Atlas Air Worldwide Holdings Inc (AAWW) 2009 Q2 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Atlas Air Worldwide Holdings, Inc. second quarter 2009 results conference call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. (Operator Instructions). This conference is being recorded today, August 5, 2009. I would now like to turn the conference over to Atlas. Please go ahead.

Thank you, Brandy. Good morning, everyone. I am Ed McGarvey, Vice President and Treasurer of Atlas Air Worldwide Holdings. Welcome to our second quarter 2009 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 like to remind you that in discussing the Company's performance today, we have included some forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements relate to future events and expectations and involve unknown risks and uncertainties. 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 26, 2009 as amended or updated by subsequent reports filed with the SEC, for a summary of specific risk factors that could cause results to differ materially from those expressed in our forward-looking statements.

In our discussion today, we also include 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 and 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, Ed. Welcome, everyone. We're pleased to have you with us this morning. Our second quarter earnings are a sharp improvement over our results for the second quarter of 2008.

They follow our record first quarter earnings and they reflect the actions we have taken to transform our business and to limit our commercial and operating risk. Just as we saw in the first quarter, our second quarter earnings were driven by the transformation of our former scheduled service business to Express Network ACMI service, productivity gains and cost savings achieved through our continuous improvement initiatives, and proactive efforts to retire a portion of our older 747-200 freighter assets.

Our second quarter net income totaled just over $11 million or $0.54 per share. Total operating revenues in the second quarter decreased to $240 million in conjunction with the deconsolidation of Polar Air Cargo Worldwide from Atlas Air Worldwide Holdings. Our latest results contrast with net income of $1.5 million or $0.07 per share for the second quarter of 2008. We achieved our strong year-over-year increase in earnings despite a more than 18% decline in global air freight traffic compared with the second quarter of 2008, a nearly 18% reduction in the size of our operating and dry lease fleet, an increase in heavy maintenance expense on our 747-400 freighters, and a reduction in AMC charter revenue and contribution reflecting a lower fuel price component in the AMCI charter rate.

Total direct contribution by our reportable business segments improved to approximately $43 million in the second quarter, an increase of more than $15 million compared with the second quarter of 2008. The increase was driven by our Express Network ACMI service operations, which added to our ACMI results while overcoming $20 million of scheduled service losses that we incurred in the second quarter of 2008. While AMC results for the quarter reflected the impact of lower fuel price component in the AMC charter rate, they benefited from a higher level of AMC demand than we had originally anticipated.

AMC volumes averaged nearly 1700 block hours per month during the quarter compared with an average of 1750 block hours per month in the second quarter of 2008. Similar to the first quarter, AMC demand was led by an increase in US military support for operations into Afghanistan. As a result, AMC flying in the second quarter was significantly higher than the 1285 block hours per month that we averaged in the fourth quarter of 2008. We expect AMC demand to remain near first half 2009 levels through the end of the third quarter and we currently expect demand in the fourth quarter to be about 1100 hours per month.

I will have more about our framework for stronger earnings in 2009 later in the call. Before that, I would like Jason to provide with you some additional perspective about the improvement in our second quarter results and financials. Jason?

Thanks, Bill, and good morning, everyone. The significant increase in our second quarter earnings reflects the strategic actions that we have taken to strengthen and transform our business. The transformation of our business model has positioned us to perform well deep into this difficult business cycle. Through continuous improvement and focused asset allocation, we have grown earnings on a reduced asset base despite high operational leverage.

With our best in class 747-400 freighters, we serve high credit quality customers under long-term contracts. 90% of our current block hours are generated under long-term or fixed price contracts, where we have only minimal fuel exposure and no direct commercial load or yield risk. In addition, we continue to maintain a strong balance sheet with a high level of liquidity. Our 2009 results reflect a deconsolidation of Polar from our financial statements. Block hour volumes and associated block hour revenues generated by aircraft in service for Polar are now included in AMCI operations rather than in the scheduled service segment.

Our second quarter 2009 results also reflect the consolidation for financial reporting purposes of Global Supply Systems limited, or GSS, a private company in which we hold a 49% interest. The consolidation of GSS, which is the entity through which three of our aircraft are let leased to British Airways took place in early April. The consolidation was due to a change in the majority ownership structure of GSS. Previously, we accounted for GSS under the equity method. Prior to the change, revenues from GSS were reported as dry leasing revenue in our consolidated statement of operation and we did not include block hour volumes for these three aircraft in our operating statistics. Income from the GSS leases was previously included in the dry leasing segment for segment reporting purposes.

Beginning with the consolidation of GSS in early April, block hour volumes, associated block hour revenues, direct costs and direct contribution generated by the aircraft in service for GSS are now included in ACMI operations. I would like to emphasize that the change in reporting for GSS has only a minor impact on our reported bottom line earnings, although it does effect pretax income and how we present our results.

