Atlas Air Worldwide Holdings Inc (AAWW) 2016 Q3 法說會逐字稿

Good morning. My name is Heidi and I will be your conference operator today. At this time, I would like to welcome everyone to the third-quarter 2016 earnings call for Atlas Air Worldwide. (Operator Instructions)

Thank you. Atlas Air, you may begin your conference.

Thank you, Heidi, and good morning, everyone. I am Ed McGarvey, Treasurer for Atlas Air Worldwide. Welcome to our third-quarter 2016 results conference call. Today's call will be hosted by Bill Flynn, our Chief Executive Officer. Joining Bill is Spencer Schwartz, our 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 by clicking on the link to presentations in the investor information section of the site.

As indicated on slide 2, we'd like to remind you that our discussion about the Company's performance today include 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 or 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 insights 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've gone through the queue, we'd 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. Our third-quarter results were at the upper end of the range that we anticipated, reflecting our expanding business base and the ongoing development of our strategic platform.

In ACMI, we started 767 flying for Amazon and we benefited from accretion generated by Southern Air. Our first aircraft, which is named Amazon One and which is the first aircraft in Amazon's new Prime Air livery, began service in mid August. We have also secured all of the conversion slots and 19 of the aircraft required for Amazon by the end of 2018.

And we've made significant progress towards integrating Southern Air and its two new operating platforms. Thus far, the contributions and synergy from Southern Air and its express focus 777 and 737 CMI services have exceeded our expectations.

In charter, our results reflected an increase in military cargo and passenger demand during the quarter. And our dry leasing business maintained its steady annuity-like performance. Despite the commentary about the Hanjin bankruptcy during the quarter, we did not observe any noticeable impact on airfreight demand or rates.

We're looking forward to a strong fourth quarter. We expect peak season demand to be solid with a seasonal improvement in commercial airfreight yield, which we are now seeing.

With additional seasonal flying for express operators and a lower level of maintenance expense, we expect both a sequential and year-over-year improvement in our block-hour volumes, revenue, profitability, and margins. As a result, we anticipate that the fourth quarter will account for slightly more than 50% of our 2016 adjusted EPS.

We believe strongly in the future of airfreight, express, and e-commerce. We are shaping Atlas to make the most of that future through the quality and scale of our fleet, through the efficiency of our operations, and through the strength of our business relationships.

As we announced recently, we have entered into a five-year agreement with FedEx to provide it with five 747-400 freighter aircraft for peak season flying in 2017 through 2021. We have worked closely and successfully with FedEx for many years, with an agreement to provide five aircraft for 2016 peak flying already in place. Our new agreement will enable both of our companies to better plan for the longer term.

Slide 4 highlights another important achievement during the third quarter. On September 20, our shareholders voted overwhelmingly at a special meeting by an affirmative vote of 99.9% of the votes cast to approve the issuance to Amazon of warrants to acquire up to 30% of the common shares of the Company. The warrants granted to Amazon are part of the inherent value creation and alignment of interest designed to strengthen the long-term relationship with each other that we announced last May.

In addition to leasing and operating 20 767-300 freighters in support of Amazon's package deliveries to its customers, our agreements also provide for future growth of our relationship, as Amazon may increase its business with us.

With that, I would like Spencer to summarize our third-quarter results in more detail. After Spencer, I'll have some more comments about our fourth-quarter outlook and then we'll be happy to take your questions.

Spencer?

Thank you, Bill, and hello, everyone. Slide 5 highlights our third-quarter results. On an adjusted basis, income from continuing operations net of taxes totaled $27.4 million or $1.09 per diluted share. On a reported basis, we had a loss from continuing operations net of taxes of $7.5 million or $0.30 per diluted share.

Our reported results were primarily due to the impact of nondeductible expenses that were triggered by shareholder approval of the warrants granted to Amazon. This approval constituted a change of control as defined under certain of the Company's benefit plans.

As a result, we recognized $26.2 million of expense, including accelerated compensation expense for certain restricted and performance share and cash awards during the quarter. The share-based portion of the compensation expense was $11.6 million.

As Bill noted, our third-quarter results benefited from the accretion generated by Southern Air. We also saw an increase in military cargo and passenger demand and a steady performance in dry leasing.

