Air Transport Services Group Inc (ATSG) 2005 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the ABX Air 2005 Fourth Quarter and Year-end Results Call.

[OPERATOR INSTRUCTIONS]

I would now like to turn the call over to your host for today's presentation, Mr. Joe Hete, President and CEO of ABX Air. Please proceed, sir.

Thank you, Colby, and good morning to all of you joining us for our fourth quarter 2005 conference call. With me today is Quint Turner, our Chief Financial Officer. The purpose of today's call is to discuss our financial results for the fourth quarter and for year ended last December 31 as well as to update you on the status of our DHL relationship and plans for our non-DHL business. After the close of the market yesterday, we issued our year-end 2005 earnings release and filed our 10-K with the Securities and Exchange Commission. We also issued a second release and 8-K concerning a reduction in the scope of services we will be providing for DHL under our Hub Services Agreement. Those documents are available on our website at abxair.com.

Quint Turner will now go over our financial results for the fourth quarter and the year. Following Quint's presentation, I'll cover our operations during the quarter and a few other matters. Finally, we will open the call to your questions. Quint?

Thanks, Joe. I need to begin by advising everyone that we may make projections or other forward-looking statements during the course of this call. Such statements involve risks and uncertainties and our actual results and other future events may differ materially from those we may describe here. I'd like to refer to ABX Air's periodic reports that are filed from time to time with the Securities and Exchange Commission, including the Form 10-K for the year ended December 31, 2005 and our Form 10-Qs for the first, second and third quarters of 2005.

These documents contain and identify important factors that could cause the actual results to differ materially from our projection. In addition, during the course of the conference call, we may describe certain non-GAAP financial measures, which should be considered in addition to and not in place of the GAAP financial measures we included in our financial statements.

Now, for the financials. Our revenues for the fourth quarter and year increased over the same period in 2004, while earnings for both periods declined, primarily due to low attainment of the revenue incentives under the Hub and Line-haul Services Agreement with DHL. Total revenues for the fourth quarter increased 9.7% to 396.6 million. Net earnings were down 49.7% by 9.1 million or $0.16 per diluted share. For the year, revenues increased 21.6% to 1.46 billion, while net earnings decreased 18.1% to 30.3 million or $0.52 per diluted share.

Base mark-up profit for the fourth quarter was negatively impacted by 1.9 million of credits we granted to DHL, stemming from higher-than-anticipated costs incurred during the quarter. Revenues generated from DHL were 1.43 billion for the year, up 21.6%, accounting for 98% of total revenues. For the fourth quarter, DHL revenues were 387 million, up 9.8%, accounting for 97% of the total revenues. Revenues from DHL eligible for cost mark-up under the Hub Services Agreement grew 24% in the fourth quarter, the first quarter having year-over-year comparisons of eligible cost mark-ups for all 19 sort centers.

There were no incremental mark-ups earned during the fourth quarter under the Hub Services Agreement. The mark-ups were negatively impacted by higher-than-anticipated labor costs associated with the consolidation of the Northern Kentucky hub into Wilmington, labor cost increases associated with the October opening of a regional hub facility in Riverside, California and an expanded regional hub operation in Kansas City. Additionally, the company did not pursue $900,000 of incremental hub services revenues earned in the fourth quarter to demonstrate its commitment to DHL during the transition period.

Earnings generated from the hub services business for the year were down 6.4 million from 2004, due to lower achievement of incentives. There were no mark-ups from the annual cost-related or service-related goals in 2005 compared to 5.9 million recognized in 2004. In both 2005 and 2004, we realized approximately 100% of the maximum available incremental mark-up from the annual cost-related goal under the ACMI Agreement of $4 million. These results reflect the company's efforts to leverage the cost structure in place to operate greater-than-planned flight hours without incurring significant incremental expenses.

Under the annual service portion of the ACMI Agreement, we attained $700,000 or 60% of the maximum mark-up in 2005 compared to 2004's 900,000 or 80% of the maximum. The company realized 60% of the fourth quarter maximum cost-related mark-up for ACMI quarterly cost incentives or $600,000. In the fourth quarter of 2004, the company earned 900,000 or 80% of the maximum available cost goal. During the year, ABX Air's DHL costs subject to mark-up under the ACMI Agreement were flat, up 1% versus 2004. This reflects results of the air network consolidation. We had higher than budgeted piece volumes and a higher percentage of larger box traffic this year, which required more labor to process than letter traffic.

DHL also asked us to implement additional sort processes in all hubs, resulting in more labor hours than we had projected. As an example, with the consolidation of the Northern Kentucky hub into the Wilmington facility, we experienced a 10.4% increase in package volume from the third quarter with 171.4 million packages being handled during the fourth quarter. Approximately 1,000 new employees were required to open the facility and handle the additional sorting. The operational challenges associated with the hub consolidation and corresponding impact on costs made achieving favorable variances from planned costs during the quarter extremely difficult.

Revenues for our non-DHL business rose 27.3% to $34 million in 2005 as compared to 26.7 million in 2004. The increase was driven mainly by maintenance service revenues and a full year of revenues from the Postal Service sort facility we manage in Indianapolis. Revenues in 2004 included 4.5 million to operate an air network for the Postal Service that was not contracted in 2005. Likewise, our 2005 revenues included 2.6 million for a one-time contract to operate a seasonal sorting facility for the Postal Service. If you exclude the non-repeating Postal contracts, fourth quarter revenues increased 10% and annual non-DHL revenues were up 41%.

Non-DHL earnings in 2005 were 6.6 million, compared to 6.8 million in 2004. Earnings were negatively impacted by bad debt charges of approximately 600,000 against maintenance services on the non-DHL business when Delta and Northwest filed for bankruptcy. Additionally, there were start-up costs in the first half of the year when the company transitioned the charter business to the more efficient Boeing 767 aircraft, generating higher revenue block hours and depreciation expenses than the DC-8 aircraft they replaced.

