Q1 2020 Earnings Call
[music].
Ladies and gentlemen, thank you for standing by and welcome to the first quarter 2020 earnings calls for Atlas Air worldwide. All lines have been placed on mute to prevent any background noise.
After the speaker's remarks, there will be a question and answer session. If he would like to ask a question. During this time simply press Star then the number one on your telephone keypad. If you would like to withdraw your question press. The pound key. Thank you I'll now turn the call over to Atlas Air to began.
Thank you Laurie and good morning, everyone I'm, Ed Mcgarvey Treasurer for Atlas Air worldwide welcome to our first quarter 2020, <unk> results conference call.
Today's call will be hosted by John Dietrich, Our Chief Executive Officer, and Spencer Schwartz, our Chief Financial Officer.
Today's call is complemented by a slide presentation that can be viewed it Atlas air worldwide Dot com under presentations in the Investor information section.
As indicated on slide two we'd like to remind you that are discussion about the company's performance. Today 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 in any forward looking statements.
For information about risks factors related to our business. Please refer to our 2019 form 10-K as amended or supplemented by our subsequently filed FCC reports.
Any references to non-GAAP measures are meant to provide meaningful insights and are reconciled with GAAP in today's press release and in the appendix that is attached to today's slides.
During our question and answer period today, we'd like to ask participants to limit themselves to one principal question and one follow up question. So that we can accommodate as many participants as possible.
After we've gone through the Q, we'll be happy to answer any additional questions as time permits.
At this point I'd like to call turn the call over to John Dietrich.
Thank you Ed and Hello, everyone and thank you for joining.
Before I discuss our first quarter performance I want to take a moment to acknowledge the extraordinary times, we've all been living through.
Why do extend our best wishes to all who have been so adversely affected by this pandemic.
I would also like to thank all of our employees and the frontline responders around the world for their tremendous efforts to combat this crisis.
Their life saving efforts are truly appreciate it.
Turning to our presentation at slide three.
As always safety is our top priority and we're focused on supporting our pilots ground staff and our customers through this challenging time.
[noise]. This includes taking extensive precautions to safeguard all of our employees and support workers and working in close partnership with our pilots and their union leadership to ensure that our operations continue to run safely. So that we can continue to carry the goods that the world needs.
We're deep cleaning our aircraft in our facilities on a frequent basis, providing safety kits for our ground staffing crew members and implementing other safety procedures to protect our team our customers enter service providers.
We're also adjusting roots and schedules to limit exposure to regions that have been more significant significantly impacted by the pandemic.
And we put in place significant social distancing and other precautionary measures in our offices, including having all employees, who can work remotely from home do so.
[noise] over the years, we've made significant investments in our technology and business resiliency capabilities to ensure that our employees have the tools they need to do their jobs effectively even if they are away from their primary place of business.
I'm pleased to say that those investments are paying off and that our transition to working remotely. During this crisis has been seamless.
And I'm confident that we have the right controls in place to continue managing our business remotely until it is safe for all employees to return to our facilities.
With respect to the business Atlas plays a vital role in supporting the global economy, and our customers by keeping goods moving.
Airfreight offers unrivaled delivery speed, which is particularly important in times of need.
From parts and components used in manufacturing processes to finished goods food pharmaceuticals and other cargo.
Businesses and individuals count on Atlas to deliver everyday.
And we are grateful to be able to provide relief to businesses and communities in the fight against Cobot 19.
In addition to our commercial operations, we have donated services to transport critical personal protective equipment and other necessary relief supplies to affected areas.
We've also made several charitable contributions to organizations that help those in need.
And we're in close contact with our customers and governments around the world to ensure that airfreight continues to move to support relief efforts globally.
Now turning to our first quarter results on slide four after a slow start and despite the continual and varying operational challenges and uncertainties related to cobot 19, we ended the quarter with results that exceeded our expectations.
Traditionally the first quarters as slow as part of the year for Airfreight and this year started out that way with the usual drop off in global manufacturing associated with the lunar new year holiday in China.
But this year cobot 19 extended the lunar new year holiday, which delayed the resumption of manufacturing.
And that drove significant flight cancellations in January and February as our customers adjusted their schedules due to the impact of the pandemic on their businesses.
As we moved into March however, cargo demand and yields improve significantly reflecting the demand for goods and needed supplies, coupled with the reduction of belly capacity of the commercial passenger airlines and the disruption of global supply chains due to the cobot 19 pandemic.
In addition to the increased demand in higher airfreight yields in March.
Our first quarter results also benefited from flying the semi aircraft added to our fleet in 2019, including five incremental 737 for Amazon.
Two incremental triple Sevens for DHL, and two incremental 7474 hundreds for Nippon cargo Airlines.
The results also benefited from lower to lower aircraft rent and depreciation.
Our overall strong AC EMI and commercial charter cargo performance was partially offset by.
Lower military passenger demand due to the department of defense is precautionary limit on military travel.
Lower 747 dream lift or flying reflecting boeings temporary suspension of at 787 Dreamliner production.
And higher cost related to the pandemic, including premium pay for our crews and the protection and cleaning measures I noted earlier as well as other operational workarounds.
The strong demand for airfreight, though has carried into the second quarter.
