To understand the scope of Atlas Air Worldwide Holdings' ongoing business transformation, look no further than Amazon One – a Boeing 767-300ER freighter with registration N1997A.
In August 2016, the 22-year-old aircraft, painted in the colours and logo of Amazon, became a symbol of a broad plan by Atlas chief executive Bill Flynn to align the company with fast-growing e-commerce and express package delivery businesses.
"We have focused and pivoted the company [to] where the majority of our freighter fleet is deployed in the faster-growing market segments," Flynn says from the corner office of Atlas's headquarters in suburban New York, about 50km from midtown Manhattan. "This express segment... is growing at a rate double of heavy freight."
Jorge Gera
To get to its current position, Flynn has guided Atlas through fleet and employee expansion, an acquisition, labour struggles, overseas expansion, and an agreement to operate aircraft for e-commerce giant Amazon.
"This is an important, perhaps transformative, move for Atlas," he says of the Amazon deal.
By 2018, Flynn expects that at least 60 of Atlas's aircraft – roughly 70% of the freighter fleet – will serve express shipping and e-commerce customers, up from just six aircraft 10 years ago.
The shift has caught investors' attention, with the stock jumping from about $35 per share in early 2016 to a current price near $60. Kevin Sterling, managing director at New York investment bank Seaport Global Securities, says of Atlas: "Where there is opportunity, they have embraced it head on. They have done a good job of pivoting."
He adds: "In today's world, if you can be a partner with Amazon instead of a competitor, that's where you want to be."
Founder Michael Chowdry launched Atlas in 1992 and began service with a single Boeing 747-200 in 1993. Today, Atlas subsidiaries own or operate more than 90 aircraft, including 737-300, 737-400, 757-200, 767-200, 767-300, 747-400, 747-8 and 777 freighters. Many of those aircraft are deployed from Cincinnati for Amazon and top customer DHL.
Atlas also operates four 747-400 Dreamlifters – high-volume freighters owned and used by Boeing – and several passenger-configured 747-400s, 767s and 737s. The company conducts twice-weekly 747-400 passenger flights between Houston and Luanda for oil company Sonangol, and charters for sports teams and musicians.
Subsidiaries include Atlas Air, which operates charters and provides a range of aircraft and crew outsourcing services, and Titan Aviation, which leases aircraft and engines. Atlas also owns 51% of Polar Air Cargo Worldwide, of which Flynn is chief executive too. Polar carries express packages for 49% owner DHL and heavy cargo for freight forwarders.
In 2016 Atlas earned operating income of $168 million and net income of $41.5 million, both up substantially year-on-year. Atlas's aircraft outsourcing business – typically derived from aircraft, crew, maintenance and insurance (ACMI) agreements – generated 45% of the company's $1.8 billion in 2016 revenue, and represented 72% of total flying, financial reports show. Charter work generated 48% of 2016 revenue and accounted for 27% of flying, and the leasing unit contributed 6% of revenue.
The years following the recession had been difficult for providers of heavy air cargo, which carry bulk shipments through the global chain of products such as electronics, pharmaceuticals, flowers and fish. Air freight traffic slowed to an annual growth rate of just 1.5% between 2007 and 2015, according to Boeing's World Air Cargo Forecast.
But while the recession played a significant role in that slump, broader factors also contributed, Flynn suggests. For instance, he notes, personal electronic devices like Apple iPhones have replaced multiple consumer products like radios and clocks. Also, consumer products have shrunk in size and now typically have less packaging.
Still, the market has since recovered, with freight volume jumping 3.8% year-on-year in 2016 and increasing at a double-digit rate this year, IATA figures show.
"I would argue we are in one of the strongest freight markets that we have seen in a long time, and we are expecting an exceptionally strong peak in 2017," says Flynn, who has worked in the transportation business for 40 years. Before Atlas he was chief executive of freight forwarding and logistics company GeoLogistics; he also held senior posts at rail freight company CSX.
Two segments of air cargo are growing much faster than traditional heavy freight, Flynn notes. Express shipments, which typically include parcels, envelopes and small packages, are growing twice as fast. E-commerce demand, meanwhile, is surging nearly 25% annually, Flynn notes. Boeing's report predicts that the value of e-commerce will hit $3.6 trillion by 2020, double its 2015 value.
That opportunity led Flynn to refocus Atlas.
In April 2016, the company acquired, for $106 million, Southern Air Holdings, which operated five Boeing 737-400 freighters and five 777Fs for DHL under crew, maintenance and insurance (CMI) agreements. "It became clear that in order to offer the widest range of products and services to our customers, we needed to further diversify the fleet," says Flynn.
