Atlas Air Worldwide Holdings Inc (AAWW) 2010 Q2 法說會逐字稿

Good morning. At this time I'd like to welcome everyone to the Atlas Air worldwide holdings second quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks there will be a question and answer session. If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad. (Operator Instructions). Mr. McGarvey, you may begin your conference.

Thank you. Good morning, everyone. I'm the Vice President and treasurer for Atlas Air Worldwide Holdings. Welcome to our second quarter 2010 results review conference call. Today's call will be hosted by Bill Flynn, our President and Chief Executive Officer. Joining Bill is Spencer Schwartz, our senior VP and Chief Financial Officer.

I would like to remind you that our discussion about the Company's performance today includes 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 they 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 10K filed with the SEC on February 24th, 2010, 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 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'd like to turn the call over to Bill Flynn.

Thank you, Ed. Good morning, everyone. We're pleased to discuss our strong second quarter results with you today. And we'd also like to share our improved earnings outlook for 2010. We will touch on several important initiatives to drive our future revenues and earnings.

Among these, we're delighted to confirm the placement of the first three of our new state-of-the-art 747-8 traders with British Airways for five years by our consolidated UK subsidiary Global Supplies Systems Limited. This agreement will begin in 2011, and GSS will lease the aircraft that it will operate for BA from our Atlas Air subsidiary. We have arranged permanent financing with a European financial institution for our first dash 8f delivery in early 2011, and we are in active discussions regarding permanent financing for our second and third deliveries. This confirms the interest of the aviation finance community in the 747-8f as an asset and Atlas Air is a credit.

In late May, we successfully launched our new outsource passenger CMI service for SonAir using two customer-owned 747-400 aircraft. On July 20th, we began CMI service for Boeing in support of its 787 dream lifter program with an inaugural 747-400 dream lifter flight from Wichita, Kansas, to Everett, Washington. We took delivery of our second dream lifter aircraft from Boeing on Friday, and expect to have all four of the dream lifters in our fleet during the course of the third quarter. Each of these CMI opportunities is expected to have a tangible impact on our results beginning in 2011.

Turning to our current results, our second quarter earnings significantly surpassed our second quarter 2009 performance with our net income rising more than 188% to $32.7 million or $1.25 per diluted share. On an adjusted basis, net income in the second quarter quadrupled last year's second quarter net income, increasing to $47.5 million, or $1.82 per diluted share. (inaudible) our first quarter results, our second quarter earnings reflected strong market conditions, earnings leverage in our model, and was based on the strategic actions that we have transformed our business, our operating cost base, and our fleet. Based on the global scale and scope of our customer offerings in aviation solutions, we were well positioned in the quarter to capitalize on a continued improvement in air freight demand, a tight supply environment, robust commercial charter volumes and rates, and continued strength in military demand.

Spencer is going to provide you with some additional perspective about our second quarter results in a moment. Before he does, I have a few comments about an important item in our second quarter results. In our earnings release today we noted that our second quarter financial results included a $17.4 million provision for an anticipated legal settlement. This item relates to our wholly owned subsidiary Polar Air Cargo LLC, or Polar LLC, which is not an air carrier and has no employees. Polar LLC is separate and distinct from, and should not be confused with, our 51% owned operating subsidiary Polar Air Cargo Worldwide, which provides express network ACMI service.

Provision represents our current estimate of the anticipated settlement of the previously disclosed Department of Justice investigation. A more detailed description of the DOJ investigation, as well as related investigations and litigation, is included in our quarterly report on Form 10-Q for the second quarter ended June 30th, 2010, that we expect to file with the SEC later today. You should be aware that our discussions with the DOJ regarding Polar LLC are still ongoing, and that no assurances can be given that Polar LLC will reach an agreement with the DOJ. I'll provide some more color about our financial results and outlook for 2010 and beyond shortly, and then we'll be happy to take your questions.

Before that, I'm very pleased to introduce Spencer Schwartz, our new CFO, and to welcome Spencer to his first earnings call with you, first that is in a speaking role. Spencer joined Atlas Air as Vice President and controller in 2008. Many of you have met him at our analyst days and at some of our one-on-one investor meetings and industry conferences and road shows. His strong financial background, business acumen, and Atlas experience will help us to position the Company for future growth in coming years. Spencer?

Thank you, Bill. Good morning, everyone. I'm glad to be on the call with you today. I've enjoyed the opportunity to meet many of you already, and I'm looking forward to meeting more of you. I joined the Company about the same time that our scheduled service business became an express network ACMI operation. And I've seen a significant improvement in our earnings from the strategic business transformation over the past couple years, both of the depth of an unprecedented down cycle in air freight and in the midst of the current market rebound.

Focusing on our second quarter results, they illustrate the complementary nature of our business segments, and our ability to optimize capacity allocations among our commercial charter, military, and ACMI segments. Total direct contribution by a reportable business segment improved to more than $106 million in the second quarter from about $41 million in the second quarter of 2009. The improvement in direct contribution was primarily driven by strong commercial charter block hour volumes and revenue yields, continued strength in AMC charter demand, and improved block hour volumes in our core ACMI business.

Commercial charter block hour volumes in the second quarter of 2010 were almost double what we flew in the second quarter of last year. Our commercial charter volumes during the latest quarter primarily reflected demand generated by the opportunistic deployment of 747-400 aircraft to the segment, our ongoing 747-400 charter service to and from South America, and an increase in charters from Asia to the US as a return leg of one-way military charter mission. 747-400 freighters are an attractive asset in the charter space because of their superior fuel burn, range, payload, and loading capabilities compared with smaller, less efficient aircraft. Block hour rates in commercial charter were driven by a significant increase in demand for air freight out of Asia compared with the second quarter of 2009 as well as a tight supply in global wide body, long haul, freighter capacity.