Non-DHL block hours for our Boeing 767 aircraft increased by 60% in the fourth quarter a compared to the third quarter of 2005. Charter profit margins were 11% for fourth quarter 2005, compared to 9% for the fourth quarter of 2004. When we successfully deploy additional 767 aircraft and further broaden the base of our 767 charter operation, we expect to see those margins stabilize as we leverage our fixed costs.

As indicated in yesterday's press release, DHL has notified us of its intent to transition the contracted truck line-haul network and management and operation of the regional hub in Allentown, Pennsylvania, away from ABX in 2006. As the exact timing of this transition is uncertain, is it difficult to project the 2006 financial impact. However, we estimate that had ABX not performed these services during 2005, 2005 revenues would have been reduced by approximately $292 million, and net earnings and cash flow would have been reduced by 4.6 million.

The estimated impact on earnings and cash flow is the same because these services to not involve assets and therefore would not impact depreciation expense. The reduction of earnings and cash flow of 4.6 million would have represented 15.2% of our 2005 earnings, 3.9% of net operating cash flow and 6.4% of cash flow from earnings and depreciation.

Now, Joe Hete will review our operations for the quarter. Joe?

Thanks, Quint. A great deal has happened in our business since our last conference call in November. We accomplished a number of things we said we would do. We purchased 11 more Boeing 767s from Delta Airlines. We restored service levels in Wilmington and the 18 other hubs we manage in the fourth quarter to where they were before the September consolidation. And we continued to expand our non-DHL business by expanding the use of the two 767s in our charter fleet, while continuing to rapidly grow the other parts of that business.

I want to state upfront that we are not happy with our financial results for 2005. We were not able to achieve some of the goals we set for ourselves, especially in the second half. But in many ways, however, our financial results stem from factors that were outside of our control. The changes that DHL made in its U.S. operations last year were unprecedented in scale and scope. ABX and DHL both thought we did everything we could to prepare for them, but in several areas, both of us fell short. Our problems lasted only a few weeks and they were mostly confined to the Wilmington sort operation. However, in that short amount of time, we knew that DHL lost a significant amount of business.

Meeting DHL's very tough service standards during a time when much of their network was being restructured required us to reposition and add many more employees, which, in turn, pushed us over budget. As a result, we failed to earn any cost-related incentives revenue in the fourth quarter from our Hub Services contract. In recognition of DHL's situation, we credited them for additional expenses we incurred trying to meet their service standards in the second half. And on top of that, we agreed to forego $900,000 in annual service-related incentives we had actually earned.

On it's own conference call earlier this week, DHL acknowledged that it was pleased with the way the U.S. service quality was progressing before the integration and that service quality is now back at all-time highs, even better than before the integration. They also said they expect to resume growing again in all of their product lines in the second half, which we certainly hope is the case.

As we announced in our 8-K filing, we are doing everything we can within the limits of what makes sense for the shareholders of ABX. DHL informed us recently that it intended to exercise provisions in our Hub Services Agreement that allowed to take back certain of those services, which we have always reminded our shareholders that they could do. We will turn over management of DHL's line-haul trucking operations in their Allentown, Pennsylvania hub later this year.

We have agreed to discuss other changes with them that are further described in our 8-K and 10-K filings. I can't tell you today exactly what those changes will be. I can say that the net effect will likely to be to increase both the risk we bear and the potential rewards we can earn under both our hub services and ACMI contracts. I can also say that we have not and will not and will not agree to any changes that looked at as a whole, would hurt our ability to deliver returns to our shareholders from our DHL relationship. In one specific area of this new agreement, we have acted directly in our shareholders' interest. DHL has agreed to adjust terms of our loan in ways that would allow us to offer a buyback of ABX common shares.

All of these changes with DHL further emphasize for me the importance of expanding our non-DHL business as quickly as possible. We made great strides in that area last year as our non-DHL revenues increased 27%. We had consecutive quarter growth for each of the last three quarters of 2005 in our non-DHL ACMI business. Excluding revenues from the air cargo network we provided for the U.S. Postal Service in 2004 that we did not have in 2005, our non-DHL AMCI revenues last year would have been up 14%.

Revenues doubled in 2005 from non-DHL products and services other than charter operations Our aircraft maintenance products and services were very popular and we expect to grow them, the flat panel display upgrade, and our Postal Service support services still further in 2006. For a number of reasons, some of the non-recurring or non-DHL earnings did not increase last year. We told you last August that the two Boeing 767s we were adding would be retained in our charter fleet and not in the DHL fleet.

Throughout the second half, those two planes gave us a significant boost in fuel efficient, competitively priced cargo capacity. We also said that we would be challenged to gain enough new business for both jets to offset their increased startup costs. That expense, plus the U.S. Postal Services decision last year to not have us operate an air network for them that we ran in 2004, led to lower earnings from our non-DHL operations in 2005 than the prior year.

Looking forward into 2006 and beyond, however, I am very confident about our non-DHL business, both in terms of growth and profitability. As you know, we will be adding at least a net of three Boeing 767s to our non-DHL fleet in 2006, the first of 12 767s we purchased from Delta last year. That's five additional 767 aircraft minus the two that we anticipate will return to DHL services this spring. These will be less expensive and have low investment costs than the ones we operated in the second half last year.

We already have strong interest in our 767s, which will all have standard wide cargo doors, from a number of airlines and forwarders just a soon as we can get them into our system. We now expect to accelerate deliveries of the remaining 767s with five due in 2007 instead of the four that were originally planned. These potential new customer include large well-known companies in the USA and internationally. We're also bidding on some very significant opportunities with the Postal Service.

Beyond that, our board has indicated that it would consider proposals for selected strategic transactions if we see something that represents a good fit. I can't go into all the details of those opportunities today. Many of you have seen the article about us in this week's Barron's and some research on us issued recently. I won't comment on their forecast, but I will add that there are many more opportunities in our non-DHL business than was mentioned in either one of them.

