Atlas Air Worldwide Holdings Inc (AAWW) 2013 Q3 法說會逐字稿

Good morning. My name is [Sinedra] and I'll be your conference operator today. At this time, I would like to welcome everyone to the third quarter earnings call for Atlas Air Worldwide. (Operator Instructions). Thank you. You may begin your conference.

Thank you, Sinedra, and good morning, everyone. I'm Ed McGarvey, Vice President and Treasurer for Atlas Air Worldwide. Welcome to our third 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 Senior Vice President and Chief Financial Officer.

As a reminder, today's call is complimented 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 atlasair.com. You may find the slides by clicking on the link of presentations in the Investors Information section of the website.

As indicated on slide two, we would like to remind you that our discussion of the Company's performance today includes forward-looking statements within the means of the Private Securities Litigation Reform Act of 1995. These statements relate to future events and expectations and may 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 attached to today's slides. You can also find these in our website at atlasair.com.

During our question-and-answer period today, we would like to ask participants to limit themselves to one principle 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 be happy to answer any additional questions that you may have as time permits. At this point, I would like to turn the call over to Bill Flynn.

Thank you, Ed, and good morning, everyone. Thank you for joining us today.

Beginning with slide three, our third quarter results and our full-year earnings outlook reflect a weaker peak season than previously anticipated. Commercial air freight volumes and yields are strengthening as we head from October into November and the remainder of the peak season, but they are not picking up to a level that would compensate for the slow pace of September and early October.

In addition, military cargo volumes have declined at a more rapid rate than we or the military planners we work with anticipated. We have also seen a reduction in the number of one-way AMC mission, as well as a shift in mix from outbound US to less favorable inbound US.

Reflecting these market factors, we reported adjusted earnings per share of $1.13 for the third quarter, and expect to report adjusted EPS of $3.40 to $3.80 for the full-year. Both our results for the quarter and our anticipated earnings for the year are supported by initiatives we have undertaken to strength our core ACMI operations, including CMI, grow our Dry Leasing segment and diversify our business mix and enhance our operating efficiency.

These actions have enabled to us to continue to generate meaningful profitability and free cash flow despite the soft commercial market and the material reduction in military cargo demand we have anticipated and experienced over the past three years. In addition, we have enhanced stockholder value through our share repurchases and effective tax planning and we are ready to take full advantage of the strong operating leverage inherent in our business as the global economy improves.

Turn to slide four. We are focused on executing a strategic plan that leverages our core competencies and solid balance sheet. Led by the strength of our new 747-8 freighters in ACMI, we're seeing increasing contributions from investments to diversify our business mix. These include the addition of 777 freighters with predictable long-term revenue streams in Dry Leasing, growing CMI operations, our expanding 767 service and our entry into military and commercial charter passenger operations.

In ACMI, we also recently began flying a 747-400 freighter for our new customer, Astral Aviation Ltd. In addition, we are benefiting from cost reductions as well as productivity and efficiency gains through our ongoing continuous improvement initiatives, and we have returned significant capital to investors.

Slide five briefly highlights our third quarter results. Our adjusted net income totaled $28.6 million or $1.13 per diluted share. On a reported basis, net income total $23.7 million or $0.94 per share. Our reported earnings for the third quarter of 2013 included an effective income tax rate near 31%, which reflects the ongoing beneficial impact of lower taxes for certain foreign subsidiaries in our Dry Leasing business.

Including our reported earnings is the loss on the early extinguishment of debt related to the refinancing of a 777 aircraft at a lower rate as well as a loss on the disposal of the remaining engines associated with our former 747-200 fleet. Revenues, rates and volumes in our core ACMI business all grew in the third quarter due to an increase in the number of our 747-8s and a ramp up in our CMI service, and direct contribution in ACMI rose 21% to $63 million. We're also seeing continued cash flow strength with free cash flow of $74 million in the third quarter and $181 million for the first nine months of the year.

In addition, we acquired over 820,000 shares of our common stock through our second accelerated share repurchase program this year, or about 3.1% of our outstanding shares. That brings our total investment in our shares in 2013 to $72 million, or approximately 6.5% of our outstanding common stock. We are committed to our share repurchase program and we'll evaluate appropriate opportunities to return additional capital to our stockholders. To that end, our Board has increased our existing repurchase authorization from $9 million to $60 million.

