Atlas Air Worldwide Holdings Inc (AAWW) 2006 Q4 法說會逐字稿

Good morning, ladies and gentlemen and thank you for standing by. Welcome to the Atlas Air Worldwide Holdings fourth-quarter 2006 results conference call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions. [OPERATOR INSTRUCTIONS] This conference is being recorded Thursday, March 8, 2007.

I would now like to turn the conference over to William Bradley, Vice President and Treasurer. Please go ahead.

Good morning, I am Bill Bradley, Vice President and Treasurer of Atlas Air Worldwide Holdings. Welcome to our fourth-quarter 2006 earnings review 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 Chief Financial Officer.

Before I turn things over to Bill, I would like to remind that you in discussing the Company's performance today we have included some forward-looking statements within the meaning of the Private Securities and Litigation Reform Act of 1995. These statements relate to future events and expectations and involve unknown risks and uncertainties.

Atlas Air Worldwide Holdings's actual results or actions may differ materially from those projected in the forward-looking statements.

For a summary of specific risks 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 release and to the risk factors set forth in our quarterly report on form 10-Q filed with the SEC on November 9, 2006.

In our discussion 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 at our website at www.atlasair.com.

You may access these releases by clicking on the link to Financial News in the Investor Relations section of the web site.

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

Thank you, Bill. And welcome, everyone.

We are glad to have you with us this morning, and we appreciate your interest in our Company. 2006 was a year of transition and achievement for Atlas Air Worldwide Holdings highlighted by our record fourth-quarter earnings. It was a year in which we transformed the cost base of the Company, which contributed to the margin improvement and earnings strength achieved in this quarter.

Importantly, we expect to sustain and build on this strength going forward. And this transformation provides us with even further flexibility to better serve our customers and thrive under ever-changing market conditions. We are delivering on our Continuous Improvement initiatives and significantly reducing our operating costs.

Continuous Improvement initiatives contributed approximately $14 million of benefit in the second half. The primary sources of savings have been in maintenance, both through improved internal processes and lower pricing achieved through competitive bids.

In fuel, where efficiency initiatives have reduced consumption and in improved parts management which significantly minimized loan borrow costs, and finally, through strategic procurement processes related to all other outside services. We anticipate that we will achieve the majority of the $100 million of Continuous Improvement benefits in 2007 with the balance in 2008.

We continue to identify and expect to achieve additional cost savings. 2006 also benefited from our active asset management and operating flexibility through sales and subleases of aircraft; thereby, maximizing our return on these assets and shareholder value. Altogether we sold four Classic aircraft during the course of the year, generating proceeds of over $27 million and a pretax gain of $10 million.

We also subleased two Classics to other parties, increasing revenues in earnings from our dry leasing activities. Last week, we completed the sale of an additional 747-200 Classic. With this latest transaction, our total fleet is now comprised of 20 747-400s and 17 Classics.

We significantly enhanced our financing -- financial flexibility controls. We did that by repaying and terminating two outstanding debt facilities during the third quarter as well as terminating our extra credit facility. These actions contributed to a reduction in our net interest expense during the fourth quarter.

Finally, we achieved two key long-term strategic objectives during 2006. We entered into an agreement with DHL to form a strategic partnership that will significantly enhance the value of our scheduled service business and offers additional opportunities for growth. We expect to close this transaction in the second quarter of this year.

Also, in 2006, we entered an order with Boeing for 12 leading-edge 747-8 freighter aircraft with options to acquire an additional 14. We achieved launch customer status and pricing for our order and for our options.

With six Dash Eights to be delivered in 2010 and six in 2011, we have established a compelling next generation technology platform for our Company and for our customers. Our selection of the Boeing 747-8 freighter places 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 airfreight. Our management initiatives and actions provide the Company with the earnings and margin strength which we saw in the fourth quarter and which we expect to sustain going forward.

We've improved our operating flexibility and capability and our position for an exciting and winning future with both organic and strategic growth opportunities.

Now, for a recap of our fourth-quarter highlights, I would like to turn it over to our CFO, Mike Barna. Mike?

Thanks, Bill. And good morning, everyone.

As you have seen in our press release of earlier today, our fourth-quarter results were a record for any quarter in the Company's history. For the quarter, we reported net income of 45.7 million or $2.16 per diluted share on revenues of approximately 417 million.

Our operating income totaled 81.8 million and our pretax income totaled 84 million. Both operating and pretax income included a $1million gain on the disposal of an aircraft.

Our Q4 results follow three quarters of transition and transformation at Atlas Air Worldwide Holdings during 2006. Both our fourth-quarter 2006 and '05 results reflect the usual peak holiday season demand for airfreight. Consistent with results for the first three quarters of 2006, total block hour flying activity and total operating revenues in the fourth quarter of 2006 were below last year's levels.

