Q2 2016 Earnings Call Transcript

Published: 3 Aug 2016

[Operator:]

Good morning. My name is Stephanie, and I will be your conference operator today. At this time, I'd like to welcome everyone to the Second Quarter 2016 Earnings Call for Atlas Air Worldwide. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session. [Operator Instructions] I would now like to turn the call over to Atlas Air. You may begin.

[Ed McGarvey:]

Thank you, Stephanie, and good morning everyone. I'm Ed McGarvey, Treasure for Atlas Air Worldwide. Welcome to our second quarter 2016 results conference call. Today's call will be hosted by Bill Flynn, Chief Executive Officer; and joining Bill is 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 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 2015 Form 10-K, as amended or supplemented by our subsequently filed SEC reports. Any references to non-GAAP measures are meant to provide meaningful insights and are reconciled with GAAP in today's press release and in the appendix that is attached to today's slides. You can also find these at atlasair.com. During our question-and-answer period today, we'd like to ask participants to limit themselves to one principal question and one follow-up question, so that we may accommodate as many participants as possible. After we've gone through the queue, we'll be happy to answer any additional questions as time permits. At this point, I'd like to draw your attention to slide three, and turn the call over to Bill Flynn.

[Bill Flynn:]

Thank you, Ed, and good morning everyone. The second quarter was one of the most important in the history of Atlas. We acquired Southern Air, and added two new operating platforms. And we agreed with Amazon to lease and 20 767 300s. We expect both Amazon and Southern Air to be meaningfully accretive to our longer-term earnings and cash flows. And we are executing our strategic plan for long-term business growth. We believe strongly in the future air freight, especially in the future of Express and e-commerce. Our long-term strategy is to build Atlas to make the most of that future through the quality and scale of our fleet, through the efficiency of our operations, and through the strength of our business relationships. The ongoing development of our strategic platform is expanding our business space, moving us more deeply into the faster growth Express and e-commerce markets, and driving long-term growth opportunities. In an otherwise challenging environment during the quarter, these historic transactions stand out. Our acquisition of Southern Air, in early April, and the addition of its Express-focused 777 and 737 CMI services generated immediate earnings accretion in the second quarter. Our quarterly earnings also reflected an increase in military cargo and passenger demand, but a slower pace in general commercial cargo. In addition, we incurred initial startup expenses for our new long-term 767 service for Amazon and its growing e-commerce business. We have secured all of the conversion slots and the vast majority of the aircraft required to support the 20 767s that we will lease and operate for Amazon by the end of 2018. We expect to place our first aircraft into service for Amazon soon in this quarter. And our relationship with Amazon includes an opportunity for additional business beyond these initial 20 aircraft. With that said, our second quarters were complicated, especially in U.S. GAAP terms. I would like Spencer to summarize the impact that Amazon Warrant accounting had on our reported earnings and EPS, and some additional details about our second quarter. After Spencer, I'll have some comments about our updated outlook, and then we'll be happy to take your questions. Spencer?

[Spencer Schwartz:]

