Atlas Air Worldwide Holdings Inc (AAWW) 2017 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 2017 Earnings Call for Atlas Air Worldwide. (Operator Instructions) I would now like to turn the call over to Atlas Air.

Thank you, Amy, and good morning, everyone.

I'm Ed McGarvey, Treasurer for Atlas Air Worldwide. Welcome to our first quarter 2017 results conference call. Today's call will be hosted by Bill Flynn, our Chief Executive Officer; and 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 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 can 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 2016 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. (Operator Instructions)

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.

We are off to an exciting start in 2017. As a result of the evolution of our business model and significant new customer relationships, we are building on our 2016 achievements and growing our earnings this year. We will have a full year of contribution from Southern Air, and we anticipate that our service for Amazon will have a positive impact on our full year results. We placed our second 767-300 into service with them in February and just added our third and fourth aircraft at the beginning of May. By the end of next year, we expect to be leasing 20 767s to Amazon and operating them on a CMI basis as well.

In addition to announcing our first quarter earnings and reaffirming our full year earnings framework today, we are very pleased to announce the placement of 2 747-8s with Cathay Pacific Cargo on an ACMI basis with service beginning this month. Cathay is a prominent airline based in Hong Kong and a global leader in the airfreight market. We are delighted to work with Cathay Pacific to facilitate the strong growth of its global network.

In addition to Cathay Pacific, we have recently announced other new agreements with Asiana Cargo, Nippon Cargo Airlines and FedEx that all contribute to earnings growth this year.

I also want to highlight another important recent development, the ratification of the collective bargaining agreement with the Atlas Air and Polar Air dispatchers. This was an outstanding experienced team of dispatchers. They are responsible for the planning, dispatch and oversight of all Atlas and Polar aircraft during flight, and they are represented by the International Brotherhood of Teamsters. The 4-year agreement extends the initial 5-year contract through November 2021. Our agreement was the result of collaborative and productive discussions with the leadership of the IBT and with the negotiating committee. We are grateful for their hard work and commitment during the entire process. We appreciate our dispatcher's overwhelming support for the extended agreement as well as the excellent service they provide every day.

Earnings in the first quarter were in line with our expectations and our outlook for the year. Our results reflected a solid seasonal performance. In ACMI, we benefited from Southern Air's 777 and 737 express CMI services and the initiation of 747-400 flying for Asiana Cargo and Nippon Cargo Airlines.

In Charter, an increase in military cargo and passenger demand as well as the additional 747-8 flying were offset by an increase in heavy maintenance and lower cost base rates paid by the military.

In Dry Leasing, the placements of 3 767 converted freighters, 2 at Amazon and 1 with DHL Express, were offset by a decrease in maintenance payments related to the 2016 scheduled return of a passenger aircraft. During the first quarter, FedEx assumed the long-term dry leases on 3 777 freighters formerly leased by us to TNT.

Slide 4 highlights our guidance framework for 2017. Consistent with our prior outlook, we anticipate that our adjusted income from continuing operations, net of taxes, will grow by a mid-single digit to low double-digit percentage compared with our 2016 adjusted income of $114.3 million. In addition, we expect adjusted net income in the second quarter of 2017 to be approximately 15% to 20% higher than second quarter 2016 adjusted income of $20.2 million.

Our view reflects our expanding business base, solid demand from our customers including the 2 747-8s for Cathay Pacific starting this month, the benefits we expect from our fleet initiatives and the steps we have taken to align our business with the faster-growing express and e-commerce markets. In addition, we're excited about our first full year of earnings contribution from Southern Air and the earnings accretion for the full year that we expect from our service for Amazon.

Given the inherent seasonality of airfreight demand, we anticipate that our results this year will reflect historical patterns with more than 70% of our adjusted net income occurring in the second half. For the full year, we expect total block hours to increase approximately 20% compared with 2016 with more than 75% in ACMI and the balance in Charter. Aircraft maintenance expense in 2017 should total about $245 million, and depreciation and amortization is expected to total approximately $170 million. In addition, core capital expenditures, which exclude aircraft and engine purchases, are expected to total approximately $55 million to $65 million, mainly for parts and components to our fleet.

