Q3 2014 Earnings Call Transcript

Published: 6 Nov 2014

[Operator:]

Good morning. My name is Chris, and I will 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] I will now turn the call over to our host from Atlas Air Worldwide. You may begin your conference.

[Edward J. McGarvey:]

Thank you, Chris, and good morning, everyone. I'm Ed McGarvey, Vice President and Treasurer for Atlas Air Worldwide. Welcome to our third quarter 2014 results conference call. Today's call will be hosted by Bill Flynn, our President and Chief Executive Officer. Joining Bill is Spencer Schwartz, our Executive Vice President and Chief Financial Officer. As a reminder, today's call is complemented by a slide presentation that accompanies our remarks. If you have not already downloaded and printed a copy of our press release and slides, you may do so from our 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 includes some forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements relate to future events and expectations and they involve risks and uncertainties. Our actual results or actions may differ materially from those projected in any forward-looking statements. For information about risk factors related to our business, please refer to our 2013 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. [Operator Instructions] At this point, we'd like to turn the call over to Bill Flynn.

[William J. Flynn:]

Thank you, Ed, and good morning, everyone. We thank you for joining us today. Beginning with Slide 3, we are raising our full year outlook for 2014. Adjusted EPS of $1.09 per diluted share in the third quarter is a sequential improvement from the $0.63 that we reported in the second quarter and the $0.45 that we reported in the first quarter. With airfreight volumes continuing to improve and market yields beginning to pick up, we expect our diversified business mix and new aircraft placement, including the third placement with Etihad that we announced this morning, to drive sequential EPS growth in the fourth quarter. As a result, we anticipate adjusted EPS of approximately $1.33 to $1.43 per diluted share in the fourth quarter. We are also raising our full year 2014 adjusted earnings outlook to approximately $3.50 to $3.60 per diluted share. Our results and our recently announced placement of 3 ACMI and 4 CMI aircraft illustrates the strength of our business and the demand for our industry-leading assets and services. They indicate that we are well positioned to capitalize on market improvement, which we are beginning to see as well as longer-term business growth. ACMI earnings in the third quarter were complemented by a profit in Commercial Charter, growth in Dry Leasing and an improved contribution by our military operations. Earnings in Commercial Charter were driven by a sharp increase in block hour volumes, reflecting the broad-based improvement in global airfreight demand. In Dry Leasing, we benefited from our addition of 777 freighters that generate predictable, long-term revenue and earnings streams. And at AMC Charter, we benefited from operating a larger share of available military flying. Our ACMI customers are beginning to benefit from the upturn in airfreight demand. Our aircraft placements are also increasing. We now have 22 747s in ACMI, up from 19 since our last call. With 22 aircraft in ACMI, our placements of modern freighters are at a record level. Our growth with our customers reflect the quality and scale of our global assets and services as well as our ability to deliver reliable performance in support of their networks. We have developed and grown CMI relationships that provide global operations for Boeing's Dreamliner program, international long-haul 747 passenger operations for SonAir, 767 service for DHL in North America and the Asia Pacific region and VIP 767 passenger service for MLW Air. From 2 CMI aircraft when we started in 2010, we fly 14 today, and we'll be increasing that to 18 by early 2015. That's when we'll begin flying 4 incremental 767s in North America for DHL's growing express operations. Slide 4 illustrates the continued positive direction of airfreight demand so far in 2014 and the positive outlook for the year. Shanghai's PACTL terminal, for example, remains on track for a record year. PACTL reported tonnage growth of 20% year-over-year in September and it's up approximately 17% year-to-date. Consistent with the gradual pickup in global economic growth, industry reports and forecasts suggest that airfreight demand will grow by several percentage points in 2014. That's a rate that is outpacing supply and is driving the first real growth since 2010. In addition, IATA estimates that international airfreight traffic, measured on a freight tonne kilometer basis, will grow at a 5% compound annual growth rate through 2017. Slide 5 focuses on our earnings framework for 2014. We're encouraged by our performance and the positive direction of market trends so far this year. Airfreight volumes continue to strengthen and yields are beginning to improve. We are seeing a general increase in demand across all regions, with the greatest growth in the Trans-Pacific market. An increase in online shopping and several new high tech product launches during peak season also continue to favor airfreight. As a result, we are raising our adjusted EPS framework for the full year to approximately $3.50 to $3.60, and our reported EPS outlook to approximately $3.92 to $4.02. For the full year, we expect to fly approximately 160,000 block hours. Our outlook includes the 747-8s and 747-400 freighters that we recently placed with DHL and Etihad. It also includes the strong seasonal flying that we do for our customers during peak season. More than 70% of our block hours will be in ACMI, with approximately 10% in AMC and the balance in Commercial Charter. In AMC, our share of military flying, mainly in passenger service, has increased due to our ability to capitalize on additional flying opportunities and a reduction in the number of carriers serving the market. With the beginning of the government's new fiscal year on October 1, however, we expect to see an overall decline in military requirements in the fourth quarter as well as in 2015 and beyond. Dry Leasing's dramatic growth includes the beneficial impact of the 5 additional 777 freighters that we have acquired since the second quarter of 2013. Turning to operating expenses. We expect that maintenance expense will total approximately $190 million to $195 million, primarily due to performing several conditions-based engine overhauls for our 747-400 fleet during the fourth quarter. This compares with no engine overhauls in the fourth quarter of 2013. In addition, depreciation this year should total approximately $120 million. Reflecting the tax planning work that we have done, we continue to anticipate that our adjusted effective income tax rate will be approximately 28% for the full year. We also expect core capital expenditures this year to total about $30 million to $35 million, mainly for spare parts for our expanded fleet. This is a good point to ask Spencer to provide you with some additional perspective on our third quarter. Following Spencer, I'll provide some additional thoughts, and then we'll be very happy to take your questions. Spencer?

