Q2 2021 Atlas Air Worldwide Holdings Inc Earnings Call
[music].
Ladies and gentlemen, thank you for standing by and welcome to the Atlas Air worldwide Holdings second quarter of 'twenty 'twenty..1 was at the conference call. At this time all participants on a listen only mode. After the speaker's presentation. There will be a question and answer session to ask the question. During the session you will need to press. The Star then the 1 key on you touched on the telephone.
On.
Please be advised this conference maybe recorded it for you.
The call operating assistance. Please press Star then zone.
And I like to hand, the conference over to the.
The Atlas Air Management team. Please go ahead.
Yeah.
Thank you Olivier and good morning, everyone I'm, Ed Mcgarvey Treasurer for Atlas Air worldwide and welcome to our second quarter 2021, the 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 and the Investor information section.
And as indicated on slide 2 I would 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 engaged and so please refer to our to our 2020 form 10-K as amended or supplemented by our subsequently filed SEC reports.
Any references to non-GAAP measures and 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 of today, we'd like to ask participants to limit themselves to 1 principal question and 1 follow up question.
And so we can accommodate as many participants as possible.
After we've gone through the queue, we'd be happy to answer any additional questions as time permits.
At this point I would like to draw your attention to slide 3 and turn the call over to John Dietrich.
Thanks, Ed and Hello, everyone.
<unk> to our second quarter earnings call.
I'd like to start by thanking all of our employees and all of the frontline responders for their continuing and tremendous efforts throughout this pandemic.
At Atlas safety is the core value and as always the top priority.
With that commitment in mind, we continue to take extensive precautions to safeguard our employees and our operations to support our customers and safely transport the goods the world needs.
This pandemic has really underscore the important role that Atlas plays and the global supply chain and and our customers' networks.
And it also highlights the significance of global air freight, which brings goods to market with unmatched speed and reliability.
We've seen and acceleration of express and e-commerce growth and and todays global economy manufacturers and merchants are needing the quickly replenish inventories to meet growing consumer demand.
That said COVID-19 continues to cause disruptions to manufacturing.
We're also seeing congestion and delays at many ocean ports worldwide.
This congestion and the related delays are leading to ocean freight rates that are extremely elevated.
And shippers are therefore increasingly choosing air freight to mitigate bottlenecks and their supply chain.
And that is driving even more air freight demand.
This all bodes well for global Air freight volumes, which are now exceeding pre pandemic levels.
Atlas is fleet and our global operating capabilities are unmatched in the industry, we're continuing to leverage the strength and flexibility of our business model.
To capitalize on current market conditions, and importantly, we're positioning the company well for the future.
We're actively managing our fleet to profitably serve our customers with modern efficient aircraft.
And we take a very disciplined approach when making aircraft investment decisions.
As announced in our press release today between May and August we acquired 3 of our existing 7 and $4.7 and 400 freighters that were previously on lease to us.
In addition, we reached agreements with our lessors to purchased 5 of our other existing 7 and 4.7 and 4 and freighters at the end of their lease terms in 2022.
Acquiring these 8 traders underscores our confidence and these assets as well as and the global air freight market.
By keeping these aircraft and our fleet, we're ensuring these capable freighters will be available to provide committed capacity to our customers with strong returns for Atlas and the years ahead.
As the world's largest 7 and $4.7 freighter operator, the 7 for 7 and 400 is core to our business.
And of complements our diverse fleet of 7 and $4.7 dash eights Triple Sevens, 760, Sevens and 737 and.
Each of which plays a unique role and our customers' networks.
Now turning to our second quarter results on slide 4.
We entered the second quarter with very high expectations, all of which were exceeded.
On an adjusted basis, our earnings were among the best and our company's history.
These positive results could only have been achieved by our entire team coming together to execute on our strategy.
Our diverse and experienced team is second to none and they pulled together to increase utilization on our aircraft and to deliver safe high quality service for our customers.
Despite a very challenging operating environment due to COVID-19.
Our performance continued to benefit from operating the for 7 for 7 freighters and the Triple 7 freighter, we reintroduced to our fleet in 2020.
This capacity.
Along with the tremendous team effort contributed to our ability to enter into and extend long term agreements with strategic customers.
As well as capitalize on lucrative short term opportunities and this strong global air freight market.
As I mentioned earlier, our second quarter results reflected global airfreight volumes that now exceed pre pandemic levels and the ongoing disruption of global supply chain due to the pandemic.
In addition, the second quarter reflected improved passenger charter flying for the U S military.
And the continued reduction of the international passenger belly cargo capacity.
Partially offsetting these benefits were lower yields net of fuel compared with the exceptionally high yields we saw in April and May of 2020 during the early months of the pandemic.
Equally important to the results we delivered is how we've delivered them.
1 of our core values at Atlas is corporate responsibility.
And in June we issued our second environmental social and governance or ESG report.
This report is themed carrying for the world we carry.
And the captures our commitments to our people communities and the planet and it also outlines our ESG strategy and goals.
We invite you to read more about our ESG program and our progress and the report which is available on the corporate responsibility section of our website.
Turning for a moment to our pilot labor negotiations.
We're pleased to report we moved even closer to completing the new joint collective bargaining agreement with our pilots at Atlas Air and Southern Air.
The Union has now provided the company with their integrated seniority list the.
The schedule of arbitration on the open issues concluded in April.
And both parties submitted their post hearing briefs in early June.
The arbitrator is now considering all the information presented and we expect to receive his final and binding decision late in the third quarter.
Now moving on to slide 5.
As I've been discussing economic and supply chain and conditions remain favorable for air cargo and for our dedicated freighters.
Inventory levels remain low the.
The purchasing managers index or PMI readings have been positive.
And congestion long lead times and elevated pricing continued to impact ocean freight helping to further favor air freight.
Demand also continues to exceed available supply, particularly on the international routes as international travel stay subdued and related belly capacity remains out of the market.
Despite some of the well publicized improvement and domestic passenger traffic the recovery of international passenger travel continues to be hampered by border closures and other travel restrictions due to continued COVID-19 challenges, especially.
Especially with the rapidly spreading delta variant.
While the operating environment remains challenging due to the pandemic.
The market dynamics, we're seeing and the third quarter remained strong.
As a result, we expect revenue of nearly $1 billion.
And the adjusted EBITDA of approximately $250 million from flying more than 90000 and block hours and the third quarter.
In addition, we expect adjusted net income to grow by approximately 50% with adjusted net income of $82.7 million in the third quarter of last year.
Our third quarter outlook reflects the contribution of our long term customer agreements that have favorable rates and guaranteed levels of flying.
High levels of aircraft utilization driven by strong demand and commercial charter yields that we expect to remain above typical seasonal levels.
We also expect ongoing expenses driven by the pandemic, including premium pay for our pilots as well as costs for continuing to provide a safe working environment for all of our employees.
And maintenance expense and the third quarter of approximately $100 million.
For the full year, we expect aircraft maintenance expense to be lower than 2020.
And we expect depreciation and amortization to be about $275 million.
For capital expenditures, which exclude aircraft and engine purchases are projected to total approximately $105 million to $115 million.
Mainly for parts and components for our fleet.
Given the ongoing economic and market related uncertainties included including COVID-19, and the unfortunate spread of the Delta variant.
As well as various travel restrictions low international passenger travel and other factors.
We are providing our third quarter outlook, but not providing a further outlook at this time, we will however look forward to keeping you updated as the year progresses.
This is a good point for Spencer to provide more details on our second quarter results and after Spencer's remarks, I'll have some additional comments and then we'll be happy to take your questions.
And Sir.
Thank you John and Hello, everyone.
Our strong second quarter results are highlighted on slide 6.
On an adjusted basis EBITDA totaled $243.7 million with adjusted net income totaling $121.8 million.
On a reported basis net income totaled $107.1 million.
Our adjusted earnings included and an effective income tax rate of 22, 4%.
Moving to the top of slide 7.
Revenue totaled $994 million on the quarter.
Higher airline operations segment revenue was primarily driven by an increase from flying and the average rate per block hour.
Block hour volume growth, primarily reflected our ability to increased aircraft utilization to serve strong customer demand.
The strength of the international Air freight markets.
The ongoing and reduction of available cargo capacity.
And the disruption of global supply chain due to the pandemic.
