Atlas Air Worldwide Holdings Inc (AAWW) 2011 Q1 法說會逐字稿

Good morning. My name is [LaShauna], and I will be your conference operator today. At this time, I would like to welcome everyone to the first quarter earnings for Atlas Air Worldwide Holdings. (Operator Instructions). Thank you. I would now like to turn the conference over to Atlas Air. You may begin your conference.

Thank you, and good morning everyone. I'm Ed McGarvey, Vice President and Treasurer for Atlas Air Worldwide Holdings. Welcome to our first quarter 2011 results conference call. Today's call will be hosted by Bill Flynn, our President and Chief Executive Officer. Joining Bill is Spencer Schwartz, our Senior Vice President and Chief Financial Officer.

As a reminder, today's call is complimented by a slide presentation that accompanies Bill and Spencer's remarks. If you have not already downloaded or printed a copy of our slides, you may do so from our website at www.atlasair.com. You may find the slides by clicking on the link to Presentations in the Investor Information section of the website.

As indicated on slide two, we 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 any forward-looking statements.

Please refer to the Safe Harbor language in our recent press releases and to the risk factors set forth in our annual report on Form 10-K, filed with the SEC on February 14, 2011, 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 U.S. Generally Accepted Accounting Principles and our related reconciliation in today's press release, and in the appendix that is attached to today's slide presentation. You can also find these on our website at www.atlasair.com. You can access our press release by clicking on the link to Financial News in the Investor Information section of the website.

Again, if you have not already done so, you may download or print a copy of today's slides by clicking on the link to Presentations in the Investor Information section of our 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. I'll start right away with the key points on slide 3.

First, 2011 is going to be an excellent year for Atlas Air Worldwide. Our view is based on continuing strong demand in our markets, steadily improving quarterly results this year, new business opportunities and execution of our business model.

The execution of our business model is generating substantial forward momentum for us. Over the past year we have grown our ACMI business, adding two aircraft for DHL Express which began flying late in the first quarter, adding a second plane for Panalpina, and a new placement with TNT Express.

With our proven ability to operate time-definite global networks, we successfully launched a new non-asset-intensive CMI service. We have built long-term CMI relationships with Boeing and with SonAir, and we are developing other potential new customers. At the same time we have expanded capacity to meet demand by placing two 747-400BCFs into military and Commercial Charter service starting this quarter.

Cargo demand in our AMC Charter segment is now anticipated to approach 18,000 block-hours in 2011, up from our prior forecast of 17,000. We are also commencing passenger service for the U.S. military this month, capitalizing on our experience in serving the military, and on our knowledge and success in providing passenger service for SonAir.

In addition, we are moving closer to implementing a long-term labor agreement with our pilots that preserves work rules and flexibility, and enhances productivity. And we're moving closer to our game-changing 747-8Fs. Each of these initiatives are incorporated in our framework for 2011.

We continue to expect 2011 earnings per share to exceed $5.30 per share. Earnings in 2011 will have a different quarterly distribution than we had in 2010, when we capitalized on the movement of M-ATVs for the U.S. military in the first and second quarters to report very strong earnings in those two periods.

In 2011, we expect our results to improve from quarter to quarter; and with our strongest results in the third and fourth quarters, as customer utilization of our aircraft increases with seasonal air freight demand; and as maintenance expense trends down in the back half of the year. Slide four highlights our first quarter results.

Net income totalled $10.5 million, or $0.40 per diluted share, on revenues of $298 million. Results for the quarter included a $0.44 per share impact due to an increase in maintenance expense, compared with the first quarter of 2010. These expenses were in line with our expectations when we provided our original guidance for 2011.

As you know, we normally incur the bulk of our maintenance expenditures in the first half of the year so that we can fully meet the demand from our ACMI and Commercial Charter customers in the seasonally stronger second-half of the year.

Maintenance expense was at more typical seasonal levels in the first quarter of 2011, while maintenance expense in the first quarter of 2010 was lower than normal. For the full year, we expect that maintenance expense in 2011 will be consistent with the full-year 2010 expense of approximately $174 million.

Our first quarter results also included start-up expenses of $0.06 per share for business opportunities that will benefit revenues and earnings beginning in the second quarter of 2011, and generate more substantial contributions beyond. These start-up expenses related to our new passenger charter service for the U.S. military, and to the two 747-400BCFs we are bringing on-line in the second quarter, to meet the demand we are seeing in our military and commercial charter business.

Slide five shows our 2011 guidance in excess of $5.30 per diluted share, with a 15% pre-tax earnings margin. As I noted a moment ago, demand in our military charter cargo business is now expected to approach 18,000 block hours, up from the17,000 hours previously forecast.

On Friday we achieved a major milestone for our Company. We received approval to commence flying passenger charters for the U.S. military, building on our successful position in military cargo charters. We expect modest levels of military-passenger flying in 2011, and anticipate a moderate earnings impact this year considering the hours of activity and the start-up costs we have incurred since January. For 2012 and beyond, we think this initiative will add meaningful and sustainable earnings. For each hour of military passenger service we fly is an hour of growth for us, and it is a part of our strategy to mitigate any longer-term reduction in military cargo demand.

As we noted on our last call, our guidance projects that we will receive and place into service three 747-8s from Boeing in the fourth quarter of 2011. For each month that a 747-8F aircraft is in service in 2011, that aircraft will contribute approximately $0.04 per diluted share to our earnings.

Moving to slide six, we are encouraged by the trends in the global air freight market. Demand growth in 2011 is likely to be more in line with the industry's traditional 5% to 6% pace.

The key points to underscore here are; absolute freight tonnage is expected to grow to more than 46 million metric tons in 2011, from a record 2010 level that approached 44 million tons. The supply of fuel-efficient, high-payload, wide-body freighter aircraft remains tight, and these conditions will benefit both our ACMI customers and our Commercial Charter operations.

Turning to recent business developments in slide 7, we can see that the quality and value of our customer solutions, and the demand for our wide-body freighter aircraft, continues to grow. These developments are a clear indication of the strength of our customers' underlying businesses, and our ability to add value to their global operations.

