Atlas Air Worldwide Holdings Inc (AAWW) 2017 Q2 法說會逐字稿

Good morning. My name is Jesse, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Second Quarter 2017 Earnings Call for Atlas Air Worldwide. (Operator Instructions) Thank you.

Atlas Air, you may begin your conference.

Thank you, Jesse, and good morning, everyone. I'm Ed McGarvey, Treasurer for Atlas Air Worldwide. Welcome to our Second 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 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 those 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.

Earnings in the second quarter were strong. We are seeing good momentum in our business, we are increasing our full year 2017 outlook and we expect the momentum we are experiencing to carry into 2018 and beyond.

Here's why. Looking ahead, air cargo is showing strong, broad-based demand growth, while new capacity is being added at a slower pace. The Chinese and Asian markets are growing and we have a strategic focus there. Currently, we operate well over 300 wide-body freighter flights per month into China and Hong Kong and that number will continue to grow.

We have created new customer relationships in the region with a range of industry-leading operators, customers like Cathay Pacific, Asiana Cargo, Nippon Cargo and Yangtze River Airlines. And today, we announced another new customer: Hong Kong Air Cargo. We have entered into an ACMI agreement to operate 3 747-400 freighters for them. The first will start flying in September, then we will add the second and third during 2018.

We also continue to move more deeply into the faster-growing express and e-commerce markets. More than 70% of our current freighters operate for customers in these markets. And that percentage will increase as we ramp up from 6 aircraft for Amazon currently to an expected 20 by the end of next year.

The evolution of e-commerce is transforming the global supply chain and creating significant new opportunities for Atlas. Scale route networks, which we operate, provide the just-in-time service that enables customers to receive their orders as quickly as possible. E-commerce is growing rapidly from low penetration levels. It accounts for only about 6% to 7% of global retail sales, and much of that is streaming media. This creates significant opportunities to expand globally. And we are well prepared to serve that expansion with our broad array of aircraft, operating networks and on-time reliability.

Moving to Slide 4. Our strong earnings growth in the second quarter reflected a 17% increase in revenue, 15% increase in block hours and higher direct contribution in all of our segments. Our earnings also reflected higher aircraft utilization and an increase in commercial charter yields.

In addition, we started flying for Cathay Pacific and Yangtze River Airlines during the quarter. And we added 4 767-300 freighters for Amazon, including our fifth and sixth aircraft in June.

Slide 5 highlights our increased growth framework for 2017. In line with solid demand from our customers and the benefits from our business building initiatives, we anticipate that our adjusted income from continuing operations, net of taxes, will grow by a mid-teens percentage compared with our 2016 adjusted net income of $114.3 million. That's approximately double the midpoint of our prior view.

In addition, we expect adjusted net income in the third quarter of 2017 to increase by a low- to mid-teens percentage compared with our third quarter 2016 adjusted net income of $27.4 million. As we've noted before, given the inherent seasonality of airfreight demand, we anticipate that more than 70% of our adjusted net income will come in the second half, which reflects historical patterns.

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 $255 million, and depreciation and amortization is expected to be approximately $170 million. In addition, core capital expenditures, which exclude aircraft and engine purchases, are expected to total approximately $65 million to $75 million, mainly for parts and components for our fleet.

At this point, I would like to ask Spencer to provide some additional detail about our second 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 second quarter results are highlighted on Slide 6. On an adjusted basis, income from continuing operations, net of taxes, totaled $29.1 million. As Bill noted, our results reflected robust increases in revenue and block hours and higher direct contribution in all of our segments.

On a reported basis, income from continuing operations in the second quarter totaled $39 million, which included an unrealized gain of $13.8 million related to outstanding warrants. Both adjusted and reported income from continuing operations in the second quarter included a $2.7 million benefit or $0.10 per share related to the timing of maintenance that moved from the second quarter to the third.

