This year's ISTAT Conference in Monaco, October 6-7, attracted 300 attendees, a 30 percent increase from the 2005 event. At the gathering, a consensus emerged: values of converted B747-400s are failing to adequately reflect the hike in feedstock prices. The B747-400 conversion has become extremely popular...
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This year's ISTAT Conference in Monaco, October 6-7, attracted 300 attendees, a 30 percent increase from the 2005 event. At the gathering, a consensus emerged: values of converted B747-400s are failing to adequately reflect the hike in feedstock prices.
The B747-400 conversion has become extremely popular, as airfreight operators seek to cope with spiraling demand and replacement of existing freighters, due to rising fuel costs and changing market dynamics. The conversion to freighter was precipitated partly by the massive fall in values of passenger aircraft and the rise in availability. Values of passenger B747-400s in 2002-2003, resulting from the events of 2001, the second Gulf War, SARS and corporate collapses and contractions, fell to around $30 million. With conversion costs from a passenger to a full freighter ranging between $20-30 million, the combined cost of acquisition and conversion of $60 million made such a program viable for operators and lessors. Values have matched these conversion costs.
However, since 2003 the combination of increased traffic, delays in the A380 and considerable enthusiasm for the -400BCF conversion, has robbed the market of cheap passenger aircraft. Instead of $30 million being paid for passenger aircraft, such aircraft are now rarely available for under $40 million. Combined with administration costs associated with the conversion, the combined cost of a -400BCF conversion can now easily exceed $70-75 million.
Steve Rimmer, executive officer of Guggenheim Aviation Partners, cited the delay in values catching up with new market realities, as reflected by the low price tag of initially securing suitable B747-400s for conversion and then the rise in their cost. The cost of conversion also goes beyond that charged by the conversion facility and should take account of the other myriad costs incurred by the conversion agent, including on site teams overseeing the conversion process. Whereas values attributed to converted units were generally below $70 million, Rimmer suggested that they should more accurately reflect the real costs of conversion and be much higher. However, the premise of most conversions is that the cost of passenger aircraft has fallen to a level that makes conversion economic for freight operators, to the point where there exists an upper limit for the post conversion value. If the price of conversion candidates continues to climb, operators may not be able to pay the higher rentals and they will have to wait for values of passenger units to once again fall to more economic levels. Although newer converted aircraft may be more economic, older aircraft also have lesser rentals. Fortunately, the B747-400BCF market is perhaps unique, due to the absence of alternatives and the much higher price of new B747 production freighters. This should allow values to more closely match conversion costs in at least the short term, but only if feedstock prices remain realistic.
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