Nonetheless, our earnings and margins were stronger in the fourth-quarter '06 than in the '05 period, due to a number of factors. First, ACMI rates increased 5.8%, due to renewals, contract escalations, mix and additional peak period flying.

Secondly, sustainable cost reductions driven by our active fleet management and our Continuous Improvement initiatives in all areas, but particularly in the area of maintenance expenditures, which were significantly lower than in fourth-quarter '05.

Thirdly, a more moderate market price for aircraft fuel and as a result of Company actions improved fuel burn efficiency during the quarter. And lastly, lower interest expense. We operated 31.4 aircraft in fourth-quarter '06 versus 39 aircraft in the '05 period as a result of our asset management initiatives.

We achieved our objective of driving average utilization of our aircraft up nearly 13% and pretax earnings per aircraft up 113% on a planned reduction in block hours. Maintenance expense trended favorably throughout 2006 compared with '05. In the latest reporting period, it totaled a little over 27 million, compared with more than 61 million in the fourth quarter 2005, where a decrease of about 34 million.

In addition to a lower volume of heavy maintenance events through our proactive fleet management, we are also benefiting from improved pricing for both heavy checks and line maintenance, due to our Continuous Improvement initiatives.

Now let me turn to fuel, which in the latest quarter totaled nearly 116 million, compared with about 146 million in fourth-quarter '05, a decrease of $30 million. Three drivers contributed to the reduction in our fuel expenditures: First, we benefited from ongoing initiatives we call "Fuel Wise," to improve fuel burn efficiency throughout our entire fleet.

As a result, fuel burn declined 3.5% per block hour, which generated a fuel savings of more than $4 million for fourth-quarter '06. Secondly, the average overall price per gallon moderated, declining to $2.03 per gallon from $2.25 per gallon in the fourth-quarter of 2005.

Lastly, fuel consumption decreased by 7.7 million gallons compared with fourth-quarter '05, which reflects a net decline of nearly 1700 block hours in our non-ACMI segments, and the previously discussed benefits of our "Fuel Wise" initiative.

Earnings in fourth-quarter '06 also benefited from lower interest expense as a result of our prepayment of approximately 141 million of outstanding debt under our aircraft credit and AFL-3 credit facilities in the third quarter. That lowered fourth-quarter '06 net interest expense by more than 8 million or 51%, compared with the fourth-quarter of 2005.

Cash measured 231.8 million, compared with 178.2 million at September 30th, reflecting our strong earnings performance in the quarter. This includes 36 million in payments made in the fourth quarter related to our new aircraft order.

At December 31, our balance sheet debt and capital lease obligations totaled 418.6 million, including current maturities of 19.8 million. The face value of this on-balance sheet debt and capital lease obligations totaled 501.5 million, which includes 82.9 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 compares with 689.9 million on December 31st, 2005 or a reduction of approximately 188.4 million.

With that, I would like to turn it back to Bill.

Thank you, Mike.

2006 was a year of transition and achievement for Atlas Air Worldwide Holdings. We enter 2007 well-positioned with solid opportunities to grow our business and improve our performance. And we are pleased by what we have seen so far in 2007.

In our ACMI market segment, we see continued strong demand, particularly for the 400s and renewed interest in the Classics. All of our 2007 renewals for the 747-400 aircraft have been secured and we are now focused on 2008 and beyond.

Our scheduled service business segment benefits from a global route structure. We have seen some softening in the Tran-Pacific market in the first quarter; however, that has been offset by strength in the Latin American and Trans-Atlantic trades where we have positioned available capacity.

In our ACM -- AMC business segment we are enjoying block levels to date that are in excess of the normalized 1450 hours per month that we discussed with you during our third-quarter call. Demand in our global commercial charter market remains robust and our dry leasing business segment is meeting our expectations.

In 2007, our focus will be on furthering our objectives in each of our markets and we are confident we can drive earnings growth and margin enhancement. We are focused on completing our transaction with DHL, and we look forward to closing as soon as we have the remaining necessary regulatory approvals.

We will continue to drive down costs, improve productivity and operating efficiencies through our Continuous Improvement initiatives. We are actively working on putting in place financing for our Dash Eight freighters. We have received many indications of interest to finance the aircraft and are confident that we can arrange an attractive package that will complement the launch customer pricing that we have for this aircraft.

We see significant growth opportunities across the spectrum of our ACMI services, including new customers in new markets, potential new fleet types, and other operating solutions. We are identifying other organic and strategic growth opportunities to grow revenues and increase earnings. In short, we will continue to be an innovator in the freight market. Our team is focused. We are executing our strategy and delivering on our plan, and we believe that we have set the stage for an exciting, dynamic future for Atlas Air Worldwide Holdings.