As planned, we placed two additional 747-400 freighters into Express Network ACMI service for the benefit of DHL Express beginning in late March. These two freighters are incremental to the six 747-400 Fs that currently provide Trans-Pacific Express network service for DHL. The placement with DHL reflects the continuing growth of the air-freight market, the growth of DHL's global express business, and our proven ability to support DHL and our freight forwarder customers with high-quality, time-definite service. As a result, we now have 20 of our 24 747-400 freighters in active ACMI service.

To address customer demand and bridge our capacity needs, we are also deploying two leased Boeing 747-400 converted freighters in our military and Commercial Charter businesses. These aircraft supplement an existing 747-400BCF that is performing very well in a strong South American market. We expect our first passenger charter flight for the U.S. military to occur this month using a 747-400 passenger aircraft that we acquired on an operating lease earlier this year.

This is a logical and exciting expansion of our business, and it builds on our position as a premier supplier of military cargo charter solutions. Our entry into passenger service for the military leverages the experience of our longstanding service in AMC cargo operations, our in-depth knowledge of the area of operations, and our experience and success in providing premium private-charter passenger CMI operations for SonAir. These factors created a low risk, low cost entry opportunity for us.

Finally, we are close to implementing a new labor agreement with our pilots this summer after an arbitrator issues a decision on a few remaining items. The major items in the new five-year contract have been agreed upon by both sides, and reflect the professional and comprehensive negotiations that we had with the Airline Division of the International Brotherhood of Teamsters.

The economic impact of the new agreement was included in our original EPS guidance for 2011, and is included in our reaffirmation today. We achieved all of our strategic objectives in this negotiation, including preserving industry-leading work rules and flexibility, enhancing overall productivity, and maintaining competitive compensation and benefits for our crew members. Bottom line, we achieved long-term labor stability until at least 2017 under a contract framework rarely seen in the aviation industry, and we can provide that long-term assurance to our customers and to our shareholders.

This is probably a good point to ask Spencer to provide you with some additional perspective on our first quarter results. After that , we'll provide some more color about our initiatives and direction, and then we'll be happy to take your questions.

Thank you, Bill, and good morning, everyone. Slide eight recaps our first quarter earnings. We delivered adjusted net income of more than $10 million, or $0.40 per diluted share, on operating revenues of $298 million.

Revenues increased 1% during the quarter, while operating expenses largely reflecting the timing of maintenance expenses as well as fuel costs. were 14% higher than in the first quarter of 2010. Operating revenues in the first quarter of this year included significant growth in our core, long-term ACMI business, and an increase in Commercial Charter revenues.

These were largely offset by a reduction in AMC Charter revenues, which were exceptionally strong in the first quarter of 2010 because the M-ATV flying we performed for the military. AMC Charter revenues in the first quarter of 2010 included incremental revenues of $18.5 million, related to the premium-rate flying of M-ATVs, which negatively impacted our first quarter 2011 revenue growth by 6.7 percentage points.

Results for the quarter were particularly affected by a more typical seasonal level of maintenance, which increased maintenance expenses by $18.5 million, or $0.44 per share, compared with the first quarter of 2010 when maintenance expenses were low due to M-ATV flying. In addition, as Bill mentioned, we incurred start-up expenses of $0.06 per share for our new military charter passenger service, and the two 747-400BCFs that will begin to fly during the second quarter.

Looking at slide nine, our first quarter revenues again highlight the complimentary nature of our business segments and our ability to optimize capacity allocations among those segments. ACMI revenues increased 30%, compared with the first quarter of 2010, as we reallocated 747-400 assets into our core, long-term ACMI business from service in our charter operations. At the end of the quarter we had 20 full-time 400 freighters in ACMI compared with 17 in the year-ago period.

In addition, the ramp-up of our CMI operations added an average of 1.6 aircraft to the segment during the quarter compared with none last year.

As illustrated on slide ten, direct contribution by our reportable segments totalled $46 million in the first quarter compared with $77 million in the first quarter of last year. Each of our key business segments was affected by the return to a more typical seasonal level of maintenance expense in the first quarter.

Direct contribution in our ACMI segment rose due to an increase in block-hour volumes. In AMC Charter, direct contribution reflected the cessation of M-ATV flying; and in Commercial Charter, direct contribution was slightly lower due to an increase in capacity, and a slow recovery in manufacturing activity in China following the Lunar New Year holiday. That was coupled with the market's inability to quickly and fully absorb the dramatic rise in aviation fuel prices that began midway through the quarter. Commercial Charter yields remain strong and continue to improve during the month of April.

Slide 11 shows block-hours and revenue per block-hour in our ACMI segment. ACMI block-hour volumes benefited from the addition of a second aircraft for Panalpina in October, the startup of ACMI flying for TNT in September, and CMI flying for Boeing and SonAir.

Despite seasonality in the air freight business, our ACMI customers flew at their contractual minimums during the first quarter this year. I think it's important to note that customers flew above their minimums in March and April, and are expected to fly about 5% to 7% above their minimums for the entire year. The increase in block-hour rates primarily reflected contractual rate increases in existing contracts, and higher rates on new customer contracts.

As slide 12 highlights, AMC Charter block-hours reflected a reduction in year-over-year first quarter flying to support U.S. military activity in Afghanistan. Revenue per block-hour rates reflected a cessation of premium-rate, mission-specified 747-400 flights of M-ATVs to Afghanistan.

Moving to slide 13, we see an increase in Commercial Charter block-hours in the first quarter compared with the first quarter of 2010. This primarily reflects improving demand for our 747-400 charter service to and from South America, and strengthening demand out of Asia.

Higher block-hour rates in Commercial Charter were driven by improved yields in South America, primarily driven by the increase in demand and by the recovery of our aircraft fuel costs during the quarter. Yields in Asian markets remained above average during the first quarter, but were constrained by a slow recovery of manufacturing activity following the Lunar New Year, a return of aircraft capacity to the market, and the market's inability to fully absorb the dramatic increase of fuel prices during the period.

