Q3 2017 Earnings Call Transcript

Published: 12 Nov 2017

[Operator:]

Good morning. My name is Sarah and I will be your conference operator today. At this time I would like to welcome everyone to the Third 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] Thank you. Atlas Air, you may begin your conference.

[Edward McGarvey:]

Thank you, Sarah, and good morning, everyone. I am Ed McGarvey, Treasurer for Atlas Air Worldwide. Welcome to our third 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 complimented 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 two, we'd like to remind you that our discussion about the company's performance today includes some forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements relate to future events and expectations and they involve risks and uncertainties. Our actual results or actions may differ materially from those projected in any forward-looking statements. For information about risk factors related to our business, please refer to our 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'd be happy to answer any additional questions as time permits. At this point I'd like to draw your attention to slide three and turn the call over to Bill Flynn.

[William Flynn:]

Thank you, Ed, and good morning, everyone. Our third quarter saw continued good momentum in our business. Revenues and volumes grew significantly and direct contribution in each of our segments increased during the quarter. Yield in aircraft utilization also grew reflecting the strong demand for our services. We believe the future for Atlas and for air freight is bright. Growth in Asia and an expansion of the global middle class are transforming the global economy. Increased disposable income will support a strong future for trade and the consumptions of goods. And our strategic focus on express and ecommerce as well as the faster growing Asian markets, positioned us for further business growth as we carry through the balance of this year into 2018 and beyond. Moving to slide four, our third quarter earnings reflected a 20% increase in revenue, 20% increase in block hours, higher yields and enhanced aircraft utilization and higher direct contribution in all of our segments. In addition, we placed and began operating our seventh 767-300 aircraft for Amazon. We also introduced Aircraft 8, 9 and 10 in October and remain on track to ramp up to a full 20 aircraft for Amazon by the end of 2018. Complementing this growth we commenced flying for two new customers during the quarter, DHL Global Forwarding and Hong Kong Air Cargo. And we started operating our second 747-400 freighter for Nippon Cargo Airlines. Cumulatively we have added 10 ACMI placement in Asian routes this year and we will enjoy that flying in 2018. As we noted in our press release today, some of that performance in the third quarter was offset by higher maintenance expense, labor related disruptions and hurricanes Irma and Harvey. As noted on slide five, we are pleased to provide support and assistance for communities affected by the recent hurricanes. In September we provided relief to affected pilots, other employees and their families in the Miami and Houston areas as well as charitable donations for local recovery efforts. In October we donated to the relief efforts in Puerto Rico following Hurricane Maria and we partnered with Jet Blue, our fellow New York airline, to deliver 117 tonnes of humanitarian aid to the Island on our aircraft. We also operated multiple hurricane relief charters on behalf of Atlas Air and our customers with the speed that only air freight can provide. Slide six highlights our growth framework for 2017. We are looking forward to a strong fourth quarter. Both we and our customers are experiencing solid peak season yields and volumes. Reflecting our year-to-date results and our fourth quarter expectations, we anticipate that our full year 2017 adjusted net income from continuing operations net of taxes will grow by a high single-digit to low double-digit percentage compared with our 2016 adjusted net income of $114 million. For the full year we expect total block hours to increase approximately 20% compared with 2016 with about 75% in ACMI and the balance in Charter. Aircraft maintenance expense in 2017 should total about $275 million and depreciation and amortization is expected to be approximately $165 million. In addition, core capital expenditures, which exclude aircraft and engine purchases, are expected to total approximately $75 million to $80 million, mainly for parts and components for our fleet. At this point, I would like to ask Spencer to provide some additional detail about our third quarter results. After Spencer I'll have some additional comments and then we'll be happy to take your questions. Spencer?

[Spencer Schwartz:]