In addition segment revenue benefited from the operation of the 5 freighters, we reactivated throughout 2020 the.
The $4.7 for 7 and 1 triple 7.
As well as improved charter flying for the U S military.
Revenue and our dry leasing segment was relatively unchanged.
Looking now at the bottom of the slide.
Segment contribution totaled $242.6 million from the second quarter.
Airline operations segment performance improved significantly compared with the prior year that included exceptionally high commercial charter yields and April and May last year.
Higher airline operations contribution during the period was primarily driven by the positive factors benefiting the segment revenue I just noted.
As well as lower heavy maintenance expense.
And dry leasing higher segment contribution was primarily due to lower interest expense related to the scheduled repayment of debt.
Now turning to slide 8.
Our net leverage ratio declined another tick, finishing the quarter at 2.0 times down on a full turn from 3 point and O times at the end of the second quarter of 2020.
We ended the second quarter with cash, including cash equivalents and restricted cash totaling $765 million.
Our cash position at June 30th reflected cash used for investing and financing activities, partially offset by cash provided by operating activities.
Net cash used for investing activities and the first half of 2021 was primarily for core capital expenditures.
Payments for flight equipment, and modifications, including pre delivery payments for 7 for 7 dash 8 aircrafts with we'll take next year as.
As well as spare engines engine overhauls and upgrade kits.
Net cash used for financing activities during the 6 month period, primarily reflect the debt payments.
Partially offset by proceeds from debt issuance.
We continue to apply a disciplined approach the financing as we've indicated before this has resulted in the low weighted average coupon interest rate, which now stands at 295% and.
And the majority of secured by our aircraft assets, which are of 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 as well as the positioning our company for continued success by managing costs and enhancing liquidity and strategically allocating resources.
Now I'd like to turn it back to John.
Thank you Spencer.
And moving to slide 9.
We have great business momentum.
Delivered a very strong second quarter and.
And we feel very good about the third quarter.
Our team continues to execute on our strategy and capitalize on the current air freight environment.
While also positioning us well for the future.
We're closer to completing a 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 serve our customers and.
And transport essential goods around the world.
At this point operator, and then we have the first question. Please.
Thank you, ladies and gentlemen of the reminder to ask the question you want to press. The Star then the 1 key on you touched on the telephone and can be trying a question and pass the pound key.
And I will become part of the county last time.
My first question coming from the line of Stephanie more with Jewish Your line is open.
Hi, Good morning, Thank you for the question and congrats on a nice quarter.
Thank you Stephanie.
I wanted to touch a bit on some of the the locked and charter.
Agreements that have been put in place really over the over the last year and and would love to get a sense of maybe what you're hearing from some of those customers that switched to a more dedicated offering I think you've called out in the H P. For example, and the past maybe just some I guess, that's really what you're hearing is their feedback I mean is this something where the.
And they're really understanding the benefits of working with the dedicated carrier or have you been able to kind of sign on more of these longer term charter agreements and I'd love to just kind of update on that thank you.
Sure, Thanks, Stephanie and and then I'll start.
The feedback has been overwhelmingly positive.
Think of customers appreciate the ability to take advantage of this committed capacity.
They have assurances that the.
Goods are going to get to where they need to be in fact.
You reflect on some of our comments not only are we entering into new agreements, but we're also extending existing agreements, which is indicative of the there.
Pleasure with the with the agreements and the fact that Theyre looking to renew and and so we feel really good about it. It's also important to note for creating a new customer base here too with the likes of HP and others, where they typically had not committed to dedicated freighters.
And and we see that as the trend.
Trend, that's renewing and hopefully expanding over time.
And maybe Stephanie it's Spencer I'll, just add a couple of things there.
As John said customers are enjoying the dedicated capacity that they now have.
The vast majority of these agreements you know go into 2022 and 'twenty 3.
Several now go into 2024 and many of them are on some of the fastest growing trade lanes that likely will not be operated by returning passenger aircrafts. So it really gives the customer of this dedicated capacity that they can count on.
And then just lastly on this topic.
During the second quarter.
And we extended 2 agreements with 2 of the big for.
Our orders and 1 we extended 1 year into 2023 and <unk>.
And 1 we extended 3 years into 2020 for now.
We also during the quarter entered into 2 new arrangements with 2 big forwarders, there as well.
1.
It goes to the end of this year and 1 is for a couple of years going into 2023 and all.
All at the very good rates.
Great well I will leave it at that and and thank you for the color.
Thank you.
Our next question coming from the lineup of <unk>.
<unk> with CJS Securities. Your line is open.
Good morning, and congratulations again on just the excellent execution and a great quarter.
Thanks, Bob.
Sure.
So with Q2, and then guidance for Q3 EBITDA in excess of several prior peaks, probably all but last year. How is the business seasonality changed with your new contracts, how should we think about seasonality going forward and and how should we think about kind of the earnings power of the business going forward.
And you can see it's of Great question, you can see that the the seasonality.
And is not as varied as it once was so of course, there's still.
Some seasonality and the fourth quarter, you would expect there's always going to be the highest quarter.
Given that the holiday period, but you can see the the seasonality. This year you know looking at the second quarter of this year versus the third quarter and.
The outlook the we've provided.
You can look and see if there is not nearly as much variability of these long term contracts are much more reliable and predictable.
And of course, we still have about 5% of our business and the.
The AD hoc charter spot market and so on.
Sure.
That is somewhat dependent on what yields are doing but the vast majority of the business now is much more and locked in and there's less seasonality of less variability.
Got it Okay. That's great and then I guess as my follow up just wanted to ask also about the what's the P&L impact of acquiring the claims that are coming off lease.
Pretty exciting and it seems like it could be of pretty good use of capital for you, particularly given the strong cash flow that you have so maybe just kind of help us give us that give us a sense of the P&L impact and and how many more after the 8 do you have this opportunity to.
After the lease and.
And you carefully.
Sure Bob.
Spencer So I guess I'll start by saying you know acquiring the aircrafts really.
And it underscores our confidence and the global air freight market.
We will ensure that we have these committed aircraft to be able to serve customer needs and.
And it delivers.
Strong returns for Atlas and the years ahead so.
What I can say there is that you know looking at the the 8 aircraft the <unk>.
IRR and there are very strong.
For many years ahead, the payback period on these aircrafts is only about 2 to 3 years and we avoided.
Having to incur some and.
Maintenance return conditions that we otherwise would have paid when returning the aircraft and.
And would have been due to the lessors. So it is a.
And again very good IRR and it'll be very good for our P&L going forward.
And your other question was how many aircrafts.
And we still have.
And remaining on lease I think right yeah.
And with the opportunity to potentially have the opportunity to potentially buy them and as well like you just did with these.
There are still about.
Approximately I think its 11 aircraft that remain on lease and those will be.
Through 2025.
So we still have opportunities there.
To either re lease not release acquire those aircrafts and so we still have those opportunities coming up.
Super Alright, thanks, so much.
And keep them.
And our next question coming from the lineup Kristof Annapolis with the scanner. Your line is now open.
Hey, good morning, everyone and thanks for taking my questions. So John Spencer.
Could you give some more detail on on what Youre seeing with with respect to the the.
Of the freighter supply demand balance as a whole and then perhaps if there are any lanes that stick out and just.
Looking at some of the wide body passenger schedules this morning.
For.
Flights originating in North America, it looks like for the second half, they're down around 12% versus the comparable period for 2019. So curious if you've seen any meaningful change.
And the dynamic versus when we last spoke and.
And May and then perhaps curious if you have any thoughts on filings.
Plans to require.
Vaccinations for all inbound.
International passenger travelers, which could probably help.
The greater dynamic for the second half as well thanks.
Sorry, John you're on mute.
My apologies.
Occupational hazard these days sorry about that.
So I'll start and then Spencer can provide some additional color.
We expect and as I've been saying all along the passenger carriers are going to have a tremendous appetite to bring as much capacity back into the market as soon as possible and.
I applaud them on that.
But what we're seeing here is.
It's much more gradual.
And even at the end of the the period, where we return back to pre COVID-19 levels of volume.
We're anticipating and some of the studies, we see are anticipating that in terms of capacity, even when the volumes come back of the capacity will likely be 20% less and what it is today.
So that's the that's.
And that's a factor to keep in mind and plays into.
