Atlas Air Worldwide Holdings Inc (AAWW) 2016 Q1 法說會逐字稿

Good morning. My name is Amy and I will be your conference operator today. At this time I would like to welcome everyone to the first-quarter 2016 earnings call for Atlas Air Worldwide.

(Operator Instructions)

I will now turn the call over to Atlas Air.

Thank you Amy and good morning everyone. I'm Ed McGarvey, Vice President and Treasurer for Atlas Air Worldwide. Welcome to our first-quarter 2016 results conference call.

Today's call will be hosted by Bill Flynn, our President and Chief Executive Officer. Joining Bill is Spencer Schwartz, our Executive Vice President and Chief Financial Officer.

As a reminder today's call is complemented by a slide presentation that can be viewed at AtlasAir.com. You may find the slides but clicking on the link to presentations in the investor information section of the site. For additional information about Atlas and our 20-plus years of operational excellence for our customers, please download our corporate fact sheet at the same address.

As indicated on slide 2 we'd like to reminder that our discussion about the Company's performance today includes some forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements relate to future events and expectations and they involve risks and uncertainties.

Our actual results actions may differ materially from those projected in any forward-looking statements. For information about risk factors related to our business, please refer to our 2015 Form 10-K as amended or supplemented by our subsequently filed SEC reports.

Any references to non-GAAP measures are meant to provide meaningful insight and are reconciled with GAAP in today's press release and in the appendix that is attached to today's slides. You can also find these at AtlasAir.com.

During our question-and-answer period today we'd like to ask participants to limit themselves to one principal question and one follow-up question so that we may accommodate as many participants as possible. After we have gone through the queue we will be happy to answer any additional questions as time permits.

At this point I'd like to draw your attention to slide 3 and turn the call over to Bill Flynn.

Thank you, Ed, and good morning everyone. This is an exciting day for Atlas. As we announced this morning we are beginning a long-term strategic relationship with Amazon.

Our new service will support the continuing expansion of Amazon's e-commerce business and the enhancement of its customer delivery capabilities. Our service will include 20, 767-300 converted freighters under long-term CMI and dry lease arrangements. We expect it to begin in the second half of this year and to scale up to full operations through 2018.

Our dry leases will have a term of 10 years and our CMI operations will be for seven years with provisions, however, to extend CMI to 10 years as well. Our Titan units will dry lease the aircraft to Amazon while our Atlas Air subsidiary will operate them on a CMI basis.

As part of the inherent value creation and to align interests and strengthen our long-term relationship, we have granted Amazon warrants with respect to the initial 20, 767-300s to acquire 20% of our common shares at a price of $37.50 per share. Our agreements also provide for the future growth of our relationship as Amazon may increase its business with Atlas.

Based on any incremental revenue paid to Atlas outside the initial 20, 767s Amazon would earn warrants to acquire up to an additional 10% of our common shares at the same exercise price. We are looking forward to serving Amazon and its customers with the excellent service that is the hallmark of our Company.

Moving to slide 4, we are entering an era of significant business growth and development, further enhancing our revenues and diversification. In addition to beginning a strategic long-term relationship with Amazon we completed our acquisition of Southern Air on April 7. Together with all of our other initiatives they provide a strong foundation for our future earnings and cash flow.

Our vision is to be our customers' most trusted partner and we appreciate Amazon's confidence in our capabilities, global scale and operating excellence. The addition of Seven Air, which shares our same commitment to safety, customer service and performance excellence, enhances our ability to be that partner.

Southern also strengthens our position as the leading global provider of outsourced aircraft and aviation operating services. Southern's highly complementary 777 and 737 operating platforms provide a broader array of services for our customers and new avenues of business growth. We're eager to capitalize on our opportunities with Amazon and Southern Air as well as our other ongoing initiatives to drive substantial value and benefit for our customers and to drive substantial value and benefit for our shareholders.

Slide 5 focuses on our framework for 2016. It begins with our first-quarter adjusted EPS of $0.31, which was in line with our expectations and our outlook for adjusted EPS growth in 2016. Consistent with our prior outlook we continue to expect our adjusted EPS in 2016 before startup expenses and the impact of initial warrants for our new Amazon agreements to increase by a low to mid single-digit percentage rate over our 2015 adjusted EPS of $5.01.

Our view reflects the demands that we are currently seeing for our services and aircraft, the benefits we expect from our fleet initiatives and debt refinancing in 2015 and the immediate accretion from our acquisition of Southern Air. As we commence our new service for Amazon we will incur an EPS impact for necessary startup expenses and the issuance of warrants. As a result, we now expect that our adjusted EPS in 2016 will be a few percentage points lower than our adjusted EPS in 2015.

