Atlas Air Worldwide Holdings Inc (AAWW) 2013 Q4 法說會逐字稿

Good morning. My name is Deidra and I will be your conference operator today. At this time I would like to welcome everyone to the fourth quarter earnings call for Atlas Air Worldwide conference call.

(Operator Instructions)

Thank you. I would now turn the call over to Atlas Air. You may begin your conference.

Thank you, Diedra. Good morning, everyone. I'm Ed McGarvey, Vice President and Treasurer for Atlas Air Worldwide. Welcome to our fourth 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 Executive Vice President and Chief Financial Officer.

As a reminder today's call is complemented by a slide presentation that accompanies our remarks. If you have not already downloaded and printed a copy of our press release and slides you may do so from our website at Atlasair.com. You may find the slides by clicking on the link to presentations in the investor information section of the website.

As indicated on slide 2 we'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 question-and-answer period today we'd like to ask participants to limit themselves to one principal question and one follow-up question so that we may accommodate as many participants as possible. After you 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 3, earnings in the fourth quarter were led by our ACMI operations, a strong contribution by our commercial charter segment which also reported a profit for the full year and continued growth in our Dry Leasing business. They were also affected by a substantial reduction in AMC volumes and contribution during the period reflecting demand levels that were below the military's previous forecast.

Our adjusted results were supported by the investments we've made to strengthen and diversify our business mix. These include our 747-8 freighters in ACMI and the addition of 777 freighters in our Dry Leasing business.

They also include our expanding 767 service, our growing CMI operations within ACMI, VIP and other passenger charters, and our ongoing continuous improvement initiatives. These results reflect several new customer relationships that we developed in 2013.

Astral Aviation in Africa, Chapman Freeborn in the UK, and Etihad in the Middle East are new or expanded customers in ACMI. In CMI, we're providing high-end 767 passenger service for Dallas-based MLW Air. And Aerologic in Europe and Emirates in the Middle East are now 777 Dry Leasing customers.

Last month we added TNT Express in Europe as another 777 Dry Leasing customer. This month we began 747-8 ACMI service for our new customer, BST Logistics, a Hong Kong-based affiliate of Navatrans International Freight Forwarding. Spencer will have more about the fourth quarter for you in a few minutes.

My remarks this morning will focus on our business and our outlook for 2014. We enter 2014 confident about the resilience of our business model and our ability to leverage the scale and efficiencies in our operations.

Clearly there are challenges presented by the market. One is the uncertain air freight environment. Another is the outlook for military charter demand.

We are well positioned to navigate through these challenges with a modern efficient fleet, innovative customer solutions, a diversified business mix, and a solid financial structure. We are also well positioned to capitalize on market improvements and to continue to focus on the long-term growth of our business.

Slide 4 illustrates how the business investments we have made in the face of an uncertain air freight market and in anticipation of a decline in military cargo have diversified our business mix and are driving business resilience. These investments are generating strong contributions, and they have offset a decline of approximately $110 million in our AMC and cargo charter operations between 2011 and 2013.

Beginning with the strength of our new 747-8 freighters, we are also benefiting from the addition of 777 freighters with predictable long-term revenue and earning streams in Dry Leasing, our growing CMI operations, expanding 767 service, and our entry into military and commercial charter passenger operations. Along with our ongoing continuous improvement initiatives, our actions have enabled us to continue to generate meaningful profitability and free cash flow despite the soft commercial market and the material reduction in military cargo demand that we have experienced over the past three years. They are also a foundation for our business expectations this year.

Slide 5 focuses on our outlook for 2014. Given the business initiatives we've undertaken and the investments we have made, we have transformed the company to deliver meaningful earnings in any environment.

Our current outlook reflects two primary considerations. First, as military activities overseas are scaled down the demand for cargo airlift also declines. Our most recent indication is that this decline will also be steeper and faster than previously forecast by the military.

For 2014, we estimate that this decline will reduce earnings by approximately $0.70 per share from 2013 levels. Second, global air freight volumes have been essentially flat for the last three years. Atlas has remained healthy and profitable throughout this period by capitalizing on strategic initiatives to strengthen and diversify our business mix, expand our customer base, generate operating efficiencies and continuous improvement savings, and enhance our portfolio of assets and services.

Should 2014 be the inflection point when growth returns to commercial air freight, our business initiatives and the investments that we have made have positioned Atlas to be one of the prime beneficiaries. If 2014 remains flat, we expect results to approximate 2013, excluding the $0.70 per share decline in AMC.

At this point of the year, there's limited visibility into second-half demand. We expect to be profitable in the first quarter, which is usually the lowest volume generating and highest maintenance expense quarter of the year. Typically the majority of our earnings are generated in the second half and we will update our expectations as the year progresses.

