Air Transport Services Group Inc (ATSG) 2011 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth-quarter 2011 Air Transport Services Group earnings conference call. 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 Mr. Joe Hete, CEO and President of Air Transport Services Group.

Thank you, moderator. Good morning, and welcome to our fourth-quarter and year-end 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.

Yesterday afternoon we released our fourth-quarter and year-end results and filed our 10-K with the SEC. Both are on our website, atsginc.com.

Since we talked last November, ATSG has completed a very solid year, with record pretax earnings and EBITDA after adjusting for impairment and other financing-related charges. Our adjusted pretax earnings increased by $16 million, or 27%, to a record $75.8 million.

2011 revenues increased 9%, including increases for each of our two business segments and in each of our smaller businesses.

Our progress is continuing under the lease-based aircraft allocation strategy we adopted nearly two years ago.

We added 10 more converted freighters to our fleet in 2011, leasing four more to outside customers and deploying the rest in ACMI for CMI service via our airlines for new and existing customers. And more are on the way, with at least six more 767s and two 757 combis already in our 2012 deployment schedule.

You may have already noticed that we have tried to make our fleet size math a little easier for you to follow through a new table at the end of our earnings release. Similar to the aircraft tables in our 10-K, the new one shows our in-service fleet by aircraft type at the end of 2010, 2011, and provides our current outlook for what we expect deploy or retire by the end of 2012.

You should not regard those 2012 totals as fixed commitments, but rather as the starting point against which we will provide updates each quarter as the mix changes.

Please stay tuned. Our strategy is to grow, and we will be expanding our fleet in 2012. Quint is standing by to begin our report with the details of our fourth quarter and year. I will return after that with more operating and outlook comments.

Quint?

Thanks, Joe, and good morning, everybody.

As I always do, I need to start by advising everyone that during the course of the call, we will make projections or other forward-looking statements that involve risks and uncertainties. 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, factors, new information, or other changes.

These factors include, but are not limited to -

- changes in market demand for assets and services;

- timely completion of additional Boeing 767 and 757 aircraft modifications scheduled during 2012;

- our continuing ability to place completed aircraft into commercial service;

- the availability and cost to acquire used passenger aircraft for freighter conversion and redeploy or sell surplus aircraft;

- our operating airlines' ability to maintain on-time service and control costs; and

- our ability to restructure our airline operations impacted by Schenker's reduction of its air cargo operations in 2011.

There are also other factors contained from time to time in our filings with the SEC, including our 2011 Form 10-K and 10-Qs.

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

As Joe said, we achieved solid results in 2011, once again demonstrating the resiliency of our business model and the talents of our employees who put it into motion. The principal driver of our results is our ability to acquire, modify, deploy, and operate profitably our converted mid-size freighter aircraft, and we were very successful at that in 2011. You will see from the table that Joe mentioned that our in-service fleet at year-end 2011 included 46 Boeing 767 and 757 aircraft, including 41 we own and five we lease from others. That is nine more 767s and 10 more in total of those two aircraft types than we had at the end of 2010. Twenty-one of them were deployed at the end of 2011 under dry lease agreements with outside customers. Those increases in aircraft deployed in revenue generating service are our signature achievement of 2011, and the principal sources of the strong cash flow that our model generated last year and is likely to do again this year. And as just Joe said, stay tuned, more are on the way.

Turning to our financial results, let me start with our pretax earnings from continuing operations, which for the fourth quarter rose 17% to $23.3 million. Fourth-quarter net earnings from continuing operations were $13.5 million, or $0.21 per share, a 14% year-over-year increase.

Revenues for the quarter were $166.5 million versus $178.6 million in the prior-year period, which was a decrease of 7%. That revenue includes reimbursements of our fuel expense from Schenker. Those reimbursement payments dropped sharply during the fourth quarter last year, as our air operations for Schenker wound down. Excluding reimbursed fuel and related expenses, however, our consolidated revenue still increased by 5%. Revenues for the year rose 9% to $730.1 million, which included $160.7 million in reimbursements for fuel and related expenses.

Net earnings from continuing operations for the year were $23.9 million versus $39.9 million. Pretax earnings from continuing operations were $40.9 million, compared with pretax earnings of $63.3 million in 2010.

