Atlas Air Worldwide Holdings Inc (AAWW) 2006 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Atlas Air Worldwide Holdings Inc. 2006 first quarter conference call.

At this time all participants' lines have been placed in a listen-only mode. Following today's presentation, instructions will be given for the question and answer session. If anyone needs assistance at any time during the conference, please press the star followed by the zero and a conference operator will assist you. As a reminder, this conference is being recorded Monday, May 15, of 2006.

At this time I'd like to turn the presentation over to Bill Bradley, Vice President and Treasurer. Please go ahead, sir.

Good morning. I'm Bill Bradley, Vice President and Treasurer of Atlas Air Worldwide Holdings, and welcome to our first Quarter 2006 results conference call. Today's call will be hosted by Mike Barna, our Senior VP and Chief Financial Officer; and Jeff Erickson, our President and CEO is on a plane in the air as we speak and will not be here to join the call.

Before I turn things over to Mike, I would like to remind you that in discussing the Company's performance today we've included 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 involve unknown risks and uncertainties. Atlas Air Worldwide Holdings' actual results or actions may differ materially from those projected in the forward-looking statements.

For a summary of specific risk factors that could cause results to differ materially from those expressed in the forward-looking statements, please refer to the Safe Harbor language in our recent press releases and to the risk factors set forth in our annual report on form 10K filed with the SEC on April 14, 2006.

In our discussions today, we have also included some non-GAAP financial measures. You can find our presentation on the most directly comparable GAAP financial measures calculated in accordance with generally accepted accounting principals and our related reconciliation in our recent press releases, which are posted on our website at www.atlasair.com. You may access these releases by clicking on the link to Financial News in the Investor Relations section of the website.

At this point, I'd like to turn the call over to Mike.

Thanks, Bill, and welcome, everyone. We're very pleased to have you here with us this morning and we greatly appreciate your interest -- investment interest, that is, in our Company. Our comments this morning will be relatively brief, partly because our last call with you was just roughly a month ago, but also we want to give you a chance to get your questions in. Bill will briefly discuss some highlights of our first quarter results with you in a few moments, but I'd first like to touch upon a few items before he does.

First, with respect to the results themselves. As we said in our release this morning, the quarter-over-quarter results reflect some tough comparables. For one thing, we saw significant reduction in military charter activity compared with the same quarter last year. In addition, weaker military demand and a reduction in 747-200 flying, that is, our classic flying in our ACMI business resulted in excess 747-200 capacity that could not be fully and sensibly deployed elsewhere.

In contrast, our modest net profit in the first quarter of 2005 was based on a combination of much stronger military demand, a much better utilization rate for our overall fleet, and much lower fuel prices. It's also important to remember that both first quarter periods reflect the seasonal nature of our business.

Historically the demand for air cargo capacity among our ACMI, Scheduled Service, and Commercial Charter customers is at a much lower level in the First Quarter of the year following the traditional September to mid-December retail holiday peak in the third and fourth quarters.

Second, I'd like to reiterate a key facet of our operating philosophy. As I noted last time, starting back in mid-2004, we began a determined effort to maximize profit and minimize risk by actively managing the allocation of available capacity among our four service types, in line with prevailing business opportunities and market conditions, with the aim of generating the best overall profitability from our total pool of assets.

Along those lines, as you know, we restructured our Scheduled Service network and we reallocated aircraft to more profitable opportunities in other business segments. That mindset, to actively manage the fleet and to continually reevaluate the fleet, has become more evident of late as we begin the process of phasing out older, under-utilized aircraft from our Classic fleet and formalizing our plans to order new, leading-edge aircraft, with better range, capacity, and fuel efficiency.

Because we saw robust demand and relatively full utilization of our available aircraft capacity through 2005 , it made sense for us to keep flying all of our Classics. Moving into 2006, however, demand for the Classics on the military side, for which the 200 or Classic is a very good plane, is not like it has been. In addition, and as previously noted, the 200 ACMI market is generally experiencing weaker market conditions. Combined, these two factors result in us having some under-utilized capacity in our fleet.

Given all of that, we are moving to sustain and, ideally, improve profitability by removing aircraft from our Classic fleet, which currently averages about 26 years of age versus approximately 6 years for our 400 fleet.

