Atlas Air Worldwide Holdings Inc (AAWW) 2008 Q4 法說會逐字稿

Welcome to the Atlas Air Worldwide Holdings, Inc 2008 results conference call. At this time, all participants are in listen-only mode and following the formal presentation, instructions will be given for the question-and-answer session. (Operator Instructions) As a reminder, this conference is being recorded today, Tuesday, February 24, 2009.

At this time, I would now like to turn the conference over to our host, Mr. Dan Loh, who is the director of investor relations. Sir, you may begin the call.

Thank you operator, and good morning, everyone. I am Dan Loh, Director of Investor Relations for Atlas Air Worldwide Holdings. Welcome to our 2008 results review conference call. Today's call will be hosted by Bill Flynn, our President and Chief Executive Officer. Joining Bill is Jason Grant, our Senior Vice President 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 statements within the meaning of Private Securities Litigation Reform Act of 1995. These statements relate to future events and expectations and involve unknown risks and uncertainties. Our actual results or actions may differ materially from those projected 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 February 28,2008 for a summary of specific risk factors that could cause the results to differ materially from those expressed in our forward-looking statements.

In our discussion today, we also include some non-GAAP financial measures. You can find the 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, www.atlasair.com. You may access these releases by clicking on the link to financial news in the investor information section of the website. At this point, I would like to turn the call over to Bill Flynn.

Thank you Dan, and welcome, everyone. We delivered strong earnings in the fourth quarter despite an unprecedented drop in global air freight. We expect to report solid first quarter earnings in a difficult market, and we are positioned to substantially improve earnings in 2009 compared with 2008. 2008 was a challenging year for global trade and air freight. Record high fuel prices in the first half of the year were accompanied by tight credit and an ongoing global recession in the second half of the year. Instead of the usual fourth quarter peak season, IOTA reported year-over-year air freight decline of 8% in October, 13% in November and a staggering 22% in December. These factors had a negative effect on our scheduled service and commercial charter segments during 2008.

In addition, our military charter business experienced lower levels of demand over the course of the year. Even in this very difficult environment, excluding special one time items, we earned about $30 million or $1.41 per diluted share in the fourth quarter with pretax of about $49 million. For the year, our adjusted net income totaled about $33 million or $1.56 per share with pretax income of nearly $60 million. Our operating results for the fourth quarter and for the full year reflect a consistency, transparency and solid performance provided by our long term ACMI contractual flying. They also provide the first proof of the significant transformation that posed block space agreement with DHL will have on Atlas Air Worldwide going forward. We ended 2008 with a solid financial platform and with high levels of liquidity. At year end, we had approximately $411 million in cash on hand which excludes about $52 million that belonged to Polar upon its deconsolidation. We expect to report solid earnings when we report our results for the first quarter of 2009. Historically, the first quarter marks the seasonal low point in global air freight demand. This is even more true this year given the current economic environment. Our outlook for a strong first quarter is based on the consistent profitability in our core 747-400 ACMI business, including a significant improvement to earnings driven by the DHL BSA. We expect the current global economic and business challenges to continue through 2009.

Given the current conditions, we would like to provide you with an operating framework for our business in 2009. The the starting point is our position in the industry. We are the only outsource operator of scale with the best in class 747-400 freighter. The benchmark 747-400 freighter provides the lowest unit operating cost of any freighter in the market. We serve a high quality customer base with staggered long term contracts that mitigate our exposure to market risk. 20 of our 22 747-400 freighters are currently under ACMI contracts. Of the other two, one serves as our maintenance cover in ACMI and serves in charter when not required in maintenance coverage. And the other, a converted freighter, is profitably deployed to provide air cargo service in South America.

On our last earnings call, we talked about the renewal scenario for 2009. At that time, we advised that we had entered into a letter of intent with a new customer for the two aircraft being returned from DHL. Our customer has advised us that due to the current market conditions, they the will delay taking the aircraft until October of 2009 at the earliest. In addition, a customer has opted to return one aircraft at the end of March under the existing terms and conditions of that contract. Their return of this asset only became definite in the last several weeks. And as previously reported, we do have one further aircraft up for renewal in the second half of this year. Our exposure to ACMI placement risk in 2009 is limited to these four aircraft. With 16 of our 747-400 freighters under contract throughout 2009, the principal variable in the business out look is our ability to place the aircraft either through renewal or a placement with a new customer. We are continually marketing our aircraft. Should a gap develop between the end of one of our agreements and the start of another, we will temporarily deploy that 747-400 aircraft in the AMC and commercial charter market in place of 747-200 capacity. What we will not place these aircraft in long term ACMI contracts at fire sale prices at the bottom of market. In a scenario where we redeploy 747-400 assets into AMC, our commercial charter, we estimate that our potential pretax earnings exposure in 2009 would be approximately $5 million to $7 million for each 747-400 aircraft that is reallocated.

