Q3 2019 Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the third quarter 2019 earnings call for Atlas Air worldwide.
This time, all participants are any listen only mode.
After the speakers presentation, there will be a question and answer session.
To ask a question during the session you will need to press star one on your telephone.
Please be advised so today's conference is being recorded.
If you require any further assistance please press star zero.
I would now with the hand the conference over to the host for today's call Atlas Air. Please go ahead.
Thank you Shelby and good morning, everyone.
Mcgarvey Treasurer for Atlas Air worldwide welcome to our third quarter 2019 results conference call.
Our call today are built Flynn, our chairman and Chief Executive Officer, John Dietrich, Our President and Chief operating Officer, and Spencer Schwartz, our Chief Financial Officer.
Today's call is complemented by slide presentation that can be viewed at Atlas air worldwide Dot com under presentations in the information Investor information section.
As indicated on slide two we'd like to remind you that our discussion about the companies.
Include 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 and any forward looking statements.
For information about risks factors related to our business. Please refer to our 2018 Form 10-K as amended or supplemented by our subsequently filed actually see reports.
And your references to non-GAAP measures are meant to provide meaningful insights and are reconciled with GAAP in today's press release and in the appendix that is attached to today's slides.
During our question and answer per today, we'd like to ask participants to limit themselves to one principal question and one follow up question. So we may accommodate as many participants as possible.
After you've gone through the Q, we'll be happy to answer any additional questions as time permits.
At this point I'd like to draw your attention slide three and turn the call over to build Flynn.
Thank you and good morning, everyone.
Hi, third quarter performance was affected by the uncertain global macro environment.
Driven by ongoing tariff and trade tensions.
In addition to lower yields and volumes than we anticipated.
Labor related service disruptions had a significant impact on our performance during the quarter.
We have recently received favorable arbitration ruling that confirmed the contractual process for a new agreement for our pilot.
We value the contributions of our pilots and we look forward to reaching a competitive contract that recognizes their efforts supporting our customers and our company.
Airfreight is a long term growth industry.
Over the last 10 years, we have built and diversified our company.
We know what we have to do to confront current headwinds and to continue to grow our business.
Despite macroeconomic issues the global Middle class continues to expand and.
And supply chains continue to grow and develop to meet demand.
And as consumption increases and supply chains evolved air freight is vital and transporting the good to materials required safely reliably and efficiently.
What does the scale and scope of our operations and our focus on express e-commerce and faster growing markets, we're positioned well to serve the demand for air freight today and in the future.
Moving to slide four.
We began flying one additional 737 freighter for Amazon on a C.M.I. basis during the quarter, increasing the current number to four.
And we expect to add our fifth 737 for Amazon before year end inline with the schedule we outlined in March of this year.
We also added a fourth 747 see in my freighter, France EA during the quarter and expect to bring on a 57 474 in CA in 2020.
And charter, we began flying and additional passenger 747 aircraft during the quarter in response to demand from the military and the NFL.
As noted.
Third quarter financial results reflect the continued softness in commercial air freight yields in volumes as well as labor related service disruptions.
In addition, and military charter passenger hours were significantly higher than in the third quarter of 2018.
Our military cargo flying was relatively in line with the prior year.
Slide five highlights our updated framework for 2019.
We expect to benefit from peak season volumes in yields, including the seasonal flying we do for express and ecommerce customers.
In addition.
Our outlook anticipates increased passenger flying for the military and lower levels of maintenance expense compared with the fourth quarter of 2018.
As well as a refund of aircraft rent paid in previous years.
Based on global economic conditions in our current expectations.
We expect to fly approximately 325000 block hours this year.
It was about 75% or the hours in AC am I and the balance in charter.
We also anticipate revenue of about $2.75 billion.
Adjusted EBITDA of approximately $500 million.
And adjusted net income to be about 60% to 65%.
Of our 2018 adjusted net income.
In addition, maintenance expense for the year as expected to total approximately $380 million with depreciation and amortization of about $260 million and core capital expenditures at about $140 million.
Which is mainly for parts and components for our fleet.
This is a good point to ask John to provide some perspectives about our business and the actions we are taking to drive our performance.
After John .
Spencer will provide further detail about a third quarter results I'll provide a few additional comments and then we'll be happy to take your questions John .
Thank you Bill and Hello, everyone.
Turning to slide number six.
As Bill noted, we are well positioned to serve our customers and the demand for airfreight.
We have the right platform in place for the future and it begins with our talented team of employees and our strong portfolio of assets and service offerings.
As we announced yesterday I'm pleased to confirm that Jim Forbes will become the new Chief operating officer of Atlas Air worldwide worldwide effective on January Onest, when I transition into the CEO role.