We expect total block hours in 2014 to be several percentage points lower than 2013 block hours. More than 70% of our block hours this year should be in ACMI with less than 10% in AMC, and the balance in commercial charter.

Our outlook for ACMI reflects the start of our 747-8 service for BST Logistics in February. It also reflects British Airways' planned returned of three -8s to us by the end of April, as well as one 747-400 returned to us by Qantas in January at the end of its full lease term.

Dry Leasing's dramatic growth includes three additional 777 freighters that we acquired in early January bringing our 777 fleet in dry leasing to six aircraft. Depreciation and heavy maintenance should each increase by about $10 million compared with 2013. As always, line maintenance will depend on block hours operated.

Continuous improvement initiatives will also provide support for our results in 2014. In addition, we expect to have an effective book income tax rate of approximately 30%. Finally, we expect core capital expenditures this year to total approximately $50 million, mainly for routable parts programs for our expanded fleet.

This is a good time to ask Spencer to provide you with some additional perspective on our fourth quarter and full-year results. Following Spencer, I'll provide some additional thoughts and then we'll be happy to take your questions. Spencer.

Thank you, Bill, and hello everyone. Slide 6 highlights our fourth quarter results. Our adjusted net income totaled $41.8 million, or $1.66 per diluted share. On a reported basis net income totaled $30 million or $1.19 per share.

As Bill noted, results from the fourth quarter benefited from the strength and scale of our ACMI business, a strong seasonal recovery in performance by our commercial charter business, and continued growth in our Dry Leasing segment. Our reported earnings for the quarter included an effective income tax rate of approximately 31%, which reflects the ongoing beneficial impact of lower taxes for certain foreign subsidiaries in our Dry Leasing business. Included in reported earnings for the fourth quarter is a special charge of $18.6 million.

The vast majority of that is a lease termination charge related to two 747-400 BCFs that we permanently parked in December. We leased these aircraft into our fleet following delays in delivery of our 747-8 freighters.

We also saw continued cash flow strength during the quarter with free cash flow of $92 million for the period compared with $53 million in the fourth quarter of 2012. Free cash flow for the full year grew to $273 million from $208 million in 2012.

Looking at slide 7, operating revenues in the fourth quarter of 2013 benefited from our diversified business mix including increased block hour rates in our ACMI business and a continued ramp-up and expansion of our CMI service within ACMI. They also benefited from strong volumes in commercial charter and from the growth in our Dry Leasing business as we previously noted. These drove our results in the quarter that was challenged by significantly lower AMC Charter demand.

Focusing on the pie charts in the bottom half of the slide you see that revenues in our ACMI business including CMI accounted for 43% of total revenue in the fourth quarter compared with 42% in the fourth quarter of 2012. Revenues in ACMI increased 7%, driven by our new -8s and increased CMI flying partially offset by the redeployment of 747-400 aircraft to other segments. ACMI rates during the fourth quarter primarily reflected the impact of higher rates for our -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. They also reflected the start of 747-400 ACMI operations for Astral Aviation and Chapman Freeborn during 2013, as well as the initiation of 747-8 service for Etihad. In AMC, revenues during the quarter declined 38% reflecting reduction in cargo and passenger flying as well as a change in the number and direction of one-way missions.

As Bill noted, we have actively diversified our business mix and developed new sources of revenue and earnings in anticipation of the long expected contraction in military demand following the withdrawal from Iraq and preparations to withdraw from Afghanistan. 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 fourth quarter increased 26% driven by a strong rise in block hours operated by our aircraft as global market peak season cargo demand picked up in late October through December. We also saw strong demand for passenger charters for sporting events, concert tours, VIP, and other private charters.

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 long-term customer lease already in place.

Moving to slide 8, segment contribution totaled $103 million in the fourth quarter of 2013 compared with $116 million in the fourth quarter of last year. The pie charts at the bottom of the slide illustrate the increasing proportion of contribution from our ACMI segment which contributed 68% of our total segment profitability as well as the increase in contributions from dry leasing.

Direct contribution in the fourth quarter reflected the enhanced profitability of our 747-8s in ACMI and increased CMI flying for DHL and Boeing. These were offset by lower average aircraft utilization during the period and an increase in maintenance expense due to the timing of required initial air frame checks in our first three -8s.

Direct contribution during the period also reflected the strong performance in commercial charter that I noted, which made up for softness in that segment through the first three quarters of the year, the impact of additional profitable aircraft in Dry Leasing, and substantially lower AMC cargo and passenger demand.