In AMC charter, block hour volumes reflected continuing flying demand related to the build-up of US military activity in Afghanistan. AMC revenue rates during the quarter were driven by a higher paid fuel price as well as a premium rate we earned for flying mission-specified 747-400 freighter aircraft. Higher block hour volumes in our ACMI segment compared with the second quarter of 2009, mainly reflected the continuation by our customers to fly above minimum hour guarantee levels. ACMI customers flew approximately 11% above their minimum block hour guarantee levels in the second quarter, which was more than 20 percentage points above the second quarter of 2009 when they flew approximately 9% below their minimums. ACMI revenue for block hour during the quarter primarily reflected the effects of above minimum guarantee flying while rates in 2009 reflected below minimum guaranteed flying.

On the expense side, line item operating expenses in the second quarter, especially aircraft fuel, were higher than the same expense in the second quarter of 2009, largely reflecting the significant increase in our block hour volumes. And as Bill previously noted, we recorded an expense for anticipated legal settlements during the quarter. Because of that particular expense, not being deductible for income tax purposes, our effective income tax rate for the quarter was nearly 47%, which was almost 10 percentage points higher than our adjusted rate for the quarter.

Turning to our balance sheet, we remain focused on leverage and we continue to manage an already strong balance sheet. We ended the second quarter with cash, cash equivalents and short-term investments totaling $638 million. Our balance sheet debt totaled approximately $546 million. Our net leverage ratio, which includes capitalized rents, remains under three times annual EBITDA, keeping us in good shape as we get ready to take the 747-8f deliveries. Capital expenditures during the first six months of 2010 totaled approximately $35 million, including about $7 million of capitalized interest relating to our Boeing 747-8f order.

We expect capital expenditures for the remainder of the year to be about $164 million, and capitalized interest to be about $9 million of that. Capital expenditures in the second half are expected to include approximately $115 million of progress payments on our new dash 8 freighters, about $60 million of that will be funded through our existing PDP financing facilities. As Bill noted, the lending community has been quite receptive to both Atlas, as well as the 747-8f asset. With a strong balance sheet and a strong credit quality, we've arranged permanent financing for our first 747-8 freighter delivery, which we expect in the early part of next year.

We also continue to focus on securing attractive permanent financing for the remaining 11 of our firm order on a basis that's related to the timing of the delivery of those aircraft to us, which continues through early 2013. With that, I'd like to thank you for your attention. I appreciate your interest in Atlas Air. I'm looking forward to working with you. Now I'd like to turn things back to Bill.

Thank you, Spencer. We're well positioned to deliver value and generate continued long-term growth for our company. Our 2010 outlook reflects encouraging trends in the air freight market, both strong demand and tight supply, that will benefit our ACMI customers and our commercial charter operations. For the full year, I expect the traffic will grow at a very strong 18% plus pace compared with the 10% decline in 2009. That implies some moderation from a 28% growth rate in the first half as monthly comparisons in the latter half of 2010 begin to reflect the recovery in air freight over the latter half of 2009. Especially in the fourth quarter of 2009.

More important, though, monthly international traffic measured in freight ton kilometers has risen to well over 13 billion FTKs per month, well above previous session levels. And total air favorite tonnage in 2010 is expected to 43 million metric tons, up from an estimated 36.5 million metric tons in 2009, and above the previous peak of 41.8 million tons in 2007. Traffic during the first half of 2010 grew by nearly 30% to 40% in all of the reporting regions, except Europe, with a 13% rate. As we saw in the first quarter, Asia-Pacific, which is a key market for our ACMI and charter customers, and Latin America, which is a key market for our scheduled charter operations, were among the growth leaders in air freight demand in the first half with Asia-Pacific rising 35% and Latin America up 48%.

Not far behind, the Middle East increased 34% and North America rose 29%. While global traffic increased 28% during the first half, global capacity only increased 7%. Over the long haul, wide body freighters supply side, 747 classic freighters in active service are down to about 61 units in July from about 137 at the beginning of 2008. A 55%decline. 747-400 production freighters and 747-400 converted freighters have been static since the beginning of 2009 with about 152 production freighters and 50 converted freighters currently in service. Based on a SANS Database, we count only three 747-400 production freighters currently parked that are in the hands of non express operators and only eight converted freighters.

Reflecting supply and demand, global load factors improved to better than 54% for the first 6 months of 2010 compared with 45% in last year's first half. In the Asia-Pacific region, load factors rose to 67%, an increase of about 10 percentage points compared with 2009. We expect to operate a fleet of 22 747-400 freighters and six 747-200 freighters through the remainder of the year. In addition, we will operate the two 747-400 passenger CMI aircraft and the four dream lifter CMI aircraft. In ACMI we continue to expect that 18 of our 747-400 aircraft will be operating in our wet lease segment by year end.

Based on the current schedules and plans for our ACMI customers, we expect they will fly about 11% above minimum contractual block hours for the balance of 2010. Our commercial charter segment will continue to benefit from tight supply and strong demand. We expect and forecast strong commercial charter yields in the fourth quarter of 2010, however they may not reach the same exceptional level as experienced in the fourth quarter of 2009. In AMC charter, we expect the demand and block hour rates will moderate during the remainder of 2010. This is driven by the military's extension of the current fiscal year contract to December 31st 2010 from September 30th, 2010, which has reduced our previously anticipated entitlement for the fourth quarter. The AMC advised us of this decision in the second quarter.

