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Atlas Air Worldwide Holdings, Inc. (NASDAQ:AAWW)

Q2 2014 Results Earnings Conference Call

July 31, 2014 11:00 AM ET

Executives

Ed McGarvey - VP and Treasurer

Bill Flynn - President and CEO

Spencer Schwartz - EVP and Chief Financial Officer

Analysts

Kevin Sterling - BB&T Capital Markets

Jason Ursaner - CJS Securities

John Godyn - Morgan Stanley

Scott Group - Wolfe Research

David Campbell - Thompson Davis & Company

Helane Becker - Cowen

Bob McAdoo - Imperial Capital

Steve O'Hara - Sidoti

John Mims - FBR Capital Markets

Operator

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

I will now turn the conference over to Atlas Air.

Ed McGarvey

Thank you, Robyn, and good morning everyone. I'm Ed McGarvey, Vice President and Treasurer for Atlas Air Worldwide. Welcome to our second 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’ve 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 two, 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 website at atlasair.com.

During our question-and-answer period today we would 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 would like to turn the call over to Bill Flynn.

Bill Flynn

Thank you Ed and good morning everyone. Thank you for joining us today. Beginning with slide three we're off to a good start in 2014. Adjusted EPS of $0.63 per diluted share in the second quarter is a sequential improvement from the $0.45 that we reported in the first quarter.

And our adjusted EPS of $1.08 per diluted share for the first half of the year compares favorably with $1.01 we achieved in the first half of 2013. Air brake demand is improving and we are encouraged about our outlook for the full year. We are maintaining our full year earnings framework as we continue to gather additional insights into the second half of yield, demand and military requirements.

Atlas is an entrepreneurial company and our results illustrate the positive contributions being generated by the investments we've made and the initiative that we've undertaken. In an uncertain airfreight market and in anticipation of a decline in military cargo requirements we have diversified our business mix and are driving resilience.

Earnings in the second quarter were led by our modern 747-8 freighters and increase in CMI fly and the six 777 freighters that we've added in dry leasing. We are also benefiting from the expansion of our 767 platform and our growth into military and commercial passenger charter operations. Led by the strength of our brand, our global market leadership in outsourced aircraft and services and our ability to work closely with our customers to enhance their route networks and grow their businesses, we are well position to take advantage of market opportunities and improving market conditions to continue our focus on longer term business growth.

Slide four illustrates the positive direction of airfreight demand so far in 2014, and the positive outlook for the year. One indicator, Shanghai's PACTL Terminal is on track for a record year, PACTL, reported tonnage growth of 12% year-over-year in June and it's up nearly 14% year-to-date.

Consistent with the gradual cyclical pickup in global economic growth, forecasts by AIRA and others suggest that air freight demand will grow by several percentage points in 2014 with AIRA estimating a 5% compound annual growth rate through 2017.

Slide five focuses on our earnings framework for 2014. We're pleased by our performance in the first half of 2014 and the positive direction of market trends so far this year. As indicated, while airfreight volumes continued to improve, there is still limited visibility into second half yield demand and military requirement. As a result, we are maintaining our earnings framework or the full year.

On a sequential basis, we expect EPS in the third quarter to improve over second quarter adjusted results by an increment similar to the per share increase between our first and second quarter adjusted earnings.

For the full year, we expect total block hours to be comparable to 2013, more than 70% of our block hours will be in ACMI with approximately 10% in AMC and the balance in commercial charter.

Our outlook for ACMI reflects our two new dash-8 placement with DHL Express in May; it also includes the new intercontinental 747-400 service for DHL that we launched in mid-June. We see continuing ACMI customer interest in our one remaining dash-8 aircraft as well as our 747-400s. And these aircraft continue to operate in revenue service and we market them in ACMI.

In AMC, our share of military fly mainly in passenger service has increased due to a reduction in the number of carriers serving the market and our ability to capitalize on additional flying opportunities. Due to cargo however we continue to expect an overall decline in military requirement compared with 2013.

Dry leasing dramatic growth includes the beneficial impact of the five additional 777 freighters that we acquired since the second quarter of 2013. That bought our 777 fleet in dry leasing to six aircraft and it’s driven significant increase in contribution from highly predictable revenue and earning streams.

Turning to operating expenses we expect that maintenance expense will total approximately $180 million. In addition depreciation this year should total approximately $120 million to $125 million. Our continuous improvement initiatives will also provide support for our results in 2014 and beyond.

One key initiative is our engine acquisition program. It complements our continuing efforts to generate savings on maintenance expense by acquiring engines with valuable service life or green time on them.

During the second quarter, we capitalized on our opportunity to trade in our older run out CF6-80 engines in connection with the acquisition of new ones. This will produce very attractive economics for Atlas. It will enhance operating reliability that we can provide for our customers and it will generate savings on maintenance expense, given the increased time interval to the first overhaul on the engines.

Another key initiative is our ongoing evaluation of appropriate tax planning strategies. As a result of this effort, we identified a substantial income tax benefit in the second quarter related to extra territorial income from the offshore leasing of certain of our aircraft.

We continue to evaluate our eligibility to claim these tax benefits and we may recognize additional amounts in future periods. Although it is too early to reasonably estimate what those benefits might be?

Reflecting the tax planning that we have done. We anticipate that our adjusted effective income tax rate will be approximately 28% for the full year. We also expect core capital expenditures this year to total approximately $45 million to $50 million and mainly for spare parts for our expanded fleet.

