Atlas Air Worldwide Holdings Inc (AAWW) 2007 Q2 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Atlas Air Worldwide Holdings Inc. second quarter 2007 results conference call.

During today's presentation all parties will be in a listen-only mode. Following the presentation the conference will be open for questions. (OPERATOR INSTRUCTIONS) This conference call is being recorded today, Wednesday, August 8th of 2007.

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

Thank you, and good morning. I am Bill Bradley, Vice President and Treasurer of Atlas Air Worldwide Holdings. Welcome to our second quarter 2007 earnings review conference call.

Today's call will be hosted by Bill Flynn, our President and Chief Executive Officer. Joining Bill is Mike Barna, our Senior VP and Chief Financial Officer. Today we have provided companion slides to our conference call. You can follow along to our presentation on your computer by visiting our website at www.atlasair.com. The audio and slide presentation will be available at our website for 90 days following the call. We hope you find this additional information helpful and would appreciate any comments or suggestions to improve them in the future. Please contact Dan Lowe at Investor Relations with any feedback.

Now, before I turn things over to Bill, I would like to remind you that in discussing the Company's performance today we have 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's worldwide holdings actual results or action 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 March 15, 2007. 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 on our website at www.atlasair.com. You may access these releases by clicking on the link to Financial News in the Investor Relations section of the website.

Now, 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 today to discuss our second quarter results. We had an exciting second quarter. We substantially increased fleet utilization, we improved our margins in earnings and we closed our landmark strategic transaction with DHL Express.

This morning I would like to talk to you about our performance, our position in the market and why we are excited about the outlook for the Company. After that, Mike Barna will take you through our financial results in greater detail. Following Mike, I will recap our recently closed DHL transaction and highlight the Atlas story, and then we'll go to your questions.

We are benefiting from aggressive asset management, operational execution and continuous improvement initiatives that are boosting margins, increasing operating efficiency and enhancing our bottom line. Our initiatives led to strong improvement in our operating metrics in the second quarter, compared with the second quarter of 2006.

With a smaller fleet, that is more efficiently sized, we generated better revenues, operating earnings and margins on fewer block hours than in last year's second quarter. For example, our operating fleet had 16% fewer aircraft than a year ago. Our block hour volumes, however, totaled nearly 33,000 hours, just 3% under last year's total. As a result, we increased the average utilization of our operating aircraft by 15.3% in second quarter 2007.

We also increased EBITDA per aircraft by 22.3% on a total fleet basis. Applying the same measure, we increased operating income per aircraft by 13.4%. Operating income in second quarter 2006 included the benefit of a pre-tax gain of $2.8 million from the sale of an aircraft. We increased EBITDA by 10% to $80 million and improved our EBITDA margin to 21.6%, an increase of 180 basis points.

Operating income and pre-tax margins improved as well. We improved pre-tax income by 2,000 basis--pardon me, by 200 basis points. Our pre-tax margin benefited from our earlier decision to prepay high cost debt with reduced interest expense and improved operating strategic flexibility.

I would like to spend a few moments on our operating income. Second quarter 2006 operating income benefited from $3.5 million of lower depreciation due to a write off of obsolete [wroteables] in 2007 and a one time $2.8 million gain on the sale of an aircraft. When adjusting for these two items, 2007 operating income per aircraft actually improved 43%, and operating income as a percentage of revenue increased by 180 basis points over second quarter 2006.

Just going to pause for a second here to let our slides catch up with us. Our continuous improvement initiatives contributed approximately $14 million of benefits in the second quarter. In addition to contributions from maintenance, fuel efficiencies, procurement and inventory management, we are beginning to realize benefits from several longer lead time initiatives that have reduced aircraft down time, improved cargo and ramp handling costs and supported gains in productivity.

Our annualized run rate benefits from continuous improvement initiatives totaled $58 million at mid-year. We continued to deliver results and we expect to achieve the balance of our $100 million of benefits in 2008. Continuous improvement is an integral part of our culture at Atlas; we will identify and achieve additional bottom line benefits beyond our current initiatives.

We are well-positioned in the ACMI market segment and our outlook is very positive. Our 747-400 fleet and our 747-8 order book provide us with the best assets in a market where demand will exceed supply for the foreseeable future. With the best assets available in the ACMI market place, our global scale and our focus on operational execution, I believe that we will deliver a compelling value proposition for our customers. We will maintain our position as the highest quality ACMI out source globally.

