March 31, 2023

Visitors view displays at the Singapore Technology (ST) engineering booth during the opening day of the Singapore Airshow at the Changi Exhibition Centre.
Visitors view displays at the Singapore Technology (ST) engineering booth during the opening day of the Singapore Airshow at the Changi Exhibition Center on Feb. 16, 2016.

The airline industry’s record-breaking rush to convert aging passenger jets into freighters during the travel-starved years of the coronavirus pandemic threatens to lead to a glut of cargo space as the global economic picture dampens demand.

Analysts say charterers, which have helped tripling annual conversions since 2019, now face losses not only from falling cargo and freight lease rates, but could be stuck with excess freight passengers or forced to cancel conversions. .

“This surge in conversions has created some concern about a bubble,” said Chris Seymour, head of market analysis at aviation advisory group Ascend by Cerium, who fears a slowdown by mid-decade.

AirAsia, Air Canada, Qantas Airways and Vietnam Airlines are among those bidding to add freighters to their fleets to diversify revenue sources.

But with cargo rates down nearly 40% from a December record, shipping giant FedEx Corp said the slowdown in global demand was set to worsen after an acceleration at the end of August, clouded by the end of the peak year shipping season.

A rapid economic downturn and growing depression are a rapid reversal from pandemic expectations, while falling aircraft prices, combined with increased cargo demand, are driving lessors and airlines to give used aircraft new life as dedicated freighters.

A record 192 such conversions are forecast this year, up from 122 last year, itself a record, and 64 in 2019, and 221 more next year, based on current orders, according to Cerium data.

Companies such as Singapore Technologies (ST) Engineering, Soar Pacific’s Hong Kong Aircraft Engineering Company (HAECO) and plane maker Boeing Co have added passenger-to-freighter (P2F) conversion capabilities to take on extra capacity in maintenance hangars after many passenger planes are grounded.

P2F converters are struggling to keep up with a surge in demand as they expand capacity amid a tight labor market, rising costs and supply chain snarls in the wake of China’s on-again, off-again lockdown.

“We’re fully booked through 2026,” said Jeffrey Lam, ST Engineering’s president of commercial aerospace. “So, really, new customers who are coming in to book slots now, they have to book by the end of 2026 or 2027.”

Readers such as AerCap Holdings NV, BBAM and Aero Capital Solutions (ACS) book speculative conversion slots in some cases before airline customers sign up.

“As aircraft age and airlines think about changing assets, the tenant community has a more important role or a larger part of this transaction base,” said Mike Doelfeld, vice president of commercial programs at Boeing Global Services.

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

Spurred by a strong e-commerce market and a slowdown in passenger flights with cargo belly capacity in some regions, some airlines have eagerly snapped up cargo, with analysts wondering how long the trend will last.

“Especially in the narrowbody segment, I think lease rates are going to come down,” said Frederic Horst, managing director of Sydney-based freight consultancy Trade and Transport Group.

“Lasers can stick to transform planes.”

Readers face more risk than converters, which can fill their hangars with other maintenance work as passenger demand rebounds, Horst added.

For its part, HAECO is trying to avoid overexposure to P2F conversions from charterers, said its chief operating officer Richard Kendall, who has seen freight demand decline over the years.

“We don’t want the bubble to burst and get caught up in broken promises that we can’t backfill at the time,” he added on the sidelines of the MRO Asia-Pacific conference in Singapore.

Passenger aircraft are being converted into cargo aircraft in Israel
People work in and around a passenger plane during its conversion to a cargo plane at the Israel Aerospace Industries site in Lod, Ben Gurion International Airport, Israel, Dec. 10, 2020. Photo taken on December 10, 2020

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