Jim is currently senior Vice President and Chief operating officer at Southern Air.
He has over 30 years of aviation operating experience and has been with Atlas since 1997 in various management roles.
Jim has been a trusted colleague for the last 20 years.
He is an outstanding leader and has a proven track record of success.
He's played a key role in our polar air cargo joint venture with DHL, our largest customer.
He is also played a lead role in the integration between southern Air an Atlas there as well as overseeing the day to day operations at southern.
I look forward to welcoming Jim to the senior leadership team.
<unk>.
Listen to our employees in our assets and services. We also had a strong core of long term customers and we play a key role in their operating networks.
With that as our foundation, we are also taking steps to navigate through the current headwinds.
We continually assess the market to best balance our capacity with the demand for our aircraft in services.
And as Bill stated, we know what we have to do and we are adjusting our business to adapt to the changing market environment with a focus on growth customers and those opportunities that generate the highest returns.
We're very focused on aggressively managing those issues that are within our control, particularly during a softer market environment.
This includes a relentless focus on reducing costs enhancing productivity improving profitability and generating cash.
[laughter].
I will also be particularly focused on completing our new joint collective bargaining agreement.
I've been in regular contact with union leaders toward that goal.
We also continue to make progress in our negotiating teams have been meeting regularly.
Looking ahead, we expect to provide our 2020 earnings outlook, which will include the expected and collective impact of our actions during our next earnings call, which will be my first as CEO .
Not only with these actions benefit Atlas in the near term. They will also contribute to the long term success of our company.
I'd now like to turn it over to Spencer for financial review.
Thank you John and Hello, everyone.
Our third quarter earnings are summarized on slide seven.
On an adjusted basis EBITDA totaled $95.6 million.
Income from continuing operations net of taxes totaled $9.5 million.
On a reported basis net income was $60 million, which included a noncash unrealized gain of $83.2 million on outstanding warrants.
Our adjusted earnings in the third quarter included an effective income tax rate of 5.7%.
And as a result of proactive tax planning to maximize income tax benefits. We now expect our adjusted income tax rate for the full year of 2019 to be approximately 12%.
Slide eight provides an overview of our third quarter segment revenues.
Since many of the factors driving segment revenues and contribution during the third quarter, a similar I'll focus my comments on segment contribution.
Moving to slide nine.
Segment contribution totaled $81.8 million in the third quarter.
Hi, My earnings primarily reflected an increase in semi flying that was offset by a decrease in AC my flying related to the impact of tariffs in global trade tensions and labor related service disruptions.
In addition, AC My segment contribution was impacted by additional heavy maintenance.
Startup cost for customer growth initiatives.
And the short term redeployment of 2747 dash eights to the charter segment prior to their subsequent placement with an AC my customer after that customer obtain necessary regulatory approvals.
Lower charter segment contribution during the period was driven by a decrease in commercial cargo yields and volumes related to tariffs and global trade tensions as was labor related service disruptions.
These were partially offset by earnings from the redeployment of 7.7 Dash eight aircraft from AC lie.
Increased passenger demand from the military.
And lower heavy maintenance expense.
In dry leasing lower segment contribution during the quarter was primarily due to the schedule return of a triple seven freighter earlier this year.
Partially offset by the placement of additional aircraft.
Turning to slide 10.
Our net leverage ratio increased modestly in the third quarter as a result of softer than expected earnings and its impact on trailing 12 months EBITDA.
We do not have any from aircraft purchase commitments and we remain committed to a strong balance sheet into reducing our net leverage ratio.
We look for a gradual improvement as we benefit from increased EBITDAR levels and as we continue to lower debt levels by maintaining debt repayments of approximately $70 million per quarter.
Now I'd like to turn it back to Bill.
Thank you Spencer.
Moving to slide 11.
Airfreight is a long term growth industry.
We have the right platform to serve our customers and future airfreight demand.
We have a strong core of long term customers and we play a key role in their operating networks.
We continually assess the market to best balance our capacity with the demand for aircraft and services.
We're adjusting our business to the changing market environment.
We know what we have to do.
And these actions will not only benefit Atlas in the near term they will contribute to the long term success of our company.
Shelby maybe we have the first question please.
Of course your first question comes from Bob Labick CJS Securities.
Good morning, Thanks for taking my question.
Hi, Bob warning.
I wanted to start wanted to try to ask this is a hypothetical question versus company specific and hopefully we can talk about it in this regard.
When a plane.
Reassigned mid contract what has to happen for that to occur.
And we saw some news articles, stating that hasn't happened in the past quarter. So whatever did happen has it stopped or.
Talk around what generally happens for that event to occur.
Well, Bob you're talking about the process of actually transferring an aircraft if.
