Q1 2013 Earnings Call Transcript

Published: 2 May 2013

[Operator:]

Good morning. My name is Yolanda, and I will be your conference operator today. At this time, I would like to welcome everyone to the First Quarter Earnings Call for Atlas Air Worldwide. [Operator Instructions] Thank you. I would now like to turn the call over to Atlas Air. Please go ahead.

[Edward J. McGarvey:]

Thank you, Yolanda, and good morning, everyone. I'm Ed McGarvey, Vice President and Treasurer for Atlas Air Worldwide. Welcome to our First Quarter 2013 Results Conference Call. Today's call will be hosted by Bill Flynn, our President and Chief Executive Officer. Joining Bill is Spencer Schwartz, our Senior 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 website at www.atlasair.com. You may find the slides by clicking on the link to Presentations in the Investor Information section of the website. As indicated on Slide 2, we'd like to remind you that our discussion about the company's performance today includes some forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements relate to future events and expectations, and they 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 relating to our business, please refer to our 2012 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 website 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 you have gone through the queue, we'll be happy to answer any additional questions that you may have as time permits. At this point, I would like to turn the call over to Bill Flynn.

[William J. Flynn:]

Thanks Ed, and good morning, everyone. Thank you for joining us today. I'd like to begin with a few key takeaways on Slide 3. We had a good first quarter, in line with our expectations as a result of our business mix, productivity gains and continuous improvement initiatives. We are affirming our full year outlook. We are driving additional stockholder value through share repurchases and tax planning actions. And we're ready to take full advantage of the operating leverage inherent in our business as the global economy improves. Turning to Slide 4. Our first quarter results and initiatives demonstrate the benefits of our modern efficient fleet, diversified business mix and solid balance sheet in a challenging business environment. The actions we've taken to transform our company, diversify our business model and develop new customers should enable us to deliver strong earnings and free cash flow in 2013. Operating income in the first quarter reflected the strength of our ACMI operations, including our 747-8F. Operating income also benefited from new organizational capabilities and the evolution of our business, such as our expanding 767 service, growing CMI operations and the efficiencies we have realized through our continuous improvement initiatives. I would also like to highlight 2 significant actions we executed during the quarter. We acquired an immediately profitable 777 freighter under a long-term lease for our Dry Leasing business, and we implemented an accretive share repurchase program. We returned value to our stockholders through late April, acquiring 903,000 shares or 3.4% of our outstanding common stock for $36.5 million. Looking forward, we have a disciplined approach to our business. We will continue to explore opportunities to expand our tightened Dry Leasing platform through investments in aircraft with lease commitments attached, and we will capitalize on our strength and resiliency to return capital to our stockholders. Slide 5 briefly highlights our first quarter results. Our adjusted net income attributable to common stockholders totaled nearly $6 million or $0.22 per diluted share. On a reported basis, net income attributable to common stockholders totaled $20 million or $0.76 per share. Included in our reported earnings is an income tax benefit of $14 million or $0.54 per share related to the tax treatment of extraterritorial income from the offshore leasing of certain of our aircraft. Despite being the seasonally weakest period of the year, our first quarter revenue grew 5% to $377 million, and our operating income increased 10% to $23 million. In addition, free cash flow for the period totaled $42 million compared with $1 million in the first quarter of 2012. Reflecting the increase in the number of our 747-8F aircraft, ACMI volumes, rate and revenues all grew. And ACMI direct contribution rose 65% to $40 million. Turning to Slide 6. We expect strong earnings and cash flow in 2013. Led by ACMI, each of our business segments is expected to be profitable for the year even in a soft market. Reflecting our ongoing Continuous Improvement actions, we expect that corporate overhead for block hour will be at least 20% below our 2009 rate by the end of 2013. And to take full advantage of the operating leverage inherent in our business, we are driving productivity gains and efficiencies in all areas of our operations, including initiatives that target our engine overhauls, procurement efforts, passenger catering, ground travel and crew scheduling. We are also leveraging our core competencies, industry leadership and deep understandings of market to deliver advantage and value to our customers and stockholders. As a result, we anticipate that our adjusted fully diluted earnings per share this year will total approximately $4.80. This is an increase from our prior guidance of $4.65, reflecting our share repurchase activity. Including the ETI tax benefit, our adjusted fully diluted earnings per share in 2013 should be approximately $5.34. Both our reported and adjusted full year 2013 EPS guidance assume the repurchase of 50 million of our outstanding stock during the year. Should our total repurchases differ from this amount, it would impact our earnings per share. Our expectation for full year 2013 operating performance is unchanged from the outlook we issued last quarter. We expect to fly fewer block hours in our Commercial Charter segment in 2013 than we previously forecast. We would also expect to lower operating expenses as a result of Continuous Improvement initiatives that drive productivity and operating efficiencies. Adjusted and reported full year earnings in 2013 will reflect strong contribution by our -8, driven by an increase in the number of -8s in service compared with 2012, including the incremental placement with Etihad Airways just announced. This is our second aircraft with Etihad and it complements the 747-400 freighter all ready in ACMI service for them. As was the case in 2012, market growth during 2013 should be seasonal and second half weighted. We anticipate a sequential increase in our adjusted quarterly earnings throughout the year, with approximately 75% of our adjusted EPS and 66% of our reported EPS occurring in the second half. Based on our revised view, block hour volumes are expected to total approximately 175,000 hours in 2013. ACMI segment flying should account for about 135,000 or 77% of expected 2013 block hours. And that includes our new 747-8F service for Etihad starting later this month, and it includes our new 747-400 service for Chapman Freeborn that began April. As previously indicated, the average number of -8s in service in 2013 should increase to more than 8 from 4.3 in 2012. About 22,000 or 13% of our block hours this year should be in Commercial Charter and 18,000 or 10% in AMC Charter. Passenger flying should account for more than 10,000 of our AMC block hours this year. We also anticipate that maintenance expense will total approximately $172 million in 2013, about 60% of which should be incurred in the first half of the year, and our revised outlook for maintenance is primarily driven by our Continuous Improvement initiatives. This is a good point to ask Spencer to provide you with some additional perspective on our first quarter results and our outlook. Following Spencer, I'll provide some additional thoughts, and then we'll be happy to take your questions. Spencer?

