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Executives

Edward J. McGarvey – Vice President and Treasurer

William J. Flynn – President and Chief Executive Officer

Jason Grant – Senior Vice President and Chief Financial Officer

Analysts

Bob Labick

Alex Brand

Helane Becker

David Campbell

Jeff Hoffman

[Steve O’Hara]

Edward Wolfe

Chris Robertson

Atlas Air Worldwide Holdings Inc. (AAWW) Q3 2009 Earnings Call October 26, 2009 10:00 AM ET

Operator

Ladies and gentlemen, welcome to the Atlas Air Worldwide Holdings third quarter 2009 results on the 26th of October, 2009. (Operator Instructions)

I will now hand the conference over to Atlas Air. Please go ahead.

Edward J. McGarvey

Thank you and good morning everyone. I’m Ed McGarvey, Vice President and Treasurer of Atlas Air Worldwide Holdings. Welcome to our third quarter 2009 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.

We would 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 26, 2009, as amended or updated by subsequent reports filed with the SEC, 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 principles and our related reconciliation in our recent press releases which are posted on our website, www.atlasair.com. You may access these releases by clicking on the link to Financial News in the Information section of the website.

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

William J. Flynn

Thank you Ed and welcome everyone. We’re very pleased to have you with us this morning.

Our third quarter earnings represent a sharp improvement over our results for the third quarter of 2008. Like our previous quarterly results this year, our third quarter earnings reflect our successful efforts throughout 2008 and 2009 to transform our business, our operating cost base and our fleet. Jason and I are very pleased to discuss our latest results with you today and we’re glad to share our outlook for the fourth quarter and for 2010 with you.

Before we do however, I want to note that our second announcement this morning about our planned public equity offering. Due to restrictions under the Securities law, we will not be discussing our equity offering on this call, nor will we will be able to take questions on that topic during the question-and-answer session. We appreciate your interest in Atlas very much, and we appreciate your understanding about the restrictions that we face in this regard.

Our third quarter results, as well as our outlook for the fourth quarter and for 2010, reflect the strategic and operating actions that we have taken to transform our business and to reduce our commercial and operating risks.

In that light, we are pleased to advise you that we have an agreement to renew the contract on the ACMI aircraft that was up for renewal in the second half of 2009 and that we have entered into a long term contract with a new customer, SonAir, to provide premium passenger service on an outsourced CMI basis. It is important to note that this new service, which is expected to begin in the first half of 2010, is consistent with the outsourcing business model under which we typically operate. The key difference is the A in our usual ACMI arrangement. Under this exciting expansion of our core outsourcing business, the customer owns the A or the aircraft. Still we eliminate the risk and associated cost of asset ownership and any strain on our balance sheet leverage. All that we are providing, based on the quality and reliability of our services and operational excellence in flying the 747 freighter, is the C, the M and the I or crew, maintenance and insurance.

Turning back to the third quarter, our current performance is being driven by the transformation of our former scheduled service business to Express Network ACMI Service, productivity gains and cost savings achieved through our continuous improvement initiatives, and our ongoing proactive efforts to upgrade the efficiency and average age of our fleet. Our results and our outlook also reflect tangible signs of the positive improvements in the market. We are encouraged by a further improvement in our ACMI customer’s utilization rates. During the third quarter our ACMI customers flew at 97% of their minimum block hour levels, up from about 80% in the first quarter and about 90% in the second quarter.

We are also encouraged by a strengthening in charter yields, which has continued into the fourth quarter. In addition we are encouraged by trends in the global air freight market. Monthly international air freight traffic volumes through August are down on a year-over-year basis, but they have been trending up on a sequential basis since early in the second quarter. We also continue to see retirements of aging and inefficient capacity from the market which is helping to improve the balance between traffic and capacity, particularly in the Asia central markets where our customers focus.

We expect that substantially more of the remaining 78 classic freighters in service in mid-October will come out of the market in 2009 and beyond. We believe that most of these aircraft, once removed from the market, will not return to service when the eventual recovery becomes because of their age, maintenance and other operating costs and relative inefficiency.

In a recovery scenario, any improvement in demand could have an early and meaningful impact on the utilization of our aircraft and on our bottom line. I will talk more about our framework for our fourth quarter 2009 and 2010’s earnings later in the call. First I would like Jason to provide you with some additional perspective about the improvement in our third quarter results and financials. Jason?

Jason Grant

Thanks Bill and good morning everyone. As Bill noted, the significant increase in our third quarter earnings reflect the strategic actions that we have taken to strengthen and transform our business.

Our third quarter net income totaled $14.7 million or $0.70 per share. In conjunction with the deconsolidation of Fuller Air Cargo Worldwide from Atlas Air Worldwide Holdings in October of 2008, total operating revenues in the quarter decreased to about $245 million. Our latest results compare with net income of $5.2 million or $0.24 per share for the third quarter of 2008.

