Atlas Air Worldwide Holdings Inc (AAWW) 2006 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Atlas Air Worldwide Holdings Incorporated third quarter 2006 results investor conference call. [OPERATOR INSTRUCTIONS] As a reminder, this call is being recorded today, Wednesday, November 8, 2006. I will turn the call over to Mr. William Bradley, Vice President and Treasurer. Please go ahead, sir.

Thank you, operator, and good morning, everyone. I am Bill Bradley, Vice President and Treasurer of Atlas Air Worldwide Holdings. Welcome to our third quarter 2006 review and earnings outlook conference call. Today's call will be hosted by Bill Flynn, our President and Chief Executive Officer, joining Bill are John Dietrich, our Executive Vice President and Chief Operating Officer, and Mike Barna, our Senior VP and CFO.

Before I turn things over to Bill, 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 14, 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 a related reconciliation in the press releases which are posted on our website at www.Atlas Air.com. You may access these releases by clinging on the link to financial news in the investor relations section of the website. At this point I would like to turn the call over to Bill Flynn.

Thank you, Bill, and welcome everyone. We are very glad to have you with us this morning and we appreciate your interest in our company. This is an exciting time at Atlas Air Worldwide Holdings. I believe that there is tremendous opportunity ahead for our company and we will share our perspective with you today.

We have just completed a key transition quarter. Our third quarter was a quarter in which we largely dealt with the costs associated with our planned aircraft reduction earlier this year. We expect to deliver record pretax income in the fourth quarter of 2006 with our pretax income exceeding $60 million. And we expect to deliver pretax income in excess of $110 million dollars in 2007. 2006 has been a year in which we have strategically repositioned our company from margin improvement and earnings growth.

We began the year with a cost structure and a fleet sized for the unusually high military volumes we saw in 2005. Since then, we have deliberately resized our fleet by phasing out 7 Boeing 747 Classics. We have eliminated over $25 million of annualized operating expenses. We have maximized our returns on these assets by capitalizing on sale and lease opportunities in the secondary market. Simply put, we actively managed the aircraft within our portfolio of assets. When our assessment of the market and other conditions tells us it is smarter to lease or sell the aircraft rather than operate it, that's what we will do. In addition we are accelerating our continuous improvement initiatives, significantly reducing our operating costs. Continuous improvement initiatives contributed approximately $4 million of benefits to our third quarter results and we expect to realize another $10 million in the fourth quarter. We are committed to a culture of continuous improvement and we will pursue additional cost saving opportunities.

We have achieved two key long term strategic objectives this year. Our recent agreement with DHL will significantly enhance the value of our scheduled service business. And further our Boeing 747 freighter aircraft order provides the next-generation technology platform for our company and for our customers.

We have taken action to enhance our financial flexibility and controls. This included enhancing the strategic and flexibility by repaying and terminating two outstanding debt facilities during the quarter as well as terminating an extra credit facility. This past May we enhanced our business profile and improved trading liquidity in our shares by listing our common stock on the NASDAQ Global Select Market. We obtained membership in the Russell 2000 Global Select index this year.

In September 2006, we reached a final settlement of an IRS income tax audit of 2001. Our settlement did not require any payment of cash income taxes, interest or penalties. As a result we we will have additional NOLs available to us.

The net impact of our initiatives and actions have been to shift the company's business profile to a sounder, more positive foundation. A profile that responds to more normalized military charter demand, higher fuel prices, and that mitigates risk. As I mentioned earlier, we expect our fourth quarter pretax income to exceed $60 million, which compares with $45 million in the fourth quarter of 2005.

This outlook reflects the positive impact of our improvement initiatives, and our assessment of the peak holiday season demand for air freight. Consistent with the first three quarters of this year we expect total block hour flying activity and total operating revenues in the fourth quarter to be below last year's level. Offsetting this revenue reduction are sustainable cost reductions driven by our continuous improvement initiatives. We also expect to benefit from lower net interest expense during the quarter, reflecting the debt that we have repaid this year. Pretax earnings in 2007 should be closer to our 2005 results but are lower revenues with higher margins.