We anticipated a 41% entitlement share for Q4. As a result of the delay and the contract award, we will continue at the 28% level for the remainder of the year. We anticipate, however, that our entitlement will increase to 41% in January when the FY11 contract award beginnings. In addition, with the draw-down in Iraq, the completion of the build-up in Afghanistan, we now expect that military charter demand, which totaled nearly 10,600 block hours in the first half will total approximately 17,000 block hours for the year. That compares with our previous view of about 21,000 hours.

Based on our framework assumptions regarding continuing demand and tightness of supply in the commercial air freight market, the deployment of our fleet, and a moderation in military charter demand and block hour rates, we are increasing our guidance for adjusted net earnings in 2010 to exceed $113 million or $4.35 per diluted share. We continue to execute on initiatives that will drive future revenues and earnings. As I noted at the beginning of today's call, we're a global leader in innovative outsourced aviation solutions. Our freighter leasing, CMI, and charter service solutions enable our customers to quickly and efficiently expand their capacity and operations and capitalize on strategic growth opportunities.

Our CMI operations are multi year agreements. Nine years in the case of our Boeing service that are expected to generate sizable new revenue and earnings to come. And we continue to seek and evaluate potential CMI opportunities. We anticipate significant growth with our new 747-8 aircraft, and pleased to have British Airways, one of the world's preeminent airlines, as the first customer. Together with our modern 747-400 freighters, our aircraft anchor of fleet strategy that focuses on our customers and reinforces our position as the most advanced, most efficient, and most reliable provider of leased freighter aircraft in outsourced aircraft operating solutions to the global aviation industry. With that, I think it's a good time to take some questions. Operator, may we have the first question, please.

(Operator instructions). Your first question is from the line of Bob Labick from CJS Securities.

Good morning. Congratulations on a nice quarter.

Thank you, Bob.

Can you take a step back? You just walked us through the change in the military outlook. Maybe you can give us a few more details and go into it further. It sounds like the timing delay in particular, but I was writing down furiously, but if you could give us a few more details on that I'd appreciate it.

Thank you, Bob. Certainly timing delay is key to the discussion here this morning. The military typically awards the contracts on the fiscal year, which commence October one on each year. The military is revising some of the components of the craft program, and as a result has elected, and they have the option in their contract, to extend the current year contract for 90 days to the end of the year. In the current contract, Atlas, along with its other team members, are entitled to a 28% share of the military flying.

Now, we can fly above entitlement, but if all carriers in the program have sufficient capacity to carry the amount of freight that they're entitled to, or passengers for that matter, one typically flies that entitlement. The teaming arrangement that Atlas is part of, that will come in to effect with the new AMC contract, will be entitled to about a 41% share. And that just goes to the components of the team and the mobilization value points that each team member brings to the contract. And so the contract being pushed 90 days, and will only commence now on January one, and will be a nine month contract and not a 12 month contract takes about 14 percentage points of share or entitlement out of our forecast for the fourth quarter. And that's the biggest part of the story.

The other part is there was a rapid build up in the first and second quarters of this year, heavily reliant on the 747-400, and I think the combined effect pushed more hours into the first half than we might have expected, but because it was substantially 400 driven, it came in at higher rates. And we had a discussion about this on the first quarter call when we were talking about the much higher rates experienced in the first quarter for AMC block hours, and that was the premium paid for the 400 aircraft. And so taking into consideration the rapid surge and perhaps higher levels than might have been expected in the first half and flown in the second quarter, and the push to the right on the award of this new contract, we've adjusted our outlook for military hours.

That said, we expect good utilization of our aircraft throughout the balance of the year, which led us to up our guidance from an excessive $4 at our previous call to excessive $4.35 now. And just one final thought, I think if you look at our business, that's the nature of military flying. it's lumpy. We had huge first half flying in 2007 with the surge in Iraq . And that's what we're seeing here in 2010 with the build-up in

Great. Thank you. That was very helpful explanation. Shifting over to commercial, it seems like everything is firing on all cylinders there, and you have potentially four strong benefits of, you know, tight supply/demand, the additional 400s in the fleet, the military strength in the first half, then inventory restocking. Seems like supply and demand in the 400s are here to stay. We're having trouble modeling how much you're out performing that. How do you think about this in the back half and in the coming years as the 400s move into the commercial fleet?

Well, let me see if I answer your question. We, first of all, indicated that we had over 11 -- we had our ACMI customers now flying at 11% over their minimums in the second quarter, and expected that 11% over mins will continue into the remainder of this year, third and fourth quarter. I've also said that in spite of flying substantially less military hours than we might have thought for the second half, we're able to fully utilize our aircraft and deploy the aircraft, whether it's 400s or 200s into a pretty robust commercial market.

So overall there's not a lot of new supply entering the market as we've talked about. You've seen our forecast. We have strong demand for the 400s. And as you know, we C-checked our 200s, and have good demand for our 200s. So I think as we look to 2010, sorry, 2011, we're not guiding to 2011 in this call, we're very optimistic about and bullish about 2011 and beyond when you consider all of the initiatives that we have underway. I don't know if that answers your question fully. Maybe Spencer, you have some other thoughts.

