Atlas Air Worldwide Holdings Inc (AAWW) 2011 Q2 法說會逐字稿

Good morning. My name is Tanya, and I will be your Conference Operator today. At this time I would like to welcome everyone to the second quarter earnings conference call for Atlas Air Worldwide Holdings. (Operator instructions.) Thank you.

I will now turn the call over to Atlas. Sir, you may begin the conference.

Thank you, Tanya, and good morning, everyone. I'm Ed McGarvey, Vice President and Treasurer for Atlas Air Worldwide Holdings. Welcome to our second 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 complemented by a slide presentation that accompanies Bill's 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'd 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 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 14th, 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 and print a copy of today's slides by clicking on the link to Presentations in the Investor Information section of our website.

During our question and answer period today we would like to ask participants to limit themselves to one principal question and one follow-up question so that we may accommodate as many participants as possible. After you have gone through the queue we will be happy to answer any additional questions as time permits.

At this point, I'd like to turn the call over to Bill Flynn.

Thank you, Ed. And good morning, everyone. We're pleased to have you join us today. I'll start right away with the key points on slide three.

First, our core business is solid, and we expect strong earnings in 2011. Several factors support our expectation for 2011 and our outlook for significant sequential improvement in our third and fourth quarter results. Higher customer utilization in our core ACMI segment in the second half of this year, the introduction of our 747-8 freighter into service in the fourth quarter, substantially lower maintenance expense in the second half of the year, increased utilization and contribution from the two 747-400BCFs that joined our fleet in late April and late May, two full quarters of passenger service for the U.S. Military which we initiated on May 17th, and continued productivity gains and cost control.

The execution of our business model is generating substantial forward momentum for us and our underlying business remains on course. We are in an era of transformative growth. Our customers are eager to start benefitting from the 747-8's commercial and operating advantages, and we are looking forward to introducing our new aircraft into service.

We are also capitalizing on opportunities to expand our share of military passenger demand. The U.S. Military outsources approximately 95% of its troop transport needs, compared with about 40% to 50% of its cargo requirements. Even during peacetime the U.S. Military will have a strong need to move troops and their families for recurring exercises, training missions, and regular rotations.

To capture a larger share of sustainable Military passenger flying we purchased a 767-300ER passenger aircraft in order to offer the AMC the midsized, wide-body aircraft that meets their mission specific requirements. Our operating expertise allows us to profitably enter into this new, attractive gauge of aircraft, and we expect to add additional aircraft to capitalize on our available AMC entitlement going forward. Military passenger service will be an important contributor for us. This additional flying should substantially increase our revenues and earnings and continue to drive an enhanced business mix in 2011, 2012, and beyond.

Slide four highlights our second quarter results. Net income totaled $24 million or $0.90 per diluted share on revenues of $350 million. Earnings in the second quarter were driven by our core ACMI business and the global scale and scope of our operations. In line with our first quarter earnings report, maintenance expense was at more typical seasonal levels in the second quarter of 2011, while maintenance expense in the second quarter of 2010 was below normal.

Slide five shows our full year 2011 guidance of $5.00 per diluted share with an approximate 15% pretax earnings margin. Our guidance reflects the strong core business performance and sequential quarterly earnings improvements that I noted earlier. We expect our ACMI customers to fly 5% to 7% above contractual minimums in the second half, and our outlook incorporates a balanced view about yield and demand in the charter market in the second half of the year, with expected yields in Asia likely to be below the levels of prior years.

Finally, our view reflects the impact of $0.35 per share for Boeing 747-8F delivery delays, lower levels of CMI flying due to Boeing 787 program adjustments, and startup expenses in 2011 for new business in 2012 including our full entry into AMC passenger service. Based on a proposed revised schedule from Boeing that we are reviewing we expect to take delivery of our first 747-8F aircraft in October and to receive two more in November.

Reflecting an aggregate delay of five months of service in the fourth quarter, we have revised the expected contribution from our 747-8 aircraft in the quarter by $0.20 to $0.16 per diluted share. As a result of the adjustments in Boeing's 787 production program during the third quarter we expect that our after-tax contribution in 2011 from CMI Dreamlifter flying for Boeing will be reduced by $0.05 per diluted share. In addition, we expect to incur startup costs of approximately $0.10 per diluted share in 2011 for 767 Military passenger service and other new initiatives commencing in 2012.

Beyond 2011 we'll benefit from the introduction of the remainder of our 12 747-8 freighters into service during 2012 and 2013 and from the increased utilization of our CMI Dreamlifter fleet, which should grow from about one aircraft on average today to four as Boeing ramps up its 787 Dreamliner programmer to full production.

Moving to slide six, our core business is unrivaled in terms of our global footprint, scale, and infrastructure. The majority of our core ACMI flying is outside of the United States, and we are aligned with premiere customers that are market leaders serving diverse and vibrant global trade lanes, including some that are not often discussed -- Europe to Africa, and Latin America, for instance, or the lanes connecting Asia, the Middle East, and Africa, or strong flows from the United States to Australia and New Zealand. In addition, our Commercial Charter business serves a strong South American market.

We are encouraged by the secular outlook for global airfreight, and while demand today is below the industry's 5% to 6% forecasted growth in 2011 we also expect to see seasonal improvement in airfreight demand over the back half of the year. We expect continued strength in the markets served by our customers in the Middle East and Africa, continued strength in South America, and new consumer and electronic product launches in the second half of the year that will predominantly move by air.

Our view on demand is underscored by the fact that absolute freight tonnage is at near record levels, the supply of fuel efficient, high payload, wide-bodied freighter aircraft remains tight, and these conditions will benefit both our ACMI customers and our Commercial Charter operations.

Turning to recent business developments, on slide seven, we can see the quality and the value of our customer solutions and the demand for our aircraft. These developments are a clear indication of the strength of our customers' underlying businesses and our ability to add value to their global operations.

