Atlas Air Worldwide Holdings Inc (AAWW) 2006 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Atlas Air Worldwide Holdings, Inc. second-quarter 2006 results conference call. At this time, all participants are in a listen-only mode. Following today's presentation, instructions will be given for the question-and-answer session. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded today, Monday, August 14th of 2006. I would now like to turn our conference over to Bill Bradley, Vice President and Treasurer.

Thank you and good morning, everyone. I am Bill Bradley, Vice President and Treasurer of Atlas Air Worldwide Holdings. Welcome to our second-quarter 2006 results conference call. Today's call will be hosted by Bill Flynn, our President and Chief Executive Officer; and Mike Barna, our Senior VP and Chief Financial Officer.

Before I turn things over to Bill and 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 10-K filed with the SEC on April 14th, 2006.

In our discussions today, we also include 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 Principles 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 on the website.

At this point, I would like to turn the call over to Bill Flynn.

Welcome, everyone. We are very glad to have you with us this morning, and we greatly appreciate your interest in our Company. I'm pleased to introduce myself to you today as the President and CEO of Atlas Air Worldwide Holdings. This is an exciting time for the Company, and I am delighted to be working with our great team of people.

To start our call today, I would like to provide you with some perspective on my background and my expectations for the Company.

Prior to joining Atlas Air Worldwide on June 22nd, I was the President and CEO of GeoLogistics Corporation, a leading logistics and freight forwarding company. Before GeoLogistics, I was with CSX Corporation, first as the senior vice president of strategic planning and subsequently at CSX Transportation, where I was responsible for the merchandise service group, the traditional carload business of the railroad. I also spent over 20 years with Sea-Land Service in a number of senior management positions. In fact, my career has been entirely in cargo transportation, mostly internationally, based in Asia and Latin America as well as in the United States.

These experiences have given me, I think, a very good understanding of the freight business and of our customers. Indeed, in the recent past, I was a customer of Atlas and Polar. This perspective is probably one of the most important that I have brought to Atlas Air Worldwide Holdings, the customer's view. For our customers, we need to continuously build our competitive advantage to remain the leader in our industry and to win their business.

I believe that there's a world of opportunity ahead for our Company. We have an impressive group of core customers, a solid financial position, a long-range -- and I would like to emphasize that -- a long-range view of our business, strong global presence and favorable long-term trends for air cargo demand and, therefore, for our customers. And so the number one reason I'm here is this opportunity to grow Atlas Air Worldwide and to drive it to the next level of business and financial success.

Now I would like to turn it over to Mike Barna, our CFO, who will discuss the highlights of our second-quarter results. Mike?

Good morning, everyone. As you have seen in our press release earlier today, we reported solid operating performance for the quarter with net income of $10.7 million or $0.51 per diluted share on revenues of just over $366 million. Our operating income was $30.6 million, and our pretax income was $17.5 million. In anticipation of some of your questions, I would like to focus on a few items.

First I'm going to touch on total revenue and block hours, which were both lower in 2006 versus 2005. Revenue was down approximately 7%, and block hours were down nearly 18%. While commercial charter and scheduled service revenues increased, the overall trend was really driven by AMC, our military charter business, where revenues were down approximately 31% and classic or 747-200 ACMI business.

On the AMC front, second quarter reflects a return to what I would characterize as a more normal level of AMC flying, and this impacts our total revenue and block hour picture on a comp basis. This decrease in AMC activity is largely the result of an overall reduction in the U.S. military's heavy lift requirements. The aggregate level of AMC flying is something we don't have a high degree of control over, but we expect AMC to continue to be an important contributor to our results for the foreseeable future, and it is one of our core businesses.

The drop in total ACMI revenues, approximately 16%, and block hours, which were down approximately 23%, is a reflection of management's decision to reduce our classic ACMI flying. This decision is consistent with our fleet transition and renewal program. The classic ACMI segment is becoming increasingly, commoditized and less attractive economically to the Company. I should add that the 400 ACMI market is strong and we continue to feel very good about that segment. Despite the decline in total revenues, unit revenues for ACMI, AMC charter and scheduled service increased for the quarter.

The second point I would like to highlight is this quarter's continuing good news on maintenance expense. Maintenance in the latest reporting period totaled almost $43.5 million compared with nearly $59 million in the second quarter of 2005, or a decrease of more than $15 million. The decrease was a function of reduced heavy maintenance events as well as material improvement related to our continuous improvement initiatives. The reduction in events included fewer [C] checks on 747-200 or classic aircraft. We did one this year versus four last year, and by a reduction in the number of engine overhauls, 13 this year compared with 16 in last year's quarter.

Based upon first-half maintenance expense of $84 million in 2006 compared with $123 million in first half 2005, we continued to see full-year 2006 maintenance expense coming in well below last year's level of approximately $234 million. Based upon where we are today, we can expect on a full-year basis that the decline will exceed the $39 million improvement that we have seen in the first half of 2006. As we pointed out on our last call, this should be driven largely by fewer engine overhauls and fewer C and D heavy airframe checks over the course of the entire year, some of which is reflective of the phaseout of some of our older classic aircraft.

