Atlas Air Worldwide Holdings Inc (AAWW) 2012 Q1 法說會逐字稿

Good morning, and welcome to the first-quarter earnings call for Atlas Air Worldwide. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. (Operator Instructions) Thank you. I will now turn it over to Atlas Air.

Thank you, Rachel, and good morning, everyone. I'm Ed McGarvey, Vice President and Treasurer for Atlas Air Worldwide. Welcome to our first-quarter 2012 results conference call. Today's call will be hosted by Bill Flynn, our President and Chief Executive Officer. Joining Bill, is Spencer Schwartz, our Senior Vice President and Chief Financial Officer. As a reminder, today's call is complimented by a slide presentation that accompanies Bill and Spencer's remarks. If you have not already downloaded or printed a copy of our slides, you may do so from our website at www.atlasair.com. You may find the slides by clicking on the link to Presentations in the Investor Information section of the website.

As indicated on slide 2, we would like to remind you that our discussion about the Company's performance today includes some forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements relate to future events and expectations, and they involve 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 10K filed with the SEC on February 15, 2012, 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 will 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 information section of the website. During our question and answer period today, we would like to ask participants to limit themselves to one principal question and one follow-up question so that we may accommodate as many participants as possible. After we 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. We expect 2012 to be a year of significant earnings growth. As indicated on slide 3, we expect increasing levels of contributions throughout the year from the investments that we have made to diversify and grow our business. As the pace of these contributions accelerates, we reaffirm the guidance we issued in February. We expect both reported and adjusted earnings per share to grow to more than $5.10 in 2012, an increase of 24% from our adjusted EPS last year.

There are several key drivers to our growth in 2012, and beyond. The first is our new 747-8 freighters. Our first three wide-body -8s have entered service, and we are looking forward to taking delivery of an additional four this year and two more in 2013. The 747-8Fs are providing efficient, reliable, long-haul cargo service. We have received positive feedback from current and perspective customers about the aircraft, as they will drive volumes and profitability in their businesses, as well as in our core ACMI business. Also in ACMI, as we announced in a related press release today, we have entered a multi-year 747-400 contract with a new customer, Etihad Airways. Etihad is the national carrier of the United Arab Emirates. Our new relationship with Etihad underscores the continuing value provided by our market leading services and the 400 aircraft type.

With this placement, we will have 19 aircraft in ACMI service, and expect to have 23 in ACMI service at the end of the year. Reflecting our -8s and our 400s, we expect total ACMI segment volumes, including CMI, to increase 17% this year rising to 120,000 block hours. Complimenting the strength of our ACMI business, our asset-light CMI business is a strategic driver of increased revenues and earnings, and improved business mix. Our CMI business will continue to ramp up in 2012 as we fly more hours for Boeing, driven by increased production of its 787 Dreamliner, and as we expand flying for DHL Express under our new 767 contract.

We have developed a versatile AMC passenger operation, and we are benefiting from a substantial increase in passenger 747 and 767 flying for the military, both internationally and within the United States, where the military also has substantial demand. Expanding our passenger capabilities, we are also bringing that same level of service and expertise to the 747 and 767 Commercial Charter passenger market, and we will benefit from increasing fleet efficiencies in our 767 operation, as we ramp up to a total of eight aircraft this year. We drive performance and value for our customers by providing leading edge assets with the lowest unit operating costs for the routes that they travel and the loads that they carry. And we deliver premium outsourced operating services that are unmatched in quality and global scale. The scale and efficiency that we provide to our customers is one of our core strengths, and one of the fundamental elements of our business model. With the investments we have made for the future, we have a modern fleet and have built a diversified, flexible, and resilient business that can perform well in any environment.

Slide 4 briefly highlights our first-quarter results, which were above our expectations. For the quarter, we delivered adjusted net income of $13.6 million and adjusted diluted earnings per share of $0.51. Our adjusted results exclude the impact of incremental costs related to the retirement of our 747-200 fleet, which totaled $0.03 per share. And we expect to incur similar costs in the second quarter. As anticipated, January and February were sluggish months in the commercial air freight markets; however, volumes and rates improve significantly in early March and we were well positioned to help our ACMI and Commercial Charter customers respond to an increase in demand for air freight capacity, especially out of Asia, and especially for new high-tech product launches, pharmaceuticals, automotive parts, and other high-value, time-sensitive to market shipments. Inventory levels remained low and we saw an increase in output around the quarter-end.

Reflecting the shift in manufacturing of high-tech products from coastal China to central China, we saw stronger demand for air freight from Chung Du and Chung Ching, as well as Hong Kong and Shanghai. Given the scale and scope of our business and operating flexibility, we are able to serve manufacturing centers in Central China on short notice. After flying below minimums in the seasonally slowest months of January and February, our ACMI customers flew approximately 11% above minimum block hours in March, reflecting the substantial increase in demand in rates. Our first-quarter results were also favorably affected by the timing of engine maintenance activities. As a result, approximately $0.10 per diluted share of maintenance expense that was expected to occur in the first quarter will now be incurred in the second quarter.

Slide 5 highlights a number of achievements so far in 2012 as we navigate the growth in our business platform. Our business begins with the customer, and we deliver superior service, reliability, and flexibility for them. Next month, we will begin flying for Etihad Airways. Our aircraft will be the first 747-400 freighter in Etihad Cargo's global network, and will link Asia, Africa, Europe and other global trade lanes with Etihad's hub in Abu Dhabi. This agreement demonstrates our focus on customer growth and continuing attractiveness of the factory built 747-400 freighter.