We expect soft demand and the concerns about prospective fuel price levels to continue to drive aging and inefficient capacity out of the market. This will offset the impact of reduction in overall air freight demand. Since the beginning of 2008, we have seen a 25% reduction in the number of 747-200 freighters serving the market. The 37 classic freighters that have left service, including the 10 that we removed from our fleet, reduced the global classic fleet to about 108 aircraft at year end. We think we will see substantially more of this older capacity come out of the market in 2009 and beyond. On average -- these aircraft are about 30 years old and have nearly reached the end of their useful economic lives. They will not the return of service when the eventual recovery comes. Other supply factors are acting to moderate the downturn in air freight demand as well. We know that the production of the 747-400 freighter will cease in the second quarter of 2009. We also know that 747-400 passenger to freighter conversation activity has diminished. And we know that manufacturer caused delays have pushed out the introduction of next generation aircraft. With that, this is probably a good point for Jason to take you through our financials. Following Jason, I will have some concluding remarks and we will go to your questions. Jason?

Thanks, Bill, and good morning, everyone. As Bill noted, the actions we have taken to the transform our business and to limit our commercial and operational risk have positioned us for solid first quarter earnings and for substantial full year earnings improvement in 2009 compared to 2008. Some of these actions also resulted in significant special items in the fourth quarter and full year results. First is a previously disclosed deferred pretax gain of approximately $154 million related to DHL Express' investment in Polar. At the time of the commencement of the full block space agreement on October 27, we made a determination to deconsolidate Polar from our financial statements. That determination is based on the application of FIN 46R and on changes to the various agreements entered into following DHL's investment in Polar as well as changes to Polar's operations during the fourth quarter. The deconsolidation is reflected in the reporting of financial and operating data for our ACMI and scheduled service segments in the fourth quarter and for the full year. As a result of the change, block hour volumes and associated block hour revenues generated by Polar Aircraft after October 26 are included in ACMI operations rather than in the scheduled service segment.

On a go forward basis, our reportable business segments will include ACMI, AMC charter, commercial charter and dry leasing. With all of our long term lease contract business now included within ATMI, we have established a more transparent platform for modeling our business and earnings growth. We also have reported a mostly non-cash, pretax special charge of $91 million related to the resizing of the 747-200 freighter fleet which partially offset the gain from DHL's investment in Polar. In conjunction with this action, we also reported a maintenance charge of $8 million related to the overhaul of several engines pursuant to the early termination of a long term maintenance services contract for 747-200 engines. As part of the downsizing of the -200 fleet, we negotiated favorable early termination agreements with our lessors regarding leases on four 747-200 aircraft which were due to expire in 2009 and 2010. This will permit us to avoid costly maintenance expenditures with respect to these aircraft. It will also allow us to use the remaining 747-200 engines and related parts to support the seven aircraft still in our -200 operating fleet and to reduce future maintenance expenditures. As a result of the developments, our fleet currently totals 29 aircraft comprised of 22 747-400s and seven 747-200s. All of our 747-200s are now unencumbered and will be managed opportunistically.

Beyond the fleet, I would also like to draw your attention to our effective income tax rate for the quarter and for the year. We reported an effective income rate of approximately 40% for the quarter and approximately 44% for the full year. As was the case in in the first three-quarters of 2008, the tax rate for the fourth quarter and full year differed from the statutory rate. The difference is primarily caused by continued losses incurred by Polar Air Cargo worldwide prior to the commencement of the block space agreement in October. As has been the case through 2008, Polar did not record income tax benefits related to its losses because it had no prior period income to apply against these losses. Looking ahead to 2009, we expect our book tax -- income tax rate to be in the 40% range. Turning to our balance sheet, we ended the year with cash, cash equivalents and short term investments totaling $411 million compared with $477 million at the year end 2007. Our cash total excludes approximately $52 million that belonged to Polar upon the deconsolidation in October.

Turning to our debt and capital lease obligations, they totaled $672 million on December 31 with their face value totaling $740 million versus $469 million on December 31, 2007. At year end, we had $68 million of unamortized debt discount related to fair market value adjustments. The increase in our debt during 2008 is a result of $217 million in outstanding borrowings under the $270 million PDP financing facility that we closed last February and $100 million in five year term loans that we completed in September, secured by the two 747-400 aircraft that we acquired earlier in the year. Our capital expenditures totaled approximately $485 million in 2008. This amount included $257 million in Boeing progress payments related to our future 747-8 aircraft deliveries and $168 million related to the acquisition of our two additional 747-400 aircraft. Capital expenditures for 2009 are expected to total approximately $90 million to $95 million. This amount includes approximately $48 million in Boeing progress payments on our -8 F order, about $10 million of which is expected to be funded by drawings under our existing PDP facility.

