Atlas Air Worldwide Holdings Inc (AAWW) 2011 Q4 法說會逐字稿

Good morning. My name is Regina, and I will be your conference operator today. At this time I would like to welcome everyone to the fourth-quarter earnings call for Atlas Air Worldwide. (Operator Instructions). Thank you.

I would now like to turn the conference over to Atlas Air.

Thank you, Regina, and good morning, everyone. I'm Ed McGarvey, Vice President and Treasurer for Atlas Air Worldwide. Welcome to our fourth-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 and Spencer's remarks. If you have not already downloaded 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 number two, we would like to remind you that our discussion about the Company's performance today include 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 are 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 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 a copy of today's slides by clicking on the link to Presentations in the Investor Information section of our website at www.atlasair.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 you have gone through the queue, we will be happy to answer any additional questions as time permits.

At this point I would like to turn the call over to Bill Flynn.

Thank you, Ed, and good morning, everyone. We are pleased to have you join us today. Let's start with a few important thoughts on slide three.

2011 was a year of expanding our business platform and investing for the future, and 2012 is expected to be a year of significant earnings growth. We made meaningful progress on several strategic business initiatives during 2011. We expect that they will drive earnings per share growth in 2012 to more than $5.10 per share, an increase of 24% from our adjusted 2011 EPS.

There are several key drivers of our growth going forward. We took delivery of our first three 747-8 Freighters. We placed those aircraft and the next two that are scheduled for delivery in 2012 in long-term contracts in our core ACMI business. We also developed and secured extremely attractive Ex-Im Bank guaranteed financing for the remaining six 747-8Fs in our order, financing that will provide significant savings in our ownership costs for these assets.

Complementing the growing strength of our ACMI business, we developed and commenced AMC passenger operations, and we expect a substantial increase in passenger flying for the military in 2012.

We also developed a new 767 passenger and cargo aircraft operating platform that will continue to ramp up as the year progresses, serving the US military on the passenger side and DHL Express in North America on the cargo side. The flying that we will perform for DHL is part of our expanding asset-light CMI business where we operate aircraft provided by our customers.

Our CMI business will continue to ramp up in 2012 as we do more flying for Boeing as it increases its production of the 787 Dreamliner. The scale and efficiency that we provide to our customers is one of our core strengths. It creates value for our customers and is an important driver of our growth.

Slide four briefly highlights our 2011 results. In a year of economic uncertainty, we delivered full-year adjusted net income of $109 million and adjusted diluted EPS of $4.12. Our adjusted results exclude the impact of pre-operating expenses that were incurred for the introduction of new aircraft types that will generate future revenue and earnings growth. They also exclude a special charge related to the retirement of our 747-200 fleet. Our 747-200s have served us well in our military and commercial charter operations, but they have reached an age where maintenance and other inefficiencies have become increasingly expensive. And with just a few remaining in our fleet, crewing and other efficiencies are not what they once were.

Our 2011 results reflect the strength of our ACMI operations, which includes our CMI business. ACMI revenues grew 16% during the year with block hours increasing 12% and block-hour rates increasing 3.5%.

We performed well by historical standards in 2011, but earnings came up short of expectations. Conditions in the global economy, delivery delays for our new 747-8 freighters, production rates that affected our ramp-up of CMI service for Boeing, and the impact of pre-operating costs for new initiatives all contributed to lower than anticipated earnings.

Slide five highlights a number of achievements in 2011 in building and growing our business platform. We delivered superior service, reliability, flexibility and performance for our customers. We implemented a comprehensive AMC charter passenger business that will be an important part of our growth in 2012 and beyond. We received our first three 747-8Fs at the end of the year, and we placed our first deliveries in long-term ACMI contracts. We secure attractive financing for all of our -8Fs, particularly an Ex-Im Bank guaranteed facility that we closed this year. We expect that it will save $130 million of interest expense over the 12-year term of the facility.

In developing and implementing our 767 operating platform, we achieved approvals from both the US Department of Defense Commercial Airlift Review Board, or CARB, and the Federal Aviation Administration. CARB approval enables us to provide 767-300 ER passenger service to the Department of the defense.

To operate the 767s, we also achieved 180-minute ETOPS, or Extended Twin-Engine Operations certification from the FAA. ETOPS enables us to plan the most efficient routings of our 767s on transatlantic flights. Both the CARB and the FAA approvals demonstrate that our continual focus on safety, reliability and operational excellence transcends aircraft types.

We completed a five-year labor contract that benefits our crew members, preserves our industry-leading work rules and flexibility, and enhances overall productivity.

In addition, we maintained IATA Operational Safety Audit certification for our cargo and now our passenger operations with zero findings by the auditors.

Slide six highlights how we are transforming our operating fleet. Growth is about leveraging core competencies and developing organizational capabilities, and that is what our 2012 fleet is indicating.

At year-end 2009, we had just two wide-body fleet types, our 747-400 freighters and our 747-200 freighters. Today we have the largest and most modern fleet in our business with a mix of cargo and passenger aircraft, serving customers who are leaders in their markets. We are building on our core competencies, diversifying our fleets and developing new operational platforms to better serve our customers and to secure new ones.

Slide seven indicates where our new aircraft capabilities and growth initiatives are taking us. As the bars on the left indicate, we believe that the combination of the 747-8s, operating passenger service for the military, the CMI operation that we are starting for DHL and the Dreamlifter flying for Boeing should deliver about 96,000 block hours of additional growth. The bars on the right show the trend in our pretax earnings from the levels in 2005 through 2009 to the levels in 2010 to 2012. As we fly these incremental block hours, we will see substantial growth in earnings and pretax margin expansion.

Turning to our specific guidance for 2012 on slide eight, we expect to report fully diluted EPS of better than $5.10 this year. This is an increase of approximately 24% compared with our adjusted EPS in 2011 on a 17% increase in block hours, and it reflects our expectations that aircraft -- that airfreight demand will improve in the second half of the year.