Highlighting our expansion into the 767 platform, we have acquired a third passenger 767-300ER which will enter service this month. Our 767s provide additional flexibility in our fleet, enabling us to better serve the needs of the US military, and to diversify the outsourced services that we offer our commercial customers. Combined with our 747-400 passenger aircraft, we generated $42 million in military passenger revenue in the first quarter, compared with none in the first quarter last year, when we were building towards the launch of our military passenger business in May 2011. The military outsources 95% of its passenger flying and that is expected to continue, and that flying is not just internationally to and from conflict zones. It also includes a significant amount of normal troop rotations and training exercises within the United States and elsewhere. Even in a post-conflict environment, we think AMC operations will remain an important part of our business mix.

During the first quarter we achieved specific ETOPS, or extended twin engine operation certifications, from the Federal Aviation Administration. ETOPS enhances our ability to provide efficient service to the US military and Commercial Charter customers. In March, we broadened our CMI service solution and expanded our long-term relationship with DHL Express, beginning 767 cargo service for DHL in North America. That new service will operate five 767-200 freighters owned by DHL, the world's leading international express shipping company. All five are expected to be operational by the end of the third quarter of this year.

Our three 767-ERs and the four passenger 747-400s in our fleet are also available for Commercial Charters, enhancing the utilization of these aircraft and the returns that they provide. Demonstrating the quality and reliability of our service, we have flown a number of high profile sporting events, concert tour, VIP and international trade missions, including New York Giants fans to and from playoff games in the Super Bowl, the Oakland A's to and from Japan for the opening of the Major League Baseball season, the Foo Fighters to and from a concert in Santiago, Chile, and the Prime Minister of the United Kingdom, David Cameron, and a delegation of business representatives on a trade building mission to East and Southeast Asia.

Following our excellent financing for -8s, we also closed an attractive $36 million five-year term loan facility with CIT Aerospace during the first quarter. Proceeds from that facility were used to back-leverage the two 747-400s and two 767-300ER passenger aircraft that we acquired in 2011. The loan facility establishes a relationship with a new financing partner, and it supports our initiatives to implement a comprehensive passenger charter solution serving the US military and Commercial Charter customers, and to expand our business in the 767 platform.

Turning to our specific guidance for 2012 in slide 6, we expect to earn more than $5.10 per diluted share on both a reported and adjusted basis this year. That is an increase of approximately 24%, compared with our adjusted EPS in 2011, on a 17% increase in block hours. We have a resilient business model and the flexibility to leverage the scale and efficiencies inherent in our business, In reaffirming our guidance for 2012, we continue to expect air freight demand will improve in the second half of the year. The key frame work on which our outlook is based includes over 160,000 block hours, with approximately 75% coming from our core ACMI segments, about 13% from our AMC charter operations, and about 12% from our Commercial Charter business. That reflects the retirement of our 747-200 fleet, as well as increased flying by our 747-8F aircraft.

And, as we have previously indicated, we plan to fly about 10,000 cargo hours and about 10,000 passenger hours for the US military, and we see a growth trajectory in CMI flying for Boeing and DHL Express. In addition, maintenance expense is now expected to total approximately $178 million. While our outlook acknowledges near-term uncertainties about the global economy, the investments we have made in our business should generate increasing contributions throughout the year. As a result, we expect to see a sequential improvement in our quarterly earnings, with results accelerating throughout the second, third, and fourth quarters. This is probably a good time to ask Spencer to provide you with some additional perspectives on our first-quarter results and our outlook. Following Spencer, I will provide some additional thoughts, and then we will be happy to take your questions. Spencer?

Thank you, Bill, and hello, everyone. As slide 7 illustrates, our first-quarter earnings compared favorably with our earnings in the first quarter of 2011. We saw sequentially better quarterly results throughout 2011, and we expect that pattern of sequential improvement again this year. We delivered adjusted net income of $13.6 million, or $0.51 per diluted share in the first quarter, on operating revenue of $359 million. In addition to the substantial improvement in air freight volumes and rates during March and the favorable effect for maintenance timing, earnings in the first quarter reflected our new military passenger service, which we began flying in May of 2011, as well as our core long-term ACMI business. I would also like to point out that our first quarter effective income tax rate was 39.8%, and that is higher than our expected rate for subsequent quarters and the full year, which we expect to be approximately 38%.

Looking at slide 8, operating revenues in the first quarter of 2012 benefited from increases in block hour rates and volumes in our AMC charter business, especially our military passenger service, which generated $42 million of revenue growth. We also realized higher rates and volumes in our ACMI and Commercial Charter operations. Overall, revenues were 21% higher than the first quarter of 2011. Revenues in our ACMI business, including CMI, grew 6% as block hour volumes and rates increased. The increase in ACMI rates primarily reflected the impact of higher rates for our first three -8's, offset by growth in our lower rate, but highly profitable, CMI business. The increase in ACMI volumes was primarily driven by incremental flying for DHL, as well as an increase in flying for our CMI customers, compared with the first quarter of 2011.

In line with the underlying strength of our ACMI segments, 73% of the total block hours we flew during the quarter were for our long-term contract customers. On average, our ACMI customers flew at contractual-minimum block hours during the first quarter, which is a typical first-quarter level in most years reflecting the seasonal nature of our air freight business. After flying below minimums in January and February, our ACMI customers flew 11% above minimums during March, driven by the strong pace of air freight market activity during the month. We operated an average of 16.5 747-400s and 3 747-8 freighters in ACMI during the quarter, with our CMI operations adding an average of 2 aircraft to the segment. In AMC Charter, revenues during quarter grew 49%, driven primarily by our new passenger service, as well as a higher average peg fuel price, and higher rates paid on 747-400 cargo aircraft utilized during the quarter. We flew 1,850 military passenger block hours during the first quarter, our highest quarterly total so far, and we expect to achieve 10,000 hours for the full year, as we combine additional 767 passenger service with our 747-400 passenger operations.

Commercial Charter revenues in the first quarter reflected a 17% increase in block hour volumes and a modest increase in rates. Higher volumes were driven by our deployment of an additional 747-400 freighter to support increased demand in South America. In addition, we were able to increase the utilization of our passenger aircraft by taking advantage of opportunities in the commercial charter market. Commercial Charter rates, meanwhile, reflect an improvement in yields out of Asia.

