Air Transport Services Group Inc (ATSG) 2011 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first-quarter 2011 Air Transport Services Group, Incorporated earnings call. My name is Medesta, and I will be your operator for today. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session.

(Operator Instructions)

As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Mr. Joe Hete, CEO and President. Please proceed, sir.

Thank you, Medesta. Good afternoon, and welcome to our first-quarter 2011 conference call. I'm 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 General Counsel; and Rich Corrado, our Chief Commercial Officer.

We released our first-quarter results this morning at our annual meeting of shareholders, and filed our 10-Q with the SEC. Both are on our website, ATSGinc.com.

Most of you are aware that we also issued a news release last week about our new five-year credit facility which, along with our cash flow, will give us the financial resources we need to fund our growth plans.

That release also gave our earnings outlook for the first quarter, which were confirmed earlier today.

The outlook talked about the fact that replacing our old credit agreement with a new one involved some non-cash transaction-related expenses we recognized in the first quarter; and that we had an operating loss in our ACMI Services segment because of some unanticipated maintenance-related aircraft downtime.

The combined effect of those items reduced our net earnings by about $0.10 a share, but our adjusted EBITDA still increased year-over-year. That means the quarter was better, according to the yardstick we focus on the most, than it might appear on a net pre-tax basis.

Quint will explain the details in a moment, including the importance of our new credit agreement to the investments in feedstock aircraft we intend to make this year.

Our year-over-year comparisons for the first quarter were already going to be complicated by the fact that first-quarter 2010 was the last one under our cost-plus ACMI agreements with DHL. We replaced them with new aircraft leasing and operating agreements at the end of that quarter, which means that our CAM subsidiary now leases to DHL most of the freighters we operate in the US for them, moving much of the DHL revenues and earnings that had been part of our ACMI operation into CAM.

Quint Turner is going to take you through the first-quarter comparisons and the details of our new credit facility. I'll tell you what happened during the first quarter from an operating perspective, and some indications about what we have in store for the rest of the year. Quint?

Thanks, Joe. Good afternoon, everybody. As I always do, I need to start by advising everyone that during the course of the call we'll 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 completions of additional Boeing 767 and 757 freighter modifications scheduled during the remainder of 2011, the availability and cost to acquire used passenger aircraft for freighter conversion, 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 US Securities and Exchange Commission, including the first-quarter Form 10-Q, which was filed this morning.

I will also refer to non-GAAP financial measures, including adjusted EBITDA from continuing operations and adjusted pre-tax earnings, which management believes are useful to investors in assessing ATSG's financial position and results. These non-GAAP measures are not meant as a substitute for the GAAP financials, and we advise you to refer to the reconciliation to the GAAP measures, which we have included in our first-quarter news release, which can also be found on our website.

As Joe said, our ACMI Services segment experienced unexpected downtime in the first quarter, due to aircraft maintenance issues, reducing net earnings by $3 million, or $0.03 per share. And, we incurred an additional $6.8 million non-cash charge, or $0.07 per share, in the quarter, for early termination of the Company's credit agreement in favor of a new five-year credit facility, offering more attractive terms that will allow us to fund our growth and meet our objectives at a lower cost of capital.

The $6.8 million non-cash charge consists mostly of recognition of deferred hedging losses for interest rate swaps, which had been required under the former credit agreement. Additionally, we wrote off remaining unamortized debt issuance costs related to the former loan.

The new $325 million credit facility was led by SunTrust Bank, which also led our previous credit agreement. The syndicate includes 13 banks, and the facility was significantly -- approximately 52%, I believe -- over-subscribed, as banks recognize the significance of our cash-flow generation and attractive aircraft assets.

The new facility is more flexible, and grants us a wider range of investment options that we may consider, including potential strategic partnerships. It includes a tiered rate structure with a fixed-rate component for at least half of our $150 million term loan, and a $175 million revolver, with an accordion feature that would allow us to expand our revolver capacity by an additional $50 million. The facility will be secured by certain aircraft, providing 150% collateral coverage to the lenders.

