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Executives

William C. Bradley – Vice President & Treasurer

William J. Flynn – President, Chief Executive Officer & Director

Jason Grant – Chief Financial Officer & Senior Vice President

Analysts

Robert Labick – CJS Securities

Alexander Brand – Stephens, Inc.

Christina Whitehead – Thompson Davis

Atlas Air Worldwide Holdings, Inc. (AAWW) Q1 2008 Earnings Call May 8, 2008 1:00 PM ET

Operator

Welcome to the Atlas Air Worldwide Holdings, Inc. first quarter conference call. (Operator Instructions) I would now like to turn the conference over to Will Bradley.

William C. Bradley

Welcome to our first quarter 2008 earnings review conference call. Today’s call will be hosted by Bill Flynn, our President and Chief Executive Officer. Joining Bill is Jason Grant, our Senior VP and Chief Financial Officer.

I would also like to remind you that in discuss the company’s performance today, we have included some forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements relate to future events and expectations and involve unknown risks and uncertainties. Our actual results or actions may differ materially from those projected in the forward-looking statements.

Please refer to the Safe Harbor language in our recent press releases and to the risk factors set forth in our annual report on Form 10-K filed with the SEC on February 28, 2008 for a summary of specific risk factors that could cause results to differ materially from those expressed in our forward-looking statements.

In our discussion today we also include some non-GAAP financial measures. You can find our presentation on the most directly comparable GAAP financial measures calculated in accordance with generally accepted account principals and our related reconciliation in our recent press releases which are posted on our website at www.AtlasAir.com. You may access these releases by clicking on the link to financial news in the investor relations section of the website.

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

William J. Flynn

We are well positioned operationally, financially and strategically to grow our business and improve our performance. We have significantly transformed our business model, our business fundamentals are solid and we are building from strength. We are on track to achieve our strategic and operating objectives over the course of 2008 and beyond. Our first quarter results were a mix of positive and negative factors. Our ongoing asset optimization efforts sustained utilization of our aircraft. In addition, demand for our 747 400 Freighter capacity remained strong during the quarter with all of our 400 capacity committed for 2008.

Continuous improvement initiatives drove cost savings during the quarter. As of March 31 we have realized $86 million in annualized savings against and addressable 2005 cost base of about $800 million. We are well on track to exceed our goal of $100 million of annualized savings in 2008. Each of these positive factors helped to mitigate the impact of record high fuel prices on our scheduled service segment and a returned to more normalized AMC volumes compared with the first quarter of 2007 and the slower pace of air cargo demand usually seen in the first quarter of the year.

Fuel pricing was an adverse element during the quarter. Commercial fuel prices were at record levels and were nearly 50% higher than they were in the first quarter of 2007. That had a substantial negative impact on our scheduled service segment which is the principal business segment where we are directly exposed to the risk of fuel priced volatility. Since we gave guidance on our last conference call in late February, jet fuel prices have surged another 20% plus.

Altogether, the rise in fuel prices in 2008 has increased the net impact of fuel for the year by nearly $30 million after giving effect to our expected surcharge recovery. Based on the current fuel environment, we now expect pre-tax earnings in 2008 to exceed $105 million. Our direct fuel price exposure goes away in October when our Polar subsidiary begins flying under its long term block space agreement with DHL Express. As a reminder, this $105 million excludes a $152 million pre-tax gain on the sale of a 49% interest in Polar to DHL. We expect to book this gain upon the commencement of the full DSA in the fourth quarter of 2008.

We have substantially derisked our business over the past two years and our focus is on long term contracts that improve our revenue and earnings stream visibility. About 85% of our expected capacity in 2009 will be under predictable long term take-or-pay contracts. Taking in to account our forecasted military charter business, about 92% of our capacity next year will be tied to fixed price contracts. Based on our current initiatives and strategies, we reaffirm our expectation that pre-tax earnings will accelerate to a range of $165 to $175 million in 2009 which will be the first full year of our Express Network ACMI service for DHL.

In addition to the full startup of Express ACMI services, we are executing on additional initiatives that will drive future revenues and earnings. The launch of our 747-8 freighter service in 2010 and 2011 will benefit from the scarcity value of these assets as well as their payload and fuel efficiency in our first to market and exclusive ACMI capability. We have a solid platform of growth opportunities. These include opportunities to grow our relationship with DHL and other customers, fleet expansion, dry leasing, extensions of our ACMI business and potential business combinations and alliances.

Jason will now take you through our financials. Following Jason, I will provide some additional color about our outlooks for 2008 and for 2009. After that, we’ll go to your questions.

Jason Grant

I’d like to start by elaborating on Bill’s comments regarding fuel. Since we last gave guidance, crude prices have increased by over 20%. The majority of that increase has occurred since we last spoke to the markets at our investor day in early April. As we have previously said, we retain fuel exposure for our core scheduled services operations until October. The fundamentals of our business are unchanged and other than the impact of fuel we remain on track for 2008 and beyond.

