Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Atlas Air Worldwide Holdings Inc. (NASDAQ:AAWW)

Q3 2008 Earnings Call

November 06, 2008; 11:00 am ET

Executive

Bill Bradley - Vice President and Treasurer

Bill Flynn - President and Chief Executive Officer

Jason Grant - Senior Vice President and Chief Financial Officer

Analysts

Bob Labick - CJS Securities

John Barnes - BB&T Capital Markets

Alex Brand - Stephens Inc

David Campbell - Thompson, Davis, & Co

Richard Robinson - Value Advisory

Operator

Welcome to the Atlas Air Worldwide Holdings Incorporated third quarter conference call. During today’s presentation all parties will be in a listen-only mode. (Operator Instructions) This conference is being recorded Thursday, November 6, 2008. I would now like to turn the conference over to Bill Bradley, Vice President and Treasurer; please go ahead sir.

Bill Bradley

Thank you and good morning everyone. I am Bill Bradley, Vice President and Treasurer of Atlas Air Worldwide Holdings and welcome to our third quarter 2008 earnings review conference call. Today’s call will be hosted by Bill Flynn, our President and Chief Executive Officer. Joining Bill is Jason Grant, our Senior VP and Chief Financial Officer.

I would also like to remind you that in discussing the company’s performance today, we have included some forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements relate to future events and expectations, and involve unknown risks and uncertainties. Our actual results or actions may differ materially from those projected in the forward-looking statements.

Please refer to the Safe Harbor language in our recent press releases, and to the Risk Factors set forth in our annual report on Form 10-K filed with the SEC on February 28, 2008 for a summary of specific Risk Factors that could cause results to differ materially from those expressed in our forward-looking statements.

In our discussion today, we also include some non-GAAP financial measures. You can find our presentation on the most directly comparable GAAP financial measures calculated in accordance with Generally Accepted Accounting Principals and our related reconciliation in our recent press releases, which are posted on our website at www.atlasair.com. You may access these releases by clicking on the link to Financial News in the Investor Relations section of the website.

At this point, I’d like to turn the call over to Bill Flynn.

Bill Flynn

Thank you, Bill, and welcome everyone. We remain focused on de-risking our business model, strengthening earnings and modernizing our fleet. The actions, we have taken to transform our business and strength our financial positions service us well in the challenging economic times. They are also the foundation for growing our business and earnings.

Results in the third quarter reflect a consistency, transparency and solid performance provided by our long term ACMI contractual flying. In the full start-up of the blocked-space agreement between Polar Air Cargo Worldwide and DHL on October 27, we move the risk of our historically unprofitable schedule service business were high fuel prices and soft demand hurt, by third quarter performance. Our 10-Q will reflect a direct contribution loss in our Scheduled Service business for the quarter of $14 million and a year-to-date loss of $43 million due to these factors.

The combination of the effected ACMI rate that we will earn in 2009 for flying six 747-400 aircraft for DHL, and the elimination of the losses due to yield and fuel risk in Schedule Service business, will generate a year-over-year earnings improvement in excess of $60 million.

This is an important perspective to gadget the transformation RBSA, with DHL will have on Atlas Air Worldwide going forward, and as a result we have established a more transparent platform for earnings growth in 2009 and beyond. The current global economic turmoil has had a negative impact on market conditions in both our Scheduled Service and Commercial Charter business segments in third quarter and going into fourth quarter.

As we have moved into the fourth quarter, we have experienced weak, peak season demand in our Scheduled Service and Commercial Charter segments. Our exposure to the Scheduled Service segment is largely eliminated after October, but our cancellations in the Commercial Charter segments which continue to face both historically high fuel costs and a weak demand environment and put pressure on the profitability of the older 747-200 aircraft that serve the segment. With peak season Charter market demand for our 747-200 capacity well below expected levels, we are actively reviewing our plans for our 200 fleet going forward. As we’ve done in the past, we will aggressively manage our classic capacity and related overhead relative to commercial demand.

As a result of this, and the impact of an unrealized loss on short-term investments we are revising our outlook for 2008. We now expect our pretax earnings in 2008 will be in a range of $55 to $60 million. This guidance of course excludes $153 pretax gain on the sale of 49% interest in Polar to DHL that we will book in the fourth quarter following the commencement of the full BSA on the October 27.

