Q1 2018 Earnings Call Transcript

Published: 3 May 2018

[Operator:]

Ladies and gentlemen, thank you for standing by. And welcome to the First Quarter 2018 Earnings Call for Atlas Air Worldwide. At this time, all participants have been placed in a listen-only mode and the floor will be open for question following the presentation. [Operator Instructions] It is now pleasure to turn the floor over to Atlas Air, to begin.

[Ed McGarvey:]

Thank you, Laurie, and good morning, everyone. Ed McGarvey, Treasurer for Atlas Air Worldwide. Welcome to our first quarter 2018 results conference call. Today's call will be hosted by Bill Flynn, our Chief Executive Officer, and Spencer Schwartz, our Chief Financial Officer. Today's 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 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 2017 Form 10-K as amended or supplemented by our subsequently filed SEC reports. As 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. 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, Ed, and good morning, everyone. We're very pleased to have you join us today. We're off to a strong start in 2018 and we expect this to be an exciting year for Atlas. We reported significant first quarter earnings growth this morning and we are increasing our full-year 2018 outlook. Our results and outlook are driven by our execution on strategic initiatives that have transformed the Company and strong customer demand. Our focus on express, e-commerce and fast-growing global markets has broadened our customer base and fleet. We are operating in a strong airfreight environment and growing global economy. And we are well positioned to capitalize on market dynamics to serve our customers. Moving to Slide 4. Our first quarter adjusted earnings reflected a 21% increase in block hours, 24% increase in revenue, 47% increase in EBITDA and almost triple net income. In addition, we achieved substantial increases in direct contribution in all of our segments. With respect to future business growth we announced the acquisition of two 777 freighters that will strengthen and expand our relationship with DHL Express. We placed and began operating an additional 767 aircraft for Amazon in early April raising the current number of 13. And that's in line with our expectations for a total of 20 aircraft for Amazon by the end of this year. And as we announced earlier today we have placed a second 747 ACMI freighter with DHL Global Forwarding. Slide 5, highlights are up early revised growth framework for 2018. With the demand we are seeing for our aircraft and services we now expect volumes to raise approximately 19% to around 300,000 block hours, revenue to exceed $2.5 billion and adjusted EBITDA to exceed $500 million. We expect that our full-year adjusted net income will increase more than the mid-20% level we previously shared. We now anticipate our adjusted net income to grow by a low-to-mid 30% rate this year. Looking at the second quarter we expected adjusted EBITDA to exceed $100 million and adjusted net income to grow 30% to 35% compared with our first quarter adjusted net income of $23.8 million. Maintenance expense in 2018 is now anticipated to total about $320 million. In addition, depreciation and amortization is expected to total approximately $220 million and core capital expenditures which exclude aircraft and engine purchases are expected to total about $100 million to $110 million, mainly for parts and components for our fleet. All these amounts are consistent with our prior outlook for the year. At this point, I would like to ask Spencer to provide some additional detail about our first quarter results. After Spencer, I'll have some additional comments, and then we'll be happy to take your questions. Spencer?

[Spencer Schwartz:]

Thank you, Bill, and hello, everyone. Our strong first quarter results are highlighted on Slide 6. On an adjusted basis, income from continuing operations, net of taxes, totaled $23.8 million, which was up $15.5 million increase over the first quarter of 2017. As Bill noted, our results reflected robust increases in block hours, revenue, and adjusted EBITDA. We also generated substantially higher direct contribution in all of our segments. On a reported basis, our net income totaled $9.6 million, which included an unrealized loss of $7.7 million on outstanding warrants. Our adjusted earnings in the first quarter included an effective income tax rate of 16.1%. On a reported basis, we had an effective income tax rate of 28.3% during the quarter, and that was principally due to nondeductible changes in the value of our outstanding warrants. With respect to 2018, we now expect our full-year adjusted income tax rate to be approximately 16%. Based on our current tax framework and the aircraft that we've purchased and placed into service, we continue to expect that we will not pay any significant U.S. federal income tax in this or the next decade. Looking at Slide 7. Increased ACMI segment revenues in the first quarter were primarily driven by significant growth in block hour volumes and a higher average rate per block hour. Block hours grew 28% during the period, reflecting increased 767 flying for Amazon, the start-up of 747-400 flying for several new customers, and the redeployment of 747-8F aircraft from the Charter segment. Higher Charter segment revenues in the first quarter were primarily driven by an increase in yields. In Dry Leasing, higher segment revenues reflected an increase in the number of 767-300 aircraft and the placement of a 777 freighter in February. Moving to Slide 8. Segment contribution totaled $86.5 million in the first quarter, a 39% increase over the previous year. ACMI earnings primarily reflected a significant increase in flying and a higher rate per block hour, partially offset by higher heavy maintenance expense and amortization of deferred maintenance costs. The improvement in Charter contribution during the period was primarily due to an increase in yields and higher aircraft utilization 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 and our balance sheet. We ended the first quarter of 2018 with cash including cash equivalents, restricted cash, and short-term investments totaling $147.5 million. Our cash position at March 31 reflected cash used for investing activities, partially offset by cash provided by operating and financing activities. Net cash used for investing activities during the quarter primarily related to payments for flight equipment and modifications, including the acquisition of a 777 aircraft, 767 aircraft to be converted 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 revolving credit facility partially offset by payments on our debt obligations. As a reminder, our debt has a low weighted average interest rate of 3.15%, almost all of that is at a fixed rate and the vast majority is secured by our aircraft assets which have a value in excess of the related debt. Moving to Slide 10, our net leverage ratio was 4.9 times at the end of the first quarter. As the slide shows, is remained fairly consistent since 2016 while we have grown our fleet. We remain committed to maintaining a strong balance sheet as we grow. And we expect our net leverage ratio to improve gradually over the next few years as we place more aircraft in service and begin to generate substantially higher EBITDAR. Now I would like to turn it back to Bill.