Turning to slide 14 and our balance sheet, you see that we ended the first quarter with cash, cash equivalents, and short-term investments totalling $584 million. Capital expenditures during the quarter totalled $11.5 million, including about $5 million of capitalized interest related to our Boeing-8 order. We expect capital expenditures for the remainder of 2011 to be about $86 million, excluding purchase deposits, aircraft, and related capitalized interest.

As we previously reported, progress payments on our -8 order have been suspended until we reach an agreement with Boeing on a new delivery schedule. Our balance sheet debt at March 31 was down to approximately $475 million. We continue to focus on leverage and we continue to manage an already strong balance sheet.

Our net leverage ratio at quarter-end, which includes capitalized rents, was a very healthy 2.7 times annual EBITDAR, which positions us very nicely with respect to the growth opportunities we see ahead. Including the benefit of an investment that we made in our outstanding EETC certificates, we have an even stronger net leverage ratio at 2.4 times annual EBITDAR.

Now I would like to turn it back to Bill.

Thank you, Spencer. We are proud of the exceptional results that our team has delivered over the past year, and that we are on-track to deliver going forward.

From any perspective, Atlas Air Worldwide is a proven performer, delivering value and growth to our customers and shareholders. This includes the growth of our ACMI business, the development of our CMI operations, the sourcing of capacity to meet demand in our military and commercial segments, and the exciting expansion of our military charter service to include passengers. It also reflects our new long-term labor agreement, our strong balance sheet, and our transformative growth initiatives.

We see a strong outlook for Atlas, and for air freight in 2011 and beyond. Demand in our market is solid, and air freight volumes are expected to grow from record levels in 2010. We have a clear vision for the future as we continue to execute on our initiatives to grow our fleet with the next-generation 747-8 freighters; as we further ramp up our CMI service for SonAir, Boeing, and other potential new customers; and as we capitalize on our core competencies and market leadership in other ways.

We expect to drive future revenues and earnings to levels significantly higher than the excellent results we have achieved in 2010, and we expect in 2011. With that, Operator, may we have the first question, please.

(Operator Instructions). Your first question comes from the line of Alex Brand with SunTrust Robinson.

Humphrey. Hey, guys. So, can we vet this maintenance issue a little bit further? I guess several questions there. Can you talk about your normal accounting for maintenance for maintenance, whether there's accrual or you've got some expensing in the quarter, and then, how do we think about, as we go forward, the first half is normally bigger I think is what you said? So, should Q2 be at a similar run rate or does it drop down to something that is one level for the rest of the year? Help us think about that.

Sure. Good morning, Alex. This is Spencer. I'll take that one. As far as the accounting goes, the way we record maintenance expense is as incurred. So, we record maintenance expense when either airframes or engines are inducted. So, the induction date is typically when either the engine or the airframe, we've agreed upon the workscope with the vendor, it's supported by a contract and contract terms and so forth, an agreement exists. Either the airframe or the engine has been delivered and accepted by the vendor and generally work has started. So we expense it as incurred, and so therefore the maintenance expense that you see on our P&L varies depending upon when these events happen. When the induction dates happened.

As far as timing for this year, the first quarter is a -- it's been an unusual quarter the past few years, for sure. Last year we had a lot of M-ATV flying, the year before was an interesting year with the economy. This year is a more normal first quarter. And typically you would expect that we would incur more maintenance expense during the first half of the year, so maintenance expense this quarter was about $50 million. We expect that for the first half of the year, should be about $100 million. So, the second quarter about the same as the first quarter, and then the remainder of about $70 million over the -- fairly equally over the last couple quarters of the year.

Okay. That's very helpful. Thank you for that. Now, in terms of -- I think you're right. You haven't had a -- since you got your DHL arrangement change, you haven't had a normal first quarter. So, can you give us some frame around what's normal? If this is it, is it 10% or less of your full-year earnings in the first quarter is normal? Is that the right way to think about it?

Well, Alex, is this Bill. I think it starts with demand, and part of the -- I think part of what we're all considering here is that there's been something quite unique in the market over the last several years. We had the dramatic decline in overall market demand in 2009. Now, we were able to offset that as compared to most other companies because we had the take-or-pay contracts fully in effect with all of our customers, including the start-up that we have with DHL. In the first quarter of 2010, as a result of the surge that the administration announced moving into Afghanistan, we had an unprecedented movement of these M-ATV vehicles which we were able it take advantage of. At the same time, we had the inventory restocking going on, the huge build-up in air freight demand coming out of the latter half of 2009 and into the market. And so the last two prior years, '10 and '09, were quite unique driven by those events.

But I think there's a couple of things that I would say are normal or typical. More typically, just in freight flows generally, first quarter is a lower first quarter than second, third, or fourth. And that's pretty true across most modes, but certainly true historically against international freight, air and/or ocean. As a result of that our customers look to reduce their flying, and can under their contract, although the full-year minimums apply, and so they do around Lunar New Year and some of the other holidays. We try to schedule as this much of the maintenance as we can in the first quarter just because we have the time available to do that. Now, we do run out the maintenance life on an engine or the maintenance life on an airframe as long as we can, but, to the extent that we can, we do try to schedule that into the first quarter.

And, among other things that we do, we certainly look to try to schedule as much of the pilot training and recertification as we can in the first quarter because we have full time workforce, and we look to schedule training there. And to the extent possible we encourage our pilots to take their vacations during the low times of the year so we don't incur overtime dollars during the peak season. So, that's more typically what we would do. And how that shakes out in terms of percentage of profitability on a quarter-to-quarter basis, the maintenance will be among the largest variables of that. Maybe, Spencer, I'll ask you to add to that.

Yes, Alex, the first quarter this year we probably expected to be somewhere in the range that you talked about, somewhere around 10% of the year or a little bit less. That should increase throughout the year. The second quarter makes up close to double that. Then it continues to grow into the third and fourth quarters. And then the fourth quarter, the peak period, also the period when we're putting in place three of the -8s, the fourth quarter is obviously going to be the strongest quarter of the year for us with, not quite, but nearly half of the Company's pre-tax income for the year in that quarter.

