Q3 2021 Atlas Air Worldwide Holdings Inc Earnings Call

November 3, 2021

Good day, and thank you for standing by and welcome to the Atlas Air World Wide Holdings, Inc.

Corporation third quarter 2021 results conference call at this time, all participants are in a listen only mode.

After the Speakers' presentation, there'll be a question and answer session.

That's good question, Jordan, Secondly, you'll need to press star one or your telephone as a reminder, this conference is being recorded if you would.

Any further assistance. Please press star Zero I would now like to hand, the conference over to Atlas Air Worldwide Holdings, Inc.

Again.

Thank you norm and good morning, everyone.

Ed Mcgarvey Treasurer for Atlas Air worldwide welcome to our third quarter 2021 results conference call.

Today's call will be hosted by John Dietrich, Our Chief Executive Officer, and Spencer Schwartz, our Chief Financial Officer.

Today's call is complemented by a slide presentation that can be viewed at Atlas air worldwide Dot com under presentations in the Investor information section.

As indicated on slide two we'd like to remind you that our discussion about the company's performance. Today includes some forward looking statements within the meaning of the private Securities Litigation Reform Act of 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 in 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 in today's press release and in the appendix that is attached to today's slides.

During our question and answer period today, we'd like to ask participants to limit themselves to one principal question and one follow up question. So that we can accommodate as many participants as possible.

After we've gone through the queue, we'll be happy to answer any additional questions as time permits.

At this point I'd like to draw your attention to slide three and turn the call over to John Dietrich.

Thanks, Ed and Hello, everyone.

Thanks for thank you all for joining welcome to our third quarter earnings call.

This is a very special moment for our company.

We've just completed the best quarter in our company's history in terms of revenues and adjusted earnings.

And we expect next quarter will be even better.

I'd like to thank the entire Atlas team for their ongoing efforts in delivering these results in this very challenging pandemic operating environment.

It's because of their efforts that we've been able to deliver these outstanding results.

As you've seen from our results, we've optimized and leveraged our business to capitalize on the current favorable market conditions.

We've also positioned the company very well for the future.

We have the best assets to serve the airfreight market.

Including an industry, leading fleet of 740 Sevens Triple Sevens, 760, Sevens and 737 aircrafts.

We have a top tier portfolio of customers.

We also have unrivaled global operating capabilities and a team that simply best in the business.

Putting this all together, we're very well positioned to serve the growing needs of our customers.

Andy Airfreight market today and in the future.

At Atlas safety is a core value and as always a top priority.

With that is our focus we continued to take extensive precautions to protect our employees and our operations to support our customers and safely transport essential goods around the world.

Our people no doubt are our greatest asset and will continue to focus on their safety and wellbeing.

In that regard we were very pleased to have reached agreement with our largest employee group our pilots.

For a new five year joint collective bargaining agreement or what we often referred to as a J CBA.

Under this long term industry competitive agreements all of our pilots will receive significantly higher K quality of life improvements and enhanced benefits.

The new pay rates became effective as of September one and we're working together with the unions new leadership to implement other provisions of the agreement as soon as possible.

This new J CBA provides even more reasons and opportunities for our pilots to grow their careers here at Atlas.

We've been preparing for this important investment in our pilots for some time and we've incorporated our expectations for these new terms when negotiating new customer contracts or win amending existing contracts.

We look forward to continuing to work collaboratively with our pilots and their new Union leadership to build an even stronger company in the future.

Importantly.

The new J CBA paves the way for us to complete our Atlas Air's merger with southern Air, which we expect to occur during the fourth quarter.

The Southern Air brand has served us well since we acquired it in 2016.

Southern we diversified our service offerings by gaining immediate entry into the triple seven.

And 737 platforms.

Ultimately, enabling us to perform triple seven flying for DHL Express <unk>.

In China, the logistics arm of Alibaba as.

As well as 737 operations for Amazon.

We look forward to continuing to leverage these capabilities as growth engines for Atlas in the years ahead.

As we serve the needs of our customers and their businesses in the third quarter.

We are also extremely proud to have supported the U S government's historic evacuation of U S personnel and refugees from Afghanistan.

As part of the call of the Silver Reserve Air Fleet, we deployed our formidable fleet of passenger aircraft to help the evacuation.

As the largest provider of air lift to the U S military.

Our flight and ground personnel volunteered and stepped up with great compassion to support the significant unit humanitarian mission.

In total we operate over 30 missions transporting about 10000 U S personnel as well as Afghan refugees.

And their families from various locations into the United States.

