atlas © Photodynamx
© Photodynamx

Yesterday’s news that ATSG has won a deal with Amazon to operate 20 767s – and that the e-tailer could buy a near-20% share in the aviation group – may not have played out well at rival ACMI operator Atlas Air.

It’s not the best of times to be an investor in Atlas Air Worldwide, but that should not come as a big surprise: it’s been a tough ride for a while for shareholders, as the chart here shows.

ATSG’s shares rose more than 20% to a record high of $14.9 on the Amazon news, closing at $13.73. ATSG’s stock is up almost 40%, year to date, while its one-year performance is up 55%.

By comparison, Atlas Air is down 4% year-to-date, and down 15% for one year.

Investors surely have to choose between Atlas and ATSG, given their similar market capitalisation (Atlas: $950m, ATSG: $877m), growth prospects/zero yield mix, and underlying business lines.

And there are concerns on the horizon, made all too visible by this week’s Amazon news.

Atlas, together with new subsidiary Southern, will rely on DHL for 27% of its revenue this year. Meanwhile, Credit Suisse analysts estimate that Amazon accounts for about 30% of DHL parcel volumes and up to a quarter of its revenue.

As has been well documented, Amazon and other e-commerce businesses are eyeing or buying their own logistics arms, moves which all too soon will hit the pockets of the express operators. DP-DHL knows this already and is under threat in its home market.

And one senior source suggests that if there is a battle between UPS, FedEx and DHL over dwindling e-commerce business, DHL is the most likely to be the casualty in the US market.

Atlas, of course, operates internationally for DHL. But it will certainly be studying all of this, and will  want more e-commerce action. One air freight executive noted that both Atlas and Kalitta were “doing all they can to source 767s”. But ATSG has the head start.

Atlas’s management team, however, is adamant that things are going well and 2016 will turn out be a year to remember.

“In addition to the acquisition of Southern Air, we expect our total EPS in 2016 to increase by a low to mid-single digit percentage over our 2015 adjusted EPS,” CEO Bill Flynn said in a call with analysts on 18 February, when he discussed annual results and business prospects.

He added that Atlas would acquire Southern Air, a deal that was announced in January, in “all-cash debt-free transaction valued at approximately $110m.”

“Southern Air … immediately expands our platform into 777 and 737 aircraft operations, something that might take up to 18 months or more to do organically.”

Mr Flynn sounded really upbeat, although much of his optimism may not be aligned with reality.

There is, for example, much market speculation that Etihad, which has three 747Fs on ACMI with Atlas, may look to end the contract, at least in part.

Etihad this month takes on two new 777 freighters, and sources close to the airline say it makes “no sense” to continue with all the ACMI capacity as well, and that the carrier is “considering its options”.

Atlas is well known for its ability to secure deals, but no airline wants too much maindeck capacity at ACMI costs.

In addition, revenues at Atlas are growing at a much slower pace than in the past, as the table here shows, and there seems to be less residual growth in Atlas in this market – hence the need to acquire assets and negotiate better terms on its debts to buy time and preserve the bottom line.

The breakdown of its operating expenses, where our team has highlighted its main operating costs, can be found here.

AAWW revenues have recorded a compound annual growth rate (CAGR) of 6.8% since 2011, which has been outstripped by the CAGR of operating costs at 8%.

Recent trends are less encouraging: revenues fell significantly both in the third and in the fourth quarter, on a comparable basis. Since 2013, the top-line has grown at a CAGR of 2.4%, while costs have risen 3.7% – and this is one reason why Atlas should now acquire assets, and may be forced to continue to do so into 2017 and beyond.

“We delivered adjusted earnings of $5.10 per share in 2015, up significantly from $3.72 in 2014. We continue to see good demand from our customers for our aircraft and services,” Flynn said.

Annual net earnings plunged by 93% from $106m to $7.2m, but had been impacted by one-off charges.

Two items stand out, which almost make up for the difference in net earnings year-on-year: $67m of accrual for legal matters and class action fees and $47m in charges associated with the refinancing of its debts.

Atlas may have sorted out its finances and refinancing risk – Mr Flynn said that “it has refinanced higher cost debt” on a number of aircraft, “enabling us to reduce our cost of debt, increase our cash flows, enhance our adjusted EPS and add flexibility to our fleet.”

Mr Flynn seems to have no doubt that he will see “a full year of benefits from each of these actions in 2016”.

But in our view, some legal risk persists and, as Mr Flynn said, given the “inherencies anomaly” of airfreight demand, the majority of its earnings in 2016 “will be generated in the second half,” which adds  short-term risk to the investment and to its operational plan.

Comment on this article

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  • George May

    March 10, 2016 at 3:29 pm

    And add to that the extremely upset crew force too!

    • Alex Lennane

      March 10, 2016 at 5:22 pm

      Alessandro says: “Many carriers in the US have problems with crew. I am not sure that adds risk, but surely it is a problem.”

      Can you say why the crew is extremely upset?

      • Disgruntled Atlas Pilot

        March 10, 2016 at 7:00 pm

        This should give you a brief idea.

        • Alessandro

          March 11, 2016 at 2:50 pm

          It’s not unusual in the industry and in deal-making but thanks much for sharing the link. DA Pilot!

  • M

    March 11, 2016 at 1:45 pm

    What would you specify as the largest remains legal concern(s) ? Thanks.

    • Alessandro

      March 11, 2016 at 2:45 pm

      It’s all in the 10k, M.

    • Alex Lennane

      March 11, 2016 at 2:52 pm

      As Alessandro wrote in his original piece, which was edited: Atlas says that pursuant to the antitrust settlement, Polar had agreed to make instalment payments over three years to settle the plaintiffs’ claims, with payments of $35m paid on 15 January 2016, $35m due on or before 15 January 2017, and $30m due on or before 15 January 2018, resulting in an accrual of $100m as of 31 December 2015.

      The United States District Court for the Eastern District of New York issued an order granting preliminary approval of the settlement on 12 January 2016, but the settlement is still subject to final court approval.

      • M

        March 11, 2016 at 3:11 pm

        Yes. Aware of that outcome, but the article left me with the impression there is more likely and unresolved litigation.

        • Alex Lennane

          March 11, 2016 at 3:56 pm

          Sorry, no, not that we know of. It’s just that the settlement is still subject to final agreement by the court. (Although with many companies using the airlines as a legal cash cow, we wouldn’t be surprised if any of the airlines were subject to even more litigation.)

          • M

            March 11, 2016 at 5:25 pm

            Great. Thank you for clarification.