Looking forward to 2009, we expect that our pretax earning some operations will exceed $130 million. The outlook for 2009 is based on continued consistent profitability in our core ACMI business, which includes the significant earnings improvement as a result of the DHL, BSA. We are maintaining our 2009 outlook for reduced military charter demand, but have lowered our full year expectations for the Commercial Charter segment.

We expect historically high fuel prices and soft demand to continue to drive inefficient capacity out of the marketplace and improve our already strong market position. We believe our model for investing in leading edge and cost efficient freighter aircraft becomes even more compelling.

The benchmark 747-400 freighter provides the lowest unit operating cost of any freighter in the market, a position that is only strengthened by the current market environment. We are the only outsource scale provider for 747-400 freighters and demand for scarce aircraft has been strong. Yesterday, at a Cargo Conference been held in Malaysia, Emirates Airlines announced that it will renew the ACMI leases on two of our aircraft, which are up for renewal in 2009.

Recently, we entered into a Letter-of-Intend to place two of our existing 747-400 aircraft with a new customer in 2009. These aircraft are available for placement with this customer as a result of DHL’s decision to end its arrangement for these two supplemental aircraft at the end of March 2009.

Subsequent to the close of the third quarter DHL notified us, that it had elected to terminate the supplemental rent. Under the terms of our agreement DHL will pay us a fee for the selection. It is important to note that these two supplemental aircraft currently serving DHL are incremental to the core six 747-400 aircraft that are covered by a landmark, Blocked-Space agreement.

The full BSA network was successfully launched on October 27, reflecting comprehensive operational planning and execution. Subsequent to the close of the third quarter, we initiated a stock repurchase program. This action reflects our ongoing commitment to improving Atlas Air Worldwide Holdings investment value, while growing our business.

Since announcing the program on October 8, we have repurchased a total of 700,243 shares, were approximately $18.9 million or roughly $26.99 per share. This is probably a good point for Jason to take you through our financials. Following Jason, I will have some concluding remarks and we will go to your questions.

Jason Grant

Good morning everyone. As Bill noted, the actions we have taken to transform our business model to focus on long-term contractual flying, to reducing our exposure to fuel prices and to attack operating cost has positioned us well in this difficult economic environment.

Our superior asset base, our focus on long-term commitments with the world’s leading air freight operators and our ability to provide top quality service has positioned us to take advantage of opportunities to grow our business and earnings. We actively manage our fleet and take advantage of its scale and flexibility in providing innovative value creating solutions to our customer.

Bill has already noted the consistent performance provided by our 747-400 aircraft during the third quarter. These aircraft continue to lead the market in operating cost and fuel efficiency, and we continue to be the only outsource provider of scale in the asset.

On the Classic side of our fleet, fuel cost and weak demand environment have put pressure on the aircraft serving the charter side of our business. With the exception of four leased aircraft, our Classic fleet is unencumbered and we have continue to manage the size of this fleet relative to the commercial and military Charter demand the asset serve.

Consistent with our fleet plans, we remove two Classic aircraft from the fleet earlier this year and we retired an additional 747-200 at the end of August rather than invest in a high-level maintenance check on the aircraft. As a result of these developments, our fleet currently totaled 36 aircraft, compared to 22, 747-400s and 14, 747 Classics.

The Classic fleet remains an area of focus for us. We have limited financial leverage in the asset, but do have operational leverage. We are evaluating the potential for further reduction in the fleet to address the weak market conditions for the asset and will attack operating and overhead cost comments with any decision to remove additional capacity.

Beyond the fleet, I would also like to draw your attention to our effective income tax rate for the quarter. Our pretax income for the quarter totaled $10.1 million. Income tax expense totaled $4.9 million, resulting in an effective income tax rate of approximately 48% for the quarter.

As was the case in the first and second quarter, the tax rate for the third differed from the statutory rate primarily due to continue losses incurred by Polar Air Cargo Worldwide during the quarter for which no tax benefit was recorded. Polar did not recording income tax benefits related to its loss in the quarter, because it had no prior period income to apply against this loss and therefore may only offset these losses against future income.

This does not affect cash taxes and we expect this position to adjust itself in the fourth quarter, with the startup of the Polar DHL Blocked-Space Agreement. Excluding the tax impact on the gain, we will realize on the commencement of the Polar DHL, BSA we expect our full-year 2008 book income tax rate to be in the range 45% to 50%, with a fourth quarter book income tax rate of about 38%. Looking ahead to 2009, we expect our book income tax rate to be in the same 38% range.

