Air Transport Services Group Inc (ATSG) 2008 Q4 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the fourth quarter 2008 Air Transport Services Group Incorporated earnings conference call. My name is Dan, and I'll be your coordinator for today. At this time all participants are in listen only mode. We will conduct a question and answer session toward the end of this conference. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes. I would now like to turn the call over to your host for today's call, Mr. Joe Hete, President and Chief Executive Officer of Air Transport Service Group Incorporated. Please proceed, sir.

Thank you, Dan. Good morning to everyone joining us for our fourth quarter conference call. I'm Joe Hete, President and Chief Executive Officer of Air Transport Services Group. Here with me today are Quint Turner, our Chief Financial Officer, and Joe Payne, Senior Vice President and Corporate General Counsel. By now most of you have seen our 2008 results and the great news we announced last week about our promissory note and aircraft lease agreements with DHL. The combination of our solid operating results and the note gives us all of us here at ATSG renewed confidence about the future. Based on the activity in our stock price last week, apparently many of you feel the same way. We know we have a lot of work ahead of us, and many important issues remain unresolved, but I'm optimistic about our future. A lot has happened since our last call in November, and I'm ready to cover the main events and answer your questions.

Right now, Quint Turner will give you some insight into our 2008 results and comment on our financial position. Quint?

Thanks, Joe. Good morning 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. Those factors include but are not limited to the scope and length of services that ABX Air performs under its ACMI agreement with DHL, ABX Air's ability to redeploy its assets that are removed from service under agreements with DHL, and generate revenue and earnings utilizing those assets, and the rate at which it can do so. Also, our ability to remain in compliance with the terms and conditions of our credit agreements, and otherwise satisfy our lenders and other factors contained from time to time in our filings with the Securities and Exchange Commission, including our first, second and third quarter Form 10-Q and our Form 10-K for the year-ended December 31, 2008, which we filed yesterday afternoon. 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 obligation to update any forward-looking statements to reflect changes in the underlying assumptions or factors, new information, future or other changes.

In reviewing 2008 results, we see many positive signs. Despite the challenge presented by DHL's restructuring and the severe global recession that is impacting the air freight industry. For the full year, revenues were up 37.2% to $1.6 billion, while fourth quarter revenues rose 34.9% to $430.8 million. This growth can primarily be attributed to our Cargo Holdings International businesses, which we acquired at the end of 2007, and therefore did not impact our 2007 results. The CHI businesses contributed revenue of $352.7 million for the year, and $87.9 million for the fourth quarter. The bottom line for both the year and quarter were impacted by a non-cash impairment charge totaling $91.2 million. $73.2 million of this charge represents the excess of the purchase price over the fair value of assets acquired for ATI and CCIA, the two airlines we purchased at the end of 2007. The remaining $18 million non-cash impairment charge pertains primarily to adjusting down the value of acquired intangibles for ATI and CCIA, specifically the value of their customer relationships as of December 31, 2008.

FAS 142 calls for an annual evaluation of goodwill on acquisitions to test whether it remains fairly valued. At year-end 2008, the goodwill of ATI and CCIA were tested separately, using industry market multiples and discounted cash flows, utilizing a market derived rate of return for each airline. The impairment charge recorded was precipitated primarily by the large scale drop in market values of transportation companies associated with lower perceived acquisition EBITDA multiples, and higher cost of capital emerging from the credit crisis. Also contributing to the impairment was a decline in future predicted cash flows associated with ATI and CCIA in response to the current economic climate and lower customer business volumes. Due primarily to the impairment charges, we reported a net loss for 2008 of $56 million or $0.90 per share for the year versus net earnings of $19.6 million or $0.33 per share in 2007. For the fourth quarter, the net loss was $64.2 million, or a loss of $1.03 per share, compared to net earnings of $8.4 million or $0.14 per share in the fourth quarter a year ago.

