Atlas Air Worldwide Holdings' CEO Discusses Q1 2014 Results - Earnings Call Transcript

| About: Atlas Air (AAWW)

Atlas Air Worldwide Holdings (NASDAQ:AAWW)

Q1 2014 Earnings Conference Call

May 1, 2014 11:00 AM ET

Executives

Ed McGarvey - VP and Treasurer

William Flynn - President and CEO

Spencer Schwartz - EVP and CFO

Analysts

Helane Becker - Cowen Securities

Kevin Sterling - BB&T Capital Markets

John Barnes - RBC Capital Markets

Jason Ursaner - CJS Securities

Scott Group - Wolfe Trahan

John Godyn - Morgan Stanley

David Campbell - Thompson Davis & Company

Jack Atkins - Stephens Inc.

Bob McAdoo - Imperial Capital

Operator

Good morning. My name is Beth, and I will be your conference operator. At this time, I would like to welcome everyone to our First Quarter Earnings Call for Atlas Air Worldwide. All lines have been placed on mute to prevent any back ground noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions) Thank you.

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

Ed McGarvey

Thank you, Beth, and good morning everyone. I'm Ed McGarvey, Vice President and Treasurer for Atlas Air Worldwide. Welcome to our first quarter 2014 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 includes 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 2013 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 are reconciled with GAAP in today's press release and in the appendix that is attached to today's slides. You can also find these on our web site 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 we'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 Flynn

Thank you, Ed, and good morning everyone. Thank you for joining us today.

Beginning with slide 3; we are off to a good start in 2014. In addition to our first quarter earnings, we announced significant news today regarding our placement of two 747-8Fs with DHL Express. These are two of the three 747-8's returning to us from British Airways, and they reflect DHL's desire to acquire additional capacity for business growth, by transitioning from two of the 747-400 aircraft that we have been operating for them. As a result, we will be operating four 747-8s and five 747-400s in ACMI for DHL, as well as continuing to operate seven 767s in CMI for them. We also continue to work with all of our customers, in support of their efforts to strengthen their route networks and grow their businesses.

Earnings in the first quarter were led by the initiatives we've undertaken to strengthen and diversify our business mix, expand our aircraft and service offerings, and develop new customers. We're confident about the resilience of our transformed business model and are well positioned to take advantage of market opportunities.

Our ACMI results benefited from an increase in the number of new 747-8 freighters in operation, including our new 747-8 service for BST Logistics that began in February, as well as an increase in CMI flying within the segment.

In Dry Leasing, the investments we have made since early 2013 in attractive, modern 777 freighters including our acquisition of three 777s in early January, are driving a significant increase in contributions from sources with highly predictable revenue and earning stream.

These aircraft are on long-term leases with strong creditworthy customers. We are also benefiting from the expansion of our 767 operations and our growth in passenger chartered service. These initiatives supported the improvement in our first quarter results, despite seasonality in Commercial Charter, and the continued reduction in AMC cargo volumes. Our results reflect our global market leadership in outsourced aircraft assets and services.

Capitalizing on the scale and quality of our portfolio offerings, we have developed several new strategic customer relationships, since the first quarter of 2013. In ACMI, we've added Astral Aviation in Africa, BST logistics in Asia and Chapman Freeborn in Europe. We've also expanded with Etihad in the Middle East. In addition, we have introduced new 767 cargo CMI service for DHL Express in the Asia Pacific region, and we've added VIP 767 CMI passenger service for U.S. based MLW Air. And in Dry Leasing, we now provide 777 freighters to AeroLogic and TNT in Europe, as well as Emirates in the Middle East.

Slide 4 illustrates the positive direction of air freight demand so far in 2014, and the positive outlook for the year. One indicator, Shanghai's Pudong International Airport Cargo Terminal or PACTL, reported tonnage growth of 17% year-over-year in March. PACTL's tonnage in March was a record for any month in its history and it capped the terminal's strongest first quarter ever.

Consistent with the gradual cyclical pickup in global economic growth, recent forecasts by the International Air Transport Association and others, suggest that air freight demand will grow by a few percentage points in 2014, the first real growth after three essentially flat years. However, forecast yields continue to lag behind demand growth.

Slide 5 focuses on our earnings growth for 2014. We are encouraged by our first quarter performance and the positive direction of market trends so far this year. But we are maintaining our earnings framework for the full year. With still limited visibility into second half air freight demand and yields, we continue to expect our results in 2014 to approximate 2013, excluding the expected decline in our AMC Charter operations that we have previously discussed.

On a per share basis, adjusted earnings in the second quarter of this year should be similar to or slightly higher than our adjusted first quarter earnings. Since the majority of our earnings are typically generated in the second half of the year, we will update our expectation as the year progresses.

For the full year, we expect total block hours to be a few percentage points lower than 2013 block hours. More than 70% of block hours will 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 our two new 747-8 placements with DHL Express. We see strong ACMI customer interest in our one remaining 747-8 aircraft, as well as our 747-400s, and these aircrafts are operating in revenue service as we market them in ACMI.

Dry Leasing's dramatic growth includes the beneficial impact of three additional 777 freighters that we acquired in early January. That brought our 777 fleet in Dry Leasing to six aircrafts, and it significantly increased the contribution generated by our Dry Leasing segment in the first quarter. We expect the Dry Leasing segment to deliver similar contribution levels in subsequent quarters this year.

Turning to operating expenses; we expect that aircraft maintenance expense will total approximately $175 million to $180 million. In addition, depreciation this year should total approximately $115 million to $120 million. Our continuous improvement initiatives will also provide support for our results in 2014. We anticipate an effective income tax rate of approximately 30% for the full year. Finally, we expect core capital expenditures this year to total approximately $45 million to $50 million, mainly for spare parts for our expanded fleet.

Air freight remains a long-term growth industry and we remain focused on the long-term growth of our business. We have invested in, transformed, and diversified our business and developed new customers and we continue to strengthen our competitive position and drive forward in a still challenging commercial air freight environment.

Given our resilient business model, we expect to generate meaningful earnings and cash flow in 2014 and to continue to drive value for our shareholders.