The third item I would like to address is our recent settlement with the Internal Revenue Service of some bankruptcy-related employment tax claims. Our recent settlement with the IRS on all employment tax claims for 2003 and prior years was $5.4 million less than we had reserved. We regard this settlement as a very positive development. $4.3 million of this amount reduced employment taxes, a component of labor expense, for the quarter. The other $1.4 million reduced accrued interest and penalties and was reflected in other operating expenses.

Partly offsetting the benefit of these items, however, was a $1.8 million payroll tax accrual related to foreign-based employees that was included in labor expense, netting $3.6 million [good guy].

Now let me turn to our fleet. As you know, fleet renewal is an important business focus for us. Bill will be touching on what that means for the future. However, first, I would like to talk about what it means for 2006. Earlier this year, we began a multiyear effort to selectively phase out older 747 classic aircraft and replace them with newer aircraft, with the replacement aircraft not expected to enter the fleet for another few years. In April, we sold one of these older aircraft for $8.4 million and recorded a $2.8 million pretax gain. We also decided to discontinue flying an additional six of our 747 classic aircraft as of midyear. Three of these aircraft are owned by the Company and are currently listed for sale. As of June 30th, these aircraft and the related spare engines had an aggregate carrying value of $22.2 million. Two of the other aircraft are under a capital lease by the Company and are being offered for sublease.

I should also add that with respect to the five aircraft our sale and sublease negotiations are in advanced stages, on four of those aircraft, with the fifth garnering interest in the market. The sixth aircraft, which was 35 years old and our only 747-100 aircraft, has been retired. We have performed an impairment test on the aircraft and spare engines, and we have determined that their fair market value exceeds their book value.

As a result of these actions, our current fleet now totals 35 aircraft, which includes 20 Boeing 747-400's and 15 747-200's. Given these actions and noting that three of our 400's are on dry lease to our UK affiliate, our operating fleet, which contributes to the block hour volume totals in our operating statistics, stands at 32 beginning with the third quarter. That compares with an average operating aircraft count of 39 in the second half of 2005. Given that the aircraft that we have discontinued flying were relatively underutilized and given that we are moving into the traditional high season for air cargo demand, we expect to see a better average utilization rate for our fleet in the second half of the year than we saw in the first six months of 2006.

Finally, let me touch a little bit on cash and debt. Our cash position continued to grow and rose to $311.6 million by the end of June, up from 305.9 million at year end 2005 for a total increase of about $6 million or so, while we continued to pay down debt during the period. This $6 million cash increase compares with a nearly $59 million cash increase for the comparable six-month period in 2005. The big items making up that $53 million difference include lower EBITDAR, $131 million versus $167 million, which I am using as a proxy for operating cash flow. In addition, you might recall that we have previously disclosed that in 2006, there was pilot profit-sharing and incentive comp payouts for 2005 performance. By contrast, there was no profit-sharing or incentive comp paid out in calendar year 2005.

The 2006 payout, however, was offset by approximately $8 million in the sale proceeds for aircraft 921 as well as a few other small items. The balance of the cash growth delta is largely due to increase in working capital, including lower trade liabilities and higher prepaid fuel and prepaid maintenance in 2006. Also at June 30th, our balance sheet debt and capital lease obligations totaled $554.8 million. At June 30th, we also had $99.9 million of unamortized discounts 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 discounts at the end of the second quarter totaled $654.7 million. That compares with $689.9 million on December 31, 2005, or a reduction of approximately $35 million.

On July 31st we used approximately $141 million of our cash balance to enhance our strategic and operating flexibility by paying off the principal that was outstanding under aircraft and AFL III credit facilities. In connection with this repayment in termination, we expect to incur a one-time, non-cash pretax expense of approximately $12.5 million in the third quarter of 2006 related to the write-off of the remaining unamortized discounts associated with the two facilities, which arose from fresh start accounting.

We also terminated an exit revolving credit facility with Wachovia Bank, under which no borrowings were outstanding on August 3rd. The removal of all of the restrictive covenants associated with the three facilities as well as the removal of associated financing liens provides us much greater latitude in pursuing our growth and development plan for the Company.

I would also like to tell you we will be filing our Form 10-Q report for the second quarter of 2006 with the Securities and Exchange Commission later today. In addition, we expect to report our third-quarter results for 2006 around or about the middle of November. For the balance of the year, we're looking forward to continued favorable comparisons in our maintenance spending compared with the second half of 2005. We are also looking forward to an improvement in average aircraft utilization compared with the first half of the year, particularly as the traditional holiday peak season, which begins in September and last through mid-December, unfolds.

We also expect our second-half performance to include approximately $13 million in benefits from our $100 million operational excellence program, with the large majority of that being realized in the fourth quarter. Procurement efficiencies are expected to be the single largest component of the benefit, with the balance spread among operations. In addition, our AMC military business rate per block hour will increase by more than 5% beginning October 1, 2006, which is the start of the new fiscal year for the military.

On that good note, I would like to turn back over to Bill Flynn.

So as we think about the future of our Company, I believe it is important to highlight our multiyear strategic plan that is focused on profitability and growth and, importantly, underscore how we're executing on our plan.