We are growing our charter segment as a capacity solution for shippers. Our flexibility and global scale create economic charter opportunities for both military and commercial customers. Currently, we see strength in the military demand, although we have recently experienced a more moderate pace than in early 2007, however, military demand continues to see surge, created by the mind-resistant vehicle program many of you saw announced this morning. The 747-200 fleet remains an economic asset for the requirements of the charter market.

Scheduled service experienced a weak market environment in the first half of 2007, but the markets are currently showing signs of improvement. The DHL transaction will reduce Atlas Air Worldwide's exposure to the month to month volatility in 2008 after the commencement of the block space agreement with DHL. The scale and scope of our operations enable Atlas Air Worldwide to allocate capacity flexibly between segments in response to market conditions.

Now, to highlight our second quarter numbers, 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 earlier today, and as Bill mentioned, we achieved a strong improvement in our operating performance in second quarter '07 versus second quarter '06 as evidenced by and EBITDAR and EBITDA up 10% and 19%, respectively.

Our performance gains were further enhanced by some significant earnings benefits associated with the DHL transaction. Our revenues totaled $370.4 million and we reported operating income of $31.2 million and pre-tax income of $25.2 million. For the quarter we reported net income of $43.2 million or $2.01 per diluted share.

Operating income in the latest quarter compares with operating income of $30.6 million in second quarter '06, which included $3.5 million less depreciation, as well as the previously mentioned $2.8 million gained from the sale of an aircraft. Net income in the quarter reflected an income tax benefit of $18 million, reported on the income tax line of our P&L. I'll speak further on this in a moment.

Results in the second quarter usually reflect an uptick in demand from the seasonal lows seen in the first quarter, and they usually point towards the coming seasonal peak period that traditionally stretches from mid-September to mid-December. We certainly saw that pattern in both our second quarter '07 and '06 results. The striking improvement in our earnings and margins for '07 versus '06, however, is due to several factors.

First, improved aircraft utilization driven by our active fleet management. Second, a nearly 11% strategic reduction in non-crew head count, which, in part, led to an 11.4% improvement in overhead costs per block hour. Third, continuous improvement initiatives across the business, particularly in the areas of maintenance and fuel. Fourth, increased AMC charter demand, and lastly, lower interest expense. Bill has already touched upon aircraft utilization, AMC charter demand, and interest expense, so I'll focus briefly on fuel, but before doing so, let me touch on maintenance.

In 2007 we are benefiting from improved pricing for both heavy checks and line maintenance due to our continuous improvement initiatives. For the full year we expect maintenance expense to be slightly higher than the $144 million level we saw in 2006 barring any unforeseen developments. In the latest reporting period, though, maintenance totaled about $38 million compared with about $43.5 million in the second quarter of '06 or a decrease of about $5.5 million. Reduced maintenance expense during the quarter was principally due to a decrease in heavy air frame expense.

Now let me turn to fuel expense of $122 million compared with about $115 million in second quarter 2006. Despite the $7 million or so increase in total fuel expense driven by higher AMC flying, there are two important points to note about our fuel expenditures in the second quarter. First, we benefited from our ongoing initiatives we call Fuel Wise to improve fuel burn efficiency throughout our entire fleet. Fuel burn declined 2.3% per block hour, which generated a fuel savings of approximately $2.9 million for second quarter '07.

Secondly, our scheduled service fuel hedging provided $1.1 million of benefits during the quarter. Coming back to taxes, the second quarter '07 net tax benefit of $18 million was driven by the DHL transaction that reduced income tax expense by approximately $28 million or $1.29 per diluted share. In addition, we recorded a $151.4 million deferred gain in the second quarter. The anticipated effective tax rate on this transaction will ultimately be about 19%, or an after tax gain of approximately $123 million. We will recognize this gain as income in 2008, when the block space agreement between Polar Air Cargo Worldwide and DHL actually commences, which is scheduled to begin no later than October 31, 2008.

Going forward, management is evaluating certain opportunities to reduce our potential cash income tax liability, which could include accelerated tax depreciation on future aircraft and other strategies enabling the reduction and recovery of U.S. cash income taxes likely to be paid in future years.