On our last call, we indicated that we expected maintenance expense in the second quarter to increase from the first quarter of 2009 due to the expected timing of heavy air frame and engine events. We also indicated that maintenance expense for the year was likely to total about 105 million to $110 million. Given the consolidation of GSS, maintenance spending of $42 million in the second quarter, which included $5 million related to GSS, was in line with expectations for the quarter. After giving effective consolidation, we now expect that full year 2009 maintenance expense will total approximately $125 million to $130 million. Approximately $15 million of the $20 million increase in maintenance expense forecast for the year is due to the consolidation of GSS. The balance reflects higher costs for heavy maintenance events, offset in part by an improved outlook for light maintenance expense.

Focusing specifically on the second half of 2009, about two-thirds of the $55 million to $60 million we expect to spend for maintenance is likely to take place in the third quarter. In addition to maintenance, I would also like to draw your attention to our effective income tax rate for the quarter and for the year. We reported an income tax rate of just under 41% for the quarter, which is largely in line with our effective income tax rate for the year. Previously, when we accounted for GSS under the equity method, the majority shareholders interest in GSS's results was excluded from our pretax income. Now, however, the adjustment for the majority owner's interest and profits or losses in GSS will be shown as an aftertax line item, appearing after net income in our income statement.

We ended the quarter with cash, cash equivalents, and short-term investments totaling $468 million, compared with $411 million at year end 2008. Approximately $12 million of the June 30 total related to the consolidation of GSS. Our balance sheet debt totaled approximately $646 million on June 30, with a face value totaling about $711 million compared with $740 million on December 31, 2008. For the first six months of 2009, our capital expenditures totaled approximately $21 million, which included about $6 million of capitalized interest related to our Boeing 747-8 order. Our cash capital expenditures for the remainder of 2009 are expected to total approximately 70 to $75 million. This includes approximately $48 million in aircraft progress payments due in the fourth quarter. About $10 million of which are expected to be funded by drawing under existing PDP facility.

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

Thank you, Jason. As we proceed into the third quarter, our fleet currently totals 28 aircraft, comprised of 22 747-400s and six 747-200s. Following the close of the second quarter, we elected to temporarily park a 747-200 freighter, pending the assessment of demand in the fourth quarter and in 2010. As we have noted before, all of our 747-200s are completely unencumbered, and we will continue to manage them opportunitistically going forward, principally in service for our military and commercial charter customers.

To briefly summarize the deployment of our 747-400 freighters, 17 continue under ACMI contract. Three are profitably deployed in AMC and commercial charter, while we continue to seek placements for them in our ACMI and dry-leasing business segments. One serves as our maintenance cover in ACMI and serves in charter when not required in maintenance cover. And one, our only converted freighter, is allocated to our commercial charter segment where it is profitably deployed in air cargo service in South America.

Recent industry data and economic reports suggest that we may have seen the worst in the deep declines in global air freight and business activity over the past year. While trends are leveling off and even beginning to slowly turn upwards, global air freight demand, which has contracted over 20% on a year to date basis according to IATA is recovering from an unprecedented decline. Overall capacity reduction has moderated the impact of the demand decline somewhat.

Year to date, though IATA reports that global supply is only down about half as much as the rate of decline in demand, which has maintained pressure on freight loads and yield. We continue to see the retirements of aging and inefficient capacity from the market, which is helping to improve the imbalance between traffic and capacity. In the important Asia-Pacific region, the latest data indicates that demand and capacity are converging at a better rate than the overall global market. On a year to date basis through June, traffic in the region is down 22%, while capacity is down more than 16%.

Since the beginning of 2008, we have seen a 43% reduction in the number of 747-200 freighters serving the market. In all, 62 classic freighters have left service since the beginning of 2008, including 25 since the start of 2009. We continue to believe that substantially more of the remaining 83 classic freighters in service at the end of July will come out of the market in 2009 and beyond. We strongly believe that most of these aircraft, once removed from the market, will not return to service when the eventual recovery comes, based on their age, maintenance and other operating costs and relative inefficiency.

As a result, any improvement in demand could have an early and meaningful impact on Atlas. With the transformation of our business , our core earnings from operations should be less seasonal in 2009 than in the past. We still expect to experience some quarter to quarter variability in our earnings pattern and we expect earnings in the second half of 2009 to mirror our first half results, excluding the impact of one-time items. We remain focused on cost and productivity enhancement. We continue to execute on initiatives that will drive future revenues and earnings, and we have a solid financial platform.

With that, I think it's a good time to take some questions. Operator, may we have the first question,

Thank you, sir. We will now begin the question and answer session. (Operator Instructions). One moment, please. And our first question comes from the line of Robert Labick with CJS Securities. Please go ahead.

Good morning.

Good morning, Bob.

Hi. First question, and obviously you just said it, so I'm still trying to work out the numbers exactly, but you said you expect second half earnings to mirror first half. Typically I would expect Q4 to have lower maintenance and generally higher utilization. What kind of assumptions do you have for the utilization and the peak season, if you will, in Q4 embedded in that forecast for second half earnings?