Thanks, Bill, and hello everyone. I want to reiterate Bill's comments about the historic and strategic significance of our second quarter transactions. Our acquisition of Southern Air and our new long-term relationship with Amazon are truly transformative. We expect them to be meaningfully accretive to our earnings and cash flows over time. As Bill noted, our service for Amazon will begin soon. And as we've previously indicated, we expect those operations to become accretive starting in 2017, and scale up to full service and full accretive benefits through 2018. Turning to slide four, reported results in the second quarter reflected the warrants issued to Amazon as part of the value-creation inherent in our agreements. As required by U.S. GAAP, we recorded a liability related to the warrants divested at the commencement of the agreement. As we did during the second quarter, that liability needs to be re-measured at fair value each period until they are exercised or they expire in May 2021. Any mark-to-market adjustments are shown as unrealized gains or losses in earnings. During the quarter, we reported an unrealized gain of $26.5 million, and recorded a tax expense of $8.7 million. For purposes of calculating fully diluted EPS under U.S. GAAP, the warrants were treated as if they were exercised upon their issuance. Accordingly, the unrealized gain was disregarded in calculating diluted EPS, while the tax expense remained in the calculation. And as you've seen in our press release today, this generated a reported loss of $0.26 per diluted share on income from continuing operations of $20.9 million in the second quarter. Turning to slide five, which summarizes both our reported and adjusted results, our adjusted income from continuing operations net of taxes totaled $20.2 million or $0.80 per share in the second quarter. On a comparative basis, our reported and adjusted results benefited from the immediate contribution generated to Southern Air. We also saw an increase in military cargo and passenger demand, but that was accompanied by lower general commercial cargo activity, and increase in crew costs associated with our fleet growth initiatives, and the initial start of expenses for our new Amazon service. In addition to the impact of warrant accounting, our reported results reflected the impact of transaction-related expenses. Reported earnings in the second quarter also included an effective income tax rate of 26.4%. That mainly reflected our continued non-U.S. reinvestment of the net earnings of certain foreign subsidiaries, as well as a reduction in state taxes resulting from changes in our flying. Based on our current tax framework, we do not expect to pay any significant federal income tax until 2025 or later. Looking at slide six, higher ACMI revenues during the quarter reflected an increase of block hour volumes, partially offset by a lower blended average rate per block hour. Both affects stem from an increase in CMI flying in 2016, particularly following our acquisition of Southern Air, and from 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 for block hour, increased to 27.6 aircraft during the quarter, compared with 16 in the second quarter of 2015 or an increase of 11.6. 747 cargo equivalents, which do include a component for aircraft ownership in the block hour rate, rose to 21.3 aircraft from 20.4 in the year-ago period. Revenues in the second quarter was primarily driven by the impact of lower fuel prices, as well as the impact of higher rates related to the U.S. west coast port disruption in 2015. This impact was partially offset by the temporary redeployment of 747-8 aircraft from the ACMI segment. Reflecting our strengths, it's important to note that, excluding fuel, revenue per block hour and charter increased more than 5% compared with the second quarter of last year. In dry leasing, revenues were affected by a decrease in revenue for maintenance payments related to the scheduled return of passenger aircraft partially offset by revenue from the placement of two 767 freighter aircraft in December of 2015 and February of 2016. Moving to slide seven, segment contribution totaled $77 million in the second quarter compared with $87 million in the second quarter of 2015. ACMI segments results reflected an increase in crew costs of the additional pilots we hired in connection with our fleet growth initiatives, including an anticipation of our new service for Amazon, as well as more 767 flying for DHL. They also reflected the temporary redeployment of 747-8 aircraft to charter, and an increase in heavy maintenance expense, partially offsetting these items with additional contribution provided by Southern Air. Charter contribution was relatively unchanged on a year-over-year basis. The impact of the U.S. West coast port disruption in 2015, and an increase in crew costs connected with our fleet initiatives were partially offset by higher military cargo and passenger demand, as well as the temporary redeployment of 747-8 aircraft to charter. As with dry leasing revenues, dry leasing contribution during the quarter was affected by a decrease in revenue from maintenance payments related to the scheduled return of aircraft. This was partially offset by revenue from the placement of two 767 freighter aircraft. Turning to slide eight, and our balance sheet, we ended the first quarter of 2016 with cash, including cash equivalents, restricted cash, and short-term investments totaling $170 million that compare with $444 million at the end of 2015. Our cash position at June 30 reflected cash use for investing and financing activities partially offset by cash provided by operating activities. Net cash used for investing activities during the first half of the year primarily related to our acquisition of Southern Air, core capital expenditures, and purchase deposits and payments for flight equipment and conversion slots, including the acquisition of 767-300 aircraft to be converted to freighter configuration for our service to Amazon. Net cash used for financing activities included $91 million of outflows for debt payments partially offset by $85 million of proceeds from debt issuance. Moving to slide nine, we remain committed to maintaining a strong balance sheet while growing our fleet. As anticipated, our net leverage ratio was 5.4 times at the end of the second quarter, primarily reflecting the cash payments we made for the acquisition of Southern Air and for the aircraft payments and conversion deposits related to Amazon. Looking forward, we expect our leverage ratio to be in the upper-four-times range at the end of 2016 as we ramp up our Amazon service. After that, as the aircraft are placed in service, and we begin to generate substantial EBITDA, we expect our net leverage ratio to decline over time. Now, I would like to turn it back to Bill.