Turning to our balance sheet, we ended the quarter with cash, cash equivalents and short-term investments totaling $427.5 million compared with $477 million at year-end 2007. Short-term investments represented $48.3 million of the totaled on September 30, compared with a zero total at year-end 2007. Our short-term investments at September 30th were primarily comprised of an investment in the Reserve Primary Fund, a money-market fund that has temporarily suspended redemptions and is in the process of being liquidated.

This past September the net asset value of the Primary Fund declined to less than $1 per share based on a portion of the funds holdings comprised of debt securities issued by Lehman Brothers Holdings, Inc. As a result, we recorded a $1.5 million estimated loss on this investment in other and non-operating expense during the third quarter. The SEC is supervising distributions from the fund and we expect to receive substantially all of our remaining balance in the fund as its assets mature or are sold.

Also on the cash front we expect to receive a payment of approximately $40.3 from DHL next week in connection with its $150 million investment in Polar Air Cargo Worldwide. This would be our final payment from DHL and it will include an the interest component of about $2.8 million. Turing to our debt and capital lease obligations, they totaled $635 million on September 30, with the face value totaling $705 million versus $469 million on December 31, 2007.

At quarter end, we had $70 million of unamortized debt discount related to our fair market value adjustments associated with fresh-start accounting. The increase in our debt since year-end is the result of $162 million in outstanding borrowings under the $270 million PDP financing facility that we closed in February and $100 million in five-year term loans that we completed in the third quarter secured by the two, 747-400 aircraft that we required earlier this year.

Our capital expenditures totaled approximately $372 million in the first nine months of 2008. This amounts included $168 million related to the acquisition of two additional 747-400 aircraft and $162 million in Boeing progress payments related to our future 747-8F aircraft deliveries.

For the balance of the year, we have approximately $84.5 million in Boeing progress payments due on all 12 firm aircraft, of which, $55 million will be satisfied by drawings under our existing PDP facility. As we look into 2009 we are well positioned from a liquidity position. Our schedule 2009, 747-8F data progress payments totaled approximately $186 million of which approximately $54 million is expected to be funded under our existing PDP facilities, for a net out of pocket for Atlas of approximately $132 million in 2009.

We are continuing our talks with potential lenders regarding PDP financing for aircraft 7312 of our dash 8F order and expect to make further progress on securing financing before these payments in the first quarter of 2009. Our discussions continue to reflect the positive views our lenders have regarding the quality of these assets, the quality of the customers that we serve, the quality of the services that we provide and the overall position of Atlas Air Worldwide.

Before I turn things back to Bill, I also want to remain to you about the segment presentation that you will see in our queue. We will report our segment results on a direct contribution basis, which we believe provides increased visibility into the performance of our business segments.

In particular, I want to highlight for you again the treatment of two 747-400 that provided flying for DHL’s expressed network services during the quarter. We consolidate the operations of Polar, which means that all revenue in operation statistics for the expressed network operations are presented in Scheduled Service.

However, for segment reporting purposes all revenue in cost related to ACMI services provided to Polar for expressed network operations have been reclassified to the ACMI segment for the purposes of calculating direct contribution. All non-ACMI cost and an equal amount of revenue remain in the Scheduled Service segment. As you will see in our queue, we provide a reconciliation of revenue between the segments reporting for ACMI in Scheduled Service and the face of the income statement.

With that, I would like to turn it back to Bill.

Bill Flynn

Thank you, Jason. We have de-risked our business and our focus is on long-term contracts that improve our revenue and earnings stream visibility. Our strategy serves us well in a difficult market environment. Along with the benefits, we have achieved from our continuous improvement efforts and the full start-up of expressed network ACMI service on October 27, we continue to execute on additional initiatives that will drive future revenues and earnings.

Most important of these is the launch of our 747-8 freighter service. We will benefit from the enhanced payload and improved fuel efficiency that these aircraft will provide to our customers, and we will benefit from the scarcity value and our first-to-market ACMI capability.

Even in these turbulent times, we see an exciting and dynamic future for Atlas Air Worldwide Holdings. There is strong demand for our 747-400 freighters especially given the increasing fuel and maintenance burden on older, wide-body freighters. Our ACMI performance for DHL Express has exceeded their expectations. Our business and financial fundamentals are solid, we are focused on execution and we are well positioned for business and earnings growth.

