Until 1993, the world of freighter wet-leasing was an obscure one. This relatively minor niche in the air-transport business had few participants, most of them well-established, specialist all-cargo carriers.

In 1993, however, Michael Chowdry, chairman and chief executive of Atlas Air, entered the scene with a "lone flyer" (one Boeing 747 freight carrier) operating a contract "wet-lease" service with China Airlines.

Four years on, Atlas is the world's largest 747 freighter operator with almost 20 aircraft used to operate wet-lease contracts with nearly a dozen carriers. The company went public in 1995 through a successful initial public offering (IPO) which raised $74 million, followed by a second equity offering which added a further $180 million, a debt issue to the tune of $100 million and a recently announced increase to $275 million on a revolving aircraft-acquisition credit fund from a banking syndicate led by Goldman Sachs and Bankers Trust.

Atlas is also profitable, the majority of the cash raised in the IPO and debt issue having been used for the acquisition and conversion of secondhand 747-200 passenger and combi (combination passenger and cargo) airframes.

In 1996, revenues totalled $315.7 million, up by 84% on those of the previous year, with a resulting operating income of $88.1 million (up by 106% from 1995 levels), representing a margin of 28%. Net income for the year totalled $37.8 million, up from $17.8 million in 1995, a 12-month period during which Atlas doubled its fleet and raised total block hours flown from 33,265 to over 59,000.


Core-business philosophy

"We settled on a core business and stuck to it," says Chowdry, who still owns more than 50% of the stock. "We have no wish to become a scheduled cargo airline. We just want to acquire aircraft at the best price and operate them efficiently for our clients, which are all airlines," he continues. Chowdry feels that marketing to the freight-forwarding community is a strength which rests firmly with his customers.

Today, with further finance available for aircraft acquisitions, Chowdry says that he is close to making another landmark decision to order a fleet of new 747-400 freighters.

The Atlas story is made even more remarkable by the fact that Chowdry created Atlas by accident, out of necessity. The seed that spawned Atlas Air was sown, ironically, in the collapse of Pan American Airways, where Chowdry's Aeronautics Leasing had placed a 747-200. In 1992, the world was in the depths of recession, airlines were suffering vast losses and Chowdry found no takers for his aircraft, which had a main-deck side cargo door. "I decided to turn it into a freighter," says Chowdry, explaining that he felt that may have been more marketable - but there were still no takers. Then, on a visit to Taipei, in Taiwan, Chowdry was made aware by China Airlines that it required the capacity of an additional 747 freighter, but was not willing to operate the aircraft itself. Forced by circumstance to create an airline, Chowdry decided that, if his aircraft were to be flown, he had to start a company which becameAtlas.

Soon, a few additional 747 freighters were acquired to support further contracts with China Airlines and Chowdry's first European customer, Dutch carrier KLM. By 1994, Atlas had already acquired the first examples of the High-Gross-Weight General Electric-powered 747-200. He decided to standardise on this younger, more efficient, model, as it could carry more payload over longer sectors, and there were plenty of them on the used market.

Chowdry went on a shopping spree, convinced that cargo-traffic growth required more 747s and that whoever could get to them first would dominate the market. Chowdry was keen on growing his fleet with business in hand. "Where possible, I only acquire an aircraft if there's a contract there for it to operate," he says. He bought four 747-200 combis from Lufthansa, wet-leasing two back after their conversions to freighters for use in the German flag carrier's cargo division.


Conversion upgrades

Atlas has since added three ex-Alitalia 747-200 combis and six 747-200 passenger aircraft from Thai International. During their conversions, each aircraft's maximum-take-off-weight has been upgraded to 377,850kg, allowing the freighters to transport revenue payloads as high as 110,000kg over sectors of as long as 7h duration. Three have been delivered to Atlas, and one is now back with Thai on wet lease.

