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

Executives

Dan Loh – Director, IR

Bill Flynn – President and CEO

Jason Grant – SVP and CFO

Analysts

Bob Labick – CJS Securities

Alex Brand – Stephens

Helane Becker – Jesup & Lamont

David Campbell – Thompson, Davis, & Co.

Howard Rosencrans – Value Advisory

Chris Robertson – Cardinal Capital

Atlas Air Worldwide Holdings Inc. (AAWW) Q4 2008 Earnings Call Transcript February 24, 2009 11:00 AM ET

Operator

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Atlas Air Worldwide Holdings Incorporated 2008 results conference call. At this time all participants are in a listen-only mode. (Operator instructions) As a reminder, this conference is being recorded today Tuesday, February 24, 2009. At this time, I would now like to turn the conference over to our host, Mr. Dan Loh, who is the Director of Investor Relations. Sir, you may now begin the call.

Dan Loh

Thank you, operator, and good morning everyone. I am Dan Loh, Director of Investor Relations for Atlas Air Worldwide Holdings. Welcome to our 2008 results 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 Vice President 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 Information section of the website.

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

Bill Flynn

Thank you, Dan, and welcome everyone. We delivered strong earnings in the fourth quarter despite an unprecedented drop in global airfreight. We expect to report solid first-quarter earnings in a difficult market, and we are positioned to substantially improve earnings in 2009 compared with 2008.

2008 was a challenging year for global trade and airfreight. Record high fuel prices in the first of a year were accompanied by tight credit, and an ongoing global recession in the second half of the year. Instead of the usual fourth-quarter peak season, IATA reported year-over-year airfreight declines of 8% in October, 13% in November, and a staggering 22% in December.

These factors had a negative effect on our Scheduled Service and commercial charter segment during 2008. In addition, our military charter business experienced lower levels of demand over the course of the year. Even in this very difficult environment, excluding special one-time items, we earned about $30 million or $1.41 per diluted share in the fourth quarter with pre-tax earnings of about $49 million.

For the year, our adjusted net income about $33 million or $1.56 per share with pre-tax income of nearly $60 million. Our operating results for the fourth quarter and for the full year reflect the consistency, transparency, and solid performance provided by our long-term ACMI contractual flying.

They also provide the first proof of the significant transformation that Polar’s Block Space Agreement with DHL will have on Atlas Air Worldwide going forward. We ended 2008 with a solid financial platform and with high levels of liquidity. At year-end, we had approximately $411 million in cash on hand, which excludes about $52 million that belong to Polar upon its deconsolidation.

We expect to report solid earnings when we report our results for the first quarter of 2009. Historically, the first quarter marks the seasonal low point in global airfreight demand. This is even more true this year given the current economic environment. Our outlook for a strong first quarter is based on the consistent profitability in our core 747-400 ACMI business, including a significant improvement in earnings driven by the DHL BSA.

We expect the current global economic and business challenges to continue through 2009. Given the current conditions we would like to provide you with an operating framework for our business in 2009. The starting point is our position in the industry. We are the only outsourced operator of scale with the best in class 747-400 freighter.

The benchmark 747-400 freighter provides the lowest unit operating cost of any freighter in the market. We serve a high-quality customer base with staggered long-term contracts that mitigate our exposure to market risks. 20 of our 22 747-400 freighters are currently under ACMI contracts. Of the other two, once serves as a maintenance cover in ACMI, and serves in charter when not required in maintenance coverage. And the other, a converted freighter, is profitably deployed to provide air cargo service in South America.

On our last earnings call, we talked about the renewal scenario for 2009. At that time, we advised that we had entered into a letter of intent with a new customer for the two aircrafts being returned from DHL. Our customer has advised us that due to the current market conditions they will delay taking the aircraft until October 2009 at the earliest. In addition, the customer has opted to return one aircraft at the end of March under the existing terms and conditions of that contract.

The return of this asset only became definite in the last several weeks. And as previously reported we do have one further aircraft up for renewal in the second half of this year. Our exposure to ACMI placement risk in 2009 is limited to these four aircraft. With 16 of the 747-400 freighters under contract throughout 2009, the principal variable in our business outlook is our ability to place the aircraft either through a renewal or placement with a new customer.

We are continually marketing our aircraft. Should a gap develop between the end of one of our agreements and the start of another, we will temporarily deploy that 747-400 aircraft in the AMC and commercial charter market in the place of 747-200 capacity. What we will not do is place these aircrafts in a long-term ACMI contract (inaudible) prices at the bottom of the market.

In the scenario, where we redeploy 747-400 assets into AMC or commercial charter,

we estimate that our potential pre-tax earnings exposure in 2009 would be approximately $5 million to $7 million for each 747-400 aircraft that is reallocated.

We expect soft demand and the concerns about prospective fuel price levels to continue to driving ageing and inefficient capacity out of the market. This will offset the impact of reduction in overall airfreight demand.

Since the beginning of 2008, we have seen a 25% reduction in the number of 747-200 freighters serving the market. The 37 classic freighters that have left service, including the 10 that we removed from our fleet, reduced the global classic fleet to about 108 aircraft at year end.

We think we will see substantially more of this older capacity come out of the market in 2009 and beyond. On average, these aircrafts are about 30 years old, and have nearly reached the end of their useful economic lives. They will not return to service when the eventual recovery comes.

Other supply factors are acting to moderate the downturn in airfreight demand as well. We know that the production of the 747-400 freighter will seize in the second-quarter of 2009. We also know that 747-400 passenger to freighter conversion activity has diminished. And we know that manufacturer cost delays pushed out the introduction of next-generation aircraft.

