Q1 2017 Earnings Call Transcript

Published: 3 May 2017

[Operator:]

Good morning. My name is Amy and I will be your conference operator today. At this time, I would like to welcome everyone for the First Quarter 2017 Earnings Call for Atlas Air Worldwide. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] I would now like to turn the call over to Atlas Air.

[Ed McGarvey:]

Thank you, Amy, and good morning everyone. I’m Ed McGarvey, Treasure for Atlas Air Worldwide. Welcome to our first quarter 2017 results conference call. Today’s call will be hosted by Bill Flynn, our Chief Executive Officer; and Spencer Schwartz, our Chief Financial Officer. As a reminder, today’s call is complemented by a slide presentation that can be viewed at atlasair.com. You may find the slides by clicking on the link to Presentations in the Investor Information section of the site. As indicated on Slide 2, we’d like to remind you that our discussion about the Company’s performance today includes some forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements relate to future events and expectations and they can 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 2016 Form 10-K, as amended or supplemented by our subsequently filed SEC reports. Any references to non-GAAP measures are meant to provide meaningful insights and are reconciled with GAAP in today's press release and in the appendix that is attached to today's slides. You can also find these at atlasair.com. During our question-and-answer period today, we'd like to ask participants to limit themselves to one principal question and one follow-up question, so that we may accommodate as many participants as possible. After we've gone through the queue, we'll be happy to answer any additional questions as time permits. At this point, I'd like to draw your attention to Slide 3, and turn the call over to Bill Flynn.

[Bill Flynn:]

