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Atlas Air Worldwide Holdings (NASDAQ:AAWW)

Q4 2013 Earnings Call

February 12, 2014 11:00 am ET

Executives

Edward J. McGarvey - Vice President and Treasurer

William J. Flynn - Chief Executive Officer, President and Director

Spencer Schwartz - Chief Financial Officer and Executive Vice President

Analysts

Jason Ursaner - CJS Securities, Inc.

John R. Mims - FBR Capital Markets & Co., Research Division

Scott H. Group - Wolfe Research, LLC

David Pearce Campbell - Thompson, Davis & Company

John L. Barnes - RBC Capital Markets, LLC, Research Division

Stephen O'Hara - Sidoti & Company, LLC

Jack Atkins - Stephens Inc., Research Division

Operator

Good morning. My name is Deidra, and I will be your conference operator today. At this time, I would like to welcome everyone to the Fourth Quarter Earnings Call for Atlas Air Worldwide Conference Call. [Operator Instructions] Thank you.

I will now turn the call over to Atlas Air. You may begin your conference.

Edward J. McGarvey

Thank you, Deidra, and good morning, everyone. I'm Ed McGarvey, Vice President and Treasurer for Atlas Air Worldwide. Welcome to our Fourth Quarter 2013 Results Conference Call.

Today's call will be hosted by Bill Flynn, our President and Chief Executive Officer. Joining Bill is Spencer Schwartz, our Executive Vice President and Chief Financial Officer.

As a reminder, today's call is complemented by a slide presentation that accompanies our remarks. If you have not already downloaded and printed a copy of our press release and slides, you may do so from our website at atlasair.com. You may find the slides by clicking on the link to Presentations in the Investor information section of the website.

As indicated on Slide 2, we'd like to remind you that our discussion about the company's performance today include 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 they involve risks and uncertainties. Our actual results or actions may differ materially from those projected in any forward-looking statements. For information about risk factors related to our business, please refer to our 2012 Form 10-K as amended or supplemented by our subsequently filed SEC reports. Any references to non-GAAP measures are meant to provide meaningful insights and a reconciled with GAAP in today's press release and in the Appendix that is attached to today's slide. You can also find these on our website at atlasair.com.

During our question-and-answer period today, we'd like to ask participants to limit themselves to one principal question and one follow-up question so that we may accommodate as many participants as possible. After you've gone through the queue, we'll be happy to answer any additional questions that you may have as time permits.

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

William J. Flynn

Thank you, Ed, and good morning, everyone. Thank you for joining us today. Beginning with Slide 3, earnings in the fourth quarter were led by our ACMI operations, a strong contribution by our Commercial Charter segment, which also reported a profit for the full year and continued growth in our Dry Leasing business. They were also affected by a substantial reduction in AMC volumes and contribution during the period, reflecting demand levels that were below the military's previous forecast.

Our adjusted results were supported by the investments we've made to strengthen and diversify our business mix. These include our 747-8 freighters in ACMI and the addition of 777 freighters in our Dry Leasing business. They also include our expanding 767 service, our growing CMI operations within ACMI, VIP and other passenger charters and our ongoing continuous improvement initiatives. These results reflect several new customer relationships that we developed in 2013.

Astral Aviation in Africa, Chapman Freeborn in the U.K. and Etihad in the Middle East, our new or expanded customers in ACMI. In CMI, we're providing high-end 767 passenger service for Dallas-based MLW Air. And AeroLogic in Europe and Emirates in the Middle East are now 777 Dry Leasing customers.

Last month, we added TNT Express in Europe as another 777 Dry Leasing customer and this month, we began 747-8 ACMI service for our new customer, BST Logistics, a Hong Kong-based affiliate of Navitrans International Freight Forwarding. Spencer will have more about the fourth quarter for you in a few minutes.

My remarks this morning will focus on our business and our outlook for 2014. We entered 2014 confident about the resilience of our business model and our ability to leverage the scale and efficiencies in our operations. Clearly, there are challenges presented by the market. One is the uncertain airfreight environment, another is the outlook for military charter demand. We are well positioned to navigate through these challenges with a modern efficient fleet, innovative customer solutions, a diversified business mix and a solid financial structure. We are also well positioned to capitalize on market improvement and to continue to focus on the long-term growth of our business.

Slide 4 illustrates how the business investments we have made in the face of an uncertain airfreight market and in anticipation of a decline in military cargo have diversified our business mix and our driving business resilience. These investments are generating strong contributions and they have offset a decline of approximately $110 million in our AMC and cargo charter operations between 2011 and 2013.

Beginning with the strength of our new 747-8 freighters, we are also benefiting from the addition of 777 freighters with predictable long-term revenue in the earning streams in Dry Leasing, our growing CMI operations, expanding 767 service and our entry into military and Commercial Charter passenger operations.

Along with our ongoing continuous improvement initiatives, our actions have enabled us to continue to generate meaningful profitability and free cash flow despite the soft commercial market and the material reduction in military cargo demand that we have experienced over the past 3 years. There are also a foundation for our business expectations this year.