With that, I think it is a good time to take some questions. Operator, may we have the first question, please.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Bob Labick – CJS Securities.

Bob Labick - CJS Securities

Good morning. This is Bob Labick from CJS Securities. First question, I was hoping maybe could review some of the comments you made earlier on the renewal cycle particularly as it relates to Emirates and the new company signed up and then I’ll ask a follow-up on that?

Bill Flynn

We have a total of four aircrafts with Emirates, and two of those were scheduled for renewal in 2009, one in the first quarter of 2009 and one in the third quarter of 2009. We have been in a negotiations and discussions with Emirates and yesterday they announced at this major cargo conference that they we moving forward and they will renew these two aircrafts for a normal contract term, and continue to move forward in collaborating and grow the business with Emirates.

The other two aircraft, if you recall that at the end of March in 2009 we provided two aircraft under a shorter term ACMI agreement with DHL. These aircraft replace two aircrafts that they had been using supplementing there lift that they had with Northwest. They had the opportunity in the contract to return the aircraft and they have elected to do so, just given the overall softness in the market that they are experiencing.

This does not affect though the six aircraft that we have under the core DSA agreement that we’ve talked about on all of our calls. However, we’ve been in negotiations in the market with customers on a non-going basis and the aircraft that are coming back we have agreement to place these aircrafts with the new customer starting after the return of the aircraft.

Bob Labick - CJS Securities

Great and then just following up on that, is there any other called out clauses in either DHL or other contracts and then also are there other renewals coming up ‘09 and how do you feel about that process, right now?

Bill Flynn

Normally we don’t talk about renewals specifically. We’ve said that we had very few in 2009. We have now advised you that two are renewed. We have one more renewal in late 2009 to complete for the 2009 renewal cycle. Given the market environment, we thought it might be useful to provide that clarity.

On the DHL six aircraft and last year when we announced that 20 year agreement with DHL, we did in the 8-K disclose what the outs are in that long-term 20 year contract. So, DHL does have an out at the end of year five, 2013 for their convenience. However, if they elect to terminate the agreement in 2013, they will have to take the six aircraft with them, which are leased for the remaining term they had leased. So, well it’s certainly an outcome we don’t want to see.

If they did elect for this early determination they would have to take the aircraft for the remaining life of that lease and have then the commercial risk of placing that aircraft or otherwise putting that aircraft to use. In the balance of the contract, we certain have some contracts where customers can convert 400s to Dash 8 as the Dash 8 come into the marketplace.

Bob Labick - CJS Securities

Okay and then just on the general overall environment, could you discuss the contract the other contract of ACMIs flying levels as it relates to minimums, maximums and expectations embedded in the forward guidance. What have you been seeing from your customer’s trends of operation?

Bill Flynn

Well, a couple of things to comment there. Clearly the market is not performing to anyone’s expectations in terms of overall Air freight demand. We are in historically what has been the peak period and not only is there no peak, the market’s contracting. The IATA statistics show that in September the market contracted over 7% on a year-over-year basis and the expectations are that that kind of rate of contraction will continue for the fourth quarter. That, the large part of it is what now informs our deal in the charter market and it wasn’t that clearly even a month ago.

Year-to-date to 10/31/08 all of our customers are flying above their contracted minimums. However, in the $130 pretax earnings that we’ve guided here today we have made the assumption that all customers will fly at minimum. So, we’ve air cut our historical experience and put all contracts at minimum in the guidance number that we are provided today given the uncertainty of the market and demand.

Bob Labick - CJS Securities

And previously I believe your were looking for normalized flying patterns in your prior guidance is that right?

Bill Flynn

Yes. That’s correct and that historically has been North of 5%, in some cases North of 7% above minimums has been our historical experience in aggregate.

Bob Labick - CJS Securities

Great. Very helpful and then given this unprecedented times, just looking for your current thoughts and expectation on industry capacity particularly as it relates to the 200s and older aircraft. You said you were evaluating your uses; what are you seeing or hearing as it relates to the substantial fleet of 200s out there?

Bill Flynn

Well, capacity is certainly comedown and I think also the MD-11’s that are kind of active in the market. Freighter capacity is down. I look at a recent study by Seabury and in Seabury’s recent study, freighter capacity is down about overall, 80K capacity’s down about 2% since July of this year. That’s just kind of one data point.

