Lessor activity intensifies in freighter conversion market

[vc_row][vc_column][vc_column_text]Fleet expansions have been widespread among long-time and new freighter fleet operators during the past year, and more are on the way as output capacity catches up with demand. Many of the additions are being fed by the leasing market, where freighter conversion deals have only intensified as some lessors look for alternate means to place their aircraft, while others continue to strengthen their leading roles. From May 2021 through mid-April 2022, Cargo Facts logged conversion orders from at least nineteen lessors that now hold a total of around 259 freighter conversions across nine programs. The table below shows these lessors and their known orderbooks for the conversion programs in question.[/vc_column_text][vc_column_text] A330 conversions gain traction with lessors Lessor activity in the medium-widebody conversion market had until recently been almost entirely focused on the 767. But that changed in the second half of 2021 when Cargo Aircraft Management (CAM), already the largest 767F lessor, signed up for twenty A330P2F slots with Elbe Flugzeugwerke (EFW) with the aim of further growing its footprint. These slots will run from mid-2023 through the end of 2025. CAM proceeded to top up its orderbook with EFW by adding nine more conversions to take place in 2026. The company told Cargo Facts in late February that it had already received letters of intent (LOIs) and deposits from four customers for fourteen of those A330P2Fs. Since then, two have surfaced: SmartLynx with six -300P2Fs and SkyTaxi with four -300P2Fs. [caption id="attachment_56725605" align="alignright" width="560"] Unit 908 arrived in Mobile at the end of March. (Photo/ST Engineering)[/caption] Prior to CAM’s announcement, EFW already had two A330-300P2F conversions on order from CDB Aviation, but CDB added twelve more in early 2022 and said that it had secured Sichuan Airlines and Jiangxi Cargo Airlines as new customers for its freighters. The first two units recently began conversion, kickstarting EFW’s new conversion lines at both the Shanghai Technologies Aerospace Company Limited (STARCO) and VT Mobile Aerospace Engineering facilities. The medium-widebody market will see more variety in the next few years. In October 2021, Israel Aerospace Industries (IAI) publicly announced the launch of its A330-300BDSF conversion program with Avolon as its launch customer, with slots beginning in 2025. Avolon’s commitment to thirty slots marks the lessor’s entry into the freighter conversion market. Apart from turning to A330s for growth, CAM has also looked beyond long-time partner IAI for additional 767 conversions. The lessor said in November 2021 that it would convert at least four 767-300ERs with Boeing, then in March 2022 announced another deal for four further conversions with options for four more. 737-800F conversions heat up The number of 737-800 conversion orders from lessors has continued to climb over the past twelve months, with multiple lessors now holding double-digit orderbooks. [caption id="attachment_417009" align="alignleft" width="560"] ACS is the largest known lessor of 737-800SFs. (Photo/Aero Capital Solutions)[/caption] Leaving aside AerCap, which holds a total of more than seventy 737-800BCF orders and options, the largest customer for Aeronautical Engineers Inc.’s (AEI) 737-800SF is currently Aero Capital Solutions, which announced seven 737-800SF conversions in July 2021 and thirteen more in November, for a total of thirty-four. Another top player is BBAM, which announced twelve more 737-800BCF conversions in July 2021 and now has more than thirty orders and commitments for the type. “This is not a defensive strategy for us,” BBAM Senior Vice President John Lynch told Cargo Facts . “We’ve been looking at this market since 2017, so we see ourselves as one of the lessors with the scale and funding to really make this a long-term strategy. That therefore also allows us to look at these things in a different way, which I think underpins our marketing success. We help a lot of airlines technically if they’re starting out with a BCF for the first time, for example.” Icelease is a new addition to the list of lessors converting 737-800s, announcing an order at the Dubai Airshow with Boeing for eleven 737-800BCF conversions. The company is also inaugurating Boeing’s conversion line at London Gatwick (LGW) with the 2004-vintage unit 33973 (ex-FlyEgypt), which arrived at the facility April 11. “We started seriously looking into the -800 about a year and a half ago, but we felt the timing was right from early to mid-2021,” Icelease Chief Commercial Officer Magnus Stephensen told Cargo Facts . “Then we obviously started looking at the conversion program options, and we decided to go with Boeing and subsequently entered negotiations to secure our slots.” Another lessor entering the 737NG conversion space is World Star Aviation, which is not new to freighter conversions and has selected IAI for ten 737-800BDSF conversions along with options for ten more. Marc Iarchy, partner at World Star Aviation, told Cargo Facts that the first aircraft is nearing induction for conversion. “We’re going to have two or three 737-800BDSFs coming out this year, with more to come next year,” he said. “We’re looking at how we can accelerate and expand that process, and we have had decent traction with operators.” At least three other new players have emerged since April 2021: Genesis with two 737-800BCF conversions; Aircastle with four 737-800SF conversions; and Aviator Capital Management with a single 737-800BCF that it will lease back to South Korea-based Jeju Air. Meanwhile, AviaAM Leasing and JLPS Ireland both added more 737-800BCF slots and now have ten and five, respectively, and GA Telesis and BlackRock have also topped up their 737-800SF conversions with AEI, now holding twelve and eleven in total, respectively. A321Fs: More lessors jump on board In addition to its 737-800BCF conversions, BBAM is also converting A321s with EFW and recently announced a deal for eighteen for slots running