[Spencer Schwartz:]

Thank you, Bill, and hello, everyone. Looking at Slide 7. Operating revenues in the first quarter of 2013 benefited from increases in block hour volumes in our ACMI business, our military passenger business and our Commercial Charter operations. Focusing on the pie charts on the bottom half of this slide, you see that revenues in our core ACMI business grew to 48% of total revenue in the first quarter from 43% in the first quarter of 2012. Revenues in ACMI were driven by our new 747-8 and increased CMI flying, partially offset by the redeployment of 747-400 aircraft to other segments. Increased volumes in ACMI were primarily due to the continued ramp up of 767 CMI flying for DHL and the continuing increase in 747 CMI service for Boeing. ACMI rates during the first quarter primarily reflected the impact of higher rates for our -8s, offset by growth in our lower rate by profitable CMI business. We operate an average of 7 -8 freighters and 13.1 747-400 cargo aircraft in ACMI during the quarter. In addition, we enhanced the utilization of our 767 passenger aircraft by taking advantage of short-term opportunities in the passenger ACMI market. Our CMI operations contributed an average of 9 aircraft to the segment, 1.6 Dreamlifter large cargo freighters, 6.4 767 freighters and 1 747-400 passenger aircraft. In AMC Charter, revenues during the quarter declined 19%, primarily reflecting a 41% decline in cargo hours. This was partly offset by a 38% increase in passenger block hours. We flew 2,561 military passenger block hours during the first quarter, an increase of 711 hours compared with the first quarter of 2012 as we combined additional 767 passenger flying with our 747-400 passenger operations. Commercial Charter revenues in the first quarter increased 18%, reflecting a 28% increase in block hour volumes that was partially offset by a 7% reduction in average block hour rates. Higher volumes in Commercial Charter primarily reflected the deployment of 747-400 aircraft from ACMI during their marketing periods. Commercial Charter revenue per block hour reflected the impact of lower yields during the first quarter. Moving to Slide 8. Segment contribution totaled $45 million in the first quarter of 2013, compared with $48 million in the first quarter of last year, with the pie chart to the bottom of the slide illustrating the increasing proportion of contribution from our core ACMI segment. Direct contribution in the first quarter reflected higher average block hour rates in ACMI complemented by lower maintenance expense for our new -8s. Revenue and volume growth in our AMC Charter passenger business, which were offset by lower military cargo demand, and revenue in volume growth in Commercial Charter, offset by softer yields and a reduction in return legs due to fewer one-way military cargo missions. Results in Commercial Charter were also affected by volume-driven operating expenses associated with flying to more expensive locations. Slide 9 summarizes the updated quarterly detail about our 2013 maintenance expense outlook. As we've noted in the past, the timing of maintenance events is subject to change as these events are conditions based. We've revised our outlook for full year maintenance expense, as Bill noted. And expanding on Bill's comments, our Continuous Improvement actions generate both earnings benefits, as well as positive economic returns. Turning to Slide 10 and our balance sheet. We ended the first quarter of 2013 with cash, cash equivalents and short-term investments totaling $344 million, compared with $420 million at year end 2012. The change was driven by a net cash of $54 million provided by operating activities and by a net cash of $100 million provided by financing activities. That was offset by a net cash of $234 million used for investing activities. Net cash used for investing activities in the first quarter primarily related to the purchase of our 8th -8 freighter for our ACMI operations and our first 777 freighter for our Dry Leasing business. Net cash provided by financing activities during the first quarter primarily reflected proceeds from the issuance of debt in connection with the acquisitions of these aircraft. These proceeds were partially offset by payments on debt obligations and a $50 million prepayment under an accelerated share repurchase program agreement or ASR that we entered into for the purchase of our shares. As a reminder, we have no unsecured debt. All of our outstanding debt is tied to a specific aircraft in our fleet. Excluding the acquisition of aircraft, engines and related capitalized interest, our core capital expenditures totaled approximately $11 million in the first quarter. I'll just quickly note that we expect our core capital expenditures for the rest of the year to be about $50 million. As expected, our net leverage ratio, which includes capitalized rents, was 4.8x trailing 12-month EBITDAR at the end of the first quarter, reflecting the benefit of our investments in our outstanding EETCs. The increase in our leverage ratio compared with year end 2012 was primarily due to financings for the -8 and 777 freighters we acquired during the quarter. We expect our earnings and cash balance to grow throughout the year and lower our net leverage ratio, including EETC investment benefits to about 4.1x at year end 2013. Slide 11 provides some additional perspective about our ability to generate free cash flow and grow our cash balance. The left side of this slide illustrates that the operating cash flows from our -8s, the favorable bonus tax depreciation benefits that they generate and the positive cashback that we have received and will receive at their deliveries should enable us to continue to grow our cash balance. Due to the benefits of bonus tax depreciation, we don't anticipate paying U.S. federal income tax until 2017 or later. On the right side of the slide, you see our outlook for free cash flow per share in 2013. All of the business efforts that we've been talking about should continue to generate significant free cash flow per share in 2013 and into the future. Moving to Slide 12. Our capital allocation strategy demonstrates our commitment to creating, enhancing and returning value to our stockholders, both through business growth and returns of capital. Reflecting our strong balance sheet and cash flow, we commenced the significant share repurchase effort during the first quarter. Between mid-February and late April 2013, we repurchased over 900,000 shares of our common stock for $36.5 million at an average cost of $40.40 per share. We acquired just over 427,000 of those shares during the first quarter, which added $0.01 per share to our adjusted and reported earnings for the period. Maintaining a strong balance sheet is essential for continued long-term growth and capital returns. Going forward, our focus will be on the appropriate balance between balance sheet maintenance, business investment and share repurchases. With that, I'd like to turn it back to Bill.