Certainly fuel has come down and fuel was the huge initial drag on the 200s, but I think that record spike in fuel that we experienced this year catalyzed the retirement of these assets and so now, while fuel is down now we’re experiencing this contraction of over 7% on a year-over-year basis, most likely for a four or five month period that’s reduced some substantially yield pressure on the charter of flight and so it’s our expectations that the 200s will continue to reduced, as our MD-11s as well.

Operator

Your next question comes from John Barnes - BB&T Capital Markets.

John Barnes - BB&T Capital Markets

A couple of things; number one, the two aircrafts that you talked about taking back from DHL and you said you have an agreement in place with the new customer. Could you just give us an idea versus what kind a terms you have with DHL, in terms of link-to-term, kind of Block Hour arrangement that type of thing? Are we in the ballpark of what you were getting into DHL in the given market conditions; is it a little bit worse terms for you or what?

Bill Flynn

There actually better terms. Better terms in rate and better terms in length of contract and Jason was pointing out me, Block Hour guarantee.

John Barnes - BB&T Capital Markets

Okay, so better on everything.

Bill Flynn

Across the board.

John Barnes - BB&T Capital Markets

Don’t you wise your business was always that easy?

Jason Grant

Well I mean the reality John is had DHL had a stronger demand my view is they would have kept the aircrafts and we would have been sourcing aircraft for this customer.

John Barnes - BB&T Capital Markets

On the dry leasing side, you’re down to I guess roughly four aircrafts are something there. As you look at your ‘09 guidance what’s your expectation on the dry lease market and would be very interested into what are you building in to that ‘09 guidance from a charter standpoint as well. If your customers are flying at a minimum, do you anticipate that charter market kind a staying as weak as it is right now?

Jason Grant

Yes. So, there’s a couple of points that you raised there. So, in our current dry lease portfolio, we have three of the 7-400’s which are dry leased into GSS, the U.K. ALC where we have a minority shareholder position and the combination of the dry lease plus GSS is the ACMI relationship that we have with DA. Those renewed and those our performing well. We have one additional dry lease aircraft and that’s one of our older 747-200s. That’s what’s in the forecast or the guidance for 2008.

We have began building a management team to grow our dry leasing business in 2009. You might have seen a press release where we hired a fellow to begin to lead that effort. This guidance doesn’t have earnings above the four aircrafts we just described.

In 2009, we are going to be judicious about making acquisition in 2009 for the dry lease sector, simple because we think we’ve not seen really the bottom of the cycle for values on aircraft and we have some expense in 2009 for Ray and the small team that he’s putting together, but we don’t have earnings yet in the 2009 guidance just because we think there is more bottom to come on the aircraft value and the types of the aircrafts that we are looking for.

What does that mean about the commercial charter business; I mean that inside was taken to our lower guidance versus prior guidance for 2009. We think that based on the estimates and announcements that we read that the market will continue to contract through the first half of 2009, given everything to move all read about, about retail sales, about consumer electronics, about all of the products that typically go to charter market.

You charter aircraft because the products inherently perishable and you need to move it and there’s seasonality around to it like fresh cut flowers for example. We charter because there’s insufficient capacity and even with introduction in the numbers of aircraft and service, we don’t see reduced capacity or you chartered because there’s some interruption in your supply chain and you need to move it.

Our sense is that the commercial charter markets going to be weak throughout at least the first half of 2009 and we’re looking for gradual recovery in the second half of 2009 in the airfreight markets but we’re certainly with the week first half, we’re only looking at a couple of percentage points growth on a year-over-year basis; by-the-time we’ll roll up full year 2009.

John Barnes - BB&T Capital Markets

Okay, and two quick questions on the military business; first it looked like they were paying roughly 430 a gallon for aircraft fuel in the quarter; obviously fuel prices have come down. When the price falls over like it has, does that pose any kind of headwind for what you’re collecting in terms of fuel from the military. Does that make that contract now less profitable than it was or is there anything to be concerned about on the fuel cost and on the military side?

Bill Flynn

Well, the military certainly adjusts the fuel peg rate with fuel coming down, but that’s the attraction of the military contact because they certainly adjust it up when fuel goes up but the core earnings that we generate in AMC is not on a differential on the fuel, it’s just on the underlying rate and the military increase, the underlying base rate, to the carriers in this new 2009 fiscal year.