That's great color. I appreciate that. I'll just -- one more and I'll turn it over. On that point about the fourth quarter, is there any change to your confidence about those deliveries? You guys still feel like that's a pretty low risk assumption to build those in on an October 1 in-service date?

Well, that's what we expect today, Alex, based on our discussions with Boeing, our understanding of where they are in flight-test certification, and that's applying some of our own judgment to that. So that combination of factors would -- we're forecasting and expecting three aircraft, in service, in the fourth quarter for British Airways.

Okay. I got you, Bill. Thanks for time, guys.

Your next question comes from the line of George Pickerel with Stephens.

Hey, good morning, guys. One follow-up question on Alex's maintenance questioning. Have you ever had that many C and D checks in one first quarter before? I think you had four D checks and six C checks.

We certainly haven't had that in the past few years, so it is a bit more than the past few years.

I think it varies. If you look at -- you have to look at the Classics versus the 400s, C's versus D's. It's hard to find a normalized pattern, if that's what you're looking for. So we have the -- every event, every quarter, George, we look at this constantly. It really does depend upon each of the aircraft, how much they fly, depends on time, sometimes depends on flight hours, sometimes it depends on cycles. So it's not easy math, it's not a straight-line pattern that you can easily see. It depends on a lot of factors.

Right, okay. And so to be clear, this was a situation -- it was just a timing issue this quarter, and versus a situation where maybe you were able to either delay or even pull forward maintenance into the first quarter? Is that a fair statement?

That's absolutely a fair statement. We didn't pull maintenance forward into the first quarter.

Okay. It just is what it is.

It is what it is. There's a calendar, there's a clock running on the C's and the D checks, and they occur when they occur.

Okay. Question for you, Bill, on just the market in general, and maybe in regard to your commercial charter comments out of Asia. Can you talk about demand out of China today, March into April? And on top of that can you talk about industry supply? Are you seeing more planes come in? Are we at a static supply base? I'll leave it at that for now.

Yes. Thank you, George. So, I think what we saw in January and February, particularly with the early Lunar New Year in February, was a more typical or, we have to go back a few years to think about what's typical and what's seasonal, but a very typical kind of historic pattern July -- I'm sorry -- January and February, the Lunar New Year shutdown was at least seven days. Plus, as people went off for the holiday, it's been reported in several places that the return to work was a little slower than typical, and that there have been some reports about problems with supply of chips and inputs that were going into manufacturing.

In March we saw clear pickup. Now, I added numbers throughout today and it actually shows March somewhat flattish on a year-over-year basis. There's got to be some effect in there for Japan, because Japan does power supply chains in regional manufacturing in Asia. But on a sequential basis, a pickup. And we've seen it ourselves. We've seen it in our customers flying above minimums in March, and where April is behind us, and we saw improved demand and improved performance in April as well from both the ACMI and the Commercial Charter customers. And so we see those trends continuing.

I attended, yesterday, the first day of the C&F conference, which is an IATA-sponsored conference, and what we heard was not that people weren't exuberant, but what we heard was really optimism and a positive outlook for the market going forward, and most of the speakers at the conference also commented on the improving trends in March carrying into April and beyond.

Okay. And last question, then I'll turn it over. Along the supply line of questioning with oil at $113 a barrel, or wherever it is today, are you getting more calls for the -8s than you did a couple months ago, and are you seeing any 200s leaving the market just because they're uncompetitive now because of fuel prices?

I don't think that that's been fully absorbed yet in the market, George. Back to specifically Atlas, our demand and our interest in the -8s is very high, and as we said on prior calls and as I think we've said today, we feel very good about our ability to place our -8s. DHL taking on the additional two 400s into their networks, which does include Japan in that network and provides them incremental intra-Asia lift, is another indication of overall market strength. We see good demand in ACMI and our ability to place not only our -8s, but also our 400s.

We took on the two incremental aircraft they really didn't start flying until one at the end of April and one in a week or so here in May. And we think we've got very good utilization for that aircraft, as well. As far as 200 retirements, we continue to track the (inaudible) database and that population continues to decline as people retire and otherwise part those things out. So our sense is, going forward, there's good demand for our assets, good placements, and if fuel stays where it's at we'll be relatively advantaged as we have been having the most fuel-efficient assets.

Great. Thanks for the time.

Your next question comes from the line of Jason Ursaner with CJS Securities.

I understand the quantification in AMC for the premiums on flying to Afghanistan, but can you quantify, or at least generally talk about , the secondary benefit that this might have had for the Commercial Charter segment in terms of lowering the incurred cost of repositioning assets to

Sure. So great point, Jason. At the end of 2009, and then moving into 2010 , we flew a lot of these M-ATV missions. They ended during the first week of June, so they were extremely strong January, February and March of 2010. During that period we flew 105 missions, we transported 525 of these M-ATVs. So you can imagine there was a lot of flying. The vast majority of those trips were one-way missions, and so what that means is that the military paid us to fly from the U.S. into military theater. And then they also paid us a premium because it was only a one-way trip, that's all they were requesting. And then we can take that premium, and then we were able to fly a fairly empty flight to Asia, pick up charter capacity, and fly back.

So, therefore, when you look at our rate per block-hour in Commercial Charter, those rates per block-hour were incredibly high last year. So one of the things that, yes, I'd like to point out is that we have seen our flights with the U.S. military -- we've picked up a lot of one-way missions once again. So because we are at capacity we are picking and choosing, and choosing one-way missions because they're more profitable flying for us, so we're able to do that given where we are. But to your question, yes, we were picking up a lot of one-way missions for the military and that led to strong charter, and we're continuing to focus on that today as we optimize and maximize our profitability right now and going

So if I look at that year-over-year compare on the revenue for block-hour, if I'm thinking about how much of the rise in fuel was actually absorbed by the market, is the right way to think about it that it's a similar average aircraft number, but more of the block-hours last year were full payloads out of Asia? Or this has kind of been offset by the one-way missions you picked up where you can pick and choose?

