Q3 2013 Earnings Call Transcript
Published:
- Operator:
- Good morning. My name is Sunidra, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Third Quarter Earnings Call for Atlas Air Worldwide. [Operator Instructions] Thank you. You may begin your conference.
- Edward J. McGarvey:
- Thank you, Sunidra, and good morning, everyone. I'm Ed McGarvey, Vice President and Treasurer for Atlas Air Worldwide. Welcome to our third 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 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 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 risk factors related 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 principle question and one follow-up question so that we may accommodate as many participants as possible. After we 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'd like to turn the call over to Bill Flynn.
- William J. Flynn:
- Thank you, Ed, and good morning, everyone. Thank you for joining us today. Beginning with Slide 3, our third quarter results and our full year earnings outlook reflect a weaker peak season than previously anticipated. Commercial airfreight volume and yields are strengthening as we head from October into November and the remainder of the peak season, but they're not picking up to a level that would compensate for the slow pace of September and early October. In addition, military cargo volumes have declined at a more rapid rate than we or the military planners we work with, anticipated. We've also seen a reduction in the number of one-way AMC missions, as well as a shift in mix from outbound U.S. to less favorable inbound U.S. Reflecting these market factors, we reported adjusted earnings per share of $1.13 for the third quarter and expect to report adjusted EPS of $3.40 to $3.80 for the full year. Both our results for the quarter and our anticipated earnings for the year are supported by initiatives we've undertaken to strengthen our core ACMI operations, including CMI, grow our Dry Leasing segment and diversify our business mix and enhance our operating efficiency. These actions have enabled us to continue to generate meaningful profitability and free cash flow despite the soft commercial market and the material reduction in military cargo demand, that we have anticipated and have experienced over the past 3 years. In addition, we have enhanced stockholder value through our share repurchases and effective tax planning, and we are ready to take full advantage of the strong operating leverage inherent in our business, as the global economy improves. Turning to Slide 4. We are focused on executing a strategic plan that leverages our core competencies and solid balance sheet. Led by the strength of our new 747-8 freighters in ACMI, we are seeing increasing contributions from investments to diversify our business mix. These include the addition of 777 freighters with predictable long-term revenue streams in Dry Leasing, growing CMI operations, our expanding 767 service and our entry into military and Commercial Charter passenger operations. In ACMI, we also recently began flying a 747-400 freighter for our new customer, Astral Aviation Limited. In addition, we are benefiting from cost reductions, as well as productivity and efficiency gains through our ongoing continuous improvement initiatives, and we have returned significant capital to investors. Slide 5, briefly highlights our third quarter results. Our adjusted net income totaled $28.6 million, or $1.13 per diluted share. On a reported basis, net income totaled $23.7 million, or $0.94 per share. Our reported earnings for the third quarter of 2013 included an effective income tax rate near 31%, which reflects the ongoing beneficial impact of lower taxes for certain foreign subsidiaries in our Dry Leasing business. Included in our reported earnings is a loss on the early extinguishment of debt related to the refinancing of a 777 aircraft at a lower rate, as well as a loss on the disposal of the remaining engines associated with our former 747-200 fleet. Revenues, rate and volumes in our core ACMI business all grew in the third quarter due to an increase in the number of our -8 and a ramp-up in our CMI service. And direct contribution in ACMI rose 21% to $63 million. We are also seeing continued cash flow strength with free cash flow of $74 million in the third quarter and $181 million for the first 9 months of the year. In addition, we acquired over 820,000 shares of our common stock through our second accelerated share repurchase program this year. We're about 3.1% of our outstanding shares. That brings our total investment in our shares in 2013 to $72 million, or approximately 6.5% of our outstanding common stock. We are committed to our share repurchase program, and we'll evaluate appropriate opportunities to return additional capital to our stockholders. To that end, our Board has increased our existing repurchase authorization from $9 million to $60 million. Let's turn to Slide 6. We expect meaningful earnings in cash flow in 2013 despite challenging market factors. We now anticipate that our full year adjusted earnings will total between $3.40 and $3.80 per share. While strengthening, peak season volumes have been slower to ramp up than anticipated and commercial airfreight yields have been volatile. Compared with our previous guidance, we now expect a systemwide shortfall in our peak season Commercial Charter yields of approximately $0.25 per kilo. This falls directly to our bottom line as the cost of flying have already been incurred. Together, the difference in our commercial yields and volumes equates to almost $1 per share in earnings during the peak season. In addition, we have experienced a rapid decline in military cargo volumes, as well as a reduction in the number of one-way missions and a change in the direction of one-ways. On a combined basis, these factors account for the majority of the change in our EPS outlook for 2013. While headwinds from a lower-than-expected commercial airfreight market and