Dailystocks.com - Ticker-based level links to all the information for the Stocks you own. Portal for Daytrading and Finance and Investing Web Sites
DailyStocks.com
What's New
Site Map
Help
FAQ
Log In
Home Quotes/Data/Chart Warren Buffett Fund Letters Ticker-based Links Education/Tips Insider Buying Index Quotes Forums Finance Site Directory
OTCBB Investors Daily Glossary News/Edtrl Company Overviews PowerRatings China Stocks Buy/Sell Indicators Company Profiles About Us
Nanotech List Videos Magic Formula Value Investing Daytrading/TA Analysis Activist Stocks Wi-fi List FOREX Quote ETF Quotes Commodities
Make DailyStocks Your Home Page AAII Ranked this System #1 Since 1998 Bookmark and Share


Welcome!
Welcome to the investing community at DailyStocks where we believe we have some of the most intelligent investors around. While we have had an online presence since 1997 as a portal, we are just beginning the forums section now. Our moderators are serious investors with MBA and CFAs with practical experience wwell-versed in fundamental, value, or technical investing. We look forward to your contribution to this community.

Recent Topics
Article by DailyStocks_admin    (10-24-08 08:51 AM)

Atlas Air Worldwide Holdings NEW. CEO William J Flynn bought 7760 shares on 10-16-2008 at $29.02

BUSINESS OVERVIEW

Overview

AAWW is a holding company with two principal operating subsidiaries: Atlas Air, Inc. (“Atlas”), which is wholly-owned, and Polar Air Cargo Worldwide, Inc. (“Polar”), in which Holdings has a 51% economic interest and 75% voting interest. On June 28, 2007, Polar issued shares representing a 49% economic interest and a 25% voting interest to DHL Network Operations (USA), Inc. (“DHL”), a subsidiary of Deutsche Post AG (“DP”). Prior to that date, Polar was wholly owned by Holdings and was the parent company of Polar Air Cargo, Inc., the entity through which Holdings had principally conducted its scheduled service business and was converted to a limited liability company in June 2007 (“Polar LLC”), Polar LLC is now wholly owned by AAWW. Holdings, Atlas, Polar and Polar LLC are referred to collectively as the “Company” “we,” “us” or “our.” We are the leading provider of leased freighter aircraft, furnishing outsourced air cargo operating services and solutions to the global air freight industry. We manage and operate the world’s largest fleet of 747 freighters. We provide a unique value proposition to our customers by giving them access to new production freighters that deliver the highest reliability and lowest unit cost in the marketplace combined with outsourced aircraft operating services that lead the industry in terms of quality and global scale. Our customers include airlines, freight forwarders, the U.S. military and charter brokers. We provide global services with operations in Asia, the Middle East, Australia, Europe, South America, Africa and North America.

We believe that demand for efficient, wide-body freighter aircraft and related outsourced aircraft operating solutions will increase due to growing international trade, in particular, growth in developing markets in Asia, India and South America. According to industry studies, global cargo traffic, measured in revenue tonne-kilometers is expected to triple over the next two decades. As demand continues to increase, we believe that the supply of suitable freighter aircraft will not keep pace with this increase in demand as a result of limited production capacity for new freighters, limited passenger-to-freight conversion capacity and the anticipated retirement of aging aircraft currently operating in the world fleet.

As of December 31, 2007, our existing fleet of 37 wide-body, freighter aircraft, including 20 modern, high-efficiency, Boeing 747-400 aircraft, and our complementary operating solutions, uniquely positions us to benefit from the forecasted growth and increasing demand for efficient wide-body freighter airplanes in the global air freight market. Our market position is further enhanced by our order of 12 new state-of-the-art Boeing 747-8F aircraft, scheduled to be delivered in 2010 and 2011. We are the only current provider of these aircraft to the outsourced freighter market. In addition to our firm order, we also hold rights to purchase up to an additional 14 Boeing 747-8F aircraft, providing us with flexibility to further expand our fleet in response to market conditions.

We believe that the scale, scope and quality of our outsourced services are unparalleled in our industry. The relative operating cost efficiency of our current 747-400F aircraft and future 747-8F aircraft, including their superior fuel efficiency, create a compelling value proposition for our customers and position us well for growth in both the wet and dry lease areas of our business.

Our primary service offerings are:


• Freighter aircraft leasing services which encompasses the following:


• Fully outsourced aircraft operating solutions of aircraft, crew, maintenance and insurance known as wet leasing or (“ACMI”). An ACMI lease is a contract for the use of one or more dedicated aircraft together with complementary operating services. We typically contract these services for three to six year periods using Boeing 747-400s and for shorter periods using Boeing 747-200s. Our outsourced operating solutions include crew, maintenance and insurance for the aircraft, while customers assume fuel, yield and demand risk;

• Express network ACMI, where Polar will provide outsourced airport-to-airport wide-body cargo aircraft solutions to DHL. Upon the commencement of this service, which will be no later than October of 2008, AAWW will operate a minimum of six dedicated Boeing 747-400 aircraft servicing the requirements of DHL’s trans-Pacific express operations. Polar has historically provided and will continue to provide scheduled air-cargo service on these aircraft to our freight forwarder and other shipping customers with scheduled airport-to-airport cargo services (“Scheduled Service”). Once the express network ACMI services commence, however, DHL will assume the commercial risk of the operation;

• Aircraft and engine leasing solutions known as dry leasing (“Dry Leasing”). We typically dry lease to third parties for one or more dedicated aircraft for three to five year periods. Dry Leasing usually involves the leasing of aircraft to customers who are responsible for crew, maintenance and insurance and who assume fuel, yield and demand risk. In February 2008, Holdings formed a wholly owned subsidiary, based in Ireland, to further its dry leasing efforts.


• Charter services, which encompasses the following:


• Military charter services (“AMC Charter”), where we provide air cargo services for the Air Mobility Command (the “AMC”).

• Commercial charters, where we provide all-inclusive cargo aircraft charters to brokers, freight forwarders, direct shippers and airlines (“Commercial Charter”).

AAWW was incorporated in Delaware in 2000. Our principal executive offices are located at 2000 Westchester Avenue, Purchase, New York 10577, and our telephone number is (914) 701-8000.

DHL Investment

On June 28, 2007, DHL acquired from Polar a 49% equity interest, representing a 25% voting interest, in Polar in exchange for $150.0 million in cash, of which $75.0 million was paid at closing. AAWW also received approximately $22.9 million in working capital from DHL as additional proceeds in November 2007. The remaining $75.0 million is scheduled to be paid in 2008 in two equal installments (plus interest). In January 2008, AAWW received the first installment of the purchase payment of $38.6 million, including interest of $1.1 million, and the final purchase payment of $37.5 million (plus interest) is scheduled to be paid by DHL on November 17, 2008, subject to potential acceleration. AAWW continues to own the remaining 51% of Polar with a 75% voting interest. In addition to the other amounts paid by DHL, in July 2007, Polar received a $30.0 million non-interest bearing refundable deposit from DHL, to be repaid by Polar on the earlier of 90 days subsequent to the blocked space agreement (the “BSA”) Commencement Date (as defined below) or January 31, 2009.

Concurrently with the investment transaction, DHL and Polar entered into a 20-year BSA, whereby Polar will provide air cargo capacity to DHL in Polar’s Scheduled Service network for DHL Express services (the “DHL Express Network”). On or before October 27, 2008, (the “Commencement Date”), Polar will commence flying DHL Express’ trans-Pacific express network. As part of the transaction to issue shares in Polar to DHL, Polar LLC’s ground employees, crew, ground equipment, airline operating certificate and flight authorities, among other things, were transferred to Polar and Polar’s interest in Polar LLC was transferred directly to AAWW.

Polar, which historically bore all direct costs of operation, regardless of customer utilization, will transfer the financial risk and costs associated with the Scheduled Service business to DHL upon the Commencement Date. Also, until the Commencement Date of the DHL Express Network, AAWW will provide both financial support and assume all risk and rewards of the operations of Polar, with DHL maintaining support and assuming risk of operating losses thereafter.

The express network service will provide contracted airport-to-airport wide-body aircraft solutions to DHL and other freight customers and shippers. The BSA and related agreements will provide the Company with a guaranteed revenue stream from the six Boeing 747-400 aircraft that have been dedicated to this venture. Over the term of the BSA, DHL will be subject to a monthly minimum Block Hour guarantee that is expected to provide the Company with a target level of profitability. Polar will provide DHL with guaranteed access to air cargo capacity, and the aircraft will be operated on a basis similar to Atlas’ ACMI arrangements with other customers, by employing a long-term contract that allocates capacity and mitigates yield and demand risks.