Given the inherent seasonality of market demand we expect the majority of our earnings this year to be generated in the second half. Unlike results in 2015 which benefited from port congestion in the first half, we anticipate that results in 2016 will be more reflective of historical demand patterns with approximately three-quarters of our adjusted EPS in the second half of the year.

In addition, we expect earnings per share in the current quarter to be approximately 3 times the level of our first-quarter adjusted EPS. For the full year, we anticipate that block hour volumes including Southern Air will increase more than 20% compared with 2015 with about 75% of the total in ACMI and the balance in charter. Results in our dry leasing segment will benefit from the addition of two converted 767 freighters to our portfolio in December 2015 and February of this year which are also operating on a CMI basis.

Including Southern Air, we anticipate that aircraft maintenance expense will total about $195 million this year. In addition, depreciation expense should be approximately $145 million while core capital expenditures, which are mainly for spare parts for our fleet, should total approximately $50 million to $60 million for the year.

At this point I'd like to ask Spencer to provide you with some additional information about our first quarter. After Spencer I will provide some additional perspective and then we will be happy to take your questions. Spencer?

Thank you, Bill, and hello everyone. This is indeed an exciting day.

I just want to add to Bill's comments about the historic transformative nature of our relationship with Amazon and our recent Southern acquisition. We expect them to be meaningfully accretive to our earnings and cash flows over time with strong NPVs and IRRs. We expect our service for Amazon to begin in the second half of this year, become accretive starting in 2017 and scale up to full service and full accretive benefits through 2018.

I also want to reiterate our vision to be our customers' most trusted partner. Our business begins with the customer. By focusing on and driving value for our customers we are positioned to drive value for our shareholders.

Turning to slide 6 and our first-quarter results, our adjusted net income totaled $7.7 million or $0.31 per share. On a comparative basis, our results were primarily indicative of our ability to capitalize on the very strong demand for air freight in the first half of 2015 which was driven by throughput issues at ports on the US West Coast. We also recognize the higher level of revenue on the return of aircraft in last year's first quarter.

In addition, the first quarter of 2016 included an increasing crew training cost associated with our investments for fleet growth and business expansion. On a reported basis, results during the period totaled $0.5 million of $0.02 per share which included a special charge for engines held for sale.

Reported earnings in the first quarter also included an effective income tax rate of 42.8%. That mainly reflected nondeductible acquisition-related expenses incurred in connection with the acquisition of Southern Air. Based on our current tax framework, we do not expect to pay any significant federal income tax until 2020 or later.

Looking at slide 7, ACMI revenues during the quarter reflected a lower blended average rate per block hour stemming from an increase in CMI flying in 2016 as well as the impact of payments received in 2015 in connection with the return of an aircraft. Average CMI aircraft equivalents which do not include a component for aircraft ownership in the rate per block hour increased 27% to 17.2 aircraft during the quarter. 747 cargo equivalents which do include a component for aircraft ownership in the block hour rate rose 3% to 21.4 aircraft.

The change in charter segment revenues in the first quarter was primarily driven by the impact of lower fuel prices as well as the impact of higher rates related to the US West Coast port disruption in 2015. This impact was partially offset by an increase in block hour volumes mainly due to higher military demand.

It's important to note that excluding fuel our full planeload yields have grown nearly 13% since 2014 on a compound annual growth rate basis. In dry leasing revenues were affected by a decrease in revenue for maintenance payments related to the scheduled return of passenger aircraft, partially offset by revenue from the placement of two 767 freighter aircraft in December 2015 and February 2016.

Moving to slide 8, segment contributions totaled $56 million in the first quarter compared with $86 million in the first quarter of 2015. ACMI segment results reflected an increase in crew training costs for the additional pilots we have hired in connection with our fleet growth initiatives including more 767 flying for DHL, and in anticipation of our new service for Amazon.

In addition, results reflected payments received in 2015 on the return of an aircraft. These were partially offset by a reduction in heavy maintenance expense.

Charter contribution was driven by the impact of the US West Coast port disruption in 2015 and an increase in crew training costs connected with our fleet initiatives. These were partially offset by higher military passenger and cargo demand.

As with dry leasing revenues, dry leasing contribution during the quarter was affected by a decrease in revenue for maintenance payments related to the scheduled return of aircraft. This was partially offset by revenue from the placement of two 767 freighter aircraft.

Turning to slide 9 and our balance sheet, we ended the first quarter with cash including cash equivalents, restricted cash and short-term investments totaling $336 million. That compared with $444 million at the end of 2015. Our cash position at March 31 reflected cash used for investing and financing activities partially offset by cash provided by operating activities.

