Atlas Air Worldwide Holdings' (AAWW) CEO Bill Flynn on Q4 2016 Results - Earnings Call Transcript

| About: Atlas Air (AAWW)

Atlas Air Worldwide Holdings (NASDAQ:AAWW)

Q4 2016 Results Earnings Conference Call

February 23, 2017, 11:00 AM ET

Executives

Ed McGarvey - Treasurer

Bill Flynn - Chief Executive Officer

Spencer Schwartz - Executive Vice President and Chief Financial Officer

Analysts

Scott Group - Wolfe Research

Jack Atkins - Stephens

Steve O'Hara - Sidoti & Company

Operator

Good morning. My name is Heidi, and I will be your conference operator today. At this time, I would like to welcome everyone to the Fourth Quarter 2016 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. Atlas Air, you may begin your conference.

Ed McGarvey

Thank you, Heidi, and good morning, everyone. I'm Ed McGarvey, Treasure for Atlas Air Worldwide. Welcome to our fourth quarter and full year 2016 results conference call. Today's call will be hosted by Bill Flynn, our Chief Executive Officer; and Spencer Schwartz, our Chief Financial Officer.

As a reminder, today's call is complemented by a slide presentation that can be viewed at atlasair.com. You may find the slides by clicking on the link to Presentations in the Investor Information section of the site.

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 2015 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 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 as time permits.

At this point, I'd like to draw your attention to Slide 3, and turn the call over to Bill Flynn.

Bill Flynn

Thank you, Ed, and good morning, everyone. 2016 was a historic year for Atlas, one that we're very proud of. We acquired Southern Air, expanding the array of the aircraft and services that we provide, especially to the faster growing express market.

We entered into strategic long-term agreements with Amazon to serve its rapidly growing e-commerce business and we recently announced new customer agreements with Asiana Cargo and Nippon Cargo Airline, in addition to signing a five-year, five aircraft contract with FedEx to provide peak season operations.

We finish the year on a very strong note. In the fourth quarter, we generated both the sequential and a year-over-year improvement in our block hour volumes, revenues, profitability and margins. In addition to record quarterly revenues, we delivered a significant increase in reported earnings and record adjusted earnings for the period.

Our performance was driven by additional seasonal flying we did for express operators, growing e-commerce demand and a lower level of maintenance expense. Our fourth quarter results also reflected a solid peak season and an improvement in commercial airfreight yield.

In ACMI we benefited from Southern Air's 777 and 737 Express CMI services, as well as better contributions and synergies than originally anticipated. We also continued ramping up for Amazon as we placed our second 767 300 aircraft into service for them this month.

By the end of next year, we will lease 20 767s to Amazon and also operate them on a CMI basis. We have now secured all 20 of these aircraft, as well as an additional one that we'll utilize as a spare.

In Charter, our results reflected an increase in commercial demand, including additional 747-8 fly and the quality, scale and efficiency of our global operations. And our dry leasing business maintained its steady, annuity like performance.

With our expanding business base in the ongoing development of our strategic platform, we are well positioned to grow earnings in 2017. We are excited about the recently announced customer agreements I mentioned a moment ago. We expect to see initial accretion from our service for Amazon and we look forward to our first full year of contribution from Southern Air. We expect these positives to be partially offset by an increase in maintenance expense and lower cost-based rates paid by the military.

Slide four highlights our guidance framework for 2017. As explained in our press release, and as Spencer will discuss further, our guidance focuses on adjusted income from continuing operations, net of taxes.

We are stronger company today. We begin 2017 with solid demand from our customers for our aircraft and services. With Amazon and Southern Air, we are also capitalizing on the steps we've taken to align our business with the faster growing e-commerce and express market.

As a result, we expect to grow our adjusted income by a mid-single-digit to a low double-digit percentage in 2017. Given the inherent seasonality of airfreight demand, we anticipate that our results this year will reflect historical patterns with approximately 70% of our adjusted income occurring in the second half.

In addition, we expect adjusted income in the first quarter of 2017, which usually have the lowest demand and highest maintenance expense of the year to be consistent with or slightly better than the first quarter of 2016.