As part of this transaction, Polar will operate six Boeing 747-400 freighter aircraft, which are being subleased from Atlas and Polar LLC, from closing until ten years from the commencement of the DHL Express Network flying. In addition, Polar is operating a Boeing 747-200 freighter aircraft, also subleased from Atlas, and may continue to do so to support the DHL Express Network. Polar and Atlas also have entered into a flight services agreement under which Atlas will provide Polar with maintenance and insurance for the seven freighters, with flight crewing also to be furnished once the merger of the Polar and Atlas crew forces (described below) has been completed. Polar will have access to additional capacity through wet leasing of available Atlas aircraft. Under other separate agreements, Atlas and Polar will supply administrative, sales and ground support services to one another.

The BSA establishes DHL capacity purchase commitments on Polar flights. Under the flight services agreement, Atlas is compensated by Polar on a per Block Hour basis, subject to a monthly minimum Block Hour guarantee, at a predetermined rate that escalates annually. DHL has the right to terminate the 20-year BSA at the fifth, tenth and fifteenth anniversaries of commencement of DHL Express Network flying. However, in the event of such a termination at the fifth anniversary, DHL or Polar will be required to assume all six Boeing 747-400 freighter head leases for the entire remaining term of each such aircraft lease, each as guaranteed by DP or a creditworthy subsidiary. Either party may terminate for cause (as defined) at any time. With respect to DHL, “cause” includes Polar’s inability to meet certain departure and arrival criteria for an extended period of time and upon certain change-of-control events, in which case DHL may be entitled to liquidated damages from Polar. Under such circumstances, DHL is further entitled to have an affiliate assume any or all of the six Boeing 747-400 freighter subleases for the remainder of the ten-year term under each such sublease, with Polar liable up to an agreed amount of such lease obligations. In the event of any termination during the ten-year sublease term, DHL is required to pay the lease obligations for the remainder of the head lease and guarantee Polar’s performance under the leases.

In other agreements, DP guaranteed DHL’s (and Polar’s) obligations under the various transaction documents. AAWW has agreed to indemnify DHL for and against various obligations of Polar and its affiliates.

Operations

Introduction. We operate our service offerings through four reportable segments: ACMI, Scheduled Service, AMC Charter and Commercial Charter. All reportable business segments are directly or indirectly engaged in the business of air cargo transportation but have different commercial and economic characteristics, which are separately reviewed by management. Financial information regarding our reportable segments may be found in Note 11 to our consolidated financial statements included in Item 8 of Part II of this Report (the “Financial Statements”).

ACMI. Historically, the core of Atlas’ business has been leasing aircraft to other airlines on an ACMI wet lease basis. Under an ACMI lease, customers contract for the use of a dedicated aircraft type that is operated by, crewed, maintained and insured by Atlas in exchange for guaranteed levels of operation at a predetermined rate for defined periods of time. We are paid a Block Hour rate for the time the aircraft is operated. The aircraft are generally operated under the traffic rights of the customer. All other direct operating expenses, such as fuel, overfly and landing fees and ground handling, are generally borne by the customer, who also bears the commercial revenue risk of Load Factor and Yield.

All of our ACMI contracts provide that the aircraft remain under our exclusive operating control, possession and direction at all times. The ACMI contracts further provide that both the contracts and the routes to be operated may be subject to prior and/or periodic approvals of the U.S. or foreign governments.

ACMI minimizes the risk of fluctuations in both Yield and traffic demand risk in the air cargo business and provides a more predictable annual revenue and cost base. Our ACMI revenues and most of our costs under ACMI contracts are denominated in U.S. dollars, minimizing currency risks associated with international business.

ACMI revenue represented 23.1%, 27.6% and 28.8% of our operating revenue and 45.1%, 50.8% and 53.2% of our operated block hours for the years ended December 31, 2007, 2006 and 2005, respectively. ACMI revenue is recognized as the actual Block Hours operated on behalf of a customer are incurred or according to the minimum revenue guarantee defined in a contract. During 2007, our principal ACMI customers included The International Airline of United Arab Emirates (“Emirates”), British Airways, Qantas, Air New Zealand, Panalpina Airfreight Management and Instone Air Services, Inc.

As of December 31, 2007, we had 17 ACMI and Dry Leasing contracts expiring at various times from 2008 to 2015, including renewals. The original length of these contracts ranged from three months to five years. Emirates, currently our most significant ACMI customer, accounted for approximately 46.7%, 43.3% and 33.9% of ACMI revenue and 10.8%, 11.9% and 9.8% of our total operating revenue for the years ended December 31, 2007, 2006 and 2005, respectively. In addition, we have also operated short-term, seasonal ACMI contracts with companies such as FedEx Corporation (“FedEx”) and Lufthansa, among others, and we expect to continue to provide such services in the future.

Scheduled Service. Both Polar and Atlas provide scheduled air cargo services to most of the world’s largest international freight forwarders and agents. We operate airport-to-airport routes on a specific schedule, and customers pay to have their freight carried on that route and schedule. Our scheduled all-cargo network serves four principal economic regions: North America, South America, Asia and Europe. We offer access through our limited-entry operating rights to Japan at Tokyo’s Narita Airport, to China at Shanghai’s Pudong Airport and Beijing’s Capital International Airport, and to Brazil at Viracopos Airport near Sao Paulo. Our Scheduled Service operation provides 18 daily departures to 15 different cities in ten countries across four continents. Our customer relationships are supported by the flight frequency and dependability of our global network.

Scheduled Service is designed to provide prime-time arrivals and departures on key days of consolidation for freight forwarders and shippers, to coordinate the various departure and arrival combination points necessary to offset directional imbalances of traffic and to arrange a global connecting or through-service network between economic regions to achieve higher overall Yields and Load Factors. Scheduled Service imposes both Load Factor and Yield risk on us since it generally provides the service regardless of traffic. Unlike our ACMI operations, our Scheduled Service business bears all direct costs of operation, including fuel, insurance, overfly and landing fees and ground handling. Distribution costs include direct sales costs through our own sales force and through commissions paid to general sales agents. Commission rates are typically between 2.5% and 5.0% of commissionable revenue sold.

The Scheduled Service business is seasonal, with peak demand coinciding with the retail holiday season, which traditionally begins in September and lasts through mid-December.

Scheduled Service revenue represented 42.1%, 41.4% and 34.4% of our total operating revenue and 32.1%, 29.6% and 23.6% of our operated block hours for the years ended December 31, 2007, 2006 and 2005, respectively. The majority of our Scheduled Service business is conducted with large multi-national freight forwarders, which include, among others, DGF (DHL/Global Forwarding), Expeditors International, CEVA Logistics, Hellmann Worldwide, Kuehne and Nagel, Nippon Express, Panalpina, Schenker AG and UPS Supply Chain Solutions. No single Scheduled Service customer accounted for 10% or more of our total revenue for 2007.

The Asian market accounts for approximately 54.5%, 57.7% and 60.8% of our Scheduled Service revenue for the years ended December 31, 2007, 2006 and 2005, respectively. In late 2004, we increased our presence in the China market by becoming one of only four U.S. freight operators permitted by the U.S. Department of Transportation (“DOT”) to serve China on a Scheduled Service basis. We currently have rights to 16 weekly flights to China, serving both the Shanghai and Beijing markets.

AMC Charter. The AMC Charter business provides full planeload charter flights to the U.S. Military. The AMC Charter business is similar to the Commercial Charter business (described below) in that we are responsible for the direct operating costs of the aircraft. However, in the case of AMC operations, the price of fuel used during AMC flights is fixed by the military. The contracted charter rates (per mile) and fuel prices (per gallon) are established and fixed by the AMC generally for twelve-month periods running from October to September of the next year. We receive reimbursements from the AMC each month if the price of fuel paid by us to vendors for the AMC Charter flights exceeds the fixed price; if the price of fuel paid by us is less than the fixed price, then we pay the difference to AMC. AMC buys cargo capacity on two bases: a fixed basis, which is awarded annually, and expansion flying on an ad hoc basis, which is awarded on an as needed basis throughout the contract term. While the fixed business is predictable, Block Hour levels for expansion flying are difficult to predict and thus are subject to fluctuation. The majority of our AMC business in 2007 and 2006 was expansion flying.

Revenue derived from the AMC Charter business represented 24.1%, 22.1% and 27.2% of operating revenue and 16.7%, 15.0% and 18.6% of our operated block hours for the years ended December 31, 2007, 2006 and 2005, respectively.

Commercial Charter. Our Commercial Charter business segment involves providing a full planeload of capacity to a customer for one or more flights based on a specific origin and destination. Customers include charter brokers, freight forwarders, direct shippers and airlines. Unlike ACMI flying, charter customers pay a fixed charter fee that includes fuel, insurance, landing fees, overfly and all other operational fees and costs. Revenue from the Commercial Charter business is generally booked on a short-term basis.