Oh, I'm talking about yeah, I've, yet to see it my contract with a certain customer and it was a side and it was reassigned to another.
Carrier.
Well theres.
Right and aircraft has to come off of carrier A's Operatings specifications and go onto carrier bees operating specification. So there is a transfer of records and information. There is off there's also what's called a conformance check where certain maintenance activities need to be performed on the aircraft before the.
Craft transfers to the other carriers operation.
And Uh huh.
And conforms to the maintenance programs at that other operating certificate.
Hi, I'm, just trying to get at what would cause it to go off of carrier.
What would have happened for that to change in the middle of a contract.
It could happen.
Well, that's a customer decision and customers look at a variety of.
Factors when they consider to to make a decision to move in asset from one operator to another.
And so it really depends on a number of factors, but certainly on the customers assessment of what's going to best suit their network and meet their customer needs.
Okay.
Different.
Being more specific we've over the years we've had aircraft.
Come to us from other operators and we would operate on semi that's not.
Unusual.
We've done that.
Several times that I can think of.
In the specific instance, I think you're referring to point to point out that at the dry lease long term drive these contracts that we have in place on the assets that have moved off of our off spec remain in place for the term.
Okay.
Thank you and then one kind of I guess longer term question, obviously, you've talked about the CAC am I correct contribution margins have been impacted by trade and tariff and then labor disruption historically, they've been in the mid to low 20% range.
We've talked on prior calls there's been some some changes over the last few years with incremental pass through expenses, which modestly impact margins.
My question is once we get passed the labor and the trade and tariff and once the ball that normalizes.
The appropriate range for direct contribution for AC HMI margins and.
An annual basis.
Yeah, Bob its Spencer.
You have that right the increase in the smaller gauge 737767 flying as well as.
The increase in.
Reimbursed costs to customers has really had quite an impact and the the increase in semi block hours.
He has had a big impact if you back out the.
Smaller gauge aircraft and the reimbursed expenses the margin the AC my margin for the third quarter.
I would have been obviously, a much higher and then the difference between the prior year.
And the current year would really be due to the impact of the.
Tariffs and global trade tension impact as well as the labor related service disruptions.
So to answer your question.
You know if you if you.
Assume all else being equal.
Then you can look at a prior period as a good representative.
But we hope to continue to add a CMO aircrafts. So it depends whether those aircraft are smaller gauge or larger gauge and then based on that it could have an impact obviously on the margins we.
Generally make more implying a beer plane across a big body of water that we do flying a smaller gauge domestically in the U.S.
Got it okay. That's very helpful. Thank you.
Your next question comes from Helane Becker of Cowen.
Thanks, Operator, hi, everybody. Thanks for the time.
I don't.
No Spencer if you can answer this but of the 80 million dollar reduction and EBITDA from the started the year.
Can you say how much is the pilot disruption.
Helane, we really.
Were reluctant to do.
Negotiate with our with the Union through an earnings call and so I know, that's not what you're asking us to do but but we really.
Don't want to do that to mature in earnings call, but the impact from both the labor disruptions as well as the.
The impact from.
The global trade tensions and tariffs are by far the two biggest issues that have impacted us.
If you look at the third quarter and I know, you're asking about the full year.
But if you look at the third quarter on its own versus our previous guidance.
It's more than made the variance is more than.
Made up by the labor disruptions.
And then the the impact from the tariffs and trade tensions those those two things together.
Make up more than the variance versus what we had expected for the quarter.
Okay. So.
Yes.
If you had been able to reach an agreement with your pilot a year ago. This time.
Is there any way you can say how much.
With the difference between what you actually earned and what you would have hernndez.
I mean, I'm kind of what I'm trying to figure out is how much of the decline is really trade related because as you know and I know this came up on the last call.
You guys always said that you weren't as impacted by out if I add afraid data and as an e-commerce focused.
Company, you shouldn't be as impacted by I added data.
Going forward, but yet you are by you know that the China U.S. trade dispute. So I'm I'm, just trying to figure out how much as macro and how much this company specific I guess.
Yeah and are now is there any way to help with that.
So I think Helane Bill speaking I, that's certainly the position that we.
We described and we discussed I think what's going on right now with that of trade data, However, or said another way with the market is something exceptional.
That we havent seen him in 10 years, I think Ayada commented something to the effect that revenues may be down 10% for though.
International Airfreight industry on a year over year basis.
Third is that due to volume in two thirds of that duty due to yield.
So the impact here is I think of a higher order of magnitude. So weve typically seen in in markets, where you have a couple of percentage point.
One versus the other.
And just overall, we're seeing that impact in air freight so I get you point really not going to be provider as line between labor and.
And market.
Those Spencer I think described them accurately those are the two big areas where.
That's really the is probably as much more as I could could say without getting into level detail. We're not we're not going to do.
