Q2 2020 Atlas Air Worldwide Holdings Inc Earnings Call
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Ladies and gentlemen, this is the operator today's topic is scheduled to begin momentarily until that time, the ones where did you say sampled the heat for your patience.
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Ladies and gentlemen, thank you for standing bars, and welcome to the second quarter 2020 earnings call for Atlas Air worldwide.
At this time, all participants are in listen only mode.
After the speakers presentation, there will be a question and answer session to ask a question journey depression.
The press Star one of your telephone.
Please be advised that today's conference is being acquired if you require any brother assistance. Please press star Zero I'd now like your hand, the call the children's your speaker today.
Your worldwide. Thank you. Please go ahead.
Thank you, Rob and good morning, everyone.
Mcgarvey Treasurer for Atlas Air worldwide walk into our second quarter 2020 results conference call.
Today's call will be hosted by John Dietrich, Our Chief Executive Officer, and Spencer Schwartz, our Chief Financial Officer.
Today's call is complemented by a slide presentation that can be viewed at Atlas air worldwide Dot com under presentations in the Investor information section.
As indicated on slide two we'd like to remind you that our 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 and 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 actually see reports.
Any references to non-GAAP measures are meant to provide meaningful insights and a 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 draw your attention to slide three and turn the call to John Dietrich [noise].
Thanks, Ed and Hello, everyone welcome to our second quarter earnings call.
Clearly the world has changed in ways, none of us could have ever imagine just a few short months ago.
It's heartbreaking to see so many people so adversely impacted by cobot 19.
We're all grateful to those working on the front lines in this corona virus fight, including all the healthcare workers treating the patients the doctors and scientists working in the labs to bring an effective vaccine to market as soon as possible.
And so many others, who are contributing to the relief efforts.
We had outlets feel tremendous sense of pride purpose and responsibility in the essential role, we're playing in the global supply chain.
The goods, we carry quite literally help save lives.
There are also fueling the economy and supporting jobs.
The entire Atlas team has stepped up and delivered.
High quality service for our customers. Despite the many challenges presented by this pandemic.
Including a variety of travel restrictions testing protocols.
Warranty mandates and other operational challenges.
I couldn't be more proud of all our employees in the work, they're doing particularly our crew and ground step out in the field.
I'd like to thank them off for their extraordinary efforts.
I'd also like to take this opportunity to acknowledge and thank the U.S. government for all the support provided to our industry as we continue to manage through the regulatory and operational issues created by coated 19.
At Atlas safety is and will continue to be our top priority and we're taking every precaution to safeguard all our employees.
We also appreciate our customers and vendors commitment to safety and their partnership and unity as we protect not only our employees, but our operations as well.
Now I'd like to turn to the business and our second quarter results on slide four.
Atlas Air worldwide had an exceptional quarter as revenue and earnings continue to exceed our expectations.
These positive results were primarily driven by the team capitalizing on strong demand and higher yields in our commercial charter in South America businesses and we also continued to provide the U.S. military with essential services in our AC and my customers, who well above their minimum guarantees.
As many of you know we operate the world's largest fleet of 747 freighters along with large fleets of Triple 776 Sevens and seven three sevens that play a key role in our customers operating networks.
Our fleet and our service offerings are unmatched in this industry.
To serve the increased demand were seeing we quickly reactivated three of our 747 400 converted freighters and operationalize the triple seven freighter from our dry leasing business.
This enabled us to serve the strong and profitable shorter term demand while also entering into numerous new long term charter programs at attractive yields.
We expanded our long term charter business to include new agreements with manufacturers, such as HP Inc. and large freight forwarders like DHL global forwarding apex logistics, DB Shanker flex port and Yodice, all that wanted to secure committed capacity from us.
In addition, our second quarter results benefited from the semi aircraft, we added to our fleet in 2019, including five incremental seven three sevens for Amazon to incremental Triple Sevens for DHL and two incremental 7474, hundreds burden Nippon cargo airlines.
And we also placed an existing 747 400 NTC My service with El Al earlier this year.
The quarter also benefited from lower aircraft rent and depreciation lower fuel prices and an expected refund of excess aircraft rent paid in prior periods.
These benefits were partially offset by higher maintenance expense related to additional engine overhauls and other maintenance, we performed to take advantage of attractive vendor pricing discounts and slot availability in the current environment.
We also experienced lower AMC passenger demand as the U.S. military took precautionary measures to limit not a central travel.
Lower 747 dream lift or flying due to Boeing slowdown a bit 787 dreamliner production.