There were a few items I would like to draw your attention to in the quarter. The first is a $3.4 million minority interest booked related to DHL Express’ 49% ownership in Polar Air Cargo Worldwide. The amount reflects Polar Air Cargo Worldwide’s allocated losses to DHL prior to commencement of the DSA flying in October. We do not expect to book additional minority interest going forward.

Turning to our balance sheet, we ended the quarter with a cash balance of $538 million which represents a $60 million increase over year end 2007 and debt and capital lease obligations totaling $449 million. The face value of our debt and capital lease obligations amount of $523 million compared with a face value balance of $469 million at December 31, 2007.

At quarter end, we had $74 million of unamortized discounts related to fair market value adjustments associated with fresh start accounting. The increase in our debt from year end is the result of a $63 million outstanding borrowing under our new $270 million PDP financing facility which we closed in February.

Capital expenditures in the quarter totaled $48 million which included $31 million in Boeing progress payments related to our future 747-8F aircraft deliveries. As I noted earlier, our cash balance in the quarter increased by $60 million which included $38.6 million in investment proceeds from DHL. The final payment from DHL of $35 million plus interest, is scheduled to be paid in November of this year.

Separately, based on progress payments that we made to Boeing prior to the closing of our financing, we were able to true up against our loan advance rate upon the facility closing. This resulted in a net refund to Atlas in the quarter of approximately $32 million. For the balance of the year, we have approximately $216 million in Boeing progress payments due on all 12 firm aircraft of which $154 million will be satisfied by drawings under our existing PDP facility. As a reminder, our existing PDP facility covers deliveries numbers one through five but we anticipate securing PDP financing for the remaining deliveries later in this year.

I am pleased to announce that subsequent to the quarter end, we closed on the purchase of our two incremental 747 400s, one of which will be in revenue service later this month. And the other, which is undergoing conversion, will be in service in September. We have elected to initially fund the purchases with cash on hand and are actively pursuing a number of financing alternatives.

Finally, I wanted to apprise you to changes of our operating segment reporting that we implemented in the first quarter. These changes are intended to improve visibility to segment performance. The first change we have made is to add dry leasing as its own reporting segment. This is in addition to the ACMI, scheduled service, AMC Charter and commercial charter segments we report today. This change recognizes the growing importance of dry leasing to our overall business model.

Second, we have also modified the manner in how we calculate our segment profitability. To date, segment reporting has been limited to fully allocated contributions or FAC. Fully allocated contribution was computed by allocating all operating and non-operating costs to segments with only taxes and other unusual items being excluded. The allocation of fixed costs led to significant swings in fully allocated contribution within the segments with changes in aircraft utilization.

We have moved to a direct contribution measure of segment profitability. Direct contribution reflects segment revenue less direct operating costs and aircraft ownership cost. Direct aircraft ownership costs include crew costs, maintenance, fuel, ground operations, sales costs, aircraft rent, aircraft depreciation and interest expense related to aircraft debt. Fixed and indirect costs are reported in the aggregate, separate from direct contribution and are not allocated to the individual segments.

We think this new approach will provide increased visibility in to the performance of our segments. The methodology will be described in more detail in the 10Q that we will file later today. We anticipate publically providing the historical quarterly segment performance under our new methodology before our next 10Q is filed.

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

William J. Flynn

We see an exciting and dynamic future for Atlas Air Worldwide Holdings. We have a solid financial platform and other than the short term financial effect of fuel prices in 2008, our outlook is unchanged. As I noted earlier, we expect pre-tax earnings to exceed $105 million this year with direct exposure to fuel prices largely eliminated in late October. We also expect our pre-tax earnings to grow to a range of $165 to $175 million in 2009.

Favorable supply and demand trends in the global freighter market and the continuing shift in aircraft ownership from airlines to lessors have created a significant opportunity to expand our leasing operations both wet and dry. We see continued strong demand for our 747 400 freighters especially given the increasing fuel and maintenance burden on older 747 Classics, MD11s and DC10s. Our 747 400 capacity is sold out.

In line with our plans to grow earnings, we seize the opportunity recently to acquire scarce 747 400 GE powered assets and increase our 400 fleet by 10% to a total of 22 aircraft. These new aircraft enabled us to successfully expand our relationship with DHL Express, commencing service with them on March 30. Our service for DHL has had a smooth startup and our performance has exceeded our customers’ expectations. Including these two additional aircraft, we will deploy a total of eight 747 400s in trans pacific operations for DHL when Polar begins full network service in support of its agreement in October.

Our business is well positioned for growth. We are focused on execution. We have the assets, services, experience and intellectual capital to deliver on our expanding opportunities. And, our performance is on track with our objectives.

