News / Atlas chief stays bullish despite revenues falling and share price taking a tumble

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Atlas Air saw its share price fall yesterday and was downgraded by Morgan Stanley as it announced that net income on a reported basis for the fourth quarter fell to $30m from $52.4m a year earlier.

While ACMI and the commercial charter business led earnings, the continued reduction in military business took its toll, and for the full year Atlas saw revenue fall to $93.8 from $129.9m in 2012.

However, while Atlas insisted that new customers such as Astral Aviation, Etihad and BST Logistics showed strength in the ACMI sector, bank analysts remained sceptical, weighing the impact of British Airways’ lease termination on three 747-8Fs, and Qantas’s decision to return a 747-400 last month at the end of its lease.

Many industry observers believe BA’s decision to take a block space agreement with Qatar is a move that will be emulated by others. In an earnings call, Bill Flynn, CEO of Atlas, was asked by Scott Group of Wolfe Research: “Do you see any risk of additional customers returning planes early? Or could there be more of this [BA’s decision], going forward?”

Mr Flynn responded: “I think it is … specific to BA, which has essentially made the decision to exit freighters and, over time, to rely on belly capacity.

“The agreement it has with Qatar is not a full ACMI or a full aircraft agreement, it’s a hard-block space agreement, as I understand it, for some number of tonnes, five days a week, between Asia and the UK. So I think that’s very much BA-specific.”

Others disagree. Ram Menen, former chief of Emirates SkyCargo, told The Loadstar: “As the existing capacities (freighters) align and are more effectively deployed, the ACMI operators are likely to struggle in the shorter term. IAG’s move is just the start, there will be more of such moves and there could be surplus ACMI capacity floating around in the short term.”

Little was revealed about the fate of Global Supply Systems (GSS), the one-contract Atlas subsidiary which leased directly to BA.

“We’re a 49% shareholder of GSS,” said Mr Flynn. “I think having a UK AOC is a viable asset. And so we’re certainly exploiting other opportunities to use that asset.”

Atlas, which wouldn’t be drawn on the amount of the termination fee due from BA – or the potential cost of redeploying the aircraft – said it intended to put the aircraft back into ACMI as soon as possible.

“We don’t have the intention to sell our 747-8s that are coming back from BA,” said Mr Flynn. “They are going to be put to work and we’ll continue to generate the kinds of returns over the course of the delivery and the placement of those aircraft that we described to our investors.”

Whether Atlas will be able to place the aircraft, in the short term, on similar lease terms is in doubt, however. BA’s five-year lease is unlikely to be replicated in the current market, say analysts.

Qantas’s commitment to ACMI also appears in doubt. While Atlas declined to be specific about individual customers, Mr Flynn did note that Qantas still had two aircraft.

“Early in 2013, it had talked about potentially dry-leasing in its own aircraft and operating them. And then later in the year, it announced that it was no longer going to pursue that. So we have two aircraft operating with Qantas, and we’ll continue to update the ACMI placements as we move through the year.”

He added that Atlas expected to see more than 20 ACMI contracts this year.

Atlas also denied that the 747-8F was underperforming, or unsuitable for current market conditions, as analysts asked whether the 777 should be included in the ACMI business rather than just dry-leasing.

“From our view, the -8 is a high-performing aircraft that delivers real bottom line value for our customers … in terms of the capacity that it provides on the long-haul route, as well as the fuel efficiency,” said Mr Flynn.

“If there were tangible opportunities to begin to offer 777 ACMI, we would. But we’re not going to speculatively invest in 777s for delivery several years from now in anticipation that we might place them into ACMI.”

Atlas did recently purchase three 777s, (in the words of Lufthansa Cargo’s Dr Andreas Otto, “the best cargo aircraft in the industry, but also most expensive”) for its dry-leasing subsidiary Titan, and they were placed, pre-delivery, on long-term leases with AeroLogic, Emirates and TNT Express.

Atlas grounded two 747-400BCFs in December and plans to keep them parked in the event of an upturn in the market. There isn’t much choice, suggested Mr Flynn. “The market value on BCFs isn’t terribly robust right now. We think the option value is for us worth more than a sale.”

The company said it expected total block hours in 2014 to be several percentage points lower than in 2013, “while more than 70% of our block hours would be in ACMI, with less than 10% in military”.

You can see the full transcript of the earnings call at Seeking Alpha, and Atlas’s results here.