This is a good point to ask Spencer to provide you with some additional perspective on our first quarter. 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 first quarter results. Our adjusted net income totaled $11.3 million or $0.45 per diluted share. On a reported basis, net income totaled $7.9 million or $0.32 per share. As Bill indicated, results in the first quarter benefited from our continued development of strategic new customer relationships, the strength and scale of our ACMI business, including CMI; a strong contribution by our expanding Dry Leasing segment, and expansion of our 767 platform, and our growth in passenger charter operations.

Included in reported earnings for the first quarter was a special charge of $3.4 million after tax, or $0.13 per diluted share that primarily related to our U.K. affiliate, Global Supply Systems Ltd. As a result, our reported earnings for the quarter, included an effective income tax rate of approximately 39%.

Also during the quarter, we generated free cash flow of $41 million, which was in line with the first quarter of last year. As a reminder, the termination fee related to our agreement with British Airways will be a second quarter item.

We also expect to incur costs related to the return of the aircraft, such as for painting, positioning, maintenance and reregistration, so both the fee and the costs will be included in our second quarter results and the net effect is not expected to be meaningful.

Looking at slide 7; operating revenues in the first quarter of this year benefited from our diversified business mix, including, increased block hour rates in our ACMI business, and the 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 a quarter that was challenged by significantly lower AMC demand.

Focusing on the pie charts in the bottom half of the slide, you see that revenues in our ACMI business accounted for 49% of total revenue in the first quarter, compared with 48% in the first quarter of last year. Revenues in ACMI increased 9% driven by our new 747-8s and increased CMI flying; partially offset by the redeployment of 747-400 aircraft to other segments. ACMI rates during the first quarter, primarily reflected the higher -- the impact of higher rates for our 747-8s, offset by growth in our CMI business.

Volumes in ACMI were in line with volumes in the first quarter of last year. Volumes benefited from 747-8 flying for Etihad and BST Logistics, 400 flying for Astral Aviation and Chapman Freeborn, as well as an increase in 747 CMI service for Boeing and our 767 flying for MLW Air.

These increases were offset by a reduction in block hours related to the deployment of 747-400 cargo aircraft to Commercial Charter and a reduction of flying by certain ACMI customers. In AMC, revenues during the quarter declined 36%, reflecting a reduction in cargo flying.

As Bill noted, we have actively transformed and diversified our business and developed new sources of revenue and earnings well ahead of this long expected contraction in military cargo demand. These include initiating asset light CMI services in our ACMI segment, expanding our tightened Dry Leasing platform, and developing a passenger component to our business.

In Commercial Charter, revenues in the first quarter increased 26% driven by a strong rise in block hours and an increase in revenue per block hour. In Dry Leasing, revenues grew following our acquisition of six 777 aircrafts since March 2013. As we've discussed, each of the aircraft was acquired with a long-term customer lease already in place.

Moving to slide 8; segment contribution totaled $51 million in the first quarter, compared with $45 million in the first quarter last year. The pie charts at the bottom of the slide illustrate the increasing proportion of contribution from our ACMI segment, which drove the vast majority of our total segment profitability, as well as the increasing contribution from Dry Leasing, two segments with more predictable and reliable earnings.

Direct contribution in the first quarter reflected the enhanced profitability of our 747-8s in ACMI and increased CMI flying for Boeing and DHL. These were offset by lower average aircraft utilization during the period, including the impact of an increase in the number of lower utilization CMI aircraft, the redeployment of 747-400 aircraft to Commercial Charter, and an increase in heavy maintenance. Direct contribution during the period also reflected the impact of the additional profitable aircraft in Dry Leasing, and substantially lower AMC cargo demand.

In Commercial Charter, segment results reflected the seasonal nature of this business, the deployment of additional aircraft into the segment, and an increase in flying to more expensive locations, partially offset by stronger demand levels.

Turning to slide 9, and our balance sheet; we ended the first quarter with cash including cash equivalents, short-term investments and restricted cash totaling $302 million, compared with $339 million at year-end 2013. The change in our cash position was driven by net cash of $45 million provided by operating activities, and by net cash of $400 million provided by financing activities. That was offset by net cash of $488 million used for investing activities.

Net cash used for investing activities, primarily related to the purchase of the three 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 acquisition of these aircraft. These proceeds were partially offset by payments for debt servicing. Excluding the acquisition of aircraft, engines and related capitalized interest, our core capital expenditures in the first quarter were approximately $4 million.

As Bill noted, for the full year, we expect our core CapEx to total approximately $45 million to $50 million. Our net leverage ratio, which includes capitalized rents, was six times trailing 12 month EBITDAR at the end of the first quarter, including the benefit of our investments in our outstanding Enhanced Equipment Trust Certificates or EETCs. The increase in our net leverage ratio was primarily driven by the financing for the 777s that we purchased in January.

Loans have a blended average interest rate of approximately 5%. Also in January, we refinanced a $104 million loan for one of our 747-8s with an EXIM bank guaranteed note. The $141 million note, which is secured by the 747-8, has an 11 year term at a fixed rate of 2.67%. All of the financings for our nine 747-8s are now in place. In the aggregate, they have a blended average fixed coupon rate under 3%.

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

William Flynn

Thank you, Spencer. As reflected on slide 10, Atlas is leading the way forward. We remain confident in the resilience of our business model and our ability to leverage the scale and efficiencies in our operations. The business initiatives we've undertaken and the investments we have made have transformed the company to deliver meaningful earnings in any environment. Should 2014 be the inflection point, when growth returns to commercial air freight and yields improve, Atlas is well positioned to be one of the prime beneficiaries.

With that Beth, may we have the first question, please.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Helane Becker, Cowen. Your line is open.

Helane Becker - Cowen Securities

Thanks for the time. I just have one question, and that's, I guess, with respect to potential new opportunities. Air France has been talking about reducing their main deck cargo business that they have. I guess, they're going from roughly 15 aircraft to 10. And then yesterday they indicated they'd go even lower. Is that an opportunity for you -- something you might be looking into? Can you just like talk about maybe, broadly speaking, opportunities that exist either in Europe or Asia with airlines like that?

