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Edited Transcript of AAWW earnings conference call or presentation 20-Feb-20 4:00pm GMT

Q4 2019 Atlas Air Worldwide Holdings Inc Earnings Call

Purchase Mar 13, 2020 (Thomson StreetEvents) -- Edited Transcript of Atlas Air Worldwide Holdings Inc earnings conference call or presentation Thursday, February 20, 2020 at 4:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Edward J. McGarvey

Atlas Air Worldwide Holdings, Inc. - Senior VP & Treasurer

* John W. Dietrich

Atlas Air Worldwide Holdings, Inc. - President, CEO & Director

* Spencer Schwartz

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

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Conference Call Participants

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* Christopher Nicholas Stathoulopoulos

Susquehanna Financial Group, LLLP, Research Division - Associate

* David Griffith Ross

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

* Helane R. Becker

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

* Lee M. Jagoda

CJS Securities, Inc. - Senior MD & Analyst

* Scott H. Group

Wolfe Research, LLC - MD & Senior Transportation Analyst

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Presentation

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Operator [1]

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Thank you for standing by, and welcome to the Fourth Quarter 2019 Earnings Call for Atlas Air Worldwide. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions)

I'd now like to hand the conference over to your speaker today. Thank you. Atlas Air, you may begin.

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

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Thank you, Jessie, and good morning, everyone. I'm Ed McGarvey, Treasurer for Atlas Air Worldwide. Welcome to our fourth quarter 2019 results conference call.

Today's call will be hosted by John Dietrich, our Chief Executive 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. (Operator Instructions)

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

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John W. Dietrich, Atlas Air Worldwide Holdings, Inc. - President, CEO & Director [3]

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Thank you, Ed, and good morning, everyone. Thank you for joining. As many of you know, today is my first time speaking to you as CEO of Atlas Air Worldwide. I do so with great pride and with a strong sense of responsibility to our company, our customers, our employees and, of course, our shareholders.

I would first like to take this opportunity to thank Bill Flynn, who retired at year-end for his many contributions to Atlas during his time as CEO. Bill is now Chairman of the Board, and I look forward to continuing to work closely with him and our other Board members going forward.

As this is my first call with you, there are several themes that I want to emphasize. Airfreight is and will continue to be a long-term growth industry that is a critical part of the global supply chain. Atlas is well positioned with a formidable fleet of aircraft in its diversified portfolio and a long list of marquee customers.

In light of recent market challenges, and as we move the business forward, we are adjusting our business to manage our costs and best align our resources with our strategic priorities, with a focus on growth customers and those opportunities that generate the best returns. And subject to some of the uncertainties and potential opportunities associated with the unfortunate outbreak of the coronavirus, we anticipate that our financial performance in 2020 will be an improvement over 2019.

Let's please move to Slide 4. As I mentioned, airfreight is vital in meeting the demands of growing global economy and the increasing demand for time-definite networks by domestic and international supply chains. Atlas will continue playing a key role in meeting the rising needs of businesses and consumers. Our fourth quarter and full year 2019 adjusted results reflected a peak season that included a pickup in customer demand and improved yields compared with the middle of the year. It also reflected our team coming together to deliver the high-quality services that our customers appreciate. As expected, our fourth quarter results also benefited from the peak season flying we do for Express customers, an increase in military passenger and cargo flying, lower heavy maintenance expense, lower aircraft rents and depreciation and a refund of excess aircraft rent paid in previous years.

Our results, however, were also affected by the global air freight environment and macroeconomic conditions, which reflected the effects of tariffs, global trade tensions and geopolitical unrest in certain countries in South America as well as certain labor-related service disruptions.

These factors resulted in lower commercial cargo yields and utilization of our 747-400 ACMI and charter aircraft. As a result, and in accordance with U.S. accounting standards, we recorded a noncash special charge for the write-down of our 747-400 freighter fleet as well as the disposition of certain nonessential dry lease aircraft and engines.

This resulted in lower aircraft rent and depreciation during the quarter and higher-than-anticipated adjusted EBITDA and adjusted net income during the period. We also expect lower rent and depreciation to positively affect earnings in 2020 and beyond.

Turning to Slide 5, I have a few thoughts about the strength of our business in the future. They begin with the company's strategic principles. First, and always, safety, security and compliance is our top corporate priority. We will continue to promote a safe and compliant operation in everything we do.

