Atlas looks beyond weak Q1 towards brighter future

With net income falling to nearly zero ($471,000), and total operating revenues down 5.9% to $418 million, it’s no wonder Atlas Air Worldwide Holdings (AAWW) chose to announce its new tie-up with Amazon concurrently with the release of its first-quarter 2016 results (see Atlas scores deal with Amazon for 20 freighters, 20% stake). On an adjusted basis net income fell less dramatically, dropping only 70%, to 7.7 million.

During a conference call with financial analysts, company executives glossed over the weak Q1 2016 results, citing one-off boosts to demand in Q1 2015, and one-off costs in Q1 related to “startup expenses” for the new Amazon deal, and its acquisition of Southern Air. As the company’s fleet ballooned 9.6% operating expenses rose 2.8% to $399 million. CEO Bill Flynn reiterated that additional costs incurred in this quarter associated with the two deals were part of “ongoing initiatives that provide a strong foundation for our future earnings and cash flow.”

Last year AAWW benefitted tremendously from increased demand for commercial charter capacity as shippers switched from ocean to air, both as a result of the labor-related congestion at the US West Coast ports, and the massive automobile recall. The impact of this non-recurring benefit became apparent as AAWS’s fleet utilization dropped 10.5% y-o-y, to 8.5 hours.

AAWW separates its business into three reportable segments: ACMI (including CMI), Charter (both commercial and military), and Dry Leasing (through its Titan Aviation Leasing subsidiary).

Block hours in the ACMI segment were down compared to 1Q15, but are expected to pick up with seasonal demand during the second half of the year. Atlas expects total block hours to increase 20% over 2015 with the acquisition of Southern Air.

Cargo charter revenue fell 8.1%, due to falling rates and lower fuel surcharges. Military-related passenger chargers, which saw a 22% spike in block hours, helped offset softer demand for cargo charters.

Dry-leasing revenues were also down, 33% for the quarter—again partially because of non-recurring benefits in 2015 During the first quarter of 2015, a returned passenger 737-800 came off lease and boosted the segment’s revenue from collected maintenance fees.

Little was mentioned regarding Atlas’ most important customer, DHL, except that they were “supportive” of the Amazon deal. Looking ahead, CEO Flynn focused on AAWW’s new partnership with Amazon and acquisition of Southern Air saying, “Together, with our ongoing initiatives that provide a strong foundation for our future earnings and cash flow, we are eager to capitalize on these [new] opportunities to drive substantial value and benefit for our customers.

As for the future of Atlas’ fleet, it will certainly see an uptick in 767-300s related to the Amazon deal. A more detailed fleet analysis will soon follow.