Atlas Air Worldwide Holdings Inc (AAWW) 2013 Q2 法說會逐字稿

My name is Amy and I will be your conference operator today. At this time, I would like to welcome everyone to the second quarter earnings call for Atlas Air worldwide. (Operator Instructions). You may begin your conference, Atlas Air.

Thank you, Amy.

Good morning, everyone. I'm Ed McGarvey, VP and Treasurer for Atlas Air Worldwide. Welcome to our second quarter 2013 results conference call. Today's call will be hosted by Bill Flynn, our President and Chief Executive Officer. Joining Bill is Spencer Schwartz, our SVP and CFO.

As a reminder, today's call is complimented by a slide presentation that accompanies our remarks. If you have not already download and printed a copy of our press release and slides, you may do so from atlasair.com. You may find the slides by clicking on the link to presentations in the information section of the web site.

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 2012 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 slides. You can also find these on our web site at atlasair.com.

During our discussion and answer period, we would like to ask participants to limit themselves to one principle question and one follow-up questionso that we may accommodate as many participants as possible. After we have gone through the queue, we'll be happy to answer additional questions as time permits.

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

Thank you, Ed. Good morning, everyone. Thank you for joining us today. I would like to begin with a few key takeaways on slide 3.

The second quarter was in line with our expectations and the guidance we presented at our analyst day on May 30th. Similar to the first quarter, our results reflected the strength of our ACMI business and enhanced business mix, productivity gains, and continuous improvement initiatives. We're reaffirming our full year outlook of $4.80 per share on an adjusted basis.

This outlook, assumes a strong peak season and reflects indications from manufactures about anticipated product launches, especially in the gaming sector, input from our customers about expected flight schedules, and demand for our services in the second half of the year, and other market intelligence. We continue to drive additional stockholder value through our share repurchases and effective tax planning.

We're ready to take full advantage of the operating leverage inherent in our business as the global economy improves. Turning to slide four, we're executing a strategic plan that leverages our core competency and solid balance sheet. Earnings in 2013 are being driven primarily by the strength of our ACMI operations including our new, 747-8 freighters.

In addition to our modern fleet, we're also benefiting from enhanced organizational capabilities and the evolution of our business such as our expanding 767 service, growing CMI operations and efficiencies we have realized through our continuous improvement initiatives. We've begun V.I.P. passenger 767 flying for a new CMI customer, MLW air. Serving professional sports team, the entertainment industry and others. We're capitalizing on opportunities to expand our Titan dry leasing platform.

In July, we acquired our second and third 777 freighters for our dry leasing business and we have added both air logic and emirates as long-term, dry leasing customers for those aircraft. Consistent with our disciplined investment strategy, each of the 777 aircraft we acquired has a long-term customer lease attached and is operated by a leading carrier in the air freight industry.

These investments enhance our position in an attractive aircraft type and they generate predictable, long-term revenue and earnings stream. Slide five briefly highlights our second quarter results. Our adjusted net income totaled $20.4 million or $0.79 per diluted share. On a reported basis, net income totaled $20.1 million or $0.78 per share.

Both our adjusted and reported earnings for the second quarter of 2013 included an effective income tax rate of just over 32% which reflects the on-going beneficial impact of lower taxes for certain form subsidiaries in our dry leasing business. Included in our reported earnings is a small gain on disposal of aircraft offset by a modest loss on the distinguished of debt related to the financing of our 747-8.

Reflecting the increase in the number of our dash 8s, ACMI volumes rates and revenues all grew in the second quarter and ACMI direct contribution rose 35% to $55 million. We're also seeing continued cash flow strength with free cash flow of $65 million in the second quarter and $107 million in the first half of the year.

In addition, we have acquired over 615,000 shares of our common stock through our share repurchase program , or about 2.3% of our outstanding shares since our first quarter earnings call.

We're committed to our share repurchase program and will evaluate appropriate opportunities to capitalize on our strengths and resiliency to return additional capital to our stockholders. Turning to slide six, we expect significant earnings and cash flow in 2013 led by our ACMI business and our continuous improvement initiatives.

We continue to anticipate a sequential increase in our quarterly earnings throughout the year with just under 80% of our adjusted earnings per share of $4.80 occurring in the second half.

As I noted, we're looking for an active peak season driven by a demand for new consumer electronics. And our EPS guidance includes actual and expected repurchases of our outstanding stock during the year.

Adjusted full year earnings in 2013 will reflect strong contributions by our dash 8s given by an increase in the number of the dash 8s in service compared with 2012. Block hour volumes are expected to total approximately 170,000 hours.