As illustrated on slide 9, direct contribution by our reportable segments totaled $48 million in the first quarter, compared with $47 million in the first quarter of last year. Earnings in 2012 were positively affected by; revenue and volume growth in our ACMI and CMI business, strong volumes in our AMC charter passenger business, as well as an increase in our premium rate 747-400 cargo volumes, and revenue and volume growth in Commercial Charter. Results in each segment, however, were partially offset by increased crew and aircraft ownership costs, compared with the first quarter of 2011. In addition, AMC charter and Commercial Charter incurred higher crew costs associated with the wind down of our 747-200 fleet during the first quarter. And AMC charter was affected by a decline in military cargo demand, while Commercial Charter reflected an increase in fuel expense. Segment results during the quarter were also affected by the nature and timing of maintenance.

Slide 10 takes a deeper look at the impact of maintenance by fleet type in the first quarter. We had a significant reduction in 747-200 fleet maintenance expense due to the retirement of our remaining 200s during the first quarter. In contrast, direct contribution in ACMI was impacted by the timing of heavy and non-heavy maintenance events on our 747-400 aircraft, as well as an increase in line maintenance, primarily driven by an increase in block hours. As a reminder, ACMI direct contribution in the first quarter is not a good indicator of the result that we anticipate for the full year. We expect that direct contribution from 747-400 aircraft and ACMI this year will normalize to historical averages, and that overall direct contribution in ACMI will benefit significantly from the introduction of our 747-8.

Slides 11 and 12 summarize some of the updated quarterly detail about our 2012 maintenance expense outlook, which Bill highlighted earlier, and then I touched on a moment ago. These slides reflect our desire to be more transparent about an important factor in modeling our business. We expect to incur about $178 million of maintenance expense in 2012, $53 million in the first quarter, about $48 million in the second, $42 million in the third, and approximately $35 million in the fourth quarter. The full year amount of our maintenance forecast is slightly higher than what we provided during our last call. Another difference, compared with our previous outlook, is the effect of the timing of engine maintenance during the first quarter. While that does not impact our full year maintenance outlook, it's important to remember that, on an EPS basis, approximately $0.10 per diluted share related to this activity will now be reflected in our second-quarter earnings, rather than our first quarter earnings.

As you can see on slide 11, line maintenance should account for approximately 56% of maintenance expenditures in 2012, and will grow throughout the year as block hours increase. Line maintenance, as we have noted in the past, 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 maintenance are expected to account for approximately 37% 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 landing gear systems, accounts for the remainder of our expenditures, or about 6%. Similar to heavy maintenance, these events more typically take place in the first half of the year. Just quickly, slide 12 shows our current outlook for the timing of heavy maintenance events in 2012. The timing of these events is subject to change as maintenance events are conditions based.

Turning to slide 13 and our balance sheet; you can see that 2012 is expected to be a year in which the business investments we have made will help to rebuild our cash balances and lower our net-leverage ratio. We ended the first quarter of 2012 with cash, cash equivalents, and short-term investments totaling $175 million. The change was driven by net cash of $52 million used for investing activities, partially offset by net cash of $18 million provided by operating activities, and net cash of $13 million provided by financing activities. Net cash used for investing activities primarily related to pre-delivery payments made to Boeing on our -8 order, as well as the purchase of a third 767-300ER passenger aircraft for our AMC Charter and Commercial Charter operations.

With respect to our -8 order, it is significant to note that we have made all of our required pre-delivery payments to Boeing, including a small payment that we made in early April. Excluding pre-delivery payments, aircraft engines, and related capitalized interest, core capital expenditures totaled $11 million in the first quarter, and are forecast to total about $56 million in 2012. 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, from 4.9 times at the end of March. Including the benefit of an investment in our outstanding enhanced equipment trust certificates, or EETC debt, our net-leverage ratio would be further reduced to 3.9 times at the end of 2012.

Moving on to slide 14; we expect the operating cash flows that our -8 should produce, to the favorable bonus tax depreciation benefits they will generate, and the positive cash back that we receive at future deliveries, should enable us to quickly rebuild our cash balance and reduce our net-leverage ratio. Due to the benefits of bonus tax depreciation, we don't anticipate paying US federal income tax until 2016 or later. With that, I'd like to turn the call back to Bill for a few concluding remarks.

Thank you, Spencer. Moving to slide 15; we expect reported and adjusted fully diluted EPS of better than $5.10 this year. As we have noted, this is an increase of approximately 24% from adjusted EPS in 2011, on a 17% increase in block hours. Our 747-8s and 747-400s will drive volumes and profitability in our core ACMI business; and our growing CMI operations, passenger military business, and 767 platform will compliment that growth. We believe that our modern and efficient fleet, our diversified business mix, customer service and operating flexibility, the investments we've made to grow our business, and our solid balance sheet position us to perform well in all economic conditions and to navigate the exciting growth we see ahead. With that, Rachel, may we have the first question, please?

Kevin Sterling, BB&T Capital Markets.

Congratulations on a great quarter, by the way.

Thank you.

Let me start with a big picture question, Bill. As I look at the market, we all saw the slowness in January and February, and it looks like March is a rebound. And you look at the Hactl data, the IATA data, and what FedEx and UPS are saying, and even Air Castle this morning said that they are seeing a bottoming in the freight market. And then Expeditors comes out and says they are seeing weakness, and it looks like you guys are saying you are seeing some strengthening too, into March and April. Can you tell me, really, what is driving the strength that you are seeing? I'm not asking to comment on Expeditors, per se, but kind of, what is driving your optimism, more so than, say, in Expeditors?

