Is the current passenger-to-freighter aircraft conversion market too optimistic?

With aircraft rates going up and air freight lagging behind, is the converted freighter market too optimistic?

The global cargo industry has witnessed a number of interesting changes during the past few years. Unlike yields from passenger services, cargo revenues slumped in 2019. However, during the COVID-19 pandemic, when people were confined to their homes, the situation was flipped. Demand for cargo space soared, particularly as many freight-carrying wide-body jets were grounded, eliminating the crucial belly capacity in the fast-moving world of air cargo.

Once again, while passenger-carrying airlines were experiencing unprecedented growth in revenues and a return to profitability, the air cargo industry began entering a slump. Worryingly, the dip began before the typical downturn that passenger, cargo, and even road freight transportation companies experience following the holidays, especially in the Western Hemisphere.

Before the travel industry was released from the shackles of pandemic-related restrictions, passenger-to-freighter (P2F) conversions appeared to be booming. Aircraft were even converted by removing passenger seats, as airlines tried to gather revenue, deliver critical cargo, and ensure crews were still licensed to fly once the world finally opened up again.  

Growing number of conversions 

While P2F conversions are estimated to continue growing, the question is whether there will be enough demand to warrant the number of conversions set to take place in the near future.

According to an analysis by the Centre for Aviation (CAPA) and AeroDynamic Advisory from March 2022, it is estimated that the number of annual P2F conversions will more than double when compared to 70 conversions between 2010 and 2020 to 163 between 2021 and 2030. The peak of conversions is likely to take place between 2023 and 2025, before dropping off in the following five years. But the more than double rate would remain, with manufacturers continuing to add additional aircraft types certified to operate as converted freighters.

According to Cirium’s Q3 2022 analysis, almost 200 P2F conversions would be completed in 2022, a significant increase compared to the 120+ retoolings in 2021. “We have noted record numbers of conversion order announcements – some 370 in 2021 and almost 190 so far in 2022. This is being driven by the growth in e-commerce, availability of feedstock during and post the pandemic, lessors converting surplus passenger aircraft from their portfolios, and also some customers securing slots in the mid-2020s,” Cirium’s analysis continued.

But the aviation analytics company also stated there were signs of concern that a bubble might be forming, particularly considering there could be as many as 220 conversions completed in 2023. The long-term forecast suggested that the industry will need between 1,600 and 2,000 converted freighters in the next 20 years. “The continuing growth of e-commerce is a key driver for the conversions market,” Cirium concluded in its analysis for the third quarter of last year.

During the past few years, manufacturers have been keen to introduce additional types of jets that can be converted to freighters.

Elbe Flugzeugwerke (EFW), a company jointly owned by Airbus and ST Engineering, delivered the first A321P2F in October 2020, while in July 2022, it delivered the first A320P2F. In March 2022, Embraer announced its freighter conversion program for the E190/E195s, while De Havilland Canada added three cargo conversion solutions, including Quick Change (QC), Package Freighter (PF), and Freighter with Large Cargo Door (F-LCD) for the Dash 8-400 aircraft, in July 2022. Even China’s Commercial Aircraft Corporation of China (COMAC) introduced a P2F program for the ARJ21 in January 2023. 

Boeing, despite there already being three conversion programs for the 777-300ER, is looking to add its own P2F solution for the largest Triple Seven model, as reported by Leeham News. However, the reason behind the decision is not a soaring demand for cargo aircraft but rather the need to provide customers, who have been impacted by delays related to the 787 program, with second-hand 777s. Subsequently, once the Dreamliners are delivered to airlines, an abundance of passenger Triple Sevens could negatively impact the demand for new aircraft, including the 777 and 787. Thus, controlling the supply of used 777s would protect its own order book and ensure that Triple Seven production lines continue to move before the 777X is introduced onto the market. 

Changing market conditions 

But as the world began to open up, the demand for goods and e-commerce services and, in turn, cargo services, began to drop.