Net cash used for investing activities primarily related to core capital expenditures mainly for rotable spare parts as well as purchase deposits and delivery payments for flight equipment including the acquisition of 767-300 aircraft to be converted to freighter configuration for Amazon. Net cash used for financing activities included $51 million of outflows for debt payments partially offset by $15 million of proceeds from debt issuance.

As slide 10 shows, we have reduced leverage while growing our fleet. At the end of the first quarter our net leverage ratio which includes the present value of rents was 4.9 times trailing 12-month EBITDAR including the benefit of our remaining investment in our outstanding WTCs. That's up a bit from 4.6 times at the end of 2015 mainly reflecting investments for fleet growth initiatives but down from approximately 6 times at the beginning of 2014 primarily driven by the paydown of outstanding debt and an increase in earnings.

Looking forward, we expect our leverage ratio to peak at just over 5 times in the second quarter of this year, reflecting the cash payment we made for the acquisition of Southern Air. Thereafter we expect to maintain our leverage ratio in the mid to upper 4 times range throughout the remainder of 2016 and 2017 as we ramp up our Amazon service. After that, as the initial aircraft are placed in service and we begin to generate more substantial EBITDAR, our net leverage ratio will begin to decline rapidly.

With that, I would like to turn it back to Bill.

Thank you, Spencer. As I noted at the start this is an exciting day for Atlas. We are entering a new era of significant business growth and development.

As reflected on slide 11, we are excited to begin a long-term relationship with Amazon and we are excited about our acquisition of Southern Air. Together with our ongoing initiatives they provide a strong foundation for our future earnings and cash flow.

We are eager to capitalize on these opportunities. We are eager to drive substantial value and benefit for our customers and we are eager to drive substantial value and benefit for our shareholders.

With that, Amy, may we have the first question, please?

Kevin Sterling, BB&T Capital Markets.

Thank you. Good morning, gentlemen and congratulations on the new agreement with Amazon. Spencer, the 20 planes for Amazon dry leasing, where will those be coming from?

Sure, Kevin, I'll take that one. We need to source all the aircraft but we've acquired a number of them already and we're well along in various stages of procurement for the remaining.

So we don't anticipate any issues in meeting the delivery timeframe that we have. I will just talk about the financing for that piece in case that would -- you'd follow up with that

Absolutely.

We expect to use secured aircraft financing and then cash generated from operating activities to fund the cost of the project. So we don't expect to have to dip into our cash balance for that.

Okay, thank you, Spencer. That's very helpful. And here's a little bit maybe bigger question as I think about this opportunity with Amazon.

As you think about growing that relationship with Amazon, Bill, and given your breadth of asset types, could this possibly expand maybe to wide-body aircraft whether it's Dash 8s or 777s for possibly longer haul flying? Have you had any of those initial discussions with Amazon or is it still may be too early in the planning stage?

Well, thank you, Kevin. I think if we focus on what we announced today it's 20 aircraft, 767-300s.

As Spencer pointed out these will all be incremental to the fleet that we have. And that's substantial and very exciting growth for us and it's really an avenue for us to really participate in the exciting growth of e-commerce. We've not talked about expansion beyond that and of course we'll be driven by our customer.

Okay. And then last question, you talked about you guys talked about some startup costs with Amazon.

Could you maybe go into a little bit more detail what those costs are? Is it additional pilots, etc.? Maybe a little more detail on the startup cost.

Sure, Kevin. So we talked about investing in the aircraft. We will also need to invest in spare engines and parts but in addition to that we will increase our workforce.

The pilots as you mentioned absolutely, maintenance staff as, well, so overall the transaction is estimated to have a small negative impact on our 2016 earnings and then will become accretive in 2017 and then more accretive thereafter. The other impact is that this year the warrant transaction will likely increase the number of diluted shares reported in our EPS calculation so that will have an impact on EPS as well.

Okay, great. Well, I will get back into because I know there's a lot of other, questions, but thanks for your time this morning and congratulations once again.

Jack Atkins, Stephens.

Hey guys, good morning. Thanks for taking my questions.

So I guess kind of going back to the Amazon deal for a moment, can you maybe walk us through, Spencer, the warrant vesting period, how that's going to work? And then sort of what proceeds -- what do you expect to do with the proceeds from any warrant exercises that Amazon undertakes? Will Amazon be getting a seat on your Board of Directors?

Sure, Jack. With regard to the warrants so there are two tranches of warrants. The first tranche is up to 20%.

They will receive 10%, they received it already when we signed the transaction so that 10% is there. And then for aircraft 11 through 20, they will be receiving warrants for those aircraft as well as they are placed in service. So they will have 20% on a post-issuance basis.

