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The lease chronicles

Recent freighter lease deals for the 737-800 are but the slow beginnings of a market that is set to burgeon rapidly, just as soon as used prices and airframe availability reach their sweet spot. Paul E Eden reports
The times are about to change for air freight operators and freighter lessors alike.  Demand for air freight has grown and with it the need for aircraft. In recent years, the majority of narrowbody freighters have been based on the Boeing 737 classic, in particular the 737-400. But GECAS’s recent announcement that it will lease two 737-800 freighters to Atran Airlines is entirely in keeping with the very beginnings of a new freight era, where traditional conversion feedstock becomes exhausted and industry turns to a new, ready source of material.
The passenger-converted aircraft are scheduled to be phased in during the remainder of 2018 and in the first half of 2019. They will provide additional capacity to Atran’s existing fleet of three Boeing 737-400 freighters and will increase Altran’s fleet to five.
That source will be the Next Generation 737s, particularly the Dash 800, but Robert T Convey, Senior Vice President Sales and Marketing at California-based Aeronautical Engineers, Inc (AEI), says the market’s not yet quite ready to be taken by storm.
“Two things are holding the NGs back. Used prices are still quite high and availability is almost as big a problem. Even those willing to pay the $13 to $14 million that an older -800 demands are struggling to find one. As we expected, the passenger airlines are extending the leases they have on 18 to 20-year old aircraft, but we thought they would be extending for a year, or maybe three. However, most are extending for five or even seven years. The oldest 737-800s turn 20 years old this year, and these extended leases will take a fair number of them out to 27 years before they become potential feedstock for conversion.”
It could be argued that modifying a younger aircraft might result in a more efficient freighter and while he doesn’t disagree, Convey says it depends on the business model. “If you wanted to pay $30 million for an -800 you’d have a really clean, new freighter, but you might struggle to make money with it.” It stands to reason that if operators might struggle to find a useful return through a newer -800 conversion, then lessors are unlikely to commission the work. That leaves the industry with the double problem of diminishing 737-400 stocks, and faced with too high acquisition costs for the oldest -800s, even if suitable prospects can be found.
To make the conversion process really worthwhile, Convey reckons the industry needs to see $8 to $10 million purchase prices, a point still some way off. At current values, he says adding the cost of conversion to the cost of buying an aircraft results in a $20 million freighter, which brings particular problems to leasees.“Even at a simple 1% lease rate factor, lease rates are more than $200,000 per month. >>

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