Well, if you recall, look at the customers we serve. And so we serve DHL, and Emirates, and British Airways, Qantas, Panalpina, and soon we will start flying for Etihad in our core ACMI business. And those customers serve, fundamentally, all major global trade lanes. So when we look at the IATA data, there's certainly some growth trends specific, but also growth into the Middle East and Africa and Latin America, and so from our customers point of view, they're seeing growth, they're driving higher utilization of the aircraft above minimums as we go through the year, and so through them we're participating in that growth.

I don't think it was just an iPad phenomenon, although that's kind of been discussed. The growth coming out of Asia that we saw, specifically in the month of March, and now through April, certainly was driven by, to some extent, by iPads and other tablets and products that compete with iPad out of Hong Kong, and out of Korea, but we're also seeing auto parts out of Korea and out of Japan, some pharmaceuticals as well, and other high-value products. So we think it's a bit -- we think it is broader than just the tablet. We think it's multi-trade lane, and not just Asia, but in the comments we made in the press release, there's still some uncertainty out there with Europe and other markets in particular. So we've reaffirmed guidance, in excess of $5.10, and we'll continue to, obviously, report on that as we move through the year.

Well, thank you for that color, Bill, and it's encouraging to hear that it's not just iPads, it's across-the-board, so, thank you. Let me ask you in keeping with that theme, March was clearly good. What kind of trends have you seen in April so far?

I think the trends continue. We had holidays, Easter, and other holidays and as we came into Golden Week in Japan, and et cetera. But, our customers are flying above minimums in April, and we expect that pattern to continue for the balance of the year as the markets --. Again, our business plan of guidance is predicated on strengthening in the second half, and more year-over-year growth in that second half.

And my last question, we've seen some bankruptcies in your space, and I'm not going to mention any names, and it looks like you're seeing the strengthening in your military, particularly passenger business. Some of these bankruptcies and carriers, maybe parking capacity, and what have you, is that helping with your military business and Commercial Charter business?

Well, in terms of the military, you know we made fairly significant investment throughout 2011 to be able to participate in military passenger service, and we've talked about that on several calls now. We handled about 1,000 hours of military passenger flying, more or less, in 2011, and we've guided to 10,000 hours this year, and you saw the real value of that investment and the return on that investment just in this first-quarter results alone. I would not speculate on what's going on with other carriers, but I think that the military does see Atlas as a valued entrant into the passenger operations. We're in with 400s and 6-7s, which are modern aircraft and valued again. There's -- military outsources 95% of its passenger business and not just to and from the Cen Com, but elsewhere. So I think we'll have a strong sustained position in military passenger and military cargo, and it will be an important segment for us as we go forward.

Thanks so much for your time today. I'll let others get on and I really appreciate the color you gave.

John Mims, FBR Capital Markets.

Bill, if we can start, can we take a look at guidance? Now obviously, fundamentals are strong, you expect stuff to get better sequentially as the year progresses from a volume standpoint, you have the -8s coming on, et cetera. This quarter is obviously much stronger than anticipated, so why the hesitancy to not raise the full year number? Now, I understand that you don't want to miss -- last year there was some extraneous factors, but still $5.10, I mean, to me, it seems very low now, given all the rest of the language, so any color there would be helpful.

I don't think it's a question of being reticent to raise, we talked about in excess of $5.10, and we've reaffirmed that. And there was a lot of nervousness in the market on January and February volumes, as you know, and as was reported by all the various entities from IATA through to Hactl and Asia airports, et cetera. So we had a good quarter. It was driven by good volumes. We'll continue to update as we go through the year but $5.10, out of 24% growth year-over-year on the 17% volumes is a pretty good, -- it is strong growth and we'll continue to update, John, as we go through the year. There is, though, some uncertainty out there in the market.

Europe is far from settled. There are uncertainties in the Middle East. There are uncertainties as to how aggressive the drawdown in Afghanistan may be after the summer. There's not a lot of clarity on that. That's informing our 10,000 cargo hours, so, I think we need a few more months of experience and stability in the market, more than green chutes, in terms of demand, to raise guidance at this point.

Right, and just kind of on that thought, if you -- well, one, where have, in April, where have yields-per-kilo trended, and if that was to stay stable or even moderately improved, is that enough to get to you more comfortable with $5.50 or $6.00, or however it may shake out?

So, I think a couple things. The yields in April have been, seasonally, pretty good. There are some markets a little bit less than March, and you've had some holidays and some capacity there that's driven $0.10 or $0.20 out of the yields, overall. But the markets, Hong Kong, Shanghai, [Inchan] are good, seasonally, and again, back to this question of are we going to up guidance and what's it going to take, I think I've already addressed that. We're four months into the year. There's some uncertainty in the market in several of the different segments. $5.10 is that 24% growth that I've talked about, a couple times already, and as they develop, as the market develops, our business develops through the year, we'll look forward to talking to you and our other analysts and investors through the course of the year.

Now looking at Commercial Charter, last call you had said, in that, sort of, outlook of 10,000 hours, that was heavily weighted -- more heavily weighted towards North/South versus Asian trade. Can you talk about how that split played out in the first quarter, and if there's any change? Do you think Asia will play more than, I think it was 60/40, if I recall your last comment? Is that still true that you expect more to come, kind of South America to the US versus freight flows out of Asia?

Well, we have a large position in the South America charter market, and we're running a couple of aircraft equivalents today in and out of South America, strong both directions, both southbound and northbound, and maybe that's the comment that you might be referring to. But Commercial Charter covers the whole globe; coming out of Asia, South America, and even, you've got East Coast of Africa coming up into Europe and to other markets. So it's broad. It's really all the trade lanes that we serve. The South American economies, particularly Brazil and the West Coast, have been strong and we participate in them.

Right, I guess to ask it a different way, was Commercial Charter volumes coming out of Asia significantly stronger than you anticipated when you look at the balance of all of those trade lanes, or is there any other color, as far as which trade lanes were particularly weak or strong, in the first quarter?