There is a second tranche, sorry, those warrants vest as I said as the aircraft are delivered and those warrants expire after five years. There is a second tranche of warrants and those warrants are for potential additional business outside of the original 20, 767-300 aircraft transaction. And so those warrants vest as revenue is paid to Atlas and they have an expiration period of seven years and both warrants have an exercise price of $37.50.

I think that is your question on the warrants but I'm happy -- if there's more. And then you asked whether Amazon would be receiving a seat on our Board?

And so yes, Amazon receives the right to appoint a non-voting Board observer at signing and then Amazon may convert that seat into the right to appoint a director to our full Board if they exercise warrants and own at least 10% off our common stock. So we're excited about that. It's a world-class company and we're happy for them to be joining our Board.

Okay, great. How should we think about the plane level accretion from this deal? Because historically I tend to think about a 767-300 freighter converted adding about $0.04, $0.05 in EPS power. I think that's before any warrant dilution or ramp-up expenses.

Is the right ballpark to think about on a per plane basis here? We're just trying to get a sense for how accretive this could be.

Yes, Jack, I don't think we're willing to go into that level of detail on a specific customer. But what we will say is that on a full run rate basis, we anticipate the business with Amazon to represent a large portion of our adjusted earnings going forward, especially into 2017 and then 2018. As I said before, with Kevin, it should have a small negative impact in 2016, become accretive in 2017 and then be much more meaningfully accretive in 2018 and I think that's all we're willing to say on that.

Okay, I'll leave it there and jump back in queue. Thank you.

Bob Labick, CJS Securities.

Good morning. So my congratulations as well on Amazon. And just sticking with that for now, you said you're going to acquire the 20 planes and dry lease them and you are dry leasing then CMI them. Can you talk about what's the difference between dry leasing and CMIing a plane versus an ACMI relationship both from Atlas's perspective and the customer perspective and how you came to the decision to do the dry lease CMI versus your other ACMI type deals?

Well, I think starting out it depends on what our customer wants to achieve and how our customer wants to achieve that. So in this context the dry lease is for 10 years with Amazon as we talked about for all 20 which we'll go out and source, Bob.

The CMI is a seven-year agreement but could be extended to 10. And I think in bifurcating the two we have a nice and very important long-term tenor to the lease on the aircraft that we're going to go out and acquire. And then the CMI in bifurcating the two it gives the customer certainly some flexibility as to how and where they want to deploy their aircraft and then once that decision is made gives them the flexibility to decide on where best and who best to operate them.

Got it. Okay, and then just clarifying the comments on the incremental warrants, does that mean if they get more than 20 planes then they can get incremental warrants?

So Bob, it's for any type of revenue beyond the 20, 767-300 aircraft. It's any revenue that Amazon pays to Atlas for any type of service. It could be for additional planes, it could be for other services, anything outside of the 20, 767-300s.

Got it. And then how is the 20% of their 19.9% the original, how did you come up with that number? Is that roughly the equivalent of what it would cost to buy the planes or what was the methodology behind coming up with that percentage?

I think there is a negotiated value between the parties. And so Amazon is providing value to Atlas, Atlas is providing value to Amazon and that's negotiated between the parties and that's what the parties agreed to.

We think it's a great transaction for us. We hope it's a great transaction for Amazon. We're both really excited about it.

Okay, great. I will jump back in queue as well. Congratulations.

John Barnes, RBC Capital Markets.

Hey, thanks for taking the questions today. Going back maybe a little bit on the math on the aircraft, I mean is the contribution from this structure, I think that's what everybody is trying to get their hands around is this whole dry lease/CMI versus an ACMI, I mean is the contribution closer to what you would get under a CMI type of arrangement or is it closer to on a combined basis to what you would see from an ACMI perspective?

John, this is it's a particular customer transaction. And so we don't talk about we're obviously announcing a terrific transaction today and so we are excited and we're talking about this customer. But we don't talk about specific details related to profitability related to a particular customer.

So I think if you want to think about the 767 flying being dry leasing and CMI being similar to ACMI you could think of it that way. They have different characteristics but you could think of it that way.

Okay. Should the agreement dissolve for some reason over time, do you have the ability to put the planes that are on dry lease back to Amazon or is that part of the reason to do it this way?

That way if they walk away from CMI then you've still got that extra -- I'm just trying to understand that piece as well. Is there some protection for Atlas in the event that -- not that I think it will -- but is that protection there?

I think, John, without going into that level of detail as Spencer suggested there's a 10-year agreement on the aircraft and a seven on the CMI which is extendable to 10.

In terms of looking at maybe the quarterly progression of earnings as this deal is fully unveiled and rolled out versus what you're talking about this year where you've said 75% of the earnings in the back half of this year. And I know there is specific issues around that.

