Atlas Air Worldwide Holdings Inc (AAWW) 2014 Q3 法說會逐字稿

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

(Operator Instructions)

I will now turn the call over to our host from Atlas Air Worldwide. You may begin your conference.

Thank you, Chris, and good morning, everyone. I'm Ed McGarvey, Vice President and Treasurer for Atlas Air Worldwide. Welcome to our third-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 complimented by a slide presentation that accompanies our remarks. If you have not already downloaded and printed a copy of our press release and slides, you may do so from our website at atlasair.com. You may find the slides by clicking on the link 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 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'll be happy to answer any additional questions that you may have as time permits. At this point, we'd like to turn the call over to Bill Flynn.

Thank you, Ed. And good morning, everyone. We thank you for joining us today.

Beginning with slide 3, we are raising our full-year outlook for 2014. Adjusted EPS of $1.09 per diluted share in the third quarter is a sequential improvement from the $0.63 that we reported in the second quarter, and the $0.45 that we reported in the first quarter.

With air freight volumes continuing to improve and market yields beginning to pick up, we expect our diversified business mix and new aircraft placements, including the third placement with Etihad that we announced this morning, to drive sequential EPS growth in the fourth quarter.

As a result, we anticipate adjusted EPS of approximately $1.33 to $1.43 per diluted share in the fourth quarter. We are also raising our full-year 2014 adjusted earnings outlook to approximately $3.50 to $3.60 per diluted share.

Our results and our recently announced placement of three ACMI and four CMI aircraft illustrate the strength of our business, and the demand for our industry-leading assets and services. They indicate that we are well-positioned to capitalize on market improvement, which we are beginning to see, as well as longer term business growth.

ACMI earnings in the third quarter were complemented by a profit in Commercial Charter, growth in Dry Leasing, and an improved contribution by our military operations. Earnings in Commercial Charter were driven by a sharp increase in block hour volumes, reflecting the broad-based improvement in global air freight demand.

In Dry Leasing we benefited from our addition of 777 freighters that generate predictable long-term revenue and earnings streams. And in AMC Charter, we benefited from operating a larger share of available military flying.

Our ACMI customers are beginning to benefit from the upturn in air freight demand. Our aircraft placements are also increasing.

We now have 22 747s in ACMI, up from 19 since our last call. With 22 aircraft in ACMI, our placements of modern freighters are at a record level. Our growth with our customers reflect the quality and scale of our global assets and services, as well as our ability to deliver reliable performance in support of their networks.

We have developed and grown CMI relationships that provide global operations for Boeing's Dreamliner program, international long haul 747 passenger operations for SonAir, 767 service for DHL in North America and the Asia Pacific region, and VIP 767 passenger service for MLW Air.

From two CMI aircraft when we started in 2010, we fly 14 today and will be increasing that to 18 by early 2015. That's when we'll begin flying four incremental 767s in North America for DHL's growing express operations.

Slide 4 illustrates the continued positive direction of air freight demand so far in 2014, and the positive outlook for the year. Shanghai's PACTL terminal for example remains on track for a record year. PACTL reported tons growth of 20% year-over-year in September, and it's up approximately 17% year-to-date.

Consistent with the gradual pickup in global economic growth, industry reports and forecasts suggest that air freight demand will grow by several percentage points in 2014. That's a rate that is outpacing supply, and is driving the first real growth since 2010. In addition, IATA estimates that international air freight traffic, measured on a freight ton/kilometer basis, will grow at a 5% compound annual growth rate through 2017.

Slide 5 focuses on our earnings framework for 2014. We are encouraged by our performance and the positive direction of market trends so far this year. Air freight volumes continue to strengthen, and yields are beginning to improve.

We are seeing a general increase in demand across all regions, with the greatest growth in the Trans-Pacific market. An increase in on-line shopping and several new high-tech product launches during peak season also continue to favor air freight. As a result, we are raising our adjusted EPS framework for the full year to approximately $3.50 to $3.60, and our reported EPS outlook to approximately $3.92 to $4.02.

For the full year, we expect to fly approximately 160,000 block hours. Our outlook includes the 747-8 and 747-400 freighters that we recently placed with DHL and Etihad. It also includes the strong seasonal flying that we do for our customers during peak season. More than 70% of our block hours will be in ACMI, with approximately 10% in AMC, and the balance in Commercial Charter.

In AMC, our share of military flying, mainly in passenger service, has increased due to our ability to capitalize on additional flying opportunities, and a reduction in the number of carriers serving the market.