Lower pretax earnings in 2011 compared with 2010 were primarily the result of one-time items. Those included the $27.1 million in non-cash asset impairment charges we took in the third quarter and the non-cash write off of $2.9 million of unamortized debt issuance costs when we accepted terms for a new credit facility in the first quarter. We also recorded a net $4.9 million in unrealized losses on our interest rate swaps throughout the year. Adjusted pretax earnings, a non-GAAP measure, looks at our results minus the 2011 items I just mentioned. Adjusted pretax was a record $75.8 million for 2011, a 27% increase over the $59.8 million in 2010. That 2010 number excludes $3.5 million in earnings from severance and retention agreements in the first quarter of that year.

Adjusted EBITDA from continuing operations, which we continue to regard as the best measure of returns on assets we deploy, was $48.1 million for the fourth quarter, including an adjustment to remove $556,000 in gain in interest rate swaps. That is up 4% from the $46.4 million in the fourth quarter of 2010.

For the year, adjusted EBITDA from continuing operations including all of the one-time items mentioned before was $180.8 million, up 9% from $165.7 million in 2010. The EBITDA adjustments are the same items included in the pretax earnings adjustments.

Turning to our operating results, I'm pleased to tell you that our leasing business, Cargo Aircraft Management, earned $16.7 million pretax, up 26% from the fourth quarter last year. CAM's revenues in the fourth quarter were up 28% to $38.5 million.

CAM ended the year with 52 owned aircraft available for service, which was eight fewer than we had in service at the end of 2010. The change is a net of the eight 767 and 757 aircraft that CAM added in 2011, minus the eight DC-8s and eight 727s that were removed from service by the end of the year. Of CAM's 38 767s, 21 of them were under long-term dry leases with external customers with expiration dates between 2015 and 2018, and an average remaining lease term of approximately five years. In addition to the 767s that CAM owns, our airlines were flying five more we leased from others. Again, you will be better able to track these fleet mix changes over the course of the year in our 2012 projections table included with our earnings release. Joe will have more to say about what is in the pipeline in just a minute.

Turning to ACMI services, our revenues excluding fuel and other reimbursable expenses were $108.3 million for the quarter, down 1% from last year's fourth quarter. Pretax earnings for the fourth quarter were $1.8 million, compared to $6 million for the fourth quarter last year. The wind down of DB Schenker's North American operations reduced our ACMI results during the fourth quarter and into the first quarter as we continue to face significant transition costs, primarily the migration of senior flight crew members from our DC-8s and 727s to our other aircraft types.

Still, our continuing ACMI business was relatively strong overall during the fourth quarter, with benefits from the holiday season work we typically do for other carriers. Excluding revenues from Schenker for 2010 and 2011 fourth quarter ACMI revenues rose 14% from a year earlier to $96.5 million.

Fourth quarter block hours, excluding the Schenker business, increased 8%. The result in increase in our average revenue per block hour mainly reflects the addition of 767-300s to our ACMI fleet. As we said in our news release, the majority of those transitioning and related reorganization costs at ATI and CCIA will affect our 2012 results, along with an increase in pension expense related to ABX Air's frozen pension plans, that we advised you about on our third-quarter call, as well as some increases in engine maintenance costs later on. Joe will elaborate on our efforts to improve these businesses and on our outlook for 2012 in a minute.

Our revenues from other activities rose 15% to $28 million in the quarter. The increase in revenues reflects additional aircraft maintenance projects and additional sort center management work for the US Postal Service since April of 2011. Pretax profits from our other activities totaled $4.3 million in the fourth quarter, compared to $2.4 million a year earlier. Overall, our operations continued to generate strong cash flow in 2011, up 21% to $136.1 million. Part of that was due to a smaller cash pension contribution in 2011 versus 2010. But as I explained on our third-quarter call, both the declining discount rate applied to pension obligations and the lower than targeted asset investment returns were expected to negatively impact both our funding obligations and pension expenses for 2012. We now anticipate that pension expense will increase approximately $5.7 million on continuing operations in 2012, which will be spread ratably across our quarterly results during the year. An additional $1.3 million of increased annual pension expense is anticipated to impact our discontinued operations. We expect to make approximately $25 million in cash contributions to the pension plans in 2012.