Turning to slide 9, and our balance sheet, we ended 2013 with cash, including short-term investments and restricted cash totaling more than $339 million compared with over $419 million a year in 2012. The change in our cash position was driven by net cash of $305 million provided by operating activities and by net cash of $197 million provided by financing activities. That was offset by net cash of $590 million used for investing activities.

Net cash used for investing activities in 2013 primarily related to the purchase of two new -8s 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 share repurchases, payments on debt obligations, and debt issuance costs.

Excluding the acquisition of aircraft, engines, and related capitalized interests, our core capital expenditures in 2013 were approximately $30 million. Our net leverage ratio, which includes capitalized rents, was 5.3 times trailing 12-month EBITDAR at the end of the fourth quarter including the benefit of our investments and our outstanding enhanced equipment trust certificates or EETCs.

In January 2014 we purchased three 777 freighters that are leased to TNT on a long-term basis. As a result of the transaction, we entered into term loans in the aggregate amount of $432 million secured by each of the aircraft. The loans have a blended average interest rate of approximately 5%.

Also in January, we refinanced the $105 million loan for one of our -8s with an Ex-Im bank guaranteed note. The $141 million note which is secured by the aircraft has an 11-year term at a fixed rate of 2.67%. All of the financings for our nine -8s are now in place. In the aggregate, they've generated well over $200 million in cash for the company, with blended average fixed coupon rates under 3%.

Slide 10 highlights the increase in our cash balance during the fourth quarter. It also provides an update about our ability to generate free cash flow. Looking at the left side of the slide, operating cash flows from our -8s and the favorable bonus tax depreciation benefits that they generate are providing support for our cash balance.

Reflecting the benefits of bonus tax depreciation we continue to anticipate that we will not pay any significant US federal income tax until 2017 or later. On the right side of the slide, you see the growth in our free cash flow per share in 2013 in comparison with 2012, a meaningful increase. All of the business efforts that we've been talking about are driving that increase.

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

Thank you, Spencer. Moving to slide 11, our capital allocation strategy continues to demonstrate our commitment to creating, enhancing, and returning value to our shareholders both for business growth and returns of capital. Reflecting the strength of our balance sheet and cash flow, we invested $72 million in 2013 to repurchase over 1.7 million shares of our common stock. The shares that we acquired in 2013 equate to 6.5% of our shares outstanding which is a substantial amount for any company to buy back in one year.

We are committed to our share repurchase program and will evaluate appropriate opportunities to return additional capital to our shareholders under our remaining $60 million authority. Maintaining a strong financial position is essential for continued long-term growth and capital returns. Our focus going forward will continue to be on the appropriate balance between maintaining a strong balance sheet, investing in attractive assets, and repurchasing our stocks.

As reflected on slide 12, Atlas is leading the way through challenging times. We reshaped and transformed our business in advance of an anticipated decline in military demand. We have a resilient business model. And we continue to drive ahead in a still challenging commercial air freight environment.

As a result, we expect to generate meaningful earnings in cash flow in 2014 despite challenging market factors. Air freight remains a long-term growth industry and we remain focused on the long-term growth of our business. We will continue to strengthen our competitive position and generate substantial free cash flow which will enhance shareholder value.

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

(Operator Instructions)

And your first question comes from Jason Ursaner.

Morning, Jason.

Just first question. Trying to figure out all of what's included in guidance excluding the military impact. Assuming the comparable market, comparable performance scenario, what is this assuming for ACMI contract renewals? You've typically spoken about three to five a year, so is it a typical year? Other than Qantas, would you expect all the others to resize at equivalent rates?

Our guidance, Jason, and we didn't really provide guidance, but our outlook and the framework we've provided, we expect to be at 20-plus ACMI contracts in 2014.

Okay. And the three from British Airways that are coming back is guidance assuming those go back into ACMI, or that those stay in charter when they come back?

We will have our -- Jason, we'll have our 747-8s profitably deployed. We have several options to do that, and, you know, we're working on those. Sometime before the aircraft actually are released by BA. We'll continue to update you and our investors on the placement of those aircraft.

Okay. And is there a termination fee to the Company from BA that's in the guidance?

Jason, again, we didn't provide guidance. We provided a framework, and an outlook for 2013, and so in that framework, yes, we expect to receive a termination fee from British Airways, and that would be included. We also expect to incur costs related to repainting the aircraft and that sort of thing. So there are costs included as well as a termination fee.

Okay. And just last question on line maintenance. I understand that it's dependent on total block hours. Does it also have variability on a per block hour basis? Is there a leverage or scale effect, or do you expect that to be comparable?