Atlas contracts typically have schedule reliability, payload and even fuel-consumption guarantees, a notion previously unheard of in wet leasing. A senior KLM executive recalls the first approach from Atlas Air (the carrier now has two 747s on wet lease). "They were hungry for business and they knew they had to do things differently to beat the competition." Chowdry says that Atlas aims to be part of its customers' "cargo-fleet planning for the future".

Where possible, Chowdry likes to buy services back from the lessee. Atlas sealed its relationship with KLM in 1995 by signing a ten-year, ten-aircraft maintenance agreement for C checks, which are performed by KLM at Schiphol. The arrangement is characteristic of Chowdry's belief in outsourcing. "We just fly the aircraft for our customers; we don't want the overhead of a maintenance site or any of the other fixed costs," he says.

Even now, Atlas has a workforce numbering fewer than 500 people, made up mostly of pilots, with flight-operations, dispatch and crew-scheduling staff based in New York and an executive office with fewer than 30 employees in Golden, Colorado. Atlas charges by the block hour, on an "aircraft, crew, maintenance, insurance" basis. Similarly, the maintenance agreement with KLM is on a fixed flight-hour basis.

Chowdry believes that passenger-focused carriers which want to exploit cargo opportunities should not have to invest in owning freighters, or even operating them. "They are typically high-cost operators and, while you can afford crew salaries in the order of hundreds of thousands of dollars per year for captains if you are flying passengers, yields in the cargo business just can't allow for that kind of salary," he says. Atlas captains are paid around $70,000 annually and Chowdry has found other ways to motivate his workforce - crews receive large, profit-related bonuses and, for the most part, are shareholders in the company as well.

Other flight-related expenses, such as fuel, handling, catering, landing fees and en route charges are the wet lessee's responsibility and, here, the latter's buying power is in any case greater. Both parties thus end up in a "win-win scenario".

To minimise risk, Atlas often tries to sign contracts for up to five years. Chowdry leases aircraft either to carriers which have no freighters and are exploiting market opportunities, or to others such as Lufthansa Cargo and Cargolux, which have sizeable freighter fleets and are supplementing their capacities. Should a severe downturn occur in the market, both groups might terminate their contracts, but he is confident that "-our cost is lower than some of these carriers' own operations, so it will be attractive for them to continue with our aircraft."

He believes, however, that the air-cargo market is fundamentally healthy. "Unless people start 'beaming' boxes between Europe and Asia, we will be in business. Even during the worst airline recession [post Gulf War], cargo business still grew at a rate of 3%," he claims.

Two key industry features have influenced Atlas' rate of growth and financial success. First, its fleet was expanded at the right time (1994-5), when the market for 747-200s was flat and acquisitions were more akin to distress sales than normal trading. "An average 747 has cost us about $22 million," says Chowdry. "We then spend an average of another $15 million on the conversion and heavy checks, and we end up with an aircraft that's good for another 20 years as a freighter," he says. This method has saved Atlas around $10 million an aircraft against the purchase of used production 747-200 freighters, which have recently traded at around $45 million.


Flag-carrier customers

The bulk of Atlas customers are flag carriers flying the wet-leased freighters between Asia and Europe - British Airways, China Airlines Emirates, KLM and SAS, for example. This arena is the second fundamental reason for Chowdry's success: Europe/Asia had one of the highest growth rates of any regional pair in the past seven years, averaging 12% annually through to 1995.

The rest of the Atlas fleet, including part of a four-strong contingent with China Airlines, is flown across the Pacific to the USA, while four 747 freighters are operated in another booming market - Latin America - on behalf of Varig of Brazil, Fast Air of Chile and Lineas Aereas Suramericanas. Atlas 747s with Cargolux and Lufthansa Cargo are flown across the Atlantic.

Demand for 747 freighters has seen the fleet double in the past ten years, to nearly 200 units, and Chowdry is aware of the need to protect business by controlling as many assets as possible. "The lack of 747 freighter availability is an effective barrier to entry to potential competitors," he says.

Source: Flight International