Sure, Bob. It's Jason. I think the, the the reality of our seasonality I think is much different than it was in the past. And I want to emphasize that. We do have really in terms of incremental aircraft utilization, it's really driven by the availability of aircraft that are otherwise in maintenance in the first half of the year. But from that standpoint, it's really a much less -- with the elimination of Polar and the scheduled service segment, it's a much less seasonal business. So I think when you think about our comments, clearly there is some Q4 utilization improvement relative to Q3, but -- and we do, as we said, have a little more maintenance expense in the third quarter relative to the fourth quarter. So you want to think about that. But generally I think we're on a much more stable quarterly earnings than we certainly have been in previous years prior to the transformation we've had through Polar.

Okay, and then just to clarify, Bill mentioned excluding one-times. What's the Q1 number in that first half that you're using? Because I mean there's $10 million in the gain obviously. Should we just back that out from Q1 or what would be the pretax number in Q1?

Yes, I think you want to think about sort of -- if we go back to Q1, we had both the $10 million and the $3.7 million related to some gain on sale and related to retirement of debt. And if you look at our full year, I think we're we're saying that and maybe to put this more simply relative to the prior guidance we've given, I think, Bob, we're basically indicating a similar range of outcomes as we've indicated in the past in terms of our earnings expectations there really hasn't been any change. I think the fundamentals, the same factors are consistent with where they were in the end of the first quarter and at the end of last year. So from that standpoint, I think we're consistent. Our view of the full year did include the effect of the $10 million in the first quarter when we provided that guidance and it continues to. So to give you a little more color on on how we think about that.

Okay. I think I'll probably follow up just to make sure I have all the moving parts there. But just moving on, in terms of military demand, in May, the House committee on the craft had said they expected levels to maintain higher than they previously had thought. Could you talk about the military demand. And you mentioned Q3 should be strong, but Q4 should drop off. What are you seeing in Q4 and what are your expectations beyond that based on the craft report, which was for reasonably high levels of demand?

Yes, Bob, this is Bill. So the craft report, as you've looked at it, outlines a pretty high levels of demand, relatively high levels of demand for FY 2010 and FY 2011 and then some uncertainty around FY 2012. And that will all play out. We've had a strong two quarters in first and second this year and a lot of that was simply driven by the, by President Obama's and the administration's posture on Afghanistan and there's been some buildup to that effect. And we see that continuing through the third quarter as I referenced in my comments here on the call. And then I mentioned that fourth quarter right now, as we understand it, looks more like 1100 hours on average.

But I want to hasten to add, that can change based on conditions on the ground, and based on the way the military sees its need for material and supplies. So as we look out, and we haven't really given guidance or thoughts onto 2010, we expect it to be a relatively strong year. It could be that the levels will be something below what we're going to experience in 2009. Now, the contract awards for FY 2010, which starts October 1, aren't yet out from the military. So from the DOD. So we'll have better clarity on not only fourth quarter, but a good look into 2010 once those awards come out, which is later in August, early September, depending on the craft timetable.

Okay, great. That's helpful. And then as it relates to renewals, I believe you have one contract up for renewal in the second half of this year. And previously you thought it would be renewed. Could you just give us an update on that and tell us how we should think about when you'll get visibility into 2010? I think it's probably too early, but when should we expect you to start thinking about the visibility in 2010 renewals?

So that contract, the specific contract you reference, we said was a second half renewal and we're continuing to work with that customer towards that renewal. But we don't have a definitive renewal yet. In terms of visibility into 2010 as we get closer to the end of the year, we're going to have better visibility and I don't mean to be cute in the answer, but there still are a lot of moving pieces in the market, even though the market strengthened a little bit and Asia-Pac seems to be doing better than some of the other regional markets. These are important for us, because Asia-Pac really is the, kind of the sweet spot of the long haul intercontinental flying, which is where our assets work best. We still I think we, as much as our airline customers and potential airline customers are going to be watching the market closely, watching what happens in fourth quarter, and that should give us some better feeling as to placements in 2010 and beyond.

Okay, great. I'll leave some questions for everyone else. Look forward to seeing you at our conference in a few weeks. Thanks.

Thanks, Bob.

Thank you, and our next question comes from the line of Alex Brand from Stephens, Inc. Please go ahead.

Thanks. Good morning, guys.

Good morning, Alex.

I feel like I got to go back on this outlook issue because it's as clear as mud for me now. Because at first, Bill, I heard you saying on an operating basis you earned about $1.25 in the first half and the second half's going to look about the same. And then Jason says, well, we really haven't changed our outlook thoughts from before. So I still need a little help.

Yes, so Alex, I recognize from Bob's response that I can maybe be a little more direct in our response, so let me try and do that. You know, I guess Bob's question, and I think your question is, how do we think about the one-time items? And our view on the operating results is that the operating results are roughly consistent in the second half to the first half, and then the one-time items in the first half would be incremental to that, Alex, so I guess I want to just reference it back to say that has been sort of a consistent view that we've held going back to the previous view we've given, which is that fairly consistent operating results and then we have the one-time items in the first half of the year.

