U.S. Markets open in 7 hrs 40 mins

Edited Transcript of AAWW earnings conference call or presentation 1-Aug-19 3:00pm GMT

Q2 2019 Atlas Air Worldwide Holdings Inc Earnings Call

Purchase Sep 4, 2019 (Thomson StreetEvents) -- Edited Transcript of Atlas Air Worldwide Holdings Inc earnings conference call or presentation Thursday, August 1, 2019 at 3:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Edward J. McGarvey

Atlas Air Worldwide Holdings, Inc. - VP & Treasurer

* John W. Dietrich

Atlas Air Worldwide Holdings, Inc. - President & COO

* Spencer Schwartz

Atlas Air Worldwide Holdings, Inc. - Executive VP & CFO

* William J. Flynn

Atlas Air Worldwide Holdings, Inc. - CEO & Director

================================================================================

Conference Call Participants

================================================================================

* David Griffith Ross

Stifel, Nicolaus & Company, Incorporated, Research Division - MD of Global Transportation and Logistics

* David Pearce Campbell

Thompson, Davis & Company, Inc. - Senior VP, Research Analyst & Institutional Sales Partner

* Helane R. Becker

Cowen and Company, LLC, Research Division - MD & Senior Research Analyst

* Howard A. Rosencrans

Value Advisory LLC - Founder & Chief Research Analyst

* Jack Lawrence Atkins

Stephens Inc., Research Division - MD & Analyst

* Kevin Wallace Sterling

Seaport Global Securities LLC, Research Division - MD & Senior Analyst

* Robert James Labick

CJS Securities, Inc. - President & Director of Research

* Scott H. Group

Wolfe Research, LLC - MD & Senior Transportation Analyst

* Seldon T. Clarke

Deutsche Bank AG, Research Division - Associate Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good morning. My name is Catherine, and I will be your conference operator today. At this time, I'd like to welcome everyone to the Second Quarter 2019 Earnings for Atlas Air Worldwide Conference Call. (Operator Instructions)

Thank you. I'd now like to turn the call over to Atlas Air. Please begin.

--------------------------------------------------------------------------------

Edward J. McGarvey, Atlas Air Worldwide Holdings, Inc. - VP & Treasurer [2]

--------------------------------------------------------------------------------

Thank you, Catherine, and good morning, everyone. I'm Ed McGarvey, Treasurer for Atlas Air Worldwide. Welcome to our second quarter 2019 results conference call. On our call today are Bill Flynn, our Chief Executive Officer; John Dietrich, our President and Chief Operating Officer; and Spencer Schwartz, our Chief Financial Officer. Today's call is complemented by a slide presentation that can be viewed at Atlasairworldwide.com under Presentations in the Investor Information section.

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 2018 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.

During our question-and-answer period today, we'd like to ask participants to limit themselves to one principal question and one follow up question so that we can accommodate as many participants as possible. After we've gone through the queue, we'll be happy to answer any additional questions as time permits.

At this point, I'd like to draw your attention to Slide 3 and turn the call over to Bill Flynn.

--------------------------------------------------------------------------------

William J. Flynn, Atlas Air Worldwide Holdings, Inc. - CEO & Director [3]

--------------------------------------------------------------------------------

Thank you, Ed, and good morning, everyone. I'm pleased to welcome John Dietrich, our President and Chief Operating Officer, to this call. And as we announced in early July, John will succeed me as Chief Executive Officer of Atlas Air Worldwide on January 1. At that time, I will become Chairman of the Board and retire from my day-to-day role at the company. Bob Agnew, our current Chairman of the Board, will become our board's Lead Independent Director.

One of the board's greatest responsibilities is to implement a thoughtful succession plan to ensure our company continues to grow and thrive, and John is the right person to serve as the next CEO of Atlas. He has been our Chief Operating Officer for many years, and we work closely together. Most of you know John already through business interactions, our investor analyst days or nondeal road shows.

For others getting to know him, John has over 30 years of experience in the aviation and air cargo industries, including 13 years with United Airlines, and more than 20 years with our company, the last 13 as Chief Operating Officer. He has an unparalleled commitment to our company, our customers and our employees. He's played a key role in driving our success. And John has the visionary leadership and solid expertise to usher in a new era of growth.

I'd like to invite John to say a few words now.

--------------------------------------------------------------------------------

John W. Dietrich, Atlas Air Worldwide Holdings, Inc. - President & COO [4]

--------------------------------------------------------------------------------

Thank you, Bill, and hello, everyone. I'm honored to have been selected as Bill's successor. It has been great working for and with Bill and the entire Atlas team over these many years, and I look forward to continuing to build on the strong foundation we have built for our great company. We have an amazing team of professionals, including our crew, ground staff and management team that has accomplished so much together. We also have a powerful portfolio of assets and service offerings that are second to none in the industry and among our competition.

I look forward to continuing to work with the team to leverage our market position and drive future growth opportunities to deliver value for our customers and our shareholders.

Equally important, I'm excited to be working with our employees to provide a rewarding work environment filled with opportunities to help them grow their careers here at Atlas. I also look forward to spending more time with our investors and analysts as we progress into the future. I'm really grateful and excited for this opportunity.

And with that, Bill, I'll turn it back over to you.

--------------------------------------------------------------------------------

William J. Flynn, Atlas Air Worldwide Holdings, Inc. - CEO & Director [5]

--------------------------------------------------------------------------------

Thank you, John. I value his partnership in driving our company forward, and I have great confidence in his leadership. It's been my honor to lead this company as CEO for the past 13 years, and I'm excited to continue to work with John, my fellow board members and our outstanding senior leadership team and employees as we execute our strategic growth agenda to create long-term value for our customers, employees and shareholders.

Turning to Slide 4 and our results. Second quarter cargo volumes and yields took a dramatic turn due to the widely reported impact of tariffs and trade tensions across the global aviation industry. In addition to these factors, our results during the period were impacted by labor-related service disruptions. We're managing through these near-term headwinds and are maintaining our focus on longer-term growth strategies and growth drivers. Our actions include ongoing continuous improvement initiatives to increase productivity, enhance efficiency and grow our business.

Additionally, we remain committed to negotiating a competitive collective bargaining agreement for our pilots. Our recent bargaining sessions have made progress, and we look forward to the scheduled upcoming sessions to continue progress toward an agreement that all parties want.

Despite the current trade tensions and resulting impacts on global air freight, we have the right building blocks for the future, which include our world-class team of employees; our modern, efficient aircraft and diversified services that customers want; our focus on express e-commerce in fast growing markets; the scale and scope of our enterprise; and our leadership position in global aviation outsourcing.

We've driven growth in our earnings over time, which has consistently driven higher book value. While the combination of tariffs, trade tension and labor disruption has affected our results and current outlook, this is not the first time we've encountered an adverse environment and a market discount to our book value. When this has happened in the past, we have always managed through it while the market has adjusted and we consistently added value.

Moving to Slide 5. We added 6 customer provided cargo aircraft to our asset-light CMI operations during the second quarter. These included 3 737s for Amazon, 2 777s for DHL and an additional 747 for Nippon Cargo Airlines. We look forward to the contributions that operating these aircraft will add.

