Air Transport Services Group Inc (ATSG) 2008 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter 2008 Air Transport Services Group earnings conference call. My name is Chanelle, and I will be your coordinator for today. (OPERATOR INSTRUCTIONS.)

I would now like to turn the presentation over to your host for today's conference, Mr. Joe Hete, Chief Executive Officer. Please proceed.

Thanks, Chanelle. And good afternoon to everyone joining us for our second quarter call. I'm Joe Hete, President and Chief Executive Officer of Air Transport Services Group.

Here with me today are Quint Turner, Chief Financial Officer, Peter Fox, our Chief Commercial Officer, Joe Payne, Senior Vice President and Corporate General Counsel, and John Graber, President of ABX Air.

Before I turn the call over to Quint to cover our second quarter results, I'd like to express our appreciation for the tremendous support that is emerging across the United States and even in other countries for our coworkers and the people of Wilmington, Ohio and its surrounding counties.

As you can imagine, it's been a very busy summer here, with a lot of activity and media attention related to DHL's plans to close its operation at the Wilmington Airport. We are very disappointed about DHL's decision, and not just for our business, which ultimately will survive and grow again, but also for the families of our employees and many others here who will be affected.

Many people, from pastors to politicians, are working hard to find a solution that would protect the 10,000 area jobs at risk and help families through some difficult choices. We appreciate their concern and support, while we focus on serving all of our customers in how best to maximize our return on assets, including those that will be displaced by DHL.

Many of you were on our July 1st call, when we discussed some of the ways that DHL's proposed agreement with UPS might affect your investment with us, and how we plan to adapt our business to new circumstances.

After Quint covers our results for the quarter, I'm going to comment briefly on those results, update you with the latest information on DHL, and outline the plan we will be executing to adopt our business to the new situation in the months to come.

Quint?

Thanks, Joe. Good afternoon, everyone.

I need to begin by advising everyone that during the course of this call, we may make projections or other forward-looking statements that involve risks and uncertainties, and our actual results and other future events may differ materially from those we may describe here.

These factors include, but are not limited to, reductions in the scope of services that ABX Air performs under its ACMI and hub services agreements with DHL, and the rate at which those reductions occur, ABX Air's ability to maintain costs and service level performance under the agreement, ABX Air's ability to, and the rate at which it can redeploy its assets that are removed from service under the agreement with DHL and generate revenues and earnings from customers other than DHL.

Our ability to remain in compliance with the terms and conditions of our credit agreement and otherwise satisfy our lenders, our ability to refinance indebtedness to DHL as required, and other factors that are contained from time to time in our filings with the Securities & Exchange Commission, including the Form 10-Q for the second quarter of 2008, which was filed Monday evening, our first quarter Form 10-Q and our Form 10-K for the year ended December 31st, 2007.

These forward-looking statements are based on information, plans, and estimates as of the date of this call, and Air Transport Services Group undertakes no obligations to update any forward-looking statement to reflect changes in the underlying assumptions or factors, new information, future or other changes.

As Joe said, a lot has happened here in Wilmington since our first quarter call in early May, but even with all the distractions, we haven't lost sight of our responsibility to our shareholders and to provide the best possible return on our assets, while continuing to grow our revenue.

In that regard, we had another solid quarter of growth, with revenues up 40% in the second quarter, compared with the same period last year. The growth was a direct benefit of our strategy to diversify into higher margin air cargo and related businesses, led by our new CHI businesses, which contributed $89 million, up from $75.4 million in the first quarter.

The Company incurred a net loss for the quarter of $526,000 or a penny per share, compared with net income of $4.5 million or $0.08 per share for the second quarter of 2007. Contributing to the loss, in part, was the affect of an otherwise favorable arbitration ruling in July that led us to absorb $4.1 million in overhead expenses without reimbursement from DHL. This includes $2.5 million in nonrecurring expenses related to our Board review a year ago of the indication of interest from ASTAR Air Cargo.

The arbitrators held ABX Air was not entitled to reimbursement from DHL for that amount. In addition, we accepted $1.6 million of recurring general overhead expenses related to the first six months of 2008 that reflects the type of costs that prior to 2008 DHL had reimbursed in full.

I'm not going to review all the history of the overhead allocation issue and the details of the arbitration ruling on the call today. The details are in the 10-Q we filed Monday night, and Joe will comment on it in a minute. If you have particular questions, we will be happy to answer them during the Q&A.

In addition, DHL is now disputing its obligation to reimburse ABX Air for $2.2 million in legal and other expenses arising from the arbitration. While we believe those expenses are reimbursable under the ACMI and other services agreements, we have elected not to recognize them in revenues until the matter is resolved.

Also impacting our bottom line was $3 million in incremental net interest expense versus a year ago, which was partly offset by lower noncash income tax expense. Interest expense rose primarily on additional aircraft loans, and our term loan for the CHI acquisition. We also had a $204,000 impairment charge related to five of the eight DC-9s that DHL took out of service on June 30th, as part of phase one of their restructuring plan.