All right. So said differently, that is -- you're saying in the fourth quarter, we've got military, we expect to get, go back to kind of a run rate level from this higher level.

Right.

And there would be no reason to have an expectation of any peak, any kind of pickup in charter, so you just kind of at a run rate, if you want to call it that--

Yes, no, Alex, it does assume a level of peak activity. I don't want to -- we are assuming a peak season. Now, are we -- we are not assuming a -- I think on a relative scale, we're not assuming sort of the historical peak seasons. We're assuming what we think is a reasonable peak season, given where we are today. And so relative to historical standards, I don't think our outlook is certainly below historical standards for peak season in terms of the returns that we expect out of the charter segment. And you pointed out the main point, which is our highest contributing use of those classic assets in particular, is in the military business. We do expect that to climb going into the fourth quarter. And you're pointing out the right factors, which is our view on charter. There will be a peak, but certainly not, we're not forecasting the levels of peak we might have in prior years.

Okay.

And then that's obviously something that we just -- no one at this point I think has a lot of visibility into peak. We're all trying to build our own estimates of what will happen. But given where inventory levels are, it's very difficult to predict right now how air freight's going to shake out. There's outcomes that could range from a relatively strong peak to continuing weakness.

Okay. With respect to conversations you continue to have with potential customers, conversation -- I think you've got one more aircraft that is going to, the contract's going to expire later this year. Is there any reason that we should think that people want to commit to aircraft at this point and that anything has changed? Is anybody willing to look past what's going on right now and think about three to five years and committing to an aircraft?

Yes, that's one of the key questions, Alex. And I think that sentiment is changing. If you ask that question in March, I would -- it would certainly be in a different answer than I think the answer in August. Back in March, the industry in general, our customers, potential customers were just trying to figure out where's the bottom and where is this going to go? And that's as much true for passenger as it is for cargo and premium seats and all of the other components of our customers' business mix.

But we've seen, I think, the bottom. We've seen a little bit more strength in Asia-Pac among certain trade lanes. We've seen, for example, one of our customers has publicly announced new points in their global freighter network. Qantas, for example, has added Vietnam for the 400 freighter, and recently announced Dallas for the 400 freighter.

Those customers and not just our customers, but those carriers that operate freighters -- are seeing volumes improve, not seeing tremendous yield pickups yet, but I think if you talk to them, most would anticipate some yield opportunities coming into the fourth quarter, assuming there will be something that resembles peak and given the amount of capacity that's come out, and we do have conversations with customers and we are in conversations with customers, including new customers about putting freighters into the fleet in to 2010 and beyond because they value cargo as part of the mix. And those that have not -- some who have not had freighters are rethinking freighters in the context of that there are real freighter opportunities, there are real cargo opportunities and with better balance, their overall business risk and business mix.

Even with this decline that we've seen, which is now 20% plus year to date, we're still looking at a very large freight market. It's not gone to zero. It's gone to 2003 kind of levels. But we still believe there's a compelling need for modern, efficient freighter assets. As the market recovers, as the economy recovers, and as the economy recovers, fuel will go higher or seek levels consistent with demand. We think that will position the 400 freighter very effectively, very efficiently.

And in the meantime -- I'll just repeat a statement that I think Jason or I made on an earlier call. You know, because we have AMC and because we have a charter business, we are not going to do a deal right now in the trough at a superlow rate just to place an asset out of desperation. And so we believe that we can work through it.

I mean I think what we've shown, now that we're seven quarters into the worst global recession that we've seen and the worst decline in air freight that we've seen post World War II, we've shown a very resilient business model and the steps we've taken over the last three or so years have placed us to come through this storm with reasonably good levels of earnings and returns and we'll build on that strength as the recovery takes over. Sorry for the long answer, but that's how we think about it.

No, and you make fair points. You're working through an incredibly different period relatively well. Just one housekeeping question and I'll get back in line. The other revenue that I think was described as administrative stuff, is that just stuff that you're doing for Polar or DHL, how ever I should look at it, that is an ongoing thing?

Part of it is that, the administrative services. You'll also note we have other contracts that are smaller recorded there, too, including the training contract for the Air Force one pilots, which I'm happy to say was just renewed again and the training that we do for the military command and control E4. So those other revenues will be caught up in there as well.

Okay. Thanks for that. Thanks for the time, guys.

Thanks, Alex.

Thank you. Our next question comes from the line of John Barnes with RBC Capital Markets. Please go ahead.

Hi, good morning, guys.

Hi, John.

Can you talk a little bit about the -- you've got $48 million that you're paying to Boeing in the fourth quarter. Can you give us some outlook as to what 2010 looks like in terms of payments to Boeing, are there any additional payments like that $48 million? And then any kind of update on the 800 delivery schedule?

