CEO Interview: Cargo - A Glass Half Full
William J. Flynn, President and CEO, Atlas Air Worldwide, remains upbeat about the prospects for air cargo.
Can you explain the structure at Atlas Air Worldwide?
Atlas Air Worldwide (AAWW) is a holding company, publicly traded on the NASDAQ, and we have four principal operating subsidiaries.
There is the original Atlas Air, Inc., founded in 1992, of which we own 100%. We also own 51% of Polar Air Cargo Worldwide, with the remaining 49% held by DHL Express. Polar principally flies for DHL Express, serving their transpacific and Asia-Europe routes. We are also a 49% shareholder in UK-based airline Global Supply Systems (GSS), with partners in the United Kingdom who own the other 51%. Our core business here is aircraft, crew, maintenance, and insurance (ACMI) leasing, and with GSS we are able to provide ACMI services to British Airways World Cargo in compliance with the UK laws on wet-leasing. Our fourth subsidiary is Titan Aviation. It is not an airline, it is a lessor. We dry-lease aircraft and lease engines to other airlines.
Our focus is on maximizing the utilization and return on assets, and moving into nearby opportunities and spaces. Our strategy is to leverage our core competencies and develop new capabilities where we can drive efficiencies across the organization. At the same time, we are managing our balance sheet so it remains very strong. We are in a solid financial position. It gives us some flexibility to think about growth.
What synergies do you achieve?
The holding company provides shared services to each of the four subsidiaries—finance, accounting, treasury, IT, legal services, and purchasing—and that really drives overhead efficiencies. It allows our operating companies and segments to focus on service quality. We outsource the majority of our maintenance, so we collectively procure and contract that maintenance at the holding-company level on behalf of Atlas Air and Polar. Our UK partners arrange those services for GSS.
There are certainly synergies in idea generation and thinking about new business opportunities. Also, we can move aircraft between Atlas and Polar or between GSS and Atlas.
We have 24 Boeing 747-400s. We now have three 747-8Fs and, with some recent fleet changes at the major 747-400F operators, I think we are probably the largest operator of the 747 freighter today.
How did you get into the passenger charter business?
In 2010, we entered into a contract with SonAir, which is a subsidiary of the Sonangol Group, the national energy company of Angola. SonAir had acquired two 747-400 passenger aircraft to ensure a direct air service between the United States and Angola, principally serving the oil industry. They own the aircraft and, ultimately, selected Atlas to operate them. It opened a new line of business for us that we call CMI (crew, maintenance, insurance).
Once we had a full year of SonAir operations completed, we were able to begin expanding our passenger charter operations. We’ve done it in two ways. We applied for and received approval from the US Department of Defense to begin flying troops. We started in the second half of 2011, carrying military passengers, operating two other 747-400s passenger aircraft. Subsequently, we added three Boeing 767ERs to that program.
That led us into another opportunity, which was the commercial passenger charter market. The service we operate between Houston and Luanda really only requires one aircraft, so there is an extra aircraft SonAir acquired, essentially as a hot spare. With a year and a half of operations under our belt, with very high levels of reliability, we agreed with SonAir that we ought to see if there were some VIP charter opportunities. We’ve been successful in entering that market and completed a high-profile mission in which we carried UK Prime Minister David Cameron and a delegation of 40 business representatives on a trade mission to East and Southeast Asia in April.
Our core is ACMI and we’ve augmented that with our CMI business. We think we provide our customers with a unique and compelling value proposition.
With Airbus and Boeing heavily committed to their backlog of passenger aircraft are you concerned about a potential shortage of new cargo lift?
I have a different view. If you look back to the beginning of 2008, there were about 140 747-200Fs operating and around 150 747-400Fs, with a very small number of passenger-to-freighter conversions. If you look at where we are today, the number of 747-200s that are operating is probably in the high 30s. The 400 fleet hasn’t changed and I suspect there are 50 or so 747-400 passenger-to-freighter conversions. Boeing introduced the 777Fs, around 30 or so that are flying, and eight to nine 747-8Fs have been delivered.
So my view is that Boeing has certainly committed to the large, widebody intercontinental commercial freighter. Boeing and Airbus are committed to the midsize freighters, the 767s and A330s, but I would argue the pace of introduction of new widebody freighters is going to help the air-freight market because I don’t think we will see an oversupply of freighters flooding the market. When we look at the net new capacity coming in and the older aircraft retiring, it is going to more closely match growth in air-freight demand and provide some stability in intercontinental air freight.
Do you think the air cargo sector can speak with one voice to governments on critical issues such as security?