At this point, I would like to ask Spencer to provide some additional detail about our first quarter results. After Spencer, I'll have some additional comments, and then we'll be happy to take your questions. Spencer?

Thank you, Bill, and hello, everyone.

Our first quarter results are highlighted on Slide 5. On an adjusted basis, income from continuing operations, net of taxes, totaled $8.3 million. As Bill noted, our results reflected a solid seasonal performance that included Southern Air's contribution as well as flying for new customers. Our adjusted earnings in the first quarter included an effective income tax rate of 9.5%, primarily due to our 2017 adoption of the amended accounting guidance for share-based compensation. This guidance now requires recognition of excess tax benefits associated with share-based compensation as part of income tax expense rather than within equity. We anticipate a full year adjusted income tax rate of approximately 30%.

On a reported basis, income from continuing operations, net of taxes, in the first quarter totaled $40,000, and this included an unrealized loss of $5.2 million related to outstanding warrants.

On a reported basis, our effective tax rate in the first quarter was 94%, and that was principally due to the nondeductible nature of the unrealized marked-to-market loss on outstanding warrants that I just noted. Based on our current tax framework and the aircraft that we have purchased in placement service, we do not expect to pay any significant federal income tax until 2025 or later.

Looking at Slide 6. Revenues in our ACMI segment in the first quarter reflected an increase in block-hour volumes, partially offset by a lower blended average rate per block hour. Both stem from a continuing increase in our CMI flying, following our acquisition of Southern Air and the temporary redeployment of 747-8 aircraft to Charter. As a result, average CMI aircraft equivalent, which do not include a component for aircraft ownership in the rate per block hour, increased to 29.8 aircraft during the quarter compared with 17.2 in the first quarter of 2016 or an increase of 12.6 aircraft.

Our Charter segment revenues in the first quarter were primarily driven by an increase in block-hour volumes, partially offset by a lower average rate per block hour. Volumes mainly reflect an increase in military cargo as well as passenger demand, while revenue per block hour primarily reflected the impact of lower cost-based rates paid by the military.

In Dry Leasing, lower revenue compared with the first quarter of 2016 resulted from maintenance payments related to the scheduled return of passenger aircraft last year. This was partially offset by a revenue from the placement of our first 2 767-300 converted freighters with Amazon and 1 with DHL Express.

Moving to Slide 7. Segment contribution totaled $63 million in the first quarter compared with $56 million in 2016. Higher ACMI earnings were primarily driven by our acquisition of Southern Air and lower cost related to crew training, partially offset by higher heavy maintenance expense. Lower Charter contribution during the period reflected an increase in heavy maintenance expense and lower military rates, partially offset by higher military demand, lower cost related to crew training and the beneficial impact of additional 747-8 capacity.

In Dry Leasing, segment contribution during the quarter reflected the decrease in maintenance return payment, partially offset by the placements of 3 additional 767-300 aircraft.

Turning to Slide 8, in our balance sheet. We ended the first quarter of 2017 with cash including cash equivalents, restricted cash and short-term investments totaling $124 million. Our cash position at March 31 reflected cash used for investing activities, partially offset by cash provided by operating and financing activities. Net cash used for investing activities during the first quarter primarily related to payments for flight equipment and modifications, including the acquisition and conversion of 767-300 aircraft for our service for Amazon, spare engines and core capital expenditures. Net cash provided by financing activities during the first quarter included $150 million of proceeds from our revolving credit facility, partially offset by $47 million of payments on debt obligations.

