Atlas Air Worldwide Holdings Inc (AAWW) 2018 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the First Quarter 2018 Earnings Call for Atlas Air Worldwide. (Operator Instructions) It is now my pleasure to turn the floor over to Atlas Air to begin.

Thank you, Laurie, and good morning, everyone. I'm Ed McGarvey, Treasurer for Atlas Air Worldwide. Welcome to our first quarter 2018 results conference call. Today's call will be hosted by Bill Flynn, our Chief Executive Officer; and Spencer Schwartz, our Chief Financial Officer.

Today's call is complemented by a slide presentation that can be viewed at atlasair.com under Presentations in the Investor Information section.

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 2017 Form 10-K as amended or supplemented by our subsequently filed SEC reports, as 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.

(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're very pleased to have you join us today.

We are off to a strong start in 2018, and we expect this to be an exciting year for Atlas. We reported significant first quarter earnings growth this morning and we are increasing our full year 2018 outlook. Our results and outlook are driven by our execution on strategic initiatives that have transformed the company and strong customer demand. Our focus on express, e-commerce and fast growing global markets has broadened our customer base and fleet. We are operating in a strong airfreight environment and a growing global economy. And we are well positioned to capitalize on market dynamics to serve our customers.

Moving to Slide 4. Our first quarter adjusted earnings reflected a 21% increase in block hours, 24% increase in revenue, 47% increase in EBITDA and almost triple net income. In addition, we achieved substantial increases in direct contribution in all of our segments.

With respect to future business growth, we announced the acquisition of 2 777 freighters that will strengthen and expand our relationship with DHL Express. We placed and began operating an additional 767 aircraft for Amazon in early April, raising the current number to 13. And that's in line with our expectations for a total of 20 aircraft for Amazon by the end of this year. And as we announced earlier today, we have placed a second 747 ACMI freighter with DHL Global Forwarding.

Slide 5 highlights our upwardly revised growth framework for 2018. With the demand we are seeing for our aircraft and services, we now expect volumes to rise approximately 19% to around 300,000 block hours, revenue to exceed $2.5 billion and adjusted EBITDA to exceed $500 million. We expect that our full year adjusted net income will increase more than the mid-20% level we previously shared. We now anticipate our adjusted net income to grow by a low to mid-30% rate this year.

Looking at the second quarter, we expect adjusted EBITDA to exceed $100 million and adjusted net income to grow 30% to 35% compared with our first quarter adjusted net income of $23.8 million. Maintenance expense in 2018 is now anticipated to total about $320 million. In addition, depreciation and amortization is expected to total approximately $220 million. And core capital expenditures, which exclude aircraft and engine purchases, are expected to total about $100 million to $110 million, mainly for parts and components for our fleet. All of these amounts are consistent with our prior outlook for the year.

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

Thank you, Bill, and hello, everyone. Our strong first quarter results are highlighted on Slide 6. On an adjusted basis, income from continuing operations net of taxes totaled $23.8 million, which was a $15.5 million increase over the first quarter of 2017. As Bill noted, our results reflected robust increases in block hours, revenue and adjusted EBITDA. We also generated substantially higher direct contribution in all of our segments.

On a reported basis, our net income totaled $9.6 million, which included an unrealized loss of $7.7 million on outstanding warrants. Our adjusted earnings in the first quarter included an effective income tax rate of 16.1%. On a reported basis, we have an effective income tax rate of 28.3% during the quarter, and that was principally due to nondeductible changes in the value of our outstanding warrants.

With respect to 2018, we now expect our full year adjusted income tax rate to be approximately 16%. Based on our current tax framework and the aircraft that we've purchased and placed into service, we continue to expect that we will not pay any significant U.S. federal income tax in this or the next decade.

Looking at Slide 7. Increased ACMI segment revenues in the first quarter were primarily driven by significant growth in block hour volumes and a higher average rate per block hour. Block hours grew 28% during the period, reflecting increased 767 flying for Amazon, the start-up of 747-400 flying for several new customers and the redeployment of 747-8 aircraft from the Charter segment.

Higher Charter segment revenues in the first quarter were primarily driven by an increase in yields. In Dry Leasing, higher segment revenues reflected an increase in the number of 767-300 aircraft and the placement of a 777 freighter in February.