We achieved a strong year-over-year increase in our earnings despite challenging though improving business environment with international air freight volumes down 16% since the end of April, 2008, when the fall in demand began; a 13% reduction in the size of our operating and dry lease fleet; and a reduction in AMC Charter revenue and contribution, mainly reflecting a lower fuel price component in the AMC Charter rate.

Total direct contribution by our reportable business segments improved to approximately $53 million in the third quarter, an increase of nearly $12 million compared with the third quarter of 2008. The increase was driven by our Express Network ACMI service which added to our ACMI results while eliminating the approximately $14 million of scheduled service losses that we incurred in the third quarter of 2008.

While our AMC results for the quarter reflected the impact of a lower fuel price component in the AMC Charter rate, they benefited from a continuing higher level of AMC demand in 2009 than we had originally anticipated. AMC volumes averaged close to 1,700 block hours per month during the quarter compared with an average of 1,450 block hours per month in the third quarter of 2008. Now more to the first six months of 2009, AMC demand in the third quarter was supported by the level of U.S. military operations in Afghanistan.

I would also like to draw your attention to our effective income tax rate for the quarter and for the year. We reported an income tax rate of 35% for the quarter. We anticipate an income tax rate of 41% for the fourth quarter and a rate of 40% in 2010.

Turning to our balance sheet, we remain focused on liquidity and leverage. We ended the quarter with cash, cash equivalents and short term investments totaling $487 million compared with $411 million at year end 2008. Our balance sheet debt totaled approximately $637 million on September 30.

For the first nine months of 2009, our capital expenditures totaled approximately $27 million, which included about $9 million of capitalized interest related to our Boeing 747-8.AF order. Our cash capital expenditures for the fourth quarter of 2009 are expected to total approximately $30 to $35 million. This includes approximately $15 million in aircraft progress payments due in the fourth quarter.

As we proceed into the fourth quarter, our active fleet currently totals 26 aircraft, comprised of twenty-two 747-400’s and four 747-200’s. In addition we have temporarily parked three other 747-200 freighters pending an assessment of demand in 2010. In the event we displace 747-200’s due to market demand, we will review the adequacy of the carrying values of those aircraft at that time. As we have noted before, all of our 747-200’s are completely unencumbered and we will continue to manage them opportunistically going forward, principally in service of our military and commercial charter customers.

To recap the deployment of our 747-400 freighters, 17 continue under ACMI contract, 3 are deployed in the AMC and commercial Charter markets, 1 serves as our maintenance cover in ACMI and serves in Charter when not required in maintenance coverage and our only 747 converted freighter is allocated to our Commercial Charter segment where it is profitably deployed in air cargo service in South America.

We continue to focus on the introduction of our new Boeing 747-8 freighters into service in late 2010. The 747-8F is expected to deliver market leading performance in terms of payload, fuel efficiency, total cost per ton mile and environmental compliance. We are well positioned as the only outsource provider with this type of aircraft on order, and we expect to realize meaningful earnings and cash flow benefits from these 12 new aircraft.

We expect that these aircraft will generate levered investment returns that exceed 20% and will generate meaningful earnings growth over our 747-400 aircraft in ACMI, which over the last four years averaged approximately $6 million annually per aircraft on a pretax contribution basis. It is important to note that we will incur on boarding costs related to the introduction of our -8 aircraft throughout 2010, but we don’t expect any meaningful contribution from the operation of the aircraft next year given the expectation that deliveries will begin late in the year at the earliest.

We are in continuing discussions with Boeing and have agreed on the rescheduling of three of our aircraft into 2012 and 2013. As a result of our agreement with Boeing our future aircraft purchase commitments, including arrangements for spare engines, flight equipment and other related items, will now be spread out more evenly over the next few years rather than concentrated in the 2010 and 2011 timeframe. For example, progress payments of approximately $15 million in the fourth quarter compare with a previously scheduled total of $48 million. In addition, total PDP payments before any other financing activity now amount to $118 million in 2010 compared with $375 million previously.

Further out, total PDP payments are approximately $226 million in 2011 and $127 million in 2012. We recognize the significant capital commitment required for our new aircraft and the impact they will have on our balance sheet leverage. While we plan to use the fleet free cash flow generated by these new assets to de-lever, we also recognize the need to remain focused on the prudent management of leverage as the aircraft are introduced.

With that I’d like to turn it back to Bill.

William J. Flynn

Thank you Jason. The transformation of our business has improved our core earnings from operations and reduced earnings volatility even as we have reduced our classic fleet.

Looking at the fourth quarter we expect the ongoing improvement in global air freight supply and demand to continue. That should benefit ACMI customer utilization levels and support charter yields.

In AMC Charter we expect that military demand will average about 1,100 hours per month during the fourth quarter. That means that full year AMC demand would total about 17,800 block hours.

