Atlas Air Worldwide Holdings Inc (AAWW) 2014 Q4 法說會逐字稿

Good morning my name is Sean, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Atlas Air Worldwide Fourth-Quarter's Earning conference call.

(Operator Instructions)

Thank you. Atlas Air, you may begin your conference.

Thank you, Sean, and good morning, everyone. I'm Ed McGarvey, Vice President and Treasurer for Atlas Air Worldwide. Welcome to our fourth-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 at atlasair.com. You may also 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 may involve risks and uncertainties.

Our actual results or actions may differ materially from those projected in any forward-looking statements. For information about risk factors related to our business, please refer to our 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 you've gone through the queue, we'll 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, 2014 ended on a strong note, and 2015 is starting out well. Continuing the improvement we saw all throughout the year, there was a strong and sustained peak season for the first time in several years. And so far, airfreight demand in the first quarter continues to reflect the broad-based pickup that began in 2014.

Our adjusted earnings-per-share of $1.55 in the fourth quarter and $3.72 for the full year, reflects the leadership and strength of our ACMI and Charter businesses, the growth of our Dry Leasing segment, and our ongoing efforts to drive efficiency and productivity through our continuous improvement initiatives.

We capitalized on the improvement in market demand, driving increased utilization of our modern efficient aircraft and innovative services. We also performed a substantial amount of heavy maintenance during the fourth quarter, most of this was for engine overhauls for our 747-400 fleet. This positions us to continue to take advantage of market growth and business opportunities ahead.

Slide 4 illustrates the positive direction of airfreight demand in 2014, and this momentum continues in 2015. Shanghai's PACTL terminal for example, posted a record year in 2014, with reported tonnage growing 16%. And just recently, it reported that January tonnage rose 12.9% year-over-year.

Reflecting the pickup in global trade, IATA reported international airfreight traffic grew 4.8% in 2014. That's a rate outpacing supply, and driving the first meaningful growth since 2010. In addition, IATA estimates that the international airfreight traffic measured on a freight ton kilometer basis will grow at a compound rate of nearly 5% through 2019.

Slide 5 focuses on our earnings framework for 2015. We begin with a favorable view about the prospects for the overall airfreight environment, and the demand for our aircraft and services. As a result, we look for moderate growth in adjusted fully diluted earnings-per-share this year.

Our current outlook reflects two primary considerations. First, industry forecasts indicate that global airfreight demand will grow approximately 4% to 5% in 2015, outpacing projected growth in global trade. Similar to 2014, achieving growth at this level will require a continuation of positive global economic activity, driven by healthy consumer and business confidence.

Second, while our operating results are expected to benefit from a reduction in maintenance expense in 2015, we face a continued contraction in military demand as US military activities overseas are scaled down.

We are seeing good demand in the first quarter of 2015, leading up to the start of the Lunar New Year holidays on February 19th. And we expect earnings-per-share in the first quarter to be in line with or better than our first quarter 2014 adjusted EPS of $0.45.

At this point in the year, there's limited visibility into second half market demand. Typically, the majority of our earnings are generated in the second half, and we will update our expectations as the year progresses. Should airfreight continue to grow as anticipated in 2015, our business initiatives and investments have positioned Atlas to be one of the prime beneficiaries.

For the full-year, we expect total block hours to be several percentage points higher than 2014, with approximately 75% in ACMI and the balance in Charter. ACMI hours are anticipated to reflect additional 747-8 and 747-400 flying, as well as an increase in CMI operations. Driven primarily by the addition of four customer owned 767 freighters to our fleet in the first quarter.

As a reminder, revenues in our ACMI segment do not include a component for fuel, or other customer borne operating costs. As a result, we expect the shift in block hour volumes from Charter to ACMI to lower total reported revenues, while overall Company earnings should grow.

In March, we will place an additional 747-8 freighter into ACMI service for DHL Express. This aircraft will initially replace an existing 747-400 operating for DHL today. The placement reflects the continuing growth of DHL's transpacific operations, and our strong partnership with them.

To affect this, one of our 747-8 freighters currently in ACMI service for Panalpina will transition promptly to DHL. We will continue to operate one 747-8 freighter for Panalpina between Europe, the Untied States, and points in Mexico on an ACMI basis.

We have also entered into a long-term 747-400 Charter agreement with Panalpina, as it expands its network and extends its customer service offerings. This new freighter service for Panalpina commences in March.

Results in our Dry Leasing segment this year will continue to be driven largely by the six 777 freighters that we acquired in 2013 and 2014. Each with a long-term customer lease in place.