The two additional aircraft that we placed into Express Network ACMI service for DHL have enhanced DHL's intra-Asia presence and its core network capabilities. The two freighters are incremental to the six that have been providing trans-Pacific Express Network service for DHL. The placement with DHL reflects the growth of DHL's global Express business, our proven ability to support DHL in our freight forward to customers with high quality time definite service and the continuing growth of the airfreight market.

The two 747-400BCFs that entered Military and Commercial Charter service for us in April and May complement an existing BCF that is performing very well in South America. They also supplement 747's 400 capacity that we reallocated to our core ACMI business in response to strong customer demand. In addition, we have acquired two new generation 737-800 passenger aircraft for our Titan dry leasing business. With these two additions the three Titan aircraft are on long-term leases to customers in Africa, Japan, and China.

We are taking a prudent approach to growing our dry leasing business, and as the geographic placement of these aircraft indicates we've taken a global approach to building our business and to developing strategic relationships in key regional markets that will enhance our aviation outsourcing platform.

This is probably a good point to ask Spencer to provide you some additional perspective on our second quarter results and our second half outlook. After that, we'll provide a brief wrap-up and discussion of the future, and then we'll be happy to take your questions. Spencer?

Thank you, Bill. Good morning, everyone.

Slide eight recaps our second quarter earnings and, as Bill said, we delivered strong results. Looking back at last year's second quarter, we took advantage of our market leadership and operational excellence to capitalize on a unique opportunity, the movement of M-ATVs on premium rate flights to capture substantial incremental earnings. M-ATV flying added $10 million to our revenues and about $6.5 million to our after-tax income or $0.25 per diluted share to our results in the second quarter of last year. The M-ATV flying we did was very high yielding but of limited duration. This flying demonstrated our ability to capitalize on opportunities in the market and drive significant incremental earnings, and we expect to continue to do so.

Slide eight highlights the sequential improvement in our results compared with the first quarter of 2011, and illustrates the nature of the sequential improvement that we expect in our third and fourth quarter performance this year. We delivered adjusted net income of $24 million or $0.90 per diluted share in the second quarter on operating revenues of $350 million. Revenues were 2% lower than the second quarter of 2010 and 17% higher than the first quarter.

Operating expenses largely reflecting fuel costs as well as the timing of maintenance expenses were 6.5% higher than in the second quarter of 2010, and they were also 11% higher than in the first quarter. Operating expenses in the second quarter of 2011 were particularly affected by aircraft fuel and maintenance. The average fuel price for our Commercial Charter business was approximately $3.48 per gallon in the second quarter compared with $2.35 in the second quarter of last year. In addition, the average pegged fuel price in our AMC Charter segment increased to $3.66 per gallon from $2.68.

Our exposure to fluctuations in fuel price is limited to only a portion of our Commercial Charter business. Our ACMI segment has no direct fuel price exposure and we generally have no risk in our AMC Charter business because the price is set contractually.

Maintenance expense which reflected a more typical seasonal level of maintenance during the quarter was $47 million, an increase of $7 million compared with the second quarter of 2010.

Looking at slide nine, operating revenues in the second quarter of 2011 benefitted from significant growth in our block-hour volumes and rates in our core long-term ACMI business. Revenues in our ACMI business grew 27%, reflecting the complementary nature of our business segments. We redeployed seven 747-400 aircraft from Commercial Charter to our long-term ACMI business to meet an increase in ACMI customer demand in 2011, as Bill indicated a moment ago.

At the end of the quarter we had 20 fulltime 400 freighters in ACMI compared with 17 in the year-ago period. In addition, the growth of our CMI operations added an average of 1.7 aircraft to the segment during the quarter compared with only 0.4 last year.

Commercial charter revenues in the second quarter primarily reflected a reduction in block-hour volumes as we redeployed 400 capacity to ACMI, as well as fewer one-way Military flights. We began to offset the decrease in Commercial Charter block-hours, however, when we placed our two 747-400BCFs into service during the quarter.

As illustrated on slide 10, direct contribution by reportable segments totaled $66 million in the second quarter compared with $106 million in the second quarter of last year. Direct contribution in our ACMI segment rose due to an increase in block-hour volumes.

At AMC Charter direct contribution primarily reflected the cessation of premiums earned on M-ATV missions flown on 747-400 aircraft in 2010. And in Commercial Charter direct contribution was lower due to the redeployment of 747-400 capacity to the ACMI segment, fewer opportunities for return leg flights for one-way AMC missions, higher aviation fuel prices, and a return of aircraft capacity to the Asian markets.

Slide 11 shows block-hours and revenue per block-hour in our ACMI segment. ACMI block-hours benefitted from the addition of two incremental aircraft for DHL Express in March, a second aircraft for [Pelapena] in October, and CMI flying for Boeing and SonAir. In addition, our ACMI customers flew 4.6% above their contractual minimums during the second quarter. The increase in block-hour rate 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 second quarter flying to support U.S. Military activity in Afghanistan. AMC block-hours also reflected the start of passenger flying for the Military, which we began on May 17th. We flew 177 passenger block-hours for the Military during the second quarter. We expect modest levels of Military passenger flying in 2011, but we believe this initiative will add meaningful and sustainable earnings in 2012 and beyond, as Bill will discuss in a few minutes. It's also part of our strategy to mitigate any longer term reduction in Military cargo demand.

On the rate side, AMC revenue per block-hour during the quarter reflected the increase in the average pegged fuel rate that I mentioned a moment ago, as well as the completion of the M-ATV flights.

