Atlas Air: A strong future for wet-leasing
30 / 05 / 2014
ON THE face of it, this does not seem like a good time to be an ACMI operator.
British Airways recently terminated wet-leases on three B747-8Fs and switched to a much smaller capacity-sharing arrangement on Qatar Airways freighters. Carriers as varied as Air France-KLM, EVA Air and Singapore Airlines have all been reducing their all-cargo fleets. And proud names in the ACMI business such as World Airways and Evergreen have recently ceased trading altogether.
Yet, despite this, Michael Steen, executive vice-president and chief commercial officer at Atlas Air Worldwide, insists the business remains healthy. “We see ACMI as a growth business with strong demand,” he says. “There is definitely a very important role for it today and, in the future, possibly even more than in the past.”
Part of his confidence is based on a conviction that the airfreight market will recover from its current doldrums – a confidence buoyed by the IATA traffic figures for March which showed a 6.7 per cent year-on-year rise in international traffic, with almost all regions seeing good growth. “So there looks to be a good recovery, though it is early days and we need to see how things go in the next couple of quarters,” Steen says.
In the medium term, he is even more confident, saying global supply chains will always require global airfreight solutions. “So there is no argument that the airfreight market will play an important role in the economy and grow over time. The only question is how fast and where.”
Nor does he particularly agree that a significant drift from freighters to belly capacity is underway. “Globally the mix is 60 per cent of cargo carried on freighters and 40 per cent in bellies and it has been so for 15-20 years,” he says.
“And while there is undoubtedly belly capacity being added, some of it is replacing existing capacity, and there is a question about where the new capacity is being deployed. Much of it will be put on the same routes that carriers are already flying – adding another daily frequency. It will not necessarily be added from, for example, Chengdu or Chongqing to Europe.”
There also remain plenty of markets where belly capacity growth is not likely to have a significant impact. Steen cites the trans-Pacific, where 80 per cent of cargo still moves on freighters. “To capture 10 per cent of that for bellies you would need 50 new B777s, for which you would have to find manufacturing slots, passenger demand and traffic rights. So structurally I do not think we are looking at a big change.”
Meanwhile there is another trend that could be in Atlas’s favour – that operating widebody freighters increasingly means operating new aircraft, with their greater fuel efficiences. This is a capital cost and long-term investment horizon that may be too much for many carriers, but not for a speciality operator like Atlas.
Steen agrees that operating new freighters is essential, and Atlas now has an entirely factory-built fleet – nine B747-8Fs and 21 B747-400 production freighters – having parked its three remaining B747 convers-ions.
He insists that the rest of the fleet is fully deployed, and points to a number of new ACMI con-tracts in the past year. These include Etihad, which took a B747-8F in May and also wet-leases a -400F; Kenya’s Astral Aviation which took a B747-400F in September; BST Logistics, which took a B747-8F in December; and charter broker Chap-man Freeborn, which leased a -400F in February. Two of the B747-8Fs returned by British Airways quickly found new homes as well, going to DHL Express. They join two other B747-8Fs leased to the express operator and five B747-400Fs. Atlas Air also operates seven B767Fs for DHL on a CMI basis.
On one level it is not such a surprise to find that DHL is such a major customer, since it is also a 49 per cent owner of Atlas’ scheduled subsidiary Polar Air Cargo Worldwide. But Steen says Atlas also works with the other big three integrators, and says express is one of the growth areas of the air cargo business. “Consumer behaviour is driving this. We all now order on the internet, and want goods delivered quickly. That is what the integrators are able to deliver,” he observes.
Robust though ACMI may be, it is far from being the only string to Atlas’ bow and, in fact, accounts for less than half of its revenue. In its Q1 2014 results presentation, ACMI and CMI together account for 49 per cent of re- venue, and the company says CMI is a growing business.
CMI involves taking ‘planes owned by third parties and operating them on their be- half. Benefits to customers include reduced crew costs, and Atlas’ experience in operating to airports around the world.
Two CMI contracts are currently on the passenger side – for example operating two VIP-configured B747-400s between Houston and Luanda for Angolan national oil company Sonangol, and operating a B767-300 that moves sports teams around the United States. Atlas also has two B747-400 and three B767-300 passenger aircraft of its own performing military and commercial charter work.
Flying for the US military continued to account for 16 per cent of revenue in Q1 2014, though that was down from 26 per cent in the same quarter in 2013.
Steen is realistic that military demand will very soon be back at peacetime levels, but says Atlas has been actively planning for the transition since 2007. Getting into the CMI business was one answer, and an increase in commercial charters (28 per cent of revenue in the first quarter versus 24 per cent in Q1 2013) is another.
Atlas also uses its own traffic rights to operate scheduled charter services on a circular route into Latin America (Miami-Brazil-Santiago-Buenos Aires and back via Lima or Quito).
Meanwhile the company is building up a dry leasing business – Titan Aviation. “It means we can [now] offer the customer a completely integrated portfolio,” says Steen. “They can outsource their fleet operations as ACMI, or they can lease one of our aircraft and operate it themselves, or they can own the aircraft and we operate it as CMI.”
Dry leasing is only six per cent of revenue so far (up from one per cent a year ago), but there is no doubt Atlas is making substantial investments in this area. It now has a US$1bn portfolio of aircraft including six B777Fs acquired in the past year, as well as B757s and B737s operating in the intra-Asian markets.
Two of the B777Fs fly for Lufthansa-DHL joint venture airline Aerologic, three for TNT and one for Emirates.
Dry leasing has the advantage that aircraft are let on very long leases – often a decade or more – which provides predictable returns on investment. One wonders if Atlas will prefer to invest in such stable assets in the future, or whether it has the stomach to expand its ACMI fleet. More B747-8Fs for example?
“If you look at our track record, we have always been very prudent asset managers, and we make sure we invest in the best aircraft,” is Steen’s answer to that question. “The -8s are performing well, and the market is growing and we will try and capitalise on that in the best way for us. I don’t want to speculate if we will grow in one direction or the other, but we have invested in the B747-8, the B777 and the B767, and if the intercontinental airfreight market continues to grow, we will see.”