Q2 2015 Earnings Call Transcript

Published: 30 Jul 2015

[Operator:]

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

[Ed McGarvey:]

Thank you, Shannon, and good morning everyone. I am Ed McGarvey, Vice President and Treasurer for Atlas Air Worldwide. Welcome to our second quarter 2015 results conference call. Today’s call will be hosted by Bill Flynn, our President and Chief Executive Officer. Joining Bill is Spencer Schwartz, our Executive Vice President and Chief Financial Officer. As a reminder, today’s call is complemented by a slide presentation that accompanies our remarks. If you have not already downloaded and printed a copy of our press release and slides, you may do so from our Web site at atlasair.com. You may find the slides by clicking on the link to Presentations in the Investor Information section of the Web site. As indicated on Slide 2, we'd like to remind you that our discussion about the company's performance today include 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 the risk factors related to our business, please refer to our 2014 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 on our Web site 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 that you may have as time permits. At this point, I’d like to turn the call over to Bill Flynn.

[Bill Flynn:]

Thank you Ed and good morning everyone, and thank you for joining us today. Beginning with Slide 3, we had a strong first half of 2015 in line with our earnings framework and our outlook for a strong year. We're seeing good demand for our aircraft and services as we have entered the second half as many of our customers are outperforming the overall market. We are gathering additional insight into second half demand, yield, and military requirements, and we continue to expect our full year results to increase significantly compared with 2014. Adjusted EPS in the second quarter totaled $1.17 nearly doubled the $0.63 we reported in the second quarter of last year. Earnings in the second quarter were driven by contribution and margin strength in ACMI, Charter and Dry Leasing. Responding to market demand and requirements, we are implementing several previously announced fleet initiatives that will enhance our ACMI, Charter and Dry Leasing businesses. These are incorporated in our outlook for the year and they include placing an additional 747-400 freighter in ACMI service at the start of the third quarter and acquiring the new 757-8 freighter with delivery scheduled for November. To meet additional Charter demand, we have reactivated and owned encumbered 757-400 converted freighter and we've entered into short-term operating lease for a second converted freighter on very favorable terms. In addition, we're expanding our Titan Dry Leasing portfolio to include two 767-300 aircraft. These are being converted to freighter configuration with delivery scheduled in the fourth quarter. More importantly these aircrafts have already been leased on a long-term basis commencing at that time. Our approach to business growth and balance sheet structure remains disciplined and we are managing our fleet accordingly. We are utilizing the proceeds from our issuance of low coupon convertible notes in June to refinance higher cost debt and to enhance our operating capabilities. Spencer will provide you with more on this in his comments. Moving on Slide 4, illustrates the continuing positive direction of airfreight demand. Shanghai's PACTL terminal for example posted 9.3% tonnage growth in the second quarter and 10.9% growth in the first half of 2015. IATA has also reported that international airfreight traffic grew at 4.5% in the first five months of 2015. IATA's midyear 2015 forecast expects that economic growth and trade will accelerate in the second half of the year. And international freight traffic measured on a freight ton kilometer basis will grow at a 6% rate this year after growing at the same rate in 2014. On the supply side capacity has exceeded demand so far in 2015. But the additions have been measured and disciplined. And while gross yield are lower due to reduced fuel prices net commercial cargo yields in U.S. dollars excluding fuel are generally steady to slightly better than last year. Slide five focuses on our framework for 2015. We are encouraged by a strong first half performance. We are seeing good demand for our aircraft and services and we continue to anticipate significant growth in adjusted EPS this year. On a sequential basis, we expect adjusted earnings per share in the third quarter of 2015 to be slightly better than our second quarter earnings, with further improvement in the fourth quarter. Taking a strong first half earnings into account. We continue to expect approximately 55% of our earnings to occur in the second half. In addition, we anticipate that our block hour volumes this year will increase approximately 10% compared with 2014 with more than 70% of the total in ACMI and the balance in charter. Our ACMI outlook reflects expected growth in both 747 freighter operation as well as CMI fly. Our charter outlook reflects the strong presence we have in the global charter market and military demand that is holding up well compared with 2014 levels. In dry leasing our portfolio is expected to include the 2767 converted freighters that I mentioned earlier. Given the flying levels that we anticipate, we continue to expect that aircraft maintenance expense will total approximately 190 million. Depreciation expense for the year should be approximately 125 million by our core capital expenditures which are mainly for spare parts to our fleet are expected to total approximately $45 million for the year. Expenditures for aircraft and engines including our new dash 8 the 767s we are converting and several engines should total about $240 million. In addition, our effective income tax rate should be approximately 30%. Reflecting our current framework we do not expect to pay any significant federal income tax until 2020 or later. I'll pause here and ask Spencer to provide you with some additional perspective on our second quarter. After Spencer I'll provide a few more thoughts and then will be happy to take your questions.