lesser-expected military cargo demand have reduced anticipated profitability for the year, tailwinds from the investments we've made to strengthen and diversify our business, as well as our continuous improvement initiatives continue to provide support for our results. Adjusted full year earnings in 2013 will reflect strong contributions by our -8, driven by an increase of the number of -8s in service compared with 2012. Block hour volume this year are expected to total approximately 159,000 hours. ACMI segment flying should account for about 73% of our expected block hours, with about 16% in Commercial Charter and 11% in AMC. In AMC, we now anticipate that passenger flying should account for more than 11,000 block hours, with cargo contributing more than 6,000 hours. We also anticipate that maintenance expense will total approximately $161 million, with about $27 million of that in the fourth quarter. At this point, I'll ask Spencer to provide you with some additional perspective on our third quarter results and our outlook. After that, 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 third quarter of 2013 benefited from our diversified business mix, including increased block hour rates in our ACMI business and the continue ramp-up and expansion of our CMI service within ACMI. They also benefited from growth in our Dry Leasing business. These drove our results in the quarter that was challenged by lower AMC Charter demand and softer Commercial Charter rates. Focusing on the pie charts at the bottom half of the slide, you see that revenues in our core ACMI business, including CMI, grew to 47% of total revenue in the third quarter from 43% in the third quarter of 2012. Revenues in ACMI increased 7%, driven by our new 747-8s and increased CMI flying, partially offset by the redeployment of 747-400 aircraft to other segments. ACMI rates during the second quarter primarily reflected the impact of higher rates for our -8s, offset by growth in our CMI business. Higher 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. We operated an average of 8, -8 freighters and 12, 747-400 cargo aircraft in ACMI during the quarter. And as Bill noted, we began flying our 13th 747-400 in ACMI for Astral Aviation at the end of the quarter. In addition, our CMI operations contributed an average of 10.6 aircraft to the segment. In AMC, revenues during the quarter declined 18%, reflecting a reduction in cargo and passenger flying, as well as the change in the number and direction of one-way missions. In anticipation of the long-expected contraction in military demand following the withdraw from Iraq and preparations to withdraw from Afghanistan, we have actively diversified our business mix and developed new sources of revenue and earnings. As Bill noted, these included initiating asset-light CMI services in our ACMI segment, expanding our tightened Dry Leasing platform and developing a passenger component to our business. In Commercial Charter, revenues in the third quarter declined 3%, primarily reflecting a reduction in the average block hour rates. In Dry Leasing, revenues grew following the acquisition of one, 777 aircraft in March and 2 in July. Each of the aircraft was acquired with a long-term customer lease already in effect. Moving to Slide 8. Segment contribution totaled $78 million in the third quarter of 2013 compared with $82 million in the third quarter of last year. The pie charts at the bottom of the slide illustrate the increasing proportion of contribution from our core ACMI segment, which contributed 80% of our total segment profitability. Direct contribution in the third quarter reflected the enhanced profitability of our -8s in ACMI and increased CMI flying for DHL and Boeing, growth in our Dry Leasing segment, decreased AMC cargo and passenger demand, as well as the change in the number and direction of one-way AMC cargo missions, and lower yields in Commercial Charter, as well as a reduction in return legs due to the change in number and direction of one-way military cargo missions. Results in Commercial Charter were also affected by ownership costs related to 747-400 aircraft deployed in the segment and by volume-driven operating expenses associated with flying to more expensive locations. Partially offsetting these items was a decrease in heavy maintenance on 747-400 aircraft. We expect our Commercial Charter business segment to be profitable in the fourth quarter, but show a loss for the full year. In Dry Leasing, direct contribution grew following the addition of the 777 aircraft we acquired in March and July. Slide 9. Summarizes the updated quarterly detail about our 2013 maintenance expense outlook, which Bill mentioned earlier. As a reminder, the timing of maintenance events is subject to change as these events are conditions based. In addition, our outlook for the full year maintenance expense reflects continuous improvement actions that generate both earnings benefits, as well as positive economic returns. Turning to Slide 10, and our balance sheet. We ended the first 3 quarters of 2013 with cash, which include short-term investments, restricted cash, totaling more than $298 million compared with over $419 million at year end 2012. The change in our cash position was driven by net cash of $208 million provided by operating activities and by net cash of $238 million provided by financing activities. That was offset by net cash of $575 million used for investing activities. Net cash used for investing activities in the 9 months through September 30, primarily related to the purchase of 2 new -8 freighters and 3, 777 freighters for our Dry Leasing business. Net cash provided by financing activities primarily reflected proceeds from the issuance of debt in connection with the acquisitions of these aircraft. These proceeds were partially offset by payments for our share repurchases, payments on debt obligations and debt issuance costs. Excluding the acquisition of aircraft, engines and related capitalized interest, our core capital