The $100 million operational excellence and continuous improvement initiative is a major element of our plan and not a one-time cost-cutting event. We have developed a framework for building a much stronger and more competitive company. We are executing on the first wave of opportunities that we have identified. And as Mike mentioned just a few moments ago, I am confident that we will achieve at least $13 million of these benefits by year end.

To deliver value to our customers, we must continually help them improve their business as their service provider of choice. We further believe that the actions that we're taking in our continuous improvement initiative will also create value for them.

Because continuous improvement is vital to our future, I have created a dedicated function reporting directly to me that is responsible to drive performance improvement in all areas of our business. This will ensure that we sharpen our competitive edge and drive better bottom-line performance.

Another key element of our plan is our refleeting initiative. We have phased out seven 747 classics, and we're disposing of them in the secondary more commoditized market. Further, we have eliminated in excess of $25 million of annualized operating and overhead costs associated with these aircraft. These $25 million in savings are instrumental to the $100 million continuous improvement initiative.

Our next step will be a significant investment in new generation freighter technology, which we expect to announce shortly. We believe that we will provide a more compelling value proposition to our customers with leading-edge freighter aircraft that possess better reliability, range, capacity and fuel efficiency. In addition, this investment will improve our commercial risk profile.

A third element of our plan is to enhance our operating and financial flexibility. We recently repaid and terminated two outstanding debt facilities and terminated an exit credit facility. We anticipate that we will be taking further steps to enhance our capital structure in the near future.

Finally, we will continually review the strategic fit of every part of our business portfolio. Currently, we're exploring several opportunities to maximize the inherent value of our traditional scheduled service business, increase its earnings and further mitigate the risks associated with the this business segment.

Each and every element of our plan is designed to contribute to a more nimble, cost-efficient and profitable Company, one that offers better technology, better service and ultimately greater value to our customers. We're confident about our future, we're focused on our customer, and we're well positioned to enhance our leadership position in the market.

Now we will be happy to take your questions. Operator, may we have the first question, please?

(OPERATOR INSTRUCTIONS). Bob Labick. Please state your company name, followed by your question.

Bob Labick from CJS Securities. First question, you have just discussed a little bit about your plan going forward. The new freighter technology obviously is key to this plan. Could you give us a sense of the upgrade cycle and how you look at it in terms of return on investment? Will you be buying new planes? Will you be leasing them? What is the expected ROI? How should we know, once you have maybe announced, if it's good or bad and relative to what hurdles are you setting for your return on investment?

As we think about our plan going forward, we would expect to begin introducing new technology in late 2009 and 2010, through, then, the completion of the cycle of the aircraft that we are going to sign up for. When we think about new aircraft, and in fact the Company has been working on new aircraft for some time, as you probably know, it's a, I would say, fairly complete analysis of the buying decision.

We first start with the customer and making sure that we understand how our customer views their business and their business growth, how they view ACMI as part of that business growth, as they think about the markets they serve and the markets they wish to serve in the future, that we ultimately need to come to a decision about which aircraft will we be most successful with in the ACMI environment. That really is kind of the departure point for us to begin to make our decision.

Then we certainly have begun to work with or have worked with consultants to help us really analyze the technical qualities and specification of the several aircraft choices that are out there, to make sure that we fully understand capabilities, the total cost of ownership of that aircraft and, more importantly, to begin to quantify the value proposition that we think aircraft type A or type B or type C can create for our customers. So we have a sense of our go-to-market value proposition and what kind of returns we can expect and, frankly, how we can articulate the value proposition to our customer throughout our selling and commercial process.

Finally, we make some assessment on and some judgment on financing the aircraft and what instrument we would choose to use to finance that aircraft. There's a range; we would likely, ultimately, use a range -- and we're in active discussion on that now, and Mike Barna and Bill Bradley are leading those efforts. Ultimately, we reduce our decision to financial expression, the expression of net present value. We certainly look at internal rates of return and others and believe that, in that process, we will make the best and most informed decision for our customer.

What is the kind of sense of the size that you could be adding to the fleet? You're obviously reducing the fleet by seven right now. Should we expect, over time, you will grow beyond seven more? Or what are you comfortable with, and how do you think of the fleet size as you go into the growth phase?

I think -- there's two parts of it. certainly, we will be replacing aircraft that we shed. But I also believe that, given the market, the market growth, the opportunity to increase ACMI penetration in the freighter market, we will be growing the fleet as well as replacing.

Bob, it's Bill Bradley. Just one tag along on the financing side. We have had a number of discussions over the last couple of months with a variety of pockets in the capital markets, whether they be banks, hedge funds, large financial institutions, banks -- you name it, leasing companies. We're feeling pretty good about opportunities out there and feel that we will have the whole finality of markets available to us to finance any new aircraft.

With the new size of the fleet, as it will be for the second half of the year, could you give us a sense of block hours by division, just -- I know you can't pinpoint them exactly, but from a modeling perspective, it's difficult to try to know the mix between how it will play out in the second half. If you could just start us in that direction, it would be helpful.

Well, we have given you some information, I think, in our press release today and you'll see some information in our 10-Q that is being released later in the day. But certainly, as we come into the fourth quarter of the year, we expect a seasonal peak this year and one that is likely to be relatively better than the peaks that we have seen in the last couple of years, which will enhance demand for our scheduled service for charter activity and generate additional flying hours for our ACMI customers.

