Air Transport Services Group Inc (ATSG) 2010 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third quarter 2010 Air Transport Services Group, Inc., earnings conference call. My name is Caitlin, and I will be your coordinator for today. At this time all participants are in a listen-only mode. We will be facilitating a question and answer session toward the end of today's conference.

(Operator Instructions).

As a reminder, this conference is being recorded.

I will now turn the presentation over to your host for today's conference, Mr. Joe Hete, President and Chief Executive Officer of Air Transport Services Group. You may proceed.

Thank you Caitlin.

Good morning, and welcome to everyone joining us for third-quarter conference call.

I am Joe Hete, President and Chief Executive Officer. With me today are Quint Turner, our Chief Financial Officer; Joe Payne, our Senior Vice President and Corporate Counsel; and Rich Corrado, our Chief Commercial Officer.

We released our third-quarter results and filed our 10-Q with the SEC last evening. Both are on our website, atsginc.com.

They represent our second full quarter of results generated under our new operating model, which we announced last March. It's our plan for maximizing our cash flow by unlocking the value of our aircraft assets via long-term leases, including thirteen 767 freighters we agreed to lease to DHL for seven years, supplemented with cash flow from our five-year CMI operating agreement and continued good returns from our other operating businesses.

These third-quarter results demonstrate that we're on the right track in meeting the cash generating goals we set for ourselves and the commitments we've made to you under this new framework.

We also issued a second release with great news last evening covering a number of new and renewing agreements with major customers. The news includes the launch of new 767 service this week with Japan Airlines in Asia, demand for the new 767-300s that we're finding creative ways to meet, and more business for other operating units as well.

These agreements confirm what we've been telling you for months about the market's appetite for the flexibility and efficiency of the freighters we're bringing online, and also demand for the reliable, cost effective services of our employees who fly and maintain them.

I'm eager to walk you through all those developments and the potential for more to come. But first Quint Turner is going to review our results for the quarter. Quint?

Thanks Joe, and good morning everyone.

As always, I need to start by advising everyone that during the course of the 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 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.

These factors include, but aren't limited to, changes in market demand for our assets and services, the timely completion of 767 freighter modifications as anticipated under our operating agreement with DHL, and our operating airlines' ability to maintain on-time service and control costs.

There are also other factors that are contained from time to time in ATSG's filings with the U.S. Securities and Exchange Commission, including our Annual Report on Form 10-K and the Form 10-Q for the third quarter, which was filed last evening.

We may also refer to a non-GAAP financial measure, EBITDA, which management believes is useful to the investor in assessing ATSG's financial position and results. This non-GAAP measure is not meant as a substitute for the GAAP financials, and we advise you to refer to the reconciliation to the GAAP measure which we have included in our third-quarter news release, which can also be found on our website.

As Joe said, we have now completed two full quarters under our new business model, which focuses on achieving targeted returns on our capital invested in medium wide-body aircraft through either leasing our aircraft to one of our airline affiliates for ACMI deployment, or through long-term external dry leases of our aircraft, together with related operating and support services.

Already, we're seeing a trend develop of solid returns, and strong cash flow across all of our businesses, yet still with some opportunities for improvement in the months to come. This pattern suggests a strong future for our Company as we continue to deploy a growing fleet of aircraft under the terms that deliver optimal returns for us, while meeting the needs of our customers.

That may be via dry leases that deliver solid, long-term cash flows, with or without an operating agreement kicker. Or, when markets are as strong as they are today, it can mean shorter-term wet leases or ACMI agreements that meet our rate of return standards.

Pre-tax earnings from continued operations were $16.7 million, more than three times last year's third-quarter results and five percent better than this year's second quarter comparable.

Net earnings from continued operations were $11.4 million or $0.18 per diluted share. Again, that is nearly four times the 2009 comparable and 15 percent over our second-quarter net earnings from continuing operations.

Discontinued operations was a negative $200,000 after income taxes, in line with the second-quarter loss for discontinued operations and down from a $900,000 gain in the third quarter of 2009. Our discontinued operations line includes the pension expense for former employees impacted by the DHL restructuring, and severance costs in excess of our initial estimate for those employees.

EBITDA from continuing operations increased 43 percent over 2009's third quarter and four percent from second quarter to $44.0 million. The increase in our depreciation expense versus the second quarter 2010 primarily reflects the progress of our aircraft conversion program and the subsequent deployment of those aircraft to customers.

The EBITDA non-GAAP measure of financial performance best shows the cash generating strength of an asset-intensive business like ours. A reconciliation of third-quarter and year-to-date EBITDA to GAAP earnings from continuing operations appears on our third-quarter earnings release on the Company's website.

