Air Transport Services Group Inc (ATSG) 2012 Q4 法說會逐字稿

My name is Dawn, and I will be your operator for today's call, reviewing the fourth-quarter and 2012 results for Air Transport Services Group. At this time all, participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded. I will now turn the call over to President and Chief Executive Officer, Joe Hete. Mr. Hete, you may begin.

Thank you, moderator. Good morning, and welcome to our fourth-quarter 2012 conference call. I am Joe Hete, President and Chief Executive Officer of ATSG. 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.

Before we begin, I would also like to call attention to two new board members of our Board of Directors -- who are listening in today.

Rich Baudouin, an expert on aircraft leasing who co-founded Aviation Capital Group, joined the Board at year-end. He filled the seat left vacant by Jeff Dominick, who resigned due to his new role at BlackRock.

And just this month, we added retired Air Force General Art Lichte as our ninth director. General Lichte was Commander of the Air Mobility Command when he retired three years ago.

With their strong credentials, I expect both men to make substantial contributions to our growth and diversification in the years ahead.

We issued our fourth-quarter earnings release yesterday afternoon. You can find it on our website, ATSGInc.com. We will file our 10-K at the close of market next Monday, March 4th.

Our fourth-quarter adjusted EBITDA, what we believe is the best gauge of our performance, exceeded the guidance we provided last November when we were facing what I would describe as most unsettled market conditions in decades. The last few months have provided little evidence of improvement in the air cargo markets, but we now have a better picture of our own customers' plans and what they will expect from us over the course of 2013.

As you saw on the 2013 guidance we provided in our release, we expect to retain all or nearly all of our current book of business throughout the year. If we do that, coupled with the savings we expect from merging two of our airlines and reducing other costs, we will generate between $175 million and $180 million in adjusted EBITDA this year, with an improving trend after our typically slow first quarter.

We also set goals for additional aircraft deployments and margin improvement in other areas this year. If we achieve those goals, we will add another 8% to 10% EBITDA growth on top of our 2013 baseline forecast, but again with a second-half weighting.

Overall, we think 2013 will be a good year for us, certainly better than 2012. But it is important to draw a line between the improvements we expect just by keeping the business we have, and the much better results we could get from deploying all or nearly all of our aircraft. We intend to make that same distinction in the guidance updates we provide throughout the year.

Quint is ready now to review our 2012 performance in more detail, discuss our CapEx outlook, and point out some factors that you should take into account as you make your own 2013 forecast. I will return with some additional operating highlights after that, and then take your questions.

Quint?

Thanks, Joe, and good morning, everybody.

Let me begin by advising you that during the course of this 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 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 include, but are not limited to— - changes in the market demand for assets and services; - timely completion of additional Boeing 767 and 757 aircraft modifications and certification testing; - the timing associated with the deployment of aircraft among customers; - our operating airlines' ability to maintain on-time service and control costs; - and the completion later this quarter of the merger of two of our airline operations, which were impacted by DB Schenker's elimination of its US air cargo network in 2011.

There are also other factors contained from time to time in our filings with the SEC, including our 2012 Form 10-K, which we will file next Monday. We will also refer to non-GAAP financial measures from continuing operations, including Adjusted EBITDA, as well as Adjusted Pretax Earnings, which management believes are useful to investors in assessing ATSG's financial position and results. These non-GAAP measures are not meant to substitute for the GAAP financials. We advise you to refer to the reconciliation to GAAP measures, which was included in our fourth-quarter news release and can also be found on our website.

In general, our results for the fourth quarter of 2012 were consistent with our November guidance and good overall, given the challenging air cargo market.

The trend in our results in 2012 was a bit unusual. Revenues and earnings were relatively flat after the first quarter, as the gains we achieved from placing five more freighters into service last year were tempered by longer lead times to place returned freighters with new customers and to reduce airline cost that our former customer Schenker had supported.

Two of our airline companies, Air Transport International and Capital Cargo International, had managed the dedicated North American air network for Schenker until the end of 2011. In that year, the Schenker business accounted for 11% of our fourth-quarter revenues, and 26% of our full-year revenues, with a significant earnings contribution.