Inclusive of the impairment charges, we reported a pre-tax loss for the full year of $45.8 million and a pre-tax loss for the fourth quarter of $57.9 million. Excluding the $91.2 million in impairment charges, full year pre-tax earnings increased 36% to $45.4 million versus $33.3 million for 2007. Fourth quarter 2008 pre-tax earnings, excluding the impairments, totaled $33.3 million, up 131% as compared to fourth quarter 2007 pre-tax earnings of $14.4 million. CHI operations, including ATI, CCIA, and CAM accounted for $18 million of 2008's pre-tax earnings, after deducting interest expenses associated with the acquisition financing.

Operating cash flow for the year rose 69.3% to $161.7 million from $95.5 million in 2007. The increase came primarily from our newly acquired CHI businesses. Adjusted EBITDA, which is earnings before interest, taxes, depreciation, amortization, plus the acquired goodwill and customer intangible impairment charges, was $174.5 million for the year versus $94.5 million in 2007. It was $68.1 million for the fourth quarter. There is a reconciliation of adjusted EBITDA to GAAP net income at the end of our earnings release, which is posted on our website. I think it is noteworthy that the Company achieved positive growth and adjusted EBITDA versus pro forma 2007 EBITDA, which includes the CHI acquired companies. In a down economy and despite the disruptions associated with DHL's restructuring.

Cash payments for capital expenditures were $111.9 million in 2008 compared to $160.2 million in 2007. The majority of these costs were for aircraft modifications for nine aircraft, of which six modifications were completed during the year. Our 2007 capital expenditures included modification costs for 11 aircraft. of which seven were completed that year. We estimate the total CapEx spending for '09 to be approximately $126 million.

Interest expense, excluding DHL reimbursements, increased $22.9 million for the year to $37 million. A majority of the increase, approximately $17.3 million, was for the unsubordinated term loan to finance the Company's purchase of CHI. Interest income decreased $2.2 million for the year to $2.3 million, due to lower investment balances and lower short-term interest rates on our cash, cash equivalents and marketable securities. During the year, the Company withdrew $38.5 million from its revolver loan and made principal payments of $116.8 million. At the end of the year, the Company had approximately $116.1 million of cash and marketable securities. There was $36.8 million of unused Credit Facility under net outstanding letters of credit through a syndicated credit agreement that expires on December 31, 2012.

While we're on the subject of liquidity, last Wednesday, we announced that ABX Air signed an agreement with DHL to amend its $92.3 million unsecured promissory note and also signed a memorandum of understanding with DHL, concerning the leases of Boeing 767 aircraft. If executed as proposed, this would reduce ATSG's total outstanding debt principal by more than $110 million. Under the promissory note agreement, ATSG will pay $15 million to reduce the principal balance of the note, the agreement calls for DHL to reduce the debt principal by extinguishing $46.3 million of the debt, resulting in a reduced note principal of $31 million, with a maturity date remaining at August 2028. The promissory note's 5% annual interest rate also remains unchanged as does DHL's committment to reimburse ABX Air for the interest payments, which now, that committment extends through 2012.

After 2012, DHL, the interest will continue to be reimbursed if we are providing five or more 767 aircraft to them under either ACMI or lease arrangements. ATSG will guarantee the $31 million note. Covenants in the DHL note now prohibit us from repurchasing shares of the Company entirely, and limit cash dividends to no more than $1 million annually. The amended $31 million note will permit buybacks and/or dividends, but for every dollar we spend, $0.20 goes toward paying down the note. The Company's senior secured credit facility also contains restrictions on dividends and stock buybacks that are customary in such facilities and which will preclude us from considering such activities until 2010 or later. Nonetheless, we are pleased to have removed the outright prohibition on such expenditures which had existed under the terms of the existing DHL note agreement.

The memorandum of understanding grants DHL options to lease from ABX Air or an affiliate four Boeing 767-200 standard freighter aircraft under favorable rates. In exchange, DHL has agreed to assume financial responsibility, retroactive to January 31, 2009, for ABX's capital leases on five Boeing 767-200 non-standard freighters currently dedicated to DHL's US network. As of December 31, 2008, ATSG's balance sheet reflected $52.8 million of debt and $22.2 million of net book value related to those five aircraft under capital lease. ABX will grant DHL up to $10 million of credit against future rent obligations if the capital leases are picked up and DHL leases all four of the optioned 767 freighters. If DHL decides not to exercise its options for any one of the four aircraft, ABX would pay DHL $2.5 million for each aircraft it chooses not to lease. The memorandum of understanding expires on April 10, '09 unless executed or extended by that date.

