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As Atlas Air grows its fleet, its financial performance should come under closer scrutiny. Not only is its balance sheet stretched, but the aircraft lessor is relying on surging demand for its services, which range from wet and dry leasing to charter-passenger and military operations.

“With airfreight volumes continuing to improve and market yields beginning to pick up, we expect our diversified business mix and new aircraft placement … to drive sequential EPS growth in the fourth quarter,” said chief executive officer Bill Flynn last week when Atlas Air topped analysts’ expectations for third-quarter (Q3) results.

Upbeat results in Q3 were driven by ACMI leasing, Atlas’s biggest revenue contributor, while the commercial charter division, dry leasing unit and military business fared relatively well.

Guidance for Q4 was raised, and its shares have been on a roll since November 6, having gained 12% in the past two trading sessions.

But is it too good to be true? Thin margins and high debts can be a bad combination.

In 2013, Atlas Air reported less than $100m of net income on almost $1.7bn of revenue, an implied net income margin of about 5%. After four difficult years for growth prospects, analysts are doubtful the carrier’s revenue and earnings will grow to the end of 2016.

Such a thin-margin business runs the risk of running out of cash if things do not play out according to plan, and if rents are not promptly paid by customers – many of which still face several headwinds in spite of lower oil prices.

Debt pile

As at 31 December 2013, the debt pile of Atlas Air stood at $1.7bn, while its total aircraft operating leases and other leases totalled $1.3bn. Figures released last week show that the total debt position now is slightly better than in 2013, while net leverage, including aircraft rent, dropped to 5.9x in Q3 from 6.3x in Q1 – although that’s a drop in the ocean.

As a result, Atlas pays millions in interest every year – and trends are not encouraging.

In 2013 and 2012, interest costs rose by 30% and 53% to $83m and $64m, respectively, as the company raised more debt to finance its fleet expansion.

Interest costs will amount to almost $240m between 2014 and 2018, which equates to roughly three years of profits, based on trailing and forward figures.

Operating cash flow

In 2013, the operating cash flow of Atlas grew to $305m from $258.5m, yet that improvement came on the back of working capital management that led to a rise in account payables and accrued liabilities.

In the nine months to the end of September 2014, its free cash flow was lower than in the first nine months of 2013. It declined to $150m from $178m, although capital expenditures were also lower.

Moreover, certain debt obligations contain a number of restrictive covenants, while many of its debt and lease obligations have cross default and cross acceleration provisions, which heighten the risk profile associated to the lessor’s business model.


According to IATA, global freight volumes are expected to increase at a compound annual growth rate of 4.1% over the next five years. In an industry where growth rate should easily outpace inflation, Atlas’s operating cash flow profile could become problematic if forecasts aren’t met – and even if they are met, trouble may lie ahead.

In fact, plunging oil prices may only marginally benefit the freight air transport sector as demand is essentially limited by cost, which is typically four or five times that of road transport, and up to 16 times that of sea transport, according to the World Bank.

“Airfreight yields appear to have stabilised, and are showing slight improvement on a year ago,” IATA recently noted, adding that “this could help reduce downward pressure on profitability, but cargo business financial performance remains weak.”

Betting on a bounce

Atlas Air boasts a fleet of 50 freighters and 10 passenger aircraft that has grown significantly in the decade since the company filed for Chapter 11 in 2004. And, it is likely to grow again.

In October, CCO Michael Steen told The Loadstar the carrier was looking at expanding both Titan Airways (its dry leasing division for 777Fs) and its 767 fleet.

“We may continue to invest in 777s, and I can see us going into more 767s,” he said. It is also looking closely at the e-commerce sector and China, he added.

Atlas’s management is betting on a bounce after five quarters of consecutive growth for the airfreight industry, but there was also a message of caution last week when, during a call with analysts, Mr Flynn refused to be drawn into discussing the outlook beyond the fourth quarter.

Volumes are on their way up, but high jet fuel prices and weakness in yields have had an impact on financial performance this year – and nobody really knows if an improved outlook will allow for a better financial performance in the next few quarters.

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