In addition, and as I mentioned earlier, we have a strong core of long-term marquee customers, and we play a key role in their operating networks. These are customers that we value, including DHL, Amazon, Asiana out of South Korea, Boeing, DSV Panalpina based in Denmark, FedEx, NCA out of Japan, Qantas in Australia, UPS, the U.S. military and the NFL, as well as many other airlines, freight forwarders, charter brokers, sports teams and direct shippers.

We have a modern and diversified fleet, providing customers the biggest and broadest array of aircraft for domestic, regional and international cargo and passenger operations. We are a major player in express, e-commerce, the U.S. military and fast-growing markets. We are also a major player in the Transpacific as well as the growing market between South America and the rest of the world, in addition to our presence in the U.S.

We are constantly focused on operating efficiencies, cost management and the on-time performance that our customers expect. And as we have shown, we have a disciplined capital allocation strategy with a focus on balance sheet maintenance. And we do all of that with a tremendous team of dedicated customer-focused, highly experienced employees, who bring diverse skill sets to help us move our business forward. So that is what has shaped where we are today and will continue to shape our future.

Atlas is well positioned for continued success going forward. We are no doubt in volatile times with the ongoing trade wars, geopolitical unrest and the coronavirus, but we will continue to manage through these challenges, and they will pass. And as history has taught us through other crises, airfreight will play a key role as the global supply chain rebalances.

One of our top priorities is also to complete a new joint collective bargaining agreement for our pilots. Our negotiating teams are meeting regularly, and some significant progress has already been made. We have a defined path forward under the merger provisions of the 2 collective bargaining agreements, and we have reached what are called tentative agreements for more than half of the sections in the new JCBA. We still need to receive a comprehensive economic proposal as well as an integrated seniority list from the union, both of which are required to complete and implement a new JCBA, but we are doing all we can to move the negotiations forward. We cannot say with certainty when this new agreement will be ultimately reached, but we remain committed to continuing to work together with union leaders to negotiate and complete the contract as soon as possible to provide our pilots with the contract they deserve.

As I said earlier, we are taking steps to adjust our business and elevate Atlas. As I reviewed the range of our business activities, I have identified certain operations that are not generating acceptable levels of return. I will be focused on addressing those areas to ensure that our resources are put to the most profitable use.

Slide 6 highlights our framework for 2020. Just about every industry is experiencing the impacts of the unfortunate coronavirus outbreak. Airfreight is no different. The full effects are yet to be determined and, therefore, our visibility into the year ahead is evolving. In these unprecedented circumstances, we are playing a key role in our customers' operating networks as they navigate through this challenging time. We are also currently accommodating special charter demand and are well prepared for the anticipated surge of volumes once manufacturing resumes in full force.

Based on global economic conditions and our current expectations, and subject to the risks and potential opportunities associated with the coronavirus, we expect to fly approximately 325,000 block hours this year, with revenue of about $2.8 billion, including the impact in 2019 and the expected impact in 2020 from lower aircraft rent and depreciation. We anticipate that our adjusted EBITDA will grow by a mid-teens percentage in 2020 and that our adjusted net income will increase by a high 30s to low 40s percentage. Excluding the impact of lower aircraft rent and depreciation in both years, we anticipate that our adjusted EBITDA and adjusted net income in 2020 will be comparable to or slightly higher than 2019 levels.

Our outlook reflects an expected refund in 2020 of excess aircraft rent paid in previous years, the impact in 2020 of an increase in amortization of deferred maintenance compared with 2019, the absence of return conditions income that we realized in the first quarter of 2019, improved operating efficiencies and cost savings and a full year adjusted effective income tax rate of approximately 21%.

Our outlook also reflects that we have parked 4 less efficient 747-400 converted freighters since the beginning of 2020. We also plan to return 1 747 freighter to its lessor in the first half of this year, and we have sold or expect to sell 3 nonessential aircraft in our dry lease portfolio.

Similar to historical patterns, we anticipate that well over 3/4 of our adjusted net income in 2020 will occur in the second half of the year. In addition, our core capital expenditures, which exclude aircraft and engine purchases, in which are mainly for parts and components for our fleet, are projected to total approximately $90 million to $100 million in 2020, significantly lower than core CapEx of about $134 million in 2019.

