Freighter conversion market to normalise but faces over oversupply

Photo: AEI

The freighter conversion market is expected to normalise this year according to IBA, although there is a risk of narrowbody oversupply.

This year’s conversion market activity is expected to be “on a more normal level” compared to 2023, IBA has reported.

Cargo capacity demand during the pandemic drove conversion activity and this continued last year despite a slump in air cargo demand.

Narrowbody conversions make up the majority of growth in the market, said the aviation data, intelligence and advisory company during its recent ‘IBA Insight: How are Freighter Values Performing?’ webinar.

But the market could face an oversupply, primarily because of too many 737-800 passenger to freighter (P2F) aircraft, warned IBA analyst Jonathan McDonald.

There are currently 737-800 conversion programmes being carried out by Boeing, AEI and IAI. The model has dominated the conversion market since 2019, with 79 737-800 conversions carried out last year alone.

McDonald said of the number of conversions: “It needs monitoring. The reason is too many 737-800s being converted.”

“There’s only so much demand for aircraft” he explained. Therefore, if conversions continue at the current rate this will “flood the market with too many aircraft”.

He added: “At some point, some reality has got to set in and it’s got to settle back down to the numbers we were seeing in 2021-22 and maybe even less.”

McDonald further noted: “Storage and inactivity do exceed 2019 levels now due to this cautionary outlook that is occurring.”

A321P2F numbers growing

While 737-800P2Fs face a reckoning, Airbus A321-200P2Fs will become much more common in the future.

A321P2F conversions will be able to ramp up as passenger (PAX) feedstock becomes available, said McDonald.

More A320-200P2F aircraft conversions are expected too.

Meanwhile, conversions of 737-300SF and 737-400SF, plus the 757-200PCF have declined.

These are “in their twilight years now” and “expected to conclude soon” as limited passenger aircraft remain, said McDonald.

Weighing up the ability of the A321P2F to replace the 757-200PCF, he reflects that the extra tonnage capacity and range of the 757-200PCF is considered “almost unique in certain markets” by some operators and the A321P2F doesn’t quite match up.

But on routes where the range of the 757 isn’t needed, the lower engine maintenance costs and improved fuel burn on the A321 may be favoured.

Widebody trends

Moving onto widebody analysis, McDonald confirmed IBA expects the prevalence of 767-300ER conversions to decrease, with most feedstock accounted for.

“Realistically if you take a combination of what little GE (engine) feedstock is left behind, a shift to Pratt and Whitney (engine), because that’s what’s becoming available now, and then the last few kits to convert you’re probably looking at around…2026-2027 before you finally see the programme get wrapped up.”

A330-300 conversions are expected to ramp up, with an increase in A330-200s alongside this, although these had previously been “sluggish”.

Looking to the future, McDonald said: “You can see the 767s dominance decreasing while the A330s become more and more prominent.”

The 777P2F is another model that is increasing in numbers.

There are currently three 777-300ER conversion programmes in place with IAI, KMC and Mammoth, plus one 777-200LR programme in development with Mammoth.

Source: AviaAM

“IAI and Mammoth are further ahead and more likely to launch sooner,” commented McDonald.

“The -200LR is probably going to be more range driven because (it has) a much smaller fuselage…whereas the -300ER programme will probably be more volume driven.”

He noted that there are less -200LRs to convert than the -300ER – of which there are nearly 800 PAX.

Leasing analysis

The oversupply of 737-800P2Fs is having an impact on lease rates, revealed McDonald.

“Lease rates have softened particularly on the 737-800P2Fs, despite the high feedstock cost.”

He said if over conversion continues it could become harder to place the aircraft and “you might see the rates slip even lower”.

In fact, the 737-800 oversupply is “dragging lease rates of other aircraft down with it”.

The A321P2F was expensive to lease initially because lease rates had to justify the initial investments, but as more feedstock becomes available and therefore more of the conversions enter the market, lease rates have come down, explained McDonald.

They are also one such model that has been further been impacted by the 737-800P2F oversupply issue.

But he further commented that because the cargo market is resilient there’s a reasonable possibility the A321P2F rates could “settle and perhaps even increase again long term”.

A more recent slight increase is partly on account of an increase in value of A321P2F passenger feedstock.

“With the recent high cost of materials and labour, high inflation scenario that we’re in, therefore high conversion cost, the resulting aircraft has gone up (in lease rates) as well.”

In any case, the lease rates for the 737-800P2F may well take longer to recover than the A321P2F because of the larger number of aircraft.

Meanwhile, lease rates on the 757-200PCF have declined, apart from a small spike recently, due to the high cost of maintenance.

McDonald said it’s an ageing aircraft now. “Directionally I can see the 757 continuing to decline.”

Likewise, lease rates for the 737-400SF will also likely decline due to their age.

The 737-400SF is the most mature of the aircraft and therefore the lease rate is lower, noted McDonald.

Looking at the market value of the widebodies, he said that lease rates are cycle driven: “The values of the lease rates look a little bit more rangey than the narrowbodies.

“These are large aircraft and they tend to go through cycles by default, deviate a lot more.”

For example, to date the 747-400P2F, with four engines, has increased in value and then settled.

He noted: “Often one of the drivers alone is the value of the engines.”

The 767P2Fs are “still relatively stable”, McDonald added.

Speaking about the newer conversions, he said: “The highest value prospect is probably the A330-300P2F. It has a relatively stable lease rate platform.”

Regardless of the popularity of various freighter conversion models, according to IBA there will be limited feedstock available due to passenger market demand and this is predicted to constrain future conversion activity.

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Rebecca Jeffrey

Rebecca Jeffrey
New to aviation journalism, I joined Air Cargo News in late 2021 as deputy editor. I previously worked for Mercator Media’s six maritime sector magazines as a reporter, heading up news for Port Strategy. Prior to this, I was editor for Recruitment International (now TALiNT International). Contact me on: [email protected]