Atlas Air Worldwide Holdings Inc (AAWW) 2007 Q3 法說會逐字稿

Good afternoon ladies and gentlemen, and thank you for standing by. Welcome to the Atlas Air Worldwide Holdings third quarter, 2007 results conference call. (OPERATOR INSTRUCTIONS) This conference call is being recorded Thursday, November 8, 2007. I would now like to turn the call over to Bill Bradley. Please go ahead, sir.

Thank you, and good afternoon, everyone. I am Bill Bradley, Vice-president and Treasurer of Atlas Air Worldwide Holdings. Welcome to our third quarter, 2007, earnings review conference call. Today's call will be hosted by Bill Flynn, our President and Chief Executive Officer. Joining Bill is Jason Grant, our Sr. VP and Chief Financial Officer.

I would also 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 litigation reform act of 1995. These statements relate to future events and expectations and involve unknown risks and uncertainties. Atlas Air Worldwide Holdings actual results or actions may differ materially from those projected in the forward-looking statements. For a summary of specific risk factors that could cause results to differ materially from those expressed in the forward-looking statements, please refer to the Safe Harbor language in our recent press releases, and to the risk factors set forth in our annual report on form 10K filed with the SEC on March 15th, 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 the website at www.atlasair.com. You may access the releases by clicking on the link to financial news in the investor relations section on the website. At this point I'd like to turn the call over to Bill Flynn.

Thank you, Bill, and welcome everyone. We are glad to have you with us today. We had an exciting third quarter and we are looking forward to a strong fourth quarter and full year 2007 performance. Our efforts to optimize our asset base and product mix and our operations combine with our continuous improvement initiative are driving significant improvements in our margins and earnings.

For the full year, we expect pre-tax earnings to exceed $130 million. That is a 39% increase over 2006 pre-tax earnings. This also exceeds 2005 earnings despite an approximate 20% reduction in block hours. Our focus is on the bottom line. We have aligned our float, size and competition with our customer's needs and we are maximizing aircraft utilization as evidenced over the last 18 months. This focus has driven higher margins and earnings with five fewer aircraft and in the face of escalating fuel prices. Our strategy is focused on leasing and outsourcing new and efficient freighter aircraft that will drive long term earnings growth.

Next October, we will provide express network ACMI service to DHL Express through Polar Air Cargo Worldwide. Our landmark strategic partnership with DHL will significantly enhance the profitability of the six, 747-400 aircraft that are deployed in the scheduled service operations. When the new service begins, we expect these assets to generate a profit contribution more consistent with our ACMI operations while mitigating traditional scheduled service risks such as fuel and commercial load. We will also have the opportunity to be a strategic supplier of additional aircraft and related services to the global leader in the express market place and build a relationship for future growth.

In addition, we are actively evaluating income tax planning opportunities that may reduce our effective tax rate in cash tax liability in 2008 and beyond. These opportunities are not yet fully developed so we cannot quantify the potential tax rate reduction in cash tax savings at this time. Nonetheless, we do not expect to pay any significant cash income taxes for 2006 or 2007 and we believe that our 2008 cash income taxes will be substantially reduced or possibly eliminated. While we do have some additional work to do, we expect this initiative will allow us to minimize or reduce our cash income tax expense over the next few years and lead to sustained reductions in our book income tax rate. We are leveraging several catalysts to drive near and long term earnings. These include operational execution and asset management combined with our continuous improvement initiative.

The start up of our express network ACMI service for DHL next October, and the launch of our 747-8 freighter service in 2010 and 2011 which will benefit from the scarcity value of these assets their pay load and fuel efficiency and our first to market ACMI capability. We have a solid platform to explore growth opportunities including new customers and new geographic markets, (inaudible) opportunities, logical extension to our ACMI business, fleet expansion and business combinations and alliances. Jason Grant will take you through the details of our latest financial results. Following Jason, I will discuss an approach to modeling our express network ACMI service to DHL. It should help you gain a better appreciation for the earnings increase, margins increase and the risk mitigation benefits we will realize when this arrangement begins next October. After that, we will go on to your questions. Jason?

Thanks, Bill. And good afternoon, everyone. We have clearly demonstrated this year that we are benefiting from aggressive asset management, operational execution and our continuous improvement initiative that are boosting margins, increasing operating efficiency and improving our bottom line.

As reported in our press release today, we achieved a strong improvement over our third quarter of 2006. EBITDAR and EBITDA were $87 million dollars and $48 million respectively. Which represented increases of 14.9% and 28.8% versus prior quarter. Revenues in third quarter 2007 totaled nearly $396 million and we report operating income of $35.4 million and a pre-tax income of $30.7 million.. For the quarter we report net income of $32.4 million or $1.50 per diluted share. Operating income in the latest quarter compares with operating income of 32.9 million in the third quarter of 2006 which included a $6.3 million gain on the sale of aircraft. Adjusting for the pre-tax gain on sale of aircraft in the third quarter of 2006 we also increased operating earnings by 32.9% compared with the year ago quarter and we increased our operating income margin to 8.9% from 7.4%.