Slide 5 focuses on our outlook for 2014. Given the business initiatives we've undertaken, and the investments we have made, we have transformed the company to deliver meaningful earnings in any environment. Our current outlook reflects 2 primary considerations. First, as military activities overseas are scaled down, the demand for cargo airlift also declines. Our most recent indication is that this decline will also be steeper and faster than previously forecast by the military. For 2014, we estimate that this decline will reduce earnings by approximately $0.70 per share from 2013 levels. Second, global air freight volumes have been essentially flat for the last 3 years. Atlas has remained healthy and profitable throughout this period by capitalizing on strategic initiatives to strengthen and diversify our business mix, expand our customer base, generate operating efficiencies in continuous improvement savings and enhance our portfolio of assets and services. Should 2014 be the inflection point when growth returns to commercial airfreight, our business initiatives and the investments that we have made have positioned Atlas to be one of the prime beneficiaries.

If 2014 remains flat, we expect results to approximate 2013, excluding the $0.70 per share decline in AMC. At this point of the year, there's limited visibility into second half demand. We expect to be profitable in the first quarter, which is usually the lowest volume generating and highest maintenance expense quarter of the year. Typically, the majority of our earnings are generated in the second half and we will update our expectations as the year progresses.

We expect total block hours in 2014 to be several percentage points lower than 2013 block hours. More than 70% of our block hours this year should be in ACMI, with less than 10% in AMC and the balance in Commercial Charter. Our outlook for ACMI reflects the start of our 747-8 service for BST Logistics in February. It also reflects British Airways planned return of 3 -8s to us by the end of April, as well as 1 747-400 returned to us by Qantas in January at the end of its full-lease term.

Dry Leasing's dramatic growth includes 3 additional 777 freighters that we acquired in early January, bringing our 777 fleet in Dry Leasing to 6 aircraft. Depreciation and heavy maintenance should each increase by about $10 million compared with 2013. As always, line maintenance will depend on block hours operated. Continuous improvement initiatives will also provide support for our results in 2014.

In addition, we expect to an effective book income tax rate of approximately 30%. Finally, we expect core capital expenditures this year to total approximately $50 million, mainly for rotable parts program for our expanded fleet.

This is a good time to ask Spencer to provide you with some additional perspective on our fourth quarter and full year results. Following Spencer, I'll provide some additional thoughts and then we'll be happy to take your questions. Spencer?

Spencer Schwartz

Thank you, Bill, and hello, everyone. Slide 6 highlights our fourth quarter results. Our adjusted net income totaled $41.8 million, or $1.66 per diluted share. On a reported basis, net income totaled $30 million, or $1.19 per share.

As Bill noted, results from the fourth quarter benefited from the strength and scale of our ACMI business, a strong seasonal recovery and performance by our Commercial Charter business and continued growth in our Dry Leasing segment.

Our reported earnings for the quarter included an effective income tax rate of approximately 31%, which reflects the ongoing beneficial impact of lower taxes for certain foreign subsidiaries in our Dry Leasing business. Included in reported earnings for the fourth quarter is a special charge of $18.6 million. The vast majority of that is a lease termination charge related to 2 747-400BCFs that we permanently parked in December. We leased these aircraft into our fleet following delays in the delivery of our 747-8 freighters. We also saw a continued cash flow strength during the quarter, with free cash flow of $92 million for the period, compared with $53 million in the fourth quarter of 2012. Free cash flow for the full year included $273 million from $208 million in 2012.

Looking at Slide 7. Operating revenues in the fourth quarter of 2013 benefited from our diversified business mix, including increased block hour rates in our ACMI business and a continued ramp-up and expansion of our CMI service within ACMI. They also benefited from strong volumes in Commercial Charter and from the growth in our Dry Leasing business as we previously noted.

These drove our results in the quarter that was challenged by significantly lower AMC charter demand. Focusing on the pie charts, on the bottom half of the slide, you see that revenues in our ACMI business, including CMI, accounted for 43% of total revenue in the fourth quarter, compared with 42% in the fourth quarter of 2012. Revenues in ACMI increased 7%, driven by our new -8s and increased CMI flying, partially offset by the redeployment of 747-400 aircraft to other segments. ACMI rates during the fourth quarter primarily reflected the impact of higher rates for our -8, offset by growth in our CMI business. Higher volumes in ACMI were primarily due to the continued ramp-up of 767 CMI flying for DHL and the continuing increase in 747 CMI service for Boeing. They also reflected the start of 747-400 ACMI operations for Astral Aviation and Chapman Freeborn during 2013, as well as the initiation of 747-8 service for Etihad.

In AMC, revenues during the quarter declined 38%, reflecting a reduction in cargo and passenger flying, as well as the change in the number and direction of one-way missions. As Bill noted, we've actively diversified our business mix and developed new sources of revenue and earnings in anticipation for the long expected contraction in military demand following the withdrawal from Iraq and preparations to withdraw from Afghanistan. This included initiating asset-light CMI services in our ACMI segment, expanding our Titan Dry Leasing platform and developing a passenger component to our business. In Commercial Charter, revenues in the fourth quarter increased 26%, driven by a strong rise in block hours, operated by our aircraft as global-market peak-season cargo demand picked up in late October through December. We also saw a strong demand for passenger charters for sporting events, concert tours, VIP and other private charters. In Dry Leasing, revenues grew following the acquisition of 1 777 aircraft in March and 2 in July. Each of the aircraft was acquired with a long-term customer lease already in place.