We also expect a sequential improvement in our quarterly earnings throughout the year after marginal first-quarter results.

The key framework on which our outlook is based includes over 160,000 block hours with approximately 75% coming from our core ACMI segment, about 15% from our AMC charter operations, and about 10% from our commercial charter business. That reflects the retirement of our 747-200 fleet, as well as about 48 months of flying by our 747-8F aircraft, which would be an average of about four -8s for the whole year.

In addition, we expect to fly about 10,000 cargo hours and about 10,000 passenger hours for the US military. The increase in our passenger volumes for the military offsets a reduction in cargo demand for the US military in international areas.

Maintenance expense in 2012 is expected to total about $174 million compared with $168 million in 2011. Heavy airframe checks and engine overhauls are expected to account for about 40% of our expenditures in 2012 with the balance for non-heavy line maintenance. We expect about one-third of our total maintenance expense to occur in the first quarter of 2012 with approximately 25% in each of the second and third quarters and 17% in the fourth quarter.

Slide nine highlights the sequential improvement we will see this year. We expect that earnings will get off to a very slow start in the first quarter and then accelerate throughout the second, third and fourth quarter. That is in line with our view that we will continue to see moderate air freight demand in the first half of 2012. The Eurozone debt crisis is still a lingering economic concern, and consumer confidence in key markets is only beginning to brighten. We anticipate that airfreight demand will pick up in the second half of the year with new high-tech product launches and continued solid demand in regional markets such as South America. We expect to receive two 747-8F deliveries in the third quarter and two more in the fourth quarter.

Our 767 passenger operations for the military will begin to ramp up in the second quarter, and we expect our CMI operations for Boeing to ramp up as Boeing increases the build rate for its 787 Dreamliner throughout the year.

Finally, our maintenance expenditures in 2012 are expected to be first-half weighted as they were in 2011 and as they are in most years. This is probably a good point to ask Spencer to provide you with some additional perspective on our fourth-quarter results and our cash flow outlook. After that, I will share some thoughts about our core strength and our future growth, and then we will be happy to take your questions. Spencer?

Thank you, Bill, and hello, everyone, on the call. As slide 10 illustrates, our fourth-quarter earnings were sequentially better than our third-quarter results, continuing the trend of better quarter-over-quarter results that we saw throughout 2011 and that we expect that pattern of sequential improvement again in 2012, as Bill mentioned. We delivered adjusted net income of $40 million or $1.50 per diluted share in the fourth quarter on operating revenues of $388 million.

Earnings in the fourth quarter were driven by our core long-term ACMI business where our customers flew 4.4% above their contractual minimums. Our results also reflected an increase in AMC charter demand, including our new military passenger service. Global economic strains affected the airfreight market in our business during the fourth quarter during which there was no real peak season, and the overall market remained sluggish. Despite this, however, overall performance in our Commercial Charter segment improved from our third-quarter results, reflecting an increase in demand and improved block hours rate, as well as continued strength in South America.

Our fourth-quarter results also benefited from substantially lower maintenance expense and continued focus on productivity improvement and cost controls. Maintenance expense decreased as there were no heavy airframe checks or engine overhauls performed during the fourth quarter of 2011. Results for the period, however, were impacted by further Boeing 747-8 delivery delays and lower than anticipated Boeing Dreamlifter flying, which affected our CMI operations.

Operating expenses, including a $5 million special charge related to the retirement of our 747-200 fleet, were 12% higher than in the fourth quarter of 2010. Increases in labor expense, travel, aircraft rent, depreciation and other operating expenses during the fourth quarter were offset by the significant decline in maintenance expense. Labor expense increased due to a new five-year agreement with our crew members, additional block hours flown and the hiring of incremental employees to support our business growth.

Looking at slide 11, operating revenues in the fourth quarter of 2011 benefited from growth in block hour volumes and rates in our AMC charter business, partially offset by a reduction in Commercial Charter volumes and rates. While overall revenues were 8% higher than the fourth quarter of 2010, revenues in our ACMI business grew 2% as block hours volumes increased by a similar amount and rates were steady at approximately $6164 per block hour.

In line with the continuing strength in our core ACMI segment, 73% of the block hours we flew during the quarter were for our long-term contract customers. We operated an average of 19.1 747-400 and 0.8 747-8 Freighters in ACMI during the quarter with the growth of our CMI operations adding an average of 1.7 aircraft to the segment.

In AMC Charter, revenues during the quarter grew 48%, driven by our new passenger service, a higher average paid fuel price, and higher rates paid on 747-400 aircraft utilized during the quarter. We flew 724 passenger block hours for the military during the fourth quarter, up from 467 hours in the third quarter and 177 hours in the second.

Commercial Charter revenues in the fourth quarter reflected a reduction in block hour volumes and rates.

As illustrated on slide 12, direct contribution by our reportable segments totaled $94 million in the fourth quarter compared with $91 million in the fourth quarter of last year. Direct contribution in our ACMI segment rose due to an increase in block hour volumes and a reduction in heavy maintenance expense.

In AMC Charter, direct contribution primarily reflected increases in block hour volumes and decreases in heavy maintenance. And in Commercial Charter, direct contribution was lower for the market reasons we previously noted.

Turning to slide 13 and to our balance sheet, you see that 2011 was a year of investment to drive future revenue and earnings growth, and that 2012 is expected to be a year in which those investments will help to rebuild our cash balances and lower our net leverage ratio. We ended the fourth quarter of 2011 with cash, cash equivalents and short-term investments totaling $195 million. The change included cash outflows of $173 million related to the acquisition of aircraft and spare engines for our Titan subsidiary, our AMC charter passenger operations, as well as our core operations.