To meet that demand Weve reactivated three of our 747 400 converted freighters that had been previously part and we began operating a triple seven freighter that was previously in our dry leasing business.
At the same time, we're mindful of the evolving and uncertain environment and the importance of prudent financial management.
We're taking actions to reduce cost and enhance liquidity, including significantly reducing discretionary spending limiting our hiring for certain positions and selling non essential assets.
That being said, we continue to higher pilots to support demand and further growth and we're seeing strong interest from pilots we're excited to join our company.
As mentioned in our press release earlier today I'm pleased to report that working together with our pilots and their union leadership, we've taken a very important step during this critical time and increased our pilots pay rates by 10% effective may onest.
We're happy to be able to acknowledge and recognize the outstanding efforts that are crews provide everyday and especially in these challenging operate in this challenging operating environment.
We're providing this pay increase as an interim step as we continued to negotiate a new joint collective bargaining agreement in connection with our merger between Atlas Air in Southern Air.
With an exceptionally talented team of employees, a strong balance sheet and a diversified portfolio of assets and services.
Atlas is well positioned to continue to adjust to market conditions to navigate through the current pandemic and leverage the scale of our global operations to further capitalize on business opportunities.
Turning to slide five we expect the positive trends that we're currently experiencing to continue throughout the remainder of the year.
And we expect a majority of our earnings to occur in the second half of the year.
However, the evolving and uncertain environment related to cobot 19 makes it difficult to accurately predict the future impact on our results.
As such we're providing an outlook for the second quarter of 2020, but our full year 2020 earnings guidance provided on February 20 as of this year no longer applies and will provide updates as the year progresses.
For the second quarter of 2020, we expect to fly approximately 80000 block hours with revenue of approximately $770 million and adjusted EBITDA of about $165 million.
Excluding the second quarter refund of excess aircraft rent paid in previous years of approximately $25 million after tax.
We anticipate second quarter adjusted net income to grow approximately 40% to 50% compared with adjusted net income of $29.9 million in the first quarter of 2020.
Including the benefit from the refund of excess aircraft rent paid in previous years.
We anticipate second quarter, adjusted net income to more than double compared with the first quarter of 2020.
In addition to the excess rent refund.
Earnings in the second quarter are expected to benefit from continued charter demand, including several long term charter programs at higher yields.
Flying the incremental cm I aircraft added to our fleet during 2019 and improved operating efficiencies and cost savings.
We expect these benefits to be partially offset by higher heavy maintenance expense lower military demand driven by the military stopped moving order related to covert 19.
Additional costs, driven by cobot 19, including premium pay for our pilots.
Costs for continuing to provide a safe working environment for all our employees.
As well as higher costs from our recent interim pay agreement with our pilots.
In addition, the availability of hotels and restaurants.
Evolving pandemic related travel restrictions and health screenings cancellations of passenger flies by other airlines or airport closures could further impact our ability to position pilots to operate our aircraft.
Our second quarter outlook also reflects the reactivation of three of our 747 400 converted freighters that had been parked in our operation of a triple seven that was previously in our dry leasing business driven by continued strong demand for airfreight.
While we're not providing an outlook for the full year 2020 at this time, we expect a majority of our earnings to occur in the second half the year.
Aircraft maintenance maintenance expense in 2020 is expected to total approximately $390 million with depreciation and amortization totaling about $250 million.
In addition, core capital expenditures, which exclude aircraft and engine purchases are projected to total approximately 85 to 95 million mainly for parts and components for our fleet.
We also expect our full year 2020, adjusted effective income tax rate to be approximately 22%.
This is a good time for me to ask Spencer to provide some more details in our first quarter 2020 results and after Spencer's remarks, I'll provide a few additional comments and then we'll be happy to take your questions Spencer.
Thank you John and Hello, everyone.
Our first quarter results are highlighted on slide six.
On an adjusted basis EBITDA totaled $121.2 million with adjusted net income of $29.9 million.
On a reported basis net income was $23.4 million.
Our adjusted earnings in the first quarter included an effective income tax rate of 24.2%.
Looking at slide seven.
Operating revenue totaled $643.5 million in the first quarter of 2020.
CMI segment revenue was lower in the first quarter, primarily from a decrease employing driven driven by the redeployment of seven horse Sevenfour hundred aircraft to charter.
As well as the customer flight cancellations as John noted earlier, partially offset by an increase in Triple 7737, and 7.7 400 CMO pipeline.
Charter segment revenue during the period was higher primarily driven by increased flying.
Partially offset by a decrease in the average rate per block hour.
Block hour volume growth, primarily reflected strong demand for commercial cargo driven by the reduction of available capacity in the market.
The disruption of global supply chains, and the redeployment of 7.7 400 aircraft for May seem bye.
This was partially offset by lower AMC passenger flying as the military took precautionary measures to limit the movement of personnel.
The lower average rate per block hour was primarily related to a reduction in charter capacity purchased from AC My customers that had no associated charter block hours.
As well as lower fuel prices.
This was partially offset by an increase in commercial cargo yields excluding fuel.
At lower dry leasing segment revenue, primarily reflected $22.3 million of revenue in 2019 for maintenance payments related to the schedule return of a triple seven freighter and Thats the lower operating now in charter.
Moving to slide eight.
Segment contribution totaled $113.8 million in the first quarter.