Moving to slide 13, Commercial Charter block-hour volumes in the second quarter reflected both the redeployment of 747-400 aircraft to ACMI flying and a reduction in return legs based on one-way Military missions. Block-hour rates in Commercial Charter reflected improved yields in South America and yields in Asia markets that were constrained by a return of aircraft capacity to the market.

If we turn to slide 14 and look at our balance sheet, you see that we ended the second quarter with cash, cash equivalents, and short-term investments totaling $470 million, capital expenditures during the quarter totaled $118 million including about $5 million of core CapEx and about $6 million of capitalized interest relating to our Boeing-8 order. The balance of our spending was for investments and business growth, including aircraft acquisitions for our Military passenger operations and our dry leasing business, which Bill highlighted earlier. We expect capital expenditures for the remainder of 2011 to be about $63 million, and that excludes purchase deposits, aircraft, and related capitalized interest. As we've 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 June 30th was down to approximately $416 million. We continue to focus on our 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 3.1 times annual EBITDAR, which positions us nicely with respect to the growth opportunities we see ahead. And if we include the benefit of an investment that we made in our outstanding [WATCs], we have even stronger net leverage ratio at 2.7 times annual EBITDAR.

Before I turn things back to Bill I'd like to take a moment to comment on our second half 2011 earnings outlook. We expect second half results of $3.70 per diluted share. Several factors, as outlined on slide 15, support that outlook. We expect continued moderate growth in the global economy, that translates into the traditional seasonality that we see in the airfreight business and our results, with demand and performance peaking in the second half of the year, typically from the third into the fourth quarter.

In addition, our core business is solid. We expect high customer utilization of our ACMI aircraft in the second half of 2011 with our customers flying 5% to 7% above contractual minimums during the third and fourth quarters. That compares with an average of about 2% above minimums in the first half. We also expect substantially lower maintenance expense in the back half of the year. For the full year we anticipate maintenance expense to be consistent with 2010. Therefore, maintenance expense in the second half is expected to total about $70 million to $75 million compared with $97 million in the first half of this year.

Looking at the charter market, we expect pricing to reflect typical seasonality in the second half of the year, although we have included a balance view about peak season pricing compared with the previous years. In additional to seasonal drivers, we expect to benefit from additional aircraft and new business in the second half. The additional aircraft will enable us to offset capacity constraints that have often limited our ability to respond to customer requests, as well as the retirement of one of our 747-200 freighters, a 30-year-old aircraft, in July.

We anticipate introducing our 747-8 freighters into service in the fourth quarter of this year, which should generate earnings of about $0.16 per share. We also expect to see increases in utilization and contribution compared with the first half from the two 747-400BCFs that we added to our fleet in late April and late May. Similarly, we expect to benefit from two full quarters of AMC passenger operations, which we initiated on May 17th. Finally, results in the second half will also benefit from our ongoing focus on productivity gains and cost control.

So with our strong second half outlook in mind, I'd like to turn things back to Bill.

Thank you, Spencer.

During the past several years we have aggressively managed and modernized our existing fleet, transformed our business model, driven improved operating efficiencies, and initiated a growth strategy that leverages our core competencies and capitalizes on new organizational capabilities, such as our CMI operations and our passenger charter service, while maintaining a strong balance sheet.

2011 will be a strong year for us, and we are looking ahead to 2012. Our 747-8 freighters will drive volumes and profitabilities in our core ACMI business and in addition volumes in our Military passenger business including our new 767 operations are expected to grow to more than 10,000 block-hours in 2012 from approximately 1,000 block-hours this year and none in 2010.

With our innovative customer solutions, our ability to capitalize on changing market demand, our strategic growth initiatives, and our solid track record in executing on our business model we look forward to driving our revenues and earnings to significantly higher sustained levels over the next several years and beyond.

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.

Can you hear me?

Now we can hear you, Alex.

[Contact stuff] we have here at SunTrust. All right, so can I just start with the Military? I want to make sure I understand, I think the original guidance for Military was 17,000 hours, but that was all cargo so is there any change to that overall or is that the number but it now includes passenger?

So the guidance for this year is 18,000 hours for 2011 cargo. In addition, we have 1,000 passengers, so a total AMC of 19,000, 18,000 cargo, 1,000 passenger. We haven't given guidance yet for 2011 on cargo, and we're working closely with the AMC on that, Alex. But our best estimate today for 2012, which we will update as we move through the year, but our best estimate today for AMC cargo in 2012 is 16,000 hours of cargo and in addition 10,000 hours of passenger for 26,000 hours of AMC flying in 2012.

Now I want to point out that there is a difference in margin between cargo and passenger. Cargo margin on a direct contribution basis is running just above 20% and passenger margin is running about 15%, so a blended average is in the 18% range, but obviously both segments are attractive to us and, in particular, the growth opportunities that passenger provides us with really a minimal investment, you know, allows us to smooth out, not only drive additional earnings but smooth out Military earnings over time as we look three, four, five years ahead.

And, Spencer, you commented on the back half guidance including kind of normal peak. Can you just talk about what, if anything, you've seen that makes you think it's normal since there's so much fear about macro? Does that mean you guys have already pre-booked some charter capacity for the peak? Anything you could tell us would be great.

Sure, Alex. I'll let Bill just talk a little bit about what he sees in the market, and then I can comment, as well.

So, Alex, you're right, there's a lot of concern out there in the market as to how this peak is going to perform. A couple perspectives. One, I think that commentary is really about trans-Pacific peak. Certainly, there's not a lot of good news coming out on the ocean side, but I think it is different on the air. So the first thing that we see on a trans-Pacific air perspective are several new product launches, consumer and other electronic product launches, as the various manufacturers continue to compete amongst themselves for that next generation, that latest introduction. We think there are really some strong trends there, particularly in airfreight.