The Company incurred a non-cash expense for federal income tax of $10.2 million in 2008. The Company's effective tax rate for '08 was approximately 37% of pre-tax earnings after adjusting for the $73.2 million non-deductible portion of the impairment charges. Last year, we had a non-cash expense for federal income tax of $13.7 million, a 41% effective rate. We do not expect to pay federal income tax for at least the next three years, although we may be required to pay alternative minimum taxes in certain state and local income taxes.

When DHL decided to suspend its domestic express business in November, they agreed to amend the ABX commercial agreements to adopt a formula that essentially fixes our pre-tax earnings from markups for the fourth quarter of 2008 and first quarter of 2009. The old formula was no longer going to be effective as package volumes declined and as the air network was pared down to serve DHL's international strategy. The new formula includes both base and incremental markup allotments, based on prior period benchmarks rather than actual expenses. We expect to negotiate fixed markups with DHL for at least the second and third quarter of '09 also, but have not concluded negotiations on exact amounts to date.

ACMI markup revenues decreased 6% in the fourth quarter to $109.5 million. Annual ACMI revenue from DHL on the same basis were $424.5 million, down 6% versus 2007. Hub services revenues were $61.6 million for the fourth quarter, down 27% and $257.3 million for the year, down 19%. Lower hub service revenues reflects the winding down of DHL domestic business. Revenue reimbursements without markup, primarily jet fuel were $139.9 million for the fourth quarter, up 55% from the 2007 Fourth Quarter. Total DHL revenues were $1.15 billion for the year, up 6%. Pre-tax earnings for the DHL business were $16.5 million in the fourth quarter, up 53%, and $25.2 million, up 19% for the year.

Revenues from DHL's commercial agreements included approximately $79.4 million for severance and retention expenses and $3.2 million for vacation pay benefits, paid out to ABX employees who were terminated under the DHL contract. Severance and retention payments reimbursed by DHL were reflected in ABX's revenues and expenses without markup. Our pension expense included a net curtailment charge of $6 million for recognized prior service costs for ABX employees terminated as a result of the DHL restructuring as prescribed by FAS 88. Through February of this year, ABX Air had eliminated approximately 4800 positions, as a result of the DHL restructuring. Pension expenses, including the net curtailment, are reimbursable under the DHL agreements with markup.

Like most, if not all, corporate funded retirement plans, the term loan and the global financial markets has negatively affected ABX's funded pension plans, which cover the majority of ABX Air and ATSG corporate employees. Last year, ABX contributed $39.4 million to its Defined Benefit Pension Plans, and $2.5 million to its post-retirement healthcare plans. Investment losses in 2008 were approximately 22% of plan assets. We project that cash contributions to our plans in '09 will be at least $36.4 million for the Defined Benefit Pension Plans. The contributions will be primarily generated from ABX's operating agreements with DHL.

Our ACMI services segment consists of our three airlines, ATI, CCIA, and ABX Air. Their revenues in 2008, excluding expenses reimbursed without markup, were $292.8 million, increasing $237.3 million versus 2007. Approximately $18.9 million of that growth was organic. ABX has deployed four additional Boeing 767 aircraft since the middle of 2007. The remaining increase was the result of the CHI acquisition at the end of 2007. The segment had a pre-tax loss of $84.1 million for 2008, owing to the impairment charges. Excluding impairment charges, pre-tax earnings for the segment were $7.1 million, up from $4.6 million last year. CCIA and ATI contributed $5 million to pre-tax earnings. Revenues for the ACMI services segment in the fourth quarter were $82.1 million, excluding revenues for directly reimbursed costs.

ABX Air incurred significant maintenance expenses due to seven planned C-checks on 767s, not part of the DHL network during the year. There were also extra expenses incurred when ABX flight crews did not voluntarily bid for extra flying as customary, forcing the Company to assign trips at extra cost as well as costs to establish a domicile for flight crews in Japan. ATI and CCIA incurred approximately $1.1 million of expense, excluding intercompany lease charges of $1.9 million from CAM for FAA certification processes to add aircraft types to the respective operating certificates. ATI added the Boeing 767 and CCIA added the Boeing 757 to its certificates.