Line maintenance should be comparable. There is a scale effect, and we have that scale effect. So line maintenance should be comparable, as you pointed out. It's highly correlated to hours flown.

Jason, we provide some information in the slides that accompany this conference call. If you look at the slides, there's a note at the bottom of the maintenance slide that talks about line maintenance expense per block hour, but it's just, it's really just math. You can take the line maintenance expense divided by block hours and you can see how that has trended over time.

Right, okay, appreciate that.

Thanks, Jason.

Your next question comes from John Mims of FBR Capital Markets.

Thanks, guys. Good morning.

Morning, John.

So with the drop-off in military, that's all on the cargo side, or how is the passenger business doing there?

The drop-off in military is predominantly in the cargo side, and that really manifested itself in the fourth quarter as we pointed out, steeper than the military had forecasted to us and all the other carriers throughout the course of 2013. Some moderation in the passenger business. But we anticipate passenger business will have ongoing and a more consistent demand pattern than cargo will post-Afghanistan.

So when we think about fleeting on the passenger side, those planes are still adequately employed or I guess --?

Oh, they are. It's a good question. So we acquired the aircraft to serve the military to fly troops. And we've had really solid returns on those aircraft over the past several years. And that was really our focus. But as time has gone on, we've been able to identify and really penetrate a commercial passenger charter market as well. So the combination of military flying, plus the passenger flying provide good utilization for those passenger aircraft.

By way of example, we operated 32 flights in the fourth quarter carrying fans, and bands, and teams for 18 of the bowl games. And just this weekend we flew for the NHL Players Association a direct flight from the US to Sochi to bring over players for various countries' teams, and we'll bring them back. So our sense is that there is a good market out there that will drive high utilization, more passenger commercial charter than we would have initially anticipated, but a good outcome overall for the Company.

John, it's Spencer. I'll just add to that just to quantify it a little bit. We talked about IRRs on those aircraft in excess of 25%, and that is before all the additional flying, all the commercial charter flying that Bill just talked about. So we've been really happy that we acquired those aircraft. They've been performing well for the AMC, and now they're performing well for commercial charter as well.

Okay. And as a follow-up, Qantas, there had been some rumblings on what they were going to do with their fleet. I don't know if I saw that it was announced before you said that they returned that one plane in January. And I know you don't like to talk specifically about accounts, but can you remind us how many planes Qantas has and what we may see over the next several months in terms of renegotiation with them?

Qantas operated a fleet of three aircraft, and now are operating a fleet of two aircraft. Earlier in 2013 they had talked about potentially Dry Leasing in their own aircraft and operating them, and then later in the year they announced that they were no longer going to pursue that. So we have the two aircraft operating with Qantas, and we'll continue to update the ACMI placements as we move through the year, John.

But they -- you can --- can you say now if those other two are up for renewal this year, or are they locked down for a little while?

John, we've never talked about specific customer renewals. We've talked about numbers of renewals.

Yes, fair enough. Thank you so much for the time.

Thanks.

And your next question comes from Scott Group of Wolfe Research.com.

Guys, do you feel comfortable, can you give us the number on the fee from British Air? Because when I think about the framework for 2014, you talk about flattish excluding the military based on flat air freight demand, but you've got $20 million of expense from maintenance and depreciation. So is the fee from BA that kind of a $20 million number to offset that or are there some other helping things that offset the two big expense things that you talked about?

Scott, we're not going to discuss the BA in specific, nor the fee. I think Spencer made the point a moment ago to Jason's question, there is a fee for that termination in the numbers. There are also expenses that are associated with it. But overall, you know, we've not -- our framework includes our anticipated ACMI placements, our CMI operations, the commercial charter market, and the improvement overall, or, excuse me, the improvement. The real growth in the Dry Leasing income from Titan with these 777s.

As well as the tax rate that we've assumed for the Company going forward. That tax rate is of a permanent nature, not a one-time event. Has a lot to do with the restructuring we did around the 777s that we've taken into the fleet and have leased out to our Dry Lease customers.

Scott, it's Spencer. I will just add to that a little bit. As you know, or as we've talked about, we placed a -8 with Etihad during 2013 in the middle of the year in June, so you will see that for a full year. We had a placement with BST Logistics that will start shortly. So you will see that for the vast majority of the year. Our CMI business continues to grow, and so you'll see that. We've talked about the military declines. We've talked about the tremendous growth in our Dry Leasing business. And so there are these various puts and takes. And when you put it all together, we try to provide this framework for our outlook.

