Atlas Air Worldwide Holdings last week reported second-quarter net income down 27.5% y-o-y to $20.6 million, as expenses incurred in gearing up for the twenty-aircraft Amazon deal ate into profitability.
Reported financial and operational results are shown in the chart at right, but perhaps more important than the results themselves is an examination of some of the issues behind them.
First there is the agreement under which Atlas, through its Titan Aviation Leasing subsdiary, will lease twenty 767-300 freighters to Amazon, which will then have Atlas Air operate the freighters on a CMI basis. This week, Atlas is putting the first of the planned twenty 767-300 freighters into operation for the e-commerce giant, but start-up expenses (buying and converting aircraft, and hiring and training pilots) will continue to be a drag on earnings for the remainder of the year – although less and less so as more freighters go into service. Atlas said it expects the deal to become accretive “starting in 2017, and scale up to full service and full accretive benefits through 2018.”
The big questions about the Amazon deal, though, were never about potential profitability if it came off as structured, but rather about whether the equipment deadlines could be met. In the last year and a half, demand for 767-300 freighters has exploded, and with FedEx having effectively cornered the market for new-builds, the only source left is conversion. But while buying a used 767-300ER and having it converted to freighter configuration may not have been a problem in the past, decent feedstock has become harder to find. Likewise, since there are only two sources of conversions – Bedek Aviation Group and Boeing –conversion slots are limited. And finally, even assuming suitable aircraft could be found and converted, there remained the issue of finding pilots to fly them. Pilot shortages, and potential shortages, have been reported in various regions worldwide for at least the last two years, so there was no guarantee that Atlas would be able to hire and train sufficient flight crews.
In discussing the second-quarter results, AAWW CEO Bill Flynn addressed the aircraft issue, saying: “We have secured all of the conversion slots and the vast majority of the aircraft required to support the 20 767s that we will lease and operate for Amazon by the end of 2018.” Regarding pilots, Atlas’ SVP and Chief Commercial Officer Michael Steen confirmed to Cargo Facts at the unveiling ceremony for the company’s first Amazon-liveried freighter that the company had had no trouble at all recruiting pilots.
A second point of interest arose out of the following statement in Atlas’ second-quarter earnings release: “Higher ACMI revenues and block hours in the second quarter of 2016 were driven by our acquisition of Southern Air and an increase in 747-400 flying, partially offset by the temporary redeployment of 747-8F aircraft to our Charter segment.” The seemingly innocuous bit about the 747-8F coming out of ACMI service and entering charter service raised considerable interest on Atlas’ conference call with financial analysts. Mr. Flynn and CFO Spencer Schwartz both pointed out that putting the freighter into the Atlas Air South America charter network was a very profitable move, and that it would likely stay there until the end of the year, to take advantage of strong demand there.
This piqued Cargo Facts’ interest. Virtually every summary of air freight data in the last two years has shown huge drops in demand in South America. How could Atlas be doing well, when virtually every other carrier in the region was in trouble? At the unveiling ceremony, we posed this question to Bill Flynn, who said that, despite the well documented political and economic problems in the region, Atlas had seen no decrease in demand air freight demand. In fact, not only was demand to/from Brazil holding up, but demand was increasing from origins in western South America (Chile, Peru, Ecuador and Colombia), particularly for perishables destined for Asia.
If you are interested in the impact that e-commerce is having on the air freight and express industries, join us at the Cargo Facts Symposium in Miami, 10 – 12 October, where senior executives from both Atlas and ATSG will share their views on the subject. To register, or for more information, go to www.cargofactssymposium.com.