Atlas Air Worldwide Holdings Inc (AAWW) 2011 Q3 法說會逐字稿

Good morning. My name is Brandy and I will be the conference operator today. At this time, I would like to welcome everyone to the third quarter earnings conference call for Atlas Air Worldwide. All lines are placed on mute to prevent background noise. After the speakers' remarks there will be a question-and-answer session. (Operator Instructions) Atlas Air you may begin your conference.

Thank you, Brandy. Good morning, everyone. I'm Ed McGarvey, Vice President and Treasurer for Atlas Air Worldwide. Welcome to our third 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 and/or printed a copy of our slides you may do so from our Web site at www.atlasair.com. You may find the slides by clicking on the link to Presentations in the Investor Information section of the Web site.

As indicated on slide number 2, 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 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 US 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 Web site 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 Web site. Again, if you have not already done so, you may download and/or print a copy of today's slides by clicking on the link to Presentations in the Investor Information section of our Web site at www.atlasir.com.

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 we 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. Good morning, everyone. We are pleased to have you join us today. I would like to start by discussing the key point on slide 3 That is the underlying core strength of our business.

Over the past several years we have transformed our business. We have done this by aggressively managing and modernizing our existing fleet, driving improved operating efficiencies and strengthening our balance sheet. We have also diversified and grown our operations, and improved our business mix with our CMI service and military passenger capability, and our new 767 aircraft platform. Our business base and scale are global. We are positioned to do well in all economic conditions. We are aligned with premier customers that are committed to air freight and that are market leaders serving diverse and vibrant trade lanes around the world. We provide the strategic capacity that our customers require to execute their business models. We provide them with modern, efficient capacity enabling them to fulfill their commitments to their long-term customers.

Although the weak global economy has affected the air freight market and our business during the third quarter, we continue to expect strong earnings in the fourth quarter. We expect higher utilization in our ACMI segment during the quarter, along with improved commercial charter yields and demand. Our fourth quarter results will also benefit from substantially lower maintenance expense, as well as continued productivity gains in cost control.

Our first 747-8F entered service yesterday. This is a milestone event for us. Continuing our drive to the next level of transformative growth. Our customers are eager to start benefiting from the 747-8's commercial and operating advantages. Our 747-8's will drive our volumes and profitability higher. We will continue to leverage our core competencies and we'll continue to capitalize on other new organizational capabilities such as our asset light CMI operations and our passenger charter service. The additional flying from each of these initiatives will substantially increase our revenues and earnings, and continue to drive an enhanced business mix this year, next year and beyond.

Slide 4 highlights our third quarter results. We generated net income of $28 million, or $1.07 per diluted share on revenues of $363 million despite a challenging, slow growth economy. Earnings in the third quarter were driven by our core ACMI business including our CMI operations. We also responded to an increase in AMC charter demand including our new military passenger service. Our ACMI results reflected a reallocation of 747-400 freighter capacity from commercial charter to meet increased ACMI customer demand in 2011 compared with 2010. In line with the strength in ACMI, 75% of the block hours we flew during the quarter were for our long-term contract customers. Reflecting the global scale of our time definite operations, we enabled our customers to take advantage of growth opportunities in the Middle East, Africa and South America which are key markets for them.

Slide 5 indicates our full year guidance for 2011. Our outlook for EPS of greater than $4.30 per diluted share represents a revision from previous guidance. Softer charter market conditions account for the largest percentage of provisions. Other factors include further 747-8F delivery delays, lower levels of CMI flying due to Boeing's 787 program adjustments, and investments we are making for the future, including AMC passenger operations, 767 CMI flying for DHL, the 747-8's and other new business initiatives. Softer consumer demand, particularly in August and September, and delays in new product introductions, primarily in the high-tech industry, contributed to a slower pace of air freight activity out of Asia during the third quarter. That resulted in a reduction in opportunities for one way commercial charters following AMC charter missions, as well as lower yields on the charters that took place.

Recently some capacity has been withdrawn from the Asia-Pacific region and we have seen a pick up in air freight activity and yields in Hong Kong and China during the past few weeks. In addition, performance in our commercial charter business in South America remains strong. As we look ahead to the fourth quarter, we expect to report a significant sequential improvement in our earnings compared with the third quarter. We expect our fourth quarter performance to reflect increased customer utilization of our ACMI aircraft, the introduction of our new 747-8 freighters into service, increased commercial charter demand, substantially lower maintenance expense and continued productivity improvement in cost controls.

Slide 6 illustrates the transformative effect that our strategic initiatives have had on our earnings since 2008. What stands out on this chart is the 148% compound annual growth rate in our pretax income since 2008 and also on our ability to capitalize on unique market opportunities such as those that we saw in 2010, including the drive to replenish inventories which continued to remain low and the opportunity to move MATVs for the US Military at premium rates, both of which drove a strong charter market for Atlas and others. All of this has resulted in significant free cash flow generation and the strengthening of our balance sheet. Excluding aircraft purchases, we generated $540 million of free cash from the beginning of 2008 through the end of September 2011.

Turning to recent business developments on slide 7, as we have already noted, we took delivery of our first 747-8F aircraft yesterday and expect to receive two more before the end of the year. The -8's are the cornerstone of our future fleet and the principle driver of our revenue earnings growth in 2012 and beyond. We expect to receive two additional -8's in the first half of 2012. Two in the second half of next year and the remaining two of our current order of nine aircraft in the first half of 2013. We have placed our first five -8s with British Airways in Panalpina, extending long-standing relationships with two of our premier customers for whom we provide strategic capacity. We are looking for toward to placing additional 747-8's and 747-400 freighters with both existing and new customers.

We are also looking forward to operating five 767-200 freighters in CMI service for DHL Express in North America starting in 2012. This will be the first CMI service for a general freight operation, complimenting the specialty lift and passenger CMI service that we provide to Boeing and SonAir. To meet expected demand in our military passenger business in 2012, we acquired two passenger 747-400 aircraft and two passenger 747-600 since May. We are looking to purchase a third 767-300. One of the 747-400s replaces a leased 747-400 passenger aircraft that we will return to the lessor when the lease expires at the end of this year. We expect this business to generate significant revenues in earnings for us in 2012 and the years to follow.

