It would seem as if all is not well at Southern Air. It is just under a year since majority owner Oak Hill Capital made a strategic investment of $55 million – but it sounds as if the cash is starting to run out, while managers are leaving, and fast. One former manager told The Loadstar the reasons for his departure: “Mainly as a result of cutbacks in the fleet size, leaving very little requirement remaining, in the short to medium term at least, for business development activities”.
Just two years ago, ACMI and charter operator Southern Air was a pure 747-200F operator, with an average fleet age of 33 years. It now has four 777s and four 747-400BCFs, with the remaining -200s due to be parked by the end of October. Although its new aircraft are deployed “in reasonable customer programmes” there is a critical need to cut costs, according to a source close to the carrier.
Two sources confirmed to The Loadstar that the new aircraft have taken their toll on the company’s bottom line, which begs the question, are today’s ACMI prices sufficient to even cover the high costs of the leases on 777F and 747-400s that existed when Southern procured the fleet?
The aircraft purchasing and leasing decision-making process takes place many years before the fleet actually enters service with any airline, especially when new aircraft are involved. To make matters worse for Southern – if that is indeed the case – lease prices for 747SF and even production 747-400F freighters are expected to fall further in the coming few years as a glut of the types come to market.
Speculation in the industry has focused on whether Southern Air has been undercutting the market on some recent deals, making the contracts less profitable than they could have been at a time when the company was already stretched financially. One 747-400 is with Chapman Freeborn for the UK’s Ministry of Defence, one with Asiana Airlines and the remaining two with the US Military. The carrier currently operates its 777s on behalf of DHL Express. Southern CEO Dan McHugh was formerly CEO of DHL Express in Asia Pacific until joining the airline in 2009, taking over from founder Jim Neff, who went on to launch Nordic Global Airlines through Neff Capital Management.
The airline changed its style with the arrival of Mr McHugh, taking on the 777s, and branding the aircraft. Some industry observers have questioned whether he was best placed for the job after having worked for just four years in the air cargo industry previously.
Sources added that Oak Hill Capital had not been keen to put further investment into the fund that handles airline. The private equity firm told The Loadstar that it would not comment on its portfolio.
Southern Air has a long and turbulent history from its original inception in 1929 as Southern Air Transport. It was rumoured to have been bought by the CIA in 1960, having worked together with the Agency since 1947, and sold on in 1973. But it continued to support covert US operations. It filed for bankruptcy in 1998, becoming Southern Air the following year under the leadership of Mr Neff.
One source told The Loadstar: “How many times can you beat a dead horse? It is time for private equity companies who think they know the air cargo industry in the US to understand that the world of air freight is a global one, and one that is constantly changing and in flux. ACMI is not exclusively an American domain, and there are just too many US-based players at the moment.”
The Loadstar wonders whether Mr Neff will start to look again at his former airline. Mr McHugh, meanwhile, who was due to speak at the Freighters World conference in Frankfurt next week, has cancelled.
Update: Southern Air has responded to The Loadstar. Mr McHugh said: “We are making operational changes to support our strategic plans, beginning with stabilizing our business in the face of continuing sluggishness in the global air cargo market. From there we will gain the capability to invest in and grow our business, positioning Southern Air for the future as an international air cargo industry leader.”