Atlas Air Worldwide Holdings, Inc. (AAWW) CEO William Flynn on Q2 2018 Results - Earnings Call Transcript

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About: Atlas Air Worldwide Holdings (AAWW)
by: SA Transcripts

Atlas Air Worldwide Holdings, Inc. (NASDAQ:AAWW) Q2 2018 Earnings Conference Call August 2, 2018 11:00 AM ET

Executives

Ed McGarvey - VP & Treasurer

William Flynn - President & CEO

Spencer Schwartz - EVP & CFO

Analysts

Kevin Sterling - Seaport Global

Helane Becker - Cowen & Company

David Campbell - Thompson, Davis and Co.

Jack Atkins - Stephens Inc.

Chris Stathoulopoulos - Susquehanna Financial

Scott Group - Wolfe Research

Stephen O'Hara - Sidoti & Company

David Ross - Stifel

Christopher Stathoulopoulos - Susquehanna Financial

Howard Rosencrans - VA

Jack Atkins - Stephens Inc.

Operator

Hello, my name is Dan and I will be your conference operator today. At this time I would like to welcome everyone to the Second Quarter 2018 Earnings Call for Atlas Air Worldwide. [Operator Instructions] I would now like to turn the call over to Mr. Spencer Schwartz, Atlas Air Worldwide CFO. Please go ahead.

Spencer Schwartz

Thank you, Dan, and hello, everyone. Welcome to our second quarter 2018 results conference call. Today's call will be hosted by Bill Flynn, our Chief Executive Officer; and me. The call is complemented by a slide presentation that can be viewed at atlasair.com under Presentations in the Investor Information section.

As indicated on Slide 2, we would 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 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 2017 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 that are reconciled with GAAP in today's press release, and in the appendix that is attached to today's slides.

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 can accommodate as many participants as possible. After we've gone through the queue, we will 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.

William Flynn

Thank you, Spencer, and good morning, everyone. We're very pleased to have you join us. We announced strong second quarter growth today and we have increased our full year 2018 outlook. Our results in our outlook are driven by mark-to-market strength and increased customer demand for our aircraft and services. Our volumes and revenue grew to record levels in the second quarter. And while non-cash warrant accounting import impacted reported results, our adjusted net income and EBITDA were sharply higher.

We expect to continue building on our strong performance in the second half of 2018, airfreight demand is solid and the global economy is growing. As a result of our multi-year strategic initiatives to grow and diversify our fleet, expand our customer base, and enhance our business mix; we are meeting the growing needs of our customers in the broader market driving our results and extending our leadership in global aviation outsourcing.

Moving to Slide 4; our second quarter adjusted earnings reflected a 19% increase in block hours and 29% increase in revenue. They also included a 23% increase in EBITDA and 71% increase in net income. Our earnings were enhanced by two items; a refund of aircraft rent paid in previous years, and the timing of non-heavy maintenance that was expected to take place in the second quarter but will now occur in the third quarter. Together these items added $9.9 million after-tax to adjusted net income. Without these items our second quarter adjusted net income grew a strong 37% over prior year.

During the quarter we placed and began operating three additional 767 aircraft for Amazon raising the current number to 15 as we discussed at our recent Investor Analyst Day. In line with the schedule we announced in 2016, we remain on-track to be at a total of 20 aircraft by the end of this year. In addition, we completed the acquisition of our A-777 freighter during the quarter and placed it into A-plus CMI service for DHL Express in July. Also in July, we announced an interim agreement to enhance the terms and conditions of the collective bargaining agreement covering our Southern Air pilots. Our announcement was the result of collaborative and productive discussions with the leadership of the pilots union. We continue on our path towards the merger of Atlas Air and Southern Air, and we remain committed to completing the bargaining process for a joint contract covering all of our pilots in a timely manner, and in the best interest of all parties.

Slide 5 highlights our revised growth framework for 2018. We now expect volumes to rise approximately 19% to around 300,000 block hours. Revenue to exceed $2.6 billion, adjusted EBITDA to grow to more than $520 million, and adjusted net income to grow by 45% to 50% compared with 2017. For the full year, we anticipate our maintenance expense will total about $330 million. In addition, we expect depreciation and amortization of approximately $220 million, and core capital expenditures which exclude aircraft and engine purchases about $105 million to $115 million, mainly for parts and components for our fleet. All these amounts are consistent with our prior outlook for this year.

Looking at the third quarter, we see adjusted EBITDA exceeding $120 million and adjusted net income growing by an upper 30% to lower 40% level compared with the third quarter of 2017. Thinking about our outlook for the third quarter on a sequential basis, if we exclude the impacts of the rent refund and maintenance timing as previously discussed, we would expect adjusted net income in the third quarter to increase sequentially by approximately 10% to 15% compared with the second quarter of 2018. During the third quarter, we also expect our tight and dry leasing subsidiary to renew it's participation in an aircraft leasing incentive program in Singapore. As a result, we expect to record an income tax benefit of approximately $8.2 million in the third quarter, and to enjoy a reduced rate going forward.