Thank you, Ed, and good morning everyone. We are off to an exciting start in 2017. As a result of the evolution of our business model and significant new customer relationships, we are building on a 2016 achievements and growing our earnings this year. We will have a full year contribution from Southern Air, and we anticipate that our service for Amazon will have a positive impact on our full year results. We placed our second 767 300 into service for them in February and just added our third and fourth aircraft at the beginning of May. By the end of next, we expect to be leasing 20 767s to Amazon and operating them on a CMI basis as well. In addition to announcing our first quarter earnings and reaffirming our full year earnings framework today, we are very pleased to announce the placement of two 747-8 with Cathay Pacific Cargo on an ACMI basis, with service beginning this month. Cathay is a prominent airline based in Hong Kong and a global leader in the airfreight market. We are delighted to work with Cathay Pacific to facilitate the strong growth of its global network. In addition to Cathay Pacific, we have recently announced other new agreements with Asiana Cargo, Nippon Cargo Airlines and FedEx that will all contribute to earnings growth this year. I also want to highlight another important recent development, the ratification of the collective bargaining agreement with the Atlas Air and Polar Air dispatchers. This is an outstanding experienced team of dispatchers. They are responsible for the planning, dispatch and oversight of all Atlas and Polar Aircraft during flight and they are represented by the International Brotherhood of Teamsters. The four year agreement extends the initial five year contract through November 2021. Our agreement was the result of collaborative and productive discussions with the leadership of the IBT and with the negotiating committee. We are grateful for their hard work and commitment to during the entire process. We appreciate our dispatcher's overwhelming support for the extended agreement as well as the excellent service they provide every day. Earnings in the first quarter were in line with our expectations and our outlook for the year. Our results reflected a solid seasonal performance. In ACMI, we benefited from Southern Air's 777 and 737 express CMI services and the initiation of 747 400 flying for Asiana Cargo and Nippon Cargo Airlines. In Charter, an increase in military cargo and passenger demand as well as the additional 747-8 flight were offset by an increase in heavy maintenance and lower cost base rates paid by the military. In Dry Leasing, the placements of three 767 converted freighters, two at Amazon and one with DHL Express, were offset by a decrease in maintenance payments related to the 2016 scheduled return of a passenger aircraft. During the first quarter, FedEx assumed the long-term dry leases on three 777 freighters formerly leased by us to TNT. Slide 4 highlights our guidance framework for 2017. Consistent with our prior outlook, we anticipate that our adjusted income from continuing operations net of taxes will grow by a mid-single-digit to low-double-digit percentage compared with our 2016 adjusted income of $114.3 million. In addition, we expect adjusted net income in the second quarter of 2017 to be approximately 15% to 20% higher than second quarter 2016 adjusted income of $20.2 million. Our view reflects our outstanding business base, solid demand from our customers including the two 747-8s for Cathay Pacific starting this month. The benefits we expect from our fleet initiatives and the steps we have taken to align our business with the faster growing express and e-commerce markets. In addition, we're excited about our first full year of earnings contributions from Southern Air and the earnings accretion for the full year that we expect from our service for Amazon. Given the inherent seasonality of airfreight demand, we anticipate that our results this year will reflect historical patterns with more than 70% of our adjusted net income occurring in the second half. For the full year, we expect total block hours to increase approximately 20% compared with 2016 with more than 75% in ACMI and the balance in Charter. Aircraft maintenance expense in 2017 should total about $245 million, and depreciation and amortization is expected to total approximately $170 million. In addition, core capital expenditures, which exclude aircraft and engine purchases, are expected to total approximately $55 million to $65 million, mainly for parts and components to our fleet. 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 first quarter results are highlighted on Slide 5. On an adjusted basis, income from continuing operations, net of taxes totaled $8.3 million. As Bill noted, our results reflected a solid seasonal performance that included Southern Air's contribution as well as flying for new customers. Our adjusted earnings in the first quarter included an effective income tax rate of 9.5%, primarily due to our 2017 adoption of the amended accounting guidance for share-based compensation. This guidance now requires recognition of excess tax benefits associated with share-based compensation as part of income tax expense rather than within equity. We anticipate a full year adjusted income tax rate of approximately 30%. On a reported basis, income from continuing operations, net of taxes, in the first quarter totaled $40,000, and this included unrealized loss of $5.2 million related to outstanding warrants. On a reported basis, our effective tax rate in the first quarter was 94%, and that was principally due to the non-deductible nature of the unrealized mark-to-market losses on outstanding warrants that I just noted. Based on our current tax framework and the aircraft that we have purchased in place and service, we do not expect to pay any significant federal income tax until 2025 or later. Looking at Slide 6 revenues in our ACMI segment in the first quarter reflected an increase in block hour volumes, partially offset by a lower blended average rate per block hour. Both stem how continuing increase in our CMI flying, following our acquisition of Southern Air and the temporary redeployment of 747-8 aircraft to Charter. As a result, average CMI aircraft equivalents, which do not include a component for aircraft ownership in the rate per block hour, increased to 29.8 aircraft during the quarter compared with 17.2 in the first quarter of 2016 or an increase of 12.6 aircraft. Our Charter segment revenues in the first quarter were primarily driven by an increase in block hour volumes, partially offset by lower average rate per block hour. Volumes mainly reflect an increase in military cargo as well as passenger demand, while revenue per block hour primarily reflected the impact of lower cost-based rates paid by the military. In Dry Leasing, lower revenue compared with the first quarter of 2016 resulted from maintenance payments related to the scheduled return of a passenger aircraft last year. This was partially offset by a revenue from the placement of our first two 767 300 converted freighters with Amazon and one with DHL Express. Moving to Slide 7, segment contribution totaled $63 million in the first quarter compared with $56 million in 2016. Higher ACMI earnings were primarily driven by our acquisition of Southern Air and lower cost related to crew training partially offset by a higher heavy maintenance expense. Lower Charter contribution during the period reflected an increase in heavy maintenance expense and lower military rates, partially offset by higher military demand, lower cost related to crew training and the beneficial impact of additional 747-8 capacity. In Dry Leasing, segment contribution during the quarter reflected the decrease in maintenance routine payment, partially offset by the placements of three additional 767 300 aircraft. Turning to Slide 8, in our balance sheet, we ended the first quarter of 2017 with cash, including cash equivalents, restricted cash and short term investments totaling $124 million. Our cash position at March 31st 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 quarter, primarily related to payments for flight equipment and modifications, including the acquisition and conversion of 767 300 aircraft for our service for Amazon, spare engines and core capital expenditures. Net cash provided by financing activities during the first quarter included $150 million of proceeds from our revolving credit facility partially offset by $47 million of payments on debt obligations. As noted previously, we expect to finance a substantial portion of the acquisition and conversion costs for the aircraft we are placing in the service with Amazon. In April, we borrowed a total of $41 million under a two term loan secured by our first two Amazon 767s. The first term loan for $20 million has a fixed rate of 3.02%. The second for $21 million has a fixed rate of 3.16% and we expect to close the financing for the third aircraft shortly. It's important to emphasize that our debt has a low weighted average interest rate of 3.3%, and that approximately 90% of that is at a fixed rate and the secured by aircraft assets, which have a value in excess of the debt. Moving to Slide 9, we remain committed to maintaining a strong balance sheet while growing our fleet. As anticipated, our net leverage ratio increased slightly to 4.9 times in the first quarter. Looking forward, we expect to be around this level next quarter and then to improve overtime as we place more aircraft into service and begin to generate substantially higher EBITDAR. Now, I'd like to turn it back to Bill.