[Spencer Schwartz:]

Thank you, Bill, and hello, everyone. Slide 6, highlights our second quarter results. Our adjusted net income totaled $29.4 million or $1.17 per share. On a reported basis, net income totaled $28.4 million or $1.13 per share. Results in the second quarter benefited from our diverse business mix and were driven by improved contributions and margins in ACMI, charter and dry leasing. During the quarter, we generated free cash flow of more than $68 million or $2.72 per share compared with $59 million or $2.34 per share last year. That brought free cash flow for the first six months of 2015 to $149 million or $5.92 per share a nice increase from $96 million or $3.81 per share in the first half of 2014. Reported results in the second quarter also included an effective income tax rate of 31%. And that reflects our continued reinvestment of net earnings of certain foreign subsidiaries outside of the United States. Looking at slide seven, higher operating revenues in the second quarter were primarily due to increases in both ACMI and charter segment flying. ACMI revenues during the quarter benefitted from an increased in block hour volumes driven by the start up of four additional 767 CMI aircraft and improvements in 747 cargo aircraft utilization. These were partly offset by a reduction in revenue per block hour that included a mix effect related to an increase in CMI flying in 2015. Average CMI aircraft equivalents rose 30% to 16 aircraft during the quarter. While average 747 cargo equivalents were effectively unchanged just over 20 aircrafts. We continue to grow our CMI fleet and enhance our business mix. Since we're done on these aircraft the average block hour rate for these planes is less than the average rate for our other aircraft in the segment. Higher charter segment revenue in the quarter was primarily driven by increases in both cargo and passenger flight. These were partially offset by a decrease in revenue per block hour reflecting the impact of lower fuel prices. In dry leasing revenue growth in the second quarter was primarily due to the recognition of revenue for maintenance payments related to the schedule return of 757-200 cargo aircraft in Titan’s portfolio. We subsequently re-leased this aircraft on a long-term basis during the second quarter. Dry lease maintenance payments concurrent at the end of an aircraft lease and the amounts will depend on the lease terms, condition of the aircraft upon redelivery et cetera. Going forward we expect Titan to generate additional revenue for maintenance payments as it manages this portfolio but we don’t currently expect any additional maintenance revenue in 2015. Moving to Slide 8, segment contribution totaled $87 million for the second quarter compared with 62 million in the second quarter of last year. The pie chart to the bottom of the slide highlights the strong contributions from each of our segments during the quarter. ACMI results were primarily driven by higher 747 aircraft utilization and a reduction in heavy maintenance expense. Contribution in charter was driven by an increase in cargo and passenger flying and by an increased aircraft utilization reflecting higher demand. Charter results also benefited from a reduction in heavy maintenance expense. In dry leasing the increase in profitability was primarily due to the revenue for maintenance payments that I previously noted. Turning to Slide 9, and our balance sheet, we ended the second quarter of 2015 with cash including cash equivalents, restricted cash and short term investments totaling $555 million. That compare with $331 million at the end of last year. Our cash position at June 30th reflected net cash of $171 million provided by operating activities during the first half of 2015, net cash of $104 million from financing activities, which included $99 million of outflows for debt payments and net cash of $59 million used for investing activities. Net cash used for investing activities in the first half of 2015 primarily related to the purchase of aircraft and engines as well as ratable spare parts primarily offset by proceeds from the disposition of aircraft. Slide 10 highlights our recent convertible note offering. In June we issued $224.5 million of 2.25% in a quarter notes during 2022. We’re using the majority of the proceeds to pay-off EETC debt on five 747-400 aircraft bearing an 8.1% average coupon. Those repayments will be completed in the third quarter and will reduce aircraft ownership costs, increase fleet flexibility and enhance cash flows. We’ll also have an accretive impact on adjusted earnings per share beginning in the third quarter which is incorporated in our framework for the year. To benefit our equity investments we’ve used the portion of the proceeds from the notes to fund the net cost of bond hedge and warrant transactions. Working together these effectively offset any dilution to our common shareholders from the conversion of the notes unless our share price exceeds $95. We use the remaining net proceeds to fund working capital and capital expenditures to repayment or refinancing of debt and general corporate purposes. As Slide 11 shows at the end of the second quarter our net leverage ratio which includes capitalized rent was 4.8 times trailing 12 month EBITDAR including the benefit of our investments in our outstanding WTCs. That’s down from six times at the beginning of last year and 5.4 times at December 31st primarily driven by the pay down of outstanding debt and then increase in earnings. With that I’d like to turn it back to Bill.