AC My earnings primarily reflected increases in CMS flying and a reduction in aircraft rent and depreciation.
Partially offset by the redeployment of 747 aircraft to charter.
AC My segment contribution was also impacted by flight cancellations and increased operating costs, including premium pay for crews operating in certain areas significantly impacted by the virus.
Higher charter segment contribution during the period was driven by an increase in commercial cargo yields excluding fuel, which reflected the reduction of available capacity in the market and the disruption of global supply chains.
Charter contribution also benefited from lower aircraft rent in depreciation and the redeployment of 7.7 aircraft from AC Mike.
This was partially offset by lower military demand and the increased operating costs that we discussed earlier.
In dry leasing.
Lower segment contribution during the quarter was primarily due to the 2019 maintenance revenue payment.
Turning to slide nine.
Our net leverage ratio ended the quarter at 4.4 times, which is consistent with year end 2019.
We expect a nice improvement as the year progresses, as we benefit from increased EBITDAR levels.
Further improve our cash balance and continue to make debt payments of approximately $70 million per quarter.
We ended the first quarter of 2020 with cash, including cash equivalents restricted cash and short term investments totaling $235.6 million compared with $113.4 million at the end of 2019.
Our improved cash position reflected cash provided by operating investing and financing activities.
Net cash provided by investing activities during the quarter primarily related to proceeds from the does the disposal of non essential assets.
Partially offset by core capital expenditures spare engines and upgrade kits.
Net cash provided by financing activities, primarily reflected proceeds from debt refinancing and from our revolving credit facility, partially offset by payments on debt obligations.
In March as a precautionary measure due to the uncertainty from the pandemic, we drew $75 million under the revolving credit facility and had $19.8 million of unused availability as of March 31.
As a reminder, our debt as a low weighted average coupon rate, which is now 3.2%.
And the vast majority is secured by our aircraft assets, which have a value in excess of the related debt.
To mitigate the impact of any continuation or worsening of the pandemic, we have significantly reduced non essential employee travel limited groundstaff hiring and the use of contractors.
Implemented a number of other cost reduction initiatives across the company.
And taking other actions such as the sale of the non essential assets.
We don't have any from aircraft purchase commitments and we remain committed to a strong balance sheet.
Now I'd like to turn it back to John.
Thank you Spencer and moving to slide 10.
And as I said earlier safety is our top priority, we're focused on continuing to support our pilots are ground staff and customers through this challenging time.
And we're taking extensive precautions to safeguard all our employees.
Our first quarter results exceeded our expectations, which was the result of our teams executing tirelessly in a challenging operating environment and im humbled by their dedication.
We're seeing strong demand for airfreight into the second quarter, but we also remain mindful of the evolving and uncertain environment and the importance of financial management.
Atlas plays a vital role in supporting the global economy, and our customers by keeping goods moving.
And we're very grateful to do our part to continue to provide relief to communities and businesses in the fight against Cobot 19.
With our exceptionally talented team of employees and sound financial structure, along with a diversified portfolio Atlas continues to be well positioned to take advantage of market conditions navigate through this pandemic.
And Leverages scale of our global operations to further capitalize on business opportunities.
With that we're happy to take your questions and operator may we have the first question. Please.
Thank you as a reminder, if you'd like to ask your question. Please press Star then the number one on your telephone keypad. Your first question comes from the line Bob Labick CJS Securities.
Good morning, Thanks for taking my questions.
Good morning, Bob Hi, Bob.
So I wanted to start could you talk a little bit about your HCM my customers and how they're utilizing the aircraft if its differently now versus a normal first half if they're benefiting from the tight market and then how does that translate to direct contribution from HCM I for Atlas if it does.
So I'll start Bob in the first part of your question.
For for our AC my customers for the most part it's more normalized operations.
Many of them, including our larger customers.
Serve some of the markets, where there are some surge out out of China, particularly.
As as we mentioned in our remarks, there was a fairly dramatic decline during that it initial period on the tail end of lunar new year, but now its return to more normalized levels.
There have been a couple of our a semi customers who have redeployed into into the China market that weren't previously serving it to to take advantage in helping the effort.
Of the cobot 19 demand surge.
But for the most part.
They have maintained their networks because they do depend on their network flying.
As part of their underlying business. So from a contribution standpoint, Spencer I don't know if you want to add anything to them.
Sure and Bob I'll just add.
The way that a CMO works as you know it's a it's a long term contract with an agreed upon.
Rate structure and.
At the at the beginning of the quarter.
When things were a little slower manufacturing wasn't as strong in China, and the PMI customer has a a guaranteed minimum.
And now that things are so much stronger.
The semi customer has a huge benefit because they've locked in that rate over a long period of time and so our AC and my customers have the benefit of that long term contract with us if they were going out into the marketplace looking for capacity now they would be paying so much more so CMI customers really benefit.
Overall from from that relationship and as I said during the first couple of months.
There were cancellations.
And then in March and certainly in April what we're seeing now.
Volume to have really really picked up.
From a from a direct contribution standpoint.
Overall.
CMI saw an increase from the CMO flying that that John talked about five additional aircraft for Amazon to Triple Sevens for DHL to currency a so we really benefited from that the segment benefited from.
Not having from having lower costs of of aircraft rent and depreciation.
And.