Our adjusted earnings in the third quarter included an effective income tax rate of approximately 30%. On a reported basis, we had an effective income tax rate of more than 230%, and that was principally due to income tax expense resulting from the nondeductible expenses triggered by the shareholder approval of the Amazon transaction. Based on our current tax framework and the aircraft that we've purchased and placed into service, we do not expect to pay any significant federal income tax until 2025 or later.

Looking at slide 6, higher ACMI revenues during the quarter reflected an increase in block-hour volumes, partially offset by a lower blended average rate per block-hour. Both effects stem from an increase in CMI flying in 2016, particularly following our acquisition of Southern Air and from the temporary redeployment of 747-8 aircraft to charter.

As a result, average CMI aircraft equivalents, which do not include a component for aircraft ownership in the rate per block-hour, increased to 28.4 aircraft during the quarter compared with 15.9 in the third quarter of 2015, or an increase of 12.5 aircraft. 747 ACMI cargo equivalents, which do include a component for aircraft ownership in the block-hour rate, totaled 20.8 aircraft compared with 21.8 in the year-ago period.

The change in charter segment revenues in the third quarter was primarily driven by the impact of lower fuel prices. This impact was partially offset by an increase in military cargo and passenger demand as well as the temporary redeployment of 747-8 aircraft from the ACMI segment. In dry leasing, revenues were relatively stable.

Moving to slide 7, segment contribution totaled $92 million in the third quarter compared with $84 million in the third quarter of 2015. Higher ACMI segment results were primarily driven by accretion from our acquisition of Southern Air.

Higher charter contribution during the period reflected the beneficial impact of additional 747-8 capacity as well as an increase in military cargo and passenger demand. In dry leasing, segment contribution during the quarter was relatively unchanged.

Turning to slide 8 and our balance sheet. We ended the first 9 months of 2016 with cash, including cash equivalents, restricted cash, and short-term investments, totaling $118 million. Our cash position at September 30 reflected cash used for investing and financing activities, partially offset by cash provided by operating activities.

Net cash used for investing activities during the first nine months of the year primarily related to our acquisition of Southern Air, core capital expenditures, and purchase deposits and payments for flight equipment and conversion slots, including the acquisition of 767-300 aircraft to be converted to freighter configuration for our service to Amazon. We expect to finance a substantial portion of the acquisition and conversion costs for these aircraft as they are placed into service with Amazon.

Net cash used for financing activities during the first 9 months included $136 million of outflows for debt payments, partially offset by $85 million of proceeds from debt issuance.

Moving to slide 9, we remain committed to maintaining a strong balance sheet while growing our fleet. As I anticipated, our net leverage ratio improved to 5.3 times in the third quarter. Looking forward, we expect our net leverage ratio to improve to approximately 5 times at the end of this year and early next year as we ramp up our Amazon service. After that, as the aircraft are placed in service and we begin to generate substantially higher EBITDAR, we expect our net leverage ratio to continue to improve over time.

Now I would like to turn it back to Bill.

Thank you, Spencer. Slide 10 highlights our framework for 2016. It begins with $2.20 of adjusted EPS that we earned in the first 9 months of the year. Our performance and the actions we've taken to align our business with the faster-growing express and e-commerce markets are the foundation for our strong fourth-quarter outlook.

Looking to the fourth quarter, we anticipate solid peak season volumes and yields across our markets. Consistent with our year-to-date performance and our framework for the full year, we expect adjusted EPS from our continuing operations to total slightly more than $2.25 in the fourth quarter. Our view includes an EPS impact for necessary startup expenses and the issuance of warrants related to our new service for Amazon.

It also anticipates substantially lower maintenance expense compared with the third quarter of 2016 and the fourth quarter of 2015. We expect maintenance to be about $200 million in 2016, which is comparable with last year. However, we incurred substantially more expense in the first three quarters of this year, and so our fourth-quarter total should be much lower.

In addition, our fourth-quarter outlook reflects our acquisition of Southern Air in April; the addition of our 10th 747-8 aircraft, which entered our fleet midway through the fourth quarter of 2015; and the addition of three converted 767 freighters to our dry leasing portfolio that we are also operating on a CMI basis. Two of these were for DHL in December 2015 and February 2016, and the other in mid-August was our first for Amazon.

