Why is Atlas Air fast-tracking its business diversification?

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Air Mobility Command

Several carriers carved out a substantial profit center during the 2000s from cargo and passenger transportation of U.S. military deployments. Annual market revenues peaked at $3 billion in 2010. For Atlas, military business had historically hovered around 30% of consolidated revenues until 2013 (22%). The U.S. Air Force’s Air Mobility Command (AMC) currently enrolls 26 carriers in its carrier program to bid on RFPs, but there has been substantial drawdown as the U.S. withdraws from Afghanistan. The accelerated loss of business also produced a second-order impact: a reduction in yield stacking. Carriers like Atlas have been used to leveraging AMC contracts to stack yield on their long-haul trips by dropping cargo and troops in Afghanistan before continuing onto picking up commercial cargo in the rest of the Asia/Pacific.

Atlas presso

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While the military drawdown has not been a secret, the recent announcement of an accelerated reduction seemed to catch the market unawares and has forced operators like Atlas to fast-track diversifying or offsetting streams of revenue. Also, the spillover of slack capacity comes at a time when (as already noted) commercial airfreight remains fairly tepid and load factors challenging.

Charter services

Typically, an ACMI and AMC (i.e. scheduled) cargo carrier like Atlas will try to opportunistically shift slack capacity from slowdowns in scheduled business into charter passenger and freight services. Indeed, Atlas continues to derive a steady 30% of revenues from commercial charters for only 10% of utilized block hours. Chartered air freight accounts for 7% to 10% of global FTKs and typically covers just-in-time as well as other special needs categories (e.g. outsize cargo) in the supply chain.

The Market Realist Take

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Atlas Air participates in the U.S. Civil Reserve Air Fleet (CRAF) Program under contracts with the AMC, which typically cover a one-year period. Airlines may participate in the CRAF Program either alone or through a teaming arrangement. Atlas Air is a member of the team led by FedEx Corporation (FDX) that also includes Delta Air Lines Inc. Atlas Air pays a commission to the FedEx team, based on the revenues the company receives under its AMC contracts. The AMC buys cargo capacity on two bases: a fixed basis, which is awarded both annually and quarterly, and expansion flying, which is awarded on an as-needed basis throughout the contract term. While the fixed business is predictable, Block Hour levels for expansion flying are difficult to predict and thus are subject to fluctuation. Atlas Air also earns commissions on subcontracting certain flying of oversized cargo and less-than-full planeload missions, or by flying cargo into areas of military conflict.

Atlas Air began flying passenger charters for the AMC in 2011. Since then, it has expanded its passenger fleet with the purchase of two 747-400 and three 767-300ER passenger aircraft. In addition to AMC flying, Atlas Air uses these aircraft to fly passengers for private charter customers, charter brokers, and other airlines. As a percentage of operating revenue, AMC Charter revenue represented 21.5% in 2013.

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Among the few pure-play or “close-fit” ACMI public comps, Air Transport Services Group (ATSG) is Atlas’ closest peer. ATSG reported a decline in its ACMI Services revenue due to operation of fewer international cargo planes for its customers, including the U.S. military, as well as fewer ad hoc charters. In general, Atlas’ business relates mainly to dry lessors like AerCap (AER), Air Lease Corp. (AL), Aircastle (AYR), and freight forwarders such as FedEx (FDX), United Parcel Service (UPS), and UTi Worldwide (UTIW). The former still are a smaller component of the business, and the latter are Atlas’ primary customer base.

AerCap’s acquisition of International Lease Finance Corp. last year prompted industry experts to conclude that the aircraft leasing industry will see further consolidation. Air Lease, which leases commercial jet transport aircraft, also said on its earnings call that over the past few years, the industry has witnessed an emergence of agent-based lessors, acquisitions of leasing franchises, and consolidations. Aircastle said that air cargo market remains weak, with a modest improvement in demand during the past year. But oversupply remains the biggest issue, and it will take a while to work through the supply of available aircraft. Freight forwarder UPS said its fourth quarter results were negatively impacted by excess operating costs due to significantly higher-than-predicted volume and inclement weather in the U.S. Both UPS and FDX have announced increases to freight rates despite international customers moving towards cheaper shipping services.

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