Sep 23, 2021
general Analysis
[4 min Read]
$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:
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:
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FedEx Express
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
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."
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