In the latest quarter our initiatives led to a strong improvement in our operating metrics and they helped overcome the impact of continuing high fuel prices. Key to our performance in the third quarter was our ability to achieve a 4.1% improvement in utilization on a comparable operating fleet of 32 aircraft. Our continuous improvement initiative contributed approximately $15 million of benefits in a third quarter of 2007. 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 downtime, improved cargo and ramp handling cost and supported gains and productivity.

By the year end, 2007, we expect to realize an excess of $65 million in annualized savings. We continue to deliver results and we expect to exceed our goal of $100 million of annualized benefits in 2008. Continuous improvement is an integral part of our culture here at Atlas, and we continue to identify and achieve additional bottom line benefits. Now I would like to turn to two of our key operating expense items, aircraft fuel and maintenance. Aircraft fuel expense of just over $140 million in the third quarter of 2007 was nearly $18 million higher than in the third quarter of 2006. Mainly due to increased demand for scheduled service and commercial charter flying. This resulted in a 21% increase in the fuel gallons consumed in those two segments. While the average price of fuel for those segments, was relatively high at $2.24 a gallon, it was approximately 1% lower than last year's quarter.

Our fuel expense in the third quarter of 2007 reflects a net benefit of $1.3 million from the fuel hedging activities related to the scheduled service business. We continue to benefit from the Fuel Wise initiative which focuses on improving fuel burn for Atlas and our customers. In the latest quarter, maintenance expense totalled $38.1 million compared with about $33 million in the third quarter of 2006 or an increase of approximately $5 million. Higher maintenance expense during the quarter was principally due to an increase of heavy air frame expense attributable to the two D-check events in the quarter compared to no D-check events in the prior period. For the full year we continue to expect that maintenance expense will be slightly higher than the $144 million level we saw in 2006 including the effect of additional flying in 2007.

During the quarter, our results also benefited from a $6.9 million reduction in our net interest expense compared with last year's third quarter. The absence of a $12.5 million non-cash charge related to the early retirement of debt in the third quarter of 2006. And, a permanent income tax benefit of 15.4 million or $.71 per share recorded in the third quarter of 2007, in connection with our ability to claim a deduction for extra territorial income on our federal income returns for 2005 and 2006. As a result, the total tax provision for the quarter was a benefit of $1.7 million. With respect to our balance sheet at September 30th, debt in capital lease obligations totaled $398.6 million including current maturities of $27.1 million. At face value of our debt and capital lease obligations amounted to $476.1million which includes $77.5 million of unamortized discount related to fair market value adjustments associated with fresh start accounting. This compares with a face value of 501.5 million on December 31st of 2006.

Free cash flow, defined as cash from operations, less capital expenditures, totaled $49 million in the first nine months of 2007 compared to $17.9 million in the same period last year. Cash from operating activities totaled approximately $96 million. versus 43.9 million last year. Capital expenditures including approximately $21.8 million in Boeing progress payments amounted to $47 million. Net cash, provided by financing activities, totaled $85.6 million principally reflecting proceeds of $75 million from DHL's investment in Polar and $30 million from a refundable deposit from DHL , off set by 25.5 million in debt re-payments. As a result, we ended the quarter with a cash balance of $372.5 million compared with nearly $232 million at year end of 2006.

In connection with the DHL transaction, we expect to receive a working capital adjustment of approximately $23 million from DHL during the fourth quarter of 2007. We are also scheduled to receive an additional $75 million due from DHL in connection with the Polar transaction in two equal instalments with interest on January 15, 2008 and November 15, 2008. Finally, we expect the capital expenditures for 2007 will total approximately $74 million. This includes $32 million in pre-delivery payments or progress payments related to our new aircraft order. With that, I'd like to turn it back

Thank you, Jason. 2007 will be a very strong year for our company. We expect our pre-tax earnings to exceed $130 million.

We look forward to reporting the final numbers to you in late February at which time, we will also discuss our business and earnings out look for 2008. The recent renewals of our contracts with the U.S. Air Force in support of the Civil Reserve Air Fleet program reflect the value and strength that we provide to the important customer. By working closely with the U.S. military, our team share of all AMCI wide body cargo business increased to approximately 43% for the fiscal year that began on October 1 from 38% in the fiscal year that ended on September 30th. It's the second consecutive year that our team share of the military business has increased.