Let's turn to slide six. We expect meaningful earnings in cash flow in 2013 despite challenging market factors. We now anticipate that our full-year adjusted earnings will total between $3.40 and $3.80 per share. While strengthening, peek season volumes have been slower to ramp up than anticipated and commercial air freight yields have been volatile.

Compared with our previous guidance, we now expect the system wide shortfall in our peak season Commercial Charter yield of approximately $0.25 per kilo. This falls directly to our bottom line as the cost of flying have all ready been incurred. Together, the difference in our commercial yields and volumes equates to almost $1.00 per share in earnings during the peak season.

In addition, we have experienced a rapid decline in military cargo volumes, as well as a reduction in the number of one-way mission and the change in direction of one-ways. On a combined basis, these factors account for the majority of the change in our EPS outlook for 2013. While headwinds from a lower than expected commercial air freight market and lesser expected military cargo demand have reduced anticipated profitability for the year, tailwinds from the investments we've made to strengthen and diversify our business, as well as our continuous improvement initiative, continue to provide support for our results. Adjusted full-year earnings in 2013 will reflect strong contributions by our 747-8s, driven by an increase of the number of 747-8s in service compared with 2012.

Block-hour volumes this year are expected to total approximately 159,000 hours. ACMI segment flying should account for about 73% of our expected block-hours with about 16% in Commercial Charter and 11% in AMC. In AMC, we now anticipate that passenger flying should account for more than 11,000 block-hours with cargo contributing more than 6,000 hours. We also anticipate that maintenance expense will total approximately $161 million with about $27 million of that in the fourth quarter.

At this point, I'll ask Spencer to provide you with some additional perspective on our third quarter results and our outlook. After that, I'll provide some additional thoughts and then we'll be happy to take your questions. Spencer?

Thank you, Bill, and hello, everyone. Looking at slide seven, operating revenues in the third quarter of 2013 benefited from our diversified business mix, including increased block-hour rates in our ACMI business, and the continued ramp up and expansion of our CMI service within ACMI. They also benefited from growth in our Dry Leasing business. These drove our results in the quarter that was challenged by lower AMC Charter demand and softer Commercial Charter rates.

Focusing on the pie charts at the bottom half of the slide, you see that revenues in our core ACMI business including CMI, grew to 47% of total revenue in the third quarter from 43% in the third quarter of 2012. Revenues in ACMI increased 7%, driven by our new 747-8s and increased CMI flying, partially offset by the redeployment of 747-400 aircraft to other segments.

ACMI rates during the second quarter primarily reflected the impact of higher rates for our 747-8s, offset by growth in our CMI business. Higher volumes in ACMI were primarily due to the continued ramp up of 767 CMI flying for DHL and the continuing increase in 747 CMI service for Boeing.

We operated an average of eight 747-8 freighters and 12 747-400 cargo aircraft in ACMI during the quarter. And as Bill noted, we began flying our 13th 747-400 in ACMI for Astral Aviation at the end of the quarter. In addition, our CMI operations contributed an average of 10.6 aircraft to the segment.

In AMC, revenues during the quarter declined 18%, reflecting a reduction in cargo and passenger flying, as well as a change in the number and direction of one-way missions. In anticipation of the long expected contraction in military demand following the withdrawal from Iraq and preparations to withdraw from Afghanistan, we have actively diversified our business mix and developed new sources of revenues and earnings. As Bill noted, these included initiating asset light CMI services in our ACMI segment, expanding our Titan Dry Leasing platform and developing a passenger component to our business.

In Commercial Charter, revenues in the third quarter declined 3% primarily reflecting a reduction in the average block-hour rates. In Dry Leasing, revenues grew following the acquisition of one 777 aircraft in March and two in July. Each of the aircraft was acquired with a long-term customer lease already in effect.

Moving to slide eight. Segment contribution totaled $78 million in the third quarter of 2013, compared with $82 million in the third quarter of last year. The pie charts at the bottom of the slide illustrate the increasing proportion of contribution from our core ACMI segment which contributed 80% of our total segment profitability.

Direct contribution in the third quarter reflected the enhanced profitability of our 747-8's in ACMI and increased CMI flying for DHL and Boeing, growth in our Dry Leasing segment, decreased AMC cargo and passenger demand as well as a change in the number and direction of one-way AMC cargo missions, and lower yields in Commercial Charter as well as a reduction in return legs due to the change in number and direction of one-way military cargo missions. Results in Commercial Charter were also affected by ownership costs related to 747-400 aircraft deployed in the segment and by volume driven operating expenses associated with flying to more expensive locations.