from 2022 through 2025, making it EFW’s largest A320/A321P2F customer. BBAM also remains the only lessor known to have committed to both 737-800F and A321F conversions, and has so far leased two A321P2Fs to Titan Airways and one to Lufthansa. “The initial few aircraft that have been delivered have been performing extraordinarily well for their operators,” Lynch said. “The rest of the market was watching that. They’re now seeing them in operation and they’re seeing how good they are.” [caption id="attachment_56725606" align="alignright" width="560"] The first A321 undergoing conversion in San Antonio belongs to GTLK Europe. (Photo/ST Engineering)[/caption] Compared with 737-800Fs, there is still a “rarity” about the A321F product and BBAM is “very focused” on developing a balanced and diversified portfolio by maintaining the right balance of geographical location, jurisdiction and credit, according to Lynch. “We’re actively marketing and what we are seeing is that pricing is very robust,” he said. “It's a strong product from a pricing perspective and from a credit perspective, so we’re hitting all the right points.” A number of other leasing entities have surfaced in the A321 conversion space over the past year. GTLK Europe is converting four units with EFW for SmartLynx and the airline will also lease two A321-200PCFs from Cross Ocean Partners. All six of these aircraft are at various stages of the conversion process, although it is unclear whether and how international sanctions affect the activities of GTLK, Russia’s largest leasing company. 321 Precision Conversions has also signed deals with a joint venture between Greenwich Highland Aviation and Zetland Capital Partners for six conversions and with a joint venture between Aerovista and Petrus Aviation for four conversions. Even as the A321F programs gain momentum, 757 conversions remain in demand. AerSale, which began its acquisition of twenty-four ex-American Airlines 757-200s in 2020, announced a new order in January to convert six additional units with Precision Aircraft Solutions, with options for four more. AerSale only recently inducted for conversion the final aircraft from its previous order for six 757-200PCFs. Icelease converted two ex-Icelandair 757s in 2021 and leased them to Amerijet, but does not currently plan to increase its 757 portfolio. “It is a fantastic aircraft and that is well displayed in the operational history, both on the passenger side and the cargo side,” Stephensen said. “Maybe the biggest question mark would be availability of engines in the long run, but that aircraft is still being converted and it definitely serves a niche market. It will continue to do that for years and years to come.” Feedstock remains available Although BBAM has drawn from some of the ninety or so 737-800s for its conversions, the company is also acquiring feedstock units from the market and taking advantage of their availability, according to Lynch. “Some of that was obviously driven a lot by COVID, but now you have the Russia-Ukraine conflict causing a number of airlines to return aircraft,” he said. “If you look at parked -800s, there’s still a significant number of them out there. So I think the fundamentals are still on the side of those acquiring feedstock and we’re still seeing feedstock prices at the right levels.” However, Stephensen noted that 737-800 feedstock availability is not the same as it was twelve months ago. “As far as pricing, we are still getting units at approximately the prices that we want but it’s becoming more and more difficult,” he said. “It’s a natural development because the market has changed now. The passenger market for the upcoming summer is getting quite good and there are a lot of carriers requesting new capacity, so it goes without saying that many of the -800s that were unemployed and in storage are finding homes.” World Star Aviation’s ideal age range right now for 737-800 conversion candidates is around 2005 vintage, Iarchy told Cargo Facts . “You are not going to get much more rent with a 2011-vintage -800 compared to 2004, but it will be worse for a 1998-vintage compared to 2004,” he said. Iarchy agreed that 737-800 feedstock prices have gone up compared with last year because many airlines have worked through some of their COVID-related problems and “don’t need to sell quickly or at rock-bottom prices” but also because there is more competition from buyers looking to convert. “I think the most important reason is that, even though the MAX is being produced nicely, the demand for -800s is very much still there,” he said. “We don’t have a single pax -800 that is not producing right now. If you gave me ten extra -800s that are able to fly passengers right now, we would probably put them up for lease for the summer for anything we want. There’s serious demand so that’s why the prices have gone up, at least compared to last year.” When it comes to A321s, because of the smaller total number produced, BBAM said it is even more selective and will aim to procure younger frames and engines for conversion. “We always look at the engines in depth and we’re trying to steer it toward younger aircraft,” Lynch said. “So 2003 to 2010 or 2012 would be more of our target vintage for aircraft for conversion, because converting twenty-plus-year-old aircraft is probably not the best place to be right now. It’s hard to have younger but we’re still picking up aircraft at the right prices.” Strong demand from lessees, but for how long? Multiple lessors have indicated to Cargo Facts that demand for their freighters is strong, if not somewhat stronger than expected. In the case of BBAM, its A321P2Fs are currently sold out for the rest of 2022 and clients are committing to aircraft into 2023, with 737-800BCFs closely following. “We’re seeing multiple clients targeting individual assets that we have,” Lynch said. “So demand very much exceeds supply at this particular juncture.” The arc in demand can at least partly be attributed to booming e-commerce, which Stephensen said “took a ten-year leap” that has turned the cargo market upside down. He also noted that insufficient