Atlas Air Worldwide Holdings Inc (AAWW) 2012 Q3 法說會逐字稿

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

Thank you. I would now like to turn the call over to our host Mr. Edward McGarvey, Vice President and Treasurer. Sir, you may begin.

Thank you, Angel and good morning everyone. Welcome to our third 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 complemented by a slide presentation that accompanies our remarks. If you have not already downloaded and printed a copy of our press release and slides, you may do so from our website at www.atlasair.com. You may find the slides by clicking on the link to presentations in the Investor Information section of the website.

As indicated on slide two, we'd like to remind you that our discussion about the Company's performance today includes some forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements relate to future events and expectations and they involve risks and uncertainties.

Our actual results or actions may differ materially from those projected in any forward-looking statements. For information about risk factors related to our business, please refer to our 2011 Form 10-K as amended or supplemented by our subsequently filed SEC reports.

Any references to non-GAAP measures are meant to provide meaningful insights and are reconciled with GAAP in today's press release and in the appendix that is attached to today's slide presentation. You can also find these on the web at atlasair.com.

During our question-and-answer period today, we'd 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'll happy to answer any additional questions that you may have as time permits.

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

Thank you Ed, and good morning everyone. We're pleased to have you join us today. Our third quarter results highlight the transformation and the diversification of our business and the essential elements of our growth story.

As slide three indicates, we have built a strong and resilient business. We are delivering increasing earnings, improved margins and growing free cash flow in a challenging business environment.

We have managed and modernized our fleet, developed and grown our express network ACMI service and we're adding our new 747-8F aircraft. We're capitalizing our new organizational capabilities such as our military and commercial charter passenger operation, CMI operations and our 767 service. We're also driving enhanced operating efficiencies through our culture of continuous improvement.

Our organizational capabilities and resiliency are inherent in the value that we create for our customers and in the consistently high ratings that our cargo and passenger operations achieve on periodic audits by IOSA and the Department of Defense.

They are also evident in the five-year contract renewal that we won during the third quarter to provide training for the pilots and crews that fly Air Force One. Our business model is working. Despite the global slowdown that is affecting us all, we are executing on a strategic growth plan that has significantly transformed and diversified our business, leverages our core competencies and underscores our ability to perform well in all economic conditions.

Slide four highlights our third quarter results. Our revenues increased 13%, and we delivered adjusted net income of $33 million and adjusted diluted EPS of $1.26, both up 10%, compared with last year's third quarter. Similar to the first and second quarters of this year, earnings and margin growth in the third quarter were primarily driven by an increase in the contributions from investments we've made to diversify and grow our earning streams, including our new Dash-8 military passenger charters and expanded CMI operations.

Earnings and margins also benefited from the scale and efficiencies inherent in our operations. Our adjusted results for the quarter exclude incremental costs related to the retirement of our 747-200 fleet as well as the gain of $0.03 per share on the disposal of 747-200 engine.

Volumes and rate in the commercial airfreight market in the third quarter reflected the typically slower summer vacation season, with the pickup in demand and yields as September progressed. Leading schedule cargo carriers remained disciplined in managing existing capacity, which help stabilize yields. Market demand in South America remains steady during the third quarter while commercial airfreight markets and trade lanes in the Middle East and Africa continue to grow.

During the quarter, we used our scale and operational flexibility to help our ACMI and Commercial Charter customers respond to the demand for airfreight capacity in the high-tech and automotive industries, which help to drive higher than minimum utilization in our ACMI segment.

Turning to slide five, we continue to anticipate margin improvement and strong double-digit earnings growth in 2012. However, given the relative underperformance of the global airfreight market this year and a softer-than-expected peak season that is materializing, we now anticipate that reported and fully diluted earnings will increase approximately 13% as our block hours increase approximately 12%. With adjusted 2012 EPS rising to more than $4.65 per share rather than over $5.10.

Current low inventory should underpin the demand for airfreight and multiple new high-tech product launches have begun and are expected during the fourth quarter. These products are time-sensitive-to-market and generally shipped by airfreight. That should have a positive impact on volumes and yields during the fourth quarter, particularly in the trade lanes supported by our ACMI customers and our Charter operations.

The key framework on which our current outlook is based includes approximately 153,000 block hours of flying with about 70% coming from our core ACMI segment, 15% from our AMC cargo and passenger operations and 15% from our Commercial Charter business.

In ACMI, volumes will benefit from increased flying by our 747-8F aircraft including the six aircraft that entered service for DHL Express at the start of the fourth quarter and the seventh aircraft that should be delivered to us and begin service for DHL before year-end. ACMI volumes will also benefit from growth in CMI flying, including Dreamlifters for Boeing and a fifth 767 freighter for DHL that should begin flying this quarter.

Reflecting the value provided by our 747-8s and 747-400s, our ACMI customers are expected to fly approximately 5% above contractual minimums in the fourth quarter and 3% to 5% above for the entire year. We continue to see good interest in our 747-400 cargo aircraft and we expect to place additional 400s in ACMI service going forward.

During ACMI remarketing periods, these aircrafts will fly in our Charter businesses. AMC Charter volumes, which include our new 767 passenger operations, should total approximately 23,000 block hours, with total passenger flying hours approaching almost 13,000 hours. Due to our lower expected flying levels in 2012, our maintenance expense is expected to total approximately $26 million in the fourth quarter and approximately $163 million for the full-year. This change is mainly due to a reduction in scheduled heavy maintenance activity in the fourth quarter including engine overhauls that are driven by utilization.

In addition, aircraft fuel expense is likely to be higher in the fourth quarter reversing what we saw in the third quarter. That's primarily due to an increase in the US Military's pegged fuel price on October 1. The increase in fuel expense for the military will have a minimal impact on earnings however. That's because we are reimbursed for fuel consumed in AMC Charter flying at the pegged rate established by the military. As a result, any increase in AMC Charter fuel expense due to the higher pegged rate will be largely offset in our AMC Charter revenue.

