From ARG analysis – updated

We’re taking a look at air cargo operator Southern Air, a most promising airline that offers low cost ACMI (Aircraft Crew Maintenance Insurance) services and charter flights. This global airline is based in Norwalk, Connecticut although most flights operate out of Ted Stevens Anchorage International Airport in the 100-tons cargo carrying segment. Southern Air has attracted a lot of attention not only because of the rapid growth that the relatively young airline has undergone in a difficult market segment. But also because the airline has become home to a very peculiar mix of long range 100-tons freighters. Operating a combination of some 15 Boeing 747-200/300 ‘Classic’ freighters alongside two brand new state-of-the-art Boeing 777 Long Range Freighters is unheard of. Operating in the same market segment the Boeing 777 LRF is probably everything that the ‘Classic’ 747 is not in every respect , not to mention the 40 years age difference between both designs. It appears that Southern Air has found the perfect balance of fleet composition by building differentiated services around the Boeing 777 LRF while still relying in the strength of the 747-200 and some odds -300 variants that form the backbone of its fleet.

Birth of Southern Air , recovering from a post 9/11 bankruptcy (1999-2007)

Constituted in 1999 from the remains of bankrupt Southern Air Transport, the airline had a tumultuous start that led to a post-9/11 chapter 11 bankruptcy restructuring process from which it exited in September 2003. At that time CEO James K. Neff anticipating an industry recovery expressed that the airline would likely grow at the rhythm of one to two additional planes to the fleet every year (1). That would complement the 2 Boeing 747-200 ‘Classic’ freighters that were operational right after the re-structuring. The airline had grown to six Boeing 747-200 Freighters by September of 2006 (2) subsequently adding aircraft number seven and number eight before the end of that same month of September (3). In March of 2007, the airline had already shown a very convincing period of sustained growth that culminated by the addition of a ninth and tenth 747-200 freighter (4) to its expanding fleet. By then strong ACMI contracts had been locked in operating on behalf of Nippon Cargo Airlines and Korean Air in and out of Seoul Incheon International Airport.

Acquisition by Oak Hill Partners in 2007.

More dramatically on July 26th 2007 the airline was acquired by private equity investor Oak Hill Capital Partners who had previously owned Cargo 360, an air cargo operator based in Seattle, Washington. Under the agreement Southern Air Inc. would merge with Cargo 360 Inc. combining into a new airline entity Southern Air Holdings, Inc. Southern Air operations was to absorb the 2 Boeing 747-200 freighters plus the single Boeing 747-300 that had made up the Cargo 360 fleet. The new ownership structure would confer “significant minority interest” to the Neff family which had founded Southern Air in 1999 (5). Most significantly the Neff brothers CEO James and CFO Brian CFO were entrusted by the new ownership with pursuing the airline objectives along the same line that had already produced a spectacular success. It was also the sign that Oak Hill had ambitious plans for the airline, a clear testimony to the Neff brother’s foresight in developing an airline with such a unique model. By February and March of 2010 the airline became the 7th operator of the brand new 777 Long Range Freighters. The state-of-the-art twin engine freighter presents operating economics that have the potential to transform the entire industry. Operating as 100-ton freighter able to cover 4,900 miles ( the Boeing 747-200 is limited to 3,500 miles with a similar payload but using four older engines technology) with only two engines. But everyone recognized that it is the 747-200 freighters, the backbone of the fleet that had single handedly propelled Southern Air to the success it enjoys today.