As noted previously, we expect to finance a substantial portion of the acquisition and conversion costs for the aircraft we are placing into service with Amazon. In April, we borrowed a total of $41 million under 2 term loans secured by our first 2 Amazon 767s. The first term loan for $20 million has a fixed rate of 3.02%. The second for $21 million has a fixed rate of 3.16%. And we expect to close the financing for the third aircraft shortly. It's important to emphasize that our debt has a low weighted average interest rate of 3.3%, and that approximately 90% of that is at a fixed rate and is secured by aircraft assets, which have a value in excess of the debt.

Moving to Slide 9. We remain committed to maintaining a strong balance sheet while growing our fleet. As anticipated, our net leverage ratio increased slightly to 4.9x in the first quarter. Looking forward, we expect to be around this level next quarter and then to improve over time as we place more aircraft into service and begin to generate substantially higher EBITDAR.

Now I'd like to turn it back to Bill.

Thank you, Spencer.

Moving to Slide 10. I'd like to emphasize my opening comment. We are off to an exciting start in 2017. We are building on our 2016 achievements, including our acquisition of Southern Air and our agreements with Amazon. We have just added our third and fourth aircraft for Amazon and expect to ramp up to 20 767s for them by the end of next year.

In addition to announcing our first quarter earnings and reaffirming our full year earnings framework, we're very pleased to announce the ACMI placements of 2 of our 747-8s with Cathay Pacific Cargo. Our most recently announced customer relationship with Cathay Pacific complements our other new relationship with Asiana Cargo, FedEx and Nippon Cargo Airlines.

With our expanding business base and the ongoing development of our strategic platform, and as we drive more deeply into the faster-growing e-commerce and express markets, we are well positioned to grow our earnings in 2017 and beyond.

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

Your first question today comes from Bob Labick of CJS Securities.

First, congratulations on the Cathay Pacific ACMI contract. I wanted to ask about that. Could you talk a little bit about the ACMI market, particularly for -8Fs? And how does -- how the market is now versus a few years ago? Talk a little bit about the process of this contract, how long you were talking to them. I know you can't give specifics about them, but maybe the market overall, the demand environment and how these things come about.

Okay. Thank you, Bob. So we've had a long-term relationship with Cathay. We certainly know their senior management and the organization quite well. In the most recent years, we've been flying a number of Charter operations for Cathay Pacific, building that relationship. And we've been in discussion for some time with Cathay about the opportunity to provide them aircraft in an ACMI relationship, these 2 747-8s. So as you can imagine, a contract of this nature takes some time to negotiate. And to implement Cathay here is outsourcing a good size or a good part of their operation to us. So completing the contract, negotiating it and then thinking about implementation, whether that's operational implementation or implementation into their sales and marketing strategy and outreach to their client, take time. But we're really delighted to have the contract in place and to announce that -- and certainly excited to have Cathay Pacific as a long-term customer of Atlas going forward. In terms of the ACMI market overall and the freighter market overall, I think there are really quite a number of encouraging trends in the market, whether that be for 747-8, for 747-400, particularly in the -- what we think the midterm fuel environment is going to look like for that asset class, and of course, the 777s that we fly now through Southern. Markets are up. I think carriers are looking at their fleet and how to organize and deploy their fleets. And we've had the announcement with Asiana for the last quarter, the CMI operations that we have now with Nippon Cargo Airlines. So I think the trends and the momentum are indeed very positive.

Your next question comes from the line of Kevin Sterling of Seaport Global Securities.

You guys highlighted additional volume with military on both cargo and passenger. Do you expect that continuing to the rest of this year? I know the military starts their budget on October 1. But maybe for the rest of this year, do you anticipate continued pretty strong fine with the military in both the passenger and cargo side, maybe a little bit above your expectations?

Yes, in fact, we do, Kevin. We've had strong military flying in calendar year '16, which bridged, as you know, the end of one and the beginning of the next fiscal year. We anticipate strong flying levels of activity in 2017. And based on our discussions with the U.S. transportation command and with the air mobility command, we anticipate that continuing through calendar year '18.

