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

Q1 2019 Atlas Air Worldwide Holdings Inc Earnings Call

Purchase May 7, 2019 (Thomson StreetEvents) -- Edited Transcript of Atlas Air Worldwide Holdings Inc earnings conference call or presentation Wednesday, May 1, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Edward J. McGarvey

Atlas Air Worldwide Holdings, Inc. - VP & Treasurer

* Spencer Schwartz

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

* William J. Flynn

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

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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

* David Pearce Campbell

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

* Jack Lawrence Atkins

Stephens Inc., Research Division - MD and Airline, Airfreight & Logistics 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

* Stephen Michael O'Hara

Sidoti & Company, LLC - Research Analyst

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Presentation

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Operator [1]

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

I would now turn the call over to Mr. Bill Flynn, President and Chief Executive Officer. You may begin, sir.

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William J. Flynn, Atlas Air Worldwide Holdings, Inc. - President, CEO & Director [2]

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Thank you, Natalia, and good morning, everyone. Before we get started, I want to acknowledge the tragic loss of Flight 3591 on February 23, just days after our previous earnings call.

The accident claim 3 lives, 2 Atlas Air pilots and a third pilot from another airline. Our focus continues to be on the families of the pilots and providing them with care and support. Safety is always our top priority and we are devastated by this loss.

We continue to work closely with the National Transportation Safety Board as it leads the investigation of this accident. I appreciated the opportunity to personally thank all of the first responders and the officials supporting the recovery effort. And I want to express my heartfelt gratitude to our Atlas Air teams who came together as we promptly activated our emergency response procedures. Their teamwork and professionalism has been extraordinary, and I thank them for their ongoing dedication and hard work as the investigation continues. I also thank our crew and ground staff for working to ensure uninterrupted business operations to serve our customers.

Now let's turn our attention to our first quarter results, and I'll turn it over to Ed McGarvey, Treasurer for Atlas Air Worldwide.

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Edward J. McGarvey, Atlas Air Worldwide Holdings, Inc. - VP & Treasurer [3]

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Thank you, Bill. Moving to Slide 2. Joining Bill today to host our first quarter 2019 results conference call is 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.

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 report. 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 would like to draw your attention to Slide 3 and turn the call back to Bill Flynn.

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William J. Flynn, Atlas Air Worldwide Holdings, Inc. - President, CEO & Director [4]

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Thank you, Ed. Our first quarter results exceeded our expectations. We are benefiting from a full year of flying the 16 aircraft we added during 2018 to meet customer demand. That includes more 767 flying for Amazon, more 777 flying for DHL Express and more 747-400 flying for Asiana Cargo, Inditex and SF Express. We are also adding 3 CMI 747-400s for Nippon Cargo Airlines this year.

Our focus on express, e-commerce and fast-growing markets provide a solid foundation to deliver continued business and earnings growth this year. 2/3 of our wide-body freighters have customers in express and e-commerce and we are continuing to build on that. We were pleased to announce the expansion of our relationship with Amazon in March. We are scheduled to begin flying 5 737-800s on a CMI basis for Amazon this year, including 2 starting this month.

We also look forward to the opportunity of adding up to 15 more by May 2021. This new fly provides a path to continued expansion in a desirable aircraft type. And it will significantly increase our scale in the 737 platform that we acquired with Southern Air. We remain confident about our future and the future of airfreight. We are driving growth in the scale, diversity and profitability of our business, and we are a leader in an industry that is vital to the modern global economy.

Airfreight provides efficient access to markets. It is driving increased innovation in supply chains and it is a powerful contributor to global economic and social development. Including cycles and seasonality, global airfreight is expected to grow at a 4% compound annual rate and to double in size over the next 20 years. As it does, we are well positioned to capitalize on our domestic and worldwide operations to deliver value for our customers and shareholders.

Moving to Slide 4. Our first quarter adjusted earnings reflected continued growth in our block hours and revenue and continued increases in adjusted EBITDA and adjusted net income. As expected, earnings in the quarter were positively impacted by $17.9 million of adjusted net income for maintenance payments that related to the scheduled return of a 777 freighter at the end of a long-term Dry Lease. We are currently working with customers to either lease or operate that aircraft.

Slide 5 highlights our current framework for 2019. It reflects our outlook for another year of volume and earnings growth. We expect global economic activity to expand at a modest pace, and overall, airfreight demand to be supported by faster growth in Express and e-commerce. We continue to expect volumes to rise to around 340,000 block hours in 2019, revenue to grow to approximately $3 billion, adjusted EBITDA to increase to about $600 million and adjusted net income to grow by a mid-to-upper single-digit percentage.

Our current outlook, however, now includes the impact of expected start-up expenses in 2019 for the new 737 CMI service that we reached agreement on with Amazon in March. It's important to note that these expenses were not incorporated in the full year outlook that we previously provided.

Maintenance expense in 2019 is expected to total approximately $420 million. The increase from 2018 mainly reflects an increase in daily line maintenance driven by the growth of our fleet and the anticipated growth in our block hours this year.

Our outlook also anticipates depreciation and amortization of about $260 million and core capital expenditures, which exclude aircraft and engine purchases, between $135 million to $145 million, mainly for parts and components for our fleet.

Looking at the second quarter, we anticipate that our adjusted net income will represent slightly more than a mid-single-digit percentage of our full year results. We also expect to fly approximately 80,000 block hours with revenue of about $710 million and adjusted EBITDA of about $105 million.