Finally, we are unlikely to pay U.S. cash income taxes in 2007. We may pay U.S. cash taxes in 2008, and we anticipate paying some U.S. cash taxes in 2009, even with successful implementation of our tax planning strategies. Lastly, in addition to cash tax savings, we anticipate that these strategies will result in a lower effective book tax rate. The magnitude of any reduction here, however, cannot be accurately estimated at this time.

With respect to our balance sheet at June 30th, debt and capital lease obligations totaled $403.3 million, including current maturities of $23.8 million. The face value of this on balance sheet debt and capital lease obligations amounted to $482.7 million which includes $79.4 million of unamortized discount related to fair market value adjustments recorded against our debt as the result of the application of fresh start accounting. This compares with a face value of $501.5 million on December 31, 2006.

Free cash flow defined as cash from operations less capital expenditures totaled approximately $13.6 million in the first half of 2007. Cash from operating activities totaled approximately $44 million. CapEx, including approximately $12.4 million in Boeing progress payments amounted to $30.4 million. Net cash provided by financing activities totaled about $61 million, principally reflecting proceeds of $75 million from DHL's investment in Polar, and $4 million from stock options--option exercises offset by nearly $19 million of debt payments.

As a result, we ended the quarter with a cash balance of $312.5 million, compared with nearly $232 million at year end 2006. We are scheduled to receive an additional $75 million due from DHL in connection with the Polar transaction in two equal installments, with interest, on January 15, 2008 and November 15, 2008. The timing of these payments will be accelerated, however, if the block space agreement between Polar and DHL begins earlier than October 31, 2008.

Finally, for the year, we continue to expect that capital expenditures will total approximately $85 million. This includes about $32 million in pre-delivery payments or progress payments related to our new aircraft order. With that, I'd like to turn it back to Bill.

Thank you, Mike. We had a solid first half in 2007. We are well-positioned with tangible opportunities to grow our business and improve our performance, and that is underscored by the successful closing of our transaction with DHL Express, which is part of our long-term strategic growth plan.

Our agreement with DHL is a landmark transaction between recognized global brands. It is also a partnership that meets the growth and the development plans of our two companies and that is cemented by a long-term commercial agreement and by DHL's investment.

In brief, DHL has acquired a 49% equity interest, including a 25% voting interest in Polar Air Cargo Worldwide for $150 million in cash. Under the blocked space agreement, DHL Express will have guaranteed access to Air Cargo capacity on Polar's network, which means that DHL will have a secure and reliable source of lift capacity for its trans-pacific routes over the life of the agreement.

Key to this transaction is an ACMI-like arrangement between Polar and Atlas Air whereby Atlas Air will provide six 747-400F aircraft and related flight services and support to Polar at the commencement of the block space agreement, and [wet] lease additional aircraft to Polar through an agreement between the companies. As a result of the DHL transaction Atlas Air Worldwide will substantially increase its profitability. It will significantly increase margins and earnings on the assets employed in the Polar network while mitigating the scheduled service commercial risks. This partnership provides us the opportunity to be a strategic supplier of aircraft and related services to the global leader in the express marketplace. We will build this relationship for future growth in the world's most important trade routes.

In closing, we achieved strong operating performance in the second quarter of 2007. We have a dynamic approach to business in a dynamic industry. We are focused on the things that we need to do in order to take advantage of the exciting opportunities that exist. We will continue to build on our strengths going forward.

We will manage our assets aggressively, we will maintain our operating flexibility, we will focus on continuous improvement and operational execution, and we will drive margin and earnings improvement. With our enhanced performance capabilities, we are better positioned to serve our customers and to prosper under ever-changing market conditions. The DHL transaction is completed and we have an outstanding book of customers and with our launch customer order for the Boeing 747-8 freighters, we are very well-positioned for an exciting and winning future.

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

Thank you. (OPERATOR INSTRUCTIONS) And our first question from Bob Labick with CJS Securities. Please go ahead.

Good morning.

Good morning, Bob.

First question. You discussed in the press release the addition of some capacity in Asia by other carriers there. Could you maybe put it in a historical perspective for us? I imagine in such a growth market there is a supply and demand change over time. How do you view the Asian market now, and when do you expect capacity to come potentially back, or supply and demand to come back in line so that it is a more profitable route for you again?

Okay. Well, there is a couple of questions in there, Bob. This is Bill Flynn.