Our interest expenses on outstanding debt decreased $4.5 million in 2011. That decline reflects the more attractive rates available to us under our new credit facility, lower market interest rates, and an increase in capitalized interest for aircraft undergoing freighter modification. You should expect to see that increase in 2012, consistent with our supplemental borrowing to buy and convert more aircraft, and in addition to the substantial operating cash we are using to fund those investments. Interest rates on the Company's variable unsubordinated debt decreased from an average of 2.9% in 2010 to 2.4% in 2011. A main contributor to our decreasing variable interest rate cost has been the improved pricing we have enjoyed under the terms of the credit facility we completed back in May of 2011.

Also favorably impacting pricing in the new facility is our continued low debt to EBITDA leverage ratio. During the year, $6.2 million were extinguished from the amortization of the remaining balance of the promissory note between ABX Air and DHL leaving a $20.2 million balance on December 31. As specified in 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. The Company's balance sheet remains very lightly levered at below 2 times adjusted EBITDA. This means that we have the needed liquidity and growth capacity to add to our aircraft fleet and achieve our desired return on investment capital targets.

In 2011, our capital expenditures almost doubled to $213.7 million from $110.7 million in 2010.

The primary driver for the increase was growth and preparation of our fleet for future business as we spent $184.3 million to acquire and modify additional aircraft. Most of the rest of our 2011 CapEx, or $21.9 million, went toward required heavy maintenance cost at our airlines that capitalize that spending. We are projecting 2012's capital expenditures to be in the range of $180 million to $200 million. Again, the overwhelming majority of that will be used to buy and convert Boeing 767-300s and 757-200s. Where we wind up in that range will depend on availability and price of feedstock aircraft; how quickly we can find and acquire suitable ones at prices that meet our criteria; and how quickly they move through the cargo modification process.

As we mentioned last November, the retirement of the vast majority of our legacy 727s and DC-8s will reduce our maintenance CapEx by approximately $15 million for 2012.

Our effective tax rate for continuing operations in the fourth quarter was 41.9%, compared to 40.6% in the fourth quarter of 2010. For the full year, the effective tax rate was 41.6%, which was affected by a $2.8 million non-deductible goodwill impairment charge. Excluding those charges, our 2011 effective tax rate was 39.2% versus 37% in 2010, which had been reduced by $400,000 for a deferred tax benefit. As of December 31, 2011, the Company had $97.9 million in operating-loss carry-forwards to offset future taxable income. We do not expect to pay federal taxes until 2014 or later.

Before I turn the call back to Joe, I want to echo Joe's confidence about our business and his prospects for the future. While we have trimmed our adjusted EBITDA guidance slightly for 2012, it's worth remembering that we still expect to acquire and deploy about the same number of aircraft this year as we did last year. That commitment to keep investing in our fleet for future growth, based on both the attractive economics and risk profile of converting and opportunistically operating medium-sized freighters, and our opportunities to place them with customers around the world, are strong evidence that we are in this business for the long run. And with that, I will turn the call back to Joe Hete for his operating review and more on our outlook.

Joe?

Thanks, Quint. As I mentioned at the outset, our results for 2011 were solid and we accomplished a great deal to strengthen us for the future. Ever since March 2010, when we restructured our business to emphasize dry-lease-based return rates as the foundation of our freighter aircraft business, the improvement in our cash generating power has been dramatic. Our ability to earn more consistent lease return on our aircraft, apart from any incremental returns from operating them, is a major driver of that improvement. We are convinced that we were on the right track and that our formula is likely to prove sustainable over the long term.

The wind-down of our direct relationship with Schenker's North American logistics network proceeded very much as we indicated it would last fall. As Schenker closed its Toledo hub and wound down its air operations, it outsourced its remaining air freight requirement to DHL. That meant that we continued to support Schenker's customers indirectly, to the extent their volume migrated into the DHL system. A few of our Schenker network aircraft began operating for DHL in January to expand DHL's network capacity to meet Schenker requirements. Those aircraft, plus a few others that remain available as backups or for ad-hoc service means that we will continue to keep a handful of our 727s and DC-8s in service well into 2012.

