MORE than an apparition, Spectre Air Capital (SAC) has emerged on the passenger to freighter (P2F) conversion stage announcing a firm order with Israel Aerospace Industries (IAI) for 15 Boeing 737-700 and 737-800 aircraft plus options, aiming to fill a gap for narrowbody cargo aircraft.
One of the key names behind the well-funded Texas-based aircraft lease finance company is its president, Kevin Casey, an experienced P2F dealmaker who left B737 conversion specialist PEMCO World Air Services as president in March 2015 after eight years in the role.
Casey then joined a VIP aircraft modification specialist to “stretch my wings a little bit, to see what I was capable of doing”.
But there was still a P2F question buzzing in his ear: “What does the future of widebody and narrowbody cargo aircraft look like, and where are they going to come from?”
He now has an answer, after teaming up with well-heeled aircraft leasing entrepreneurs and Spectre co-founders: Jordan Jaffe and Loddie Naymola. Casey knew that the B737 classic passen
passenger feed stock for conversions was coming to an end and that the next generation B737s of -700s and -800s were the narrowbody future. Demand would be driven by rapidly growing e-commerce that fuels network capacity demand from express parcel operators across the globe, but with Chinese operators at the front of the queue.
In June this year, Aeronautical Engineers Inc signed an agreement to provide 15 firm orders and 15 options for B737-800SF conversions with an undisclosed customer.
A month later, Boeing unveiled six orders for its B737-800 Boeing converted freighter (BCF).
Says Casey: “Before the B737 classics fell away we needed a new programme and capital.”
Casey saw a business model where a lease specialist like Spectre would buy a fleet of passenger aircraft, have them converted to freighters by Supplemental Type Certificate (STC) holders and then leased to a growing customer base of express carriers.
As Casey set about raising the required B737 capital himself, he was invited to advise Jaffe on how best to utilise a fleet of
B767-300ERs bought from American Airlines, most of which are now destined for operation on behalf of Amazon.
He also took the opportunity to present his vision of how the -700 and -800 are going to be among the primary heirs apparent to the classics and potentially even to a “substantial portion” of today’s B757 market.
Says Casey: “I had done business with Jordan very successfully on some B737-400s a few years earlier. So that conversation on the 767 programme led to ‘hey we understand you are raising capital, what are your thoughts on building your company within our capital structure’.”
A war chest of funding was available via Spectre and so the idea took wing.
Jetran, the separate family business run by the Jaffes, has bought and sold many hundreds of aircraft and many hundreds of engines and exercised enormously large fleet size transactions.
Leveraging existing back-end aircraft maintenance, engine and record inspection expertise, the incremental cost to utilise those same resources for the freighter focused trading is nominal.
Says Casey: “It creates very little drag on the freighter business and so it allows the freighter piece to scale very cost effectively.”
Casey categorises the B737 P2F market in this way: “The classics will give way to age and they have insufficient pedigree to enter import restricted areas.
“The future was going to be other aircraft types, and it was going to take some special knowledge and trading expertise to supply regional express carriers with aircraft that allow them to continue to make a profit.
737-700F in conversion
A door opens for the 737-700F
“I chose to focus on narrowbody and me¬dium widebody aircraft because the large widebody market is incredibly different.
“There are 110 or so narrowbody freight operators, each with an average of 5.5 or six airplanes.”
That is the market, and the Spectre busi¬ness model will be bespoke conversion projects, working with known customers: “To acquire and convert assets and build their engines, airframes and components to a standard that is determined in ad¬vance and will be custom built. And when I say bespoke I mean it.”
Spectre will also supply other customers with existing classic freighters as well as “actively pursuing new freighter conver¬sion projects to fill some of the gap”.
The Texan company will focus on oper¬ating leases, where Spectre remains the beneficial owner of the aircraft asset.
“While it does sell aircraft and engines, operating leases on 737NGs, 757s and 767- 300s are the primary thrust of the Spec¬tre objective, along with operating leases for existing classic assets for the next few years.
“We can do a three year lease on an existing classic asset, right up through a seven plus year lease on a newly converted -800, where you are easily talking about an aircraft that could be in excess of $20m, post-conversion.”
The operating lease on such an aircraft is probably more than the average B737 clas¬sic freighter operator is prepared to pay, but Casey advises: “follow the numbers”.
He says that a B737-400F, freshly convert¬ed to the tune of around of around $8.5m, will lease out for $130,000 to $140,000 per month depending upon the credit, but cautions that there is going to be a time when that ubiquitous airplane is “consid¬ered a little long in the tooth because they stopped making them in 1999, and there are not a whole lot of aircraft in those last few years available at the moment”.
The average lease factor − for a newly
converted Classic freighter − is 1.6% per month which is “a pretty high rate if you compare that to a brand new aircraft which is in the order of 0.6 or 0.7”, says Casey, who explains that the higher rate is due in part to the much shorter perceived life of the converted freighter.
The -800 is 14% − or 1.5 pallet positions − larger than the -400 classic, and with a lease a little north of $200,000 per month but with “substantially lower” (minus 25%- 37%) maintenance and fuel (minus 16%) costs.
For a typical operator flying anywhere from a low of 1,100 hours a year at $1.75
‘The future was going to be other air¬craft types, and it was going to take some special knowledge and trading expertise to supply regional express carriers with aircraft that allow them to continue to make a profit’
Kevin Casey, Spectre
per gallon and 1,400 hours at $3 per gal¬lon, that aircraft is going to save the -800 operator between $60,300 and $94,938 a month.
“It also carries 12% more weight and pro¬vides 14% more volume, it has direct navi¬gation capabilities, meets all noise and emissions regulations and can operate in congested areas like London-Heathrow, and Beijing and Shanghai.
“The point is that not everyone can go out and buy a $20m aircraft, to replace an $8m airplane. Operators that today are buying or renting aircraft that were originally worth $8m and are today worth maybe $4.5m will struggle to find the bank financing to buy a $20m airplane.”
Continues Casey: “That is where Spectre can come in, because we have the ability to buy whole fleets of aircraft, and there is a ‘know your customer’ requirement by the top tier aircraft lessors and in-house trading departments from the big airlines.”
Thus the longstanding Jaffe business relationships come into play. Time to market is also a critical issue, and a factor in the launch order with Tel
Aviv-based IAI, a major supplier of high tech aerospace solutions to defense and commercial markets worldwide, including its Bedek Aviation Group P2F conversion specialist.
“Time to market is a big deal and as a trading company, if you don’t have something to trade then you’re not in business.
“IAI ticked all the boxes in respect of competency and capability, and are one of three primary B737 freighter conversion and technical support companies. They have ample staying power and their product is second to none.”
IAI is also the STC holder for launch customer for Alaska Airlines’ B737-700 P2F programme, an airline Casey knows from his PEMCO days: “To Alaska Airlines’ credit, they push you to be your best.”
Casey has “crawled all over” the Alaska P2Fs and has been very impressed by IAI’s “level of design, engineering and installation workmanship”.
Another key factor is that Boeing and AEI have sold a majority of their early slots on the -800s, which means that demand has to be met elsewhere in the short term.
And with its -700 now in certification and Spectre’s launch -800 going into work shortly, helped by it being a derivative of the -700, Casey says that IAI “very likely has potential of being the first to market”.
He concludes: “Whether it is first, second or third, we are not capacity constrained because of STC holder prior commitments and this allows Spectre and our customers to access aeroplanes that they might not otherwise have had.
“This is by no means negative towards Boeing or AEI, but an acknowledgement of the quality of the IAI product and of a decision taken for having the right aeroplanes at the right time with a very competent