With that, 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.

Jason Grant

Thanks Bill, and good morning everyone. As Bill noted, the actions we have taken to transform our business and to limit our commercial and operational risk have positioned us for solid first-quarter earnings and for substantial full-year earnings improvement in 2009 compared to 2008. Some of these actions also resulted in significant special items in our fourth quarter and full-year results.

First, is a previously disclosed deferred pre-tax gain of approximately $154 million related to DHL Express’ investment in Polar? At the time of the commencement of the full block space agreement on October 27, we made a determination to deconsolidate Polar from our financial statements. That determination is based on the application of FIN 46R, and on changes to the various agreements entered into following DHL's investment in Polar, as well as changes to Polar’s operation during the fourth quarter.

The deconsolidation is reflected in the reporting of financial and operational data for our ACMI and Scheduled Service segments in the fourth quarter and for the full year. As a result of the change, block hour volumes and associated block hour revenues generated by Polar aircraft after October 25 are included in ACMI operations rather than in the Scheduled Services segment.

On the go forward basis, our reportable business segments will include ACMI, AMC charter, commercial charter, and dry leasing. With all of our long-term lease contract business now included within ACMI, we have established a more transparent platform for modeling our business and earnings growth.

We also have reported a mostly non-cash pre-tax special charge of $91 million related to the resizing of our 747-200 freighter fleet, which partially offset the gain from DHL’s investment in Polar. In conjunction with this action, we also reported a maintenance charge of $8 million related to the overhaul of several engines pursuant to the early termination of a long-term maintenance services contract for 747-200 engines.

As far as the downsizing of our dash 200 fleet, we negotiated favorable early termination agreements with our lessors regarding leases on four 747-200 aircrafts, which are due to expire in 2009 and 2010. This will permit us to avoid costly maintenance expenditures with respect to these aircraft. It will also allow us to use the remaining 747-200 engines and related parts to support the seven aircraft still in our dash 200 operating fleet, and to reduce future maintenance expenditures.

As a result of these development, our fleet currently totals 29 aircraft comprised of 22 747-400, and seven 747-200. All of our 747-200s are now unencumbered and will be managed opportunistically.

Beyond the fleet, I would also like to draw your attention to our effective income tax rate for the quarter and for the year. We reported an effective income tax rate of approximately 40% for the quarter and approximately 44% for the full year. As was the case in the first three quarters of 2008, the tax rate for the fourth quarter and full-year deferred from the statutory rate. The difference is primarily cost by continued losses incurred by Polar Air Cargo worldwide, prior to the commencement of the block space agreement in October.

As has been the case through 2008, Polar did not record income tax benefits related to its losses because it had no prior period income to apply against these losses.

Looking ahead to 2009, we expect our book income tax rate to be in the 40% range. Turning to our balance sheet, we ended the year with cash, cash equivalents and short-term investments totaling $411 million compared with $477 million at year-end 2007.

Our cash total excludes approximately $52 million that belong to Polar upon its deconsolidation in October.

Turning to our debt and capital lease obligations, they total $672 million on December 31 with their face value totaling $740 million versus $469 million on December 31, 2007. At year-end, we had $68 million of unamortized debt discounts related to our fair market value adjustment. The increase in our debt during 2008 is the result of $217 million in outstanding borrowings under the $217 million PDP financing facility that we closed last February, and $100 million in five-year term loans that we completed in September, secured by the two 747-400 aircraft that we acquired earlier in the year.

Our capital expenditures totaled approximately $485 million in 2008. This amount included $257 million involving progress payment, related to our future 747-8 aircraft deliveries and $168 million related to the acquisition of our two additional 747-400 aircraft.

Capital expenditures for 2009 are expected to total approximately $90 million to $95 million. This amount includes approximately $48 million in Boeing progress payments on our dash 8F order, about $10 million of which is expected to be funded by drawings under our existing PDP facility.

As we look into 2009, we are well positioned from a cash flow and liquidity position. Following delay in their delivery schedule for the new 747-8 freighter has moved the expected delivery date of the first 12-8F into late 2010 at the earliest and is considerably reduced the amount of our expected pre-delivery deposit payments to Boeing in 2009.

We are currently in discussions with Boeing regarding a revised delivery schedule. We continue to look forward to the launch of the 747-8 freighter service, and we will benefit from the enhanced payload and improved fuel efficiency that these aircrafts will provide to our customers.

We will also benefit from their scarcity value and from our first to market position in their ACMI capability.

With that I like to turn it back to Bill.

Bill Flynn

Thank you, Jason. Even in these turbulent times, we see an exciting and dynamic future for Atlas Air Worldwide Holdings. We have de-risked our business, and our focus continues to be on long-term contracts that improve our revenue and earnings stream visibility.

Our strategy serves us well in a difficult market environment. We have manageable ACMI renewal risk in 2009. The full start-up of the BSA on October 27, removes the risk of our historically unprofitable Scheduled Service business, where high fuel prices and soft demand hurt our performance over the first 10 months of 2008.

Updating a comment we made on our last call, our 10-K will reflect the direct contribution loss in our Scheduled Service business of approximately $46 million for the year-to-date period up to October 27, 2008. The combination of the effective ACMI rate that we will learn in 2009 for flying six 747-400 aircraft in Express ACMI, and the elimination of the losses due to yield and fuel risk in the Scheduled Service business will generate substantial year-over-year earnings improvement.