At ATSG's current debt-to-EBITDA ratio, a portion of the facility will initially be priced at the 90-day LIBOR rate plus 2 percentage points. That's 25 basis points lower than the comparable rate under our previous agreement. The reduction in the upfront loan initiation fees, compared to the previous credit agreement, will reduce the annual amortization of such fees that roll into our interest expense by approximately $1.2 million.

We expect to execute fixed-price interest-rate hedges on at least half of the $150 million term loan by the end of June. The $172.4 million balance of the former loan was paid off yesterday, with $150 million drawn from the new facility's term loan, and $65 million drawn from the revolver.

That's a summary of the new credit facility. Now, I'll summarize our financial results for the quarter, which are further detailed in our earnings release and 10-Q.

Revenues from continuing operations increased 9% from the first quarter 2010, to $175.1 million, primarily from increased leased aircraft revenues and higher customer-reimbursed jet fuel costs. Pre-tax earnings from continuing operations in the quarter were up $4.6 million, compared with $10.8 million.

Better reflecting the performance of our core businesses, adjusted pre-tax earnings from continuing operations for the first quarter, which exclude charges related to the termination of the former credit agreement, and earnings from the DHL Severance and Retention Agreement, were $11.4 million, versus $7.2 million a year ago, an increase of 57%.

The $4.2 million increase in adjusted pre-tax earnings reflects CAM's $6.9 million earnings improvement, and a $3 million improvement from the Company's maintenance and other activities, as well as lower interest expense. Those were offset by the $6.3 million decline in first-quarter pre-tax from ACMI Services.

Adjusted EBITDA from continuing operations, excluding those one-time charges I mentioned earlier, was $37.8 million in the first quarter, up 14% from last year's first quarter.

Pre-tax earnings for the CAM segment more than doubled to $13.5 million, primarily due to the placement of 16 additional aircraft since March 31, 2010. Revenues for the quarter were up 80%, to $32.1 million for CAM, as compared to $17.8 million.

At the end of the quarter, CAM had 61 aircraft on lease to customers, of which 44 were leased internally to our airline subsidiaries, ABX, ATI, and CCIA. CAM delivered a Boeing 767-200 freighter to a Florida operator in March under a seven-year lease agreement, to bring the number of aircraft leased to external customers to 17. Revenues generated by leases to external customers were $14.1 million for the quarter.

As I touched on at the beginning of my presentation, ACMI Services incurred higher-than-expected expenses, and lower-than-projected revenue because of maintenance-related down time that Joe will discuss in a moment.

Consequently, the segment recorded a pre-tax loss of $2.5 million. That compares to earnings of $7.4 million in the first quarter of 2010.

But last year's first-quarter earnings included $3.5 million in severance and retention payments for the restructuring of DHL's U.S. Express package operations. First-quarter revenues for the segment were $102.5 million, down 13% from $117.4 million in the first quarter of 2010.

A major reason for the lower revenues is that last year's revenues included reimbursement for aircraft depreciation and maintenance expense under the former cost-plus agreement with DHL. First-quarter block hours rose 12% year-over-year.

As of March 31, ACMI Services had 59 in-service aircraft, including 11 Boeing 767-200 series freighters that were leased to DHL and operated under the DHL CMI agreement. A twelfth aircraft was delivered to DHL in early April, and we will deliver the thirteenth and final aircraft to them this month.

Revenues from Other Activities were up 46% in the quarter, to $25.4 million. Pre-tax earnings for these businesses were $1.7 million, compared to a $1.3 million loss in the first quarter of last year.

Contributing to the $3 million turnaround was a $1.4 million reduction in post-retirement obligations, as a result of benefit changes, service fees received from DHL for managing workers' compensation claims, and increased revenues from aircraft maintenance services. Additionally, ABX incurred an unallocated $1 million overhead charge in the first quarter of 2010 that could not be charged back to DHL.

The Company continues to generate strong cash flow. Cash generated from operating activities totaled $45.9 million for the quarter, versus $53.4 million in the first quarter of 2010. Our year-ago cash flow was unusually large, though, and more than double the first-quarter cash flow in 2009, because DHL had begun to pay down what it owed us to terminate our old agreement.