As you can imagine, the economic recession is negatively impacting our US customers, including BAX Global. We have reduced operations for BAX Global in line with their projected lower volume for 2009. ATI will operate seven aircraft in the BAX US network in 2009, instead of nine and CCIA will operate 10 in their US network, down from 12 in 2008.

CAM, our aircraft leasing business, had earnings of $18.1 million, reflecting an allocation of interest expense and carrying value of its operating assets. The subsidiary had revenues of $44.8 million or the leasing of aircraft to ATI, CCIA, and ABX. During 2008, CAM began leasing two Boeing 767s to external customers under a long term lease, and had two Boeing 767's and one Boeing 757 under aircraft undergoing modification. In February of this year, CAM finalized a seven year lease agreement with Amerijet, a Miami based operator for two Boeing 767 aircraft. The term is expected to begin by the end of the second quarter, pending certification. Amerijet has the option for three more 767s from CAM. In March, CAM signed an agreement to lease a Boeing 767 aircraft under a three year term to First Air, a Canadian airline that is expanding its freight operations.

Revenues from other activity increased $10.5 million to $46.4 million in 2008, primarily from an increase of part sales and maintenance services. Of the increase, $10 million was from intercompany transactions for parts and maintenance work. Pre-tax earnings for other activities were $7.1 million, compared to $5.9 million last year. Now I'll turn the call back to Joe Hete for his review. Joe?

Thanks, Quint.

I spent a lot of time talking about our Company last year. I've been interviewed more times than I can count, testified before a Congressional committee, and I met with both of the Presidential candidates last Fall. Unfortunately, nearly all of that conversation was devoted to one part of our business. Meanwhile, important developments in the rest of the business were not getting the attention they deserved. I don't want to minimize what DHL represents to us. It was 72% of our revenues, and 55% of our pre-tax profit last year before impairment charges. Nearly half of our in service aircraft are committed to DHL, and probably about 85% of our employees, but a lot of other things were changing last year and not just our name. By many measures, ATSG is a better, stronger and more competitive Company than we were just a year ago.

Let me review our DHL situation briefly. During most of 2008, as DHL was exploring its options, we were focused on keeping its US air network and ground sorting operations running smoothly, even as volumes declined. That required a lot of operational changes to restructure the air and sorting networks, keeping employees motivated, and working effectively even as their co-workers were departing, and making sure our aircraft and crews were meeting our on time and operating efficiency goals. As package volume levels began to drop, and DHL began to pare down its network, we still managed to keep quality levels high. Even DHL has acknowledged in testimony before Congress, this decision to explore an alternate supplier relationship was not driven by service quality issues, but mainly by its need to capture scale economies. I give a lot of credit to John Graber and his Management team at ABX Air for meeting our obligations to DHL under tough conditions.

We still have several unresolved matters with DHL, but we managed to reach agreement on one of the most critical last week. Amending our promissory note and reducing its principal amount by about $60 million, including a $15 million pre-payment from us, will give us financial breathing room and a partial relief from some covenant restrictions, including limits on paying dividends and buying back shares. We have other restrictions on our dividend flexibility under our credit facilities but I would look for them to ease if we hit our financial targets over the next year or so.

Our MOU with DHL in leases for some of our 767 freighters is another key step in the evolution of our relationship. DHL is very interested the 767's advantages and we are willing to provide them with the right to lease four standard freighters beyond the term of our current ACMI agreement under favorable terms, so long as they will assume leases on five passenger door aircraft that were financed with $53 million in capital leases. The combined $113 million in debt principal reduction from these two agreements represents over 20% of our total long term debt. DHL will continue to reimburse the 5% interest on the remaining note balance, at least through 2012, and perhaps longer. We intend to continue to seek opportunities to further reduce our debt during 2009.