Well, I think there is a mix in there, Jason. This is Bill Flynn. We saw very strong recoveries just generally in the market in the South American trades on fuel, and the combination of three factors in trans-Pacific, which would be the -- there were some capacity that's come back. IATA's reported capacity did come back into the market. However the production was off a bit, particularly in February. As we've talked about already, with the more typical one-week-plus Lunar New Year shutdown and then some slower ramping-up post-Lunar New Year because of slower return to work from migratory labor force, as well as some supply-chain problems with component inputs into manufacturing. The combination of that softened the market's ability to push the full fuel increase into the market. So, that's part of it.

Okay. And for the new business in military passenger flying, was there a specific need within the FedEx team for passenger capacity, possibly as a result of members that either left the team during the downtown, or was this kind of on your own?

No. There wasn't a specific need for capacity within either the FedEx team per se, or overall capacity, necessarily, for military demand. It was an initiative that we undertook. Our point of view, once we were able to secure SonAir, SonAir gave us a number of things. First of all, on a stand alone basis, SonAir is a very attractive win for us in terms of being a CMI win and being the first initiative we had or the first customer we had in CMI. But it also allowed us to enter a passenger in terms that make sense for us.

Again, CMI, it's about flying, maintaining, operating, but we don't have the crew, I'm sorry, we don't have the revenue risk of filling the plane or fueling the plane, but it gave us a new set of expertise and credentials. Under the military, under DOD contracting, a company has to have at least one year of experience in passenger operations. For that matter, one year experience in charter operations or cargo operations, to be able to be certified to fly. And so shortly after we acquired SonAir, we began the process of understanding the military certification requirements and qualifying for that, and we've been working on that for a good eight months now. So, it's pretty much what I said in my comments. We're in the passenger business because we see an opportunity, and we will be able to secure missions.

The passenger business coupled with what we're doing with Boeing on LCF, more than in my mind, will begin to certainly mitigate, possibly more than mitigate, the contraction we see in our traditional AMC cargo business, which has been one of the real private questions in almost every earnings call. We've had, How are you going to moderate that? How are you going to mitigate that? And we think combination of passenger LCF certainly does do that. And then the growth comes with the -8 -- earnings growth comes with -8s and other initiatives that we have.

Okay. And then just the last question for me. As the Company grows as a global business, can you talk a little about the trade imbalances and risk associated with the backhaul leg to Asia? Specifically to some of the FX volatility, not for routes into and out of the US, but since that's a pretty small percentage of the mix now, have you seen any softer demand on the backhaul legs?

Well, they're different legs, and our customers actually participate in the legs in different ways. And so it might be useful to talk about customer in the specific, and then maybe more macro. We'll start with the trans-Pacific though, because that's perhaps the trade leg people are most familiar with. Historically imbalanced, significantly imbalanced, the longer-term forecast, however, suggested that trade lane may balance better over time.

DHL flying the service that they fly, and because they have both express traffic and heavy freight, are actually running very high utilizations of the aircraft in both directions, particularly with the real uptick in U.S. exports over the last 12 months. And that trend seems to be continuing with the very low dollar, as well as integration of sub-parts and components that are manufactured here in the U.S. and are going to manufacturing operations in Asia. So, that lane is actually showing sustainable trends of improved balance over time, and that should play out over the next ten years or so.

Our other customer that's active in a big part of that trade lane is Qantas. Qantas has the ability, however, where Australia and New Zealand still do import quite a bit from the U.S.. So, Qantas is very high level of utilization out of the U.S. into Australia and New Zealand, perhaps a little bit lighter load factor on their route between Australia to Asia, and then full out of Asia. So, very high levels of utilization. Emirates is flying high levels of utilization overall. They're flying heavy into the Indian subcontinent and Middle East and Africa on the southbound runs with manufactured products coming out of Asia, and the region generally; down into South Africa bringing food stuffs and fish and horticulture; northbound with stops in Kenya coming in, and then continuing with some of that product into Europe and then back again into the Middle East. South America is full round trip for us, southbound and northbound.

The TNT and British Airways are benefiting from full loads coming out of Asia. The European imbalance back in Asia is much better. So on a very specific level, our customers are enjoying very high levels of utilization, and that gets manifested in higher-than-block-hour minimum flying which we see currently, and expect to continue to somewhere between 5% and 7% this year on an overall basis. But just growth, generally, I think having that wide geographic distribution of our customer base is strong, and I think we have balanced imbalanced risk. First of all, it's our customers' direct risk from an ACMI perspective, but long-term, if they're not making money, they're not going want to continue to ACMI from us. So it is, of course, important to us. And I think our risk profile is balanced pretty well.

Great. I appreciate all those details. I'll jump back in the queue. Thanks, guys.

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

Thanks very much, Operator. Hi, gentlemen. So, these are my questions. There was an article in one of the trade magazines last week that British Air is giving back the three 747-400s they have on lease once they get the 8s. So, have you started to remarket those planes yet?

Well, I'm not sure which article you're referring to. I can tell you this. BA is firmly committed in my mind to the 747-8s, and as we have said on other calls, we believe that we've got very good demand and we will place the other three -- the current three 747s that BA has either with BA keeping one or more of those assets, and that will be their decision, of course, or placing the aircraft with other customers. And we have -- our marketing of our assets is, as you would imagine, ongoing given the nature of the sales cycle.

Okay, thanks. And then the other question I have is actually with respect to the classics. So, what's your plan now for those planes? Are you continuing to keep them in service, or are you phasing them out again, or what's the thought there?

The 200s, Helane, have always provided us swing capacity, and we have talked about that, so in 2008 and '09, first half of '09 with the big downturn in the market, we were able to park those assets and then bring them -- not all of them, park some of those assets and bring a few of them back into service. But through 2011 and into 2012, our outlook is to retire those assets as we introduce our -8s and as we fully utilize the 747-400s. So today's outlook would say, by the end 2012 or, more likely than not, out of the 200 fleet.

Okay. Is the military --

It's really demand -- excuse me. I didn't mean to interrupt. It's really demand-driven in the military and Commercial Charter side.

Okay, great, because I was going to ask about the military. I thought they were trying to get away from the older aircraft and focus more on the 400s. But they're still willing to take those?

