Jetrader - March/April 2009 - 9

As the Market Adapts to Recent Changes, Are Freighter Conversions Good Lease Investments? By Stephen J. Fortune, Principal, Fortune Aviation Services P assenger-to-f assenger-to-freighter conversions are an essential element for a viable commercial air c cargo market where cost is king. The ai cargo value proposition air for shippers is constantly being tested against faster, more reliable ocean, rail and road networks. The cargo airlines’ drive to continually drive down cost is manifested in a robust market for converted freighter aircraft. Since the capital cost advantage of a converted freighter versus a new freighter of the same model is substantial, it is no surprise that three of every four freighters is a converted passenger unit. With a 20-year forecast requirement of almost 4,000 additional freighters needed for growth and replacement, there is a compelling and substantial requirement for ﬁnancing freighter conversions. Since the overwhelming majority of commercial passenger aircraft are either leased or ﬁnanced and freighter conversion is a costly and irreversible modiﬁcation, it is natural that the ﬁnancial community needs to ensure that the capital outlay for conversion yields a satisfactory return on investment (ROI). Unfortunately, many variables in the ROI calculation are difﬁcult to quantify at the time the investment is made. This article will discuss the principal elements that must be considered for a freighter conversion investment and the difﬁculty inherent in analyzing this successfully. Should a Lessor Invest in a Freighter Conversion? Operating lessors continually evaluate their portfolios. Earnings performance is measured against assumptions made at the time of the initial investment, residual value assumptions are updated, changes in lessee credit standing are reviewed and aircraft maintenance and records are inspected. In addition aircraft with leases that will be terminating are evaluated with respect to post-lease disposition. Depending on market conditions a lessor has a range of options available including renewing with the existing lessee, ﬁnding a new lessee, selling the aircraft, parting it out and ﬁnally, freighter conversion. If the lessor determines that the aircraft type is a suitable candidate for conversion, they must then answer a series of questions to decide whether an investment would be warranted. Question #1: Will a conversion improve or extend the earning power of the asset? Given the substantial investment for the conversion, if demand still exists for the aircraft in passenger conﬁguration, it is highly unlikely that the investment will improve the ROI enough to justify the expense. Freighter conversion is typically only viable when the passenger customer base is dwindling or exhausted and/or Jetrader 9

Jetrader - March/April 2009

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