[William Flynn:]

Thank you, Spencer. Moving to Slide 11, we are off to a strong start in 2018 and we expect this to be an exciting year for Atlas. We reported significant first quarter earnings growth and we have substantially increased our full-year earnings outlook. Our results and outlook are driven by our execution on strategic initiatives that have transformed the company and strong customer demand. Our focus on express, e-commerce and fast growing global markets has broadened our customer base and fleet. We're operating in a strong air freight environment and a growing global economy and we're well positioned to capitalize on market dynamics to serve our customers. With that, Laurie may we have the first question please.

[Operator:]

[Operator Instructions] Your first question comes from the line of David Ross of Stifel.

[David Ross:]

Yes, good morning, gentlemen.

[William Flynn:]

Good morning, Dave.

[Spencer Schwartz:]

Hi, Dave.

[David Ross:]

Bill, can you talk a little bit about how business trended through the quarter, specifically in the Charter segments, was it strong throughout that ramp up trail off and then where do you see the air cargo market in April?

[William Flynn:]

Sure. Generally we had a strong charter market throughout the first quarter with the exception of the week or so around Lunar New Year, which was in mid-February. So overall the market to perform well, as you can see by revenues and by contribution, our charter markets broad based beyond the Asian market. South America was very strong for us. We had a great participation in flower markets for example for Valentine's Day. The seasonal produce that's coming up south to north during our winter overall, and we expect a strong charter market throughout the year. This quarter and we gave you some perspective on second quarter outlook as well. So I'm looking forward to a strong charter markets throughout the year.

[Spencer Schwartz:]

And David, Spencer, I'll just add that if you back out fuel, first quarter 2018 yields were above 2017 throughout the quarter.

[David Ross:]

Excellent and then just I guess somewhat related Spencer. It doesn't appear that the EBITDA guidance was revised up as much as net income guidance? Could you talk a little bit about what might be going on there? What we might be missing?

[Spencer Schwartz:]

I don't necessarily agree with that the premise Dave. It may just be because the terms we're using last quarter we said approximately and this time we're talking about in excess So it's probably just that, but we're looking at fairly similar margins from what we talked about before with very, very strong margins that we saw in the first quarter and we expect those to continue.

[David Ross:]

Okay, I guess there is just different numbers were the net income going from 25% to 33% growth and then EBITDA is like around this and more than that, but if we take the net income, the EBITDA would likely flow similarly.

[Spencer Schwartz:]

It should yes.

[David Ross:]

Okay. Thank you.

[Spencer Schwartz:]

Thank you.

[William Flynn:]

Thank you.

[Operator:]

Your next question comes from the line of Bob Labick of CJS Securities.

[Peter Lukas:]

Yes, hi. Good morning. It's Peter Lukas for Bob I know you went through the Amazon update there, saying now up to 13 planes and expect to get to the 20 by year-end if I heard that correctly. Just any update on the other seven where you stand.

[William Flynn:]

Well we'll have all 20 in operation by the end of the year and as we've previously talked about Pete, we've secured the aircraft. We've secured all of the conversion slots that we need from the two companies providing conversion. And we're on target to deliver, remain on target to deliver the aircraft on time for our commitments to Amazon, as we've done with the first 13.

[Peter Lukas:]

And then ex-Amazon, you went through a couple where you added to DHL. Just any other timing of new capacity additions we should be looking out for there?

[William Flynn:]

Well let me talk about are a couple things. So we've been flying five aircraft in a CMI operation for DHL. Those are the 777s. We acquired one of those CMI aircraft and converted that to an ACMI aircraft and then we have the six aircraft to deliver which will operate in ACMMI for DHL Express. We're really excited about the second 47 ACMI aircraft that we've put into operation for DHL Global Forwarding and particular excited by the comments that their CEO made about their focus on dedicated capacity and then types of solutions that allow them to provide for their customers as well and we earlier talked about six 747s that we've added to the fleet, two in 2017, and four that are in the process of coming in through the balance of this year. So that's the fleet outlook as we see it and we think it's all that underpins the kind of growth that we've talked about here in earnings and EBITDA and adjusted net income.

