IN FOCUS: Demand for narrowbody conversions rebounds

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Something interesting is happening in the narrowbody freighter conversions market. Aeronautical Engineers Inc (AEI) of Florida - has seen a run of new orders for Boeing 737 conversions. That is a little surprising given the global economy is in the doldrums, air cargo is suffering from overcapacity and freighter operations are under threat from falling yields and growing belly capacity.

So where are the orders coming from? The answer is: an interesting mixture of customers. In 2012 AEI has had two orders from Russian carrier Atran, a fifth and sixth order from Aviation Capital Group, three for lessor ASL, and one for Air Incheon, a South Korean start-up. All of these orders were for the 737-400 variant.

737-400 airteamimages.com

 Airteamimages

737-400 feedstock prices are coming down

While this hardly constitutes a flood, it suggests that there is some vibrancy at this end of the market that is not being matched in widebody freighters. "I can't explain it," says Robert Convey, vice-president sales and marketing for AEI. "Our hangar has never been so busy. I thought it was a bubble, but now we are setting up inductions for February and March, so it seems to be continuing."

One possible reason for the relative buoyancy may, perversely, be the increase in belly capacity as passenger carriers continue to expand. "The traditional widebody freight routes are getting large amounts of new belly capacity, and that is why the widebody freighter operators are suffering," Convey says. "But at the other end it still has to be distributed to the final destination, and that is where our freighters come in."

Other reasons may be that regional markets in emerging economies are more resistant to the global chill, or that aircraft that used to perform feeder work are being squeezed out. Examples include the 727, excluded from major gateways in Australia under new noise regulations, and Russian aircraft such as the Antonov An-12, An-26 and Ilyushin Il-76 that are increasingly being banned even in African countries on safety grounds.

Demand from the big three express operators is also a not insignificant factor. The ASL aircraft are destined for subservice at DHL, and the Atran ones will fly for UPS. Convey points to demand from the Brazilian post office and Nigerian government too - both markets relatively immune to cold winds from the global economy.

Last but not least, 737-400 feedstock prices are coming down. Of its 12 aircraft backlog - six under conversion and six orders, Convey says all but two - destined for Africa - are 737-400s. "There is still a small premium compared to the -300, but in the last six to nine months -400 prices have come into the right zone," he says.

LION'S SHARE

Despite all this, one might question if it is a boom for 737s, or a boom for AEI. The company does seem to have the lion's share of the available market in the past year or so. Bedek admits that it is a year since it did a 737 conversion, and its joint venture on the type with GAMECO, of China, has now lapsed. The company says it is "now reviewing ways to reposition itself in the 737 market, including other strategic partnerships".

Meanwhile, Pemco was in Chapter 11 bankruptcy protection from March until July, as it attempted to shed a loss-making operation in Dothan, Alabama. Kevin Casey, Pemco's president, insists that it never affected its conversion business, however, and on 4 October it announced a deal to convert two International Lease Finance-owned 737-400s for China Postal, to add to seven already converted by Pemco in its fleet.

"Demand is exceptional, even by our standards as the market-leading 737 programme. I have never seen it so busy," Casey says. "We will deliver a dozen 737s this year, and we will soon be announcing enough orders to keep us occupied all next year."

Convey also predicts a strong 2013, though he expects the 737-400 programme to face some stiff new competition. Fortunately, that competition will be coming from AEI's own latest product, the Boeing MD-80 conversion.

The prototype for this freighter had its first flight on 28 September, and Convey is hoping to get its supplemental type certificate by the start of November. From May next year he hopes to have two or three lines running for the type. The company is also rumoured to be close to announcing a conversion programme for the MD-90, which would have one extra pallet and greater range. With feedstock available for less than $1m and the conversion costing just $0.5m, the MD-80 has a similar payload and range to the 737-400, but with a smaller cross-section, which means it cannot take 3.18m (10.4ft) pallets laterally, and can carry only eight of these, or 12 2.74m pallets.

kulula md-80 airteamimages

 Airteamimages

AEI says the Boeing MD-8o conversion is ideal for less developed countries

AEI reckons that given the freighter's low cost, operators will put up with this disadvantage, and also predicts that with its high-mounted engines and relatively low maindeck (making for easy loading) it will be ideal for operations in less developed countries. No orders have been publicly announced for the aircraft, but Convey says it has 15 aircraft lined up for customers from the USA, South America, Africa, the Middle East and Europe. "We are holding off announcing their names until we get our STC," he says, holding to a prediction of more than 200 MD-80 conversions, and admitting it will take away some of the 737 market. "There is not an unlimited number of operators, so they will divide between the two types. It will be interesting to see who goes for which," he says.

MARKET DOMINATION

A step up from the 737, the 757 conversion market continues to be dominated by the order for 89 for FedEx, which is being steadily worked through by ST Aerospace. Outside of this, the two players are Precision Conversions, of Oregon, and Pemco, the latter certifying a 757-200 combi earlier this year, with four delivered so far.

Precision has also just completed its combi, which is undergoing flight tests, the first of two planes for Air Transport Services Group that will fly for the US Air Mobility Command. Military uses apart, Brian McCarthy, vice-president marketing and sales at Precision, sees a market for the combi in remote regions of the northern hemisphere, for example in Russia or Canada: "any place with long thin routes, especially where there are seasonal changes in passenger load, so you can keep cargo strong and hedge your bets".

Apart from the combi, Precision converted four other 757s this year, two for SF Express, of China, one for ATSG and a fourth one for an undisclosed Russian customer. The company is in the process of completing certification in Russia, and McCarthy has high hopes for this market. Otherwise, Precision says enquiries are coming from South America, the Philippines, Hong Kong, South Korea and Australia, as well as China, where the company is planning to open a second line at joint venture TAECO next to meet expected demand. McCarthy sees the aircraft, with its 2,800-3,200nm range, as being ideally suited to the sector lengths in China.

As with the 767, a problem for the 757 has been feedstock but McCarthy says values have been falling recently in the expectation that American Airlines and United are about to retire significant numbers of the aircraft from their fleets. Many are the more modern version of the aircraft with winglets, and McCarthy is therefore pleased to have just received certification to convert such aircraft. "They can add 10,730lb of payload [4.9t] or increase the range by 200nm," he says. "That is enough to fly from Clark Air Base [in the Philippines] to Hawaii, and I expect these aircraft to be a big part of the feedstock pool in the future."