Lastly, we finalized an industry leading five year collective bargaining agreement with our flight crew members in September. This agreement completes a merger of our Atlas and Polar crew forces into a single collective bargaining unit with an integrated seniority list. Under the terms of the new agreement, both pilot groups have been brought to parody with each other, and we have achieved all of our strategic objectives in the process, including maintaining competitive compensation and benefits for our crew members, preserving industry leading work rules and flexibility, and enhancing overall productivity. Bottom line, we achieved long-term labor stability under a contract framework rarely seen in the aviation industry that provides real value to our crew members, customers and stockholders.

This is probably a good point to ask Spencer to provide with you additional perspective on our third quarter results and our fourth quarter outlook. After that, I will provide some thoughts about our fleet and future growth and then we will be happy to take your questions. Spencer?

Thank you, Bill. Hello, everyone. Slide 8 recaps our third quarter earnings. It also highlights the sequential improvement in our results during the first three quarters of 2011 and points to continuing improvement that we expect in our fourth quarter performance. We delivered net income of $28 million, or $1.07 per diluted share in the third quarter on operating revenues of $363 million. Revenues were 11% higher than the third quarter of 2010. Operating expenses largely reflecting fuel costs were 18% higher than in the third quarter of 2010. Excluding fuel, operating expenses increased 9% compared with the third quarter of last year.

The average fuel price for our commercial charter business was approximately $3.20 per gallon in the third quarter, compared with $2.32 in last year's third quarter. In addition, the average peg fuel price in our AMC charter segment increased to $3.97 per gallon from $2.68. As a reminder, 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 ACM charter business because the contractual fuel reimbursement mechanism with the US Military.

Looking at slide 9, operating revenues in the third quarter of 2011 benefited from growth in block hour volumes and rates in our core long-term ACMI business. Revenues in our ACMI business grew 13%. Reflecting the complimentary nature of our business segments, we redeployed 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. We operated an average of 19.9 747-400 freighters in ACMI during the quarter. With the growth of our CMI operations adding an average of 1.6 aircraft to that segment. AMC charter revenues during the quarter also benefited from increases in block hour volumes and rates. As a result, AMC revenues grew 69% driven by higher cargo demand and our new passenger service, as well as a higher average peg fuel price and higher rates paid on 747-400 aircraft utilized during the quarter. Commercial charter revenues in the third quarter primarily reflected a reduction in block hour volumes as we redeployed 747-400 capacity to ACMI and had fewer commercial charter return legs following one way military flights.

As illustrated on slide 10, direct contribution by our reportable segments totaled $69 million in the third quarter, compared with $81 million in the third quarter of last year. Direct contribution in our ACMI segment rose due to increases in block hour volumes and ACMI rates, partially offset by an increase in volume driven operating expenses. In AMC charter, direct contribution primarily reflected increases in block hour volumes and premiums earned on 747-400 missions during the quarter, partially offset by an increase in volume driven operating expenses and an increase in heavy maintenance expense primarily driven by 747-200s. In commercial charter, direct contribution was lower for the market reasons we noted earlier.

Slide 11 shows block hours and revenue per block hour in our ACMI segment. ACMI block hour volumes benefited from the addition of two incremental aircraft for DHL Express in March and a second aircraft for Panalpina in October. In addition, our ACMI customers flew 4.5% above their contractual minimums during the third quarter. The increase in block hour rates primarily reflected contractual rate increases in existing customer contracts and higher rates on new contracts. As Bill noted, the growth in ACMI demonstrates the underlying strength of our core long-term business.

As slide 12 highlights, AMC charter block hours during the third quarter reflected an increase in cargo demand to support US Military activity. AMC block hours also reflected a sequential increase in passenger flying for the military which we began in mid-May. We flew 467 passenger block hours for the military during the third quarter, up from 177 hours in the second quarter. We continue to expect that this initiative will add meaningful and sustainable earnings in 2012 and beyond. It's also part of our strategy to mitigate any longer term reduction in military cargo demand. With regard to rates, AMC revenue per block hour during the quarter reflected higher rates paid on 747-400 freighters utilized during the period, as well as the increase in average peg fuel rate that I mentioned a moment ago.

Moving to slide 13, commercial charter block hour volumes in the third quarter reflected the conditions we described previously. Block hour rates in commercial charter reflected the recovery of increased aircraft fuel costs in South American markets and constrained yields on charters out of Asia.

Looking at slide 14 and focusing on our balance sheet, you see that we ended the third quarter with cash, cash equivalents, restricted cash and short-term investments totaling $546 million. That exceeded our balance sheet debt of $524 million by $22 million. We borrowed $120 million under a 12 year term loan facility on September 30. The proceeds were classified as restricted cash in our balance sheet at September 30 and were applied to the acquisition of our first 747-8 freighter yesterday. Capital expenditures during the third quarter totaled $76 million including about $14 million of core CapEx and about $7 million of capitalized interest relate to our Boeing-8 order. The balance of our spending was for investments in business growth including aircraft acquisitions for our military passenger operations, which Bill highlighted earlier. Excluding aircraft and related capitalized interest, we expect core capital expenditures to be about $43 million for the remainder of 2011. On October 3, we made a $210 million pre-delivery payment to Boeing and we expect to make an additional payment of approximately $16 million later this year.

Our net leverage ratio at quarter end, which includes capitalized rents, was a very healthy 3.3 times annual EBITDAR, which positions us nicely with respect to the growth opportunities we see ahead. Including the benefit of an investment that we made in our outstanding WTCs, we had an even stronger net leverage ratio at 2.9 times annual EBITDAR. We expect that the financing program for our 747-8 freighters, including our first delivery yesterday, will generate substantial net cash for the Company. Considering the pre-delivery payments on the -8s, the permanent financing we raised in our first three deliveries, plus the amount we expect to raise on the remainder of our order and we have made significant progress in this banking facility since our last call, we expect that the net cash to Atlas on our 747-8 deliveries will total approximately $170 million. And that will be in addition to the strong operating cash flows that we expect these aircraft to produce and the favorable bonus depreciation benefits that we anticipate most of these aircraft will qualify for.