Revenues from continuing operations were $167.7 million, down four percent from last year's third quarter, while increasing five percent from second-quarter revenues of $160.1 million. The year-over-year decline was primarily due to our restructured operating role with DHL, and their lower employee benefit reimbursements to us.

Cash flow provided by operations for nine months rose 65 percent to $81.7 million, helped in part from DHL's payment of receivables owed to ABX Air.

Lower debt and interest rates reduced interest expense for the quarter by $1.6 million from the first quarter 2009. The variable interest rate on the company's unsubordinated debt is 2.9 percent, down from 4.2 percent in the first quarter of 2009.

During the quarter $1.6 million was extinguished from the promissory note owed by ABX to DHL, leaving a $27.9 million balance on September 30. As specified in the CMI agreement with DHL, this note will continue to decline by $1.6 million each quarter until fully extinguished as we continue to perform services over the remaining term of the CMI operating agreement.

Starting in the second quarter 2010, we began reporting our operating results under two segments - ACMI Services and CAM Leasing. Results of all other businesses are reported under other activities. Lease revenues in the CAM segment include those associated with the 56 aircraft that CAM had under lease at September 30, 2010, which included 40 aircraft leased to airline affiliates, and 16 aircraft to external customers. Revenues from the ACMI Services segment include those associated with the DHL CMI Agreement, as well as those stemming from ACMI agreements with other customers.

Pre-tax earnings from CAM leasing were $12.0 million, up $5.9 million from last year's third quarter and $2.2 million from the second quarter, reflecting 16 additional aircraft under lease since September 30, 2009. Eight Boeing 767-200 aircraft have been modified to standard cargo configurations since a year ago, and CAM acquired eight other Boeing 767-200 aircraft in standard cargo configuration from ABX.

ACMI Services revenues were $142.7 million, up $3.9 million versus the second quarter 2010, but down $17.6 million from the third quarter of 2009. Year-over-year revenues generated from DHL fell $33.2 million, stemming from the transfer of aircraft leases to CAM, as well as the fact that the 2009 period included significant reimbursements for employee severance and retention benefits paid to employees impacted by the restructuring of DHL operations. The decline in revenues was offset by a 6 percent increase in block hours flown, including increased hours operated for our customers in Europe, the Asia-Pacific region, and the Caribbean.

ACMI revenues also included $2.3 million for ABX's short-term bridging arrangement with DHL to supply Boeing 767-200 aircraft until pending freighter mods are completed and leases for the remaining 767s DHL requires for its US network are executed. Similar short-term arrangements with DHL generated revenues of $3.8 million in the third quarter of 2009 and $2.6 million last year.

Pre-tax earnings for the segment were $3.4 million, up from a million dollars for last year's third quarter, reflecting improved profits from ABX's transatlantic operation and increased block hours. But they were down from our second quarter 2010 pretax earnings for ACMI Services of $4.1 million, due mainly to a premature DC-8 engine failure and extra planned maintenance tasks targeted at improving Boeing 757 and 727 fleet reliability at Capital Cargo International Airlines. Crew training costs also increased in the third quarter, as ATI prepared to add a third Boeing 767 aircraft, as well as a DC-8 in BAX Global's network, and CCIA prepared to deploy two Boeing 727 aircraft, one on a scheduled basis and one as an operational backup.

Revenues from other activities were $23.0 million, up $5.2 million from the third quarter of 2009 and up $300,000 from the second quarter of this year. Pre-tax earnings were $3.1 million, up $3.0 million from the same period a year ago but down $700,000 from the second quarter. Revenues were up from additional aircraft maintenance for external customers in the quarter, and there were additional pretax earnings gains from lower employee postretirement obligations and lower overhead compared with 2009.

That's a summary of our operating results.

To complete the review of the quarter, let me add that capital expenditures for the first nine months of 2010 were $90.7 million, compared to $49.9 million for the comparable period in 2009. In addition to maintenance capex we have acquired three 767-300s and modified eight 767-200 aircraft so far this year, versus six in the first nine months of 2009. The breakdown included $65.2 million for aircraft acquisitions and modifications, $22 million for heavy maintenance, and $3.5 million for other equipment costs. We continue to project total capex for all of 2010 at approximately $114 million.

We added some additional disclosure in our 10-Q filing this quarter, which provides a range of expected capex spend between October of this year and the end of 2011. We anticipate that capex for fleet expansion during this 15-month period will range from $160 million to $190 million. The increased level of growth capex as compared to 2010 is due to the nine 767 cargo mods scheduled for completion next year along with spending necessary to provide up to three 757 combi aircraft for the military. At this point, the military has yet to publish a solicitation for a newer generation combi aircraft, and whether we fall at the low end of the $160 million to $190 million range will depend upon whether the military proceeds with a 757 combi bid request.

