October 1, 2022

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

The airline industry’s record-breaking struggle to convert older passenger planes into freighters during the years of the travel-hungry coronavirus pandemic threatens to lead to overcrowding in cargo space as a weakening global economic picture hits demand.

Analysts say aircraft lessors, which have helped triple annual conversions since 2019, now not only face the fallout from falling freighter and freighter lease rates, but could be stuck with excess freighters or forced to cancel conversions.

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

AirAsia, Air Canada, Qantas Airways and Vietnam Airlines are among the carriers adding freighters to their fleets in bids to diversify revenue streams.

But freight rates have fallen nearly 40% from a December record, and shipping giant FedEx Corp said a slowdown in global demand would worsen after an acceleration in late August, clouding the year-end shipping peak.

The rapid economic downturn and growing pessimism are a rapid reversal from pandemic expectations, when falling aircraft values, combined with rising cargo demand, prompted 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, which itself was a record, and 64 in 2019, rising even higher to 221 next year, based on current orders, according to Cirium data.

Firms such as Singapore Technologies (ST) Engineering, Swire Pacific’s Hong Kong Aircraft Engineering Company (HAECO) and planemaker Boeing Co have added passenger-to-freight (P2F) capabilities to take up spare capacity in maintenance hangars after many passenger planes grounded.

P2F converters are struggling to keep up with rising demand as they expand capacity amid a tight labor market, rising costs and supply chain disruptions following repeated Chinese blockades.

“We’re fully booked until about 2026,” said Jeffrey Lam, president of commercial aerospace for ST Engineering. “So really, for new customers coming in now to book seats, they need to book in late 2026 or 2027.”

Lessors such as AerCap Holdings NV, BBAM and Aero Capital Solutions (ACS) have piled on, in some cases even booking speculative conversion dates before signing up airline clients.

“As airplanes age and airlines consider asset changes, the lessor community has a more important role or a larger share of this transaction base,” said Mike Doellefeld, Boeing Global Services vice president of commercial programs.

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

Although some airlines have been eagerly buying freighters, fueled by a strong e-commerce market and the slow return of passenger flights with cargo capacity in some regions, analysts wonder how long the trend will last.

“Especially in the narrow body segment, I think the effect will be that rental rates will come down,” said Frederic Horst, chief executive of Sydney-based freight consultancy Trade and Transport Group.

“Lessors may be stuck with converted aircraft.”

Lessors face more risk from converters, who can fill their hangars with other maintenance work as passenger demand recovers, Horst added.

For its part, HAECO is trying to avoid overexposure to charterer P2F conversions, said Richard Kendall, its chief operating officer, who has seen demand for cargo ships fall in several years.

“We don’t want to see the bubble burst and be caught with broken commitments that we can’t then fulfill,” he added on the sidelines of the Asia-Pacific MRO conference in Singapore.

Conversion of passenger planes to cargo planes in Israel
People work inside and around a passenger plane as it is being converted into a cargo plane at the Israel Aerospace Industries site at Ben Gurion International Airport, Lod, Israel on December 10, 2020. Picture taken on December 10, 2020.

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