Moving to Slide 8. Segment contribution totaled $103 million in the fourth quarter of 2013, compared with $116 million in the fourth quarter last year. The pie charts of the bottom of the slide illustrate the increasing proportion of contribution from our ACMI segment, which contributed 68% of our total segment profitability, as well as the increasing contribution from Dry Leasing.

Direct contribution in the fourth quarter reflected the enhanced profitability of our 747-8s in ACMI and increased CMI flying for DHL and Boeing. These were offset by lower average aircraft utilization during the period and an increase in maintenance expense due to the timing of required initial airframe checks on our first 3 -8s. Direct contribution during the period also reflected the strong performance in Commercial Charter, that I noted which made up for softness in that segment through the first 3 quarters of the year, the impact of additional profitable aircraft in Dry Leasing and substantially lower AMC cargo and passenger demand.

Turning to Slide 9, and our balance sheet. We ended 2013 with cash, including short-term investments or restricted cash, totaling more than $339 million, compared with over $419 million at year end 2012. The change in our cash position was driven by net cash of $305 million provided by operating activities and by net cash of $197 million provided by financing activities. That was offset by net cash of $590 million used for investing activities. Net cash used for investing activities in 2013 primarily related to the purchase of 2 new -8 and 3 777 freighters for our Dry Leasing business. Net cash provided by financing activities, primarily reflected proceeds from the issuance of debt in connection with the acquisitions of these aircraft. These proceeds were partially offset by payments for share repurchases, payments on debt obligations and debt issuance costs.

Excluding the acquisition of aircraft, engines and related capitalized interest, our core capital expenditures in 2013 were approximately $30 million. Our net leverage ratio, which includes capitalized rents, was 5.3x trailing 12-month EBITDAR at the end of the fourth quarter, including the benefit of our investments and our outstanding Enhanced Equipment Trust Certificates or EETC.

In January 2014, we purchased 3 777 freighters that are leased to TNT on a long-term basis. As a result of the transaction, we entered into term loans in the aggregate amount of $432 million secured by each of the aircraft. The loans have a blended average interest rate of approximately 5%. Also, in January, we refinanced the $105 million loan for one of our -8s with an [indiscernible] bank guaranteed note. The $141 million note, which is secured by the aircraft, has an 11-year term, had a fix rate of 2.67%. All of the financings for our 9 -8s are now in place. In the aggregate, we have generated well over $200 million in cash for the company with blended average fix coupon rates under 3%.

Slide 10 highlights the increase in our cash balance during the fourth quarter. It also provides an update about our ability to generate free cash flow. Looking at the left side of the slide, operating cash flows from our -8s and the favorable bonus tax depreciation benefit that they generate are providing support for our cash balance. Reflecting the benefits of bonus tax depreciation, we continue to anticipate that we will not pay any significant U.S. federal income tax until 2017 or later.

On the right side of the slide, you see the growth in our free cash flow per share in 2013 in comparison with 2012, a meaningful increase. All the business efforts that we've been talking about are driving that increase.

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

William J. Flynn

Thank you, Spencer. Moving to Slide 11, our capital allocation strategy continues to demonstrate our commitment to creating, enhancing and returning value to our shareholders, both through business growth and returns on capital.

Reflecting the strength of our balance sheet and cash flow, we invested $72 million in 2013 to repurchase over 1.7 million shares of our common stock. The shares that we acquired in 2013 equate to 6.5% of our shares outstanding, which is a substantial amount for any company to buy back in one year.

We are committed to our share repurchase program and we'll evaluate appropriate opportunities to return additional capital to our shareholders under our remaining $60 million authority. Maintaining a strong financial position is essential for continued long-term growth and capital returns. Our focus going forward will continue to be on the appropriate balance between maintaining a strong balance sheet, investing in attractive assets and repurchasing our stocks.

As reflected on Slide 12, Atlas is leading the way through challenging times. We reshaped and transformed our business in advance of an anticipated decline in military demand. We have a resilient business model, and we continue to drive ahead in the still challenging commercial airfreight environment.

As a result, we expect to generate meaningful earnings and cash flow in 2014 despite challenging market factors. Airfreight remains a long-term growth industry and we remain focused on the long-term growth of our business. We will continue to strengthen our competitive position and generate substantial free cash flow which will enhance shareholder value.

With that, operator, may we have the first question, please?

Question-and-Answer Session

Operator

[Operator Instructions] And your first question comes from Jason Ursaner.

Jason Ursaner - CJS Securities, Inc.

Just first question. I'm trying to figure out, I guess all of the -- what's included in guidance, excluding the military impact? Assuming the comparable market, comparable performance scenario, what is this assuming for ACMI contract renewals? And you've typically spoken about 3 to 5 a year, so is it a typical year other than Qantas? Would you expect all the others to re-sign at equivalent rates?

William J. Flynn

Yes. So our guidance, Jason, and we didn't really provide guidance, but our outlook and the framework that we've provided, we expect to be at 20-plus ACMI contracts in 2014.

Jason Ursaner - CJS Securities, Inc.