Thanks, Bill, and hello, everyone. Our third quarter results are highlighted on slide seven. On an adjusted basis income from continuing operations, net of taxes totaled $29.7 million. As Bill noted, our results reflected robust increases in revenue and block hours and higher direct contribution in all of our segments. On a reported basis we announced the loss from continuing operations of $24.2 million due to an unrealized loss of $44.8 million related to warrants, which was caused by an increase in our stock price during the quarter. Both adjusted and reported net income in the third quarter included a $1.7 million impact related to Hurricanes Irma and Harvey. Our adjusted earnings in the third quarter included an effective income tax rate of 24.3% and we continue to anticipate a full year adjusted income tax rate of approximately 30%. On a reported basis we had an effective tax expense rate of 72.7% during the quarter and that was principally due to non-taxable changes in the value of the outstanding warrants. Based on our current tax framework and the aircraft that we've purchased and placed into service, we do not expect to pay any significant federal income tax until 2025 or later. Looking at slide eight, revenue growth in our ACMI segment in the third quarter reflected an increase in block hour volumes and higher aircraft utilization. Volumes were primarily driven by greater 767 flying for Amazon, 747-8 flying for Cathay Pacific and 747-400 flying for DHL Global Forwarding, Nippon Cargo Airlines, Asiana Cargo and Suparna Airlines, which was formerly known as Yangtze River Airlines. Average ACMI rates reflected an increase in CMI flying. Higher Charter segment revenues in the third quarter were primarily driven by an increase in rates. Rates primarily reflected the impact of Charter capacity we purchased from our ACMI customers on flights that had no associated charter block hours, higher fuel prices and higher commercial cargo yields. Moving to slide nine, segment contribution totaled nearly $97 million in the third quarter compared with $92 million in 2016. ACMI earnings primarily reflected an increase in flying related to greater aircraft utilization, partially offset by higher maintenance costs. The improvement in Charter contribution during the period was primarily due to an increase in commercial yields partially offset by higher maintenance costs and the redeployment of 747-8 aircraft to the ACMI segment. In addition, segment contribution in both ACMI and Charter was negatively impacted by work slowdowns and service interruptions for which we are seeking a preliminary injunction. We expect a ruling later this month. In Dry Leasing higher segment contribution during the quarter primarily reflected a reduction in interest expense related to the repayment of debt on 777 aircraft and the placement of 767 aircraft. Turning to slide 10 and our balance sheet, we ended the first nine months of 2017 with cash including cash equivalents, restricted cash and short-term investments totaling $187 million. Our cash position at September 30th reflected cash provided by operating and financing activities, partially offset by cash used for investing activities. Net cash provided by financing activities during the first nine months included $249 million of net proceeds from our issuance of convertible notes and $159 million from our financings of 767-300 aircraft, partially offset by $153 million of payments on debt obligations. In October we completed the financings of three additional 767-300 aircraft, which raised cash of $73 million. Net cash used for investing activities during the first nine months primarily related to payments for flight equipment and modifications including the acquisition and conversion of 767s, spare engines and jet engine upgrade kits and core capital expenditures. Our debt has a low weighted average interest rate, which is now down to 3.1%, 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 their related debt. Moving to slide 11, we remain committed to maintaining a strong balance sheet while growing our fleet. As anticipated, our net leverage ratio at the end of the third quarter stayed fairly consistent with the prior quarter. Looking forward, we expect it to increase gradually over time as we place more aircraft in service and begin to generate substantially higher EBITDAR. Now, I'd like to turn it back to Bill.

[William Flynn:]

Thank you, Spencer. Moving to slide 12, I'd like to underscore my opening comments. We're encouraged by our performance in the third quarter. The momentum from our business initiatives is continuing. Revenues, volumes and direct contribution in all of our segments grew during the quarter. So did yields and the utilization of our aircraft, which reflected the strong demand for our services. The future for our company and for air freight is bright. Growth in Asia is transforming the global economy and our strategic focus on express, ecommerce and the faster growing Asian markets position us for further business growth as we carry through the balance of this year into 2018 and beyond. With that, Sarah, may we have the first question please?

[Operator:]

Certainly, your first question comes from the line of Bob Labick, CJS Securities. Please go ahead.

[Bob Labick:]

Good morning.

[William Flynn:]

Hey, Bob.

[Bob Labick:]

I wanted start with the maintenance. Obviously there's been the -- a change from last quarter to this quarter's outlook for the year. I think you raised your maintenance expectation by about $20 million. Can you just talk about what that's going towards and is that a kind of pull forward of what would have occurred next year or is it just higher expenses to do the same amount of things you were expecting to do and how shall we think about maintenance going forward?

[Spencer Schwartz:]

Sure, Bob. So this quarter we had a number of one-time unplanned maintenance expenses that had to be performed. Some of the things that were worked on included wings, flaps, air conditioning, wiring, thrust reverser events. So they were primarily due to the findings and then the cost of the work that really isn't known until the work is performed and then once you find those issues you need to perform the work, you can't jeopardize safety. So it was really an issue with the quarter. There's a little bit of an impact in the fourth quarter and that's built into the full year framework that we provided today. We don't think that this is the new normal. We think it was a situation that happened in the quarter and a little bit into the beginning of the fourth quarter.

[Bob Labick:]

Okay, very helpful. Thanks. And then just I guess my follow-up in terms of you discussed obviously some impact from labor issues in the quarter. Could you talk -- I don't know if you are A, able to quantify that or B, talk about timing of resolutions and potential outcomes.

