Q1 2021 Atlas Air Worldwide Holdings Inc Earnings Call
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Yeah.
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Good day, and thank you for standing by.
Welcome to the Atlas Air worldwide Holdings first quarter 'twenty to 'twenty, one results conference call.
At this time all participants are in a listen only mode.
After the speaker's presentation, there will be a question and answer session.
To ask a question during the session you will need to press star one on your telephone.
Please be advised that today's conference is being recorded if you require any further assistance. Please press star zero.
I would now like to hand, the conference over to your speakers Atlas Air. Please go ahead.
Thank you Jay and good morning, everyone I'm, Ed Mcgarvey Treasurer for Atlas Air worldwide.
Welcome to our first quarter 2021 results conference call.
Today's call will be hosted by John Dietrich, Our Chief Executive Officer, and Spencer Schwartz.
<unk> financial officer.
Today's call is complemented by a slide presentation that can be viewed at Atlas air worldwide Dot com under presentations and the Investor information section.
And 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 they involve risks and uncertainties.
Our actual results or actions may differ materially from those projected and any forward looking statements.
For information about risk factors related to our business. Please refer to our 2020 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 and 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 first quarter earnings call.
On behalf of all of Us and Atlas I Hope that you your families and friends continue to stay safe as we progress towards brighter days ahead.
I wanted to again, thank all the frontline responders and essential workers around the world for their efforts, we're encouraged by the distribution of vaccines.
And at the same time, we're just heartened that the path to recovery continues to be prolonged and many regions of the world, particularly in India.
We operate frequently and that region and are actively engaged with multiple customers and organizations to support relief efforts.
We're also pleased to see so many others, both within and outside the industry stepping up to provide critical support.
I'd also like to thank our more than 4000 employees for their incredible dedication and contributions.
We're continuing to take wide ranging precautions to protect our employees and our operations to ensure we're able to safely transport the goods for the world needs.
Our team continues to work tirelessly doing our part to keep the global supply chain moving.
This pandemic has certainly highlighted the important role that air flight Air freight plays in the global supply chain and how it brings essential goods to market with unmatched speed and reliability.
At Atlas the services, we provide have always been essential and they're now even more critical than ever.
We're leveraging our unmatched global operating capabilities and flexible business model to capitalize on current market conditions.
This includes transporting vaccines PPE and medical supplies Express and E Commerce perishables.
Manufacturing components and other daily necessities around the world.
And we're seeing general air freight tonnage grow from pre pandemic levels.
Throughout the pandemic, we demonstrated to our customers that they can count on Atlas to provide the services and innovative solutions they need to keep their operating networks moving even in difficult times.
These capabilities weren't born out of this pandemic they've been developed at Atlas through many years of growth and diversification, which allows us to capitalize on market opportunities on a global scale.
And you can see that from the excellent results we have been reporting.
Advancing our initiatives and positioning us well for the future we continue to enter into and extend numerous long term charter agreements with strategic customers that have chosen Atlas because of our high quality services and operating expertise.
We recognize the important role we play and their supply chains, and we're committed to delivering for them and these unprecedented times and beyond.
Before we move to the next slide and review our results I'd like to take a moment to briefly discuss the segment reporting change we announced in our press release this morning.
I'll also ask Spencer to share more details during his remarks.
Beginning with the first quarter of 2021, we've changed our operating and reportable segments to reflect the evolution of our business.
Many of you are likely familiar with the three segments, we had previously, namely a CMI charter and dry leasing.
But as the CMI and charter businesses have become more similar.
We view and manage them as one segment.
We will now have two operating and reportable segments airline operations and dry leasing.
This change to our segment reporting now reflects how we analyze both current operations and new business opportunities to ensure that our resources are put to the most profitable use.
Now turning to our first quarter results on slide four.
Our performance was driven by the strength and flexibility of our global business model.
As well as our team continuing to capitalize on the current air freight environment with demand and yields that are well above typical seasonal levels.
I wanted to again, thank all of our employees at Atlas for delivering safe high quality service for our customers and this very challenging operating environment.
We continue to leverage our global network and increased aircraft utilization to match significant air freight demand.
Our first quarter results continued to reflect strong demand for our aircraft and services are expanded and extended customer agreements.
Hi, commercial charter yields and the significant reduction of international widebody widebody belly cargo capacity.
Our results also benefited from the for seven and $4 seven freighters and one triple seven freighters that we reintroduced to our fleet throughout 2020 to serve customer demand.
These benefits were partially offset by higher costs related to premium pay for pilots operating into certain areas that have been significantly impacted by COVID-19.
The 10% pay increase we provided our pilots and May 2020, and higher heavy maintenance expense.
Turning to our pilot labor negotiations and we remain committed to reaching a joint collective bargaining agreement with our pilots and connection with the merger between Atlas Air and Southern Air.
We're pleased to report that we've now moved closer to completing the new J CBA.
The scheduled arbitration proceeding on time and recently concluded on April one.
And the Union has now provided the company with the integrated seniority list. This is a critical item for implementing a new agreement.
The next step is for both parties to submit post hearing briefs on and agreed schedule.
After which the arbitrator will consider all the information presented and render a binding decision, which we expect sometime in the second half of this year.
Now moving to slide five.
We're off to a very good start in 2021.
And are seeing continued business momentum and the second quarter.
We're closely monitoring the market and leveraging the diversity of our business model.
This includes being prepared to capitalize on global market conditions, as well as being able to successfully adjust to any changes.
Long haul international passenger flying on wide body aircraft has been slow to recover and will likely be last to return as countries continue to struggle with COVID-19, and many borders remain closed.
Although there's been a lot of attention about recent levels have improved U S passenger air traffic.
It is important to note that these recent increases have largely been driven by pent up demand for domestic and regional leisure travel with smaller gauge aircraft, which is less impactful to international air freight.
Yeah.
It will also be important to monitor what the new normal will be beyond the pandemic, including any impact on international business travel.
With the strong global demand for air freight outpacing air cargo supply, we anticipate air freight demand and yields to remain strong with capacity on long haul trade lanes remaining tight.
Looking to the second quarter, we expect to fly approximately 90000 and block hours with revenue of approximately $950 million and adjusted EBITDA of about $210 million.
In addition, we expect adjusted net income to grow by approximately 30% compared with adjusted net income of $72 2 million and the first quarter of this year.
Our outlook anticipates commercial cargo charter yields to remain above typical seasonal levels, but below the historically high yields experienced during the second quarter of 2020.
We also expect additional expenses driven by the pandemic, including premium pay for our pilots.
Costs for continuing to provide COVID-19 safety measures and the workplace.
Higher costs from the pay increase we provided to our pilots and May 2020 and.
Maintenance expense and the second quarter of approximately $130 million.
For the full year, we continue to expect aircraft maintenance expense to be lower than 2020, with depreciation and amortization totaling about $270 million.
In addition, core capital expenditures, which exclude aircraft and engine purchases are projected to total approximately $110 million to $120 million.
Mainly for parts and components for our fleet.
Given the ongoing economic and market related uncertainties, including COVID-19, new variance of the virus surges and cases globally travel restrictions and other factors.
We are providing our second quarter outlook, but not providing a full year of 2021 outlook at this time and we look forward to providing updates as the year progresses.