Partially offsetting these items was a decrease in heavy maintenance on 747-400 aircraft. We expect our Commercial Charter business segment to be profitable in the fourth quarter, but show a loss for the full-year.

In Dry Leasing, direct contribution grew following the addition of the 777 aircraft we acquired in March and July.

Slide nine, summarizes the updated quarterly detail about our 2013 maintenance expense outlook, which Bill mentioned earlier. As a reminder, the timing of maintenance event is subject to change as these events are conditions based. In addition, our outlook for the full-year maintenances expense reflects continuous improvement actions that generate both earnings benefits as well as positive economic returns.

Turning to slide ten and our balance sheet. We ended the first three quarters of 2013 with cash which includes short-term investments and restricted cash totaling more than $298 million compared with over $419 million at year-end 2012. The change in our cash position was driven by net cash of $208 million provided by operating activities and by net cash of $238 million provided by financing activities. That was offset by net cash of $575 million used for investing activities.

Net cash use for investing activities in the nine months through September 30, primarily related to the purchase of two new 747-8 freighters and three 777 freighters for our Dry Leasing business. Net cash provided by financing activities primarily reflected proceeds from the issuance of debt in connection with the acquisitions of these aircraft. These proceeds were partially offset by payments for our share repurchases, payments on debt obligations and debt issuance costs.

Excluding the acquisition of aircraft, engines and related capitalized interest, our core capital expenditures in the first nine months of 2013 totaled approximately $25 million and we expect our core capital expenditures for the fourth quarter to be about $18 million.

Our net leverage ratio which includes capitalized rents was 5.5 times trailing 12-month EBITDAR at the end of the third quarter, including the benefit of our investments in our outstanding enhanced equipment trust certificates or EETCs. The increase to our net leverage ratio compared with year-end 2012 was primarily due to the immediate impact of the financings for the 747-8s and 777 freighters we've acquired this year, as well as a lag in earnings generated by these investments.

Slide 11 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 747-8s, the favorable bonus tax depreciation benefits that they generate and the positive cash back we have received and expect to receive in connection with their financings should enable us to maintain and improve our cash balance. Reflecting the benefits of bonus tax depreciation, we continue to anticipate that we will not pay any significant US federal income 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 meaningful increase. All the business efforts that we've been talking about are driving that increase.

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 the strong growth of our balance sheet and cash flow, we commenced a significant share repurchase effort during the first quarter and continued during the second and third quarters, as Bill noted.

In mid May, we entered into our second accelerated share repurchase program agreement this year. The program settled in August and we acquired an additional 820,276 shares for $35.6 million.

In total, we have invested $72.1 million this year to repurchase over 1.7 million shares of our common stock. That equates to 6.5% of our shares outstanding, which is a substantial amount for any company to buy back in one year.

We continue to discuss our capital allocation strategy with our Board which has increased our repurchase authority to $60 million, as Bill pointed out a few minutes ago. 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, investing in attractive assets and repurchasing our stock. With that, I would like to turn it back to Bill.

Thank you, Spencer. As reflected on slide 13, we remain focused on the long-term growth of our business. We reshaped and transformed our business in advance of an anticipated decline in military cargo demand, and we continue to drive ahead in a still challenging commercial air freight environment. We have a modern efficient fleet, diversified business mix, and a sound balance sheet.

These provide a competitive advantage that's unmatched in the outsourced aviation sector. They position us well to capitalize on market improvements, and the strong operating leverage in our model and to return capital to our investors.

Our 747-8Fs are performing well and they provide a solid foundation for the future. We now have nine 747-8s in our fleet and we will benefit from a full year's contribution by all nine in 2014.

In ACMI, we have added Astral Aviation in Africa as a new customer. Our CMI business is growing.

Our flying for Boeing is ramping up as production of the 787 Dreamliner 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 we'll explore opportunities to invest in additional attractive aircraft with lease commitments attached to them.

Air freight remains a long-term growth industry. Our business model is solid. We have strong customer relationships and a superior fleet, and we continue to strengthen our competitive position and generate substantial free cash flow which will enhance stockholder value. With that, operator, may we have the first questions, please?

(Operator Instructions). Your first question comes from Jack Atkins.