We've transformed and diversified our business model and we've invested in the growth of our business. Our initiatives have enabled us to increase earnings, improve margins and grow free cash flow despite a difficult economy. The investments we have made in our business have generated increasing contributions throughout the year.

We expect sequential improvement to continue in the fourth quarter with our earnings to be substantially higher than the third quarter. And while our outlook acknowledges softer near-term market conditions, the global airfreight market will expand from today's near-record tonnage levels. This is a good point to ask Spencer to provide you with some additional perspective on our third quarter results and our outlook. Following Spencer, I'll provide some additional thoughts and then we'll be happy to take your questions. Spencer?

Thank you, Bill, and hello everyone. As slide six illustrates, our third quarter earnings compared favorably with our earnings in the third quarter of 2011. They are also moderately higher than our second quarter 2012 results as we anticipated.

For the quarter, we delivered adjusted net income of more than $33 million or $1.26 per diluted share on operating revenue of $409 million. Earnings growth in the third quarter was primarily driven by the addition of profitable 747-8 in our core long-term ACMI business, as well as our new military passenger service, which we began flying in May of 2011. Results also included an effective income tax rate of 36.4%, which reflects the resolution of outstanding income tax examinations in Hong Kong during the quarter.

Looking at slide seven, you see that operating revenues in the third quarter of 2012 benefited from increases in block-hour volumes in our ACMI business, our military passenger business, which generated $60 million of revenue growth and our Commercial Charter operations. Overall, revenues were 13% higher in the third quarter of 2011. Revenues in our ACMI business, including CMI, increased 9%, compared with the third quarter of 2011 driven by our new 747-8 and increased CMI flying, partially offset by the redeployment of 747-400 aircraft to other segments.

Increased volumes in ACMI were primarily due to the start-up of four 767 cargo aircrafts in CMI service for DHL and the continuing increase in 747 CMI service for Boeing. ACMI rates during the third quarter primarily reflected the impact of higher rates for our Dash 8 offset by growth in our lower rate, but highly profitable CMI business.

On average, our ACMI customers flew 5.2% above contractual minimum block hours during the third quarter. We operate an average of 15.2 747-400 and 4.7 747-8 freighters in ACMI during the quarter. With our CMI operations adding an average of 6.1 aircraft to the segment, 1.3 Dreamlifter large cargo freighters, one passenger of 747-400 and 3.8 767-200 freighters.

In AMC Charter, revenues during the quarter declined 4%, primarily reflecting a 50% decline in cargo block hours and a 33% decrease in the average pegged fuel price. These were partly offset by a 700% increase in passenger block hours, as well as higher rates paid on 747-400 cargo aircraft utilized during the quarter. We flew 3,882 military passenger block hours during the third quarter, up from 467 hours in the third quarter of 2011, as we combined additional 767 passenger flying with our 747-400 passenger operations.

Commercial Charter revenues in the third quarter increased more than 50%, reflecting a similar percentage increase in block-hour volumes that was partially offset by a modest decline in average block-hour rates. Higher volumes in commercial charter reflected the deployment of 747-400 cargo in lieu of retired 747-200s. The deployment of an additional 747-400 cargo aircraft to support demand in South America and 747-400 aircraft from ACMI during remarketing periods.

In addition, we enhanced the utilization of our passenger aircraft by taking advantage of opportunities in the Commercial Charter market. Commercial Charter revenue per block hour reflected the impact of lower yields on increased global cargo capacity during the third quarter.

Moving to slide eight. Segment contribution totaled $82 million in the third quarter of 2012, a 16% increase compared with $71 million in the third quarter of last year. Earnings in 2012 reflected higher average block hour rates in ACMI, complemented by lower maintenance expense for our new 747-8s.

Revenue and volume growth in our AMC Charter passenger business as well as lower heavy maintenance expense on 747-400s versus 747-200s, which were partly offset by a reduction in the number of one-way military cargo missions. And revenue and volume growth in Commercial Charter offset by softer yields and a reduction in return legs due to fewer one-way military cargo missions.

Results in each segment were also partially offset by other volume-driven operating expenses and by increased crew cost compared with the third quarter of 2011. In addition, AMC Charter and Commercial Charter incurred higher aircraft ownership costs related to the deployment of 747-400 aircraft into these segments in place of retired 747-200s.

Slide nine summarizes the updated quarterly detail about our 2012 maintenance expense outlook. Maintenance expense of $41 million in the third quarter was about $2 million less than what we forecast for the quarter during our last call. Most of the difference was due to reduced non-heavy maintenance expense.

As Bill noted, we expect to incur about $163 million of maintenance expense for the full year with approximately $26 million in the fourth quarter. As we've noted in the past, the timing of maintenance events is subject to change as these events are conditions based. The number of scheduled heavy maintenance events during the third quarter and first nine months of this year were in line with what we anticipated and no heavy maintenance events are anticipated for the fourth quarter.

Turning to slide 10 and our balance sheet, 2012 is a year in which the business investments we have made are growing our cash balance and lowering our net leverage ratio. We ended the third quarter of 2012 with cash, cash equivalents and short-term investments totaling $325 million compared with $195 million at year-end 2011. The change was driven by net cash of $197 million provided by operating activities and by net cash of $265 million provided by financing activities, partially offset by net cash of $333 million used for investing activities.

Net cash used for investing activities in the first nine months of 2012, primarily related to the purchase of our fourth and fifth 747-8 freighters, a third 767-300ER passenger aircraft for our AMC Charter operations and a 737-300 cargo aircraft for our dry leasing business. Net cash provided by financing activities primarily reflected proceeds from the issuance of debt in connection with our fourth and fifth 747-8s, which were partially offset by payments on debt obligations and debt issuance costs.

Both the proceeds from our issuance of debt and the payments we made on our debt obligations reflect the refinancing of a total of $285 million of floating rate term loans under a facility guaranteed by Ex-Im Bank. The refinancing enable us to establish the fixed coupon rates of 2.02% and 1.73% on 12-year secured bonds that are guaranteed by Ex-Im Bank.