Moving to Slide 8. Segment contribution totaled $86.5 million in the first quarter, a 39% increase over the previous year. ACMI earnings primarily reflected a significant increase in flying and a higher rate per block hour, partially offset by higher heavy maintenance expense and amortization of deferred maintenance costs. The improvement in Charter contribution during the period was primarily due to an increase in yields and higher aircraft utilization, partially offset by the redeployment of 747-8 aircraft to the ACMI segment. In Dry Leasing, higher segment contribution during the quarter primarily reflected a placement of additional aircraft.

Turning to Slide 9, and our balance sheet. We ended the first quarter of 2018 with cash, including cash equivalents, restricted cash and short-term investments totaling $147.5 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 quarter primarily related to payments for flight equipment and modifications, including the acquisition of a 777 aircraft, 767 aircraft to be converted to freighter configuration, spare engines and upgrade kits and core capital expenditures. Net cash provided by financing activities during the period primarily reflected proceeds from our revolving credit facility, partially offset by payments on our debt obligations.

As a reminder, our debt has a low-weighted average interest rate of 3.15%. 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. Our net leverage ratio was 4.9x at the end of the first quarter. As the slide shows, it has remained fairly consistent since 2016 while we have grown our fleet. We remain committed to maintaining a strong balance sheet as we grow. And we expect our net leverage ratio to improve gradually over the next few years, 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. We are off to a strong start in 2018, and we expect this to be an exciting year for Atlas. We reported significant first quarter earnings growth and we have substantially increased our full year earnings outlook. Our results and outlook are driven by our execution on strategic initiatives that have transformed the company and strong customer demand. Our focus on express, e-commerce and fast-growing global markets has broadened our customer base and fleet. We are operating in a strong airfreight environment and a growing global economy. And we're well positioned to capitalize our market dynamics to serve our customers.

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

(Operator Instructions) Your first question comes from the line of David Ross of Stifel.

Bill, could you talk a little bit of how business trended through the quarters, specifically in the Charter segment? Was it strong throughout? Did it ramp up, trail off? And then where do you see the air cargo market in April?

Sure. Generally, we had a strong Charter market throughout the first quarter, with the exception of the week or so around a Lunar New Year, which was in mid-February. So overall, the market performed well as you can see by revenues and by contribution. Our Charter market's broad-based beyond the Asia market. South America was very strong for us. We had a great participation in flower markets, for example, for Valentine's Day. The seasonal produce that's coming up South to North during our winter overall, and we expect a strong Charter market throughout the year, this quarter and we gave you some perspective on second quarter outlook as well. So I'm looking forward to a strong Charter market throughout the year.

And Dave, it's Spencer. I'll just add that if you back out fuel, first quarter 2018 yields were above 2017 throughout the quarter.

Excellent. And then just, I guess, somewhat related, Spencer. It doesn't appear that the EBITDA guidance was revised up as much as the net income guidance. Could you talk a little bit about what might be going on there? What we might be missing?

I don't necessarily agree with the premise, Dave. It may just be because the terms we're using. Last quarter we said, approximately in this time, we're talking about in excess. So it's probably just that. But we're looking at fairly similar margins from what we talked about before with very, very strong margins that we saw in the first quarter, and we expect those to continue.

Okay, because, I guess, there's just different numbers around the net income going from, say, 25% to 33% growth, and then EBITDA is like around this and more than that. But if we take the net income, the EBITDA would likely flow similarly?

It should, yes.

Your next question comes the line of Bob Labick of CJS Securities.

It's Pete Lukas for Bob. I know you went through the Amazon update, there saying you're now up to 13 planes and expect to get to the 20 by year-end, if I heard that correctly. Just any update on the other 7 where you stand?

Well, we'll have all 20 in operation by the end of the year. And as we previously talked about, Pete, we've secured the aircraft, we've secured all of the conversion slots that we need from the 2 companies providing conversion. And we are on target to deliver and remain on target to deliver the aircraft on time per our commitments to Amazon as we've done with the first 13.

And then x Amazon, you went through a couple where you added to DHL. Just any other timing of new capacity additions we should be looking out for there?

Well, what we talked about are a couple of things. So we've been flying 5 aircraft in the CMI operation for DHL. Those are the 777s. We acquired one of those CMI aircraft and converted that to an ACMI aircraft, and then we have the 6 aircraft to deliver, which we'll operate in ACMI for DHL Express. We're really excited about the second 4 7 ACMI aircraft that we've put into operation for DHL Global Forwarding and particular excited by the comments that their CEO made about their focus on dedicated capacity and the types of solutions that allows them to provide for their customers as well. And we earlier talked about 6 747s that we've added to the fleet, 2 in 2017 and 4 that are in the process of coming in through the balance of this year. So that's the fleet outlook as we see it, and we think it's all of that underpins the kind of growth that we've talked about here in earnings and EBITDA and adjusted net income.