We're looking at operating a fleet in the second half of the year of about 35 aircraft. The way that would break down would be 12 in our ACMI business, plus the three that we have dry leased to GSS in the UK; eight in scheduled service; 10 in our charter business unit, which includes both our AMC military flying as well as our commercial charter; and two planes we notionally think as being dedicated to maintenance activities. However, in the fourth quarter, those two will be flying as the seasonal demand picks up. So likely our charter business unit well effectively work with 12 aircraft.

In terms of maintenance, obviously, you have done a terrific job of lowering those expenses and you said they should continue to be down throughout this year. Is this something that's being -- expenses are being deferred into the following years, or is there a different shift? How should we think about maintenance in '07 and beyond?

We're not deferring scheduled maintenance as a way to address the numbers. We maintain our planes and execute our maintenance according to our standards and regulations.

One of the things that perhaps didn't come out in our comments is that the large part of our continuous improvement initiative is really about leveraging a fairly high level of purchases and then bringing the most out of each dollar that we spend in acquiring a good or a service. So a fair part of what we have been able to achieve in our maintenance year-over-year savings has been using a very aggressive RFQ and strategic purchasing process to reduce the cost of the goods and services that we acquire to maintain our aircraft. So we will continue to maintain our aircraft, certainly execute our C&D checks and other heavy maintenance items per schedule, per regulation. But as we do that going forward, I believe we will continue to benefit from lower unit costs because of our continuous improvement initiative.

Adam [Zirkin]. Please state your company name.

Libertas Partners. A couple of questions for you, just on the cost savings front, because I will wait a little bit on the fleet because you guys just got grilled on that. How do I think about the other $87 million of cost savings beyond the $13 million that you say you will have this year? Are you still comfortable with that number, or when do you think they come on a year from now when we talk, how many of those do you think we have?

First of all -- this is Bill Flynn. I am comfortable -- I am confident with the number. In fact, just prior to joining Atlas, I spent a fair amount of time in due diligence and a lot of time since joining, among other things, really digging into our continuous improvement in our efficiency initiative. So I can tell you I feel good about that number.

So we've Talked about 13 million in calendar year 200 and there could be some upside to that. Going into 2007, I think that's where the vast majority of the cost take-out is going to be realized because a lot of what we're doing -- the majority of what we're doing -- it is through the purchasing and an RF-2 process. So it just takes an amount of time here, and that's the time we're investing in 2006 to get that RFQs out, to survey a wide range of potential suppliers for whatever good or service we're talking, to negotiate new contracts, to put in service-level agreements, for example, or purchasing standards and then those cost benefits roll out. So I think we'll see the benefit of -- the vast majority of that -- in 2007. Then you will have a tail in 2008, just as the full-year effect of actions we get fully implemented in, say, the second and/or third quarter of 2007 roll forward into 2008.

Do you have a sense, Bill, of how much it cost you to get those savings in place?

Well, the $100 million is a net savings. We're not going to gross out of that. The cost -- a lot of it is really the intellectual capital. It's management time and energy and making sure we have the right people on board that can drive and then implement these kinds of initiatives. So the cost is really, in that context, very minimal to the kind of benefits that it drives.

Anything else would be netted out in that $100 million target?

Yes, that's a net number.

Got you, okay. Turning just to the commercial charter business for a second, because it looks that that business is growing a fair amount and the rates are obviously almost approaching military type numbers. How do you think about that business? Certainly, in this strong freight environment, do you get to a point where you are allocating capacity directly to that business as opposed to just thinking of it as a place for the extra capacity?

Well, the charter business unit is a viable business segment, and it's a segment that we serve. Certainly, we should dig through our 10-Q's, and you look at our FAC analysis on our segments -- we do, in our mind, dedicate aircraft and charge aircraft out against that unit. It's seasonal, and we're coming into a season for that as the fourth-quarter demand or late third quarter/fourth quarter demand picks up out of Asia. That's one key market segment, although there are others that we serve. So, as I mentioned earlier and I think Mike also covered in his comments, we continually evaluate each of our business portfolios and then make our best informed judgment about the asset allocation that each segment, based on what our commercial people are telling us in terms of the size of the opportunity and the potential return. So it's an important market segment for us and one we will certainly continue to serve.

Moving toward the refleeting, just out of curiosity, you referred in your comments to 747-200 capacity being essentially commoditized. Can you get a sense, really, Bill, as you look toward that first thing you think about with new aircraft, which I think you said you start with looking at what the customer needs? What are the types of freight capacity, say, that are not commoditized? What sort of aircraft do you feel that customers are looking for?

Well, think about the 200's for a minute. First of all, many of them are 25 plus years in age. They were built at a different time. Fuel costs something much less than -- they are coming in to pass C and D checks and major engine maintenance requirements as well. And their lift is substantially below what the 747-400 offers today.

