Atlas Air Worldwide Holdings Inc (AAWW) 2009 Q3 法說會逐字稿

Ladies and gentlemen, welcome to the Atlas Air Worldwide Holdings third-quarter 2009 results on the 26 of October, 2009.

Throughout today's recorded presentation all participants will be in a listen-only mode. After the presentation, there will be an opportunity to ask questions. (Operator Instructions).

I will now hand the conference over to Atlas Air. Please go ahead.

Thank you and good morning, everyone. I am Ed McGarvey, Vice President and Treasurer of Atlas Air Worldwide Holdings. Welcome to our third-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 some non-GAAP financial measures. You can find our presentation on the most directly comparable GAAP financial measures calculated in accordance with Generally Accepted Accounting Principles and our related reconciliation in our recent press releases, which are posted on our website, www.AtlasAir.com.

You may access these releases by clicking on the link to financial news in the Information section of the website. At this point, I would like to turn the call over to Bill Flynn.

Thank you, Ed, and welcome, everyone. We are very pleased to have you with us this morning.

Our third-quarter earnings represent a sharp improvement over our results for the third quarter of 2008. Like our previous quarterly results this year, our third-quarter earnings reflect our successful efforts throughout 2008 and 2009 to transform our business, our operating cost base and our fleet.

Jason and I are very pleased to discuss our latest results with you today, and we're glad to share our outlook for the fourth quarter and for 2010 with you.

Before we do, however, I want to note our second announcement this morning about our planned public equity offering. Due to restrictions under the securities law, we will not be discussing our equity offering on this call, nor will we be able to take questions on that topic during the question-and-answer session. We appreciate your interest in Atlas very much, and we appreciate your understanding about the restrictions that we face in this regard.

Our third-quarter results, as well as our outlook for the fourth quarter and for 2010, reflect the strategic and operating actions that we have taken to transform our business and to reduce our commercial and operating risk. In that light, we are pleased to advise you that we have an agreement to renew the contract on the ACMI aircraft that was up for renewal in the second half of 2009, and that we have entered into a long-term contract with a new customer, SonAir, to provide premium passenger service on an outsourced CMI basis.

It is important to note that this new service, which is expected to begin in the first half 2010, is consistent with the outsourcing business model under which we typically operate. The key difference is the A in our usual ACMI arrangement. Under this exciting expansion of our core outsourcing business, the customer owns the A, or the aircraft, so we eliminate the risk and associated cost of asset ownership and any strain on our balance sheet leverage. All that we are providing, based on the quality and reliability of our services and operational excellence in flying the 747 freighter, is the C, the M and the I for crew, maintenance and insurance.

Turning back to the third quarter, our current performance is being 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 our ongoing proactive efforts to upgrade the efficiency and average age of our fleet.

Our results and our outlook also reflect tangible signs of positive improvements in the market. We are encouraged by a further improvement in our ACMI customers' utilization rates. During the third quarter, our ACMI customers flew at 97% of their minimum block hour levels, up from about 80% in the first quarter and about 90% in the second quarter.

We're also encouraged by a strengthening in charter yields, which has continued into the fourth quarter. In addition, we are encouraged by trends in the global air freight markets. Monthly international air freight traffic volumes through August are down on a year-over-year basis, but they have been trending up on a sequential basis since early in the second quarter. We also continue to see retirements of aging and inefficient capacity from the market, which is helping to improve the balance between traffic and capacity, particularly in the Asia central markets, where our customers focus.

We expect that substantially more of the remaining 78 Classic freighters in service in mid-October will come out of the market in 2009 and beyond. We believe that most of these aircraft, once removed from the market, will not return to service when the eventual recovery [becomes], because of their age, maintenance and other operating costs and relative inefficiency.

In a recovery scenario, any improvement in demand could have an early and meaningful impact on the utilization of our aircraft and on our bottom line.

I will talk more about our framework for our fourth-quarter 2009 and 2010's earnings later in the call. First, I would like Jason to provide you with some additional perspective about the improvement in our third-quarter results and financials. Jason?

Thanks, Bill, and good morning, everyone. As Bill noted, the significant increase in our third-quarter earnings reflects the strategic actions that we have taken to strengthen and transform our business.

Our third-quarter net income totaled $14.7 million or $0.70 per share. In conjunction with the deconsolidation of Polar Air Cargo Worldwide from Atlas Air Worldwide Holdings in October of 2008, total operating revenues in the third quarter decreased to about $245 million.