Aircraft maintenance expense in 2015 should total approximately $175 million, and depreciation is expected to total approximately $125 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 between $30 million to $40 million, mainly for spare parts for our fleet.

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

Thank you, Bill, and hello, everyone.

Slide 6 highlights our fourth-quarter results. Our adjusted net income totaled $38.8 million, or $1.55 per diluted share. On a reported basis, net income totaled $41.6 million, or $1.66 per diluted share.

Results in the fourth quarter benefited from earnings in ACMI, and improved contributions in Charter and Dry Leasing. During the quarter, we generated free cash flow of $97 million or $3.88 per share, bringing our full-year total to $248 million or $9.86 per share.

Our reported results in the fourth quarter included an income tax rate benefit of 7%. That was primarily due to an income tax benefit of $10.7 million related to beneficial tax planning, regarding the treatment of extraterritorial income from the offshore leasing of certain of our aircraft. Partially offsetting this sizable income tax benefit, our reported results also included a pretax special charge of $5.5 million, primarily related to an aircraft held for sale.

Beginning with our results for the fourth quarter of 2014, we have combined our Commercial and Military Charter businesses into a single Charter segment as we now assess operating results at that level. This decision recognizes the contraction of our Military business compared with the past, as well as the increased interchangeability of our Charter aircraft between Commercial and Military customers.

Looking at slide 7, operating revenues in the fourth quarter benefited from our diversified business mix. Including higher volumes in ACMI, the global scale and scope of our Charter business, and the growth of our Dry Leasing operations.

ACMI revenues and volumes for the quarter were up about 3% to 4%, primarily due to increases in 747-8 and CMI flying. In Charter, revenues in the fourth quarter were comparable to revenues in the fourth quarter of 2013, but they reflected a different mix of cargo and passenger block hours and rates. In Cargo, block hours were lower, reflecting our decision to reduce capacity at the end of 2013 and the continued contraction of flying for the military.

In Passenger, increased buy-ins were driven by higher overall demand. During the College Football Bowl season, we operated Passenger Charters for nearly 20% of the universities competing in the games. We operated flights carrying a variety of teams, bands and officials to 13 ball games, many of which were on behalf of repeat customers.

In Dry Leasing, revenues grew following the acquisition in early 2014 of three of our six 777 freighters. 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 $91 million in the fourth quarter compared with $103 million in the fourth 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.

Direct contribution in ACMI during the fourth quarter reflected an increase in aircraft utilization, driven by market demand. These were offset by an increase in conditions-based heavy maintenance expense, primarily on our 747-400 aircraft and engines.

Improved Charter contribution during the quarter reflected an increase in Cargo block hour rates, and utilization. Driven by market demand, and our decision to reduce Cargo capacity at the end of 2013.

Charter results also benefited from an increase in Passenger block hour volumes as I noted a moment ago. These were partially offset by increases in heavy maintenance expense, as well as crew member travel and ground handling expenses from flying to higher cost locations. In Dry Leasing, profitability grew following our acquisition of 777 aircraft and the expansion of our Dry Leasing business.

Turning to slide 9 and our balance sheet. We ended the fourth quarter of 2014 with cash including cash equivalents, short-term investments, and restricted cash totaling $331 million. That compared with $288 million at September 30th, and $339 million at the end of last year.

Our cash position at December 31st reflected net cash of $105 million provided by operating activities during the fourth quarter. And that was partially offset by net cash of $24 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 payments of debt. Excluding the acquisition of aircraft and engines, our core capital expenditures during the quarter totaled $7 million, and were approximately $25 million for the year.

As slide 10 shows, at the end of the fourth quarter, our net leverage ratio, which includes capitalized rents, was 5.4 times trailing 12 month EBITDAR. Including the benefit of our investments and our outstanding EETCs, that's down from 6 times at March 31st, 5.8 times at June 30th, and 5.6 times at September 30th. Primarily driven by the pay down of outstanding debts. During 2014, we paid down approximately $200 million of our overall debt.

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. In addition to expected earnings growth this year, we continue to focus on the longer-term growth of our business.

With a resilient business model, world-class employees, strong customer relationships, and a superior fleet. We are well-positioned to capitalize on market improvements, to generate substantial earnings in cash flow, and to continue to enhance shareholder value.

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

Thank you.

(Operator Instructions)

Jack Atkins.

Good morning, guys. Thanks for taking my questions.