[Spencer Schwartz:]

Thank you, Bill, and hello, everyone. Slide 6 highlights our third quarter results. Our adjusted net income totaled $27.4 million or $1.09 per diluted share. On a reported basis, net income totaled $27.6 million or $1.10 per share. Results in the third quarter benefited from earnings in ACMI and improved contributions in Commercial Charter, Dry Leasing and our military business. During the quarter, we generated free cash flow of $55 million, bringing our year-to-date total to $151 million. Reflecting our commitment to shareholder value, we also bought back 1.8% of our outstanding common stock. Under our share repurchase program, we acquired nearly 459,000 shares at an average cost of $32.68 per share. Future repurchases may be made at our discretion and would be under our remaining $45 million share repurchase authority. Looking at Slide 7. Operating revenues in the third quarter benefited from our diversified business mix, including strong volumes in Commercial Charter, improved passenger and cargo volumes in our military business and the growth of our Dry Leasing operations. ACMI revenues and volumes for the quarter were down about 3%, primarily due to lower 747-400 flying by certain of our ACMI customers. These impacts were partially offset by higher 747-8 revenues and growth in CMI flying. In AMC, revenues during the quarter increased 15%, primarily driven by increases in both passenger and cargo flying. This impact was partially offset by decreases in average revenue per block hour, which stemmed from a reduction in the average pegged fuel price set by the military. Because fuel is a pass-through component in our military business, any impact to revenue from changes in the pegged price is generally offset by a corresponding impact to our fuel expense. In Commercial Charter, revenues in the third quarter increased 37%, driven by a strong rise in block hours and an increase in revenue per block hour. Our block hour volumes reflected the broad-based uptick in airfreight demand. The increase in revenue per block hour reflects the impact of subcontracted cargo revenue on Commercial Charter flights with no associated block hours, partially offset by lower market rates. In Dry Leasing, revenues grew following the acquisition of 5 of our 6 777 aircraft. As we've discussed, each of the aircraft was acquired with a long-term customer lease already in place. Moving to Slide 8. Segment contribution totaled $81 million in the third quarter compared with $78 million in the third quarter of last year. The pie charts at the bottom of the slide highlight the significant proportion of contribution from our ACMI segment, which generated the vast majority of our total segment profitability as well as the increasing contribution from Dry Leasing, 2 segments with more predictable and reliable earnings. Direct contribution in the third quarter reflected an increase in -8 maintenance and lower 400 flying by certain customers in ACMI, which was partially offset by

[William J. Flynn:]

Thank you, Spencer. As reflected on Slide 11, Atlas is leading the way forward. We have diversified our business mix and are driving business resilience. Our results illustrate the positive contributions being generated by the investments we've made and the initiatives we've undertaken. Led by the strength of our brand, our global leadership in outsourced aircraft and services and our ability to work closely with our customers to enhance their route networks and grow their businesses, we are well positioned to take advantage of market opportunities and improving market conditions and to continue to focus on longer-term business growth. With that, Chris, may we have the first question, please?

[Operator:]

Certainly. Your first question is from Kevin Sterling with BB&T Capital Markets.