ACMI segment flying should account for about 74% of our expected block hours with about 15% in commercial charter and 11% in AMC. At AMC, we now anticipate that passenger flying should account for more than 11,000 block hours with cargo contributing more than 7,000 hours.

With the revision in block hour guidance, we now anticipate that maintenance expense will total approximately $162 million, about 63% of which was incurred in the first half of the year. This is a good point to ask Spencer to provide with you some additional perspective on our second quarter results and our outlook.

Following Spencer, I'll provide some additional thoughts and will be happy to take your questions.

Spencer?

Thank you, Bill. Hello, everyone. Looking at slide seven, operating revenues in the second quarter of 2013 benefited from our diversified business mix and increases in block hour volumes in our ACMI business and our commercial charter operations.

These enabled us to perform well in a quarter that was challenged by lower AMC charter demand and softer AMC and commercial charter rates. Focusing on the pie charts at the bottom of half the slide, you see that revenues in our core ACMI business grew to 45% of total revenue in the second quarter from 38% in the second quarter of 2012.

Revenues in ACMI were driven by our new 747-8s 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 continued ramp up of 767 flying for DHL and the continuing increase in 747 CMI service for Boeing.

ACMI rates during the second quarter primarily reflected the impact of higher rates for our dash 8s offset by growth in our CMI business. We operated an average of 8.2-8 freighters and 11.4 747 400 cargoaircraft in ACMI during the quarter.

Our CMI operations contributed an average of 9.6 aircraft to the segment. 1.6 Dream lifter large cargo freighters, seven 767 freighters and one 747-400 passenger aircraft. In AMC, revenues during the quarter declined 32% primarily reflecting a reduction in cargo and passenger flying as well as lower revenue per block hour.

In anticipation of the long-expected contraction in military demand following the withdraw from Iraq and preparations to withdraw from Afghanistan, we have actively diversified our business mix and developed new sources of revenue and earnings initiating an asset-like CMI offering, expanding our Titan dry leasing platform, and developing a passenger component to our business.

In commercial charter, revenues in the second quarter declined 3%, reflecting a 10% increase in block hour volumes that was offset by a 12% reduction in average block hour rates. Higher volumes in commercial charter were partially due to the deployment of 747-400 aircraft and a 747-8 during ACMI marketing periods.

Moving to slide 8, segment contribution totaled $68 million in the second quarter of 2013 compared with $82 million in the second quarter of last year. With the pie charts at the bottom of the slide, illustrating the increasing proportion of contribution from our core ACMI segment which contributed 81% of our total segment profitability.

Direct contribution in the second quarter reflected the enhanced profitability of our dash 8s and ACMI and increased ACMI for DHL and Boeing. Decreased AMC cargo and passenger demand as well as fewer one-way AMC cargo missions and an increase in heavy maintenance on the 767 passenger aircraft and volume growth in commercial charter offset by lower yields and a reduction in return legs due to fewer one-way military cargo missions.

Results in commercial charter were affected by ownership costs, related to our 747-400 aircraft deployed in the segment and by volume-driven operating expenses associated with flying to more expensive locations. We expect our commercial charter business segment to be profitable for the full year.

Slide nine summarizes the updated quarterly detail about our 2013 maintenance expense outlook which Bill mentioned earlier. As we've noted in the past, the timing of maintenance events is subject to change as these events are conditions-based.

In addition, our revised outlook for full year maintenance expense reflects continuous improvement actions that generate both earnings benefits as well as positive, economic returns. Turning to slide ten, in our balance sheet, we ended the first half of 2013 with cash, cash equivalents, and short-term investments, totaling more than $367 million, compared with over $419 million at year-end, 2012.

The change was driven by net cash of $128 million provided by operating activities and by net cash of $164 million provided by financing activities. That was offset by net cash of $346 million used for investing activities.

Net cash used for investing activities in the first half primarily related to the purchase of two new 747-8 freighters and our first 777 freighter for our dry leasing business. Net cash provided by financing activities during the first half primarily reflected proceeds from the issuance of debt in connection with the acquisitions of these aircraft.

These proceeds were partially offset by payments on debt obligations and net payments under accelerated share repurchase programs that we entered into for the purchase of our shares. We have no unsecured debt. All of our outstanding debt is tied to specific aircraft in our fleet.

Excluding the acquisition of aircraft engines and related capitalized interests, our core capital expenditures noted approximately $19 million in the first half and we expect our core capital expenditures for the rest of the year to be about $34 million. As expected, our net leverage ratio which includes capitalized rents was five times trailing 12-month EBITDAR at the end of the second quarter.

Including the benefit of our investments in our outstanding enhanced equipment trust certificates or EETCs. The increase in our net leverage ratio compare with year-end 2012 was primarily due to financings for the dash 8 and 777 freighters we acquired during the first half.