[William J. Flynn:]

Thank you, Spencer. Looking at Slide 13. We've spoken a great deal about the action we've taken to transform our business. We have a modern efficient fleet, diversified business mix and a solid balance sheet. These provide a competitive advantage that's unmatched our business. We're not just managing our business for the present, however. We're committed to generating strong earnings and cash flow this year, next year and well beyond. Our 747-8s are performing well and they provide a strong foundation for the future. We will grow to 9 -8s in our fleet this year, and we'll benefit from the full year's contribution by all 9 in 2014. Our CMI business is growing. Our flying for Boeing is ramping up as the production of the 787 Dreamliner increases. And building on the operation we established this spring, we will have a full year of 767 service for DHL in Asia in 2014. In addition, our Dry Leasing business is expanding. We've added our first 777 freighter and will explore opportunities to invest in additional aircraft, with lease commitments attached to them. We are well positioned to serve our customers in the airfreight market. We're innovative and adaptive, responding to external market forces outside our control by developing new customers, focusing on costs and driving continuous improvement and pursuing initiatives to improve our profitability and enhance our strategic options. As a result, we are ready to take advantage of improvements in the macro environment, positioned to return capital to our stockholders even in challenging times and well positioned to grow our business for the long term. With that, operator, may we have the first question, please?

[Operator:]

[Operator Instructions] Your first question comes from the line of Kevin Sterling with BB&T Capital Markets.

[Kevin W. Sterling:]

Bill, you just signed a new ACMI agreement with Etihad and despite all the negativity that we hear about regarding the international markets, can you tell us how important it is for you to partner with customers such as Etihad, DHL, British Airways who are actually growing thier business in times of turmoil and may need additional capacity?

[William J. Flynn:]

Yes. I think that's a great question, Kevin. And that, actually, is the Atlas story if you think about it. And we come to market with a modern, efficient fleet, with high-quality services, and our goal clearly is to partner and enter into these long-term relationships with customers, such as you have described. DHL, we started with 6 aircraft in 400s and now we have 9, and we now also fly 7 767s for them on a CMI basis, and they grew their business 9% last year. Mr. Hogan, in his press release today, in the downmarket described that their volumes and cargo grew 19% over the last year on a 14% capacity increase measured by AFTK. Steve -- Stephen Gunning from British Airways was recently quoted about their business. And while it doesn't have those kinds of growth numbers, outperformed, one might say, other carriers within Europe or principally serving Asia, Europe markets. So that's the other half of the story. Right assets, great service, but these customer relationships with customers who are growing in spite of a challenging or soft market overall.

[Kevin W. Sterling:]

Right. And then kind of a follow-up. Can you touch on some of the trends you've seen so far in April, maybe in terms of some of these customers flying above minimum block hours in ACMI? And what type of rates in block hours have you seen in Commercial Charter in April?

[Spencer Schwartz:]

Well, Commercial Charter, so -- just to kind of step back a bit, so January and February, most folks like to look at those 2 months combined because Lunar New Year is typically moving somewhere between one month and the other. And January and February market seem pretty good on a seasonal basis with nice yields, I would say, seasonally attractive yields coming into Lunar New Year. I know there was some concern expressed more generally in the market after Lunar New Year because the immediate pickup or the pickup after Lunar New Year didn't seem as strong as it -- as I think maybe market expectations were. I think March 2013 over 2012 was more challenging because March 2012 had a substantial amount of new product introductions principally led by Apple, and it probably was the only month back then in 14 or 15 months that actually showed growth on a year-over-year basis. So I think, sequentially, March performed as expected. And as we come into April, the charter -- spot charter rates are in the $3 -- mid-$3 in the Hong Kong market closer to $3 in Shanghai in that range coming out of Inchon or coming out of Korea. So I would say a good level of demand, and I think we'll be leading into a good market demand overall as we come through March, April, June into the summer.

[Operator:]

Your next question comes from the line of Helane Becker with Cowen Securities.

[Helane R. Becker:]

Bill, I just have a couple of questions about your thoughts with the 747s going forward. I noticed that you have fewer 400s year-on-year than you had last year. So is it a thought process to start divesting of those older aircraft perhaps? And focusing on the 777s or 67s going forward, can you just kind of talk about what your thoughts are with respect to the, maybe, the 5-year plan for the fleet?

[William J. Flynn:]

Sure, Helane. So we've, I think, talked pretty regularly about one of the -- one of our areas of focus in Atlas is managing our fleet. And we've said, I think, managing our fleet aggressively. So we did move from the -- we moved the 200s out of our fleet, and we've brought the -8s into our fleet. And through CMI operations and passenger operations for the military, we now operate 10 767s where we, 2 years ago, we had none. My belief is that the 747-400 pure factory freighter is an attractive asset. You notice we placed just a couple of them in the last several months with Etihad and with Chapman Freeborn and with DHL. And I think the 747-400 will continue to be a competitive asset in the market. At some point, as we think about our fleet, we will look to move potentially some of the 400s out and introduce perhaps additional incremental aircraft. But I think you said 5 years, and I think it is longer term not near term. This is -- we're not looking to make a near-term or immediate fleet adjustment. The only thing that we have said is that the BCFs are going to go back when they run off of lease, and we currently do have one BCF part. And so that's kind of a flexible capacity, if you will. But I believe the 747-400 pure factory freighter has a good, attractive, highly contributing useful life ahead of it in the Atlas fleet and for our customers.

[Helane R. Becker:]

Are you -- I mean, obviously, you placed a couple of aircraft recenty as you've pointed out. So you're getting questions about the planes? I mean...

[William J. Flynn:]

Yes. We are in discussions with other customers about additional 747-400 placements. Just to expand a little bit more, I mean, the 747-400 is the larger percentage of our fleet. It performs well. It delivers a very good fuel burn, and there are quite a number of markets where that aircraft is a very attractive asset.

[Operator:]

Your next question comes from the line of John Barnes with RBC Capital Markets.

[John L. Barnes:]

A couple of questions on the fleet as well. First, I think there was an announcement out of Boeing or maybe it just kind of flew into the radar a little bit that they had 4 -8s that came off the line. They were due to be delivered to customers. They changed the tail numbers of those and you had 4 -8s that essentially got parked right off the line. Two things. Number one, how concerning is that from -- is that a big negative red flag that, obviously, there is still too much capacity in the marketplace. And I guess along those same lines, you've talked about maybe moving up in the order book and taking an opportunity maybe at incremental -8s. Does that present an opportunity to you in that regard?

