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Cargo

The borrowers

Aircraft, crew, maintenance and insurance (ACMI) providers are broadening their platforms and client bases. Ian Putzger talks to several of the key players to investigate this increasing trend
 

Rich Corrado, President of Airborne Global Solutions (AGS), has recently been asked a lot of questions about some of the company's activities in its US home market. But he would rather talk about a fledgling venture on the other side of the globe.

 

Air Transport Services Group (ATSG), one of the freighter leasing companies under the AGS umbrella, was revealed last September to be one of the founders and stakeholders in a new freighter airline slated to take to the skies over China midway through 2016. "A big focus right now is getting this China venture off the ground," says Corrado, who is also Chief Commercial Officer at ATSG.

 

 With an investment of $16 million, ATSG is going to have a 25% stake in the nascent United Star Express, alongside: Chinese Boeing 737 operator Okay Airways; a developer and investment company; and Vipshop, the third-largest e-tailer in China, according to Corrado.

 

 The undertaking aims squarely at the effervescent e-commerce market in China, he confirms, pointing to a large middle class market in a country which the retail infrastructure is not as robust as in the US, something that magnifies the trend to shop online. Growth in this segment has been in excess of 40% in China, he adds.

 

 Going it alone was not an option for a US-based ACMI outfit. "We can't fly cabotage routes in China. That's a non-starter," he remarks. Moreover, joining forces with interested parties in a consortium appears to be a promising approach to this market. Corrado points to Alibaba which, after teaming up with SF Express triggered meteoric growth in the courier firm's airline offshoot, SF Airlines.

 

The e-commerce theme envelops ATSG on its home turf as well. In North America it is the subject of fevered speculation surrounding the logistical ambitions of Amazon, particularly after reports surfaced that ATSG was involved in trials for a hub-and-spoke operation involving five Boeing 767 freighters for an unidentified customer. Not too many potential customers spring to mind, though Amazon has been quite vocal about its desire to control its own logistics, hinting at potential savings in the neighbourhood of $5.5 billion. In December one report alleged that the company was in negotiations to secure 20 767 freighters for its own network. Moreover, the trials conducted by ATSG served airports within 90-minute trucking distance from Amazon distribution centres.

 

 Corrado is not at liberty to comment on anything relating to this customer, including any confirmation that it is Amazon. However, a tie-up with an ACMI provider would make a lot of sense for the e-commerce firm, more so than establishing and managing a proprietary airline.

 

 The growth of e-commerce engenders the emergence of new clients for ACMI operators and lessors. Besides giant e-tailers and carriers to serve them, some postal authorities are showing a fresh appetite for dedicated freighter operations. "We dry-lease a freighter to China Post," says Michael Steen, Executive Vice President and Chief Commercial Officer at Atlas Air Worldwide and President and Chief Executive Officer of Titan Aviation Holdings Inc. Atlas Air Worldwide's clientele for the ACMI, CMI and dry-leasing services now hails from the airline, integrator, forwarder, postal service and shipper segments.

 

The aircraft for China Post, a 737-400F, added a new type for its dry-leasing line-up. In recent years its fleet has grown from an all Boeing 747 base to include 777s, 767s, one 757 and two 737s, both  in freighter and passenger variants.

 

 Southern Air has undergone an equally radical transformation. It shed its 747 freighter core and embraced the 777 as its main aircraft, with its fifth being delivered late last year. It also brought 737-400s into the fold, reflecting its focus on integrators as a core clientele. That focus was also in evidence a year ago, when Southern announced that it was taking over Florida West International Airways, an ACMI outfit focusing on 767-300 aircraft. Southern management described the takeover as a move to expand and diversify its service offerings through new fleet platforms.

 

 "767s and smaller freighters are the (ACMI) market today," comments Stan Wraight, Executive Vice President of Strategic Aviation Solutions International. Medium-range widebodies like the 767 work best with integrators, postal networks or regional markets, Corrado adds.

 

 After years of near inertia, acquiring 767s and turning them into an all-cargo configuration has become a lively scene, raising questions about adequate feedstock to meet demand. ATSG has secured a supply of 767s from Qantas, but Corrado sees bottlenecks ahead.