belly capacity has prompted a number of new entrants into the dedicated cargo market. “There is a lot more demand for cargo capacity and it will, in my view, continue for years to come,” Stephensen said. “Now, whether you’re looking at a two- or three-year window or a four- or five-year window, I have no idea and nobody can tell, but for the time being, in the short to medium term, I think the demand will be there.” For CDB Aviation, the development of the e-commerce market in the past year made it bullish about the long-term prospects of the medium-widebody segment and its A330 conversion order. “The strong growth of express and e-commerce operators, for which 78% of the medium-widebody fleet flies, certainly informed our significant investment decision,” CDB Aviation’s Head of Strategy Cronan Enright told Cargo Facts in February. “We think that the growth seen during the pandemic is now locked in and here to stay. We also see e-commerce as a strong stabilizing influence when air cargo was previously probably more prone to volatility.” [caption id="attachment_417652" align="alignleft" width="560"] Younger 757-200s are still being converted even as older frames are removed from service. (Photo/Precision Aircraft Solutions)[/caption] Apart from e-commerce growth, part of the demand is driven by the need to replace the older freighters currently flying around the world, including 737-300Fs, 737-400Fs and some 757s and 767s. “These aircraft are all getting replaced and they’re all going to get replaced even if there is no growth,” Iarchy said. “So there’s strong demand for younger, more efficient and less polluting aircraft, both in terms of greenhouse gases as well as noise. Second, there is secular growth every year and I think that growth is accelerating as a result of e-commerce.” The desire to be more fuel-efficient represents a significant “pull” in the overall push-pull equation of the newer generation of converted freighters, Lynch said. “People are looking at increasing fuel prices and they want more modern technology,” he said. “That’s probably a huge driver. That’s going to accelerate the switch from the Classics and the 757s to 737-800s and A321s as we settle into a period of elevated oil prices, coupled with the lack of parts and the increase in engine costs on the 757. So obsolescence is actually accelerating.” Iarchy also pointed to other factors like the increasing importance of volume as opposed to weight and the fact that there is still not enough belly space, even if the situation is changing quickly. “So there’s this massive dislocation that is going to last another year, maybe a year-and-a-half, but even when that returns to normal there is still going to be replacement and just long-term growth, which we believe presents significant opportunities for us,” he said. Speculative conversions and oversaturation Many of the lessors that have committed to conversion slots over the past year have done so without having secured firm customers, based — at least partially — on their confidence in the demand for these freighters. “We signed for our eleven slots purely on speculation,” Icelease’s Stephensen said. “We have analyzed and done quite a bit of work on the market and we felt quite comfortable doing this. We don’t have any worries whatsoever in our ability to place these aircraft and we know that the market is out there. We see that based on the current demand and we feel we will hit the right time when there is ample demand.” World Star Aviation is similarly happy to buy “naked” aircraft with a view to converting them and has been deploying them in the passenger market in the meantime. “We’re not too concerned and the reason for that is that these aircraft are not 1998 or 1999 737-800s,” Iarchy said. “When we are buying aircraft naked that are earmarked for conversion, we are quite careful with respect to vintage. If I’m operating a 1998 or 1999 -400, why on earth would I take a 1999 -800? I think if I were the owner of an on-spec 1998 or 1999 -800 I would not be very comfortable right now. With a 2007 -800, it’s a different story.” There have now been three different STCs for 737-800 freighters for a couple of years and there are now at least ten to fifteen conversion lines, while for A321s the ramp-up in conversion capacity is only just starting. For BBAM it was important to be an early mover on both of those types. “Each individual slot is in itself like a rare gem, if I could say that, because in essence it doesn’t have any competition at a particular point in time,” Lynch said. “And it’s particularly evident in the A321P2F program because the slots are very limited. It’s very early days in that program and you’re in a checkmate position to a certain extent when you have positions in that program over the next twelve to twenty-four months because in essence you have strong control over a significant part of the supply.” Despite what seem to be ever-growing numbers of jet freighter conversion orders from more and more leasing entities, those that spoke to Cargo Facts appear unfazed — at least for now — by the possibility of an oversupply scenario, based on a combination of factors including oil prices, retirement of older equipment, new players and the strength of the business. “There’s always a risk of some overshooting, but I think it’ll normalize,” Lynch said. “Certainly, right now, I think demand and supply is probably still in favor of the supply side and I think that will remain until the end of this year, or probably into 2023. It’s obviously hard to predict with any degree of certainty when that might flip or return to at least equilibrium, but it’s robust at the moment.” This story originally appeared in the May 2022 issue of Cargo Facts . Join Air Cargo World and Cargo Facts as we put technology in focus at the 2022 Air Cargo Tech Summit. Taking place June 6-7 in Miami, this new event will provide participants with the foundation for technological improvement in airfreight logistics. Learn more and register here . [/vc_column_text][/vc_column][/vc_row]

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