Earnings in the second quarter will benefit from the incremental aircraft we added to our fleet during 2018. We expect this benefit to be offset by several factors during the quarter, including the timing of maintenance events, crew costs primarily related to our interim agreement with pilots of Southern Air, start-up expenses associated with our new 737 CMI service as well as the refund in the second quarter of 2018 of aircraft rent paid in previous years.

I'd like to share some additional perspective. The building blocks we have developed are driving consistent long-term business growth in earnings performance. We came into 2019 from a record 2018. Volume, revenue, adjusted EBITDA and adjusted net income were all dramatically ahead of the prior year, and 2017 was an improvement from the year before.

As we go forward, we are looking to consolidate the gains we have made and continue leveraging these building blocks to grow our business today and into the future.

This is a good point to ask Spencer to provide some additional detail about our first quarter 2019 results. After Spencer's remarks, I'll add a few additional comments and then we'll be happy to take your questions. Spencer?

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Spencer Schwartz, Atlas Air Worldwide Holdings, Inc. - Executive VP & CFO [5]

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Thank you, Bill, and hello, everyone. Our first quarter results are highlighted on Slide 6. On an adjusted basis, income from continuing operations net of taxes totaled $27.3 million, which was an increase of 15% over the first quarter of 2018.

On a reported basis, because our stock increased significantly during the quarter, our results were a net loss of $29.7 million, which included a noncash unrealized loss of $46.6 million on outstanding warrants.

Our adjusted earnings in the first quarter included an effective income tax rate of 15.3%. For the full year, we expect our adjusted income tax rate to be approximately 20%.

Looking at Slide 7. Higher ACMI segment revenue in the first quarter was mainly due to an increase in 767 flying for Amazon, incremental 777 flying for DHL Express and the start-up of 747-400 flying for new customers.

Higher Charter segment revenue during the period was driven primarily by an increase in flying and an increase in average rate per block hour, and higher Dry Leasing segment revenue primarily related to the revenue for maintenance payments that we discussed.

Moving to Slide 8. Segment contribution totaled $104.7 million in the first quarter, a 21% increase over the prior year. ACMI earnings primarily reflected increases in 767 and 777 CMI flying. These were offset by higher crew costs, including enhanced wages and work roles resulting from our interim agreement with our Southern Air pilots, additional nonheavy maintenance and repairs and increased amortization of deferred maintenance costs.

Lower Charter segment contribution during the period was driven by additional nonheavy maintenance and repairs and by lower military cargo flying related to unusually late cancellations of a number of flights by the military, which left us without adequate time to take advantage of alternative opportunities in the commercial market.

This impact was partially offset by an increase in military passenger demand and by an expansion in the flying we did for sports teams and VIP Charter customers.

In Dry Leasing, higher segment contribution during the quarter was primarily due to the maintenance revenue payments we received as well as the placement of additional aircraft with DHL Express and Amazon.

Turning to Slide 9. You can see our focus on lowering our net leverage ratio, which remained fairly consistent while we increased our fleet significantly and that ratio began to move lower in the second half of 2018. And we ended the first quarter of 2019 at 4.1x, a further reduction from year-end. Importantly, we expect our net leverage ratio to continue to improve gradually throughout 2019, as we benefit from flying the aircraft we have added to the fleet, continue to generate strong EBITDAR and make debt payments of approximately $70 million per quarter.

We ended the first quarter of 2019 with cash, including cash equivalents, restricted cash and short-term investments totaling $175.9 million. Our cash position at March 31 reflected cash used for investing and financing activities, partially offset by cash provided by operating activities.

Net cash used for investing activities during the first quarter was primarily for core capital expenditures, spare engines and upgrade kits and 767 aircraft and related freighter conversion costs.

Net cash used for financing activities during the period primarily reflected payments on debt obligations, partially offset by proceeds from debt issuance. We are focused on maintaining a strong balance sheet. As the slide shows, we have grown our fleet to take advantage of great opportunities. In doing so, we have continued to apply a disciplined approach to financing.

As we have noted before, this has resulted in a low weighted average interest rate of 3.3% for our debt, almost all of which is at a fixed rate. In addition, the vast majority is secured by our aircraft assets, which continue to have a value in excess of the related debt.

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

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William J. Flynn, Atlas Air Worldwide Holdings, Inc. - President, CEO & Director [6]

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Thank you, Spencer. Moving to Slide 10. Our first quarter results exceeded our expectations. We are benefiting from a full year of flying the 16 aircraft we have added for customers in 2018 and the 3 aircraft we are adding for NCA in 2019.

Our focus on express, e-commerce and fast-growing markets provides a solid foundation to deliver continued business and earnings growth. We announced an expansion of our relationship with Amazon in March. We remain confident about our future and the future of airfreight. We are driving growth in the scale, diversity and profitability of our business. We are a leader in an industry that is vital to the modern global economy. And as airfreight continues to grow, we are well positioned to capitalize on our domestic and worldwide operations and deliver value for our customers and shareholders.

Natalia, may we have the first question please?

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Questions and Answers

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Operator [1]

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Your first question is from the line Bob Labick with CJS securities.

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

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Congratulations on the expansion of the relationship with Amazon. Wanted to start with direct contribution of ACMI. And we've talked about it on the last couple of calls. If you look over the last 4 quarters, it's been pretty much flat. But looking ahead, obviously, we don't know all the levers, but seemingly to achieve your guidance, there should be a strong increase in direct contribution from ACMI in the back half of the year. And so I was just wondering if you could kind of remind us of what's been going on kind of behind the scenes? And what's going to change in the second half so that we see the ACMI direct contribution margin and dollars increase in the back half of the year?