On June 28th, DHL notified ABX Air that it would remove from service by the end of the year 23 of the 55 DC-9 aircraft ABX had in DHL's network. After learning the book value of the 23 DC-9 aircraft was approximately $6.6 million, ABX notified DHL that it would sell the 22 aircraft back for a total of $5.8 million, which DHL has accepted. Sale of the aircraft will take place as they are removed from service.

We estimate that the removal of the 23 DC-9s will reduce ABX' annualized cash flows and revenues from reimbursed depreciation expenses by approximately $3 million. We expect all 55 DC-9s will be removed from service by the end of the first half of 2009.

For the first half of '08 consolidated revenues were $776.9 million, a 36% increase over last year's consolidated revenues of $569.4 million. Net income was $3.3 million or $0.05 per share compared to $8.8 million or $0.15 per share in the first half of '07.

Our first half results continue to demonstrate the effectiveness of our strategy to drive cash flow from each of our businesses. Primarily due to the CHI acquisition year-over-year first half operating cash flow was $73 million, 51% over last year's cash flow for the first half of $48.5 million, and more than sufficient to support our debt and fund our continuing investment to modify wide body freighters.

As of June 30th we had $82.7 million in cash and cash equivalents and $1.2 million marketable securities. A year ago we had $38.7 million in cash and cash equivalents, and $21.4 million in marketable securities. Our strong cash flow position continues to allow us to strengthen our balance sheet. In the second quarter we reduced long-term debt by $12.9 million to $515.9 million.

Earnings before interest, taxes, depreciation, and amortization, or EBITDA, increased 38% to $31 million, from $22.4 million in the second quarter. This is a non-GAAP measure, so I want to remind you that there is a reconciliation of EBITDA to GAAP net income at the end of our second quarter earnings release, which is posted on the ATSG website.

Moving to segment reporting, pretax earnings from our two commercial agreements with DHL were $1.1 million in the second quarter, versus $3.4 million in the second quarter of '07. Revenues for the two DHL commercial agreements increased 8% in the quarter to $280.3 million, compared to $258.9 million for second quarter 2007.

Block hours under the ACMI agreement remained approximately the same as a year ago for both the second quarter and the first half. Base markup revenues were 10% lower in the second quarter compared to the same period last year. The reduction reflects the transfer of the Riverside and South Bend hubs to DHL management during 2007, removal of seven aircraft from the AMCI agreement in 2007, and the transfer of the Columbus, Ohio area logistics services operations in January of 2008.

Under the DHL, ACMI commercial agreement, incremental markup revenues were $684,000, up 40% from second quarter of 2007 on continued solid performance against cost related goals. No incremental revenues were generated under the hub services agreement in either the second quarter '08 or '07, primarily due to lower package volumes.

Second quarter revenues for our ACMI services segment, which include the non-DHL, ACMI, and charter operations of ABX Air, ATI, and CCIA were $68.1 million, excluding $38.6 million in reimbursable expenses, primarily for fuel, compared to $14.2 million for the second quarter 2007.

Approximately $4.5 million and $15.5 million of second quarter and first half growth was organic, mainly from block hours generated by four Boeing 767s that ABX Air has added since June 30, 2007. ABX Air's block hours, excluding DHL hours under the ACMI agreement, increased by over 1,800 hours or 53% in the quarter, and by 4,600 hours or 83% in the first half.

The two former CHI airlines, CCIA and ATI, generated the remaining segment growth, which was $54 million for the quarter, and $110.1 million for the first half. Those airlines operated 30 aircraft during the first half, mostly under ACMI service contracts for customers, such as [Backs Global], the U.S. Military, and for DHL into Latin America.

ACMI services incurred a $773,000 operating loss in the second quarter compared with $2.2 million in income for the second quarter of 2007. Several factors contributed to the shortfall. Excluding $1.4 million in intercompany lease charges, ATI and CCIA incurred approximately $1.1 million for startup costs related to the Boeing 767 and 757 aircraft being added to their operating certificate. Additionally, ATI absorbed $300,000 in expense for nonrevenue flying to reposition aircraft for military flights.

ABX Air's profits were impacted principally by higher maintenance and labor costs, including more overtime pay for flight crews and additional costs related to ABX Air's contract with All Nippon Airways, or ANA. Revenues for this contract are now booked on a block hour basis instead of a cost plus basis.

Also, the quarter's results were negatively impacted by ABX Air's decision to hold two 767s for potential use by DHL, as guidance from DHL prior to their May 28th announcement of the UPS contract discussions had indicated a strong interest in additional 767s for deployment in their U.S. network as part of their restructuring efforts.

During the second quarter, our leasing business, Cargo Aircraft Management, or CAM, had 32 aircraft under lease to our airline subsidiaries. Imputing market lease rates and appropriate interest expense, the segment generated $4.8 million of pretax earnings during the second quarter.

Our other activities line captures the results of our aircraft maintenance and postal operations, some other smaller businesses, and the net affect of asset sales on direct non-reimbursed corporate expenses.

