Q3 2020 Atlas Air Worldwide Holdings Inc Earnings Call
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Thank you Michelle and good morning, everyone I'm, Ed Mcgarvey treasure for Atlas Air worldwide.
Welcome to our third 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 includes some forward looking statements.
Within the meaning of the private Securities Litigation Reform Act of 1995.
These statements relate to future events and expectations and involve risks and uncertainties.
Our actual results or actions may differ materially from those projected in any forward looking statements.
For information about risk factors related to our.
Please refer to our 2019 form 10-K as amended or supplemented by our subsequently filed SEC 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 queue, 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 over to John Dietrich.
Thanks, Ed and Hello, everyone welcome to our third quarter earnings call.
Thanks for joining us.
I'd like to start by thanking all our employees and frontline workers around the world for their unwavering efforts. During this COVID-19 battle.
What continues to be a complex challenging and evolving environment.
On behalf of everyone at Atlas I want to express my sincere hope that you your families and friends continue to stay safe during this pandemic.
I'm very proud of the important role atlas's, playing in responding to cope with 19 globally.
Air cargo has always been a vital component in the global supply chain as it provides speed security and reliability that is unmatched by other modes of transportation.
We at Atlas remained committed to moving the goods the world needs, most including medical equipment Pharmaceuticals, personal protective equipment E commerce, and other manufacturing and consumer products.
Over the last several years, we strengthened and diversified our business and our fleet with a focus on serving express E commerce and the fastest growing global markets.
This pandemic is driving acceleration in E commerce as people increasingly turn to online shopping to support their everyday needs.
The size and diversity of our fleet positions us well to continue to serve our customers both regionally and internationally.
Our 747 and Triple seven freighters are in great demand for long haul international flying in our 767 and 737 freighters are actively serving regional and domestic markets.
We're also preparing for our expected role in the timely distribution of vaccines once they become available.
The steps, we've taken enable us to maximize the opportunities we're seeing today.
As well as those in the years ahead.
As Spencer and I will share further with you today the structural change in airfreight capacity caused by COVID-19.
Has presented meaningful opportunities for our company.
But those opportunities also have come with significant operational hurdles as well as additional costs.
The performance, we're delivering this year doesn't just happen on its own.
It's been made possible by our team coming together and tirelessly managing through a complex environment.
To provide safe operations for our employees and high quality service for our customers.
Safety always comes first at Atlas and we're continuing to take wide ranging precautions to ensure our employees remain safe, while delivering goods the world needs. During this difficult time.
And with that mindset, we're navigating through an evolving operating and regulatory environment that includes ever changing travel restrictions border restrictions increased testing in quarantine mandates remote working and additional surges in KOVA 19 cases globally.
Now turning to our third quarter results on slide four and as our results reflect the positive momentum of our business continued in the third quarter.
We're seeing substantial demand for our long haul wide body services, both near and long term at attractive yields.
And we're leveraging the agility of our business model and the scale of our fleet and global operations to serve this increased demand.
We've also continued to broaden our customer base and grow with existing customers to maximize market opportunities.
We further increased our roster of long term charter customers, including the recent addition of China now the logistics arm of Alibaba as well as expanding with HP and several large global freight forwarders.
It's important to highlight that these long term charter agreements provide secure and attractive revenue streams.
We've also expanded operations for Amazon, where we began flying three additional 737 freighters in September.
We're now operating 873 sevens for Amazon complementing to largely to seven six sevens that we have with them.
These expanded businesses deepen our strategic position in the fast growing E commerce sector as well as an important global markets like China and South America.
And as mentioned in our press release today. We're also excited about a significant development in our joint venture between our Titan dry leasing subsidiary and Bain capital credit.
The joint venture has arranged $500 million in financing facilities.
This important step will enable it to serve the strong market demand for freighters.
In addition, our third quarter results benefited from strong demand and higher yields the significant and ongoing reduction of passenger belly capacity in the market lower aircraft rent and depreciation and lower fuel prices.
These benefits were partially offset by higher maintenance expense related to additional engine overhauls, we performed to take advantage of attractive vendor pricing and slot availability.
As well as higher pilot costs related to the premium pay we've been providing our pilots for operating into certain areas outside the us that had been significantly impacted by COVID-19, as well as the 10% pay increase we provided to our pilots in may pending the completion of our joint collective bargaining agreement.
As I've mentioned, we're operating in a very favorable airfreight market, but we also recognize the uncertainty in front of us and.
And because of that we're taking steps today that will position our company for continued success as we move forward.