This is a good point for me to ask Spencer to provide more details on our first quarter results and our segment reporting and.
And after Spencer's remarks, I'll look forward to providing a few additional comments and then we'll be happy to take your questions.
Spencer.
Thank you John and Hello, everyone.
I'd like to start by discussing the change to our segment operations and reporting and then we'll move to the next slide and I'll discuss our great first quarter results.
On prior earnings calls, we've talked about the blurring of lines between <unk> and charter and how these agreements have become more similar over the past few years.
As our long term charter business grew significantly during 2020, the similarities became even more pronounced with both our <unk> and charter businesses now including contracts of a long term nature.
And as we've expanded the amount of flying that's performed on their long term contracts, we've reduced the percentage of our business that serves AD hoc demand.
Both <unk> and the majority of the charter services provide outsourced aircraft operating capabilities for customers on a fixed take or pay basis, providing us with more predictable revenue streams.
As we look to capitalize on customer demand and maximize returns we regularly exchange aircrafts between <unk> and charter service.
This operating flexibility allows us to fly to the destinations and transport the cargo that customers want regardless of whether they pay by block hour with <unk> whereby flight with charter.
And from a sales operations and support staff perspective, we have the same team of outstanding employees, assisting both <unk> and charter activities.
For both <unk> and charter we operate on similar routes fly to similar airports carry similar goods provide similar services and customers are primarily responsible for fuel.
Now moving to our strong first quarter results, which are highlighted on slide six.
On an adjusted basis EBITDA increased to $181 3 million with adjusted net income growing to $72 2 million.
On a reported basis net income totaled $89 $9 million.
Our adjusted earnings and the first quarter included and effective income tax rate of 21, 9%.
Moving to the top of slide seven.
Operating revenue totaled $861 $3 million and the quarter.
Higher airline operations revenue was primarily driven by a significant increase and flying and the average rate per block hour.
Block hour volume growth, primarily reflected strong demand for our commercial charter and CMI services, driven by higher air freight volumes the reduction of available cargo capacity and the market the.
And the disruption of global supply chains, and our ability to increase the aircraft utilization.
In addition, the segment revenue benefited from the operation of five freighters that we activated throughout 2020, including four seven and four 7% and one triple seven.
These items were partially offset by lower AMC passenger flying and the U S. Military has taken precautionary measures to limit the movement of military personnel.
Revenue and our dry leasing segment was relatively unchanged.
Looking now at the bottom of the slide segment contribution totaled $179.7 million from the first quarter.
Higher airline operations contribution during the period was primarily driven by the positive factors benefiting segment revenue I just noted.
These benefits were partially offset by higher pilot costs and higher heavy maintenance.
Similar to revenue dry leasing segment contribution was also relatively unchanged.
Now turning to slide eight.
Our net leverage ratio ended the quarter at two one times, which is consistent with year end 2020.
We ended the first quarter of 2021 with cash, including cash equivalents and restricted cash totaling $714 million.
Our cash position at March 31 reflected cash used for investing and financing activities, partially offset by cash provided by operating activities.
Net cash used for investing activities during the first quarter was primarily for core capital expenditures.
Payments for flight equipment, and modifications, including pre delivery payments for our 747 dash eight order.
As well as spare engines engine overhauls and upgrade kits.
Net cash used for financing activities during the period, primarily reflected payments on debt obligations.
Partially offset by proceeds from debt issuance.
We continue to apply a disciplined approach to financing.
As we've noted before this has resulted in a low weighted average coupon interest rate, which now stands at 296%.
And the majority is 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're taking actions to mitigate the impact of any continuation or worsening of the pandemic by reducing costs enhancing liquidity and strategically allocating resources.
Now I'd like to turn it back to John.
Thank you Spencer.
Moving to slide nine and as.
As I mentioned, we're off to a very good start in 2021 and are seeing continued business momentum and the second quarter. Our team continues to capitalize on the current air freight environment, while delivering safe high quality service for our customers.
We look forward to finalizing the new joint collective bargaining agreement with our pilots.
And we will continue to take every precaution to protect our world class team of employees and our operations to ensure that we can continue to transport essential goods around the world.
At this point operator may we have the first question. Please.
As a reminder to ask a question. Please press Star then the number one on your telephone keypad again.
And is start and the number one and we got all your question press the pound or Heskey. Please standby, while we compile the Q&A roster.
Your first question comes from the line.
Bob <unk> from CJS Securities. Your line is open.
Good morning, Congratulations on the performance and a very attractive guide for Q2 as well.
Thank you Bob.
I wanted to start with.
I'm, just trying to get a sense how much of the strong first half performance related.
It relates to spot or AD hoc flying versus contracted a CMI and long term charter kind of take or pay contracts I'm trying to get a sense of the kind of sustainability and recurring nature of the contribution.
And the first half.
Sure Bob.
And so about <unk>.
60% to 65% of our flying now.
And what was traditionally CMI about 20% is now and long term charters.
10% is with the U S military.
And 5% is flying around South America, and only about five or 6% now is what was traditionally kind of.
AD hoc spot market. So it really has become a very small percent of our overall business and so approximately 94% of all the flying is on dedicated dedicated aircrafts.
Got it great and then.
I'm just looking to the second half and 2022, then with that and mind other than pilot labor.
Information that you'll get for.
And of this year pilot costs, what are the biggest variables you're thinking about for the second half and for 2022 since so much of your flying is kind of already locked up.
Yeah really.
Of course, we're in the middle of a pandemic so.
There are a lot of uncertainties related to that and what that might mean overall based on everything we're seeing.
<unk>.
And we feel pretty good about the space that we play and and the continued strength of the air freight environment, but there are plenty of uncertainties out there as you know.
Other than that it's really supply demand and.
Impact on yields operational challenges.
Amazing work that our team does to overcome those operational challenges those are really the big items.
Yeah, and Bob if I could add to that.
We've talked a lot through 2020 about COVID-19 related and pandemic related movements, which are still continuing.
But we're also keeping a close watch on overall economic conditions and as I said and my comments what lies beyond the pandemic.
And it came out with some statistics pretty recently to show that the economy and economies are recovering.
We're going to be watching that closely inventory levels are down we expect manufacturing.
And to want to get back to full strength, which it's not right now.
So those are beyond the pandemic and the things I'm looking to.
And variable to keep an eye on.
Super Thank you very much.
Thank you.
Your next question comes from the line of Helane Becker from Cowen Your line is open.
And thanks, very much operator, hi, everybody and thank you very much for the time.
And just a couple of questions on and you think about the aircraft for the next.
Years, you're taking these for last gassy and I guess, you'll find on like 30 or 40 years. So maybe this isn't a question you have to think about too soon but then how are you thinking about aircraft replacement for some of the older seven for seven and 400.
Maybe.
Yeah, I'll start with that.
And.
It's important to remember that the seven for seven and 400 is still a great airplane and still well within its useful life.
And the models that we have are on average.
2000 22022 builds.
And if you look at the Lifeline you just described for the seven and $4 seven day shaped that still applies to seven and $4 seven and 400 and so.
So we expect that for 400 will continue to be a workhorse and in the years to come.
And I would say similar to our comments on the $70 seven dash eight overtime. We also think there is some of the older ones start to retire and what I mean by that is the less productive ones, which are likely to be the converted passenger to freighter.