[Kevin W. Sterling:]

Bill, let me just ask kind of a general question here about the airfreight market. And you've shared some good stats about the strength you're seeing and, obviously, you guys are benefiting from that. Maybe touch a little bit on lower oil prices outside of the lower operating costs for your customers in ACMI. But I'd heard that DHL was actually saying they were seeing a shift back from the ocean to the air. And I'm just curious, as kind of bigger picture thoughts, with the drop in oil prices, has that helped airfreight in particular kind of made some of that modal shift we've seen maybe come back? Because it makes airfreight more competitive.

[William J. Flynn:]

Yes, that's a very good question, Kevin, thank you. So we're looking at good growth in this quarter, this fourth quarter of 2014. So we've now got, I think 5 quarters in a row, starting with the fourth quarter of 2013, of solid demand growth in the airfreight market. So it just wasn't a peak in 2013 driving growth with some product introductions. That's continued across most markets throughout the balance of the year, and particularly not driven by any one product launch but just by a general uptick in trade and, as a result, an uptick in airfreight demand. I think lowering fuel prices, and if they stay low for some period of time, creates a lot of benefits for our ACMI customers. Certainly, we'll -- there's a fuel surcharge and a fuel quotient, in any rate, I think will accrue to the underlying airfreight shippers. I think there's several things that are driving good airfreight growth right now. Certainly, it is a peak period, and we've seen it all year. We've got new product launches that are moving into global markets wherever they may. There's some issues on the West Coast of the United States and concerns there as well. And so a lower fuel price reducing the underlying cost of airfreight transportation I would think, as you suggested, has to be a positive for airfreight demand and airfreight growth.

[Kevin W. Sterling:]

Okay, great. And I know you may not be ready to talk about 2015, but maybe looking ahead here, I think you -- you talked about military, you saw some passenger and cargo improvement this quarter. That helped you. But it sounds like that's going to slow down in the fourth quarter, and I think you said even into next year. So military might be down next year. How should we, maybe big picture, think about ACMI in 2015? I think you said you have 22 planes in ACMI. Should we expect that number or maybe even more in 2015? But maybe just frame a little bit kind of bigger-picture color around 2015, if you don't mind.

[William J. Flynn:]

Sure. So we'll talk about 2015 in much more detail at our call coming up in February. But I think, Kevin, you've hit on several of the key ingredients about how we're thinking about 2015. We see more of a sustained improvement in the airfreight market overall. That's really across all major trade lanes, and we've had these 5 quarters now that I've talked about of growth on a year-over-year basis. AMC, AMC as we've consistently said, is expected to go down, but I would say we don't have a lot of clarity on what the demand will be yet because of just kind of all the turbulence that's going on around the world beyond Afghanistan, certainly, with what we see just generally in Syria and Iraq and Ebola and other humanitarian kind of disasters and relief. I think we're just not getting a great forecast from the military, but we have higher levels of demand than we might have anticipated. Certainly, than we anticipated earlier in the year. 22 is a really good level of placement for us. And we are continuing to work to place more aircraft in ACMI. And without foreshadowing or giving a 2015 kind of outlook, I think there's good opportunities, not only to place more aircraft in ACMI but also to earn more CMI business as well.

[Operator:]

Your next question is from Jack Atkins with Stephens Inc.

[Jack Atkins:]

Just a couple of questions for me. I guess, just to go back to Kevin's question around 2015, and to take another stab at that. At the Analyst Day, you guys talked about your expectation for earnings growth in 2015 over 2014. Is that something you guys continue to expect to see on a year-over-year basis, just from a big picture perspective? And how do the placements of those aircraft into ACMI service impact your earnings in 2015 over 2014? I would assume that, that's an accretive shift but if you could give us some sense for how accretive that is, I think that will be helpful.

[Spencer Schwartz:]

Sure. Thanks, Jack. We'll talk, obviously, in more detail about 2015, as Bill said, during our next call. But to give a little bit more flavor, obviously, we had 3 placements recently, the aircraft moving from Commercial Charter into ACMI and obviously; then, we have the longer-term predictability, reliability; we have guaranteed monthly minimums and so forth. So you have those 3 placements later this year. Next year, we'll be able to enjoy a full year of those earnings. And so we feel really good about that. The airfreight environment, as Bill talked about, is really picking up. Has been broad-based, it's not any particular region or any particular new product introduction. It really is very broad-based, and that should lead to greater utilization and more flying by our ACMI customers. And as Bill talked about before, lower fuel prices certainly don't hurt our ACMI customers. So all of that should lead to enhanced utilization in ACMI. So we are excited about all of that. That being said, we're not sitting still. We continue to expect additional placements, additional opportunities to grow our business with our customers in ACMI as well as CMI. We're pleased where things are, the direction of the business and the overall environment. And all that should lead to a good 2015.