On a consolidated basis, revenues for the fourth quarter 2012 were $154.6 million, flat with third quarter's $153.8 million, while down from last year's $166.5 million. Net earnings from continuing operations for the fourth quarter were $12.2 million, below the $13.5 million we earned in the fourth quarter of 2011. Our earnings per share was $0.19 for the quarter, compared with $0.21 a year ago.

Our 2012 annual revenues decreased by $122.7 million, to $607.4 million from $730.1 million in 2011. Schenker contributed $187 million of our 2011 revenues, including reimbursables. Net income from continuing operations for 2012 however, was up 75% to $41.6 million or $0.65 per share from $23.9 million or $0.37 in 2011.

We had $34.9 million in pretax charges in 2011 that reduced our GAAP results significantly. That figure included $27.1 million in pretax charges related to impairments of Schenker-related aircraft asset values, goodwill, and customer intangibles. Once again, as you consider our GAAP earnings, you need to keep in mind that our tax net operating loss carryforward remains large enough that we do not expect to be a significant cash payer of federal income taxes until at least 2015.

Our Adjusted EBITDA, which also excludes the non-cash charges I just described and the continuing effect of unrealized derivative gains and losses, was $42.6 million in the fourth quarter. That was 6% better than our $40 million guidance, but down from $48.1 million in the fourth quarter of 2011. Like our GAAP results, Adjusted EBITDA was nearly flat, on a consecutive quarter basis, with the second and third quarters of 2012. For the year, Adjusted EBITDA totaled $163.2 million, down 10% from $180.8 million in 2011.

Looking at our segment results, our leasing business, CAM, had pretax earnings of $17.7 million for the fourth quarter, up 6% over fourth quarter 2011. Revenues increased 2% to $39.5 million. Again, our model calls for CAM to lease its aircraft wherever it can get the best return, externally to third parties or internally to our airline affiliates. Internal leases reflect fair market lease rates, which means that our airlines bear the same risk that an external customer would have holding a long-term leased-in asset.

At the end of 2012, CAM owned 48 aircraft that were available for service. Twenty of those CAM-owned aircraft were leased to external customers, and 28 were leased to our affiliate airlines. All six of CAM's DC-8 and 727 freighters it had at the start of the fourth quarter were retired at the end of the year. CAM placed one more aircraft in service during the fourth quarter. That was a 767-300 freighter that completed modification and was leased to an airline affiliate. CAM also purchased one aircraft in the quarter, which was the first of three 757 combis recently acquired from National Air Cargo. The last two were purchased in January. When they complete certification and other tests, ATI will lease all three of these 757 combis from CAM, plus the fourth it purchased and modified earlier. The 757 combi fleet is expected to replace our four DC-8 combis by mid-year. CAM also expects to complete modification of two more 767-300 freighters during 2013. A summary of our fleet changes and year-end 2013 fleet outlook can be found in our earnings release.

The loss of our business with Schenker was the biggest year-over-year factor in our ACMI Services segment results, just as it was for our consolidated results. The 2012 fourth-quarter pretax loss in ACMI Services was $3 million, versus a $1.8 million pretax profit in the fourth quarter 2011. Revenues for airline services were $103.6 million in the fourth quarter, that's down from $108.3 million in the fourth quarter of 2011, which included $11.9 million in revenues from Schenker. Airline services revenues excludes fuel and other reimbursed expenses.

Fourth-quarter results from our military combi operations were stable compared with a year ago and with the third quarter. Our new two-year award from the military for combi ops took effect on October 1, the beginning of the government's fiscal year. The unique nature of our combi service, which serves remote military installations with few alternate sources of supply, makes it unlikely to be affected by any federal budget sequester program. We do, however, expect to bear some unreimbursed flight retransitioning costs in the second quarter as we phase in our 757 combis.