The current inventory to sales ratios are quite low. I know there's some concern in consumer numbers out there, but as we've done in the past when we peel down a few layers we still see strong demand for generally the products that are airfreight and then any bounce in consumer sentiment or in sales given how late we are into the retail season and coming into the holiday season it's going to favor air because any postponed purchases at this point have to go air. I think -- or most of it will go air, is probably a better way to say it. And I think our view on the trans-Pacific market reflects comments, similar comments from UPS and FedEx in terms of their view on international freight and overall demand, as well in their express products.

The other part of the story is, as I mentioned on several of my slides, our peak isn't only the trans-Pacific peak, we serve the Asia and Middle East and African markets, and our customers are performing very well in those markets and there's good strength into Australia, as well. Again, for the holiday season and our Commercial Charter market into Brazil is again strong, just driven by the economy and again seasonal uptick there.

So when we look -- when we go from the general market to the next layer down of airfreight and the drivers of airfreight and then one more level below and look at Atlas' actual customers the strength that we're seeing in their market, their hours of flying, and the input that we're getting in our Commercial Charter market, you know, all of that's what informs and drives our view about our third quarter and fourth quarter earnings.

Okay, that was good color. Just one more if I could? I hear you guys saying on the one hand with more specificity than I can recall, a plane in October and two in November, which sounds like you're feeling like it's more real, but then you're also saying until we renegotiate with Boeing and they confirm the deliveries we're not going to make any payments. So is there -- has anything really changed or are you feeling more confident about the deliveries?

I think there's two different discussions there. The first discussion is about when we expect to get delivery. Boeing has announced it's completed flight testing and it's in the process of submitting the final documentation and other supporting data to the FAA for certification and entry into service. And so we're talking about one aircraft in October and November, that's pretty specific, and that's going to go into service for our customer.

The comments we're making about the schedule and overall our negotiations with Boeing have to do with the contract that exists between Boeing and us and what remedies exist for Atlas for delay and other issues that we may have with Boeing about the overall program. So they're kind of two separate streams.

Sure. Alex, I would just add to that that we're in constant discussions with Boeing. We haven't yet agreed on a final schedule, and that's why we haven't resumed making progress payments. But the -8s are very close and we feel more comfortable I think than we have felt in the past, and that's why we're a little bit more clear on when we're saying we think they'll be delivered.

It is still fairly consistent with what we've been saying all year, all throughout this year we've said that we felt we would start flying in the fourth quarter. We've now just gotten a little bit more granular on the exact months. We thought they would all start flying in the beginning of the quarter, and now we've moved that slightly based on the latest discussions with Boeing. But they're coming, they're very close, and we're excited to get them.

Got it. Appreciate the time, guys.

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

Good morning.

Hi, Jason.

Hi, Jason.

Just for the -8 delivery, I'm not trying to get ahead of everything but as we look past the initial three, these are essentially coming out of I guess a supply that's been built-up, with production rates still low how do you think about the timing for the next batch of deliveries, and does it begin to shift out?

Yes, Jason, as we said, we still haven't reached agreement with Boeing on that delivery schedule, but our best estimate is that we will be flying a few of them, three of them in the fourth quarter of this year. That probably means that we will take delivery somewhere in the range of four to seven next year, and then the remaining the following year, the first half of 2013.

Okay, and just following up on that, for the next batch, how are you presently thinking about permanent financing on them? And if they do take time to get to you is there an inefficiency from running a subscale I guess fleet of the aircraft or is it close enough to the 400?

Let me first comment on the financing. So we have permanent financing in place for the first three of our -8 deliveries at effective fixed interest rates of 6.15 for the first and 6.38 for the second and third, so blended it's about 6.3%. In addition to the first three deliveries that we've previously financed. I'm happy -- I'll share a little bit of progress during this call -- we've made significant progress in putting in place a banking facility covering the next six deliveries. We've awarded a mandate. We've signed a term sheet, and we're now in the process of finalizing approvals. We hope to complete the process in time for the next earnings call in early November. So when completed we will have arranged financing for nine of our order of 12 aircraft at terms more favorable to those used in the initial purchase order analysis.

So we're excited about the financing, Jason, to answer the first part of your question. I can't really talk more about it because not everything is finalized, but I can tell you, and hopefully you hear it in my voice, we're really excited about that. That will close nine of the 12 aircraft at really attractive rates. And then as far as subscale, that's not an issue for us. We've been getting ready for this for awhile.

Yes, and just to add, the 747-400 and the -8 have the same type certification, and so with just minimal classroom training and some home based computer training our pilots can go from a 400 to an 800 and back, so it's essentially the same common fleet type. So that's why we were excited about the -8 many years ago when we made the purchase because of the efficiencies it'll drive into our operation.

Okay, great. I'll go back into queue. Thanks.

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

Thank you, Operator. Good morning, gentlemen.

Hello, Kevin.

Bill, can you talk a little bit about the impact of Japan on your business, if any? And then what are you seeing going forward as it relates to Japan?

Yes, sure, Kevin. Interesting, Japan has had some affect on intra-Asia trade flows and some affect in supply chains, but not a very strong or a particular affect on Atlas flying. Aircraft seven and eight that we initiated for DHL started at the end of March, and they've basically began flying a Japan centric route, U.S. to Japan, Japan, Korea, Shanghai, Japan and back. And so it provides incremental lift in and out of Japan for DHL on a line haul basis, an intra-Asia lift out of Japan, and in and out of Japan again for DHL. So we haven't had a significant affect of Japan on either our volumes but, more importantly, on our customers' volumes.

Okay. Thank you. And if I can have a follow-up question, what -- you had talked a little bit about capacity coming back on the market. We've been reading some about that. Maybe get your viewpoint, what are you seeing in terms of capacity coming back to the market?

