Air Cargo Management

Gaining altitude: Atlas Air set to expand strategic agreements

Air freight charters for relief aid
photo_camera There is strong demand for freighter lift in various markets

Buoyed by soaring demand for freighter capacity, Atlas Air went from strength to strength in 2018, and looks geared to expand strategic agreements even further.

“We had great momentum in 2018, building on a very strong 2017,” says William Flynn, president and CEO of Atlas Air Worldwide Holdings. “The market was strong both in cargo and passenger business. We expect that to continue.”

When the world’s largest freighter leasing outfit unveiled its results for the third quarter at the beginning of November, it also raised its outlook for the full year, projecting net income to rise in the neighbourhood of 50 per cent over the previous year.

“Looking to the full year, we continue to expect our revenue to exceed $2.6 billion. We project adjusted EBITDA to increase to more than $525 million. And we anticipate our full-year adjusted net income to grow near or above 50 per cent compared with 2017,” Flynn stated in November.

“We see volumes for the year rising approximately 17 per cent to around 297,000 block hours, with about 75 per cent of the hours in ACMI and the balance in charter.”

Revenues in the third quarter climbed 23 per cent to $656.6 million, which brought the company’s tally to $1.912 billion for the first nine months of 2018, up from $1.528 billion for the same period the previous year.

Net profit for the January-September period reached $59.593 million, up from $14.025 million a year earlier.

The results have been fuelled by strength across all of the segments covered by Atlas – from ACMI over dry leasing and CMI to commercial charters and government contract work, Flynn says.

Revenues in the core ACMI segment advanced 21 per cent in the first nine months to reach $832.777 million, with block hours growing 19 per cent. This reflects strong demand for freighter lift in a market where major trade lanes continued to show strength.

Airline executives, as well as charter brokers and other ACMI providers, have pointed out that freighter capacity has been tight, owing to a combination of demand outstripping capacity for most of 2018 and a lack of new freighters coming on stream, as airlines refrained from placing orders during the global downturn.

In response to slack demand, Boeing had throttled back production of its large widebody freighters in 2017 to one B747-8 every other month and five 777s a month. Medium widebodies have been gobbled up for e-commerce.

Boeing predicts that over the next 20 years 2,650 freighters will join the global jet aircraft fleet, which is projected to grow from 1,870 aircraft in 2017 to 3,260 units over the period, with half of the additional planes needed to replace retiring models.

Atlas Air freighter capacity
Atlas and ATSG have been buying and converting 767’s

The aircraft maker expects global air cargo to grow on average 4.2 per cent a year. Rival Airbus and some observers have argued that freighters will be losing ground to bellyhold capacity, as passenger demand is going to fuel a steady stream of new widebody planes, but Boeing dismisses this argument.

Tom Crabtree, regional director, Airline Market Analysis, marketing and business development at Boeing, notes that the share of global air freight volume commanded by freighters did not diminish during the global economic downturn.

More than half of the new widebody passenger aircraft are being deployed on routes that are of minor significance for global shipping patterns, he points out, adding that between 66-75 per cent of global air freight volume is business-to-business.

The ACMI market looks solid, judging from clients’ commitments to leased freighters. Flynn points out that engagements with DHL and Amazon are long- term.

He reckons that the focus will be largely on longer-term alignments, saying that for many Atlas customers the company is becoming part of their value chain. “Our status is more long term, less ad hoc,” he says.

Crabtree sees a promising market for ACMI providers at least in the near term. After the last downturn, many airline boardrooms are hesitant to invest in new freighters.

Instead they are showing greater interest in used models and ACMI contracts, he says. As used freighters remain in short supply, ACMI is the most likely option for many.

In recent years Atlas has shifted its focus increasingly from general cargo carriers to the express and parcel sector. It now has 41 aircraft in service for DHL and 20 for Amazon. During the peak season it also operates charters for FedEx and UPS.

Atlas Air: Atlas 747-8f Air to Air
Atlas 747-8f Air to Air

The trend is unlikely to reverse itself in the foreseeable future. Heavy freight has grown 4 per cent, whereas the integrators have clocked up 7 per cent growth, Flynn notes. He expects e-commerce to continue to grow, pointing to the way consumers are increasingly shopping.

“Growth in e-commerce favours air,” he adds. “It has extended our growth cycle.” In November Atlas delivered the twentieth B767 freighter to Amazon.

The e-commerce giant has contracted another 20 767 cargo planes with ATSG, and is rumoured to plan a further expansion of its dedicated freighter fleet.

Other e-commerce carriers are also looking to boost their capacity. In September, Atlas signed
an agreement with SF Express to operate a B747- 400F for the Chinese express carrier “on key global routes across the fast-growing transpacific market, connecting China with the United States”.