As I think we talked about at an earlier call and I think all of us have seen in market statistics, the first four months or so of the year in the transpacific route was the first time in some recent in history where demand for air freight contracted on a year-over-year basis. I think in May, however, we started to see the market conditions change, the rate of contraction on a year-over-year basis began to decelerate. Hong Kong, which is the single largest port-airport in the transpac trade announced growth for the first time on a year-over-year basis in 2007, and we began to see prices and yield begin to creep up and improve.

So I think as we look forward to second half market, what we understand from our customers, the freight forwarders and shippers they expect to see demand improving and strengthening going forward. I think the point on a capacity addition was the capacity came in; several aircraft worth of capacity came in exactly at the time that the market was contracting.

Clearly a growth market will attract a new capacity and we would expect to see that as you point out, but it was the combination of new capacity at a time when the market was softening, and then I think some reaction on pricing all combined together to produce the conditions that existed in the first quarter, and have begun to improve in the second.

All that said, I think that's why you'll sense our enthusiasm about our DHL transaction. Because as we move into that block space agreement in 2008 we move away from the risks that are inherent in the scheduled service business and transform the majority of our business and certainly all of our 747-400 assets into a more ACMI-like environment with ACMI levels of return and earnings.

Great. That is a perfect segue, could you--do you have statistics on roughly what percentage of your ACMI fleet is using those routes as well, or how do you anticipate the market for Asia will be impacted or your ACMI business if at all will be impacted in the future from these trends?

Right. Well, if you look at our--who our ACMI customers are, all of our ACMI customers participate in the Asia trades in one form or another. It is the center for air freight, and there are three major trade routes. The transpacific, freight from Asia to North America/South America.

The Asia-Europe trade lane which just by way of comment is a better balanced trade lane. The freight levels from Europe back to Asia provide a better balance than the freight levels from North America back to Asia and then the very rapidly growing intra-Asia trade. So all of our ACMI customers participate in that market to some fashion or another.

I would comment that British Airways ultimately through our subsidiary and Emirates participate more fully in the inter-Asia, India and Asia to Europe markets with certainly strong lift into the Middle East and then the back haul trades and both participate in the trans-Atlantic. Qantas and Air New Zealand who are other ACMI customers actually end up with I think better utilization than other carriers might because of the strong, west bound freight coming out of the United States and Canada into Australia and New Zealand and so have a minimal kind of empty like back up into Asia where they then begin to participate in those heavy trade routes.

So I think the nature of the customers; the nature of the markets they serve will provide us I think a little bit more resiliency than we might otherwise have in a softening trans-pacific market.

Great. Shifting gears a little, could you remind us of your timing and intentions for financing the dash eights and also comment if the current tightening credit environment has any impact on those financing plans?

Bob, this is Mike.

We continue as we have suggested earlier--in earlier calls, we are already hard at work at looking at the multiple options we have with respect to aircraft financing. Yes, there's been a little hiccup in the credit markets, everybody's quite aware of that. We don't believe that is a long-term trend. If you were desperate for aircraft financing this week or next week, you might have a more difficult execution ahead of you, but we have a very long glide path into our first delivery in 2010.

So we anticipate really no issues with respect to the current credit market disruption that we've all seen, and again, we are looking at all options available, including both on balance sheet and off balance sheet options and from our perspective, we see a lot of opportunity.

And if I could just underscore what Mike said, it is Bill Bradley.

Our first initial focus is going to be on PDPs. That is a particular market with a lot of European bank presence, I think it is somewhat a different animal than the credit issues that are out there today, and to underscore what Mike said, the lead time on the permanent financing is a ways out there. So we continue to feel very sanguine.

Great, thank you very much. Look forward to seeing you at our conference next week.

Terrific. Thanks, Bob.

Thank you. Next question comes from David Campbell with Thompson Davis. Please go ahead.

Yes, good morning, everybody. The Asia Pacific market is substantially better, according to the industry data in July and June is better than May, but you have moved aircraft according to your press release from the Asia Pacific market into other places where it had been stronger, I guess transatlantic markets, South America. What will you do now? Move those planes back into the Asia Pacific market?

Yes, this is Bill Flynn. I mean, that really is the strength of our operating model, and how we manage our business, and so, where we saw a very soft market in the first and second quarters, we moved capacity and made more capacity available to the higher growth that was there in the South American and the transatlantic trades.

That doesn't necessarily mean we move an entire aircraft on a theater to theater basis. It does mean, for example, where we could take a flight inbound from Asia and rather than turn around and fly back to Asia, we would take that aircraft and do a flight back and forth to Europe on an incremental basis.