[Bill Flynn:]

Thank you, Spencer. Moving to Slide 10, I'd like to emphasize my opening comments. We are off to an exciting start in 2017. We are building on our 2016 achievements, including our acquisition of Southern Air and our agreements with Amazon. We have just added our third and fourth aircraft for Amazon, and expect to ramp up to 20 767s for them by the end of next year. In addition, to announcing our first quarter earnings and reaffirming our full year earnings framework, we're very pleased to announce the ACMI placements of two of our 747-8s with Cathay Pacific Cargo. Our most recently announced customer relationship with Cathay Pacific complements our other new relationship with Asiana Cargo, FedEx and Nippon Cargo Airlines. With our expanding business base and the ongoing development of our strategic platform, and as we drive more deeply into the faster growing e-commerce and express markets, we are well positioned to grow our earnings in 2017 and beyond. With that, Amy, may we have the first question, please?

[Operator:]

Your first question today comes from the line of Bob Labick of CJS Securities. Your line is open.

[Bob Labick:]

First, congratulations on the Cathay Pacific ACMI contract. I wanted to ask about that, could you just talk a little bit about the ACMI market, particularly for -8s? And how the market is now versus a few years ago? Talk a little bit about the process of this contract, how long you were talking to them? I know you can't give specifics about them, but maybe the market overall, the demand environment and how these things come about?

[Bill Flynn:]

Okay, Thank you, Bob. So, we've had a long-term relationship with Cathay. We certainly know their senior management and the organization quite well. In the most recent years, we've been flying a number of Charter operations for Cathay Pacific building that relationship. And we've been in discussion for some time with Cathay about the opportunity to provide them aircraft in an ACMI relationship, these two 747-8. So as you can imagine, a contract of this nature can take some time to negotiate. And to implement Cathay here is outsourcing a good size or good part of their operation to us. So completing the contract, negotiating it and then thinking about implementation, whether that's operational implementation or implementation into their sales and marketing strategy and outreach to their client take time. But we're really delighted to have a contract in place and to announce that, and certainly excited to have Cathay Pacific as a long-term customer of Atlas going forward. In terms of the ACMI markets overall and the freighter market overall, I think there's really quite a number of encouraging trends in the market whether that be for 747-8, for 747-400, particularly in that, but we think the mid-term fuel environment is going to look like for that asset class and of course the 777s that we fly now through Southern. Markets are up. I think carriers are looking at their fleet and how to organize and deploy their fleets. And we've had the announcement with Asiana last quarter, with the CMI operations that we have now with Nippon Cargo Airlines. So, I think the trends in the momentum are indeed very positive.

[Operator:]

Your next question comes from the line of Kevin Sterling of Seaport Global Securities. Your line is open.

[Kevin Sterling:]

You guys highlighted additional volume with military on both cargo and passenger. Do you expect that continue into the rest of this year? I know the military sets their October 1st, but maybe for the rest of this year, do you anticipate continued pretty strong flying with the military in both passenger and cargo side maybe a little bit above your expectations?

[Bill Flynn:]

Yes. In fact, we do Kevin. We've had strong military flying in calendar year '16, which bridged as you know the end of one and the beginning of the next fiscal year. We anticipate strong flying levels of activity in 2017. And based on our discussions with U.S. transportation command and with the air mobility command, we anticipate that continuing through calendar year '18.