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

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Sure. Good question. Thank you, Bob. There are several things that impact that. Let me address the, I think, margin first. It's, I think, an interesting point. If you look at ACMI margins, they're really being driven by an increase in the smaller gauge, CMI 767 flying, an increase in maintenance cost and an increase in reimbursed amounts that are recorded as operating revenue while the costs are recorded as operating expenses. And I've talked about this a little bit in the past, but these costs include airport, navigation, ground handling and other charges that historically were considered outside of the typical ACMI business model. But we take on these charges for ACMI customers, either when we're in a better position to process them or there are certain routes that make more sense for us to do that or if our customers don't have an established airline operation. And these charges have really grown as we've taken on more of this for newer customers.

If you exclude the smaller gauge, 76s and 73s, you exclude the smaller gauge aircraft and you exclude the reimbursed cost, ACMI margin has been fairly steady over the past several years. So just wanted to make that point. If you just look at it on its face, you can't necessarily see what's really happening. And those reimbursed costs and the smaller gauge CMI flying are really driving that, that sort of core of the business continues to be very strong and sound.

And then with regard to ACMI going forward. Yes, it should be very strong in the back half. We're incurring a significant amount of maintenance costs in the first half of this year, especially the higher nonheavy maintenance that we incurred as you saw in the first quarter of this year. Most of the nonheavy maintenance increase for the full year was actually incurred in the first quarter. So you'll see an improvement in that line throughout the year. And of course, maintenance expense will be lower in the back half of the year, which should -- we expect, which should help ACMI contribution. So long answer. But yes, we expect ACMI contributions to increase as the year progresses.

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William J. Flynn, Atlas Air Worldwide Holdings, Inc. - President, CEO & Director [4]

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If I could add. I think more broadly, Spencer, and you touched on it. In second half of '19, we're looking at lower maintenance expense than we incurred in 2018. And we talked a little bit about military in our comments and in our press release, we're expecting a very strong second half '19 for the military, both in cargo and in passenger. And a very solid growth on a year-over-year basis. And so that's, while you ask, Bob, about ACMI, I think as we talk about the second half here, it's important to recognize the strength that we expect in military. I was just at a conference 2 weeks ago with senior leadership, and then the lower maintenance that we expect to incur.

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Spencer Schwartz, Atlas Air Worldwide Holdings, Inc. - Executive VP & CFO [5]

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And we have -- yes. We have several engine overhauls, fewer in 2019 than in 2018 in the back half of the year.

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Robert James Labick, CJS Securities, Inc. - President & Director of Research [6]

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Great. That's super color. And then just my, I guess, follow-up and a quick one and then I'll get back in the queue. We know of the -- I think Nippon Cargo, CMI, the Amazon CMI, so that's 8 planes, can you give us a sense of the rest of the fleet changes over the course of the year? Will there be more than that? Are there any dropping off? Or how should we think about the size of the fleet for the balance of the year?

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Spencer Schwartz, Atlas Air Worldwide Holdings, Inc. - Executive VP & CFO [7]

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Sure. Sure, Bob. It's Spencer. So you know that we added 5 leased aircraft last year. Couple of them you see operating in ACMI, the remainder you see operating in Charter. We'll add the 3 aircraft for NCA, as you said. We'll add 5 for 737s for Amazon, as you said, 2 this month. And one other thing there to point out is the Dreamlifter, the flying that we do for Boeing, you may have seen that the aircraft equivalence for that increased.

In the first quarter, Boeing increased the production rate on the Dreamliner to 14 ship sets from 12. And so that really increases some of the flying that we do. Still, 4 aircraft, but the aircraft equivalence increased.

And then to your question, we added 1 767-300. It's currently undergoing conversion. It should come out of conversion towards the end of the summer. And then we will operate that either in Charter or ACMI. And then as the year progresses, there may be 1 other passenger aircraft that may be added. And that's what we're thinking of at the moment.

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Operator [8]

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Your next question is from the line of Jack Atkins with Stephens.

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Jack Lawrence Atkins, Stephens Inc., Research Division - MD and Airline, Airfreight & Logistics Analyst [9]

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Spencer, going back to the ACMI direct contribution for a moment. And I don't mean to harp on it but I just want to make sure I'm understanding sort of the trends there. But the last 12 months sort of LTM period ending in the first quarter, the revenue in ACMI is up 17% but the direct contribution's down 1%. Is that just a function of just higher overall maintenance expense? And if that's the case, can you sort of walk us through why maintenance expense has been so elevated over the course of last 12 months?

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Spencer Schwartz, Atlas Air Worldwide Holdings, Inc. - Executive VP & CFO [10]

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Yes. Jack, I thought I addressed that with Bob. But the biggest reasons for that, are that we are incurring a lot of reimbursed costs for newer customers. And so we incur the cost, so it's included in revenue, it's also included in cost, doesn't impact the bottom line. Traditionally, those costs were being incurred by the customer. And now they're being -- we're taking that on for them because of the nature of the customer or the flying. And so that has a negative impact on margin but it really doesn't impact the overall business. And that's having a real big impact. The other part of it is smaller gauge CMI flying is clearly not as strong from a margin perspective.

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

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Yes. And I'll just add a little bit, if I may, Jack, to Spencer's point. So we've taken on a number of customers who are not airlines or have airline-like operations. And so on their behalf, they ask us to go out and procure the services and perhaps procure even fuel. And that's the point Spencer is making.