Well, I think the best -- anecdotally you know about charter flights that are happening on a weekly basis, but IATA also is reporting the AFTKs that came back are available freight 10 kilometers as a proxy for capacity that came back in April, May, and June, and capacity did come in at a higher rate in those three months, ended the market expansion, you know, just in terms of rate of growth.

And so I think that's kept yields down and created a bit more competition for the freight that's out there. That said, our customers in the ACMI business are running, as Spencer pointed out, have been running above minimums, are targeted to grow, to operate above minimums as Spencer's numbers pointed out in the third and fourth quarter. Those are the schedules that we're flying. And so where we see it the most perhaps is on some of the charter yields, but we're taking account for that in our forecast because we've used lower yields for third and fourth quarter than we saw in prior years.

Okay, great. Thanks so much for your time today.

Thanks, Kevin.

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

Thanks. Hey, good morning, guys.

Good morning, Ed.

Good morning, Ed.

It seems like this $0.10 of startup cost for the Military is new. I think last quarter you noted there was $0.06 in the first quarter for startup for the passenger business, so I assume this is related to the 767. Can you talk about what these startup costs are and whether there's going to be any more as you get to 10,000 block-hours and how many aircraft you need to get there?

Sure. So there being a number of startup costs and they've been building perhaps incrementally as we've been able to get some certainty that we could move ahead and go forward. So the first set of costs that we had, Ed, were to go out and apply our 747-400 passenger aircraft on lease. We had to carry that lease cost -- the best deal for us was to get that aircraft in January when we looked at all available aircraft in the market and the lease rate, but the lessor in this case United Airlines, you know, required that we take that aircraft from January 1.

So we had to carry lease cost from January through May 17th for no flying, but we had to have that aircraft not only because of the lessor requirement but we also had to demonstrate to the Military to the air mobility command that we, in fact, actually had the aircraft while we were going through the process to get approval in order to fly. We couldn't begin flying until May because we had to have one year of passenger flying under our belt, if you will, one year of the SonAir flying which was the predicate to get into the Military, and that only -- that anniversary only occurred at the end of April, the beginning of May.

As we were building up to that startup we had a hire and train flight attendants. We had to take on some other costs to supply the 747-400 aircraft, I mean we're getting into the weeds here -- catering carts, and all of the other supporting stuff that you need to have to do that. Now as we move forward into 2012 we've been able to identify the opportunity to expand the business to run a mixed fleet of 747-400 and 767-300 passenger aircraft for the Military to serve that 10,000 or more hours that we're forecasting at this point in time.

So additional onboarding cost for the 767s, we're going to have to hire more fight attendants, we'll have to go through the Military [CARB] approval process. And so we have these carrying costs in '12, excuse me, in '11 for what's really going to -- a service that really doesn't ramp-up until the calendar year begins in 2012.

We think it's very attractive flying on the 767s that we're buying. I'll note that we're buying aircraft with [6-80] engines, which is engine commonality to our 747-400s. We talked about a 15% margin, we will aggressively depreciate the aircraft over a very short term. We will essentially write the aircraft down to residual scrap value. And even with all that we're looking at about a two-year payback on this investment, a nice revenue stream and earnings growth going forward.

So how many aircraft are you going to need to get to 10,000 block-hours for 2012?

Well, we're looking at somewhere around four or more aircraft, depending on how much over 10,000 we might look at.

And right now you have two, technically, you have the 747 still and you have -- or the 400, and the 767?

That's correct.

And so the two more would be 767s?

It could be a mix of -- it could either be one and one or two. We're making sure we understand the forecast and our entitlement before we fix on exactly the fleet.

But so you still need to go out and get two more planes is what I'm getting at?

We'll need more aircraft to fly 10,000 hours of passenger service.

Okay, and then just as a follow-up, the CMI hours seemed like they were down in second quarter relative to expectations as we ramp-up, what was driving the CMI down? How much of it was on the Dreamliner side and how much of it was on the passenger side?

It was all Dreamliner.

Okay, so that's all in your guidance going forward?

Yes, and we pointed that out, too, as well in our comments, Ed.

Yes. Okay, thanks for the time.

Thank you, Ed.

Thank you.

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

Good morning. Thanks. Just wanted to follow-up on that Asian capacity question. Can you just try to give us some more color on where you think it's coming from? Is it a passenger -- I saw the same data from IATA that you're speaking about, it's just is it coming from passenger planes, is it express carriers that are doing more bulk, or are there other freight players that are adding some planes out there?

I think it's coming from all the elements, Scott. It's no one single driver. There's certainly more passenger capacity in and on the triple 7s, particularly have absolutely a good cargo carrying capacity in the range of about 35 tons, if I recall correctly. Some BCFs have come into the market. The Cafe Air China joint venture have put some BCFs back into service that were parked. With the strong Military demand and other carriers operating one-way, Military one-way service, we're seeing that capacity carry-over into the Military market to add capacity. And express operators have also increased capacity in the market. We've put two more in for DHL, ourselves, but also FedEx has increased its capacity, notably with the introduction of their triple 7s into service. So it's coming from across the board.

That's helpful. Thanks. And then I know it's really early but I figured we take a shot. The Defense budget cuts from the debt ceiling deal, anything you can help us think about in terms of the risk there or mitigating the risk?

Yes, so there's obviously a lot of discussion about Defense spending and budgets going forward. Where we start with, however, for our view on Military demand is with boots on the ground, and we're looking still at 90,000 troops in Afghanistan. There will be a draw-down. There's still troops in Iraq, but there's also troops in Kuwait and in the region generally.

So our forecast generally looks at troop deployment. We also get forecasts from Transcom, who is really our customer, they're the DoD command that buys our services, and we work closely with them as do the other carriers. And our sense of 2011, well, I should say 2012 and beyond we think we've got a pretty good forecast as represented by the 16,000 hours, and I'll just caveat that it could change. If the Administration accelerates the draw-down then we'll see what that means for '12 and beyond. But knowing what we know today that's our best estimate of the demand in '12, and as we move into '12 and beyond we'll have better views of future demand. And there's still a number of variables to play out, as you point out.