Okay. And the 3 from British Airways that are coming back, you guys assuming those go back into ACMI? Or that those stay in charter when they come back?

William J. Flynn

We will have our 7, 8 additional -- we will have our 747-8s profitably deployed with several options to do that, and we're working on those, sometime before the aircraft actually released by BA. And we'll continue to update you and our investors on the placement of those aircraft.

Jason Ursaner - CJS Securities, Inc.

Okay. And is there a termination fee to the company from BA that's in the guidance?

Spencer Schwartz

Jason, again, we didn't provide guidance. We provided a framework and an outlook for 2013. And so in that framework, yes, we expect to receive a termination fee from British Airways and that would be included. We also expect to incur costs related to repainting the aircraft and that sort of thing. So there are costs included as well as a termination fee.

Jason Ursaner - CJS Securities, Inc.

Okay. And just last question on line maintenance. I understand that's dependent on total block hours. Does it also have a variability of a per block hour basis? Is there a leverage or scale effect? Or do you expect that to be comparable?

William J. Flynn

Line maintenance should be comparable. There is a scale effect and we have that scale effect. So line maintenance should be comparable. As you pointed out, it's highly correlated to hours as well.

Spencer Schwartz

Yes, Jason. We provide some information in the slides that accompany this conference call. If you look at the slides, there's a note at the bottom of the maintenance slide that talks about line maintenance expense per block hour. But it's just, it's really just math. You could take the line maintenance expense divided by block hours and then you could see how that has trended over time.

Operator

Your next question comes from John Mims of FBR Capital Markets.

John R. Mims - FBR Capital Markets & Co., Research Division

So with the dropoff in military, that's all on the cargo side? Or how is the passenger business doing there?

William J. Flynn

So the drop-off in military is predominantly in the cargo side and that really manifested itself in the fourth quarter. As we pointed out, steeper than the military had forecasted to us and all the other carriers throughout the course of 2013. Some moderation in the passenger business, but we anticipate passenger business will have ongoing and a more consistent demand pattern than cargo will post-Afghanistan.

John R. Mims - FBR Capital Markets & Co., Research Division

So when we think about kind of leading on the passenger side, your -- those plans are still adequately employed? Or I guess...

William J. Flynn

They are. They are. It's a good question. So we acquired the aircraft to serve the military to fly troops, and we've had really solid returns on those aircraft over the past several years. And that was really our focus. But as time is going on, we've been able to identify and really penetrate the commercial passenger charter market as well. And so the combination of military flying plus the passenger flying, provide good utilization for those passenger aircraft. And by way of example, we operated 32 flights in the fourth quarter of carrying fans and bands and teams for 18 of the bowl games. And just this weekend, we flew for the NHL Players Association, a direct flight from the U.S. to Sochi to bring over players for various countries' teams and we'll bring them back. So our sense is that there's a good market out there that will drive high utilization, more passenger Commercial Charter than we would have initially anticipated, but a good outcome overall for the company.

Spencer Schwartz

John, it's Spencer. I'll just add to that, and just to quantify a little bit. We talked about IRRs on those aircraft in excess of 25%. And that is before all of the additional flying, all of the Commercial Charter flying that Bill just talked up about. So we've been really happy that we acquired those aircraft. They've been performing well for the AMC and now they're performing well for Commercial Charter as well.

John R. Mims - FBR Capital Markets & Co., Research Division

Okay. And as a follow-up, Qantas, there's been some rumblings on what they're going to do with their fleet. I don't know if I saw that it was announced before you said that they returned that one plane in January. And I know you don't like to talk specifically about accounts, but can you remind us how many planes Qantas has? And what we may see over the next several months in terms of renegotiation with them?

William J. Flynn

The Qantas operated a fleet of 3 aircraft and now are operating a fleet of 2 aircraft. Early in 2013, they had talked about potentially Dry Leasing in their own aircraft and operating them. And then later in the year, they announced that they were no longer going to pursue that. And so we have the 2 aircraft operating with Qantas, and we'll continue to update the ACMI placements as we move through the year, John.

John R. Mims - FBR Capital Markets & Co., Research Division

Okay. But they -- can you say now if those other 2 are up for renewal this year? Or they locked in for a little while?

William J. Flynn

John, we've never talked about specific customer renewals, we've talked about numbers of renewals.

Operator

And your next question comes from Scott Group of wolferesearch.com.

Scott H. Group - Wolfe Research, LLC

So do you feel comfortable -- can you give us the number on the fee from British Air? Because when I think about the framework for 2014, you talked about flattish, excluding the military, based on flat airfreight demand. But you've got $20 million of expense for maintenance and depreciation. So is the fee from BA that kind of a $20 million number to offset that? Or are there some other helping things that offset the 2 big expense things that you talked about?

William J. Flynn

Scott, we're not going to discuss the BA in specific, nor the fee. I think Spencer made a point a moment ago to Jason's question. There is a fee for that termination in the numbers. They're also expenses that are associated with it. But, overall, we've not -- our framework includes our anticipated ACMI placement, our CMI operations, the Commercial Charter market and the improvement, overall, or excuse me, improvement, the real growth in the Dry Leasing income from Titan with these 777s, as well as the tax rate that we've assumed for the company going forward. And that tax rate is a permanent nature, not a one-time event, and has a lot to do with their structure and we did around the 777s that we've taken into the fleet and have leased out to our Dry Lease customers.