[Kevin Sterling:]

Okay. Great. Are you mainly flying cargo or is it kind of an even mix between cargo and passenger? Is there any way to kind of break that down? Is it weighted toward one or the other?

[Bill Flynn:]

Well, it's actually more weighted to passenger than cargo, and that's been the trend now for really several years, particularly post OEF and the withdrawal from Afghanistan and Iraq. So that continues. So, it's more passenger operations than cargo. But I guess we're not really getting into detailed numbers, but a bit more cargo than we thought than we might have asked what's different perhaps, how we were planning for the year than we were experiencing. I’ll say a little more cargo than we thought. Passenger is at the level that we had expected.

[Kevin Sterling:]

Okay. And just remind me, you kind of like that cargo because it's just little bit one way mission and you could pick up freight and bring it back. Am I thinking about that right still?

[Bill Flynn:]

Yes, you are. There is a good percentage of one way that gives us more flexibility in our Charter fleet and Charter operations overall.

[Operator:]

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

[Unidentified Analyst:]

Hey, guys, it's actually Andrew on for Jack this morning. I guess, first off, kind of a bigger picture question. We've really seen a surge in global airfreight demand I guess it's really been passed nine months or so. So Bill, what do you guys think is driving this? And how sustainable you think is this going forward I guess through the rest of this year?

[Bill Flynn:]

So, that's -- I think you're right in terms of your timing. We saw airfreight demand pick up about July of last year overall and that's continued. I think a couple of things. I think there's just higher levels of economic activity overall, generally across all trade lanes we're seeing growth and demand on across the Pacific, across the Atlantic, Asia, Europe and South America volumes. So, it's across virtually all markets and it's across virtually each segment or each cargo class that uses airfreight from consumer into consumer and consumer electronics and industrial, capital goods, pharma and perishables. So, I think there's a general rise in activity overall. I think there's certainly been some rationalization of fleet and some redirection and refocus on a number of the airlines on their cargo markets. So, we've seen that growth. We, of course, -- well that's the traditional heavy freight market and an important market to us. Obviously, Cathay and Asiana and Nippon Cargo Airlines, our growth is also as you know very much driven by what's going on in the express markets with DHL and with FedEx that we’ve talked about and of course you know the DHL is our larger customer. And the positioning that we talk about now having the opportunity to fly for Amazon and growing our fleet with Amazon through 2018 puts us into the e-commerce market, so part of the excitement we feel about the trends at Atlas and in our businesses, our broader participation across each of these three key segments.

[Jack Atkins:]

Got you. That's helpful. And just as a follow-up. Trends like good in the first quarter, I think we saw that show in your Charter cargo block hours for sure. But if you look at that direct to contribution line in Charter, I know you guys called out the new military pricing is a headwind this year. But how should we think about going forward for the rest of the year, the impact of that new pricing now not that easier to talk on your direct contribution margin or from revenue, for block hour standpoint? Just some context on how we should be thinking about that going forward?

[Bill Flynn:]

Sure, Andrew. We talked about during the last, our last earnings call, the fact that the military teams are pricing a bit. And that on a year-over-year basis that certainly had an impact. However, as Bill pointed out a moment ago, we're seeing really strong volumes from the military. And passenger continues to do really well. And as Bill said, cargo is a bit stronger than we thought and we expect that to continue for quite some time. So yes, you're right, the rates are an issue. However, we are seeing really strong volumes that are essentially offsetting that.

[Jack Atkins:]

Got you. So, I guess if look at the first quarter, the direct contribution down 17%. You guys have called out the heavy maintenance and the military pricing. So, I mean, can you put those in buckets as to I guess what was the maintenance impact to it if that tapers off throughout the year. how we should think about direct contribution going forward?

[Spencer Schwartz:]

If you think about direct contribution going forward, I mean, we expect there will be a substantial increase in direct contribution for 2017 full year versus 2016. So, you should expect to see that continue to improve throughout the year.

[Operator:]

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

[Unidentified Participant:]

Hey, guys, it's actually Steve on for Helane. Following up, I guess just on the previous question. As far as the rate in the Charter business, you guys were talking about how the cargo business was a little better than kind of expected. Are you seeing rates kind of ex-military start to pick-up?