And higher crew costs related to that 10% pay increase we provided to our pilots effective may onest pending the completion of our joint collective bargaining agreement and premium pay we're providing for our pilots for operating operating into certain areas outside of the U.S. that have been significantly impacted by cobot 19.
During the second quarter, we executed on very favorable business opportunities in a challenging operating environment with the safety of our employees is our top priority.
We continue to leverage the scale of our World class fleet, the scope of our global operations in the flexibility of our business model to capitalize on the current favorable market dynamics.
As we take advantage of opportunities to grow our business. We're also mindful of the important of disciplined financial management.
Particularly in the evolving and uncertain environment.
In that regard, we've taken a number of steps, including significantly reducing non essential employee travel limiting groundstaff hiring in the use of contractors.
And tightening spending in virtually every area of the business.
We also remain focused on ensuring that our resources are allocated to opportunities that generate the best returns.
With that in mind, we decided to exit certain older unprofitable 737 400 aircraft.
And we've renegotiated other customer agreements to drive enhanced profitability as we committed to do.
We're also taking actions to increase our liquidity and further strengthen our financial position.
This includes the sale of certain non essential assets and our participation in the cares Act payroll support program for air cargo carriers that we announced in June.
As indicated on slide five were reintroducing, our full year 2020 outlook.
Reflecting our first half results in our current expectations for the balance of the year and subject to any material cobot 19 developments, we expect to fly more than 330000 block hours. This year with about 70% of those in the AC and my segment in the remainder in charter.
We anticipate full year 2020 revenue of just over $3 billion and adjusted EBITDA of approximately $750 million.
Our outlook also anticipates approximately 50% of our full year 2020, adjusted net income to occur in the second half the year.
That would result in our 2020 adjusted net income being more than double that of 2019.
As many of you know we've historically generated the vast majority of our earnings in the second half of the year.
This year, however, and due to the strength of the first half we anticipate our full year 2020, adjusted net income to be more evenly split between the first and second half of the year.
Maintenance expense for the year is expected to total approximately $480 million with depreciation and amortization totaling about $255 million and core capital expenditures, which exclude aircraft and engine purchases are projected to total approximately $80 million to $90 million, mainly for parts and components for our.
Fleet.
We also expect our full year 2020, adjusted effective income tax rate to be approximately 23%.
Looking at the third quarter, we've seen commercial charter yields moderate from the second quarter, but they still remain elevated in very attractive compared with typical years for this yields for this time of year.
We anticipate that our adjusted net income for the third quarter will represent approximately 20% of our full year results.
This would be more than six times higher than adjusted net income of $9.5 million in the third quarter 2019.
We also expect to fly more than 85000 block hours in the third quarter with revenue of nearly $800 million and adjusted EBITDA of about $170 million.
So this will be a good time for me to Spencer to provide a review of our second quarter 2020 results. So Spencer over to you and after which I'll be happy to take your questions.
Thank you John and Hello, everyone.
Our strong second quarter results are highlighted on slide six.
On an adjusted basis EBITDA totaled $247 million with adjusted net income of $123.2 million.
On a reported basis net income was $78.9 million.
Our adjusted earnings in the second quarter included an effective income tax rate of 21.6%.
Moving to the top of slide seven.
Operating revenue totaled $825.3 million in the second quarter.
Hi, My revenue during the quarter, primarily reflected lower block hours driven by the redeployment of 7.7 400 aircraft to charter to support the numerous new long term charter programs that John noted.
Partially offset by an increase in Triple 7737, and 747 400 see lifeline.
Higher charter revenue was primarily driven by increased flying.
And the higher average rate per block hour.
Block hour volume growth, primarily reflected strong demand for freighter aircraft driven by the disruption of global supply chains.
The reduction of available cargo capacity in the market.
The redeployment of seven for some 400 aircraft from AC line and a triple seven freighter from dry leasing.
And our ability to increase utilization.
And dry leasing revenue primarily related to changes in leases and that just disposition of certain non essential aircraft during the first quarter of this year.
Looking now at the bottom of the slide.
Segment contribution totaled $210.2 million in the second quarter.
AC My earnings primarily reflected increases in semi flying and a reduction in aircraft rent and depreciation expense.
These benefits were offset by the redeployment of 747 400 aircraft to charter.
Higher heavy maintenance expense, including additional engine overhauls to take advantage of availability and pricing discounts.
And higher pilot costs, including the 10% pay increase and the premium pay for operating in certain areas.
