WORLD AIRLINERS: Slow recovery begins for widebody cargo conversions

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Boeing has gone two years without an order for its two flagship freighter conversion products - the 747-400BCF and 767-300ERBCF. But the manufacturer does not seem concerned about its dwindling orderbook for Boeing Converted Freighters, which stands at five 747s and 10 767s, or the fact that not one 767 re-delivery is scheduled for 2011.

BCF programme manager Ralph Kramer says "we have seen an uptick in demand and interest" and predicts 2011 will be the turning point for orders. He says next year will be strong for the 747-400BCF and 767-300ERBCF, while a launch order will be secured for the 777-200ERBCF. "I think we're beyond the cancellation and delay phase," Kramer says. "It seems the popcorn is popping faster than last year."

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Air China took this 747-400BCF in July. Picture: Boeing
DREADFUL YEAR
By all accounts 2009 was a dreadful year for the air cargo industry. With International Air Transport Association cargo traffic down 10%, including 21% in the first half, widebody freighters were sent to the desert en masse, and demand for new widebody conversions evaporated. "A lot of capacity was laid up and that put a pretty significant slowdown in widebody conversions," says Cargo Conversions president Rich Hatton.

This year, however, traffic has recovered faster than expected and was up 25% in the first nine months. In recent months traffic has returned to 2007 levels, a surprise compared with earlier predictions that it would be 2011 or 2012 before a return to pre-crisis levels.

In response to the surging demand, cargo carriers have quickly reactivated all their newer widebodies such as 747-400Fs, leaving in the desert only ageing aircraft - in particular 747-200Fs, which are economically not worth bringing back. As cargo carriers start to examine options for adding capacity in the second half of 2011 and 2012, widebody conversions seem to be the only solution.

Boeing rival Israel Aerospace Industries says the improvement in market conditions has already led to some new orders for widebody conversions. In mid-October, IAI general manager of marketing and business development Jack Gaber told the Cargo Facts aircraft symposium that after a "quiet two years" it has this year secured five new orders for its 747-400BDSF, 10 for its 767-300ERBDSF and four for its 767-200BDSF.

Gaber expects IAI's 747-400 conversion operation to return to pre-crisis levels in 2011 with seven re-deliveries. During the downturn IAI has had long gaps without any 747 conversion work, but is now working on two 747-400s for the DVB bank. These will be delivered to World Airways in December and February.

Signalling the market is starting to recover, they are the first 747-400s to be converted by DVB aviation investment division Deucalion more than five years after the bank acquired 747 conversion slots from IAI. DVB has repeatedly deferred its conversions and cancelled four of its original eight conversion orders. Senior vice-president group investment management Paul da Vall says the bank is set to use its two remaining slots in 2012, but "we'll bring those forward if we can".

Several 747 freighter operators face capacity shortfalls and "are all looking at once" for more aircraft, says da Vall. "All of a sudden the market has come to life," he says.

IAI's 767-300/-300ER conversion line, part of a joint venture with Japan's Mitsui, has also been busier. IAI re-delivered its first 767-300ER at the end of 2009. Through the first three quarters of this year IAI re-delivered only one 767-300ER, to Guggenheim Aviation Partners. But Guggenheim chief executive Steve Rimmer says IAI completed in October a second 767-300ERBDSF for the lessor and is to re-deliver its third in March.

Of all of IAI's cargo conversion products, the 767-200 has been the most active during the economic downturn as it had "a good backlog", says Gaber. IAI now has three lines for the 767-200 and one for the 767-300ER - all in Tel Aviv, although it previously had a 767-200 line at TAP Maintenance & Engineering Brazil. It is, says Gaber, looking to open at least one more 767 line in 2011 - most likely overseas.

A healthy pre-crisis backlog has also helped Boeing keep active its 767-300ER conversion line at Singapore Technologies Aerospace and its 747-400 line at Taikoo (Xiamen) Aircraft Engineering. Boeing vice-president freighter conversions Dan da Silva says the 44th 747-400BCF was completed in July, compared with 20 747-400BDSFs to date for IAI. "We've achieved 67% market share on the 747, despite having a higher price," da Silva says. "I think the same thing will happen with the 767."

Da Silva attributes IAI's recent 747 and 767 order successes to very steep discounts. Boeing is still looking for its first orders on both products since 2008. "There's a difference in business decision making and pricing policy. We don't try to chase production capability with price," he says.