So I guess just to start off, could we talk about the shift of the contract on the dash 8 from Panalpina to DHL? Was this at the expiration of Panalpina's existing contract, and just why would Panalpina want to enter into a long-term Charter contract versus an ACMI agreement? Could you maybe help us understand how those two types of contracts differ?

Sure. I'm not going to spend a lot of time talking about Panalpina per se. We don't discuss our customers, Jack, as you know. But they did issue their own press release this morning, and described the transaction from their perspective.

But essentially, Panelpina, we will continue to operate the 747-8 and ACMI for Panalpina. ACMI contracts are multi-year, and their a fixed take or pay where we provide the aircraft and all the services for the customer.

The Charter contract is just that. It's a Charter contract. It is to serve their new route networks that they're putting in place from Asia into the Americas, and they'll describe that I think in more detail as I think about it

But it is a Charter contract. It doesn't have the same fixed take or pay nature that an ACMI contract has. But for them, that combination in their own controlled network, the combination of one ACMI agreement with Atlas.

And then this multi-year agreement on the Charters where they talk about them being in the range of several hundred per year is the cornerstone of the relationship going forward. And this is a relationship, as you may know, that we've had with Panalpina now for over 20 years.

DHL, on the other hand, certainly they've got five 747-8s in service for them today. They very much appreciate the aircraft and what it's able to do for them in their network. And so the dash 8 that's coming back from Panalpina immediately goes into service for DHL.

And if you step back and think about DHL, they've had great growth over the past several years, and even in their most recently reported earnings as a segment of Deutsche Post. We're looking at 8% to 9% volume growth in their business overall.

And if you look at the growth, even before this dash 8 comes in, that we've experienced with DHL in 2014 over 2013. We had almost 10% growth in terms of the deployed capacity measured by an available freight ton kilometer basis with DHL.

Okay. Bill, thank you for that. And then just a follow-up, the issues on the West Coast as it relates to the labor disputes out there, and also poor congestion continuing to seem to get worse not better with some port shutdowns over the course of the next four or five days.

Are you seeing much ocean to air conversion? Did you see much in the fourth quarter? Are you seeing that again in the first quarter? And can you maybe talk about how that plus lower fuel prices could maybe help drive some significantly elevated demand levels in 2015?

So there's a lot there, Jack. I made a comment earlier, we, I think we the industry, saw that a very strong and sustained peak in 2014 that we hadn't seen before. Depending on how you think about it, volumes really began to materialize in late August early September timeframe, and ran right through to essentially the holiday season.

In 2013, we had a narrow peak, if you will. One that began in October, and we didn't really see any material rate increase until November. And it felt like it was more driven by one or two product introductions, as opposed to just general levels of overall demand.

Coming out of the holiday season, and some of it could certainly be the later Lunar New Year this year, which New Year's Day is I guess February 19th. We had strong demand, we, the industry and we Atlas, in our ACMI customers as well, had strong demand picking up right up after the holidays and running, from our view, right up to Lunar New Year. And then on top of that, there's been the effect, from our perspective, of the interruptions on the West Coast port and the effect that's having on the supply chain.

So certainly, there's some volume in the market today as a result of the West Coast port operations. In particular, there's a lot of full plane load Charter activity coming out of Japan. As the Japanese automakers and other Japanese manufacturers with assembly operations here are needing to fly material and product into the US to support the manufacturing plants that they have here.

But I think your question had some really good insight. I think if fuel remains at lower levels than we've seen it in recent years, and I won't predict the fuel price, but if fuel remains at lower levels combined with the interruptions that have occurred on the West Coast. I think a number of companies may begin to include more air than currently they have in their global supply chain strategy, and I think that overall for the industry is a good thing.

It's hard to predict, but I don't think it's an unreasonable concept to think about. Overall, with the stronger market and lower fill prices, I think that creates a very favorable environment for us, for our ACMI customers, and our ability to place more aircraft into ACMI and strengthen the Charter returns going forward.

Okay, Bill. Thanks so much for the insight, I appreciate it.

John Mims.

Thanks, guys. Good morning, and thanks for taking the calls.

So, Bill, maybe if we can just continue on that a little bit. Panalpina, in their press release, has said they're going to commit to 200 Charters. There is, like you said, some strong demand out of Japan, and you've got the forward disruptions.

The planes that are available for Charter are less than they were at this point last year. So it seems like you've got a fairly limited supply and demand coming from a number of places. So what would you need to see and when would you need it to be a bit more positive?