Based on the improving trends that we see in the commercial markets and on the level of AMC Charter demand that we see, we expect that our fourth quarter net earnings will exceed $18 million. We also anticipate that our net earnings in 2010 will be consistent with our currently expected 2009 earnings level, excluding one time items from 2009.

Earnings in 2010 will continue to benefit from the commercial and operating transformation that we have achieved. Our outlook for 2010 is based on encouraging trends in air freight and in the broader economy, but also recognizes some continuing uncertainty regarding the pace of economic recovery. In ACMI, assuming a modest pace of recovery, we expect that 18 of our 747-400F aircraft will be operating in our wet lease segment by year end 2010, up from 17 in the fourth quarter 2009. In our AMC segment, although our visibility is limited, we currently expect demand to remain consistent with the expected full year 2009 levels.

We remain focused on cost and productivity enhancement and we will continue to benefit from the commercial and operating transformations that we have achieved. Moreover, should we see a more substantial economic recovery, the operating leverage in our model should drive additional earnings growth for Atlas. We continue to execute on the initiatives that will drive future revenues and earnings.

As noted at the beginning of today’s call, we announced an agreement on Friday to commence outsourced premium passenger aircraft operations in 2010. This opportunity to expand our outsource operating business model, as well as adjacent dry leasing opportunities in our Titan subsidiary will provide additional avenues for future Atlas growth.

With that, I think it’s a good time to take some questions. As noted at the start, we will not be able to respond to any questions about our equity offering on this call. Operator, may we have the first question please?

Question-and-Answer Session

Operator

Thank you sir. (Operator Instructions) Your first question comes from Bob Labick.

Bob Labick

You mentioned a couple of things you know that were interesting in the quarter. Most recently on Friday you had announced the SonAir deal and you talked a little bit about it. I was hoping you could give us a little more color and maybe explain the risks of the contract to you now since you don’t have the aircraft but you’re doing the maintenance. How should we look at this on a go forward basis and model for it? Will it be part of ACMI? Or could you just talk more broadly about where this will fit into the P&L and potential contribution you might expect in the future.

Jason Grant

Sure Bob. It’s Jason. So let me give you sort of where we stand today. We are thinking of this as ACMI in terms of the classification going forward. We do have some time here before the service starts so that’s sort of our preliminary read on this in terms of how it will be presented. In terms of modeling you want to think of this similar to our core ACMI business on the 400 freighter fleet. Effectively we’re providing the same outsourced operating services that we would provide on the 400 freighter platform. It just happens to be in passenger configuration.

From an economic standpoint I think the simplest way to think about this is you know this is effectively economics that are similar to the ACMI business in terms of the contribution that we will generate up on the business. Its two physical aircraft. Its effectively one aircraft that we’re flying and from a modeling standpoint we think of this similar to the contribution we generate on a 400 ACMI unit on the freighter side, Bob, which you can really get referencing back to our 10-Q or 10-K. So that’s how you think about the contribution. From a cost standpoint I think the unique feature of this contract is that we are not bearing asset risk, so that is obviously a positive feature when we talk about sort of ACMI type contribution without the asset risk for the aircraft.

Bob Labick

And in the release and Bill just mentioned at the very end of the call there, expected contribution and growth from Titan in 2010. Is there anything in Titan right now that’s contributing or does this mean that you have some plans already put in place that would begin there? And could you just elaborate on that?

William J. Flynn

Bob this is Bill Flynn. You know certainly as we’ve said about Titan on our prior calls we’re going to look at growing that business opportunistically, the dry lease business, be it aircraft or be it engines. We think that the market’s at a point where there are some opportunities that would make sense for us. We do not have aircraft in Titan as of this moment.

Bob Labick

You spread out the payments and sounds like the delivery schedule for the -8F’s and I guess if I was listening closely you said you might expect to begin now the current schedule is the end of 2010. You know if we’re looking out, it’s a 24 month period or a 36 month period and what’s the kind of spacing that’s currently in place? I know there’s always you know potential delays and things will always change and you’re in negotiations, but if you did it now how would we expect these to roll in over the, you know from late 2010 through 2013, just so we can get a sense you know kind of looking forward?

William J. Flynn

Yes. Thank you Bob. So there’s a couple of points to the discussion on the -8. First thing as Jason noted in his comments from the schedule that we have from Boeing today, we’re looking at potentially first deliveries late in 2010. Now we’re going to bear some costs prior to the deliveries because we’ll need to be prepared to onboard the aircraft, begin to hire and train crew, make other investments in inventory and just general network onboarding expenses. We’ve also announced that we’ve reached an agreement with Boeing to delay three of the aircraft into 2012 and 2013. But we’ve not agreed with Boeing is the firm delivery schedule on the other nine. So that’s the process that we’re working through and you know as we firm that up and agree with Boeing on specific dates, you know we’ll certainly have to discuss that in more detail with you and with our customers.