Da Silva argues that Boeing has more flexibility than IAI as it does not own any conversion sites and is able to shift its engineering resources from freighter conversion to production aircraft programmes when needed. "That flexibility allows us to wait for the right timing," he says. "It's the beauty of our business model. We don't have to fill our MRO."

Boeing is confident of orders despite the price gap between Boeing and IAI solutions. For the 747-400, da Silva says interest has picked up in the past three months. He says several potential customers are waiting only for a final outcome for the five 747-400BCFs and two 747-400Fs being auctioned as part of the Japan Airlines restructuring.

Da Silva says several companies bid for these aircraft and those that are ultimately unsuccessful at acquiring them will have no alternative but to purchase and convert passenger 747-400s because there are no more available 747-400Fs or BCFs.

He believes some of the 19 ex-JAL 747-400 passenger jets already sold to new lessor AerSale as part of the same restructuring will also be converted because the passenger market is not strong enough to absorb all these aircraft.

The 767-300ERBCF situation is more challenging. In December, Boeing will redeliver the last of the seven conversions ordered by All Nippon Airways between 2005 and 2008. The only other order for the 767-300ERBCF programme to date, a 2008 commitment for 10 aircraft plus 10 options from Q Aviation, has been deferred indefinitely. While Kramer says the lessor is "making progress" in finding 767s to buy and convert, it is likely Boeing and ST Aerospace will go through 2011 without working on a 767-300ERBCF, given the nine-month lead time required for the conversion.

The medium-term outlook for 767-300ER converted freighters looks more promising as demand for medium-size freighters is on the rise again, and 787 deliveries are expected to begin next year, resolving the feedstock challenge. Aircastle is looking again at converting 767s after electing not to convert any of the roughly 50 767s in its portfolio three years ago due to the strong passenger market and 787 delays. The lessor's chief executive Ron Wainshal says it is considering both the Boeing and IAI products, but "it's more a 2012 and 2013 thing" because it does not have any 767s coming off lease until the end of next year.

The changing market conditions for 767-300ER conversions are even prompting a third company, Wagner Aeronautical, to develop its own P2F product to compete with Boeing and IAI. Chief executive William Wagner says his California-based firm, which designed the 757-200 P2F now sold by Precision Conversions, has been "tinkering" with a 767 P2F product for two years, but has been waiting for market conditions and feedstock to improve before formally launching the programme. "We're hoping by the end of this year or the first quarter of next year to make a [launch] announcement," Wagner says.

The company intends to launch the programme with an order for more than 10 aircraft from one customer, which he expects to secure over the next couple of months. Wagner is talking to MRO shops in Asia and the USA that have expressed interest in performing the initial conversions.

777 PRODUCTS
Early 2011 could also see the launch of at least one 777 conversion product. Boeing began offering the 777-200BCF and 777-200ERBCF in the second quarter of this year and expects a launch customer by mid-2011. "We're thinking first half, maybe even first quarter of next year, would be launch," Kramer says, although "it could go later. It's all about finding the launch customer. You don't do one of these - you need a significant quantity."

One big customer or a few smaller customers could give Boeing the quantity it needs to formally launch the programme, adds Kramer. FedEx Express, which along with UPS would be big enough to persuade Boeing to launch the 777BCF with just one customer, confirmed last year that it was evaluating the programme. But FedEx is only one of seven or eight carriers that have expressed "serious" interest in the aircraft, says Kramer. Several other airlines and leasing companies have expressed "general interest" in the programme, he adds.

Last year Boeing indicated that the smaller and older 777-200 could be converted ahead of the 777-200ER. Kramer says the -200ER "seems to be gaining traction to a point that's what we are focusing on". Kramer says data so far shows the 777-200ERBCF coming in at a payload of about 81,720kg (180,000lb) and a range of about 4,000nm (7,400km). The 777-200ERBCF could enter service in 2014.

Boeing also aims to select a conversion shop for the 777BCF next year. In September, it issued a request for information to "about a dozen" MRO firms with conversion capabilities. ST Aero and TAECO are seen as the most likely partners given their involvement in other BCF programmes. IAI is also interested in converting 777s as a Boeing partner or by pursuing its own supplemental type certificate. "We can go either way," Gaber says. "We have the capability and knowledge to do it ourselves."

Da Silva says that "if there's a compelling business reason" Boeing would consider partnering IAI on the 777BCF. But he adds: "It's an unlikely scenario. I wouldn't say your main competitor would be the one you go to."