Before Bill provides some concluding thoughts, I would like to take a moment to comment on our fourth quarter 2011 earnings outlook. Several factors, as a outlined on slide 15, support our outlook. Overall, we expect continued moderate growth in the global economy despite some apparent headwinds. That translates into the traditional seasonality that we see in our results with demand for our services peaking in the fourth quarter. We expect higher customer utilization of our ACMI aircraft in the fourth quarter with our customers flying 5% above contractual minimums.

We anticipate introducing three of our new 747-8 freighters into service late in the fourth quarter, which should generate earnings of about $0.10 per share. We also see a sequential increase in demand for our commercial charter aircraft during the quarter. Barring any unforeseen circumstances, we expect substantially lower maintenance expense in the quarter. For the full year, we continue to anticipate maintenance expense to be consistent with 2010. Therefore, maintenance expense in the fourth quarter is expected to total about $25 million compared with $145 million in the first nine months, and that $25 million on an EPS basis will contribute over 50% right to the bottom line.

Finally, results in the fourth quarter will also benefit from our ongoing focus on productivity gains and cost control. I would also like to note that we are looking forward to providing guidance for 2012 and we will do that during our next earnings call. Now here is Bill to make a few concluding remarks.

Thank you, Spencer. Slide 16 highlights our forecasted year end 2012 operating fleet. It underscores the premium assets that comprise our fleet, the quality and value of the customer solutions and the demand for our aircraft. By year end 2012, our operations are expected to include seven 747-8 freighters and 24 747-400 freighters. We also expect to have two passenger 747-400s and three passenger 767-300s providing charter service to the US Military and other customers. In addition, we anticipate that we will operate at least 11 customer owned aircraft in our CMI operation and this compares to none at the beginning of 2010. Those operations include four 747 large cargo freighters or Dreamlifters for Boeing. Five 767 freighters for DHL Express and two 747-400 passenger aircraft for SonAir.

Slide 17 indicates a very manageable aircraft placement profile over the next three years. On average, three to four of our ACMI contracts come up for renewal in any given year. We retired one older generation 747-200 aircraft in 2011 and we expect all five of our remaining 747-200s to be retired by mid 2012. We will use modern, more efficient 747-400 freighter aircraft in our current fleet to replace those aircraft and to provide continuing service in our AMC and commercial charter operations. We will also return one of our short-term converter freighters to the aircraft's lessor in early 2014. By the beginning of 2014, we expect that nine new and better performing 747-8F aircraft will replace seven older, lesser performing aircraft. And we expect that, that will minimize and normalize our placement risk.

Moving on to slide 18, 2011 will be a good year for Atlas from a historical perspective. We expect to report our second highest earnings on a pretax basis and we are looking ahead to 2012 and beyond. Our 747-8 freighters will enhance our underlying core business strength and they will drive volumes and profitability in our business. Our asset light CMI operations will continue to grow and add to earnings. As we noted on our last call, we expected volumes in our military passenger business will grow to more than 10,000 block hours in 2012 from a approximately 1,200 block hours this year and none in 2010. And we will continue to manage our fleet aggressively. We will benefit from the diversity and global scale of our operations.

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) Our first question comes from the line of Kevin Sterling with BB&T Capital Markets.

Spencer, this is probably a question for you. It seems like your maintenance expense, it seemed to me, at least, a little unusually high for a third quarter. I know you are guiding significantly down for the fourth quarter. Was there anything in the third quarter that caused it to at least be above sequentially what we saw in Q2? Is there anything unusual? Like I said, it seemed a little high to me. I would love to get your take on that.

Kevin, thanks for your question. The heavy maintenance overall this quarter, third quarter that is, was fairly consistent with the third quarter of 2010 and it's consistent with what we have been guiding to all year. We said that this year we expected that our overall maintenance expenses would be similar to last year or approximately $170 million and that continues to be what we are guiding to. So, that means that we have incurred about $145 million already this year. That means that we expect about $25 million in the fourth quarter, and therefore, significant improvement in the fourth quarter, but the maintenance overall is pretty consistent with what we've been talking about. It's a much more normal year overall.

Okay. Thank you. I guess I'll get a follow-up question in. Bill, this is more for you, I believe. It's a big picture question. You talked about having three or four ACMI contracts up for renewal in a given year. You probably don't want to talk specifics. I'm not asking specifics, but maybe you could talk directionally and give us an indication, as you think about renewing some of those contracts or placing some new planes in ACMI next year, could you talk to us a little bit about how those conversations are going with customers, how it's being received?

Yes, thank you, Kevin. A couple thoughts. That's one of the reasons we wanted to include the fleet slide in the fleet discussion here in our call today. First, the 200s are going to retire. They have good demand and there is -- based on good demand markets in AMC and commercial charter overall. We will need to serve that market with some of our 400 freighters.

I think it was an important milestone that we took our first 747-8 freighter yesterday and it departed Washington today, and I think a number of customers, who we have been talking with, are anxious to see that aircraft, to see that aircraft fly and then that aircraft is performing for our first customer, British Airways. Two more are going to deliver this year and then as we've talked about, we have the next two going to Panalpina. I think with the certainty of the program, with the certainty now the launch, there was noise that Cargolux had two around some of their first deliveries. The aircraft is up. It is flying. It is going to provide a very meaningful stair step improvement and performance for the customers that take on the 747-8.

That said, the 400 is still a very strong performer. It provides great operating efficiency for our customers. All that said, we are looking at a normal year in terms of placements. A normal year in terms of -8s and 400s, so three to four is what we have got to place as we move through '12. And as I've said on prior calls, I feel very good about our ability to place those aircraft, renew and place with current and new customers as we move through 2012 and into '13.

