Cargo operator Atlas Air insists it will swiftly emerge from Chapter 11, but even if it does, can its current business model survive?

When on 30 January Atlas Air Worldwide Holdings filed for Chapter 11 bankruptcy protection, it presented the move as a stepping stone on its path to recovery. The carrier said it had made the move after "obtaining agreements in principle from its major secured creditors and lessors", and continues to predict that it will emerge from Chapter 11 around the middle of the year.

"We are confident we are coming out, and coming out strong," states Atlas. The carrier also says it remains committed to its current strategy, which includes freighter wet-leasing, cargo charters, and scheduled cargo airline Polar Air Cargo. But that is about all it is prepared to say. It will not comment on the prospects in any of those three business areas, on how restructuring is going, or on its performance in 2003 - it has yet to publish 2003 results. "Things are getting better with each court appearance, but we don't want to comment further," says director of corporate communications Alan Caminiti. "We would rather emerge from Chapter 11 and then we can give you a complete story."

What is not in doubt is that the company's problems remain formidable. Its debt is $930 million according to its 2002 accounts, which were finally published in December after a lengthy re-auditing process. In the same month Atlas admitted that revenue for the three and nine months ended 30 September 2003 had fallen "significantly below" projections. Unaudited losses for the third quarter were $19.8 million, and for the first three quarters totalled $81.1 million. For 2002, the loss was $53.8 million.

For most observers the question of how successfully Atlas can recover from that position depends on its future in the wetleasing - or ACMI (aircraft, crew, maintenance and insurance) - market. This was the market in which Atlas rose rapidly to prominence in the 1990s, reaching a revenue peak of $790 million by 2000. Among the bold decisions of its founder, Michael Choudhury, who died in a private plane crash in 2001, was the decision to invest in new Boeing 747-400 freighters at a time when the much cheaper 747-200 freighter conversions ruled the market. Wet-leasing 747 freighters from Atlas quickly became a popular way for airlines around the world to expand their cargo fleets, and the company still remains dominant in that sector.

Changing market

But in the last few years the sector has shrunk dramatically, not just because of the general downturn in aviation, but because some former Atlas customers have taken to buying new 747-400 freighters. By 2002, ACMI accounted for just $358 million of Altas's non-Polar revenues, or 30% of total revenues. Its charter work had grown from virtually nothing in the late 1990s to $376 million in 2002, with the scheduled services of Polar - bought by Atlas in mid-2001 - totalling $348 million.

Though the company has said it will cut its fleet from 51 to 41 aircraft as part of its restructuring, that still leaves 30 747 freighters - excluding the 11 that fly for Polar. This is still too many, say the critics. Ned Laird, managing director of Seattle-based consultants Air Cargo Management Group, reckons that 10 to 15 aircraft would be sufficient on top of 10 for Polar. Atlas's current 50 747Fs represent 20% of all the 747Fs in operation worldwide, he points out.

In response, Atlas acknowledges that the past three years have seen an oversupply of freighters in the ACMI market, but insists that the upturn has now started. "In 2003, we placed more units than for some years, and on longer lease terms - not just a month or two, but 12 months or more," said Scot Dolan, senior vice-president and chief operating officer for Atlas Air, in a presentation to the Air Freight Asia conference in Bangkok in February. "Existing customers are also extending leases, and we have two five-year deals in the pipeline that have not yet been announced," he added.

Dolan predicted that 6-7% annual growth in the air freight market over the next decade would lead to a demand for 12-14 extra widebody freighters a year, or 22 taking into account the retirement of old 747-200F aircraft. But he said carriers were not ordering enough freighters to meet this shortfall and maintain their market position. "Larger carriers will not seek to buy capacity until they see a clear recovery, and that will create a gap in which they will need additional aircraft," he predicted.

One possible drawback, however, could be the arrival on to the market of new capacity from 747-400 passenger-to-freighter conversions. Both Boeing and IAI of Israel launched conversion programmes last year. First deliveries are not due until 2006, but potentially conversions offer carriers a middle way between buying their own 747-400Fs and leasing them.

Dolan acknowledged this in his presentation, saying 747-400 conversions could "change the market dynamic a lot" after 2007, but Bob Dahl, project director for the Air Cargo Management Group is not so sure. "Even when it is up and running the 747-400F programme will only produce 8 to 10 planes a year," he says. "It still won't be a solution for those who need capacity in a hurry. There will still be a place for ACMI."

Even if it gets its market predictions right, however, there is the question of how successfully Atlas will manage to renegotiate its own aircraft leases, most of which were originally agreed in the 1990s when demand was high. Some sources say Atlas is paying as much as 60% above the current market rate for some of its leases, which is putting a strain on the profitability of its ACMI operations.

One thing nearly all commentators agree on is that whatever the prospects for Atlas, ACMI remains a viable and important model for the air cargo industry. "The ACMI business model will remain," says Holger Sindemann, a partner with consultancy Roland Berger. "It allows airlines to enter the freighter market at relatively low cost and risk. The fact that Atlas has stayed in the market since 9/11 shows that airlines are willing to pay a premium in order to avoid risk."

At least one person thinks it would be better if ACMI did not exist at all, however. Jim Friedel, president cargo at Northwest Airlines, the only US major with a freighter fleet, thinks the ACMI model has a bad influence on the air cargo industry. "It adds to the whole boom/bust cycle," he says. "Carriers sign up for capacity, and instead of parking it in a downturn, as they could if it was their own aircraft, they keep flying because they are still committed to the ACMI contract. My preference is for an industry where everyone owns their own capacity and makes pricing decisions based on the bottom line."

As for other areas of the Atlas business, views differ. Critics say that its now substantial charter work has largely been based on flying for the US military in recent conflicts and predict that once Iraq settles down, the business will dry up. Atlas responds that its work for the US government is not dependent solely on flying to Iraq and remains a long term, viable business. "We are doing a lot of military flying and we will continue to do so for the foreseeable future," says Caminiti.

Meanwhile Polar Air Cargo, which Atlas acquired in November 2001, is arguably its biggest success story at the moment. Accounting for 32% of revenues, it has been re-focused and given a new market presence under Atlas ownership. Though it still flies freighters around the world, Polar is now particularly concentrated on transpacific routes. On these it uses its valuable fifth freedom rights between Japan and other Asian countries to exploit the booming intra-Asian cargo market and so balance the notoriously imbalanced transpacific air cargo market, where westbound traffic is scarce.

Questionable wisdom

Should Polar be part of Atlas at all, however? Many still question the wisdom of buying a scheduled operator, saying that Polar competes with Atlas airline customers. Laird, for example, points out that Polar flies into Hong Kong, while Atlas provides freighters to China Southern Airlines out of nearby Guangzhou. He says it is a "ridiculous assumption" that the two companies can work together. But he does declare an interest having been retained by the committee of unsecured creditors of Polar. It is hoping to get the courts to separate Polar from Atlas.

"Polar operates at a small profit, while Atlas has made record losses for the past three years, with no signs that things are getting any better," says Laird. "The message from creditors is that they want their airline back." n


Source: Airline Business