With the beginning of the government's new fiscal year on October 1, however, we expect to see an overall decline in military requirements in the fourth quarter as well as in 2015 and beyond. Dry Leasing's dramatic growth includes the beneficial impact of the five additional 777 freighters that we have acquired since the second quarter of 2013.

Turning to operating expenses. We expect that maintenance expense will total approximately $190 million to $195 million, primarily due to performing several conditions based engine overhauls for our 747-400 fleet during the fourth quarter. This compares with no engine overhauls in the fourth quarter of 2013.

In addition, depreciation this year should total approximately $120 million. Reflecting the tax planning work that we have done, we continue to 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 about $30 million to $35 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 third quarter. Following Spencer, I'll provide some additional thoughts, and then we'll be very happy to take your questions. Spencer.

Thank you, Bill, and hello, everyone. Slide 6 highlights our third-quarter results. Our adjusted net income totaled $27.4 million or $1.09 per diluted share. On a reported basis, net income totaled $27.6 million or $1.10 per share.

Results in the third quarter benefited from earnings in ACMI, and improved contributions in Commercial Charter, Dry Leasing and our military business. During the quarter, we generated free cash flow of $55 million, bringing our year-to-date total to $151 million.

Reflecting our commitment to shareholder value, we also bought back 1.8% of our outstanding common stock. Under our share repurchase program, we acquired nearly 459,000 shares at an average cost of $32.68 per share. Future repurchases may be made at our discretion, and would be under our remaining $45 million share repurchase authority.

Looking at slide 7, operating revenues in the third quarter benefited from our diversified business mix including strong volumes in Commercial Charter, improved passenger and cargo volumes in our military business, and the growth of our Dry Leasing operations.

ACMI revenues and volumes for the quarter were down about 3%, primarily due to lower 747-400 flying by certain of our ACMI customers. These impacts were partially offset by higher 747-8 revenues and growth in CMI flying.

In AMC, revenues during the quarter increased 15%, primarily driven by increases in both passenger and cargo flying. This impact was partially offset by decreases in average revenue per block hour, which stem from a reduction in the average pegged fuel price set by the military. Because fuel is a pass-through component in our military business, any impact to revenue from changes in the pegged price is generally offset by a corresponding impact to our fuel expense.

In Commercial Charter, revenues in the third quarter increased 37%, driven by a strong rise in block hours and an increase in revenue per block hour. Our block hour volumes reflected the broad-based uptick in air freight demand. The increase in revenue per block hour reflects the impact of subcontracted cargo revenue on 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've discussed, each of the aircraft was acquired with a long-term customer lease already in place.

Moving to slide 8, segment contribution totaled $81 million in the third quarter compared with $78 million in the third 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 contribution from Dry Leasing, two segments with more predictable and reliable earnings.

Direct contribution in the third quarter reflected an increase in Dash 8 maintenance, and lower 400 flying by certain customers in ACMI, which was partially offset by lower maintenance on our 400 aircraft, an increase in passenger and cargo volumes in AMC Charter, higher volumes and improved aircraft utilization in Commercial Charter, partly reflecting our decision to reduce capacity at the end of 2013, and the impact of additional profitable aircraft in Dry Leasing.

Given the smaller size of our military business and since the aircrafts are interchanged regularly between AMC and Commercial Charter, we have decided to include AMC as a customer within our charter segment starting with the military's fiscal year, which begins in the fourth quarter. As a consequence, we expect to report our results that way when we announce year-end earnings in February.

Turning to slide 9 and our balance sheet. We ended the third quarter of 2014 with cash including cash equivalents, short-term investments and restricted cash totaling $288 million compared with $299 million at June 30.

Our cash position at September 30 reflected net cash of $61 million provided by operating activities during the quarter. That was offset by net cash of $15 million used for investing activities, and $60 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 and our share repurchases.

Excluding the acquisition of aircraft and engines, our core capital expenditures in the first nine months of 2014 were approximately $18 million. And as Bill noted, for the full year, we expect our core capital expenditures to total approximately $30 million to $35 million.

As slide 10 shows, at the end of the third quarter our net leverage ratio, which includes capitalized rents, was 5.6 times trailing 12-month EBITDAR including the benefit of our investments and our outstanding EETCs.

That's down from six times at March 31 and 5.8 times at June 30, primarily driven by the paydown of outstanding debt. Since the beginning of the year, we have paydown approximately $149 million of our overall debt, and we expect that to be approximately $200 million for the full year.

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

Thank you, Spencer. As reflected on slide 11, Atlas is leading the way forward. We have diversified our business mix, and are driving business resilience.