Thanks for the time. So I guess to start off and, Bill, I don't mean to ask too pointed of a question, but I think something that is on the top of everyone's mind here is; I think we're all trying to understand why, just given the volatility out there in the marketplace around charter rates, why you guys took such an aggressive approach to earnings guidance around peak season, really for the past three years? I understand that you guys want to give the market your best assessment on how you thinks things will shape up, but given the fact that peak season has been such a disappointment really since 2011, why not be more conservative with your outlook around peak season?

Yes. Thank you, Jack.

As we entered 2013, we had the sense that we would experience moderate growth, but growth nonetheless in the air freight market somewhat second half weighted. And as we move through the year -- we along with many other industry players -- we're encouraged by the announcement of new product introduction as well as new product refresh from major manufacturers -- manufacturing in Asia -- focused on distributing into the major consumption markets in the US and in Europe and now the increasing growing consumption markets in Africa, South America and elsewhere.

Our sense was that given, particularly with product refresh and with what manufacturers were talking about in terms of units sold -- and even more recently in the midsummer as we looked at what the major retailers and distribution channels were saying about these products; Amazon, GameStop, Best Buy and others -- while also taking a look at capacity, we have a sense that the market would be strong. I think it's strong relatively -- not as strong as we clearly anticipated -- but the balance of capacity that was available and likely coming to the market. Our sense was that with the puts and takes, we thought that was indeed a realistic outlook at the time.

Okay, thank you for that color. Then for my follow-up question on the revised guidance for the rest of this year. On the block-hour guidance for the ACMI segment, it looks like -- if my math is correct -- about a 10,000 block-hour reduction in the ACMI segment. Could you talk about what's driving that lower level of block-hours in ACMI -- and do you expect -- or I guess how far above the minimums do you expect your customers to fly in the fourth quarter?

Jack, it's Spencer. You're right, and your math is correct. The reduction in ACMI flying is primarily due to lower third quarter and fourth quarter 747-400 ACMI utilization. So that is customers continuing to fly above their minimums, but not fly as high above their minimums as we previously expected. So that's what is primarily driving that.

We expect that our customers will fly around 3% to 4% above their minimums in the fourth quarter. You also saw a decline -- you didn't ask about it -- but there's also a small decline in military volumes as well.

Sure.

That's obviously driven by military demand.

Okay, great. Thank you, again, for the time.

Thank you, Jack.

Your next question comes from Helane Becker.

Thanks very much, operator. Hi, guys. I just have a couple of questions. One is, as you buyback more and more of your stock, does it make sense to remain a public company?

Well, Helane, that's a good question. I'm not sure it's the right question for today, but I'll give you a couple of thoughts.

When we out to seek [x] in financing for our 747-8s, being a public company I think was very helpful for us. We are compliant with all of the public company requirements, we're compliant with Sarbanes Oxely, we have very transparent reporting.

We have regular quarterly filings with a tremendous level of detail. I think all of those things really helped us firm up the financing for all of our 747-8s.

And I think that's right, Spencer, not only the more recent x in financing, but when we did go to the capital markets and raised new equity several years ago. That was in advance of the delivery of 747-8s, and I think we netted something around $110 million, maybe a little more or a little less. And that at that time provided us the additional equity, the capital that allowed us to negotiate -- in our minds -- very favorable terms on the first three 747-8s that we took delivery of because it was clear to our lenders on the first three the resources that we had.

I think also being a public company is a benefit to several of our customers. When a customer engages with us to ACMI, they are indeed outsourcing not only a part of their fleet, but they're outsourcing their product. They're outsourcing a part of their overall cargo operation.

So being able to sit down with the CEOs, chief operating officers, CFOs of our customer organization takes them through who we are as a company, and they have transparency and visibility. That's a key consideration for them because they want to over the long-term have the assurance and have some visibility that they are in fact outsourcing a key part of their business to a solid operator.

Okay. That's awesome. Then my other question is with respect to your pilot contract. How many years does that still have to go, or when do you have to open negotiations for that?

The initial term of that contract was five years, and so we're talking into 2016. Then as you know, contracts don't expire they become amendable, and so there's a period of time at which there's a back and forth of negotiations and discussions. And so I think there will be some time beyond 2016 before we would have a contract negotiated, in place and ratified by the members of the union.

Great. Then FAR 117 does not apply to you, is that correct?

Flight duty rules, specifically?

Yes.

Well, yes it does. The FAR 117 will apply for our passenger operations.

Okay.