Our adjusted earnings in the second quarter included an effective income tax rate of 29.4%, which was in line with our anticipated full year adjusted income tax rate of approximately 30%. On a reported basis, our effective tax rate in the second quarter was 21.6%, and that was principally due to nontaxable changes in the value of outstanding warrants that I just noted. 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 7. Revenue growth in our ACMI segment in the second quarter reflected an increase in block hour volumes and higher aircraft utilization. Average rates reflected the increase in CMI flying. Average CMI aircraft equivalents, which do not include a component for aircraft ownership in the rate per block hour, increased to 32.4 aircraft during the quarter compared with 27.6 in the second quarter of 2016, or an increase of 4.8 aircraft.

Higher Charter segment revenues in the second quarter were primarily driven by an increase in block hour volumes and rates. Volumes mainly reflected an increase in commercial and military cargo demand, while revenue per block hour primarily reflected the impact of higher commercial cargo yields.

In Dry Leasing, higher revenues were primarily due to the placement of 6 767-300 converted freighters with Amazon between August 2016 and June 2017.

Moving to Slide 8. Segment contribution totaled $100 million in the second quarter compared with $77 million in 2016. Higher ACMI earnings primarily reflected an increase in flying related to greater aircraft utilization, partially offset by higher heavy maintenance expense. The increase in Charter contribution during the period was primarily due to better commercial cargo yields, lower cost related to crew training and stronger overall demand. These impacts were partially offset by heavy maintenance costs and lower cost base rates paid by the military.

In Dry Leasing, segment contribution during the quarter primarily reflected incremental contribution from the placements of 767 aircraft. Dry Leasing also benefited from a reduction in interest expense, which was due to the scheduled repayment of debt on 777 aircraft.

Turning to Slide 9 and our balance sheet. We ended the first 6 months of 2017 with cash, including cash equivalents, restricted cash and short-term investments, totaling $291 million. Our cash position at June 30 reflected cash provided by operating and financing activities, partially offset by cash used for investing activities.

Net cash provided by financing activities during the first half included $289 million of proceeds from our issuance of convertible notes and $128 million from our financings of 767-300 aircraft, partially offset by $93 million of payments on debt obligations.

Net cash used for investing activities during the first half primarily related to payments for flight equipment and modifications, including the acquisition and conversion of 767s, spare engines and core capital expenditures.

Our debt has a low weighted average interest rate, which is now down to 3.1%. Almost all of that is at a fixed rate and the vast majority is secured by our aircraft assets, which have a value in excess of the related debt.

Moving to Slide 10. We remain committed to maintaining a strong balance sheet while growing our fleet. As anticipated, our net leverage ratio remained at 4.9x in the second quarter. Looking forward, we expect to be around this level next quarter and then to improve over time as we place more aircraft in service and begin to generate substantially higher EBITDAR.

Now I would like to turn it back to Bill.

Thank you, Spencer. Moving to Slide 11. I would like to emphasize my opening comments about Atlas and the markets we serve. We are experiencing good momentum in our business. We expect that to carry through 2017, into 2018 and beyond. Both the expanded customer portfolio and the enhanced business mix that we have developed provide a view to that future growth.

Air cargo is showing strong broad-based demand growth, capacity additions have moderated, the Chinese and Asian markets are growing quickly and we are strategically focused there, having added 5 new customers since the beginning of the year.

More than 70% of our current freighters operate for customers in the faster-growing express and e-commerce markets, and that percentage will increase as we ramp up operations for Amazon.

E-commerce is growing rapidly from low penetration levels, and the evolution of e-commerce is transforming the global supply chain and creating significant new opportunities for Atlas. With a broad array of aircraft and our network operating skills, we are well positioned to serve the express, e-commerce and general air cargo markets, and we are capitalizing on those growth opportunities now.

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

(Operator Instructions) The first question comes from Bob Labick with CJS Securities.

Congrats on the new Hong Kong Cargo contract. So I wanted to start there. I guess 2 questions to that. First, with the new contract now in a favorable market, how is this contract versus the prior contract 3 to 5 years ago for the previous person? Is it the same, better or worse, given the strong environment? And who were the planes that we're dropping off?