[Bill Flynn:]

Thank you, Spencer. Slide 10 highlights our updated framework for 2016. It begins with our first-half adjusted EPS of $1.11. As we commence our new service for Amazon, we will incur an EPS impact for necessary startup expenses and the issuance of warrants. As a result, we currently expect that our adjusted EPS in 2016 will be lower than our adjusted EPS in 2015 by a high single-digit percentage. Our view also reflects anticipated demand for our services and aircrafts, the benefits we expect from our fleet initiatives and debt refinancings in 2015, and accretion from our acquisition of Southern Air. It also reflects our decision to sell a subsidiary that we acquired in connection with our acquisition of Southern Air, and whose results have been presented as a discontinued operation. Looking at it from another perspective, excluding the anticipated impact from Amazon startup expenses, and the accretion from Southern Air's operations on our EPS in 2016, as well as West Coast port congestion-related earnings in 2015, we anticipate that adjusted EPS in our base business will grow by a low-to-mid single-digit percentage in 2016. Given the inherent seasonality of air freight demand, we expect the majority of our earnings this year to be generated in the second half. Unlike results in 2015, which benefited from port congestion in the first-half, we anticipate that results in 2016 will be more reflective of historical demand patterns, with slightly more than three-quarters of our adjusted EPS in the second-half of the year. In addition, we expect earnings per share in the current quarter to be approximately 20% to 25% of our full year adjusted EPS. Looking to the fourth quarter, we expect adjusted EPS to benefit from substantially lower maintenance expense, compared with the fourth quarter of 2015, our acquisition of Southern Air in April, the addition of our 10th 747-8, which enter roughly midway through the fourth quarter of 2015, and the addition of two converted 767 freighters to our Dry Leasing portfolio in December of 2015 and February of 2016, which we are also operating on a CMI basis. For the full year, we continue to expect that block hour volumes, including Southern Air will increase about 20% compared with 2015. It was about 75% of the total in ACMI and the balance in charter. Including Southern Air, we anticipate that aircraft maintenance expense will total about $200 million this year. In addition, depreciation and amortization expense should be approximately $145 million, while core capital expenditures which are mainly for spare parts roughly should total approximately $62 million to $67 million for the year. Moving to slide 11, I would like to underscore the following. The second quarter was one of the most important in the history of Atlas. We acquired Southern Air and added its 777 and 737 operating platforms and we agreed with Amazon to lease and operate 27 767 300s. We expect both Amazon and Southern Air to be meaningful drivers of longer term earnings in cash flows, and we are executing our strategic plan to long-term business growth. We believe strongly in the future of air freight, especially in the future of the faster Express and e-commerce markets, and our long-term strategy is to build out just to make the most of that future. Led by strength of our brand and our global market leadership, we are uniquely situated to leverage our core competencies, diversify our business mix, and develop new organizational capabilities to drive business growth. With that, operator, may we have the first question please?

[Operator:]

Thank you [Operator Instructions] Your first question comes from the line of John Barnes with RBC Capital Markets. Your line is open.

[John Barnes:]

Hi, good morning. Thanks for taking my question. Let's see, first, I guess at the Analyst meeting you were guiding in more of the earnings down mid single-digits, you know, I am just curious can you elaborate on what changed between, I guess, the Analyst meeting and why that guidance would have changed, and maybe what percentage of that is increased start-up cost versus what percentage of it would be the result of a slower environment that you are dealing with? Thanks.