Operator

Your next question comes from Alex Brand.

Alex Brand

I guess I want to focus on guidance for 2010. So you’ve got 17 ACMI now, 18 by the end of next year. So not only are you assuming an additional aircraft but that you renew whatever comes up next year. How should we think about you know your confidence in the renewals and you know is there a new customer that you know about that accounts for the 18th or whatever you can tell us about that would be helpful.

William J. Flynn

Alex, Bill Flynn. A couple of thoughts. As I did mention first of all in my comments here that the aircraft that we did have up for renewal this year has been renewed and in fact customers talk about that themselves in their own press releases. In also earlier calls we’ve talked about having you know some number of aircraft typically available for renewal or up for renewal or extension I should say in any given year. We gave a lot of information out in 2009 on specific renewals. So what we’re saying here I think are a couple of things. One, we wanted to give certainly some guidance on the number of aircraft that would be in ACMI and you have a view you know as to what that’s worth on the contribution level. And the numbers that we’re talking about or the outline that we’re providing for 2010 you know conveys our confidence that we will have these aircraft placed. That’s in the number.

Jason Grant

Yes and I think, Alex, the other point we should make in 2010 is you know the new flying we have, which is the SonAir contract, understand that that is not a Jan. 1 start. We’re saying you know we’re targeting to start that early in the year and obviously we will have some cost onboard the passenger operation. So you know I mentioned on the prior question that we’ve got you know I think a fairly good, and we’re very happy about the contribution of that business going forward. The full year effect is really the driving value in 2011. 2010 has this sort of part year effect.

Alex Brand

When I think about the guidance for 2010 as it relates to charter, how are you thinking about that? I guess I’m not clear on you said you have four 200’s now, three parked. So that’s the seven you had. So as I think about Charter for 2010 you’re assuming the four 200’s and then how are you thinking about pricing and demand? I guess I’m trying to gauge how conservative your guidance is for next year.

Jason Grant

So Alex I think it’s fair to say that we are not you know assuming a robust turnaround in the economy. We have seen Charter pricing that has rebounded substantially in Q4 here and you saw the results in Q3 as well. And I think there’s a lot of factors driving that. Our focus is you know what will the environment be in Q1? I think we’re taking a fairly cautious approach to that. And the other point I’ll make is just capacity constraints. We are you know waiting I think to make an assessment of the classic fleet and some of the decisions that we’ll look to there later this year. And if Commercial Charter demand stays you know at the level or even improves, I think we’ll need to make some decisions around potentially bringing some more capacity online. I would say that our forecast is not assuming that sort of robust scenario where we would keep capacity to fly that business and where you see continuing strength in the yield. So we’re hoping there’s some upside to that as we said earlier to the extent that the market improves at a more significant pace or a sustained pace.

William J. Flynn

And then the other third variable there is of course military demand, which we have said or I commented we’re looking at something very similar in terms of levels. We don’t know what the administration’s decision is going to be and what troop deployment will look like and our other troop movements around the world, because military demand around the world is not just Iraq and Afghanistan. So that’s the other variable that’s out there as we think about 2010.

Alex Brand

It seems like it’s strong now for peak and so are the 3 parked just because they came up for maintenance and you weren’t prepared to make the decision on investing in those aircraft right now?

Jason Grant

Yes. They were up against airframe events, Alex. We’ve behaved the same way we’ve done previously to say you know we’re looking at the cash return on that investment and without better visibility into the 2010 environment we’re taking a cautious approach.

Alex Brand

As I think about the opportunities that you have our there, CMI’s obviously something you’re at the very beginning stages of and that has possibilities. That requires relatively little investment. And you talked a little bit to Bob’s question about Titan. You know what’s out there to look at? Is the used aircraft market becoming much more attractive? I think this is the first time I’ve heard you say an actual number for an IRR threshold. Are there things out there that you know are starting to hit those thresholds that you guys might be able to take a look at?

William J. Flynn

Alex this is Bill. I think first of all you started a very important point. It is the IRR threshold and so we’re very prudent about our use of capital and investment, but we do believe that there are opportunities in the market that you know meet or exceed that threshold. And we’re seeing that certainly in the dry lease arena as well as in our core ACMI business. Valuations have fallen and continue to fall. There is a re-fleeting requirement in the mid-size and smaller freighter. As the markets have improved you know since the April, May timeframe in terms of overall demand both freight and express, and express it really hadn’t contracted as much as heavy freight, you know we think there are opportunities to invest, put assets to work, always mindful of a return threshold that we operate with to make sure we’re good stewards of capital.

Operator

Your next question comes from Helane Becker.

Helane Becker

This is my question. With respect to the kind of the numbers for the fourth quarter and kind of I guess the outlook part, maybe you can’t really talk about this, but how should we think in terms of you know rate per hour on the contract renewals? Is it consistent with the existing rate, number one? And number two, my second question is with respect to the passenger CMI business for next year, I know it’s coming in kind of mid of 2010. Can you just give us a sense of when it comes in? Because I don’t think you said that yet.