Revenue derived from our Commercial Charter business accounted for 7.5%, 5.6% and 6.7% of our operating revenue and 5.6%, 4.1% and 4.0% of our operated block hours for the years ended December 31, 2007, 2006 and 2005, respectively.

Long-term Revenue Commitments

Sales and Marketing

We have regional offices covering the Americas, Asia and EMEIA (Europe, Middle East, India and Africa). These offices market our ACMI services and charter services directly to other airlines and indirect air carriers, as well as to charter brokers and agents. The Scheduled Service sales organization markets its Scheduled Service and Commercial Charter services directly, or through a network of unaffiliated general sales agents to freight forwarders. Additionally, we have a separate, dedicated charter business unit that directly manages the AMC Charter business and capacity, and also manages our Commercial Charter business and capacity either directly or indirectly through our sales organizations.

Maintenance

Maintenance represented our fourth-largest operating expense for the year ended December 31, 2007. Primary maintenance activities include scheduled and unscheduled work on airframes and engines. Scheduled maintenance activities encompass those activities specified in a carrier’s maintenance program approved by the Federal Aviation Administration (“FAA”). The costs necessary to adhere to these maintenance programs will increase over time, based on the age of the aircraft and/or engines or due to FAA airworthiness directives (“ADs”).

Scheduled airframe maintenance is based upon “letter checks” performed at progressively higher repetitive intervals beginning with lower order daily checks (48 elapsed hours), “A” Checks (750 flight hours for Boeing 747-200s, 650 flight hours for Boeing 747-400), C Checks (18 months) and D Checks (nine year/ 25,000 flight hours for Boeing 747-200s, six years for Boeing 747-400s). These checks are also progressively higher in scope and duration, with C and D Checks considered “heavy” airframe maintenance checks. Boeing 747-200 heavy checks are generally more involved than those performed on our Boeing 747-400 aircraft, chiefly due to the age of the aircraft, its earlier evolution maintenance program and directives prescribed by the FAA. Our employees and contractors at our maintenance facility in Prestwick, Scotland perform C Checks on our Boeing 747-400 aircraft. All lettered checks are performed by our maintenance staff or by third-party vendors. Unscheduled maintenance, known also as line-maintenance, rectifies defects occurring during normal day-to-day revenue operations.

Our FAA-approved maintenance programs allow our engines to be maintained on an “on condition” basis. Under this arrangement, engines are sent for repair based on life-limited parts and/or performance deterioration.

We believe that a balance between “in-house” and power by the hour contracts provides the most efficient means of maintaining our aircraft fleet and the most reliable way to forecast our maintenance costs. A certain portion of our lower-level maintenance activities (primarily, daily checks and A Checks) are performed on a time and material basis.

CEO BACKGROUND

Eugene I. Davis , age 53, has been the Chairman of our Board of Directors and a member of our Audit Committee and our Compensation Committee since July 2004 and of our Nominating and Governance Committee since its establishment in March 2006. Mr. Davis is Chairman and Chief Executive Officer of PIRINATE Consulting Group, LLC, a privately held consulting firm specializing in turnaround management, merger and acquisition consulting and hostile and friendly takeovers, proxy contests and strategic planning advisory services for domestic and international public and private business entities. Since forming PIRINATE in 1997, Mr. Davis has advised, managed, sold, liquidated and served as a Chief Executive Officer, Chief Restructuring Officer, Director, Committee Chairman and Chairman of the Board of a number of businesses operating in diverse sectors such as telecommunications, automotive, manufacturing, high-technology, medical technologies, metals, energy, financial services, consumer products and services, import-export, mining and transportation and logistics. Previously, Mr. Davis served as President, Vice Chairman and Director of Emerson Radio Corporation and Chief Executive Officer and Vice Chairman of Sport Supply Group, Inc. He began his career as an attorney and international negotiator with Exxon Corporation and Standard Oil Company (Indiana) and as a partner in two Texas-based law firms, where he specialized in corporate/securities law, international transactions and restructuring advisory. Mr. Davis holds a bachelor’s degree from Columbia College, a master of international affairs degree (MIA) in international law and organization from the School of International Affairs of Columbia University, and a Juris Doctorate from Columbia University School of Law. Mr. Davis is also a member of the Board of Directors of Delta Airlines, Inc., American Commercial Lines, Inc., Knology, Inc., Foamex, Inc., and Silicon Graphics Inc.

Robert F. Agnew , age 57, has been a member of our Board since July 2004, the Chariman of our Audit Committee since June 2006 and a member of our Nominating and Governance Committee since its establishment in March 2006. Mr. Agnew is President and Chief Executive Officer of Morten Beyer & Agnew, an international aviation consulting firm experienced in the financial modeling and technical due diligence of airlines and aircraft funding. Mr. Agnew has over 30 years experience in aviation and marketing consulting and has been a leading provider of aircraft valuations to banks, airlines and other financial institutions worldwide. Previously, he served as Senior Vice President of Marketing and Sales at World Airways. Mr. Agnew began his commercial aviation career at Northwest Airlines, where he concentrated on government and contract sales, schedule planning and corporate operations research. Earlier, he served in the U.S. Air Force as an officer and instructor navigator with the Strategic Air Command. Mr. Agnew is a graduate of Roanoke College and holds a master’s degree in business administration from the University of North Dakota. In addition, Mr. Agnew serves on the board of The National Defense Transportation Association and chairs the Military Airlift Committee for the Commander of the USAF Air Mobility Command.

Timothy J. Bernlohr , age 49, has been a member of our Board since June 2006 and a member of our Audit Committee and Nominating and Governance Committee since that time. Mr. Bernlohr is the managing member of TJB Management Consulting, LLC, which specializes in providing project specific consulting services to businesses in transformation, plan administration, and interim executive management. Mr. Bernlohr founded the consultancy in 2005. Mr. Bernlohr is the former President and Chief Executive Officer of RBX Industries, Inc., which was a nationally recognized leader in the design, manufacture, and marketing of closed cell rubber and plastic materials to the automotive, construction, and industrial markets. Prior to joining RBX in 1997, Mr. Bernlohr spent 16 years in the International and Industry Products division of Armstrong World Industries, where he served in a variety of management positions. Mr. Bernlohr is also a director of Cadence Innovation, WCI Steel, Trident Resources Corporation, RAB Food Group, LLC, General Insulation Company and Zemex Minerals, Inc. Mr. Bernlohr is a graduate of Penn State University.

Keith E. Butler , age 54, has been a member of our Board since July 2004 and a member of our Audit Committee since June 2006. Mr. Butler is the sole owner of BCS Placements, LLC, a broker dealer registered with the National Association of Securities Dealers, Inc. Mr. Butler joined Paine Webber in 1997, which later merged with UBS Warburg, a global securities and investment banking firm. He is currently a financial advisor and was an investment banker with UBS Warburg until 2003. Mr. Butler’s focus was on the transportation sector (air, shipping and rail), including the financing of freighter aircraft. Before Paine Webber merged with UBS, Mr. Butler was a Managing Director at Paine Webber, where he launched and built the first structured finance product group for transportation assets and at Alex Brown, where he initiated the transportation debt practice. Mr. Butler graduated from Harvard College and received a master’s degree in business administration from Harvard Business School.

William J. Flynn , age 54, has been our President and Chief Executive Officer since June 2006 and has been a member of the Board of Directors since May 2006. Mr. Flynn has had a 30 year career in international supply chain management and freight transportation. Prior to joining us, Mr. Flynn served as President and Chief Executive Officer of GeoLogistics Corporation since 2002. He was initially recruited by the private equity sponsors of the company in 2002 to lead that company’s turnaround to profitability and the exit strategy for the investors. The company was acquired in September 2005 by PWC Logistics Corporation of Kuwait. Prior to his tenure at GeoLogistics Corporation, from 2000 until 2002, Mr. Flynn served as Senior Vice President to the Merchandise Service Group of CSX Transportation, Inc., the operating unit serving the traditional railcar traffic of CSX Transportation, Inc., one of the largest Class 1 railroads operating in the U.S. Mr. Flynn spent over 20 years with Sea-Land Service, Inc., a global provider of container shipping services. He served in roles of increasing responsibility in the U.S., Latin America and Asia. He was ultimately responsible for Sea-Land’s consolidated operations in Asia. Mr. Flynn is also a director of Allied Waste Industries, Inc. and Horizon Lines, Inc. He holds a Bachelors degree, summa cum laude , in Latin American studies from the University of Rhode Island and a Masters degree in the same field from the University of Arizona.