With that, operator, I think it's a good time to take some questions. May we have the first questions, please?

Yes, sir.

[OPERATOR INSTRUCTIONS]

Our first question is from Bob Labick with CJS Securities. Please go ahead.

Good morning. Congratulations on a strong quarter.

Thank you, Bob.

Thanks, Bob.

I had a couple of questions.

First I wanted to see if you can expand a bit. Obviously, you did a terrific job of containing costs, particularly maintenance as you just highlighted to us. Could you give us a sense of -- maybe even just timing of maintenance related events expected in '07, and how we should look at maintenance going forward now that you have achieved a lot of these cost savings.

It's hard for us to model it going forward while you're in the midst of cutting out so many costs.

That is a good question, Bob.

I think that you should think about our heavy maintenance expenses in 2007 will likely be at a level similar to 2006. The Continuous Improvement initiatives that delivered rate savings and rate benefits and other productivity benefits will continue through 2007 and beyond.

Great. No, that's very helpful.

In terms of the $110 million in pretax profit that you outlined for '07 on the last call, could you update us if that is still your goal for '07.

And does that include the 50 million or so additional cost savings in addition to the 22 already taken in '06.

Bob, we are not updating or revising our guidance at this time.

Okay. Fair enough.

Just moving I guess a little more strategically, you mentioned you want to -- you are hoping to close the DHL deal in the second quarter.

Could you expand on the relationship? Are there any more or additional opportunities for you with DHL? Have you explored or are things in the works to potentially -- with their ground assets or anything else? And where -- where do we stand with that deal?

Well a couple -- a couple of points imbedded in your question.

As we have made in our comments -- said in our comments, we are working through the regulatory approval process. We have achieved a certain -- the antitrust approvals already, and that's generally public, Scott Rodino and other EU approvals.

We are working with the D.O.T. through that process and then subsequently we will be working with the FAA and overseas authorities as we transfer the certificates and the route rights and other operating authorities. That is moving as we planned, and led to our comments that we expect to be able to close the transaction in the second quarter of 2007.

We do believe, as we have said, that there are opportunities to grow our business with -- with DHL, and that has several components. Certainly, there is the opportunity to place additional aircraft and additional services to bear for DHL Express. Our goal is really, as you would imagine, to get this deal closed and implemented, and -- and positioned before we -- before we get into additional substandard discussions about long-term placement.

That said, I think it's both parties expectations that those opportunities are there and ultimately will be realized. Beyond that, we were able to grow our business with the broader Deutsche Post family, and we have seen some increased traffic from the freight component of DHL and we will be wanting to work with them, particularly on our back haul lanes where we can increase the utilization of our flights in routes such as Trans-Pacific westbound and others.

Great. Very helpful.

Just one of the comments you made that there was renewed interest in the ACMI for 200s. Do you know what's driving that.

And I guess kind of related to that question, can you give us a sense of your fleet size this year. Is it likely to be maintained? Is there more downsizing in the near term? Or would this renewed interest is the right size of your Fleet?

A couple of points there.

Certainly, as fuel prices have moderated, that has helped to make the 200 more attractive than it was when fuel was up over $2.29 a gallon as it peaked at one point in 2006. But in addition to that, our sales and marketing team has really been focused on working with a select set of targeted customers where we believe the 200 has good utility in their business and in their trade lanes.

And I -- as a result, we have been able to place a couple of 200s in -- in ACMI that frankly a year ago I wouldn't have been so optimistic that we could have done that, kind of knowing what we know -- knew back then.

So I think our fleet will continue to be right now, again, from where we can sit and forecast about the -- the operating fleet of a 37 aircraft that we talked about earlier in the call.

Great, thank you very much. I will get back in queue.

Thank you.

Your next question comes from Adam Zirkin with Libertas Partners.

Gentlemen, congratulation on the quarter. Great numbers.

Thanks, Adam.

A couple of quick questions for you.

First of all, just a housekeeping item. The Dash 200 you sold a few weeks ago. What did you get paid for it?

We are not disclosing that Adam, but suffice it to say that we will be booking a small gain on it.

Okay.

It looks to me -- if I just look at the ACMI average, the ACMI hours and do a little division that you flew the planes at about 495 hours a month. I've certainly never seen that number so high.

Are those pretty much at capacity that this point? Or were they during the quarter?

Adam, I think -- I think you could definitely say they were pretty much at capacity. I think your number may be a little bit on the high side, but --

Okay.

Yes, definitely you should assume that is pretty much capacity for the 400s.

Got it..

I want to spend just a little time on the cash flow numbers. If I look sort of at the $93 million in EBITDA and I back out the predelivery deposit and some Cap Ex and some interest and so forth, I get a free cash flow number in the high 40s, and it looks like the changing cash in the quarter was about 59 million.