Okay, great. Thank you. I don't want to hog up the Q&A. I will get back in line. Thanks for your time this morning.

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

Thanks, Operator. Hi, gentlemen. I think you still have options on some 747-8 freighters. When do those options come due and can you talk about your thoughts with respect to exercising them?

So, as you know, we have adjusted the initial order from 12 aircraft down to nine and we have talked about that and had a press release to that effect. We have a total of 14 units. We have an option for one aircraft and purchase rights for 13 more for the total of 14. As you also know, we are in discussions with Boeing on the aircraft that we are taking delivery of. So, our expectation is the aircraft will be a good performer. There is going to be good market desire to want to fly the aircraft or have it provided to them in ACMI. As we work through our discussions with Boeing, it would be the time that we begin to talk about taking on more aircraft and the timing of those. But, I guess the other part of your question is, we certainly have time in terms of our horizon, if we want to go forward and buy more -8s.

Okay. And just one point of clarification, with the quarter being about half over, and there being sort of a limited window for freight now going into the holiday, the peak, are you -- can you talk a little bit about what you are seeing from your -- I think you said that you saw capacity come out of the market, but what are you seeing in the way of demand?

So, a couple of points there, Helane, in terms of the capacity, more than anything, not only our own observation, but referring to some of the recent IATA publications and IATA noted about 0.9% reduction in capacity in Asia-Pacific in August and a 2.5% reduction in capacity in September. So, that is kind of a data point based on an addition to our own observations on the market. So, we have seen two things. We have seen demand for charter pick up coming into the fourth quarter. We are October into November. There have been some new product releases. The I4S and some other products coming out of China and Korea and we have seen strengthening or improving is probably a better word, in the rates and charter rates out of China, Hong Kong and Korea, the key markets. And, so, we are seeing an improving market.

There is still some opportunity. We are only at the beginning of November for later shipments to get them into supply chain and out to customers. And, also, I think what enhances that, the product that we are talking about don't necessarily need to go to a retail shelf. People are ordering their I4Ss for example online, so product comes in from Asia, goes direct through a distribution center and gets mailed out or expressed out. You don't have the extra week or two that gets added on to put it into a retail -- a store shelf distribution supply chain.

Got you.

Good opportunity late into December for continued charter activity and continued shipping side of Asia.

Got you. Do you have any comments, Spencer, about 2012 maintenance expectations?

Helane, it's a little early to talk about 2012 right now. I guess what I would say is we mentioned before our relentless focus on continuous improvement and efficiencies, and our maintenance costs on a block hour basis have continued to decline and we continue to focus on that. And we will come out with our guidance in early 2012. Of course, the -8 maintenance holiday, which we talk about a lot and we are really going to enjoy, the -8s won't need maintenance for quite some time. They won't need C checks for a couple of years, they won't need D checks for eight years, they won't need engine overhauls for 5.5 years, any major part repairs we will have warranties.

Maintenance on the -8s will be incredibly low. We hope the light maintenance will be very, very light on those. Overall, maintenance we feel good about going into next year, but we will provide -- I know you want more than that. We will provide better guidance next earnings call.

Okay. Thank you.

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

A lot of attention is paid to the commercial charter market and the market is clearly seeing weakness, but you mentioned the majority of your block hours is ACMI. Bill, you often describe the segment as providing strategic capacity. I was wondering if you could elaborate on what that term really means to you, what it means to your customers and their freight forwarders, and given their unique coverage routes, why, if we look at volatility in the charter market, why it may not be the best indicator of ACMI demand.

That is a good question, Jason. A couple of things. I think we pointed out in our prepared remarks today that 75% of our block hours were flying for our ACMI customers in the quarter and over several calls over the past quarters, we talked about the fact that the commercial charter market was very strong in 2010, early 2010 and we took advantage of that. And then we saw the real opportunity to pivot capacity out of commercial charter and put it to work in long-term ACMI contracts for our customers. More importantly for our investors, we were investing in a very large order book, now nine aircraft of 747-8Fs, to put them to work in long-term ACMI contracts for our customers. The charter market has always been opportunity for us, but the ACMI market is our core business.

With finally the addition of new capacity in the form of the 747-8s, total new capacity, and a game changer in terms of what it's performance will be for our customers, that all adds up to our comment about it being strategic both for us, given the investments we are making and the earnings we expect to derive from them, and strategic for our customers because our customers are either DHL Express, their core business is, their business is freight and express, or it is the passenger airline for whom cargo is a major important part of their business, not only from a revenue point of view, but from a contribution point of view. They have decided to outsource that capacity to Atlas to our ACMI contracts.

All in all, that's why we say it's strategic. Charter is opportunistic. We take advantage of it, but we don't buy planes because we want to be in the charter market. We are in the charter market because it grants us -- gives us better utilization of our assets. That's why we believe we are well positioned going forward into '12 and beyond.

Great. Second, on the charter market, you mentioned improvements in yields. If I'm looking at the yields on an ex-fuel basis, obviously, fuel is up a lot and the yields are down over 25% year over year on an ex-fuel basis, and it's down sequentially as well. When you talk about an improvement going into Q4, I guess could you try and break down what percent you are flying out of Asia versus South America and what type of improvement you might be seeing in the Asia market?

I think you got the point very well, particularly if you just look at some of the stats that are appended to our earnings release. When you look at that, you see that the commercial charter block hour rate was $20,500 in Q3 '10 and $20,900, or something to that effect, in Q3 '11. The difference is fuel has gone up substantially. There is the 25% net yield loss that you are pointing out. What it says is that with the addition of capacity and softer demand, the market wasn't prepared from a pricing point of view to fully absorb the increase of fuel.

