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World Trade Issues Set to Impact Rentals?

May 27, 2019

The best that can be said for the trend in airfreight growth is that it is uncertain. The increase for March was virtually non-existent and indeed for the first three months of 2019, there was a fall in traffic. The global economy continues to suffer from the lack of progress with regard to trade talks between China and the U.S. This means that the fall in traffic at the same time as capacity is being added has resulted in the load factor experiencing a decline. This is now 46.5 percent, far less than the 50 percent which is considered desirable (unlike passenger aircraft, cargo aircraft transport goods in one direction or carry less on the return flight). The fall in traffic is noticeable in the Asia/Pacific region, previously the powerhouse of airfreight. Traffic was done by nearly four percent compared to a year ago demonstrating the weakness of the market. The slowing Chinese economy has been particularly evident. The Middle East traffic has also suffered.

With no clear indication that the market will improve in the coming months the sustained delivery of new freighter aircraft and underfloor cargo capacity on passenger aircraft means that some older aircraft are vulnerable. The higher price of fuel also makes the older aircraft less efficient although of course with lower utilization the fuel component of direct operating costs is relatively low. Nonetheless, the rentals of nearly all freighter aircraft be described as fragile. The exception is the B767F which continues to be held in high regard not least because of the acquisition of additional units by Amazon.

Where FTK = Freight tonne kilometers; AFTK = Available freight tonne kilometers; FLF = freight load factor. Rentals provided by The Aircraft Value Analysis Company Limited www.aircraftvalues.net, www.aircraftvalues.com.

 