That's a fluid situation, so thanks for that. I appreciate it. Lastly, just you said you're taking one 200 out of service in July. Can you just remind us on the rest of the 200s the timing on the next required maintenance and timing for your decision points on what to do with those? Thanks.

Yes, sure. We're thinking that the 200s will be retired in 2012. You're right to point out, some of it's driven by maintenance, next maintenance intervals and maintenance investments, and also by the fact we're getting -- we're looking forward to getting our 747-8, and we've always planned to retire that fleet. So we look to retire the fleet of 200s in 2012.

Is there more granular on that and what quarter, kind of each plane, or anything helpful on that?

I think a lot of it, Scott, is going to depend on demand. It's really going to depend on Military demand and how that plays out over the quarter. So I think as we come into our October call, our November call, and then into the beginning of the year we'll have better visibility, but it's a little early for us to be more granular on it, on 200 retirements.

Okay. Thanks.

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

Hey, this is actually [John] filling in for Bill. Guys, you raised your guidance for 2012 Military passenger block-hours quite a bit. Can you just elaborate on the specific trends driving that? Is demand for the service outstripping your prior forecasts or is this a situation where the demand hasn't really changed but you've just been able to bring more aircraft capacity on faster to meet it? And looking beyond 2012 how should we think about the growth profile off of that 10,000 block-hour base?

Sure, John. This is Bill. So when we provided guidance on Investor Day we talked about 1,000 -- sorry, I think it was 700 hours this year. At that time, remember, we were just starting service and there was some uncertainty into the hours that would be available to us. And I think we were outlooking at about 7,000 hours coming into 2012.

We've upped our guidance because we have more clarity on the business given our entry into service, a bit more clarity on demand going forward, and some more certainty in our ability now to provide the 767-300. Because Military passenger demand long haul is divided into two categories, the Military by a large wide-body category, which is the 747-400 and other aircraft, and a medium sized wide body, which is the 767-300. So our ramp-up in block hours is really driven by better visibility into demand and better certainty about our ability to participate in and to deploy midsized wide-body aircraft to meet AMC's requirements.

Hey, John, this is Spencer. I'll just add to that that as you probably remember on Investor Day we just started flying passengers for the U.S. Military and there's -- yes, that exact morning. But so there may be concern and risk around what troop redeployment would mean. It's important to point out that for Atlas we're brand-new into this flying, and so while other carriers who've been flying Military passengers for some time may see a decline, for Atlas it's all up side. And so that's part of the reason why you see the tremendous growth fro us, as well.

Finally, going forward, when we just think about Military business overall, we have a cargo and a passenger component, and I think as we've said on a number of calls and meetings that we've had with each other that our core business is ACMI. We are not only growing ACMI, we're able to grow our CMI business, as well. And going forward we've been looking to smooth out the impact of any draw-down or any decline in Military demand. And we've had several strategies to smooth that out. Certainly, one strategy has been the CMI operations and particularly the Boeing LCF contract, which is a nine-year contract.

Entry into Military passenger business is another element of that strategy to smooth out and, frankly, the combination of both will more than offset the decline in the cargo business, even if Military passenger business does decline going forward it's all new flying for us, as Spencer pointed out. But the combination of CMI, particularly LCF, and passenger Military more than offset the current kind of contribution that we've enjoyed over the past several years from AMC cargo.

That's helpful. Thanks. And in the past you guys have been really helpful with helping investors think about the incremental impact of some of your growth initiatives. You've given guidance on the $0.04 per month impact from the -8s. Are there any rules of thumb you can give us to help put some bounds around what, let's say what 1,000 incremental block-hours of Military passenger might mean in terms of direct contribution or EPS or anything like that?

Well, I said earlier, John, that the cargo is running around -- slightly above 20% margin on direct contribution margin on revenues, and we think passenger is going to run at about 15% direct contribution to margins. Just a little color on that, the passenger aircraft get a little bit lower utilization than freighters do and, in fact, the cargo operations that we have simply ride on existing aircraft that then get into charter operations and, or other customer service operations. The Military passenger aircraft, certainly the Military passenger, and so they get a little bit lower utilization and a little bit higher operating costs with flight attendants and other components of that service. So about a 15% margin on revenue.

And how have the revenue per block-hour sort of been trending cargo versus passenger? Is passenger a lot lower or similar?

It's somewhat lower, it's somewhat lower because the 767 is going to get a lower rate, it's a smaller aircraft than the 767-400. We're in the range of $19,000 to $20,000 a block-hours for passenger Military service.

So, John, we're looking at about 10,000 block-hours at somewhere around $19,000 to $20,000 a block-hour we're looking at somewhere close to $200 million at a close to 15% pretax margin for next year.

That's perfect. Thanks a lot, guys.

Your next question comes from the line of Stephen O'Hara with Sidoti Company.

Thanks. Can you just in terms of the peacetime flying, we've all been waiting for AMC Charter cargo business to kind of go back to peacetime flying. I'm not sure when that would be, but I mean do you have any sense of what the peacetime flying block-hours would look like for maybe passenger and cargo?

So what we've said, we're not sure, as you say, when does that all occur, but in the past we've said that cargo would be somewhere perhaps around 8,000 to 10,000 hours in a non-conflict environment, might be the way to describe it. When and how, the timing of how the Military might draw-down to that demand we don't have a clear forecast on, Steven, that's really administration and policy and a number of other variables that aren't that clear at this point. As well, passenger will also draw-down, but 95% of passenger does go on on commercial operations, and so passenger will still be there, will be an important part of the mix.

