Jeff LeeHello and welcome to this episode of cargo facts connect, the podcast of cargo facts, the newsletter of record for the air cargo and freighter aircraft industries for over 40 years. I’m Jeff Lee, editor of cargo facts and it’s Monday, the 11th of November. The A321 freighter type recently found its way into the portfolio of another lessor, with Crestone Air Partners now managing a Precision-converted aircraft that joined Global Crossing Airlines in last year. Earlier this month, my colleague Robert Luke spoke with Crestone Chief Executive Kevin Milligan, who shared more about the young lessor’s ambition as it continues expanding.
Robert LukeKevin, to what extent has the demand from the passenger sector now altered Crestone’s leasing strategy if it has it all? Could you speak a little bit to that?
Kevin MilliganYeah. Demand has been very strong. I think it’s fairly common knowledge in our sector. We see that continuing for the next couple of years, the under supply of new aircraft has been driving that obviously among other factors, strong passenger demand, strong recovery coming out of the pandemic period. The lack of confidence I think on new technology aircraft just because of reliability issues and. The Max safety issues and all those things I think have compounded. And have caused operators to to reevaluate their strategy on on new tech. I mean, eventually the shift will happen and people will adopt that technology. And it’ll be the prevalent fleet. We know that’s coming over time, but I think the shift is gonna be slower. Than everyone anticipated and also the OEMs are still having a lot of trouble producing at some of the rates they promised over the years, which I think are impacting fleet plans and for our business, we’ve seen a lot of extensions. We’ve seen extremely strong sales values on things that we’ve traded out of. That’s good when you own assets, it’s hard when you’re trying to buy assets on lease, for example. So we’ve had to take sharper views on valuation and in some cases accept a little bit lower yields to try to to get in there and still win our share of transactions we look at. A tremendous chunk of market activity. We were just going through stats this year and I think through. Through the end of October we we priced 9 billion worth of assets over 500 aircraft and engines. We think that’s a pretty good bite size. We don’t win anywhere near that. We we win a smaller percentage, but we’re highly selective. So we’re trying to find things that fit our criteria where we can add value and when we do go in and win that stuff, you know we have to pay. Somewhat premium pricing in this environment, but we still think there’s. There’s room for everyone to to succeed. We think our the folks selling to us are making healthy profits. We’re still finding ways to to make money with those assets and make our investors and our partners happy at the end of the day.
Robert LukeHas this demand spike because of the passenger and freighter segment basically competing for existing aircraft that should have been basically trickle down to the air cargo sector. Kind of places. Crestone’s focus excuse me more on the engines, the airframes or the the aircraft overall?
Kevin MilliganWe’ve always been kind of an engine focused company because that’s where we came from. That’s our history. The team collectively has done a lot in engines in their past. So and we’re targeting a segment of the market that’s mid to end of life really more end of life in a lot of ways. So as you know that’s where most of the value shifts to is the engines when the aircraft matures. So we’re always looking for ways to to optimize engine value and try to extract as much as we can out of that to help our customers to avoid shop visits or possible. And and they’ll ultimately help us too to try to avoid having to make Big Mountain main. Payments. Or possible, but to your question I guess where we see values and. It’s really comes down to what? What is that future value and utility of the asset look like that we’ve made some? What some people might think interesting bats like buying 11 Condor 757 3 hundreds. That’s been out there in the press. That’s that’s really an engine play. But we we like transactions where there’s optionality, so it could be an engine play, but there’s also a surprising amount of passenger aircraft demand for that type, which wasn’t necessarily our base underwrite, but we knew that it was out there and that people liked the 757. And the the unit cost is very compelling. And there’s still a reasonably sized installed fleet and there’s crossover to freight for those engines. So those are the kind of dynamics that we typically look for where we see value.
Robert LukeLooking at the focus more on the engine side has that I don’t want to say compelled, but encouraged Crestone to remain within the narrowbody segment, which was the entry point for you when you started acquiring cargo assets and how you see things going forward over the next two to five years.
Kevin MilliganYeah, we, we continue to focus on engines, but we also try to pick airframes, cargo airframes particularly that have long term fundamental value. So we made some large bets on. Attempted to make some large bets on 737400 freighters. We were one of the finalists on the VX capital portfolio. Chasing that down, I think that was reported publicly already. We ended up picking up a handful of those assets. We didn’t take down the whole portfolio. Obviously we’ve pieced together our own. But we looked at that like the 400 still had life. It was probably gonna move downstream. Into, you know, tier three type operators. And we thought that that aircraft on a operating economic basis was more compelling, could be more compelling than the the 800 in some ways. And that’s what we underwrote when we bought those types of transactions. So and it’s proving out right now granted the the cargo market softened. Over the last couple years, we’ve seen, I think what 14 consecutive months of growth recently though. You and we think it’s it’s kind of coming back to pre pandemic trend. We had the big surge of activity and then we kind of had a the belly capacity coming back online and some softening and over building we think of of 800 freighters and I think. It’s all rebalancing. Granted, there’s still a lot of parked aircraft and it’s gonna take years for that to be reabsorbed into the system. But fundamentally, people need freighters. And there’s a trend, I think, to more and more of that. So we look for those types of value dynamics. We like the 800 still at the right price. We’ve been, we’ve got one of those right now under LOI 800 freighter. That’s hopefully gonna close this month and then we have three others in the portfolio right now, so.