[Peter Lukas:]

Oh! Great. Thanks. And you also mentioned in terms of debt a lot of it was fixed so that was a positive for you. So given the short-term rate increases fair to say you don't see much of a big impact on long-term asset backed financing?

[William Flynn:]

We're in a good position in that the vast majority just about all of our debt is fixed and the vast majority of it is backed by our aircraft and secured by that. We've done really well with our financing as I said you know low weighted average coupon interest rate of 3.15%. So we are in a really good position, yes, interest rates are rising and that could impact future financing but overall on a weighted average basis we're really in a very good position.

[Peter Lukas:]

And last one for me just given the general rhetoric around protectionism these days. Just wondering if you've seen any impact from that and what feedback you're hearing from your customers in terms of any plans they're making for changes?

[William Flynn:]

So that certainly that's something we're watching closely as I guess just about everyone else is as well. And we're talking with our customers regularly and we're not seeing - we've not seen a specific impact at this point the earlier tariffs on steel and aluminum is not something that directly affects airfreight flows maybe over the long-term it might affect asset costs. But even still there is a lot of exceptions there. I've been in Asia twice in the month of April, two different trips talking with customers, shippers, freight forwarder as and others. And I think most of them if not all would have pretty much answered the same - the question same I did we continue to monitor. Freight flows remain strong and that's something we'll just have to watch. On the other hand we were growing in place new assets with customers and so they have a very - they have a view that their business is strong and they're making asset commitments into that believe based around our ACMI operations.

[Peter Lukas:]

Great. Thank you very much.

[William Flynn:]

Thank you.

[Spencer Schwartz:]

Thank you, Pete.

[Operator:]

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

[Helane Becker:]

Hi, thanks operator. Hi, everybody. Thank you so much for the time. Just a couple questions. One, Spencer, you used to talk about minimum hours flown. Is that is relevant anymore as it used to be minimum hours by your customers and is that we should still think about?

[Spencer Schwartz:]

Hi, Helane. It's changed over time we used to talk about it more when we had a much smaller fleet and fewer ACMI customers and now our fleet has grown so much and our customers have grown so much. So we don't focus on it quite as much. But our customers continue to fly well above their minimums, flew nearly 8% above their minimum store in the first quarter. Some of our newer customers fly more kind of network like schedule of operations which have higher utilization, higher minimum and therefore higher block hours. So it's probably more relevant to look at the block hours and block hour growth. But these are all things that we've paid attention to.

[Helane Becker:]

Okay. That's helpful. And then is there are any and maybe this is a question for Bill. Is there any update on pilot negotiations anything happening along those lines?

[William Flynn:]

Hi, good morning, Helane. We continue in negotiations with our pilots as we've talked about in the past we have a framework agreement in place. We're meeting with the pilots, the union representatives and continue in regular negotiations and have future date scheduled with them, in fact our negotiating team is meeting with the union representatives as we speak this week.

[Helane Becker:]

Okay. That's actually good to hear too. And then the other question is more long-term as you think about your business over the next let's say decade. The 747 - so Atlas Air is always been one of those companies that's been on the leading edge of technology with respect to the aircraft fleet. The 747-400 now is a little older. The 747-8 was the last new technology aircraft to come in. I think the first ones were supposed to come in 2008 or 2010, I think come until maybe 2012 or 2013, so you're going along with an aircraft that is still relatively young in its life. But as you think about like the next say 2023 to 2030 timeframe, will you have to consider a new aircraft type? Have you talked to Boeing about a next generation aircraft for a replacement? I know it's a long time away, but I'm just wondering how you're thinking about that?

[William Flynn:]

Yes. That's a great question, Helane. So looking at the 747, both the 747-400 and 747-8, I mean an essential quality of those aircraft is indeed the nose door, and the nose door creates great value and utility for our customers. Our oldest 747-400s and 1998 bills are new as our 2004 bills. So there still I would argue a very long runway left on the useful life of those assets. And the nose door I believe is something that will be valued by a wide array of shippers for some time to come. In fact there is very few pure factory freighters parked anymore. I don't know what the number is, it's maybe four or something like that that are certainly going to require a huge investment to come back because they've been idle for so long and probably have some other issues. So in terms of the economic rent and the utility of these assets going forward, I think that's certainly something we believe in and something that will create value for our customers and for our shareholders for quite some time to come on those assets. Part of what your question says though, I'm going to be a little bit long winded here now. That's what we wanted to - it certainly diversify our fleet types, so going from what we used to be the single asset type long haul intercontinental operator getting the 767, the aircraft that work very well in the medium range now are valued certainly in express and e-commerce was an important move for us. We're moving well past 40 on that asset type, almost equal number of aircraft to our 747 fleet, and then the Southern acquisition particularly provides the 777. So we'll continue to invest as make sense on the long haul intercontinental aircraft types as well as medium range. I've talked in the past about the A330. I think there's opportunities there. Only a few of those converted freighters are flying. So I think there's choice and growth opportunities in the mid-range freighters. But we will have to have a conversation what's that next long range intercontinental freighter going to look like, and that's probably little ways away.