This begins with aggressively managing our costs in every aspect of our business and being prudent stewards of our balance sheet.
And we remain focused on ensuring that our assets and resources are allocated to opportunities that generate the best returns.
Now moving on to slide five and our outlook.
Looking to the fourth quarter and subject to any material COVID-19 developments, we anticipate solid volumes and yields drew.
Driven by continued ecommerce growth in year end freight airfreight demand coupled with the ongoing reduction of passenger belly capacity in the market.
To meet customer demand, we re activating our fourth 747 freighter that had been previously park.
This will add to the 3747 freighters and the Triple seven we placed back into service during the second quarter.
As a result, we anticipate fourth quarter adjusted net income to grow approximately 25% compared with adjusted net income of $82.7 million in the third quarter of this year.
We're also expecting to fly approximately 95000 block hours in the fourth quarter with about 65% of those in CMI and the remainder in charter.
Was primarily driven by increased flying partially offset by a lower average ray provoq hour due to lower fuel costs.
Blackout volume growth, primarily reflected strong demand for freighter aircraft driven by the reduction of available cargo capacity in the market.
The disruption of global supply chains.
The redeployment of 747 400 aircraft from CMI and a triple seven aircraft from dry leasing.
And our ability to increase aircraft utilization.
And dry leasing revenue primarily related to changes in leases.
And the disposition of certain non essential aircraft during the first quarter of this year.
Looking now at the bottom of the slide.
Segment contribution totaled $189 $1 million in the third quarter.
A semi earnings primarily reflected increased utilization.
And a reduction in aircraft rent and depreciation.
These benefits were partially offset by higher pilot costs, including premium pay for operating in certain areas.
And the 10% pay increase resulting from our recent interim agreement.
Higher heavy maintenance expense, including additional engine overhauls to take advantage of availability and pricing discounts.
And the redeployment of 747 400 aircraft to charter that I've just noted.
Higher charter contribution during the period was driven by an increase in commercial cargo yields excluding fuel <unk>.
Strong demand for freighters and our ability to increase aircraft utilization.
Charter contribution also benefited from lower aircraft rent and depreciation and.
And the redeployment of aircraft from AC My and dry leasing.
These benefits were partially offset by higher heavy maintenance expense and higher pilot costs.
And dry leasing lower segment contribution during the quarter was primarily due to changes in leases and the disposition of certain nonessential aircraft during the first quarter.
Before we moved to the next slide I'd like to comment on another recent development that we shared in our press release this morning.
On October 9th Amazon elected a cashless exercise with respect to approximately three 6 million shares vested under a warrant issued in 2016.
As a result, Amazon acquired approximately 1.3 million shares which represented approximately $4, 99% of our outstanding common stock after the exercise.
Now turning to sliding.
As the Slideshows, our net debt and net leverage ratio continue to improve during the third quarter.
Our net leverage ratio decreased another half turn from three point O times at the end of the second quarter to 2.5 times at the end of the third quarter.
And we expect further improvement year and as we benefit from increased EBITA levels are strong cash balance and maintaining that payments are approximately $70 million per quarter.
We ended the third quarter of 2020 with cash, including cash equivalents restricted cash and short term investments totalling 729 $3 million.
Compared with $114.3 million at the end of 2019.
Are improved cash balance of September 30th primarily reflected cash provided by operating activities and also included the funds we received through the cares Act.
Net cash used for financing activities, primarily related to payments on debt obligations, including a revolving credit facility, partially offset by that issuances.
Net cash used for investing activities, primarily related to core capital expenditures spare engines and upgrade kits, partially offset by proceeds from the disposition of certain non essential aircraft and engines.
As a reminder, or that as a low weighted average coupon rate of 3.0%.
And the vast majority of secured by our aircraft assets, which have a value in excess of the related debt.
We remain committed to a strong balance sheet.
And we are taking actions to mitigate the impact of any continuation or worsening of the pandemic by reducing costs enhancing liquidity and strategically allocating our resources.
I would like to turn it back to John.
Thank you Spencer and moving slide nine.
2020, certainly has been an unprecedented year in the third quarter was no different R.
Our team continues to step up and execute in a complex and challenging operating environment.
We expect volumes and yields in the fourth quarter to be driven by continued ecommerce growth and year end air freight demand coupled with the ongoing reduction a passenger belly capacity in the market.
We will continue to take every precaution to protect our employees and operations to ensure we're ready to respond to customer demand and deliver the goods the world needs most.
With our talented team world-class fleet strong balance sheet and agile business model will continue to deliver high quality service for our customers and solid results for our investors in these uncertain times and beyond.