We expect our earnings in cash balance to grow in the second half and lower our net leverage ratio, including EETC investment benefits to under five times a year in 2013. Slide eleven provides an update about our ability to generate free cash flow and grow our cash balance.

The left side of the slide illustrates that the operating cash flows from our dash 8s, the favorable bonus tax depreciation benefits they generate, and the positive cash back that we have received and will receive in connection with their financings, should enable us to grow our cash balance. Reflecting the benefits of bonus tax depreciation, we don't anticipate paying US federal income tax until 2017 or later.

On the right side of the slide, you see our outlook for free cash flow per share in 2013 in comparison with 2012 .A 40% increase.

All of the business efforts that we've been talking about are generating significant pre cash flow per share. Moving to slide 12, our capital allocation strategy demonstrates our commitment to creating, enhancing and returning value to our stockholders. Both through business growth and returns of capital.

Reflecting our strong balance sheet and cash flow, we command the significance share repurchase effort during the first quarter and continue during the second quarter as Bill noted. In mid May, we entered into our second accelerated share repurchase program agreement for the repurchase of our common stock for an aggregate purchase price of a minimum of $35 million up to a maximum of $44 million.

As of June 30th, we had received delivery of an initial 615,791 shares pursuant to the program which is expected to conclude no later than the middle of October. Thus far, we have repurchased over 1.5 million shares of our common stock or 5.7% of our shares outstanding since mid February.

Maintaining a strong balance sheet is essential for continued long-term growth and capital returns. Going forward, our focus will continue to be on the appropriate balance between maintaining a strong balance sheet and net leverage ratio, investing in attractive assets and repurchasing our stock.

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

Thank you, Spencer.

As we reflected on slide 13, we have transformed our business and we will continue to drive ahead in a gradually improving but still challenging environment. We have a modern, efficient fleet, diversified business mix and a solid balance sheet. These provide a competitive advantage that's unmatched in our business.

And they drive our ability to generate strong earnings in cash flow. Our dash 8s are performing well and they provide a solid foundation for the future. We now have nine dash 8s in our fleet and we will benefit from a full years contribution by all nine in 2014.

Our CMI business is growing. Our flying for Boeing is ramping up as production of the 787 Dream liner increases and building on the operation we established this spring, we will have a full year of 767 service for DHL in Asia in 2014.

In addition, our dry leasing business is expanding and is adding predictable revenues and earnings. We now have three 777 freighters and multiple opportunities to invest in additional attractive aircraft with lease commitments attached to them.

We're well positioned to serve our customers in the air freight market. We are innovative and adaptive, responding to external forces outside of our control by developing new customers such as Chap and Freeborn in ACMI. MLW air in CMI and Arrow logic and Emirates in dry leasing. By focusing on costs and driving continuous improvement. And by pursuing initiatives to improve our profitability and enhance our strategic options.

As a result, we're ready to take advantage of improvements in the [inaudible] environment, returning capital to our stockholders even in challenging times, and well positioned to grow our business for the long-term.

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

(Operator Instructions). Your first question comes from the line of Kevin Sterling, of BB&T Capital Markets. Your line is open.

Thank you, good morning, gentlemen.

Hi, Kevin.

Hey, Bill, the comments about your expectations for peak season. Sounds like you're expecting a strong peak season. Compare that for me to last year, do you think it is similar to last year? It sounds like maybe better. How should we kind of frame that related to the last year?

Thank you, Kevin. Well, I think we are expecting an improved peak season over prior year. I think there are several ingredients. Last year, when we were looking at peak season at about the same time, there were a number of new consumer products that were announced in the marketplace and they drove expectations about demand overall. And to one extent or another, the enthusiasm for those products failed to materialize.

And not to go manufacture by manufacturer but there just wasn't the uptake on those products from the consumer as was expected. We think that's very different this year. As I referred in my own remarks, opening the call, what we've been able to read and gather in terms of market intelligence. Several major products, particularly the Xbox one and Play Station four, in our view should drive fairly significant demand for schedule capacity as well as into the charter market. The manufacturers themselves are talking about pre orders being far in excess of what the orders were for the prior introduction of the Xbox 360 and even the prior iteration of Play Station four.

The major retailers have announced they're basically sold out of their preorder capacity and not taking new orders at this time. And even the manufacturer at least in case of Microsoft have talked about the strength of these pre orders. That's encouraging. These game stations create quite a bit of volume when you think just about the size of the unit and the packagingthat they have. And just the amount of volume they'll need to show. That's just kind of one very important data point on market expectations going forward.