We did put some additional 400 capacity into the South America market. So going forward, as we evaluate the market demand and pricing and yield, we will make capacity available where it produces the best bottom line result for the Company.

Do you see--do your customers see the recent strength in the Asia Pacific market continuing, and why has it gotten stronger?

Well as we talked to the several forwarders out there I think there are a couple conditions. One, demand has improved, in a very macrosense I think certain market segments were working off of existing inventory and as that existing inventory has been worked off in consumption markets, I think companies are certainly refilling their supply chain in the pipeline with demand.

There is concern about and we'll say specifically on the transpacific market, there is concern about ocean services going forward into the third and fourth quarter peak period. There have been several articles out there in the press about container availability in Hinterland, China and other parts of Asia.

There have been several articles and talking about throughput capacity on the--at the U.S. West coast ports, as well as the rail capacity support intermodal movements into the Midwest and East coast. And so I think the combination of concerns about the global supply chain via the ocean mode or surface is also causing companies to think about air, and begin to plan for a greater air participation in moving their products to market as we come to peak.

Which would increase the peak season more than normal, is that--is that possible?

Well we had very--what's normal is probably a good question as you think over the last four or five years, there was the--I forget it was the 13 week, but some number of weeks strike in 2002 on the West coast. In 2003 there was clearly issues with throughput capacity, on the West coast, particularly related to marine terminal operation. There was some issue in '05 around rail capacity, but as interest rates became lower and warehousing became more available, a lot of freight moved early in the year via ocean -- 2006 not much of a peak at all.

So I'm not sure what the normal year is any--is right now, if we were to look back over a four or five year period. That said, the market is telling us and certainly our ACMI customers as well and we're seeing some strengthening in commercial charter demand that there should be more of a peak in 2007 than we saw in 2006.

Right, and in your comments, you said that you had reached the benefit of--annual benefit of $58 million in your cost containment, or cost continuous improvement program--

Yes.

--in the second quarter and then by the end of the year you'll be at $65 million. So does that mean--?

We should exceed $65 million. At an earlier--earlier at our last quarter call, we talked about achieving a $65 million run rate by the end of the year. We achieved a bit higher than we expected at the time for the second quarter, so we certainly believe the $65 million is there, and obviously, we are pushing hard to over achieve that number for this year.

Right, but at this point, it's another $7 million of annual benefit in the next two quarters, is that the way to look at it?

Well, based simply on the math, that's correct, and that's why in our press release, we specifically said in excess of 65 because we are--as I mentioned, we are working as aggressively as we can to maximize the results and advance the full benefit of that $100 million as much as we can.

And we have seen--this is my last question. We have seen benefit in the yields, I guess, even though they were down year to year on an available ton mail basis. You had some programs underway to increase yields.

When we initially had talked about continuous improvement in early 2006. The Company talked about the majority of that coming out of cost and productivity. And some portion of that, somewhere in the range of $20 million to $30 million coming out of revenue and yield improvement. As we moved through 2006, we talked at an earlier call and I think it was probably a year ago, and we said that $100 million we will deliver through cost and productivity improvement, and that yield improvement would be incremental to that.

So yes, you are seeing the benefits that you realize in the scheduled service business go back to your earlier question about reallocating capacity and taking advantages of the markets. And what we wanted to do as a team really was to focus on delivering that $100 million on the items that were most under our control which are costs and productivity.

Thanks very much for your answers.

Thank you.

Thank you. (OPERATOR INSTRUCTIONS) And our next question comes from [Deirdre Simon] with [Liebertal]. Please go ahead.

Hi, I have a question about your supply and demand imbalance. How much of that is being impacted by passenger airplanes adding additional capacity for cargo?

It's incremental PACS, passenger capacity is not really affecting the market as much as the incremental 747 freighters that were introduced into the market in the transpacific trade lane. Going forward over the long-term, understanding the trends in the forecast that are out there, it suggests that the demand for freight over a 15 to 20 year cycle is likely to increase at about 6% on a annual year-over-year basis, whereas the demand for passenger--incremental passenger growth would be more like 3% to 3.5%.