[Bill Flynn:]

Yes, we are.

[Spencer Schwartz:]

Yes.

[Bill Flynn:]

Absolutely.

[Unidentified Participant:]

Anyway to kind of quantify that a bit?

[Spencer Schwartz:]

We can tell you that yields excluding fuel in our commercial Charter business for the first quarter this year were ahead of the first quarter of last year. We can certainly say that unequivocally. And then the AMC pricing has an impact on that. And so if you back that out, what you see is really the commercial Charter yields for the first quarter being higher than the prior year and doing quite well in a strong market.

[Stephen Stone:]

And is that across the board or are you seeing any errors that are stronger than others?

[Spencer Schwartz:]

No, we're really seeing that across the board, across all geographies, we're seeing it across all different cargo types. And so years ago, you may remember that we used to -- we'd rely more on a strong peak season or we needed a new product introduction or things like that, and that is not what we're seeing today. We're seeing strength all across.

[Stephen Stone:]

Okay. And then going to your debt pay down a little bit, I see you guys are planning. Was it 45 million to 50 million debt pay down per quarter? Is that kind of higher interest rate that or they're kind of low hanging fruit that you guys can do there?

[Spencer Schwartz:]

We've restructured and repaid most of the higher rate debt. And so what you're seeing is sort of the normal pay down of principal and interest through the debt repayment that you're talking about, the $47 million in the first quarter and about that same amount going forward a little bit higher, going forward. We are really focused on trying to continue to lower our overall weighted average rate. As I said, it's 3.3%, which is a really great rate. And most products, most financing that we're entering into today are even lower than that. So, we're really pleased we're doing quite well in that area.

[Operator:]

Your next question comes from the line of David Ross of Stifel. Your line is open.

[David Ross:]

Going back to the Charter segments, have you ever talked about the percentage of block hours that are military versus commercial Charter?

[Bill Flynn:]

We really don't, Dave. We -- years ago, we used to have a separate segment for the military for when that business really start when troops came back from Iraq and Afghanistan and that part of the business changed. And so we reported -- we have been reporting now for years both of those together. And so the military is just another customer like any of our other Charter customers, freight forwarders, Charter brokers and so forth airlines. And so, we don't break out any particular customer and military is just another customer within our Charter business.

[David Ross:]

Okay. And if I had to look at it, will military be in a minority? So most of the block hours are commercial? Is it close to 50-50? Or actually most of the block hours is military?

[Bill Flynn:]

What you can do is we're going to file our 10-Q a little bit later and you can certainly look at the 10-K as well. But we break out military revenue in our footnotes and so you can see it -- you can look at the revenue for the military versus total revenue for the Company for a particular segment that you can certainly do.

[David Ross:]

But is military less than half of Charter block hours?

[Bill Flynn:]

The other part of this is that for the military, they include the cost of fuel in the revenue. And so, which is different from some other customers. So, you have to factor that as well, you have to look at the fuel and how the cost of fuel and the gallons that were uploaded and so forth, that all plays into it. But your question with regard to kind of the ratio, the military is a very large portion of our Charter business overall.

[David Ross:]

Okay. And then in the comments on the release talking about ACMI and lower costs related to crew training in the quarter I guess I was a little curious since I thought there would more cost for crew trainings since you have the two new planes going for Amazon this quarter that you probably training for last quarter, I'm not sure if there was anything associated with that in a year ago. Could just add a little bit more color there?

[Bill Flynn:]

Yes, it's a great question, a very perceptive question. So costs are down on fewer training events in the first quarter of 2017 versus the first quarter of '16. It takes pilots to train pilots. And during the fourth quarter of 2015, we needed a number of our training pilots to fly in the network rather than training. And so as a result, some of the training moved out of the first -- sorry the fourth quarter of 2015 and into the first quarter of 2016. Enough new pilots were trained during 2016 that we didn't have a similar issue with the fourth quarter training events moving into the first quarter of 2017. So, it was really the first quarter of '16 where training was a bit high and so first quarter of '17 which is a bit more normalized compared to '16, created that issue.

[David Ross:]

Okay. So I just want to understand it correctly, basically doubled up on training 1Q last year and this year is a more normal quarter, maybe with a little additional on the normal, but still down year-over-year?