Turning to our financial results. Our second quarter adjusted earnings reflected a softening in anticipated commercial cargo block hours and yields in our Charter segment as manufacturers and shippers took a wait-and-see approach regarding tariffs and trade issues during the quarter. In military Charter, cargo hours were in line with our expectations for the quarter and were up from the first quarter, as we anticipated they would be. But military passenger demand was less than expected.

Slide 6 highlights our current framework for 2019. Tariffs and related trade disputes are uncommon occurrences, but our guidance reflects the magnitude of the current situation. We also recognize that the trade issues between China and the United States in particular could be addressed in part or whole at any time. And if that happens, we could see a meaningful improvement in air freight dynamics within a relatively short period of time and in our outlook as well.

Based on current conditions and expectations, we expect to fly approximately 330,000 block hours in 2019, with about 75% of the hours in ACMI and the balance in Charter. We also anticipate revenue of approximately $2.9 billion, adjusted EBITDA of approximately $520 million and adjusted net income of about 80% of our 2018 adjusted net income. In addition, maintenance expense for the year is expected to total approximately $395 million with [depreciation] and amortization of about $260 million, and core capital expenditures of about $140 million, which is mainly for parts and components for our fleet.

Looking at the third quarter. We anticipate that our adjusted net income will represent a mid- to upper teen percentage of our full year results. We expect to fly approximately 85,000 block hours in the third quarter, with revenue of more than $700 million and adjusted EBITDA of about $125 million.

This is a good point for Spencer to provide some additional detail about our second quarter results. After Spencer's remarks, I'll add a few additional comments, and then John, Spencer and I will be happy to take your questions.

Spencer?

--------------------------------------------------------------------------------

Spencer Schwartz, Atlas Air Worldwide Holdings, Inc. - Executive VP & CFO [6]

--------------------------------------------------------------------------------

Thank you, Bill, and hello, everyone.

Our second quarter earnings are summarized on Slide 7. On an adjusted basis, EBITDA totaled $86.4 million, and income from continuing operations, net of taxes, was $4.5 million. On a reported basis, net income was $86.9 million, which included $59.8 million of tax benefits related to the favorable completion of an IRS examination of our 2015 tax return as well as a noncash unrealized gain of $42.3 million on outstanding warrants.

Due mainly to the favorable completion of the IRS exam, both our adjusted and reported earnings in the second quarter included an income tax benefit. As a result, we expect our adjusted income tax rate for the full year of 2019 to be approximately 16%.

Looking at Slide 8. Higher ACMI segment revenue in the second quarter was mainly due to an increase in 767 and 737 flying, the startup of 747-400 flying for new customers and incremental 777 flying, partially offset by a decrease in average rate per block hour mostly related to the growth in smaller-gauge 767 and 737 CMI flying.

Lower Charter segment revenue during the period was primarily driven by lower flying and a decrease in the average rate per block hour, as Bill noted, and higher dry leasing segment revenue primarily related to the placement of additional aircraft partially offset by the scheduled return of a 777 aircraft in March that is awaiting placement with a customer, which we expect in the fourth quarter.

Moving to Slide 9. Segment contribution totaled $65.8 million in the second quarter. ACMI earnings primarily reflected increases in 767 and 777 CMI flying. These were offset by higher crew costs, including enhanced wages and work rules resulting from the interim agreement with our Southern Air pilots, additional heavy maintenance expense and increased amortization of deferred maintenance costs. In addition, ACMI segment contribution was impacted by startup costs for customer growth initiatives as well as the labor-related service disruptions that Bill noted.

Lower Charter segment contribution during the period was driven by the decrease in commercial cargo yields and volumes related to the impact of tariffs and global trade tensions, a decrease in military cargo and passenger flying and additional heavy maintenance expense. Charter results were also affected by labor-related service disruptions.

In dry leasing, lower segment contribution during the quarter was primarily due to the scheduled return of the 777 freighter in March, partially offset by the placement of additional aircraft.

Turning to Slide 10. We have grown our fleet to take advantage of great opportunities. We do not have any firm aircraft purchase commitments for the remainder of the year, and we expect our operating fleet growth to be in our asset-light CMI business. As a result, for the first time since 2015, we expect our full year free cash flow in 2019 to exceed our flight equipment expenditures.

We remain committed to paying down debt and reducing our net leverage ratio. Even as we lowered our overall debt outstanding, our net leverage ratio ticked upward in the second quarter as a result of softer than expected earnings and its impact on trailing 12 months' EBITDAR. We expect to see gradual improvement going forward as we benefit from increased EBITDAR levels and as we continue to lower debt levels by maintaining debt repayments of approximately $70 million per quarter.

Now I'd like to turn it back to Bill.

--------------------------------------------------------------------------------

William J. Flynn, Atlas Air Worldwide Holdings, Inc. - CEO & Director [7]

--------------------------------------------------------------------------------

Moving to Slide 11. Results in the second quarter were affected by the widely reported impact of tariffs and trade tensions on current cargo volumes across the global aviation industry. We also saw an impact from labor-related service disruptions. Despite trade tensions and the resulting impacts on global air freight, we have the right building blocks for the future. Additionally, we're committed to negotiating a competitive labor contract for our pilots. We're well positioned to manage through current headwinds, and we're maintaining our focus on our longer-term strategies and growth drivers.

Catherine, may we have the first question, please?

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Yes, sir. (Operator Instructions) Your first question comes from the line of Bob Labick with CJS Securities.

--------------------------------------------------------------------------------

Robert James Labick, CJS Securities, Inc. - President & Director of Research [2]

--------------------------------------------------------------------------------

First I just wanted to start with a quick congratulations to Bill and John. Bill, you've done a tremendous job, obviously, growing the company over the last 13 years and it's been great working with you. I look forward to seeing you again before you move on to the chairman role. And John, obviously, we know each other and I look forward to working with you more closely. Excited for you guys.

So jumping to the quarter. Direct contribution from ACMI. We knew it would be tough this quarter. We talked about it on the last call. But it's been kind of flat, just the dollars, not talking margins, just dollars, for the last 4 quarters or so. And it took an incremental hit down. And it's hard to get a sense of the magnitude.

You've talked about labor disruptions. Can you give us maybe an example of the magnitude of that? Or what's going to change to grow -- the ultimate question here. What's going to change to grow ACMI direct contribution dollars going forward? Because it's been tough for the last 5, 6 quarters.

--------------------------------------------------------------------------------

Spencer Schwartz, Atlas Air Worldwide Holdings, Inc. - Executive VP & CFO [3]

--------------------------------------------------------------------------------

Sure. Thanks, Bob, it's Spencer. So within the ACMI segment, we had a higher contributions from additional flying this quarter, but that was more than offset by higher costs related to the Southern Air pilots, as we've talked about, startup costs and then the labor-related service disruptions, as you noted. But one of the biggest items is the higher heavy maintenance expense, and so that was really up in the quarter.

And to answer your question, how will it get better, for the second half of 2019 we'll enjoy peak with flying for all integrators, and we expect heavy maintenance expense to be around $15 million below the second half of 2018. So you should really see ACMI profitability improving as well as ACMI margins improving, especially in the fourth quarter.

