Air Transport Services Group Inc (ATSG) 2009 Q2 法說會逐字稿

Welcome to the second quarter 2009 Air Transport Services Group, Inc. earnings conference call. My name is Shamika and I will be your coordinator for today. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation for today's call Mr. Joe Hete, President and Chief Executive Officer.

Thank you, Shamika. And welcome to our second quarter conference call. I'm Joe Hete President and Chief Executive Officer of Air Transport Services Group. Here with me are Quint Turner our Chief Financial Officer, Joe Payne our Senior Vice President and Corporate General Counsel and John [Graber], President of ABX Air.

I know that for many of you the news at DHL has given us the required one year notice of its intent to terminate our ACMI agreement takes away a lot of the positive energy that our solid second quarter financial results would have created on their own. What I want to tell you first that terminating the current agreement and replacing it with a new more competitive framework, as DHL says its keenly interested in pursuing makes sense for us as well. So much so in fact we considered whether we should exercise our own right to terminate that agreement if DHL had chosen not to. After Quint covers our financial, I will explain to you why we share DHL's interest in the new arrangement that would create the framework we both need to become more competitive and the opportunity to extract the most return on the assets we have today.

I also want to mention one more item before Quint begins, I would be remiss if I didn't take an opportunity to acknowledge the thousands of people who have contributed to make the Air Park here in Wilmington such a great place for us to do business, not just over the last year but for 29 years since AirBorne began here. Cargo operations ended here in Wilmington on July 24th, at least for now. RIght up to the end, we operated with an exemplary safety and performance record under both AirBorne and DHL. We hope along with the rest of the people here that this Air Park will remain open and support a wide range of innovative new businesses before very long.

Now I will let Quint Turner tell you about our earnings in the second quarter and review our financial position.

Thanks, Joe. Good morning everyone. As always 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; the timing for and extent to which ABX Air is reimbursed for expenditures made under its retention agreement from DHL and for costs associated with the termination of services under its commercial agreements with DHL, ABX Air's ability to sufficiently reduce its cost including its flight member crew member cost in order to compete for new business and generate reasonable returns, the timely conversion and deployment of Boeing 767 aircraft, the consummation of a tentative agreement for the provision by ABX for future services to DHL beginning on the termination of the ACMI service agreement and other factors that are contained from time to time in ATSG's filings with the US Securities and Exchange Commission, including its annual report on form 10-K and quarterly report on form 10-Q, which we filed yesterday. 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 or future or other changes.

I'm pleased to tell you that we continue to build on our first quarter results during the second quarter. Our business strategy is taking hold despite the tough economy that has hit the transportation industry especially hard. As we evolve into a smaller Company, we are becoming more diversified and better able to leverage our assets to maximize cash flow. That has enabled us to pay down debt, strengthen our balance sheet and provide growth capital. We achieved higher net earnings for the quarter ended June 30th, 2009 on strong contributions from our DHL and CAM leasing businesses. ATSG earned $18.1 million or $0.13 per share in net income for the quarter. On a pretax basis, earnings were $11.9 million, of which $5.7 million came from the DHL segment and $5.8 million from our CAM business. In the second quarter of 2008, ATSG recorded a loss of $526,000 or $0.01 per share. The loss included $4.7 million in non recurring items related to an arbitration ruling. Our consolidated revenues for the second quarter this year were $235.1 million. Revenues were down 40% year-over-year as our role in DHL's US operations was reduced first by lower volumes and then dramatically as DHL eliminated its US based domestic express packaging operations in January 2009. Reimbursements for fuel expense that is we earned from several key customers were also lower as both fuel prices and the quantities we consumed were sharply lower in the second quarter this year as a result of the reduction in flight operations for DHL's restructured air network.

Net cash generated by operations for the first six months of 2009 was $43.7 million, compared to $73 million for the first half of 2008. The decrease in operating cash flow reflects the pay down of vendor payables as DHL down sized its business and a lag in reimbursement payments by DHL for employee severance, retention and vacation benefits paid by the Company as a result of DHL's downsized operations. Earnings before interest, taxes, depreciation and amortization or EBITDA, increased 29% to $40.1 million in the second quarter versus one year ago. For the first half of 2009, EBITDA increased 28% to $87 million. Although this is a non-GAAP measure of financial performance, it is a metric we believe best reflects the cash generating strength of an asset intensive business like ours and is key to creating value for shareholders during these difficult times. There is a reconciliation of EBITDA to GAAP net income in our second quarter earnings release published yesterday evening, which is available also on our website.