This is a good point to ask Spencer to provide you with some additional perspective on our second 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 second quarter results. Our adjusted net income totaled $15.9 million or $0.63 per diluted share. On a reported basis, net income totaled $29.6 million or $1.17 per share. Also during the quarter, we generated free cash flow of $55 million.

Results in the second quarter benefited from our dash-8 in ACMI growth in CMI flying and a strong contribution of our expanded Dry Leasing segment. We also benefited from the expansion of our 767 platform and our growth in passenger charter operations. Included in reported earnings for the second quarter was an income tax benefit of $24 million or $0.95 per diluted share due to our beneficial tax planning with respect to the tax treatment of extra territorial income as Bill noted. That benefit was partially offset by a non-cash loss of $9.4 million after tax or $0.37 per diluted share resulting from the trade in the run up used spare engines for new engines.

As a reminder, the termination fee related to our agreement with British Airways was also a second quarter item. Because we incurred cost related to the return of the aircraft, such as for painting, positioning, maintenance and reregistration and downtime as a result of those processes, the net effect during the quarter was not meaningful.

Looking at slide seven, operating revenues in the second quarter 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 of our Dry Leasing business, as we previously noted. These drove our results in a quarter that also saw a decline in ACMI block hours related to the return of 3-8 as well as significantly lower AMC cargo activity.

Revenues in ACMI increased 3% reflecting our dash-8 aircraft and then increase in CMI flying. ACMI rates during the second quarter primarily reflected the impact of higher revenues on dash-8. While volumes in ACMI were affected by the return of the aircraft, the impact was partially offset by our placement of 2-8 with DHL Express in May, the start up of dash 8 volume for BFT Logistics in February and for Etihad in May 2013. And the start up of 747-400 ACMI flying for Astral Aviation in September 2013.

In addition ACMI block hours during the second quarter benefited from an increase in CMI dreamwork they are flying for Boeing and the initiation of CMI 767-200 passenger service for MLW air during the third quarter of 2013. In AMC, revenues during the quarter declined 3%, primarily driven by reduced cargo flying.

This impact was partially offset by an increase in passenger flying and an increase in average revenue per block hour which was driven by a greater requirement for higher yielding 747-400 passenger aircraft. As noted we have actively diversified our business and developed new sources of revenue and earnings well ahead of this long expected contraction in military cargo demand.

In commercial charter revenues in the second quarter increased 14% driven by a strong rise in block hours and an increase in revenue per block hour. The increase in revenue per block hour reflects the impact of incremental cargo revenue on sub-contacted commercial charter flights with well associated block hours partially offset by lower market rates.

In July leasing, revenues grew following the acquisition of five of our six 777 aircraft. As we've discussed each of the aircraft was acquired with a long-term customer lease already in place. Focusing on the pie charts on the bottom half of the slide you see the revenues in our dry leasing business accounted for 6% of total revenue in the second quarter compared with 2% in the second quarter last year.

Moving to slide eight. Segment contribution totaled $62 million in the second quarter, compared with $68 million in the second quarter of last year. The pie charts at the bottom of the slide highlight the significant proportion of contribution from our ACMI segment, which generated a 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 second quarter reflected an increase in maintenance expense for aircraft operating in ACMI, which was partially offset by higher dash-8 revenue and increased CMI flying, an increased in the volume of passenger flying on higher yielding 747-400 aircraft in the AMC, the impact of additional profitable aircraft in Dry Leasing and a decrease in market rates and increased maintenance and crewmember travel expenses in commercial charter. Given the smaller size of our military business and since the aircrafts are interchanged regularly between AMC and commercial charter, we think investors and analysts should review the results of these two businesses together.

Turning to slide nine and our balance sheet. We ended the second quarter of 2014 with cash including cash equivalents, short-term investments and restricted cash totaling $299 million, compared with $302 million at March 31st. Our cash position at June 30th, reflected net cash of $62 million provided by operating activities during the second quarter. That was offset by net cash of $21 million used for investing activities and $44 million used for financing activities during the period.

Net cash used for investing activities, primarily related to the purchase of engines and (inaudible) spare parts. And net cash used for financing activities primarily reflected scheduled payments of debt. At the end of the second quarter, our net leverage ratio, which includes capitalize rent was 5.8 times trailing 12 month EBITDAR including the benefit of our investments in our outstanding EETCs.

The improvement there in our net leverage ratio versus March was primarily driven by the pay down of outstanding debt since our triple financings in January we have paid down approximately $100 million of our overall debt. Finally, excluding the acquisition of aircraft, engines and related capitalized interest our core capital expenditures in the first half of the year were approximately $11 million and as Bill noted for the full year we expect our core capital expenditures to total approximately $45 million to $50 million.

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

Bill Flynn

Thank you, Spencer. As reflected on slide 10 Atlas is leading the way forward. Our investments and initiatives are driving a resilient business model that’s delivering meaningful earnings and is focused on longer term growth. Growth is returning to the air freight market and with our strong brand and global market leadership, we are well positioned to be a prime beneficiary. With that Robin may we have the first question please?

Question-and-Answer Session

Operator

Your first question comes from the line of Kevin Sterling with BB&T Capital Markets.