Air freight.
In terms of available new capacity coming into the market I'll say, it's somewhat a gradual and slower.
And there are really no available production slots for wide body freighters and.
The late fourth quarter 2023.
Other than those that are already on the books and.
And many of those are going to some.
Some of the express operators that are more customers and competitors of ours.
Some of the other available aircraft through conversions are longer lead times.
So you know over the next.
Couple of years.
At least we see the supply.
And not keeping pass with the significant demand I talked about some of the factors for the demand is coming back and once Covid subsides, which we all hope the sooner than later, there's just my view is going to be tremendous appetite for manufacturing movement of goods raw materials and finished products to get moving again businesses aren't really.
Interested and getting going again.
And we think that all favors air freight, particularly when you look at some of the other supply chain challenges of Ocean that we mentioned.
So that dynamic is in play capacity.
It is going to be tight and we expect.
Continued growth and air cargo, putting aside COVID-19 demand just general economic.
On the return of air freight to be 3 of 4% annually and.
Fueled by our strong global economy.
And once things get rolling again.
With regard to your question on Baidu plans.
The required.
The inbound immunization Guy I think that's another the burden for the international passenger carriers. It is going to further a subdued demand.
Because I know there of strong feelings on people and getting the vaccination or not or meeting the cross those hurdles.
And in fact, what we're seeing if you follow the news and some of the reports.
Entries are reversing course, and getting more restrictive now points and China I read this morning, some pressure and in Germany.
And it's almost taking 2 steps forward 1 step back of describing how you will.
So, yes, we think that will contribute.
And to international.
Passenger travel being a bit slower than people forecasted and say this time last year for example.
Okay and my follow up so it looks like yesterday of the U S. D O D reinstated some travel restrictions.
But still around 89% of their installations have had have the restrictions lifted. So if you could just give us an update on the utilization trends for the U S. D O D.
The third quarter and then.
Our part D. I'm curious I realize youre not of passenger airlines that you do have some commercial.
Air lift and curious if you're seeing any slowdown.
And bookings related to the Covid cases, and the Delta Gary and thanks.
So I'll start with the D O D and and say that as we said and our remarks, we're seeing the the U S military passenger.
Movements to return to kind of pre COVID-19 and higher.
We're still evaluating while the demand is still strong and the cargo side with the withdrawal of Afghanistan. We expect there to be continued movement and returning to pre COVID-19 levels, but just different kinds of flying.
But the cargo has not yet returned to the pre COVID-19 levels, but we expect it will it will moderate.
And I can't really comment on the passenger side our business as you pointed out is so different on the passenger side that much of.
Much of what we do is for the military which I've said this is increasing which leaves somewhat less capacity for other passenger travel other than pre booked things like sports teams that we move of proud to move 5 of the NFL teams to the away games and the.
The things that are already under contract and so I can't really comment on kind of the impact of the Delta Varian and its impact.
It was just curious because there was something about Garth Brooks potentially canceling some concerts and the second half and I do in the past I think you have moved some kind of music entertainment.
So curious if anyone has sort of pope.
<unk> has locked in charter space and is now perhaps looking to move that into 2022.
Nothing of consequence of Chris.
Great. Thank you.
Thank you.
And as a reminder, ladies and gentlemen to ask the question. Please press star 1.
Our next question coming from the line of Scott Group with Wolfe Research. Your line is now open.
Hi, This is Jake on for Scott. Thanks for taking my question.
And J J.
So 1 more on guidance it looks like and include the $33 million sequential decline and maintenance expense from Q3, Q, but earnings and applied are pretty flat sequentially. So I understand there isn't as much seasonality of the tailwind right now given the long term charter contracts, but what are the cost.
For the.
Lower maintenance expense.
Let's see.
Nick.
And the question is with regard to.
The maintenance expense.
Yes maintenance expense, we expect to be lower certainly than the second quarter.
And so you see that sequential.
Benefit there.
And what are the offsets you are asking.
I think.
I think charter yields and maybe a slight offset there as charter yields.
We're a bit higher on a sequential basis, but we'll see how that plays out.
So that's a potential offset there.
And then we do have.
Yeah.
And the fuel Spencer fuel and that equation.
Oh very little exposure on a on a net.
Net basis, I think to feel there.
I think it's probably more of a yield story Jake.
Alright, and we're being conservative hopefully, we're being conservative there I think it's more of a yield story.
And.
On the on the small portion of our business that has the AD hoc charter flying.
Got it.
Yep.
It makes sense and then.
We all saw the bulk of the.
The release from the pilot Union for that.
Can you give some thoughts around the flavor of the availability of broadly and.
Directionally, how should we be thinking about labor cost and for Paul on the arbitration.
Al Jake I'll start.
And I'll be honest, we've been preparing for this earnings call. So I hadn't.
<unk> seen the the the labor press release, but as we said and our remarks were.
We're excited to get to the point, where we're going to get our next day CBA and.
And as we said there will be and.
Our pilot increase what we've described as the material pilot increase coming sooner than later, where and the homestretch here, it's all up to the arbitrator and timing, which which is right.
And right around the corner.
And we believe we have just a tremendous value proposition for any pilot to come work for us.
The diversity of our fleet the type of flying we do where we do it.
Atlas can choose among different aircraft types and different networks, both domestically and international.
And and increase.
And in the current.
Agreement is going to enhance our ability to recruit and retain.
Now having said all of that Theres no question that our pilot availability is an industry issue, it's not and Atlas issue, it's an industry issue.
And when you had some of the majors and the the legacy carriers and integrators.
Putting programs in place like early retirements, when they were under significant financial pressure.
To cut costs and avoid furloughs.
You had a lot of pilots come out of the market because of that.
Coupled with now the return of starting with the domestic passenger travel and.
The expansion of significant expansion of what our colleagues and the industry of stocks and Etfs and our growing and they're hiring.
All of that places.
And on pilot availability.
Particularly near term when pilots elected make a change to go from and Atlas to another carrier or from another carrier to Atlas all of those dynamics are and play.
Of said before it's not uncommon win win.
The larger airlines that have bigger contracts and ours are hiring that we lose pilots.
And just the fact of life.
But when and when that's happening and a.
And the environment with Big numbers sure that has an impact on us, but we believe we have a tremendous value proposition and we will be of carrier of choice, especially with our new contract and and we're looking forward to doing that and having our pilots.
This is of career destination.
So to the extent the press release of reference since that otherwise I don't agree with it.
The to the extent of its consistent I agree with it.
And I'll look forward to reading it.
Thanks for everyone really appreciate the time here.
Thank you.
Thanks Jay.
Our next.
<unk> coming from the line of bank of <unk> with Stifel. Your line is open.
Right.
Thank you very much for taking my questions.
Wanted to ask of high level question about capital allocation.
The 2 between growth returning capital to shareholders and paying down debt.
What are the priorities for the cash flow is coming in.
And particularly interested and walking through the thought process on that decision.
Sure.
As we've said all along.
We have a variety of priorities and.
<unk> mentioned, you know paying down debt.
And certainly 1 of them and I think we've done really.
Solid job of doing that and went down a full tech as was reported.
We're going to continue to do that strengthen our balance sheet and make sure that we're able to endure.
Endure any potential downturn on.
And I'm not anticipating that's going to happen, but as we've been talking about we're not through this pandemic yet.
And we need to be sure we have the wherewithal to weather through the entire pandemic and then be positioned.
To grow the business.
And for now with regard to you know.
The.
Any kind of share.
Share buyback or anything like that we're currently still under the restrictions of the cares Act.
But that certainly on the the the law.
List of options available to us when we get to that point.
And that we're able to to have that as a serious consideration.
So we're focused on on.
Honestly, making as much money as we can during this unprecedented period.
Keeping our head down and doing that strengthening the balance sheet.
Moving to manage through this pandemic support our employees.
And invest and the business and seek to maximize our shareholder value and.
And the multiple forms of that May take.
Yeah.
Okay.
Helpful and and I guess following up on the.
On the balance sheet, given that we arent through this pandemic.
And Theres, a number of kind of already pre committed.
And <unk>.
Capex decisions with the for.
Our newbuild planes and then the 8 planes that was announced this quarter.
Kind of on the on AR.
I guess the larger picture of what is a normalized.