As you look at once this deal is fully implemented and the aircraft are up and running in 2018, is there less seasonality in the business going forward? I know obviously Amazon is going to have a huge surge around the peak but does this move out some of that demand throughout the year where maybe the earnings progression quarter to quarter is a little bit more consistent until 4Q?

I don't have the answer or the ability to comment on what demand patterns Amazon is ultimately going to have when the aircraft are deployed and their network is up and operating. But if we think about today's business, the business that we're operating today, there always has been the differences in quarter, in earnings per quarter which reflects in our case two things: market demand and also our election to accomplish as much of the maintenance and pilot training that we can in the first quarter which is the lowest quarter of market demand so that as the market ramps up and we move throughout the year we've accomplished the maintenance and we have as many of our pilots trained and deployed into the operation. And as you know the seasonality of demand and consequently the seasonality of our earnings reflects I think just about all modes of freight transportation in terms of how the quarter has changed.

All right. Then lastly I guess is the aircraft -- I think this goes back to the maintenance. As you add the incremental 20 aircraft in you talked about ramping up staffing.

Are you going to have to staff to handle that level of maintenance in 1Q? How do you go about that staffing level if you are trying to absorb all of that into like a 1Q?

Is there some of this that's being outsourced or is this entirely being done in-house? And therefore I'm just trying to understand do you have an underutilized capability for a portion of the year because you are trying to handle more and more of that in 1Q and now you're trying to do it on a much larger fleet?

Well I think a couple of points. We have good scale in the 767 fleet already. We are operating 21, 767s today and we've built that up over the last several years.

The aircraft that come in are incremental and so we will of course be hiring pilots to meet that incremental demand for flight crews. It's measured. The aircraft will be coming in over a period of time as Spencer described.

We do have operating leverage in our business and so we do have, in terms of ground staff and maintenance staff, we have that staff in place for the 21 aircraft today, we will have to add to that. But as you know, we manage maintenance, we don't perform it. So the maintenance that will be required on any new aircraft we outsource whether it's heavy.

So I think it will be as I said it will be measured. We have operating leverage in the Company and we will certainly increase our pilot workforce because we're adding so many more aircraft.

Okay. And then on the pilot side, since you mentioned that, on the pilot side I know there is some negotiation going on now. I think you guys were recently saying that you felt like it was maybe too early to get to mediation or something.

Can you just talk about the reaction from the pilots has been thus far? I mean obviously expanded opportunities are never a bad thing. But can you just talk about, and does this kind of flying for a particular customer like Atlas does it change anything about the agreement with you and the pilots in terms of work rules or anything like that?

Well, I think first of all we have a great group of pilots that have helped make Atlas the Company that we are today and we very much appreciate that. My expectation is that our pilot workforce should be happy about this opportunity or this new agreement that we're announcing today because it's about job creation. It will make us a larger, a stronger Company.

So in terms of our discussions with the pilot, as you know we have a contract with our pilots. It's governed by the National Mediation Board and the Railway Labor Act and we don't anticipate changing work rules and under our contract both of us as parties have rights and obligations in the contract. So we're looking forward to continue to grow our Company, serving Amazon and their customers and to continue to create opportunities for everyone that's on the team here at Atlas.

All right, very good. Nice deal. I appreciate you taking the time to answer my questions.

Steve O'Hara, Sidoti.

Hi, good morning. Congratulations on the announcement. I just had a question about how the transaction came about.

I'm wondering, obviously there was news several months ago about their desire or rumors about them looking into the business. And I'm just wondering were they growing customer prior to this or was this something that was just out of the blue where they weren't a customer or where they were doing kind of a trial relationship prior?

So we haven't provided direct flying to Amazon before this transaction. We've had ongoing discussions with Amazon. But I really don't think we should comment more broadly on that, Steve.

Okay, and I guess your competitor that also announced a transaction with Amazon or an agreement with Amazon had talked about potential synergies with DHL. I'm just wondering maybe if you could comment on that at all as well?

From my perspective DHL is very supportive of this transaction. And I think more broadly that ultimately all of our customers will benefit from the increased scale and scope of our operations that this transaction will drive. What specific synergies that might be realized I think are potentially out there but I don't think we really should be describing those and getting into that discussion today.

And Steve, it's Spencer. I will just add, this should make us a better Company, as Bill said more scale, more diversification, stronger financially, should be better for all of our customers.

We need to continue to focus on meeting and exceeding expectations of our customers and to provide operational excellence. That's not going to change.

Okay. And then just on the kind of dual agreement with ACMI for dry lease separation, it's my understanding that ACMI agreements maybe are a little easier for a customer to exit than a traditional dry lease.