For the full year, we expect that block-hour volumes, including Southern Air, will increase about 19% compared with 2015, with more than 70% of the total in ACMI and the balance in charter. We also anticipate that depreciation and amortization expense to total approximately $145 million. And that core capital expenditures, which are mainly for spare parts for our fleet, should be about $55 million for the year.

Moving to slide 11, I'd like to underscore the following. Our third-quarter results were at the upper end of the range that we anticipated, reflecting our expanding business base and the ongoing development of our strategic platform.

We are looking forward to a strong fourth quarter, led by our superior fleet, the strength of our brand, and our global market leadership. We believe strongly in the future of airfreight and we are shaping Atlas to make the most of that future by driving more deeply into the faster-growing express and e-commerce markets, building new and stronger business relationships, and delivering long-term growth opportunities.

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

(Operator Instructions) Bob Labick, CJS Securities.

I wanted to start with Amazon. I know you can't say too much about a particular customer, but we've talked a little bit about this. Could you tell us if the upfront expenses, the training, et cetera, are in line with your expectations so far? And if you still believe that in total, the contract should turn profitable in 2017?

Sure, Bob. It's Spencer. So you know last quarter we said that the startup expenses were a little bit higher than we had anticipated. This quarter, the third-quarter expenses were in line with what we had anticipated and we expect the same for the fourth quarter.

So as we've talked about, we are bringing on pilots before they actually start flying. We are training pilots, and so we're incurring those startup costs. We expect that, as you know, to be a drag on earnings this year.

And yes, we still expect next year that the relationship with Amazon will become accretive because we still will be incurring those startup costs because we will continue to bring in pilots before they actually start operating. And we'll continue to train them before they start operating. However, we will be operating many more aircraft for Amazon and that more than offsets the startup costs.

So the relationship becomes accretive in 2017. It becomes even more accretive in 2018 and then much more beyond that.

Okay, great. And then don't know if you can answer this part of it, but in terms of timing of Amazon Prime 2 through 20, is there way we should think about when those planes will come online?

So Bob, we haven't said that and we're not going to say that today. But what we can tell you is that, as you know, we are operating the first now and we expect to have 20 by the end of 2018. And I think it's a fair assumption that between 2017 and 2018, we'll be rolling out 19 more fairly evenly over that period. Beyond that, we can't really comment on it.

Okay, great. I'll get back in queue. Thank you.

Helane Becker, Cowen.

Can you just explain the compensation expense? I'm not sure I understand that accelerated compensation line.

Sure, Helane. It was really described in the proxy statement that we filed. But the change of control under our benefit plans, as I said, we filed our proxy statement in August. We had a special shareholder meeting on September 20. Shareholders, as Bill noted, approved the Amazon transaction by a vote of 99.9% of the votes cast.

And so as a result of that, we incurred a change of control as defined under some of the Company's benefit plans. And so the $26 million charge resulted from accelerated vesting of certain restricted stock units, performance stock units, and cash-based long-term incentive awards that would have otherwise been incurred over a relatively short period of time. Less than about a third has actually been paid out as cash. The vast majority is an accrual. Does that help?

All right, thank you. That's helpful, thank you. And just on another subject, can you talk about your other customers in the fourth quarter and whether they are flying above minimums and how you see the fourth-quarter peak shaping up?

Sure, Helene. This is Bill. I'll address it. We are seeing a very strong peak season in this fourth quarter across our customer base. That was the question you asked. And it is across our customer base.

But also it's across all markets or most markets that we serve. So it's not just strength in the transpacific, but we are seeing very good strength in Asia to Europe trade lanes, South America trade lanes, and Europe exports overall.

So for us, that's a very good story. In prior years we've seen, for example, maybe a strong transpacific fleet. And if there were weakness in other markets, aircraft would start to migrate to that market. But kind of the broad strength of the concern I think is good for the industry overall. It's certainly good for our customers and for us. And it's having a positive -- the strength has a positive impact on yields as well and we're seeing that now.

And I'll just add, Helane, that during the third quarter, our ACMI customers flew 11% over their minimums. And so that was well above the prior-year third quarter. We expect customers to fly well above their minimums, as Bill was talking about, but well above their minimums in the fourth quarter.