And then of course, we're reimbursed and it appears to grow revenues, yet the implication is it's pressuring margins. The good news in all of that because we're able to do that, because we have scale, perhaps we can buy fuel better than they may be able to buy for themselves. Because we have the depth in the operation, we can actually create customers who because -- who otherwise if they didn't have a way to solve for these kind of necessary enablers may not take on aircraft. And so it's really -- I think it's an added value from our perspective to build new customers who otherwise might not be able to take on a full aircraft or aircraft operations on their own behalf.

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Jack Lawrence Atkins, Stephens Inc., Research Division - MD and Airline, Airfreight & Logistics Analyst [12]

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Well, that -- I certainly understand the margin implications from all of that and I think that's definitely understood. But I guess, even when you look at it from a block hour perspective, your block hours are up in the high teens. So I guess I'm just trying to understand why we're not seeing more of a flow through to segment direct contribution? But maybe that's something we can just address off-line but I was just curious about that. On the...

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Spencer Schwartz, Atlas Air Worldwide Holdings, Inc. - Executive VP & CFO [13]

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Sure. Yes. Let me just point out on that. It's also the first quarter. And so as the year progresses, especially the back half of the year, I think you'll see ACMI contribution. So ACMI contribution grew a little bit, '17 to '18. And I think you'll see it grow nicely '18 to '19.

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Jack Lawrence Atkins, Stephens Inc., Research Division - MD and Airline, Airfreight & Logistics Analyst [14]

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Okay, okay. Great. And then just one last one for you. When we sort of go back to the fourth quarter call in February, you guys were saying you expected your second half of the year to be about 75% of full year earnings. Now if we sort of take your implied second quarter guidance, it looks like the back half is about 80% or 81%, low 80s. Could you maybe help walk us through sort of what changed in terms of your outlook? Did something sort of change in the second quarter in terms of your expense structure? I'm just trying to understand sort of the puts and takes there.

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Spencer Schwartz, Atlas Air Worldwide Holdings, Inc. - Executive VP & CFO [15]

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Sure. Sure. We had some timing issue with regard to military volumes. There were some, as we said in the first quarter, military cargo volumes. There were some cancellations that the military made. And we expect that, that will pick up for the remainder of the year. So that is one thing, certainly that changed with regard to the back half of the year. And then nonheavy maintenance, more of that was incurred in the first quarter. And so as I said before, most of the increase in nonheavy maintenance for the full year was actually incurred in the first quarter. So that will be lower. And then heavy maintenance, we have fewer engine overhauls in the back half of the year, so all of those are now impacting the back half.

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Operator [16]

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

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

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Just continuing your guidance for a second, what -- you've added the new aircraft with Amazon. What has changed with the organic guidance, now that you have -- you kept revenue and block hour guidance the same, but you have some incremental assets coming online. What's changed of sort of the organic business there?

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

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I don't think anything has changed. The block hour guidance has zeros at the end, it's kind of a rounded estimate. And so we don't get to that level of precision, especially this early in the year. But block hours may certainly grow from that point. It's probably slightly conservative, again, it's just a rounding. But now the fund -- so I was pointing out to Jack just a moment ago, I think we have some timing issues with the military. We have some timing issues with the maintenance. But the core fundamentals of the business are doing quite well.

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

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Okay. So it's just, I guess, incremental aircraft is not that meaningful in the context of 340,000 block hours? Is that the sense I'm getting?

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

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No. I think as the year progresses, you will see the benefit of the aircraft that we added last year and the aircraft that we're adding this year. It's just that they've been masked in this first quarter a little bit, and certainly will be in the second quarter. But for the full year, you'll see that a lot more. But yes, we are now enjoying the Amazon for the 767s. We're now enjoying full accretion from the Amazon 767s and so you'll see that. We're now enjoying the aircraft that we added in '18, the aircraft that we will be adding in '19.

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William J. Flynn, Atlas Air Worldwide Holdings, Inc. - President, CEO & Director [21]

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Yes. I think -- this is Bill Flynn. I'll just add so the point we're making on the incremental 737 CMI operations is they weren't included in prior guidance but neither were the necessary start-up expenses for a new fleet type. And so while we've kept guidance, our framework, consistent from our prior call, we're actually taking on expenses here as we hire crew and make other investments to bring on a new fleet type. And I think that's the nuance we were suggesting in the press release and our prepared comments.

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Seldon T. Clarke, Deutsche Bank AG, Research Division - Associate Analyst [22]

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Okay. That's helpful. And could you just help quantify those start-up costs? Or kind of give us a way to think about how this should progress over the next several quarters?

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Spencer Schwartz, Atlas Air Worldwide Holdings, Inc. - Executive VP & CFO [23]

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Seldon, it's Spencer. So we don't quantify those, they're very customer-specific. But what I will tell you is that they -- as you know, they were not in our prior guidance. They are now in our current guidance. And it is a new aircraft type for us. So we do fly 73s, but a different gauge of 73s, these are 737-800s. And so it does take a bit more with the newer aircraft type and so we are taking on training aircraft to ensure that pilots get the hours that they need, and we are training pilots who will train other pilots and hiring pilots before the flying starts and so forth. So start-up costs are a little different for this aircraft type.

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Seldon T. Clarke, Deutsche Bank AG, Research Division - Associate Analyst [24]

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All right. But more front-end loaded?

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Spencer Schwartz, Atlas Air Worldwide Holdings, Inc. - Executive VP & CFO [25]

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Yes.

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William J. Flynn, Atlas Air Worldwide Holdings, Inc. - President, CEO & Director [26]

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Yes.