 

 "I think it will be a challenge in the next year or two getting feedstock," he says, adding that demand will possibly drive up prices. Would he turn to Airbus A330s to cover a shortfall of 767s? "I don't see us getting into anything other than 767s in this situation. The A330 has longer legs, but the cube is not that different. In express you rarely max out on weight. For the economics in an express network, the 767 is better for us," he comments.

 

 A few years back, all the action was around 747s, while 767 conversion activity was stagnant. Has the momentum swung away from the larger aircraft altogether? Steen sees no demand for converting 747s ahead, but he remains bullish on the platform – both the 747-8 and the 747-400. He points out that the transpacific freighter operation that Atlas provides through Polar Air Cargo to DHL has grown from six to 12 747 freighters. Atlas also increased its number of 747-8 freighters from nine to 10 in 2015, meaning it now has atotal of 34 747 production freighters in its fleet. "There will be growth in intercontinental and intra-regional markets. I see opportunities in both," he comments.

 

 The global fleet of 747-400 cargo aircraft – conversions and production freighters – has shrunk considerably in recent years, while more are poised to exit as carriers downsize their widebody freighter fleets and bring in newer replacement models. Historically, this type has been a core aircraft in the ACMI business, and for some operators the only type.

 

 "The past few years have been challenging for 747-400 aircraft owners and operators. We've had to work hard to successfully keep all our aircraft operating at full capacity. While the freighter market has been relatively soft, and new and more efficient widebody freighters have been introduced into the market, the worldwide 747-400 freighter fleet has started to shrink with a number of aircraft being scrapped or parked," confirms Hannes Hilmarsson, Chief Executive of Air Atlanta.

 

 The more recent decline in fuel prices will slow down this trend and give the remaining 747-400 fleet a stronger position in the market, he says. "There are, and always will be, certain key routes that will continue to require a 747-400 freighter, as they cannot be serviced by passenger aircraft alone. There is simply no other aircraft that can offer the same operating characteristics as the 747," he concludes. "The 747-400 has a lot of life in it," declares Steen. "We are extremely happy with the performance." He adds that projections of continuing moderate fuel prices over the coming years augur well for the type.

 

 The combination of downward yield pressure and low fuel cost is undermining the case for the 777 and 747-8 freighters, given their high capital costs. They require excellent utilisation on an ongoing basis to justify the investment, notes Hilmarsson. Still, some operators are adding more 747-8s to their fleets and Atlas Air has all of its own committed in long-term deals. "It is extremely important for global trade," comments Steen. In November, Atlas took delivery of its 10th 747-8 freighter.

 

 Steen anticipates ongoing demand for freighters as global trade overall is projected to grow. Further opportunities beckon as carriers cut back their own freighter activities while still requiring supplemental capacity.

 

 Like Atlas, Air Atlanta has all of its eight 747-400 freighters signed up on long-term contracts. In addition to these, the Icelandic ACMI provider has seven 747-400s in passenger configuration. "This has given Air Atlanta excellent economy of scale and major operational efficiency on the 747-400 aircraft, so we are in a great position to add further 747 freighters to our fleet in 2016 should there be demand in the market, which we feel likely given the recent fuel developments," Hilmarsson remarks.

 

 Like Atlas and Southern, Air Atlanta is looking to other types as well. "We are also constantly looking for opportunities to add capabilities for other widebody aircraft types, where we have already added A330/A340 capabilities and are very keen to explore the 777 market," Hilmarsson comments.

 

 He is looking at the 777 as a likely replacement down the line for Air Atlanta's passenger 747s, which would open the door to offer 777s in cargo configuration as well. "We are not yet in a position to make any comments on the economics of a 777 converted freighter, but we remain very keen to explore the business case of the 777 further, for both passenger and freighter ACMI services," he states.

 

Atlas has gone through a massive change in its set-up. From 25 aircraft of two types back in 2008 (747-400s and -200s) it has grown to 67 across 747-8 and -400, 777, 767, 757 and 737 platforms. This range gives it a broad base in the market, which has been reflected in its most recent published quarterly results: for the period ending 30 September 2015 there was an adjusted gain of 11.6% in net profit.

 

 "All segments were performing steadily throughout the first three quarters of 2015," comments Steen. "If the general market was slow but express grew, we grew with it.”


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