[William Flynn:]

Yes, Bob. This is Bill. I'll take that. So what we've talked about is essentially we have an issue with our union and what we've observed here is a concerted campaign by the union in violation of the Railway Labor Act and it's about gaining what we would call unlawful leverage in contract negotiations. So this has manifested itself and what we've observed is a significant increase in sick and fatigue calls near the time of departure, which makes recovery, takes longer to recover in that kind of an event, and an increase in refusal to take open time of overtime. So these behaviors have cost some operational disruption and that's the point of the preliminary injunction that we're seeking. In the meantime though, we continue in negotiations with our pilots. We're in negotiations this week. So we haven't provided a specific quantification of the impact, but the impact is indeed in our third quarter results, as well as in the guidance or framework that we provided for the fourth quarter as well so we've considered the situation, kind of the operation environment that we're in now in providing that number as well.

[Bob Labick:]

Got it. Okay, thank you very much.

[Operator:]

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

[Helane Becker:]

Thank you very much, operator. Hi, it's Helane. So the -- obviously the market is not happy with the guidance because the stock is under performing today, but I am just kind of wondering this. If the load and the low or high single-digit low double-digit guidance that you're providing now for the full year is -- I mean, is that -- can you just kind of walk us through how you get to that because I think you had a pretty good second quarter and I know you don't normally raise guidance midyear but I am just kind of wondering how impactful maintenance and pilots are to the updated guidance.

[Spencer Schwartz:]

Sure, Helane, it's Spencer. So we had the hurricane impact during the third quarter so that carries through certainly for the full year. We had some impacts from Hurricane Maria, which happened during the fourth quarter in October and so that obviously has a fourth quarter impact. The crew issues, the labor related disruptions that we saw in the third quarter and early fourth quarter that has an impact on the full year framework and then maintenance, as we talked about. So those things are sort of weighing on the framework but then offsetting that of course is a really, really strong air freight market and a very good peak season.

[Helane Becker:]

Okay. Will you benefit from the iPhone X movement?

[William Flynn:]

We're going to participate in the iPhone X movements. In fact, we are already.

[Helane Becker:]

Okay. And then, Bill, I think you said that the crew issues were in the Charter business. Is that, is it confined to that area or is it across the board?

[William Flynn:]

No, I don't think I said that, Helane. The labor disruptions are in the business and that would be both segments, ACMI and AMC.

[Helane Becker:]

Perfect, not so much but okay thank you for the clarification.

[William Flynn:]

Thank you.

[Operator:]

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

[Jack Atkins:]

Hey, guys, good morning. Thanks for taking my questions.

[William Flynn:]

Sure, Jack.

[Jack Atkins:]

So Bill, I guess just if we could go back to the labor front for a moment and I am guessing you're going to be hesitant to talk about this and for understandable reasons but I think it's important to ask the question. Could you maybe give us an update on sort of where you all stand in the negotiations with your pilots? I think you said that you're negotiating or your teams will be negotiating this week or have negotiated this week. So just could you give us an update on sort of what the time line looks like in terms of when you all think we could see a new labor agreement with your pilots? And is there some rough framework that you all can give us in terms of how we should be thinking about the P&L impact from a revised contract?

[William Flynn:]

Sure. So we've been -- we're negotiating with our pilots under a framework or a protocol agreement that we reached with our pilots back in June of this year and we have been negotiating that protocol agreement with the pilots for some period of time and I think we began talking about that framework to commence or recommence discussions back in October of 2016. And so we're at the table. We've been at the table for some time now, now since June and, as I think you know, this is collective bargaining. And so both parties are at the table and both parties have to negotiate in good faith and it's a large contract with a number of articles. And what we're also negotiating, Jack, is a joint collective bargaining agreement so we're integrating this other collective bargaining agreement into the new joint collective bargaining agreement at the same time. So that's going to take some time and at this point I am really not in a place to say when that agreement might be concluded and what the economic impact or cost of that agreement might be. We're just really not in a position to be able to provide that perspective today, Jack.

[Jack Atkins:]

No that's understandable, Bill. I appreciate that additional color though. And then just if you could, you talked about the iPhone X but it certainly seems like just given the updated block hour guidance, which was increased this morning that you have raised your peak season expectations or at least that's the way I am taking it. So could you maybe talk through your peak season expectations today versus perhaps three months ago at the last time you updated the market and sort of what, how you're viewing air freight trends as we move into 2018?