Our results illustrate the positive contributions being generated by the investments we've made, and the initiatives we've undertaken, led by the strength of our brand, our global leadership in 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 to focus on longer term business growth. With that, Chris, may we have the first question, please.

Certainly. Your first question is from Kevin Sterling with BB&T Capital Markets.

Thank you. Good morning, gentlemen.

Good morning, Kevin.

Bill, let me just ask a general question here about the air freight market. You've shared some good stats about the strength that you're seeing. And obviously, you guys are benefiting from that.

Maybe touch a little bit on lower oil prices outside of the lower operating costs for your customers in ACMI. But I'd heard that DHL was actually saying they were seeing a shift back from the ocean to the air.

And I'm just curious as to [your] bigger picture thoughts with the drop in oil prices. How does that help air freight, in particular, kind of make some of that modal shift we've seen maybe come back because it makes air freight more competitive.

That's a very good question, Kevin. Thank you.

So we're looking at good growth in this fourth quarter of 2014. So we've now got, I think, five quarters in a row, starting with the fourth quarter of 2013, of solid demand growth in the air freight market.

So it just wasn't a peak in 2013 driving growth with some product introduction. That's continued across most markets throughout the balance of the year and particularly not driven by any one product launch, but just by a general uptick in trade and, as a result, an uptick in air freight demand.

I think lowering fuel prices, and if they stay low for some period of time, creates a lot of benefits for our ACMI customers. Certainly there's a fuel surcharge and a fuel quotient and, in any rate, I think will accrue to the underlying air freight shippers.

I think there's several things that are driving good air freight growth right now. Certainly it is a peak period. We've seen it all year.

We've got new product launches that are moving into global markets, wherever they may. There's some issues on the west coast of the United States, and concerns there as well. And so a lower fuel price reducing the underlying cost of air freight transportation, I would think as you suggested, has to be a positive for air freight demand and air freight growth.

Great. Thank you, Bill, for that color.

I know you may not be ready to talk about 2015. But maybe looking ahead here, you talked about military, you saw some passenger and cargo improvement this quarter. That helped you.

But it sounds like that's going to slow down in the fourth quarter, and I think you said even into next year. So military might be down next year.

How should we, maybe big picture, think about ACMI in 2015? I think you said you have 22 planes in ACMI.

Should we expect that number or maybe even more in 2015? Maybe just frame a little bit bigger picture color around 2015, if you don't mind?

Sure. So we'll talk about 2015 in much more detail at our call coming up in February.

But I think, Kevin, you've hit on several of the key ingredients about how we're thinking about 2015. We see more of a sustained improvement in the air freight market overall. That's really across all major trade lanes that we've had these five quarters now that I've talked about of growth on a year-over-year basis.

AMC, as we've consistently said, is expected to go down. But I would say we don't have a lot of clarity on what the demand will be yet because of all the turbulence that's going on around the world beyond Afghanistan, certainly, with what we see generally in Syria and Iraq, and Ebola, and other humanitarian disasters and relief.

We're just not getting a great forecast from the military, but we have higher levels of demand than we might have anticipated, certainly than we anticipated earlier in the year.

22 is a really good level of placement for us, and we are continuing to work to place more aircraft in ACMI. Without foreshadowing or giving a 2015 outlook, I think there's good opportunities not only to place more aircraft in ACMI, but also to earn more CMI business as well.

Okay. Great. Thank you so much, Bill.

Gentlemen, thanks for your time this morning. Congratulations on a nice quarter.

Thanks, Kevin.

Your next question is from Jack Atkins with Stephens Incorporated. Your line is open. Mr. Atkins, your line is open.

Hey, guys, can you hear me okay?

We can, Jack, thank you.

Great. Sorry about that.

Congrats on a great quarter here. Just a couple of questions from me.

I guess just to go back to Kevin's question around 2015 and to take another stab at that. At the Analyst Day, you guys talked about your expectation for earnings growth in 2015 over 2014. Is that something that you guys continue to expect to see on a year-over-year basis just from a big picture perspective?

How do the placements of those aircraft into ACMI service impact earnings in 2015 over 2014? I would assume that that's an accretive shift. But if you could give us some sense for how accretive that is, I think that would be helpful.

Sure. Thanks, Jack. We'll talk obviously in more detail about 2015, as Bill said, during our next call.

But to give a little bit more flavor. Obviously, we had three placements recently, the aircraft moving from Commercial Charter into ACMI. And obviously then, we have the longer term predictability, reliability. We have guaranteed monthly minimums, and so forth.