As we look at 2009, we are well-positioned from a cash flow and liquidity position. Boeing's delay in the delivery schedule for the new 747-8 freighter has moved the expected delivery date of the first 12 -8 Fs until late 2010 at the earliest and has considerably reduced the amount of our expected predelivery deposit payments to Boeing in 2009. We are currently in discussions with Boeing regarding a revised delivery schedule. We continue to look forward to the launch of the 747-8 freighter service, and we will benefit from the enhanced payload and improved fuel efficiency that these aircraft will provide to our customers. We will also benefit from their scarcity value and from our first to market position in their ACMI capability. With that, I would like to turn it back to Bill.

Thank you, Jason. Even in these turbulent times, we seen an exciting and dynamic future for Atlas Air Worldwide Holdings. We have de-risked our business, and our focus continues to be on long term contracts to improve revenue and earnings stream visibility. Our strategy serves us well in a difficult market environment. We have manageable ACMI renewal risk in 2009. The full start up of the BSA on October 27 removes the risk of our historically unprofitable scheduled service business where high fuel prices and soft demand hurt our performance over the first 10 months of 2008. Updating a comment we made on our last call, our 10-K will reflect a direct contribution loss in our scheduled service business of approximately $46 million for the year-to-date period up to October 27, 2008. The combination of the effective ACMI rate that we will earn in 2009 for flying six 747-400 aircraft and express ACMI and the elimination of the losses due to yield and fuel risk in the scheduled service business will generate substantial year-over-year earnings improvement. With Polar's transformation and a reporting deconsolidation from Atlas Air Worldwide, we have a more transparent platform for earnings growth in 2009 and beyond. We continue to focus on costs and productivity and we continue to execute on initiatives that will drive future revenues and earnings. With that, I think it's a good time to take questions. Operator, may we have the first question, please?

(Operator Instructions) And our first question comes from the line of Bob Labick of CJS Securities. Please go ahead at this time.

Good morning.

Good morning, Bob.

First, you gave us a context to understand the impact if you are unable to place the 400s as they come back to you, and I know you are actively seeking to place them. But previously, you had guided to pretax income of $130 million in 2009. You only gave us context as a delta. Is that 130 still the right starting point for the delta guidance that you just gave us?

Bob, that would be the right starting point.

Great, that's very helpful. Then you discussed the LOI planes. Could you talk about it maybe just a little more? You discussed moving potentially from March to October, but if you found a home for those planes before the October at the earliest, can you place the planes then, or are they up in the air for six months no matter what? How is that arrangement working out right now?

So as we talked about in our last earnings call, we entered into an LOI with the customer for placement and our expectation then was that the aircraft would essentially go right into service for that customer upon return. The customer has amended the LOI and given the market conditions as indicated to us October 2009 at the earliest, as I have said, if we had a firm placement for that aircraft or those aircraft before that date,we would place the aircraft.

Okay, great. Could you discuss the various options, just broadly speaking, not obviously customer specific, but that you are looking at for the 400s as they come back? Are there dry lease options, are there other markets? What are the potential? You mentioned you don't want to go into a five or eight year ACMI contract at the bottom of the market, but what are the options you are looking at?

Well as we said, we are continually marketing our aircraft to customers, and we have a steady ongoing dialogue with a range of customers. We prefer an ACMI placement. We think that particularly in this market would give us the best margins and the best returns and build a long term relationship that we want to have. So we are in dialogue with other customers, I think is the first point to make. If -- the other point we said in our script and in our release, we are not going to bottom price this aircraft. We've don't need to bottom price the aircraft because I would say somewhat unlike a dry lessor, we have an alternative placement for the aircraft that will yield us attractive margins in return in our AMC if we don't find an attractive contract immediately in ACMI. And if there were a dry leasing opportunity that made sense and yielded the kind of returns that we estimate we could otherwise achieve, certainly we would consider it. But those I think are the range of marketing options that we are working today, Bob.

Okay, great. I'll ask one more and I'll jump back in queue, and it relates to AMC. Could you give us a sense of the military outlook? I saw the other day another 17,000 troops going to Afghanistan. But the '09 overall outlook versus your previous expectations, both on the demand for freighters and also on the supply. If you could talk a little bit about your competitor's fleets. Obviously, there has been a reduction of the overall fleets. How has that impacted the supply for freighters in in the craft AMC program?