[Helane Becker:]

Okay. That's helpful. And then just one follow-up growth promise. So when customer - and know [indiscernible] still a customer, and I should know this, but I think Emirates used to be a customer and maybe they still are. I notice that they've had to ground a bunch of aircraft for lack of pilots, so it's a two part question. One, are you finding any issues finding pilots for your own flying in your own expansion? And then the second part of the question is as you think about that obviously they're not going to want their valuable pilots to fly freight, they are going to want them fly passenger, so do you think that that's an opportunity for you not only with them, but with other international airlines that are having issues attracting and retaining pilots? Thank Bill.

[William Flynn:]

Sure, Helane. So we've managed a lot of growth in the last - really in the last several years, I may be wrong, but my recollection is that we flew about 185,000 block hours in 2015, it's somewhere in that range, and now we're talking about 300,000 block hours just a couple of years later. And so we've had to manage that growth. Some of those hours are Southern of course, but the large rate of growth is in our core business, our Southern acquisition and we need to go out and hire, train and retain pilots to fly those levels of operations and we're managing our business and managing to do that. In terms of any other carrier, any other foreign carrier for example, it is certainly could be opportunities for us to fly for them. Emirates has not been a customer of Atlas, in quite a number of years as they internalized all of their freighter operations, somewhere around 2010, 2011 if I would remember. But that's certainly something we're studying for future opportunities. Just Cathay is a good example. Cathay want to expand. They historically have only been internalized with their own very large freighter fleet, but this recently we're able to put two 747-8s to them, for a number of reasons. It's not - I'm not saying it's a pilot reason, but it's - made sense to them from a business point of view and it surely made sense to us as well.

[Helane Becker:]

Perfect. Okay, thanks very much for your help. I really appreciate it.

[William Flynn:]

Thanks Helane.

[Operator:]

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

[Scott Group:]

Hey, thanks. Good morning, guys.

[William Flynn:]

Hi, Scott.

[Scott Group:]

Just wondering, Bill what are your thoughts on the IATA commentary from yesterday about sort of slowing or a lack of inventory restocking. It doesn't sound like you're seeing it, but curious your thoughts on it in and maybe along those lines, you mentioned strength in South America. Can you maybe help breakdown the charter business and how much is Asian versus non-Asia?

[William Flynn:]

So I looked at the IATA report as I guess just about everybody else on the call did and from my perspective, I think it's a little - the IATA records a bit unfortunate how they look at the market because from our view, they only capture about 75% of what's moving in international air freight. They're not really capturing Express and by extension they're not capturing charter and they're not capturing e-commerce if they're separate dedicated e-commerce flows. So we think that IATA is only reporting on about 75% of the market. But the segments they're not capturing, I would argue could well be the higher segments of the market, high rate of growth segments of the market. I think DHL, Deutsche Post DHL is going to report next week. Let's see what their numbers are and what kind of rate of growth are they talking about. DGF freight forwarder typically - freight forward is typically didn't buy into long - longer view dedicated capacity, say the exception of [indiscernible] whose another ACMI customer of ours, are buying in now to ACMI because they want to provide the certainty of service to their customers. And I think we look at the other where we look at Express carriers like operators FedEx and UPS and we're seeing higher rates of growth. So I'm not saying IATA is wrong, but they're not capturing the full market and I think a more fulsome view and we've encouraged frankly, we've encouraged IATA to think about that, and more fulsome view might provide all of us a better picture of where growth is. Now they did they - we certainly in that report you saw a very high rate of growth 15.5% or something like that in Latin America we participate in that market, we have a large share overall. And first quarter is a strong market for them for that region part of me. Ecuador and Colombia for flowers for Valentine's Day, the West Coast, Chile, Peru and Ecuador also as we think about fish and then all the counter season fruits and vegetables asparagus and cherries and blueberries and all of that, which are huge trade flows for us. So we had two very strong markets in Charter, Asia and Latin America. That will change locus as we move forward. But there's no one segment that dominates our charter market. It's a 52 week a year market for us. You see that every quarter we're reporting good charter numbers. You'll see the number of units that that we that we fly and the hours and I'm going on a little bit longer, but that's why I think IATA is missing something, and they do have the numbers in their reporting that would benefit I think all of us in terms of getting a sense of what's going on.