William Flynn

Thank you, Elaine. Well I think there's probably a broader answer to the question on opportunities and where does Atlas see growth going forward and really in 2014 and beyond. So as we've said in the call, I think we've consistently said, we believe that air freight is -- long-term is a growth industry and has been, and when you look back over the last several years, it's been flat and there have been a lot of challenges to air freight growth even before that. But consistently a growth industry, an important part of the global economy and one that we expect returns to growth whether that's in 2014 or 2015 and beyond.

Our traditional ACMI customers have been airlines, airlines with large passenger operations that wanted a freighter operation and they continue to be our customers. We've been able to grow and expand and develop integrators as a customer. Our largest customer is DHL, as I think everyone on the call knows. But we've also been able to develop freight forwarders as ACMI customers, and that's [ph] in and out for many years and in the last year we've developed BST Logistics which is a Chinese freight forwarder.

So I think our growth in Europe and Asia, the Middle East, Africa, South America really across all the major trade lanes is good. And whether that's an airline that chooses to downsize their own operation and potentially outsource, or on the other end of the spectrum, an airline who hasn't been in freighter operations and wants to get into freighter operations or current customers or airlines well placed in air freight and want to grow. I think those are all real opportunities for us and that's where we're going to look.

Helane Becker - Cowen Securities

Okay. That's great. That was really it. The other questions I had you actually answered in your prepared remarks. Thank you very much.

William Flynn

Thank you, Elaine.

Operator

Your next question comes from the line of Kevin Sterling, BB&T Capital Markets. Your line is open.

Kevin Sterling - BB&T Capital Markets

Thank you. Good morning, gentlemen.

Spencer Schwartz

Hi, Kevin.

William Flynn

Good morning.

Kevin Sterling - BB&T Capital Markets

Bill, you guys have done a great job replacing those two 747-8s British Airways with DHL. What are your plans for the third one? If you can't place it, would you put it in Commercial Charter?

William Flynn

So as I said in my remarks, we've got good ACMI interest in the 747-8 as well as in our 400 fleet. Our goal is to put it into ACMI service, and I think the strength of our model is that prior to placing aircraft into ACMI or in an interim marketing period, we can put those aircraft to work and generate good returns from the aircraft, and certainly can do that with the 747-8 aircraft. So really that's our focus, Kevin.

Kevin Sterling - BB&T Capital Markets

Okay. Thank you. And kind of a little bit of different angle here for my second question. In the first quarter, were you guys flying below minimums in ACMI? And then if you could kind of touch on some of the trends you're seeing here, at least for the first month of the quarter in April, if you don't mind.

Spencer Schwartz

Sure, Kevin. It's Spencer. Yeah. Our customers flew on average 3% below their minimums during the first quarter. As you know, that's pretty common for first quarter, which is usually the slowest time of the year. We also had British Airways, which was winding down their operations, and so that played a little impact. But when you look at the trends during the quarter, certainly it started to pick-up in March and so good signs from that.

Kevin Sterling - BB&T Capital Markets

Okay. And are you seeing similar pick-up into April or has it gotten stronger or stayed about the same what you saw in March?

William Flynn

Yeah. So we've seen good level of market activity in March as Spencer said, and continuing into April. And I think probably Kevin, with all the recent reports we've had from Kuehne+Nagel and Panalpina and Etihad and others. Other industry players are certainly seeing good level of market activity, certainly from volume demand, and then so I think the whether-why is on how our yield is performing and then how does that move into the second half.

Kevin Sterling - BB&T Capital Markets

Okay, great. Thank you for your time and congratulations on a solid quarter.

William Flynn

Thank you, Kevin.

Spencer Schwartz

Thank you.

Operator

Your next question comes from the line of John Barnes, RBC Capital Markets. Your line is open.

John Barnes - RBC Capital Markets

Hey, good morning. Let's see. Given the success on the Dry Leasing side and obviously the volatility on ACMI, and I acknowledge you've done a pretty nice job of keeping the ACMI pretty full. But, can you just talk a little bit about maybe future use of cash flow? Do you see more of your capital spending going towards the Dry Lease side over time, or could you just talk about how you see growth in that business going forward?

William Flynn

Sure. Thank you, John. Just from an overview, as I said a moment ago, we believe long-term -- in the long term growth of airfreight and airfreight demand. ACMI is a core business for us. We feel good about the investments we made in the 747-8s. We feel good about our ability to continue to place our 747-400s. As we've said, we expect 20 plus placements this year, so that's one more 747-8 to place and then the increment over that has to be in the 400s and we believe that we'll be able to do that.

We've consistently said that we'll invest and tighten in our Dry Leasing business. But the focus there is to acquire the right aircraft that have existing leases stapled to them with solid creditworthy customers, so that upon acquisition they're immediately accretive, and we think there still are opportunities to continue to do that. The pace of that investment will just really be dependent on the opportunity set, how and when they present themselves and when we're able to achieve that.

And then the third area where we also remain focused on growth is in our CMI operations and there are additional opportunities in CMI which is indeed asset-light, but really leverages our core operating strength and as we continue to operate more of common asset types, we drive real operating efficiencies in the business.

So as we talk about cash, we'll come back to kind of the three legs of our stool; maintain the healthy balance sheet, invest in the business, and return capital to shareholders through share repurchases. So it will be opportunistic going forward. We don't envision in terms of fleet whether it were to be in ACMI or in Titan, to be a major fleet kind of investment, but rather kind of an asset-by-asset investment moving forward, if that answers the question.

John Barnes - RBC Capital Markets

Yeah, absolutely. All right, my next question is the placement of the 747-8s with DHL in exchange for the 400s you're getting back from them, are you getting the type of economics on the 747-8s that you originally forecasted when you took them into the fleet, or because DHL is getting to a size now in terms of your exposure to them? Did you provide some discount to make sure that you were getting the 747-8s into place and fully utilized?