Higher charter contribution was also driven by the increase in commercial cargo yields and demand for freighter aircraft.
Charter contribution also benefited from lower aircraft written depreciation.
And the redeployment of aircraft for May see mind dry leasing.
These benefits were partially offset by lower passenger demand from the us military and the higher heavy maintenance expense in pilot costs.
In dry leasing.
Lower contribution was primarily due to changes in leases and the disposition of certain non essential aircraft during the first quarter.
Now turning to slide eight.
As this slide shows our net leverage ratio improved significantly during the second quarter decreasing from 4.4 times at the end of the first quarter to 3.0 times at the end of the second quarter.
And we expect further improvement as the year progresses, as we benefit from increased EBITDAR levels, a strong cash balance and maintaining debt payments of approximately $70 million per quarter.
We ended the second quarter with cash, including cash equivalents restricted cash and short term investments totaling $739.2 million compared with 113.4 million at the end of 2019.
Our improved cash balance at June Thirtyth, primarily reflected strong cash provided by operating activities and also included a funds we received through the payroll support program.
Net cash provided by financing activities, primarily reflected proceeds from debt issuance.
And from our revolving credit facility, partially offset by payments on debt obligations.
Net cash used for investing activities, primarily related to core capital expenditures and spare engines and upgrade kits, partially offset by proceeds from the does disposal of certain non essential aircraft and engines.
As a reminder, our debt has a low weighted average coupon rate, which now stands at 3.0%.
And the vast majority is secured by our aircraft assets, which have a value well in excess of the related debt.
We remain committed to a strong balance sheet.
And as John outlined earlier, we are taking actions to mitigate the impact of any continuation or worsening of the pandemic hi, reducing costs.
Enhancing liquidity and strategically allocating resources.
Now I'd like to turn it back to John.
Thank you Spencer and moving to slide nine.
As I mentioned earlier Q2 was an exceptional quarter for Atlas Air worldwide.
And we have a very favorable outlook for the remainder of 2020.
Atlas will continue to play in a central role in the global supply chain.
And we're taking every precaution to keep our employee safe and ensure that we continue to transport the goods the world needs. During these challenging times.
With an exceptionally talented team of employees a strong balance sheet.
Fleet and operating capabilities that are unmatched in our industry will continue to deliver safe and high quality service for our customers.
And strong results for you our investors.
So with that operator, I'd like to turn it over to you take our first question. Thank you.
As a reminder to ask a question you will be depressed start wondering your telephone to withdraw your question press the pound key.
And your first question comes on the line David Ross from Stifel. Your line is open.
Yes, thank you very much and good morning, gentlemen.
Hi, Dave wondered.
Hi, I wanted to first talk about.
The longer term charter business that you mentioned.
The opportunity here with a strong yield environment to lock up some of these.
Transactional customers for little bit longer than that.
A quick transaction.
Do any of these extend after 2020 or is this kind of good to go to take us through year end, and then who knows after that.
Yes. Thanks, Thank you David and the answer is yes. They do extend beyond 2020, the characterization of long term reflects that from from our perspective and the way we're looking at them as they are very much HCM I like.
While taking advantage of.
The current market dynamics in the yields that the market is gaining right now so.
Yes.
Well through 2020.
Yes. Thanks.
Dave if I can just add.
Some of these agreements.
Several of these agreements.
Go into.
The second half of 2022 Im several.
Our.
Our latest 21 so.
There.
There longer term charter arrangements they are much more HCM I'd like in nature.
And I've talked about before.
The good blurring between AC am I in charter that has started to happen in our business in these new long term charter arrangements Im sort of further that so you can think of this as you know sort of.
Medium shorter term CMI or or medium or longer term charter if you want to think of it that way.
Okay. That's helpful. It's really a long term contract not just long term for charter kind of long weekend.
Or something along those lines.
These are years.
Yes, John you mentioned in the comments that the South America businesses were particularly strong as South America business.
What was driving that can you comment a little bit more about the regional.
Strength.
I think it was a combination of of a number of factors of course the reduction in overall capacity in the market was a contributor we're a strong player.
With the large wide body aircraft, we have in that market to begin with.
So.
When you take the reduce capacity along with the schedule reliability that we have and the connectivity of our network. All those factors contributed to really strong yields for us and strong demand.
And Dave we have.
Relationships with.
All the big Forwarders, there and the big.
Charter movers and.
Atlas's.
One of if not the top.
Mover into and out of the Miami Airport from South America, and so and that relationship and that commitment to that region.
