WWW.MROMANAGEMENT.COM
DECEMBER 2016 | VOLUME 18 ISSUE 4
Slot machine
Boeing 737
Boxing clever
Freighter conversions
Product support
Boeing/Rockwell Collins
Ageing gracefully
PW100 maintenance
Freighter conversions
Package deal
Passenger to cargo conversions are thriving, with high demand but some
technical issues standing in the way. Ian Harbison spoke to some of the
main players
The first 737-700 conversion is
destined for Alaska Airways. It is
seen here being prepared for first
flight in Tel Aviv (photo: IAI Bedek)
T
his sector of the market is still in a state of
transition as Boeing 737-300/400 programmes
come to an end and STCs for the follow-on
737-700/800 are in development. Certainly, the quality
of the 737-300/400 feedstock is deteriorating, with
terms such as ‘abused aircraft’ and ‘bottom of the barrel’
being mentioned. This is in the face of increasing
demand, driven by next day deliveries for e-commerce.
It seems that smaller aircraft will be needed to get into
smaller airports to ensure that timescales are met.
AEI
Robert Convey, Senior Vice President of Sales &
Marketing at AEI Inc, says 2016 has been a very good
year, with orders outstripping availability and full
conversion lines from now until the end of 2017. It has
not been without its challenges, however, especially on
the Boeing 737-400, where the quality of the feedstock
has dropped, resulting in more unscheduled arisings
28 MRO Management
and damage and corrosion to be treated, sometimes
extending the turnaround time and delaying deliveries.
On the other hand, this is to be expected towards
the end of a programme, which he expects to last for
only a couple more years. That demand means that, in
addition to five conversion lines at partner Commercial
Jet’s facility in Dothan, AL, and another four at its
Miami, FL, facility, plus a line at Boeing Shanghai, there
is possibly a need for a further North American line.
The 737-400 quality problems have stimulated
demand for the McDonnell Douglas MD-80SF, with
interest from eastern Europe, an order from Everts Air
in Alaska, and a fifth aircraft for Aeronaves TSM, which
will be used to support DHL in Mexico.
TSM is also a customer for the Bombardier CRJ200
SF freighter conversion, with orders for four aircraft,
which received FAA STC approval in late October. As
TSM operates a mixed fleet, he anticipates that there
may be more orders to come as part of a rationalisation
www.mromanagement.com − December 2016
Freighter conversions
process. Meanwhile, the first CRJ200 SF has been
delivered to IFL Group of Waterford, MI. AEI currently
has over 45 firm orders and commitments for the
CRJ200 SF freighter conversion and he says interest in
the platform remains high.
Of course, the company is looking ahead to the
737-800, for which its STC is on track for approval at the
end of 2017 and for which it has over 100 orders and
commitments. This would keep the lines full until 2020,
he comments.
Convey is intrigued by the direct OEM involvement
in conversions, using Boeing Shanghai for the touch
labour, and links it to customers being able to trade
in their retired aircraft as part of 737 MAX purchase
agreements. He also notes that Chinese airlines tend
to capitalise their maintenance costs, which gives
an inflated final book value that is difficult to realise,
so this may also be something that Boeing is better
placed to handle as part of new aircraft sales.
However, while the quality of the initial feedstock
may be better, he does not think that the more rigid and
formal procedures of a large company are ideally suited
to conversion work, which requires an ability to anticipate
problems or work around them when they arise.
It may be that there will be an opportunity for AEI
to develop a presence in the Chinese market through
a partnership but this will be with a local MRO to
reduce costs.
IAI Bedek
Rafi Matalon, Senior Director & General Manager
Marketing and Business Development, says the first
Boeing 737-700 conversion is at a very advanced stage.
At the start of November, the aircraft was structurally
complete, including the door and its surround
structure, the strengthened floor and the rigid barrier,
with power on expected in a few days. By the time this
article appears, it should have flown for the first time in
the second half of the month. STC approval is expected
by the end of 2016, as is delivery of the aircraft to
launch customer Alaska Airways.
Matalon says the 737-700/800 conversion process
is relatively simple for IAI Bedek as it uses the same
door and structure on the same location as the
737-300/400. He notes that these are built on jigs,
so that the entire unit can be removed in case of
ground damage. This will give the company a first to
market advantage over the competition, especially
as operators will increasingly have no choice but the
-700 for the next few years. This reflects a drying up
of quality feedstock on the older models and residual
values being maintained on the -800. In addition, the
growth markets of China and India have age limitations
on aircraft being imported into the country and not
all of the demand can be met by domestic passenger
aircraft, while the Boeing ageing aircraft programme is
an expensive option for many cargo airlines, involving
repairs, modifications and upgrades. North America
will also be an important market, he adds.
