Already the world's leading passenger wetlease operator, Air Atlanta is moving into cargo
Air Atlanta Icelandic may not be the industry's best-known brand, but it is certainly becoming more visible to residents of its home base in Reykjavik. The blue logo of Iceland's tenth largest company now shines out from the top of an office building on the outskirts of the city. It may only occupy the top three floors, but the logo is a visible sign of how Air Atlanta is going up in the world.
Before moving its 150 headquarters staff to the new building in October, it operated from much more modest premises in the village near Iceland's capital, where it was founded in 1986 by Capt Arngriumur Johannsson and his wife Thora Gudmundsdottir.
Since then, Air Altanta has grown into the world's largest wetlease operation for passenger services. And it is now making substantial inroads into the cargo market. The fleet includes 17 Boeing 747s (two -200s, two -300s and seven -200 freighters), as well as seven Boeing 767s and four Boeing 757-200s. The fleet is set for rapid growth, in particular for the freighter segment, with Air Altanta chief executive Hafthor Hafsteinsson predicting that the number of cargo aircraft will rise to 11 in 2004 and 15 in 2005.
Yet despite its growing fleet, to the passenger Air Altanta is often invisible. It operates on a strict ACMI (aircraft, crew, maintenance andinsurance) basis, with aircraft usually painted in the client's colours and with their own cabin staff.
Key markets on the passenger side include flights to Saudi Arabia for the hadj pilgrimage - a business that Air Altanta has been in since 1988 - and flying holiday routes for northern European carriers and tour operators, particularly in the UK. Typical destinations include London Gatwick or Manchester to Spain, Greece or Cyprus, as well as to the Caribbean and Egypt.
Sitting within the European common aviation area, if not the European Union (EU), Air Atlanta can fly many of these routes in its own right, but has in the past faced restrictions to non-EU destinations. To counter this, in June 2003 it set up Air Atlanta Europe, a UK subsidiary 60% owned by UK nationals and with its own air operators certificate (AOC). The new carrier has taken control of three of the 767s. "This will enable us to expand services to tour operators who do not have their own AOC," Hafsteinsson says.
Less prominent, but perhaps more sensitive, are the niches that Air Atlanta fills on scheduled services. In South America, it has gained a foothold in countries which lack the FAA's category-one safety status needed before their own carriers may serve the USA. Examples include 767 services on behalf of Southern Winds out of Buenos Aires and for Guyana's Universal Airlines to New York.
Another, newer market is taking over aircraft that are approaching retirement, and flying them for the original owner. An interesting relationship here is with Virgin Atlantic Airways. Air Atlanta not only launched its new route to Lagos, but also leases two of the carrier's 747-200s and then wetleases them back to Virgin Holidays for the Manchester-Orlando route. "The advantage for Virgin is that they can retire the classics, retire the maintenance programme, and so save costs," says Hafsteinsson. "The planes go on our AOC, but Virgin still has the asset and can still generate revenue by leasing it to us."
It is the same basic opportunity that Air Atlanta sees in the cargo business, where it is already operating four 747-200 freighters for Malaysia Airlines and various shorter-term contracts for other carriers. It is also about to purchase three 747-200Fs from Lufthansa Cargo, which it will lease back to the German carrier on a three-year flexible charter contract from July.
The latter deal in particular garnered attention in the air cargo industry, because it was part of the retirement by Lufthansa of its entire remaining 747-200 freighter fleet of eight aircraft. "In my view, this is a concept we will see more and more," comments Hafsteinsson. "If you look at the major airlines, they are phasing out the -200s from their fleet. So it makes sense for them to retire the -200Fs and lease them back from us."
Critics might ask how why Air Atlanta can operate the aircraft profitably when mainline carriers cannot? Hafsteinsson's answer is threefold. First, with 15 747-200s in its fleet, it has the critical mass to make maintaining them economic. Second, he stresses, Air Atlanta is not operating aircraft with the older, less economic, Pratt &Whitney JT9D "vintage" engine.
Third, he sees a very specific window of opportunity for operating the freighters. "Converted 747-400s are coming on to the market, but the first will not be until 2005, and the book values of most conversion candidates won't be right until 2007 or 2008," he says. "So for four or five years the -200s and -300s will be strong in the market, and that is long enough for us to make a return on our investment."
One thing he is sure of is that cargo is where the real growth opportunity lies at present. While the recent crisis has raised awareness of the need for more operational flexibility among mainstream passenger carriers, he admits that it remains something of a niche. Pilot unions also tend to be a limiting factor in extending wetleasing into such operations. "We can only provide services if the unions agree, and that tends to be only so long as permanent staff could not fly the route," Hafsteinsson says.
By contrast, ACMI is an established practice in cargo, with most major European and Asian freighter operators wetleasing 747 freighters. There is another advantage of cargo. "Its peak period is in October, November and December, which is a slack period in our passenger business," he says.
For all these benefits, there is a terrible warning of what can go wrong in cargo ACMI in the shape of Atlas Air Cargo, however, which had a booming business wetleasing 747-400 freighters in the late 1990s, but came rapidly unstuck in the downturn of the past few years. Hafsteinsson declines to comment directly on his US rival, but does point out that there are several differences.
One is that while Atlas owned its freighters, Air Altanta generally operates aircraft owned by others. It owns eight passenger 747-200s, plus the three freighters it will buy from Lufthansa, but apart from that its aircraft are all owned by lessors such as GECAS, Sumitomo, ILFC and GATX. "The goal is obviously to match the lease period for the aircraft with the contract length so we don't have planes sitting idle," Hafsteinsson says. "We bought the 747-200s only because their residual values made purchase more sensible than leasing."
Also, in contrast to Atlas, Air Atlanta has no plans to buy new aircraft. Hafsteinsson expects to add some more 757s and 767s on the passenger side, and does not rule out 747-400 freighter conversions in the longer term. But he insists: "We will always be offering secondhand capacity. Otherwise we won't be cost effective."
One interesting effect of its growing freighter business could be that it will give Air Atlanta an introduction to many of the leading Asian carriers - where it currently has little presence on the passenger side. Already, Hafsteinsson admits, it has approached Malaysia Airlines to discuss passenger wetleasing. "Cargo gives you a foot in the door, and means you get to know the right people, so yes, it is definitely a help," he says.
He also reveals that Air Atlanta has just won a new batch of traffic rights into China. "We are always trying to get into new markets. Russia is another. It's not always easy, but we take one step at a time," he says. "One advantage of being based in a smaller country is that when you seek rights, you're less of a threat."
But despite its island base, Air Atlanta is highly international, with aircraft and crews based at 19 airports around the world, and employees spanning some 40 nationalities. "Many of our pilots prefer to fly six months of the year, and take the rest off, so it works well," Hafsteinsson says. "It is flexible for both us and them." That could be a motto for the whole business.
REPORT BY PETER CONWAY IN REYKJAVIK
Source: Airline Business