We continue to operate under 121 for our cargo, sowe have a split operation. We've modeled that. We've modeled the new rules that will come into effect on January 4 of 2014.

We're prepared for those new rules up and down the organization. And given the nature of the flying that we've been doing, the stage length that the flights have and the restrictions that 117 brings versus 121, we don't expect a material impact the underlying cost of us to provide passenger operations.

Will you have to hire additional pilots?

We don't believe we have to hire additional pilots to provide passenger operations under 117.

Perfect. Thanks for your help. I appreciate it.

Thank you.

Your next question comes from John Barnes.

Two things. Number one, in looking going into next year -- not looking for the specific maintenances number -- but should we make an assumption in our model that maintenance costs are going to at least flow through the year similar to what they did in 2013?

It's a little early to talk about 2014 for us right now. We provide, as you know, really goody detail. We have for a little while now on our maintenances expense, but we do that in the year. During our call in February, we'll provide detail for maintenance expense for the full year of 2014.

Fine. Secondly, can you talk a little bit about what the run rate is? I think at one time you had originally said the 747-8s would be $0.04 per month per aircraft. Can you talk about where that run rate is today in terms of contributions from those aircraft?

Sure, John. We updated that to say that it's $0.04 per plane per month for the first year, then years two through four, it's about $0.035 to $0.038, so still seeing really strong profitably from those aircraft. They've been delivering in those ranges, so it's been a great investment for us.

So we can model that correctly, can you just remind us -- and I can go back and look at the numbers -- but where is the 747-8 fleet fall out in terms of those years now? You have got how many that are still in year one?

We took delivery of two this year, four last year and three at the end of 2011.

Okay. So the two this year should still be in that $0.48 per year range, the rest should be in that $0.035 to $0.038 per month range.

That's generally accurate, yes.

Very good. Thanks for your time.

Thank you, John.

Your next question comes from Scott Group.

Thanks, morning, guys.

Thanks, Scott.

I just want to understand the guidance a little bit more because to one of the earlier questions. The big change in block-hours is on ACMI, but it sounds like the big reduction in earnings you're saying is charter and military.

So what's offsetting the lower block-hours in ACMI where that's not the earnings issue? I guess I'm struggling to understand the difference between the block-hour change and the earnings change.

If you think about the Commercial Charter segment, Bill talked about $0.25 change in yields verses what our prior guidance had. That had a very large impact on our expectations for the year, so that lowered profitability pretty significantly.

Then with regard to ACMI that had a smaller impact. But as we talked about before, block-hours are lower than we previously anticipated they would be in the ACMI segment. Customers continue to fly above, but just not as high above as we previously thought.

It wasn't just a yield story in Commercial Charter we had volume as well. The ramp up into peak which we now see in terms of volumes, we had anticipated earlier in September to begin with the announced products that we all saw, and that really didn't happen until late October. So there's a volume impact in Commercial Charter in September and better part of October, Scott.

Okay. Spencer, want to get your thoughts on the balance sheet and the ability to buyback stock and continue to add 777s or other Dry Leasing planes. Just think about this year, year-to-date debt's up $300 million or so, cash on the balance sheet is down $130 million or so.

When you think about going forward, would you use cash flow to buy more planes in leasing, or would you feel comfortable financing more planes with additional debt? I'm just trying to think if there's room in the model for both new planes and buybacks. Just curious on your thoughts there.

Sure. Thanks, Scott.

I think we look at each situation based on its own facts and circumstances and its own merits. For each additional aircraft that we look at -- or you mentioned our share repurchases -- for each situation we try to take a look at the overall IRR, what rates are we going to earn on the investment and we try to take a look at best way to finance those. So is that with debt, is that with existing cash and what is the right proportion of both, and so forth.

We spend a lot of time. I think we've done incredibly well in that area. I think we have been getting it right.

But we spend a lot of time focusing on that, Scott, and thus far -- we're trying to, as we've said before -- we're trying to ensure that we have a strong balance sheet, we're trying to ensure that we continue to have assets that customers want and we're also trying to ensure that we return capital to our shareholders. We're trying to get that balance correct.

That's helpful. I don't know that I asked it so well. I guess would you feel comfortable taking on additional debt in order to acquire new aircraft and at the same time, buyback stock?

If the aircraft that are being acquired have a strong rate of return, if the returns on the aircraft are above our threshold and something that we are willing to acquire, yes, absolutely. How we would finance that depends on that particular circumstance.