Kevin Sterling - BB&T Capital Markets

In AMC charter I think you cited an increase in the volume of passenger flying. Do you expect his strength to continue or was the volume you saw in the second quarter more one-time in nature?

Bill Flynn

Well I think for the balance of 2014 Kevin there is going to be a good level of AMC passenger flying particularly as the military draws down in Afghanistan to a level that we understand is going to be about 10,000 troops going forward. So I think that's the outlook that we have right now in terms of their requirements for the year. And then after that draw down, it will be a more steady state lower level of activity and we're still working to get a better appreciation for that from the air mobility command.

Kevin Sterling - BB&T Capital Markets

Okay. Thank you. So along those lines, do you think you're picking up some share from some competitors who were solely tied to the military who have now since exited the business?

Bill Flynn

Yes, we certainly have picked up share. I made a passing comment to that in my remarks. We absolutely have picked up share of the flying that's available.

Kevin Sterling - BB&T Capital Markets

Alright, great. And here's my last question. Spencer, when you talk about Q3, seeing a sequential improvement from Q2, similar to what you saw from Q1, maybe a little more clarity there. Are you talking about a similar increase on a percentage basis, or on an absolute dollar amount?

Spencer Schwartz

Yes. Good question. If you look at our adjusted earnings, the change in our adjusted earnings between the first and second quarter, we are looking for a similar change on a earnings per share basis from the second to the third quarter.

Kevin Sterling - BB&T Capital Markets

Okay. Not necessarily on a percentage basis, but on the incremental increase on an EPS basis.

Spencer Schwartz

On an EPS basis. Yes.

Kevin Sterling - BB&T Capital Markets

Got you. Okay. Thanks for your time this morning and congratulations on a nice quarter in a challenging environment.

Spencer Schwartz

Thank you.

Bill Flynn

Thank you.

Operator

Your next question comes from the line of Jason Ursaner with CJS Securities

Jason Ursaner - CJS Securities

Good morning.

Bill Flynn

Good morning.

Jason Ursaner - CJS Securities

I'd like to focus on the charter segment. The market obviously continues to do fairly well there, and outlook was a bit optimistic. And so I'm just wondering with all of the changes in the dash-8s and the 40s moving around in ACMI, and with the holiday season coming, if you could maybe walk through the nine planes you had allocated in that segment his quarter and go through how you view that capacity and revenue versus the direct contribution there? And just whether you think it's rightsized going forward, or if it's one to two more planes that you'd like to see move back into ACMI, and how you're looking at the fleet here right now?

Bill Flynn

So, not necessarily going go plane-by-plane. But currently we have 19 aircraft in ACMI and what we’ve talked about in the past is 20 plus. And so those incremental aircraft would come from the fleet at serving charter and AMC today. So, as we increment increase the ACMI operations those aircraft come out of the fleet that’s available for commercial charter.

We’re seeing and certainly number of companies are commenting on and an improving demand environment, if you listen to what Panalpina (inaudible) and others have said an EPS in terms of volume, we’re seeing all of those trends. The question that’s still out there is how our yields going to perform as we move into the second half and move into the peak season. And if there is a good uptick in yields, when does that occur? Last year, we saw a good volume growth starting in October but yields didn’t start to improve until November. And so, I commented a bit on that Jason in my opening remarks. We’re feeling very encouraged by the volume and certainly monitoring the market closely to see how yields are going to perform now through December.

Jason Ursaner - CJS Securities

Okay. I guess I was more just concentrating on charter because I mean cargo, obviously AMC had a much better quarter but the cargo piece still declined, you are down 1.5 points there. So I mean most of it needs to be coming out of commercial charter which I mean a lot of that capacity seems like it should get soaked up.

Bill Flynn

Yes and we're talking about the 747-400s. and I think Spencer made that 747-400 fleet we interchange between AMC and commercial cargo, based on the demand. And again as we go to 20 plus that capacity comes out of the AMC out of the fleet available to AMC into commercial charter.

And when we're talking about improving yield, we're really talking about commercial charter. And improving underlying demand generates hours in ACMI and generates direct -- yield is directly attributable to our comments on commercial charter.

Jason Ursaner - CJS Securities

And besides price, with the decline in the freight side on military, just what was impacting the quarter from one-way flying?

Bill Flynn

One way flying Jason this quarter actually went a lot more in the right direction than we’ve seen in the past, so actually one-way flying in the second quarter of this year, there were a lot more one-way flights that were going East bound as opposed to West bound that we saw earlier in the year and certainly throughout a lot of last year. So we're happy to see much more East bound flying. From a direct contribution standpoint, does that more impact military or the charter segment?

Spencer Schwartz

It impacts both. We’ve talked a little bit about it during my opening comments, Bill just made a comment to it, but our military business obviously with military cargo flying coming down, our military business is a lot smaller and we really think those two businesses, it's time to look at those two businesses together.

We routinely trade capacity Jason between the two segments. We'll turn down in AMC request, if it conflicts with better yielding charter, we'll pass on a program charter if we believe the capacity can be better deployed with the military. We've routinely used AMC missions as position or charter missions, we used charter missions as position as for AMC mission. Some of the charter positioning into the AMC missions or sometimes low yielding but in the profitability the AMC missions we take on makes up for that and sometime it's feel aware around. So we trade-off between those two and it's important to think of those together. So I think to answer your question, they benefit each other.

Jason Ursaner - CJS Securities

Okay, great. I appreciate all the comments. Thanks. Good quarter.

