Narrow-bodies pace conversion market

The business climate for passenger to freighter conversions depends on the type of conversions. While wide-body conversions have slowed to a trickle, business is brisk for converters of narrow-bodies.

One company riding the wave of strong narrow-body demand is Tampa, Fla.-based PEMCO World Air Services.

“The situation is different between narrow and wide-body, and we are fortunate to be in the small, narrow-body position,” Kevin Casey, president of PEMCO, says. “Wide-bodies are parked all over the place. Fortunately on the 737 end of the game, we are in a sweet spot. It’s a function of the circumstances of the fleet we are replacing.”

Casey says PEMCO is enjoying a lot of activity in the 737-400 and 737-200 business as a result of improving economies in Asia, Africa and Brazil.

“There is a demand for regional freighter fleets, both for outbound from manufacturing centers to distant points, as well as a growing middle class that is demanding high value goods,” Casey says. “China continues to be popular. Brazil is heating up, and we are getting more orders out of Africa. Airplanes that we convert are used in areas without good roadways and topography that prevents efficient movement of goods by surface, whether by rail or river.”

Casey projects that PEMCO will convert 18 to 24 planes this year. PEMCO has demand in excess of that number, but it does not have the capacity to fill all of its potential orders.

PEMCO performs its conversions at its Tampa headquarters and at two facilities operated by HAECO in Jinan and Xiamen, China.

To meet the growing demand, PEMCO plans to open two more manufacturing sites in the Americas at sites to be announced later this year. The facilities, which will take about two months to ramp up, have been in the planning stage for about two years.

“The gains we have made have come in penetrating new markets,” Casey says. “Many are geographically proximate to North America and culturally similar to the Americas region. Demand is quite high at the moment and for good reasons. Each aircraft can generate US$4-5 million per year in freight yield. We know this from operations that disclose those figures.”

PEMCO also is a leader in combi products and has been building some 737 special mission aircraft for the U.S. Department of Energy in partnership with AAR, an aviation support company.

“Our product is perhaps less expensive than the other guy’s,” Casey says. “We’ve been able to hold costs down by developing an effective supply chain. We’ve held our prices for several years. The people that buy our product get great reliability, and they are making money with it.”

Slow times for wide-bodies

Boeing and EADS EFW, the freighter conversion division of EADS and a sister company of Airbus, are not so busy these days as they navigate the effects of a tough global economy. However, both firms remain optimistic that the conversion business will cycle upwards in the coming years.

Wolfgang Schmid, vice president of sales, marketing and customer support for EADS EFW, uses the phrase “extremely bad” to describe business conditions.

“There actually is now business presently for wide-bodies and for large aircraft as well,” Schmid says. “The reason is we face an overcapacity of ready-made and converted freighters. There’s 10 to 30 percent overcapacity. A lot has transferred from freighters to belly.”

But Schmid remains optimistic. A lot of aircraft will be replaced in the coming years, he says.

“Of course, we expect some growth in the business as well. More cargo will go on the bellies of low-cost carriers, and other carriers will use cargo to balance their financial results. The airfreight market will rise again, I am sure.”

Another reason for Schmid’s optimism is the new Airbus A330 conversion program being developed with ST Aerospace, an airframe MRO provider.

“We are very optimistic that after 2016, we will have a good echo on our new A330 program which will replace wide-bodies,” Schmid says. “It will be used as a regional freighter and an upgrade replacement. That is our expectation. Nobody is really talking about buying aircraft now, but we have requests for 2016 and 2017, and that supports my optimism. We don’t have contracts yet and everybody is still waiting, but that is not unusual. A conversion program is a short-term thing. Customers don’t order three or four years ahead like they do new aircraft.”

EADS EFW completed and delivered six conversions during the first half of the year, and Schmid says that will be it for 2013. The Dresden-based company recently completed an 18-aircraft program for DHL. In the meantime, EADS EFW will keep busy with aircraft maintenance.

Boeing has delivered one conversion this year: a 767-300 ER for Guggenheim Aviation Partners, which is part of a three-aircraft program. Another will be completed by the end of 2013, and the final conversion is scheduled for 2014.

Brian Hermesmeyer, Boeing’s product marketing director for freighter conversions, like Schmid, says the wide-body conversion market has been hit hard by the global economic downturn.

“747-400 conversions used on long-haul routes is an example,” Hermesmeyer says. “As those trade lanes have gotten thinner over the last couple of years, those aircraft have found themselves parked. Demand has evaporated for now.”

The medium-wide market has also been hit by the same economic factors, Hermesmeyer says.

“The reason we are seeing narrow-body markets strengthen like they are is that a lot of emerging markets have had an explosion in their domestic cargo markets,” Hermesmeyer says. “Africa is an example. A narrow aircraft is a great fit to get companies rolling and then they can transition to a larger aircraft.”

Hemesmeyer believes there will always be a market for conversion and that segments that are down will rebound.

“I am bullish on the conversion market,” Hermesmeyer says. “Historically, roughly two-thirds of freighters have come from aircraft conversion. We have a strong order book for new-build aircraft. I see the 767 becoming stronger as time goes on as some of the regional markets like Southeast Asia, Brazil and Africa mature. In the near term, we have the strength of narrow-bodies. Conversions are certainly here to stay and will maintain a historic presence in the marketplace.”