BRENDAN SOBIE / WASHINGTON DC
The wet-lease cargo sector has collapsed in the worst market conditions for a decade. What are the prospects for recovery?
Although its recent financial struggles and corresponding business moves have been more public than those of its rivals, Atlas Air is not the only cargo carrier these days scurrying to offset a rapidly shrinking wet-lease customer base. The worst market conditions in at least a decade have set off a wave of cuts and consolidation among a group of around 20 mostly little-known jet operators. Freighters ranging in size from Boeing 727s to 747s have been parked, expansion plans have been shelved, and many companies are seeking joint ventures or new investors.
Faced with an overcrowded playing field and, in some cases, the threat of liquidation, many wet-lease cargo carriers are now a fraction of their former size. Some have left the wet-lease business for smaller niches, and a few are under new ownership. "There is a consolidation of customers and players in the business," says Tradewinds Airlines chief executive Jeff Conry. "This is a humble man's game."
Shrinking market
He adds that US wet-lease carriers are vying to win business from half as many customers as a few years ago. To make matters worse, those that remain have drastically cut their reliance on wet-leased freighters. "The exclusive ACMI [aircraft, crew, maintenance and insurance contract] in many parts of the world is dead, and in other parts of the world is dying," says Gemini Air Cargo vice president of customer service Bob Wilson. "The industry is changing and you have to do something."
The three companies moving the largest volumes of heavy air freight within North America - BAX Global, CNF and Eagle Global Logistics (EGL) - have halved their fleets in the last two years. Once the largest wet-lease customer, the US Postal Service (USPS) in North America, has closed its three freighter networks, which relied on a wet-leased fleet of around 50 aircraft.
Tradewinds, which still counts CNF and EGL as its primary customers, responded to fast-changing market conditions by selling out to the Coreolis Group in December. Coreolis was formed by four US investment firms last year as a holding company for 727 wet-lease operator Express One International Airlines, which Coreolis acquired in 2000, as well as for possible future airline investments. It is trying to acquire Kitty Hawk Airlines, a bankrupt cargo-carrier which closed its wet-lease business at the end of last year after losing contracts from BAX, EGL and USPS - although it continues to operate 15 727s on its own network.
The addition of Kitty Hawk would expand Coreolis into the scheduled business, just as Atlas did with its purchase last year of Polar Air Cargo. By combining Express One and Tradewinds, Coreolis also expanded into a wider range of aircraft, a move Atlas is expected to copy in time by adding smaller aircraft to complement its all-747 fleet.
Industry officials expect these initiatives to be followed by other carriers, creating a much smaller playing field. "There will be three or four major players, and those players will operate aircraft across the spectrum," says Gary Kincaid, vice president of sales and marketing at freighter lessor C-S Aviation. Jerry Trimarco, vice president of transportation for CNF logistics subsidiary Menlo Worldwide, also predicts a mass failure of US wet-lease carriers. "Right now I don't think there is enough business to support them all. I don't think they'll all be here at the end of the year," he says.
Several US cargo carriers are looking at acquiring bankrupt Fine Air, a McDonnell Douglas DC-8 and Lockheed L-1011 operator offering a mix of wet-lease and scheduled services with a focus on Latin America. Fine itself acquired former competitor Arrow Air in 1999. Bidders for Fine include Caribbean specialist Amerijet International, which left both the wet-lease business and bankruptcy protection only last year, and South American carriers Staf Airlines and Cielos del Peru. "The way this industry is going, you're better off with a bigger strategy than being a little player," says Tradewinds' Conry.
Shake-out
Capital Cargo International Airlines chief executive Peter Fox says: "I think if you dig down deep, the industry doesn't have long-term contracts. So the shake-out probably hasn't ended."
Amerijet and Kitty Hawk blamed the depressed 727 wet-lease market for their bankruptcies. Supply, however, continues to outstrip demand, even with their departure from the wet-lease field. Express One, for example, has parked nearly its entire fleet of around 20 727s after losing contracts with all its long-term wet-lease customers: CNF, EGL and USPS. The carrier is operating ad hoc charters with two 727s while it looks for business. "We've significantly reduced our flying because there is less business," says Express One's executive vice president of sales and marketing Charlie Carson.
Ryan International Airlines, which provides CMI, has also significantly reduced its 727F operation. The carrier is operating 15 aircraft for CNF, compared with 30 a year ago. The weak market conditions have also scared another wet-lease carrier, Miami Air, into shelving its 727F expansion plans. The carrier had planned to convert its four remaining 727 passenger aircraft into freighters and acquire up to another six more 727Fs. "Both markets are not as good as last year, but the passenger market is much stronger," says vice president of cargo John Passwater. Miami Air's four 727s are wet-leased to EGL, which owns a stake in the carrier.
Tiny Custom Air Transport also continues to operate two 727Fs, but its flights are mostly arranged through sister company Charter America. Express.net Airlines operates four 727s alongside eight Airbus A300s. But its A300s have proven more popular, and are on long-term wet leases to CNF, while its 727s have been limited to charters. The carrier is exploring expansion opportunities, but not through acquisition. "I don't think we need to expand by adding anyone," says Express.net co-owner Michael Goldberg. "We can expand just as we have done. There is no reason why we can't expand internally."
Internal growth
Capital Cargo's Fox has similar thoughts: "It's easier to grow incrementally and smartly," he says. The carrier began expanding again late last year, adding two 727s after winning a nine-aircraft contract from BAX Global. But its 12-aircraft fleet is still smaller than the 15 727s it operated last spring.
