Atlas Air Worldwide Holdings Inc (AAWW) 2010 Q3 法說會逐字稿

Good morning, my name is Kristie and I will be your conference Operator today. At this time, I'd like to welcome everyone to the Atlas Air Worldwide Holdings Third Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers are marked, there will be a question-and-answer session. (Operator Instructions) I'll now turn it over to Atlas for today's presentation.

Thank you, Kristie, and good morning everyone. I'm Ed McGarvey, Vice President and Treasurer for Atlas Air Worldwide Holdings. Welcome to our Third Quarter 2010 Results Review Conference Call. Today's call will be hosted by Bill Flynn, our President and Chief Executive Officer. Joining Bill are Spencer Schwartz, our Senior Vice President and Chief Financial Officer.

I'd like to remind you that our discussion about the Company's performance today include some forward-looking statements within the meaning of Private Securities Litigation Reform act of 1995. These statements relate to future events and expectations and involve unknown risks and uncertainties. Our actual results or actions may differ materially from those projected in the forward-looking statements. Please refer to the Safe Harbor language in our recent press releases and to the risk factors set forth in our annual report on 10K filed with the SEC on February 24, 2010, as amended or updated by subsequent reports filed with the FCC, for summary of specific risk factors that could results to differ materially from those expressed in our forward-looking statements.

In our discussion today, we include some non-GAAP financial measures. You can find our presentation on the most directly comparable GAAP financial measures calculated in accordance with the generally accepted accounting principles and our related reconciliation and our recent press releases which are posted on our website, www.atlasair.com. You may access these releases by clicking on the links 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 and good morning everyone. We're very pleased to have you join us today. We expect 2010 to be a record year for our company and we are pursuing exciting initiatives that will drive longer-term revenue and earnings growth. I'll touch on these this morning and Spencer will provide you with some additional details. After that, we look forward to your questions.

We expect to report record adjusted earnings per share of more than $5.40 per diluted share this year. Our outlook includes an expense of $0.30, per diluted share, in the Fourth Quarter to perform previously unplanned maintenance on our 747-200 freighters. We're making this investment in our 747-200 fleet to meet anticipated levels of demand in 2011, principally in our AMC commercial charter business segments and in recognition of our recently announced placements of two additional 747-400 aircraft in ACMI service. We see this investment in our 200s as an excellent opportunity to earn a swift payback on these aircraft. Both our Third Quarter earnings and our full year outlook reflect the strategic actions we have taken to transform our business and reduce our commercial and operating risk. Our ability to leverage the global scale in scope of our business to capitalize on profitable market opportunities and strong market conditions. In both our earnings and our initiatives demonstrate we're building a solid track record of execution. We're delivering sustainable core earnings growth and we are managing our business to take advantage of the market opportunities and capture the substantial upside operating leverage in our business model.

Our earnings and our initiatives also reflect our focus on the global economy, a global customer base, and our ability to deliver innovative value-added solutions to our aviation industry and customers, which include airlines, express providers, freight forwarders, charter brokers, direct shippers, and aircraft-asset owners. Reflecting the quality and value of our customer solutions, and the demand for wide body aircraft, we have entered into new ACMI agreements on two of our 747-400 freighters. One is an exciting new contract with TNT Express that expands our relationships to all four of the major global express operators. The other is a second aircraft that we have placed with Panalpina, a leading global freight forwarder, which has enabled Panalpina to introduce comprehensive, around the world service to it's customers. We believe this is the right time to place more of our 400 freighter capacity in ACMI arrangements. As a result, we now have 19 of our 22 747-400 freighters in active ACMI service, one more than we have been targeting by year end.

We continue to be encouraged by the trends in the global air freight market. We see both strong demand and tight supply, which will benefit both our ACMI customers and our commercial charter operations. IATA indicates that global traffic increased 25% during the first nine months of 2010. For the full year, IATA expects that traffic to grow close to 20%, compared with a 10% decline in 2009. It also forecasts that total air freight tonnage will exceed 44 million metric tons, compared with an estimated 36.9 million metric tons in 2009, and the previous peak of 41.8 million tons in 2007. Demand growth in 2011 is likely to be more in line with the industry's traditional 5% to 6% pace and we expect that supply will continue to remain tight.

Responding to the strong global demand and improved yield for air freight, our ACMI customers continue to fly above their minimum contractual block hours during the Third Quarter, averaging 10% above minimums for the period. In addition, our commercial charter volumes and rates strengthened considerably with those of the Third Quarter of 2009. These factors more than offset the anticipated moderation in our ACM charter revenues and volumes, compared with the Third Quarter 2009 and the first half of 2010. Our Third Quarter results also mark the first full quarter of outsource passenger CMI service for SonAir and they included the startup of CMI flying for Boeing pursuant to our nine year agreement with them. Each of Boeing's four modified 747-400 Dreamlifter aircraft are now operating on our certificate. Both of these CMI opportunities are expected to have a tangible impact on our results beginning in 2011. This is probably a good point to ask Spencer to provide you with some additional perspective on our Third Quarter results. After that, we'll provide some more color on our initiatives and direction, and then we will be happy to take your questions. Spencer

Thank you, Bill. Good morning, everyone. Our Third Quarter earnings this year were sharply higher than our Third Quarter 2009 results. On an adjusted basis, net income in the Third Quarter increased 129%, compared with last year's Third Quarter net income, rising to $33.7 million, or $1.29 per diluted share. Our Third Quarter results illustrate the complimentary nature of our business segments and our ability to optimize capacity allocations among them. Total direct contribution by a reportable segments increased to about $81 million in the Third Quarter from about $50 million in the third quarter of 2009. The improvement in direct contribution was primarily driven by strong commercial charter block hour volumes and revenues and improved block hour volumes in our core ACMI business. Commercial charter block hour volumes in the Third Quarter of 2010 were more than 50% higher than in the Third Quarter 2009. Our commercial charter volumes, during the latest quarter, primarily reflected the increase in demand in commercial charter and an increase in 747-400 service to and from South America.