Our latest results compare with net income of $5.2 million or $0.24 per share for the third quarter of 2008. We achieved a strong year-over-year increase in our earnings despite a challenging though improving business environment with international air freight traffic volumes down 16% since the end of April 2008, when the fall in demand began; a 13% reduction in the size of our operating and dry lease fleet; and a reduction in AMC charter revenue and contribution, mainly reflecting a lower fuel price component in the AMC charter rate.

Total direct contribution by our reportable business segments improved to approximately $53 million in the third quarter, an increase of nearly $12 million compared with the third quarter of 2008. The increase was driven by our express network ACMI service, which added to our ACMI results while eliminating the approximately $14 million of scheduled service losses that we incurred in the third quarter of 2008.

While our AMC results for the quarter reflected the impact of a lower fuel price component in the AMC charter rate, they benefited from a continuing higher level of AMC demand in 2009 than we had originally anticipated.

AMC volumes averaged close to 1700 block hours per month during the quarter compared with an average of 1,450 block hours per month in the third quarter of 2008.

Similar to the first six months of 2009, AMC demand in the third quarter was supported by the level of US military operations in Afghanistan.

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 35% for the quarter. We anticipate an income tax rate of 41% for the fourth quarter and a rate of 40% in 2010.

Turning to our balance sheet, we remain focused on liquidity and leverage. We ended the quarter with cash, cash equivalents and short-term investments totaling $487 million compared with $411 million at year end 2008.

Our balance sheet debt totaled approximately $637 million on September 30. For the first nine months of 2009, our capital expenditures totaled approximately $27 million, which included about $9 million of capitalized interest related to our Boeing 747-8F order.

Our cash capital expenditures for the fourth quarter of 2009 are expected to total approximately $30 million to $35 million. This includes approximately $15 million in aircraft progress payments due in the fourth quarter.

As we proceed into the fourth quarter, our active fleet currently totals 26 aircraft, comprised of 22 747-400s and four 747-200s. In addition, we have temporarily parked three other 747-200 freighters, pending an assessment of demand in 2010.

In the event we displace 747-200s due to market demand, we will review the adequacy of the carrying values of those aircraft at that time. As we have noted before, all of our 747-200s are completely unencumbered, and we will continue to manage them opportunistically going forward, principally in service of our military and commercial charter customers.

To recap the deployment of our 747-400 freighters, 17 continue under ACMI contract; three are deployed in the AMC and commercial charter markets; one serves as our maintenance cover in ACMI and serves in charter when not required in maintenance coverage; and our only 747 converted freighter is allocated to our commercial charter segment, where it is profitably deployed in air cargo service in South America.

We continue to focus on the introduction of our new Boeing 747-8 freighters into service in late 2010. The 747-8F expected to deliver market-leading performance in terms of payload, fuel efficiency, total cost per ton mile, and environmental compliance. We are well positioned as the only outsource provider with this type of aircraft on order, and we expect to realize meaningful earnings and cash-flow benefits from these 12 new aircraft.

We expect that these aircraft will generate levered investment returns that exceed 20% and will generate meaningful earnings growth over our 747-400 aircraft in ACMI, which, over the last four years, averaged approximately $6 million annually per aircraft on a pretax contribution basis.

It is important to note that we will incur on-boarding costs related to the introduction of our 747-8 aircraft throughout 2010, but we don't expect any meaningful contribution from the operation of the aircraft next year, given the expectation that deliveries will begin late in the year at the earliest.

We are in continuing discussions with Boeing and have agreed on the rescheduling of three of our aircraft into 2012 and 2013. As a result of our agreement with Boeing, our future aircraft purchase equipment commitments, including arrangements for spare engines, flight equipment and other related items, will now be spread out more evenly over the next few years rather than concentrated in the 2010 and 2011 timeframe.

For example, progress payments of approximately $15 million in the fourth quarter compare with a previously scheduled total of $48 million.

In addition, total PDP payments before any other financing activity now amount to $118 million in 2010 compared with $375 million previously.

Further out, total PDP payments are approximately $226 million in 2011 and $127 million in 2012. We recognize the significant capital commitment required for our new aircraft and the impact they will have on our balance sheet leverage. While we plan to use the free cash flow generated by these new assets to delever, we also recognize the need to remain focused on the prudent management of leverage as the aircraft are introduced.

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

Thank you, Jason. The transformation of our business has improved our core earnings from operations and reduced earnings volatility, even as we have reduced our Classic fleet.

Looking at the fourth quarter, we expect the ongoing improvement in global airfreight supply and demand to continue. That should benefit ACMI customer utilization levels and support charter yields.

In AMC charter, we expect that military demand will average about 1100 hours per month during the fourth quarter. That means that full-year AMC demand will total about 17,800 block hours.