Looking to the first quarter, which is also subject to the developments related to the coronavirus, we expect approximately 75,000 block hours, $640 million in revenue, $90 million of adjusted EBITDA and adjusted net income ranging from approximately breakeven to a modest profit.

This is a good time to ask Spencer to provide an overview of our fourth quarter 2019 results. And after Spencer's remarks, I'll provide a few additional comments, and then we'll be happy to answer your questions. Spencer?

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Spencer Schwartz, Atlas Air Worldwide Holdings, Inc. - Executive VP & CFO [4]

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Thank you, John, and hello, everyone. Our fourth quarter results are highlighted on Slide 7. On an adjusted basis, EBITDA totaled $204.7 million, and income from continuing operations net of taxes totaled $98.2 million. This included after-tax benefits of $10.5 million, $7.6 million due to lower aircraft rent and $2.9 million due to lower depreciation. On a reported basis, we had a net loss of $410.2 million, which was primarily driven by a noncash special charge of $485.2 million after tax.

Our adjusted earnings in the fourth quarter included an effective income tax rate of 17.7%. For the full year, we had an adjusted tax rate of 12.5%. In 2020, we expect our full year adjusted income tax rate to be approximately 21%.

Looking at Slide 8. Operating revenue totaled $747 million in the fourth quarter. ACMI revenue reflected a decline in 747-400 ACMI flying related to the global airfreight environment and macroeconomic conditions, partially offset by growth in 747-400, 777 and 737 CMI cargo flying.

In charter, revenue was relatively in line with the fourth quarter of 2018 driven by increases in cargo and passenger flying that were mainly offset by a decline in commercial cargo yields, excluding fuel.

In dry leasing, revenue during the quarter primarily reflected the scheduled return of a 777 freighter in 2019.

Moving to Slide 9. Segment contribution totaled $186 million in the fourth quarter. ACMI earnings primarily reflected a reduction in heavy maintenance expense, a decrease in aircraft rent and depreciation and growth in CMI cargo flying. Charter contribution during the period was primarily driven by a decrease in commercial cargo yields and lower 747 freighter utilization. This was partially offset by increased passenger and cargo flying for the military, a reduction in heavy maintenance expense and lower aircraft rent and depreciation.

In dry leasing, the change in contribution was similar to the change in revenue, primarily driven by the scheduled return of the 777 freighter, partially offset by lower interest expense and lower depreciation.

Turning to Slide 10. Our net leverage ratio moved a bit lower in the fourth quarter as we continue to make debt payments. We ended the year at 4.4x. We look for an improvement by the end of 2020, as we increase our cash balance and continue to make debt payments of approximately $70 million per quarter. We don't have any firm aircraft purchase commitments, and we remain committed to a strong balance sheet.

Earlier this month, we extended dry leases with a key customer for 2 777 freighters, each for a period of 10 years from the end of the existing leases. In connection with the lease extensions, we refinanced 2 secured loans totaling $126 million on the aircraft that had balloon payments of $112 million due later in 2020, with 2 new 10-year term loans with fixed coupon rates averaging less than 3.3%.

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

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John W. Dietrich, Atlas Air Worldwide Holdings, Inc. - President, CEO & Director [5]

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Thank you, Spencer.

Moving to Slide 11. I would like to revisit the themes that I started with today. Airfreight is and will continue to be a long-term growth industry that is a critical part of the global supply chain. Atlas is well positioned with a great fleet of aircraft and long list of marquee customers. As we move the business forward, we are adjusting our business to manage our cost and best align our resources with our strategic priorities, again, with a focus on growth customers and those opportunities that generate the best returns. And subject to some of the uncertainties and potential opportunities we've talked about, we anticipate that our financial performance in 2020 will be an improvement over 2019.

With that, operator, may we have our first question.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from Bob Labick with CJS Securities.

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Lee M. Jagoda, CJS Securities, Inc. - Senior MD & Analyst [2]

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It's actually Lee Jagoda for Bob this morning. So just starting with the fleet changes, can you give us some more color around the BCFs that you're retiring or parking and then the selling of the 3 nonessential aircraft from the standpoint of expected proceeds, potential uses of proceeds and things like that?