Spencer Schwartz

Scott, it's Spencer. I'll just add to that a little bit. As you know, or as we've talked about, we placed the -8 with Etihad during 2013 in the middle of the year in June. So you'll see that for a full year. We had a placement with BST Logistics that will start shortly, and so you'll see that for the vast majority of the year. Our CMI business continues to grow and so you'll see that. We've talked about the military declines. We've talked about the tremendous growth in our Dry Leasing business. And so, there are these various puts and takes and when you put it all together, we try to provide this sort of framework for our outlook.

Scott H. Group - Wolfe Research, LLC

Okay. Yes, that's helpful. Maybe, just another question is, so you have the issue with British Air, can you give us an update on maybe the conversations you've had with the other -8 customers? And kind of what's the turnaround of those conversations? I know they don't have things coming up for renewal anytime soon but do they seem happy with the -8? Do you see some risk of pricing? Do you see any risk of additional customers returning planes early? I just want to get a sense from you if you think that this BA thing is really specific to BA? Or could there be more of this going forward?

William J. Flynn

Yes. I think there's a couple of perspectives here. Starting with BA, I think it is, indeed, it's specific to BA. BA has essentially made the decision to exit freighters. And to over time, rely on belly capacity, as well as some of the belly capacity that will be coming in over the next several years as new passenger aircraft are delivered. The agreement they have with Qatar, moving forward, is not a full ACMI or a full aircraft agreement, it's a hard-block space agreement, as I understand it, for some number of tons, 5 days a week, between Asia and the U.K. So that's, I think that's very much a BA specific. As Spencer noted, we've placed recently 2 of the 747-8s, 1 with Etihad and 1 with Navitrans, which is a freight forwarder, a large freight forwarder, Chinese-based freight forwarder. And you might think of them similar to Panalpina. Now talking about the -8 itself, from our view, the -8 is a high-performing aircraft that delivers real bottom line value for our customers. In terms of the capacity that it provides on the long-haul route, as well as the fuel efficiency that it drives through the new GEnx engines that are on the aircraft. And when you look at the freighter market going forward, they're really 3 freighters out there: the 747-8, the 777 freighter, and the 747-400 freighter as well. And we have, I think, deep insights to all 3, particularly given the 6 that we've taken into our Dry Leasing operation. And starting with the 777 freighter, if you look at that operation, and how that operations on the 777 and how they typically deploy, particularly by the integrators since they are largest customer for the 777. Those are long-haul, point-to-point operations. So for example, FedEx is flying from China to Memphis. DHL uses 777s to fly from Hong Kong to Cincinnati to Leipsic to Hong Kong. So it's a point-to-point, long-haul operation serving that defined market. 747-8 can provide the same economics in that kind of operation with more capacity, if that capacity is required. But what the 747-8 does, it provides a gathering and a distribution network operation that very common and heavier airfreight, certainly the network that DHL runs, as well as UPS. And certainly the network that appeals to our other customers. So if you can envision a departure from Hong Kong to Shanghai to Incheon where the customer is loading and unloading freight along the way, that's your kind of gathering and distribution network, cross the Pacific to Anchorage, down to Cincinnati. And freight is picked up and delivered along that route, as well as the right through freight. And the result of that, the stack yield of that, provides a superior outcome. And so we think of that, the heavy freight operators, when we think about our other customers, that's how they're using the 747-8. Some have 777s in their fleet as well. So we think that the -8 delivers a superior performance for our customers and, ultimately, for our shareholders. And finally, the 747-400 is equally attractive depending on the markets it deploys. It could be shorter stay's length, could be markets where the total available freight demand is less than other markets and so a little bit smaller capacity may make sense for the customer. I know it's a long answer, but it's a very broad question. I think you teed up and I wanted to take the time to do that. And finally, when you look at the -8s and the 747-400s, the nose door on those aircraft is very valuable, particularly for higher gross market, such as South America, Sub-Saharan Africa, areas where there are extractive industries and pipe, and heavy equipment need to support those. So that's just kind of argue with those 3 fleet types.

Scott H. Group - Wolfe Research, LLC

Just one follow-up to what you just said. So when I think about the 3 aircraft types, do the changes in military and then some other parts of the market, is that, in your mind, accelerate potential to retire the 400? Are you thinking about or considering or potentially selling any of the -8s coming back from BA? And then, what's the -- is there any constraints that prevents you from buying more 777s, either from a balance sheet perspective or just from a -- you can't find them on the market perspective?