Also in the third quarter we anticipate a ratification bonus related to an interim agreement to enhance the employment terms and conditions of our Southern Air pilots. The agreement is subject to ratification by the Southern Air pilots in a process we expect to be completed by mid-August. This is a good opportunity to ask Spencer to provide some additional detail about our second quarter results. After Spencer, I'll have a few additional comments and then we'll be happy to take your questions. Spencer?

Spencer Schwartz

Thank you, Bill. Our strong second quarter results are highlighted on Slide 6. On an adjusted basis, income from continuing operations net of taxes totaled $49.7 million which was an increase of $20.6 million over the second quarter of 2017.

As Bill noted, our results reflected robust increases in block hours revenue, adjusted EBITDA and adjusted net income. Our segments also generated substantially higher direct contribution. On a reported basis, we had a net loss of $21.1 million which was driven by an unrealized loss of $50 million on outstanding warrants, primarily driven by a 19% increase in our stock price during the quarter, as well as a special charge of $9.4 million associated with trade and engines help for sale.

Our adjusted earnings in the second quarter included an effective income tax rate of 16.2%. On a reported basis, we had an effective income tax rate of 159.6% during the quarter, and that was principally due to non-deductible changes in the value of the outstanding warrants. With respect to 2018, we now expect our full year adjusted effective income tax rate to be approximately 15%. Based on our current tax framework and the deductibility for the substantial investments that we have made to grow our fleet, we continue to expect that we will not incur any significant U.S. federal income tax.

Looking at Slide 7; increased ACMI segment revenues in the quarter were primarily driven by significant growth in block hour volumes and a higher average rate per block hour. Black hours grew 19% during the period reflecting increase 767 flying for Amazon, the start-up of 747-7 and flying for several new customers, and the redeployment of 747-8 from the charter segment. Higher charter segment revenues in the second quarter were primarily driven by an increase in volumes, and an increase in the average rate per block hour. In dry leasing, higher segment revenues reflected an increase in the number of 767-300 aircraft throughout the second half of 2017 and the first half of 2018, as well as the placement of a 777 in early 2018.

Moving to Slide 8, segment contribution totaled $116 million in the second quarter, a 17% increase over the prior year. ACMI earnings primarily reflected a significant increase in flying and higher rate per block hour offset by higher heavy maintenance expense and amortization of deferred maintenance costs. The improvement in charter contribution during the period was primarily due to increases in military cargo and passenger demand, and increase in commercial cargo volumes and higher aircraft utilization. These were partially offset by the redeployment of 747-8 aircraft to the ACMI segment. In dry leasing, higher segment contribution during the quarter primarily reflected the placement of additional aircraft.

Turning to Slide 9; we ended the second quarter of 2018 with cash including cash equivalents, restricted cash, and short-term investments totaling $245.4 million. Our cash position at June 30 reflected cash used for investing activities, partially offset by cash provided by operating and financing activities. Net cash used for investing activities during the first half of the year primarily related to payments for the acquisition of 777 and 767 aircraft, as well as conversions to freighter configuration, spare engines and upgrade kits, and core capital expenditures. Net cash provided by financing activities during the period primarily reflected proceeds from our financings of 777 and 767 aircraft partially offset by payments on debt obligations.

As a reminder, our debt has a low weighted average interest rate of 3.3%, almost all of that is at a fixed rate and the vast majority secured by our aircraft assets which have a value in excess of the related debt. We are committed to maintaining a strong balance sheet. As the slide shows, we have grown our fleet to take advantage of great opportunities, and as you can also see, our net leverage ratio has remained fairly consistent since 2016 while we have diversified our aircraft and grown our fleet over 20%. We expect our net leverage ratio to improve gradually over the next few years as we place more aircraft in service and generate higher EBITDAR.

Now, I would like to turn it back to Bill.

William Flynn

Thank you, Spencer. Moving to Slide 10, we've reported significant growth in the second quarter and first half of 2018, and we have substantially increased our full year earnings outlook to reflect the market strength and customer demand for our aircraft and services.

We expect to continue building on our strong performance in the second half of 2018. Airfreight demand is solid and the global economy is growing. As a result of our strategic initiatives, we are meeting the growing needs of our customers and the broader market. We are driving our results and extending our leadership in global aviation outsourcing, and we continue to capitalize on opportunities in fast growing global markets.

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

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Kevin Sterling with Seaport Global.

Kevin Sterling

Let me touch on your aircraft rent, you talked about it being lower this quarter than expected; should we use that as a run rate going forward and maybe kind of give us some nuance as to why it's little bit lower this quarter if you don't mind and how we should think about it going forward?

Spencer Schwartz

We had -- I think what you're talking about is the return -- we had excess rent, that was return -- is that the nature of your question?

Kevin Sterling

Yes.

Spencer Schwartz

Okay, because rent expense has been fairly consistent but if you're talking about the return of rent that we received, so certain of the company's aircraft leases were restructured back in 2004, and then that led to required rent payments that over the ensuing 14 years since that time were in excess that they were required but they were in excess of the actual cash required to satisfy the underlying obligations. And the excess cash was basically building up and then was returned to us this this quarter when the underlying obligations were satisfied. So that's the nature of that sort of unusual transaction. We did not know that it was going to happen when we were together for Investor Day; and then -- so is returned to us and then we recorded it; so it's a bit of an unusual item.