To recap, we had a very challenging year in 2005 and 2006 is shaping up to be just as challenging, but with a very positive outlook on the non-DHL side. Today, we are meeting the performance standards that DHL has set for us. In fact, as DHL has said, our service quality is running at a record pace. We and DHL agree that both companies need to do even more for both companies to be successful and we will jointly explore ways to make that happen. Doing that will require major advances in many areas, including how we select, train and motivate our own employees, how we schedule, maintain and operate our aircraft and how we perform and measure and fine tune our performance.

But it will also require DHL and DHL's other vendors to work harder and to be better engineered through processes and systems that also affect our performance. They have committed to do so and we trust that they will deliver. If we succeed, we expect to be appropriately rewarded above and beyond the incentives currently specified in our Hub Services and ACMI Agreements. If we don't or if DHL-owned other vendors don't improve, we still expect to fully recover the costs we incur on DHL's behalf.

That's a summary of where we stand what the future looks like as of today. I can assure you that maximizing returns for our shareholders is and will remain the fundamental principle that guides everything we do. I know I speak for the entire management team at ABX Air when I tell you that we will strive to do all that we can to deliver on that promise.

Now, Quint and I are ready to take questions. Moderator, can you introduce the first questioner?

[OPERATOR INSTRUCTIONS]

Your first question comes from the line of Helane Becker with the Benchmark Company. Please proceed.

Thank you very much, operator. Hi, gentlemen.

Good morning, Helane.

Good morning.

A couple of questions. First, on the $900,000 that you decided to forego, I guess I understand the thought process that goes behind it, but don't -- do you think your shareholders will be angry that you made that choice?

I think it was a tough call, Helane, in terms of deciding to offer that back to DHL, but I think without question they were hurt markedly by the service disruptions that were incurred in the latter part of the year. DHL has sustained significant losses and we just looked at it as a good gesture on our part in that we are supporting them in their attempts to make inroads into the level of business that FedEx and UPS occupy in the U.S. and, in the final analysis, that was the prudent thing to do.

Okay. Did they indicate that they were willing to acknowledge that that was the right thing to do, and then therefore, in the future, gives you come consideration in exchange for doing that? Or is that just something you thought of doing on your own?

It was something we thought of doing on our own.

Got you. Okay. And then, as a follow-up, you talked about having to hire 1,000 extra people at the Wilmington hub. That hub, as I understand, is much more automated than the prior hub that you were operating there was. So, is there a point this year that we'll look and see a lot of those people having been let go?

The hub that we're operating today in Wilmington actually is strictly a manual-based hub just as the Legacy hub was. It was just in addition to that. Later on this year, probably about the third quarter, they will hopefully be ready to turn on the automated letter and small sort here in Wilmington. The amount of people that that will require will vary slightly from where we are today with our current manual sort for those two product types. So, we don't anticipate that that, in and of itself, would drive a reduction in headcount outside of what we could normally absorb through attritions that we have here in the Hub itself.

We have brought down the staffing level significantly since the peak period in the fourth quarter as we've transitioned through the first quarter in the interest of trying to make the operation more efficient than what we saw in the fourth. And along with that, as we've mentioned already, is the service levels that they're accompanying, the more efficient operation or the record levels, especially for a first quarter.

Okay. I'm going to get back in the queue and let other people have questions, too. Thank you.

You're next question comes from the line of Monica Logani with Foresight Research. Please proceed.

Thank you. I just wanted to get a little bit more detail on DHL's decision to eliminate the Allentown hub. First of all, I -- in the release, it sounded like you were saying the Allentown hub is your biggest. I was under the impression that Wilmington was the biggest. So, if you could just clarify that point. And also, just getting back to this -- to DHL's motivation for this. I mean, we're trying to understand, is this an isolated event or is this an indication of things to come that, we're going to see a couple hubs being closed every year?

And then, secondly, the amount of impact that you talk about -- a little under 300 million - I just want to try to understand where that number is coming from. Because if you just look on your income statement in terms of your line-haul expense, it's over 300 million and that number, the 290 number that you talked about, obviously includes the hub as well as the line-haul being eliminated. So, if you could just give us some detail.

To take the first one, Monica, the [ADH] hub is the largest of the regional hubs. Wilmington is certainly the largest hub of the entire network by far. As far as whether the -- DHL decision -- DHL has a new management team in place for their ground product, which, obviously, is the largest potential product line in the lines of business that they offer in the U.S. And it is a fully -- will be a fully automated hub, which is something we have traditionally never had to deal with -- one that was 100% automated.

So, based on a combination of a new management team overseeing the ground product, this would be a key linchpin in that network. It being an automated facility, which we have very little experience with, they decision to go ahead as we do the transition from the current manual sorting facilities to take over the management of that new Allentown facility themselves. To that end, we have been given no indications to date. In fact, quite to the contrary. They've assured us that their current plans do not entertain moving any of the additional regional hubs over the DHL or some other operator from ABX.

So, are you trying to say that this is an isolated event, just the whole automation of this hub? I mean, it sounds like that would be the trend.

Well, there's certainly nothing that would stop it from being a trend, but as we sit here today, there's no indications that this is anything but a one-off occurrence.

Okay. And can you provide some details just on the impact that you noted?

Yes, Monica, this is Quint. In terms of the number that we disclosed in the press release yesterday, the -- I would say that approximately 265 to 268 million of that is related to the line-haul truck expenses. The remainder, approximately $20 million is related to the Allentown hub. The line items in our P&L that you referenced the purchased line-haul, which is larger, also includes some expenses associated with, for example, truck fuel surcharges that we do not get a mark-up on, per se, and also includes the air charters, the feeder air charters that transitioned to DHL last year. You may recall there was some feeder charters that are in there as well.

