Snapping up younger frames for conversion: the age-old question

In November 2020, a 2010-vintage 737-800 touched down at the GAMECO facility in Guangzhou (CAN). Unlike most of the 737-800s that had passed through the MRO’s large maintenance bays, this airframe wasn’t brought in for scheduled maintenance. Rather, the ten-year-old airframe was inducted for conversion to freighter configuration by Boeing. The table below shows the approximately thirty-five 737-800s that Cargo Facts recorded being inducted for conversion in 2020. The y range from ten to twent y -one years old, with the average age at the time of induction at around 16.8 years ; the youngest is unit 39393, owned by Shanghai-based Bank of Communications Financial Leasing Co. Ltd ( BoComm Leasing ). A GECAS-owned 737-800 (29120, ex-Air Berlin) was the oldest 737-800 inducted in 2020 at nearly twenty-two years old. Ages of 737-800s inducted for conversion in 2020, as of Feb. 28, 2021 Age is typically only important to airlines operating freighter conversions insofar as it reflect s price. Feedstock selection is “generally driven by availability and price of the feedstock,” Dave Andrew, CEO of ASL Aviation Holdings , told Cargo Facts . Prior to the COVID-19 pandemic, 737NG feedstock was limited because its modern replacement, the 737 MAX, had been grounded since March 2019. Many operators kept hold of their 737NGs, delaying the release of -800s destined for conversion. “The -800 was affected by not just the normal sort of feedstock limitations, but also the fact that the MAX was grounded which, of course, meant there was additional demand on all the airplanes ,” Andrew said . “ At the end of 2019, there was just very little feedstock available.” Toward the end of 2020 , the Federal Aviation Administration (FAA) finally ungrounded the 737 MAX, with other regulators gradually following suit. In addition, the passenger demand slump is freeing up feedstock candidates. As passenger-to-freighter inductions continue, time will tell if the young unit 39393 will remain as an outlier, or signal the emergence of a trend among feedstock units for newer jet - conversion programs such as the 737-800 on the narrowbody side, and the A330 on the widebody side. Conversion programs that rely on older or out-of-production models, such as the 737-400 and the 767-300, are not immune from the impact of COVID-19, or the events that have transpired during the past year. Rather, newer airframes simply aren’t available in large numbers. The overall age profile for 737-800 inductions has not yet changed much compared with 2019, when around twenty 737-800s with an average age of 16.9 years were inducted for conversion, as can be seen below.