[Bill Flynn:]

Thank you, Spencer. As reflected on Slide 12 we are confident about the outlook for 2015. We have a strong and dedicated team and we are well prepared to leverage our competencies and market leadership this year and beyond. We’re working closely with our customers many that are outperforming the overall market. Our outlook reflects fleet initiatives that respond to market demand and customer requirement and we’re utilizing the proceeds from our convertible notes to enhance our operating capabilities and financial structure while maintaining the interest of our equity investors. Lead by the strength of our brand and our global market leadership we are taking advantage of market opportunities and continuing our focus on longer term business growth. With that Shannon may we have the first question please?

[Operator:]

[Operator Instructions]. Your first question comes from the line of Jack Atkins from Stephens. Your line is open. Please go ahead.

[Jack Atkins:]

So I guess just to start off we’ve seen a significant amount of capacity added here over the course of last several months at least from the numbers we get from IATA and AAPA, I am just curious seems like you guys believe that that’s not going to have a negative impact on rates as we move through the year. Just sort of can you maybe help us understand what’s going on within your business and within your customer base that would sort of make you more immune to what seems like an oversupply market as we enter into the second half of the year?

[Bill Flynn:]

I think it's an important question, I think changes in the market aren’t equal across all trade lines and all markets and so if one looks at where our aircraft are deployed for our ACMI customers and in our charter business, market demand overall is holding and we think net rates when you factor out fuel are stable to slightly better and we’ll see some increases in rate as we come through the year and into the peak in the fourth quarter of course. Our largest customer DHL you can take a look at their results and their earnings and their growth and they are performing quite well, as are most of our other customers. So I think the story with Atlas is certainly underlying airfreight market. But it's also how are the customers performing overall and how we’re performing in the markets where we deploy our charter capacity. So looking at the market where we are today, very high utilization that you’ll see on our aircraft as you look through the Q and the press release. Looking into the second half it makes sense for us to bring back 429 that was the aircraft that we’ve had parked in, we've intended to bring it back when the demand wanted it. We were able to lease an additional converted freighter on extremely favorable terms and so that give us some flex capacity. And the dash 8 as we think about the fleet going forward, we've talk about this that that we would want more dash 8s in our fleet they make sense, I think we are in a very good position on that aircraft. We intent to deploy it into charter as we take delivery of it, probably the best place for the aircraft in that fourth quarter peak market and then we expect it will be an ACMI as we come into 2016.

[Jack Atkins:]

Just to follow up on that dash 8, with the first group of planes you talk there were some metrics out there for us to think about the accretion of those planes, $0.48 a year I think was the initial expectation for those at first rather dash 8. How should we think about A, how this new plane will be financed, will it be through the Exane Bank? And then how should we think about the incremental accretion from this aircraft on a go forward basis. Is it similar to what we would have expected when you took the first round of dash 8?

[Spencer Schwartz:]

It's Spencer, as far as financing goes we’ve done incredibly well financing all of our recent aircraft purchases I expect we will do that again, interest rate continue to stay low as it's a really good time to be financing aircraft right now. Our company is obviously doing well, we’re at good credit. So I expect that we’ll good financing. We’re talking to numerous parties. So no final answer on that just yet, but I think the financing will be terrific. As far as the profitability from the plane as you know there is a maintenance honeymoon in early days for aircraft. Obviously this plane will be brand new, won't need maintenance for quite some time, profitability should be very high also has very, very limited line maintenance. So we expect the profitability will be strong. We have gotten away from providing sort of pinpoint profitability for a particular aircraft for competitive reasons and so we’re trying to provide less sort of customer specific or aircraft specific detailed information. But we are excited about the terms and conditions related to the aircraft, we’re excited to put it in place and think the profitability will be strong.