Ten years ago Atlas signed an agreement with DHL for a 20-year partnership that included a 10-year capacity deal for the freighter operator to provide transpacific lift via its Polar Air Cargo arm.

Starting with six 747 freighters, this has since grown to encompass 41 aircraft that Atlas has in service for the express firm.

The initial capacity agreement is now approaching its life span, but the pair intend to continue their collaboration. The aircraft leasing terms are part of the umbrella agreement, which is for 20 years, Flynn remarks.

“The partnership is strategic for both. We look to continue with them,” he says. The capacity on Polar’s flights not used by DHL is eagerly filled by forwarders, notably on the transpacific and intra-Asian sectors.

Lately a rising number of large cargo agents have secured dedicated freighter capacity, such as Flexport across the Pacific or Senator International for automotive traffic moving across the North Atlantic or between Europe and South Africa.

Likewise, charter brokers have lined up more dedicated freighter operations over the past couple of years. Shippers are also interested. Atlas has started flying for Spanish fashion giant Inditex.

Forwarders, brokers and cargo owners will experiment with capacity arrangements, remarks Flynn. “We’re excited that different actors in the global supply chain are looking for capacity,”
he adds.

Airlines, which have traditionally been the core of the ACMI freighter business, have shown regained appetite for freighter leases. In September, Atlas Air started flying a second 747-400F for Asiana Cargo, supplementing the Korean carrier’s own capacity.

CMI activities, which kicked off for Atlas with two passenger aircraft, have also increased, most recently with an agreement with Nippon Cargo Airlines to operate three more 747-400Fs for the Japanese carrier. Atlas now flies five 747-400Fs for the Japanese carrier and operates about 24 freighters for DHL under CMI terms.

Offering CMI, as well as dry leases – the latter through its Titan Aviation arm – Atlas can offer different types of lease structures. Under long-term commercial agreements announced in 2016, Atlas Air operates for Amazon on a CMI basis, while the aircraft is leased via Titan Aviation.

Customers embrace CMI for different reasons, such as lease terms or cost of capital, Flynn remarks.

For Nippon Cargo Airlines, shifting its 747-400s to CMI arrangements is a way of reducing its fleet to one type, the 747-8, in terms of maintenance while still retaining the capacity, says Shawn McWhorter, President, the Americas at Nippon Cargo Airlines.

The charter business generated $954.725 million for Atlas in the first nine months of 2018, climbing 28.4 per cent.

Some scheduled freighter operators that had focused more on this segment during the downturn have reduced their exposure to that market during the recovery of the past two years, but for Atlas it has retained its share of 25 per cent of business, Flynn points out.

If anything, the charter market has firmed up. It used to be dominated by seasonal traffic flows, such as the peak season or peak demand times for flowers, but over the past decade it has turned into a 52-weeks-a-year business, Flynn says.

“It’s not ad hoc for us, it’s core,” he says. “It allows us to drive a high utilisation of our assets.” Over the past year, Atlas expanded its asset pool, adding some aircraft to its fleet to accommodate customers’ needs.

It acquired two B777-200Fs from LATAM Airlines and took delivery of the last B767 freighters for Amazon under the contract for 20 767 cargo planes. Aircraft acquisitions are made on the basis of customer demand.

“We’ve been opportunistic about the fleet. We’re not buying aircraft speculatively. If we were to acquire more, we would have to have a pretty clear idea where we place them,” says Flynn. “We look to additions across the range. We continue to study the market,” he adds.

Atlas Air: Polar
Polar’s capacity not used by DHL is filled by forwarders

The Atlas fleet has grown from a pure 747 freighter line-up to a mix of 747, 777, 767, 757 and 737 aircraft. Thanks to the Amazon contract, the 767 contingent has grown rapidly. The type has been eagerly snapped up by parcel carriers, but there is still feedstock in the market, Flynn observes.

There have been suggestions that a shortage of 767s could prompt a push for A330 freighters, but Atlas is unlikely to pounce soon.

The residual value of feedstock for conversion is still rather high, and issues with engines for A350s suggest that the A330 is likely to stay longer in passenger service than expected, Flynn remarks. “It’s an asset class that we continue to study,” he adds.

For most of Atlas Air’s customers, the advance of digitisation and the rise of disruptive technologies have been major developments to wrestle with. As an ACMI provider, Atlas does not market its capacity directly, but it still feels the pull from digitisation.

“We’re working on different visibility tools. We want to allow our airline, broker and charter customers good visibility for their product,” says Flynn.

According to him, predictive analytics is one disruptive technology that the company is already spending “quite a bit of work and energy” on, largely on issues related to operations and maintenance.

He sees much promise in blockchain, with tremendous opportunities in maintenance and the management of aircraft parts and components. More work has to be done on the charter side on how to incorporate blockchain, he reflects.

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