As we discussed last time, we sold one Classic aircraft in early April. We've also announced that we expect to discontinue flying another six Classic aircraft by mid-year, which would reduce the size of our total fleet to 35 aircraft from 42 at year-end 2005. We are looking to sell or lease five of these Classics. The sixth, which is a 747-100, manufactured approximately 35 years ago, will be retired.

Once we've placed an order for new aircraft, the delivery time will be at least a couple of years. Nonetheless, on a longer term basis, we will be looking to potentially grow our fleet to take advantage of the expected growth in our industry.

Finally I'd like to quickly reiterate our continuing focus on our other key initiatives: Cost savings, revenue enhancement, and leveraging our recent three additional frequencies in China. Helping us to do that and to follow up on our accomplishments under Jeff Erickson, will be our new President and CEO, Bill Flynn, who joins us on June 22.

Bill is a seasoned executive with leading transportation companies and strong management background in global freight and logistics. Most recently, he was president and CEO of GeoLogistics, a global transportation and logistics enterprise with operating revenues in excess of $2 billion.

Throughout his career in senior management, Bill has consistently improved the balance sheet by focusing on cost controls and productivity improvements. We also expect that his considerable operating and strategic planning experience will contribute greatly to the pursuit of our growth and profitability objectives.

With that as an intro, let me turn it over to Bill -- Bill Bradley, that is -- to speak to a few items on our first quarter results.

Thanks, Mike.

And as you've seen in our press release today, we reported operating income of 7.1 million on revenues of 332.1 million for the first quarter. Results for the period include a pretax loss of 6.2 million and a net loss of 3.7 million, or $0.18 per diluted share for the quarter ended March 31, 2006. And while total revenues were down quarter-over-quarter, unit revenues in all four segments were up and total operating expenses were down slightly.

And I'd also like to reiterate the overall tone that came through in Mike's words is that despite tough comparables quarter to quarter, we actually feel pretty good about the quarter that we recently just put under our belt.

And the press release goes into great detail on a line by line basis with respect to specific performance, and therefore I'm not going to actually repeat the release itself; however I would like to mention a few items.

The first point I wanted to highlight was this quarter's maintenance expense figure, which totaled a little more than 40 million versus 64 million in Q1 2005, or a decrease of approximately 24 million. This decrease was largely driven by fewer engine overhauls in the quarter, 10 versus 19, as well as fewer C checks. Based upon where we are today, we see full year 2006 maintenance expense coming in on a full year basis below last year's level of approximately 234 million. And also based upon where we are today, we can expect on a full year basis that the total decline will exceed the 24 million. This should be driven largely by fewer engine overhauls and fewer C and D checks over the course of the entire year, some of which reflects our expected phase-out of some of our older Classics.

The second point I wanted to mention was depreciation and amortization, and many of you may have noticed actually a step-up in our D&A expense from what you saw in the fourth quarter of last year. Our depreciation expense had run at approximately 13 million per quarter last year until the fourth quarter, where depreciation expense dropped to 8.5 million. Now, you have to note that there are elements of our aircraft inventory expense that vary from month to month and create some variability in this expense line from quarter to quarter.

Now, you should also note there will be variance in this expense going forward relating to our fleet transition.

Thirdly, on the cash front, our cash and cash equivalents rose to 309.2 million from 305.9 million at year-end 2005, and in anticipation of your questions, I wanted to help bridge this quarter's cash growth versus the cash growth in Q1 2005. This quarter, cash and equivalents increased by a modest 3 million or so versus a cash increase of nearly 30 million in the first quarter of 2005.

The $27 million delta in cash generation is a function of a few items and some of the key ones that I'd like to mention are as follows: First, this quarter compared to last quarter -- and again, this is sort of a net delta figure -- we had slightly higher CapEx of approximately 3 million and slightly higher debt principle repayments of approximately 4 million, offset by stock option proceeds to the Company of approximately 1 million. In addition, unlike last year, in Q1 2006 we had our pilot profit-sharing and incentive comp payout for 2005 performance. There was no profit-sharing or incentive comp payout in 2005 based upon 2004 performance.

And finally, EBITDAR for this quarter -- and I'm using EBITDAR as a quick proxy for operating cash generation -- was down about 13 million from 72 million in Q1 2006 -- from 72 million in Q1 2005 to 58 million in Q1 2006.