Our effective tax rate for continuing operations for the quarter was 31.7 percent, compared to 38.6 percent for the third quarter of 2009. The effective tax rate for the quarter was reduced by $400,000 by the recording of a deferred tax benefit under FASB 740-10. We estimate the effective tax rate for 2010 to be 35.9 percent.

And again, it is important for you to remember that based on our deferred tax assets, we do not expect to pay federal income tax until at least 2013, other than certain alternative minimum taxes.

Now I will turn the call back to Joe Hete for his comments. Joe?

Thanks, Quint.

Since April, Quint and I have met with or spoken to more than 100 of our investors, including many of you on the call today. We knew that we needed to get out and explain how and why we are placing greater emphasis on leasing our expanding fleet of 767 freighters, which is to capture greater cash flow margins than we were getting under our legacy ACMI agreements, especially since those cost-plus agreements did not allow us to generate a return that reflected the market value of our 767 assets.

Here very briefly are a few of the operating highlights of the quarter.

We have nearly doubled income from CAM, our leasing business, from a year ago and grew it 23 percent from the second quarter, as we continue to grow our externally leased fleet. Of our 30 Boeing 767-200 standard freighters, 16 of them were leased to a non-ATSG affiliate at the end of the third quarter, including 11 of the 13 that CAM committed in April to lease to DHL.

ATSG's results, and particularly its cash flow, will continue to be driven by our CAM Leasing business as it acquires, converts and deploys what we expect to be at least thirty- nine 767 freighters by late next year. Our preference is for a balance of long-term dry leasing agreements with separate agreements for supplemental operating services under our A plus CMI approach.

However, we're very willing to support customers who want to take a more incremental approach toward building a 767 capability, either through shorter-term wet lease operations or through a certification and fleet migration program that we can custom design and execute for any customer.

Our airlines stand ready to operate our expanding fleet anywhere in the world. Two of our airlines have new long-term collective bargaining agreements with their pilot unions that we believe will allow them to be competitive with cargo carriers anywhere. We expect an agreement with our third pilot group at ATI, by the end of the year. The service reliability performance of our airlines, often in the upper 90s in terms of on-time performance, would place us in the top tier of ACMI providers in the world, and our training and maintenance programs are designed to make sure we continually improve over time.

While our ACMI Services segment sharply exceeded its year-earlier quarterly results, we underperformed against Q2 results, mainly for two reasons. Personnel costs were higher, as we brought on and trained more flight crews to match the expected growth in our flight operations in the fourth quarter and on into 2011, as I will discuss in a moment.

Also we decided to take more aggressive steps to upgrade fleet reliability at one of our three carriers, Capital Cargo International Airlines. CCIA operates 727 freighters and our two757 aircraft. CCIA had recently seen a decline in the reliability of its 727 and 757 operations below the level its customers had come to expect. As a result, CCIA embarked on an aggressive reliability improvement campaign aimed at minimizing unplanned aircraft mechanical issues. The expenses associated with that work were approximately $1.2 million of the $5.3 million in increased third quarter maintenance costs from the prior 2010 quarter. Most of the remaining $4.1 million increase was for routine maintenance of our 767s operated by ABX Air for DHL, and most of that amount was reimbursed to us per our agreements.

We expect some continued, although smaller impact from expanded flight crew training and CCIA's incremental maintenance expenses in the fourth quarter. However, we also expect a growing revenue stream in our ACMI Services segment to outpace those costs as more aircraft enter revenue service.

As I said at the outset of this call, we have good news to share about our expanding volume of new and renewal business.

On Monday, ABX Air began operating one of our Boeing 767-200s from Narita Airport in Japan for Japan Airlines International, serving DHL customers in China and elsewhere in Asia. This new flight represents our return to the rapidly growing market in Asia, where we believe our 767s represent ideal feeder aircraft for spoke routes that connect fast-growing regional cities with major hub airports in Japan, China and elsewhere.

Amerijet yesterday exercised the first of three options for a 767-200 for a seven-year dry lease, to be effective January 2011. Amerijet currently leases two 767-200 aircraft from CAM.

In addition, in October we began operating the first of what we expect will be as many as four DHL-owned 767s in the U.S. market. These are four of the five aircraft that DHL assumed from us last year, along with our capital lease obligations for those airplanes.