We are excited about our agreement with DHL to form a strategic partnership that enhances the value of our scheduled service business and that will be an important contributor to our stockholder value. The DHL transaction monetizes a portion of our scheduled service business. And it aligns the go forward operation with the more profitable and predictable outsourcing platform. By way of background we acquired Polar Air Cargo from GE Capital Aviation Services in 2001 for an effective purchase price of $54 million. As we announced last month, we entered into a letter of intent for DHL to acquire a 49% equity interest in Polar's scheduled service business for $150 million. While we expect to recognize a significant gain on this transaction. We do not expect that gain to be realized in 2006 or 2007 and it is not reflected in our earnings guidance. The transaction also includes a landmark 20 year commercial agreement that will insure DHL access to aircraft capacity in key global markets while providing our companies with a valuable long term customer and a potential revenue stream in excess of $3.5 billion over the full term of the agreement. Further, DHL will also have access to additional aircraft capacity from our Atlas Air subsidiary and this represents a significant growth opportunity.

Finally, our recent order for 12 Boeing 747-8 freighters with option to acquire an additional 14, puts us in a stronger position to participate in profitable growth opportunities in the expanding air cargo markets. That is especially true in our core ACMI business where demand for long haul intercontinental wide body freighters has been outpacing the general increase in demand for air freight. We will continue to be an innovator in the air freight market and we will align our portfolio of services to meet the evolving needs of our customers. Now for a recap of our third quarter highlights I would like to turn it over to our CFO, Mike Barna.

Thanks, Bill, and good morning, everyone. As you have seen in our press release today, we reported third quarter 2006 net income of $7.1 million or $0.34 per diluted share on revenues of just over $361 million. Our operating income was $32.9 million and our pretax income was $8.4 million. This pretax figure includes the $6.2 million gain on the disposal of an aircraft as well as a one time noncash expense of $12.5 million associated with the early retirement of outstanding debt. As Bill has indicated, Q3 reflects a key transition quarter, and the metrics bear this out.

Total block hours and total revenues are down 18% and 11% respectively over the comparable quarters in 2005. Earlier this year, we made the decision to phase out certain classic aircraft consistent with our decision to reduce 747-200 ACMI flying which has become an increasingly commoditized and less attractive business for us. We purposely avoid pursuit of unattractive revenues. Hence, ACMI block hours declined 24% and revenue was down 19%. At the same time ACMI revenue per block hour increased by 7%, reflecting a favorable change in the mix of 400 versus 200 ACMI flying. As a result of our active fleet management, we have reduced on an annualized basis, approximately $25 million of associated operating and overhead costs. Since cost reductions lag fleet reductions our Q3 results were impacted. The full benefit, however will positively impact Q4.

Our fleet optimization reflects a return to a more normal level of AMC flying. This impacts our total revenue and block hour picture on a comp basis. On the last call, we indicated that we believed 1500 hours per month was a more steady-state level for AMC flying. For Q3, we actually did better than that, averaging approximately 1730 block hours per month. This number however, was down nearly 37% over the prior comparable quarter. Because of the increase in the AMC rate compared to last year, however, total AMC revenues were down less than the block hour decline, falling only 27%. As we also said on the last call, 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 future results, and it is one of our core businesses.

Maintenance expense continues to trend favorably in 2006. In the latest reporting period, it totalled $33 million compared with about $49 million in the third quarter of 2005, or a decrease of more than $16 million. This decrease was driven primarily by lower expense for heavy air frame checks and engine overhauls where we had two fewer D checks and 7 fewer engine inductions in third quarter '06 as well as achieving significantly lower cost on our C airframe checks. In addition, we benefited from improved line maintenance based upon reduced block hours and our cost savings initiatives. We expect the improvement in maintenance expense on a full year basis will exceed the $56 million improvement that we have seen through September 30th and well below last year's total maintenance expense of $234 million. As we pointed out on our last call, this positive variance for full year maintenance expense is driven largely by fewer engine overhauls and fewer C and D heavy airframe checks. Some of which is reflective of the phaseout of some of our older classic aircraft as well as reduced block hours and our cost savings initiative.