[Operator:]

Your next question comes from the line of John Barnes from RBC Capital Markets. Your line is open. Please go ahead.

[John Barnes:]

In terms of kind of the fleet outlook on a go forward basis and Bill you just maybe comment that you want more dash 8. Can you talk a little bit about the age of the 400s at this point, at what point do you start to get to a situation where maybe some of those 400s need to be replaced and as you take more dash 8, how many do you think will be as a result of replacement needs versus growth needs going forward?

[Bill Flynn:]

That's a great question. So I think for some time now, we’ve been saying that ultimately we would want more dash 8 aircraft into our fleet. We said there will be a point at which incremental dash 8s will be paired with exiting some of the 400s out of the fleet as well. I don’t think we're at that point yet and with the 400 themselves that 98, 99, 2000 kind of deliveries. So still from a freighter perspective relatively young aircraft and depending on once outlook for fuel prices, fuel $60 to $80 if that's the planning range over some mid-term, the 400 is a very competitive aircraft. And it will serve our customers well in the markets that they chose to deploy it in. And I guess a couple of years ago we're looking at and talking about different types of the aircraft and where the dash 8 makes more sense, where the 400 work and how does the 777 fit-in in those markets as well. So kind of horses for courses argument, but I think we have a good long of line on the 400. We've always -- I think stated we want more dash 8s over time, market has to be right, customer demand has to be right et cetera we'll want more dash 8, but we're not at that point yet. John, where we're going to start shutting factory freighters. I think the first to go would be a BCF before pure factory freighter, we spotted that. And that's just something as we said we manage our fleet accordingly and will do.

[John Barnes:]

And then, if you think about what we're starting to see in the market place a little bit, I think there was recent statistic showing that air freight rates are beginning to weaken a little bit, CH Robinson in there announced yesterday made the point that they saw weaker air freight rate late in 2Q and into 3Q. Can you just talk a little bit about your outlook and I hate this to be that multipart question, but your outlook on peak combined with you've obviously got the tougher comp because the West Coast situation and just what that means to you either as a charter business or those typical extra hours that your customers fly typically in the peaks season, just kind of how you get your head around all of, kind of all the puts and takes?

[Bill Flynn:]

Well a couple of points, so as we said and consistently I think you and the folks who follow us know about 70% of our flying is in ACMI, so in terms of the ACMI CMI we know what our rates are, we know what we will charge customers for their above minimum flying and above minimum flying is quite strong even now, so that part of the business we've got a pretty good handle on it. Military rates we know what those rates are because they're by contracts, so comes down to that charter market and comps going forward. In terms of the peak itself we expect it to be a similar peak in terms of volumes and demand as we saw last year. And what we talked about last year was freighter peak relative to prior years in '13 and '12 and '11, so I think volume is there. Kind of in our framework what we're looking for rate levels somewhat to similar to last year maybe off just a little bit they were as a confluence of two events last year that don't repeat this year. One, fuel fell precipitously as we were coming into the peak particularly in November and December, but fuel prices fuel surcharges lag, so there was a fairly dramatic drops in fuel but a lagging effect of fuel surcharge is in that charter market rate. So when fuel is going up dramatically, you take a hit because it takes awhile for the surcharges to take effect, but when fuel comes down dramatically you kind of hopefully you're catching up with the hit you took at some point in the past. And then of course we did see the early impacts of the West Coast work interruptions in late November and December, I mean at certain built in January and February, but it was pretty evident late November late December. So on the outlook and the framework that we've provided I think several good data points for you to think about, we're thinking volumes are going to be somewhat similar to last year. Right now we think net rates are holding and this is inside, John I think the piece you put out the other day stripping out fuel and discussions put about rates is spot on and that's what we're seeing and I think overall that's what in our guidance. I should say our framework our outlook for the balance of the year.

[John Barnes:]

All right very good. I am glad to know somebody is reading my research. I said that was a good thing.

[Bill Flynn:]

We always do, John.