Block hour rates in commercial charter were driven by a significant increase in demand for air freight out of Asia, compared with the Third Quarter of 2009, as well as, a tight supply in global wide body and long haul freighter capacity. Higher block hour volumes in our ACMI segment, when compared with the Third Quarter of 2009, mainly reflected the continuation by our customers to fly above minimum block hour guarantee levels. As Bill mentioned, Our ACMI customers flew 10% above minimum guaranteed levels in the Third Quarter, which was more than 12 percentage points above the Third Quarter of 2009, when they flew approximately 2% below their minimums. Based on current schedules and plans from our ACMI customers, we expect they will fly about 9% to 10% above minimum contractual block hours for the balance of 2010.

In AMC charter, block hour volumes reflected a reduction in flying to support US military activity in Afghanistan. Compared with the third Quarter of 2009, AMC revenue rates increased due to a higher paid fuel price. Compared with the first and second quarters of 2010, however, AMC revenues decreased due to the cessation of premium rate, mission specified, 747-400 freighter aircraft flights in support of the movement of MATVs to Afghanistan. As we discussed during our last call, the AMC charter demand and yields in the first half of 2010, benefited from a surge in military activity in Afghanistan that drove a high proportion of one-way missions and higher rates on MATV flights to Afghanistan. This MATV activity added approximately $29 million of revenue and about $0.69 per diluted share to our EPS in 2010.

Looking at expenses, line item operating expenses in the Third Quarter, especially aircraft fuel, were higher than the same expenses in the Third Quarter of 2009. Largely reflecting the 18% increase in our block hour volumes. On our last call, I also indicated that heavy maintenance expense in the second half of this year was expected to be about $5 million higher than in the first half. Based on our current forecast for the year, we now expect that heavy maintenance expense in the second half of 2010 will exceed the first half by $19 million, with most of the increase driven by a decision to continue to invest in our 747-200 fleet to meet anticipated levels of demand in 2011.

Turning to our balance sheet, our focus remains on leverage and we continue to manage an already strong balance sheet. We ended the Third Quarter with cash, cash equivalents, and short-term investments totaling $570 million. Our balance sheet debt is now down to approximately $438 million and our net leverage ratio, including capitalized rents, declined to just over two times annual EBITDAR. In September, we elected to prepay $120 million of predelivery payment borrowings under PDP financing facilities related to the first two aircraft in our 747-8 order. This was an opportunistic action that will enable us to realize a net cash savings over the remaining six month term of the borrowings. We are able to take advantage of this opportunity due to the strong operating cash flow that we are generating, which totaled $214 million during the first nine months of 2010.

Capital expenditures during the first nine months of 2010 totaled approximately $60 million including about $11 million of capitalized interest related to our Boeing Dash 8 order. We expect capital expenditures for the remainder of the year to be about $33 million and capitalized interest to be about $6 million of that. Progress payments of $100 million on our new Dash 8 freighters over the balance of 2010 have been suspended until we reach an agreement on the delivery and payment schedule. When we make the payments, we expect to draw upon our PDP financing facilities for approximately half of that amount. Now I would like to turn it back to Bill

Thank you, Spencer We are well positioned to deliver value and generate continued long-term growth for our company. Our outlook for record earnings in 2010 attest to that. So do our initiatives for 2011 and beyond. We expect to operate a fleet of 22 747-400 freighters and six 747-200 freighters through the remainder of the year and into 2011. 19 of our 400 freighters will be in ACMI service as which I previously mentioned. In addition, we'll operate the two 747-400 passenger CMI aircraft and the four Dreamlifter CMI aircraft. In commercial charter, we expect to benefit from continuing demand and tight supply. Average charter market yields in the Fourth Quarter should be in line with average yields in the fourth quarter in 2009.

In AMC charter, we expect that demand that block hour rates will moderate compared with the Fourth Quarter in 2009 and the first half of 2010. We also expect that demand will total more than 18,000 block hours in 2010, and approximately 17,000 block hours in 2011, which reflects an increase in our team entitlement. We expect to provide formal guidance for 2011 when we announce our Fourth Quarter results in February. We are excited about our future and we continue to execute on initiatives that will drive sustainable earnings growth. We are 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 in operations and capitalize on strategic growth initiatives. We anticipate significant growth in our fleet with our new 747-8 aircraft and we're pleased to have British Airways, one of the world's preominate airlines, as our first customer. However, we are very disappointed by Boeing's announcement that the delivery of our initial Dash 8 freighters has been pushed out until mid-year 2011.

Our customers are very eager to capitalize on these game-changing aircraft and we are very eager to realize the earnings growth that we expect these aircraft to provide. 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 efficient and reliable provider of lease freighter aircraft in outsourced aircraft operating solutions to the global aviation industry. With that, Operator, may we have the first question?

(Operator Instructions) Your first comes from Bob Labick with CJS Securities.

Good morning. Congratulations on a great quarter

Thank you

First question I wanted it ask you. You discussed the strong demand and tight supply in ACMI. Could you speak, probably directionally, hopefully, as it relates to the new contracts you signed with both Panalpina and TMT, if they were in line with current contracts on your average, or if they were better or worse, in both rate and in length of contract and how the market's shaping up for renewals and things?

Thank you, Bob. A couple things. We think the market clearly has firmed up and we're excited about the opportunities as we come out of the second half here of 2010 and looking into 2011. Demand growth for the air freight market has been exceptional. None of us a year ago would have predicted a 44 million ton market, and that's what we seem on track to hit with, with strong growth carrying into 2011 and beyond. And that all then is what underpins the demand for ACMI placements. I'll start with Panalpina first. We were excited to place a second aircraft into Panalpina, a global freight forwarder whom you know. They are looking at building a more comprehensive global network of fixed capacity to offer to their customers and they expect to gain competitive advantage in the freight forwarding arena as a result. TMT, first time that we're doing fixed ACMI for TMT. It expands our base into the integrators as we talked about in my comments a moment ago. I think it underscores the time definite nature of global networks that Atlas is proficient at operating. I think TMT clearly saw that when they decided to enter into an ACMI agreement with us. Now, more to your specific question. Eighteen months ago, we had commented on calls and meetings that we wouldn't place aircraft at bargain basement rates in the trough of the cycle that could potentially harm or undercut the pricing strategy that we had in place and we didn't. We were able to put our aircraft to work for the military and in commercial charter. So the tenor of the contracts that we have entered into for -- with Panalpina and with TMT are attractive from our perspective across all terms and conditions.