Now let me give you an update on our fleet. As Bill mentioned, we began a multiyear effort to selectively phase out older 747 classic aircraft and replace them with newer leading edge technology aircraft. In April, we sold one of these older aircraft for $8.4 million and record a $2.8 million pretax gain. We also discontinued flying an additional 6 of our 747 classic aircraft as of mid year. Two of these aircraft were sold in September for $18 million. Resulting in the previous mentioned $6.2 million pretax gain. In October, we completed sublease agreements on two other aircraft and sold our only 747-100. That leaves one classic aircraft held for sale at the end of October. These actions maximize our returns on these assets by capitalizing on sale and lease opportunities in the secondary market.

Finally let me touch on cash and debt. Our quarter end cash position measured $172.8 million compared with $305.9 million at at year-end 2005. In the third quarter, we used approximately $141 million of cash to enhance our strategic and operating flexibility by paying off the outstanding debt under the aircraft credit and AFL III credit facilities. In connection with this repayment, we incurred a one time noncash pretax expense of $12.5 million in the third quarter. relating--related rather to the write off of the remaining unamortized discount associated with those two facilities.

At September 30, our balance sheet debt and capital lease obligations totalled $423.2 million including current maturities of $19.2 million. The face value of this on balance sheet debt and capital lease obligations totalled $508 million, which includes nearly $85 million of unamortized discount related to fair market value adjustments recorded against our debt as a result of the application of fresh start accounting. This $508 million compares with $689.9 million on December 31, 2005, or a reduction of approximately $182 million.

We also terminated the revolving credit exit facility with Wachovia bank in the third quarter. The removal of all of the restrictive covenants associated with these three facilities, as well as the removal of associated financing liens provides us much greater latitude in pursuing our growth and development plans for the company. Finally, we will be filing our Form 10-Q report for the third quarter of 2006 with the Securities and Exchange Commission in the coming days, and we expect to report our full year results for 2006 on or about the middle of March, 2007. On that note, I like to turn it back over to Bill.

Thank you, Mike. We are committed to a culture of continuous improvement and success. Our team is focused on executing our strategy and delivering our plan. We believe that we are setting the stage for an exciting dynamic future for AAWW, and we look forward to improved margins and earnings growth in our business. I am confident about that because we have an impressive group of core customers, solid financial position, a long range view of our business, a strong global presence, and favorable long term trends for air cargo demand and therefore, for our customers. I think it is a good time now to take your questions. Operator, may we have the first question, please?

Thank you, sir. Ladies and gentlemen, at this time we will begin the question and answer session. [OPERATOR INSTRUCTIONS] Our first question is from Bob Labick with CJS securities.

Good morning.

Good morning, Bob.

Hi. Just to start out, could you help us understand, could you describe the demand dynamics overall for air cargo and in terms of incremental capacity utilization for you. Are you walking away from some business because of pricing ? Or are you taking as much as you possibly can? Or how do you differentiate on price and what is the demand out there for you?

Okay. Well, thanks, Bob. This is Bill Flynn. Certainly, as you know, we have three principles, four market segments. The scheduled service business, ACMI, commercial charter, and military. Right now, on my last call I talked about the fact that we were looking forward to a strong or better peak period in 2006 over 2005 and that is principally, principally a trans-Pacific business that exhibits business peak characteristics. And I think you will see that we have had good revenue growth year-over-year in scheduled service. Third quarter over third quarter, and we anticipate that trend to continue in the fourth quarter of 2006.

We haven't deployed additional aircraft in our trans-Pacific routes. We are operating with the same number of aircraft. And so in that route we are getting better utilization and we're seeing yield improvement and we are growing at about the same pace as the market is growing. Somewhere between 5% and 6% and we will know the final numbers at the end --shortly after the ends of the year.

In the AMC, AMC is down. We know that the military demand for lift is down substantially over last year. And we certainly look at all of our market segments and take advantage of and deploy our aircraft to take advantage of the best margin opportunities. And so we are meeting and carrying the AMC freight that's offered to us. We've had some expansion. As Mike talked about, we carried some additional flights, some lifts beyond what we had initially projected above our 1500 hours or so. And so we're responding, and we have the fleet and the scope to be able to do that flexibly. In ACMI, the big difference year over year is we've taken the 200 aircraft out of the ACMI business, and I think Mike's comments was, it had simply become more commoditized. The increase in fuel, combined with the increased maintenance cost of operating older aircraft and the available market opportunities for placing 200 in the high fuel environment, it simply has changed. As that principally motivated our decision to exit as many of the 200s that we did, the market demand isn't there and it, there is less AMC military available to us. And so we assess each market, each segment, take a look at those opportunities, current trends and project those out, and that informs our decision around fleet.