Okay. Great. Now are you mainly flying cargo? Or is it kind of a even mix between cargo and passenger? Is there any way to kind of break that down? Is it weighted toward one or the other?

Well, it's actually more weighted to passenger than cargo, and that's been the trend now for really several years, particularly post OEF and the withdrawal from Afghanistan and Iraq. So that continues. So it's more passenger operations than cargo. But I guess, we're not really getting into detailed numbers, but a bit more cargo than we thought that we might ask what's different, perhaps, about how we were planning for the year than what we'd experiencing. I'd say a little bit more cargo than we thought passenger is at the level that we had expected.

Okay. And just remind me, you kind of like that cargo because it tends to be a little bit one-way mission that you can pick up freight and bring it back. Am I thinking about that right still?

Yes, you are. There's a good percentage of one way that gives us more flexibility in our Charter fleet and Charter operations overall.

Your next question comes from the line of Jack Atkins of Stephens.

It's actually Andrew on for Jack this morning. I guess, first off, kind of a bigger picture question. We've really seen a surge in global airfreight demand. I guess, it's really been the past 9 months or so. And so, Bill, what do you guys think is driving this? And how sustainable do you think this is going forward and, I guess, through the rest of this year?

So that's -- I think you're right in terms of your timing. We saw airfreight demand pick up about July of last year overall, and that's continued. I think a couple of things. I think there's just higher levels of economic activity overall. Generally across all trade lanes, we're seeing a growth in demand, across the Pacific, across that Atlantic, Asia, Europe and South America volumes. So it's across virtually all markets, and it's across virtually each segment or each cargo class that uses airfreight from consumer into consumer and consumer electronics, into industrial, capital goods, pharma and perishables. So I think there's a general rise in activity overall. I think there's certainly been some rationalization of fleet and some redirection and refocus on a number of the airlines on their cargo markets. So we've seen that growth. We, of course -- well, that's the traditional heavy freight market and an important market to us, obviously, Cathay and Asiana and Nippon Cargo Airlines. Our growth is also, as you know very much driven by what's going on in the express markets with DHL and with FedEx that we've talked about. And of course, you know DHL is our larger customer. And the positioning that we talked about now, having the opportunity to fly for Amazon and growing our fleet with Amazon through 2018, puts us into e-commerce market. So part of the excitement we feel about the trends in Atlas -- at Atlas and in our businesses are broader participation across each of these 3 key segments.

Got you. That's helpful. And then just as a follow-up. Demand turned really good in the first quarter. I think we saw that show up in your Charter cargo block hours for sure. But as you look at that direct contribution line in Charter, I know you guys called out the new military pricing is a headwind this year, but how should we think about going forward for the rest of the year, the impact of that new pricing? And I don't know if it's easier to talk on direct contribution margin or from a revenue per block hour standpoint. Just some context on how we should be thinking about that going forward.

Sure, Andrew. We talked about during the last -- our last earnings call, the fact that the military changes their pricing a bit. And that on a year-over-year basis, that certainly had an impact. However, as Bill pointed out a moment ago, we're seeing really strong volumes from the military, and passenger continues to do really well. And as Bill said, cargo is a bit stronger than we thought, and we expect that to continue for quite some time. So yes, you're right, the rates are an issue. However, we are seeing really strong volumes that are essentially offsetting that.

Got you. So I guess, if you look at the first quarter, the direct contribution, down 17%. You guys have called out heavy maintenance and the military pricing. So I mean, can you put those in buckets as the -- I guess, what was the maintenance impact if that tapers off throughout the year? How we should we think about direct contribution going forward?

If you think about direct contribution going forward, I mean, we expect there will be a substantial increase in direct contribution for 2017 full year versus 2016. So you should expect to see that continue to improve throughout the year.

Your next question comes from the line of Helane Becker of Cowen and Company.