William Flynn

I'll let Spencer answer the question more precisely. But we have a long-term relationship with DHL and as I think you know most -- as you know and almost everybody on the call knows, we started with six aircraft in the intercontinental long haul. Now we have nine. And we started from zero to now seven of the 767s in CMI. And we provide DHL an excellent service in terms of the underlying service quality, which is a key element of their value chain. In terms of the economics, we've preserved our economics and I'll let Spencer comment more fully.

Spencer Schwartz

John, its Spencer. So as you know, it's a really competitive marketplace and so we're trying to provide less sort of customer specific or aircraft specific detailed information. You know in the past, we provided more indicative ranges of profitability by aircraft and we've talked about some different things and so we're trying to provide a little bit less of that, not to hurt the information that's out there, not to hurt all of you, but really just for competitive information.

You know, each quarter we provide segment profitability. We provide the number of aircraft that are operated in each segment. So we think with that information, our analysts, our investors should have sufficient details to see how we've grown in ACMI and CMI, the continuously strong rate per block hour that we've earned and the profitability in our segments. So I think the answer to your question will be very evident going forward when you look at our statements each quarter.

John Barnes - RBC Capital Markets

Okay. But I shouldn't expect that there were some major -- there is some major change to the $0.40 a year kind of guidance that you've given on a per 747-8 basis with the DHL planes? There's not some major change in that, right?

Spencer Schwartz

So I think what we're saying is, we're not going to talk about the profitability for our DHL arrangement. But instead, I think you'll see over time when you take a look at the rate per block hour, when you take a look at the profitability in the segment, I think you'll see these businesses continue to perform really well.

John Barnes - RBC Capital Markets

Okay. And then Bill, just one last question in terms in that competitive dynamic. There are some pure ACMI providers out there, main deck guys that are clearly going through some difficulties. There's a couple that have gone away. There's some refleeting going on that -- while they're getting better aircraft, they still look like they're taking on aircraft that are not going to be economical over time. Can you just lay out your vision on the competitive dynamic from a main deck perspective, and especially on the ACMI side over the next couple years, do you think that more and more of that ends up going away and more and more of these aircraft get parked and you're kind of one of the few left standing or do you think -- I guess there was a comment recently that there's not going to be anything on the conversion side for a while that economics on the conversion side just don't make any sense right now. So it looks like you guys are kind of free and clear from a competitive standpoint. So just a little bit of color on kind of the go forward, if you would?

William Flynn

Thank you, John. From a go-forward basis, we believe there's a good market and very good opportunities for Atlas and as we -- I think we've talked about in the past, we believe we have the right mix of assets, assets that are competitive, that deliver very efficient economics for our customers, whether it's fuel burn or payload, and in kind of the right market segment for them.

Certainly, there's been some distress with other operators that that's been well reported. While not trying to characterize any one individual or comment on any other provider, my perspective is some of the carrier is just overly dependent on the military and didn't diversify their business and didn't -- from my perspective invest in modern assets and build the kind of commercial marketing organization that I believe we have. That understands -- has a good depth of understanding about international freight flows and is able to go out and work with customers and place aircraft.

There's not another scale operator out there, which doesn't mean we don't have competition. Of course we have competition, every business does. But to a large extent, I view competition as much as internal versus i.e. in-sourcing versus outsourcing and then the challenge to us is continue to provide a meaningful, tangible value proposition. And over and above that, we need to go out and identify and/or work to create new customers and that's why I think we go back and reference BST Logistics and Astral in particular.

Certainly Chapman Freeborn is a well-known charter broker, but ACMI placement with a charter broker is new. BST Logistics is a major forwarder in China, but most folks outside of China may not know them. And then of course, Astral is tapping into Kenyan -- they are working with a Kenyan airline, is tapping into the high growth markets, higher growth markets in and out of Asia.

So the ACMI challenge for us is not that there's less customers out there, It's identifying who those customers are and creating the value proposition that in a -- what has been a weak market as we know, to go forward and make the commitments to take that fixed capacity and I think we're in a good position to do that.

The other operators may be behind -- they've got to come up with their own plans to move beyond the military demand that all of us benefited from for almost 12 years. So I think that's the dynamic in the market.

John Barnes - RBC Capital Markets

All right. Great color. Thanks for your time.

William Flynn

Thank you.

Operator

Your next question comes from the line of Jason Ursaner, CJS securities. Your line is open.

Jason Ursaner - CJS Securities

Just following up on the last question of identifying customers and overall interest from potential ACMI customers in both the 747-8 and 400. I'm not looking for the specific number of companies that you'd be in discussion with, but just generally trying to understand how broad-based the demand is, particularly on the 400 gauge? Is it a couple of key customers, a handful, is it 10, 20? Just trying to get a better sense for that; and would it primarily be existing customers that are considering expanding their dedicated operations or are there really active discussions with new customers that are not existing clients?

William Flynn

Well, I'll start from the last question -- the last part of that question Jason. There are active discussions with companies that are not current customers, in ACMI, for both of the two principal assets with offer, and in CMI as well. But specifically on ACMI, rather than suggest how many customers are out there, I do think that is competitively sensitive. We have talked about 20 plus placements this year. That's a number we believe in; and that will be a mix of expansion with current customers. Some of them might be very recent customers, so we'll see, along with longer term customers and growth with new customers.

Jason Ursaner - CJS Securities

Okay. And just at a high level, what do you think is holding customers back at this point, just given the freight volumes. They do continue to trend at or near records and they are growing, maybe slower than people would have expected, but at least decent growth so far for 2014. So is it just concerns on supply and load factor or is there something else?

William Flynn

I think that -- I think you put your finger on it. But this is really one quarter's worth of growth, right. When we combine January and February, so we can normalize for the Lunar New Year effect and look over the prior years, that was pretty good. And in March, we're seeing the tonnage there and we're seeing some of the reports from one or another terminal or one or another freight forwarder. But it's kind of one quarter.