Is really helpful.
And then last question just on the pilots.
You saw the.
At the 10% pay increase go into effect.
Last quarter, which I'm sure with well received has there been any improvement in the negotiations with talks with union since the pay increase went into effect any comments around service levels. They also seen any improvement.
Yes, David I think.
We've seen a lot of changes over the last number of months.
In the pilot situation we did.
Offer in the Union accepted the 10 preprint, 10% pay increase we work closely with the Union leadership to enter into an what's called a memorandum of understanding and enable you to provide premium pay.
For those flying into some of the international Hot spots with Colvin, that's gone a long way to help the operation and our crew members make a little more money and the company to continue operating.
All that coupled with the negotiations that now have a defined path forward in the merger we've talked about earlier the courts of weight in the arbitrators of weight in and the clock is now ticking on the nine months of bargaining.
That started in May of this year and the parties are continued to to negotiate in bargain.
So we've seen a lot of forward progress.
As well as a tremendous effort from our crew members.
At a time, where where the world needs them, the most and Thats now through this pandemic. So it's.
It's been a great.
Operation and our customers are happy and in our pilots have the opportunity to take advantage and enjoy some of the the benefits with the pay increase in premium pay.
Excellent. Thank you.
Thank you.
Your next question comes from the line, while Lubbock from CJS Securities Your line.
Good morning, and congratulations on the just outstanding operating performance.
Thanks.
Hi, I wanted to start can you maybe talk a little bit about the.
Direct contribution distribution between HCM lie and charter in the quarter and.
Obviously.
Basic and my contribution was lower I would assume related to the heavy maintenance and timing of maintenance how should that.
Factor into the back half of the year for AC line, how should we think about direct contribution because they just swung so while this quarter as long as a little guidance there.
Yeah sure Bob Spencer.
Yes and CMI.
We had higher heavy maintenance, especially incremental engine overhauls and other repairs we have.
You know given what's happening with some of the passenger airlines, we have opportunities to take advantage of open windows for performing maintenance, so there's slot availability.
In addition to that.
We are being offered.
Discounts that we can take advantage of and so we're performing maintenance at lower costs, and so we're saving and quite a bit on that so we've we've accelerated some maintenance that perhaps would have been performed and later this year or especially maintenance into next year. So we've accelerated some of that to take advantage of the.
And then.
That has an impact we allocate those costs based on block hours.
And so 70% of that gets allocated to a CMI.
And.
So anyway that has an impact certainly on on on those results.
Theres maintenance in 2021, as I said that we're going to move into this year.
Some we already did in the second quarter I just mentioned, but some later this year and so that will impact that contribution if you were to back out.
The the incremental maintenance if you were to back out the crew premium pay that we are paying.
Menu at it back out that the 10% increase.
You'd see an AC EMI margin in the second quarter that was higher than the second quarter of last year.
So that's something to think about if you think about sort of a normalized run rate.
Got it okay that's great.
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Thank you and then obviously you've discussed over the last call a little bit works today, the long term charter contracts.
Hi.
Have they impacted this quarter and in particular or is this really more for the kind of back half and going out through.
Partially 2022, as you mentioned and how does that decision made to call. It a charter contracts.
Versus an AC am I kind of what actually it does distinguish it now.
Yes. Good question. So the contracts there are a good number of them, which is great and we're entering into those it's great for the customer gives them the capacity that they're looking for at less than.
Current.
You know market really high yields.
Great for us because they're generally higher than a typical.
CMI rate and the term as we talked about as longer.
So it's kind of a win win for the customer and for the company.
To your question about.
What's the difference between AC amine charter as I said, it's starting to get Blurrier, but.
In.
In charter the customer generally pays on a per trip basis.
In all all in rate which includes fuel.
In HCM my customers typically pays for fuel on it so and pays us on a block hour basis, not a per trip basis. So the differences are getting really slight.
But but those are the primary ones I think also there are lot of other ancillary services.
In the charter side that are not necessarily included in the CMI product they can be.
On a kind of a line item basis and I'll just touch on the fuel that's been sort of mentioned while fuel is included there are also protections in our agreements for wild swings in fuel is should that happen and its indexed to account for.
Significant swings that could occur over longer periods of time.
Got it okay, great and last one for me if I could just as it relates to the obviously strong environment can you talk about.
And my renewals, assuming you're still getting some of those as well you're shifting obviously some to long term charter, but as a semi contracts come up how is that renewal process for you and has that been playing out in a directional.
