Q4 2014 Earnings Call Transcript

Published: 12 Feb 2015

[Operator:]

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

[Edward McGarvey:]

Thank you, Sean, and good morning, everyone. I’m Ed McGarvey, Vice President and Treasurer for Atlas Air Worldwide. Welcome to our fourth 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 also 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. During our question-and-answer period today, we would like to ask participants to limit themselves to one principal question and one follow-up question, so that we may accommodate as many participants as possible. After you’ve gone to 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 Flynn:]

Thank you, Ed, and good morning, everyone. Thank you for joining us today. Beginning with Slide 3, 2014 ended on a strong note and 2015 is starting out well. Continuing the improvement we saw all throughout the year, there was a strong and sustained peak season for the first time in several years. And so far airfreight demand in the first quarter continues to reflect the broad based pick-up that began in 2014. Our adjusted earnings per share of $1.55 in the fourth quarter and $3.72 for the full-year reflects the leadership and strength of our ACMI and Charter businesses, the growth of our Dry Leasing segment, and our ongoing efforts to drive efficiency and productivity through our continuous improvement initiatives. We capitalized on the improvement in market demand, driving increased utilization of our modern efficient aircraft and innovative services. We also performed a substantial amount of heavy maintenance during the fourth quarter. Most of this was for engine overhauls for our 747-400 fleet. This positions us to continue to take advantage of market growth and business opportunities ahead. Slide 4, illustrates the positive direction of air freight demand in 2014 and this momentum continues in 2015. Shanghai’s PACTL terminal for example closed at a record year in 2014, which reported tonnage growing 16%. And just recently it reported that January tonnage grows 12.9% year-over-year. Reflecting the pick-up in global trade IATA reported international airfreight traffic grew 4.8% in 2014. That’s a rate outpacing supply and driving the first meaningful growth since 2010. In addition, IATA estimates that international airfreight traffic measured on a freight ton kilometer basis will grow at a compound rate of nearly 5% through 2019. Slide 5, focuses on our earnings framework for 2015. We began with a favorable view about the prospects for the overall airfreight environment and the demand for our aircraft and services. As a result, we look for moderate growth and adjusted fully diluted earnings per share this year. Our current outlook reflects two primary considerations. First, industry forecasts indicate that global airfreight demand will grow approximately 4% to 5% in 2015, outpacing projected growth in global trade. Similar to 2014, achieving growth at this level will require a continuation of positive global economic activity, driven by healthy consumer and business confidence. Second, while our operating results are expected to benefit from a reduction in maintenance expense in 2015, we face a continued contraction in military demand as U.S. military activities overseas are scaled down. We are seeing good demand in the first quarter of 2015, leading up to the start of the Lunar New Year holidays on February 2019. And we expect earnings per share in the first quarter to be in line with or better than our first quarter 2014 adjusted EPS of $0.45. At this point in the year, there is limited visibility in the second-half market demand. Typically, the majority of earnings itinerated in the second-half and we will update our expectations as the year progresses. Should airfreight continue to grow as anticipated in 2015 our business initiatives and investments have positioned Atlas to be one of the prime beneficiaries. For the full year we expect total block hours to be several percentage points higher than 2014 with approximately 75% in ACMI and the balance in Charter. ACMI hours are anticipated to reflect additional 747-8 and 747-400 flight, as well as an increase in CMI operations, driven primarily by the addition of four customer owned 767 freighters to our fleet in the first quarter. As a reminder, revenues in our ACMI segment do not include the component for fuel or other customer-borne operating costs. As a result, we expect the shift in block hour volumes from charter to ACMI to lower total reported revenues, while overall company earnings should grow. In March, we will place an additional 747-8 freighter into ACMI service for DHL Express. This aircraft will initially replace an existing 747-400 operating for DHL today. The placement reflects the continuing growth of DHL’s trans-pacific operations and our strong partnership with them. To affect this, one of our 747-8 freighters currently in ACMI service for Panalpina will transition promptly to DHL. We will continue to operate one 747-8 freighter for Panalpina between Europe, the United States, and points in Mexico on an ACMI basis. We have also entered into a long term 747-400 charter agreement with Panalpina as it expands its network and extends its customer service offerings. This new freighter service for Panalpina commences in March. Results in our Dry Leasing segment this year will continue to be driven largely by the six 777 freighters that we acquired in 2013 and 2014, each with a long term customer lease in place. Aircraft maintenance expense in 2015 should total approximately $175 million and depreciation is expected to total approximately $125 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 expenditure this year to total between $30 million to $40 million, mainly for spare parts for our fleet. This is a good point to ask Spencer to provide you with some additional perspective on our fourth quarter. Following Spencer, I’ll provide some additional thoughts and then will be happy to take your questions. Spencer?