With Polar’s transformation and the reported deconsolidation from Atlas Air Worldwide, we have a more transparent platform for earnings growth in 2009 and beyond. We continue to focus on cost and productivity, and we continue to execute on our initiatives that will drive future revenues and earnings.

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

Question-and-Answer Session

Operator

Certainly. (Operator instructions) And our first question comes from the line of Bob Labick with CJS Securities. Please go ahead at this time.

Bob Labick – CJS Securities

Good morning.

Jason Grant

Good morning, Bob.

Bill Flynn

Good morning, Bob.

Bob Labick – CJS Securities

First, you gave us a context to understand the impact, if you are unable to place the 400s as they come back to you, and I know you are actively seeking to place them. But previously you had guided to pre-tax income of $130 million in 2009. You only gave us a context as a delta. Is that 130 still the rate starting point for the Delta guidance that you just gave us.

Bill Flynn

Bob, that would be the right starting point.

Bob Labick – CJS Securities

Okay, great. That is very helpful. And then you discussed the LOI claims, could you talk about it may be just a little more. You discussed moving potentially from March to October, but if you found a home for those planes before October at the earliest. Can you place the planes then or they are up in the year, I guess, for six months no matter what. How is that arrangement working out right now?

Bill Flynn

So, as we talked about it in our lost earnings call, we entered into an LOI unit and customer for placement, and our expectation then was that the craft would essentially go right into service for that customer upon return. The customer has amended the LOI, and given the market conditions, has indicated to us that October 2009 at the earliest as I've said. If we had a firm placement for that aircraft – for those aircrafts, before that date, we would place the aircraft.

Bob Labick – CJS Securities

Okay, great. And could you discuss the various options, just proudly speaking not obviously customer specific, but you are looking at for the 400s as they come back, I mean are there dry lease options, are there other markets. What are the potential – you mentioned you don't want to go on to a 5 or 8-year ACMI contract at the bottom of the market, but what are the options you are looking at?

Bill Flynn

Well, as we said we are continually marketing our aircraft to customers, and we have a steady ongoing dialogue with a range of customers. We prefer an ACMI placement. We think particularly in this market would give us the best margins and the best returns and build a long-term relationship that we want to have. So, we are in dialogue with other customers. I think it is the first point to make. If – the other point we said in our script and in our release, we are not going to bottom price this aircraft. We don't need to bottom price the aircraft, because I would say, somewhat unlike a dry lessor, we have an alternative placement for the aircraft that will yield us attractive margins and returns in our AMC, if we don't find an attractive contract immediately in ACMI. And if there were a dry leasing opportunity that made sense and yielded the kind of returns that we estimate we could otherwise achieve, certainly we consider it. But those I think are the range of marketing options that we are working today Bob.

Bob Labick – CJS Securities

Okay great. I will ask one more and I will jump back in queue. And it relates to AMC, could you give us a sense of the military outlook, I just saw the other day, another 17,000 troops going to Afghanistan, but the ’09 overall outlook versus your previous expectations both on the demand for freighters and also on the supply, if you could talk a little bit about, you know, your competitors’ fleets, obviously there has been a reduction of the overall fleets. How has that impacted the supply for freighters and aircraft in AMC programs?

Bill Flynn

Okay, so a couple of points. We're experiencing right now in the first quarter a higher level of AMC demand than we had expected. Certainly some of that is driven by the deployment of troops to Afghanistan as well as another troop deployments in rotation in Iraq as well as just overall AMC flying to the other bases that are outside of (inaudible) in Germany and in the Pacific et cetera. So again, you know, we're just sitting here at the end of February, near the end of February and the market demand is a bit unclear, but there is the potential for higher levels of military flying, than we would have thought, you know, back in the fourth quarter. And that is really going to depend on the administration decisions and the DOD decisions going forward.

As far as the supply of aircraft in AMC, AMC is over subscribed, there is more aircraft committed to AMC than actually would fly. Each team and we are a member of the FedEx team is awarded a market share or an entitlement. The entitlement is based upon the overall aggregate aircraft that you commit as a percentage of the total aircraft committed. So we are flying at or above our entitlement levels. I would say there is enough aircraft to serve AMC demand. So, the retirements have not created any balance there. We're not going to carry more because people have retired more. If we carry more than we anticipated, it is largely because the demand is going to be greater than we anticipated.

Bob Labick – CJS Securities

Okay, great. Thank you very much. I will get back in queue.

Jason Grant

Thank you Bob.

Bill Flynn

Thanks Bob.

Operator

And our next question comes from the line of Alex Brand with Stephens. Please go ahead at this time.

Alex Brand – Stephens

Thanks, good morning guys.

Bill Flynn

Good morning, Alex.

Alex Brand – Stephens

I guess I want to start with clarification on a couple of things in the press release, the $5 million to $7 million estimate, if you don't place the four aircraft immediately, what is baked in that, is that the annual number per aircraft from whatever date you lost the contract, or you didn't get the contract renewed, but it also assumes the aircraft doing some amount of work and some other in one of the other segments.

Jason Grant

Yes, Alex, it is Jason. That is right. The number is not an annualized number; it is an annual ‘09 number. So, it is short of the average pre-tax annual ’09 delta related to the reallocation of the aircraft, and the factors that would drive that delta clearly the foregone contribution that we otherwise would have achieved in an ATM might placement, but some improvement for the reallocation of the aircraft into a military segment where the aircraft does achieve better operating economics than the 200 that have been displaced.