[Jack Atkins:]

Yes, that's really helpful color, Spencer, and I appreciate that. And just to follow up, it's more of a housekeeping item, but when I looked at the changes, I guess, in some of the specific line item guidance, particularly around maintenance expense, it looks like there was maybe some pull-forward of maintenance into the fourth quarter from, I don't know, from the first half of 2015. By my math that's, call it, $0.25, I think and sort of a headwind to the fourth quarter. So it looks like you guys would have seen maybe even a better fourth quarter than what you're guiding had it not been for that. Is that the right way to think about that? Or is that maintenance expense really kind of coming out of the first half of next year, basically?

[Spencer Schwartz:]

It's a very astute and good question, Jack. You're right, maintenance expense is conditions based, and so we need to perform maintenance when those conditions require that the maintenance be performed. And so this year, we are going to have more maintenance in the fourth quarter. And you're right, that means that our earnings would have otherwise been even stronger in the fourth quarter. So you're right on all of that. It's a little early to talk about 2015 again, but we do expect the maintenance should probably be lower next year as a result.

[Operator:]

Your next question is from Steve O'Hara with Sidoti.

[Stephen O'Hara:]

Yes, maybe just first, a quick follow-up. When you say maintenance lower next year, you're talking about lower than it normally would have been or lower year-over-year?

[Spencer Schwartz:]

I was talking about for the full year, Steve. If you look at the total maintenance expense for the full year of 2014, currently -- again, subject to change, but currently, we expect the 2015 total maintenance expense to be lower than that of this year.

[Stephen O'Hara:]

Okay. That's great. And then just if I think about the framework that you guys put out, I want to say it was on the fourth quarter call or around that time frame, you had talked about earnings kind of approximating 2013, with the exception of I think it was about a $0.70 hit from AMC Charter. So AMC Charter is up about 6% year-over-year. And so I guess maybe the difference maybe is Commercial Charter really didn't cooperate as much as you had hoped in the first part of the year, but it's starting to turn now. Is that kind of how things have played out so far?

[Spencer Schwartz:]

Yes, Steve. I think AMC, certainly, has performed a lot more strongly than we had thought. As Bill noted before, there's been a lot more activity in both cargo and passenger flying than we thought earlier in the year. That is offset somewhat by -- in Commercial Charter. But overall, that decline is much lower than we thought it was going to be. We've seen Commercial Charter really starting to pick up, as you saw, we generated a profit this quarter in Commercial Charter, which we are very excited about. So that helped to offset that and, therefore, the framework that we provided earlier in the year, we've now updated that and we are expecting much stronger results than that.

[Stephen O'Hara:]

Okay. And then just kind of -- if I think about the potential contribution from Commercial Charter in 4Q, and maybe in 2015, how many -- so I assume the 747-400s are the big piece of that, and potentially it's -8, but I guess the -8 will be with DHL anyway. So I mean, how many aircraft going forward, if you don't do anything else, would we expect to see in Commercial Charter, assuming normal re-signings of contracts that are up?

[Spencer Schwartz:]

Sure. Good question. So in Commercial Charter, as you would have seen in our press release today, we had about 8.5 aircraft equivalent in that segment. If you -- we just announced 3 placements recently, 3 ACMI placements. Those planes basically moved from Commercial Charter into longer-term ACMI. So you take those 3 out, you're at about 5.5. We have 2 planes that fly a loop around South America. We need 1 to 2 planes for maintenance cover. And so the difference there leaves 1 or 2 planes that are available to move into ACMI.

[Operator:]

Your next question is from Jason Ursaner with CJS Securities.

[Jason Ursaner:]

Just one of the things that I think, Bill, you talked about a little last quarter, was that you weren't quite ready to call the improvement in airfreight, confirm an inflection point yet. So looking at the results for Q3, and obviously the strong outlook for Q4, there's obviously some positives that you're having a very strong runway to generate earnings right now. And driven by the tech launches in the upcoming holiday season, should we just take that for what it is and kind of be happy with it for right now? Or would you start to say maybe you're turning a bit and this could be more of a sustained fundamental improvement heading into next year?