Our fourth-quarter airline block hours were down 5%, but up 2% excluding Schenker. For the year, block hours were down about 13%, but increased 9% minus Schenker. Pretax earnings from all of our other business activities, which includes our maintenance MRO and postal operations, were $3 million, down $1.3 million from the fourth quarter a year ago. Revenues for our other businesses increased 9%, to $30.5 million, including inter-company revenue.

During the quarter, ATSG announced an agreement with the Clinton County Port Authority and the state of Ohio for the lease of a new 100,000 square-foot hangar that is being constructed at the Wellington Air Park. Airborne Maintenance & Engineering Services, or AMES, will lease the new hangar from the Port Authority, expanding its ability to provide maintenance, repair, and overhaul services to both ATSG and third-party aircraft, beginning in early 2014. We have included about $13 million of our capital budget for 2013 associated with the construction of the new hangar. That summarizes our operating results.

Our 2012 net cash flow provided by operating activities was $110.6 million, down $25.5 million from 2011, with reductions on the operating cash side stemming from reduced cash earnings and some final 2012 payments to vendors related to our Schenker business, and higher cash pension contributions. Capital expenditures for 2012 total $155.2 million, down $58 million from 2011. We expect capital expenditures for 2013 to finish well below that, at about $110 million. That 2013 CapEx estimate includes $95 million for acquiring, modifying, and maintaining aircraft, most of which has already been spent. Two of the three 757 combis we bought from National were purchased in January, and we are incurring mod costs for two 767-300s that IAI is finishing up for us by mid-year. We presently have no plans to acquire any additional aircraft in 2013 beyond the two 757 combis we purchased in January. That could change if we were to obtain a multi-year customer commitment for an aircraft we do not have available today.

As of December 31, we had drawn $143 million against our revolving credit facility to supplement our CapEx funding. In January, we drew an additional $60 million against the revolver for aircraft purchases and modifications. You may recall that the limit on the revolver was increased by $50 million to $225 million last July. That revolver capacity is adequate to complete our current commitments, and remains available for other opportunities. We would project the ability to de-lever our revolver during the last two quarters of 2013, as our CapEx spend dissipates.

Our financial position remains quite strong. Our debt-to-EBITDA ratio at the beginning of 2013 was 2.1, which qualifies us for continued low interest rates of 2.5% on our revolver during the first quarter. Before I hand the call back over to Joe, I want to reaffirm our confidence in the 2013 outlook he shared earlier. But I also want to highlight a few factors that you should keep in mind as you build your own models of our 2013 performance.

We expect our 2013 pension expense to be lower than in 2012, due primarily to the excellent return we realized last year on the pension trust assets. Cash contributions into the asset trust are projected to be similar to 2012's contribution of approximately $25 million. We also project higher interest expense in the first half of 2013, approximately $1 million more each quarter as compared to the fourth quarter of 2012. That is largely due to our increased borrowings in January. We look for ACMI Services results in the first quarter to improve from an $8.2 million pretax loss a year ago, but it is not likely to be profitable for the quarter, based on current business volume, along with severance and other expenses related to merger.

And finally, the combi fleet transition cost I mentioned earlier will be a combination of retraining and some overlapping staffing, as we moved to the 757s. We are anticipating about $1 million more in additional expense there, mainly in the second quarter. Naturally, there will be significant benefits from the airline merger, and Joe is standing by to talk about them as part of his operating review and outlook discussion. Joe?

Thanks, Quint. Even for us, the leader in the mid-size freighter space for ACMI and dry leasing, the air cargo market continues to be a challenge. But we are not just standing by until the market turns around. We are very focused on what we can control, which is to shrink excess overhead to the level we need today, and to strengthen our fleet by phasing out our legacy 727s and DC-8s, and bringing on more 767s and 757s. Both efforts represent the culmination of a five-year period of adjusting the size and scale of our business to the opportunities before us, and making sure we extract every last dollar of cash flow from the business and assets we retain.

The first piece, merging our ATI and CCIA airlines, will be completed by the end of this quarter. We have already begun to consolidate facilities and operations, and move some of our ATI personnel and functions to our Wilmington location. As of January 1, all of our 727 and DC-8 freighters have been retired, as they are no longer necessary to serve our current customers. We will be disposing of them as quickly as possible, either through airframe or engine sales, or scrapping. But the net benefit will be fairly small for aircraft of this vintage.