So with that operator, I'd like to take the first question. Please.
As a reminder, cast question. Please press one.
So let's try a question as the power.
At first question comes from Bob Lately Ah CJR security your lines open.
Good morning, and congratulations on another strong quarter.
Thank you Bob connect fun.
I wanted to start maybe we've talked about it a little bit in the past I'm kind of new long term charter agreements, maybe we can dig in a little further can you give us a sense are you locking up more capacity for the long term or are you simply shifting kind of ACI into charter because they're kind of blending.
How does this position Atlas for the next few years in terms of your capacity under longer term agreements your ability to.
Move planes around your total utilization how does that impact your future earnings power by going into these long term charter agreements.
So I'll I'll start Bob and thank you.
What we're trying to do is strike the right balance the long term charter agreements do provide us long term benefit as we said at attractive rates.
And.
Is at the core of our business model.
But we also want to ensure that we.
Preserved enough capacity to take advantage of the market and the extraordinary market that we're seeing right now.
So it's striking that delicate balance.
With secure attractive longterm customers and we're seeing a blend prior.
Prior aircraft.
That had been in ACI are being used for the long term charters and we're also drawing from the charter pool as well.
Again.
Looking at the market.
And longer term, while will always be attracted to.
The HDMI part of the business.
It's an exceptional charter market right now as well so we're going to be very judicious about with whom we lock in with them over what period of time and what rates to be able to enjoy the strength of both and that's really where we're at.
And private Spencer I'll, just I'll just add that.
And as we talked about and the release and earlier, we added several more of these long term commercial charter agreements.
We added them throughout the second and third quarters.
Now up to three years in length and they go through the end of 2023.
And there are a lot of similarities between these long term charters and our ACMD segment there are differences.
In that.
It's priced differently. So it's priced on a per charter basis, rather than per hour or.
On a monthly basis like AC would be an Atlas pays for fuel and then fuels included in the in the charter price. So they are fairly minor differences between the two.
But so there's similar.
And as John said these provide predictable reliable revenue and earnings streams. So we're really pleased with them.
Okay that sounds great. Thank you and thanks for the additional color and then for my.
Last question just wanted to ask about CMI growth obviously.
Nice to hear three more planes with Amazon under CMI contracts can you talk about the availability of planes freighters out there right now and end of pilots.
And your ability to grow CMI going forward given the market dynamics.
Sure.
With regard to the a valid ability of pilots.
We're in a very good position there.
The available pool of pilots is actually quite strong on.
Unfortunately on the passenger side of the business certain carriers.
Have have closed their doors and others as you have seen gone through significant reductions.
Furloughs.
And so we're quite well positioned to bring on pilots with regard to planes.
We'll continue to monitor the market is you've seen we brought capacity back in.
For ourselves and to the extent there are opportunities elsewhere in the market, which we expect there will be you have again some of the passenger carriers, putting their aircraft down or their conversion candidates out there.
767 is a great airplane to 70 207 800 is a great airplane.
So between availability of aircraft for ourselves and for our customers. We expect there to be CMI opportunities as we go forward.
An Atlas has I'll just add briefly to that Alice.
Alice has.
Advantages we have.
Route rights traffic rights Overfly landing parking we have we have various abilities that perhaps other carriers do not.
Have those abilities for all types of aircraft.
And we have no how and we have scale advantage that perhaps other operators don't and so those are all benefits of the CMI service that we offer.
Okay, great. Thank you very much.
Thanks, Bob.
Our next question comes from David Roth Stifel on is open.
Yeah, it's good morning, gentlemen.
Question I wanted to talk about the military flying.
Typically that a 50% of charter what is it now and what's your best guess for 2021.
The military telling you on the demand coming back.
So thanks, David Yes.
The military flying particularly on the passenger side.
Has been <unk>.
Lighter than we anticipated coming into.
<unk> 2020, and Covid certainly with the stop movement order the.
The government had the dad had put in place had considerably impacted the passenger business that is starting to come back.
And frankly as you may recall, we mentioned at a prior call that while the passenger military business had slowed it was actually an opportunity for us to take those cruise that we would otherwise served with the military and deploy them to our cargo operations, which was seeing a significant increase.
And demand.
So we were able to take advantage of that and get higher utilization, while hiring up in the meantime to prepare for the return of the military business, which we're now starting to see it's not back to where we expected and where.
Prior levels were but we expect bye bye next year and certainly a.
A vaccine will have an impact on that but it is gradually coming back.