Yes. I'd just add to that, Bob, talk about yields for a moment. So yields in the commercial charter space, especially if you look the at the Asia/US charter yields, for the second quarter of 2010 were approximately 450 per kilo. That compares with the same time last year of about 235 per kilo.

So we're seeing incredibly strong yields, however we expect a normal sort of slowness over the summer. That's normal, to just dip a little bit below that. As far as the peak season, you know, we're seeing the demand is really strong. We think that peak yields will be very high. We just caution, because they may not be as high as they were last year, but we are seeing very strong demand and yields.

Okay. That's great. I'll let others ask questions. Thank you very much.

Your next question is from the line of William Greene with Morgan Stanley.

Can I just do a follow-up on this charter yield comment? Is normal seasonality that the fourth quarter is the strongest period for the charter yields?

Well, seasonality, it's between late third quarter and normal, although I'm not sure we've had normal for a couple years, but normal bill would be late third quarter into the first couple of months of the fourth quarter. Usually by Thanksgiving typically the air freight that would move has moved because those products need to be in the distribution cycle for sales.

That wasn't last year's case. Last year's case, we had an exceptionally strong December and January and February, and it continued, some of that restocking, some of that being new product introduction. July is typically, again, historically a low month. It's the shoulder month before peak would typically start in earnest in August. Ocean freight generally precedes it by a few weeks, and falls off a few weeks earlier.

So if we look the at the commentary about the fourth quarter in that last year was obviously very strong, so it's tough to know if this year can be as strong, is it also reasonable to assume as we look at first quarter and second quarter of 2011 it would sort of follow, if normal seasonality has hold, that those two couldn't be as strong as they were in 2010?

Well, I think there's several components to consider. There continues to be new product introduction. We understand Samsung and LG are coming out with new products, competitive phones, and other products in the market in August and September. Will that continue past the holiday season and into the first quarter? It could. As well as the supply/demand equation is not going to change.

We don't see new aircraft introduction. There's not a lot of capacity left on the sidelines, as I commented earlier, to come back into service. So the kind of dramatic falloff that we've seen historically in first quarter, I'm not sure at this point is going to happen. That's something we're watching closely and we're modeling as we have contacts and discussions with our ACMI customers and with the brokers and freight forwarders that we talk to on the commercial charter side of the business. I think it's a little early to call January, February, March.

That's fair. So if we -- I think last quarter you talked about that you'd actually actively decided to put a dash 400 into the charter market. I guess we'd assume that you'd sort of move away from that as we think about yields normalizing. Is that fair?

Well, what we said is we move flexibly to take advantage of the market opportunities, which I think our second quarter results, which are extremely strong, demonstrated. We took good advantage of the commercial charter, and we took good advantage of the military business. We've said that, if you look at our fleet, we have 21 747 pure factory freighters and one 747-400BCF.

The BCF we run in a scheduled charter operation in Latin America. The 21 that we have, we said that 18 will be in ACMI by the end of the year. That leaves a few additional freighter. One is a maintenance cover. Then we have a flex lead of two others, which we could either put into ACMI or continue to put in charter based on the market demand and yields as we see it. That's something that we manage dynamically.

Okay. That's helpful. Thank you for the time. Thank you, Bill.

Your next question is from the line of Michael Fontaine with RBC Capital Markets.

Good morning, guys. Nice quarter.

Thank you, Mike.

Just wanted to come back to the guidance of EPS exceeding $4.35. I guess or year-to-date, you guys have done 288 implying an EPS of 147 in the back half of the year. I know that you expect a little bit lower military business, but just what's driving kind of the slow down from the first quarter -- or from the first half to the second? Can you give me a little color on that?

Well, as you know, consensus for the full year was $4.28 to $4.30, and we're guiding $4.35 and above. So certainly above consensus. Second quarter, there's a lumpiness as we've talked about to the military. And that's reflected in both the current results and the guidance. You know, if you were to look back, not unlike the surge and the lumpiness in military volumes that we experienced in 2007.

Some of the impact, of course, is the delay of the military contract award, where we would have had a higher share of some of the highest yielding traffic that's available to us. It's not a share that's lost forever. It's lost for that quarter. We expect they'd be flying at that entitled share from the first quarter of 2011 through that contract year. In addition -- so there's an impact there, although you would note that we took 4,000 hours out of military flying from our previous expectation, and raised guidance.

So we've been able to offset the impact of that military flying in the commercial market and in ACMI. We will have some slightly higher maintenance expenses in the second half of 2010 versus 2009, and maintenance can be a bit lumpy. It's normal on a full year, but we have to recognize it in the quarter that we incur it. So there's some additional maintenance expense that's also affecting our guidance numbers, or embedded in our guidance numbers is a better way to say it for the second half.

Sorry, Mike, I'll just provide a little bit more clarity on the heavy maintenance. We expect that the second half of the year's heavy maintenance compared with the first half of this year will be about $5 million higher. So just wanted to give you that clarity to help. And then obviously the bigger expense items, fuel, line maintenance, crew salary, wages and benefits, those things are obviously activity-based and vary depending on the volumes.

Okay.

So, I think when we sum it up, we think we're in a strong position to take advantage of the market opportunities. We feel certainly good about what we've delivered, but I think in the numbers as you look at your models, and you look at the actual activity we've had, there's been a strong contribution from military. We're saying that's going to trend down for the second half. We feel we're well positioned for 2011.

Okay. And then one more on the 18th aircraft you guys expect to have in ACMI service. Should we think about that more of a third quarter or fourth quarter event? How deep are you in negotiations? I guess you've already started the negotiations with that prospective customer. Can you give me a little color there?