[William J. Flynn:]

Yes, good morning, John. Well, look, I think we have our order book of 9 -8s, and we're executing against that. We certainly have commented in the past that we have these options for up to 13 more aircraft, and we have a long window within which we could exercise those options and take more -8s into the fleet as part of the overall fleet planning as we just talked about with Helane. There are some 747-8s parked. I don't think it's an asset issue. Overall, I do think that may have to do more with the customers of those aircraft and what their plans are and what the timing is for them. But for the 8 that we've taken, they're performing well for our customers. They're delivering the fuel burns, the efficiency improvement that they expect, they're delivering the tonnage they expect and, frankly, that was all part and parcel of the conversation that we had with Etihad, our most recent -8 customer. And again, Mr. Hogan referred to that in his call today about what he expects for this aircraft to deliver to his overall cargo operations. So we think it's a great asset and so do our customers.

[John L. Barnes:]

Okay. And then along those same lines then, we've seen this with other asset types. Will there be things like barge industry or other asset types that when customers start to realize the benefits of the new asset, then the attractiveness of the older asset dissipates very quickly. And while I understand that the 400 is still the work horse and it's still a very good asset, do you foresee kind of the customer lifespan of the 400? I'm not talking about whether it could actually fly and how long it could be in service, but the customers' acceptance of the 400 shrinking, given how good the economics have been on the -8.

[William J. Flynn:]

I think, John, if you step back and you look at it, I think it'll take clearly some time before the 400 becomes -- I want to be clear, before the 400 pure factory freighter becomes obsolesced. There's a finite number of 400s in service. There's a finite number of -8s delivered in on the order book, and that's even true for the 777. The MD-11s are in service but challenged. The 200s are essentially gone. And our own analysis, as we look at markets and routes and demand and potential customers suggest to us we'll have good utilization of our 400. Moving forward, we've got to make the decisions around how -- what the fleet composition should look like. Should there be more -8s? If we want to retire 400s beyond the BCFs that will be exiting our fleet in the nearer term, when and how and what's the right form to do that? And we are in that process. But I also think we've increased the optionality for Atlas by moving into the 767 fleet within the CMI operations. I think there's more CMI operations for us there. We could invest in 767s. We haven't other than the 3 passenger planes that we have to date. And we have one now, 777 freighter, in our Dry Leasing business. I think, again, we have a good -- a deep understanding of freight in the international freight flows. We've created optionality in our fleet and strategic options for the company as we go forward. And at some point, that 400 is going to be a 20-year-old aircraft or more, then you're starting to kind of get towards the end of useful life but some -- an inflection point on the contribution from the asset, but we're not there yet. We certainly have time to work through our fleet planning and make choices for growth.

[Spencer Schwartz:]

And John, it's Spencer. I'll just quickly add that, as you know, the 747-200s were flying a very long time after the 747-400s came out. We operated a number of those for a very long time and so did our competitors. And it wasn't until fairly recently that those planes started coming out. They flew a very, very, very long time, and were a work horse. And we think the 747-400 similarly is quite a work horse. As Bill talked about, we placed 3 of them with very strong customers very recently, and we're in discussions with a number of potential customers to place additional 400s.

[Operator:]

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

[Scott H. Group:]

So I want to first ask about the 777 that you took on and how we should think about you guys and that aircraft going forward. Would you think about it at some point starting to make a bigger investment in those and ACMI and those kinds of planes? Or does that, I mean, not make sense?

[William J. Flynn:]

So we've acquired the one aircraft as we've noted and it's in Titan and our Dry Leasing business and it's got a good tail on the lease that's attached to it. And we've talked about potentially making more investments both in Titan and in particularly looking at the 777 asset. I think one of the strengths that Atlas has as compared to a Dry lessor particularly with freight -- with freighters, pardon me. We could service and/or otherwise operate the aircraft. And so we have that ability to toggle should we think it's the right thing to do or should we need to. And so kind of building on the discussions with John and Helane in the last several questions, we're evaluating the fleet. We're evaluating what the fleet makeup should look like from a strategic perspective and thinking forward. We certainly could acquire more 777s for our Dry Leasing business. And as we think about the ACMI market and other operations, there could the opportunities for us to acquire and operate 777s in ACMI as well.

[Scott H. Group:]

Okay, that's helpful. I want to ask -- I saw a report last week about Qantas is planning to return one of its 400s. And just wanted to hear from you guys if you're expecting it to just be one of their planes or all 3 of their planes. And then with that -- what's in the guidance? Are you assuming that you'll replace that Qantas plane with another ACMI? Or does that move in to Charter?

[William J. Flynn:]

So a couple of thoughts. Qantas did announce that they are going to internalize or operate this A freighter, which would return one to us in 2014. So that's not a 2013 event. Perhaps going just back to John's earlier question, I would point out that they have leased a 747-400 freighter as opposed to -- and other aircraft types, so that aircraft type certainly works for them in the routes that they choose to operate. I believe we'll continue to operate for Qantas going forward. But if you look back at the history of Atlas, now over 20 years, customers change over time. Several have grown recently. Others have reduced the level of business we have with them, but I think that's pretty normal in most any other business. Customers -- what we'd like them to be forever aren't always forever. And so if you think about where the fleet is today and even going back to Kevin's question about growth and where customers are headed, we've got -- sticking with the pure and the large wide bodies, we have 9 with DHL, 3 with Qantas, 3 with BA, 2 now with Etihad, 1 with Chapman Freeborn and 2 with Panalpina. Emirates, who was a long customer of ours has returned the last aircraft that we had with them. That was -- that is and was in our guidance as we said 20 plus. And our view is at end year, we will be 20 plus aircraft at end year 2013 and into 2014.

[Scott H. Group:]

Okay, that's great. And just one last thing, if I can, just on the maintenance side. So you lowered the guidance for maintenance by $20 million. What's the offset there to keep kind of the net income guidance unchanged? And then is that maintenance that you think permanently goes away based on efficiency? Or should we think about that getting pushed out to '14?

[Spencer Schwartz:]

Scott, it's Spencer. So we also lowered our block hours. We lowered our block hours, primarily in Commercial Charter. So you'll see that impact, as well as the maintenance impact. So we affirmed our guidance, you're right. So there are other offsets that offset the maintenance expense. And as far as whether that goes into the future, as we talked about earlier, we're putting in place a number of continuous improvement initiatives that will permanently reduce our expenses, some of which are in the area of maintenance and some of those will be permanent. So others are simply based on timing because maintenance is due when it's due and needs to be incurred when it has to be. So there will be maintenance reductions. But I just want to point out it doesn't necessarily mean that if you're modeling going forward, you have to model the impact of plane-by-plane, engine-by-engine and what their maintenance schedules require.