So you have those three placements later this year. Next year, we'll be able to enjoy a full year of those earnings. And so we feel really good about that.

The air freight environment, as Bill talked about, is really picking up, has been broad-based. It's not any particular region or any particular new product introduction. It really is very broad-based.

And that should lead to greater utilization and more flying by our ACMI customers. And, as Bill talked about before, lower fuel prices certainly don't hurt our ACMI customers. So all of that should lead to enhanced utilization in ACMI.

So we are excited about all of that. That being said, we're not sitting still.

We continue to expect additional placements, additional opportunities to grow our business with our customers in ACMI as well as CMI. We're pleased where things are, the direction of the business, and the overall environment. And all that should lead to a good 2015.

Okay. Thank you. That's really helpful color Spencer, and I appreciate that.

Just to follow up, with more of a housekeeping item. But when I looked at the changes and some of the specific line item guidance, particularly around maintenance expense, it looks like there was maybe some pull forward of maintenance into the fourth quarter from the first half of 2015, by my math, that's, call it $0.25 I think, and sort of a headwind to the fourth quarter.

So it looks like you guys would have seen maybe even a better fourth quarter than what you're guiding to had it not been for that. Is that the right way to think about that, and is that maintenance expense really coming out of the first half of next year, basically?

It's a very astute and good question, Jack.

You're right, maintenance expense is conditions based. And so we need to perform maintenance when those conditions require that the maintenance be performed. So this year, we are going to have more maintenance in the fourth quarter.

And you're right, that means that our earnings would have otherwise been even stronger in the fourth quarter. So you're right on all of that. It's a little early to talk about 2015, again, but we do expect the maintenance should probably be lower next year as a result.

Okay. That's very helpful. Thanks again.

Thank you.

Your next question is from Steve O'Hara with Sidoti.

Maybe first a quick follow up. When you say maintenance lower next year, you're talking about lower than it normally would have been, or lower year-over-year?

I was talking about for the full year, Steve. If you look at the total maintenance expense for the full year of 2014, currently, again subject to change. But currently, we expect the 2015 total maintenance expense to be lower than that of this year.

Okay, that's great. And then just, if I think about the framework that you guys put out, I want to say it was on the fourth quarter call or around that timeframe, you had talked about earnings approximating 2013, with the exception of, I think it was about a $0.70 hit from AMC Charter.

So AMC Charter is up about 6% year-over-year. And so I guess maybe the difference maybe is Commercial Charter really didn't cooperate as much as you had hoped in the first part of the year, but it's starting to turn now. Is that how things have played out so far?

Yes, Steve, I think AMC certainly has performed a lot more strongly than we had thought, as Bill noted before. There's been a lot more activity in both cargo and passenger flying than we thought earlier in the year. That is offset somewhat by -- in Commercial Charter.

But overall, that decline is much lower than we thought it was going to be. We've seen Commercial Charter really starting to pick up.

As you saw, we generated a profit this quarter in Commercial Charter, which we are very excited about. So that helped to offset that. And, therefore, the framework that we provided earlier in the year we've now updated that, and we are expecting much stronger results than that.

Okay. And then just, if I think about the potential contribution from Commercial Charter in Q4, and maybe in 2015. How many -- so I assume the 747-400s are the big piece of that, and potentially Dash 8, but I guess the Dash 8 will be with DHL anyway. How many aircraft going forward if you don't do anything else would we expect to see in Commercial Charter, assuming normal re-signings of contracts that are up?

Sure. Good question.

So in Commercial Charter, as you would have seen in our press release today, we had about eight and a half aircraft equivalents in that segment. If you -- we just announced three placements recently, three ACMI placements. Those planes basically move from Commercial Charter into longer term ACMI.

So you take those three out, you are at about five and a half. We have two planes that fly a loop around South America.

We need one to two planes for maintenance cover. And so the difference there leaves one or two planes that are available to move into ACMI.

Okay. All right. That's it. Thank you very much.

Thank you, Steve.

Your next question is from Jason Ursaner with CJS Securities.

Good morning. Congratulations on a great quarter, guys.

Thank you, Jason.

One of the things, I think, Bill, you had talked about it a little last quarter, was that you weren't quite ready to call the improvement in air freight a confirmed inflection point yet. So looking at the results for Q3, and obviously the strong outlook for Q4, there's obviously some positives that you're having a very strong runway to generate earnings now driven by the tech launches and the upcoming holiday season.

Should we just take that for what it is, and be happy with it for right now? Or would you start to say maybe you're turning a bit, and this could be more of a sustained fundamental improvement heading into next year?