We're in negotiations and deep detailed discussions with a number of our -- a number of our customers. Not only regarding our 400s, but also our next deliveries of 747-8s beyond the first three we'll have placed with British Airways. You know, we're looking -- when would somebody want an aircraft in they'll want it either into the third or beginning of the fourth quarter in order to capture the peak from the ACMI operator's point of view.

Okay. Thanks so much. I'll let somebody else at it.

Your next question is from the line of Alex Brand with Stephens incorporated.

Thanks. Bill, I have to stay on this topic because this is a big question for all of us. You're saying you raised guidance by a nickel, but just blew out by 80%. That's the concern that we all have. I hear you saying you're putting all the aircraft to work, high utilization. Are you putting them to work in a way where the return is that much lower than the return you get on military? Is that the simple difference? In the way the aircraft are going to be used in the back half?

Well, a couple things, Alex. Our guidance heretofore was in excess of $4. So, just doing the math, we've raised it more than a nickel. The full year -- we've never guided individual quarters, because we recognize the lumpiness of quarters based on the nature of the segment flying that we'll do, the variation in rate that could occur. And so we have guided full year recognizing that, as well as some of the lumpiness on maintenance expenses overall. What we've guided is in excess of $4.35.

The prior consensus that was out there, if we simply added first half and second half would have been over $5.10. We never guided to $5.10. So to answer your question, we're putting the aircraft to use where we get the best utilization and the best return, and we think that we're delivering a result that's 28% above last year and positioning us well as we come in to 2011 with all the other initiatives we have going on. I understand the math doesn't necessarily add up to what the second half consensus was, but, again, we were not guiding at $5, which would be the result if you add those two numbers.

Right, I understand. As we look at the Q2 number, the military had already -- was fewer block hours sequentially already, so has military already gotten to that lower run rate that you were expecting post MATV? Had you already got than there by the end of Q2?

So in the military, they were slightly above 5,000 hours, relatively high or higher average hourly rates because of the high utilization of the 400s for both the MATVs and for other missions into Afghanistan. Initially our expectations at the end of 2009 were for about 500 MATV shipments. We've carried 1,000. The MATV shipments are certainly -- by air are substantially complete. Several thousands were moved in. We had the majority of that share. And several other flights that we had carrying equipment.

So as we talked about on the last quarter's call, someone asked about what rate should we use in our model for military flying going forward, and I think we advised that the rate that you saw in Q1 and the rate that you see in Q2 reflect the build-up rate, reflect the heavy utilization of 400s, and we said that number would trend down. So that's in fact happening, Alex, to answer your question. But this shift in the contract award is somewhere between 1500 and upwards of 2,000 hours impact for us in the calendar year, in just that one quarter. And so there is an impact there that could have otherwise been modeled into the guidance, and we had to take account for that change, and the margin shift of that in the quarter and in the guidance, but as we pointed out we expect to be back to that, or up to that 40%, 41% entitlement come January.

All right. Just one more question, I'll turn it over. The aircraft, the dash 8s that you placed for next year, I think you already answered about trying to put those 400s to work somewhere else. Should we assume that the economics on those first aircraft were about the kind of returns that you guys have been thinking all along the new ones could generate?

Absolutely.

Great. Thanks for the time, guys.

Your next question is from the line of Jerry Revich with Goldman Sachs.

Hi. Good morning.

Good morning, Jerry.

Could you talk about what is driving the military contract delay and can you please step us through the mechanism by which your share of existing flying rises under the new contract?

Sure. Let me start with the latter part of that. The way the contract fundamentally works is that the carriers that participate in the craft program commit specific aircraft on a unit-by-unit or tail-by-tail basis to the military. Each individual aircraft is assigned a value. You can consider it a point. 400s are worth more than 200s that are worth more than 747-100s -- an MD-11 is worth more than a DC-10, and on and on through the different passenger aircraft types.

Most of the carriers that participate, participate in teams. So Atlas, for example, is a member with FedEx, and another carrier on what's called the FedEx team. When you sum up all the aircraft that have been committed, and all the points, the FedEx team is entitled to about 28% market share. The other balance of those -- of that share or entitlement is distributed over the two other teams and one or two carriers who participate individually. In 2011 -- and each year teams can change or and/or be reconfigured. In 2011, we'll have another carrier join the FedEx team, and the result of them joining the team and bringing their committed aircraft from the team they're leaving to the FedEx team they're joining entitled the FedEx team to a 40% to 41%market share.

That's the simple math of how the entitlement works. It's a bit more complex, and you can imagine there's a lot of nuance, but that's essentially how the mechanism works. The military has postponed the award, because they're working on some of the rules set within the award. And the rule set will essentially work to distribute flying to those carriers that actually fly. That sounds like a funny statement, but flying is distributed across the teams.

There are team members who commit aircraft, but don't actually fly in peace time. We're considered to be in peace time. Their aircraft would be called to fly if there were a call-up, if there were a national emergency. That's only happened once in recent time. That happened for a few weeks in Gulf War one. They sell their commission or entitlement points to the carriers that want to fly.

What the military is doing is rewriting some of the rule set, which will provide more of the flying to carriers that fly and reduce the amount -- effectively reduce the amount of commissions they have to do that flying. It's a long story, but in short it will slightly advantage Atlas, because we are a flying carrier. We will have a higher market share. And from the commission point of view we'll be favored. So that's a long answer, but that's what's going on within craft because of rule set change is -- has some consequences, the military decided to delay it for 90 days to get the rule set right and award the contract for a January start.