In November 2022, a traditional pre-holiday peak season, which includes early December 2022, air cargo performance softened, the International Air Transport Association’s (IATA) noted in its monthly global air cargo market report.  Even if monthly market demand remained stable, signals were mixed: export orders shrunk globally, and China continued to battle soaring numbers of new infections despite the country finally ending its stringent COVID-19 policy in December 2022. On the contrary, “oil prices stabilized, inflation slowed and there was a slight expansion in goods traded globally,” said Willie Walsh, the Director General of IATA. 

Meanwhile, according to WorldACD, a data-publishing company for the air cargo industry, rates fell throughout December 2022, experiencing a sharp drop of 26% between December 19 and December 26, and December 26, 2022, and January 1, 2023. And while the post-holiday upswing was lagging by a week or so compared to 2022, “the recovery is similar in magnitude to last year”. Furthermore, “when looking at the first two weeks together, the scale of this year’s recovery (+18%) is similar to that seen last year (+16%)”. But mixed signals were once again present, as “tonnages were still down from all regions in this two-week period,” the WorldACD analysis continued, adding that rates are 25% lower compared to the same period in 2022, “despite the effects of higher fuel surcharges, but they remain significantly above pre-Covid levels”.  

One core change is that China has opened to international travel and airlines have begun adding seats on widebody aircraft to and from the country, with scheduled capacity in February 2023 increasing by 23% and by 13% in March, according to data from Cirium, as reported by Reuters. Subsequently, this means that more belly cargo capacity will be added to/from flights to China. Etihad Airways, for example, used the opening of borders in China to add one more weekly flight from the United Arab Emirates (UAE) to China from February 2, 2023. As such, the eight weekly flights will amount to 850 tons of cargo capacity out of Shanghai, China.

Etihad Airways operates five Boeing 777F aircraft. 

Cathay Pacific, meanwhile, expects the cargo market to recover in mid-February 2023. While news of cross-border trucking between Hong Kong and China was welcoming, “with COVID-19 still impacting various parts of the country, coupled with Chinese New Year occurring in January, the air cargo market will continue to experience challenges until mid-February,” stated Ronald Lam, the CEO of Cathay Pacific, as he overviewed the carrier’s results in 2022 and provided a short-term outlook.

Hong Kong International Airport (HKG), where Cathay Pacific is based, is one of the busiest cargo airports in the world.  

Aircraft delivery delays and the second-hand market 

Another change of circumstance is that aircraft, whether single or twin-aisle, are once again in demand, driving up prices on the second-hand market. Airlines have continued to reactivate aircraft. According to Cirium’s Q3 2022 report, around 3,700 narrow and wide-body jets were parked as of Q3 2022, which represents 16% of the total aircraft fleet. In the single-aisle jet market, “the parked inventory in particular now represents 14% of the overall fleet, only some 5 points more than the 9% we saw at the start of the crisis”.

One of the reasons why more and more aircraft are being brought back to service is that Airbus and Boeing have faced supply chain issues that, in turn, result in delivery delays for new jets. Airbus had to change its delivery target throughout 2022, eventually reducing the number to 700. In December 2022, the European Original Equipment Manufacturer (OEM) had to concede that this goal was not achievable due to a “complex operating environment”. It eventually delivered 661 aircraft.

Boeing, meanwhile, delivered 480 jets. The US OEM had its own issues, such as the temporary suspension of 787 deliveries that lasted until August 2022 and the ramifications of the 737 MAX groundings, with Boeing unable to deliver the type to Chinese customers since March 2019. While China Southern Airlines flew the first commercial flight in China with the type on January 13, 2023, data suggests that no 737 MAX aircraft were delivered to Chinese airlines during the first month of the year. Meanwhile, Boeing delivered three jets of the type on January 20, 2023, alone, with examples going to Akasa Air (not taken up airframe, first flight in October 2019), Southwest Airlines (first flight December 2022), and United Airlines (first flight January 2023). Additionally, a page dedicated to the 737 MAX published on indicated that there are 200 already-built frames waiting for delivery, as of January 20, 2023.