So the net effect to us would be further displacement of 200 capacity in 2009 as the 400s are reallocated, and hand there is obviously the loss of contribution drives, the negative effect here, but there is some improvement on fuel burnt on the aircraft for deploying it into military.

Alex Brand – Stephens

Okay, now I read the press release. It talks about there were 20 of the 22 of the 400s are in ACMI, but three of the 400s are in dry lease. So help me rectify those two.

Bill Flynn

Good. The three that are in dry lease are the three that we have leased to GSS, which is a UK airline. We own 49% of that. And then they take those three aircraft, which they have dry leased and then have an ACMI contract to fly for British Airways.

Alex Brand – Stephens

All right, so you just include those three in the 20.

Jason Grant

We do, and it is important Alex as a distinction that – they are shown on the face of the income statement as dry lease. It is dry lease income for the holding company, but we effectively are able to achieve (inaudible) lease economics on those aircraft –

Bill Flynn

Because of the nature of the service.

Jason Grant

Right.

Bill Flynn

Because of the nature of the ACMI service we provide BA.

Alex Brand – Stephens

Okay, and I am sorry, I keep doing this to you guys, but if I take the block hours reported for ACMI 20,139 and 18 average aircraft, that only gives me 371 hours a month.

Bill Flynn

Yes, and Alex the one thing I would caution you is, you need to adjust for the sub period in Q4.

Alex Brand – Stephens

Okay.

Bill Flynn

We did have 8 – we had the 8 aircraft operating for DHL through 26 October. Those hours you need to reclassify from Scheduled Services to ACMI, if you are looking for sort of a go forward run rate number.

Alex Brand – Stephens

Okay, fair enough.

Jason Grant

And Alex, the other point being that the GSS aircrafts are the aircraft that were referenced that are operated through the UK sub. Those hours are not reflected in the ACMI, so you want to kind of proxy those as well, if you are trying to get to the math, I think you are trying to get to.

Alex Brand – Stephens

Okay, and also you said $46 million loss through October for Polar, and forgive me, because I don't have it in front of me, what does that imply the loss was for the month of October?

Bill Flynn

Alex, I think it is important that that $46 million loss is not fully allocated. That is just contribution. And that would suggest on a contribution basis, which is effectively contribution after the cost of the airplane, October would have been effectively a loss, it would have been close to a breakeven outcome for the month, just over $40 million loss for the year compared to a $37 million contribution in ‘07.

Alex Brand – Stephens

Okay, and then just one more and I will turn it over. There is at least some hinting by Boeing that there might be uncertainty about the dash 8 production, is that something you guys have even thought about, and does it make that big of a difference. I mean, would you just probably shift your focus to the 777 or something.

Bill Flynn

Alex, this is Bill. My sense is that Boeing is committed to building the 747-8 platform. Certainly something could happen, but knowing what we know today, what we believe today, we believe they are committed to building up the platform.

Alex Brand – Stephens

Okay.

Bill Flynn

And we do think it will be a very good freighter, exceptional freighter when it comes into service.

Alex Brand – Stephens

Okay, fair enough. Thank you for your time guys.

Bill Flynn

Thanks, Alex.

Jason Grant

Thanks Alex.

Operator

And our next question comes from the line of Helane Becker with Jesup & Lamont. Please go ahead.

Helane Becker – Jesup & Lamont

Thank you very much, operator. Hi, gentlemen.

Jason Grant

Hi, Helane.

Helane Becker – Jesup & Lamont

Thank you for taking my question. I just have a point of clarification. Bill, I think you said that the pre-tax number that we start with this still $130 million for ’09, but what about the seven planes that were being eliminated from service this year, didn't they make any contribution or not?

Jason Grant

And Helane, it is Jason. I think as we discussed on the third quarter call and really the market, the market has changed much since – it has gotten worse from a demand standpoint, but we really didn't have a lot of contribution from a commercial sense tied to those aircraft, and that is really what made the decision compelling, and if you remember back in November, when we were discussing the third quarter, we were actually discussing variances to guidance related to a reduction in the charter demand. So I think we have probably factored a lot of that in and as Bill said there are a lot of factors going on right now for us right now, including potentially some opportunities on the military side from a demand standpoint. So on balance we think that the classic fleet is probably on balance, a trade op versus where we were in November and that the real focus for us in terms of the variables on performance going forward are related to the renewal of these 400s.

Helane Becker – Jesup & Lamont

Right got you, and then so as we should think about it. You renewed two already back in the fourth quarter that you talked about on the November call. So you still have two to renew or there were 6 to be renewed and you renewed two and there are four to go?

Bill Flynn

Let me take that. There were – we renewed two in the fourth quarter. Those two would have been up for renewal in 2010.

Helane Becker – Jesup & Lamont

Oh, I see.

Bill Flynn

I'm sorry, excuse me. I misspoke. You are ahead of myself. Those would have been up for renewal in 2009.

Helane Becker – Jesup & Lamont

Right. Those are two in the March.

Bill Flynn

No. One was earlier in the year and one was later in the year.

Helane Becker – Jesup & Lamont

Okay.

Bill Flynn

Now, that's two. Let's put those aside. We have four that we discussed today and we should focus on the four.

Helane Becker – Jesup & Lamont

Okay.

Bill Flynn

The first two of the four are the two, the DHL that is returning to us. Aircraft 7 and 8, we talked about that in some detail in the last call.

Helane Becker – Jesup & Lamont

Right.