The first of these four DHL- owned 767s completed standard freighter modification, and ABX began operating it on DHL's behalf last month. We anticipate that the remaining three will also enter service in DHL's US network after completing their conversions to standard freighters over the next several months. ABX would operate them under terms of the CMI agreement we signed with DHL back in March.

ABX was pleased to be chosen as DHL's CMI operator for these aircraft. I think it speaks to the quality of services ABX provides, as well as the seamless expansion that is possible with the CMI agreement we struck with DHL.

Within the next few days we will also begin operating the new 767 ACMI transatlantic service for DHL between Europe and its hub at the Cincinnati airport. The service will launch with one of our 767-200s and then quickly shift to a 767-300 freighter that we're leasing from a third-party under a 45-month agreement.

The fact that we have leased a 767-300 to meet DHL's immediate needs, when the first of the three we purchased from Qantas won't arrive until the first quarter of next year, is evidence of the strong demand for 300s worldwide. As for the three ex-Qantas passenger 767-300s that we purchased this year and expect to complete modifications of next year, we continue to work with potential customers toward firm commitments for both the dry and wet leasing options. I'm as confident as ever about our ability to generate our targeted returns on the investments in these aircraft.

Placing our 767-200s and 300s and providing crews for others is an important element of executing our strategy, and a key reason for our confidence about the future. However, the good news isn't limited to just our 767s.

ATI and CCIA's support of the BAX Global network in North America is expanding as well, with the new ATI DC-8 service from the BAX hub in Toledo to several points in Mexico, and the recent reintroduction of a CCIA 727 into BAX Global's domestic network. ATI has also been renewed as the Air Mobility Command's exclusive provider of DC-8 combi service through the end of the fiscal year next September. You may have also seen the news that we have signed a design and engineering agreement to be able to offer a 757-200 version of the combi, if and when a military requirement develops for that aircraft. We should know the answer to that question relatively soon.

Finally, we have renewed our agreements with the U.S. Postal Service for all three of the regional sort centers we manage for them, under similar terms. We will also manage an expanded sort operation for the USPS in Dallas through the holiday season.

Collectively, we expect the annualized impact of this new business on our ACMI services segment revenues to be an additional $40 million to $45 million. This does not include the additional dry leased 767-200 to Amerijet, which will be part of the CAM segment.

As I said at the beginning, we're only beginning to capture the benefits of the plans and opportunities we first described to you last March and have spoken to so many of you about over the last few months. We know that we have much more work ahead of us to keep us on track and on pace to provide the aircraft and operating support our customers need.

In most of our investor meetings, we received a lot of feedback along with questions. Most of it tended to fall in two categories -- our model sounded great, and we were clearly undervalued; or it made sense, but they need to be proven out over a couple of quarters' results.

Frankly, I think both groups were right.

It's certainly true that our plan represented a big shift away from the cost-plus regime we had operated under in the past. We had just emerged from a very challenging period when our debt, cost structure and customer relationships raised concerns about our future. And we understood those who worried about whether new customers would commit to long-term leases in a soft economy.

But some of you looked us over closely this summer and saw what we saw--how much cash we could generate over the long term by executing our plan with the assets we control today -

By increasing the size of our 767 freighter fleet by 50 percent from last April through the end of 2011,

By deploying them under long-term external leases with double-digit returns, or to an affiliate airlines, still generating market return on the aircraft, while adding additional margin from operating it, and

The flexibility to provide our customers maintenance and other value-added services like no one else in the air cargo business.

That long-term potential, along with the strong summer recovery of the air freight market, have proven very compelling for some. Today ATSG's share price has more than tripled from where we closed on March 30 of this year, the day we introduced our new business model and announced new leasing and operating agreements with our largest customer.

We acknowledge that our business model represents a new direction for us, and we are still working out some of the operating challenges in seizing the highest and best opportunities for our aircraft as the market defines them.

But as our second and third quarter results attest, we now have an engine that can generate solid cash flows over the long term, with ample room for those who waited to see it in action.

Now, Caitlin, I'm ready to take some questions.

(Operator Instructions) Helane Becker, Dahlman Rose.

On the $40 million to $45 million in more revenue that you just talked about from this new business, is that net of the cost to lease-in that extra 767?

That's the gross revenue, so the costs associated with that revenue would contain the lease cost of that 767-300.

Okay, can you say how that cost to lease-in that plane compares to -- I don't know. Can you say what the cost is actually? (laughter) Or can you give us some guidance as to how we should think about the cost of that relative to the plane that it will eventually leave to be replaced by?

If you look at it from a leasing standpoint, we've always given you a range in terms of what the 767-200, and we've also advised in terms of where we think the market would be for a 300, and it does fall within the range that we've given you as previous guidance on a 300 lease.