Today, all of our in-service freighters are converted 757s and 767s, and more than half of them have been rebuilt and upgraded through our modification partners within the last five years. The 767 and 757 both have lower fuel-burn rates and better reliability than the aircraft they replaced. That is vital when your ACMI customer is responsible for fuel costs, and when your customer agreements provide for incentives and penalties based in part on on-time performance.

While we are best known for our 767s, the 757 is also an important part of our fleet. The air cargo networks where mid-size freighters predominate are a mix of long- and short-haul routes, and volumes vary. Having both airframes available makes us more attractive as a source of hub-and-spoke airlift and regional networks that the global logistics providers are developing. We intend to stick with those two airframes for now, and reap the benefits of their common pilot-type ratings, parts and maintenance requirement similarities, and the flexibility for our customers to match aircraft capacities with their cargo requirements.

We began 2012 with an expanded role in DHL's network, as most of Schenker's North American volume shifted to DHL. That extension helped prolong the life of a few of our 727s, and increased DHL's appetite for our 767s and 757s. We added more of our aircraft to their network already this year. The DHL-dedicated portion of our fleet now numbers 30 of our 54 owned and leased aircraft. Of those 30, 13 are freighters that CAM leases to DHL under long-term dry releases, and 4 are DHL-owned freighters that we lease from them. This expansion of our business with DHL is simply a product of DHL's great success, operating as an international package-only carrier, letting FedEx and UPS battle it out in the domestic package market.

One of our continuing goals is to diversify our revenue sources, both by customer and economic region. Under Rich Corrado's direction, we had placed our own full-time representative in Asia, which raises our visibility, and alerts us to opportunities we might have missed otherwise. We are in regular contact with several potential customers in Asia, and exploring ways we can participate in the European market, now that TNT will remain an independent operator.

From an asset standpoint, we have never been better prepared to go after new opportunities abroad. The 44 freighters we own and have in service, plus the six 767s we have leased in, represent the world's largest and most modern mid-sized freighter fleet available on a dry- or wet-lease basis. The four 757 combis and two 767-300s still in mod will fill out a lineup that no other dry-lease or ACMI operator in the mid-size space can come close to matching.

As you know, we had an option to buy and modify more 757s for combi service ourselves, beyond the one we developed last year. But when the military chose to retain us for the current two-year combi award, the availability of National's three 757 combis simply provided a faster path to bring online a newer, more reliable airframe for military combi missions. That changeover is scheduled for completion around the middle of this year, subject to regulatory approvals. Tied to that transition are the crew retraining and transitioning costs that Quint referenced earlier. Our combis typically carry reserve flight crews, loadmasters, flight attendants, and maintenance techs, given that we fly to very remote locations. So switching aircraft models is a bit more complex in this instance than it is with our freighters.

On a similar note, we're waiting for final regulatory approval of the merger of ATI and CCIA. Over the past 12 months, we have been paving the way for this combination with a series of office consolidations and management changes to pare down the overhead that supported the Schenker network and a few other contracts. Those savings have already begun, even if they are not yet fully apparent in our wage and salary line. The slight fourth-quarter increase in that line year-over-year primarily represent salary adjustments earlier in 2012, and severance to employees who opted not to accept transfers to the new consolidated facilities. We continue to project annual synergy savings from the airline merger at approximately $5 million to $6 million, most of which will come from staff reductions. Nearly all of that savings should drop straight to our pretax earnings line, as we do not expect to lose any business from shifting CCIA flying, which is now mainly for DHL, over to ATI.