And we think we'll end the full year similar to the prior year of around 7.5% over. And that's even though the prior year had the benefit of the West Coast port congestion at the beginning of the year.

Yes. That's right.

Great. Thanks, gentlemen. Thanks for your help.

David Ross, Stifel.

Bill and Spencer, it maybe a different answer for the two of you. But what is the most important metric or tool that you focus on? When you come into the office every day or when you're talking to people in the field, what is it that you track more than anything else right now?

On-time performance. The first thing we look at. And we get three shift briefs a day and I surely look at two of them; I don't necessarily get the third all the time. But that's the first thing we talk about.

Because that is what our customers buy. That's how we are able to differentiate ourselves for the customers. That's how we're able to grow with our customers. And if we are running on time at a very high rate of reliability, it is ultimately a lower cost operation to run.

Because once a network or an aircraft gets off schedule for whatever reason, we are spending more money than we would have planned to to get back on time. We have to ferry crews or reposition aircraft, et cetera. You can imagine. So that's the number one metric. Because that in my mind drives everything else.

That makes sense. And Spencer, do you have any different answer from the finance side?

I don't, really. Like Bill, I look at the same thing constantly. I mean, we don't operate a simple, easy, scheduled network. Our network is quite complex. We fly where our customers want us to fly. It is a complicated puzzle; you know, operating all of that and ensuring that we have a high level of utilization.

So as Bill said, any delay, any sort of issue can throw everything off. And we are constantly focused on meeting that on-time performance.

Other than that, you know all the metrics that we share publicly and those are obviously all very important. Typically, they are a bit more back-looking, whereas on-time performance is now. What's happening right now. Where are our aircraft? How are they operating? Are we meeting customer requirements?

One thing that I'll just add a little bit more. If you look in our proxy and in our CD&A, you'll see that compensation is principally driven by EPS and free cash flow. But every employee who is part of the management bonus program, no matter what your role is, a percentage of your bonus is determined by the Company's on-time performance against goals. The belief being no matter what role you have in the Company, there's some site line where you can indeed affect on-time performance.

Thanks. That's very helpful. And then just a clarification question on your Amazon answers from earlier. You said that the 19 other aircraft in the current contract are expected to come through in 2017 and 2018. That means that you're only going to be flying one this peak season? Which is the one you put in in August?

Yes, yes.

Yes, that's right.

Okay. And then on the answer about how the startup costs are trending versus expectation. You mentioned that 2Q is higher than expected, but 3Q and 4Q are coming in as expected. Now, is that off of a reset expectation after the higher level in 2Q or is that that they are coming in now lower in line with initial expectation?

No, I think there was some timing. So during the second quarter, we had some higher training than we expected. And so now that's kind of leveling off. And no, it wasn't a sort of reset. But now the costs are in line with our expectations. We continue to watch it very, very closely, but we expect that they will be in line with our expectations.

Excellent, thank you.

Scott Group, Wolfe Research.

So Spencer, I'm hoping you can help us kind of bridge to the fourth-quarter guidance. I don't think we've ever seen earnings double from third quarter to fourth quarter. Maybe can you give us a little bit more of the pieces in terms of revenue or contribution margins and tax rate and things like that?

Absolutely. So one of the biggest items -- so Bill talked about it before. But one of the biggest items is maintenance expense. If you look at maintenance expense, our estimate of maintenance expense for this year, it is right around $200 million. And if you look at the actual maintenance expense last year, it was right around the same amount.

However, if you look at what we've incurred thus far through three quarters and you compare that to what we incurred through the first three quarters of last year, we've incurred much more this year. And so it's a long way of saying that the fourth-quarter maintenance expense we expect to be much lower than it was in the prior year.

Heavy maintenance we think should be significantly down from the fourth quarter 2015. We have no heavy maintenance events forecasted. Last year in the fourth quarter, we had a seat check, we had a D check, we had some engine overhauls. So that's a really significant difference. So that's the biggest one.

Then we added Southern, of course. We acquired Southern on April 7, and so we'll have a full quarter of those earnings that we just didn't have last year. Last year during the fourth quarter, we put in place our 10th 747-8, and so it operated for about half of the quarter last year. And so this year, we'll have a full quarter of that and it is performing well.