Okay. So that is the - so, the 265 to 268 is the expenses that could be marked up.

No, the costs there that we've got are all marked-up costs.

Okay. They're already marked up. Sorry. Yes, okay. Got you.

There's also some costs that will stay with ABX, some - in that purchased line-haul number on this P&L.

So, you'll be doing a little bit of that still?

Yes.

Okay. All right. My next question and then I'll jump off is -- you talk about these three planes joining the -- going into service by the end of '06 for your non-DHL ACMI business. And then five in '07. I just wanted to understand -- it seems a little bit accelerated from what we were expecting. Is this conversion, which I thought was 90 days to go from--- to get to a cargo conversion, is that quicker than that? Is that what's causing the change here in its acceleration?

No, actually, Monica, the conversion schedule is pretty much as we had talked about previously, anywhere from 90 to 110 days. Really, what's occurred is the acceleration of the availability of the aircraft from Delta Airlines. Initially, when we had signed the agreement in the fourth quarter, they had a schedule laid out, but since that time, they have removed, I believe, every one, but one of the aircraft from their operating fleet and they are now parked out in the desert, I believe, waiting for us to take them as we see fit. So, we're trying to get them into the modification queue as quickly as possible and that's the reason for moving up the in-service date.

Okay. All right. That makes sense. Thank you.

Your next question comes from the line of Ian Zaffino with Oppenheimer. Please proceed.

Hi. Good afternoon, gentlemen. Talking about the buyback here, how do you actually -- has DHL actually agreed to lift those covenants? What are the terms of those and what's the timing and the magnitude of any sort of buyback and what would be the interim steps to execute that?

As of now, Ian, the exact terms are unspecified. The limits -- the annual limits on what we would be able to buy back have not been determined. And that is going to require some additional discussion with DHL.

So, how much -- or what are you going to pay them for them to lift this covenant?

I'm sorry, Ian, you were cutting out there during that question.

Is there anything that you have to give them in exchange for them allowing you to buy back your shares?

Not that we're aware of. Again, we have yet to finalize those discussions [technical difficulty].

Okay. And then as far--

On the stock buyback.

Okay. And as far as the [third] party business [technical difficulty] rate, is that any good indication that you're going to [technical difficulty].

I hate to interrupt you, but you've got some background noise there and we really can't hear your questions very well. I think we're going to have to go to the next caller.

Let me just try that one more time [technical difficulty] rate, is that any type of indication that you're seeing better than expected demand or how shall we be thinking about that?

If I heard you correctly, Ian, you were asking whether the acceleration of the planes -- the 767s, in modification, was because of an increased interest in -- on the demand side. And the answer to that one is yes. I mean, we have customers calling us almost daily asking for the availability of the 767 aircraft. With fuel prices where they're at today, compared to the aircraft that it would replace from a traditional standpoint, be it a DC-8 or even a 727, there is a significant savings to an ACMI customer to employ this aircraft type.

Your next question comes from the line of [Patrick Anderson] with LCG. Please proceed.

Hey, Joe. Hey, Quint.

Hey, Pat.

Hi, Patrick.

I have a question on the super bonus for the ACMI, as disclosed in the exhibit. Can you explain -- maybe I should just let you explain a little bit before I ask anymore questions. It's the cut -- reduced cost by $80 to $100 million.

That's in the -- you're talking about the one related to the ACMI.

Yes. The ACMI one. I mean, how would you do that?

Well, if you look at it on a macro basis, there's still a lot of details that need to be flushed out here, Patrick, in regards to that agreement because it was pretty broad based. But essentially, the idea is if we can fine tune the network capacities as they are today and, of course, we're always in there with ideas and thoughts in terms of how that can be accomplished, that if we can take the overall network cost down in numbers -- I believe it's $80 and $100 million in the two traunches, if we can take it down to those kind of levels, based on the input of all parties involved. And again, the idea being here, for everybody that has a piece of that network to participate, that we will be able to avail ourselves of additional bonus money.

Okay. Okay. And would some of this fine tuning mean ABX is actively making the decision to put packages on trucks, if possible?

Now, the ultimate decision for any of those kind of changes does rest with DHL. However, as I say, we've got a number of years of experience of operating the network in its entirety. And as such, we see -- we can see opportunities wherein they can make themselves more cost effective in that regard. That can include taking freight off of aircraft and putting it onto trucks or conversely, it could have freight coming off of trucks and going onto available space on the aircraft. It could be -- entail things like changing an aircraft type on a specific run or just doing reroutes with certain aircraft types. So, there's any manner of opportunities where you can tweak the network as you go forward and, as you can imagine, again, going back to something as expensive as fuel, it doesn't take a lot to garner significant gains.

Okay. That makes a lot of sense. And in terms of how the contracts will be changed, conclude more variability? Is there an opportunity or is there a chance that the contracts are changed so that there is no mark-up guarantee? Aside for one-off, such as the fourth quarter, when there's a lot of change, in the normal situation, is -- could the contracts change that ABX could lose money?

Well, as we -- as I stated earlier, what we're going to take in to consideration as we work through this is the risk reward trade-offs, but certainly, at the same point in time, we don't want to do anything that would negatively impact our shareholders or wasn't a prudent decision in that regard. Again, we don't have sufficient detail at this point in time. It was a concept they asked us whether we would be willing to agree to explore further and to which we replied yes, but we have no real details as of yet.

Okay. So, other questions such as would these changes, in the terms, also change the length of the contract or the ability of DHL to take business? That's too early to discuss also?

Well, I think today they have all the flexibility in the world to take business that's under the hub and line-haul contract, certainly under the ACMI, they themselves couldn't perform it. But I think, certainly from our standpoint, we'd be looking to is we wanted the gives that we would get would be to see if we can get some longer term for the services we provide.