The Fleet: being modern with ancient

From the start Southern Air management deliberately set its focus on one specific variant of a legendary aircraft model: the Boeing 747-200 equipped with four General Electric CF6-50E2 turbofan engines. In the 100 Tons freighter market segment cargo operators were clamoring for the very efficient and modern 747-400. These 747-400 models became readily available as more passengers versions were being pushed out of service in large numbers by very economical newer Boeing 777 which offered much superior operating economics and yield on similarly average routes. A thriving passenger-to-freighter conversion industry could maintain adequate supply of newly converted 747-400 freighters with very low usage, keeping the supply pipeline for large freighters fluid. For a low cost start-up, capital adequacy requirements in order to acquire these aircraft was simply to high or collateral (in the form of other owned aircraft for example) was just not available. And in fact upon exiting bankruptcy in 2003 Southern Air management recognized that because of the 747-400 adoption in that market, Boeing 747-200 had fallen dramatically in value and were stored in abundance. These were still 100-plus tons freighters (capability to carry 108 tons over 3,500 miles) of the 747-400 class but still with lower performing operating economics (for instance requiring a crew of three instead of two for the 747-400). However one could have argued that acquiring later build 747-200 that had came off the assembly line in the mid eighties was not as bad as operating early 1970’s build airframe. First, Southern Air management gambled that a few specific good 747-200 airframes could provide a very robust performance that would allow the airline to compete with even 747-400-equipped operators on certain markets segments. Secondly it was imperative to organically build a strong maintenance and engineering base to support the operations of 747-200 fleet. And third the airline would actively seek additional airframes that could be parted-out in order to provide a continuous supply of spare parts for the active fleet. This applied primarily for engines especially given that engine manufacturers were less likely to maintain significant spare parts inventory for out-of-production older models.

Sorting out the better ‘Classics’

In a January 10th, 2010 interview on new CEO Daniel McHugh (who add replaced James Neff the previous month) indicated that the 747 ‘Classic’ fleet consisted of 12 Boeing 747-200s and 3 Boeing 747-300s operational at that time. In the same article he reiterates the fact that Southern Air has an almost unlimited appetite for 747-200 (with a leaning towards the better maintained airframes) as well as the accompanying General Electric CF6-50E2 engines that were powering most of the airline ‘classic’ fleet and also airframes that could be source of spare parts. The CEO also continuously stressed the airline almost exclusive operational reliance on the General Electric CF6-50E2 engine variant (categorically quoted for its ‘superior fuel burn performance’) probably well into the year 2020. And finally the extraordinary level of Boeing 747 ‘Classic’ core engineering competencies that had been developed and achieved organically by the airline to achieve the success that has been witnessed. To that effect Southern Air is well recognized as a center of excellence for 747 ‘Classic’ maintenance.

Our observations regarding Southern Air’s 747 ‘Classic’ fleet

The build-up period: considering that the airline exited chapter 11 bankruptcy protection with two 747-200 freighters in September of 2003, the company’s website only indicates the addition of ship 747-200 number five acquired from Air France in January 2006, number six in August 2006 from Nippon Cargo Airlines, and number seven and eight acquired both from Polar Air in September 2006. Their press release also suggests that number nine would have been acquired from Martinair early March 2007 and number ten from Atlas Air later in March 2007.

We conducted a review of data available from various public websites (see listing below). Following are the results of our observations.

The active fleet of CF6E50E powered Boeing 747-200 comprises 11 aircraft. Following is their listing ordered by date of aircraft manufacturing:

#1 N748SA built 1975 acquired December 29th 2006 from Martinair (model -206B SUD) converted SUD March 1998, active as of December 2010 old livery (mach 0.84 to Mach 0.85)

#2 N760SA built 1976 acquired February 8th 2007 active as of January 2011

#3 N752SA built 1976 acquired #1 on 26th April 2004 from Air France F-BPVR last seen active June 2010

#4 N754SA built 1978 acquired June 26th 2007 from Atlas Air last seen active in December 2010 with old livery

#5 N761SA built 1979 acquired # on February 25th 2007 from Polar Air Cargo last seen active in December 2010

#6 N753SA built 1979 acquired # January 12th 2006 formerly F-BPVZ Air France last seen active October 2010

#7 N815SA built 1980 acquired # April 20th 2009 seen active as of January 2011

#8 N765SA built 1980 acquired # January 4th 2008 seen active as of January 2011

#9 N758SA built 1984 acquired # from Nippon Cargo Airlines September 1st 2006 last seen active December 2010

#10 N820SA built 1986 acquired # on May 27th 2010 from Air Atlanta Icelandic last seen active December 2010

#11 N783SA built 1987 acquired # February 19th 2008 from Nippon Air Cargo seen active as of January 2011

Furthermore we identified three Boeing 747 ‘Classic’ aircraft that had formed the Cargo 360 fleet and have been incorporated to the Southern Air fleet after the merger of 2007. To all indications these planes are still active. We first notice that they actually comprise two very late build Boeing 747-200s and one Boeing 747-300 all built in the year 1988. So these aircraft are much younger than the early 1970-manufactured 747-200 . We also notice that contrary to our statement regarding the airline sourcing exclusively General Electric CF6-50E2 powered variants, these three ‘Classics’ model are powered by four Pratt & Whitney JT9D-7R4G2 engines and are listed below:

#12 N749SA built 1988 acquired December 16th 2007 (model 3B5M(SF) from Cargo 360 powered by 4x PW JT9D-7R4G2 was N301JD 747-3B5M(SF) airframe number 24194/713 currently active. It is actually a -300 series airframe painted to Southern Air livery (from the Cargo 360 scheme) between December 2009 and March 2010.

