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Growth in Freighter Fleet Fails to Bolster Values Of Older Types

November 26, 2018

Values of Older Aircraft Dependent on Conversion

Were it not for the large number of freighter conversions of the B747-200 in the 1980s and 1990s, the A300s in the 1990s, the B747-400s and B757s in the 2000s and the B737-400s in the 2010s, values of the passenger aircraft no longer in production would be significantly lower.

There was a view 20 years ago that virtually all aircraft types would be eligible for freighter conversion such was the perceived demand. In 1998 the Boeing World Air Cargo Forecast stated that the 1997 freighter fleet of 1,434 would increase to 2,706 freighters as of 2017 stimulated by an average annual growth rate of 6.5 percent for airfreight. The freighter fleet was therefore expected to double and this would have absorbed a reasonable proportion of passenger aircraft that would have otherwise been permanently retired. In the latest Boeing World Air Cargo Forecast, the 2017 fleet amounted to only 1,870 units representing an increase of only 30 percent. The Boeing forecasts from 20 years ago significantly overestimated demand for airfreight not least because of the limited growth that has taken place over the last ten years as well because of the amount of freight being carried on widebody passenger aircraft.

In the 2018 forecast, Boeing expects to see the fleet growth to 3,260 units representing nearly an 80 percent increase through to 2037. This may be viewed as optimistic in view of the limited growth in the number of conversions taking place over the last 20 years and the current problems associated with global trade. The actual freighter fleet forecast by Boeing will see some 2,650 deliveries of which 980 will be new production freighters and the remainder – 1,670 – will be conversions. A large number of these new and converted aircraft will replace existing freighter aircraft. The expected conversion of 1,670 aircraft or 83 per annum, comprises both wide and narrowbodies and therefore represents a small proportion of the 18,000 passenger aircraft that Boeing expects to be retired over the next 20 years or 900 each year on average. The conversion of B737-800s is progressing but there are already nearly 5,000 passenger -800s in service and over 20 years it would be expected that the majority would need to converted to remain in service thus representing an annual tally of 250 -800 conversions which compares with the Boeing forecast of a total of 83 conversions per annum for all aircraft.

For any freighter conversion program to be viable in the first instance requires that the values of the passenger feedstock is sufficiently low to warrant conversion although this is not always the case. In the mid 2000s, the values of passenger B747-400s increased by a significant amount as the demand for cargo space outstripped supply. Buyers had previously acquired passenger -400s at less than $30 million and then undertook a conversion at $25 million which then worth some $60 million but due to the demand, prices of more than $50 million were being paid for -400s before conversion. Conversely, the values of the B757 had to fall to less than $15 million before conversion became economical and similarly, a value of less than $5 million was needed to warrant the conversion of the B737 Classics. Today feedstock prices for the B757 conversion program are well below $10 million and for the B737-400, pricing is likely to be only $2-3 million. The economics of airfreight, which usually involves less utilization, makes it necessary to acquire less capital intensive aircraft. Buying a new or nearly new freighter makes little economic sense for the majority of cargo operators.

The residual values of the passenger configured A330ceo and B777 depend to some extent on the popularity of the freighter conversion program going forward. Any assessment of market values depends to some extent on the level of availability. A freighter conversion program can easily absorb some of the excess that inevitably emerges when a type ends production. With such acquisitions the number of aircraft on the market is reduced which in turn makes the aircraft worth more. The equation surrounding the extent of any premium is inevitably dependent on the number of aircraft being converted as a percent of the total fleet. The existence of a viable and established freighter conversion program can add some 20-50 percent to the value of the passenger configured aircraft compared to a type that does not have a viable conversion program.

Consequently, even assuming that the 80 percent increase in the freighter fleet is correct between 2017-2037, the number of conversions will be few and far between and unlikely to be sufficient to bolster the values of outgoing models unless such conversions focus on a few types at the expense of the majority. The previous held assumption that all passenger aircraft will have another life, is now seemingly untenable. Therefore, there is every likelihood that the values of the outgoing passenger aircraft will not benefit from the freighter conversion program except with the exception of a very few types.

 

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