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John W. Dietrich, Atlas Air Worldwide Holdings, Inc. - President, CEO & Director [3]

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Sure. I'll start with the 747 parking of the converted freighters. As we talked about throughout the latter part of last year, demand has been soft -- softer and when in that environment, it's usually the least efficient aircraft, logically, that get parked first. And frankly, the demand has not been there for those aircraft, so we elected for the 747 converted freighter to be temporarily parked as we manage through the current period. They are available to us with appropriate lead times to return back to service. But they are generally -- because they're converted freighters, they're generally heavier, less efficient, more fuel burn, no nose load capability than the 747-400s. So that's kind of the reason behind the parking of those aircraft.

With regard to the other, what we described as nonessential aircraft, we believe the market was right to monetize some of those aircraft and collect the cash. We got fair returns. We're pleased with the results of those disposition of assets, and we look forward to some of our future investing activities. Spencer?

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Spencer Schwartz, Atlas Air Worldwide Holdings, Inc. - Executive VP & CFO [4]

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And Lee, this is Spencer. I'll just add that as far as use of proceeds, we intend to use those proceeds to shore up our balance sheet and to continue to focus on trying to lower our net leverage ratio.

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Lee M. Jagoda, CJS Securities, Inc. - Senior MD & Analyst [5]

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Okay. And then just a follow-up in terms of other opportunities you have to either reduce costs, increase margins things of that nature without incremental aircraft additions.

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John W. Dietrich, Atlas Air Worldwide Holdings, Inc. - President, CEO & Director [6]

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Sure. We're looking at every aspect of the business. It includes optimizing things, like our crew scheduling and bidding practices, leveraging technology to make us more efficient, updating and streamlining our heavy maintenance tasks. These task cards develop over time, and we review them from time-to-time, whether that work is required or not and if there are ways to streamline those maintenance events to make it more efficient and less expensive. And some of the other things you'd expect in a softer market, reducing nonessential travel, canceling certain conferences or meetings that can otherwise be leveraged through webcasts, appropriately managing our headcount and the kind of other things you'd expect limiting outside services and contractors, and it really runs the whole gamut of the whole organization, contributing to keep our costs under control.

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Operator [7]

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Your next question comes from Helane Becker with Cowen.

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

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So John, welcome on board. It's different for you now, right? Instead of being just a listener, you get to participate more aggressively.

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John W. Dietrich, Atlas Air Worldwide Holdings, Inc. - President, CEO & Director [9]

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Yes, indeed, Helane.

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

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So I'll try to not be so mean to you for your first conference call, but this is one of my questions. Would your pilots agree that you're doing everything possible to get that agreement negotiated and that you're just waiting on them to provide you with stuff to move it forward?

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John W. Dietrich, Atlas Air Worldwide Holdings, Inc. - President, CEO & Director [11]

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I think many would agree, some may not. I think really where the proof lies is in the facts of what we're seeking to do. We announced our merger with Southern Air back in 2016. And since then, we have taken all steps to move this process forward. Fortunately, for us, the 2 CBAs have pretty explicit provisions as to what is called for in the event of a merger. And that process, we've described in prior calls, requires the union to do certain things, including giving us an integrated seniority list, and that triggers a defined period of time of barging, after which any unresolved issues should go to arbitration, if there are any unresolved issues. But to your question, the union leaders particularly have steadfastly refused to honor those terms, which has forced us to seek legal intervention. So while that has taken time, it does, in my opinion, fit into the bucket of us doing everything possible because we believe in the contract to provide an orderly timely process to get this resolved.

Nonetheless, and notwithstanding some of the legal wrangling, we continue to bargain. We have brought in, at the union's request, a third-party professional negotiator that both parties know and respect to help us close the gap. So I think from that standpoint, they would also view us as working together to make progress together because that's what it's going to require. And so yes, I think it would be, if you were to ask an individual crew member, you'd get mixed results, but we truly believe we're pressing as quickly as we can.

Notably, the things I identified fit into the category of things we do require to make further progress. We are waiting on a comprehensive proposal. We're at that point in the bargaining where every section does have economic consequences, so we need to know what the total ask is, as we allocate where the funds are best applied. And we need the seniority list, that even if we were to agree to the CBA, it really can't be implemented until we have the seniority list. So that's why we identify that the union has some responsibilities in this as well. So hopefully, that answered your question.