Okay. That's fair I'll, let you off the hook on that one.
Yes, Hi, now [laughter] just my follow up question is now that we're here in late October beginning in November can you just say how the peak is shaping up like how are you thinking about the next five or six weeks in terms of the peak I know you're doing a lot of flying for Fedex and others, maybe you could just talk about data level.
No sorry my questions. Thank you [laughter] yeah. Thanks, that's that's that's.
Great question so.
What were generally we're all reading and hearing is that that yes. There is a peak certainly a peak for 2019, but it's not what the industry experienced in 2018 in 2017.
We're seeing volumes and demand should begin to.
Begin to exhibit those peak to characteristics.
In in discussions with our marketing organization.
And charter teams, we're starting see yields come up as we move into the peak.
And you made an important point about express operation. So as we think about atlas's peak going forward.
A couple of components that are that are important to to underscore. So we'll be flying a greater number of freighters dedicated to the.
US express operators during this peak those are at negotiated rates that reflect the.
Kind of the value of providing supplemental lift for a short period of time during the peak and we've been doing is for many years until we feel very good about that and glad that we're able to put several more units into that operation I commented that the military passenger hours are going to be up on a year over year basis, that's an import.
Component of our fourth quarter.
Slide or framework shall I say military.
Cargo hours are in there as well overall AC might find will be up and and so our arc.
Our view that remaining commercial charter market is what's reflected in the.
Guidance framework the updated framework that we provided here on the call a little while ago. So there are several components to our outlook on peak.
Great. Thank you.
Your next question comes from Jack Atkins of Steven.
Hey, guys. Good morning, I appreciate you taking my questions.
So I guess first bill congratulations on your retirement and John Congratulations on your your new role, but I guess.
Stepping back for a for a saket I mean, when when we think about.
Yeah that the company as it sits today and I know there are definitely some puts and takes going on this year.
You know bill your comment earlier that this is that airfreight growth industry I mean, when I look at your results in 2019, the midpoint of guidance range, then would imply something from a from a net income level similar to what we saw in 2015.
And we still have a reset to column on the on the labor front. So I'm trying to understand revenue is up significantly over the last four or five years.
Pre tax income is.
Flat and you know there's definitely some concern about potential risk going forward.
Yeah, you know what can you guys do took to improve the cost structure of this business because it really seems like it's been under quite a bit of pressure in there, perhaps just want to go.
So so Jack it's John and and thank you for your for your comments and congratulations.
We're looking at every aspect of the business aggressively, particularly in this environment, where clearly we're we're under some pressure.
We're looking at every line item minimizing discretionary spending.
Certainly controlling head count there's a lot of headway, we can get tightening our our relationships with our vendors that we rely on quite a bit for our.
Hi cost items like heavy checks and engine overhauls.
Working with our customers for network efficiencies.
So that we ensure optimal scheduling so we get the best yield out of the our resources both aircraft and crew.
Further leveraging technology wherever we can on things like crew scheduling just to make us more efficient.
Flight planning what are the roots, we can fly that are the most efficient with the least amount of fuel Burton burned spend.
Inventories I, just really Jack looking at the whole gamut of our cost structure.
No as well as you know if there are some some routes that are not profitable or not as profitable potentially shedding some of those routes and redeploying those assets as elsewhere to more profitable flying so we're looking at every aspect of it as we go forward here.
Okay Gotcha, John Thank thank you for that that color.
I guess on the fourth quarter guidance.
On the fourth quarter guidance when I went to think about sort of what your full year implies the there's really not a big change to your fourth quarter outlook relative to three months ago.
Are you assuming that some of these trade issues abate in some of these labor issues debate because it seems like those would carry forward and be a headwind to the fourth quarter more so than and then what's you're guiding to.
Right. That's a that's the right question Jack Thank you.
Spencer so in the fourth quarter, there are a number of.
Positives, that's offset by one one big negative so.
Positives are that we expect to receive a return of.
Excess rent that we paid in previous years.
We have a much lower heavy maintenance expense in the fourth quarter. This year versus the fourth quarter of last year, we have higher ability sorry passenger volumes and we have higher NFL flying because we added.
Additional team this year. So those are all the positives for the fourth quarter.
And then the big offset to your point is that charter yields we expect to be.
Much lower than the prior year and so when you when you offset the decline.
Based on the charter yields with the positives that I mentioned.
They offset each other and so the our outlook for the fourth quarter is very similar to the fourth quarter of last year. After all those puts and takes.
Okay.
Thank you Spencer last last question.
For Bill on for John but I guess as you are looking out at global Airfreight market.
Are you seeing anything in terms of leading indicators that will lead you believe that maybe things are stabilizing or you're starting to see some some green shoots out there I.