Okay, thank you. And I think that was it. Those were my only two questions. Thank you.

Alex Brand, Stephens Inc.

Good morning. This is Sterling in for Alex. Good morning gentlemen. Congrats on the quarter and especially the nice contract wins. Great to see.

My first question relates to the CMI business that you've won with DHL. It sounds like one contract, you've already started flying one of those planes, but you sound awfully sure about the other three. Is that just a matter of putting pen to paper, or are those other three out for bid?

No, I think -- well, I don't know that DHL has bid them to anyone else, but clearly if they added one, from a practical perspective, it wouldn't make a lot of sense for them to go out to seek another operator for the remaining three aircraft, when we are already operating 14 of them for them.

Okay. Gotcha. And can you give us any color around the type of revenue you'll get per plane for each of those, and anything around margins, EPS accretion for those CMI aircraft? I imagine it is going to be at a much higher margin than your typical ACMI margin given the A plus CMI structure that you use right now.

Well again, keep in mind that we don't provide the 'A' for those particular aircraft. We only provide the CMI piece, and it would be the single-digit returns, similar to what we see under the ACMI side.

If you think about that from a revenue perspective, what we've said previously is that the margin-generating portion of the DHL CMI is about $75 million to $80 million annually, and you can estimate that it is somewhere around a 2 percent increase in revenue for each one of these aircraft, as we add the operation of each one of these aircraft under the CMI.

Gotcha, that's very helpful. A couple of questions around maintenance -- the $1.2 million for the 757/727 program with CCIA, is that -- are you just being conservative by treating that as an expense in the quarter? Could that be capitalized? Or is that not the right way to think about that kind of expense?

The air frame checks that are done on those aircraft, which typically occur every 18 to 20 months, those are capitalized. This cost, because it was more akin to line maintenance procedures that were done, not during the otherwise scheduled maintenance visit, which is capitalized, is -- we treat as expense, and that is why the $1.2 million that was invested in those fleets under these line procedures was handled that way.

Okay, that's good. On the maintenance line, $22.4 million in the quarter, much higher than what you've seen in recent quarters, and I understand there were a number of C checks done, and that's partly reflected in the reimbursable expenses on the top line. But what are we looking -- in both those lines, what should we be looking for in the fourth quarter and into 2011? Does it look more like second quarter? Or is this third quarter kind of something we can extrapolate going forward?

Well, I believe that while the fleet improvement that CCIA embarked on in the third quarter, there will be some continuation of those investments in the fourth quarter. It will be on a lesser basis. That's our expectation because most of that was done during the third quarter. So I would anticipate that that line item is lower in the fourth quarter.

But your point, Sterling, that much of that cost is -- also in revenue, it's -- as part of the agreed-upon CMI, that's a really key point. I believe that what we just talked about earlier was $1.2 million being associated with these CCIA fleet upgrades. If you think about the increase versus last quarter, which was over $5 million, that means the rest of that was really a function of the timing of checks that were done, some of which was directly reimbursed by DHL. There was also an engine item that was in there that was I think a little over $400,000 that was an unplanned event.

But for the most part when you trend that item out, those cost swings are going to be mirrored in revenue.

This was a little out of the ordinary, and that's why we're talking about it specifically with CCIA, because they did embark on that program.

Okay, great.

The other thing you have in there, Sterling, is as flying increases, whether it is in the DHL network or not, that is a -- the maintenance power by the hour expenses flow through that maintenance and repairs line, so as revenue increases, so will that as the power by the hour costs go up.

Yes. If we fly more trips -- for example, if we added transatlantic routes, that you're going to see the power by the hour, which is always built into our revenue stream on the engine maintenance, also impact that expense item.

Right. Thank you for that. That's -- it's all very helpful.

I understand the gross revenue guidance overall on the contract wins. Is there -- these are different aircraft types being phased in at different times, some you've started flying in October, some in November, some start -- one January, for instance. As far as modeling this going forward, is it fair to kind of take the revenue guidance and existing margins and kind of divide that equally through the quarter, and that's how we should treat it? Or should we look at -- should we get into the weeds here about the returns on a DC-8 and 727 versus what you've already given on the 300, 200 767s. How would you model that going forward? Or is it possible to give guidance on a per-aircraft basis?

Well Sterling, we love to stay out of the weeds, so (laughter) we're going to try to do that. But I think all -- what -- the new business that we spoke about in the release last night, which Joe alluded to a moment ago on the $40 million to $45 million, that's an annual revenue estimate, and since all of those have -- Pretty much all of them, Joe, have already started; right? Started right around November 1?

Yes.