Great. And you also mentioned in terms of the debt, a lot of it was fixed, so that was a positive for you. So given the short term rates increases, is it fair to say you don't see much of a big impact on long-term asset-backed financing?

Well, we're -- Pete, we're in a good position, in that the vast majority, just about all of our debt, is fixed. And the vast majority of it is backed by our aircraft. It's secured by that. We've done really well with our financing. As I said, low-weighted average coupon interest rate of 3.15%. So we're in a really good position. Yes, interest rates are rising, and that could impact future financing. But overall, on a weighted average basis, we're really in a very good position.

And last one for me, just given the general rhetoric around protectionism these days, just wondering if you've seen any impact from that and what feedback you're hearing from your customers in terms of any plans they're making for changes?

Certainly, that's something we're watching closely as, I guess, just about everyone else is as well. And we're talking with our customers regularly. And we're not seeing -- we've not seen a specific impact at this point, the earlier tariffs on steel and aluminum is not something that directly affects airfreight flows. Maybe over the long term, it might affect asset cost. But even still, there's a lot of exceptions there. I've been in Asia twice in the month of April, 2 different trips talking with customers, shippers, freight forwarders and others. And I think most of them, if not all, would have pretty much answered the same -- the question the same way I did. We continue to monitor, freight flows remain strong and that's something we'll just have to watch. On the other hand, we're growing and placing new assets with customers, and so they have a very -- they have a view that their business is strong and they're making asset commitments into that belief, based on our ACMI operations.

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

Just a couple of questions. One, Spencer, you used to talk about the minimum hours flown. Is that as relevant anymore as it used to be, in a minimum hours by your customers? And should -- is that something we should still think about?

It's changed over time. We used to talk about it more when we had a much smaller fleet and fewer ACMI customers. And now our fleet has grown so much and our customers have grown so much, so we don't focus on it quite as much. But our customers continue to fly well above their minimums, flew nearly 8% above their minimums during the first quarter. Some of our newer customers fly more kind of network-like scheduled operations, which have higher utilization, higher minimums and, therefore, higher block hours. So it's probably more relevant to look at the block hours and block hour growth, but these are all things that we pay attention to.

Okay. That's helpful. And is there any, and maybe this is a question for Bill. Is there any update on pilot negotiations? Anything happening along those lines?

Yes. We continue in negotiations with our pilots. As we've talked about in the past, we have a framework agreement in place. We're meeting with the pilots, the union representatives and continue in regular negotiations and have future dates scheduled with them. In fact, our negotiating team is meeting with the union representatives as we speak this week.

Okay. That's actually good to hear, too. And then the other question is more long-term as you think about your business over the next, let's say, decade. The 747 -- so Atlas Air has always been one of those companies that's been on the leading edge of technology with respect to the aircraft fleet. And the 747-400 now is a little older, the 747-8 was the last new technology aircraft to come in. I think the first ones were supposed to come in, in 2008 or 2010, it didn't come until maybe '12 or '13. So you're going along with an aircraft that is still relatively young in its life. But as you think about like the next, say, 2023 to 2030 time frame, will you have to consider a new aircraft type? Have you talked to Boeing about a next-generation aircraft for a replacement? And I know it's a long time away, but I'm just wondering how you're thinking about that?

Yes, it's a great question, Helane. So looking at the 747s, both the 400s and the -8s, I mean, an essential quality of those aircraft is indeed the nose door. And that nose door creates great value and utility for our customers. Our oldest 400s are 1998 builds. Our newest are 2004 builds. So they're still, I would argue, a very long runway left on the useful life of those assets. And the nose door, I believe, is something that will be valued by a wide array of shippers for some time to come. In fact, there's very few pure factory freighters parked anymore. And I don't know what the number is, it's maybe 4 or something like that, that are certainly going to require huge investment to come back so -- because they've been idle for so long and probably have some other issues. So in terms of the economic rent and the utility of these assets going forward, I think that, that's certainly something we believe in and something that will create value for our customers and for our shareholders for quite some time to come on those assets. One of the -- part of what your question says though -- I'm going a bit long-winded here then I'll stop, that's why we wanted to certainly diversify our fleet types. So going from what we used to be the single asset type, long-haul intercontinental operator getting the 6 7s, the aircraft that worked very well in the medium range and now are valued certainly in express and e-commerce, was an important move for us. We're moving well past 40 on that asset type. Almost equal number of aircraft to our 747 fleet. And then the Southern acquisition particular provides us the 777s. So we'll continue to invest as makes sense on the long-haul intercontinental aircraft types, as well as the medium range. I talked in the past about the A330, I think there's opportunities there. Only a few of those converted freighters are flying. So I think there's choice and growth opportunities in the midrange freighters. But we will have to have a conversation what's that next long-range intercontinental freighter's going to look like. And that's probably a little ways away.