First-quarter interest expense decreased $1.1 million from 2010's first quarter, as a result of further deleveraging of our debt since March 2010 and lower interest rates. Interest rates on the Company's variable un-subordinated debt decreased to 2.6%, from 2.9% in the first quarter of 2010. Interest-bearing debt decreased $76.6 million since the end of first-quarter 2010.

We made $9.3 million in principal payments during the quarter, and $1.6 million was extinguished from the promissory note owed by ABX to DHL, leaving a $24.8 million balance on the note on March 31. As specified in the CMI agreement with DHL, we expect the note will continue to decline by $1.6 million each quarter, until fully extinguished over the remaining term of the CMI operating agreement.

Capital expenditures for the quarter were $44.5 million, compared to $19.2 million in the first three months of 2010. During the quarter, we spent $35 million for the acquisition and modification of aircraft, $9.1 million on heavy maintenance and $400,000 for other equipment.

As we stated in our year-end conference call, we continue to expect CapEx to be in a range of $170 million to $200 million. The final amount will depend on whether we invest in a 757 combi aircraft program to replace the DC8 combi we operate for the US military. If the military does not solicit bids or we are not awarded the bid this year, we would expect to be at the lower end of the range, around $170 million.

Our effective tax rate for the quarter was 37%, the same as last year's first quarter. We expect the full-year rate to be approximately the same. The Company is and remains in a deferred tax asset position, and does not expect to pay federal income tax, other than certain alternative minimum taxes, until at least 2013.

Now, I'll turn the call back to Joe for his review of our operations and some comments on our outlook. Joe?

Thanks, Quint.

Although the cash-flow producing ability of our business model remained evident, from an ACMI operating standpoint the first quarter of 2011 was certainly below our expectations. Despite this, we remain on track to carry out our growth plan, converting and deploying the rest of our 767s by year-end into an air freight market that remains strong and growing.

Most, but not all, of the challenges we faced in the first quarter were in our ATI airline business, where we fly the DC-8 combi for the military and some 767s for DHL, along with our ongoing support for BAX Schenker, primarily with DC-8 freighters.

The four DC-8 combi that ATI operates serve routes that can extend to small islands in the Atlantic, Pacific and Indian Oceans, far from our primary maintenance stations, which means that when one of them encounters a significant maintenance problem, it can take days to get the parts and proper personnel to that location to make the repair. As a result, these problems can wind up costing more in lost revenue, than in maintenance costs, although both can be significant.

This time, we lost about $2.3 million in revenue from cancelled combi runs, offset in part from some fuel-cost savings. Revenue rates were reduced in our newest military combi contract, making it all the more important that we operate every revenue trip offered. We also had to cancel some runs for one of our 767s flying from Bahrain into Afghanistan because of a significant wiring issue. That is new service that ATI started in February for DHL.

The combi flights that we are uniquely equipped to provide remain profitable, and we would like to continue to serve them with a new converted combi based on the Boeing 757 when the military is ready to commit to such a program.

We mentioned one other first-quarter issue on our fourth-quarter call in March. That was the delay in deployment of a leased 767 because of a problem we discovered during the scheduled heavy maintenance check. It took us two months and $400,000 to get it fixed, and we lost two months of lease revenue that we otherwise would have earned in the quarter.

Finally, we had $800,000 in start-up costs for the 767 passenger aircraft we now have in operation with a tour operator. That service began on April 1, principally between Europe and Puerto Rico, and allows our subsidiary, ATI, to build toward 12 months of passenger operating experience, which is a prerequisite in order to bid for military passenger flying.

All together, those and other changes in our ACMI business during the first quarter reduced our overall operating margins compared with our own expectations, and certainly compared with some of yours as well.

Unplanned downtime will always be a factor in the airline business, and we budget accordingly. But as we said earlier, and I can repeat with confidence now, the first quarter had several unusual events but nothing that suggests a systemic problem.

We are beefing up our resources to minimize down time no matter where it happens so that our customers are not inconvenienced and our crews are not stranded in far-off locations.