As mentioned at the outset, our 2013 guidance is in two parts, to give you a clear indication of our confidence about our continuing business, versus what we might be able to add as markets firm up. Even our baseline goal of $175 million to $180 million in EBITDA is a high-single-digits increase from 2012, which we would regard as good progress. But like last year, we project that the first quarter of this year will be seasonally weak from a new business standpoint, and still burdened by many of the same legacy airline costs that hurt us last year. On the other hand, if we were able to find new homes for the four 767 freighters that we have that are underutilized today, and for the two 767-300s coming out of mod, 2013 could be an exceptional year. Rich and his group, along with all of our operating unit teams, are working very hard to make that happen.

I am not going to forecast specific deployment dates for specific aircraft types, but I can tell you that we are still in discussion with the same customers that were interested in us last year. We are ready to help them put those plans into action.

With that, I will open the floor to your questions. Moderator, who has the first question?

(Operator Instructions)

Kevin Sterling, BB&T Capital Markets.

Thank you, good morning, Joe and Quint.

Good morning, Kevin.

Morning.

Congratulations on a nice quarter.

Thank you.

Quint, just a little housekeeping question here. How many ACMI block hours did you guys fly in the quarter? Do you have that number handy?

Yes, I do, Kevin. The quarter-block hours totaled about 20,654, is what I show.

Perfect.

And that compares to -- in the fourth quarter of 2011 -- 21,756 or so. So off about 5%, but, of course, a year ago we had some Schenker hours in there as well.

Yes. Okay. And if you back out the Schenker hours, I'd imagine your block hours are actually up. Is that right?

That is correct. The Schenker hours, I think last year were -- in the fourth quarter were about, a little over 1,500. So --

Okay. (Multiple speakers)

Kevin, Schenker started winding down in September of last year, in terms of the number of aircraft. So the fourth quarter was --Quint Turner: Was lower than the previous quarters. Lower than the previous three. Certainly. Yes.

Right, right. Okay. Thank you. Joe, you talked about savings from merging the two airlines. Can you put some -- could you put some numbers around that? Can you quantify that some more for us? Is that possible?

Yes. I think, Kevin, as I said in my remarks, if you look at where we were last year, for example, on a year-over-year basis, just looking at January. Our first quarter last year on the ACMI segment, as you recall, we had an $8.2 million loss, and most of that was due to the fact that we had to start shedding folks because of the loss of the Schenker business. If you look at it on a year-over-year basis, we probably cut out over $1 million a month, in terms of salaries and wages, for example, by starting to wind down the two airlines together. We still have -- which we will continue to pare out after we get the merger done, which we hopefully will have done next week or the week after, if everything goes according to schedule -- we will spend the rest of the year pulling out the balance. And that should probably be about $5 million to $6 million in additional synergy costs we can get.

Okay. Great. You guys had to have a regulatory approval process to finalize the merger, is that right?

Yes, we had to do -- we were doing proving runs, you have to do some proving runs to show that the CCIA folks understand the ATI procedures and everything else, and we have got most of those behind us at this point. So, still a little paperwork to do, and maybe one or two more proving runs, and then hopefully we will get the seal of approval.

Alright. Okay. Quint, how should we think about maintenance expense for 2013, as it relates to 2012?

Well, two paths on maintenance. One is, of course, capitalized maintenance, or maintenance CapEx. And we have kind of given guidance in the past on that. This year, we would anticipate something in along the lines of $20 million to $25 million. So, out of our total CapEx spend -- I think we referenced $110 million that we are expecting for 2013 -- you'd see about $20 million to $25 million related to Cap maintenance.

As far as the expense side, I would caution you there -- and we have kind of done that in the past -- is that, because we are also maintaining some aircraft for our lessee customers, the maintenance expense that you see in our P&L is somewhat offset in the revenue line, because -- for example, the aircraft that DHL leases from us, the 13 aircraft, as well as aircraft that some of our other dry-lease customers have, we do the maintenance on. So, you see expense going through, but we are also billing those customers, and our maintenance MRO derives a margin from that. So that is pretty -- it is tough, sometimes, to figure out what the net effect would be from our maintenance expense line.