$226 million related to pre-delivery payments that we made to Boeing on our -8 order and $47 million related to the paydown and closing of our 2008 pre-delivery payment financing facility.

These payments were partially offset by a total of $40 million of net cash inflows we received at closing in connection with the financing of our first three -8 aircraft.

In addition to our core capital expenditures of $37 million in 2011, we purchased three 747-8s, two 747-400 passenger aircraft, two 767-300 ER passenger aircraft, and two 737-800 passenger aircraft to support our growth initiatives. Excluding predelivery payments, aircraft engines and related capitalized interest, we expect core capital expenditures to be about $60 million in 2012.

Moving to slide 14, we expect that the strong operating cash flows that -8s should produce, the favorable bonus tax depreciation benefits that they will generate, and the positive cash back that we receive at future closings should enable us to quickly rebuild our cash balances and reduce our net leverage ratio. Due to the benefits of bonus tax depreciation, we don't anticipate paying US Federal income taxes until 2016 or later.

We also plan to back-lever the aircraft purchases that we made in 2011. Accordingly we expect our cash balance to grow throughout the year and lower our net leverage ratio, which includes capitalized rents to about 4.2 times annual EBITDAR at year-end 2012 from 4.9 times at year-end 2011. Including the benefit of an investment that we made in our outstanding WTCs, our net leverage ratio would be reduced from 4.5 times annual EBITDAR at the end of 2011 to 3.9 times at the end of 2012.

Slides 15 and 16 summarized some of the quarterly detail about our 2012 maintenance expense outlook which Bill highlighted earlier. These slides reflect our desire to be more transparent about an important factor in modeling our business.

As Bill noted earlier, we expect to incur about $174 million of maintenance in 2012, about one-third in the first quarter, about 25% during each of the second and third quarters, and the remainder in the fourth quarter. Coupled with a seasonal pattern in airfreight activity with the first quarter starting off slow and building up during the course of the year, maintenance timing is an important factor in the expected quarterly earnings acceleration that we see this year.

As you can see in slide 15, line maintenance, which we incur to support our day-to-day operations, is expected to account for more than 50% of maintenance expenditures in 2012 and will grow throughout the year as block hours increase.

Line maintenance generally trends up during the course of the year as the pace of flying increases on a seasonal basis. Heavy maintenance events, C and D airframe checks and engine overhauls are expected to account for approximately 40% of our spending and are primarily completed in the first half of the year.

Non-heavy maintenance, for example, worked on auxiliary power units, thrust reversers and lending gear systems accounts for the remainder of our expenditures or approximately $12 million. Similar to heavy maintenance, these events more typically take place in the first half of the year.

So just quickly for your information, slide 16 shows our current outlook for the timing of heavy maintenance events in 2012.

And now turning to slide 17, I would like to update you regarding financing efforts for our -8s. Two weeks ago we announced that we closed on a groundbreaking transaction with the US Export-Import Bank. The granting of this loan guarantee was ultimately premised on our solid business model and our strong financial condition. The $865 million facility will be used in connection with financing our remaining six -8 aircraft at advanced levels and interest rates far better than anything available in the aviation finance marketplace today.

We expect that this transaction will result in a 200 to 300 basis point improvement and more than $130 million in interest expense savings over the very attractive commercial bank financings we achieved on our first three deliveries.

With this Ex-Im transaction completed, we have now secured financing for our entire order of -8s and have addressed another important factor in the growth outlook for the Company. Based on the strong advanced levels we have achieved across all of the financings and the predelivery payments that we have already made to Boeing, we expect to generate approximately $215 million of positive cash flow on a cumulative basis for all of the -8 deliveries. That will be in addition to the strong operating cash flows that we expect these aircraft will produce and the favorable bonus tax depreciation benefits that we anticipate that each of our nine aircraft will qualify for.

With that, I would like to turn it back to Bill for a few concluding remarks.

Thank you, Spencer. Moving to slide 18, we are looking ahead to 2012 and beyond. We expect to report fully diluted EPS of better than $5.10 this year, which is an increase of approximately 24% from an adjusted EPS in 2011 on a 17% increase in block hours. Our 747-8 aircraft will drive volumes and profitability in our core ACMI business, and our growing CMI operations and passenger military business will complement that growth. We believe that our modern and efficient fleet, our diversified business mix, and our solid balance sheet position us to prosper in all economic conditions and to navigate the growth ahead.

We also believe the combination of our innovative customer solutions, our ability to capitalize on changing market conditions, our strategic growth initiatives and our track record in executing our business model will drive our revenues and earnings to higher sustained levels over the next several years and beyond.

With that, operator, may we have the first question, please.

Alex Brand, SunTrust Humphrey.

I have got so many questions, I don't want to waste my primary and my follow-up. Let me start with on the military business where I think you had talked about in the past that peacetime flying would be no worse than 8,000 to 10,000, and now you are saying 10,000, but my sense is we are not in peacetime. What is going on there? Are you just being conservative on the cargo portion of the military guidance?

So I think there's a couple of things there to talk about. On our last call, we talked about at that time an expectation of 14,000 cargo hours and about 10,000 passenger hours. Based on recent changes in announcements and discussions from the military, we are seeing the demand for cargo or reduction in the demand for cargo beginning to accelerate.

I think we are all aware of Secretary Panetta's comments about a more advanced drawdown in 2012 and out of combat operations in 2013. So from our last conversation to our conversation today, we have reduced cargo demand from 14,000 hours to 10,000.

If you just look at our contribution rate, each 1000 hours of cargo hours is about $0.19 on an EPS basis. We are holding our passenger hours at about the 10,000 again. Again, these hours, the 10,000 and 10,000 are really based on indications that we have from the US military and our own analysis and complications we have with outside parties who also study these hours. And that is a change.