[Spencer Schwartz:]

Thank you, Bill, and hello, everyone. Slide 6 highlights our fourth quarter results. Our adjusted net income totaled $38.8 million or $1.55 per diluted share. On a reported basis, net income totaled $41.6 million or $1.66 per diluted share. Results in the fourth quarter benefited from earnings in ACMI and improved contributions in Charter and Dry Leasing. During the quarter, we generated free cash flow of $97 million or $3.88 per share, bringing our full year total to $248 million or $9.86 per share. Our reported results in the fourth quarter include an income tax rate benefit of 7%. That was primarily due to an income tax benefit of $10.7 million related to beneficial tax planning regarding the treatment of extra territorial income from the offshore leasing of certain of our aircraft. Partly offsetting the sizable income tax benefit our reported results also included a pre-tax special charge of $5.5 million, primarily related to an aircraft held for sale. Beginning with our results for the fourth quarter of 2014, we have combined our commercial and military charter businesses into a single charter segment, as we now assess operating results at that level. This decision recognized the contraction of our military business compared with the past, as well as the increased interchangeability of our charter aircraft between commercial and military customers. Looking at Slide 7, Operating revenues in the fourth quarter benefited from our diversified business mix, including higher volumes in ACMI, the global scale and scope of our Charter business and the growth of our Dry Leasing operations. ACMI revenues and volumes for the quarter were up about 3% to 4%, primarily due to increases in 747-8 and CMI flying. In Charter, revenues in the fourth quarter were comparable to revenues in the fourth quarter of 2013, but they reflected a different mix of cargo and passenger block hours and rates. In Cargo, block hours were lower reflecting our decision to reduce capacity at the end of 2013 and the continued contraction of flying for the military. In Passenger, increased volumes were driven by higher overall demand. During the College Football Bowl season we operated passenger charters for nearly 20% of the universities competing in the games. We operated flights carrying a variety of teams, bands, and officials to 13 bowl games, many of which were on behalf of repeat customers. In Dry Leasing, revenues grew following the acquisition in early 2014 of three of our six 777 freighters. 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 $91 million in the fourth quarter, compared with $103 million in the fourth quarter of last year. The pie chart to the bottom of the slide highlights the significant proportion of contribution from our ACMI segment, which generated a vast majority of our total segment profitability, as well as the increasing contribution from Dry Leasing. Direct contribution ACMI during the fourth quarter reflected an increase in aircraft utilization driven by market demand. These were offset by an increasing conditions based heavy maintenance expense primarily on our 747-400 aircraft and engines. Improved Charter contribution during the quarter reflected an increase in cargo block hour rates and utilization, driven by market demand and our decision to reduce cargo capacity at the end of 2013. Charter results also benefited from an increase in passenger block hour volumes as I noted a moment ago. These were partially offset by increases in heavy maintenance expense, as well as crew member travel and ground handling expenses from flying to higher cost locations. In Dry Leasing, profitability grew following our acquisition of 777 aircraft and the expansion of our Dry Leasing business. Turning to Slide 9 and our balance sheet, we ended of the fourth quarter of 2014 with cash including cash equivalents, short term investments and restricted cash totaling $331 million that compared with $288 million at September 30 and $339 million at the end of last year. Our cash position at December 31 reflected net cash of $105 million provided by operating activities during the fourth quarter and that was partially offset by net cash of $24 million used for investing activities and $44 million used for financing activities during the period. Net cash used for investing activities primarily related to the purchase of engines and relatable spare parts and net cash used for financing activities primarily reflected payments of debt. Excluding the acquisition of aircraft and engines, our core capital expenditures during the quarter totaled $7 million and were approximately $25 million for the year. As Slide 10 shows, at the end of the fourth quarter, our net leverage ratio which includes capitalized rents was 5.4 times trailing 12-month EBITDAR including the benefit of our investments in our outstanding WTCs. That’s down from 6 times at March 31, 5.8 times at June 30, and 5.6 times at September 30, primarily driven by the pay-down of outstanding debt. During 2014, we paid down approximately $200 million of our overall debt. With that, I’d like to turn it back to Bill.

[William Flynn:]

Thank you, Spencer. As reflected on Slide 11, Atlas is leading the way forward. In addition to expected earnings growth this year, we continue to focus on the longer term growth of our business. With a resilient business model, world-class employees, strong customer relationships, and a superior fleet, we are well positioned to capitalize on market improvements to generate substantial earnings and cash flow, and to continue to enhance shareholder value. With that, Sean, may we have the first question, please?

[Operator:]

Thank you. [Operator Instructions] Your first question comes from the line of Jack Atkins. Your line is open.

[Jack Atkins:]

Good morning, guys. Thanks for taking my questions.

[William Flynn:]

Good morning, Jack.

[Spencer Schwartz:]

Hi, Jack.

[Jack Atkins:]

So I guess just to kind of start off, could we talk about the shift of the contract on the -8 from Panalpina to DHL, was this at the expiration of Panalpina’s existing contract? And just sort of why would Panalpina want to enter into a long term Charter contract versus an ACMI agreement and could you maybe help us understand how those two types of contracts differ?