Revenues increased to $9.4 million in the second quarter, compared to the same period a year ago. The increases reflect higher aircraft parts sales and maintenance services for other airlines.

Pretax losses under other activities were $2.5 million for the second quarter. The loss for the quarter includes the $4.1 million previously mentioned for the ASTAR review and allocated to ABX overhead. Also contributing were additional corporate and administrative costs for the CHI acquisition and new business development costs, plus $2.2 million that the Company elected not to recognize as revenues from DHL until the dispute on the arbitration costs, I mentioned earlier, are resolved.

We incurred primarily noncash deferred tax expense of $397,000 for the second quarter, and $2.8 million in the first half. Due to the uncertainty of our DHL contracts, the Company placed a valuation allowance against state net operating loss deferred tax assets of $600,000 during the quarter, as we cannot utilize those in the states we stopped flying to if the DHL contract ceases. This has increased the overall effective tax rate for the first half from 39.5% to 46.4%.

Cash payments for capital expenditures were $54 million in the first half of '08, compared to $92 million in the first half of '07, primarily for aircraft modification. We estimate the total level of capital spending for all of 2008 will be approximately $130 million, compared to $160 million in 2007.

You may be aware that since we filed the default notice with DHL last November that triggered the arbitration, and then the DHL restructuring announcement in May, the banks syndicating our term loan have been unable to place as much of the principal amount as they had planned under our credit agreement.

We were facing a likely interest rate increase if the lead banks had to bear that additional exposure, so we recently opted to participate in the term loan in the amount of $47.5 million, effectively reducing our balance under the loan by that amount.

Now, I'll turn the call back to Joe Hete for his review of our operations and some other matters. Joe?

Thanks, Quint.

As you can imagine, I'm not satisfied with the results we posted for the quarter. While the arbitration ruling was not as favorable as we had hoped, other issues that have nothing to do with our DHL relationship also had an impact on our earnings for the quarter.

Quint covered most of the main items, including delays in the certification of the 767 and 757s into ATI and CCIA, and over time sick calls and assignment issues with our ABX Air pilots. Frankly, we could have handled these issues better than we did.

While we don't make forecasts, I'm confident our third quarter operating results will be stronger, especially in our ACMI and CAM businesses than we saw in the second quarter. Before yearend, we will have six additional 767s and one more 757 in service, generating revenue than we had at the end of the second quarter.

That includes two 767s we were dry leasing to Cargojet in Canada. The first has already been delivered, and the second will be delivered in September. Two 767s will be in ACMI service with ATI, and the additional 757 will be flying for DHL.

At ABX we have one 767 in the DHL network to replace the one that caught fire in San Francisco in July, and one more will be in service from Miami for an ACMI customer. We also have letters of intent for dry leases for two 767s with options for two more beginning in 2009.

ATI also received good news from the military, which extended through the end of the year our contract for a DC-8 economy flight in the Pacific that was to expire in September.

And, finally, we hope to get word from the U.S. Postal Service in the coming weeks that we have been selected to manage a [for] sorting facility for them, this one near Knoxville, Tennessee. I'm pleased to note that our USPS centers in Dallas, Memphis, and Indianapolis were solidly profitable for the second quarter, and should do even better in the second half.

I'm sure it's obvious from the news that we are involved in very intense negotiations with DHL that could lead to significant swings in our results as their restructuring program unfolds. The uncertainty and volatility this creates is painful for everyone, but we can't compromise the interest of this community, our employees, and the return on your investment just for the sake of clarity. There's too much at stake for too many people to accept anything less than a fair settlement.

Regarding the arbitration, many of you are aware that this issue dates back to last November, when DHL withheld about $8 million from its regular weekly payments, claiming that we had triggered the overhead allocation provision of our commercial agreements.

We rejected their argument and declared them in default. As soon as they realized we were serious they sent us the $8 million and said they would submit the issue to arbitration.

We were entirely in favor of that approach. We believe we had a very strong argument on the eligibility of fuel reimbursement payments as GAAP revenues, and we were confident we would prevail, as well, on the eligibility of public company costs.

For the most part, we were right. The arbitrators agreed with our point of view, especially on the main issue of whether the fuel and the other cost that DHL reimbursed to us without markup should be included in our revenue stream. But in other areas the ruling was inconsistent or outside the scope of the issue they were asked to review.

If you were on our last call on July 1st, you heard us review our preliminary outlook for our Company in a post DHL environment, and our plans to monetize the majority of our DHL fleet through put exercises, and to retain and convert a portion of our Boeing 767s that are currently in DHL service.

We also explained then that some of the steps we intend to take are subject to discussions with DHL, that haven't happened yet, or are far from complete. That's still true in many areas, including severance benefits, post retirement commitments, and financial obligations tied to our DHL aircraft. Some of these discussions may not make much progress until DHL completes an agreement with UPS, or decides to pursue another course.