Well, let me take that. So we're certainly excited about Hong Kong Air Cargo. It's ultimately a subsidiary of the Hainan Group, which includes Yangtze River Airlines. So good growth overall with that customer. We're putting the first aircraft into service in September, as I talked about, and then the subsequent two placements will occur during 2018. Bob, we're excited about the contract. We -- certainly, the terms and conditions are attractive to us and important for us. And I wouldn't necessarily qualify or characterize this contract versus others. It's the kind of contract we like and a good growth story for us in our ACMI segment.

Got it. And then the roll off?

Where are the aircraft coming from.

Well, we have aircraft in our fleet. As you know, we've grown our fleet over the past several years. And if we felt we needed more aircraft in our fleet going forward, then we would certainly take a look at that and bring aircraft on if we need to. We've got, I think, a very strong track record of managing our fleet. And any aircraft addition or fleet addition we would have would be backed by a solid business case and customer commitment.

So initially, Bob, they'll move from Charter. And then, if determined that we are going to acquire additional capacity, as Bill's saying, we would address that at that point in the future.

Got it. Okay. Great. And then just for my follow-up, and I'll get back in queue. Just the unallocated was higher year-over-year, as you pointed out in the press release. It mentioned on growth initiatives and customer incentive asset. Could you just elaborate on that? Maybe talk about the growth initiatives? And is this the new normal level for the unallocated? Or how should we think about that?

Sure, Bob. So as you know, we are expanding greatly. Our fleet has grown tremendously, and so the expenses that are included in unallocated are also growing accordingly. And so that's what you see there. In addition to that, we have the Amazon warrants. There is an asset and that asset gets amortized over time based on revenue that we receive from Amazon. And so that customer incentive amortization is included in unallocated, and that will increase over time. So that's part of what you're seeing in there as well.

Your next question comes from Helane Becker with Cowen and Company.

I just have a couple of questions. Just so that we know, how many aircraft then are now going to be in Charter? Is that -- like, do we just subtract the 4 aircraft from the 18.7 that was in this quarter's press release?

Yes, Helane. I think that's a reasonable way to look at it, yes. And unless and until we acquire incremental capacity, that is the right way to think about it.

Okay. That's perfect. And then just as you think about this business, this growth that you're experiencing, you talked about more than 300 flights a week from -- or a month, I think you said, from Asia. It's a lot of cargo and we've seen very strong strength in cargo. And we really haven't seen big rollouts of new technology. Can you maybe talk a little bit about what kind of things your customers are shipping?

Well, sure. Helane, this is Bill. So we talked about more than 300 flights a month for Hong Kong and China. And so if you think about that, those are really flights to all major markets. It's certainly a large part of that is transpacific as you think about the networks we offer -- we operate for a number of our customers, including express. But we're also flying Asia, Europe. So to Europe from Hong Kong and China into India as well as part of that, there's Mid-East connections as well. There's cargo that's flowing through into South America. So it's Asia exports really to the world. And certainly technology is a key part of that. There are new technology introductions. They're not splash that they used to be. In fact, there are just more steady-state as the various manufactures update products that they're offering their customers. There's also just-in-time, other just-in-time markets that we serve, such as textile and apparel markets. So it's a really -- it's really broad-based markets, so broad-based commodities across the market that we're serving. But it's important to remember that we're serving the -- really, the global markets to and from Asia.

Okay. And then just my last question is on the revenue, where you had, I think it was called deduction from revenue for, like, 1 aircraft or something. Was that an aircraft that you took back from a customer? Customer incentive asset, that was the line item.

Yes. So the customer incentive amortization is the similar question that Bob just asked. The customer incentive amortization is related to the Amazon warrant asset, and that asset is being amortized over time as we enjoy revenue from Amazon. And so that's what you're seeing as a -- it's a contra-revenue. So it gets amortized against revenue. And as we enjoy more revenue from Amazon, you should expect to see that amortization increase over time.

Your next question comes from David Ross with Stifel.

Just follow-up on some of the other questions about Hong Kong Air Cargo and the planes coming initially from Charter. Is there a minimum number of planes, as you think about the business longer term, that you want in Charter? Or if all of the planes in your current fleet could operate ACMI, would you do that?