So, the military is, over time, focused on getting out of 200s and moving more fully into the 400 fleet, and that's good for us. That's certainly something we've been encouraging the military to do. I think that will begin to accelerate as they -- as there is eventually a draw-down, and as they -- the trans-com and the military overall has to deal with the budget constraints, and the 400 will be a more fuel-efficient, better operation overall for the military. And they're focused on that, but that's not going to be one day to the next. They're moving in that direction and my comments about pacing the retirements of the 200s is somewhat correlated to our understanding of how they may pace and change the demand at AMC as well.

Okay. And then my last question is with respect to the military passenger business. Will that business be as lumpy as the cargo business, or will that help to smooth out that business, or how should we be thinking about that? So for an example, with what -- the events that went on in North Africa when the U.S. was moving it's nationals out of Libya and Egypt, was that a business you could have participated in had you had passenger aircraft available, or not? Would that not have even helped?

Well, we could have. Yes, with we could have participated in that. So, the rhythm of the military passenger business really is about troop rotations and training exercises. It's at a much higher level of activity now still, of course, with CENCOM, and we thought about the troop rotations that came out of Iraq as the government drew down a hundred thousand forces there. And over time there's going to be that draw-down in Afghanistan and the theater. But, there are troops and there will be troops, we expect, in Europe. They'll be in Asia, in the Pacific. There are normal, planned training exercises.

When we get post-conflict, and I'm not forecasting when that is, but as you become post-conflict, the rhythm of military demand will probably be seasonal; for passengers, more summer-time and when training missions and troop rotations are there. But not exclusively, and that will drive the demand, and that's a bit of a learning curve I think, Helane, that we're going to have to come up and the military will, too, as the draw-down occurs and we get to a non-conflict area. So, we've got a bit of learning to do on that as we come into 2012 and beyond.

Okay. Thanks for your help.

Thank you.

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

Hey. You know, I just wanted to follow up a little bit on the 747-8s. When you try to figure out how to market this, obviously you're still expecting the jets to come in in the fourth quarter. If they don't, it's safe to assume you don't have penalties or any risks associated with delays at Boeing?

Penalties from our customers?

Yes. Like in other words, if you don't deliver on what you've now contracted, there's no risk?

We have no penalties from our customers on late delivery because we're not the manufacturer, and we never warranted the delivery date. All we were able to provide, and have provided our customers, is the same kind of delivery date schedules that we have from Boeing, and then the information that Boeing provides us in terms of the delays that have occurred and the flight-test certifications process that's underway. We're very transparent with our customer, as is Boeing, and our invitation with our customer to make sure that they understand what the delivery schedule looks like.

Yes. Okay, good. So then, when you think about trying to market this, what do you do with another delay? You just endure, or how do we think about what kind of flexibility you have around that, or maybe there's not much?

Well, I think it's a good question, Bill. I think the real question is that the answer, probably the best answer to the question, is that the aircraft is going to be a game-changing aircraft. It's going to provide substantial improvement in fuel burn and fuel efficiency and payload. And I think those of us that are on the receiving end here, whether we're Atlas, the company buying the aircraft, or any other airline that has an aircraft order, or in our case, our ACMI customer who's anticipating that aircraft, we're all frustrated with the delays. But whether it's endure or forebear or understand but not be happy with the situation we're in, that's kind of what it is. However, it hasn't dampened the interest in the aircraft because of the expectations of what the aircraft is going to deliver for the customers when they onboard it.

Yes, okay. No, it makes sense. If you look at your existing fleet, is there a way to estimate the kind or how much excess capacity might be in it? In other words, whenever you have solicitations of new interest from a customer, do you have to go and take another aircraft on lease or something? Or is there an ability to move things around within this fleet?

Well, the reason that we took on additional aircraft, the 747-400BCF, was really driven by the delay of the 747-8s, and good market demand both in military, Commercial Charter, and ACMI as well. And so we didn't want to lose or spill opportunity as a result of not having that capacity. We wanted to bring in the BCF on what I would call flexible terms. It's a three-and-a-half year average lease for both aircraft, but we think that will bridge us. Back to Helane's earlier question, it bridges us as we retire our 200 fleet over the next 18 months perhaps, as a timeline, and gives us the flexibility we need to meet demand.

In terms of positioning aircraft, we have been tight and we did move an aircraft from a customer to another customer in this quarter, but I think our goal is to size our fleet, and we have aggressively managed our fleet since coming out of bankruptcy in 2004, to size the fleet as appropriate as we can for the demand that we see. So, what does that mean going forward? What it means going forward is we take our -8s, we have our 400 freighter fleet. Those are the -- those two are the premiere asset for ACMI and ACMI contracts. We'll make decisions about how many more -8s we may want, and as we do that, we'll very consciously make decisions about how many 400s we keep in the fleet, and then what the plan -- the longer-term, the five- to ten-year outlook might be on on the fleet and manage that fleet going forward.

Okay. And then, sorry if you answered this. Just one question on this new passenger business for the military. Two (inaudible), number one, does it show up in military flying in terms of where you segmented? And also, is the profitability, once fully ramped, similar to cargo -- military cargo, or is it different?

So it'll be reported in our military segment because it is military charter. The contracts are the same in that it is a cost-plus contract. You don't have fuel risks. So all the contractual attributes are the same. Margin, we're not really forecasting margin going forward yet. Right now, one aircraft is a sub-scale fleet. It doesn't have the benefit of scale, I'm saying the same thing twice here, but we've got to size our fleet for 2012 and beyond based on our understanding of the demand and our understanding of our entitlement and access to that business. And so we've not answered the questions yet as to, okay, what's that revenue and what's that margin and going forward, because we still have some learning to go through and experience to gain this year. We'll be in a much better position to talk to that in more detail, Bill, as we come towards the end of the year. Our sense at the end of the day? It will be attractive business for us.

Yes. So while there's a ramp, maybe there's -- it sort of depresses the segment's margins a little, but over time we would assume it would be at least in line with averages?

