Podcast: Lessors navigate narrowbody freighter market challenges

Jeff Lee
Hello and welcome to this episode of cargo facts connect, the podcast of cargo facts, the newsletter of record for the air cargo and freighter aircraft industries for over 40 years. I’m Jeff Lee, editor of cargo facts and it’s Monday, the twenty first of October. We’ve just returned from Cargo Facts Symposium in San Diego last week, where we not only celebrated the 30th anniversary of this event but also heard from a range of industry leaders. While we’ve already shared some of the top stories from CFS and will continue to, we thought we would bring you this extract of a discussion during a panel on freighter aircraft and engine leasing, where guest moderator Mylene Scholnick from Amazon Air talked to Dora Alexander of Hamden Aviation, Ryan Anderson of Aero Capital Solutions, David Ellis of GA Telesis, and Maik Falkuss of MTU about the state of the market and the issues they’re dealing with.

Mylene Scholnick
So we start with you, Dora. I think we wanted to explore first, market dynamics and trends, and so current market landscape, what are the current trends shaping the demand for engine and freighter leasing? Obviously, engine leasing rates versus freighter leasing rates. And then I think we had a secondary question, which was the impact of kind of post pandemic shifts onto those those trends? What has that brought to the market? Maybe we can start with you, and then the rest of the panel can also opine on that.

Dora Alexander
Sure. So I think there’s a couple interesting things that we’ve noticed, and I’m sure my colleagues here will share similar experiences, and that is a real shortening in terms of planning cycles. So as the lessor we’re talking to our operators all the time, either new operators or existing lessees, and we’re finding groups going from needing absolutely nothing in terms of additional capacity to suddenly needing, you know, aircraft within a month. And I think that’s sort of a result of hesitations in the market, of logistics companies also holding off on contract commitments all the way down the pipeline. So that makes it challenging in terms of planning, and just requires more the lessors to be a little more nimble on the engine and freighter side. You know, we talk a lot about the over conversion, or, I guess, the abundance of conversion, particularly in the narrow body space. And I think what happened was you see, sort of the squeezing down lease rates on the aircraft side with just an abundance of capacity, and then some groups just parking, for example, some 37 800 pulling engines off and deploying them on lease, rather than, you know, taking such a hit on the lease side for the overall aircraft. So those are a couple trends that noticed recently.

Mylene Scholnick
Thank you. Ryan?

Ryan Anderson
Sure. Let me just add a couple of thoughts. Think from a from a narrow body perspective, the first thing to think about, or that we think about anyway, as it relates to airplanes, is incredible demand for the passenger side, particularly on. Midlife assets, really, as a result of, obviously, OEM delivery delays, I think on the engine side, you know, the engines that power those midlife assets, whether they’re V 2500 or 70 or five days, you know, we’ve seen consistently from our customers, demand for exchanges and leasing, certainly as an opportunity to reduce and manage maintenance costs, but really as an opportunity to obviate or get around sort of long turnaround times at the shop and to have that green time now.

Mylene Scholnick
Thank you. David was to you. What do you see? And then interesting like, when, when did, when did that decision between leasing engines versus leasing the freighters came about like, is it a year ago and and what kind of numbers are we talking about?

David Ellis
Yeah, I think everybody’s observing similar trends. I mean, the demand for the near body freighter has softened. We had large quantities, high volumes, of aircraft converted in a relatively short period of time. We haven’t had the classic freighters. There’s still 200 classic freighters in service. We haven’t seen that replacement phase really hit. It’s still just been a net growth in terms of the NG conversions on the nearby side, and then the shop visit cost, the turnaround times, the local supply chain, the increased cost of new material, the OEM, a lot of list prices going up. All of these variables contribute to an expensive shop visit cost. The more expensive the shop visit cost, the greater the demand for engine leasing. And so deferring a shop visit divert, deferring that expense becomes, there’s a greater incentive to put that off into lease engines. Couple that with a high volume of aircraft converted the classics staying in service longer is sort of a perfect storm of the freighter values suffering while at the same time, engine values have gone up. Call it 20% two years in a row, year over year, and so suddenly, the decision for a lessor that has the flexibility to do this, not all lessors have the same level of flexibility, depending on how they finance their converted freighters, but if you have the flexibility, the decision to park an airframe, lease the engines take advantage of that market condition has been fairly compelling, I think, myself included, we kind of avoided doing that as long as we could. The way it played out in our fleet was we ultimately hold some of our more expensive, stronger engines sold or lease those into the market and then eventually backfill with with sort of a lower profile engine. So I think everyone kind of handles an asset management strategy a little differently, but for us that that’s what works.

Mylene Scholnick
I guess, on the other side of the of the world, increasing cost material shop visits. How does that impact the market?

Maik Falkuss
Yeah, so, let me put it that way. So everything basically has an impact or an influence, right? So, and yeah, as we already learned, that see mature engine fleets retiring anytime soon, right? They’re flying longer. We see it also in our shops, right? We have really problems to get the material right on time for the engines. And this is basically, yeah, definitely one of the situations where we see that our customers trying to avoid shop visits and rather trying to lease or exchange engines, I can completely confirm that statement.

Mylene Scholnick
Yes?

Dora Alexander
So just in terms of putting some numbers to when we’re talking about an over convergence of available capacity, narrowbody sector, you just take, for example, 737, 800 and in 2019, there were something like between 10 and 20 converted in 2023 there were over 70 converted. And currently, right now, there’s probably over 50 737 freighters for sale currently being actively marketed. So that gives a bit of a scope of what we’re talking about in terms of creating that downward pressure on lease pricing and people making different decisions on leasing out these engines.