Great. That was very helpful I appreciate the color there. Just taking it a step further in terms of the 200s, which you just discussed in the ACMI part. Are there any -- How do you feel about the size of your fleet now. Looking into, '07, '08, '09 in terms of I think it's the 12 remaining classics, is there thoughts on accelerating retirement of additional planes, or is 12 the right number for the next couple of years. What are you thoughts on that?

Well, we will assess that on an ongoing basis. We think that it is about the right number for 2007. We have the 2400s, which certainly are very attractive and we have very strong ability to place those in the market, whether that be ACMI scheduled or chartered market. And the 200s, the number we have in the fleet seems to be about right. We will evaluate that on an ongoing basis. We may choose to retire another one or two going through the year, based on market demand. The point, though, that we made in our earlier discussion was that our focus on continuous improvement and our other initiatives is critical to understanding how we are going to drive earnings growth in 2007 and beyond, and so the combination of getting rid of the aircraft, the ownership costs and the other operating and overhead costs associated with that driving our continuous improvement initiatives and making prudent choices about how we deploy our available assets to the best market segments, you know the combination of those are the platform going forward to improve earnings and increase margins going forward.

Got it. Then, shifting back to ACMI, the leases that you have or the contracts you have that are coming up for renewal. What are the new terms. How is that process going and do you have a lot in '07, or what is the status of the overall portfolio of contracts.

I think as we covered in prior calls we don't discuss the details of contracts. Because frankly that is competitive. But I think we have also pointed out that we have our contracts staggered in such a way that we don't have in any year a substantial number of contracts coming due. We feel -- that said, we feel very good, very positive about our ability to renew and extend any contracts that are coming due in 2007 and in some cases we are getting margin improvement, some escalation on the rates because of the demand that is out there for this aircraft.

Perfect. My last question. I will get back in queue. If you could just update us on the status of the NOL with the settlement, and pre- and post-DHL transaction, just the kind of cash taxes we should expect in '07 and '08.

Right. Well, I guess to take those in reverse order. We don't anticipate any significant cash taxes until '08. And our current look at NOLs going forward approximate $345 million, although they will be limited to section 382. As we said in the past.

Great, thank you very much.

Thank you. Our next question is from Craig Peckham with Jefferies & Co.

Good morning.

Good morning, Craig.

Thanks for giving us some outlook for 2006 and 2007. Underlying the $110 million of pretax. I guess in excess of that, could you give us a sense for what kind of assumptions around block hour improvement there are and in that 2007 number versus 2006.

Well, I think, again, it's story about our continuous improvement in cost control. We expect some improve men in block hours in schedule and charter combined. But the real story is in, well, there is two points to that. As Mike has said on any number of occasions. Not all block hours are created equal. So we have a mix change now where a preponderance of our block hours are now 747-400 block hours, and there is a different earnings profile there versus the 200 as we discussed.

But the story really is an execution story, Craig, around our ability to take costs out, keep them out on a sustainable basis and drive the margins. And so our initiatives, whether it is continuous improvement initiatives that we've talked about, $100 million initiative of which we got $15 million this year and we are expecting in the range of $65 million on an annualized basis to be achieved next year, and our other cost initiatives will be the primary contributors to earnings growth in 2007. We will fly less block hours in ACMI, we have less 200s, and that was our conscious and deliberate choice. AMC is roughly flat and then some increase in the commercial business and scheduled, combination scheduled commercial charter, which is how we think about that business segment.

Okay. And it sounds like you are moving very aggressively on the continuous improvement program. With $65 million outlined next year, does that reflect a cumulative annualized expense savings or is that $65 on top of the $15 million that has already been realized.

That is the annualized impact of activities achieved in '07.

Okay, so just looking at it another way. Does that imply --

Maybe to look at it another way. We have $14 million in 2006. Of identifiable, quantifiable savings as a result of our continuous improvement initiatives. We will get about $50 in 2007. We don't get them all on January 1. Some accrue later in the year and so the effect of that $50 is about another $15 million in annualized benefits that we will achieve in 2008 and we will have additional initiatives that we will get additional benefit on in 2008.