Some for <unk> those will likely retire earliest.
I would say the pure freighters are going to have scarcity value overtime with its payload range capabilities as well as its nose loading capabilities. So we feel really good about the $7 seven into the future both the 400 and the dash eight now.
Now that said there are also some great airplanes out there the triple seven is a great airplane.
The existing free.
Freighter fleet and looking forward.
Two the converted triple seven as well as other aircraft types.
Airbus is talking about the <unk> hundred 50, we're going to be looking as we always do it awfully types.
But.
And with the some for seven is kind of the backbone of our operation.
Gotcha, Okay, and Thats very helpful.
Thank you for that and then the other question I have is you gave your pilots and pay increase and May.
Last here.
Yes.
And now you're it's so good to see that Youre, making progress on the contract glad that it hopefully coming through and and.
Or maybe the beginning depending on how you think about it.
<unk>.
And I named first came and went this year.
And is not giving them. Another raise this year just holding off because you think you're close to getting an agreement before year end that one and context.
Pay that would cover this year.
Well, Hello, and Theres a lot of on that question and I agree with you. We were pleased to see this negotiation coming to and and then I can say it it is coming to an and.
The arbitration is now complete and.
And we have specific dates where the post hearing briefs are due.
Arbitration completed on April one.
Two weeks of hearings.
And it is coming to and and and the arbitrator has committed to us to get to a.
On outcome as soon as reasonably possible, we're hoping it's within.
Our 60 day time period, there was a large record that was submitted.
But it is coming to and ended and we're pleased about that so.
There's nothing to prevent us from continuing dialog with the Union.
Representatives have been in touch with each other through the process.
But the arbitration procedure that we have been.
Pushing for for so long in terms of bringing this to a conclusion.
It's happening and we expect to result, I can't give you a specific date, but we expected and the second half of the year.
I heard you say that on the call.
Well. Thank you. Thank you very much and while that was quite a credit quarter congratulations.
Thank you.
Thanks Helane.
Your next question comes from the line of Stephanie Benjamin from Travis Your line is open.
Hi, good afternoon.
And I think.
I wanted to touch on on the long term charter business, you had really strong success last year locking and some of these incremental longer term charter contracts. So just love to hear an update on really the demand you're seeing for these types of contracts this year as well as maybe the types of customers on net the momentum from 2020 has.
Continued through 2021.
And.
Yes, Thanks Stephanie.
We're seeing strong interest from these customers and.
And and.
And early in when some of these contracts were being entered into.
On this.
As I described and a prior call. This is a new customer base and from lessons learned from the pandemic and perhaps overdependence on per.
Passenger belly capacity.
And what many of our customers are seeing and learning.
And that main deck freighters is very attractive and to be able to secure that capacity.
And is important.
Both within this pandemic environment, but also beyond.
So we've seen strong interest.
And are excited about that it's a whole new customer base and and Spencer pointed out they are more a CMI like contracts because they have term associated with them and.
And on many of the attributes of a CMI.
And as I mentioned in my remarks, we're not only seeing new agreements entered into but extensions of existing agreements and.
And so that's all.
Kind of responsive to your question about the interest.
I also think there's going to be some post pandemic lessons learned about the attractiveness of main deck freighters on a dedicated capacity on.
Some of our customers already recognize the benefits.
On a real time inventory and moving product around rather than carrying large inventories that may or may not sell and I think air freight will be a key component of that in the post pandemic economy.
And Stephanie it's Spencer I'll, just add very briefly to Johns comments there.
We now have dozens of these long term contracts during the first quarter.
We had for contracts that were extended.
To that either added aircraft or at a rotations and we had one new customer for two years and the vast majority of these contracts go into 2022 and 'twenty three some go into 2024 and the majority are on the sort of fastest growing trade lanes and they probably will not.
<unk> be operated by returning passenger aircraft.
Great well. Thank you so much for all that color.
Thank you.
Your next question comes from the line of Chris <unk>.
Hold on to those from SaaS Gahanna International Group Your line is open.
Good morning, Thanks for taking my question.
Hey, Chris So expense for John So with the change and reporting here can we interpret.
And this year that.
The changes here and ACM iron more structural or permanent in nature, meaning are you no longer prioritizing or pursuing short term charter business and then if so.
How should we think about weather.
Whether it's however, you want to quantify and.
EBITDA margins or EBIT dollars, our free cash flow.
Through the cycle now.
Given the change India.
Duration of the contracts thanks.
Thanks, Chris and I'll start in terms of your prioritization question.
And the <unk> model is very attractive and provides secure assured revenue streams and.
And some of what we're seeing as we talked about the long term charter agreements for more ACM I like.
And then another element of the long term charters as sometimes Spencer mentioned dozens of these agreements is our ability to per customers and.
And get full utilization out of the aircrafts by combining customer demand.
Versus a typical traditionally CMI, which is fully dedicated full time used for the aircraft and I think there is there is demand and desire for both and it allows us to offer.
Partial aircraft.
For the remainder for another customer so that's worked quite well for us and our network planning on a global basis. So.
From a prioritization standpoint.
Those two the ACI and the long term charters are certainly the kind of deals, we like and and and we'll secure a long term basis, but we also are able to flex our capabilities to take advantage of and the amount of fleet that we keep aside for AD hoc charter and Theres no doubt and.
And that's allowed us to deliver a lot of these results and that's really always been the case for us because we know theres a consistent level of interest.
Both in good times, and and challenging times for the spot charter market.
So should we think about this is generally accretive or positive for free cash flow and that if so that would you would look to direct that capital towards the order book or when the PSP restrictions <unk>.
Expire.
And returning capital or pursuing other activities.
Yeah.
Yes, Chris with regard to.
No.
For two parts of that question I think there was a.
Capital allocation question.
And then there was kind of a free cash flow question.
Free cash flows.
And you can see.
Really been strong and continue to stay that way.
As far as.
Capital allocation.
You've seen that our net leverage ratio.
And there is down to low twos.
We're continuing to use our cash to strengthen our balance sheet pay down debt and to pay for the $7 seven day shape pre delivery payments.
We take a really disciplined approach to deploying our capital and we set aggressive return targets. Our focus continues to be on growing the business, while generating returns that are above our cost of capital and at the same time, maintaining a strong balance sheet.
Right now we have cares act limitations that don't allow us to.
Two either.
Put in play share repurchases or to put in place a dividend program.
Something that the board is always considering and when those restrictions are gone and Thats something that the board will have to determine at that time, but at the moment, it's not really a consideration at this point and we just can't.
Okay. Thank you and then just a follow up question and just wondering if you could give some color on what youre seeing with respect to.
Supply on some of your key routes it looks like we're starting to see some <unk>.
Indications of long haul commercial wide body flights.
And it back and areas like Latin America, it looks like we could be heading back towards pre pandemic levels and the next few months. So curious.
And I realize your network is pretty complex, but if youre, maybe top three or five.
Lanes, what does that dynamic look like currently and then how you're thinking about that for the second half. Thanks.
Yeah, Chris we're really not seeing that at all.
And in fact as I mentioned in my remarks, it's slow to recover.
Borders still remain closed now and I also believe there will be a significant appetite for the passenger carriers too.
To get their aircraft back up and running.
But there are a number of dynamics, there that still favor air freight, including some of the aircraft that are on.