James S. Gilmore III , age 58, has been a member of our Board since July 2004, a member of our Nominating and Governance Committee since its establishment in March 2006 and the Chairman of such Committee since June 2006. Mr. Gilmore, who is currently a candidate for the United States Senate seat from the Commonwealth of Virginia, has been a partner in the law firm of Kelley Drye & Warren LLP since 2002 and was Governor of the Commonwealth of Virginia from 1998 to 2002. He is currently the Chair of his firm’s Homeland Security Practice Group, and his practice also focuses on corporate, technology, information technology and international matters. In 2003, President George W. Bush appointed Mr. Gilmore to the Air Force Academy Board of Visitors, and he was elected Chairman of the Air Force Board in the fall of 2003. Former Governor Gilmore served as the Chairman of the Republican National Committee from 2001 to 2002. He also served as Chairman of the Congressional Advisory Panel to Assess Domestic Response Capabilities for Terrorism involving Weapons of Mass Destruction, a national panel established by Congress to assess federal, state and local government capabilities to respond to the consequences of a terrorist attack. Also known as the “Gilmore Commission,” this panel was influential in developing the Office of Homeland Security. Mr. Gilmore is a graduate of the University of Virginia and the University of Virginia School of Law. He is also a director of Barr Laboratories, Windmill International, Rampart Financial Services, Inc. and Cypress Communications, Inc., and serves on the advisory board of Unisys Corporation.

Carol B. Hallett , age 70, has been a member of our Board since June 2006 and a member of our Compensation Committee since that time. She has been of counsel at the U.S. Chamber of Commerce since 2003. From 1995 to 2003, Ms. Hallett was President and Chief Executive Officer of the Air Transport Association of America (ATA), Washington, D.C., the nation’s oldest and largest airline trade association. Prior to joining the ATA in 1995, Ms. Hallett served as senior government relations advisor with Collier, Shannon, Rill & Scott from 1993 to 1995. Ms. Hallett has also been a member of the board of directors of Mutual of Omaha Insurance Company since 1998, Rolls Royce-North America since 2003 and Wackenhut Services Inc., since 2006. From 2003 to 2004, Ms. Hallett was chair of Homeland Security at Carmen Group, Inc. where she helped to develop the homeland security practice for the firm. Additionally, from 1993 to 2003, she was a director of Fleming Companies, Inc., and from 1993 to 2002, she was a director of Litton Industries.

Frederick McCorkle , age 63, has been a member of our Board and Compensation Committee since July 2004 and a member of our Nominating and Governance Committee since its establishment in March 2006. General McCorkle has served as Chairman of the Compensation Committee since June 2006. General McCorkle retired from the U.S. Marine Corps in October 2001 after serving since 1967. He last served as Deputy Commandant for Aviation, Headquarters, Marine Corps, Washington, D.C. General McCorkle is a graduate of East Tennessee State University and holds a master’s degree in Administration from Pepperdine University. He is currently a Senior Advisor and a member of the board of directors of GKN Aerospace Services. He is also a member of the board of directors of Lord Corporation, Jura Corporation and Rolls-Royce North America. In addition to his board memberships, General McCorkle serves as a Senior Strategic Advisor for Optical Air Data Systems and the Purdy Corporation.

MANAGEMENT DISCUSSION FROM LATEST 10K

Business Overview

We are the leading provider of aircraft and outsourced aircraft operating solutions to the global air freight industry. We manage and operate the world’s largest fleet of 747 freighters. We provide a unique and compelling value proposition to our customers by giving them access to new production freighters that deliver the highest reliability and lowest unit cost in the marketplace combined with outsourced aircraft operating services that lead the industry in terms of quality and global scale. Our customers include airlines, freight forwarders, the U.S. military and charter brokers. We provide global services with operations in Asia, the Middle-East, Australia, Europe, South America, Africa and North America.

We believe that demand for high-efficiency, wide-body freighter aircraft and related outsourced aircraft operating solutions will increase due to growing international trade, in particular, growth in developing markets in Asia and South America. According to industry studies, global cargo traffic, measured in revenue tonne-kilometers is expected to triple over the next two decades. As demand continues to increase, we believe that the supply of suitable freighter aircraft will not keep pace with this increase in demand as a result of limited production capacity, limited passenger-to-freight conversion capacity and the anticipated retirement of aging aircraft currently operating in the world fleet.

As of December 31, 2007, our existing fleet of 37 wide-body, freighter aircraft, including 20 modern, high-efficiency, Boeing 747-400 aircraft, and our complementary operating solutions, uniquely position us to benefit from the forecasted growth and increasing demand for wide-body freighter airplanes in the global air freight market. Our market position is further enhanced by our order of 12 new state-of-the-art Boeing 747-8F aircraft, scheduled to be delivered in 2010 and 2011. We are the only current provider of these aircraft to the outsourced freighter market. In addition to these 12 aircraft, we also hold rights to purchase up to an additional 14 Boeing 747-8F aircraft, providing us with flexibility to expand our fleet in response to market conditions.

We believe that the scale, scope and quality of our outsourced services are unparalleled in our industry. The relative operating cost efficiency of our current 747-400F aircraft and future 747-8F aircraft, including their superior fuel efficiency, create a compelling value proposition for our customers and position us well for growth in both the wet and dry lease areas of our business. Our primary services are:


• Freighter aircraft leasing services which encompasses the following:


• Fully outsourced aircraft operating solutions of aircraft, crew, maintenance and insurance known as wet leasing or ACMI. An ACMI lease is a contract for the use of one or more dedicated aircraft together with complementary operating services. We typically contract these services for three to six year periods on Boeing 747-400s and for shorter periods on Boeing 747-200s. Our outsourced operating solutions include crew, maintenance and insurance for the aircraft, while customers assume fuel, yield and demand risk;

• Express network ACMI, where Polar will provide outsourced airport-to-airport wide-body cargo aircraft solutions to DHL. AAWW will operate a minimum of six dedicated Boeing 747-400 aircraft servicing the requirements of DHL’s trans-Pacific express operations. Polar has historically provided and will continue to provide scheduled air-cargo service on these aircraft to our Scheduled Service air-cargo service to our freight forwarder and other shipping customers, but post commencement, DHL will assume the commercial risk of the operation;

• Aircraft and engine leasing solutions known as Dry Leasing. We typically Dry Lease to third parties for one or more dedicated aircraft for three to five year periods. Dry Leasing usually involves the leasing of aircraft to customers who are responsible for crew, maintenance and insurance and who assume fuel, yield and demand risk. In February 2008, Holdings formed a wholly owned subsidiary based in Ireland, to further its dry leasing efforts.


• Charter services, which encompasses the following:


• AMC Charter services, where we provide air cargo services for the Air Mobility Command or the AMC;

• Commercial Charters, where we provide all-inclusive cargo aircraft charters to brokers, freight forwarders, direct shippers and airlines.

We believe that the following competitive strengths will allow us to capitalize on the compelling growth opportunities that exist in the global air freight industry:

Market leader for freighter aircraft leasing and outsourced aircraft solutions to the global air freight industry:

We manage the world’s largest fleet of Boeing 747 freighters, the largest and most cost effective long-haul commercial freighter available. Our fleet consists of 20 Boeing 747-400, 16 Boeing 747-200 and one Boeing 747-300 freighters representing roughly 10% of the heavy freighters operating in the world today. This highlights our position as the preeminent provider of these highly desirable and scarce assets in the case of the current Boeing 747-400F and the future Boeing 747-8F. Our operating model is unique in that we deploy our aircraft across a range of freighter aircraft leasing and charter services in order to drive maximum utilization and value from our fleet. The scale of our fleet enables us to have aircraft available globally to respond to our customers’ needs, both on a planned and ad hoc basis. This provides us with a commercial advantage over our competitors with smaller inflexible fleets.

The Boeing 747-400, which is the core of our ACMI and express network ACMI segments, is the industry leader for operating performance in the intercontinental air freighter market due to its cost and capacity advantage over other freighters. According to the manufacturer, these aircraft burn 10-16% less fuel and have 26 tons and 1,200 nautical miles of incremental capacity and range compared to Boeing 747-200s. In September 2006, we placed an order for 12 new, state-of-the-art Boeing 747-8 aircraft, which have even better operating performance relative to the Boeing 747 400 and will allow us to grow and maintain our industry leading position for the foreseeable future.

Stable base of contractual revenue and reduced operational risk:

Our focus on providing contracted aircraft and operating solutions to customers contributes to increased stability of our revenues and reduces our operational risk. Typically, ACMI and dry leasing contracts with customers for Boeing 747-400 aircraft range from three to five years. Under the ACMI and dry leasing structure, our customers assume fuel, yield or demand risk resulting in reduced operational risk for AAWW. Most ACMI contracts typically provide us with a guaranteed minimum level of revenue and target level of profitability. If levels of operations exceed the guaranteed monthly minimum, we can achieve profitability in excess of our targets.