[Scott Group:]

So I don't know if that's really helpful. I don't know it is the right way to ask it. But if you think I added captures call it, 75% of the market. What percent like - how would you think about your business meaning yourself instead of 75% traditional and 25% express charter your X% express charter? I mean I guess that's what do you think you are relative to the broader…

[William Flynn:]

So it's good question Scott. So what we've historically talked about and it proves out in a lot of large numbers over time. We're about 25% charter and we're about 75% ACMI, CMI as measured by block hours. So that when you look at the number of units that we have. We're flying 37% aircraft for DHL will be flying 20 aircraft for Amazon by the end of the year. So 57 aircraft out of 90 something. Pull out the military including the military passenger in the LCF. The four units in the LCF for Boeing for the Dreamlifter. So we are a much higher percentage of our fleet by far is express and e-commerce, particularly so than the way the company used to be when you and I first started talking about our company years ago now. So I think it doesn't under represent both our current performance and our upside opportunities and as we've talked about not just specifically but as I've talked about generally. We have the benefit of most of our customers being publicly traded companies and key to understanding Atlas is what are our customers saying about their business, how are they performing and what are their rates of growth. And that's - and I think the really useful way to think about us.

[Spencer Schwartz:]

And Scott, It's Spencer, I'll just add minor point to that which is the military flying that we do which has been very, very strong and we have a very large share of that business and that flying kind of goes hand in hand with the commercial charter flying because it could be a one way military trip that leads to commercial charter and vice versa. So that's something that you wouldn't see in the I add in numbers not only would you not see the military flying but also you wouldn't see the benefit that we get of operating both of those together.

[Scott Group:]

Okay so that makes. So you're basically saying that you're just over index to the 25% of the stuff that I add is not capturing. Can you tell us that the other part of the business so that I add is talking about do you sense that that is flowing now? That's a smaller part of your business.

[William Flynn:]

Well, so I add it will poll or I add it will get a report from the carriers in Asia. And the so we're flying for Qantas and we're flying for Cathay. Two planes each. So that would be captured I would imagine and I add it based on their reporting right.

[Scott Group:]

Okay. And Spencer back into ask you one last one quickly so, obviously you came in well above your expectations for the first quarter. We typically see a pretty nice step up 1Q to 2Q. Do you feel like there's some conservatism in the guidance for the second quarter or just because the base from 1Qs are bigger than normal don't expect the same sort of percent uplift 1Q to 2Q that we've seen in some past quarters.

[Spencer Schwartz:]

Yes, it's a great thoughtful question. The first quarter was very, very strong. We saw great utilization and very strong yields. And so that will play into it there's also the impact of heavy maintenance. We've had some heavy maintenance movements between quarters here and there which is conditions based as they need it. So we feel good about the second quarter outlook Scott and then as the year progresses we'll update as we continue that to see more. But we feel good about - we feel great about the first quarter, we feel very good about the remainder of the year.

[Scott Group:]

Okay. Thank you very much for the time. I appreciate it.

[William Flynn:]

Thank you.

[Spencer Schwartz:]

Thank you, Scott.

[Operator:]

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

[Jack Atkins:]

Hey, guys, good morning. Thanks for the time.

[William Flynn:]

Hi, Jack.

[Spencer Schwartz:]

Hi, Jack.

[Jack Atkins:]

Just following up on my guidance for a momentum, it comes sort of thinking about the full year obviously very strong start to the year in the 1Q. But when you think about the update to the guidance is it that you just following through the first quarter upside relative to your plan or have your outlook for the second half of the year, currently big season change versus when you updated several months ago.

[Spencer Schwartz:]

Yes. Jack, I don't think it changed all that much. We expect about 30% of our earnings in the first half of the year about 70% in the back half of the year. That's pretty consistent with what we've seen historically at least in the past couple of years. Last year, I think it 28-72, so it's pretty consistent I think. As I said with Scott, in the first quarter, we really saw very strong utilization, very strong volumes, charter yields that were very high, military business, we saw great demand from the military, and we were in a terrific position to take advantage of that. I think we will continue to do that throughout the remainder of the year.

[William Flynn:]

I would just add, Jack as I said in my comments, we're excited about the year. Great start to Q1, a bit stronger than we expected, but it was strength across all of our segments, Charter, the ACMI segment, and of course, Dry Leasing. We've up from mid-20's to low-to-mid 30's, so all 40% up, based on the last time we talked, 40% to 50%, do the math on that. Great new customers in our ACMI business and in our CMI business, and as the market changes and develops I believe very well positioned to take advantage of it. So we're excited about 2018 and what it means for our company.

[Jack Atkins:]

Okay. That's helpful. The lease that you announced this morning with DHL Global Forwarding of the 747-400, is that a new aircraft to your fleet or are you moving that out of the Charter segment into ACMI, how should we think about where that particular asset will be coming from?

[Spencer Schwartz:]

Sure, Jack. Bill talked about earlier and we talked about in the past, we added two 744 through operating leases last year and we're adding four this year. So one we added during the first quarter and three more that will be adding a little later in the year certainly before peak. So with all the new customers that we've been adding, our aircraft are somewhat fungible, we're able to move them between Charter and ACMI and vice versa. So it's all related to the incremental aircraft that we've been putting in place and there's really great customer demand.