There is another item I would like to comment on as well. We talked about this prior calls and I think in the investor day as well. With the decline in military cargo demand, we're also seeing a very dramatic decline in one way requests from the military. So if we think back to a couple of years ago, of one way capacity coming into the Hong Kong market in particular, any given week, there were 20 to 25 747 freighters in the market as a result of the one-way demand that the military had, essentially a subsidized placement of the aircraft into that market.

Today, with the dramatic decline in military cargo demand, coupled with an even greater decline in the percentage of that demand that are one-way flights, we're looking at six, maybe seven aircraft currently in the market and that's not expected to increase. So that's a fairly substantial reduction in capacity.

I think, Kevin, we can see that even in the current spot rates for freight in the market, in Hong Kong as well as in Shanghai and in Korea. This is the low time of year, July is typically a very soft season. In prior years, we've seen rates this time of year at $2.50 out of Hong Kong to west coast. $2.70 out of Hong Kong to east coast, Midwest. Those rates today are more typically $3.10, Hong Kong to west coast. $3.30 to $3.50,Hong Kong to east coast. Slightly higher out of Shanghai.

I think the absence of the one-way freighters is being seen, I think, very clearly in those kinds of rates, given the seasonally soft shipping period we normally experience in July. And then the correlation of that is fairly good discipline in the market from several of the large scheduled operators with their capacity. Doesn't mean that it wouldn't bring capacity back in the face of demand. They would. But I think they're also light to passenger carrier industry, doing a good or better job in terms of balancing capacity. So, we've talked about the peak being important to our guidance but it's informed by several important data points such as we've just talked about.

Bill, thank you. That was very informative. If I could just frame it, it sounds like the fact that the capacity cuts, some market intelligence but also, remind me, did you mention in your prepared remarks that some of your customer conversations, are they talking to you about potential flight schedules or capacity commitments? Did I hear that right, as well? Does that help give you confidence?

Yes, you did hear that, Kevin. I was referring to both our ACMI customers and the schedules they're providing us and what they're looking forward to flying as well as the inquiries and discussions with major freight [inaudible] and charter brokers about the need for capacity and programmatic charters coming into this peak period.

Thank you. My last question and it is probably more for Spencer. As we think about the back half of the year, assume your guidance is more heavily weighted in Q4 versus Q3. Spencer, could you help break down a rough percentage of how we should think about Q3 and Q4 for modeling purposes?

If you think about Q3 versus Q4, it is probably 1/3, 2/3, if you think of it that way which is fairly typical but that's the way it should break down.

That's very helpful. Thank you. That's all for me. Thanks so much for your time this morning. I really appreciate the color.

Thank you.

Your next question comes from the line of Helane Becker, of Cowen Securities LLC.

Hi, guys. Thanks for the time. Just a couple of questions here. Did you say, or could you say what your minimum over block hours were in the second quarter and what you're thinking about for the rest of the year?

Sure, Helane. It's Spencer. For the second quarter, our customers, on average, flew about 3.5% above their minimum block hours. For the full year, we expect that our customers will fly somewhere between 3% and 5% above for the full year. Remember, in the first quarter, they typically fly below and this year they flew about 1.9% below for the first quarter. So for the full year, averaging that altogether with strong flying that we expect in the third and fourth quarters, we think they'll be somewhere between 3% and 5% for the full year.

Okay, great. And then just my follow-up question is just with respect to your comments, Bill, on the one ways and what you're seeing and so on and so forth, I also guess you're being helped by the fact that FedEx and U.P.S. have pulled freight capacity down and I think Singapore Air just announced they're pulling a fourth 747 out of the market. So is that why you're seeing these other guys coming out of the market so there's more room now? Is that how we should think about that?

Well, I think there's a couple of things there, Helane. Certainly, we've seen what FedEx and U.P.S. have said about their operations. Singapore has talked about taking an aircraft out but two other very large players, Cafe and Korean have moderated their capacity. I'm not suggesting they permanently park the aircraft in the desert but they are flying their existing capacity at lower levels of operation. And when you couple that with the absence of the one ways, I think the first evidence that hypothesis holds together is the yields we're seeing right now as I mentioned before at kind of a very, very slow period in the market which July and early August typically are.

So that creates, I think, certainly the absence of one way creates benefit for all operators, it creates benefits for our ACMI customers in terms of yield and hours they may fly. It will benefit the market generally because it will be less subsidized capacity in the market. And as we expect, the peak season to have a greater amplitude this year versus last. That, for Atlas, will drive both demand and yield.

Great. Okay. Thanks very much. I really appreciate the color and the help.

Thank you, Helane.

Your next question comes from the line of Jack Atkins, from Stephens. Your line is open.