Okay. Great. As it relates to the British Air 400s and the Dash 8 deliveries there, has there been any indication from British Air what they want to do with their current 400 fleet?

We're in discussions with BA and they're certainly taking a look at their network going forward. The merger with Iberia certainly expands their range of network planning opportunities. BA has not given us a definitive answer if they want to keep one or more of the 747-400s that we have with them. We are in those discussions with them now, and they could keep one or more. That option is certainly available to them. But, going back to your first question, I think the market is such that we feel confident about our ability to place those aircrafts into ACMI utilization. Should they not elect to keep any or all of them.

Okay. Great. Last one, I'll get back in queue. Could you just -- do you have any -- give us any indication of the next milestones or data points we should look for with the Dash 8 deliveries or when you'll know, when you'll get them into the fleet?

We have not agreed with Boeing on a definitive delivery schedule of the aircraft. We're in discussions with Boeing as to when the aircraft will specifically deliver on a unit by unit basis, as well as we're considering the remedies and protections that we have in our contract relative to yet an additional delivery delay. It's our belief Boeing is anxious to deliver the aircraft. We understand that more than ten of the aircraft have been assembled. I don't have the exact number, top of mind today, but certainly something larger than -- a number larger than ten have been assembled and are sitting on the runway in Everett. So, it's clear to me that Boeing wants to make the remediations, complete the flight tests, and secure the certifications and deliver these aircraft and get paid. We're not through with that work yet or completed with those discussions yet, but once we do, we will be able to provide more color.

Okay. Great. Congratulations again. Thank you very much.

Thank you. Your next question comes from the line of Bill Greene with Morgan Stanley

Good morning. Bill, in the past, you discussed in effect finding a replacement for the AMC flying and the contribution that it provides to the overall enterprise. Can you give us a sense for where you are in that process and what that may mean for how it will flow in and impact margins in '11?

Sure, Bill. A couple things. We have said that this year's flying is about 18,000 hours. And we've just advised that we are looking at about 17,000 hours in 2011. About 1,000 hours less on a year-over-year basis, and, certainly, some contribution less above that, given the contribution that the MATV has contributed, particularly in the first five months of this year. What we talked about in our meetings, and even in our analyst day back in May, was that we were particularly excited about the LCF flying that we have with Boeing. I think they even provided some schedules that showed how that flying would ramp up based on Boeing's plans they had given us for manufacturing assembly of the H-7s. So that when those aircraft are the full aircraft that the LCI are in full operation, Boeing had forecasted to us something like 13,800 hours of LCI flying. I think that kicks in somewhere around 2013, again depending on the delivery schedule and the manufacturing schedules at Boeing. And what we've said is that, that goes a long way to replacing the contribution that the military hours provide to Atlas today. It's not necessarily dollar for dollar, hour for hour, we don't expect 17,000 hours to go to 0. We anticipate we will have some level of military flying for some time to come, and , certainly, beyond 2013, the military expects that. We see the LCF plus the other CMI contract that we have in SonAir substantially replacing the contribution that military provides to us today. You layer on top the dash 8s we're taking delivery of, and other growth initiatives that we're working on, and that's where earnings and contribution growth come from. LCF and CMI answer a large part of the question around AMC contributions. Dash rates and other iniatives are what drive growth, and that's the way we've talked about

I just want to make sure, because there's a lot of moving parts here, in terms of timing and when things come in. Does the loss of the military -- can it get made up in 2011 or is that just something we've still got to bridge? That's what I'm trying to understand

I don't know what we're losing in 2011. It's about a 1,000 hour difference, and some margin on MATVs. There's a strong commercial market. There's 19 aircraft in ACMI. There are dash 8s coming in in 2011. There's about, I think we said about 5,000 hours of LCF that's coming in in 2011. So, that's 5,000 LCF on top of 17,000 military. And then there will be a certain number of hours in the SonAir. So that's -- we're trying to break it down into what's tangible and measurable. And that's the math in our mind on that, Bill.

Okay, thank you. That's good

Just wanted to amplify a little bit. Just to reiterate again. We think we expect to have over 18,000 hours in AMC in 2010. We're expecting 17,000 block hours in 2011. That reflects the change in entitlement that we previously talked about. So there shouldn't be that much of a change that we're anticipating for 2011

Then when we look at the ACMI contracts in the 10% above minimum level, I don't think you can, but can you go higher than that? Or what does that mean when you're that far above minimum? Does it mean you have to raise rates? I don't know how to interpret 10%. I assume you don't run there forever, but how do we think about that?

10% is 40 hours, so that's 440 hours. The minimum, as we said, are around 400 net. Historically, markets run around 7%, and as you think about the seasonality of freight flows, that would suggest something lower than 10%, or 7% in the first half of the year, and something higher in the second half of the year. We can certainly fly 440 hours a month on the 400s. These are eight to nine-year-old aircraft, there are months when we have flown north of 500. Now I don't suggest we can do 500, 520 hours twelve months a year because of maintenance requirements and things of that nature. But we can sustain a 440 hours a month on the aircraft I guess I was getting at does it mean you're under charging?

I'm not sure I understand your question. Well, if they are willing to fly that much above minimum, I guess that would suggest that there's more demand than you had initially thought when you set the minimums. In other words, what levers do you have to pull as this above minimum continues? Or maybe it's just normal this other contract runs we normally fly above minimums in normal periods.

