Jetrader - May/June 2010 - 21

by the DC10-10 and subsequently the A310/ A300 and 767; and the short range, lower volume narrowbody routes handled with the 727, 737 and most recently the 757. Today these aircraft types represent almost 2,000 aircraft or 86 percent of all jet freighters flying today. In the future, the narrowbody market segment will be significantly smaller due to improvements in road and rail networks and changes in integrators’ product mix. The demand for overnight letters has been largely replaced by internet-driven technology, while an explosion of direct shipping (e.g. Amazon) of consumer goods has taken its place. These combined network and demand changes have resulted in higher volume regional widebodies replacing the narrowbody as the backbone of the express operator fleets. In addition, high growth rates in South Asia and China, where geographical and infrastructure constraints hinder ground transport, further fuel the growing need for regional widebodies. The end result is a future market dominated by the growth of the regional widebody segment. Fleet Age Profile – The age distribution of the passenger fleet type is of critical importance in determining whether the type has the right attributes to be a conversion candidate. What proportion of the fleet type is in the primary conversion age zone of 12-18 years? Are there more aircraft older than 18 years than younger than 12 years? Given the importance of the regional widebody market, the fleet age profiles of the three principal aircraft types are evaluated and depicted in the chart on Page 20. The distribution of fleet populations shows three distinct patterns and provides an indicator of the relative strength of each type. The older A300-600, although still a productive freighter, is becoming less attractive as a conversion as it moves out of the “conversion zone.” Conversely, the bulk of the 767-300 fleet (47 percent) is within the conversion zone, while the bulk of the A330-300 fleet is still too young to consider for conversion. Fleet Fragmentation – Fleet uniformity is an important concept with several attributes that needs detailed evaluation to determine if a sufficient number of compatible units exist to warrant a productive conversion program. Uniformity is measured by several metrics including operator concentration, engine types and variants, aircraft

Freighter Conversion Attribute Scorecard
Cargo Market Requirements MD80/90 B737 Classic B757 B767-200 B767-300ER B747-400 B777 A300-600 A330-300 Age Profile Fleet Fragmentation Pax Popularity Feedstock Pricing

weight variants, and other type specific differences. Fleet diversity translates into higher cost and reduces the ability to assemble a block of conversion candidates cost-effectively. Airframe weight increases and engine variant standardization can both require expensive “paper changes” from the manufacturer or worse, physical modification. For example, the 767-300ER has three engines types with 11 variants, while the A300-600 has two engine types and four variants. An operator considering the 767 must evaluate creating a fleet among different engine variant aircraft blocks as well as the cost to standardize to a single desired variant. Passenger Aircraft Popularity – Success as a passenger aircraft type may or may not translate into success as a freighter. A successful passenger aircraft type will have a broad and deep customer base of wellestablished operators. This base should have a predictable retirement pattern and the current passenger operators should be potential post-conversion customers. A predictable retirement pattern requires a viable replacement option in order for the aircraft type to achieve sufficient availability and the right price point as the bulk of the fleet passes through the “Conversion Zone.” For example, the 767-300ER, a very popular passenger aircraft with good freighter attributes, is experiencing an elongated retirement profile due in part to the delay of its likely replacement—the 787. At an age when the aircraft type would be considered a good conversion candidate, lease rates and values have remained firm as carriers

retain aircraft awaiting replacement aircraft. This prolonged fleet turnover is even more pronounced due to an unprecedented global recession resulting in almost 80 otherwise suitable conversion candidates aging beyond the optimal conversion zone. Feedstock Pricing – Market pricing is closely related to popularity, but also is a function of the commercial aircraft market cycle. Used aircraft prices, which are tied to general economic cycles, bottom out about every eight to 10 years. The rate and amount of decline from peak to trough as well as market recovery characteristics differ by aircraft type due to differences in markets served, fleet age, replacement orders and production status. For example, 737 Classic pricing has fallen dramatically because it is out of production, has viable replacement options and the markets it serves have been particularly hard hit by the recession. Combined with other favorable attributes, the 737 Classic represents a very good conversion candidate, tempered only by a declining narrowbody freighter market share. The decision to convert an aircraft to freighter use is often a case of choosing between the lesser of two or more evils. In the current environment, freighter lease rates require feedstock pricing to be close to aircraft scrap value, making the choice even more difficult. Quantifying an aircraft type’s key attributes will help in making a sound economic decision. The table above illustrates a general evaluation of the attributes of current potential feedstock types. An informed investment decision will require a deeper dive into each attribute. Jetrader 21


Jetrader - May/June 2010

Table of Contents for the Digital Edition of Jetrader - May/June 2010

Jetrader - May/June 2010
A Message from the President
Q&A: Steven F. Udvar-Hazy
ISTAT Shines in Orlando
The State of Aviation Finance
A Closer Look: Airbus A380
Cargo Conversion Candidate Aircraft
Emerging Entrants
Help Yourself
Bavarian Splendor
Flying Higher
Aircraft Appraisals
From the ISTAT Foundation Index
Jetrader - May/June 2010 - Jetrader - May/June 2010
Jetrader - May/June 2010 - Cover2
Jetrader - May/June 2010 - A Message from the President
Jetrader - May/June 2010 - 4
Jetrader - May/June 2010 - Contents
Jetrader - May/June 2010 - 6
Jetrader - May/June 2010 - Calendar/News
Jetrader - May/June 2010 - 8
Jetrader - May/June 2010 - Q&A: Steven F. Udvar-Hazy
Jetrader - May/June 2010 - 10
Jetrader - May/June 2010 - 11
Jetrader - May/June 2010 - ISTAT Shines in Orlando
Jetrader - May/June 2010 - 13
Jetrader - May/June 2010 - 14
Jetrader - May/June 2010 - 15
Jetrader - May/June 2010 - The State of Aviation Finance
Jetrader - May/June 2010 - 17
Jetrader - May/June 2010 - A Closer Look: Airbus A380
Jetrader - May/June 2010 - 19
Jetrader - May/June 2010 - Cargo Conversion Candidate Aircraft
Jetrader - May/June 2010 - 21
Jetrader - May/June 2010 - Emerging Entrants
Jetrader - May/June 2010 - 23
Jetrader - May/June 2010 - Help Yourself
Jetrader - May/June 2010 - Bavarian Splendor
Jetrader - May/June 2010 - Flying Higher
Jetrader - May/June 2010 - Aircraft Appraisals
Jetrader - May/June 2010 - 28
Jetrader - May/June 2010 - From the ISTAT Foundation
Jetrader - May/June 2010 - Index
Jetrader - May/June 2010 - Cover3
Jetrader - May/June 2010 - Cover4