Okay. That's helpful. And then I just have one last question, promise. So, one customer -- I don't know if they're still a customer, and I know I should know this, but I think Emirates used to be a customer and may be they still are. I noticed that they've had to ground a bunch of aircraft for lack of pilots. So it's a two-part question. One, are you finding any issues finding pilots for your own flying? And then in your own expansion, and then the second part of the question is as you think about that, obviously, they're not going to want their valuable pilots to fly freight, they're going to want them to fly passenger. So do you think that that's an opportunity for you, not only with them, but with the other international airlines that are having issues attracting and retaining pilots?

Sure, Helane. So we've managed a lot of growth in the last, really, in the last several years. I may be wrong, but my recollection is that we flew about 185,000 block hours in 2015. It's somewhere in that range. And now we're talking about 300,000 block hours just a couple of years later. And so we've had to manage that growth. We've had -- some of those hours are Southern, of course, but the larger rate of growth is in our core business, or free Southern acquisition. And we need to go out and hire, train and retain pilots to fly those levels of operations, and we're managing our business and managing [them] to do that. In terms of any other carrier or any other foreign carrier, for example, there's certainly could be opportunities for us to fly for them. Emirates has not been a customer of Atlas in quite a number of years as they internalized all of their freighter operations somewhere around 2010, 2011, if I remember. But that's certainly something we're studying for future opportunities. And just Cathay is a good example. Cathay wanted to expand. They historically have only been internalized with their own very large freighter fleet, but this recently we're able to put 2 747-8s to them, for a number of reasons. It's not -- I'm not saying it's a pilot reason, but it made sense to them from a business point of view. And it surely made sense to us as well.

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

So I was just wondering, Bill, what are your thoughts on the IATA commentary from yesterday about sort of slowing or lack of inventory restocking? It doesn't sound like you're seeing it, but curious your thoughts on it. And maybe along those lines, you mentioned strength in South America. Can you maybe help break down the Charter business, and how much is Asia versus non-Asia?

So I looked at the IATA report as, I guess, just about everybody else on the call did. And from my perspective, I think it's a little -- the IATA report is a bit unfortunate how they look at the market. Because from our view, they only capture about 75% of what's moving in international airfreight. They are not really capturing express. And by extension, they're not capturing charter. And they're not capturing e-commerce if they have separate dedicated e-commerce flows. So we think that IATA is only reporting on about 75% of the market. But the segments they're not capturing, I would argue could well be the higher segments of the market, higher rate of growth segments of the market. I think Deutsche Post DHL is going to report next week. Let's see what they're numbers are and what kind of rate of growth are they talking about. DGF, a freight forwarder, who typically, freight forwarders typically didn't buy into longer view dedicated capacity, say the exception of Panalpina, whose another ACMI customer of ours. Our buying in now to ACMI because they want to provide the certainty of service to their customers. And I think we look at the other -- we look at express carriers like operators, FedEx and UPS, and we're seeing higher rates of growth. So I'm not saying IATA is wrong, but they're not capturing the full market, and I think a more fulsome view, and we've encouraged, frankly, even encouraged IATA to think about that. A more fulsome view might provide all of us a better picture of where growth is. Now they did -- certainly in that report, you saw a very high rate of growth, 15.5% or something like that in Latin America. We participate in that market. We have a large share overall. And first quarter is a strong market for them, for that region, pardon me. Ecuador and Colombia for flowers for Valentine's Day. The West Coast, Chile, Peru and Ecuador also, as we think about fish and then all the counter-season fruits and vegetables, asparagus and cherries and blueberries and all of that, which are huge freight flows for us. So we had 2 very strong markets in Charter, Asian and Latin America. That will change locus as we move forward. But there is no one segment that dominates our Charter market. It's a 52-week a year market for us. You see that every quarter, we're reporting good Charter numbers. You'll see the number of units that we fly and the hours. And again, I guess, I'm going on a little bit long here, but that's why I think IATA is missing something, and they do have the numbers in their reporting that would benefit, I think, all of us in terms of getting a sense of what's going on.

