Ã¢â‚¬Å“The operators have certainly been weakened by the recent turn of events,Ã¢â‚¬Â says Brian McCarthy, vice president of Marketing and Sales for Beaverton, Oregon-based Precision Conversions. Ã¢â‚¬Å“The costs associated with changing fleet types (pilot/mechanic training, spares provisioning, tooling and ground support equipment) go well beyond the lease rate of a converted jet.Ã¢â‚¬Â
But, feedstock for conversions is a concern as passenger operators hold on to assets artificially longer than history would have predicted. Some conversion companies have fared far better than others, however.
Ã¢â‚¬Å“The picture for original equipment manufacturers (OEMs) is perhaps worse,Ã¢â‚¬Â observes Kevin Casey, president of Pemco World Air Services in Tampa, Florida.
BoeingÃ¢â‚¬™s 747-400 lines in Asia, for example, are reportedly down from three to a broken single line. And AirbusÃ¢â‚¬™ Dresden production has been all but mothballed for much of the past couple of years.
The reasons are simple. Demand for express freight has dropped. Some shifted modes to surface or disappeared altogether. Air cargo industry may be experiencing double digit growth, but todayÃ¢â‚¬™s economic indicators suggest that the global recovery is slowing. Freight rates and yields remain under pressure and are down from their highs of a few years ago.
Ã¢â‚¬Å“All of this cools demand for fleet expansion and robs airlines of earnings needed for fleet renewal,Ã¢â‚¬Â says Casey. Ã¢â‚¬Å“And where conversion customers (operators) sought to lease a few years ago, today they expect to purchase the passenger airplane feedstock for their conversions at a bargain.Ã¢â‚¬Â
But this too, is fraught with problems. Funding acquisitions can be difficult given new lending regulations, plus aircraft owners are unable to sell assets due to high book values relative to market. Ã¢â‚¬Å“All of this is slowing down what would have been a more robust recovery,Ã¢â‚¬Âsays Casey.
Boeing 747, 767 conversions
Boeing sees the highest demand for large freighter conversions coming from the US and Asia. Yet emerging markets in Turkey, Brazil, India and Russia, as well as select countries in Africa, are also creating new demand.
BoeingÃ¢â‚¬™s advantage in the conversion market is its offering OEM engineering and parts, shorter down times and unmatched customer support.
Ã¢â‚¬Å“This provides freighter operators with a product that has lower lifecycle costs and higher reliability,Ã¢â‚¬Â comments Dan da Silva, vice president, Freighter Conversions, Boeing. Another important differentiator is the fact BoeingConverted Freighters provide higher residual value, according to published appraiser data.
Consequently, Boeing expects to see orders for both the B747 and B767. The B767-300 Boeing Converted Freighters (BCF) replaces DC-8, A310 and A300 class freighters. Boeing also sees the B777BCF as a great replacement for DC-10/30 and early vintage MD-11 Freighters.
Ã¢â‚¬Å“To date, practically all MD-11 candidate airplanes have been converted to BoeingBCF configuration. The programme is very near its completion,Ã¢â‚¬Â says da Silva.
Since the first conversion was delivered to Cathay Pacific in December 2004, Boeing has delivered 44 B747-400BCFs.
Ã¢â‚¬Å“The B747-400BCF is a perfect replacement for older B747Classic freighters and for startup operators in the large freighter market,Ã¢â‚¬Â da Silva remarks.
So far six B767-300BCFs have been delivered to launch customer ANA.
In addition, Boeing has data license agreements with all standard body conversion providers such as Pemco, AEI Conversions, IAI Bedek, and Precision Conversions. Boeing also is in the product development phase of a B777 conversion program.
Ã¢â‚¬Å“Our plan is to offer and launch that programme in the next 12 months, with deliveries beginning around 2014,Ã¢â‚¬Â says da Silva.
AEI orders increase
AEI finds that the narrow body conversion market has fully recovered. While the B727-200 conversion market is totally dead, AEIÃ¢â‚¬™s Convey comments that the B737-200, B737-300, and B737-400 have stepped in to fill the replacement need.
Ã¢â‚¬Å“We are forecasting steady growth for the next two to four years,Ã¢â‚¬Â Convey says. In fact, AEI, which has been converting aircraft since 1958, already has received a steady increasing number of orders since July 2009. The company has a back log of 12 aircraft that will be converted through fourth quarter 2011.
AEIÃ¢â‚¬™s B737 conversion products fall into two categories. Half are replacements for older B737-200 or B727-200 freighters. The other half are for new operators entering the business that have selected either a 737-300 or 737-400 due to the payload and range that these aircraft offer.