I know, it's been a tough year, but it just just curious if you're seeing anything that would be would give you some more confidence as we head into 2020.
So there is as you point out Chuck has a fair amount of uncertainty out there.
When we look just across different markets South America. As you know is important to us and in spite of the disruption that we saw in Chile.
Recently, and some of the a similar activity in Ecuador that markets holding fairly strong for us.
We referenced military a couple of times here today, it's 12.5% of our business, we expect very stable military volumes in this fiscal year and trailing into next fiscal year.
Our trailing or leading into the next fiscal year as leadership.
Military leadership has told us.
And the other carriers at that that operate for them.
But we do is essential to many of our customers and were integrated into their core operating networks airfreight itself is essential.
The Big question is what what does a.
Do we get a phase one agreement with China, what do we get that and what does that lead to.
We're looking for some uptick really at this point.
Absent any other a better information kind of continuing situation as we move into 2020 with some.
Improvements as we get into the second half of the year, but we've really all of us here.
And all of you on the call, we really to sharpen our focus on.
Now what the second half of next year looks like.
Okay. Thank you again for the time.
Thank you Jack.
Your next question comes from Scott Group of Wolfe Research.
Hey, Thanks morning, guys.
So a sense or can you tell us how how much is this refund customer refund in the fourth quarter and then just Directionally you think maintenance costs is higher or lower in 2020 years 2019.
Sure so with regard to the quantification for the fourth quarter I tried to give that.
The response to two to Jack's question.
We have.
A number of significant positives in the fourth quarter that are offset by a significant negative. So we're not going to quantify you know each particular item.
Although heavy maintenance, we do provide detail on that so you have that our estimate of what that will be.
As in our our slide deck and you can certainly compare that to the prior year. So you have that.
And then the other items are offset.
Our an offset to to charter yields.
And then I'm sorry, Scott your question about maintenance was 18 versus 19 or was the Nike versus 20, yet I don't think about it for 20.
So for 2020 as John said, we will certainly talk about that during our next earnings call. We are in the process now of.
Trying to determine.
What that what exactly that will be and as John talked about.
We're going through a.
Really appropriate process.
Turning to ensure that we have the cost that we need.
And we eliminate those costs that we do not need.
Okay, and I think the military business sort of resets each year in fourth quarter. So can you just give us an update on the share and then I've heard a lot about passenger today, but should we think about how should we think about cargo military going forward.
Growing shrinking any help there.
Sure Scott it's John .
Yes in terms of entitlement our share of the business is somewhere in the neighborhood, but 40 excuse me 5300, 54%. It's right in between there will continue to enjoy that.
Through 2020.
In terms of the demand I think bill said, it well, we expected to be steady and stable both on passenger and cargo and that's consistent with what we're hearing from the military as well.
Okay and then just last question if I can so you know telfair freight environment.
We know.
Where our customers. This is in a say my question, where customers flying relative to block hour minimums and as you look out to next year do you think it's.
More likely that we grow or a semi fleet or shrink our AC nicely and then maybe would that just is next year, a normal heavy or light year from a contract.
Placement standpoint.
Okay.
Three parts of that one so the first part is.
Flying above or below minimum guarantees.
Our AC my customers during the third quarter.
Flu, just a little over 10% above their their minimums.
So on one hand, that's good on the other hand, they flew about 18% above in the third quarter last year. So.
For the first three quarters of this year customers have been flying.
Below well sorry, not in the first quarter. The first quarter. This year was stronger than the first quarter last year from that perspective.
The second quarter was pretty similar the third quarter. This year was much much below.
So for the full year customers typically by somewhere 5% to 7% above this year, we expect it will be above that.
But but below 2018 levels.
And then.
Another part of your question was.
Next year do we expect to have more or fewer aircraft operating in a CMI.
Today, we have 75 aircraft in anyway CMI.
You were asked another part of your question was how many contracts are up for renewal, we always have a handful or so that are up for renewal at any given time, we try to kind of space them out. So we don't have too many coming due at any one time and so that is fairly fairly normal with regard to next year.
We have to see how it all plays out we are as John pointed out looking to make some changes and ensure that we're we're earning the highest returns that we can.
But we also continue to focus on growing our semi business, which we have been doing.
Okay. Thank you guys.
Your next question comes from Kevin Sterling of Seaport Global Securities.
Thank you good more gentlemen.
I want to Kevin Yes.
John you talked to kind of follow up on Scott's question, a little bit about the military obviously the passenger flying is better than expected this quarter.
If I am not mistaken one at last quarter. It lags a little bit. So what we saw this quarter is that some carryover from last quarter or is it just just strong and like you said, it's going to be strong heading into 2020.