So I am wondering is there any sort of balance sheet-driven, cash changes, working capital type things that were in the cash number but not disclosed in the release?

Adam, we had the strong earnings, largely working capital, and there was nothing that was sort of really extraordinary in that regard that we haven't really talked about. Normal course, some timing of working capital but there was nothing sort of extraordinary in the fourth quarter.

We have identified the amounts that we advanced on the new aircraft order, and we've got sort of the CapEx and fixed charges and just working capital.

Got it..

Then in commenting on the scheduled service business in the press release. You took some time to talk about unit revenues being better in North Atlantic and South America, but that the revenue per ton mile was down 4. -- 5.4% in aggregate.

Is the delta there primarily Trans-Pacific?

The delta is primarily Trans-Pacific. And what you see there, Adam, is that we had to fly, frankly, essentially more round trips in the Trans-Pacific, relying on less one-way traffic from AMC.

And so that -- when you do the math it has the effect of driving it down, but when you -- if you were to look at it simply on a one-way basis, I think would you see some strength.

So the eastbound traffic, if you will, you are seeing strength in?

Eastbound traffic performed well in terms of the pricing on a pure point-to-point basis. Because we had to run more round-trip flights to lift that capacity at the -- when you do the math it has the effect of driving it down.

Understood. And then lastly, I know --

I think the other point we wanted to make there, Adam, is that Trans-Atlantic and the North-South trades with Latin America are very strong, and because we have the global routes and the global -- we have the ability to take -- to take advantage of that, and we did.

And I may have missed this, Bill, in the prepared remarks, but has that strength continued into the year? Or was that sort of fourth quarter?

No, it has continued.

It is continued.

It is continued. To a certain extent Latin America is kind of cyclical.

We here in the north are enjoying the fruits and the vegetables and the fish, et cetera, that come up from South America to North America during this winter season. And the southbound planes continue to remain pretty full with finished and manufacturing products.

Great.

And then, lastly, I know this is a small piece of the business, but it looks like in the commercial charter business and usually that business is pretty low in the fourth quarter, the rates per hour were down significantly. What is -- what's going on there?

Well, there are two things. We -- the hours are down because as Mike pointed out we are operating 31 aircraft versus 39. We allocated our aircraft to -- to the markets we thought makes sense.

The charter market that is affecting the rate sheet?

No. To a large extent it is the same point that we made about the one-ways versus round trips.

Okay.

When we have a one-way aircraft in the Middle East as a result of a military flight and buries over over to Asia, to Hong Kong, for example, we can operate that as a scheduled service under a PO or a Polar call sign or we could operate it as a charter under GT and it will simply depend onto whom and how we marketed that.

But the effect that you are seeing in the charter is similar to the -- to the effect that we have in the Trans-Pacific scheduled service rates.

Okay.

And then two -- two quick things, lastly.

First of all, you know, there's been some talk, I guess, particularly with what's happening over with DHL in the Northwest bankruptcy, that the date at which the Northwest Atlas contract, the DHL contract with Atlas gets initiated could potentially move up.

Can you comment on that at all?

Well, as we said in our press releases October 31st, 2008 is the latest date by which the DHL transaction would have the BSA kick in, the block space agreement. The agreement and the way it is structured is such that we could certainly -- and we have provided for an early implementation of the block space agreement.

We have not had formal discussions with DHL about an acceleration of the block space agreement, but we are certainly prepared both operationally and contractually to do that.

Okay.

And then finally on th 747-8s. I know you talked a lot about having launch customer pricing. Can you quantify that at all for us or do you keep that close to?

I think the Boeing police would be after me if I did.

Okay, got it..

Congratulations, and thanks so much.

Thanks, Adam

The next question comes from Craig Peckham with Jefferies & Company. Please go ahead.

Good morning, gentlemen.

Good morning, Craig.

I had a question about maintenance expense here.

Is it possible for you to quantify for us how much of the year on your decline comes from the Continuous Improvement program?

Well, there's -- there's a couple of things there. Certainly, I think that about $9 million of the maintenance improvement on a year-over-year basis is directly related to Continuous Improvement.

And that's on a fourth-quarter basis, not a full-year basis, right?

That is a full-year basis.

Okay.

So 9 million of the full year is maintenance exclusively?

9 million of the full year is directly related to Continuous Improvement initiatives.

Okay.

And when we are talking about the $100 million cost improvement from Continuous Improvement, should we be using 2005 as the cost base?

Yes.

Okay.

And the -- the other question -- kind of shifting gears here a little bit. When you talk about demand shifting and demand improvement in the Latin America, North America corridor, are you referring purely to seasonal improvement or there something more structural that's going in that land?