Very good. Very good. And finally, just the -- can you talk a little bit more to the financing of planes? I know in the 10-K it was noted that CapEx will be about 125 and about 50% of that would be financed. And it looks there's about 100 - a little over 100 for the Delta planes. Can you talk more to - will that be debt financing or will that be lease financing and how you're weighing those two alternatives?

Well, Patrick, what the current plan is -- this is Quint, would be for the five aircraft that we placed in service this year to lease three of those aircraft and to purchase two aircraft with our operating cash. The leases themselves -- the five aircraft are sort of spaced out during the year, but essentially, there were three aircraft -- two, three and five, that we plan on leasing and the first aircraft we plan on purchasing. That's the aircraft that we intend to place in service in April.

The way we looked at it was, of course, we're weighing the flexibility and liquidity requirements we have with our operating cash as well as the cost of the lease financing. And we feel pretty good about the terms we received. So, if you figure there are three aircraft, roughly, at 17 -- a little over $17 million a piece, those three aircraft that we leased, we would have proceeds coming back to us out of that 125 million, due to those leases.

Okay. And the lease amount is the full value of the plane.

Correct.

Okay. Thank you. All right, I'm all set. Thank you.

Thanks, Pat.

Your next question comes from the line of David Campbell with Thompson Davis & Company. Please proceed.

Hi, Joe and Quint. I am -- you're obviously optimistic about the market for the charter - 747, 767 charters. But it didn't seem like your revenues went up much from the charter services in the -- from the third to the fourth, despite your problems in the third quarter of getting them into service. Do you have any numbers -- revenue numbers you can share with us?

Well, I think the best way to look at that, David, is if you go back through the year in terms of the progression from a block hour standpoint. In the second quarter, for example, of 2005, our total block hours flown, which was primarily with DC-8 aircraft, we had a total of 825. By the third quarter, when the 767s were basically fully up to speed and in service, we had that number up to 1,176 total hours and we were up about 1,250 hours in the fourth quarter. There's obviously a finite amount of hours you're going to be out of an aircraft in any given marketplace, depending upon the schedules you operate, but I think the quarter over quarter growth in the total utilization of those aircraft is something we'll be able to continue to build off of as we move into - in and through 206.

So, really, the fourth quarter charter revenues, which were $4.5 million, that is what you would consider relatively maximum utilization of your available aircraft, of the three -- you have two aircraft in service, right?

Yes. Two aircraft in service.

And so, that's what we look for as a base going forward into '06.

Yes, sir.

All right. Okay. And what is the latest status of the old plan of DHL to reduce the number of aircraft by 27? I think seven were taken out of the fleet, but where does that stand now?

That's always been taken out of the fleet as of today. As we mentioned earlier that we're in the process of trying to fine tune the network. And of course, the largest number of aircraft that were originally announced as being part of that 26 aircraft reduction was the DC-9 aircraft. With that said, the DC-8 aircraft is probably the most reliable and certainly is the one that's most apt to be able to do a lot of the multi-stopping, if that's what you do in order to reduce the cost. It's a two-engine, two-crew member aircraft. And so, I told -- there is a better handle for what the current loads require. And looking to optimize, from a cost standpoint, the overall network that DHL operates, they have elected not to remove any of those additional aircraft from service.

So, it's still only seven that have been taken out.

That is correct.

Okay. So, and then my last question is the line-haul costs - purchased line-haul costs on the P&L will basically go down to very little in the third and fourth quarters, assuming transfer of this responsibility to DHL. Is that correct?

That's correct.

Okay. Thanks. I'll -- if I have any more, I'll get back in line.

All right.

Your next question comes from the line of Chris Heintz with Perennial Investors. Please proceed.

Yes, can we go back to the DL planes -- the Delta Airlines planes for a moment. The 196 million for the 12 aircraft, at the end of it all, how much equity do you expect to have invested in those planes? In other words, you said that you were going to --

Are you talking about leased, versus purchased aircraft?

Correct.

It'll depend a bit on the treatment of those leases as to whether or not they're capital leases or operating leases, Chris. But certainly, we intend to purchase two aircraft. Right now, we believe that the three that we're going to finance are going to be treated as operating leases. And they're a little over 17 million a piece.

Okay. And then the, I guess, '07 and '08 commitments, any sense for how you're going to try to treat those?

Yes, we have five that we intend to place in service during 2008 -- excuse 2007, and two in 2008. And out of that remaining seven aircraft, we intend to finance all but two of those aircraft.

Okay. Could you review again for me the return on invested capital metrics that you're sort of targeting for these planes?

Yes, certainly. As we've talked about on the previous call is our anticipation is that we will execute contracts for the use of these aircraft that would generate utilization on a monthly basis of somewhere between 175 to 200 block hours as a guarantee. And then, coupled with that would be block hour rates that would range somewhere between $3,000 to $4,000 a block hour, depending upon the number of cycles employed for the aircraft as well as how many hours they're willing to back it up.

But, if you do the math on that, from a revenue standpoint, you're looking at revenue generation of between $6 to $7 million per aircraft. And our anticipation is if it is a purchased aircraft, that we will get a return on that investment of between 10% and 15%. With a leased aircraft, obviously, it's going to be a little different metric since it's not tying up our capital. The differential between the -- a leased aircraft and a purchased aircraft, with the financing costs rolled in, can be as much as half-a-million to a million dollars a year differential between the two.

So, the - when you say return on investment, it's as simple as taking kind of pretax income divided by the investment in the plane.

That is correct.

Okay. And then, presumably the return on equity, when you lease it, goes up modestly, right?

Yes.

Depending, of course, on the financing costs. Do you have any sense for the financing costs at this time?

I'm not -- I don't have it here with me, Chris, and really ...

Okay. In the press release, you mentioned that you intend to aggressively explore opportunities in the marketplace, which would enhance shareholder value. Can you comment on what you mean by that?

Only from the standpoint of we will look for opportunities whether it's investing additional aircraft or anything in relation to acquiring additional lines of business, anything that's going to be accretive to the shareholders' return.

