Good morning Mr. Secretary, ladies and gentlemen. Thank you for the introduction Roger. I am glad to be here this morning and hope that I can leave you all with some information that you will find interesting, if not useful about the air cargo industry.
Freighter Airline Strategies For Growth & Financial Viability Ron Lane Chief Marketing Officer Presentation To 30 th Annual FAA Aviation Forecast Conference March 17, 2005
Atlas Air Worldwide Holdings <ul><li>World’s largest Boeing 747 freighter operator </li></ul><ul><ul><li>20 Boeing 747-400Fs </li></ul></ul><ul><ul><li>22 Boeing 747 “Classic” Freighters (-200s/-300s) </li></ul></ul><ul><li>Global network serving all major trade lanes </li></ul><ul><li>Diversified portfolio of businesses </li></ul><ul><ul><li>Scheduled, airport-to-airport (Polar) </li></ul></ul><ul><ul><li>ACMI Outsource (Atlas Air and UK-based GSS) </li></ul></ul><ul><ul><li>Charters </li></ul></ul>Company Overview Primary Operating Units
AAWH’s operating units participate in all major air trade lanes around the world. Company Overview AAWH Capacity Deployment: 2004 Source: Atlas Air Worldwide Holdings. Data reflect scheduled services, charters and ACMI Outsource operations.
Polar’s scheduled service network <ul><li>Hub networks at Chicago, Amsterdam and Seoul </li></ul><ul><li>Serving most major intercontinental markets </li></ul><ul><li>Recently awarded China authority </li></ul>Company Overview
<ul><li>Industry Structure and Major Airline Competitors </li></ul>
There are two basic business models: integrated and non-integrated. Agent Destination Forwarder Airline Origin C O N S I G N E E S H I P P E R Airport-Customer Interface Customer-Airport Interface Airport-To-Airport (A-T-A) Integrated Carrier Integrated Carrier Integrated Carrier Retail competitors deal with shippers ACMI and Charter carriers provide primary and supplemental capacity to Shippers, Forwarders, Airline’s and Integrators Industry Structure Retail competitors deal with shippers Wholesale competitors deal with retail firms
The consolidation trend is well underway… <ul><li>Forwarders are free to acquire and merge as they see fit. </li></ul><ul><li>Carrier consolidation is limited by national-ownership rules. </li></ul><ul><li>Integrator business model requires large-scale operations, so there are virtually no small players. </li></ul>Rest 100% = /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. TRAFFIC SHARES: 2003 2.6 bn shipments 12.6 mm metric tons 109.7 mm FTKs Top 15 Sources: MergeGlobal, Inc. primary research, IATA World Air Transport Statistics, company reports. Industry Structure
The Top 16 Cargo Airlines by freight tonne-kilometers (CY 2003) <ul><li>FedEx </li></ul><ul><li>Lufthansa </li></ul><ul><li>Korean </li></ul><ul><li>UPS </li></ul><ul><li>Singapore </li></ul><ul><li>[ Atlas/Polar ]* </li></ul><ul><li>Cathay </li></ul><ul><li>Air France </li></ul><ul><li>China Airlines </li></ul><ul><li>EVA Air </li></ul><ul><li>JAL </li></ul><ul><li>Cargolux </li></ul><ul><li>British Airways </li></ul><ul><li>KLM </li></ul><ul><li>Northwest </li></ul><ul><li>Emirates </li></ul><ul><li>Polar Air </li></ul>Source: International Air Transport Association and company data * Consolidated Traffic Industry Structure
Overall air freight market prospects are good. <ul><li>According to IATA, 2004 saw 13.4% world air freight traffic increase over 2003 </li></ul><ul><li>Forecasted average market growth rate to average 6.3% per year compared to 5.4% average growth in large freighter capacity increase* </li></ul><ul><li>ACMI lift represented 8.2% of capacity in 2003, up from approximately 5% in 1995 * </li></ul><ul><li>Charter market rebound attests to supply/demand constraints </li></ul>* Source: Boeing 2004/2005 World Air Cargo Forecast Supply / Demand Outlook
Cargo demand is growing faster than passenger traffic. More freighters will be required to handle the demand. Supply / Demand Outlook Forecast Index (2003= 100) Passenger Traffic Growth = 3.1% CAGR Freight Traffic Growth = 6.2% CAGR Passenger Traffic Growth = 5.2% CAGR Freight Traffic Growth = 6.3% CAGR Historical Index (1990 = 100) Intercontinental Passenger/Cargo “Growth Gap” Source: IATA historical data and Boeing forecasts (contained in Commercial Market Outlook and World Air Cargo Forecast) “ Growth Gap”
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 Asia/Pacific Europe Latin America +246 +1,042 +127 +271 +405 +698 +418 +568 Exports From The U.S. Imports Into The U.S. Asia/Pacific represents ≈ 60% of new import tons! Source: MergeGlobal, Inc.