In addition to this important military business and as you saw in our earnings release. This morning, our strategic focus continues to be on express E Commerce, and fast growing global markets, particularly Asia and South America.

These markets are driving robust demand for our services and producing excellent financial results.

We've safely increase the utilization of our aircraft despite an extremely challenging pandemic operating environment.

We've also extended or entered into important new long term agreements.

In that regard, we recently announced long term contract extensions for 20 aircraft with DHL Express.

We also entered into a new long term <unk> agreement with Fedex among other long term agreements.

Collectively this demonstrates our ability to capitalize on current market opportunities, while deepening long standing relationships with our strategic customers for the future.

With that in mind, we continually manage our fleet to balance capacity with demand.

We're looking forward to taking delivery of four new 737 dash eight freighters in 2022.

These are the last 747 that Boeing will ever produced and we're delighted there'll be coming to Atlas.

They provide unmatched payload capacity nose loading capability as well as improved fuel efficiency and noise emissions.

We expect to take delivery of these dash eights between May and October of next year.

As reported in our press release today in October we acquired three more of our existing 747 400 traders that were previously on lease to us.

This is in addition to the $3 747, four hundreds we recently acquired and discussed during our last earnings call.

As a reminder, we previously announced that we were purchasing five.

Our other existing 747 400 freighters at the end of their lease terms in 2022, bringing the total number of acquired 747 four hundreds to 11.

Acquiring these new forecasts excuse me these four new dash eights in 11 of our existing some 47 four hundreds.

Underscores our confidence in the ongoing demand for wide body freighters.

We will provide strong returns for Atlas in the years ahead.

Now turning to our outstanding third quarter results on slide four.

As I mentioned, our revenue and adjusted earnings grew to New Records.

This included our quarterly revenue exceeding $1 billion for the first time in our company's history.

Our third quarter results reflected higher yield and increased aircraft utilization.

They also reflected the impact of numerous new and extended long term customer contracts.

The operation.

$174 seven freighter that we reactivated during the fourth quarter of 2020.

Ongoing reduction of available cargo capacity in the market.

And the continued disruption of global supply chain due to the pandemic.

Our third quarter performance also benefited from passenger charter flying for the U S military related to the Afghanistan evacuation efforts and lower heavy maintenance expense.

Partially offsetting these benefits were higher pilot costs, driven by our new J CBA.

Now moving on to slide five.

We're certainly operating in a very strong airfreight market.

We expect industry conditions and demand for our services to remain favorable for the foreseeable future.

Global Airfreight volumes continued to exceed pre pandemic levels, while industry capacity, particularly on long haul international routes has not kept pace with demand.

This includes fewer new freighter aircraft coming into the market as well as the substantial amount of international passenger belly capacity that has not yet returned.

Supply chain bottlenecks, including the widely reported challenges at Ocean ports worldwide are driving increased modal shift to air as manufacturers retailers and shippers strive to replenish very low inventory levels, especially ahead of the holiday shopping season.

In addition, the current environment has led to a structural acceleration of express growth in e-commerce across the globe.

Which will drive both current and longer term airfreight demand.

While the pandemic continues to make the operating environment, a very challenging one.

The market dynamics, we're seeing in the fourth quarter remained very robust.

As a result, we expect record revenue and record adjusted earnings in the fourth quarter, including revenue of nearly $1 1 billion.

And adjusted EBITDA of approximately $325 million from flying more than 90000 block hours.

We also expect adjusted net income to grow in excess of 20% compared with our prior fourth quarter. Adjusted net income record of $143 2 million in the fourth quarter of last year.

Our fourth quarter 2021 outlook includes the impact of our new J CBA.

As well as the proactive initiatives to help mitigate the higher cost from the new agreement, including increased contribution from our long term customer agreements.

It also reflects continued high levels of aircraft utilization driven by strong demand and solid peak season volumes and yields.

We also expect ongoing expenses driven by the pandemic, including additional pay for employees flying into certain locations that have been significantly impacted by COVID-19.

As well as costs for continuing to provide a safe working environment for all employees.

And maintenance expense of approximately $90 million.

For the full year, we expect aircraft maintenance expense to be around $450 million.

And depreciation and amortization to total about $280 million.

Core capital expenditures, which exclude aircraft and engine purchases are projected to total approximately $90 million to $100 million.

Mainly for parts and components for our fleet.

This is a good point for spectrum to provide more details on our third quarter results and after Spencer's remarks, I'll have some additional comments and then we'll be happy to take your questions.

Sir.

Thank you John and Hello, everyone.

Our excellent third quarter results are highlighted on slide six.