[Spencer Schwartz:]

Hi, John, it's Spencer. Yes, to answer your question, the change in the guidance is really twofold. It's both things that you mentioned. It's a combination of softer commercial cargo environment then we were experiencing. And so, as a result of that, we lowered guidance a bit. And then the start-up expenses for Amazon have been coming in a little bit higher than we had anticipated. And so, the result of both of those things put together is the reason why we changed the guidance. Those are the main two drivers, you had them right.

[John Barnes:]

But I mean, is it more heavily weighted to one of the other, or is it pretty 50-50?

[Spencer Schwartz:]

It's pretty even.

[John Barnes:]

Okay, all right. And then my second question is, you mentioned the 747-8 moving over to charter; one, is that any different from what you talked about at the Analyst meeting, and if so, why? And then, maybe just to help us out a little bit, between now and the end of the year, especially just given how weighted the earnings are to 4Q this year. Can you talk a little bit about how the fleet is dispersed among ACMI and charter as the rest of the year progresses, just so we have some idea in -- was there anything else that would lead to a shift around in those numbers?

[Bill Flynn:]

Yes. Good morning, John. This is Bill. A couple of things; so stepping back, I know we are just here in August, and looking forward our sense is that there will be a peak in air freight Express and e-commerce this year, and that's certainly part of our guidance or framework. We are looking forward to a very strong fourth quarter led by not only the combination of the demand and the amount of capacity that we have sold at very attractive margins already into the fourth quarter, but substantially lower maintenance expenses as well as we've talked about in the press release and in our call. Express and e-commerce are performing very well. Southern has met its expectations in terms of accretion for us as you know they sent to every one customer, DHL and to find that network for DHL, and they reported good results for themselves. So as we look into the remaining part of the year that Dash 8 that's in the Dash 8 charter is what we expected, that's not different. Ultimately our Dash 8s will be in ACMI service. Coming into the second half we're not troubled by having the Dash 8's in the charter segment. They produce very good earnings in that segment. So we think that's fine. I think we have a track record of being able to place our aircraft, and sometimes customers do have changes in their business model and may return an aircraft to us, but we have a good track record of putting that aircraft back out into the market.

[John Barnes:]

So, that aircraft is as expected?

[Bill Flynn:]

As expected.

[John Barnes:]

Okay, all right, all right, very good. All right, again thanks for taking the questions, I appreciate it.

[Bill Flynn:]

Thank you, John.

[Spencer Schwartz:]

Thank you, John.

[Operator:]

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

[Scott Group:]

Hey, thanks. Good morning guys. So kind of want to stop on kind of both of those last questions. So the guidance for the break-up for third and fourth quarter was a little confusing to me. I just want to make sure I have the right - are you guys basically guiding to earnings of about a dollar in the third quarter and about, call it $2.40 in the fourth quarter, is that right?

[Spencer Schwartz:]

Scott, we're going to leave that math to you, the guidance that we provided. We don't provide pinpoint guidance, but you can calculate based on the framework that we provided. So we're going to leave that math to you. It certainly leads one to arrange, and then we'll leave you to determine where in that range you come up with. But I will comment just quickly on this. The fourth quarter that leads pretty significant earnings for that was in the fourth quarter and so Bill talked about it earlier but I'll just sort of reiterate. Heavy maintenance should be significantly lower the fourth quarter of this year versus the prior year. We don't expect heavy maintenance events like we saw in the fourth quarter of 2015. We also have Southern and Southern's immediately creative contributions this year. We have the tenth Dash 8 which we had for just a partial portion of the fourth quarter last year and so on. Enjoy that for the full fourth quarter and then we have the two incremental DHL 767-300, and so we'll enjoy that those two this year as well. So I wasn't exactly your question but I wanted to point that out because it was a key part of the guidance framework as well.