Our lower debt and strong EBITDA have reduced our interest expense on the covenants for our senior debt facility. In the second quarter, aggregate interest rates under the senior unsubordinated credit facility declined by approximately 38 basis points after we reduced the ratio of first lien debt to EBITDA to 2.38, thereby reducing the spread over LIBOR that we are required to pay. That translates into a decrease in our net interest expense of approximately $800,000 on an annual basis. Overall interest expense decreased $1.5 million in the second quarter as our principal declined and our EBITDA gain improved our coverage ratios. The interest rate on the unhedged portion of the unsubordinated term loan decreased from 5.4% at the end of the second quarter of 2008 to 3.2% this past quarter.

We incurred $3.8 million in tax expense in the second quarter and the effective tax rate was 31.7%. We do not expect to pay federal income tax until at least 2011 other than certain minimum taxes. Deferred tax expense in 2009 should be at a rate of approximately 38%.

Turning to our segment results, revenues for the DHL segment were down 50% quarter-over-quarter to $138.9 million. Segment pretax earnings for the quarter were $5.7 million, up from $1.1 million a year ago. When DHL decided to suspend its domestic express business, ABX's ACMI and HUB services agreements were renegotiated and mark up payments was based on fixed dollar amounts that better reflect an appropriate return on the substantial fixed asset value and service level required in DHL's US base air network. Markups under the two commercial agreements with DHL were based on agreed fix amounts for both the first and second quarter of 2009. Revenues and earnings also include contributions from our severance and retention agreement with DHL last year, which we negotiated to assure our ability to retain and appropriately compensate our work force or maintaining good service for DHL during its restructuring. Revenues under the DHL ACMI agreement were $101.9 million, less than half of 2008's second quarter revenues. Pretax earnings for the quarter under the ACMI agreement were $3.7 million. In the second quarter, HUB services had $37 million in revenues and $2 million pretax earnings. During the second quarter, DHL notified ABX that it was exercising its right to terminate the HUB services agreement effective August 15th, 2009. Consequently, the final contributions from our HUB services agreement will be in the third quarter at approximately two-thirds of what they were in the second quarter.

$28.6million in severance and retention costs for employees affected by DHL's US restructuring were included in the second quarter's revenues. Through June 30, 2009 ABX terminated 8000 employees since DHL's restructuring began in 2008. Since last year and through the second quarter ABX has paid out a total of $15.1 million in benefits for accrued vacation to employees who lost their jobs as a result of the restructuring. DHL paid us $3.2 million in reimbursements for those benefits under the severance and retention agreement in the fourth quarter last year. In May, however, DHL said it is reconsidering whether it is obligated to reimburse us for those benefits and has declined to make further payments. By May, of course, we had recorded $7.1 million in first quarter revenues and earnings for reimbursement of those benefits. We paid an additional $4.8 million of accrued vacation to former employees during the second quarter and decided to take a conservative approach by not recognizing any reimbursement revenue. We believe that those benefits are eligible for reimbursement under the severance and retention agreement and we are prepared to demonstrate that. Our strong preference is to revolve this matter through the continuing discussions we are having with DHL about other line down issues.

In 2008 our second quarter DHL results included one time charges totaling $4.7 million related to an arbitration case last year. A part of that charge represented a reserve for reimbursement of arbitration legal expenses that is we did not recognize then but later recovered from DHL.

Turning to ACMI services, that segment is made up of our three airlines, ACI, CCIA and a portion of our ABX Air business, not covered by the two main DHL commercial agreements. Revenues for this segment excluding reimbursed expenses were $67.7 million for the second quarter, roughly flat from a year ago. Pretax profits from the segment rose from a loss of $800,000 to a profit of $600,000. Contributing to the turn around were increased flights for the military and additional aircraft brought into service. Approximately $1.1 million was spent in the second quarter of 2008 to complete FAA certifications to add the Boeing 767 to ATI's operating certificate and the Boeing 575 to CCIA's certificate. Additional costs in the 2009 second quarter were incurred for two additional heavy maintenance checks, retraining ABX DT9 flight crew members for the Boeing 767 and cost incurred as we build volumes for our recently initiated trans-Atlantic service.

