Bleaker economy could sour airline industry's bet on cargo planes

Singapore Technologies Engineering

22/09/2022 09:28

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    By Jamie Freed
       SINGAPORE, Sept 22 (Reuters) - The airline industry's
record-breaking scramble to convert older passenger jets to
freighters during the travel-starved years of the coronavirus
pandemic threatens to bring a glut of cargo space as a dimming
global economic picture hits demand.
    Analysts say aircraft lessors, who helped drive a tripling
in annual conversions since 2019, now face not only fallout from
falling rates for cargo and freighter leases, but could get
stuck with excess freighters or be forced to cancel conversions.
    "This surge in conversions has raised some concerns about a
bubble," said Chris Seymour, the head of market analysis for
aviation advisory group Ascend by Cirium, who fears there could
be a slowdown by the middle of the decade. 
    AirAsia  CAPI.KL , Air Canada  AC.TO , Qantas Airways
 QAN.AX  and Vietnam Airlines  HVN.HM  are among the carriers
adding freighters to their fleets in their bids to diversify
sources of revenue.
    But cargo rates have fallen nearly 40% from December's
record, with shipping giant FedEx Corp  FDX.N  saying a global
demand slowdown is set to worsen after an acceleration at the
end of August, clouding the peak year-end shipping season.
 urn:newsml:reuters.com:*:nL1N30N0H7
    The rapid economic downturn and growing pessimism are a
swift reversal from pandemic expectations, when falling aircraft
values, combined with a surge in cargo demand, drove lessors and
airlines to give used planes 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 will
climb higher still to 221 next year, based on current orders,
according to data from Cirium.
    Firms such as Singapore Technologies (ST) Engineering
 STEG.SI , Swire Pacific's  0019.HK  Hong Kong Aircraft
Engineering Company (HAECO) and planemaker Boeing Co  BA.N 
added passenger-to-freighter (P2F) conversion capabilities to
take up spare capacity at maintenance hangars after many
passenger planes were grounded. 
    P2F converters are struggling to keep up with the surge in
demand as they expand capacity amid a tight labour market,
rising costs and supply chain snarls in the wake of China's
on-again, off-again lockdowns.
    "We are fully booked until around 2026," said Jeffrey Lam,
president of commercial aerospace for ST Engineering. "So,
really, for new customers that are coming in now to book slots,
they have to book in late 2026 or 2027."
    Lessors such as AerCap Holdings NV  AER.N , BBAM and Aero
Capital Solutions (ACS) have piled in, even, in some cases,
booking speculative conversion slots before signing up airline
customers.
    "As aircraft age and airlines think about asset changes, the
lessor community has a more vital role or a greater stake in
this base of transactions," said Mike Doellefeld, the vice
president of Boeing Global Services' commercial programmes.
    AerCap declined to comment, while BBAM and ACS did not
respond to requests for comment.
    Even though some airlines have eagerly snapped up
freighters, prompted by the strong e-commerce market and the
slow return of passenger flights with cargo belly capacity in
some regions, analysts wonder how long that trend will last.
    "Particularly in the narrowbody segment, I think the effect
is going to be that lease rates are going to drop," said
Frederic Horst, managing director of Sydney-based freight
consultancy Trade and Transport Group.
    "Lessors may be stuck with converted planes."
    Lessors face greater 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 being overexposed to
P2F conversions from lessors, said Richard Kendall, its chief
operating officer, who saw a drop-off in freighter demand in a
couple of years.
    "We don't want to see the bubble burst and be caught with
broken commitments that we can't then backfill," he added on the
sidelines of the MRO Asia-Pacific conference in Singapore.
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Passenger planes converted into dedicated freighters    https://graphics.reuters.com/AIRLINES-FREIGHT/jnpwemnykpw/
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 (Reporting by Jamie Freed; Editing by Clarence Fernandez)
 ((Jamie.Freed@thomsonreuters.com;))