#13 N704SA built 1988 acquired October 6th 2008 powered by 4x PW JT9D-7R4G2 from Wells Fargo Bank Fleet  was N298JD 747-2B5F(SCD) airframe number 24195/718 probably still active was last seen painted all white well into December 2010.

#14 N708SA built 1988 acquired January 31st 2008 from Cargo 360 (since July 14th 2006) powered by 4x PW JT9D-7R4G2 was N299JD 747-2B5F(SCD) airframe number 24196/720 with Cargo 360. Painted to Southern Air livery between March 7th and April 18th 2010 is active in the fleet.

The presence of non-GE CF6E50E engines in the Southern Air was certainly imposed by the acquisition from Oak Hill Capital Partners. In any case these were three very recent 747-200 (build model 1988) which had been well maintained by their previous owner Korean Air and had been placed with Cargo 360 on lease from Wells Fargo Bank Northwest so it was a valuable investment.

Subsequently to uncovering the presence of the three Pratt & Whitney powered engines we looked at the planes that were in storage for the airline and we immediately noticed the following:

We uncovered 3 more airframes that had been powered by the PW JT9D-7R4G2 but are all stored at Mojave evidently for parts reserve.

The Pratt & Whitney Reserve comprises:

#15 N798SA built 1986 acquired August 14th 2008 from JAL 4x PW JT9D-7R4G2 stored 2008 seen at Mojave pix November 2010 looked a mess with N818SA, N723SA and two other Southern Air unidentified airframe (that we identify as N740SA and N746SA)

#16 N818SA built 1983 as a 747-346 stored with JAL in July 2009 acquired January 18th 2010 powered by 4x PW JT9D-7R4G2 was ferried straight to storage on January 18th 2010 seen in a picture stored at Mojave: looked good in April 2010. By November 2010 had all engines stripped.

#17 N723SA  built 1987 acquired from JAL  May 16th 2008 stored on the May 21st 2008 powered by 4x PW JT9D-7R4G2 visible on picture from November 25th 2010 at Mojave the plane had been stripped of its engines probably stored since November 28, 2008

Finally we can look at the CF6-E50E powered planes that are kept in storage in support of the 11 active 747 with similar engines, they are four in numbers and are listed below:

#18 N746SA -206 SUD built 1975 became SUD in June 1998 with KLM acquired August 12th 2003 stored as of December 29th 2009

#19 N740SA built 1978 acquired August 15th 2004 from Atlas Air last seen March 7 2009 reportedly stored April 10th 2009

#20 N751SA built 1981 formerly F-GCBE from Air France acquired February 17th 2003 stored December 31st 2008 (last seen November 2008)

#21 N795SA built 1980 acquired September 25th 2008 from Air Bridge Cargo stored since October 24 2010 built 1980 last seen April 10th 2010

We uncovered a few more additional airframe that have been scrapped or in storage. Looking at various aircraft registration listings, we can ascertain that:

N725SA production 21550/344 built in 1978; an SUD from KLM acquired around October 4th 2003 was scrapped probably almost immediately after being acquired

Through FAA records analysis we have found:

-3 aircraft owned by CF6-50 LLC registered at 117 Glover Avenue, Norwalk, CT which we believe are in various stage of storage/scrapping process (N728SA, N729SA, and N288BA)

-6 aircraft are registered to Southern Air

-16 registered to Air Mobility Inc.

the Boeing 777 N774SA N775SA are registered  to WELLS FARGO BANK NORTHWEST NA TRUSTEE

N729SA production 22379/491 SUD built 1980 (KLM) acquired November 16th 2004

N728SA production 21982 built 1980 acquired from Air France F-GCBA stored December 2nd 2004

N288BA production 22710 Boeing 747SR-81 (formerly JA8157) 4x CF6-45A2 built 1981 stored March 27th 2006 (said to be owned by Boeing Aircraft Holding Company has 85 planes including 44x 747) FAA registration claims it is owned by CF6-50 LLC. of 117 Glover Av Norwalk, CT and is most likely stored.