Compared with the many challenges we face from the huge DHL restructuring in 2008, our adjustment to the termination of Schenker Air Network was much smoother. While we have lost the services of many talented airline employees, we are gratified that so many of them worked very hard throughout the wind down period and met our commitments to both Schenker and DHL.

After Schenker, our ACMI business will be changing in several important respects, as in nearly all 767 and 757 operator, we can offer our aircraft with greater confidence in their performance, while reducing our projected maintenance costs. Our already good reputation for service quality will get even better.

In addition, the phase out of our 727s and DC-8s will lead to a proportionately larger reduction in our flight crews. 767s and 757s only require two person crews, compared with three for the 727s and DC-8s, so our operating efficiency will rise as well.

Some of that benefit will be coming a little later than expected. Our commitments to UPS through the holiday season delayed our ability to respond to the reductions in the Schenker network, which meant that we entered the first quarter with more crews than the seasonally soft first quarter requires.

Finally, this transaction has let us to take a closer look at how we structure and manage our airline operations. We are still studying our options, but so far, we have reduced the aggregate work forces in our two airlines that supported Schenker, ATI and CCIA, by about 30%.

They continue for now as separately certificated airlines, but will be sharing certain management and administrative resources. We will be looking for other ways to make ATI and CCIA even stronger this year as the year progresses. This restructuring and delay in redeploying two aircraft freed up from outsourced network cut backs means we will have a loss in our ATMI services segment for the first quarter, somewhat larger than we anticipated when we issued updated guidance last month.

As Quint mentioned, our CAM leasing segment keeps delivering outstanding cash flow and will do better in 2012 with even more 767s under lease, and a full year of returns from those we added last year. CAM will have at least six more 767s in service by the end of this year, including two we acquired last month. Today, CAM's 767 deployment outlook includes the one 767-200 we completed in the first quarter, two 767-300s each in the second and third quarters, and one 300 in the fourth. Our year-end 2012 aircraft table also shows us picking up another 767-300 in June on an operating lease to meet customer demand. We are hoping to buy even more 767s and 757s to keep our mod partners busy.

All of our 767 additions will be of the extended range 300 variety, as passenger airlines replace them with new 787s. Any 757 freighters we add would be in addition to the two 757 combis in mod now, targeted for second-half completion. The word we get from the Air Mobility Command continue to be positive for our 757 combis. Eventually, we expect 757 combis to replace our four DC-8 combis, but right now, our plans call for two of the DC-8 versions to remain in service into 2013.

On the new business front, I'm pleased to tell you that we will soon add to our operations in Asia, with one 767 to be deployed there for a significant customer, and the prospect of another later in the year. And we hope to deploy additional 767s to the Middle East. A final word on that arrangement is expected in the next few weeks.

In our meetings with investors early this year, we described our outlook for 2012 as one of continuing improvement with a weak first quarter and progressive improvement as our ACMI service changes are completes and aircraft deployments ramp up. Quint also mentioned the additional pension expense and engine maintenance cost we will be bear this year. Overall, we still expect a good year in 2012, with an increase in adjusted EBITDA compared with 2011.

Amid all those issues, I want to leave you with an indication of our sense of the tone of the market for our mid-sized aircraft, which remains more positive than the air freight market in general, based on what you might be reading and hearing elsewhere.

Our customers' willingness to make commitments is growing as the year progresses. 2012 may not be as bright as we had hoped six months ago, but is shaking up to be a good one, and my optimism about our ability to generate strong cash flow by applying our strategy effectively, remains intact. Thank you, and now, moderator, we are ready to handle some questions.

(Operator Instructions) The first question will come from the line of Jack Atkins of Stephens.

First off, I guess, to start off, if we could talk about how you expect 2012 to play out. Could you maybe provide a little bit of color for us on how you expect profitability to ramp throughout the year? I'm not asking you guys to give specific guidance by quarter, but I think it would be helpful for folks to understand, as you guys think about '12, how do you expect EBITDA to ramp towards your $190 million to $200 million goal?