When you strip away fuel and fuel recovery and you look at the base rate, while we are looking at lower hours in 2009 which we talked about on prior calls and in our guidance there is a slight increase of about 8% on the underlying base rate and so we think that the 1,100 hours a month that foresee for 2009 is reasonable at this time and while there will be adjustments in fuel up or down depending and how the peg goes, it doesn’t deteriorate the attractive profitability of this line.

Jason Grant

Bill, I’d just say John; there is a margin component on top of fuel that we do achieve and for the component which I think is the component you’re referring to we’ve modeled 2009 assuming today’s fuel prices. So we’re not using the 430, we’re using the 235, just under $250 per gallon assumption for military fuel. So that margin component has been eliminated from or at least reduced from the numbers that we’ve given for ’09.

John Barnes - BB&T Capital Markets

Okay and then my last question on the military business was there was an announcement out this morning that I think they are drawing down forces, a little bit quicker in the year. I think that in January there’s going to be a reduction of 4000 people or so in a rack and that type of thing and I guess with the change in the administration you’d probably see some pull out. Have you changed your outlook on the military business more so now with maybe this quicker exits or is it kind of that’s what the prior guidance is already kind of based on?

Bill Flynn

Yes, I mean we weren’t predicting the election, but we certainly were predicting through draw downs and changes in just deployment of forces and so this quarterly we are just under a couple of hours under 1450 a month, which had been described as normalized for 2008 calendar. In 2009 the 1100 simply reflect that troops are going to come down. We anticipated some draw down after the election. There will be freight moving in both directions, both two theater and from theater, and it’s that view that’s in our numbers and so, we don’t at this point believe we need to adjust military further down based on that.

Operator

Your next question comes from Alex Brand – Stephens Inc.

Alex Brand - Stephens Inc

The guidance commentary has been a little disjointed here and I’m wondering if you’ll sort of pull this all together for us. So, we’ve got ACME at contract minimums; we’ve got military at 1,100 hours a month; we’ve got charter. I guess I’m confused on charters as to whether you said you’re assuming virtually no charter business next year or Bill did you say it would be up a couple of percent because it’ll get better in the back half. Just help me get all your -- where you’re guidance is and where you think there is still a little risk to your guidance and that will be very helpful?

Bill Flynn

So, the ACMI is at minimum and that’s got all of the aircraft deployed. The military is at the 1100 hours per month through the air and we just spent a little bit of time talking with John on haw the peg is changed, but we’ve taken the peg down. We are not saying no commercial charter business, we’re saying low commercial charter business at lower yields.

Alex Brand - Stephens Inc

Okay. So and then sort of the second of my question; as you look at it now and that it will appear as you even said, probably going to get worse. Is there anything where you feel like there’s probably some realistic risks still there or do you feel like now these are really conservative numbers and we feel like realistically we’ve baked in what we see right now?

Bill Flynn

I understand the frustration that exists around getting our arms around 2008, first starting with just we where fuel will end and where fuel surcharges did not recover and then just as we thought we had tipping point in fuel, we see this really precipitous drop in demand and the sense of the frustration that exists out there is what Jason and I and the management team have been working on to get grounded on 2009.

On the ACMI, because we’ve taken it to minimums and the visibility we have on the placement of the aircraft we think the ACMI is pretty solid. Should President Obama come in and just say I’m taking 50,000 troops out in a matter of 90 days, we’ve not factored that in, but we don’t think that’s practical in 2009.

Certainly by 2010 we could accelerated dry downs but the other messages you’re hearing from him and the military is we need to do something about Afghanistan, we’ve got troop deployments there, we’ve got troop deployments globally. So, our sense is that on the AMC the numbers are pretty good and supported a bit by the increase we got in the underlying base rate of about 8% over prior fiscal year.

I think we’ve been conservative on commercial charter of demand and our own planning has dialed it back substantially as a result. Perhaps not in consistent with some of the observation you’ve made, in your own analysis on commercial charter.

So, we got no up tick in the second half of commercial charter, we’ve got the very low level of commercial charter and reduced yields in commercial charter in 2009. So what’s out there Alex is some global recessionary impact greater than the kind of weakened demand that we see today. Substantially great what we see in retail and in some of the other segment that depend on charter throughout the year.

