Atlas Air Worldwide Holdings Inc (AAWW) 2021 Q3 法說會逐字稿

Good day, and thank you for standing by. Welcome to the Atlas Air Worldwide Holdings, Inc. Third Quarter 2021 Results Conference Call. (Operator Instructions) As a reminder, this conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to Atlas Air Worldwide Holdings. Please begin.

Thank you, Norma, and good morning, everyone. I'm Ed McGarvey, Treasurer for Atlas Air Worldwide. Welcome to our third quarter 2021 results conference call. Today's call will be hosted by John Dietrich, our Chief Executive Officer, and Spencer Schwartz, our Chief Financial Officer. Today's call is complemented by a slide presentation that can be viewed at atlasairworldwide.com under presentations in the Investor Information section.

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 2020 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. 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 can accommodate as many participants as possible. After we've gone through the queue, we'll be happy to answer any additional questions as time permits. At this point, I'd like to draw your attention to Slide 3 and turn the call over to John Dietrich.

Thanks, Ed, and hello, everyone. Thank you all for joining. Welcome to our third quarter earnings call. This is a very special moment for our company. We've just completed the best quarter in our company's history in terms of revenues and adjusted earnings, and we expect next quarter will be even better. I'd like to thank the entire Atlas team for their ongoing efforts in delivering these results in this very challenging pandemic operating environment. It's because of their efforts that we've been able to deliver these outstanding results.

As you've seen from our results, we've optimized and leveraged our business to capitalize on the current favorable market conditions. We've also positioned the company very well for the future. We have the best assets to serve the airfreight market, including an industry-leading fleet of 747s, 777s, 767s and 737 aircraft. We have a top-tier portfolio of customers. We also have unrivaled global operating capabilities and a team that's simply best in the business. Putting this all together, we're very well positioned to serve the growing needs of our customers and the airfreight market today and in the future.

At Atlas, safety is a core value and is always a top priority. With that as our focus, we continue to take extensive precautions to protect our employees and our operations to support our customers and safely transport essential goods around the world. Our people, no doubt, are our greatest asset, and we'll continue to focus on their safety and well-being. In that regard, we were very pleased to have reached agreement with our largest employee group, our pilots, for a new 5-year Joint Collective Bargaining Agreement or what we often refer to as a JCBA. Under this long-term industry competitive agreement, all of our pilots will receive significantly higher pay, quality of life improvements and enhanced benefits. The new pay rates became effective as of September 1, and we're working together with the Union's new leadership to implement other provisions of the agreement as soon as possible.

This new JCBA provides even more reasons and opportunities for our pilots to grow their careers here at Atlas. We've been preparing for this important investment in our pilots for some time, and we've incorporated our expectations for these new terms when negotiating new customer contracts or when amending existing contracts. We look forward to continuing to work collaboratively with our pilots and our new union leadership to build an even stronger company in the future.

Importantly, the new JCBA paves the way for us to complete our Atlas Airs merger with Southern Air, which we expect to occur during the fourth quarter. The Southern Air brand has served us well since we acquired it in 2016. Through Southern, we diversified our service offerings by gaining immediate entry into the 777 and 737 platforms, ultimately enabling us to perform 777 flying for DHL Express and Cainiao, the logistics arm of Alibaba, as well as 737 operations for Amazon. We look forward to continuing to leverage these capabilities as growth engines for Atlas in the years ahead.

As we serve the needs of our customers and their businesses in the third quarter, we are also extremely proud to have supported the U.S. government's historic evacuation of U.S. personnel and refugees from Afghanistan. As part of the call up of the Civil Reserve Air Fleet, we deployed our formidable fleet of passenger aircraft to help the evacuation. As the largest provider of airlift to the U.S. military, our flight and ground personnel volunteered and stepped up with great compassion to support the significant humanitarian mission. In total, we operated over 30 missions, transporting about 10,000 U.S. personnel as well as Afghan refugees and their families from various locations into the United States.

In addition to this important military business, and as you saw in our earnings release this morning, our strategic focus continues to be on Express, e-commerce and fast-growing global markets, particularly Asia and South America. These markets are driving robust demand for our services and producing excellent financial results. We've safely increased the utilization of our aircraft despite an extremely challenging pandemic operating environment. We've also extended or entered into important new long-term agreements. In that regard, we recently announced long-term contract extensions for 20 aircraft with DHL Express. We also entered into a new long-term ACMI agreement with FedEx among other long-term agreements.