That's the overall market, John. If we had good market in March, as we talked about, and that was our ACMI customers, and absolutely there was Commercial Charter capacity in Asia in March for that uptick in demand, overall.

Okay, I'll leave it there, thanks.

Alex Brand, SunTrust.

I'm wondering if I can just get some color, and maybe I'm misunderstanding, the expected improvement in demand in the back half, is that a market commentary, that you think it will improve, or that's just because you know if you've got more -8s coming that it is Atlas specific?

Well it starts at the market, and we've talked about that in our last call when we discussed guidance for the full year, so we expect that after 12 months of decline on a year-over-year basis starting in March of 2011, really running through to February of this year, we believe that we've kind of hit the bottom, and some folks have commented on that as well. That generally economic conditions are improving in most of the markets, in most of the air freight markets, consumer confidence is better, that's a relative word, but not at an all-time high, but better, so just in terms of the market, we start there. When talking to our ACMI customers, because again, we serve a determined number of customers, that's what they're telling us about their business. DHL, I think, reported a 9% volume growth when they reported their full year 2011 over 2010. They continue to grow their business. They are our largest ACMI customer. They're flying a very strong pattern. We expect to grow with them.

British Airways has the -8s, we have the next two -8s coming into Panalpina. Emirates, Qantas are certainly flying good levels of ACMI activity. Etihad starts up. We've said on the call that we'll have 23 aircraft and ACMIs, combined with strengthening Commercial Charter, and we've got a growing, and important, passenger military segment. So that's a long answer, John, but it starts at the general and gets more specific as we look at our Company and our guidance for the year.

John, Alex, I'll go by whatever.

I'm sorry, Alex, I'm sorry. See, I got so long winded there, I got -- I said John, I apologize, Alex.

I understand, so let me just try to get some color. I know you guys like to stick just to the full year guidance, but you obviously had a much better than expected first quarter. Last year you had talked about seasonally normal was something like 10% of your earnings in the first quarter, double that in the second quarter, about half your earnings in the fourth quarter. After such a good first quarter, does that seasonally normal pattern seem like the right way for us to think about it?

Alex, it's Spencer. I think we're not going to provide the granularity that you might be seeking here, but we talked about, during our last call, about 70% of our earnings coming from the second half of the year. And so we're still in that general neighborhood, so we're not going to provide an exact percentage, but that's what we're looking at.

Well I had to give it a shot, Spencer. After so much better than marginal, I had to try this quarter again.

Jason Ursaner, CJS Securities.

-- on a great start to the year. Bill, I just want to reconcile some of the comments you made from earlier questions. So you and your ACMI customers are clearly outperforming the industry. And you mentioned the iPad phenomenon with some broader industry activity that lead to strong ACMI demand, but also yield enhancement and Commercial Charter. But then you also mentioned the recovery path being uncertain with the challenging near term outlook. So my question is how long do you expect some of the Company and customer specific activity to remain heightened? And then with backfilling some of the underutilized 400 demand from charter back into ACMI, with the announcement this morning, do you think it can carry you through the summer months, even if industry demand remains pretty soft?

Well, I think, go back to a comment I made. DHL reported 9% volume growth in 2011, for example, in their full-year call. That's way above market, and that kind of volume growth drives our activity with the eight aircraft that we have placed with DHL, for example. Qantas is serving a different market than some other Pacific carriers may. They have very good utilization inbound from the US into Australia and New Zealand, and very good utilization coming out of Asia back. So they are -- the nature of their business is a much better balanced, round-trip business than most carriers who would serve the trans-pacific, because of their home market in Australia.

BA reported earlier better than average, better than market growth, in volumes and overall yield, and they're operating the -8s at higher ACMI rates, and at higher minimum levels of utilization than the 400. The Panalpina's had good operations with the 400, going to the -8s. There's certainly growth in our business as a result, and they absolutely expect growth with the -8s in the different markets that they serve. And then, I think you follow that through with Emirates with the Asia, Middle East, Africa routings that they have. Etihad with the very similar routings, as that comes up, and our expectation of having our 23 aircraft in ACMI at the end of the year.

And again, because of our different segments, because we've developed the CMI business, because we've gotten into passenger military business, all of that is adding to growth through the years. So again, it is -- there's the overall market and then there are the components of a business, and the result of having diversified our business, those are all important earnings drivers this year.

And in the past, when you've had very specific product launches, how long have they typically last, just because, when the iPad came out mid March, is it ending by -- like how does it generate excess demand for you in terms of being a heightened level of activity?

Well, you have the iPad, and then there's the competitive tablet products that will be coming out in the market. There is substantial rumor about an iPhone 5, that may or may not be true. But, I mentioned in my comments and in the press release, auto parts coming out of Asia, and if you look at -- those auto parts are coming out of Asia and they are going into production and assembly here in North America. And they are the higher-value component parts that are in the vehicles, and those are going air freight. And you look at what's happening with automotive demand here, overall. So. I believe it is broader based than just the tablets and the next product launch. And our customers, our ACMI customers, in the large freight-forwarders, who are our Commercial Charter customers, share that view.

Jack Atkins, Stephens.

So I guess, first off here, if we can kind of focus on this 747-400 that you placed with Etihad, was that a plane that was in the AMC or Commercial Charter fleet already, or was this one was rolling out of an existing ACMI contract?

Well, that was one that rolled out of an existing ACMI contract with Emirates, and we placed it with Etihad, effectively. That's why we wanted to be specific about 19, so that is not a net-new, but it is, in our view, an important placement of the 400. And then the net-new roll through the year, as we get to that 23 number at the end of the year.

And then, you guys cited strengthen in Latin America in your press release, and we've seen a strength in the Latin America volumes for IATA and other trade groups. So I was wondering, maybe, if you could talk about, do you think the strength you saw in the first quarter was more seasonal, or do you think this is more indicative of a longer-term trend?