[Bill Flynn:]

Yes, I'm not sure what's double. But, yes, that's right. We had additional training in the first quarter of '16 that carried from the prior year.

[Operator:]

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

[David Campbell:]

Thanks for taking my question. The two 747s that you're leasing to Cathay Pacific, that where do they come from? Who canceled service in order for you to give those to Cathay Pacific?

[Bill Flynn:]

So David, we had those in Charter and we deployed those into Cathay this quarter. One of the aircraft did prior fly for Etihad and the other carrier -- the other aircraft we had both in Charter and also flying for a Chinese Freight Forwarder.

[David Campbell:]

So, it essentially reduced your Charter available capacity?

[Bill Flynn:]

You took these -8s that were temporarily placed in Charter during the first quarter back into ACMI.

[David Campbell:]

Yes, yes. And I think I heard you say that the second quarter net income would be up 50%, but the year was only going to be up 5% to 10%. Is that this -- did I miss here there?

[Spencer Schwartz:]

We said 15% to 20%.

[David Campbell:]

In the second quarter?

[Spencer Schwartz:]

In the second quarter.

[David Campbell:]

15% to 20%, okay.

[Spencer Schwartz:]

And we said single-digit to mid-double-digit for the full year.

[David Campbell:]

So it's a pretty big range for the full year?

[Bill Flynn:]

It's a range.

[Spencer Schwartz:]

Mid-single digit to a low-double digit for the full year and about 15% to 20% for the second quarter, David.

[David Campbell:]

Right. And what's the status of the Houston, Africa passenger service that you've had for I guess it was on Sonangol and I can't remember the name of the service.

[Bill Flynn:]

Right, so that's ongoing. So, the name of the customer is Sonangol, who is a -- SonAir is the actual airline operation, that's a subsidiary of Sonangol, which is in Angola state oil company and that operation is continuing.

[David Campbell:]

Okay. That's good because that business -- the oil exploration business looks like it's going to pick up, which should help that service.

[Bill Flynn:]

That is a CMI, David. That is a CMI service, right. So, we're not taking risk on revenues and fair and fuel. That is a pure CMI service.

[David Campbell:]

Yes. I knew that right. I knew that. And you mentioned the commercial charter rates are up in the first quarter. Wasn't that mostly in the month of March? It didn't do too much in January and February, did they?

[Bill Flynn:]

No, they actually did, David. We saw strength in January and February and March, even with the Lunar New Year effect, which came in February with the late January Lunar New Year. And they were -- I think where we saw some of the larger uptick was in fact, Asia, Europe. With strength in Asia is the U.S, but Asian Europe was a good market this year.

[David Campbell:]

Europe is extremely strong, so I'm not surprised. And I would think that the rates would go up more in the second quarter than they were in the first, but that obviously, you can say it but it looks like that's it looks going to happen.

[Bill Flynn:]

And out there in the Charter business, and of course, we benefit from that directly in Charter, but certainly so do our ACMI customers, right, which is where the majority of the fleets deployed.

[Operator:]

Your next question comes from the line of Stephen O'Hara of Sidoti & Company. Your line is open.

[Stephen O'Hara:]

Can you just talk about of the simple transaction you had just kind of ACMI as of the main deployment with Cathay. And I was just curious if this is kind of we're still at maybe -- what we kind of go into nine year or we still at sever with.

[Spencer Schwartz:]

We're at 9.

[Stephen O'Hara:]

We're at nine. So, this brings you to the nine and there is still one flying in Charter after deployment.

[Bill Flynn:]

Right. So, yes, we're at nine. We have six with DHL Express, one with Panalpina and the two with which he we had for a very long time with Panalpina and then the two with Cathay and one in Charter. And as we pointed out on our prior calls, the returns on that -8 in Charter are certainly equal to our returns and ACMI, and it's a good operation for us.

[Stephen O'Hara:]

Okay. And just your comments around the peak season and maybe needing a strong peak, based on your guidance, what's your expectation for peak season? I mean, are you kind of expecting peak season similar to last year? Or are you more maybe a little milder in terms of what your expectations are? As that comes up, there's maybe upside to expectations.