Collectively, this demonstrates our ability to capitalize on current market opportunities while deepening long-standing relationships with our strategic customers for the future. With that in mind, we continually manage our fleet to balance capacity with demand. We're looking forward to taking delivery of 4 new 747-8 freighters in 2022. These are the last 747s that Boeing will ever produce, and we're delighted they'll be coming to Atlas. They provide unmatched payload capacity, nose loading capability, as well as improved fuel efficiency and noise emissions. We expect to take delivery of these -8s between May and October of next year.

As reported in our press release today, in October we acquired 3 more of our existing 747-400 freighters that were previously on lease to us. This is in addition to the 3 747-400s we recently acquired and discussed during our last earnings call. As a reminder, we previously announced that we will be purchasing 5 of our other existing 747-400 freighters at the end of their lease terms in 2022, bringing the total number of acquired 747-400s to 11. Acquiring these 4 new -8s and the 11 of our existing 747-400s underscores our confidence in the ongoing demand for wide-body freighters and will provide strong returns for Atlas in the years ahead.

Now turning to our outstanding third quarter results on Slide 4. As I mentioned, our revenue and adjusted earnings grew to new records. This included our quarterly revenue exceeding $1 billion for the first time in our company's history. Our third quarter results reflected higher yield and increased aircraft utilization. They also reflected the impact of numerous new and extended long-term customer contracts, the operation of one 747 freighter that we reactivated during the fourth quarter of 2020, the ongoing reduction of available cargo capacity in the market, and the continued disruption of global supply chains due to the pandemic. Our third quarter performance also benefited from passenger charter flying for the U.S. military related to the Afghanistan evacuation efforts and lower heavy maintenance expense. Partially offsetting these benefits were higher pilot costs driven by our new JCBA.

Now moving on to Slide 5, we're certainly operating in a very strong airfreight market. We expect industry conditions and demand for our services to remain favorable for the foreseeable future. Global airfreight volumes continue to exceed pre-pandemic levels, while industry capacity, particularly on long-haul international routes, has not kept pace with demand. This includes fewer new freighter aircraft coming into the market as well as the substantial amount of international passenger belly capacity that has not yet returned.

Supply chain bottlenecks, including the widely reported challenges at ocean ports worldwide, are driving increased modal ship to air as manufacturers, retailers and shippers strive to replenish very low inventory levels, especially ahead of the holiday shopping season. In addition, the current environment has led to a structural acceleration of express growth in e-commerce across the globe, which will drive both current and longer-term airfreight demand.

While the pandemic continues to make the operating environment a very challenging one, the market dynamics we're seeing in the fourth quarter remain very robust. As a result, we expect record revenue and record adjusted earnings in the fourth quarter, including revenue of nearly $1.1 billion and adjusted EBITDA of approximately $325 million from flying more than 90,000 block hours. We also expect adjusted net income to grow in excess of 20% compared with our prior fourth quarter adjusted net income record of $143.2 million in the fourth quarter of last year.

Our fourth quarter 2021 outlook includes the impact of our new JCBA as well as the proactive initiatives to help mitigate the higher costs of the new agreement, including increased contribution from our long-term customer agreements. It also reflects continued high levels of aircraft utilization, driven by strong demand and solid peak season volumes and yields. We also expect ongoing expenses driven by the pandemic, including additional pay for employees flying into certain locations that have been significantly impacted by COVID-19 as well as costs for continuing to provide a safe working environment for all employees and maintenance expense of approximately $90 million. For the full year, we expect aircraft maintenance expense to be around $450 million and depreciation and amortization to total about $280 million.

Core capital expenditures, which exclude aircraft and engine purchases, are projected to total approximately $90 million to $100 million, mainly for parts and components for our fleet. This is a good point for Spencer to provide more details on our third quarter results. And after Spencer's remarks, I'll have some additional comments, and then we'll be happy to take your questions. Spencer?

Thank you, John, and hello, everyone. Our excellent third quarter results are highlighted on Slide 6. On an adjusted basis, EBITDA totaled $280.5 million, with adjusted net income totaling $145.4 million. On a reported basis, net income totaled $119.5 million. Our adjusted earnings included an effective income tax rate of 22.3%.

Moving to the top of Slide 7, revenues rose to $1.02 billion in the quarter. As John mentioned, this was the first time Atlas generated over $1 billion in revenue during the quarter. Higher Airline Operations segment revenue was primarily driven by an increase in the average rate per block hour, which was mainly due to an increased proportion of higher-yielding flying, including the impact of new and extended long-term contracts, the ongoing reduction of available cargo capacity in the market, the disruption of global supply chains, as well as higher fuel costs. Volumes during the period were relatively unchanged as we reduced less profitable smaller gauge CMI flying, while increasing utilization of our current fleet to meet strong customer demand.