expenditures in the first 9 months of 2013 totaled approximately $25 million. And we expect our core capital expenditures for the fourth quarter to be about $18 million. Our net leverage ratio, which includes capitalized rents, was 5.5x trailing 12-month EBITDAR at the end of the third quarter, including the benefit of our investments in our outstanding enhanced equipment trust certificates or EETC's. The increase in our net leverage ratio compared with year end 2012 was primarily due to the immediate impact of the financings for the -8 and 777 freighters we have acquired this year, as well as the lag in earnings generated by these investments. Slide 11. Provides an update about our ability to generate free cash flow and grow our cash balance. The left side of the slide illustrates that the operating cash flows from our -8s, the favorable bonus tax depreciation benefits that they generate and the positive cash back that we have received, and expect to receive in connection with their financings should enable us to maintain and improve our cash balance. Reflecting the benefits of bonus tax depreciation, we continue to anticipate that we will not pay any significant 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 in comparison with 2012, a meaningful increase. All of the business efforts that we've been talking about are driving that increase. 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 the strong growth of our balance sheet and cash flow, we commenced a significant share repurchase effort during the first quarter and continued during the second and third quarters, as Bill noted. In mid-May, we entered into our second accelerated share repurchase program agreement this year. The program settled in August and we acquired an additional 820,276 shares for $35.6 million. In total, we have invested $72.1 million this year to repurchase over 1.7 million shares of our common stock. That equates to 6.5% of our shares outstanding, which is a substantial amount for any company to buy back in one year. We continue to discuss our capital allocation strategy with our Board, which has increased our repurchase authority to $60 million, as Bill pointed out a few minutes ago. Maintaining a strong balance sheet is essential for continued long-term growth and capital returns. Going forward, our focus will continue to be on the appropriate balance between maintaining a strong balance sheet, investing in attractive assets and repurchasing our stock. With that, I'd like to turn it back to Bill.
- William J. Flynn:
- Thank you, Spencer. As reflected on Slide 13, we remain focused on the long-term growth of our business. We reshaped and transformed our business in advance of an anticipated decline in military cargo demand, and we continue to drive ahead in a still challenging commercial airfreight environment. We have a modern efficient fleet, diversified business mix and a sound balance sheet. These provide a competitive advantage that's unmatched in the outsource aviation sector. They position us well to capitalize on market improvements and the strong operating leverage in our model and to return capital to our investors. Our 747-8s are performing well, and they provide a solid foundation for the future. We now have 9, -8s in our fleet and we will benefit from a full year contribution by all 9 in 2014. In ACMI, we have added Astral Aviation in Africa as a new customer. Our CMI business is growing. Our flying for Boeing is ramping up as 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 and is adding predictable revenues and earnings. We now have 3, 777 freighters and we'll explore opportunities to invest in additional attractive aircraft with lease commitments attached to them. Airfreight remains a long-term growth industry. Our business model is solid. We have strong customer relationships and a superior fleet. And we continue to strengthen our competitive position and generate substantial free cash flow, which will enhance stockholder value. With that, Operator, may we have the first question please.
- Operator:
- [Operator Instructions] And your first question comes from Jack Atkins.
- Jack Atkins:
- So I guess, to start off, Bill, I don't mean to ask too pointed of a question, but I think something that's on the top of everyone's mind here is, I think, we're all trying to understand why, just given the volatility out there in the marketplace around charter rates, why you guys took such an aggressive approach to earnings guidance around peak season, really for the past 3 years. And I understand that you guys want to give the market your best assessment on how you think things will shape up. But given the peak season has been such a disappointment, really since 2011, why not be a bit more conservative with your outlook around peak season?
- William J. Flynn:
- As we enter 2013, we had the sense that we would experience a moderate growth, but growth nonetheless, in the airfreight market somewhat second half weighted. And as we move through the year, we along with many other industry players, we're encouraged by the announcement of new product introduction as well as new product refresh from major manufacturers manufacturing in Asia, focused on distributing into the major consumption markets in the U.S. and in Europe, and now the increasing growing consumption markets in Africa, South America and elsewhere. Our sense was that given, particularly with product refresh and with what manufacturer were talking about in terms of unit sold, and even more recently, in the midsummer, as we look at what the major retailers and distribution channels are saying about these products, Amazon, Gamestop, Best Buy and others. While also taking a look at capacity, we have a sense that the market would be strong. And I think it's strong, relatively, not as strong clearly as we anticipated. But the balance of capacity that was available and likely come into the market, our sense was that with the puts and takes, we thought that, that was indeed a realistic outlook at the time.