Based on the improving trends that we see in the commercial markets and on the level of AMC charter demand that we see, we expect that our fourth-quarter net earnings will exceed $18 million. We also anticipate that our net earnings in 2010 will be consistent with our currently expected 2009 earnings level, excluding one-time items from 2009.

Earnings in 2010 will continue to benefit from the commercial and operating transformation that we have achieved. Our outlook for 2010 is based on encouraging trends in airfreight and in the broader economy, but also recognizes some continuing uncertainty regarding the pace of economic recovery.

In ACMI, assuming a modest pace of recovery, we expect that 18 of our 747-400-F aircraft will be operating in our wet lease segment by year end 2010, up from 17 in the fourth quarter of 2009.

In our AMC segment, although our visibility is limited, we currently expect demand to remain consistent with the expected full-year 2009 levels.

We remain focused on cost and productivity enhancement and we will continue to benefit from the commercial and operating transformations that we've achieved. Moreover, should we see a more substantial economic recovery, the operating leverage in our model should drive additional earnings growth for Atlas. We continue to execute on the initiatives that will drive future revenues and earnings.

As noted at the beginning of today's call, we announced an agreement on Friday to commence outsourced premium passenger aircraft operations in 2010.

This opportunity to expand our outsource operating business model, as well as adjacent dry leasing opportunities in our Titan subsidiary, will provide additional avenues for future Atlas growth.

With that, I think it is a good time to take some questions. As noted at the start, we will not be able to respond to any questions about our equity offering on this call. Operator, may we have the first question please?

(Operator Instructions).

Operator, are we having any technical difficulties?

Thank you for your patience, sir. We are just about to put the first question through.

Thank you, operator.

Bob Labick.

Good morning. Congratulations on a strong quarter.

Good morning, Bob. Thank you.

You mentioned a couple of things that were interesting in the quarter. Most recently, on Friday, you had announced the SonAir deal and you talked a little bit about it. I was hoping you could give us a little more color and maybe explain the risks of the contract to you now since you don't have the aircraft but you are doing the maintenance.

How should we look at this on a go-forward basis and model it? Will it be part of ACMI or can you just talk more broadly about where this will fit into the P&L and potential contribution you might expect in the future?

Sure, Bob. It's Jason. So let me give you where we stand today. We are thinking of this as ACMI in terms of the classification going forward. We do have some time here before the service starts, so that is our preliminary read on this in terms of how it will be presented.

In terms of modeling, you want to think of this similar to our core ACMI business on the 400 freighter fleet. Effectively, we are providing the same outsourced operating services that we would provide on the 400 freighter platform; it just happens to be in passenger configuration.

From an economic standpoint, I think the simplest way to think about this is this is effectively economics that are similar to the ACMI business in terms of the contribution that we will generate up on the business.

It's two physical aircraft. It is effectively one aircraft worth of flying. And from our standpoint, from a modeling standpoint, we think of this similar to the contribution we generate on a 400 ACMI unit in ACMI -- or on the freighter side, Bob, which you can really get referencing back to our 10-Q or 10-K. So that is how you think about the contribution.

From a cost standpoint, I think the unique feature of this contract is that we're not bearing asset risk. So that is obviously a positive feature if we can -- when we talk about sort of ACMI-type contribution without the asset risk for the aircraft.

Okay, great. That was very helpful.

In the release, and then Bill just mentioned at the very end of the call there, expected contribution and growth from Titan in 2010. Is there anything in Titan right now that is contributing, or does this mean that you have some plans already put in place that would begin there? Or could you just elaborate on that?

This is Bill Flynn. Certainly as we have said about Titan on our prior calls, we're going to look at growing that business opportunistically, the dry lease business, be it aircraft or be it engines. We think that the market is at a point where there are some opportunities that would make sense for us. We do not have aircraft in Titan as of this moment.

Okay, great. And then last question and I will get back in queue. You spread out the payments and it sounds like the delivery is scheduled for the 747-8Fs. And I guess if I was listening closely, you said you might expect to begin now the current schedule at the end of 2010.

If we're looking out, it's a 24-month period or 36-month period, and what is the kind of spacing that is currently in place? I know there's always potential delays and things will always change in your end projections, but if you did it now, how would we expect these to roll in from late 2010 through 2013, just so we can get a sense looking forward?

Yes, thank you, Bob. So there's a couple of points on the discussion to the shipment 747-8. First thing, as Jason noted in his comments, from the schedule that we have from Boeing today, we're looking at potentially first deliveries late in 2010. Now we're going to bear some costs prior to the deliveries because we'll need to be prepared to onboard the aircraft, begin to hire and train crew, make other investments in inventory and just general network on-boarding expenses.

