Bloomberg News

Atlas Revenue Hit as Economy Converges With Troop Cuts: Freight

January 09, 2013

Obama Weighs Leaving No U.S. Troops in Afghanistan After 2014

U.S. Defense Secretary Leon Panetta speaks to the troops during a visit to Kandahar Airfield on Dec. 13, 2012. Photographer: Susan Walsh/Pool/Getty Images

Atlas Air Worldwide Holdings Inc. (AAWW:US), which did almost one-quarter of its flying for the armed forces in 2003, is seeking new customers to counter a drop in military shipments as the longest combat operation in U.S. history winds down. A weaker global economy just makes it harder.

In an air-freight industry in which available aircraft has exceeded demand for 21 of the past 22 months, Atlas has had trouble signing private customers to long-term contracts while Europe remains in a recession and Asian economies struggle.

The transportation of military equipment and soldiers, about 15 percent of all the hours Atlas spent flying in the third quarter, amounted (AAWW:US) to almost 30 percent of operating revenue in that period. Hours flown for the military may dwindle to about 7 percent, the Purchase, New York-based carrier said, as operations wrap up in Afghanistan.

“People need to be cognizant of the fact that the military drawdown will have a negative effect on Atlas’s earnings at the same time the company is challenged by overall soft economic conditions,” said Jack Atkins, an analyst at Stephens Inc., who downgraded the company to a hold in November. “All those things together made us say: ‘Let’s just pump the brakes.’”

Two Atlas competitors had trouble staying afloat amid the dwindling of the Afghanistan war. Norwalk, Connecticut-based Southern Air Holdings Inc. blamed its September bankruptcy filing on the drawdown and shrinking defense budgets. Privately owned Global Aviation Holdings Inc., which provides the largest share of civil-reserve service, is emerging from bankruptcy reorganization.

More Crews

Atlas will offset fewer military charters by attracting private business to its fleet of modern, more fuel-efficient Boeing Co. 747-8s, which are replacing aging 747-400s, and by providing more flight crews, Dan Loh, director of investor relations, said in a phone interview.

Together with aircraft maintenance and insurance, those services make up more than 70 percent of Atlas’s business, as measured in block hours, or the time aircraft spend traveling.

Other companies involved in military transportation have also tried to reposition their revenue streams as the war effort lessens. Miami-based World Fuel Services Corp. (INT:US), which brokers aviation fuel in Afghanistan, bought Denmark’s Nordic Camp Supply ApS in 2011 to capitalize on that company’s relationship with the North Atlantic Treaty Organization.

Atlas receives military charters as a member of the Civil Reserve Air Fleet, which aids the Department of Defense when its demand exceeds capacity. Atlas’s contract entitles it to about one-third of all military requests. Carriers including United Continental Holdings Inc. and FedEx Corp. (FDX:US) also work for the armed forces.

In fiscal year 2012, commercial aircraft flew 85 percent of troops and 37 percent of cargo around the globe for the military, according to U.S. Transportation Command figures.

Earnings Guidance

Weak private demand has prevailed so far, leading Atlas to trim earnings guidance. Industry-wide global air freight volumes fell 2 percent in the first 10 months of 2012 compared with the year-earlier period, according to the most recent International Air Transport Association data. Atlas secured 20 long-term aircraft contracts instead of a projected 23 by the end of 2012, and it cut estimates for total block hours flown last year to 153,000 from an earlier expectation of 160,000.

Atlas shares have slumped (AAWW:US) about 37 percent after peaking on Feb. 18, 2011. While the stock partly recovered last year, it dropped 17 percent on Nov. 1 when the company posted third- quarter profit trailing analysts’ estimates and reduced its forecasts for 2012 earnings. Shares declined further on Nov. 27 when RBC Capital Markets analyst John Barnes lowered his Atlas rating to “sector perform” from “outperform.”

Fewer Troops

Shrinking military business presents further risk. The number of troops on commercial flights fell to 1.2 million in fiscal 2012 from 1.4 million in 2009, the government figures show. Airlines hauled 176,818 tons of cargo last year, down from a peak of 243,345 tons in 2010.

At Atlas, military charter revenue dropped 4 percent in the third quarter from the same period a year before, the first decrease in more than a year. The carrier was more often booked for one-way missions that paid two-way fares during the Middle East buildups.

“Military volumes certainly have declined and will continue to decline, just absolutely,” Bill Flynn, president and chief executive officer of Atlas, said during a Nov. 14 investor conference. “Our business model is not built on military.”

The total hours Atlas will fly for the military should drop to about 18,000 this year from 23,000 in 2012, Stephens’s Atkins said. It flew almost 35,000 hours for the armed forces in 2003.

Afghanistan Drawdown

While the government has yet to announce a detailed plan for leaving Afghanistan, the number of U.S. soldiers there peaked at about 100,000 in May 2011, according to data compiled by the Brookings Institution. As of November, there were 68,000 stationed there.

Finding more military passengers elsewhere probably won’t be a viable option for Atlas either. The number of troops in foreign countries averaged about 536,000 from 1950 to 2000 and was declining throughout that period, according to a 2006 study from the Heritage Foundation. There were about 203,000 troops abroad in 2002, the year before the invasion of Iraq.

“There are going to be a heck of a lot less people deployed overseas than there are right now,” said Steven Bucci, director of foreign policy studies for the Washington-based foundation. “I’d be surprised if we had much of anything left in Europe by the end of President Obama’s term. In the Middle East, South Asia theater, you’ll definitely see a retraction from the high points that we hit in the past and where we are right now.”

To contact the reporter on this story: Alex Kowalski in Washington at akowalski13@bloomberg.net

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net


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Companies Mentioned

  • AAWW
    (Atlas Air Worldwide Holdings Inc)
    • $34.81 USD
    • -1.24
    • -3.56%
  • INT
    (World Fuel Services Corp)
    • $41.67 USD
    • -0.39
    • -0.92%
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