Finally I'd like to touch on the outstanding debt. At March 31, 2006, our balance sheet debt and capital lease obligations totaled 571.1 million, including the current maturities, and as of March 31, we had a little more than 103 million of unamortized discount related to fair market value adjustments recorded against our debt as a result of the application of Fresh Start accounting.

In addition, our on balance sheet debt and capital lease obligations before discount at quarter-end totaled 674.5 million. That compares with 689.9 million on December 31, 2005, or a reduction of approximately 15 million, and compares to a balance of 750.9 million on March 31, 2005, or a reduction since then of 76 million. If you net our cash balances against these figures, our net on-balance-sheet debt before discount has declined to 366 million at Q1 2006 from 384 million at year-end 2005, and from 587 million from Q1 2005, or about a $221 million improvement over the course of the last 12 months.

Finally, we will be filing our form 10-Q report for the first quarter of 2006 with the SEC later today. And in addition, we expect to report our second quarter results for 2006 around or about the middle of August.

And with that, I'd like to turn it back to Mike.

Thanks, Bill.

One last piece of information before we go to the questions. I know many of you are keenly interested in the status of our efforts to list our shares on a national securities exchange. I'd like you all to know that we are diligently pursuing this process and we hope to have some news for you about that as soon as we can. Because it is a confidential review process, however, we're really unable to comment any further about it at the moment.

With that said, Operator, I think this is a good time to begin questions. So may we have the first question, please.

Thank you.

[OPERATOR INSTRUCTIONS.] Our first question will come from Bob Labick with CJS Securities. Please go ahead.

Good morning.

Good morning, Bob.

Hi. First question I wanted to ask was in relation to the fleet renewal program. I was wondering if you could give us a sense of the cost for a new 400 and the different expenses there versus the retired 200s. Essentially, if you could give us a broad based way to think about the ROI of the fleet renewal program.

I think, Bob, probably the best way to address that without getting too specific, obviously new aircraft come with them significantly higher ownership costs; however, newer technology aircraft bring with them the benefits of improved aerodynamics, a greater use of things like composites, typically substantially improved engine performance, i.e., that is, better fuel economy. So in effect, for our first world-class ACMI customers, typically new technology is a win-win for them.

Okay, maybe just walk us through, I guess, the retired fleet. Were they -- or the fleet that you intend to retire, the six. Were those planes currently profitable? I think you eluded to, in your prepared remarks, that you should be able to maintain or even enhance profitability by retiring these. Could you just expand on that?

Sure. Well, first I think that we've disclosed that we took a look at our fleet and obviously, it's best when we can look at the fleet and determine which aircraft are most appropriate to retire. And I think as we have said in the past, we look at things like when their next heavy airframe checks are coming and how is the aircraft deployed currently, as well as what are the infrastructure costs associated with that fleet. So, we can take a look at where the aircraft are today and what we could change with respect to both direct as well as indirect costs, and then overhead as well. And the best that we can hope for is to manage it down so that in fact we come out head at the end of the day.

Okay. You said several times that not all block hours are created equal. Could you give us a sense of if these planes are out of the fleet by mid-year, the impact on your -- rough impact on your block hour outlook. Were these utilized equally with all of the other planes? Were these lower? Could you just give us a sense of what block hour outlook might be for the remainder of the year?

Right. The aircraft that are being phased out are the ones that saw the least amount of block hour production or flying during the first quarter. So in fact they were the most -- or among the most under-utilized aircraft in the fleet. So, I mean, you will probably see some further diminution, but as we progress through the seasonality of our business those other aircraft that were not operating at max block-hour performance will be an uptick or be an offset to some of this.

Okay. So Q1 would most likely have the highest decline in block hours and we should see gradual, I guess, improvement on the year-over-year change?

Yes. I mean, obviously, the planes that go away can no longer contribute to total block-hour performance, but again, if you think about it, the entire fleet was operating in first quarter so they're all somewhat less utilized than they are later in the year, as we have always said. So the pickup will begin to offset those aircraft that will eventually leave the fleet.

Great. My last question -- I'll get back in queue.

