Atlas Air Worldwide Holdings Inc (AAWW) 2015 Q2 法說會逐字稿

Good morning, my name is Shannon, and I will be your conference operator today. At this time I would like to welcome everyone to the second quarter earnings call for Atlas Air Worldwide. All lines have been placed on mute to prevent any background noise. After the speakers remarks there will be a question and an answer session. (Operator Instructions). Thank you. I will now turn the call over to Atlas Air.

Thank you Shannon, and good morning everyone. I am Ed McGarvey Vice President and Treasurer for Atlas Air Worldwide. Welcome to our second quarter 2015 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 two, 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 and 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 2014 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 slides. You can also find these on our website at AtlasAir.com. During our question and answer period today, we'd like to ask participants to limit themselves to one principal question and one follow-up question, so that we may accommodate as many participants as possible. After we'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. And thank you for joining us today. Beginning with slide three, we have a strong first half of 2015, in line with our earnings framework and our outlook for a strong year. We are seeing good demand for our aircraft and services as we enter the second half, as many of our customers are outperforming the overall market. We are gathering additional insight into second half demand, yields, and military requirements. And we continue to expect our full year results to increase significantly compared with 2014.

Adjusted EPS in the second quarter totaled $1.17, nearly double the $0.63 we reported in the second quarter last year. Earnings in the second quarter were driven by contribution and margin strength and ACMI, charter, and dry leasing. Responding to market demand and customer requirements, we are implementing several previously announced fleet initiatives that will enhance our ACMI, charter and dry leasing businesses. These are incorporated in our outlook for the year, and they include placing an additional 747-400 freighter in ACMI service at the start of the third quarter, and acquiring a new 747-8 freighter with delivery scheduled for November. To meet additional charter demand, we have reactivated an owned, unencumbered 747-400 converted freighter, and we've entered into a short-term operating lease for a second converted freighter on very favorable terms.

In addition, we are expanding our Titan dry leasing portfolio to include two 767-300 aircraft. These are being converted to freighter configuration with delivery scheduled in the fourth quarter. More importantly, these aircraft have already been leased on a long-term basis commencing at that time. Our approach to business growth and balance sheet structure remains disciplined, and we're managing our fleet accordingly. We are utilizing the proceeds from our issuance of low coupon convertible notes in June, to refinance higher cost debt and to enhance our operating capabilities. Spencer will provide you with more on this in his comments. Moving on, slide four illustrates the continuing positive direction of air freight demand. Shanghai's PACTL terminal for example posted 9.3% tonnage growth in the second quarter, and 10.9% growth in the first half of 2015. IATA has also reported that international air freight traffic grew at 4.5% in the first five months of 2015, IATA's midyear 2015 forecast expects that economic growth in trade will accelerate in the second half of the year. And in international freight traffic, measured on a freight ton kilometer basis, will grow at a 6% rate this year after growing at the same rate in 2014. On the supply side, capacity has exceeded demand so far in 2015. But the additions have been measured and disciplined. And while gross yields are lower due to reduced fuel prices, net commercial cargo yields in US dollars excluding fuel, are generally steady to slightly better than last year.

Slide five focuses on our framework for 2015. We are encouraged by a strong first half performance. We are seeing good demand for our aircraft and services, and we continue to anticipate significant growth in adjusted EPS this year. On a sequential basis, we expect adjusted earnings per share in the third quarter of 2015 to be slightly better than our second quarter earnings, with further improvement in the fourth quarter. Taking our strong first half earnings into account, we continue to expect approximately 55% of our earnings to occur in the second half.

In addition, we anticipate that our block R volumes this year will increase approximately 10% compared with 2014, with more than 70% of the total in ACMI, and the balance in charter. Our ACMI outlook reflects expected growth in both 747 freighter operations, as well as CMI flying. Our charter outlook reflects the strong presence we have in the global charter market, and military demand that is holding up well compared with 2014 levels. In dry leasing, our portfolio is expected to include the two 767 converted freighters that I mentioned earlier. Given the flying levels that we anticipate, we continue to expect that aircraft maintenance expense will total approximately $190 million.