Our Express Network ACMI contract with DHL will include the allocation of blocked space capacity on a long-term basis of up to 20 years. This arrangement will eliminate yield and demand risks, much like our ACMI business, for a minimum of six Boeing 747-400 aircraft that currently fly in the Scheduled Service network. DHL will be subject to a monthly minimum Block Hour guarantee and take retail commercial risk on both DHL and non-DHL freight.

Our AMC Charter services are operated under an annual contract with the military, where the military reimburses us for fuel costs, mitigating the operational risk of this business.

Focus on Asset Optimization:

By managing the largest fleet of Boeing 747 freighter aircraft, we achieve significant economies of scale in areas such as aircraft maintenance, crew training, crew efficiency, inventory management, and purchasing. The addition of the Boeing 747-8 aircraft will further enhance efficiencies as these new aircraft will have an operational, maintenance and spare parts commonality of approximately 70% with our existing fleet of Boeing 747-400s, as well as a common pilot-type rating.

Our mix of aircraft is closely aligned with our customer needs. We believe our freighter aircraft leasing businesses are well suited to our existing Boeing 747-400s and our recently ordered Boeing 747-8Fs. Our commercial charter service operates profitably with our Boeing 747-200 freighters in the substantial commercial cargo charter market and continues to be an attractive and flexible aircraft for deployment to the US military charter market. We continually evaluate our fleet to ensure that we offer the most efficient and relevant mix of aircraft across our various businesses.

Our leasing model is unique in that we offer a portfolio of operating solutions that complement our freighter aircraft leasing businesses. We believe this allows us to improve the returns we generate from our asset base by allowing us to flexibly redeploy aircraft to meet changing market conditions, ensuring the maximum utilization of the fleet. Our charter services complement our freighter aircraft leasing services by allowing us to increase aircraft utilization during open time and to react to changes in demand in these segments. We have employees situated around the globe who closely monitor demand for commercial charter services in each region, enabling us quickly to redeploy available aircraft. The majority of our Boeing 747-200 aircraft are unencumbered, which allows us to quickly adjust the size of our fleet in reaction to changes in market demand. We also manage our leasing contract portfolio to stagger contract terms to mitigate our remarketing risks and aircraft down time.

As a result of our fleet management and our efficient deployment of aircraft, we have been able to improve the Block Hour utilization of our fleet by 9.9% during 2007.

Long-term strategic customer relationships and unique service offerings:

We combine the global scope and scale of our efficient aircraft fleet with high quality, cost-effective operations and premium customer service to provide unique, fully integrated and reliable solutions for our customers. We believe the outcome is customers who are motivated to seek long-term relationships with us. We are therefore able to command higher prices than our competitors in several key areas. These long-term relationships build resilience into our business model.

Our customers have access to solutions, such as inter-operable crews, flight scheduling, fuel efficiency planning, and maintenance spare coverage, which set us apart from other participants in the freighter aircraft leasing market. Furthermore, we have access to valuable operating rights to restricted markets such as Brazil, Japan and China. We believe our freighter leasing services allow our customers to effectively expand their capacity, operate dedicated freighter aircraft and capitalize on the growing air freight market without simultaneously taking on exposure to fluctuations in the value of owned aircraft and, in the case of our ACMI leases, long-term expenses relating to crews and maintenance. Dedicated freighter aircraft enable schedules to be driven by cargo rather than passenger demand (for those who typically handle portions of their cargo operations via belly capacity on passenger aircraft) which we believe allows our customers to better meet their global supply chain needs.

We provide freighter aircraft leasing solutions to some of the world’s premier airlines (such as Qantas Airways, Emirates, and Air New Zealand) and some of the world’s largest freight forwarders (including DHL, the largest buyer of aircraft capacity, Expeditors, Nippon Express, Panalpina and Kuhne and Nagel).

Experienced management team:

Our senior management team has extensive operating and leadership experience in the air freight, airline and logistics industries at companies such as United Airlines, US Airways, ASTAR Air Cargo, American Airlines, Canadian Airlines, Continental Airlines, SH&E Air Transport Consultancy, Lufthansa Cargo and KLM Cargo, as well as the United States Navy, Air Force and Federal Air Marshal Service. Our management team is led by William J. Flynn, who has held senior management positions with leading transportation companies. Prior to joining AAWW, Mr. Flynn was President and CEO of GeoLogistics, a global transportation and logistics enterprise, where he led the turnaround to profitability and successfully completed the sale of the company to PWC Logistics.

Business Strategy

Our strategy includes the following:

Actively manage our fleet with a focus on leading-edge aircraft

We will continue to actively manage our fleet of leading-edge wide-body freighter aircraft across our two primary business services to meet customer demands. Our Boeing 747-400s and Boeing 747-8Fs will be utilized primarily in our freighter aircraft leasing segment (dry leasing, ACMI and Express Network ACMI). We will deploy our Boeing 747-200 fleet in the charter and dry leasing markets, while evaluating sale opportunities as market conditions warrant. We continue to work with aircraft manufacturers to update our fleet with new aircraft to ensure that we provide our customers with the most efficient aircraft to meet the substantial anticipated growth in global air cargo demand over the next two decades. We will also continue managing our older aircraft in an opportunistic way to maximize returns.

Accelerate fleet growth and expand our leasing business

The favorable supply and demand trends in the global freighter aircraft segment and the continuing shift in aircraft ownership from airlines to lessors creates a significant opportunity to expand our leasing opportunities for Boeing 747 and other freighter fleet types. We anticipate significant growth in our fleet chiefly as a result of our Boeing 747-8F order and expect to increase our capacity by at least 17% over the next several years as we take delivery of these aircraft. We believe that a further growth opportunity exists in our dry leasing segment. Through our deep understanding of the freighter aircraft market and our high quality customer base, we believe that we are well positioned to take advantage of this opportunity. Dry leasing arrangements are complementary to our ACMI leasing segment, offering customers a broad range of leasing solutions to meet their individual air freight requirements. Dry leasing also provides additional, stable contractual revenue and predictable margins. As we evaluate other fleet types we will consider these new aircraft for both our ACMI and dry leasing service offerings.

We will take advantage of opportunities to expand our relationships with our existing customers, while seeking new customers and new geographic markets.

Focus on securing long-term contracts

We will continue to focus on securing long-term leasing contracts, which provide us with stable revenue streams and predictable margins. In addition, these agreements limit our exposure to fuel and other costs and mitigate the risk of fluctuations in both yield and demand in the air freight business, while also improving the overall utilization of our fleet.

Drive significant and ongoing efficiencies and productivity improvements

In 2006, we began to enhance our organization through an initiative called Continuous Improvement. We created a separate department and officer position to drive the process and to involve all areas of the organization in the effort to re-examine, re-design and improve the way we do business. Our initial goal is to generate $100 million in cost savings, on an annualized basis, by the end of 2008, however, our efforts to realize additional savings will continue through 2009 and beyond.

Our efforts thus far have resulted in initiatives in five principal areas: fuel, maintenance, crew and related costs, other aircraft operations and general and administrative costs. As of December 31, 2007, we have implemented projects that have produced approximately $68.4 million in annualized savings. We are on track to achieve our initial goal of $100 million in annualized savings in 2008.

Specific initiatives include:


• New processes to improve the fuel efficiency of our aircraft operations;

• Outsourcing our maintenance and back-office support functions to reduce costs;

• Improving our processes for managing aircraft maintenance, with the goal of reducing turn-times and eliminating costs;

• Application of new technology and processes to optimize our crew scheduling to maximize crew efficiency;

• Consolidating and eliminating facility and space requirements; and

• Increasing the efficiency of our procurement capabilities to drive lower costs for purchased goods and services, including crew travel and outsourced ground and maintenance services.

Selectively pursue and evaluate future acquisitions and alliances

From time to time, we expect to explore business combinations and alliances with other cargo airlines, air cargo services providers, dry leasing companies and other companies to enhance our competitive position, geographic reach and service portfolio.