[Jack Atkins:]

Okay. That's helpful. On the 777 A plus CMI contract with the DHL, the incremental plane there that you announced during the first quarter. I think it's really good to see incremental customer demand for that particular type of contract for that particular type of asset, are you seeing any customers outside of DHL who are interested in potentially going forward with an A plus CMI contract on the 777F?

[William Flynn:]

Well 777F is a great freighter, and of course this one - this sixth aircraft that we're talking about for DHL is an express long haul intercontinental point-to-point fly. We may have talked about this before, but there are several long haul intercontinental aircraft out there between the 747, the two types there and the 777. And the aircraft selection that a customer would make really get to network design for the most part and I believe there are customers for both 747s and 777s. It really gets to the network in which asset produces the best economic rent for the customer and their network design or everything else that goes along with it.

[Jack Atkins:]

Okay. So would you say just giving out how tight the global air freight market is and a lot of part 744 is out there, are you seeing incremental demand for 777 leases?

[William Flynn:]

Yes. There is demand for both asset types.

[Jack Atkins:]

Okay. And then last question…

[Spencer Schwartz:]

Jack, it's Spencer. I'll just point, we acquired the Southern business just a couple years ago, and a key goal of ours in acquiring that was to add a 777 platform and then to grow the platform, and that's exactly what we're doing now.

[Jack Atkins:]

Yes, absolutely. I guess I'm just curious, when we'll be able to see customers outside of DHL for that particular type of asset, because until now it seems to been sort of niche to them that when ACMI leased that aircraft?

[William Flynn:]

Well, I mean Emirates has a nice fleet of 777s, certainly express carriers value the 777s if you look at the fleet that FedEx operates.

[Jack Atkins:]

Sure.

[William Flynn:]

We have 777s into AeroLogic on our lease business. So again it really does get down to network design in terms of which assets to more attractive assets for any given network.

[Jack Atkins:]

Okay, and then last question I'll turn it over, but just given all the significant demand that you're seeing for your assets, the contracts that you're wrapping whether it's for Amazon or DHL or several other customers. Is there a way to kind of think about the cost that you guys were carrying in the first quarter maybe that you expect to be carrying this year, associated with those contract ramps that I think as we look out in the 2019, you should be able to get leverage on those costs. Can you kind of help frame that for us in some way?

[William Flynn:]

Yes, Jack and we talked about it mostly with the Amazon ramp up. But you're absolutely right. There are start-up costs as we ramp up new business and it's particularly true in the case of Amazon where we're adding 20 aircraft over a very short period of time. We need to hire crews, train crews and there's a cost to all of that as you saw in last year in particular and then 2019 will be the first full-year for flying all 20 Amazon 767s for them without any start-up costs related to those 20. So yes, we agree with you and we will enjoy more efficient and more profitable business going forward.

[Jack Atkins:]

Gotcha, but there's no way to sort of think about how much those costs are this year?

[William Flynn:]

No, it just continues to happen, but the business that where we are operating divorce now that the start-up costs where it was the opposite through most of last year with a start-up costs were greater than the earnings from the flying. This year it's the other way around and then next year it was just be all upside.

[Jack Atkins:]

Okay, great. Thank you.

[William Flynn:]

Thank you, Jack.

[Spencer Schwartz:]

Thank you.

[Operator:]

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

[David Campbell:]

Yes, thanks for taking my question. I had a couple of questions. One is, as far as your outlook for this year, Bill you did not raise your estimated revenue block hours for the year at still 300,000? And - but all your estimated revenues significantly for this year, so it appears to be using more operating profitability from the assets. So this must be some savings on expenses. Do you have any comment on that?

[Spencer Schwartz:]

Hey, David, it's Spencer. Block hours did stay and block hour outlook stayed fairly consistent. But we saw stronger yields. We're seeing stronger yields in our charter business as I mentioned earlier yields in the first quarter - every month of the first quarter were greater than the prior year. So we're seeing strong yields in charter in particular and are ACMI revenue per block hour is higher than the prior period and higher than our previous expectations. So we're seeing increased revenue and that flows through to the bottom line. So I think that that is the biggest piece. Block hours fairly steady, but greater yields weeding to greater earnings.

[David Campbell:]

I was wondering, the outlook for yields is consistent with the slowing of air cargo demand and I know that IATA doesn't capture all of the business and I agree mostly sensations don't capture all the business, but they're catching the same business, they captured three months ago. But their growth is down. I mean Asia Pacific for example is way down, and in the in March and April and South America is also adding that to some extent, but Europe's weak as well. So this is a pickup in demand how they're going to continue to get higher yields.

