News / Q1 results bring clearer skies for Atlas Air and ATSG and pilot dispute softens

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Both Atlas Air and ATSG enjoyed year-on-year improvement in their first-quarter results, lifted by soaring demand for air freight.

Atlas Air has also showed a softening in its relations with pilots, offering them a 10% pay increase while negotiations continue.

ATSG saw customer revenues grow 12% to $389.3m, while adjusted earnings from continuing operations (non-GAAP) rose 13%, to $29.3m. Adjusted ebitda from continuing operations (non-GAAP) increased 9%, to $124m

Atlas boasted first-quarter 2020 net income of $23.4m, compared with a reported loss of $29.7m a year earlier; adjusted ebitda was $121.2m, up from $120.4m in Q1 19. Adjusted net income was $29.9m, up 9.5%.

Alongside starting to operate a 777, which was part of the dry leasing business, Atlas also put three parked 747s back in the air, a move which pilots told The Loadstar was originally delayed due to lack of crew. But relations with its pilots appear to have thawed, following Atlas’s decision to implement an interim pay increase of 10% from 1 May. The increase will remain in place until the new contract is reached, confirmed CFO Spencer Schwartz on an earnings call.

“It’s fair to say that … [salary] rates have been somewhat below market for an extended period of time,” he said. “Quite frankly no one expected … the merger negotiations for the joint collective bargaining agreement to take this long.

“But given where we are in that cycle and given, frankly, had we followed those merger procedures, the new … agreement would already be in place by now and we just thought it was a prudent time to recognise our pilots and give them this interim pay bump.”

While January and February were affected by Chinese new year and the extended manufacturing shutdown there, demand and yields took off in March through a mixture of high demand and low capacity. However, Atlas noted a decline in military passenger flying, as well as lower demand from Boeing for Dreamlifter flying. Atlas also noted higher costs, relating to additional crew payments and new cleaning expenses.

These costs, along with potential difficulties with crew repositioning owing to restrictions and lack of hotels, however, would still see Atlas’s second-quarter adjusted net income up 40% to 50% from the first quarter, it said.

Atlas is looking to lure in long-term charter customers, negotiating during a high-rate period.

“We want to take advantage of the near-term surge in the yields, but we’re also focused on the long term as well, and there are customers who see the value of the freighters, going forward,” said chief executive John Dietrich.

“They see the dynamics that we talked about with the significant reduction in capacity in the market, coupled with what they see as their needs. So that has opened the door for us to engage in the discussion and get some longer-term charter contracts at very favourable rates.”

Some, in fact, were so long they were looking more like ACMI deals, added Mr Schwartz.

ATSG said it too was seeing a lot of requests for charters.

“There’s a heavy demand right now. We are bidding on a couple of long-haul charters that will last for months, the regular routes for existing customers that we’re hoping to get,” said incoming chief executive Rich Corrado.

Meanwhile ACMI customers were benefiting, added Mr Scwhartz.

“The ACMI customer has a guaranteed minimum and now the things are so much stronger, the ACMI customer has a huge benefit because they’ve locked in that rate over a long period of time. If they were going out into the marketplace looking for capacity now, they would be paying so much more.

“There were cancellations, and then in March and certainly in April, what we’re seeing now is that volumes have really, really picked up.

“It’s really going to benefit, it seems, airfreight for quite some time, and so the value of freighters should improve from sort of scarcity value standpoint for sure.”

Atlas executives were non-plussed about the new ‘passenger freighters’ in the market, suggesting the impact was relatively small.

“Any additional capacity has an impact …but not in the form of full-blown cargo conversions,” said Mr Dietrich. “But over time, as rates settle, which they will, there’s a price point below which that will no longer be feasible … and there’s also an efficiency factor.

“When you get into loading and unloading main deck passenger aircraft, it becomes quite inefficient and costly, and causes more and more downtime. So there are a number of reasons why that’s not optimal.”

ATSG’s Mr Corrado agreed: “The cargo rates for flying that do not support the level of freight that you would get in a converted or using cargo in the upper deck of a passenger jet. So as soon as those moves come down, that business goes away.”

ATSG noted its customer mix when pointing to its higher results. The US Department of Defense is ATSG’s largest customer, representing 30% of revenues in Q1, while 29% of revenues came from Amazon and 11% from DHL. ATSG confirmed it would have 50 767-300 freighters in its fleet by the end of this year.

Mr Corrado said he expected “the increase in e-commerce shopping and air fulfillment will lead to lasting changes in buying habits. And we expect that it will be many months, if not years, before the major passenger airlines fully restore their networks. So cargo carriers can expect to receive volume that had travelled in belly space with passenger jets for some time to come.”

Atlas’s Mr Dietrich however conceded that the demand would likely be linked with consumer spending habits.

“We’re very optimistic, but cautiously so given the market conditions. We think manufacturing .. is going to continue to surge on the back end of this, but you also have significant unemployment in the US and what’s the consumer market going to be? Those are the things we’re looking at, as well as available aircraft on the market.”

You can see ATSG’s results here, and earnings call transcript on Seeking Alpha here. You can see Atlas Air’s results here, and earnings call transcript on Seeking Alpha here.