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

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SINGAPORE — The airline industry’s record-breaking scramble to convert older passenger planes into cargo planes in the travel-hungry years of the coronavirus pandemic threatens to flood cargo space as a darkening global economic picture hits demand.

Analysts say aircraft lessors, which helped triple annual conversions since 2019, are now not only facing the consequences of falling cargo and freighter leasing rates, but could also be stuck with excess cargo planes or be forced to make conversions to cancel.

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

AirAsia, Air Canada, Qantas Airways and Vietnam Airlines are among the airlines adding cargo aircraft to their fleets to diversify their revenue streams.

But freight rates are down nearly 40% from December’s record, with shipping giant FedEx Corp saying a global demand slowdown will worsen after an acceleration in late August, clouding the year-end shipping peak.

The rapid economic downturn and growing pessimism are a rapid reversal of pandemic expectations, as declining aircraft values ​​combined with a surge in cargo demand prompted lessors and airlines to breathe new life into used aircraft as all-cargo aircraft.

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A record 192 such conversions are forecast this year, up from 122 last year, itself a record, and 64 in 2019, and will climb even higher to 221 next year based on current orders, according to data from Cirium.

Companies including Singapore Technologies (ST) Engineering, Swire Pacific’s Hong Kong Aircraft Engineering Company (HAECO) and aircraft manufacturer Boeing Co added passenger-to-freighter (P2F) conversion capacity to take advantage of spare capacity in maintenance hangars after many passenger aircraft were on the ground.

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P2F converters are struggling to keep up with rising demand as they expand capacity amid a tight labor market, rising costs and supply chain difficulties amid China’s ever-recurring lockdowns.

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

Landlords such as AerCap Holdings NV, BBAM and Aero Capital Solutions (ACS) have in some cases even booked speculative conversion seats before recruiting airline customers.

“With the age of aircraft and airlines contemplating asset changes, the lessor community is playing a more important role or portion of this base of transactions,” said Mike Doellefeld, vice president of commercial programs at Boeing Global Services.

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

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While some airlines have been eager to buy cargo planes due to the strong e-commerce market and the slow return of cargo-carrying passenger flights in some regions, analysts are wondering how long this trend will last.

“I think leasing rates will fall, especially in the narrowbody segment,” said Frederic Horst, managing director of Sydney-based freight consultancy Trade and Transport Group.

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“Lessors may get stuck with converted planes.”

Lessors are at greater risk than converters, who can fill their hangars with other maintenance work when passenger demand recovers, Horst added.

For its part, HAECO is trying to avoid being overly exposed to P2F conversions from lessors, said Richard Kendall, its chief operating officer, who saw freighter demand drop in a couple of years.

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

(Reporting by Jamie Freed; Editing by Clarence Fernandez)



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