William J. Flynn

Thank you Helane. Bill Flynn. Yes, the first question on block hour rates our renewal rates are consistent with the block hour rates that we experience today. And as far as [pack] CMI you know we’ve said first half and kind of what’s variable in the first half is the aircraft themselves are undergoing refurbishment. They’re being essentially upgraded to a premium first class and business class service with some coach capacity. As Jason pointed out we don’t own the aircraft. The aircraft are owned by our customer SonAir so we have no risk there, but just that you know there could be some unanticipated delay in the final refurbishment of the aircraft. And there are some approvals as well. We’re saying you know somewhere in first half. I know that’s a six month kind of window but we’re just not really more specific at this point because of the factors of maintenance, refurbishment and maybe some approvals that we’re going to need to get and taking time together. We’ll have certainly better visibility as we come into the full year earnings call you know early in 2010.

Helane Becker

I’m just sort of thinking your guidance for 2010 has to include something for that. So you know I know Alex asked all those questions about you know next year and I know there’s not a lot you can say but.

Jason Grant

And Helane just to clarify on that point as I said to Bob in the first questions we’ve given the framework to say think of the contribution on this flying consistent with the contribution on our ACMI 400 freighter flying, but not a significant contributor in 2010 because of the combination of the timing of the start up and some of the onboarding costs we have up front. But we think a very attractive business going into 2011 from a growth standpoint.

Helane Becker

Do you know how many flight attendants you’re going to have to hire? How many crews the planes will take?

William J. Flynn

Well we certainly have some idea of that. We haven’t discussed that specifically but I think getting back to you know Jason’s point, first of all the margins and the contribution we expect to earn, are going to be consistent with what we experience in ACMI today. It’s two aircraft, one operating more as a hot standby, so we may be you know something north of 50 or 60 flight attendants. But we’ll need to finalize the schedule of course with the customer.

Helane Becker

This is ex-world flying and I know that that level of service is supposed to be very high and very first class but the customer is compensating you for that and that’s not a problem.

William J. Flynn

Well that’s why we’re excited about it. In the first instance, we don’t have to go out and invest in aircraft and then in the second it’s at levels that are consistent with what we have for CMI and it’s a charter operation. It’s not open to the general public.

Helane Becker

I know you can’t say anything about the deal but can you sway the when of the deal?

William J. Flynn

Which deal now?

Helane Becker

Your timing of your common stock offering that you announced today. Can you say like when we should think about it coming to market?

Jason Grant

Yes I think Helane we’ll refer back to the announcement that went out this morning that announced that it was launched today, but I think all of the details in the release are the details we can talk about that and there really isn’t much more than that.

Operator

Your next question comes from David Campbell.

David Campbell

I’m a little surprised that there isn’t more leverage in the fourth quarter from earnings. What you’re saying is the earnings will be up from the third quarter slightly it looks like, but the demand changes are huge. I mean you know you’ve got peak season pricing for everything in the fourth quarter and of course increasing demand relative to third quarter so you know what happened to the leverage? I mean you know or are you just being or you just don’t know about December or something?

William J. Flynn

Well I think there’s a couple of things, David. The core of our fleet is in ACMI which is you know multi-year contracts and the strength that we had in first, second and third quarters reflect the fact that we build customers on minimums. And so we’re not in that market we’re not pricing retail and riding retail rates. That’s the business we exactly got out of when we converted Polar to Express Network ACMI. So what we talked about in prior calls is that our earnings on a quarter-to-quarter basis would typically be flatter because of the contract nature of the business. And that’s where you know essentially 75% of the fleets deployed and that gives us the earning visibility and the predictability.

Now we have had high levels of AMC flying in the third quarter, slightly lower levels of AMC flying in the fourth quarter based on our visibility to military demand. And so about 8% or 9% of our capacity is going to be flying commercial charter or so. That’s where we can certainly take advantage of higher pricing that exists in the market and we are and that to some extent is what’s reflected in the outlook that we’ve given and the growth in earnings from $0.70 a share or so in the third quarter to you know prior to the offering on a constant number of shares looks something like $0.85, $0.86.

Jason Grant

Now Bill to your first point, I think David it’s important that the operating leverage in our business is driven by customers flying above minimum guarantees. And as we said this year you know 20% below Q1, 10% below Q2, we expect them to approach minimum guarantee levels in Q4 but again I think you have to put in context here. We’re not talking about customers flying above those minimums which is really where the operating leverage exists. And as we look forward to ’10 and ’11 you know we’re hopeful that a real pace of recovery here will drive back to that normal state of 5% to 7% above minimum guarantees which is typically where we like to operate and typically where our contracts operate in the ACMI space.

David Campbell

But they will be flying above minimum levels in the fourth quarter.