In its most recent comments, DHL has withdrawn its original commitment to create an agreement with UPS within three months, which would be in about two weeks from now. UPS indicated last week that a deal is unlikely anytime soon.

At the same time, we have dozens of other customers and potential customers who don't care what happens between us and DHL. They just want good service at reasonable rates. And we are eager to assist them, focusing always on ACMI and leasing offers that leave our P&L sheltered from the impact of fuel costs.

Across all our businesses our strategy is unchanged, to make ourselves less dependent on any one customer as we give great service to every customer, to modify to market standards, and deploy into the best markets our very attractive assets, and to put the talents of our people to work where they deliver the greatest benefit for shareholders.

We have always planned for a future when DHL would represent a much smaller portion of our business. The surprise to us was that the future arrived a lot earlier than we expected.

As we indicated last month, we will put nearly all the remaining DC-9 aircraft to DHL, as they are removed from service. We also expect to put approximately half of the 29 767s in DHL's service back to DHL, namely those with nonstandard loading systems and Pratt & Whitney engines.

We will use the proceeds from those puts to help finance the modification of the remaining Boeing 767s to standard freighter configuration and deploy them under either lease or ACMI contracts. That modification program will begin in September.

In summary, I know I speak for everyone in our ATSG Management Team, when I tell you that we are confident of our ability to grow and prosper beyond our U.S. relationship with DHL, while remaining in compliance with our credit agreements and access to liquidity.

I recognize the last few months have been very difficult for you, as shareholders, as they have been for the majority of our employees and their families. I fully expect that in the second half our business apart from DHL will display more of the strength and growth we expected when we made our aircraft investments and acquired CHI.

Thank you for your continuing support. Now, Moderator, let's open the floor to questions.

(OPERATOR INSTRUCITONS.)

Your first question comes from the line of Charles Jack of Wall Street Access.

Hey, good afternoon, guys.

Hi, Charles.

Previously, you guys had provided block hour numbers for the third-party business, do you guys have those numbers for this quarter and kind of on a comparable basis to last year?

If you look at it on the comparable basis, Charles, we were up about 16% in the month of June, if you just compare that to March in terms of the total block hours, excluding those aircraft that are in the DHL network and excluding the ANA [supply], because the ANA transition in the month of April from -- or the month of February, excuse me, from a cost plus to a block hour basis. So really about a 16% increase in total block hours from March to June.

Okay. And then, I mean do you have the absolute number for this quarter?

If I look at the absolute number for the quarter, it's [about] 5,000 block hours.

Great. Thanks. And then in a related question, you know, the way I always understood is that most of your third-party contracts, there are flying level block hour contract minimums. Can you just talk about how you're seeing flying on those contracts? Are you seeing demand as keeping the flying solidly above those minimums or are there contracts where you're actually flying below the minimums? Just wondering if you could provide some color on that?

As far as the flying, it depends on which contracts. Some are actually above what the minimums are, some are below. What we attempt to do in cases where a customer doesn't have the demand to meet the minimum requirement, what we do is put them together with another customer who can backfill the balance of that so that we get the utilization we need in order to get a good return on that particular investment. So we may have in a couple of instances or actually do have in a couple of instances two customers sharing the same aircraft.

Okay. Yes, and then I mean really I was just kind of interested in directionally kind of how it's progressing over the last three to six months? I mean how you've seen kind of those block hours flown change, and kind of it looks like they've been up. But I mean can you kind of differentiate between what you're seeing in Asia versus Latin America?

Asia is pretty flat. Most of the growth is in the Latin American segment, Charles, just most of the aircraft have been moved into the Miami base of operations that we have.

Okay. On kind of those couple onetime expenses, the crew and the maintenance, and you kind of gave us the numbers on the military, I was just wondering if you could kind of provide in dollar terms what, kind of how much those expenses were up over last year levels? I mean just really trying to kind of understand what the profitability of that unit is going to be once we kind of get past these items?

Well, one of the key impediments that we had over the last quarter, Charles, as we mentioned, was that there were a couple of assets that weren't deployed, and we had held back two 767s in anticipation of putting them into the DHL network in the June, July timeframe.

So if you look at just the impact for those, you know, you figure the depreciation expense for those two aircraft would be about $600,000 all by itself for the quarter. And then when you start talking about the other pieces, the maintenance component, there were two heavy checks in the second quarter, those were about $600,000 apiece for the 767, and we didn't have that same thing in the prior year's quarter. So you're going to have probably the equivalent of about 1.5 [C checks] per month in the ACMI segment on an average basis.

Okay. And then just kind of from my estimate, it looked like the ABX segment of ACMI experienced a loss again this quarter. I know you guys have talked on the call kind of about getting past some of these onetime expenses and getting back to a more normal run rate in kind of third quarter, fourth quarter. I mean you talked a little about seeing that, but is that kind of, you know, you think we're kind of past the lumpy expenses that we saw in the first half of the year and kind of the second half, that we should kind of (inaudible)?