Freighter Lease Rates (Dry) US$ ‘000s pm – May 2019
Aircraft Age Rental Trend Analysis
A300F4 1976-79 45-65 The age of the aircraft and reduction in the fleet is taking its toll on the type and rentals are beginning to suffer after a long period of stability. The maintenance issues are increasing even with low utilisation and when a D check and engine overhaul are due owners have the difficult decision of whether to pay for costs or admit the inevitable – ie that the aircraft should be scrapped. The type is much more likely to be provided on the basis of a power by the hour arrangement (a term coined by Rolls-Royce) with a minimum number of hours/paid for each month rather than seeking a formal operating lease. There will also ACMI leasing.
1980-84 50-78
A300-600RF 1994-981999-06 85-11590-190 The -600RF has the volume and relative youth to meet the demands of a number of operators. Again, the -600RF will not likely be used 3-4,000 hours per annum but will more likely be used for 1-1,500 hours. Such low utilisation has the benefit of allowing maintenance costs to be spread over a much longer calendar interval particularly with respect to the engine SVs and LLPs. This contrasts with the passenger market where intense utilisation is still likely to be a requirement. There are some 175 A300-600Fs and A300-600RFs in operation still with 15 operators. Of these 15 operators, FexDEex and UPS operate 120 aircraft. EAT operate another 20. The aircraft has good volume for intra-regional traffic as well as the small package industry.
A310-300F 1985-97 70-95 The -300F has reasonable volumes but with the B737-800 and A321 there are now alternatives emerging even if they do not offer the same volumes. As long as maintenance reserves or power by the hour arrangements continue then the type should be able to remain in service for a little longer.
A330-200F 2009-18 250-640 The -200F cannot be classed as a success but neither can it be considered a failure. The A330-200F has been one of the few dedicated freighters that Airbus has produced. The lease rentals are weaker as demand can be sporadic with potential buyers determining the sale price to some extent given that there are relatively few interested parties. The freight on regional routes can quickly change and this makes it necessary to divest or acquire equipment.
B727-100C 1965-71 15-30 A type that is well and truly past its sell by date for all the right reasons. With so many scrapped and in storage there is no upside for lease rentals and the scrappage rate continues such that there are few in service.
B727-100CH 1965-71 20-35 The aircraft can be bought for small change but maintenance and operating takes rather deeper pockets and patience. The lease rentals are not expected to move but there can be a considerable range in rentals. There are still some operating without hushkits.
B727-200FADV 1972-78 20-45 There can still be some variation in lease rentals as the aircraft is considered to be viable by a surprising number of operators. Leasing still takes place given that it is an inexpensive alternative to the B757 and other younger freighters. Noise is an issue as is emissions.
1979-83 20-45
B727-200FHA 1972-78 25-40 The lease rentals of the -200FHA can vary considerably as any lessee will be anxious to retain the aircraft with the existing lessee rather than seek a new one. The hushkit is a necessity in so many markets but some can still be found without them. The freighter still has considerable utility for many operators. There are just too many out there to ignore. The type will be good for leasing for many more years though power by the hour arrangements will be preferable for some. The rates are becoming weaker as the market turns away from the type.
1979-83 35-45
B737-300SF/QC 1986-911992-97 75-9590-125 Lease rentals are holding steady but the age profile is something to be studied as placing aircraft can be difficult where age restrictions apply. However, even with the problems of the airfreight industry there is not expected to be any reduction in rentals for the time being. The higher price of fuel is not something which is to the advantage of the -300F or the -400F even if the fuel component of direct operating costs is relatively low. The demand for internet shopping remains strong but delivery rates continue to be extremely competitive ensuring that the cost of operating the freighter aircraft has to be reasonable. The arrival of the -800BCF threatens the -300/-400SF only in the medium to long term as the rates for the former are still too high except for those operating the aircraft more intensively. There are nearly 150 -300Fs in a freighter role with 65 operators with the most being in Asia with very few being operated in the USA. Nearly 140 -400Fs are now in service with some 40 operators which ensures that placement is relatively easy as new conversions are slowing.
B737-400SF 1988-97 90-140
B747-100SF 1969-76 N/A There is no place for the -100F in todays market even though it was once held in high regard.
B747-200SF 1971-78 65-90 The rates to be paid are likely to be on the basis of a power by the hour arrangement. The aircraft is still of some use as a backup and for its engines but that is about all.
1979-84 70-90
B747-400F 1993-981999-09 160-250260-460 With the downturn in the Asia/Pacific region this creates difficulties for the -400F as the fleet is highly dependent on demand from this region. As such rates are considered to have weakened slightly and whether this trend continues depends on how the market performs in the coming months. The lease rentals of freighter aircraft tend to exhibit greater volatility than passenger aircraft as demand for airfreight can easily increase or subside. The market for Huawei phones is an issue as some of the airfreight traffic will be for their products. Capacity needs are being met by new widebodies with underfloor capacity as well as the B777F and B747-8F making it more difficult to find homes for the plethora of -400Fs that are still parked. The considerable age range ensures that there exists lease rental convergence with fewer operators willing to pay such a premium for newer examples which offers similar the same capacity and performance.
B747-8F 2011-19 650-1700 While the focus of the market is on other things, deliveries of the -8F albeit at a snails pace. Production is ticking over and there are doubts as to whether it is making much in the way of profit but with no competition and considerable opportunity in terms of replacing existing aircraft, sustaining production will remain an important consideration for Boeing. Rates for the leviathan are holding reasonably steady.
B757SF 1986-93 80-110 The B757 is a great cargo aircraft that has proved its worth to as number of operators. Age is an issue that will increasingly make operators consider an alternative particularly as the price of the competition falls in the coming years. The range of the B757 is not used as an absolute and therefore the A321 is able to be used as a replacement not least because of the lower hold capacity. For the time being the rates are likely to remain stable.
1994-98 95-130
B767-200SF 1981-92 90-110 The rates for the -200SF can exhibit considerable variation compared to the indicated range depending on the length of the lease and the credit. The lease rental factors for freighters is usually higher than for passenger aircraft. The market for the -200SF is perhaps larger than might be imagined. The type provides capacity for the small package companies. There are some 13 operators of the 60 -200Fs that are in service. Moreover, the type is well dispersed with smaller operators though ABX, Atlas,and Star Air dominate the operator base. The aircraft has seemingly been more attractive than the A310-300F. The rates for the -200SF are considered to have stabilised as the type is to some extent suited to the needs of the expanding internet shopping phenomenon.
B767-300F 1995-992000-07 160-250220-330 The rates for the -300F may have actually increased slightly, one of the few types to actually do so. The demand from Amazon is a positive but the improvement also stems from other operators. Indeed, there is a danger when considering that demand emanates from a single operator as a switch to an alternative type can easily result in a surplus occurring at a time when demand deteriorates. A long term lease to a Tier 1 credit will inevitably allow for some discounting. There are some 140 in service with 15 operators although FedEx and UPS dominate as usual representing some 70 percent of the fleet. With high volume but low weight such as produce, the aircraft can fly long distances. There are a good many routes that require limited volume not least because of the lack of demand on the return trip. The -300F remains in production but whether younger aircraft warrant a much higher premium is doubtful.
B777-200F 2009-19 400-1200 The demand for the B777F continues but it must be wondered if Boeing are offering highly incentivised deals in order to keep production going. Lease rentals are stable but the age profile is such that some movement can be expected in the near future but it is doubtful that rates at the lower end of the indicated ranges will be accepted. There are over 140 in service with 17 operators. FedEx is the largest operator with 35 units. The age of the aircraft at ten years makes it ever more likely that more will enter the used market at rates that may increasingly see lease rental convergence. The lease rentals can vary considerably depending on the lessee and the length of the lease. The aircraft provides very good economics on those routes which have dense high value loads but this means the traffic issues in Asia/Pacific may impact rates going forward.
BAe146QT 1984-89 40-50 The market for the smaller jet freighters is inevitably small given that the economics only work on specialist routes. The lease rentals have fallen slightly but may higher for some lessees, particularly those featuring shorter terms.
MD11F 1990-93 60-70 There is increasingly limited appetite for the MD11F even with the improvement in the airfreight market. The operator base is much less diverse than it used to be and rates have inevitably declined again.
1994-99 60-70
Commentary reflects change from the last update to Freighter Rentals of January 2019

 

 

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