$AAWW This is an update on my AAWW DD, based on what we learned from the FedEx earnings call. I know it is heavily focused on FedEx, but theres a lot of reading between the lines here and it all looks amazing for Atlas Air.

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Recap

In Part 1 of my DD on Atlas Air WorldWide (AAWW) I outlined the following points:

AAWW trades at a P/E of <5
AAWW is hugely benefiting from global supply disruptions
Those supply disruptions have no end in sight
Even when they do end, the shift of passenger airlines to narrow-body jets will drop airfreight volume capabilities by ~20%, and AAWW will be needed to fill this gap
13.6% of the float is shorted
The CARES act restriction on buybacks will end this month.

Thesis

Atlas Air Worldwide (AAWW) is critically undervalued at an absurdly low valuation given its great near- and long-term prospects; there several upcoming catalysts for a rapid revaluation.

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FedEx Earnings Call

Turning now to International, we are forecasting air cargo market to be more than $80 billion by calendar year 2025... We expect air cargo capacity to remain constrained through at least the first half of calendar year 2022, a full recovery is not anticipated until 2024. Global air cargo capacity ... is still down 10% compared to pre-pandemic levels. Capacity on international lanes remain scarce and we have seen European and APAC export demand recover to pre-pandemic levels. -Brie Carere, Chief Marketing and Communications Officer

FedEx Earnings

Today we got to hear earnings from FedEx (FDX), a major global shipper and customer of AAWW. But yesterday, we got a sneak preview when it was announced that FedEx is increasing its rates by 5.9% to 7.9% next year. For your reference, that's the most in over a decade - a clear indicator that they don't expect their costs to come down.

In this comment, before the earnings were released, I made it clear what we want to see from FedEx: high revenues and high costs. And that is exactly what we saw. Revenues are up pretty significantly (on top of a strong year when stay at home drove high delivery volumes) - this signals strong demand. But the bigger, most beautiful line item is "Purchased Transportation." FedEx spent $5.66B on outsourced transport this quarter. That is almost 14% higher than this same time last year.

FedEx Earnings Strong, Expenses Stronger

Now, I know what you think... "How do we know how much of that Purchased Transportation went to airfreight?" Good news. They split it out by segment. On page 23 of the report, FedEx states the following:

FedEx Statement on Purchased Transportation Costs, page 23

I will emphasize the higher volumes at FedEx Express and FedEx Freight...!

Now, it's safe to assume:

FedEx Ground labor costs have nothing to do with our beloved Atlas Air.
FedEx Express consists of a decent chunk of airfreight.
FedEx Freight is significantly airfreight.

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FedEx Express

Purchased Transportation costs increased 19% YOY, from 1.3B to 1.55B this quarter. [Page 28]
Statement: "Purchased transportation expense increased 19% in the first quarter of 2022 primarily due to higher utilization of third-party transportation providers and increased rates." [Page 29]

Now, to be clear, the majority of FedEx Express's Purchased Transportation is almost certainly not airfreight. The actual percentage of increased expense on outsourced airfreight is probably better indicated in FedEx Freight...

FedEx Freight

Purchased Transportation costs increased 41% YOY, from 170M to 239M. [Page 31]
Statement: "Purchased transportation expense increased 41% in the first quarter of 2022 primarily due to the challenging labor market resulting in increased utilization of third-party service providers and higher rates." [Page 32]

This is a huge indicator not just of FedEx's spend with Atlas Air, but the general market void that AAWW is filling...!

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So Where Are We Now?

The FedEx earnings report could not have gone any better for Atlas. The numbers speak volumes. But beyond that, FedEx spells it out for us quite clearly in their Business Outlook section, and the section capturing their future aircraft orders.

The Business Outlook section includes this fun reading:

"However, we expect costs associated with the challenging labor market, including increased purchased transportation costs, higher labor costs, and network inefficiencies, to continue to pressure operating profit growth during the remainder of 2022." - Page 25, Outlook

And the Commitments section makes it even more clear:

During the first quarter of 2022, FedEx Express exercised options to purchase an additional 20 B767F aircraft, ten of which will be delivered in 2024 and ten of which will be delivered in 2025. - Page 16

And sure enough, as of this morning, we got news that FedEx expanded its agreement with Atlas. You can bet that expanding that agreement right now was at top dollar.

TL;DR FedEx might as well have said "We're so desperate to move freight that we gave Atlas Air a blank check...and they cashed it for so much money we had to raise rates higher/faster than we have in over a decade. And we bought 20 additional planes...which wont be delivered for 2-3 years."

Positions or Ban

I've only increased my stake since my last DD