So a couple of thoughts. So initially, the aircraft will come from Charter, as Spencer has described. And I think as we've talked about before, the Charter segment is an important segment for us for several reasons. Our military activity is in Charter, although that's more passenger than cargo, as we've talked about in the past. And having that Charter segment, I think we've demonstrated over time, allows us to really maximize the utilization of the aircraft that we have. So as we move aircraft between ACMI and Charter, I think you'll see historically, even in more challenging markets, very good aircraft utilization at Atlas because of the ability to move the assets between one market segment or another. So what I was responding to in the first question, if we -- as we come into 2018, we believe that the strength of the Charter market is there and we would need an additional asset or 2 in that market. We would seek then to lease in aircraft as we've done in the past. And we've leased in BCFs in the past or converted freighters in the past to meet demand on flexible terms that make sense for us. So hopefully, that provides a little better perspective.

Yes. I guess just to follow up on that. As you think about, I guess, the future growth for the company and you're going to have a lot more planes operating under ACMI in a year, in 2 years, if Charter's an important component of the business, do you look at it on a relative size basis? For example, if you have 100 planes in ACMI, do you need 25 in Charter? Or if it's 80 at ACMI, do you need...

No, it's not -- there's not a neat ratio like that, David. But I think a couple of just supplementary comments. We do have -- I think we understand the market pretty well. We also understand where aircraft are, should we want to bring an aircraft on as we have done in the past. We know the market pretty well there. But I think we have a good handle on military demand as we run through 2000 -- fiscal year '18 and into '19, at least as based on the forecast that we received from our customer. And we'll be -- we'll stay very close to the Charter market. And again, we'll toggle that capacity based on the strength of the markets, the returns we believe we can get and the best utilization of the fleet that we have.

Your next question comes from Scott Group with Wolfe Research.

So I just wanted to follow up on the airfreight strength. Bill, how do you separate secular versus -- or structural versus cyclical growth right now? How are you thinking about peak season? And then just as it relates to earnings, if I look at what you did in second quarter and the guidance for third quarter, it's actually not as much of a sequential increase as what we've typically seen. Is there some conservatism in there? Or somewhat of a slowdown in Charter built in? I'm just trying to understand the guidance relative to what clearly feels like an exceptional airfreight environment.

Okay. I'll take the second part and then I'll -- Bill, you can take...

Well, certainly, Spencer. Go ahead.

All right. So Scott, on the question about the sequential earnings. So as we said in the press release and in our comments before, there's some heavy maintenance, timing of heavy maintenance that moved from the second quarter to the third quarter. And so we said it's about a $2.7 million net income impact. It's about $3.9 million on a line item basis. So heavy maintenance of about $3.9 million is moving from the -- moved from the second quarter to the third quarter, and that has about a $2.7 million net income impact.

Or $0.10 or so.

Yes. About $0.10 a share, that's right.

Right. And so if you took that $0.10 off of second and put into third, as we pointed out in the press release, I think you'd see the secular impact that you're thinking of, Scott. But again, also pointing out that at $0.99, that's a very strong performance, from our perspective, in the second quarter, even accounting for and adjusting that maintenance that moves from one quarter to the other. And yes, we do think that we're seeing a very strong peak for 2017. And that's what our customers are telling us, and that's what we're prepared for operationally. So the more fundamental question is, well is this just something that's cyclically happening? Or is it sustainable? I think there's a couple of points. And certainly, I believe e-commerce is changing the way supply chains are going to function and underlies some of this growth because I do think that e-commerce and the just-in-time nature that customers have in terms of receiving their purchases favors airfreight growth, whether that airfreight is international and/or the airfreight is domestic. So I think that's important for us. That's also why we want to -- and we do kind of underscore where our fleet is placed and the fact that it is in express and express is growing at a greater rate than market, even through the down cycles as we've seen them; and in e-commerce, and here we're talking about the Amazon fleet. The ACMI contracts that we've signed, we've just signed 5 new customers up in this year, and we believe that is giving us -- it does drive the momentum into 2018 and beyond. And so with Cathay Pacific, for example, and Asiana, long-term historical players in the airfreight market viewing us as a way to grow fleet. And now with the 2 new Chinese carriers, Yangtze River and Hong Kong Air Cargo, both subs of the Hainan Group, who's made a substantial investment in aviation overall with Swissport, Hahn Airport and other investments that they've made, I think we're very well-positioned with good momentum with key customers who have their plans, strong, growth-oriented targets for themselves, that we're about as positioned as -- optimally positioned as we might be.

