Air Freight Companies: Cleared for Takeoff?

Atlas Air Worldwide Holdings (AAWW) had a spectacular third quarter, showing a 181% jump in profits despite a 45% decline in revenue from a year ago in a report released Oct. 26. Too bad the aircraft owner and outsourcer of operating services isn't representative of most of the freight-delivery industry, whose financial results continue to be hobbled by the weak economy. (Despite the strong results, the shares were hammered 20% lower on Oct. 26 as the company announced a stock offering that investors feared would prove dilutive to its earnings per share.)

The main advantage that Atlas and its only direct competitor, Air Transport Services Group (ATSG), have over most freight companies is that much of their revenues comes from the flat fee per hour they get for contracting blocks of time on the two firms' aircraft to clients through multiyear contracts. Atlas earns the same amount no matter how much of its shipping capacity clients are using. Fortunately, capacity utilization is improving, up to 97% for Atlas' aircraft in the latest quarter from 90% in the prior period.

The block-hours pricing reduces earnings volatility between quarters and insulates the company from a lot of the less-than-favorable business conditions that are hurting profitability for most freight forwarders, says Charles Rupinski, an analyst at Maxim Group in New York.

As the owner and lessor of aircraft and crews to the more typical air freight forwarders, such as Swiss company Panalpina, Atlas isn't responsible for fuel costs, landing fees, or filling its 747s with cargo, all of which fall on its clients. Another advantage is that all of Atlas' clients are international and should do better than U.S.-based freight forwarders as economies in other parts of the world recover ahead of the U.S., says Helane Becker, an analyst at Jesup & Lamont Securities (JLI) in New York.

"I'm not sure we're seeing the recovery or peak shipping season that people were hoping to see in the fourth quarter," she says. That's especially disappointing since comparisons with year-ago numbers should be getting easier toward the end of the year given how the economic downturn worsened in the fourth quarter of 2008, she adds.

Shipping volumes were down 24% last December and those year-on-year declines have only begun to narrow since June 2009, which at least shows the economy moving in the right direction, she says.

"Nobody thought we'd get back to 2007 [freight capacity utilization] peaks in 2009," she says. "People are thinking that won't come back until 2010 or 2011."

Trucking: Glimmers of a Pickup What about conditions on the ground? The American Trucking Assn.'s monthly tonnage index fell 0.3% from August to 103.9 in September, a 7.3% drop from September 2008. That was a step back after monthly gains of 2.1% in July and August, but "the best year-over-year comparison we've seen since last November when the official recession was declared," says Connie Heiss in the ATA's public affairs office. On the ATA index, 2 million tons equals 100, and the index has been as high as above 120 in January 2005, she says.

Some trucking companies report getting more questions about moving freight, which would imply there's some inventory rebuilding going on by manufacturers, especially in preparation for the holiday orders season, says Becker. Trucking capacity utilization has ranged between 75% and 80% recently, compared with 97% for Atlas.

Some trucking companies seem to be expecting tonnage to be up year-over-year as early as November, but the industry as a whole may still be showing declining volume in November, says David Campbell, an analyst at Thompson, Davis & Co. in Richmond, Va.

Trucking volumes are being hampered by their complete dependence on the U.S. economy, which has been slower to recover than many overseas economies. In contrast, air freight volumes will probably be up in November from a year ago since there's already a normal recovery occurring internationally, Campbell says. In an excerpt from an interview published Oct. 5 by The Wall Street Transcript, he said global air freight data were showing a recovery starting in late August, which freight forwarders are attributing mostly to a shortage in inventories and the need for faster-than-normal delivery of manufacturing components and some consumer goods in certain parts of the world. A sharp drop in air cargo rates has also made it cheaper to ship by air than six months or a year ago, Campbell said.

UPS Is Still Struggling Things continue to be tough for package delivery giant United Parcel Service (UPS). On Oct. 22, UPS reported a 43% drop in third-quarter earnings to 55¢ from 96¢ a share a year ago, but that beat analysts' forecast of 53¢. Revenue fell 14.5% to $11.15 billion, but that was also ahead of the consensus estimate of $11 billion.

From a daily average volume perspective, UPS's international business is already showing an uptick, up 3.7% in the latest quarter, while domestic volume slid 4.7%. But on a revenue basis, the 18% decline for international packages—likely due to a decline in air cargo rates—actually exceeded a 13% decrease in the U.S. In the latest quarter, domestic shipping generated $6.87 billion, or 61.6% of total revenue, vs. $2.42 billion, or 21.7%, contributed by international freight.

The latest financial results of the other major air freight companies are less useful for gauging a recovery since they're less recent. On Aug. 24, UTI Worldwide (UTIW) reported a 57% earnings decline for the quarter ended July 31, to 12¢ from 28¢ a year ago, on a 33% decline in revenue, to $840.5 million from $1.26 billion. Total revenue in the Americas fell almost 31%, less than the declines in the Europe-Middle East and Asia Pacific regions but more than the drop in Africa.

FedEx (FDX), reporting for its quarter ended Aug. 31 on Sept, 17, showed a 22% decline in U.S. domestic package revenue despite a slight increase in package volume. The company's International Priority package revenue fell 22% on a 4% decline in volume. Earnings for the quarter dropped nearly 53%, to 58¢ a share from $1.23 a year earlier, on a 20% decline in revenue.

Although it will probably take time for the world economy to warrant a large bounce in freight volumes, air freight carriers should take comfort in the fact that a lot of aging international 747 freight aircraft have been grounded recently. That bodes well for higher cargo prices and better margins for air freight companies, says Rupinski at Maxim Group.

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