[Scott Group:]

Yes, no I certainly get some of the year over year benefits particularly with maintenance. I guess we've just never seen such a significant ramp in earnings from third quarter to fourth quarter and I just want to understand kind of what changes and maybe can you clarify, is Amazon, are there heavy startup costs in third quarter and you think fourth quarter is going to be very profitable or is there some other explanation for the just that big earnings ramp 3Q to 4Q that we haven't seen before?

[Spencer Schwartz:]

No, I think it's what I just mentioned, Scott. I think you're seeing a big ramp in the fourth quarter because the items that I just mentioned, heavy maintenance will be significantly lower. Our expectation is that it will be significantly lower than it was. You can see it, we provide that, there's a chart that we provide on maintenance, you can look at what we expect for the fourth quarter this year about $20 million lower than the prior year. So that's fairly significant so that's a big, big driver of that. And then again we have the contribution from Southern, the contribution from the Dash 8 for the full fourth quarter and the contribution from the incremental 2763s that we placed with DHL. So those are the big drivers.

[Scott Group:]

Okay and then I guess can you just give a little bit more color on this temporary redeployment of the Dash 8 into charter and it sounds like a customer returned a plane but can you just give a little bit more color on kind of who the customer was and when you expect to return that to ACMI?

[Bill Flynn:]

Yes, this is Bill, Scott. So we do have a Dash 8 in charter that's as expected and as I talked to John just a moment ago we don't do customer specifics as you know but the other point I made from time to time in our heavy freight ACMI market, customers do change their fleet, do align their businesses based on the demand that they're experiencing and if we get an aircraft back I think we, as I said earlier, we have a good track record of showing we're able to redeploy that aircraft back into ACMI when it also makes sense for us, because given the charter environment that we're in, given the demand that we're seeing as we come into the fourth quarter I think we will get very good earnings out of it, Dash 8 assets in charter as we're coming into second half of this year and look for placement as we move beyond that.

[Scott Group:]

And can you at least clarify, is this a customer that has other Dash 8s. Do you think this is a change in their strategy or just kind of a one off and just returning one of the planes?

[Spencer Schwartz:]

So I'll answer slightly differently and that's what we wanted to talk about it as I did in my comments. If you think of who Atlas is today, not so long ago we had basically two segments. We had ACMI and we had a charter segment. That was going back even further is you know very dependent on military more than anything else. As we moved forward we've got our ACMI business, we have a very substantial fleet of CMI which is all new growth for us. It's not asset intensive that gives us scale and scope and fleet type. We've built out now with the Southern acquisition a 36 aircraft platform flying for DHL with growth opportunities. We're starting our 20 aircraft growth platform with Amazon, a solid charter business and then a dry lease business that has kind of an annuity revenue stream, an earning stream to it. And I know it's a bit of a longwinded answer, but I wanted to kind of compare and contrast the platform we've built. So, if we get an aircraft back and that's where I was leading to, if we get an aircraft back in ACMI then we have the ability to deploy as makes sense. I think charter is the right place for the aircraft now. I think we will post season look to place in ACMI and I believe we will. But the movement now is we move into 70 plus operating aircrafts, we're going to 90 operating aircrafts. The movement of one or another aircraft is much lesser than impact on our operations and on our business, if that makes sense.

[Scott Group:]

Yes, no that's fair. Okay. Thank you, guys.

[Spencer Schwartz:]

Thanks, Scott.

[Bill Flynn:]

Thank you, Scott.

[Operator:]

Your next question comes from the line of Robert Labick with CJS Securities. Your line is open.

[Chris Moore:]

Great, thanks. It's Chris Moore for Robert. Just a question, the IATA, the data came out suggesting a nice stick up in demand for June, but still faster incremental capacity growth. Can you talk a little bit about the load factors that your load factors relative to the IATA data that you discussed on the Analyst Day?