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Operator [27]

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

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Scott H. Group, Wolfe Research, LLC - MD & Senior Transportation Analyst [28]

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So I just wanted to follow up there. I know we can't sort of quantify the start-up cost, but when we look at the second quarter net income guidance, it's down what 60%, 70% year-over-year. Is the majority of that start-up cost -- I just want to think about sort of going from down in the second to obviously implied up in the third and fourth and just want to get to comfort with that.

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

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Sure. No, no, it's not that, Scott. The majority of it is maintenance. And so we have significantly higher maintenance than the second quarter of 2018. But then maintenance will be a lot lower in the second half of the year. But in the second quarter focusing on that, yes, heavy maintenance will be higher. We have 3 additional D Checks, 1 additional CF6-80 engine overhaul, 1 additional 744 C Check. We have higher nonheavy maintenance as we have 7 additional auxiliary power units and 11 additional thrust reversers. So all those things happen in the second quarter. Our fleet increased. The rates that we pay our Southern crew, we have the interim agreement that we put in place last year. And so that's an increase second quarter of this year versus second quarter last year because it wasn't in place yet in the second quarter.

So all those things will happen in addition to the Amazon start-up cost. And then of course, they're offset by incremental contribution from additional 777 flying for DHL, incremental 744 contribution from the aircraft leases we put in place last year and then the full benefit for the 767 flying and the accretion from that related to Amazon.

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

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Okay. Sounds like we just got a lot of timing issues, we just need to think about the year.

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William J. Flynn, Atlas Air Worldwide Holdings, Inc. - President, CEO & Director [31]

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That's right. That's right, Scott. We agree with that.

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Scott H. Group, Wolfe Research, LLC - MD & Senior Transportation Analyst [32]

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If I can ask just one another. So yesterday, ATSG just announced they renewed their contract with DHL. Maybe just an update on your relationship there. I know there was some questions entering the year about DHL starting to do some in-sourcing of aircraft and so maybe just an update there?

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William J. Flynn, Atlas Air Worldwide Holdings, Inc. - President, CEO & Director [33]

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Sure, Scott, this is Bill. So our relationship with DHL continues to grow, and we are now up over 40 aircraft operating for DHL and that's under the umbrella of the 20-year block space agreement that we put in place with DHL. Signed in 2007, but we actually began flight operations under that agreement in March -- sorry, October of 2008. So I believe that we've got a very strong relationship with DHL. Obviously, very important for our company. I believe we are the largest provider of lift to DHL on an ACMI -- on a combined ACMI to CMI basis, also provide aircraft to DHL on a Dry Lease basis.

So I think there's good growth opportunities with DHL. And that's consistent with our view that we're really well positioned given the footprint we have in serving express customers. And we do serve FedEx and UPS through -- in holiday peaks with added SF Express, the Chinese express operator and the growth that we're -- expect to benefit from on e-commerce as we grow with Amazon. So very different company, very different risk profile in the highest growth segments of the market. So it's a strong relationship with DHL and we look forward to continue to grow with them.

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Operator [34]

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

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David Griffith Ross, Stifel, Nicolaus & Company, Incorporated, Research Division - MD of Global Transportation and Logistics [35]

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Just an update if you can on the pilot situation, where you are in, I guess, the 2-stage process of getting to an agreement on how to agree and then moving forward with the actual contract negotiation?

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William J. Flynn, Atlas Air Worldwide Holdings, Inc. - President, CEO & Director [36]

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Yes. This is Bill. So as you were alluding to, we've had a difference in contract interpretation on how to move forward to reach a new contract. And ultimately, under RLA, under the Railway Labor Act, differences in contract interpretation are resolved through binding arbitration. We did have those arbitrations. There's 2, the southern arbitration and the Atlas arbitration. Two contracts that will bring into -- ultimately into single joint collective bargaining agreement. So those -- the arbitrations were heard. The final step of the oral arguments were heard in the fourth quarter of '18. And there's a closing brief that each party had to submit so the closing briefs were submitted this year. And we're expecting a decision from the arbitrators at some point. And our sense is that the decision from the arbitrators really should be soon, because of the time that's elapsed now since the oral argument and the briefs were submitted. That said, we continue to meet with the union representatives, we continue to negotiate with the union representatives. So there's a dual track, while arbitration are still pending or the decisions are still pending, we're meeting regularly with union representatives and continue to negotiate with them towards the new contract. And our protocol agreement says that any agreements we reach on the many sections of the agreement, pending the arbitration decisions, an argument is an agreement.

So once we get the decisions and the path forward is specified for us, we won't be going back to the first article, the first section. We'll take up from where we are at that point, with some percentage of the contract already behind us.

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David Griffith Ross, Stifel, Nicolaus & Company, Incorporated, Research Division - MD of Global Transportation and Logistics [37]

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Is it possible that 2 arbitrators don't agree, so you need an arbitrator to arbitrate the arbitrators?

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William J. Flynn, Atlas Air Worldwide Holdings, Inc. - President, CEO & Director [38]

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No. We don't need an arbitrator to arbitrate the arbitrators. What I mean by that -- and what I mean by that, there's a process that says, if it's, call it, a split decision, we know which path we'll be going down with the union to get to a new agreement. So not a successive arbitration or subsequent arbitration.

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David Griffith Ross, Stifel, Nicolaus & Company, Incorporated, Research Division - MD of Global Transportation and Logistics [39]

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Okay. So even a split is a go, that makes sense.

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

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Even a split is a go.

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David Griffith Ross, Stifel, Nicolaus & Company, Incorporated, Research Division - MD of Global Transportation and Logistics [41]

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Yes. Boeing has been in the news a lot recently with issues over the Max, and there's been headlines about folks thinking Airbus may be a better plane, given pilot recruiting issues. What are you seeing as a Boeing shop, either what you're hearing from customers? Or what are your thoughts longer term about Boeing versus Airbus?