We've also announced that we have reached an agreement with Boeing to delay three of the aircraft into 2012 and 2013. But what we have not agreed with Boeing is the firm delivery schedule on the other nine, so that is the process that we're working through. And as we firm that up and agree with Boeing on specific dates, then we'll certainly have to discuss that in more detail with you and with our customers.

Okay, great. Thank you very much.

Alex Brand.

Let me start -- I guess I want to focus on guidance for 2010. So you have got 17 ACMI now, 18 by the end of next year; so not only are you assuming an additional aircraft, but that you renew whatever comes up next year. How should we think about your confidence in the renewals? And is there a new customer that you know about that accounts for the 18th, or whatever you can tell us about that would be helpful.

A couple of thoughts. As I did mention, first of all in my comments here, the aircraft that we did have up for renewal this year has been renewed. And in fact customers talk about that themselves in their own press releases.

In also earlier calls, we've talked about having some number of aircraft typically available for renewal or up for renewal, or extension, I should say, in any given year.

We gave a lot of information out in 2009 on specific renewals. So what we're saying here I think are a couple things.

One, we wanted to give certainly some guidance on the number of aircraft that would be in ACMI, and you have a view as to what that is worth from a contribution level. And, the numbers that we are talking about or the outline that we are providing for 2010 conveys our confidence that we will have these aircraft placed. That is in the numbers.

Yes. And I think, Alex, the other point we should make in 2010, is the new flying we have, which is the SonAir contract, understands that that is not a gen 1 start. We are targeting to start that early in the year. And obviously we will have some costs to onboard the passenger operation. So I mentioned on the prior question that we've got I think a fairly good -- and we're very happy about the contribution of that business going forward. The full-year effect is really the driving value in 2011 and 2010 has this sort of part-year effect.

Okay. When I think about the guidance for 2010 as it relates to charter, how are you thinking about that? I guess I'm not clear on -- you said you have four 200s now, three parked. So that is the seven you had, three are parked right now. So as I think about charter for 2010, you're assuming the four 200s; and then how are you thinking about pricing and demand? I guess I'm trying to gauge how conservative your guidance is for next year?

So, Alex, I think it is fair to say we are not assuming a robust turnaround in the economy. We have seen charter pricing that has rebounded substantially in Q4 here, and you saw the results in Q3 as well. And I think there is a lot of factors driving that. Our focus is where will the environment be in Q1. I think we are taking a fairly cautious approach to that.

And the other point I will make is just capacity constraints. We are waiting to make an assessment of the Classic fleet and some of the decisions that we'll look to there later this year. And if commercial charter demand stays at the level or even improves, I think we will need to make some decisions around potentially bringing some more capacity online. I would say that our forecast is not assuming that sort of robust scenario, where we would keep capacity to fly that business, and where you see continuing strength in the yield. So we are hopeful there is some upside to that, as we said earlier, to the extent that the market improves at a more significant pace or sustained pace.

And then the other third variable there is, of course, military demand, which we have said or I commented we are looking at something very similar in terms of levels. But we don't know what the administration's decision is going to be and what troop deployment will look like, and our other troop movements around the world because it is not just -- our military demand around the world is just not Iraq and Afghanistan. So that is the other variable that is out there as we think about 2010.

It seems like it is strong now for peak, and so, are the three parked just because they came up for maintenance and you weren't prepared to make the decision on investing in those aircraft right now?

Yes, they were up against heavy air frame events, Alex. We have behaved the same way we have done previously to say we're looking at the cash return on that investment. And without better visibility into the 2010 environment, we are taking a cautious approach.

Just one more, if I could, then. As I think about the opportunities that you have out there, CMI is obviously something you are at the very beginning stages of, and that has possibilities. That requires relatively little investment. And you talked a little bit to Bob's question about Titan.

What is out there to look at? Is the used aircraft market becoming much more attractive? I think this is the first time I've heard you say an actual number for an IRR threshold. Are there things out there that are starting to hit those thresholds that you guys might be able to take a look at?

First of all, you started a very important point. It is the IRR threshold, and so we're very prudent about our use of capital and investment. But we do believe that there are opportunities in the market that meet or exceed that threshold. And we're seeing that certainly in the dry leaves arena as well as in our core ACMI business.

Valuations have fallen and continue to fall. There is a re-fleeting requirement in the midsize and smaller freighter. As the markets have improved since the April/May timeframe in terms of overall demand, both freight and express -- and in express, it really had not contracted as much as heavy freight -- we think there are opportunities to invest; put assets to work; always mindful of a return threshold that we operate with, to make sure we are good stewards of capital.