So I think when you model 2011, you can look at that being as sort of -- pretty much an equal contributor across the quarters. You can spread that $40 million to $45 million that way, and that would be a reasonable way to look at it.

Okay. And a two-thirds benefit in the fourth quarter on the top line? Is that right?

Again, you're kind of (multiple speakers) a little bit, and so you are fairly close (multiple speakers)

Yes, and the other thing you've got to consider, there really isn't much of a difference on the margin side between the 767 or the DC-8, the way we've structured the business. So you're still talking, as we've always said, single-digit margins on the ACMI revenues.

Remember, all this is ACMI revenue, so for example, the option that Amerijet picked up, that's in the CAM segment, and we've given you, Sterling, we've given you guys a lot of -- a pretty good view of how the revenues and the margins work on the dry lease 767-200s.

Right. And on a revenue per block hour and total block hour basis, that's going to be consistent with guidance you've given in the past?

It really is a bit different. For example, the aircraft in Japan is going to have a higher rate because there are higher costs associated with having an operation that far offshore, and the utilization isn't that high, and that's kind of why we gave you the guidance in terms of what the gross revenues will look like, because each one of them is markedly different.

The 300, for example, will be flying with a more expensive asset on longer legs than what the 200, which is a less expensive asset, would be, on shorter legs in a Japan route for example.

All right. You guys, you are keeping me gainfully employed for sure.

(laughter) That's reassuring] (multiple speakers)

And just one last one, and I will get back in the queue. But the -- as the two aircraft that you're subleasing and using for -- as part of the 13 for DHL, as those two leases fall off, can we look for an operating margin benefit drop-off in lease expense at the same revenue?

Now, Sterling, you're talking about going from 11 to 13 --

Correct.

-- on the leases? Yes, what will happen is we'll -- as those aircraft or those modifications are completed next year on the 767-200, we will execute leases with DHL, and the interim aircraft or the bridging 767-200s that are currently filling that gap with DHL will be available for deployment with other customers.

And so, again, we've explained on the economics of the 200, on the 'A' piece we expect to achieve anywhere from $250,000 to $300,000 a month in revenue, and then on the operation of that aircraft, we expect a single-digit margin, and that is on the operating costs, which are primarily the flight crews and the maintenance associated with the airplanes.

That's really no different. It's just you've got another asset out there basically, two more assets in this case, to generate those kind of revenues.

So fair to say, you're seeing the same types of returns on your aircraft, whether they are leased or owned?

Yes. As we've said, we require our affiliates to pay the leasing company a fair market return for the asset. So that --

I'm sorry. I don't mean if it's internally leased from CAM to one of the acting subsidiaries, but if you're -- or so these two planes -- maybe I'm misunderstanding. The two planes that are serving as a bridge are CAM-owned planes? Or are they being externally leased from a third party?

No, those are CAM-owned planes.

Okay. I gotcha. All right. Thank you very much for the time guys. I appreciate it.

(Operator Instructions) Kim Zotter, Imperial Capital.

So it looks like your revenue mix is roughly now say 80 percent ACMI, 15 percent CAM, and the rest in other? What is your long-term goal? And how do you expect that mix to change?

Well, keep in mind, on the ACMI revenues, for example the BAX network is part -- our business, CCIA and ATI's flying for BAX -- is included in there. One of the things we do for BAX is we procure the fuel for them that is used in the network. So if you look at the jet fuel expense on our P&L, most all of that is the ACMI revenues. That is that reimbursed part.

So revenues for the ACMI are always going to be higher. If we just have a 50-50 mix for example of aircraft that are either deployed as external dry leases or internal with an affiliate, on the revenue line you're still going to have a very much disproportionate ACMI Services revenue, because it's going to include, in addition to that fair market return on the asset, which is really all that is in the CAM revenue, it is going to have all the reimbursement for the operating costs, and in a case of BAX, even for fuel procurement. So we're not going to see -- ACMI is always going to be the bigger revenue piece.

Keep in mind, the way we've structured the model is every time an aircraft enters revenue service from CAM, CAM will always report a lease rate for that aircraft, whether it is to an affiliate or an external company, and then depending upon whether that is purely a dry lease to an external customer or a lease to an affiliate, will drive either an addition to ACMI margin or none at all.

Well, could you provide what the mix is I guess based on lease count? I'm just trying to see where the business may shift going forward?