As that demand plays out, clearly we believe that the demand for large wide body freighters will increase. Because on a relative basis passenger belly capacity will lose share to dedicated freighters. And in the long haul markets that we principally serve, either as providing the ACMI operations to our customers or where we provide scheduled service, it's really the long haul freighter that really drives the market as opposed to belly capacity on passenger airlines.

Okay, and so you are saying as more and more--there will be more and more long haul freighters. So then I'm wondering about how does that impact pricing? How quickly does the impact of the additional capacity hit pricing? How does that work?

The point we wanted to bring out a little bit earlier in our comments was that if you look at then the several data points, this demand growth--the sustained demand growth that we will believe that is out there in the market and that it will occur in--the highest rate of growth will occur in long haul markets, transpacific, intra-Asia, Asia Europe. It would suggest that the demand for wide body freighters is clearly there.

We think, however, there will be a scarcity value to our assets, both our 747-400s and more importantly the 747-8s. We would question whether the production line capacity, as well as the capital exists to fully fund and build the demand that ultimately may exist. Further, we are at this point the only ACMI operator that has ordered the 747-8s, and we begin to take delivery in 2008.

I think from the demand picture we think that the scarcity value of our assets will be there and sustainable at least for our planning horizon that we'll be able to earn the rates of return that we should on scarce assets, and finally, again, I made the point earlier about mitigating the risk of scheduled service and how the DHL transaction allows us to do that. Scheduled service per se has substantially more pricing volatility on a short-term quarter by quarter basis than the ACMI market does.

Our ACMI market contracts run from say three to five years typically in duration. We are fully renewed for all of our contracts in 2007 and really focusing on 2008 and 2009 renewals, and so while there is a lot of noise in scheduled service pricing and volatility in that pricing we see a much smoother more predictable pricing curve and trend in the ACMI business.

Okay. All right, and do you feel that the other airlines are having the same or similar experience, or do you feel like you are really ahead of the pack, so to speak?

We believe that we are positioned differently than quite a number other airlines because of the market we serve. And when compared to other ACMI operators, our scale and scope provide us network and operating advantages. We believe cost advantages in our maintenance as well as the customer book that we have are really those ACMI--excuse me--are those airlines who are committed to freight as being a substantial part of their business plan going forward. And so these long lived relationships with these customers tell us that we will be able to place our assets at appropriate levels of price over the--the long-term that these types of assets and these investments require.

Okay, I have one other question about the guaranteed DHL revenues of $3.5 billion over 20 years. Polar does $600 million of revenues a year. Does the DHL deal allow you to efficiently go after the difference?

Well, there are really three components to that transaction. The first we have talked about which was the investment that DHL made in Polar for 49% of the equity of $150 million. The key to understanding the transaction is that when the BSA commences, the six assets, the six 747s that will be providing service to DHL are providing service under an ACMI agreement between Polar and Atlas Air. So our earnings, our margins, our returns are generated by the ACMI agreement between Atlas Air and Polar. That is the $3.5 billion that we are talking about. That references as a minimum level of revenue stream in the ACMI relationship between Polar Air Cargo Worldwide and Atlas Air over the term of 20 years.

DHL will have a separate revenue stream with Polar under the block space agreement. I think to better answer your question we will--and that is why we were clear when we made the comment. We will substantially improve our earnings as Atlas Air Worldwide because we are certainly going to--I believe generate better margins and returns on our assets through the ACMI agreement than are available in a full scheduled service operation.

Okay. Thanks.

Thank you. Our next question comes from [Mike Laneer] with AIG. Please go ahead.

Good morning, gentlemen.

Good morning, Mike.

The--you just mentioned on the last answer the six 747s that are going to--into the ACMI deal, are these planes that Polar's already flying, or are you going to be moving some things around?

No, these are the existing 747-400s that are in the Polar network today.

And when the dash eights come in, how are those going to be distributed between Polar and Atlas?

We'll distribute those aircraft where we get the best returns. Simply stated. They could certainly provide service to DHL through Polar, but as those aircraft come on, again we are not only the launch customer but really the only ACMI provider that has ordered that asset, and we think they will earn and demand a substantial premium in the market, and that is where the aircraft will go.

Do you think they will inevitably end up in pacific routes because of their added range?

Well, the range is actually fairly--when fully loaded the range is very consistent with a 747-400 which is, frankly a great range when you think about the logic of freight flows and where planes fly to and from. What they offer is an increase in capacity, as well as 15% to 16% and substantially greater fuel efficiency.