We included it as a GAAP by the rent -- when we recorded the rent expense overtime was also included as rent expense on a GAAP basis overtime. So when we sort of reversed it, it was treated somewhat similarly.

Kevin Sterling

It kind of sounds like it just one-time and obviously a good problem to have you got additional cash back in the door, right. Is that right?

Spencer Schwartz

Yes, understand well.

Kevin Sterling

You explained it well, thank you. And then just as a follow-up question and this is just bigger picture if you don't mind -- obviously you guys had a good quarter, you're raising your outlook and your expectations again for the rest of the year but Bill if you could help us as we think about -- maybe even into 2019, the frame for us kind of what we're seeing now? Do you expect it to continue the strength continue into 2019? And maybe if you could share some of your customer conversations how they're thinking about the world today, and even put some color or context around 2019, particularly with all the noise that we hear regarding terrorists and trade wars and everything; if you could just kind of help us frame maybe general outlook for 2019?

Spencer Schwartz

Well, sure Kevin, there's a lot there, so let's think about it in several components. So certainly there is a lot of concern and uncertainty about what terrorists mean and where does this is ultimately, and how might it affect just the markets broadly and then how does it affect the companies that are key actors in those markets. What we've seen I'd say, somewhat positive note in the last several weeks; Mr. Yankus [ph] was here on behalf of the EU, it sounds like the U.S. and the E.U. want to find a positive path forward to resolve the tension that's in the Transatlantic trade, we'll see how that all shakes out but it would -- kind of feels like we're in the right direction.

On NAFTA, the new President of Mexico, Lopez Obrador, has commented publicly that he wants to constructively engage with the U.S. on working through the revisions to NAFTA going forward. So two key trading block for us; as a country, seemed to be moving in a more positive direction. China is really uncertain, I was listening to some analysis today that even in the face of this potential for 25% tariffs the discussion was about well, that would likely if it were to come about -- may not even necessarily be or most likely wouldn't be applied uniformly. And so it could be that's a major source of all of our mobile phones, that -- there is probably not a big tariff on mobile phones because of the larger dislocation it would have in consumers and how we lever daily lives.

On the other hand there are many sources of garments and footwear around the world and perhaps those would bear the brunt of a tariff, I'm just using by way of the example from the analysis I heard [indiscernible]. Low cost footwear and garments, if probably not, that's more emotion, but we'll all have to see what that means but more -- another point that you raised, what does it mean we think about the fundamentals of change that has happened in global supply chains, what that means in terms of express and integrated services, and then on top of that layer in e-commerce and the expectations that consumers have around e-commerce, and I think those fundamental supply chain changes and the impact of e-commerce and changing the way we live our lives and by all favor here. And I think through the whole level of uncertainty that exists, I think that air and air supply chains have changed the way companies do business, and as a result, I think we're in a very good place as a company and the industry that we're a participant in.

We've diversified our business, we've diversified our fleet, we diversified our customer mix, and we have a broad array of services, we're substantially positioned in express and e-commerce; so I think as we kind of sort through the confusion and the uncertainty raised by tariffs, I think there is a very -- we're in a very strong position as a company, and as we talk about regularly Kevin -- what are our customers saying about their business, what are our Express customers saying about their business, what are the e-commerce customers saying about their business -- I think we're in a very good position. So rolling into 2019, I think we continue to see good growth and demand for our services and in the market overall.

Kevin Sterling

Thank you, Bill and obviously you guys have become much more e-commerce centric versus 10-12 years ago when you relied more in the air freight; that's all I've got, I'll get back in queue but I really appreciate your time and your thoughts and congrats on a great quarter.

Operator

Your next question comes from the line of Bob Novak [ph] with CJS Securities.

Unidentified Analyst

Just following up on the kind of bigger picture questions as we're talking about; the environment is very strong right now, there is that uncertainty you just touched on but can you talk -- you've added a lot of fleet this year both in terms of short-term and medium-term leases, and then growing out and purchasing some more fleet as well. Can you talk about the fleet composition ahead, expectations for your growth there over the next few years? And also, if there are more opportunities for you more CMI contracts and growth in the asset light areas of your business as well?

William Flynn

So I'll start with CMI; if we go back and look over the past several years, we've had tremendous growth in CMI overall, and we believe that that will continue to be an important part of our growth going forward. And so what our customer is buying is really in CMI, our ability to operate essentially time definite networks for them, and that certainly -- the resources that we bring to those operations, I would say the intellectual capital that we bring in knowing how to operate time definite networks that we operate, and really on a global basis and I think there will continue to be good demand for CMI services along with ACMI services, and of course, the beauty of CMI is we're not taking on a substantial amount of leverage yet we get the benefit of scale because EMI occurs in the fleet types that we already operate or that we intend to operate.

In terms of our fleet it's diverse now from 777 freighters all the way through the dash eight [ph] freighters, in hindsight we're certainly very pleased that we did diversify the fleet so that we could serve broad array of our customers' needs and be even more valued strategic provider of services to them. So we will see growth in the fleet, it will be CMI and ACMI; as a Spencer pointed out his comments, we are certainly mindful and focused on maintaining a healthy balance sheet, so CMI is really important for growth and scale effect while ensuring that we're maintaining that healthy balance sheet and gradually reducing our leverage ratio overtime.