Debt level look like for Atlas either from a debt to EBITDA of our debt to total cap kind of.
<unk>.
And Spencer I'll turn it over to you I'm, just kind of give a high level and that's a tough that's on what's what's normalized and I think it depends on the time and place on where we are and you know there may be times, where we're prepared for the right opportunity to take on some more debt.
This has been a period of of.
Paying that debt down it wasn't all that long ago that we were well north of for pushing Clive.
And you know we did that for the right reasons, we took on debt when we bought the Amazon aircraft for example.
And now we're in an environment, where we could do a little bit of both invest and the business as well as bring down our debt. So at a high level I don't know that we can.
Provide anything thats normalized but in terms of the the ratio of expense and maybe you want to comment on on that further what's the comfortable place.
Yes, Frank.
Our target generally has been somewhere between 3 and 4 times, we're obviously well below that and.
That's a good place to be for a capital intensive business.
As John said, it is pretty situational and we had the opportunity to acquire the last for dash eights that Boeing is producing and they.
The tremendous tremendous aircraft.
And we had an opportunity to acquire these for hundreds coming off lease and.
The 4 hundreds are.
Generally on average about mid life and so they have still a good long and.
And kind of runway ahead of them.
So we had some good opportunities and we've taken those opportunities. So overall, we're below kind of where our target is but again as a capital intensive business.
We feel good about it and we think it's the right place for us to be we used to hear for investors, sometimes debt our leverage ratio was a little too high and so we've really been focusing on bringing that down and we're pretty proud of.
Where we've gotten to.
Yeah and so.
I guess.
Just for kind of following up again, but the.
With that context.
If historically normalize those kind of 3 to 4 times the investors didn't like of that debt level.
I guess the worldwide.
And it's very it's very committed.
It was higher than that when they were not happy with the with the leverage level. It was higher than that and so I think they would be more comfortable and that sort of range or below of where we are now.
Okay.
Sorry, the the point I was really trying to get to was how much of that has already been spoken for it right. If you look at what Capex needs to go out and the debt that's associated with that.
On.
And I.
But how.
And how much more can you how much capex do you have to work with outside of that.
It's already been accounted for.
Well there are 2 parts to the net leverage ratio equation right the earnings as a part of it as well and so we need to deliver.
The good strong earnings to keep that level.
We'd like it to be so that's a really important part of it.
And then and your question about how much.
And sort of Capex is already spoken for and how much we have available.
And it's highly sure of how to answer that.
But we feel comfortable with our leverage and we feel comfortable where it is and where it's going to be.
And we haven't provided an outlook beyond that at this point and so the comment on.
Our capex spending.
Beyond our outlook period, I don't think would be appropriate today.
Okay.
Thanks, Ed.
Yes, I'll just add.
And of.
We're really fortunate position, we were able to pay so the the 4.
And for $7.7 dash eights that were taking delivery of next year.
They have a pretty significant pre delivery payment schedule and so we have to make those payments this year and we've been in a position where we did not meet the finance so as we've been able to pay those and cash.
And so we've been doing that we've been.
Hiring the aircrafts that we talked about today, and where and a great position to be able to do that and our balance sheet is quite strong which allows us to do that.
And as of if I could if I could add to that as I said in my remarks, and we strive to be very disciplined and our investments on particularly on aircrafts. So what Spencer has been talking about.
Are the aircraft for our operations.
But we also have our Titan business that is continuing to focus on the market for opportunities for further investment.
We did announce the 2 sale leaseback aircraft the 760 sevens that will ultimately be converted.
So as the evolution.
Evolution of the passenger business kind of continues to shake out.
And there.
There are other opportunities and the marketplace for investments for converted candidates for example, we're going to be watching that closely as well.
Great. Thank you very much.
Thank you.
And then I have a follow up question from Christopher enough I'll ask Mike to scanner you on that.
Okay.
Hi, Thanks for taking my follow up Spencer just.
Remind us when the restrictions around PSP, 1 lapse and the.
Pardon me did you take any funds on PSP, 2 or 3 and also so your order book here you have the 8 aircraft that you're going to buyout at the end of the lease you have the for factory orders.
Should we think about capex.
Returning to a high teens low <unk>.
20% level of revenue for 2022 and 2023.
Thanks.
Yeah.
Thanks, Chris as far as the cares Act restrictions.
So the restrictions.
With regard to.
Not being able to pay dividends or repurchasing shares those expire at the end of September.
We still have restrictions on executive compensation and go into <unk>.
2022, and then we still have a of loan portion.
Related to the Grand portion of the loan portion of it and so the loan portion is.
As long term and so we still have that outstanding and we'll need to consider that as we move forward.
And we did not take any funds after the initial allocation for the cargo air carriers.
Let's see with regard to capital allocation, yes, we've been.
We're fortunate enough to acquire the for aircraft.
And for 7 day shaped next year and we're acquiring these 8 but we're really not going to talk about our outlook and beyond those at this point, we have no commitments beyond those at this point, we've we've told you.
The commitments that we have.
And then just curious how many aircrafts can you realistically grow your fleet of your order book over the next few years.
It's 8 to 10 sort of the the limit and then how should we think about.
Maintenance.
Expense as you bring that aircraft on are there any.
Sort of price.
Yeah.
Okay.
When we bring aircraft.
And is there any maintenance required and I think that's what you were asked and Chris at the end of at the end and just just to take of Stickley, how many claims.
And Sonic curious of 8 to 10 is the limit and then also on and prep. These aircrafts I realize the for from the factory, but whether there's any upfront maintenance costs that are that we should expect as you get ready to place those aircraft and service. Thanks.
Yes.
So.
And again kind of goes to time and place and as you may recall as you identified we brought up.
24 airplanes and a matter of 24 months when we brought on the Amazon aircraft and that included acquiring them as well as converting them and then bringing them online and so a lot more work involved and that.
They are definitely our lead times and when you.
And when Youre growing you want to be able to accrue it which is also another reason why we are looking forward to getting into our next collective bargaining agreement to make us even that much more attractive candidate.
They're generally with with.
Used airplanes.
And Theres generally speaking a maintenance requirement and the aircraft go through what's called the C checks generally speaking to bridge on to from where it was operating before onto your certificate and those C checks can range from 21 to 2.
The 31 days roughly speaking depending on the age of the aircraft and the type of C. Check that's required and so when you're talking about used aircrafts. There is that lead times for new aircraft like the dash eights, there would not be it come right online.
Yeah, and I'll, just I'll, just add to that debt for the and.
For the 8 aircraft that we're acquiring there already and our existing fleet. So there is no maintenance requirement there and in fact, it's the opposite.
I mentioned before and.
There would be if we were continuing if the lease was ending and we would have a maintenance condition and kind of payment that would be due to the lessors at the end of the lease period and.
And because we are acquiring the aircraft and those will not be so it's the it's a cost avoidance, which is terrific on the 4 new 7 for 7 dash 8 those are brand new aircraft and and just the opposite again those.
And those aircrafts come with kind of the sort of a maintenance honeymoon and as we've referred to it as.
Because they they will not need maintenance for for quite some time and most things that could possibly go wrong with the aircrafts are under warranty for a good period of time.
Thanks, if I could just squeeze in 1 more and I think this is important for investors to hear just just how could.
Could you remind us how payload sensitive Atlas to day overall is relative to last year and I know you've moved a lot of the charter business too.
The multi monitor multiyear contracts, but what's the sort of the mix of consolidated block hours that move on sort of spot vs that are on contract. Thanks.
Sure Chris So when you look at our overall flow.
<unk>.
About 60% of 65% of that flying is and our traditional kind of a CMI business about 20% of that is now in the long term charter arrangements 8.
8% to 10 percentage with the U S military.
The 5% is.
Flying that we do around South America, and that leaves the right around 5.6%.
In the AD hoc sort of spot charter market.
Okay. Thank you.
And Q.
And I'm not showing any further questions at this time I would now like to turn the call back on my agenda for John Dietrich for any closing remarks.
Great. Thank you operator, and thanks for all of you for your great questions.
On behalf of all of Us at Atlas.
And I would like to thank you for your interest and Atlas Air worldwide and we really appreciate you taking the time to be with us of today.
Of course, we hope you and your families continue to stay safe and we look forward to speaking with you all again soon thanks so much.