What we've said historically is, we fly 7% above minimums, and 400 is net. So contracts can be written for more than 400 hours a month, but customers have a certain amount of cancellations if they want to pull down a flight on the Labor Day weekend, or the Memorial Day weekend, but 400 is the net. After cancellations, it's 400. So roughly we're between 90 and 95%. You know as well as I do, the seasonality of freight. We certainly encourage our customers to fly more. We charge for more. They don't fly for free. An incremental 10 or 20 hours drops very effectively to the bottom line because we're not hiring more pilots and taking on more fixed costs to fly that

This is Spencer. I would just add, if you actually plotted the percent over or under a guarantee that our customers fly. If you actually plotted it going back to the beginning of 2009 and drew a trend line, it's pretty linear. It's increasing sequentially, but it's starting to level off. We're at a point now, as Bill said, about 440 hours a month. You start to see it level off.

Okay. One last question. On the events of last week in the Middle East related to the suspicious packages. Have you gotten any updates from any government authorities about any changes that they may make?

We certainly do. You would imagine we, just like all the other carriers are in close contact with Homeland Security and with the TSA, both directly as an individual carrier and through our industry associations. Obviously, very concerning for all of us, safety and security is our number one consideration, as it is with all of our customers, airlines, express operators, charter brokers, et cetera. So, I think you saw the article in the Wall Street Journal this morning, or at least Wall Street Journal online this morning. We expect that the TSA and Homeland Security will put out some additional requirements on cargo security going forward. What we understand based on their own comments even in some discussion with Homeland Security this morning, they are going to be targeted at risk-based-targeted enhancements on the security protocol . We doubt that this is leading to 100% screening of cargo everywhere. I don't know that the net -- the systems exist to even be able to do that, but as you would imagine, there certainly is going to be a lot more screening on cargo and packages originating from Yemen, just by way of example. And other areas where TSA and DHS assess the risk to be

All right. Thank you for all the time

Thank you

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

Hello. Good morning. I thought I heard you say there was $0.69 of EMIRAT impact in the first half. Did I hear that right, Spencer?

Yes, that's right, Ed. What we did to calculate that was, we assumed that if the MATVs, sorry, if our planes weren't flying MATVs and we weren't using 400s for them, so we would not have received a premium for flying 400s and we would not have received a premium for flying one way missions. If the same hours were flown with the military, just not 400s and not one way, that increment was about $29 million which equated to about $0.69 a share. We just wanted to provide some color on that so that you understood how much we enjoyed in the first half of the year from MATV flying.

That's really helpful. Can you break it up between the two quarters, the $29 million?

It is, obviously it's a bit more towards the first quarter, because the MATV missions stopped in early June, because those missions were completed, but otherwise, fairly even.

Okay. Thank you. That actually is really helpful. How much conviction do you have in the 17,000 military hours for 2011? Do they actually give you some parameters that far in advance or are you making your best guesses based on where you are now in the three months of visibility they give you or how do we think about that 17,000?

There's a couple of factors that come together, Ed, to triangulate on the number. One, we do have a forecast from the military. It starts with the notion of a fixed buy. Which, typically, is run, when you look back over the years, it's about 25% or so of what's actually consumed. The other 75% are done on quarterly expansion buys and on an ad hoc buy. So we can look at fixed buy estimates and then make an assessment. We talked at some length, I guess, in the last call about an increase in our entitlement towards military craft, military cargo, our market share. So, when the market is contracting, we expect carriers are going to carry closer to entitlement because capacity is there. So, we look at the market going forward based on our team entitlement as well. Knowing what we know today, based on the number of boots on the ground that exist, based on -- because there's correlation between boots on the ground and flying, based on the military fix buy and our team entitlement, absent some major revision of strategy after the July 11 review, that's our number.

That's good. Thank you. That's also helpful. One last question regarding to that. I know that your mix of your team membership improves starting January 1 and that only lasts through third quarter. What have you assumed in the fourth quarter, the same mix as the rest of this year?

It's a two year teaming agreement

Oh it is? So it goes through September 30 of '12?

Correct.

That's great. Just switching gears for a second. You talked a little bit about the 200s that you're going to be spending some money on in fourth quarter. How many 200s now do you expect to have in the fleet somewhere beginning 2011 and where do you expect that to end 2011?

We said that we'd be up -- my comments here, we talked about six 747-200s. We're going to continue to manage the 747-200 fleet, but six is the number coming into 2011. For us, it makes sense to invest in the maintenance. As I think you know, the fleet's totally unencumbered. We've got very flexible work rules in place with our pilots. We can reduce the fleet as we need to. In fact, we had couple of aircraft parked way back in the early part of 2009, which we brought back in 2009 and made the investment in. We have two more aircraft now in ATMI, so making the investment makes sense to us. We can dial back capacity as we need to, if we need to, in 2011, based on charter demand.

Is some of the money that you're going to spend in fourth quarter the C checks you would have been doing in July and August on those 200s?

We've got -- C checks are due when they're due and we've maximized the yield of the C checks. The C check money we invested in fourth quarter of 2009 has earned us a pretty rich payback in 2010. The heavy check that we're going to elect to do, -- to for 2010 is due now. It's not something that we're advancing. It's something that's due now, and a fair amount of the other heavy maintenance expense we're going to incur in the fourth quarter are engines, and the engines are due when the engines are due.

Okay and that heavy check is 200 then in the fourth quarter?

It's a 200.

Okay. Then last question and I'll let someone else have it. You gave some good color in terms of ACMI, I'm sorry, in terms of charter hours and block hours. Can you give any sense of block hours for ACMI in the fourth quarter? Is there a range that you've been looking at?

I think we've talked about flying over minimums in the range of up to 11% is what we said on the last call. It was spot on 10% in the third quarter and we anticipate over flying in the fourth quarter as well. As you know, the market's out there, the demand is there and our customers are asking us to do the flying

But in terms of number of hours total, you're not giving any kind of guidance on that? There's just a lot of noise between the charters and planes coming in.

We have 19 aircraft in ACMI at an average minimum of 400 hours, and I just haven't done the math on that. And then, we're talking about flying in excess of the minimums in similar ranges third quarter.

None of the CMI hours are going to go through that line? Is that what you're telling?

Oh no, okay, I misunderstood your question. Yes, there will be some CMI hours in there as well.