[William Flynn:]

Sure, I’m not going to spend a lot of time talking about Panalpina per se, we don’t discuss our customers, Jack, as you know but they did issue their own press release this morning and kind of described the transaction from their perspective. But essentially, Panalpina, we will continue to operate the one 747-8 in ACMI for Panalpina. ACMI contracts are multiyear and they’re a fixed take or pay, where we provide the aircraft and all the services for the customer. The Charter contract is just that it’s a Charter contract. It’s not - it is to serve their new route networks that they’re putting in place from Asia into the Americas and they’ll describe that I think in more detail to think about it. But it is a Charter contract. It doesn’t have the same fixed take or pay nature that an ACMI contract has. But for them, that combination in their own controlled network, the combination of one ACMI agreement with Atlas, and then this multiyear agreement on the charters where they’ve talked about them being in the range of several hundred per year is the cornerstone of the relationship going forward. And this is a relationship as you may know that we have with Panalpina now for over 20 years. DHL on the other hand certainly they’ve got five 747-8 in service for them today. They very much appreciate the aircraft and what it’s able to do for them in their network and so the -8 that’s coming back from Panalpina immediately goes into service for DHL. And if you step back and think about DHL, they’ve had great growth over the past several years and even in their most recently reported earnings as a segment of Deutsche Post. We’re looking at 8% to 9% kind of volume growth in their business overall. And if you look at the growth, even before this -8 comes in that we’ve experienced with DHL in 2014 over 2013, we had almost 10% growth in terms of the deployed capacity, measured by an available freight ton kilometer basis with DHL.

[Jack Atkins:]

Okay. Okay, Bill, thank you for that. And just to follow-up, the issues on the West Coast as it relates to the labor disputes out there and also port congestion continue, to see if it get worse, not better, with some port shutdowns over the course of the next four or five days, are you seeing much ocean to air conversion, did you see much in the fourth quarter, are you seeing that again in the first quarter? And can you maybe talk about how that plus lower fuel prices could maybe help drive some significantly elevated demand levels in 2015?

[William Flynn:]

So there is a lot there, Jack. The - I made the comment earlier. We, I think, we the industry saw that a very strong and sustained peak in 2014 that we haven’t seen before depending on how you think about it. Volumes really began to materialize in late August, early September timeframe, and then right - ran right through to essentially the holiday season. In 2013, we had a narrow peak, if you will, one that began in October, and we didn’t really see any kind of material rate increase until November. And it felt like it was more driven by one or two product introductions as opposed to just kind of general levels of overall demand. Coming out of the holiday season and some of it could certainly be the later Lunar New Year this year, which New Year’s day is I guess, February 19, we had strong demand, we the industry, and we the Atlas, and our ACMI customers well, had strong demand picking up right after the holidays and running from our view, right up to Lunar New Year. And then on top of that there is been the effect from our perspective of the interruptions on the West Coast port and the effect that’s having on supply chain. So certainly there is some volume in the market today as a result of the West Coast port operations. In particular, there is a lot of full planeload Charter activity coming out of Japan, as the Japanese automakers and other Japanese manufactures with assembly operations here are needing to fly material and product into the U.S. to support the manufacturing plants that they have here. But I think your question have some really good insight. I think if fuel remains at lower levels then we’ve seen it in recent years and I won’t predict the fuel price, but if fuel remains at lower levels, combined with the interruptions that occurred on the West Coast, I think a number of companies may begin to include more air than currently they have in their global supply chain strategy. And I think that overall for the industry is a good thing, it’s hard to predict, but I don’t think it’s an unreasonable concept to think about. Overall with the stronger market and lower fuel prices I think that creates a very favorable environment for us, for our ACMI customers, and our ability to place more aircraft into ACMI and kind of strengthen the Charter returns going forward.

[Jack Atkins:]

Okay, Bill. Thanks so much for the insight. I appreciate it.

[William Flynn:]

Sure. Thank you, Jack.

[Operator:]

Your next question comes from the line of John Mims. Your line is open.

[John Mims:]

Thanks guys. Good morning, thanks for taking the call. So, Bill, maybe if you can just continue on that a little bit. Panalpina, in the press release said they are going to come back to 200 Charters. There is like you said some strong demand out of Japan. You got the port disruptions. The planes that are available for Charter are less than they were at this point last year. So it seems like you’ve got a fairly limited supply and demand coming from a number of places. So what would you need to see and when would you need to see to be a bit more positive. I mean, I look at where the stock’s trading right now, and I know that you’re only kind of saying what you can say, what you see right this minute, but the market is reading this somewhat negatively. So I’m just curious like what you would need to see to put a more aggressive line in the stand as far as what you could see this year based on the tailwinds that are seem to be coming?