Ladies and gentlemen that does conclude the conference for today. Thank you for your participation you may now disconnect.
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Ladies and gentlemen, and thank you for standing by and welcome to the Atlas Air worldwide Holdings second quarter 'twenty 'twenty..1 was on the conference call at this time, all participants on a listen only mode.
So to speak of the presentation there'll be a question and answer session to ask the question. During the session you will need to press. The Star then the 1 key on you touched on the telephone.
Please be advised this conference may be recorded if you would call operating assistance. Please press Star then zone.
Oh, and I like to hand, the conference over the.
For the Atlas Air Management team. Please go ahead.
Yeah.
Thank you Olivier and good morning, everyone I'm, Ed Mcgarvey Treasurer for Atlas Air worldwide.
And for our second quarter 2021 results conference call.
Today's call will be hosted by John Dietrich, Our Chief Executive Officer and spun.
For 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.
As indicated on slide 2 I'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 1095.
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 base interest please the floor.
Part of our to our 2020 form 10-K as amended or supplemented by our subsequently filed SEC reports.
Any references to non-GAAP measures and meant to provide meaningful insights and are reconciled the 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 1 principal question and 1 follow up question.
So we can accommodate as many participants as possible.
After we've gone through the queue, we'd be happy to answer any additional questions as time permits.
At this point I'd like to draw your attention to slide 3 and turn the call over to John Dietrich.
Thanks, Ed and Hello, everyone.
And to our second quarter earnings call.
I'd like to start by thanking all of our employees and all of the frontline responders for their continuing and tremendous efforts throughout this pandemic.
At Atlas safety is the core value and as always of top priority.
With that commitment in mind, we continue to take the extensive precautions to safeguard our employees and our operations to support our customers and safely transport the goods the world needs.
This pandemic has really underscore the important role that Atlas plays and the global supply chain and and our customers' networks.
It also highlights the significance of global air freight, which brings goods to market with unmatched speed and reliability.
We've seen an acceleration of express and e-commerce growth and and todays global economy manufacturers and merchants are needing the quickly replenish inventories to meet growing consumer demand.
That said COVID-19 continues to cause disruptions to manufacturing.
We're also seeing congestion and delays at many ocean ports worldwide.
This.
And the related delays are leading to ocean freight rates that are extremely elevated and.
And shippers are therefore increasingly choosing air freight to mitigate bottlenecks and their supply chain.
And that's driving even more air freight demand.
This all bodes well for global Air freight volumes, which are now exceeding pre pandemic levels.
Atlas is fleet and our global operating capabilities are unmatched in the industry, we're continuing to leverage the strength and flexibility of our business model.
To capitalize on current market conditions, and importantly, we're positioning the company well for the future.
We're actively managing our fleet to profitably serve our customers with modern efficient aircraft.
And we take a very disciplined approach when making aircraft investment decisions.
As announced in our press release today between May and August we acquired 3 of our existing 7 for 7 and 400 freighters that were previously on lease to us.
In addition, we reached agreements with our lessors to purchased 5 of our other existing 7 for 7 and 4 and freighters at the end of their lease terms in 2022.
Acquiring these 8 traders underscores our confidence and these assets as well as and the global air freight market.
By keeping these aircraft and our fleet, we're ensuring these capable freighters will be available to provide committed capacity to our customers with strong returns for Atlas and the years ahead.
As the world's largest 7 for 7 freighter, operator, the 7 and $4.7 and 400 is core to our business.
And of complements our diverse fleet of 7 and $4.7 dash eights Triple Sevens, 760, Sevens and 730 Sevens.
Each of which plays a unique role and our customers' networks.
Now turning to our second quarter results on slide 4.
We entered the second quarter with very high expectations, all of which were exceeded.
On an adjusted basis, our earnings were among the best and our company's history.
These positive results could only have been achieved by our entire team coming together to execute on our strategy.
Our diverse and experienced team is second to none and they pulled together to increase utilization on our aircraft and to deliver safe high quality service for our customers.
Despite a very challenging operating environment due to COVID-19.
Our performance continued to benefit from operating the for 7 and $4.7 freighters and the Triple 7 freighter, we reintroduced to our fleet in 2020.
This capacity.
Along with the tremendous team effort contributed to our ability to enter into and extend long term agreements with strategic customers.
As well as capitalize on lucrative short term opportunities and the strong global air freight market.
As I mentioned earlier, our second quarter results reflected global air freight volumes that now exceed pre pandemic levels and the ongoing disruption of global supply chains due to the pandemic.
In addition, the second quarter reflected improved passenger charter flying for the U S military.
And the continued reduction of the international passenger belly cargo capacity.
Partially offsetting these benefits were lower yields net of fuel compared with the exceptionally high yields we saw in April and May of 2020 during the early months of the pandemic.
Equally important to the results we delivered is how we've delivered them.
1 of our core values at Atlas is corporate responsibility.
And in June we issued our second environmental social and governance or ESG report.
This report is themed carrying for the world we carry.
And the captures our commitments to our people communities and the planet and it also outlines our ESG strategy and goals.
We invite you to read more about our ESG program and our progress and the report which is available on the corporate responsibility section of our website.
Turning for a moment to our pilot labor negotiations. We're pleased to report we've moved even closer to completing the new joint collective bargaining agreement with our pilots at Atlas Air and Southern Air.
The Union has now provided the company with their integrated seniority list.
The scheduled arbitration on the open issues concluded in April.
And both parties submitted their post hearing briefs in early June.
The arbitrator is now considering all the information presented and we expect to receive his final and binding decision late in the third quarter.
Now moving onto slide 5.
As I've been discussing economic and supply chain and conditions remain favorable for air cargo and for our dedicated freighters.
Inventory levels remain low.
Purchasing managers' index or PMI readings have been positive.
And congestion and long lead times and elevated pricing continued to impact ocean freight helping to further favor air freight.
The demand also continues to exceed available supply, particularly on the international routes as international travel stays subdued and related belly capacity remains out of the market.
Despite some of the well publicized improvement and domestic passenger traffic the recovery of international passenger travel continues to be hampered by border closures and other travel restrictions due to continued COVID-19 challenges, especially.
Especially with the rapidly spreading delta variant.
While the operating environment remains challenging due to the pandemic.
The market dynamics, we're seeing in the third quarter remained strong.
As a result, we expect revenue of nearly $1 billion.
And the adjusted EBITDA of approximately $250 million from flying more than 90000 and block hours and the third quarter.
In addition, we expect adjusted net income to grow by approximately 50% with adjusted net income of $82.7 million in the third quarter of last year.
Our third quarter outlook reflects the contribution of our long term customer agreements that have favorable rates and guaranteed levels of flying.
The high levels of aircraft utilization driven by strong demand and commercial charter yields that we expect to remain above typical seasonal levels.
We also expect ongoing expense is driven by the pandemic, including premium pay for our pilots as well as costs for continuing to provide a safe working environment for all our employees.
And maintenance expense and the third quarter of approximately $100 million.
For the full year, we expect aircraft maintenance expense to be lower than 2020.
And we expect depreciation and amortization to be about $275 million.
For capital expenditures, which exclude aircraft and engine purchases are projected to total approximately $105 million to $115 million.
Mainly for parts and components for our fleet.
Given the ongoing economic and market related uncertainties included including COVID-19, and the unfortunate spread of the Delta variant.
As well as various travel restrictions low international passenger travel and other factors.
We are providing a third quarter outlook, but not providing a further outlook at this time, we will however look forward to keeping you updated as the year progresses.
This is a good point for Spencer to provide more details on our second quarter results and after Spencer's remarks, I'll have some additional comments and then we'll be happy to take your questions.
Sensor.
Thank you John and Hello, everyone.
Our strong second quarter results are highlighted on slide 6.
On an adjusted basis EBITDA totaled $243.7 million.
With adjusted net income totaling $121.8 million.
On a reported basis net income totaled $107.1 million.
Our adjusted earnings included and an effective income tax rate of 22, 4%.
Moving to the top of slide 7.
Revenue totaled $994 million and the quarter.
Higher airline operations segment revenue was primarily driven by an increase from flying and the average rate per block hour.
Block hour volume growth primarily reflected.
Our ability to increase the aircraft utilization to serve strong customer demand.
The strength of the international Air freight markets the <unk>.