While the business we have with DHL was down substantially, our working relationship with their US team, including their new CEO, Ken Allen is very good. We still have many things to discuss with them, including funding for the pension liabilities we acquired when we were separated from Airborne back in 2003, but they're listening to our proposals, we're doing our best to address their concerns, and we are making progress. It's fairly clear to us that an agreement between DHL and UPS is unlikely, given the relatively small volumes at stake and the adjustments that would be required at UPS. I don't know what DHL will ultimately decide about who will run its scaled-down air network here in the US, or where it will choose to operate. I've been told to expect they will need our help at least through September. Given continued progress on the issues we're discussing, we will continue to support them so long as it makes economic sense for us to do so.

DHL wasn't our only challenge in 2008. When we started talking about an acquisition of CHI in mid 2007, we were assuming that we would remain a substantial part of DHL's US network, at least through the renewal date of our ACMI agreement in 2010. We understood their issues and their need to make major changes, but the deal we structured with CHI, we did not think it likely that DHL would ever consider a cut over to another supplier, as early as the end of last year as their initial plan envisioned. As it turned out, that didn't happen. But it has caused a great deal of concern among our creditor group, along with the effects of the recession and tight credit markets. We understand their concerns, even as we remain confident that the CHI acquisition was not only the right thing to do, it was essential to our long term future.

In 2008 we began to capture the advantages that come with having multiple companies and multiple ways to help our customers move and sort air freight, or to deliver the same services at less cost. Over the course of the year, we have learned ways to do that more effectively than ever, and you can expect much more progress this year. Our CHI businesses, particularly ATI and CAM, performed very well last year, and made substantial contributions to our financial performance, as Quint discussed. Those businesses collectively added $74 million in EBITDA in 2008, which was greater than what we projected at the start of the year, and more than the year ended in 2007 on a pro forma basis. That progress came in part from adding a new aircraft type, the 757, as well as three 767's to our portfolio of assets.

Adding customers and capabilities was a big part of our story for 2008. We weren't necessarily looking to be bigger through CHI, as much as we wanted to be broader. Having one major customer makes it tough to persuade new ones that they would get the attention they deserve, and having the complete portfolio of services including logistics, dry leasing and different aircraft configurations like ATI's DC8 that the US military prefers, gives us an advantage over competitors who offer only ACMI and charter services. With two new airlines, a leasing business, and a logistics services Company, plus the MRO business we are pulling out of ABX Air as a separate sub this year, we've already seen evidence that airlines, forwarders, and other cargo operators are more attracted to our service offerings and less concerned about our DHL relationship. We expect to soon reach a point where DHL is just one of many good customers, which is exactly what our strategy envisioned.

CAM in particular is a potent new tool for us in competing with other aircraft Operators. Dry leasing offers an important advantage for us with many potential customers who have their own fleets and crews and for some who have worked with us on an ACMI basis on a start up, but now want to build their own airline. We will continue to offer ACMI charter relationships at the right price. We have informed all of our pilots, maintenance and administrative groups those choices are largely in our customers' hands and they can read what our costs are versus what they can drive themselves or get elsewhere. If those customers continue to choose to lease, that will affect employment at all of our airlines, but we will continue to deploy all of our aircraft where we can get the greatest return for the shareholder.

The good news is that we have about 2500 people still on the payroll here in Wilmington, plus hundreds more around the country, and we will be able to hold on to many of those people this Spring as we launch our new MRO, which we have named Airborne Maintenance and Engineering Services, or AMES. Our AMES business is designed to let us capture more of the third party MRO work we've been doing all along for other carriers, but in a more focused, systematic way. As I've said before, we are not betting our future on business with DHL. We have no assurances that we will put any part in DHL's US operations after September this year, although we will continue to support them in other markets. We know they are committed to serving the US market on behalf of their major global customer base, for whom access to the US market is essential.

Some of you were on our July and November calls when we discussed our strategy for growth after DHL and how we plan to develop and redeploy our aircraft assets. Let me recap for you what we said then and where we stand today. We made it clear then that we had considered DHL a great source of cash. It was clearly a much lower margin business than the CHI businesses we were acquiring. Our financial performance was never going to be impressive with DHL contracts alone. It's always been about what we could do with the cash we generate. On that score, I think we have a pretty good track record.