[William Flynn:]

Well, I think what we started out saying is we have a very favorable view about the market going forward. I think the only caution that we put out there is that the second half of each year tends to be the stronger part of the earnings cycle. And there’s just limited visibility into the second half. And I think that’s just the case generally. With the strength that’s in the market, the good growth year-over-year, those trends continuing to 2015, we’re very positive. I think the cautionary tales are, or the caution is about, what’s happening around the world generally, what happens in Europe with Greece and some of the other questions that are out there, does that put a damper in demand and demand in the very important Asia to Europe trade lane that we and our ACMI customers serve, and the instability in the Middle East, what that may or may not lead to. We’re just pointing out to the fact that there is still remains some uncertainty in the forecast of market demand going forward. In terms of our ability to cash our growing market there are several factors. I certainly increased utilization by our ACMI customers, a high percentage of that drops to our bottom line. There is certainly very good interest in ACMI and growing ACMI with our customers. We do have the capacity, a good amount of capacity, probably a better way to say it, in terms to serve that Charter market and drive higher utilization of the aircraft in that market as well. And so our marketing team working with our operating team are looking at all of the Charter opportunities that are presented to us. And we’re seeking to optimize the result by aligning which charters will accept and when they are going to fly, how quickly we are able to turn that one flight into another flight, turn the aircraft and keep going. So there is the opportunity to do that as well. In terms of capacity additions, fundamental fleet capacity additions, we have a disciplined approach to managing our fleet if there is a clear line of sight for us we’re not speculatively taking on capacity, we will.

[John Mims:]

Right. Okay. That’s helpful. And if you look using the retail industry in the spring fashion, supply chain, and whatnot, that seems to be fairly, I guess, a big piece of the port disruption conversation right now. Are you having or your customers having conversations or are involved in those conversations now, in terms of getting goods to the shelves in time for the spring fashion trade or is that something that still sort of yet to be determined from your view?

[William Flynn:]

No, I don’t think it’s yet to be determined, I think the key freight forwarders and express operators and other supply chain providers are absolutely in conversations with the several commodity segments that have got to be concerned about the continued disruption on the port, in the West Coast ports.

[John Mims:]

Okay. And then just one follow-up and I’ll turn it back, the tax rate guidance that you gave out on a year-over-year basis it’s a little lumpy, first quarter tax rate was fairly high. What’s the - I appreciate the guidance of flat EPS, flat to better EPS year-over-year in the first quarter. But how does first quarter look in your projections on a pre-tax basis?

[Spencer Schwartz:]

John, it’s Spencer. I think - I don’t think there should be any big surprise in our tax rate during the first quarter. We think it will be approximately 20% for the full-year, and so I think, using that throughout to a reasonable expectation at this point.

[John Mims:]

Right, so okay, all right. But I just need to model that. I just want to make sure that’s not implying that pre-tax would be down and you make that up on a favorable tax rate.

[Spencer Schwartz:]

No, no, that’s not our expectation.

[John Mims:]

Right, cool. Okay, thanks so much.

[William Flynn:]

Thank you.

[Spencer Schwartz:]

Thank you.

[Operator:]

Your next question comes from the line of David Campbell from Thomas Davison Company [ph]. Your line is open.

[Unidentified Analyst:]

Yes, thanks, Bill and Spencer. I am a little curious about the - how the company gets more block hours, so if any significance and therefore improved growth without more aircraft. And somebody mentioned, as you mentioned that, aircraft available for Charters would be down, I guess, because you’re using one more with DHL. So I am a little confused about where we are going to get the - how we’re going to get more block hour growth with any significance to that without and to the aircraft fleet.

[Spencer Schwartz:]

Hey, David, it’s Spencer. I think part of that answer is higher utilization. So a stronger market should lead to our ACMI customers flying above their minimum guarantees, it should lead to a stronger Charter market and higher utilization in our Charter business, and should also impact yield. So you talked about growth, so there is growth in block hours and therefore utilization. But there is also growth in yield. So I think those things taken together should lead to growth for us for next year, this year, I’m sorry, 2015.

[Unidentified Analyst:]

Yes.

[William Flynn:]

And I think the only thing to add to that David is, if we see a sustained requirement for capacity that we feel very strongly about that we can put to work and generate the kind of returns that we would want. We’d be willing to increase capacity. But before we do that, we would certainly look to drive the max utilization of the fleet and make sure we’re pushing the price lever as much as possible as we can on yield. And then I think we’ll begin to think about capacity. Just given the uncertainty about how several of these larger macro issues may play out through the balance of 2015 into 2016. And that was really kind of the balancing equation we’re trying to solve for.

[Unidentified Analyst:]

Okay. And I hear what you said about - you through there is some traffic was moving from sea-freight to airfreight services, because of the West Coast. I had a hard time seeing it in the export data from Asia. That is the growth in the fourth quarter or in the month of November, December, seeing to be comparable to what was happening before the strike had an impact, and I - but you seem to think that…

[William Flynn:]

I think it’s just a matter maybe of recency David. We were experiencing a very strong peak as we talked about in the fourth quarter, although these port issues have been going on for quite some time. I think with the interruptions we’ve had really since January and now they’ve reported - CMA’s reported this cessation of stevedoring operations for the next five days, I think all of that - the impact, I think, is going to be more clearly seen in the first quarter.