Subsequently, as airlines scramble to ramp up capacity offered for the upcoming summer season, which starts on March 26, 2023, per IATA, they are turning to the second-hand market to acquire airframes. Delta Air Lines, for example, has been introducing older 737-900ERs previously flown by Lion Air to bolster its capacity for the upcoming months. Air India has also done the same with ex-Delta Boeing 777-200LRs, including VT-AEF and VT-AEG. With that, the feedstock for conversions has been dwindling, and even then, it is getting more expensive to acquire aircraft that would be turned into freighters. This is only exacerbated by inflation, which has driven up prices across the board. For example, even if Airbus failed to achieve its delivery target of 700 aircraft, that has not negatively impacted its financial guidance for 2022.  

An uncertain future? 

We have seen over the years how a single major event can disrupt the travel and aviation industry. However, the sector has always been able to eventually recover from even the deepest crises, including the Global Financial Crisis (GFC) of 2008. While the industry has not yet fully bounced back from the COVID-19 pandemic, we are continuing to witness a slow but steady recovery. 

Cargo has experienced difficult periods throughout history. The GFC had a massive impact on freight volumes. In its 2009 annual report IATA noted: “Measured in freight tonne kilometers (FTKs), airfreight began the year at a fairly robust pace, growing around 5% in the first quarter. By December, however, airfreight volumes had collapsed more than 22% below the level a year earlier.” Even in 2001, when the September 11 attacks grounded many fleets across the globe, “the decline was only 13.9%,” said Giovanni Bisignani, the then-Director General of the association. 

Still, by 2014, cargo had begun to recover. Steady growth was witnessed throughout Q2 2013, continued throughout the year, and the freight-carrying sector “continued to gather strength in 2014, nearly recovering the long-term trend rate” Boeing noted in its overview of air cargo for 2014 and 2015, which was published in 2016. “World air cargo traffic is forecast to grow an average 4.7% per year over the next 20 years to reach a total of more than twice the number of revenue tonne-kilometers (RTK) logged in 2013,” the summary continued.

Incidentally, IATA indicated “that 2019 was the worst year in a decade for cargo demand,” as it was the first year that volumes had declined since 2012.

Straits Research predicted that the same-day delivery market would experience a Compound Annual Growth Rate (CAGR) of 21.3% between 2021 and 2030, reaching a market value of $34.4 billion by 2030. “The airways section will hold the second-largest share. Airways create a new market for logistics by offering quick and dependable service for the product’s initial delivery,” the report by the research company continued.  

Supply chain woes, which have restricted the ability of manufacturers to reach their annual delivery targets, are set to eventually disappear. Pratt & Whitney’s parent company, Raytheon Technologies, is expected to get back to pre-pandemic levels by the end of 2023 in terms of the supply of components to build jet engines. P&W supplies engines for the A320neo, A220, and Embraer E2 aircraft families. If OEMs can ramp up production in the coming years, it will bode well for the second-hand market, especially as airlines will look to purchase more fuel-efficient aircraft in the near-term future in order to replace their aging fleets. 

Boeing plans to build approximately 50 737 MAXs per month by 2025/2026, for example, ramping up from the current rate of 31 aircraft per month. Airbus, meanwhile, still targets 75 monthly deliveries “by the middle of the decade” without a certain date. 

As such, feedstock pricing for converted freighters would normalize and, once again, allow operators to purchase airframes at more financially attractive conditions. With the arrival of the A321P2F, as well as the A320P2F, and Boeing expanding conversion facilities for the 737-800, cargo airlines will be able to source aircraft that would replace the older-generation aircraft. The same could be said about the A330, for example, which, together with the three types mentioned previously, leads to the P2F market pivoting “around a generational shift from the older types like the 737 Classic, 757 and 767 to newer types like the 737NG, A321, and A330,” concluded Scott Zhao, an Aviation Analyst at Ascend by Cirium.  

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