And through a similar refinancing on October 10, we achieved the coupon rate of 1.56% on Ex-Im guaranteed bonds in connection with the delivery of our sixth 747-8 aircraft early last month. Altogether, our three Ex-Im guaranteed bond issues have a blended average coupon rate of 1.77%. Excluding the acquisition of aircraft, engines and related capitalized interest, our core capital expenditures totaled $27 million in the first nine months of 2012 and our forecast to total about $40 million for the full year.

We expect our cash balance to continue to grow during the fourth quarter and our net leverage ratio, which includes capitalized rents to be about 4.6 times annual EBITDAR at year-end. That compares with 4.7 times at the end of September and 4.9 times at the end of last year. Including the benefit of an investment we made in our outstanding Enhanced Equipment Trust Certificates or EETC debt, our net leverage ratio would be further reduced to 4.3 times at the end of this year.

Slide 11 provide some additional perspective about our ability to generate free cash flow and grow our cash balance. As the left side of the slide illustrates, we expect the operating cash flows from our 747-8s, the favorable bonus tax depreciation benefits that they generate and the positive cash back that we have received and will receive at future deliveries, will enable us to continue to grow our cash balance. Due to the benefits of bonus tax depreciation, we don't anticipate paying US federal income tax until 2016 or after. As expected, we received the 2010 income tax refund of more than $24 million during the third quarter.

On the right side of the slide, you see our outlook for free cash flow. All the business efforts that we've been talking about should generate significant free cash flow per share this year and into the future.

With that, I would like to turn it back to Bill.

Thank you, Spencer. Moving to slide 12. We've built a strong and resilient business and our model is working as expected. We are growing earnings and expanding margins despite the global economic slowdown. We anticipate strong double-digit earnings growth this year that our fully-adjusted diluted EPS increasing approximately 13% to more than $4.65.

Airfreight remains a vital element of the global economy. High-tech products, manufactured goods, automotive parts, pharmaceuticals and perishables are moving. While it is never a smooth, straight line, airfreight will continue to grow. And we're well positioned to serve our customers in these markets.

Our brand stands for excellence. We have a track record of executing on our commitments and we're leveraging our deep understanding of global markets to continue to grow our business and to continue to deliver advantage and value to our customers and stockholders.

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

Jason Ursaner, CJS Securities.

Good morning.

Hi, Jason.

First question. I want to concentrate on the cash generation. And I guess, it's page 11 of the slides. The $440 million you are expecting at the end of the year now. It's a $20 million change down from what you had been showing in the Analyst Day presentation. And that's more than the change in EPS guidance.

So, I'm just wondering how you are reconciling between the change in cash and the change in earnings. And then how that $440 million would still compare to the $590 million by mid-year 2013, $690 million by full-year 2013. Yes. And how that -- if you were going to get there, how the $250 million increase in cash would compare to the free cash flow excluding aircraft purchases?

Jason, it's Spencer. Good question. So the cash balance that we're projecting now for the end of this year $440 million, as you said, keep in mind that's an increase from $195 million at the end of last year, a tremendous, tremendous increase, mostly driven by cash flows driven by our operating activities.

To get to your question, the change in pre-tax income due to revised earnings guidance was pretty similar to the impact on cash. And so therefore it impacted operating activities. There was also a change in working capital. And that really accounted for the difference. But again, I try to focus on the fact that we had a $195 million at the end of last year, growing to $440 million at the end of this year. It's tremendous, tremendous growth on our cash balance.

Agreed. And then --

As far as 2013, we will -- during our next call, we'll talk all about 2013. We'll provide our guidance for the P&L for the year. We'll also provide guidance for the cash balance. So, we'll give you a full picture of 2013 during our next earnings call, early next year. But we don't anticipate to update anything on 2013 at this time.

Okay. And then just a follow-up for Bill. In terms of the softer-than-expected peak that's materializing, I'm assuming you're talking about amplitude since it started earlier in the year with a strong September for some of the new products you talked about. Can you talk about how much is -- what you're hearing versus what you're actually seeing in terms of rates? And just any other color you could add to really describing why you're saying that's softer-than-expected peak?

Sure. Thank you, Jason. I think our view is pretty consistent with what several other key actors in International airfreight and express have talked about. So, back in July, August, all of us were anticipating several product releases from Apple, from Microsoft, Kindle and others. And I think most of us on the call know the litany of new product launches. Some were delayed and some simply haven't generated the volume that was anticipated in the market. Rates certainly have improved from the third quarter to the fourth.

Current spot market rates out of Korea to the West Coast are in the $4.10 range, the Hong Kong $4.40 to $4.50, PVG Mainland China, $4.80, $4.90. And so we are seeing the peak effect. But a lot of the volume that we're seeing is moving on scheduled service as opposed to driving high charter demand overall or driving high charter yields.

And if we look back and just kind of visualize the expectations, even into July, we [with the] observers, IATA and other observers were calling for a much stronger peak than it's materialized and while the market, which has been contracting now for some 18 or 19 months on a year-over-year basis in terms of demand, capacities continue to come in.

So it's dampened the overall charter market. Yields are good. We've talked about in terms of how it will affect Atlas. Our ACMI customers will be up, flying up about 5% above minimum into the quarter, into this quarter as well. And so we're going to be driving our earnings, our growth of 13% on a year-over-year basis. And then sequential improvement in EPS of about 39%, third quarter coming into fourth, given the market conditions that we have.

Okay, great. I appreciate the commentary. I'll jump back in the queue.

John Barnes, RBC Capital Markets.

Hi. Good morning, guys. I just want to talk a little bit about the contribution margin for the Commercial Charter business. I mean, you had sizable increase in revenue on a year-over-year basis, yet the margin was significantly worse on a year-over-year basis. I understand you've got some higher crew costs, maybe some higher ownership costs, but you're also flying a much better aircraft in Commercial Charter than you were a year ago as well.

So, can you just walk us through the bucket here of why we're seeing this margin degradation? And then, I guess, most importantly, is this the level of contribution margin from Commercial Charter we should be expecting on a go-forward basis?