- Jack Atkins:
- Okay. And then for my follow-up question. On the revised guidance for the rest of this year. On the block hour guidance for the ACMI segment, it looks like there is if my math is correct, about a 10,000 block hour reduction given the ACMI segment. Could you talk about what's driving that lower level of block hours in the ACMI? And do you expect or I guess how far above the minimums you expect your customers to fly in the fourth quarter?
- Spencer Schwartz:
- Hello, Jack. It's Spencer. You're right and your math is correct. The reduction in ACMI flying is primarily due to lower third quarter and fourth quarter 747-400 ACMI utilization, so that is customers continuing to fly above their minimums but not fly as high above their minimums as we previously expected. So that's what is primarily driving that. We expect that our customers will fly around 3% to 4% above their minimums in the fourth quarter. You also saw a decline -- you didn't ask about it, but there's also a small decline in military volumes as well. And that's obviously driven by military demand.
- Operator:
- Your next question comes from Helane Becker.
- Helane R. Becker:
- I just have a couple of questions. One is, as you buy back more and more of your stock, does it make sense to remain a public company?
- Spencer Schwartz:
- Well, Helane, it's a good question. I'm not sure it's the right question for today, but I'll give you a couple of thoughts. When we went out to seek Ex-Im financing for our -8s, being a public company, I think was very helpful for us. We are compliant with all the public company requirements. We're compliant with Sarbanes-Oxley. We have very transparent reporting. We have regular quarterly filings with a tremendous level of detail. I think, all of those things really helped us firm up the financing for all of our -8s.
- William J. Flynn:
- Yes and I think that's right, Spencer. Not only the more recent Ex-Im financing but when we did go to the capital markets and raise new equity, several years ago, that was in advance of the delivery of the 747-8s, and I think we netted something around $110 million, maybe a little more or a little less. And that at the time, provided us the additional equity the capital that allowed us to negotiate, in our minds, very favorable terms. With the first -- on the first 3, -8s that we took delivery of because it was clear to our lenders on the first 3 the resources that we had. I think also being a public company is a benefit to several of our customers. When a customer engages with us to ACMI, they are indeed outsourcing not only a part of their fleet, but they're outsourcing their product. They're outsourcing a part of their overall cargo operations. And so being able to sit down with the CEOs and Chief Operating Officers, CFOs of our customer organization and take them through who we are as a company and they have transparency and visibility, that's a key consideration for them because they want, over the long-term, have the assurance and have some visibility that, that they're, in fact, outsourcing a key part of the business to a solid operator.
- Helane R. Becker:
- Okay, that's awesome. And then my other question is with respect to your pilot contract. How many years does that still have to go and when do you have to open negotiations with that?
- William J. Flynn:
- The initial term of that contract was 5 years and so we're talking into 2016. And then as you know, contracts don't expire. They become amendable. And so there's a period of time at which there is a back and forth of negotiations and discussions and so I think, there will be some time beyond that, beyond 2016 before we would have a contract negotiated in place and ratified by the members of the union.
- Helane R. Becker:
- Great. And then SIR[ph] 117 does not apply to you, is that correct?
- William J. Flynn:
- You fly duty rule specifically?
- Helane R. Becker:
- Yes.
- William J. Flynn:
- Well, yes, it does. The Hart[ph] 117 will apply for our passenger operations. And we continue to operate under 121 for our cargo. So we have a split operation. We've modeled that. We've modeled the new rules that will come into effect on January 4 of 2014. We're prepared for those new rules up and down the organization. And given the nature of the flying that we've been doing, the stage, length that the flights have and the kind of the restrictions that 117 bring versus 121, we don't expect a material impact in the cost, the underlying cost of us to provide passenger operations.
- Helane R. Becker:
- Were you have to hire additional pilots?
- William J. Flynn:
- We don't believe we have to hire additional pilots to provide passenger operations under 117.
- Operator:
- And your next question comes from John Barnes.
- John L. Barnes:
- 2 things. #1, in looking -- going into next year, not looking for the specific maintenance number, but should we make an assumption in our model that maintenance costs are going to, at least, flow through the year similar to what they did in 2013?