So when you think about the freight market is -- we look at the market and part of our strategy is to segment the market and decide which customers are the most appropriate ones for us to target and which are the ones that are most appropriate to go after in the ACMI market segment. For us, kind of the sweet spot of our customer opportunity really is with an airline with a very firm and dedicated commitment to freight, see it as a valuable component of their business. Likely there are many markets to serve, but the vast majority of freight flies in the East-West freight market, between Asia and North America, between Asia and Europe, between Europe and North America. That's not to say the North-South routes are not important routes; they are. But the demand in those East-West markets far outweighs what I would call the North-South sector.

Then, as you think about that, our very strong belief is that our target customers are looking for size and efficiency. The combination of new aircraft, with heavy lift capacity, with latest generation fuel efficiency and engine technology, with maintenance, heavy maintenance and major maintenance items somewhere substantially out in the future, we think, gives us the opportunity to put this new generation aircraft with an early near-first mover or launch customer kind of status into the customers' fleet and gives them a leg up on their marketing strategies as well.

As you talk about customers demanding size; I then just have to ask about the A-380 for a minute. I know that some of the 400 ACMI customers, I believe, of yours, are either customers on the A-380 list already or are looking at it. Do you think the launch of that aircraft, whenever it comes -- I know it keeps getting delayed -- affects the demand of the 400? Or do you think it's deep enough for both aircraft to coexist?

Part of what we did in making our decision on freighter aircraft was to look at and kind of model what we think the estimated demand is going to be for new wide-body aircraft in the, say, 2010 to 2020 environment. I believe there is opportunity for more than one aircraft type to coexist. Our customers will certainly make their decisions as to what their current fleet looks like, what they believe their lift requirements are. Certainly, people are going to make decisions around the densities that they are likely to achieve in any given market, the volumetric freight versus weight, versus heavy freight. Certainly, it wouldn't be strange to see two different companies looking at the same market and perhaps coming to a different conclusion based on their business and the customers they serve. So they could both exist.

Sure, I mean I'm more specifically, in terms of your customers that are some of the longer-term 400 ACMI leases. Are you expecting to have any 400's put back to you, as a result of those customers taking 380 deliveries? That's what I'm asking.

Okay. I think, if you look at our fleet and as we have modeled it out into the future, we think there is a good demand for the 400's, and we're experiencing that today. So I believe that we will be able -- if 400's come back to us in the normal cycle of ACMI retirements, I believe that we will have the opportunity to effectively place that aircraft elsewhere.

Got you. And then just lastly, Bill -- and this might be me being a little tricky; and if it is me being tricky, please tell me. But in the press release, you talk about Next Generation freighter technology. Should I read from that that at least in your business plan right now, passenger ACMI is not part of the cards? Because we have talked about that in a couple of previous calls.

You shouldn't read that into that. We're going to look at -- as we think about growing our business going forward, we certainly need to think about other opportunities that we might pursue with current customers or new customers. So on passenger ACMI, that's potentially an opportunity for us. We simply need to do more work on that as a growth opportunity. So it's not something we could talk about in a lot of detail today, but it's not something we have discarded or moved away from strategically.

Craig Peckham. Please state your company name.

Jefferies & Co. I wondered if you could clarify for us -- as we look at the improvement in rates on the ACMI business, roughly how much of that can we ascribe to changes in mix, 400's as opposed to classic business, as opposed to outright pricing improvement on a like-for-like basis?

The majority of that is a mix change, 400's versus 200's. In our ACMI contract, most of them do have an inflation or, better said, an escalation clause on a year-over-year bases. But the majority of that, of the change that you are seeing, is the mix change.

I noticed that there was a rather substantial year to year increase in the legal and consulting line of about $4 million. Could you give us a little more color on where that is from and how much longer we can expect that to recur?

Well, there's a couple of things in there. Certainly, as I mentioned earlier, we do take on some advisers to help us think through our aircraft and fleet decisions, as well as some advice in the financing for that fleet. Some of those dollars reflect that.

We have also had, as you know, we have had the ongoing DoJ investigation and we're fully cooperating with that, and so we have had some unexpected expenses. Some of those expenses there are legal expenses for us to fully cooperate and comply with, a request that we have received from DoJ.

I wanted to talk for a second about your comments on the scheduled service side. Can you give us a sense in terms of the several opportunities that you cite for improving the value on the traditional scheduled service side as well as improving earnings -- are we to read from that that you're continuing to plan to be committed to retaining that scheduled service business longer term? If so, what exactly are some of the strategies there to drive better returns on it as you own it?

I probably cannot give you the kind of detail that you're looking for in your question. I would not read into that that it's fair to say commitment to retain scheduled service long term. Why I am saying is that there are several options that we have available to us, and we're working through those, and they are not exactly the same. The outcome, I think, when we come back and we're able to discuss it, should be pretty clear, I think, for you and others to understand what we expect we can do and complete. I think you'll be able to get a sense of what it means for us, mid to long term.

Obviously, you guys have made a lot of progress delivering yourselves a lot more flexibility financially, both the actions in July and what we saw later in 2005. Can you outline for us what the key improvements are in terms of financial flexibility that you have now that you didn't have before?