And I look at where the stock iss trading right now, and I know that you're only saying what you can say what you see right this minute, but the market is reading this somewhat negatively. So I'm just curious what you would need to see to put a more aggressive line in the sand as far as what you could see this year based on the tailwinds that seem to be coming?

Well I think what we started out saying was we have a very favorable view about the market going forward. I think the only caution that we put out there is that the second half of each year tends to be the stronger part of the earnings cycle, and there's just limited visibility into the second half. And I think that's just the case generally.

With the strength that's in the market, the good growth year-over-year, those trends continuing into 2015, we're very positive. I think the cautionary tales are or the caution is about what's happening around the world generally.

What happens in Europe with Greece and some of the other questions that are out there. Does that put a damper on demand in the very important Asia to Europe trade lane that we and our ACMI customers serve?

And the instability in the Middle East, what that may or may not lead to. We're just pointing out to the fact that there still remains some uncertainty in the forecast of market demand going forward.

In terms of our ability to capture growing market, there's several factors. Certainly, increased utilization by our ACMI customers, a high percentage of that drops to our bottom line. There's certainly very good interest in ACMI, and growing ACMI with our customers.

We do have the capacity, a good amount of capacity is probably a better way to say it, in terms to serve that Charter market, and drive higher utilization of the aircraft in that market as well. And so, our marketing team working with our operating team are looking at all of the charter opportunities that are presented to us. And we're seeking to optimize the result by aligning which Charters we'll except, and when they're going to fly, how quickly we're able to turn that one flight into another flight, turn the aircraft, and keep going.

So there's the opportunity to do that as well. In terms of capacity additions, fundamental fleet capacity additions, we have a disciplined approach to managing our fleet. If there is a clear line of sight for us where we're not speculatively taking on capacity, we will.

Okay. That's helpful.

And if you look using the retail industry and the Spring fashion supply chain and what not, that seems to be fairly I guess a big piece of the port disruption conversation right now. Are you having or are your customers having conversations or involved in those conversations now in terms of getting goods to the shelves in time for the Spring fashion trade? Or is that something that's still yet to be determined from your view?

No, I don't think it's yet to be determined. I think the key freight forwarders and express operators and other supply-chain providers are absolutely in conversations with the several commodity segments that have got to be concerned about the continued disruption on the port -- on the West Coast ports.

And then just one follow-up, and I'll turn it back. The tax rate guidance that you gave out on a year-over-year basis, it's a little lumpy, your the first quarter tax rate was fairly high. What's the -- and I appreciate the guidance of flat EPS, flat to better EPS, year-over-year in the first quarter. But how does first quarter look in your projections on a pretax basis?

John, it's Spencer. I think -- I don't think there should be any big surprises in our tax rate during the first quarter. We think it will be approximately 28% for the full year, and so I think using that throughout is a reasonable expectation at this point.

Right. So, okay. All right.

But I just need to model that. I just wanted to make sure that's not implying that pretax would be down, and you make that up on a favorable tax rate.

No, that's not our expectation.

Right, cool. Okay, thanks so much.

Thank you.

Thank you.

David Campbell, Thomas Davis and Company.

Thanks, Bill and Spencer. I'm a little curious about how the Company gets more block hours of any significance, and therefore, improved growth without more aircraft. As somebody mentioned, as you mentioned, that aircraft available for Charters would be down I guess because you're using one more with DHL. So I'm a little confused about where we're going to get the -- how we're going to get more block our growth of any significance without adding to the aircraft fleet?

David, it's Spencer. I think part of the answer is higher utilization. So a stronger market should lead to our ACMI customers flying above their minimum guarantees.

It should lead to a stronger Charter market, and higher utilization in our Charter business. And should also impact yields.

So you talked about growth. So there's growth in block hours, and therefore, utilization, but there's also growth in yield. So I think those things taken together should lead to growth for us for next year -- this year, sorry, 2015.

Yes. And I think the only thing to add to that, David, is, if we see a sustained requirement for capacity that we feel very strongly about that we can put to work and generate the kind of returns that we would want. We'd be willing to increase capacity.

But before we do that, we would certainly look to drive max utilization out of the fleet, and make sure we're pushing the price lever as much as possible as we can on yield. And then I think we'd begin to think about capacity, just given the uncertainty about how several of these larger macro issues may play out through the balance of 2015 into 2016. And that was really the balancing equation we're trying to solve for.

Okay. And I hear what you said about, you thought that some traffic was moving from C freight to airfreight services because of the West Coast. I had a hard time seeing it in the export data from Asia. That is, the growth in the fourth quarter or in the month of November, December seem to be comparable to what was happening before this strike had an impact. And -- but, you seem to think that (multiple speakers).