Good morning, guys. Thanks for taking my questions. I guess to start off here, could you all maybe comment about the current ACMI leasing market for both dash 8s and dash 400s? When do you guys expect to have the last dash 8s under lease and any insight about the dash 400s out for marketing today that you may expect to have in your guidance for the back half of the year?

Thank you, Jack. So we expect we'll place the ninth dash 8 into ACMI. However, in the interim, we're running or operating that in revenue service and it is generating similar level of return or consistent level of return that we would expect on the dash 8 placed into ACMI. We're able to benefit by the fuel burn improvements that they offer. Just as our ACMI customers do and benefit from the load capability that the aircraft has. In terms of the 400s, we're actively marketing our 400s and Jack, I've consistently said 20 plus in ACMI and that's where we expect to be and that's what's incorporated in the guidance whether we have affirmation of the guidance we provided today.

Okay. That's helpful, Bill, thank you. Spencer, just a couple of housekeeping items on the guidance. Does the guidance still assume $50 million in share repurchases for the full year? And then also, what's the correct tax rate to use going forward, is the lower tax rate now more appropriate than the 38 level from prior quarters?

Both very good questions, Jack. It is Spencer. I'll recap the accelerated share repurchase program just quickly. But as you know, we acquired $36.5 million of our stock with a program that started during the first quarter and completed before our last earnings call. We're currently in a program that is a variable notion program which means we'll purchase between $35 and $44 million of our stock. That's what our guidance assumes that we will purchase somewhere in that range. In addition to the $36.5 million. So that is certainly above the $50 million that we talked about before. Where in that range exactly it will end, we don't know. It depends on our stock price. But you can do some modeling based on that.

Okay, not to interrupt you, but just to be clear, so the additional program that you entered into is beyond the $50 million that you've already exercised, is that correct?

We exercised $36.5 million for the first program. And the second program will be between $35 and $44 million.

Oh, okay.

At the low end, that's about $71 million.

Okay. That's helpful. Then on the tax rate?

Yes, the tax rate, good question. We're starting to now see benefits of the tax planning we've done for our dry leasing business outside of the United States. So we're starting to see the benefit of that and you saw that in the effective rate this quarter. For the second half of this year, for modeling purposes, I think it's appropriate to use a 36% rate for the full year, next year and sort of going forward on a run rate basis, I think we're look at something like 35%. So we're really going to start seeing the benefits of the tax planning that we've put in place for many, many years that we've been working on.

And the maturing of Titan as we've acquired the three 777 assets into Titan, Spencer.

Absolutely right.

Okay. Thanks so much for the color, guys.

Thank you.

Next question comes from the line of David Campbell of Thompson Davis. Your line is open.

Hi, Bill. Thanks for taking the question. It's hard to find a forwarder that is expecting any increase in airfreight in the last six months of 2013. And they're pretty close to the market. Your comments seem to be implying growth in the last six months, especially in the peak season. How do you understand this situation?

Thank you, David. Well, a couple of comments. I've read several of the releases from a couple of major forwarders and I think there is a spectrum of view. I think [Kunin Nogel] in particular was fairly bullish about the results to date and the growth that they expect to see in the market in the second half of the year. I think they, to some extent, talked specifically about the Trans Pacific market as well as the introduction of consumer electronics.

That's one data point that we have. We do have a number of the major freight forwarders who are our customers for our charter business. One who is an ACMI customer and based on what we're hearing from them and the kind of discussions we're having about programs, charter programs for them, and then on top of that, what several of the manufacturers are saying about their products and the early uptake in pre orders, and the point that I was making with Kevin earlier, the absence of one way capacity into the market, I think that strengthens our outlook for the peak in 2013, David.

Right. So is it is a combination of lower capacity in the industry and the peak that gives you some relative optimism.

I think we should not underestimate the absence of the one-way charters. Several years ago, there were four or five 747s a day. That essentially had free positioning into Hong Kong as a result of one ways. Then in the market, that's a fair amount of capacity which can obviously have an impact on yields. That capacity isn't there today. I think we're seeing that spot rates today. Combined with some of the capacity decisions that several of the large scheduled freighter operator or scheduled operators have made.

I think that will play through into the fourth quarter because military cargo demand is not increasing. One ways are not going to increasegoing forward. And I think there will be a limited amount of one-way capacity coming into the market and with fuel at $3 a gallon, it is very hard to subsidize in an empty positioning flight at low yields. There's just not enough money there to do it.

My follow-up would be what about the belly capacity of the passenger planes. Obviously that is going up. Nothing to do with cargo. To do with the growth in passengers.