Cargo aircraft management or CAM, our leasing segment, had second quarter revenues of $14.7 million, up 27%. CAM has 39 aircrafts under lease. Pretax earnings for this segment in the quarter was $5.8 million, versus $4.8 million in the second quarter last year. $12.2 million of second quarter revenues were for the lease of aircraft to ATI, CCIA and ABX. We continue to build our external CAM business leasing two additional aircraft to external customers in the second quarter. The first was a Boeing 767 freighter, leased to a Canadian customer under a three-year lease and the second was a passenger aircraft. Today four aircraft out of the CAM lease are leased to outside carriers with the remaining 35 leases going to ATI, CCIA and ABX.

Revenues from our other businesses increased 38% to $13 million in the second quarter, driven by growth in aircraft maintenance services. Pretax earnings for the quarter of $2.1 million compares to a loss of $2.5 million a year ago. That loss included a one time charge of $2.5 million stemming from the previously mentioned arbitration ruling.

Our balance sheet is beginning to show the benefits of the debt restructuring initiative we announced in March, when we projected a reduction of about $120 million in our aggregate obligations from the end of 2008. The first step was DHL's forgiveness of $46 million in principle on the $92 million promissory note with them, which we recorded in the first quarter. That amendment calls for the interest rate on the note to remain at 5% reimbursed at least through 2012. It continues to mature in 2028. The second was DHL's assumption of our capital leases on five 767's retroactive to January. As of June 30, 2009, our balance sheet reflects $47.5 million of debt and $20.9 million of net book value related to the five leased aircraft. In July, DHL assumed three of the five leases. We anticipate the other two will be completed during the third quarter as well. The final step is our commitment to pay DHL an additional $15 million toward a further reduction to the promissory note principal to $31 million. We intend to pay that from proceeds when we complete the put sale to DHL of retired DC9s and five unmodified 767s with (inaudible) engines, hopefully during the third quarter.

Cash and cash equivalents at the end of the first half were $112.1 million, compared to $82.7 million at the end of the first half of 2008. Our DHL receivable, which varies with the timing of the quarter and DHL's reimbursement schedule, was $58.6 million at the end of the first half. Capital expenditures for the first half were $31.4 million, primarily for modification of three 767s. In the first half of 2008 we spent $54 million to modify eight aircrafts. We expect $109 million in total cap ex in 2009 or slightly below last year's $109 million. Only about a third of that is required maintenance spending on our aircraft and the rest is mostly our 767 conversion program. We have the flexibility to postpone most of that conversion spending if necessary, although we don't feel a need to do so now.

Now, I will turn the call back to Joe Hete for his review.

Thanks. I want to comment briefly on the results of the quarter which remain very good in light of our economy and our reduced book of business with DHL. Then I'll cover the news on the ACMI agreement and take your questions.

DHL had a big impact on our earnings as well as strong returns from our leased aircraft business. Cash flow, as measured by our EBITDA was up 29% for the quarter and 28% for the first half. We think that's a better standard for measuring our underlying earning strength. The reduction in revenues was in line with our expectations. We have reduced our work force by nearly 8,000 people from the second quarter last year, removing those reimburseable costs, as well as a substantial amounts of reimburseable fuel cost from reductions and lower fuel prices. Our fixed dollar mark up formula with DHL is helping us maintain the cash flow we need to support the work we are continuing to do for them. We expect to keep the same approach through the end of the ACMI agreement next year unless another arrangement is adopted sooner.

Reimbursement revenues will drop as our HUB services work ends, but we are still aiming for margins on our DHL ACMI business roughly comparable to what we have earned in the last two quarters. As you know, DHL terminated the HUB services agreement in May and reopened its former HUB at the Cincinnati regional airport on July 24th. We earned $2 million under that agreement during the second quarter. We are still supporting them by managing the airport here in Wilmington and by sending a couple hundred of our experienced ramp and sort workers toss their Cincinnati HUB to help them through the transition. That will generate a small amount of final HUB services revenue and earnings in the third quarter. All in all, we are doing our part to make DHL's move to Cincinnati goes as smoothly as possible. We want them to be successful as they are still a significant customer.