I think it's just a matter maybe of recency, David? We were experiencing a very strong peak, as we talked about, in the fourth quarter. Although these port issues have been going on for quite some time.

I think with the interruptions we've had really since January and now they've reported CMA's reported this cessation of [stevedoring] operations for four of the next five days, I think all that -- the impact I think is going to be more clearly seen in the first quarter.

Okay, thank you.

Scott Group, Wolfe Research.

Thanks, morning, guys. So I'm not too familiar with how the longer-term Charter agreements work, so just a few questions here.

So are there contractual minimums involved here, or is the 200 Charters just based on the current demand outlook? And then just along those lines, what do you -- how do you think 200 Charters compares on a block hour basis versus a dash 8 in ACMI? And is there in any comfort you can give us about the contribution margins here being better than average Charter margins that we've seen in the past couple years?

So, a couple of things. These are -- this is a hard agreement. And I did want to distinguish Charter from ACMI. But there are 200 plus flights in the year contracted with Panalpina running through the year, because they are using the Charters as part of what they call their own controlled network and refer to often as a unique network.

So this is a fixed capacity schedule of flying that Panalpina will market to their customers in the trade lanes that these will serve. And it will generate, for the full year, attractive returns for us. It will provide, I believe, for Panalpina the capacity they want to have in the direction and in the trade lanes that they want to have for their customers.

If something changes in the demand environment and they wanted -- and their customers tell them we need 150 Charters a year. How does that work?

I'm not going to get into the detail of their contracts. But Panalpina's press releases said they have 200 Charter flights scheduled with Atlas for the year, and I'd just leave it at that.

Okay. In terms of the maintenance expense, it feels like a good amount was pulled forward into fourth quarter, matured -- heard fourth quarter helps 2015. Is there any initial way to think about 2016?

Is that somewhere between 2014 and 2015 from a maintenance standpoint? Any way to think about that?

Scott, this is our fourth-quarter 2014 earnings call, and so we've provided a framework for 2015. I don't think we're in a position at this point to start talking about 2016.

We've provided maintenance expense all throughout -- for the full year of 2015. But you're right in that there was additional maintenance. Maintenance is conditions based, so it's based on either the calendar, how many months, or it's based on cycles.

For example, for engines. How many takeoffs and landings. So it's conditions based, either based on time or based on activity.

And so there was more incurred in the fourth quarter than we had previously thought, and that's going to lead to less maintenance in 2015, that's for sure. And so that's what we're talking about.

Okay. And if I can just ask one more, just on the Military side. I know you're not breaking that out specifically anymore.

But if I remember, so a year ago, you talked about a $0.70 headwind to 2014 earnings. I'm guessing it ends up being not as bad as that. But within the framework for 2015, are you expecting a similar magnitude headwind in the numbers?

Yes so for 2014, the ACMI business overall, it did decline due to the continued contraction -- sorry AMC, did decline due to the continued contraction in Military demand as the military presence overseas has been reduced. But block hours were higher than what we originally thought this time last year.

For 2015, we think that both AMC Cargo and AMC Passenger, both of those we expect to decline. And so what we've said is that we think we'll see -- to your previous question, we think we'll see some tailwinds coming from lower maintenance, but we think we'll see some headwinds coming from lower military activity. And together, those two things combined, we think will lead to our earnings growing moderately.

Okay. All right. Thank you, guys.

Thanks, Scott.

Thank you.

John Barnes, RBC Capital Markets.

Thanks, guys, for taking my question. First, on the reduction of fuel costs. Obviously, jet fuel prices have come down.

Do you feel like they've come down enough and maybe the market with the volume increase in 2014 in the real peak, and then you've even said you're starting off 2015 in pretty good shape. Are you concerned at all about that combination may be attracting some parked capacity back into the industry? And if so, how much could come back in before we'd really begin to have negative consequences for rates, utilization, that type of thing?

Yes, Tom, this is Bill. It really is a good question, and we've spend a lot of time analyzing that, as you would expect.

So about six months ago or greater, there were 19 747-400 factory freighters parked, and today there are 19 747-400 factory freighters parked. So even in the face of what was a much different peak this year that started mid-third-quarter, capacity didn't really come back. Now, I have to imagine there were some capacity increases, just our ACMI customers alone flew at a higher level of utilization. That's a form of capacity increase.