It's actually Steve on for Helane. Following up, I guess, just on the previous question. As far as the rates in the Charter business, you guys were talking about how the cargo business was a little better than kind of expected. Are you seeing rates kind of ex military start to pick up?

Yes, we are.

Yes.

Absolutely.

Any way to kind of quantify that a bit?

We could tell you that yields excluding fuel in our commercial Charter business for the first quarter this year were ahead of the first quarter of last year. We can certainly -- we can say that unequivocally. And then the AMC pricing has an impact on that. And so if you back that out, what you see is really the commercial Charter yields for the first quarter being higher than the prior year and doing quite well in a strong market.

Is that across the board? Or are you seeing any areas that are stronger than others?

No, we're really seeing it across the board, across all geographies. We're seeing it across all different cargo types. And so years ago, you may remember that we used to -- we'd rely more on a strong peak season or we needed a new product introduction or things like that, and that is not what we're seeing today. We're seeing strength all across.

Okay. And then going to your debt pay down a little bit. I see you guys are, I guess, planning, what is it, $45 million to $50 million debt pay down per quarter. Is that kind of higher interest rate that? Or are there kind of low-hanging fruit that you guys can do there?

We've restructured and repaid most of the higher rate debt, and so what you're seeing is sort of the normal pay down of principal and interest through the debt repayment that you're talking about, the $47 million in the first quarter and about that same amount going forward, a little bit higher going forward. We are really focused on trying to continue to lower our overall weighted average rate. As I said, it's 3.3%, which is a really great rate. And most products, most financing that we're entering into today are even lower than that. So we're really pleased we're doing quite well in that area.

Your next question comes from the line of David Ross of Stifel.

Going back to the Charter segment, have you going to ever talk about the percentage of block hours that are military versus commercial Charter?

We really don't, Dave. We -- years ago, we used to have a separate segment for the military for when that business really start. When troops came back from Iraq and Afghanistan, that part of the business changed. And so we reported -- we have been reporting now for years both of those together. And so the military is just another customer like any of our other Charter customers, freight forwarders, Charter brokers and so forth, airlines. And so we don't break out any particular customer, and the military is just another customer within our Charter business.

Okay. And if I had to look at it, will military be in the minority? So most of the block hours are commercial? Is it close to 50-50? Or actually, most of the block hours is military?

What you can do is we're going to file our 10-Q a little bit later, and you can certainly look at the 10-K as well. But the -- we break out military revenue in our footnotes, and so you can see it. You can look at the revenue from the military versus total revenue for the company or for a particular segment. That, you can certainly do.

But is military less than half of Charter block hours?

The other part of this is that, for the military, they include the cost of fuel in the revenue. And so -- which is different from some other customers. So you have to factor that as well. You have to look at the fuel and how the cost of fuel and the gallons that were uploaded and so forth. That all plays into it. But your question with regard to...

The ratio.

yes, kind of a ratio, the military is a very large portion of our Charter business overall.

Okay. And then in the comments on the release talking about ACMI and lower costs related to crew training in the quarter. I guess, I found that a little curious since I thought that there would more cost for crew trainings since you had those 2 new planes going for Amazon this quarter that you're probably training for last quarter. I'm not sure if there was anything associated with that a year ago. Could you just add a little bit more color there?

Yes, that's a great question, a very perceptive question. So costs are down on fewer training events in the first quarter of 2017 versus the first quarter of '16. It takes pilots to train pilots. And during the fourth quarter of 2015, we needed a number of our training pilots to fly in the network rather than training. And so as a result, some of the training moved out of the first -- sorry, the fourth quarter of 2015 and into the first quarter of 2016. Enough new pilots were trained during 2016 that we didn't have a similar issue with the fourth quarter training events moving into the first quarter of 2017. So it was really the first quarter of '16 where training was a bit high. And so first quarter of '17, which is a bit more normalized compared to '16, created that issue.

