Sitting in a well-appointed office in the foothills of the Rocky Mountains west of Denver, Michael A Chowdry has reason to be pleased. His brainchild, Atlas Air, has carved out an enviable niche for itself. Less than eight years after starting operations, Atlas has become the world's third largest cargo airline. Today it operates the largest fleet of Boeing 747 freighters, with more to come. Its aircraft carry more freight than any other fleet besides Federal Express and United Parcel Service. And the company's financial results speak for themselves, with impressive levels of profitability even during recession. Chowdry, the Pakistani entrepreneur whose dream has turned out so well, attributes much of the company's success to a business model almost uniquely insulated from the risks of the airline business cycle.
Atlas provides additional capacity to mainline carriers to meet their cargo lift needs, making available to them dedicated aircraft, crews, maintenance and insurance (ACMI) on long-term contract. For its part, the customer airline incurs all other operating costs, such as charges, handling and logistics, as well as the risks. "These are the elements that are difficult in this business," Chowdry says, using the example of load factor. "If the load factor drops, your profitability goes down because you have fixed costs. We don't take load factor risks," he says. If another carrier starts undercutting prices on a route, Atlas is not exposed to the yield risk. "We get paid whether our planes are full or half empty." Atlas is also unconcerned about the currency fluctuations that would normally affect an international carrier of its size - it operates flights to 101 cities in 46 countries. "We don't take any currency risks. All our costs are in US dollars and so is our revenue."
When Chowdry started Atlas in the aftermath of the Gulf War, he had already been in the aviation business for more than 15 years and had seen the "mistakes" made by others in the airline industry. "The idea wasto try to create a formal business structure where we can avoid as many known risks as there are in this business, and only sell the services that really add value," he says.
Atlas started flying in April, 1993, with a single 747-200 dedicated to Taiwan's China Airlines. Incidentally, now the same carrier uses four Atlas aircraft and at one time Atlas accounted for almost 26% of its flying. Since those early days, the list of Atlas customers has continued to grow and now numbers more than a dozen. That includes flag-carriers from Europe, Latin America and the Middle East, such as Air France, Alitalia, British Airways, Emirates and LanChile. Key customers from the Asia-Pacific region represent a growing percentage of business, and currently include Korean Air, Malaysia Airlines and Dragonair. Mainland China's top three carriers - China Southern, China Eastern, and Air China - were all added to the customers list last year.
In search of added value
While they shield Atlas from risk, the ACMI contracts are equally attractive to customers because they "add value", says Chowdry. Atlas has been able to maintain a low-cost operating structure and can offer an international airline a dedicated aircraft to provide the additional cargo lift it needs at rates 30%, or even more, below their own costs. Under a typical deal, an airline will contract services for three to five years, guaranteeing minimum monthly utilisation levels at fixed hourly rates. In the process, this helps to provide Atlas with a highly stable revenue stream. Atlas tends to operate up to four aircraft for each customer, and many use the aircraft above the minimum guarantees. Depending on the model of 747 in question (Atlas now has a dozen of the mighty 747-400F and four on order), the company generally aims for utilisation of between 10 and 14 hours a day.
Contracts generally allow customers to cancel up to 5% of the guaranteed hours of aircraft utilisation over the course of a year, but Chowdry says the level cancelled is more like 3%. The reduced flying usually takes place in the first quarter of the year - following the seasonal holiday peak in December - when demand for air cargo capacity historically is lower. The long-term ACMI contracts provide Atlas with about 97% of its revenues, with the remaining coming from seasonal flying and ad hoc charter service contracts picked up when it has uncommitted capacity.
As a contract carrier, Atlas rarely appears in the limelight. For example, it would not surface in the Airline Business ranking of cargo airlines - the freight that it carries is rather included in the totals for its customers. Yet Atlas is a major player, sitting third in the world behind FedEx and UPS in terms of cargo tonnes. Atlas officials are careful to note, however, that while the US parcel giants primarily carry smaller packages - averaging 3.6kg (8lb) - the average Atlas shipment is 4.5t.
The company's structure and operating plan has clearly paid off in terms of financial results. Despite soaring growth rates, which saw revenues climb by over 50% again in 1999, Atlas has managed to maintain one of the airline industry's highest profit margins. Operating margins have hovered around the25-30% level for the past few years, while net profit margins have never been too far from double digits (see table below).
Although full results are not yet out for 2000, Chowdry is confident that financial and operating performance will show another steady improvement. In the third quarter, revenues and operating profits were both up 29%, keeping margins steady. Helped by the fact that it is insulated from fuel costs, total unit costs for Atlas actually fell by 3%, thanks to debt reduction and cost efficiency programmes.
Total block hours (the best measure of how much flying Atlas is carrying out for customers) were also up by 27% in the September quarter. At the same time the fleet had grown only by 10%, resulting in a 15% rise in average aircraft utilisation.