Alex Brand - Stephens Inc

That’s great color and I guess just sort of, I hear what you’re saying on the market because we can all see the market data and I’m just wondering was there are something in your business that changed from a month ago when you cut your guidance and didn’t cut ’09 that spooked you or is there something different now or are you just looking at the market data saying “No, we just don’t know were its going to be?

Bill Flynn

Yes, that’s a fair question. I think there’s a couple of points to make. So a month or little more than a month ago we were looking at market that’s a couple of percentage points decline in June and July, a week August.

I think the kind of the general thinking, not just with us, but the markets thinking was August was particularly soft in a large part because China had shutdown all the factories for the Olympics and that what we would see coming out the Olympic so some strength in September into October, because there was just pent up demand and pent up products that needed to be shipped and people wanted to kind of replenish the supply chain along with the seasonal peak effect and we had bookings.

We had fairly good book and a number of bookings at very attractive rates for customers in the commercial charter unit for flying; October, November and December into early December and what happen post guidance was that in fact that market did not materialize. The factories are not pumping out high rates of product in China.

Not only is there no peak, there is contraction and it’s that kind of change in the market that wasn’t visible a month ago or five weeks ago that has changed our outlook exclusively driven by the commercial charter and so I don’t know if it spooked us, it certainly a cause just to get even more granular not only on the short-term but on 2009 and to adjust expectations particular on that commercial charter on the market.

Jason Grant

Now I would like to just add to those points we are fortunate that this is a very manageable problem for us. We have had interests in the past where as the 200 have been not viable in the commercial sense, we’ve attacked that problem aggressively, both in terms of the fleet and in terms of the costs that support the fleet.

This isn’t a market that has a lot visibility and we’ve had some big customers cancel, charter programs that again the business generally and one of the challenges about business are relatively limited visibility into the demand and the whole market I think has being somewhat holding it’s breadth with the 747-200s knowing that they’ve been effectively pushed out of commercial use over the course of the summer with higher fuel prices and waiting to see how that capacity was then deployed in peak and understand what that meant for 2009.

I think what was clearly is that capacity is available in peak at rates that are unprecedented and world rate approaching variable costs and we’ve had that read now in peak we are managing it now and we’re going to attack this problem quickly and that view is built into 2009 assuming that there is some reduction in capacity and that the view the levels of charter we’re achieving today, we’re not expecting as much upside the ’09 going forward on that.

Alex Brand - Stephens Inc

Good color that’s very helpful and I just have to ask one more question. What’s thought process behind what should be and is potential a very accretive stock buy-back and then giving guidance that’s not based on EPS where you would be able to get the benefits of that accretion?

Jason Grant

Well and I think so Alex what we’ve done is we’ve certainly I guess given the pieces we said set it’s 138% tax rate and the share count is about $21 million shares now fully diluted reflecting the 700,000 shares we bought back. Our goal here was to give the element needed for that because I realize that you’re all making assumptions right now in tax rates for 2009. We’ve given a view that we think that numbers 38% for 2009 and a share count based on the activity that we’ve bought back in the market today.

Operator

Your next question comes from David Campbell – Thompson, Davis & Co.

David Campbell - Thompson, Davis & Co

I just wanted to ask about the decrease in fuel prices and how that’s changed the economics of the Boeing 272 fleet which you have said it’s not economic at the old fuel prices; what about the new fuel prices?

Jason Grant

Well, David I think there’s probably a couple of parts of answer to that question. At $140 a barrel, $100 a barrel, we thought even over $80 a barrel. The 200 is economic in terms of just covering variable cost, but fuels come down and we’re much lower than any of us would have thought we would have been at this point in time and so that fuel overhang isn’t what it was, although in the summer it catalyzed the retirement of these aircraft.

What’s happened in spite of very, very low, relatively lower fuel prices, although they’re still historically high, the demand is really falling off and so the aircrafts that are now somewhat relived to the overhang of fuel are competing for substantially less available market because the schedule service deployment that all the carriers have out in the market is more than adequate to meet demand and so that’s where you are not getting the charter market and were you do have a charter market were 200 conserve, there doing so at very, very low rates just to get the aircraft line.

So, the yield decline as a result to the market decline is kind of almost one for one substituted for burden not to higher fuel rates for placing on the 747-200 aircraft.

David Campbell - Thompson, Davis & Company

The way you talk, you’re going to have less of a fleet next year then you have now, because you’ll be selling or granting some of these 200’s?