[William Flynn:]

Sure. So I think if you look at what's available publicly and listen to quite a number of both our customers and their own kind of earnings calls and perspectives that they provide, I think the market firmly believes this is going to be a very strong peak season and we're seeing that as well. And, as you well know, Jack, the trends in this market have really started in July of '16 and we've just seen month after month after month of growth and even in our second quarter earnings call we were talking about a strong peak. And clearly that's what's playing out. That's what our customers are experiencing. That's what they're asking us to schedule for in terms of our operations that we provide or operate on behalf of them and in our own Charter market and so we're seeing great demand, strong volumes and yields that are in the open charter market just so you know we think about that, 550, $5.50 a kilo, in that kind of average range, which is very strong peak yields from my perspective. So how does that carry into 2018 is another question. We've had now going on 18 months of very, very strong growth nearing double-digits in many months and everything that we see today tells us to expect a very strong market in 2018. Will we grow double-digit every month for the next 18 months? I don't know because you're getting now into these year-over-year comparables, but we're still seeing very strong growth, high single-digit kind of growth and our customers are telling us to prepare for a strong 2018 and that's what we're doing.

[Jack Atkins:]

Okay great. Bill, thanks for that commentary and I'll look forward to talking to you soon.

[William Flynn:]

Yes we'll see you soon.

[Operator:]

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

[David Ross:]

Good morning, gentlemen.

[William Flynn:]

Good morning, Dave.

[David Ross:]

Can you just wrap up the labor issue real quick or hope to just talk near-term about the ruling that's expected later this month? What is the impact if the injunction is granted on the business and what would the impact be if the injunction is not granted as requested?

[William Flynn:]

Sure. So as you may know, David, the Railway Labor Act has a couple of essential obligations on the parties and so the primary obligation is for both parties, the union and the company to negotiate in good faith to reach a timely agreement on a new contract and while that's going on to insure that there's no disruptions to the operations and no harm or inconvenience to the public. That's broad terms the context, one of the key components of Railway Labor Act. And so as I mentioned earlier, we've seen and we've observed violations of the status quo, violations by the union of their obligations to maintain the status quo and not disrupt operations while we're in contract negotiations. And so that's the essence of the preliminary injunction that we've sought in court and those hearings were concluded last week and, as I or Spencer might have mentioned earlier in the call, we expect a ruling from the judge later this month. And so we're not going to predict which way the ruling is going to go. Whether with or without the ruling, our point is we expect to see a change in the behavior and observance of the status quo, status quo behavior on the behalf of the group going forward. With or without the preliminary injunction the law provides, the law and the regs provide a number of remedies that are available to us to compel or to seek to compel behavior that respects the status quo and that's what we're going to continue to do with our without the preliminary injunction.

[David Ross:]

Okay, that's helpful. And then just more about the business broadly speaking, you mentioned in your comments about a strategic focus on the Asia markets and the growth that's going to come over there. Where do you expect it to come from in terms of plane types? Do you -- are you talking to customers mainly about more deployment of the Dash 8s or moving into more 767s or other plane types over there?

[William Flynn:]

Sure, that's a great question. So as I mentioned in my comments in the last year we've signed up 10 new aircraft agreements or placements and that's a combination of ACMI and CMI and we've talked about them on the prior call but just to remind folks, it's the two aircraft with NCA. That's a CMI operation. The agreements now with Cathay and Asiana, Hong Kong Air Cargo and Suparna, which as Spencer knows used to be called Yangtze River Airlines. And the new aircraft at ACMI Aircraft that we've placed with DGF, DHL Global Forwarding, which is primary. It's around the world aircraft operations, but it's Asia focused. It's Asia centric in terms of the cargo. Those are all 747-400s and 747-8s so the long haul intercontinental, all of that are one or the other variant of the 747-8 while at the same time we're building our 767 fleet out as we continue to deploy for DHL. More broadly there's continued interest in growth and growth with Atlas and in growth across both aircraft types, both our 767 and our 747 and yes we have had disruptions and we've talked about that. But we've grown the company as well and were able to provide capture growth and provide services that our customers expect us to do.

[David Ross:]

Okay. But mainly within the 74s and the 76s, correct?

[William Flynn:]

Well, 7 -- so let me, so 74s are the last 10 that we talked about. The 76s have been mostly North America focused. I am not ruling out that there's an opportunity for 767 operations within Asia and there are -- we have ongoing discussions about our other aircraft types, which would be southern, would be in long-haul would certainly be the 777 and there are opportunities I believe there as well.

[David Ross:]

Excellent, thank you.

[William Flynn:]

Thanks, David.

[Operator:]

Your next question comes from the line of Kevin Sterling from Seaport Global Securities. Please go ahead.

[Kevin Sterling:]

Thank you. Good morning gentlemen.

[William Flynn:]

Hi, Kevin.

[Kevin Sterling:]

Hey, so Bill, part of the labor issue if I am not mistaken and maybe a way that you guys are remedying it, is it a matter of hiring more pilots so you don't have the overtime and the overwork issues and so how are you progressing in terms of I guess bringing on additional pilots for 2018?