But I'll come back to where I commented before, we've all known, all of us on this call know that Military is going to draw-down. We know that cargo is going to draw-down. The introduction into passenger will smooth out the earnings affect of that draw-down for Atlas, and then layering on top the LCF and our other CMI operations I believe more than offset the peak contribution that we've earned in Military in a prior year. And then as you think about the growth drivers for this Company and our investors it's the -8s, as well as other initiatives that we have going forward. Our view is we're not a Military contractor. We take advantage of the opportunities as they present themselves in the market.

Okay, yes, that makes sense. In terms of those opportunities, I mean and other than the new product introductions I mean is there anything else out there you can kind of point to in terms of --

Well, we expect that we will grow our CMI operations, as we've talked about at Investor Day and on other calls, as well. There's another tangible opportunity for us to move-in, as well.

Okay, all right, great. Thank you very much.

Your next question comes from David Campbell with Thompson, Davis & Company.

Hi, good morning, everyone. Bill, I think you mentioned during the prepared remarks you may have relayed that sea freight, global sea freight business was down and it was doing worse than airfreight. That's really not what I hear from the forwarders and what I see in the results. It looks to me that they're on track on sea freight, they're not on track on airfreight. So is that what you said or did I read it wrong?

Well, what I've been looking at, for example, is that the average ocean freight rate trans-Pacific is at -- it's either at an all-time low for the last 10 to 15 years or is at a second-year low for the last 10 to 15 years. And couple that with charter markets, time charter rates in the charter market for container vessels have gone down considerably, even in the last 30 days, in part driven by about a 9% increase in tonnage in most trade markets. And I think perhaps and this is -- I haven't been in the ocean business now for 10 years, but there's a huge amount of capacity coming in next year, and I think some of the carriers are using price to line-up the tonnage as they introduce what will be a record amount of new tonnage in 2012. So I would say, David, more anecdotally than anything else, but our view is that there's a lot more challenges in sea freight than there is in airfreight right now.

Yes, so you were talking a combination of growth and rates. I was just thinking in terms of growth in TEUs.

Okay. No, I was talking about growth and rates. I understand the peak season surcharge that was targeted for August 1 did not take, was not implemented, it's been postponed to August 15th. And so just kind of more general comments about the market and some general observations I have, David.

Yes, yes, but do you think it means anything with regard to airfreight? You mentioned that since, and what I see is the TEUs in ocean business being relatively stronger than airfreight, but do you think that's what you're implying when you say there should be a seasonal peak in airfreight because people have deferred airfreight deliveries? I mean do you think the TEUs are a better example of the world's demand for freight in general than airfreight right now?

Well, airfreight only moves about 3% of the volume of internationally traded manufactured goods, but 35% of the value. And I think the first point I was making is that what moves airfreight is a different product than what moves sea freight. And that when we look at the products that are teed up for new product introduction, consumer electronics in particular, those are airfreight.

And what I was trying to point out that -- I think what I was trying to point out was that there is a core airfreight demand and that we see new product introductions for core airfreight demand and particularly in the trans-Pacific trade. I was answering an earlier question about the peak, and then I went on to point out in addition to the drivers of airfreight and trans-Pac that we see strong demand for our services from our customers in other trade lanes, the Asia, Middle East, Africa trade lanes, Europe, Middle East to Africa trade lanes, and for all trade lanes, Europe, North America and Asia into South America. So trying to give a finer point and color on our specific business.

Right. And the last question is the number of aircraft or the number of block-hours in CMI operations, I don't remember if you mentioned that, what your estimate is for this year and next year for CMI block-hours?

We haven't given that guidance yet, David. And we provided some outlook at Investor Day for next year. We haven't really changed our view going forward from our Investor Day about new growth hours. What's been the variable this year is being the pause that Boeing announced in the 787 production, and we did have and we pointed out there's about a $0.05 per share earnings hit due to lower CMI flying this year, all 787, but we expect -- what Boeing is telling us and really telling the market about the ramp-up in 787 production that that'll recover, and we will be up to a very attractive full-scale CMI operations for Boeing.

David, this Spencer. I'll just add that the SonAir flying that we do is fairly consistent. It's six flights per week and it's fairly consistent, so the variability will primarily be with the Dreamlifter flying that we do for Boeing. And Bill talked about what we've seen thus far. At Investor Day we talked about next year something like 7,500 block-hours and in 2014 as Boeing ramps up its 787 production we expect the block-hours to also ramp-up to something like 13,000 block-hours.

Okay. Thank you.

Thank you.

Your next question comes from the line of [Howard Rosenkrantz] with [VA].

Hi. Thank you very much. Can you give us some -- a lot of questions have been answered, but can you give us some more color on Military passenger further out beyond '12? No sort of granularity, just sort of can you scale the opportunity? Correct me if I'm mistaken but I believe on Investor Day you talked about it possibly being for you guys, and please correct me, a billion dollar opportunity or a billion dollar addressable market where you could hopefully capture 40% to 50% of it down the road?

Sure, Howard. I think what we said around Investor Day was that in 2011 the forecasted spend by the Military on all passenger was about $1.6 billion, it was probably the number. So that's all passenger flying into the [Sencom] theatre, but it's all passenger flying everywhere, which would include even the 757 gauge of aircraft flights into the Pacific and even within domestic flying within the United States as troops move around on troop rotation and troop training.

We've said today that we're looking at about $200 million of flying in 2012, that's the 10,000 block-hours at 19ish kind of thousand dollars per block-hour, so that kind of implies a share of what we will take or expect to carry of the addressable market. We got the draw-downs that the President has announced. To go beyond '12 at this point I really think we need to get later in the year, we need to hear what this congressional committee of 12 is going to recommend, and we need to hear more from the President and the Military about troop deployments into Sencom going forward.