December 2016 − www.mromanagement.com
The timing for the -800 is delivery of the prototype
to Tel Aviv in early 2017 with STC approval and
delivery to Spectre by the end of the year. This is the
more important of the two models and he expects a
fast ramp up of conversions when the prices reach a
suitable level. The -700 will be steady and IAI Bedek is
forecasting that it can get a market share of around 100
aircraft. It is looking at double that number on the -800.
Separately, the 767 conversion line continues at a
steady pace. However, attention has already turned
to the 777 as a follow on project and the company
has collected all the necessary data to start work on
the design. This requires internal top management
approval. The STC development is expected to take
about two years.
He adds that the A320 Family is also under
consideration, although this is not the right time as
feedstock prices are too high.
PEMCO
Mike Andrews, Director of Conversion Programmes
at PEMCO World Air Services, says 2016 has been a
relatively slow year but this is not a surprise. The current
high demand for passenger traffic has resulted in leases
being extended for candidate conversion aircraft,
delaying their availability. In turn, this has kept residual
values high, not just for older 737-300/400s but also the
newer 737-700/800s. For the latter, instead of dropping
to the target range of $10-12 million, they have stayed
at $14-18 million. He believes this will only change
significantly when the 737 MAX begins to enter service.
PEMCO has four conversion sites but these have not
been adversely affected by the slowdown for a number
of reasons. At headquarters in Tampa, FL, there is
space for three lines but the MRO side of the business
has seen an increase in work this year and so only a
single line has been retained. Andrews says there is a
seasoned conversion team that the company wants to
keep together, so transferring them to maintenance
operations is a good way of retaining them. „
This 737-300, delivered in
November from STAECO in Jinan,
is the 17th PEMCO 737-300/400
conversion to be delivered to SF
Airlines, the air cargo division of
SF Express. The Chinese airline will
take two more aircraft by the end
of 2016 (photo: PEMCO)
MRO Management 29
Freighter conversions
The first CRJ200 SF for IFL Group,
seen here after painting at
Commercial Jet in Dothan, AL. STC
approval was gained in October
(photo: AEI)
There are three lines at STAECO in Shandong, China,
but the freight market there is extremely buoyant,
driven by e-commerce, so demand has been consistent
(it delivered the 15th 737-300 freighter to SF Airlines in
May, with a further four to be delivered before the end
of 2016). There are two lines at Coopesa in Costa Rica
and a single line at Kelowna in Canada. He notes that
these two companies also have a very healthy MRO
business that offsets any PTF delays.
Feedstock for the older models is drying up, especially
for the 737-400, although there are some good -300s
around, built in 1997/1998. He comments that some of
the aircraft being made available are not in very good
condition. This requires close cooperation with the end
customer and a careful survey of the aircraft to determine
the possible level of unscheduled arisings. One result
of the tighter market is greater competition between
the conversion houses, with turnaround time and
quality being the main drivers for customers.
Precision
Brian McCarthy, Vice President, Marketing and Sales at
Precision Conversions, says the market for the Boeing
757-200 freighter remains extremely strong, with the
76th aircraft since the start of the programme in 2001
It could be a very serious contender in
a world full of low density, time sensitive
e-cargo with logistics organisations really
thinking ‘out of the box’
30 MRO Management
currently in work and a total of 19 aircraft due to be
delivered this year. With a 25 aircraft order backlog,
that figure is expected to stay about the same for the
next two years.
To meet the demand, there are three conversion
lines at Flightstar in Jacksonville, FL; two lines at
HAECO Xiamen in China; and one at Air China Technic
in Chengdu. There is a further line at HAECO Americas
in Greensboro, SC, but a large military contract may
displace this work to another facility.
Part of the success comes from a 28 aircraft order
from DHL, which is replacing its European fleet, and the
work is expected to last for up to two more years as the
fleet is acquired and converted. There are also several
orders from Chinese operators, including China Postal
Airlines (which received its first Precision converted
aircraft from HAECO Xiamen in October, although this
was the 12th conversion to be carried out there by
HAECO with two more aircraft in work); SF Airlines; China
Cargo Airlines; and a couple of startup operators.
Many of these aircraft are coming from the retiring
fleet of China Southern Airlines and Xiamen Airlines.