As John shared, volumes also benefited from the operation of one 747-400 freighter that we reactivated during the fourth quarter of 2020 as well as increased passenger charter flying for the U.S. military related to the support that we provided for the Afghanistan evacuation efforts. Revenue in Dry Leasing was relatively unchanged.

Looking now at the bottom of the slide, segment contribution totaled $275.7 million in the third quarter. Significantly higher airline operations contribution was primarily driven by the positive factors benefiting segment revenue I just noted as well as lower heavy maintenance expense. These improvements were partially offset by higher pilot costs related to our new Joint Collective Bargaining Agreement. In Dry Leasing, higher segment contribution was primarily due to lower interest expense related to the scheduled repayment of debt.

Before we move to the next slide, and given the recent increase in prices, I'd like to take a moment to remind you that Atlas has a very limited direct exposure to fuel. For our longer-term commercial charter contracts, fuel risk is largely mitigated by price adjustments, including those based on index fuel prices. For our shorter-term commercial charters, our exposure to fluctuations in fuel price is limited as those contracts typically reflect prevailing market fuel prices. We don't incur fuel expense for our ACMI and CMI services or in our Dry Leasing business as the cost of fuel is our customers' responsibility. In addition, we don't have fuel risk for U.S. military flying as the U.S. military pays us for fuel, so it's in our revenue and offset in expenses.

Now turning to Slide 8. Our net leverage ratio improved another 2 ticks, finishing the quarter at a record low of 1.8x. We ended the third quarter with cash, including cash equivalents and restricted cash, totaling $784.1 million. Our cash position at September 30 reflected cash used for investing and financing activities partially offset by cash provided by operating activities. Net cash used for investing activities during the first 9 months of 2021 was primarily for payments for flight equipment and modifications, especially including the predelivery payments for the 4 747-8s, core capital expenditures, as well as spare engines, engine overhauls and upgrade kits.

Net cash used from financing activities primarily reflected debt payments partially offset by proceeds from debt issuance. We continue to apply a disciplined approach to financing. As we've indicated before, this has resulted in a very low weighted average coupon interest rate which now stands at 2.94%. And the majority is secured by our aircraft assets, which have a value in excess of the related debt. We remain committed to a strong balance sheet and cash balance which allows us to opportunistically deploy capital to strengthen our business as well as to navigate unexpected events. Now I'd like to turn it back to John.

Great. Thank you, Spencer. And moving to Slide 9. We have great momentum. We've delivered an excellent third quarter, and we expect the favorable market conditions to continue. Our team is executing on our strategy, proving again that Atlas can capitalize on opportunities in any environment. We're pleased to have reached a new Joint Collective Bargaining Agreement with our pilots, and we're excited for the opportunities this agreement provides to them. We have the highest quality assets, a strong balance sheet and unrivaled network of customers and unmatched global operating capabilities. And we'll continue to take every precaution to protect our world-class team of employees. To sum it all up again, we're very well positioned to serve the growing needs of our customers and the airfreight market today and in the future. And at this point, Operator, I'd like to turn it over to you to take our first question, please.

(Operator Instructions) Our first question comes from Stephanie Moore with Truist.

For my first question, I wanted to touch a bit on capital allocation. Another stepdown in just your net leverage ratio this quarter. Obviously, a really strong performance here and cash flow generation for the year. So maybe just where you stand in terms of share repurchases or acquisitions and just your overall view?

Thank you, Stephanie. And I'll start with that. Similar to what Spencer referred to on our financing activities, it relates to our capital allocation strategy. We take a very disciplined and balanced approach, and frankly, look at all of our highest priorities for using our cash. As I said in our prepared remarks, we've invested heavily in new technology as well as acquiring the 747-400 aircraft in terms of funding our fleet. We focus on modern efficient aircraft. And we're always looking for opportunity for growth, whether that's organic growth or M&A. And in the meantime, a considerable time spent focusing on bringing our debt down as well. We're very pleased with where we are. We also have to remember, we're still in this pandemic environment. And as Spencer mentioned in his comments, there still remains a lot of uncertainty out there in the marketplace. While we feel strongly that the current conditions will continue, we want to be sure we're best positioned to weather any potential downturns. I'm not saying that that's going to happen, but we're in a good position to weather that. So really, all options are on the table. I think we've said that before. So Spencer, I'll turn it over to you to see if you want to add anything to that.