So I don't know if that's really helpful. I don't know if it's the right way to ask it, but if you think IATA captures, call it, 75% of the market, what percent -- like how would you think about your business, meaning your -- instead of 75% traditional and 25% express Charter, your x percent express Charter? I mean, I guess, what do you think you are relative to the broader...

That's a good question, Scott. So what we've historically talked about and it proves out in a lot of large numbers over time, we're about 25% Charter and we're about 75% ACMI, and CMI is measured by block hours. So then when you look at the number of units that we have, we're flying 37 aircraft for DHL. We'll be flying 20 aircraft for Amazon by the end of the year. So 57 aircraft out of 90-something, pull out to military, including the military passenger and the LCF, the 4 units in the LCF for Boeing, for the Dreamlifter. So we are a much higher percentage of our fleet by far is express and e-commerce. But particularly so then, the way the company used to be, when you and I first started talking about our company years ago now. So I think it does underrepresent both our current performance and our upside opportunities. And as we've talked about, not just specifically to you, but as I've talked about, generally, we have the benefit of most of our customers being publicly traded companies. And a key to understanding Atlas is what are they -- what are our customers saying about their business, how are they performing and what are their rates of growth? And that's, I think, a really useful way to think about us.

And, Scott, it's Spencer. I'll just add a minor point to that, which is the military flying that we do, which has been very, very strong, and we have a very large share of that business. And that flying kind of goes hand in hand with the Commercial Charter flying. Because there could be a one-way military trip that leads to Commercial Charter and vice versa. So that's something that you wouldn't see in the IATA numbers. Not only would you not see the military flying, but also you wouldn't see the benefit that we get of operating both of those together.

Okay. So that makes -- so you're basically saying that you're just over indexed to the 25% of the stuff that IATA is not capturing? Can you tell if, that the other part of the business so that IATA is talking about -- do you sense that, that is slowing though? That's a smaller part of your business?

Well, so what does IATA will pull or IATA will get a report from the carriers in Asia. And to this -- so we're flying for Qantas and we're flying for Cathay, 2 planes each. So that would be captured, I would imagine, in IATA based on their reporting, right?

Okay. And Spencer, if I could just ask you one last one quickly. So obviously, you came in well above your expectations for the first quarter. We typically see a pretty nice step-up 1Q to 2Q, do you feel like there's some conservatism in the guidance for the second quarter? Or just because the base from 1Q is a lot bigger than normal, don't expect the same sort of percent uplift 1Q to 2Q that we've seen in some past quarters?

Yes, it's a great thoughtful question. The first quarter was very, very strong. We saw great utilization and very strong yields. And so that will play into it. There's also the impact of heavy maintenance. We've had some heavy maintenance movements between quarters here and there, which is conditions based as they need it. So we feel good about the second quarter outlook, Scott. And then as the year progresses, we'll update as we continue to see more. But we feel good about -- we feel great about the first quarter. And we feel very good about the remainder of the year.

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

So just following up on the guidance for a moment because I was sort of thinking about the full year. Obviously, a very strong start to the year in the 1Q. But when you think about the update to the guidance, is it that you're just flowing through the first quarter upside relative to your plan? Or has your outlook for the second half of the year, your particularly peak season changed versus when you updated us several months ago?

Yes, Jack. I don't think it's changed all that much. We expect about 30% of our earnings in the first half of the year, about 70% in the back half of the year. That's pretty consistent with what we've seen historically, at least, the past couple of years. Last year, I think, was 28%, 72%. So it's pretty consistent, I think, as I said, with Scott, the first quarter we really saw a very strong utilization, very strong volumes, Charter yields that were very high. Military business, we saw great demand from the military. And we were in a terrific position to take advantage of that. I think we will continue to do that throughout the remainder of the year.

I would just add, Jack. As I said in my comments, we're excited about the year. Great start to Q1, a bit stronger than we expected. But it was strength across all of our segments: Charter, the ACMI segment and of course, Dry Leasing. We've upped from mid-20s to low to mid-30s. So all that a 40% up based on the last time we talked. 40 to 50, do the math on that. Great new customers in our ACMI business and in our CMI business. And as the market changes and develops, we're, I believe, very well positioned to take advantage of it. So we're excited about '18 and what it means for our company.

Okay. Okay. That's helpful. The lease that you announced this morning with DHL Global Forwarding of the 747-400, is that a new aircraft to your fleet? Or are you moving that out of the Charter segment into ACMI? Just how should we think about where that particular asset will be coming from?