AEI will begin offering conversions for the MD-80 in the summer of 2011. To date, the company has converted over 350 aircraft. When the MD-80 comes on line, AEI expects to hit 400 conversions by 2012. Ã¢â‚¬Å“This will join the list of aircraft replacing the B727-200 void,Ã¢â‚¬Â he says.
Convey believes AEI is uniquely qualified to rapidly respond to its customer requirements as is exemplified in recent improvements to its B737- 400SF conversion product. Originally designed as a nine AAA container freighter, AEI customers continually requested more main deck capacity. AEI responded with an in-depth study that resulted in the modification of frames near the aft passenger doors that allowed for a tenth AAA container to be fitted.
Overall, Convey sees the narrow body conversion market nearing a critical cross road. Ã¢â‚¬Å“The B737-300 is quickly loosing favour with operators who are favouring the B737-400,Ã¢â‚¬Â he says.
Conveys also sees MD80 and A320 aircraft coming on line in the next two years. Ã¢â‚¬Å“Both will offer operators similar capacity, but with very different economics,Ã¢â‚¬Â he says.
As he points out, the feedstock for the MD-80SF can be purchased for about US$1 million and can be converted for $2.2 million, giving operators an onramp cost of $3-3.5 million. The A320 will be certified in 2012 with feedstock estimated to cost about $6-8 million and can be converted for $4.5-5 million, thereby giving operators an on-ramp costof $10-13 million.
Ã¢â‚¬Å“If history repeats itself and follows the B727-200 model, the MD-80 should be converted in very large numbers Ã¢â‚¬“ 200 to 300 units,Ã¢â‚¬Â he surmises.
The B727-200 was not converted in large numbers until the feed stock price matched the scrap price. The MD80 passenger aircraft are currently selling for the scrap price, which indicates that it will likely be converted in large numbers.
PrecisionÃ¢â‚¬™s B757-200 programme Precision Conversions is currently only involved with the B757-200 conversion programme, which is considered the replacement for the B727, DC9, DC8 and B707.
Executives at Precision see the conversion market for the B757 starting to improve in concert with improvements in the general cargo market. The company expects to see about six conversions this year versus three last year.
To date, the company has re-delivered 25 conversions to various customers ranging from direct operators to leasing companies. Precision can handle at least 12-14 conversions per year using its current MRO sites. ItÃ¢â‚¬™s currently set up to handle additional conversion work with its two approved modification facilities: Flightstar Aircraft Services in Florida and TAECO in China.
Feedstock is still a concern as passenger operators hold on to assets longer than anyone would have predicted. Ã¢â‚¬Å“This is certainly the case for the B757,Ã¢â‚¬Â McCarthy remarks. But he sees the freight, fuel and noise efficient B757 remaining popular and predicts the B757 will win any ageing aircraft contest with a B737, or A320 for that matter.
The reason is, that as a freighter, the B757 is regarded a transitional aircraft that fits between the small narrowbodyand widebody aircraft categories.
Ã¢â‚¬Å“Many industry players are steering clear of the wide body investments because they do not wish to get into an overcapacity scenario,Ã¢â‚¬Â he says. Ã¢â‚¬Å“Yet the small narrow body aircraft will not meet their needs because of range limitation, so the B757 becomes a good option.Ã¢â‚¬Â
McCarthy believes the industry is starting to realise that a narrow body freighter needs to haul enough cargo to Ã¢â‚¬Ëœfeed the engines.Ã¢â‚¬™
Ã¢â‚¬Å“This is where the B757 pulls ahead of the narrowbody pack with 15 pallet positions compared to a B737 with 8 or 9 positions,Ã¢â‚¬Â he says.
McCarthy, in fact, sees the B757-200PCF nipping at the heels of the A310-200 and A300B4.
Ever since Precision introduced the weight upgrade option (High Payload B757- 200PCF) on its freighter last year, McCarthy has found that every customer has requested to at least have the aircraft provisioned for the higher payload.
Ã¢â‚¬Å“This option is becoming quite valuable to both our leasing customers and our end operators,Ã¢â‚¬Â he says. Ã¢â‚¬Å“Most of the operators we have encountered wonÃ¢â‚¬™t even recognise a Ã¢â‚¬ËœpartialÃ¢â‚¬™ pallet position when considering the operating economics of a freighter.Ã¢â‚¬Â
Precision now offers weight upgrade packages for both the Rolls-Royce and Pratt & Whitney powered B757s which can bring the total payload up to 36 tonnes, which is an increase of 1.8-3.6 tonnes depending on the variant.