Are you, in any way, precluded from doing those types of things and/or adding debt financing to do them by virtue of contract with DHL?

By virtue of the contract with DHL?

Yes.

No, sir.

No.

Okay. And then, finally, is there any reason, based on what you know now, that the balance of what stays behind at hub services, in other words, excluding Allentown and purchased line-haul, that the balance can't return to more normalized profit levels in 2006?

Well, I think when you, as we disclosed, I mean, you're going to see a lesser impact, certainly, than the annualized impact that we put in our press release yesterday of $4.6 million. So, depending upon the timing and when things are implemented, it's going to be some number less than that. And now, these 767s that we're putting into service -- of course, as Joe mentioned, the first two really backfield two aircraft that we have been operating and that were previously in our earnings base. It's only those last three that will be incremental and make incremental contributions to our profitability. And those will be primarily in the second half.

So, I guess, at least from my perspective, I think the -- given that it will be a diminished, not an annualized impact of the loss of services, that it could be very close to an offset. But it will depend upon the timing, and of course, what sort of attainment and growth we would have had in the expenses that are being pulled out of the contract.

I guess what I was asking about was more specific to the stuff that's left behind, even without the loss of purchased line-haul, the sort of core hub services, whether it's the Wilmington sort or others, performed much worse than it did last year because of the integration. And my question is, for what' left behind, can that return to more normalized levels of typical mark-ups.

Well, I think to that end, Chris, the -- you've only got three years of history out there in terms of performance under that agreement, so I'm not sure what normalized would be. Certainly, 2005 had its challenges with the integration of the Wilmington hub as well as the opening of the Riverside in the Kansas City hub. We did extremely well from a performance standpoint in 2004 under the Hub and Line-haul Services Agreement. And certainly, 2005 wasn't one that we're very happy with in terms of the way the results came out. Looking through the balance of 2006, there are no significant event taking place like we saw in the latter part of '05. Certainly, as DHL said themselves, right now they want some stability within their network and certainly build off of that to rebuild customers' confidence across the board.

So, I would have an expectation that our performance in 2006 will certainly be better than where we ended up with in 2005. But it's achieving the same levels of attainment that we saw in '04. It's certainly not going to be an easy task.

Okay. Thank you.

We had, again, in 2004, Chris, we had an 88% attainment, I think, on the Hub Services Agreement in terms of incremental mark-ups. On the ASMI Agreement in '04, it was over 98%. Now, we came very close -- we were pretty much there again in 2005 in terms of the ACMI Agreement. But on the Hub Services Agreement, you know, it was below 10%. I think it was about 8% in terms of the mark-up. And so, certainly, we're looking to improve upon that performance on the hub services in '06. And I think that's certainly doable.

That's kind of my point, which is that even if we can get halfway back, that more than makes up for the loss of purchased line-haul, at least as compared to 2005.

If we're able to do that, that will positively contribute to bridging that gap. You're correct.

Okay. Thank you.

Your next question comes from the line of Greg Nathan with Coldwater Asset Management. Please proceed.

Hey, Quint.

Hey, Greg.

I just wanted to offer a little bit of some congratulations in the sense that you guys are doing the right long-term things for enhancing the value of your business. And I just wanted to start off with the question on, can you break down the $125 million of CapEx you put in the K there? Now, you said about half of that's going to be finance and the other half is, I guess, it's cash cost.

Yes. The -- well, the financing is not pulled out of that number, Greg.

Okay.

So, in other words, from a -- in terms of GAAP financial reporting of your capital expenditures, that's the 125 million. But we're going to get back in proceeds -- cash, when we do the financings on the three 767s, call it $51, $52 million of cash that comes back when those leases are executed on the three planes. Of course, the majority of the CapEx, the $120 million is driven by the 767 aircraft that we're taking delivery of.

Can you quantify that [out]?

It's -- let's see, we've got approximately $105 million, call it, of CapEx -- yes, $104.3 million of CapEx that's related to aircraft, aircraft parts, cap expenditure is driven by that.

Is that -- does that include -- is that just for the 767s that are coming online?

It also includes support in terms of parts support for the other two fleets, the DC-9 and the DC-8 aircraft.

Can you break down the two, between the 767s and the parts for the DC-8s and DC-9s?

The 767 is the vast majority of it. I would say that is probably 70 -- oh, more than that. It's probably 90 -- 95 million of the number. I mean, the requirement for the other two fleets is quite low.

Okay. Okay. So, if I'm just looking at this correctly, this year you guys did about -- your earnings were 30.3 million and in your K you said you said you're going to have 43.3 million of depreciation and amortization in 2006. So, in getting to cash flow operations at 73.6 million, it looks like your maintenance capital spending to maintain your existing fleet is about -- call it 10 to 15 million. So, it leaves you with 60 million of free cash flow, excluding your growth capital spending. But then, obviously, you're going to lose that 4.6 million from the Allentown hub at some point. You'll probably lose a little bit more from the 20 -- or the 19 aircraft that will likely come off at some point. But you're going to get some of that back from the two 767s that are coming online.

So, from my calculations, assuming no improvement in Hub Services and no non-DHL increase in your business, you're still going to do free cash flows, about $0.90 a share, which, obviously, is very good and if you're able to buy back your stock at these levels, hopefully DHL will give you that chance. And you guys seem to be compromising, doing the right things with them, so hopefully, there will be some reciprocation from that standpoint.

Yes, the only item you didn't mention in there, Greg, that you might want to give some consideration to is the repayment of the capital lease obligations for the five 767s that we disclose.

Right. Right.

$7 million a year.

Okay. And just one more question, just so I fully understand. On the 767, the way -- what is the depreciation and amortization expense on a per plane basis for the ones that are coming on-line for your non-DHL business?

We use a 15-year life and the asset would probably be around $17 million into service. So, just a little over $1 million a year.