Overall, the segment performed well even given the softness at the beginning of the period, Yes, I think if I could spend or the other thing I'd add above is our for our customers. They really enjoyed the low fuel prices well I mean, it's been a substantial benefit for them.
So with our modern efficient aircraft, coupled with the low fuel price in the high demand. During this most recent period.
I've expected.
Enjoyed really good returns.
Okay Super and then just for my follow up I guess.
Kind of thinking ahead to 2021 or beyond we've obviously been seeing a lot of.
On a press reports about potential capacity coming out of commercial.
Airlines in the future how does that influence the value of freighters going forward and your potential operations.
Next year and beyond.
Sure.
So.
Yes, certainly the significant decline in passenger capacity in the marketplace has had an impact on freight.
And the one of the big questions is when will that passenger capacity come back into market and reasonable mines can differ on that but we do know it's going to be awhile before that happens and we also expect it will be more gradual we're watching that closely.
And from a capacity standpoint, it also ties in with where that capacity is going to be redeployed. Once it starts coming into the market will focus on Europe first or Asia. Most of the production is coming out of Asia, and I think it's going to be awhile before that capacity has a significant impact on the cargo demand.
Which ties into your question on the value of freighters.
That speaks to the freighters, having significant value and in high demand is essential mentioned that certain certainly the case now and time will tell how long that continues on into the future, but we expect for the foreseeable future.
People aren't talking about days and weeks, they're talking about months in years before.
The passenger capacity materially rebounds.
And Bob It's Spencer I'll just add.
Couple of small points to that.
As you know about 50% of air freight has moved in the belly space of passenger planes and so.
That has really had an impact that as John said.
We're looking at months to years.
For for when Thats going to come back so it's really going to benefit it seems airfreight for for quite some time.
And so that the value of freighters should improve.
From the sort of scarcity value standpoint for sure. The other benefit we have is that we also have a dry leasing business and our dry leasing business because the passenger aircraft values.
Have dropped and most likely will continue to drop.
Due to the large fleet reductions and parked aircraft. So our dry leasing business should see some great investment opportunities.
And there should be attractive aircraft that can be freighter conversions like 767, 377, eight hundreds, possibly athree hundred 30, 303, Athree hundred 21 to hundreds so some good opportunities out there overall Bob.
I will get back in queue as you asked thank you very much.
Thank you.
Our next question comes from the line of Scott Group of Wolfe Research.
Hey, Thanks, good morning, guys.
Hi, Scott Corning wanted to start on the charter side, So charter rates were down for the quarter, but maybe can you talk about that.
Trend that you saw throughout the quarter and what you're seeing right now and then.
I understand.
Not giving full year guidance, but maybe can you share what we're in the initial guidance, what where are you assuming for charter rates and what do you what do you actually seeing right now.
Sure Scott.
Spencer so.
Overall charter.
Rates rate per block hour was down on on a first quarter. This year versus first quarter last year, which is not what you would expect.
And so it's made up of a few different pieces, so I'll try to explain that.
The overall.
Yields were down a few hundred dollars a block hour.
The the.
Biggest piece of that well, let me start with the increase so just from overall market rates driven by what we're seeing in the market yields were up significantly.
So thats what you would have expected to see but then there were a couple of offsets one is of course fuel and so fuel is a component thats in charter.
In our CMI business fuel is not a factor in our charter business, it's part of the overall rate.
And so since fuel was so much lower that had a pretty significant impact on the rate per block hour and then the second piece that had a pretty big impact.
Is something we call purchased capacity, we've talked about this a little bit in the past.
From time to time, we will buy back space from our AC my customers on on those planes.
And then we will sell that in the charter market and so.
The charter revenue shows up in the charter segment, because it was sold in the charter market, but the actual flying took place on an AC My aircraft. So the block hours are are in a CMO. So that was the situation we had last year.
Last year the rate per block hour had a very big benefit from that.
This year that was not the case and so on a comparison year over year basis.
You would see that and so we were able to operate those hours directly in charter and not through not using a CMI.
So how did not been for fuel had it not been for this reduction in purchase capacity. What you would've seen was a sharp increase in commercial market yields.
Overall to the second part of your question yields were certainly higher.
In March and continued to be higher.
Then we had anticipated sharply higher than what we had anticipated.
Now in January and February.
Things were very different.
But in March and certainly April yields are much much higher than we had anticipated in our plan at the beginning of the year.
And just so I understand that this purchased.
Capacity capacity is this is this a sort of a headwind to reported charter yields all years. This first quarter phenomenon and then what are you doing if anything to sort of are you doing anything to lock in these charter rates for longer than normal.
Hi, how are you approaching the market right now.
Sure.
I can talk about.
Both of those so I'd say, it's an issue I'm the purchase capacity.
That will be an issue on a comparison basis, probably just the first couple of quarters of the year.
And then the question you're asking about longer term charters. So we are.
I said this on a on a previous call. The difference between AC mine charter is starting to get a lot more blurry than it used to be used to be HMI was AC mine charter was charter and they're starting to blend a lot more together as charters are getting longer term.
And.
The nature of the of the charter relationship is starting to look more and more like like AC My.
So what we're seeing on the in the charter space is that charter customers want to enter into much longer agreements. So they used to be very short term.