Yes. Well, currently the 16 aircraft that are externally leased, the 767s, are all of course in the CAM segment. CAM has 56 aircraft under lease though. The other 40, which are the DC-8s, the 727s, are leased to a -- and some of the 767s -- are leased to an airline affiliate. And so in terms of the fleet mix, as we move forward and we -- you know, we've got nine more coming into service next year. We announced yesterday that Amerijet is going to dry lease one. We're going to have two more that go to DHL. So that's at least 19 external leases that we can foresee now, based on what is ahead of us, out of what will be 39 767s that are freighter-capable.

Of course the DC-8s and the 727s are going to continue to be leased by CAM to ATI and CCIA, primarily used in the BAX network and for the -- in the case the DC-8 combi, the military. So that is the mix according to the airplanes.

If you take the revenues that are in each segment today and you just assume, based on what you know is coming into service, which is the 76s, you can make an assumption about how many do you think are going to be externally leased, etc. So if they all went as a dry lease, for example, externally with no CMI associated with it, you would see no increase in the ACMI segment for those aircraft. But if they go to an -- if all of them went to an affiliate, you would see an increase in CAM, as well as the ACMI segment.

Okay, all right. My second question, looking at the balance sheet, comparing, I guess, your cash position as of September 30, I guess you have around $45 million. And looking back at your year-end 2009 balance, $83 million, it's down almost half from year end. So do you have a minimum operating level you feel comfortable with? And is there any left on the DHL receivable?

We do have a little bit left on the DHL receivable, I think about $13 million or so. Some of that is sitting in other assets because it is longer-term. It is associated with settling some workers comp items, etc., that we don't anticipate for another year or two.

The change versus the end of the year, is -- as you may remember, we had agreed to pay some -- fund that some pension liability with our flight crews when we wrapped up the collective bargaining agreement, and that was about $30 -- I think altogether $31 million that we put in there. That was the ABX flight crews.

We've also had capex commits, etc. We've begun to settle some severance costs that were accrued as of the end of the year. So we had been in some cases paid the monies, but the actual pay-down of those severance amounts to employees -- and part of that is health care and so forth that goes along with their severance period -- has occurred this year. So that has been some of the factors that have resulted in a decline in the cash since the end of the year.

In terms of a minimum operating level, it's always debatable, but we kind of think of something around $25 million as a comfort zone. As you know, CFOs would like big numbers in cash. CEO like to spend it so we strike a balance .

(laughter) Right, right. Okay.

From a liquidity standpoint, we -- keep in mind, we still have a $75 million revolver which is essentially untapped, with the exception of backing some letters of credit, which is probably around $10 million or $11 million in total. So we've got plenty of liquidity on the balance sheet today.

Right, right. Okay.

Yes. Our leverage right now is -- at least certainly on secured debt, is below 2 turns of EBITDA. So we're very lightly levered.

Very helpful. Thank you guys. Great quarter.

Steve O'Hara, Sidoti & Company.

Good morning. Can you just talk about your economies of scale and how much further you could take that and how that translates to your ability to drive customers -- additional customers to your business in the future?

Economies of scale -- you're talking about in terms of the sheer number of 767s that we have? Is that what you're referring to, Stephen?

Yes.

Well, I think right now the nice position that we're in, at least as respects these 767-200s, is we're kind of right now the only game in town in terms of somebody that has the 767-200 aircraft coming online over the next 12 months, if you want to lease the aircraft or have us operate it on your behalf. So we kind of own that piece of the marketplace today.

On the 767-300, there's just not a lot of feedstock available today on the 767-300 side that you could induct into the modification program. And as it stands today, you have a choice of either the IAI mod for the 767-300, which is the one we chose, or you can go the Boeing route.

To my knowledge there are no additional commits to anybody on either side, whether it's Boeing or IAI, as far as 767-300 mods, and essentially we have the IAI mod lines between our 200's and 300's pretty well booked up, at least through the end of the third quarter into the fourth quarter of next year.

Okay. I mean, in terms of the 767-300, that appears to be I guess your future growth prospect. When do those maybe come online for future purchase and modification?

Well, clearly the pacing item in that is -- always has been and will continue to be the availability of the 787 and its introduction into service. Right now it is about, what, two years behind -- delivery date? So that has kind of kept a cap on the market. In fact, it got to the point, because of delays in those deliveries, where Boeing had to deliver additional brand-new 767-300s to potential purchasers of the 787.

Right now, based on the most recent info, you're probably not going to see a softening of that market in terms of availability until probably in the late 2012/2013 time frame.

Okay, thank you very much.

Adam Ritzer, CRT Capital.

I appreciate you taking my call. I remember the good old days, it was just me and Helane on these calls for it seemed like a couple of years.

Now you got to get in line.

I know. It's unbearable. That's a good thing. Real quick question -- the $40 million, $45 million of added revenue you've mentioned, is that just for the planes that you talked about adding in Q4, those three, and then the three more for 2011? Or does that include other planes you're expecting too?

