SAN DIEGO – After years of stagnant demand for widebody freighter conversions, 2016 saw the market suddenly bounce back. Last year, fourteen 767 P-to-F conversions were added to the global widebody freighter fleet (eleven 767-300BDSFs and three 767-300BCFs), and a similar number will be put into service in 2017. However, according to speakers on an appraiser’s panel at last week’s ISTAT Americas conference, this phenomenon is broadly viewed as a one-time event, supporting the ramp-up of Amazon’s Prime Air network, rather than the beginning of a widebody conversion renaissance.
“We are not going to see a lot of widebody conversions after Amazon,” said Douglas Kelly, SVP asset valuation at AVITAS Inc., as many of the carriers who previously would have found widebody conversions appealing, have disappeared. Since the 2008 recession, industry consolidation has significantly reduced the number of widebody freighter operators, from 95 in 2012, to just 75 in 2016. This, coupled with the proliferation of cargo-friendly widebody passenger aircraft like the 777-300ER, has reduced demand growth for freighters. Take last year for example, underlying air freight market growth was 3.8%, yet the global widebody freighter fleet expanded by less than 1%.
This is not to say that freighters no longer have a place – they certainly do. But most of the larger cargo carriers that remain in the market have better access to capital, and can achieve high utilization rates on long-haul intercontinental routes. Such utilization says Kelly, enables these carriers to justify the higher acquisition costs of new-build widebody freighters. FedEx and UPS for example, both operate large fleets of freighter-converted widebodies, but, in recent orders, have opted instead for new-build freighters.
Domestic routes do not see nearly the utilization, and thus freighter-converted 767s have found their sweet spot on routes where express operators can fill the cube. ATSG’s subsidiary airlines have long operated freighter-converted 767s for DHL within the United States in support of DHL’s international network. And now Amazon has placed its bet on converted 767s. As a result, nearly all of the redelivered 767 conversions in 2016 went into service for Amazon.
Still, there are hundreds of widebody freighters that will need to be replaced in the future (even if not on a 1:1 ratio), and a significant number of ageing widebody passenger aircraft. When asked if freighter conversion programs would emerge for airframes like the 777 as they have in the past for the 747 and A300, panelists were bearish, at least for the near-term. Operational comparisons with 777 new-build freighters aside, Stuart Rubin, Principal at ICF doubted the economic feasibility of a 777 conversions due to high feedstock acquisition costs. Lindsey Webster, director asset valuations, Morten Beyer & Agnew, agreed that, in the short term, the number of parked widebody freighters on the secondary market meant that 777-200LR conversions were unlikely.
In a few years, when an increasing number of 777-300ERs begin to reach retirement age, the market could potentially support conversion, but, in the near-term, panelists did not expect much beyond Prime Air’s 767 fleet build-up. Of course, Amazon could choose to add larger freighters once its new air hub in Cincinnati/Northern Kentucky is operational, and UPS could replace its MD-11Fs with conversions rather than new-build freighters, but it is difficult to identify any other potential operators of freighter-converted widebodies.
Turning to China, the crystal ball becomes a bit murkier when attempting to forecast freighter demand. Tightly controlled airspace and restricted landing slots, paired with a pilot shortage, could force China’s burgeoning express market to favor larger widebodies. SF Express will take delivery of its fifth 767F this year, and is eager to continue growing. SF’s next steps will shed more light onto the viability of the 767F for domestic express service in China, but for now, the region could still become another hotspot for medium widebody freighters.