless of the number of new entrants, the near-term prospects for freighter leasing appear to be healthy on a global basis. “The pandemic has accelerated the demand for express cargo, and we see a medium-term benefit to freighter leasing in general,” said Kageman. “Through the remainder of this year, demand will stay strong.” Kageman also noted that, in the longer term, changing consumer behavior because of the impact of COVID-19 will change the underlying fundamentals of express air freight and consequently the need for freighters. “If you weren’t on Amazon Prime, you may be now,” he said.

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