In the fourth quarter last year, it was a late start to the peak and it really only started in October. The yields didn't really manifest themselves or yield growth didn't manifest itself until November and it ran straight through Christmas. And so I think it's -- I think in some cases, customers are simply looking for another period of time, I won't say if that's a quarter or what their own perspectives are, but a little bit more evidence of a sustainable inflection in the air freight market, and I think as they do, we are really well positioned. We've got the right assets. Our operating group delivers very-very high level of service and there is real operating leverage in the business, given our scale and scope and global network.

Jason Ursaner - CJS Securities

Okay. And just last question for me, the core CapEx, you lowered the forecast slightly to 45 to 50. You only spent $4 million in the quarter, which is down a lot year-to-year, and historically there hasn't really been a lot of seasonality to the spending. So is there any specific projects that are more back-half weighted or is this just building in some cushion at this point in the year?

Spencer Schwartz

Jason, that's a good question. It's primarily related to what we call rotable parts, parts that are not expendable, parts that can be refurbished then put back into inventory. So its primarily related to our spare parts, including some initial stocking for the 747-8s, assets that we contribute to joint venture, 50% joint venture that we have with Cargolux. So it's really related to that. There are some other really small items, but that's the predominant piece of it. As far as the timing goes, it really does relate to some of those restocking efforts which takes place throughout the course of the year. So we still do expect about $45 million to $50 million of CapEx for the full year.

Jason Ursaner - CJS Securities

Okay. Actually just one more if I can. Last quarter you had reclassified some aircraft rent into the navigation fees and it was a pretty significant jump in Q4 that -- I guess maybe I had attributed more to a seasonal pickup. But the combined aircraft rent and navigation, it's still trending a fair amount higher. So just wondering, where some of that growth is coming from and was there anything specific to either this quarter or last quarter that would have impacted, what as an outsider we should consider more of a normalized run rate?

William Flynn

Sure. Good question. The increase in that line, Jason, is really due to an increase in purchased capacity, capacity that we subcontract from some our -- for some of our Commercial Charter flights. It's also due to increased Commercial Charter flying. So it's really what we call reaccommodated air, primarily and it's the collaborative nature of the work that we have, that we do with our customers. Not all capacity is the same. It really depends on availability of the aircraft, when and where, what type of aircraft. Some of our customers have aircraft that are in a better position than our aircraft. Some of our customers are in a better position to fly certain routes. So when we find those situations, we acquire the capacity from them, so we subcontract and then operate the flight. So you see, we have the revenue, obviously it's included up above in revenue, and then you see the increased expenses down below.

Jason Ursaner - CJS Securities

Okay. Great. I appreciate it. Thanks.

William Flynn

Thank you.

Operator

Your next question comes from the line of Scott Group, Wolfe Research. Your line is open.

Scott Group - Wolfe Trahan

Hey, thanks for taking the question, guys.

William Flynn

Good morning.

Scott Group - Wolfe Trahan

So wanted to know if we can get a little bit more color on some of the assumptions behind the earnings framework for the year. Few things in particular curious on; one is, why did depreciation come down so much in the first quarter and why is it supposed to ramp up so much more than you initially thought? Two, do you still expect a $0.70 earnings headwind from military? And then just a couple other things, just in terms of some of the assumptions. Can you give us kind of the fleet count assumptions for the 400s and 747-8s in ACMI and any color you've got on why second quarter is going to be more flat sequentially when it's typically up a lot? Just not sure I follow that thought. So a bunch of little things, but just around the assumptions behind the guidance.

Spencer Schwartz

Sure. Thank you, Scott. So there were a bunch of questions there. We'll try to address them, make sure we hit them all. But before I start though, Scott, I want to point out in your report this morning, you noted a, what I believe you called a benefit from minority interest or non-controlling interest. But really, it wasn't a benefit. We've talked about a special charge that we recorded this quarter of about $8 million that was related to GSS, our U.K. subsidiary, and so we own 49% of that entity. The other 51% is owned by parties in the U.K.; and so the expense that we recorded for the special charge, we then need to remove the 51% that's related to this other entity, because it's recorded on a consolidated basis.

So I just wanted to make sure you realized that on a net basis, it certainly was an expense, the special charge was an expense related to GSS, and so you were focusing on a piece of it and calling that a benefit. But overall, it's a net expense, and then it's a non-GAAP item and so on an adjusted basis it's all removed. So I just want to make sure --

Scott Group - Wolfe Trahan

Thanks for clarifying that. Thank you for clarifying that. I'd been in touch with Dan and we're going to make sure that that gets fixed. But thank you for clarifying.

Spencer Schwartz

Okay. All right. Then on to the other questions. So as far as depreciation, the way we described depreciation last quarter is we said that, you really take the run rate from the fourth quarter of 2013, kind of extrapolate that and add about $10 million and now we've upped that just a little bit. So that would equal about $110 million. We've upped that now just a little bit to, I think we've said now $115 million to $120 million. So we've upped it just a little bit, Scott and that's just a matter of -- we just took on a bunch of new aircraft and so we had our earnings call in the first half of February, and we had just taken on a lot of new aircraft and so we've refined our estimates now. That should be a pretty good estimate going forward.

As far as the fleet count, I think Bill has been pretty clear that we expect our ACMI placements to be at 20 plus by the end of the year and that's nine of the 747-8s and that's 11 plus of 744s.

Let's see. With regards to the second quarter being pretty consistent with the first quarter, I think generally, we've seen a pattern at Atlas of approximately 30% of our earnings coming in the first half of the year and approximately 70% in the back half of the year. I think you'll see a similar pattern this year.

And the other item, of course is, I think you understand, maintenance timing. We obviously try to -- if at all possible, we try to perform maintenance in the early part of the year, so that we can have the aircraft available during the typically strong peak season period towards the end of the year.

I think I've addressed all of your questions. So you asked about our overall, sort of, framework that we provided for the year, and that's still consistent. It's just too early in the year. We don't yet have visibility into the second half. There's still a lot of uncertainty that remains out there, especially with regard to yields. It's been a great start to the year. We're very happy with that. As Bill said, we are placed really, really well and so if there's any upside, we are poised to take advantage of that. But it's just too early in the year for us to raise.