Okay, so a couple of points. We are experiencing, right now in the first quarter, a higher level of AMC demand than we had expected. Certainly, some of that is driven by the deployment of troops to Afghanistan as well as as other troop deployments and rotation in Iraq as well as overall AMC flying to the other bases that are outside of the theater, in Germany and in the Pacific, et cetera. So again, we are just sitting here at the end of February, or near the end of February, and the market demands have been unclear. But there is the potential for higher levels of military flying than we would have thought back in the fourth quarter. That is really going to depend on the administration's decisions and DOD decisions going forward. As far as the supply of aircraft in AMC, AMC is oversubscribed. There is more aircraft committed to AMC than actually would fly. Each team, and we are a member of the FedEx team, is awarded a market share, or an entitlement. The entitlement is based on the overall aggregate aircraft that you commit as a percentage of the total aircraft committed. So we are flying at or above our entitlement levels. I would say there is enough aircraft to serve AMC demand so the retirements have not created an imbalance there. We are not going to carry more because people have retired more. If we carry more than we anticipated it is largely because the demand is going to be greater than we anticipated.

Okay, great. Thank you very much. I'll get back in queue.

Thank you, Bob.

Our next question comes from the line of Alex Brand with Stephens. Please go ahead at this time.

Thanks, good morning, guys.

Good morning, Alex.

I guess I want to start with clarification on a couple of things in the press release. The $5 million to $7 million estimate if you don't place the four aircraft immediately, what is baked in that? Is that the annual number per aircraft from whatever date you lost the -- you didn't get the contract renewed, but it also assumes the aircraft is doing some amount of work and some other -- one of the other segments?

Yes -- Alex, this is Jason. That is right. The number is not an annuallzed number, it is an annual '09 number. So it is sort of the average pretax annual '09 delta related to reallocation of the aircraft. And the factors that would drive that delta are clearly the foregone contribution that we otherwise would have achieved in an ACMI placement, but some improvement for the reallocation of the aircraft into a military segment where the aircraft does achieve better operating economics than the 200 that it would display. So the net effect to us would be further displacement of 200 capacity in 2009 as the 400s are reallocated. And there is, obviously, the loss of contribution drives the negative effect here. But there is improvement on fuel burn and on the aircraft for deploying it into military.

Okay. Now, when I read the press release, it talks about that there were 20 of the 22 air -- of the 400s are in Acme, but three of the 200s are in dry lease. So help me rectify those two.

The three that are in dry lease are the three that we have leased to GSF, which is a UK airline. We own 49% of that. Then they take those three aircraft which they have dry leased in and then have an ACMI contract for fly for British Airways.

So you just included those three in the 20?

We do, and it is important Alex, as a distinction, that they are shown on the face of the income statement as dry lease, because it is dry lease income to the holding company. But the dr -- we effectively are able to achieve (inaudible) economics on those aircraft --

-- because of the nature of the service. Because of the nature of the ACMI service we provide BA.

Okay, and -- I'm sorry to keep doing this to you guys, but if I take the block hours reported for Acme 20,139 and 18 average aircraft, that only gives me 371 hours a month.

Yes, and Alex, one thing I caution you is you need to adjust for the stub period in Q4. We had the eight aircraft operating through DHL through the 26th of October. Those hours you need to reclassify from scheduled service to ACMI if you are looking for a go forward run rate number.

Okay. Fair enough.

And Alex, the other point being that the GSF aircraft, so the aircraft we referenced that are operated through the UK sub, those hours are not reflected in ACMI, so you would want to proxy those as well if you are trying to get to the amount that I think you are trying to get to.

Okay, and let's see, you said $46 million loss through October for Polar. And forgive me because I don't have it in front of me. What does that imply the loss was for the month of October?

So -- and Alex, I think it is important that that $46 million loss is not fully allocated. That is just contribution. That would suggest that on a contribution basis, which is effectively contribution after cost of the airplane, October would have been effectively a wash, it would have been close to a break even outcome for the month, and a 40 -- just over $40million loss for the year compared to a $37 million contribution for -- in '07.

Okay, and then just one more and I will turn it over. There is at least some hinting by Boeing that there might be uncertainty about the -8 production. Is that something you guys have even thought about, and does it make that big of a difference? Would would you shift your focus to the 777 or something?

Alex, this is Bill. My sense is that Boeing is admitted to building the 747-8 platform. Certainly, something could happen, but knowing what we know today and what we believe today, we believe they are committed to building up the platform.

Okay.

And we do think it will be a very good freighter, exceptional freighter when it comes into service.

Okay, fair enough. Thanks for your time, guys.

Thanks, Alex.

Our next question comes from the line of Helane Becker with Jesup and Lamont. Please on go ahead.

Thank you very much, operator. Hi gentlemen, thank you for taking my question. I just have a point of clarification. Bill, I think you said that the pretax number that we start is still $130 million for '09. But what about the seven planes that were being eliminated from service this year? Didn't they make any contribution or not?

Helane, it is Jason. I think as we discussed on the third quarter call, and really, the market hasn't changed much since. It has gotten worse since from a demand standpoint. But we really didn't have a lot of contribution from a commercial sense tied to those aircraft, and that is really what made the decision compelling. And if you remember back in November when we discussed in the third quarter, we were actually discussing variances to guidance related to a reduction in the charter demand. So I think we probably factored a lot of that in.