I think everything else, Kevin, on an equal footing basis -- I think you will probably see the maintenance expenses for this current fleet pretty similar to what we experienced in 2012. Obviously, we don't have the more maintenance-intensive DC-8s and 727s in the fleet -- or won't, once we get rid of the last of the DC-8s with the combi. But I think if you look at 2012 as a proxy for maintenance expense, it would probably be pretty good --

Okay. No, that's great. Thank you. So Joe, if UPS wins some of the postal airlift that is up for renewal in September this year, could UPS, come knocking on your door for some capacity, given how tight they tend to run their network?

Yes. Certainly, from the standpoint of -- if you look at the UPS fleet, the backbone of their domestic fleet anyways, is a 757 and the 767, which, obviously, we are a great provider of a lift capacity for those two aircraft types. As I said in my remarks, we do have a couple of idle assets right now, so we would certainly -- if they didn't come knocking on our door, we'd probably go knocking on theirs.

Got you. Thank you. And last question here. With your reduction in CapEx, Joe, you guys are really becoming a free cash flow story. How would you prioritize uses of that cash?

Well, Kevin, this is Quint -- if you look at 2013, and we mentioned in the prepared remarks that we had some front-load CapEx early in the year, and we actually drew our line of credit in January by an additional $60 million. So I think we were something like -- we were pretty fully utilized, not totally, but were pretty fully utilized on that line of credit. We are a little over $200 million on the $225 million. So I think that the de-levering that we spoke of the remarks -- we will anticipate in the third and fourth quarter paying that line down. And I think that would be the priority, as we look at 2013.

Now as you look out, as you get into the fourth quarter and you look at 2014 -- as we have said in the past, we really don't have aircraft commitments other than our maintenance CapEx, which we pegged at kind of $20 million to $30 million. And so, as we have said previously, we will look at the best allocation of capital, based on what the market is doing, our opportunities with customers, and our growth plan, as we see that free-cash flow manifest itself, late this year and into next year.

Okay. Great. Gentlemen, thanks for your time this morning.

Yes. Thanks Kevin.

Thank you. Jack Atkins of Stephens.

Good morning, guys, thanks for taking my questions. I guess, to start off here -- Joe and Quint, when you think about the assets that you guys have that are underutilized -- you mentioned four currently and then two more that are coming out of mod in the first quarter. Do you see any additional aircraft in your current book of business? I know there had been some talk about maybe Rio pushing their aircraft back to you. Do you see any additional aircraft in your book of business that could come back in the first half of the year? And just sort of -- how should we think about the total number of assets that you might have to find a home for this year?

I think, Jack, if you focus on that four that are currently underutilized, and then the two additional coming online, I think that is a pretty good yardstick to use, looking at 2012. When you look at our base case, in terms of the $175 million to $180 million in EBITDA, it is predicated on, essentially, the aircraft that are deployed today continuing to be so through the balance of this year. We think what is out there today is pretty solid, in terms of the customer continuing to have a requirement for those aircraft.

Got you, got you. Okay. And then, just sort of stepping back and thinking about the market more generally -- I know, as you guys said, the second half of the year, and particularly the fourth quarter, was a very, very difficult market for you guys. And just trying to understand -- what you are hearing from your customers today about their needs for additional capacity. Do they seem more willing to take on additional capacity today than they were, call it three or four months ago?

I'm going to lateral that one over to Rich Corrado, Jack.

Sure.

I would say the market still remains cautious. We met with some of our larger customers just recently. They are surprised that volumes are holding up. That is a good sign. They are not as focused on being -- holding onto resources, et cetera. So they are still cautious, though. They are not in a growth mode. They are not taking risks, et cetera.

However, we do have a lot of opportunities that we developed through the back half of last year, that we are optimistic on. We have spent time looking at additional markets, where we can combine customers. Particularly in the integrators, they are forwarding in certain Asian markets. There is some opportunity to combine them, the integrator business with forwarders, and put up a lane that has got more reliability to it. So we have been doing a lot of discussions with customers and bringing them together. In the medium widebody segment, it is easier to build a lane, certainly, than it is in the large segment. And so taking advantage of those types of opportunities is starting to develop into some real meaningful discussions, going forward. We do have some specific opportunities that we invested a lot of time in, as has the customer, and we are optimistic, particularly in the Asian market, that towards the second part of the year, we have a good shot at putting some aircraft up there.