I think over time what you would see is, it will be very attractive flying for Atlas. It's flying with very discernable margins, very strong returns, and again, overall military volumes have declined, but each hour of passenger is growth hour for us. Adding that with the LCF on top of our charter, our cargo charter business, and I think there's a whole-cloth answer that we can put out to the market to our investors of, okay, I understand now how Atlas is going to deal with this military contribution that we've earned in '08 and '09 and '10 and how going forward there's a very tangible answer, and growth comes from -8s and other initiatives.

Yes. Okay, great. Thank you for the time.

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

Hi. Good morning, it's Varun Gokarnin for Scott. Just a quick question on the labor expense, and you touched on the pay rate increases with the union renegotiation. Could you give us some color on what you think about that line for the full year? The expense for employees has been pretty flat over the last three years, so how would you expect that metric to change going forward?

Yes. That's a good question. Thank you. So just to touch on the contract just for a moment. We've been in contract negotiations with our pilot workforce, both Atlas and Polar, since about the beginning of 2005. We announced the merger of the two contracts and the unions at that time. And that's been a long process if you look at where we are today, in 2011, anticipating that the final contract becomes implemented later this year. A couple of other points, and some I touched on in the script.

The basic pay scale for the pilots has not increased for both pilot workforces, Atlas and Polar, since 2005. We'll integrate both workforces into a single workforce which will improve our efficiency and flexibility, because we won't be working to optimize or schedule two separate crew forces. It will act and operate -- our pilots will be all part of a single workforce, and you can visualize what some of the benefits of that will be. It will be a five year contract term from date of signing, again, later this year, but our contracts are regulated under the Railway Labor Act, and so when we're talking about 2017 in the contract, typically at the expiry of the contract as we're in negotiations, those processes or negotiations typically go on for up to several years, in fact, before the pilot workforce could seek release to strike or work stoppage, if you want to call it that. And so that, that's that 2017, possibly 2018, outlook.

So we're excited about the term of this contract and the kind of assurances it gives us, it gives our customers, as we're looking to place our assets, our ACMI assets, in their operations on the long-term. We've maintained our productivity rules and we've maintained our efficiency rules. Now let's -- your question was, okay, but what about the numbers? I kind of heard all that. So, we're looking at about a 10% to 11% increase in the pay scale for our pilots at date of signing. And then, very nominal increases for the four successive years after that. In terms of an annual run rate, that is a 10% to 11% increase on about $128 million currently in our pay. So, obviously, if you want to look at it from the full-year run rate, it's 10% or 11% of that. The impact in this year will be when the contract is entered into.

That's really helpful.

It's Spencer. I just wanted to add, to reiterate something Bill said earlier. That has been included in our guidance, so there's really no news here. The impact of any increase in our crew cost has already been included in our guidance, both when we gave guidance before, and again today in the reaffirmed guidance.

And as we continue to grow, as we take on -8s, as we hire new pilots, our pilots will be coming in at the bottom of the scale because they'll be new hires, as opposed to at the top of the scale.

Is there an annual wage inflation rate we should think about going beyond this year, like a 3% to 4%? Does that seem reasonable, or is it higher than that?

It's much lower than that.

Okay. Thank you.

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

Thanks. Good morning. I guess it's good afternoon now, guys.

Good afternoon, Ed. How are you?

Good. Just want to start with -- well, I'll finish up on a cost side, maybe. So, you just talked a little bit about labor. Can you talk a little bit about the rental expense ? You've got the two cargo planes and now the one passenger plane that are leased. How should we think about the aircraft rental line that was $38.4 million, and is that where we'll see it, or will we see that lease payment somewhere else or that rent payment somewhere

Ed, this is Spencer. So, we talked about some of the startup costs. So it's included in the startup costs, our rent that we paid for the passenger aircraft, and so we incurred rental costs there without any corresponding revenue. We rented that plane -- we leased it earlier this year, so we incurred those costs without actually being formally admitted to the program until just the other day. So there were some costs related to that. We also incurred rent for the two BCFs, and so together we said that was about $2.3 million, or about $0.06 per share. Going forward, yes, we will expect to see those, however, there will be profit related to that. So I think if you model it out consistent with what you're seeing on the rent expense line, it should be pretty consistent. But hopefully we'll see some revenue much more than offsetting that.

So, Spencer, you're saying that $2.3 million was in the rental line?

Not all of the costs related to the passenger startup was in that line. Some of that was in training and in other areas.

Because when I look at that line at $38.4 million, it hasn't moved in five years. It doesn't look any different than it did. So, should my rental not change at all going forward, or do I have more costs with more leased planes?

We bought back a plane, Ed. There was an aircraft, tail number 499. We purchased the owner-participant interest in that plane, if you recall, and so what previously showed up as a rental cost, we now own that aircraft and so it shows up through depreciation. So that would have lowered the rental costs. Offsetting that would be rental costs for the passenger plane and then the two BCFs. So, perhaps what you're seeing is the muted impact of those three different events.

Okay. And then when I look at the 18,000 block-hour guidance you gave for AMC, does that include any passenger in it, or is that just for cargo?

Cargo.

So how do we think about the passenger business? One aircraft or is, in your mind, is this building very quickly to four or five aircraft? Because it's very different. It's not passengers -- I mean, it's not cargo, so if it doesn't go well, it's not like you can take this plane and put it somewhere else so easily.

Well, that's right. I think what we've said in, at least what I've said in the script, was kind of modest-level of activity and a modest level of impact to the bottom line. This is about getting certified and beginning to fly, and so it's something slightly better than a neutral impact. But also as I pointed out in our script, it leverages that which we do in order to begin, and so the growth will be in 2012. And where you'll be able to discern a meaningful impact from passenger flying will be in 2012 and beyond.

How many aircraft? That we're going to have to provide you a better perspective on a little bit later in the year, Ed, because we have got to do a couple things. One, get a bit more certainty on what the flying level will be for us, and then that will tell us how many aircraft we can source and should source. And the attractiveness of this flying to us, there's a number of reasons why it's attractive to us, but the attractiveness to it is that we will be a very good position to manage the amount of aircraft we have, and our crew force and flight attendant workforce, et cetera, to the forecasted demand and, as you know, it's a cost plus contract.

