WORLD AIRLINERS: Narrowbody cargo conversion market recovers

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While the bounceback of the widebody aircraft conversion market has so far been slow to materialise, the narrowbody conversion market has fully recovered and providers are quickly responding to the surging demand by boosting capacity.

"The narrowbody and widebody stories are different," Pemco World Air Services chief executive Wake Smith told October's Cargo Facts 2010 aircraft symposium. He points out that while widebody conversion orders evaporated for two years, "narrowbody conversion demand continued to trickle through this doldrum".

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AEI's 737-300/400SFs have a cargo door manufactured by Universal Cargo Doors. Picture: Aeronautical Engineers
Few narrowbodies were grounded or retired during the downturn, whereas several dozen widebodies were exiled to the desert and could be reactivated without having to invest in new conversions.

Aeronautical Engineers (AEI) vice-president sales and marketing Robert Convey identifies another factor contributing to the faster recovery of the narrowbody freighter conversion market: it does not face the same financing challenges as the widebody market. Narrowbody customers typically buy conversions with cash or loans backed by local banks.

AEI has seen a "dramatic and rapid recovery" in the narrowbody market this year, says Convey. In 2009, the company did not re-deliver a single aircraft, but so far this year it has completed six Boeing 737 conversions, including three in the third quarter, with three more re-deliveries expected by year end.

The sudden surge in demand was challenging to manage and was "a shock to our system", says Convey. But AEI sister company Commercial Jet was quickly able to spool back up and AEI is now further expanding its capacity by bringing additional conversion centres online.

MORE CENTRES
Florida-based Flightstar Aircraft Services has become AEI's second conversion centre after Commercial Jet. The third will be Boeing Shanghai Aviation Services when it starts work next year on its first 737. Two more centres in South America and the Middle East will be appointed soon, says Convey. "We think we'll need in 2012 space for 40 aircraft," he says.

AEI expects about half of its future conversions to consist of 737s and half Boeing MD-80s. For the 737, AEI offers an eight-pallet product for the -200, nine and 10-pallet solutions for the -300 and an 11-pallet conversion for the -400. The -400 is generating the most interest, says Convey, although AEI continues to convert 737-300s into both nine- and 10-pallet freighters and even completed one 737-200 conversion this year with another 737-200 set for conversion early next year. "We also have a 727-200 we are looking to induct in a few weeks, so never say a product is dead," Convey told the Cargo Facts symposium.

In February, AEI launched its MD-80 passenger-to-freighter programme, and is now offering MD-81, -82, -83 and -88 conversions that provide 12 customised pallets. The design is nearly complete, says Convey, and AEI should be ready in February to cut metal on the prototype, which it acquired several months ago.

Its first flight is set for May 2011 and certification for early in the third quarter. While several companies including Boeing have studied MD-80 conversions for more than a decade, AEI is the first provider to come to market with a P2F product for the MD-80.

In February, Wagner Aeronautical revealed plans to pursue a P2F product for the twinjet, but the project is stalled. "We're kind of holding, waiting for a launch customer," says company president William Wagner.

The firm initially expected to secure a launch customer within a few months after its initial announcement, but "that hasn't worked out" as the deal "was not as firm as we thought", he adds. Wagner is not prepared to start the certification process without a customer. "It's an unproven entity," says Wagner. But he thinks at some point there will be room for two MD-80 P2F providers.

Although AEI has not yet formally announced a launch customer for the MD-80SF, it says it has customers lined up for its first 10 conversion slots. It expects to re-deliver the first eight MD-80s in 2011 and have 40 orders before the aircraft is certificated.

While the industry has long been sceptical of the MD-80's potential as a converted freighter given its narrow fuselage and poor fuel economy, AEI claims there is significant interest from operators in developing markets that cannot afford 737-300/400s, with Convey noting that some cargo carriers are unable to operate 737 Classics because of their low-hanging engines, which do not provide sufficient clearance at certain airfields.

According to Convey, an MD-80SF costs only about $3.5 million, including $2.2 million for the conversion, about $1 million for the aircraft and engines and the remainder for maintenance. "When you can move freight cheaply you don't care what it's flying in," he says.

Pemco's Smith acknowledges the MD-80's lower price tag may appeal to certain operators. But he expects the gap in feedstock prices between the MD-80 and 737-300/400 "to be very short" and believes investing in an MD-80 P2F programme to be "a short-term bet".

"There are 737s that are continuing to come out. The bad news for 737 owners is that this will continue to drive down the values of the 737," says Smith. Once 737 values come down closer to MD-80 values, the MD-80 product will no longer have any demand because "the 737 is much more attractive and has more interline capability", he suggests.

Pemco, a long-standing player in the 737 conversion market, has decided to invest in the 757 instead. Late last year, it acquired the 757-200 P2F supplemental type certificate secured by Alcoa-SIE Conversions in 2006. It has not yet done or sold any 757 P2F conversions but has started work on the world's first 757 passenger-to-combi conversion.

The plan is to certificate its 757 P2C conversion and deliver the first four aircraft to launch customer National Air Cargo in the first half of next year. Smith says Pemco has already started working on the first three aircraft, with a fourth set to arrive at its Alabama facility shortly.

The certification process for the 757 P2C should only take four to five months because it can be partially based on the Alcoa-SIE STC for 757 P2F conversions, notes Pemco president Kevin Casey. Pemco can also draw on its recent experience converting 737-400 passenger aircraft into combis for Alaska Airlines. It also offers P2F and passenger-to-quick change conversions for the 737-300 and -400.