We also uncovered

N730SA another SUD built 1981 from KLM that we believe was in storage since 2004, after having flown with Air Atlanta Icelandic under TF-ARQ. FAA documents indicate that N730SA was de-registered as of March 9th 2009. Most likely scrapped.

Finally we went further to trace the aircraft that the company used at its inception from 1999 on to the exit from chapter 11 re-structuring in late 2003. The four planes that we identify have all been de-registered in the US with title transferred to foreign entities. We believe that they are still providing reliable flight services under Air Atlanta Icelandic.

#1 N742SA built 1981 acquired October 21st 1999 , transferred June 13th 2003 to Air Atlanta Icelandic became TR-ARH last seen July 2009 Air Atlanta Cargo

#2 N743SA built 1982 acquired August 1st 2000 moved to Air Atlanta Icelandic May 16th 2003 became TF-ARL last seen July 2009 Air Atlanta Icelandic

#3 N744SA built 1980 acquired September 14th 2000 transferred to Air Atlanta Icelandic September 10th 2003 became TF-ARM last seen active September 21st 2010 with Air Atlanta Icelandic but probably in and out of storage.

#4 N745SA built 1980 acquired July 11th 2002 moved to Air Atlanta Icelandic April 10th 2003 became TF-ARN had MasKargo markings up to July/August 2009 then unmarked (probably in and out of storage with Air Atlanta Icelandic)

A note on aircraft ownership structure

From public government records we see that Southern Air is leasing 16 of the Boeing 747 from Air Mobility Inc. from 117 Glover Avenue, Norwalk, CT while another 6 are registered to Southern Air of the same address. While the two Boeing 777LRF N774SA and N775SA are owned by WELLS FARGO BANK NORTHWEST NA TRUSTEE evidently the lender.

A word on the 777 Long Range Freighter

With the signature of a Block Space Agreement on October 19th 2009 with Thai Airways International Public Company for all the capacity on the 2 new aircraft these aircraft were evidently to fly under the Thai Airways livery upon their delivery brand new from the manufacturer. In fact they began operating the routes Bangkok-Frankfurt-Bangkok twice a week and Bangkok-Hong Kong-Amsterdam-Bangkok once a week in March/April 2010 following delivery to Southern Air in February/March 2010. Being complete ACMI contracts the aircraft have been painted to the Thai Cargo Livery and are frequent visitors to Frankfurt, Tokyo, Amsterdam, Liege, Maastricht, Hong Kong,

This snapshot of Southern Air Boeing 747 operations confirms the discipline behind the systematic building of capability to support a single aircraft model. Even considering the age of the design, one can not minimize the ability the remarkable payload capacity of the ‘Classic’. But we see that the level of engineering competencies that had to be developed had generated value of its own: the stringent demand for reliable operations from customers like Korean Air, NCA and Lufthansa had to be met. And Southern Air could show that its maintenance and parts supply systems were extremely robust. We have uncovered various schema for aircraft storage and scrapped processes that clearly show that the airline had much deeper pool of retired planes to extract part from than we initially anticipated. Our note for the future is that unfortunately the ‘Classic’ will eventually have to be relegated to less taxing work than the strenuous 6 to 11 hours duration flight that we see them undertaking across Newark, Frankfurt, Seoul, Anchorage etc….

Prospects for the future look strong. On October 6th 2010 the airline signed a charter deal with Lufthansa Cargo Charter Agency. Combined with its US military airlift contracts in and out of Dover Air Force base to Liege and Frankfurt on top supplemented by ad-hoc charter flights, the airline is sitting on solid revenues for the times to come. Management I said to envisions growing its fleet of 777 by another 2 and also acquiring 747-400 in the near future(6).

photo: thanks to Wikimedia commons (#Dontworry)

1.Fairfield County Business Journal , September 1st 2003.

2.Southern Air press release September 1st 2006

3.Southern Air press release September 29th 2006

4.Southern Air press release March 02nd, 2007

5.Southern Air press release July 26th 2007

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