In ACMI services, we are getting the results from our two newer airlines, ATI and CCIA. ABX Air's performance outside the DHL relationship continued to lag. All of our in service aircraft are generating revenue though, though utilization rates in some cases are below what we hoped for. Compared with a year ag,o we had extra costs in the first half for more heavy maintenance checks and for flight crew retraining. The trans-Atlantic flight that commenced in January for TNT has taken longer than expected to meet our targeted cargo volumes, but we are seeing steady improvement there. Our acquisition of CHI is proving to be more of a strategic asset than we expected. ATI and CCIA have brought us aircraft assets that allow us to better meet all of our customer requirements. DHL and backs are now sharing requirements on selected routes where ABX, ATI and CCIA were overlapping in the past. This results in significantly lower costs and increased flexibility for both of our primary customers.

Our CAM subsidiary continues to perform well. It owns a total of 39 aircraft, including four deployed with outside customers. Two more leased to an outside company by the end of the year. The 767s that come out of our conversion program will be added to CAM to be leased to our own airlines or other operators. And finally, we are taking advantage of our maintenance and technical services unit to offer lower cost toss DHL and to make competitive bids for MRO work with sister companies and other aircraft operators, including those with sizable fleets and specialized requirements. Airborne maintenance and engineering services, AMES is another piece of our diversification strategy. In June, its first full month, this business is already experiencing better than expected volumes and results. To summarize I describe our second quarter as another positive step along our path to becoming a well diversified multi services Company we seek to become, with strong cash flow from multiple business channels.

The wind down of our legacy DHL business is now nearing the end and the new phase of our DHL relationship is beginning to take shape. In that regard I told you a few minutes ago that while it had some uncertainty in the short-term, we share DHL's desire to do away with our current ACMI agreement and replace it with something we think will be more valuable for both organizations. As we talked about a year ago in the context of our pension plan under funding at the time we separated from airborne, we had limited input into the foundational agreements between DHL and ABX air as they were being drafted six years ago. DHL and AirBorne were focused on completing their merger. The separation of the ABX air from the combined DHL was one of many agenda items. That kind of process was almost guaranteed to produce a suboptimal results and we and DHL have been coping with the short comings ever since. Today, both we and DHL have a better understanding of how we can work together most effectively in ways to structure a relationship that can adapt to future changes. We have been discussing those concepts with DHL for months including pieces of the framework we would like to employ. I can't assure you we will reach any agreement much less describe what the new framework will look like or what it will mean to you as shareholders, but there are a couple of reasons to conclude that both parties are motivated to seek such an arrangement, assuming we can fix our ABX flight crew costs.

DHL continues to tell us that our converted Boeing 767 200 freighters, which represents one of the lowest cost and reliable source also a good fit for their global air networks and they would like to use more of them. At DHL's request, ABX Air now flies six, 767s for them under separate supplemental short-term agreements including one that operates overseas. Those are in addition to the 767s still covered under the principle or legacy or ACMI agreement. DHL is already getting 10 of our nonstandard passenger door 767's, through assumption of our capital leases and put sales. They have asked for some of our early conversion spots to modify some of those aircraft. Finally, the have lease options for four of our 767 freighters that would begin a year from now and continue through 2015. In summary, they are making a strong commitment to a great aircraft and want to do more.

The second reason is that DHL needs more than ever a reliable, quality minded US certified air lift provider to achieve its financial and service objectives in the United States, a market that is strongly committed to serve. Our record of on time performance and operational capabilities such as category three low visibility landings is difficult to match. I don't mean to imply that terminating the ACMI agreement is without risk. Our relationship with DHL senior management is much better than it was a year ago we are still far from agreement on some critical items. Cost structure is an important factor. It is essential we reduce costs to be competitive. Wages and salaries have been cut throughout ABX with the exception of its pilots. We must work hard to deliver the service quality we have always provided DHL, but in the most cost effective way as possible.