Well, Jack, that's been sustained for some time. Broadly speaking, Latin America, or at least the major economies in Latin America, didn't suffer in the recession that we saw, or the more general global recession that we saw over the last couple of years. Argentina is not the key market in the charter network that we're operating, so the kind of immediate stuff that's going on in Argentina, with the nationalization of REPSOL's share in YPF, et cetera, isn't really -- from us is not necessarily a head wind in that charter market, at least a market we serve. Southbound to Brazil, with all the economic expansion, the investment in energy and other resources, drive the southbound market. And then the northbound market is principally the West Coast of South America; Chile, and Peru, and Ecuador, Colombia, with the fresh produce, horticulture, and seafood products that come up. And that seems to be -- our expectation is that's continuous.

Thank you for that, and last question for me and I'll jump back in the queue. Spencer, could you maybe give us some color on what you're expecting for interest expense in 2012, sort of what your guidance implies for that line item?

Jack, it's a little difficult to hear you, but I think you're asking about interest expense. It was $14 million in the first quarter, and we expect that to continue to increase throughout the year as we take on additional -8s. And we just entered into some financing with CIT that we've talked about, and so you would expect interest expense to increase steadily throughout the year.

Right, but could you maybe give us some brackets around what we should expect for net-interest expense in 2012, what your guidance assumes?

So interest expense was $14 million this quarter, it grows to about $19 million in the fourth quarter, so you can grow that fairly consistently from first quarter to fourth quarter. Interest income was $4.9 million this quarter and that should remain fairly steady. Capitalized interest, I think we said, was $6.4 million during the quarter and we expect that to be about $17 million for the full year.

Scott Group, Wolfe Trahan.

So just wanted to just clarify one thing. The 23 planes in ACMI at the end of the year, is that including the CMI or excluding?

Excluding. That's the seven -8Fs and sixteen 400Fs. It excludes CMI.

Okay, that's what I thought. Can you give a little bit of color on what happened with the Emirates plane, why they gave up a plane, and what your expectations are for their other two planes?

Well, Emirates has long announced, Scott, that they were investing in thirteen 777 freighters, and we've talked about that on prior calls, and that's essentially what they're doing. They are building their 777 fleet, because as you know, they have a huge fleet of 777 passenger planes. That gives them an operating scale efficiency that has lead them into that decision. We've said prior, we expect to have a continuing relationship with Emirates. It's one of our longest standing customers, really since Atlas began almost 20 years ago. And I -- my expectation is that they will supplement their 777 fleet with some number of 747s, because that -- the 747 will do -- will serve the certain market routes better for them, because of its larger capacity, than the 777.

And then, just going back to the number, the 23 ACMIs that you expect by the end of the year. So if we're at 19.5, I think in first quarter, and we've got the four -8s coming, are you expecting Panalpina to return the 400s, and are those goes going to stay in ACMI, or are those going to charter? I'm just want to -- I'm just trying to understand how we should model out the fleet by quarter as we go throughout the year.

Here is how I think we should -- here is the way I would talk about the fleet. By year-end, we will have seven 747-8s, and in that 23 number, of what we're saying, is those seven will be placed in ACMI. We will have sixteen 747-400 freighters that will be placed in ACMI, among current and new customers, and the same thing would apply for the 747-8F. There's a certain competitive nature to the comments here so I'll stop there, on that portion of our fleet. In our reported ACMI CMI, there is a 747-400 passenger plane equivalent, so that would make it 24, because that's the aircraft that we fly for SonAir, that's reported in the segment. There's a detailed break down of the aircraft equivalent types in our press release, and, we'll also have in CMI, about one aircraft equivalent of the LCF that we fly for Boeing.

The Dreamlifter.

The Dreamlifter. So that, on a reported basis, that gets us to 25, but I wanted to call out the 23 for clarity, for you and our other analysts and investors, that's the pure, straight up ACMI, and then the other two aircraft equivalents are CMI 400s. In our total fleet then, we have 31 aircraft. So that breaks out seven to eight aircraft equivalents that will be used in AMC cargo operations, because we retired the 200 fleet; our Commercial Charter operations, Asia, Latin America, we just talked about the several trade lanes that consume that; and we still do need one aircraft in that fleet of eight for our maintenance cover, for C checks, D checks, et cetera. And when it's not doing maintenance coverage, it's flying in Commercial Charter.

That's extremely helpful, appreciate that. Just last thing, Spencer, I think you mentioned that we shouldn't look at the contribution margins in ACMI this quarter as representative, and I understand that seasonally and sequentially they should improve throughout the year. But why -- can you give a little bit of color on why the benefit that you're expecting from the -8s wouldn't have been apparent in the first quarter, but should be apparent as we progress throughout the year?

Well, they actually, they are apparent. It's just that they are a little clouded, so as we said, the first quarter, we don't really feel, is indicative and that's for several reasons. One is, just the timing of higher maintenance on our 400s, and so that higher maintenance on the 400s, because the 400s primarily fly in ACMI, you see allocation of that maintenance to that segment. Just because it's the first quarter of the year, given the seasonal nature, there's lower utilization. And then our CMI business is continuing to ramp up and increase, and of course, because we don't own those aircraft, because we don't have aircraft ownership costs, the CMI, on a rate per block hour, sometimes clouds things.

But we do expect improvement all throughout the year, and so we think as we get to -- as the year continues, and certainly as we get to the end of the year, Scott, we think it will become more and more apparent to you, and it's all included in our guidance. It's all built in. We think you'll see the tremendous profitability from the -8s, because of the maintenance holiday, because of the rates, because of the higher guaranteed minimums, because of the terrific financing, we think all that will be apparent.

Bill Greene, Morgan Stanley.

I'm wondering if we can get some color around the introduction of the -8s, and their effect on the -4s? You'd mentioned you had placed another -4 with Etihad, so that's great. Did that have to come at a lower rate? How did that affect the economics behind the -4s?

So we placed that 747-400 at our normal terms and conditions.

On 400s?