IAI is also eyeing a P2F product for the Airbus A330, with a decision on its next widebody conversion project expected next year. Earlier this year, Airbus delivered its first A330-200 production freighter and has been planning a P2F product for the A330-300. Airbus Freighter Conversion vice-president of marketing and sales Michael Fuerst, who earlier predicted the launch of the A330-300P2F by the end of 2009, now says it is unclear when a launch customer will be secured and that Airbus is re-examining the programme. "Today it's better to look once more than go ahead," he says.

B/E Aerospace unit Flight Structures (FSI), which competes against EADS EFW in the A300-600 P2F market, has also been looking at potential new widebody solutions. But it may be difficult for FSI, IAI or other non-OEMs to certificate conversions of new-generation widebodies as they are more technologically complex than 767s or 747-400s. "It's even a challenge for us OEMs," da Silva says.

Garber says "it's clear the next generation of conversions will require new challenges and new skills", but points out that IAI has experience in producing composites and even designing entire aircraft. "We are well positioned to address this new challenge."

The potential launch of A330 and 777 conversion products from OEMs and independent providers comes as the similarly sized Boeing MD-11BCF approaches the end of its run. Boeing plans to convert only four more MD-11s, says Kramer, as the airframer only has four MD-11BCF cargo doors remaining.

Of these aircraft, one is being converted at ST Aerospace and will be re-delivered to Boeing Capital at the end of this year and two additional Boeing Capital MD-11s are set for conversion in 2012. Boeing is speaking to owners of the roughly 14 remaining MD-11 passenger aircraft that may be interested in acquiring the fourth remaining cargo door, says Kramer.

The A300-600 P2F conversion also has suffered from a lack of demand during the downturn, but both suppliers hope there is still life left in their programmes as over 100 are A300-600s in passenger operation.

The EADS EFW A300-600 line recently resumed after what Fuerst terms a "long" gap. There is one A300-600 being converted, but Fuerst sees business picking up and says a second A300-600 will be inducted shortly.

FSI has converted only one A300-600 since securing its STC in 2008 and has no orders but continues to offer conversions. Sales and marketing director Paul Nation says there is demand, but passenger operators continue to hold on to aircraft as there are no suitable replacements. "The kits are there, the STC is there, the customers are there," Nation says. "The issue is getting aircraft."

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THE FINANCING HURDLE IN WIDEBODY CONVERSIONS
Lack of financing, rather than lack of demand or feedstock, may be the biggest obstacle to conversions of 767 and other widebodies, with those banks that have returned to the market this year gravitating to new aircraft - and reluctant to back transactions involving older types.

"There are some areas where the banks are still not active," says BNP Paribas head of global marketing and aviation finance Olivier Trauchessec. "Older aircraft is where we see the challenge - financing aircraft older than a vintage 2000 is a challenge."

Guggenheim Aviation Partners' chief executive Steve Rimmer calls financing "the thing that's missing", while Ron Wainshal, head of lessor Aircastle, terms it an "impediment" and "a built-in inhibitor that will take a lot longer than the downturn to fix".

But conversion providers are confident the financing challenge will be resolved. "There's enough demand out there," says Boeing vice-president freighter conversions Dan da Silva. "There is money to be made. The economic equation is too appealing to stay out for too long."

Da Silva adds that Boeing also has the option of turning to Boeing Capital to help cement conversion orders.

LACK OF financing, rather than lack of demand or feedstock, may be the biggest obstacle to new orders for widebody aircraft conversions, with those banks that have returned to the market this year gravitating to new aircraft - and reluctant to back transactions involving older types.

"There are some areas where the banks are still not active," says BNP Paribas head of global marketing and aviation finance Olivier Trauchessec. "Older aircraft is where we see the challenge - financing aircraft older than a vintage 2000 is a challenge."

Guggenheim Aviation Partners' chief executive Steve Rimmer calls financing "the thing that's missing", while Ron Wainshal, head of lessor Aircastle, terms it an "impediment" and "a built-in inhibitor that will take a lot longer than the downturn to fix".

But conversion providers are confident the financing challenge will be resolved. "There's enough demand out there," says Boeing vice-president freighter conversions Dan da Silva. "There is money to be made. The economic equation is too appealing to stay out for too long."

Da Silva adds that Boeing also has the option of turning to Boeing Capital to help cement conversion orders.