Analysts say aircraft leasing companies, which have contributed to a tripling of annual conversions since 2019, are now facing the impact not only of falling freight and freight rental rates, but also surplus freighters or being forced to cancel conversions.
“This increase in conversions has raised concerns of a bubble,” said Chris Seymour, head of market research for aviation consultancy Ascend by Cirium, who fears a slowdown will happen by mid-decade.
AirAsia, Air Canada, Qantas Airways and Vietnam Airlines are among the carriers adding cargo planes to their fleets in their efforts to diversify their revenue streams.
But freight rates have fallen nearly 40% from December’s record high, and shipping giant FedEx Corp says the global slowdown in demand will worsen after accelerating in late August.
The rapid economic slowdown and growing pessimism is a rapid reversal from pandemic expectations as falling aircraft values, combined with an increase in cargo demand, prompted lessors and airlines to give used aircraft a new lease of life as specialty cargo aircraft.
A record 192 such conversions are expected this year, up from last year’s 122 (also a record) and 64 in 2019, and that number is set to rise to 221 next year, based on current orders, according to data from Cirium.
Companies such as Singapore Technologies (ST) Engineering, Swire Pacific’s Hong Kong Aircraft Engineering Company (HAECO) and aircraft maker Boeing Co have added passenger-to-freight (P2F) conversion options to take up spare capacity in maintenance hangars after many airliners were grounded.
P2F converters are struggling to keep up with rising demand and are expanding capacity amid a tight labor market, rising costs and supply chain issues caused by the Chinese blockades.
“We’re fully booked until about 2026,” said Jeffrey Lam, president of commercial aviation for ST Engineering. “So new customers coming to book slots now should book before the end of 2026 or 2027.”
Landlords such as AerCap Holdings NV, BBAM and Aero Capital Solutions (ACS) have jumped on it, in some cases even reserving speculative conversion slots before signing up airlines.
“As the aircraft age and airlines consider asset changes, the lessor community plays a greater role or importance in this base of transactions,” said Mike Doellefeld, vice president of commercial programs, Boeing Global Services.
AerCap declined to comment, while BBAM and ACS did not respond to requests for comment.
While some airlines have eagerly picked up freighters, prompted by the strong e-commerce market and the slow return of passenger flights with cargo capacity in some regions, analysts wonder how long this trend will last.
“Especially in the narrow-hull segment, I think the effect will be that charter rates will come down,” says Frederic Horst, director of Sydney-based freight consultancy Trade and Transport Group.
“Landlords may be left with converted aircraft.”
Lessors are at greater risk than converters, who can fill their hangars with other maintenance work when passenger demand picks up again, Horst said.
HAECO, for its part, is trying to avoid being too exposed to P2F conversions from lessors, according to Richard Kendall, its chief operating officer, who sees a drop in demand for freighters in a few years.
“We don’t want to see the bubble burst and end up with broken commitments that we can no longer honor,” he added on the sidelines of the MRO Asia-Pacific conference in Singapore.