So when you say military move down from 50% of the business to the third of the business and charter.
Roughly that's a fair estimate.
And then <unk>.
<unk>.
Titan JV.
How does that.
How do you see that progressing over the next several years, how does it impact the earnings of Atlas and does it change the business model at all whereby maybe the JV on the plane.
And rather than Atlas or is that not how it's structured.
Yeah, I think it's a way I'm looking at is very complimentary to our business.
In terms of changing the business model.
I'm not sure. It will result in significant change it will allow us to grow.
In the dry leasing space and.
And we also have the operating leverage that Atlas actually could be a customer of the JV.
And.
That's an opportunity to continue to grow so we will be getting revenue streams not only from the dry leasing but also from managing the fleet of the JV. That's one of the areas of expertise that Atlas and tightened bring to the table.
Certainly bane will enjoy the benefits of the dry leasing business.
And.
We feel good about the timing of entering the market.
And our ability to take advantage of freighter centric opportunities as they go forward. So I think there's multiple benefits to us the management fees. The participation on the equity side of the aircraft ownership and leasing as well as the leverage to operate certain assets for for the venture. So we're excited about it.
Thank you.
Sure.
Our next question comes from Scott Group of Wolf Research Your line open.
Hey, Thanks morning, guys.
So Scott and I look at the fourth quarter guidance I think it's starting if there's background noise MF. That's me when I look at the fourth quarter guidance I think it's the smallest sequential increase in earnings we've.
We've seen in like 10 years, and just talk through some of the assumptions there Joseph Airfreight pricing is really picking up.
What are you assuming on our rates and then can I have can I just lump into that on the maintenance side.
You raise the maintenance expense guidance again, how should we think about maintenance next year.
Sure Scott Spencer So, let's look at the fourth quarter first and then we'll talk about maintenance.
So for the fourth quarter of this year compared to the fourth quarter of last year, certainly commercial charter yields and volumes.
Are we expect will be higher.
But they are.
Partially offset by higher heavy maintenance costs.
Expect heavy maintenance costs to be about.
About $27 million higher.
And then last year in the fourth quarter, we had a really large refund of excess rent payments and was 27 $6 million.
So so too pretty big items, there and then in addition to that this year we have.
Premiums that we're paying our crew for.
For flying into certain areas heavily impacted by COVID-19.
And then there's the pay increase the 10% crew pay increase that we provided and as John just talked about lower military cargo volumes.
And certainly passenger volumes are down this year versus the prior year.
So all that being said still.
It's it's growth over the prior year, but there are clearly some some big offsets now.
I will talk about yields.
Answer your maintenance question.
We expect the fourth quarter charter yields too.
To remain above sort of normal historical fourthquarter level, reflecting the strength of the market.
As well as continued capacity constraints and just overall demand for atlases services we.
We don't expect rates to reach where they were the levels. We saw in the second quarter, especially April and early may.
But it's.
It's important to note that we talked about the long term charters are much of our fourth quarter capacity has been committed to those long term charter contracts, we still do have some capacity available.
To serve the AD hoc spot market and.
We could take advantage of yield increases. So if there are yield increases that aren't contemplated in our forecast and we will talk about those next quarter.
As far as.
Heavy maintenance goes.
With regard to heavy maintenance I think looking forward.
I just wanted to point out that.
We expect next year 2021, heavy maintenance costs to be.
At least probably a little bit more than $60 million lower than than this year.
We previously expected 2021 was going to be a very heavy year in terms of especially engine overhauls, but also some airframe check requirements and we have the opportunity to accelerate some of the engine inductions into this year and we got.
We've talked about the availability of.
Maintenance slots.
Because the passenger carriers operating as much and then we received pricing discounts from our vendors as a result so.
Should bring 2021 heavy maintenance closer to sort of normal run right. Although it is still may be a little higher than.
2018, 19 average.
So hopefully I've answered both your question Scott yet all very helpful. I was asking about the third quarter to fourth quarter progression any thoughts there.
And that was typically it's typically up more third to fourth that was more of my question I understand some of the year ago.
Headwinds before.
Yes, Scott, it's John Thanks, and I'll, let Spencer provide any further color but.
I think it is important to note that.
This third quarter was an extraordinary third quarter, given where we are in the pandemic and we have.
I've been experiencing what I'll describe is.
Peak level.
Levels of utilization as well as rates.
[noise] contributed to a very strong.
If not record third quarter.
So that the incremental leap into a typical fourth quarter may not be as great because of that factor alone.
It speaks stitches. The overall market is Spencer pointed out there will be some upside on rates for sure.