Okay. And then, what's the cash maintenance expense for that plane?

When you say cash maintenance expense, would you --

To maintain that plane, so that it's -- so you can still fly every year. The depreciation is a little bit over a million. Is the maintenance capital spending a little bit less than that?

Well, we expense all the maintenance as it's incurred with the aircraft that we have and fleets, so we don't do any capitalizing of any maintenance events, other than the -- that is part of its initial into service mod. So, anything from that standpoint is figured into our costs for providing the ACMI services.

Okay. So, when you talk about these $3,000 to $4,000 per block hour, that's already including the cash maintenance expense that you're going to need for that plane?

That's correct. It also includes the crew and the insurance for the aircraft.

Okay. So, on a cash flow basis, on a per plane basis, how much -- I guess you said each plane is about 17 million. So, from a cash flow perspective, you're assuming 1.7 million to -- call 2.5 million of cash flow per plane?

I think it -- again, it depends upon whether it's a purchased plane or a lease plane.

Yes, on a purchased plan per se.

On a purchase plane, like I say, that would fall within the range that I gave you of 10% to 15% return.

Okay. Great. Thank you, very much.

Your next question comes from the line of [Mike Peasley] with Priority Capital. Please proceed.

Hey, guys. Just back to the hub real quick. I don't want to beat a dead horse, but as I understand it -- as I understand, you said at DHL they don't have any immediate or intermediate plans to automate any of your existing hubs. But as you're looking forward over the next couple few years, the new hubs, assuming that they continue to grow throughout the U.S., their ground system, would you assume that the new hubs would be either fully or more automated than their existing hubs?

Or maybe, will they continue with the strategy of replacing existing hubs in the sense that they did with Allentown? I mean, I guess, generally speaking, I'm trying to figure out two to three years down the road, as your hub services the core base business, is it - is it - will it be growing or do you sort of envision it sort of as a status quo?

Well, our hope certainly is that it continues to grow, but in response to your earlier part of your question in regards to automating and facilities, certainly, it's a significant investment to automate a sorting facility, so one of the key drivers there is the size of the facility and the volume you expect it to handle. Allentown, as we mentioned, certainly is the largest facility they have. I would say that the Riverside facility -- Riverside, California, which we current operate, is also -- is the -- one of the largest ones. And it is in the process of having, and was designed as such, to have a portion of it that automated. But only a portion, not fully automated as the Allentown hub will be. And of course, we are currently operating the Riverside facility.

So, from my standpoint, based on information I have available and from years of experiences is the key driver there is labor costs, how much of the total that entails for a given hub operation itself and what return can you expect to get by automating it as opposed to have the manual processing.

Okay. All right. Well, that makes sense. I guess that's it for now. Thanks for your time.

Thank you.

Your next question comes from the line of [Matt Thought] with First Capital Alliance.

Hi. I'd like to have you expand a little bit on what kind of customers you said are calling and the types of service they are seeking. Also, what kinds of things are they looking to transport, and why can't your competitors serve this demand?

Are you talking about the ACMI of the 767?

Yes.

From a customer standpoint, obviously, we don't like to disclose our customers or potential customers. But essentially what we would be doing is, offering it under an ACMI basis. Right now, we have no plans to offer scheduled service and then have to go out and solicit various customers to fill the aircraft. But to that end, the commodity they would be transporting, near as we can tell, would be general commodities just as we do today. Nothing specific by any one carrier type that we're aware of. But the aircraft is the reason when you say why they're not going to somebody else or what is it about us, I mean, first of all, 767 is a very rare commodity these days in terms of having a 767-200 freighter. There just aren't any out there that are available and that's why they are calling us.

And one other question is in your press release you discussed that there's still some additional negotiation of some additional modifications of the Hub and ACMI Agreement. What has been established in terms of the basic annual performance levels for 2006? Has that been completed and, I guess, what is left to negotiate still?

In terms of performance level, there's two components, obviously -- one is cost and one is service, under both contracts. The cost, of course, is based on the budgets that we negotiate with DHL and the service metrics are pretty much the same ones that have been in there since day one [when] we executed the contract. So, from the service aspect, nothing has changes. Where the indications we're getting from DHL where they were proposed changes, would be on the cost side in terms of today it's based on a guaranteed base mark up on all costs. So, essentially, there's risk. And what they've indicated today it is - they would like to see a little more of the risk reward come into the equation. We, of course, as we said, don't want to be in a position where we're going to do anything that on a macro basis or taken as a whole would detrimental to the shareholders of ABX.

Your next question comes from the line of Helane Becker. Please proceed.

Thank you very much, operator. Just one quick one, Joe. You talked about business being in queue. Is there -- two questions related to that. Is there any way you could give us an idea of what the backlog might be? If you manage to win X percent of the business or all of the business, it would add X millions of dollars to revenue. And the second part of the question, which is really unrelated, is with the U.S. Postal Service, they didn't do an air operation in the fourth quarter of last year. And I guess I'm wondering why they didn't do that. Or did they do that and just not do it with you guys and give more of it to FedEx and others. And is there a realistic chance that you get that business again this year?

Okay, Helane, going to your first question on 767 backlog, right now I have the demand. I just don't have the assets available. Again, the first two aircraft are going to, basically, swap out with the ones that we deferred placing into the DHL network. But the -- suffice it to say that every one of the aircraft that will come into service after that, the three remaining in July, October and November, already have a home. It's just a matter of us making a commitment as to which one of the customers we would like to place them with.

As to the USPS, certainly, we were disappointed that they didn't have a network, as we saw in the fourth quarter of 2004, but they did not put one to bid at all. The business, as I understand it, all went to Federal Express. So, whether they put another one up in fourth quarter of '06, I think if they got through '05 and didn't see any real service issues - and certainly, we don't have any indications one way or the other at this point - that if they got through 2005 without it, I don't envision that there is going to be a high degree of probability that they will put one up in 2006.