What we've said, if you think back to our Investor Day back in last May, we said looking out to 24, we saw cargo hours even at a 7000 rate and passenger hours 6000 to 7000 and we think that is right. And, again, what we are trying to calibrate here is the pace of withdrawal from CENTCOM.

Further, what we have talked about over the several years that we are not a company that is built on the military. It is an important component of our business, but the combination of the -8s, the growing contribution from the LCF, the introduction now of military passenger to moderate the decline in cargo hours are all -- all those pieces are coming together, and it is based on that that we are looking at a 24% earnings growth on a year-over-year basis.

Thanks for that color, Bill. If I can just clarify on the first quarter, I think last year you had talked about the normal seasonality Q1 would be 8% to 10% of the year, and now you are using the word marginals. Is marginal still 8% to 10%, or does marginal literally mean breakeven?

So, in the call today and in the guidance that we have provided, we have tried to do a couple of things. In conversations we have had with you and with other analysts and with our investors, there is always a concern about maintenance and how should we model maintenance, how should we think about maintenance.

So, in Spencer's comments, we wanted to provide as much visibility on maintenance as we can and we did several things. We have given the quarterly perspective. We have provided the heavy checks and when they expect to occur, and I think your models have rates around what those heavy checks are worth. But we wanted to then break maintenance into heavy, non-heavy and line.

So, first of all, line is pretty much driven by volume. Line maintenance occurs on all aircraft types. Even, as we said before, the new -8s have line maintenance because we are flying them.

So you see that on that slide, line maintenance growing through the quarter as volume grows through the quarters just based on the nature of airfreight demand, and we try to plan our heavy maintenance as much as possible in the first quarter into the second so that we have as much aircraft availability for the heavier demand in the second half of the year.

And then we called out what is called non-heavy, and that is not a C check or a D Check or an engine, but it is about landing gears and APUs and other fairly expensive ops. So getting back to your question, so we wanted to give that maintenance visibility.

Now all that is occurring, the largest preponderance of that is in the first quarter. Some of the new growth initiatives, the 767 growth, the passenger growth does not really begin to ramp up until second quarter. The 767-200 flying for DHL does not really ramp up or begin to ramp the first aircraft, frankly, the second quarter through the balance of the year. That 747-8F deliver towards the second half and into the third quarter, fourth quarter, as opposed to more front-end weighted.

So the combination of the expenses, the ramp-up of new initiatives and what everyone I think is calling a fairly sluggish market, particularly in the first quarter and second quarter this year, tells us first quarter is going to be marginal, although we are not guiding to a specific dollar point in the first quarter, but we wanted to provide you and all the other interested parties with as much visibility as we can.

I will just add to that that Bill explained all the reasons why and I think if you adjust your model for those things, it will help provide a little more clarity around that. But just to be clear, we did say marginal. We did say that the first quarter of 2012 would be much lower than the first quarter of 2011. So I just want to make sure that all those things are factored in.

Thank you, Spencer. I just wanted to give you guys an opportunity to clarify that because I know this comes up every quarter with the guidance issue. Thanks for your time, guys.

John Mims, FBR Capital Markets.

Let's start looking at the guidance for ACMI, so you are guiding -- the math gets you to 120,000 hours for 2012. That is up 17% or 18%. How much as the CMI ramps up, how much of that increase is attributed to CMI?

John, there is on one of the slides that Bill presented, if you --

We have a table there, John -- (multiple speakers)

(multiple speakers) really good table. So it shows you on slide seven you can see the CMI block hours there. We expect that the CMI block hours that we fly for Boeing were about 2600 block hours in 2011. We expect they will increase to about 4900 block hours in 2012. And the flying that we do for SonAir remains fairly steady going from about 4400 to about 4300, so that one is fairly steady. So you can see the block hours right there for CMI.

And the other CMI is the DHL. (multiple speakers)

Which is right above that.

Right. So, as that ramps up -- and that was kind of a lead-in to the real question I had was -- how does that change your revenue per block hour and the contribution margin for the ACMI segment? Because my thought is obviously that would come with a lower revenue per block hour, correct, but higher margin?

Higher margin for sure. We have not really talked about the impact on the rate per block hour there. That depends on the particulars with our customers. But it is reasonable to think it is absolutely correct that the margins would expand.

And so there are several components to that. So we have not disclosed the ACMI rate for the 747-8, and that is 20,000 hours plus of that growth. We have talked about margins in the LCF and for SonAir, and those margins are in those hours as well. We did talk about a lower margin in the mix on the 767-200 flying because those are low hours of utilization in any one given month. So there is a mix of rates in each kind of segment, but overall what we are talking about is margin expansion.

Right, okay. I have got a bunch of other questions, but I will stick to the two and get back in the queue. Thank you.

Jason Ursaner, CJS Securities.

Bill, my main question relates to profitability of the -8. You previously talked about this $0.04 per month per plane incremental profitability. So when you look at it now, the -8 contract versus a 400 ACMI with the incremental profitability of a 400 versus a 200 in the military, do you see any change in this forecast?

The $0.04 is the number that we have talked about for some time, and that is the number that we believe that the 747-8 will deliver, if that was your specific question. Overall there is margin expansion as we just talked about with John given the growth in the various segments that we have talked about for 2012 and beyond.

I will just add to that that the really attractive financing that we put in place has been a long time coming. And so that had already been factored in when we provided the $0.04.

Okay. And then just as a follow-up, can you talk a little bit about Commercial Charter specifically out of Asia? There was a couple of companies that rested planes in the quarter, just what you are seeing now given the early lunar new year and some of that?

So it certainly was a challenging year in 2011 in the context of airfreight demand where on a year-over-year basis, airfreight demand contracted for 10 months in a row, and January has been soft certainly by all reports, and we have seen that ourselves. The combination of an early lunar new year, perhaps the absence of some new product introductions, is not a very strong January in the market overall, and that has had an effect on a number of operators.