Occasionally we had certainly program charters.
But now what we're seeing is request for more long term charter relationships.
At higher yields and so we are now entering into those and so we expect the charter demand to be strong for quite some time and if I could add to that Spencer.
Scott from from my perspective, we're focused on both of course, we want to take advantage of the near term.
Surge in the yields.
But we're also focused on the long term as well and there are customers, who see the value in the freighters going forward. They see the dynamics that we've talked about with the significant reduction in capacity in the in the market coupled with what they see as their needs. So that has opened the door for us to to engaging.
A discussion and get some longer term charter contracts at very favorable rates.
One more quickly if I can can you just give a cures act update it did you guys participate in the and the dollars for cargo companies was there anything in that in first quarter second quarter guidance.
So there is not in the guidance and as many of you know the cares act sets aside specific funds for cargo airlines.
We have been in discussions with treasury to evaluate whether Atlas will participate in the program.
But no decisions have been made on that and we'll we'll let you know how that develops.
Okay I'll get back in queue. Thank you guys.
Thanks Scott.
Our next question comes from the line of Helane Becker of Cowen.
Thanks, very much operator I appreciate the time gentlemen, soon here is my one question about two questions. One is I know for a while there were issues flying into China for your pilots because the government wanted to clarify.
And.
You know that just is ridiculous [laughter] home kind of wondering.
And for that worked out and how it worked out and then how I should think about the contract pay rates.
So as to 10% like a down payment.
You know a potential increase later on that might be as much as 30% or does the 10% have a light.
Limit to it and then you would renegotiate this away and negotiating new contract.
Okay. Thanks, Thanks, Helane I'll take those.
In terms of flying into China, Yes, you're right there have been.
A number of regulatory and operational hurdles we've had to overcome.
It was frustrated by.
Accommodated the need for essential freight to keep moving.
And there was also different testing requirements and as you say different quarantine requirements for the most part we were able to transition our crews and go through China without lay over without too much problem. There were some testing that would would take place some of it was more invasive than others.
And that was concerning for a while if not disruptive for awhile, but working together with the industry and with the government, we were able to get more reasonable and rational.
Ways in which to operate in and out of China, including migrating to a point, where we can actually do more efficient and less risky layovers within China and places like Shanghai.
So we're in a much better place now than we were several weeks ago on that so it's working as well as can be expected in and there were some pretty harsh approaches earlier on for example, if someone were to be.
Tested positive that they would somehow be stuck in China. When I think it was in everyone's interest for us based pilots and citizens to get them out of China and back home again, and we've worked through those issues as well so.
You're right. It was a serious concern and continues to be a concern, but its mitigated overtime deuce due to some great work in the government's dealing with each other than the industry dealing with the governments. So.
So thats that part of it.
With regard to the pilot.
Contract there is no limit on it.
This is a 10% increase.
That will remain in effect until we reach our next contract.
I think it's fair to say that our contract is long since amendable. So.
The rates have been somewhat below market for an extended period of time.
Quite frankly.
No one expected I certainly didnt expect the merger on negotiations for the joint collective bargaining agreement to take this long. Unfortunately, we had a a number of procedural disputes to enforce the contract in the merger provisions within the contract.
Fortunately we were successful in many many court decisions in arbitrations.
To define what procedures apply.
But given where we are in that cycle and given frankly had we followed those merger procedures.
The new joint collective bargaining agreement would.
Already be in place by now and we just thought it was approved and time to recognize our pilots and give them. This interim pay bumped it will not have an expiration date.
I view it as kind of a bridge to the next contract.
So thats where were at with regard to the 10%.
That's great. Thank you very much in and just one last follow up question.
As the passenger airlines since you do do some passenger flying can you apply for PSP funds I know I think Scott asked about cargo.
Could also ask for passenger funds to now.
Yes, no that's not the case and the government did contemplate there were carriers, who did a little bit of both and they set some definitions. If you were predominantly a cargo carrier and did some passenger you fell under the cargo bucket. If you were predominantly a passenger and did some cargo you fell under the passenger bucket. So.
We would to the extent that we proceeded we would be in the cargo in the cargo bucket.
Thanks have a nice day.
Excellent. Thanks Helane.
Your next question comes from the line of David Ross at Stifel.
Hi, good morning, gentlemen.
Hi, Dave.
As follow up on one of the earlier questioning lines.
When you talked about the charter segment, having more longer term charters say multi month agreement rather than multi week agreements.
What percentage of your charter planes are now flying under those longer term contracts versus really running free in the spot market.
Hey, David Spencer I don't really have a percentage, but one of the things in the premise of your question was.
Months versus days, we now have charter contracts that are several years in length and Thats why are we saying they start to look more and more like an AC my contract to did they have some different elements, but but they're starting to look similar.
So we have now charter contracts that.
We'll go into the years.
On a percentage basis I don't think we know that.
It's not really the way we operate.
But.
Good.
Not really sure I don't want to speculate not really sure on a percentage basis, we still have some that are very much in the in the spot market and then we have others that are tied to longer term arrangements.
If you got 14 15 planes in charter our half of them tied up under long term deals.
I would not say half if something less than half, but beyond that it would just be speculating.
And then how do you think about fuel working into longer term charter rates because typically.
Fueled a part of that all in charter rate as you mentioned with the revenue per block hour.