Operator

Your next question comes from the line of John Godyn with Morgan Stanley.

John Godyn - Morgan Stanley

My question. I wanted to ask about the outlook in a bit of a broader sense, Bill. The language that you used in there is that the volumes and the demand is good, but the yield environment is still very weak. Just as a general characterization of the environment, I'm curious if you could just elaborate on that, what is driving all of the yield weakness, what we need to see, to see that rate environment of both volume and yields moving the same direction? And do you think that is sort of a likely scenario, as we look out a year or so from now? I'm just trying to get a little bit more detail.

Bill Flynn

Yes. Well it think thank you John I think just referring to some recent market commentary right so UPS just a few days ago talked about strongly improving volumes but noted that market pricing on key Asia to U.S. like is under pressure, Cathay Pacific talked about an improving volumes but yield somewhat under pressure I think that was just a few days ago in the Wall Street Journal and Cunanalgo and Expeditors and Panalpina all have talked about a good volume story but waiting to see where the yield are going to go I think that the yields right now are kind of where they would be seasonally and so current yields in the market are not depress but kind of seasonally appropriate if that’s the way to think about it.

So we are anticipating a good peak so the variable would be capacity in terms of how yields are affected and how much more capacity comes into the market is the question and capacity the fungible capacity less, aircraft park that’s necessarily going to be return to service there are fair number of aircraft part that doesn’t come back short term necessarily but it’s the number of rotations and the kind of hours that freighters can fly several of the big carriers or big freighter fleet have exercised pretty good discipline through the year.

So those trends continue then we should have an improving yield environment and I guess what we are saying is just I think we are consistent with other major players in the market we are not going to call a big yield uptick until we get closer to peak and see it. Is that helpful?

John Godyn - Morgan Stanley

Yes that is helpful. And just a separate question for Spencer, just an update on capital allocation thoughts in general. Spencer, we've seen the Company do a good job of sort of tactically buying back shares here and there, when the stock is weak. Is there any appetite to get even more aggressive with the buyback, and also just general thoughts on M&A, as a use of cash. Thanks.

Spencer Schwartz

Sure, John. Thank you. As we've talked about it is a balancing act, we continue to focus our capital allocation on trying to maintain a balance between ensuring that balance sheet remains strong. We have strong cash balance we have been paying down debt.

Second part of our capital allocation is business investment, we purchased 6777s and 2-8 during the last year. We're now seeing returns from our dry leasing investments and investments that we have made into our passenger business. So we continue to look at other investments, you mentioned M&A more always out there and looking we haven't found an opportunity that makes sense. But we are always looking at potential opportunities.

We also may continue to grow our dry leasing business and as we talked about, the points that we have added in our tighten dry leasing business have really done well, you are starting to see those returns now. And so we may continue to make investments there.

And then lastly, of course to your question, we had a very, very large share repurchase in 2013, we still have Board authorization remaining for $60 million of share repurchases. We want to use our cash balance in the right way at a constant balancing act to deliver long-term shareholder value.

So, we will continue to focus on all of these things, there are certain investments that we are looking at right now. And so therefore, we're considering that along with share repurchases and maintaining strong balance sheet.

John Godyn - Morgan Stanley

Great. Thanks a lot.

Spencer Schwartz

Thank you.

Operator

Your next question comes from the line of Scott Group with Wolfe Research.

Scott Group - Wolfe Research

Hey thanks, good morning guys.

Bill Flynn

Good morning Scott.

Scott Group - Wolfe Research

So, just wanted to understand the earnings framework a little bit better. In the beginning of the year, I think you guys talked about a $0.70 earnings drag from the military, and it looks like military contribution was pretty flat so far year-to-date. Should we just assume that the military is not going to be that $0.70 drag anymore based on what you talked about on the passenger side?

Spencer Schwartz

Yes, Scott, it’s Spencer, good question. We still expect the AMC contribution to decline year-over-year. We just don’t think it will be as large as we previously thought. But we are maintaining our framework because commercial charter yields continue to be weak and in fact weaker than we previously thought. So, while military won’t be down as much as we previously thought. The commercial charter yields are taking some of that slack unfortunately. And so we are maintaining our framework and as Bill said until there is a little more certainty around peak season yields and military requirements in the second half of the year.

Scott Group - Wolfe Research

So just o make sure I understand. So, military now at $0.70 headwind but the initial framework of their core earnings flat that might be a little bit worse than flat, because of the weakness in charter yields? Is that the way you're thinking about it?

Spencer Schwartz

No what we’re saying is that the decline year-on-year that we’ve talked about before which was more primarily focused on AMC is now a little bit more in commercial charter and still some in AMC. We’re just saying that decline is now primarily in those two segments as opposed to just that one.

And as we talked before it's one of the reasons why we continue to say that we reached that point now where we think it's time to really look at AMC and commercial charter together.

Scott Group - Wolfe Research

That makes sense. And then I guess I just wanted to ask about the ACMI contribution in the quarter, because it was down a lot year-over-year and we are assuming side and wondering if there is anything unusual in there I know you said that the BA termination didn't really had a net impact, but was there something unusual in there? And may be just some specific things, how should we think about utilization block hours and revenue per block hour in ACMI going forward?