Thank you, John. So just a couple of things on margins. You're right. Our margins in ACMI improved this year of that 29% versus 24.8% last year. Our margins in military improved four full percentage points from 18% in 2011 up to 22% this year. But margin in Commercial Charter did contract and it's a combination.

Certainly there are higher ownership costs and crew costs, as you referenced, John, but there was substantial pressure on yields, overall, in the third quarter of 2012, where rates were back down in the $3 range in July and August and not really coming back until September when we started to see some Apple products and others moving into the market. I think in terms of the go-forward margins on 2013, I wouldn't conclude that this quarter determines the margins going forward.

As Spencer pointed out, we'll provide -- pointed out to Jason, we'll provide more color on margins into 2013 and we'll talk about commercial. The other impact that happened was the change in military. As you can see, we're down to 10,000 cargo hours this year, which pretty much is where we guided to earlier in the year. But what's changed is, we also have substantially fewer one-way cargo missions.

As you may recall, one-way mission we fly from the US into the Central Command region, ferry into Hong Kong and carry back. But as we are now drawing down from Afghanistan substantially, the military is buying more round trip flights because they need to pull the retrograde cargo back. So fewer one-ways into the Theater, fewer one-ways to re-market has also put a -- had its impact on margins. So some of the charter we flew, we needed to fly round trip from US to Asia, pickup the load and come back and that's also had an impact on margins.

All right. Can you give us some flavor, rates a year ago, just we have kind of a point of reference on the pricing environment?

In the Commercial Charter market, John, I would say they are roughly similar.

Okay. So, this is - this sounds like it's much more depended on the military, the impact of the military shifting to more round trips. I mean if pricing is similar on a year-over-year basis and, okay, so you've got a little bit higher ownership cost, a little bit higher crew costs, then it sounds like a lot of it's on the military. Now what benefit did you get from -- is there any offset from running the 747-400 versus running the 200 just given productivity, fuel efficiency, that type of thing?

Sure. So, couple of things. We've talked for sometime that the one-way military flights contributed to margins and yields both in Commercial Charter and in the military operations per se. This 18-hour flight paid, where we are earning revenue on a military flight five or six hour charter or ferry and then another 13, 14-hour flight where you are earning revenues again is very highly contributory kind of point-to-point operation. And we have, I think, commented before that as military draws down, as one-ways come down that would have an impact on the Commercial Charter market.

And why I didn't not prepare really to comment on 2013 in a go-forward margin is the markets going to have to absorb that because it's not just fewer one-ways operated by Atlas, which then ferry to Asia. It's fewer one-ways operated by all carriers which then come out of the Asian market. So that impact, I don't think, has been fully recognized and absorbed in the market. So I think, going forward, we should see strengthening in charter margins as a result of just that air -- those -- that capacity not being in the market.

So, in terms of the 747-400, it's more reliable, it's more dependable and it carries more weight. And so we did -- we are marketing a higher -- the higher capacity of the aircraft at the going market rates. Market rates are all in recognized fuel. So to the extent that the 400 is competing at the same rate versus the 200 that's helpful given the fuel burn.

Okay. All right. And then, just one last question. On your guidance where you made the comment about you're going to -- any plane that's currently being -- any 400 that's currently been remarketed, it's going to be shifted over to Commercial Charter. Just for clarification, I mean, are you pointing out that there is going to be a different number of those available in the fourth quarter or is that more of a generic comment around this is what we intended to do with the fleet as we're going through a remarketing process?

That's what we intend to do with our fleet and I think it's the strength of the model. We're at the dry lessor, if the aircraft comes back, it comes back and it's parked until it's put into service. Our best -- for example, our best estimate of the 400 fleet today has about 11 400 factory freighters parked, that includes Jade and Grandstar and some of the others that you know about as well as four or five BCFs are also parked. Where we are now, we have a charter market.

As we have a marketing period between one aircraft, if it comes back or it have to be placed or an 8 goes into service and a 400 comes back. If it doesn't immediately go into another ACMI operation, our model allows us to put us in charter operation, fly it and generate a return on it.

Okay. Thanks for your time guys.

John, it's Spencer. I'll just add quickly with regard to Commercial Charter. You asked whether that -- this is the new norm and whether margins would stay that low or contribution would stay that low. I think what we saw during the third quarter was not necessarily indicative of an overall pattern. And I think you'll see the contributions from charter rising.

Alex Brand, SunTrust.

Hey, guys. Good morning.

Hi, Alex.

I just want to pick up on the demand and I'm trying -- I think you mentioned that maybe it had more to do with capacity. But I am wondering relative to where you thought you would be? It sounds like you still think that the tech product launches will be a big part of peak season. So was it -- is it that demand has been slow to materialize, but you think it will come yet, or is it more that you thought capacity would be at a different level from where it turns out actually is?

It's a combination of a couple of things Alex. I think we and the market generally expected a bit more demand than we are seeing. I think you -- I guess, I mentioned earlier, I think you've heard that from all the major actors in the international airfreight flows, as they've recently talked about their own view of the market. So demand is up. It's a bit less than frankly I think we expected to see in the market, given the expectations around product launches generally.

There is capacity has continued to come in to the market on a year-over-year basis, month-over-month. That said, we think that the market is still strong, but we're looking at a market that's at 46 million to 47 million tonnes this year. It's not as strong as we would have expected even back in July. But all that said, if you look at the numbers that we're producing, we're growing into this market where we're growing 13% year-over-year into this market with the kind of headwinds that we described.

Understood. With the Dash 8s and the cash flow, and Spencer has done a good job of articulating the cash flow opportunity, how should we think about what you're willing to do with that cash flow? I mean, if the market is weak, would you consider not buying new planes, past these nine and then aggressively buying stock or maybe starting a dividend or some other uses of cash?

So, one thing that we've talked about, we do manage our fleet. We're very focused on the fleet and the size of the fleet and what's the right aircraft mix, aircraft type mix within the fleet. And suspension, I've commented on prior calls, everything is on there, all options are on the table as we build cash and what we would do with that cash, whether it's a return of cash to the shareholders in one or another form, as you suggested, or additional investments in our business and we've not announced or decided what we're going to do, but we certainly are evaluating all the options that are open to us.

