As the freighter market has begun to stabilize after the return of passenger aircraft belly capacity, the drop in demand for narrowbody freighters and the corresponding decrease in supply could result in capacity shortcomings in the near future. The inconveniently timed retirements of aircraft types vital to surging e-commerce operations, combined with a decrease in passenger-to-freighter conversions, create an opportunity for narrowbody fleet investment.
Narrowbody passenger-to-freighter conversions past their peak
As a result of the elimination of belly capacity provided by passenger aircraft during the pandemic, as well as the growth of e-commerce, many aircraft owners and operators turned to passenger-to-freighter conversions as a potential way to increase their revenue.
As a result, conversions more than tripled from 61 in 2019 to about 185 in 2023, representing a growth of 32% per year during that period, according to McKinsey & Company. This increase in conversions was driven by the narrowbody segment and included the introduction of a variety of new freighter types such as the A321P2F in 2020, followed by the A321PCF and A320P2F a couple of years later.
It was the 737-800 freighter type that saw the most growth, with many lessors converting aircraft speculatively because they had no use for them in the passenger market at the time.
While the narrowbody conversion market saw tremendous growth during the first two years of the pandemic, deliveries of converted freighters have slowed now that passenger flights have resumed and even overtaken 2019 levels. Various STC holders reduced their delivery schedules in 2024, while other conversion houses have voiced concerns about challenges facing maintenance, repair and overhaul facilities, including supply-chain shortages and decreasing demand.
Narrowbody freighters coming off conversion lines have also headed into storage, leading to concerns about overcapacity, according to Oliver Wyman.
Overall, McKinsey & Company expects a decrease in conversions of ~5-10% per year from 2023 through 2030. The drop in demand experienced today is tied to not only the return of belly capacity but the strength of the passenger market itself as well as delays with new aircraft deliveries, prompting lessors to keep aircraft in service with passenger operators for longer.
E-commerce growth remains while conversions slow
The rise and potential of e-commerce growth has confounded traditional thinking of the freighter market. While growth of air cargo in terms of Revenue Tonne Kilometers (RTKs) has traditionally been closely linked to growth in GDP, long-term air cargo traffic will continue to outpace global trade growth due to “structural factors” like e-commerce and evolving supply chains, according to Boeing’s most recent Commercial Market Outlook, published in June 2023.
E-commerce has doubled its share of retail sales over the last five years and could account for 23% by 2026, with a demonstrable impact on narrowbody freighter demand, according to Boeing.
Boeing’s Commercial Market Outlook also says that new express networks will continue to support the growth in e-commerce, with a forecasted growth of 58% in express fleets over the next 20 years, while specific rates of growth will change per region with new ACMI opportunities being created around e-commerce platforms. In the narrowbody market, for example, the 737-800 freighter has already been adopted and utilized by the likes of Amazon, DHL, Mercado Libre and JD.com for their own networks.
Anticipated retirements will exacerbate a shortage
With the tremendous growth in e-commerce, and future supply of converted freighters stumped by shortfalls in present demand, an increase in retirements is expected in the next few years for many of the aircraft in the express freighter fleet. While e-commerce has relied upon narrowbody workhorses like the 737-400F and 757-200F, both types are nearing their inevitable retirements.
In fact, Boeing estimates in its Commercial Market Outlook that there are more than 700 older technology narrowbody freighters still in service that are 30 years old on average.
In the case of the 737-400F, Europe’s largest operator of the type, ASL Aviation Holdings, has begun replacing its inventory of the Classic with 737-800 freighters. While in 2019, ASL was operating more than 40 737-400s, by 2023, that number had dwindled to around 25 of the type.
As for the 757-200F, DHL has already sent some to be parted out while the largest 757 operator, FedEx, has recently started retiring the type. Despite the ability of the aircraft type to preserve its value to the airline in its age, with express operators like SF Airlines signing 10-year agreements with Spirit Aerosystems in 2021 to maintain its 40-strong 757-200 fleet; the average age of these aircraft nearing 30 years old creates an inevitable conclusion: replacements will be needed to keep pace with the doubling of e-commerce in the next 20 years.
Ultimately, airlines wishing to take advantage of the assurance of growth in e-commerce will be facing a shortage of converted narrowbody freighter availability as retirements continue. Combined with the decrease in conversions in the long-term outlook, there is an impending shortfall of freighter capacity in this segment.
Despite short-term drops and the tumultuous upsets of the past few years, it is important to remember that the cargo industry is cyclical but still carries potential in the long run. After all, global air cargo demand, partly driven by e-commerce, will grow at around 2-4% every year through 2030, according to McKinsey. Businesses investing in narrowbody converted freighters for e-commerce can therefore expect stable, long-term returns on their investment.