We will work diligently to see that our service remains at superior levels.

As you all know, April 1, 2010 marked the start of a new phase of the development of ATSG, a major milestone moment for all of us. By unlocking the value of our aircraft assets through dry leases, we more than doubled the cash flow associated with our 767 fleet, and were able to reinvest that cash flow into converting our non-standard passenger door 767-200s and acquiring larger and longer-range 767-300s.

As a result, our CAM leasing segment continues to be the cash flow pacesetter for the rest of the business, owning and then leasing almost all of our aircraft to the internal or external customers that can put them to work most profitably. CAM's strong performance in the first quarter is just the beginning of what we expect it to yield as the year continues. And we place in revenue service the nine additional aircraft we will deploy during 2011.

We reported in our earnings release that the first of six 767-200s we deploy this year recently went into ACMI service with West Atlantic in Europe. Two more, as we said in February, will be dry-leased for 59-month terms to RIO airlines of Brazil, beginning with the first one this summer and the second in the fall.

We also have news about the three 767-300s we acquired last year and are converting this year. ATI will operate the first one between North and South America under a new ACMI agreement starting in June.

The other two will go to another customer as ACMI aircraft and the network between the Americas and Europe. It's a three-year deal, with one aircraft launching in each of the last 2 quarters of the year.

That leaves us with three more 767-200s coming out of conversion in the second half. We remain confident that we will reach agreements with one of the several prospective customers for each of those aircraft by the time they are ready to enter service.

As Quint told you, nearly all of our net pre-tax income came from CAM, as our pre-tax loss in ACMI Services offset a small gain in other activities. While we expect ACMI Services to return to profitability in the current quarter, CAM will remain the principal cash engine of the Company for the foreseeable future. CAM's role, as we have said before, is to efficiently allocate our aircraft assets in a global market and serve as a foundation for a long menu of additional services we can offer to support those assets.

The best way to keep our cash engine humming long into the future is to continue to do what we have done so successfully almost from the inception of our business. Acquire, convert, and deploy the type of aircraft that today's air cargo network operators want, and have them ready when they want them.

Earlier today, we announced that we had reached terms with Qantas for our acquisition of a fourth 767-300 from them in late June, with its cargo conversion plan to be completed in early 2012.

As I mentioned to you on our last call, the recent escalation of fuel prices has had little impact on us so far. Although we do have some fuel cost exposure in our military business, for the most part our risk is in our customers' modal allocation decisions, and whether fuel costs could force shifts that lead to the return of one of one of our aircraft. We don't expect that to happen today.

We think that rising fuel costs do indicate, however, that we need to be ready with replacement options for the many less efficient, small and medium-sized freighters operating today, both in our own fleet and in others. As other airlines look to retire many of their own less efficient aircraft, we need to be ready to replace them with Boeing 767s, 757s, or even 737s, as their air network requirements would dictate.

In short, we want to be the first place that cargo airlines turn to meet their incremental needs for our types of aircraft. We can remain in that position only if we have the type of aircraft they want, when they want it.

Along with our own cash flows, the new credit facility that Quint discussed will help us fund those fleet investments at attractive rates. But, they must be the right aircraft types and available at the right price.

I'm convinced that we will find more motivated sellers as the year progresses, and we will be inducting more aircraft into the conversion pipeline in 2012.

And with that, Medesta, I'd like to conclude my remarks and take some questions from investors on the line.

(Operator Instructions). Your first question today comes from the line of Alex Brand with SunTrust Robinson Humphrey.

I was going to start where you finished, Joe, on the risk of returned aircraft. Am I right in thinking that there's not a ton of risk outside of BAX Schenker? And, can you update us if there's anything to update with that negotiation?

I think as far as BAX Schenker goes, they operate in their network the 727s and the DC8s, which obviously in a period of rising fuel prices, is going to have a marked impact on their bottom line. Where we're at today with BAX Schenker is the original agreement was set to expire on March 31st. We extended that for an additional 90-day period as we continue with the negotiations and they formulate what their business plan is going to look like on a go-forward basis. But outside of BAX, realistically, with the 767s and the 757s that we operate, they're about as efficient as you're going to get.