And a number of the large carriers with -- a number of the carriers with large freighter fleets could put more rotations in possibly per week, which would be and other form of increased capacity. But we haven't seen it yet to date, and I think many carriers exercise some capacity constraint and elected to drive yield.

So some of those 747-400 freighters could come back. I think the companies that have those freighters have shown that their reasons on that, judicious on that. So I think certainly it's possible that some capacity could come back. I don't know that all 19 come streaming back into the market.

Your question of when would it be -- when would it have an impact, is really supply and demand. I think what we've seen is good discipline, and we'll see how that continues. But it seems to be what most of the carriers are talking about when they talk about their businesses.

I'm not concerned that we're going to see a lot of BCF's, which are parked as well, coming back in. That aircraft just doesn't have a high level of market acceptance. It burns more fuel, and it carries last cargo due to the -- from a loadability point of view.

In large part, because you have that upper floor from the old passenger deck goes halfway down aircraft. So some could come back. So far, the market seems to have pretty good discipline. And you might see a couple of BCF's come back here and there, but I think they serve perhaps different market.

And the 19 OEM built freighters, how long -- at what point are they permanently parked? How long can they sit out there until they're just permanently parked?

They could be maintained for some time. But as time elapses, they're heavy maintenance events that are just driven by time not by use.

And so you're going to start to accumulate time on, again C checks and D checks, and so the owner then is going to have to make that economic analysis to say is it worth so many millions of dollars of heavy maintenance? And then they would need to consider what the state -- where the engines are in order to bring them back.

I think one of the good things through about the -- there's a lot of good things about lower fuel overall for the airfreight industry. But I think particularly from an Atlas perspective, even though there are some number of aircraft parked and a couple may come back, I think it certainly extends the competitiveness of the 747-400 into the markets where they serve best. And our customers can take advantage of that lower fuel cost.

Sure. Okay. And I have one question on the DHL -- I'm sorry, the Panalpina agreement,

And I'm sorry to beat this horse, but when you look at it taking an ACMI customer, and now you've rolled out a new product with a contract that has multiple charters. It's different from your spot Charter activity, obviously. But, I don't want to use the word desperation, but there's been a lot of questions around the size and scope of the ACMI market, how many customers are out there.

And I guess when we see some modification to an agreement like this, it begs the question, does this suggest that there's a limit to how many customers are potentially out there? And what is the risk that modifying an agreement like this with one of your long-term customers opens up that floodgate for other customers to come in and say, hey, you did it for them, we'd like to look at something similar? And is there a risk that it changes the dynamic of that ACMI agreement that we've come to rely on to provide that degree of predictability in your model?

I think the perfectibility in our model is good, John, and I'll address it another way. So we announced last year that we had a new ACMI, BST Logistics, a Chinese freight forwarder. Not terribly different from Panalpina in their business model.

And what we had had with BST in place for several years, was a fixed Charter agreement. Where we ran Charters on a fixed scheduled basis, if you will, for BST for a number of years. And those fixed Charter agreements allowed them to build their business, and they ultimately became a 747-8 ACMI customer. So and I think they're potentially could be more growth with them, and other non-traditional or non-airline operator ACMI customers.

There was a lot of questions at the time of the delivery of the 747-8s, because we put them to work. And could we put them to work and generate the kind of returns we wanted to when we had the investment. Last year at this time, there was a lot of concern in the market about British Airways' decision to exit their own dedicated freighter capacity in ACMI, and we've put those 747-8s to work.

Etihad, who has grown their cargo business quite genetically. In their most recent press release, their CEO, James Hogan, was talking about the importance of cargo and how cargo is growing for them. And one of the things he noted about specifically was this new service from Malpensa, Italy to Columbia in a joint venture with Avianca.

Well that's an Atlas Air 747 aircraft that's operating that for Etihad, and they have the two aircraft plus fours, plus the dash 8. As I mentioned earlier, DHL increased its AFTKs through Atlas 10%. in 2014. And I expect they will increase deployed capacity through Atlas in 2015 as well, and they've already done some of that incrementally in the 747-8.

Qantas has retained ACMI operations, and it's an important part of their business. When, not so long ago because of the more broad issues and considerations around Qantas, that I think there might of been market expectation the aircraft were coming back.

So I think what Panalpina has done is its looked at their reserved markets, how they want to deploy dedicated capacity that they choose to operate, and then the mix that they'll buy in the market. That capacity, it should increase but I don't see it as desperation at all. I think there's a good ACMI market, I think we will be able to grow ACMI with current and new customers.