[William J. Flynn:]

Yes, thank you, Jason. So I mentioned earlier in the question-and-answer period here, we've got 5 quarters now of continued airfreight demand growth across virtually each market, and not just product driven. Of course, in the Trans-Pac, there always is the product-driven kind of phenomena in the fourth quarter. So our sense is that the market is growing. This is what IATA has reported. Other industry analysts have drawn similar conclusions. So first, the market's come back, volume is up and now we're seeing yield improvement as well. So volume first, fill the planes in the market and then yield follows. Kevin noted earlier in his question the falling fuel prices, which overall enhanced, I think, the attractiveness of airfreight as people think about their supply chains overall. So coming into '15, I think our sense is we're seeing growth for the first time in really almost 4 years. '11, '12 and '13 had no measurable growth of any consequence until the fourth quarter of '13, and now we've got this full year of growth, and our sense is that, that will see growth in '15 and beyond. And I think a good evidence of that is our ability to increase our ACMI placements. We're up to 22, as we've talked about. Certainly, we've growth with DHL, who is growing at greater than market, and consistently have. But Etihad has talked about their growth and their ambitions, and they've grown greater than market. And we've grown from 0 to 3 aircraft with them. We've placed aircraft with BST, who is a major forwarder out of China; with Astral, who is a Kenyan carrier. And you think about where the opportunity set lies, it does lie with us identifying growth with current customers, growth opportunities, putting a good value proposition in front of them, but also identifying carriers that aren't necessarily top of mind, from those folks, the people who are growing in their own markets and see our ACMI offering has a real value-added proposition to their business plans.

[Jason Ursaner:]

Okay. And you just touched on it a bit, but you did a fantastic job placing additional aircraft into ACMI. And as you mentioned, it's not a short-term decision for these customers or kind of a 1-quarter volume or fuel issue. So I mean, anecdotally, is this just a function of the same dynamic that they've been seeing -- seeing the market growth for a little over a year, and you've talked about kind of underlying some of these leases that you had pretty strong marketability, it just hasn't translated as this -- beginning to translate some of that, that they become more comfortable with the market over the last few quarters?

[William J. Flynn:]

You know I think that's exactly right, Jason. We've talked about this for some period of time. ACMI commitment is a big commitment that a customer of ours make for a take-or-pay basis for fixed capacity. So I think the ability to get to the number we have and the work that our marketing organization does every day to continue to place more aircraft is -- their outcomes are enhanced by just the stronger market and more conviction on the part of our customers that this market has indeed turned and that they'll be able to take good advantage of it.

[Jason Ursaner:]

Okay. And just last question for me. Obviously, there's a lot of headlines from companies discussing economic activity in Europe. Was just wondering if maybe you could comment at a high level, either ACMI or Charter, on the trading planes touching Europe? Just because, I mean, you've seen a lot of strength from your carriers that touch Europe in some capacity. So just wondering if maybe you're bucking the trend a little bit or just what you're seeing there?

[William J. Flynn:]

Well, I think several of the older -- the legacy carriers that have had larger -- had large freighter operations, they've struggled a bit. BA ultimately opted to get out of freighters and go with their own freighters, go with belly capacity and then purchased block space agreement capacity on another carrier. And Air France/KLM have their own considerations that are under way right now, including Martinair. So I think the kind of the Europe-Asia trade lane is weaker than any of the other trade lanes. Their yields are -- haven't improved. The yields in that trade lane are fairly flat and haven't really improved. But if you look at growth, Astral, for example, our Kenyan customer, that's between Europe and Sub-Saharan Africa. So there are growth trade lanes in and out of Europe, but the East-West trade lane between Europe and Asia is probably the one that's among the softest in the market right now. And I think the legacy carriers whose route rights and operating authorities are tied to that are still not as -- not enjoying the kind of growth and bottom line benefit that other carriers operating in other trade lanes are. Etihad. Etihad is in and out of Europe, but again, it's a North-South trade, not an East-West trade. So there's opportunities there, and our objective is to identify them and work with customers to take advantage of them.

[Operator:]

Your next question is from Scott Group with Wolfe Research.

[Scott H. Group:]

So I wanted to ask a little bit about pricing, and you mentioned that Charter pricing is starting to improve a little bit. You had some placements in the quarter on ACMI. Are you seeing improvements in ACMI pricing? And if you can't talk so much about pricing, maybe talk about contribution margins in ACMI? They've been under a little pressure over the past 2 quarters. With these 2 placements, do you expect contribution margins to turn back positive?