Bill Flynn

Sure. A couple of things, one is that of course British Airways was winding down their business. And so that has impact on utilization when you look at the second quarter of this year versus the second quarter of last year, you would expect to see that and so that's not really a continuing item, it's sort of a onetime issue.

The other thing I would say is that maintenance expense really increased when you look at period over period some of that was temporary that wont' be continuing. Some of that was just the timing of a particular event or something like that.

So again I think it's probably important when looking at ACMI to really continue to focus on the exceptional returns that we are getting in that segment. The customer value that we are driving in that core segment of our business. It continues to deliver great earnings and predictability more so then other parts of the business.

Scott Group - Wolfe Research

Do you think ACMI contribution grows in the third quarter versus a year ago?

Bill Flynn

We have provided a framework for the third quarter. We haven't gotten down for that level of detail. Sorry, what I mean is that we haven’t disclosed that level of detail. So we're going to stay with our overall framework for the business and not drive down into what the third quarter looks like in a particular segment.

Scott Group - Wolfe Research

Okay. Alright. Thanks guys.

Bill Flynn

Thank you.

Operator

Your next question comes from the line of David Campbell with Thompson Davis & Company.

David Campbell - Thompson Davis & Company

Yes, hi. Thanks for taking the question, Bill, Spencer. And sort of short long-term, whatever you want to call it, outlook for next year, I guess the growth next year will come from looking at this AMC, commercial charter segments together and the commercial charter can continue to decrease, but the AMC charter may be continuing to increase. Is that the way we should look at, I'm trying to figure out where your growth next year will come from. It's not going to come from, I don't think it's going to come from block hours, because you don't have more aircraft than you had this year. How do you see the growth or where do you see the growth coming from?

Bill Flynn

Thanks David. So first of all, the growth starts at our core ACMI, CMI business. I think we've come through now, if the markets indeed inflected and if the underlying demand in the airfreight, international airfreight market is finally entering a growth phase after arguably what have been three flat years. I think that teed up very well. I think first of all in ACMI and CMI, we have the opportunity for higher utilization of the aircraft with existing customers. Prior years, years when growth was a fact in the market, we were looking at 6% and 7% above minimum utilization, just in the core ACMI. And those are highly contributory hours because we are not hiring extra pilots et cetera to fly 20 more hours a month per aircraft but that goes to the bottom line.

If market is indeed improving again we are teed up well as we think about aircraft renewals as we think about securing new customers in the aircraft and as we continue also to focus on growing the CMI business. So that’s a core of the company that’s where our largest investments are made and improving market I think we are very well positioned there.

Dry leasing, is as you look through the second, third, fourth quarter. That’s the earnings, predictable earnings stream that we have talked about. And should we acquire more aircraft for dry leasing, it will -- our focus would be to add aircraft in terms of their immediate accretive earning power with very similar to the six that we have acquired as well.

And yes, military cargo will continue to decline, military passenger demand will be lower than what it will be this year. Our marketing is developing alternative, sustainable uses for the passenger aircraft in the commercial passenger charter market and I think we will see good utilization of the aircraft in that market as well. There is a market out there and we have learned a lot more about it and have demonstrated an ability to go out and be competitive in that market and drive good results.

And if there is again this market inflection and demand growth, I think that also argues very well for the commercial charter segment, the commercial charter cargo segment. A lot of capacity has come out, a number of carriers have exited the business, some of the mainline carriers of prior years are retiring or getting out of their fleet. Air France KLM is working through what they may do with their freighter fleet, Singapore Airlines and other large operators for many years have dramatically realigned their freighter business and part freighter. So any improving market, I think when you sum all that up and then combine with that our focus on continuous improvement, focus on cost and productivity and the operating leverage that we have in the business and we combine to be the several parts for earnings growth in 2015 for Atlas.

David Campbell - Thompson Davis & Company

Right. Okay. And the second question is you mentioned that you're accustomed to 6% above minimum flying in your ACMI section, business. What do you think the increase is this year on a -- based upon what you're forecasting right now in terms of block hours? Is that 6% above minimum? What is it?

Spencer Schwartz

David, it's Spencer. Typically for the full year, we generally see about 3% to 5% above minimum flying. And this year, we expect to be in that range, perhaps towards the top of that range, but right around that range.

David Campbell - Thompson Davis & Company

So, but in a good year, it could be better than that, is that what you're saying?

Bill Flynn

At least to the high end and then on a customer by customer basis, the opportunity to go above that; it will depend on their markets, their growth and their business plan.

Spencer Schwartz

And it seems…

Ed McGarvey

I know of course, during the first quarter customers generally fly below their minimum and then throughout the year they generally…

David Campbell - Thompson Davis & Company

Yes, I understand. Okay, thank you very much.

Bill Flynn

Thank you, David.

Operator

The next question comes from the line of Helane Becker with Cowen.

Helane Becker - Cowen

Thanks operator. Hi guys. Thanks for your time. Just on the aircraft availability, are you getting calls from customers looking for more aircraft? Or are you finding that you’re making more calls going out looking to place the aircraft?

Bill Flynn

Thank you, Helane. We’re certainly getting calls for fourth quarter capacity in our commercial charter market as you would expect, given that where -- just at the beginning of August. In terms of the ACMI placement, I think it’s really the focus of your question. That’s an ongoing discussion with our customers with current customers and potential customers around renewal and expansion and then bringing new customers on board. And we’ve brought several new customers on board just in the last year when you think about ANA Astral, out of Kenya and BST out of China. And the sale process is it takes -- there is a process and it starts with being able to sit down with the customer and build a business case around a freighter for them to make the kind of commitment that they need to make in terms of the fixed capacity by that they’re making over time.