The Charter market is great for us because it drives high utilization of the fleet. And with CMI, we brought on even more aircraft now. We'll be up to 18 in CMI, so I think it underscores the quality of the underlying service, the flight operations, the maintenance operations and the logistics overall.

So I think we're in a good position to grow. And if you think about where we were last year on this call, it was a very different environment. It hadn't been a great peak, a lot of uncertainty, what the heck is 2014 going to look like, can we place planes. And I think we're in a very different position at the beginning of 2015 then we found ourselves last year. That's my view.

All right. Well thank you for that color. I really appreciate it.

Thanks, John.

Jason Ursaner, CJS.

Good morning.

Morning.

Going back to the maintenance question, I'm just still not really understanding what led to pulling forward the $11 million of heavy maintenance relative to the guidance in November? If it's conditions-based on time or activity, shouldn't this have been pretty well telegraphed?

Yes, Jason. Some of it can be, and some of it cannot be. So sometimes it is purely calendar-based. In the 18 months or 24 months you know that a check is due, and so that can absolutely be scheduled.

Sometimes there's not a slot available, so sometimes there's a check scheduled for say January. But a slot is not available, and so there is a slot open in December, for example. So that happens.

There are other times when for engines, for example, we had some engines that were off wing. Where we needed those engines for early 2015, and so it's going to help our operations in early 2015. So that's why we feel good about what we're seeing for the first quarter of 2015.

There are also things unfortunately sometimes that are unforeseen. You take an engine off wing for what seems to be a routine check, and then you do borescope and you find out there are some blade issues or this or that. And things like that happen.

So that happens sometimes as well. So it's not perfectly clear, but we try to give you -- every quarter we try to give you our best estimate of what maintenance is going to be. And I think the work that we did in the fourth quarter will really put us in a good position for the first quarter and going into 2015.

Okay. And in the quarter in Charter, just where would you peg average spot rates out of Asia for most of the quarter?

Well they've been changing as a result of the West Coast port interruptions. And so the rates out of Hong Kong are probably $3.50, $3.60, maybe $3.40 for the West Coast, $3.50, $3.60 to the Midwest for spot rates. They're in the low $4 coming out of Shanghai into the same markets overall. So they're good rates for -- certainly a very good rate for February as we move into Lunar New Year.

And, Jason, I just want to confirm. You were asking about rates currently right now, or you were asking about the fourth quarter of last year?

You gave currently right now, but also maybe just where they peaked out during the holiday season?

Sure. So interestingly, when you look at the Commercial Charter yields throughout 2014, interestingly, the first half of the year when you exclude fuel, the yields were the lowest they've been for the past five years through the first six months. However, from that point forward, starting in between June and July, the rates started picking up at that point, and by the end of the year they were better than 2012 -- 2011, 2012 and 2013.

Which kind of makes sense, Spencer, as you think about the market and the fact that we had a sustained peak.

Right. So maybe just following up on that last part with rates at some point shifting and going above the last couple years. Just going back to some of the questions you took on the guidance outlook and fuel.

The one thing that really surprised me was that there really wasn't a whole lot of mention of fuel in the prepared remarks. And I understood the commentary that you're not predicting fuel prices for the full-year, and that it should be a benefit.

But wouldn't it be more material than that? Sitting here today, wouldn't current fuel prices really produce a pretty sizable margin benefit in terms of the spread of yields over fuel if yields are above where they were?

Look, recall, we have limited operations where we have fuel risk. So 75% of the flyings at ACMI CMI, there's no fuel exposure in ACMI and CMI.

I'm just talking more about Charter.

But even Charter, when we're flying for our military customer in the Charter segment, there's no fuel risk there either. And a number of our program Charters, ones that have longer tenure, internally, we call it ACMI Charter, not that it's the ACMI contract. But it's ACMI Charter, because we're not taking any fuel risk, even in the longer-term charter programs.

So, we quote to our customer in that context a rate without fuel, or a rate for a short-term period of time so we're not taking risk or a rate with an index. So when you start to parse all of that back, then the fuel component becomes quite small relative to the total level of flying. And then -- so we're getting -- not wholly, but we are nearly fuel neutral, which I think for the long-term that's where we want to be.

Okay, great. Appreciate the details. Thanks.

Steve O'Hara Sidoti and Company.

Hello, good morning.

Morning, Steve.

I was just curious if you could just talk about free cash flow and looking at 2015. If net income is up a little bit, depreciation I think it's $125 million, and then I think you have other amortization in there that actually adds a little bit to that.