Bill, that's helpful. Can you talk about how many planes you're committing? How many of the 400s you're committing for the program, in 2011? Also, can you discuss if there are other changes or terms under consideration in the broader discussion?

We commit substantially all of our aircraft to craft. That essentially determines what share we, Atlas, are entitled to in terms of points, although we typically fly at 17,000 hours. That's typically, you know, four and a half to six aircraft worth of flying.

Thanks for that. And the second half of that question, any other changes in terms that are under consideration or that the military is evaluating?

No. that's pretty much the -- those are pretty much the terms for the 2011 change, Jerry. Every year they evaluate the rate, which is based on cost input, because it's a cost plus payment schedule. But that's not new. That's been a feature of the contract every year. The rule set change is more about ensuring that the carriers that do the flying retain a larger percentage of the income generated by the flying.

And Bill, lastly, can you talk about the placement work that you have to do on the 2011 fleet, presumably the incremental 400s coming off from British air, plus what you normally have expiring over the course of the year, means your marketing guys have their work cut out for them. Can you just talk about the prospects of putting all those to work for ACMI, or do you expect to do more charter work next year? Maybe it's too early to tell, but would love your thoughts there.

Sure, we've typically said on our calls that an average placement year is between three to four aircraft. On the 400s, if the three 400s that are currently at British Airways were to all come back, in other words if BA decides not to increase the size of their fleet, then we would be dealing with a typical year, three to four aircraft worth of placements.

Bill, your point is, you have no other aircraft coming to you next year. Is that the message?

Well, they have three and I said three to four. So it's a very low number otherwise that are coming back, Jerry.

Okay. Thank you very much.

Your next question is from the line of Ed Wolfe with Wolfe Trahan.

Good morning, guys.

Good morning.

I want to make sure I'm in the ballpark with this math. So based on your guidance, we're reducing block hours for AMC by about 3500 hours in the back half of the year. Is that right? Because you've flown 10 1/2, and you're giving guidance now of 17 down from 21. Am I thinking about that right?

That's correct.

That's right, Ed.

All right. And if I just attach roughly $20,000 per block hour, that gives me about $70 million of revenue? Is that kind of a fair ballpark way to think about this?

That's the math. That's what 20 would be, sure.

Yeah. And if I take a pre tax margin above the rest of the business, call it 25% or so, I'm getting about $0.40 impact for the back half of the year. I just want to make sure I'm not doing anything egregious here. Obviously not to the penny, but directionally, you know, I'm seeing a $0.40 impact. I want to make sure I'm thinking about that right directionally.

It's not a pure $0.40, because that would suggest the aircraft are not utilized for those hours. The aircraft will be utilized, flying in commercial charter, or in the market I should say. So it's not $20,000 to zero. It's $20,000 to a difference between the next best utilization and the AMC rate.

Okay. Well, Bill, let's make it the worst case scenario. Let's assume there's no one to take those planes and there's a $0.40 impact. The problem with the guidance, the reason the stock is down so much right now, I think people are looking at what that implies. $4.35, if you back out the back half of the year, implies $1.46 for the back half of the year when you did $2.89 in the first half, and historically the second half of the year is 60% or 70% of the year. It's a much bigger part of the year. So even if I take that $0.40 out of the back half of the year, I'm not getting close to -- unless there's something else seasonally very different this year or -- it just doesn't add up, unless you're being extremely conservative.

Well, I think, let me come back to a couple of the points. The military is very heavily weighted in the first half of this year as a result of the contract push-off. And as a result of the surge. If you're looking for a -- if someone's looking for a parallel for that, that was essentially the Iraq surge in 2007. If you look at the hours we flew in 2007 and when we flew them, we flew them in the first half or first quarter really of the year as the surge was built up. So there's big lumpiness there.

Consensus was for slightly over $2 for the of first half. We certainly came through, substantially largely driven by charter and commercial -- I'm sorry -- by military and commercial charter, with exceptional yields on commercial charter in first and second quarter compared to any historic precedent. And you know the implied per kilo rates on that, Ed.

Sure.

So there is clearly an impact flying the aircraft in other than AMC, which is among the highest yielding. There is some maintenance, and we have said in excess of $4.35. We've not given a specific point guidance. Could there be upside? Sure, there could.

Again, I just want to get the seasonality, because even in 2007, when you had the major shift down in military in the second half, second half earnings grew 60% of the year, they were much stronger than the first half overall. And so just -- is there any -- other than the military taking out that $0.40 worst case scenario kind of scenario, and looking at clearly you can't bank on charter being the way it is, and I don't think anybody expects that, and if you did that would be great, but is there anything else one time or that's different in your thinking now that may be some planes can't fly that you were banking on flying? Are there going to be fewer planes in the charter business altogether that, did some of the 200s have to come out? You know, what am I missing here?

Well, we talked about maintain as well, that Spencer talked about in the second half, which will be somewhat higher than the first half. And we're not expecting aircraft grounded. We're not expecting aircraft not to fly. The ACMI business is flatter now than historical comparisons in the second half of 2009 commercial charter at $6 plus per kilo was an exceptionally high rate for the fourth quarter.

Other than military, what we have talked about are flatter quarter-over-quarter returns, not exactly flat, because Q1 typically you're doing maintenance and customers do have some cancellation hours typically in Q1. We net of course those hours when we talk about a 400 per month average. That's the math that's included in our guidance. I think it is distorted by an exceptionally strong second quarter. I think overall we're talking about a strong story for the full year of the Company. And I believe we're well positioned as we come in to 2011 when you look at the other things that we've talked about.