--------------------------------------------------------------------------------

Robert James Labick, CJS Securities, Inc. - President & Director of Research [4]

--------------------------------------------------------------------------------

Got it, great. And then just on my follow up there. On AMC, you noted a recovery, I guess, so to speak, in the cargo. And then passenger was a little lower than expected. Can you just talk about expectations there going forward? And we talked a little about Q1, the change in order patterns in cargo. Is that completely behind us now? Is it slightly recovered? Or what's the outlook in AMC?

--------------------------------------------------------------------------------

William J. Flynn, Atlas Air Worldwide Holdings, Inc. - CEO & Director [5]

--------------------------------------------------------------------------------

Yes, I'll answer that. Bob, this is Bill. So for second half cargo, we expect cargo relatively flat to last year, but second half cargo AMC volumes to be somewhat higher than first half 2019 cargo volumes, and cargo relatively flat to last year.

In passenger, we expect second half to be substantially higher than the first half of 2019, as well as substantially higher than the second half of 2018. We've added a couple of aircraft to our passenger fleet, a 767 and 747, and we also had a 767 last year in the second half that was in maintenance due to some damage it had incurred. And so now we've got all of the aircraft in service flying for the military, so we expect an -- for those several reasons, we expect an uptick in the second half.

--------------------------------------------------------------------------------

Spencer Schwartz, Atlas Air Worldwide Holdings, Inc. - Executive VP & CFO [6]

--------------------------------------------------------------------------------

And Bob, it's Spencer. I'll just add that our entitlement in that area remained fairly steady, around 54% for both cargo and passenger flying.

--------------------------------------------------------------------------------

Operator [7]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Helane R. Becker, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [8]

--------------------------------------------------------------------------------

The one question I was wondering if you could answer is what percent of the difference was labor versus the actual business decline?

--------------------------------------------------------------------------------

Spencer Schwartz, Atlas Air Worldwide Holdings, Inc. - Executive VP & CFO [9]

--------------------------------------------------------------------------------

Yes, Helane. Hi, it's Spencer. So we're not going to quantify that, but we'll tell you that the largest impact was really due to tariffs and trade tensions followed by higher heavy maintenance, lower military cargo and passenger flying, the increase in the Southern crew costs as well as startup cost and then also labor disruptions.

And the other thing is that looking at the second quarter alone, the prior year obviously had a benefit, as you I'm sure know, from a refund of rent paid in prior years. So that's kind of the magnitude of the various items that made up the shortfall in the second quarter.

--------------------------------------------------------------------------------

Helane R. Becker, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [10]

--------------------------------------------------------------------------------

Okay. I mean, I noticed that in June specifically, technology products was up 4%, just a little under 4%, and pharmaceuticals was up just a little over 5%. So I would think that you might have seen some benefit from the tech products you tend to carry in June. But it sounds like that did not occur.

--------------------------------------------------------------------------------

William J. Flynn, Atlas Air Worldwide Holdings, Inc. - CEO & Director [11]

--------------------------------------------------------------------------------

So this is Bill, Helane. Just a couple things. Volumes certainly have been impacted by the tariffs. There have been 3 announced series of tariffs, and back in September there was that third tranche of tariffs on $200 billion worth of items at a rate of 10%. And those tariffs were somewhat held in abeyance from then really through March into April as the discussions between the U.S. and China continued. And most of us were hoping for that -- somewhat of a resolution as we came to the end of April. But that didn't happen. It went the other way.

And then that tranche of those items under that $200 billion third tranche of tariffs were implemented. The tariffs were implemented, and then they went from 10% to 25%. And that was on May 19. What we saw then was a fairly dramatic impact where volumes certainly came down. I think some volumes were buoying up a bit in first quarter as people were perhaps building some inventories against these tariffs. Then as volumes dropped, the yields dropped pretty quickly because capacity didn't really come out.

And I think what we're describing here and what we've observed here is, I think, very consistent with what several of the integrators have talked about in their recent earnings calls, and certainly several of the large cargo airlines, European and Asian cargo airlines, have said about their cargo results. And I think one or 2 of the U.S. large passenger carriers have talked about what's happened to some of their volumes recently in their recent earnings calls as well.

And I heard what you said about Pharma and tech. We certainly have seen some tech already shifting to Taiwan, some tech shifting into Vietnam, and we're carrying that on Charters, but it's not offsetting the volume decline and the concurrent yield declines that we've seen in the market place. And that's what we've reflected -- that's the kind of context we're reflecting into the guidance framework that we provided.

--------------------------------------------------------------------------------

Helane R. Becker, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [12]

--------------------------------------------------------------------------------

Okay. I just have one other question unrelated. I think you were supposed to replace 2 747-400s for Qantas with 2 747-8 freighters. Is that on hold now, or is that transaction still going forward?

--------------------------------------------------------------------------------

William J. Flynn, Atlas Air Worldwide Holdings, Inc. - CEO & Director [13]

--------------------------------------------------------------------------------

No, that transaction's going forward. There's some regulatory signoffs. Those are essentially lined up, and we expect to fly those aircraft for Qantas this quarter.

--------------------------------------------------------------------------------

Operator [14]

--------------------------------------------------------------------------------

Your next question comes from the line of Seldon Clarke with Deutsche Bank.

--------------------------------------------------------------------------------

Seldon T. Clarke, Deutsche Bank AG, Research Division - Associate Analyst [15]

--------------------------------------------------------------------------------

For the full year EBITDA, you lowered your guidance by 13%, but you only lowered revenue and block hour guidance by just 3%. Can you talk about the moving pieces there and whether you think you can make up for that EBITDA shortfall in 2020?

--------------------------------------------------------------------------------

Spencer Schwartz, Atlas Air Worldwide Holdings, Inc. - Executive VP & CFO [16]

--------------------------------------------------------------------------------

Seldon, it's Spencer. I don't think we're ready to talk about 2020 at this point. We still need to see how fourth quarter peak shapes up and what yields are going to be like. We're starting to hear some positives that could help the remainder of the year, so we really have to see how this plays out. The decline happened so quickly in the second half of May, and then into June and July. But we're now starting to hear some positives, so we will see.

With regard to your other question, there are reimbursed expenses that play into some of that and for certain customers. And then there's maintenance expense. And so Maintenance expense, as I mentioned before, we expect to lower in the second half of the year, and so that should really benefit EBITDA.

--------------------------------------------------------------------------------

Seldon T. Clarke, Deutsche Bank AG, Research Division - Associate Analyst [17]

--------------------------------------------------------------------------------

So I guess that really hasn't changed from your initial guidance is more my question. So the 330,000 block hours, $2.9 billion in revenue imply somewhere around the same revenue per block hour as your previous guidance. But you lowered EBITDA by 13%. You've lowered your forecast for maintenance expense as well. So I'm just curious what the disconnect is there.

--------------------------------------------------------------------------------

Spencer Schwartz, Atlas Air Worldwide Holdings, Inc. - Executive VP & CFO [18]

--------------------------------------------------------------------------------

Okay, sure. So if you take a look at the full year, our previous guidance versus our current guidance, the greatest variances are due to the international market softness, which includes yields and volume impacts of the tariffs and trade tensions. We also lowered guidance because of declines in military passenger volumes, and then impacts from labor disruptions.