Thanks, John. Yes, Stephanie, our focus is on growing the business while generating returns above our cost of capital and maintaining a strong balance sheet. As John said, given the strength of the market, we see opportunities for us to invest in organic growth. We're especially focused on investing in modern efficient aircraft that customers want like the 4 -8s that we have coming. But we're also evaluating M&A opportunities, both in our immediate space as well as potential adjacent spaces. But we're taking a disciplined approach given the current valuation, so we're being careful and thoughtful. We think that organic growth and M&A would generate the best returns for our shareholders, so we continue to evaluate these investment opportunities. And while we're doing that, we continue to make normal sort of regular debt paydowns and our leverage is reducing, and we have a really, really strong balance sheet that helps us prepare for any unexpected events that may happen while we are focusing in on flexibility and opportunistic capital deployment.

Got it. So I mean, I guess just to push that a little bit further, in terms of your share repurchase appetite, can you remind us when the lockup period expires in terms of being able to reengage in share repurchases?

Yes. The CARES Act restrictions ended at the end of September, and so they are technically no longer there. There's still, of course, significant amount of scrutiny with regard to those companies that received CARES Act grants, but they did end on September 30. As far as share repurchases go, it's something that our Board certainly considers. We've been, as we've talked about, we've been paying down debt, ensuring that we have a strong balance sheet. We want to finance our fleet and have modern efficient assets. And our board in the regular course considers share repurchases, and obviously we'll let everyone know if that changes.

I'd like to add to that, too, because Spencer, you raised a good point. While, as Spencer noted, the technical legal time has passed, I'd like to remind that we are still in the pandemic environment. And one of the fundamental reasons we participated in the CARES Act was due to the uncertainty created by the pandemic. And so that's part of our thought process. We're not quite out of that yet. Another factor in our focus on the uses of cash towards growing the business organically and paying down debt and exploring M&A opportunities. Not that share repurchases aren't a tool available to us, but given that we're still in the pandemic, we would raise CARES Act considerations as a practical matter.

Our next question comes from Bob Labick with CJS Securities.

Congratulations on great execution. Obviously, you have extraordinarily strong demand. I was wondering if you could talk a little bit about labor availability as it relates to pilots, if you need to hire any more from the new JCBA or obviously potentially from the -8s and whatnot. But also, kind of across the board for the rest of your employees as well, how is labor availability impacting you right now?

Sure. Thanks, Bob. Yes, labor availability is certainly an industry, if not a national global consideration. You see in the headlines, kind of the great resignation culture that we're in. We feel good about our labor availability across the board. That's not to say that we don't experience some of the challenges that others do. We do. Pilot availability is certainly an industry issue. You see it in the headlines every day. The majors are hiring. The integrators and express carriers are hiring pilots and other personnel. It certainly has an impact on everyone in the industry, and Atlas is no exception. That said, we're delighted, as I said, to have entered into this collective bargaining agreement with regard to our pilots. We feel good about the outcome of the JCBA to long-term agreement that provides very competitive rates within our comparators in the industry that we serve. And the pilots got a very good pay raise, and we believe, I believe, that we have a great culture here at Atlas and a place where pilots can grow their careers. I believe that's true with the rest of the organization as well. I mean, if you just look across our management team starting from the top down, many of us have worked together for well over 10 years, if not longer, and that resonates and is a theme throughout our organization. People come to Atlas and they generally stay for all the right reasons. That said, it's a war for talent as they say. So we're out there every day looking to recruit and importantly, retain, and we'll be focused on that. So in summary, I'd say it's an issue, but it's something we're continuing to manage and we'll need to manage as everyone else is going forward.

Okay. Great. And then you touched on this, but maybe an update on the -8 deliveries as it relates to customer interest, remaining payments for the PDPs. And then also, as it relates to future contracts that you're going to sign, obviously having the collective bargaining agreement signed helps, but any other benefits from having this agreement done for future contracts?

Yes. Thanks, Bob. Well, look, we feel really good about the -8s coming. Frankly, they can't come soon enough. It's a great airplane, and one we're really excited about coming to us. So in terms of placement, we're in a really strong environment. We're not worried about placing the aircraft. We're focused on where is the best placement of the aircraft. And there's, as we talked about, there's tremendous customer interest. It's the best freighter in the market really for what it does. That's not to disparage other aircraft, and 777 is a great airplane too, but the -8 is really a great airplane. So we feel good about that, of course. Our ability to staff it and crew it is important to our customers, and as I just talked about, we're going to continue to manage that. But the -8 will be put to work for sure and we're excited about bringing them online.

And our next question comes from Chris Stathoulopoulos with Susquehanna International.