Smith says the 737 conversion lines Pemco has in Alabama and its two Chinese MRO partners - Taikoo (Xiamen) Aircraft Engineering (TAECO) and Shandong TAECO Aircraft Engineering - have been "steady".

Israel Aerospace Industries also has a 737-300/400 conversion line in China, at Guangzhou Aircraft Maintenance and Engineering, and has secured a follow-on order from GECAS for 10 additional 737s, which will be converted between now and early 2012, says general manager of marketing and business development Jack Gaber. Having so far converted 40 737-300s and five 737-400s, IAI says most future 737 conversions will be done in China as it focuses on widebody conversions at its Tel Aviv facility.

Smith declines to discuss Pemco's 737 orderbook, but says "we have ongoing discussions that we think will lead to opportunities". He points out that "people don't plan narrowbody conversions in advance", making the market different from its widebody counterpart.

Pemco is also confident it will next year start 757 P2F conversions in both Alabama and China, with Casey "working on projects that would make it happen". The company is now offering the 14.5-pallet 757 P2F solution it acquired from Alcoa-SIE and is considering a 15-pallet solution. Most of the design work is done for the 15-pallet solution, but a decision on formally offering the product has slipped a few months because of the focus on the new P2C solution, says Casey.

Alcoa-SIE completed only one 757 conversion, while rival Precision Conversions, which offers a 15-pallet solution, has to date completed 27 conversions. But Alcoa-SIE's lack of success was not a result of insufficient demand for a 14.5-pallet solution, but was caused by "commercial problems", says Smith, who notes that the Singapore Technologies Aerospace 757 P2F product, which has so far secured 87 orders, accommodates only 14 pallets.

ST Aerospace's 757 conversion operation - which includes three lines at its subsidiary in Alabama and two lines in Singapore - has in the past two years been turning out freighters faster than any other conversion operation. But its P2F STC for the 757 has involved only FedEx Express. "We look forward to other customers," says ST Aerospace's senior vice-president of marketing for the Americas, Stephen Lim. "With FedEx's endorsement we think there will be a good market."

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APPEALING
Precision believes the 15-pallet solution is much more appealing to leasing companies and most operators. It has converted five aircraft so far this year and added capacity by appointing China's TAECO as its second conversion centre after Flightstar. TAECO performed its first conversion for Precision earlier this year and will perform the modification work for about half of the US firm's future conversions, predicts Precision vice-president marketing and sales Brian McCarthy.

Precision has the capacity to convert more than 15 aircraft a year, says McCarthy, who expects its output will be closer to seven aircraft next year. "We're not there in terms of the market. I'd be thrilled to do 10 aircraft," McCarthy says. "This market is still recovering. We still need operators and a lot more cargo moving."

In addition to offering the 757-200PCF, Precision has launched a P2C conversion after securing an order for three combi conversions from the Air Transport Services Group.

Precision is also working on a P2F solution for 757 passenger aircraft that have winglets, says McCarthy. Such aircraft cannot be converted under Precision's existing STC and would require a separate certificate because the winglet installation is considered a major modification that could alter load and fuselage performance. Developing a new STC for 757 with winglets would, says McCarthy, help solve the current feedstock challenge that continues to affect demand for 757 conversions. He estimates there are 300 757s with winglets.

Airbus also plans to compete in this market with the A320 and A321 P2F products. Airbus Freighter Conversion, a joint venture between the airframer and Russia's United Aircraft, revealed at Cargo Facts a launch operator for the A320P2F, which was initated in 2008 with a 30-aircraft order from AerCap.

European cargo carrier West Atlantic will take the prototype, as well as the third and fourth aircraft that emerge from the conversion line at EADS EFW in Dresden. But first delivery - which was originally scheduled for late 2011 and slipped earlier this year to mid-2012 - has fallen further, to November 2012.

"We thought it wasn't ready," says Airbus Freighter Conversion vice-president of marketing and sales Michael Fuerst. "We need the right feedstock and the right prices of feedstock."

The on-ramp cost of an A320P2F is $9-11 million, including $4.5 million for the conversion and $4.5-6.5 million for the aircraft.

Airbus and AerCap are speaking to other potential A320P2F operators and expect a second customer in the first half of 2011, says Fuerst. While one A320P2F will be re-delivered in 2012, Airbus plans to convert 15-16 in 2013, when conversion lines will operate at Dresden and United Aircraft's site in Ulyanovsk.

But 737 and 757 conversion centres do not see A320 and A320 converted freighters positing a major competitive challenge for several years. Smith says Pemco will consider offering its own A320 P2F solution in the future, but for now believes the limited feedstock available is not appropriate for conversion.

Boeing also does not see a P2F product for the 737NG being available until about 2017 or 2018. For now, the 737 Classic, 757 and perhaps the MD-80 stand to be the main benefactors of renewed demand for narrowbody freighters - a market dominated by conversions.

Boeing's latest 20-year market outlook, for example, envisages a need for 1,070 converted narrowbody freighters but only 10 production aircraft. "That's great news for all the guys who do the narrowbodies," says Boeing vice-president of freighter conversions Dan da Silva.

AEI converts 737-300s into nine and 10-pallet freighters and -400s into 11-pallet freighters

Chinese start-up SF has two 757-200PCFs, including the first 757 converted by TAECO