Okay. And so just understanding correctly, doubled up on training 1Q last year, and this year was a more normal quarter, maybe with a little additional on the normal, but still down year-over-year?

Yes, I'm not sure what's double, but yes, that's right. We had additional training in the first quarter of '16 that carried over from the prior year.

Your next question comes from the line of David Campbell of Thompson Davis & Company.

The 2 747s that you're leasing to Cathay Pacific, that -- where do they come from? Who canceled service in order for you to give those to Cathay Pacific?

So David, we had those in Charter, and we deployed those into Cathay this quarter. One of the aircraft did a prior flight for Etihad. And the other carrier -- the other aircraft we had both in Charter and also flying for a Chinese freight forwarder.

So it essentially reduced your Charter available capacity?

It took these -8s that were temporarily placed in Charter during the first quarter back into ACMI.

Yes, yes. And I think I heard you say that the second quarter net income would be up 50%, but the year was only going to be up 5% to 10%. Is that -- did I mishear that?

We said 15% to 20%...

In the second quarter?

In the second quarter.

15% to 20%, okay.

And we said single digit to mid-double digit for the full year.

So it's a pretty big range for the full year.

It's a range. It's a range.

And mid-single digit to low double digit for the full year and about 15% to 20% for the second quarter, David.

Right. And what's the status of the Houston-Africa passenger service that you've had for -- I don't know. I guess, it was an oil company. I can't remember the name of the service.

Right, so that's ongoing. So the name of the customer is Sonangol, who is a -- SonAir is the actual airline operation. That's a subsidiary of Sonangol, which is the Angolan state oil company, and that operation is continuing.

Okay. That's good because that business -- the oil exploration business looks like it's going to pick up, which should help your -- it should help that service. And...

That is a CMI. David, that is a CMI service, right? So we're not taking risk on revenues and fares and fuel. That is a pure CMI service.

Yes. I knew that. Right. Right. I knew that. And you mentioned the commercial Charter rates are up in the first quarter. Wasn't that mostly in the month of March? They didn't do too much in January and February, did they?

No, they -- actually, they did, David. We saw strength in January and February and March, even with the Lunar New Year effect, which came in February with the late January Lunar New Year. And they were -- I think where we saw some of the larger uptick was, in fact, Asia, Europe, with strength in Asia U.S. But Asia Europe was a good market this year.

Yes. Well, Europe is extremely strong, and so I'm not surprised. And I would think that the rates would go up more in the second quarter than they were in the first. But that, obviously, you can't say about that. But it looks to me like that's what's going to happen.

Given the market demand out there in the Charter business. And of course, we benefit from that directly in Charter, but certainly, so do our ACMI customers, right, which is where the majority of the fleets deploy.

Yes, right, they will fly more. They will fly more. That's for sure.

Your next question comes from the line of Steve O'Hara with Sidoti & Company.

Can you just talk about the simple kind of -8Fs? I just -- kind of in the ACMI as the main deployment with Cathay. And I was just curious if this is kind of a -- we're still at maybe -- or we'd kind of go into 9 here. Are we still at 7 with...

We're at 9, yes.

We're at 9, so this brings you to 9. And then there's still one flying in Charter after deploying?

Right. So yes, we're at 9. We have 6 with DHL Express, 1 with Panalpina and the 2 with -- which we've had for a very long time with Panalpina, and then the 2 with Cathay and 1 in Charter. And as we pointed out on our prior calls, the returns on that -8 in Charter are certainly equal to our returns in ACMI, and it's a good operation for us.

Okay. And just your comments around the peak season and maybe needing a strong peak. Based on your guidance, what's your expectation for peak season? I mean, are we -- are you kind of expecting a peak season similar to last year? Or are you more maybe a little milder in terms of what your expectations are? If that comes up, there's maybe upside to expectations.