Bill Flynn

And in the last call I advised that we had an LOI on those two aircrafts to go into service right upon renewal from a new customer. What I said today is that that new customers has advised us they want to delay taking those aircraft on until October at the earliest.

Helane Becker – Jesup & Lamont

Got you. Okay.

Bill Flynn

Because of the market conditions. So that aircraft one and two of the four that we are talking about now today. Aircraft 3 is an aircraft that is being returned to us from another customer.

Helane Becker – Jesup & Lamont

Right.

Bill Flynn

Under their contract. We only learned about that in December as a potential but it really only became a definite return in the last several weeks because we've been working with that customer modeling for that customer to find ways to keep it in service for them, they ultimately decided to return it.

Helane Becker – Jesup & Lamont

Got you, okay.

Bill Flynn

And then aircraft 4 is the one that we did talk about in the last call. That is one that is rolling off in the second half, and so those are the four aircrafts that we referenced in our earnings release, and that Jason and I talked about in today's call.

Helane Becker – Jesup & Lamont

Got you. Okay. Thank you so much for clarifying that. I really appreciate it. And then now as we go forward on and this is probably more a question for Jason. So much more of your business is in the ACMI area, so how will that change, it seems like crew travel expenses and maintenance related expenses on going forward?

Jason Grant

Well, Helane it's a good question. I think from a – it is effectively the same operation. So, you know what we've done is we have converted the operation of the Polar aircraft, which is 8 today; going to 6 on April 1 – into this what is an express schedule. And so, I think, the results already reflects the maintenance and crew travel related cost that you would expect to see. So I, you know, the real change is obviously fuel is eliminated as an expense item on the P&L, ground handling, landing, over fly parking, all of what we call the non-ACMI expenses are eliminated on the consolidation and then on the revenue side obviously we are reporting a net ACMI revenue as opposed to a growth schedule service revenue but otherwise the operating costs are very similar to they are today.

Helane Becker – Jesup & Lamont

Got you, okay. And then –

Bill Flynn

What we are seeing in the market Helane, obviously is reducing travel costs, reducing hotel cost and part of our focus on cost and productivity given the general softness in the market for those expenses. Our purchasing team is out negotiating aggressively to take advantage of the environment and drive that cost down, but that will be more as a result of the market, not necessarily as a mix of schedule on ACMI.

Helane Becker – Jesup & Lamont

Okay, all right. Thank you. And then my last question is related to that $52 million that is attached to Polar. Where does that show up, if at all on your balance sheet?

Bill Flynn

It won’t Helane, so going forward, the Polar, you know, debt cash otherwise in the balance sheet is deconsolidated and will not show up. So, what you see and what you will see when we file the K is the Atlas Air Inc. and holding cash is separate from the Polar Air Cargo worldwide cash.

Helane Becker – Jesup & Lamont

Okay, and that will be reported that way going forward.

Bill Flynn

It will be. So effective the fourth quarter of this year and going forward, we will show that deconsolidated presentation of Polar.

Helane Becker – Jesup & Lamont

Okay, that's fine. Thank you very much. I really appreciate your help.

Jason Grant

Thanks, Helane.

Bill Flynn

Thanks, Helane.

Operator

And our next question comes from the line of David Campbell with Thompson, Davis, & Co. Please go ahead.

David Campbell – Thompson, Davis, & Co.

Good morning, everybody.

Bill Flynn

Good morning, David.

David Campbell – Thompson, Davis, & Co.

I just wanted to clarify, the schedule service traffic and revenues that you reported for the fourth quarter. That will be basically zero from now on. That was just up until August, I mean October 26.

Bill Flynn

That's correct, David.

David Campbell – Thompson, Davis, & Co.

So that is the big change as far as 2009 is concerned, and the starting point you mentioned the estimate for $130 million in 2009. That is still effective potentially reduced by the $5 million to $7 million per aircraft for some time that you – for whatever time that you can’t release them. Is that the way to look at it?

Bill Flynn

Yes, David, I think the way that we've approached this is, rather than providing you all with the point estimate of where we think that outcome is. We have said, we have a starting point. We have a range of outcomes that encompass that starting point, and we wanted to give you the visibility of what we think the variables are that drive some risk to that, and it really is at this point, in our view, the primary driver is the 400. So, we have said we have got four aircrafts that are scheduled to come off lease to be renewed or replaced, and to the extent they are not placed, we have given you that $5 million to $7 million range as the impact.

David Campbell – Thompson, Davis, & Co.

Right. Okay, now in terms of the market, you know, as you mentioned we have had this unprecedented drop in air freight traffic since October through January, especially in the Asia-Pacific region. Given that unprecedented drop, which you know, far exceeds the drop in business activity generally. First of all, what do you attribute it to? I mean the world's economies aren’t down 25% to 30%, but air freight is, and secondly why wouldn't we get a substantial pick up in February and March given that drop.

Bill Flynn

David, I think there are a few factors there. There was a report that I guess was more than a month ago now that I read, but it was a JP Morgan report that looked at manufacturing output across a number of economies for the fourth quarter of 2008, and among those economies were the, you know, the usual US, Germany, Japan included South Korea, Taiwan, China and India. And in aggregate, the report suggested that manufacturing output was declining at an annual rate of about 20%. You know, that's not necessarily one for one with airfreight, but absolutely not inconsistent with what we seen in airfreight. And if you look at some of the other international freight participants like ocean freight, you will see very similar levels of decline in ocean freight, as we have experienced in airfreight. So, the economies of the world haven't stopped as you say, and the economies don't seem to be down that much and they are not, but products that move internationally are suffering from weaker demand overall. People are working off of inventories, with inventories they have, and we would agree at some point that either it needs to come back or at least the fall needs to bottom and begin to stabilize and, so if you look at where we are today as you get into easier comps, you know, in the second half of this year, we should start to see it bottoming or bottom. But we certainly haven't seen indicators of growth yet. There are some markets that are faring better than others particularly in and out of the Middle East, and from Asia and Europe. Not a large market but in aggregate the African trade lanes are growing, but there is still a lot of uncertainty and fundamentally what is going to drive airfreight is the pickup in demand of the products that are shipped there and that has not happened yet.