So this would kind of protect the fixed assets a little more than maybe a traditional ACMI contract. Is that fair?

Well rather than comment on the contract specifically let's step back and give a perspective. So the core business way back 20 years ago was ACMI as the Company originally constructed it. Several years ago we saw opportunities and began talking about the ability to unscramble that alphabet, that there's ACMI, there's A plus CMI.

We created Titan, focusing just on dry leasing and then we were able to build the CMI business where the customer is providing the aircraft, either they own or they lease and they bring it into us. But if we step back and just think about aircraft and aviation services, we've grown to today in that outsourced operating services we are operating over 50 aircraft. And we're going to add another 20 to that whole range of operations through this transaction.

So it becomes difficult to parse an ACMI versus an A versus a CMI and if we think more broadly about outsource operation -- aviation services, our outsourced operations, we've come from less than 20 aircraft at some point a while ago now to something that's going to be north of 70. And we think there continue to be good opportunities for us and we will manage the risk of asset ownership across that scope as well as build scale and scope in the CMI operations and continue to focus on being a better provider of operational excellence to our customers.

Okay, thank you very much.

Helane Becker, Cowen and Company.

Hi guys, thank you for the time. Actually, may I ask a question not related to Amazon? So in looking over your first-quarter income statement your travel budget seemed to have gone up about 50% and I'm kind of wondering about that run rate, and is that just more people flying, is it the bigger operation, is that the new way I'm supposed to think about this?

Yes, Helane, it's a good question. As I mentioned earlier, we incurred increased crew training costs and so included in that we incurred travel to get our crew through the schoolhouse, through our training center which is located in Miami. So we were in part trying to do that for our ongoing business but we also were trying to do that in anticipation of adding additional pilots and preparing for the ramp-up for Amazon.

Okay, so then that $30 million run rate is kind of the way we should think about it going forward for at least this year?

While we're ramping up for Amazon I think you'll see increased travel until we get to a sort of new sustained level.

Okay, perfect. I mean all those Amazon questions I think suffice for me. So thank you. That's all I had.

Scott Group, Wolfe Research.

Good morning all. It's actually Vanck Zhu on for Scott. Congrats on the Amazon deal.

Just a couple of questions from me. So I guess going back on those planes, are you buying the converted freighters or are you converting them yourselves?

We are buying them and then converting them. So we will be sourcing the aircraft and then we will be converting them.

Okay, and how should we think about CapEx per plane both on the I guess initial acquisition of the passenger plane and then on the conversion?

So we're not really commenting on that because you can imagine the cost is competitively sensitive. But we will need to -- we've already acquired a number of aircraft and we'll well along the procurement process for the remaining. But we will be acquiring -- whatever we haven't acquired thus far we will be acquiring feedstock and then incurring conversion costs per aircraft.

Okay. And I know you don't want to speak too much on the EPS accretion per plane but I was wondering if you can help us think about just accretion in terms of block hours, revenue per block hour?

It's two things. One it's a little early and two, this is customer specific. So we really just don't provide customer-specific details like that.

It would be improper for us to do so. But we've said overall the relationship will have a small negative impact on our EPS this year. It will become accretive next year and then become meaningfully accretive thereafter.

Okay. And then one final one on fundamentals.

Just wondering in terms of ACMI contribution margins, they seem like they are the lowest they've been in a while. I know we talked about maintenance costs and travel. I was wondering if there's anything else unusual in the quarter and I guess what do you expect the ramp to be through the rest of this year for ACMI contribution margins?

Sure, I think the biggest thing that we talked about during the quarter our ACMI contributions were impacted by crew training and so we spent a little time talking about that. We really accelerated crew training during the first quarter, again for our existing business but also to get pilots through the schoolhouse, through our training center so that we can be ready for the ramp-up with Amazon.

So that certainly had an impact on our ACMI profitability. And you didn't ask but when looking at the ACMI rate per block hour we talked about a little bit earlier it is really driven by the mix of CMI flying that's included in there.

Our CMI business continues to grow and because it doesn't have the A component it brings that down. But CMI block hours up 16%, CMI aircraft up 27%. So we're really excited about the growth of that business.

Okay, great. Thanks for taking the time, guys and congrats on the deal.

David Campbell, Thompson Davis & Company.

Yes, thank you very much. I appreciate the chance to ask you some questions and congratulations on the new contract. You must have some -- of course you realize that the global freight market has a substantial amount of excess capacity and adding 20 aircraft or whatever number it is this year will have some impact on rates.

What does that do to your existing business in the Pacific, especially the Asia-Pacific region where carriers are already getting low rates. Now you're going to reduce them more with more capacity. So what do you think about all that?