In terms of spot rates, we have been looking at something like $3, $3.25, $3.50 a kilo out of Shanghai, Hong Kong to LA to Chicago, those rates are coming into the $4 right now. The rates are up with fuel being fairly constant. Fuel prices are where they are and they haven't changed much. That is where some of the improvement in charter is coming. It's not a $7 market. Those are exceptional when they do happen. We are above $4 in the market right now with fairly stable fuel rate. That is where the opportunity I'm talking about or the improvement, which is a relative word, is occurring.

Okay, great. Appreciate the commentary.

Our next question comes from the line of Steve O'Hara with Sidoti Company.

It seems like some of the maintenance was basically pulled forward to the third quarter, is that fair to say?

It's not really pulled forward. We are not pulling to the quarters. It occurs when it occurs. I think what we had said on the earlier call, about $100 million of maintenance in the first half. $70 million odd in the second half. That is what Spencer has reaffirmed in his comments.

If we can manage, and we can sometimes, we have a difference of a few weeks here and there where we might, we would like to have more of the maintenance done before we come into the fourth quarter because the fourth quarter is our highest demand quarter. We want to have all of our assets or as many of our assets fully available for revenue service in the fourth quarter and not down for a heavy check during that fourth quarter. So, I think the numbers are there, there is the timing of one quarter versus the other, but the $170ish million is the right number, Steve.

Second, in terms of the agreements with the pilots and so forth, how does that affect your wage rates going forward if at all?

Sure, Steve. The important thing on the labor for us, most importantly was all that got achieved there. We have long-term stability overall. We have a very, very long contract term now. We've maintained competitive compensation and benefits for the crew members. We preserved our work rules and our flexibility and importantly, what this will do is enhance our overall productivity and efficiency. We will have a single workforce that we will be able to utilize Polar pilots for Atlas flying and Atlas pilots for Polar flying and so forth. That will really help our efficiency overall.

I think we've talked about before that the pilots hadn't received a raise in quite some time. Previously we talked about there will be a year one impact. The crew will receive a raise and then going forward, they will have nominal single digit increases going forward. They will have a low double digit increase at the start. So, overall, we are quite pleased with it. Normally people get increases on a regular basis. These folks didn't. They got a one time catch up and it is going to really improve our efficiency and, most importantly, gets us long-term labor stability over a very long period of time.

When does that one time event happen?

Sorry, when or how much?

When?

It's effective October 1.

Okay. Thank you very much.

Sure.

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

Hi, guys. Good morning. A couple of questions on capacity. You are talking about the renewals, you are talking about the number of 400s that you have in ACMI. You are talking about taking the classics and retiring those. So, I guess I'm looking at a lot of moving parts when it comes to capacity.

Afghanistan and Iraq are winding down faster than expected. There might not be as much demand in AMC. Commercial charter is a little bit weaker right now. Where, as you take the new aircraft -- I know the first 5 -8s are accounted for, but if you don't have as much AMC demand or commercial charter demand in the near term, is there any concern that you are going to end up with excess capacity that is going to be well under utilized given the current environment we are in?

Well, John, the environment we are in is being contracting for several months now or more than several months now in 2011. It doesn't feel like 2008-2009 where the market fell off the cliff and contracted 30% out of Asia in the fourth quarter of 2008, and contracted another 30% again in the first quarter of 2009. We have been talking about fleet renewal. In fact, I went back and I looked at some of the historical presentations we have made. Back in our investor day in 2008, we talked about then that all 200s would retire as we began to get -8s and that the market we would be serving would be served by the 400 fleet, i.e., military and commercial charter. There is a military market that is going to require service for some time to come. Certainly, we are all reading the announcements from the administration. We will update our AMC forecast when we update our guidance for 2012 on the fourth quarter earnings call.

So, going forward then and the number I talked about earlier were four aircraft, if we assume that we are covering the 200s with our 400s, with some of our 400s, we are looking at two aircraft of renewal for 400s and two placements of 747-8s going into 2012 which, from our perspective, is a manageable number. To your point, we watch the market closely. The fundable capacity we have over the next couple of years are the short-term leased BCFs which we brought in for British capacity, which will go back to the lessor at the end of the term. Even in the slow market, the best performing assets, the ones that produce the lowest unit cost for our customers are the ones that continue to operate and remain in place. We saw that even in the market for 2008 and 2009. We think we have got the right mix of assets that will provide us good utilization, very good returns on the investments we have made.

Okay. All right. Can you just walk us through the accretion again on the -8 with your commentary around $0.10 of contribution in the fourth quarter from the delivered aircraft. I just want to make sure there is no change to that $0.48 per year per aircraft that you had given in the past.

Sure, John, it's Spencer. We still continue to think that the -8s will generate approximately $0.04 per plane per month. That is your main question. The $0.10 that remains is about 2.2 months if we want to get technical. That is the amount of flying that we now expect as the deliveries have slid a little bit. And, so, we started at nine months where we originally thought we would have nine months worth of flying with the -8s this year. We scaled back to four and now we are scaling back to what we believe is 2.2 months worth of flying for the fourth quarter.

Okay. So, given the prior announcement about the cancellation of the other three aircraft, the math hasn't changed, any issues related to possible accretion for those aircraft was limited to those three aircraft, correct?

Those three aircraft were lesser performing aircraft. That's why, between the delays and the performance considerations, we canceled those aircraft. The aircraft that we are taking are later producing aircraft, are better performing aircraft to the ones we canceled. We still expect that the -8 will deliver what we've talked about.

The last question, can you just speak to where you stand in the process with Boeing today in terms of negotiating whatever monetary compensation may be coming your way or what type of compensation might be coming your way as a result of the delays of this? And is there any potential monetary compensation given the delay in the Dreamliner production and the impact on the CMI agreement?

You have several questions there. We are not completed in our negotiations and our discussions with Boeing on the nine aircraft that remain in our order book. That continues with Boeing. That said, we took delivery of the aircraft without those discussions being completed because we needed to put the aircraft to work for British Airways. We weren't going to delay our ability to place the units into ACMI because we have ongoing contract differences with Boeing. That's where we stand on that, John. So, we will continue in discussions with Boeing to address the contract differences that exist between us.