Depreciation expense for the year should be approximately $125 million, while core capital expenditures, which are mainly for spare parts for our fleet, are expected to total approximately $45 million for the year. Expenditures for aircraft and engines, including our new Dash 8, the 767s we are converting and several engines should total about $240 million. In addition, our effective income tax rate should be approximately 30%. Reflecting our current framework, we do not expect to pay any significant Federal income tax until 2020 or later. I'll pause here, and ask Spencer to provide you with some additional perspective on our second quarter. After Spencer, I'll provide a few more thoughts, and then we'll be happy to take your questions. Spencer.

Thank you Bill, and hello everyone. Slide six highlights our second quarter results. Our adjusted net income totaled $29.4 million, or $1.17 per share. On a reported basis, net income totaled $28.4 million, or $1.13 per share. Results in the second quarter benefited from our diverse business mix, and were driven by improved contributions and margins in ACMI, charter, and dry leasing. During the quarter we generated free cash flow of more than $68 million, or $2.72 per share, compared with $59 million or $2.34 per share last year. That brought free cash flow for the first six months of 2015 to $149 million, or $5.92 per share, a nice increase from $96 million, or $3.81 per share in the first half of 2014. Reported results in the second quarter also included an effective tax rate of 31%, and that reflects our continued reinvestment of net earnings of certain foreign subsidiaries outside of the United States.

Looking at slide seven, higher operating revenues in the second quarter were primarily due to increases in both ACMI and charter segment flying. ACMI revenues during the quarter benefited from an increase in block hour volumes, driven by the start-up of four additional 767 CMI aircraft, and improvements in 747 cargo aircraft utilization. These were partly offset by a reduction of revenue per block hour that included a mix effect related to an increase in CMI flying in 2015. Average CMI aircraft equivalents rose 30% to 16 aircraft during the quarter, while average 747 cargo equivalents were effectively unchanged, at just over 20 aircraft. We continue to grow our CMI fleet and enhance our business mix.

Since we don't own these aircraft, the average block hour rate for these planes is less than the average rate for our other aircraft in the segment. Higher charter segment revenue in the quarter was primarily driven by increases in both cargo and passenger flying. These were partially offset by a decrease in revenue per block hour, reflecting the impact of lower fuel prices. In dry leasing, revenue growth in the second quarter was primarily due to the recognition of revenue for maintenance payments related to the scheduled return of a 757-200 cargo aircraft in Titan's portfolio. We subsequently released this aircraft on a long-term basis during the second quarter. Dry lease maintenance payments can occur at the end of an aircraft lease and any amounts will depend on the lease terms, condition of the aircraft upon redelivery, et cetera. Going forward, we expect Titan to generate additional revenue for maintenance payments as it manages its portfolio, but we don't currently expect any additional maintenance revenue in 2015. Moving to slide eight, segment contribution totaled $87 million in the second quarter, compared with $62 million in the second quarter of last year. The pie charts at the bottom of the slide highlight the strong contributions from each of our segments during the quarter. ACMI results were primarily driven by higher 747 aircraft utilization, and a reduction in heavy maintenance expense. Contribution in charter was driven by an increase in cargo and passenger flying, and by an increase in aircraft utilization reflecting higher demand. Charter results also benefited from a reduction in heavy maintenance expense. In dry leasing, the increase in profitability was primarily due to the revenue for maintenance payments that I previously noted.

Turning to slide nine and our balance sheet, we ended the second quarter of 2015 with cash, including cash equivalents, restricted cash, and short-term investments, totaling $555 million. That compared with $331 million at the end of last year. Our cash position at June 30th reflected net cash of $171 million provided by operating activities during the first half of 2015, net cash of $104 million from financing activities, which included $99 million of outflows for debt payments, and net cash of $59 million used for investing activities. Net cash used for investing activities in the first half of 2015 primarily related to the purchase of aircraft and engines, as well as rotable spare parts, partly offset by proceeds from the disposition of aircraft. Slide 10 highlights our recent convertible note offering. In June, we issued $224.5 million of 2.25% notes due in 2022. We're using the majority of the proceeds to pay off EETC debt on five 747-400 aircraft bearing an 8.1% average coupon. Those repayments will be completed in the third quarter, and will reduce aircraft ownership costs, increase fleet flexibility, and enhance cash flows. We will also have an accretive impact on adjusted earnings per share beginning in the third quarter, which is incorporated in our framework for the year. To benefit our equity investors, we've used a portion of the proceeds from the notes to fund the net cost of bond hedge and warrant transactions. Working together, these effectively offset any dilution to our common shareholders from the conversion of the notes, unless our share price exceeds $95. We will use the remaining net proceeds to fund working capital and capital expenditures, the repayment or refinancing of debt, and general corporate purposes.

