Atlas Air has found a winning formula: acquire used Boeing 747-200 freighters and operate them profitably on behalf of major airlines. Jane Levere reports. Some people say Atlas Air, the Golden, Colorado-based cargo carrier, is really in the taxi business rather than the air freight business. However you describe the niche the company operates in, it appears to have found a winning formula.

The brainchild of Michael Chowdry, a former aircraft lessor, three-year-old Atlas operates under a unique and, so far, highly successful scheme. The company buys older Boeing 747-200s; converts them into freighters, if necessary, and then leases them out to mostly non-US airlines that find their low operating costs highly desirable. Atlas supplies only the aircraft, crew, maintenance and insurance (ACMI); its customers are responsible for marketing the freighter service, handling and fuel.

Chowdry's formula appears to be paying off. The carrier posted a net profit of $17.8 million last year, up from $3.6 million in 1994. During the year revenues rose by two-thirds to $171.3 million, while unit costs declined 17 per cent. Atlas' operation has multiplied from one aircraft in February 1993 to 14 today; it plans to add another 10 aircraft to its fleet by the end of next year.

The company also is basking in the approval of the US investment community. It raised $74 million in an initial public offering last summer and $180 million in a second equity offering in May this year. A debt issue last November grossed another $100 million.

Chowdry's success seems to be the result of both a shrewd strategy and lucky timing. His strategy is based, in part, on the availability of relatively cheap and abundant equipment suited to longhaul air freight. At the same time, he has identified an opportunity to meet the needs of airlines, which cannot operate a dedicated cargo fleet profitably or just need extra uplift.

Chowdry, who is Atlas' chairman and the owner of 59 per cent of its stock, says he opted to focus on the B747-200 because it is the most cost-effective aircraft for carrying large amounts of heavy cargo long distances.

Richard Shuyler, the former TWA finance chief who is now Atlas' chief financial officer, says the carrier's B747-200s can carry 120 tons of cargo, compared to the 50 or 60 tons carried by a DC-10 freighter. He adds that Atlas' B747-200s can fly 5,000 miles nonstop with a full belly of cargo, compared to the 4,000 to 4,500 mile range of the DC-10.

Price clearly is also a factor. Greg Smith, vice-president of the Colography Group, a Marietta, Georgia-based consulting company, points out that a new B747-400 freighter, which carries the same amount of cargo as a B747-200 but has longer range, can cost as much as $180 million with spares. On the other hand, Shuyler says Atlas pays $35-40 million for each of its aircraft, including purchase, refurbishment and/or freighter conversion.

Industry experts concur with Atlas' estimates of the cost-effectiveness of the B747-200. In a report issued last year, Washington air freight consultant MergeGlobal concluded that the B747-200 is the lowest cost and most profitable aircraft type in the longhaul freighter market, followed by the B747-400, B747-100, MD-11 and DC-10.

Chowdry's strategy also takes advantage of larger forces at play. Atlas has been able to buy aircraft that have become redundant as carriers modernise their longhaul fleets with B777s and A340s. Atlas' most recent purchase of six B747-200s from Thai International Airways, for example, was a result of the Bangkok-based carrier ordering 14 B777s.

Atlas also is taking advantage of a trend toward cost-cutting and outsourcing among the world's carriers, particularly those outside the US. Shuyler says Atlas provides its airline customers with an individually tailored, flexible air cargo product at rates as much as 50 per cent below what it would cost them to produce a comparable service themselves.

'Atlas' costs are 40-50 per cent less than the customer's costs when you aggregate the aircraft, crew, maintenance and insurance,' he says. 'We're buying used planes.' There are also huge crew cost differences; for example, at KLM (which is an Atlas customer) the average 747 pilot earns $250,000 per year, while at Atlas the pilots (who are not unionised) earn between $65,000 and $70,000.

'We only have 25 employees in our corporate headquarters,' he adds. 'Thus we make a far more productive use of our human resources.'

Atlas' continuous growth has enabled it to create economies of scale that have significantly cut its operating costs, according to Shuyler. Unit costs fell 17 per cent last year, with aircraft utilisation climbing from seven hours a day in 1994 to 12 hours last year. Similarly, as its customer base and route network have expanded, Atlas has been able to schedule and utilise its crews more efficiently. In the first quarter of this year, the company needed only 8.5 three-person crews per aircraft, compared to 11.5 in the first quarter of 1995.

In addition, Atlas offers its customers more flexibility to fulfil their air freight needs than they could easily achieve themselves, explains Shuyler. Carriers' contracts with Atlas cannot be cancelled, usually range from one to three years, and stipulate a minimum number of flying hours. But carriers can ask Atlas to fly on whichever route they desire on short notice; the carrier flies on its customers' route authorities, not its own. For example, if KLM were to decide one week that it wanted Atlas to fly from Amsterdam to Singapore instead of to Hong Kong, it would simply ask Atlas to make the switch. If KLM were serving Amsterdam-Hong Kong itself and wanted to fly from Singapore instead, it would have to reschedule its fleet and crews, a lengthy process.

Atlas' relatively inexpensive and flexible service is attractive to carriers that are seeking ways to cut their own operating costs and improve profitability, often through outsourcing.

Graham Bunsell, manager of outsourced capacity for British Airways, says BA opted to go with Atlas and other carriers selling similar services once it realised it could not make money carrying freight on most of its longhaul passenger flights, many of which are now operated by B747-400s.

'Two-thirds of our longhaul capacity is to the United States and Canada, but the majority of cargo markets are in the Far East, South America and South Africa. The US is not our best market for yield and profitability,' he says. Bunsell says 9 per cent of BA's cargo service currently is provided by Atlas and other carriers.

