Atlas Air Worldwide Holdings Inc (AAWW) 2014 Q2 法說會逐字稿

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

(Operator Instructions)

I will now turn the conference over to Atlas Air.

Thank you, Robin and good morning everyone. I'm Ed McGarvey, Vice President and Treasurer for Atlas Air Worldwide. Welcome to our second-quarter 2014 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 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 meanings 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 2013 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 website at AtlasAir.com.

During our question and answer period today we would like to ask participants to limit themselves to one principal question and one follow-up question, so that we may accommodate as many participants as possible. After we have gone through the queue, we will be happy to answer any additional questions that you may have, as time permits.

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

Thank you, Ed, and good morning everyone. Thank you for joining us today. Beginning with slide 3, we are off to a good start in 2014. Adjusted EPS of $0.63 per diluted share in the second quarter is a sequential improvement from the $0.45 that we reported in the first quarter. And our adjusted EPS of $1.08 per diluted share in the first half of the year compares favorably with the $1.01 that we achieved in the first half of 2013.

Air freight demand is improving, and we are encouraged about our outlook for the full year. We are maintaining our full-year earnings framework as we continue to gather additional insights into second-half yields, demand, and military requirements. Atlas is an entrepreneurial company, and our results illustrate the positive contributions being generated by the investments we have made, and the initiatives that we've undertaken.

In an uncertain air freight market, and in anticipation of a decline in military cargo requirements, we have diversified our business mix and are driving business resilience. Earnings in the second quarter were led by our modern 747-8 freighters, an increase in CMI flying, and the six 777 freighters that we have added in dry leasing. We are also benefiting from the expansion of our 767 platform, and our growth into military and commercial passenger charter operations.

Led by the strength of our brand, our global market leadership and outsourced aircraft and services, and our ability to work closely with our customers to enhance their route networks and grow their businesses, we are well-positioned to take advantage of market opportunities and improving market conditions, and to continue our focus on longer-term business growth.

Slide 4 illustrates the positive direction of air freight demand so far in 2014, and the positive outlook for the year. One indicator, Shanghai's PACTL Terminal, is on track for a record year.

PACTL reported tonnage growth of 12% year-over-year in June, and is up nearly 14% year to date. Consistent with the gradual cyclical pick-up in global economic growth, forecasts by IATA and others suggests that air freight demand will grow by several percentage points in 2014, with IATA estimating a 5% compound annual growth rate through 2017.

Slide 5 focuses on our earnings framework for 2014. We are pleased by our performance in the first half of 2014, and the positive direction of market trends so far this year. As indicated, while air freight volumes continue to improve, there is still limited visibility into second-half yields, demand, and military requirements. As a result, we are maintaining our earnings framework for the full year.

On a sequential basis, we expect EPS in the third quarter to improve over second-quarter adjusted results by an increment similar to the per share increase between our first- and second-quarter adjusted earnings. For the full year we expect total block hours to be comparable to 2013. More than 70% of our block hours will be in ACMI, with approximately 10% in AMC, and the balance in commercial charter.

Our outlook for ACMI reflects our two new dash-8 placements with DHL Express in May. It also includes a new Intercontinental 747-400 service for DHL that we launched in mid-June.

We see continuing ACMI customer interest in our one remaining dash-8 aircraft as well as our 747-400s. These aircraft continue to operate in revenue service, as we market them in ACMI.

In AMC, our share of military flying, mainly in passenger service, has increased, due to a reduction in the number of carriers serving the market, and our ability to capitalize on additional flying opportunities. Due to cargo, however, we continue to expect an overall decline in military requirements, compared with 2013.

Dry leasing's dramatic growth include the beneficial impact of the five additional 777 freighters that we acquired since the second quarter of 2013. That brought our 777 fleet in dry leasing to six aircraft, and it's driven a significant increase in contribution from highly-predictable revenue and earning streams.

Turning to operating expenses, we expect that maintenance expense will total approximately $180 million. In addition, depreciation this year should total approximately $120 million to $125 million.

Our continuous improvement initiatives will also provide support for our results in 2014 and beyond. One key initiative is our engine acquisition program. It complements our continuing efforts to generate savings on maintenance expense by acquiring engines with valuable service life, or green time, on them.

During the second quarter, we capitalized on an opportunity to trade in our older, run-out CF6-80 engines in connection with acquisition of new ones. This will produce very attractive economics for Atlas. It will enhance the operating reliability that we can provide to our customers, and it will generate savings on maintenance expense, given the increased time interval to the first overhaul on the new engines.

Another key initiative is our ongoing evaluation of appropriate tax planning strategies. As a result of this effort, we identified a substantial income tax benefit in the second quarter related to extraterritorial income from the offshore leasing of certain of our aircraft. We continue to evaluate our eligibility to claim these tax benefits, and we may recognize additional amounts in future periods, although it is too early to reasonably estimate what those benefits might be.

