ISTAT News | 01 September 2019
Jetrader: Finding the Sweet Spot
By: Helen Frech
This article was originally published in the Autumn 2019 issue of Jetrader magazine.
US$30.8 billion sales in one day! That was Alibaba’s Singles Day 2018, the infamous online shopping highlight of the year in China. Undoubtedly, e-commerce is shaping customer buying patterns and expectations toward convenience and overnight delivery, and is giving air freight a big push with around 9% growth in 2017. According to the International Air Transport Association (IATA), e-commerce sales are expected to reach US$3.5 trillion this year and US$4.48 trillion by 2021. Further, the transport of perishables, pharmaceuticals and electronic devices worldwide heavily depend on air transport due to their nature (e.g., time sensitive, temperature controlled, etc.). The transportation of e-commerce goods, which are characterized by low utilization, overnight services, regional routes, low densities and volume centric, will be best served by the new generation converted freighter. When aircraft are coming off lease, owners or lessors might face the options of selling the asset, tearing it down or investing significant amounts in cabin refurbishments. Freighter conversion offers a lucrative alternative to asset managers, as it potentially doubles the aircraft operational life by adding 15-20 years of service.
With air cargo expected to double within the next 20 years, the worldwide freighter fleet is expected to grow by 64% from approximately 1,700 today to approximately 2,900 aircraft. According to Cargo Facts Consulting, 1,240 aircraft of today’s fleet will be replaced and 1,140 aircraft added. Today’s fleet is more or less divided equally among narrowbodies, medium widebodies and large widebodies. Over the next 20 years, this profile is expected to evolve with almost half the added and replaced aircraft projected to be narrowbodies (see Chart 1).
There are two main options for operators expanding and/ or replacing their freighter fleet: new-built factory freighters or freighters converted from passenger configuration. While the former might be more fuel efficient and well-suited for transporting higher payloads on longer routes with high utilization, the latter have the advantage of lower capital costs and are usually the quickest access for potential owners and operators to freighters. It is expected that one-third will be production freighters with the remaining two-thirds being converted aircraft. By 2038, it is expected that all narrowbody freighters will be converted from passenger configuration, medium widebodies to be split 50/50 between new and P2F aircraft and large widebody aircraft 80/20, respectively.
There’s a lot happening in the conversion world. Not only will the composition of freighter size and new versus converted dramatically change but so will the types of aircraft, as this is directly linked to available feedstock. Within the narrowbody landscape, 737-300s and 737-400s feedstocks are being depleted and replaced by the 737-700/-800 and the A320/A321P2F. The A321P2F is developing momentum as a replacement for the 757-200PCF as available 757 feedstock declines and Airbus’ unique-in-its-class containerized lower deck optimizes operational cost through better volume/payload ratio. Within the medium widebody segment, Airbus feedstock has dried up for the older-generation programs — A300B4, A310 and A300-600 after more than 20 years, and 200+ firstand second-generation conversions. With the first aircraft in express operation in Asia, the A330-300 and its substantial volume for a mid-size widebody is expected to overtake the 767. The slightly smaller A330-200 scores with more payload and cargo density capabilities. On the upper end, choices are still limited to the 747-8F and the 777F.
As the air’s “pickup trucks,” freighters require reliability and simplicity. Nevertheless, aside from external modifications such as putting the main deck cargo door into the airframe or the deactivation and/or reskinning of passenger doors or window plugging, converting an aircraft is very complex, which also potentially includes the total replacement of the floor grid, rewiring of the aircraft, updating of systems to freighter specs and coping with future ATC requirements (e.g., flight warning computers) — or, in case of the A330P2F freighter, a powered cargo loading system with intelligent logic of moving more than one container simultaneously in the upper deck along the tail-high floor.
Ultimately, key factors determining prime candidates for conversion are availability, cost, total flight cycles and flight hours, weight specifications and engine type. Furthermore, fleet commonality/sisterships are considered by operators who require multiple aircraft, as the likelihood of same engines, parts and standardized maintenance procedures help to avoid multiple spare inventories or extra personnel training. In some countries, age restrictions for the introduction of aircraft into fleets are applied (e.g., Indonesia, China, South Korea, Saudi Arabia, Thailand) but not yet in the United States, Canada, Europe or Australia. While feedstock of older aircraft might be available and cheaper in the market, additional maintenance costs on top of the acquisition and conversion need to be considered. On the other hand, younger aircraft can technically be a great fit (e.g., better avionics), but values might be too high to meet the business case of the owner or operator looking to convert the aircraft. Thus, an aircraft should be “not too young, not too old” to be an ideal candidate for conversion. A general rule of thumb is to look at an age bracket of 15-20 years where the aircraft has accumulated enough flight cycles in order for values to decline to a point at which the acquisition price plus any maintenance checks performed during conversion plus conversion costs leave the owner with an aircraft that generate profits.
Nevertheless, we have seen much younger and much older airframes being converted. Running production lines also implies decades of support and spare parts for the particular airframe that support the operational setup of the aircraft in its freighter operation. Depending on the chosen aircraft type and its technical complexity to be converted, the conversion will require substantial investment and not generate revenue while being converted. However, in conjunction with the unavoidable downtime, software upgrades, modifications or heavy base maintenance typically accompany conversions to avoid separate downtime. The removal of the passenger interior, floor reinforcements or the installation of the main deck cargo door require similar levels of deep airframe access that are included for structural inspections in D or C4 checks. Thus, combining these heavy maintenance checks, old repair assessment and repairs with the conversion will avoid the costly and extra man hour charges for opening and closing the airframe. While doing the next due check, the aircraft can be flown for the next two years (depending on operation) without a heavy check downtime. The conversion downtime can be used to source parts, provide engineering solutions, (final) repairs and repair approval sheets in due course or send components for overhaul in a closed loop to avoid costly new or exchange components. Further, the conversion process will provide an opportunity for flight deck upgrades to new integrated avionics systems as well as weight upgrades.
With the introduction of new generation and more fuelefficient aircraft, airframes from maturing fleets will be retired from passenger airline service. At first, few airframes supply components in the aftermarket, and values eventually fall to a sufficiently low level that works economically for freighter conversion. However, other events impact as well. Conversion experts agree that the MAX grounding has not only impacted the 737-800 conversion program but also alternatives such as the 757 and A321 as airlines retain these types longer. Limited available feedstock and inflated residual values (and limits of half-life engines) build at least today the largest challenge and will add a little extra time stretch until the new conversion programs can fully kick off.
What’s the bottleneck? What makes or breaks a good conversion candidate? Where is the sweet spot for conversions? These and other questions will be discussed by the leading conversion experts in an interactive freighter conversion lunch workshop at ISTAT EMEA in Berlin. Attendees will learn more about the different stages in an aircraft’s life cycle with leading conversion and market experts. Although space has filled up, you can contact helen. firstname.lastname@example.org with any questions you may have.
Helen Frech is the marketing manager for EFW’s A330P2F and A321/A320P2F programs. She promotes the life extension programs of Airbus aircraft through freighter conversion. She can be reached at email@example.com.