The contract rate for fiscal year 2008 has increased as well. We are also very proud to announce that we were awarded a five year contract to provide flight training to the pilots who fly Air Force One. This exclusive contract recognizes the performance and quality that Atlas Air delivers to all of its customers. Our business is well positioned for growth and improved performance. Our landmark partnership with DHL Express is part of our long term strategic growth plan. It's a partnership between recognized global brands and it is cemented by a long- term commercial agreement and by DHL's investment. Under the block space agreement which is now scheduled to start on October 7, 2008, DHL Express will have guaranteed access to air cargo capacity on Polar's network ,which means 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 the ACMI-like arrangement that will provide DHL with access to six, 747-400 aircraft and related services.

Further, we have opportunities to provided additional aircraft going forward. On the commencement of the BSA in October, 2008m we will significantly increase margins and earnings on these assets while eliminating scheduled service commercial risks including fuel. Essentially, we will transform our lowest margin, most volatile business into one of our highest margin, least volatile businesses. We think it is important to clarify the benefits we anticipate from this arrangement. From a modeling perspective, it's best to think about the six 747-400 aircraft that. are currently deployed in our scheduled service in ACMI-like terms. For example, 747-400 aircraft in the ACMI operations typically generate minimum monthly block hour guarantees in excess of 400 hours per month. Six aircraft would therefore generate approximately 29,000 block hours per year.

When the BSA commences, the profitability for Atlas Air Worldwide Holdings on these 29,000 annual block hours would go from near zero at best, to margins that are similar to our historical ACMI margins. Applying our historical average revenue per block hour and our margin to these hours should give you a sense of the profit improvement opportunity. Please bear in mind several other key points when analyzing the framework of the DHL partnership. First, we expect that we will continue to treat Polar as a consolidated subsidiary for financial reporting purposes. Second, Polar will continue to provide scheduled service to its freight forwarder and other shipping customers both prior to and after the commencement of our express network ACMI service. Third, we will continue to provide financial support and assume all risk and rewards associated with Polar's operations until the express network ACMI service begins next October. Thereafter, all costs to the Polar operation, including fuel and commercial loads and all risks associated with those costs, including the risk of operating losses will shift to DHL.

In closing, we achieve solid operating performance in the third quarter of 2007 and expect to report a strong full year performance. We are focused on execution and we will continue to build on the strengths going forward. We are well positioned to prosper under changing market conditions and we have an exciting and winning future. With that, I think it is a good time to take some questions. Operator, may we have the first question please.

Yes, sir. (OPERATOR INSTRUCTIONS) Our first question comes from Bob Labick with CJS Securities.

Hello, Bob.

Good afternoon. I have a couple of questions. First, I guess if we can start with ACMI. Several of the dry leasing aircraft companies indicated significant increases in renewal rates when pricing comes up. Can you discuss how the leasing market is right now and in terms of renewals on your contracts-- with the market looks like now and what your expectations are for the next few years including when the dash eights come on.

Okay Bob, this is Bill. I would characterize the market for ACMI and our renewals as firm. As you know, we stagger our renewals and so only have a limited number of renewals that come up each year and we are certainly optimistic about those. And, as we plan out into the future, we think that the scarcity value around the 747-400 will continue and as we've modeled out the economics on the dash eight and done that with specific customers, looking at their current flying, their specific markets and routes, we think we've got very good pricing opportunity on those dash eights when we begin to place them under contract with our customers.

Great. Moving over to military, obviously you have some visibility if it is two, three, four months somewhere along the lines. Can you discuss the outlook relative to Q4 and then also just in general, could you talk a little more about the M wrap roll out from the military standpoint and how that impacts the other freight going overseas.

Well, couple things there. The congressional budget office recently issued a report on AMC that came out-- sorry craft spend and demand that came out in October and that showed a fairly flat demand year to year, a slight decrease of about,-- I think decreasing from a $2.7 billion spend to about a $2.6 billion spend in the fiscal year. That remains to be seen how it plays out. I think our demand is good in the fourth quarter, consistent with the level of demand we have been experiencing all year and we feel good about first quarter demand coming into next year.

Great. And then.

On the M wrap, I think that was the other part of your question. We are not currently carrying the M wrap. AMC has opted to try and ship all the M wraps, at least those that go by air. fully assembled and on aircraft that have the bottom ramp. However, since the military aircraft is now occupied carrying M wraps. that's taken the normal or sustainment cargo and made it available-- or incremental sustainment cargo available to us, for us to carry.

Great, so that should be part of the strong demand that you are seeing in Q4 and Q1 then.

It is.

Then looking at scheduled service. Obviously you show very strong revenue results and I guess it will come out soon and we will see the AFC, can you break out I guess globally. How profitability was without specific numbers for the quarter and how fuel may have impacted that. 'Cause fuel certainly was up sequentially.