As Slide 11 shows, at the end of the second quarter, our net leverage ratio, which includes capitalized rents, was 4.8 times trailing 12-month EBITDAR, including the benefit of our investments in our outstanding EETCs, that's down from 6 times at the beginning of last year, and 5.4 times at the December 31st, primarily driven by the paydown of outstanding debt and an increase in earnings. With that, I would like to turn it back to Bill.

Thank you Spencer. As reflected on Slide 12, we are confident about the outlook for 2015. We have a strong and dedicated team, and we are well prepared to leverage our competencies in market leadership this year and beyond. We're working closely with our customers, many that are outperforming the overall market. Our outlook reflects fleet initiatives that respond to market demand and customer requirements. And we are utilizing the proceeds from our convertible notes to enhance our operating capabilities and financial structure, while maintaining the interest of our equity investors. Led by the strength of our brand and our global market leadership, we are taking advantage of market opportunities, and continuing our focus on longer term business growth. With that, Shannon, may we have the first question, please.

Certainly. (Operator Instructions). Your first question comes from the line of Jack Atkins from Stephens, your line is open. Please go ahead.

Yes, good morning guys. Thanks for the time. So I guess, just to start off, we've seen a significant amount of capacity added here over the course of the last several months, at least from the numbers we get from IATA and AAPA. I'm just curious, it seems like you guys believe that is not going to have a negative impact on rates as we move through the year. Just sort of can you maybe help us understand what's going on within your business, and within your customer base, that would sort of make you more immune to what seems like an oversupply of market as we enter the second half of the year?

Well, thank you, Jack. I think it's an important question. I think changes in the market aren't equal across all trade lanes and all markets, and so if one looks at where our aircraft are deployed for our ACMI customers and in our charter business, market demand overall is holding. And we think net rates, when you factor out fuel, are stable to slightly better, and we'll see some increases in rate as we come through the year and into the peak in the fourth quarter, of course. Our largest customer, DHL, you can take a look at their results, and their earnings and their growth, and they're performing quite well.

As are most of our other customers. So I think the story with Atlas is certainly underlying air freight market, but it's also how the customers are performing overall, and how we performing in the markets where we deploy our charter capacity. So looking at the market where we are today, and very high utilization that you'll see on our aircraft as you look through the Q and the press release, looking into the second half, it made sense for us to bring back a 429, that was the aircraft that we had parked, and always intended to bring it back when the demand warranted it.

We were able to lease an additional converted freighter on extremely favorable terms, and so that gives us some flex capacity. And the Dash 8, as we think about the fleet going forward, we've talked about this, that would want more Dash 8s in our fleet, they make sense, I think we're in a very good position on that aircraft. We intend to deploy it into charter as we take delivery of it. That's probably the best place for the aircraft in that fourth quarter peak market. Then we expect it will be an ACMI as we come into 2016.

Okay. That's helpful, Bill. Just to follow up on that, on that Dash 8, I know with the first group of planes you took, there were some metrics out there for us to think about, the accretion of those planes, $0.48 a year I think was the initial expectation for that first round of Dash 8s. How should we think about, A, how this new plane will be financed, will it be through the Ex-Im Bank, and then how should we think about the incremental accretion from this aircraft on a go-forward basis? Is it similar to what we would have expected, when you took the first round of Dash 8s?

Thanks Jack. It's Spencer. As far as financing goes, we've done incredibly well financing all of our recent aircraft purchases. I expect we will do that again. Interest rates continue to stay low. It is a really good time to be financing aircraft right now. Our Company is obviously doing well. We're a good credit. So I expect that we'll have good financing. We're talking to numerous parties. So no final answer on that just yet, but I think the financing will be terrific. And as far as the profitability from the plane, as you know, there's a maintenance honeymoon in the early days for aircraft. Obviously this plane will be brand new, won't need maintenance for quite some time, profitability should be very high. Also has very, very limited line maintenance. So we expect the profitability will be strong. We have gotten away from providing sort of pinpoint profitability for a particular aircraft for competitive reasons, and so we're trying to provide less sort of customer-specific or aircraft-specific detailed information. But we are excited about the terms and conditions related to the aircraft. We're excited to put it in place and think the profitability will be strong.