Passenger aircraft that are being uses what's called traders.
And once passenger.
Traffic returns a lot of that capacity is going to come out of the market and there are also likely going to come out of major cargo trade lanes and back to passenger service trade lanes, but.
On it.
It's been slow and we expect that's going to continue to be slow so we're not necessarily seeing what youre describing.
I think theres a lot of.
There is going to be a lot of attention given to the passenger carriers too.
And get back up and running and and.
Some of the improvements, but right now what we're seeing on the demand side is not within the timeframe you're talking about.
And reasonable minds can differ on when it will return to pre pandemic levels, but I'm not one who believes it's going to be and the next few months at all.
Okay, but the routes I was referring to was on Latin American and overall.
And the number of flights coming back are still small I was just curious if theres been any.
Route.
And where you've seen a perhaps a marked difference versus a few months ago.
No not really.
Okay. Thank you.
Sure.
As a reminder to ask a question you will need to press fire one on your telephone I can't that is star one.
Next question comes from the line Scott Group from.
Wolfe Research your line is open.
Hey, Thanks morning, guys. So I wanted to go back to the segment reporting because when I look at charter margins have never been higher AC.
Hey, CMI margins have never been lower and.
And and charter rates are about three times as high as <unk>. So.
From a financial standpoint, they still look and feel very different so I'm just struggling with what what should the longer term margins of this segment look like.
Yes, Thanks Scott.
We don't think they are.
That got different anymore, as we talked about the businesses have been becoming more and more similar over time and you know.
We as a company, we view and manage them as one segment.
Not something that just.
Transpire during the pandemic the two segments have been converging for awhile now.
And as we talked about and are sort of opening comments. They both have long term and short term nature.
And nature to them, even a CMI has.
And pretty significant short term arrangements and it as well and.
Both provide similar services.
And exchange aircraft between them both fly similar routes carry similar goods and <unk>.
Same staff support all of them.
There was also a challenge from.
On a cost allocation standpoint, and keeping the two separate.
Because we record our maintenance for the most part on a as incurred basis. So in a quarter, where we incurred maintenance that maintenance may have been allocated.
To either a CMI or to charter.
But then the flying for the full year.
And may have been.
For the quarter were the maintenance was allocated may have been disproportionate.
And two how the whole year's worth of flying May have performed and.
And so for example, you are talking about historically CMI margins.
Margins being lower and there were times when <unk> would get allocated a disproportionate amount of maintenance for example.
Even though.
That's not the way the year would've necessarily played out.
And that's just the way that we allocate and we consistently have allocated that way so it presented problems that way and.
It harmed one segment or the other segment is just better to look at the two of them together at this point we think.
So you are asking about our long term, yes, sorry go ahead, yeah, I understand why you're consolidating I'm, just saying I'm struggling with how to think about what this combined segment should look like.
Over time now.
Yeah. So we've entered into these long term.
Charter contracts now so they are starting to look a lot more similar in that regard. These contracts as I said go into 2022, and 2023 and some go into 2024.
And so they are starting to.
Act a lot more like traditional CMI.
And so over the next number of years.
I think youll see those margins kind of normalize for both and as John talked about those long term charter contract customers, they're really getting the taste of what it is to have dedicated aircraft capacity.
And to be able to operate their networks, having that committed capacity and we hope and <unk>.
Expect that this is here to stay and those customers are going to want to stay and those arrangements and extend them even longer.
Okay and then.
And I don't know if you can.
And it helped.
Help with this but maybe you can so the 6% on the business that's ad hoc.
Is there any way to say sort of what percentage of the earnings and that's representing now and then the 94% that you think about as more and longer term now.
Are the rates on that 94% of fixed or do those still move based on market conditions I just want to understand the business now.
Sure.
So as far as do the rates move.
<unk>.
So for the U S. Military for example, that's a cost plus contract so if cost change.
And then.
That could certainly change the flying we do around South America, we fly a loop around South America.
So those rates do change over time.
<unk>.
The 6%, obviously those rates change.
The long term charters and the <unk> typically those rates only change when those contracts come up for renewal.
Okay, Alright, thank you guys.
Thank you. Thank you Scott.
We have a follow up question coming from the line of Chris Tussle with two of those from Susquehanna International Group. Your line is open.
Hey, Thanks for taking my follow up so just getting back to my first question and perhaps getting at Scotts from it from a different angle here.
Should we think that.
Perhaps you know if you want to look at it on and <unk>.
EBITDA margin that you are still.
Is this overall at a.
Corporate level.
High teens, 20%.
Business through the cycle here with these changes.
And the fact that you're moving.
Fewer missions on spot.
Yeah.
Absolutely you can see the growth and our segment margins.
And if you just look at the past year, you can just add the two.
And Mike charter together or you can look at them separately whichever.
But when you look at.
2020 versus 2019, and now you see 2021 versus 2020, you can see the growth those margins with these long term charter contracts and we look at.
As John talked about before we look at each and every arrangement each and every.
Schedule and network and we're trying to piece them altogether and.
If we can successfully do that as we have done.
And then we'll see we'll continue to see really strong margins and you can see that our utilization when you look at our utilization is up tremendously and our group has really been.
Focused on increasing that utilization or seven for seven dash eights utilization and increased $7 seven for hundreds and both of those and traditional HDMI utilization has increased our CMI customers flew 16% above their minimum guarantees during the quarter commercial charter utilization was up the <unk>.
Utilization that was down was the U S military which is understandable given the circumstances and that's on the passenger side that is.
So utilization has been really strong which is driving those strong margins.
Okay, and a follow up and.
Color on for update on on on the Amazon business, what with the active fleet Count is route served or if you could perhaps frame how it's been growing and what's left on the order book and where we are with the next.
Tranche of warrants.
Okay.
So the operating fleet were at seven.
17, 767, and eight 737 and 800, so that's 25 total airplanes operating for Amazon.
Those are all up and running and we brought on.
I think the last III towards the tail end of last year.
Working closely with Amazon.
And let Spencer comment on the warrants on.
But it's a great relationship with a great customer you know they're continuing to.
And to grow and diversify.
And their providers and we're gonna be and they're competing as best we can for for the business and we appreciate the business that they give us so we're up to 25 airplanes right now.
And all.
Just briefly comment on the warrants so.
Amazon exercised warrants and October and January of this year October of last year and January of this year.
And so we issued.
About $2 6 million shares, but in doing so because they exercised on a cashless basis, they actually sort of surrendered or cancelled about four 9 million shares so from a.
And existing shareholder equity dilution standpoint, there's a lot less potential dilution there as far as warrants outstanding and.
There are about 338000 shares worth of warrants that are vested warranty that is and.
No warrants C shares have vested and.
The remaining investing are tied to revenue paid to the company. So Amazon vest based on revenue that they pay to the company.
Okay, and then Spencer and any plans to apply for PSP three thanks.
I'll answer that one we have no plans to apply for PSP three.
Okay. Thank you.
Sure.
And there are no further questions over the phone line at this time presenters may continue.
Great. Thank you operator, and thanks for all of you for your great questions.
On behalf of all of our employees Spencer and I would like to thank you for your interest and Atlas Air worldwide. We appreciate you sharing your time with US today, we hope that you and your family stay safe and we look forward to speaking with you all again soon thanks so much.