No, that just covers the ones that we put in the earnings release and then in a separate release yesterday that are entering ACMI Service.

So that's basically six planes?

Yes.

So beyond those six, what are our opportunities to add more planes? Do you have more mods coming? What can we do above and beyond those six?

Well, right now we're essentially out of aircraft at this point in time. That's one of the drivers in terms of us having to lease-in that 767-300. We won't start seeing new aircraft come into service until the first quarter of 2011. Right now it's anticipated that when you look at the output dates from a mod standpoint, kind of look at the 767-200s and the three 767-300s kind of evenly spaced throughout the four quarters of next year.

Okay.

...two to three aircraft every quarter coming online.

What we've said there is -- and you may go back to the investor slides we had published earlier on, but we've basically said the aircraft would -- we thought when fully deployed would generate annualized EBIT, those nine aircraft -- well, it was actually 13 I guess that we were talking about at that time, because we pegged it back to April 1.

But we said those 13 aircraft that were introduced between April 1 of this year and the end of next year, which included those nine, would generate we thought, if they were dry leased only, I think a little north of $23 million of EBIT on an annual run rate.

Yes. No, no, I got that perfect, and the numbers match up exactly right. I'm just -- I'm still confused. Are you saying you can add another two to three aircraft per quarter after Q1?

Yes. Because we have got basically nine aircraft available.

Okay, so there's more upside beyond this $40 million to $45 million. It is just a matter of you don't have those deals in hand, but you are going to have more aircraft coming, so if you can lease them, that's gravy on top of the $40 million to $45 million.

That's correct.

Is there anything else out there going on -- I know some of your competitors have announced good results -- strength in the economy? Any comments on that, what you're seeing? Any new business potential you see coming?

I think certainly the business that we just announced yesterday pretty much spells it out. You'll look at the BAX/Schenker network, adding two additional aircraft in, so their business is starting to grow again, and they're -- maxed out the existing capacity we had.

Remember, we are the sole provider of main deck lift for BAX/Schenker and their network with the 727s and DC-8s.

And of course then you've got the additional aircraft on an ACMI basis that we put in, the one in Japan, which basically kind of took the place of the fact that JAL got out of the main deck freighter business November 1.

And then of course the transatlantic coming into the DHL hub here in Cincinnati is a totally new run as well. All those point to continuing growth in the marketplace.

Great. Okay. That's great. That's all I had. Thanks very much.

Helane Becker.

Joe, is there a thought about the 727s and the DC-8' in terms of replacement aircraft? How should we think about that longer term? I know you're spending the money to improve the reliability, but at some point the money doesn't make sense to spend, and it makes sense to think about the replacement aircraft. So can you just talk a little bit about the timing of such?

Yes, basically, Helane, the majority of that is going to be driven by the customer. Certainly the aircraft become more and more expensive to maintain as time goes on, and especially since the majority of those are dedicated to the BAX network, which is only a four-day-a-week operation, and therein lies the challenge.

To go out and justify spending the money to acquire a 767 or 757 for what already starts as a low utilization business in terms of the overnight air networks, and then to lop off one day out of the week from what the norm is -- five days, and BAX only operates four -- makes it extremely difficult to justify making those kind of investments, because you just don't have the hours to amortize the investment cost over.

Clearly there is benefit to upgrading the aircraft in terms of lower maintenance costs, lower crew costs, because all the newer generation would be a two-man crew versus a three. And certainly the biggest factor would be the fuel cost in terms of fuel burn related to those aircraft.

It's a fairly easy calculation to do, and right now the economics just don't work.

That said, we are talking to the folks at BAX. We had a meeting with them a couple of weeks ago talking about what potential re-fleeting options would be, but it's something they're going to have to say they're willing to step up to in terms of both the cost as well as the longer-term commitment that would be required for us to go out and procure those number of assets to replace the 72s and DC-8s.

So you would only -- the key comment there is you would only take -- make the investment if they were really willing to subsidize it?

Yes, because right now if I did the math, it would be more expensive for them on a day-to-day cost basis for their operation if I could flip a switch and switch to 75s and 76s, and that's just a cost they're going to bear.

Gotcha. Thank you.

This concludes the question and answer section of the call. I would now like to turn the call back over to Mr. Joe Hete for closing remarks.

Thanks Caitlin. Quint and I will be going back on the road again in a week or so to further review today's news and why we think we can do better in the months to come. I hope to talk with many of you then or on our fourth-quarter investor call early next year. Thank you, and have a quality day.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a great day.