If you look at the segments, that's a combination of all three, and the ABX segment actually turned just a marginal profit. The ATI and CCIA were the ones that were a negative for the quarter. But, yes, we should be past that, as Quint mentioned in his comments and we've put in our press release, there was a startup expenses associated with bringing an aircraft on to certificate, the 767 in ATI's case, the 757 in the CCIA's case.

We had originally anticipated that we would have been able to get that accomplished for the 75 back in the February, March timeframe, and for the 76 on ATI we though April, May. But it has taken a bit longer than what we had planned for. The 757 is now on the CCIA certificate and it's flying revenue for DHL in Latin America, and the -- ATI should have the certification of their 767 before the month is out.

Okay. And then I guess just, finally, my last -- still housekeeping, can you give me a rough percentage of what the ABX business was of the third-party ACMI revenue?

Let us check that number, Charles, and we'll ...

Okay. Yes, I can follow-up with you guys. All right. Thanks.

And your next question comes from the line of [Adam Rizer] of [PRT Capital].

Hey, guys, how are you?

Good. How are you?

I'm okay. A couple of questions. Can you help me understand a little bit more about the $47 million credit facility investment? If it's by one of your subsidiaries? I'm just a little confused by that.

Yes, basically, the Company, you know, there was a credit facility, a $345 million credit facility, Adam, that was part of the -- that was set-up, it included a $270 million term fee, and a $75 million revolver, you know, when we made the CHI acquisition.

And the financing, you know, the syndication of that facility was -- the majority of that was sold, but not all of it, and there remained outstanding about $47.5 million on that facility that had not been syndicated. And we were making efforts, and I think we had an excellent chance of getting that done, and then, of course, the DHL announcement and so forth made that very difficult, as you would expect.

And so what the options were for the lending bank and the -- principally the main bank, the main two banks in the facility, included flexing interest rates up or seeking money by other lenders which would have been more expensive months.

And so what we were able to do, based on our liquidity and based on our needs for the future borrowing was to in effect participate in that facility ourselves and invest in that credit facility, and that's what we've done. And I think it's a good move in that it avoided those higher costs, and it also closed the syndication of that facility.

Okay. So if the facility was $270 million, is it now $223 million, and you've essentially just paid $47 million off, or does--?

Basically, we've funded a $47.5 million investment in the term facility.

Okay. So basically you own a piece of that term facility, and it would show up as an investment of some sorts on your balance sheet?

Yes, in terms of the accounting, that will be done in the third quarter, and potentially we will reflect that as a net item.

Okay.

But that'll have to be resolved as we review the proper treatment based on GAAP.

Okay. So it may show-up as a reduction?

If you netted it you'd be netting the cash essentially with the debt, the debt would go down, as well as the cash.

Got you. Okay. Understand. The other question I had was about your CapEx, it looked like you've said all of '08 is going to be $130 million, you've spent $53 million so far. It would indicate you have $77 million left, and I think in the Q it said you had $17 million left to spend on plane modifications. What is the other $60 million for beyond your maintenance CapEx?

Well, maintenance CapEx is a big portion of that. We also, in that plan have CapEx associated with the acquisition potentially of an additional 757.

Okay. So there's one more plane left, and then you have one more plane left in '09, is that how to read it?

In terms of commits, yes, committed aircraft.

Okay, so of that $60 million maybe there's $20 million of it or so could be for that 757?

Correct. And that would be about $17 million for the 75.

Yes.

Okay. And the rest is the maintenance. Okay. Perfect.

And could you give any color, at all, on the second half? If I look at your proforma numbers for last year, which include the CHI acquisition, you did about $154 million of EBITDA, which would indicate in the second half you did something close to $80 million. Will the second half of this year be similar, you know, better, worse, for any particular reasons?

Well, if you look at the CHI businesses, last year on a -- and, again, we had given some -- for 2007 some proforma information that we put out, and they generated I think $70 million, low $70 millions, wasn't it Joe?

$71 million.

$71 million or so of EBITDA in their own right during 2007, and if you look at the DHL, as we mentioned in our prepared remarks, I mean that business volume is somewhat difficult to predict, just because of the situation with DHL. But I think the 2008 EBITDA from DHL, other than the release of DC-9 aircraft, which we've talked about, those 23 planes that come out, won't be significantly impacted by anything they may or may not do with UPS. Of course, a big chunk of that is related to the 767s, and we really don't have a sense of DHL's plans to remove any of those aircraft in '08, at least nothing communicated that we're aware of there that would lead us to think there'll be a substantial change.

And the second half should be relatively the same as the first half, then you have to add into that under the DHL agreements, for example, we have incremental markups that don't get paid out until yearend from a service and a cost perspective, so you can add in your own estimate of what we expect there. And we do have, as I mentioned earlier in my remarks, the fact that we have more assets coming online, generating revenue and profitability with that, as well as the depreciation if you're talking about in the EBITDA number. So it should be up over what we experienced in the first half of this year.