Our plan is to put back to DHL virtually all of their DC-9s plus a number of the 23 767 PC's that DHL is currently using as they release them. We will upgrade the 767s we keep and convert them into industry standard freighters, although some of our early mods may go to DHL under the MOU lease agreement I discussed earlier. One of our non-standard 767 PCs was released by DHL at our request. IEI has made it a prototype, and we expect delivery of that first modified aircraft in the second quarter this year. The second aircraft will enter modification next month, and we expect to follow that with others on a much shorter schedule of about 120 days. Timing on all 767 releases and our opportunity to exercise our puts is still up to DHL. If we were to keep and redeploy 17 of our 767s now in DHL service, we eventually would have a total of 36 full freighters available for dry lease or ACMI operations, a very strong position in a cost conscious market that favors fuel efficiency and load flexibility.

In the current global recession, all cargo carriers are reporting substantial reductions in pay load, which inevitably affects rate. It's clear that airlines that survive those market conditions will be the ones that offer the lowest cost option. Aside from fuel, labor costs are the biggest differentiating factor in those rates. We're making steady progress in that regard. We have frozen pay and a pension plan for non-pilot employees at ABX Air and Corporate, and we have targeted May 4 for completing the restructuring of ABX Air. The last key hurdle in reaching the cost levels we need are a new collective bargaining agreement with our pilots.

To conclude, we dealt with a lot of issues in 2008 that stressed our people and our balance sheet. We've remained patient and worked hard at protecting the business we have in leveraging the assets and business models we can offer. I expect us to continue to make both financial and operating progress in 2009, regardless of the state of the economy. And now we are ready to take your questions. Operator?

(Operator Instructions). The first question comes from the line of Helane Becker from Jesup & Lamont. Please proceed.

Thanks very much, Operator. Hi, guys.

Hello.

First of all a great job on restructuring the business and the second question is you didn't really talk about the Wilmington airport, which is owned by DHL and is really too big to handle the hundred thousand or so packages a night that they're going to have. Even if they extended your agreement beyond September, so could you just talk a little bit about what happens with that airport, what happens to you guys and on and on in that vein?

I think, Helane, first and foremost, DHL does own the airport so the decision basically rests with them as to what the disposition of the facility will be, but with that said, you can scale back the utilization of the airport facility itself, as the amount of aircraft operating in and out of here shrinks with the reduced volume of business that DHL has. As you know, there's two runways here. You don't necessarily need two runways to support a fleet of 30 aircraft that are coming in and out of here on a nightly basis, and you can pare back to one runway. The balance of the facility, you can shutter some of the sort facilities that DHL already has and consolidate into one or two buildings, as opposed to five buildings that were part of the sort operation prior to the wind down, so there's an opportunity to reduce the overall cost to operate out of such a large facility, even with the reduced volume and we're working hand in hand with DHL to get those costs out as quickly as possible.

Okay, so the bottom line is they haven't really talked to you about their plans either then?

No. One of the things obviously folks on a local basis are waiting to understand what DHL's plan is. Certainly first and foremost we would like to see DHL decide to remain here in Wilmington, it would be great for not just ABX but for the community of Wilmington and Clinton County as well. Keep in mind as we transition through the ACMI agreement, ABX still has a lease hold on the parts of the property that we occupy through the end of the existing ACMI agreement, which is August of 2010, and then there's a reasonable transition period if for some reason we would no longer be allowed to reside here in Wilmington. All of our plans is with the announcement of AMES is focused on being able to maintain access to the hangar facilities here and continue to retain employment for as many people as possible in the local community.

Got you. So is it possible for you guys to remain there even if DHL were to donate it to Ohio or sell it or do something else with it?

Certainly. We've operated this facility for 29 years now. We know what it takes to keep the facility going. If you're only having occasional air traffic coming in and out of here for example, you don't need to staff things like control towers, you don't have to plow all of the acres of concrete, you just do the minimum required to allow an airplane to come in and depart.

Got you. Okay, thank you.

Thank you.

(Operator Instructions). Your next question comes from the line of Adam Ritzer from CRT Capital.