First of all, I'd like to underscore the fact that the facility -- the Deutsche Bank facilities were just expensive. They were secured facilities, and from an operational standpoint, we still had a lot of maintenance kind of obligations, above and beyond tracking for limited life parts, not putting as much flexibility on swapping engines out. As we have decided to get out of the classic business, there's engine swapping with respect to financed engines versus engines on wing.

So operationally, there was just an awful lot of heartache, if you will, attached with that. So it was expensive; there were some operating items on it. And I think, if you just said, Bill, what other covenants were knocked out, you might recall we knocked out most of the financial covenants last November. I think probably the last remaining covenant restriction from a sort of a financial standpoint other than a -- I guess we still had an EBITDAR [trailing in the dark] test. We did have a limitation on investments as well. So all that is gone; all the liens are released. So it just made total sense when you looked at all the attributes of why we should be getting rid of it.

I'd like to just come back to your question on the ACMI mix. While it is certain that the majority of the increase there was the mix of more 400 and less 200, we did on a year-over-year basis experience somewhere around a 2.5% to 3% increase in the base rate in the ACMI existing contract. So there is some rate in that as well. I don't want to pass over that.

Just to pursue that a little bit more, is that reflective of new contracts being signed? How should we view that?

There were a few new contracts signed. The largest part of it was the escalators that exist in the contracts already as a feature that we look to get in each of our contracts.

Stuart Quan. Please state your company name followed by your question.

Zander Capital. I just had a question on the military block hours. Can you give us a sense of how the declines in block hours progressed through the quarter?

Well, they were actually fairly consistent second quarter over first quarter, in terms of our block hours. I think we flew, in Q1 '06, 4,510 block hours. And in second quarter, we flew 4,565. So it was really flat.

Is it down 39% for the second quarter? Was that April, May and June were down roughly that number each month? Or was there any kind of variation in that?

It was fairly consistent across the months. I don't have the specific detail in front of me, but my sense is that it was fairly consistent across the months.

Okay. And then you talked about enhancing financial flexibility. Is one of those alternatives potentially an equity offering?

I think as we said in the past, we're looking at and considering several different opportunities with respect to the capital markets. And now that we're back listed on the NASDAQ, obviously, there are some fairly attractive opportunities out there. So I really can't say much more than that, but we are looking at opportunities across the board.

Steve Ruggiero. Please state your company name followed by your question.

CRT Capital. You have two ACMI classics, 747 classics, still leased. When did those two leases expire?

Steven, we don't really talk about those types of dates specifically. If you look in our 10-K, I think the way we talk about the falloff in ACMI contracts is the contracted revenues in future years. But we really don't speak to the details of those individual contracts.

Could you just indicate if it's within the next couple of quarters?

In all honesty, Steven, I'd really rather not. It will happen in due course.

Also in the press release, you made the statement that the current quarter experienced a more normal level of AMC activity. Should we assume that block hour level will be a good target in our models for the third and fourth quarters?

You can use that as a target. Of course, we experienced some increase in flying as a result of the troubles in Lebanon. Of course, we don't predict those events but certainly don't wish for those things to happen, either. Depending on what the decision is on troop rotation and levels of troop in Iraq and in Afghanistan and elsewhere around the world, it could be higher. But we're thinking at that level ourselves, as for our modeling activity.

I think I would only add that at these levels we're fairly consistently flying at what is our "entitlement" in the program. However, when things change unpredictability or rather quickly, the military then has to request expansion flying, which is where, if you recall, through last year, we were garnering much more than our fair share of that, largely due to our Company's ability to flex, to basically provide the list that the military needs on relatively short notice. So, to the extent that there are new requirements that come up quickly, typically that bodes well for our Company.

I am just trying to get a better understanding of the $100 million cost efficiency program and how that gets layered in through 2007. You bring up that $13 million mostly in procurement will occur in the fourth quarter of this year or at an annualized rate, I'm assuming. What about for 2007? What are you planning on for how your cost efficiencies get folded into your operation throughout 2007? Is it front-end loaded? Is it back-end loaded? And is it the full $87 million delta?

I would think of it as rolling out throughout the year, as we go through 2007. Some of our initiatives, for example, we have had a very strong initiative, a strong focus on managing fuel burn and fuel efficiency. Well, that's in the program as of today, and that will continue to flow throughout 2007. That's an initiative, I would say, well underway.

Procurement will roll out through the year as contracts expire, as we have the opportunity to execute on our RFQs, get those responses in, create new contracts and begin the implementation process. As well, on revenue margin, there's opportunities as well. Again, those will fall through, flow through the year. The revenue opportunities will reflect the kind of seasonal nature of our business. So there's more revenue opportunities in fourth quarter than there are in first, just given the nature of international freight flows and the nature of our business.

Helane Becker. Please state your company name followed by your question.

I just have a question about sort of the difference between Atlas and Polar and how we should think about that. If we look at the numbers on the revenue side, is there -- do we think of sort of Polar as being scheduled services and Atlas being the rest of the business? Or is there like a mix that we can think about? Either on aircraft or -- what each group contributes to the total?

Polar is, as you say, largely scheduled service. Polar does also run some of the charters as Polar and has done some AMC flying historically. As we go forward, our sense is Polar is the scheduled service business, and Atlas serves the ACMI, AMC and charter business.

