November 28, 2022

Visitors look at presentations at the Singapore Technology (ST) Engineering booth during the opening day of the Singapore Airshow at the Changi Exhibition Center
Visitors look at displays at the Singapore Technology (ST) Engineering booth during the opening day of the Singapore Airshow at Changi Exhibition Center on February 16, 2016.

The airline industry’s record scramble to convert old passenger planes into cargo planes during the travel-thirsty years of the coronavirus pandemic threatens to create a glut of cargo space as a lackluster global economic picture hits demand.

Analysts say aircraft lessors, who have helped triple annual remittances since 2019, not only face the fallout from lower freight and charter rates, but may be bogged down with freight overloads or have to cancel remittances.

“This increase in remittances has raised some concerns about a bubble,” said Chris Seymour, head of market analysis for aviation advisory group Ascend by Cirium, who fears there will be a slowdown by mid-decade.

AirAsia, Air Canada, Qantas Airways and Vietnam Airlines are among the airlines adding shipments to their fleets in bids to diversify revenue sources.

But freight rates are down about 40% from the record high set in December, as shipping giant FedEx Corp said the slowdown in global demand is set to get worse after accelerating at the end of August, spoiling the peak of the year-end shipping season.

The rapid economic downturn and growing pessimism is a quick reversal of pandemic expectations, when declining aircraft values, combined with increased demand for goods, have prompted lessors and airlines to give used aircraft new life as dedicated cargo.

A record 192 conversions are expected this year, up from 122 last year, a record in itself, and 64 in 2019, and will climb even higher to 221 next year, based on current orders, according to data from Cirium.

Companies such as Singapore Technologies (ST) Engineering, Swire Pacific’s Hong Kong Aircraft Engineering Company (HAECO), and Boeing Co have added passenger-to-freight (P2F) conversion capabilities to accommodate spare capacity in maintenance hangars after several passenger aircraft were grounded.

P2F transformers are struggling to keep up with the increase in demand as they expand their capacity amid a tight job market, rising costs, and a faltering supply chain in the wake of China’s shutdowns again, and again.

“We are fully booked until around 2026,” said Jeffrey Lamm, head of commercial aviation for ST Engineering. “So, really, for the new customers who are now coming in to book in slots, they have to book in late 2026 or 2027.”

Leasing firms such as AerCap Holdings NV, BBAM and Aero Capital Solutions (ACS), have even, in some cases, booked speculative transfer slots before signing up for airline clients.

“As aircraft age and airlines consider changes to assets, the lessor community has a more active role or greater stake in this transaction base,” said Mike Doelfield, Vice President of Commercial Programs for Boeing Global Services.

AerCap declined to comment, while BBAM and ACS did not respond to requests for comment.

Although some airlines have eagerly cut back on cargo planes, spurred by the strong e-commerce market and the slow return of cargo-capacity passenger flights in some regions, analysts are wondering how long the trend will continue.

“Especially in the narrow cargo sector, I think the impact will be that rental rates will go down,” said Frederic Horst, managing director of Sydney-based freight consultancy Trade and Transport Group.

“Converted planes may stumble on lessors.”

Horst added that lessors are taking greater risks from transformers, which could fill their hangars with other maintenance work as passenger demand picks up.

For its part, HAECO is trying to avoid overexposure to P2F shifts from lessors, said Richard Kendall, chief operating officer, which has seen a drop in freight demand in a few years.

“We don’t want to see the bubble burst and get caught up in broken commitments that we can no longer re-implement,” he added on the sidelines of the MRO Asia-Pacific conference in Singapore.

Converting passenger planes into cargo ships in Israel
People work in and around a passenger plane as it is converted into a cargo plane at the Israel Aerospace Industries site at Ben Gurion International Airport, Lod, Israel, December 10, 2020. Photo taken December 10, 2020

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