Scott Group - Wolfe Trahan

Do you still -- is $0.70 still the right headwind to think about for military?

William Flynn

For military, we're going to have to continue to provide some perspective as we go through the year, Scott. It's really going to be driven, I think by -- I think all of us would imagine, by ultimately the decisions that are made in the administration on Afghanistan and how much withdrawal, when that withdrawal occurs for both people and cargo and what kind of ongoing support the military needs as far as limited inbound of material in any event.

So with the uncertainty around who the winner is in the election and what the status of forces agreement may be, we're just not getting much long-term forecast from the military. So I think it's early for us to update it and probably something that will make more sense to discuss when we report second quarter earnings later in the summer.

Scott Group - Wolfe Trahan

Okay. That's great. So kind of just following up on the guidance, just one last time. So if I -- as I just look first quarter to second quarter the past four years, earnings have basically doubled. So I guess I am still just not clear why they would be flat in the second quarter, relative to 1Q.

William Flynn

I think Spencer has provided some perspective, suggested some of the considerations; in particular, maintenance and elsewhere. We are providing a framework and not specific guidance and we've also commented about yields still continuing to lag demand, and so that's a perspective that we're providing, Scott.

Spencer Schwartz

The other thing, Scott, if you're just looking at a period without digging deep into what's happening during that period, it may give you a false perspective. We acquired two 777s in March and July of last year. We acquired -- well, we acquired one in March, two in July. We acquired three, of course, at the beginning of this year and so -- those types of things can sway.

William Flynn

Right. And that's consistent quarterly earnings in Dry Leasing, as you pointed out, Spencer.

Scott Group - Wolfe Trahan

Okay. Thanks, guys. Appreciate it.

William Flynn

Thank you.

Operator

Your next question comes from the line of John Godyn, Morgan Stanley. Your line is open.

John Godyn - Morgan Stanley

Hey, guys. Thanks for taking my question. Bill and Spencer, when I think back to sort of prior Investor Days and just what the company has been willing to talk about in the past, it's not uncommon for you to sort of speak to the potential for long-term earnings growth. And I'm not trying to lock you down on a specific number, but there seems to be a presumption in the marketplace that you might not see earnings growth in 2015 or 2016 versus 2014 levels including this -- including what's going on with AMC Charter. I am just curious what your perspective is on that, because you've been willing to kind of talk about the ability to generate long-term growth in the past?

William Flynn

Okay. Well, thank you, John, and we hope to see you and others on the call in June 6th at our Investor Day here in New York as well. We believe that air freight is a long-term growth industry and we believe we're very well-positioned in the industry, particularly at any inflection point there or when an inflection point would occur in the future.

We think we've made the right investments in the 747-8s. We believe there are continuing good opportunities to put the 747-400 to work, and we believe there are opportunities for growth in CMI. So in the ACMI segment, we believe there are good growth opportunities for the company going forward.

Answer to some of the other questions earlier we talked about; some of the changing nature of who that ACMI customer might be, because there is real value in ACMI and different companies in the supply chain are seeing the value of having dedicated freighter main deck capacity.

We will invest, continue to invest in Titan, in accretive investments, as we've already discussed. And so I believe the company is a long-term growth company, and that those opportunities are there in 2015 and 2016 and we can talk more about that when we're together in June.

John Godyn - Morgan Stanley

And is it fair to say that some of these unique opportunities that you've developed like CMI and Dry Leasing, you expect that to fully offset any headwinds from other businesses in a flat freight environment? I'm just trying to get a handle on the potential for earnings growth specifically.

Spencer Schwartz

So dry lease -- in the Dry Leasing segment we've reported the results for this quarter and absent any additions into the Dry Leasing fleet this year, that number will be pretty flat quarter by quarter and has an annuity quality to it and goes a long way to addressing the continued contraction in AMC cargo. And frankly, we feel good about our ability to have executed those acquisitions in a fairly short period of time throughout 2013. More so, given the fairly dramatic decline in AMC cargo demand, very different from what the military had been forecasting to us, even in the middle of the year of 2013.

So that's one segment. ACMI, higher utilization, more placements of our aircraft, more placements of the 747-400s, a strengthening market, better yields in commercial cargo which I think do follow the strengthening market and that's why we're not talking or giving a lot of perspective on second half. We need to see that happen as our investors do. But I believe we're well positioned to do that.

John Godyn - Morgan Stanley

Great. And just a couple knits [ph] for Spencer. As the company continues to expand Dry Leasing, some of the dry lessors give us a few other pieces of information. I'm not sure if you're willing to speak to it, but it's normal to get the average lease life of the remaining leases. You mentioned that they're on long-term leases. I'm not sure if you could add a little more clarity on that? And also if you could speak to the internal processes for testing for impairments of assets, that would be very helpful. Thanks.

Spencer Schwartz

Sure John. So we've talked a little about the 777s and I think we've stated there -- as you said, they're very long-term. We acquired those leases with approximately 10 years remaining on them. So they're very-very long-term leases.

With regard to impairment testing, we look at impairment every quarter, as we are required to under U.S. GAAP. We constantly are looking for potential triggers, things that might indicate that there's some sort of an issue and so we do that every quarter. We have pretty much contemporaneous documentation and review on that. And thus far, we and of course our auditors who sign our financial statements, we have not needed to record any impairment. The cash flows from ours assets are well in advance of the book values of those assets.

John Godyn - Morgan Stanley

That's great. Thanks a lot, guys.

William Flynn

Thanks John.

Operator

Your next question comes from the line of David Campbell, Thompson Davis. Your line is open.

David Campbell - Thompson Davis & Company

Good morning, everybody. Well I have got two questions. One relates to industry situation; and that is one of your leading competitors in the air freight market's Chief Executive Officer has been extremely vocal recently, saying that there's no growth in the air freight market long term, that whatever freight is there will go on boats. Is he -- I don't know what he would say now about the 6% growth in March, but where is he coming from? What's the reason for him being so negative about the potential market you're in?