Those are by far the biggest items, and we assume that the current conditions over the past few months will continue over the summer into the fall, and then will impact peak yields. We think volumes will be there during peak. The question is what will the yields be like. And then as Bill said before, any positive developments with tariffs or trade negotiations could really improve our outlook.

--------------------------------------------------------------------------------

Seldon T. Clarke, Deutsche Bank AG, Research Division - Associate Analyst [19]

--------------------------------------------------------------------------------

Okay. And then, some of these, not asking customer-specific, but some of these new business wins that you bring on. I think you have more startup costs than normal, associated with the 737s. But are they generally profitable in the first year, or is that something that starts to inflect in Year 2 or Year 3? Or how exactly does that work?

--------------------------------------------------------------------------------

Spencer Schwartz, Atlas Air Worldwide Holdings, Inc. - Executive VP & CFO [20]

--------------------------------------------------------------------------------

So it varies. Every customer arrangement is a little different, and it depends. The 737s was a bit of a new fleet type. We didn't have scale in that fleet. We needed to bring in pilots and get them trained very quickly, and so there were startup costs there that were a little more unusual than we've had with other startups. But normally, yes, there's a really quick payback period and turnaround so that new customer agreements are accretive fairly quickly.

--------------------------------------------------------------------------------

Seldon T. Clarke, Deutsche Bank AG, Research Division - Associate Analyst [21]

--------------------------------------------------------------------------------

Okay, and just the last one from me on that. When you bring on new longer-term contracts in your ACMI segment, how does cyclicality affect those negotiations?

--------------------------------------------------------------------------------

Spencer Schwartz, Atlas Air Worldwide Holdings, Inc. - Executive VP & CFO [22]

--------------------------------------------------------------------------------

Well, if we're seeing a --

--------------------------------------------------------------------------------

Seldon T. Clarke, Deutsche Bank AG, Research Division - Associate Analyst [23]

--------------------------------------------------------------------------------

So in a softer market like now, are you signing up new business at a lower rate than maybe you would have signed it up last year? Or is it a little stickier than that?

--------------------------------------------------------------------------------

William J. Flynn, Atlas Air Worldwide Holdings, Inc. - CEO & Director [24]

--------------------------------------------------------------------------------

It's stickier than that because a couple -- this is Bill Flynn, Seldon. It's stickier than that. Clearly, 2008-2009 was a market condition that affected every industry, and none of us had ever seen anything like that again. What we're talking about here are trade tensions and tariffs, and that's unusual. Even the Fed chairman, Powell, commented on that yesterday as well. But what we're not seeing is a collapse in the market. We're not seeing what we saw back then 10 years ago.

So our ability to place a ACMI contract with a customer, or a CMI contract. We've got to be able to describe the value that we're going to provide, the service levels that we'll perform at, and we're looking at over an extended period of time. And we're not deeply discounting or discounting temporarily just to get something placed. That's not the situation that we're in.

--------------------------------------------------------------------------------

Operator [25]

--------------------------------------------------------------------------------

Your next question comes from the line of Kevin Sterling with Seaport Global Securities.

--------------------------------------------------------------------------------

Kevin Wallace Sterling, Seaport Global Securities LLC, Research Division - MD & Senior Analyst [26]

--------------------------------------------------------------------------------

Bill, congratulations on your pending retirement. And John, congratulations on your new role.

Bill, I want to step back and ask a big picture question if you don't mind. Because for the longest time you guys -- and you've talked about how you've been transitioning your model to be, I guess, more reliant on e-commerce and less heavy international air freight, and how your exposure to e-commerce would help offset some of your exposure to the traditional international heavy air freight market. But then when I look at this quarter and your outlook, it sounds like none of that played out.

So can you help just reconcile what's going on? Because obviously you're not -- I don't think you're quite as exposed to the international market as you once were, say, 5, 6 years ago. But it does seem like it reared its ugly head this quarter.

--------------------------------------------------------------------------------

William J. Flynn, Atlas Air Worldwide Holdings, Inc. - CEO & Director [27]

--------------------------------------------------------------------------------

Yes. Thank you, Kevin. Well, I think that what you initially described is accurate. We have been transitioning our model over a period of time now with a focus on express and e-commerce, and I think that shows in these results. But we've always had a play in the Charter market, and I think we've consistently seen about 25% of our volumes in Charter, commercial and military. And when we look at quarterly contribution, while there was pressure in several segments, we really saw it in commercial Charter. And it happened really quickly. It happened from mid-May on.

But in terms of our ACMI-CMI operations, yes, there were some items there, and Spencer discussed them, but pretty stable core part of the business, and certainly less exposed to the kind of volatility that we saw in this quarter in the commercial Charter market. So I think the thesis in the business model holds. That's consistent, but Charter is still a large part of the business when it's at 25%.

--------------------------------------------------------------------------------

Kevin Wallace Sterling, Seaport Global Securities LLC, Research Division - MD & Senior Analyst [28]

--------------------------------------------------------------------------------

Okay. Can I switch to heavy maintenance? And Spencer, you talked about that, the higher heavy maintenance expense in the quarter. And we kind of, I think, knew that. But without getting too specific, as we look at, say, the next couple years, heavy maintenance tends to be more scheduled.

Can we expect another year in 2020, maybe next year, of really high heavy maintenance? Or have you guys worked through a lot of that, do you think, some of the that potential heavy maintenance expense this year?

--------------------------------------------------------------------------------

Spencer Schwartz, Atlas Air Worldwide Holdings, Inc. - Executive VP & CFO [29]

--------------------------------------------------------------------------------

Heavy maintenance, it's kind of due when it's due. And so it really depends on, from an engine standpoint, it really depends on cycles, how many takeoffs and landings. From an airframe check, it really depends on time. And when those things are due, they're due. And it really just depends on when we've taken on aircraft and when they're due for these various heavy maintenance events.

As far as the cost of event, we have seen an increase in the cost per event recently, and our teams are very focused on that and trying to achieve some operational efficiencies there. Some of the heavy maintenance did require more work, and so we saw greater work scopes and more work being performed than we had previously estimated.

So John's operational teams are quite focused on that in trying to bring those costs down.

--------------------------------------------------------------------------------

John W. Dietrich, Atlas Air Worldwide Holdings, Inc. - President & COO [30]

--------------------------------------------------------------------------------

Yes. And if I could, Kevin, to build on what Spencer just said. There's a tremendous focus on working towards getting as much predictability on a per event basis, which looking to big data and following some of the trends, you never know, really, what you're going to find, for example, when you open up an engine. And when you have additional findings, that increases costs from time to time. But we're very focused on bringing more stability to that so that we can have some more predictability when those events occur.

--------------------------------------------------------------------------------

Kevin Wallace Sterling, Seaport Global Securities LLC, Research Division - MD & Senior Analyst [31]

--------------------------------------------------------------------------------

Okay. I mean, has there been anything unusual? I mean, you talked about the higher -- I guess the higher costs this quarter. Has there been anything unusual? It seems in terms of the aircraft you've gotten in, that may have led it to spike this year. Could we see it maybe "normalize" next year? I mean, or should it just continue to be a high-level run rate maybe because it costs more now to service these planes?