We added the two 767s for DHL. Offsetting that, of course, is the Amazon startup expenses that we'll have this year that we didn't have last year. And we had some tax benefits in the fourth quarter of last year that we don't expect to have this year. So when you put all that together, it's a pretty significant increase from the fourth quarter last year to the fourth quarter this year. Or if you look at it sequentially either way.

And there's a good slide -- we have a slide in our presentation that really focuses on the maintenance expense. And you can really see that coming down and you can see that there's no heavy maintenance scheduled for the fourth quarter of this year, which was again not the case last year.

Right. So I see the maintenance and we've had years where you've had a similar kind of sequential drop in maintenance. But maybe I'm just missing something on the top line. Can you share what's a ballpark revenue number that you guys are thinking for the fourth quarter? Maybe I'm just missing something on the top line.

Scott, we typically don't guide to that level of detail. But we try to give you what we think will be the bottom line. We think that the direct contribution in our ACMI and our charter segments will continue to improve. We think that the margins in both of those segments will continue to improve. I think those are the key details there. But we generally don't guide down to that level of detail.

Okay. And then maybe just last question. Any initial views on 2017 you can share with us? Maintenance expense is a big one, if you have an initial view there. And then do you think that we have a new pilot contract in 2017 or is that more likely in 2018 as we think about the expense there?

So I'll comment on some of the things for 2017 and I'll turn it over to Bill to talk about the labor. But I think the things to think about for 2017 -- obviously, we provide our 2017 framework in early 2017. We'll do that during the next earnings call.

But some things to think about is, as I mentioned before, we acquired Southern on April 7. So next year we'll have a full year of Southern. We put in place the two 767s operating for DHL. And so we'll have a full year of that. Amazon, we talked about the fact that this year it's a drag on earnings. Next year it becomes accretive. So that's a big item.

And then maintenance is the big sort of unknown that we haven't provided you guidance on yet. We're still going through that process internally and that's something that we have to come back to you on. And so we'll do that in February. Those are really the big I think puts and takes for 2017 to think about.

And then I'll let Bill talk about labor.

Sure. Thank you, Spencer. So obviously, our pilots, our crew are really incredible part of our team and really are at the front end of providing service to our customers. And just kind of thinking back to the question I had from David.

The Atlas contract became amendable in September. The Southern contract becomes amendable in November. We are in discussion with our union leadership within the context of the contract, within the context of the Railway Labor Act. So I think both parties want to get to an agreement as quickly as practicable, but I'm really not in a position to predict when that agreement may occur.

Okay. Thank you, guys.

(Operator Instructions) Jack Atkins, Stephens.

Thanks for the time. So I guess first off here on the cash balance, when I look at it in the quarter -- at the quarter end, it's as low I think as it's been in quite some time. I think typically you guys try to run it about $300 million to $500 million historically in cash on the balance sheet.

Has your philosophy there changed? And what sort of liquidity do you guys have under your credit facilities if you need cash or working capital or CapEx?

Yes, it was a great question. Thank you, Jack. So you know, this year we acquired Southern in an all-cash transaction, which is immediately accretive. And we've been out there acquiring aircraft and conversion slots related to the Amazon flying. And we've been paying cash to do that.

We'll be able to back lever a substantial portion of the Amazon 767s that we'll be operating for them. So it will just take a little bit of time.

The aircraft that we are acquiring are passenger aircraft that we'll be converting to freighter configuration. And then after they come out of freighter integration, they start operating for Amazon. They become financeable at that point.

So we have to outlay some cash before that happens. So over the next couple of years as we are doing that, hurts our cash. But then as soon as they come out, then we'll be able to back lever them. So that will have a big impact over the next couple of years.

We have good, as you heard -- we have good expectations for peak season. That will certainly improve cash flows. We feel good about our ability to continue to raise money. We think that we had a really strong balance sheet. We continue to have a strong balance sheet.

That strong balance sheet enabled us to acquire Southern. It enabled us to go out and acquire these aircraft for Amazon. So we are in a really, really good position that allowed us to do this.