Sure, Jack. And Bill talked about earlier, and we talked about in the past. We added 2 744s through operating leases last year. And we're adding 4 this year. So 1 we added during the first quarter, and 3 more that we'll be adding a little later in the year, certainly before peak. So with all the new customers that we've been adding, our aircraft are somewhat fungible. We've able to move them between Charter and ACMI, and vice versa. So it's all related to the incremental aircraft that we've been putting in place, and there's really great customer demand.

Okay. That's helpful. Okay. On the 777, A plus CMI contract with DHL, the incremental plane there that you announced during the first quarter, I think it's really good to see the incremental customer demand for that particular type of contract, for that particular type of asset. Are you seeing any customers outside of DHL who are interested in potentially going forward with an A plus CMI contract on the 777-F?

Well, 777-F is a great freighter. And of course, this 1, the 6th aircraft that we're talking about for DHL, is an express long-haul intercontinental point-to-point flying. We might have talked about this before, but there's several long-haul intercontinental aircraft out there between the 4 7s, the 2 types there and the 777s. And the aircraft selection that a customer would make really gets to network design for the most part. And I believe there are customers for both 4 7s and 777s, it really gets to the network and which asset produces the best economic rent for the customer and their network design and everything else that goes along with it.

Okay. So would you say just given how tight the global airfreight markets is and it's -- that there are a lot of part 744s out there, are you seeing incremental demand though for 777 leases?

Yes, there is demand for both asset types.

Okay. Okay. And then last question, I'll turn...

Jack, it's Spencer. I'll just point out, we acquired the Southern business just a couple of years ago, and a key goal of ours in acquiring that was to add the 777 platform and then to grow the platform, and that's exactly what we're doing now.

Yes. But absolutely, I guess, I'm just curious if -- when we'll be able to see customers outside of DHL for that particular type of asset? Because until now, it seems to have been sort of niche to them that when ACMI leased that aircraft.

Well, I mean, the Emirates has a nice fleet of 777s, Etihad has a fleet of 777s. Certainly express carriers, value the 777s, if you look at the fleet that FedEx operates. We have 777s into AeroLogic on our lease business. So again, it really does get down to network design in terms of which assets, the more attractive assets for any given network.

Okay. And then last question, and I'll turn it over. But just given all the significant demand that you're seeing for your assets, the contracts that you're ramping, whether it's for Amazon or DHL or several other customers? Is there a way to kind of think about the cost that you guys were carrying in the first quarter, may be that you expect to be carrying this year associated with those contract ramps that, I think, as we look out into 2019, you should be able to get leverage on those costs? Could you kind of help frame that up for us in some way?

Yes, Jack, and we talked about it mostly with the Amazon ramp up, but you're absolutely right. There are start-up costs as we ramp up new business. And it's particularly true in the case of Amazon, when we're adding 20 aircraft over a very period of time. We need to hire crews, train crews and there's a cost to all of that as you saw in last year, in particular. And then 2019 will be the first full year for flying all 20 Amazon 767s for them without any start-up costs related to those 20. So, yes, we agree with you, and we'll enjoy more efficient and more profitable business going forward.

Got you. But there's no way to sort of think about how much of those costs are this year?

No, it just continues to happen. But the business that we are operating dwarfs now that the start-up costs where it was the opposite through most of the last year, where the start-up costs were greater than the earnings from the flying. This year, it's the other way around, and then next year, it will just be all upside.

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

I had a couple of questions. One is as far as your outlook for this year, Bill, you did not raise your estimated revenue block hours for the year, it's still 300,000. And -- but you -- or your estimated revenues significantly for this year. So it appears to be you're getting more operating profitability from the assets. So there's mostly some savings on expenses. Do you have any comment on that?

David, it's Spencer. The block hours did stay. Our block hour outlook stayed fairly consistent. But we saw stronger yields. We're seeing stronger yields in our Charter business, as I mentioned earlier. Yields in the first quarter, every month of the first quarter were greater than the prior year. So we're seeing strong yields in Charter, in particular, and our ACMI revenue per block hour is higher than the prior period and higher than our previous expectations. So we're seeing increased revenue and that flows through to the bottom line. So I think that, that is the biggest piece. Block hours fairly steady, but greater yields leading to greater earnings.

I was wondering, did the outlook for yields is consistent with the slowing of air cargo demand, I know that IATA doesn't capture all of the business, and I agree that mostly associations don't capture all of your business, but they're catching the same business they captured 3 months ago. But their growth is down. I mean, Asia Pacific, for example, is way down in March and April. And if South America is offsetting that to some extent, but Europe is weak as well. So unless this is a pickup in demand, how are you going to continue to get higher yields?