--------------------------------------------------------------------------------

Spencer Schwartz, Atlas Air Worldwide Holdings, Inc. - Executive VP & CFO [32]

--------------------------------------------------------------------------------

Kevin, maintenance expense is actually down. Heavy maintenance expense is actually down on a year-over-year basis. So yes, we're not really seeing that. We're managing it very, very closely. But you have to strip out line maintenance, of course, which is a variable cost, and that's based on hours. So as hours increase, line maintenance costs increase. But if you just look at heavy maintenance expense, we expect that in 2019 it'll actually be lower than 2018.

--------------------------------------------------------------------------------

John W. Dietrich, Atlas Air Worldwide Holdings, Inc. - President & COO [33]

--------------------------------------------------------------------------------

If I could add just an additional point, we have had a number of aircraft come into our operation, including engines, that are now going through the system and through the cycle, and some for the first time, engine overhauls, for example. And once we put them through our program, we're also expecting some stability there because you get more familiar with the aircraft, airframes, and engines themselves.

--------------------------------------------------------------------------------

Operator [34]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Scott H. Group, Wolfe Research, LLC - MD & Senior Transportation Analyst [35]

--------------------------------------------------------------------------------

I echo congrats to Bill and John. I want to ask: the implied fourth quarter guidance has us starting to grow earnings again pretty nicely despite a tough comp because fourth quarter last year was really good with the tariff pull forward. So what are we assuming that changes so dramatically to go from this earnings decline in 2Q and 3Q back to earnings growth in fourth quarter?

And then I also wanted to ask on the maintenance side, the reduction in the maintenance expense guidance. Is that a less flying so there's less maintenance, or are we deferring some heavy maintenance from '19 into the out years?

--------------------------------------------------------------------------------

Spencer Schwartz, Atlas Air Worldwide Holdings, Inc. - Executive VP & CFO [36]

--------------------------------------------------------------------------------

Thank you, Scott. It's Spencer. I'll take the second part of that first, which is lower flying. You got it right. Lower flying leads to lower maintenance costs, and so cause and effect, that's what happened there.

And then with regard to your question about the fourth quarter, there were several things there. In looking at fourth quarter expected results this year versus the prior year, of course we're expecting lower yields during the peak season, ex-Asia, due to the tariffs and trade issues. That has a really dramatic effect.

Offsetting that are more flying for the military, passenger flying for the military; more flying for the NFL, which is starting really soon; lower heavy maintenance costs, we have 7 fewer CF-680 overhauls, and we have one fewer 747-400 C-check. So those are some of the biggest items that are impacting the fourth quarter.

--------------------------------------------------------------------------------

Scott H. Group, Wolfe Research, LLC - MD & Senior Transportation Analyst [37]

--------------------------------------------------------------------------------

Okay, so you're not assuming a sort of return to the -- of market conditions getting better. It's more just timing things around maintenance costs and things like that.

--------------------------------------------------------------------------------

Spencer Schwartz, Atlas Air Worldwide Holdings, Inc. - Executive VP & CFO [38]

--------------------------------------------------------------------------------

We think that volumes will be there during peak, Scott. But right now, we are expecting that yields will be much lower than we've seen over the past few years. That may change, but that's what we're anticipating at this point.

--------------------------------------------------------------------------------

John W. Dietrich, Atlas Air Worldwide Holdings, Inc. - President & COO [39]

--------------------------------------------------------------------------------

Yes, and if I could, Scott. It's John Dietrich. I think in the peak season, you generally see a number of areas where we're able to get higher rates during the peak season rush, so that will be a contributor to fourth quarter as well.

--------------------------------------------------------------------------------

William J. Flynn, Atlas Air Worldwide Holdings, Inc. - CEO & Director [40]

--------------------------------------------------------------------------------

Yes, that's the flying that we're going to be doing for the integrators that we do every year.

--------------------------------------------------------------------------------

John W. Dietrich, Atlas Air Worldwide Holdings, Inc. - President & COO [41]

--------------------------------------------------------------------------------

Yes, the flying that we do for the integrators is an example, and other...

--------------------------------------------------------------------------------

Spencer Schwartz, Atlas Air Worldwide Holdings, Inc. - Executive VP & CFO [42]

--------------------------------------------------------------------------------

Charter customers.

--------------------------------------------------------------------------------

John W. Dietrich, Atlas Air Worldwide Holdings, Inc. - President & COO [43]

--------------------------------------------------------------------------------

Reliable -- Charter customers, exactly.

--------------------------------------------------------------------------------

Scott H. Group, Wolfe Research, LLC - MD & Senior Transportation Analyst [44]

--------------------------------------------------------------------------------

Okay, thanks. And just secondly, Spencer, to your point about no planes on order and free cash flow. What are your plans with the free cash? Is it debt? Is it buying back stock?

--------------------------------------------------------------------------------

Spencer Schwartz, Atlas Air Worldwide Holdings, Inc. - Executive VP & CFO [45]

--------------------------------------------------------------------------------

Yes. Our capital allocation plans are the same. They're not changed. We have been disciplined and balanced. We continue to focus on maintaining the strong balance sheet, investing in the right assets. We have a low weighted average cost of debt, our weighted average coupon rate of 3.3%.

So our priorities continue to be the same 3 things. We want to maintain a strong balance sheet; we want to invest in assets, although we have no remaining commitments this year, but invest in assets the customers want; and then potentially share or purchase. But really, where our focus has been is lowering our overall debt balance and hopefully leading to a lower net leverage ratio to attract more investors.

--------------------------------------------------------------------------------

Operator [46]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

David Pearce Campbell, Thompson, Davis & Company, Inc. - Senior VP, Research Analyst & Institutional Sales Partner [47]

--------------------------------------------------------------------------------

Bill, congratulations on the great job you've done over the years. I want to ask you about the Southeast Asia situation. There is some industry data indicating that there is cargo growth in Southeast Asia partially offsetting the decrease in north Asia. And I was wondering how much flexibility you have in your fleet to move aircraft into markets such as Singapore, and Indonesia, and Malaysia and so forth, and Vietnam to take advantage of the movement of manufacturing. It seems to be increasing demand for cargo in that region as opposed to north Asia, where the demand is terrible. Do you have any thoughts about that?

--------------------------------------------------------------------------------

William J. Flynn, Atlas Air Worldwide Holdings, Inc. - CEO & Director [48]

--------------------------------------------------------------------------------

Yes. David, first of all, thank you for your comments and thank you for the question. I think it's a very good and right question. So we are seeing volumes move and new volume flows coming out of 2 places, really. Vietnam has been a beneficiary of some certainly relocated, whether it's permanent or not, I don't know, but relocated manufacturing. Several of the Korean consumer product companies already have large manufacturing operations, particularly around Hanoi. They've got, it seems, the ability to quickly lever that existing capacity and move more production there. We're seeing that. And our Charter flights into Vietnam have certainly increased. We're seeing some more growth as well down in Ho Chi Minh.