Fleet expansion
The Atlas fleet of 747 freighters had grown to 37 by the end of last year, including 22 of the older747-200Fs, three 747-300s acquired and converted to cargo use, and 12 new 747-400F freighters. Of these, the carrier owns 26 and leases the remaining 11. Atlas has also exercised options for four new 747-400s to be delivered next year, a $750 million deal which Boeing heralded as making Atlas the largest freighter operator in the world. The airline is also in the market for more 747-200s, while Chowdry says that Atlas is now weighing the possibility of adding two other classes of aircraft to its otherwise standardised fleet.
The first decision will involve a smaller aircraft - either the Airbus A300-600R or Boeing 767 - which could serve feeder routes in Europe, the Middle East, Far East and even possibly some US domestic markets. A decision on whether and what to acquire could be made by the end of the first quarter.
Atlas also is analysing the Airbus A3XX and Boeing 747X offerings, and could make a decision sometime next year: "We believe that in order for us to maintain our leadership position, we've got to have the most efficient aircraft," Chowdry explains. If it decides to acquire the smaller or larger freighters, he says Atlas will commit to substantial numbers: "You can't just add three or four - it's too expensive."
Chowdry, who is still only 46, first fell in love with aviation as a small boy. Born and raised in Pakistan, he remembers sleeping in the open during very hot weather as a child. Every night, he would watch a Douglas DC-3 fly overhead, listening to its engine and dreaming about being in the airplane instead of on the ground. "I have a very clear memory of it," he says, admitting that "it was not quite clear in my mind how to get there."
The DC-3 has always had a special meaning for Chowdry, who now owns one of the venerable aircraft, along with a Czech L-39 Albatross fighter, both of which he keeps at a secondary airport in Denver. A pilot since his early twenties, he keeps current so that he can fly the DC-3 and the fighter, as well as a Boeing Business Jet which the company acquired as a corporate aircraft. "A lot of people like playing golf," he says. "For me, it's very relaxing to be in the cockpit, flying…."
| Atlas Air financial/operating performances - five year record | ||||||
| 1999 | 1998 | 1997 | 1996 | 1995 | ||
| Revenues | $ million growth | 637.1 50.9% | 422.2 5.3% | 401.0 27.0% | 315.7 84.3% | 171.3 66.3% |
| Operating result | $ million Margin | 187.5 29.4% | 135.8 32.2% | 56.0 14.0% | 88.1 27.9% | 42.7 24.9% |
| Net result | $ million Margin | 53.3 8.4% | 46.2 10.9% | 23.4 5.8% | 37.8 12.0% | 17.8 10.4% |
| Block hours | Thousand growth | 109.6 43.7% | 76.3 1.4% | 75.254 26.6% | 59.445 78.7% | 33.265 74.6% |
| Fleet | units | 31 | 27 | 17 | 17 | 10 |
Journey to America
Chowdry's biography is literally one of those story-book tales of an immigrant coming to America as a young man, working hard to make his dreams come true and leveraging knowledge learned and capital earned from one venture into the next opportunity.
"I was fortunate that I was able to get in a business where you could actually enjoy what you do and also make money with it," Chowdry says. He has made the most of the opportunity. Last year, he was 309th in the Forbes list of the "400 Richest" in the USA. With a net worth of $920 million, Chowdry is one of just a few in aviation ever to make the list.
Chowdry's eventual journey to the USA started when family circumstances caused his mother to send him to London, alone, when he was a 15-year-old. He initially stayed in a hostel in Belgravia, went to school and drove a cab - wearing a cap pulled down low, growing a moustache and smoking cigarettes to look older than he was, he says. In 1976, he made his way to America, once again on his own, attending college in Minnesota and learning to fly.
"I always wanted to be in the aviation business, and aviation opportunities in the UK were very limited," he explains. He started his career in aviation, flying crop dusters in the upper Midwest where he could make a year's wages in three or four months, he says, because of the hazardous nature of the work. In the next 10 years, he sold Piper aircraft; was involved in fixed-base operations; started Airlink, a commuter airline in Colorado, eventually selling its valuable take-off and landing slots to United Airlines; and acquired a fleet of Boeing 727s from Frontier Horizons, using them for domestic feed operation for Flying Tigers International - his first ACMI venture. When he was 30, he started Aeronautics Leasing Inc., a company which leased passenger aircraft to airlines around the world.
When he acquired the 727s, he sought for a time to enter the passenger airline business. "I had this dream of starting a low-cost operation like Southwest out of Fulton County Airport, Atlanta's secondary airport," Chowdry says. "I wasted a lot of time and money, and underestimated Delta's political power there."