Sure. There is an increase in belly capacity. We talked about this, I think, at the investor day that we haven't seen that dramatic an increase in belly capacity. I think the impact on belly is more pronounced in Trans-Atlantic than it is on Trans Pacific or Asia Europe. And again, if the manufacturers' expectations around their shipping volumes for this year are accurate, they are going to need a significant amount of capacity to move the kind of volumes they indicate they want to move, you know, in a 10-week to 12-week period of time.

Okay. Thank you.

Thank you, David.

Your next question comes from the line of John Godin, of Morgan Stanley.

Hey, everybody. Thanks for taking my question. There have been a few questions on this fourth quarter peak concept but I wanted to maybe ask it a little differently. When we think about the peak that you're forecasting, are we thinking a first quarter 2012 iPad-like situation or is there a reason to believe that this peak would roll into 2014 and should actually fundamentally improve our outlook for 2014. How do we think about the durability of your commentary?

That's a good question, John. In the near term, we have these consumer products, these game stations, particularly, that want to get to market for the product launch for holiday. With good consumer acceptance, that certainly could continue and should continue past the holiday season. But the two major communications companies, Samsung and Apple, are all talking about product refresh overall. The full suite of the Apple products, the next Galaxy products from Samsung and others, and those should be of more continuing duration and could certainly lead into a nice way that continues well into the first quarter. That remains to be seen, John, and I think fourth quarter will be very telling in terms of the durability going into Q1.

Okay, outside of product cycles which certainly are positive and impactful , but outside of product cycles, if they were to think of base load demand trends, is there any reason to believe that is also sequentially improving above seasonality or anything of that nature?

So it's probably a little early to call an inflection point. I think most folks on the call have the opportunity to look at the most IATA report. We saw some growth in June. I think it was 1.2%, better than May. Does that constitute inflection? Not sure. But we are seeing growth across the several trade lanes that are important. Not just the intercontinental Asia Europe transpac but where Atlas flies which includes South America, Middle East Africa, good growth there. Big part of the Atlas story is the Atlas customers and how are they doing with their businesses. It's a little early to call an inflection but if, indeed, we have bottom, that will be positive for Atlas' customers.

Thanks. Just one more as a general question just to hear your thoughts but is there any update or framework you can offer us just thinking about your defense exposure broadly within the context of sequestration? We've seen some comments out of other companies that certainly sequestration is not hitting as bad. I know you guys don't have necessarily the same direct exposure there but the idea of defense cuts certainly affects you. If you could just give us an update on your bigger picture thoughts there, assessing these risks, if you're seeing any change in tone on the margin with any discussions that you're having at AMC, just an update would be helpful. Thank you.

Sure, John. Our defense department exposure is indeed AMC. We have been discussing this now for several years, at least, about our expectation that AMC demand is going to come down. That's no unique insight as we withdraw from Iraq and as we complete the exit from Afghanistan. And we've been obviously not just anticipating that but building our business model out as a result. And so we've developed the CMI services that we have. We added passenger because we anticipate 140,000 troops deployed post-Afghanistan overseas. And, we're growing our Titan business and we're benefiting from the dash 8.

So in terms of the impact to Atlas, we're looking at 11,000 hours of passengers this year, which is down from last year, and 7,000 plus cargo hours. It is uncertain at this point what fourth quarter is going to look like beyond the numbers we've given. We haven't seen any shift from the administration yet about some form of an accelerated withdrawal beyond where we are now. I think 2014 is the year where the numbers come down to what the base business is going to be in terms of AMC demand. Sequestration creates that cloud of uncertainty. The department of defense is in the process of its quadrennial defense from views, their QDR, which translates into plans which then translates into estimated demand for us. But I think it is all consistent with what they've been seeing for some time now. DOD is going to come down.

It will be an important part of our business going forward but a much smaller part of our business going forward. Cargo comes down at a greater rate than passenger with, however, 140,000 troops deployed, mostly in the Pacific. There is a demand that we expect for our passenger services to AMC and some on-going cargo. In terms of updating where we stand, it is going to be if not November, it would be the full year call in February where we have a better perspective on what we really depend on at this point, John, is guidance from the military in terms of their expected demand.

That's very helpful. Thanks.

Your next question comes from the line of Scott Group, of Wolfe Research. Your line is open.

Thanks. Morning, guys.

Good morning, Scott.

I want to understand the placement issue with the final dash 8. Maybe, Bill, you can give us some color perspective. Is there a specific customer in mind but there's a specific delay that's happening or are you still just trying to find a customer to place that plane? Some color there would be helpful. And as we think about our models for third and fourth quarter, how many planes do you think we should have in ACMI in third and fourth quarter relative to 20 in the second quarter?