For the full year, we expect total block hours to increase approximately 20% compared with 2016, including the ramp-up for Amazon, Southern Air in our new services for Asiana and Nippon Cargo. More than 75% of our 2017 hours will be in ACMI with the balance in Charter.

Aircraft maintenance expense in 2017 should total about $240 million and depreciation and amortization is expected to be approximately $170 million. In addition, core capital expenditures which exclude aircraft and engine purchases are expected to total approximately $55 million to $65 million, mainly for parts and components roughly.

I would like to ask Spencer to provide some additional detail about our framework for 2017 and to follow that with more information about our 2016 results. After Spencer, I'll have some closing comments, and then we'll be happy to take your questions. Spencer?

Spencer Schwartz

Thank you, Bill. And hello, everyone. As were now in 2017, we are taking this opportunity to revise the focus of our guidance framework. Our guidance today and for the foreseeable future will focus primarily on adjusted income from continuing operations, net of taxes. We view this is the most mean meaningful information to provide analysts and investors.

Earnings per share are indeed very important. But because the unique characteristics of warrant accounting, our EPS can be substantially influenced by changes in the market price of our shares. As the market price of our shares increases, diluted shares outstanding from the warrant accounting also increase, which has the impact of diluting earnings per share.

We saw this happen in the fourth quarter when our adjusted diluted shares outstanding rose to 26.3 million shares, including 772,000 implied shares from the warrant accounting impact. This information is included in the non-GAAP earnings reconciliation table which is on page 11 of today's press release.

Conversely if the market price of our shares decreases there will be a related decline in diluted shares outstanding, which would increase earnings per share. Our diluted share count each quarter will be impacted by the treasury stock method of accounting for warrants, under that method, all vested in the money warrants are assumed to be exercised at the strike price, such as those held by Amazon with a strike price of $37.50 per share.

The hypothetical proceeds are then presumed to be used by the company to repurchase its stock at the average daily closing share price for the quarter. The difference between the vested warrants shares, and the hypothetically repurchase shares would be included in the total number of diluted shares outstanding for the quarter. For the full year, diluted share count would be the simple average of the diluted share counts for each of the four quarters.

Let's move to our fourth quarter results on slide six. On an adjusted basis, income from continuing operations, net of taxes totaled $59 million or $2.24 per diluted share. On a reported basis, we had income from continuing operations, net of taxes of $28.7 million or $1.12 per diluted share.

Our reported results included an unrealized loss on financial instruments of $27.9 million related to outstanding warrants. As Bill noted, our fourth quarter results benefited from the accretion generated by Southern Air. We also saw an increase in commercial cargo demand and a steady performance in dry leasing.

Our adjusted results in the fourth quarter included an effective income tax rate of about 31%. On a reported basis, we had an effective tax rate of approximately 47% and that was principally due to the non-deductible nature of the unrealized mark-to-market loss on outstanding warrants that I noted a moment ago.

Based on our current tax framework and the aircraft that we have purchased and placed into service, we do not expect to pay any significant federal income tax until 2025 or later.

Looking at slide seven, we had record fourth quarter ACMI revenues. Revenues in ACMI reflected an increase in block hour volumes, partially offset by a lower blended average rate per block hour, both stems from an increase in CMI flying in 2016, following our acquisition of Southern Air and the temporary redeployment of 747-8 aircraft to Charter.

As a result, average CMI aircraft equivalents, which do not include a component for aircraft ownership in the rate per block hour, increased to 28.7 aircraft during the quarter, compared with 16 in the fourth quarter 2015, or an increase of 12.7 aircraft.

Higher Charter segment revenues in the fourth quarter were primarily driven by an increase in commercial cargo demand, partially offset by the impact of lower fuel prices. In dry leasing, revenues were relatively stable.

Moving to slide eight, segment contribution totaled $142 million in the fourth quarter compared with $95 million in the fourth quarter 2015. Record fourth quarter ACMI earnings were primarily driven by accretion from our acquisition of Southern Air and lower heavy maintenance expense.