Yeah. Thanks, Bob we feel really good about that it's a good market to be in cargo right now and I think those a semi customers that we do have are very pleased.
They have them on a long term basis I think prospective.
Customers and existing customers, who maybe thinking about more aircraft.
I think it's an attractive proposition for them to to fix a their rates and do so on a market competitive basis.
Generally speaking the charter rates are little bit higher so it's a way for them to secure.
There are costs and take advantage market. So we're excited about the future prospects of both the AC HMI and the long term charter arrangements for that reason.
And Bob.
Bob I'll, just add its Spencer John talked about earlier the sort of.
Flexible nature of our business or the resiliency of our business and one of the great benefits that our company has is to we have a CMR. We have shorter term charter we have longer term charter we have dry leasing and we can move aircraft between all of those to take on best advantage of each of those marketplaces and to serve.
Each of those customers.
Got it sounds great. Thank you very much.
Thank you thanks, Tom.
Your next question comes from the line of Helane Becker from Cowen Your line is open.
Thanks, very much operator, hi, guys. Thanks for the time.
Just a couple of questions on this seven for Sevens that you brought back.
Where are you did you write off last year accelerate depreciation and do you have to reverse that at some point this year.
Sure Good question Helane.
No we temporarily park them. So we continue to depreciate them and bringing them back was a really easy decision.
It was very excuse me inexpensive to bring them back they needed just tiny amount of maintenance, we quickly perform that and got them back going so im not much of an impact on the business overall, and then we've been really able to use them quite well, especially during the second quarter.
For sure and then we expect to continue using them at least through the end of this year.
Okay. That's very helpful. Thanks Spencer.
Other question actually is.
The 7374, hundreds that John referred to as you're getting out of them.
And I saw that there was a southern aircraft in modification.
I guess in China, being being modified I guess, the aircraft and 800 said.
Operator by southern so I guess the assumption is it.
So thats going to the 7378 hundreds.
Is there going to be a write off associated with the 400 parking is what are you doing with those planes.
So the 77 400 delaying you may recall.
In a prior earnings call, we talked about reviewing all of our operations and phasing out those that were unprofitable. This was one of them.
And so we don't in southern did not on those aircraft there or third party aircraft. So they were CMR.
So they'll go back to they'll go back to the customer.
Okay.
Im sorry level, yes, and the in the 7378 hundreds you are talking about yeah southern has.
A few more 7378, hundreds coming and we look forward to bringing them online.
Okay are those CMO why are you running.
Those will be CMO.
Okay. That's.
That's very helpful. And then if I could just sneak one more question about the peak.
How are you thinking about the peak this year.
You are seeing such demand.
Yes, Spencer you when I talked about that.
The demand you're seeing.
A lot of charters.
Well what are you thinking about the peak I mean is this sustainable.
Well, we feel really good about the peak I do.
And I, absolutely think it's sustainable this year.
As we're seeing in the media and in the industry.
The expectations of passenger belly capacity.
To come back into the market have slowed dramatically they will eventually come back but.
With the call it resurgence or continuation of coated.
That's not happening as quickly as I think many hoped.
That plays well for for our business frankly, and that coupled with a lot of the secured agreements we already have in place that we do for the peak season, a lot of those deals are already fixed as well as the demand were seeing just generally and not just PE, but both ERP in general.
Manufactured goods.
That we have capacity still to sell and we believe the yields will continue to be very strong.
For the weeks and months to comment certainly through peak and Helane its Spencer I'll just add.
Just a little bit to that is that we expected peak will be strong for general cargo like consumer products and we think it will be strong for E Commerce and express shipments for sure.
For the all the reasons that John talked about another indicator for the Airfreight peak demand, obviously, we're out talking to our customers all the time they expect the same but another indicator.
His ocean carriers are currently enjoying a good peak and that's usually a pretty good indicator.
You know for us and what our customers expect.
Based on what what.
We are hearing and we're seeing.
We really don't expect.
Things to ticket back to the way they used to be from a capacity standpoint overall.
Certainly well into 2021.
If at all.
That's that's really helpful. Finally, you get to pet.
I don't argument.
Yes.
[laughter].
Thanks Clynt.
Hi, again, if you like to ask a question. It start wondering your telephone. Your next question comes from spot group from Wolfe Research. Your line is open.
Hey, Thanks morning, guys. So I just want to follow up on the long term short term charters stuff. So can you just directly tell us how how much of the commercial charter now is long term charter and then can you just get Directionally talk about where these rates are relative to a year ago.