All right. I appreciate the time, guys.

Helane Becker.

So this is my question with respect to the numbers for the fourth quarter and the outlook -- maybe the outlook part; maybe you can't really talk about this. But how should we think in terms of rate per hour on the contract renewals? Is it consistent with the existing rates, number one.

And number two, my second question is with respect to the passenger CMI business for next year. I know it is coming in kind of mid of 2010. Can you just give us a sense of when it comes in, because I don't think you said that yet?

Thank you, Helane. Bill Flynn. Yes, first question on block-hour rates. Our renewal rates are consistent with the block hour rates that we experience today.

And as far as pack CMI, we said first half and kind of what is variable in the first have is the aircraft themselves are undergoing refurbishment. They are being essentially upgraded to a premium first class and business class service with some coach capacity. As Jason pointed out, we don't own the aircraft; the aircraft are owned by our customer, SonAir, so we have no risk there. But just that there could be some unanticipated delay in the final refurbishment of the aircraft, and there are some approvals as well; we're saying somewhere in first half, I know that is a six-month kind of a window. But we're just really not more specific at this point because of the factors of maintenance refurbishment and maybe some approvals that we're going to need to get to take and tie together. We will have certainly better visibility as we come into the full-year earnings call early in 2010.

Okay, all right. Well, that's fine. I'm just thinking your guidance for 2010 has to include something for that. So I know Alex asked all those questions about next year, and I know there's not a lot you can say, but --

Helane, just to clarify on that point, as I said to Bob on the first question, we have given the framework to say think of the contribution on this flying consistent with the contribution on our ACMI 400 freighter flying, but not a significant contributor to 2010 because of the combination of the timing of the startup and some of the onboarding costs we have upfront. But a very -- we think a very attractive business going into 2011 from a growth standpoint.

Right. Do you know how many flight attendants you're going to have to hire, how many crews the planes will take?

Well, we certainly have some idea of that. We haven't discussed that specifically. But I think getting back to Jason's point, first of all, the margins and the contribution we expect to earn are going to be consistent with what we experienced in ACMI today.

Right.

It is two aircraft, one operating more as a hot standby. So we may be something north of 50 or 60 flight attendants. We'll need to finalize the schedule, of course, with the customer.

Right, right, because this is ex-world air flying. And I know that that level of service is supposed to be very high and very first class. But the customer is compensating for that, so that is not a problem.

Well, that's why we're excited about it. In the first instance, we don't have to go our and invest in aircraft. And then in the second, it's at levels that are consistent with what we have for CMI. It is a charter operation; it's not open to the general public. (multiple speakers)

Okay. I know can't say anything about the deal, but can you say the when of the deal?

Which deal now?

Your timing of your common stock offering that you announced today. Can you say like the, when we should think about it coming to market?

Yes, I think, Helane, we will refer back to the announcement that went out this morning that announced that it was launched today. But I think the details -- all of the details in the release are the details we can talk about, and there really isn't much more than that.

Okay. Thank you.

David Campbell.

Thank you for taking my question. I'm a little surprised that there isn't more leverage in the fourth quarter from earnings. What you're saying is the earnings will be up from the third quarter, slightly, it looks like, but those demand changes are huge. I mean you got peak season pricing for everything in the fourth quarter, and of course increasing demand relative to the third quarter. So, what happened to the leverage? Are you just being -- or you just don't know about December or something?

Well, I think there's a couple of things, David. The core of our fleet is in ACMI, which is multi-year contracts, and the strength that we had in first, second and third quarters reflect the fact that we bill customers on minimums. And so, in that market, we are not pricing retail and writing retail rates. That is the business we exactly got out of when we converted Polar to express network ACMI. So what we've talked about in prior calls is that our earnings on a quarter-to-quarter basis would typically be flatter because of the contract nature of the business. And that is where essentially 75% of the fleet is deployed, and that gives us the earning visibility and the predictability.

Now, we have had high levels of AMC flying in the third quarter; slightly lower levels of AMC flying in the fourth quarter based on our visibility of the military demand. And so about 8% or 9% of our capacity is going to be flying commercial charter or so. That is where we can certainly take advantage of higher pricing that exists in the market and we are. And that, to some extent, is what is reflected in the outlook that we have given and the growth in earnings from $0.70 a share or so in the third quarter to -- prior to the offering on a constant number of shares -- looks something like $0.85, $0.86.

And Bill, to your first point, I think, David, it is important that the operating leverage in our business is driven by customers flying above minimum guarantees. And as we said, this year, 20% below Q1, 10% below Q2; we expect them to approach minimum guarantee levels in Q4. But again, I think you have to put in context here we're not talking about customers flying above those minimums, which is really where the operating leverage exists. And as we look forward to '10 and '11, we're hopeful that a real pace of recovery here will drive back to that normal state of 5% to 7% above minimum guarantees, which is typically where we like to operate and typically where our contracts operate in the ACMI space.