But we've been operating it pretty high levels throughout the third quarter, which makes that comparison a little bit narrower.
Yeah, so talking sequentially third quarter this year versus fourthquarter. This year. So we will have higher commercial charter earnings we will have lower heavy maintenance costs.
Those will be partially offset by.
Non heavy maintenance.
We have one more landing gear event, and we have some higher apu's auxiliary power unit.
Maintenance events, so I'm, a little bit higher there.
And then Ah military earnings both cargo impacts should be lower cargo and passenger should be lower in the fourth quarter is John noticed but then we we expect that to be better next year.
Okay. That's all fair about the higher starting point, okay. Thank you guys.
Alright, Thanks Scott.
Our next question comes from Chris That's a lot of Susquehanna in line that's open.
Good morning, and thanks for taking my question.
Or.
John Spencer just.
If you could what is the weighted average duration of your contract business and then.
What percent of your charter doesn't move on contract now or is closer to the to the spot market.
So our tip.
Typical ACMD contract is somewhere between two and five years.
But then obviously we have much longer.
Gration contracts with with DHL and with Amazon for example, so they vary.
And the long term charter contracts I mentioned the.
The duration there they go up to three years in length.
And so we're starting to use a lot of our capacity with these longer term arrangements, which is great.
From a.
Predictable reliable nature of our revenue in our earnings streams.
And they're they're really good contracts.
So there's there's some left I don't know the exact percentage because it's not quite that simple because it it's not.
Always an aircraft that can be.
A portion of an aircraft or one flight of weak or that kind of thing so.
It's a smaller portion that is currently available in the AD hoc spot charter market.
But there are still some available.
Okay, and that's smaller portion as a percent of charter or your oval overall look of business does that low single digits.
Yeah, well, we'll have to get back to you on that I don't have the exact percentage, but it's it's definitely a smaller portion with these longer term charter contracts that we've entered into again, it's not simple.
One might think it's just a.
This aircraft divided by total number of aircraft, but it really doesn't work that way it may be a rotation or maybe a portion of road irritation.
So it's calculations a bit more complex, yes, and if I could Chris so it's a bit fluid as well.
To the extent in this current environment, we have a semi agreements that are rolling off we mentioned some of the long term charters.
But.
There are a number of ACMD opportunities that we may want to time to a later date because of the charter market is so robust right now and so that ties in with Mike on the balancing act that we're doing.
Our focus is is on the opportunities we have in front of US right now near and long term.
So.
Maybe in a situation where there is an ACMD customer that typically we would sign for on a longer term basis, but maybe we'll forgo for a period of time.
Due to the very robust market and we're going to we're watching all those dynamics closely.
But right now, it's very favorable market conditions for the charter business.
Near in on these long term charters.
And Chris just to provide just to sort of a ballpark, it's really as John said quite fluid and I am not an exact science, but it's approximately 5% of.
Total Atlas capacity.
Okay. Thank you.
So second question and I realized you probably want to wait to January to talk about 22021 guidance, but given where we are with covid.
This is obviously a very unique opportunity here for.
Greater operators.
You have around half of the capacity that you typically compete with as effectively sideline.
The rollout of the vaccine looks like a multiyear event ample feedstock.
And E commerce demand that looks like it's been put forward a few years so.
Look at what you're guided four EBITDA for <unk> and that would put up your implied 2020 in the double digits.
Is it reasonable to assume that you could.
You know.
Realize positive the positive EBITDA growth next year.
Assuming we have a vaccine in the first half in the D O D lips.
Could you travel restriction orders.
Yeah.
The right question a good question.
We will provide are.
Next year guidance early next year in February.
But.
Point out some things and you did as well.
Certainly we do not expect that yields will be like they were in the second quarter of.
Of this year, we wouldn't expect to see that again next year of course that could change, but we wouldn't expect something like that.
Of course with with Covid things are changing constantly.
So it's all subject to change, but the key things I think are some of the key things I think to keep in mind and some of them you mentioned of course.
We should expect to have lower maintenance expenses I talked about.
Over $60 million lower the vaccine distribution.
Certainly seems like it's going to go on as you said, Chris quite some time and.
And that's going to have quite an impact.
An air freight.
There are continued capacity constraints and we really don't see those changing for quite some time.
The utilization that we get on our aircraft has been increasing and we expect that to continue to be the case.
We have a very modern efficient fleet, we don't have like the fleeting needs things like that these long term charter contracts with really attractive yields are terrific.
All of our customers are looking to add capacity right now an air freight has.