Could you help us understand the impact on the salary line by the retirement of the six planes and the outlook on that line? Also, if you could -- salaries were a little higher than I had anticipated. Maybe just because of the block-hour decline, I thought there would be more variability there. Could you just remind us of the variability of salaries with block hours as well?

Well, I think there's probably a couple things moving there. First, our crews do have minimum guarantees, so even during times where utilization drops very low, there is minimums that they earned. Secondly, as Bill reported, profit-sharing took place during first quarter, which hasn't been paid in quite a while. And then lastly, with respect to going forward, as aircraft leave the fleet there will be furloughs to crews and ground staff commensurate with that fleet shrinkage.

Got it. And just -- I'm sorry, but just to back up: The profit-sharing was not a cash flow hit -- was not accrued for last year, it was actually P&L and cash flow in this quarter?

My mistake. It was accrued for in '05.

Okay. That's what I thought. Okay. Great. Thank you very much.

Thank you. Our next question comes with Adam Zirkin with Libertas Partners. Please go ahead.

Hi, gentlemen. How are you?

Hi, Adam.

Just a couple of questions, specifically about the 200 asset. Can you talk a bit about what's driving the fall in demand for that asset, and is it more than it just doesn't fit with your ACMI customers and the military's rolling offers, or is it something more fundamental than that?

I think, if I could just jump in, Mike, it's really two areas. You know, we've seen the AMC decline on an aggregate-wide body and lift basis, you know --

Sure.

The Q1 over quarter, there's been less demand on that front and as we've said before, the 200 ACMI market is something that over time we want to get out of. It's definitely a more challenging market than the 400s, so, you know -- there are stupid deals that people can make out there and then when you layer in the cost of fuel in today's environment, for many people it's just, not something that people can make a go at it. So, I mean, the aircraft are good aircraft for a lot of situations, but for where we are and where we want to go with the Company, it doesn't make sense for us. So --

So, along those lines, Bill, are you seeing reasonable demand, say in the dry lease market for them?

Yes. I think that's a fair statement. I think these aircraft are clearly marketable and there are folks out there who are interested them. I think to sort of sum it up, as we have stated, our principal objective is to stay on the leading edge of technology.

Yes.

And given our Company and the sophistication we bring to our operation and the reliability our customers demand, it's difficult to play in a game where you have on foot in 25 year-plus old aircraft and another foot in aircraft that are less than ten years old, and we would rather focus on the newer generation aircraft.

Great.

And out of curiosity, you guys gave a lot of guidance in terms of, like, per block hour revenues that you haven't given before and I think, you know, just be careful when we say we appreciate that! But can you break out the rates on the 200s versus the 400s for us ?

Adam, we haven't done that historically and I don't think we envision doing it going forward.

Can I ask if they're moving in opposite directions? Meaning, I mean, obviously, across-the-board it looks like the rates were down a little bit, but is that more the impact of the 200s?

I think going forward, I think all we're really willing to say is the 200s are less profitable.

Okay, that's fine.

Away from the aircraft, can you talk a little bit more about the 100 million in cost savings, Mike, and where that's coming from? Is that tied to the fleet or is it general overhead things?

This is across the entire Company. We -- as I think we've already identified, we went through a strategic planning process late last year and we determined that we saw significant opportunity across all operational areas as well as overhead to streamline our operations and to be more efficient in the way we do our business. So as I think I've said, we're leaving no stone unturned. We are looking across every operational area. We think it's a very significant number. We know that it will take several years to realize all of it. But we also know that there will be a nice amount captured during fiscal -- or during calendar year 2006.

Do you have any sense of what it's going to cost you to capture that or how much of it gets captured this year?

Well, you know, the 100 million-plus that we've talked about is net of all costs.

Okay.

So, we're not playing games with that number. That is the true benefit that we will see.

Got it.

The bottom line.

And then just lastly, for housekeeping: I saw you had the new 220 AMC fuel rate in the release.

Yes.

Is that for the entire October to October military year?

That's right.

That's for the fiscal year that began last October 1. Correct.

And runs through the end of August. Right. Or the end of --

September.

September.

Of '06.

Great. Thank you very much, guys.

You bet, Adam.

Thank you. Our next question comes from Craig Peckham with Jefferies & Company. Please go ahead.

Good morning. I had a question, just a follow-up on the $100 million program. Does the expense levels we see here in the March quarter reflect any realization off of the $100 million program?