Reflecting the tax planning work that we have done, we anticipate that our adjusted effective income tax rate will be approximately 28% for the full year. We also expect core capital expenditures this year to total approximately $45 million to $50 million, mainly for spare parts for our expanded fleet.

This is a good point to ask Spencer to provide you with some additional perspective on our second quarter. Following Spencer, I'll provide some additional thoughts, and then we will be happy to take your questions. Spencer?

Thank you, Bill, and hello everyone. Slide 6 highlights our second-quarter results. Our adjusted net income totaled $15.9 million or $0.63 per diluted share. On a reported basis, net income totaled $29.6 million or $1.17 per share. Also during the quarter, we generated free cash flow of $55 million.

Results from the second quarter benefited from our dash-8s in ACMI growth, in CMI flying, and a strong contribution by our expanded dry leasing segment. We also benefit from the expansion of our 767 platform, and our growth in passenger charter operations.

Included in reported earnings for the second quarter was an income tax benefit of $24 million or $0.95 per diluted share, due to our beneficial tax planning, with respect to the tax treatment of extraterritorial income, as Bill noted. That benefit was partially offset by a non-cash loss of $9.4 million after-tax or $0.37 per diluted share, resulting from the trade-in of run-out used, spare engine for new engines.

As a reminder, determination fee related to our agreement with British Airways was also a second-quarter item. Because we incurred costs related to the return of the aircraft, such as for painting, positioning, maintenance, re-registration and downtime as a result of those processes, the net effect during the quarter was not meaningful.

Looking at slide 7, operating revenues in the second quarter 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 strong volumes in commercial charter, and from the growth of our dry leasing business as we previously noted.

These drove our results in the quarter that also saw a decline in ACMI block hours related to the return of three dash-8s, as well as significantly lower AMC cargo activity. Revenues in ACMI increased 3%, reflecting our dash-8 aircraft, and an increase in CMI flying. ACMI rates during the second quarter primarily reflected the impact of higher revenues on dash-8s.

While volumes in ACMI were affected by the return of aircraft, the impact was partially offset by our placement of two dash-8s with DHL Express in May, the start-up of dash-8 flying for BST Logistics in February, and for Etihad in May 2013, and the startup of 747-400 ACMI flying for Astral Aviation in September of 2013. In addition, ACMI block hours during the second quarter benefited from an increase in CMI Dreamlifter flying for Boeing, and the initiation of CMI 767-200 passenger service for MLW Air during the third quarter of 2013.

In AMC, revenues during the quarter declined 3%, primarily driven by reduced cargo flying. This impact was partially offset by an increase in passenger flying, and an increase in hours of revenue per block hour, which was driven by a greater requirement for higher-yielding 747 400 passenger aircraft. As noted, we have actively diversified our business and developed new sources of revenue and earnings, well ahead of this long-expected contraction in military cargo demand.

In commercial charter, revenues in the second quarter increased 14%, driven by a strong rise in block hours, and an increase in revenue per block our. The increase in revenue per block hour reflects the impact of incremental cargo revenue on subcontracted commercial charter flights with no associated block hours, partially offset by lower market rates.

In dry leasing, revenues grew following the acquisition of five of our six 777 aircraft. As we have discussed, each of the aircraft was acquired with a long-term customer lease already in place. Focusing on the pie charts in the bottom half of this slide, you see that revenues in our dry leasing business accounted for 6% of total revenue in the second quarter, compared with 2% in the second quarter of last year.

Moving to slide 8, segment contribution totaled $62 million in the second quarter, compared with $68 million in the second quarter of last year. The pie charts at the bottom of the slide highlight the significant proportion of contribution from our ACMI segment, which generated the vast majority of our total segment profitability, as well as the increasing attribution from dry leasing, two segments with more predictable and reliable earnings.

Direct contribution in the second quarter reflected an increase in maintenance expense for aircraft operating in ACMI, which was partially offset by higher dash-8 revenue, and increased CMI flying, an increase in the volume of passenger flying on higher-yielding 747-400 aircraft in AMC, the impact of additional profitable aircraft in dry leasing, and a decrease in market rates and increased maintenance in crew member travel expenses in commercial charter. Given the smaller size of our military business, and since the aircraft are interchanged regularly between AMC and commercial charter, we think investors and analysts should review the results of these two businesses together.

Turning to slide 9, and our balance sheet, we ended the second quarter of 2014 with cash, including cash equivalents, short-term investments, and restricted cash, totaling $299 million, compared with $302 million at March 31. Our cash position at June 30 reflected net cash of $62 million, provided by operating activities during the second quarter. That was offset by net cash of $21 million used for investing activities, and $44 million used for financing activities during the period.

Net cash used for investing activities primarily related to the purchase of engines and rotable spare parts, and net cash used for financing activities primarily reflected scheduled payments of debt. At the end of the second quarter, our net leverage ratio, which includes capitalized risk, was 5.8 times trailing 12-month EBITDAR, including the benefit of our investments in our outstanding EETCs.