Higher Charter contribution during the period reflected a beneficial impact of additional 747-8 capacity, as well as a decrease in heavy maintenance expense. In dry leasing, segment contribution during the quarter was slightly better than a year ago.

Turning to slide nine and our balance sheet. We ended 2016 with cash including cash equivalents, restricted cash and short term investments totaling $143 million. Our cash position at December 31st reflected cash used for investing and financing activities, partially offset by cash provided by operating activities.

Net cash used for investing activities during 2016, primarily related to payments for flight equipment and modifications, including the acquisition of 767 300 aircraft for our service for Amazon, our acquisition of Southern Air and core capital expenditures.

As noted previously, we expect to finance a substantial portion of the acquisition and conversion costs for these aircraft as they are placed into service with Amazon.

Net cash used for financing activities during 2016 included $179 million of outflows for debt payments, partially offset by $103 million of proceeds from debt issuance. It's important to note that our debt has a low weighted average interest rate of 3.3% and that over 95% of that is at a fixed rate. In addition, 88% of our debt was secured by aircraft assets, which have a value in excess of the debt.

In December, we entered into a three-year $150 million secure revolving credit facility for general corporate purposes, including financing the acquisition and conversion of 767 aircraft prior to obtaining permanent financing for them. In January of this year, we drew $100 million under the revolver for these aircraft.

Moving to slide 10, we remain committed to maintaining a strong balance sheet, while growing our fleet. As anticipated, our net leverage ratio improved to 4.8 times in the fourth quarter.

Looking forward, as we place more aircraft in service for Amazon and begin to generate substantially higher EBITDAR, we expect our net leverage ratio at the end of 2017 to be below 2016.

Now I'd like to turn it back to Bill.

Bill Flynn

Thank you, Spencer. Moving to slide 11, I would like to emphasize the significance of what we accomplished in 2016. We acquired Southern Air and its 10 aircraft 777 and 737 operating platforms. We entered into long-term agreements with Amazon to lease and operate 20 aircraft. We added Nippon Cargo airlines and now Asiana Cargo as new customers.

We signed a five-year five aircraft peak season contract with FedEx and we finished the year on a very strong note, with record quarterly revenues, a significant improvement in reported earnings and record adjusted earnings. We could not have accomplish this without the exceptional contribution of our crew members and our ground staff.

With our expanding business base and the ongoing development of our strategic platform, we are driving more deeply into the faster growing e-commerce and express markets. We are well-positioned to grow earnings in 2017.

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

Question-and-Answer Session

Operator

Certainly. Your first question comes from Bob Labick from CJS Securities. Please go ahead.

Unidentified Analyst

Good morning. This is actually Robert filling in for Bob this morning.

Bill Flynn

Morning, Robert.

Spencer Schwartz

Morning, Rob.

Unidentified Analyst

Can you just give us an overall update on your ability to get planes converted on time and on cost?

Bill Flynn

Sure. This is Bill, Robert. So as I mentioned in the - in my comments, we have secured all of the 20 aircraft, plus an additional aircraft for an operating spare given the size of our growing 767 fleet.

We've contracted with both the IAI in Israeli and with Boeing in Asia to perform the conversions. We've delivered our first two and we have very good controls in place and you know, hands on management approach at both conversion shops to ensure that the aircraft will be converted and delivered and put into service based on our commitments to Amazon.

Unidentified Analyst

And then on Amazon are the upfront expenses, training, et cetera, in line so far with your initial expectations? And do you still expect the term profitable in 2017?

Spencer Schwartz

Yes, Robert. It's Spencer, the startup costs are consistent with our expectations and yes, we still anticipate that in the second half of 2017 Amazon will become accretive, will turn positive for us.

Unidentified Analyst

Thank you. And just lastly from me, retailers are seemingly continuously lowering inventory levels, closing stores and shifting online. Beyond the obvious benefits to Amazon, are you getting the benefits of e-commerce or seeing shifts or changes to what you're carrying?

Spencer Schwartz

I believe we absolutely are, as you know we have the - our largest customer today is DHL Express and we provide peak season flying to other operators, as well as our current ACMI customers, I think we are all benefiting from a shift to e-commerce and we're seeing those volumes move into air in one form or another through one channel or another.