- Spencer Schwartz:
- It's a little early to talk about 2014 for us right now. We provide, as you know, really good detail we have for a little while now on our maintenance expense. But we do that in the year. So during our call in February, we'll provide detail for maintenance expense for the full year of 2014.
- John L. Barnes:
- Fine. Secondly, can you talk a little bit about what the run rate is? I think, at one time you'd originally said the 747-8 would be $0.04 per month per aircraft. Can you talk about where that run rate is today in terms of contribution from those aircraft?
- Spencer Schwartz:
- Sure, John. And we updated that to say that it's $0.04 per plane per month for the first year. And then years 2 through 4, it's about $0.35 to $0.38. So still seeing really, really strong profitability from those aircraft. And they've been delivering in those ranges. So it's been a great investment for us.
- John L. Barnes:
- All right. Can you just so we can model that correctly, can you just remind us and I can go back and look at the numbers, but just for clarification, where does the 747-8 fleet fallout in terms of those years now? You've got how many that are still in year 1?
- William J. Flynn:
- So we took delivery of 2 this year, 4 last year and 3 at the end of 2011.
- John L. Barnes:
- Okay, so the 2 this year should still be in the $0.48 per year range, the rest should be in that kind of a $0.35 to $0.38 per month range?
- Spencer Schwartz:
- That's generally accurate, yes.
- Operator:
- And your next question comes from Scott Group.
- Scott H. Group:
- So I just want to understand that the guidance little bit more because to one of your earlier questions, the big change in block hours is on ACMI. But it sounds like the big reduction in earnings, you're saying, is Charter and military. So what's offsetting the kind of lower block hours in ACMI where that's not the earnings issue and kind of what's the -- I guess, I'm struggling to understand the difference between the block hour change and the earnings change.
- Spencer Schwartz:
- Sure. So if you think about the Commercial Charter segment, we talked about -- Bill talked about $0.25 change in yields versus what our prior guidance had. And that had a very large impact on our expectations for the year. So that lowered profitability pretty significantly. And then with regard to ACMI, that has a smaller impact. But as we talked about before, block hours are lower than we previously anticipated they would be in the ACMI segment. Customers continue to fly above but just not as high above as we previously thought.
- William J. Flynn:
- And then we have -- it wasn't just the yield story in Commercial Charter. We had volume as well. The ramp up into peak, which we now see in terms of volumes, we had anticipated earlier in September to begin with the announced products that we all saw, and that really didn't happen until late October. And so there's a volume impact in Commercial Charter in September and better part of October, Scott.
- Scott H. Group:
- Okay. Spencer, kind of want to get your thoughts on the balance sheet and the ability to buyback stock and continue to kind of add 777s or other Dry Leasing planes. So do you feel -- so if I just think about this year, year-to-date, that's up $300 million or so, cash on the balance sheet is down $130 million or so. When you think about going forward, would you use cash flow to buy more planes in leasing or would you feel comfortable financing more planes with additional debt? I'm just trying to think if what if there's room in the model for both new planes and buybacks. Just curious on your thoughts there.
- Spencer Schwartz:
- Sure. Scott. I think we look at each situation based on its own facts and circumstances and its own merits. So for each additional aircraft that we look at or you mentioned our share repurchases, for each situation, we try to take a look at the overall IRR, what sort of rates are we going to earn on the investment, and we try to take a look at the best way to finance those. So is that with debt, is that with existing cash, and what is the right proportion of both and so forth. We spent a lot of time, I think, we've done incredibly well in that area. I think, we have been getting it right. But we spend a lot of time focusing on that, Scott. And thus far, we're trying to, as we've said before, we're trying to ensure that we have a strong balance sheet. We're trying to ensure that we continue to have assets that customers want. And we're also trying to ensure that we return capital to our shareholders, and we're trying to get that balance correct.
- Scott H. Group:
- That's helpful. Maybe just I don't know that I ask it so well, I guess, would you feel comfortable taking on additional debt in order to acquire new aircraft, and at the same time, buy back stock?
- Spencer Schwartz:
- If the aircraft that are being acquired have a strong rate of return, if the returns on the aircraft are above our threshold and something that we are willing to acquire, yes, absolutely. How we would finance that depends on that particular circumstance. And I did mention before, Scott, that in your prior question, obviously, I just -- a reminder that our Board increased our share repurchase authority and so we have $60 million. We previously had $9 million. The board increased that now, so we have $60 million remaining. And so we will manage those share repurchases, along with additional aircraft purchases and trying to ensure that we maintain a really strong balance sheet. That continues to be our focus.