Jason Grant

And David, the point Bill made earlier on supply, I think it is important to remember and put in perspective that in 2008, you know, total supply grew by 1.5% in the market. We talked about the 200 that came out and you know, 25% of that market basically came out and supply came out of the market in 2008. When we look at 2009, we think it is a sort of a significant change from where we were in ‘08. We have limited new capacity coming in to the marketplace. A lot of the 747-200s that were being operated were being held for the fourth quarter of 2008 to see if we could justify their continued existence or not, and where we are now is a 108 aircraft that I think, you know, a large part of which are poised to leave the market. So, I think the benefit that we have in our space that may be some others don't have in transport is just the size of the potential capacity that could come out of the market this year, and really the limit on introduction of new capacity, because of the deferral and delay of some of the new program introductions on the freight side. So, when you look at demand, I think you have always look at it from our standpoint, supply at the same time, and that to us is a much better picture in ‘09 than it was in ‘08.

David Campbell – Thompson, Davis, & Co.

So you don't really need an increase in overall demand of any significance to have success in releasing your aircraft?

Bill Flynn

Well, I think – I don't think that is exactly what we said, I mean one of the things we did say in the call today, for example is that the two air craft that we have the LOI with this new customer have been postponed, but we do expect that LOI will place. And given the uncertainty that it is in the market these are the challenges that we are working through with our customers, potential customers for the aircraft. We need to sit with them, we need to model, we need to work with them on routes, in some cases even with current customers. We are identifying opportunities that they may not have seen for themselves to carry more freight, to get better utilization off of the assets. That's just part of what we do in our customer relationships, but you know, it's about sentiment, and part of our ability to place aircraft is going to be driven by ultimately the airline customer sentiment and customer experience. And it's for that point that we wanted to give you the visibility on these variables in, you know, in our call today and in our press release earlier this morning.

David Campbell – Thompson, Davis, & Co.

Thank you very much for helping.

Bill Flynn

Thanks, David.

David Campbell – Thompson, Davis, & Co.

With that visibility, I'll now let someone else ask questions, thank you.

Bill Flynn

Thank you.

Operator

And our next question comes from the line of Howard Rosencrans with Value Advisory. Please go-ahead.

Howard Rosencrans – Value Advisory

Hi, and thank you very much. Guys, I just want to understand regarding your concept of how we get to this 110 and in particular, the AMC business. What is the block hour rate and what do you perceive that the – because you had indicated, I believe, in the last call the number of hours was down though or that you were looking for, I think you went from 1400 to 1100, the number of hours that you're looking at and I think – I’d be curious to what sort of block hour rate you’re using and what sort of direct margin we can anticipate in that business.

Bill Flynn

Yes, Howard, I'm not certain of what the 110 is that you're referencing but I can speak to, you know the –

Howard Rosencrans – Value Advisory

The $110 million was the 100, was the $130 less about, I guess I'm sort of saying around $20 million from the 400 that sort of the removal of three planes and maybe a little more. That is where the 110 comes from.

Bill Flynn

Fair enough. If you're using an estimate of 110, I can certainly speak to and from an AMC standpoint, where we are on revenue rates and it is an important point because the real driver on the AMC side, is it is a cost plus contract and part of that cost is fuel, and you did see in the fourth quarter that we had an average rate on AMC charter of just over $26,000 an hour for revenue rate, and I think you know, our expectations that rate is diminished going forward simply because of the reduction in fuel prices. So, if you look at the fourth quarter of 2007, where we were just over $18,000 an hour. And you look at the relative fuel prices today, relative to where we are. I think that is probably a decent indication of where, you know, we are headed in terms of AMC rates into 2009, and I guess, I just want to stress the point that that fuel is effectively a pass through. So you want to think about a lower AMC rate for ‘09, but you also want to consider the fact that the fuel cost comes down commensurately.

Howard Rosencrans – Value Advisory

What sort of direct margin are you looking at in that business? Is that about 25% direct margin business?

Jason Grant

Yes, I think you know we've often discussed sort of 14% free cash contribution. I think if you look at the direct margins, you know they have been relatively stable. So, I think you can use in our ‘08 basis as you go forward and think about the contribution from AMC in ‘09. Again, with the careful point of adjusting for fuel.

Bill Flynn

And I think Howard, this is Bill Flynn, part of what we have been communicating today is, you know, it is not clear where AMC is going to end up. We are carrying higher than what we expected right now in the first quarter. A lot of that is driven by the deployments into Afghanistan as an earlier question specifically referring how the administration and DOD are going to deploy troops and then make decisions about what commercial capacity they need to contract is really unclear at this point, and so we need to watch that closely and serve it as it – as we move through the year.

Jason Grant

And Bill, I would add to Howard’s question. That direct contribution of 25% has been fairly stable for us. There are factors like the mix of the types of machines we operate and see if we can drive it, but as a proxy it is probably fair.

