State-owned investment fund Temasek and Singapore Technologies Engineering are forming a leasing joint venture involving converted freighter aircraft. Temasek will be partnering 50-50 with ST Engineering's wholly-owned aviation asset management unit to build a portfolio valued at about US$600 million within five years.

The joint venture expects to purchase passenger aircraft at lower-than-average prices as their value has been affected by travel restrictions arising from the Covid-19 pandemic. The aircraft will be converted by ST Engineering and then leased, with financing coming via a mix of equity and debt.

According to consultants Oliver Wyman, the number of cargo aircraft is expected to grow 2.4% annually between 2020 and 2031, roughly the same as the 2.3% annual growth rate of the previous decade.  But there will be a growing number of conversions relative to new orders. More than 750 freighter conversions are forecast over the 10-year period, an increase of 28% from the previous decade. 

During the Covid-19 crisis, ST Engineering has already more than doubled its annual number of Airbus A321 passenger-to-freighter (A321P2F) conversions.

At present ST carries out A321P2F conversions in Singapore and at the Dresden, Germany facility of its Elbe Flugzeugwerke (EFW) joint venture with Airbus.

ST Engineering Aerospace Guangzhou Aviation Services and VT San Antonio Aerospace in Texas are now also doing A321P2F conversions.

Business growth

For the new joint venture, ST Engineering will provide the associated maintenance, repair and overhaul services while ST Engineering will be the asset and lease manager to the joint venture.

“This joint venture represents a significant step by ST Engineering in growing our aviation leasing business as we expand beyond passenger aircraft and engines to include freighter aircraft assets as part of our portfolio,” says Jeffrey Lam, president and head of commercial aerospace at ST Engineering. “As we embark on this exciting venture with our partner, Temasek, we also welcome and look forward to working with other potential like-minded partners who are looking to invest in the strong freighter aircraft leasing market. In the medium to long term, the JV intends to securitize the leasing income streams by way of a business trust to unlock capital.”

Alongside large widebody freighters, there is strong demand for smaller freighter aircraft as companies re-align their supply chains in the wake of the pandemic. There has also been a big fall in freight volume that would normally have been carried in the bellies of passenger aircraft.

Airlines are also adjusting their passenger fleets, and a large number of Airbus A321s have been put up for sale. The other main narrowbody conversion involves the Boeing 737-800. 

In January EFW delivered an A321P2F aircraft to global lessor BBAM for lease to UK-based Titan Airways. The plane has a capacity of 28 tonnes.

P2F conversion

Last November CDB Aviation, a wholly-owned Irish subsidiary of China Development Bank Financial Leasing Co. Limited (CDB Leasing), entered into a partnership with EFW to conduct the P2F conversion of two Airbus A330-300 aircraft, which will be available for lease to airline customers from early 2022.

The A330-300 P2F conversion programme marked CDB Aviation's entry into freighter conversion, advancing the lessor’s strategic efforts to deliver ever-more customized fleet solutions to customers while tapping the long-term growth potential of the medium widebody freighter market.

“We are seeing an increasing interest from our customers for medium-sized freighters, as they look to take advantage of record-high freighter utilization, rapidly growing e-commerce demand, and higher cargo yields,” CDB Aviation chief executive officer Patrick Hannigan commented at the time. “We look forward to working with EFW on converting our highly efficient A330-300 aircraft into the next generation of medium widebody freighters that our customers can use to meet the burgeoning international and regional air freight demand."

In early May EFW announced an order for four Airbus A321P2F conversions from new customer, GTLK Europe, a global leasing company based in Dublin, Ireland. Three of the four aircraft will be inducted for conversion this year, with the fourth conversion to be carried out in 2022.