- Scott H. Group:
- Okay. That's great. and just last thing, if I can, can you guys just give an update on the 9, -8 and just timing around placement for that.
- William J. Flynn:
- So we are continuing to work with customers to place the 9, -8s, which we expect to do. In the interim, we are operating that in our South America operation and without given which too much competitive information, we're enjoying very good returns on that aircraft. And we're also benefiting from the fact of the payload capacity that the -8 offers, as well as the better fuel burn.
- Operator:
- And your next question comes from David Campbell.
- David P. Campbell:
- I was curious, Bill, given the disappointing block hours in Commercial Charter and unpredictability of it, why not just transfer or try to put all your 747s into ACMI? Where I can forget -- forget this unpredictable Commercial Charter business, which has caused a lot of problems.
- William J. Flynn:
- David. So our core business is, indeed, ACMI. And I think as we talked about, 73% of our block hours this year will be in ACMI. And the other discussions we've had all year is how many units do we expect to have in ACMI, and we've said 20-plus and we're at 20-plus now. And ideally -- all right that is our core business. We use the Commercial Charter market to fundamentally drive increased utilization of the assets and to take advantage of the opportunities that are there, as opposed to saying we want to allocate X and Y. We will always have a preference for ACMI and then drive utilization of existing assets in Commercial Charter. So one of the things we will consider and talk about as we come into next year is the fleet that we have overall and make some decisions perhaps about our fleet going into 2014.
- David P. Campbell:
- Okay. And the second question is, do you think the growth in your block hours in late October and November, especially in the Asia-Pacific region, do you think that growth, percentage wise at least, will continue in the first quarter 2014 or is this just some temporary spurt based on new products?
- William J. Flynn:
- I don't think it's a temporary spurt, per se, David. The fourth quarter is typically the highest demand in shipping quarter, and it has been for quite some time and we talked about it as the peak. The art and the science kind of what's the amplitude of that peak and what's the capacity that's deployed into the market. As I answered, that might have been Jack's question earlier, we and others anticipated stronger start to the peak, a peak that would start in September and continue to drive very strong volumes through to just before Christmas. That didn't happen. Some of the products were delayed in terms of when they were released. Some manufacturers, I'm told, that apparently some production issues and are kind of late to market with their product. Some have commented that they didn't launch in certain markets this quarter because they're reserving that product production for higher larger markets like the U.S. and Europe. And so it could be, and I'm not saying that this is a forecast, but it could be that there might be a good tailwind into first quarter on some of these product releases because the production problems and in fact, because a good consumer acceptance and a carry-on market. Pattern wise, I think, first quarter being the softest demand quarter, postholiday season plus the holidays that occur in Asia and elsewhere in that first quarter running through to the strong or more peak demand in fourth quarter, I don't think that pattern is changing.
- Operator:
- Your next question comes from Chris Robertson.
- Christopher W. Robertson:
- I wanted to see just a couple of points to kick off. Could you give the block hour above minimums for the third quarter? I know you said 103% to 104% for fourth quarter.
- William J. Flynn:
- Chris, our customers flew, on average, 3.4% above their minimums in the third quarter.
- Christopher W. Robertson:
- Next is on the count of the aircrafts. We had, if you back out the CMI planes in the 747 range, you had around 10 flying in the third quarter, down from around 11, 11.5 in the second quarter. And you had the 8, -8s flying in the fourth quarter, roughly the same number in the second quarter. So if you take on the Astral Air, that takes you to approximately 11 in the fourth quarter to go along with the 8, which gets you to 19. And I believe your previous guidance had been -- you expected to be a minimum of 20. And I just wanted to make sure I wasn't missing an aircraft there.
- Spencer Schwartz:
- Chris, we have -- currently we have 8, -8s placed in ACMI. One of the -8s is flying in Commercial Charter, as Bill noted. So we have 8, -8 flying in ACMI. We have now 13, 747-400s flying in ACMI. So that's 21 of our aircraft flying in ACMI.
- William J. Flynn:
- It could be, Chris, that the count isn't for equivalent units of LCF. I think, it's about 1.6 LCF. And so maybe that might be creating some confusion.
- Christopher W. Robertson:
- No, I was actually backing those out because those were in CMI. You had talked about 20 before, and I was not under the impression that included the flying for the LCF.
- William J. Flynn:
- No it doesn't. Does not.
- Christopher W. Robertson:
- Right. So then that would give you 11 this quarter -- sorry, 10 this quarter and 11 with the Astral Air, correct? Just flying on ACMI, not CMI?