Bill Flynn

So, that’s what we done over the past several years and this we have three aircraft less at year-end that we had last year, had this aircraft comp up for heavy maintenance checks and heavy maintenance investments we do retire them and part them out or otherwise harvest the value, and we’ll continued that process of managing this fleet as we go forward into 2009, particularly given all the comments and discussion we’ve had here on the call today about the market and the somewhat anemic demand that exists out there and will continue for some several months.

David Campbell - Thompson, Davis & Company

Do you have any heavy maintenance overall in ‘09 of the 200s?

Bill Flynn

David, I think the interesting point now is that, we always spoke previously and I think when we talk about the classic, where we said the D check, which is the significant sort of six to seven years maintenance items that runs $5 million to $6 million in total cost was really the driver of the decision to continue operating aircraft the aircraft or ground the aircraft.

I think what’s happen now is we are really getting to sort of C check, which is an event that occurs over 18 months and given the marginal economics of these aircrafts, your almost looking at that as a potential decision to continue with the aircraft or not, so half the fleet or two-thirds of the fleet in the given year are up for C checks. The threshold is really diminished in terms of the investment you are willing to make on these aircraft going forward.

Operator

(Operator Instructions) Our next question comes from Richard Robinson.

Richard Robinson - Value Advisory

Two questions here, I think our fire alarms going on off so I might have to pick up the answered on transcript, but I want to get an idea ACMI, whether we can expect to see any kind of rate increases, with Emirates or the new company that’s going to take DHL. I also wanted to get could on the utilization, obviously with having the same airplanes that you have this time last year and your utilizations is gone down 8% looking at block hours. Is it feasible that you guys my unload plans that kind push you through this and what’s going to happen with the dash 8’s [inaudible] continue the cities well block hours? Thanks.

Bill Flynn

Well there are several parts of the question, when we had answered that on the two aircraft that we are placing with a new customer those were at higher rates that what we had been enjoying. We don’t get into specific rates, but our rates do you have inflation causes and adjustments in then and even in the face of a difficult market we thing that rate picture on ACMI for the 400’s will look very good in 2009 given the scarcity value of the assets and the quality of the operating solution that we provide our customers.

As far as the going forward into 2009, what we said here several times on the call and as we have historically we will manage aggressively our 747-200 fleet and Jason was just pointing out about evaluating the fleet going forward even now on C check kind of intervals as appose to D check intervals.

We have a view that the market continuing to contact and we’ll be using the next several months to sharp in that view a make a decision about the fleet of 200s going forward in 2009.

As far as the dash 8 goes, the stair step function at the dash 8 provides an improvement in terms of unit cost per kilo to move a product from A to B, fuel efficiency, etc we believe position it and continue to position it as a superior aircraft in global wide-body inter continental airfreight and the 400 will still retain superior value even with the introductions of dash 8’s.

So, I think going forward there is accelerated retirement of older 747-200 and MD-11s; there is going to be continuous scarcity value for the 747 freighter to have been the numbers of 747 passenger to freighters aircraft conversion that were anticipated even just two years ago and as that aircraft continued to age, particularly remaining in service as a result of delays on that 380s and to some extent even delays on the 787; that aircraft age and become less suitable for PDF conversion and then with only 80 or so Dash 8’s currently on order in the freighter configuration we think that the underlying scarcity value, remain for these assets the 400 and the Dash 8’s and we feel very good about them.

Richard Robinson - Value Advisory

Are you still looking at those dash 8’s to be on time given Boeing’s recent strike?

Bill Flynn

While the strike will create some delay we have not yet had a formal update meeting from Boeing. We are still assessing what the strike means and we will have that meeting with them later this quarter.

Richard Robinson - Value Advisory

Okay, so we should have more color on that at the begin of next year.

Bill Flynn

We will have more color on deliveries next year.

Operator

(Operator Instructions) It appears to be no further questions at this time. Please continue with any closing remarks.

Bill Bradley

Okay, well thank you, operator and on behalf of all us here at Atlas Air Worldwide Holdings, we would like to thank you all for participating in today’s conference, for the discussion we had in the conference call today and for your interest in our company. Thank you.

Operator

Ladies and gentlemen, this concludes the Atlas Air Worldwide Holdings Incorporated third quarter conference call. Thank you for your participation. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Atlas Air Worldwide Holdings Inc. Q3 2008 Earnings Call Transcript
This Transcript
All Transcripts