Okay. And so, just on that 767 answer, the numbers that you cited earlier, the 100 and some odd hours at five to six -- $3,000 to $4,000 an hour for revenue. I wrote them down before. But, I mean, we can just sort of assume that range of numbers for the backlog. Is that reasonable?

If you look at our fourth quarter, Helane, we did, from a revenue standpoint in that segment, $4.4 million of revenue.

And how many aircraft?

That was two aircraft.

Okay.

That was for one quarter. Multiply that by four and --

And add an aircraft. Well, divide by two, multiply by three and multiply by four.

Yes, ma'am.

Right? For three planes.

Yes.

Yes. Got you. Okay. Thank you.

Your next question comes from the line of [Bob Kanar] with Ramius Capital. Please proceed.

Hi. Thanks for taking my question. A couple things. One, are we clear that DHL is the one who's going to be operating the Allentown hub or is it going to be another third party or do we not --?

DHL has not given us an indication whether it will be them or a third party.

Okay. Second question. Do you have an expectation of what percentage of revenue will come from non-DHL customers in 2006?

We have not given any guidance to date, other than what we expect to see with the additional aircraft coming on-line. On top of that, there are eight of the U.S. Postal Service half facilities that will be put out for bid in 2006. At least that's what we were told as of this week. One of those, of course, is the one that we currently operate in Indianapolis. And then, there is the Dallas and Atlanta plus five new locations where they will be putting facilities out for bid. So, that certainly is an opportunity. The current level of spend on the one that we operate in Indianapolis is about $3 to $3.25 million a year from a revenue standpoint.

And so, you can draw your own conclusion in terms of how many you think we will be successful in. All I can tell you is the facility we've operated for them in Indianapolis, they are very pleased with the work we performed. They awarded that holiday network for the month of November and December and it carried through January for a facility in Newark. And I think that establishes our credibility that we have with the postal service in terms of our ability to handle these sorting facilities. Outside of that, we have the other category that's in our earnings release and we expect to be able to at least hit the same levels that we did in 2005 in that sector.

Okay. Last question, in the exhibit in the 10-K, it talks about ABX agreeing to open book accounting with DHL. I'm just curious, is that, with respect to the hub services agreement, can you just tell us what that is and how is that different from your prior arrangement with DHL?

Well, the -- as we've discussed, the impetus for DHL that they've talked about in their recent releases is they're going to try to drive down costs and they're looking for some stability in the network. They've gone through these large integrations. And certainly, the fallout from those integrations and those expansions that have taken place over the last couple of years has been, as you guys have seen in our expenses, on a year-over-year comparison, is quite an increase in the level of spend. And so, what they need to do and what they must to do, of course, is to get a lead on cost efficiencies and improvements.

Now, we have always, under our existing contracts, they have been afforded the opportunity to come in and review our books. And in fact, they do that at each quarter end as we close out the accounting for the two contracts. And what they require us to do or are asking us to do is to provide more - sort of more real-time information, in terms of what the cost inputs are at the various hub facilities and so that we can have more up-to-date and more ability to react quicker, I guess, as to trends in those costs. And that's what we've agreed to do.

Okay. That's helpful. I appreciate it. Thank you, very much.

Your next question comes from the line of Chris Heintz with Perennial Investors. Please proceed.

Thanks, guys, for taking my follow-up. Could you break out for me in more detail the 125 million of capital spending for '06 -- how that breaks down?

Chris, we -- of course, we talked about it on another question a few minutes ago. I don't know. That was a pretty thorough breakdown. Approximately 104.3 million of that is related to aircraft and aircraft parts of which almost all of that is related to the 767 fleet, other than a few million dollars. And then, the balance of the spending is for -- to support the facility, the equipment, to do some upgrades in some of the other support equipment that are associated with the aircraft, some IT expenditures and so forth. And then, of course, as we mentioned, we will receive back proceeds due to the financings on three aircraft. So, I'm not sure what --

I must have -- I stepped away for a minute, so I missed that. But then, as far as the balance, how much of that balance is for ACMI related -- sorry, DHL-related business versus third party-related business?

In terms of -- well, if you take the 767s out of the equation, it's part of the third party business, so I would assume you're referring, Chris, to --

Just the balance above the 104, I guess it was.

Yes, very little of that is tied into third party business.

So, it's DHL related.

Everything's DHL related.

And so, what's the reimbursement on that?

Well, basically, depreciation is reimbursable under the ACMI Agreement. And of course, depending upon the life of the asset itself, would depend on how fast the cash flow comes back.

Okay. And can you give us a sense for those useful lives on average?

Depending upon the fleet, it matches the lives of the aircraft. On of the expenditures, for example, that we're doing is we're looking at putting in a lower deck cargo system on some of the 767 aircraft that we have that would allow them to handle some larger freight. And that benefits DHL because they do handle, in some of the markets, particularly the Gateway markets, the West Coast and out of JFK and Newark and so forth, with the international freight, some larger, bulkier cargo. And the 767s that we have -- I think we have 24 that are fitted for the -- sort of the non-standard smaller container system that loads through the passenger door.

We're going to invest in modifying the bellies, so that they can handle those larger containers and larger, bulkier freight. And that's something that's going to be, I think, of a lot of value to DHL because it will allow them to make more efficient use, in their network, of our 767 aircraft that were outfitted for the smaller containers. Now, they'll sort of have a hybrid that can be effectively deployed in markets and they can leverage the fuel efficiencies. The lower crews that -- we have a two-man crew in the 76. Some of their flights, they have aircraft that are less fuel efficient with three-man cockpits. And so, that investment is something that certainly was of value to our customer.

Okay. Thank you.

At this time, there are no further questions in queue, so I will now turn the call over to management for closing remarks.

I'd like to thank everyone for joining the call today, and we look forward to having a 2006 that turns out much better than we finished up on 2005. So, thanks for your time.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.