Okay. That's helpful. Maybe just another question is, you had the issue of British Air. Can you give us an update on maybe the conversations you've had with the other -8 customers and what's the tenor of those conversations? I know they don't have planes coming up for renewal anytime soon, but do they seem happy with the -8? Do see some risk of pricing; do you see any risk of additional customers returning planes early? I just want to get a sense from you if you think that this BA thing is really specific to BA or could there be more of this going forward?

Yes, I think there's a couple of perspectives here. Starting with BA, I think it is indeed specific to BA. BA has essentially made the decision to exit freighters. And to over time rely on belly capacity as well as some of the belly capacity that will be coming in over the next several years as new passenger aircraft are delivered. The agreement they have with Qatar moving forward is not a full ACMI or a full aircraft agreement. It's a hard block space agreement as I understand it for some number of tons, five days a week, between Asia and the UK. So that's -- I think that's very much BA specific.

As Spencer noted, we've placed recently two of the 747-8s, one with Etihad and one with Navatrans, which is a freight forwarder, a large freight forwarder Chinese-based freight forwarder and you might think of them similar to Panalpina.

Talking about the -8 itself, from our view the -8 is a high performing aircraft that delivers real bottom line value for our customers in terms of the capacity that it provides on the long haul routes, as well as the fuel efficiency that it drives through the new GEnx engines that are on the aircraft. When you look at the freighter market going forward, there are really three freighters out there; the 747-8, 777 freighter, and the 747-400 freighter as well. We have, I think, deep insight to all three particularly given the six that we've taken into our Dry Leasing operation.

And starting with the 777 freighter, if you look at that operation and how the operations on the 777 and how they're typically deployed, particularly by the integrators, since they're the largest customer for the 777, those are long-haul point to point operations. So, for example, FedEx is flying from China to Memphis. DHL uses 777s to fly from Hong Kong to Cincinnati to Leipzig to Hong Kong. So it's a point to point long-haul operation serving that defined market.

747-8 can provide the same economics in that kind of operation with more capacity, if that capacity is required. But what the 747-8 does, it provides a gathering and a distribution network operation that very common in heavy aircraft, certainly in the network that DHL runs, as well as UPS. And certainly the network that appeals to our other customers. So if you can envision a departure from Hong Kong to Shanghai to Incheon, where the customer is loading and unloading freight along the way, that's your kind of gathering and distribution network across the Pacific to Anchorage, down to Cincinnati, and freight is picked up and delivered along that route as well as some ride-through freight. The result of that, the stack yield of that provides a superior outcome. So when we think about the heavy freight operators, when we think about our other customers, that's how they're using the 747-8. Some have 777s in their fleet as well. So we think that the -8 delivers a superior performance for our customers and ultimately for our shareholders.

Finally, the 747-400 is equally attractive depending on the markets of deploy. Could be short a stage length, could be markets where the total available freight demand is less than other markets, and so a little bit smaller capacity may make sense for the customer. I know it's a long answer, but it was a very broad question I think you teed up, and I wanted to take the time to do that. And finally when you look at the -8s and the 747-400, the nose door on those aircraft is very valuable, particularly for higher growth markets such as South America, sub-Saharan Africa, areas where, you know, they're extractive industries, and pipe and heavy equipment need to support those. That's just kind of our view of those three fleet types.

So thanks for that. That was a very thoughtful answer. So thank you. Just one follow-up just to what you just said. When I think about the three aircraft types, do the changes in military and then some of the other parts of the market, does that, in your mind, accelerate the potential to retire the 400? Are you thinking about or considering or potentially selling any of the -8s coming back from BA? And then what's the -- is there any constraint that prevents you from buying more 777s either from a balance sheet perspective or just from a you can't find them on the market perspective?

Well, I think the question of the military draw down really doesn't have a significant impact for the 747-400 factory freighter. It may have an impact for the 747-400 BCF. The BCF doesn't have the nose door, it's a heavier aircraft than a pure factory freighter, and as a result, has higher fuel burn and higher maintenance expense. So there's not a lot of market take-up for the BCF. As you know we just decided to early return two of the aircraft and took the charge for those, those ones that we took in, those are the ones that we took in given the delay of the 747-8. I think the fleet type at risk for a more accelerated retirement is probably the MD-11. That's not new news.

The largest freighter operator, Lufthansa, has been in the process of retiring their MD-11 which were purpose built freighters, not converted freighters and are moving into the 777s. We don't have the intention to sell our 747-8s that are coming back from BA. Those are going to be put to work and will continue to generate the kinds of returns that we've described to our investors over the course of the delivery of those aircraft and the placement of those aircraft.

In terms of 777, we acquired six in less than a year. We identified the opportunities to acquire them. We had the balance sheet and the cash to be able to make those investments, and so in a rather short period of time, we were able to identify and acquire six of the aircraft placed on very long-term leases with very attractive credits, and so if those opportunities present themselves, and there may be more, we'll certainly act on it.