Great. So without giving guidance, you just kind of gave us guidance. I appreciate that. That's good. So I guess the next step is really just keep track of what's going on with the UPS, DHL negotiations, and when they're done then you could get to work on your negotiations?

Correct.

Okay. Thanks very much, guys.

Okay, Adam. Thanks.

Your next question comes from the line of [Muhammad Lubani] of [Lubani Limited Partners].

Hi, guys. I just had a quick question on the return on the planes that you guys have been deploying in the ACMI agreement. I just wanted to take you guys back to a shareholder presentation you did in 2007, where you showed that the projected operating margin or the projected operating amount was $1.1 million per year on each plane. So that suggests the return on invested capital for each plane of about 5.5%, is that the way you guys look at it, as well?

When you say 5.5% are you saying prior to interest?

Well, I'm not sure here in the operating costs, if you're putting interest in or not. So what would you--?

You're saying return on invested capital, not return on revenue, and that'd be about correct, yes.

Okay. So your return on invested capital on these planes has been about 5.5%, is that -- do you agree with that?

If you're talking about a $20 million airplane generating about $1.1 million after taking into account depreciation, you're correct.

Sure. So with the return on invested capital, like that, going forward, wouldn't it make more sense to put money down towards maybe paying down that $92 million DHL note instead of purchasing more planes? Because the note is at about 5%, as well, and your weighted average, your interest cost is higher than 5%, so reducing debt would be a priority above accumulating more planes.

Well, in terms of the additional planes, I mean we're only talking about cumulative -- we've got a commitment to purchase the one 767, and we have one 757 which we already have an ACMI agreement in place, too, that we need to fulfill. But outside of that, there's no additional acquisitions, just modification of the existing aircraft. Keep in mind, with the DHL note is you're applying cash to an unsecured note that's due in 2025 at 5%, and it's just -- we just don't see that as a (inaudible).

I think you're [commanding it], chances are you guys are going to end up paying it anyway, and I mean the hope is that whatever you pay, the interest, they're going to reimburse, but it is -- I mean it's a liability that's in question, it may end up coming to you sooner than 2025. That being said, I wasn't sure about the 757, so you're saying that you've already committed an ACMI agreement to it, and you're just buying the plane to fulfill that agreement?

Well, I'd say if we can't find the aircraft, obviously, we're not contractually bound to have to get that, but we have an agreement in place that we think makes the appropriate sense in terms of giving us an adequate return on that investment.

Okay. All right. Well, my point is -- I'll finish here -- is that's with the 5.5% I mean that's not great, especially compared to the interest cost that you guys are paying. So the more planes and the more ACMI agreements you get into where that's the return you're getting compared to the cost that you're paying on the interest to finance those planes is just -- it just wouldn't make economic sense. It'd be better to put the money down towards this note if you can settle it with DHL, if they're going to push you guys to settle it, than to buy more planes.

Well, you know, keep in mind, too, that our business includes dry leasing opportunities for aircraft that we acquire, and the return on assets in those situations is significantly better than 5.2% or the number you had calculated.

Okay. Well.

So the blend of ACMI and dry leasing opportunities I think produces a return on assets much better than 5%.

Fair enough. It's really hard for us, I mean for the shareholders to figure that out right now because there's so many costs coming in, as you deploy the plane, so I mean I take your word for it that that's hopefully the return we'll be getting going into the future. But I'm just, I just wanted to discuss this projection, and throw this idea out there, that maybe adding more planes now for new ACMI agreements maybe is not the best idea. All right. Well, thanks a lot for all your work, though, guys.

Okay. Thank you.

Your next question comes from the line of Brian Lorraine of First Capital Alliance.

Hello. Hi, this is actually Rich Newman at First Capital Alliance. The question I have is in a general way how is DHL contractually bound in terms of shutdown, severance, and pension payments going forward, if we make the assumption that the UPS deal is consummated?

Well, Rich, in terms of severance and retention, while those negotiations are ongoing and are yet to conclude, so we don't want to get too detailed in our discussion on this call with respect to those. Suffice it to say that I think we've made substantial progress with DHL in terms of the severance and retention piece, and our expectation is that that would be a cost that would be paid through and reimbursed through our DHL agreements. And so it wouldn't be ultimately a cash flow liability of the Company.

Okay. Next question, and that would be in terms of corporate overhead, again, first of all, what is a rough number for corporate overhead as of June 30th, or whatever the appropriate date is, as it stands? How would you break that down?

Well, Rich, we had, as we mentioned earlier, a -- given the arbitrator's ruling that we had crossed the 10% threshold effective in January, we recorded an adjustment for the six-month period in our second quarter results of $1.6 million. Now ...

I'm not -- I'm really asking more -- where I'm going with this is I'm merely asking in a more general way if we assume that the UPS agreement is, in fact, intact, that going forward it's pretty obvious that we're going to have to reduce some corporate overhead because -- and we're assuming some what I would call public shareholder overhead, and then we have corporate officers and directors, and so on, and so forth that's for a larger company than we may have going forward. What is the room that we have, and what is the plans that we might have in terms of being able to work that down as we go to reach profitability post DHL?