So there's not a lot of risk in the flying. I guess the risk really is that we understand demand and we properly fleet up for it. So, it's just a little difficult for us to tell you how many aircraft equivalents, or better said, what are the aircraft equivalents, what are the hours, and what are the profit margins in this business, which could be different from profit margins in the cargo business.

Okay. Can you give us a quick update on what the fuel surcharge in the military flying was in first quarter, and what you expect that to be for second quarter?

Sure, Ed. The military, as you know, it's a pegged rate so the military provides a rate, and then any difference between that rate and the actual amount that we pay is either, we reimburse the military or they reimburse us. So, the rate for the first quarter of last year was $2.68, the rate for this year is $2.95. The military just changed the peg rate and so that will start, actually started just the other day, so going forward from May 1 on, the pegged rate will become $3.98.

Thank you very much. That's all I've got. Thanks a lot.

Thank you, Ed.

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

Hey. Good morning or good afternoon. Bill, you talked a little bit about sub-scale fleets. Going back to the discussion around the 200 F fleet and the potential retirement of those aircraft, can you talk a little bit -- I guess, right now that fleet is probably kind of close to the bottom-end of sub-scale, or -- correct scale, and if you take a couple out, then you start to get into sub-scale. Once you start the retirement process on the 200s, and I understand the whole demand and military and that type of thing, but once you start that retirement process how long do you envision it taking?

It will be fairly quick. I think the majority of those fleet -- that aircraft will time out and be put out of service very close, one to the other.

Okay. Very good. And then going back to the labor contract , I just want to make sure I understand. Given the delivery of the -8s, there's no need to negotiate anything further. Those pilots, any pilots that would be moved over to fly the -8 or hired to fly the -8, would be coming in as new employees, and therefore there's no additional negotiation required for that aircraft

That's correct.

Okay. All right. Very good.

There's no negotiation for any additional aircraft type effectively, Ed, because the rates are driven off -- excuse me, John, because they're driven off of (inaudible). So if we were to fly a different gauge, we know what our rate is going to be for that gauge today. We know that in the new contract going forward.

All right, very good. And then my last question, there was some discussion around [Cargolux] selling a portion of itself. I guess it's being shopped in the marketplace, that's the rumor anyway. I'm curious, is there any concern on your behalf that their attempt to sell a stake in their company could result in one -- fewer potential ACMI customers in the marketplace if somebody decided to make that investment? Are you concerned about your customer-base potentially looking at that as an investment opportunity or somebody that you've called on, and all of a sudden it results in one less customer?

I haven't seen that, John, and I think we've all heard speculation as to who one or another of those investors might be. So, we haven't seen that or heard that at this point. I think, though, the larger question, or the implied question may be just our level of confidence in being able to place at the right rate levels and other contract conditions, the aircraft we have and the aircraft we're buying. And so to answer it maybe from a different perspective, we feel very good about our ability to do that.

Okay. All right. So you don't see any pressure in the marketplace as a result of something, some event like that?

No.

Let me take the opposite stance then. There is a couple of your competitors in the ACMI marketplace that, as they go through fleet replacement programs, they're coming up with a mix of, whether it's 747-400s along with a triple 7 for example. Are you starting to see more opportunities because maybe some of your competitors in the normal ACMI business are unable to fleet-up entirely with 747-8s or 400s and, therefore, you're seeing some more opportunity coming because of the fleets you're running?

You know, I think that's right. What Atlas built a long time ago, really the decision to get into the 400 fleet, the pure-factor 400 fleet that the Company made 12 or 13 years ago when they made it allowed the Company to build a scale of operation in the 747-400s that we now amplify and build upon with the -8s. It's really hard to replicate. And for companies to start to build one aircraft at a time, that's a challenge. It's a challenge if you don't have the pilot fleet and you're flying sub-optimal fleet size, back to your question, and so you don't have crew efficiencies.

It would spill over into your maintenance costs and maintenance expenditures and the kind of investments you'll need to make in parts and engines and everything else that goes along with it. It comes down to your value proposition to your customer. If you don't have a maintenance spare to cover checks, and your customer has one or two or three aircraft and that's the fleet, well, they're either out of business or 50% capacity or two thirds capacity, absent that maintenance coverage. So we're going to always have competitors, every company in virtually every business does, but there is a scale advantage in our operation. We don't rest on our laurels and think that that's some ultimate barrier to entry, but it's certainly a competitive advantage that we have, and one that I think our customers appreciate and it creates value for them.

Okay. All right. Thanks for your time, guys.

Your final question comes from the line of Steve O'Hara with Sidoti & Company.

Hi. Good morning or good afternoon. I guess pretty much everything has been asked and answered at this point. Could you just go through your renewals the next two years for the 400s?

So, we've actually got very low levels of renewals this year, and we've talked about that, Steve, and there's nothing exceptional about 2012 as well. Now we do have a new aircraft coming and so the -- we even had the earlier question or discussion about what BA may do or what another potential customer might do if they take (inaudible) and they're an existing customer, so that's the overall placement question that we have. I will come back to what I said earlier.

I think we're in a very good position to place the 400s and the -8s, both fleets, because we see market growth. Those 200s are coming out. The BCF can work in charter markets, but it is not typically attractive ACMI aircraft from our point of view. Others may have a different view, but we don't see it that way because it's, in some ways, is a little bit better, but not substantially better than a 200. Obviously better fuel-burn, but performance-wise, payload not much better. So, again, we think that the per se renewals are at or below our historic numbers that we've talked about of a couple aircraft a year. It's a little less than that this year, and we think the demand is good for both asset types.

Okay. Thank you very much.

And there are no further questions at this time. Do you have any closing remarks?

I do, thank you, Operator, and I would like to thank all of you who have been on the call today. Thank you for your interest in Atlas Air and thank you for the questions. We appreciate your participation. We look forward to speaking with you soon, and we'll hope to see you just in a couple of weeks time at our annual Investor Day later in the month. Thank you.

Thank you for your participation. This concludes today's conference call. You may now disconnect.