And Alex, it's Spencer, I'll just add. We continue to evaluate opportunities to grow and expand the business at appropriate returns on our investments. I think we're really well-positioned to be able to do that.

Fair enough. Thanks for the time guys.

Thank you, Alex.

John Godyn, Morgan Stanley.

Hey, thanks a lot for taking my question. Spencer, I take your point on growing cash balance, but debt over time has also gone up. So, if you could just help us think about what the right way to think about excess cash is. How much cash do you need to be comfortable in operating the business?

And with respect to some of the other balance sheet metrics that you highlighted in the slides, leverage ratios, things of that nature, where would you like to go on those metrics before truly feeling like you have excess cash to play with?

Sure, great question, John. Let's say a couple of things. I guess, first, I would say from a cash balance perspective, what allows us to sleep at night sort of question, we have run various sort of stress test scenarios and kind of all sorts of scenarios that would have terrible things happening and we have determined what cash we would need to make sure that this business continues and can stay as strong as it today in those scenarios. And we're going to make sure that the Company maintains appropriate levels of cash on its balance to make sure that that can happen. I think that's one of the really key differences between Atlas and some of our competitors.

As far as debt, you talked about the debt balance rising, we look at our net leverage ratio and if you take a look at our net leverage ratio, it rose at the end of last year, because we took on debt for the Dash 8s, but we didn't yet have the opportunity to see the earnings from the Dash 8 offset that. But now that you see this year progressing, you see the net leverage ratio coming down throughout the year and we expect that to continue to happen.

We want our net leverage ratio to be below four times trailing 12 months EBITDAR, and we think that you'll see that pretty soon. And that is an area that we'll be comfortable with. As long as that ratio keeps coming down, we'll be comfortable, we'd like it to be below four times and I think you'll see that soon.

Okay. And then I just want to follow-up on some of the comments about the military market. I think we're aware of the challenges that you guys have executed through as the nature of the military businesses changed with respect to military, but also charter flying to Asia. But to what extent do you think that wartime activity structurally tightened up international air cargo market such that we're now dealing with sort of structural overhang on air cargo markets broadly that might start impacting ACMI and your ability to remarket aircraft. How do you think about sort of the bigger picture takeaways from that?

Well, couple of thoughts on a bigger picture takeaways John. We, at the beginning of the year, talked about military cargo declining from 18,000 hours in 2011 to about 10,000 hours in 2012, and that's essentially what's going to play out. Two years ago we flew no military passengers. Last year we flew 1,300 hours of military passengers.

This year we'll fly 13,000 hours of military passengers. And the FedEx team, which is essentially Atlas and Delta flying passengers is now the single largest operator of passenger services for the US Military. With a reduction and withdrawal ultimately from Afghanistan, there still will be about 150,000 troops deployed, 270,000 troops deployed overseas, majority of them in Asia-Pacific. And our sense is that provides continuing demand for passenger charter services. And so the investment in there will more than pay off for Atlas in terms of that passenger business.

And the other thing that it's certainly done for us, it is moderated and mitigated this very dramatic 50% decline in cargo operations. The absence of one-way charter flight into the CENTCOM is going to change, I believe, some of the pricing on Commercial Charter. I think it is a net benefit for airfreight overall because it effectively removes what I would characterize as cheap capacity from the market. It absolutely will lead to the retirement of the 747-200 fleet, of which only a few are left operating. The 747-200 fleet was to some extent artificially subsidized in a cost-plus contract. Those aircrafts are gone or are going and are going to be gone fast. So those one-ways come out of the market. And they get retired, there's not a secondary home for that 200 fleet.

So, what that means is that capacity tightens in our view in Asia-Pac, which should drive better load and yield for our ACMI customers, better Commercial Charter net rates for us as the market absorbs that in the 200 capacity and I would argue even some BCF capacity are part and really not utilized. And that strengthens, as the market begins to grow, I believe it strengthens our ability to place aircraft into ACMI, given the quality of service that we provide, given the scale, benefits, and operating efficiencies in our network, given the fact that there is a large market to serve, the 46 million or 47 million tonnes And while we haven't seen growth, ultimately with flight economic recovery, we expect to see a rebound in total airfreight demand.

And how -- and what can you tell us about sort of the timing and how long it takes that excess capacity to kind of leave the market?

I think it's happening now. Right now, for example, it's our understanding that military, the Air Mobility Command are not [casking] 200s. They are looking at all operators for 400s first for cargo and only after 400 capacity would be exhausted will they take 200. So, I think we're seeing it happen right now. We saw Southern announce that, all their 200s will be grounded by the end of the year, that leaves really only one operator, I think, with 200 serving the US Military of any size. And I think that's happening now.

Okay. Thanks a lot.

Scott Group, Wolfe Trahan.

Hey, thanks, good morning guys.

Good morning, Scott.

So, Bill, I think last quarter you talked about ending the year with 23 planes in ACMI and I think you ended third quarter with 20. What's the thought now in terms of where you are ending the year on ACMI aircraft?

Well, some of the customers we've been working with given the softer market that they've seen are they're likely to differ that into 2013. So, I believe, we're going to be in the 20 range as we come to the end of the year and we have otherwise then deployed that aircraft into our Commercial Charter operations, Scott.

Okay, that makes sense. So, if I think about a normal fourth quarter and I have the opportunity to be in ACMI or in Charter, [I mean] in a normal fourth quarter, you can actually have better contribution in Charter than ACMI. Am I thinking about that right or is that different in fourth quarter this year?

No, you are thinking about that right. The rate per block hour -- Scott, generally, the rate per block hour, on a net basis, after you back out the fuel component, on a net rate per block hour, generally the Commercial Charter segment will generate a higher rate per block hour than in the ACMI segment.

Right. I guess what I'm getting at -- so you've got less planes (inaudible) in ACMI and more in Charter, which should be net-net at least in the near term good for earnings and you're cutting the earnings [guidance], I guess, I'm just struggling with those two dynamics.

