MROMANAGEMENT DECEMBER 2016 WWW.MROMANAGEMENT.COM

DECEMBER 2016 | VOLUME 18 ISSUE 4

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Volume 18 • Issue 4 Boeing 737

Boxing clever Product support Ageing gracefully Freighter conversions Boeing/Rockwell Collins PW100 maintenance Freighter conversions

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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 his sector of the market is still in a state of and damage and corrosion to be treated, sometimes destined for Alaska Airways. It is transition as Boeing 737-300/400 programmes extending the turnaround time and delaying deliveries. seen here being prepared for first come to an end and STCs for the follow-on On the other hand, this is to be expected towards flight in Tel Aviv (photo: IAI Bedek) T 737-700/800 are in development. Certainly, the quality the end of a programme, which he expects to last for of the 737-300/400 feedstock is deteriorating, with only a couple more years. That demand means that, in terms such as ‘abused aircraft’ and ‘bottom of the barrel’ addition to five conversion lines at partner Commercial being mentioned. This is in the face of increasing Jet’s facility in Dothan, AL, and another four at its demand, driven by next day deliveries for e-commerce. Miami, FL, facility, plus a line at Boeing Shanghai, there It seems that smaller aircraft will be needed to get into is possibly a need for a further North American line. smaller airports to ensure that timescales are met. The 737-400 quality problems have stimulated demand for the McDonnell Douglas MD-80SF, with AEI interest from eastern Europe, an order from Everts Air Robert Convey, Senior Vice President of Sales & in Alaska, and a fifth aircraft for Aeronaves TSM, which Marketing at AEI Inc, says 2016 has been a very good will be used to support DHL in Mexico. year, with orders outstripping availability and full TSM is also a customer for the Bombardier CRJ200 conversion lines from now until the end of 2017. It has SF freighter conversion, with orders for four aircraft, not been without its challenges, however, especially on which received FAA STC approval in late October. As the Boeing 737-400, where the quality of the feedstock TSM operates a mixed fleet, he anticipates that there has dropped, resulting in more unscheduled arisings may be more orders to come as part of a rationalisation

28 MRO Management www.mromanagement.com − December 2016 Freighter conversions

process. Meanwhile, the first CRJ200 SF has been The timing for the -800 is delivery of the prototype delivered to IFL Group of Waterford, MI. AEI currently to Tel Aviv in early 2017 with STC approval and has over 45 firm orders and commitments for the delivery to Spectre by the end of the year. This is the CRJ200 SF freighter conversion and he says interest in more important of the two models and he expects a the platform remains high. fast ramp up of conversions when the prices reach a Of course, the company is looking ahead to the suitable level. The -700 will be steady and IAI Bedek is 737-800, for which its STC is on track for approval at the forecasting that it can get a market share of around 100 end of 2017 and for which it has over 100 orders and aircraft. It is looking at double that number on the -800. commitments. This would keep the lines full until 2020, Separately, the 767 conversion line continues at a he comments. steady pace. However, attention has already turned Convey is intrigued by the direct OEM involvement to the 777 as a follow on project and the company in conversions, using Boeing Shanghai for the touch has collected all the necessary data to start work on labour, and links it to customers being able to trade the design. This requires internal top management in their retired aircraft as part of 737 MAX purchase approval. The STC development is expected to take agreements. He also notes that Chinese airlines tend about two years. to capitalise their maintenance costs, which gives He adds that the A320 Family is also under an inflated final book value that is difficult to realise, consideration, although this is not the right time as so this may also be something that Boeing is better feedstock prices are too high. placed to handle as part of new aircraft sales. However, while the quality of the initial feedstock PEMCO may be better, he does not think that the more rigid and Mike Andrews, Director of Conversion Programmes formal procedures of a large company are ideally suited at PEMCO World Air Services, says 2016 has been a to conversion work, which requires an ability to anticipate relatively slow year but this is not a surprise. The current problems or work around them when they arise. high demand for passenger traffic has resulted in leases It may be that there will be an opportunity for AEI being extended for candidate conversion aircraft, to develop a presence in the Chinese market through delaying their availability. In turn, this has kept residual a partnership but this will be with a local MRO to values high, not just for older 737-300/400s but also the reduce costs. newer 737-700/800s. For the latter, instead of dropping to the target range of $10-12 million, they have stayed IAI Bedek at $14-18 million. He believes this will only change Rafi Matalon, Senior Director & General Manager significantly when the 737 MAX begins to enter service. Marketing and Business Development, says the first PEMCO has four conversion sites but these have not Boeing 737-700 conversion is at a very advanced stage. been adversely affected by the slowdown for a number At the start of November, the aircraft was structurally of reasons. At headquarters in Tampa, FL, there is complete, including the door and its surround space for three lines but the MRO side of the business This 737-300, delivered in structure, the strengthened floor and the rigid barrier, has seen an increase in work this year and so only a November from STAECO in Jinan, is the 17th PEMCO 737-300/400 with power on expected in a few days. By the time this single line has been retained. Andrews says there is a conversion to be delivered to SF article appears, it should have flown for the first time in seasoned conversion team that the company wants to Airlines, the air cargo division of SF Express. The Chinese airline will the second half of the month. STC approval is expected keep together, so transferring them to maintenance take two more aircraft by the end by the end of 2016, as is delivery of the aircraft to operations is a good way of retaining them. „ of 2016 (photo: PEMCO) 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 MRO Management 29 Freighter conversions