William J. Flynn

Well, I think the question of the military drawdown really doesn't have a significant impact for the 747-400 factory freighter. It may have an impact for the 747-400BCF. The BCF doesn't have the nose door. It's a heavier aircraft than a pure factory freighter and as a result, had higher fuel going in and higher maintenance expense. And so there's not a lot of market takeup for the BCF, and as you know, we decided to early return to the aircraft and took a charge for those, with the ones that we took in. Those are the ones that we took in, given the delay of the 747-8. I think the fleet type at risk for a more accelerated retirement is probably the MD-11. That's not new news. The largest freighter operator, Lufthansa, has been in the process of retiring their MD-11 which were purpose-built freighters, not converted freighters and are moving into the 777s. We don't have the intention to sell our 747-8s that are coming back from BA. Those are going to be put to work and we'll continue to generate the kinds of returns that we described to our investors over the course of the delivery of those aircraft and the placement of those aircraft. In terms of 777, we acquired 6 in less than a year. We identified the opportunities to acquire them, we have the balance sheet and the cash to be able to make those investments. And so in a rather short period of time, we were able to identify and acquire 6 of the aircraft placed on very long-term leases with very attractive credits. And so if those opportunities present themselves, and then maybe more, well we're certainly act on them.

Operator

And your next question comes from David Campbell.

David Pearce Campbell - Thompson, Davis & Company

Bill and Spencer, yes, in talking about the commercial freight market for this year, you're basically assuming flat, sounds like flat block hours, flat demand with last year. But we've had pretty good of the evidence of strong demand in January. And should that continue into March, that's not a flat year, I mean I'm trying to figure out why and if you are so cautious and so concerned about the demand?

William J. Flynn

Yes. So I think what we're saying, David, is that there well could be an inflection point in 2014. That's something we've talked about in the past. But what we're saying here is we're -- we've provided our perspective on 2014, and if there is an inflection point, I think that signals real opportunities. That said, it's a little early in the year to call that inflection point. And we did talk about the profitable first quarter and we're seeing the trends that you're seeing as well are the market is seeing in general, in January and February. But not calling that there's a catalyst yet for some inflection later in the year that we haven't seen in the past couple of years. If the market does, we believe we're very well positioned to take advantage of that for all the different factors we've enumerated in the call and in previous conversations.

David Pearce Campbell - Thompson, Davis & Company

I guess just 2 quick ones then. If this demand for 777s is so strong, why not put them in your wet leasing program, somehow over acquiring more aircraft?

William J. Flynn

Well, the 777s that we acquired were from other lessors with long-term leases stapled to them at attractive rates of return. And one way to think about those, it was for us as an important opportunity to take advantage of, particularly in the face of the military decline and building out this long-term annuity type income stream that stretches for some time in the 8 to 10-plus year kind of scenarios that you can imagine. We'll continue to evaluate our aircraft fleet and our ACMI opportunities. We think that the -8 is an excellent ACMI aircraft as is the 400. And if there were tangible opportunities to begin to offer 777 ACMI, we would. But we're not going to speculatively invest in 777s for delivery several years from now in anticipation, we might place them into ACMI. Any large fleet additions going forward are going to have to be back-to-back with the contract that gives us the certainty to go out and make an order for aircraft for future delivery.

David Pearce Campbell - Thompson, Davis & Company

And my last question is, I'm trying to get straight on the maintenance and depreciation, Bill. I think you said during your remarks that maintenance and depreciation would increase this year. But with block hours down, I guess it's largely on the depreciation that's going to go up?

Spencer Schwartz

Well, David, it's Spencer. So it's a little of both. So depreciation, we've obviously added more aircraft to our fleet. And so depreciation will go up accordingly. And we've said we expect depreciation to go up about $10 million in total. And with regard to maintenance, it's somewhat similar while block hours may be down and so, therefore, line maintenance may be lower. The heavy maintenance, because we've added more aircraft, the maintenance on that may be higher. And so what we've said is that, overall, we expect maintenance to increase about $10 million. And I think it's a pattern of our maintenance expense. I think you can expect to see a similar pattern that we've seen in prior years, which is if at all possible, we try to incur those maintenance cost towards the beginning of the year so that we can reap the benefits of having the aircraft ready for the strongest periods towards the end of the year.

Operator

And your next question comes from John Barnes of RBC Capital Markets.

John L. Barnes - RBC Capital Markets, LLC, Research Division

Couple of questions here. Let's see, the first one is you've talked about -- you've mentioned you've never really talked about customer specific renewals, you talked about just the numbers. So between the Qantas plane, British Airways aircraft and normal renewals, what are we looking at in terms of aircraft needing potential placement in ACMI service in 2014?

Spencer Schwartz

John, I think 2014, other than the British Airways' return, is a fairly normal year for us. And so, we've said that a typical year, we have approximately 3 or 4 planes that are coming up for renewal, and then so that this year will be a typical year. And generally, those planes are -- we continue to place them. They renewed generally with our existing customers.

John L. Barnes - RBC Capital Markets, LLC, Research Division

Okay, all right. That make sense. Secondly, there tends to be a pretty wide variability in first quarter profitability. If I just go back over the last 3 years, it's ranged anywhere from kind of $0.21 on the low-end to as much as $0.50 or so on the high-end. I guess my question there is, number one, you outlined the maintenance in your presentation, should we anticipate maintenance being spread out in the year similar to what you experienced in '13? And then, given some of these gives and takes with, again, the BA aircraft, the timing of getting whatever termination payment, the expense -- you see where I'm coming from? I'm just trying to -- I'm not asking you for a specific number but could you, at least, give us some direction? Would you expect that to be on the $0.21 side of it? Or should we be thinking something better than that with all the gives and takes?