Atlas has 11 customers. Last year, three of them - China Airlines, KLM and Varig - produced 80 per cent of its business. CAL, which in 1995 generated 47 per cent of Atlas' revenues, has four contracts for two years or longer; KLM, which generated 20 per cent of Atlas' revenues, has two comparable contracts; and Varig, which generated 14 per cent of Atlas' revenues, has a one-year contract.

Other customers include Lufthansa, with two contracts of two years or longer; SAS, which has one two-year contract for a joint service with Japan Airlines; Swissair, with a 21-month contract; British Airways, which has a one-year contract; as well as Alitalia, Emirates, and UPS. In mid-June, Thai placed a three-year contract with Atlas worth $256 million.

Chowdry wants Atlas to continue to grow at the pace it has sustained since its startup. The carrier will have 24 aircraft by the end of 1997, the newest equipment being the six B747s purchased from Thai and five B747s it is leasing from Federal Express. Chowdry says Atlas currently owns or leases 10 per cent of the world's high gross weight aircraft: freighters capable of carrying 50 tons or more. He says his objective is to maintain the 10 per cent share of the market as more aircraft become available.

'In the next 15 to 20 years, it will be extraordinarily important to control as many [aircraft] assets as possible,' Shuyler says. 'They will be in huge demand, and there will be a tremendous shortfall of these planes.'

Boeing's Current Market Outlook says that the number of freighters capable of carrying 50 tons or more will grow from 219 last year to 859 aircraft by 2016, when this sector will account for 38 per cent of the world freighter fleet. The manufacturer agrees that most new freighter capacity will be met by converting old passenger aircraft, observing: 'Large numbers of low-priced used airplanes will be available.'

If Atlas succeeds in locking up a large number of these aircraft, it will be able to take advantage of 'the enormous pricing opportunity' that will be created, says Shuyler. 'Freight will move on airlines that control capacity, that have more capacity. They'll be able to profit because of the increased prices they can charge.'

Chowdry is seeking new customers, particularly in the Pacific Rim and Europe, to grow his business. His main targets are the 25 carriers that fly 80 per cent of the world's freight with which Atlas is not already working. In early June, he said he was talking to six carriers, but would only identify Qantas. He and Shuyler also say Atlas is eager to sign up JAL once it has had some experience with the SAS-JAL service, which began in April.

For the moment, Atlas is not a viable option for US airlines because of the crew issue. The US majors' pilot union contracts contain a scope clause that determines the rules and regulations of their pilots' flying. These pilots undoubtedly would find the hiring of Atlas by their employer a not-so-veiled attempt to cut costs and assume some of their responsibilities, and they therefore would almost certainly resist such efforts.

The Far East will be vital to Atlas' - and its competitors' - fortunes. McDonnell Douglas forecasts a 7.3 per cent annual increase in global cargo traffic through the year 2013, while Boeing forecasts 6.7 per cent average annual growth in the freight and express package businesses through 2015. More important, both manufacturers predict that the highest rates of growth will be on routes to Asia or within the region; Boeing expects intra-Asia freight traffic will climb some 9 per cent annually through 2015, followed by North America-Asia traffic (up 8 per cent annually) and Europe-Asia/Australasia traffic (up over 7 per cent annually).

To serve intercontinental, longhaul markets better, Chowdry says he is considering adding the MD-11 to Atlas' fleet. He says a decision will be made on the aircraft, which might 'make some economic sense,' by the end of 1996.

To help implement these growth plans, in late spring Chowdry hired Mickey Foret, Northwest's chief financial officer and one of the architects of that carrier's return to profitability, as Atlas' president. 'I wanted someone who has depth, credibility and knowledge, someone with a background in finance, because one of our targets is to bring the cost of borrowing to a lower level. Mickey certainly brings all of this,' Chowdry said.

Chowdry also is adamant about not switching Atlas' course; he intends to pursue the B747-200 leasing strategy, and insists he would never consider seeking shippers or forwarders as customers, in addition to airlines. 'Atlas doesn't want to compete with its airline customers,' Shuyler says. 'It gives them comfort to enter into a longterm contract with us and know we're not going to try to steal business away from them.'

Not all of Atlas' competitors have adopted this philosophy. Columbus, Ohio-based Southern Air Transport does work with forwarders, though it does not use its three B747-200s for this business.

Gemini Air Cargo, a Washington/Dulles based startup that is currently seeking certification, also is in discussion with forwarders, according to William Stockbridge, president and chief operating officer.

Gemini, which has six DC-10-30s, is considering working with forwarders 'in case the ACMI business is no longer in vogue, or we have trouble getting ACMI customers,' Stockbridge says. However, he also says the forwarders Gemini has approached serve markets that would not compete with the carrier's potential ACMI customer base.

Chowdry is bullish about Atlas' longer term prospects; he believes that as the world's markets 'become increasingly global, air cargo will be a relatively safe bet for the next 10 years or so.'

Brian Clancy, a principal of MergeGlobal, agrees. Clancy, who says Chowdry 'hit a home run with his business model,' believes the greatest risk to Atlas' strategy is the possibility of airlines not renewing their contracts, perhaps due to price-cutting by competitors. 'But in the long run, Atlas will have such a large unit cost advantage, they could win the price competition and still maintain their profit margins,' he says.

The only potential problem seems to be economic downturns. Voicing the concerns of several other observers, Brian Dahl, a project director for the Air Cargo Management Group in Seattle, says: 'After the Gulf war there was a worldwide recession, and the whole freight industry became depressed. We'll have to see how Atlas' strategy will play out in that kind of environment.' At least until then, this company is on a roll.

Source: Airline Business