So, certainly there is inquiry about capacity. But the real -- the way we actually place is for our commercial and marketing team to work one on one with customers and build that business plan that they ultimately bring up to their capital approval process or their larger commitment approval process how each company works.

Helane Becker - Cowen

Okay. And then I know with Etihad and Emirates as two of your largest customers, or two customers, are you seeing any -- what's the right word? Any concerns from them, given what's going on in their part of the world right now?

Bill Flynn

Well, we haven’t had a discussion of that and I mean certainly when we talk about what's going around geopolitically and more how that may affect near term schedules for their flying based on the global network that’s on the like Etihad and any of our customers deploy. But in terms of their operations, the global hub and spoke operations that they operate via Dubai and Abu Dhabi we really haven't had those kinds of conversations.

In fact conversations we’ve had with Etihad are about growth and the great growth trajectory that they're on and that their CEO’s talked about growth both in passenger and growth in cargo.

Helane Becker - Cowen

Okay. And then just maybe for Spencer, how should we think about the leverage going forward? I know it came down a little bit. You have that slide that showed that. But how should we think about it for the rest of the year and maybe into next year?

Spencer Schwartz

Sure Helane. We use to talk about sort of targeted net leverage ratio and we think it's less relevant today. We still think obviously it's important we share it. We've made significant investments in our dry lasing business. So leverage really can’t be viewed in isolation like at once was here. And so we don’t have a singular number that we target. The higher leverage that we've taken has really been supported by enhanced quality of our earnings from strong credits like AeroLogic and Emirates and TNT. We look at all of our investments, we evaluate them holistically. We don't have any leverage covenants and any of our financing debt rates generally are fixed with tenures that are match to the underlying lease terms for our dry leasing transactions.

So it's a long way to answer to your question, we're happy to see it coming down as we stay down debt, we worked hard of that. But doesn't mean if we make additional investments I our dry leasing business that are leverage ratio could go, could might not decrease, we're may stay stable. If we make those investments, it's because they themselves those investments are delivering a really strong return great IRRs, good EPS, very good MPB and the quality of investment is good, contribution towards our overall strategic goals. So that's where our focus is a little bit more than on a particular leverage point.

Helane Becker - Cowen

Okay. I really appreciate that clarity. Thank you very much.

Bill Flynn

Thanks Helane.

Operator

Your next question comes from the line of Jack Atkins with Stephens.

Unidentified Analyst

This is actually Andrew on for Jack. Most of the questions we had have already been answered. But looking back at commercial charter, looking at the direct contribution of that segment, would you expect it to be profitable for the full year?

Bill Flynn

We expect our charter segment will be profitable for the full year.

Unidentified Analyst

Okay. Good. And then looking at peak season, I know you mentioned there is not too much visibility into it, but looking at your guidance for the full year what kind of in terms of demand and pricing, compared to 2013 what are you assuming in that guidance for peak season?

Bill Flynn

I think we have made a couple of comments already Andrew we are seeing a good demand outlook as number of other companies have commented as well. I think we are seeing a stronger demand outlook now than we saw last year at this time. And I think that certainly encouraging and that’s how we have characterized it. Yields I think seasonally where we would expect them to be and so it gets back to what I think we have commented on already it’s I think yields will inflect kind of when they inflect and by how much they inflect I think is kind of the variable here in terms of our outlook going forward and we just haven’t seen that inflection point yet.

Unidentified Analyst

Thank you, guys.

William Flynn

Thank you, Andrew.

Operator

Your next question comes from the line of Bob McAdoo with Imperial Capital.

Bob McAdoo - Imperial Capital

A couple questions. On ACMI to make sure what the earlier answer you gave on this ACMI is up 2% or 3% in terms of revenue but contributions down about 20%. Did I understand you say that was because in this particular period there was extra maintenance on some planes that are basically ACMI aircraft? Is that what was going on? Or was there something else going on in there?

Bill Flynn

Yes Bob you have it right, it was primarily due to higher maintenance some of that maintenance was temporary in nature and some of it is longer term we also had an issue where British Airways as you know wound down their overall dedicate freighter operations and so as they were winding down the aircraft were not as utilized as they would What it has been in the prior year period.

Spencer Schwartz

And there were some downtime in the transition of the aircraft, that painting and the engineering work that needed to be done as well.

Bob McAdoo - Imperial Capital

So that was included in the expenses. Yet, the revenues were actually up, that was what was, they went opposite directions and that was what was surprising, the fact that you were able to get the revenue up but what you're saying is there were some extra expenses in there, I guess.

Bill Flynn

And Bob, also Bob the revenue also include CMI flying. So the increase in revenue was in ACMI and CMI.

Bob McAdoo - Imperial Capital

Yes, okay. Another issue. I don't remember, you're talking about this, your program, acquiring engines with green time left on them, so that you can replace the avoid some engine overhauls or whatever. And in the presentation you put in you obviously used that as an adjustment. It appears that you use that as an adjustment to give us adjusted net income, but yet if that's really if those write-offs or however you want to say it, are really expenses that you're using, that are running through the books to replace engine hours that would otherwise be replaced by doing engine overhauls, wouldn't that be more of an ongoing maintenance expense, and shouldn't necessarily be removed from a disclosure that's called adjusted net income?