Mylene Scholnick
So of those aircraft that are parked, are lessors thinking about removing the engines and leasing them out. And how easy is that to do? Are you doing it?

Ryan Anderson
I mean, it’s happening,

Mylene Scholnick
It’s happening. But how easy is it to really?

Ryan Anderson
You know, I think David makes a good point that you know, lessors, depending on how they’re structured, have the ability to be patient, and as long as, let’s take the 800 for example, since you brought that up tomorrow, as long as lease rates are as high as they are for the 7b for example, a lessor can afford to be potentially patient with that airframe and storage while those two engines are out creating value for customers and for lessor shareholders in the market. I think secondarily, just to maybe follow up on a point, David that you made, is depending on the size of the lessors portfolio. From an engine perspective, they might have the ability to to find, say, a, you know, a study engine, like we say, something with 1500 2000 cycles, for example, that for a passenger operator doesn’t create a lot of values, a couple months of operation. But for for utilization, for a freighter operator might be years of utilization. So in terms of sort of finding the right asset for the right mission set, some of source will be able to do that as well.

Mylene Scholnick
Thank you. That was one of our questions about balancing act for the source and airlines, about between the engine and the freighter but would you say that if you were to lease a freighter for 180,000 a month, you can lease the engine for more to be blunt? We didn’t prepare that question. But like, is it? Is it as simple as that?

David Ellis
I think, Well, the simple math is the length of the lease terms a key variable as well. And so engine leasing in a shorter term market for a 12 month lease, yes, you could probably get 75 to $90,000 a month for a base lease rate, and the maintenance reserves are going to be the same whether it’s a freighter or just a standalone engine lease, the maintenance reserve should be roughly the same. That is a good way to generate cash flow when the freight market’s soft, optimally and ideally, you still want to put your aircraft on a lease. You want that eight year lease term as a less or it’s a financial product. You don’t really want to deal with frequent lease return return conditions for scopes, engine leasing is a much more hands on type of endeavor and business model than aircraft leasing. Aircraft leasing typically, you know, are longer terms. So you can do it in a math on a simplistic basis. Yes, the all the intermarket strong, you can replicate the freighter lease rate. But I think ideally you really want to put the aircraft out on lease. There’s no, there’s no better option than a long term lease to a good home for a freighter.

Mylene Scholnick
OK, good to hear on the widebody and engine related we have the same issue. CF6, PW, 4000 is it the same kind of balancing act between engine markets and federal easing? Or is it a total different landscape there?

David Ellis
I think in that instance, it’s a little different because the call of the implied cost of the airframe itself. So if you have CF 680s 94 inch Pratt 4000s if those engines are trading in the plus or minus $6 million range. But the whole freighters, you know, $30 million or $35 million the engines are actually a slightly smaller portion of the value of the asset, versus in the narrow body market. You could have two engines that are worth 10 million each in today’s market, and the whole freighters weren’t worth 20 to 25 so there’s less incentive to I think part of the airframe and the market, I mean, the market for the for the medium wide bodies, is much stronger than it is for the narrowbody freighters. And I think that creates a balancing effect where you don’t see as many you know, CF, 680s being pulled off of 767 at least this market, there’s a huge demand for the 7/67 Raider, and so that’s just naturally sort of kept that market more stated.

Mylene Scholnick
One question we had about supply chain constraints, we touched a little bit about it, but maybe from the MRO side, how are the supply chain constraint OEM production delays impacting, you know, the the engine, the engine market, and are they creative solutions lessor and operators are using to navigate those issues? Maybe sort of on the green time, on the turnaround time, if you can take that?

Maik Falkuss
Yes. So basically, you know, when you have material constraints and there’s a shortage on certain material, there’s not really something you can do about it, right? I mean, you have to wait until you get the material. But the thing is, the situation, especially for right to you, it’s not you, right? And I think we found quite some good examples how you can handle or how you can cope with it, for instance. And coming back to the 7b It’s a super maintenance friendly engine, right? So, and one thing is, you just don’t have to overall an engine all the time. So one thing we came up with is a module change, right? So you can exchange every single module on the 7b Right? So, and we at MTU MLS, we have quite a good start on ready to go modules. So what should we can feed to our shop in Dallas, exchange a necessary module, put it on the test seller and go back to service. And this can be done somewhere in between 10 to 50 days.

Mylene Scholnick
Thank you.

Ryan Anderson
I alluded to it before. I was just going to say that we’ve talked a lot about engine leasing in particular in the course of this chat, but we see as much and probably increasing demand for engine exchanges. To Mike’s point, there are whether it’s a model stronger exchange, there is an immediacy that that solution offers, that a shop visit just, just doesn’t and frankly, if you don’t need, you know, the full run that comes both shop visit, it could be really cost effective solution as well.

Mylene Scholnick
Thank you.

Jeff Lee
That was Mylene Scholnick there, moderating a panel on the freighter aircraft and engine leasing market at last week’s 30th Cargo Facts Symposium. Thank you again to Mylene as well as all our speakers and attendees. That’s all the time we have today, but in the meantime, stay tuned to cargo facts.com for more coverage of CFS and the freighter aircraft market. Thank you very much for tuning in, and join us again next time.