Converting passenger aircraft into cargo planes under volatile market demand

Abstract

The COVID-19 pandemic has severely affected airlines’ passenger businesses, while the air cargo sector has been more resilient. To reduce the financial pressure and tap into the profitable cargo business, airlines around the world are actively converting passenger aircraft into cargo planes (i.e., preighters). This paper develops an integrated economic model to examine airlines’ aircraft conversion strategies when facing dynamic market demand due to the pandemic. We consider the possibility of temporary conversion, i.e., passenger aircraft that have been converted into preighters during the pandemic can be converted back into passenger aircraft after the pandemic. We find that when the air cargo transport price is exogenous, the socially optimal conversion rates are lower than the profit-maximizing level for airlines in both the pandemic and the post-pandemic periods, and a government subsidy reduces social welfare. Competition in the passenger market or the cargo market increases conversion rates under both the airline optimum and social optimum, and widens the gap between them. However, if the airlines can influence the air cargo transport price, conversion rates may be higher under the social optimum than under the airline optimum. Competition in the passenger market and the cargo market has opposite effects on the two optimal conversion rates. When the expected cargo market size is small (large), the conversion rates in the social optimum are lower (higher) than the airline optimums, and a government subsidy worsens (enhances) social welfare. Finally, we extend our model by incorporating more real-world factors, such as the lower efficiency of preighters than that of freighters, the freighter leasing market and airlines’ lay-up of idle passenger aircraft. Most of our analytical results remain valid.