This concludes today's conference call. Thank you for participating you may now disconnect.
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Good day, and thank you for standing by and welcome to the Atlas Air worldwide Holdings first quarter 'twenty to 'twenty, one results conference call.
At this time all participants are in a listen only mode.
After the speaker's presentation, there will be a question and answer session.
To ask a question during the session you will need to press star one on your telephone.
Please be advised that today's conference is being recorded.
Any further assistance please press star zero.
I would now like to hand, the conference over to your speakers Atlas Air. Please go ahead.
Thank you Jay and good morning, everyone.
Ed Mcgarvey Treasurer for Atlas Air worldwide.
Welcome to our first quarter 2021 results conference call.
And it's called 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 and the Investor information section.
And 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 they involve risks and uncertainties.
Our actual results or actions may differ materially from those projected and any forward looking statements.
For information.
And about risk factors related to our business. Please refer to our 2020 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 and 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 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.
Turn the call over to John Dietrich.
Thanks, Ed and Hello, everyone welcome to our first quarter earnings call.
On behalf of all of US at Atlas I Hope that you your families and friends continue to stay safe as we progress towards brighter days ahead.
I wanted to again, thank all the frontline responders and essential workers around the world for their efforts, we're encouraged by the distribution of vaccines.
And at the same time, we're just hardened and that the path to recovery continues to be prolonged and many regions of the world, particularly in India.
We operate frequently and that region and are actively engaged with multiple customers and organizations to support relief efforts.
We're also pleased to see so many others, both within and outside the industry stepping up to provide critical support.
I'd also like to thank our more than 4000 employees for their incredible dedication and contributions.
We're continuing to take wide ranging precautions to protect our employees and our operations to ensure we're able to safely transport the goods the world needs.
Our team continues to work tirelessly doing our part to keep the global supply chain moving.
This pandemic has certainly highlighted the important role that air flight Air freight plays in the global supply chain and how it brings essential goods to market with unmatched speed and reliability.
At Atlas the services, we provide have always been essential and they're now even more critical than ever.
We're leveraging our unmatched global operating capabilities and flexible business model to capitalize on current market conditions.
This includes transporting vaccines PPE and medical supplies Express and E Commerce perishables.
Manufacturing components and other daily necessities around the world.
And we're seeing general air freight tonnage grow from pre pandemic levels.
Throughout the pandemic, we've demonstrated to our customers that they can count on Atlas to provide the services and innovative solutions they need to keep their operating networks moving even in difficult times.
These capabilities weren't born out of this pandemic they've been developed at Atlas through many years of growth and diversification.
Which allows us to capitalize on market opportunities on a global scale.
And you can see that from the excellent results we have been reporting.
Advancing our initiatives and positioning us well for the future we continue to enter into and extend numerous long term charter agreements with strategic customers that have chosen Atlas because of our high quality services and operating expertise.
We recognize the important role we play and their supply chains, and we're committed to delivering for them and these unprecedented times and beyond.
Before we move to the next slide and review our results I'd like to take a moment to briefly discuss the segment reporting change we announced in our press release this morning.
I'll also ask Spencer to share more details during his remarks.
Beginning with the first quarter of 2021, we've changed our operating and reportable segments to reflect the evolution of our business.
Any of you are likely familiar with the three segments, we had previously, namely a CMI charter and dry leasing.
But as the CMI and charter businesses have become more similar.
We view and manage them as one segment.
We'll now have two operating and reportable segments airline operations and dry leasing.
This change to our segment reporting now reflects how we analyze both current operations and new business opportunities to ensure that our resources are put to the most profitable use.
Now turning to our first quarter results on slide four.
Our performance was driven by the strength and flexibility of our global business model.
As well as our team continuing to capitalize on the current air freight environment with demand and yields that are well above typical seasonal levels.
Want to again, thank all of our employees at Atlas for delivering safe high quality service for our customers and this very challenging operating environment.
We continue to leverage our global network and increased aircraft utilization to match significant air freight demand.
Our first quarter results continued to reflect strong demand for our aircraft and services are expanded and extended customer agreements.
Hi, commercial charter yields and a significant reduction of international widebody widebody belly cargo capacity.
Our results also benefited from the for 747 freighters and one triple seven freighters that we reintroduced to our fleet throughout 2020 to serve customer demand.
These benefits were partially offset by higher costs related to premium pay for pilots operating into certain areas that have been significantly impacted by COVID-19 the.
And the 10% pay increase we provided our pilots and May 2020, and higher heavy maintenance expense.
Turning to our pilot labor negotiations, we remain committed to reaching a joint collective bargaining agreement with our pilots and connection with the merger between Atlas Air and Southern Air.
And we're pleased to report that we've now moved closer to completing the new J CBA.
The scheduled arbitration proceeding on time and recently concluded on April one.
And the Union has now provided the company with the integrated seniority list. This is a critical item for implementing a new agreement.
The next step is for both parties to submit post hearing briefs on and agreed schedule.
After which the arbitrator will consider all the information presented and render a binding decision, which we expect sometime in the second half of this year.
Now moving to slide five.
We're off to a very good start in 2021.
And are seeing continued business momentum and the second quarter.
We're closely monitoring the market and leveraging the diversity of our business model.
This includes being prepared to capitalize on global market conditions, as well as being able to successfully adjust to any changes.
Long haul international passenger flying on wide body aircraft has been slow to recover and we.
And we'll likely be last to return as countries continue to struggle with COVID-19, and many borders remain closed.
Although there's been a lot of attention about recent levels have improved U S passenger air traffic.
It's important to note that these recent increases have largely been driven by pent up demand for domestic and regional leisure travel with smaller gauge aircraft, which is less impactful to international air freight.
No.
It will also be important to monitor what the new normal will be beyond the pandemic, including any impact on international business travel.
With the strong global demand for air freight outpacing air cargo supply, we anticipate air freight demand and yields to remain strong with capacity on long haul trade lanes remaining tight.
Looking to the second quarter, we expect to fly approximately 90000 block hours with revenue of approximately $950 million and adjusted EBITDA of about $210 million in.
In addition, we expect adjusted net income to grow by approximately 30% compared with adjusted net income of $72 2 million and the first quarter of this year.
Our outlook anticipates commercial cargo charter yields to remain above typical seasonal levels, but below the historically high yields experienced during the second quarter of 2020.
We also expect additional expenses driven by the pandemic, including premium pay for our pilots.
Costs for continuing to provide COVID-19 safety measures and the workplace.
Higher costs from the pay increase we provided to our pilots and May 2020.
And maintenance expense and the second quarter of approximately $130 million.
For the full year, we continue to expect aircraft maintenance expense to be lower than 2020, with depreciation and amortization totaling about $270 million.
In addition, core capital expenditures, which exclude aircraft and engine purchases are projected to total approximately $110 million to $120 million.
Mainly for parts and components for our fleet.
Given the ongoing economic and market related uncertainties, including COVID-19, new variance of the virus surges and cases globally travel restrictions and other factors.
We are providing our second quarter outlook, but not providing a full year of 2021 outlook at this time and we look forward to providing updates as the year progresses.
This is a good point for me to ask Spencer to provide more details on our first quarter results and our segment reporting.
And after Spencer's remarks, I'll look forward to providing a few additional comments and then we'll be happy to take your questions.
Spencer.