Very, very helpful from both of you. I just want to make sure I heard one point, though. You think that just-in-time and e-commerce not just drives domestic airfreight, but you think it's also driving international airfreight.

Absolutely. Think about -- one way to think about that, Scott, is not only the kind of the demand that customers have in both directions, because e-commerce certainly grows in Asia, but that product that's being bought has to move into the e-commerce supply chain. And if you think about what people are buying through the various markets, that is coming from Asia and elsewhere in the world.

Okay. And if I can just ask one more. So Bill, you've made feels like a bunch of references to 2018, so it sounds like you have some visibility there. Maybe, can you just directionally lay out how you're thinking about 2018 in terms of block hour growth? Or military up or down? And then maybe maintenance costs higher or lower, as well?

Well, I can't -- we're here in August and we typically give a more complete framework for 2018, or the next year, in our next call, which we'll do. But what I'm thinking about here, specifically, we've deployed 6 of 20 aircraft for Amazon, and the balance of those come -- and they come this year into -- and into 2018, as we've talked about. We signed up new ACMI contracts, which we only just started flying. And those are carrying into 2018 as well. We think there is a strong Charter market that will continue into 2018. And from a military perspective, we're expecting a similar levels of demand in '18 as we've seen in this year, and that's what the Air Mobility Command is communicating for us. So I'll just -- I'm just going to give kind of broad brush top line view there, but I think its a compelling top line view as we think about the growth that the company is going to have. And we'll provide more color on some of the other areas that you've talked about, Scott, as we come into the October or November's earnings call.

Earnings call in early 2018.

Oh, yes. Sorry, early 2018. Sorry, Spencer. Thank you.

Your next question comes from Jack Atkins with Stephens.

So Bill, I guess just to follow up on Scott's question there for a minute. I mean, I think reading through the IATA press release this morning, and even they admitted that the cycle may have peaked here in terms of just broader airfreight demand. And I'm just sort of curious to get your thought on that specific comment in light of what you've been saying earlier. And then I guess when we think about the cycle, the airfreight cycle and how that may be driven to some degree, or maybe to a large degree, by tech demand and semiconductor demand, which has been extraordinarily strong in the first 6 months of this year with the data we have. And that cycle may have peaked as well. So how do you put all that together, just sort of thinking out to '18? And sort of kind of have a constructive view when things may be sort of at the top of the mark here?

Well, I disagree with what IATA put out today. And they basically said the same thing in the prior month's report. Frankly, I've never seen an optimistic or positive IATA report on airfreight in a long time. So what does -- IATA captures the data and information that's shared by members. For the most part, it doesn't capture express, and I would say as a result, the express operator's volumes. And I would say, as a result, is missing a big chunk of what's being moved, of what e-commerce drives in terms of those movements. So I disagree with their finding. And I just think it's overly pessimistic. Perhaps semiconductors are at a peak, I'm not sure. But when I look at PMI and PMI going forward, which is, I think, also highly correlated to underlying airfreight demand that's pretty positive. But I think, Jack, and this is something we've talked about -- or Spencer and I have talked about on a number of occasions. To understand Atlas, you got to look through Atlas to look at our customers. Look what is DHL saying about itself? What is Amazon saying about itself? What has Cathay said about its business and where it's growing? Look at the growth ambitions and expectations that the Hainan Group has overall in the aviation industry and specifically in cargo. We have an important military component that is providing similar levels of activity as we go into 2018. So I think that -- from our perspective, that informs our view, my view, of how we think about the business into '18 and beyond.

Okay. Okay, Bill, that's helpful. And then just kind of going back to the potential for some asset acquisition in terms of 747-400 freighters. Bill, did I hear you right that you'll be able to lease that capacity in if you did need some extra capacity for Charter versus buying it? And just sort of what's the market like right now in terms of going -- trying to go out and either buy or lease in that type of aircraft?