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

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Yes. No, that's very good. I appreciate that. My other question is with respect to what we're seeing in rates. So we've seen rates out of Asia double and over the past couple of weeks because there's no belly space, there's no container shipping. And obviously, if there's any manufacturing, it has to go on air. And I'm just kind of wondering if there are companies, I guess, shippers that are contacting you to start reserving space for March, April and May, especially March and April as manufacturing starts to eventually ramp back up in China.

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John W. Dietrich, Atlas Air Worldwide Holdings, Inc. - President, CEO & Director [13]

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Absolutely. We're getting a lot of calls with some very experienced and knowledgeable shippers, freight forwarders, brokers who are anticipating. Well, none of us knows for sure what's going to happen. There's a lot of uncertainty. But what we do know, and with really the support of all the senior officials in government who are committed to keeping goods moving, the supply chains moving, it's going to return. And we've been through crisis, maybe not exactly like this before, but the kind of activity you're talking about is absolutely happening.

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Helane R. Becker, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [14]

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Okay. And then just one really easy question. The 123 aircraft in the chart, does that include the 4 parked aircraft?

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John W. Dietrich, Atlas Air Worldwide Holdings, Inc. - President, CEO & Director [15]

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It does.

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Operator [16]

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Your next question comes from Scott Group with Wolfe Research.

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Scott H. Group, Wolfe Research, LLC - MD & Senior Transportation Analyst [17]

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So I just wanted to follow-up on Helane's coronavirus question. So can you just be clear, like, what have you assumed in the guidance, a net positive or negative in the first quarter and the year? I know Helane talked about rates doubling. Is that, in fact, what you are seeing? And then any -- are there any limits we should be thinking about in terms of the number of charter flights you can actually fly?

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

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I'll take the first part of that, Scott. It's Spencer. So I mean, thus far, the coronavirus impact has been a negative one. As you would imagine, with Lunar New Year extended, factory workers not being able to get into the factories and so forth, so we've had flight cancellations. We've also had crew members who we were not able to get into position because the passenger airlines were not operating appropriately. As Helane indicated, that really is starting to change quite dramatically now. And now we're starting to really see the tremendous demand and the increase in yields. And the factories did get back to work this week, some of them not on full power. We expect that to continue to change, and they will get on full power over the next -- we think about a week or 1.5 weeks.

And so there's really going to be this kind of anticipated surge. So it's -- as John said earlier, our view is evolving. Right now, we've had some cancellations and negatives with regard to this. We expect that we are then going to have quite some positives. And both of those are kind of built into our outlook. But as -- again, as John said, it really is an evolving view given the uncertainties. And then I'll let John address the rest of it.

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John W. Dietrich, Atlas Air Worldwide Holdings, Inc. - President, CEO & Director [19]

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Yes. And as I mentioned in my remarks, we are really well positioned to take advantage of that upside significantly. We worked together with the union to enter into a memorandum of understanding. We are taking volunteers for any flying in and out of China and working together with the union. We have implemented some programs, including premium pay for those segments into and out of China and been working very cooperatively with the pilots and the entire team and the union leadership, so my shout out to them. And taking advantage, as Spencer mentioned, there have been some cancellations in the interim period. But also those voids have been picked up by some of the charter activity, which we expect to continue, if not accelerate, when the surge happens.

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Scott H. Group, Wolfe Research, LLC - MD & Senior Transportation Analyst [20]

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Just so I understand. So like the - I know you (inaudible) second quarter guidance, and we have full year guidance. Do you feel like for your second quarter -- implied second quarter reflects a meaningful benefit from this or not? I guess that's just not clear to me.

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Spencer Schwartz, Atlas Air Worldwide Holdings, Inc. - Executive VP & CFO [21]

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It's still evolving, Scott. So it's hard to know exactly what it's going to mean. So I think it's fair to say that there is potentially downside if things get worse or change. And I think it's fair to say that there's potentially quite a bit of upside if there is the surge that we anticipate.

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John W. Dietrich, Atlas Air Worldwide Holdings, Inc. - President, CEO & Director [22]

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And I would add to that, we've been careful not to take on too much risk on the upside until we get more visibility and things materialize that we're anticipating.

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Scott H. Group, Wolfe Research, LLC - MD & Senior Transportation Analyst [23]

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Okay. Makes sense. Just on the write-down of the 400 fleet, just so I understand, was this the entire fleet that you wrote down or just the ones you're parking? And the 400s that are coming out, were these in ACMI or charter?