[Bill Flynn:]

So we'll update that slide from time to time, but one -- there's not a substantial difference really in the one month or so since we've looked at that data. IATA did talk about an improving June, and so that's good. The other thing we talked about in the earnings; sorry; in Investor Day, IATA doesn't capture a lot of data, it doesn't capture for example the Express operators and Deutsche Post DHL for example issued their earnings today. And the DHL Express had an 8% increase in volume in the second quarter year-over-year. That's not captured in IATA, but it's absolutely captured in our operations because we operate a large part of that. And to the extent e-commerce is moving on the Express operators, that doesn't get captured either. And finally the charter market doesn't get captured in IATA. IATA basically captures scheduled services. So we're glad to see the increase in June that IATA report. We're very much positioned in that plus other markets. And that's why I was talking about our sense is there's going to be a peak this period. I don't think there's one in ocean but I certainly believe there's one in air, Express and e-commerce.

[Chris Moore:]

Got you, that's helpful. Thanks.

[Operator:]

Your next question comes from the line of Steve O'Hara with Sidoti. Your line is open.

[Steve O'Hara:]

Yes, hi, good morning.

[Bill Flynn:]

Good morning, Steve.

[Steve O'Hara:]

Good morning. I wasn't sure -- I know it's been kind of bantered about a little bit, but I think you have two Dash 8s now in charter, is that right?

[Bill Flynn:]

Yes.

[Steve O'Hara:]

Okay. And was there a hift from the customer taking 747-400 and returning Dash 8? Is that what happened?

[Bill Flynn:]

No, we had a return of a Dash 8 as we were talking about.

[Steve O'Hara:]

Okay, so there was another 400 added into by a separate customer into –

[Bill Flynn:]

In the second quarter, yes.

[Steve O'Hara:]

Okay, okay. And just, I mean in terms of the 747s and that program. I mean any thoughts on maybe the eventual end of that program and what that does for the aircraft and how long maybe typically Boeing or somebody else would support the aircraft?

[Bill Flynn:]

So a couple of things; we've all seen the different commentary that Boeing has made over the last several weeks and at some point the 747 production is going to stop. But if we step back and look at the aircraft that are out there for large wide body intercontinental flying. There's two choices, there's a 74 both the 400 and the Dash 8 and the 777. In one of our prior calls we talked about the lower fuel prices or what maybe persistently low fuel prices have added, got a new competitive life to the 747-400. And as you look at global freight closes, one considers global freight closing what is moving there is clearly demand for a freighter with nose to our front loading capability, to take oversized pieces and to serve those markets. So in terms of that of our 747 platform, I believe there's good long term useful life for the 747. There are markets that it serves. It's very effective and very well. The 777 typically is a very good freighter. It serves different markets and it serves different routes. And with Southern we're agnostic as to which freighter but we think both have a long term position in the market place. Boeing has obligations to serve that fleet, to support that fleet over time, nothing spinning out I suspect that for example the next Air Force One or VC-25 is going to be a 747 from Boeing, don't know that but that that it could be and in that context there's further reason for Boeing to support the airframe for some time to come.

[Steve O'Hara:]

Okay, thank you. And then just I guess I was a little surprised on the improved charter of rate per block hour excluding fuel. Is that -- was that kind of better markets or general market strength or it seems like capacity seems to be on the rise. I'm just wondering if you get a little more color there, thank you.

[Spencer Schwartz:]

Sure, Steve, it's Spencer. It really is an outstanding result and if you look at our charter contribution it's essentially flat and last year it had the benefit of the West Coast port disruption for some portion of the second quarter, the beginning of it. So really an overall great result. Your question is more about the yields and so it's really if you strip out fuel as you said and as we talk about, our net revenue per block hour is up. And again that includes the benefit that the prior year had a West Coast port disruption. It's driven by a few things. One, as Bill has talked about we are able to take advantage of where opportunities are. We've taken advantage of having the Dash 8 included in charter and so we're operating that in South America and doing quite well with it. It's a terrific aircraft to operate there. And so we've benefited from that. We've also we talked about higher demand from the military so we've seen a pick-up in our demand for AMC cargo as well as passenger and that's included in the charter segment. Those are the biggest drivers I think supporting that. So it's really our opportunity to kind of handpick the best routes and rates that we can get. It's the Dash 8 thing in charter and it's the incremental military business.

