Finding the sweet spot for next-gen narrowbody conversions

July 12th, 2018

By Alan Hedge

Over the past few years, there has been a lot of excitement (and jockeying by conversion houses) over the newest generation of narrowbody freighters, the Boeing 737NGs (737-700/-800) and Airbus A320 family (A320/321). As these newer freighters stand poised to begin replacing older types, let’s take an early look at the new programs and the age characteristics of these aircraft.

There are at least eight 737NG and A320 family programs with confirmed orders or commitments (see chart at below). Not included in the chart are C3 Aerospace and Sine Draco, which are both working on A320 family solutions.

Each of the programs are at different stages of maturity. Starting with the Boeing 737 NGs, IAI Bedek has already redelivered three 737-700 freighters to Alaska Airlines and has another -700 in conversion for Spectre Air Capital. IAI is also about ready to redeliver its first 737-800 conversion. Boeing and AEI, meanwhile, are converting only the larger 737-800. Pemco is also in the 737NG market with freighter and combi versions of the smaller -700 model.

Turning to the A320 family programs, there are at three least with confirmed orders or LOIs. EFW is undertaking both A320 and A321 conversions, and 321 Precision Conversions (a JV of ATSG and Precision) is specializing in the A321. As mentioned above, C3 Aerospace and Sine Draco are also developing A320 family conversion programs.

Of the very small sample of four re-delivered aircraft shown in the table above and six (known) under-conversion, almost all of the aircraft fall into the “sweet spot” of 16-20 years of age at conversion. At thirteen years of age, the Pemco 737-700 Flex Combi conversion for Texel Air is a relatively young outlier.

A natural question looking ahead is whether these young conversion programs are correctly timed. The healthy initial demand for more than 50 orders and commitments for the 737-800BCF certainly indicates market confidence, especially in China and on the part of the dominant 737 lessor, GECAS. Lessor Vallair has spread its bets on being the launch customer for both the EFW and 321 Precision Airbus narrowbody conversion programs.

What about passenger feedstock? Although the number of stored passenger aircraft of these very popular models is currently very small, each has in excess of 100 aircraft of 16-20 years of age in operation and on their way to being replaced by newer narrowbodies, thus assuring there will be enough retirements to meet initial demand.

This brief converted freighter and passenger feedstock analysis is only a proxy for what really matters to buyers, sellers, lessors, and operators, and that is the on-the-ramp price or lease rate of these newer aircraft and the question of whether they can deliver profits. Although we expect the differential to narrow, in in the near term some of these newer aircraft will have capital or lease costs of three times the oldest models they will eventually replace.

Freighter conversion feedstock and freighter fleet analysis is a major concentration of Cargo Facts Consulting. Please contact us with your questions and requirements for custom consulting.

Alan Hedge joined ACMG in 2006 as a Senior Analyst, and now serves as its Senior Director. Mr. Hedge has more than 20 years of experience in the airline industry in a variety of financial and consulting roles from fleet analysis to international regulatory and competition analysis. He started his aviation career in 1989 at American Airlines. He left in 1999 to become Research Director at The Campbell-Hill Aviation Group in the Washington, DC area. He holds a BS in Electrical Engineering from Stanford University and an MBA from the University of North Carolina.