And then as soon as the aircraft come out, we'll be able to back lever them. And then as the aircraft start operating for Amazon, generating significant free cash flow, then you'll really see the cash balance start to improve. So we're right where we thought we would be, right where we want to be, and then you'll start to see us be able to back lever a bit more.

If I could just add a couple more comments. We never planned or intended to have a cash balance of $0.5 billion on our balance sheet. If you kind of look back historically, as we built up those cash balances, we were able then to take them and invest them and grow our business.

Now, growth sometimes is stairstep like or episodic as those opportunities present themselves. Years ago, in 2010 and 2011, we were -- Spencer and I talked to our investors about the stress test that we had run on the Company and how much cash balance did we need in order to feel that we had an adequacy of capital. And it was substantially more like what we have today, not $300 million or $400 million or $500 million.

Okay. Okay, great. Well, Bill and Spencer, thank you for that clarification. And then just going back to maintenance expense for a moment. If you look at the absolute level, Spencer, to your point earlier, it's been relatively flat over the last several years, at just plus or minus $200 million.

But your maintenance expense per block-hour has declined, I think, call it, 23% or so from 2014. What is sort of driving that decline? Are there are internal things that you guys have been doing to pull that lever down? And is that sustainable or do you think that maybe your maintenance expense per block-hour may creep back up as we move forward?

Jack, that's a great question. We've really seen maintenance per block-hour decline, as you've said. I think it's helpful as we've grown our fleet. For example, 767s, when we first started flying 767s, we didn't really have the scale efficiencies.

And so having those efficiencies helps us certainly from a crewing standpoint, but also helps us have the right parts and the right maintenance. And so all of that just makes us a more efficient airline. So having many more 767s has really helped with that overall.

We have a continuous improvement initiative here at the Company. And we have saved well over $200 million over the past several years. It is a nonstop effort. We're constantly focused on it. And we sit around with some very smart people and try to focus on what can we do to try to take some costs out. And of course, run a safe, reliant, reliable, compliant airline.

So we're constantly looking at that. I think we've made great strides, as you've talked about. We will continue to try to focus on that.

Okay, great. And then one quick follow-up question, if I could. You had a nice increase in your passenger charter flying in the quarter. I think that was up 20% year over year. Is that commercial passenger or was that military related? And can you speak to what you're seeing in terms of military demand as you head into the new military fiscal year, which started last month?

This is Bill, Jack. So military level of flying is up a bit, but I think going into 2017, we are expecting pretty much stable level of activity, 2017 or FY2017 compared with FY2016.

The passenger flying, as you know, is a larger component of our AMC flying today. Majority of that passenger flying is pretty much steady-state. Programs that we run, such as free flights a week every week from Seattle to Japan and Korea and back for military personnel and their families. Right now, our plan and the expectation is that the 2017 level of flying looks pretty similar to what we've had so far in FY2016.

Jack, just the other -- I think part of your question is it's primarily due to military passenger flying.

Okay, great. Thanks again for the time.

Steve O'Hara, Sidoti & Company.

Just a question, going back to the pilots. Just curious what you are finding terms of the hiring process and whether -- there seems to be some talk about a pilot shortage. And just kind of wondering your thoughts on that and whether you think you have the ability to hire enough pilots as needed or any issues there?

Thanks, Steve. So right now, we have about 2,000 pilots. We've hired something in the neighborhood of about 350 pilots this year. We do, of course, need to hire more pilots in 2017 for growth with Amazon, as we've already talked about. We have some retirements as well and maybe a bit of attrition.

Our goal is to be an employer of choice. I think we are. I think the hiring that we've been able to achieve and just the kind of the great people that are joining our pilot workforce suggest that or underscore that with us. So I believe we're in a very good position to continue to hire the workforce that we're going to need to meet our customer requirements.

Okay, thank you. Then just going into the contracts with the union groups. Can you just remind me -- do they want to combine those groups or do they want to stay separate? And maybe your feeling on that?

So what we've said, Steve, is that we will merge Southern into Atlas. And there are really three aspects of that. There's the normal back -- well, yes. There's normal back-office integration when one company is acquired by another. We are essentially through most of that integration work that Spencer and other folks here at the Company have led. And that's pretty much done.