Ongoing and reduction of available cargo capacity.
And the disruption of the global supply chain due to the pandemic.
In addition segment revenue benefited from the operation of the 5 freighters, we reactivated throughout 2020 the.
The 4.7 and 4.7% and 1 triple 7.
As well as improved charter flying for the U S military.
Revenue and our dry leasing segment was relatively unchanged.
Looking now at the bottom of the slide.
Segment contribution totaled $242.6 million from the second quarter.
Airline operations segment performance improved significantly compared with the prior year that included exceptionally high commercial charter yields and April and May last year.
Higher airline operations contribution during the period was primarily driven by the positive factors benefiting the segment revenue I, just noted as well as lower heavy maintenance expense.
And dry leasing higher segment contribution was primarily due to lower interest expense related to the scheduled repayment of debt.
Now turning to slide 8.
Our net leverage ratio declined another tick, finishing the quarter at 2.0 times down a full turn from 3 point of times at the end of the second quarter of 2020.
We ended the second quarter with cash, including cash equivalents and restricted cash totaling $765 million.
Our cash position at June 30th reflected cash used for investing and financing activities.
Partially offset by cash provided by operating activities.
Net cash used for investing activities and the first half of 2021 was primarily for core capital expenditures.
Payments for flight equipment, and modifications, including pre delivery payments for $7.7 dash 8 aircrafts and we'll take next year as well as spare engines engine overhauls and upgrade kits.
Net cash used for financing activities during the 6 month period, primarily reflect the debt payments, partially offset by proceeds from debt issuance.
We continue to apply a disciplined approach the financing as we've indicated before this has resulted in the low weighted average coupon interest rate, which now stands at 295%.
And the majority of secured by our aircraft assets, which are of 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 as well as the positioning our company for continued success by managing cost and enhancing liquidity and strategically allocating resources.
Now I'd like to turn it back to John.
Thank you Spencer.
And moving to slide 9.
We have great business momentum.
<unk> delivered a very strong second quarter.
And we feel very good about the third quarter.
Our team continues to execute on our strategy and capitalize on the current air freight environment.
While also positioning us well for the future.
We're closer to completing a 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 serve our customers.
And transport of central goods around the world.
At this point operator, and then we have the first question. Please.
Thank you, ladies and gentlemen of reminded to ask the question you want to press. The Star then the 1 key on your Touchtone telephone to withdraw your question press the pound key.
And I will compile the Q&A roster.
The first question coming from the line of Stephanie more with Cowen Your line is open.
Hi, Good morning, Thank you for the question and congrats on a nice quarter.
Thank you Stephanie.
I wanted to touch a bit on some of the the locked in charter.
Agreements that have been put in place really over the over the last year and and wed love to get a sense of maybe what you're hearing from some of those customers that switched to a more dedicated offering I think you've called out the HP for example on the path maybe there's some I guess, that's really what you're hearing is their feedback I mean is this something where the.
And they're really understanding the benefits of working with the dedicated carrier or have you been able to kind of sign on more of these longer term charter agreements and I'd love to just kind of update on that thank you.
Sure. Thanks, Stephanie and then I'll.
I'll start the <unk>.
Feedback has been overwhelmingly positive.
I think customers appreciate the ability to take advantage of this committed capacity.
They have assurances that there.
Goods are going to get to where they need to be in fact.
You reflect on some of our comments not only are we entering into new agreements, but we're also extending existing agreements, which is indicative of the.
Their pleasure.
Pleasure with the with the agreements and the fact that Theyre looking to renew and and so we feel really good about it. It's also important to note for creating a new customer base here too with the likes of HP and others, where the typically had not committed to dedicated freighters.
And and we see that as a trend thats renewing and hopefully expanding over time.
And maybe Stephanie it's Spencer I'll, just add a couple of things there as John said customers are enjoying the dedicated capacity that they now have the.
The vast majority of these agreements go into 2022 and 23.7.
Several now go into 2024 and many of them are on some of the fastest growing trade lanes that likely will not be operated by returning passenger aircrafts. So it really gives the customer of this dedicated capacity the because they can count on and then just lastly on this topic.
During the second quarter.
We extended 2 agreements with 2 of the big.
Forwarders.
And we extended 1 year into 2023 and.
And 1 we extended 3 years into 2020 for now.
We also during the quarter entered into 2 new arrangements with 2 big forwarders, there as well.
1 <unk>.
Goes to the end of this year and 1 is for a couple of years going into 2023 of them all.
And at very good rates.
Great well I will leave it at that and and thank you for the color.
Thank you.
Our next question coming from the lineup of Lubbock with.
C J and Securities. Your line is now open.
Good morning, and congratulations again on just the excellent execution and a great quarter.
Thanks, Bob.
Sure.
So with Q2, and then guidance for Q3 EBITDA in excess of several prior peaks, probably all of it last year.
How is the business seasonality changed with your new contracts, how should we think about seasonality going forward and and how should we think about kind of the earnings power of the business going forward.
And you could see it's of Great question, you can see that the the seasonality.
And as not as varied as it once was of course there is still.
Some seasonality and the fourth quarter, you would expect it's always going to be the highest quarter.
Given that the holiday period, but you can see that the seasonality. This year looking at the second quarter of this year versus the third quarter and.
The outlook that we've provided.
You can look and see there is not nearly as much variability of these long term contracts are much more reliable and predictable.
Of course, we still have about 5% of our business and the.
The AD hoc charter spot market and so on.
That is somewhat dependent on what yields are doing but the vast majority of the business now is much more and locked in and there's less seasonality of less variability.
Got it Okay. That's great and then I guess as my follow up just wanted to ask also about the what's the P&L impact of acquiring the claims that are coming off lease, it's pretty exciting and it seems like it could be of pretty good use of capital for you, particularly given the strong cash flow that you have so maybe just kind of.
Help us give us that give us a sense of the P&L impact and and how many more after the 8 do you have this opportunity to.
2.
After the lease ends.
And your current fleet.
Sure Bob.
Spencer, So I guess I'll start by saying acquiring the aircrafts really.
And it underscores our confidence and the global air freight market.
We will ensure that we have these committed aircraft to be able to serve customer needs and it delivers very strong returns for Atlas and the years ahead. So.
What I can say there is that you know looking at the 8 aircraft. The IRR is there are very strong.
For for many years ahead, the payback period on these aircraft is the only about 2 to 3 years and we avoided.
And having to incur some.
Maintenance return conditions that we otherwise would have paid for and returning the aircraft and.
And would have been due to the lessors. So it is a.
Again, very good IRR it would be very good for our P&L going forward.
And your other question was how many aircrafts.
And we still have.
Remaining on lease I think Greg yes.
Yes, with the opportunity to potentially have the opportunity to potentially buy them and as well like you just did with these.
There are still about.
Approximately I think its 11 aircraft that remain on lease and those will be.
Through 2025.
So we still have opportunities there.
To either re lease not release acquire those aircrafts and so we still have those opportunities coming up.
Super Alright, thanks, so much.
And keep them.
And our next question coming from the lineup Kristof Annapolis with the scanner. Your line is now open.
Hey, good morning, everyone and thanks for taking my questions. So John Spencer.
Could you give some more detail on on what Youre seeing with with respect to the the.
The greater supply demand balance as a whole and then perhaps if there are any lanes that stick out and just.
Looking at some of the wide body passenger schedules this morning.
For.
Flights originating in North America, it looks like for the second half they are down around 12% versus the comparable periods for 2019. So curious if you've seen any meaningful change.
And that dynamic versus when we last spoke and.
And May and then perhaps curious if you have any thoughts on filings.
Plans to require.
Vaccinations for all inbound international passenger travelers, which could probably help.
The greater dynamic for the second half as well thanks.
Sorry, John you're on mute.
My apologies.
Occupational hazard these days sorry about that.
So I'll start and then Spencer can provide some additional cover color.
We expect and as I've been saying all along the passenger carriers are going to have a tremendous appetite to bring as much capacity back into the market as soon as possible and.
Applaud them on that.
But what we're seeing here is.
It's much more gradual.
And even at the end of the period, where we return back to pre COVID-19 levels of volume.
Yeah.
We're anticipating and some of the studies, we see are anticipating that in terms of capacity.
