Minneapolis (MSP) is not a base for all-cargo carriers, and yet a freshly painted 737-800BCF (32605, ex-Hainan Airlines) landed at the airport on June 26, having arrived empty from Everett (PAE). The aircraft had arrived in Everett in early June after conversion to freighter configuration by Boeing in China.
In the past three months, GECAS, the owner of the airframe, has taken redelivery of nine 737-800BCFs, most sent to MSP by Amazon, their lessee. According to Amazon’s guidance, the freighters are entering service with Sun Country Airlines on behalf of the e-commerce giant.
GECAS has been the largest player in the next-generation narrowbody conversion market by a considerable margin since April 2018, when Boeing redelivered the first 737-800BCF to GECAS. Large lessors with portfolios of passenger narrowbodies have so far ordered the majority of freighter conversions for newer types, including A320-family and 737NGs, but the COVID-19 pandemic is expected to catalyze the entrance of other types of conversion customers.
Lessors with next-gen narrowbody orders
|Lessor||Aircraft||Conversion house||Number ordered (+ options)||Number redelivered|
|Aviation Holdings III||737-800F||AEI||1 (2)||0|
|Aviation Capital Group||737-800F||AEI||15 (15)||0|
|Spectre Air Capital||737-700F + 737-800F||IAI||15 (15)||3 x 737-700F; 2 x 737-800F|
|Spectre Air Capital||737-800F||Boeing||Undisclosed||3|
|Vallair||A321F||321 Precision Conversions||10||0|
Leasing companies “started off leading the charge into the next-generation narrowbody conversions,” according to Bob Convey, senior vice president of sales and marketing at Aeronautical Engineers Inc. (AEI), which redelivered its first 737-800SF to GECAS last year.
Companies with aircraft already on the books didn’t have to hunt for suitable feedstock, which, until recently, was a scarce resource. Even in January, the on-ramp cost of a 737NG freighter, inclusive of feedstock acquisition, maintenance and conversion, ran $21-$26 million, Convey estimated. With such a price tag, lease rates would run well over $200,000 per month.
The lessor with the second-highest number of NG redeliveries so far, Spectre Air Capital, has redelivered eight 737NG freighters converted according to three different STCs. “We have one 737-700BDSF delivering in a week with another 737-700BDSF starting there after plus several 737-800s lined up nose-to-tail,” said Kevin Casey, president of Spectre.
Prior to the onset of the global pandemic, the flux point of on-ramp costs under $15 million hadn’t been expected for a few more years.
“Last year, we were close to pulling the trigger on NGs,” said Sam Thornton, principal of Automatic LLC. The deal would have diversified the company’s portfolio of just over a dozen 737 Classic freighters by adding 737NGs in passenger configuration with multi-year leases attached. The company ultimately decided to forgo the deal — a fortuitously wise maneuver given the current crisis.
Jumping ahead to today, some of the narrowbodies idled as a result of the COVID-19 crisis are unlikely to find their way back into passenger service, especially once the 737 MAX re-enters service in larger numbers.
“Prices [for NG types] are starting to soften slowly and many of those now looking to convert are dealing with the looming problem of not being able to put these frames out on passenger lease any time soon,” said Convey. The feedstock supply and economics may enable lessors like Automatic to skip the multiyear passenger lease and send new acquisitions straight into conversion.
Echoing AEI’s sentiments, Israel Aerospace Industries (IAI), which offers conversions for the 737-700 and 737-800, expects inductions to pick up later this year and into 2021. “We have a lot of interest from leasing companies right now,” said Rafi Matalon, senior director, general manager of marketing and business development at IAI. “They are not necessarily making commitments at the moment, but in two to three months, I expect they will execute contracts.”
“Lots of metal comes across my desk these days,” said Automatic’s Thornton. So far, however, the company hasn’t rushed into new deals, choosing instead to see where values head in the next few months. As passenger aviation begins its recovery, Thornton expects aircraft deals to begin to accelerate this year in late Q3 or early Q4.
As for a competitive lease rate that could drive the transition to newer types, Thornton sees rates of $180,000 per month as a “sweet spot.” Such rates, he said, would make NGs an attractive target for current operators of 737 Classics used to paying rates in the range of $150,000 per month.
Luxembourg-based Vallair, the launch customer for the A321 conversion programs by both Elbe Flugzeugwerke (EFW) and 321 Precision Conversions, will soon receive the first A321F converted by EFW and redeliver it to launch operator Qantas. The aircraft (835) was recently painted into its new livery and should be leaving the ST Engineering facility in Singapore (XSP) to head to Australia in around two months.
According to Alistair Dibisceglia, chief leasing and trading officer at Vallair, the redelivery of the first frame and the emphasis on cargo during the pandemic could bring about new interest in A321 conversions from lessors and airlines alike, especially since A321 values could see declines of between 10 and 30%.
“I do expect a lot of airlines considering opening a cargo business unit, especially if they already have A321s,” Dibisceglia said. “For us, I see many opportunities opening up for sale-leaseback transactions, through which airlines can raise some much-needed cash, especially after the pandemic. If we can secure an aircraft with, perhaps, a lease attached to a reputable airline, I think that’s a win-win.”
He added that Vallair had already been in sale-leaseback talks with A321 operators and continues to engage in these discussions, but the “perfect match” would be an airline that has some cargo experience in addition to A321s.
U.S.-based C Cubed Aerospace, which last year inducted the conformity aircraft (1523, ex-Sky Airline) for its first A320 passenger-to-freighter conversion, said most recent queries have been from operators with A320-family aircraft in their fleets, and entities without A320s on their books.
This differs from pre-crisis interest in the C Cubed’s A320 conversion program, according to Brian Sagi, managing director of C Cubed Aerospace. “Existing LOIs are from leasing companies that already have A320s in their portfolio, and do not have to purchase them,” he said. C Cubed Aerospace expects to commence flight tests on its conformity aircraft in Q4, with an FAA-issued STC not far behind.
For now, GECAS will continue to lead the pack, with additional 737-800BCFs soon making their way to Amazon’s fleet, either to MSP or other gateways. But additional next-generation narrowbody freighters will soon be making their way toward new lessors and operators, such as BlackRock’s Aviation Holdings III, with up to three 737-800SFs; Garuda Indonesia, with two 737-800BCFs from GECAS; and Titan Airways, which expects to receive its first A321F on lease from BBAM later this year.