[Steve O'Hara:]

Okay sounds like there's a few more cash shipments due to Iran. So maybe get a portion of that too. Thanks appreciate it.

[Spencer Schwartz:]

Not authorized to fly to Iran yet.

[Steve O'Hara:]

Yes, no, no I'm sure. Thanks.

[Bill Flynn:]

Thanks, Steve.

[Operator:]

[Operator Instructions] Your next question comes from the line of Jack Atkins with Stephens. Your line is open.

[Jack Atkins:]

Thanks guys, good morning, and I appreciate your time.

[Bill Flynn:]

Good morning.

[Jack Atkins:]

So I guess, Spencer, just to go back to the question around the second half guidance for a moment, not to sort of harp on that, but sort of we read between the lines the fourth quarter guidance implies roughly call it low 50s percentage of the full year in the fourth quarter. Historically, it's about called high 30s, understand your point on the maintenance on the year over year basis but again over that same period of time maintenance, fourth quarter maintenance is typically about 22% of the full year maintenance span and this year is 21%. So what accounts for the rest of the difference is guess, in terms of why the fourth quarter is so heavily weighted?

[Spencer Schwartz:]

Yes, Jack and as I talked to Scott about earlier you have the incremental contributions from Southern that we haven't seen in the past. We have a Dash 8 that we'll be operating our tenth Dash 8 and we'll enjoy that for the full quarter. With the incremental two 767-300 with DHL and so those really do drive it. Maintenance I know you're discounting it a bit, Jack, but it's huge, it's over $20 million difference versus 2015.

[Jack Atkins:]

Sure again Spencer I'm not necessarily talking about year over year I'm just talking about normal seasonality and that's why it really stands out to folks of how seasonally the fourth quarter is typically about like high 30s in the full year and this year is below 50s. I think that's what we're trying to reconcile.

[Spencer Schwartz:]

Yes, no last year was very different but if you look at this previous years 2014 the second half of the year was about 71%. 2013 second half of the year was about 30%. And the last year was different of course because the West Coast port impact. But this year is starting to feel a little bit more typical but clearly heavily weighted in the fourth quarter for the reasons that we talked about.

[Jack Atkins:]

Okay. One quick housekeeping item, then I'd like to ask a question about the Dash 8s. But Spencer, the tax rate for the quarter was lower than guidance and then I think you're still going through a higher tax rate in the back half of the year, can you explain the variance versus the guide in the second quarter?

[Spencer Schwartz:]

Yes, during the second quarter we had an adjustment related to state taxes and so that drove the rate down in the second quarter. For the full year, we still expect the effective rate to be somewhere around 31%.

[Jack Atkins:]

Okay. And then question on the Dash 8s. We now have two in charter. I understand you answered several questions about this but I was sort of curious, have the economics around the Dash 8 changed given the lower fuel price rolled it through the Dash 400 and sort of why, I don't understand why that number in terms of Dash 8s in the charter is creeping up. I would think you'd want those expensive assets placed under a long term lease. So just any sort of comments just around the economic viability of the Dash 8 in a lower fuel environment, that'd be helpful.

[Bill Flynn:]

So, Jack, just a couple of things; we believe the Dash 8 is a very viable aircraft we're meeting or exceeding the returns that we expected it to generate on that aircraft from our business case. If you think about some of the deployments we're serving today particularly for someone like DHL when it's slot constrained environments like Hong Kong and Shanghai having a 138 times available to depart when you have one slot versus a smaller aircraft type, the aircraft works very well. We had one in charter, that's right, it has performed very well for us in charter and we spent quite a bit of time on the call already talking about the charter results we've been able to drive so far this year in what is not a great market overall. The lower operating costs for the Dash 8 certainly contributed to that. The one Dash 8 is deployed in South America in our charter operations there. We have a very substantial commanding market share in the Latin America trade with their high utilizations aren't around for business given the nature of that trade. The second Dash 8 is returned from a customer as we talked about. Our choice, our preference is to put it into charter now, take advantage of the second half that we foresee -- the peak that we foresee and the demand we see for that aircraft. And I'm very confident we will place that into ACMI, and we will have the opportunity to place the tent into ACMI if that's the better disposition of that asset. But the asset is performing very well from a returns point of view.