Sure. So John, I'll start with giving you the picture on the, on the PDP delivery schedule. Obviously, and I think we've said it in the past and we'll say it again here, we are in negotiation with Boeing. This is the payment schedule they have proposed to us. We reflected it obviously in our K and in our Qs, and so this is a schedule that continues to be negotiated. But as it stands now, I'll give you kind of the lay of the land today.

If you -- the remainder of 2009, as we said, we have $48 million in total predelivery payments that begin again in the fourth quarter. $38 million of that is of our equity, 10 of that is finance. Going into 2010, our total PDP commitments are approximately $375 million, but 44 of that roughly is financed under the first five aircraft. And so our net equity obligation before any incremental financing activity on the second seven aircraft -- as a reminder, on the 12 aircraft we have financed PDPs on the first five, we are working on financing on the second set of seven. So our total equity commitment at this point before any incremental financing would be $330 million in 2010.

Okay, very good. And just any update on the delivery schedule?

Well, as we've -- this is Bill, John. As we've stated before, we are in negotiations with Boeing on the delivery schedule. They have presented a schedule to us. We've not accepted it. We're in discussions with them on those deliveries for the timing of when it will take on the aircraft.

Are you still expecting to take at least an aircraft in 2010?

I can't really give you a precise answer to that. We're in the negotiations Bo with Boeing. It will depend on their manufacturing -- those are live talks, John.

Again you've mentioned that your customers are obviously flying hours below minimum and so you're still billing at the minimum and that's why revenue per block hours are up because they are flying below the minimums. If you do get some type of upturn in whether it be a stronger peak and they are flying above minimums at that point should -- I'm thinking about this right, we should see some sequential degradation in the revenue per block hour, just on the math of them flying more block hours, correct?

Yes, that's correct. And just to give you some perspective, because I think it gets to the question that Alex asked a moment ago. In the first quarter, our customers flew about 80%. The actual block hours were about 80% of contracted minimums. In the second quarter now, our customers are flying on average about 90% of the contracted minimum. So we've seen that, we've seen the utilization absolutely come up. You're right, when we do revenue per block hour, it's revenue versus actual hours flown, which the simple math will inflate the average rate per block hour. As customers come up to minimums and get above that, then math will take over, algebra takes over and the average goes down.

Very good. Talking about the 200 fleet and the decision, I think you said you're parking one after the second quarter, so you're down to five in service, correct?

No, we've temporarily parked one and we had seven. So we're actually six in service.

Six, okay, sorry. Just your outlook for the 200s on a go-forward basis, I mean as you think about taking delivery of the 800s having 400s in the AMC and the charter business, can you talk about what your outlook is longer term for the 200s, and especially as you made the comments about the number of classic aircraft that have come out of the system. At what point do you think you draw down the remaining 6-200s and you're solely a 400 or a 400, 800 fleet?

Clearly, the 200s over time leave the fleet. It's a question of how long that horizon is, and I think there's a few variables that make it difficult for us to give you and probably inappropriate to give you anything specific in terms of timing. Clearly the delivery of new aircraft will drive, potentially drive 200 capacity out of the fleet and obviously as we've said, that continues to be a point of negotiation, a point of discussion and an open point with Boeing.

In terms of the remainder of the fleet, it is a very dynamic decision for us because it's a function of the timing of heavy maintenance on the aircraft and really the issue for us and just to give a little more color, the aircraft that we had temporarily parked here at the end of the second quarter was really a function of a heavy maintenance event and our need to really assess the return on investment of those events as we go forward. So really it's going to he -- I think a big factor is going to be how does peak season shake up and then how does our view of AMC develop as we go go 2010? And Bill's already touched on just the there's always a degree of visibility that is sometimes tough to get from the military on their longer-term planning. So I think it's really a function of how do we see peak season play out, how does the AMC outlook look for 2010 and where are we on the 400 placements, where are we on the new aircraft, and because of all of those variables, I'm not willing to give you a specific time line.

Okay, that's fair. Two quick things. Going back to, Bill, your comments on the percentage of minimums being flown in the first and second quarter, have you seen, have you seen any kind of sequential month to month improvement? I mean if those numbers, did they bottom in January or February and have they been steadily getting better, and was June, May or June one of the better months you've seen this year, or has it been pretty constant over the quarter?

Yes, I think it's been a steady rampup. I mean you can imagine, just think back about how everyone was feeling in January, coming off of the worst November, December no peak 20% market decline in Asia, and we always fly some lower number of hours in the first quarter anyway because of maintenance and customers just flying to minimums. And I did reference one customer because they put this information out publicly, which is Qantas starting in Vietnam and now announcing Dallas. So we are seeing -- generally we are seeing a ramping up as we go month to month.

Okay, all right. And then Jason, your comment on maintenance, I'm sorry, I missed the third quarter number for maintenance.