Let me just, both Jason and I will take your question in a couple of parts. What we are seeing in the scheduled service business andI think you might have seen some of the recent IATA reporting, is that demand certainly began to strengthen in the second half of this year. Starting in December and running through just about April, particularly in the trans pack, there was clearly a year-over-year decline in demand and beginning in May, that started to ramp up and we certainly experienced that in the market of today. We are seeing a good demand overall for our services. We're seeing some pricing power on the base rates. We're getting a healthy rate of inquiry on charter operations and our ACMI customers, and other data point, certainly are flying very good schedules in excess-- block hours in excess of--- , well in excess of minimum contract

Bob, in terms of the segment performance, it is actually quite similar to the performance that we reported on a segment basis back in the third quarter of '06 on a year-over-year basis. I guess, the one thing I would point out there is we have seen some improvement in the scheduled service segment quarter over quarter-- Year-over-year for the third quarter with some of the improvement we have seen in that, despite what's been a really difficult fuel environment. So, that's been an improving story for us and if you are thinking about the quarters and obviously, you'll see the Q soon. the Q 3 of '07 looks very much like Q of'06 from a segment standpoint.

Last question and I will get back in queue. You indicated in the release that you had two. D-checks and one, I think was for a 200. I would assume that means you have pretty good demand for that plane to want to put in that much money for part of the fleet that you could be retiring over time. Could you discuss the decision to do a D-check on the 200?

Yes, Bob, I think that's right, I will say, we had a-- this is a leased aircraft so we had a commitment to check the aircraft, but I think regardless, the observations you have made on your comments on military, clearly, that has been a significant driver of the classic deployment and that is a driver of our decision to continue to maintain and deploy the aircraft.

Thank you very much.

Thank you, Bob.

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

I thank you very much. I just wanted to understand a little bit better your comments about the Polar agreement saying that all costs of the Polar operations will be shifted to DHL after October next year. I don't understand how that works. If you're going to-- what you mean by that. If the aircraft are also going to be flying freight for forwarders?

This is Jason. Let me see if I can explain it in a little different way. You know, the relationship after the commencement of the BSA in October of 2008, we described as ACMI-like. And essentially, what we have created is an agreement that gives DHL the benefit of the capacity on the aircraft along with freight forwarders who will also access that capacity.

But, from the Atlas holding company perspective our relationship with Polar will be an ACMI-like relationship. So, the economic risk and the economic cost of fuel of the day to day risk of filling the airplane with either DHL cargo or third party forwarder cargo will be borne by our partner DHL and we will have an ACMI-like relationship at the holding company.

Okay. Then, what 50% of the profits of that relationship will be minoritied out of your P&L.

That's correct.

Okay, I understand a little bit bette now. In your comments about demand, in the Asia Pacific region, it sounded relatively optimistic and consistent with what I have seen in the industry's reports of traffic. I just wonder how, I mean, demand is strong now but, of course, investors are saying in some degree, that because of the financial crisis here, it will ultimately lead to lower demand for air freight. And do you have any thoughts on that?

Well, I think, this is Bill. Couple of thoughts. The kind of range for the next five years of growth in demand going forward has been somewhere around a low expectation of around five and high expectation just north of 6% on a multi compounded growth rate. Our sense, right now, is we have seen a very good second half so far in 2007. That if you look at the segments-- the sub-segments going forward-- that would be the Trans-Pacific,

Asia to North America and the Asia to Europe trade routes, even trans-Atlantic and the intra-Asia routes, which are principally the segments that we serve for our customers, have better than average rates of growth. And, yes. it's all dependent on economic demand but, our sense is that that demand is sustainable and given the way we are now positioned with the ACMI customers, the multiple trade routes that they serve-- and it is not really wholly dependent just on the transpack route and North American only, as well as what will occur when we transform to the Polar into the express network ACMI for DHL. I think it will be very well positioned. We'll have very good transparency on our committed capacity and as we pointed out in the release earlier, frankly a less volatile business that should be easier for us to describe and for you to model and understand.

All right. So the current increase or improved demand is not dependent on the U.S. market but it has, in fact, helped in the last six months of 2007 is that correct.

That's correct. The point I was making, we certainly enjoy the increase of demand on transpack but when you think about Atlas and you look at the underlying customers we serve at Emirates or Quantas here in New Zealand, British Airways, they are serving global trade routes of which trans-pack is a part but not exclusively the major part of their business. So, the risk is more distributed based on the global trade flows that the customers serve and in those large wide-bodied global trade flows, the trans-pack, the Asia Europe, the trans-Atlantic. and intra-Asia routes in particular, the rates of growth there are expected on a trade lane basis for those trade lanes, are higher than the average of five or 4.8 which is the most which the most recent IATA statistic came out a week or so ago.

Right. Okay. Thank you very much.

Thank you.

Our next question comes from [Deirdre Simon] of (inaudible)

Can I forst ask a follow-up question to the last one. I am a little unclear. Are you implying that U.S. manufacturing is not a significant component of your freight carry? How do you mitigate if manufacturing and freight is down in the U.S. How is that mitigated by you?