Okay. Thanks for the time, guys.

Thank you, Jack.

Thank you, Jack.

Your next question comes from the line of John Barnes from RBC Capital Markets. Your line is open. Please go ahead.

Hey, thanks for taking my questions. In terms of kind of the fleet outlook on a go-forward basis, Bill, you just made the comment that you want more Dash 8s. Can you talk a little bit about the age of the 400s at this point, at what point do you start to get to a situation where maybe some of those 400s need to be replaced, and as you take more Dash 8s, how many do you think will be as a result of replacement needs versus growth needs going forward?

Yes, thank you, John. That's a great question. So I think for some time now, we've been saying that ultimately we would want more Dash 8 aircraft into our fleet. We said there would be a point at which incremental Dash 8s would be pared with exiting some of the 400s out of the fleet as well. I don't think we're at that point yet. And with the 400s themselves at 1998, 1999, 2000 kind of deliveries, those still, from a freighter perspective, relatively young aircraft, and depending on one's outlook for fuel prices, fuel, $60 to $80, if that's a planning range over some mid term, the 400 is a very competitive aircraft. And will serve our customers well in the markets that they choose to deploy it in. And I guess a couple of years ago we were looking at and talking about different types of aircraft, and where does the Dash 8 make the most sense, where does the 400 work, and how does the 777 fit in those markets as well, so kind of a horses for courses argument. But I think we have a good long run on the 400s, we've always, I think, stated we want more Dash 8s over time. The market has to be right. Customer demand has to be right, et cetera. We'll want more Dash 8s but we're not at that point yet, John, where we're going to start shedding factory freighters. I think the first to go would be a BCF before a pure factory freighter, we just brought it back. That's just something, as we say, we'll manage our fleet accordingly, and we'll do.

Okay. All right thank you. And then if you think about what we're starting to see in the marketplace a little bit, I think there was a recent statistic showing that air freight rates are beginning to weaken a little bit. C.H. Robinson in their announcement yesterday made the point that they saw weaker air freight rates late in 2Q and into 3Q. Can you just talk a little bit about your outlook? And I hate this to be that multipart question, but your outlook on peak, combined with obviously you've got a tougher comp because of the West Coast situation. Just what that means to either the charter business or those typical extra hours that your customers fly, typically in the peak season. Just kind of how you get your head around, all of those, all of the puts and takes?

Okay. Well, a couple of points. So as we said and consistently, I think, you and the folks that follow us know, about 70% of our flying is in ACMI. So in terms of the ACMI CMI, we know what our rates are, we know what we will charge customers for their above minimum flying, and above minimum flying is quite strong, even now. So that part of the business we've got a pretty good handle on. Military rates, we know what those rates are because they are by contract. So it comes down to that charter market and comps going forward. In terms of the peak itself, we expect it to be a similar peak in terms of volumes and demands as we saw last year, and what we talked about last year was a pretty good peak, relative to prior years in 2013 and 2012 and 2011. So I think the volume is there. Kind of in our framework, we're looking for rate levels somewhat dissimilar to last year, maybe off just a little bit.

There was a confluence of two events last year that don't repeat this year. One, fuel fell precipitously as we were coming into the peak, particularly in November and December, but fuel prices, fuel surcharges lag, so there was a fairly dramatic drop in fuel but the lagging effect of fuel surcharges in that charter market rate. So when fuel is going up dramatically we take a hit because it takes a while for the surcharges to take effect, but when fuel comes down dramatically, you kind of are hoping you're catching up with the hit you took at some point in the past.

And then of course we did see the early impacts of the West Coast work interruptions in late November and December. I mean, it certainly built in, but it was pretty evident late, pardon me, late November, late December. So on the outlook, and the framework that we've provided, I think there are several good data points for you to think about, we're thinking volumes are going to feel somewhat similar to last year. Right now we think net rates are holding, and just as an aside, John, I think the piece you put out the other day, stripping out fuel and the discussion you put about rates is spot on, and that's what we're seeing. And I think overall that's what's in our guidance, I should say our framework, our outlook for the balance of the year.

All right. Very good. I'm glad to know somebody is reading my research. That's always a good thing.

We always do, John.

We always do.

I appreciate the comment. Thanks for the color.