Unidentified Analyst

And then just my follow-up in terms of that fleet opportunity out there, we understand obviously you had some really nice information at the Analyst Day that expressed the fact that the -- particularly, the freighter fleet is tight and the supply demand dynamics are also very tight; and so can you talk about -- I think you hinted about a potential growing e-commerce relationships out as well; is there enough opportunities for you to get more fleet to grow or just please kind of talk through the fleet dynamics and the assets out there that you could potentially be using in the future?

William Flynn

I think more broadly, there are opportunities, there exists an opportunity for us to acquire the fleet we need to grow the business and serve our customer requirements and we've talked about that. I think probably had a lot of conversation about mid-body or mid-size wide body freighters, and how many more 6-7s are out there and then what happens after that. And while there has been quite a few 6-7 passenger conversions overtime, there is certainly still is a fairly large size fleet of 6-7 aircrafts that can be converted and the first several A330 [ph] converted freighters are now in service, I think there are -- perhaps three of them in service today; I think the industry broadly is learning about the 330 freighter and what it can achieve. And so in that class I think there is certainly a growing opportunity and good opportunity with a very large fleet of 330s that are in service more or so if they -- typically, the majority are in Asian markets today, but the passenger aircraft -- certainly that can be converted. There is a large fleet of 737s if customers are looking for a smaller gauge aircraft, the three seven-eight hundreds are beginning to enter the market, I think that's an exciting opportunity as we think down the line.

And then of course, we've seen substantial orders by express carriers, in particular, the long haul wide body intercontinental aircraft. Some of those we may operate but I think the point there is, that these are the three largest express operators; DHL, FedEx and UPS; each of them in the last couple of years now, and recently DHL have made substantial orders of freighters which I would argue conveys real confidence in the future of the markets they serve, and essentially the markets we serve.

Operator

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

Helane Becker

Just two questions; one, as you look ahead to March 29 of next year, have you thought about if there is no bilateral agreement between the U.K. and the E.U. or the U.S. and the U.K.; how your clients would be able to use your aircraft to operate into that market -- in and out of that market actually?

William Flynn

Ultimately, I believe there will be a bilateral agreement of some fashion but I think we are positioned to be able to operate on behalf of our customers with the aircraft and the fleet that we have.

Helane Becker

Yes, I mean there may be a transition agreement -- you just don't know what's going on but you have to at least prepare for that anyway.

William Flynn

Yes, and the U.K. is an important market for us, no doubt; the majority of our operations are much more continental than they are you [ph] for sure. And so I think you years ago, as every -- most folks on the call know, we were operating three freighters for British Airways before they decided to exit the freighter market; that was a good size operation. If that were the case today, it would be more -- a larger part of our business but it's not, and I think we're -- we think about the customers we fly for, but where we fly, if you even were to look at the route maps that we have in our investor presentations -- while the U.K. is an important economy, it certainly participate in that, if not, an anchor part of our Europe operations.

Helane Becker

And then, on those aircrafts that DHL Express ordered at Farnborough, have they talked to you at all about the opportunity that might exist flying those aircraft for them, A)? And B) and I promise last question -- the little letter B is, would you have the pilots available to be able to do that?

William Flynn

So as I was just chatting with Bob, I thought it was really exciting a couple of levels to see DHL move forward with an order for 14 777 which is kind of follows on what FedEx has ordered for themselves and the substantial order that UPS has made themselves. One of the core reasons for us to acquire Southern Air in 2016 was because they have the 777 and 37 platform. And Atlas was 767 and 47 platform. As we talked about strategic move, buy versus build, we are now operating a 6 777 for DHL add the Southern platform. We are 1 of 2 777 operator for DHL. So I think we are well-positioned to grow and to fly some of that fleet. I wouldn't go further than that on any discussions that we have with our customers. But I think that opportunities there, absolutely. In terms of -- and earlier we'll certainly continue to work and negotiate with our pilots for joint collective bargaining agreement. And I'm very confident we'd be able to serve DHL if they awarded us additional 777 flying.

Operator

Your next question comes from the line of David Campbell with Thompson, Davis and Co.

David Campbell

Really, that the biggest concern I have in the long around, or really the rest of the year, are rates you get for flying. Right now, it doesn't really -- to me, it doesn't make any sense. I know it misses a lot of freight. This is a lot of foresight that's going on out there. But nevertheless, the capacity to carry freight -- airfreight has increased in recent months at a rate significantly faster than the revenue block hours have increased. And I don't understand why in that environment the marketplace and investors, in general, talking about higher rates for flying airfreight. Normally, when demand is growing less than capacity, the capacity will reduce your rates, but it's not happening, apparently. And so, I know your answer partly they are missing some of the freight, but they are also missing some of the capacity. So I -- it's fairly harsh for me to figure out what's going on. Can you help?