When you say north Asia, there's one distinction. The other location that has benefited from relocation of manufacturing is Taiwan. A lot of the consumer product manufacturers in PRC are, in fact, Taiwanese companies, and they've pulled some production in near-term (technical difficulty) as well. So how well this resolves itself and where products ultimately are made remains to be seen. But we certainly have the fleet and the flexibility, the operations, and network know-how and capability to serve the freight where the freight is.

And importantly, in terms of the regulatory consideration of having route rights in operating authorities, those are well in place. We've been flying in and out of Vietnam for a long time. Everywhere else in Southeast Asia, you mentioned Singapore, Malaysia, for example, we're well established in those locations, and similarly in Taiwan. So we certainly have the fleet, we have the capabilities, and we can serve the freight wherever the freight originates.

David, I think one other point. What we haven't seen is a one-for-one volume offset. Certainly, there's more product moving out of Vietnam and Taiwan, but it's not one-for-one equivalent to what we're not seeing out of China yet. That'll take some time. If that were to be permanent, it would take some time to build up those production capabilities in those locations.

--------------------------------------------------------------------------------

David Pearce Campbell, Thompson, Davis & Company, Inc. - Senior VP, Research Analyst & Institutional Sales Partner [49]

--------------------------------------------------------------------------------

But also could be a big benefit to your results next year. Is that possible?

--------------------------------------------------------------------------------

William J. Flynn, Atlas Air Worldwide Holdings, Inc. - CEO & Director [50]

--------------------------------------------------------------------------------

Yes it is, absolutely.

--------------------------------------------------------------------------------

Operator [51]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Jack Lawrence Atkins, Stephens Inc., Research Division - MD & Analyst [52]

--------------------------------------------------------------------------------

Let me just echo everyone's congratulations to you Bill, to both you and John. I've enjoyed working with you, Bill; and John, looking forward to working with you in the future.

So I guess if I could go back to Kevin's question earlier, I thought it was a good point. Just around the cyclicality of the business today, Bill, and I certainly understand and appreciate all the changes that you've driven with this company over the last decade.

But I'm just going back and looking. 2Q EPS, this was the lowest 2Q EPS since '08. As you think about how the business is constructed today versus a decade ago, how do you think about the cyclicality of the business today? Was this result just a function of a number of things sort of hitting you all at one time, or do you think the cyclicality has sort of lessened today versus a decade ago? I just would be curious to get your thoughts on that.

--------------------------------------------------------------------------------

William J. Flynn, Atlas Air Worldwide Holdings, Inc. - CEO & Director [53]

--------------------------------------------------------------------------------

Yes. Thank you, Jack. Well, I think we are a very different company than we were a decade ago, and I get your point about the comparison. But when we go back a decade ago, we were just beginning our first flights in express operations for DHL. We had a much smaller fleet. We were moving out of the last 2 747-200s we had and we essentially had a fleet of 747-400s, and an order for 747-8s that hadn't arrived and took a couple of extra years to get here.

So when we think about the company today, we've grown substantially with DHL. We have growth startup operations for Amazon. Those are large numbers of aircraft placed into dedicated networks with network-type operations, not ad hoc, and certainly with different kinds of scheduled standards than we saw even in our ACMI operations.

The acquisition of Southern with the 777 fleet and the 777 operations allow us to basically offer all and any of our customers the right aircraft for the network and the array of services they want to buy from us and that they need for their business. So clearly, this was a disappointing quarter, and indeed it is.

But the impact here, the volatility in this quarter, while Spencer talked through the several contributing factors, starts with the market and the real precipitous decline that we saw in volumes, particularly in our Charter market, which is an important part of our business. And then beyond volumes, yields took a fairly significant hit.

And it's certainly tranched back, but not just. There's been quite a bit of commentary out of Germany recently about the impact it's had on German trade flows between Asia and elsewhere. And Scott might have mentioned there was potentially some impact of, in anticipation of tariffs, a lot of volume moved earlier on. And that may be a part of it. At least it is probably for some individual companies.

But I absolutely believe the model's transformed. We have the right book of customers, we have the diversification and the array of services that we provide them. The CMI business didn't exist in 2008, although it does now, and that's a nice asset-light growth, as Spencer talked about. That gives us the ability to build scale and scope, and just get overall more productivity. And so our guidance reflects what we see now, but it also reflects what we've talked about with several of the other fellows out here on the call.

We anticipate there will be a peak, a more typical peak in terms of volume flows. And so the question is where do the yields actually fall out. And we'll learn more about that as we go through the year.

As John Dietrich pointed out just a moment ago, a big part of our fourth quarter cargo, or peak cargo, is the dedicated aircraft we put into the large integrators and fly for them. And those are prenegotiated operations that we provide them, and we have been for many, many years. And that really does help contribute and ease some of the volatility that we might experience in an open cargo market.

--------------------------------------------------------------------------------

Jack Lawrence Atkins, Stephens Inc., Research Division - MD & Analyst [54]

--------------------------------------------------------------------------------

Okay. Okay, thank you for that, Bill. And then I guess just a couple of other questions elsewhere in the business. With regard to the labor issues in the quarter, my understanding was that you guys had an injunction against your union. So I guess I'm confused why these disruptions are still ongoing. Can you talk with what's happening there, and if it's different than the disruptive actions that you've seen in the past and sort of what you can do there?

Then secondly, Bill, just on the labor front. Your comments around working towards a fair and competitive deal for your pilots, that seemed to be a little bit more optimistic I guess just in tone around the potential to maybe get a deal done sooner rather than later. So if you could just sort of touch on how you're thinking now about timing with regard to getting your new pilot contract in place.

--------------------------------------------------------------------------------

William J. Flynn, Atlas Air Worldwide Holdings, Inc. - CEO & Director [55]

--------------------------------------------------------------------------------

Well, since you addressed it, I'll take a -- and then John and I can, I think, address different parts (technical difficulty). So we do have a preliminary injunction in place. We went to court in 2017 and we were able to demonstrate to the judge, to the court, that there was concerted behavior going on directed by union leadership that was causing disruption in the business, and we obtained an injunction against those disruptive behaviors.

That injunction was challenged and appealed by the union. It went to the court of appeals in D.C., and that court ruled back in -- just a few weeks ago that indeed the injunction was proper, and upheld the injunction and the decision of the district court judge. That behavior has improved, but we're still seeing an -- we're seeing an increase in some disruptive behavior now, and we have notified the union formally about that disruptive behavior.

And I know there's some questions about, "Well, how should we think about that, and what's the impact of that?" And the impact really is a cost impact, is we fly and serve our customers. But when we have disruptive behavior, it costs us more. It costs us more because we need to move crew around. We may have a late departure. Any disruption, whether it's a weather disruption, could be a maintenance disruption, in this case a labor disruption, any disruption from schedule adds additional cost into the operation. And that's kind of how we're thinking about the impact of these disruptions. It affects service and it affects cost.

John, you might talk about where we are in our discussions with pilots and how you see us moving forward into 2020.

--------------------------------------------------------------------------------

John W. Dietrich, Atlas Air Worldwide Holdings, Inc. - President & COO [56]

--------------------------------------------------------------------------------

Sure. And as Bill has mentioned, we remain committed and focused to getting our next labor agreement as soon as reasonably possible. As many of you have seen, there have been some procedural disputes along the way in terms of what is the ultimate path forward, whether we're filing the merger provisions of our collective bargaining agreements or not. And that's been really the focus of some of the procedural disputes.