Thank you John and Hello, everyone.
I'd like to start by discussing the change to our segment operations and reporting and then we'll move to the next slide and I'll discuss our great first quarter results.
On prior earnings calls, we've talked about the blurring of lines between <unk> and charter and how these agreements have become more similar over the past few years.
As our long term charter business grew significantly during 2020.
Similarities became even more pronounced with both our <unk> and charter businesses now including contracts of a long term nature.
And as we've expanded the amount of flying that's performed on their long term contracts, we have reduced the percentage of our business that serves AD hoc demand.
Both <unk> and the majority of the charter services provide outsourced aircraft operating capabilities for customers on a fixed take or pay basis, providing us with more predictable revenue streams.
As we look to capitalize on customer demand and maximize returns we regularly exchange aircrafts between <unk> and charter service.
This operating flexibility allows us to fly to the destinations and transport the cargo that customers want regardless of whether they pay by block hour with <unk> whereby flight with charter.
And from a sales operations and support staff perspective.
And the same team of outstanding employees, assisting both AC and charter activities.
For both <unk> and charter we operate on similar routes fly to similar airports carry similar goods provide similar services and customers are primarily responsible for fuel.
Now moving to our strong first quarter results, which are highlighted on slide six.
On an adjusted basis EBITDA increased to 181 3 million with adjusted net income growing to $72 2 million.
On a reported basis net income totaled $89 9 million.
Our adjusted earnings and the first quarter included and effective income tax rate of 21, 9%.
Moving to the top of slide seven.
Operating revenue totaled $861 3 million and the quarter.
Higher airline operations revenue was primarily driven by a significant increase and flying and the average rate per block hour.
Block hour volume growth, primarily reflected strong demand for our commercial charter and CMI services, driven by higher air freight volumes the reduction of available cargo capacity and the market does.
Disruption of global supply chains, and our ability to increased aircraft utilization.
In addition, the segment revenue benefited from the operation of five freighters that we activated throughout 2020, including $4 seven for <unk> and one triple seven.
These items were partially offset by lower AMC passenger flying and as the U S. Military has taken precautionary measures to limit the movement of military personnel.
Revenue and our dry leasing segment was relatively unchanged.
Looking now at the bottom on the slide segment contribution totaled $179.7 million from the first quarter.
Higher airline operations contribution during the period was primarily driven by the positive factors benefiting segment revenue I just noted.
These benefits were partially offset by higher pilot costs and higher heavy maintenance.
Similar to revenue dry leasing segment contribution was also relatively unchanged.
Now turning to slide eight.
Our net leverage ratio ended the quarter at two one times, which is consistent with year end 2020.
We ended the first quarter of 2021 with cash, including cash equivalents and restricted cash totaling $714 million.
And our cash position at March 31.
<unk> cash used for investing and financing activities, partially offset by cash provided by operating activities.
Net cash used for investing activities during the first quarter was primarily for core capital expenditures.
Payments for flight equipment, and modifications, including pre delivery payments for our 747 dash eight water.
As well as spare engines engine overhauls and upgrade kits.
Net cash used for financing activities during the period, primarily reflected payments on debt obligations.
Partially offset by proceeds from debt issuance.
We continue to apply a disciplined approach to financing.
As we've noted before this has resulted in a low weighted average coupon interest rate, which now stands at 296%.
And the majority is secured by our aircraft assets, which have a value in excess of the related debt.
We remain committed to a strong balance sheet and.
And we're taking actions to mitigate the impact of any continuation or worsening of the pandemic by reducing costs enhancing liquidity and strategically allocating resources.
Now I'd like to turn it back to John.
Thank you Spencer.
Moving to slide nine and as.
As I mentioned, we're off to a very good start in 2021 and are seeing continued business momentum and the second quarter.
Our team continues to capitalize on the current air freight environment, while delivering safe high quality service for our customers.
We look forward to finalizing the new joint collective bargaining agreement with our pilots.
And we'll continue to take every precaution to protect our world class team of employees and our operations to ensure that we can continue to transport essential goods around the world.
At this point operator may we have the first question. Please.
Okay.
As a reminder to ask a question. Please press Star then the number one on your telephone keypad again that is start and the number one and withdraw your question press the pound or Heskey. Please standby, while we compile the Q&A roster.
Your first question comes from the line of Bob.
<unk> Lubbock from C. J S Securities. Your line is open.
Good morning, congratulations on on the performance and a very attractive guide for Q2 as well.
Thank you Bob.
I wanted to start with.
I'm, just trying to get a sense how much of the strong first half performance relates to spot or AD hoc flying versus contracted <unk> and long term charter and take or pay contracts I'm trying to get a sense of the kind of sustainability and recurring nature of the contribution and the first.
Half.
Sure Bob.
And so about.
60% to 65% of our flying now.
And what was traditionally CMI about 20% is now and long term charters.
10% is with the U S military.
5% is flying around South America, and only about five or 6% now is what was traditionally kind of.
AD hoc spot market. So it really has become a very small percent of our overall business and so approximately 94% of all the flying is on dedicated dedicated aircrafts.
Got it great and then.
Just looking to the second half and 2022, then with that and mind other than the pilot labor.
Information that you'll get.
And at the end of this year pilot costs, what are the biggest variables you're thinking about for the second half and for 2022 since so much of your flying is kind of already locked up.
Yeah really.
Of course, we're in the middle of a pandemic so.
There are a lot of uncertainties related to that and what that might mean overall based on everything we're seeing.
On.
And we feel pretty good about the space that we play and and the continued strength of the air freight environment, but there are plenty of uncertainties out there as you know.
Other than that it's really supply demand.
Impact on yields operational challenges.
Amazing work that our team does to overcome those operational challenges those are really the big items.
Yeah, and Bob if I could add to that.
Yeah.
We've talked a lot through 2020 about COVID-19 related and pandemic related movements, which are still continuing.
But we're also keeping a close watch on overall economic conditions and as I said and my comments what lies beyond the pandemic.
IATA came out with some statistics pretty recently to show that the economy and economies are recovering.
We're going to be watching that closely inventory levels are down we expect manufacturing to.
Want to get back to full strength, which it's not right now.
So those are beyond the pandemic and the things I'm looking to and important variable to keep an eye on.
Super Thank you very much.
Thank you.
Your next question comes from the line of Helane Becker from Cowen Your line is open.
And thanks, very much operator, hi, everybody and thank you very much for the time.
Just had a couple of questions on and you think about the aircraft here for the next bunch of years, you're taking me for last cash seats and I guess on slide on like 30 or 40 years. So maybe this isn't a question you have to think about too soon but then how are you thinking.
Aircraft replacement for some of the older seven for seven and four hundreds.
Maybe.
Yeah, I'll start with that.
And.
It's important to remember that the seven for seven and 400 is still a great airplane.
And still well within its useful life.
And the models that we have are on average.
2000, 22022 builds and.
And if you look at the Lifeline you just described for the $7 seven day shape that still applies to seven and $4 seven and 400.
So we expect that the 400 will continue to be a workhorse and in the years to come.
And I would say similar to our comments on the seven for seven dash eight over time. We also think there is some of the older one start to retire and what I mean by that is the less productive ones, which are likely to be the converted passenger to freighter.
Some for <unk> those will likely retire earliest.