The improvement in our net leverage ratio versus March was primarily driven by the pay down of outstanding debt. Since our triple financings in January, we have paid down approximately $100 million of our overall debt.

Finally, excluding the acquisition of aircraft, engines, and related capitalized interest, our core capital expenditures in the first half of the year were approximately $11 million. And as Bill noted, for the full year, we expect our core capital expenditures to total approximately $45 million to $50 million.

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

Thank you, Spencer. As reflected on slide 10, Atlas is leading the way forward. Our investments and initiatives are driving a resilient business model that is delivering meaningful earnings, and is focused on longer-term growth. Growth is returning to the air freight market, and with our strong brand and global market leadership, we are well-positioned to be a prime beneficiary.

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

Kevin Sterling, BB&T Capital Markets.

In AMC charter, I think you cited an increase in the volume of passenger flying. Do you expect this strength to continue, or was the volume you saw in the second quarter more one time in nature?

Well, I think for the balance of 2014, Kevin, there's going to be a good level of AMC passenger flying, particularly as the military draws down in Afghanistan, to a level that we understand is going to be about 10,000 troops going forward. I think that's the outlook that we have right now, in terms of their requirements for the year.

And then after that draw down it will be and more steady-state, lower level of activity, and we're still working to get a better appreciation for that from the air mobility command.

Thank you. So along those lines, do you think you're picking up some share from some competitors who were solely tied to the military who have now since exited the business?

Yes. We certainly have picked up share, I made a passing comment to that in my remarks. We are -- we absolutely have picked up share of the flying that's available.

Great. And here's my last question.

Spencer, when you talk about Q3 seeing a sequential improvement from Q2, similar to what you saw from Q1, maybe a little more clarity there. Are you talking about similar increase on a percentage basis, or on an absolute dollar amount?

If you look at -- good question, if you look at our adjusted earnings, the change in our adjusted earnings between the first and second quarter, we're looking for a similar change on a earnings-per-share basis from the second to the third quarter.

Okay. Not necessarily on a percentage basis, but on the incremental increase on an EPS basis.

On an EPS basis, yes.

Thanks for your time this morning, and congratulations on a nice quarter in a challenging environment.

Jason Ursaner, CJS Securities.

I'd like to focus on the charter segment. The market obviously continues to do fairly well there, and the outlook was a bit optimistic. So I'm just wondering with all of the changes in the dash-8s and the 400s moving around in ACMI, and with the holiday season coming, if you could maybe walk through the nine planes you had allocated in that segment this quarter, and go through how you view that capacity in revenue versus the direct contribution there?

And just whether you think it's right-sized going forward, or if it's 1 to 2 more planes that you'd like to see move back into ACMI, and how you're looking at the fleet there right now?

Not necessarily going to go plane by plane, but currently we have 19 aircraft in ACMI, and what we've talked about in the past is 20-plus. Those incremental aircraft would come from the fleet that is serving charter and AMC today. So as we increment, increase the ACMI operations, those aircraft come out of the fleet that's available for commercial charter.

We're seeing, and certainly a number of companies are commenting on an improving demand environment. We have seen approving demand environment, if you listen to what if you look into what Panalpina or [Cunanalgo] and others have said, and EPS in terms of volume, we're seeing all those trends. The question that's still out there is, how are yields going to perform, as we move into the second half and move into the peak season?

And if there's a good uptick in yield, when does that occur? Last year we saw good volume growth starting in October, but yields didn't start to improve until November. So I commented a bit on that, Jason, in my opening remarks, where we feel very encouraged by the volume, and certainly monitoring the market closely, to see how yields are going to perform now through December.

I guess I was more just concentrating on charter because cargo, obviously, AMC had a much better quarter but the cargo piece still declined, you were down to 1.5 planes there. Most of it needs to be coming out of commercial charter, which a lot of that capacity seems like it should get soaked up.

Yes. We're talking about the 747-400s, and I think Spencer made a point that 747-400 fleet we interchange between AMC and commercial cargo, based on the demand. Again, as we go to 20-plus that capacity comes out of the fleet available to AMC into commercial charter.

And when we're talking about improving yields, we're really talking about commercial charter. An improving underlying demand generate hours in ACMI, and generates direct -- yield is directly attributable to our comments on commercial charter.

And besides price, with the decline in the freight side on military, what was impact on the quarter from one-way flying?

One-way flying, Jason, this quarter, actually went a lot more in the right direction than we have seen the past. One-way flying in the second quarter of this year, there were a lot more one-way flights that were going eastbound, as opposed to westbound that we saw earlier in the year, and certainly throughout a lot of last year. We are happy to see much more eastbound flying.

From a direct contribution standpoint, though, does that more impact military or the charter segment?

It impacts both. We talked a little bit about it during my opening comments, Bill made a comment to it, but our military business, obviously with military cargo flying coming down, our military business is a lot smaller. We really think those two businesses, it's time to look at those two businesses together.