Okay, that clarifies it. You mentioned earlier in the prepared remarks, Bill, sort of what is happening with seasonal activity and seasonal demand patterns, we notice that the load factor in the scheduled business did, looks like it ticked down very slightly in September quarter over June. Could you, I guess compare that trend on load factor, with what you are seeing, kind of more broadly, in terms of seasonal demand? I'm thinking particularly about what is coming out of Asia?

We are seeing about -- of course, the seasonal, the overall schedule number aggregates all of our scheduled services, trans-Pacific, transatlantic and South America. When we deconstructioned on a theater basis, we saw very good growth and very good yield improvement in the trans-Pacific. So the market I think, is, as best we see, and I've looked at ATA and IAD and other statistics, suggest about a 6% demand, 5.5% year-over-year increase in air freight demand trans-Pacific eastbound. And we're trending just a little bit better than that in terms of pure volume or FTKs on a year-over-year basis. And that seems to be the market pattern in October or November. '05 over '04 wasn't that strong, '05 over '04 was really in a couple percent demand increase, if you look back at the market then.

Okay. And a last question here for you. The remaining classic that is held for sale now. Any thoughts on the market value of that asset or maybe compare it to what you realized on the previous sales?

Craig, this is Mike. I mean, we typically don't divulge that type of detail. Obviously, as you and the market are fully aware of, aircraft evaluations are really tied to the specific tail and there are a lot of variations from one aircraft to another. We assume that we will get, you know, a favorable market rate when we place that aircraft.

Thank you, ladies and gentlemen. [OPERATOR INSTRUCTIONS] Our next question is from Adam Zirkin with Libertas Partners.

Hi, gentlemen, how are you?

Good morning, Adam.

Couple of questions for you. I guess we'll -- let's stay on the trans-Pacific business for a moment. I know that we received a release last week regarding some additional frequencies to Beijing. What are the growth plans for the Polar business trans-Pacific? What sort of DOT decisions are you waiting on now and so forth?

Well, we have those additional 4 frequencies that were awarded. So it's total of 16 frequencies. We will get those additional 4 frequencies in, at the end of the first quarter next year. In anticipation of that though, within our existing 12, we've redeployed several of those existing 12 to initiate service to Beijing so that we get a presence in the market during the fourth quarter. So that as the slower season occurs kind of at the end of first, beginning of second, we're already a known presence in the market. We have our sales and marketing teams in place and we have our customer relationships in that market.

Overall, I think, Adam, our growth in the trans-Pacific next year is--will pretty much mirror market. We are not planning to have additional line haul freighters going transPacific. What we are working with is our feeder network. Again as we picked up Beijing and Shanghai, and feed out of Hong Kong and Japan, we look for the, kind of what I believe is called a best stack yield of the aircraft coming trans-Pacific. So we will make ultimate aircraft allocations and set market targets around the best yielding freight that's available to us in the market. And so I think a similar growth rate in trans-Pac of close to market, but we'll be focusing on expanding yield by the mix of freight, origin mix of freight. Whether it is Beijing, Shanghai, Incheon, Narita or Hong Kong, that is something we manage on a dynamic basis.

Okay. With regards to the wide body fleet planning and the -8, does the plans to purchase the -8 sort of conclude the wide body portion of the fleet planning for you guys?

We've place an order for 12 with options on 14. We will continue to evaluate what other opportunities exist in the market. We felt that the first decision we needed to place was the decision on the replacement for the 747 class of aircraft. We looked at 777s, we looked at other aircraft, and we will continue to evaluate that as the market is changing, to see if there is a valuable market opportunity for us in another gauge or another aircraft type. Hindsight is a beautiful thing with what has happened to the other aircraft, the 380 F, we feel very good about the orders we placed.

Sure.

Because we are on early deliveries and we frankly think we have them at a pretty good price compared to what later sales are going to given the challenges that people are finding over there with Airbus.

But it is fair to say that you are still looking at capacity opportunities that could come online between say now and 2010 when you start taking the -8s.

Yes, always looking at the opportunities.

With respect to the -8s, and I know we had the ability to talk to you about the DHL deal on the conference call, but we didn't the aircraft order. How should we be thinking about the potential revenue generating potential of those aircraft? I mean, can we look at what a 400 per block hour runs at and think about the operating efficiencies and the incremental capacity and so forth over the 400, and try to get a ballpark to what kind of cash flow contribution comes from those aircraft?