[William Flynn:]

So a couple of I think elements there David. So if we go back to the business - our business 75% in ACMI and CMI and just to the fleet counts with what we have in DHL, Amazon we could see what Cathay saying about their business for example. And others now we have DGF who in their press release today are saying. We need this capacity because as we look out forward for the business that we have to serve. For our customers whom we have to serve, we need this capacity and we want it on a dedicated basis. For example, again why I often say look at our customers and many of them are outperforming the market. But in the Charter business then the other piece of this where yielder strong we have about half of that is commercial and half as military. Spencer talked about a very strong military environment which then tees up the one ways as we fly into theater, CENTCOM in elsewhere, Mideast in elsewhere we take that asset and then fly it on a one way charter which not only are there market yields, but it's the yield inherent in our network. These we're not fly empty position is to Asia to fly back. We're flying military nearby, a shorter ferry and then a full charter back and that's the multiply effect on our yields. And this is the quarter for South America. This is not a quarter for our Asia with a Lunar New Year and before to Ching Ming festival in China and Hong Kong now elsewhere. It is the South America quarter and we took full advantage of that. So I think it's just a layer to deep in our business. And that's the beauty of the air charter business it, it's global, it's in different theaters, it different times and we're positioned to move the assets to take advantage of it.

[David Campbell:]

And last question I had is relative to Amazon we year old, we continue to hear about Amazon wanting to do more of the business themselves rather than turn it in - whether they needed help for forwarders or other logistics players. I wondered if you'd seen any impact from that indication. In your business or what you thought Amazon might be thinking about?

[William Flynn:]

Yes, we're not really in a position to comment on Amazon, but we have as is the contract for the 20 aircraft were 13 aircraft flying and we're going to deliver the balance over the rest of the year to get up to the full 20 complement that.

[David Campbell:]

Okay. Thanks. Thanks a lot Bill and Spenser.

[Spencer Schwartz:]

Sure. Thanks David.

[William Flynn:]

Thanks David.

[Operator:]

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

[Christopher Stathoulopoulos:]

Good morning and thanks for taking my question. In terms of the headcount for the quarter. How did it trend versus the 2017 versus year end and what's the level we should think about for this year?

[Spencer Schwartz:]

Chris, we typically only provide that information annually in our 10-K. But you know that we're adding aircraft and so clearly it takes more people to operate those aircraft as we move forward. We continue to be an employer of choice and continue to higher and fill positions.

[Christopher Stathoulopoulos:]

Okay. All right. And then the timing for the placement for the second and third 747s with Hong Kong air I think the first was put in service last September.

[William Flynn:]

Yes, so we're we are now - we're looking at timing and potential growth of Hong Kong air and we'll see how that plays out. We have our aircraft now fully occupied and fully deployed in our charter market. Timing will depend on the customer themselves and how they see their plan evolving. That said Spencer was just talking about with David, we're focused on the 3,000 block hours and delivering those for the wide range of our customers.

[Christopher Stathoulopoulos:]

Okay. And then last question in terms of the charter capacity purchase from ACMI customers. I think we saw something similar last 3Q? Is that something we can expect going forward particularly in high demand periods just peak or are you considering bringing on additional aircraft there? Thanks.

[Spencer Schwartz:]

Sure. So purchase capacity that's where Atlas basically buys back even though it's our own plane, we essentially buy back hours from our ACMI customers. So it's the collaborative nature of working with our ACMI customers. It depends on things like the availability of aircraft, when and where they're needed, the operating rights, who can use the capacity et cetera. And so the ACMI customer, we continue to receive revenue from them, although we buy back the time, and then we sell that space in Charter. So you see that increase through our P&L. To your question is that the new norm? Yes, we do think that continues to be an opportunistic area for us when we have the rights, when the ACMI customer perhaps has a little space in their schedule and their strong charter demand, and we're better able to sell that charter space than the ACMI customer depending upon route rights and so forth.

[William Flynn:]

Yes. I think it's just a great opportunity. If you think about it, we've got a lot of flexibility there, we've developed the opportunities here in many ways, and it just drives high utilization of the aircraft and drives yields as well. So it's something we'll continue to do and year-by-year it will depend on how capacity flows, but it's an important part of our business planning and business mix.

[Christopher Stathoulopoulos:]

All right. Thanks for the time.

[William Flynn:]

Thank you, Chris.

[Operator:]

Your next question comes from the line of Adam Hackel of Imperial.

[Adam Hackel:]

Hey, guys. Thanks for taking the time here. Just going back to Amazon for a second, obviously you guys can't speak for them, but I'm just sort of curious how your conversation with them have evolved since you guys signed the agreement with them. Do you get any sort of sense of a growing appetite on their part just given the growth of prime, I think they mentioned 100 million prime members now and their success obviously of initial aircraft that you guys have rolled out? Just curious on that.

[William Flynn:]

Yes. We're really excited about the contract we have with Amazon and we've got the 13 in place and seven more to go and we really can't speak much beyond that and we don't for other customers either, Adam.