Thank you, Jason.

So I mentioned earlier in the question-and-answer period here, we've got five quarters now of continued air freight demand growth across virtually each market. And not just product driven, of course, in the Trans-Pac there always is the product driven phenomenon in the fourth quarter. So our sense is that the market is growing.

This is what IATA has reported, other industry analysts have drawn similar conclusions. So first, the market has come back, the volume is up. And now we're seeing yield improvement as well.

So volume first, fill the planes in the market, and then yield follows. Kevin noted earlier in his question the falling fuel prices which overall enhance, I think, the attractiveness of air freight as people think about their supply chains overall. So coming into 2015, I think our sense is we're seeing growth for the first time in really almost four years.

2011, 2012, and 2013 had no measurable growth of any consequence until the fourth quarter of 2013. And now we've got this full year of growth. Our sense is that we'll see growth in 2015 and beyond.

I think good evidence of that is our ability to increase our ACMI placements. We're up to 22, as we've talked about. Certainly, we've grown with DHL who is growing at greater than market, and consistently have.

But Etihad has talked about their growth and their ambitions, and they've grown greater than market. We've gone from zero to three aircraft with them.

We've placed aircraft with BST who is a major forwarder out of China, with Astro who is a Kenyan carrier. And you think about where the opportunity set lies, it does lie with us identifying growth with current customers, growth opportunities, putting a good value proposition in front of them but also identifying carriers that aren't necessarily top of mind for most folks, the people who are growing in their own markets and see our ACMI offering as a real value added proposition to their business plans.

Okay. And you just touched on it a bit, but did you a fantastic job placing additional aircraft into ACMI. And as you mentioned, it's not a short-term decision for these customers or a one quarter volume or fuel issue. So anecdotally, is this just a function of the same dynamic that they've been seeing, seeing the market growth for a little over a year, and you've talked about underlying some of these leases.

You've had pretty strong marketability. It just hasn't translated. Is this beginning to translate some of that, that they've become more comfortable with the market over the last few quarters?

I think that's exactly right, Jason. We've talked about this for some period of time.

An ACMI commitment is a big commitment that a customer of ours makes for a take-or-pay basis for fixed capacity. So I think the ability to get to the number we have and the work that our marketing organization does every day to continue to place more aircraft, their outcomes are enhanced by the stronger market and more conviction on the part of our customers that this market has indeed turned, and then they will be able to take good advantage of it.

Okay. And last question for me. Obviously, there's a lot of headlines from companies discussing economic activity in Europe.

I was just wondering if maybe you can comment at a high level, either ACMI or Charter on the [trade playing] touching Europe? Because you've seen a lot of strength from your carriers that touch Europe in some capacity, so just wondering if maybe you're bucking the trend a little bit or just what you are seeing there?

Well, I think several of the older -- the legacy carriers that have had large freighter operations, they've struggled a bit. VA ultimately opted to get out of freighters and go with their own freighters, go with belly capacity, and then purchase blocks base agreement capacity on another carrier. Air France KLM have their own considerations that are underway right now, including Martinair.

So I think that Europe/Asia trade lane is weaker than any of the other trade lanes. Their yields haven't improved. The yields in that trade lane are fairly flat and haven't really improved.

But if you look at growth, Astro, for example, our Kenyan customer, that's between Europe and sub-Saharan Africa. So there are growth trade lanes in and out of Europe, but the east-west trade lane between Europe and Asia is probably the one that's among the softest in the market right now. And I think the legacy carriers whose route rights and operating authorities are tied to that are still not enjoying the kind of growth and bottom line benefit that other carriers operating in other trade lanes are.

Etihad is in and out of is Europe. But again, but it's a north-south trade, not an east-west trade. So there's opportunities there, and our objective is to identify them and work with customers to take advantage of them.

Okay, sounds great. Best of luck finishing up the year. Thanks.

Thank you.

Your next question is from Scott Group with Wolfe Research.

Thanks. Good morning, guys. Nice quarter.

Thanks, Scott.

So I wanted to ask a little bit about pricing. You mentioned that Charter pricing is starting to improve a little bit. You had some placements in the quarter on ACMI.

Are you seeing improvements in ACMI pricing? And if you can't talk so much about pricing, maybe talk about contribution margins in ACMI.

They've been under a little pressure the past two quarters. With these two placements, do you expect contribution margins to turn back positive?

Scott, it's Spencer. I'll take that.

You know that we try not to talk about specific customer contributions and profitability with specific customers. So it's hard to talk about these specific placements.