[William Flynn:]

Yes thanks for the question, Kevin. I mean I think it's important to clarify. What I have been talking about so far is really the issues we have with the union and the union's campaign but at the end of the day we're not going to be successful. We're not going to achieve our results without our pilots. That's what we are. We're an airline and obviously we appreciate what our pilots do for our customers and what they do for the company and for us the end goal here is to get to a new contract and negotiate that in good faith. Now, more specifically to your questions, we have certainly been hiring pilots, hiring pilots to ramp up for the Amazon operations, hiring pilots to ramp up for the overall increase in operating tempo in the company and hiring pilots over the last several years as we brought a number of 747s into operation for the company. And so in part we've hired to ensure that with a lower reliance on open time, or overtime as we call it, we have the work force required to meet the demand of the peak period that we're in and that's reflected in the earnings framework that we provided today.

[Kevin Sterling:]

Okay, thanks. And maybe kind of a bigger picture question here, as you think about the opportunities on the horizon, you guys obviously added some new customers. You went through those opportunities but as you think about today and look out maybe the next couple years, are you getting calls from your existing customers looking for additional lift or is it new customers that are coming to you and being like hey, I'm thinking about ACMI or a CMI arrangement? If you could kind of maybe shed some light on some of the discussions you're having and maybe where you see the most opportunity going forward is it from new or existing customers or I'm sure it's a combination of both but are you getting maybe more calls from non-traditional ACMI leasing customers?

[William Flynn:]

Sure. Well, the answer is both, right? We've had good growth with our existing customers but I went through the quite a few customers over the few minutes ago that we've simply added and they are new and they are exciting customers as well to develop with all against the backdrop of this expansion that we're enjoying with Amazon. I make the comment we believe the future for air freight and express is bright and we really believe that and we believe that based on our own growth based on the market statistics and market growth information as we have and based on the conversations we're having with our customers, to your point, both new and existing. And so by way of example putting a dedicated ACMI aircraft to work for DGF's new and it's new on -- not new completely on two levels but it's new with DGF and it's really exciting to see another forward, another major global forwarder purchase in or contract in for dedicated fixed capacity, like we've been flying for Panalpina for a number of years. So the impact of ecommerce, the impact of this rising and dramatically increasing global middle class is about consumption and we think that's going to continue to favor and drive higher rates of growth in underlying demand for us and for our customers.

[Kevin Sterling:]

Yes, so I guess it seems like kind of this pendulum has swung, if you will from a few years ago it seemed like all everybody could talk about was the growth of belly capacity and how that may take away from dedicated main freighters but today now it seems like dedicated main freighters are back in vogue and it seems like a lot of that is due to the need for speed as supply chains speed up. Is that a fair assessment of how you see the market today?

[William Flynn:]

Yes that's a great assessment, Kevin. So not so long ago we were having discussions with investors and interested parties about the growth of belly capacity. All the triple 7s and 787s and now 350s, 8 350s coming into the market with higher kind of nominal capacity for cargo and was that really going to sunset the freighters and fundamentally change freight flows. And our view then was that it wasn't going to do that for a number of reasons and our view today is that it hasn't. Freight still moves about half in bellies and half in freighters, kind of law of large numbers. The major trade lanes out of Asia predominantly are freighters. That's not going to change. The nature of the new passenger aircraft call for more point-to-point flying. That's kind of the design logic of a 787. We're not going to go through a hub; we're going to go from Shion to Phoenix as opposed to Shion to Shanghai, Shanghai to San Francisco, San Francisco to Phoenix but that's not the way freight flows. So, yes, I agree with your point. Freighters are well established in the market. So are bellies. They're complementary and they're integrated. It's not one versus the other. It's that both are important and both make and important contribution to freight flows and both have their appropriate markets and both are going to be essential to the growth in air freight going forward but one is not going to disintermediate or push the other aside.

[Kevin Sterling:]

No got you, okay. Well, really appreciate your time today and the additional color provided. Thanks a lot.

[William Flynn:]

Thank you, Kevin. Operator Your next question comes from the line of Steve O'Hara from Sidoti & Company. Your line is open.

[Stephen O'Hara:]

Hi, good morning.

[William Flynn:]

Good morning, Steve.

[Stephen O'Hara:]

Hi, could you just talk about maybe just going back to the pilot issue, are you guys -- there's been a lot of talk about pilot shortages within the passenger airlines and I mean I am wondering your -- have you had any issues hiring pilots? Are you able to hire pilots to the rate you'd like and any issues with over staffing? I mean are you over staffed at the current time relative to the number of pilots you might need typically point in time?