But they will be flying above minimum levels in the fourth quarter?

I think our view would they will be slightly flying at 2% or slightly above, but not materially above, David. Again, coming back from a long ways from Q1 and a very positive trend. But we are not guiding here that they will fly meaningfully above the guarantees.

Right, right. And the increasing demand you see in the freight market, is that pretty match continuing in November in your opinion, or it will continue in November?

Yes, it has, and we made a couple of comments to that point, David. First of all, we're seeing -- well, in the commercial charter market, we're seeing stronger rates, and we see that going forward and continuing in October and into next month and in the fourth quarter.

We take advantage of that, as I've said, in the percentage of capacity that we have in charter markets, the 8% or 9% that I said.

But the more important I think indicator there is a strengthening market, strengthening yield, improving overall conditions, are the kind of external conditions we need to place our aircraft in ACMI, retain and grow our customers in ACMI. So, while that is not our business directly, it is a key indicator for us as we think about the business going forward.

Right, okay. Thank you very much.

Jeff Hoffman.

Thank you very much. With the push-out of the new deliveries, has this changed your thinking in terms of your retirement schedule over the next couple of years? And could you just give us an idea where things stand right now, where you think net block hour changes are in '11, '12 and '13?

Sure. So as Jason pointed out in his comments, we have 22 747-400s, of which 21 are pure 400 freighters and one are the BCF. We have seven 747-200s, three of which we have temporarily parked, four of which we're operating.

Now the key driver on those aircraft are the heavy maintenance investments that are required, the C checks and/or D checks.

And as we talked about in our call earlier, our evaluation on those aircraft really depend on what we expect demand to be for military and commercial charter. And as we get a better sense of what military demand is looking like going forward, coupled with demand and yield and charter, we may choose then to invest in those aircraft, those temporarily parked aircraft, and do the heavy checks or not.

Our future, clearly, is the 747-400 platform and the 747-8. The 200s are really in an end-of-life strategy, and that's how we manage them opportunistically. And so they are not long-term, really not even a midterm component of the fleet, as you think about age and maintenance, and the fact that we will be taking delivery of the 747-8.

In terms of block hours per say, military will be what it will be. We expect high utilization of the 747-400s. As we've talked about on earlier calls, at a minimum utilization of 400 hours a month or so. Our typical contracts for the 747-400s are capable of flying more. The 747-8 can fly in excess of that, particularly in the first five to six or so years of the aircraft, where we have a maintenance holiday, no major maintenance events effectively, D checks specifically. So we will look to even higher utilization as we place those very variable assets with our customers going forward.

And so, we're -- in terms of the number of block hours, we really need to nail the final schedule down with Boeing before we can talk more fully about what black hour utilization and production ought to look like.

And back to the 747-8s, I know you don't have signed contracts to talk about but the range is longer, the up-time should be greater. Are you looking at charging a rate differential on those aircrafts for customers with the 747-8 versus the 747-4s? And do you have a rough idea of what that could be in terms of how we should be thinking about your revenue?

Sure. And I think I will go back to the statements we made in the prepared remarks. We're going to be careful about speaking to revenue rates per hour; just, you understand where we are in the process here and (multiple speakers) in the stage of placing the aircraft. But I think we do want to give you a construct to think about the earnings power of the aircraft.

And I think the two data points we are focused on here is a return on the project from an IRR standpoint in excess of 20%.

And then to help you think about just to ground I think the economics of the contribution of those assets, you look to the contribution of the 400 today, which we've said has averaged about $6 million a plane, from a pretax profit standpoint, per year over the last few years.

And without getting too specific because we want to be careful at this stage, given the commercial sensitivities, we've said that we think the contribution of this asset clearly exceeds the contribution we are achieving on the 400 today.

But you mentioned that's a levered contribution. Should I just assume for my own purposes an 80%/20% leverage?

So to be clear, the contribution would be P&L, so that is sort of the profit pretax net of ownership costs; correct. And I think you should assume probably slightly lower leverage than that. I think the market is probably 65% to 70% and not 80% any longer in terms of total leverage.

Okay. Thanks so much and best of luck.

Thank you.

Steve O'Hara.

Thank you very much. I just had a question on, first, the guidance for 2010. And did you say you're assuming 1100 block hours per month on the AMC charter?

We said 1100 block hours per month for Q4 but that 2010 total AMC block hours should be roughly equivalent with the 2009; and that number is 17,800.