But I think what we will say is that when we provide our revenue per block hour, and you can see that that has stayed fairly steady. And that includes all of the additional CMI that's been included in there, which generally drags that down, the rate per block hour.

We've talked about the reason why -- you talked about the lower contribution to ACMI. It's primarily due to maintenance timing. You saw an increase in maintenance last quarter.

We talked about it some more now. So I wouldn't read too much into the impact that has on our overall ACMI customer business.

What I would say is that we are really satisfied with the terms and conditions of our new agreements, the direction of the business, the overall air freight market. We're happy where things are.

Okay. That's helpful. And so if maintenance comes down next year, realistically we should think ACMI contribution margins improve?

All else being equal, yes. We also need our customers to continue to increase their utilization. So all of those things would be really helpful for ACMI, absolutely.

Got you, okay. And then two things I want to clarify. One, on the military side, what percent increase in share do you get starting this quarter? And then in Charter, how does fuel work there, and what have you assumed for fuel prices in the fourth quarter?

Sure. So with regard to AMC, there aren't too many carriers remaining, and so we expect our share to stay fairly steady at somewhere around 50%. So we fly about half of the military needs.

With regard to fuel and commercial charter, we're seeing fuel rates right now that're around $2.52, something like that. Our business, as I think you know, in ACMI we have no fuel exposure whatsoever. Our customers pay for fuel.

It's not a pass through. It's just something that the customer is responsible for.

In our military business, the military pays us for the fuel. So whatever we pay, they basically reimburse us. There's a pegged rate, and then any over or under is compensated back and forth. So there's no exposure to Atlas, although sometimes it impacts our margins in that business.

The only real fuel exposure that we have is in our commercial charter business. And that business is generally contracted pretty close to when the flying actually takes place, and so therefore, we can generally include that -- the fuel within our pricing. And any longer term pricing is generally tied to some sort of a fuel index, so there's very little exposure for us.

Okay, great. Thank you guys.

Your next question is from John Godyn with Morgan Stanley.

Thank you for taking my question. When I think just over the last few years, I feel like one of the stories over the last few years has been every time we've gotten excited about seasonal or cyclical upturns in demand, what happens is we hit a wall with some structural headwinds that continue to depress air cargo pricing, whether it's belly capacity continuing to grow, maybe even the OEs trying to sell more dedicated freighters in the marketplace, some of the dynamics with modal shift. And along those lines, guys, I just wanted to follow up on your comments a bitbecause another cargo-exposed lessor, that reported earlier this week, said something along the lines of, well, we're seeing a bit of uptick in cargo demand. But we're not seeing these structural headwinds go away. So we're going to sell aircraft into that, and continue to reduce our cargo exposure.

And there's really no way to get bullish on cargo until these structural headwinds go away. So when I think about your comments, how can we have some confidence that these structural headwinds have gone away, and that there really is some sustainability to the uptick that we're seeing?

Well, John, I'll offer a couple of comments. It will either play out or not play out, and so you're asking for a forward view. We'll be on this call a year from now, and we'll see what's actually happened.

Our sense is the market is growing. I don't know which company you're specifically referring to, and that's not important. But I would say one of the things that we've talked about consistently is what are the competitive advantages that Atlas has. And it starts with our aircraft.

We have a very modern fleet of factory built freighters, both our 747-400s and our 747-8s. And those are the most competitive assets in the market. And those are the assets that customers want to fly.

And so if we look at what's parked and what's struggling to be placed in the market, it's typically the 747-400 converted freighters, the passenger-to-freighter conversions, which do carry a weight penalty, a fuel burn penalty. They're older, they have higher maintenance expenses, and they carry less cargo.

So I think it's probably useful to peel the onion back just one layer, and take a look at the underlying assets and how customers want to put them to work. And that's why we've said in a recovering market, we should be able, as Atlas, to take advantage of that early because we have the assets that customers want to fly and operate, and simply the -- I would say the record of our placements just over the past several years when the market had all the structural headwinds that you described, we continued to place aircraft and place them quite consistently.

And over and above that, you take the asset and then look at the reliability and the performance and our global scale, the other element, what I think, is our essential competitive advantage, and so we are excited about freight going forward.

We do believe it will grow. We do believe we'll place more assets than we have to date, and we will grow our CMI operations. So, and then, without being too long-winded here, look at our customer base.

DHL, it's a large customer of ours. About 40% of our fleet flies for DHL. About 40% of large wide body intercontinental freighters fly for integrators.