So David, a couple of things. If you think about where our aircraft serve today, our single largest commercial customer is DHL. And so their volumes, their express volumes are not even counted in the statistics that IATA and others publish.

So there is -- we're serving a different, we're serving a different market than necessarily is recorded in the IATA statistics, necessarily that's what PacTel and other sources of information that might be out there. As we look at our other ACMI customers, they are many of them are outperforming the market and doing quite well. The aircraft that we're talking about adding here would be added to serve Amazon and to serve their e-commerce business which is in many ways a new market.

Predominantly our initial operations I anticipate will be domestic. And so I think there's another way to think about this and just looking at the traditional airfreight market and where capacity may be coming in, I don't think tells the story about our results, how we see our outlook prior to beginning to serve Amazon. And as Spencer pointed out the capacity will start to come in at the end of 2016, be delivered through 2017 with a full 20 in service into 2018.

So it's not an immediate introduction of 20 assets in a very short period of time. It's over a longer period of time. We were looking at our charter yields which is where we are exposed most directly to the heavy freight market.

It's about 20% of our flying, that includes our military flying in that number of 25%. We went back and we looked at 2016 over 2014 to try and normalize for the impact of the West Coast port stoppages that we had in the first half of 2015.

So on 2016 over 2014, net of fuel our yields are up 13% in that charter segment. So we've been able to manage that segment and manage where we position aircraft and take advantage of what that market has to offer us.

I see. Okay, thank you. And you currently are doing business with Amazon on your existing transpacific operations, are you not?

We are not flying aircraft for Amazon. Are our other customers, ACMI customers doing business with Amazon, I imagine so. But this is a new arrangement for us directly with Amazon.

Yes, but their freight, their forwarders give you freight may come from Amazon. And that business will be now going on Atlas aircraft, is that the way to look at it?

I wouldn't draw the conclusion, again, I don't know the details of how Amazon moves their international freight. We're not working with them directly on that. That would be other service providers.

Right. And the plus 20% of growth and revenue block hours this year, your forecast for 2016, that's before Amazon, is it not? That doesn't include any Amazon flying.

No, it doesn't but it does include Southern. Amazon flying as we said is towards the end of 2016 when it begins. But it does include Southern and our -- and what are other customers have told us to anticipate in terms of their operating schedules for the balance of the year.

Will you adjust the revenue block hour forecast later on in the year when you have a better idea of what Amazon is going to be -- what number of aircraft you actually will be operating for them this year?

Sure, David. We update our outlook framework every quarter and we'll give you the best information that we can every quarter.

But it's likely they will be a significant contributor to fourth-quarter capacity, fourth-quarter revenue block hours. Or don't you know yet?

I think it's premature for us to talk about fourth-quarter block hours in total and what contribution Amazon's operations may be at that time, David.

Okay. Thank you for helping me and I will stay on here for a while. Thank you.

Jack Atkins, Stephens.

Hey guys, thanks for the follow-up opportunity. I guess first off I think there was an engine or charge related to engines held for sale.

What sort of drove back and is that a charge and I think we've seen several asset charges over the last couple of years. Do you feel like you're properly accruing depreciation given the current market?

Sure, Jack, great question. We've talked about this before we have an engine acquisition program. It's part of our overall continuous implement program.

We've been able to purchase engines for less than it would cost us to perform overhauls in some cases. In this case we were able to trade in run out engines for engines that were fresh from overhaul. And so by trading in these old engines it allowed us to reduce the cost of these other engines.

In this case we pool all of our engines together and so therefore even though these engines were run out, the book value of the engines was on a pooled basis. And so it creates a very big loss and so for adjusted purposes, we back that large loss out. It's a non-cash item and so that's the nature of the item.

Overall we trade in the engines, we get to select any engines that we want to trade in. And so in this case we chose these run out engines. They happened to have a higher book value which creates this loss.

Okay, in terms of the military charter demand for 2016, have your expectations changed there now that you're four months into the year?

Military level is fine. Both cargo and passenger is slightly higher than 2015 and consistent with our expectations as we came into the year.

Okay, and then just a couple of additional follow-ups, the number of diluted shares, Spencer, that sort of baked into your guidance for the full year, could you provide that number?

No, I don't have that, sorry, Jack, I don't have that at my fingertips. But if you're asking how the Amazon warrants will impact that, is that what you're asking?

Yes I'm just I mean you're saying part of the reason the guidance is coming down is additional shares. Just trying to figure out what share count you're assuming.

Sure, sure. It really depends on what happens to our stock price. Because the warrants will be accounted for under the treasury stock method and so I don't know how much detail you want to know about that but it's an interesting accounting method but it really depends on where the stock is versus where the exercise price is.

