Freighter Airline Strategies
For Growth & Financial
Viability
Presentation To
30th Annual FAA Aviation Forecast Conference
Ron Lane
March 17, 2005
March 05
Chief Marketing Officer
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AGENDA
I.
II.
III.
IV.
V.
March 05
Company Overview
Industry Structure
Supply / Demand Outlook
Freighter Airline Strategies
Conclusions
1
I.
March 05
Company Overview
2
Company Overview
Atlas Air Worldwide Holdings
World’s largest Boeing 747
freighter operator
20 Boeing 747-400Fs
22 Boeing 747 “Classic”
Freighters (-200s/-300s)
Global network serving all
major trade lanes
Diversified portfolio of
businesses
Scheduled, airport-toairport (Polar)
ACMI Outsource (Atlas Air
and UK-based GSS)
Charters
March 05
Primary Operating Units
3
Company Overview
AAWH’s operating units participate in all
major air trade lanes around the world.
AAWH Capacity Deployment: 2004
Source: Atlas Air Worldwide Holdings. Data reflect scheduled services, charters and ACMI Outsource operations.
March 05
4
Company Overview
Polar’s scheduled service network
Hub networks at Chicago, Amsterdam and Seoul
Serving most major intercontinental markets
Recently awarded China authority
March 05
5
II. Industry Structure and Major
Airline Competitors
March 05
6
Industry Structure
There are two basic business models: integrated
and non-integrated.
Retail competitors
deal with shippers
Origin
S
H
I
P
P
E
R
CustomerAirport
Interface
Airport-ToAirport
(A-T-A)
AirportCustomer
Interface
Integrated
Carrier
Integrated
Carrier
Integrated
Carrier
Forwarder
Airline
Agent
Retail competitors
deal with shippers
March 05
Wholesale competitors
deal with retail firms
Destination
C
O
N
S
I
G
N
E
E
ACMI and Charter carriers provide
primary and supplemental capacity
to Shippers, Forwarders, Airline’s
and Integrators
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Industry Structure
The consolidation trend is well underway…
Forwarders are free to
acquire and merge as
they see fit.
Carrier consolidation is
limited by nationalownership rules.
Integrator business
model requires largescale operations, so
there are virtually no
small players.
TRAFFIC SHARES: 2003
100% =
12.6 mm
metric tons
109.7 mm
FTKs
Top 15
61%
64%
2.6 bn
shipments
100%
Rest
39%
36%
Forwarders /a
Carriers /b
Integrators /c
/a International air freight traffic only.
/b IATA members only; Scheduled freight FTks – Freight Tonne-Kilometers.
/c Integrators defined as: DHL, FedEx and UPS. Data represent U.S. air and ground parcel shipments.
March 05 Sources: MergeGlobal, Inc. primary research, IATA World Air Transport Statistics, company reports.
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Industry Structure
The Top 16 Cargo Airlines by freight
tonne-kilometers (CY 2003)
1.
2.
3.
4.
5.
6.
FedEx
Lufthansa
Korean
UPS
Singapore
[Atlas/Polar]*
6.
7.
8.
9.
10.
Cathay
Air France
China Airlines
EVA Air
JAL
11.
12.
13.
14.
15.
16.
Cargolux
British Airways
KLM
Northwest
Emirates
Polar Air
*Consolidated Traffic
March 05
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Source: International Air Transport Association and company data
III. Supply / Demand Outlook
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Supply / Demand Outlook
Overall air freight market prospects are good.
According to IATA, 2004 saw 13.4% world air
freight traffic increase over 2003
Forecasted average market growth rate to average
6.3% per year compared to 5.4% average growth
in large freighter capacity increase*
ACMI lift represented 8.2% of capacity in 2003, up
from approximately 5% in 1995 *
Charter market rebound attests to supply/demand
constraints
March 05
* Source:
Boeing 2004/2005 World Air Cargo Forecast
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Supply / Demand Outlook
Cargo demand is growing faster than passenger
traffic. More freighters will be required to handle
the demand.
