the current freighter conversion industry is no easy task. Yet, when words fail us, sometimes those of history’s great writers still ring with meaning today. So let’s let Dickens summate: “It was the best of times and it was the worst of
times.” Nothing could be truer of the conversion market over the past few years.
To understand this, let us start with
some of the background. Much has been made of the thin demand for international airfreight and excess capacity in the widebody market. This, in turn, has led to continued weak demand for widebody conversions. And with a significant upswing in global GDP nowhere
in sight, odds are slim that cargo operators will benefit from a global recovery any time soon.
It is well understood that cargo
demand closely correlates with global GDP and foreign direct investment. Things have recovered slightly since the massive contraction in 2008, but it has slowed due to the recession in Europe, a 35 per cent cooling of China’s growth rate and the generally
uncertain global economic outlook. Additionally, waning demand is compounded by ageing widebody fleets, though pockets of the regional narrowbody freighter market have fared much better than their widebody freighter counterparts. This is despite the threat
of slightly weaker yields per segment, a much higher operating cost environment and freighters flying long past their economic prime.
Meanwhile, 737-300, 737-400, MD80 and periodically 757 programmes are making the news, with strong demand reported for the 737-300/400.
Here at Pemco, demand through 2013 for 737-300/400 freighter and combi/quickchange products could double compared with typical volumes. With a backlog of 40 conversions in a market where deals are taken close to the conversion date, we expect
this demand to continue through to at least 2015.
Demand for freighter conversions
is driving the swelling demand for 737-size freighters and is it translating to the venerable 757 and other freighter programmes?
On the supply side, the 737-300, and more recently the 737-400 passenger-to-freighter (P2F) conversion programmes, are benefitting from distressed market conditions. These conditions are driven by short-term realities together with the long-term
market outlook for the regional air cargo industry.
Volatility in air passenger numbers, record aircraft deliveries, accelerated
re-fleeting, and legacy fleet liquidations are each freeing younger 737-300/400s into the feedstock and substantially driving down prices. This is likely to continue. If you are in the market, be sure to get the right aircraft. Younger aircraft are more desirable
in terms of maintenance costs and reliability, but aircraft with a high gross weight, or that can be upgraded, will serve you better.
demand, 10- to 15-year-old narrowbody freighters are rapidly being deployed to sustain new markets within developing economies and to replace ‘dinobird’ aircraft, which are too old to meet the latest government-mandated age safety-driven standards.
Until recently, only the oldest 737-300s were readily available at the rock-bottom prices required by most under-capitalised start-ups and operators
at the far corners of the globe. Today, carriers are taking advantage of low prices by also buying 737-400s. These prices are approaching liquidation value in some instances.
These narrowbody cargo operators are gaining utility and efficiency for their effort. So much so that one of Pemco’s two-ship customers recently reported earning $10m profit through the last 12 months.
This sort of performance is inspiring imitators; indeed a growing number of new cargo carriers are taking advantage of their competitors’
continued reliance on 727s and other ‘Jurassic’ aircraft by rolling out converted Classics – increasingly 737-400Fs.
are betting on forecasts for high freighter demand and an average five per cent increase in air cargo traffic, which both Boeing and Airbus predicted in their annual 20-year market studies (which admittedly are notoriously optimistic, particularly for widebodies).
Boeing, Airbus and the Air Cargo Management Group (ACMG) have each forecast an excess of 1,000 narrowbody freighters over the next 20 years –
nearly all of which will be passenger aircraft conversions because Boeing and Airbus will likely build just a handful of military variants.
Classics versus Jurassics
So how does the Classic conversion compare with less youthful alternatives
and how will the global narrowbody freighter fleet develop? On fuel alone, the indications are pretty compelling. The table overleaf compares three common narrowbody freighters on a typical 500 mile route flown 1200 hours per year, and shows that the 737-300/400
saves $3m a year compared with the 727.
