Dan McHugh is the CEO of Southern Air, a U.S.-based ACMI (Aircraft, Crew, Maintenance and Insurance) operator. Prior to his appointment as CEO in 2009, McHugh was the CEO of DHL Express Asia. Southern Air recently navigated its first year since emerging from restructuring, and in March, the company entered a multiyear agreement with DHL Express to provide five Boeing 737-400s. McHugh spoke with Air Cargo World about Southern Air’s future.
What is the outlook for Southern Air?
Even with the reduction in the U.S. military business, which is a material impact for the entire industry, I am personally very, very confident in our future without the U.S. military business because we repositioned. So everything goes in cycles, and you need to continue to innovate and ensure that you focus on costs. This is a very, very capital-intensive, cost-intensive business, so you need to be the low-cost player.
I look at Southern Air – we came out of bankruptcy, our financial restructuring, one year ago, and we moved our company to the greater Cincinnati area, the CVG, which is Cincinnati-Northern Kentucky. We completely re-staffed our organization for the most part. We have exceptionally high-quality organization, and we in the meantime have been awarded the new DHL 737 network. So again, I don’t want to knock on wood and jinx anything, but we’ve done a tremendous amount in the last year, and we’ve really repositioned our business, and I’m very confident about the future.
What is the outlook for the worldwide ACMI market?
You really got to think about it in terms of what type of aircraft you’re flying. The international air cargo market, you got to have big, wide-body airplane. You either have to have a 777, or you have to have a 747-8 or the 747-400. The MD-11s are, for the most part, way past their efficiency. And one could argue that the 747-400 is as well, and that’s why you see so many of these aircraft that have been grounded in the last year. So you got to ask the question why, and it’s really because of efficiency. Four engines vs. two on the 777, for example. Older vs. newer – newer is more reliable. And they’re both two-man cockpits, but the fact that you just have efficiencies with the 777 that you don’t have with 747s. Now there are 747-8s that are being delivered by Boeing to the people like Cathay, Korean Air, etc., and Atlas as well. I think Atlas has got a unique 747-8. But those aircraft can only be used in the big, main pipelines of international air cargo – Shanghai to Chicago, Hong Kong to Amsterdam. It’s got to be the big, kind of meaty, wide pipelines. And therefore, it’s only those carriers who really serve those types of pipelines. The 777, in contrast, is a large aircraft, has the range and has a smaller payload definitely, but more than enough of a payload, and I think that’s the difference. And it has two engines vs. four engines.
The second is that the ACMI market is, over the last 10 years, there has been a bit of speculative nature for it where people saw the demand exceeded supply. Companies would go out there and spec an airplane – they’d go in and lease an airplane knowing that they were able to put it into a contract with the same duration or greater, and make some money out of it. Well, no one’s going to be specing airplanes, especially 747-400s, anymore, and I doubt if anyone’s specing 747-8s. I think there’s opportunities in the 767 market. We certainly have found that the 737 is an ACMI opportunity for us with DHL.
What sectors of the market are gaining importance for Southern Air?
People come to me and say, “You are now very, very focused on DHL, and aren’t you worried about that?” And I say it’s the eggs in the basket type of question, right? And my response is I love the basket. It’s the best basket. If you’re in our business, it’s the best basket in the world to be in. Why? Because this comes back to the sectors. The integrators and international supply chains will continue to grow at double-digit. It’s a growth part of the industry. So the integrator sector, those who serve the integrator sector should have, let’s call it, above-market opportunity. The integrator market is growing faster than normal air cargo. And if you’re doing business in the integrator sector, you should have above-average growth opportunity.