John, Spencer and team, congrats on finally tying up this labor deal. If I could here, not to rain on anyone's parade, but curious, so it looks like in your prepared remarks you said September, the deal was reflected in September. So as we think about the exit rate for the fourth quarter here for SWB and any other adjustments that you need to make that relate to that new contract, what gives you the confidence that you can offset some of these, the higher wages, into 2022, particularly when it looks like for at least the summer and the back half of next year, a lot of widebody capacity is coming back online. And then Part B of that, last spring, when you moved to more ACMI-like contracts and charter, some of those deals I remember you saying were 3 to 6 months or 1 to 2 years in duration. And how much of those at this point have already come up for renewal? And how much are about to come up or about to expire?

Sure. I'll start, Spencer, and then turn it over to you for some further thoughts. But first of all, Chris, we're not going to let you rain on our parade. You're right, the rates went into effect September 1. And you're also right, capacity is starting to come back online. But certainly not at a rate that causes me any immediate concerns. I think what you're going to see, first of all, is as borders start to open up, we expect a transatlantic and already seeing some of that. That belly capacity will come back. But you also need to remember that the demand for airfreight is beyond pre-pandemic levels. And we're not expecting the capacity to come back, first of all, to the levels that it was at pre-pandemic. And also, not at the pace that capacity is coming back into the market. In other words, demand is exceeding that pace at least for the foreseeable future. There's a number of considerations that go into that question as well as where is that capacity coming back? And what kind of capacity is coming back? Will that be -- will that capacity be international passenger belly capacity, particularly? Will that be on typical cargo trade lanes or will it be more point-to-point? Some of the newer aircraft coming online like the 787 is designed for point-to-point. It can certainly serve hub and spoke, but we're watching that closely. How much capacity will be coming in the Trans-Pacific, which is a really important trade lane for us? And we see that coming back, one, more slowly, but as well, on the backend of the recovery. So for the amount of capacity that's coming back and the rate that's coming back, we think the demand is going to continue to exceed that supply. Another factor to consider as well is some of the changes, the growth of e-commerce and express that are going to continue to grow as we pointed out. As well as some of the new customers we've been able to create. There's been a tremendous demand from customers that are new to us, manufacturers, as I said, some of the freight forwarders are seeing the value of fixed capacity and controlled capacity. And we think that's going to sustain beyond the passenger recovery on the international sector. So there are a number of considerations. I'm not suggesting things aren't going to moderate. They will eventually from where we are today, but we feel good about the long-term prospects. And to tie into your second part of your question in terms of the duration, I don't think we've said that 3 to 6-month duration. The deals we've been signing and amending go well beyond that, including more recent contract extensions of people that are favoring our assets and the service we provide. So we see this as a longer-term play in our ability to pass on those costs. We feel better about it than what your question suggests. Spencer, over to you.

Thank you, John. Chris, I'll just make a couple of points, but then more specifically comment on the duration. Just a couple of points to add to what John said. As you know, inventory levels are at record lows, and there are a number of widely reported shortages of goods, which means that when these things come back and when chips are available and when these goods are available and when people start to -- if they go back to malls and things like that, all of that bodes really well for airfreight because goods will need to move very, very quickly. And then just one other point, and then I'll talk about the duration, is that manufacturing continues to move away from cities that have large passenger hubs. And so that drives airfreight to airports that are more cargo focused. And so the belly capacity is not as available and it's less of an issue in those important trade lanes. But then to get to the duration of these long-term charter contracts, the vast majority of them go into 2022 and 2023. Some of them go into 2024 and 2025. During the quarter, we added an aircraft with a customer for a term of 3.6 years, so it goes through April 2025 at a really good rate. We also extended term with another customer that goes to October 2024 with a higher rate. And so on a fairly regular basis, customers are extending these agreements at higher rates, so we feel good about the long-term charter business.

Okay. And as a follow-up to that, so you mentioned earlier, I think there was a question around capital allocation here. And the restrictions on the buybacks have lifted under the CARES Act. Admittedly, it's probably not a good time for airlines to be buying back stocks, all things considered. But with respect to M&A, so you did the Southern deal, I think it was in 2015, to get into the 777s. As we look at other potential carriers or perhaps something upstream, you're long 767, 747, 777s. Should we assume, or is it fair that perhaps moving into the Airbus platform might be something that you could do? Or would it be something as an MRO or something kind of further upstream?

Yes, Chris, that's a great question. And I think from our perspective, all options are on the table. We're not, certainly not ruling out an Airbus product. It's a great product. And our view has been we would want to be sure we have sufficient scale to go into any new aircraft type. I feel very confident we have the organizational capabilities to do that. Many of our technical people and flight ops people have flown and maintained the Airbus product in their careers, so we're not concerned about that. We just would want to be sure that it's the right asset of sufficient scale for our business. So I wouldn't rule out an Airbus product at all. With regard to, and Spencer alluded to this, other options, there are fewer and fewer M&A opportunities presently at times. So do we look to adjacent space, MRO or something else? Sure. I think all options are on the table, so I wouldn't rule anything out at this point.