Ages of 737-800s inducted for conversion in 2019, as of Feb. 28, 2021 In the early months of 2021, the picture has been mixed, with ASL sending for conversion three frames between fourteen and fifteen years old, while several others have been twenty years old or more. Turning to widebodies, the A330 has seen a starker difference in the age s of frames being sent for conversion in recent months , although perhaps the relatively small numbers of frames mean s that the figures are not fully representative. As it stands, DHL Express — the largest customer of A330 conversions so far — has sent three A330-300s to the Elbe Flugzeugwerke (EFW) facility in Dresden (DRS) in 2021 that average just nine years old, compared to the two frames converted in 2020 that were both aged thirteen at the time. Monaco-based lessor Stratos, meanwhile, inducted a fifteen-year-old unit (713) with EFW last summer. In terms of the pipeline for 2021, CBD Aviation expects to induct two thirteen-year-old A330-300s (958 and 964, both ex-China Southern) around midyear, however it is unknown at this stage whether Turkmenistan Airlines has selected its two A330-200 frames. Reckoning day yet to come? Despite the large number of passenger aircraft groundings and redundant aircraft, the pandemic did not immediately catalyze the number of aircraft being remarketed. Though prices have begun to fluctuate, shifts in values may not yet reflect the severity of the dislocation caused by groundings, and the macro-level intervention s utilized to keep the industry and the economy at large afloat. [caption id="attachment_415175" align="alignright" width="560"] Unit 29052 with World Cargo Airlines was around twenty years old at induction. (Photo/World Cargo Airlines)[/caption] “If you look at values since COVID started, there’s a big lag, and that has been holding steady,” David Yu, chairman of China Aviation Valuation Advisors , told Cargo Facts . Large-scale government stimulus and quantitative easing , particularly in the United States and in Europe have increased the money supply. In turn, “Banks have not really pulled the plug o n many of these types of transactions, which normally have spearheaded the faster absorption of price discovery.” “At what point are these rental holidays and restructurings considered an impairment , versus a kind of a temporary fix? There’s going to be a return to the equilibrium at some point,” Yu said. “Right now, there’s still that very large disconnect.” A year into the pandemic, the number of aircraft being remarketed is beginning to rise. The March 2020 issue of the Jet Transport Aircraft edition of Airfax showed just sixteen 737-800s available, with an average age of 16.7. By contrast, as of March 2021, Airfax shows fifty-six passenger 737-800s available for sale or lease, ranging from five to twenty years old and with an average age of 11.6. While it is very unlikely for the youngest of these to be heading to the cargo market so soon, the number and age of the aircraft could drive down feedstock prices generally. A premium worth paying for IBA estimates the value of a 2002-build freighter-converted 737-800 has dropped 12.5% from $20.9 million in May 2020, to $18.28 million in February 2021, with younger aircraft seeing an even greater drop. As of February 2021, the half-life value for a 2006-vintage 737-800BCF freighter was $20 million , less than the half-life values for 200 1 -vintage frames , which in May 2020 , were valued at over $20 million . For operators that had already planned to add freighter conversions prior to the pandemic, the drop in feedstock values could lead to the selection of younger airframes. “If in early 2020 you were expecting to convert a twenty-year old aircraft, and it worked well under the economics regime of trying to get keep your costs low, and now all of a sudden, you can get the same cost and maybe a couple-years-younger airframe, then why not,” said Yu. [caption id="attachment_415564" align="alignleft" width="560"] China Postal Airlines now has five 737-800BCFs. (Photo/Boeing)[/caption] ASL recently began converting a total of twenty 737-800 aircraft under an agreement signed with Boeing in 2019. “[The pandemic] has certainly brought the age profile down with more younger airplanes available,” said ASL’s Andrew. “If we were looking at the end of 2019, we were probably looking at feedstock that was sort of late 90s, early 2000s. At the moment , there are quite readily available aircraft that are mid-2000s, even late 2000s.” The first 737-800 airframe (33641) ASL acquired was originally delivered to Ryanair in 2007. Five additional 737-800s in various stages of conversion are all ex-Ryanair aircraft ranging in age from thirteen to fifteen years old. As a group with various EU-based airlines, commonality and compliance with EU regulators are important factors, which have made the Ryanair frames a good fit. “As to age, that's going to be a case of what we can afford and what the pricing is,” Andrew said, noting that a small premium is worth paying for an airplane that is effectively five or six years younger. Values for out-of-production widebody aircraft have declined along an even steeper curve, and the A330-300ceo is no different. Half-life values for a 2010-vintage A330-300 dropped by 25% from $47 million in mid-2020, to $35.48 million in early 2021, estimates IBA. “If you're a lessor and you're an owner of an airplane, freighter conversion is a great way of extending your possible life on the aircraft and trying to recover some of the investments you make on a ten-year-old airplane, said Andrew. It is not necessarily the case that operators will be chasing the vintage,” Andrew said. BBAM, which to date remains the only lessor known to have ordered conversions of both 737-800s and A321s, told Cargo Facts that it will continue to convert aircraft “across a spectrum of ages.” The two A321s it has converted so far were around twenty years old at the time of induction, while the 737-800s were between sixteen and twenty-one. “I think twenty years old will be at the upper end of the age range,” said John Lynch, senior vice president of BBAM. “We will also convert younger A321s if that can be justified from an economic and technical perspective.” Whether more ten-year-old airframes are converted will depend on the recovery trajectory for passenger airlines. Based on where the passenger industry is at the moment, ASL’s Andrew sees passenger carriers potentially deferring new narrowbody deliveries and absorbing , or holding on to , many of the younger 737NG frames that aren’t currently being operated. “I suppose it could go either way, but I think it will probably free up more aircraft available for conversion,” he said. [ This feature first appeared in the March 2021 issue of Cargo Facts. ]

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