We are waiting on one last decision among those disputes. We've prevailed as a company in each of those up to this point. We expect to prevail in the last outstanding one. But nonetheless, we've continued to negotiate and be at the table. In fact, the team is together as we speak negotiating and making progress towards our next collective bargaining agreement.

In any bargaining, there's a reason they call it bargaining. It takes 2 to get to an agreement. So we are committed to moving quickly as possible. The union will have a say in that as well, and we have a number of things we're working on with them, continuing the dialogue and the communication. And we'll continue to have sessions, and we're hopeful and cautiously optimistic that to the extent we have any unresolved issues, they can be resolved through this merger process under the collective bargaining agreements, which is an important piece that we're looking to conclude; all the while focused on quality of life improvements for our crew members and a competitive total package for them so they can, as I said, build their careers here at Atlas as we go into the future.

I mean, we have a tremendous value proposition for our pilots, given the strong and diverse fleet we have, the operation that we have that's truly global, a great customer base. And we think that's a very attractive proposition for them. We just need to get to our next agreement in working together with the union.

--------------------------------------------------------------------------------

Jack Lawrence Atkins, Stephens Inc., Research Division - MD & Analyst [57]

--------------------------------------------------------------------------------

Okay, that's helpful color. And then last one from me. Really just goes to the AMC PAX flying. You talked about improved flying in the second half of the year, both year-over-year and sequentially. But could you maybe speak to what caught you by surprise in the second quarter specifically? Was it just an unexpected reduction in military flying more broadly, or did you have a plane out of service? I'm just trying to understand what was happening there.

--------------------------------------------------------------------------------

John W. Dietrich, Atlas Air Worldwide Holdings, Inc. - President & COO [58]

--------------------------------------------------------------------------------

I'll comment on that, Jack. This is John Dietrich. It was mostly just a softening in the demand for that period of time. We expect that it'll resume to the levels that Bill talked about, which will be an increase, both over first half and certainly over the first half of last year. And we have more capability, as Bill mentioned. There was a couple more airplanes, one that was out of service last year, but an additional one that we've added this year.

--------------------------------------------------------------------------------

Operator [59]

--------------------------------------------------------------------------------

Your next question comes from the line of David Ross with Stifel.

--------------------------------------------------------------------------------

David Griffith Ross, Stifel, Nicolaus & Company, Incorporated, Research Division - MD of Global Transportation and Logistics [60]

--------------------------------------------------------------------------------

I just want to go to the Charter segment to ask a little bit more about how the breakdown occurred, if you will, when you drew a line in the sand around the May 19 tariff issue, precipitating a lot of the decline. The utilization in the cargo Charter was down 22%, 23% year-over-year. How did that trend through the quarter in terms of April-May-June? Was it down 5% or 10% and then it ended at about 30%?

--------------------------------------------------------------------------------

Spencer Schwartz, Atlas Air Worldwide Holdings, Inc. - Executive VP & CFO [61]

--------------------------------------------------------------------------------

David, it's Spencer. It really started to impact more as the quarter progressed. And so if you look at the beginning of the year -- I know you're asking about the quarter -- but if you go back to the beginning of the year, the first couple of months of the year were very strong. Things started to change a little bit, but then yields started to really get impacted, as Bill said, second half of May, and then certainly June and into July.

--------------------------------------------------------------------------------

David Griffith Ross, Stifel, Nicolaus & Company, Incorporated, Research Division - MD of Global Transportation and Logistics [62]

--------------------------------------------------------------------------------

Yes. And then, I guess, any comment on the trend you've seen through July? If the yields, say, were flattish to start off the second quarter and then they ended up down 10% to 15%, is that still the trend you're seeing in the air cargo side of things?

--------------------------------------------------------------------------------

Spencer Schwartz, Atlas Air Worldwide Holdings, Inc. - Executive VP & CFO [63]

--------------------------------------------------------------------------------

Yes, the yields, as I said, in the beginning of the year yields were much stronger. But then, really beginning in April and then much stronger in May, yields have been much lower than the prior year. We do expect a pickup in yield, but not like we saw in the previous years. And when you think about --

--------------------------------------------------------------------------------

William J. Flynn, Atlas Air Worldwide Holdings, Inc. - CEO & Director [64]

--------------------------------------------------------------------------------

And --

--------------------------------------------------------------------------------

Spencer Schwartz, Atlas Air Worldwide Holdings, Inc. - Executive VP & CFO [65]

--------------------------------------------------------------------------------

Yes. Go ahead.

--------------------------------------------------------------------------------

William J. Flynn, Atlas Air Worldwide Holdings, Inc. - CEO & Director [66]

--------------------------------------------------------------------------------

David, I'm just going to make the point that we've made a couple times already. When we think about fourth quarter yields, in commercial, certainly a big part of that is the commercial market. But the other part of it is the confirmed placements we have with the integrators, rates that we negotiate with them that are independent of the market, which we've done every year.

--------------------------------------------------------------------------------

David Griffith Ross, Stifel, Nicolaus & Company, Incorporated, Research Division - MD of Global Transportation and Logistics [67]

--------------------------------------------------------------------------------

That makes sense. On the labor side, you talked, Bill, about the cost impact of those issues and mentioned there's a service impact. How severe has the service impact been? And is that something that's, I guess, stunted growth in any way or prevented any new contracts?

--------------------------------------------------------------------------------

John W. Dietrich, Atlas Air Worldwide Holdings, Inc. - President & COO [68]

--------------------------------------------------------------------------------

So it's John, David. The impact, by virtue of the fact that we're talking about it, tells you it rises to the level that it has caused customer impact. And in terms of what we're doing about it, we're continuing to work with our customers. We're flying the hours, as you can see. We're maintaining the hours, but they have been disruptive hours. And as Bill mentioned, when you have disruption, it creates additional disruption, and it has kind of a ripple effect. We're continuing to work closely with them to adjust, and we look forward to continuing improvement as we go into the future here.

--------------------------------------------------------------------------------

David Griffith Ross, Stifel, Nicolaus & Company, Incorporated, Research Division - MD of Global Transportation and Logistics [69]

--------------------------------------------------------------------------------

And Spencer, just real quick. What's the current average age of your fleet? And I know it varies by plane type, et cetera. And how do you expect that to trend going into next year?

--------------------------------------------------------------------------------

Spencer Schwartz, Atlas Air Worldwide Holdings, Inc. - Executive VP & CFO [70]

--------------------------------------------------------------------------------

Yes. We're in a pretty fortunate position there, Dave. Our fleet is relatively young from a -- if you look at it compared to others. On average, our fleet is about 18, 19 years old. And for freighters, that is pretty young. We flew our 747-200s, they were well into their 30s. So we have no imminent refleeting needs or anything like that. Of course, our -8s are only 6 or 7 years old. They're really young. We have 777s that are about the same, 6 or 7 years old. And overall, our fleet is about 18, 19 years old, which is great for freighters.