[Unidentified Analyst:]

Okay. Thank you.

[Operator:]

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

[Scott H. Group:]

Hey, thanks. Morning, guys.

[William Flynn:]

Good morning, Scott.

[Scott H. Group:]

So I’m not too familiar with how these - the longer-term charter agreements work, so just a few questions here. So, are there contractual minimums involved here, or is this - is the 200 charters just based on kind of the current demand outlook? And then just along those lines what do you - how do you think 200 charters compares on a block hour basis versus a -8 in ACMI and is there any comfort you can give us about the contribution margins here being better than kind of the average charter margins that we’ve seen in the past couple of years?

[William Flynn:]

So a couple of things, these are - this is a hard agreement and I want - I did want to distinguish charter from ACMI. But there are 200 plus flights in the year contracted with Panalpina running through the year, because they are using the charters as part of what they call their own controlled network and refer to often as a unique network. So this is a fixed capacity, schedule of line that Panalpina will market to their customers in the trade lines that these will serve and it will generate for the full-year attractive returns for us, it will provide I believe for Panalpina the capacity they want to have in the direction and the trade lines that they want to have for their customers.

[Scott H. Group:]

If something changes in the demand environment and they wanted - and their customers tell them we need 150 charters a year, how does that work?

[William Flynn:]

Yes, I’m not going to go get into the detail of their contracts, but Panalpina’s press release have said, they have 200 charter flights scheduled with Alice for the year and I just leave it at that.

[Scott H. Group:]

Okay. In terms of the maintenance expense and it feels like good amount was pulled forward into fourth quarter, which helps fourth quarter of 2015, is there any initial way to think about 2016, is that kind of somewhere between 14 and 15 from a maintenance standpoint, anyway to think about that?

[William Flynn:]

Hey, Scott, this is our fourth quarter 2014 earnings call and so we provided a framework for 2015, I don’t think we are in a position at this point to start talking about 2016. We’ve provided the maintenance expense all throughout - for the full-year of 2015. But you are right in that there was additional maintenance, maintenance is conditions based. So it’s based on either the calendar how many months, or it’s based on cycles, for example, for engines, how many takeoffs and landings, so it’s conditions based either based on time or based on activity. And so there was more incurred in the fourth quarter than we had previously thought and that’s going to lead to less maintenance in 2015, that’s for sure. And so that’s what we are talking about.

[Scott H. Group:]

Okay. And I could just ask one more just on the military side, I know you are not breaking that out specifically anymore, but if I remember, so a year ago you talked about a $0.70 headwind to 2014 earnings, I’m guessing, it ends up being not as bad as that, but within the framework for 2015, are you expecting a similar magnitude headwinds in the numbers?

[William Flynn:]

Yes, so for 2014, the ACMI business overall, it did decline due to their continuing contraction, sorry, AMC did decline due to their continuing contraction in the military demand, as the military presence overseas has been reduced. But block hours were higher than what we originally thought this time last year. For 2015, we think that both AMC cargo and AMC passenger both of those we expect to decline. And so what we’ve said is that, we think we’ll see to your previous question, we think we’ll see some tailwinds coming from lower maintenance, but we think we’ll see some headwinds coming from lower military activity and together, those two things combined, we think will lead to earnings growing moderately.

[Scott H. Group:]

Okay. All right. Thank you, guys.

[William Flynn:]

Thanks, Scott.

[Spencer Schwartz:]

Thank you.

[Operator:]

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

[John Barnes:]

Hey, thanks, guys, for taking the question. We’ll see first on the reduction of fuel cost, obviously jet fuel prices have come down. Do you feel like you’ve come down enough and maybe the market with the volume increase in 2014 in the real peak and then you’ve even said, you are starting off 2015 in a pretty good shape. Are you concerned at all about that combination maybe attracting some parked capacity back into the industry and if so, how much could come back in before we would really begin to have negative consequences for rates utilization that type of thing?

[William Flynn:]

Yes, John, this is Bill. It really is a good question, and we’ve spent a lot of time analyzing that, as you would expect. So about six months ago or greater, there were 19 747-400 factory freighters parked and today there are 19 747-400 factory freighters parked. So even in the face of what was a much different peak this year that started kind of mid-third quarter, capacity didn’t really come back. Now there - I have to mention there were some capacity increases just our ACMI customers alone fluid higher level of utilization that’s a former capacity increase in a number of the large carriers with - a number of the carriers with large freighter fleets could put more rotations in possibly per week which would be another form of increased capacity. But we haven’t seen it yet to-date, and I think many carriers exercise some kind of capacity constraints, and elected to drive yield. So some of those 747-400 freighters could come back, I think the companies that have those freighters have shown that they are reasoned on that, judicious on that, so I think certainly it’s possible that some capacity could come back. I don’t know that all 19 come streaming back into the market your question of when it would be - when would have an impact is, really gets us kind of supply and demand. I think what we’ve seen is good discipline and we’ll see how that continues, but it seems to us most of the carriers are kind of talking about when they talk about their businesses. I’m not concerned that we are going to see a lot of BCFs which are parked as well coming back as and it’s - the aircraft just doesn’t have a high level of market acceptance, it burns more fuel in it. It carries less cargo due to - from a loadability point of view, the large part, because we have that upper floor from the passenger deck goes half way down the aircraft. So some could come back, so far the market seems to have pretty good discipline and you might see a couple of BCFs come back here and there, but I think they serve perhaps in different market.