Ed, just to give it a little bit more color, I think if you take a look at the third quarter of this year. You filled in a little bit of a premium per peak, something near 10%, you're probably getting close, and that includes, as Bill just said, that includes the CMI hours.

Great. Thank you, perfect. Thank you for the time

Your next question comes from the line of John Barnes with RBC Capital Markets.

Good morning. Nice quarter. Bill, can you talk a little bit about the CMI operations for both SonAir and the LCF for Boeing? Is it, just given that you talked about it being an offset to the AMC -- the curtailment of AMC versus what you did in 2010? Is CMI currently profitable, as you're running it right now, and did you have to incur any startup cost in this particular quarter for either of those opportunities?

Good morning, John. So, we started up the two aircraft for LCF on May 31, and we did have some expenses earlier in the year to get geared up for that operation. The flying then is continued for the SonAir. We said it was about 400 a month for the flying. That's three times a week between Houston and [Lewanda]. That's essentially what we're flying right now. The operation is profitable for us. We haven't had additional or incremental startup expenses in the quarter. We have just had normal operating expenses. It's performing well. I believe our customers are satisfied, very satisfied, with the level of performance that we're providing them. We are flying the LCF as well this quarter and certainly next quarter. All four of them are on our operating certificate. We did have some startup expenses for the LCF as well, but the operation is performing and it is profitable for us in this quarter and will be in the next quarter.

All right. Are either of the opportunities, the CMI opportunities, at the contribution that you had guided to yet, or are they still working to that level of contribution?

The SonAir is certainly at that level of contribution. ACMI, LCF is approaching because third quarter was really startup. We still cleared and hit the numbers. It was profitable in the third quarter. I think the fourth quarter will be more a full quarter of operation than the third quarter was, because we got the LCFs in. I think the first one was in July and I think that we had the first actual flight in August, which was a revenue flight. Kind of a mixed quarter in Q3 for the LCF.

John, this is Spencer. I'll just add that we remain excited about the margins that we're seeing in those areas

Okay. Very good. Can you talk a little bit about the placement of the two aircraft, the one with Panalpina and the one with TMT? Can you talk a little about what that did in terms of -- can you quantify how much revenue that might have taken out of this quarter from commercial charter and went to ACMI? What were you trending? Was it a similar trend line that we were seeing in the second quarter before those planes were removed and placed in ACMI?

Well the aircraft actually started flying in September for both customers. Not a lot of flying for those customers in the calendar third quarter. A couple of weeks worth of flying depending on the start date. So, not a lot of pull from either commercial charter or military into ACMI. It's really fourth quarter. I think where we are now between our remaining 400s and the very high utilization on the 200s, and our BCF, I don't see a lot of cannibalization there, John, to your point, to your question, excuse me. I think what we're doing is we're running or going to run at full utilization on the aircraft. It may be, I may time this slightly wrong, I think the first TMT flight was actually an October event. So it would have been fully a fourth quarter event.

Okay. Very good. Lastly Bill, I'm bringing this up because you referenced the IATA data that has come out. In their press release,when they have been talking about some of the data points has become consistently more pessimistic as to the outlook of air freight, and since you brought it up, as to the data points that we should look at. I'm just curious as to how your outlook for the business marries up with their increasingly pessimistic attitude towards international air freight. I wanted to make sure that I understood. You believe that international air freight is moving back toward more of that 6% to 7% longer term growth in volumes, correct?

Just to deal with the specific numbers, IATA was talking about 5% to 6% going forward for '11 in those ranges. Boeing is going to put out a number in the next several days based on their world forecast. We have been using more like 4.5% on a planning assumption. For Atlas Air, we're typically are at the lower end of the scenarios that the several different entities put out. We think even at a 4.5% cargo demand growth, if it were to be that end of the range, the supply trends in the aging 200 fleet look very favorable for us. Also, combined with the pace of new product introduction whether that be the Dash 8 BCFs or 777 that actually get into heavy freight. I would note that IATA press releases always tend to be negative. Six months ago, they were talking about the demise of the passenger industry and now they're not. Now, they are talking about freight moderating. It's a data point. I think 4.5% to 5% for us is what we're using as a planning assumption, and that shows good trends for us.

John, I add as numbers for this year, as I'm sure you know and in Bill's comments earlier, they are forecasting the strongest year in air freight, from a tonnage standpoint. So growth on top of that, even reasonable growth of 5% to 6%, range is really quite pleasing

Yes. Absolutely. It's just a little surprising as to how pessimistic their tone has become when all it looks like is your just up against tough comps. That's why I asked the question. Well, Guys. Nice quarter. Thank you for your time

Thank you.

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

Thank you very much, operator. I just have two very quick questions. Hi, Guys. My first question is, should we think about the dash 200s that you're putting into maintenance as kind of replacements for the eights, so that if the eights had been delivered on time that you wouldn't have actually made this decision, or would you still have made this decision?

The 200 serve a very different market than the dash 8 does. The investment we make is based on the commercial charter market and the military demand that we see going forward and the better clarity. So, the hypothetical is, had we had the dash 8s, and had BA not elected to keep 400s, would we have had some capacity prior to subsequent placement that we might have put into the commercial charter market or the military. I guess the answer is maybe. I can't say for sure on that, Helane. We're dealing with what we have and the market that we have. So, our choice is to make that investment and have that aircraft ready to go

Okay. Thank you. Then my other question, with respect to the military, I know you had mentioned the premiums they pay for 400s. Have they indicated, in their commentary, that they could continue to pay premiums for 400s, or are they okay with the 200s?

The military will pay a premium for the 400. Right now, the contract was delayed until January 1 instead of the fiscal year start in October 1. Part of what is embedded in that delay is the rate making process and the military coming back and saying what rate they will pay. And then that will be, what rate they will they pay for a 200 as well as what rate they will pay for a 400 and an MD11, for example, and the wide body freighters. So, with the aging fleet that the 200s represent and the eventual retirement of that fleet, the military clearly knows that they need to move and will move into 400s for their mobility requirements.

