Aeronautical Engineers (AEI) has formally launched its freighter conversion programme for the Boeing 737-800 saying the model has now entered the ‘zone of conversion’.

After studying the programme for a year, the Miami-based passenger-to-freighter conversion specialist says it is now developing a modification programme to turn 737-800 passenger aircraft into both freighter and Combi versions.

AEI says the wholly self-funded engineering work will take between two-and-a-half and three years.

As a passenger version the 737-800 is the most liquid narrowbody aircraft in the market and remains the operating lessor's favourite model.

Its diversified operator base (more than 169 operators around the world according to Flightglobal’s Ascend Online database), current fleet in operation (approximately 3,142 units), hefty backlog (about 1,400 aircraft), and ease of marketability has ensured that this aircraft remains desirable in the marketplace.

A conversion by 2017 should be attractive for current narrowbody cargo operators looking at better economics.

“The 737-800 is the next logical step in the narrowbody conversion market – one more pallet than the popular 737-400SF and with a proven airframe with newer technology – with aircraft that are now entering that 15-20 year age zone for conversion and with a successor (737-8/9 Max) lined up,” comments Ascend head of market analysis Chris Seymour.

He expects a conversion cost at more than $3 million.

DVB Bank senior vice president Aviation Research Simon Finn says the conversion price “must be competitive”. He says: “If a 757 conversion costs $4-5 million then the rational pricing of an A320/737NG conversion needs to be around $3.5 million to be attractive to the market.”

Seymour recalls that converted 737-400SFs, in their initial conversion years between 2006 and 2008, commanded passenger half-life values in the $9-15 million zone.

“Today the oldest 737-800s (1997-vintage) are already at $15 million and by the time conversions start building say two to three years from now, more aircraft will be in that $10-15 million zone,” says Seymour.

“I don’t think anyone is going to be too keen if the “ramp” price (price after conversion and maintenance costs) is more than $14 million and I suspect around $12 million is where most would draw the line. So, if the conversion/maintenance costs $3.5-4 million, then the value of the feedstock aircraft must not exceed $8-10 million,” says Finn.

"This makes me think that we’re some years away from seeing any serious volume of conversions. Personally, I think it’s time to do the product study now so that, conversion suppliers are ready for the speculators when values drop into in the conversion zone – after the next industry downturn," he adds.

The age of 737 Classics is becoming an issue for import of used freighter and converted passenger aircraft but on the other hand -800 values are too high to make a conversion attractive for most investors.

Seymour says 737-400 conversions have been more popular in the past three years as passenger -400 values have fallen to $3-4 million.

“This does not mean that -800s will get to that level in the near future but, by early 2020s, there will be increasing replacement by Max and so we would expect values to be on the decline, increasing conversion opportunities. With average age of current -300/400SFs at 22 years, by then there will be significant replacement opportunities,” he says.

According to Flightglobal’s Fleet Forecast at least 200 units will be converted over time.

Finn reckons the Chinese domestic freight will be attracted by the new product as well as ‘those wishing to adapt to the higher fuel price’ and any Express cargo airlines in a growth mode.

“Boeing also expects strong demand for narrowbody passenger conversions in emerging markets,” he says.

The programme could also provide an opportunity for lessors to leverage some additional life out of their older -800s through conversion, according to Seymour.

“This might additionally be attractive if there are any older aircraft that have not yet been depreciated sufficiently, so that their book values may currently be above market values. If a lessor is not yet ready to accept an impairment on such airframes then a conversion and recapitalisation to a different book value may help solve the accounting problem? Thus you may find lessors amongst initial customers – ie, they own their own aircraft and are seeking an extended life. The smaller cargo users are more likely to wait until values fall further before investing.”

Source: Cirium Dashboard