Despite defaulting on $246 million of debt in late November and getting its third ratings downgrade from Standard & Poor's in a year, air cargo wet-lease operator Atlas Air insists that its business model remains sound and prospects are healthy.

Atlas says the default on a loan to Deutsche Bank was only a technical one and involved no suspension of payments. "Our covenant required us to file third quarter earnings returns by a certain date," says Atlas. "Because we are restating our earnings for 2000 and 2001, we could not do that. We are in negotiations with the lender to get a waiver for the requirement."

The restating of earnings was triggered by a change of auditors from Arthur Anderson to Ernst & Young in April. The new auditors conducted a review of Atlas's accounts, resulting in a 16 October statement that the company would be restating its previous two fiscal years. This process is expected to take until the end of the first quarter of 2003.

Standard & Poor's (S&P) responded to the default by lowering the carrier's corporate credit rating to B minus down from B. S&P credit analyst Lisa Jenkins pointed out that the default meant the lender could insist on early repayment of the loan, and says it raised worries about non-compliance with other covenants.

Even before the latest news, there was "some concern about the liquidity position" at Atlas, she adds. Atlas has $959 million of debt, and a cash balance of $204 million.

S&P has also recently highlighted the increased risks in the carrier's changing business model, including its purchase of Polar Air Cargo and the increasing share of its revenue that comes from charters as opposed to longer term wet leases. An interim third quarter statement from the carrier shows wet-lease block hours down 36% year on year, while charters made up the shortfall by rising from 3.6% to 26% of Atlas block hours operated.

One concern is that much of the increase came from military contracts and charters to get around the US West Coast port dispute in September and October - neither of them long-term business opportunities.

However, Atlas insists that this shows it is flexible in meeting different market conditions, and the company expects the fourth quarter to be its best ever. All but one of the six aircraft parked by Atlas in 2001 have been reactivated, and it has won increased business from China Southern, one of three carriers with wet-lease contracts up for renewal in 2003. In October Atlas again began operating a 747-400F on China Southern's behalf for services to Liege in Belgium.


Source: Airline Business