[Operator:]

Your next question comes from the line of Nathan Hong from Morgan Stanley. Your line is open. Please go ahead.

[Nathan Hong:]

I kind of just wanted some clarity on the 2Q results, you did mention that there was large maintenance expenses during the quarter and it seems to have shifted into second half. So if we actually back out that shift, I am not sure about 2Q results would have probably fell below your original framework, just wonder if you can offer some color here, I am wondering if there is anything specific else weaker than what you guys expected?

[Bill Flynn:]

Nathan, nothing is weaker than we expected. Maintenance is condition based and sometime there are shifts we try to provide our best estimates every quarter. And years passed we did not do that and some analysts had some trouble modeling maintenance expense and so now we provided every single quarter, we updated every quarter, we try to give your our best view. But it is conditions based I mean it really depends on the condition of the aircraft, how much they're operating, what happens during flight and all of that. So there was a bit of shift, we had some maintenance that moved from the second quarter into the third and fourth quarter of this year that happens. We also have some block hours towards the back end of the year and so that means that's a good think, but also that means that line maintenance expense which is volume driven will generally increase as well.

[Nathan Hong:]

And as I think about the full year framework I know you just mentioned a couple of pieces here about maintenance increasing in the second half but I'm just curious. Can you walk me to rationale of why you guys didn't actually update the full year framework despite the fact that you guys are picking up additional aircraft or raising block hour guidance for that matter?

[Bill Flynn:]

Well I think Nathan we just didn't decide to buy aircraft yesterday and we've been in negotiations with selling on the 747-8 and we've been planning on the 747 BCF coming back and in negotiations on the flexible capacity that we brought on as well as discussions on purchasing and converting the 767. I think we said in the press release and our comments these were noble costs and these were considered in the framework that we provided.

[Operator:]

Your next question comes from the line of David Campbell from Thompson Davis. Your line is now open. Please go ahead.

[David Campbell:]

Bill first of all I just want to ask your estimate of the industry tonnage and I agree that it's really not that relevant with the industry, because the good companies are doing better than the bad companies and many of the forwarders that are good are continuing to show increase as a business but your trend is what bothers me, I mean you can argue that international tonnage wasn’t up 4.5% and through May but is in trending down from 2% to 3% growth in April to zero and in June and but what you have it growing faster and is that based upon discussions with your customers just exactly what is it based on?

[Bill Flynn:]

Well I think there is couple of data points certainly if we want to start with discussions with our customers there is programs that they are asking us to consider for the balance of the year and as to speak discussions with our ACMI customers and the volumes they are seeing and the trade lanes that they are serving and the charter market we're looking at all the customers including the military to understand what kind of military demand is going to look like. We think that's somewhat stabilized now as we look out into '16 and beyond we think that the military demand levels are right but I would call more stable levels if some hit some a point there of better anticipated demand. The combination when we think about airfreight demand is two measures, right, there is weight, ton and there is a freight ton kilometers which are actually are revenue generating. So [FTK] are up, forecasted to be up greater than the increase in fuel rates. So I think on the trade lanes that we are serving the customers that were serving ACMI and then the commercial charter the discussions we're having with them about what their needs are going to be I think put us in a good position, David. Well I mean which is always well I think expansion I encourage, there is the underlying market we serve but to kind of understand now have to look at the customers we serve as well.

[David Campbell:]

Yes. Absolutely that's the case. I agree with that. The other question I had Spencer can you estimate your dry leasing revenues for the last two quarters to this year?

[Spencer Schwartz:]

Yes, David. I think if you take a look at our dry leasing it should be fairly steady the last two quarters that wasn’t the case because we had some maintenance return conditions that we've recognized but going forward as I had mentioned earlier we don’t expect to have any of those return conditions for the next two quarters. So I think when you look at the business overall you should expect that it should be pretty flat, we had a plane come back, but we really sit right away and there are long-term arrangement, our contribution from dry leasing excluding return conditions should stay pretty steady around $7 million to $7.5 million from a revenue standpoint if you just back out the return conditions that we had in the first two quarters it's a fairly consistent run rate.

[David Campbell:]

So it will go up from the first quarter and second quarter as you won't have any returns.