[Adam Hackel:]

Yes. I understand. I guess one last one on that, so just can you remind us in your current contract, what sort of the framework in terms of any kind of expansion on that or any additional aircraft on that, is something in your current contract that would allow that? And I guess where you get some potential, obviously some high level trainers for that and is there additional warrants that would go along with that as well?

[William Flynn:]

So what we've discussed, at the time of the initial contract with Amazon, we had a special shareholders meeting because there were warrants as part of the agreement as you just raised. And so there are two tranches of warrants. The first tranche is tied to are linked to the 20 aircraft that we're talking about and the remaining warrants in the tranche vast ratably as we place additional aircraft in service up to the 20. There is a second tranche warrants that are tied to incremental business. And so in terms of what opportunity might be there, there's nothing specific beyond that that we've talked about other than the tranche of warrants, the second tranche of warrants that our shareholders approved backed in at that meeting.

[Adam Hackel:]

Great. Appreciate the color. Thanks guys, and a great quarter.

[William Flynn:]

Thank you very much.

[Operator:]

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

[Stephen O'Hara:]

Hi, good morning.

[William Flynn:]

Good morning, Steve.

[Spencer Schwartz:]

Hi, Steve.

[Stephen O'Hara:]

Good morning. Just curious about the - I guess the 2Q guide and the maintenance expense in 2Q, I mean relative to the increases on the first quarter and then kind of you're guiding 2Q. I mean how much of that maybe degradation growth do you see is the maintenance expense or are you pulling forward maintenance or is it mostly kind of timing based?

[Spencer Schwartz:]

We don't pull maintenance forward, right, maintenance - the heavy maintenance, letter checks for the airframes and engine overhauls really are conditions based, time based on checks and conditions based on engines, and they occur when they occur. I mean what our view is, we've got a great second quarter coming in a great year. And that's following a stronger than anticipated first quarter and we were really well positioned to take advantage of the market demand that was out there and capture it. So we've upped the framework for the full-year. It's going to be a very strong second quarter and you know the 70

[Stephen O'Hara:]

Okay, that's helpful. And then just in terms of that military benefit, is that - and maybe you mentioned this, but is that continuing in the second quarter? If so, how long do you expect to continue and did you quantify the amount of the benefit in the first quarter and maybe what the expectation is for the full-year, I remember kind of with the M-ATVs was a pretty sizable benefit in the past and I'm just wondering maybe how sustainable that might be going forward? Not necessarily to say that other things will decline, but that could be something that maybe a jolt at some point if it's anything like it was in the past? Thank you.

[William Flynn:]

Sure, well the M-ATVs were indeed a jolt and that was in 2010 and what it happened was President, Obama surged. I think it was an additional 30,000 marines into Afghanistan and with that surge of troops the military needed a new vehicle that was more suitable for the - generally poor quality of roads in Afghanistan and that was the M-ATV. And the military opted to fly several thousand of those M-ATVs over a 90 day period to have the aircraft there as the troops were arriving and provide for their requirements and we flew about a thousand of those vehicles, over that three month period of time and it was a substantial upside to our earnings in 2010. But we haven't seen really anything like that sense. Cargoes up in 2018 with the military cargo volumes of military up and based on our conversations with the military, we expect those cargo volumes to be strong throughout 2018 and through fiscal year 2019, based on recent conversations we've had with the with the military as early as just a couple days earlier this week. Now if there's a good percentage of one way and if that one way percentage that allows us to have that multiplier effect on an underlying yields because we're flying the military to nearby shorter ferry and then a full plane load charter coming back in and we expect that to continue.

[Stephen O'Hara:]

Okay, that's very helpful. And then just quickly on - I thought I saw, 767-300 in charter and I don't know if that was kind of maybe between being online or Amazon or something like that, but is that something that you're looking to grow, going forward or is that something that is kind of a timing thing.

[William Flynn:]

It was kind of a timing thing to use your word Steve. So that that is a an aircraft that had been we acquired it, we converted it, but we have a little bit of time before we started operating it for another customer and so we utilize that within charter. We took advantage of volume.

[Stephen O'Hara:]

Okay, okay. All right, thank you very much.

[William Flynn:]

Thank you.

[Spencer Schwartz:]

Thank you.

[Operator:]

Thank you. At this time, I will turn the call to Atlas Air for any additional or closing remarks.

[William Flynn:]

Okay, well thank you, Laurie. And Spencer and I want to thank each of you for your interest in Atlas Air worldwide and spending so much for your time with us here today on earnings call, we also want to remind you about our upcoming Investor and Analyst Day. We're going to hold that in New York City on June 25 and will - in the near future be communicating more details about the day and we really look forward to seeing you there, thank you, everyone.

[Operator:]

Thank you. That does conclude the first quarter 2018 earnings call for Atlas Air Worldwide. You may now disconnect your lines and have a wonderful day.