So it's a little early for us to address that. I think our larger message is here's an opportunity, we're able to move-in, take advantage of that opportunity, drive some additional revenues and earnings to our bottom line, that smooths out over time. But while that's over time, smoothing out over three or five years, you know, I think it's important to kind of draw everyone's attention back to what is our business model and not only these growth opportunities that we have in front of us but our -8s and our 400 fleet, our ACMI customers, our ability to take advantage of the charter market, our ability to grow into the CMI market.

And when you add that up to the several components of what is the Atlas business mix, and look at our track record of executing on that business mix, I think value and growth investors ought to see a pretty strong story here.

Well, you said, just a quick check on the math here, you said that next year is about $200 million in Military passenger, is that correct?

That's what we said, that's what we said.

That's right, Howard.

Yes. Okay, and in terms of the block-hours on CMI, you commented that '12 was 7,500 and '13 was 13,000, and what is your number for '11?

We haven't provided that level of granularity.

But, Howard, those were incremental growth hours that we were talking about, if you're referring back to the Investor presentation. That was -- it was growth on existing hours.

So you're saying that '12 will be 7,500 more hours beyond the '11 level, am I getting that correct?

That's what we said at the Investor Day.

Okay, very good. Thank you very much.

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

Thanks, Operator. Hi, gentlemen. And, frankly, most of my questions have been asked and answered, so thank you very much for the information. Just a couple of points of clarification on the new aircraft. Do we think of them as going into the leasing subsidiary and then being leased out to the operating division, or are they going right into the operating division?

You said -- I'm sorry, Helane, can you say that again, please?

Well, I'm just trying to get a sense of how these planes are going to come into the operation. Whether you're going to take them into the leasing company that you have and then lease them to the operating company or if you're just going to -- the accounting will just be that they go right into the operating company?

Helane, we're looking at all of that, and we will do -- we will put the planes to use to make sure that we take advantage of whatever opportunities we have. So if it makes sense from a tax standpoint, for example, or from a financial reporting standpoint, or if we think there will be opportunities to lease the aircraft at the end of their use with us, we'll factor all of those things in and we'll put the aircraft into the right entity and geographic locations.

Okay, and then just on the 767s, are you -- I probably missed this, you may well have said it -- are you looking at 300ERs, 200 -- what aircraft should we think about that you're wanting to look at for this operation?

For Military passenger flying it's the 767-300ER.

Got you. Okay, and then on the maintenance of those, who does the maintenance? Do you do that or did that get sent out, how does that work?

We outsource it, we manage but outsource our maintenance today.

Got you.

So we would outsource the maintenance on the aircraft, and a point that we've already made, these are 6-80 engines so there's a commonality in the engine pool for us.

Got you. Okay, and then my last question is on -- I know you said that you're retiring a fleet of 747-200s and they'll be out by next year. And I'm sort of thinking that they'll be out by next year unless there's an opportunity for them, like there was the last, you know, over the last year or so. But so does that mean that the 747-400 will be the aircraft of choice for the AMC business, I guess I should think about it like that?

Well, that's right, Helane, because the 400 is becoming the aircraft of choice for the business, not just from an Atlas perspective but from the Military's perspective.

Right.

That's something that we have encouraged the Military to consider but as you think about the pressure that's coming on the DoD around budget and expenditures naturally the Military is going to move into the 747-400. Greater cargo capacity at a lower fuel burn.

Right. Okay.

And that's one of the reasons we brought on the BCFs, the two BCFs that we leased for three-and-a-half years was to provide us some incremental capacity for charter and Military as we move through this transition, as we still look forward to reasonable levels of Military flying going forward.

Got you. Okay. Thank you. I appreciate your help.

Thanks, Helane.

Thank you, Helane.

(Operator instructions.)

Your next question is a follow-up from Ed Wolfe with Wolfe Trahan.

Hi, guys. Thanks. It was asked and answered. Thank you.

Oh, thank you, Ed.

There are no further questions at this time. I'm sorry, you do have a question from the line of Jason Ursaner with CJS Securities.

Just a quick follow-up, I know you got asked a bunch about the AMC passenger, but since you commenced in May and now are expecting this growth if you aren't committing a whole lot of passenger aircraft, I guess what's driving the confidence that you can get the entitlement? Was it the FedEx Team not taking its full allocation or are you displacing another carrier on the Team?

Our confidence in the hours that we're forecasting has to do with the entitlement process and the amount of passenger flying that the FedEx Team will be entitled to.

Okay, and but is it dependent on you allocating more passenger aircraft once you get them or once you -- or is the Company --

So it's kind of a virtuous circle here, Jason. We're only going to acquire, we're only going to have a fleet of passenger aircraft that matches our expectation of what our entitlement hours are.

Okay, but what --

And just maybe to put one more point on it that might be helpful, AMC flying is oversubscribed. More cargo planes and more passenger planes are committed to the AMC than the forecast would suggest in almost any circumstance that the AMC would need. That whole process of committing aircraft and the rules set by which you commit aircraft drives team entitlement.

So based on the committed aircraft that all members of the FedEx Team have made relative to the commitments made in the Alliance Team and in the UPS Team and independently by carriers drives the entitled share that the FedEx Team would have, the Alliance Team would have, the UPS Team would have. Within the Team the carriers within the Team then reach agreements as to who is going to fly what, and based on that FedEx Team dynamics, that's what drives our 10,000 hour kind of entitlement flying that we're discussing today.

Okay, that makes a lot of sense. I appreciate it. Thanks.

Thanks, Jason.

There are no further questions at this time.

Okay, thank you, Operator. And Spencer and I would like to thank all of you for your interest in Atlas Air Worldwide. We certainly appreciate your participation today, and we look forward to speaking with you again soon. Thank you.

This concludes today's conference call. You may now disconnect.

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