Sure, Jack. So certainly, if we need additional capacity, because we have a compelling business case for that capacity, we would go out and obtain capacity. And what I specifically reference is our most likely course would to be lease in, on appropriate terms, incremental aircraft. And specifically, I was referring to 747-400s. And there are aircraft available in the market that we have a line of sight on. And again, and I'm repeating myself, with the right business case and belief in that market, we would bring on capacity.

Okay. Okay. That's helpful. And one last follow-up question, if I could, for Spencer. Has the tax rate guidance, Spencer, for the full year changed at all? Or do you continue to expect, I think it's 30% rate for the full year?

Yes, Jack, that's stayed consistent. For the full year 2017, we expect around a 30% effective tax rate.

Your next question comes from David Campbell with Thompson, Davis & Company.

I notice that in your new estimates for block hours this year, they really haven't changed much from their previous estimates. This is despite what we see in the air cargo market, despite the fact that the air cargo market is stronger than one would have expected it to be a few months ago. So is the reason for that -- is the reason for the fact that you're doing very well, but you're not increasing any of your estimates of your activity, is the reason for that is because more of the growth is in the express business, which is -- which requires -- doesn't require larger aircraft, but -- and may require less of consolidation of the shipments individually -- going individually on, say, FedEx or UPS, which is also doing very well? Is the market really growing more in that arena than in the consolidation of the shipments, which typically would go on a freighter, like 747s?

So David, I think we're talking about a 20% increase in block hours on a year-over-year basis. That certainly is outstripping -- and at higher rate of growth than what we're seeing in the underlying airfreight market. So I think there is growth there and it's at a rate above what just the average market growth is. Our growth is across all of our segments. And so we've talked about e-commerce and express. And certainly, that is indeed growing as you look at the number of units, particularly the 6, 7 units that we're bringing in for Amazon. But we also announced 5 new customers in ACMI who are Cathay and Asiana, Nippon Cargo, Yangtze and Hong Kong Air Cargo. So there is indeed growth in the general cargo market and we're participating in that through these ACMI agreements as well as in our Charter market. So I think there is good growth, and then -- there. And then beyond that, we -- Spencer, I think in his comment, pointed out that commercial yields are up, Charter yields are up. So not only are we growing in volume, but we're having yield and rate growth in that segment of the market that's -- that prices to the market. And that's a part of the story as well.

All right. Well, yields are less predictable than -- I think, than demand because demand is so broad-based.

Well, yes, but we're sitting here in August, and we're looking to the end of the year with a sense of where this market is now, where that fourth quarter market would be. So in terms of the kind of a near-midterm forecast, I think we're comfortable with that.

Is there any upside to the yields -- I mean, is there any upside to the revenues because yields would be better than what it looks like right now?

Well all that's factored into the framework, the earnings framework that we've given you. And I know you said a moment ago demand's more predictable than yield. I'll just restate it. We're seeing we're up 20%. That's fairly significant.

Your next question comes from Steve O'Hara with Sidoti.

Just on the delay in that -- or not delay, but the cadence of the aircraft of the new customer announced today. Is that maybe they're spooling up for their service? Or is that more a delay on your part maybe in regards to the peak season capacity there?

That's really the customer spooling up their service, entering into the long-haul intercontinental market and then taking capacity on as it makes sense for them and their own sales and distribution capabilities. So it's not our delay, it's their programmed entrance into long-haul intercontinental.

Okay. And then just on the capacity maybe available for the peak season in Charter, et cetera. I mean, where are you today versus maybe what you kind of hope to have at the beginning of the year? I mean, I guess, did you want to have x amount of capacity for the peak season back in January? And maybe that's up, what you wanted to have is up 5% or 10% or down 5% or 10%. I mean, so in terms of the peak season that you're expecting, have your expectations improved from Q1?

Well, I think a couple of things. I think this summer season has been stronger than we might have initially expected. Historically there -- although I'm not sure what history means because it's changed almost every year. But more typically, July, early August tended to be slower seasons of the year and then we'd ramp quickly into peak. We've had, as we've said and that you saw in the fourth quarter, we've had strong demand, and that continues. I can think to an earlier question. We're expecting a very strong peak and it's kind of teeing up where we expected it to be. We've been consistent, I think, on that. At least in the underlying general air cargo market, that's been growing really since last June, July. So we're -- I think we're where we would have expected it to be.