Howard Rosencrans – Value Advisory

Okay. And the commercial business you expect, it is reasonable to assume that that operates is in the ballpark of break even based on where you guys stand today.

Jason Grant

On commercial charter that is probably a reasonable assumption. It is not a lot of it. I mean there are two issues in commercial charter this year, and I think Helane was kind of focused on that. There is substantially less commercial charter in the market than there have been in prior years, and one of the drivers of commercial charter is regular scheduled service is full, and so one of the reasons people do go out for commercial charter is they just need the capacity because it is not currently available in scheduled operations that the various airlines offer, but that is not really the case right now, and so that was clearly one of the drivers of a very low commercial charter demand, which has put pressure on pricing which has put the direct contribution, you know, much more at break even as opposed to generating any kind of income.

Bill Flynn

Okay. And you just saw 100% clarity on the $5 million to $7 million, that is just the – that is the ‘09 impact so that’s really the – that is the impact for 9 months. Is $5 million to $7 million not the annualized impact of a 400 missing.

Jason Grant

That is the average impact for calendar ‘09, correct.

Howard Rosencrans – Value Advisory

Okay, so that would be just for 9 months.

Jason Grant

Yes.

Howard Rosencrans – Value Advisory

Okay, I'll get back in queue. Thank you guys very, very much. I appreciate the color.

Bill Flynn

Thanks, Howard.

Operator

And our next question comes from the line of Chris Robertson with Cardinal Capital. Please go ahead.

Chris Robertson – Cardinal Capital

I just wanted to clarify on the $49.3 million of adjusted pretax. When I look at the numbers, if I am assuming that you are adding back the $8.2 million for the early engine work, the $91 million of the charge, and the $153 million, $154 million on the Polar gain, which gets me to just under $60 million. With your prior pre-announcing guidance of $55 million to $60 million that sounded right to me but I just wanted to run those three different numbers by the – call it the guidance versus the $49.3 million in the press release.

Bill Flynn

Yes, Chris, you got that right. I mean, I think we were looking at we said 55 to 60 adjusted pretax that would for the full year, which would exclude all of the items that you referenced, and that is reconciled to the $59.7 million adjusted number that we reported for the full year.

Chris Robertson – Cardinal Capital

Okay.

Jason Grant

And 49 was Q4. We had about 10 million cumulative coming into the fourth quarter.

Chris Robertson – Cardinal Capital

Got it. The second question I just wanted to make absolute certainty on, is the – you have talked at length about the four jets and what is due when and where and the cost that would be associated with them. In any of you other contracts that you have out there, whether it be for 2009 or beyond, can you talk publicly about any of those contracts that might have clauses that allow for the early return of a jet such as you experienced with the one customer you referenced in December.

Bill Flynn

So, for 2009, the exposure we have in 2009 are the four aircrafts that we have talked about.

Chris Robertson – Cardinal Capital

Right.

Bill Flynn

So that is the exposure.

Chris Robertson – Cardinal Capital

And for 2010, can you give us a sense for that?

Bill Flynn

Well, Chris, I think the best way to probably frame it for you, is I think when we, you know, we have given indications in the past that you know the term of these contracts, and the average number of aircraft rolling off in a given year, and I think if you look at 2009, we think that is sort of the high range in any year, based on current portfolio where we would be exposed to renewal, including the effects of any termination options that exist. And these are the long-term contracts, you know, any termination options are typically associated, you know, the company with penalties are certainly within the context of a long-term contract.

Jason Grant

And I think the final point is, you will see in the K a table of our committed revenues going forward.

Chris Robertson – Cardinal Capital

And that would – the table will give us a sense as to some back of the envelope math that was like you, how many planes in any given year would be up for renewal, is that the way to think about that?

Bill Flynn

No, but Chris I think it just gives you a means to triangulate what you're trying to do, which is I understand, what is the minimum sort of non-cancelable revenue that I can presume in a given year.

Chris Robertson – Cardinal Capital

That's correct.

Bill Flynn

We do have disclosure in the K that gives you that number, and I think that in combination with the disclosure we have given around the contracts, you can fairly you know, I think accurately triangulate where I think the guarantees –

Jason Grant

It doesn't talk about placements or renewals, but it could help you in the consideration that you have here.

Chris Robertson – Cardinal Capital

Okay, and I certainly understand in a long-term sense how you could view that as being proprietary, but I certainly would feel in the current environment that we are in – that you can appreciate how that can be more important to investors.

Bill Flynn

No, we understand it is proprietary but it is also competitive.

Chris Robertson – Cardinal Capital

Of course.

Jason Grant

Yes, and so Chris, I think what we have achieved here is to give you visibility for ‘09 and certainly to give you with the K visibility into those comments going forward in a sense of what we think the maximum exposure is going forward.

Chris Robertson – Cardinal Capital

Thank you for your time.

Bill Flynn

Thank you.

Jason Grant

Thanks Chris.

Operator

(Operator instructions) And our next question is a follow-up question from Howard Rosencrans with Value Advisory. Please go-ahead.

Howard Rosencrans – Value Advisory

Yes. Hi guys, thanks. Is there any – just going back to the prior, the gentleman who just asked a question. I believe your answer to – was just about – in general, but to get the specificity, there is usually about two to three aircraft that come off in most years.

Bill Flynn

Yes, and just to repeat what I said Howard, I said that we have four aircrafts this year.

Howard Rosencrans – Value Advisory

But usually –

Bill Flynn

I think that is indicative of what we will consider a sort of a peak year for renewals going forward.