But it seemed like net -- operating cash flow should be in the neighborhood of let's say $250 million to $270 million pretty easily. And I'm just wondering what other CapEx you have out there that maybe you're looking at that would maybe negate some of that free cash flow, being maybe returned to shareholders or paying down debt and boosting or benefiting the balance sheet?

Sure. Good question, Steve.

So when it comes to cash, we are very proud of where we ended the year. And so I just wanted to point out a few things, and then I'll come to free cash flow.

But with regard to cash, over the course of 2014, we added modern efficient assets to our fleet. We added three 777's, as you know, early in the year. We added to our CMI business, which requires very little cash outlay.

We paid down $200 million of debt. We repurchased 1.8% of our outstanding stock. We did all of those things, and our cash balance stayed the same as the prior year.

So we were able to do all of those things and our cash balance stayed the same. So I'm excited to talk about that.

So free cash flow in 2014, as you know, was $9.86 per share. For 2015, to your question, we think that the free cash flow will be in line with or better than 2014. So pretty similar result, which gives us the opportunity to continue to pursue our capital allocation strategy.

Which is to really focus on three things, which we think we've really done well and balanced quite well. One is maintaining a strong balance sheet, and so we expect to continue to pay down debt. The other is continuing to invest in our business, and as we said last year, we bought 777s.

We continued to look at opportunities to find ways, to David's question earlier, to find different ways to continue to grow the business, and then returning capital. So we will do that on an opportunistic basis. We still have $45 million remaining under Board authority.

So we still plan on focusing on all of those things. And again, when it comes to cash we utilize our free cash flow in each of the areas in our capital allocation strategy to really do some great things in 2014 that allowed us to end the year at the same position as we started. More or less.

Okay. And I guess in terms of -- when do you -- maybe bolstering the fleet, when do you need to make decisions on the fleet type going forward, and more dash 8s, or 777s, or something like that? Is that something that's an eminent decision, or could we get a few years of very good free cash flow, even with full CapEx included?

It seems like you could do $7 a share pretty easily without even blinking in 2015. And it doesn't really seem to be reflected in the stock price, and I'm just kind of wondering where the disparity comes from?

I can't answer what the stock market is thinking are reacting, or why there's disparity between the free cash flow being generated and the stock price. But we are generating a significant amount of free cash flow, and we've been using that, again, we think, the right ways. Last year, we were able to buy three 777s, we bought three 777's the year before.

Those assets are performing really well. And when we first did it, I think there was some question about it. But now you see the results.

And so that's what we were talking about when we acquired those assets. You now see the results, you now see the growth of our Dry Leasing business, so we continue to evaluate.

We will see if additional purchases make sense. But if not, we haven't made any purchases really that did not make sense. And so, Steve, we'll continue to utilize that cash.

If nothing else makes sense, then maybe we'll buy more of the stock back, or maybe we'll pay down more debt. We will continue to do what we think is right with our cash.

Okay. All right. Thank you very much.

Thank you.

Jack Atkins, Stephens Incorporated.

Great, thanks, guys. Just a couple quick follow-up here.

The plane that is currently being held for sale, could you give us a little bit of color on what exactly that is in terms of asset type?

Sure. I'll comment on that for you, Jack.

It is a 737-800 passenger plane, so it's a narrowbody plane. And just the reason why it's for sale, as you know, over the last couple of years, I was just saying that over the last couple of years, our focus had tightened for our Dry Leasing business has really shifted more towards widebody freighters.

We had a good opportunity in this case to sell a narrowbody passenger aircraft, lock in a good economic return, and enhance the cash position for future investments. So the results there for that plane, were actually better than the business case that we prepared when we acquired aircraft. And so overall when it comes to our Dry Leasing business, as I was just saying, we're really pleased with the investments we've made in that business and you can now see the resulting financial returns.

Okay. That's helpful, Spencer.

And the last question in terms of the expected amount of debt amortization, Spencer, that you're projecting for 2015. I think under your XM dash 8 agreements and at least three of your 777s, there's sort of a steady amortization there. Could you maybe help us think about that just from a balance sheet perspective?

I think, Jack, it would be pretty similar to 2014. Obviously, a little bit lower, but very, very similar to the --.

About $200 million in net debt reduction?

Approximately. It should be a little bit lower over time due to the amortization tables, but pretty similar.

Okay, that's great. Thank you.

Thank you.

There are no further questions at this time. Presenters, I turn the call back to you.

Thank you, Sean. Spencer and I would like to thank all of you for joining us today, and 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 sharing your time with us today, and we look forward to speaking with each of you soon. Thank you.

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