Headwind with fuel dropping but as you extended out.
This fuel get separated out from that to spread the risk scores fuel in there and then you're taking some element of fuel risk, where you could benefit of fuel falls or you could get hurt in fuel rises.
We have some adjusters in the agreements that call for the extremes in either direction right. So.
As we talked about on long term basis, no one could predict what's going to happen with fuel. Although we don't expect any dramatic changes in the near term, but there are protections for both for both parties in these longer term charter to make adjustments for fuel in either direction and David Spencer just just add to that.
We always talk about one of the great benefits of our business is that we really don't have much fuel exposure, a little bit, but not really much in a semi.
We really don't have fuel exposure with the military we really don't have fuel exposure in charters, the only area, where there's a little bit and where we're entering into a short term charter arrangement.
For something that's going to happen over the next several days, we have a pretty good idea of what the rates are if we're entering into a longer term arrangement.
The fuel is typically pegged to some sort of a fuel index.
And so there's just a very small amount of risk there as fuel is moving up or down if it's if it's volatile, but otherwise it's tied to an index and I'm really the customer will mostly enjoy the benefit of have lowered fuel or suffer the consequences of rising fuel, but at the at the moment certainly the benefit.
Of lower fuel.
Okay. Thank you very much.
Thank you and Q.
Your next question comes from the line of credit Lop off so that fiveg.
Hi, Good morning, Thanks for taking my question, So Spencer starting with the balance sheet could you just tell us exiting the quarter.
With respect to unencumbered assets, whether thats aircraft slots or any other.
Substantive economic value and then also with the military weakness via the the stop order movement, but offset here with what's going on in the charter market for main deck freighters.
What how should we think about your debt into.
The ended the quarter and assuming the stop order movement remains in place and we have a similar level of demand in charter what that might look like at the end of year. Thanks.
Okay, Hi, Chris It's Spencer so with regard to.
Other forms of.
Collateral or unencumbered assets, we certainly have some under levered assets on our balance sheet, such as our seven for seven days shades.
In addition.
We certainly have assets that could potentially be disposed. If we were to do that in addition to the ones that we already have where we have no plans.
To do that on any large scale basis.
Yeah.
Let's see the other part of your question was about the military and.
There is a short term.
Stop movement in order for non essential movements the military still moving.
They're moving essential movements, but they're not moving non essential movements and we expect that will be lifted.
Probably June or July.
And we expect that business will come back just fine.
[music].
I'm not sure I completely understood. Your question you are suggesting that perhaps if the military wasn't flying it would have some impact on our balance sheet and I didnt quite follow that.
We're not buying for the military the charter market is so strong right now.
We would be able to.
Utilize those aircraft in the charter market.
And if I could add to that.
I'm sorry, Chris go ahead.
What I was looking for is really given where we are the military and the charter.
If theres a leverage target that we should think about exiting twoq or perhaps into.
The second half assuming things remain where they are now Oh sure.
Sure sorry, I Didnt realize thats, where you were asking Chris.
From a net leverage ratio standpoint.
We we really expect that it's going to reduce.
Fairly significantly throughout the rest of the year again, we didn't provide.
We're not applying the full year guidance, but.
Our goal has been.
For our net leverage ratio to be somewhere between three and four times.
And we expect that it will be there over the remainder of this year.
Okay, and then also with what's going on.
In terms of spot rate.
We'll hear is looking at the tack index.
Should we interpret this at this is perhaps an opportunity for ATM migrates to reset higher when those leases on rollover.
Yes, I think Thats, that's that's a fair fair conclusion, as we talked about earlier. The these are very valuable assets.
And particularly for the foreseeable future and.
That's taken into account as we renegotiate our a semi rates yet and as I said earlier to someone else, Chris that's the great benefit that and they see my customer gets is that they they have this kind of locked in fixed pricing over a longer period of time and so in times like this where the spot market is.
So high.
CMI customer gets that benefit.
Okay and last question has earned premium if you.
Okay. If you answered this before was on another call, but I believe exiting Fourq you had.
Think it was four aircraft in storage and just where that is today and then also the costs that are involved putting aircraft in storage.
And taking those out thanks.
Yeah, Chris. Thank you, yes, there was afford that Weve part, we brought three of them back into service already and it was was really nominal cost.
They are put into temporary theyre different forms of storage temporary storage and long term storage and the costs associated with that very higher cost with the longer term your storing them for and then there are some.
Costs that are involved in getting them back up and running on the line. So the three that we brought back the trip. Some four sevens were brought back up quite efficiently and quickly and in a cost efficient way now the longer you keep them in service there will be other cost like engine maintenance and and heavy check.
Yes that you will incur but just bringing them back online was not difficult. It didnt take a lot of time and it was not costly.
Thank you.
Yes.
Once again, if you'd like to ask your question. Please press Star One. Your next question comes from the line of David Campbell of Thompson Davis The company.
Yes. Thank you for taking my question.
Since March there then a lot of passenger airlines.
Converting their aircraft to fly cargo.
So the capacity to carry cargo.
It's up in my April compared to what was in March but you don't tend to be concerned at all about it is that because you.
The demand is also other oil or some other reason.
Yeah, David Thank you.
Not overly concerned it does have an impact of course any any additional capacity has an impact.