Okay.

As Bill said, there is a lot of factors going on right now for us, including some opportunities on the military side from a demand standpoint. So on balance, we think that the classic fleet is probably on balance a trade off versus where we were in November, and that the real focus for us in terms of the variables on performance going forward are related to the renewal of the 400s.

Right, got you. And then -- so as we should think about it, you renewed two already back in the fourth quarter that you talked about is on the November call. So you still have two to renew or there were six to be renewed and you have renewed two and there are four to go?

Let me take that. There were -- we renewed two in the fourth quarter. Those two would have been up for renewal in 2010.

I see.

I am sorry, excuse me. I misspoke. A year ahead of myself. Those would have been up for renewal in 2009.

Right, those were two of the March planes?

No, the -- one earlier in the year and one was later in the year.

Okay.

Now, that's two. Let's put those aside. We have four that we discussed today, and we should focus on the four.

Okay.

The first two of the four are the two that DHL is returning to us, aircraft 7 and 8, and we talked about that in some detail on the last call.

Right.

And in the last call, I advised that we had an LOI on those two aircraft to go into service right upon renewal from a new customer. What I have said today is that that new customer has advised us they want to delay taking those aircraft on until October at the earliest --

Got you, okay.

-- because of the market conditions. So that's aircraft one and two of the four we are talking about now today. Aircraft three is an aircraft that is being returned to us from another customer under their contract. We only learned about that in December as a potential, but it really only became a definite return in the last several weeks because we have been working with that customer, modeling for that customer to find ways to keep it in service for them, and they ultimately decided to return it.

Got you, okay.

And then aircraft four is one that we did talk about in the last call. That's one that's rolling off in the second half. So those are the four aircraft that we reference in the earnings release and that Jason and I talked about in today's call.

Got you, okay. Thank you so much for clarifying that. I see really appreciate it. And then, now, as we go forward, and this is probably more a question for Jason. The -- so much more of your business is in the ACMI area. So how will that change things like crew travel expenses and maintenance related expenses going forward?

Well Helane, it is a good question. I think from a -- it is effectively the the same operation. What we have done is we've converted the operation of the Polar aircraft which is eight today, going to six on April 1, into this, what is an express schedule. And so I think the results already reflect the maintenance and crew travel related costs that you would expect to see. So the real change is obviously fuel is eliminated as an expense item on the C&L ground handling, landing, over fly parking, all of what we call the non-ATMI expenses are eliminated on deconsolidation. Then on the revenue side, obviously we are reporting a net ACMI revenue as opposed to a gross scheduled service revenue. But otherwise, the operating costs are very similar to what they are today.

Got you, okay --

But we are seeing in the market, Helane, obviously is reducing travel costs, reducing hotel costs, and part of our focus our cost and productivity given the general softness in the market for those expenses, our purchasing team is out negotiating aggressively to take advantage of the environment and drive that cost down. But that will be more as a result of the market, not necessarily of the mix of schedule and ACMI.

Okay, all right, thank you. And then my last question is related to that $52 million that is attached to Polar. Where did that show up, if at all, on your balance sheet?

It won't, Helane. So going forward, all Polar debt cash otherwise on the balance sheet is deconsolidated and will not show up. So what you see and what you will see when we file the K is the Atlas Air Inc. and Holdings cash separate from the Polar Air Cargo Worldwide cash.

Okay, and that will be reported that way going forward?

It will be. So effective the fourth quarter of this year and going forward, we will show that deconsolidated presentation of Polar.

Okay, that's fine. Thank you very much. I really appreciate your help.

Thanks, Helane.

Next question is David Campbell with Thomas Davis and Company. Please go ahead.

Good morning, everybody. Good morning, David. I just wanted to clarify the scheduled service traffic and revenues that you reported for the fourth quarter, that will be basically zero from now on. That was just up until August -- I mean October 26?

That's correct, David.

So that is the big changes as far as 2009 is concerned. And the starting point you mentioned, the estimate for $130 million in 2009, that is still effective potentially reduced by the $5 million to $7 million per aircraft for some time that you -- for whatever time you can't release them, is that the way to look at it?

Yes, David, I think the way that we have approached this is rather than providing you all with a point estimate of where we think that outcome is, we have said we have a starting point. We have a range of outcomes that encompass that starting point, and we wanted to give you the visibility of what we think the variables are that drive some risk to that, and it really is, at this point in our view, the primary driver is the 400. So we have said that we've got four aircraft that are scheduled to come off lease to be renewed or replaced. To the extent they are not replace, we've given you that 5 to 7 range as the impact.

Right, okay. Now in terms of the market, as you mentioned, we have had this unprecedented drop in air freight traffic since October through January, especially in the Asia-Pacific region. Given that unprecedented drop which far exceeds the drop in business activity generally, first of all, what do you attribute it to? The world's economies aren't down 25%, 30%, but air freight is. Secondly, why wouldn't we get a substantial pick up in February and March, given that drop?