Even when the volumes come back of the capacity will likely be 20% less and what it is today.
So that's the that's a factor to keep in mind and plays into.
Air freight.
In terms of available new capacity coming into the market I'll say, it's somewhat gradual and slower.
There are really no available production slots for wide body freighters.
Until late fourth quarter 2023.
Other than those that are already on the books and many of those are going to.
Some of the express operators that are more customers and competitors of ours.
Some of the other.
Available aircraft through conversions are longer lead times.
So you know over the next.
A couple of years.
At least we see the <unk>.
Fly.
Not keeping pass with the significant demand I talked about some of the factors for the demand is coming back and once Covid subsides, which we all hope the sooner than later.
My view of going to be tremendous appetite for manufacturing movement of goods raw materials and finished products to get moving again businesses are really interested in getting going again.
And we think that all favors air freight, particularly when you look at some of the other supply chain challenges of Ocean that we mentioned.
That dynamic is in play capacity.
<unk> is going to be tight and we expect.
The continued growth and air cargo, putting aside COVID-19 demand just general economic.
The return of air freight to be 3 of 4% annually.
Fueled by our strong global economy.
Once things get rolling again.
With regard to your question on <unk> plans.
The required.
And inbound immunization Guy I think that's another the burden for the.
International passenger carriers it is going to further a subdued demand.
Because I know there of strong feelings on people getting the vaccination or not or meeting the cross those hurdles.
And in fact, what we're seeing if you follow the news and some of the reports.
Entries are reversing course and getting more restrictive now.
Points and China I read this morning, some pressure and in Germany.
It's almost taking 2 steps forward, 1 step back or describe and how you will.
So, yes, we think that will contribute.
2 international.
Passenger travel being a bit slower than people forecasted and say this time last year for example.
Okay and my follow up so it looks like yesterday of the U S. Dod reinstated some travel restrictions.
But still around 89% of their installations have had had the restrictions lifted. So if you could just give us an update on the utilization trends for the U S Dod and.
The third quarter and then us.
Our part D. I'm curious I realize youre not of passenger airlines that you do have some commercial.
Air lift and I'm curious, if you're seeing any slowdown.
And bookings related to the Covid cases, and the delta of area. Thanks.
So I'll start with the D O D and and say that as we said on our remarks, we're seeing the the U S military passenger.
Movements to return to kind of pre COVID-19 and higher.
We're still evaluating while the demand is still strong and the cargo side with the withdrawal of Afghanistan. We expect there to be continued movement and returning to pre COVID-19 levels, but just different kinds of flying.
But cargo has not yet returned to the pre COVID-19 levels, but we expect it will it will moderate.
And I can't really comment on the passenger side our business as you pointed out is so different on the passenger side that much of you know.
Much of what we do is for the military which I've said this is increasing which leaves somewhat less capacity for other passenger travel other than pre book things like sports teams that we move of proud to move 5 of the NFL teams to their away games and.
And things that are already under contract. So I can't really comment on kind of the impact of the.
Delta variant and its impact.
It was just curious because there was something about Garth Brooks potentially canceling some concerts and the second half and I do in the past I think you have moved some kind of music and entertainment.
So curious if anyone has sort of pope.
<unk> has locked in charter space and is now perhaps looking to move that into 2022.
Nothing of consequence, Chris.
Great. Thank you.
Thank you.
And as a reminder, ladies and gentlemen to ask the question. Please press star 1.
Our next question coming from the line of Scott Group with Wolfe Research. Your line is open.
Hi, This is Jake on for Scott. Thanks for taking my question.
And J J.
So 1 more on guidance and it looks like and included the $33 million sequential decline and maintenance expense from particularly the thank you, but earnings and applied are pretty flat sequentially. So I understand there isn't as much seasonality of the tailwind right now given the long term charter contract, but what are the cost.
For the.
Lower maintenance expense.
Let's see.
Jake.
The question is with regard to.
The maintenance expense.
Yes maintenance expense, we expect to be lower certainly than the second quarter.
So you see that sequential.
Benefit there.
And what are the offsets you are asking.
I think.
I think charter yields may be a slight offset there as charter yields.
We're a bit higher on a sequential basis, but we'll see how that plays out.
So that's a.
Potential offset there.
And then we do have.
Okay.
And the fuel Spencer fuel and that equation.
Oh very little exposure on it on a net basis I think the feel there.
I think it's probably more of a yield story Jake.
Alright, and conservative hopefully, we're being conservative there I think it's more of a yield story.
And.
On the on the small portion of our business that has the AD hoc charter flying.
Got it.
Yep.
It makes sense and the.
We all saw the bulk of their release from the pilot Union for that.
Can you give some thoughts around the flavor of the availability of broadly and <unk>.
How should we be thinking about labor costs and for can you Paul on the arbitration.
Jake I'll start.
And I'll be honest, we've been preparing for this earnings call. So I hadn't.
The the labor press release, but as we said and our remarks were.
We're excited to get to the point, where we're going to get our next day CBA.
And.
As we said there will be and.
The pilot increase what we've described as the material pilot increase coming sooner than later, where and the homestretch here and it's all up to the arbitrator and timing, which which is.
Right around the corner.
And we believe we have just the tremendous value proposition for any pilot to come work for us.
You see the diversity of our fleet the type of flying we do where we do it pilots can choose among different aircraft types and different networks, both domestically and international.
And and increase.
And the current.
Agreement is going to enhance our ability to recruit and retain them.
Now having said all of that.
There's no question that our pilot availability is an industry issue, it's not and Atlas issue, it's an industry issue.
And when you had some of the majors and the the legacy carriers and integrators.
Putting programs in place like early retirements, when they were under significant financial pressure.
To cut costs and avoid furloughs.
You had a lot of pilots come out of the market because of that.
And coupled with now the return of starting with the domestic passenger travel and.
The expansion of significant expansion of what our colleagues and the industry of Fedex and Etfs are growing and they're hiring.
All of that places.
Sure on pilot availability.
Particularly near term when pilots elected make a change to go from and Atlas to on that.
Other carrier or from another carrier to Atlas all of those dynamics are and play.
I've said before it's not uncommon when when.
Larger airlines that have bigger contracts and ours are hiring that we lose pilots.
It's just the fact of life.
But when it when its happening and a.
And in the environment with Big numbers sure that has an impact on us, but we believe we have a tremendous value proposition and we will be of carrier of choice, especially with our new contract and.
And we're looking forward to doing that and.
And having our pilots.
This is of career destination.
So to the extent the press release of referencing set otherwise I don't agree with it.
The to the extent, it's consistent I agree with it and I.
And I look forward to reading it.
Thanks, everyone really appreciate the time here.
Thank you.
And I see.
Our next question coming from the line of Bank of <unk> with Stifel. Your line is open.
Great. Thank you very much for taking my questions.
And I wanted to ask of high level question about capital allocation.
The 2 between growth and returning capital to shareholders and paying down debt.
What what are the priorities for the cash flows coming in.
And particularly interested and walking through the thought process on that.
Decision.
Sure.
As we've said all along.
We have a variety of priorities and Spencer mentioned paying down debt.
And certainly 1 of them and I think we've done it.
Really.
Solid job of doing that and went down a full tick as was reported.
We're going to continue to do that strengthened our balance sheet and make sure that we're able to.
Endure any potential downturn on.
And I'm not anticipating that's going to happen, but as we've been talking about we're not through this pandemic yet.
And we need to be sure we have the wherewithal to weather through the entire pandemic and then be positioned.
And to grow the business.
And for now with regard to.
And.
And any kind of.
Share buyback or anything like that we're currently still under the restrictions of the cares Act.
But that certainly on the the the.
The list of options available to us.
When we get to that point.
And that we're able to have that as the serious consideration.
So we're focused on on honestly, making as much money as we can and during this unprecedented period keeping.
Keeping our head down and doing that strengthening the balance sheet.
Moving on to manage through this pandemic support our employees.
And invest and the business and and seek to maximize our shareholder value and.
And the multiple forms of that May take.
Okay, that's helpful and and I guess following up on the.
On the balance sheet, given that we arent through this pandemic.
And Theres, a number of kind of already pre committed.
And <unk>.
Capex decisions with the for.
Newbuild planes and then the 8 planes and that was announced this quarter.
Kind of on the on AR.