Spencer Schwartz

John, we're not providing anything more firm than what we've provided earlier. But I'll -- you would expect to see the quarters, the second half weighting similar to what we've seen, certainly in the prior year as far as the second half. Certainly, our business is much more second-half weighted, especially with the military declining. That part of the business, obviously, was less focused on peak season. And so you should expect to see similar patterns of prior year. With respect to the maintenance expense, the incremental maintenance expense that we talked about, I think you can expect to see maintenance expense be spread similarly to the way it was spread in 2013, or incurred the way it was incurred in 2013, is a better way to say it.

John L. Barnes - RBC Capital Markets, LLC, Research Division

All right. And then, Spencer, I think you have one comment that might have been a little subtle change in terms of your comment about being a cash taxpayer. I think we had all assumed 2017 to be the number you said potentially maybe a little longer, is that because now you're looking at less profitability this year? You're talking about this big drag from military and that kind of thing. Does that just mean that you extend the benefits out a little bit longer? Or is there something else in play there?

Spencer Schwartz

Sure, John. I think the comment about not paying any substantial federal income tax, we will pay a small amount, but not paying a substantial amount until 2017 or later. And that's pretty consistent with what we've said in the past. And one of the big reasons is that we took delivery of 2 -8s during 2013, and those 2 qualified for 50% bonus tax depreciation. So we were able to take 50% of that cost and deduct it for tax purposes directly in 2013. And in '14, we'll be able to deduct the other 50% of that. And all of the bonus tax depreciation has, obviously, helped us shelter future earnings so taxable income will be able to be offset by the previous bonus tax depreciation, and then operating losses have been built up as a result.

Operator

And you have a question from Steve O'Hara of Sidoti.

Stephen O'Hara - Sidoti & Company, LLC

Yes. Just, I mean, if I look at the aircraft count, I mean I know it's up, utilization is down. So I mean, in terms of your willingness or desire to enter into any additional CapEx, I mean is there a -- should we be expecting any additional kind of exits from the fleet? Or is there any utilization level that we should be looking for to kind of say, okay, the business is may be further stabilized or stabilized and maybe we'll look for a little more growth now as opposed to kind of stabilization?

William J. Flynn

All right. So where we are now, we have our core ACMI fleet established. We have the 9 747-8s delivered. We have the 21 747-400 factory freighters in the fleet. We have temporarily parked, last year as you know, the 1 BCF which we owned outright. And we have returned 2, the 2 747-400BCFs that we leased in, given the delay some years ago to 747-8. So 2 more freighters out of the 747-400 fleet. The balance of the equipment, the passenger planes we talked about earlier, are well utilized in the combination of military and commercial passenger charter markets. The rest of the utilization is driven by the utilization on our CMI business and there are different rates of utilization in the CMI business, whether it's the SonAir aircraft, the LCF, the Dreamlifter, which utilization will be increasing as Boeing drives up to a higher build rate through 2014 on the Dreamliner. And then, we have the 767-200s we operate for DHL, domestic North America, the new 767-200 packs for MLW and then the 2 767-300s for DHL intra-Asia. Some of those aircraft have lower utilization than average. I think that was right thing to do to train those BCFs out. At the end, they have less market utility than do the 400s. We wanted them through the end of the year so we can take advantage of the late-blooming, but still important fourth quarter Commercial Charter market. We don't report CMI separate from ACMI, more for competitive reasons than anything else, but the utilization in the ACMI of the aircraft, were 12.8 hours or so for the year for ACMI customers. So good utilization aircraft, overall. CapEx this year is really the maintenance CapEx we have for the aircraft. And no major fleet plans that we've talked about, Steve, other than the answer to the prior question, if there was a good opportunity, a real opportunity along the lines of the 777 acquisitions we've made, we'd absolutely consider that. Immediately accretive with solid credits over a long-term, and we think those were good choices to make.

Operator

And you have a question from Jason Ursaner of CJS Securities.

Jason Ursaner - CJS Securities, Inc.

The BCF that you do have parked and unencumbered if you wanted to potentially sell it?

Spencer Schwartz

Sorry, Jason, can you repeat that?

William J. Flynn

We could. We could sell the BCF if we wanted to if we thought there was an appropriate market for it. And the BCF can also serve as a swing capacity, which we did with the 200s several years ago. If there's an inflection and if there's a demand, we could bring that aircraft to temporarily parked, we could bring that aircraft back into service.

Spencer Schwartz

Yes and, Jason, we've kept that aircraft in the states so it can be brought back. So that if there is increased demand, that aircraft is ready for us to be able to bring it back. There's some maintenance that will be required, but, otherwise, it's ready to be brought back.

William J. Flynn

It creates optionality and I think you know the market values on BCF aren't terribly robust right now. We think the option value is for us worth more than a sale.

Jason Ursaner - CJS Securities, Inc.

Okay. And the 2 that you returned, was there kind of an opportunity where you could have potentially bought those off lease? Just I mean the charge you took looks fairly high relative to -- I guess in my perception, were the market price is on those.