[William Flynn:]

Yes that's a great question. So we've done quite a bit of hiring and so our total pilot work force has grown considerably over the last several years and that kind of makes sense because look at the amount of aircraft that we've added and the growth that we've had and, as we've talked about in ramping up for Amazon. For example, we were hiring in 2016 and into 2017 a large group, a large number of pilots to get them hired through our training and get them what's called operational experience so we could deploy each of the nine aircraft that we deploy or in the process of deploying here on top of the one that was already there in late '16 for Amazon. And we've got the number of pilots that are required for our work force. We've hired perhaps a bit more than we might have hired when we saw the behaviors in the work force that were singing a refusal or resistance to taking open time the way that our pilots did in the past. We made the managerial decision to hire a few more or to hire more than we would have, we might have otherwise because we can't risk the service to our customer, right? And so the right managerial decision from our perspective was increase the number of pilots that we might have otherwise ordered because we've got to take cognizance of what's going on in the day-to-day operations. So yes I would say we've hired some number of pilots, more than we might otherwise would have done, but I am sure you'll agree it was the right thing to do and we certainly believe it is.

[Stephen O'Hara:]

Okay. So, I mean, I guess in terms of the number of pilots that you're carrying right now, you probably have more than you carry under a normal operational times. I mean obviously you're increasing the number of 767 pilots I guess too but it does sound like you're carrying more than maybe you'd need under normal operational circumstances.

[William Flynn:]

Yes we're carrying some number more than we might have otherwise hired because of the behavior change that we've observed and the desire to have additional reserve crews to address some of the late notice or short notice sick and fatigue time that we've seen. But again, from my point of view, that's the right thing to do and to ensure the operations for our customers.

[Stephen O'Hara:]

Yes, I agree with you there. And then just on the maintenance, the maintenance obviously was much higher in the quarter. You explained what it was and were there any -- how much revenue did you lose or were there any other offsets? So I mean if maintenance had come in in-line with your expectations, would that drop directly to the bottom line or were there other offsets where you didn't fly as you didn't pay? I mean I guess I would think that the majority of that increase would just come away and hit the bottom line.

[Spencer Schwartz:]

Yes, Steve, you're right. The majority of that would generally flow right to the bottom-line. Maintenance as we talked about came in higher. If it would not have come in higher, if the types of issues that we saw did not happen and therefore maintenance expense was lower, yes we think the results that we talked about today would have been much higher.

[Stephen O'Hara:]

Okay. And then the other maybe I don't think you guys -- I mean typically you give your outlook I think in the fourth quarter but I mean directionally I mean maintenance is up it looks like 33% for the year or that's the projection and it sounds like there's a fair amount of (inaudible) the one-time in there leaking into fourth quarter. I mean directionally how do you think you look now for 2018?

[Spencer Schwartz:]

Well, as you say, we're not going to provide overall 2018 guidance for today but what we will say is that a couple things. With regard to maintenance, as I said before, we don't think this is the new normal. We're dedicating more resources. We're providing more oversight of our vendors and our network, as Bill talked about, we've placed a lot of incremental aircraft now with new customers and that nature of that flying is more predictable flying from more ad hoc flying. That should help normalize maintenance expenses as well. So maintenance expense typically we expect it to increase because we expect our volumes and growth and number of aircraft to increase as well. And then for 2018 we obviously have all of the new customer flying that Bill talked about. The Amazon relationship will be much more accretive in 2018 so those are the things that kind of offset that and we're looking forward, as Bill said. We're looking forward to growth in 2018.

[Stephen O'Hara:]

Okay, alright. Thank you very much.

[William Flynn:]

Thank you.

[Operator:]

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

[Scott Group:]

Hey, thanks. Morning guys.

[William Flynn:]

Good morning, Scott.

[Scott Group:]

Can you just clarify the hurricane impact in the quarter? Is that net of the benefit for the charter activity for the hurricane or were you guys just highlighting the cost impact?

[Spencer Schwartz:]

Sure, Scott, so it's there were numerous costs related to the hurricanes. We lost crew days. We had to cancel flights in South America. We had to cancel some flights, passenger flights out of Houston. We had some actual -- some damage to our facilities in Miami so anyway it was the cost of all of those things kind of put together and then net of taxes.

[Scott Group:]

And then do you have any rough idea of how much of that was offset by the increased charter activity you talked about for the hurricanes?

[Spencer Schwartz:]

Well, there really wasn't a lot of increased charter activity the hurricanes and a fair amount of the flying we did we contributed as opposed to charge revenue service for. Our aircraft were largely committed to the charter market to the peak and flying in Trans Pacific and elsewhere. We lost in addition in our charter operations. We have large charter operations in South America. And so a lot of that northbound lift which is perishable, fish and flowers and fresh fruit, needs to get discarded because it's delayed two or three days in shipping, it's lost shelf life so we had some Charter revenue there. As we talked about, we've operated some Charter revenue. We also lost a substantial amount of Charter revenue in the South American operations so I think that's a fair representation of the net to the Company.

