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A new lease of life

Flexibility is leasing’s USP, meaning it wins when business is booming for express freight and wins again when demand is flat and airlines divest themselves of their aircraft or choose leasing over buying. Rob Coppinger investigates

Leasing has a bright future with e-commerce driving express freight services, while changes to international cargo traffic patterns means cargo, not passenger airlines choose leasing and converted aircraft to reduce their fleet costs. 


The big leasing story of the last 12 months was e-commerce retailer Amazon’s decision to lease 40 freighters for its new Prime Air cargo arm. “The spike in demand [for express freighters] I think was created by Amazon putting 40 aircraft into service in such a short time frame,” Air Transport Services Group’s (ATSG) COO of Cargo Aircraft Management, David Bucher, tells Airline Cargo Management. “It wasn’t a surprise [that Amazon did that] when you look at the amount of merchandise Amazon moves on a daily basis through the air or on the ground. In my view, it was unreasonable to expect that UPS and FedEx would be in a position to grow to the levels necessary just for the Amazon freight.”


Amazon ordered half of those 40 from ATSG and the other half from another US leasing firm, Atlas Air. ATSG is delivering the mix of Boeing 767-200s and 300s to Amazon by the end of this year. Bucher believes it is unlikely the e-commerce firm will completely replace its existing air cargo service providers, FedEx, UPS and the US Post Office.


As for the rest of the market, “once we take Amazon out of the situation, then the demand for 767s has been, over the last two years, moderate,” says Bucher, adding that he typically has three to five potential customers enquiring about leasing 767-300s at any one time. Looking across the world regionally, ATSG has placed aircraft into Europe, Canada and the US, with some of those US assets being used for South American and Caribbean services. China is the other notable e-commerce express freight hotspot and Bucher says ATSG has had interest from “two to three places in China for the 767”. 


For 2017, ATSG will join Israel Aerospace Industries in converting one aircraft per month. Bucher explains that as airlines start operating the 787 and factors such as fuel costs cause fleets to realign, the divestiture of 767s becomes unavoidable, so providing newly available conversion feedstock. “Qantas Airways retired its 767s, which we took quite a few of [and] American [Airlines] has retired quite a few 767-300s. We have finally had sister ship quality aircraft freed up by their original operators.”


These recent fleet realignments and divestitures of aircraft have also helped the narrowbody feedstock supply for the rapidly growing express freight market. Spectre Air Capital decided the trend was important enough that it launched a dedicated freighter service in September last year.   


Called Spectre Cargo Solutions, the freighter-focused unit is aimed at assisting customers with their narrow and widebody needs, including turnkey operating lease. “We have this rapidly growing e-commerce express freight requirement that is happening at the same time as a lack of reasonably priced feedstock of Boeing 757 or 737-300/400. Express freight is almost entirely e-commerce-driven in some form or another, whether it is historic feeder networks of DHL in Europe or emerging markets, particularly Chinese e-commerce,” says Spectre Air Capital President, Kevin Casey. 


Freighter future


Three to four years ago, Casey envisaged a future where the market demand for freighters would increase, and now he is seeing narrowbody aircraft leaving passenger fleets in sizeable numbers due to what he calls a “softening of demand,” which is predicted to continue. Another contributor to this divestiture of narrowbodies is the arrival of Airbus and Boeing’s newest products, according to Casey: “The A320 current engine option and 737 Next Generation are going to be exiting fleets in increasingly voluminous numbers over the  next few years as [Airbus] neo and [Boeing] MAX variants come [off the production line] at six per month each.”


“Leasing makes up over 35% of all aircraft flying worldwide today and will increase to 50% in the next decade,” says Shukor Yusof, founder of Singapore-based aviation advisory service, Endau Analytics. “Leasing is an attractive and economical approach for many airlines given that it doesn't impact the bottom line as a direct purchase. So yes, under the current conditions, leasing represents a very attractive proposition.” He describes the express market as niche, but expects it to continue to develop in the next few years, adding that “leasing gives more financial manoeuvrability”.  


Yusof also sees a divergence between the freight sector and the passenger airline services he expects to continue. “Some airlines, not many, will continue to stick with combos [freighters], but overall most airlines will focus on the passenger business. In Asia, with the exception of Korean Air and Cathay Pacific, most carriers focus more on the commercial passenger [service] than the cargo business.” But, he could see airlines adopting the approach International Airlines Group (IAG) has taken with its brand British Airways and lease Qatar Airways’ 777 freighter space. “Possibly [other airlines will do it], although the rate of growth for the cargo sector remains slow.” >>

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