No, it's structural improvement not seasonal.

I actually spent the early part of my working career living and working in Latin America, way back in the '80s, and I studied it for a long time and this is, Craig, this is one of the -- to me it is -- it is a structural change that we haven't seen really in prior cycles, I think.

And so what I am saying is that both north -- you have got several things going on. There is a very strong trade between North America and South America, but because Polar has the global network and I probably didn't bring it out in my comments, there is a huge demand for capacity and service from both Asia and Europe as well into Latin America, which we are able to essentially network through Miami and/or other flights.

And so we are able to optimize the stack yield on that aircraft departing Miami going down into Latin America and then coming back north. Now there is seasonality to commodities. For example, in February we had a substantial lift of roses to -- to the U.S. and to Europe for Valentine's Day. Now we have a substantial lift of seeds coming northbound for the spring and summer seasons.

On a commodity-by-commodity basis you will see seasonality. Other than for a couple months in the summer, their winter, we are seeing I think a structural shift in demand.

And you referenced some softening on -- on the Asian side. Anything in particular there that is responsible for that?

I think there is a couple -- I mean, the first -- typically coming out of the Christmas holiday season, you have a bit of a decline. Certainly, you have a slowdown as those last shipments move out of the market.

But in prior years I think we and the market have seen a nice pickup up to Lunar new year where there is a real push to get product out before the seven to ten-day holiday that Lunar new year presents particularly in mainland China. But in many other parts of Asia, Korea, Hong Kong, of course, and Southeast Asia.

This year we did not see that demand generally in the market. Hong Kong was strong all the way through. Mainland China was a bit softer, particularly in Shanghai.

Some of that is affected by additional capacity in the market, but I think some of it was a bit of softness in demand for what -- for what that market had to export.

Okay.

And the last question, you had mentioned that there was some benefit from lease renewals in the ACMI business, could you give us a sense for -- sort of what percentage do the ACMI fleet, so to speak, was renewed. And -- and what kind of percentage increase have you guys been experiencing on the 400 ACMI lease?

In terms of renewals as I said in my comments earlier -- on our 400s, we secured all the renewals that were up for renewal in 2007, and we have focused on now 2008 and 2009 -- even 2009 renewals.

So we haven't typically talked about the actual contract rate and the -- and the rate of increase on contract renewals, and you will start to see some of that bleed through, but for competitive reasons, I would prefer not to give you an actual percentage increase.

But I would say the increases we have gotten reflect the fact there is a scarcity of demand for the aircraft.

Okay. And I promise this is the last question.

As far as the $110 million pretax income number, when you say you are not updating or revising that guidance, can we still assume then that $110 million is the Company's expectation for '07?

We are really not updating or affirming at this time.

Okay. Thank you.

Thanks, Craig.

Your next question comes from Evan Ratner from Credit Suisse. Please go ahead.

Good morning, guys.

Good morning, Evan.

I have to get a little quicker on asking all my questions because most have been asked. But I will try here.

Another question on the DHL Polar contract. Just to confirm, it seems like it is only regulatory focus in terms of you guys or DHL having to sign off on anything. Is that -- is that all done, is it only regulatory approvals to be done in the next -- in the second quarter?

Essentially, yes.

As we said in the release, we have entered into an agreement which means the two parties have really effectively concluded the commercial agreements between the two parties, and all that which is subject to the regulatory approval.

Okay.

Second. On Cap Ex for '07, you know, 40ish million still a reasonable, you know number, range?

Yes, Evan. It is Bill Bradley.

The CapEx for next year, sort of the core, sort of recurring is around 30 or 40. You know what you are going to see, I think, in the K when it comes out soon, if you include payments related to the new aircraft order, as well as an element of a sort of one-time nonrecurring payments in the aggregate you will see at 99 million for -- for 2007 or thereabouts.

Okay.

Assuming we spend everything.

But, again, if you look at what the core recurring is 30 to 40 and, again, we are doing a number of special projects which have got significant NTB savings for us and then, as I said before, in that 90 million to 100 million also is about 30 or so related to new aircraft.

Okay.

How should we be thinking about cash taxes in '07?

In '07, you know, we actually are based upon where we sit today anticipating paying some cash taxes. And I think the range on that is somewhere approximately 15 million to 20 million. We did increase the NOLs. I think we ended the year a little more than 300 million.

But we do have an annual limitation on that. The current view where we sit today is about 15 to 20.

Okay.

Any -- I know the military is impossible to predict. Any kind of order of magnitude how you guys did either anecdotally or quarter over quarter.

I know what we hear in the press of ramp-up in Iraq and -- and any sense if that continues? And any color will be helpful.

