Good navigators, whether in cockpits or corner offices, sense when it is time to change course. The navigators for Long Beach-based Polar Air Cargo think that the time is now. But knowing when to change is only part of their challenge; they also must know what to change and what to leave alone. Five years after launching the international all-cargo airline, Polar chief executive Edwin "Ned" Wallace and president Mark West are about to test their navigational skills.

Adversity and success have combined to bring them to this point. Polar's adversity is clear enough - cargo to Asia has dried up. For an airline formed to fill the vacuum left by the sale of Flying Tigers to Federal Express, this is serious. Rates to Asia have plunged below half of where they were a year ago.

Airlines from Japan, South Korea, Taiwan, Hong Kong, and Singapore have added transpacific cargo capacity to compensate for lost passengers. Yet the west-bound cargo pickings are so slim that carriers are scrambling for every pallet.

This hits not only Asia, but other routes too. Japan is importing so little that Japanese carriers are competing for US cargo headed to Australia. "They'll carry it over Japan and then feed it down to Australia on passenger flights," Wallace complains. Resorting to what he calls "predatory pricing", he says Asian companies are trying to find any way they can to put incremental revenue on their aircraft. "We even have competition on Australian cargo from British Airways," Wallace says. "They'll carry cargo from Los Angeles over London all the way to Australia!"

West seems more resigned than Wallace to such tactics. "That happens sometimes when the market's soft. They'll take cargo anywhere they can get it," he says.

The result for Polar has been traffic erosion, yield erosion and the company's first loss after four years of consistent profit.

Privately held Polar will not disclose how much, but Wallace concedes it is more than the $2.5 million mentioned in some reports.

Success beyond expectations has also brought a need for change. When Wallace and West left Flying Tigers, they launched Polar Air Cargo with a business plan that envisioned a fleet of only five aircraft in five years. Today they have 13 Boeing 747-100/200s. "We caught the market when it was going up," West recalls. "No one paid any attention to us until it was too late."

Flying Tigers had served as freight forwarders. FedEx bypassed them with its own integrated approach; it wanted Flying Tigers mostly for its 40-year collection of route rights. That left a ready-made base of freight forwarders looking for an airline. With relationships already cemented from the old days and with visible support from GE Capital, Wallace and West stepped into a vacuum bigger than they expected. Coupled with that, new routes became available. With experienced ex-Tigers lobbyists in Washington, Polar applied for and gained routes faster than they dreamed possible.

Secrets of success

Growth came in two phases. First, Polar set out to duplicate the Asian network that FedEx had bought via Flying Tigers for $1 billion. Polar still does not match FedEx in Asia, but it comes close. Second, Wallace and West saw the need for geographic diversity. They looked beyond Asia, sought and gained routes to Europe, Latin America, and most recently, Africa. With a flexibility that flows from leasing aircraft and outsourcing most ground work, Polar added routes at a fraction of the startup costs for a passenger airline and with breathtaking speed.

"For our first two years, we basically added a country a month," Wallace recalls. Only now has that expansion stopped. Polar still has an application pending for rights to Colombia, but otherwise completed its Latin network in August when it added Peru. It operates a loop south from Miami through Brazil to Argentina and Chile, then back north through Lima and Caracas. Elsewhere, the final big additions were due at the end of October, when Polar was scheduled to launch its much-coveted service to Tokyo's Narita. Three weekly flights will follow its circle-Pacific pattern from Australia through Manila to Tokyo and back to the USA. It will also operate a Tokyo turnaround flight from the USA.

"We didn't have any expectation that we'd be able to operate at Narita for years," says Wallace. "We were the new kid on the block, so we're delighted." But Polar paid a price for this delight. Starting early last year, it operated a weekly service through Osaka Kansai, an under-performing freight route. "Narita accounts for 70-80% of the traffic out of Japan," says Wallace.

Moreover, Polar's Kansai launch coincided with the start of Asia's collapse. It added a truck feeder service from Tokyo, but Kansai still caused what Wallace calls "some frightful losses". Nonetheless, he thinks it was the right decision. "We felt we had to operate that Kansai service to have any credibility with the US Department of Transport. Those losses were not a surprise to us. That was really an investment for the future."

Africa is Polar's last big addition. This route has also been in development for several years. After crossing the Atlantic, Polar will circle south from its Amsterdam hub in Europe through Jiddah and Nairobi to Johannesburg, and then back through Harare, Nairobi and Jiddah to Europe and New York. Polar will have fifth freedoms on all sectors.

Predicting traffic volumes

"We expect about 30% of the volume to Africa will come out of the USA; about 70% out of Europe," Wallace says. "We're now signing contracts for the northbound space with major produce shippers out of Johannesburg and Harare. Based on market forecasts, we're optimistic."

Where else would Polar hope to go? Malaysia and Thailand are candidates after Asia recovers, but China is the only big hole Wallace and West see in their global network. US-China negotiators are destined for a second round of bilateral talks next year. If Washington is able to negotiate new rights, Wallace thinks that Polar is a "prime candidate". He hopes to have some China authority by the "end of 1999". China aside, however, he declares: "We basically have our global network put together."

Thus Polar enters the brave new phase of consolidating the results of its whirlwind growth and simultaneously finding its way back to profit. That is more complicated than it sounds. Polar's lack of profit did not owe to its fast growth, but to Asia, so navigators Wallace and West face two separate challenges.