We routinely trade capacity, Jason, between the two segments. We'll turn down an AMC request if it conflicts with a better-yielding charter. We'll pass on a program charter if we believe that capacity can be better deployed with the military.

We routinely use AMC missions as positioners for charter missions. We use charter missions as positioners for AMC missions. Some of the charters positioning into AMC missions are sometimes low-yielding but then profitability of the AMC mission we take on makes up for that.

Sometimes it's the other way around. So we trade-off between those two, and it's important to think of those together. I think, to answer your question, they benefit each other.

I appreciate all the comments. Thanks. Good quarter.

John Godyn, Morgan Stanley

I wanted to ask about the outlook in a bit of a broader sense, Bill. The language that you used in there is that the volumes and the demand is good, but the yield environment is still very weak. Just as a general characterization of the environment, I'm curious if you could just elaborate on that? What is driving all of the yield weakness?

What we need to see, to see that rate environment of both volume and yields moving the same direction? And do you think that is sort of a likely scenario, as we look out a year or so from now? I'm just trying to get a little bit more detail.

I think -- thank you, John, -- I think just referring to some recent market commentary -- so UPS, just a few days ago talked about strongly improving volumes, but noted that market pricing on the key Asia to US Lane is under pressure. Cathay Pacific talked about improving volumes, but yields still somewhat under pressure. I think that was just a few days ago in the Wall Street Journal.

And Cunanalgo and Expeditors and Panalpina have all talked about a good volume story, but waiting to see where the yields are going to go. I think that the yields right now are where were they would be seasonally, and so the current yields in the market are not depressed, but seasonally appropriate, if that's a way to think about it.

So, we're anticipating a good peak, so the variable would be capacity in terms of how yields are affected. And how much more capacity comes into the market is the question.

Capacity, this fungible capacity is less aircraft parked that's necessarily going to be returned to service, there are a fair number of aircraft parked, that doesn't come back short term necessarily. But it's really the number of rotations and the kind of hours that freighters can fly.

Several of the big carriers, the big freighter fleets, have exercised pretty good discipline through the year. It those trends continue, then we should have an improving yield environment, and I guess what we're saying is just, I think we're consistent with other major players in the market. We are not going to call the big yield uptick until we get closer to peak and see it. If that's helpful.

That is helpful.

Just a separate question for Spencer. Just an update on capital allocation thoughts in general.

Spencer, we've seen the Company do a good job of sort of tactically buying back shares here and there, when the stock is weak. Is there any appetite to get even more aggressive with the buyback, and also just general thoughts on M&A, as a use of cash.

Sure John, thank you.

As we've talked about, it is a balancing act. We continue to focus our capital allocation on trying to maintain a balance between ensuring that our balance sheet remains strong, we have strong cash balance, we have been paying down debt.

The second part of our capital allocation is business investment. We purchased six 777s and two dash-8s within the last year, we are now seeing returns from our dry leasing investments, and investments that we have made into our passenger business.

We continue to look at other investments. You mentioned M&A, we are always out there looking. We haven't found an opportunity that makes sense but we are always looking at potential opportunities.

We also may continue to grow our dry leasing business, as we have talked about. The planes that we have added in our Titan dry leasing business have really done well. You're starting to see those returns now. We may continue to make investments there.

And lastly, of course, to your question, we had a very large share repurchase in 2013. We still have board authorization remaining for $60 million of share repurchases.

We want to use our cash balance in the right way. It's a constant balancing act to deliver long-term shareholder value, so we will continue to focus on all of these things. There are certain investments that we're looking at right now, and so therefore, we're considering that along with share repurchases and maintaining a strong balance sheet.

Scott Group, Wolfe Research

I just wanted to understand the earnings framework a little bit better. In the beginning of the year, I think you talked about a $0.70 earnings drag from the military, and it looked like military contribution was pretty flat so far year to date. Should we just assume that military is not going to be that $0.70 drag any more based on what you talked about on the passenger side?

Scott, it's Spencer. Good question.

We still expect the AMC contribution to decline year over year. We just don't think it will be as large as we previously thought.

We are maintaining our framework because commercial charter yields continue to be weak, and in fact, weaker than we previously thought. While military won't be down as much as we previously thought, commercial charter yields are taking some of that slack, unfortunately.

So we are maintaining our framework, and, as Bill said, until there's a little more certainty around peak season yields and military requirements in the second half of the year.

So just to make sure I understand. Military not a $0.70 headwind but the initial framework of the core earnings flat, that might be a little bit worse than flat, because of the weakness in charter yields? Is that the way you're thinking about it?

No. What we're saying is the decline year over year that we talked about before, which was more primarily focused on AMC, is now a little bit more in commercial charter, and still some in AMC. We're just saying that decline is now primarily in those two segments, as opposed to just that one.

As we talked about before, it's one of the reasons why we continue to say that we've reached that point now, where we think it's time to really look at AMC and commercial charter together

That makes sense.