And so capacity has come out of the market as a result of one or another operator's decision to park planes, etc. And that, again, shapes the curve for 2012 as we think about the sequential earnings growth quarter to quarter with more weighted towards the back half of 2012, which is consistent with just the ramp-up of our several operations that we have discussed.

Jack Atkins, Stephens.

The first thing here is, with regard to the expense that you guys are excluding in your adjusted EPS calculation, could you maybe talk about the decision to exclude expenses relating to the introduction of new aircraft types? Why exclude that now versus in prior quarters?

Sure. So the pre-operating expenses represent costs that we incurred for the introduction of the new aircraft types, which include the 747-8s, the 767s, both passenger and freighter, and the 747 passenger planes.

They also include incremental costs that we incurred as a result of aircraft delivery delays. The costs include things like training and travel, ownership costs that we had to incur and the like. And they totaled over $17 million, which was about $0.36 on an after-tax basis of EPS.

And Jack, to get to your question, we felt that was just so significant that we wanted to highlight that for people to help understand our results.

We also had a special charge that we incurred related to the retirement of our 200 fleet, and so I will talk about that a little bit more.

But, as a result of that item, in addition to the preoperating expenses, we felt that the two together really were pretty meaningful. The special charge happened in the fourth quarter. There were a significant number of the preoperating expenses that happened in the fourth quarter, and when we put the two together, we felt they were meaningful to provide to all of you.

Just to give a little more color around the special charge, after receiving the revised delivery schedule from Boeing and taking delivery of our first three -8s, we made a decision in the fourth quarter of 2011 to retire the 200 fleet, and at that time we parked two of the aircraft. And then we also decided to park the remaining three 200s the first quarter of this year. And so that decision resulted in $4.1 million of impairment charges to write down the engines, the rotable equipment and expendable parts to their appropriate fair value.

So that was $4.1 million. We also took a charge related to furloughing or terminating certain of our crew members, specifically flight engineers as a result of that. And so with all of that together, we thought it was significant enough to provide you the color so that you can understand the numbers better.

Okay. Thank you for that color, Spencer. I appreciate that. Then just ask my follow-up, if we could talk about the SG&A line for a moment. So a pretty substantial uptick there sequentially. The $76 million, $77 million range, is that what we should be assuming as a run-rate going forward or maybe you can help us think about if there was anything one-time there or just the seasonality of that line?

Well, I think there are a couple of things. One is we have clearly provided a lot of maintenance detail on a quarterly basis, including the events, included our estimated amount of the expenses on a quarterly basis. So you have all of that now. We have talked about the fact that we entered into a new agreement with our crew members, and that agreement started on October 1, the increased salaries started. So we have said in the past that was around 10% to 11% increase in crew salaries, wages and benefits. So I think that is an important piece of it.

So those I think are the two biggest things. The rest of the expenses generally move along with our volumes. There are things that depend on flights like landing fees and parking fees. The rest of the expenses are variable and generally move with block hours.

And just to add to that, part of those expenses in the salary lines were pilots and first officers and flight attendants who we had to hire. These are part of the preoperating expenses, but people whom we had to hire to train to fly the 767s, to fly the 747-400 passengers in the support to growth, which is ramping up now. So there is a timing to that expense, and people have to be hired, and they need to get in the classroom and on the simulators to be qualified to commence that flying now in January in building through the year.

Steve O'Hara, Sidoti.

Could you talk about the aircraft you have coming out for British Airways? They signed up for three of the -8s. Panalpina has two of the -8s that that they will be flying. What happens to those 400 aircraft? Are they being marketed to other customers, or are they just going to simply replace the 200 coming out of military or Commercial Charter or wherever they are flying?

Right. So we have talked about this several times, and I think you will see in our appendix and in some of our previous investor presentations that have been on our website our indicative fleet plan going forward.

So the intention has always been that when we retire the 200 fleet, we needed to have 400 aircraft available for us in order to continue to provide and cover the flying that the 200 does today.

And so what we have indicated in our prior presentations that the first five aircraft that are being coming out as a result of the -8 placements need to go into service to cover military and to cover Commercial Charter and our schedule charter operations in South America as well, and that is where the aircraft have gone.

Okay. Then the average of 3.5 that you guys put out there for each year in terms of replacements, are those in addition to the, let's say, five that are coming out?

No, because the majority of the aircraft have been assumed in the 200 -- sorry, where the 200s were previously flying. So our placement requirement this year is really 2.5 to 3 aircraft units as we have indicated on that slide that is in your deck and we have talked about in prior meetings.

John Barnes, RBC Capital Markets.

A couple of things. So, number one, understanding that some of the uncertainty around your model and the potential upside to your model is in Commercial Charter, excess miles or block hours flown by your ACMI customers, that type of thing. The guidance that you provided for 2012, can you give a little color around -- maybe just a little bit more detail color around where you expect minimum block hours to be or above minimum block hours to be and what your outlook is Commercial Charter? I know you indicated that it is back-half loaded, but can you give us a feel for -- do you feel more optimistic about Commercial Charter as the year progresses? What are you hearing from your customer base that might give you some of that maybe upside to what we saw in 2011?

Sure. So overall we talked about the fact that our ACMI customers flew 4.4% above their minimum block hour guarantee in the fourth quarter. Over the course of the year, that equated to about 3.3% that our customers flew above. So looking at 2012, when you think about growth, you mentioned a couple of the areas, but I would mention others.

So just to answer your question, we would expect that our ACMI customers would fly at somewhat similar levels to where they flew throughout 2011 with some hope that there is upside potential beyond that. But when you really think about the growth, you have to think about the -8s, the incremental growth and profitability from the -8s. You have to think about the passenger flying. We are going to add something like 9000 incremental block hours of flying passengers for the military. We are going to add about 2300 additional block hours flying for Boeing this year. And so those are really key areas that we are looking at that are really going to drive growth in 2012.