Bill Flynn

When you visit one of these sortation centers, Robert, you visit one today versus visiting one you know several years ago, I think you see some drastic differences. And so today you're seeing the smaller brown boxes that are appearing on all of our doorsteps, whereas in the past, you know, it was a different type of cargo that was moving through. So there is absolutely a shift occurring.

Unidentified Analyst

Thank you.

Bill Flynn

Thank you, Robert.

Operator

Your next question comes from Helane Becker from Cowen and Company. Please go ahead.

Unidentified Analyst

Hey, guys. It’s actually Steve on for Helane. Real quick on what share guy’s outlook for a kind of aircraft feedstock, I think there was a comment last week that Amazon might need about hundred aircraft of different types, is there any stress in the market or kind of any ability to ramp up to demand out there?

Bill Flynn

So I'll just comment from our perspective. As I mentioned earlier now, we have acquired the aircraft that we need to fulfill our commitments to Amazon. We have acquired the conversion slots and we're managing the conversions as we talked about.

There is a good feedstock of aircraft and different aircraft types, depending on what the market is going to look forward and what it demand. So my belief is that, that not being specific to anyone customer, there are several - several companies out there that are looking at aircraft and conversion, I think the feedstock is adequate to meet the demand.

Unidentified Analyst

Okay, perfect. And then just ramping up for this contract, how does hiring look, are you guys having any trouble bringing in pilots are you having to pay any more to get people to come over or is that been relatively smooth?

Bill Flynn

We scaled – certainly been able to scale to meet our growth across all of our asset types. We hired about 370 pilots last year across all of our aircraft type. We have our contract in place. We think we have an attractive contract in place and certainly believe we'll be able to hire the additional pilots we need in 2017 and 2018, as we grow for Amazon and for our other customers.

Unidentified Analyst

Okay, perfect. And one last one, just looking at that guidance, I guess, I was a little surprised that 1Q '17 wasn’t up a bit, just given the Southern Air acquisition, I think that closed April 1, right, is there any just kind of – anything offsetting that?

Bill Flynn

Sure. It’s a good question, Steve. So when you look at the first quarter of this year 2017 compared to last year, you're right, we'll have full year of Southern, so we'll enjoy countries from Southern in the first quarter. Heavy maintenance expense is higher and so that will be higher in the first quarter of '17 than it was in 2016.

The other big item is if you go back to the first quarter 2016, you'll see that our Titan dry leasing business enjoyed return conditions in 2016. So those won't recur in 2017. So those were the items - the big items at play there.

So really nice contributions from Southern, offset - partially offset by return conditions from our Titan dry leasing business, that were really one-time the nature and then higher heavy maintenance.

Unidentified Analyst

Okay, perfect. Thanks, guys.

Bill Flynn

Thank you.

Operator

Your next question comes from Scott Group from Wolfe Research. Please go ahead.

Scott Group

Hey, thanks. Morning, guys.

Bill Flynn

Hi, Scott.

Spencer Schwartz

Morning, Scott.

Scott Group

So, wanted to ask first just on the maintenance expense, so a nice kind of step up in 2017. Is this a, unusually high year would you call it, or is this more of kind of a new normal just given the size of the fleet now?

Bill Flynn

Yes, Scott. Well, different types of maintenance, right. And so there's line maintenance, which is a variable cost and grows as you flying levels increase and block hours rise. And then there's heavy maintenance and then the heavy maintenance really is you know, it’s partially time-based. And so heavy maintenance is due when it’s due and then part of it is also based on for engines for example based on cycle counts and takeoffs and landings.

So it really varies, the heavy maintenance varies depending upon how many checks are in one particular year. So you're comparing '17 versus '16 you know, we expect that we will have several incremental d-checks, several incremental engine overhauls.

We will have a full year of Southern. So maintenance expense related Southern will be higher, but that's more than offset by earnings from Southern. We'll have a couple more dash eight [ph] seat checks and then of course we've been growing our 767 300 fleet, and so some incremental checks there.