Joe and can you just clarify our these new long term charter rates are they have locked in through next year or to the or the rates still variable.
So the rates are locked in and as Spencer said. These deals are very CMI lot like I'll caveat that in say the fuel piece of it there are adjusters, if fuel swings heavily in one direction or the other but other than that they're locked in and they're locked in for for the longer period of time.
So.
Again, I would think of it in terms of HCM I like in terms of percentage of the total charter business.
I don't know Spencer if you have.
Percentage number but.
You see from from my prepared remarks, there're a number of new deals five or six new customers in that regard so you're looking at.
At least an aircraft per customer there so it's sizeable.
Yes, Scott I would just add from a sort of percentage standpoint, you know about 70% of the block hours that we fly approximately are in.
CMI and so approximately 30% that are in charter and then of charter typically half of that.
Flying for the us military and that leaves the other half for commercial charter and then of that other.
Half for commercial charter, so approximately 15% of our total block hours.
About a third of that is flying we do around South America.
Where rates have been very very good over a number of years and we have fixed block space agreements with a number of leading forwarders and then about another third of the block hours is for these.
More programmatic charters the longer term charters that we have at fixed rates as John said index for fuel and then that leaves the other sort of third of that are about 5% of our total block hours.
Our allocated more towards the AD hoc charters and those are.
Out there in the spot market.
Enjoying the the rates that are out there in the marketplace.
And then Directionally those long term charter rates that you're talking about how much.
How much are those rate. So we can see how much the short term charter rates are but I just don't know how to think about the long term charters.
Well, they're very customer specific and we don't want to talk about customer specifics.
On an open call but.
We can certainly say that.
They are consistent with what the overall supply demand environment is like they are consistent with a very very strong.
Transcontinental airfreight market and demand for wide body international aircraft that we operate.
So.
There there are attractive rates.
Okay, and then just just lastly, Spencer for you how much 2021 maintenance will pull forward into this year and then when I look at the fourth quarter guidance or the implied fourth quarter guidance, it's sort of flat year over year relative to just massive earnings growth in second and third.
Quarter, maybe just some thoughts on why that would be.
Sure both.
Really good question Scott.
Let's.
Let's start with maintenance so for for 2021, typically we don't provide.
An estimate of.
We typically wouldn't provide an estimate for 2021 heavy maintenance costs.
Until we're in the beginning of 2021, but.
As we've talked about moving this forward, we want to provide a little bit more so we.
We expect 2021 heavy maintenance cost to be around $60 million lower than 2020.
We previously expected 2021 to be a very heavy year in terms of engine overhaul and airframe check requirements and as we've talked about we had an opportunity to accelerate some of the engine inductions into this year into 2020 to take advantage of the slot availability in the opportunities for vendor pricing discounts.
So those actions should bring 2021 heavy maintenance costs closer to a sort of normal run rate. Although it's still may be somewhat higher than 2018, 19 average and then.
Scott you had another good question about the fourth quarter.
So the fourth quarter of this year compared to the fourth quarter of last year couple a few big things to to kind of point out there.
With regard to.
Volumes and yields we should see tremendous advantages in the fourth quarter of this year versus last year.
Especially when it comes to those volumes in yields.
The fourth quarter. This year will have higher heavy maintenance cost as we have six incremental engine overhauls CF Sixeighty engine overhauls as I just talked about.
The fourth quarter of last year had a refund of excess rent.
That will be greater than the amount this year.
We also this year have the crew pay increase the crew premium pay.
And military reductions of flying volume reductions of military flying and then but offsetting that a little bit is we also have.
Cost reductions throughout the company so factoring all those things together because of the higher heavy maintenance and the prior year refund of excess rent. If you were to strip that out from last year.
Then you'd really see the benefit of the.
The yields in the volumes that were going enjoy this fourth quarter.
Okay. Thank you guys.
Sure. Thank you.
And once again, it's star one to ask a question. Your next question comes to life, Chris Stressful Uplifts from Susquehanna. Your line is open.
Good morning, everyone. Thanks for taking my question.
Chris Spencer just want to make sure I heard the what you said the two in response to Scott's question that 5% of your block hour.
Book is tied to the spot market.
Approximately we just giving rough approximation of how the block hours breakout yes.
Okay. So I am guessing with the move to these more hybrid charter in HCM I contracts that there's been some concession with respect to pricing.
Just council, what we're seeing in some of the rates like to tack index up do you think that those rates are competitive enough where some of the.