[Scott Group:]

Okay, helpful. I think the military calendar kind of resets every year in fourth quarter. Can you just give us an update on kind of your team split and maybe your split within the team and what do you think this means for military block hours over the next 12 months?

[William Flynn:]

Yes well you're right, Scott. Of course it operates on a fiscal year so October 1 is the new fiscal year and we're in that fiscal year. From a team entitlement point of view, our team is up a few points, one point or so from prior year up to from 53% to about a 54% entitlement and then our kind of participation within that entitlement will be from a percentage point of view the same as we're coming into FY18 and beyond. And in terms of military activity, the AMC and -- as Air Mobility Command essentially kind of guided us to expect similar levels of activity in FY18 as we've experienced in FY17.

[Scott Group:]

Okay, very helpful. And if I could just ask one more, Bill. So obviously a strong air freight environment, do you think you're going to be acquiring more aircraft next year? Obviously if you don't acquired aircraft could be some really good free cash flow. If you do acquire aircraft obviously less so, so just how are you thinking about aircraft acquisition next year?

[William Flynn:]

Yes the last 747s or so that we've added into the fleet we've leased in and we talked about that I think in the Q2 call if not the Q1 call. So going forward if the opportunities are there if we have a solid business case for us to go out and bring more aircraft in, particularly in the large wide bodies, we would lease that aircraft in and that would be -- that decision is going to be backed and supported by a business case and our view is certainly want to match term with our perspective on opportunity in terms of the lease. On 67s…

[Scott Group:]

So that's a change in the -- go ahead, sorry.

[William Flynn:]

Go ahead, no, ask you question, sorry.

[Scott Group:]

That's a change in the way you guys are thinking about in terms of leasing instead of cash acquisitions of planes and is that right?

[William Flynn:]

Yes it is a bit of a change and we've talked about that. I mean the lease markets, the lease market for that type of aircraft is from our point of view as the lessee attractive and obviously mindful of leverage and balance sheet we see and we've acted on several opportunities to lease in aircraft rather than acquire the aircraft.

[Spencer Schwartz:]

It's cash flow positive today and tomorrow.

[Scott Group:]

Okay, thank you guys. Appreciate it.

[William Flynn:]

Thanks, Scott.

[Operator:]

Your next question comes from the line of David Campbell from Thompson, Davis & Company. Please go ahead.

[David Campbell:]

Yes, good morning everybody. Bill, you read I am sure what IATA said when they reported September's cargo tonnage up 9% for them versus previous months have been up 11%, 12% and they cited a slowdown, slowdown in air freight demand that might continue. We all know they don't carry all the world's air freight and they may be carrying less of it but so how do I from your discussion earlier today it didn't sound like you saw any slowdown but what do you think?

[William Flynn:]

Well, IATA has been predicting a slowdown in air freight for the last 18 months. I'll go back and read every -- I'm serious, David, I'll go back and read every chart that IATA has put out for the last 18 months and they'll end it with it's going to be a slowdown in air freight, so right? And so the other thing is that, as you pointed out, they don't capture all of the express volumes. They only capture member airlines volumes that choose to report and the growth in express if you look at all of the major express carriers that are publicly traded have talked about very high rates of growth. And then if it's 9% on September I think September last year was double-digit and I made a comment earlier that we've had 18 months or some number of months where the each month majority of those months have been double-digit and now we're starting to see a 9% or a 10% or an 8% on top of what was exceptional growth the year before. I still believe there's real growth in the market. Whether it's in heavy freight or express and certainly in ecommerce I think we're well positioned for it and I was a little facetious when I started my response. I just don't think IATA gets it right. I think they're missing too much or -- and I've had that conversation with IATA.

[David Campbell:]

Well, I agree. I just wanted to hear you say it because you know what's going on. I don't really know what's going on but you feel it. You see it; you see the demand I don't and thank you very much for your comments and appreciate your hard work. Thank you.

[William Flynn:]

Thank you, David.

[Operator:]

[Operator Instructions] Your next question comes from the line of Christopher Stathoulopoulos from SFG. Your line is open.

[Christopher Stathoulopoulos:]

Morning, thanks for taking my question. I just want to make sure I understand. You said that you have plans in place to address any pilot productivity shortfall independent of the expected ruling this month and that the additional staffing is reflecting your revised guidance?