[Spencer Schwartz:]

No it'll go down. But we recognize revenue for those events when the planes came back we have been collecting deposits essentially and then when the planes came back we got to keep those deposits to recognize them as revenue. We don’t expect to have that situation in the third quarter or fourth quarter.

[David Campbell:]

Okay.

[Spencer Schwartz:]

And our margin when you exclude the return conditions we have been achieving over 30% margins and that should stay it around that level which is terrific.

[David Campbell:]

Despite having less revenues than the first quarter and the second quarters you also have better margins. Is that right?

[Spencer Schwartz:]

Yes. And that's a sector we continue to invest, and David we talked about the 2767 already couple of times now and they’ll come into service late fourth quarter, into first and we’ll continue to seek out opportunity and tighten as well in the dry leasing segment.

[David Campbell:]

And how would you describe the Asia Pacific market looking forward -- going forward is that continuing to show strength like the rest of your markets or less strength.

[Spencer Schwartz:]

Well, AAPA put out a report I guess late yesterday talked a bit, the lower rate of growth in FTKs, my sense though was again based on the conversations we’re having and comments I’ve made about peak, we’re going to see a peak that shows growth and I think we’re well positioned and as you confirmed it really depends on freights you’re talking to or the customer that you’re working with on the ACMI business, it's how they see that market and how they deploy the assets.

[Operator:]

Your next question comes from the line of Kevin Sterling from BB&T Capital Markets. Your line is now open. Please go ahead.

[Kevin Sterling:]

Bill you touched little bit on this so I just want to maybe dive into little bit more, so really the decline in revenue for block hour and charter that’s mainly a function of lower fuel surcharges and in ACMI it sounds like the mix shift with more CMI flying, is there anything else going on that maybe missing am I reading that right?

[Bill Flynn:]

I think those are really the key points, fuel and if you can see the cost per gallon there in the Q or in the press release so that’s come down dramatically and that’s right. And then on ACMI and Spencer took a look at the numbers we're at 20 aircraft in ACMI but we’ve grown from 12 to 16 in CMI and we’re going to keep growing. So in CMI as Spencer said the customer owns the aircrafts so our rates are going to be crew, maintenance and our margin. So that mix does have an impact.

[Kevin Sterling:]

And then touch a little bit on military demand both from the cargo and passenger perspective, it seems like it’s a little bit better than what you may have thought in last year or even beginning of this year. And do you have an indication how the rest of the year or 2016 might look and you’re seeing maybe little bit more military demand or better military demand because maybe some of the your existing competitors that we're servicing the military have gone out of business.

[Bill Flynn:]

Yes, I think you really hit on a key point. So yes, we’re seeing a bit more military demand than we had what it anticipated at the beginning of the year. We’re working closely with the military to understand the demand pattern going forward. As I commented on a moment ago I think we’re at some level of stability now over the next couple of years in terms of what the demand is going to look like and what Atlas’s participation is going to be on both the passenger and the cargo level. And you made another good point as well, several carriers are not flying or have reduced their level of participation in the craft and so as a result we’re gaining a bit more market share. That’s our best perspective on it now and we’ll continue to get updates from the military as we move forward.

[Operator:]

Your next question comes from the line of Helen Becker from Cowen. Your line is open. Please go ahead.

[Helen Becker:]

So two questions, one, with respect to the military the fuel reimbursement rate is fairly high relative to where fuel costs are today, when do they evaluate that?

[Bill Flynn:]

So Helen they reevaluate it periodically if there is not any sort of set time maybe that periodically from time-to-time but the reason why it is so much higher than what you would expect for the rest of our charter business is the nature of that flying and where that flying is and the ability to procure fuel in those locations. So it generally is going to be higher than what you would normally expect. There is no impact on our -- no impact whatsoever in our bottom line. It doesn’t of course impact revenue and impact our cost which has an impact on margins, and otherwise there is no impact to our earnings.

[Spencer Schwartz:]

Either up or down because as you recall there is that true up. If we’ve been over compensated we would return and of course we accrue to what we believe the right true up to be, if we’d be under compensated than we would get true-up the other direction.

[Helen Becker:]

And then my other question is with respect your leverage, so really nice improvement there over the last couple of years, is there a target that we should think about in terms of leverage ratio or I don't know how you want to think about it but with the nice substantial cash position, is it a possibility to pay cash for that aircraft that’s coming in or how you’re thinking about that and how should we either fore think about that?