Okay. And then can you just talk about the -- just with the Secretary of State?

Sure. So we're part of a coalition that believes that the Open Skies agreements that our country has in place with over 100 countries now are important and serve the U.S. economy and serve certainly aviation well. A number of other carriers have a different point of view, specifically to the Open Skies agreements with Qatar and Emirates. And so as part of that group, we've had the opportunity to meet with the Secretary of State, Secretary of Commerce and Secretary of Transportation and share our view that these Open Skies agreements are important and they're vital, that unilaterally opening up an Open Skies agreement with one or another country could have the unintended consequences of other countries feeling the same way about their own air carriers. And that if the legacy carriers have a point of view that they're being damaged or injured, that there does exist a legislation, it's been on the books for a long time now, called the International Air Transportation Fair Competitive Practices Act, calls for a process that's administered by the Secretary of Transportation, a fairly expedited 180-day process. It's been used quite a number of times that if the carriers believe that they're being damaged, that they should use that process, make their case and let the Secretary of Transportation make a determination. I think opening up Open Skies to address the matter which they want to address, it's not under the purview of Open Skies, it should be addressed elsewhere. And that was -- those were the points we wanted to make. Our points were heard. And so I think in that context, it was a good meeting. Several other folks who were at the meeting talked about the benefit of Open Skies not just for the airline industry but about the growth in tourism that it brings, the positive benefits that tourism into the U.S. creates overall and the travel industry. And airports talk about the positive benefits that increased activity and services into and out of the airports bring. So that was the -- kind of the nature of the discussion, to share a point of view on the benefits of Open Skies.

Okay. And then just on the Amazon contract, do you expect that to be breakeven to profitable for the full year? And do you still expect -- I mean, it seemed like you did, but by year-end 2018 you expect to have that full fleet in service?

Right. So yes, what we talked about earlier is still our view, that the Amazon contract will be accretive in the second half of 2017, and as a consequence, accretive for the full year 2017. And we anticipate to deliver the aircraft, the full fleet of 20, into 2018.

And Steve, it's Spencer. I'll just expand on that slightly. So it should turn accretive next quarter, the third quarter, but not cumulatively accretive until the fourth quarter. So as Bill said, turns accretive in the second half and then it becomes accretive for the full year.

Even more so next year, obviously.

Your next question comes from Chris Stathoulopoulos with Susquehanna Financials.

I wanted to dig into the Amazon service a little, specifically how the utilization levels thus far have been -- have come in relative to your expectations with 6 planes in the network, and competitor ATSG I think got their full 20 planes now. And so how has, in terms of flight times or service levels, that been shaking out versus where you were coming into the year?

So we really don't comment specifically about any one customer. And I think what we can say is that we're at our expectations in terms of that contract.

Okay. Okay. And then for the quarter, what was the percent of terms of customers flying above their minimum block hour times?

Sure, Chris. So for the first quarter, we talked about our customers flew 12.5% above versus the prior year, where it was pretty flat. So during the second quarter, to your question, once again, we saw another really strong quarter. Customers flew over 19% above. In the second quarter of last year, a little over 7% above. So again, very strong flying levels in both the first and the second quarter, especially versus the prior year. For the full year, typically, customers fly around 5% to 7% above their minimum guarantees. This year, we expect them to be well above those typical levels.

Okay. And then lastly, any updates on the CBA for the Southern Air and Atlas pilots?

Sure. What we announced -- and I guess it's about a month ago now, that we, the company, have entered into a framework agreement with our pilots to return to negotiations. And we're in that process now.

Your next question comes from David Ross with Stifel.

Yes. Just a couple of quick follow-ups. Are there any planes that are close to aging out, either in the Charter or the ACMI fleet that might have to be replaced in the next few years?

No, there aren't.