The other -- the second area of integration or emerge is the operating certificate. So we are in the process of acquiring a single operating certificate, and at the end of that, we will operate as Atlas. That's a regulatory process; it's certainly guided by and improved ultimately by the FAA. We are well underway in that process.

We expect to have that single operating certificate in the second half of 2017, and that is well underway. And it's a fairly defined process; it's what United and American and Delta have all done. So it's notable and definable and we're working within that construct.

And the third element is, of course, the pilot workforce. And so it is our plan, it is our intention, to integrate and merge the two pilot groups into a single workforce. And that process is underway and that process is provided for. Both in the Atlas contract and in the Southern contract, there's specific contractual language that defines the process we follow should Atlas acquire a company and seek to emerge it. And there's very similar language in the Southern contract.

Okay. All right. Thank you very much.

David Ross, Stifel.

Thanks for the follow-up. In the press release and talking about third quarter in the charter segment, it mentioned a decline in market rates, excluding fuel surcharge. From everything we've heard, the airfreight market was actually pretty decent in third quarter, with most people reporting growth. So I was wondering what the reason was for the softness in market rates, in your opinion?

Dave, it's a good question. The biggest decline overall in rates for us in our charter business was obviously fuel. But if you back fuel out, we saw a much smaller impact driven by just overall decline in rates.

Now, as Bill talked about before, that is not what we are seeing right now. Right now, we're seeing yields that have really improved. But over the summer, it's pretty typical. It's a slower period of the year. Right now, what we're seeing is yield improvement.

And what's interesting right now as opposed to the past several years, it's not really being driven by a new product introduction or something like that, a big program charter that's happening. Instead, it's really broad across. And so it bodes very well overall for the industry. So that's what we're seeing right now.

I think, as you're pointing out there, Spencer, July wasn't great in terms of the overall underlying market demand. August showed some nice improvement for the first time in a while. And we've just had these September numbers. So I think you're seeing the effect of the full three months of the third quarter, David.

But what's important to us is this nice increase and trend in demand as we go September into October, November, which is the peak season. And we are also seeing that impact in yields as well, as we talked about earlier.

And then lastly, UPS mentioned on their conference call last week they're going to buy up to 28 747-8s. What are your thoughts on that impact as it relates to the market for the 747-8s?

Yes, I think it was obviously a great order by UPS. So they've committed to 14 firm, as I understood from their press release, and with options for 14 more. Well, I think it's says a couple things. I think we'd agree that UPS is a knowledgeable buyer of aircraft, and for them, they determined that the 747-8 would be the right next large wide-body freighter into their fleet.

It's certainly beneficial for all operators of the 747-8 to simply have more 747-8s operating in a global fleet. From time to time, we've been asked about the utility and the attractiveness of that aircraft. We've acquired 10. And what we think about Boeing's willingness to continue to support and things of that nature. So increasing the size of the fleet benefits all of us who operate the 747-8.

And I think it underscores another topic that we've talked about on prior calls, that as you think about the two large wide-body aircraft that are in the market today, the 777 and the 747-8 that there are markets and networks where the 747, either the 400 or the -8, would be an optimal choice relative to the 777.

But the converse is true as well. And that's, of course, one of the key reasons we were interested in acquiring Southern. So that now we are in the position to operate and do operate both 47 platform, the 400s and 8s and the 777s, and we can be responsive and provide the right asset that our customer would want for their network or for a part of their network. So overall, I think it's very good and very encouraging.

And is UPS currently using any of your 747-8s? Or is this all incremental?

The only flying we do for UPS when we do fly for UPS is peak season flying. They are not a year-round ACMI customer of ours. So these are 14 into their fleet. They have, as they pointed out, a number of 747s now. And I think they suggested -- I obviously can't speak for UPS -- some fleet rationalization over time. But that really -- they will define, I'm sure.

Great, thank you.

And there are no further questions at this time. I turn the call back over to the presenters.

Okay. Well, thank you, Heidi. Spencer and I certainly want to thank all of you for taking time to talk with us today and for your interest in Atlas Air Worldwide. We appreciate your sharing your time with us and we certainly appreciate the questions and the opportunity to have a good dialogue. So thanks very much and we look forward to speaking with you again.

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