Not really. Not as of yet. We're still fairly early in the program. Obviously, we have identified very specific line items, but you know, it's going to be a little bit later in the year until they begin to get realized.

Okay. And as you think about the expense impact of parking the Classics mid-year, was that contemplated as part of the efficiency program?

Well, first I guess I'd like to suggest to you that we really haven't said we're going to park aircraft. We are looking for new homes for those aircraft through a variety of means, so it's really not -- we're not suggesting we're going to be flying them out to the desert, at least not at this time.

But secondly, no. That is, quote, a program distinct and separate from the 100 million cost reduction program.

Okay. And then I guess thinking a little bit more longer term here about options for refleeting, can you walk us through sort of what the strategic puts and takes would be as it relates to what your limiting factors are, be it access to the aircraft itself, financing, and then what types of aircraft would you prefer to be looking at here?

Sure. Well, I guess to start off, I would say that we are a very customer focused company and we need to be, because we are, in effect, their outsource flight operations solution. So we are very interested in what our existing customers and what potential or prospective customers think about the future. So with that being said, we are looking at all new airframe types and engine types going forward.

Now, historically, we have been, as everyone knows, a 747 operator. We see the possibility that that may change, that we may in fact become a multi-airframe operator, whether that's two or more is yet to be determined, but clearly we are looking at all of the best freighter airframe technologies, and obviously, engines associated with them, that are out there. So, we are looking at both of the principal OEMs who play in the heavy cargo area. I think we see very interesting opportunities. We are trying to fine tune what we think we're going to be doing for, like I said, our existing and prospective customers in the not-too-distant future. And, obviously, that will have a big impact with respect to where we end up.

Mike, is supply of aircraft a bigger hurdle than financing the aircraft at this point?

I don't think supply is so much the issue. You know, it's more timing of supply, I think would probably be the better way to characterize it. So that is, some aircraft may be available sooner than others, and that's just a case of a bunch of market factors.

Financing for aircraft -- of course, financing is not unlimited, so clearly, we need to make the right decisions at the right times and grow the business and growth in the business supports further acquisitions of aircraft, obviously, and growth in the balance sheet. So it's really a combination of all of the above.

Okay. And just a last question. Could you maybe give us an update on how you guys are thinking about passenger ACMI these days?

You know, we continue to talk about it with customers as well as some prospective customers. We think that it continues to offer a niche opportunity, a fair bit out into the future. As we've always described it, it's not -- our approach would not be to go after passenger ACMI broadly but to focus on those niche areas where primarily international flag carriers would have subscale fleets for one reason or another, so we think that is still a possibility. We think it's a ways away yet, so it's a little premature to talk too specifically about it. But we think the possibility is still out there. And like I said, a few of the folks that we have spoken to seem to have found it to be very compelling in their own individual cases.

Okay, thanks. I'll jump back in the queue.

Thank you. Our next question comes from Helane Becker with Benchmark Company. Please go ahead.

Thank you very much, Operator, and thank you, Bill and Michael, for taking my question.

Good morning.

Just on trends within the quarter, could you just speak to how it went during the quarter and if you have available April and May, maybe how they're going relative to either your expectations to the first quarter or to last year?

Well, we're really not making any remarks beyond March this morning. I think, trends, it was sort of a standard first quarter, with the exceptions around military business was down in the heavy cargo spot for us. Additionally, Classic ACMI is proving to be challenging and although there is still demand for Classic ACMI out there, as we said, if we can't make sense of it, if we can't make it work, it's better for us to move on and to go forward with our longer term strategy, which is what we are pursuing.

Okay. And as part of the bankruptcy you had had on -- or prior to the bankruptcy, there were aircraft on order, the larger new, I guess -- I think Airbus or Boeing aircraft, that you were going to be one of the launch customers for. Those went away in the restructuring. Is that what happened?

We never had anything, to the best of my knowledge, anything formal in place with Airbus going in pre-restructuring. As Mike had indicated, we talked to everybody all the time and it may have been that prior management had some more near-term discussions, but there was nothing formal to my knowledge with respect to Airbus going into the restructuring.