Well, we have talked about the military in the past. The annual tender which tends to be awarded in August and what is awarded is a guarantee buy but the majority of the flying is what we call expansion buy.

The military is cautious in its firm awards and its committed award to carriers. So we have reasonably good visibility three months out, because that is effectively the military's planning cycle for that expansion buy.

Right.

As you know, as all of us know there has been not only talk of a surge for Iraq, but increased activity in Afghanistan. So as I said earlier, we have been performing above the 1450, 1500 hours for the first two months of the year into March.

That is, again, driven by body armor and Humvee armor shipments principally to Afghanistan as well as some to Iraq and there have been increased deployments of troops to Iraq. General Petraeus was on the radio this morning talking about one combat battalion per month now through the summer.

So sitting here knowing what we know, we are looking at, I think, a -- a second -- sorry a first half that is stronger than the 1500 hours or so that we have talked about as being the normalized run rate. Beyond the summer, we really don't have a lot of visibility at this point, kind of given the political discussion that is going on in D.C. as well as the events on the ground in the theatre.

Right.

Have you -- your -- your Iraq shipments, have that -- has that already kicked in yet?

Yes. Okay, okay. Very good. Thanks a lot, guys. Very good quarter.

Hey, Evan, if I could -- one footnote on the CapEx number.

That number for the moment just said if we did not get or put in place any aircraft financing in 2007, obviously that is going to be and is a focus of us, but I just wanted to note that that number assumed that we did not finance any of that.

Right.

My focus more on the Cap Ex side was ex any financing, just more of the true maintenance and regular weight CapEx.

Okay.

Thank you.

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

Yes, good morning.

Obviously, you usually have a decrease in demand in the -- in the Asia-Pacific region in January. Can you count on any in March how does that the surge -- the normal seasonal upsurge look in March at this point?

Well, volumes have improved coming out after -- after Lunar New Year. As I think I mentioned earlier, Hong Kong is performing particularly well for us. We are seeing increased demand in Shanghai.

So March looks to be okay to good. What I was commenting on before in terms of weakness was that period pre-Lunar New Year where in other years we have seen a build-up to Lunar New Year and we did not see those same levels of activity this year.

I understand.

In the $100 million Continuous Improvement program. I always thought that some of that was related to improving things like yield controls, cargo yield controls and other revenue improvements.

Is that not part of the $100 million?

When the plan was originally -- when the initiative was originally announced, we talked about it as -- and when we talked about it as a Company, we called it Operating Excellence and think we were giving as I recall, the Company was giving ranges of about $25 million in revenue in yield and 75 in cost and productivity.

What we did, David, was redirect that and we renamed it for internal purposes really Continuous Improvement because, to me, Operations Excellence suggests something around service quality and business activity.

The 100 million that we are talking about is purely cost and productivity. There is no revenue component of that. That said, we clearly are focused on revenue and yield improvements, but improvements there will be incremental to the $100 million.

All right.

And you don't -- you haven't quantified that incremental revenue improvement?

Not externally.

Thanks very much. I appreciate your help.

Thanks, David.

Our next question comes from [Carl] [ Inaudible ] with Dillon Reed. Please go ahead.

Yes, thank you.

I was wondering if you could add some comment on your -- on your statement that you are evaluating potential organic or strategic growth opportunities.

Specifically, what I am trying to understand there is, are you looking at opportunities yourself, businesses, assets, or are you also referring there perhaps to approaches from other parties, call it private equities, strategic parties and you are evaluating perhaps outside interest in your business.

My comments are really about growth opportunities in the strategies for Atlas Air, specifically. And organic to me simply means growth in earnings and or revenues doing what we do today. And strategic, I think, really are other opportunities we have to grow revenues and bottom line as well.

And those opportunities include, on the organic side, there are certainly market -- new market opportunities or market growth opportunities. Japan, for instance, is deregulated. It has been deregulated and now allows for long-term wet leasing of non-Japanese registered aircraft. That creates an opportunity for us.

India has substantial unmet demand for airfreight services, and we think there are opportunities there. The long-haul demand into and out of Latin America between Europe and Asia are, again, another set of organic opportunities, and while we currently have five aircraft under dry lease, there could be other opportunities to produce a better return through dry leasing as opposed to necessarily operating all of our 37 aircraft.

Beyond that, I think we do need to evaluate and we are not complete with this evaluation at all, but certainly are looking at that and considering it, another aircraft gauge would make sense. There are markets such as the Inter-Asia, Asia Middle East, Asia Middle East Africa, Middle East Europe and segments in the South America market where there may be good opportunities for a 50 to 65-ton freighter in an ACMI operation.

And, again, thinking about are there -- and that mid-sized freighter could be either a wet lease operation or a dry lease operation. So those are the opportunity sets we are evaluating.