[Bill Flynn:]

Spencer didn't say we need a strong peak season for this year. I think Spencer was saying historically looking back five or so more years ago, a lot of the business depended on a very strong peak. And what Spencer was pointing out at that's not the case and that's not where we are today, particularly with the express and e-commerce platforms, which are full year round platforms. The places we have with our other ACMI customers, I would say just the nature of the business, the diversification of the fleet, diversification in the customer base and our operations overall is much less, really peak dependent, and I don't think of us as a peak dependent business. Now that said, we're anticipating a good peak for 2017. There was a good peak in 2016, the market started going in July of '16 as we talked about on an earlier question. And the indications we have from our -- from all of our customers, including our ACMI customers and the Charter brokers and freighters that we're speaking with are looking forward to a good peak for 2017.

[Operator:]

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

[Unidentified Participant:]

Hi guys. It's Christian filling in for Scott. Thanks for taking the question. Can you just give any color on the temporary redeployment of the -8s into Charter? Was this customer returning a plane or was this, and was there any impact in the quarter?

[Bill Flynn:]

Are talking about the 10th aircraft?

[Unidentified Participant:]

Yes.

[Bill Flynn:]

Well, that's actually been in Charter for a number of periods now, and we've talked about that on prior calls that that aircraft is providing very good returns for us. Not the result of return, we bought an additional -8 at the end of 2015. And it moved into our Charter market when we did.

[Unidentified Participant:]

Okay, so it's not new, okay. And then can you just discuss the impact of fuel on the Charter result? Is there any way to kind of quantify the impact in the segment? And should this impact the segment going forward?

[Spencer Schwartz:]

Fuel was down year-over-year, and so if you look at the revenue per block hour, some portion of that, especially for Charter passenger flying, some portion of that was driven by fuel. And the other portion is driven by the military rate, which we already talked about. And those are the two biggest drivers, when you look at the Charter passengers yields, for example. So it's about half-and-half, I'd say military and fuel driven for that. That's the biggest best of it.

[Unidentified Participant:]

Okay. That makes sense. And then just lastly, on the military side, the demand increase is something that you guys said should be continuing. But is it based on market share gains or is it just an increase in military activity?

[Bill Flynn:]

I guess a little bit of both. I think I've said earlier to another question that the cargo activity was up a little bit more than we expected. We are up a few points in terms of entitlement of our market share. We're at about 53% entitlements right now in both passenger and cargo and that's a few percentage points gain in this contract year, October to September fiscal year. And so we're up a little bit in entitlement or market share as well.

[Operator:]

Your next question comes from the line of [indiscernible] of Susquehanna Financial. Your line is open.

[Unidentified Analyst:]

So, you've been very clear about your pivot towards express market and e-commerce and how a lot of your businesses not reflected in the added numbers. But could you give us a rough sense though of how much of your business is in that data or more specifically in the traditional airfreight markets?

[Bill Flynn:]

So, I think a way to think about that is the level of activity that we have in Charter is absolutely in the eye, in what you would be captured in IATA statistics, and that's the cargo that were -- but there was a military mix in there, so you have to make an assumption of how much of that is military and how much of that is commercial, Spencer Charter a bit about that. And then in terms of our ACMI business, our CMI business it's really the customers other than DHL and other than Amazon. That's the market they server and of course we are flying for them into those markets. They're retailing the capacity into those markets, not Atlas directly.

[Unidentified Analyst:]

And so far as Amazon, have you guys started running planes out of CVG yet?

[Bill Flynn:]

Well, we've got four aircraft deployed into Amazon right now, but we don't really specifically discuss the networks in the airport to airport flying that we do for Amazon.

[Operator:]

Your next question comes from the line of Michael Derchin of Imperial Capital. Your line is open.

[Michael Derchin:]

Regulatory question, as you know, President Trump seems to be inclined to link trade and military kind of discussions with given his conversations about the North Korea with the President of China. And if that's the case, I know he's going to visit Saudi Arabia soon to talk about antiterrorism with the hierarchy in the Middle East. And as you know there is great opposition by the big three network carriers to the current bilateral open skies with some of the Middle East carriers. I just wondering, if half come up in the conversation and what message would you want to send it to them regarding any impact on youi and airfreight business?