With that, I think it’s a good time to take some questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Robert Labick – CJS Securities.

Robert Labick – CJS Securities

You were just discussing the expansion of your relationship of DHL with the two new planes that went in to service at the end of March. Could you clarify if those two are now going to be under the similar multiyear, 20 year block sharing agreement and the economics similar to the other six? Or, is there a distinction between the two planes and the fixed planes?

William J. Flynn

Well, a couple of points. The two aircraft enter service for DHL in an ACMI relationship. So, similar to the other six they will perform and be contracted in under ACMI terms which, as you know, a block rate per hour and a minimum number of hours per month and per year. The term though for the two incremental is not the 20 year term for the original six, it is a shorter term.

Robert Labick – CJS Securities

Then, you probably have been hinting or just saying directly about the expansion opportunities. One of the ways which you could expand certainly is to take advantage of the options for the additional 14-8s. When would you, or what would you need to do to utilize those options? And, when would you have to make the commitment for that?

William J. Flynn

Well, we’re evaluating those options Bob and we think there is certainly real value in those options. The questions I think is really the timing of when we commit to them and while we have good pricing on that, there are other conditions that we are in the process of discussing with Boeing and negotiating with Boeing. So, we certainly would look to take aircraft in 2012, 2013, possibly 2014 so that if we’re going to execute those options we would need to do that over the next 18 months or so.

Robert Labick – CJS Securities

You’ve discussed that you’re already sold out for the [inaudible] capacity for 400s through 08 but given the dynamics with rising fuel and essentially the increased value of the 400s versus a lot of the 200s that are getting retired, what’s the renewal environment look like for 09? Or, how is that shaping up?

William J. Flynn

We have a few aircraft to renew in 2009. We don’t believe we’ll have a problem placing that aircraft.

Robert Labick – CJS Securities

Generally you have small increases in pricing, you have long term relationships with your customers, in terms of pricing I can see both sides, if fuel goes up, it hurts the customer but also the scarcity of value of 400 are going up, so how does that dynamic look?

William J. Flynn

That is exactly the dynamic and the third element of course, is obtaining a longer term contract. So there’s term, there’s price and then there’s the market pressure on the customers’ economic. As we come to renew the aircraft and/or place the aircraft, if we bring on additional customers we’ll be pushing to maximize the block hour rate that we’ll get.

Robert Labick – CJS Securities

In terms of the 200s out there, not necessarily just in your fleet but overall in the market, given the fuel environment, there seems that there’s more pressure for the retirement of the 200s, at least from ACMI. Are you seeing any of those moving in to commercial charter? How will that play out when they do get retired? And obviously, you’re growing your commercial charter, so what are you competitive advantages towards growing that?

William J. Flynn

Well, I think there are a couple but let’s answer the first part of your question, the 200s and ACMI and scheduled service for any operator is certainly under stress given where fuel is today, there’s no doubt about that. We have been able to grow our commercial charter business and certainly one of the advantages that I believe we have is the size of the fleet because the fleet allows us to flexibly place aircraft between military demand as well as to place it in to the commercial charter market. Having an appropriate size fleet and having the availability gives us the opportunity to respond flexibly to the customer and meet often what are short timelines for them.

Operator

Your next question comes from Alexander Brand – Stephens, Inc.

Alexander Brand – Stephens, Inc.

I just want to make sure I’m clear on the 400s that are coming on. The two that just went in to service for DHL, those were reallocated aircraft and then we’ve got these two incremental aircraft, is that accurate?

William J. Flynn

In our fleet of 400s Alex, we have 20 aircraft; one we use throughout the year as a maintenance cover so the two that went in to service now for DHL at the end of March, one of them was the maintenance cover because we had a window in our scheduled maintenance activities where we could put that aircraft to work for DHL and not upset maintenance schedules that we had in place.

The other aircraft was an aircraft that came back off of a ACMI placement, a planned return from another customer and that’s the second aircraft that went in to service for DHL. The two that are coming on one will be coming on later in May, that will be the maintenance cover if you want to think of it in those terms and then the second aircraft comes in around the end of the third quarter and then that will go in to revenue service as well. So, we don’t actually get to 22 aircrafts until the end of the third quarter.

Alexander Brand – Stephens, Inc.

Do you have work for the one in Q3 already? Or, is that something you’re looking to sign up?

William J. Flynn

We have demand for that aircraft.

Alexander Brand – Stephens, Inc.

In your press release you talked about some block hour reductions for political conditions and I just want to understand, what’s your customer’s flexibility to fly less based on what’s going on out in the world?

William J. Flynn

It’s the difference between minimums and above minimum flying for the most part Alex. So, our customers will certainly meet their contractual commitments this year and as in prior years, they will fly above minimums. The two markets specifically that we’re affected was there was the political instability in Pakistan at the beginning of the year and there was political unrest in Kenya around the elections there.

