Playing with slots: Freighter conversions on spec

Timing it right Multiyear backlogs for new production freighters have long made lead times for freighter conversions a faster option for fleeting up — rarely have aircraft converters been unable to meet turnaround requests by more than a few months. But an increasing number of lessors and aircraft investors have taken to cargo conversions to rid their books of passenger aircraft idled by the pandemic, imparting operators with much-needed lift to meet booming demand for freighters, and now conversion slots are booking out to beyond 2023 for some programs. Since April 2020, at least fifteen lessors have placed orders for the latest generation of freighter conversion programs. Since many of these orders were placed on a speculative basis, there is concern of a possible mismatch between the quick tempo of redeliveries and the pace at which carriers can add new freighters. But is the market for new conversion types at risk of overheating? Lessors on a recent Cargo Facts Asia panel do not think so. Jumping aboard the 737-800 train BlackRock’s Aviation Holdings II Investments fund announced its first 737-800SF conversions with Aeronautical Engineers Inc. (AEI) in May 2020, with an order for three. BlackRock added a fourth and a fifth conversion in September 2020 and January 2021, respectively, then topped up its order book with AEI with three additional 737-800SF conversions in March. “All of our slots were inducted on spec,” said Bill Kmiotek, director at BlackRock. BlackRock, which placed its first 737-800SF with South Korea-based Air Incheon earlier this year, has found that lessees show up “in numbers” just before an aircraft is due to finish conversion. “It takes about four months to convert an airplane from start to finish, and in the first two months you’re out there doing your marketing, sending specs around, talking about economics, and trying to see what lessee is the best fit for this airplane,” Kmiotek said. “What I’ve learned is that the last month of completion is when they come out of the woodwork and everybody wants an LOI. So you have to do it on spec and feel confident that when you place that one airplane for which you’re talking to ten different airlines, you’re leaving nine others without an airplane,” he said. “So you want to give them the next plane, or give them a chance for the next aircraft. We’ve never had an airplane that was completed without somebody at the ready to take it.” [caption id="attachment_415882" align="alignleft" width="560"] Aero Capital Solutions placed its first 737-800SF with Georgian Airways earlier this year. (Photo/Georgian Airways)[/caption] Similarly, Aero Capital Solutions, which placed its first order with AEI for four 737-800SF conversions in 2020, announced a top-up order for ten more in February 2021. The lessor recently delivered its first unit on lease to Georgian Airways and is “absolutely taking a forward position relative to the market,” said Chief Commercial Officer Dan Watson. “We would obviously undertake a conversion if we felt like that was the best possible chance for us in managing the aircraft,” Watson said. “Luckily, we're in a position where we’ve had long-term traditional partnerships, with both mainline operators as well as some of the freight operators. And in our view, the best path to success is always having a line of sight to a lessee who is effectively there for us when we make the initial investments.” Other lessors without confirmed commitments from lessees when they placed their 737-800 conversion orders include: Aircraft Finance Germany, AviaAM Leasing, GA Telesis, KF Aerospace and Macquarie AirFinance. Of those, GA Telesis has already added to its original order. The lessor recently placed its first 737-800SF with Ethiopian Airlines and told Cargo Facts it will likely continue converting 737-800s, based on “compelling near-term opportunities.” The A330 also picks up steam In the medium widebody segment, Elbe Flugzeugwerke’s (EFW) A330 conversion program has gained more traction since April 2020, although the space is currently much less active among lessors than the 737-800 market. CDB Aviation, which announced a conversion order for two A330-300P2Fs with EFW in November 2020, told Cargo Facts at the time that it was in advanced discussions with several parties. “We were speculative to begin with,” said Head of Strategy Cronan Enright at Cargo Facts Asia 2021. “There have only been ten A330s converted so far by EFW, and they're only with two customers, DHL and Egyptair. So this was a requirement for us to be bold, and to move ahead of the market to be one of the first lessors in the converted A330 leasing space.” [caption id="attachment_415617" align="alignright" width="560"] CDB says its next batch of A330-300P2F conversion orders will be less speculative. (Photo/CDB Aviation)[/caption] Enright said he has been pleased with the traction CDB has amassed in terms of customer interest and potential LOIs from companies around the world. “As we move forward with the next batch of conversions, we won't need to be as speculative as the first time,” he said. “We're happy — both with the lease rates we'll been achieving, and with the customer acceptance of the aircraft. Because it's a new type in that