So, if you think about our-- let me spend a minute on our business segments. For Polar, the Trans-Pacific is a very important trade route. That's where we have the Polar capacity deployed and what we have said is, that that rate of growth while the forecast have tempered it down slightly, it is still a rate. of growth that is now forecasted about 5.4% . We serve other trade lanes in Polar, the Trans-Atlantic and South American routes and those routes have been certainly buoyant, particularly in the earlier part of this year when compared to demand in the trans pack and by being able to re-deploy our assets, we have been able to take advantage of demand in the South American trade routes, the Trans-Atlantic trade routes and serve the Trans-Pacific. The point I was making on the trans pack was that in the last several months we started to see very good increase in demand the second half of '07..

And, what we saw, what the market showed in the first four months of this year and December of '06 was actually a contraction in the market and being quite some time since we have seen contraction in the trans pack market. The other point I was making, if you look at the other components of Atlas' business. In our ACMI segment , where we have ten of our 27 747-400s deployed, those customers, while they do have a Trans-Pacific component to their business, serve other trade routes. And so, if you look at someone like Emirates. they're serving routes from Asia into the Middle East, north and south in Africa and back up to Middle East into Europe, across the Trans-Atlantic and into even western Africa. So what I am suggesting there is that, for those aircraft which Emirates deployed, they are serving different routes that have very high rates of growth and they are not wholly dependent on what happens in the U.S. Quantas and Air New Zealand, other ACMI customers of ours also serve a different profile.

Australia and New Zealand are heavy importers from North America and so they are running very good load factors of U.S. exports out of North America on a westbound route into Australia and New Zealand and then go northbound into Asia and Asia out across and towards Europe, Trans-Atlantic. full circle to North America and begin the westbound route down to Australia and New Zealand. There, there is actually very limited participation in the Trans-Pacific route, but certainly good participation in other routes that are equally as strong and again, somewhat insulated from U.S. demand and frankly insulated from the dollar and dollar fall. These are Euro and pounds and other stronger currency markets. We serve BA, British Airways through your subsidiary GSS and again, different route structures than what Polar runs. And so I guess the point I was trying to draw was that if . you look at the network we ultimately serve through the individual customers, add on top of that our AMC-- our charter business, Polar, at least until the BSA kicks in, and I am suggesting that our footprint is global and that we don't have all of our financial and business risk solely focused on one trade lane which is driven, and that trade lane, the trans pack, which is driven by U.S. consumer demand for

Okay. My other question was about the maintenance, it was my understanding that part of your cost saving initiatives was to reduce maintenance expense. Is that correct? Or is that, and I notice that maintenance for this year is expected to be a little bit higher than last year.

Deirdre, this is Jason and you are right, a significant part of the savings that we have achieved and continues improvement has come from maintenance. But, the point we need to highlight on that is one, our maintenance expense is--- we do expense our events as they are incurred so the timing of maintenance drives variability in earnings. And secondly, our block hour activity is up, so clearly just additional volume drives additional variable expense, But, when we measure ourselves-- the way we measure ourselves, is we say, how much are we paying for that event and if we can drive down the cost of the event, that is a savings to us independent of number of events which are really driven more by scheduling. And then secondly, how efficiently can we manage the aircraft so that we insure that the aircraft is down for the minimum necessary time to achieve the maintenance and we maximize and increase our turn times for the maintenance, So, it is important that there is a bit of a-- you have to create a break between the number on the P&L driven by the timing of maintenance and the actual savings we achieve which is driven by doing those events a less expensive way and getting more utilization of the aircraft.

Is some of this, I am not sure what your proportion of 200s to 400s is right now. I remember in the previous earnings call, I think you were using more of the 200s than you anticipated originally. Is that a factor as well.

Yes, the 200 utilization has stayed high, I think relative as the military demand has continued, we maintained the utilization of the fleet and, again, a lot of the continuous improvement initiative that allows us to drive maintenance savings also improved the utilization of the aircraft. If you look at the fleet today. We have got the 37 aircraft. We have got 20 400s and 17 classics. That'is being consistent throughout this year. So we haven't had-- quarter over quarter we have the same operating fleet we did last quarter.

One more question. I was wondering, when do you plan on seeking the ACMI contracts on the new dash eights.

Well, we are in discussion with the, about the dash eights now. We take early delivery or first delivery, I should say, in the first quarter of 2010 and so, frankly we are in active discussion with a number of customers right now for our first placements.

Okay. What is the typical time you usually give yourselves to market the aircraft?

Well, I guess a couple of thoughts. The decision to lease the aircraft is a fairly, including the 747-400s. These are large dollar value commitments and so, they often rise to a sea level kind of discussion if you will, with the customer's organization and are the result of substantial modeling and kind of pressure testing the business case. And we should, about a year out from deliveries have the aircraft placed.

Okay. Thanks.

Thank you.

Our next question comes from [Adriana Almeda ] with DTHM.

Hi gentlemen. I have-- first I want to-- how many of the ACMI contracts did you renegotiate this year?