Okay.

Your next question comes from the line of Nathan Hong from Morgan Stanley. Your line is open, please go ahead.

Hi, thanks for taking the question. I kind of just wanted some clarity on the 2Q results. You did mention that there was lower maintenance expenses during the quarter, and it seems to have shifted into the second half. So if we actually back out that shift, I'm not sure about 2Q results would have probably fell before your original framework. Just wondering if you could offer some color here? I'm wondering if there's any specific other than what you guys expected?

Nathan, nothing weaker than what we expected. Maintenance is conditions based, and so sometimes there are shifts. We try to provide our best estimate every quarter. In years past we did not do that, and some analysts had some trouble modeling maintenance expense, and so now we provide it every single quarter. We update it every quarter. We try to give you our best view. But it is conditions-based. I mean, it really depends on the condition of the aircraft, how much they're operating, what happens during flight, and all of that. So there was a bit of a shift. We had some maintenance that moved from the second quarter, into the third and fourth quarter of this year. That happens. We also have some more block hours towards the back end of the year, and so that means, that's a good thing. But that also means that line maintenance expense, which is volume-driven will generally increase as well.

Got it. And as I think about the four-year framework, I know you just mentioned a couple pieces here about maintenance increasing in the second half, but I'm just curious, can you walk me through the rationale of why you guys didn't actually update the four-year framework despite the fact that you guys are picking up additional aircraft, or raising block hour guidance for that matter?

Well, I think we just didn't decide to buy aircraft yesterday. We've been in negotiations with Boeing on the 747 Dash 8, and we've been planning on the 747 BCF coming back, and in negotiations on the flexible capacity that we brought on, as well as discussions on purchasing and converting the 767. So as I think we said in the press release and our comments, these were noble to us, and these were considered in the framework that we provided.

Okay. That's helpful. Thank you.

Thank you.

Your next question comes from the line of David Campbell from Thomson Davis. Your line is now open. Please go ahead.

Okay. Thanks for taking my question. Bill, first of all, I just wanted to ask you, your estimate of the industry tonnage, and I agree that it's really not that relevant what the industry does, because the good companies are doing better than the bad companies, and many of the forwarders that are good are continuing to show increases in business, but their trend is what bothers me. I mean, you can argue that international tonnage wasn't up 4.5% through May, but it has been trending down from 2% to 3% growth in April, to zero in June, but you have it gross faster. Is that based upon discussions with your customers? Just exactly what is it based on?

I think there are a couple of data points. Certainly we want to start with discussions with our customers. The programs that they're asking us to consider for the balance of the year and into peak, discussions with our ACMI customers, and the volumes they're seeing in the trade lanes that they're serving. In the charter market we're looking at all of the customers, including the military, to understand kind of what military demand is going to look like. We think that's somewhat stabilized now as we look out into 2016 and beyond. We think that the military demand levels are at what I would call a more stable level, with some hits from a point there of better anticipated demand. The combination, when we think about air freight demands, there are two measures, right? There is weight, tons, and there's freight ton kilometers, which are actually the revenue, our revenue generating. And FTKs are up, forecast to be up greater than the increase in pure weight. So I think on the trade lanes that we're serving, the customers that we're serving, ACMI and in the commercial charter, the discussions we're having with them about what their needs are going to be, I think put us in a good position, David.

Okay.

Well, I mean, which is always the, I think what Spencer and I encourage is, there is the underlying market we serve, but to understand that, we have to look at the customers we serve as well.

Yes. Absolutely. That's the key. I agree with that. The other question that I had, Spencer, can you estimate your dry leasing revenues for the last two quarters of this year?

Yes, David. I think if you take a look at our dry leasing, it should be fairly steady. The last two quarters that wasn't the case because we had some maintenance return conditions that we recognized, but going forward, as I mentioned earlier, we don't expect to have any of those return conditions for the next two quarters. So I think when you look at the business overall, you should expect that it should be pretty flat. We had a plane come back, but we released it right away under a long-term arrangement. Our contribution from dry leasing excluding return conditions should stay pretty steady, around $7 million to $7.5 million from a revenue standpoint, if you just back out the return conditions that we had in the first two quarters, it's a fairly consistent run rate.

So it will go up from the first and second quarters because you won't have any returns?