William Flynn

Well, couple of thoughts. I think in terms of measuring the market and measuring demand, this is something we've talked about for a number of years. And in fact, we've had our own approaches to IATA to work with them and see if they can't in their market estimates, include the parts of the market that they are not reporting, because I believe they have the data. And so that's just kind of an ongoing discussion with them. And hopefully, that'll begin to incorporate the other segments that don't get deported currently. In terms of our party is able to capture capacity, that's pretty much -- that's more finite. And that's really a number of tales. And I think that's easier to track than perhaps maybe in some of the volume that's out there. In terms of Atlas and where we see ourselves, we had a tremendous quarter. In Charter, it's been a very strong performer for us for quite some time now. And so looking into the balance of the year, as we sit here and it's beginning of August, understanding the schedules that our ACMI and CMI customers are asking us to fly as well as the discussions we have with the key charter brokers and freight forwarders, who fundamentally our the charter customers for us. Last year we had a terrific peak. We think this year is a very strong peak. I'm not sure we know if one is peek year and the other, so to speak. But we see ourselves in a very good position in the fourth quarter. The demand is certainly very strong for us Jack. And if that's the outlook -- that's the perfective that informs our framework and outlook for the balance of the year.

Spencer Schwartz

And David, it's Spencer. I would just add, if you do the fuel, Commercial Charter for the year four Atlas for the six months of 2018 were above -- consistently through each month, were above the yields for 2017. And if you look at the yields for this week currently in early August, years -- Transpac yields out of Hong Kong, for example, are in the mid-3s. Transpac yields out of China start with a four. So it's continues to be a strong yield environment. And that's what we're seeing.

William Flynn

Right, it's just not at issue. Our South America operations or strong that's reflected in our Charter market. And just other global -- excuse me, other Charter pilots and operator and other parts of the world, outside of Asia, continue to be strong with high demand.

David Campbell

It just kind of amazing the way here you talk it. Absolutely, you're correct. But it's still amazing, because I see Asia Pacific volumes in July or in June and July relatively flat. In terms of China, some of the China carriers actually down year-to-year in tonnage. And it's hard to figure out in that environment how rates can be strong. But I agree, I mean, you're on the line, you know and they are and just worry that they wouldn't be sustainable.

William Flynn

Well, I think the other thing too, David, a lot of the capacity that is my year in a FT case is belly capacity, not for the capacity. The orders we've seen recently, are going to be delivered in next 2 to 6 years. In terms of what, the very large orders we've seen over the past two years. So orders are there. I don't know the capacity isn't there yet and belly capacity it's real, but the greater the length of the flight, the belly capacity is going to reduce of that length. And so I think a lot of the FTKs are still nominal capacity as opposed to actual capacity measured on 12- and 13-hour flights.

Operator

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

Jack Atkins

Bill, just going back to the comments you made earlier about the DHL aircraft order. If I'm not mistaking sort of reading the press release about that, they're talking about those aircraft been for replacement of some older wide-body aircraft probably 747s. And given that you guide lease 12 747s to DHL including I think 7 -400 to polar, do you think some of those aircraft's get a returned to you at the lease expiration? How should we think about that because four of those acres are going to be delivered next year, I think?

William Flynn

Well, a couple of things. First of all, we operate 13, 747 for DHL currently, 6 of our 747-8s, [indiscernible] that number's right. In terms of the aircraft, they're relatively young, they're factory freighters nosed our aircraft. And I said, towards the younger age of the fleet of 747s and I think how substantial, attractive, competitive remaining life on the asset. The nose door is a very important feature. We tend to think of new doors for oversized rate or pipes and things like that, that cannot come through the side door. The side opens the Rose or Anna down for the length of the aircraft but in many of our operations in SEC. Particularly in the corner of operations. The nose are often opened an aircraft is loaded and unloaded from both the nose and from the side door. So it's an attractive feature. The 747-400 lifts about 118 tons. And as we think about slot constraint of airports, particularly in Asia, Shanghai and Hong Kong and other key airports in China, I think it'll -- that kind of payload lift in a slot controlled airport with one flight a, one113, 12-hour flight, for example, has a tremendous, useful economic life for quite some time to come. So I can't comment as to what future decisions will be on fleet and fleet mix with any customer. I think these are attractive assets that will absolutely be placed and deliver excellent economic rent for us and our shareholders.

Jack Atkins

Okay, just to follow-up on that. The thought is that, if the DHL does decide to post those aircraft back to you, you think just given the strength of underlying freight market, there is a home for those planes kind of going forward?

William Flynn

Well, I'm not going to comment as to what DHL may or may not do. But I just think very specifically, those aircraft's are very attractive aircraft with long, useful life remaining on the aircraft. The new spirits are 2004, for example they're pure factory freighters. They're nose store and they perform very well. And I think overall, underlying airfreight demand will want to lose aircraft for quite some time to come.

Jack Atkins

Okay, thank you Bill. And Just a follow-up question. Looking at ACMI segment contribution it was down modestly this quarter. I'm guessing that's because of higher maintenance accruals. But for the 6 months it's only up just under 5% despite a pretty hefty increase in block hours and revenue. Could you maybe help us think there is sort of what's going on segment level profitability there? And would you anticipate that accelerating as we get into the back half of the year?

Spencer Schwartz

Yes, sure, Jack. You're exactly right. It's maintenance expense. And you would expect that the -- you're exactly right, the back half of the year; you would expect those margins to improve as we incur less maintenance expense.

Jack Atkins

Okay, and, I guess, going forward, you would anticipate block hour growth over time to -- block hour growth and your contribution profit growth to be at a similar level in the segment going forward?