Yes, so we said, John, we're basically indicating that we expect two-thirds of the remaining 55 to $60 million on maintenance in the third quarter. So weighted -- consistent with prior years, weighted towards the third quarter. And again, it's so we can have the fleet sort of maximum availability in the fleet of Q4 for peak.

Okay.

Our expectation is -- it's predominantly skewed towards Q3 and not Q4.

Very good. Nice quarter, guys. Thanks for your time.

Thank you, John.

Thank you, John.

Thank you. Our next question comes from the line of [Michael Baird with Wolf Research]. Please go ahead.

Good morning, guys.

Good morning.

Quick question thinking about the sensitivity, I think this year you said previously it was $5 million to $7 million per unplaced aircraft with ACMI and two of those ended up in commercial charter and there's one up for renewal I think in September. As I think ahead to 2010 now that we have a fairly clear earnings base established for 2009, at least based on your guidance, can I do a similar kind of a sensitivity and say assuming these three unencumbered aircraft are placed in 2010, there's that same $5 million to $7 million sensitivity tail wind in 2010? And then as a follow-up, what number of aircraft within ACMI are up for renewal in 2010?

So, Michael, it's Jason. I'll start with the last part and then I'll work backwards. We've indicated for 2010 that it's an average year for the Company and our average year is three to four aircraft coming up for renewal. So we expect -- 2010 is a consistent year in that regard. The guidance we gave in 2009 was, you correctly stated, $5 million to $7 million hit per plane. There were a total of four aircraft, and just to be clear on 2009, four aircraft up for renewal. Three of those aircraft came off of contract April 1, and so that effect was really felt beginning at the start of Q2. And then we have the one aircraft which was towards the end of the year. We've already talked about that aircraft, which is still in process of negotiations for renewal.

So the real issue around your question, and I'm going to be careful not to give you a specific guidance for 2010, but is really the timing of the return of the aircraft and in the worst case, where those aircraft are not renewed. And I think -- as we said, we're in the process of working for renewals on the aircraft. It's early for us I think to be giving a definitive view right now for 2010, and we won't. But I think generally the 2010 aircraft, if you were modeling your worst case scenario are rolling off slightly later in the year than they were in 2009. To answer your question directly on 5 to 7, there's a little difference in timing, but we're just going to be careful at this point not to get too specific about 2010 yet.

Just trying to get a handle. Then the second question, with the DHL block -- who shares in the -- in other words, how do you benefit from the back haul on that? I assume most of the capacity is utilized 80% on the head haul US to Asia, but is that capacity completely underutilized, unutilized on the back haul and who benefits, should that utilization start to improve in 2010?

Yes. Well, I think you're getting back to the nature of the transaction, which we have talked about. But for I think the easiest way to think about it is our transaction with DHL via Polar is essentially an ACMI transaction, which is why we call it Express Network ACMI. Atlas Air Worldwide Holdings at the parent level extracts its economic rent through an ACMI agreement between Atlas and Polar. Polar then serves DHL. So P&L in the actual operation at the aircraft level, load factors, yield, fuel, really is for DHL.

Front haul and back haul, no difference there?

No difference.

Okay. Thank you very much.

Okay.

Thanks, Michael.

Thank you. Our next question comes from the line of Charles Rupinski with Maxim Group. Please go ahead.

Thanks a lot. All of my questions are asked and answered. Good quarter.

Thank you.

Thank you.

Thank you. Our next question comes from the line of Helane Becker with Jesup & Lamont. Please go ahead.

Thank you very much, operator. Hello, gentlemen.

Hi, Helane.

Couple of questions, first, I was kind of surprised that with the decline in the number of aircraft wasn't really a commensurate decline in the salary, wage and benefit line. So maybe you could talk about that. And then the second question I had for you is with the increase in cash balances, I thought there would have been an increase in interest income. And we didn't really see that. And the third question is there have been reports lately that you guys are negotiating with the US-Africa Group to pick up the World Air, Houston-Africa service beginning in May of 2010. And I was just kind of wondering, it's been a long time since you've talked about having passenger aircraft again. Is that something that you're seriously considering, or are they using you more as a stocking horse? Thanks.

Okay. So Helane, Jason. To cover the first question, in terms of the salary line, the utilization, if you look at the utilization on the fleet really wasn't significantly different relative to the first quarter. We had the same number of aircraft operating. So from a salary and wages standpoint quarter over quarter, we've got, we've got consistency there and I think we expect to continue to see a fairly consistent salary line. And going forward I think there is some efficiency improvement in peak season in Q4, but generally that's our expectation. So in terms of salaries, I think the sensitivity on the crew cost is not direct -- there's a bit of friction related to ours and you can't take crew costs out efficiently by the hour. It tends to come in a step function. And the types of changes in utilizations we've seen have not driven material changes in the salary line. That's the answer to the first question. The second question?

Interest.