Results of Operations

Years Ended December 31, 2007 and 2006

Operating Statistics

ACMI revenue decreased due to two fewer 747-200 units deployed in ACMI and a slight reduction in the average Revenue Per Block Hour. In 2007, we had an average of 2.4 Boeing 747-200 aircraft in ACMI compared with an average of 4.5 in 2006. In 2007, we redeployed aircraft to AMC and Commercial Charter based on attractive market conditions in those segments. The number of Boeing 747-400 aircraft under ACMI during 2007 was ten, which was unchanged from the prior year. The Revenue Per Block Hour decreased slightly in the period reflecting a reduction in peak season ACMI charter activity which was partially off-set by the shift from Boeing 747-200s to the higher-yielding Boeing 747-400. ACMI Block Hours were 60,230 for 2007, compared with 67,666 for 2006, a decrease of 7,436 Block Hours, or 11.0%, reflecting the reduction in 747-200 flying. Total aircraft contractually supporting ACMI, excluding dry leased aircraft as of December 31, 2007, was one Boeing 747-200 aircraft and ten Boeing 747-400 aircraft, compared with two Boeing 747-200 aircraft and ten Boeing 747-400 aircraft supporting ACMI at December 31, 2006. Revenue Per Block Hour was $5,992 for 2007, compared with $6,016 for 2006, a decrease of $24 per Block Hour, or 0.4%

Scheduled Service revenue reflected a challenging Yield environment on certain routes in the trans-Pacific market during the first half of 2007, which improved during the second half of the year. The decrease in Yield during 2007 was driven by the weak demand out of Asia in the first half of the year and a change in our mix of flying from Asia and South America. We proactively deployed capacity early in the year to take advantage of steady demand from the South American and trans-Atlantic markets which contributed to and 8.5% increase in Block Hours and a 7.7% increase in revenue compared to 2006. RTMs in the Scheduled Service segment were 1,607.3 million on a total capacity of 2,491.3 million ATMs during 2007, compared with RTMs of 1,475.4 million on a total capacity of 2,322.0 million ATMs during 2006. Block Hours were 42,798 in 2007, compared with 39,446 for 2006, an increase of 3,352, or 8.5%. Load Factor was 64.5% with a Yield of $0.409 during 2007, compared with a Load Factor of 63.5% and a Yield of $0.414 during 2006. RATM in our Scheduled Service segment was $0.264 during 2007, compared with $0.263 during 2006, representing an increase of 0.4%.

AMC Charter revenue benefited from an increase in demand related to overseas deployment of U.S. forces and equipment. AMC continued to satisfy the bulk of its demand through short-notice expansion flying and we were able to capture much of this flying because of our ability to respond quickly to AMC requirements. AMC Charter Block Hours were 22,292 for 2007, compared with 19,954 for 2006, an increase of 2,338 Block Hours, or 11.7%. Revenue Per Block Hour was $16,893 for 2007, compared with $16,376 for 2006, an increase of $517 per Block Hour, or 3.2%. The increase in rate was primarily due to an increase in the AMC’s charter rate per ton mile flown, which is calculated on a cost plus basis and is adjusted annually on October 1. In early 2007, we continued our strategy of reducing capacity in the Boeing 747-200 ACMI business and shifted that capacity to the AMC Charter business to maximize contribution. In the fourth quarter of 2007, as AMC demand moderated, we successfully shifted capacity from AMC to the Commercial Charter market.

Commercial Charter revenue increased significantly year over year. The increase in Block Hours for Commercial Charter in 2007 compared with 2006 was the result of a focused development of charter market opportunities including increased demand from perishable markets, entertainment events management and high-tech segments, among others. Our ability to flexibly deploy additional assets from other segments to respond to such opportunities increased overall asset utilization. Commercial Charter Block Hours were 7,442 for 2007, compared with 5,450 for 2006, an increase of 1,992, or 36.6%. Revenue Per Block Hour was $15,741 for 2007, compared with $15,194 for 2006, an increase of $547 per Block Hour, or 3.6%.

Other revenue increased slightly to $50.5 million from $48.9 million or 3.3%. An increase in revenue from two additional Boeing 747-200 dry leases to third parties was offset by a reduction in lease rates on three Boeing 747-400 leases to our 49% owned affiliate.

Total Operating Revenue increased 5.9% in 2007 compared with 2006, despite an 8.8% (3.1 equivalent aircraft) reduction in our average operating fleet during 2007. The increased revenue was primarily the result of an increase in AMC, Commercial Charter and Scheduled Service Block Hours as well as increased Revenue Per Block Hour partially offset by a planned reduction in 747-200 ACMI Block Hours. Throughout 2007 we optimized revenue through active allocation of capacity between our service segments depending on market conditions and opportunities. We deployed aircraft into Scheduled Service and AMC to capitalize on opportunities early in 2007 and as conditions changed, we successfully redeployed capacity to the Commercial Charter segment later in the year. Improved asset management drove a 0.2% increase in block hours on an 8.8% reduction in operated aircraft versus the prior year.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

Results of Operations
Three Months Ended June 30, 2008 and 2007
The following discussion should be read in conjunction with our Financial Statements and notes thereto and other financial information appearing and referred to elsewhere in this report.

ACMI revenue decreased due to lower Block Hours, while revenue per Block Hour increased slightly compared with the same quarter in the prior year. ACMI Block Hours were 12,587 for the second quarter of 2008, compared with 15,283 for the second quarter of 2007, a decrease of 2,696 Block Hours, or 17.6%. Revenue per Block Hour was $6,058 for the second quarter of 2008, compared with $5,971 for the second quarter of 2007, an increase of $87 per Block Hour, or 1.5%. The reduction in Block Hours was due to a reallocation of one Boeing 747-400 to Express Network ACMI service for DHL. This aircraft is one of the two Boeing 747-400s, which we began flying for DHL in the second quarter of 2008 in Trans-Pacific Express Network ACMI service. The revenue and operating statistics for the Express Network ACMI operation are included in Scheduled Service. We redeployed one Boeing 747-200 at the end of its ACMI contract to the Charter business unit during 2008. During the three months ended June 30, 2008 there was an average of nine Boeing 747-400 aircraft and an average of 1.4 Boeing 747-200 aircraft supporting ACMI compared with an average of ten Boeing 747-400 aircraft and an average of 2.9 Boeing 747-200 aircraft supporting ACMI for the comparable period in 2007.
Scheduled Service revenue increased significantly due to higher revenue ton miles as well as higher yields per revenue ton mile. RTMs in the Scheduled Service segment were 458.3 million on a total capacity of 717.4 million ATMs in the second quarter of 2008, compared with RTMs of 376.3 million on a total capacity of 593.8 million ATMs in the second quarter of 2007. Block Hours were 12,073 in the second quarter of 2008, compared with 10,164 for the second quarter of 2007, an increase of 1,909, or 18.8%. Load Factor was 63.9% with a Yield of $0.466 in the second quarter of 2008, compared with a Load Factor of 63.4% with a Yield of $0.383 in the second quarter of 2007, representing an increase of 0.5 percentage points in load factor and an increase in yield of 21.7%. Scheduled Service revenue and Block Hours in the second quarter of 2008 increased over the second quarter of 2007 due to the addition of two Boeing 747-400 aircraft for the purpose of serving DHL’s Trans-Pacific Express Network ACMI. One of the aircraft was sourced from ACMI service and the second aircraft was sourced via the deployment of a maintenance spare. The substantial increase in Scheduled Service yield is primarily the result of the fuel surcharge increases that were implemented consistent with the increasing price of fuel and the start-up of Express Network ACMI during the second quarter of 2008. RATM in our Scheduled Service segment was $0.298 in the second quarter of 2008, compared with $0.243 in the second quarter of 2007, representing an increase of 22.6%.
AMC Charter revenue increased primarily as a result of the increase in the AMC’s per ton mile rate offset partially by a small reduction in Block Hours. The AMC’s mileage rate includes the cost of fuel, which increased significantly on a quarter-over-quarter basis. AMC Charter Block Hours were 5,249 for the second quarter of 2008, compared with 5,459 for the second quarter of 2007, a decrease of 210 Block Hours, or 3.8%. Revenue per Block Hour was $21,291 for the second quarter of 2008, compared with $17,489 for the second quarter of 2007, an increase of $3,802 per Block Hour, or 21.7%. The AMC demand for Boeing 747 widebody cargo flying fell during the period, which drove the reduction in Atlas’ AMC Block Hours flown during the second quarter of 2008 compared with the second quarter of 2007. The AMC raised the wide body cargo per ton mile rate in October 2007 by 2.3% in the normal course of its annual rate making process. The AMC then raised its “pegged fuel price” on February 1, 2008 to $2.70 per gallon and again on June 1, 2008 to $3.20 per gallon. The changes from the rate making process as well as the interim increases in the “pegged fuel price” had the effect of increasing the AMC revenue per Block Hour from $17,489 for the second quarter of 2007 to $21,291 for the second quarter of 2008.
Commercial Charter revenue decreased as a result of a decrease in Block Hours that was partially offset by an increase in Revenue per Block Hour. The increase in revenue per Block Hour was the result of pricing increases effected to compensate for the higher cost of fuel. Commercial Charter Block Hours were 1,246 for the second quarter of 2008, compared with 1,837 for the second quarter of 2007, a decrease of 591, or 32.2%. Revenue per Block Hour was $19,559 for the second quarter of 2008, compared with $15,587 for the second quarter of 2007, an increase of $3,972 per Block Hour, or 25.5%. The decrease in Block Hours is partially the result of the retirement of one Boeing 747-200 aircraft at the end of the first quarter of 2008 and the retirement of a damaged Boeing 747-200 aircraft in February 2008 (see Note 2 to our Financial Statements for further discussion).