Not at all, not even close. Our -8s and our 777s are obviously extremely young aircraft. Our 747-400s are generally in their sort of mid to upper teens, which is kind of midlife for a freighter practically. So no, Dave, that's not an issue here at all.

And then, just to run the upcoming peak season. We hear a lot of people already scrambling for capacity. And Bill, you mentioned that there's some freighters coming back into the market, but it might not to be enough. How do you see that playing out? And how do you see, I guess, Atlas' role in potentially either bringing some of that capacity back in or managing some of the capacity once it gets brought back in?

Well, to be clear, I said there are freighters that are not operating right now that are parked. It's not a huge number, but we know where they are. And if -- I think I was a making a point, if we felt we needed additional capacity, we have a line of sight on where to go and get it. Capacity comes back in a couple of ways. One way is higher utilization of existing assets. And Spencer talked about 19% above-minimum flying. I think virtually every company that's operating freighters today has increased rotations just to increase the levels of operation. That's the first way that capacity comes back. We haven't seen a lot of capacity, however, entering the market over the last 6 to 9 months. And so that may happen as we come into peak, we'll see. I think we're well positioned, is what I said earlier, David. And we're flying at very high levels of utilization and we anticipate to do that -- doing that in the fourth quarter. And I think we've talked about higher yields, and we expect that continues into the fourth quarter. And we've incorporated that into the framework that we updated today, where we're essentially double the midpoint that we were in our prior call in terms of that framework.

Your last question comes from Bob Labick with CJS Securities.

Spencer, I wanted to go back to the balance sheet a little bit. You did the convert. I just want to ask, where are you in terms of need for financing additional capital? Or in terms of the capital needed for the Amazon fleet and the conversions? And then I guess subsequently, when does the deleveraging start?

Sure, Bob. So with regard to financing, you'll see in our 10-Q that we file -- expect to file a little bit later today, you'll see that we, in addition to the convertible notes that we issued, we also financed a number of 767s. So you'll see that in our 10-Q today. We expect that to continue as we place aircraft in service for Amazon. So we expect the financing of those individual aircraft to continue. We've seen generally pretty good rates on those. As I said, our weighted average debt now, the coupon rate on our debt now is 3.1%, which is pretty amazing, I think. So we expect that to continue. That was part of your question. And then with regard to deleveraging, that's already really starting to happen. Our net leverage ratio actually stayed the same last quarter versus this quarter. But what we talked about during the convertible notes issuance, we actually showed a little chart that it would increase ever so slightly. That didn't happen, it actually stayed flat. We think it'll be around this level next quarter and then really start to decline after that. So all moving according to schedule, we think.

Okay, terrific. And then if I can sneak in one last one. It looks like maintenance expense for the year might be up $10 million versus the prior expectations. Is that just higher flying than previously? A shift from next year into this year? Or how should we think about that?

Well maintenance is up, and you're right on that, Bob. And particularly, we had a couple of things that are driving that. We had several unplanned engine events, and we had to address that and take care of our engines and make sure that they're good to go to serve our customers. And at the same time, we experienced a bit higher activity required in several of our C and D checks on our 747-400 fleet. And so as we opened them up, there was more work that needed to be done. And so certainly, we did that as we're investing as much as makes sense into maintenance so that the aircraft are there and reliable to fly when we need to do it.

Got it. Great. And despite that numbers, your guidance still went up. So that's terrific.

Your final question will come from Kevin Sterling with Seaport Global Securities.

This is actually Will on for Kevin. Just real quick on the maintenance deferral from Q2 to Q3. Was that volume related? Or is there some other rationale there why you postponed that?

No. It's -- sometimes these things just happen. And if it moves from the last week of one quarter to the first week of the next quarter, it's really nothing more than that. It's a matter of making sure that the maintenance provider can take us at the right time. It's making sure that we can handle customer needs. And so it's just -- it's a constant puzzle. And if it moves from late in one quarter to early in the next quarter, sometimes those things happen.

There are no further questions at this time. I'll turn the call back to the presenters.

Okay. Well thank you, Jesse. And Spencer and I want to thank all of you for taking the time to be on our call today and for your interest in Atlas Air. And we look forward to talking to you soon.

Thank you.

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