Next question comes from Helane Becker with Cowen.

Just a couple of questions. The first question I have is, on your pilots, what's the average tenure? If I look at the contract and I compare it to the old contract, I would see the starting salaries didn't go up significantly. But those for people with longer tenures went up significantly. So like how should we think about junior pilots versus senior pilots and the average tenure, I guess, is the best way to ask it?

Yes. So I'll speak to the average tenure. It's coming down. The weighted average is coming down. We saw, as you know, Helane, over the past 4 years or so, we've had a tremendous amount of growth. We've grown really all of the platforms. The 777s for sure, the 767 in large numbers. So when you're hiring off this -- when you're hiring new pilots, your average tenure goes down. I don't have a specific number other than to say we've had a significant increase in younger pilots. And what I'll say, when I say younger, I mean shorter tenured pilots because we've hired so much. And then the Age 65 rules kicked in and scheduled retirements is also contributing to that average coming down. I'd be guessing, I don't have the exact number at my fingertips, but it's probably north of 5 years, but I'd be guessing there in the aggregate. So that's that piece of it.

Yes. No, I would think it would be coming down. But I'm just thinking if it's like in the 8 to 10-year range versus over 12?

I don't think it's over 12 at this point. But again, I don't have the exact number. And look, it's an exciting opportunity for us to have the 737 gauge. It's, I don't want to say it's an entry-level aircraft, but it's a smaller gauge aircraft that we're able to hire into and pilots generally graduate up to larger equipment. So when I mentioned our fleet, we have the ability for pilots to really enjoy a variety of fleet types, smaller gauge, largest gauge as well as different types of operations. So we feel we have a really attractive value proposition for pilots to come work for us. So the second part of your question was on rates. In going through this arbitration process and the negotiations with the union, we looked at all the rates, both entry-level as well as top of scale, and strive to be competitive with our comparators in the marketplace. And we feel good about where we landed there. So I wouldn't say we're on the low end. I'd generally say across the board on rates, we're on the higher end of our comparators. That's certainly true with the top of scale people, which gives our younger pilots something to strive for.

Got you. Okay. I really appreciate it. And then, I think this might be a question for John. As you think about the growth, and I appreciate all the comments that you made in answer to all the other questions about it, and the new aircraft and so on, how do you think about somebody like Maersk ordering 2 777 freighters? You wouldn't normally -- for their Star Air subsidiary, right, you wouldn't normally see a shipping company wanting to own aircraft. So how are you thinking about like nontraditional folks getting into the airfreight market and how that would impact any rates that you might think about or your own marketing position in the next year or so?

Sure. That's a great question. I personally have mixed feelings about it. I'm always a little cautious when a new potential competitor comes into the marketplace. I get very competitive there, and so you want to keep that to a minimum. But on the other hand, if you look at it, it ties in with the comments I was making earlier about the value of airfreight and sustainability. It says that some very sophisticated players in the freight market see the value of airfreight, so much so that they're willing to invest in it. So I think that bodes well for the long-term future of airfreight and ties in with some of the comments of new customers being created. Spencer, to the extent there's modal shift, it doesn't take a great deal of modal shift from sea to air to make a meaningful impact on air freight. So I think you have to view that as a favorable sign for airfreight. What it also means is, at Atlas, we need to continue to compete and be the best at what we do to make sure we get our share of the business.

Our next question comes from Scott Group with Wolfe Research.

I want to ask one of Chris' questions a little differently. Just with the longer-term charter business, what's the rough percentage of your business next year that will get repriced in one way or another? And how does that compare with a typical year? I'm guessing it's less, but any thoughts there?

Scott, we have a number of these long-term charter agreements. And as I said, we are in regular conversations with all of these customers. They need this capacity. And so they are entering into conversations with us on a very regular basis about extending those. And those are happening all the time. There's interest in extending these for up to 5 years. There's demand for 5-year terms out in the marketplace. So as far as our ACMI agreements, it's I would say less than typical because those are fairly long-term in nature. As far as these charter agreements, as I said, most of them go into 2022 and 2023, some go into to 2024 and 2025. And again, they're all looking to ensure that they have this capacity, so we feel good about it.

No, I get it, but like meaning the rails will say, hey, 50% of our business reprices in a given year, or the truckers might say it's 80% or whatever it is. Is there a rough ballpark so we can understand it?