Without getting into the details, I can mention a few of the changes that we and DHL agree must be provided under any deal. The first one is to do away with our cost plus expense driven business model with DHL. As many of you know, cost plus relationships almost always produce conflict instead of cooperation. Customers are motivated to challenge every expense and vendors are frustrated by fixed margins. That has certainly been the case with us and DHL which is compounded by their own competitive challenges. We agree with DHL that cost plus deal is not in the best interest of either company, DHL does not want to micro manage its vendors expenses and it is not in our best interest to give any customer control over our margins. We want to run our businesses with the expectation that if we innovate and find better more cost effective ways to operate without compromising service than the principal benefit should go to our shareholders.

Its also in both companies interest to create a new relationship that allows us to support the business that DHL has today and in the future instead of the business we had hoped for six years ago. ATSG companies already support DHL in several markets outside the US and would hope to expand that role in the future. We want the flexibility to bring to DHL anywhere they need them, more of the capabilities we have today. We have also discussed the fact that our ABX Air flight crews are compensated at levels that are clearly uneconomic for any carrier not just ABX Air, under today's market conditions. DHL has made it clear to us that includes the services of ABX Air's flight crews is out of the question without a much different collective bargaining agreement than the one we have today. In that sense, we regard DHL's termination notice as a confirmation of what we have been saying in negotiations with our ABX flight crews for years. This labor issue is very critical obstacle to a much more favorable long-term relationships not only with DHL but with the rest of ABX Air's customers. It is not within our power or DHL's to preserve any job if the ultimate customer refuses to bear its costs. In today's markets, the customer has the upper hand and it is up to the service providers and employees to respond.

With that said, I'm optimistic about what a new DHL relationship might bring and about how dedicated both we and DHL are to a rapid resolution. We have a common interest in serving their customers well under competitive terms in the US and wherever else they need our aircraft and support. I'm fully dedicated to achieving that result and at the same time rewarding the long timeshare holders we deserve. Now, we are ready for questions.

Your first question comes from the line of Helane Becker of Jesup & Lamont.

On the -- so to understand this ACMI issue, it is not that -- they are terminating the agreement the way it is but they are coming back to you to renegotiate the agreement to make it more attractive? Is that how we should think about it?

That is pretty much it. The agreement is in terms of the book of business we have has changed obviously markedly from when the agreement was struck six years ago and in today's environment we need to change the overall structure. Certainly the margins we had at that which were fixed at 1.75% above cost were not what you want in the way of a return for the amount of asset value that we were bringing to the table from our perspective and from theirs, of course, they want more certainty to the cost level they will incur on a go forward basis.

We can think about it sort of -- the contract -- not necessarily being terminated as being amended?

It is Quint. No, it is a non renewal. The existing contract in its form is coming to an end in mid August of 2010. What DHL has told us is that they are committed to discussions with the Company about a relationship that would extend beyond that contract. We think of that in two parts. They are interested in the assets and securing access to 767s. They are also interested in a continuation of an aircraft operations agreement with us, which would cover the crew, maintenance and insurance. But as Joe pointed out in his remarks a minute ago, that portion is certainly keyed in closely to the ability for ABX to streamline its costs to be more competitive in today's market and of course, the crew member bargaining agreement is a key component of that.

Got you. I see that. If they don't reach an agreement with you on August 10th, what do they do for a lift? I would think they need the capacity somewhere and there is not that much excess capacity out there in 767s, is there?

The conversations we have had to date focus on splitting the ACMI into an A agreement, they would dry lease the 767s from us and an operations agreement which would cover the CMI portion of that. If they get that in place that is the ability to go to an alternate operator once they have it under dry lease.

Okay, I see. Thank you. My questions were really related to that. The rest is pretty self explanatory. Thank you.

Your next question comes from the line of Jonathan Fight of KMF Investment.

Good morning, gentlemen. How are you? Can you guys hear me?

Yes.

I had some questions regarding the Q1 to Q2 sequential performance and looking at the non DHL segments, I was wondering if you can comment on the decline in the ACMI segment, the enhanced performance in the CAM segment and the stellar enhanced performance in the other activity segments? Wondering what some of the puts and takes were on a sequential basis, if there are seasonal or one time affects we see there?