The first CRJ200 SF for IFL Group, There are three lines at STAECO in Shandong, China, currently in work and a total of 19 aircraft due to be seen here after painting at but the freight market there is extremely buoyant, delivered this year. With a 25 aircraft order backlog, Commercial Jet in Dothan, AL. STC driven by e-commerce, so demand has been consistent that figure is expected to stay about the same for the approval was gained in October (photo: AEI) (it delivered the 15th 737-300 freighter to SF Airlines in next two years. May, with a further four to be delivered before the end To meet the demand, there are three conversion of 2016). There are two lines at Coopesa in Costa Rica lines at Flightstar in Jacksonville, FL; two lines at and a single line at Kelowna in Canada. He notes that HAECO Xiamen in China; and one at Technic these two companies also have a very healthy MRO in Chengdu. There is a further line at HAECO Americas business that offsets any PTF delays. in Greensboro, SC, but a large military contract may Feedstock for the older models is drying up, especially displace this work to another facility. for the 737-400, although there are some good -300s Part of the success comes from a 28 aircraft order around, built in 1997/1998. He comments that some of from DHL, which is replacing its European fleet, and the the aircraft being made available are not in very good work is expected to last for up to two more years as the condition. This requires close cooperation with the end fleet is acquired and converted. There are also several customer and a careful survey of the aircraft to determine orders from Chinese operators, including China Postal the possible level of unscheduled arisings. One result Airlines (which received its first Precision converted of the tighter market is greater competition between aircraft from HAECO Xiamen in October, although this the conversion houses, with turnaround time and was the 12th conversion to be carried out there by quality being the main drivers for customers. HAECO with two more aircraft in work); SF Airlines; ; and a couple of startup operators. Precision Many of these aircraft are coming from the retiring Brian McCarthy, Vice President, Marketing and Sales at fleet of and Xiamen Airlines. Precision Conversions, says the market for the Boeing On the issue of feedstock, McCarthy says there are 757-200 freighter remains extremely strong, with the 200 potential candidates, many with less than 32,000 76th aircraft since the start of the programme in 2001 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 It could be a very serious contender in flight cycles. He notes that this feedstock count does not include the fleet, which can be a world full of low density, time sensitive expected to fly to the end of their useful passenger life in accordance with the airline’s usual policy. e-cargo with logistics organisations really Another reason for the high demand is that the thinking ‘out of the box’ cargo market has changed, driven by e-commerce.

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Load density has decreased while volume has increased He has some interesting views on the but some of this is partly due to inefficient packing by 737-700/800, based on the Precision experience. shippers. McCarthy thinks lessons will be learnt and the The big integrators, with higher value cargo, may be trend will slowly reverse to some extent but it makes the early adopters but the second and third tier carriers, 757’s capacity a very attractive option in the meantime. and there are plenty of them, are much more sensitive He also explains that it is a relatively expensive aircraft about on-ramp price. He says they will be happy to to operate, particularly the high cost per cycle for the hang on to the older 737s and 757s, or even take engines, but integrators are willing to bear this cost the poor quality 737 Classics now available and because of its substantial volume, gross payload/range combine them with green time engines, to wait until capabilities. The 757 caters to the integrator market and prices drop on the new generation replacements. all of the operators serving the integrators. Precision faced exactly this situation in the early days Of course, demand for 757s must diminish at some of the 757, so deferred gratification on conversion point and he sees this around 2020, when those costs programmes is not unusual. Another engine issue will be compared against the A321-200 and 737-800, is the mandatory full LLP Stack change on the but the end of the programme could be as far out as CFM56-7B on the 737-700/800, which could add 2025, when he reckons Precision will have converted an $5-6 million or so per engine to the acquisition and estimated 130 to 135 aircraft. conversion costs. „

The cargo bay of the CRJ200SF (photo: AEI)