Jason Grant

I think our view would be they’ll be flying at 2% or slightly above but not materially above, David. Again coming back from a long ways from Q1 and a very positive trend, but we’re not guiding here that they will fly meaningfully above the guarantees.

David Campbell

And the increasing demand you see in the freight market, is that pretty much continuing in November in your opinion? Or it will continue in November?

William J. Flynn

Yes it has and we made a couple of comments to that point, David. First of all, you know we’re seeing in the Commercial Charter market we’re seeing stronger rates. And we see that going forward and continuing in October and into next month and in the fourth quarter. We take advantage of that as I said in the percentage of capacity that we have in charter market, the 8% or 9% that I said. But the more important I think indicator there is a strengthening market, strengthening yield, improving overall conditions are the kind of sterile conditions we need to place our aircraft in ACMI, retain and grow our customers in ACMI, so while that’s not our business directly it is a key indicator for us as we think about the business going forward.

Operator

Your next question comes from Jeff Hoffman.

Jeff Hoffman

With the push out of the new deliveries, has this changed your thinking in terms of your retirement schedule over the next couple of years? And could you just give us an idea where things stand right now, where you think net block hour changes are in ’11, ’12 and ’13.

William J. Flynn

So as Jason pointed out in his comments, we have 22 747-400’s of which 21 are pure 400 freighters and 1 are the BCF. We have 7 747-200’s, 3 of which we’ve temporarily parked, 4 of which we’re operating. Now the key driver on those aircraft are the heavy maintenance investments that are required, the C checks and/or D checks. And as we talked about on our call earlier, our evaluation on those aircraft really depend on what we expect demand to be for military and for Commercial Charter. And as we get a better sense of what military demand is looking like going forward, coupled with demand and yield in Charter, we may choose then to invest in those aircraft, those temporarily parked aircraft, and do the heavy checks or not.

Our future clearly is the 747-400 platform and the 747-8. The 200’s are really at an end of life strategy and that’s how we manage them opportunistically. And so they are not long term and not even really a mid-term component of the fleet as you think about age and maintenance. And the fact that we will be taking delivery of the 747-8’s.

In terms of block hours for say military will be what it will be. We expect high utilization of the 747-400’s. As we’ve talked about you know on earlier calls, minimum utilization of 400 hours a month or so are typical contracts for the 747-400’s. They’re capable of flying more. The 747-8 can fly in excess of that, particularly in the first 5 to 6 or so years of the aircraft where we have you know a maintenance holiday, no major maintenance event effectively, [due] checks specifically. So we will look to either higher utilization as we place those very valuable assets with our customers going forward.

And so in terms of the number of block hours, we really need to nail the final schedule down with Boeing before we can talk more fully about what block hour utilization and production ought to look like.

Jeff Hoffman

And back to the -8’s, I know you don’t have [selling] contracts to talk about but the range is longer, the up time should be greater. Are you looking at charging a rate differential on those aircrafts for customers with the -8’s versus the -4’s? And do you have a rough idea of what that could be in terms of how we should be thinking about your revenue?

Jason Grant

Sure, and I think I’ll go back to the statements we made in the prepared remarks. We’re going to be careful about speaking to revenue rates per hour. Just you understand where we are in the [audio impairment] and in the stage of placing the aircraft. But I think we do want to give you a construct to think about the earnings power of the aircraft. And I think the two data points we are focused on here is you know a return on the project from an IRR standpoint in excess of 20% and then to help you think about just to ground the economics of the contribution of those assets, you know you look to the contribution of the 400 today which we’ve said has averaged about $6,000 a plane from a pretax profit standpoint per year over the last few years. And without getting too specific because we want to be careful at this stage given the commercial sensitivities you know we said that we think that the contribution of this asset clearly exceeds the contribution we’re achieving on the 400 today.

Jeff Hoffman

Well you mentioned that’s a levered contribution. Should I just assume for my own purposes an 80/20 leverage?

Jason Grant

So to be clear the contribution would be P&L, so that’s sort of the profit, pretax, net of ownership costs. Correct. And I think you should assume you know probably lower leverage than that. I think probably you know 65% to 70% and not 80% any longer in terms of total leverage.

Operator

Your next question comes from [Steve O’Hara].

[Steve O’Hara]

I just had a question on first the guidance for 2010 and did you say that you’re assuming 1,100 block hours per month on the AMC Charter?

William J. Flynn

This is Bill Flynn, Steve. We said 1,100 block hours per month for Q4 but that 2010 total AMC block hours you know should be roughly equivalent with the 2009, and that number’s 17,800.

[Steve O’Hara]

And then in the past couple calls you’ve talked about discussions with a new customer. Can you just say if those are still ongoing and if that’s included in you know your assessment you know for 18 ACMI planes for next year?

William J. Flynn

I would say our discussions are still ongoing and you know we certainly are considering new customer placement when we give the number 18.