I did mention before, Scott. But in the prior question, obviously just a reminder that our Board increased our share repurchase authority, and so we have $60 million. We previously had $9 million. The Board increased that now, and so we have $60 million remaining.

So we'll manage those share repurchases along with additional aircraft purchases, in trying to ensure that we maintain a really strong balance sheet. That continues to be our focus.

Okay, that's great. Last thing if I can. Can you guys just give an update on the 9th 747-8 and timing around placement for that?

We are continuing to work with customers to place the 9th 747-8 which we expect to do. In the interim, we're operating that in our South America operation. And without giving too much competitive information, we're enjoying very good returns on that aircraft. We're also benefiting from the fact of the pay load capacity that the 747-8 offers, as well as the better fuel burn.

All right, thanks a lot, guys. Appreciate it.

Thank you.

Thank you.

And your next question comes from David Campbell.

Yes, good morning. I was curious, Bill, given the disappointing block-hours in Commercial Charter and unpredictability of it, why not just transfer or try to put all of our 747s into ACMI work and forget this unpredictable Commercial Charter business, which has caused a lot of problems?

Thank you, David. So our core business is indeed ACMI, and I think as we talked about, 73% of our block-hours this year will be in ACMI. The other discussion we've had all year is how many units do we expect to have in ACMI, and we've said 20-plus, and we're at 20-plus now. Ideally, that is our core business.

We use the Commercial Charter market to fundamentally drive and increase utilization of the assets and take advantage of the opportunities that are there, as opposed to say we want to allocate X and Y. We'll always have a preference for ACMI, and then drive utilization of existing assets in Commercial Charter. One of the things we will consider and talk about as we come into next year is the fleet that we have overall, and make some decisions, perhaps, about our fleet going into 2014.

Okay. And the second question is do you think the growth in your block-hours in late October and November -- especially in the Asia Pacific region -- do you think that growth percentage wise at least will continue in the first quarter of 2014, or is this just some temporary spurt based on new products?

I don't think it's a temporary spurt per se, David. The fourth quarter is typically the highest demand and shipping quarter and it has been for quite sometime, and we talk about it as a peak. The art and the science is what's the amplitude of that peak and what's the capacity that's deployed into the market.

As I answered -- it might have been Jack's question earlier -- we and others anticipated a stronger start to the peak. A peak that would start in September and continue to drive very strong volumes through to just before Christmas. That didn't happen.

Some of the products were delayed in terms of when they were released. Some manufacturers, I'm told, apparently some production issues and are late to market with their product. Some have commented that they didn't launch in certain markets this quarter because they're reserving that product production for higher, larger markets like the US and Europe.

And so it could be -- and I'm not saying this is a forecast-- but it could be that there might be a good tailwind into first quarter on some of these product releases because of production problems, and in fact, because of good consumer acceptance in a carry-on market. Pattern-wise, I think first quarter being the softest demand quarter -- the post holiday season, plus the holidays that occur in Asia and elsewhere in that first quarter, running through to the strong or more peaked demand in the fourth quarter -- I don't think that pattern is changing.

Thanks. Appreciate your comments.

Thank you, David.

Our next question comes from [Chris Patterson].

Good morning. I wanted to see a couple of points to tick off. Could you give the block-hour above minimums for the third quarter? I know you said 103% to 104% for fourth quarter.

Chris, our customers flew on average 3.4% above their minimums in the third quarter.

Thank you. Next is on the count of aircraft. We had, if you back out the CMI planes in the 747 range, you had around ten flying in the third quarter, down from around 11, 11.5 in the second quarter. You had the 747-8s flying in the fourth quarter, roughly the same number in the second quarter.

So if you take on the Astral Aviation, that takes you to approximately 11 in the fourth quarter to go along with the eight which gets you to 19. I believe in your previous guidance had been you expected to have been a minimum of 20, and I just wanted to make sure I wasn't missing an aircraft there.

Chris, currently we have eight 747-8s placed in ACMI. One of the 747-8 flying in Commercial Charters, as Bill noted.

So we have eight 747-8s flying in ACMI. We have now 13 747-400s flying in ACMI, so that is 21 of our aircraft flying in ACMI.

It could be, Chris, that the count isn't' for equivalent units of LCF. I think it's about 1.6 LCF, so that might be creating some confusion.

No, I was actually backing those out because those are in CMI. You had talked about 20 before, and I was not under the impression that included the flying for the LCF.