Tailor-made from Pemco
While Pemco World Air Services finds that interest in conversions is picking up, most conversion companies are still feeling bruised by the global financial meltdown. Ã¢â‚¬Å“Where we have capacity for 24+ conversions a year, filling half of these slots is a challenge,Ã¢â‚¬Â says Casey.
Pemco is involved in several B737-300 and 400 freighter/ combi/quick change projects, as well as a few B757-200 freighter and combi projects. Its B737 and B757 cargo aircraft replace DC9F, 727- 100F, 727-200F, 707F, DC8F, etc. There is also new interest in special mission cargo products.
But by offering tailor-made solutions for a wide variety of clientele that range from cargo carriers in need of fleet expansion to those with very special (and sometimes classified needs), Pemco has faired far better than some competitors.
Ã¢â‚¬Å“ThatÃ¢â‚¬™s because we donÃ¢â‚¬™t cut corners,Ã¢â‚¬Â says Casey. Ã¢â‚¬Å“We never stop advancing our products. We solve operational challenges with tailor-made airplane solutions no matter how narrow the market. Large companies have a hard time being agile and, because of their bloated overheads, their prices and even and their minimum quantities are often a bit high.Ã¢â‚¬Â
Hainan Airlines, a fast growing entrepreneurial company with a successful and expanding Yangtze River Express operation complimented by sister company Hong Kong Express, offers a good example. Altogether, HNAÃ¢â‚¬™s air cargo airlines operate 12 Pemcoconverted B737-300 aircraft, with this latest aircraft coming from their own passenger airline fleet.
Ã¢â‚¬Å“ItÃ¢â‚¬™s gratifying to see the success HNA companies are having and to realise that we Ã¢â‚¬“ and our local partners in conversion Ã¢â‚¬“ HAECO Group subsidiaries STAECO (Jinan) and TAECO (Xiamen) Ã¢â‚¬“ play a small part in helping them along the way,Ã¢â‚¬Â Casey says.
Macro shift for Intrepid
One of the most dramatic changes in the conversion market is the decision by Intrepid Aviation of Germantown, Tennessee, to depart conversions and take up aircraft leasing.
With more medium widebody freighters in service than large widebodies, Intrepid sees the development of the A330 production freighter as an opportunity to take advantage of a macro shift in the industry away and bring a long-range capability to the medium widebody freighter segment that was never available before.
Ã¢â‚¬Å“As a result, we moved into the new aircraft space in 2007 with our launch order for 20 A330-200FÃ¢â‚¬™s,Ã¢â‚¬Â remarks Gerry Aubrey, senior leasing officer, Intrepid Aviation.
Deliveries were deferred on account of the downturn. But, as market conditions proved over the past couple of years, Aubrey points out that an operator cannot count on filling a large freighter all the time. Ã¢â‚¬Å“But the operator is taking on the challenge to always fill the big airplane with reasonable yields,Ã¢â‚¬Â he adds.
Overcapacity drives higher fixed and higher trip costs. But the right sized airplane, being more fully utilised, will provide more profits than larger airplanes operating partially full or with lightly loaded and low yielding backhauls. Increased traffic and improved yield may be generated if a market is served daily or every other day, rather than once or twice weekly, he surmises. Fuel prices can also fluctuate wildly, making widebody freighters very expensive to operate. This means operators must focus on fuel efficiency and match capacity with market demand.
Ã¢â‚¬Å“Consequently, operators like what they see in the A330,Ã¢â‚¬Â Aubrey comments. Ã¢â‚¬Å“With three sizes of new, efficient, longrange production freighters available in the A330-200F, B777F and B747-8F, conversions of older equipment look much less attractive for high utilisation operators.Ã¢â‚¬Â
He also points out that the fuel efficiency, high reliability, lower maintenance cost and low emissions of the new airplanes are very compelling.
Ã¢â‚¬Å“The lease rate of an older airplane has to be discounted to such a degree to offset the operating cost disadvantages that most often you will not be able make the business case for the capital investment to convert an older widebody,Ã¢â‚¬Â he says. For the low utilisation operator that values a low lease rate more than low operating cost, Intrepid executives expect existing freighters to meet the need. ThatÃ¢â‚¬™s because as more and more of the new generation freighters come in to the market, the better existing converted freighters and older model production freighters will fill the low utilisation role.
Ã¢â‚¬Å“While the trade-offs are different in this market sector, the result is the same. We rarely see the economics justifyingthe investment of a widebody conversion,Ã¢â‚¬Â Aubrey says.