[John Barnes:]

In the 19 OEM built freighters, how long - at what point are they kind of permanently parked, I mean, how long can they sit out there until they are just kind of permanently parked?

[William Flynn:]

They could be maintained for some time, but as time elapses, there are heavy maintenance events that are just driven by time, not by use. And so you are going to start to accumulate time on again C checks and D checks. And so the owner then is going to have to make that economic analysis to say is it worth, so many millions of dollars of heavy maintenance and then they would need to consider with the state where the engines are in order to bring them back. I think one of the good things though about, there is a lot of god things about lower fuel overall for airfreight industry. But I think particularly from an analyst perspective, though there are some number of aircraft parked and a couple may come back. I think it certainly extends to competiveness of the 747-400 into the market what they serve best and our customers can take advantage of that lower fuel cost.

[John Barnes:]

Sure, okay…

[William Flynn:]

In our charter market itself.

[John Barnes:]

And then I have one question on the DHL - I’m sorry, the Panalpina agreement, and I’m sorry to beat this horse. But when you look at it taking an ACMI customer and now you’ve kind of rolled out a new product with a contract that has multiple charters kind of a - it’s different from your spot charter activity obviously, but I don’t want to use the word desperation, but I mean, there’s been a lot of questions around the size and scope of the ACMI market, how many customers are out there. And I guess when we see some modification to an agreement like this, it begs the question, does this suggest that there is a limit to how many customers are potentially out there. And what is the risk that modifying an agreement like this with one of your long-term customers opens up that floodgate for other customers to come in and say, hey, you did it for them; we would like to look at something similar? And is there a risk that it changes the dynamic of that ACMI agreement that we’ve kind of come to rely on to provide that degree of kind of predictability in your model?

[William Flynn:]

I think the predictability in our model is good, John, and I’ll address it another way. So we announced last year that we had a new ACMI customer, BST Logistics, a Chinese freight forwarder, not terribly different from Panalpina in their business model. And what we’ve had with BST in place for several years was a fixed charter agreement, where we ran charters on a fixed schedule basis if you will for BST for a number of years. And those fixed charter agreements allow them to build their business and they ultimately become a 747-8 ACMI customer. So - and I think there potentially could be more growth with them, and other non-traditional or non-airline operator ACMI customers. There were a lot of questions at the time of the delivery of the 747-8s, could we put them to work, and could we put them to work and generate the kind of returns we wanted to when have the investment. Last year at this time, there was a lot of concern in the market about British Airways’ decision to exit dedicated - their own dedicated freighter capacity through in ACMI. And we’ve been able - we put those 747-8 to work. Etihad who has grown their cargo business quite dramatically in their most recent press release, their CEO, James Hogan was talking about the importance of cargo. And how cargo was growing for them and one of things you noted about specifically was this new service from Malpensa, Italy to Colombia in joint venture with Avianca. Well, that’s an Atlas Air 747 aircraft. It’s operating that for Etihad and they have the two aircrafts plus 4s, plus the -8. As I mentioned earlier DHL increased its AFTKs with Atlas - through Atlas 10%. And in 2014, I expect they will increase the deployed capacity through Atlas in 2015 as well. And they’ve already done some of that incrementally in the 747-8. Qantas has retained ACMI operations and it’s an important part of their business, when not so long ago, because of the more broad issues and considerations around Qantas, I think there might have been a market expectation, the aircraft were coming back. So I think what Panalpina has done is, has looked at their reserved market, how they wanted to deploy dedicated capacity that they choose to operate and in the mix that they’ll buy in the market. That capacity should increase but I don’t see it a desperation at all. I think there is a good ACMI market. I think we will able to grow ACMI with current and new customers. The Charter market is great for us, because it drives high utilization of the fleet and the CMI we brought on even more aircraft now, we’ll be up to 18 in CMI. So I think it kind of underscores the quality of the underlying service, the flight operations and maintenance operations and the logistics overall. So I think we are in a good position to grow. And if you think about where we were last year on this call, it was a very different environment, hadn’t been a great peak, lot of uncertainty, what the heck is 2014 going to look like, can we place planes. And I think we are in a very different position at the beginning of 2015 than we found ourselves last year. It’s my view.

[John Barnes:]

All right, well, thank you for that color. I really appreciate it.

[William Flynn:]

Thanks, John.