[Operator:]

Your next question comes from the line of John Godyn with Morgan Stanley.

[John D. Godyn:]

I was -- it wasn't that long ago when you used to talk about a $20 million annual contribution for each -8 in ACMI, and I believe there's a $6 million contribution for each -4 in ACMI. I was hoping that just given sort of how the market dynamics have evolved with sort of the themes that we've been talking around on the call on saturation, of -8 freighters and substitution of -4 freighters, as well as sort of the evolution of maintenance costs. Are those still the right numbers to be thinking that about as we model ACMI for the next few years here? Or are the incremental deals that you're signing sort of very different from those levels?

[William J. Flynn:]

Yes, thanks, John. Good question. As far as the -8s go, I think we affirmed last quarter that in the early years, the -8s certainly are delivering about $20 million of pretax income. It declines a little bit in the next few years, primarily because of C checks and line maintenance. But years 3 and 4 are still in the neighborhood of, say, $18 million to $19 million. And so, yes, those numbers are holding up. -8 profitability is doing extremely well. We're really pleased with the investments we've made in those fuel-efficient assets. They're really paying off. As far as the 747-400s, we've traditionally talked about a pretax on a direct contribution basis there of between $5 million and $7 million and they remain in that $5 million to $7 million. So we're continuing to see strong performance from both.

[John D. Godyn:]

As we think about sort of modeling the next handful of years, how long do you think -- or how do you guys think about how many really cycles it takes before the -8s converge to the -4s in terms of incremental contribution?

[William J. Flynn:]

Well, it looks like some time, John. I mean, if you step back and you think engines are coming -- engine maintenance -- heavy engine maintenance comes at 5.1, 5.2 years. D check at 8. Now there will be C checks through the cycle and line maintenance may increase slightly just as more cycles occur and as years go by but not dramatically. Those aircraft will clearly perform for some time. And that's kind of beyond, in my mind, the kind of fleet planning window that Helane was asking about over the next 5 years. And so, certainly, a good amount of time for this company to think about its business, its mix, its segments and its fleet.

[John D. Godyn:]

Got it. And if I could ask one more. When you think about signing up ACMI customers, what kind of return hurdles do you apply for those leases?

[William J. Flynn:]

Well, we've talked about thinking about what have we -- what are the returns that we've generated on the 400 fleet. And the 400 fleet, combination of the lease plus the revenues and earnings on service from an IR perspective has been in the 20% range. And we've said that our -8 fleet is going to produce in excess of that. And I think we were saying something approximating 24% or greater, particularly now with the Ex-Im financing that's been put on a fair number of assets in the fleet. And we believe those are the numbers. Again, and that triangulates back to the numbers that Spencer just reviewed on the $20 million that may kind of drift towards $18 million, $19 million over the next couple of years in the $5 million to $7 million over the life of what we generated with the 400. I think those numbers will true up as you think about them.

[Operator:]

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

[David P. Campbell:]

Bill, you were pretty optimistic or favorably inclined anyway toward the cargo -- commercial cargo demand in March going into the second quarter, but you've reduced your estimate for the year by 10,000 block hours in that sector or the business. And so I'm curious as to why you are less optimistic than you were 3 months ago.

[William J. Flynn:]

I think -- well, we are optimistic about the freight market overall, David. We're seeing growth in -- well, we're optimistic about our business within the freight market, and we're optimistic about the freight market. And it would come back to what we talked about earlier. Our key customers are growing even in quarters where the market is not, and their growth overall is some multiple of what overall growth was it that -- what drives Atlas's business, particularly in our core ACMI, that's was driving utilization, our ability to place and the earnings we derive from that. We've tempered our view on Commercial Charter market but it's still overall growth and some of that is tempered by, I would say, some of the experience, David, of some -- of recent or last quarter product introductions that didn't have the uptake that they had, so we've tempered that. We've certainly focused on cost to make sure we're delivering the earnings that we've said we would deliver. But we have that capacity available to us should the market spike greater than what our expectations are or greater than what current -- where general thoughts are about the market.

[David P. Campbell:]

So it's not based upon company surveys or your surveys of forwarders or anything like that in terms of what they think the fourth quarter demand will be?

[William J. Flynn:]

Oh, it absolute is. Now we're saying ACMI is 77% of our overall flying, and that we did take Commercial Charter down to something more like 13% from, I guess, that would have been 14% -- maybe 16% above. But we're talking to all the major freight forwarders and charter brokers on a routine basis. There was a very large freight forwarders. As you know, Panalpina is a customer. Chapman Freeborn is now -- was a charter broker customer. Now it's an ACMI customer. So we have dialogue with them on a regular basis. I don't think anyone is calling an inflection point, but there is in the market quite a good level of discussion about product introduction, about flying between now and kind of mid-July when it tapers off before the peak begins again later in August. And what we're calling for is growth certainly in our ACMI segment, in our Commercial Charter segment, we've tempered that a bit, and we're addressing costs and other areas of productivity as a result. So yes, it is about discussion. It is based on discussions with the charter brokers, freight forwarders and, of course, our ACMI carrier customers will have their own discussions as well.

[Operator:]

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

[Jack Atkins:]

So, I guess, just to start off, if we could just kind of go back to the ACMI segment for a moment and your expectations for 2013. I think it will be helpful to know how may planes are currently being remarketed as you talked about the Emirates planes that have been returned to you and I know we'll have the Qantas plane coming back later this year. I mean, how many planes are currently being marketed for re-lease in the ACMI segment that currently don't have a home? And then what is your expectation for the number of ACMI aircraft, like in the core ACMI business that will be flying for the remainder of the year?

[William J. Flynn:]

So Jack, we've said 20 plus, and I went through the numbers just a moment ago, the placements by customer and that's a 20 right now. And 20-plus for '13 is our forecast. The Qantas aircraft, when it does come back, is in 2014, not in 2013. Our aircraft, other than one BCF all have a home. They're flying either in ACMI or they're flying in Commercial Charter. The BCF we talked about last quarter, given the level of charter demand made sense to us to park that. It's available for -- to fly should we need it, should the market snap back. And so we haven't changed our guidance on the number of aircraft flying and the number of aircraft flying exclusively in ACMI and what we expect to fly at the end of '13, coming into '14.