Spencer Schwartz

Bob, you can treat it however you like. We believe that it is non-routine and it's not ordinary course of business. We're generally not in a business having engine trade-ins and entering into a sort of relationship whereby we are trading in run out used engines and acquiring new ones. It is non-routine and it's an infrequent item. And so therefore we don’t look at it that way.

Bob McAdoo - Imperial Capital

Okay. Well, the way, the way you talked about it earlier in the discussion, it sounded like this was kind of a normal thing that you’re starting to do and I just curious about that. And then one final quick thing, as I read an article, I saw a headline go by that said something about the 787-10 was going to always have to be produced in South Carolina, because there was a problem with the fuselage was too big for the Dreamlifter. Is that going to change what we should be thinking about in terms of the business, the Boeing business, the volume of Boeing business going forward? Is that something we should worry about?

Bill Flynn

No, I don’t think you should worry about that Bob. Boeing has not given us a forecast that adjust the level of flying. I think what it says is that their program their 87 program continues to evolve and they’re looking at an uptake in production and that by definition drives more utilization of the LCFs.

Bob McAdoo - Imperial Capital

Other than the fuselage, it clearly would have to drive some extra business there, I would think.

Bill Flynn

Yes, And what’s really drive what will really drive, well yes if it’s a longer fuselages and extra body section but what’s going to drive the higher utilization of the LCF is the total build rate of the program and that’s performing nicely.

Bob McAdoo - Imperial Capital

Good, good, all right. Thanks.

Bill Flynn

Thank you.

Operator

Your next question comes from the line of Steve O'Hara with Sidoti.

Steve O'Hara - Sidoti

Hi good morning.

Bill Flynn

Hi Steve.

Steve O'Hara - Sidoti

I was just curious in terms of your guidance it’s been asked I guess couple times but maybe to kind of put it different way. When you provided the guidance was this type of environment you had expected or are we kind of a little bit of the different place from kind of what you expected when you provided the guidance?

Bill Flynn

I think we're in a different place and that we are many months further along -- the military requirements certainly have changed a bit, we have flown a lot more military passenger hours and then the nature of the hours is changed, we have flown a lot more higher yielding 747-400 passenger emissions than we thought. Cargo flying for the military is up just a little bit more as well. But the commercial charter, commercial charter is kind of, there is really strong demand volumes are up but yields are a bit lower than we thought they were. So those things somewhat offset.

Spencer Schwartz

And I think what we're also saying is that we're encouraged by what's going on in the market from a demand point of view and so our a number of other companies that there are large players in the market.

So is there the potential for yield outside, yes, there is. We haven’t seen it yet is what we are saying. But is there the potential for that upside, yes, we believe there is and we are well positioned to take advantage of that.

Steve O'Hara - Sidoti

Okay. Thank you. And then in terms of the number of 747-400 cargo planes you have a commercial charter, obviously if you see good peak season do you guys benefit significantly. On the flip side of that, assuming your kind of at -- let's say 2013 was kind of normal level. I mean what's your comfort level with keeping let's say 7.5, 8, 400s in that business? My assumption is you much prefer them in ACMI whether it would be higher utilization higher returns. And may be how do you think about getting to where you want to be in terms of utilization with the opportunity for upside? So I guess it maybe goes out to how many aircraft, how many 400s do you really want to be able to maximize returns, but limit your downside as well?

Bill Flynn

Well, we've talked about 20 plus aircraft in ACMI. So that 20 plus has to include the placement of some number of 747-400s. That's our core business and we would want to 747-400s in ACMI, absolutely. That said, there is a good charter market out there. If we have the kind of peak that potentially could occur this year with volume and yield, we’ll get very good returns on that. But we've said on other calls and in our investor meetings that we aggressively manage our fleet. And we will invest in the fleet. And if we invest in additional dash-8s, we would be exiting 747-400s; additional dash-8s would not come in incremental to the total 747 fleet. We would be existing 400s consistent with that and certainly take advantage of the higher margins and returns that the dash-8s deliver for us and deliver for our customers in terms of capacity and fuel burn. So we will continue to manage fleet going forward.

Steve O'Hara - Sidoti

Okay. And I mean, in terms of commercial charter, I mean what is your -- how many aircraft ideally, maybe the 400s are the biggest piece of that, but I mean how many aircraft ideally would you want in there?

Bill Flynn

I hate to answer that question with it depends, but it does, right. If the market is delivering volumes and yields; we've got a very strong position in our South America operation. This commercial charter market is a year around market, it’s more north-south in the first quarter, into the second quarter it’s east-west and the balance of the year. So honestly Bob, it will depend on the market condition, sorry Steve, I am sorry Steve. It will depend on the market conditions.

Steve O'Hara - Sidoti

Okay, alright. Thank you.

Operator

Your last question comes from the line of John Mims with FBR Capital Markets.

John Mims - FBR Capital Markets

Good morning. Sorry. I was on another conference call, so I missed part of the beginning. But thank you for letting me jump here on the and. Bill, just a broader industry question. I know there is some positive momentum and outlook for peak season, at least in terms of volumes and hopefully yields, but so much of this discussion has been about bellies and bellies taking some demand away from freighters over the last couple of years. Are you starting to see after you kind of have the fleet shrink and you start to see more volume push into the system, are using any signs of that shifting back in favor of the main decks?

