Picture credit: Aeronautical Engineers
The pandemic created an unusual economic situation with consumers staying well-off due to those on furlough being paid not to work and those working from home not having commuter costs.
Not being able to go on holiday or spend money on leisure activities such as eating out meant consumers had money to spend, which was spent online.
This created extra air cargo demand, which meant orders for new and converted freighters.
The cycle ended at the start of last year, amplified by geopolitical issues and economic challenges such as high inflation and rising interest rates.
Lifting travel restrictions and the return of leisure activities means consumers are spending less on buying goods, reducing cargo demand.
Robert Convey, Senior Vice President Sales & Marketing at Aeronautical Engineers, says demand has been soft so far this year and that is likely to continue for the rest of the year.
He says, “Demand for the operators is slow, the integrators are not letting new contracts out. Their freight and profits are down so it is a slowing cycle mainly driven by consumers starting to spend money on leisure travel versus consumer goods, which during the pandemic was all they could do and that is what drove the increase in the need for freighters.”
In the last five years, the industry has converted around 200 Boeing 737-800s while the classic models, the -300s and -400s are only starting to go into retirement, which means there was a lot of capacity.
Convey comments, “Now as we are starting to slow, we see people starting to get rid of older aircraft, the -300s and -400s, out of their narrowbody fleets, people are stopping or dramatically slowing down on taking -800s in and they are on pause until we get past this slow cycle and things start to return.”
The industry is coming off what Convey calls a hypercycle with three strong years with a lot of aircraft conversions and infrastructure being installed. He believes this is a normal slowdown but coming from the pandemic highs, it feels bigger, especially as 2022 was Aeronautical Engineers’ busiest year when it delivered 45 aircraft.
Aeronautical Engineers only converts narrowbody aircraft and has active programmes for the 737-300, 737-400, 737-800, CRJ200 and MD-80.
The MD-80 and classic 737s are near the end due to a lack of feedstock and their age, though a few 737-400s are coming in.
The CRJ200 still has a few years left while the 737-800 is the busiest programme with 20-30 conversions a year.
With 737-400s, only 500 were made with most having been scrapped or already converted so there is limited feedstock, though you may find a hidden gem.
Convey has been predicting the end of the 737-400 for a few years now but they keep trickling through.
He adds there are a few used 737-400 freighters for sale, which are not selling quickly so if customers want one, they will buy the used freighter.
The MD-80 has feedstock but limited demand with only three active operators, limiting the chances for new orders as it is unlikely now that a new operator will want to use such an old aircraft.
For operators, the 737-800 is an attractive aircraft due to fuel efficiency being a 14% improvement over classic 737s, combined with a greater range and one more pallet position than a -400.
With 5,000 being built, the feedstock will not be used up any time soon.
“What is driving a lot of southeast Asian and Latin American companies into the -800, who I think would prefer -400s because they are cheaper, are economical and get the job done, is that they are just not available so that forces them into a more expensive aircraft,” says Convey.
Back to normal
Lag from last year means numbers for this year are likely to be high on the way back to doing 20 to 25 aircraft a year, which Convey calls the sweet spot for production capability.
Measured by conversion starts, there were still a lot on the books with deliveries close to 40 and starts in the low 20s.
With current soft demand, lessors are trying to push orders out with Aeronautical Engineers having 10 converted 737-800s owned by lessors looking for homes, so unless the conversion has already started, there is no point getting started.
Convey gives it six months, saying all the aircraft on the ground will find homes and things will get back to normality.
Short term, the next six to 12 months are likely to be slow with fewer orders from lessors with operators converting their own aircraft or buying them for conversion filling the slots at a steadier pace than before.
Convey predicts lessors will be back in the market in the second half of next year.
Production rates are likely to return to 2017/18/19 levels with around 40 737-800s being added to the market by Aeronautical Engineers and other companies, in addition to Airbus conversions.
Convey says, “I would love to be as busy as I was in 2022 that is not sustainable, you can’t run that forever because the demand is not there, there are not that many operators to take aircraft so it had to come down at some time. We rode it as long as we could and now it is coming down to a normal production flow.”
Breathing room
2023 is shaping up to be one of the busiest years in Precision Aircraft Solutions’ history, says Director of Sales and Marketing, Zachary Young.
So far, five Airbus A321s and seven Boeing 757s have been redelivered with another seven A321s and six B757s expected to be delivered by the end of the year.
Pre-pandemic, Precision would deliver around 12 757s a year, fluctuating from 10 to more than 20 depending on demand.
Young is predicting another good year for 2024 with over 20 A321s and B757s being redelivered.
Commenting on the current slowdown in cargo demand, Young says, “We have seen a very small number of deferrals, but no cancellations. The deferrals have improved our performance in the short term and given us some “breathing room” during such a busy time over the last few years.”
Young adds that the B737-800F market is very saturated and the A321 is an emerging aircraft fewer on the market.
In times of declining yields, the A321-200PCF stands out with its high payload, generous payload, low fuel burn and lower operating empty weight, says Young.
He adds that B737-800s and A321-200s are in high demand for passenger operations and delays from engine and aircraft OEMs have caused lease rates to skyrocket. Young says this makes freighter conversions harder to justify.
Young says, “The fact still remains there are freighter aircraft flying beyond their original expected retirement dates and will need to be replaced in high numbers over the next few years, especially toward the middle to end of this decade. Conversions are never short-term investments; it is a long game. Yields were at all time highs through Covid but were never expected to stay high forever.”
This article was published in the October 2023 issue of Air Logistics International, click here to read the digital edition and click here to subscribe.