So there's two other attributes. As you've seen, we've talked about a yield hit in Commercial Charter even though the charter is there, that's part of our change in earnings guidance. And Commercial Charter, while offering a higher rate per block hour, it does provide a bit lower utilization per month, particularly with the markets not as robust as it's been. So we're not flying at 428 hours a month on a Commercial Charter, we're flying something less than that. So, I think it's a combination of yield and net yield pressure as well as a little bit lower block hour utilization affects the return this year and why we've adjusted our guidance.

Okay. That makes sense. And then when I look at the ACMI contribution margins, and obviously the percentage look really good. How do we think about the contribution margin, maybe margin dollar on 400 in ACMI versus the new CMI business?

Sorry, Scott, I thought I understood your question, but the end confused me a little bit, can you just tell me the last part again?

400 in ACMI versus the CMI, how do we think about the contribution margin dollars per aircraft?

Okay. 400 in AC -- I think your question was the contribution on a 400 in ACMI versus the contribution of a 400 in CMI, ACMI versus CMI.

[or any CMI]?

Any CMI.

Okay. So the -- as far as the 400s go, the contribution is very similar, 400 in ACMI versus 400 in CMI, we've talked about somewhere in the range of $5 million to $7 million an aircraft, about $0.14 a year. So we've talked about that in the past and that remains to be the case. As far as other aircraft in CMI, 767s, we've generally talked about those being lower utilization and lower profitability.

Are they drastically lower? I guess what I'm trying to figure out is sort of trying to -- you talked about $0.04 per plane per month on the Dash 8s and we can see there's 4.5 more Dash 8s, but the contribution margin certainly increased in ACMI, but it didn't increase the math -- didn't increase the full amount relatively to what you would have thought. I'm just trying to understand how much of that is [steward 400s, there are] more CMIs and the 767s. I'm just trying to do the math on the moving parts on the contribution.

Sure, Scott. I guess the first thing I would say is, I disagree with the premise, but I do think the math does work. The Dash 8s are producing approximately $0.04 per plane per month as we've talked about. We had -- so we added 4.7 Dash 8s this quarter versus the prior year. We also removed 4.7 400s from the ACMI segment this quarter versus similar quarter last year. So you take that and back it out. We also had a return fee that was paid by customer during the third quarter of last year. And so sometimes when customers return planes, we charge them a return fee and so there's an impact there. And when you back all that out, the math I think works out pretty well.

Okay. And that's fair, maybe I'll follow-up offline as Spencer (inaudible) there are a lot of moving parts. Okay. Thanks a lot, guys, appreciate it.

Just a few, but sure we are happy too.

Jack Atkins, Stephens.

Great, guys. Thanks for taking my questions. I guess, first, when you look at the ACMI segment, it sounds like there are 15 400s, both factory freighters and BCFs that are parked, could you maybe talk about the impact that's having on the rate environment where ACMI leases for the Dash 400. In general, my guess is it would have a fairly significant negative impact. And just curious how far out do you think the customer is going to push out their 400 lease decisions into next year?

Well, the fact that aircrafts are parked, Jack, have not affected our ACMI rates with our customers. The aircrafts that are parked if you think about who they are, China Airlines, the Taiwanese carrier have three parked. There is one parked in China that was the Grandstar joint venture between Korean and Chinese operator, actually Sinotrans. There are six aircrafts from Jade Cargo, the joint venture between Lufthansa, Shenzhen and ultimately Air China was in that, they are parked. And then there is the one low air cargo which really has been parked since delivery, that's been parked for several years now.

That's what's parked in terms of 400 [tier] freighters and then there are five or so maybe six BCFs. The BCF is really not an attractive aircraft for a quite a number of reasons from an operator's point of view. It's heavy, it burns more fuel, loads less cargo and it's substantially older and has the issues that aging aircrafts have. So the fact that 400s are out there and may affect the dry lease, there is certainly some pressure on dry lease rates within the market on 400, but that's, again, I think the strength of our model. We provide the asset the 400, the Dash 8, but we provide the service and earn a margin on both. So, our rates and margins have held in this market, as evidenced, I think, in the reported ACMI rates that you can see.

Sure. I guess my underlying question there was, when you think about remarketing the 400s that you have that are coming off of lease right now, when you think about what's happened to the rate environment for ACMI 400s just given all the aircrafts that are parked. Has that had a negative impact on the market rates for an ACMI aircraft 400 and is this current rate environment acceptable from your perspective to put planes under three to five year lease right now?

Well, again, it's ACMI and not dry lease, so just the, a, there is pressure on pure straight up dry lease for a 747-400, but the decision to enter an ACMI is not simply driven by our customer or any airline saying I want a 747-400. They are buying the whole service, and they are buying the logistics and they are buying the global scale and scope and the 90% on-time reliability, the redundancy and capability in our network.

And so that is a very different buy than calling up a dry lessor and saying, what's the market line on a 747-400 today. So, our belief is that there is good demand for our 400s. We will place our 400s into ACMI service along with our Dash 8s and that's our core business. And it's a combination of the right assets with, what I'll characterize as, exceptional service, allows us to market and margin up on the aircrafts that we place with our customers.

Okay. Great. Thank you for that color, Bill. And then, Spencer, just the question on the maintenance guidance for the fourth quarter. It looks like you guys are now expecting three fewer engine overhauls in the fourth quarter versus your prior guidance. Would you expect those to be pushed out into early 2013 or how should we think about that?

Yeah. Good question, Jack. So we did lower the full-year guidance for maintenance, and it's due to the utilization. So that's resulted in, as you said, three fewer CF6-80 which are the engines that power our 747-400s. So we expect three fewer overhauls in the fourth quarter. And, as you said, yes, I mean, they have to be overhauled at some point, it's just about it's being delayed. So this would generally slip into next year. The other thing is that, just as a result of lower block hours, there's lower line maintenance and there's also some lower non-heavy maintenance as a result.

Okay. Thanks for the time, guys.

Thank you, Jack.

David Campbell, Thompson Davis.