And I wanted to ask about the ACMI contribution in the quarter, because it was down a lot year over year, and worse than we thought, and I'm wondering if there's anything unusual in there? I know you said that the BA termination didn't really have a net impact, but was there something unusual in there, and maybe just some specific things? How should we think about utilization block hours and revenue per block hour in ACMI going forward?

Sure. A couple of things.

One is that, of course, British Airways was winding down their business, and so that had an impact on utilization, when you look at the second quarter of this year versus the second quarter of last year. You would expect to see that. That's not really a continuing item, it's sort of a one-time issue.

The other thing I would say is that maintenance expense really increased, when you look at period over period. Some of that was temporary. It won't be continuing. Some of that was just the timing of a particular event, or something like that.

Again, I think it's probably important when looking at ACMI to really continue to focus on the exceptional returns that we are getting in that segment. The customer value that we are driving in that core segment of our business, it continues to deliver great earnings and predictability, more so than the other parts of the business.

Do you think ACMI contribution grows in the third quarter versus a year ago?

We haven't -- we have provided a framework for the third quarter. We haven't gotten down to that level of detail. I'm sorry, what I mean is, we haven't disclosed that level of detail.

We're going to stay with our overall framework for the business, and not drive down into what the third quarter like in a particular segment.

All right. Thanks.

David Campbell, Thompson Davis & Company.

Spencer, in the short long-term, whatever you want to call it, outlook for next year, the growth next year will come from -- looking at this AMC commercial charter segments together, and the commercial charter can continue to decrease, but the AMC charter may be continuing to increase.

Is that the way we should look at -- I'm trying to figure out where your growth next year will come from. It's not going to come from -- I don't think it's going to come from block hours, because you don't have more aircraft than you had this year. How do you see the growth? Where do you see the growth coming from?

First of all, the growth starts in our core ACMI CMI business. I think we have come through now -- if the market is indeed inflected, and if the underlying demand in the international air freight market is finally entering a growth phase after arguably would have been three flat years, I think that tees Atlas up very well.

I think, first of all, in ACMI and CMI, we have an opportunity for higher utilization of the aircraft with existing customers. Our prior years, when growth was a factor in the market, we were looking at 6% and 7% above minimum utilization, just in the core ACMI. Those are highly contributory hours, because we're not hiring extra pilots, et cetera, to fly 20 more hours a month per aircraft, but that goes to the bottom line.

If market is indeed improving, again, we're teed up well, as we think about aircraft renewals. As we think about securing new customers in the aircraft market, and as we continue also to focus on growing the CMI business. That's the core of the company, that's where our largest investments are made and in an improving market, I think we're very well-positioned there.

Dry leasing, as you look through the second, third, fourth quarter, that's the earnings, predictable earning streams that we have talked about. And should we acquire more aircraft for dry leasing, our focus would be to add aircraft. In terms of their immediate accretive earnings power, it looked very similar to the six that we have acquired as well.

And, yes, military cargo will continue to decline. Military passenger demand will be lower than what it will be this year.

Our marketing team is developing alternative sustainable uses for the passenger aircraft, and the commercial passenger charter market, and I think we'll see good utilization of the aircraft in that market as well. There is a market out there, and we've learned a lot more about it, and have demonstrated an ability to go out and be competitive in that market and drive good results.

If there is, again, this market inflection in demand growth, I think that also argues very well for the commercial charter segment, the commercial charter cargo segment. A lot of capacity has come out, a number of carriers have exited the business. Some of the mainline carriers of prior years are retiring or getting out of their fleets.

[Air France] KLM is working through what they may do with their freighter fleet. Singapore Airlines, another large operator for many years, has dramatically realigned freighter business and parked freighters. Any improving market, I think, when you sum all of that up, then combine with that our focus on continuous improvement, our focus on cost and productivity and the operating leverage that we have in the business, combine to be the several parts for growth -- earnings growth in 2015 for Atlas.

Okay. And the second question is, you mentioned that you're accustomed to 6% above minimum flying in your ACMI section business. What you think the increase is this year on -- based upon what you're forecasting right now in terms of block hours? Is that 6% above minimum? What is it?

David, it's Spencer.

Typically for the full year, we generally see about 3% to 5% above minimum flying. This year, we expect to be in that range, perhaps towards the top of that range, but right around that range.

But in a good year, it could be better than that, that's what you're saying?

At least to the high end. And then on a customer by customer basis, the opportunity to go above that. It will depend on their markets, their growth, and their business plan.

It's seasonal, of course. During the first quarter, customers generally fly below their minimum -- and throughout the year --

Yes. I understand. Thank you very much.

Helane Becker, Cowen.

Just on the aircraft availability, are you getting calls from customers looking for more aircraft? Or are you finding that you're making more calls going out, looking to place the aircraft?

Thank you, Helane.