Let's say the pure freighters are going to have scarcity value overtime with its payload range capabilities as well as its nose loading capabilities. So we feel really good about the.
For $7 seven into the future both the 400 and the dash eight.
Now that said there are also some great airplanes out there the triple seven is a great airplane.
The existing.
Freighter fleet and looking forward.
Two the converted triple seven as well as other aircraft types.
Airbus is talking about the <unk> hundred 50, we're going to be looking as we always do it awfully types.
But.
With the Sun for seven is kind of the backbone of our operation.
Gotcha, Okay, that's very helpful.
Thank you for that and then the other question I have is you gave your pilots and pay increase and May.
Last here.
Yes.
And now it's so good to see that Youre, making progress on the contract go.
Got it hopefully coming to and and.
Maybe it beginning depending on how you think about it.
And.
And they first came and went this year would it is not giving them. Another raise this year just holding off because you think you're close to getting an agreement before year end that went and context.
And now pay that would cover this year.
Well, Hello, and Theres a lot on that question and I agree with you. We were pleased to see this negotiation coming to and and then I can say it it is coming to an and.
The arbitration is now complete and.
And we have specific dates.
Where the post hearing briefs are due to arbitration completed on April one.
Two weeks of hearings.
And it is coming to and and and the arbitrator has committed to us to get to a.
Outcome as soon as reasonably possible, we're hoping it's within.
Our 60 day time period, there was a large record that was submitted and.
But it is coming to and ended and we're pleased about that so.
There is nothing to prevent us from continuing dialog with the union.
Representatives have been in touch with each other through the process.
But the arbitration procedure and that we've been.
Pushing for for so long in terms of bringing this to a conclusion.
And it's happening and we expect to result, I can't give you a specific date, but we expected and the second half of the year.
I heard you say that on the call.
Well. Thank you. Thank you very much and and while that was quite a credit quarter congratulations.
Thank you.
Thanks Helane.
Your next question comes from the line of.
Stephanie Benjamin from choice your line is open.
Hi, good afternoon.
Aside from Anthony.
I wanted to touch on on the long term charter business, you had really strong success last year locking and some of these incremental longer term charter on contracts. So just love to hear an update on really the demand you're seeing for these types of contract this year as well as maybe the types of customer and if the momentum from 2020.
Continued through 2021.
And.
Okay.
Yes, Thanks Stephanie.
We're seeing strong interest from these customers and.
And in early and when some of these contracts were being entered into.
And as I described and a prior call. This is a new customer base and from lessons learned from the pandemic and perhaps overdependence on path.
Passenger belly capacity.
And what many of our customers are seeing and learning.
And that main deck freighters is very attractive and to be able to secure that capacity.
And is important.
Both within this pandemic environment, but also beyond.
So we've seen strong interest.
And are excited about that it's a whole new customer base and as Spencer pointed out they are more a CMI like contracts because they have term associated with them and.
And on many of the attributes of a CMI.
And as I mentioned in my remarks, we're not only seeing new agreements entered into but extensions of existing agreements and so that.
Paul.
Kind of responsive to your question about the interest.
I also think there's going to be some post pandemic lessons learned about the attractiveness of main deck freighters on a dedicated capacity.
Some of our customers already recognize the benefits.
And real time inventories and moving product around rather than carrying large inventories that may or may not sell and I think air freight will be a key component of that and.
On the post pandemic economy.
And Stephanie it's Spencer I'll, just add very briefly to Johns comments there.
And we now have dozens of these long term contracts during the first quarter.
We had for the contracts that were extended we had two that either added aircraft or at a rotations and we had one new customer for.
For two years and.
And the vast majority of these contracts go into 2022 and 'twenty three some go into 2024 and the majority are on the sort of fastest growing trade lanes and they probably will not be operated by returning passenger aircraft.
Great well. Thank you so much for all that color.
Thank you.
Your next question comes from the line of Chris It's tough for the two of those from SaaS Gahanna International Group. Your line is open.
Good morning, Thanks for taking my question.
Chris So expenses for John So with the change and reporting here can we interpret.
This year that.
No.
The changes here and ACM iron more structural or permanent in nature, meaning are you no longer prioritizing or pursuing short term charter business and then if so.
How should we think about weather.
Whether it's however, you want to quantify and EBITDA margins or EBIT dollars, our free cash flow.
Through the cycle now.
Given the change and via the.
And the duration of the contracts. Thanks.
Thanks, Chris and I'll start in terms of your prioritization question.
And the AC and my model is very attractive it provides.
The cure.
<unk> revenue streams and some of what we're seeing as we've talked about the long term charter agreements for more ACM I like.
And then another element of the long term charters as sometimes Spencer mentioned dozens of these agreements is our ability to per customers and get full utilization out of the aircrafts by combining customer demand.
And as a typical traditional HDMI, which is fully dedicated full time used for the aircraft and I think there is there is demand and desire for both and it allows us to offer a partial aircraft.
For the remainder for another customer so that's worked quite well for us and our network planning on a global basis. So.
From a prioritization standpoint.
Those two the ACI and the long term charters are certainly the kind of deals, we like and and and we'll secure a long term basis, but we also are able to flex our capabilities to take advantage of on the amount of fleet that we keep aside for AD hoc charter and Theres no doubt.
And that's allowed us to deliver a lot of these results and that's really always been the case for us because we know theres a consistent level of interest.
And I, both in good times, and and challenging times for the spot charter market.
So should we think about this is generally accretive or positive for free cash flow and that if so.
So that would you would look to direct that capital towards the order book or when the PSP restrictions.
Expire.
And returning capital or pursuing other activities.
Yeah.
Yes, Chris with regard to.
Sort of two parts of that question I think there was a.
Capital allocation question.
And then there was kind of a free cash flow question.
Our free cash flows.
You can see.
Really been strong and continue to stay that way.
And as far as.
Capital allocation.
And you've seen that our net leverage ratio.
And is down.
Low twos.
And we're continuing to use our cash to strengthen our balance sheet pay down debt and to pay for the $7 seven day shape.
Pre delivery payments.
We take a really disciplined approach to deploying our capital and we set aggressive return targets. Our focus continues to be on growing the business, while generating returns that are above our cost of capital and at the same time, maintaining a strong balance sheet.
Right now we have cares act limitations that don't allow us to.
Two either.
Put in play share repurchases or to put in place a dividend program.
Something that the board is always considering and when those restrictions are gone and Thats something that the board will have to determine at that time, but at the moment, it's not really a consideration at this point and we just can't.
Okay. Thank you and then just a follow up question and just wondering if you could give some color on what youre seeing with respect to.
Supply on some of your key routes it looks like we're starting to see something and.
Indications of long haul commercial widebody flights.
And it back and areas like Latin America, it looks like we could be heading back towards pre pandemic levels and the next few months. So curious.
And I realize your network is pretty complex, but if youre, maybe top three or five.
Lanes, what does that dynamic look like currently and then how you're thinking about that for the second half. Thanks.
Yes, Chris we're really not seeing that at all.
And in fact as I mentioned in my remarks, it's slow to recover.
Borders still remain closed now I I also believe there will be a significant appetite for the passenger carriers to get their aircraft back up and running.
But there are a number of dynamics, there that still favor air freight, including some of the aircraft that are on.
Passenger aircraft that are being uses what's called traders.