On the issue of feedstock, McCarthy says there are
200 potential candidates, many with less than 32,000
flight cycles as they are operated on longer sectors,
which would give them well beyond 20 years of cargo
service before they hit the Limit of Validity at 50,000
flight cycles. He notes that this feedstock count does
not include the Delta Air Lines fleet, which can be
expected to fly to the end of their useful passenger life
in accordance with the airline’s usual policy.
Another reason for the high demand is that the
cargo market has changed, driven by e-commerce.
www.mromanagement.com − December 2016
Freighter conversions
Load density has decreased while volume has increased
but some of this is partly due to inefficient packing by
shippers. McCarthy thinks lessons will be learnt and the
trend will slowly reverse to some extent but it makes the
757’s capacity a very attractive option in the meantime.
He also explains that it is a relatively expensive aircraft
to operate, particularly the high cost per cycle for the
engines, but integrators are willing to bear this cost
because of its substantial volume, gross payload/range
capabilities. The 757 caters to the integrator market and
all of the operators serving the integrators.
Of course, demand for 757s must diminish at some
point and he sees this around 2020, when those costs
will be compared against the A321-200 and 737-800,
but the end of the programme could be as far out as
2025, when he reckons Precision will have converted an
estimated 130 to 135 aircraft.
He has some interesting views on the
737-700/800, based on the Precision experience.
The big integrators, with higher value cargo, may be
early adopters but the second and third tier carriers,
and there are plenty of them, are much more sensitive
about on-ramp price. He says they will be happy to
hang on to the older 737s and 757s, or even take
the poor quality 737 Classics now available and
combine them with green time engines, to wait until
prices drop on the new generation replacements.
Precision faced exactly this situation in the early days
of the 757, so deferred gratification on conversion
programmes is not unusual. Another engine issue
is the mandatory full LLP Stack change on the
CFM56-7B on the 737-700/800, which could add
$5-6 million or so per engine to the acquisition and
conversion costs. „
The cargo bay of the CRJ200SF
(photo: AEI)
Hangar Doors
Weathertight and insulated.
The most reliable hangar door choice from
Arctic areas to scorching hot climates.
www.championdoor.com
December 2016 − www.mromanagement.com
FRANCE
HEAD OFFICE / FACTORY
Tél +33 147 202 314
Tel. +358 445 8800
[email protected] [email protected]
USA
Tel. (713)-352-0403
[email protected]
UAE
Tel. +971 488 103 31
[email protected]
MRO Management 31
Freighter conversions
The most important factor in selling
converted aircraft is the potential customer
portfolio at a given price point
Then there is the Airbus A321. There is little capacity
difference between the two 737 generations but the
A321 can outclass them as it has a much greater main
deck and belly hold volume. If the price is right, he
says, it could be a very serious contender in a world
full of low density, time sensitive e-cargo with logistics
organisations really thinking ‘out of the box’ as they
find the most cost effective way to adjust and position
inventory all over the planet.
Spectre
The first Precision 757-200 aircraft
for China Postal Airlines, delivered
in October from HAECO Xiamen
(photo: Precision)
32 MRO Management
The latest entrant into the Boeing 737-700/800
freighter conversion market is Texas-based Spectre
Air Capital, with an initial order of 15 firm aircraft plus
rolling options with IAI Bedek and a launch order from
Korea-based Air Incheon for three 737-800 freighters
on long-term lease for delivery beginning in 2017.
Leasing is the key to the 737 programme, which
will be the responsibility of new subsidiary Spectre
Cargo Solutions (SCS), headed up by President
Kevin Casey, who gained considerable experience
of the conversion market at PEMCO, and Sam Goh,
ex-HAECO in Asia.
Casey says leasing is the lowest risk option for
airlines, as Spectre will be taking the attendant
technical, financial and schedule risks inherent with
aircraft acquisition and PTF modification programmes.
These include airlines getting rid of their most
maintenance-intensive, least reliable aircraft first,
which will probably have engines and other major
components with little remaining life. For an operator,
that generates the need to restore the aircraft to a
condition that meets its operational requirements and
to align maintenance programmes. Late delivery due
to delays in the conversion process can also have a
financial impact. Finally, of course, there are the costs
associated with disposal of the aircraft, which will
almost certainly be at scrap/part-out value and below
the acquisition cost. Spectre has the advantage of an
established material management business.