We're certainly getting calls for fourth-quarter capacity in our commercial charter market, as you would expect, given that we're just at the beginning of August. In terms of the ACMI placement, though, I think it's really the focus of your question, that's an ongoing discussion with our customers, with current customers and potential customers around renewal and expansion and then bringing new customers on board. We've brought several new customers on board just in the last year, when you think about ANA Astral, out of Kenya, and BST out of China.

The sales process takes its -- it has its own -- there is a process, and it starts with being able to sit down with a customer and build a business case around the freighter for them to make the kind of commitment that they need to make, in terms of the fixed capacity buy that they're making over time. Certainly there's inquiry about capacity, but the real -- the way we actually place is for our commercial and marketing team to work one-on-one with customers, and build that business plan that they ultimately bring up through their capital approval process, or their large commitment approval process, how each company works.

And then I know with Etihad and Emirates as two of your largest customers, or two customers, are you seeing any -- what's the right word? Any concerns from them, given what's going on in their part of the world right now?

Well we haven't had a discussion of that. Certainly when we talk about what's going around geopolitically, and more how that may affect near-term schedules for their flying, based on the global network that someone like an Etihad or any of our customers deploy. But in terms of their operations, the global hub and spoke operations that they operate flying into Dubai and Abu Dhabi, we really haven't had those kinds of conversations.

In fact, conversations we've had with Etihad are about growth and the great growth trajectory that they're on, and that their CEO has talked about. Growth both in passenger, and growth in cargo.

And then just maybe for Spencer, how should we think about the leverage going forward? I know it came down a little bit. You had that slide that showed that. But how should we think about it for the rest of the year and maybe into next year?

Sure, Helane. We used to talk about it at targeted net leverage ratio, and we think it's less relevant today. We still think obviously it's important, and we share it. We've made significant investments in our dry leasing business, so leverage really can't be viewed in isolation like it once was here, and so we don't have a singular number that we target.

The higher leverage that we have taken has really been supported by enhanced quality of our earnings from strong credits like AeroLogic and Emirates and TNT. We look at all of our investments. We evaluate them holistically. We don't have any leverage covenants in any of our financings. Our debt rates generally are fixed, and we have tenders that are matched to the underlying lease terms for our dry leasing transactions.

So it's a long-winded answer to your question. We are happy to see it coming down as we paid down debt. We have worked hard at that.

That doesn't mean, if we make additional investments in our dry leasing business, that our leverage ratio could go -- might not be decrease or may stay stable. If we make those investments, it's because they themselves, those investments, are delivering a really strong return, great IRRs, good EPS, very good NPVs, and the quality of the investment is good, the contribution towards our overall strategic goals. So that's where our focus is, a little bit more than on a particular leverage point.

I really appreciate that clarity. Thank you very much.

Jack Atkins, Stephens.

This is actually Andrew on for Jack. Most of the questions we had have already been answered.

Looking back at commercial charter, looking at the direct contribution of that segment, would you expect it to be profitable for the full year?

We expect our charter segment will be profitable for the full year.

Okay. Good.

And then looking at peak season, I know you mentioned there's not too much visibility into it, but looking at your guidance for the full year, what kind of -- in terms of demand and pricing, compared to 2013, what are you assuming in that guidance for peak season?

I think we have made a couple of comments already, Andrew, we're seeing a good demand outlook, as a number of other companies have commented, as well. I think we're seeing a stronger demand outlook now than we saw last year at this time. And I think that's certainly encouraging, and that's how we have characterized it.

Yields are, I think, seasonally, where we would expect them to be. It gets back to what I think we have commented on already, I think yields will inflect, when they inflect and by how much they inflect is the variable here in terms of our outlook, going forward. We just haven't seen that inflection point yet.

Thank you, guys.

Bob McAdoo, Imperial Capital

A couple questions.

On ACMI, to make sure I understood what the earlier answer you gave on this, ACMI is up 2% or 3% in terms of revenue, with contributions down about 20%. Did I understand you say that was because in this particular period, there was extra maintenance on some planes that are basically ACMI aircraft? Is that what was going on? Or was there something else going on in that?

Yes, Bob, you have it right. It was primarily due to higher maintenance. Some of that maintenance was temporary in nature, and some of it is longer term.

We also had an issue where British Airways, as you know, wound down their overall dedicated freighter operations, and so as they were winding down, the aircraft were not as utilized as they would have been the prior period.

And there was some down time in the transition of aircraft, the painting, and the engineering work that needed to be done as well.

So that was included in the expenses. Yet, the revenues were actually up, that was what was -- they went opposite directions and that was what was surprising, the fact that you were able to get the revenue up but what you're saying is there were some extra expenses in there, I guess.

Bob, also the revenue also includes CMI flying, so the increase in revenue was in ACMI and CMI.

Yes. Okay.