Okay. And then I just kind of have a question about the Classic ACMI and the fact that it's challenging. I'm just kind of curious: If you guys, who have a relatively low cost structure, really can't make it work, where is the home for these aircraft? Where do you think you can sell them into? Because I would think if you can't make it work, how can somebody else make it work?

I think there's actually a variety of players that -- how I'll refer to them, they are smaller in scale than we are. They tend not to fly the latest technology aircraft, that is, the 400 freighters today. They tend to fly older aircraft that have either been converted to freighters or had always been freighters and they just continued to make a business sort of in that segment of the marketplace, and there are quite a few players, some notable, that I think everybody -- or many -- would recognize, and others are upstarts. It happens to be the one segment of the market where every couple years or so there is possibly a new entrant, because as those aircraft age and their valuations become more favorable, it makes it a lot more easy for someone on the outside looking in to enter the market.

Got it. Okay. Thank you so much for explaining that. Thank you.

Thank you. Our next question comes from David Campbell with Thompson, Davis & Company. Please go ahead.

Yes, thanks. I just wanted to confirm that in the third and fourth quarters, as it stands right now, you'll be operating 32 aircraft in revenue block0hour production. Is that the way we should plan it?

Well, I think what we've said is that we expect -- where we sit today, we expect to cease flying on those Classics that we talked about, I think that's sort of where we are today and that there is a likelihood that, yes, that they will not be flying, but what we've said so far is that we expect to see those planes cease flying. But a final determination has not yet been made.

Yes. All right. And the the $100 million, as I take it, profit and improvement plan, is exclusive of this downsizing of the fleet because that's supposed to improve the profitability as well. Is that not --

Each separate item.

Yes. Right. Okay, well I think that about answers -- most of my other questions have been answered. Thank you very much.

Thank you.

Thank you.

Our next question comes from [Timon Tadozi] with Highland Capital. Please go ahead.

Good morning. First question is -- help me. I'd like to understand the impact. You talked on the last conference about your three new China routes and how those were going to be significant for your scheduled traffic. Help me understand kind of the order of magnitude of your available ton miles as you fill out those routes.

And your quarterly numbers, you show you have 500,000 ATMs in the quarter. Kind of give me what -- an expectation. As you fill out those China routes, what are those numbers, whit is it going to move up to? What's the magnitude? Like 525, 550, 600? How much does that capacity increase with the China routes?

It's really more of a mix issue as opposed to incremental lift. We continue to fine tune the network and so you're sort of constantly evaluating, doing a pecking order, if you will, on best to second best to third best, and you're really just doing a reallocation within that. So I would not anticipate, obviously, other than for seasonal and longer term economic growth, but all other things being equal , you won't see a ramp-up in ATMs just because of a pickup in three legs a week -- an incremental three legs a week.

Okay. So the incremental leg, the incremental traffic is really no increase in available ton miles. It's just a movement of airplanes from one specific mission to a new one?

Yes, sir.

Correct.

Second question is related to some commentary at some recent air shows involving you guys. Is there any prohibition in any of your bank covenants for you guys to make permitted acquisitions?

I guess -- first of all, acquisitions are, depending upon whatever agreement you're looking at, you can have slight different definitions, so they are all slightly different. I will say this: Last fall, we addressed most of our major covenants that were largely driven through our two facilities with Deutsche Bank, and as a result of addressing some of those covenants they also had the beneficial impact of adjusting the longer dated double ETC paper as well. So we think -- in answer to your question, we think we're in a pretty good position with respect to having the kind of flexibility, operating and financial and otherwise, that we would like to get.

Okay. And just a follow-on to that. Okay, so I'm assuming that there is no prohibitions for acquisitions. The follow-on is, when you guys talk about your ACMI business and this need to kind of like divest of these older Classic freighter aircraft, at what point, if you guys are making that strategic move, is it possible to perhaps just off-load all those aircraft in that whole business if it's going to be difficult to continue to operate in it. One of the previous analysts even suggested, if you guys can't make money in that business, you know, who can? Is there a means of somebody out there that you could actually just divest that business to? Or is that even in your strategic thinking? I mean, if you're going to get rid of all of those airplanes anyway?