Hi, guys. Once again, nice job with everything that's been going on in the last six to nine months.

Thank you.

And just a variety of questions. Can you talk a little bit about the MRO business and what kind of revenues, EBITDA you think this might generate over the next couple years?

Well as far as the revenues, one of the key elements of us being able to launch this MRO is the fact that we have a call it a targeted baked in book of business with the assets operated not just by ABX but the two sister airlines as well for a potential base to support the business and then grow it with the third party outside of that. We have done a lot of work over the years, although not on a large scale, but targeted to specifically to aircraft owners and operators that had very small fleets, sports teams, for example, small cargo operators, et cetera, and while it wasn't a significant portion of the business, it was able to leverage the infrastructure in place. From a pure EBITDA standpoint, we don't usually give those kind of projections but the MRO business is not really asset intensive, once you get past the fact you have the hangars we own a lot of the assets such as tooling, parts, et cetera already to be able to support it, but if you look around the globe in terms of MRO type business, it's in the single digit margins.

Okay. Could you talk about what kind of revenues you have baked in and what you see as a potential?

Again, Adam we don't usually get into that.

Okay. No problem. Can you talk about I know you sign aid few new deals this year, two with Amerijet, I guess is the Miami carrier, and one with the Canadian carrier. Can you give us any idea of what kind of terms you have just so we can see where the current market is on leasing the planes?

Again as we've talked about in the past, the market rate, lease rate for a 767, depending upon a lot of factors play into that, the lease term, how the aircraft is configured for example, but you usually look at a range of somewhere between $250,000, $300,000 a month for a lease rate and that's going to be driven in part by the term, the First Air agreement for example, is a three year agreement because it coincides with the contract they have with the Canadian Post, the Amerijet lease is a seven year arrangement on a per tail basis.

Okay. So when you guys look out, once the DHL is gone or they keep a certain amount of planes, I think you number you mentioned you'd have about 36 planes net-net, is that what you said?

Yeah that's 36 under the ATSG umbrella so some of the aircraft are on the ATI certificate, some on the ABX certificate, and some will be under CAM on a dry lease.

Okay so if you look at ultimately having those 36 planes under a variety of agreements, what do you think, well I don't know if you care to talk about this, but what do you think of the EBITDA you generated last year, roughly $175 million, you can keep of that going forward with the ultimate aircraft you have in service?

Well I think if you look at the aircraft that we have in service today first and foremost obviously the number is going to come down as DHL winds down its U.S. book of business, so if you look at the fleet we had today, it's about 46 aircraft and will be down to that 36 based on our current plan, but if you look at the margins on a dry lease basis, for example, the margins are much greater than what you see under the arrangements we have with DHL today. The revenue number drops quite a bit but the margin you get on that revenue is significantly greater than the minimum margins we get under the DHL book of business so when we look out, Adam, we look at a combination of dry leasing of the aircraft as well as ACMI operations of the aircraft, so we have a more diversified portfolio, depending upon what that mix comes out, it will be a key determinant. We've targeted from an EBITDA standpoint on the ACMI operations, somewhere in the vicinity of the 25 to 30% EBITDA margin and on the dry leasing as you could imagine the biggest expense you have against that revenue would be the asset cost itself so your EBITDA margin is more like 90%.

Right. So I guess you don't want to get too granular on in terms of actual numbers you could keep at this point in time?

Other than to say, Adam, the EBITDA that we have today, it holds up, even if DHL were to leave, it holds up pretty well because the full freighter aircraft that we have continued to generate the same kind of EBITDA that we had before and perhaps even better, because we're able to deploy them under different type contractual arrangements. The only thing that sort of there's a lull in is as we convert some of the 767s that under contract to DHL that don't have the standard door, it's a large door, there's a period of time there where you got those planes out of service undergoing conversion.

Right.

We're getting some EBITDA from those aircraft via the DHL contract.

Okay.

So that's a cost plus arrangement with pretty low depreciation reimbursement. It's not as much as you would imagine. For example, one of those 767 small doors, the annual depreciation is right around $0.5 million.

