Jetrader - March/April 2009 - 13

the investment almost certainly must be leveraged with an adequate ratio of debt to be proﬁtable. Convincing a traditional lender to advance funds using an aircraft slated to undergo conversion during which time it will not be airworthy or generating any income is challenging in the most benign lending environments. The 2009 aircraft lending environment can only be described as bleak. An assetowner planning to convert aircraft near term should already have a debt commitment in hand or assume that 100 percent equity will be required at least until the conversion is completed. On the positive side, current economic conditions should drive aircraft values low enough that aircraft may be acquired for conversion at prices that will proﬁtably support a 100 percent equity investment. Investors with strong liquidity and an understanding of freighter conversion dynamics are likely to capitalize on near-term favorable market conditions and provide the stimulus to reinvigorate the conversion market. Conversion Capacity. Given the dramatic movements in the used commercial aircraft and air cargo markets, conversion providers face the daunting task of properly gauging production capacity required to meet the expected demand. As recently as 18 months ago conversion slots less than 12-24 months in advance for popular aircraft types were not available. Now, sufﬁcient capacity for all popular types is abundantly available and, as the saying goes, priced to move. Potential investors with candidate aircraft and properly priced capital are currently in a strong position to achieve favorable contract terms and desirable slots. Customer. The ﬁnal and most essential ingredient required in successful conversion investment is a customer willing to pay a compensatory price to lease or purchase the converted aircraft at or near the time the conversion is completed. This is a case where getting three out of the four ingredients is not good enough. As challenging as it is to line up candidate aircraft, capital and conversion capacity in the right amount and at the right time, without a customer ready and waiting at the end of the process, the investment is in trouble from the start. As stated previously, speculative conversions are not for the faint of heart and require a vision of the future few possess. Highly proﬁtable speculative conversion investments have been made over the last 15 years; the parties had a higher-than-average tolerance for risk and a ﬁrm belief in the direction of the market, but for the more typical investor, an end user is a prerequisite before a conversion commitment is made. As is the case with any complex capital decision, asset expertise, sound business practices and an ability to accurately predict the course and timing of key markets are essential elements for a successful conversion investment. It is not the type of investment that can be completed and simply put on the shelf while waiting for the returns pile up, but rather one in which investors must be prepared to roll up their sleeves and actively manage to a successful conclusion. However, for those with the proper resources and understanding of the risks and beneﬁts, it can be a highly proﬁtable and rewarding experience. Jetrader 13

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Jetrader - March/April 2009

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