So there's a couple of perspectives. One is certainly to compare the value drivers or the attributes of the 747-8 with the 400, and there is value drivers in greater fuel efficiency, and value drivers in greater lift capacity. So those two areas have value. And in addition, being new aircraft, they are going to have lower maintenance costs, certainly for a period of time, by virtue of the fact that they simply are new.

In addition to that, part of the reason we are so excited about our transaction with DHL is that it initially calls for six aircraft. But we have every opportunity to place additional aircraft with DHL. And so, as we think about not only our normal, traditional ACMI markets, and those markets are -- depending on whose data you read, whether it's Boeing or Airbus or merge global, they are -- you know, the forecasts are fairly consistent that over the next 20 year period, the demand for wide body ACMI aircraft is likely to double. And that's in a traditional freighter market. And then as we think about the strategic partnership with DHL, the fact that they are making an investment as opposed to just a long term contract with Atlas-Polar, their-plans are certainly to increase the fleet that they have dedicated to them on an intercontinental basis. And so we feel even more confident about our order now, around the -8, because we have expanded frankly, you know our addressable or our available market by virtue of this transaction.

Sure. Okay and then just lastly, two quicker things. With regards to the economics you are seeing on the -200s. Obviously those have been, you know, softer and you have reported that the last couple of calls. But have those stabilized at all? Or are they still in a bit of a free fall, particularly you know [inaudible].

Well, with fuel improving, or you know, improvement in fuel cost, there is a bit of stabilization with the 200s. And that's something, we're going to, we closely monitor, we think we are at the right level now. There was a question earlier, or are we going to get rid of a couple more. Or is that the right number for 2007? That's really part of what is factoring into our consideration. There could be, because of the nature of fuel stabilizing and because of just market conditions and demand, there may be some opportunities for shorter term 200 ACMI, we're evaluating that. There may be some markets for scheduled service where we could position 200s, or a 200 where we don't have it today. So that's really a dynamic part of of the business and that's what we evaluate on an ongoing basis.

And lastly, you may have reported this, and if you have already I'm sorry. What is the military fuel rate for 2007 then?

225.

225. Thank you very much, guys

Thanks, Adam.

Thank you, our next question is from (Blair Jordan) with Credit Suisse.

Hey guys, how are you doing? Just a quick sort of a couple of questions clarifying things that you've discussed already. We all understand with the withdrawal of the classic aircraft that block hours are going to go down across various business segments. I guess what I would like to drill down into is getting some understanding whether in this last quarter you saw sort of softening of macro demand impacting that block hour rate as well or was it purely the withdrawal of the aircraft?

Well, there was clearly softening of demand in AMC. Versus the third quarter that we had in 2005.

Sure, and perhaps exclusive of AMC. That is kind of a separate question. I guess commercial demand.

Well, schedule, as I think you have seen in the numbers, we had a good growth in our scheduled service business and that was 400 and 200. We do have 200s operating in the business and we did in our Trans-Atlantic services where we have 200s, and we experienced growth there. The real challenge in terms of the demand then is the attractiveness of the 200 in the ACMI market, and that's what's changed, and that's what we were just talking about with Adam. That's been the change. I think the one other area where it is just a little softer than last year could be the demand for charter aircraft or charter flights trans-Pacific. We've seen nice growth in the scheduled service, we will have a good year overall in charter, but because of the high fuel, I think if you look at the market statistics you will see that the trans-Pacific eastbound maritime, or ocean market has grown better than the trans-Pacific eastbound air market on a year-over-year comparison.

Okay. That is helpful and I guess those comments are born through that the next quarter is going to be much stronger. The second question, we sort of touched on already. And that's the effect of fuel on scheduled service. Obviously there has been a substantial reduction in the price of fuel. I think it is reasonable to expect that that is going to filter through in the ongoing quarters as long as we don't get a spike up again.

Yes, that is reasonable to expect. We have used a -- we've taken the forward fuel curve and considered that in our 2007 thinking. Right now we believe we are a bit conservative on fuel based on what we're hearing in the market.