Then, in May 2016, Atlas announced the Amazon partnership. Under that deal, Atlas subsidiary Titan would lease 20 767-300 freighters to Amazon for 10 years, with Atlas Air operating the aircraft for at least seven years (though Amazon can extend the operational agreement to 10 years). The aircraft would fly domestic routes from the Cincinnati hub of Amazon, which calls the operation Prime Air.
Atlas Air
The agreement permits Amazon to acquire up 20% of Atlas shares as the deal progresses, plus another 10% should the companies expand the agreement to include more aircraft. Upon owning 10% of shares, Amazon can appoint a member to Atlas's board of directors.
News of the deal came two months after Atlas's competitor Air Transport Services Group (ATSG) announced a similar arrangement with Amazon, also involving 20 767Fs.
Atlas began flights for Amazon in August 2016, and has since deployed six aircraft. It expects all 20 to be in Amazon service by the end of 2018, at which time Atlas's total fleet should exceed 100 aircraft, Flynn says.
Flynn declines to speculate about potential expansion of the Amazon business. But Seaport Global's Sterling thinks Atlas could, in the future, operate larger aircraft on overseas routes for Amazon. "I think... there is going to be opportunity down the road to ramp up international flying," he says. "As Amazon goes global, they are going to probably need widebody aircraft."
More broadly, Sterling thinks Amazon's expansion bodes well for the air freight market, noting that the company has been pushing same-day deliveries. "Amazon is causing everyone to speed up their supply chain," he says. "That's very conducive to air freight."
LABOUR STRUGGLES
Atlas's expansion has not come without hiccups.
For example, it has been seeking to bring Southern under the same operating certificate as Atlas Air, and to have a single labour agreement for Southern and Atlas pilots, both represented by the International Brotherhood of Teamsters. In February, Atlas sued the union, accusing it of failing to negotiate a merged contract as required under existing labour agreements. Atlas asked a court to order the parties to arbitration, court papers show.
Although the case remains open, the parties tentatively agreed on a process for negotiating a joint pilot deal, and negotiations began on 6 July, Atlas says.
The union has meanwhile continued a broad campaign to raise awareness of what it calls low wages and poor working conditions at several US cargo airlines, including Atlas Air, Polar, Southern, Kalitta Air, and ATSG unit ABX Air. The union has accused those carriers of responding to pressure from Amazon and DHL by seeking to force pilots into poor contracts, leading to a surge in pilot resignations. Atlas's pilot attrition rates doubled this year, exacerbating a flightcrew shortage and raising questions about the carrier's ability to fulfil contract flying, the union argues. The Teamsters have organised protests at DHL's and Amazon's offices and sent US president Donald Trump a letter asking him to support their cause.
APA director of representation Greg Unterseher says pilot issues have affected Atlas's operation, and he raises doubts about whether Atlas can reach a goal of hiring 2,000 pilots by the end of 2017, citing pay issues and an insufficient new pilot pipeline.
"There is no way they can get to 2,000 this year," Unterseher says. "It's a big problem to fulfil obligations to Prime Air."
"A lot of these companies have their heads very far in the sand," he adds.
Flynn downplays the union's warnings. He says he "fully expects" to merge Atlas and Southern under a single operating certificate by 1 January 2018, regardless of whether Atlas reaches an agreement with the union.
"We can merge prior to having a contract, it's just [that we] will have a discrete Southern workforce and a discrete Atlas workforce," he says.
All airlines have a degree of staff turnover, Flynn adds, and he notes that Atlas has ongoing pilot-training classes. Atlas is "on track" to meet the 2,000-pilot goal by year-end, up from 1,750 pilots at the end of 2016.
"I expect we will certainly be able to field the... total workforce of 2,000-plus pilots that we need to operate for our customers," he says.
LOOKING GLOBAL
Flynn sees opportunity to expand Atlas's reach elsewhere. Demand has recently been strong for heavy freight shipments of products such as fruit, fish and flowers from South America and from South and East Africa. "As we think about growth in air freight and the express markets, it's truly global," he says.
No region holds such promise as Asia, home to 40% of global air freight demand, with China being the single largest market, Flynn says.
Jorge Gera
That opportunity has caught the eye of competitor ATSG, which announced plans to lease 737-400 freighters to Chinese operator Okay Airways. ATSG has also sought Chinese regulatory approval for a joint business with Okay.
Atlas, however, is not pursuing investments in Chinese airlines or joint ventures in China, says Flynn, citing capitalisation requirements and regulatory uncertainty. But in recent months, the company expanded in Asia through CMI and ACMI deals with carriers including Cathay Pacific Cargo, Asiana Cargo, Nippon Cargo Airlines, Hong Kong Air Cargo and Yangtze River Express Airlines, a unit of Shanghai-based HNA Group.