Jack, I think if you look at the way we started off 2011 is probably a good benchmark. We had a low first quarter last year and then ramped up each successive quarter to finish up strong for the latter part of the year, and I think you will see a similar ramp-up this year. Although, obviously we are going to have to put up stronger numbers in the third and fourth quarters of 2012 than what we did in '11 in order to hit our target of $190 million to $200 million in EBITDA.

Okay. That's helpful. Then when I think about each plane that -- each new 767 that you are adding to your fleet, what's the incremental EBITDA on an annualized basis for each one of those planes that you are adding -- will add to your results?

Jack, I think if you think about the 767-200s which we now have deployed, but remember they went in service -- they weren't in service for a full year last year. A lot of those came online during the year. On an annualized basis, think of those as $3 million, and then depending upon what the pluses are, you can get some increase over that. A good rule of thumb is $3 million annualized for a 767-200.

The 300, you are looking at more like $4 million-plus on an annualized basis. And again, some of that depends upon whether we go with the straight dry-lease deployment or a dry-lease plus maintenance or a dry-lease plus the full CMI.

Okay. That's helpful, Quint. Thank you. And then when we think about that ramp throughout the year towards your guidance goal of $190 million to $200 million, when you think about where you are going to exit the year at, maybe this will help folks picture how the guidance -- how the year should ramp. Where do you think you are going to exit the year? What EBITDA run rate do you think you are going to exit 2012 in? I know it's early, but any color there will be helpful I think.

If you think about, I guess we spent some time talking about first quarter, being as that's the one that's clearest in focus since we are in March now. And we always benchmark versus the prior-year quarter. If you remember back first quarter of 2011, on an adjusted basis, let's talk a minute about our pre-tax earnings on an adjusted basis, as well as our adjusted EBITDA.

I think we had $37.8 million of adjusted EBITDA for the quarter in first quarter of '11. And the adjustment, I think we added back some bank fees that we had charged off. We think that in terms of our first quarter, we are probably looking at slightly below that, is currently where we are thinking. And as Joe mentioned, what that means is that you make that up.

We are going to grow, we believe, year-over-year. We are saying for the full year, a range of $190 million to $200 million. So, that implies you are going to see a stronger third and fourth quarter than we saw obviously in 2011. So if you think about the first quarter of 2011's pre-tax earnings that was $11.4 million. And we had a tax rate of about $37.5 million. So if you think about on an EPS basis, we were around $11 million at that time. And again, similar to EBITDA we current target for first quarter, for some of the reasons we pointed out would be a little weaker than that. And so that again implies that ramp.

In terms of exiting the year, again we have got the full-year impact of the 2011 aircraft. We have got the aircraft that we have talked about going on-line in 2012. I think as we exit the year, and just on an EBITDA basis, we will probably be somewhere $55 million to $60 million, in that range.

Okay. That's very helpful. Last question from me, and I will jump back in queue. Quint, could you maybe talk about the tax rate in the quarter and what drove that up versus where you have been tracking on adjusted basis all year? And then what tax rate should we expect for modeling purposes in 2012?

We had the -- third quarter we charged off $2.8 million of nondeductible goodwill, which drove the effective rate up. I would say when you model it, and I think in the remarks we had prepared, I think we said on an adjusted basis, we were around 39% for the year 2011. So we are probably in the 38.5% to 39% range for 2012.

(Operator Instructions) The next question comes from the line of Sterling Adlakha, Suntrust Robinson Humphrey.

Good morning, gentlemen. This is Sterling in for Alex. So with the aircraft count, I thought there were 16 aircraft originally under contract with BAX. But when I look at that table where you give the fleet profile, if I total the DC-8s and 727s, I see 24 in 2010, and that goes to 7 in 2012, so that's a reduction of 17. So, can you help me understand that?

We had other DC-8s out, Sterling, besides the ones that were tied into BAX. We had 4 aircraft in total that we were operating, using for military charters and ad-hoc work. The 16 still is a number that applied to the BAX piece. We reduced the total number that we have available for ad hoc work through 2012.

So how many aircraft were reduced for ad hoc work?

Basically through the course of the year last year, we reduced 1. We had 4, then we went to 3, and then we're going from 3 to 2 for 2012.

And that's work with military, correct?

Military and others.

Okay. So you're still reducing what? The original BAX order aircraft by 14, is that right?