Operator

Your next question comes from Edward Wolfe.

Edward Wolfe

Can you talk a little bit about the revenue per block hour in ACMI? And it’s down sequentially but second quarter was very strong. Can you remind what was going on there?

Jason Grant

Well, two things I think. A lot has to do with the utilization and we’ve talked about this on several calls, that customers pay us at a minimum utilization. And so if they’re only flying 80% of minimums but paying us the minimums it certainly you know it [mathematically] increases the average block hour rate. And the same thing occurred in second quarter where we were at you know 90% utilization of minimums. But now in third quarter we’re at 97% utilization of minimum so while the block hour rate will certainly appear lower relative to second quarter and first quarter, when you look at it historically for block hour rates you know for 2008 and even 2007, the number’s going to look pretty much in line with those numbers, Ed.

Edward Wolfe

But again back in those years you were over 100% utilized so apples to apples if I normalize it, it’s down year-over-year. So should I think about it that way?

William J. Flynn

No. I mean the block hour rate fourth quarter in 2007 was, well it’s got some 200’s in it so we need to be careful there, but it was around $5,900 and you know around $6,100 in Q4 of 2008, and slightly lower in the prior quarter. So I would say the number is relatively flattish over the past several years and we’ve maintained our block hour rate.

Jason Grant

And Ed just to clarify mechanically, you know we have a minimum guarantee. We’re being paid for the hours above that guarantee. So your point that you know wouldn’t the rate be lower in periods where we were over flying, it would not necessarily be lower given we’re being paid a rate above those minimums as well.

Edward Wolfe

So in fourth quarter you would expect a similar rate to third or higher?

Jason Grant

I think as the customers approach minimums and we’re indicating that in Q4 they will be approaching those minimums, the rate will come down, we expect that the rate will come down slightly. I don’t think that’s a material change quarter over quarter. And then you know you would stabilize at rates going above the minimum generally.

Edward Wolfe

Can you give an update on the letter of interest that you had talked about with the 2 400’s and then the 2 behind that with that customer?

William J. Flynn

Ed, pretty much the same question that Steve just asked a minute ago. You know our sense is that we’re going to place aircraft with a new customer and that’s in the numbers that we’ve given but we’re not, just because of the competitive environment we’re not commenting specifically more than that. And that’s why we wanted to give you those absolute numbers as part of our discussion here this morning.

Edward Wolfe

So no update on the ones that you had mentioned before? You said it was an Asian customer I believe but that it was 2 planes. No?

William J. Flynn

What we’re going to say about our customers are in the numbers that we’ve talked about so far.

Edward Wolfe

Just a little more clarification on the passenger contribution, you had talked about that the contribution should be similar and you don’t have the plane risk. When you’re talking about contribution were you talking about margin or were you talking about absolute dollars per plane per year kind of thing?

Jason Grant

Yes, Ed, to clarify, absolute dollars per plane per year.

Edward Wolfe

The maintenance expense, at one point for the year you had given it $125 to $135, is that still a good range for the year?

Jason Grant

Yes, I think if you went back to Q2 we were at $125 to $130 and that is still a good range for the year.

Edward Wolfe

And in your guidance for 2010 you said similar block hours I believe relative to 2 ’09. Is it same number of planes? Is 31 where you were at average planes for the quarter or kind of the same number?

Jason Grant

Yes and I think there, Ed, we’ve got an assumption that the question is really the 200’s here and what happens to the 200 fleet. We’ve parked a few aircraft as they’ve hit their C check, the airframe heavy maintenance checks that are due. We’re down to 4 operating now. Below 4 units and we have another aircraft which is due for a heavy check here shortly in Q4, we start to have to look hard at the operating economics of the fleet.

We’ve taken what I think is the more conservative view of 2010 in terms of the classic fleet and assumed that those units have really a very little contribution to total block hours for 2010. I think the outside scenario would be that we got comfortable bringing that capacity online because of a further improvement in the demand environment and particularly in both AMC and Commercial Charter from where we are today.

Edward Wolfe

So is there a range of what that average fleet size might look like?

Jason Grant

Yes, it’s pretty simple. I mean we’ve got effectively 4 aircraft left today on the 200’s. They’re flying sort of 200 to 225 hours a month today. And if those aircraft were not operating effective January 1 you know that’s sort of your sense of what the maximum down side could be. Now that said I want to counter that which is if we do see customers continuing their trend closer to minimum guarantees it will mean quite a bit higher utilization on the 400 fleet. And those are two factors that when you look at year-over-year total block hours basically we’ve said could come close to sort of negating each other.

Edward Wolfe

The new passenger planes when those start up, since they’re not your planes, those wouldn’t count in the plane fleet I’m assuming. Would they count as you’re thinking about it in your hours? Or would that just be separate somehow outside of the way you’re looking at your total hours?