Well, I think strategically, you can always think about the sale of something, right? You can package it up and probably somebody out there might see that package as attractive, but I guess I'd want to re-emphasize the fact that just because some Classics will be leaving the fleet this year, we still have other Classics that are contributing well overall to the Company, and will continue to do so. So this shouldn't be viewed sort of as a, well, 2006 is the year we're cleaning house. In fact, that's absolutely not the case. I presume that some of those Classics will continue to fly and contribute to the overall betterment of our Company for years to come.

So I think from an air craft-type standpoint, I think that's sort of the right perspective to put this all in. You know, certain of those aircraft no longer work as well as they have in the past and we're taking action with those, and others will continue to fly for us for the foreseeable future.

Okay. Then just one last question, then. Of the six you're pulling out, the Classics you're pulling out, are they from a specific mission or are they across all four of your product lines?

They are largely, I want to say AMC and Commercial Charter , but they had also been doing some Scheduled Service work as well.

Okay. Thank you.

Thank you. Our next question will come from Matthew Barnett with Jett Capital. Please go ahead.

Hi, guys. Quick question on the military business. You kind of were consistent in the past saying that your share had not declined, yet in the press release today indicate that it looks like the share is declining. Can you kind of talk through that and give some color?

Well, I think to start it off and with the formation of the third team, the Company's allocation, as we've talked about in the past, has gone down slightly. I think last year we were averaging somewhere in the low 40s and now we're -- I would call sort of directionally the high 30s. But allocation is only part of it. As we saw in 2005, the level of military flying in the heavy cargo segment was substantial and in fact, we actually realized a fair bit of flying in excess of our "allocation".

You know, this year, with the amount of heavy cargo flying down somewhat, we're not sure where we're going to come out year-over-year, but obviously we haven't been flying at the same levels we were flying in '05.

And when you talk about in the release that your share is down, does that equate to the allocation, the only difference is the third team? Or is there something else going on?

Well, I think it's primarily driven by the two factors. Overall heavy cargo shipments are down, as well as the fact that, for example, one other domestic -- obviously, domestic -- player in this business picked up a Classic aircraft -- I forget if it was late last year or earlier this year -- and it's participating in the AMC program. So suddenly there is another player out there who has another available 747 Classic to do [inaudible].

Okay. Thank you.

Our next question is a follow-up from Craig Peckham with Jefferies & Company. Please go ahead.

Hi. I just wanted to come back to perhaps the expense impact that might go with flying the Classics less frequently. I mean, where do you expect you'd see the greatest impact in the income statement, setting aside fuel, of course?

I think the two principal areas are going to be crew and maintenance. I think you'll have some light shed on that when the Q comes out later today and you'll be able to look at fully allocated contributions across segments and things like that.

Okay. Looking forward to getting that.

And then, as it pertains to maintenance, you touched on the reasons why it was down year to year. Just kind of curious why the level of maintenance activity was down coming after a full year in '05, where you mentioned you had obviously quite high utilization rates.

Yes, we actually -- I don't know if you recall, in Q4 we actually had a number of items sort of hit the cycle earlier than we had anticipated just because of the full flying in '05. So, a lot of those were put through toward the end of '05. But having said that, if you just look at sort of our engine overhauls, historically, over the last couple of years we have done a fair amount of engine overhauls. And then in addition, if you just look at the first quarter, block hours are down, so there is a correlation with overall maintenance with respect to the block hours.

Is the recent run rate that we're seeing in the military business roughly approximate to what your initial allocation is? I'm trying to get a sense for how much spot business is part of the March quarter block hours out of the military side.

Yes. I think we're still over-entitled a bit.

Okay, thank you.

Sure.

Thank you. Management, at this time there are no additional questions in the queue and I'd like to turn the presentation back over to you for any further remarks.

Thank you, Operator.

I'm going to be very brief. I guess I'd like to thank everybody again for your participation today and for your investment interest in the Company. Please, when you think of air cargo, I hope that you think of Atlas Air Worldwide Holdings. We are a market leader and I hope again that you will think of Atlas Air Worldwide Holdings going forward. See you next time. Bye-bye.

Thank you, Management.

Ladies and Gentlemen, at this time we will conclude today's teleconference presentation. If you would like to listen to a replay of the presentation please dial 1-800-405-2236 or 303-590-3000, with the access code of 11060830. Once again, if you would like to listen to a replay of this presentation, please dial 1-800-405-2236 or 303-590-3000 with an access code of 11060830.

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