Freight conversion offers good potential for aircraft investors - but only for those with their eyes wide open
With strong underlying demand, the burgeoning freight market provides good opportunities for aviation-minded investors. Passenger-to-Freight conversion of mid-life aircraft is the obvious route for such investors, but in a new whitepaper aviation consultancy IBA Group emphasises that while conversion offers the greatest potential return it is also the most technically complex route to freighter acquisition and can be time consuming and costly as well.
Improved global industrial production, the extraordinary growth in e-commerce and the demand for express delivery services are behind the bullish growth forecasts for air freight from the OEMs. IBA notes that it is not just industries which rely on the movement of time-sensitive and high-value goods such as consumer electronics and perishables that want air-freight. Rapidly growing e-commerce, which reportedly now makes up 20 per cent of global air cargo volume, changes in consumer expectations for fulfillment and express delivery services are driving the growth in demand for air-freight, the paper's authors say.
It is not surprising, therefore, that the OEM's forecasts for freight are bullish. In its Current Market Outlook 2017-2036 Boeing forecasts the freighter market will require 2,480 additional freighters (1,560 conversions and 920 new). The prediction from Airbus for freighter demand over the same period is slightly lower, but still extremely strong at an additional 1,950 freighters (1,218 conversions and 732 new).
IBA have launched a new freight advisory practice that is headed up by industry veteran Moshe Haimovich.
On paper, the authors state, affordable feedstock, growing demand and favourable costs all make the decision to invest in conversions straightforward. But in reality, they caution, the process is complex, time consuming and costly. The complexity involves conversion supplier selection, the combined scope of work for conversion and maintenance and fleet standardisation including any avionics upgrade.
The project is also inevitably time consuming. From start to finish a typical conversion is a three to four month project, earning zero revenue in that period, which makes it imperative to avoid delays. And conversions are expensive, with a typical narrowbody conversion requiring an investment of between $4 million and $6 million.
The authors says that current market conditions still favour older generation aircraft; feedstock is still available for the short term and fuel prices are low. However, they add, the market is facing a transition to new generation converted freighters for the long term and they expect an acceleration for replacement and growth from, although not before, 2020, due to current high market value of new generation feedstock aircraft for conversion.
New production freighters are available only in the widebody category (above 40 tonnes payload) and include the B747-8F, B777F, B767-300ERF and A330-200F. Active cargo conversion programmes are only for medium widebody aircraft (40-80 tonnes payload) and include the B767-300ER and the A330-200/-300 under development. Typical costs of conversion range from $2,3 million for an MD80 by AEI right up to $16 million for an A330-300 by EFW-ST Aero.
In the large widebody aircraft (above 80 tonnes payload) the last conversion programme was for the B747-400 with one B747-400 Combi to be converted by IAI for Asiana in 2017. The B777-200ER/-300ER conversion is not yet launched and, the authors note, has reportedly been under evaluation for over five years.
The white paper identifies three routes to entering the freighter market. The acquisition of a new production freighter is relatively straightforward, albeit requiring an in-depth analysis of the operational requirements and market before aircraft selection is made. After placing the order, it is essential to remain engaged with the OEM to ensure that the aircraft is built to the agreed specification within the agreed price and delivered on time, IBA says.
Acquiring production freighters in the secondary market is more complex. In addition to the necessary market and operational analysis, an in-depth assessment of the asset condition along with due diligence of the counterparties is required.
The third route, cargo conversion, offers the greatest potential return. Given the relatively low utilisation compared to passenger operations, it can extend the useful economic life of a passenger aircraft from under 25 years by as much as 15-20 years.
The authors also note that after many years of Boeing's domination of narrowbody freight conversion there will be competition in this segment in the future with the A320 and, to an extent, the A321 offering real choice to the long-established B737-800.
The full white paper can viewed here.