Okay. Great. Great. Then, a couple of housekeeping items, just to kind of round things out. When you think about the 757s versus the DC-8 combis -- the 757 combis versus the DCA-8 combis -- how should we think about the revenue per plane level there? And then also, [the percent of] your more expensive assets, the ownership costs are higher. Should we think an equal step-up in profitability on those assets, just given the need to keep your returns on capital similar?

Jack, the way the military prices that business -- essentially, the rate that we will receive for the 757 is the same as what we would have received for the DC-8. The trade-off here is -- in terms of where we manage to maintain our margins -- is in that we have a lower fuel cost associated with the 757. But, obviously, we have a higher asset cost than we did with the DC-8. So you are going to tradeoff basically depreciation for fuel, in terms of your expenses associated with providing that business. So, essentially, you would see no change in revenue, and little-to-no change in the margin.

Okay. Okay. That is helpful. And then, lastly, Quint, when we look at the depreciation and amortization line in 2013, how should we view that line trending in 2013 over 2012, just given the [puts] and takes with your fleet?

It is going to be -- clearly, it is going to be up, Jack, with the addition of the 757 combi, for example, and the 767s, the two 767s that we spoke of, that are to be added this year, as well as the full-year impact of what we added during the year in 2012. So, D&A was roughly the mid-80s -- 84 and change -- in 2012. I think you can assume somewhere around a $7 million -- call it a $7 million increase or so, year over year.

Okay.

If you think about those 300s, Jack, you're looking at an asset that is $28 million to $30 million over a 20-year life from a depreciation standpoint. And on the combis, we are going to have a shorter life, I think we are planning on using a 12-year life, and the asset is in the low $20-millions.

Okay. Okay. That's very helpful. Thanks so much for the time, guys.

Thank you.

Thank you.

(Operator Instructions)

Adam Ritzer, R. W. Pressprich.

Hey guys, thanks for taking my call.

Hey, Adam.

Right now, you have six planes, or you will have six planes to deploy, and you are thinking there is nothing else you have coming off lease the rest of this year. Is that what I'm hearing?

Yes, we think what we have got deployed today will remain deployed during the balance of the year, Adam.

Okay. And some of the other questions I had were answered already. One question I did have is -- I know right now there is no new purchases you have. I guess you did say that if you found a long-term multi-year lease, you might go ahead and buy something. Can you just reiterate my memory, that -- let's say you bought a plane for $5 million, spent $20 million modifying it, and you are in there for $25 million. What is your return on that? Is it a return on equity, returning on capital? Can you just refresh me, how you're thinking of that?

Sure. We target a 10% return on invested capital when we make those investments, Adam.

Okay. Now, is that a 10% EBIT return, or -- just, how do you look at that? Or is it EBITDA return?

No, it is an EBIT return.

An EBIT return. Okay. And -- got it. Are there, in terms of what is out there, I think in recent calls you said there is really not a lot of aircraft that are out there. Are you seeing other aircraft out there now, or is that secondary market pretty tight?

Well, obviously, with the grounding of the 787 fleet -- had a negative impact what on was still a tight market, surprisingly enough, in terms of fleet stock available for a 767-300, which is where we would make any additional investments -- or, possibly, a 757. 757 has been a tight market forever and a day -- so it hasn't gotten any better, is probably the easiest way to put it. And until such time that you see the 787 put back in the air, and Boeing starting to be able to make some deliveries -- they have quite a parking lot developing, I guess, out in the Pacific Northwest -- the 767, which is what the -78 replaces, is going to remain a tight market.

Got it. Okay. I don't know that is good or bad, but we can talk about that later. Pension expense -- how much was the cash expense in 2012, Quint?

The cash expense was right around $25 million in 2012, and in 2013, we are anticipating something very similar to that.

Right. Got it. Got it. Okay. That is all I had, thanks very much.

Okay.

Thank you.

(Operator Instructions)

Michael Chapman, Private Capital Management.