So you're right it is stronger than last quarter, a little of it may be carry over but mostly what we're seeing is.
Stabilizing the demand and we expect that in the weeks and months to come.
Okay. Thanks, My last question here instead of looking back on the labor disruptions and things.
If we can maybe look forward. If you if you don't mind you know on blast peak season was this compressed cycle going to see in 2019 was 2013 as you know Thanksgiving is late this year essentially got a three week period between Thanksgiving and Christmas, whereas compressed.
Service levels and domestic air freight.
It's going to be relied upon.
2030, wet weather and obviously you PS synthetics got overwhelmed and that's when after that Amazon decided to develop their own air network and so they need. They did you guys. This this time around on Amazon is broken up with Fedex and yes is obviously filled.
With their own e-commerce growth so looking forward to.
The peak season. This year, what are some of the things you're doing in on the labor front to ensure that.
Labor disruptions are mitigating 'cause it seemed like the past couple of quarters, we put out we've we've had those in your pilots. They work hard they're very very good people and their life plus the Oregon organization and kind of in lock step what are some of the things that you're doing to ensure I think a smooth peak season, given that it's going to be challenging because it is so.
Compressed does that question make makes sense kind of maybe looking for some of the.
Positives and things that can be done to mitigate any disruptions.
Yes, that's a that's a great question, Kevin and there's two parts to it. So let me just talk about the market and then John will talk about what we're doing it with our with our.
Thanksgiving is late Theres, no doubt about it but that doesn't mean that the flying that supports.
I believe there is a genuine interest on on the new logos part to continue to make progress.
To to that approach to follow the contract.
Operationally there is also a number of things that we're doing in terms of having more crew availability out in the network to protect our peak season.
By design, we try and have our crew members take as much vacation time as they can in the first half of the year do as much training as we can in the first half of the year. So that they are available to our customers during the important peak season.
There are some qualified training instructors as well that we released into the field to provide some added buffer.
And then importantly, it's a shared responsibility not only do we rely on our crew members, but here back at headquarters for our control Center, making sure that we do the basic blocking and tackling that Theres transportation ready for the crew members. There's the hotels or reservations are there to make sure. The schedules are in line with.
Not being fatiguing for example, we work closely with the Union aren't on our bid schedules. So all those things go into.
To being best positioned to deliver the best quality for our customers in the peak.
Okay.
John Thank you Bill. Thank you best of luck team and then everything appreciate your time this morning.
Thank you. Thank you.
Your next question comes from Savant Clark of Deutsche Bank.
Hey.
Thanks for the question.
So it looks like you guys removed this slide in your quarterly presentation about the relationship between Atlas's book value the market cap and just given everything that's happened this year at the labor situation general weakness in air freight military Lumpiness and the semi business moving away or the HCM I'm moving away.
Do you see any risks that you might have to take an impairment on any of your aircraft at some point.
Hi, Southern Spencer, So that's something that we look at.
With regard to the accounting rules and when there there are triggers that happen than we take a look at the.
Okay. The expected cash flows.
In particular aircraft types, and we compare that with our book value. So that's something we look at.
All the time.
And this quarter, we we impaired too.
737 400.
Training aircraft, so that happened during the third quarter and then if there's other impairment that may or may not happen that would we would look at that of the future thus far.
When we compare our.
Cash flows and you do that on an Undiscounted basis first as the first step from an accounting standpoint, where we look at our cash flows compared to book value that has not been an issue. If however, those cash flows are then under that book value.
Then you perform a calculation using the discounted cash flows and then record any necessary impairment.
So we will continue to look at that as we always do.
And if there is that we will record that in the future, but thus far we have not needed to do that.
Is there a sense of where you are in terms of kind of breakeven with those cash flows.
I mean like is there precedent for how long if we see another year of weakness like this like how how much buffer you guys have right now.
It's a calculation that we look at all the time and it depends on every particular aircraft type.
In the past it has not been an issue.
We look at it and we will see.
Okay I appreciate it.
And then just on free cash flow, where do you guys expect that to shake out this year.
Just given what's happened with the stock price recently have you considered any changes to your capital allocation strategy.
Sure.
The way, we only we took that slide out because we just felt that.
We kind of made the point last quarter, but but the same same situation still applies we didn't take it out for any other reason.
With regard to free cash flows.
We expect free cash flows in the fourth quarter to be stronger than they were in the fourth quarter of last year again for the reasons that I talked about before we have some positives that are offset by.
Lower yields but all in all.
We have more very similar earnings in the fourth quarter of this year versus the fourth quarter of last year and cash flows we think will be a little bit stronger in the fourth quarter.
With regard to.
Capital allocation.
Nothing's really nothing's really.
Change there.
It's something the board looks at on a regular basis and considers.