[Jack Atkins:]

Okay. Okay, that's helpful commentary there. And then with regards to the maintenance expense reduction, when you look at sort of the different buckets that, that expense falls into, I noticed a pretty significant reduction in the number of engine overhauls. I guess, my thought was, in the past that was more of a function of the number hours that you put on the aircraft, not something that can sort of be moved around. Just -- kind of curious what drove that reduction. And then how much of the reduction and maintenance expense is more fewer block hours versus better procurement on the maintenance side?

[William J. Flynn:]

So your point is right. You can't -- when aircraft engines need to be maintained, as we've always said, our maintenance is conditions based. And so when they need a shop visit or hospital visit or an overhaul, they need it, and you can't hunt it or decide to defer it. You have to do it. So some of the maintenance expense is indeed conditions based, as Spencer said. It has to be. And so we've taken the maintenance forecast down this year to $171 million. But, certainly, some of the savings in maintenance this year is the result of the Continuous Improvement initiative that we've implemented with our focus on cost reduction and productivity. That requires a bit of a more detailed explanation and that's something we certainly intend to address at our Investor Day here later in May. But there are -- clearly, some of that savings is permanent, and it is as a result of Continuous Improvement and we'll want to spend time talking to you and our other analysts and investors later in May when we get together.

[Jack Atkins:]

Okay, that's great. And one last quick housekeeping item. Spencer, what's the correct share count to use for the second quarter?

[Spencer Schwartz:]

The second quarter, we were at, on an average basis, we were at about 26.4 million for the first quarter. That number will be lower because of the share repurchases during the first quarter. I don't have that math at my fingertips, but it will probably be somewhere between 26.4 million and about 26 million. So somewhere just above 26 million.

[Operator:]

Your next question comes from the line of Jason Ursaner with CJS Securities.

[Jason Ursaner:]

First, I wanted to ask about the military cargo. I mean, if you can repeat anything you said on the outlook for the full year and, I guess, whether there was anything seasonal about the 1,900 block hours in Q1 and just how that should trend seasonally going forward.

[William J. Flynn:]

So in military, we said 18,000 hours. About 10,000 of hours would be passenger and 8,000 hours would be cargo. So the 1,900 is close to a quarter. Based on the estimates we have and the work that we have -- excuse me, the ongoing dialogue that we have with the military, yes, we think that 8,000 hours for the full year of 2013 is the right number.

[Jason Ursaner:]

Okay. And I just want to try to follow up the question from before about reconciling the full year guidance with the revised outlook for maintenance. I mean, it's being revised down over $20 million, and it had been the single largest factor contributing to the view on flat year-over-year performance. So, obviously, it's not a small change. And the previous guidance had been given in mid-February. So, I guess, I'm just unclear in that short of period of time, they have changed so rapidly and be -- what the offset would be given that it's over $0.50 on a full year basis and $0.20 just in the quarter alone.

[Spencer Schwartz:]

So as we entered the beginning of 2013, Jason, clearly, we have our view on the market. But also, we had our view on the things that we can't control. And so the market, we can't control. Demand is what demand is going to be. We look to provide the right assets and the highest quality of service we can to our customers, skew our customers and grow as our customer grows. But we'll also stay very much focused on costs and productivity, and we implemented a number of initiatives at the end of the year that have gained a good traction and are delivering bottom line benefits to us through this initiative called Continuous Improvement. That has many sub-component parts to it. And we've been able to achieve good cost savings and good productivity gains that have offset or offset to some extent the softness in the market, and we have capacity available should the market uptick this year, in the second half and be able to go out capture it. Spencer, you might have some additional perspective on that.

[Spencer Schwartz:]

No, I think that's right. Our Continuous Improvement initiatives, we are focused all across the organization, numerous areas, we are looking to focus on cost efficiencies. And as you've noted, there is some softness in the market. We lowered our Commercial Charter block hours, as Bill just said. But we've been able to offset that with our focus on efficiencies. So a lot of the maintenance reductions you'll see will be on a permanent basis, and we've been extremely focused on this, Jason. And during the period from last earnings call to this earnings call, we are able to put some things in place that allowed us to lower our maintenance forecast.

[Operator:]

Your next question comes from the line of Mark Rieber with Foundation Asset Management.

[Unknown Analyst:]

I just had a question. I was trying to understand the interplay between AMC Charter and the Commercial Charter business. I guess, the Charter cargo block hours were down 1,300 hours and the Commercial Charter was up about 1,000. And I assume a piece of it is I think you've talked about in the past is the loss of the 1-way routes covering the back haul to Asia. So as you think about -- you added $14 million in Commercial Charter in the revenue but your direct contribution declined $10.5 million. So as you look at 2014, what are you anticipating for in the military cargo business? And what are your options for replacing the one-way business you had covering you to Asia? And how should we kind of think about any profitability impacts from that?

[William J. Flynn:]

So thank you, Mark, and a couple of things. We've talked quite a bit over the last several years that military cargo would indeed come down, and it has. And, of course, it's all driven by boots on the ground and so military cargo will continue to contract beyond the 8,000 hours as we come into '14 and beyond. We've also talked about offsetting a large part of that impact through -- in the near term the passenger business, military passenger and that indeed has happened. That will come down as well but less because we'll still have a fair amount of the troops outside of the U.S. more so in the Pacific than in central command, but that will continue. Commercial Charter is more seasonal and operates to a different kind of market demand than certainly military does. First quarter is the seasonally weakest quarter of the year in Commercial Charter. It's also -- while our maintenance is less than we had expected. It is the quarter when we perform the majority of our maintenance. We have a larger number of aircraft allocated into Commercial Charter, and so that fleet in Charter, if you will, the virtual fleet in Charter is bearing a higher percentage of the maintenance costs overall. We have also said ACMI is 70% of the business and growing. So full year, we expect Commercial Charter to be profitable. We certainly look for opportunities to position aircraft into Asia to maximize the yield -- the achieved yield and return on those business and so -- and there are opportunities. Moving heavy -- moving manufactured goods and materials for oil refining and resource extraction, anywhere into the Middle East, anywhere into Africa or near Asia -- near East Asia, gas the aircraft within 6, 7 hour kind of a positioning flight into Asia, we're pursuing that, then we'll continue to develop that. I think the commercial charter results this quarter do, indeed, reflect the seasonal nature of the Commercial Charter and all commercial markets overall and reflects our maintenance strategy as well.