On 400s. I want to make sure I understood, an answered to your question. The 400 that we placed with Etihad, and announced today, we placed at typical terms and conditions to our other 400s.

That makes a lot of sense. So if we think then, about what the -8 economics sort of imply, and I think you kind of hinted at this earlier in a response, but I would assume that it's a bit more in demand, you can probably command a bit of a premium there, given the new technology essentially. So is it realistic to think about the utilization of that aircraft being substantially higher than the -4s? Is that how the economics identifies itself, as well as higher rate?

Well, there's a couple things. There's a higher rate, as you pointed out. There is the maintenance holiday that the -8s will enjoy as a brand new aircraft, and there's a higher minimum. Because the aircraft is brand new, because it has less maintenance time, we have higher minimums on the -8s than we do on the 400s, which is, frankly, what we had with the 400s when they were brand new into our fleet 10 years ago. And we have lower average financing costs on the -8s than the 400s. So all of those combined to the much higher contributions and earnings that Spencer referenced a moment ago.

Is it realistic that customers that will fly well above minimums, versus, like 400s?

Well, certainly they have the opportunity to fly well above minimums, and if the market is there, as we talked about a moment ago, Bill, with kind of a second-half growth view, then we should expect, in those peak periods or those later periods in the year, to see above minimum flying, certainly with the -8.

Okay, and then last aircraft question then. Given that you've sort of introduced a new aircraft as well, the 76, does that suggest that you're sort of open to a variety of new aircraft, that we should think that, maybe, there would be a greater expansion into different kinds of aircraft types?

So we've been a 747 platform for, really since we started, and one of the launch customers on the 747-8. And so the 747 platform, both the 400 and the -8 going forward, we believe is the right aircraft for that large wide-bodied inter-continental aircraft for ACMI service. Scott asked me a question a moment ago about Emirates, and what we see with Emirates, huge 777 fleet. 777 freighter makes sense for them, it would be difficult, I think, to ACMI a 777 into Emirates because of the scale efficiency.

So the 400 and the -8 are the core platform for our ACMI business going forward. There is a good opportunity in 767s, we'll have eight at the end of the year. I think some of that is going to be more CMI opportunity, and we'll see about investments into 67s, if there's a good business rationale over and above CMI to actually own that. If your question implies a 777, you know, we would have to have a very compelling business case to get into any other platforms at Atlas, whether it's a 777 or some other product. It would really have to be a compelling business case, with real beliefs about the sustainability of the returns in that aircraft type, for us to get in it.

That makes a lot of sense.

Bill, it's Spencer. I'll just quickly add, consistent with what Bill said, I mean we manage our fleet aggressively. The investments we've made in the 767s have been a terrific investment for the Company, and you can see in the first quarter that investment is paying off. As Bill said, for us to look at another fleet type, we would put together a business case. There would need to be a compelling business case. But we're very careful about how we manage our fleet, and we've shown that we make very smart investments.

Helane Becker, Dahlman and Rose.

It is actually Conor Cunningham in for Helane. Can you just talk about the opportunities that may have arisen, given that several companies have granted their -400 fleets, and what type of opportunities that may mean for you guys going forward?

This is Bill. Well, the only one that's actually grounded is Jade, and with the dissolution of that joint venture, their 747-400ERFs are currently grounded. I expect, at some point, they will come back to the market. The other carriers that have taken some capacity out, necessarily haven't grounded and parked aircraft, Cathay and Singapore in particular, Korean to some extent, they are simply flying the aircraft less. And I think we have seen the impact of that in, certainly in March and into April, it's less flying by some of that capacity, it strengthens yield.

I think as the market improves that capacity comes back. And again, these are large operators. If you look at the size of the core fleet that Cathay operates and the size of the fleet that Singapore -- excuse me, Korean operates, they are not typical ACMI customers, given their fleet size. I think our opportunity lies from two perspectives. One, we have the 747-8 they are delivering -- they are going to deliver great results overall, and so there's a good demand for that aircraft and we'll continue to place them. And the 400 still has very good economics for our customers, and that was the aircraft of choice for Etihad, and as I -- given the kind of perspective we gave on the aircraft we expect to have placed by the end of the year, basically, we're saying we think there's a good market for that 400 and continues to be.

The rest of our questions have been answered, thanks.

Steve O'Hara with Sidoti & Company.

You've noted that March was pretty surprising, seems to be the case, based on your guidance. Could you just talk about A, in terms of your profitability through the quarter. I mean were you guys basically marginal until, kind of, a very strong March, and if the March was as surprising as it apparently was, does that imply that maybe things could have been better had you not been surprised as much?

Steve, it's Spencer. January and February were very slow, weak periods, months for us. You know Asia to US market was slow. We had two New Years, we had the calendar New Year and the lunar New Year in January. Both of those had an impact on shipments out of Asia.

The end of February into early March, it really sparked kind of a renewed interest and demand. We saw yield increases, demand increases, as Bill talked about earlier, it's more than Apple. There was general demand. It wasn't just mainland China, but we saw increased yields in demand coming out of Japan, Hong Kong, South Korea. So that's what we saw in the first quarter, as Bill said, our customers are flying over their minimums into April, and we're cautiously optimistic. As Bill said, there are some uncertainties going forward, and that's why we've reaffirmed our guidance. We feel good about where we are right now, I'm not sure if I'm answering your question, but that's how we're looking at things.

But I want to address the second -- what I thought I heard is the second part of your question, and were we surprised, and as a result of being surprised could it have been better? I think I formulated the question, Steve.

I would say, we've got a track record of being able to pivot and take advantage of market demand on really short notice. We did that in the second half of 2009 when the market really [inflect] July, August, and then running through the first half of 2010. And I don't know what everybody else is going to report this season, that participate in international air freight markets, but we did drive a -- we were able to provide an 11% level of flying -- 11% above minimum level of flying for our ACMI customers who had been, frankly, flying at, or below minimums. And so we had the ability to pivot, to put the crews in place, to make sure the aircraft maintained and operational, as well as drive high volumes into charter. So, could it have been higher is a hypothetical, but I think we've demonstrated a very good capability to grab that opportunity, or allow our customers to grab the demand opportunity when it appeared.