Well, we're working through those number right now. It's not a number that we're prepared to share at this point in time, but we're looking at all aspects of the operation, not just the corporate overhead, but you've got overhead in the maintenance, supplied operations area, et cetera, so it's all the way across the board, not just strictly corporate overhead.

I understand. If I'm looking at doing a model, where I'm trying to compare the proforma numbers that somebody did earlier, ex-DHL, and make certain projections, can you just give me some kind of very round numbers, like even if it's within $5 million of what the number could be, I mean is it a very small number, or is it a number of substance that I can play with?

I'd just -- we're just not prepared to give you a number at this point in time.

Have we cut any corporate overheads since the announcement that DHL made that they were going with UPS?

Yes, we have.

You have? Is it body count or just office supplies?

Body counts and everything else.

It is. Okay.

We're working those numbers down.. Keep in mind, we've got a lot of issues that we have to deal with and cutting corporate overhead is certainly one of them, along -- as well as all the other overhead that we have out there.

Okay. Now on the -- one last question, because the caller before was I think confusing to shareholders who may be on the call. Obviously, your investment return on you're allocating of your planes and doing your business is on a -- previous to allocating interest and so on, is a much, much higher return than 5%. I mean we're talking, you know, it wouldn't make sense to make those investments unless they were at least 15% or 20%. So can you clarify that a little bit, because you left the door open that he was -- that there was some legitimacy to what he said?

Well, I mean I think what we, you know, he was referring back to some projections, and I think they were pretty conservative, back in 2007 or so, that were done. And, again, it was strictly for ACMI deployment, and it assumed sort of some basic utilization, and it did not have any assumptions with respect to marketing the assets and anything other than an ACMI arrangement, and ...

What -- so, for example, your third-party business, whet's your gross profit margin there?

On the operating level we're looking at 12%, 13% is what we're targeting.

Well, okay, so that's what I was looking for. Okay. I'm done. Thank you.

Your next question comes from the line of [Eric Shanian] of [Rafos Capital].

Hi, gentlemen. I was wondering if you could speak a little bit about the retirement obligations, the workforce? You mentioned very briefly that you had more sick days, I think it was, or holidays, how is your workforce dealing with the fact that they notice that layoffs are somewhat imminent? Is that causing some difficulties at this point in time? How are you looking to handle that going forward?

Two pieces, and I'll take the first, and I'll let John Graber handle the second piece. But I think what we referred to is not more sick days or holidays in terms of the overall population, but that was strictly in regards to the ACMI operations under ABX that we saw an increase, market increase in the sick calls for our flight crews, which then forces us to have to backfill those, so essentially it's kind of doubling up on our cost perspective.

But I think on balance I think the employees are responding extremely well, and I'll let John give you some details on that.

Good afternoon, Eric. I'll tell you a report I received from a senior official at DHL last week, he said that the performance of ABX Air since May 28th has been amazing. We're running for DHL, our largest customer, when you count departures from the hub for factors that ABX Air can control, we're running 99% on time in over 70 operational days since May 28th.

So the organization is producing for DHL the quality of service that we're supposed to produce. And, having said that, we are concerned about problems that people have in performance and in their lives when they realize that their jobs may come to an end in the near term.

Okay.

And we're working with our employees by over communicating, by making sure we're sensitive to their needs, by supporting them in the ways that we can, and I think it's fairly impressive how they're holding up. And, having said that, this is clearly a struggle in a community of 12,000 people in Wilmington, Ohio, and in southwest Ohio, in six counties, we have 7,000 employees who could be affected by this, so it's no small job.

Okay. So that's helpful. Back to the community issue, I mean we've seen a lot of discussion about how this is hurting the community. There are a couple ramifications. What are you really looking to accomplish in all of that press discussion about the community? Are you hoping that DHL will step in and kind of make it better? What's the outlook on that end?

Well, I think a couple of things. First, we're leaving it to our elected officials to represent the interests of the community and the state and southwest Ohio, and we're cooperating with them in the ways that are responsible for a corporation to deal with our elected officials, because so many of the people impacted work for us.

We're working with DHL every day. We're working with them very well. We're talking to them about some of these macro issues, and we're making progress in those discussions. And I think what we want out of it is the reasonable outcome that makes the most sense for all the parties involved, and we're not sure exactly what that looks like yet.

Okay. Could you -- go ...

But, of course, the ultimate outcome would be that we believe our economic proposal to DHL makes good sense, and it certainly can hold its own against an economic proposal from UPS, and that's something that we hope we have the opportunity to talk about.

Now, could you provide some color on the post retirement obligations if layoffs do occur? Are there any accelerations of this? How would it look?

Well, potentially you could trigger at some point, as layoffs progress, curtailment accounting treatment could come into play. And that's something that I don't know that getting into it now on the call is a good time, because it can get to be a pretty complicated matter. But essentially the projected obligation that you're carrying on the balance sheet, which encompasses assumed future increases in pay and so forth, is reset to the current obligation, based on service to date, and that can trigger some noncash type financial income statement items.