The CAM piece, that was additional aircraft that were placed into service to lease arrangements with both internal affiliated companies under the ATSG umbrella and external customers as well. There was a third 767 freighter that was lease to a Canadian operator starting in the second quarter and one aircraft which was a passenger configured aircraft which began operation in the second quarter as well. On the ACMI segment, the difficult -- as I mentioned in my remarks, ACI and CCIA -- performed at levels we expected them to during the quarter, where we were lagging on the ABX air segment. There were two contributing factors to that. In the operations that have been called the legacy of the ABX ACMI side. We had an increased crew cost as we go through this whole restructuring in the seniority list because we are taking the total number of ABX flight crews down from about 600 at the time DHL reduced I said book of business to something like 200 flight members. That entails some folks that were in the DC9 that were more senior having to go through a retraining process as they go to the 767 equipment. So that upped our expense side significantly, as did one additional heavy maintenance check on the 767 versus the same quarter last year. Equally so there was the impact of the trans-Atlantic flight that we started at the very end of the first quarter, this year. As we transitioned to the second quarter, we had hoped to be able to basically increase the cargo loads on that aircraft. That is something that is unusual for us in that (inaudible) that trans-Atlantic flight is something where essentially and it is ABX's responsibility to fill up the other half. We did not generate the level we had hoped to do in the time frame we had expected. That put an additional drain on the ACMI segment. On the other segment, combination of factors there, one was some asset sales. Quint, you have the details on that.

Yes, the other activity, you have maintenance which had improved performance and also the postal operation which had an improved performance versus the first quarter. Those two items were responsible for about $1.3 million better or pretax earnings in the other activities bucket.

Those items -- that would largely equate to the difference between the Q1 pretax earnings and the Q2. Those items would be sustainable if it was a large maintenance business and postal business rather than part sales?

Yeah, we expect the maintenance business and postal performance to be consistent. It was a good quarter in both of those areas. The part sales as Joe says, it depends. Those could be a little bit lumpy so to speak quarter to quarter depending on what opportunities present themselves.

Do you have a breakdown of what the other activities pretax earnings are attributable to part sales?

I don't have it in front of me. I believe part sales overall might have been down versus prior -- the biggest piece of the overall increase was in maintenance particularly in the heavy maintenance check area, as well as in the postal. Those two items really explain the majority of the net change from quarter to quarter in other activities.

Thanks, gentlemen.

(Operator Instructions). You have a question from the line of Adam Ritzer of CRT Capital.

Just a few things. On terms of your debt, I guess what you are saying is the cap leases on the 767s, eventually, that will all be the off the balance sheet by the end of Q3, right?

Adam, certainly, we know that three of the five are going off. In fact, they came off in July. The other two, we anticipate will be off by the end of the quarter. The way that works, DHL is obligated by virtue of the June 1st lease option agreement that we put out an 8K on, to take financial responsibility for all five of those aircraft. So ultimately, cash flow wise, that's a done deal. We won't have any negative cash flow at all from those obligations. On the balance sheet in order to remove the liability, we wanted DHL to complete the negotiations it had to go through with the lessor to make sure that we could execute the actual transfer of the liability to DHL from ABX Air. That occurred for three of the five planes and they are negotiating on the other two with the lessor and we expect those negotiations to conclude before we put out our third quarter results.

The other two were an early termination, Adam. The actual leases run through 2011. They are trying to do an early termination of those leases.

The DHL note you explained will be down another $15 million. That's already in there. On the aircraft loans, are there any of those that are coming off in the near future we should know about that that might be reduced at all?

No, Adam, those were 10 year facilities. I think they go through 2018. They are ten-year amortizations that run through 2018. You will continue to see us amortize that principal down. We are not going to early pay or do anything like that.

Got it. The $4.7 million non-recurring item, is that a pretax charge for the quarter?

Yes, it is.

Really, add that back, that is another $0.06, $0.07, $0.08 in terms of earnings and you are still not paying any taxes even though you are reporting them as paid but they are not being paid, right?

You are talking about the $4.7 million pretax charge from the prior year?

Wasn't there one in this quarter?

I think, Adam --

You are right. That was 2008.

That was the arbitration.

Right.

That was last year.