And, I think, as we told the market repeatedly, opportunities for somebody to shift modes on a regional freighter is a lot less likely than if you were operating a 747 where they're going to put it on a ship. People that have done modal shifts have already done so, and moving them to trucks or trains or whatever they wanted to do because of the shorter range. And anything left is either from a time-sensitivity standpoint because it's part of an express network, or because of the commodity -- perishables is a prime example -- they're more apt to want to keep flying or be in a position of having to keep flying as opposed to looking for other modes.

With respect to the $3 million, if I take the $2.5 million operating income, pre-tax, for ACMI and add back $3 million, is that what ACMI would have looked like otherwise?

I think you've got to add back -- depending what numbers you're talking about -- but, if you look at the impact of the one aircraft, the 767 that had the heavy structural problem and the lost lease revenue where I should say lease expense was borne by ABX under the ACMI segment. Add in the $800,000 for the gearing up for pax service, and then add that to the impact of the ATI piece with the combi revenue loss and the downtime of the one freighter because of the wiring issue, you're going to be at a number that's bigger than $3 million in total. Probably closer to $5 million when you add all those pieces up.

To cut right to the chase, then, everything looked pretty good except for ACMI. I'm just trying to figure out what's the run rate on ACMI from $2.5 million in the first quarter, seasonally that probably makes some sense. Is that the right way to think about what it should have made or could have made without these sort of one time events?

I think, as we've said, first quarter is always a little bit softer than second and third, and fourth is just a little bit stronger than the second and third. So, I think if you use as a proxy the kind of quarter-over-quarter results for last year, I think that's the best proxy you're going to get Alex.

Okay. Going back up the P&L a little bit, there's two line items that I want to make sure I understand. One is what you think the right quarterly run-rate for maintenance expenses is. And the right run- rate for salaries and wages, which I thought were going to come down more because you don't have postal in the first quarter. But maybe I didn't get that right for the salaries and wages.

One thing that affects the salaries and wages line, Alex, is the payroll taxes. We have some topping out based on the cycle limits. The higher-compensated employees, say the pilots, et cetera. And so, in the early quarters, the first couple quarters of the year, your effective payroll tax rate that's baked into that line is going to be higher than it is in last two quarters. And I'd say it's probably $1 million associated with that that will swing. So, you'll see a favorable trend in that payroll tax and expense line that's embedded in the salaries in the last couple of quarters.

The other piece on this, Alex, is we're gearing up, as we said, for the 767-300s. Three of them are all going to be deployed in ACMI contracts, and then we had the passenger service, all 767-related. So, the first quarter we obviously had the gearing-up expenses for flight crews for those additional lines of business coming on, with the passenger thing started April 1, as I mentioned, and of course, like I said, in June we'll start the first of the 767-300s flying. If you look at bringing a flight crew online, it's about a 90-day period of time from the day the person walks in the door until they're ready to go online and fly the aircraft. So you're always looking about a quarter in advance of when you'll see the revenue that you'll start to incur the expenses.

In terms of the maintenance line, Alex, remember, we said block hours were up 12%. One of the things that is in the maintenance line item is a power-by-the-hour on the engine maintenance. And some of that is certainly in the revenue as well. For example, through CAM, we extend power-by-the-hour availability to CAM's lease customers, such as Amerijet, for example. And so, one of the things that's driving those costs is increased hours that are operated, both by our subsidiary airlines that drive the power-by-the-hour engine maintenance cost as well as the lessees out there who are taking advantage of that program. We mentioned some of the unscheduled maintenance also that impacted the quarter. It's called the pickle fork on one of the 767s that was being delivered to Amerijet, and some of the unplanned downtime with the combi and the 767 operating with the wiring issue.

There is one other expense item that I want to make sure I understand, and that is the rent line.