Our capital allocation strategy remains pretty disciplined and balanced.
We're focused on maintaining a strong balance sheet.
Investing in aircraft when it's appropriate and we have customer demand.
And we're focused on trying to lower our net leverage ratio and continue to be focused in that regard.
We bought back over 10% of the company a few years ago.
We have not done that since because we were really ramping up.
For for Amazon and we have the southern acquisition.
And so we did not do that it's something that the board considers and.
I'm sure. They will continue to to consider that number right now that that's what our focus has been on.
Okay got it and then just last one from me it was that refund of aircraft rent and your guidance previously or is this a new development.
No. It it has been in there.
It's not new.
So it's been in its been in there and we are always expected that it would be in the fourth quarter and we've had in the past two we had about a $12.4 million if memory serves last year.
2018.
Okay I appreciate it thanks.
Thank you so.
Your next question comes from David Ross with Stifel.
As good morning, gentlemen.
Hi, good questions. Just first question just on labor timing.
I assume you got to merge seniority rosters recently and I know you're still waiting on the comprehensive economic proposal.
But what are the provisions for the orderly process and is the clock.
Started once you got the senior already rosters and when does the clock and.
Sure.
So so David I'll say that we do not yet have the integrated seniority list that is another item that we're waiting on.
And that receipt of the seniority list is what starts to clock ticking on a period of nine months of bargaining.
After which any unresolved issues.
Would go to prompt arbitration.
Binding arbitration.
So that's what the contract provides.
Frankly, the union failed to to meet the deadlines that the arbitrators laid out.
And then I'll comment Barry on the depreciation and amortization, so depreciation expense should be.
Fairly steady.
Your next question comes from Howard Rosencrans a V.
As investors were first and foremost focused on making money on the stock I don't mean to to overstate. The obvious have been doing this for 30 35 years.
With labor that your reticent about bringing on.
For this is not transitory. This is something that has subsisted now for for 12 15 years of your entire tenure Bill. So is is you're now moving to chairman of the board.
What is the Radisson swift, making moves to really assess what's going on it to give the.
A meaningful improvement I can say in profitability, but again at the end of the day its its share price the only.
Resonating factor to watch the shareholders is the.
Yeah, It doubt that will take away that sort of amplifies. Our hurt is the compensation to to management, which runs significantly north them of of.
The one hundreds of millions of dollars.
So let me take that.
And then just a couple of points, so I too am a fairly substantial shareholder of the company and I absolutely understand.
What it when shares don't perform and price Doesnt appreciate what that means.
In terms of our management team and choices, we're making now relative successes to success.
Few former to look at some of the recent senior management team choices and decisions. We've made we certainly have brought people in from outside the organization as well as promoted people within and we look for that balance.
And when we do that each time I won't talk about each.
Individuals' choice here or or or selection here, but this is a technical industry. We are an operating company we fly.
Complex aircraft operating time definite networks on a global scale with everything else that goes along with that operation.
From flight Ops Tech ops networked ops.
Regulatory compliance focus on safety and security operating in over 100 countries.
Performing.
The core services for our customers.
And so when we build out that management team, it's a balance.
Promoting.
Folks with the expertise that know how to do it.
How to run the business and.
And comply with bringing in new talent in perspective, and so we brought in senior executives from.
Including retail from GE from Pepsi and other companies rather than.
Naming each person. So I think we have very good mix of talent, new talent and promote and talent within and Thats the balance that we seek.
So is there a issue with.
So so is this management team imperative to resolving the the labor issues.
Is the caught to new what do you have the management team imperative to resolving a labor.
The senior management, who is all staying in place and or being promoted.
I believe that the continuity the senior management is imperative for the company.
Of which solving and resolving the labor or the new labor contract is just part of that.
Okay with all due respect we'll have to agree to disagree.
Certainly not belittling the challenges of of running the aircraft in the and the company in the complexities thereof, but we will have to agree to disagree on on on the execution and success. They are off you seem to be very confident that this team has has.
Don has done very well in that regard and I I would say that the barometer is.
I would say that the evidence the overall the barometer that it's important to shareholders and or the brommer that is important to labor.
Because there you're certainly not the only company that faces that that faces labor challenges I mean, even somebody is complex.
At a much worse industry as as GM has been able to successfully resolved.
Labor issues more expeditiously so.
I I might just beg to differ with what's your view wind.
I hope I hope that will be.
Changes for the positive.
Thank you for your time appreciate your courtesy.
Yes, well Howard Thank you and I'm.
Sure I understand your point of view.
We will disagree I think just a couple of things on labor.
We're in the process of working to realize a new collective bargaining agreement.
Following the terms of the contract.
Clearly unfortunate, but we had to go to court.