Interest income, Yes, the interest income, I wish we had -- I think we, like a lot of other companies, are seeing a pretty bleak environment for the yields that we can achieve on cash balances. I think we are currently in effectively government securities with our cash. We're reviewing some alternatives that could drive a little more yield, but I don't want to overstate that. The yield growth that you can achieve by moving into commercial and money market paper is very, very skinny right now. So unfortunately I think compared to prior years, certainly the yields are down significantly and I don't see that changing in the immediate term in terms of the yields on the cash.

And this is Bill. I'll take up the question on Africa or passenger ACMI. Some years ago, I think back in 2005, maybe still in early 2006, the Company had talked about a passenger ACMI and the idea at that time, just to clarify the history, the idea at the time was working with Airbus to put together a passenger ACMI operation using the A 380. The underlying idea would be there would be some number of carriers who only needed one or two of those aircraft in their operations and that an ACMI platform where we could aggregate several carriers have a slightly -- have a fleet that would be of economic size could have been a business to pursue. I don't think it's a bad idea, but with everything that's happened first with the A 380 and now with just demand overall, that idea is -- the 380 idea is certainly on the shelf.

What you've seen in the press and even some DOT filings, we have entered into an LOI with the carrier whereby we would provide CMI, the crew, the maintenance, insurance and all of the operations for this Company on a passenger service. But I want to add, as an LOI, it's not a contract yet. It's certainly not a stocking horse. If we conclude a contract, we'll ramp up this operation. It would be attractive for us to do so, because it leverages our core competencies of 747 and C and M operations, and it's a non-asset play from our side. So there's revenue and earnings without having to out and acquire more assets.

Okay. So I understand this correctly, you would not have to buy the 747 that they are looking for. They would give you the plane and you would just provide the CMI, as you just said?

Yes. We will not be going out and buying an aircraft to fly for the customer.

Okay. I want to make sure I understood that correctly. Okay. Thank you very much. I appreciate your help.

Thank you.

Your next question comes from the line of Steve O'Hara from Sidoti & Company. Please go ahead.

Hi. I just had a question about the charter segment, in terms of the direct contribution in the first quarter versus the second quarter. It was lower and I'm just wondering if that was due to maintenance or what kind of drove that?

Steve, it's Jason. We did have incremental maintenance activity, as you know, in the quarter that did burden all of the segments including commercial charter, and the direct contribution in that segment is $2.5 million in Q1 and changes in maintenance can drive swings, significant swings in that. So I think that would be the single biggest driver quarter over quarter.

Okay, and then I guess I was a little surprised by the increase in that line given all the negativity out there. I mean is there anything besides the South American operation that's kind of driving that?

Well, there are some other factors. Certainly we have the South American operation and we are selling more charter activity in Asia than we had in the first quarter, just by way of example. One of the, one of the markets we've pursued historically is what we call the one-way charter out of Asia. So we have a military mission to the Middle East on a one-way basis with the air mobility command. Then you pick up a charter in Asia and fly back to the US. That, that market segment, or that market opportunity was virtually dead in the first quarter. We had none of it. I think maybe we had three charters and that would have been a lot.

That market's actually come back. And so we've had, we've had both these one-way military charters and some increase. I don't want to oversell it, but some increase in charter activity from Asia back to North America because of some new product that's being developed and coming into the market. And some examples of that are the, the competitors to the iPhone that LG and Samsung and others are pushing into the market right now a fair amount of that flew in charters. Ours and others as well.

So we're starting to see this improvement in activity. APA, the Asian Association of Asian airlines has talked about that. It's it's gradual, but we're starting to see some activity, which led us to make some of the comments we've made in the call about some anticipation of a peak. How high, how broad, but there seems to be some anticipation of a peak, forwarders are telling us that's their expectation and nobody's gone back to the peak of 2007 or 2005, but more life than we certainly saw last year.

Okay, and then just to kind of follow up on Helane's question on the salary and wages when do you see that step function that Jason was talking about? Assuming the same fleet, at what block hour per month do you see the step function up or down?

I think, Steve, it's probably fair to say it's kind of units of aircraft. I think if we're talking about units of aircraft coming in or out of the fleet you'll see -- but again, you have to recognize that when you're taking out aircraft, and the action that you need to take to save salary costs is furlough, and in the case of our crew costs the nature of the contracts is you furlough from the bottom of the seniority list, so there is some friction that airlines tent to have as you shrink the fleet size. And I don't overstate that, but it's certainly some friction on the downside. As I said, if you're looking at sort of modeling that cost, it's probably correlated highly with the fleet size.

Okay, great. Thank you very much.

I think just to just -- you look at just on a full-year basis, salary, wages and benefits from, in 2007, you had about 251 -- $250 million of salary, wages and benefits. 2008 we reduced the fleet and we are down at $222 million, or about an 11% decline. And as you look on a year-over-year basis, you will see those numbers come down in 2009 over 2008 and you'll see we are taking the costs out.