[Operator:]

Your next question comes from the line of Chris Robertson with Cardinal Capital.

[Christopher W. Robertson:]

I just wanted to clarify some math to make sure I heard everything correctly. So with the EPS guide up, that was essentially related to the share repurchases. And that with lower maintenance expense forecasted, I'm assuming that that's just a function of flying less Commercial Charter, for example, and therefore, getting less revenue there. And then I wanted to see how you look at the market in general as it relates to the price at which you can market a 400 given that currently, people are able to acquire 400s for lower rates and, therefore, operate them, I would assume, at a lower rate than you could. And how that's impacting your search for new 400 customers?

[Spencer Schwartz:]

I'll take the first couple of those. So Chris, your first question was about our earnings per share guidance. And so yes, our guidance on an operating basis is the same what we've affirmed our guidance. But 15 additional cents per share is related to the actual and expected share repurchases, and so we've taken our guidance from $4.65 to $4.80 as a result of share repurchases. With regard to maintenance, I think we've talked a lot about the maintenance, and so I think you are asking if we've taken maintenance expense down, what is offsetting that, I think, is your question, to get to a similar EPS range.

[Christopher W. Robertson:]

Correct.

[Spencer Schwartz:]

Right. And so we said we took 10,000 and we reduced our Commercial Charter block hour forecast by 10,000 hours so that comes down as well. There's a softer Commercial Charter yield environment as we've seen in the first quarter, and so there are some offsets to that. So our continuous improvement initiatives are extremely helpful, which allow us to affirm our guidance and then raise it for the share repurchases. And then -- so I think...

[William J. Flynn:]

So in the market, Chris, if we were simply a dry lessor of aircraft, then it could be a race to the bottom on the monthly lease rate for a BCF or the lease rate for an older 400. But with the 400, that's not the market we're in. We're in the ACMI market. And yes, the underlying cost of the aircraft and the A component of the ACMI rate is important. But what Chapman Freeborn, for example, was acquiring when we entered into the ACMI contract with them, what Etihad acquired when we entered into the ACMI market for them was the 400, was the CMI, the scale, the scope, the service and the other capabilities that we bring to bear as a package. And Spencer was asked a question earlier in the call. So tell me about your contribution on the 400. Is it still in the range that you've historically talked about? And the answer is yes, and we are able to place the 400 at the kind of earnings that we have described, at the earnings we've described. Not kind of -- at the earnings we have described because it is ACMI and not just the straight Dry lease. And so we are in additional conversations with other customers for the 400s, and I believe we'll place 400 this year with our customers at the kinds of returns we're discussing.

[Christopher W. Robertson:]

And the second question I had was, I don't know if you saw the article in the Journal the other day about the -8 and 400 -- 747 in general, that, that might be shorter lived on the Boeing production line because of the extended 777 that they're talking about. And, clearly, you're talking about looking at 777s as an opportunity. Would you be able to frame that for us? And whether that could end up being a good thing for the company with less -8s over the course of the program.

[William J. Flynn:]

Sure. So I did read The Wall Street Journal article. I think a lot of the focus there was on the 747-8 I, the Intercontinental, and talking about -- which is the passenger version and talking about the market acceptance of the passenger version. The 777-8X and/or the 777-9X are probably 8 to 10 years away, so that's kind of a planning horizon, I think, we would want to factor in. Now focusing on the 747-8 freighters, we'll have 9. We have options to buy more. The aircraft is performing well, meeting the expectations that our customers have around fuel burn and around load. So a smaller fleet of -8 freighters isn't -- global fleet, that is. I think you were hinting at, "Isn't there a scarcity value on a fuel efficient modern asset like that?" And I believe there is. And I believe that scarcity value will be to our benefit and certainly benefit our customers going forward in the market.

[Christopher W. Robertson:]

If I could just ask one date question before I let you go. When were the 2 remaining Emirates aircrafts, when did those leave the book so to speak?

[William J. Flynn:]

Well, the most recent one was in March.

[Christopher W. Robertson:]

Was that the last one?

[William J. Flynn:]

Yes. Yes, as I talked about earlier, our -- customer relationships change over time. We've had a lot of growth with a number of customers. But as I think of most of us know, back in 2006, Emirates placed an order for a very large fleet of aircraft, and we've continued to operate with them over these past 7 years. So it's certainly been in our planning horizon that, ultimately, they would internalize their fleet wholly, and they have.

[Spencer Schwartz:]

And Chris, customer relationships, as you know, change and evolve over time. We expect that Emirates will continue to be a customer of ours.

[Operator:]

Your next question comes from the line of Bob McAdoo within Imperial Capital.

[Bob McAdoo:]

Just want to go back over to the Commercial Charter thing one more time. I understand what you've said about trends and how maintenance might have been a little heavier when the first quarter ended. If I understood what you're saying that you've -- because you had extra airplane time available that the maintenance that went on to those planes got charged to commercial. I guess what I'm trying to get in my head is an understanding of why, in the first quarter, your Commercial Charters did not make a positive direct contribution. Actually, it was a meaningful negative. And how we should be thinking about what that contribution level should be on a per hour basis or whatever going forward for the rest of the year?

[Spencer Schwartz:]

Sure, Bob, it's Spencer. So I'd say with regard to Commercial Charter, this was the first quarter, the seasonally weakest quarter, which typically has the lowest demand for the year. We had a lot of maintenance expense. And so as you pointed out, we had a lot of maintenance expense that was allocated to the Commercial Charter segment. On a full year basis, we expect that all of the aircraft in our Commercial Charter segment will be profitable. And so you're asking about level of profitability. I think probably single-digit direct contribution margin in the Commercial Charter segment is probably the way to think about it. Last year, that segment had a direct contribution of about 7%, and I think we'll see this year but probably a little bit less than that, but somewhere in that neighborhood.