[Bill Flynn:]

Sure. So maybe working backwards, in terms of open skies, Atlas, along with FedEx and JetBlue, represent a different voice. We believe in open skies, we believe in the benefits that holistically drive from open skies and we think maintaining the strong open skies framework is good for certainly express and freight flows as it is for passenger flows as well. And Alaska Airlines is also part of that correlation. What we've said and we certainly had discussion with members of the administration, with the State Department and with the Department of Transportation as well, that from a freight and express perspective, freight flows, tend to be directional, they are seasonal. And having the fifth and seventh freedoms that derive from the Open Skies agreement, allow us and other freight operators to build the kind of networks that provide efficient and cost effective transportation whether that's express or traditional heavy freight. In terms of the specific discussion regarding the Gulf carriers, our point of view there is clear. We don't believe that the discussions or the issues that the legacy carrier want to address should be addressed in the Open Skies agreement or should be addressed by kind of a unilateral opening of the agreement. Back in the 70s, Congress passed a law the International Air Transport Fair Competitive Practices Act, IATFCPA. But IATFCPA provides for an expedited process through the Department of Transportation, where the carriers, the legacy carriers, could bring their complaints their allegations of damages, and seek a remedy. And that’s been used in the past. It requires evidence and requires demonstrated damage. And to date, none of the carriers have actually approached to my knowledge, approached the DOT or have sought to use the benefits of this law and regulation. And that's where we think it should be addressed. Again, a little long in the answer for you, but more broadly I think the administration clearly understands the benefits of trade. Certainly, secretaries Tillerson and Ross do and as well as secretary Chao. So, I think what we're going to see emerge is, I hope and expect a more nuanced view about trade and trade relationships and the benefit to our economy and that’s a discussion that we have and we point out as well.

[Operator:]

Your next question comes from the line of David Ross of Stifel. Your line is open.

[David Ross:]

Just a quick follow-up Spencer, something transaction related expenses in the numbers again. Wasn't expecting those because there were many transactions, and I don't know if that was holdover from the Southern Air deal, and do you expect that to continue this year?

[Spencer Schwartz:]

Yes, David, you're absolutely right. It is related to the Southern Air acquisition. There are still some consulting costs there that we are still incurring. We expect those to wind down hopefully through this summer and then they really should start to go away. We are moving close to a single operating certificate between Atlas Air and Southern Air, and we expect that to happen. And as I said, those fees should wind down as we move closer and closer to a single operating certificate.

[David Ross:]

So those expenses are related to the merger of the two operating certificates?

[Spencer Schwartz:]

Yes. They're integration related expenses. That's right. As a result of the acquisition, we're trying to bring the two carriers together to one, and these are cost related to that, primarily.

[David Ross:]

And then is it possible to bring them together is one before negotiating a separate long-term deal or do they have to happen at the same time?

[Bill Flynn:]

No, it’s possible to bring the single operating certificate together as one as Atlas here, while the negotiations for joint collective bargaining agreement continue.

[Operator:]

Your next question comes from the line of Kevin Sterling of Seaport Global Securities. Your line is open.

[Kevin Sterling:]

Bill, on Amazon you guys are four planes now. What's been kind of the feedback you've got from them since they tend to be a really service-centric customer in terms of your reliability, on-time departure, lending, et cetera. So may be with that going to be specifics, so I don’t want to talk about that. But just maybe some feedback as you ramps to four planes and on your way to 20 kind of feedback from Amazon that you've gotten from them?

[Bill Flynn:]

Well, I really don't want to characterize Amazon feedback, Kevin. But you can imagine we are focused on delivering the service and the service quality that we’ve committed to deliver them starting with the first aircraft and now ramping up through all four. That's what we're focused on.

[Operator:]

[Operator Instructions] And there are no further questions in the queue. I turn the call back over to the presenters.

[Bill Flynn:]

Okay. Well, thank you very much, Amy. And Spencer and I want to thank all of you for your interest in Atlas Air Worldwide and certainly appreciate you’re taking the time to be with us today, and we look forward to speaking with you again soon. Thank you very much.

[Operator:]

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