From the Cockpit with Kevin Milligan of Crestone Air Partners

The freighter aircraft segment continues to generate interest in the leasing community, with new entrant Crestone Air Partners recently acquiring two 737-400SFs as the first freighters in its portfolio.

Crestone is a wholly owned subsidiary of Air T, the parent company of aviation businesses that include FedEx feeder operators Mountain Air Cargo and CSA Air. The new lessor was announced in July 2022 and is a spinoff of an aircraft asset management joint venture Air T set up in 2021.

Cargo Facts caught up with Kevin Milligan, principal and head of investments at Crestone, to discuss the lessor’s entry into the freighter market. What follows is an edited version of the conversation.

Cargo Facts: What is the overall strategy and target segment of Crestone Air Partners?

Kevin Milligan: We’re continuing to expand with our investment partners and have a variety of strategies we employ. We’ve bought a couple of 737-400 freighters with leases attached and we’ll invest in 737NG family aircraft as well as A320 family aircraft, but we’re also looking at individual engines that power those types. We’ll look at 757s and 767s on a select basis, but it’s not our main focus. The cargo market is new to Crestone but our team has a history of working with freighters in the past, whether it be at GA Telesis or Aviation Capital Group. So we’ve been interested in that market and now want to get our investors comfortable with it.

CF: Why 737-400Fs and not -800Fs?

KM: We’re not actively going out and looking to speculatively convert aircraft. We think that the 737NG freighter market is overcrowded at this stage. We priced that into our calculus. We like the 737-400 because we think it can largely accomplish the same mission as the -800. It has a little bit less range, but if you look at the typical mission for the fleet, most are not being used to their maximum range. The payload differential can be meaningful, but in most of these cases they’re not running at max takeoff weight either.

The -400 is still a compelling aircraft. Even though it’s certainly aging, the maintenance costs and total financing costs are substantially lower than the -800 — by a factor of two, in some cases. Even with fuel prices, given the low utilization and shorter stage lengths, we still think the -400 is a pretty competitive airplane, especially as you see lease rates below $100,000.

There are challenges that are in front of us with that type though, especially in certain markets. As we see more and more discussion around ESG regulations and noise, especially in Europe, that could be another component that may push that 737-400 prematurely out of certain markets. So that’s something that we’re mindful of.

CF: How much further do you plan to grow your freighter portfolio?

KM: We continue to look at freighters and evaluate them on a transaction-by-transaction basis and we could see ourselves growing beyond those two 737-400s, which presented themselves as interesting opportunities. Last year, we chased the Vx Capital portfolio pretty hard and I think we were in the top three bidders. We were initially willing to do a larger slice of aircraft — around 38 — but it got pared down a bit due to Russian exposure and other factors. But we could see ourselves doing more. We look at every transaction and try to make sure that it fits the profile for our investors and that there’s an angle for potential maintenance reserve optimization and maintenance condition optimization.

We like the freight market and it was kind of a hedge against some of the passenger uncertainty that we’ve seen. But we’ve also been in situations where the freight market has become very challenging. When we were investing in 757-200 freighters, I recall an aircraft sitting for a number of years before it found a home. We’ve seen both sides of the market and right now everyone is diving in converting aircraft left and right, but we have to be careful.

CF: Are you also considering A320Fs and A321Fs?

KM: We looked at the A321 a bit but we haven’t done a deep dive on how it compares. Our theory on the 737-400 is that we can always outprice through time in terms of lease rate. Granted, you still have the fuel dynamic and other factors you’ve got to consider, but on a unit basis it will always be able to be cheaper for the foreseeable future. One consideration for the A321 is that it is a different market segment and in that market, we see growth potential. We would in the long run also be interested in exploring that. It’s also a potential investment candidate but we’re not comparing that directly with our business today.

CF: How optimistic are you about the freight market?

KM: There’s certainly a need to move items quickly in bulk. So we think that’s one piece of the underlying market condition moving forward. But freight is very closely correlated to GDP growth and I think we see continued GDP growth in the future globally. Obviously, we’re facing some headwinds and recessionary pressure in certain markets, record inflation, high interest rates, and other challenges in the near term but ultimately, we’ll see it through those challenges. And on the other side, there’s going to be a story of growth: growing populations, growing incomes and more demand for fast delivery.

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