So it’s just – it’s an ongoing you know part of the business and I think that’s what we're seeing in 2017.

Scott Group

No, no, I totally understand that it can be lumpy. I am just trying to think beyond '17, if this is a heavier than normal year in '17 or if this is more of a normal year?

Bill Flynn

Well, line maintenance is up about 20% and so our block hours to Spencer's point. So that's activity driven and so that's an important part of the equation. And then that is the timing of the heavy events Scott, as Spencer pointed out. So we're up a little over 10% on heavy, but that's more timing than anything else, when these events occur.

Scott Group

Okay, okay. Can you give a total CapEx number for '17 including aircraft?

Spencer Schwartz

So Scott, we typically talk about our core capital expenditures, and we typically don't talk too much about the aircraft. But I understand your question, it's a good one. We've said that our core capital expenditures for 2017 should be somewhere between $55 million and $65 million, but that's not really your question, you're asking about the aircraft and engines.

So when you see our 10-K that will file later today, you can take a look at the 767s that are included in there. And then you can estimate additional 767s that will be added. I think given the sensitive nature of you know, us being out the marketplace acquiring additional aircraft would really not - really don't want to say more than that, about how much these aircraft or are costing. But I think that will give you some of the information that you need.

Scott Group

Okay. I guess maybe what I was trying to get at, are there more - now that you have all the planes for Amazon are there any additional aircraft you are planning to acquire in '17?

Spencer Schwartz

So the - we have secured all of the planes that we need for Amazon. However, from a cash standpoint some of those you know, we made deposits on, we have conversion slots and some of those we've made deposits on. So from a cash standpoint, from a CapEx standpoint, there is still additional capital expenditures that will be expended during 2017.

Scott Group

Okay, that makes sense. And if I could just ask one last thing real quick. So the two 400 ACMI contracts that you announced, one in December and then one I guess a couple weeks ago, are those net additions so we should be raising the ACMI fleet by two and lowering the Charter fleet by two aircraft?

Bill Flynn

Its actually in one in one, one is in ACMI, one is the CMI. So the one ACMI is our fleet, the CMI is an addition.

Scott Group

Okay, perfect. Thank you, guys.

Bill Flynn

Thanks, Scott.

Spencer Schwartz

Thank you, Scott.

Operator

[Operator Instructions] Your question comes from Jack Atkins from Stephens. Please go ahead.

Jack Atkins

Hey, guys. Good morning.

Bill Flynn

Hi, Jack.

Spencer Schwartz

Hi, Jack.

Jack Atkins

So, I guess just to go back to guidance, and I guess maybe to hold your feet to the fire a little bit on that. I am having trouble understanding the rationale for deemphasizing earnings per share.

I get that there is some volatility from the stock price, but I just don't understand deemphasizing the capital efficiency of the enterprise because in theory you can grow your income from continuing ops while also diluting your shareholders if you are not focused on EPS.

So, I just think it maybe sends the wrong message to your shareholders and I just would love to get your thoughts on that?

Spencer Schwartz

Sure, Jack. It's really a function of the warrant accounting and the impact it has on EPS, and its this sort of converse you know relationship or inverse relationship, so that when our share price increases, our EPS decreases and then the opposite of course is true and we saw that during the fourth quarter, we absolutely saw that, our share price rose pretty dramatically hat during the fourth quarter and then that really increase the shares outstanding and then hurts the EPS.

So we don't want to - first of all, it's difficult to - for us as a company to sort of reliably forecast our stock price movement and we certainly don't want to have incentives for stock price declines, right, if our stock price declines than our EPS is better, but we would never want to have an incentive in that direction.

So we're really trying to focus the future guidance on adjusted net income. That's what the company, you know can control, rather than EPS. We had a really balanced, I think as you know, a really balanced capital allocation approach, that doesn't change in any way.

We've continue to support you know, having a very strong balance sheet. We've continue to invest in assets, modern efficient assets that our customers want and you know we'll help the company in the long-term.

And we bought back over 10% of the stock through share repurchases over the last several years. So we had a really balanced approach and we don't see that changing.