Any comment on whether you have been approached by private equity or strategic players? Or no comment on that?

There is no comment on that.

Thank you.

Next question comes from Mike [Linear] with AIG. Please go ahead.

Thank you. Great numbers guys.

My question is about the -- what you are seeing on the -- just like the global supply and demand of these 400s. I mean, are you -- are they -- as far as you know, is it fully utilized? None of these planes are parked, right?

No, there is -- there is a scarcity value and very strong demand for the 747-400 freighter and that is globally.

And have you -- so is it safe to say that as far as asset values on your balance sheet, that -- year-over-year these things are stable if not increasing. Do you think the demand is more likely to be overwhelming traditional depreciation values?

Yes. I think for the foreseeable future, that sort of the view that we have.

And given how well the business is running and rates are, -- transportation rates are going, it seems likely that you could finance your fleet better than the current EETC structures out of you.

Have you explored any ideas about the dismantling of that current structure and coming up with a better finance package on that?

We are -- we are actually looking at all possible financing alternatives. We are -- we are constantly looking for ways to optimize the way in which we fund this Company.

So I think the short answer is, absolutely, we are looking at all possibilities. And always do.

And I think adding to Mike's comment, there clearly is substantial interest in freighter financing. In generally all types, but it particularly in the wide-body inter-continental, long haul inter-continental where we are seeing substantial in the market.

Have these conversions ever really started happening? Is that just a nonevent?

No conversion radios are underway and are happening. What seems to have affected the conversion market is -- is really the troubles -- among other things are the -- I think the troubles with the A380-S.

Clearly, a number of carriers had the aircraft on order for the passenger business and now with those delays seem to be holding on to their 747-400 PAX aircraft and so there is simply less feed stock available for conversion. I think the feed stock that is available for conversion is probably costing substantially more than might have been originally modeled, and I can't -- again, we have decided not to go that route, but I think it's -- there certainly is some -- some limit on feed stock currently for conversion as a result of that.

And as far as growing your fleet, I -- I know you are open-minded to any opportunities, but I am -- I am assuming you are planning on staying in the -- having a fleet be mostly 400s or the new Dash Eights when they roll out in three years. If -- if there's -- if the fleets are fully utilized globally, how would you between now and those new deliveries -- what the likelihood that you will actually be adding planes?

I think there are probably a couple of points imbedded in your question.

As we think about earnings and margin growth over the next couple of years, and capacity is -- is relatively fixed unless we do something else as you suggest. That's where, clearly, our Continuous Improvement initiatives and our other -- our other management activities around maximizing the value of -- of each asset that we have by -- by making clear choices about where aircraft are deployed, the margins we can earn and the rates that we can earn on that aircraft are what give us the confidence that we can grow earnings and expand margins with the capacity that we have prior to increasing that capacity which happens in 2010.

We have -- we are looking at potentials for other gauge aircraft that we might be able to put to use in other markets. That could provide incremental capacity between now and 2010 and new business opportunities and consequently new earnings growth.

In addition to that, we are certainly looking at the current 400 market, including what may be out there in conversion, and we would likely -- if we could find that an agreeable rate, dry lease in some additional 400 capacity to meet the demand that our current and potential customers have between now and, say, 2010 when we -- when we begin to grow the fleet with the Dash Eights.

All right. Thank you very much.

Thank you.

Your next question with Bill [Focal] with A.L. Advisors. Please go ahead.

Hello, gentlemen.

Hey, Bill.

Good quarter.

I wanted to hammer down a couple more things. I just wanted to be clear for the military block hours, we should expect in a normalized scenario 1500 a month or around that. Is that correct?

That's what we said back at our third-quarter release, about 1450 to 1500 we called normalized. And normalized comes on our projection thinking about current levels of troop deployment, and -- and what the likely supply base is going to be for that.

That was what was baked in your previous guidance, correct?

Well, we didn't specifically tie A and C block hours or monthly flying hours to guidance.

Okay.

I guess you guys -- there has been a heightened level of AMC flying of late, and that hit in the first quarter, so far January, February. It wasn't in -- in the fourth quarter; is that correct?

Well on a year-over-year basis that's -- that's how the numbers look. Certainly we had a pickup in January and February.

And can you give us the numbers for January and February in terms of military block hours per month?

No, Bill, we are not disclosing those specific numbers, but what we have said is that the activity has picked up, and I think you would expect that given troop surge in Afghanistan and some of the other specific data points I mentioned.

Okay.

And then you said you had about three-month visibility going forward. For the next three months do you expect to have high AMC flying?

We do, particularly bases on some of the comments that you've -- that -- that all of us have heard today and read in the press about the surge and the additional deployments and as I said, mentioned earlier, commander on the ground in Iraq, General Petraeus has talked about an additional combat division per month. So we factor that into our thinking.