Yeah. Hi, Bill, Spencer. If you look at page 14 of your press release, it seems obvious to me the biggest problem, not the only problem, but the biggest problem in your earnings, a reduction from estimates is the ACMI utilization, which per day was down to 11.9 in the third quarter from 12.3 for the nine months. So there has been a substantial change in ACMI utilization from what it was in the first six months to what it was in the third quarter. And based on your forecast for the fourth quarter, that's going to continue.

I didn't quite understand how that can be -- how that can deteriorate so fast when your outlook for Commercial Charter revenues and Commercial Charter utilization is up. The other thing I -- relative from where it was three months ago. The other thing, I disagree with is your thought that everybody's lowered their estimate on international air cargo in the fourth quarter. That's simply not true; there are some forwarders who have increased their estimate of air cargo in the fourth quarter. And I think they're going to be doing better than expected three months ago. So, if you can explain all these, I'd appreciate it.

Well, we'll do our best. But let's start with the latter part of your question [and I'll tell you]. I was referring, David, certainly to comments made by UPS, by FedEx, by Expeditors, UTi and Ford among others. I think, maybe (inaudible) might have increased their expectation for airfreight. I don't know if that was -- if they were characterizing it as their total market or their share of the market and how much airfreight they intend to move. But, I'm referring to general overall --

[They are in the] total market and so is DSV and these other things, but FedEx and UPS are not. If you get those guys, I mean, [they are currently flying packages or not]?

So do we, we have nine aircraft flying for DHL and we have five flying for DHL in North America. But we'll have five flying for DHL in North America. And my point is that right now IATA has forecasted a decline, a continuing decline in airfreight demand and [that's] a slight breakeven. And that is a different forecast than what I would characterize the market was viewing back in July and August. We were looking forward still growth, overall, in total international airfreight demand. That's simply what I am characterizing.

Because you've have added more DHL aircrafts (multiple speakers)?

More 767-200s, which are flying domestically. It's just nighttime operations from outlying airports to the hub, as opposed to, we're not talking about 747-400s or 747-8 flying at that low utilization for DHL, obviously fly at 747 rates of utilization as opposed to 767-200 rates of utilization.

But this utilization -- this utilization was not baked into your previous forecast for the year. That's where your biggest changes in block hours for the year.

There are fewer number of unit. I think the question that Scott asked earlier, we had said 23 units in ACMI by the end of the year and we are saying 20 in ACMI by the end of the year and that capacity otherwise then it's consumed in Commercial Charter, you then with fewer 400 units or -- excuse me -- 747 units and we'll have five 200s, the simple math of low -- of five aircraft at lower utilization rates will have an impact on the average, its math, not actual asset utilization on the 747 fleet.

So, next year we can't really -- we can't really [for] model anything next year based upon what's happening now?

I wouldn't conclude that, David.

Okay. And lastly, I would, as far as the market is concerned, I would look at the Asia-Pacific Airline Association. They were shocked with the increase they had in, almost flat in September. There is no question that the market is getting better.

I agree that the market is getting better and hopefully I'm not talking positive on that. We agree that the market is getting better. We talked about, there was a question earlier, what are the yields looking like and we talked about yields that were $3 in earlier in the third quarter, that are approaching $5 out of China today.

There is no doubt that the market is improving, what I suggested was we're not seeing the strength of the improvement that was anticipated. There was an amplitude comment earlier in the call that the strength of the market isn't what was in my view expected given the sheer number of new product launches that were talked about back in August and July. It is getting better, it's not as peaky, if you will, or strong as we anticipated.

Okay. Thanks very much. I appreciate your answers.

Thank you, David.

Helane Becker, Dahlman Rose.

Thanks very much, operator. Hi, guys.

Hi, Helane.

Just a couple of questions. The first one is with some of the other airlines like Southern going bankrupt, have you seen any improvement in your business as a result of their maybe grounding more capacity?

Well, Southern's principal business, as I understand, that their four aircraft that they fly for DHL and continue to fly for DHL, the four 777 and the majority of their business was with military, with a couple of ACMI contracts beyond the DHL. Military has come down, we've not seen it, we're flying just slightly above our entitlements. So we haven't really seen an impact yet from a smaller fleet at Southern.

Okay.

Where we would see it, if we were would be in military if somehow the team, the Patriot Team could not fly its entitlement, but there are other cargo operators on that patriot team. So we're not going to, I think, in the near-term see a big impact of a smaller fleet at Southern.

Okay. And then, the other question I had for you is, on your other existing fleet where you have your customers are normally three to five year customers, not your DHL customer, but your others. Are you seeing any, well, I know we're at the end of the year. So I'm kind of thinking that most of your renewals are up or have already been renewed. If there is anything left to be renewed this year, are you seeing any impact on renewals?

Okay. I think we're going to -- the discussion on renewals is - we have this typical kind renewal levels into 2013. Our view is that our contract terms and contract conditions are durable, and will be the contract terms and conditions at which we'll renew our ACMI contracts going into 2013 and beyond.

Okay. So it's sort of like the usual number whatever three or five, I think you actually put that in one of your presentations recently?

We said, typically that based on the staggered rate of renewals, that's kind of a typical year for renewals, a typical number for renewals in any given year.

Right, okay. And then my last question is, I've seen some press reports from other forces I guess other people saying that there has been a decided preference for seven 777 freighters versus 747 freighters. And I was just wondering if you could comment on that, obviously your business is holding up, so you are not necessarily seeing that, but are you hearing that from customers?

Well, not from customers per se, but I think there are couple of, certainly, data points, more 777's have been sold than 747-8's have been sold. That's certainly a fact. The majority of the 777s that are sold or a large percentage of the 777's that have been sold are going into integrated fleets, principally FedEx or the DHL operates 777's across several of their route networks as well in addition to operating 74s, both 400 and Dash 8s.

Our view, we've invested in the nine 747-8, they are delivering the fuel burn improvement, they are delivering the payload improvement. And for the heavy freight route network as well as some of the integrated networks, it is the aircraft, it's the right aircraft. The other operators or commercial buyers of 777, for the most part, have very large passenger fleets of 777s. And so putting the 777 into their cargo operation allows them to leverage the scale that they had inherent in the 777 Pax fleet. They are both good freighters. I would point -- argue or make the point that they serve somewhat different markets.