So we do expect flying above minimums in 2012 more consistent with the levels that we incurred or our customers flew in 2011. And we are saying Commercial Charter will add about 10% of our total block hours, and from our perspective, that makes sense. There is good, strong regional flying in South America, and that continues to grow. There is seasonal flying around produce, fresh cut flowers and some of the other perishables, and that continues and we are moving that. And we continue to expect to do so.

We believe that demand does improve through the year. So, as we come into the third and fourth quarter, there will be demand in the typical ex-Asia markets whether that is to North America, Europe or into Middle East/Africa. And those are the three key components that color our view on Commercial Charter.

Okay. And I recognize those are other growth avenues. I'm not trying to dismiss those at all. But there is a lot of volatility in your model around these particular things, especially on the Commercial Charter side, and that is -- so I appreciate the clarity there.

I guess if I go back and I think about the guidance that you gave for 2011, I think you had said it was going to be above a $5 number or somewhere in that ballpark. So clearly it appears like we are a year behind on where the numbers should be. Can you talk a little bit about why you have more faith in Boeing this year whether it is getting the 10 aircraft per month on the 787 and, therefore, realizing the CMI flying with them; their delivery schedule on the 747-8, which appears to continue to have some complications? What gives you more confidence that these things are going to materialize, and this guidance of $5.10 that you are giving this year is going to be the right number?

Sure. Well, I think there are several key components there and some of those you have listed.

So, first, I think we are saying that 75% of our block hours, the 120,000 block hours that someone commented on a moment ago, are in our ACMI and our CMI business, and that is our core business. And that is what we have invested in in terms of the new aircraft we have purchased and in terms of the customers we have secured, both ACMI and CMI. And I think that shows the strength of the model, and it answers the question that we have had on a year ago or prior calls, what are you going to do about military? And what we are showing is a transformation away from military and growth going forward in the other parts of our business.

Commercial Charter at 10% seems to be reasonable based on the seasonality and the perishables that we have talked about. And military at 15% is a mix now of cargo and packs, still a good number of ours, and we think that there, as we have talked about in a prior question, is a sustainable core of cargo demand and passenger demand that in peacetime will serve.

In terms of the 747-8 delivery schedule, I think that is a key part of your question there. We are expecting four aircraft in 2012. We have tempered our forecasted delivery date based on some of the experience we have already had with our first three deliveries. And that is why when we are getting four aircraft in 2012, we are really getting one incremental aircraft year, a full year of flying for the first three that have been delivered, and then with the latter half deliveries of the four, we get 12 more months of flying, and we're trying to correlate that back to the $0.04 expectation.

In terms of the build rate for Boeing, we rely on Boeing's forecast and our experience with Boeing to forecast LCF flying for them. Our sense is that Boeing is building to that schedule and that we calculate our LCF hours simply by a multiple of about 107 to 110 hours of flying per aircraft built. And so that allows us to forecast.

Now, as you pointed out, the risk in that forecast would be if the LCF build rates don't occur. Our sense is that they are, but we obviously have to be guided by our customer, Boeing.

I would just add briefly to that. Obviously last year we were disappointed and surprised by just how long some of the Boeing delays were. Obviously the -8 delays we went from about nine months to less than two months of -8 flying. Their issues with the 787 production and the impact that had on the CMI flying quarter by quarter by quarter, you know that we were disappointed by that. Hopefully we are a little smarter, and we have learned a little bit from the experience. And so hopefully we are providing more reasonable estimates this time.

Bill Greene, Morgan Stanley.

This is actually [John] filling in for Bill. If I could just follow up on that last question -- and maybe I'm over emphasizing the fact that you said exceed $5.10, but it sounded like you gave a lot of reasons why $5.10 was a reasonable number, but why do you think that the risks to the number is decidedly skewed to the upside, or am I just reading into that too much because I know you have used that terminology before?

I think the big variable, there are several variables, of course -- market demand and John Barnes was just asking us about LCF and Dreamliner build rates. Those are all there. I think the upside above the $5.10 would probably be driven more by the military cargo demand than anything else.

And Bill, you mentioned diversification as a benefit, but you also mentioned that one of the reasons you felt confident about the $5.10 number was because of the resiliency and the quality of ACMI. It seems like some of the other businesses have been more overhangs than benefits. Why not continue to shift more aircraft to ACMI?

Well, it is ACMI and CMI, right? A big part of the diversification is the CMI, the flying that we do for Boeing, that we do for SonAir, and that we are now going to do for DHL with the 767-200s.

Cargo -- the decline in cargo demand for the US military was inevitable. It is something we have talked about for quite some time because we certainly knew that -- all of us knew that there would be a drawdown in Afghanistan, and it seems to be slightly accelerated.

In peacetime, though, there is a demand for cargo, and there is a demand for passenger. And then one of the reasons -- the main reason we wanted to get into the passenger -- well, there were two. It is very good margin flying, but it also moderates cargo decline. And in some of those cargo -- sorry, some of those passenger hours that we have been flying for the military, we have been flying domestically, and we are flying into the Pacific and into Hawaii and Guam and Korea. And so that kind of footprint in a peacetime environment continues.

So there is a combination. Our core business is ACMI and CMI. It builds scale. It builds operating leverage. We leverage our core competencies in that to get into the 67 platform, to get ETOPS. We know there is a consistent military demand out there in a peacetime environment, and I think all of those are important components of the growth, and they allow us to use our fleet as flexibly as possible, and we will seek to shift our fleet to where we have the best long-term earnings opportunities. And we have a track record of doing that, and that will dial -- or that will kind of indicate how we move fleets and secure customers going forward if that is helpful.