Okay. So that's pretty consistent with what they've been saying?

Yes, it's consistent with what they've been saying.

Okay. Great. Thank you very much.

Your next question comes from the line of Alex Brand with Stephens Inc.

Good morning. I wanted to start with a question on the P&L. The salaries, I just want to make sure I understand why salaries and wages would decline a fair bit sequentially, and what maybe we should think about going forward.

I'm just trying to take a look, Alex. Salaries, year-over-year salaries, wages and benefits increased year-over-year due to company performance, merit increases and the like.

And more pilots. We've gone back out and hired more pilots as a result of more flying this year. We had furloughed pilots we called back. You're talking about a decline, Alex?

Right. In other words, in the first half of the year is there that much incentive pay and in Q3 there's less? Is it as simple as that? So, $60 million wasn't the right run rate? $56 is more like the right run rate?

We think the run rate we're seeing now is pretty indicative for the rest of the year. What we're seeing in the second half thus far, we expect to see going forward.

Back to Ed's question on the $0.69. I just want to make sure I understand. You assume those hours would still have been military, but you did assume lost premium there. If those planes had been a charter, you would have made a lower margin, right? But you're saying you have accounted for taking out that premium?

I think we could have calculated this many ways. What we were trying to do was provide some color. Subsequent to the last earnings call, there were a lot of questions about the incremental revenue that we enjoyed from MATB flying. So, we were trying to provide some color around it. We could have calculated it many ways. We could have said, what if we flew those hours in charter as opposed to the military? What if we flew in the military and not 400s, with 200s and so forth? We thought the right way to calculate it was that the hours would still have been utilized within the AMC, just that they would have not enjoyed the additional premium for flying 400s and the additional premium for flying one way missions. If you put both of those premiums in play, then we're looking at about a $29 million increment that we enjoyed during the first close to six months of this year.

Let me tie that into my next question. I think everybody's trying to get a handle on what normal looks like. Right? So when we get into next year, particularly the first half, just qualitatively, I know you guys aren't giving any guidance yet, but shouldn't next year look more normal seasonally. So we should have a lot of maintenance in the first quarter and a slow start to the year and then ramp up. Is that the right way to think about 2011?

Well, a couple things there, Alex. We said 17,000 hours. We called out that in the 10,000 hours that we did in the first half of 2009, there was this large MATV movement and Spencer's put some dimension around , okay so what's the value of the increment of an MATV one way in a 400? So going forward into next year without giving guidance, we have the 17,000 hours, I would say at a more normalized military rate and that's why we wanted to give the gui- or not guidance, at least perspective on the military even though we're not giving full year next year guidance. Because we know that's something that we had a fair amount of conversation about last year.

The timing of that, in terms of how the military is going to play quarter-by-quarter, that remains to be seen. Without any specific insight from the US military, the Administration says theyre going to have a -- has stated that there's going to be a review of the strategy and a measure of success in Afghanistan in July. We could see higher flying in the first quarter or the first half, in advance of whatever military offensive may be contemplated. That we have had over the last several year, a lot of military activity in Q1. We haven't put a dimension as to how that 17,000 hours shapes quarter-by-quarter. It could be a little bit more weighted to Q1 and Q2, than Q3, Q4 based on the policy and the strategy that the Administration and the DOD pursue.

But you're right on maintenance, we do like to do maintenance at the lowest activity quarter, which is typically Q1. That wasn't the case this year, but typically, that is. That's when we plan maintenance and that's when we plan training events for our pilots, as well, so that they take advantage of the lower Ops tempo to get the training done. And we have them ready, certified and full up for the latter half of the year.

Then the third unknown, I guess, or variable is a better way to say it, is commercial charter. Last year we were trying to handicap what happens after Thanksgiving, what happens after Christmas, what happens after Lunar New Year. I guess some of those questions are still out there this year. Not for the fourth quarter. We see a very strong fourth quarter as we've talked about. There seems to be some delay in several of the high-value consumer products. The next phone, the next generation of the IPad, and their competitors. So, I don't know yet what Q1's going to look like. So, that's not giving you the best answer, in terms of your modeling, but I think those are the variables that out there that we don't have all the answers to yet,

That's good color, Bill. I appreciate it. One more question relative to John's question on the IATA. The one thing that struck me in the last release was that load factors have started weakening out of Asia. Is it just that that's not on wide body aircraft so you're not seeing that? Because the one worry would be if it's already weakening and you have new capacity coming next year, that's not a good setup.

I have to say from our customer's point of view, we're absolutely not seeing that. Our customers are asking for charter capacity that we can help supplement them with. So, we're not seeing that load factor contraction that the map gives you when you do the math as to what's been added, what's been amended, and so what's the result. We're not seeing that. As you know, a portion of our business is trans-Pacific. The largest single portion of that is DHL, which is -- on that, those aircraft -- is the express business plus heavy freight. Qantas operates some trans-Pacific. But the other customer base is really not trans-Pacific. As you know, the routes that Qantas, excuse me, that Emirates and British Airways and Panalpina fly, so we're just not seeing that kind of several percentage point slip in utilization

Alex, this is Spencer just to add to that a little bit. We look at the same statistics that you do, obviously, and we see the numbers coming out of the airports and so forth. We are just about completely sold out. Maybe it's the type of planes that we fly, maybe it's the type of customers we have, maybe it's the type of global operations that we have, but as Bill said, we're really just not seeing that. In fact, we're seeing some shortages in electronic components, as Bill mentioned. It's not what we're seeing. I also wanted to get back to you on your question with regard to salaries decreasing. It's really just an accounting function of how we calculate incentive compensation that was more heavily weighted in the beginning part of the year. So nothing that should concern you. We do expect that that should normalize as the year goes on.

Okay. Great. Thank's for the time, guys.

Thanks, Alex.

Your next question comes from the line of Carter Lee with Davenport & Company.

Good afternoon. I want to cut to the -- what I thought I heard, can you reconfirm the 17,000 AMC block hour guidance is in fact a two year agreement?