Perhaps our customers, that might be the case for our customers, Scott, who are freight forwarders or charter brokers and so forth in their dealings with their customers. But for us, it's a little different because we have -- we don't have that many of these, right? We have a finite number of ACMI contracts. We have a finite number of these long-term charter contracts. And so we're managing them all very closely. It's not sort of law of large numbers kind of thing.

Okay. Got it.

Scott, I'd like to add a little additional perspective as well because we've been balancing the long-term charter agreements with the short-term swing capacity that is very high yielding, right? So when we commit to a long-term charter agreement, particularly in the environment we're in, it's generally a little bit longer route and that tied in with my comment to Chris. But I also don't want to undervalue the significance of the flex capacity and the ad hoc capacity that at times we maintain by design rather than committing to lower-yielding long-term charters. And that has contributed that fairly complex balance to the very strong results. So while we heavily favor the long-term charter in the ACMI, we're also wanting to capitalize on the near term, very, very favorable conditions as well.

That makes sense. Can I just ask one more? So probably at this time a year ago, there's almost nobody thought you'd grow earnings this year and earnings will be up, I don't know, 35%, 40% this year. Any thoughts on next year and the ability to grow earnings? And anything you could share on either maintenance or military now that the calendar is reset on those 2 items?

Yes, Scott, overall, as John has talked about, the environment is incredibly strong, and we expect that, that will continue. The acceleration of express and the adoption of e-commerce, the record low inventory levels, all of these things bode really well for airfreight overall. With regard to 2022, we'll look to provide some more information during our next earnings call. It's an interesting environment, obviously, in the midst of a pandemic, and so we've only been providing quarterly guidance this year. We'll see next quarter whether we provide one quarter guidance or whether we get back to the kind of more normal providing guidance for a longer term. So we'll talk more about that during our next earnings call. But there are a number of really positive factors. And of course, one big variable is yield. And we do expect that they will normally moderate at some point. And so we'll just have to see when that is, and we'll do a lot of modeling around that.

And I just have one additional point, if I could add to that, because in my prior remarks, I mentioned we may see some lower flying on military. And Scott, you mentioned military. I don't necessarily view that in the near-term as a bad thing. Those resources will be gainfully employed into the strong commercial market, and it's more efficient flying, generally speaking, the commercial market versus the more ad hoc charter flying for the military. That's not in any way to disparage the military flying, it's just we have other current uses, so the timing isn't all that bad if there's going to be a softening of the AMC cargo business for us right now.

And our next question comes from Frank Galanti with Stifel.

Great. I wanted to ask about the supply dynamics for the widebody freighter market. From what I understand, historically, the dedicated freighters moved about 40% of transoceanic freight in kind of a normalized environment as passenger belly space took up, made up the difference. Can you talk to what that current rate is and what you expect kind of moving forward as international capacity returns to more normalized levels?

Frank, we work from the operating premises. It's more -- it's closer to 50/50 in terms of what was pre-pandemic belly versus main deck freighters. Clearly, for the foreseeable future, it's going to be more heavily weighted in favor of main deck freighters. There will be new freighters coming into the market. But for us, not as directly competitive. Most of the 777 -- we talked about, we're taking the last 747s, that leaves the 777 and the 767 mainly for new production. The 777s are largely, not exclusively, but largely going to the integrators, the FedExes and DHLs and the integrators, so not competitive to us. As is true for many of the 767s. But offsetting that, there's also a lot of older equipment that may be retiring. There's going to be a lot of questions on the MD-11's future, right? While they're gainfully employed now, when they come up for heavy checks, which is a very expensive investment, I think there's going to need to be a lot of thought. So some of that, the older equipment will retire out. And then the question will be how much of the international passenger belly capacity will come back? Nobody knows for sure. But I think the general consensus is, given all the passenger aircraft retirements, that it will be less than what was pre-pandemic for a while. And reasonable minds can differ whether that's 80% or 70% of pre-pandemic levels. Nobody knows for sure. And then the last factor in that equation is, okay, how many aircraft are going to be converted? The 777 conversions are a couple of years out. The A-330 conversions, and for the large widebody, those are the real factors that would play into that, which again speaks that it will be more heavily weighted towards main deck freighters versus belly. So I don't have an exact percentage, I don't know that, but I just would say it's more than 50% will be main deck for the foreseeable future.

Okay. That's really helpful. And I guess as my follow-up, just trying to get a sense of what normal supply growth looks like. From what I understand, it's about 600 widebody planes flying today after, obviously 2020 brought a bunch of them back from being parked. But in your prepared remarks you said that deliveries for dedicated freighters were lower than usual. Can you kind of talk through what's happened with deliveries in the last couple of years relative to more normalized times? And then kind of what the outlook is from your guys' perspective on the years going out? And I guess, secondarily, how many freighters are retired each year in a more normalized world?