It does not.

Right, so that would give you 11 this quarter -- sorry, 10 this quarter and 11 with the Astral Aviation. Correct? Just flying in ACMI, not CMI?

Sorry, I'll say it again. We have eight 747-8s flying in ACMI, and 13 747-400s flying in ACMI.

Fine. I'll circle back with you later on that one. On the ACMI side of the house, you started the year with 175,000 block-hour expectations overall, and that came down to 159,000.

I know part of that came out of around 1,000 or so less on the military side, but the rest of that came out of ACMI. I wanted to see if that is a function of being much lower on the percent above minimums, or fewer jets flying within the category?

Chris, it's a little of both. Some of it is due to customers not flying as high above their minimums as we previously thought, so that's a portion of it. Some of it is timing of placements.

For example, Astral Aviation started flying with us at the end of September, whereas previously we may have thought that was going happen slightly earlier. It's a little of both. It's timing of placements and it's utilization of the aircraft.

The last one I had is just on understanding the difference between the utilization and the block-hours and how you do the math there. Because clearly, you're under utilizing the aircraft in Commercial Charter and possibly military. Your ACMI is only a couple percentage points below what you talked about being above minimums.

How do you come up with the block-hour number relative to the utilization? Is there a large degree of deadhead, so to speak, numbers that are built into block-hours?

Chris, the block-hours themselves are very easy to calculate. Those are actually the block-hours that operate in each of our segments. But I think what you're talking about is utilization per aircraft. Aircraft are allocated.

When you're looking at utilization per aircraft, if we have aircraft that are allocated to a particular segment and they're not fully utilized, then you'll see that block-hour per aircraft utilization percentage decline. So that's what we saw, which was primarily driven by the softer Commercial Charter market as well as the decline in demand with the military.

So we were not able to absorb 100% of our available capacity. I think that's what you're seeing.

okay. I would just encourage you when you're setting the guidance for 2014 to use some level of a range with the bottom end of it being a similar peak season that we've had for the last couple of years here just so that we don't get into trouble based on how things play out there. Thanks, guys.

Thank you, Chris. We certainly understand.

And your next question comes from Jason Ursaner.

Good morning. Thanks for taking my questions. Just want to make sure I understand all of the commentary on the guidance reduction, concentrated in charter. The $0.25 [kilo] shortfall, that's blended over the course of the whole peak season?

It is, Jason, from September to December, yes.

What's that change relative to in terms of the base rate that had been embedded in overall guidance and where are rates currently? I guess is that shortfall more a factor of a lower magnitude, or is it the shorter duration, just given that it's still pretty early in the holiday season?

We talked about the order of magnitude and something $0.25 a kilo. $0.25 a kilo bases our expectations. On a flight, then that roughly equates to $25,000 a flight, as 100 tons a flight is a good estimate to use over the flights that we had in the quarter.

So where's the market today is probably a place to start. Korea, we think about LG and Samsung and the Korean products that come to market is probably in the 310, 320 ton range right now which is low for this period of time. Hong Kong is 410 to 425 ton, so 435 to 450 is not an unreasonable number for Hong Kong during a more typical or frothy peak season.

There's a lot of volatility in Shanghai simply based on the capacity that is coming in. Shanghai is somewhere around 435, 450 ton right now.

We shared that prospective to give some insight to the range that we were first considering for peak volume in terms of a rate. I think let's put the pressure on yield, Jason, are two things there.

There was both volume and yield pressure in September and October because there was a lot of capacity in the market anticipating product launches and a more frothy demand than occurred, so there was both volume and yield there. There's still a fair amount of capacity in the market even with the peak finally materializing and occurring. Those are really the two factors that have driven the largest part of the reduced guidance that we're providing today.

Okay. And how fast can charter rates change? As you look at the peak season, do people contract out in terms of days, weeks, months? How fast could it change potentially?

So we look to do I think -- and other operators look do the same thing -- we have longstanding customers that are year-round shippers with us and we commit some of our capacity with them earlier, or in anticipation of the peak season and we agree on an anticipated rate there. On the balance though, we look to commit closer to the season. And then finally, keep some disposable capacity at the end, so we can take advantage of where the market may go.

This is an anecdote and I don't think you should model this, necessarily. Yesterday in the Shanghai market, an operator announced four or five new charters to happen over the next several days, and the rates dropped fairly considerably. Twelve hours later, that operator canceled those flights and the rates sprang right back in a 12-hour period.