I guess the larger picture of what is a normalized.
Debt level look like for Atlas either from a.
Debt to EBITDA of our debt to total cap kind of positioning.
And so that's for all frankly turned over to you I'm just kind of give a high level and that's a tough that's the 1 what's what's normalized I think it depends on the time and place and where we are you know.
And there may be times, where we're prepared for the right opportunity to take on some more debt.
This has been a period of of.
Paying that debt down it wasn't all that long ago that we were well north of for pushing 5.
And we did that for the right reasons, we took on debt when we bought the Amazon aircraft for example.
And now we're in an environment, where we could do a little bit of both invest and the business as well as bring down our debt. So at a high level I don't know that we can.
Provide anything thats normalized but in terms of the ratio of expense for maybe you want to comment on on that further what's the comfortable place.
Yes, Frank.
Our target generally has been somewhere between 3 and 4 times, we're obviously well below that and.
That's a good place to be for a capital intensive business.
As John said, it is pretty situational and we had in the opportunity to acquire the last for dash eights that Boeing is producing and the tremendous tremendous aircraft.
And we had an opportunity to acquire these for hundreds coming off lease and.
400.
And generally on average about mid life and so they have still a good long and.
Kind of runway ahead of them.
So we had some good opportunities and we've taken those opportunities. So overall, we're below kind of where our target is but again as a capital intensive business.
We feel good about it and we think it's the right place for us the B, we used the here for investors, sometimes debt our leverage ratio was a little too high and so we've really been focusing on bringing that down and we're pretty proud of.
Where we've gotten to.
And so.
And I guess.
Just for kind of following up again, but the.
With that context.
If historically normalize those kind of 3 to 4 times and investors like.
Like of that debt level.
I guess the real question is how much of that's very it's very committed.
It was higher than that when they were not happy with the with the leverage level. It was higher than that and so I think they would be more comfortable and that sort of range or below it where we are now.
Okay sorry.
Sorry, the point I was really trying to get to was how much of that has already been spoken for right. If you look at what capex needs to go out and the debt that's associated with that.
On.
And.
Yeah.
How much more can you how much capex do you have to work with outside of that what's already been accounted for.
Well there are 2 parts to the net leverage ratio equation right the earnings as a part of it as well and so we need to deliver.
Good strong earnings to keep that level.
Where we'd like it to be so that's a really important part of it.
And then.
Your question about how much.
Sort of Capex is already spoken for and how much we have available.
And it's highly sure.
The answer that.
But we feel comfortable with our leverage and we feel comfortable where it is and where it's going to be.
Haven't provided an outlook beyond that at this point and so the comment on.
Sure.
Our capex spending.
Beyond our outlook period, I don't think would be appropriate today.
Okay.
That's good.
Yes, I'll just add we're.
And a really fortunate position, we were able to pay so the.
For $7.7 dash eights that were taking delivery of next year. They have a pretty significant pre delivery payment schedule and so we have to make those payments this year and we've been in a position where we did not need to finance those we have been able to pay those and cash and so we've been doing that we've been.
The hiring the aircrafts that we talked about today, and where and a great position to be able to do that and our balance sheet is quite strong which allows us to do that.
And if I could if I could add to that as I said in my remarks.
And we strive to be very disciplined and our investments on particularly on aircrafts. So what Spencer has been talking about.
The aircraft for our operations, but.
But we also have our Titan business that is continuing to.
Focus on the market for opportunities for further investment.
We did announce the 2 sale leaseback aircraft, the 767 and that will ultimately be converted.
And so as the.
Evolution of the passenger business kind of continues to shake out.
And.
There are other opportunities and the marketplace for investments for converted candidates for example, we're going to be watching that closely as well.
Great. Thank you very much.
Thank you.
And we have a follow up question from Christopher and alcohol as Mike just Ocana your line and that's helping.
Hey, Thanks for taking my follow up Spencer just.
Remind us when the restrictions around PSP, 1 labs and that.
Pardon me did you take any funds on PSP, 2 or 3 and also so your order book here you have the 8 aircraft that youre going to buyout at the end of the lease you have the for factory orders.
Should we think about Capex and rich.
Returning to a high teens low.
20% level of revenue for 2022 and 2023.
Thanks.
Yes.
Thanks, Chris as far as the cares Act restrictions.
And.
So the restrictions.
With regard to.
Not being able to pay dividends or repurchasing shares those expire at the end of September.
We still have restrictions on executive compensation and that go into.
2022, and then we still have a of loan portion.
Related to the there was a grant portion of the loan portion of it and so the loan portion.
As long term and so we still have that outstanding and we'll need to consider that as we move forward.
We did not take any funds after the initial allocation for the cargo air carriers.
Let's see with regard to capital allocation, yes, we've been you know.
We're fortunate enough to acquire the for aircraft.
December 7 day shaped next year and we're acquiring these 8 but we're really not going to talk about our outlook and beyond those at this point, we have no commitments beyond those at this point we've told you.
The commitments that we have.
And then I'm just curious how many aircrafts can you realistically grow your free to air Order book over the next few years.
It's 8 to 10 sort of the the limit and then how should we think about.
Maintenance.
Expense as you bring that aircraft on are there and.
Sort of front.
Yeah.
Okay.
When we bring aircraft.
And is there any maintenance required I think thats, what you were asking and Chris at the end of the and just take US quickly how many claims.
So the army curious of 8 to 10 is the limit and then also on the prep. These aircraft I realize the for from the factory, but whether theres any upfront maintenance costs that are that we should expect as you get ready to place those aircraft and service.
Yes.
So.
And again kind of goes to time and place and as you may recall as you identified we brought up.
24 airplanes and a matter of 24 months and when we brought on the Amazon aircrafts and that included acquiring them as well as converting them and then bringing them on line. So a lot more work involved and that.
They are definitely our lead times.
And when Youre growing you want to be able to crew. It which is also another reason why we are looking forward to getting into our next collective bargaining agreement to make us even that much more attractive candidate.
They're generally with with used airplanes.
There is generally speaking a maintenance requirement and the aircraft go through what's called the C checks generally speaking to bridge on to from where it was operating before onto your certificate and those C checks can range from 21 to 2.
The 31 days roughly speaking depending on the age of the aircraft and the type of C. Check that's required and when you're talking about used aircrafts. There's at lead time for new aircraft like the dash eights, there would not be it come right online.
Yeah, and I'll, just I'll, just add to that debt for the and.
For the 8 aircraft that we're acquiring there already and our existing fleet. So there is no maintenance requirement. There in fact, it's the opposite as I mentioned before and there would be if we were continuing if the lease was ending and we would have a maintenance condition kind of payment that would be due to the less.
Or is it the end of the lease period.
And because we are acquiring the aircrafts and those will not be so it's the it's a cost avoidance, which is terrific on the for new $7.7 dash 8 those are brand new aircraft and and just the opposite again.
Those aircrafts come with kind of a.
Sort of of maintenance honeymoon as we've referred to it as.
Because they will not need maintenance for for quite some time and most things that could possibly go wrong with the aircrafts are under warranty for a good period of time.
Thanks, if I could just squeeze in 1 more and I think this is important for investors to hear just how.
Could you remind us how payload sensitive Atlas today overall is relative to last year and I know you've moved a lot of the charter business too.
The multi month or multi year contracts, but what's the sort of the mix of consolidated block hours that move on sort of spot vs that are on contract.
Sure Chris So when you look at our overall <unk>.
Lying.
About 60% of 65% of that flying.
And our traditional kind of a CMI business about 20% of that is now in the long term charter arrangements the 8.
8% to 10 percentage with the U S military.
The 5% is for.
Flying that we do around South America, and that leaves the right around 5% 6%.
In the AD hoc sort of spot charter market.
Okay. Thank you.
Thank you.
And I'm not showing any further questions at this time I would now like to turn the call back all of that Jonathan John Dietrich for any closing remarks.
Great. Thank you operator, and thanks to all of you for your great questions.
On behalf of all of Us at Atlas.
And I would like to thank you for your interest and Atlas Air worldwide and we really appreciate you taking the time to be with us of today.
Of course, we hope you and your families continue to stay safe and we look forward to speaking with you all again soon thanks so much.
Ladies and gentlemen, and that does conclude the conference for today. Thank you for your participation you may now disconnect.