Yes, there's really no fixed number of how many retirements in a normalized world. I don't know what a normalized world is anymore, to be honest, and I think it comes down to what are the market conditions at the time some of these aircraft come up for retirement or parking decision? And there's a lot of fluidity to that. And it's really -- it's more market-driven than asset-driven. Generally speaking, if you're willing to invest in the heavy maintenance, you can prolong the life of those assets. With regard to the production, I'll just comment on what I said before, you've got one line that's retiring entirely and that's the 747. The 777s are predominantly, my understanding, will be freighters. And I don't want to speak for Boeing, but I think that production rate is something like 1 or 2 a month, 2 on the high end a month of 777s. The 767s might be a little higher than that. So there will be capacity coming into the market. But again, I go back to, to what extent will that be replacement capacity or truly incremental? And I think that's an open question which will be market-driven on how much carriers are willing to invest into heavy maintenance. Spencer, I don't know if you have any more detailed numbers you want to put behind that answer?

The only thing I can really add is in the long-haul widebody space where we primarily operate. We have the last 4 747-8s. There won't be any more after that. With regard to the 777s, I think there are something like 38 announced aircraft going to announced customers from Boeing, and most of those are integrators. So it's DHL and FedEx are getting most of those. There are also some Asian and Europe and Middle Eastern airlines as well. But there's just not that much capacity coming into the space. So that's a really important consideration, Frank. I'll just add, typically, demand grows, and as John said, there's no such thing as typical anymore. Historically, the demand in air freight grows 3% to 4% per year. And so if you take 3% to 4% times the number of aircraft that are out there, that means the number of incremental aircraft need to be added every year. Plus, you have the older aircraft that are retiring, as John talked about, and so it's just further need for more aircraft. But there really aren't that many orders out there.

And I have a follow-up with Chris Stathoulopoulos with Susquehanna.

So Spencer, I'm going to ask, even though you answer this just about every quarter now, or at least certainly since last year. But I think it's important to ask because I get a lot of questions around how payload sensitive Atlas is today. And that certainly changed versus where you were in 2019, 2018. But what percent of your block hours are currently on spot? I believe that number is 5. And do you anticipate that mix to remain at 5 through the next stages of the recovery? And it sounds like John feels, based on your comments, that this is going to play out perhaps longer than some do, sounds like at least through 2023. But that 5%, is that the sort of new level of spot sensitivity, for lack of a better word, we should think about with respect to block hours and of course contribution dollars?

Sure. Thank you, Chris. So overall, I'll give the kind of the rundown. Our block hours in traditional ACMI are somewhere between 60% and 65% of all the flying that we do. These long-term charters are somewhere around 20%. Flying that we do for the military is now somewhere around 6%. Flying we do in South America is about 5%, and that leaves sort of ad hoc space at somewhere around 5% to 6%. So hopefully, that is true. The other part of your question was, do we expect this to kind of continue? Yes, I think we do, Chris. This is becoming perhaps the new normal. At least for the kind of foreseeable future, our expectations are at these levels. They change a little bit. As John said, military came down a little bit, which allowed us to operate more in the long-term charter space, so these percentages change slightly, but you can tell if you look back, they're fairly consistent.

Okay. If I could squeeze one last in here. There was an article out there in the press over the last 2 weeks or so about Amazon looking around for some 777s and I think for some Airbus freighters. On the 777 side, is that something, and this is for outbound flights from China, is that something that you would be able to fly without knowing anything else about how that would work, point-to-point, hub and spoke? But in terms of if it is an outbound flight from China, could you even participate in something like that?

I'll comment on that, and I'll start by saying we don't speak and can't speak for Amazon. What I can say is, and this ties in with my prepared remarks, that we have global operating capabilities in the asset types we're talking about here. So we'd obviously have to look at what the route rights would be involved and whether we could get the right traffic rights, but we are a global player in the 747 and the 777.

And I'm showing no further questions in the queue at this time. I'd like to hand the conference back over to Atlas Air Worldwide for closing comments.

Great. Thank you, operator. And thanks to all of you for your great questions. Spencer and I really appreciate the opportunity to engage. As I said, we're really excited about our results and where we are and where we're going. Our focus is on the future and the long term. We really appreciate you taking the time with us today. We hope you and your families stay safe, and we look forward to speaking with you all again soon. Thanks so much. Thank you, operator.

Thank you. This concludes today's conference call. Thank you for your participation. You may now disconnect. Everyone, have a wonderful day.