There are 2 727s that are still operating that were part of the BAX network, although they are operating for DHL today. All of the DC-8s that were operating for BAX are out of service at this point.

Okay. And those 2 727s, those are expected to continue operating with DHL?

Right now all indications are, unless they decide they want to replace those with a 757, for example, to get a newer generation aircraft. Although as we sit here right now, we have nothing definitive along those lines, so we are anticipating the 2 72s running through the balance of the year.

Okay. Thanks, Joe. So the 2 72s that you added to DHL, that's a lot -- I won't say a lot, but that's less than what you had anticipated to bulk up the DHL contract with, after BAX closed down the US operation. Can you help us understand what happened there? Why didn't DHL either get the freight that they were expecting, or they didn't need the aircraft to outsource it to you guys.

Keep in mind nobody knew at the time that BAX closed down their network, how much of their business they would be able to retain when they combined efforts with DHL. As you recall, we went from 8 DC-8s and 8 727s down to 5 DC-8s and 3 727s at the time they closed down Toledo. Then the DC-8s were further reduced in the October time frame, and as things shook out, we added 1 additional 767-200 into the DHL network essentially it was called to replace 1 of those DC-8s in the November time frame. So realistically, we added 3 aircraft, or kept 3 aircraft going, although the 8s were replaced by the 767 and we kept the 2 727s.

Okay. Thank you for that clarification, Joe. I wanted to ask in the press release, you mentioned that CAM has no external leases expiring before 2015. Can you also talk about the ACMI contracts? What expires in the next year or two on that side of the business?

If you look at the CAM piece, we did have one lease that was to expire in June of this year, and the customer just renewed that this month. So it's going out for another three years from June of 2012. On the ACMI side, we don't usually get into expirations on those since most of the agreements, Sterling, tend to be in a year in duration, and they're constantly rolling over. So I would say that if you looked at where we are at today, probably half of the aircraft that we have on the ACMI side are going to come up for a renewal, so to speak, at some point in time during the year. That said, keep in mind that we have aircraft out there that have been on one-year agreements that have been going on for seven or eight years continuously. We don't tend to focus too much on how many are coming up just because they are constantly turning over.

That's very helpful. Thank you, Joe. I have one last one. The 767-300s that you are adding over the course of 2012, can you give us an idea of the pace of the adds quarter-by-quarter through the year? Is it back-end loaded? Is it relatively equal through the year?

There are two in the second quarter, two in the third quarter, and one in the fourth quarter, based on what we have that we own today. And that doesn't take into account any potential additional acquisitions we might do.

And the next question is a follow-up from Jack Atkins, Stephens.

Great, just a couple quick items here. First, could you maybe talk a little bit more about the availability of 767-300 feedstock? I got the sense from your press release that you would be willing to use your balance sheet to aggressively acquire feedstock if it became available. I was wondering if you could talk for a minute about what you are seeing out there as far as opportunities to acquire passenger aircraft within your hurdle rates.

I think right now, Jack, it is best to say the market hasn't loosened a bit in terms of available feedstock. The two that we closed on this year so far essentially were aircraft that we had started working on the latter part of last year. Right now, nothing is on the horizon that I can say would be something that we would have in our sights as being able to close on in the near term. There are still not much in the way of aircraft coming available with 787s coming into service. That said, we also are seeing some demand for 757s, and so we are assessing that market, as well as potential investment candidates.

Okay. That's helpful. And then maybe if you talk for a moment about the military charter business, and what's the outlook for that business in 2012 as you talk to your customer there, the US Military?

We don't do a lot other than the combi business. We do some ad hoc work here and there. I know both ABX and ATI will run routes down to Guantanamo Bay in Cuba, for example. That's a regularly scheduled route, and we do that quite a few times during the year. But when you look at the combi piece of business, as we advised last year in our last call, we've got the combi biz locked up through the end of June. And the first time it would open a door for somebody else to potentially bid on that would be for our third quarter, the military fourth quarter this year, the July to September time frame. And then the next bid going out would be for fiscal '13 and '14.