Thanks a lot for the time. I appreciate it.

Thank you.

And your next question comes from David Campbell.

Hey, Bill and Spencer.

Hi, David.

In talking about the commercial freight market for this year, you're basically assuming flat, sounds like flat block hours, flat demand with last year. But we've had pretty good evidence of strong demand in January. And should that continue into March, that's not a flat year. I mean, I'm trying to figure out why and if you are so cautious and so concerned about the demand.

So I think what we're saying, David, is that there well could be an inflection point in 2014. That's something we've talked about in the past. But what we're saying here is we provided our perspective on 2014, and if there is an inflection point, I think that signals real opportunities.

That said, it's a little early in the year to call that inflection point, and we did talk about profitable first quarter, and we're seeing the trends that you're seeing as well or the market is seeing in general in January and February. But not calling that there's a catalyst yet for some inflection later in the year that we haven't seen in the past couple of years. If the market does, we believe we're very well positioned to take advantage of that for all the different factors we've enumerated in the call and in previous conversations.

I guess just two quick ones then. If the demand for 777s is so strong, why not put them into your wet leasing program, somehow acquiring more aircraft?

Well, the 777s that we acquired were from other lessors with long-term leases stapled to them at attractive rates of return. And one way to think about those, it was for us an important opportunity to take advantage of, particularly in the face of the military decline. And building out this long-term annuity type income stream that stretches for some time, the 8 to 10-plus year kind of scenarios that you can imagine. We'll continue to evaluate our aircraft fleet and our ACMI opportunities. We think the -8 is an excellent ACMI aircraft as is the 400.

If there were tangible opportunities to begin to offer 777 ACMI we would, but we're not going to speculatively invest in 777s for delivery several years from now in the anticipation we might place them into ACMI. Any large fleet additions going forward are going to have to be back to back with a contract that gives us the certainty to go out and make an order for aircraft for future delivery.

And my last question is, I'm trying to get straight on the maintenance and depreciation. Bill, I think you said during your remarks that maintenance and depreciation would increase this year, but with block hours down, it's all, it's largely on the depreciation that's going to go out.

David, it's Spencer. It's a little of both. So depreciation, we've obviously added more aircraft to our fleet. And so depreciation will go up accordingly. And we've said we expect depreciation to go up about $10 million in total. And with regard to maintenance, it's somewhat similar. While block hours may be down and so therefore line maintenance may be lower, the heavy maintenance, because we've added more aircraft, the maintenance on that may be higher.

And so what we've said is that overall we expect maintenance to increase about $10 million, and I think the pattern of our maintenance expense -- I think you can expect to see a similar pattern that we've seen in prior years, which is if at all possible we try to incur those maintenance costs towards the beginning of the year, so that we can reap the benefits of having the aircraft ready for the strongest periods towards the end of the year.

Great. Thanks for the answers.

Thank you, David.

And your next question comes from John Barnes of RBC Capital Markets.

Hey, good morning, guys.

Good morning, John.

Couple of questions here. Let's see. The first one is, you've talked about, you mentioned that you've never really talked about customer-specific renewals. You've talked about just the numbers. So between the Qantas plane, the British Airways aircraft, and normal renewals, what are we looking at in terms of aircraft needing potential placement in ACMI service in 2014?

John, I think 2014, other than the British Airways return is a fairly normal year for us. So we've said that a typical year we have approximately three or four planes that are coming up for renewal. And so that this year will be a typical year, and generally, those planes are, you know, we continue to place them, they're renewed generally with our existing customers.

That makes sense. Thank you. Secondly, there tends to be a pretty wide variability in first quarter profitability. If I just go back over the last three years, it's ranged anywhere from $0.21 on the low end as much as $0.50 or so on the high end. I guess my question there is, number one, you outlined maintenance in your presentation. Should we anticipate maintenance being spread out in the year similar to what you experienced in 2013?

And then given some of these gives and takes with, again, the BA aircraft, the timing of getting whatever termination payment, the expense, you see where I'm coming from? I'm just trying to -- I'm not asking you for a specific number, but can you at least give us some direction? Would you expect that to be on the $0.21 side of it, or should we be thinking something better than that with all the gives and takes?

John, we're not providing anything more firm than what we provided earlier, but I will -- you would expect to see the quarters, the second half weighting similar to what we've seen. Certainly in the prior year, as far as the second half. Certainly our business is much more second half weighted, especially with the military declining. That part of the business obviously was less focused on peak season. And so you should expect to see similar patterns the prior year. With respect to the maintenance expense, the incremental maintenance expense that we talked about. I think you can expect to see maintenance expense be spread similarly to the way it was spread in 2013 -- or incurred, the way it was incurred in 2013 is a better way to say it.