Spencer Schwartz

I'm not sure what you mean by similar?

Jack Atkins

Well, I mean if you grow your block hours and revenue by 10% and you grow your contribution. I understand that could be quarter-over-quarter [indiscernible], but over time, would you expect a similar growth rate for both of those lines?

William Flynn

So Jack, it depends on the block hours themselves. It depends upon whether it's ACMI, whether it's CMI only. Whether it's 76 versus a 74 or 777. So they all have different earnings characteristics. But otherwise, yes, taking that into account, then those things should more in tandem.

Operator

Your next question comes from the line of Chris Stathoulopoulos with Susquehanna Financial.

Christopher Stathoulopoulos

Just going back to some of the comments on Farnborough, they were in addition to the DHL order, they were several other high-profile orders, I think cargo logic holding put in an order for 29 777s. So I'm just -- wanted to get your thoughts on whether you think freighter supply is coming on too fast here?

William Flynn

Well I think a few things. I haven't any specifics as to when, for example, cargo logics freighters may deliver. Our understanding its 2 to 6 years. And I think that it was not a firm order our contract. It was an LOI, but don't want to comment on anyone customer one customer don't have that kind of insight on their business. But certainly there will be, I think, two things. I think will continue to see long-haul Intercontinental demand growth as much across the fleet in the areas [indiscernible] e-commerce and express. There are a number of older freighters that simply are going to retire. As I mentioned, a moment ago, our freighters, I believe, the 400s are at the younger end of that spectrum. There are already freighters out there who are approaching well beyond the 25 years in age. And so I think we will see freighter retirements. That BCS will retire, the BCS 400 DCS will retire as well. So I think the combination of growing demand, fundamental changes in the global supply chains and global supply chains and customer graph retirement will absorb a lot of the capacity that's coming in.

Christopher Stathoulopoulos

Okay. Then my follow-up, in regards to Amazon. I know you don't typically give a lot of color here. But could you give us a sense of color how the network is maturing, perhaps, how many points you are flying? And whether there's some predictability to flight planning? May be said another way do you think there's a point make sense operationally to bring on additional aircraft?

William Flynn

We don't comment on customer. What we said about Amazon for 15 aircraft, 67 and five more this year. By two points in and out of Cincinnati. The operation is going well, but we're not in a position to comment beyond that about that Amazon.

Operator

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

Scott Group

Is there anything about the BSA with DHL that prevents them from returning aircraft? Can you maybe talk to that? And then is there any way and I totally understand your point, Bill, but is there any way to think about profitability of a 400 on ACMI versus a 777 on CMI.

William Flynn

Again, it's a lot of specific detail about DHL that we're not going to comment on. I think if we step back, we're going to celebrate our 10-year anniversary with DHL this year in October. We started with 6 aircraft for DHL. We're now at 41 aircraft for DHL across our business segments, ACMI, CMI and in Titan. I think it's a very important strategic relationship. And I think in some of the earlier comments I made, I think that 777 are a growth opportunity for Atlas to our Southern platform as it run it by through integration and the new joint collective bargaining agreement. I believe the 47-400 have great demand and provide a great service for DHL and to our other customers.

Spencer Schwartz

And Scott, it's Spencer. I'll just add. I think it's just sad, but I'll just add. And we are excited about the DHL order, the DHL announcement. As Bill said, there are only 2 operators of the 777 for DHL. We are one of them. We expect to grow with DHL. We've grown. As Bill said, we are celebrating our 10-year anniversary. We have grown from 6 aircraft to 41 aircraft with them. And we expect that partnership to continue. And it's a long-standing caliphate partnership and we look forward to going it even further.

Scott Group

Okay, and then I want to ask about the guidance. So obviously, great second quarter results. But it looks like you're not really realizing the second have guidance, if anything, may be slightly lowering second half. May be just you can speak to why that is? And why you think we're going to have a lower third quarter than second quarter EBITDA, that's somewhat atypical?

Spencer Schwartz

Yes, Scot, we actually I think the full year guidance is slightly higher than what we previously guided, too. So it is a -- assuming you take the beat in the second quarter and add it for the full year or just if you look at the second half on its own, I think, it's slightly higher than what we previously guided too. And then with regards to third quarter, I think, Bill, if you're asking about sequential, I think Bill talked about that. And sequentially sort of backout this somewhat unusual items and timing that we have for non-heavy maintenance events. And you see the 10% to 15% sequential growth. If you look at third quarter on a year-over-year basis, you see terrific for growth over the prior year.

Operator

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

Stephen O'Hara

Just on the, I guess, the contribution of Charter to the business going forward. I mean, it seems like there a contribution from the segment has been very strong this year, very strong growth, it's increased in second half of this year or second quarter as well. I mean, you expect a more balanced business going forward in terms of the contribution from Charter versus ACMI? How do you think about that, I guess, going forward?

William Flynn

Sure, Steve. You're right. Charter's been very strong. We talked about the yields before. The yields for the first six months of the year has been over the yields for the first six months of last year. It's been a very, very strong market with great demand. So you saw that improvement sequential from the first quarter to the second quarter in Charter. As we move forward, of course, the fourth quarter in Charter is usually the strongest quarter of the year in that segment. And this year, we expect that to continue. We took 2 -8s as you know, and we move them from ACMI -- sorry, from Charter to ACMI. So that has a slight impact when you look at things on a year-over-year basis. But otherwise, we think that fourth quarter for Charter is going to be very strong once again.