[Spencer Schwartz:]

Good question Helen. So as we showed on Slide 11 I happen to love that slide, it's a really nice direction and our leverage continues to come down which is great. For us there isn’t a target like we once had, once we entered the dry leasing business we started buying aircraft before that business and the aircraft you're seeing now are driving really nice returns in that business. And so there is purchases an increased our leverage ratio that really paying off now we’re seeing terrific returns of our dry leasing business over 30% margins and really nice profitability to our bottom-line. So that’s been great, we’re adding the dash 8, as Bill talked about and so when we look at it, we really don’t have a specific target, we don’t look at our leverage in isolation or have a singular number that we target instead. We really look at every investment by itself. We take a look at NPV and IRR, we take a look at the EPS accretion, how good of an investment is it, who is the customer and what type of credit are they, how does it align with our overall strategic goals, those types of things. We’ve done incredibly well with financing. Our financing is such a low rate we’re really happy with where our leverage is right now.

[Helen Becker:]

And I guess just you said I think that the customers are flying above minimum, can you say how much above minimum for some kind of a range?

[Spencer Schwartz:]

Sure, absolutely. In the second quarter our customers flew 8.5% above their minimums and the second quarter of last year they flew 6.3% above. So again a nice improvement for the full year, even though you didn’t ask I’ll give it to you for the full year. Last year our customers flew 5.3% above and this year we expect something similar or better than that.

[Helen Becker:]

Actually I was going to ask what it was so far in the third quarter, what it was in July?

[Spencer Schwartz:]

Continues to be above, but it's just too early to tell for sure. But it continues to be nicely above.

[Operator:]

Your next question comes from the line of John Mims from FBR Capital Markets. Your line is now open. Please go ahead.

[John Mims:]

Just one quick for me and most of my other ones have already been answered. The framework for 2015 is established, I understand with some things that you all know about and we didn’t know about like the new planes that are kind of incorporated in that. But when we look and it may be adjusted as we get closer to peak season, I understand all of that part. But when we look at kind of the commercial charter market now and kind of visibility you have going in peak right now. Are there people already committing to capacity in the fall or is it still just kind of an open dialogue where you have a good idea, they are going to need your aircraft or are people kind of clambering to go ahead and secure capacity getting ready for peak shipment?

[Bill Flynn:]

Customers are looking to secure capacity now for the peak. So that’s really the situation. We have commitments and we have, I’ll be clear with my words. We have good commitments for charter capacity in third quarter and fourth quarter as we come into the peak.

[John Mims:]

Typically at what point in the year does it get to the, do you -- I guess what’s the normal cadence of those conversations as far as we think we’re going to ship this much to -- we need to go ahead and start locking it in, so they're doing more of a competitive process where you have some pricing power. Is there a normal timeframe where that really starts to develop and is the year any different than say last year?

[Bill Flynn:]

So there are several charter markets, one of our charter markets is of course South America, we’ve got a pretty good handle on that that’s been performing well for us all year long. As you think about the year progressing there are several potential product launches that are being actively discussed. We’re in conversations with quite a number of key freight forwarders that are product launch specific. But there are quite a number several of large freight forwarders who have large market-shares, who do talk to us and talk to other people in the market and seek to secure capacity as we are coming towards the end of the second quarter and into the beginning of the third quarter. And so then the art and the science of that for us is it for us is to lock down a percentage of our capacity at attractive rates, minimize fuel exposure with our customers and keep some capacity uncommitted because we want to get the tenure of that -- of the peak as it developed so that we have some pricing opportunity as well. So it's in our -- science I guess the best way to think about it. I think we manage it well and we feel very good about where we are this year, it's in our framework and it's why we made some of the capacity decisions we've made and if we didn't have a good book of commitments we wouldn't have necessarily bring aircraft back out of the desert for example.

[Operator:]

At this time as there are no further questions in queue, I will turn the call to the presenters.

[Bill Flynn:]

Well, thank you operator, and first of all Spencer and I would like to thank all of you for your interest in Atlas Air Worldwide today. We appreciate you sharing your time with us today. And certainly we look forward to speaking with you again soon. Thanks you very much.

[Operator:]

And this concludes today’s conference call. You may now disconnect.