Okay. So I guess if I look at the break down roughly of your DHL business, looks like it does 90 to $95 million, the other businesses, looks like it does $75 million to $80 million roughly, I mean, if you could keep half the DHL EBITDA depending upon margins, revenues, and add some other growth areas, I mean you can't replace all of it but if you could replace half of it you guys were in pretty good shape I guess?

The DHL business isn't $90 million-some Adam and I think what you're thinking of is the ABX business which also include a lot of the ACMI and charter work that we do outside of DHL.

Okay. So how would you break it down?

Well, we haven't really provided that, but suffice it to say that the DHL EBITDA is probably maybe a little more than half of the 90 that you put up there.

Got you, okay. Excellent. That's very helpful. I appreciate it.

(Operator Instructions). Your next question comes from the line of Nicholas Snyder with Morris Snyder Management. Please proceed.

Good morning, gentlemen. Congratulations on negotiating the DHL note.

Thanks Nicholas.

Really great news. You'd said that most of the 2009 CapEx, I think you said $126 million is going to be related to aircraft modifications?

Yes, sir. There's the aircraft modifications for the PC to SF. There's also one additional aircraft that we have an agreement to purchase assuming it finishes its modification process that was part of the CHI acquisition, it's about $23 million expenditure. And then there's some maintenance CapEx in there as well.

Could you break out what is the maintenance CapEx? I'm trying to get some idea of what discretionary cash flow will look like going forward?

The maintenance CapEx is primarily related to ATI and CCIA. Their accounting convention that they had was to capitalize the airframe checks that are done typically on about a 20 month interval, call it a two year kind of time frame and they are amortized rather quickly over that time frame and I think that between ATI and CCIA, the maintenance CapEx is right around what a $25 million to $30 million annually. As Joe mentioned, there's an aircraft that we're obligated to purchase the 767 this year, that's roughly 23 and then you've got the modification of the small door 767 aircraft to large door that we talked about earlier, that will come as DHL releases some of those small door aircraft that we would convert.

That number could actually come down. The PC to SF Mod is about a $12 million investment, and depending upon what DHL may elect to do in regard to some of the aircraft that they take back from us as part of the cap lease transaction, they may want to take a couple of those slots which would reduce our overall CapEx spend if they do so.

Yeah. Good point. In other words, the $126 million could drop at DHL, absorb some of those mods.

And where are you seeing market for passenger configuration 767s? Has that come down? Is it below where you could put them back at this point?

Well in terms of the PCs in our network understand that it's a unique cargo system and it was unique to airborne at this point in time, and deploying that particular cargo configuration basically has very little to no marketability around the globe and as I said, it was unique to the Airborne operation so we had the flexibility as we go through the DHL wind down depending upon what their plans are, and as each aircraft is released we can induct it through a PC to SF modification or we can put it to DHL for the put proceeds. Keep in mind the net book values of those aircraft are probably somewhere around $4 million $4.5 million and DHL only has to reimburse from a put standpoint the lower of fair market or book.

Okay. Could you give me some sense to what the market value of one of these planes is after modification?

Depending upon the configuration, there's some that will come out with a higher gross weight capability and some that will come out with a lighter weight capability. You will have probably a market value of $18 to $20 million depending upon the configuration.

Okay, so but you're buying one this year for $23 million, so after configuration that's--

That is an extended range version of an aircraft so it's got a little bit more capability outside of what the aircraft that are currently part of the DHL network would require and again, it's time we did that arrangement. It was over a year ago.

Are there any other legacy obligations to purchase aircraft after this?

That's it.

Okay, great. Well thank you very much gentlemen.

Thank you.

At this time there are no further questions in queue. I'd now like to turn the call back over to Mr. Joe Hete for closing remarks.

Thank you, Dan. Our 2008 results were truly impressive given the experiences we had last year, but I'm now very confident we can compete and win in the Air Cargo marketplace anywhere in the world with a mix of service options for customers that can compliment their own aviation resources and future requirements. We know we have to stay in compliance with our credit agreements, protect our access to liquidity, and reduce our costs substantially. Those are key objectives for 2009. Thank you for your interest and continuing support and enjoy the rest of your day.

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