No. There are two questions there. We said, or I said, that the forecast in terms of hours is 17,000 hours for 2011. I think it was Ed Wolf asked me about the teaming arrangements, and what I said was that the teaming arrangements, the structure that results in a market share, are for two years. The number of hours for 2012 will be dependent upon demand. We'll have a proportional share, or entitlement to that, based on the same teaming arrangements we have today, if that's helpful.

That's very helpful. Is there any chance of getting the percentage market share increase from you?

It's possible if another airline --

No what you've got. Put differently, if this is a bigger piece of a smaller pie, perhaps what was the difference between 2011 and 2010 on the total allocations?

The year-over-year.

I'm trying to find out, maybe what was the FedEx team's increase in allocation or your increase in allocation within the FedEx team?

The increase is the increase for the team. So, we don't have a separate increase than anyone else. Our team is our team. Last call we talked around 41%. The final allocation is still being worked. It's going to be in that range. That would suggest around a 12% or so increase. The details of that are being worked out, but that's the order of magnitude. That's the increase assumption I'm using when I say 17,000 hours based on what the demand is.

With a larger slice of a smaller pie, that's how we're coming to approximately 17,000 block hours for 2011.

One other point I'd like to make. Particularly when the demand was very strong as you think back historically. We, Atlas, historically carried more than our entitlement. We had the larger fleet and we had the fleet management disciplines in place that we can carry more than our entitlement. The way that simply works, I think the ad hoc missions that the military have, they will essentially put them out on the market. They will go to each team and see if the team can accept the demand per the entitlement. When a team cannot meet its entitlement, that capacity spills into a bid. Not for rate, just can you do this? Can you fly this mission in the time that we want it flown? We've been in a position, historically, to respond to that and take missions. Historically, we have carried greater than our entitlement would have provided us. What I was commenting on earlier was, is as the pie shrinks, I expect the carriers are going to be able to meet their entitlements and are likely, over time, to carry more add entitlement. Which is why we're excited to have a bigger share, or bigger entitlement, as part of the FedEx team

So maybe we'll switch over to 400 dynam -- supply demand dynamics of the 400, with particular focus on the XJAL aircraft as they come into the market, probably very competitively priced. Some of your competitors picked up a few of their freighters. Do you see any risks that some of your competitors who did not previously operate 400s or who have taken 400s might now, either to get an attractive entry point on the platform or increase market share, maybe in AMC?

The two 747-400s that went to market did not go to AMC operators, and did not go to ACMI operators. They went into fleets of cargo airlines. So those two aircraft did not come into that market. It remains to be seen where the BCF's go, the four BCFs that were recently transacted coming out of [Jow]. I think it's five, excuse me, a couple went to a lessor. So, we'll see where they end up. But a company can't just show up and raise a hand to the military and say, hey, guess what, I have a 400 now.

Forget the AMC. What about just the platform in general? Just 400, more conversions coming online?

Sure. More conversions will likely come online. The conversions are not very successful in AMC. The 400 freighter is substantially better aircraft than a BCF is in, -- in ACMI. I'm getting my alphabets confused here for a moment. Too many acronyms. But the BCF is not as competitive as a 747-400 pure factory freighter in ACMI. If you look at the actual characteristics of the BCF, it is better than a 200, but it's marginally better. That's been some of the concern about the aircraft and I think partially contributes to why you see fewer. But what we've consistently said, is that our long-term strategy is to lead with the most efficient technology that's available in the market. And that's why we placed the orders on the dash 8. That's why we've not bulked up on BCFs, in fact, we've made the investment dollars in the 200s to continue to extend the useful life of that aircraft for the commercial charter and the military charter and we'll park them when we park them, and we walk away, we cut them up for parts. If there are operators out there who are ACMI focused as they come into BCS, I think we have a very competitive offering with the 400. The dash 8 is two generations ahead, and I think we said on other calls, or in meetings, that we will manage that 400 fleet such that we will size the fleet appropriately for the demand and we will increase dash 8 orders as makes sense to us. And to some extent, that replicates what we have done with the 400s and the 200s.

I want to circle back to the previous question regarding the leverage that could be left in the ACMI contracts. But before we go there, I just want to clear up a comment made. You had mentioned around 540 hours per month. That would suggest close to 18 hours per aircraft, per day, which seems extremely high. I would think 450 hours, or 15 hours a day, is that 540 number really achievable on amend utilization per aircraft basis, per month?

I don't know that I said, 540, I'll go back and check the transcripts later, but what we said is, the minimums are 400 on average. That's a net minimum after any cancellations that a customer is entitled to particularly around holiday weekends. We've said we're flying 440 today. I think Bill Greene was asking for some clarification on this. We said historically that customers flew about 7% over min, so that's 428 hours. The 500 comment that I think I made was that, at times, and particularly in the fourth quarter and around peak and other peak demand periods, we do in fact operate the aircraft in access of 500 hours. To your point, 500 hours, 12 months a year is not sustainable because you need time for maintenance and everything else. But 420, 428 up to 430, very doable, and we have historically done that.

I just meant it for model calibration. If I entered the fleet data that you gave, and the utilization, I get around 6.4% above the often cited 400 monthly minimum versus the quote of 10%. Should we assume you have a lower average monthly min-to-guarantee to correlate to the 10% or is there something else that I'm missing?

Carter, This is Spencer. The 400 is just an average. It differs by customer. So, we have different minimum block hour guarantees by customer. They have different cancellation hours and so forth. We try not to provide specific customer information. So it's just an average. But the 10% is our calculation this quarter of what our customers flew above their minimum block hour guarantees.

Great. Just one more. Is there any material change in how one way AMC rates are priced on the coming year that might impact a favorable prepositioning dynamics in commercial charter?

Carter, before we go there, there's one point, I'm not sure, maybe it was John Barnes who was asking about this. In our ACMI segment, we report ACMI and CMI and that may actually skew some of the numbers that you're looking at. We've said that the SonAir flying is about 383 hours a month and we've said that 383 hours a month more-or-less is going to give us earnings equivalent to the 747-400 in ACMI.