Let's avoid guidance for a while. If next year, 2011, the world were to slow dramatically, and you had the three 400s to place, one of the things that's attractive about the model right now is you have the depreciated 200s to sit at some point. What's a scenario where if you couldn't place those three 400s, how do you proceed from there? You retire that number of 200s and put the 400s into military? Or how do we think about that?

Well, here's how I think about it. We've got the dash 8s coming into service in 2008 with BA, for the first three, which I know has been a big question we've had on prior calls. I think it's frankly a strong statement about the ACMI market and the belief in commercial freight demand, when BA with, a number of the opportunities and issues they're dealing with sign up for this aircraft over the term that they have. In terms of the 400 fleet that we have we feel very good about our ability to place the aircraft and otherwise utilize the aircraft.

We haven't said military is going to zero. We said it's going to 17,000 this year, that there's an impact in the fourth quarter, but that we'll be coming back to a 40% share for the majority of 2011. And I expect that team that comes in to effect in January will be the team that we have in place in 2012. So a continued higher share of what would be a smaller demand or a contracting demand.

So in terms of -- we're not guiding for 2011, but in terms of our belief for 2011, good military demand, partially driven by a higher entitled share, which I think is important. We've been working hard to achieve that. Strong ACMI placements for the 400s. And there will be, I believe, a charter market. I believe the charter market will be attractive because there's still not capacity coming back. Yes, demand could soften depending on global economic factors.

I still believe we're well positioned there, Ed, and I think we'll have good uptake on the remaining three dash 8s that we're going to deliver. In an extreme situation, because I think you posited an extreme situation question, our fungible fleet is the 200s. If we had to park 200s, we would in order to get the best utilization out of 400s, which is what we did in the very extreme situation we were in 2008. We kept that 200 as reserve capacity, to check and pull out and put into the market as we did in 2009, 2010.

That makes sense. One last one, just because you raised it, if you think you're going to be 41% of the share for 2011 and possibly 2012, where does that percentage on the blend for 2010 shake out? Is it 30% per share on average for 2010? Do you have a number somewhere like for that, Spencer?

What have we done in terms of ACMI flying for 2010?

Yes. Because you said it's going down in fourth quarter. Where it's been in the first three?

We've had 28% for the first two quarters, and for the third quarter of this year. We always expected to be at 28% quarters one, two and three of the calendar year. We expected to get up to the 41% for Q4 of the calendar year, which would have been the first quarter of the FY11 military contract.

Okay. So the idea, next year you would expect to be a higher percentage of a smaller number of total hours, and that will certainly look better in first quarter relative to fourth quarter?

That's right.

Potentially a bigger slice of a smaller pie.

Right, that's correct. You know, this is something that has been in our sights to achieve and we've been working on for the last 18 months, recognizing that demand would contract, we wanted to have the opportunity, and pursued an opportunity to maximize our share capture of that.

Okay. Thanks for the time, everybody. I appreciate it.

Thank you, Ed.

Thanks, Ed.

Your next question is from the line of Kevin Sterling with BB&T Capital Markets.

Good morning, gentlemen .

Good morning, Kevin.

Bill, I don't want to beat the horse to death about your guidance, I just want to make sure I understood it correctly too. You indicated your minimum block hours for the second half of 2010 for ACMI, you included in your guidance, you expect your customers to fly 11% above the minimum block hours? Did I hear that number right?

That's correct.

Okay. As we've kind of -- now we're sitting here in the month of August, can you talk a little bit about how your July trends were, what you saw in terms of customers flying above minimum block hours and things like that? Just if you could comment a little bit on your July trends.

Well, I think in July we saw continued good performance in the market. I mean, what we've said is we expect 11% for the second half. Included in that is our view of the July actuals as well as what the flying is going to be for the remainder five months of the year. I think all players in the market have reported a July that was not as strong as June. How do you read that?

Well, I think you read that as normal kind of summer performance in anticipation or before the peak begins to build in August, September and October. We know that there are new product introductions releasing in August in Korea and Asia. Our view is July was as we expected it, if I could provide color to it, Kevin, in that context.

Kevin, I'd just add that our ACMI customers are seeing the same things that we're seeing. So there's very, very strong demand. Yields continue to be high. ACMI flying is very strong. We've talked about normal years where ACMI above minimum flying is something in the neighborhood of 6% and we're saying this year about 11%. So July is consistent in that very, very strong ACMI.

We've talked about AMC charter a lot during this call, and so I think you know where that is. Commercial charters is somewhat consistent. I just sort of add to all of this that since our customers are seeing the same thing that we're seeing, it's actually a nice environment to be placing ACMI aircraft. There's really high yields and strong demand, and our customers are seeing that, so it provides a nice environment for us.

Okay. Thanks. Kind of a follow-up, as you have discussions with your customers what's their appetite, I guess, for longer-term leases versus shorter-term today as you talk to your customers about capacity needs in the current environment?

So the historical view, in the first quarter of 2008, no one wanted to talk to you versus now BA announced a five-year contract, and our sales -- you know, our focus has always been for multi year contract with the recovery and demand but also the recovery and yield, and just general overall economic improvement, our focus is on multi year placements.

Okay. Thank you.

I want you to understand that, you know, look to secure capacity themselves.