No, it will go down. We recognize revenue for those events. When the planes came back, we had been collecting deposits essentially, and then when the planes came back, we got to keep those deposits and recognize them as revenue. We don't expect to have that situation in the third or fourth quarter.

Okay.

Our margins, when you exclude the return conditions, we've been achieving over 30% margins, and that should stay at around that level, which is terrific.

Right. Right. Despite having less revenues than the first and second quarters, you'll still have better margins, is that right?

I agree. Yes.

And that's a factor we continue to invest in, David. We talked about the two 767s already a couple of times now, and they'll come into service late fourth quarter, into first, and we'll continue to seek out opportunities in Titan as well, and the dry leasing segment.

Right. Right. All right. And how would you describe the Pacific market, Asia-Pacific market looking forward, going forward? Is that continuing to show strength like the rest of your markets, or less strength?

Well, AAPA put out a report, I guess late yesterday, talked about a bit lower rate of growth in FTKs. My sense though, is again, based on the conversations we're having, and the comments I've made about peak, we're going to see a peak that shows growth, and I think we're well positioned, and as you've confirmed, it really depends on the freight forward you're talking to, or the customer that you're working with in the ACMI business, as to how they see that market and how they deploy the assets.

Okay. Thank you.

Thanks, David.

Thanks, David.

Your next question comes from the line of Kevin Sterling from BB&T Capital Markets. Your line is now open. Please go ahead.

Oh, thank you. Good morning, gentlemen. Congratulations on another nice quarter.

Thanks, Kevin.

Thank you, Kevin.

Bill, you touched a little bit on this, I just want to dive into it a little bit more, the decline in revenue per block hour in charter, that's mainly a function of lower fuel surcharges, and then ACMI, it sounds like it's a mix shift with more CMI flying. Is there anything else going on that I may be missing? Am I reading that right?

I think those are really the key points. Fuel and you can see the cost per gallon there in the Q, or in the press release, so that's come down dramatically, and that's right. And then on ACMI, and Spencer took a look at the numbers, we're at 20, just slightly north of 20 aircraft in ACMI, but we've grown from 12 to 16 in CMI, and we're going to keep growing. And so in CMI, as Spencer said, the customer owns the aircraft, so our rates are going to be fuel, excuse me, are going to be crew, maintenance, and our margin. So that mix does have an impact.

All right. Thank you, Bill. And then touching a little bit on military demand, both from a cargo and passenger perspective, does it seem like it's a little bit better than what you may have thought either last year, or even the beginning of this year? And do you have any indication how the rest of the year or 2016 might look, and are you seeing maybe a little bit more military demand, or better military demand because maybe some of the pure existing competitors that we're servicing the military have gone out of business?

Yes, I think you have really hit on the key points. So, yes, we're seeing a bit more military demand than we would have anticipated at the beginning of the year. We're working closely with the military to understand the demand pattern going forward. As I commented on a moment ago, I think we're at some level of stability now over the next couple of years, in terms of what the demand is going to look like, and what Atlas' participation is going to be on both the passenger and the cargo level. And you make another good point as well, several carriers are not flying or have reduced their level of participation in the craft, and so as a result, we are gaining a bit more market share. But that's our best perspective on it now, and we'll continue to get updates from the military as we move forward.

Great. That's all I had. Thanks for your time today.

Thank you.

Thank you, Kevin.

Your next question comes from the line of Helane Becker from Cowen. Your line is open. Please go ahead.

Thanks, operator. Hi, guys. Thanks for the time. So two questions. One, with respect to the military, the fuel reimbursement rate is fairly high relative to where fuel costs are today. When do they reevaluate that?

So, Helene, they reevaluate it periodically, but there's not any sort of set time. They do that periodically from time to time. But the reason why it is so much higher than what you would expect, or that it is for the rest of our charter business, is the nature of that flying, and where that flying is, and the ability to procure fuel in those locations. So it generally is going to be higher than what you would normally expect.

Okay.

No impact whatsoever on our bottom line. It does of course impact revenue and impact our cost, which has an impact on our margins, but otherwise, there's no impact to our earnings.

Either up or down because as you recall, there is that true-up. If we'd been overcompensated, we would return. And of course we accrue to what we believe the right true-up to be. If we'd been undercompensated, then we would get a true-up the other direction.