William Flynn

Well, David, that's a difficult one to answer, because I'm not sure that I know what anyone's thinking. Each company, each business looks like the same market and draws different conclusions. In the case of air freight, we've seen Air France-KLM talking about reducing capacity, and on the other hand we've got Etihad increasing capacity and Cathay increasing capacity and buying a large fleet of 747-8s, complimenting their 74s and getting out of 777s.

So people take different -- look at the same market and come to different conclusions. Our conclusion is that long-term air freight is a growth industry. It is indeed vital to global trade. Time matters for several key segments of global trade and they'll continue to rely on air freight. So that's not a view I share, but I don't have the benefit of the other parties thinking.

David Campbell - Thompson Davis & Company

Is it possible -- I mean have you underestimated the capacity being provided by passenger airlines, particularly in the Asia-Pacific region?

William Flynn

That's a good question. And I think if we look at what's the new capacity introduction; the largest amount of new capacity introduction is going to be the 787, whatever variant, the 2008, 2009 and the 2010. But United was fairly specific a week or so ago in their earnings call about -- they're delighted to be getting the 87s, because now they can do more point-to-point flying. So it's less Chicago to Tokyo, Tokyo to somewhere else in Asia, as an example; or some domestic origin to Chicago, Chicago, then Tokyo and somewhere else in Asia to more point-to-point flying. So maybe its Phoenix-Beijing or Salt Lake City to Hong Kong, pick a long-haul destination.

And if that's how those aircraft are fundamentally going to be deployed and that's what almost every carrier has said, that actually is not how air freight moves. Air freight moves through hubs because that's how the freight forwarders who market 85% of air freight capacity, both belly and main deck, consolidate, build loads and drive their earnings.

Having myriad kind of point-to-point flights with albeit good belly capacity available, but does not allow them the opportunity to aggregate their freight and get the kind of rent and return they get on building those pallets, mixing weight and volumetric cargo. I don't think it's going to pull necessarily as much cargo away as being suggested and the 60/40 ratio of 60 main deck, 40 belly, I think is going to continue. And I think that whole notion of how are these aircrafts going to be deployed, how much point-to-point flying is going to happen, I think its not fully appreciated or fully factored into some of the forecasts around a big diversion of main deck to belly. How are the passenger airlines going to fly them?

David Campbell - Thompson Davis & Company

Thanks. My last question is in your page 5, you mentioned that if air freight growth remains -- that air freight growth returns, that you're a prime beneficiary. Is that primarily going to be in block hours or in yields or both?

William Flynn

I think it's in both. In terms of the ACMI customers, it will be block hours, because there will be the opportunity for them to fly above minimums and I believe they will as they have in stronger markets, and you'd see that over our historical above min flying. And then we have a charter segment, it's 20%-ish of the business and so yields will directly benefit the charter market -- our charter market segment I mean.

David Campbell - Thompson Davis & Company

Okay. Thank you.

William Flynn

Thanks, David.

Operator

Your next question comes from the line of Jack Atkins, Stephens, Inc. Your line is open.

Jack Atkins - Stephens Inc.

Good morning guys. Thanks for the time. So I guess first off here, just back to the 400s for a moment if I could, we've been seeing quite a few of those assets parked globally. I'm just sort of curious with your fleet on the charter side going I think from seven or eight to maybe nine or 10 over the next couple of months, how do you think about your 747-400 fleet and would you maybe look to start parking or maybe retiring those aircrafts at any point in the next couple years?

William Flynn

So starting with kind of the back part of that -- of your question, we aggressively manage our fleet and as you've seen, we've exited a couple the BCFs already and we have one of the BCFs parked. I do believe we will place more 747-400s into ACMI. That's implicit in the 20-plus, given that there are 18 in ACMI today and we have one more 747-8 to place.

I think there is good demand for the 747-400s. When it is in ACMI? Because it's the freighter, the asset plus the quality of the CMI service, the CMI side of that, the operating side of that, that we're able to provide to our customers and that really does make the difference. If you look at the scale of our fleet of 747-400s, we have a lot of redundancy and a lot of capability in that fleet. We have the ability to cover check. We have the ability to increase capacity for short-term charter or peak demand that a customer may see in their operations.

Certainly, we don't want to have any AOGs but when we have an AOG, the scale and the disposition of the fleet, we can quickly recover from almost all of our customers, any kind of AOG situation that does happen. It does happen with planes. So I think we are perhaps well positioned, better positioned than most, to be able to put 747-400s to work in ACMI, because of several of the points I made and other parts of our value proposition.

Jack Atkins - Stephens Inc.

Okay, Bill. Thanks for that. And then on the military side of the business, and if you addressed this earlier I apologize, but how does the status of forces agreement, if we do see one put in place in Afghanistan, how does that change your assumption around, I guess just from a directional perspective for that AMC business in 2014, 2015, would you still expect that $0.70 type of a headwind, or would that status of forces agreement mitigate that to some degree?

William Flynn

Jack, it's hard to answer, because we just don't have enough visibility. But what we're seeing is a military cargo demand that would be lower than what was previously forecasted by the military, even just a year ago at this time, and we've communicated that.

Passenger business isn't wholly dependent on the sofa, but also the forces that we have in Japan and Korea and Europe, elsewhere in [indiscernible] and in Diego Garcia. So we are going to see cargo contract beyond where I think the number will settle for the calendar year 2014. Passenger will contract less, and I think there will be an ongoing demand for a good level of passenger flying for us and an ongoing demand for cargo. But it will be at a lower level than earlier forecasts we've received from the military and earlier forecasts that we've communicated. And so we'll continue to update that for the year, because it just gives an evolving situation.

Jack Atkins - Stephens Inc.

Okay, got you. And then last question. Again, if you addressed this I apologize. But on the Commercial Charter side of the business, does the framework that you all have for 2014 expect Commercial Charter to be profitable from a direct contribution basis for the full year, and then sort of what does the framework assume in terms of yields? Would you assume yield pressure in Commercial Charter or do you assume just sort of stable yields on a year-over-year basis? Thanks.