Jack Atkins

Okay. So shifting gears here I guess a bit to the marketplace and demand for leases. I have noticed the announcements, to Scott's point, on the dash 400 leases, but you still have two dash 8s in Charter.

I guess I am just curious why it has been so difficult to put those dash 8s under a long-term contract and would you expect to be able to ink a deal for one or both of those planes in 2017?

Spencer Schwartz

So what we talked about the past, Jack is our ability to use those dash eights in Charter and drive meaningful results with those aircraft as what we've done in the fourth quarter and I think several times we've talked about that and we do expect ultimately that 747 dash eights go into charter – excuse me, go into ACMI.

But I don't think it should be lost the earnings power those aircraft have and the ability that we can - we have to drive those earnings power with those - with the aircraft.

Bill Flynn

I think the other thing that shouldn't be missed either. In 2016, we basically signed up 30 aircraft units of committed growth, which is huge, huge, why we said it was historic year for us. The 20 aircraft with Amazon, plus the 10 aircraft that we have acquired, those are ACMI operations through Southern flying for DHL.

It’s a very significant year for us as we're moving to a hundred aircraft in the fleet and I'm not minimizing or attempting to you know, minimize your question. But I think we have a very solid track record of putting our assets to work, driving great earnings from those assets and now we have a year behind us, where we've laid out a very compelling growth platform for the company going forward for the next several years.

Jack Atkins

Okay, Bill thank you for that. Last question and I will turn it over. You referenced in the prepared comments and in the press release lower cost base rates in the US military. Can you explain exactly what is driving that reduction and are these lower rates a new sort of run rate for that military business looking out?

Bill Flynn

Sure. So the rates in the – for AMC flying our cost base. All carriers that fly for the military submit a years worth of information of actual costs incurred to operate a given aircraft type. The military then audits that information and then establishes a base rate that's paid to all operators, all operators of the same aircraft type.

As carriers in the craft program commit more modern and more efficient aircraft and they themselves become more efficient and they operate in their own operations, the cost basis came down, and that's exactly what happened, and then so I would say, a cost plus.

So its plus on the average cost and that was the impact that we saw for more modern fleet across all the carriers, serving the military, more efficient operations by all the carriers, lower the - lower the cost base and then essentially brought down the plus or the other profit margin that's now applied on lower base.

Spencer Schwartz

And I'll just add to that Jack, just quickly is that, you know, when looking at '17 guidance, so we're hurt a bit by this AMC pricing, we're hurt a bit with the rising maintenance, but our earnings you know are still growing, 2017 versus 2016 still growing, because Amazon becomes accretive, we get a full year of Southern and we've added these new customer agreements. So that's really the key important point.

Jack Atkins

Okay. Bill, Spencer, thanks again for the time.

Bill Flynn

Thanks, Jack.

Spencer Schwartz

Thank you.

Operator

Your next question comes from Steve O'Hara from Sidoti & Company. Please go ahead.

Steve O'Hara

Yes, hi. Good morning.

Bill Flynn

Good morning, Steve.

Steve O'Hara

Just a question on the aircraft that you purchased for Amazon. I know you said you have secured all the aircraft and the slots. Have you purchased -- other than the spare have you purchased other or secured other purchases for 767 aircraft?

Bill Flynn

Other than…

Spencer Schwartz

At least 21 is what we've secured.

Bill Flynn

Yes.

Steve O'Hara

Okay, so you don't have any options on any others or anything like that?

Bill Flynn

No, we don't have options on other aircraft Steve, but we're going to continue to evaluate the market, evaluate opportunities and evaluate our whole array of customer opportunities. And if and when it makes sense to grow the fleet we will.

Steve O'Hara

Okay. And then maybe just following up on that with the 767 demand, I mean I know in the past your competitor has talked about demand from other customers has been improving.

And I am just wondering - I mean it seems like you guys have, to my knowledge, one big customer in Amazon and another big customer - or maybe a little smaller in the 767 in DHL. Have you explored other opportunities going after smaller customers in that aircraft type?