"I think we are substantially positioned in that market," Flynn says of Asia and China. "On any given month we will have somewhere between 320 and 380 departures from Hong Kong and China."
Expansion will require aircraft, and Flynn has his eye on several types, including 767 converted freighters and 747-8Fs. "I do believe we eventually want more -8s, whether they are ordered new or whether we get them from the market," he says.
With oil at less than $80 per barrel, those aircraft are "very competitive, if not more competitive, on a cost-per-kilo [basis]" than 777Fs, Flynn says. And when not fully loaded, 747-8Fs have comparable range, too, he adds.
Likewise, cheap fuel has "significantly expanded the useful life" of Atlas's 747-400s.
Flynn also has interest in Airbus A321 and A330-300 converted freighters, although he notes that those types are not yet widely available on the used market.
The A330-300 "carries a couple more tonnes" than the 767 and has competitive range and costs, says Flynn. "We are really excited about the potential for the Airbus A330-300 converted freighter," he declares. "It's a great competitor for the 767... It would be good to have another asset type."
REGULATORY CONCERN
New aircraft could help Atlas expand its global reach, which is made possible largely through more than 100 open-skies air services agreements between the US and foreign nations.
Lately, however, some of those agreements have been at the heart of political discussions in the USA – including an ongoing battle between the three major US passenger carriers and three Middle Eastern airlines.
American Airlines, Delta Air Lines and United Airlines have alleged that Emirates, Etihad Airways and Qatar Airways received some $52 billion in state aid and complained that this violates open-skies air services agreements and gives the Gulf carriers an unfair advantage in pursuing US expansion. The US airlines have asked the national government to investigate.
Emirates, Etihad and Qatar deny the allegations and accuse their critics of hypocrisy, saying the US industry has benefited from lenient bankruptcy laws.
Atlas and several other airlines – FedEx, Hawaiian Airlines and JetBlue Airways – have stood in opposition to their US counterparts, urging the government not to act. They say subsidies do not violate open-skies deals, and insist the agreements have broader benefits, promoting trade, travel and economic expansion.
"I don't believe the international freight networks would be efficient and effective without the fifth and seventh freedoms and the benefits that derive from the open-skies agreements," Flynn says. Fifth-freedom rights enable airlines to operate flights from the USA to a foreign country and onward to another country, while seventh-freedom rights allow flights between foreign countries.
Atlas and its allies also fear that foreign governments might respond to US actions with their own restrictions. "If there is retaliation, we potentially stand in the cross-hairs," says Flynn, noting that, unlike other US passenger airlines, Atlas actually flies to Middle Eastern countries. "If other countries perceive that the US is operating unilaterally, and opening up this agreement to protect US carriers, why wouldn't other countries with their own fleets be encouraged to do the same?"
Instead of challenging open-skies deals, US airlines should file complaints through an existing channel via the International Air Transportation Fair Competitive Practices Act, Flynn argues.
Open-skies deals have also played a role in recent controversy over applications by subsidiaries of Norwegian in Ireland and the UK for permits to operate to the USA.
US labour groups had opposed those applications, claiming that the company based the subsidiaries in those countries to take advantage of "less-restrictive labour and regulatory laws" – a "flag of convenience" move, says the Air Line Pilots Association, International.
Atlas, however, has supported Norwegian, again citing broader goals and benefits of open-skies deals.
"The legislative intent wasn't just about airlines. It was about consumer choice. It was about competition," he says. "It was about bringing tourists to our country."
US regulators approved the application by Norwegian's Irish subsidiary in 2016 and tentatively approved the UK unit's application in July.
Closer to home, Atlas has taken a strong stance on another controversial political topic – one that largely united the US airline industry, including freight and passenger airlines.
The controversy centres on a bill that would overhaul US air traffic control by shifting ATC out of the Federal Aviation Administration's purview and into a non-profit entity managed by industry players and funded by users.
The bill is working through the US Congress.
Although it is opposed by the general aviation and business aviation segments, its advocates say the new organisation would be better able to manage airspace modernisation.
The idea "makes compelling sense", says Flynn.
"We will reduce the amount of time it takes to fly. We will reduce the amount of fuel consumed," he says. "Shorter flights effectively create capacity."
That capacity could come in handy amid what Flynn sees as substantial growth opportunity in the e-commerce segment.
Currently, e-commerce accounts for just 6-7% of total retail sales – and half of those e-commerce sales reflect purchases of digital products such as streaming media and e-books.
"What's the acceleration curve going to look at in terms of physical product moving?" Flynn asks.
"I think there's a lot more to come," he adds. "It's great to be on the ground floor with Amazon."
Source: Cirium Dashboard