It's a funny accounting method and any amount of the warrants that are in the money will impact the dilution. So it really depends where our stock is. We have made certain estimates in trying to provide our framework outlook for today but it really will depend on how our stock performs versus the exercise price.

But in terms of what's baked into your own model to come up with the down several points, that's something we can maybe follow up on?

It's not something -- we really don't want to tell you where we think we project our stock price will be. We obviously don't know but of course we had to make certain projections. But it really depends on where our stock price will be at the end of the year and how that compares to the exercise price.

And I will point out, Jack, that the other part of being down a few percentage points are the costs that we're going to incur as we ramp up our pilot, a number of our pilots and some of the other expenses that someone else asked about earlier on the call. Because we will be starting at the end of the year flying in 2017 but we really do need to begin to hire and train and take on other expenses, necessary expenses in anticipation of the startup. So it's coming.

Maybe that's not the way to get at it. What sort of extra expenses are you expecting to incur this year on behalf of that ramp-up?

Sure. We will be hiring additional pilots. We will be hiring some additional maintenance and other staff and we'll be incurring crew training as we ramp up.

But in terms of a number, is there a number you can share with us, Spencer?

No, so we had previously provided our framework for the year and then we've given you a revised guidance. So you can see what that difference is and you can determine how you want to allocate that between the various items. But we've given you a before and after.

Okay, thank you for the time.

Bob Labick, CJS Securities.

Hi, thanks. Just following up on the quarter, you addressed most of these, but in terms of let's see the contribution margin on the charter side, obviously, I guess there was pretty strong contribution from the military. Is that expected to remain at the levels from Q1 throughout the year or will that come down or how are you looking at that over the course of the year?

Yes, Bob, I think Bill just commented on that. I think we expect that our military business, both cargo and passenger for the military should be consistent with or slightly better than the prior year.

Okay great. And sure, but Q1 was obviously a very strong quarter in terms of contribution from the charter side versus two years ago. Last year obviously had the West Coast port strike so it's not really a good comparison.

But versus 2014 it was a fantastic quarter. And so I was just wondering if there was on a full-year basis military is slightly higher than 2015 but if it was front-end loaded, therefore giving you a good quarter, you know what I mean? I'm just trying to get a sense of how the rest of the year plays out in terms of those contribution margins?

So as one of our customers in the charter business is military I don't believe it's front-end loaded. It tends to be kind of smoother than that through the year, Bob. I think, though, that it's worth commenting a bit about the charter market.

The charter market has changed. A number of passenger carriers in intercontinental operations have reduced their freighter fleets over the last several years. And so from our perspective it's a bigger commercial charter market than it used to be.

It's not just fourth-quarter seasonal peak with consumer goods and [EGITS] coming into Transpac or Asia Europe, it's global. We've just completing a great fresh-cut flowers out of Latin America into the US into Europe for Mother's Day and spring generally as well.

So we're operating over 1,000 charter flights a year. That's multiple charter flights a day. I think we've got a great charter salesforce and sales team that understands the market well. And I think what we'll see are smoother charter-type contributions or good charter contributions through the year.

The market has changed over the last couple of years and of course first quarter last year was exceptional because of all the work stoppages, etc., that happened out on the West Coast. But I think it's a different charter market than it's been.

Okay, that's great. Thanks so much.

Steve O'Hara, Sidoti.

Yes, hi, I appreciate the follow-up. Just quickly, I don't know if you talked about it, I may have missed it, the Amazon they are going to be operated in the domestic market in the US, is that correct?

And then also on the conversion slots do you have slots available? How sure are you of that process and will it be -- are you planning on using Boeing or I think IAI is the other one? And if you could comment, thank you.

Thanks, Steve. Well we haven't got a specific schedule from Amazon but we anticipate that the operations or the vast majority of the operations will be within North America. We'll get that schedule from Amazon as we're moving closer to operation startup.

As Spencer said we've already secured some of the aircraft with good line of sight on the balance of the aircraft that we need to acquire. We'll be working with several shops to convert the aircraft from passenger to freighter. And I think as Spencer might've said earlier, we feel very confident about our ability to deliver the converted aircraft to Amazon based on the schedule we've agreed with them.

Okay, thank you very much.

Okay, I think, Amy, you said there weren't any other questions. So with that, Spencer and I would like to thank everyone for your interest in Atlas Air Worldwide and for taking time to join us on the call here today.

We look forward to speaking with you again soon and hopefully seeing many of you at our Investor Day which we're going to hold on June 15 in New York at the NASDAQ market site. So thank you once again.

Thank you.

This concludes today's conference call. You may now disconnect.