And I want to be careful with the use of the term converting their utilizing their aircraft and maybe doing some.
Taking out of seats and using aisles and things like that but not in the form of full blown cargo conversions.
But sure it has an impact but.
Overtime as as rates settle which they will.
There's a price point below which that will no longer be feasible as well and.
You know, we're not too concerned and Theres also an efficiency factor one of the things that we've observed is that.
The market is accustomed to using freighters and certainly valley, but when you get into loading and unloading main deck passenger aircraft, it becomes quite inefficient and costly and causing more and more downtime. So there are a number of reasons why that's not optimal.
It does tell you how high the rates are that it could still be economically feasible for passenger carriers to do that.
It shows you where the market is right now and and look there are other factors as well the passenger carriers have an interest in keeping their pilots current and flying because if they're not flying.
They lose currency, which adds additional cost and time, if and when they ramp back up again. So there are a number of factors in play and sure. It does have some capacity impact, but we're not overly concerned about it at this time as a long term impact and David its Spencer I'll, just add to that that.
In about 90% of the passenger aircraft.
I have been have been parked or non operating units you know about 21000 aircraft, so 90% of them and normally 50% of the world's airfreight implies in a in a passenger aircraft. So the fact that some passenger aircraft are starting to carry freight.
It is having a very small very little impact.
Dedicated freight or it's just so much different write a passenger.
Aircraft does not have a cargo dori can handle pallets above the wing can't handle palletized cargo.
So you can put a box on a seat or or take a seat out and stack boxes, but it's not the same as being able to move palletized containers, and so forth and so we're really not seeing that much of an impact on our business.
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And my second question as it has mentioned then.
I see that growth recovery in China.
And and cargo demand.
Particularly in March and April.
But in Europe have you seen any comparable inclusion.
Cargo demand in Europe or are they still flat.
Not an appreciable other than China Europe, I think is still has similar dynamics to the U.S. and meeting a lot of the pp.
And I think that will be a big question, we're watching closely commercial.
General freight is coming back, but PE is still a big part of it in both markets.
So that's something we're watching closely and we expect I expect.
There will be I once PB.
Softens theres going to be a strong demand for manufacturing to get back in full business.
So we'll be watching that very closely and it's Spencer I'll just add that you know as the quarter progressed are now the first four months of this year have progressed.
Originally things were really slow manufacturing was was not taking place in Asia as we talked about and then what started to move was really sort of.
Intra Asia.
You know goods to be used within the manufacturing process like raw materials were really moving to help get the factories ready.
And so thats what was moving first and then.
Then.
Then the factory started to produce and and so now the types of things that we're moving include Hi Tech automotive retail components machinery parts used in manufacturing. So all of that as started to move in a very strong weigh in as John said.
At some point that BP.
Movement will will slow.
And then there is really going to be a big push to get all of these goods back.
Two to two retail.
Okay.
Hi, Thanks, Thanks for your answers thank you very much.
Thank you David.
Your next question as a follow up from Scott Group with Wolfe Research.
Hey, Thanks for the follow up so is there any way you could share from the initial guidance that you gave us a few months ago, what the what that to Q.
Originally it was supposed to be in your mind, and then is there anyway to quantify the military headwind on that passenger side.
Let's see so with regard to.
The second quarter.
Certainly charter is.
Much much stronger.
We now as John said, we're bringing several aircraft back that we're operating and we've now operation operationalize. The triple seven so those aircraft were not expected to be in our numbers and so now that that's for large aircraft that are in charter, earning very high yields.
So huge benefit to our second quarter earnings.
Those we've also because of what's going on.
We've been significantly reducing our costs and working very very hard.
Doing that.
And.
Your second part of your question was about the military.
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So the the military.
Has cancelled or or not ordered a significant amount of passenger flying.
So we haven't really quantified that for you Scott but.
It was a significant reduction in the first quarter, we expect it will be significant reduction in the second quarter.
Fortunately it is much more than offset with the strength of the overall charter market and if I could add to that Spencer.
There is a and offsetting factor as well the fact that the military demand was was down as much as it was allowed us to redeploy some of our crews to bring back to three some four sevens as quickly as we did because crewing is an important feature it doesnt make up for the full GAAP of that but with that.
Out if there wasn't that softness of the military was that these higher levels. We may not have been able to capitalize as much on the charter 747. So it also allowed us to get some pilots through training that gives us a better opportunity to be positioned when the military ramps up to full strength, which.
I expect we'll be by the end of June so.
Overall, not the worst case scenario, frankly, and a good opportunity for us to position.
To further leverage the our scale when when it ramps up again.
Okay and then my last question. So I understand your view of why this is good for HCM I, maybe can you just offer some perspective on.
One of the planes was returned to you and if you see risk of any other.
Claims getting return.
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I assume Scott you're talking about the trickle side of that was returned a year ago.
Well that was a year ago. So that was not that wasn't that wasn't than in 2000 early 2019.
Yeah.
Yes.
And that's when we put back in service.
Okay. So I guess, Okay. Then that question does not apply okay. Thank you guys.
Thank you. Thank you.
Your next question comes from the line of credit cycle Appaloosa Fiveg.
Hey, Thanks for taking my follow up so just just didn't add ons and Scott's question on the military side.