Howard Rosencrans, Value Advisory.

I have quite a few questions, some of which have been addressed. But in terms of the 8s, when you talk about the profitability, you were factoring in the associated interest costs. Am I correct in that?

Yes, that is right. (multiple speakers)

(multiple speakers) So if now you have markedly better associated interest costs, why would -- why is the profitability not higher than the suggested $0.48 per plane?

Sure. So we have been working with the US Ex-Im Bank for -- it has been about two years now, and so it is not an easy process. This was a groundbreaking transaction. We are the only ACMI operator who has ever qualified for financing like this. It has been a long process, but for some time now we have been pretty sure that we would qualify for that financing. We have been fairly comfortable with where those rights were. And so when we talked about the $0.04 per plane per month, that included the Ex-Im Bank financing already. So if that financing did not come through, for example, then I guess it would have been a lower number. But it certainly did.

When we take a look at the average financing now that we have in place for nine of these aircraft, including the first three that we have with commercial banks, the next six that we have in place with Ex-Im, we are looking at coupon rates just a little over 4% on an all-in basis slightly above that. When we originally modeled the -8 purchase, we were looking at coupon rates of about 8% and all-in rates about 8.35%. So it is just tremendous, tremendous savings.

But to your question, that was all built-in already when we provided that information.

Okay. I'm not sure that all reconciles, but anyway the longer-term profit picture that you laid out -- and I guess it is my eyes in part -- but if we go back to I think it was slide seven and you talk about the long-term profitability and the incremental number of block hours and the growth in block hours, what does that translate to with the incremental 96,000 hours? It seems pretty clear that in '10 to '12 there is $200 million-ish to sort of pick a midpoint on that graph. Where does that graduate to? And I assume the future is -- I assume the future is '14, which is the out year. So what sort of roughish number does that, I guess, light blue or whatever color that is translate to?

So that slide on the right-hand side of that slide shows three buckets. So it shows 2005 through 2009, which generally on an adjusted pretax basis, were somewhere between $53 million and $129 million. Then it shows 2010, 2011, 2012, which on an adjusted pretax basis, are somewhere between $179 million and $237 million. I realize you want us to provide guidance beyond that, but we are not going to.

But the slide proportionately is correct, and so you can look at that and run your models. The block hours obviously drive tremendous growth here. So we are looking at 2013 and beyond.

As John Barnes, I think, said earlier, we are looking at sort of delayed growth with delays of the -8s, the CMI that was not as strong with the flying with Boeing. So, as you see on the left side of that chart, it really does ramp up, and we think that is going to deliver tremendous incremental volumes and block hours, which will relate to or translate into tremendous profitability and also margin expansion.

Right. And then we said back at our Investor Day, there was another slide that accompanied this one, and it suggested 96,000 hours or so of growth at '14, layered on base with some of the 200s retiring looked like around 200,000 hours of flying in '14, if that is helpful in modeling the future.

Yes, so the number has not changed. The number is still just 200,000 hours that is going to translate into some sort of pretax profit that you said is graphically presented correctly. That has not changed since earlier in the year? I think you first introduced this chart, I think, verbatim in, if I'm not mistaken, at the analyst meeting in May, correct?

That is correct.

That is right. (multiple speakers)

So my follow-on question to you is, since you have now reduced the number by three planes that you are taking from the all important and wildly profitable 8s, why is that number not affected?

Well, it is. If you were to look back at the May chart, you would see that the red bar that represents -8 incremental on a year-over-year basis we have adjusted.

Okay. (multiple speakers) But the future profitability, the future profitability level has not been adjusted.

Howard, in 2014 we are still expecting that we will have more than nine 747-8s. So when you look at the red on the bottom, the block hours from the -8s, it is incremental beyond the nine that we have today.

So it is incremental above the nine. So you -- okay, I will have to look back at the May chart. I did not think that that (multiple speakers)

It has not changed from the May chart.

So it has not changed from the May chart. So how do you -- so your expectation in this is still that you will be taking the 12?

We will be taking incremental aircraft.

David Campbell, Thompson Davis & Co.

I have got two questions. One is, can you estimate the Company's non-operating expense or net interest costs in 2012, which was a credit last year including capitalized interest? Do you have an estimate for this year?

I can tell you that capitalized interest for 2012 we are expecting that number to go down to about $17 million from about $27 million in 2011.

Okay. And then the interest expense will go up presumably, right?

Sure, as we have taken on additional financing, absolutely.

Right. Okay. Bill, you sort of danced around a little bit the issue of Commercial Charter demand in 2012. I understand that it sounds like you are not anticipating much potential there for growth. Therefore, the March peak will be less than last year, or am I reading that wrong?

Well, I did not intend to dance around it. We said 10% of our hours and our hours are 160, so about 16,000 hours. That is kind of our outlook.

Now the March -- there are several components of a March peak. This time of year, of course, the flow is northbound out of South America for both the produce and the fish, and certainly flowers are strong, and we are a strong participant in that market. Some of those flows are also out of East Africa into Europe and other locations, and we are participating in that market as well. There is some market anticipation of new consumer products coming out towards the end of February and March. So I think that will all be there. But I think the broader number, as we said, about 16,000 hours of Commercial Charter, and that is the number that we expect today knowing what we know about the market.

Scott Group, Wolfe Trahan.

So I was wondering if you could help with the math on the ACMI fleet. So we have 20 planes between the 400s and the -8 in fourth quarter, and if I think about first quarter, we have got three -8s and I think I read in the relay 16 400s, so that is 19. Am I missing something on the math, or is there another plane that is coming out of ACMI?

So there is a difference in -- one is aircraft equivalents that you are talking about, and the other is the actual number of airplanes. So they are different calculations and different measures, but we have 19 airplanes on long-term ACMI contracts.