Those were the two specific markets which are normalized now, if you will, and we are operating in and out on behalf of our customers. So, our customers do need to meet their minimum commitments, what they can take are some holidays or some cancellations at given months in the year and that’s what the customer did here. But, they still have to meet their minimums at the year end and they will and that customer will be flying over minimums as well.

Alexander Brand – Stephens, Inc.

Jason, on the maintenance expenses, I think that was pretty clearly explained in the release as to what happened in Q1, can you help us understand what that might look like going forward?

Jason Grant

Alex, when you think about the year, I think history is not a bad indicator based on your activity levels going forward. I think there is not any unusual activity planned this year, if anything, our 200 heavy maintenance has decreased slightly as we have actually retired some 200 aircraft as they come up to their significant heavy decheck events. So, I think as you look for the year and you think of an activity driven trend on that, I think that’s a reasonable basis.

The only thing I’ll flag on that Alex is that there is induction costs related to the two new aircraft, so the two new aircraft that come in to service require a [C check] and some conformity work to be put on to our maintenance program. There will be some incremental expense for that but measured in the million range and not materially above that. Again, I think if you think of the trend line on maintenance expense as a good basis for forecasting, that’s a reasonable basis to do that.

Alexander Brand – Stephens, Inc.

Then is it fair to say that in the first quarter of like 09, is this a step function? Because, it seems to me like it wouldn’t step up that much because you’re not adding that many aircraft in 09?

Jason Grant

Yeah, I think a couple of things, one is we do have some heavy maintenance timing. Most of the heavy maintenance that is done is done in the first six months of the year. We did have some additional expense for heavy maintenance in the quarter.

The other thing I would point out Alex is that we did have some costs to initiate our express network services so one of the factors we had to deal with in the quarter was our original operating plan was to gear up for our express network services in October of 2008, we were fortunate to accelerate the flying to start at the end of March. What that meant was an additional investment in maintenance and aircraft to school up for that, that did drive some incremental costs in the quarter. Those will not be repeated in the quarters going forward.

Operator

Your next question comes from Christina Whitehead – Thompson Davis.

Christina Whitehead – Thompson Davis

How do you see business shaping up so far in April and particularly in the Asia Pacific region?

William J. Flynn

Well, we’ve had good demand in Asia Pacific since the beginning of the year. The most recent [IOTA] reports that came out for the first quarter showed year-over-year growth which we certainly see as a good sign. Last year, in the first quarter of 2007, the market was actually contracting year-over-year versus 2006 so demand has actually been good in the trans-Pacific market and we expect that will continue.

I just may add to that, the two new aircraft that are flying that we started for DHL at the end of March, DHL uses a good percentage of the aircraft but doesn’t fill the aircraft and we’ve been able to put incremental new commercial freight on that aircraft to fill the planes out coming from Hong Kong in to North America.

Operator

Your next question comes from Robert Labick – CJS Securities.

Robert Labick – CJS Securities

I was hoping Jason maybe you could expand upon the minority interest charge in the quarter as it relates to DHL? And, why we wouldn’t expect to see any more in the next few quarters and if we can talk about how it will be treated next year?

Jason Grant

The nature of that, it really relates to the transaction back in June of last year for DHL’s acquisition of the 49% interest in Polar. The nature of that transaction limits DHL’s exposure to any losses at Polar to the $3.4 million that we booked in the first quarter. So, pre-BSA, pre-October of this year, their exposure to any minority losses is limited to that $3.4 amount which we booked in the first quarter. Going forward, the nature of the relationship is such that it will not generate, it is not expected to generate pre-tax losses or gains for which there would be any minority interest. So, going forward that number is expected to be zero.

Robert Labick – CJS Securities

Then shifting gears, in terms of, I know you reiterated your ‘09 guidance, previously we had discussed AMC, or you had discussed AMC revenues in the $200 million range. Obviously, with the step of AMC fuel, you’re revenue for block hours are up materially. It’s a pass through I know but would the revenues then be higher in your ‘09 guidance? Or, have you reduced your block hour expectations for ‘09? How should we think about that?

William J. Flynn

We’re consistent in our block hour expectations for AMC. It’s the same basic assumption we made when we gave the $165 to $175 range back in February.

Robert Labick – CJS Securities

I think I calculated roughly 11,000 or 12,000 block hours for AMC back on those terms, so you’re saying that’s the same?

William J. Flynn

Yes, absolutely. We’ve not increased or decreased the level of AMC flying as we have reaffirmed guidance here today on ‘09.

Operator

There are no further questions.

William J. Flynn

Thank you operator. Again, on behalf of the management team, we’d like to thank all of you for participating in our conference call today and thank you for your questions.

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Source: Atlas Air Worldwide Holdings, Inc. Q1 2008 Earnings Call Transcript
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