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William J. Flynn, Atlas Air Worldwide Holdings, Inc. - President, CEO & Director [42]

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Now that's a pretty broad question. I'll answer it from our perspective. The 2 crashes, the 2 737 Max crashes were a tragedy, almost close to 350 people lost their lives and that investigation is ongoing. I know what I read in -- I'm reading what you're reading. The MCAS system only exists in the MAX, we don't have that in any of our aircraft type. We think Boeing makes great freighters and the aircraft, the commercial aircraft, the passenger aircraft that are available to us to convert, make great converter freighters as well.

So for us, our fleet is now, of course, it'll be the 2 types, 2 gauges of 737s, the 400 and the 800 converted aircraft. The 67s converted aircraft. We do also operate a several 67-300 pure freighter aircraft converts, 777s, 747-400s and 747-8, so a wide array of Boeing aircraft and they've performed very well for our customers.

Now that said, there's a lot of growth in express and e-commerce, the midsize, wide-body freighter has a lot of utility. And as I've said on earlier calls, we're looking closely at the performance of the first A330-300 passenger to freighter conversions that are in the market. And we think that given what I believe demand is going to be for the mid body or mid wide-body freighter, there's opportunity there with the 330-300 on conversion but that's a little bit aways from that I think, given the higher level of utilization those aircraft have as passenger planes, particularly with Asian operators.

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Operator [43]

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

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Stephen Michael O'Hara, Sidoti & Company, LLC - Research Analyst [44]

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Just on the, I guess, the second half guidance. Is there any other aircraft return kind of factored into the second half?

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

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No. There is not. You mean like the maintenance return condition that we received in the first quarter, is there something like that in the back half of the year? No. There's not.

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Stephen Michael O'Hara, Sidoti & Company, LLC - Research Analyst [46]

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Okay, okay. And then in terms of the military, it sounded like there was some last-minute cancellations. And I'm just wondering, I mean, it doesn't seem like that's going to be picked up in the second quarter, and I'm just wondering if you're expecting better military demand in the second half of the year based on that.

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William J. Flynn, Atlas Air Worldwide Holdings, Inc. - President, CEO & Director [47]

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Yes. That's a good question, Steve. So I mentioned in, I think, response to maybe Bob's question on top of the Q&A. I just came back from a conference with the other carriers and senior military leadership, and we're looking forward to a very strong second half 2019. Certainly, a stronger second half 2019 in both cargo and passenger hours versus first half of '19, and a stronger second half '19 versus second half 2018.

So I think at the end of the year, we'll see that cargo's fairly flat on a year-over-year basis but still at very high levels of activity. And military passenger flying, that will be up substantially in second half 2019. And it was in the first half of 2019 over 2018. So there's quite a bit of activity that's called for. I would attribute what we saw and this quarter has a timing event. But I've got very, very strong confidence in the level of flying that we're going to have for the -- for military and in the yields that we'll enjoy as well.

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Operator [48]

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

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

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Bill and Spencer, et cetera, you mentioned that your forecast for this year is $3 billion in revenues and block hours of 740 -- 340 million for the year?

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Spencer Schwartz, Atlas Air Worldwide Holdings, Inc. - Executive VP & CFO [50]

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Thousand.

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David Pearce Campbell, Thompson, Davis & Company, Inc. - Senior VP, Research Analyst & Institutional Sales Partner [51]

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340,000 for the year, right. And those estimates are basically the same, I think, as you had given us before you signed the agreement with Amazon for additional 737 flying. So I'm a little confused as to why they didn't increase those estimates?

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Spencer Schwartz, Atlas Air Worldwide Holdings, Inc. - Executive VP & CFO [52]

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Sure, David. The 340,000 has 3 zeros at the end and so it's a rounded number. And so maybe before it was just under and now maybe it's significantly over. But still, generally rounds to that same area. So it's early in the year. We chose not to change the block hour forecast. But it's just an approximation at this point in the year. The Amazon flying clearly will add block hours, it's just that, that number is still rounded. That's all.

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David Pearce Campbell, Thompson, Davis & Company, Inc. - Senior VP, Research Analyst & Institutional Sales Partner [53]

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And you would say the same. Therefore, you didn't change your revenue forecast because you didn't change the block hour forecast.

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Spencer Schwartz, Atlas Air Worldwide Holdings, Inc. - Executive VP & CFO [54]

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Correct. And that's rounded to billions of dollars. So yes.

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

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And it's early in the year, David. So as we come into, obviously, our call in August when we have the second quarter behind us and we're more than a month into the third quarter and at the beginning shoulder of the peak, I think we'll have much more color to add, yes.

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David Pearce Campbell, Thompson, Davis & Company, Inc. - Senior VP, Research Analyst & Institutional Sales Partner [56]

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Now my second question is, Bill, you didn't say -- haven't said much about the cargo market in 2019. Did you see the usual seasonal pick up in March? And was it as good as a year ago? And how does your outlook for the second quarter shape up for industry cargo demand?

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William J. Flynn, Atlas Air Worldwide Holdings, Inc. - President, CEO & Director [57]

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Yes. Thank you, David. So I referred to it a bit in my prepared comments, but it's really here the first question on the market itself. So I think the first quarter of 2019 reflected more historical patterns that we might have seen in prior years, '15, '16, '17. '18 was a very strong first quarter in cargo demand. In fact, we didn't stopped for the peak and it just kept rolling into the first quarter. I think this year's first quarter looks more typical to prior years.