And again apologies if you addressed this in your prepared remarks, but on it with respect to utilization at zero being none of the planes are moving there on the ground and five.
You know on all cylinders.
Could you just sort of are we at a three there and is there an opportunity to re purpose those planes for other mission and then the second question I realize you have to 10% interim pay rate here.
And a few other.
Moving pieces here on the piano, but.
You know we're right now.
In a pretty favorable environment for for freighter demand and I think that will probably persist as belly capacity.
It's going to come on slower and on an absolute basis I think a lot smaller as the passenger airlines are now saddled with with higher debt here. So so why isn't there an opportunity here to work towards you know how do we get towards business, perhaps three times with respect to leverage or or even lower here.
Assuming that you have enough aircraft in the fleet to meet demand and if you don't want to acquire aircraft.
Perhaps go out and and ran some I'm guessing right now with there's there's probably opportunities in the wide or even medium wide bodies.
With respect to favorable rates sense, given all the the pressure on the.
Eco system right now in aviation. Thank you.
Sure. So I'll start on the in the first part with regard to the military demand, even though theres a stop movement order there that does not mean, they're not moving anything they're just being very cautious.
And limiting the amount of military movements. So on your question on a zero to five it's not zero and it's not five I would put it something.
In the 2.25 range of on your scale.
And so it's not at its at a complete halt.
With regard to incremental capacity.
Going into the year, our planning was.
To have those four aircraft part.
So.
There was a little bit of a silver lining in some of that floor military business as I just talked about because we were able to redeploy the crews we expected in the military to ramp up on the very lucrative charter flying and backfill with additional through hiring and training.
So yeah, but as we look forward.
We are always interested in growth opportunities and we will continue to be.
We want to be very careful we've we've ramped up quite quickly.
The four aircraft, which has talked about the three triple sub skews me three seven fours in the triple seven.
Over a short period of time.
We're also keeping an eye in the market so as to not over again too much capacity as we're watching closely what happens on the on the back end of this that we're very optimistic.
But cautiously so.
Given the market conditions.
We think manufacturing I think manufacturing is going to.
Continue to search on the back end of this but you also have the fact that.
But.
Significant unemployment in the U.S. and what's the consumer market going to be those are the things were looking at as well as concurrently looking at available aircraft on the market.
So so if charter remains where it is now in the military stop order moving is lifted in June or July here in HCM by rates reset higher and again I know you have the 10%.
Hey, raise and 10 and that hit to EBITDA, but is there a reason why we shouldn't think now if demand continues and we have let's say a seasonally in line or perhaps outperformance with respect to peak season, why you can't see leverage.
No go below four by the end of the year or perhaps get to three and a half.
Yes, I think I'll, let Spencer talking I think he did say we're expecting it to go below four but Spencer yeah, that's exactly right.
Our target has been to get between three and four so certainly ticket below four.
Somewhere around the mid threes, and we expect that will be in that area by the end of the year. We expect our net leverage ratio will decrease continued to decrease as the year progresses.
Okay. Thank you.
Thanks, Chris Chris.
Your final question comes from the line of David Ross at Stifel.
Thanks for squeezing me back in Spencer you talked in the release about the core Capex number for 2020, what additional capex might there be on top of that for the year. What would you think of is the total capex number.
So in addition to core Capex, which is primarily.
Parts.
I used for aircraft.
In addition to that would really be.
Some engines and.
We typically.
Don't provide an estimate on that but.
The it's in the.
I don't have dozens of millions.
Because we will need to.
Capitalize overhauls, so that counts was core capital expenditures to capitalize some overhauls.
And we are also upgrading our Gen X, which is the genex to be which is the engine on the dash eight.
We continue to.
Put those in for overhauls and upgrades and those are also capitalized so.
Again, so we'll have some genex to be engines, some see of Sixeighty, which is the engines for the some core sevens.
Probably somewhat similar to previous years [noise].
Okay $90 million corn Capex, maybe at some are from 120 140 total.
A bit more than that that more than that.
Okay.
And because we'll have that have capitalized overhauls, so its normal maintenance, but they are capitalized for.
The Genex engines.
Okay.
And then you talked earlier on the dry lease side about.
[music].
You will value of passenger planes coming down and maybe an opportunity for increased freighter conversions.
In addition to dry lease how do you think about an opportunity to potentially trade up on the existing fleet, whether it's in charter or a CMO you guys have a fairly young fleet as it is but maybe there's a couple of planes that are little bit older that you could replace at a lower rate over the next year. How are you thinking about that.
Yes, well I think Thats, David will be looking at that and for example, theres potential with the 767 is that we're flying in our military business.
They be right for conversion and then to replace with some more.
Modern and recent Sevensix on passenger aircraft those are the kind of things were evaluating all the time and we got our eye on that.
Great. Thank you very much.
Thank you Dave.
Thank you at this time there no further questions gentlemen are there any closing remarks.
Yes. Please.
Thank you operator, and thank you all for your questions on behalf of all our employees Spencer and I would like to thank you for your interest and Atlas Air worldwide. We appreciate you sharing your time with US today and we look forward to speaking with you again soon thank you very much.
Thank you for participating in today's first quarter 2020 earnings call for Atlas Air worldwide. You May now disconnect your lines and have a wonderful day.
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