It's always vital to the global economy, but.
Especially now and then I would just say that.
Again, there's really.
Not much production coming out from the.
The major manufacturers and so we expect a supply demand imbalance too too.
Still have stronger demand and supply.
And the growth of express an E commerce, I mean that is not going away anytime soon.
The diversity of our business and our fleet that Jon talked about.
And just the capabilities and relationships that we have developed in.
Continue to service those things will serve us well.
Next year and beyond.
Get a good call if I could get one more in with respect to capital allocation I believe you can't do buybacks here under the terms of the PSTN.
Correct me, if you're wrong I don't think you took anything under the L. P under cares, but should we think that you're throwing off a lot of cash here.
Should we expect that you're going to start to start to grow the fleet or continue to.
Delever. Thanks.
Thanks, Chris Yes, it's all of the all the above we're looking at everything.
We're in a position where if.
There's aircraft available that.
Fit with our our needs and our growth needs.
We will be in a position to look at that.
Of course.
Terms of continuing to pay down debt, that's going to be hugely important is spencer talked about and showing we maintain our balance sheet.
We need to be cautious to to a degree I mean with what lies beyond while we're very confident in.
Optimistic on 2021.
I can't stress enough the.
The tremendous effort all our employees are putting forward and managing through this covid environment.
And in Europe for example, I mentioned border restrictions and.
Almost overnight, we're seeing changes in and the ability to adapt and what's going to happen with the overall economy, we feel really good about it for all based on all the comments that.
That we talked about and as we look forward to 2021, but we're also going to be mindful of of what lies beyond and be assured that we can weather any anything that may come our way.
Okay. Thanks for your time.
Thank you.
Our next question comes from Helen Becker of Cohen.
Your line is open.
It's very much operator and high everybody. Thanks for your time I just have a couple of questions. So the first question was did you respond to representative Cliburn slaughter.
Asking you to return the care stacked funds that you did take I think the responses, yes, I Monday.
Yes, we did a link.
And how are you thinking about that.
So.
Look we put a lot of thought into even applying for the cares Act funds.
Start by saying.
We were fully qualified in our in full compliance with the cares act and receiving the funds.
It was with a lot of deliberation because.
There's no question our circumstances are somewhat different in the passenger side, obviously with what we're talking about.
But what we evaluated I was kind of the totality of our circumstances, including.
Some of the challenges that presented itself immediately when covid hit.
There was a tremendous amount of uncertainty China effectively shutdown not only doing during lunar new year, but for weeks thereafter.
For which we.
Experienced a significant impact to our business.
I also talk just just now I'm talking with Chris about what lies beyond.
So all those factors went into our contemplation.
To apply for and ensure that we're using the funds for the purposes of which they are intended and that was for payroll support.
And again, we're in full compliance and we and we shared that with the chairman in response to our letter so based on the totality not only did we apply for when we're eligible for.
In this program, which I should add is not a needs based program. It was not something that we had to demonstrate or need to be able to.
Pay on payroll.
But for all those reasons, we not only applied for received but we are not intending to return the funds.
And we responded accordingly and have been in full compliance not only with the committee's request, but sharing the documents and so forth that they've asked for in and we will continue to fully cooperate.
That's that's very helpful. Thank you. Thank you for that detailed answer I really appreciate it and then the other question I had is uhm.
What do.
Do you think Amazon exercise.
Winds aside from the fact that they were that they are in the money. So I guess that makes sense for them to do that but I mean have they talk to you about.
About.
I don't know <unk>.
Increasing their position about I think they're bored seat is that an observer not an official board seat and they talk to you about getting more active in the company name what what do you think is behind that.
So I have a bias because I think it's just a great investment and a great company.
But I don't speak for Amazon I can't speak for them.
We have not talk to them about their reasons and I'm not going to speculate as to that.
So we just think it's a great and I just think it's a great investment.
Okay. That's that's very helpful. Thank you very much.
Thank you Hillary.
Of course.
Our next question comes from Barry Haynes Sage asset management. Your line is open.
Thanks, So much for taking my question you.
You mentioned that.
You're looking at possibly adding to fleet and that there could be conversion opportunities could you give us a feel for.
Sort of minimum hurdle race Roissy, however, you choose to look at it.
It would make sense for you to go forward with <unk>.
Situations like that thanks.
Sure buried Spencer.
We take a a really disciplined approach to deploying our capital and we set really aggressive return targets.
So is John talked about balance sheet strength and leverage reduction remain our top priority but.