- William J. Flynn:
- Sorry. I'll say it again. We have 8, -8s flying in ACMI and 13, 400s flying in ACMI.
- Christopher W. Robertson:
- On the ACMI side of the house, you had -- you started the year with 175,000 block hour expectations overall, and that came down to 159,000. I know part of that came out of around 1,000 or so less on the military side. But the rest of that came out of ACMI. And I wanted to see if that is a function of being much lower on the percent above minimums or fewer jets flying within the category?
- Spencer Schwartz:
- Sure, Chris. It's a little of both, so some of it is due to customers not flying as high above their minimums as we previously thought. So that's a portion of it. Some of it is just the timing of placements. So for example, Astral Aviation started flying with us at the end of September. Whereas previously, we may have thought that, that was going to happen slightly earlier. So it's a little of both, it's timing and placement and it's utilization of the aircraft.
- Christopher W. Robertson:
- The last one I had, is just on understanding the difference between the utilization and the block hours and how you do the math there because clearly, you're under utilizing the aircraft in Commercial Charter and possibly military. Your ACMI is only a couple of percentage points below what you talked about being above minimums. But how do you come up with the block hour number relative to the utilization? Is there a large degree of deadhead, so to speak, numbers that are built in to block hours?
- Spencer Schwartz:
- Chris, the block hours themselves are very easy to calculate. That those are actually the block hours that operate in each of our segments. But I think, when you're -- I think what you're talking about is utilization per aircraft. And so aircraft are allocated. And so when you're looking at utilization for aircraft, if we have aircraft that are allocated to a particular segment and they're not fully utilized, then you'll see that block hour per aircraft utilization percentage decline. And so that's what we saw, which was primarily driven by the softer Commercial Charter market as well as the decline in demand with the military. So we were not able to absorb 100% of our available capacity. And I think, that's what you're seeing.
- Christopher W. Robertson:
- Okay. And I would just encourage you when you're setting the guidance for 2014 to use some level of a range with the bottom end of it being a similar peak season that we've had for the last couple of years here. Just so that we don't get into trouble based on how things play out there.
- Spencer Schwartz:
- Chris. We certainly understand.
- Operator:
- And your next question comes from Jason Ursaner.
- Jason Ursaner:
- I just want to make sure I understand all the commentary on the guidance reduction concentrated in the charter. So the 25% -- $0.25 kilo shortfall, that's blended over the course of the whole peak season?
- Spencer Schwartz:
- It is Jason. From September to December. Yes.
- Jason Ursaner:
- Okay. What's that change relative to in terms of the base rate that had been embedded in overall guidance and where are rates currently? And I guess is that shortfall more a factor of a lower magnitude or is it the shorter duration, just given that it's still pretty early in the holiday season?
- William J. Flynn:
- So we talk about the order of magnitude, it's something $0.25 a kilo. $0.25 a kilo bases our expectations. On a flight, then that roughly quotes to $25,000 a flight. It's 100 tons a flight is a good estimate to use over the flights that we had in the quarter. So where is the market today is probably a place to start. So Korea, we think about LG and Samsung and the Korean products that come to market, is probably in the 3.10, 3.20 range right now, which is low, certainly for this period of time. Hong Kong is 4.10 to 4.25. So 4.35 to 4.50 is not an unreasonable number for Hong Kong during a more typical or frosty peak season. There's a lot of volatility in Shanghai, simply based on the capacity that's coming in. I would think Shanghai is somewhere around 4.35, 4.50 right now. And so we share that perspective to give -- I think some insight to the range that we were first considering for our fee flying in terms of the rate. And I think what's put the pressure on yields, Jason, are 2 things. There was both volume and yield pressure in September and October because there was a lot of capacity in the market, anticipating product launches in a more frosty demand than occurred. And so there was both the volume and yield there. There's still a fair amount of capacity in the market even with the peak finally materializing and occurring. So those are really the 2 factors that have driven the largest part of the reduced guidance that we're providing today.
- Jason Ursaner:
- Okay. And how fast can charter rates change? I mean, as you look at the peak season, do people contract out in terms of days, weeks, months? How fast could it change potentially?
- William J. Flynn:
- So we look to do, and I think and other operators look to do the same thing. We have long-standing customers that are year-round shippers with us, and we commit some of our capacity with them earlier or in anticipation of the peak season and we agree on an anticipated rate there. The balance though, we look to commit closer to the season and then finally, keep some disposable capacity at the end, so that we can take advantage of where the market may go. And this is an anecdote, and I don't think you should model this necessarily, but yesterday, in the Shanghai market, an operator announced 4 or 5 new charters to happen over the next several days. And the rates dropped fairly considerably. 12 hours later, that operator canceled those flights and the rates sprang right back in the 12-hour period. So I'm not saying the whole market is like that and is like everyday -- it's like that everyday. It's not. But rates do -- rates are moderating up and down within a $0.25 to $0.50, $0.60 range. And then when you multiply that over 100 tons, you know the big dollars per flight, if that's helpful.