Bill Flynn

Yes, I don’t think we are back, there has been a lot of discussion about how much shift may have occurred between bellies and freighters. I don’t know that we have got a lot of evidence that it occurred. And over the long run this kind of 60-40 balance where 60% of international freight moved main deck and 40% belly. It hasn’t appeared to fundamentally change. But another way to think about it, if we are going to see a peak, if growth is going to be 3% plus up to this 5% CAGR that [IR] is talking about over the next four to five years, that will fundamentally accrue to main deck freighters. Because we are talking about growth out of production centers that are going to want the assurance of the main deck freighter capacity. And the other question that we've talked about, the other side of the question we've talked about to, the deployment of the 787 is not a hub and spoke deployment. Carriers are investing in the 87s to go point to point. But the point to point is not necessarily where airfreight flowed. Airfreight flows through hubs, consolidated by the distribution channel fundamentally the freight forwarders, they make their economic rent through consolidation, not smaller volume point to point in the belly of a passenger plane.

So, I think a strong and improving market favors the freighters. Just our view.

John Mims - FBR Capital Markets

Sure. On that same line, it seems the last couple of years, it's been somewhat spotty, the outlook on peak season, but it's also been driven by a lot of special projects and contracts. Electronics launches, the iPhone, the PlayStation and whatnot. Are you seeing more of a kind of freight of all kinds type of demand when you're talking to customers now on the charter side, where airlines and forwarders are just trying to secure general capacity, or is it more specifically targeted for launches, like we saw last year and in 2012?

Bill Flynn

Yes, that's a great question. Growth could not be sustained or be sustainable as there was simply tied to product launches out of Asia and to the consumer electronics. It is just not enough to drive it. And the airfreight growth that we've seen this year wasn't tied than the specific product launches in the first half of the year.

So, we've seen growth in the North-South freight. To and from Latin America and all market, To and from sub-Saharan Africa, smaller market, but very high rates of growth. Etihad, for example is taking advantage of that. East-West improving economy in Europe is helping certainly some of that from Asia to Europe, a good east, west in terms of not only U.S. imports but there was a very good U.S. export season this year in terms of several products.

So, I think the good news is that we’re seeing growth across all market, across all kind of underlying airfreight demand segments that we talked about. And I think the electronic peak the consumer electronic peaks that we’ll hopefully see this year. That’s going to have a very good impact I think on yield.

John Mims - FBR Capital Markets

Sure. No, that makes sense. And then one final question, and I’ll let you go get lunch. And you may have touched on this earlier, and I missed it, so apologies for that. But when you look at the pipeline for ACMI and even more specifically the CMI business, can you tell me, or remind how many planes you have up for renewal in the ACMI fleet, into the rest of 2014 and 2015?

And on the CMI side, it seems like it's been a while since you’ve announced any new CMI contracts with new customers. Is there still an active pipeline of additional CMI opportunities that make sense that you could see in the fold the next couple of quarters?

Bill Flynn

Sure. So, on ACMI we have 19 aircraft in ACMI today and 20 plus is the prospective we’ve offered for this year. We aren’t specifically talking about 2015 but we would see that as a normal year and that as far as we’re prepared to go given the competitive environment that’s out there. Our marketing team is working with CMI as well. We do have a pipeline of CMI opportunities we’re in discussions with our customer. We did add one CMI aircraft this year 767 which is nice because it incremented our 675 to 11 aircraft, so that bodes scale and efficiencies for us. And there are additional CMI opportunities that we're out there and we're competing for.

John Mims - FBR Capital Markets

Are those with new customers or -- because the one addition was with DHL, right?

Bill Flynn

One addition was with MLW Air. And we had two 767-300 ERFs with DHL. The opportunities are both and we think that's good, growing a greater share of wallet with existing customers while bringing on new customers I think is sweet spot for us to be in.

John Mims - FBR Capital Markets

Right, okay. And then just for clarification on the ACMI, historically you had said there is what four to five planes that you needed to renew every year, maybe it was three to five, is that kind of even without fully disclosing your plan for 2015, is that trend still accurate?

Spencer Schwartz

We’ve always said is that we expect next year to be a normal year and I think Bill just said a moment ago, he really doesn't want to get into that level of detail. We consider 2015 to be a normal year. And our business is obviously growing, getting a lot more complex. And we have different types of customers. If you look at the DHL for example, we have a 20 year block space agreement with them. We also have a joint venture to different kind of a customer.

So every customer is different their relationship are different. For next year we think our renewal opportunities, replacement opportunities are normal.

Bill Flynn

And if the market is improving, if it’s volume growth that we've seen in the first half sustainable and rolls into 2015, that puts in a better position on renewals and expansion.

John Mims - FBR Capital Markets

Sure. That's fair enough. I was is going to try to pick at it different way. So again thank you very much for the time, and I appreciate it.

Bill Flynn

Thank you.

Spencer Schwartz

Thanks.

Operator

At this time, there are no audio questions.

Bill Flynn

Okay. Well, thank you very much Robin. And Spencer and I would like to thank you all of you for your interest in Atlas Air Worldwide today. Thanks for sharing your time with us and for your questions and we look forward speaking again with you soon. Thank you very much.

Operator

Thank you for your participation. That concludes today's conference call. You may now disconnect.

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