As we have focused on in prior comments and different meetings with our fleet is predominantly deployed in e-commerce and express. And they are both growing at higher than the average growth market. We're really encouraged to see the China PMI Index up. There is some discussion about U.S. and China reaching an agreement. I think the Financial Times called this current meeting, the penultimate meeting, we'll see. But just coming out of a Lunar New Year, and now we've got May holidays, May Day today in China. And we had a late holiday for Lunar New Year and a new Emperor now in Japan, and that affects Asian market flows as well both inter Asia, et cetera.

We're hearing, I would say, pretty good news out of China. We're talking with our marketing organization just on Tuesday, on yesterday, and they are seeing volume pickup. They're starting to see yields pickup. And that of course, informs the commentary we're providing, Spencer and I are providing today on the balance of the year in the second half and the framework. So a little long answer there. But a more typical first quarter. And I think very strong signs about pickup. More broadly, as we come out of -- into the back half of the second quarter and into the balance of the year, and our position with express and e-commerce, I think, we'll use that even a bit more, as you think about Atlas and Atlas' customers.

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David Pearce Campbell, Thompson, Davis & Company, Inc. - Senior VP, Research Analyst & Institutional Sales Partner [58]

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Bill, I mean, that outlook is considerably brighter than you get from reading newspapers and other countless forecasting, doom and gloom all the time. It certainly doesn't sound like that's the real world, you are the real world. You're doing great.

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Spencer Schwartz, Atlas Air Worldwide Holdings, Inc. - Executive VP & CFO [59]

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Business as usual doesn't always make news.

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William J. Flynn, Atlas Air Worldwide Holdings, Inc. - President, CEO & Director [60]

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Yes. And David, just as I said at the close of my comments that while we -- obviously, we operate in the market, so we're not separated from the market. But majority of our customers are publicly traded companies, and one can look at what are they saying about their business, what are they saying about their international flows and domestic flows, of course, and how does that help think about Atlas and our business opportunities.

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David Pearce Campbell, Thompson, Davis & Company, Inc. - Senior VP, Research Analyst & Institutional Sales Partner [61]

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Sounds like you got a lot of them.

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William J. Flynn, Atlas Air Worldwide Holdings, Inc. - President, CEO & Director [62]

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Thanks, David.

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Operator [63]

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Your next question is from the line Christopher Stathoulopoulos with SIG.

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Christopher Nicholas Stathoulopoulos, Susquehanna Financial Group, LLLP, Research Division - Associate [64]

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The around $18 million after-tax payments for the scheduled return of the 777 freighter in Dry Lease. Could you help frame that for us, on a typical quarter, what do the maintenance payments look like? And then was this included when you first gave us 2019 guidance?

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

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Sure. So I'll start with the latter part of that. Yes, it was included when we provided guidance. We even highlighted, focused on it because of how large it was going to be. This is kind of an infrequently carrying item because our Dry Lease portfolio isn't that large, so we have had these several times in the past but it does happen infrequently. This aircraft had been on lease with us for 5.5 years. And consistent with what we've done in the past, we recognize the amount received is Dry Lease revenue when the lease ends. Hopefully, that answers your question.

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Christopher Nicholas Stathoulopoulos, Susquehanna Financial Group, LLLP, Research Division - Associate [66]

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Yes. And then on Amazon looking to move to 1-day prime shipping. I was wondering if you give us some color on how you're thinking about their North American network going forward? A lot has changed since you and ATSG did the first TSA back in 2016. Should we expect like utilization levels to start increasing as they move to 1-day and I'm guessing additional point come on the network?

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William J. Flynn, Atlas Air Worldwide Holdings, Inc. - President, CEO & Director [67]

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Yes. Well, we're not really in a position to comment, Chris, on Amazon's plans and their strategy around the 1-day prime that we all read about. What we can say they've significantly increased the amount of aircrafts that they'll have dedicated to their operation. They announced -- first, they announced the 10 aircraft increase with ATSG for a total of 30. And now there -- we've got 5-plus additional opportunities that could result in us having 40 aircraft operating with them or a total of 70 aircraft over a relatively short period of time. But beyond that, we're really not in a position to say or to discuss what the 1-day means and how Amazon may be thinking about that across their entire supply chain.

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Spencer Schwartz, Atlas Air Worldwide Holdings, Inc. - Executive VP & CFO [68]

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Chris, it's Spencer. The only thing I would add to that is that the warrant structure that we agreed with Amazon has incentives built in for them to earn incremental warrants for flying that is beyond what's contracted thus far.

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Christopher Nicholas Stathoulopoulos, Susquehanna Financial Group, LLLP, Research Division - Associate [69]

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Okay. And if I could just get in one more. Curious if there's been any early indications around peak season, Charter increase or perhaps if you can give some color on broader supply/demand trends as we work into that?

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William J. Flynn, Atlas Air Worldwide Holdings, Inc. - President, CEO & Director [70]

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Yes. We're really not that far away, as we get, sitting here just at the beginning of May for peak shoulder which starts in August and then runs through. Based on our conversations with our customers, which beyond our ACMI, CMI customers but our Charter brokers, our freight forwarder customers. We're looking for a good peak. We're looking for growth throughout the year. We were excited about the PMI kind of color that's coming out of China and what we're hearing in the market as folks come out of Lunar New Year back to work now of course we have the May 1 holidays in Asia. But everything that we see suggests -- and what we've been talking about here today throughout the call is a very good second half. And that by definition has to include a good peak.

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Operator [71]

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Our next question is from the line of Kevin Sterling with Seaport Global Securities.