I'm not saying the whole market is like that everyday, it's not. But rates are moderating up and down within a $0.25 to $0.50, $0.60 range. When you multiply that over 100 tons, those are big dollars per flight, if that's helpful.

No, that is helpful. I guess a last question. At a very high level, how do you think investors should be looking at the identity of the Company?

I know in the past you've express some frustration that people overlook the strategic nature of ACMI and become overly focused on the charter rates out of Asia and the contribution from military. Given that it is clear that these two elements do matter to your flex capacity and variable profitability, how should people balance that with considering Atlas as a real strategic outsource provider?

Well, I believe indeed we are a strategic outsource provider, and I believe also, that the air freight industry is a growth industry. Maybe just a little bit long winded here, but I was just looking back the other day at the last 15 years or so of the air freight market, and we had a lot of volatility in that market.

If you go back all the way to 1998 and 1999, we had the Asia economic crisis. It started with speculators moving against the BOT in Thailand, and then it rolled all the way through Asia and it created some turmoil and it affected demand for quite a period of time.

Seemingly after recovery, we have the .com meltdown in 2000 into 2001, then 9/11. We had fairly good years between then until about 2007, and then we were in crisis from Bear Stearns all the way through to the air freight meltdown in 2008-2009. 2010 was a good growth year and then we've had this economic delays. So generally, 2011 through 2013 with no real growth.

Yet through all that noise, the air freight market has grown. It's had more peaks and valleys I think than any of us like and that is what we have managed through.

So what is the Atlas plan? So our bet so far is, first of all, the best technology wins, and we've made the investment that we made in the 747-8 fleet. You can see the returns that we are generating in ACMI and in our CMI business and the growth that we've had there.

We knew that was critical to execute because all of us expected that military would decline and indeed it has. We knew we would withdraw from Afghanistan and Iraq. I think we were somewhat surprised based on what close working relationship we have with military planners to see that the drawdown in this fourth quarter in terms of buying commercial cargo aircraft capacity and using more of there own assets.

And so, I think to Chris' question earlier, we are about 3,000 hours off on military this year from where we started. Not 1,000. We are about 3,000 hours off there.

And so, we are working with the military planners and we will see where they go, what the pace of the withdrawal from Afghanistan is going to be, how much of their own capacity are they going to use for cargo. But I think it was a good move for us to have moved into passenger because the relative drawdown cargo versus pax and the need for ongoing pax services with a 150,000 or 160,000 troupes deployed overseas is going to continue.

We have made, I think, very good investments in Titan with the acquisition of the 777s and we have the opportunity to continue to invest in Titan. But there we are looking for stability and annuity type income streams, good aircraft, good credit, long-term leases at great returns.

And through that though, we have also been able to return capital to the shareholders with our $72 million of repurchases this year. Our Board has authorized another $60 million.

So to some extent, what we see going forward, Jason, I would say is the post AMC Atlas. The Company's [At] will generate it's earnings and it's growth in it's core commercial segments, ACMI and CMI, our Dry Leasing business in Titan. And then having an appropriate sized fleet that we would operate either in Commercial Charter or provide flex capacity upside should there be expansion or more expansion in the ACMI market.

So that is how we are thinking about the Company and how I believe we've transformed it. And then finally, all the while being laser-like focused on costs and productivity and efficiency, so that we deliver a great service to our customers, but we do it so we create margin and keep some of the [vie] that we create for our selves and our shareholders. Long answer, but that is how we think about it.

No, I appreciate that level of detail. In terms of the appropriate sized fleet as you come out of the peak season in charter given the utilization rates are already pretty low, and you talked about the continued moderation in military. Would expect to need to park any additional planes in the first half of 2014?

So we are in the process of finalizing the 2014 plan, and part of that will be resources and in aircraft our resource component. So that is something we will be in a better position to talk about in February when we report on full year and then provide our Investor's Review on 2014.

Okay. I appreciate that, Bill. Best of luck finishing out the year.

Thanks, Jason.

Thanks, Jason.

There are no further questions in queue at this time.

Okay. Thank you, operator. Spencer and I and everyone here at Atlas Air would like to thank you for your interest in our Company. Thank you for taking the time today. We appreciate your questions and we look forward to speaking with you soon. Thank you, everyone.

This concludes today's conference call. You may now disconnect.