There will always be differences of opinion on the most effective and efficient ways to implement cargo security. However, there is no difference in opinion on the urgency to do so. Carriers are working with IATA and, in the United States, Airlines for America and the Cargo Airline Association, and, overall, the industry has good interfaces with the Transportation Security Administration (TSA) in North America and with the European Union (EU).
My view is that TSA and the EU security organizations are working more closely together than ever before to design security programs that are compatible and supportive of one another – and I think we are seeing pretty good results. Most carriers, certainly those with all-cargo operations and the integrators, would believe a risk-based approach to security is the right way to go for a safe cargo aviation environment.
All security programs don’t have to be exactly the same in terms of their implementation, but they need to have the same elements—intelligence gathering, a cargo-assessment system, a trusted shipper program and a focus on the screening of high-risk cargo. While we want to avoid costs, there are a number of approaches that will allow us to be smart and to be safe, secure and protect lives. I don’t believe screening 100% of all cargo is even feasible and the technology does not exist to screen cargo at the pallet level.
But here is what is clear: terrorists are constantly looking for new ways to subvert a detection system by changing their methodology and the combination of substances they use to produce explosive devices. So we really need to look for things that we haven’t seen before.
We should use focused screening techniques, X-ray, and explosive trace detection and screeners on cargo that possess the highest risk. Also, good intelligence resources and an air-cargo assessment system that identifies high-risk cargo and points out inconsistencies and anomalies in shipments–when combined with a very important private sector role in canine screening–should provide a comprehensive approach to cargo security. We should screen 100% of all cargo that’s identified as high risk, whether it is in a passenger plane or a cargo plane.
What can the air cargo sector do to help aviation meet its environmental goals?
The air cargo segment can do a lot. Some of it is specific to air cargo and some is more general to airlines and the aviation industry. It starts with the introduction of modern, fuel-efficient aircraft, as well as continued research and development into future generations of engines and airframes. Then there are tactical things.
We don’t need to wait for the future. There are more effective maintenance procedures – such as engine washing, which results in a reduction in fuel burn. And there are operating procedures that reduce fuel burn and eliminate unnecessary hold times. That’s an air traffic control function, that’s a taxi function. Certainly, we are all hopeful that we see the introduction of NextGen technology and SESAR in Europe.
But it is also about working with our shippers and freight forwarders and supply chain providers. It’s reducing weight and changing the kind of packaging that is used in shipping, and the final product and supply chain strategies that provide for more direct downstream deliveries, which eliminate intermediate handling and distribution that burn energy. Finally, we need to stay focused on alternative fuels. Again, it is an industry issue and all players are invested.
How does e-freight play into that?
From an environmental viewpoint, e-freight, if nothing else, is going to eliminate forms and paper, and facilitate throughput. This will certainly help with energy conservation.
More importantly, the focus on e-freight—getting a common vision for the e-Air Waybill and transitioning to an XML platform—is the key for the industry.
There is a good industry coalition called the Global Air Cargo Advisory Group (GACAG), which includes IATA, The International Air Cargo Association (TIACA), the International Federation of Freight Forwarders Associations (FIATA) and the Global Shippers Forum. They have a taskforce where airlines and forwarders continue to work to create a framework strategy to catalyze e-commerce and e-freight.
When you think about freight flows, security issues, efficiency, and sustainability, as well as the overall successes in the air cargo supply chain, greater employment of e-freight and the shift away from paper is going to produce a substantial amount of benefits.
Can you share your views on the overall air cargo market outlook?
I think the market is in reasonably good shape. From 2001–2007, we had basically seven years of year-over-year growth in air-freight demand. Then, with the beginning of the financial crisis and the global economic recession, we saw a drop in 2008 of about 10%, domestic and international.
We had about 32 million metric tonnes of air freight in 2001, peaking at 47 million tonnes in 2007, and then a drop of 3.5% in 2008 and another 10% drop in 2009, to almost 41 million metric tonnes, which is about where we were in 2004. So the market gave back five years of growth in that recession. In 2010, we snapped back 12%, to about 46 million metric tonnes, and, last year, came in at about a 0.7% contraction.
This year is looking flat, but we are still looking at a 45-46 million metric tonne air-freight market. In terms of total demand, that is pretty good. If you look at what went on in Europe in 2011, and in the United States, to maintain that demand is a glass-half-full story to me.
We did see contraction on a year-over-year basis through the first 10 months of 2011–and January-February 2012 didn’t look too strong—but March was very strong. And it was strong across the board.
One month doesn’t make a trend, but you’ve got to have a good month to start that trend.
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