Okay. That's good to know. So the AMC business then. I know you have announced previously that we should expect around 1500 block hours a month from this business. I guess it's really just a point of curiosity. Is that military demand? A, does it still exist and B, if it exists is it being satisfied by U.S. military capacity, is their business going to competitors that your team isn't getting? Do you have any further color on that for us?

We -- a couple of things we announced I think in our last earnings release, in fact we have achieved about a 2 point increase in market share, our team going into this new fiscal year which started October 1, and in addition we achieved some rate increases as well. So we have got a couple of point increase in share, as our team enjoys that improvement in fiscal year '07, and the demand we are talking about is demand for civilian flying and you know, the C-17s and the other military aircraft are fully utilized and we think that that number based on -- and we have regular conversations with the military -- we think that's a reasonable expectation to sustain in 2007.

I guess the really interesting thing is, clearly there was a lot of demand in that segment last year, and that drove great performance, among other things. That demands has fallen off, and --

Yes, there was one particular spike and you may recall, there was a real concern about the very large number of Humvees deployed in Iraq that didn't have reinforced armor, and so the substantial spike, a large part, maybe not all of it, but a large part of that substantial spike last year in third and fourth quarters were expedited shipments of armor plating to retrofit Humvees.

That's very helpful, I know the Humvee side of that story relatively well. Okay.

So the 1400 to 1500 hours really talks about the current level of troop rotation and more normalized shipments of materiel to meet that kind of troop day to day, troop levels and troop rotation.

Okay. That is very helpful. Final question, the $110 earning before tax suggestion for next year. I wanted to confirm there is absolutely no DHL built into that and there is the effect of the announced continuous improvement savings-- revenue enhancement and cost savings built into that, is that correct.

That's correct. That's correct. The DHL enhancement is the long term, the 20 year block space agreement that we've discussed. That block space agreement should take effect in 2008. No later than October 31st, 2008. It can be accelerated

That's what I was just going to say, yes.

But there is no acceleration and no anticipation of an acceleration in the $110 number.

Thank you, that's all I wanted to know. Thanks a lot, guys.

Thank you our next question is from Randy Hecht with (Goodenough Investment Group).

Thanks for taking my question. I am just trying to square the projection that you're going to do $60 million pretax in the fourth quarter, because I am looking at last year's fourth quarter and you had almost $132 million of revenue from the AMC charter business and you just reported about $84 million in the third quarter. I know that is highly profitable business. Can you just. Without going line item by line item. Can you just steer me towards what I am missing. I mean, what is offsetting that military? That is a big chunk of profitability that has to be offset and yet you anticipate growing profitability year over year.

And increasing margins. And so there's really a couple of things there. On the revenue line, we will have certainly increased scheduled service revenues on a year-over-year basis. That is probably the big highlight there. But the balance of the earnings growth and the expansion in the earnings growth next quarter will be right across all of our cost lines and that's what continuous improvement and cost take out is about. We expect benefits in salary wages and benefits, crew travel, maintenance, and fuel being the principle cost drivers. We will have a little bit of an increase in ground handling and landing fees, but that's because we are flying more scheduled service than we did the prior year. But -- and you know our business, the big cost drivers is fuel, crew and maintenance were more than off set. And the reduction in revenues that we will be experiencing in AMC, and that's really the math.

Is it fair to assume the AMC business will be comparable to the third quarter. There is nothing seasonal about AMC, right?

It is going to be comparable. What could change? Literally, the military decide they want to fly in Christmas supplies and Christmas foods to the troops. Things of that nature, but roughly it will be comparable.

Okay, thank you.

Thank you. At this time I would like to turn the call back to Mr. Flynn for additional remarks.

Well, we would like to thank you for joining us today. We certainly appreciate your questions and you interest in our company. On behalf of the Atlas team, thanks for the interest in our company.

Thank you, sir. Ladies and gentlemen, this concludes the Atlas Air Worldwide Holdings Incorporated third quarter 2006 results investor conference call. If you would like to listen to a replay of today's call please dial 1-800-405-2236. Or internationally at (303)590-3000 access number 11075511 followed by the pounds sign. Once again, if you would like to listen to a replay of today's conference, please dial 1-800-405-2236 or (303)590-3000 with access number 11075511 followed by the pound sign. Thank you so much for your participation and have a pleasant day. You may now disconnect.