[Jack Atkins:]

Okay, thank you for the comment.

[Bill Flynn:]

Thank you, Jack.

[Operator:]

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

[Scott Group:]

Hi guys, I appreciate the follow-up. So, just wanted to ask again about the future of the 747 program, so, if we get -- I understand your point about low fuel and we can keep the current assets longer, if we got to the point of wanting to grow the wide body fleet again, do you think you're more likely to do that with used 400s or dash 8s or do you think you're more likely to move to the 777? And then kind of just separately on this topic, does the change from Boeing, if they stop production, does that have any impact on the way you guys account for fair value of the dash 8?

[Bill Flynn:]

I'll let Spencer answer the fair value part of the question first, and I'll come back to the market question I think you asked.

[Spencer Schwartz:]

Sure.

[Bill Flynn:]

From a valuation…

[Spencer Schwartz:]

Yes, from the value of the assets, no. The way the accounting works we have to look at cash flows from the aircraft over time, and the expected cash flows from the aircraft far, far exceed the value on the books, and so not an issue from an impairment standpoint. There's also a potential scarcity value. These aircraft are excellent aircraft, and they're very young. And customers love them. So, yes, a customer may have returned one, but as Bill said, we're very confident they'll be placed back in ACMI. So these are terrific aircraft. And if Boeing is not producing them, and so if that were to happen there could be tremendous scarcity value for those who have the aircraft, so they could become more valuable, and not less valuable.

[Bill Flynn:]

So to answer your question on equipment types, the 777 long-haul point-to-point intercontinental flying, such as the way, for example, DHL and FedEx have that deployed, that's an excellent aircraft, because you can get the range. The type of traffic that's being carried is lighter-weight traffic. So, more cube-oriented than weight-oriented, and it works very well in a schedule, such as Hong Kong, Cincinnati, Leipzig, Bahrain, Hong Kong, that' a great use of the 777. But the 747, whether it's a 400 or a dash 8 works very well in the -- kind of the stack yields networks; Hong Kong, Shanghai, Jinsheng [ph], Anchorage, Cincinnati, and return, because you're on-boarding and offloading cargo at each point along the way, and so the through yield of that aircraft is an exceptional yield compared to just point-to-point flying. So kind of horses for courses and that's where you see someone, like DHL, committed to a fleet of both 747 and 777s. The other express operators, UPS is going with the 74s and FedEx is going with 777, and they have their reasons for doing that. Fleet growth, so fleet growth will depend really on the customer and the market segment or sub-segment of the market that we seek to serve. Can in envision us in more 777s? Yes. Can we envision ourselves in more 747-8s? Yes. Do I think our future is with old -- if expanding our fleet by going into eight 747s? No. I think the point on our 747-400 fleet is with this somewhat persistent lower fuel price we are going to get the full value of the investments we've made in those aircraft, back in 1998, or so, when the company first acquired those factory-built freighters.

[Scott Group:]

Okay. Thank you, guys.

[Bill Flynn:]

Thank you, Scott.

[Spencer Schwartz:]

Thanks, Scott.

[Operator:]

I'm showing that that was our last question. I turn the call back over to the presenters.

[Bill Flynn:]

Okay, thank you very much, Stephanie. So Spencer and I would like to thank everyone on the call today for your interest in Atlas Air Worldwide. We very much appreciate your sharing your time with us today, and we look forward to speaking with you soon. Thank you everyone.

[Operator:]

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