Yes. Spencer didn't say we need a strong peak season for this year. I think Spencer was saying historically looking back 5 or so more years ago, a lot of the business depended on a very strong peak. And what Spencer was pointing out is that, that's not the case, and that's not where we are today, particularly with the express and e-commerce platforms, which are full year-round platforms, the places we have with our other ACMI customers. I would say just the nature of the business, the diversification of fleet, diversification in the customer base, in our operations overall is much less are really peak-dependent. And I don't think of us as a peak-dependent business. Now that said, we're anticipating a good peak for 2017. There was a good peak in 2016. The market started growing in July of '16, as we talked about on an earlier question. And the indications we have from our -- from all of our customers, including our ACMI customers and the Charter brokers and forwarders that we're speaking with, are looking forward to a good peak for 2017.

Your next question comes from the line of Scott Group of Wolfe Research.

It's Christian filling in for Scott. Can you just give any color on the temporary redeployment of the -8F into Charter? Was this customer returning a plane? Or was this an -- and was there any impact from the quarter?

Are you talking about the 10th -- Christian, are you talking about the 10th aircraft?

Yes.

Oh, that's actually been in Charter for a number of periods now, and we've talked about that on prior calls that, that aircraft is providing very good returns for us. Not the result of a return, we bought an additional -8 at the end of 2015, and it moved into our Charter market when we did.

Okay. So it's nothing new. Okay.

It's nothing.

Got it. And then can you just discuss the impact of fuel on the Charter results? Is there any way to kind of quantify the impact in the segment? And should this impact the segment going forward?

Fuel was down year-over-year. And so if you look at the revenue per block hour, some portion of that, especially for Charter passenger flying, some portion of that was driven by fuel. And the other portion is driven by the military rate, which we've already talked about. And those are the 2 biggest drivers when you look at the Charter passengers yields, for example. So it's about half and half, I'd say, military and fuel driven for that. That's the biggest best of it.

Okay, okay. That makes sense. And then just lastly, on the military side. The demand increases is something that you guys said should be continuing. But is it based on market share gains? Or is it just an increase in military activity?

I guess a little bit of both. I think I said earlier to another question that the cargo activity was up a little bit more than we expected. We are up a few points in terms of entitlement or market share. We're right about 53% entitlement right now in both passenger and cargo, and that's a few percentage point gain in this contract year, October to September fiscal year. And so we're up a little bit in entitlement or market share as well.

Your next question comes from the line of Chris (inaudible) at Susquehanna Financial.

So you've been very clear about your pivot towards the express market and e-commerce and how a lot of your business is not reflected in the IATA numbers. But could you give us a rough sense, though, of how much of your business is in that data or more specifically in the traditional airfreight markets?

So I think a way to think about that is the level of activity that we have in Charter is absolutely in the -- in what you would be captured in IATA statistics, and that's the cargo that were -- but there is a military mix in there, so you have to make an assumption of how much of that is not -- is military and how much of that is commercial. Spencer chatted a bit about that. And then in terms of the -- our ACMI business -- our CMI business, it's really the customers other than DHL and other than Amazon. That's the market they serve, and of course, we're flying for them into those markets. They're retailing the capacity into those markets, not Atlas directly.

Okay, okay. And so far as Amazon, have you guys started running planes out of CVG yet?

Well, we've got 4 aircraft deployed into Amazon right now, but we don't really specifically discuss the networks and the airport-to-airport flying that we do for Amazon.

Your next question comes from the line of Michael Derchin of Imperial Capital.

A regulatory question. As you know, President Trump seems to be inclined to link the trade and military kind of discussions with -- given his conversations about the North Korea with the President of China. And if that's the case, I know he's going to visit Saudi Arabia soon to talk about antiterrorism with the hierarchy in the Middle East. And as you know, this great opposition by the big 3 network carriers to the current bilateral Open Skies with some of the Middle East carriers. And I was just wondering what message -- if it happens to come up in the conversation, what message would you want to send to them regarding any impact on you and the airfreight business?