In terms of the pension plan, I think we said in our last call that certainly if DHL executes the agreement with UPS that becomes an issue which is one we expect to have further discussion with them on in terms of the ramifications on that obligation and what we would expect to be their responsibilities with respect to the obligation.

But, Eric, I think what Quint is saying is this is speculative at best at this point. It's just far from known.

Okay. Okay. Now, one last question, and then I'll get out of the queue. In terms of the 767s, you had a discussion, I believe it was on the call in June, and you said that you -- or assuming that you're going to use around half of them, and I just wanted to know what is your process in looking to re-contract the airplanes? Are you looking at if it gets too costly, if you're not seeing enough of a demand, are you considering liquidation at that point in time, or are you considering a more speedy liquidation as they come on? What's really the strategy there in terms of performance, if you notice that the strategy to re-contract isn't working, I guess, to plan?

When you say "liquidation," can you clarify how you're defining that?

I'm just saying readily sell the planes?

I mean we have the put option with DHL, obviously, we can exercise.

That's essentially what I mean.

So we will start the program in September. The first aircraft is going to take somewhere between six and nine months for a certification, so that puts us into second, first or second quarter of next year. And then at that point in time then we will -- once the first one is complete, then we'll induct a second.

And obviously at any point in time if we see that there's no demand for the asset we obviously have the opportunity just to say enough and stop where we're at, and then we can do whatever we please with the assets that are completed and the ones that if they're still flying in the DHL network and the DHL termination occurs, say, at the end of 2009, we have the flexibility to put them to them at that point.

So you're comfortable in using the put agreement automatically if you find there's no alternative that's viable?

It's a (inaudible).

Okay. Great. Those are all my questions. Thank you very much, gentlemen.

Your next question comes from the line of [Kevin Stark].

Hi. What was the source of funds for the participation in the term loan?

I'm sorry, Kevin. Could you speak up, because you faded out?

What was the source of funds for the participation in the term loan?

Well, I mean as we said on the balance sheet, Kevin, we had $83 million in cash and cash equivalents at the end of the second quarter, and we also had plenty of availability on the revolver, because really we hadn't drawn on it other than to back some letters of credit.

Right. So did you use $47 million in cash, or did you borrow $47 million off the credit facility?

It was a combination.

Okay. Does that create any tricky inner-company receivable situations that we should be mindful of?

No, no.

Okay. Now, in terms of putting back planes, obviously you have a bias toward putting back converted -- unconverted 767s, but would there be any distinction in terms of how those aircraft are financed? Would you have a preference to put back some of the ones that are on aircraft loans or on capital leases or owned outright?

If you look at the aircraft that are in there, you know, certainly there are five, out of the 24 that have the nonstandard freighter door, five of those are equipped with Pratt & Whitney engines. The balance of the fleet is equipped with the GE engine. So the Pratt being an anomaly we would put them -- make those ideal candidates to put back to DHL at that point. There are five aircraft that are on capital leases. All of the rest of the PCs are unfinanced. We own them outright.

Okay. So the ones that are financed and the aircraft loans have been filed in 8-Ks, those are actually not in the DHL, ACMI?

That is correct. Those are ones that were part of the Delta fleet acquisition that we did back in 2005, and we financed I believe seven of those out of the 12 of the Delta fleet, and then there's a 13th that was an ex-American aircraft.

Very interesting. So, in fact, if you put back these unconverted or converted planes owned outright, you would actually end up with higher net proceeds than you would otherwise?

Well, the proceeds would be lower, fair market value or booked. The current booked value if say we did the put today would probably be bout $4.5 million a copy for each of those aircraft.

Okay. Would you be able to give us an average value, average book value for the converted planes?

Throughout the entire fleet?

Yes.

The average book value for the entire fleet of the converted airplanes, probably about $20 million.

Okay. I think that does it for me. Thank you.

that concludes the Q&A session. I would now like to turn the call back over to Management.

Certainly. Just to follow-up on a question asked by Charles Jack earlier, if you look at the ACMI operations, excluding the fuel that's reimbursed, the ABX portion was about 30% of that total, Charles.

That said, with the second quarter behind us we are focused on delivering more aircraft to customers under dry leases and deploying others under revenue generating ACMI contracts, not just this year, but in 2009 and beyond.

Fuel efficiency is the name of the game today, and our 767s top our competition in that area. That momentum should be reflected in our third quarter, even as our DHL results scale down, and we expect more in the fourth.

Today international attention is focused on Wilmington and the 10,000 people here with jobs tied to DHL. As we move forward, we are mindful of our obligation to them, as well as to you, our shareholders. Nothing will deter us from achieving the best possible outcome in the shortest amount of time, so everyone can look with confidence to the future.

Thanks for joining us on this call, and have a good afternoon.

Ladies and gentlemen, that concludes the presentation. Thank you for your participation. You may now disconnect. Have an excellent day.