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December 2016 − www.mromanagement.com MRO Management 31 Freighter conversions

aircraft acquisition and PTF modification programmes. The most important factor in selling These include airlines getting rid of their most converted aircraft is the potential customer maintenance-intensive, least reliable aircraft first, which will probably have engines and other major portfolio at a given price point 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 Then there is the Airbus A321. There is little capacity to align maintenance programmes. Late delivery due difference between the two 737 generations but the to delays in the conversion process can also have a A321 can outclass them as it has a much greater main financial impact. Finally, of course, there are the costs deck and belly hold volume. If the price is right, he associated with disposal of the aircraft, which will says, it could be a very serious contender in a world almost certainly be at scrap/part-out value and below full of low density, time sensitive e-cargo with logistics the acquisition cost. Spectre has the advantage of an organisations really thinking ‘out of the box’ as they established material management business. find the most cost effective way to adjust and position In addition, the company specialises in the sale and inventory all over the planet. lease of mid-life passenger and freighter aircraft and engines. It can use its financial strength to purchase Spectre conversion feedstock in fleet-sized transactions. It The latest entrant into the Boeing 737-700/800 already has freighter experience as earlier this year freighter conversion market is Texas-based Spectre it collaborated with Jetran on a 20-aircraft Boeing Air Capital, with an initial order of 15 firm aircraft plus 767-300ER programme. The majority of the aircraft rolling options with IAI Bedek and a launch order from will become freighters and be operated in support of Korea-based Air Incheon for three 737-800 freighters e-commerce giants such as Amazon’s Prime Air and on long-term lease for delivery beginning in 2017. China-based Alibaba. Leasing is the key to the 737 programme, which It is this express delivery sector of the market will be the responsibility of new subsidiary Spectre that is particularly attractive to Spectre. Jordan Jaffe, Cargo Solutions (SCS), headed up by President Chief Executive Officer and cofounder, says: “Demand Kevin Casey, who gained considerable experience for express freighters is at an all-time high, with of the conversion market at PEMCO, and Sam Goh, hundreds more required in the coming years to meet ex-HAECO in Asia. the demand created by rapid growth in e-commerce The first Precision 757-200 aircraft Casey says leasing is the lowest risk option for and expansion of the global middle class. The classic for , delivered in October from HAECO Xiamen airlines, as Spectre will be taking the attendant freighter feedstock is becoming increasingly scarce and (photo: Precision) technical, financial and schedule risks inherent with overly expensive for their age.” „

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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.

IAI Bedek says its 767 conversion As noted above, SCS is using IAI Bedek’s passenger- The components include high value items such as work continues at a steady pace to-freighter STCs. The 737-700 is now production- engines and landing gear and this is where another (photo: IAI Bedek) complete and in the advanced stages of certification, part of the group might come into play, again which means that the first aircraft should be available dependent on the eventual customer location. Vallair in 1Q17. Industry in Montpellier, France, has the ability to The first of Air Incheon’s 737-800 freighters will perform MRO work and also has a paint shop. Aircraft be IAI Bedek’s prototype. Spectre will deliver the could be ferried there from the conversion line to aircraft to Tel Aviv early next year for flight testing receive finishing touches. set to begin in February 2017 as part of the final One 737-400 has been converted so far, by AEI engineering required before modification starts in Inc’s partner, Commercial Jet in Dothan, AL. This was March. Certification is expected in 3Q17, as the STC is subsequently leased to West Atlantic in the UK. In a derivative of that for the -700, making the process April 2016, Vallair signed with AEI Inc/Commercial Jet simpler. SCS feels this will give a speed to market for a further four 737-400SF freighter conversions. advantage over the other providers. In June, it signed an MoU with World Air Services After certification, PTF production will expand for a 737-400 passenger-to-freighter conversion to initially to two staggered lines and expand thereafter be carried out by PEMCO’s partner STAECO, in Jinan, based on demand. The remaining Air Incheon aircraft Shandong Province, China. will be converted and enter service over the following 12 Koster says there is a lot of uncertainty in the to 18 months. Specific aircraft MSNs will be selected and market, especially with the timing of a rollover to announced perhaps six months ahead of induction. the 737-700/800. While the company fully intends to develop the freighter conversion business, it does have Vallair the advantage that the other strands of the business Peter Koster, Business Development Director for are operating as separate profit centres. This means Vallair, says the reason for the company entering the 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 There is a lot of uncertainty in the year, Japan Investment Adviser (JIA). JIA had invested close to $40 million in Vallair projects in the 12 months market, especially with the timing of prior to taking the shareholder, including trading, tear-down and cargo conversions. n a rollover to the 737-700/800

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