This is the first time the military will do more than a one-year deal, and we expect to be able to have ready for that bid period at least two 757 combis to present to the military as a new modern version of the legacy DC-8s out there. Right now, everything, like we said, everything we hear says that's going to come to pass. Obviously we still have to finish the modification and certification of our first aircraft. Right now that's anticipated to take place in the third quarter and the second aircraft would complete its modification right around the start of our fiscal fourth quarter, first fiscal quarter for the military.

Okay. That's helpful. And one last question, if I can jump back to the 767 feedstock issue for a moment. What leverage level would you feel comfortable going up to if you were able to find a decent number of planes available for purchase? If you could give us some color on how you would be willing to use your balance sheet if the opportunity came along?

Jack, in terms of -- first off where we sit now is, as we said, is slightly under two times EBITDA on an adjusted basis. We have, of course, this year we have added some debt. We ended up with about $347 million of debt at the end of the year approximately. The plan we have with the $180 million to $200 million of CapEx is going to result in us, again, adding some debt during 2012. I think it's going to put us between 2 and 2.25 in terms of our EBITDA leverage, just with the plan that is on the table. If we got more aggressive, as Joe said, we do feel comfortable levering more than that. Certainly 2.5 to 3 times is not an impossible leverage for us.

However, in terms of our borrowing capacity, we are likely to -- as you know, we have $175 million revolver. If we were to do that, in fact, even if we don't do that, we will probably go on ahead and expand the size of that revolver. We'll seek to expand our revolver using the accordion and adding another $50 million of head room on top of the $175 million. There are other financing sources that are available to us based on our balance sheet and our collateral, et cetera. We've got a lot of room to grow if the opportunities present themselves.

Jack, if you go back to when we did the CHI acquisition at the end of 2007, we levered up to about 3 times EBITDA at that point.

The next question will come from the line of Helane Becker, Dahlman Rose.

It's actually Conor in for Helene. I had a quick question. Cargo demand has weakened over the past several months. I'm curious on what your thoughts on lease rates are and rates are in general, seeing that you have 50% turnover in your ACMI stuff. Thanks.

I'm going to turn that over to Rich Corrado, our Chief Commercial Officer. Rich?

Air freight growth has been flat through the first quarter of the year over 2011. There was an uptick in growth in November and December, but it's remained flat. That has put a little pressure on freight rates. One of the things that had bolstered our pipeline has been the attractiveness of the replacement characteristics of the 767 aircraft.

If you look at our pipeline, our top three opportunities, in fact, are opportunities where the either a 767-300 or 767-200 are projected to replace older, aging aircraft. And I think it speaks well to the strength of the 767 asset in our overall strategy. Although demand is soft, our pipeline remains bolstered by the attractiveness of our assets.

Great, thanks. And just a quick follow. Have you guys thought of 2013 CapEx, and where you are thinking of growing and anything surrounding that? Some color would be great. Thanks.

The nice thing I guess is, Connor, that in terms of committed CapEx, based on the plan that we have and the aircraft that are in mod, while we were projecting that $180 million to $200 million for 2012, if you think about what's implied based on the assets we have to complete modification on for 2013, there is not a lot of committed CapEx. It would be under, probably under $100 million. Call it $90 million to $100 million. Now that said, all that means is, of course, that we will be looking to opportunistically grow.

And with the introduction of the 787 and the number of 767-300 out there in the world's fleets, we do expect that feedstock problem to lessen, and we will have opportunity to insert some additional growth aircraft into that 2013 capital plan.

The other thing we will be looking at in the latter part of 2012 into the 2013 time frame, depending upon how the bid process goes, we have 2 757 combis we will put in service this year. We actually operate 4 DC-8s today. If we are successful in retaining all of that business, we will look to have to increase that number of 757 combis as well, which would fall into the 2013 cap budget.

That concludes the question-and-answer portion. I would like to turn the call back to Mr. Joe Hete for closing remarks.

I want to thank all of our investors for their support in 2011, another good year for ATSG, and tell you that we are very committed to making 2012 even better as we expand our position as a leading, independent source of converted wide-body 767 freighters. We will be on the road meeting with many of you to talk about our unique dry leasing plus ACMI model, and why the future cash flow streams it can produce should have us at a better stock price multiple than we have today. If you live in a Super Tuesday primary state, don't forget to vote. Have a quality day.

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