Another issue. I don't remember, you're talking about this -- your program, acquiring engines with green time left on them, so that you can replace -- avoid some engine overhauls or whatever, and in the presentation you put in -- you obviously used that as an adjustment. It appears that you use that as an adjustment to give us adjusted net income, but yet if that's really -- if those write-offs or however you want to say it, are really expenses that you're using, that are running through the books to replace engine hours that would otherwise be replaced by doing engine overhauls, wouldn't that be more of an ongoing maintenance expense, and shouldn't necessarily be removed from a disclosure that's called adjusted net income?

Bob, you can treat it however you'd like. We believe that it is non-routine, that it's not ordinary course of business. We're generally not in the business of having engine trade-ins and entering into a relationship whereby we are trading in run out, used engines and acquiring new ones.

It is non-routine. It as infrequent item, and so therefore we don't look at it that way.

Well, the way you talked about it earlier in the discussion, it sounded like this was kind of a normal thing that you were starting to do. I was just curious about that.

And then one final quick thing. I read an article, I saw a headline go by that said something about the 787-10 was going to always have to be produced in South Carolina because there was a problem with the fuselage was too big for the Dreamlifter.

Is that going to change what we should be thinking about in terms of the business, the Boeing business, and the volume of Boeing business going forward? Is that something we should worry about?

No. I don't think you should worry about that, Bob. Boeing has not given us a forecast that adjusts the level of flying. I think, what it says is that their program, their 87 program continues to evolve, and they are looking at an uptick in production. That by definition drives more utilization of the LCF.

Other than the fuselage, it clearly would have to drive some extra business there. I would think.

What really will drive utilization -- well, yes, if it's a longer fuselage, there's an extra body section. But what's going to drive the higher -- what drives a higher utilization of the LCF is the total build rate of the program, and that's performing nicely.

Good. Thanks.

Steve O'Hara, Sidoti

Good morning. I was just curious, in terms of your guidance, it's been asked a couple of times but maybe to put it a different way -- when you provided the guidance, was this the type of environment you had expected, or are we at a little bit of a different place from what you expected when you provided the guidance?

I think we're in a different place, in that we are many months further along. The military requirements certainly have changed a bit. We have flown a lot more military passenger hours, and the nature of the hours has changed. We have flown a lot more higher-yielding 747-400 passenger missions than we thought.

Cargo flying for the military is up just a little bit more as well. But the commercial charter -- commercial charter is kind of -- there's really strong demand. Volumes are up. But yields are a bit lower than we thought they were. So those things somewhat offset.

Yes, I think what were also saying is that we are encouraged by what's going on in the market, from a demand point of view. And so are a number of other companies that are large players in the market.

So, is there the potential for yield upside? Yes, there is. We haven't seen it yet is what were saying but is there potential for that upside? Yes, we believe there is. We're well-positioned to take advantage of that.

Okay. Thank you.

And then, in terms of the number of 747-400 cargo planes, you have a commercial charter, obviously, if you see a good peak season, you guys, I think, would benefit significantly.

On the flip side of that, assuming you're at a -- looks like 2013 was a normal level -- I mean, what's your comfort level with keeping, let's say, 7.5, 8 400s in that business? My assumption is you would much prefer them in ACMI where there would be higher utilization, higher returns.

And maybe how do you think about getting to where you want to be in terms of utilization, with the opportunity for upside? I guess it -- maybe it goes out to how many aircraft -- how many 400s do you really want to be able to maximize returns, but limit your downside as well?

We have talked about 20-plus aircraft in ACMI. That 20-plus has to include the placement of some number of 747-400s. That's our core business and we would want the 747-400s in ACMI. Absolutely.

That said, there is a good charter market out there. If we have the kind of peak that potentially could occur this year with volume and yield, we'll get very good returns on that. But we've said in other calls and in our investor meetings that we aggressively manage our fleet, and we will invest in the fleet, and if we invest in additional dash-8s we would be exiting 747 400s. Additional dash-8s would not come incremental to the total 747 fleet.

We would be exiting 400s consistent with that, and certainly taking advantage of the higher margins and returns that the dash-8s deliver for us, and deliver for our customers, in terms of capacity and fuel burn. So we will continue to manage the fleet going forward.

And in terms of commercial charter, what is your -- how many aircraft ideally, maybe the 400s are the biggest piece of that, but how many aircraft ideally would you want in there?

I hate to answer that question with, it depends, but it does. If the market is delivering volumes and yields we've got a very strong position in our South America operations, the commercial charter market is a year-round market. It's more North-South in the first quarter into the second quarter, it's East-West in the balance of year.

Honestly, Bob, it will depend on a market conditions. I'm sorry, Steve. It will depend on the market conditions.

Okay, all right. Thank you.

John Mims, FBR Capital Markets.

I'm sorry, I was on another conference call, so I missed part of the beginning. Thank you for letting me jump here on the end.

Bill, just a broader industry question. I know there is some positive momentum and outlook for peak season, at least in terms of volumes and hopefully yields, but so much of this discussion has been about bellies and bellies taking some demand away from freighters over the last couple of years. Are you starting to see, after you have had the fleet shrink, and you're starting to see more volume pushing through the system, are using any signs of that shifting back in favor of the main decks?

