Feature
Cargo strategies
title here
Cash converters
The passenger-to-freighter conversions market is seeing significant activity,
especially for Boeing 737 feedstock. Martin Rivers investigates
A
Boeing 737 Classics dominate viation consultancy FlightAscend predicts
the conversion market global demand for 1,530 jet conversions over
(photo: PEMCO ATSG)
the next two decades more than 70% of them
narrowbodies as passenger airlines switch to the latest
generations of fuel-efficient aircraft, and older models
are re-purposed for a new life flying cargo. Last year saw
a total of 74 passenger-to-freighter conversions, marking
steady growth on the 65 completed in 2015. The work is
conducted by a handful of highly specialised companies
that obtain supplemental type certificates (STCs) for
their designs from national regulators.
Aircraft valuations are the main factor in determining
the viability of such projects, with cargo customers
routinely shelling out $3.5 million for conversions
and $1.5 million for maintenance, on top of base
prices for narrowbodies. Older, more affordable
models like Boeing 737 Classics (-400s and -300s)
therefore dominate the conversion market. But as
the availability of Classics dwindles, the industry is
turning its attention to younger and much pricier
737NGs (-800s and -700s), the current generation of
narrowbody passenger jets.
For companies like Miami-based Aeronautical
Engineers Inc (AEI), the time has also come to introduce
52 / Low Cost & Regional Airline Business
novel conversions like the Bombardier CRJ200 an
eight-pallet freighter derived from the 50-seat passenger
jet. Other major players such as Bedek, a subsidiary of
Israel Aerospace Industries (IAI), are evaluating Airbus
A320 feedstock.
Yet even as the market explores these new types,
no-one is taking their eye off the all-important 737
workhorse. "People are converting anything from the
early 90s they can get their hands on," explains Robert
Convey, Senior Vice President of Sales & Marketing at AEI.
"Youre going to see any and all -400s converted for
the next probably three or four years. Even though well
have our STC for the -800 around the end of this year,
Im thinking Im not going to see large volumes of -800s
being converted until about 2020, maybe 2021. Theyre
just too expensiveThe other thing that will drive it
is when absolutely all the -400s are done, but with a
couple of hundred still out there thats some time away.
Its not going to stop tomorrow."
AEIs recent activity underscores the continued
popularity of Classic conversions. The company delivered
17 aircraft last year and 19 in 2015 all but three of which
were -400s. Its mechanics are currently working on 10 more
-400s, with slots for a further 20 of the type backlogged.
www.lowcostandregional.com / April 2017

The company has received firm orders and options for
101 converted -800s, half of which were placed by lessors
GECAS and Aviation Capital Group. Launch customer
GECAS says it plans to provide at least two of the
aircraft to Dublin-based ASL Aviation Group, an existing
customer of AEIs, when they begin arriving next year. As
Convey admits, however, enthusiasm among these early
adopters is driven more by necessity than anything else.
"The youngest -400s are still too old to get into
Thailand," he notes, referring to Thai regulations that
prohibit certification of aircraft older than 18 years. "ASL
operates [cargo airline] K-Mile Air out of Thailand, so
their plan is to put several of our -800s in there."
While the oldest NGs dating from 1998-2000 sell for
about $12 million, age restrictions make 2002-6 vintage
models far more appealing to current NG customers. "Were
seeing a focus on that age bracket," he confirms. "And those
aeroplanes are still $15 million average pricing."
Financial justification
Given that converted -800s hold just one more pallet
than converted -400s 12 versus 11 Convey says most
operators "cant financially justify" moving to NGs at current
pricing levels. This financial barrier is in turn fuelling a
rebound in Classic feedstock values, with prices rising from
as little as $3 million several years ago to $4.5 million today.
The gulf in pricing between NGs and Classics is perhaps
most stark when looking at lease rates: a -400 costs about
$120-130,000 per month to rent, according to Convey,
compared to $200-210,000 per month for an -800.
Two closely related market developments will
ultimately dictate how quickly NG prices fall: the launch of
next-generation narrowbodies like Boeings 737 MAX and
Airbuss A320neo, which will be used to replace current-
generation passenger jets; and the price of crude oil, which
underpins the commercial rationale for upgrading to
fuel-efficient aircraft.
"Theres a fork in the road depending on where oil
goes," Convey explains. "[Passenger airlines] are not going
to pay the extra rent for a MAX thats saving fuel money
if fuel doesnt cost a lotConversely, if we go back up to
anywhere near $100 a barrel, youre going to see a rapid
switch from NG to MAX. [In that scenario] NGs will then
become available in the market. Theres a lot of them out
there 4,000-plus so youre going to see saturation pretty
quickly in that high-fuel environment. The prices will drop,
and conversions will benefit."
Rafi Matalon, Bedeks Senior Director General Manager
of Marketing and Business Development, agrees that the
Classics days are numbered. But where Convey stresses the
chilling effect of cheap oil, Matalon believes the winds of
change are already blowing for fleet managers.
"The prices of the -800 feedstock will come down the
moment that the 737 MAX will arrive at the passenger
operators," Matalon predicts, referring to this summers
April 2017 / www.lowcostandregional.com
Cargo strategies
induction of the first MAX by Norwegian Air Shuttle. "There
is no choice. They cannot operate both of them. They have
to phase out the old platforms.
"And if the oil price goes up , the Classic will be
trash. Nobody is going to operate the Classic. Its like
a gas station."
Asked what pricing is needed to entice cargo
customers to NGs, Matalon said conversions will "ramp
up" when feedstock values hit $6-7 million, while
Convey believes the tipping point could be as high as
$8-9 million. That latter range equates to lease rates of
about $170-180,000 per month.
Bedek is taking a different path to AEI, starting its NG
output with a -700 programme before subsequently
inducting the -800. The company has already carried out
test flights of the shorter variant and expects to secure
its STC about the time this article goes to press, paving
the way for -800 certification this summer.
"Instead of stepping up a very high step, we have an
intermediate solution with the -700," Matalon affirms.
"Its good preparation to go to the -800." Texas-based
lessor Spectre Air Capital has placed a firm order for 15
of Bedeks NGs with options for 15 more, splitting the
commitment between the two variants. At least three of
the -800s will be delivered to South Koreas Air Incheon.
For AEI, meanwhile, the receipt of its CRJ200 STC in
October opens a welcome production bridge between
its -400 and -800 programmes.
Regional jet conversions
"What caught my eye was the lack of replacement
freighters in that regional sector," Convey says of the
programme. "The ones flying now are Douglas DC-6s,
Convair CV580s, Saab 340s, Fokker 50s, just a bunch of
old aircraft. Other than maybe the ATR 42 or 72, there
were no [successor] large-cargo-door mods out there.
So I started talking to Bombardier and there were a lot of
AEI has introduced the CRJ200
[CRJ] aeroplanes available at scrap value, engine value to the conversion market
It just seemed to make sense." f (photo: Bombardier)
Low Cost & Regional Airline Business / 53
Feature
Cargo strategies
title here