I don't believe it is a placement issue. I think it's consistent with what we talked about even as we were placing the 400 at the Chap and Freeborn. Customers are looking at the market in the context of the placement with Chap and we said that we had anticipated that placement. Customer had delays getting some sense of the market themselves. I believe we'll place the ninth and final dash 8 into ACMI service and as I pointed out in the interim, we're generating the anticipated 3.94 cents a share on that aircraft.

Where we have it deployed in revenue service today. An earlier question, we said 20 plus on the ACMI overall. That's that combination of 8s and 400s and as we place our next aircraft, we'll certainly communicate that to our investors so 20 plus is 8 plus 12 plus. Between now and the end of the year.

Okay. That's helpful. And just in terms of the maintenance, relative to the beginning of the year, expected maintenance costs are down about $30 million. Spencer, how much of this is maintenance that either through some Cap Ex or process, you think is permanently goes away and how much of this is maintenance that has gotten pushed out to future years? Is there a way to put that into those two buckets?

We had talked during our last call and during our investor day about a $19 million reduction primarily as a result of engine purchases we were able to make at favorable rates. The difference now, we lowered our guidance again about $10 million. It is really one primary reason which is that we lowered our block hours. As a result of lowering the block hours, we were able to remove a couple of over hauls and the line maintenance, which is just a factor of how many block hours we're flying. The line maintenance also reduces.

That's why maintenance went down now. There's really not much of a different story from what we talked about during the last call and during our investor day. Overall, we are very focused on continuous improvement. We're look all across our organization at controlling all that we can so we're looking at making ourselves more and more efficient. Lowering our costs where we can. Maintenance is one of those areas and on a go-forward basis, I think we talked in the past like about $25 million of continuous improvement that will go into the future. In addition to what we've already reduced in the past.

Directionally, can you give any kind of color or guidance on maintenance in 2014?

It is just too early to do that right now, Scott. We'll be able to do that during our first quarter call.

Okay. All right, guys, thank you.

Thank you, Scott.

Your next question comes from the line of Jason Ursaner of CJS securities. Your line is open.

Good morning. Just wondering in terms of profitability in the ACMI segment, if you can talk about the incremental direct contribution margin, you typically generate above minimum block hour flying and how important is the 3% to 5% above minimum flying for the full year is in terms of hitting the guidance numbers at this point?

So, Jason, as you know, most of the costs are covered at that point. And so the last amount of flying is typically the most profitable amount of flying. So that is extremely important. And as Bill said before, we have obviously great relationships with our customers. We're out there talking to them about their plans and their schedules and so, the answer to the question that I gave before to Helane, I believe, is based on our discussions with our customers. So we expect them to be flying well above their minimums of the third quarter as well as the fourth quarter.

Okay. And you had a question before on marketability of the remaining dash 8 and 400 aircraft. When I look at the overall rate market as a whole, tonnage levels are quite high. It has been the growth rate that's been disappointing and with the excess capacity, you have the load factors being down. What gives confidence now that operators would be any more willing to make commitments to dedicated capacity in the second half given that dynamic?

It simply depends on the operator, Jason. It depends on their business, the markets they serve, the trade routes or bilateral traffic rights that they have and our ability to place. So our ability to place is clearly one for one correlated with the specific customer and their market and their performance. We've seen that. [inaudible] said that about themselves. Largest growth is with DHL over the past several years and where their growth has been. Chap and Freeborn, a new customer, the trade lanes that they're serving between Europe, Middle East, Africa and the near Middle East. So where we place aircraft is going to reflect where the high rate of growth is. At a macro level, it is a high level of volume. I think the [inaudible] report said the highest since 2011. But a very slow rate of growth. Our placements are always customer-specific. And it's about their business as well.

Okay. Just last question, similarly, as you look at your existing ACMI customers, at a high level, you think about the average number of renewals you stagger every year, the tonnage is there from a demand perspective to power your business model. From your customer's perspective, is the excess supply issue compressing their profitability at all in terms of renewals, is that a concern for how existing customers evaluate their fixed commitments to capacity?

Well, the logic of renewal is the same as the logic of placement. That individual customer again has to assess their business, their business plan, their market and their ability to earn money with the aircraft to do the renewal. So it is the same logic. Renewal is after placement, I think customers are gaining greater confidence in their ability to use that aircraft.

As I think we've talked about and I know I've talked about with others on the call, we're not a dry leasing company in ACMI where we simply lease out the aircraft and hope the customer does well with it. We, through the life of the contract, we're spending time with our customers, our commercial organization is spending time with our customers. They are to drive maximum profitability they can enjoy from that aircraft. On the commercial side, we regularly introduce new freight flows to our ACMI customers for them to grow their profitability and grow their business. For one example.