So I think our placement or our percentage of our fleet placed with an integrator matches the market. But they're growing high single digits, even in a slow market. Etihad announced that their CEO is talking about 16% growth in this market.

So I think again another -- one more level of analysis, are Atlas' customers growing, and are we well positioned to grow with them? And I think we are.

Yes. And I do believe that Atlas has a lot of advantages, regardless of the market environment. But just specific to the idea of are you seeing evidence of these structural overhangs go away or inflect, one way or another, are you actually seeing that evidence? Or are they still out there?

I think the underlying -- the question is, is the freight market -- has the freight market finally returned to growth? And I think it has. And if that's the case, then we should be able to benefit from it, and our customers will as well.

Okay. Thanks a lot.

Thank you, John.

Your next question is from John Mims with FBR Capital Markets.

Hey, guys. How are you?

Hey, John.

So let me ask maybe that question slightly different way. When you talk about the air freight markets are really growing, and we're seeing evidence of that. And fuel prices are down, which are great for demand. But you're down to 2010 levels on a fuel price basis.

How low does that go, or where is the bottom level where you start seeing activation of some of these older, less efficient planes? They may not be as profitable as yours, but these older converted freighters or just older, classics, or even older 400s are pretty cheap now. So what's the risk of having this surge in supply in the commercial market which would hurt yields?

Well, we've talked about five quarters of growth. We've had four quarters of growth with high fuel prices. These lower fuel prices that we're talking about are indeed a very recent phenomenon, almost within the last 60 days.

So we've had growth in the market with much higher fuel prices, I think, as a reflection of what's going on with underlying economic activity, and I think the value that air freight brings to any global supply chain as you think about it.

These BCFs or BDSFs, as we think about these older converted freighters, our first question is who is going to fly them and who wants them? And we haven't seen any placed in ACMI in a very long time, several years now.

So, yes, there's -- there are BCFs parked. There are quite a number of them parked. I just don't see them coming back in large volumes anytime soon.

I'm not aware of airlines that are asking for them, thinking that the lower underlying lease rate of that asset is going to be superior to the benefits that it would have from better fuel burn, lower maintenance costs, and better cargo carrying capacity of a pure factory freighter. We just don't hear anything like that in the market.

So could they come back? Sure. Are they likely to come back? I'm not sure who is going to operate them and who wants them.

Right. Yes, that's the question. It's definitely -- I wouldn't think it's a very good idea but, on the margin, as the breakeven point lowers just due to reduction in fuel prices, do you have these things entering the charter market just going after particular freight forwarders or whatnot, but you haven't started seeing that yet?

No, and somebody has to be willing to put them on their operating certificate and fly them. And we're just not seeing them come back.

Sure. Fair enough. Let me ask you another question on DHL as well.

You're placing more planes with them, so obviously they feel better about growth. And one of the things I've heard from some industry contacts is just that the amount of share of traditional air freight that the integrators are taking from more of the legacy carriers or regular weight air freight. Are you seeing -- everybody's numbers have been good in third quarter.

So that aside, are you seeing DHL in their planning with you really talking about sustained ability to take share in the traditional air freight markets? And if so, what's the theoretical limit or any type of cap that you could have with your relationship with them?

If it's in terms of the number of aircraft that you operate for them, or a percentage of your revenue, is there anything from a concentration standpoint that you would be wary of or that DHL would allow them to be exposed to one particular carrier?

I don't think we should be commenting on DHL or any specific customer of ours. But I think one point you've touched on is that integrators are growing at a rate greater than the air freight market. So they're doing that by taking share from traditional air freight.

And they do that, I think, as you think about the three majors, FedEx, UPS, and DHL, they do that by providing a very compelling value proposition to the customer. But, that said, you look at the large airlines, they're growing as well. And I don't think they've surrendered market to an integrator, and we've been able to grow with them.

We mentioned Etihad, just by way of example, pointing to the remarks they've made about themselves and their growth targets. DHL, we have a 20-year agreement with them. We're in year six.

They've invested $150 million way back in 2007 to own 49% of Polar. That was a strategic decision on their part to make that investment, to have that ownership in one of our underlying subsidiaries. And we've had just great growth with them.

I wouldn't suggest there's a limit to what our growth opportunities are. That would really be for the customer to talk about, really not us.

But we've had great growth from six aircraft initially, to when we take on these four Dash 8s we'll be flying 23. They have an outsourced model as part of their go-to-market proposition. And so I think we have continued growth opportunities with them.

I don't know that there's a cap. I think we've been fortunate to identify companies that are growing, and to become a valued part of their overall operation., whether it's a large customer like DHL, a customer like Etihad, or our other customers.