[Bob McAdoo:]

So I am correct that maybe Commercial Charter in the first quarter got penalized and got more than its pro rata share of maintenance for the year because that's where the spare time was and that's the time of the year when you do maintenance? Is that a reasonable way to think about it?

[William J. Flynn:]

Well, I don't think any of our businesses get penalized, Bob. I think that costs are allocated the way they should be. And so when you look at segment profitability, that's where it landed. But I don't want you or anyone else to get too excited. It's the first quarter. It's the seasonally weakest quarter. We expect that, that segment will be profitable for the year.

[William J. Flynn:]

And costs are allocated on a number of tails in the segment. So that you can see and understand the allocation and I think we've got good description of that in the K and in the Qs.

[Operator:]

Ladies and gentlemen, we have time for one more question. And your final question will come from the line of John Mims with FBR Capital Markets.

[John R. Mims:]

Spencer, let me ask you, on the guidance, I'm just going back to this buyback. When you -- you're guiding the $50 million for the year, you've put in a $36.5 million, and $17 million in the first quarter, about $19 million to the second quarter. When you've got $500 million in free cash for the year as your guidance, why not use the full authorization to $100 million because if it's -- this is implying there is only $13.5 million left that you're going to buy back this year is what you're putting in your guidance.

[Spencer Schwartz:]

Sure, John. So we had -- originally, there was approval from the board for a $100 million program back in 2008. $18.9 million of that was repurchased. And then as you talked about, we repurchased $36.5 million thus far. That leaves -- under that board authority, that leaves about $44.5 million. We have yet to determine the exact amount of a share repurchase this year. But what we've said is that for guidance purposes and for forecasting purposes, we have assumed that the share repurchases this year would be approximately $50 million. And if they are more or less than that amount, the guidance -- the results would change accordingly. So your question is, why not go for all of it now? There are a number of reasons. We will make that determination. It could be higher than the $50 million, it might not be the $50 million. It depends on a number of factors. We are constantly looking at this. We are absolutely focused on investing in the business. We are ensuring that we maintain a strong balance sheet, and we also want to return capital to investors. We want to show investors that we're committed to supporting the stock over the long term. There are all -- I'm sure you know, John, there are all sorts of requirements about minimum levels that can be repurchased, 10b-18 rules and so forth. And we watch all that very closely and we'll be careful about how we buy the stock back.

[John R. Mims:]

Sure, that's helpful. That's just a question I've been getting a lot as far as -- can you be more aggressive with the buyback? Will you consider a dividend? I mean, is this the right -- you purchased the 1 777, but are there enough investment opportunities in this market to justify not doing the dividend or a more aggressive share buyback given this -- given where your balance sheet is and your cash flow. So yes, thank you for that. On another note, just quickly, looking near term on the Commercial Charter business, have you seen any impact positively -- any positive impact from the strikes in Hong Kong as far as supply chain disruptions? The port strikes there have been going on for 5 weeks. Has there been any shift to air freight just as supply chains have been sort of twisted and disrupted because of that? Or is that sort of a nonevent from your side?

[William J. Flynn:]

We've seen a little bit of shift but not meaningful because there is a disruption in Hong Kong, as you well noted. And that is still probably the largest single container port in the world in terms of annual TEU throughput. But there is the ability to shift up into Guangdong province and out of Yantian and then shift everything where things are made. So things -- where things are made, they can be diverted from -- within Guangdong province and further to the west, come out via [indiscernible] and the Pearl River delta. So there's been perhaps a little bit of it, but at this point, not meaningful because of the alternative points of exit available to the Chinese manufacturers nearby.

[John R. Mims:]

Okay. That's helpful. And let me just jump back to the buyback quickly. Do you have -- as far as this authorization and getting the board to extend the authorization potentially, how much does opportunistic share buying -- I mean, looking where the stock is trading now, how much does that play in to how much leeway you get and how aggressive you can get versus your broader capital thoughts in terms of do we buy planes for those planes are cheap now, do I buy stock because the stock is cheap now. If you can just help, just some color on that thought process would be helpful.

[William J. Flynn:]

Sure, John. I mean, you're right. All of those things are extremely important. I mean, ultimately, those are all things that the board and management consider. We think about returns on all of our investments, whether we invest in the company, whether we invest in other assets. Obviously, the low share price right now is something that we see that we consider, the extremely low multiple of the stock is trading at, all those things play into that. We think we are very aggressive during the first and then into the second quarter with the accelerated share repurchase program that we implemented. And we think we will continue to look at all of those uses for our cash. We'll evaluate all of that. I don't think this company has made a bad investment, John. We've been very smart about every investment that we've made. Our extremely efficient fleet has done incredibly well both for the company, for its investors and for its customers. We'll be smart about those assets. We'll be smart about investments that we make in the Dry Leasing space, and we'll be smart about any decisions on share repurchases.

[John R. Mims:]

Sure. No, that's helpful. The way the stock has traded despite you're being as aggressive as you have been in the first half of the year, there's been more sellers than buyers the last 2 months. And I don't know if it gives the wrong signal to say that suddenly -- or it appears that way now that looking forward for the rest of the year that you'd back off some on that pace given that the stock is still...

[William J. Flynn:]

Yes. I wouldn't characterize it as backing off. What we wanted to provide was an assumption that you and others could look at so that we could talk to, among other things, an earnings per share. Without that assumption is somewhat nebulous. And so what we've said is we're authorized up to $81 million under the current authorization. We bought back $36.5 million and for today's call and today's release in our current discussion, let's use $50 million as a reasonable assumption, and what does that do to earnings per share and it also allows us the opportunity to talk about that, as well as do what we did, reaffirming our guidance for 2013.

[Operator:]

There are no further questions.

[William J. Flynn:]

Okay. Thank you very much, operator. Spencer and I would like to thank all of you for your interest in Atlas Air Worldwide and certainly for your participation and, I think, the good question-and-answer question we had after our prepared remarks. We certainly hope those of you who can will indeed the join us for our Investor Analyst Day on May 30. And if you cannot, we hope you listen to the webcast. Please contact Dan Loh in Investor Relations for any more information, and we look forward to speaking with you again soon. Thank you very much.

[Operator:]

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