The idea behind Atlas came to Chowdry during the downturn after the Persian Gulf War in the early 1990s, when he realised that there were many new passenger planes coming off assembly lines and being parked in the desert, but there were no large cargo aircraft sitting around. Even in the downturn, he says, they were used by the military to transport troops or to haul cargo.
Besides his twin goals of "adding value" and minimising aviation's known risks, Chowdry wanted to operate in a realm where there would be "less competition" and to ensure there would be a big differential between his and the customer's costs. Although many questioned the wisdom of starting a new carrier during a business downturn, Chowdry's strategy paid off. Because of the ready supply of available passenger aircraft, Atlas was able to acquire its first 747-200s at relatively low capital costs and convert them for cargo.
The start-up was also able to buy quality maintenance services in the marketplace at low rates, in some cases lower than the providers' costs because they wanted incremental revenues and to keep their shops open. With a new, low-seniority workforce, Atlas was able to provide dedicated cargo lift capability, including flight crews, at prices significantly lower than an established, high-cost carrier would have incurred if it added to its own fleet: "In every single aspect of our services, we created a differential in the pricing between our costs and our customers' costs," Chowdry says.
The company also sought to grow in mass and size as quickly as possible in order to be competitive and survive a downturn if it had to. In less than eight years, according to Deutsche Banc Alex Brown analyst Susan Donofrio, Atlas has assembled a fleet that acts as an effective barrier to entry for new competition, given the large initial capital commitment that would be needed by a start-up.
Recession-proof by design
Atlas still has what it calls advantageous long-term maintenance contracts, largely on fixed-cost-per-flight-hour bases with KLM (for its 747-200s), Lufthansa Technik (for its 747-400s), and General Electric and MTU Maintenance Hanover for engine maintenance.
Because of its growing business to and from Asia and the Pacific Rim, Atlas officials acknowledge for the record that economic or political turmoil in those areas could potentially have an adverse impact on the air cargo market. But Chowdry believes Atlas is as recession-proof as a carrier can get and that the increasingly global economy will protect it, as much as possible, from economic downturns, in the USA or worldwide.
Although the Asian financial crisis in the late 1990s had a major impact on passenger airlines, substantially reducing Asia-Pacific services during the downturn, Atlas did not experience any adverse impact: "People from Korea quit taking trips to Disneyland, but they were still producing sneakers and video recorders and whatever else," Chowdry says.
Because manufacturing of so many products and components has shifted to countries where labour costs are lower (making economies dependent on factor imports) the air movement of these goods would be necessary even with a general slowdown, he believes: "This is a commodity business. Even in a downturn in the USA, there are a lot of things we no longer produce in this country, items like television screens and computer screens and telecommunications gear."
Much of Atlas' business is shipping what Chowdry calls physically perishable products - flowers or fish or vegetables, as well as economically perishable goods, such as computers or servers or cell phones - the kinds of items that have a shelf-life of less than four months because of continuing innovations. Even the apparel industry is "amazingly economically perishable these days," with a design-to-selling cycle of less than100 days. "I think there would be less of an impact on us than a lot of other businesses."
Atlas is effectively a US carrier and subject to US bilateral air service agreements, but because it also operates on behalf of foreign flag-carriers, it more often uses the authority granted to its customer airline. However, the FAA must approve its ACMI contracts, and long-term deals with foreign carriers need to go through the Department of Transportation.
Although most of its international operations go smoothly, Atlas occasionally gets caught in a controversy. For example, during the recent US-UK bilateral negotiations, the British Cargo Airline Alliance objected to two contracts which Atlas holds with British Airways to provide 747-400F services. The lobby group argued the unfairness of Atlas being free to run wet leases for BA, while its members are barred from wet-leasing foreign aircraft to US carriers. Although, the UK Government has since ordered the leases to be terminated, negotiations are still under way.
"It's ridiculous," he says. It was the only subject raised during an extensive interview that causes the soft-spoken Chowdry to raise his voice even slightly. "British carriers have the ability to provide the same service to British Airways," he says. "All they need is the equipment. They don't have the equipment. We're doing it simply because we have the equipment." Chowdry is a strong supporter of open markets in aviation. "We believe in open skies worldwide. There should be no trade barriers; I think our business thrives on it."
With growing size and success, Atlas has also become attractive for union activity, and in 1999, the company's pilots, 788 out of the company's 1,462 employees at the end of November, voted for representation by the Air Lines Pilots Association. The company and union are negotiating a new contract. ALPA has also challenged in court Atlas' suspension of pilot participation in company profit-sharing.
"I don't see any problem from our point of view in working with the union," Chowdry says. "I think we all have the same objective - to be successful, provide better value for our shareholders and employees." But, he adds: "In the business we are in, we have to have a differential between our costs and our customers' costs - that's the only reason we're in business."
Source: Airline Business