Right. Can you give us a little color on how many excess planes you think you will have and how many DHL will have and the terms of dry lease agreement to give us an idea of what the ACMI could be replaced with?

What do you mean by excess planes?

They will terminate the ACMI next August. How many planes do you think DHL could use of the 767s and what kind of terms of a dry lease in the current environment would you expect to have?

If you look at the DHL network today, Adam, there are four aircraft that we have already got the lease option agreement with DHL for. Those are the four SFs that are part of the existing ACMI agreement. Beyond that there are roughly 10 aircraft that are scheduled in addition to those SFs that we are talking about those. The significant number of those are the PCs or non significant freighters. Some were in total from DHL's perspective would be 12 to 14 aircraft that they would look for on a go forward basis. A lot of it is dependent on what their ultimate book of business settles out at and how they want to structure the network. In additional what ABX is flying in the way of 767s, there is also five or six DC8s in the US network that they schedule with A Star.

So you guys are modifying what, 14, is that right?

14 PCs and right now we intend to modify all 14 of those.

Potentially DHL could use a majority of that or even all of them?

Correct.

What would be the terms of a dry lease? I think in the last presentation you laid that out. I don't have it in front of me. Could you tell us again what that will work?

That is part of the negotiation. In terms of the term, to the extent that we're successful with DHL with providing them lists, they are likely to be multi years, seven year type arrangements. As we said in our release, we are having discussion was DHL about eight to 10 in addition to the four that were part of the capital lease option arrangement. Remember those four go through 2018. We are also in discussion with other potential users for the aircraft and at this point in time it is -- again, we would like to and we think it makes sense to come to terms with DHL to provide them some of these aircraft but we can't predict to what extent we will be able to be successful with that. We are certainly in discussion was them along those lines.

Monetarily how much are you getting for those --

Again, at this point I don't want to talk about terms that have yet to be negotiated.

Have there been any ones that have been negotiated recently that you can talk about?

We put out in our recent investor road show that we had in June, there was a slide show in there, Adam, that had an option of what we could do with aircraft, and I think it was something like $250,000 to $275,000 a month that we had targeted to potential revenue in terms of dry lease type revenue.

Right. That's what I was trying to figure out. Okay.

I think with our Company structured the way that Joe has put us together here, we have the ability to provide a lot of complimentary services whenever we provide air freight to the customer and the maintenance organization that he spoke about, the great example of that. So to the extent that we replacing dry leases with DHL or any customer, we also believe that we're a very good option for that customer is order to procure heavy maintenance services, engine support, inventory, spare parts inventory, of which you can imagine we have a number of spare engines and other things.

Right.

And DHL situation, certainly the 767 is a wonderful airplane for them. To find someone else to provide them lift, spare support, maintenance support all in one package is a pretty tall order for them and I think they recognize that.

So, if you guys could get your costs down, you guys might be able to provide, like you said, A and B services for each aircraft.

That's correct.

And, in terms of what you termed the B services, what do those amount to? Is that a monthly type charge? Annually? How does that work?

Traditionally, in the ACMI area, Adam, you are going to provide an aircraft through the maintenance and insurance on a cost per block hour basis, with certain minimum guarantees. But, in the domestic network that DHL has, we probably would come up with a different formula because the utilization is so low, you are only doing one flight in one flight out on a daily basis that from a framework perspective, we're looking at an alternative structure that would give more certainty. And also, at the same time, you want to do something that would incent them to want to fly the aircraft more, whether its for additional legs they may have, et cetera. So we're looking at changing the entire format of what a traditional ACMI agreement would look like, especially in light of the fact that we're biforcading the A from the CMI piece.

Could you give us any idea of what that might amount to on a monthly basis for one aircraft just as a guideline?

No, I really couldn't give you that number, Adam.

Okay, great, I really appreciate it. You guys have done a great job with a difficult situation. Thanks a lot.

Your next question comes from the line of Mohamed [Lubani] of [Lubani] Limited Partnership. Please proceed.

Hi guys. First off, I just wanted to say congratulations on your work taking down all that debt over the past year. It really has exceeded I think probably even the most optimistic projections out there of what you guys could do.

Thank you.