Bill, there's one other thing I should make sure people understand as well -- Steve, just to reiterate, we did consolidate GSS in the second quarter. There's about $3.5 million of salary expense that's reflected in the second quarter related to that consolidation. Again, not a bottom line effect to the Company, just a presentation effect to the Company and then the other point we should probably point out on salary is we did a significant amount of fleet change in the fourth quarter. As you remember, we took seven classics out of the fleet and that drove a lot of training activity, because we have to retrain crews between the 200 and the 400 and that training activity really continued into the second quarter and it's been another kind of friction on the reduction. So I think it's fair to say going forward, we'll have I think the $3.5 million sort of increase related to GSS is probably a fair proxy going forward, but otherwise in the second half there should be some improvement on salary line.

All right, great. Thanks. That's helpful.

Thank you, Steve.

Thank you. Our next question comes from the line of Howard Rosencrans with Value Advisory Services. Please go ahead.

Yes, hi, guys. Thank you. Just so I have clarity on your guidance, if I remove the $14 million from the pretax, the second half will look like the first, just for quick clarity on that, on a pretax basis. To follow up that, in, in the fourth quarter we go to a run rate in theory of, of 1100 units, down from the 14 or 1500 that we've been experiencing in the last two quarters. If we have a few units come off, if we have a few units that come off theoretically, one in the second half and possibly a few more in the first half as you hold out for an upturn, what creates 2010 being possibly a higher year than, than 2009? Seems to me you have a lot of head wind. If you could just talk globally about what would possibly -- positively influence 2010 to make that not become a reality? Thank you.

So, Howard, in answer to your first question, I think you do understand the outlook that we've provided correctly. And I think that the one thing we have to I think we're coming back to -- we've been careful here and I think it's early for us to be being definitive about 2010 from an outlook standpoint. Obviously the fleet, the timing of any fleet decisions in or out of the fleet will have a significant bearing on that. But also remember that we are a Company with a fairly high degree of operating leverage and really the opportunity for us to really drive improvement comes from getting the the utilization up in the fleet.

And as Bill has said previously, Q2 was a fairly low utilization of the fleet. We saw some sequential -- I'm sorry. Q1 was a very low utilization of fleet. We saw some sequential improvement in Q2, but there's a lot of opportunity for us if we can get the utilization of the fleet up, and as Bill indicated, generally we view, hopefully, 2010 as a more positive macroenvironment than 2009 is being, and I think we're certainly getting more comfortable with that view. So we've got the big picture fleet questions, and we've also got the utilization issues and I think we'll begin to give you more color as we go into the third quarter here around that outlook.

The business moved, just for clarity, in terms of your reporting, the dry lease moved to basically -- I know it was sort of ACMI anyway, but you're now classifying that as ACMI?

That's correct, Howard. We are consolidating the results of this entity that had previously been accounted for in the equity method.

The commercial charter business, it looked like you had, and I apologize if somebody addressed this before, maybe I didn't hear it. You did $36 million the quarter in that business, so that's a darn quarter. I thought that -- maybe you could just give us a little more color on that, I apologize if you addressed it already, I must have missed it.

Yes, Howard, this is Bill. In the fourth quarter, and in the first quarter, we were just raising big question marks in our comments as were the questions from you and the other folks that follow us, so what's that market going to look like with the substantial decline in demand? And what I, what I had mentioned earlier was that there are some new product introductions combined with the reduction in capacity. A lot of capacity has come out on a year to date basis. 16% has come out in the Asia markets. And there are these new product introductions. Some markets that are underserved relative to the capacity that exists today, and so we found some, hopefully not green shoots of demand in the commercial charter market.

You said new product introductions?

Yes. As I mentioned a moment ago, in particular you've got hand phones that are iPhone competitors coming out of Samsung and LG and that are being produced in Korea in particular, and to China and some extent that are being chartered and flown into the US to hit the market.

Okay. And so your outlook for that business for the second half, if you were to break out that segment, is that -- would that segment be expected to be consistent on the commercial charter business with where it was in the first half?

Well, as far as we can see today, it's -- it is difficult to predict, but I think it's going to look like first half or maybe a little better. And the caveat there is just what does this peak, if a peak materializes, looks like. That's still a bit of a guessing game.

Okay. But you're referring to the commercial charter segment, just for clarity?

More clarity.

Okay. Thank you very much.

Thank you.

(Operator Instructions). One moment, please. And at this time, management, we have no further questions in the queue. I would like to turn the call back over to you for any closing remarks.

Well, thank you, operator. I would like to thank all of you for your interest in Atlas Air Worldwide Holdings and your participation today. I think we've had a good call and a good set of questions and we look forward to speaking with you again soon. Thank you.

Ladies and gentlemen, this concludes the Atlas Air Worldwide Holdings, Inc. second quarter 2009 results conference call. If you would like to listen to a replay of today's conference, please dial 303-590-3030, or 1-800-406-7325 followed bypass code of 4125872. ACT would like to thank you for your participation and you may now disconnect.