All right. Then Spencer, I think you had one comment that might have been a little subtle change in terms of your comment about being a cash taxpayer. I think we had all assumed 2017 to be the number you said potentially maybe a little longer. Is that because now you're looking at less profitability this year? You're talking about this big drag from military and that kind of thing. Does that just mean that you extend the benefits out a little bit longer, or is there something else in play there?

Sure, John. I think the comment about not paying any substantial federal income taxes, we will pay a small amount, but not paying a substantial amount until 2017 or later, and that's pretty consistent with what we've said in the past. One of the big reasons is that we took delivery of two -8s during 2013, and those two qualify for 50% bonus tax depreciation. So we're able to take 50% of that cost and deduct it for tax purposes directly in 2013, and in 2014 we'll be able to deduct the other 50% of that, and all of the bonus tax depreciation has obviously helped us shelter future earnings. So taxable income will be able to be offset by that, the previous bonus tax depreciation and the net operating losses that have been built up as a result.

That makes sense. Thanks for your time today.

Thank you, John.

Thanks, John.

You have a question from Bob McAdoo of Imperial Capital.

My question has already been asked. Thank you.

Thanks, Bob.

And you have a question from Steve O'Hara of Sidoti.

Good morning.

Good morning, Steve.

Hi, Steve.

If I look at the aircraft count, I mean, I know it's up, utilization is down. So I mean, in terms of your willingness or desire to enter into any additional CapEx, is there a, you know, should we be expecting any additional kind of exits from the fleet, or is there any utilization level that we should be looking for to say -- okay, the businesses may be further stabilized or stabilized and, you know, maybe we look forward for a little more growth now as opposed to stabilization?

Right. So, where we are now, we have our core ACMI fleet established. We have the nine 747-8s delivered. We have the 21 747-400 factory freighters in the fleet. We have temporarily parked last year, as you know, the one BCF which we owned outright, and we have returned two -- the two 747-400 BCFs that we leased in given the delay. Some years ago the 747-8. So two more freighters out of the 747-400 fleet. The balance of the equipment, the passenger planes we talked about earlier are well utilized in the combination of military and commercial passenger charter markets.

The rest of the utilization is driven by the utilization of our CMI business. There are different rates of utilization in the CMI business, whether it's the SonAir aircraft, the LCF, the dream lifter, which utilization will be increasing as Boeing drives up to higher build rate through 2014 on the Dreamliner. Then we have the 767-200s we operate for DHL domestic North America, the new 767 Turner Pax for MLW, and then the two 767-300s for DHL intra-Asia. Some of those aircraft have lower utilization than average. I think it was the right thing to do to trim those BCFs out. At the end they have less market utility than do the 400s.

We wanted them through the end of the year so we could take advantage of the late blooming, but still important fourth quarter commercial charter market. We don't report CMI separate from ACMI, more for competitive reasons than anything else. But the utilization in the ACMI of the aircraft, were 12.8 hours or so for the year for our ACMI customers so good utilization of the aircraft overall. CapEx this year is really the maintenance CapEx we have for the aircraft. And no major fleet plans that we've talked about, Steve, other than the answer to the prior question, if there was a good opportunity, a real opportunity along the lines of the 777 acquisitions we've made we'd absolutely consider that.

Okay.

Immediately accretive with solid credits over a long term. We think those were good choices to make.

Okay. Thank you.

Thanks.

And you have a question from Jason Ursaner of CJS Securities.

Yes, Jason.

The BCF that you do have parked and unencumbered if you wanted to potentially sell it?

Sorry, Jason, can you repeat that question?

We could. We could sell the BCF if we wanted to and if we thought there was an appropriate market for it. The BCF can also serve as a swing capacity, which we did with the 200s several years ago. If there's an inflection and if there's a demand, we could bring that aircraft -- temporarily parked, we could bring that aircraft back into service.

Jason, we've kept that aircraft in a state, so that it can be brought back, so that if there is increased demand, that aircraft is ready for us to be able to bring it back. There's some maintenance that would be required, but otherwise it's ready to be brought back.

It creates optionality and I think you know the market values on BCFs aren't terribly robust right now. We think the option value is for us worth more than a sale.

Okay. And the two that you returned, was there kind of an opportunity where you could have potentially bought those off-lease? The charge you took looks fairly high relative to, I guess, my perception of where the market price is on those.