Right. Okay. Perfect. And then my other question is with respect to your leverage. So really nice improvement there over the last couple of years. Is there a target that we should think about, in terms of leverage ratio, or I don't know how you want to think about it, but within a nice substantial cash position, is it a possibility to pay cash for that aircraft that's coming in, or how are you thinking about that, and how should we therefore think about it?

Okay. Good question, Helene. So as we showed on slide 11, I happen to love that slide, it's a really nice direction, and our leverage continues to come down, which is great. For us, there isn't a target like we once had. Once we entered the dry leasing business, we started buying aircraft for that business, and the aircraft you're seeing now are driving really nice returns in that business. And so those purchases increased our leverage ratio, they're really paying off now. We're seeing terrific returns on our dry leasing business, over 30% margins, really nice profitability to our bottom line. So that's been great. We're adding a Dash 8, as Bill talked about, and so when we look at this, we really don't have a specific target. We don't look at our leverage in isolation, or have a singular number that we target. Instead we really look at every investment by itself. We take a look at NPV and IRR. We take a look at the EPS accretion, how good of an investment is it, who is the customer, and what type of credit are they. How does it align with our overall strategic goals, those types of things. We've done incredibly well with financing. Our financing is at such a low rate, we're really happy with where our leverage is right now.

Okay. Okay. So that's fine. And I guess just you said, I think, that customers were flying above minimums. Can you say how much above minimums, or some kind of a range?

Sure. Sure. Absolutely. In the second quarter our customers flew 8.5% above their minimums, and in the second quarter of last year they flew 6.3% above. So again, a nice improvement. For the full year, even though you didn't ask, I'll give it to you. For the full year, last year our customers flew 5.3% above, and this year we expect something similar, or better than that.

Actually, I was going to ask what it was so far in the third quarter. That's what I was going to ask. What it was in July?

Continues to be above, but it's just too early to tell for sure. But it continues to be nicely above.

Great. Thanks so much for your help. I appreciate the time.

Thank you.

Thank you.

Your next question comes from the line of John Mims from FBR Capital Markets. You line is now open. Please go ahead.

Thanks. Thanks guys for taking the question. Just one quick one for me, Most of my other ones have already been answered. Bill, the framework for 2015 is established, and I understand there was some things that you all knew about that we didn't know about like the new planes that are kind of incorporated in that, but when we look, and it may be adjusted up as we get closer to peak season. I understand all of that part. But when we look at kind of the commercial charter market now, and kind of the visibility you have going into peak right now, are there people already committing to capacity in the fall, or is it still just kind of an open dialogue where you have a good idea they're going to need your aircraft, or are people kind of clamoring to go ahead and secure capacity, getting ready for peak shipment?

Customers are looking to secure capacity now for the peak, so that's really the situation.

Looking, right?

No, we have commitments and we have, I'll be clear on my words. We have good commitments for charter capacity in third and fourth quarter as we come into the peak.

Okay. That's fair. Typically what point in the year does it get to be, I guess what's the normal cadence of those conversations as far as we think we're going to ship this much, to we need to go ahead to start locking it in, to there being more of a competitive process where you have some pricing power? Is there a normal timeframe where that really starts to develop, and is this year any different than say last year?

Yes, so, there are several charter markets. One of our charter markets is of course South America, we've got a pretty good handle on that, and that's bin performing well for us all year long. As you think about the year progressing, there are several potential product launches that are being actively discussed. We were in conversations with quite a number of key freight forwarders that are product launch-specific. But there are quite a number, several large freight forwarders who have large market shares, who do talk to us, and talk to other people in the market and seek to secure capacity as we're coming towards the end of the second quarter, and into the beginning of the third quarter.

So then the science of that, for us, as it is for us to lock down a percentage of our capacity at attractive rates, minimize fuel exposure with our customers, and keep some capacity uncommitted, because we want to get the tenor of the peak as it develops so that we have some pricing opportunity as well. So it's an art and a science, I guess, is the best way to think about it. I think we manage it well, and we feel very good about where we are this year. It's in our framework and it's why we have made some of the capacity decisions we've made. If we didn't have a good book of commitments, we wouldn't have necessarily bring aircraft back out of the desert, for example.

Okay. That's really helpful. Thanks for the explanation. I'm jump back into the queue.

Thank you.

Thank you John.

At this time, as there are no further questions in queue, I would turn the call back to the presenters.

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

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