To obtain a preliminary injunction to address illegal behavior.
That's something we simply had to do.
We've continued to grow and diversify the company diversify the customer relationships and the array of services that we offer.
To our customers.
It's clear this the shares haven't responded.
But if you're asking fundamentally if the question is do we have a platform ultimately for success platform to move through both to the headwinds in the market because they exist and the challenges of getting to a new Labour agreement I believe we do.
[noise] I would say in a bare minimum they.
I would say in a bare minimum my reset of expectations is is duly in order, but I guess will <unk> I guess, we'll see what time as you introduced.
2020, where that.
Assuming you can though the labor thing has been going on for many many many years. So this is not this is not new one the horizon I I believe it should have been dealt with it we shouldn't have allowed it to coincide with with the difficult macro environment. We should have been ahead of the curve in my opinion, but anyway I kept at a time and look forward to it.
Reset.
Well I'm, sorry, I understand that Howard I.
Just.
As part of what is a whole RL lay framework is.
For a number of reasons these agreements take time to ultimately arrived at.
The next agreement.
I'm not defending it.
By any means I would argue that in our specific instance.
Had the Union leadership, we filed the contracted would have had a deal two years ago, but they chose not to for whatever reason and I'm not going to.
In a say more about that that's just the fact.
In the industry.
Perhaps there's a new regulatory framework at some point, that's that's beyond this conversation but.
Second years over at several very large passenger airlines to get through to their new agreements. Other I'm not it's not misery loves company I'm simply saying, that's just a feature of the.
The industrial labor structure that exists under our lay in aviation.
And so John has talked about he'll be providing the full year results and the 2020 framework when we have our next earnings call.
Thank you.
Thank you.
Your final question comes from Chris that Hello, Hello.
<unk> financial services.
Thanks for getting the in here.
So two part question, but sort of the same question.
Right here at heart and this is for John or Bill does we look towards 2020 and beyond curious what's the next chapter here for Atlas few years ago was about pivoting to ecommerce, which you did but the stock today is below where it was first deal at Amazon. So should we think about Atlas as.
The cost story now and are there additional opportunities and ecommerce say beyond Amazon and DHL in other vertical assays and MRO and then as we look forward again 2020, you have no aircraft commitments.
Weak macro backdrop and the potential for a labor deal given that and the cost in the productivity focus would you talk about is it reasonable to say that the business can do around 10%.
EBITDA growth. Thank you.
So Chris it's John from my perspective.
We absolutely are focused on 2020 and beyond if you you look at some of the.
Fastest growing markets in segments were a key player in each of them ecommerce express and some of the other growing markets. We've got the right assets.
And we've got the right team together.
Execute on that and I think we've demonstrated that.
Over the last 10 years of growth and diversification.
And we've been able to adapt.
To the changing marketing capitalize on these opportunities and we expect to continue to do so.
Okay, Chris its Spencer I would just add that this has obviously been a challenging year for the company.
And if you were too.
Back out the impact of the.
Tariffs and trade tensions and back out the impact from the labor related service disruptions that we've had you would've seen nice EBITDA growth and so.
When those things are behind.
The other initiatives that John is talking about.
Thats, where focuses and just more broadly bill just to round it out.
We believe that airfreight, whether its heavy e-commerce or express is ultimately growth industry diversification in the fleet types that we have the operational capabilities on the different types of networks that we operate long haul intercontinental.
Domestic.
More time definite E Commerce in express.
Our our skills and capabilities that that position the company for growth and so we believe in that growth opportunity and that will execute on it.
So if I understand if you are saying if we take out you know the impact of the tariffs in the labor that this business as a whole between the dry lease and the other subsidiaries that this is a business that later cycle can do or around you know, 8% to 10% adjusted EBIT growth.
We're not quantifying that the future I was simply pointing out that.
This year has been a challenging year, if you back those items out.
It would have been a very very different year I'm, even with those items were still delivering EBITDA of approximately $500 million.
So just pointing out that with without those things and with the initiatives that John talked about and the growth that we see in airfreight overall in our place in it.
Should lead to.
Good opportunity for the company in the future.
Okay. Thanks for the time.
Thank you thank you Chris.
That concludes the Q and a portion of today's call I'd like to turn it back over to management for any closing remarks.
Okay, well. Thank you Shelby and is as we've talked about on the call today I am transitioning from CEO of Atlas Air worldwide. At the ended the year end will continue as chairman of the board I personally just want to let's say it everybody on the call that it's been a privilege to work with you all through my during my tenure here and I've appreciated your engagement over the years.
Spencer, John and I want to thank you for sharing your time with US today and we look forward to your continued interest in Atlas Air worldwide. Thank you everyone.
This concludes today's conference call. Thank you for your participation you may now disconnect.