--------------------------------------------------------------------------------

William J. Flynn, Atlas Air Worldwide Holdings, Inc. - CEO & Director [71]

--------------------------------------------------------------------------------

Yes. I was just going to add, the 767 fleet that we've built up, we're purposely -- we're acquiring them at 15, 16, 17 years, and then running them through conversion from PAX to freighter. And while the manufacturing year still is 15 or 16, all the work that's done on those aircraft in conversion, they really have many, many years of flying left.

--------------------------------------------------------------------------------

Operator [72]

--------------------------------------------------------------------------------

Your next question comes from the line of Howard Rosencrans from Virginia (sic) [Value Advisory Services].

--------------------------------------------------------------------------------

Howard A. Rosencrans, Value Advisory LLC - Founder & Chief Research Analyst [73]

--------------------------------------------------------------------------------

I just wanted to do a quick recap to understand the factors, and you mentioned them earlier, the various severity in the quarter, and in which areas you see improving. I guess it's more so weighted to the fourth quarter, but that's going to be because of the integrator mix. But I guess I just wanted a slight recap on exactly where you saw the negativity that so dramatically impacted the quarter. Thank you.

--------------------------------------------------------------------------------

Spencer Schwartz, Atlas Air Worldwide Holdings, Inc. - Executive VP & CFO [74]

--------------------------------------------------------------------------------

Okay. Howard, it's Spencer. In the beginning of your question, it seemed like you were asking about the fourth quarter, but then it seemed like you ended with a question about the second quarter. So with regard to the second quarter, you were asking about what are the biggest things that drove the quarter and the results being below our previous expectations. So the largest impact was due to the tariffs and trade tensions, which had a big impact on yields. And that revenue then goes right to the bottom line, followed by higher heavy maintenance costs during the quarter.

And then we had lower military cargo and passenger flying. We had an increase in crew costs for our Southern pilots following the interim letter of agreement that we put in place with them last September. There were some startup costs related to new customer flying, the labor disruptions that we've talked about. And then the prior year, second quarter of last year, had a big benefit from a refund that we received, a rent that was paid in previous years. So those are the issues surrounding the second quarter.

And then I think part of your question was also asking about the fourth quarter. And we expect heavy maintenance to be much lower in the second half of the year, and so that will really help especially in the fourth quarter. We expect that the flying that we do for integrators, and then the Charter flying that we do in the fourth quarter usually has the highest yields in the commercial segment. And so we expect to benefit from that as well. And then, of course, if there's any positive -- if there are any positive developments with regard to the U.S. and China trade tensions, that would really -- and if the positive developments there had then a nice positive impact on goods moving, that would have a tremendous benefit for our company.

--------------------------------------------------------------------------------

Howard A. Rosencrans, Value Advisory LLC - Founder & Chief Research Analyst [75]

--------------------------------------------------------------------------------

Okay. I really just was trying to get the order of severity, and you had -- because you had given that in part before. So in terms of order of severity, it was tariffs, trade tensions, followed which a higher heavy maintenance. And the higher heavy maintenance is really just transitory, as in the second half that will improve pretty dramatically. The third thing that was the negative in the quarter was the military cargo and passenger, and I just want to get a little more clarity on that. That sounds like just a lumpy quarter thing on both the cargo and the passenger. I want to get clarity. So that's the third biggest point, so I just want to get clarity on that. Thank you.

--------------------------------------------------------------------------------

John W. Dietrich, Atlas Air Worldwide Holdings, Inc. - President & COO [76]

--------------------------------------------------------------------------------

Thank you. Howard, it's John Dietrich. I think your characterization is fair with regard to the military.

--------------------------------------------------------------------------------

Howard A. Rosencrans, Value Advisory LLC - Founder & Chief Research Analyst [77]

--------------------------------------------------------------------------------

Okay. And then the crew is the fourth, and then the fifth item, which is startup for new customer, so we're not talking about incremental Amazon in there? Because they're not a new customer. There's no incremental Amazon in there? I just want to be clear on that.

--------------------------------------------------------------------------------

Spencer Schwartz, Atlas Air Worldwide Holdings, Inc. - Executive VP & CFO [78]

--------------------------------------------------------------------------------

So the startup costs are related to new flying. So the 747s for Amazon, that is new flying. And as I mentioned earlier, it was the 737-800s is a new aircraft type for Atlas. We don't have scale in that aircraft type. And so we had to bring in pilots, we had to train those pilots. We had some unusual costs related to that training and to try to get that done in the timeframe that Amazon wanted. So those startup costs were a bit higher than normal. We also had some startup costs related to the 777 flying for DHL. And then the other item, I just want to make sure, it was somewhat large on a quarter-over-quarter basis, is the rent refund that we received in the second quarter of last year. Since you were asking about magnitude, that was about $8.6 million, or about just under $7 million on a net income basis.

--------------------------------------------------------------------------------

Howard A. Rosencrans, Value Advisory LLC - Founder & Chief Research Analyst [79]

--------------------------------------------------------------------------------

Okay. I was a little confused about the startup for new customer. It's the same customer, it's just -- well, in that it's largely Amazon. It's just the new equipment. Okay, that cleared it up. That was very helpful. And then the last factor, and I was trying to get them in terms of severity, the least significant factor in the mix was the labor disruption. Am I correct in understanding that, up to 6 items you referenced?

--------------------------------------------------------------------------------

Spencer Schwartz, Atlas Air Worldwide Holdings, Inc. - Executive VP & CFO [80]

--------------------------------------------------------------------------------

Yes. The labor impacts several other areas, and so it impacts penalties that we might have to pay, it impacts not receiving bonuses that we otherwise might have received, it impacts hours that we may or may not have flown as a result of cancellations or delays. So it has impacts in different areas. And so that's why we've listed that one at the end.

--------------------------------------------------------------------------------

Howard A. Rosencrans, Value Advisory LLC - Founder & Chief Research Analyst [81]

--------------------------------------------------------------------------------

Yes. But in terms of magnitude is really my question. The other factors, tariffs, trade tensions, heavy maintenance, lower military cargo and passenger, increase in crew costs for Southern with their new contract, startup for new customer. I just want to get it in terms of the magnitude of severity. So the labor disruption was the least in the mix. Is that fair to say?

--------------------------------------------------------------------------------

Spencer Schwartz, Atlas Air Worldwide Holdings, Inc. - Executive VP & CFO [82]

--------------------------------------------------------------------------------

I think the labor disruption is all part of it, and we want to be careful. We're in the midst, as John said. There are people at the bargaining table right now. Certainly don't want to get into our labor issues too much during this call, but the labor disruptions were certainly one of the top handful of factors this quarter.

--------------------------------------------------------------------------------

Operator [83]

--------------------------------------------------------------------------------

Ladies and gentlemen, thank you for participating in the Q&A. I'd now like to turn the call back over to Atlas Air.

--------------------------------------------------------------------------------

William J. Flynn, Atlas Air Worldwide Holdings, Inc. - CEO & Director [84]

--------------------------------------------------------------------------------

Okay. Thank you, Catherine. And John, Spencer and I want to thank everyone who participated in the call today. As always, we appreciate your questions, we appreciate your interest in our company and we look forward to speaking again with you soon in the near future. Thank you very much.

--------------------------------------------------------------------------------

Operator [85]

--------------------------------------------------------------------------------

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