Spencer Schwartz

Jason, I think the answer is, sure, there's always that opportunity. A willing buyer and a willing seller, there's always that opportunity. We view those aircraft as planes that we made a decision that we no longer needed those aircraft in our fleet. So we terminated the leases, we abandoned the aircraft at the end of the year. And perhaps the reason why the number looks high to you is just the way the accounting for that works. But included in that charge is the expense of all remaining lease payments that would have been paid on those aircraft, and that's the biggest part of it. We also have -- there were some prepaid maintenance that we had recorded, there's an asset that needed to be taken down associated with that, there's repainting and storage. So there's a lot of different elements of that charge.

Jason Ursaner - CJS Securities, Inc.

Got it. And then, just for Bill, I think in one of the answers you had said, the framework includes some anticipated ACMI placements. I guess I'm just wondering that's kind of part of the overall number of 20 plus you threw out or? I guess, I'm just wondering what exactly...

William J. Flynn

Yes. Yes, that's right.

Jason Ursaner - CJS Securities, Inc.

What exactly is built in for anticipated placement?

William J. Flynn

It's 20 plus. And that includes placing additional aircraft, yes.

Jason Ursaner - CJS Securities, Inc.

Okay. And then, Spencer, I think you said overall maintenance, you expect to be $10 million higher? Or that was the heavy maintenance part of it?

Spencer Schwartz

Overall maintenance. Yes, maintenance expense in total, about $10 million higher.

Operator

And you have a question from Jack Atkins of Stephens.

Jack Atkins - Stephens Inc., Research Division

So I guess, just to go back to the framework for a moment just to make sure I'm understanding that correctly. The framework does assume that you place the -8s coming off of lease with British Airways. Did you say -- you expect that was placed when they roll off? Or do you expect to have them placed later on in the year?

William J. Flynn

Jack, we've provided a framework and we've said we will have our aircraft placed. We didn't say exactly what day.

Jack Atkins - Stephens Inc., Research Division

Okay. Okay. And then, when I look at the -- I guess, when I think about the net benefit from the lease termination fee from BA, I know you guys don't want to give a hard number in and there will be some expenses there, but would you expect it to be a net benefit or a net drag or neutral to earnings in 2014 versus 2013?

Spencer Schwartz

Jack, we really just don't want to talk about customer specifics on such a sensitive topic. Included in our 2014 results, we expect will be the termination fee as well as costs related to the termination, and they will both be in our numbers. And I'm not saying which is greater than the other. It's just very, very sensitive. It's between the customer and us and a very, very sensitive topic.

Jack Atkins - Stephens Inc., Research Division

I understand that. I'm just trying to -- I think a lot of people are probably in the same boat I am, trying to understanding like the underlying expectations operationally for the business. And I know we backed out of lease termination charge that you all took in the fourth quarter of this year, so I'm just trying to understand on an apples-to-apples basis, should we expect that to be a headwind or a tailwind coming into 2015, if that makes sense?

Spencer Schwartz

Yes, again, the lease termination charge that we took was different. And included in the lease termination charge that we took was for accounting purposes, the lease expense for subsequent lease payments. So that's a little different than a payment that our customer is making to us as a result of terminating their contract early. So they are different and that's I think that's all we really want to say on this.

Jack Atkins - Stephens Inc., Research Division

Okay. Okay, I got you. I got you. And then kind of moving on, and when you think about your fleet, and how it's been until today relative to the current market, you guys have hinted in the past that you would look at some maybe adjustments to your fleet, maybe rightsizing that for the current level of market demand. Are you all thinking about doing that now? And what point, as you move through the year, would you maybe look to shrink that 400 freighter fleet to sort of match the current market dynamics?

William J. Flynn

Well, we have. We've taken the 2 BCFs out, Jack. And that's approximating a 10% reduction if you think about just that. And you take the one that we temporarily parked a year ago. So that is indeed an acknowledgment of the market, but also an acknowledgment that we think that the 400 freighter fleet that we have is a competitive fleet and will be well utilized in 2014.

Jack Atkins - Stephens Inc., Research Division

Understood. I guess I'm just looking at the amount of planes in charter, and you got the Qantas plane coming back to you. And assuming you can redeploy those -8s, you're still looking at, call it, 8 planes in Commercial Charter that are -400 factory freighters. So is that the optional number that you guys would like to have in charter? I guess maybe that's a better way to get to it.

William J. Flynn

But, Jack, we also place 400 factory freighters in ACMI as well. And I certainly don't subscribe that there is no ACMI market to 400 freighter. There is.

Jack Atkins - Stephens Inc., Research Division

Okay. Okay, that's helpful. And then, last question for me. Can you talk about the strategic direction for GSS once that British Airways contract is terminated in April? Will you look to keep that subsidiary going? Or maybe look to restructure that?

William J. Flynn

So we're 49% shareholder of GSS. As you know, by regulation, that's the max that a non-U.K. E.U citizen can hold. And we have our partner. I think having a U.K. AOC is a viable asset. And so we're certainly exploiting other opportunities to use that asset.

Operator

And there are no further questions. Presenters, you may go ahead with your closing remarks.

William J. Flynn

Well, thank you very much, operator. And Spencer and I would like to thank all of you for your interest in Atlas Air Worldwide today. We appreciate you taking the time to be with us on our call, and we look forward to speaking with you again soon. Thank you very much.

Operator

This concludes today's conference call. You may now disconnect.

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