space, we've had to spend a lot of time with airlines just working through how this aircraft will fit into their network and how it replaces previous types, in some cases.” Another recent entrant to A330 conversions is Altavair, which will lease two A330-200P2Fs to Mexico-based MasAir in the first quarter of 2022. It is unclear whether the lessor had already signed on the carrier as its lessee when it placed the conversion order with EFW. Growth or replacement? Regarding the newer narrowbody freighter types, and the 737-800 in particular, the cost competitiveness compared to the older generation of aircraft bodes well for strong replacement demand, while market dynamics are conducive to fleet growth, said Aero Capital Solutions’ Watson. “Another aspect is the long-term demand from the e-commerce portion of the market, which the widebodies are not well-suited to serve,” he said. Falling feedstock values and lower acquisition costs will make the newer types “very competitive.” “As a result, the last thing we're concerned about is overcapacity ... it’s more about making sure [lessors] actually have enough aircraft to deliver to customers,” said Watson. A large swath of near-term narrowbody freighter placements will also cater to fleet replacement, according to BlackRock’s Kmiotek. With 737-200Fs, 737-300Fs and 737-400Fs approaching 50,000 cycles, operators will have to start thinking about withdrawing them from service and looking for replacements. “We think the -800F is the right airplane,” Kmiotek said, noting that the -700 is harder to justify, at least from BlackRock’s perspective, while there is no conversion program for the -900. “So my gut feeling is that I’m not worried about having too much capacity in the market over the next couple of years,” said Kmiotek. With international travel still extremely limited, especially in Asia, many carriers are seeing more lift opportunities for cargo and considering turning to freighters. As an extreme example, Kmiotek said he even had an all-Airbus operator asking about leasing a 737-800F because the company did not want to wait until 2022 for more A320 family conversions to become available. CDB Aviation has also seen this demand from airlines seeking medium widebody capacity in the short and medium-term. “Airlines want A330 capacity to come on stream in 2021 and 2022; 2023 is a bit far out for them and that puts pressure on the conversion slots,” said Enright. “We certainly would want to frontload our conversions as much as possible to answer that demand from airlines. “We’re not worried about the demand falling away after the pandemic because the A330 is such a new type. And I think that the retirement of older aircraft in the medium widebody space — whether it’s A300s, A310s or 767s — has to happen,” Enright added. “The average age of aircraft in that sector is around twenty-two years old, so we know that there will be a retirement tranche of aircraft every year, even before you get to the growth that e-commerce demands.” All about the belly The return of bellyhold space will be “the ultimate driver of [freighter lift] overcapacity,” said David Yu, chairman of China Aviation Valuation Advisors. Newer narrowbody aircraft are among the first types being returned to domestic and short-haul passenger service while passenger widebody flight volumes are expected to return to pre-pandemic levels at a much slower pace, even according to optimistic forecasts. “It's not going to be day one when we're going to be at overcapacity,” Yu said. “It's going to take a minimum of at least three to five years.” In any case, freighter operators are, as Enright put it, “in very good days.” CDB believes the medium widebody space holds particularly promising prospects given the growth of express and e-commerce. “The trajectory is much faster than general cargo for as far as we can see,” said Enright. “I think that the widebody space has to grow, and can only really grow with converted aircraft after 2028, because until there's a new production medium widebody freighter entering the market, converted aircraft will be the key to that segment. So we’re very confident about the long-term growth of the medium widebody segment.” Concurring with Yu that the next correction is three to five years out, Kmiotek said he has seen various cycles over the years and it is inevitable this one too will come to an end. “We're not that concerned,” he said. “We're not looking beyond three to five years.” This story originally appeared in the May 2021 issue of Cargo Facts . Cargo Facts EMEA, taking place June 2-3 as a virtual experience, is the event for exploring opportunity in the EMEA region. The event continues to bring together the best, brightest, and most innovative executives in the global air cargo industry. Learn more and register at www.cargofactsemea.com .

Playing with slots: Freighter conversions on spec

Lessors bullish on new conversions of 737-800s and A330s, which cater to growth and fleet replacement

Introducing the CF EMEA opening session

American Airlines, DB Schenker join webinar on commercial shifts in cargo booking

American Airlines, DB Schenker join webinar on commercial shifts in cargo booking

Cargo Facts Free Newsletters

Cargo Facts Connect Podcast

Follow Us

Welcome Back!

Retrieve your password