On an adjusted basis EBITDA totaled $285 million with adjusted net income totaling $145 $4 million.

On a reported basis net income totaled $119 $5 million.

Our adjusted earnings included an effective income tax rate of 22, 3%.

Moving to the top of slide seven.

Revenues rose to one point or $2 billion in the quarter.

As John mentioned this was the first time that was generated over $1 billion in revenue during the quarter.

Higher airline operations segment revenue was primarily driven by an increase in the average rate per block hour, which was mainly due to an increased proportion of higher yielding <unk>, including the impact of new and extended long term contracts.

The ongoing reduction of available cargo capacity in the market.

The disruption of global supply chains, as well as higher fuel costs.

Volumes during the period were relatively unchanged as we reduced less profitable smaller gauge CMI flying while increasing utilization of our current fleet to meet strong customer demand.

As John shared volumes also benefited from the operation of $1 $74 seven 400 freighter that we reactivated during the fourth quarter of 2020.

As well as increased passenger charter flying for the U S military related to the support that we provided for the Afghanistan evacuation efforts.

Revenue in dry leasing was relatively unchanged.

Looking now at the bottom of the slide.

Segment contribution totaled $275 $7 million in the third quarter.

Significantly higher airline operations contribution was primarily driven by the positive factors benefiting segment revenue I just noted.

As well as lower heavy maintenance expense.

These improvements were partially offset by higher pilot costs related to our new joint collective bargaining agreement.

In dry leasing higher segment contribution was primarily due to lower interest expense related to the scheduled repayment of debt.

Before we move to the next slide and given the recent increase in prices I'd like to take a moment to remind you that Atlas has very limited direct exposure to fuel.

For our longer term commercial charter contracts fuel risk is largely mitigated by price adjustments, including those based on index steel prices.

For our shorter term commercial charters, our exposure to fluctuations in fuel prices limited as those contracts typically reflect prevailing market fuel prices.

We don't incur fuel expense for our <unk> and CMI services or in our dry leasing business as the cost of fuel is our customer's responsibility.

In addition, we don't have fuel risk for U S military flying as the U S military pays us for fuel so it's in our revenue and offset in expenses.

Now turning to slide eight.

Our net leverage ratio improved another two ticks, finishing the quarter at a record low of one eight times.

We ended the third quarter with cash, including cash equivalents restricted cash totaling $784 1 million.

Our cash position at September 30 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 nine months of 2021 was primarily for payments for flight equipment and modifications.

Specially including the pre delivery payments for the four seven and $4 seven dash eights.

Core capital expenditures as.

As well as spare engines engine overhauls and upgrade kits.

Net cash used for financing activities, primarily reflected debt payments, partially offset by proceeds from debt issuance.

We continue to apply a disciplined approach to financing as we've indicated before this has resulted in a very low weighted average coupon interest rate, which now stands at 294%.

And the majority is secured by our aircraft assets, which have.

Have a value in excess of the related debt.

We remain committed to a strong balance sheet and cash balance, which allows us to opportunistically deploy capital to strengthen our business as well as to navigate unexpected events.

Now I'd like to turn it back to John.

Great. Thank you Spencer.

And moving to slide nine.

We have great momentum, we've delivered an excellent third quarter and we expect the favorable market conditions to continue.

Our team is executing on our strategy proving again that Atlas can capitalize on opportunities in any environment.

We're pleased to have reached a new joint collective bargaining agreement with our pilots and we're excited for the opportunities. This agreement provides to them.

We have the highest quality assets, a strong balance sheet and unrivaled network of customers and unmatched global operating capabilities.

And we will continue to take every precaution to protect our world class team of employees.

To sum it all up again, we're very well positioned to serve the growing needs of our customers and the airfreight market today and in the future.

And at this point, operator, I would like to turn it over to you to take our first question. Please.

Thank you as a reminder to ask a question you will need to press star one on your telephone.

Our first question comes from Stephanie more with <unk>. Your line is open.

Yes.

Okay.

I Wonder if your line is open.

Oh can you hear me.

Okay Gotcha.

Okay got it thank you.

Next question I wanted to touch a bit on capital allocation and then Theyre stepped down and just your net leverage ratio this quarter.

They are really strong.

Strong performance here and cash flow generation for the year. So maybe just where you stand in terms of share repurchases or acquisitions and yet your overall deal. Thank you.

So thank you Stephanie and I will start with that and similar to what Spencer referred to on our financing activities.

Rates to our capital allocation strategy, we take a very disciplined and balanced approach.

And frankly look at all of our.

Hi, its priorities for using our cash.