We are looking at a number of potential investments in the expected returns. So we target low to mid teens after tax Irr's four hour drive <unk> portfolio.
For other projects.
Including operating aircraft, which is I think what you were asking about return targets are really set based on the individual sort of risk profile.
<unk> upon the particular situation, but in all cases, we target double digit.
Percentage returned.
747 days sheets for those who remember when we brought those in.
They generated in IRR north of 20% when we got into.
Starting to fly passengers are passenger fleet investment generated.
Pretty similar returns north of 20%.
Those types of returns are not always achievable.
But our targets remain really aggressive and.
We make sure we achieve those.
Great I appreciate the caller. Thank you.
Thank you.
Our next question comes from David Campbell of Thompson, Davis and company airline is open.
Yeah. Thanks for taking my question.
And he has talked a lot about this but I just wanted to clarify it a little bit.
Is new.
Contract charter agreements.
Long term agreements.
Apparently.
Based on the third quarter results.
Have resulted in no increase in.
In your cargo charter.
<unk> for blackout, which were flat in the third quarter, and and I guess, we'll be even lower than that.
And the fourth quarter is you have more and more of these agreements in effect.
So I don't I don't see how.
Flatter down.
Yield take care.
In terms of the revenue for a blackout or.
That's helpful.
Uh-huh.
L. As in the long term you got you Gotta you guys.
Source of stable revenue, but but how does it gets you in base earnings.
Sure David.
Spencer let me just.
The issue I think you're looking at on a revenue per block hour and the issue is fuel is included in that and fueled dropped 40% on a year over year basis fuel fuel in the third quarter of last year was 227, a gallon. This year $1 35. So that's that's really I think clouding the picture that you're looking at.
If you were to.
Exclude fuel.
What you would see as a revenue per block hour would have been up to $3000 a block hour.
And these these new long term charter agreements have you take a look at the segment contribution the profitability of our charter segment.
Improved.
Over 1200% on a year over year basis. So.
I think fuel the decrease in fuel I think is clouding, what you're looking at.
Yeah, I think it has something to do with it I wasn't sure how much so a new.
Obviously clarify that the second question I had was.
<unk>.
He obviously doesn't sound like you see any.
Any slowdown in demand.
Relative to.
Third quarter.
But.
I've heard that there has been some slowdown in in.
Demand and I, just wondered whether whether you've seen any change in your.
Overall.
Here for demand for.
The demand for cargo.
Cargo.
Space.
Yes, David Thanks, we do not see any slowdown in demand and particularly for the fourth quarter, we see an increase in demand.
And.
What we're looking at what we talked about for 2021, we expect these favorable market conditions to continue.
Into the future based on some of the dynamics that are in play in which we don't expect to change for some time.
Thanks, very much I appreciate it.
Thank you thanks, David.
Our next question comes from Scott Group Wolf reset your lines open.
Hey, guys. Thanks for the follow ups.
How should we think about the Titan and long term impact on Capex does this lower the long term capex that we should expect atlas to to spend.
Well, Scott will be sharing and that so atlases responsibility is.
10% gains responsibility is 90%.
And that is of the the equity portion.
That part that's not going to be covered by that.
So I.
I guess, if you look at it that way, yes pain is now.
Very important very large joint venture partner with Atlas to grow the dry least part of our.
Freighter leasing business.
Yeah, and I think if I could Spencer and that this venture is not the only entity through which we may invest there may be assets that don't fit the profile of the purpose of the joint venture that we may be interested in so.
I think part of the answer is we'll see if we are going to be very judicious on where we spend our capital, but it's not the only vehicle.
Alright, but I'm looking at this right right <unk> gone from.
Less than 10 planes to 30 planes and charter in the last five years. So it's been a big part.
[noise] of your Capex.
Some of those planes moved from from a CMI in there again very similar to <unk>, they have slight differences, which move them into the charter segment, but they're very similar so some of those just moved over from one segment to the other based on the nature of how the customers charge and who pays for fuel and things.
Like that.
Okay, and then just lastly.
Do you think that you'll directly participate in vaccine distribution and can you give us the new sure on the military business that just reset in the fourth quarter. Thank you.
I'm, sorry, you broke up a little bit on the first part of that question can second part was entitlement pick that yet.
Yoga is through our equity participate in the vaccine.
District, Yes, I'll answer, yes, we do in one form or another I mean, there's been a lot of discussion.
As to whether or not.
Some of that will be done by the government. Some of it will be done by the manufacturers you have the administration's saying the military is going to.
Be responsible.
But we believe whatever form it takes that our capacity is going to be a part of that and we will continue to work with our customers.