We have not actually ever reported the numbers. We think there is a competitive insight there we don't wish to share, but what we have said on our several calls is that. they are staggered and so we have a number of aircraft that come up each year for renewal.

Well, the press release said you just renewed one on the 200. On one of the 200s.

Yes, we should just. It there is an important distinction that we should draw on the two fleet types. The classic ACMI product is very much an annual renewal cycle given the nature of those older aircraft and the market for those services. I think from a sort of a modeling standpoint and understanding the risk on the ACMI profile, when you look. at the 400 fleet which is really the ten 400s committed to ACMI, we've said the typical term on those aircraft is three to five years. They are longer term contracts and I guess reiterating those points. You can do a percentage calculation and guesstimate what renewal we will have each year in terms of the number of contracts.

I guess, what my real question is, how do we think about pricing when these contracts get renewed. Is there some kind of a step up, that you anticipate as you renew the contract.

Well, we certainly look-- there's two features-- in the contract. Some of the contracts have an escalation provision in the contract. going forward, even under contract to take account of increases that can be described and understood between ourselves and our customers and then when we sit down on a renewal, we certainly look to maximize the renewal rate with the customer.

Okay. There is basically been on this 400 fleet, there is zero turn of-- among customers, right? The planes that have been with the Emirates or some other customer have been with them since they have been in service, is that correct?

The Emirates have been a very long term customer of our and have had the five 400s in service for a long time and through several renewals, that's correct.

Okay. What I am really trying to understand is that-- as we model out-- lets say, an assumption that there will be minimal churn because the planes are in such demand, whoever has them wants to keep them. Is it fair to model in some pricing, say of one to 2% escalation over the years or does the revenue from this block of business just grow because of block hours. I mean, because that is limited. You can only get so much out of the 10 airplanes.

There is an ultimate limb as to how much hours you can fly the aircraft. And I'll come back to your question in a second, but I just wanted to underscore what Jason said earlier when answering the question on continuous improvement.. A, we certainly want the rate per event to come down and we've achieved that but, because there is a cap on hours, we certainly work to minimize any maintenance hours, included even in scheduled maintenance, Every hour we squeeze out of kind of the historical experience on those maintenance events, there's's an hour more of flying that we can definitely not only produce but we can sell and we do sell. So, you know, in modeling.

Going forward. What rate increases, you might model in there's some pricing up side in the rates going forward and some of that is dampered a bit by fuel and our customer's current P&L experienced in their scheduled service business, but you can model a modest increase in those rates.

Okay. My next question then is back to the military, first, were you guys surprised by this report from the military in terms of the flat usage given how high the levels are already and they are going to be sustained in 2008.

I'm not sure we were surprised. I think anyone that's been looking at the AMC demand, which is only really derived demand from the military and political strategy, that is in place, didn't necessarily think there was a lot of downturn in this quarter and next quarter . I think that all the questions the people have raised is what happens when you get closer to an election. The CBL report that I referenced, just a pretty good demand in 2008. And it is based on the understanding of what the political and military strategy is going to be

These reports come out, what, every October?

No. They don't. The fiscal year, of course, starts in October. Typically by August, these are one year contracts with AMC, the award was given in last August , but this was a special report that the CVO did based on inquiries from members of congress and it is the first time in a couple of years that I have seen a study like this on

Okay, 'cause where I was going-- , do they have a history of underestimating the requirement for airlift. Let's say they do underestimate the requirement and you get a big surge in 2008. What, how many more aircraft -- first of all, before we go there-- are you starting the new fiscal year with more aircraft devoted to AMC, than you just had up to

No. I'm not sure that's not the way to think about it. What we have is a commercial-- we have a charter business unit and the charter business unit has two groups of customers, the military, the AMC, and then a diverse group of customers, commercial customers freight forwarders, and large shippers and sports and entertainment agencies, etcetera, who use our services on a year round basis. If there is a surge or a peak demand in military flying, we would simply allocate more of our existing capacity to AMC and we did that in the first quarter.

The first quarter of 2007, the calendar first quarter of 2007, we talked a few minutes ago about how the demand was relatively soft in some markets. But the demand in AMC was strong abut more importantly, we have the size and scale in our network and flexibility in our operations to move assets around. And so we certainly made the aircraft available to cover AMC. So, if there were a spike again-- a new surge, for example, because that's what the first quarter was about earlier this year. If there were a new surge, we would be able to reallocate existing capacity into the military to take and the cargo that is offered to us. And if you look at some of our other historical reporting.

We have typically carried over our entitlement, over the 38% of last year, over the 36% or so what it was the fiscal year before. Because we do have the network scale, scope and flexibility that when short notice flying is offered by the AMC to the craft providers we are among the most successful at being able to secure the incremental lift because of our ability to place the aircraft, and serve them.