Yes. I don't think -- there's been a lot of discussion about how much shift may have occurred between bellies and freighters. I do know the we've got a lot of evidence that it occurred. Over the long run, this kind of 60-40 balance where 60% of international air freight moved main deck and 40% belly hasn't appeared to fundamentally change.

But, another way to think about it -- if we're going to see a peak, if growth is going to be 3% plus up to this 5% CAGR that IATA is talking about over the next 4 to 5 years, that will fundamentally accrue to main deck freighters. Because we're talking about growth out of production centers that are going to want the assurance of the main deck -- of the main deck freighter capacity.

The other side of the question we talked about too, the deployment of the 787s, it's not a hub and spoke deployment. Carriers are investing in the 87s to go point to point. The point to point is not necessarily where air freight flows.

Air freight flows through hubs, it's consolidated by the distribution channel, fundamentally the freight forwarders, they make their economic rent through consolidation, not smaller volumes, point to point in the belly of a passenger plane. So I think a strong improving market favors the freighters. Just our view.

Sure. On that same line, it seems the last couple of years, it's been somewhat spotty, the outlook on peak season, but it's also been driven by a lot of special projects and contracts. Electronics launches, the iPhone, the PlayStation and whatnot.

Are you seeing more of a kind of freight of all kinds type of demand when you're talking to customers now on the charter side, where airlines and forwarders are just trying to secure general capacity, or is it more specifically targeted for launches, like we saw last year and in 2012?

Yes. That's a great question.

Growth could not be sustained or be sustainable if it was simply tied to product launches, out of Asia, to the consumer electronics. There's just not enough to drive it. And the air freight growth that we have seen this year wasn't tied to any specific product launches in the first half of the year.

So, we have seen growth in the North-South freight. To and from Latin America and all markets. To and from sub-Saharan Africa, smaller market, but very high rates of growth. Etihad, for example, is taking advantage of that.

East-West, improving economy in Europe is helping certainly some of that, from Asia to Europe. Good East-West in terms of not only US imports, but there was a very good US export season this year, in terms of several products. So I think the good news is that we're growth across all markets, across all underlying air freight demand segments that we talk about, and I think the electronic peak, the consumer electronic peaks that we'll hopefully see this year, that's going to have a very good impact, I think, on yield.

Sure. That makes sense.

And then one final question, and I will let you go get lunch. And you may have touched on this earlier, and I missed it, so apologies for that, but when you look the pipeline for ACMI and even more specifically the CMI business, can you tell me, or remind how many planes you have up for renewal in the ACMI fleet, into the rest of 2014 and 2015?

On the CMI side, it seems like it's been a while since you announced any new CMI contracts with new customers. Is there still an active pipeline of additional CMI opportunities that make sense, that you could see in the fold the next couple of quarters?

Sure. So, on ACMI, we have 19 aircraft in ACMI today. And 20-plus is the perspective we have offered for this year. We haven't specifically talked about 2015, but we would see that as a normal year, and that's as far as we are prepared to go, given the competitive environment that's out there.

Our marketing team is working with CMI as well. We do have a pipeline of CMI opportunities. We're in discussions with our customers. We did add one CMI aircraft this year, a 767, which is nice, because it incremented our 67 platform now to 11 aircraft, so that builds scale and efficiencies for us.

There are additional CMI opportunities that are out there, and we're competing for.

Are those with new customers or -- the one addition was with DHL, right?

The one additional was with MLW Air. And we had two 767-300ERFs with DHL.

Right.

The opportunities are both, and we think that's good. Right? Growing greater share of wallet with existing customers while bringing on new customers, I think is a sweet spot for us to be in.

Right. Okay.

And then just for clarification on the ACMI, historically you had said there was 4 to 5 planes that you needed to renew every year, maybe it was 3 to 5, is that-- even though without fully disclosing your plan for 2015, is that trend still accurate?

John, what we said is that we expect next year to be a normal year. I think as Bill just said a moment ago, he really doesn't want to get into that level of detail. We consider 2015 to be a normal year.

Our business is obviously growing, getting a lot more complex, and we have different types of customers.

If you look at a DHL, for example, we have a 20-year block space agreement with them. We also have a joint venture, it's a different kind of a customer, so every customer is different. The relationships are different. For next year, we think our renewal opportunities or placement opportunities are normal.

If the market is improving, if this volume growth that we have seen in the first half is sustainable and rolls into 2015, that puts us in a better position on renewals and on expansion.

Sure. That's fair enough. I was is going to try to pick at it different way. Thank you very much for the time, and I appreciate it.

At this time there are no audio questions.

Okay. Well, thank you very much, Robin, and Spencer and I would like to thank all of you for your interest in Atlas Air Worldwide today. Thanks for sharing your time with us and for your questions, and we look forward to speaking again with you soon. Thank you very much.

Thank you for your participation. That does conclude today's conference call. You may now disconnect.