Atlas Air Profits In Q1 From Supply Chain Snarls, Long-Term Contracts

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Higher yields and long-term contracts powered Atlas Air Worldwide to record first-quarter revenue of $1.04 billion and adjusted net income of $88.8 million amid mixed signs of softening in the global air cargo market. Revenue was 20% higher than a year ago and it was the third consecutive quarter for Atlas with revenue above $1 billion.

Despite uncertainty about how much the air cargo industry will be affected by sagging global trade, the Purchase, New York, cargo airline said it expects even better results for the full year. The guidance calls for revenue of $4.6 billion and adjusted earnings before interest, taxes, depreciation and amortization of about $1 billion, more than four times first-quarter adjusted EBITDA of $202.8 million. Billable operating hours will also more than quadruple to 350,000.

Freighter operators continue to see bright prospects. Atlas Air AAWW CEO John Dietrich said Thursday the company would consider adding Airbus' new A350 and converted A330 to its all-Boeing fleet as part of ongoing fleet upgrades to capture more growth.

Executives based their optimism on continued supply chain disruptions, particularly in ocean shipping, that are driving freight to air transport and capacity shortfalls on long-haul trade lanes because of the slow return of widebody flights until travel demand fully rebounds. Analysts say there is a 13% deficit in total space compared to 2019. 

Atlas Air was able to improve first-quarter adjusted profit by $16.6 million, compared to the year-ago period, despite 6,000 fewer block hours thanks to higher rates and fuel surcharges that boosted yields. High yields more than offset lower aircraft utilization. The company performs more of its heavy maintenance in the first half of the year and enjoys higher rates and demand in the fourth quarter peak period.

Yields for unplanned charter flights out of Asia, not including fuel, were $8.07 during the quarter versus $4.83 in 2021, Chief Financial Officer Stuart Schwartz told analysts. He predicted rates will stay high in the second quarter and that spot market yields "will remain well above pre-pandemic levels driven by the shift in consumer demand patterns and continued lack of available capacity." 

The yield is the average fare paid by a customer to transport one ton of freight one revenue mile.

The company said block hours decreased because more flying shifted from smaller aircraft that were retired to larger, more efficient jets and because of operational disruptions associated with COVID within its own staff and at airports. The 737-400 narrowbodies and 767-200 medium widebodies that exited the fleet flew more often to move the same amount of cargo as bigger aircraft.

Supply chain disruptions

Atlas is now coping with COVID disruptions in China as the government mounts an all-out war on the omicron variant, which has limited service and labor availability at many Chinese airports. Many airlines are canceling flights or flying half empty because of city lockdowns that make it difficult for delivery trucks or warehouse employees to reach cargo terminals. 

Schwartz said Chinese exports have temporarily dried up because of factory closures but that airlines will soon be flush with pent-up demand. 

"I think some people are misinterpreting that to mean that there's some sort of a slowdown. But I think it's really a short-term COVID blip. And when China opens back up, there's going to be a tremendous backlog of goods and there's going to be a lot more goods manufactured. And so, there's going to be tremendous demand for airfreight and presumably higher yields as a result," he said.

Atlas' experience fits with the slowdown in the overall airfreight sector, where supply chain choke points are partially blamed for limiting throughput. 

The company attributed a significant portion of current and future revenue growth to more customers signing long-term contracts for dedicated air transport in an effort to guarantee capacity in a tight market. Schwartz said 10 large customers signed multiyear contracts during the quarter. The company now has about 30 customers under contracts that run through early 2025, and some until the end of 2027. 

Previous customers with extended transport services agreements include Cainiao, Alibaba's logistics arm, mega forwarder Kuehne+Nagel, Flexport, Chinese express delivery company SF Group, Spanish apparel firm Inditex, and HP.

"We're expanding and diversifying our customer base and increasing the amount of flying that we perform under long-term contracts with attractive rates and guaranteed levels of flying. In fact, during the first quarter, our customers continue to enter or enhance long-term agreements with Atlas for dedicated freighter capacity," said Dietrich. "The overwhelming majority of our fleet is now committed under these long-term contracts, which puts us in a strong position for the years ahead."

Fleet Expansion

As previously announced, Atlas Air will purchase five of its existing 747-400 freighters when their leases expire this year to ensure enough aircraft to meet customer demand. It similarly retained six 747s from leasing companies in 2021. 

The company is also scheduled to receive the last four 747-8 freighters produced by Boeing BA, all of which have already been assigned to customers, by the fourth quarter. The first one, which is undergoing final testing and painting, is expected to be delivered later this month. Atlas also has four 777s on order from Boeing.

The investment reflects management's confidence in demand for international airfreight, particularly in the express and e-commerce sectors.

Atlas Air provides service for companies such as Amazon AMZN, FedEx FDX, UPS UPS and DHL Express DPW.

The transport services provider said it is dealing with higher costs for pilots from its new collective bargaining agreement, which was finalized last year, and higher premium pay for pilots operating in COVID hot spots.

The holding company's operating assets include all-cargo carrier Atlas Air, leasing company Titan Aviation and a majority stake in Polar Air Cargo. It operates 108 aircraft, including 54 747s. Five of the jumbo jets, plus five Boeing 767s, are passenger aircraft that provide charter transport for airlines, sports teams, entertainers and the U.S. military.

About 60% of its flying is on fixed service contracts that include hiring the aircraft along with crew, maintenance and insurance with guaranteed monthly minimums and a guaranteed rate per block hour of operation. Another 25% is long-term charter work in which customers pay by the trip. Six percent of Atlas' flight time is with the U.S. military and about 4% is for impromptu, one-time charters.

Earnings per share of $2.99 beat Wall Street's consensus by 36 cents and revenue was $20 million higher than projected.

More FreightWaves/American Shipper stories by Eric Kulisch.

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