Near term growth in Large Freighter capacity will come principally from MD-11 and B747-400 conversions. <ul><li>MD-11 conversions are continuing at a high pace. Eventually, the feed stock will be used up. </li></ul><ul><li>747-400 conversions will begin to come on line in 2006. Production capability will increase over time. </li></ul><ul><li>Retirements of less productive 747 Classics will continue as new capacity comes on line. </li></ul><ul><li>Production of 747-400F/ERF aircraft is continuing. </li></ul><ul><li>New types of freighter production will come at the end of the decade (A380, B777, B7XX) </li></ul>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. 747-200 Freighter Equivalents * Data and projections from MergeGlobal 2003 Study Historical Projected Global Freighter Supply and Demand* Supply / Demand Outlook
Two logical extremes capture and project the main issues in freighter strategy. Strategy High Revenue Low Cost Philosophy “ Air cargo is a commodity” “ Air cargo is segmentable” <ul><li>Complex product range </li></ul><ul><li>Heavy marketing spend </li></ul><ul><li>Large network – emphasize scope, scale and quality </li></ul><ul><li>Superior operational execution – especially with regard to revenue integrity! </li></ul><ul><li>Bare-bones product </li></ul><ul><li>Little or no marketing – willing dependence on key customers </li></ul><ul><li>Small network (“cherry-picking”) </li></ul><ul><li>Focus on being absolute low-cost producer </li></ul>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. <ul><li>Minimum Competitive Scale (MCS) is the fleet size below which unit revenue will not exceed unit cost over the long term. </li></ul><ul><li>Both unit revenue and unit cost curves are unique to each airline. </li></ul><ul><li>Objective is to maximize the profit envelope, not unit cost or unit revenue. </li></ul>Fleet Size (Freighters Or Equivalents) USD Per Block Hour Unit Cost Versus Unit Revenue USD Per Block Hour ILLUSTRATION Average Unit Cost Average Unit Revenue Minimum Competitive Scale (MCS) Source: MergeGlobal, Inc. Profit Freighter Airline Strategies
AAWH has adopted a Diversification Strategy <ul><li>Achievable only with a large fleet </li></ul><ul><li>More complex approach to business </li></ul><ul><li>Portfolio of different services between which capacity can be reallocated as market conditions change </li></ul><ul><li>Reduces overall risks </li></ul>Freighter Airline Strategies
Atlas Air Worldwide Holdings – Sales Channels U.S. Gov’t Brokers Direct Shipper Sales Unit Customer Service Type Scheduled Service Freight Forwarders Polar Airlines Charter Business Unit ACMI Atlas ACMI Charter AMC & Com’l Charter Forwarder Charter Freighter Airline Strategies
Conclusions: <ul><li>Air freight demand will continue to grow – but will be volatile </li></ul><ul><li>Tight supply versus demand is projected to continue for several years – resulting in stronger yields </li></ul><ul><li>Higher fuel costs will require higher yields, but will make efficient fleets more competitive over the long term </li></ul><ul><li>Consolidation will continue in the industry making scale and scope of operations important competitive factors </li></ul><ul><li>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 </li></ul>Conclusions