- Jason Ursaner:
- Yes, that is helpful. And I guess, just last question. At a very high level, how do you think investors should be looking at the identity of the company? Because I know in the past you've expressed some frustration, the people overlook the strategic nature of ACMI and become overly focused on the charter rates out of Asia and the contribution from military. So given that it is clear that these 2 elements do matter to your flex capacity and variable profitability, how should people balance that with considering Atlas as a real strategic outsource provider?
- William J. Flynn:
- Well. I believe, indeed we are a strategic outsource provider. And I believe in also that the airfreight industry is a growth industry. And maybe just a little bit long-winded here, but just looking back the other day at the last 15 years or so of the airfreight market, and we had a lot of volatility in that market. If you go back all the way to '98, '99, we had the Asia economic crisis, right, started with speculators moving against the baht in Thailand and then it rolled all the way through Asia and it created some turmoil and it affected demand for quite a period of time. Seemingly, after recover, we have the dotcom meltdown in 2000 into 2001 then 9/11. We had fairly good years between then until about 2007, and then we were in crisis from Berrystone[ph]to all the way through to the airfreight meltdown in 2008, 2009. 2010 was a good growth year, and then we've had this kind of economic delays more generally. 2011 through '13, with no real growth. Yet through all that noise, the airfreight market has grown. It's had more peaks and valleys, I think than any of us like and that's what we have managed through. So what's the Atlas bet then -- our bet so far is first of all the best technology wins, and we made the investments that we made in the 747-8 fleet and you can see the returns that we're generating in ACMI and in our CMI business and the growth that we've had there. We knew that was critical to execute because all of us expected that military would decline, and indeed it has. We knew we withdraw from Afghanistan and Iraq. I think, we were somewhat surprised based on what close working relationship we have with military planners to see that the drawdown in this fourth quarter, in terms of buying commercial aircraft, cargo aircraft capacity and using more of their own assets. And so I think to Chris' question earlier, we're about 3,000 hours off on military this year from where we started, not 1,000. We're about 3,000 hours off there. And so we're working with the military planners and we'll see where they go, what the pace of the withdrawal from Afghanistan is going to be. How much of their own capacity they're going to use for cargo. But I think, it was a good move for us to have moved in to passenger because the relative drawdown, cargo versus pax and the need for ongoing pax services, was 150,000 or 60,000 troops deployed overseas going to continue. We've made, I think, very good investments in Titan, with the acquisition of the 777s and we have the opportunity to continue to invest in Titan. But there, we're looking for stability and annuity type income streams, good aircraft, good credit, long-term leases at great returns. And through that, though, we've also been able to return capital to the shareholders with our $72 million of repurchases this year. Our Board has authorized another $60 million. So to some extent, what we see going forward, Jason, I would say, is the post-AMC Atlas. The company that will generate its earnings and its growth in its core commercial segments, ACMI and CMI, our Dry Leasing business in Titan, and then having the appropriate sized fleet that we would operate either in Commercial Charter or provide flex capacity upside, should there be expansion or more expansion in the ACMI market. So that's how we're thinking about the company and how, I believe, we've transformed it. And then finally, all the while being laser-like focused on costs and productivity and efficiency so that we deliver a great service to our customers, but we do it so we create margin and keep some of the value that we create for ourselves and our shareholders. Long answer, but that's how we think about it.
- Jason Ursaner:
- I appreciate that level of detail. In terms of the appropriate size fleet, as you come out of the peak season in charter, given the utilization rates are already pretty low and you talk about the continued moderation in military, would you expect to need to park any additional planes in the first half of 2014?
- Spencer Schwartz:
- So we're in the process of finalizing the 2014 plan and part of that will be resources. In aircraft our resource component, so that's something we'll be in a better position to talk to in February, when we report on full year and then provide our investors view on '14.
- Operator:
- There are no further questions in queue at this time.
- William J. Flynn:
- Okay, thank you, operator. Spencer and I and everyone here at Atlas Air would like to thank you for your interest in our company. Thank you for taking the time today. We appreciate your questions, and we look forward to speaking with you soon. Thank you, everyone.
- Operator:
- This concludes today's conference call. You may now disconnect.
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