And on the other side, fuel isn't our risk in an ACMI operation but I can assure you our operating organization is working daily with our ACMI customers to minimize their fuel burn to use all of the techniques that an airline would want to use and some they may not have thought of to minimize the fuel burn as the single largest operating expense. I think that's why we have a strong track record of renewals and long-standing customer relationships.

Okay, great. Appreciate it. Thanks.

Thank you.

Your next question comes from the line of Stephen O'Hara from Sidoti & Co.

Hi, good morning.

Hi, Steve.

I'm sorry if you covered this, I apologize. Did you say whether the final dash 8 was assumed to be an ACMI in your guidance?

No, we didn't say that. We said 20 plus, Stephen, in that you know, our guidance contains our assumptions on where aircraft are placed and how they're utilized.

The dash 8 is flying today in our commercial charter business and it is earning something similar to what it would earn if it was flying in ACMI.

Okay. Does the direct contribution suffer because of the cost of the dash 8 for the commercial charter business?

No. The dash 8 is very profitable.

Okay. And then finally, as you look to the second half of the year, the marked improvement or peak season, that would be most seen in the direct contribution mark and for commercial charter, is that correct? Or am I thinking about that the wrong way?

That's right. That's absolutely right, Steve. You would see it in commercial charter as well as ACMI customers flying above their minimums. It would show up in both of those places.

Okay. Thank you very much.

Thank you.

Your next question comes from the line of Jack Atkins, of Stephens. Your line is open.

Thanks, guys, my follow-up question was already answered.

Thanks, Jack.

Your next question comes from the line of Scott Group, of Wolfe Research. Your line is open.

Hey, thanks. For the quick follow-up. Just looking at the fleet statistics you gave and so you had a dash 8 that you used a little bit in charter in the second quarter. Was that the ninth dash 8 or one of the existing eight that you used a little bit in charters? We hadn't seen that before and just wanted to understand what's going on there.

Thanks, Scott. It is primarily the dash 8 that is deployed in commercial charter that's operating profitably in South America. That's generally what it is.

It's that final that ninth that came in toward the end of the quarter I'm guessing.

Yes. Although it is a little more complex than that because it is the ninth aircraft is actually the aircraft that was painted and is actually operating and it is actually the eighth delivery operating in commercial charter. So sorry to make that minor correction. But it is the aircraft that is not yet placed in ACMI.

Perfect. Okay, thanks, guys.

Your next question comes from the line of Michael Fountain, of RBC Capital Markets. Your line is open.

Can you talk about how maintenance costs might have impacted the individual segment results during the quarter?Was there any change on a year-over-year basis that might have hit the commercial charter segment specifically?

No. I don't think there's anything dramatic that you should think about there. We did have some maintenance on some 767s which impacted our CMI business. But no. To answer your question, no. There's nothing dramatic that impacted commercial charter.

The maintenance expense in the commercial charter segment was proportional to the number of units that are deployed there. We don't assess it proportionally but it is based on the actual costs incurred.

Okay. And then did I hear you correctly when you said that a third of second half earnings would be in third quarter andthen the remaining 2/3 in the fourth quarter?

Approximately, yes.

Okay and then where does the share count end? Where do you guys stand right now?

Where is it at the end of the second quarter?

Sure.

Shares outstanding at the end of the quarter, 25.2, correct.

Those were my questions. Thanks so much.

Thank you.

Next question comes from the line of Bob McAdoo, of Imperial Capital. Your line is open.

Just a couple of quick ones. The aircraft shown out of service, can you educate me about that? Is that a 400 that was bumped out when you had the dash 8 that's not placed or what is that aircraft and what's the prognosis for it and what's the on-going carrying cost of that? Is it totally off into the desert somewhere or what's the status of a plane like that. How should we think about that?

Bob be, that's a 747 400BCF. We talked about that a couple of calls ago. That BCF is parked. Temporarily. Can be called back into service and that's a fully unencumbered asset that we own so the carrying costs are minimum.

Okay. All right. Then when you talk about the Xbox and Play Station business, some kind of a bump in that business, is that business that's going to flow through the commercial line or to the ACMI customers, do you think?

It will flow through both because the volumes that both manufacturers are talking about are significant. Those launches will be worldwide. You think about where our ACMI customers are flying and then our charter capacity, that kind of bump or peak, whether it is those products and or others will be seen in both but given where we are in the trends we have in commercial charter, you'll see it in commercial charter.

Thanks. Appreciate it.

Thanks, Bob.

There are no further questions. I turn the call back over to the presenters.

Well, thank you, operator. Spencer and I would like to thank all of for participating today and for the discussion we've had. We thank you for your interest in Atlas Air.