Another thing I would add, if I may. So Charter's really changed over time as well. It typically was a strong burst of activity in the fourth quarter for peak typically out of Asia, as consumer electronics were -- particularly were launched with fanfare and kind of market expectation. That's changed. Consumer electronics still come out of out of Asia. And when new products are launched, they certainly use quite a bit of Charter. Attends of the years around less and less holiday centric. And the other thing that's changed is that Charter is really a 52-week business for us, serving diverse market beyond -- certainly Asia is key, is an important part of us. But other markets as well. But the level of Charter activity on a year-round basis is growing as well. And that's a great thing for us. And we did a great position to serve that market on a year-round basis as well.

Spencer Schwartz

And Steve, just that, that you also asked about ACMI. And so as the year progresses, we expect that our earnings in ACMI will continue to do well. And we do flying, as you know, for the integrators in the fourth quarter. And so that should really improve as well.

Stephen O'Hara

Okay. And then on the, I guess, the utilization within ACMI. I think it was down a little bit and, I mean, is that just because of the mix of aircraft within the ACMI business now?

Spencer Schwartz

It's actually -- we had some more maintenance -- some heavy maintenance. And so heavy maintenance does two things. One, it increases costs, because we have to pay for the heavy maintenance. But then also, the planes are down. And so we had three incremental calendar-based sea checks for 747-8 during the quarter compared with the second quarter of '17. And so not only does it -- again, not only does it impact costs, but it also impacts downtime when the check is performed. Because we had three incremental that had an impact on utilization. Otherwise, utilization was good.

Operator

Your next question comes from the line of Dave Ross with Stifel.

David Ross

So it's a pretty airfreight market out there everybody knows. What do you think different, though, about Charter segment today versus back in the 2008 to 2010 period when the Atlas had contribution margins in the 20s and even some times in the low 30s?

William Flynn

I think it's what we talked about. It is -- it's a changed in market. It's a year-round market. Behaviors have changed, the global supply chain has changed. It used to be so heavily dependent on peak, fourth quarter flying when yields would be very strong. We would incur losses sometimes for the beginning parts of the year and then we'll have our earnings at the end of the year in Charter. And now Charter makes money more evenly throughout the year with better margins throughout the year, as opposed to just waiting for that fourth quarter volumes.

David Ross

Was the last military business that then? Was that after a business back then?

William Flynn

No, 10 years ago there was more military business, it's more cargo business. So we look at our military business now it's changed, two things have changed there. Back 10 years ago, our military business was strong because we had OEF and OIF. And then President Obama took off and even surge troops into theater. But we are only a cargo carrier at the time. As we saw the market, we all expected, of course, the market was going to come down and change into the military, we move into military passenger. So we could take advantage of, what I would call, the ongoing regular non-conflict flow, non-conflict base flows of passengers to our bases around the world. So military was particularly cargo was much stronger 10 years ago than it is now.

David Ross

And then just to follow-up on comment you made earlier about peak season ahead. You expect it to be another strong peak. You have a regular dialogue with your customers in talking to them about the schedules that the CMI and ACMI customers ask you to fly. How are those schedules shaping up to be different this year than last year? Are the discussions around, we need more aircraft for longer, we need more aircraft for a short period of time, it's going to start earlier, it's going to go later?

William Flynn

A couple of things. We've just simply grown our ACMI and CMI business, right? Even in this year we had growth -- certainly, this year we had growth. Customers are talking about very high levels of utilization. That's why we are on the maintenance programs we do in the first half of the year, so we have the aircraft ready and able and fit, so to speak, for high levels of utilization in the late third and fourth quarters. E-commerce has driven demand such that it runs right up to Christmas internationally and domestic. So we're -- again, we're planning for another very strong and terrific peak just like we saw last year. And it's not just ACMI and CMI customers, it's the discussions we have with our freight-forwarder customers and our Charter broker customers as well.

Operator

[Operator Instructions]. Your next question comes from the line of Chris Stathoulopoulos with Susquehanna Financial.

Christopher Stathoulopoulos

Just want to go back to a comment that Bill made around 767 fleet stocks. You were saying that there is aircraft out there, but we've been hearing post the Amazon deal that the stock is tight. But a few months back, I think there was some talk in the press about United potential looking to replace around 50 767 in their fleet. So can you give us a little bit more color on what you're seeing out there on fleet stock as this is sort of popular aircraft with the e-commerce guys?

William Flynn

Yes, it certainly is a popular aircraft and a very good aircraft, and a very good converted aircraft. So there's a couple of things going on. Certainly, there are -- there is the 67 to 787 change that are going on in fleets -- passenger flights around the world. Some of that is a bit on hold, I would say, right now, because the issues with certain engine types on 787s that need to be worked through. But overall, they are -- our view is that there's an array of 767s available. The -- our fleet is predominantly a GE[indiscernible] out there. We operate 5 or near collapse as well. So yes, there's a good risk demand for the aircraft type. I still believe that -- I do believe that there are quite a few 767s in the market suitable for conversion from passenger to freighter. United is an example of aircraft that could be coming to market to provide that fleet stock. And again, I'll come back to the A330, 300 conversion, that's a very promising conversion as well. There are hundreds of A330 in service today, 300s that are, I believe, suitable for conversion themselves. And maybe one time there was some tightness in the market. But if we take the longer view there's good fleet stock out there to serve the demand for that 50 to 60 ton freighter.