David, I think there is a few factors there. There was a report that -- I guess it was more than a month ago that that I read. But it was a JPMorgan report that looked at manufacturing output across a number of economies for the fourth quarter of 2008. And among those economies were that the usual US, Germany and Japan included South Korea, Taiwan, China and India. And in aggregate, the report suggested that manufacturing output was declining at an annual rate of about 20%.

That is not necessarily one for one with air freight, but absolutely not inconsistent with what we have seen in air freight. If you look at some of the other international freight statistics like ocean freight, you will see very similar levels of decline in ocean freight as we have experienced in air freight. So the economies over the world haven't stopped, as you say, and the economies don't seem to be down that much. And they are not, but products that move internationally are suffering from weaker demand overall. People are working off of inventories, what inventories that they have. And we would agree at some point, that either needs to come back or at least the fall needs to bottom and begin to stabilize.

So if you look at where we are today, as we get to easier comps in the second half of this year, we should start to see a bottoming or bottom, but we certainly haven't seen indicators of growth yet. There are some markets that are faring better than others, particularly in and out of the Middle East and from Asia and Europe, not a large market, but in aggregate, the African trade lanes are growing. But there is still a lot of uncertainty and fundamentally, what is going to drive the air freight is a pick up in demand of the products that are shipped air, and that has not happened yet.

And David, the point Bill made earlier on supply, I think it is important to remember and put in perspective that in 2008, total supply grew by 1.5% in the market. We've talked about the 200s that came out, and 25% of the market basically came out -- supply came out of the market in 2008. When we look at 2009, we think it is a sort of a significant change from where we were in '08. We have limited new capacity coming into the marketplace. A lot of the 747-200s that were being operated were being held for the fourth quarter of 2008 to see if peak would justify their continued existence or not.. And where we are now is 108 aircraft that I think, a large part of which are poised to leave the market. So I think the benefit that we have in our space that maybe some others don't have in transport is the size of the potential capacity that could come out of the market this year and really the limit on introduction of new capacity because of the deferral and delay of some of the new program introductions on the freight side. So when you look at demand, I think you have to always look at it from our standpoint supply at the same time, and that to us is a much better picture in '09 than it was in '08.

So you don't really need an increase in overall demand of any significance to have success in releasing your aircraft?

Well, I don't think that is exactly what we said. One of the things we did say on the call today, for example, is that the two aircraft that we have the LOI with with the new customer have been postponed. But we do expect that LOI will place. And given the uncertainty that's in the market, these are the challenges that we are working through with our customers -- potential customers for the aircraft. We need to sit with them, we need to model, we need to work with them on routes. In some cases, even with current customers, we are identifying opportunities that they may not have seen for themselves to carry more freight to get better utilization off of the assets, because that is part of what we do in our customer relationships. But it is about sentiment, and part of our ability to place aircraft is going to be driven by, ultimately, the airline customer sentiment and customer experience, and it is to that point that we wanted to give you the visibility on these variables in our call today and in our press release earlier this morning.

Thank you very much for helping. With that visibility, I will let someone else ask questions, thank you.

And our next question comes from the line of Howard Rosencrans with Value Advisory. Please go ahead.

Hi, thank you very much. Guys, I just want to understand regarding your concept of how we get to this 110 and in particular, the AMC business. What is the block hour rate, and what do you perceive that the -- because you had indicated, I believe in the last call that the number of hours was down or that you were looking for, I think it went from 1,400 to 1,100, the number of hours that you were looking at and I think you -- I would be curious as to what sort of block hour rate you are using and what sort of direct margin we can anticipate in that business.

Howard, I am not certain of what the 110 is that you are referencing, but I can speak to the AMC --

The 110 was the 130 less about -- I guess I am saying a random $20 million from the 400 that sort of the removal of three planes and maybe a little more? That's where the 110 comes from.

Fair enough. If you are using an estimate of 110, and I can certainly speak from an AMC standpoint where we are on revenue rates, and it is an important point because the real driver on the AMC side is -- it is a cost plus contract, and part of that cost is fuel. You did see in the fourth quarter that we had an average rate on AMC charter of just over $26,000 an hour for revenue rate. I think our expectations are that that rate is diminished going forward simply because of the reduction in fuel prices. So if you look at the fourth quarter of 2007 where we were just over $18,000 an hour and you look at the relative fuel prices today relative to where we are, I think that is probably a decent indication of where we are headed in terms of AMC rates into 2009. I guess I just want to stress the point that fuel is effectively a pass-through. So you want to think about a lower AMC rate for '09, but you also want to consider the fact that the fuel cost comes down commensurately.

What sort of direct margin are you looking at in that business? Is that about a 25% direct margin business?