So a couple of, I think, elements there, David. So if we go back to the business, our business, 75% in ACMI and CMI, just do the fleet counts with what we have with DHL, Amazon. We can see what Cathay is saying about their business, for example, and others. Now we have DGF, who in their press release today are saying we need this capacity because as we look out forward for the business that we have to serve, for our customers whom we have to serve, we need this capacity, and we want it on a dedicated basis. For example, again, what I often say, look at our customers and many of them are out performing the market. But in the Charter business than the other piece of this where yields are strong, we have about half of that is commercial and half is military. Spencer talked about a very strong military environment, which then teased up the one ways, as we fly it to theater, CENTCOM and elsewhere, Mideast and elsewhere, we take that asset and then fly it on a one-way Charter, which not only are there market yields, but it's the yield inherent in our network. Because we are not flying empty positioners to Asia to fly back. We're flying military nearby, a shorter ferry and then a full Charter back, and that's the multiplier effect on our yields. And this is the quarter for South America. This is not the quarter for Asia with a Lunar New Year and 4-day Ching Ming Festival in China and Hong Kong now, and elsewhere. It is the South America quarter, and we took full advantage of that. So I think it's just a layer or 2 deep in our business, and that's the beauty of the air Charter business is it's global, it's in different theaters, at different times and we're positioned to move the assets to take advantage of it.

Last question I had is relative to Amazon. We hear -- we continue to hear about Amazon wanting to do more of their business themselves rather than turn it in for, rather than to get help from freight forwarders or other logistics players. And I wondered if you'd seen any impact from that indication in your business or what you thought Amazon might be thinking about?

Yes. We're not really in a position to comment on Amazon. But we have, as you know, is the contract for the 20 aircraft, or 13 aircraft flying, and we're going to deliver the balance over the rest of the year to get up to the full 20 complement there.

Your next question comes from the line of Chris Stathoulopoulos of Susquehanna.

In terms of the headcount for the quarter, how did it trend versus the 2,870 versus year-end? And what's the level we should think about for this year?

Chris, we typically only provide that information annually in our 10-Q -- sorry, in our 10-K. But you know that we're adding aircraft, and so clearly, it takes more people to operate those aircraft as we move forward. We continue to be an employer of choice and continue to hire and fill positions.

Okay. All right. And then the timing for the placement for the second and third 747s with Hong Kong Air, I think the first was put in service last September?

Yes. So where we are now, we're looking at timing and potential growth with Hong Kong Air. We'll see how that plays out. We have our aircraft now fully occupied and fully deployed in our Charter market. Timing will depend on the customer themselves and how they see their plan evolving. That said, Spencer was just talking about with David, we're focused on the 300,000 block hours and delivering those for the wide range of our customers.

Okay. And then last question in terms of the Charter capacity purchased from ACMI customers, I think we saw something similar last 3Q. Is that something we can expect going forward, particularly in high demand periods, just peak? Or are you considering bringing on additional aircraft there?

Sure. So purchase capacity, that's where Atlas basically buys back, even though it's our own plane. We essentially buy back hours from our ACMI customers. So it's the collaborative nature of working with our ACMI customers. It depends on things like the availability of aircraft, when and where they're needed, the operating rights, who can use the capacity, et cetera. And so the ACMI customer, we continue to receive revenue from them although we buy back the time and then we sell that space in Charter. So you see that increase through our P&L. To your question, is that the new norm? Yes, we do think that, that continues to be an opportunistic area for us when we have the rights, when the ACMI customer perhaps has a little space in their schedule and there's strong Charter demand. And we're better able to sell that Charter space than the ACMI customer, depending upon route rights and so forth.

Yes, and I think it's just a great opportunity, if you think about it. We've got a lot of flexibility there, we've developed the opportunities here in many ways. And it just drives high utilization of the aircraft and drives yields as well. So it's something we'll continue to do. And year by year, it will depend on how capacity flows. But it's an important part of our business planning and business mix.

Your next question comes from the line of Adam Hackel of Imperial.

Just going back to Amazon for a second. Obviously, you guys can't speak for them. But I'm just sort of curious how your conversations with them have evolved since you guys signed the agreement with them? And do you get any sort of sense of a growing appetite on their part, just given the growth of prime, I think they mentioned 100 million prime members now and just the 6F, obviously of the initial aircraft that you guys have rolled out. Just curious on that.