Right. On the rent side, when you look year-over-year, remember, the Clinton County Port Authority took possession of the air park here in Wilmington from DHL last year, after the first quarter. Since that time, we have been paying rent to the county for the facility here in Wilmington. We also, in November of last year, you may recall we began doing an operating lease on a 767-300 that we started flying transatlantic service for DHL, the Guggenheim plane. We also have four DHL-owned aircraft that they have asked us to operate under the CMI agreement for them. You remember, we had the 13 we leased to them that we own, and then they have four that they own that we now operate under that agreement. We actually executed sort of an operating lease to do that from them, and then its reimbursed right back to us in the revenue. But, it drives that expense line item up some.

So, the bottom-line impact is only with the Guggenheim and the air park lease.

Okay, thanks for that. One more and I'll turn it over for someone else. The quarter seemed like it was a little messy, and a lot of that is outside your control. But, it seems like at worst, you're on track for generating revenue from assets that you've already got -- and cash flow. But, maybe you're even a little ahead of schedule. I just want hear your qualitative thoughts on where you think you are versus what you expected a few months ago, and how the sort of roll-out of the aircraft's going.

I think as far as the aircraft going into service, we've had a few minor delays in terms of the conversion over at IAI, a couple weeks here, a couple weeks there. Right now, Alex, probably the biggest impact was that one that got hung up in the heavy maintenance event that cost us two months worth of external lease payments. Outside of that, we're pretty much on target. If you look at the number of aircraft left, there is eight. We put one into service -- or one completed mod at the end of the first quarter, so there's eight more due the balance of the year. Figure one per month going into service for April or May through December.

Your next question comes from the line of Helane Becker with Dahlman Rose.

This is one question. Does the new credit facility allow you to at some point either buy back stock or pay dividends?

It does. I believe there's like a $50 million limit on either one of those things on an annual basis. As we've said before, the DHL note, which currently is amortizing under the CMI agreement, still contains provisions until it's gone that says that for every $1 that we would buy back in stock or pay in dividends, we would have to make a cash payment of $0.20 on that dollar to DHL towards the balance of the note.

Okay. My next question is, can you say exactly what block hours were in the quarter? I got the percent change, but I didn't actually get the number and I didn't see them in the Q.

I've got to apologize to you, Helane. We can get back.

They were down about 5% over the fourth quarter, up 12% over last year. But apologize we don't have the exact number.

If you've got fourth quarter, it's about 5% off of that.

Okay. How does that compare to kind of a normal -- if you exclude the issues with the downed aircraft, how would that compare with a sort of normalized run rate? Should we go back and look at the fourth quarter plus the one additional aircraft as our normalized run rate for going forward?

One of the big changes, Helane, that occurred in the first quarter was we were running that one 767-200 for TNT's transatlantic route. That got swapped out to a European carrier with a 767-300 guest air or jest air, I'm not sure how you pronounce it.

And then, that 767-200 was transitioned over to a run between Oslo and their hub in Liege. So, the block hours went down significantly based on the transition of that route to a shorter haul. Block hours in those kind of cases don't necessarily translate directly into profitability because there's a high fixed-cost component attached to an aircraft. Where, if you're flying it a lot, you're amortizing it over those hours. And, on a short haul, like an Oslo to Liege, for example, it's going to have a bigger fixed-revenue component, as opposed to a variable.

December is probably a normalized run rate, but again, you've got a little bit of peaking volume in there, nothing on the order of double-digit percentages, but certainly there's a little bit of extra hours in the fourth quarter.

We've talked a lot about the DC-8s, and I know that that's not necessarily your decision to replace them so I'm not as concerned about that. But on the 767s, I feel like they should never break down because they're coming out of mod, they're relatively new. Do you think you have to fly some of those aircraft -- and maybe this would be true for the DC-8s -- with a mechanic on-board and spare parts? Or, is this something that just happened and is kind of a really a one-off event and not something that would potentially threaten the franchise?