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Kevin Wallace Sterling, Seaport Global Securities LLC, Research Division - MD & Senior Analyst [72]

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Let me dig into military a little bit more. Obviously, you're feeling good about the back half of the year and I think you've got good visibility there. But maybe if take a little bit longer approach, Bill, and without getting to anything specific but if I look at the next couple of years, it seems to me the military, they've aging equipment, they've -- they continue to rely on outsourced providers like yourselves and ATSG and others. Is that a trend? Are we moving toward that trend for the next couple of weeks where the military could continue to outsource maybe even of their flying to some of the commercial providers like yourselves? How should we think about that?

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William J. Flynn, Atlas Air Worldwide Holdings, Inc. - President, CEO & Director [73]

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Well, that's a good question, Kevin. So I think we should separate cargo and passenger flying because they're both different, right? And our national crisis plans call for 90% of the troops that would have to move on commercial aircraft, and 40% of the cargo that would have to move on commercial aircraft. And if we look to the peak of OEF and OIF, sure was that 2009 or 2010 with the surge that we experienced under President Obama, that's about the right -- those are the numbers. That's what actually happened.

Secretary Mattis articulated a new national defense strategy and then in implementing that strategy, I think what we're going to see is certainly more military passenger flying, as we look at rotational combat brigades and the different kinds of missions that the military is going to undertake in different theaters, going forward over, let's call it a reasonable planning horizon. And those would need to be supported by cargo operations as well.

The other kind of longer-term position that the military has taken is that there was a substantial overfly or heavy utilization of the C-17s throughout the 10 years of OEF/OIF. And the current plans are to reduce the level of utilization, currently of C-17s to the level necessary for trading in currency. And then for cargo operations beyond that use commercial lifts so they can extend the useful life of the C-17. That kind of posture is still in place and I think has been recently reaffirmed. And it's a long way -- wouldn't be way of saying that I think the levels of cargo operations are going to continue where we see them, which are high. And I think we have the opportunity for more passenger operations, which is in part why we went out and acquired a 747-400 passenger plane to add to our fleet. And that's going to drive our ability to take on additional growth in passenger flying in the second half of the year that we've talked about.

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

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Kevin, it's Spencer. I'll just add that we continue to be the largest outsource provider to the military with our entitlement fairly steady at about 54%. And during the first quarter, we flew about 82% one-way missions almost all eastbound.

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William J. Flynn, Atlas Air Worldwide Holdings, Inc. - President, CEO & Director [75]

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And as good as the business is, and it is, and we do everything possible to do a great job for the military, it's still about 12% of the flying. So we're not with the growth in military, which is great for us. We also have growth in commercial. So you're not seeing us balance to an overdependence on military relative to our growth and our opportunities in commercial flying.

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Kevin Wallace Sterling, Seaport Global Securities LLC, Research Division - MD & Senior Analyst [76]

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Got you. That's very helpful. And last question. As I look at your guidance, it looks to me like essentially, you were able to absorb your CMI start-up cost, which are occurring in Q2. Is it safe to assume that without these costs, you may have raised your guidance?

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Spencer Schwartz, Atlas Air Worldwide Holdings, Inc. - Executive VP & CFO [77]

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You got it. That's right, Kevin. Yes, the start-up cost are now included but we kept our guidance the same. So essentially, yes, we have increased our guidance but then added the start-up costs so we got to the same place. That is correct.

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Operator [78]

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Your final question is from the line of Chris Stathoulopoulos with SIG.

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Christopher Nicholas Stathoulopoulos, Susquehanna Financial Group, LLLP, Research Division - Associate [79]

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I think if there's been any opportunity perhaps in Charter with the Max groundings and then what you're seeing in the aftermarket relates to PTFs on the 737 new generations?

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William J. Flynn, Atlas Air Worldwide Holdings, Inc. - President, CEO & Director [80]

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Well, we don't have that passenger fleet, Chris, that would pick up any flying as a result of the 737 Max groundings. When that's solved and when the aircraft has returned to service, that remains to be seen, I think. But to your other question, what does that mean in terms of the availability of 737-800s for possible packs to freighter conversion. That remains a question, right, because that would be to keep aircraft as a result of the grounding of that size if that's the fleet that you operate.

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Spencer Schwartz, Atlas Air Worldwide Holdings, Inc. - Executive VP & CFO [81]

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Could create a little tightness in the supply/demand market if more of those conversions to freighters don't happen or are delayed, that could be a good thing overall for airfreight yields. And perhaps there is a small minuscule amount of cargo that would have gone on the belly space. But we're not really seeing that, it would be so immaterial.

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Christopher Nicholas Stathoulopoulos, Susquehanna Financial Group, LLLP, Research Division - Associate [82]

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Okay. And then last one, what was the above minimum block hour trend in ACMI for 1Q?

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Spencer Schwartz, Atlas Air Worldwide Holdings, Inc. - Executive VP & CFO [83]

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Sure. So for the first quarter, it was 9.5. And that compares with about 7.9 in the first quarter of last year. Typically, customers fly somewhere 5 to 7 above minimum guarantees. And this year, we expect the customers to be well above those minimums.

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Operator [84]

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There are no further questions.

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William J. Flynn, Atlas Air Worldwide Holdings, Inc. - President, CEO & Director [85]

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Okay. Well, thank you, Natalia. And Spencer and I want to thank everyone for joining the call today, spending your time with us and we appreciated all your questions. We look forward to talking to you again in August when we announce our second quarter results. Thanks, everybody.

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Operator [86]

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This concludes today's earnings call. Thank you for your participation. You may now disconnect.