But there is more to the story. The 727-200’s three JT8D engines and three-man
flight crew compares with just two for the 737 or 757. And while acquiring an older freighter requires minimal capital, cash operating costs are 50 to 60 per cent higher than a typical 737-300/400. In total, the 737-300/400F and 757 have lower costs per ton-mile
for a typical payload than older competitors.
Admittedly, older aircraft can sometimes make economic sense on infrequent operations
and on routes with consistently high volumetric loads, but the 737-300/400F, along with most classic freighters, has such a fuel cost advantage, lower maintenance and crew costs, higher reliability and payload versatility, that it is easy to see why operators
with adequate cash or credit are lining up for Classic narrowbody freighter conversions.
So, which narrowbody aircraft should a start-up carrier select? As discussed, the 737 Classic is certainly among the most viable, cost-efficient
and affordable narrowbody freighter option at this time. But the 14 to 15 pallet 757-200 has some efficiencies over the nine to 11 position 737-300/400, provided the routes can support the higher payload/volume and longer flight segment, which favour the 757
and high payload orientation. Precision Conversions and ST Aerospace certainly have well-engineered 757 products. If the 757F fits your application (route/stage length/payload), you probably cannot go wrong.
But given that, why are there currently so few deals for the 757? This is perhaps because the aircraft type still needs operators and these are slow to develop. Additionally,
second and third tier operators are waiting on the sidelines for an abundance of cheap 757s, but these are not arriving fast enough. Unfortunately, engines and shop visit costs are killing the 757 PTF business.
The 757 is a phenomenal aircraft and a real workhorse, but it is too much for most short-haul regional routes, particularly given large express integrators’ frequency
objectives and many express freight carriers’ typical load size. Conversely, it is too small to meet the need for jumbo freighters on long international routes.
Compared, however, with the 737, the 757’s high capital costs typically drive lower gross margin performance unless they are flying longer routes with very high utilisation. Therefore, the vast majority of all converted
757-200s are in service with major international carriers and provide special express service within the US and Europe.
what is so different about the 737-300 and -400 converted freighter and why, after 21 years in service, has the 737 Freighter become desirable? Given the gradient of the uptick in demand, one may well ask whether this interest is sustainable.
The answer is that the demand is real and should be here for a while. The real surge in demand for the 737-300/400 Freighter is the combination
of eight years’ worth of steady markets combined with new demand from developing economies.
China continues to be important
in this market – particularly for Pemco where eight out of 10 narrowbody freighters are Pemco aircraft. Here, together with HAECO Group (primarily STAECO), Pemco has converted about 35 aircraft since 2005. China’s love for the 737 has caught on
all over Asia and has spread to South America, Eastern Europe, Turkey and Russia.
These emerging markets account for conversion
companies’ growing backlogs. This is led by increasing demand for high-value and time-sensitive, low-density goods, such as: electronics; pharmaceuticals; auto and industrial parts; seafood and flowers.
In addition to this, manufacturing is moving away from expensive cities in favour of remote and inexpensive production centres. Narrowbody freighter demand has benefitted in these regions because
goods need to be rapidly moved from the manufacturing plant to ports and to market. Most developing countries do not have the road infrastructure to do this, so air cargo is often the only solution for fast, secure and reliable transportation of goods.
Pemco in the year ahead
Although the roaring 1990s, when Pemco converted about 100 727’s for FedEx, are long gone, the future is still exciting. In fact, early this year, we will convert our 100th 737 Classic – a 400 Series 11-position
It will represent the completion of a year-long process to exit the company’s old legacy operations in Alabama, and
position it as a debt-free company with a strong orderbook. All MRO and PTF operations will be primarily located at the company’s modern on-line MRO base in Florida.
In the near future, Pemco will announce some exciting new PTF programme developments to compliment two significant new maintenance programmes with a US flag carrier and a prominent low-cost carrier.
Original link: http://www.afm.aero/magazine/fleet-operations/item/626-freighter-conversions