Robert LukeSo speaking to that next generation freighter type. Obviously there’s an interest in the CFM 56, five and seven series engines and obviously you’ve entered into the A 321 segment with the management that you recently announced and we’ll speak to that shortly, but with over 50 or nearly fifty, I would say 737800 freighters for sale. Are there any other additional ones that you’re looking at, or are you also kind of keeping your mind open to potentially? Acquiring some that have lots of Green Time engine remaining and just stocking up your engine inventory to not only be able to support your the market, but to build up inventory for yourself and your customers.
Kevin MilliganWe’d we’d love to buy seven bees with life remaining serviceable, then with a 5B. Particularly the tech insertion or the evolution motors. They’re hard to find right now, and I think a lot of folks that park their freighters have taken engines off in order to take advantage of the strong lease market, which makes probably economic sense in the near term with where we see 7B lease rates in some. Instances approaching 100,000 a month for base rent. Yeah, that’s probably outlier pricing, but let’s say. 60s to 80s for base rents on those. That’s pretty compelling. Where you put engines to work at those levels. But it’s making it very challenging. I think for folks in the future to activate reactivate airplanes because think the least rate environment is kind of here to stay for a while. Have to factor that in. I think when you’re taking off engines. But yeah, we’re we’re we’d be very eager to acquire either engines or aircraft. That make economic sense for us.
Robert LukeUnderstood. I’m gonna switch back to the 737 classics cuz obviously you have a couple of them that you purchased that were already under lease with customers. Is there any more room in Crestone’s portfolio to grab a few more of those considering today’s market conditions?
Kevin MilliganI think we would consider it if there’s a good underlying. Operator credit with some remaining lease term. It’s it’s not what we’re as focused on right now, just given the ticket size of those assets. It’s, you know, it’s just as much work to manage a 400 as it is an 800, so. In our earlier days, I think we were. Focused on smaller stuff generally just to get going and to build the track record and the portfolio and and now we’re trying to look a little bit more toward scale and efficiency with the platform. We’re a small team. You know, we’re we’re 15 people. So yeah, there’s only so much you can focus on at once, but we’re we’re we’re trying to do package type transactions and and fleet type solutions in the future, so that’ll that’ll be probably more what we look towards.
Robert LukeThank you for sharing as I as I switch back to the A 321, the recent announcement of you managing 4A321 aircraft and one of them or a couple of them were belonging to Global X. How much of that allows you as a lessor to see the performance of the A 321 freighter within the Americas? And how does that I would say? Direct your strategy as far as looking to implement those into your portfolio.
Kevin MilliganYeah. So at the moment that’s a fairly new management project for us. We’re happy to support that investor on it. Two of one aircraft’s a passenger. 321 and the other is a a freighter both on lease. And then there’s there’s one other freighter aircraft as well as one in conversion. So we’re we’re looking for customers out in the market that might want to adopt the 321F. We think it offers a lot of capability. It hasn’t been widely adopted yet, though, and that’s I think that’ll come in time. It was. The launch timing was a bit challenging considering where the the freight market went. So we’re we’re talking to operators every day about those aircraft and. It’ll it’ll come around.
Robert LukeAlright. And I’m gonna go wide for a second. ’cause. I do recall the last time we spoke, there was a limited level of interest in the wide body segment for CRESTONE. Is that still true today, and if so, how much interest would crestone have in trying to potentially secure some of the 777300 ER assets given the strong demand for the Gen. X engines?
Kevin MilliganI think we would look at it. We haven’t spent a ton of time on the widebody segments on the aircraft side we have. We did in the last couple of months do a lot of underwriting on the engines. So we’ve been looking at the larger fan stuff trying to make sense of the technical dynamics there and what we would wanna select for our future investments in that space. And you’ll be seeing some more activity there in the future. But on the aircraft side, we still have more homework to do, I would say. Obviously are extremely capable airplane though and would would be interested in getting involved in that market.
Robert LukeOK.
Kevin MilliganGood thing is we have pretty flexible capital and that we can go pursue a lot of different things and our capital also really does understand aviation and the dynamics at play there, which has been great for us. They’re extremely adaptable. We can go do all kinds of things. Like it got a touchdown from from M and a projects to down to engine. For landing gear, even gear even leases a pretty wide span of of capability.
Robert LukeOK. Well, since you have that financial flexibility, what is your appetite for some of the new entrants beyond the the Airbus a 321 into the freighter segment such as the the E190F or some of these electric capable aircraft enter into segment like the the? MP1 with impair have you all considered that? Or you just kind of staying where you’re at right now.
Kevin MilliganWe I think for us we need. Assets with pretty well established market reach. That are liquid and like I touched on earlier, we like something with optionality.So the 800 F for example, even the the dynamic we were discussing about engine leasing, that’s optionality where you can still bring economic value and market conditions change. So for us it would be hard to adopt some of the more speculative types granted the. There’s obviously have that engine dynamic, but we would wanna see a little bit more wide market adoption. I think before we we jump into some of those segments. The electric side, I haven’t spent a ton of time on yet. I think it’s still a bit early. Need to see where that goes. There’s probably there’s tremendous potential on short term routes, short duration routes rather.So we’ll we’ll continue to watch that space, but you know it’s probably. Five years plus out before we would really even consider looking at it seriously.
Jeff LeeThat was Kevin Milligan, CEO of Crestone Air Partners, talking to my colleague, Senior Associate Editor Robert Luke. And that’s all the time we have today. For more coverage of the freighter aircraft market, visit cargofacts.com. Thank you very much for tuning in, and join us again next time.