So the aircraft equivalents can be more than the number of planes?

They can be, for example, if one of our customers has another plane that flies for them for a short period of time for an example.

So is that what is going on? How should we think about the aircraft equivalents between the 400s and the -8s relative to the 20 in fourth quarter? How should we think about that in first quarter?

Well, I think if you focus on the 16 400s that we have in ACMI and the three -8s and we talked about the incremental placements for the -8s that we expect throughout the year, I think if you think about those that is the best way to model it.

Okay. So I guess with that, the three to four 400s that are up for normal renewal this year, can you talk about the timing for those? Has anything been signed to yet? Where do you expect those planes, do you expect them to stay in ACMI in the guidance, or are they ending up in charter? Just because when I looked at charter hours up 15% in the guidance for 2012, that does not seem to necessarily match with your commentary on the overall charter market.

Well, Spencer is going to take a look at numbers here. But, again, I'm not -- our sense of the charter market is two things is that there is a charter market. In fact, there are several charter markets. There is a regional market in Latin America. There is a regional market in Africa. There are the seasonal flows out of Asia to large consumption markets in North America and in Europe as well.

So there are several markets there, and then we have the opportunity to market and sell capacity that comes off of our one way military cargo flows. So all of that suggests to us that there is a 16,000 or so block hour charter market available to us, and that that market, combined with the military market of 10,000 or so block hours on cargo, need to be served by our 400 fleet now that we are essentially out of 200s. Not essentially, we are out of 200s. And those 400 aircraft were always intended for that charter market, which is military, commercial/regional markets. That is how to think -- that is how I think about it.

Any update in there just in terms of the three to four, not the 400s with British and Panalpina that are moving to charter, but the three to four just regular ACMIs that are up for renewal this year, the timing on those, and then do you expect them to stay in ACMI, or is there anything in the guidance involving them going to charter?

One of the important things to think about here, of course, is we had six 200s that were flying. At the middle of last year, we had six 200s that were still flying. We parked one in July, and we parked a couple more at the end of the year, and we are putting the rest down now. And so those planes need to be replaced, that 600 planes 747s that are coming out, and so those planes need to be replaced. The military has gotten more demanding for more efficient aircraft, and so some 400s will obviously fly to support the military. So I think that is an important consideration.

So if I hear you correctly, you are -- the three to four 400s that were coming up for renewal, you are opting not to keep all of them, and you are going to move them into charter and military? Is that what I'm hearing?

No, that is not what we said because we have not given that specific aircraft by aircraft guidance. What we have said is that we will put all of our 747-8Fs into ACMI. We have a large 747-400 market, and we are going to serve that and continue to place and renew aircraft in the 400 market. And just doing very simple math, we have said there is about 26,000 hours of flying, 10,000 cargo military and 16,000 cargo commercial that need to be served by 400 aircraft. And I think without talking about one specific aircraft, I think you can think through the model, apply hours around those numbers of hours, and get to aircraft equivalents types that will be in one form of service or the other.

John Mims, FBR Capital Markets.

Just one quick follow-up, going back to Commercial Charter. As you move under this kind of peacetime or whatever you want to call it, just shifting AMC hours and routes and whatnot, my sense in the past has been they match up well. You fly to Afghanistan, ferry the plan over to ,China and bring that back. Is there any impact to margins in the commercial side if that call it a backhaul opportunity goes away from the military or if you are just flying to different places in the military?

Well, we have talked about that in the past several times, John, but yes, when we can commercialize a one way charter, i.e. fly to CENTCOM out of North America, ferry empty into Asia or up north to Europe and then fly back with a Commercial Charter, that is going to be very contributory on both reportable segments, military and Commercial Charter, because we have sign hours and revenues by segment. So there is an impact on that segment of our business where we are not flying one way.

Now, as I was trying to point out in several comments, that is not all of our Commercial Charter business. That is why the South American Commercial Charter is important to us, and that is why other lanes are important to us. But there is a margin impact, and we have considered that in the guidance that we have provided.

Okay. So that is in the guidance? What in the guidance, the 16,000 hours give or take, what percent is South America or North/South Europe?

It is certainly more than half when you add up those segments, but I don't -- competitively I don't want to break out one region from the other.

It is substantial, but, as Bill said, we are not going to provide guidance beyond that. But it is a very large portion.

That is fine. More than half is very helpful. Thank you, guys. Thanks for the time.

Jack Atkins, Stephens.

A couple of real quick housekeeping items. First, could you give us the rate per kilo that you saw in Commercial Charter in the fourth quarter?

Well, it fluctuated by market. It was -- there were -- rates out of Asia to Europe were fairly low until Jade started grounding aircraft. There was some softness out of Korea in December. Shanghai overall was soft. But it was somewhat over $3 if I were to take an average of averages. So certainly not the kind of charter rates we have seen in that marketplace in prior years.

Okay. Thank you for that. And then last question here. Spencer, could you give us some guidance for depreciation expense in 2012? What do you expect there for the full year?

Well, we have certainly -- we have added additional aircraft. If we take a look at depreciation expense for 2011 versus 2012, you will see a fairly significant increase. You have to model in the -8s as we said to have what will -- by the end of the year, we will have seven -8s.

We have also purchased, as you know, several additional aircraft to support the passenger flying, and those have a pretty short life for depreciation purposes. So depreciation goes up very significantly from where it was in 2011.

Okay. But do you have some brackets you could help us put around that, though, from a numbers perspective?

I would tell you it is over 75% increase.

I will now turn the conference back over to management for any further remarks.

Well, thank you, operator, and thanks to everyone for your interest in Atlas Air Worldwide, and we certainly appreciate your participation today. We look forward to speaking with you again soon. Thank you.

Ladies and gentlemen, this does conclude today's conference. Thank you all for participating, and you may now disconnect.