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Spencer Schwartz, Atlas Air Worldwide Holdings, Inc. - Executive VP & CFO [24]

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Sure. So Scott, it was the 747-400 freighter fleet, so the entire fleet. It's together as one sort of asset group, which includes owned and leased airframes and engines, rotable parts, lease hold improvements. So it was all of our 747-400 freighter fleet. And sorry, did you have another part of the question that I missed?

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Scott H. Group, Wolfe Research, LLC - MD & Senior Transportation Analyst [25]

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Well, just the ones that are coming out that are getting parked here, were those in ACMI or were those in charter?

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Spencer Schwartz, Atlas Air Worldwide Holdings, Inc. - Executive VP & CFO [26]

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Right. They were in charter.

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Scott H. Group, Wolfe Research, LLC - MD & Senior Transportation Analyst [27]

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Okay. Do you think with the right kind of the whole 400 fleet, we should be thinking about parking more of the pure factory freighters over time?

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John W. Dietrich, Atlas Air Worldwide Holdings, Inc. - President, CEO & Director [28]

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Scott, we're not anticipating that. In fact, the 747, as I mentioned, still a great airplane with its nose loading capability, more tonnage. It's an aircraft of choice for the military as well and very attractive aircraft in our charter business. Again, it's parking the least efficient aircraft during this period, which we expect to be temporary. But the 747 freighters -- 400s are here to stay.

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

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And I would just add that we just placed a 744 on -- in an ACMI arrangement with a new customer just a few weeks ago. So it's an aircraft that's still in good demand.

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Scott H. Group, Wolfe Research, LLC - MD & Senior Transportation Analyst [30]

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Okay. Last one, just real quick. The rent refund, how much in '20 in the guidance versus '19?

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Spencer Schwartz, Atlas Air Worldwide Holdings, Inc. - Executive VP & CFO [31]

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Thank you, Scott. So we haven't said exactly how much that's going to be in '20. In '18, we had about $12.4 million. In '19, we had $27.6 million. And then in 2020, we haven't yet said what that is, but something along those lines. And we'll announce it as the year progresses.

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Operator [32]

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Your next question comes from Chris Stathoulopoulos with Susquehanna.

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Christopher Nicholas Stathoulopoulos, Susquehanna Financial Group, LLLP, Research Division - Associate [33]

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If -- so if belly capacity to Mainland China and Hong Kong comes back in, say, mid-2Q, how should we think about commercial charter, or more specifically, the overall supply-demand balance for freighters? A few months ago, before the virus, I got the sense that -- and I think you had suggested that some freighters might have to be parked. And I know that there's a need for capacity into China, but given how fluid the situation is, I'm curious on what are you seeing in the market ex this region.

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John W. Dietrich, Atlas Air Worldwide Holdings, Inc. - President, CEO & Director [34]

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So my view on that, Chris, is that even when the commercial belly capacity comes into the marketplace, there's still going to be a tremendous amount of demand given the significant setback that manufacturing has experienced. And it's not going to change overnight when some of the commercial carriers resume service. And looking ahead, I don't have all of the dates, but some of the commercial carriers have pushed into April before they'll resume service. So you're talking about that period of time before it even returns and that pent-up demand potentially building, which favors main deck freighters.

So while eventually it will balance and goods that have moved by surface will move by air for -- previously moved by surface just because of the urgency to go to market. So we think that once the surge occurs, it's going to be a while and that the passenger belly capacity is not going to move the needle that much for a period of time.

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Christopher Nicholas Stathoulopoulos, Susquehanna Financial Group, LLLP, Research Division - Associate [35]

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Okay. So we shouldn't necessarily think that your current block hour and EBITDA guide is anchored to whenever American, Delta, they kind of put capacity back online. It sounds like you're expecting a sort of a peak to follow whenever that happens.

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John W. Dietrich, Atlas Air Worldwide Holdings, Inc. - President, CEO & Director [36]

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Yes, that -- my view is that forecast is independent of the commercial carriers and the belly capacity.

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Christopher Nicholas Stathoulopoulos, Susquehanna Financial Group, LLLP, Research Division - Associate [37]

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Okay, okay. And then could you remind us where you are with respect to the Amazon warrants, specifically the 2016 tranche, the strike price and whether any have been exercised and when that tranche expires?