Howard Rosencrans – Value Advisory

And just so I understand the – and the contracts usually call for a minimum of – it’s a minimum of 400 hours on the ACMIs.

Bill Flynn

For the 747-400, yes. As we have talked about in our prior releases, you know, a minimum of 400 hours on average.

Howard Rosencrans – Value Advisory

Okay, so if it is – so, here would be the question. Are the – so that's what the guarantee is. That's what the take or pay guarantee is, but my question is you would be how often are the customers now paying but not taking. Is there any financial advantage to them paying instead of taking or conversely, any negative to you in one scenario or it doesn't matter to you, but how often are they not even – are they saying, listen, you know, we haven’t got any freight flowing, so we can’t – there is not reason for us to take.

Bill Flynn

Well, we've talked about this in other calls. So, there is a seasonality to freight, and so in the first quarter of the year it is typical for us to schedule maintenance.

Howard Rosencrans – Value Advisory

Right.

Bill Flynn

And we would do that, and our customers do that and their flexibility in their contract to fly a little bit less in the first quarter and fly more later in the year, but when you smooth it out over the whole year, you get back to the average.

Howard Rosencrans – Value Advisory

Okay, so the answer to the question, and I don’t want to put words in your mouth. So the answer is due to the seasonality factors, well, I guess my question relates then to the fourth quarter. When you saw this December month where you had 22% fall off, nothing in particular but there was a worldwide fall off of 22% in airfreight flows. Were you experiencing where the customers – and that's the seasonal peak time where you are experiencing where the customers were simply paying instead of taking.

Bill Flynn

What we said was customers were flying at minimums. And that is what we talked about at our last call and that we also said that through 2009, we expect that customers will be flying at the minimum and the other data point we had was that typically though, we have been experiencing over minimum flying and that had averaged somewhere around 7% or 8% over minimum. The other point we talk about is that minimums are very close to maximums. You know, at a 400 hour minimum there is – you can get up to 430 or so a month, maybe even 440 on a push, but there is not a big delta between minimums and what is effectively available from the aircraft. Is that helpful Howard?

Jason Grant

And Howard, I mean I think you have to understand it. I'm somewhat hitting this point, but Q1

Bill Flynn

Is always a low point.

Jason Grant

We are going to be below mids, and that is a historical fact. So, it is difficult for us to extrapolate I think, and you have to be careful extrapolating too much from you know, the performance on February 24th in terms of full-year numbers.

Howard Rosencrans – Value Advisory

Okay, but the fourth-quarter experience was people were actually flying the minimums.

Bill Flynn

Yes. Yes, and some flew a little bit above, but yes.

Howard Rosencrans – Value Advisory

Okay, and is there any – you just give us some quick color, if this is an easier to question to answer, otherwise we can just forget it. Is there a – you know, the customers are going to pay for it anywhere, is there a real variable quest to the customer to fly it instead of simply to pay for it, is it –

Bill Flynn

Yes, I mean the customer would incur fuel expense and other operating cost that we and ACMI don't – we carry so –

Howard Rosencrans – Value Advisory

Okay, so it is modest, so the bright light would be that yes, the customer was in this hard, hard, hard fourth-quarter environment. They still managed to be – I am not trying to spin this, I'm just saying that they were actually flying the minimums, still not just sending you a check.

Bill Flynn

So, in the fourth quarter we operated at minimums because I don't want to spin it and create any misperceptions. We were flying at minimums in the first quarter where we are now, we are paid at minimums. Some people are flying low minimums, below minimums. Some of that is because of their normal schedule maintenance or because it is just the schedule they would intend to operate anyway or could be because of the current market. So there are three variables there, and we are going to need to come out of the first quarter and see what demand looks like and how customers respond to that demand to have a better perspective. I think on the utilization question that you are asking.

Howard Rosencrans – Value Advisory

Okay, but here is what – the minimums in the fourth quarter were a result I guess of levels that were, I mean because earlier in the year there are taking less and then they're pushing out their minimum commitments to later in the year. So, despite the fact that they pushed out their minimum and admittedly there was more demand in the beginning of ‘08 there was later in the year, but despite the fact that they pushed out their minimums, they still managed to fly at their minimums in the fourth-quarter.

Bill Flynn

That is not exactly that linear, because some of the customers could have achieved and recovered any of those hours just even in the second quarter.

Howard Rosencrans – Value Advisory

Okay, all right.

Bill Flynn

It's kind of a customer by customer, and I'm not trying to not answer, but there is a lot of precision there that to give the complete answer, I think that you are asking, which we don't disclose on our customer.

Howard Rosencrans – Value Advisory

Very good, thank you for the color.

Bill Flynn

Thank you.

Jason Grant

Thanks, Howard.

Operator

And gentlemen, at this time, there are no further questions. Please continue with any closing comments you may have.

Bill Flynn

Thank you, operator. On behalf of Atlas Air Worldwide Holdings and our management team here today, we'd like to thank all of you for participating in our phone call. Thank you for your questions and the dialogue that we have had today, and thank you for your interest in our company.

Operator

Thank you. Ladies and gentlemen, this does conclude our conference call today. If you do wish to listen to a replay of today's call, you may so by dialing either 303-590-3000 or 1800-405-2236. You will need to enter the access code of 11126785. The conference will be available after 1 p.m. ET today. We thank you for your time. You may now disconnect your lines.

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. Q4 2008 Earnings Call Transcript
This Transcript
All Transcripts