Bill Flynn

So just to refresh, so we've got 13 767 flying for DH, we'll have the 20 ultimately for Amazon and this tranche, we'll have our spare aircraft. We also have 5 767 pax that we're operating in military, as well as another 767 that we're flying for a MLW Air, which is Mark Cuban's aircraft for their sports teams and charter work that they do.

Yes, I believe there are other opportunities for the mid body freighter, the kind of growth that we're going to experience here in '17 and into '18 with that, two things, it's a fair amount of growth to absorb. We're well positioned to be able to do that, and I think there will be other opportunities to fly midsize freighters for other customers, if that's what you're asking.

Steve O'Hara

Yes, okay. That’s helpful. And then just maybe on the 747-8Fs, just based on the framework you’ve put out there, do you expect the dash 8s to go into ACMI this year? And maybe what's the high end to the low end of the guidance? And maybe what your feeling is on the peak season this year?

Obviously it is a ways away. But are you looking for a more normalized season it seemed like the peak was pretty good this year, maybe what your thought is there? Thank you.

Bill Flynn

Sure. So may be kind of working backward. I think the peak that we had this year was perhaps a more normal peak. The peak we experienced in '15, you know, benefited greatly from the West Coast port work stoppages overall. So this peak while is a good peak and strong peak you know, just in terms of demand was more normal and not necessarily exceptional.

We were able to take advantage of the peak period in terms of our ability to put aircraft to work for other express operators and that commitment you know, as we've said we've strengthened that commitment now FedEx and contracted out peak season flying for five years starting in 2017.

You know, years ago we use to talk about earnings power on the dash 8. We were trying to provide a framework of what they would contribute as they came into service on five or so years ago now.

But just put a finer point on the balance between ACMI and Charter, we are earning ACMI like returns in the Charter market with the dash 8 because of the fuel efficiency they provide and the cargo carrying capacity that have.

So the dash 8s operating in Charter this year we're not at a discount to ACMI type returns. So we feel really confident about the earnings part of that aircraft, regardless of ACMI or Charter placement and our ability to keep them placed and active.

Steve O'Hara

Okay. All right. Thank you very much.

Bill Flynn

Thank you.

Operator

Your next question is a follow up question from Scott Group from Wolfe Research. Please go ahead.

Scott Group

Hey, guys, I appreciate the follow up. A couple of things, did you give a tax rate for the year?

Spencer Schwartz

Are you talking about '16 or '17, I presume you're talking about…

Scott Group

For '17, guidance for '17 if you have it, Spencer.

Spencer Schwartz

Sure. We think that with some tax planning that we anticipate for this year, we expect the 2017 adjusted effective tax rate to be a bit below to 2016 rate which was around 31%. So my long-winded point is 31% on adjusted basis in '16, we think it will be lower than that in '17, a bit lower.

Scott Group

Okay, so around 30% is a good place to be?

Spencer Schwartz

Somewhere a little south of 31%, yes.

Scott Group

Okay. The Amazon -- just to make sure I understand. Are you saying it is now accretive in the second half of the year or accretive in the full year?

Bill Flynn

Yes, its…

Scott Group

It becomes accretive in the second half of the year but it makes it accretive for the full year?

Spencer Schwartz

That’s exactly right, yes, perfect.

Scott Group

And then just lastly, any update you can give us on pilot contract negotiations and if you are assuming any kind of step up in pilot pay in the guidance for 2017?

Bill Flynn

Scott, this is Bill. So our contract at Atlas became amenable in September of last year and in November of last year at Southern. We're in discussions with our pilots. We look forward to continuing to make progress or make progress with the pilots on the contract and we haven't made specific assumptions on the contract in our guidance this year, other than the contractual rates that we have in place.

Scott Group

Okay, so you don't accrue any potential increases in real time?

Bill Flynn

No impact we expected for 2017, if that’s what you are asking.

Scott Group

Okay, thank you, guys. Appreciate it.

Bill Flynn

Thank you.

Operator

And there no further questions in the queue.

Bill Flynn

Okay. Well, thank you very much Heidi, and Spencer and I certainly want to thank all of you for your interest in our company and we really do appreciate you sharing your time with us today and look forward to speaking with you all again soon. Thank you.

Operator

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

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