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

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Sure, Chris. None of those warrants have expired -- sorry, yes, none of them have expired, none of them have exercised. So we had a few different tranches. Warrant A and B had a strike price of $37.50, and warrant C has a strike price of $52.90. And again, none of those have yet been exercised.

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Operator [39]

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(Operator Instructions) Your next question comes from David Ross with Stifel.

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David Griffith Ross, Stifel, Nicolaus & Company, Incorporated, Research Division - MD of Global Transportation and Logistics [40]

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A question on the labor side of things again. You mentioned in the fourth quarter there was labor-related service disruption. It's been highlighted throughout the past year or so. Was it any less in 4Q '19 than in prior quarters? And how do you see that trending into 2020?

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

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Yes, it was less in the fourth quarter for a combination of factors, including some of the steps that we took in management to ensure we had enough crews out in the workplace. For example, we plan for peak season to have crews available -- more crews available. They've, for the most part, completed vacation and training, so we have more crews generally available by design, as well as there's instances where we'll close down the schoolhouse, where we have qualified pilots who serve as instructors out on the line as additional coverage. And frankly, the positive momentum with the labor discussions. Our pilots stepped up and delivered the service that our customers come to expect.

And the reference in my remarks about the service disruptions are related to just generally in the labor environment we're in. We still see some instances of what we believe are labor-related service disruption, so that hasn't gone away entirely. But the overwhelming majority of our pilots are stepping up and serving our customers. And that's why it's not as much of a focus in the fourth quarter as it was in previous quarters.

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David Griffith Ross, Stifel, Nicolaus & Company, Incorporated, Research Division - MD of Global Transportation and Logistics [42]

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And going into 2020, do you expect this to be highlighted in the quarterly earnings again? Or is it close to minimal?

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

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We're optimistic. We're focused on getting to a deal with our pilots. We want to get them the contract. The union has some responsibilities here as well, as I've mentioned. Unfortunately, it's taken longer because of the litigations and the arbitrations that we've had to go through. But my view is our pilots want to go to work, they want to serve our customers and they want to do their jobs and they want their contract. So if we keep moving in that direction, which we have been, I'm optimistic we're going to continue to see improvements, and I'm certainly hopeful of that.

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David Griffith Ross, Stifel, Nicolaus & Company, Incorporated, Research Division - MD of Global Transportation and Logistics [44]

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And I know you can't control what the union does, but do you have a goal for timing of resolution to the labor contract?

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John W. Dietrich, Atlas Air Worldwide Holdings, Inc. - President, CEO & Director [45]

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As soon as possible. And I think there are levers that both sides could pull to make that happen. It's not going to happen overnight because there's still a lot to discuss, but there's nothing that prevents us from continuing to kind of accelerate the time periods. One of the things that I've shared publicly with the union, the current contract provisions call for the union to tender us the seniority list, and after which, there's a period of 9 months of bargaining, after which, any unresolved issues go to binding arbitration.

As I mentioned, we also have a majority of these sections already agreed. That 9 months contemplates that you're starting from scratch, from 0, and we're not. So there are opportunities to accelerate, if we can, but our view is that, unless and until we get the seniority list and the integrated -- excuse me, the seniority list and the comprehensive economic proposal, it's difficult to make rapid progress. So both sides have a responsibility to move this forward.

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David Griffith Ross, Stifel, Nicolaus & Company, Incorporated, Research Division - MD of Global Transportation and Logistics [46]

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And then just one follow-up. You said earlier that there's a certain lead time to get the parked 747s back into service. What is that general lead time if you see the demand out there?

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John W. Dietrich, Atlas Air Worldwide Holdings, Inc. - President, CEO & Director [47]

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It could range anywhere from a week to 45 days, depending on the status of the aircraft, depending on the status of the engines, when it's due for certain maintenance. There's no single answer to that. But there are a couple of aircraft that we would hold out that could move pretty quickly back online, if we need them. And probably the other 2, a little bit more lead time in that 30- to 45-day time period.

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Operator [48]

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There are no further questions at this time. I turn the call back to the presenters for any closing remarks.

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John W. Dietrich, Atlas Air Worldwide Holdings, Inc. - President, CEO & Director [49]

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Great. Thank you, operator. Spencer and I would like to thank all of you for your interest in Atlas Air Worldwide. We appreciate you sharing your time with us today, and we look forward to speaking with you all again soon. Thank you very much.

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Operator [50]

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