From your comments with respect to the aircraft and so on, do we take away from that that Polar is definitely a big part of that Atlas Worldwide Holdings family kind of going forward? Or are there opportunities to kind of monetize the value of Polar and concentrate on just the Atlas business? Is the Atlas business kind of a better business than just the scheduled service would be?

Polar -- in the comments that I was referring to and in our press release, we talked about initiative or opportunities, frankly, that we're evaluating on our scheduled service. So back to your first question, that's predominantly focused at Polar. Polar does have value; starts with a book of customers and a revenue stream. We do have assets in Polar, not only aircraft but certainly our route rights in Asia, our landing rights in Asia and those route rights as well as in South America are also tangible assets. Cumulatively, it all has value. So as we go forward and as we're working on these several options that we have, we expect that we will deliver substantial value for the Company and for our shareholders as we make your choices and implement.

Atlas got some additional routes in the whole China bilateral; those are separate, right, from what Polar has? So you could give up Polar rights but maintain route rights in Asia with Atlas?

No, the routes are Polar. The routes are assigned for Polar's [AOC].

That's mostly because the ACMI contracts for Atlas allow you to use your customers' route rights?

Well, we do fly on our customer route rights; we do fly on some of our rights, as well. But historically, Polar had the route rights as part of the logic of Atlas acquiring the Company back when they did. So future rights have been assigned to Polar.

So I appreciate your help and clarifying that. All my other fleet questions have been answered.

Dominique [Niel]. Please state your company name followed by your question.

Canyon Capital. I'm wondering why you guys can't give us a better guidance for the year, especially in view of a stock price that has lost more than 25% over the last few months. And the first two quarters, albeit I recognize they are seasonally low quarters, but that are down at least on an EBITDA, around 30%. Is it that you don't have visibility on block hours, especially in the military business, or revenue per block hours or your cost structure is not clear at this point? What is it that makes it so difficult for you guys to give us a range in EBITDA or EBITDAR that would bring more visibility to your performance and maybe bring more coverage on your stock?

I think how I would respond to that is, as we have always said, our business is really highly seasonal. When we are sitting there in the first, even through the second quarter, I think, as I have said in the past, AAWW's year is truly made in the second half. Given that seasonal leverage, if you will, it does make it more difficult, I think, to predict how the global economy and the regional economies are actually going to factor into, really, on the revenue production side. Visibility certainly in scheduled service and the military side of the business is not very far into the future. We look at it, we hear what people say regarding the upcoming peak season. But the truth is, until you actually get into and you see the commitments of players, it is very difficult to predict.

On the ACMI side, clearly, when we have contractual terms that include minimums, obviously, we know what that looks like. But when we think about giving full-year guidance with a range, not so much that our costs, that we don't have a handle on our cost structure. In fact, as we have said throughout this call, it's going through a transitional period and in fact changing for the better. The range would be quite wide, in all fairness, because to fine tune it based on what people are speculating for the peak season or for military is very difficult.

Even in almost mid-August, there's no way of giving some guidance for the second half?

We don't -- again, Mike has, I think, summarized the reasons why we don't give guidance, but I think, in our press release, our call today and our 10-Q, we have shared, I think, some qualitative information. We have talked about what we expect to deliver in our continuous improvement initiative of $13 million. We have talked about our annualized cost take out of some $25 million or perhaps more on our scheduled -- on the exit of our classic 747's. We have talked about our normalized run rates as we think about military, which certainly could increase, depending on world affairs. And we have talked about an increase in our rate in military, our base rate of some 5%. So there's certainly information there that --

And the further savings in maintenance.

-- and the further savings in maintenance.

-- for the back half of the year.

We have also said that, given the seasonality and time, most of this will deliver in the fourth quarter. So there's something there that I think you can work with.

Evan Ratner. Please state your company name followed by your question.

Evan Ratner of Credit Suisse. The timing of the classics phaseout, the six classics -- when was that? Was it beginning of the quarter, end of the quarter? Can you give us any feel?

I think you should think of it as of the end of the quarter.

On the Polar side, there is a blurb in cargo facts about you guys getting or potentially getting additional routes. Can you maybe talk about the timing of those additional China routes?

Well, we're applying for those China routes under the procedures laid out by DOT. So additional routes would be awarded for next year.

So sometime early 2007 you guys will hear?

Bill Bradley We'll hear in early 2007, and if I'm not mistaken, they would be available in the second quarter.

On CapEx, since the fleet is down, any feel as we try to model out, when looking at our free cash flows, it's $30 million to $40 million of CapEx you guys had talked about. Any adjustment in that or revision?

No. I think we're still kind of ballparking for the back half of the year about $20 million.

Can you maybe update your thoughts in terms of paying cash taxes and when, roughly?

We don't envision paying any significant cash income taxes through 2008.

2008?

Yes.

[Corey Armom]. Please state your company name followed by your question.

[Rice Felkor]. Most of my questions have been answered also, but I have a financial question. Could you please explain in a little more detail the big decline in depreciation and amortization? D&A decline, goodness, I think it was about 50% quarter to quarter and year over year. Is this a sustainable level, quarterly, going forward?