[Spencer Schwartz:]

Scott, it's Spencer. I'll take that. You know that we try not to talk about specific customer contributions and profitability with specific customers, so it's hard to talk about these specific placements. But I think what we will say is that we provide our revenue per block hour, and you can see that, that has stayed fairly steady. And that includes all the additional CMI that's been included in there, which generally drags that down, the rate per block hour. We've talked about the reason why -- you talked about the lower contribution at ACMI. It's primarily due to maintenance timing. And so you saw an increase in maintenance last quarter. We talked about it some more now. So I wouldn't read too much into the impact that has on our overall ACMI customer business. What I would say is that we are really satisfied with the terms and conditions of our new agreements. The direction of the business, the overall airfreight market. We're happy where things are.

[Scott H. Group:]

Okay. That's helpful. And so if maintenance comes down next year, realistically, we should think ACMI contribution margins improve?

[Spencer Schwartz:]

All else being equal, yes. We also need our customers to continue to increase their utilizations. So all those things would be really helpful for ACMI, absolutely.

[Scott H. Group:]

Got you. Okay. And then just 2 things I just want to clarify. One, on the military side, what percent increase in share do you get starting this quarter? And then in Charter, how does fuel work there and what have you assumed for fuel prices in the fourth quarter?

[Spencer Schwartz:]

Sure. So with regard to AMC, there aren't too many carriers remaining. And so we expect our share to stay fairly steady at somewhere around 50%. So we fly about half of the military needs. With regard to fuel in Commercial Charter, I mean, we're seeing fuel rates right now, they're around $2.52, something like that. Our business, as I think you know, in ACMI, we have no fuel exposure whatsoever. Our customers pay for fuel. It's not a pass-through, it's just something that the customer is responsible for. In our military business, the military pays us for the fuel. So whatever we pay, they basically reimburse us. There's a pegged rate, and then any over or under is compensated back and forth, so there's no exposure to Atlas. Although, sometimes, it impacts our margins in that business. The only real fuel exposure that we have is in our Commercial Charter business, and that business is generally contracted pretty close to when the flying actually takes place. And so therefore, we can generally include that -- the fuel within our pricing. Any longer-term pricing is generally tied to some sort of a fuel index. So there's very little exposure for us.

[Operator:]

Your next question is from John Godyn with Morgan Stanley.

[John D. Godyn:]

When I think just over the last few years, I feel like 1 of the stories over the last few years has been every time we've gotten excited about sort of seasonal or cyclical upturns in demand, what happens is a we sort of hit a wall with some structural headwinds that continue to depress air cargo pricing, whether it's belly capacity continuing to grow, maybe even the OEs trying to sell more dedicated freighters in the marketplace, some of the dynamics with modal shift. And along those lines, guys, I just wanted to follow up on your comments a bit, because another cargo-exposed lessor that reported earlier this week sort of said something along the lines of, "Well, we're seeing a bit of an uptick in cargo demand, but we're not seeing these structural headwinds go away. So we're going to sell aircraft into that and continue to reduce our cargo exposure." And there's really no way to get bullish on cargo until these structural headwinds go away. So just, Bill, when I think about your comments, how can we have some confidence that these structural headwinds have gone away and that there really is some sustainability to the uptick that we're seeing?

[William J. Flynn:]

Well, John, I'll offer a couple of comments. It will either play out or not play out and so, you're asking for a forward view. We'll be on this call a year from now and we'll see what's actually happened. Our sense is the market is growing. I don't know which company you're specifically referring to, and that's not important, but I would say one of the things that we've talked about consistently is what are the kind of competitive advantages that Atlas has. And it starts with our aircraft. We have a very modern fleet of factory-built freighters, both our 747-400s and our 747-8s, and those are the most competitive assets in the market, and those are the assets that customers want to fly. And so if we looked at what's parked and what's struggling to be placed in the market, it's typically the 747-400 converted freighters, the passenger-to-freighter conversions, which do carry a weight penalty, a fuel burn penalty. They're older, they have higher maintenance expenses, and they carry less cargo. So I think it's probably useful to peel the onion back just one layer and take a look at the underlying assets and how customers want to put them to work. And that's why we've said in a recovering market, we should be able, as Atlas, to take advantage of that early because we have the assets that customers want to fly and operate. And simply, the record -- I would say the record of our placements just over the past several years when the market had all the structural headwinds that you described, we continue to place aircraft and place them quite consistently. And over and above that, you take the asset and then look at the reliability and the performance and our global scale, the other element, what I think is our central competitive advantage. And so we are excited about freight going forward. We do believe it will grow. We do believe we'll place more assets than we have to date. And we will grow our CMI operations. So -- and then without being too long-winded here, look at our customer base. DHL, a large customer of ours, about 40% of our fleet flies for DHL. About 40% of large widebody intercontinental freighters fly for integrators. So I think our kind of our placement or our percentage of our fleet placed with an integrator kind of matches the market. But they're growing high single digits even in a slow market. Etihad announced that their CEO's talking about 16% growth in this market. So I think, again, another -- one more level of analysis, our -- Atlas's customer's growing and are we well positioned to grow with them? And I think we are.