Government and commercial and being available in prioritizing our assets to help as soon as we can.
And then the second part of your question I think was.
Sure or what the military calls entitlement, we continue to be the largest outsource provider to the U S military.
With regard to large widebody aircraft, our entitlement on both the passenger as well as cargo.
Side is between $53, 54%.
Thank you.
Thank you.
Our next question comes from Chris Statham Happiness of Susquehanna. Your line is open.
Hey, Thanks for taking my follow up so.
Just.
Continuing with Scott question on Capex and being here may be looking at it from a different angle, but if you could give him and what we're seeing on the passenger.
Side of things all the acid dislocation.
Retirement, the move towards simplification could you comment on what you're seeing an asset prices.
The medium to wide body, 7677, 40 sevens or the.
The three seven and then on the chain <unk> would you be willing to look outside of bowling and perhaps into some of the.
Airbus Thanks.
So I'll start with the last question and say.
Say that.
Sure on the Airbus product, what our position has been is for the most part we're fleet agnostic is.
Is the demand is there we have the operating capabilities.
Operate them, we've got a depth of experience of.
People, who have both on the maintenance in flight upside who have flown and maintained Airbus product. It's it's a great company great airplanes.
Generally speaking the Boeing has had the market on freighters.
But I think that you are seeing some of that change with the <unk> hundred 30. For example, that's now in the market converted basis. Some express carriers are flying those and.
The.
800, twenties that may be coming into the market. So.
Sure if the demand is there we would.
We would certainly entertain that.
And then on the asset prices have have you seen.
Rates come down for 18, 20 year old vintage 767747, I know Delta is retiring at 767.
There just seems to be a lot of opportunity on the passenger side.
Depending on where at their fleet needs are certainly where their balance sheet is.
Yeah It really.
Chris It really depends on an asset by asset basis, it really depends.
How good the engines or how much.
Life is left in the engines before it's next overhaul.
That particular aircraft.
The vintage of the aircraft and so forth it really depends.
If it's a passenger to be converted.
And.
It's really the engines.
Often that are.
Being sought after.
Of course as well as the airframe.
If it's an aircraft that's on lease what are the terms of the least that's attached to it and so forth. So it really is on a case by case basis, we've seen.
We've seen a lot of inconsistency, so, let's just say that.
If I could add to that.
There's also the factor of.
What.
The market will be going forward.
I think the cares act.
Has.
Provided some some cushion and some of the other.
Financings that the passenger carriers have done it provide some cushion for them before they have to take a too drastic of measures on fleet I think all carriers the industry's looking to how quickly they can bring back assets.
And I think there's there's more to.
Come on that.
Kevin how long the pandemic less there.
Maybe some more.
Pricing.
Pressure.
Last much further into the future.
Okay, and then Spencer balance sheet cash flow two questions here working capital.
Side of <unk>.
Hi credit customers Amazon DHL.
You know any color on credit quality as we move down the spectrum of customers anyone asking for deferrals and.
And then also what's left on your revolver and what maturities do have June 2021 to 2022. Thanks.
Okay. Thank you, let's see three questions. There. So the first with regard to our receivables we have.
Outstanding outstanding customers.
And the HDMI front, they're all pretty much household names very very strong credits.
And we have no issues there.
Charter space.
These long term charters are obviously all household names, but some of the the spot AD hoc spot charters.
Generally pay in advance so.
So we really haven't had collectability issues. So we're very very fortunate that way, we do a great job our team does a great job managing those risks.
Your.
Second.
<unk>.
Oh, that's right.
We have $200 million available under our.
Sure revolver.
And then with regard to maturities.
Maturities of Acm's contracts. So we have had some maturities with our HDMI contracts, we typically have a handful of year.
Generally those that are being renewed are typically being renewed at higher rates in this environment.
I was asking on the on the maturities on the desk site, there's anything bumps are coming too yeah.
K. Thank you sorry, we have a.
Convertible note that comes due in June of 2022.
$224.5 million nothing out of the ordinary just normal principal and interest payments between now and then.
Okay. Thank you.
Thank you.
There are no further questions like to turn the call back over with that was there for closing remarks.
Okay. Thank you operator, and thanks to everyone on behalf of all our employees Spencer and I would like to thank you all for your interest and Alistair worldwide. We appreciate you sharing your time with us today.
Again, we hope your family stay safe and we look forward to speaking with you again soon thanks so much.
Ladies and gentlemen does that concludes the conference may now disconnect everyone have a great day.
Thank you.
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