[Operator:]

Your next question comes from the line of Jason Ursaner from CJS. Your line is open.

[Jason Ursaner:]

Good morning.

[William Flynn:]

Good morning, Jason.

[Spencer Schwartz:]

Good morning, Jason.

[Jason Ursaner:]

Going back to the maintenance question, I’m just still not really understanding what led going forward the $11 million of heavy maintenance relative to the guidance in November. And just, if it is conditions based on time or activity shouldn’t those have been pretty well telegraphed?

[Spencer Schwartz:]

Yes, Jason. Some of it can be and some of it cannot be. So sometimes it is purely calendar based in 18-months or 24-months that a check is due and so that can absolutely be scheduled. Sometimes there’s not a slot available. So sometimes there is a check scheduled for say January but a slot is not available. And so there is a slot open in December. For example, so that happens there other times when - for engines for example, we had some engines that were off wing, where we needed those engines for early 2015 and so it’s going to help our operations in early 2015. So that’s why we feel good about what we’re seeing for the first quarter of 2015. There is - there are also things unfortunately sometimes they’re unforeseen. You take an engine off wing for what seems to be a routine check and then you do a borescope and you find out that there are some blade issues or this or that - and things like that happen. So that happens sometimes as well. So it’s not perfectly clear, but we try to give you - every quarter we try to give you our best estimate of what maintenance is going to be. And I think the work that we did in the fourth quarter will really put us in a good position for the first quarter and going into 2015.

[Jason Ursaner:]

Okay. And in the quarter in Charter just where would you peg average spot rates out of Asia for most of the quarter?

[William Flynn:]

Well, they have been changing as a result of the West Coast port interruptions. And so the rates out of Hong Kong are probably $3.50, $3.60, maybe $3.40 to the West Coast, $3.50, $3.60 to the Midwest for spot rates. They’re in the low $4 coming out of Shanghai into the same markets overall. So they’re a good rate for - certainly a very good rate for February as we move into Lunar New Year.

[Spencer Schwartz:]

Jason, I just want to confirm you’re asking about rates currently right now or you were asking about the fourth quarter of last year?

[Jason Ursaner:]

Well, I mean, you gave currently, right now. But, you also maybe just where they peaked out during the holiday season?

[Spencer Schwartz:]

Sure. So, interestingly when you look at the commercial Charter yields throughout 2014, interestingly the first half of the year, when you exclude fuel, the yields were the lowest they’ve been for the past five years through the first six months. However, from that going forward starting between June and July rates started picking up at that point and by the end of the year they were better than 2012 - 2011, 2012 and 2013.

[William Flynn:]

Yes, which kind of makes sense, right, Spencer, as you think about the market and the fact that we had a sustained peak?

[Jason Ursaner:]

Right. So let me just following up on that last part with rates at some point shifting and going above the last couple of years. Just going back to some of the question you took on the guidance outlook and fuel. One thing that really surprised me was that there really wasn’t a whole lot to mention on fuel in the prepared remarks. And I understood the commentary that you’re not predicting fuel prices for the full-year and that it should be benefit, but wouldn’t it be more material than that? I mean, sitting here today wouldn’t current fuel prices really produce a pretty sizable margin benefit if in terms of the spread of yields over fuel if yields are above where they were?

[William Flynn:]

But we recall, we have limited operations where we have fuel risk. So 75% of the flying in ACMI and CMI, there is no fuel exposure in ACMI and CMI. And we’re flying…

[Jason Ursaner:]

I’m just talking more about Charter.

[William Flynn:]

But even Charter, when we’re flying for our military customer in the Charter segment there is no fuel risk there either. And a number of our program charters once that are longer tenure, internally we call it ACMI charter not that it is the ACMI contract. But it’s ACMI charter because we’re not taking any fuel risk even in the longer term charter program. So we quote to our customer in that context a rate without fuel or a rate for a short-term period of time. So we’re not taking risk or a rate with an index. So when you start to parse all of that back then the fuel component becomes quite small relative to the total level of flying. And then, so we are getting not wholly but we are nearly fuel neutral, which I think for the long-term that’s where we want to be.

[Jason Ursaner:]

Okay, great. I appreciate the detail. Thanks.

[Operator:]

Your next question comes from the line of Stephen O’Hara from Sidoti & Company. Your line is open.

[Stephen O’Hara:]

Hi, good morning.

[William Flynn:]

Good morning, Steve.

[Spencer Schwartz:]

Hi, Steve.

[Stephen O’Hara:]

I was just curious if you could just talk about free cash flow and looking at 2015, I mean, if net income is up a little bit, depreciation, I think, it’s $125 million. And then, I think, you have other amortization in there that actually adds a little bit to that. But I mean, it seem like, net - operating cash flow should be in the neighborhood of, let’s say, $250 million to $270 million pretty easily. I’m just wondering, what other CapEx you have out there that maybe you are looking at that would maybe mitigate some of that cash flow being maybe returned to shareholders who are paying down debt and boosting the - benefiting the balance sheet?