[John D. Godyn:]

Yes. And I do believe that Atlas has a lot of advantages, regardless of the market environment. But just specific to the idea of are you seeing evidence of these structural overhangs go away or inflect one way or another, are you actually seeing that evidence or are they still out there?

[William J. Flynn:]

I think the underlying -- the question is, is the freight market finally -- has the freight market finally returned to growth? And I think it has. And if that's the case, then we should be able to benefit from it and our customers will as well.

[Operator:]

Your next question is from John Mims with FBR Capital Markets.

[John R. Mims:]

So let me ask an earlier question in a slightly different way. When you talk about the airfreight markets are really growing and we're seeing evidence of that. And fuel prices are down, which are great for demand. But you're down to sort of 2010 levels on a fuel price basis. How low does that go or where is kind of the bottom level where you start seeing activation of some of these older, less efficient planes? They may not be as profitable as yours, but these older converted freighters are just older, classics, or even older 400s are pretty cheap now. So what's the risk of having just kind of a surge in supply in the commercial market, which would hurt yields?

[William J. Flynn:]

Well, you know we've had -- we've talked about 5 quarters of growth. We've had 4 quarters of growth with high fuel prices. These lower fuel prices that we're talking about are very, indeed, a very recent phenomena. Almost within the last 60 days. So we've had growth in the market with much higher fuel prices, I think, as a -- just kind of reflection of what's going on with underlying economic activity, and I think the value that airfreight brings to any global supply chain, as you think about it. These BCFs or BDFSs [ph], as we think about these older converted freighters, the first question is, who's going to fly them? And who wants them? And we haven't seen any placed in ACMI in a very long time, several years now. So yes, there's -- there are BCFs parked, there are quite a number of them parked, I just don't see them coming back in large volumes anytime soon. I don't -- I'm not aware of airlines that are asking for them, thinking that the lower underlying lease rate of that asset is going to be superior to the benefits they would have from better fuel burn, lower maintenance costs and better cargo-carrying capacity of a pure factor freighter. We just don't hear anything like that in the market. So could they come back? Sure. Are they likely to come back? I'm not sure who's going to operate them and who wants them.

[John R. Mims:]

Right. Yes, I mean, that's kind of the question. It's definitely -- I wouldn't think it's a very good idea. But on the margin, if the breakeven point lowers just due to reduction in fuel prices, do you have these things entering the Charter market just going after particular freight forwarders or whatnot. But you haven't started seeing that yet?

[William J. Flynn:]

No, and somebody has to be willing to put them on their operating certificate and fly them. And we're just not seeing them come back.

[John R. Mims:]

Sure. Fair enough. Let me ask you another question on DHL as well. You're placing more planes with them so, obviously, they feel better about growth. And one of the things I've heard from some industry contacts is just that the amount of share of traditional airfreight that the integrators are taking from the more of the legacy carriers are just kind of regular way airfreight. Are you seeing -- everybody's numbers have been good in the third quarter, so that aside, are you seeing DHL in their planning with you really talking about sustained ability to take share in the traditional airfreight markets? And if so, what's sort of the theoretical limit or any type of cap that you could have with your relationship with them? And if it's in terms of the number of aircraft that you operate for them or percentage of your revenue? Is there anything from a concentration standpoint that you would be weary of or that DHL would allow them to be exposed to one particular carrier?

[William J. Flynn:]

Well, I don't think we should be commenting on DHL or any specific customer of ours. But I think one point you've touched on is that integrators are growing at a rate greater than the airfreight market. So they're doing that by taking share from traditional airfreight. And they do that -- I think, as you think about all -- the 3 majors

[Spencer Schwartz:]

And John, it's Spencer. I'll just briefly add to that. I know you're a quantitative guy, like I am. When we take a look at the overall large widebody fleet and you take a look at how many planes are operating with the integrators, so if you include those that are operating in their own or those that outsource to others, over the past couple of years, the integrators, as a percent of the overall large widebody fleet, have been somewhere between 30% and 40% of that fleet of large widebody aircraft. And if you took take a look at what Atlas is operating in that same space for DHL, it's the same, about 30% to 40% over the last 2 years. So our balance is pretty consistent with the overall use of large widebody freighters.