As a general rule, Helane, if we go to an offline location, for example, if we're flying out of Miami down into Bogota, we don't have a maintenance base in Bogota, Colombia, so we put an aircraft mechanic on board. When we're flying from Bahrain to Afghanistan, we have an aircraft mechanic on-board as well. The difficulties we had in this particular quarter, one particularly with the DC-8, was a major failure of a duct on the aircraft which put it down hard, which no mechanic or any amount of tools he had with him were going to allow him to fix it quickly because it was a large part. The 767 that we had a wiring issue with was -- it did go through the modification and near as we can tell, that was probably what kind of precipitated the issue in that near as we could tell, a metal shaving got down in a wire bundle and caused an issue there. So, you're always going to have some fluke deal. But overall, the 767's reliability, it's pushing at 99% consistently, but every once in a while you're going to have one of those unexpected situations.

Got you. For the military passenger business, do you have to fly for what, a year before they would approve you for that?

It requires 12 months. We've obviously got experience in the passenger side with the combi, but that's a narrow-body. The 767 being a wide-body, you have to have the additional experience.

So, you would be looking at really second quarter of '12 before you could bid on that business?

Yes.

(Operator Instructions) Your next question comes from the line of Kevin Sterling with BB&T Capital Markets.

Joe, we've heard about some capacity coming back into the market. Let me get your perspective on that. Is it mainly in the wide-body market? What's your outlook on the capacity situation?

I think any capacity coming back in is going to be in the bigger aircraft, the 747 type lift, Kevin. I know there's a lot of 747s had parked previously coming back in. But, when you look at the medium wide-body segment, the competing aircraft types are the 767, which we kind of are the market. Nobody's bringing back an A300-B4 there are a couple of A300-600s, which aren't coming back into the market per se, they're just shifting from one operator to another. So, we don't see a whole lot of additional lift capacity in the markets that we compete in coming back online.

On the acquisition of the Qantas passenger 767-300, how did that come about? Did Qantas call you, or are you actively out there in the market looking for deals? Are the passenger airlines knocking on your door a little bit more now?

I think we're probably knocking on their door before they knock on ours at this stage of the game. And we've really seen no pick-up in the availability of additional assets out there. Clearly, from Qantas' standpoint, we've got a well-established relationship with them that we bought those three in one fell swoop. We did operate a 767-200 for them on an ACMI basis, which that contract ended in the first quarter and that aircraft moved over to Europe. So, from that standpoint, we like to, as we've always said, get multiple aircraft from the same fleet, as it makes the transition to a new operator much more expedient in terms of the manuals and the layout of the aircraft et cetera. But, it's still pretty sparse in terms of available feedstock right now.

Following up on that, what do you think will loosen up the availability of feedstock?

The biggest driver -- there's one of two. One, is going to be if there is just a return in terms of a down economic situation globally where people just aren't flying anymore, which would precipitate excess capacity on passenger side. But probably the key driver is still going to be the introduction of the 787, which right now is, what, three years behind schedule. ANA, who we have a long-term relationship with, we've bought 24 767-200s from them over the years, as well as we've flown for them on an ACMI basis--They are the launch customer. But, even with the introduction of the additional 787s, which they're supposed to start receiving later this year, they said it's probably out in the 2013 timeframe before they're probably going to divest themselves of some of the 767-300s, only because they had a large pick-up in business because of JAL's situation with its bankruptcy and cutting back its level of service.

Sounds like with your need a lot of credit, you're looking for some feedstock, so best of luck.

Your next question comes from the line of Chris Hartstein with Casey Capital.

Can you walk me through the projected $2 million EBITDA run rate? Given the maintenance, unanticipated maintenance expenses, should I annualize the fourth-quarter EBITDA of $46 million? And then, assume the nine additional aircraft coming onboard throughout the rest of the year, should I add approximately $3 million each? Is that the right way to look at it? Any light there would be very helpful.

What we've said is that the nine aircraft, when all those aircraft are online, on a go-forward run rate, we will be in excess of $200 million on an annualized run-rate basis. If you look at third quarter, I think we were at about -- on an adjusted EBITDA basis, we were about $44 million. The fourth quarter was about $46 million. So, you're sort of in that range. And you annualize that base and then you add EBITDA related to the additional aircraft. Remember, we've talked about just on a dry-lease basis, what to expect from revenue contribution from the asset, the 767-200 lease rates being between $250,000 and $300,000 a month, so $275,000 is a good number. Six of the nine aircraft are 200s. Three of the nine aircraft are 767-300s, and those lease for anywhere between $375,000 and $400,000 a month is kind of a ballpark run-rate. So, you've got six of the 200s, three of the 300s, you're adding that on a base of mid-40s million. Now, first quarter, obviously you've got to exclude out the financing charges, if you're looking at 2011. If you want to think about it on an adjusted basis.