Depreciation and amortization is relatively sustainable on a year-over-year basis. I think for calendar year '06, you should expect it to be in the mid 30s. For calendar year '07, it's likely to be in the low to mid 30s.

Todd [Jannel]. Please state your company name followed by your question.

Varde Partners. You talked about phasing out the classics at the end of the second quarter. Does that mean that we're going to see half of the $25 million of operating and overhead costs in the second half of this year?

Yes.

Mike Lanier.

Can you go back over what your plans are as far as 400 conversions, the passenger conversions into freight? How many you have lined up and when you think they will be coming around?

You'll see in our 10-Q today that we have essentially filed notice with IAI that we're not likely to go forward with 400 SF conversions. So we're in discussions with them about the slots that we have and some of our deposits that we have made on those slots. As you may know, we have a very large and comprehensive relationship with IAI for maintenance activities. So we think we will find a good solution to those deposits and those slots going forward. So we're not likely to proceed.

What changed your mind?

I think, going back to the comments I made on the decisions and the analysis we used to make the decisions on new technology, it's not necessarily we're passing judgment on the 400 SF as an aircraft type or the conversion of that. But if we think about our customers, and their applications and where we're most likely to have our best opportunities with them to place aircraft, we ultimately decided that the 200 SF wasn't necessarily the right aircraft for us going forward.

Well, you were going to convert a 200, not a 400?

I'm sorry; I meant to say a 400 SF; my mistake.

So you are basically saying that from your feedback from the customer front -- because there's some questions about how many of these conversions industry-wide might take place -- from the feedback you are getting, there's not a lot of interest in a converted passenger?

No, I didn't say that. Again, as I said earlier on the question on different types of new wide-body aircraft. The evaluation that we had to make -- our valuation of our current customers and potential future customers, what we at Atlas could bring to the market as our most compelling value proposition, and what we think creates the most value for our customers with Atlas putting that asset into the market, we've decided that the 400 SF isn't the most attractive choice for us.

Another company, another ACMI operator with a different strategy and a different kind of segmentation model could find it very attractive. But that was the choice we made. Again, if you go back to what we talked about or what I was talking about, the long-range markets, I think that we're certainly interested in range, payload, fuel efficiency and the reliability of brand-new aircraft.

So what are they calling these? The 400-8's?

The -8's are one of the new wide-body aircraft, yes.

But currently, you think that the 400's from the late 1990s, early 2000's series 400's are still -- they are still in very strong demand? None of them are parked, right? I'm not talking about yours; I'm talking about the whole industry.

No; there's very strong demand for the 400 F.

Have you seen any transactions in the first half of the year where people have bought and sold any used 400's?

We certainly watch our competitor. There has been some transactions announced recently where another ACMI operator has announced the acquisition of passenger aircraft for conversion to the 400 SF.

But very little activity in the original freighters, not conversions but just original freighters? I'm just trying to get a feel --

I'm a little confused where you're going. You are talking about the 400 F?

Yes.

Well, I think [Cafe] announced the acquisition of several ERF's, and I think that represents, essentially, the closedown of the 400 freighter line, although I don't want to speak for Boeing. You'd have to really address it to them. But I think Boeing has announced the closedown of the 400 freighter new construction line.

So the orders you have now are for the -8's?

I have not said what we have ordered. I have said we're close to completing a transaction for new generation wide-body aircraft, but we have not said what we're going to do.

Scott Tillman. Please state your company name followed by your question.

Harbinger Capital Partners. I had a couple of quick question for you, and I know many people have touched on guidance issues, but I guess just a month and a half in is there any clarity you have on what has been going on with the military at all, even if it's just kind of a review of the last month and a half?

I think I touched on it briefly, Scott. This is Bill. We talked about this normalized level, but we did also indicate that we have done some additional expansion flying as a result of what's going on in the Levante as well as with troop locations not going to be exercised or implemented, and a number of those have been canceled. There's some additional flying as a result of [R&R] that's going to take place now that wasn't originally going to take place, had those troops been redeployed back to North American.

When I look at the 5% increase in the base rate on AMC, is that going to drop just straight to the bottom line?

Yes. But that's not base rate; it's not the full rate that we have in the Q, which includes fuel.

Okay. You had alluded towards, I guess you were seeing a stronger peak season than normal. Can you give any more clarity there?

Well, it's a sense. That's, I think, how we described it. But as we talk to our customers, as we talk to our own -- our people in Asia and in North America, our sense is that, based on prior year, there's a sense that there will be a stronger demand for air freight in the peak season than we felt, shall I say, last year or the year before.

Stuart Quan.

Just a follow-up question on the scheduled service. In terms of maximizing the value there, is that sort of a Q3/Q4 event, or is that something we should just be thinking about longer term, 2007?

Well, I think maximizing the value is certainly a continuous nature -- component to it, whatever we choose. I really can't get too much further into it, given the discussions that we're in, but it's certainly something we're looking to conclude and move forward with as soon as practicable.

I guess the only thing that I would add is that we had previously said that a portion of the improvements that we're looking to achieve are on the revenue side. I think with respect to scheduled service, revenue and capacity management, I think we will begin to see movement there but it will take a period of time for that full effect to come together. But we do hope to see improvement building over time.

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