Yes, we're really excited about the contract we have with Amazon, and we've got the 13 in place and 7 more to go. And we really can't speak much beyond that. And we don't for other customers either.

No problem, I understand that. Just, I guess, one last one on that. Just can you remind us, in your current contracts, what sort of the framework in terms of any kind of expansion on that or any additional aircraft on that? Is there something in your current contract that would allow that? And I guess, what are, I guess, potential, at least from a high-level, triggers for that, and if there's additional warrants that would go along with that as well?

Right. So what we've discussed, at the time of the initial contract with Amazon, we had a special shareholders meeting because they were warrants as part of the agreement as you just raised. And so there are 2 tranches of warrants. The first tranche is tied to or linked to the 20 aircraft that we're talking about, and the remaining warrants in that tranche vest ratably as we place additional aircraft in service up to the 20. There's a second tranche of warrants that are tied to incremental business. And so in terms of what opportunity might be there, there's nothing specific beyond that, that we've talked about other than this tranche of warrants, second tranche of warrants that our shareholders approved back then at that meeting.

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

Just curious about the, I guess, the 2Q guide and the maintenance expense in 2Q. I mean, relative to the increase you saw in the first quarter and then kind of your guiding too for 2Q. I mean, how much of that may be degradation growth do you see as a maintenance expense? Or are you pulling forward maintenance? Or is it mostly kind of timing based?

Well, we don't pull maintenance forward, right? Maintenance onto the heavy maintenance, letter checks for airframes and engine overhauls, really are conditions based. Time based on checks and conditions based on engines. And they occur when they occur. I think what our view is we've got a great second quarter coming and a great year. And that's following a stronger than anticipated first quarter, and we were really well positioned to take advantage of the market demand that was out there and capture it. So we've upped the framework for the full year, it's going to be a very strong second quarter. And the 70-30 ratio of first half to second half, I think, is pretty much evident this year as it's been in the past.

Okay. That's helpful. And then just in terms of that military benefit. Is that, and maybe investments, but is that continuing in the second quarter? If so, how long do you expect it to continue? And did you quantify the amount of the benefit in the first quarter? And maybe what the expectation is for the full year? I remember kind of with the M-ATVs, it was a pretty sizable benefit in the past. I'm just wondering maybe how sustainable that might be going forward? Not necessarily to say that other things will decline, but that could be something that may be a jolt at some point if it's anything like it was in the past.

Sure. Well, the M-ATVs were indeed a jolt, and that was in 2010. And what had happened was President Obama surged, I think it was an additional 30,000 marines into Afghanistan. And with that surge of troops, the military needed a new vehicle that was more suitable for the generally poor quality of roads in Afghanistan, and that was the M-ATV. And the military opted to fly several thousand of those M-ATVs over a 90-day period to have the aircraft there as the troops were arriving and provide for their requirements. And we flew about 1,000 of those vehicles over that 3-month period of time, and it was a substantial upside to our earnings in 2010. But we haven't seen really anything like that since. Cargo is up in 2018 with the military. Cargo volumes in the military are up and based on our conversations with the military, we expect those cargo volumes to be strong throughout 2018, and through fiscal year 2019 based on recent conversations we've had with the military, as early as -- just a couple of days earlier this week. Now there's a good percentage of one way, and if that one-way percentage that allows us to have that multiplier effect on underlying yields because we're flying a military to nearby, shorter ferry and then a full planeload charter coming back in, and we expect that to continue.

Okay. That's very helpful. And then just quickly on the -- I thought I saw a 767-300 in Charter, and I don't know if that was kind of maybe between being put on line for Amazon or something like that. But is that something that you're looking to grow going forward? Or is that something that is kind of a timing thing?

It was kind of a timing thing, to use your words, Steve. So that is an aircraft that had been -- we acquired it, we converted it, but we have a little bit of time before we started operating it for another customer. And so we utilized it within Charter. We took advantage of that (inaudible)

Thank you. At this time, I will return the call to Atlas Air for any additional or closing remarks.

Okay. Well, thank you, Laurie. And Spencer and I want to thank each of you for your interest in Atlas Air Worldwide and spending so much of your time with us here today on the earnings call. We also want to remind you about our upcoming Investor and Analyst Day. We're going to hold that in New York City on June 25, and we'll, in the near future, be communicating more details about the day, and we really look forward to seeing you there. Thank you, everyone.

Thank you. That does conclude the First Quarter 2018 Earnings Call for Atlas Air Worldwide. You may now disconnect your lines, and have a wonderful day.