[William Flynn:]

So yes the staffing's on board because in the first instance, Chris, we're talking about the fourth quarter framework, fourth quarter and full year framework and the level of operations that we have and we've been hiring all year. For some time now we've observed the refusal to take open time and overtime and we've been hiring. Our hiring model has considered that and one of the -- clearly as I talk about, one of the ways to address that component of activity is to hire some more, right? It's adjusting in a net, it's adjusting your straight time overtime mix and planning your work force and that's what we did. We've adjusted for more straight time than overtime and that's in the framework.

[Christopher Stathoulopoulos:]

Okay. And then just curious, there seems to be some debate around when the pilot slowdown began showing up with having gone through the court docs I think your study was saying that after the Section 6 notice was sent in early 2016 and the APA is saying actually it goes back several years and it's really because of the way that the footprint of the network has changed but if this had been going on for some time why wasn't an injunction or perhaps even a restraining order similar to what Spirit filed in 2Q of this year put in place earlier?

[William Flynn:]

So what we stated in our court documents that we believe the concerted actions by the union began literally on or about February of 2016 when we advised the union that in view of our acquisition of Southern Air that we would be negotiating under the terms of our contract for a new joint collective bargaining agreement and there are very specific terms in the contract about what happens when we acquire another airline. Coincidentally but importantly, the Southern contract has almost the identical language verbatim about what happens when there's a merger. And so we advised the union back in February if 2016 that we would be negotiating a joint collective bargaining agreement under the terms and conditions in the contract. It is indeed our assertion after that point in time that the union began its communications to get to concerted action those -- there's a lag between when communications start and when activity begins but that's what we presented in the court case and that's what's in our Exhibits and our testimony. That's our view.

[Christopher Stathoulopoulos:]

Okay. And what's been the customer response, particularly for service sensitive customers like Amazon and DHL, especially as we go into what's looking like it's shaping up to be a strong peak season?

[William Flynn:]

Well, all our customers are service sensitive and I am not saying that to be cute. I mean they're all service sensitive that's what we sell is we sell service. So we've kept our customers closely informed about -- and they know. They know exactly the operations and we have kept them closely informed about our discussions with the pilots, where we are in contract negotiations. Our view as to the different remedies and ultimately including the preliminary injunction and our customers on the other hand are also very savvy buyers of air freight services. I think they understand the Railway Labor Act very well. They understand the nature of airline industry kind of pattern bargaining, if you will, and they understand the status of where we are but they have their own business and they have their own promises to their customers and they expect us to deliver and to perform. And we are managing the negotiations with our pilots. We're managing the disruptions and we're delivering the service to our customers.

[Christopher Stathoulopoulos:]

I know you mentioned bringing on additional pilots to address the open time shortfall but if for whatever reason the labor situation drags on and the union decides to "work to the rules where they take a very literal approach to the procedures" what are some of the things you can do to address pilot productivity during 4Q and the peak season?

[William Flynn:]

I think that's almost getting into negotiations with the union and we've been negotiating on the call here, at least indirectly. I think the better way to think about it is the Railway Labor Act establishes clear obligations and duties as well as rights on the parties, both the company and the union. And I believe with law and the regulations in place and within that context we will be able to manage our business, serve our customers and take advantage of the growth that's out there available to us in the market.

[Christopher Stathoulopoulos:]

Okay. Last one, did you give the core commercial Charter yields ex fuel for the quarter?

[William Flynn:]

No those rates generally are all inclusive rates and include fuel but perhaps you're asking what about fuel and I can tell you that our Charter contracts have fuel surcharge mechanisms in them and we all saw that fuel went up in the last few days.

[Christopher Stathoulopoulos:]

Understood, okay.

[Spencer Schwartz:]

Chris, it's Spencer. I'll just add that if you exclude fuel in commercial cargo yields throughout 2017 have been ahead of 2016 yields all throughout the year.

[Christopher Stathoulopoulos:]

Okay. And last question, what about the trend in terms of customers flying above the ACMI block hour minimums? What was that number?

[Spencer Schwartz:]

Sure, so during the third quarter it was a very strong quarter. Our customers flew nearly 21% above their minimums. That compared with about 11% over for the third quarter of last year. Typically customers fly 5% to 7% above their minimum guarantees for the full year. Last year was a little bit above that. This year we expect them to be well above typical levels.

[Operator:]

Your last question comes from the line of Kevin Sterling from Seaport Global Securities. Please go ahead.

[Kevin Sterling:]

I was going to ask the question about the percent above minimum so that got answered.

[William Flynn:]

Thanks, Kevin.

[Operator:]

There are no further questions at this time. Atlas Air, I'll turn it back over to you.

[William Flynn:]

Well, thank you, Sarah. And once again, Spencer and I would like to thank all of you for your interest in our Company, Atlas Air, and we certainly appreciate the time that you shared with us today and your questions and we look forward to speaking again with you soon. Thank you, operator.

[Operator:]

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