Spencer Schwartz

Sure, Jack. I'll try to tackle that. Yields in Commercial Charter as we talked about have lagged behind. We've seen pretty strong demand. We've seen our block hours grow. We've seen that part of our business really growing. Yields have still been a little further behind, so we certainly saw that during the first quarter. We will see where that trends throughout the rest of the year.

With regard to the segment overall, I think it depends on what aircraft get placed within ACMI, what aircraft are in Commercial Charter, because the way our process works, as Bill described, we like having assets in Commercial Charter. We like being able to take advantage of demand and be able to operate for customers on quick notice. So we like to have aircraft in that segment.

But for purposes of allocation, for purposes of reporting, the ownership costs related to those aircraft then get allocated to the Commercial Charter segment. So it depends on several factors. But I think, again, allocating excess capacity to charter we think is a really good thing. It allows the aircraft to be ready to be deployed around the world, so that we can capitalize on any short-term notice Commercial Charter demand and we've benefited from that in the past and hope to continue to do so.

Jack Atkins - Stephens Inc.

Thanks so much again for the time guys.

Operator

Your next question comes from the line of Bob McAdoo, Imperial Capital. Your line is open.

Bob McAdoo - Imperial Capital

Thanks for taking the question, guys. A couple of things. I've had a guy explain to me and I try to make sure, just trying to verify the idea that one of the issues that we're seeing in the industry obviously is -- his rule of thumb is that three 777 passenger planes have as much belly space for cargo as a freighter and that's what he considers to be one of the biggest issues we're facing. And with that in mind, what is the -- could you educate me just a little bit on 787s that we see as a growth vehicle that we talked about a few minutes ago. What is the capability, belly space capability and the competitive threat, if you will, of a 787 versus a 777 belly capability for a freighter, if we do have some of this point-to-point stuff? Does that make sense, the two sides of that question?

William Flynn

Yes, there's a lot in the answer there, Bob, and -- sorry, in the question and in our answer. You know Dan Loh, who is our Head of Investor Relations. There are a number of studies that are out there already on belly and capacity and what's the nominal capacity of a freighter versus the effective capacity of a freighter when put into operations. And there's a difference between the nominal and effective capacity.

So as we look at the long haul intercontinental flying between Asia and Europe on a 777 belly, the effective capacity is about 18 tons. Normally, it's higher. But the effective capacity is about 18 tons. And you'll see a similar impact with the 787s and with the Airbus A350 as they begin to deliver.

I would argue that more point-to-point flying reduces the attractiveness of that belly capacity because of the sheer nature of the freight forwarder as 85% of distribution channel and what's driving that freight forwarder is consolidating at hubs, building the main deck pallets and driving their margins through what they pay for the pallet versus what they're able to charge the customer on chargeable weight whether that's volume or actual weight.

And so we've not seen the ratio meaningfully change on main deck freighter versus belly capacity. And I think the point I was making earlier on just the comments from United and other airlines, is they go to point-to-point flying to provide a better experience for their passenger customer. That's what's driving their business. So they don't have to change planes. So they don't have to go into hubs. So they can improve essentially their yields.

I think it effectively begins to remove some capacity from the long-haul intercontinental freight because it's flying away from the hubs, not in and out of the hubs. We could go on for a while talking about this and there is probably some things that I think we ought to do and make sure we provide our perspective and some of the analysis at our Investor Day that's coming up here in June, and we will.

Bob McAdoo - Imperial Capital

But still --

William Flynn

Its not a comprehensive answer, but it's not -- the gentleman you spoke to, it's not a hypothesis, I accept.

Bob McAdoo - Imperial Capital

Okay. So the 18 tons that you talk about, is the 18 -- so what you're saying there is that 787 can do -- can have 18 tons of effective capacity about the same as a 777. So the type of airplane doesn't change the effective capacity. Obviously, where it's flown and whatever it obviously does. And I guess --

William Flynn

Right.

Bob McAdoo - Imperial Capital

Pardon.

William Flynn

It's both, Bob. There is a nominal capacity.

Bob McAdoo - Imperial Capital

But they're both about the same size is what you're saying -- is what I'm saying and what I'm trying to understand. In terms of -- somehow, I'd gotten the impression that the 787 --

William Flynn

They're not. I mean, they're not. Well, a 787 may have more -- slightly more nominal capacity than a 777. But if your flight is Shenyang to Phoenix, it is a longer flight. It's going to -- you're going to -- with that, you're going to drop cargo.

Bob McAdoo - Imperial Capital

Sure.

William Flynn

And if you have a passenger, heavy passenger load factor and a lot of baggage you're going to drop cargo again. So there is variability in that. And it's an important -- it's actually a very important discussion, because there is a hypothesis out there in the market that's looking at capacity. But there is some very good work done on it. And its understanding how the aircraft -- one of the other variables that's not yet well understood, in part, because the carriers have to define it. The operators of the aircraft have to define it. More point-to-point flying, I think takes some capacity away from the networks that exist today, where it's hub to hub, and that belly capacity is lining up right next to a freighter in the market.

Bob McAdoo - Imperial Capital

Great. That's what I was thinking was that, as you go in that direction, obviously, the need for the really large aircraft that some of you -- someone still have, 747-400s that are in passenger mode, that they're flying between hubs, they're going to find less and less interest in using those airplanes to the hubs, if they're stealing traffic from the hub and going point-to-point. So that could actually go the other direction in terms of being a positive for your side of the business, I would think. Is that a reasonable way to think about it?

William Flynn

Yes. It could be a positive for main deck freighters, yes.

Bob McAdoo - Imperial Capital

Okay. Well thanks for the discussion. I look forward to learning more in June.

William Flynn

Yeah. Thank you very much Bob.

Operator

I will now turn the call back to Atlas Air for closing remarks.

William Flynn

Well, thank you, Beth. And Spencer and I and the Atlas team want to thank all of you for your interest today in Atlas Air Worldwide, and we appreciate you sharing your time with us and your questions and our discussion. We certainly look forward to speaking with you all again soon and hope that you'll be able to participate in our Investor Day, which will be June 6 in New York. Thank you, everyone. Thank you, operator.

Operator

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

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