Yes, I think we have often discussed sort of 14% pretax contribution. I think if you look at the direct margins,we -- they have been relatively stable, so I think you can use our '08 basis as you go forward to think about the contribution from AMC in '09, again, with the careful point of adjusting for fuel.

And I think Howard -- this is Bill Flynn. Part of what we have been communicating today is it is not clear where AMC is going to end up. We are carrying higher than what we expected right now in the first quarter. A lot of that is driven by deployments into Afghanistan as an earlier question specifically referenced. How the administration and DOD are going to deploy troops and then make decisions about what commercial capacity they need to contract is really unclear at this point. So we need to watch that closely and serve it as it moves through the year.

And Bill, I would add to Howard's question, that direct contribution of 25% has been fairly stable for us. There are factors like the mix of the types of missions we operate that can drive it. But as a proxy, it is probably fair.

Okay. And the commercial business you expect -- reasonable to assume that that operates in the ballpark of break even based on where you guys stand today?

On commercial charter, that is probably a reasonable assumption. There is not a lot of it. There are two issues in commercial charter this year, and I think Helane was focused on that. There is substantially less commercial charter in the market than there has been prior years, and one of the drivers of commercial charter is regular schedule service is full. And so one of the reasons people do go out for commercial charter is they need the capacity because it is not currently available in scheduled operations that the various airlines offer. Well, that is not really the case right now. So that's clearly one of the drivers of a very low commercial charter demand, which has put pressure on pricing, which has put the direct contribution much more at break even as opposed to generating any kind of income.

Okay. Just for 100% clarity on the $5 million to $7 million, that is just the -- that's the '09 impact? So that's really -- that is the impact for nine months? Is $5 million to $7 million not the annualized impact of the 400 missing?

That is the average impact for calendar '09, correct.

Okay, so that would be just for nine months?

Yes.

Okay. Okay, I'll get back in queue. Thank you guys very, very much. Appreciate the color.

Thanks, Howard.

And our next question comes from the line of Chris Robertson with Cardinal Capital. Please go ahead.

I just wanted to clarify. On the $49.3 million of adjusted pretax, when I looking at the numbers, I am assuming that you are adding back the $8.2 million for the early engine work, the $91 million of the charge and the $153 million, $154 million on the Polar gain, which gets me to just under $60 million with your prior preannouncement guidance of $55 million to $60 million. That sounded right to me, but I just want to run those three different numbers by you, to call it the guidance versus the $49.3 million in the press release.

Chris, you have got that right. I think we were looking at, we said $55 million to $60 million adjusted pretax that would for the full year, which would exclude all of the items that you referenced, and that reconciles $59.7 million adjusted number that we reported for the full year.

Okay.

And 49 was Q4, we had $10 million cumulative coming into the fourth quarter.

Got it. The second question I just wanted to make absolute certainty on, is the -- you have talked at length about the four jets and what is due when and where and the costs that would be associated with them. In any of your other contracts that you have out there, whether it be for 2009 or beyond, can you talk publicly about any of those contracts that might have clauses that allow for the early return of a jet such as you experienced with the one customer you referenced in December?

So for 2009, the exposure we have in 2009 are the four aircraft that we have talked about.

Right.

So that is the exposure.

And for 2010, can you give us a sense for that?

Chris, I think the best way to probably frame it for you is I think when we have given indications in the past that the term of these contracts and the average number of aircraft rolling off in a given year. And I think if you look at 2009, you think that is the high range of any year based on the current portfolio where we would be exposed to renewals, including the effect of any termination options that exist. These are long term contracts. Any termination options specifically associated -- accompanied with penalties and are certainly within the context of a long term contract.

I think the final point is that you will see in the K, a table of our committed revenues going forward.

And that would -- the table will give us the sense as to some back of the envelope math that would let you know how many planes in any given year would be up for renewal? Is that the way to think about that?

No, but Chris, I think it just gives you a means to triangulate what you're trying to do, which is to understand what is the minimum non-cancelable revenue that I can presume in a given year.

That's correct.

We do have disclosure in the K that gives you that number, and I think that in combination with the disclosure we've given around the contract, you can fairly, I think accurately triangulate where you think the guarantees --

Right. It doesn't talk about placements or renewals, but it could help you in the consideration that you have here.

Okay. And I certainly understand in a long term sense how you could view that as being proprietary, but I certainly would feel in the current environment that we are in that you can appreciate how that can be more important to investors.

We understand. It is proprietary, but is also competitive.

Of course.

So Chris, I think what we have achieved here is to give you visibility for '09 and certainly to give you with the K visibility into those commitments going forward in a sense of what we think the maximum exposure is going forward.

Thank you for your time.

Thanks, Chris.

(Operator Instructions) Our next question is a follow up question from Howard Rosencrans with Value Advisory. Please go ahead.