You have a strong incentive to do that. Are the returns better if you put it into the military flying? Than elsewhere.

That is exactly the decision we make.

On the seven, and it is important to note, the 747-200 fleet that is the key.

Yes, sure. And the aircraft right now, because I am still trying to understand, you said you increased your share and the flying is.

We increased our share and we traditionally-- we have . historically carried above

Are you today operating more block hours in the military than you were during this last quarter?

You are talking about third quarter '07 versus third quarter '06?

No, I'm talking about the quarter that just finished September 30th versus what you're doing now in the fourth. In November in the fourth quarter. Yes.

And I think we haven't said. I this we have given a-- .

I am trying to get you to say it.

I know you are. I thought by giving guidance for the year we did it. But I mean the fact is the fleet is the same. The fiscal year started in October, which may create opportunities from a budget standpoint on the military side to maybe open up their ability to spend some more on airlifts, but beyond giving you sort of a vague guideline we haven't given you a number and. I think, won't give you a number. We have given the guidance number for the year. And you know what the fleet is. The fleet hasn't changed and you know, we do see variability quarter to quarter on the military number.

Okay, and that is four additional aircraft that could potentially be put into the AMC? The fleet is what, eight aircraft?

No. Fifteen operating. So, we said you know, seven to eight classics have been deployed in the military/ The remaining classics are deployed in a combination of commercial charter deployments and opportunistic scheduled for the 200s including some flights that operate on the back end of military operations. So there actually is a significant amount of swing capacity to think about in terms of capacity we could bring to bear on additional military flying in it happens.

Just to add on what Jason said. Our sense is that, we are essentially fully booked currently for the fourth quarter. It is not that we have idle planes or idle capacity at this point, for the balance of the year. We are just seven weeks away from the end of the year. That we have been in that position. So, what we would do is we would simply make the decision around margin enhancement or incremental earnings opportunity for flying an hour of say military for example versus flying an hour of a commercial charter. So, it is an upgrade opportunity given that there isn't any white space It is all booked out.

My final question, I think this will be an easy answer, but, is there anything from just your own business side and the way you collect money from customers. Any currency impact. The stuff you do in Asia, do you get paid-- is your entire business-- in dollars?

Yes, it is-- there are some very few exceptions. It is predominantly U.S. dollar denominated. Top line.

All right. Thank you. Good job.

Thank you.

Next question comes from Mike Laneer with AIG, please go ahead.

Thank you. Just a couple here. A couple have been answered, you think the fleet size is going to change between now and when you start taking delivery of the dash eights?

Well, certainly we need to manage the fleet. And we will see some retirement of our 200s. as we move forward to 2010 and begin to take delivery of the dash eights and those will certainly, and the question earlier, I think it was from Bob Labick, was around the D-check. and so we manage all the fleet types, the two we have and the 200s on a tail by tail basis. As those aircraft move through their normal maintenance life cycle, we have to make a decision each time a D-check event comes up for a 200 to determine if we will do the D-check. We'll do the D-check if it makes sense. The other opportunities is to sell or part out the aircraft for example and those are the analyses we make. each time we're faced with an potential investment decision like a D-check.

What do D-checks go for roughly these days.

Well, there is a big difference between Mike, this is Jason.. The older classics which typically run between 4 and $5 million and sometimes more. To a 400 which is a much less intensive check and run. Sort of high high $1 million, low $2 million range in terms of cost. So, particularly on the older aircraft, it is a significant capital investment and one we don't take likely, making sure there is enough demand to justify it.

Would you anticipate trying to scare up some more 400s for the fleet between now and when the eights roll off the assembly line.

We are very opportunistic on our fleet planning, so if opportunities are available on the marketplace, if the term-- if we can make it work from our standpoint to match our fleet plan including the dash eight which is sort of our future platform, absolutely we are always looking for opportunities to grow in a smart way for the company.

You think that, which direction do you think, with the eights coming around the the corner, what do you think the prices for the 400s out on the market--. Which direction are they heading, are they getting a little softer? Hanging in there?

Meaning the air frame prices.

Yes.

Well, I think the issue that is been in the market place. has been the 747-400 passenger aircraft which I think have sustained their value longer than people probably originally thought. And part because of the delays in the 380 passenger program. So. I think that generally, the thing that would pressure the 400 freighter to some extent. although, it is not, I think, as capable an aircraft as the production freighter is, is the converted freighter. The converted freighters have been produced in less numbers than I think people thought a year or two ago.

Because of the feedstock price which is driven by delays in the 380 program. I think the 400 value has has held up quite well. Aircraft over time will always come under pressure as new generations enter the market place and that's what creates the pressure. but, right now. We don't see events that are going to cause that supply demand relationship to change much and even after the dash-eights are delivered. There just will not be enough of them fast enough to overcome what is a significant retirement schedule for classics globally in the next few years.

Boeing is not printing any new 400s anymore, right?