Okay. That's very helpful. Thank you very much.

Thank you, Helane.

Bob McAdoo, Imperial Capital.

Hi, guys. Just a couple of quick ones. You've talked about that your ACMI customers are running about 5% over the guaranteed levels. What would that have been that same kind of number a year ago? And then the second question is, if you have these 400s that you are [deploying] that were ex-ACMI airplanes and they are going into commercial. But if they are really -- if the Commercial Charter business is such that they are -- you were not able to use (inaudible), if you put zero utilization on the airplane that came out and moved in the -- as the new plane that came into Commercial, what would be the cost in terms of contribution, does it eats up, if you will, by just being an idle airplane that just sits there?

As far as customers flying above their minimum block hours, as we said, we saw customers fly about 5.2% above their minimums this quarter, the third quarter of this year. And last year it was about 4.5% over. So, pretty similar, a little bit better third quarter of this year versus the prior year.

Okay.

The other part of your question Bob, was what if we had to park a plane and what would be the impact of that?

Yeah, I mean, I understand (multiple speakers) it once or twice, but what if you didn't -- really didn't use it at all. What would be the cost of having an idle airplane?

Well, as you'll see in the Q later today, and I think there is a fair amount of information in the press release, that's not what we are experiencing. Our aircrafts are being well utilized in which every business segment that we have them operating, and I think, I made the point earlier in a question, that is in fact the strength of our model and that we are able to do that. At this point, I really wouldn't speculate on what the impact of that would be. I think that's kind of -- just not a point where we want to go to, it's not something that we envision Bob.

I guess there probably would be guarantees on crews and that's about -- that would be kind of the ongoing cost of having an extra airplane. If you did end up, I'm not saying you are going to have, I'm just trying to figure out if we get question?

We have a working environment with our crew and a contract that allows us to adjust our crew to the level of operation, and in fact we did do that back in 2008 and 2009 when the market created some 30% on a year-over-year basis.

And Bob, it's Spencer. I just want to point out, I know we lowered our guidance. We're certainly aware of that. Our business is growing tremendously. Our block hours are growing tremendously, our aircrafts are being utilized. So I just don't want to lose sight of that.

No. I'm not -- I'm just -- but you get questions in one of the bare case is, what if they can't find a home for these. We popped a couple of planes out here that went into the commercial and now you've got a couple more airplanes coming in early '13, what if they can't find extra homes for these things and we just kind of got a -- we're just putting bigger airplanes into ACMI and the others are kind of [perhaps] tend to be more idle than not what -- how bigger -- how bigger drain is it? So, I think it was one of the barge rafter asking those kinds of questions and usually you try to respond to?

I think it's -- and again, it's not something we envision. There are ownership costs and we would incur ownership costs, but all of the incremental operating costs, those would be avoided. But again, we just -- we don't anticipate that sort of scenario, Bob, at all.

Yes. I understand. Okay. That's helpful. Thanks.

Thank you.

Kevin Sterling, BB&T Capital.

Thank you. Good morning, gentlemen.

Good morning, Kevin.

Hey, I jumped on late. So, I apologize if I ask a question that's been answered, just let me know. Bill, there's been a lot of talk about capacity, have you seen a detrimental impact to capacity from passenger belly space?

Kevin, not per se, not a line of sight, belly capacity per se. We did talk about earlier in the call that capacity has come into the market this year month-over-month whereas the market has contracted slightly month-over-month and we're seeing a bit of a peak nonetheless. But belly capacity per se, no Kevin.

Okay.

Capacity, yes.

I got you. And then you talked about some of the 200s coming out of the market, particularly for the military one-way missions. In your opinion, how many you're starting -- you think you're starting to see that now? How many 200s you think are left in the market that could meaningfully come out?

Well, you've had several operators talk about retiring them. My view is that the 200s are fundamentally, there's 47 200s still - excuse me, 42 200s still in service globally. I think there are some number of those that are serving the military that are going to get parked very soon. The other point I wanted to make -- that I was making about those.

Military is a cost-plus contract and it have the effect of subsidizing an aircraft that wasn't viable in the commercial market. Effectively, there was no demand for 200s, near I won't say, no. Minimal demand for 200s, other than that military market, which the military has had in this fiscal year, which started October 1. That would be the last aircraft of choice after 400 -- all 400s available in the market were exhausted.

So I think that's going happen pretty quickly. And then the other effect it's going to happen as military draws down, there is simply less one-way capacity in the market overall coming into Asia, which over time should have a net beneficial effect for our ACMI customers and for our Commercial Charter customers as that cheap subsidized capacity comes out.

Okay. I mean, you may have answered this earlier, so I apologize. How many Dreamlifters are you now flying for Boeing?

So we have four Dreamlifters on our certificate, but the build rate is 3.5 and increasing and I think in the quarter we operated about 1.8.

1.3.

Sorry, 1.3 Dreamlifters or 1.3 aircraft equivalent in the Dreamlifter operation. It's rising to five builds by the end of this year and then coming into 2013. We will continue to grow their build rate.

Okay. (multiple speakers).

That will continue to increase the relative number or the effective number of aircraft utilization with full utilization anticipated in 2014.

So, Kevin, the increase in our LCF equivalents, as Bill said, it's 1.3, which is a 0.7 increase. And so as we talked about, it continues to increase. Bill talked about Boeing producing five 787s. Boeing has said they expect that to go to seven in the first quarter, up 13 that will grow to 10 in the first quarter of '14 and continue to grow up to 14 per month throughout several years. So continued upward trajectory, we continue to ramp up those block hours flying -- those planes for Boeing.

Okay. So when Boeing gets to 10, is that assumed full utilization of the four Dreamlifters, is that how we should think about it?

Yes.

Okay. All right. Well, thank you so much for your time today.

Thanks, Kevin.

Thank you, Kevin.

And there no further questions, sir.

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

Thank you for participating in the third quarter earnings call for Atlas Air Worldwide. You may now disconnect.