Despite the extensive amount of engineering work taking place to develop freighter conversions, most would argue that the number of sales for these various programs has been disappointing.
The poor market circumstances and low growth in the air freight and express business are two of the primary reasons for the lack of conversion orders. A companion issue is aircraft pricing, which fortunately is getting more attractive as residual values on used aircraft continue to fall.
In general terms, we find that small-capacity converted freighters need to be priced in the range of $6-10 million to find market acceptance, while medium capacity and large capacity converted freighters need to be in the range of $15-20 million and $35-50 million, respectively.
Given that conversion costs are:
- $2-3 million for 737-300s
- $4-5 million for 757-200s
- $7-10 million for medium widebodies (A300s, 767s and MD-11s)
- $15-25 million for large widebodies (747s)
It is possible to determine the necessary residual values for passenger aircraft at which conversion makes sense from an economic standpoint.
Simply subtracting the conversion price from the freighter prices shows the following price requirements for various aircraft types:
- 737-300s at $6-7 million
- 757-200s at $8-10 million
- 767-200s and A300-600s at $8-12 million
- 747-400s at $25-35 million.
Residual values have declined 30 percent to 40 percent for many aircraft types since September 11. For example, current market values for:
- mid-1980s vintage 737-300s have dropped 40 percent to under $7 million
- mid-1980s 757-200s have values under $10 million
- early-production 747-400s now have values just over $40 million
Distressed sales (is there any other kind today?) will result in even lower prices. Accordingly, we are at or near the point where we can expect conversion activity to pick up dramatically. If the economic situation improves in 2004 as many observers predict, we will see the long-awaited rebound in demand for air freight that will jump-start the freighter conversion market.