Okay, thank you. And then in the past couple of calls you talked about discussions with a new customer. Can you just say if those are still ongoing and if that is included in your assessment for 18 ACMI planes for next year?

I would say our discussions are still ongoing, and we certainly are considering new customer placement when we give the number 18.

Okay. Thank you very much.

Edward Wolfe.

Can you talk a little bit about the revenue per block hour in ACMI? It is down sequentially but second quarter was very strong. Can you remind what was going on there?

Well, two things I think. A lot has to do with utilization, and we've talked about this on the several calls, that customers pay us at a minimum utilization. So if they're only flying 80% of minimums but paying us for minimums, it certainly -- it arithmetically increases the average block-hour rate.

And the same thing occurred in second quarter, where we were at 90% utilization of minimums. But now in third quarter, we're at 97% utilization of minimum.

So, while the block-hour rate will certainly appear lower relative to second quarter and first quarter, when you look at it historically for block-hour rates for 2008 and even 2007, the number is going to look pretty much in line with those numbers.

But, again, back in those years you were over 100% utilized. So apples-to-apples if I normalize it, it is down year over year. Should I think about it that way?

No.

No.

No, I mean the block-hour rate fourth quarter in 2007 was -- well it's got some 200s in it, so we need to be careful there. But it was around $5900 and around $6100 in Q4 of 2008 and slightly lower in the prior quarter. So I would say that number is relatively flattish over the past several years, and we've maintained our block-hour rate.

And, Ed, just to clarify, mechanically, we have a minimum guarantee. We're being paid for the hours above that guarantee. So your point that wouldn't the rate be lower in periods where we were over flying? It would not necessarily be lower, given we're being paid a rate above those minimums as well.

So in fourth quarter you would expect a similar rate to third or higher?

I think as the customers approach minimums, and we're indicating that Q4, they will be approaching those minimums, the rate will come down -- we expect the rate will come down slightly. I don't think that is a material change quarter over quarter. And then you would stabilize at rates going above the minimum, generally.

Okay. Can you give an update on the letter of interest that you had talked about with the two 400s and then the two behind that with that customer?

Ed, pretty much the same question that Steve just asked a minute ago. Our sense is that we're going to place aircraft with a new customer, and that is in the numbers that we've given. But, we're not -- because of just the competitive environment, not commenting specifically more than that. And that is why we wanted to give you those absolute numbers as part of our discussion here this morning.

So, no update on the ones that you had mentioned before. You said it was an Asian customer, I believe, but that it was two planes; no?

Ed, what we're going to say about our customers are in the numbers that we've talked about so far.

Okay. Just a little more clarification on the passenger contribution. You had talked about that the contributions should be similar and you don't have the plane risk. When you're talking about contribution, were you talking about margin or were you talking about absolute dollars per plane per year kind of thing?

Yes, Ed; to clarify, absolute dollars per plane per year.

Okay. The maintenance expense, at one point for the year, you had given at $125 million, the $135 million. Is that still a good range for the year?

Yes. I think we were -- if you went back to Q2, we were at $125 million to $130 million, and that is still a good range for the year.

Okay. And in your guidance for 2010, you said similar block hours, I believe, relative to 2009. Is it same number of planes; is 31 where you were at average planes for the quarter kind of the same number?

Yes; and I think there, Ed, we've got an assumption that -- the question is really the 200s here and what happens to the 200 fleet. We've parked an aircraft -- we've really parked a few aircraft as they have hit their C-check, the airframe heavy maintenance checks that are due. We are down to four operating now.

Below four units -- and we have another aircraft, which is due for a heavy check here shortly in Q4 -- we start to have to look hard at the operating economics of the fleet.

We've taken what I think is the more conservative view of 2010 in terms of the Classic fleet and assumed that those units have really a very little contribution to total block hours for 2010. I think the outside scenario would be that we got comfortable bringing that capacity online because of a further improvement in the demand environment, and particularly in both AMC and commercial charter from where we are today.

Okay. So is there a range of what that average fleet size might look like?

Yes. So it's pretty simple. We have got, effectively, four aircraft left today on the 200s. They're flying 200 to 225 hours a month today. And if those aircraft were not operating effective January 1, that is your sense of what the maximum downside could be.

Now, that said, I want to counter that, which is if we do see customers continuing their trend closer to minimum guarantees, it will mean quite a bit higher utilization on the 400 fleet. And those are two factors that when you look at year-over-year total block hours, basically we said could come close to negating each other.

Okay, that make sense.