Dry Leasing revenue was essentially unchanged on a year over year basis. The Company had three Boeing 747-400 aircraft and one Boeing 747-200 aircraft on Dry Lease to third parties at June 30, 2008 and three Boeing 747-400 aircraft and two Boeing 747-200 aircraft on Dry Lease to third parties at June 30, 2007. We experienced customer defaults on three Dry Leased Boeing 747-200 aircraft in the second quarter of 2008 as the two customers leasing these aircraft filed for protection under local insolvency laws. We have repossessed two of the three aircraft from one customer and have been in negotiations regarding the lease of the third aircraft with the other customer. All rents and maintenance reserves payable to us under these Dry Leases were fully reserved against in the second quarter of 2008.
Total Operating revenue increased in the second quarter of 2008 compared with the second quarter of 2007, primarily as a result of the fuel-driven price increases in the Scheduled Service and AMC business and new Express Network ACMI flying, offset by reductions in ACMI and Commercial Charter flying .
Operating Expenses

Aircraft fuel expense increased as a result of increased market prices for fuel. The average fuel price per gallon for the Scheduled Service and Commercial Charter businesses was approximately $3.61 for the second quarter of 2008, compared with approximately $2.12 for the second quarter of 2007, an increase of $1.49, or 70.3%. Fuel consumption for the Scheduled Service and Commercial Charter businesses increased 4.8 million gallons or 12.3% to 43.6 million gallons for the second quarter of 2008 from 38.9 million gallons during the second quarter of 2007. The average pegged price per gallon for the AMC business was approximately $2.86 for the second quarter of 2008, compared with approximately $2.25 for the second quarter of 2007, an increase of $0.61, or 27.1%. AMC Fuel consumption decreased by 0.5 million gallons, or 2.6%, to 17.2 million gallons for the second quarter of 2008 from 17.7 million gallons during the second quarter of 2007. The decrease in our AMC fuel consumption is commensurate with the decrease of Block Hours in that segment. We do not incur fuel expense in our ACMI service as the cost of fuel is borne by the customer.
Salaries, wages and benefits decreased due to the reduction in Block Hours as well as lower profit sharing and incentive compensation accruals related to decreased profitability in the second quarter of 2008 compared to the second quarter of 2007. In the second quarter of 2008, we also released employment tax reserves related to the successful resolution of an examination with the IRS resulting in a $2.7 million non-recurring benefit for the period.
Maintenance materials and repair increased as a result of increases in heavy maintenance. Heavy maintenance activity reflects one additional Boeing 747-400 D Check offset by one less Boeing 747-200 C Check and one less CF6-50 engine overhaul. There were two C Checks on Boeing 747-200 aircraft in the second quarter of 2008, as compared with three C Checks during the second quarter of 2007. For our Boeing 747-400 aircraft, there was one D Check in the second quarter of 2008 compared with none in the prior period. There were ten engine overhauls in the second quarter of 2008 compared with eleven during the second quarter of 2007. The average cost per overhaul on engines increased during the second quarter of 2008 compared with 2007.
Aircraft rent increased primarily due to short-term engine leases and supplemental rent expense for return conditions on two leased aircraft. In the second quarter, short-term engine leases added $0.9 million of additional rent expense and we recognized $0.9 million in supplemental rent expense to reflect maintenance return condition obligations related to two of our leased Boeing 747-200 aircraft.
Ground handling and airport fees increased primarily as a result of an increase in Scheduled Service flying. Scheduled Service has the highest departure driven ground handling expense of any of our service types.
Landing fees and other rent increased primarily as a result of the increase in overfly fees related to non-ACMI Block Hours. The higher overfly fees are the result of flying a more fuel efficient route, allowing us to recover the additional overfly fees in fuel savings. We generally do not incur landing fees in our ACMI service as the cost is borne by the customer.
Depreciation and amortization increased primarily as a result of increases in scrapping of certain engine parts and rotables during overhaul. During the quarter we saw an increase of $2.3 million as a result of scrapping.
Gain on disposal of aircraft in the second quarter of 2008 was the result of the disposal of aircraft tail number N527FT, which was damaged and subsequently scrapped (except for engines and other valuable rotable parts) after we reached a settlement with our insurer (see Note 2 our Financial Statements for further discussion). The gain represents the amount the insurance proceeds exceed the net book value of the aircraft.
Travel increased as a result of an increase in the cost of airline ticket prices and increases in travel requirements to meet our customers’ flight schedules .
Minority Interest is related to DHL’s 49% ownership interest in Polar. The amount of Polar loss attributable to DHL was $0.2 million for the quarter, which is reflected as a decrease in our consolidated operating expenses.
Other operating expenses remained flat compared to the same quarter in the prior year. AMC commission expense increased by approximately $2.4 million due to higher AMC mileage rates, partially offset by a $1.8 million benefit from reduced interest from a settlement with the IRS on an employment tax examination.
Total operating expense increased in the second quarter of 2008 compared with the second quarter of 2007 primarily due to the increased price of aircraft fuel.

CONF CALL

William Bradley

Thank you and good morning everyone I am Bill Bradley, Vice President and Treasurer of Atlas Air Worldwide Holdings. Welcome to our second quarter 2008 earnings review conference call. Today's call will be hosted by Bill Flynn, our President and Chief Executive Officer. Joining Bill is Jason Grant, our Senior VP and Chief Financial Officer.

I would also like to remind you that in discussing the company's performance today, we have included 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 involve unknown risks and uncertainties. Our actual results or actions may differ materially from those projected in the forward-looking statements.

Please refer to the Safe Harbor language in our recent press releases, and to the Risk Factors set forth in our annual report on Form 10-K filed with the SEC on February 28, 2008 for a summary of specific Risk Factors that could cause results to differ from those expressed in our forward-looking statements.

In our discussion today, we also include some non-GAAP financial measures. You can find our presentation on the most directly comparable GAAP financial measures calculated in accordance with Generally Accepted Accounting Principals and our related reconciliation in our recent press releases which are posted on our website at www.atlasair.com. You may access these releases by clicking on the link to financial news in the Investor Relations section of the website.

At this point, I would like to turn the call over to Bill Flynn.

Bill Flynn

Thank you, Bill, and welcome everyone. We reported today a pretax profit for the second quarter and first half of 2008. Earnings in the second quarter were a mix of positive and negative factors, just as we saw in our first quarter results. Our results reflect the impact of fuel prices, primarily in our Scheduled Service business, but are not indicative of our earnings expectations going forward.

The impact of fuel prices is directly reflected in our revised pretax earnings guidance of $85 million for 2008. Our view of 2009 remains that our pretax profits will double to the range of $165 million to $175 million.

Our DHL transaction has removed much of the risk of our historically unprofitable Scheduled business and established a platform for earnings growth in 2009. Although the impact of fuel prices has been painful for the industry, we believe it supports our model for investing in leading edge and cost efficient freighter aircraft. We expect fuel to drive inefficient capacity out of the marketplace, and improve our already strong position as the leading supplier of cost efficient freighter solutions.

The 747-400 provides the lowest unit operating cost of any freighter in the market, a position that is only strengthened in this high fuel cost environment. We are the only outsource provider of scale for the 747-400 freighter, and we continue to see new demand for this aircraft.

All of our 400 capacities is committed through 2008, and flying levels for our ACMI 747-400 aircraft are above contractual minimums. Very few of our ACMI [400F] aircraft are available for renewal in 2009, and we fully expect that they will be renewed or placed on favorable terms.

During the quarter, we acquired two additional 747-400 aircraft to meet customer demand for these scarce assets. This will increase the size of our 400 fleet by 10% to 22 aircraft. One of these aircraft, a factory built 400 freighter entered service on June 12. The other is being converted to freighter configuration and is expected to enter service late in the third quarter.

Initially, we relied on our strong balance sheet to fund the acquisition of these aircraft using cash on hand. Shortly after the close of the second quarter, we secured attractive commitments for five year term loans that will finance $100 million of the approximately $167 million dollars acquisition plus conversion price for these aircraft.

The financing reflects the positive views our lenders have regarding the quality of these assets, the quality of the customers that we serve, the quality of the services that we provide and the overall position of Atlas Air Worldwide.

Continuous improvements initiatives drove cost savings during the second quarter. As of June 30, we have achieved and surpassed our goal of $100 million in annualized savings against an addressable 2005 cost base of about $800 million.

