From the Cockpit with Altavair CEO Steve Rimmer
A discussion of widebody freighter conversions and the cargo market
Altavair became the first lessor to take redelivery of an A330-200P2F in January 2022 after conversion with Elbe Flugzeugwerke (EFW) and has now placed two on lease to Mexico-based Mas. The lessor has more A330P2F conversions on the way, including both -200s and -300s.
Cargo Facts recently caught up with CEO Steve Rimmer to discuss the state of the freighter market and the company’s conversion strategy.
Cargo Facts: What experiences or lessons have you learned from these last couple of years? How will you implement them going forward as you try to project or forecast potential sales or aircraft to focus on for your next projects?
Steve Rimmer: What I would say is we’re not really what I would classify as an “opportunistic” freighter investor. If you look at our history for the last two decades, we’ve always had a focus on the freight market. So I think what the last two years did for us is not necessarily focused on the sector and its demands, but on what probably was the acceleration of certain opportunities.
We’d already made the commitment before the pandemic to the 777-300ER with a long-term perspective on converting airplanes. We already had 777-200LRs in our portfolio which we’d always intended to convert, and we got the A330s. All of these were probably positioned for conversion a little further in the future than we looked at, so I don’t think the pandemic has necessarily changed our view of the assets that we wanted to be invested in because we were already invested in them. It’s probably changed the timing, and I think the timing of it was not just reactive.
I think we’ve seen some structural shifts in the freight market. If you look at CMA CGM, Geodis and Maersk, they kind of got left behind by some of their more traditional contracted providers of freight capacity, and these people have taken a move forward in terms of actually securing their own capacity. So some of the client base that we’re looking at and talking to is different than it was before.
But the other aspect of where the market has changed and people have started looking at things a little differently is the scheduled passenger networks and the 45% of air freight that travels in the belly of the scheduled carriers. We saw international route networks for passenger carriers shrink and obviously, belly capacity shrank.
I think as we go forward, we’re seeing that the passenger alliances are changing shape and size, and we think going forward that might become a little bit more fragmented. If you fragment the passenger alliances, you don’t get the critical mass of people going through centralized hubs, and if they’re not going through centralized hubs in volume, then the size of the airplane serving that hub is probably also going to change and the size of the belly capacity is going to change. I also think we’re going to see more point-to-point flying. So to the extent that belly freight can’t go through centralized hubs where it can then be redistributed, then you’re going to see more point-to-point freight flying.
SR: I think there will be changes to the size and shape of what we’re going to see from the freight market going forward. And some of those are going to be systemic changes, not just temporary.
When we look forward five, ten, twenty years, I think we see freighter demand, size demand changing, which I think also plays into some of the bets we’ve made on A330s. We think the 777-300ER is going to make a good freighter. When you look at the change in cargo densities that we’re seeing and have experienced over the last five to ten years, the cargo density is going to mean that volumetric capability might be more attractive than ultimate weight payload capability. So something like a 777-300ER volumetrically can offer something that’s pretty attractive.
There’s always going to be an element of heavyweight and outsize freight that will benefit from the nose-loading capability of something like a 747. But whether we’re talking to investors or operators, everybody is under pressure to address ESG issues. And when you add all those into the equation, I think we’re going to see some changes. Winding the clock back three to five years to when we were making our investments in the widebody space, it was with some of those criteria in mind, but I will admit that what the pandemic has probably done is accelerated the timing of some of that.
SR: We were fortunate that we didn’t have a large portfolio of off-lease or challenged single-aisle airplanes so we didn’t have to be reactive to anything there. It’s a space which, in truth, we haven’t played a lot in in the past. It’s a space where people who have large fleets react and say, “What can I do with my airplane?” That’s certainly the case in the 737-800 market. If you look back probably a year to eighteen months, the dynamics of the single-aisle market were very different. We haven’t seen the flooding back of domestic traffic like we’re seeing here in the U.S. and within other borders, so that we see traffic above the 2019 levels. So demand for these single-aisle products wasn’t there, and that flowed through to demand for engines.
So if I’ve got a 737-800 sitting on the ground, what can I get from my airplane? Well, it might be the sum of the parts, I might get $1 million for the airframe, and I might get $3.5 million each for the two engines. So maybe I’ve got an $8 million asset there. And a lot of people were over-invested at a higher level than that, so that didn’t work. But if I could spend roughly $5 million on converting it and get somewhere between $165,000 and $210,000 a month of rent on a converted airplane, my opportunity cost looks quite attractive.
The question was: how deep was that market? We thought it might be oversubscribed and we didn’t see the proactive opportunity to go in and play in that market, because with a lot of supply already in the system, you might be competing to provide something at even lower rents than we were actually seeing in the market.
SR: The question is: What’s the size of the market? I think we’re probably seeing a market of somewhere in the 250-unit range, ultimately. So how many programs does that support? I’m not sure it supports three programs; I’m not sure it supports four programs, but maybe it supports two programs. So then you start thinking about the dynamics. Let’s face it: The pricing is probably going to be somewhere between $25 and $35 million for the conversion program. If you’re investing that amount of money, you’re looking at a long-term recovery of that investment.
So when you look at the programs, you want to know that whoever you commit to has the technical program and financial capability to complete the delivery on that asset, and then you want to know that you’re dealing with somebody who’s going to be around for the next twenty years to support it both financially and technically. So those are the considerations that we’re going through and I think we’re close to making the decision.