[John R. Mims:]

Okay. That's helpful from both of you. And one last quick one, if I could, on just peak season and fourth quarter guidance. Based on visibility, how far out you quote your Commercial contracts as far as the flight plans for your ACMI customers, how much year do we have left as far as potential to -- for upside or downside surprise based on the guidance you've set forth and the block hours you expect for 2014 in the fourth quarter? I mean, is there still -- is that window 1 month or is it 6 weeks that you could really see that? Do you have some variability there, either up or down?

[William J. Flynn:]

We're fairly well contacted for the balance of the year. We have some features in our contract where we've committed capacity but not yet price, and so we're in a position where we can take advantage of upside and yield, and yield is improving. Certainly has over -- it's actually been a good yield environment since August, overall, when we think about it. So I think we have good visibility into our numbers for the balance of the year. We're -- it's the first full week here of November, and I think our view is pretty solid.

[John R. Mims:]

Okay, but the swing factor would be yield at this point, and volumes are pretty set?

[William J. Flynn:]

It wouldn't be a lot of swing factor. I mean, we have a lot of committed capacity at yield. What I was suggesting is we've held back some yield commitment to be able to take advantage of an improving yield environment. And our sense is the yield environment is, indeed, improving as we get closer to the holiday.

[Operator:]

Your next question is from Steve O'Hara with Sidoti.

[Stephen O'Hara:]

I just had a question about the -- just going back to the military. In terms of the current projection from them, I mean, should we be thinking about a similar type impact next year that you were kind of expecting this year? And I'm just kind of wondering if that kind of makes sense. I mean, obviously, you have more in ACMI, Commercial Charter seems to be picking up, but I'm just kind of curious if kind of maybe talking about flat. If you were to say 2015 was going to be flat with 2014, would you see the same kind of impact that you kind of expected in 2014?

[William J. Flynn:]

Yes, Steve. I'd say it's very hard for us right now to predict military because there's just so much going on and they're not able to give us good visibility going forward. We said in the call that we expect military volumes to contract somewhat in 2015. How much? I think we're going to be in a much better position to talk about when we get on the call in February and report our full year '14 earnings. The combination of what's going on in West Africa and in Syria and Iraq, has just driven higher levels of military demand than we would have anticipated. I'm not sure when these situations normalize and when that might occur in 2015. The military's not able to give us great forecast going forward. We're in a good position to take advantage of everything they offer, just given the size of our fleet and the flexibility we have. We do expect it to be lower in '15. I think we'll give -- we'll be in a better position to give you some quantification of that when we get on that call in February.

[Stephen O'Hara:]

Okay. And then just maybe quickly on CapEx for 2015. I mean, I don't think you have anything firm lined up but I was kind of curious maybe your thoughts on adding aircraft versus just maybe generating more free cash flow. And my assumptions would be that 2015 would be a normal year in terms of placements or contract renewals. Could you just comment on that?

[Spencer Schwartz:]

Sure, Steve. I think there were several things in there. So as far as ACMI renewals, next year is a typical year. We've said that, typically, we have 3 to 4 renewals that come up in any particular year. Next year is a typical year. With regard to capital expenditures. We have no sort of commitments for any aircraft acquisitions. So therefore, the only capital expenditures that are commitments would just generally be our core capital expenditures, which are generally for purchases of rotable parts for our 400s and -8s, primarily for those. And there are some other small things in there. However, all that being said, we did buy 777s this year. They've been a fantastic investment for this business. We will continue to look for additional investments that make sense for our business. Right now, there's nothing on the horizon. There's nothing that we're sharing with you today. But we constantly are looking to find ways to grow long-term shareholder value, to deliver strong IRRs and EPS accretion. So we'll continue to do that.

[Operator:]

There are no further questions at this time. I'll turn the call back over to our presenters.

[William J. Flynn:]

Thank you, Chris. Spencer and I would like to thank all of you for your interest in Atlas Air Worldwide. We're strategically positioned to meet the growing needs of our customers in the broader market and to maintain our leadership in aviation outsourcing. We appreciate your -- spending your time, sharing your time with us today. And we look forward to speaking with you again in the future. Thank you.

[Operator:]

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.