Okay. So that $200 million, that could be the low end, with maybe potentially upside from there?

In terms of when all nine planes are in place, we believe that it's going to be in excess of $200 million on a go-forward run rate.

Your final question comes from the line of Michael Chapman with Private Capital Management.

Quick question on the BAX Schenker line haul that you guys have. In reading into that, it looks like you, and correct me if I'm wrong, provide kind of flex capacity for them on some of their main routes. What other capacity could they substitute for your 767s or DC-8s? Is there a lot of narrow-body capacity out there that's idle?

There's really not. Part of the decision process they're going through is looking to upgrade their fleet to newer generation from the DC-8 and the 727, specifically. What we've told them, the logical replacements are is the 757 and the 767 and possibly, depending upon the run, they might want to look at a 737 freighter. But, that's really the key part of the decision process is how long do they continue to operate these older aircraft in a market where fuel prices are rising. It's a pretty straightforward mathematical equation in terms of the newer generation versus the old. Newer generation has a lower direct operating cost, the older one has a lower investment cost, and fuel is the key driver.

When you have negotiations with them, just looking at the parent company financials, looks like their logistics business is profitable but not hugely profitable. Is it possible that they could bring that on themselves, or do they outsource all of that?

Because they're not a U.S. citizen, they can't own or control a U.S.-certificated air carrier, so they have to sub-contract all that out.

So, if they wanted to replace your capacity, they would have to find some other U.S.-certificated airline to do that.

That's correct.

What is the number of 737 freighters that are out there?

I have no idea off the top of my head.

Is that an area of potential investment for you, given that it seems that their line-haul needs with you are smaller planes, narrow-body?

It is certainly is a potential. It's not an aircraft type that we operate today. If it was a pure dry-lease situation, we would be more apt to look at it than on an ACMI perspective. But again, a lot of it would be driven by the length of commitment they were willing to step up to. The current agreement with BAX was only a two year duration. We're not going to invest in a new aircraft type based on only a two-year commitment.

And then on the additional 767 that you're buying from Qantas, is that a June delivery date, so that CapEx will show up in the second quarter?

The purchase price will, for the pax asset, but the cargo conversion will be in early 2012. As we've said in the past, the cargo conversion on those planes, is kind of in the $13 million range. Depending upon the condition of the airplane, the acquisition price can be all over the board, depending on the condition of the engines, et cetera. But, into service, we've said the last 3 is roughly $28 million or less into service --when you're all in with the conversion added in.

So, you had given previous guidance, kind of $170 million to $200 million in total CapEx, but that was predicated on figuring out whether you had additional 757 combis for the military. Does this take it up, given that you weren't expecting to buy a 757?

No, we anticipated having to do with some acquisition of some feedstock in the number. And, course, the continued delays in the military coming out with any decision on the 757s. The longer they wait to make that decision, the less CapEx we have dedicated to that program in 2011.

In August, when the second quarter Q comes out, we'll probably update the guidance. But at this point in time, we're sticking with the $170 million to $200 million range.

And the CapEx that you had this quarter, how did it break down between equipment, heavy maintenance and other?

Here it is. $35 million for acquisition and modification of aircraft; $9.1 million on heavy maintenance, and $400,000 for equipment.

Ladies and gentlemen, that concludes today's Q&A session. I would now like to turn the call back over to Joe Hete for closing remarks.

Thanks, Medesta. I want to express my appreciation to all of our shareholders for continued support. I shared with those attending our annual meeting this morning that we have substantially expanded our investor outreach, including nine investor conferences we will attend this year. Between those events and other visits we will be making this year, I look forward to continuing to share with you our progress against our goals. Thank you, and have a quality day.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.