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With the continued growth in demand for cargo capacity, there is an increasing need for financing and leasing freighter aircraft and passenger-to-freighter (P2F) conversions.
While financing P2F conversions, in particular, requires a slightly different analysis from more traditional aircraft financing products, the good news is that there is an expanding pool of investors and financiers with the expertise – and appetite – to support this growing segment of the market.
The case for cargo and conversions
In its World Air Cargo Forecast 2020-2039, Boeing predicts that world air cargo traffic will grow at 4 percent per year over the next 20 years. Coupled with the increasing need for freighter capacity, Boeing projects that this will result in a 60 percent larger freighter fleet over that same period. In absolute numbers, that is an increase from 2,010 to 3,260 aircraft and, interestingly, Boeing’s view is that more than 60 percent of the freighter aircraft to be delivered during that period, around 750 aircraft, will be P2F conversions.
If these forecasts prove to be correct, that translates into roughly 37 conversions per year over a 20-year period.
Out of the shadows and into the mainstream
While once viewed by some as a niche segment of the commercial aircraft financing and leasing market, freighter financing and leasing may be heading into the mainstream. A brief snapshot of recent high profile announcements illustrates this:
- In July 2021, GECAS Cargo announced the addition of a further six Boeing 737-800BCFs to its fleet, bringing its fleet of P2F-converted 737-800NGs in operation to more than 40.
- In October 2021, one of the top three global leasing companies announced that it had signed an agreement with Israel Aerospace Industries (IAI) to become the launch customer for IAI’s Airbus A330-300 freighter conversion program, taking 30 conversion slots between 2025 and 2028.
Fueled in part by the COVID-19 pandemic, and also by the growth of the e-commerce market and consumers’ increased expectations of next day delivery, this reflects a pattern that we have seen over the last 12 months or so: an increase in interest in the freighter and P2F conversion market among investors, aircraft owners and operators, as aircraft owners and operators consider how best to optimize their fleets in light of continuing demand for air cargo capacity, the potential increase in availability of feedstock for conversion programs and travel restrictions affecting passenger flights.
The multimillion-dollar question
However, converting passenger aircraft is not a straightforward process. Technical and economic expertise is required to identify suitable candidate aircraft for conversion. The process of obtaining the necessary certifications to undertake the conversion is complex. There are important logistical considerations, such as whether there are sufficient conversion slots available at authorized conversion facilities. Alongside all of this is the significant question of cost and how the conversion can be financed.
According to IBA, a narrowbody P2F conversion could cost in the region of $4.2 million for a Boeing 737-800 and $6.1 million for an Airbus A321-200. A widebody P2F conversion could cost in the region of $14.7 million for a Boeing 767-300ER and $18.4 million for an Airbus A330-300. Clearly, this is a significant investment.
- The passenger-to-freighter conversion market is growing, with roughly 750 conversions projected over the next 20 years
- Major industry participants, including ST Engineering, Avolon and Fortress, are backing conversion projects
- Post COP26, financiers are under more scrutiny and green credentials could be brought into question