Intercontinental Passenger/Cargo “Growth Gap”
Historical
Index (1990 = 100)
350
300
250
200
150
100
50
0
Forecast
Index (2003= 100)
400
350
Freight Traffic
Growth =
6.2% CAGR
Freight Traffic
Growth =
6.3% CAGR
300
250
Passenger Traffic
Growth =
3.1% CAGR
200
Passenger Traffic
Growth =
5.2% CAGR
150
100
'90
'93
'96
'99
'02
'03 '05 '07 '09 '11 '13 '15 '17 '19 '21 '23
“Growth Gap”
Source: IATA historical data and Boeing forecasts (contained in Commercial Market
Outlook and World Air Cargo Forecast)
March 05
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Asia will account for the majority of the world’s
air freight growth in the next five years.
Forecast Growth In U.S. Intercontinental Air Freight Demand
Thousands Of Additional Metric Tons Compared To 2004
Imports Into The U.S.
Exports From The U.S.
+1,042
+698
Asia/Pacific
represents ≈
60% of new
import tons!
+568
+418
+405
+271
+246
Asia/Pacific
Europe
Latin America
2005 2006 2007 2008
Source: MergeGlobal, Inc.
March 05
+127
2005 2006 2007 2008
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Supply / Demand Outlook
Near term growth in Large Freighter
capacity will come principally from MD-11
and B747-400 conversions.
MD-11 conversions are continuing at a high pace. Eventually, the
feed stock will be used up.
747-400 conversions will begin to come on line in 2006.
Production capability will increase over time.
Retirements of less productive 747 Classics will continue as new
capacity comes on line.
Production of 747-400F/ERF aircraft is continuing.
New types of freighter production will come at the end of the
decade (A380, B777, B7XX)
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Supply / Demand Outlook
Air freight is inherently a cyclical market driven by
demand that is more flexible than supply, leading to
pockets of problems and opportunities.
Global Freighter Supply and Demand*
747-200 Freighter
Equivalents
450
400
350
300
250
200
150
100
50
0
Demand
Supply
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Historical
* Data and projections from MergeGlobal 2003 Study
March 05
Projected
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IV. Freighter Airline Strategies
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Freighter Airline Strategies
Two logical extremes capture and project
the main issues in freighter strategy.
High Revenue
Philosophy
Strategy
March 05
“Air cargo is segmentable”
Complex product range
Heavy marketing spend
Large network –
emphasize scope, scale
and quality
Superior operational
execution – especially
with regard to revenue
integrity!
Low Cost
“Air cargo is a commodity”
Bare-bones product
Little or no marketing –
willing dependence on
key customers
Small network (“cherrypicking”)
Focus on being absolute
low-cost producer
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Freighter Airline Strategies
Low costs do not guarantee profit or survival in a
network- based business. It is critical to understand
scale effects on both costs and revenue.
$11,000
USD Per Block Hour
Minimum Competitive
Scale (MCS) is the fleet
size below which unit
revenue will not exceed
unit cost over the long
term.
Both unit revenue and
unit cost curves are
unique to each airline.
Objective is to maximize
the profit envelope, not
unit cost or unit revenue.
Unit Cost Versus Unit Revenue
USD Per Block Hour
ILLUSTRATION
Minimum
Competitive
Scale (MCS)
Average
Unit Cost
Profit
$10,000
$9,000
Average
Unit
Revenue
$8,000
1
6
11
16
21
26
Fleet Size (Freighters Or Equivalents)
March 05
Source: MergeGlobal, Inc.
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Freighter Airline Strategies
AAWH has adopted a Diversification
Strategy
Achievable only with a large fleet
More complex approach to business
Portfolio of different services between which
capacity can be reallocated as market
conditions change
Reduces overall risks
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Freighter Airline Strategies
Atlas Air Worldwide Holdings – Sales
Channels
Atlas
Charter
Business
Unit
Polar
Airlines
U.S. Gov’t
Brokers
Direct Shipper
Freight
Forwarders
Sales Unit
Customer
Service
Type
March 05
ACMI
ACMI
Charter
AMC &
Com’l Charter
Forwarder
Charter
Scheduled
Service
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V. Conclusions
March 05
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Conclusions
Conclusions:
Air freight demand will continue to grow – but will be
volatile
Tight supply versus demand is projected to continue for
several years – resulting in stronger yields
Higher fuel costs will require higher yields, but will make
efficient fleets more competitive over the long term
Consolidation will continue in the industry making scale
and scope of operations important competitive factors
Carriers with greater market reach and diversification will
be better able to profit by the market circumstances and
be better equipped to weather any volatility
March 05
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