Kalitta Air is also expanding by adding 727s - but not by choice. Its sister company, Kalitta Leasing, has been unable to dry-lease the three 727s it purchased and converted in 1999. As a result, Kalitta Air decided to begin operating two of the 727s last December and will add a third in April. All of Kalitta's aircraft, including its four 747s, are limited to charters. "We'll do what we can with ad hoc," says general manager Peter Sanderlin. "Right now there are no long-term contracts out there."
Kalitta is not the only 747F operator having increasing difficulties finding wet-lease customers. Atlas, which until last year prided itself on only entering into long-term full-aircraft contracts, is the prime example of how the market has been turned upside down. The carrier has six 747s parked in the desert. Of the 30 747s Atlas is still operating, five are in its new fractional wet-lease programme, which was launched last year to try to offset the decline in demand for full wet-leases.
Atlas is slashing its 747 fleet at its Polar subsidiary by over 50%. Atlas's chief financial officer Doug Carty says that by mid-year Polar will only operate five or six 747s, primarily flying transpacific scheduled flights and military charters. Carty says: "It is clear we have excess aircraft," and adds that Atlas is also counting more than ever on ad hoc flights, especially for the US military, to keep its aircraft flying.
Evergreen International Airlines has also been relying on military charters to keep its nine 747s busy. The carrier has always counted the military as one of its biggest customers, but this winter it cut its transpacific scheduled operation to the bone owing to weak demand, and re-assigned some 747s to charters. The latest reincarnation of Southern Air is also competing against Atlas and Evergreen for ad hoc 747 charters. Southern flies three 747s, primarily between Miami and South America.
Supply is also clearly outstripping demand for wet-leased McDonnell Douglas DC-10s. Gemini Air Cargo parked four of its 12 DC-10s in early January, although it quickly re-activated three of the aircraft to accommodate an increase in charter demand. New-start Centurion Air Cargo has also failed to find long-term customers for its three DC-10s, and has been forced to limit itself to occasional charters.
World Airways is in the same position, with its four DC-10s, having last year lost wet-lease contracts with CNF and Colombia's Pan Airlines. Despite the weak market, Gemini's Wilson believes industry consolidation will be limited to operators of smaller freighters. "We're not thinking about consolidation since we're not a target, and we're not considering acquiring anybody," he says.
The decline in demand for wet-leased widebodies is a global phenomenon, its origins going back long before 11 September. Some carriers have blamed the floundering world economy, as well as the decision by various national carriers to replace outsourced capacity with in-house aircraft. In North America, the rapid decline in wet-lease demand can similarly be traced to the economy - and also to the shift from air to road as the preferred mode of transport for many domestic shippers. In response, BAX Global, CNF and EGL have replaced aircraft with ground vehicles.
BAX is only flying 18 aircraft in its overnight network, including around 10 DC-8s operated by sister company Air Transport International (ATI). "We're flying half the aircraft we used to fly and still have available capacity on them," says Michael Dan, chief executive of BAX and ATI parent Pittston. ATI, which removed 10 DC-8s at the end of 2000, now operates 13 DC-8 freighters and five combis. The less BAX flies, the more ATI has to rely on wet-lease business, now reliant primarily on the US military, and for which it must compete with fellow DC-8 operators ABX Air, Fine Air and Florida West International Airlines.
CNF's fleet, meanwhile, has been slashed from 97 to 29 aircraft since the end of 2000. The aircraft, around 30 of which were operated for USPS, included freighters operated by defunct CNF subsidiary Emery Worldwide Airlines, as well as a handful of wet-lease operators. CNF lost its USPS business last year and is now entirely dependent on wet-leased aircraft, with Ryan operating 15 Emery-owned 727s, while most of the other aircraft are A300s operated by Canada's International Cargo Charters (ICC), ICC's Mexican affiliate AeroUnion, Express.net and Tradewinds.
Consolidation
"If Emery hadn't happened, a lot of them would have been weeded out by now," says Miami Air's Passwater. But CNF was one of the biggest wet-lessees even before its airline closed. Back in CNF's heyday, Ryan flew 31 727s and Express One flew another nine for the company.
ICC and Express.net have also flown A300s in CNF's overnight network since 1998 and 2000, respectively. CNF planned to eliminate all wet-leased aircraft from its network to offset the loss of USPS business, but these plans were reversed when its airline was grounded by the US Federal Aviation Administration and then voluntarily shut down. USPS is moving nearly all its express mail on FedEx, one of four US express package carriers with its own airline. EGL has similarly replaced seven Boeing 727s wet-leased from Express One Airlines with capacity on DHL Airways.
Airborne, FedEx, DHL and United Parcel Service have not used wet-lease carriers in the past except in December to supplement their own capacity. Until the EGL and USPS deals, they only dealt in small packages, leaving heavy freight and mail to the wet-lease carriers. "The postal decision with FedEx has changed the world for a lot of us," Tradewinds' Conry says.
His company is not the only carrier looking to combine with another. Florida West and ICC have discussed a possible joint venture, and Sanderlin says Kalitta "would look at joint ventures to get better utilisation". But he is also hopeful the market will rebound like it did in the 1980s, the last time supply outstripped demand as badly. "Like any market, it has its ups and downs," Sanderlin says. "It will come back - but to what extent is unknown."
Source: Flight International