Has the heightened flying so far been because of the surge or has it just been because of higher activity and if the surge actually occurs as we expect that should extend the heightened flying activity. How should we think of the block hour increase thus far?

There are several sub components. There is certainly increase in activity of flights to support Afghanistan, which is not surge related, but I think it is simply reflects requirements on the ground.

There is new iteration of -- of body armor protection and vehicle protection. That's created some additional flying. And there has been deployments, incremental troop deployments to Iraq, which has created some -- which contributes to additional flying.

There have been deferred rotations back home of troops which creates additional flying, and that is the kind of math that adds up to a surge.

Okay, great.

And then in terms of the cost savings expected this year versus last, how much in cost savings on a dollar figure should we model you realizing in '07 above what you realized in '06?

What we've said is that by the end of 2007, the -- the run rate basis would be $70 million of incremental savings and someone earlier asked against what year. And that was 2005 was the base year that we had modeled this against. S the savings are going to roll through the year.

They are principally driven when contract renewals occur, and we are able to go out and have an RFQ process and identify qualified suppliers in addition to the incumbent and work that through. So the value is going to roll in through the year, but something in the range of half of that number would be an actual dollar value.

And then you catch the tail of that as you run through the subsequent year.

I see. What was the run rate as of year-end '06.

We haven't said that. We said we have achieved 14 in '06.

Okay.

Second half of '06.

Got it.

We should have nice growth also through '08 on a year-over-year basis.

That's correct.

Interesting.

And -- and in terms of fuel costs, any feel for what we should expect '07 versus '06? Have you boxed anything in or should we be looking at the strip.

Bill, we've entered into six forward purchases on gallons related to our scheduled service business, where we sit today. It basically -- we've got coverage on about approximately 20% of our scheduled service uplift, and we continue to look at that to see if we -- want to increase that hedge, if you will.

Net-net should we expect fuel costs to be somewhere where the strip is today to be up or down based on what your hedge are versus '07 to '06?

I think they would be slightly favorable.

Okay.

Any other big variances we should be thinking about, '07 to '06 with the remaining portions, cost items, revenue items that we should be modeling in?

Obviously, you have the China routes. You have less airplanes but better contracts, blah-blah-blah.

I am just trying to -- trying to do my best modeling you guys out. Just wondering if there is any big variances that you guys have talked about that I should be thinking about.

I think we have covered most of the big-ticket items.

And I guess what -- what is the logic around not giving any guidance or updating it.

Is that going to be your practice going forward or is there specific reasons why you are not doing it now but you may do it now at some later point.

I think, Bill, what we've done in the recent past is, somewhere on or around the third-quarter release that is when we've typically updated and given some indications with respect to the completion of the year and a forward look.

And I think right now that's -- that is sort of where our thinking is in terms of comfort and level of information we think we want to provide over and above the quarterly filings.

Also what is the logic of not giving us your military block hours for the first two months.

Why not just disclose that information and let us use it as we will.

I mean, we -- we give -- we give operating stats in our filings, and I think we made that decision a year ago that we weren't going to provide discrete periods of operating stats in between our regulatory filings to just keep it simple.

Okay. That's fair.

One final question. Are you doing any DHL business today?

Well, yes, we do. There are really two components of DHL. One is DHL Global Forwarding, which is traditional heavy freight forwarding. They are and have been an existing customer of many years with Polar. That continues.

We are handling some Express business, although not a lot, because most of the Express business is committed under contract with other carriers. But where there is available Express businesses that's free, if you will, or not specifically committed, we have begun to carry freight for DHL Express.

And -- sorry, just one more.

If you want to, can you sell any of your slots for -- for the Boeing planes? Are those transferable or aren't they? Moreover, is there a -- should we be thinking there is a value associated with those spots beyond --

We haven't commented on what we might do with slots going forward, Bill.

Oh, do you have the ability to sell them if you wanted to?

We are not -- we are not really commenting on the details of the contract.

Okay.

We have a confidentiality -- pretty solid confidentiality clause in there with Boeing that really doesn't allow us to --

Bill I think we have got to go --

No, that's fair. Thank you very much for your time and congratulations.

Thanks, Bill.

Thank you Bill

At this time there are no further questions in the queue. I would like to turn the call back over to management for the concluding remarks.

Well, first of all, we would like to thank everyone for taking the time and joining the call, and we do thank you for -- for the -- for really a good set of questions and a good dialogue here this morning.

And so we will look forward to meeting with you again when we release our first-quarter earnings later this year. Thank you, everyone.

Ladies and gentlemen, this does conclude the Atlas Air Worldwide Holdings fourth-quarter 2006 results conference call.

You may now disconnect, and thank you for using ATT teleconferencing.