Operator

Your next question comes from the line of Howard Rosencrans with VA.

Howard Rosencrans

I'm just trying to reconcile a couple of comments. How do you make -- you indicated we have sort of a push out, and I got this maybe it was contradictory or at least to me, the quarter was excellent, you had a nice speed on EBITDA, et cetera. But you pushed out heavy maintenance or some of the heavy maintenance to Q3, which takes Q3 down, however, at the same time, if I understood, you just commented that heavy maintenance negatively impacted the second quarter. And, I guess, that sort of connected to the ACMI direct contribution margin being only 19% in the second quarter, so down 400 bps year-to-year. So if you guide could reconcile that, I would appreciate it?

Spencer Schwartz

Sure, Howard. It's Spencer. So there are a few different types of maintenance expense that we typically talk about it. So there is heavy non-heavy maintenance, which is auxiliary power units our APUs, thrust reversals and the landing gear overhauls. And there's line maintenance, which is sort of a variable expense, every time a plane lands, it needs some things done to it. And so I think you're mixing up a few of them. So within our press release and our earlier comments, there were some non-heavy maintenance, which is, again, APUs, thrust reversals and landing gear overhauls. And they moved from very, very late in the second quarter, literally within days, very late in the second quarter to very early in the third quarter. So it's just a matter of days, but unfortunately, that crosses quarters. So that impacts the -- positively impact the second quarter and then negatively impacts the third. So we want to make everyone aware of that. And then when I was talking before about the utilization and I talked about the 747-8 and the sea checks, that is heavy maintenance, so different types of incidents. I hope we weren't contradictory.

Howard Rosencrans

I'm sure it was me. So that in the second quarter was negatively impacted by 3C check heavy maintenance and is that what negatively -- is that echo what accounted for -- or a good portion of what accounted for 400 bps decline in year-to-year ACMI direct contribution?

Spencer Schwartz

Yes. So when you look at year-over-year heavy maintenance, yes, it increased on a year-over-year basis. And so that did have an impact on the ACMI profitability and margins. We had -- on a year-over-year basis, we had two incremental CF 680 engines overhauls. And then, as I said we, had the three incremental 747-8 sea checks and line maintenance. That's okay, we just had to have rental line maintenance was a. But the overhaul -- the engine overhauls and the -8 sea checks, yes, had an impact.

Howard Rosencrans

So we're not going to get -- so we don't "get that back" at any point in the second half or even if we look at '19, we're not going to -- there's not a -- we don't get that back?

Spencer Schwartz

Well it's just -- these things are -- the sea checks or calendar based and so it depends when they are due. And so we -- those that were just went through their check, they wouldn't me to another one for a couple of years. And then the engines are based on cycles. So it's just the parents of how many takes over landings that they have. So now they have gone through and overhaul, they're good for a while years in the end.

Operator

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

Jack Atkins

Just a couple of modeling questions for Spencer. Let's see here. Could you tell us where the rental refund fell, in the, I guess, from the segment perspective and in the P&L in the quarter?

Spencer Schwartz

Yes, Jack. So it fell into other non-operating. And it's not in the segment results.

Jack Atkins

Okay, that's great. And then the deferred income tax benefits that you're expecting for the third quarter, is that included in your net income guidance for FY '18? And I have a follow-up question on that?

Spencer Schwartz

Yes, it is included. The program that we're in, in Singapore, we expected to change. It's basically a program that sort of finite lives and then it gets reviewed. And so we expected that at the beginning of the year where we provided our guidance, also and Investor Day, when we provided guidance and certainly today as well. Also including the changes with regard to the Southern Air pilot that we expected our Investor Day and today, certainly.

Jack Atkins

Okay, got you. So that deferred tax, does that flow through tax expense line. Because I noticed in the press release, you're saying you expect a full year tax rate of 15%, which is consistent with the last couple of quarters where you didn't have that benefit. So if you just expect how much higher fourth quarter rate? I'm just trying to understand how that our worst quarter?

Spencer Schwartz

Yes. It's good question. It doesn't flow through the income tax expense line. And it's just a matter of how our earnings are. Obviously, the earnings are smaller in the beginning of the year then are greater at the end of the year. And so it just depends what discreet items there are and the impact that they have on our earnings throughout the year. So our rate was 16.2% this quarter. We expect it will be 15% for the full year. And then next year, without that discrete item, you would expect that rate to go up a little bit. But then we'll also enjoy a lower Singapore rate overall on an ongoing basis.

Operator

At this point, we reached the end of the Q&A session. I'll turn it back over to the presenters for closing remarks.

William Flynn

Well, thank you, Dan. Spencer and I will like to thank each of you for your interest in and sharing your time with us and certainly for your questions throughout the quarter. We look forward to speaking with you again soon. Thank you very much.

Operator

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