The Dreamlifter does have some minimum payments associated with it or minimum revenue streams associated with it. We are below -- we are kind of in that environment, I would say, with Boeing right now, but based on Boeing's announcements, we expect activity to ramp next year as they ramp up based on their announcements of what they expect the 787 delivery cycle to look like in 2012.

Very good. Thanks for your time, guys.

Our next question comes from the line of Jack Atkins with Stephens.

Good morning, guys. Thanks for taking my questions this morning. My first question is going back to the commercial charter business for a moment. When I think about your guidance for 2011 and your implied guidance for the fourth quarter, could you help us think about what that assumes as far as the rate that you are getting on a block hour basis in that business? And also the number of planes you are going to have operating there. I think you had 3.5 planes in the third quarter. Do you expect the same number of planes operating for commercial charter in the fourth quarter or do you expect that to tick up sequentially?

If you look at the guidance of in excess of $4.30 per share, if we just look at $4.30 a share, that implies $1.93 in the fourth quarter, up from $1.07 that we have generated in the third quarter. As Spencer noted in his comments on maintenance, with the substantial reduction in maintenance expense in the fourth quarter, about $0.50 per share is attributable to substantially lower maintenance costs in the fourth quarter. ACMI will be flying at about 5% or so better or above minimum utilization. We were in the 3% range for this quarter and then just overall activity, commercial charter, and in both Latin America or our South American markets and Asia, are going to drive the improvement that gets us up to the $1.93. In terms of aircraft employed in the commercial charter unit, I think the number is fairly similar. Not a huge amount more aircraft going into that, but the number is fairly similar.

Great. As far as the rate that you are getting, I know you talked about a $4 per kilo rate, or maybe even a $4 plus per kilo, that you are seeing now out of Asia. Is that the rate that we should assume for what your guidance reflects for the commercial charter business?

Yes. Our guidance, which includes our commercial charter business out of Asia, reflects the pricing that we are seeing this quarter in the market.

Shifting gears here and talking about the AMC business, clearly you have benefited this quarter from premium pricing there from employing the -400s in that fleet. Could you talk about how we should expect block hour rates in that business to trend, both in the fourth quarter and then as we look out into next year when you put more of the 400s into that fleet?

We will provide more speer perspective on AMC for 2012 in the fourth quarter call. There are some moving pieces as you have seen in some of the recent administration announcements. We did say what we thought the passenger business would be, about 10,000 hours next year. We will continue to refine that with the military as we move through the quarter. We said for this year that the cargo component of that would be about 18,000 hours. We think 18,000 hours is roughly what the full year for cargo will come out. I think I said earlier in my comments, passenger will be somewhere around 1,200 hours. That is pretty much how we see it.

Okay. Thanks, guys.

Thank you.

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

Hi, thank you. Bill, I realize you don't want to give guidance on the military for 2012, unfortunately we actually have to have a forecast for 2012. Is it still the right way to think about it in terms of boots on the ground? Is that a fair metric to still think about in terms of at least starting with a forecast because we are going to have to do it. Is that the right metric I should look at?

Boots on the ground is certainly an important data point. Again, some of the other things could be, if there is a campaign of one or another sort or if there is a desire to preposition inventory and hardware, there is a desire to bulk up perhaps for the Afghan forces, that could drive more cargo. If there is interruption in some of the land base supply chain leading up to changes in troop deployment, that could also create more air and less ability to use water.

So, we've said that 18,000 this year, Bill, and we said it would be less than that next year. I think that's not a specific number for you yet, but it's less than the 18,000. I don't think it's a huge fall off from the 18,000. Then there are other factors that drive demand because it's not only CENTCOM, but it is demand in other theaters and even to some extent if the president is moving around and he is moving around by air, that takes capacity out of the supply chain channel and that drives higher AMC hours for the cargo carriers such as Atlas and others. If there is a lot of presidential movement this year, coming up in 2012 as we lead into the election, it could drive higher than one might expect utilization in AMC.

That's helpful. Thanks. The other thing that I think you've tried to do sort of strategically, you said, one of the things AMC did for us was it allowed us to fly to that part of the world, but then also a quicker hop to Asia and then on which offered some ability to get a kick on contribution from in effect using the same assets. As you move more of the military business to passenger, I don't sense you can do that as much. Can you update us on how you think about how the contributions are moving around? Have you fully replaced that depending on what happens with the military?

Sure. There are two different markets. There is the military cargo business, which uses our existing 747-200 and will be all on our 747-400 freighter asset going forward as we come into '12, and then there is this commercial passenger business. I will start there first.

We were able to get into the commercial passenger, commercial passenger business for the military because through SonAir we were able to demonstrate one year of passenger service that the military and the DOD could audit and that was a necessary predicate to qualify to be able to then carry troops. As we go forward next year, we've said 10,000 hours of passenger service. Those are effectively all new hours. We haven't traded cargo hours to fly passenger hours. They are separate. So, call it 8,800 new hours next year because we are doing 8,800 this year and that is separate and it's new contribution. Last call we said $200 million plus and we said that business generates around a 15% margin. That is all correct. That is essentially all new business.

In cargo, we are talking 18,000 hours this year. We said it is going to come down in '12, that is not a surprise to anyone. And it is going to come down in '13 and beyond. We will guide more specifically around '12 in our next call, but it's less than the 18,000 hours. On top of that, we have been able to replace and more than replace the declining contribution that comes out of military cargo through our CMI operations. In particular, and in prior discussions, we have pointed to the LCF.

As the LCF ramps up from a couple of thousand hours this year to 13,000 hours or more as we come into '13 at full production rates for the 787. If you just envision a graph where cargo contribution from the military is declining over time '12, '13, '14 but then graph upward right the LCF contribution that builds in '12, '13 and '14 on a nine year contract at very attractive margins, and then layer in ones belief about the new contribution from passenger, overall we end up with a very strong net positive improvement in contribution, including the benefit that accrued from the one way charter movement. As you think about the 25% of our business that today is commercial charter and military cargo and think about then lesser military cargo hours, new passenger hours which never existed before, LCF and add some other CMI on top of that, 767s for DHL, that's positive, that's a net positive number and a fairly strong one. And then think about our ACM business with 75% of what we do today, 400s and -8s, and that's the story -- that's how we think about driving our Company forward into '12, '13 and '14.