Right, okay. Thank you. Just one more follow-up. You know, you had success with BA placing the dash 8s. How are discussions going with new customers or existing customers about the dash 8s? I imagine that's an easy conversation to have. And are you talking to customers now about your dash 8 program?

Yes, we're talking with customers about our dash 8s and about our 400s, both. The dash 8s, that next generation of aircraft, that's what BA expects. That's why they signed up for it. As I said earlier, it's a five-year contract. You know, it's valued in the hundreds of millions of dollars of fixed capacity that they're signing up for. They're doing that because they believe it's going to deliver for them. I think once the aircraft is delivered, as any new aircraft platform is, once it's delivered and flying and customers see the results, that it's able to generate, there's going to be a lot of excitement about the dash 8s. We feel good about our ability to replace the balance of our order.

Okay. Thank you. Thanks for your time today.

You're welcome.

Your next question is from the line of Helane Becker with Dahlman Rose.

Thanks very much, operator. Hi, gentlemen. Just with respect to the passenger ACMI business, can you just address, number one, what -- where we're seeing that and what -- I think it's an ACMI business -- and what percentage of the revenue in the second quarter that was. And number two, what your experience has been so far in flying it relative to your expectations. Thank you.

Helane, the ACMI is really CMI contracts with one customer. Sonair. Sonar is a subsidiary of the Angolan oil company so we operate on their behalf, a dedicated flight three times a week between Houston and Rwanda and return. Sonair purchased two 747-400 passenger aircraft, which were converted into a three class premium service, essentially a typical 747-400 passenger plane carries something north of 350 passengers. This aircraft is outfitted to carry 185 passengers, 140 in business class. You can kind of see the focus of the market segment they want.

We began flying on May 31st, so we flew the full month of June with three times a week rotations. We essentially flew 383 hours or so in the month of June. So in our queue, when you see it later, we've given the details. We've got 383 hours of flying relative to the total flying, which is about 1.5% or so of the flying in the quarter. Now, that, of course, will be a full quarter's worth of flying at about 380 hours or so per month going forward through the contract.

Great. Okay. Thank you. That's all.

Thanks, Helane.

Your next question is from the line of David Campbell with Thompson Davis.

Yes, thank you very much. Based on the July numbers that are coming through Asia-Pacific is still very strong, as you suggested in answering some questions. What about Europe? Have you seen any improvement in the European business, which we all know is lagging, the global growth in the first six months.

Well, Europe has been a slower growth rate exactly as you point out, David. I think it's more like 13% on a year-over-year growth compared to the much stronger double digits in all other theaters. That said, for the customers, our customers, that fly the Asia-Europe routes and Asia-Middle East routes, they're flying at high levels of utilization, and they're among the customers that are flying at 11% above minimums.

So for our ACMI customers, we're seeing good utilization. I understand they have good load factors. They feel strong about the balance of the year. We are also flying some charters in that market. And so it's recovering.

Demand and yields are good. And we'll have to obviously watch that as we come in to this -- into the balance of the second half. But still there's -- I would say there's recovery in Europe, albeit not at the pace that we've seen in the other major markets.

Thanks. Just one follow-up on that. Some are suggesting that with the Euro weakness the market will see increasing growth in Europe in exports. Export activity will improve. Is that something that you would participate in, and is that something that you have any way of anticipating or looking or estimating?

Well, I think exports have increased out of Europe. Certainly Germany is the biggest beneficiary with the lower Euro, and exporting to Asia. We're seeing increased load factors for our ACMI customers from Europe into Asia. We're seeing increased load factors also from North America into Asia, which is something that we have predicted to be a very favorable long-term trend for our ACMI customers as they get better balance and better overall profitability.

So we're not participating in substantial charter flights from Asia to -- sorry -- from Europe to Asia. In that direction, we're flying from North America into theatre for military, and then ferry into Asia to pick up Asia to North American flights to return the aircraft back to North America. But we do see those trends. Our customers are showing better load factors on the Europe-to-Asia route driven by the weaker Euro and also by the weaker pound.

Thanks. That's a big help.

Thank you, David.

Your next question is from the line of Steve O'Hara with Sidoti.

Yes. Hi. Most of my questions have been answered, but can you talk briefly about any opportunities you might be seeing in the dry lease segment?

Well, the dry leasing business is something we look at opportunistically, Steve. We have that one 757 and some engines in dry leasing. We continue to think there could be some additional opportunities in dry leasing, but it's not something that we've acted on in this quarter. And it's a market we'll continue to measure.

So it's not something you'd buy aircraft, and then spec them out, you're looking for somebody with a need before you purchase the aircraft?

On the dry leasing business, we're not buying aircraft speculatively to place. If we're going to buy -- or as we buy more aircraft for our dry leasing business, we'd have to have a pretty clear view as to where that aircraft is going to be put to work.

Okay. Thanks.

I think there are opportunities to do that, but with other initiatives we have on the table today, whether it's growth through the dash 8, placements of our 400s, the CMI opportunities, we think there's good growth opportunities in the business and wouldn't want to take on a new -- an unnecessary or undo risk on speculative dry lease smaller gauge aircraft.

Okay. Thanks a lot.

Thank you for your questions today, gentlemen. Do you have any closing remarks?

Thank you operator. On behalf of the Atlas Air team we'd like to thank you for participating in your call today. We appreciate your questions. We hope we've provided you some additional insight on our numbers and on our forecast, and we look forward to speaking with you soon. Thank you.

Thank you for joining today's conference call. You may now disconnect.