[William Flynn:]

Sure, sure. Good question, Steve. So when it comes to cash, I just - we are very proud of where we ended the year. And so I just want to point out a few things and then I’ll come to free cash flow. But with regard to cash, over the course of 2014, we added modern efficient assets to our fleet, we added three 777s as you know, early in the year. We added to our ACMI business, which requires very little cash outlay. We paid down $200 million of debt. We’ve repurchased 1.8% of our outstanding stock. We did all of those things and our cash balance stayed the same as the prior year. So we were able to do all of those things and the cash balance stayed the same. So I’m excited to talk about that, so free cash flow in 2014, as you know, was $9.86 per share. For 2015, to your question, we think that the free cash flow will be in line with or better than 2014. So pretty similar result, which gives us the opportunity to continue to pursue our capital allocation strategy, which is to really focus on three things, which we think we’ve really done well and balanced quite well. One is maintaining a strong balance sheet, so we expect to continue to pay down debt, the other is, continuing to invest in our business. And as we said last year, we bought 777s. We continue to look at opportunities to find ways to David’s question earlier to find different ways to continue to grow the business, and then returning capital. So we will do that on an opportunistic basis, we still have $45 million remaining under our board authority, so we still plan on focusing on all of those things. And, again, when it comes to cash, we utilized our free cash flow in each of the areas in our capital allocation strategy to really do some great things in 2014 that allowed us to end the year at the same position as we started more or less.

[Stephen O’Hara:]

Okay. And I mean, I guess, in terms of, I mean, when do you - maybe bolstering the fleet, I mean, when do you need to kind of make decisions on the fleet type going forward and more-8s or 777s, or something like that. I mean, is that something that’s imminent decision or could we get a few years of very good free cash flow kind of even with full CapEx included, I mean, it seems like you do $7 share pretty easily without even blinking in 2015, and it doesn’t really seem to be reflected in the stock price, and I’m just kind of wondering where the disparity comes from?

[Spencer Schwartz:]

Yes, I can answer what the stock market is thinking or reacting or while the disparity between the free cash flow being generated in the stock price. But we are generating a significant amount of free cash flow. We’ve been using that again, we think, the right ways. Last year, we were able to buy three 777s. We bought 777s the year before, those assets are performing really well. And when we first did it, I think, there were some questions about it, but now you see the results. And so that’s what we were talking about when we acquired those assets, you now see the results, you now see the growth of our Dry Leasing business, so we continue to evaluate. We will see if additional purchases make sense, but if not we haven’t made any purchases really that did not make sense. And so, Steve, we’ll continue to utilize that cash if nothing else makes sense then maybe we’ll buy more the stock back, or may we’ll pay down more debt. We will continue to do what we think is right for with our cash.

[Stephen O’Hara:]

Okay. All right. Thank you very much.

[William Flynn:]

Thank you.

[Spencer Schwartz:]

Thank you, Steve.

[Operator:]

Your last question comes from the line of Jack Atkins from Stephens Incorporated. Your line is open.

[Jack Atkins:]

Yes, great. Thanks, guys. Just a couple of quick follow-ups here. The plane that is currently being held for sale, could you give us a little bit of color on what exactly that is in terms of asset type?

[Spencer Schwartz:]

Sure, sure, I’ll comment on that for you Jack. It is a - it’s a 737-800 passenger plane, so it’s narrow body plane, and just the reason why it’s for sale. As you know, over the last couple of years, I was just saying that, over the last couple of years, our focus had tightened for our Dry Leasing business, has really shifted more towards wide body freighters. We had a good opportunity in this case to sell a narrow body passenger aircraft, lock in a good economic return, and enhance the cash position for future investments. So the results there for that plane were actually better than the business case that we prepared when we acquired the aircraft. And so, overall, when it comes to our Dry Leasing business, I was just saying, we are really pleased with the investments we’ve made in that business and you can now see the resulting financial returns.

[Jack Atkins:]

Okay, that’s helpful, Spencer. Thank you. And last question, in terms of the expected amount of debt amortization, Spencer, that you are projecting for 2015, I think under your XM -8 agreements and your, at least, three your 777s there’s sort of a steady amortization there, could you maybe help us think about that just from a balance sheet perspective?

[Spencer Schwartz:]

I think Jack it would be pretty similar to 2014, obviously a little bit lower, but very, very similar to the…

[Jack Atkins:]

$200 million in that debt reduction?

[Spencer Schwartz:]

Approximately, should be a little bit lower over time due to the amortization tables, but pretty similar.

[Jack Atkins:]

Okay, that’s great. Thank you.

[William Flynn:]

Thank you.

[Operator:]

There are no further questions at this time. Presenters, I turn the call back to you.

[William Flynn:]

Thank you, Sean. Spencer and I would like to thank all of you for joining us today and 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 sharing your time with us today and we look forward to speaking with you each of you soon. Thank you.

[Operator:]

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