John, it's Spencer. I'll just briefly add to that.

I know you're a quantitative guy, like I am. When we take a look at the overall large wide body fleet and you take a look at how many planes are operating with the integrators, so if you include those that are operating their own or those that outsource to others, over the past couple of years, the integrators as a percent of the overall large wide body fleet have been somewhere between 30% and 40% of that fleet of large wide body aircraft.

And if you take a look at what Atlas is operating in that same space for DHL, it's the same, about 30% to 40% over the last two years. So our balance is pretty consistent with the overall use of large wide body freighters.

Okay. That's helpful from both of you all. Thank you. And one last quick one if I could on just peak season and the fourth-quarter guidance.

Based on visibility, how far out you quote your commercial contracts as far as the flight plans for your ACMI customers, how much year do we have left as far as potential for upside or downside surprise, based on the guidance you've set forth and the block hours you expect for 2014 in the fourth quarter? Is there still -- is that window a month, or is it six weeks that you could really see that -- some variability there to the up or down?

We're fairly well contracted for the balance of the year. We have some features in our contract where we've committed capacity but not yet price, and so we're in a position where we can take advantage of upside in yield. And yield is improving, certainly has over -- it's actually been a good yield environment since August overall when we think about it.

So I think we have good visibility into our numbers for the balance of the year. It's first full week here of November, and I think our view is pretty solid.

Okay. But the swing factor would be yield at this point, and volumes are pretty set.

It wouldn't be a lot of swing factor. We have a lot of committed capacity at yield. What I was suggesting is we've held back some yield commitment to be able to take advantage of an improving yield environment, and our sense is the yield environment is indeed improving as we get closer to the holiday.

Sure. Makes perfect sense. Thank you so much.

Thank you, John.

Your next question is from Steve O'Hara with Sidoti.

Good morning. Thanks for taking the follow up.

I just had a question about the -- going back to the military. In terms of the current projection from them, should we be thinking about a similar type impact next year that you were expecting this year? I'm just wondering if that makes sense.

Obviously, you have more in ACMI. Commercial Charter seems to be picking up. But I'm just curious if maybe you're talking about flat, but if you were to say 2015 was going to be flat with 2014, would you see the same kind of impact that you expected in 2014?

Yes, Steve. I'd say it's very hard for us right now to predict military, because there's just so much going on and they're not able to give us good visibility going forward. We've said in the call that we expect military volumes to contract somewhat in 2015. How much, I think we're going to be in a much better position to talk about when we get on the call in February and report our full-year 2014 earnings.

The combination of what's going on in West Africa, and in Syria, and Iraq has just driven higher levels of military demand than we would have anticipated. I'm not sure when these situations normalize and when that might occur in 2015. The military is not able to give us great forecasts going forward.

We're in a good position to take advantage of everything they offer, just given the size of our fleet and the flexibility we have. We do expect it to be lower in 2015. I think we'll be in a better position to give you some quantification of that when we get on that call in February.

Okay. And then just maybe quickly on CapEx for 2015.

I don't think you have anything firm lined up. But I was curious, maybe your thoughts on adding aircraft versus just maybe generating more free cash flow, and my assumptions would be that 2015 would be a normal year in terms of placements, or contract renewals. Could you just comment on that?

Sure, Steve. I think there were several things in there.

So as far as ACMI renewals, next year is a typical year. We've said that typically we have three to four renewals that [does] come up at any particular year. Next year is a typical year.

With regard to capital expenditures, we have no commitments for any aircraft acquisitions. So, therefore, the only capital expenditures that are commitments would just generally be our core capital expenditures, which are generally for purchases of rotable parts for our 400s and Dash 8s, primarily for those, and there were some other small things in there.

However, all that being said, we did buy 777s this year. They've been a fantastic investment for this business. We will continue to look for additional investments that make sense for our business.

Right now there's nothing on the horizon. There's nothing that we're sharing with you today. But we constantly are looking to find ways to grow long-term shareholder value to deliver strong IRRs and EPS accretion, so we'll continue to do that.

All right. Thank you very much.

Thank you.

There are no further questions at this time. I will turn the call back over to our presenters.

Thank you, Chris. Spencer and I would like to thank all of you for your interest in Atlas Air Worldwide.

We're strategically positioned to meet the growing needs of our customers in the broader market, and to maintain our leadership in aviation outsourcing. We appreciate your spending your time, sharing your time with us today, and we look forward to speaking with you again in the future. Thank you.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.