Jason, I think the answer is, sure, there's always that opportunity. A willing buyer and a willing seller. There's always that opportunity. We viewed those aircraft as planes that we made a decision that we no longer needed those aircraft in our fleet. So we terminated the leases, we abandoned the aircraft at the end of the year, and perhaps the reason why the number looks high to you is just the way the accounting for that works.

But included in that charge is the expense of all remaining lease payments that would have been paid on those aircraft. And that's the biggest part of it. We also have, there were some prepaid maintenance that we had recorded as an asset that needed to be taken down associated with that. There's repainting and storage. So there are a lot of different elements of that charge.

Got it. And then just for Bill, I think in one of the answers, you had said the framework includes some anticipated ACMI placements. I guess I'm just wondering, that's kind of part of the overall number of 20-plus that you threw out? Or I guess I'm just wondering --

Yes.

What exactly is building in for anticipated placements?

It's 20-plus. And that includes placing additional aircraft, yes.

Okay. And then, Spencer, I think, you said overall maintenance you expect to be $10 million higher, or that was the heavy maintenance part of it?

Overall maintenance, yes. Maintenance expense in total, about $10 million higher.

Okay. Appreciate it. Thanks.

And you have a question from Jack Atkins of Stephens.

So I guess just to go back to the framework for a moment, just to make sure I'm understanding that correctly, the framework does assume that you place the -8s coming off of lease with British Airways, did you say you expect to have those placed when they roll off or do you expect to have them placed later on in the year?

Jack, we've provided the framework and we've said we'll have our aircraft placed. We didn't say exactly what date.

Okay, okay. And then when I look at the -- I guess when I think about the net benefit from the lease termination fee from BA, I know you guys don't want to give a hard number, and there will be some expenses there. But would you expect it to be a net benefit or a net drag or neutral to earnings in 2014 versus 2013?

Jack, we really just don't want to talk about customer specifics on such a sensitive topic. Included in our 2014 results we expect will be a termination fee as well as costs related to the termination, and they will both be in our numbers. And I'm not saying which is greater than the other. It's just very, very sensitive. It's between the customer and us, and very, very sensitive topic.

No, I understand. I'm just trying to -- I think a lot of people are probably in the same boat I am, trying to understand like the underlying expectation operationally for the business. And I know we backed out a lease termination charge that you all took in the fourth quarter of this year. So I'm just trying to understand, you know, on an apples-to-apples basis, should we expect that to be a headwind or a tailwind coming into 2015, if that makes sense?

Again, the lease termination charge that we took was different. And included in the lease termination charge that we took was for accounting purposes, you know, that the lease expense for subsequent lease payments. So that's a little different than a payment that a customer is making to us as a result of terminating their contract early. So they're different. And that's -- I think that's all we really want to say on this.

Okay. I got you, I got you. And then moving on, when you think about your fleet, and how it stands today, relative to the current market. You guys have hinted in the past that you would look at some maybe adjustments to your fleet, maybe right-sizing that for the current level of market demand. Are you all thinking about doing that now, and at what point, you know, as you move through the year would you maybe look to, you know, shrink that 400 freighter fleet to match the current market dynamics?

Well, we have. We've taken the two BCFs out, Jack, and that's approximating a 10% reduction, if you think about just that. You take the one that we temporarily parked a year ago, so that's a, you know, that is indeed an acknowledgement of the market, but also an acknowledgement that we think that the 400 freighter fleet that we have is a competitive fleet and will be well utilized in 2014.

Understood. I guess I'm just looking at the amount of planes in charter, and you've got the Qantas plane coming back to you. Assuming you can redeploy those -8s, you're still looking at, you know, call it eight planes in commercial charter that are -400 factory freighters. Is that the optimal number that you guys would like to have in charter? I guess maybe that's a better way to get to it.

But, Jack, we also placed 400 factory freighters in ACMI as well. And I certainly don't subscribe that there is no ACMI market for a 400 freighter. There is.

Okay. That's helpful. Last question from me, can you talk about the strategic direction for GSS once that British Airways contract is terminated in April? Will you look to keep that subsidiary going or maybe look to restructure that?

So we're a 49% share holder of GSS, as you know, by regulation, that's the max that a non-UK EU citizen can hold, and we have our partner. I think having a UK AOC is a valuable asset. So we're certainly exploring other opportunities to use that asset.

Okay. Great. Thanks again for the time.

Thank you.

Thank you, Jack.

And there are no further questions. Presenters, you may go ahead with your closing remarks.

Well, thank you very much, operator, and Spencer and I would like to thank all of you for your interest in Atlas Air Worldwide today. We appreciate you taking the time to be with us on our call, and we look forward to speaking with you again soon. Thank you very much.

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