Great, thanks. Just a -- Quint, question on the pension costs. You said that pension costs would be down this year. Previous year, you had said they had gone up about $5 million with the re-measuring of the liabilities. How much are they coming down this year? (Multiple speakers)

As you know, the cash is, the cash that goes in is one thing, Michael, and the expense is another.

Yes.

The expense for these frozen plans, we are anticipating to be down $4 million to $5 million in this year's, as compared to 2012.

Okay.

And so, it is kind of snapping back to where it was. But on the cash side, we are continuing to -- as you have read, with the discount rates declining and so forth, you are continuing to see the liabilities remain pretty significant.

And then, just on that -- was there a change in the discount rate between 3Q and 4Q? Looks like your pension liabilities got down to $160 million, and then they jump back up to $185 million in the fourth quarter. Was that just a re-measuring of the interest rate?

You are exactly right. At each year-end, you are going to remeasure, based on where the rates are, the long rates that match up with those liabilities. And those declined. We have a couple of different plans, and the decline was a little different in each plan. But on the whole, it was -- call it 60-plus basis points, on average, that these rates decline, versus the end of 2011.

Okay. Then, just on the new hangar -- you called out $13 million in CapEx for this year. What will be the total cost on CapEx for the new hangars? So how much would you have in 2014?

I think we are looking at around --

It's about $15.7 million for total build. (Multiple speakers)

So the majority of it is going to be this year?

Yes. We expect to pretty much be open for business probably the latter part of the first quarter of 2014, depending upon weather.

Michael, one thing that I probably should have mentioned when -- a moment ago, we were talking about pension and the discount rates is, if you look at our -- if you look at where we stand with the plans frozen, of course the biggest thing that moves that liability is that discount rate, along with, of course, the asset earnings -- which have been, knock wood here, pretty good in the last couple years.

But if you believe the discount rate -- and I know we tend to say this each year -- but if you believe discount rates are more likely to go up in the future, as opposed to down, there is a pretty strong case I think you can make that we have suffered the pain in the last couple of years of seeing those rates decline. If those rates move up -- and they don't have to move up a great deal -- you will see a big decline in our liability. Now, you will see some offset to that in the value of the bond piece of the asset portfolio, but on the whole, potentially we could be a big beneficiary on the balance sheet of an upward movement in the interest rates.

Right. But you guys still expect to be funding that at roughly $20 million, $25 million in cash a year for the foreseeable future, until that pension -- that net pension liability gets down to a relatively small level, correct?

Yes. Assuming the rates stay where they are, I think that is a fair statement.

Okay. And then, just clarification on the CapEx by quarter this year. You guys said you drew down a line $60 million in January, so I am assuming that was for purchasing the new 757s and the mod of the 300s. Given that your full year is $110 million, it looks like first and second quarter are going to be the majority of it, and then you will drop just to maintenance CapEx levels in the third of fourth. Is that the way to think about it?

Yes, and we will have the hangar, which -- that construction ramps up as you get into the summer.

But you have the final mod payment on the last of the 767-300s in the -- call it June, July, timeframe. But if you look at where we are at today, we probably have spent almost 50% of the capital budget by the end of January.

Okay. Great. Thanks. That is all I had. I appreciate it.

Alright. Thank you, Mike.

Thank you.

(Operator Instructions)

At this time, I would like to turn the call back to Mr. Hete for closing remarks.

Thanks, Dawn. We split our 2013 outlook into two parts this time, to make sure you understand our confidence and our ability to grow our cash flow in the book of business we have today, while sharing our cautious optimism about growing even faster through new business we are working hard to acquire. We are also eager to leverage the merger of two of our airlines in the more modern we have to offer, and begin capturing efficiency benefits from both. We expect final merger approval soon, and we will move immediately to complete the final steps to integrate those operations. The fact that we expect EBITDA gains, even in tough markets, points to the resilience of our business model and our effectiveness in executing it. That is what we will do throughout 2013, and we appreciate your support as our efforts yield results. Thanks and have a quality day.

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.