Yes, hi guys, thanks. Is there any -- just going back to the prior -- the gentlemen who just asked a question. I believe your answer to it was there's about -- in general, to get the specificity, is it usually about two to three aircraft that come off in most years?

Yes, and just to repeat. What I said Howard, I said that we have four aircraft this year and that is indicative of what we would consider a peak year for renewals going forward.

And just so I understand the -- and the contracts usually call for a minimum of 400 hours on the ACMIs?

For the 747-400s, yes. What we have talked about in our prior releases is a minimum of 400 hours on average.

So if it's -- so here would be the question. Are the -- so that is what the guarantee is, that is what the take or pay guarantee is. My question to you would be how often are the customers now paying but not taking? Is there any financial advantage to them paying instead of taking or conversely, any negative to you in one scenario? Or it doesn't matter to you, but how often are they saying, listen, we don't got any freight flowing, so we can't -- there is no reason for us to take?

We have talked about this in in other calls. So there is a seasonality to freight. So in the first quarter of the year, it is typical for us to schedule maintenance, and we would do that and our customers do that. There is flexibility in their contract to fly a little bit less in in the first quarter and fly more in it later in the year. But when you smooth it out over the whole year, you get back to the average.

So the answer to the question, and I don't want to put words in your mouth, so the answer is due to the seasonality factors, well, I guess my question relates then to the fourth quarter. When you saw this December month where you had 22% fall off, not you in particular, but there was a worldwide fall off 22% in air freight flows, were you experiencing where the customer -- and that's the seasonal peak time, were you experiencing where the customers were simply paying instead of taking, effectively?

What we said was customers were flying at minimums, and that is what we talked about at our last call. We also said that through 2009, we expected customers to be flying at the minimums, and the other data point we had was that typically though, we had been experiencing over minimum flying, and that had averaged somewhere around 7% or 8% over minimum. Now the other point we talk about is that minimums are close to maximums. At a 400 hour minimum, there's -- you can say get up to 430 or so a month, maybe even 440 on a push, but there is not a big delta between the minimums and what is effectively available from the aircraft. If that is helpful, Howard.

Howard, I think you have to understand, I am somewhat forgetting the point that was made, but by Q1 people are going to be below mins, and that is a historical fact. So it is difficult for us to extrapolate I think, and we have to be careful about extrapolating about too much from the performance in February 24 in terms of full year numbers.

Okay, but you are saying based on -- the fourth quarter experience was people were actually flying the minimums.

Yes, and some flew a little bit above, but yes.

Okay, and is there any -- just give us some quick color if this is an easy question to answer, . Otherwise we can just forget it. Is there a -- if the customer is going to pay for it anywhere -- way, is there a real variable cost to the customer to fly it instead of to simply pay for it? Is

Yes, the customer would incur fuel expense and other operating costs that we at ACMI don't carry.

So the bright light would be that yes, the customers in this horrid, horrid, horrid fourth quarter environment, they still managed to be -- I am not trying to spin this, I'm just saying that they were actually flying the minimum still, not just They they were flying the minimum still, not just sending you a check?

So in the fourth quarter, we operated at minimums, because I don't want to spin it either and create any misperceptions. We were flying at minimums in the first quarter where we are now. We are paid at minimums. Some people are flying below minimums. Some of that is because of their normal scheduled maintenance or because it was just the schedule they would intend to operate anyway, or it could be because of the current market. So there is three variables there, and we are going to need to come out of the first quarter and see what demand looks like and how customers respond to that demand to have a better perspective, I think on the utilization question that you are asking.

But here is what -- the minimums in the fourth quarter were the result of levels that were -- because earlier in the year, they are taking less and then they are pushing out their minimum commitments to later in the year. So despite the fact that they pushed it out their minimum, and admittedly, there was more demand in the beginning of '08 than there was later in the year. But despite the fact the fact that they pushed out the minimums, they still managed to fly at their minimum in the fourth quarter.

Well it's not exactly that linear, because some of the customers could have achieved and recovered any of those hours, just even in the second quarter.

Okay, all right.

It is a customer by customer, and I'm not trying to not answer, but there is a lot of precision there that -- to give the complete answer I think that you are asking, which we don't disclose on our customers.

Very good, thank you for the color.

Thanks, Howard.

And gentlemen, at this time there are no further questions. Please continue with any closing comments you may have.

Thank you, operator. On behalf of the Atlas Air Worldwide Holdings and our management team here today, we'd like to thank all of you for participating in our phone call. Thank you for the questions and the dialog that we've had today, and thank you for your interest in our company.

Thank you. Ladies and gentlemen, this does concludes our conference call for today. If you do wish to listen to a replay of today's call, you may do so by dialing either 303-590-3000 or 1-800-405-2236. You will need to enter the access code of 11126785. The conference will be available after 1:00 p.m. eastern today. We thank you for your time. You may now disconnect your lines.