With air travel down by as much as 85% from a year ago and losses mounting by the billions, airlines are forced to take a new look at their future. The once stable industry is facing unprecedented challenges as it waits for the Covid-19 pandemic to end. But even the most optimistic forecasts do not see a resurgence of air travel as it was in 2019 until 2024 at the earliest. The urgency to stop the bleeding for airlines worldwide has never been greater.
The industry has no doubt explored options to survive until the expected resurgence. One remedy that surely will not work during the pandemic is to offer steep discounts as has been their wont in previous recessions and other sluggish airline travel periods. It would do little to encourage people to travel during Covid. Despite a bump here and there during holiday periods, the airline business is merely a shadow of its previous self. To even keep the number of limited passengers, airlines had to give up their middle seats to comply with social distancing requirements.
In executive offices of airlines around the world, the search was on for a solution, albeit temporary. In the good old days, an airline might have leased some of their planes to generate revenues but as might be imagined, there are few takers during a pandemic and limited passenger travel.
The silver lining turned out to be the booming online business that had flourished due to the pandemic. With many people staying home and entire cities shutting down, the average consumer became an on-line shopper overnight. Airlines sensed that there was an opportunity in perhaps using some of their aircraft to transition to cargo and so began a new trend in the airline business.
From Air Canada to China’s CDB Aviation, airlines and leasing firms were rushing to permanently convert older passenger jets into freighters, betting on a boom in e-commerce as the value of used planes tumbles amid the pandemic. Firms like Israel Aerospace Industries (IAI) and U.S.-based Aeronautical Engineers became major players overnight in converting conventional aircraft to cargo planes. In some cases, they could hardly keep up with demand.
Aviation analytics firm Cirium expects the number of such plane conversions globally will rise by 36% to 90 planes in 2021, and to 109 planes in 2022. This comes at a time when the lucrative market for used planes is on the decline. The market value of 15-year-old planes has fallen by 20% to 47% since the start of the year depending on the model, according to advisory firm Ishka, which makes freighter conversions more attractive.
It is simply a new reality that a plane’s value is measured by its freight capacity rather than the age-old number of seats. That is why international airlines are taking some of their largest jets out of passenger circulation and retrofitting them to be able to handle freight in some capacity. While airlines will tell you that the conversions are mostly temporary, the fact is that many airlines are looking to make it a more long-term solution. Permanent conversions are a financial bet that air freight demand, which was weak before COVID-19, will remain strong for years to come as shoppers turn to e-commerce.
Boeing said cargo yields had risen by 40% through September because of the pandemic-related passenger disruptions, and it forecasts more than 60% of freighter deliveries over the next 20 years will be conversions rather than new widebody freighters like the 777. Narrow body freighters are almost all conversions.
The conversion boom is also helping aviation maintenance, repair and overhaul groups offset some of the lost business from the decline in passenger flights. It of course does nothing to help the lucrative airport business which has suffered immensely due to the pandemic. Many restaurants and shops at airports have closed in recent months. This does not even include the ancillary businesses such as transportation, parking and hotels which have lost millions.
Converting an airplane is a costly and time-consuming exercise. Such conversions generally cost millions of dollars on top of the cost of the aircraft and take three to four months, said ST Engineering Aerospace president Jeffrey Lam. “We are all booked out for 2021 for aircraft conversions,” Lam said. “The first slots are well into 2022.”
Israel’s aircraft industry is thriving during this new conversion trend. IAI can convert 18 or more 767s a year and produces most of those used by Amazon. “We are investing a lot of effort to meet the market demand,” said Yosi Melamud of IAI. “What happened with the coronavirus outbreak, commercial flights were significantly reduced … international flights dropped to nearly zero,” he said. “So, the only solution for transporting cargo, and with the trend that people are staying at home ordering online, is cargo planes.”
It seems that even if there is a return to normal for the airlines a few years down the road, the expectation is that there will be a few large increases in e-commerce in the future. Amazon will continue to be a major factor in the rise and in fact Israel is converting many planes for Amazon’s use.
The business advisory company Ishka said the value of 15-year-old planes has fallen between 20 percent and 47 percent since the start of the year. It means that there is no longer a market for second-hand or used planes. This drop in value makes freighter conversions more attractive, or pleasing, to businesses, the company said.
There are two type of airplane conversions: Temporary where passenger seats are removed to carry more freight and permanent which are much more costly because the planes are actually redesigned to hold freight and the risk is so much greater when you have given up passenger space. There is every reason to believe that the industry will in the lob-term integrate the cargo capacity, especially since it seems that one direct result of the Covid-19 pandemic will be a permeant shift to e-commerce or on-line shopping.
The next time you fly you may just want to take a closer look at your seat and realize that its value may not be what you paid for it but space for a bunch of Amazon packages.