E-commerce strongest demand driver for freighter conversions

The P2F conversion market is at a crossroads. Accelerated by the Covid-19 pandemic, there is an increased demand for freighter conversions while experts are cautious due to a potential oversupply. The industry is looking forward to seeing how this will turn out as the passenger belly capacity is coming back and the increased e-commerce movements is forecasted to push the demand up.

The recent 'Freighter Conversions Market 2022' report by 360 Market Updates reads, "The global freighter conversions market size is projected $400.1 million in 2022 and is forecasted to the size of $841 million by 2028, with unexpected a CAGR of 13 percent."

The aerospace consulting firm AeroDynamic Advisory in March 2022 analysis projected that the volumes of converted freighters will grow from ~70 aircraft per year pre-Covid to over 180 per year by 2025, and ~160/year on average for the entire decade.

It also reads, "This rapid increase in output is enabled by a significant amount of new capacity for conversions being added to the market – our firm estimates that nearly 30 new conversion lines will be opened by 2025 compared to 2020."

The senior associate at AeroDynamic Advisory Mike Stengel thinks that the landscape for freighter conversion programmes is becoming increasingly crowded, so his impression is that "announcements for new conversion programmes will slow down and the STC (Supplemental Type Certificates) holders will be in execution mode to achieve their goals."

"There are several conversion programmes that are still under development but are expected to be completed in the coming years, like the Mammoth 777, KMC 777, IAI A330, C-Cubed A320/321, Sine Draco A321, and the E-Jet Freighter. Moreover, there are ambitious plans to ramp up conversion capacity in the face of labour and supply chain challenges," he said.

"Announcements for new conversion programmes will slow down and the STC holders will be in execution mode to achieve their goals."
Mike Stengel, senior associate, AeroDynamic Advisory

The biggest thing in the conversion market, according to Aerovista's vice president of asset management Yuriy Tokarev is overheating and oversupply. Aerovista is an aircraft leasing, trading and asset management firm.

"The enthusiasm in demand for freighters and cargo solutions, that arrived with the lockdown, still keeps momentum but with the restoration of the passenger traffic (that is expected by 2024), the demand for converted freighters shall drop and shall be induced by the e-commerce segment only," he added.

Stengel also notes that the acceleration in e-commerce is perhaps the strongest fundamental demand driver.

"Giants like Amazon are shifting their supply chain such that there are more frequent shipments of smaller packages, which benefits air cargo over ocean container shipping. In addition, growing global e-commerce demand means that regional air cargo networks need to be built out. These two trends are tailwinds for narrowbody freighters like the 737NG and A320/321 and medium widebody freighters like the, 767, and A330," he said.

While discussing the geographies that will influence these conversions, Tokarev notes that the African market is significantly underserved regarding cargo solutions.

"The connection of China with Asian and European markets still looks very promising. There are signs of stable demand in South America," he added.

He also opines that big players in the market (FedEx, UPS, DHL) will determine the demand in the mid-term and noted that "the renewal of their fleets shall be the major driver of the evolution of the freighter conversion market."

"Investment decisions are to be made now, but the aircraft shall be converted in 2-3 years when the landscape of the market will be different."
Yuriy Tokarev, vice president of asset management, Aerovista

It was very recently that the Singapore-based ST Engineering and its joint venture with Airbus Elbe Flugzeugwerke (EFW) redelivered the world's first A320P2F to its launch customer Vaayu Group who placed the aircraft on lease to the Indian freighter operator Pradhaan Air Express.

There are a few ways by which Stengel looks at the aircraft types in the freighter conversion market.

First, "narrowbody programmes like the B737NG and A320/321 are behind most of the increase in conversion volumes," he notes.

In the second point, he opines that the focus on e-commerce means that platforms that offer higher cargo volume (not payload) are best-positioned.

"This doesn't mean everyone will migrate from narrowbodies to widebodies but rather will favour larger variants within a given aircraft class. For example, e-commerce-oriented operators seeking narrowbodies will prefer a 737-800 over a 737-700, or an A330-300 over an A330-200 on the widebody side," he said.

Third, "STCs that have a global presence and strong network of authorised conversion providers are best-positioned to achieve high market share. Affiliation with the aircraft OEMs also provides an advantage," he added.

However, Tokarev expressed his concern about the over-optimism in the B737-800F conversion market. "In 2-3 years there will be a significant drop in demand although these aircraft replace fleets of retiring B737-300/400F," he said.

He also notes that the announcement of Airbus about launching the program of OEM-built A350 freighter was a big surprise for him.

He thinks, "Seems the demand for the passenger version is not sufficient and Airbus is trying to stimulate it."

He also thinks that the A321F programme is very promising as "A321F can be a decent replacement for the ageing population of B757 freighters," he said.

Tokarev wants airlines to be careful with the estimate for the growth of their markets.

"Investors should be cautious in making investment decisions regarding conversions. Investment decisions are to be made now, but the aircraft shall be converted in 2-3 years when the landscape of the market will be different," he reasons.

On the same line, Stengel notes that there is an emerging consensus that the record levels of freighter conversions will not last.

"While we see longer-term tailwinds that should support a higher baseline of freighter conversions compared to pre-Covid, we also expect the number of annual conversions to contract as passenger jets with belly capacity return to service in the coming years. In addition, there are a variety of lessors placing orders for converted freighters and we are monitoring their ability to place these aircraft with an operator. If this proves harder than expected, then the industry could potentially face excess air cargo capacity that will need to be corrected," he adds.

This was originally published in the August 2022 issue of The STAT Trade Times.