Once passenger traffic returns a lot of that capacity is going to come out of the market and.
And there are also likely going to come out of major cargo trade lanes and back to passenger service trade lanes, but.
It's been slow and we expect that's going to continue to be slow so we're not necessarily seeing what youre describing.
There's a lot of.
And there is going to be a lot of attention given to the passenger carriers too.
On.
Get back up and running and and tout some of the improvements, but right now what we're seeing on the demand side is not within the timeframe you're talking about.
And reasonable minds can differ on when it will return to pre pandemic levels, but I'm not one who believes it's going to be and the next few months at all.
Okay. The routes I was referring to was on Latin American and overall.
The number of flights coming back are still small I was just curious if theres been any.
Route that's.
And where you've seen a perhaps a marked difference versus a few months ago.
No not really.
Okay. Thank you.
Sure.
As a reminder to ask a question you will need to press its fire one on your telephone I can that is star one.
Question comes from the line Scott Group from Wolfe Research Your line is open.
Hey, Thanks morning, guys. So I wanted to go back to the segment reporting because when I look at charter margins have never been higher.
And my margins have kept for Penn lower and.
And I mean charter rates are about three times as high as <unk>. So.
From a financial standpoint, they still look and feel very different so I'm just struggling with what what should the longer term margins of this segment look like.
Yes, Thanks Scott.
And we don't think they are.
That got different anymore, as we talked about the businesses have been becoming more and more similar over time and you know.
We as a company, we view and manage them as one segment.
Not something that just you know.
Transpire during the pandemic the two segments have been converging for a while now.
And as we talked about and are sort of opening comments. They both have long term and short term nature.
Nature to them, even a CMI has.
Pretty significant short term arrangements and it as well and.
Both provide similar services exchange aircrafts between them both slides similar routes carry similar goods and.
Same staff support all of them.
And there was also a <unk>.
Challenge from.
On a cost allocation standpoint, and keeping the two separate.
Because we record our maintenance for the most part on a as incurred basis. So in a quarter, where we incurred maintenance that maintenance may have been allocated.
And two either.
Or to charter.
But then the flying for the full year.
On may have been.
On the quarter, where the maintenance was allocated may have been disproportionate.
And how the whole year's worth of flying May have performed.
And so for example, you are talking about historically a CMI.
<unk> being lower and there were times when <unk> would get allocated a disproportionate amount of maintenance for example, even though.
And that's not the way the year would've necessarily played out.
Just the way that we allocate and we consistently have allocated that way so it presented problems that way and.
Sure.
And it harmed one segment or the other segment is just better to look at the two of them together at this point we think.
So you are asking about our long term yeah. Sorry go ahead, yeah, Yeah, I understand why you're consolidating I'm, just saying I'm struggling with how to think about what this combined segment should look like.
Over time now.
Yeah. So we've entered into these long term.
Charter contracts now so they are starting to look a lot more.
Similar in that regard these contracts as I said go into 2022, and 2023 and some go into 2024.
So they're starting to.
Act a lot more like traditional CMI.
So over the next number of years.
I think youll see those margins kind of normalize for both and as John talked about those long term charter contract customers, they're really getting the taste of what it is to have dedicated aircraft capacity and to be able to operate their networks, having that committed capacity.
And we hope and.
I expect that this is here to stay and those customers are going to want to stay and those arrangements and extend them even longer.
Okay and then.
And I don't know if you can.
Hum.
Help with this but maybe you can so the 6% on a business that's ad hoc.
Is there any way to say sort of what percentage of the earnings that's representing now and then the 94% that you think about as more and longer term now.
For the rates on that 94% on fixed or do those still move based on market conditions I'm, just trying to understand the business now.
Sure.
So as far as do the rates move.
So for the U S. Military for example, that's a cost plus contract so if cost change.
And then.
And that could certainly change the flying we do around South America, we fly a loop around South America.
So those rates do change over time.
<unk>.
The 6%, obviously those rates change.
The long term charters and the <unk> typically those rates only change.
When those contracts come up for renewal.
Okay, Alright, thank you guys.
Thank you. Thank you Scott.
We have a follow up question coming from the line of Chris its tussle with two of those from Susquehanna International Group. Your line is open.
Hey, Thanks for taking my follow up so just getting back to my first question and perhaps getting at Scotts from it from a different angle here.
Should we think that.
Perhaps you know if you want to look at it on an EBITDA margin that you are still.
Is this overall.
At a corporate.
Corporate level.
High teens kind of 20%.
Business through the cycle here with these changes.
And the fact that you're moving.
Fewer missions on spot.
Yeah.
Absolutely you can see the growth and our segment margins.
And if you just look at the past year, you can just add to that.
And Mike charter together or you can look at them separately whichever.
But when you look at.
2020 versus 2019, and now you see 2021 versus 2020, you can see the growth those margins with these long term charter contracts and we look at.
As John talked about before we look at each and every arrangement each and every.
Schedule and network and we're trying to piece them altogether and then.
If we can successfully do that as we have done.
And then we'll see we'll continue to see really strong margins and you can see that our utilization when you look at our utilization is up tremendously and our group has really been.
Focused on increasing that utilization or $74 seven dash eights utilization has increased $74 seven for hundreds and both of those and traditional HDMI utilization has increased our CMI customers flew 16% above their minimum guarantees during the quarter commercial charter utilization was up the only.
Utilization that was down was the U S military which is understandable given the circumstances and that's on the passenger side that is.
So utilization has been really strong which is driving those strong margins.
Okay, and a follow up and any color on for update on on on the Amazon business, what with the active fleet Count is route served or if you could perhaps frame how it's been growing what's left on the order book and where we are with the next.
On a tranche of warrants.
Okay.
So the operating fleet were at 17.
17, 760 Sevens and eight 737 and 800, so that's 25 total airplanes operating for Amazon.
Those are all up and running and we brought on.
I think the last III towards the tail end of last year.
Working closely with Amazon.
And let Spencer comment on the warrants and.
But it's a great relationship is a great customer they're continuing to.
And to grow and diversify.
There are providers and we're gonna be and they're competing as best we can for for the business and we appreciate the business that they give us so we're up to 25 airplanes right now.
And I'll just briefly comment on the warrants so.
Amazon exercised warrants and October and January of this year October of last year and January of this year and so.
And we issued.
And about $2 6 million shares but in doing so because they exercised on a cashless basis, they actually sort of surrendered or cancelled about $4 9 million shares so from a.
And existing shareholder equity dilution standpoint, there's a lot less potential dilution there as far as warrants outstanding.
And there are about 338000 shares worth of warrants that are vested warranty that is.
And no warrants C shares have vested and.
Any remaining investing are tied to revenue paid to the company. So Amazon vest based on revenue that they pay to the company.
Okay, and then Spencer and any plans to apply for PSP three thanks.
I'll answer that one we have no plans to apply for PSP three.
Okay. Thank you.
Sure.
And there are no further questions over the phone line at this time presenters may continue.
Great. Thank you operator, and thanks to all of you for your great questions on.
On behalf of all of our employees Spencer and I would like to thank you for your interest and Atlas Air worldwide. We appreciate you sharing your time with US today, we hope that you and your families stay safe and we look forward to speaking with you all again soon thanks so much.
This concludes today's conference call. Thank you for participating you may now disconnect.