William J. Flynn

There’s a technical part to the answer, Ed. The aircraft will be on our registry because of the nature of the flying and we’re flying on the Atlas certificate and so we’ll have to think more fully about how we disclose and describe the results from those operation so that you and the market and our customers can understand it. So they will be on our registry. We will have no risk on those aircraft from a financial perspective but technically from a DOT perspective they would be 2 more aircraft there.

Edward Wolfe

But they weren’t in your guidance of flat hours I’m taking it for 2010?

Jason Grant

Yes, they were for partial year. Correct.

Edward Wolfe

They are or they’re not?

Jason Grant

They are. And they will be reported in hours going forward as well to answer the question on the hours.

Edward Wolfe

So when you think about that for partial year, you’re assuming they’re in for half a year or?

Jason Grant

Assume worst case would be half the year.

Edward Wolfe

And are there any start up costs you had mentioned that are significant that we should think about? And when would you incur them for the business?

Jason Grant

Yes, they’re in the guidance, Ed. We’ve said that we don’t expect the business to be a significant bottom line contributor for 2010 because of those start up costs that occur in the first half of the year. So based on the other numbers we’ve already given you can kind of triangulate where that comes out.

William J. Flynn

And we should mention, Ed, just to close on that, there are also some start up costs implied in that number for the 747-8 although we’re thinking about very late delivery on the aircraft, and not really a meaningful contribution from those aircraft until 2011. And that is also in the guidance.

Operator

Your next question comes from Chris Robertson.

Chris Robertson

I wondered if we could walk through some of the -8 details for the future as we start to think about this, from a financing perspective and from a value perspective, if we’ve got somewhere in the neighborhood of $1.7 to $1.8 billion in future payments, if we understand what you said earlier it sounds like about 35% of that would have to be financed and if you run through the math with the 20% hurdle rate would that imply somewhere in the neighborhood of $110 million of incremental pretax profit and the 35% is getting you to the 550 that you would multiply by the 20%?

Jason Grant

Yes. Maybe Chris you’re taking a little more complicated path than we intended to here. So maybe just to go back we’re indicating that sort of mid-cycle the aircraft would have generated $6 million of plane after ownership costs and yes I think working backwards you know you’re going to get to a pretax income. What we haven’t given you here is how much improvement over and above the [400] and I recognize that, but we wanted to give you the baseline and sort of what could the worst case incremental contribution from the planes look like. And obviously I think you can probably back in if you’re using an IRR assumption and your financing assumption into what you think that means. But we’re sort of giving you the threshold here from an earnings standpoint.

Chris Robertson

You’ve talked about in the past various options for financing. Are you seeing that the environment has improved at all?

Jason Grant

Yes, Chris, definitely. I mean you’ve probably seen you know the U.S. operators have seen significant access to the capital markets I think in a big way in the last few months. A market that was effectively shut since I think before Q3 and Q4 of 2008, so the pricing I think for those credits is still high. You know I think we’ve advanced our discussions enough in terms of our options and specific lender discussions on the aircraft that you know we feel like we’ve got pretty good visibility. I think we have a relatively better credit standing than many of the folks who’ve had to access that market. But the fact is if the market’s open for those weaker credits it’s a good sign I think of the improving health of the capital markets generally for financing these assets. And again we think you know the best thing we can do here is continue to show consistent earnings and continue to generate the results with the assets we have and tell the story around the -8. And we think it’s a compelling one.

Chris Robertson

But you feel like something in the neighborhood of 35% is what you would need to bring to the table through some form of financing?

Jason Grant

Yes. So let me clarify. We’ve said of the 12 aircraft and to go back to comments we’ve made in prior calls, of the 12 aircraft we would expect that up to half of that fleet could be sale lease-back financed. That would be sale lease-back financing for effectively 100% of the purchase price. And half of the fleet would be debt financed. And the debt financed aircraft we said would look at advance rates say 65% to 70% today, you know and then potentially a little lower in the current environment. We’re hoping that improves by the time we have to finance the assets going into late 2010.

And at the end of the day, debt financing these assets makes sense for Atlas because we will have cash tax obligations beginning in 2010 if we don’t otherwise have the deferral mechanism of these assets on our balance sheet.

Chris Robertson

So you would view debt financing as the only option you would think about for the -8’s besides some sort of sale lease-back?

Jason Grant

Correct. Those are the two options that we would look to.

Operator

We appear to have no further questions at this time. I’d like to now hand back to Atlas. Thank you.

Edward J. McGarvey

Thank you operator, and thanks to all of you for your interest in Atlas Air Worldwide Holdings. We appreciate your participation today and we look forward to speaking with you again soon. Thank you.

Operator

This concludes the Atlas Air Worldwide Holdings third quarter 2009 results. You may now disconnect.

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Source: Atlas Air Worldwide Holdings Inc. Q3 2009 Earnings Call Transcript
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