The new passenger planes, when those start up, since they are not your planes, those wouldn't count in the plane fleet, I'm assuming. Would they count as you are thinking about it in your hours? Or would that just be separate somehow outside of the way you're looking at your total hours?

So there is a technical part to the answer. The aircraft will be on our registry because of the nature of the flying and we're flying on the Atlas certificate. So we'll have to think more fully about how we disclose and describe the results from this operation, so that you and the market and our customers can understand it. They will be on our registry. We will have no risk on those aircraft from a financial perspective. But technically from a DOT perspective there would be two more aircraft there.

But they weren't in your guidance of flat hours, I'm taking it, for 2010?

Yes, they were for partial year, correct.

That are or they are not?

They are, and they will be reported in hours going forward, as well, to answer the question on the hours.

Okay. So when you think about that for partial year, you are assuming they are in there half the year or --?

Assume worst-case would be half the year.

Okay. And are there any start-up costs you had mentioned that are significant that we should think about? And when would you incur them for the business?

Yes, they're in the guidance, Ed. We've said that we don't expect the business to be a significant bottom-line contributor for 2010 because of the start-up costs that occur in the first half of the year. So based on the other numbers we have sort of given you, you can triangulate where that comes out.

Okay. Thanks, guys. I really appreciate the time.

And we should mention, Ed, just to close on that, there are also some start-up costs implied in that number for the 747-8, although we're thinking about very late delivery on the aircraft, and not really meaningful contribution from those aircraft until 2011. And that is also in the guidance.

Thank you.

Chris Robertson.

I wondered if we could walk through some of the 747-8 details for the future as we start to think about this.

From a financing perspective and from a value perspective, if we've got somewhere in the neighborhood of $1.7 billion to $1.8 billion in future payments, if we understand what you said earlier, it sounds like about 35% of that would have to be financed. And if you run through the math with a 20% hurdle rate, would that imply somewhere in the neighborhood of $110 million of incremental pretax profit, and the 35% is getting you to the [515] that you would multiply by the 20%?

Yes, maybe, Chris, you are taking a little more complicated path than we intended to here. So, maybe just to go back, we're indicating that sort of mid cycle, the aircraft would have generated $6 million of plane after ownership costs. And, yes, I think working backwards, you're going to get to a pretax income. What we haven't given you here is how much improvement over and above the 400, and I recognize that. But we wanted to give you the baseline and sort of what could the worst-case incremental contribution from the planes look like. And obviously I think you could probably back in if you're using an IRR assumption and your financing assumption into what you think that means. But we're sort of giving you the threshold here from an earnings standpoint.

You've talked about, in the past, various options for financing. Are you seeing the environment has improved at all?

Yes, Chris, definitely. You've probably seen -- the US operators have seen a significant access to the capital markets I think in a big way, in the last few months a market that was effectively shut since I think before Q3 and Q4 of 2008. So the pricing I think for those credits is still high. I think we've advanced our discussions enough in terms of our options and specific lender discussions on the aircraft that we feel like we've got pretty good visibility. I think we have a relatively better credit standing than many of the folks who have had to access that market. But the fact is if the market is open for those weaker credits, it's a good sign I think of the improving health of the capital markets generally for financing these assets. And again, we think the best thing we can do here is to continue to show consistent earnings and continue to generate the results with the assets we have and tell the story around the 747-8. And we think it is a compelling one.

But you feel like something in the neighborhood of 35% is what you would need to bring to the table through some form of financing?

Yes, so let me clarify. We said of the 12 aircraft, had to go back to comments we've made on prior calls, of the 12 aircraft, we would expect that up to half of that fleet could be sale-leaseback financed. That would be sale-leaseback financing for effectively 100% of the purchase price. And half of the fleet would be debt financed. The debt-financed aircraft, as I said in my remarks earlier, we would look at advanced rates say 65% to 70% today, and potentially a little lower in the current environment; we're hoping that improves by the time we have to finance the assets going into late 2010.

At the end of the day, debt financing these assets makes sense for Atlas because we will have cash tax obligations beginning in 2010, if we don't otherwise have the deferral mechanism of these assets on our balance sheet.

So you would view debt financing as the only option you would think about for the 747-8s, besides some sort of sale-leaseback?

Correct; those are the two options that we would look to.

Okay. I guess that is all I've got. Thank you.

Thanks, Chris.

(Operator Instructions). We appear to have no further questions at this time. I would like to now hand back to Atlas. Thank you.

Thank you, operator. And thanks to all of you for your interest in Atlas Air Worldwide Holdings. We appreciate your participation today, and we look forward to speaking with you again soon. Thank you.

This concludes the Atlas Air Worldwide Holdings third-quarter 2009 results. You may now disconnect.