Players or marginal players in the market lets say delta or Alaska have been getting into this market to backfill lost main deck load factors do you think that where you set these rates, there's an opportunity here to drive share to Atlas or some of the more natural players in this.
Market. Thanks.
Sure Chris.
So the rates as we talked about for these long term charter arrangements are they are very attractive rates.
As far as.
We think business is certainly being driven to Atlas and you can see the number of contracts that we've entered into.
They are great contracts over a good period of time.
As far as I'm talking about other carriers.
I don't really think thats, our place to talk about that as far as the passenger especially the U.S. operators.
They were they were operating.
Passenger planes as freighters.
And that really help them keep their pilots current and help them.
You know generate some business because the passenger business was down so much.
But you know in yields are really.
Escalated like they were in April and May.
Perhaps that makes more sense and when the government is.
As essentially the U.S. government is.
Helping to pay for employee costs than you know those those airlines can take advantage of those things, but as yields have come down and if the government funding.
May or may not be there going forward. That's a decision obviously they have to make and really is in our place to comment on yes, I'd like to weigh in on that a little bit as well Chris.
It's a total value proposition between the assets in the service offering that we bring to some of our long term charter customers.
The the passenger carriers.
In using the passenger aircraft for freight for example.
There there is a price point at which it makes sense for them and not but I would not say, it's a comparable product they're not capable of handling the main deck freight the loading and unloading is inefficient.
But in a high demand environment, there is business for them to do that and if they can cover their variable costs and get some contribution they'll do that.
But we think of the type of customers, we've laid out here as looking for the total value proposition and the capability that we bring from a schedule standpoint from a loading standpoint from a distribution standpoint, so odd that garners a rate and I would argue a premium ray.
Great and taking advantage of the market that were written as Spencer notified so I think too.
For that reason and if you look to some of the durations of these contracts and speaking to an earlier question I think Helane asked about the duration.
These are longer term contracts and these are sophisticated buyers who are taking a physician and committing to capacity for this long term, which speaks favorably for the air cargo market going forward and for our business.
Okay, and then my follow up John or Spencer. So you know, let's hope this is a once in a 100 year event.
With coded.
But this is certainly unique opportunity here for.
Cargo operators or as I say, the more natural players in the market. So.
You have I'm guessing expanded flying with Amazon due to E commerce.
No capacity that you compete it with the.
Main deck isn't coming back lets say for two to three years you have this cost reduction program I don't think you've put any targets around there but.
That's that's out there and of course, you have the outstanding CBVA with the I'd be keys. So we put all these together and we assume.
Asms for.
The passenger airlines are not going to hit pretty Colby levels for say two to three years, what's driving why can't we see 10% to 15%.
EBITDA growth for the next two to three years and then you start to work down your leverage to three and hopefully something to closer to two and a half. Thanks.
So on I mean, the number of things you identified again speak very favorably for us.
We're.
Looking to the future with with optimism, but also with with a realistic view as a we talked about the regulatory environment should cobot continue.
Much longer into the future things can get disrupted pretty quickly and that could have a a pretty.
Immediate impact potentially.
But absent that and taking advantage of the market fundamentals that were really strong coming into this.
No.
We havent rolled out the kind of performance you're talking about when you mentioned the the debt ratio were just about there now.
So.
The EBITDA growth, we're excited about the future and we plan to continuing to focus on how we we grow EBITDA going forward.
Thank you.
Thank you.
Yes, we have a follow up question from a line of Scott Group from Wolfe Research Your line open.
Hey, Thanks, guys. So can you can we just give an update on the military.
How much was that business down how much is recovering and then you said something about military down in the fourth quarter I think thats when the new fiscal year starts and maybe just give us an update on the share.
And expectations for the next fiscal year.
So I'll give an overall view of the military and how that played out and then Spencer can get into some specifics on the numbers, but you know as a result of the stopped move order.
That the Deo D issued there was a a slowing it didn't ses, but a slowing of the military business, particularly in the passenger side I was a precautionary to protect our troops in their families from the spread of covert.
And.
There was essential movements that was that we're continuing to go both passenger and cargo, but the passenger side was more heavily impacted cargo was down but somewhat steady.
The Scott move order a restriction started to lift in a they were scheduled to expire at the ended June and towards the beginning of June they started to ease in more exceptions were were permitted so we've seen a both cargo and passenger return and going forward.
We expect that trend to continue we expect.
Passenger demand to normalize to what the levels were.
Pre coded and cargo to continue at a at a strong pace. So Spencer I don't know if you have any specific numbers you want to sure.
I'll just add.