There are a few more to roll off the line. There have not been any incremental orders at this stage, I think the focus is now on the Dash-eight.

And you are first in line for those, right?

We are one of the launch customers and we will be one of the early deliveries.

Well, speaking about that. Do you have any remaining progress payments in '07 or is the next one in '08.

We have some progress payments left to think about $10 million in the fourth quarter of 2007. And I think we have disclosed progress payments for 2008. Our focus right now is to align--- , line up the PDP financing

Being short for ---.

Progress payments, sorry, for the pre-delivery payments. Our objective will be to finance some degree of those progress payments going forward.

You already disclosed what the '08 amount is.

It is about $245 million.

Okay. And you talked about signing up, and hoping to sign up the clients for the Dash-eights At least a year early. That is reasonable.

I think a range is a six months to a year is kind of where we are. It is a process and you have, certainly a good sense of where you are headed in our discussions with our customers around the assets.

Now, does it make financing easier once you signed up a client, or can you do the financing without the clients being clear.

Well a couple of things on that. We can do the financing without the customers being clear and the indications that we are getting from the market is that there is a lot of interest in the aircraft. And it is the-- the Dash-eights certainly will be the most, efficient and best value wide- body freighter out there for quite some time. As we have talked to people out there about the aircraft. And financing. Pretty much everywhere we look, there is just very good enthusiasm-- about Atlas, but certainly also about the aircraft itself.

And so, when you order, you have 12 of the firm for options with six more.

We have 12 firm. We have options and purchase rights for up to an additional 14.

Oh, 14.

So for a total of 26.

And at this point are you basically contemplating simply growing the company by that much and retaining all your existing fleet and bolting these on and just becoming that much bigger of a carrier. Is that the plan.

Well, the 200s are going to retire. We have said that. And obviously over time. And as you look out over the next eight to nine years, that retirement will certainly begin and move forward.

And as we said, I think in some of our other calls, we opportunistic and Jason just commented earlier. If there were some opportunities for 400s-- the right terms and conditions and timeline in the nature of that lease, certainly those are opportunities we would look at and we haven't specifically disclosed,. But we are looking at other opportunities to participate in the freight market. And we think that freighters. as Jason commented. also a moment ago. there's going to be a very aggressive retirement schedule of some 500 plus, and maybe as many as 600 wide-body freighters over the next 15 or so years. We think that then creates an opportunity for us. As freight demand continues to grow, as we believe freighters will take an increasing share from belly capacity for a number of drivers, that our role here is to serve the freight market and we think there are other opportunities out there for us to harvest and to potentially grow our fleet and certainly grow top and bottom line as a result.

Could these Dash-eights wind up in the DHL relationship then.

They could. Absolutely.

And Mike, if I could add, I think, the 400 is the lowest cost and most efficient operating platform for air freight today. We bring a lot of value to our customers and our ability to bring that to bear on their operation. And the Dash-eight will, going forward. There are a lot of operations outside of the 400 and Dash-eight long haul, high density lane segments, where other freight types could be viable and bring a similar value to the customer and our ability to deploy those assets. So, I think we do think broadly about fleet opportunities and including beyond the Dash-eights going forward and so it's something we are certainly not sort of narrowed in on a single point here. We think our value proposition applies across a number of assets.

Okay. Agreed. Last question. Of these did you say earlier that you have 11 planes that are in longer term ACMI contracts. How many planes are in the longer term ACMI contracts.

Specifically in ACMI, we have 10, and we should talk about the specific different fleet types and for the 400. We have 10, 747-400s operated by Atlas. And we have six which are the six we referred to which are in the Polar scheduled service business today and those are the six that will convert to express network ACMI for DHL in October of next year.

Those are 400s.

Those are 400s. We have three which we dry lease to a subsidiary of Atlas. A subsidiary of which we are a 49% shareholder. Global Supply Services. GSS has an ACMI contract for those aircraft with British Airways.

For all three?

For all three. The last aircraft, the 20th aircraft, we use for maintenance cover., for our customers when their 400s are in C-check or D-check. When it is not performing maintenance cover. we have it revenue flying in the various market segments. In the 200 fleet, we effectively have two 200s in ACMI today. The balance are in the commercial charter market or the AMC market that we talked about earlier and we have two 200s that are dry leased out to other operators.

Great. You know, the 12 you have in the three double E T C structures are all of those in ACMI or not necessarily?

Not necessarily.

Okay. All right. Well thank you very much. Thanks Mike.

That does conclude the question-and-answer session. I would like to turn the call over to management for their concluding remarks.

We would like to thank all of you for joining us today as we talked about Third Quarter results and our outlook for 2007, full year. Thank you for your interest in Atlas Air and we look forward to talking with you again in late February as we announce final full year performance for the company. Thank you.

Ladies and gentlemen, this does conclude the Atlas Air conference call. You may now disconnect.