"The Boeing family has been converted in the last

If the oil price goes up, the 737 Classic will be out, warns Matalon
(photo: IAI Bedek)
30-40 years. Right now the Airbus is the first one, so
maybe they are facing a problem that we faced 30 years
ago," Matalon says, referring to Bedeks decades-long
history converting US-built aircraft, as well IAIs experience
manufacturing jets like the Gulfstream 280. "You have to
be an expert to develop a conversion. Its not like going to
develop new aircraft. I say this all the time."
Concerns over cost and complexity could scupper
other proposed programmes, such as BAE Systemss
plans for a converted version of its Avro RJ regional jet.
About 130 of those aircraft are currently in active service
around the world, with feedstock prices estimated at
just $1-1.5 million.
Still, whatever new types emerge, the 737s ubiquity
and long history of conversions will guarantee that
-700s and -800s eventually dominate the narrowbody
freighter market. Boeing itself is working on an -800
conversion programme with Chinas STAECO, to date
receiving up to 60 orders. Other companies will follow as
price and supply move together.

The company has already secured commitments

for 46 of the type from customers including Michigan-
based IFL Group, Canadas Avmax and Mexicos
Aeronaves TSM. Negotiations are ongoing with buyers
in Colombia, South Africa, the Middle East and Europe.
"Anywhere youre flying a long thin route, about 1,000
miles, 15,000 pounds of freight, you need the jet speed,"
Convey explains. "If its over 500 miles the turboprop
doesnt make a lot of sense, because its too slow. And
theres a lot of little markets like that. Itll find its niche."
Longer-term, AEI is beginning to think about future
conversion programmes for the CRJ700 and the
737-900ER. "One or both of those will be our next
projects," he affirms.
Industry efforts to convert Airbus narrowbodies
have intensified since 2014, when California-based
PACAVI formally announced the first such programme
in partnership with Chinas GAMECO. The following
year, Singapore-based ST Aerospace unveiled plans
for its own collaboration with Elbe Flugzeugwerke, a
subsidiary of Airbus parent EADS. But just as PACAVI later
postponed its project, neither ST Aerospace nor Bedek
seem in any rush to start work. Convey sees a lack of replacement freighters in the regional
"This is in our planning," Matalon affirms. "But right sector (photo: AEI)
now we dont see this as the right time to go to market,
based on the very high prices of the feedstockThe "This is a cycle weve seen before. Its not shocking,"
moment that it is economical to buy feedstock and to Convey says of the gradual transition from older to
invest money on conversions, we will be there." newer feedstock. "The 737-300 is leasing for $105,000
He suggests that the A321 is the most attractive a month today, but when that plane first came outIt
variant given its comparable size to the 757 a popular leased for $185,000 a month.
conversion model championed by Oregon-based "People complain about it, but at the end of the day
Precision Aircraft Solutions but the barriers to entry for any start of a conversion programme is going to be
brand new types remain daunting. expensive because the feedstock is still too new."

54 / Low Cost & Regional Airline Business www.lowcostandregional.com / April 2017