Scott that our share or what the military cause entitlement.
Has remained fairly steady at 53% to 54% for both cargo and passenger flying.
And then I think John cover the trends really well.
So overall, we expect.
Military flying this year to be down from where it was in.
Previous year.
But as John said, we expected to kind of get back to what had previously was.
Okay. Thanks, and then just my last one for you John So generating lots of our free cash are you going to be buying any planes or is this all going to be going towards the balance sheet and then bigger picture. If Boeing is not going to be making seven per sevens anymore, what's going to be the future for.
Ratliffe's longer term.
Sure.
So we're going to be looking at all opportunities.
With our cash and.
Aircraft are certainly part of it.
Our balance sheet is absolutely a part of it and what May lie beyond we're in a in a fortunate position to be able to look at all those opportunities. So I look it look forward to keep you posted on that.
With regard to the 747 and Boeing's announcement that Dell discontinue production. After the last one is delivered I think is in 2022 towards the end to 22 and I were sad to see the Queen of the Sky cease production for sure, but it's a great airplane and Boeing has committed to us.
To commit to continue to service those aircraft.
Got some great customers of the some four seven Atlas included EPS included so they'll need to continue to support from an engineering and a spare parts standpoint, and they've told us that directly and I believe them they've demonstrated in the past that they've done that with the 7472 hundreds for example.
And Boeing is a great partner.
The some four seven I think personally overtime not only did a great airplane, but overtime, it's going to have scarcity value as well.
It has capabilities.
That.
No other freighter has including those loading for the pure freighters the nose loading capability the payload and the range. There's still some 474 hundreds are still.
Right age there generally in the 20 year old time periods, they've got a long life left in the Dash eights are the best technology and capability on the market today from a freighter standpoint, so we feel good about the some four sevens going forward.
And you'll recall that the some for seven two hundreds which is much lesser aircraft.
I lived in a useful life way beyond their 30 years so.
We remain optimistic and bullish on the aircraft and frankly, all our fleets, but the 747, particularly.
Okay. Thank you guys.
Thank you think Scott.
And your next follow up question comes from a line of Chris strapped Thoughtless from Susquehanna. Your line is open.
Hey, Thanks for taking my follow up.
Spencer CNO were free cash flow here in the second quarter pretty significant I know you have you benefited from the stronger.
Charter yields and I'm guessing above your minimum utilization levels, but how much of your HCM ibook reset in the quarter.
We don't really talked about.
Customer turnover like that but typically we try to have our AC Mike contracts on a staggered basis or would it have too many coming due in any particular year is usually about a handful of them in any any given year.
And you're right free cash flows incredibly strong in the second quarter.
From higher earnings lower costs, lower core capital expenditures.
And we expect to to enjoy a record free cash flows.
And on the Usdtwo Destock ordered movement has that been lifted or are we still in a situation where I think John on the last call. You described the utilization levels on a scale from zero being planes are grounded five firing on all engines. I think you said, a two or three where are we with with with that piece.
Yes, the stop move movement order is no longer in effect and the levels of of operations are returning to more normal unexpected levels.
Now Okay last question cobot could impact that forward, but right now that that's the state of play.
Okay last question, if I could Spencer how has that was applied for.
Anything on the the loan program under cares and or were there any laurence attached with the payroll support or was that a straight grant and no loan attached to it. Thanks.
Sure, Chris Yes Atlas.
Hatless.
Participated in the the carriers Akt program that was available to air cargo carriers.
We received an aggregate amount of $406.8 million between Atlas and and southern it's comprised of grants as well as loans.
The loans, our 10 year unsecured non advertising.
Promissory note and there is a small amount of warrants.
Associated with that.
Up to 625452 shares, but that would be the kind of maximum amount as.
Atlas Canada.
It's choosing settle those shares on a net basis.
And so you never really get to that amount. So it's either net cash or net stock.
And so you'd never really issue that many shares.
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So yes, we certainly participated in the Invacares act available to cargo carriers.
That's for the payroll support have you apply for the loan program separate Oh I'm, sorry that was your question, Okay, sorry, Chris I know we did not.
Okay. Thank you.
Yes.
Thank you.
Yeah. There are no further questions at this time Mr., John Dietrich I turn the call back over to you for some closing remarks.
Great Great. Thank you Rob.
And on behalf of all our employees here at Atlas Spencer and I would like to thank you for your interest and now several wide. We appreciate you sharing your timeless today hope you stay safe and we look forward to speaking with you again soon thank you very much.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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