Yes, the long haul wide body aircraft will certainly fly in and out of Asia, the routes are not only transpacific routes, those routes would include Asia-Europe, Asia-Middle East-Europe, Asia-Middle East-Africa. There are any number of routes including Australia, New Zealand that those aircrafts are very, very appropriate to fly.

So DHL doesn't have--they didn't ask for some first in line status to tie up one of those--any of the dash eights?

I think what DHL is really focused on now is getting the block space agreement implemented, and getting the network integrated and turned over to Polar, and as we go forward with DHL we have, as we've said before, the opportunity to put more aircraft to DHL, but I feel very strongly that the demand for the dash eights is there and a substantial group of our current and potential customers have expressed strong interest in the dash eights so we're not concerned that we'll be able to place that aircraft.

Okay, and on a couple of different questions, it seems like Mike said that the delivery started in 2010 and you said '08 at one point--

My advice? If I said '08, then I erred. The first aircraft, we'll receive six aircraft in 2010 and six aircraft in 2011, with the first two coming in the first quarter of 2010.

Two in Q1 of '10. And the progress payment there was a comment made 12.4, was that--is that the entire progress payment for '07, or is that just a quarterly payment? And does that number ramp up, or can you give us a little more color?

Sure, Mike. That was what's been paid, that was paid in the second quarter--I'm sorry the first half through June and I think for the full year it gets up into 30s, low 30s, but then in 2008, the payments pick up. As we get closer to the delivery date, those payments do increase.

So what is the theory? They want it half paid when the plane's delivered.

Well, I'm sure if you made that offer to Boeing, they would take it and run, but not anywhere near half. That is a strongly negotiated agreement there.

Right, and then, I guess just two other things. When the--on the 12 planes inside the existing double ETCs when the rent rolls up in January, are there any offsets, or is that just going to be a little bit higher expense?

Well, we straight line the accounting on the rent expense. So you would basically get that that would be from a P&L standpoint, that was locked and loaded at the time of July of '04 upon emergence. Cash is cash.

Okay, so on an accounting basis you--you smoothed it out.

It is a straight lane. You basically look at all the remaining rents over the life of the lease, average it out and book that on a go forward basis.

Oh, okay, so it will just be--it will show up in the cash but on the income statement there will be no effect?

That's right.

And then, I guess that --

Just as a reminder. What I just described to you is standard GAAP accounting procedures.

All right. Fine, and then, with the--you said the military is picking up and kind of moving around. I mean, are you--are you having any thoughts about this administration change coming around next year? I mean, what capacity--how much of your capacity is probably dedicated to military at this stage?

Yes well, I can answer some of that, but I'm really not probably in a position to speculate on other parts of the question.

Sure.

But let's work backwards. We have it roughly about seven aircraft today; the equivalent of seven 747-200s flying for the military today. As we go forward and as we ultimately move to peace time, a military demand will come down and we have talked about that on our prior calls. We believe that there are opportunities to employ that aircraft economically employ that aircraft in the global charter market.

And so as we think about--I can't predict the timing of when military demand softens, it's been stronger in the first half of 2007 than we had talked about, back in March, when we talked about our 2006 earnings, we talked about a normalized rate of military hours of about 1,450 hours a month. We have certainly flown more than that through the--through the first six months of the year, and expect to fly in excess of that going forward.

How the election plays out and what that means for demand, I couldn't speculate on that. But with the--the need to move these M-wrapped vehicles, whether they actually fly on 747s or not, I think the need to move that vehicle quickly into theater will provide additional strength to military demand because what would fly wheeled on a C17 would displace--sustain the cargo that could fly on a 747 aircraft.

And so our understanding--in fact, I met with the U.S. Air Force Air Mobility Command on Monday of this week to get a sense of what it's going to look like going forward, and so I think our levels will be fairly consistent for the balance of this year and we work closely with them to understand the forecast going forward.

All right. Thank you, very much.

Thanks, Mike.

Thank you, and gentlemen, I'm showing there are no further questions. I'll turn it back to you for any closing comments you'd like to make.

Thank you, operator, and we'd like to thank everyone for taking the time to join the call, for your interest in our company, and for the opportunity to continue our dialog with you. We look forward to speaking with you when we release our third quarter earnings. Thank you.

Thank you. Ladies and gentlemen, that will conclude today's teleconference. We do thank you again for your participation, and at this time you may disconnect.