And then, just quickly, in terms of -- you know, obviously the Street missed this beat, including myself, but maybe I'm focused on the wrong things, but what should we be focused on going forward to, kind of, get a better handle on what you guys could possibly do?

Well, it starts with demand, and I think, even in your note -- your earlier note, you observed that. Where market did -- March did have a change, and I think if there are market inflections like that, we expect to be able to take advantage of it. Obviously it's ACMI, but our customers are key players in the Market too, so I think if market inflects and there's strength there, that should be one indicator. We've given good -- I think, good perspective on placements, at least in terms of total number, so I think the kind of the three or four basics in our business remain the same.

Howard Rosencrans, Value Advisory.

Hi guys, thank you, and excellent quarter. A lot of my questions have been fielded. And first of all, thank you for the incremental transparency regarding the maintenance and the budgeting of the debt budget for 2012. That's also very helpful. Where do you guys see debt peaking? Can you give us, if just in terms of generality, can we look at it a little farther and just get a sense that would -- I'm saying that based on your current fleet, not assuming any additions. And then I have a follow-up question to that.

Howard, I think the best way to look at that is looking at our net-leverage ratio, its been where our focus has been, the net-leverage ratio is higher than we would like at the moment, as I think you know. It's at 4.9 times EBITDAR. We expect that to come down throughout the year, so I think we're near that high, at the moment and we expect it will come down throughout the year, and we expect it will continue to come down thereafter. So, I would say, we're kind of at that peak from a net-leverage ratio standpoint.

And the follow on question is, I believe it's still the current presentation, you guys talked about, please correct me if I'm mistaken, I think the number was 200,000 hours-ish in the out-year being, I guess, 14ish when you have all of the 8s on stream. Without incremental fleet, because you did cut back from the twelve 8s to the nine 8s, can we still get there, or do we need to add some, I mean, three 12s, excuse me, three 8s is a big deal so can you give me some general color on that?

We don't think that nine is the right number of -8s for us. As I said before, we aggressively manage our fleet. We believe in the -8 as a key part of our fleet going forward. We cancelled those first three aircraft due to the issues with the aircraft, but we still expect that our fleet will have more than nine -8s going forward, and so the 200 block hours that we talked about includes some incremental -8s, so we have not changed our order. Our order with Boeing stands at nine, and we continue to be in discussions with Boeing, and obviously we'll report if that should change. But to get to the 200,000 hours, we expect that we will have more -8s than we currently have ordered.

If you ordered them tomorrow, when would they come in, realistically?

That depends on discussions with Boeing, and so we don't want to speculate on that, but we think that we can meet the plan that we talked about, if we choose to do so. Did you lose your turn in the order, or what happened there? We're really not going to speculate on potential timing on potential orders, but we think that we can meet those hours if we decide that's the path we choose.

And in terms of financing on the 8s, you presently have an order. How much incremental financing do you need to do? How much have you completed, just as a reminder, to date and how much do you need to do to take us there?

On our firm order of the nine aircraft, they are all financed. We financed the first three with European commercial banks, and we financed the next six with -- they're backed by the US export/import bank, with a facility with Apple Bank. All of those aircraft have financing available for them.

Thank you very much and congrats on an excellent quarter.

Thank you.

Thank you.

David Campbell, Thompson Davis & Company.

I just wanted to ask the source of the other expenses in the first quarter, almost $32 million up from $20 million last year. Is there anything unusual in there, how sustainable is that, can you add any explanation for that?

I think there are really two big reasons. The first is, obviously, we've entered into the passenger business, especially flying that we're doing for the US military, and so within other expenses, there are two big items. One is, costs that we incur for flight attendants, and the second is, passenger catering. So those are new expenses and that's why you see that increase when you're looking quarter-versus-quarter, this year compared to the prior year. And then lastly, also included in that line item are commissions that we pay for the business that we have with the US military, and so as the AMC business increases then our commission expense increases, that's also included in there. So those are really the biggest drivers, there are a bunch of tiny items, but those are the biggest things driving that variance.

Just to remind everyone, we do not directly employ our flight attendants. We contract them in from an outside provider, so that's why it's contract labor, and not in other labor expenses above.

So that's going to continue? Those costs will continue?

They will, and David, we're looking at, as our passenger business continues, we'll continue to look at whether they should be included in that line item, or whether we should break them out separately. So we will look at that to make sure that we can give you the clarity that you seek.

And my last question is, in the block hours for the year, I think you had implied three or four months ago, that they would be 24,000 AMC block hours, and it looks to me like you've reduced that and increased the Commercial Charter block hours. Is that correct?

We, David, when we had spoke in November for third-quarter results 2011, we talked about 14,000 military cargo hours and 10,000 military passenger hours. But back in February when we talked about full year 2011, we revised downward the military cargo hours at that time to 10,000, and reaffirmed the 10,000 passenger hours, and that's basically all driven by the forecasts that are provided to us by the military, driven by boots on the ground, the acceleration of troop withdrawals from Afghanistan, lowered cargo from 14,000 to 10,000. There is a commercial charter market out there. We looked at good utilization of our aircraft, so what we don't serve in military would certainly look to put the aircraft to work either in ACMI or Commercial Charter.

And that concludes our questions for today. Are there any closing remarks?

Yes. Thank you, Operator, and we would like to thank everyone for their participation on the call today, and we thank you for your interest in Atlas Air Worldwide. We look forward to speaking with you soon again, and we hope to see all of you at our Investor Day on June 6. Thank you much.

Thank you, ladies and gentlemen, for your participation in today's call. You may now disconnect.