We realized this important milestone six months ahead of our expectations. Continuous improvement is a permanent part of the culture at Atlas Air Worldwide Holdings and we will identify and achieve additional cost savings.

Fuel however, had a large unfavorable impact on the quarter. Commercial fuel prices rose to new record levels and our average cost was 70% higher than it was in the second quarter of 2007. That had a substantial negative impact on our Scheduled Service segment, which is the principle business segment where we are directly exposed to the risk of fuel price volatility. We have, therefore, revised our 2008 pre-tax guidance to include the impact of fuel prices.

Our direct exposure to fuel largely goes away in October when our Polar subsidiary begins flying under its long-term block space agreement with DHL Express. It is important to note that the $85 million of pretax guidance excludes a $150 million pretax gain on the sale of a 49% interest in Polar to DHL. We expect to book this gain upon the commencement of the full DSA in the fourth quarter of 2008.

Given the current challenges in our industry, we actively manage our fleet and take advantage of its scale and flexibility in providing innovative, value creating solutions to our customer. We have derisked our business, and our focus is on long-term contracts that improve our revenue and earnings streams visibility. Along with the benefits that we have achieved from our continuous improvement efforts, and the full start-up of express network ACMI service in late October, we continue to execute on additional initiatives that will drive future revenues and earnings.

The most important of these is the launch of our 747-8 freighter service in 2010 and 2011. We will benefit from the enhanced payload and improved fuel efficiency that these aircraft will provide to our customers, and we will benefit from the scarcity value in our first-to-market exclusive ACMI capability.

Finally, I would like to close out these remarks with two recent announcements that speak to the quality of our services and our leading industry position. First, we have been selected by the US Air Force to provide training for the pilot and flight engineers that fly the E-4B National Airborne Operations Center. The E-4B is a military version of the Boeing 747-200 that serves the President, the Secretary of Defense and the Joint Chiefs of Staff in times of national emergency. This selection, along with our prior selection to train the pilots and engineers that fly Air Force One, demonstrates our commitment to safety, quality and innovation, which are inherent in all of the services that we provide.

Second, Atlas Air Inc. has been certified for inclusion in IATA's Operational Safety Audit registry after a stringent audit of our operational standards and procedures. This certification will directly benefit both Atlas Air and our customers operations. This is now a good point for Jason to take you through our financials. Following Jason, I will provide some additional color about our outlook for 2008 and 2009. After that, we will go to your questions. Jason?

Jason Grant

Thanks, Bill, and good morning everyone. As Bill noted, the fundamentals underpinning our business are was solid. Other than the impact of fuel, where we retained exposure in our Scheduled Service operations until October, we remain on track for 2008 and beyond. Our second half performance is expected to be consistent with that of prior years. We achieved $80 million or better in pretax earnings in each of 2005, 2006, and 2007. The capital markets have shown their support for our story with debt financing commitments for our two new 747-400s, and permanent lease financing for two of our 747-8s. I would like to start by highlighting a few points related to the quarter.

The first relates to changes in the composition of our fleet during the quarter. Bill has already noted that the 747-400 aircraft that we are adding to the fleet. Our second quarter block hours in aircraft utilization also reflect the removal of two Classic aircraft from our fleet during the quarter. This contributed to a 6.6% reduction in our operating fleet in the second quarter compared with the second quarter of 2007.

Results in the quarter reflected our decision to retire one of our 747-200 rather than invest in a high level maintenance check on the aircraft, consistent with our fleet plans. In addition, we reached a $5.9 million cash-in-lieu-of-repair settlement with our insurance carriers with regard to a second Classic aircraft that was damaged in the first quarter, and they did no flying during the second quarter. We recognized a that $2.7 million pretax gain on this settlement in the second quarter.

As a result of these developments, our fleet currently totals 36 aircraft, comprised of 21, 747-400s and 15, 747 Classics. Between now and the end of the third quarter, we expect to take delivery of our 22nd 747-400 on completion of its conversion to freighter configuration.

We are also likely to retire an additional Classic that will soon reach its next scheduled D Check as we continue to modernize our fleet. As noted in the release, we expect to redeploy two Classic aircraft from dry lease to the charter business unit.

Another item I would like to draw your attention to in the second quarter is our effective income tax rate. Our pretax income for the quarter totaled $6.6 million, including the previously mentioned $2.7 million gain from insurance.

Income tax expense totaled $5.1 million however, resulting in an effective income tax rate of nearly 77% for the quarter.

The tax rate for the quarter differed from the statutory rate, primarily due to a loss incurred by Polar Air Cargo Worldwide during the quarter, for which, no tax benefit was recorded. Polar did not record income tax benefits related to its loss in the quarter, because it had no prior period income to apply against this loss and, therefore, may only offset these losses against future income. This does not affect cash taxes, and we expect this position to reverse itself in the third quarter, so that we will end the year with an effective tax rate of approximately 38%.

Turning to our balance sheet; we ended the quarter with a cash balance of $368 million, which represented a decrease of nearly $110 million since our year-end 2007, mainly due to our acquisition of two additional 747-400 aircraft using cash on hand.

Debt and capital lease obligations totaled $487 million on June 30th, with the face value of our debt and capital lease obligations totaling $559 million, versus $469 million on December 31st, 2007.

At quarter-end, we had $72 million of unamortized debt discount related to fair market value adjustments associated with fresh-start accounting. The increase in our debt from year-end is a result of $107 million in outstanding borrowings under the $270 million PDP financing facility that we closed in February.

Capital expenditures in the first half of 2008 totaled approximately $274 million, which included $152 million related to the acquisition of our additional two 747-400 aircraft, and $90 million in Boeing progress payments related to our future 747-8F aircraft deliveries

For the balance of the year, we have approximately $156 million in Boeing progress payments due on all 12 firm aircraft, of which, $109 million will be satisfied by drawings under our existing PDP facility.

Since the first quarter, we have furthered our track record of accessing the capital markets for attractive financing for our assets. As Bill previously noted, subsequent to the quarter-end, we completed arrangements for $100 million of financing with regard to two 747-400 aircraft that we have acquired. The financing includes a $58.4 million five-year term loan secured by the 747-400 freighter that has already entered service. We also have a commitment on a $41.6 million, five-year term loan secured by the aircraft being converted to freighter configuration.

That loan is expected to close in the third quarter when the conversion of the aircraft is expected to be completed. In the second quarter, we also executed a term sheet for permanent sale-leaseback financing for our first two 747-8F deliveries. The transaction is subject to standard documentation, which we expect to finalize in the third quarter. As a reminder, we also have a long-term financing commitment in place for an additional four of the 747-8Fs.

As we approach the market, our bias will be towards ownership of these assets given the flexibility and tax benefits that provides. However, we have decided to pursue these first two sale-leasebacks given the compelling terms in economics.

I also wanted to spend a minute talking about our segment presentation that you will see in our Q. On our last call, I discussed how we have moved to a direct contribution presentation which we believe provides increased visibility into the performance of our segments. I want to highlight for you the treatment of the two 747-400s we started flying for DHL's Express network services at the end of Q1.

We consolidate the operations of Polar, which means that all the revenue and operating statistics for the express network operations are presented in Scheduled Service. However, for segment reporting purposes, all revenue and cost related to ACMI services provided to Polar for express network operations have been reclassified to the ACMI segment.

All costs associated with providing such services have also been reclassified for purposes of calculating direct contribution. All non-ACMI cost and an equal amount of revenue remain in the Scheduled Service segment. In our Q, we will provide a reconciliation of revenue between the segment reporting in the face of the income statement.

With that, I would like to turn it back to Bill.

Bill Flynn

Thank you, Jason. We see an exciting and dynamic future for Atlas Air Worldwide Holdings. We have a solid financial platform. And other than the short-term affect of fuel prices in 2008, our outlook is unchanged. We expect pretax earnings to total $85 million this year, with direct exposure to fuel prices largely eliminated in late October. We expect our pretax earnings to double to a range of $165 million to $175 million in 2009.

Long-term supply and demand trends in the global freighter market remains favorable. We see strong demand for our 747-400 freighters especially given the increasing fuel and maintenance burden on older, wide-body freighters. Our 747-400 capacity is sold out. Our ACMI flying is above contractual minimum levels.

We have successfully expanded our relationship with DHL Express, adding two additional aircraft that commence service for them on March 30. Our performance for DHL Express has exceeded their expectations. In total, we will deploy eight 747-400 freighters in Express network operations for DHL in October.

Our business fundamentals are solid. We are focused on execution. We are well positioned for growth, and our performance remains on track with our objectives.

SHARE THIS PAGE:  Add to Delicious Delicious  Share    Bookmark and Share



 
Icon Legend Permissions Topic Options
You can comment on this topic
Print Topic

Email Topic

1265 Views