Very helpful.

Long answer, but that's the composite I believe.

That was excellent. Very complete. That was awesome. Thank you. Spencer, before I let you go, can you remind us where you are on all the financing for the -8s? And that's it. Thank you.

Sure, Bill. We are working on a proposal. We have a committed bank. There are certain components of the transactions that are not yet closed so, therefore, since it's not yet closed, we are not in a position to really talk about it too much more, but I will say a couple of things. One, is that we are looking at loan to value that will be higher than the first three aircraft that we financed. And we will see a substantially lower interest rate than the first three that we financed. The other thing I talked about a little earlier, but with the pre delivery payments that we have made, with the financing that we expect, the -8 deliveries will actually be cash flow positive. We expect to have about $170 million of positive cash flow on these deliveries. So, I think between the fantastic financing that is not quite done, but almost, and the terrific cash flow coming from this, I think we are quite pleased. I think Bill stepped back into the queue, Operator.

Our next question comes from the line of Alex Brand with SunTrust Robinson Humphrey.

I know we are past the hour, so I will just one simple question. On the maintenance guide, $175 million less $145 million is $30 million. You guys said $25 million a couple of times and $5 million moves the needle. I want to make sure which one is the right guide for Q4.

Sure, Alex. We said about $170 million for the year less about $145 million for the first three quarters, which leaves about $25 million for the fourth quarter.

I got you. I was looking at last year's number and going straight across. Okay. $170 million. Got it. Thank you.

That's it.

I can go more, but it's been an hour. It's enough.

Thanks, Alex.

Our next question comes from the line of Scott Group with Wolfe Trahan.

Good afternoon, guys. So, I just want to understand that there is no change in the cargo or passenger military hours for 2011 and I would have thought there would have been a little opportunity given the pull out from Iraq, and I'm wondering if there is not really much of a benefit from the pull out from Iraq or if you think that is something that you see the benefit in early 2012?

It's not clear yet, Scott, what we are going to see from Iraq and whether that is going to be a December or whether that is going to be a January. We've talked about 1,200 hours total, which, based on the hours we reported already, suggests something around 500 to 600 hours for this quarter in passenger. It really remains to be seen how that is going to play out and if the timing of that doesn't slip over into January. We don't have the details yet from the military.

When you think about the passenger military business, though, is there a theoretical kind of full utilization we can get this many hours, block hours per plane and how does that compare with the theoretical hours you can get from a 400 where you are doing military, cargo military one way and then charter the other way. I'm trying to think of the utilization of passenger versus cargo.

Passenger has lower utilization than cargo because cargo, as in our earlier discussion with one of the other folks on the line, we have been able to -- a freighter aircraft is just that, it's a freighter aircraft. It can be used for multi-purposes and we commercialize a lot of that capacity. One way, fly to CENTCOM, ferry to another theater, Asia or Europe, and commercialize a ferry back. We talked on our prior call that cargo is more in the range of a 20% margin or better and that on passenger, when we start with the 2012 which is being run calendar this year by the military, in the military contract, we will be entitled to a fairly good share of the military passenger market and that's what generates the 10,000 hours that we are talking about.

Again, as I said to someone else, it's not that we are giving up cargo hours to take passenger hours. They are separate. These are incremental. The margins there we said are 15%. In that 15% we are recognizing lower utilization of the passenger aircraft and slightly higher expense given the nature of serving passengers versus serving cargo. What we have not put into the forecast are commercial passenger charters. There is a market out there and we think that there is a market that we can access. We haven't focused a lot on that market yet because our goal is to get the military up and running. That would be incremental. There may be some up side and what I mean by that, some better utilization of the passenger aircraft as a result.

That makes a lot of sense. Last thing, the 400s coming back from BA and then from Palantina, how quickly can you get those back into service and do you think there is an opportunity in this environment to put them into ACMI or do you think they have to stay in charter in this economy?

No, I don't think they have to stay in charter. We will get aircraft back towards the beginning of the year. We have delivered one aircraft to BA. The aircraft that it will free up as it moves into schedule next week will serve a good charter demand that we see out there for that aircraft. The other aircraft now are pushing into December which is why Spencer talked about 2.2 months worth of aircraft flying, as opposed to the nine that we were originally looking at because aircraft moved a week or two into the delivery cycle.

As we go forward into 2012, there are ACMI opportunities for the aircraft and we will have a mix of the aircraft that are freed up, some into ACMI, some into the commercial charter market but we are anxious to retire our 200s. Those hours have to be served. We have been talking about this for several years now. The other part of the maintenance question that Spencer had earlier on from someone, we talked about the benefit of the maintenance holiday on the -8. The other maintenance benefit we look to see in 2012 is we're not going to be thinking maintenance dollars into 200s. We are anxious to retire them. That flying has to be picked up by 400s and some 400s will go into ACMI.

Scott, this is Spencer. Maybe I will quickly add on to that, that if all we merely did was park 200s and have 400s replace the flying 200s we're doing and have -8s replace the flying that the 400s were doing, that would be tremendously accretive to this organization and to our stockholders. I want to make sure that you understand that as well. If that's the only thing that happened, is that replacement, the -8s will be so much more profitable and so will the 400s as we park the 200s. That will deliver tremendous bottom line results.

Spencer, how much of the $170 million on maintenance this year is on 200s?

Let me do a little math. For the full year, Scott?

Yes.

Hang on. I'll have to come back to you on it. What I don't have -- I have the heavy maintenance. What I don't have, Scott is the line maintenance which is sort of on going ordinary maintenance that planes undergo when they come into a station. So, I'll come back to you on that.