In addition, the company specialises in the sale and
lease of mid-life passenger and freighter aircraft and
engines. It can use its financial strength to purchase
conversion feedstock in fleet-sized transactions. It
already has freighter experience as earlier this year
it collaborated with Jetran on a 20-aircraft Boeing
767-300ER programme. The majority of the aircraft
will become freighters and be operated in support of
e-commerce giants such as Amazon’s Prime Air and
China-based Alibaba.
It is this express delivery sector of the market
that is particularly attractive to Spectre. Jordan Jaffe,
Chief Executive Officer and cofounder, says: “Demand
for express freighters is at an all-time high, with
hundreds more required in the coming years to meet
the demand created by rapid growth in e-commerce
and expansion of the global middle class. The classic
freighter feedstock is becoming increasingly scarce and
overly expensive for their age.” „
www.mromanagement.com − December 2016
Freighter conversions
IAI Bedek says its 767 conversion
work continues at a steady pace
(photo: IAI Bedek)
As noted above, SCS is using IAI Bedek’s passengerto-freighter STCs. The 737-700 is now productioncomplete and in the advanced stages of certification,
which means that the first aircraft should be available
in 1Q17.
The first of Air Incheon’s 737-800 freighters will
be IAI Bedek’s prototype. Spectre will deliver the
aircraft to Tel Aviv early next year for flight testing
set to begin in February 2017 as part of the final
engineering required before modification starts in
March. Certification is expected in 3Q17, as the STC is
a derivative of that for the -700, making the process
simpler. SCS feels this will give a speed to market
advantage over the other providers.
After certification, PTF production will expand
initially to two staggered lines and expand thereafter
based on demand. The remaining Air Incheon aircraft
will be converted and enter service over the following 12
to 18 months. Specific aircraft MSNs will be selected and
announced perhaps six months ahead of induction.
Vallair
Peter Koster, Business Development Director for
Vallair, says the reason for the company entering the
There is a lot of uncertainty in the
market, especially with the timing of
a rollover to the 737-700/800
34 MRO Management
737 freighter conversion market is reflected in the
company’s motto that ‘end of service does not mean
end of life’. There is a clear demand for these aircraft,
driven by e-commerce and the growing market shares
of integrators. There are also a growing number of
players in the market but, perhaps uniquely, he says
the Vallair group of companies can bring synergies
to the market combined with a strong project
management capability.
Vallair Solutions in Luxembourg is involved in
aircraft, engines and spares leasing and trading. This
is the source of feedstock for the conversion lines,
which are at AEI Inc, IAI Bedek and PEMCO. These have
different STC solutions so a candidate aircraft will be
directed to the most appropriate for the customer
configuration and location. Given the decreasing quality
of feedstock, the company can also provide many
of the necessary items to bring the aircraft back to a
reasonable technical standard from internal sources.
Equally, items removed when the aircraft is stripped of
the passenger configuration can be added to the Vallair
Solutions inventory and sold on the market. This activity
is based at Chateauroux in France, where the company
also operates an aircraft breaking facility.
He says the most important factor in selling
converted aircraft is the potential customer portfolio at
a given price point. This internal sourcing and disposal
can give Vallair a competitive advantage on costs,
potentially widening the customer base.
The components include high value items such as
engines and landing gear and this is where another
part of the group might come into play, again
dependent on the eventual customer location. Vallair
Industry in Montpellier, France, has the ability to
perform MRO work and also has a paint shop. Aircraft
could be ferried there from the conversion line to
receive finishing touches.
One 737-400 has been converted so far, by AEI
Inc’s partner, Commercial Jet in Dothan, AL. This was
subsequently leased to West Atlantic in the UK. In
April 2016, Vallair signed with AEI Inc/Commercial Jet
for a further four 737-400SF freighter conversions.
In June, it signed an MoU with World Air Services
for a 737-400 passenger-to-freighter conversion to
be carried out by PEMCO’s partner STAECO, in Jinan,
Shandong Province, China.
Koster says there is a lot of uncertainty in the
market, especially with the timing of a rollover to
the 737-700/800. While the company fully intends to
develop the freighter conversion business, it does have
the advantage that the other strands of the business
are operating as separate profit centres. This means
any hiatus in the programme could be less financially
painful than for a completely specialised business.
Vallair has also had a new shareholder since March this
year, Japan Investment Adviser (JIA). JIA had invested
close to $40 million in Vallair projects in the 12 months
prior to taking the shareholder, including trading,
tear-down and cargo conversions. n
www.mromanagement.com − December 2016