And, I just had a few quick questions. With regard to the vacation payments that you guys made to the workers that are now being disputed by DHL, do you have any more coming up? Or now that the transition from the Wilmington HUB to the CBG HUB has happened, is that all in the past?

No, there will still be some charges we will incur in the third quarter, because the HUB actually didn't transition until July 24th. And in July, we put out a war notice to 1,000 additional people, so we'll see the impact of those as we go through the third quarter.

I'm trying to remember if that was mentioned in the 10Q, do you guys have an approximate --

I think it was $5 million and change additional that we would expect.

My last question was about the pension liability. I noticed there was about $18.5 million of amortization that happened because you have fewer workers accruing liability pension going forward. Do you expect a similar number in the third quarter? Or have we seen the peak of the actual gains on the pension and liabilities?

We will continue to see -- again, the pension FAS 87 expense we expect to be similar, the pension expense in the third quarter as to what it was in the second quarter.

But in terms of the liability you guys are carrying on the balance sheet, as you have fewer crew workers accruing service costs, that should go down?

We will have to -- each year end you reevaluate the liability based on the change in discount rates, et cetera. You won't really see a recomputation of that liability until the fourth quarter based on where the asset values are and the discount rate on the liability.

So in terms of the growth in liability, the service cost and interest costs --

You will see that go down with the head count, the service cost piece will go down going forward.

And in terms of sort of your outlook over the next couple years of how you will make the $30 million to $40 million in pension payments, what do you see as potential scenario if you switch to this A and B agreement with DHL starting in August 2010? Will pension costs be worked in there explicitly or will it be something you try to factor in from your overall revenues you get from them?

Cash flows -- certainly pension expense is reimbursed through August 2010 as part of the agreement with DHL, the cost plus arrangement. After that, in terms of the cash that we have put into the pension plan and the expense, that will have to be baked into our other contractual arrangements which includes the dry leasing as well as potentially aircraft operating agreements.

Not just for DHL, but for any other operation.

There is no talk of DHL carrying that cost --

We have yet to negotiate with DHL for any agreements. Right now what we have from them is a -- an interest in exploring opportunities beyond the expiration of the current contract. We can't provide you any specific information about what those arrangements look like as we have yet to go through that process.

That sounds good. Thanks a lot. Again, really, really, fantastic work over the last year and a half I must say. Keep up the good work.

Your final question comes from the line of Jonathan Fight as a reprompt question.

Just a quick follow-up, finding some of the writings in the Q that you guys filed, I wanted to follow up on it seems like petulant behavior on the DHL. Can you recap the dispute about the put values and you allude to the a resolution process that is described or prescribed in the ACMI agreement. What that might entail over the next couple months?

On the puts the process is such we get an appraisal and we submit that to DHL. Of course, the put process calls for DHL to pay the lower of fair market or booked. If DHL does not agree with our fair market appraisal, they have the option of getting their own evaluation. If their valuation was less than ours, we can submit it to a third appraiser who gets to pick one or the other.

And basically that's the process that has yet to ensue. They have got a separate third party appraisal at 22.7 and you guys have to then rationalize the two values?

In terms of your characterization as petulant, I wouldn't agree with that. DHL has a view on the asset value as do we and we are going to go through the contractual process if the parties fail to resolve it in another way. We are talking to them and they are talking to us about exploring whether there is another way to resolve it. In terms of the puts it is quite a lot of money. You would expect them to approach it carefully just as we would. We are hopeful that we can reach an agreement that maybe doesn't quite follow the prescribed process although that process is available to us if we want to go through it.

I see. Is there an expectation as far as a time frame for that resolution?

I think both parties would like to see it resolved relatively quickly. We keep thinking in the very next quarter. Perhaps next quarter we will have it resolved when we have our call with you folks.

Thank you.

This concludes the Q&A portion. I would like to turn the call back over to Joe Hete for closing remarks.

Thanks. I began this call today by thanking the people who contributed to making the Air Park here in Wilmington such a great place to do business. There are thousands of others including our customers and you, our investors, who support we depend on to make this Company successful. I know it hasn't been a smooth ride the last few years and we are not in the clear yet, but I want to tell you again, we appreciate your support and to you generating reasonable returns on your investment remains our number one goal. Thank you.