We said that Boeing, the LCF, was ramping up in this quarter. So the Boeing LCF flying that we did would be counted in aircraft in ACMI before the quarter end, but it was lower utilization than the 400 or 440. So that, unfortunately from the math, will skew it for your calculus. So, the 440 plus 10% I was talking about, the pure up ACMI flying for the ACMI customers that we have, not getting a little clouded with some of the CMI numbers.

That would do it and you're right, that's how you've told us you were doing it. I was just circling back to, if there's any change in the way the one way MC rates are priced that might impact the prepositioning dynamics, the favorable dynamics, that help the commercial charter segment in 2010?

The final rates are coming through. There is the obvious benefit of having them one ways in our business, so we just have the short six or seven hour ferry into Asia and out. We think that's essentially going to be consistent as we come into 2011. We don't have the final contract rates yet, but it's going to behave or function pretty much the same way, Carter.

Great. Thanks for taking my questions.

Thank you

Your next question comes from the line of Scott Malat with Goldman Sachs.

HI, thanks. Just on the 200s, hopefully quick. The $0.30 for 4Q, I just wasnt' sure what that really meant. Is that basically for two C checks and two engine overhauls and then, we still have C check costs ahead for the other four and engine overhauls for the other 200s that are not included in 4Q? Can you just take us through what you're doing with that $0.30 and what should we expect next year?

In the last earnings call, I think we talked about maybe a $5 million more in maintenance for Q4 and what we're looking at is, something that looks like $13 million to $15 million more -- excuse me, something that looks like $13 million to $15 million more in that period, and that is a combination of a one aircraft heavy check and engine. Going forward into 2011, we got the aircraft checked up for the 400s. We'll make the decision as we go through '11 if we want to continue to make investments in the aircraft themselves with C checks or something heavier than that and we'll do the engines as needed.

Okay. I might follow up after the call. The other thing, I think you gave me this, and I want to make sure I'm looking at this right. In terms of the 28% going to 41%. So we can assume it was higher than 28% share previously because, in AMC, just because you were getting some of those volumes in overflow. So we can't think of it as simply 28% going to 41% and then the 17,000 down 5% or 6%, which just implies that the overall business is down a little over 20% from three Q levels in 2011? That's not the right math? It's actually down probably more than that, I guess? I'm not sure. I'm trying to figure out the underlying business, what it's down, if you exclude the share gains?

There are a couple of numbers that are moving there to try to answer the question. We have, historically, over carried our entitlement. Our entitlement this year was in the range of 28%. We were in the low 30%s for the first half of the year. We were over 28% in the third quarter just completed. And we're looking at being slightly above that. So the contraction year-over-year in total demand is less than 28% to 40%, or 28% to 41%. If that's somewhat helpful to you? So that the gain that we're picking up here is not a 14% gain. That's just the mathematics, or 12 % gain, that's just the mathematics of entitlement. The effective numbers are 5% or 6% more likely in terms of actual flying hours. What I was saying earlier is, depending on how the demand contracts, there's less over entitlement flying -- likely to be less over entitlement in flying available to Atlas, because the other carriers will fly their entitlement and what we were -- the objective we had in getting the larger team was anticipating that the demand would contract. We'd get a larger share of a contracting demand.

Okay. That makes sense. Thanks, I appreciate it.

Thank you.

(Operator Instructions) Your next question comes from the line of David Campbell with Thompson Davis.

Good afternoon. Thank you for the time. I just want to get my aircraft and operations straightened out. There were 29.2 in wet leasing and charter activity in the third quarter. That includes SonAir and LCF. So in the fourth quarter, what should we use for what we see now and for next year?

David, that's right. So we have 22, 747-400s. We have six of the classics and the CMI aircraft equivalents were approximately 1.3 during the quarter, so you have those numbers, right. Then going forward, I think, we share with you, during the analysts day, what we think the block hours will be related to CMI. It's just a matter of modeling those block hours and then you can figure out the aircraft equivalent for those.

So there will be more than 29.2 in the fourth quarter?

It depends on how much flying we do for Boeing with the LCF Dreamlifter service we have in CMI.

But it can't exceed the third quarter? I mean, there's only a certain number of aircraft. I'm trying to figure out.

I'm sorry. For Boeing, there are four of the Dreamlifter aircraft that we operate on a CMI basis. Those are Boeing's aircrafts that we operate for them and there are four of those. And the issue is how much aircraft equivalent of flying that we do. It depends on how many hours we fly for those aircraft. It can be one aircraft equivalent, two, three, four. It depends on how much volume there is for Boeing.

They are not your aircraft. I forgot that. SonAir's not your aircraft either?

Correct.

So I guess -- you don't really know until you get what their utilization is? So Sonair will be more in the fourth quarter, because that will be a full quarter of four aircrafts?

So let's talk about the aircraft that are on the certificate, registered on our certificate in the flying. We have 22 747-400s that are Atlas Air aircraft. One's a BCF and 21 are pure freighters. We have six 747-200s Atlas Air on the certificate. Two SonAir 747-400 passenger planes and four LCFs. So, that's the aircraft that are on the certificate. When we convert into aircraft equivalents, particularly in the LCF and the SonAir, about 350 or so hours equals one aircraft equivalent. So even though there are two SonAir aircraft on our certificate, we had a full quarter of operations in the third quarter for SonAir, three times a week, Houston [LaWon] to Houston, that ran at about 380, 400 hours a month that roughly, even though it's two units, it roughly equals one aircraft. The same thing with the LCFs. There are four on the certificate. Depending on the number of hours we fly, we're going to divide the hours by 350ish hours, 350, I think, for the LCF, and that will give us the aircraft equivalent units that we fly. That's how we're doing the math, David.

Okay. Thank you very much for the help.

Thank you. At this time there are no further questions.

Thank you, Operator. On behalf of the Atlas Team, I'd like to thank all of you for your interest in Atlas Air Worldwide Holdings. We appreciate your participation and the questions and the good dialogue we had on today's call. We look forward to speaking with you again soon. Thanks very much

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