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IBA’s freighter advisory serviceP2F conversion

Freighter Advisory Practice

IBA is well placed to answer the key questions for the cargo market and passenger-to-freighter (P2F) conversions:

What makes the freighter market a good investment? What are the options for freighter fleet development? What are the economics of conversions vs other mid-life

or end-of-life alternatives? Which passenger aircraft are candidates to become

freighters? What is the availability and anticipated cost of conversion? What is the timeframe for a conversion? What are the differences between the conversion options

– OEM and non-OEM?

IBA’s freighter advisory practice sits squarely within the broad experience offered by our technical, advisory and commercial teams. Combining our consultancy services, proprietary data, and our market and costs-benefit analysis of the freighter market, we facilitate the economic, technical and commercial decisions for conversions and other midlife options.

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Is conversion the way forward?

IATA reported that global airfreight tonne kilometres (FTKs) grew by 12.7% year-on-year in May 2017, up from 8.7% in April 2017. Driven by the growth of ecommerce and by industries reliant on the movement of time-sensitive and high-value goods such as consumer electronics and perishables, demand for freighter aircraft has significantly increased from 2015.

IBA’s Freighter Advisory Practice 3

What are the opportunities in the freighter market?

Freighter fleet additions 2017-2036Boeing and Airbus both forecast robust freighter fleet additions for growth and replacement in the next 20 years, with Boeing predicting in their CMO 2017-2036 that the freighter market will require 2,480 additional freighters (1,560 conversions and 920 new) and Airbus in their GMF 2017-2036 predicts 1,950 additional freighters (1,218 conversions and 732 new).

The current market conditions of available feedstock and low fuel prices still favour the older generation aircraft conversions. The market is in a transition period shifting from old generation to new generation converted freighters, with 2020 set to be the switchover tipping point. Airbus

1,950Boeing2,480

Source: IBA.iQ June 2017

Rarely

0

500

1000

1500

2000

2500

New

Conversion

Boeing 737-400 (Freighter) statistics (does not include combis)

Active aircraft 103

Parked aircraft 10

Total fleet 113

Number of leased aircraft 72

Number of owned aircraft 41

Average fleet age (years) 23.41

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What are the options for mid-life aircraft ?

There are multiple options for mid-life aircraft. Passenger aircraft are typically active for up to 25 years although there is evidence that is reducing.

Converting the aircraft to cargo can extend the economic life by 15-20 years and increase ROI. On paper, affordable feedstock, growing demand and favourable costs make the decision to invest in conversions straightforward.

In reality the process is:

Complex Requiring conversion supplier selection, combined scope of work for conversion and maintenance and fleet standardisation including avionics upgrade.

Time consuming From start to finish a typical conversion is a 3-4 month project, earning zero revenue in that period. It is imperative to avoid delays.

Costly A narrowbody conversion requires an investment of between $4-6M.

Sale

Part out

Convert: P2F

Extend lease

Year 1 Year 25 Year 35 plusFrom 12 years on

$$$

$$$

$$

What are the economics of conversions?

Boeing 737-400 Boeing 737-800

Passenger feedstock aircraft market value $4,000,000 $11,000,000

Cargo conversion cost $2,800,000 $4,000,000

Modifications/Maintenance/Airworthiness Directives/Materials $1,415,000 $1,040,000

Registration cost $15,000 $15,000

Ferry flight $110,000 $100,000

CAMO $80,000 $80,000

Onsite representative $80,000 $80,000

Insurance/Fees/Legal costs etc. $700,000 $835,000

Current market value (5% investment premium) $9,660,000 $18,007,500

Sustainable monthly lease rate post conversion $127,302 $187,083

Lease rate factor 1.47% 1.10 %

Sample value breakdown

Source: IBA.iQ

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When is the right time to convert?

A P2F conversion combined with a maintenance package turnaround time is anticipated to take approximately 90 days for a narrow-body aircraft and approximately 120 days for a wide-body aircraft.

However, in reality the turnaround time is often extended due to avoidable delays. The non-revenue period of the conversion time and the delivery date commitment of the aircraft owner to lessees, buyers or operators is critical and requires expert oversight.

IBA’s freighter advisory and project management practice oversee the full conversion process including scope of work definition, production planning review, agreement consulting and production monitoring through to the redelivery. Our oversight mitigates against the risks and minimise the impacts of redelivery delays.

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What is the time frame for P2F?

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Key evaluation considerations for converting aircraft

Assess the aircraft age, utilisation (total flight hours /total cycles) and the remaining design life. Verify if the aircraft specification and capabilities meet the pre-conditions of the conversion STC and what

investment maybe required to comply. Ensure that the aircraft capabilities after conversion will not be inferior to similar converted freighter

models (payload / weight upgrades etc.) Evaluate the maintenance requirements in conjunction with the conversion and scope of work. Assess the aircraft records, history and events for potential conversion problems and additional costs. Check fleet standardisation and commonality requirements. Review BFE requirements and their cost.

IBA House, 7 The Crescent, Leatherhead, Surrey KT22 8DY, UK T: +44 (0) 1372 22 44 88marketing@iba.aero

28-32 Pembroke Street Upper, Dublin 2, Ireland T: +353 (0) 1 237 46 90marketing@iba.aero

www.iba.aero

How can we help?

IBA offers specialist support, analysis and expertise in the area of freighter conversion

We help you maximise revenue benefit and minimise the risks around: Freighter market study and analysis. Freighter selection /feasibility. Feedstock for conversion analysis. Freighter valuations. Consulting on cargo conversion. Conversion management and on-site management. Evaluation of investment. Second life (cargo conversion) or EoL decision.

For more information contact: marketing@iba.aero