If you have the heavy maintenance, that's great because that is definitely what's going away next year, I would guess.

Sure. So, the heavy maintenance is approximately -- it's about $20 million of heavy maintenance. That is on a total of about $85 million. So, it's a fairly significant portion of our heavy maintenance, Scott.

Great. Thanks so much, appreciate it.

Sure.

Our next question comes from the line of Howard Rosencrans with CA.

Yes, hi, guys. Thank you very much. Informative call. I will just ask you -- a lot of my questions have been answered. I will ask you about the placement on the balance of the fleet. You talk about the 7.5 required placements and five will go to replace the 200s, when would you hope to have an outside contract for one of the 400s? Would you -- since you are moving them into replace the 200s would you necessarily -- when would you look to have an outside commitment from an outside party for one, two or three planes for the balance of the fleet that moves outside?

Well, we will do that as we move later into 2012, Howard. When we take the 200s down, we are going to look to take them down not all in one day, but in short order.

So, you are not even looking to market, just for clarity, you aren't even looking to market a 400 to an outside party until mid or late in the year?

I think mid -- so, to answer the question completely, we are marketing our aircraft, both -8s and 400s today, to customers for ACMI placements and so the timing of that is more I think the answer I was giving you. When we ground the 200 fleet, we will ground the whole fleet in very short order because retaining one or two aircraft and operating that last tail of the aircraft for some number of months is hugely inefficient from a crew point of view and from an expense point of view. When we retire that fleet, we are going to retire the fleet. That won't then generate a lot of excess 400 capacity to be marketed into ACMI. The management team here, we are looking at the timing of the fleet, as we think about '12, when the fleet goes down and then that will tee up and identify for us first available placement dates for the 400 and that's what we are marketing to. If that's helpful.

Yes. I'm trying to get a sense of when you might be in a position to announce one, two, or three planes, however many, of 400 placements? I'm trying to get a sense of whether we could be hopeful that would come in the next month or two, in the balance of '11, in the first quarter or when we get a sense of the --

It's more likely going to be in '12, Howard.

First half, second half, no sooner than March, April, May? Give us a sense when you get those 400 reallocated is important.

It's important, but it's important to recall what Spencer just said. If we did nothing more, it will be hugely accretive next year. The other question that we got from Bill Greene, is can you give me guidance on the military cargo demand. If we have strong military cargo demand, we will serve that market first with those aircraft while we have them. It's the best paying hour we have. I'm not trying to equivocate on the answer, but until we have clarity on that commercial charter market, that's where we are going to put those aircraft. Until we get some better visibility as to how that tails off, is when we are going to be pushing -- wanting to push the button to have that aircraft go into ACMI.

Okay. Fair enough, thank you very much.

Thank you.

Our next question comes from the line of David Campbell with Thompson Davidson.

Thank you very much. I wondered if you could tell me anything about the travel costs in the third quarter. You mentioned a lot of increases there. Was some of that non-recurring in the quarter related to various opportunities you had?

It's Spencer. As you know, we have been growing and diversifying our business and as part of that, we have been taking on additional aircraft. There is some travel related to taking on the -8s certainly, there is some travel related to taking on the 767-300 aircraft and the 747-400, all of those are passenger aircraft. The travel was primarily -- or the spike in travel that you are talking about was primarily related to new initiatives, start up activities that will lead to future profits.

Not necessarily all recurring on a quarterly basis?

The other piece of it is crew travel, of course, goes along with block hours. As we fly more block hours, we are going to be positioning crews and our crews are going to be flying for longer. So, there is a travel cost related to positioning crews and you see that increase as block hours increase, and there is this one off travel that we did to prepare these assets.

And to prepare for the first -8s. There was a fair amount of travel associated with that as well.

Second question is, your charter, a lot of talk about the charter opportunities in the fourth quarter. Do you think the block hours will be up from a year ago or just up from the third quarter in charter block hours?

What we have talked about is sequential improvement and you also know that we have two aircraft less in charter, at least two 400s worn now in ACMI as opposed to charter. The improvement in block hours is more of a sequential improvement.

Okay. Thanks. You got all my other questions answered.

Thank you, David.

Our final question comes from the line of Charles Swain with Snyder Capital Management.

I would like to review the cash flow impact of bonus depreciation allowable from the 747-8F purchases. Considering the purchase and delivery of the 4 8F aircraft in 2012, will the accelerated bonus depreciation allow you to deduct 100% of the cost of the equipment as extra first year depreciation? And assuming, say roughly $180 million purchase price for the planes, will this amount to over $8 per share of cash flow?

Good question, Charles. So, let me step back a little bit and point out that we expect that our -8s will qualify for bonus depreciation. Those that are placed in service in 2011 and '12 will qualify for 100% bonus depreciation. Those in '13 for 50% bonus depreciation. But they need to qualify for the bonus depreciation, so it depends upon where the customer is and what type of flying they are doing, but I will say overall to your question that we don't expect to pay US Federal income tax in 2011. In fact, we don't expect to pay US Federal income tax for the next several years, and we don't expect to pay until 2015, and that is all as a result of the bonus depreciation on the assets. Tremendous, tremendous cash flow.

In addition to that, we did pay some US Federal income tax in 2010 and as a result of the bonus depreciation, we will be able to carry back the deductions to 2010 and actually receive a refund, so additional cash flow next year. Many -- perhaps this is beyond your question, but there are a lot of -- most US states don't recognize bonus depreciation, so we still expect to pay a small amount of state tax, but most of our income is not even subject to state tax because most of the flying that we do is outside of this country. So, overall, yes, very, very strong cash flow. We don't expect to pay taxes until at least 2015 as a result of the bonus depreciation.

Great, thanks very much for your answer.

Thank you.

There are no further questions at this time. Management do you have any closing remarks?

Yes, thank you very much, operator. We would like to thank everyone who participated on the call today for your interest in Atlas Air Worldwide and we look forward to speaking with everyone again soon. Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.