To make matters worse, those challenges are somewhat contradictory. On the one hand, Wallace says: "Now it's a matter of expanding our existing markets by building service and frequencies." He sees a favourable trend by freight forwarders preferring all-cargo carriers over combination carriers because the latter tend to bump cargo at the last minute whenever they can put on more passengers. So there are reasons to build frequencies on existing routes, but Wallace also thinks Polar should suspend its fleet growth.

"Until this year, our plan was to add about three aircraft a year. We felt we could absorb that with the growth we have and our expansion into various markets. But given the economy now in Asia, we frankly don't see adding any aircraft for probably another year," he says.

This is not because markets outside Asia are stagnant. Latin-US air cargo, for example, shows double-digit growth. But Polar is already flying most frequencies that is has been awarded in every region except Asia. So why add fleet without rights?

That may sound like a reason for going slow, but rights evolve constantly. At any given time, Polar has applications pending for more frequencies in up to five places around the globe. Why not exploit the caution of others and build market presence during Asia's slowdown?

"That sounds to me like a risky way to do business," says Bob Dahl, project director for Air Cargo Management Group, Seattle-based consultants. "It's only natural that Polar would slow its growth, given today's uncertain conditions. They have already shifted capacity away from Asia to more promising markets such as Latin America. FedEx is doing the same thing - despite phenomenal growth, they've decided to freeze international expansion."

Polar may have frozen growth, but it is still considering partnerships as a way to add lift.

"We're talking to several people now about forming some type of alliance," says Wallace. "We haven't been in a position up until now where we could leverage our position. But now we have a route system that we think will have some real appeal."

Polar is exploring alliances with several combination carriers to which Wallace prefers not to put a name. Combination carriers offer frequency. "If you're operating only three times a week, somebody else can carry freight for you the other days," he says.

Polar now has four weekly flights to South America, six to Europe, four to the Middle East and India, four to Australia, four direct flights to Asia and four via Australia. It will start Africa with two. On different week days these flights serve different cities. As markets change, schedules change with them.

The right alliance or group of alliances may forestall fleet expansion, but only temporarily. Wallace knows that and is already looking beyond next year when Polar may start building again.

Beyond the Asia crisis

"Given the situation in Asia, there's going to be additional 747-200s coming onto the market - passenger aircraft that we can convert at a reasonable price," Wallace says. "Until last year you still faced $45-50 million for a 200-series aircraft. Realistically, they're going to be down in the mid-thirties here in another year."

Buying aircraft represents a change in Polar's philosophy. In its current fleet of 10 747-100s and three 747-200s, it owns only one. That was a 747-200 purchased as part of its corporate restructuring with GE last year. Polar leases eight jumbo freighters from GE, two from Arkia Israeli Airlines, and two from other lessors. Wallace does not suggest Polar will abandon leasing in favour of purchase, but he does foresee more of a mix.

Inevitably that leads into finance, capitalisation, and ownership. Several factors converge here. Besides a shift in fleet policy and a need to finance more aircraft, Polar itself is in for some ownership changes. GE wants to reduce its stake. Until last year GE, or its subsidiary Polaris Aircraft Leasing, was simply a limited partner. Wallace and West were general partners. Then the three of them agreed to convert Polar into a corporation. GE took 49%. Wallace and West held the rest.

Wallace and West do not plan to buy whatever shares GE sells. Instead, they envisage "a multi-step process" in which GE privately places some of its shares with another investor, and that party, probably together with Wallace and West, injects more capital. While negotiations are under way, no one wants to discuss specifics, but Wallace and West confirm that they intend no dilution of their majority stake, and have no public offering plans.

In summary, Polar's new course is marked by an end to rapid network growth, plans for more capacity on some routes, but a delay in implementing it. That is mostly caused by Asia's slowdown. Meanwhile, Polar may use alliances to add frequencies. When it resumes fleet growth it will still lease, but will look for deals to buy more aircraft. The company needs to improve its capitalisation in conjunction with GE's sale of some shares.

Other things will not change. Polar will continue to be predominantly an international carrier - 99.7% of its freight is non-US. It will focus on scheduled service, now 80% of operations, and will keep serving freight forwarders. Integrators such as FedEx and UPS are aggressive and growing, but Wallace predicts: "It will be a long time before they displace the freight forwarder, who is our customer."

Polar will continue to outsource most ground operations. It outsources all warehouse and ramp work, and recently hired Unisys to look after its information technology. Third parties handle all its heavy maintenance. Polar has no maintenance facility of its own. Aside from 170 pilots, most of Polar's 580 employees manage terminals, supervise maintenance, or handle customer service.

No change is planned in Polar's hub system. Anchorage is its biggest, handling 15 flights a week. It will grow even more when Asian traffic warrants re-opening Polar's Europe-Alaska-Asia routes. Amsterdam is the only hub in doubt, because of night restrictions at Schiphol. Polar is looking at Ostend or Liege in Belgium as alternatives.

Polar's biggest non-change is to keep Asia-Pacific as its top market. Asia and Australia were number one for Flying Tigers, and accounted for all of Polar's revenue when it started. Today the Asia-Pacific is down to about 40%, but Polar sees that as temporary.

"Once we get through the recession in Asia, we expect it to bounce back," predicts Wallace. Reciting what sounds like an article of faith, he adds: "Long term, Asia's still our bread and butter market."

Now may be a time for change, but Polar's navigators also have a sense of what needs to stay the same.

Source: Airline Business