Sure. So maybe working backwards, in terms of Open Skies, Atlas, along with FedEx and JetBlue, represent a very different voice. We believe in Open Skies. We believe in the benefits that holistically drive from Open Skies. And we think maintaining the strong Open Skies framework is good for, certainly, express and freight flows as it is for passenger flows as well. And Alaska Airlines is also part of that coalition. What we've said, and we've actually had -- we certainly had this discussion with the members of the administration, with the State Department and with the Department of Transportation as well, that from a freight and an express perspective, freight flows tend to be directional. They're seasonal. And having the 5th and 7th freedoms that derive from the Open Skies agreement, allow us and other freight operators to build the kind of networks that provide efficient and cost-effective transportation, whether that's express or traditional heavy freight. In terms of the specific discussion regarding the Gulf carriers, our point of view there is clear. We don't believe that the discussions or the issues that the legacy carriers want to address should be addressed in the Open Skies agreement or should be addressed by kind of a unilateral opening of the agreement. Back in the 70s, Congress passed a law, the International Air Transport Fair Competitive Practices Act, IATFCPA. But IATFCPA provides for an expedited process through the Department of Transportation, where the carriers, the legacy carriers, could bring their complaints, their allegations of damages, and seek a remedy. And that's been used in the past. It requires evidence, and it requires demonstrated damage. And to date, none of the carriers have actually approached -- to my knowledge, approached the DOT or have sought to use the benefits of this law and regulation. And that's where we think it should be addressed. Again, a little long in the answer here. But more broadly, I think the administration clearly understands the benefits of trade. Certainly, Secretaries Tillerson and Ross do and as well as Secretary Chao. And so I think what we're going to see emerge is, I hope and expect, a more nuanced view about trade and trade relationships and the benefit to our economy. And that's a discussion that we have and we point out as well.

Your next question comes from the line of David Ross of Stifel.

So a quick follow-up, Spencer. Saw some transaction-related expenses in the numbers again. Wasn't expecting those because there were many transactions, and I don't know if that was a holdover from the Southern Air deal. And do you expect that to continue this year?

Yes, David, you're absolutely right. It is related to the Southern Air acquisition. There's still some consulting costs there that we are still in carrying. We expect those to wind down hopefully through the summer, and then they really should start to go away. We are moving close to a single-operating certificate between Atlas Air and Southern Air, and we expect that to happen. And as I said, those fees should wind down as we move closer and closer to a single-operating certificate.

So those expenses are related to the merger of the 2 operating certificates?

Yes, they're integration-related expenses. That's right. As a result of the acquisition, as you know then, we're trying to bring the 2 carriers together to 1. And these are costs related to that, primarily.

And then is it possible to bring them together as one before negotiating a separate long-term deal? Or do they have to happen at the same time?

No, it's possible to bring them to a single-operating certificate together as one as Atlas Air while the negotiations for collective bargaining agreement continue.

Your next question comes from the line of Kevin Sterling with Seaport Global Securities.

Bill, on Amazon, you guys are at 4 planes now. What's been kind of the feedback you've gotten from them since they tend to be a very service-centric customer in terms of your reliability, on-time departure, landings, et cetera? So maybe without getting into too many specifics, and they don't want to talk about that, but just maybe some feedback as you ramped to 4 planes and on your way to 20, kind of feedback from Amazon that you've gotten from them.

Well, I really don't want to characterize Amazon feedback, Kevin. But you could imagine we are focused on delivering the service and the service quality that we've committed to deliver them, starting with the first aircraft and now ramping up through all 4. That's what we're focused on.

(Operator Instructions) And there are no further questions in the queue. I turn the call back over to the presenters.

Okay. Well, thank you very much, Amy. And Spencer and I want to thank all of you for your interest in Atlas Air Worldwide and certainly appreciate your taking the time to be with us today, and we look forward to speaking with you again soon. Thank you very much.

And this concludes today's conference call. You may now disconnect.