As I said in our prepared remarks, we've invested heavily in new technology.

As well as acquiring.

Some 47 400 aircraft in terms of funding our fleet and we focus on modern efficient aircraft.

And we're always looking for opportunity for for growth, whether that's organic growth or M&A and in the meantime, considerable time spent focusing on bringing our debt down as well.

We're very pleased with where we are.

We also have to remember we're still in this pandemic environment and the Spencer mentioned in his comments.

Sure.

Still remains a lot of uncertainty out there in the marketplace.

While we feel strongly that the current conditions will continue we wanted to be sure. We're best positioned to weather any any potential downturn I'm, not saying that that's going to happen but.

We're in a good position to weather that so.

Really all options around the table I think we've said that before.

So Spencer I'll turn it over to you to see if you want to add anything to that.

Thanks, John.

Stephanie.

Our focus is on growing the business, while generating returns above our cost of capital and maintaining a strong balance sheet.

As John said, given the strength in the market, we see opportunities for us to invest.

<unk> growth.

We're especially focused on investing in modern efficient aircraft that customers want like afford dash eights that we have coming but we're also evaluating M&A opportunities.

Both that are immediate space as well as potential adjacent spaces.

But we're taking a disciplined approach given the current valuation so we're being careful and thoughtful.

Organic growth and M&A would generate the best returns for our shareholders. So.

So we continue to evaluate these investment opportunities.

While we're doing that.

We continue to make normal sort of regular debt paydowns.

Our leverages, reducing and we have a really really strong balance sheet that helps us.

Prepare for any unexpected events that may happen, while we are focusing in on flexibility and opportunistic capital deployment.

Got it.

I guess, just a push that a little bit further in terms of share repurchase appetite can you remind us.

When the lockup period expires in terms of being able to re engage in share repurchases.

Yeah.

Yes.

So the cares act restrictions.

Ended at the end of September.

And so they are technically no longer there theres still of course significant amount of scrutiny.

With regard to those companies that received <unk> current but they did end on September 30.

As far as share repurchases go.

Something that our board certainly considers we've been as we've talked about we've been paying down debt and ensuring that we have a strong balance sheet. We wanted to finance our fleet and have modern efficient assets and our board in a regular course consider share repurchases and obviously, we'll let everyone know that changes.

I'd like to add to that to be dispense you raised a good point.

Wow.

As Spencer noted the tactical legal time has passed I would like to remind that we are still in the pandemic environment and one of the fundamental reasons. We participated in the cares Act was due to the uncertainty created by the pandemic and so.

That's part of our thought process, we're not quite out of that yet.

Another factor in our focus on the use of cash towards growing the business organically.

And paying down debt and exploring M&A opportunities not that share repurchases.

Orange a tool available to us but.

Given that we're still in the pandemic.

Yes.

Reyes Cares act considerations as a practical matter.

Got it well I really appreciate all the color I'll pass it on thank you.

Thank you.

Thank you. Our next question comes from Bob <unk> with J F.

JC CES.

Alright.

Securities Your line is open.

Good morning.

For taking questions and congratulations on great execution.

Thanks, Bob.

You know, obviously you have extraordinarily strong demand.

I was wondering if you could talk a little bit about labor availability as it relates to pilots if you need to hire any more from the the new J CBA or obviously.

Potentially from the dash eights and whatnot, but also kind of across the board for the.

The rest of your <unk>.

Ploy ease as well how is labor availability impacting you right now.

Sure. Thanks, Bob.

Yeah labor availability is certainly.

In industry, if not a national global consideration.

The U.

You see in the headlines kind of the great resignation.

Culture that we're in.

Hum.

We feel good about our labor availability.

Across the board.

That's not to say that.

We experienced some of the challenges that others do we do.

Pilot availability is certainly in the industry issue you see it in the headlines every day.

The majors are hiring.

The integrators and express carriers are hiring pilots.

And other personnel. So it certainly has an impact on everyone in the industry and Atlas is no exception.

That said.

We're delighted as I said to have entered into this collective bargaining agreements with regard to our pilots.

We feel good about.

The outcome of the of the J CBA to long term agreement that provides very competitive.

Rates within our competitors in the industry that we serve.

And the pilot has got a very good pay raises and we believe I believe that we have a great culture here at Atlas in a place where parts can grow their careers I believe thats true with the rest of the organization as well I mean, if you just look across our management team starting from the top down many of US have worked together for four.

Well over 10 years, if not longer and that resonates and is a theme throughout our organization.

People come to Atlas and they generally stay.

For all the right reasons that said, it's a it's a war for talent as they say so we're out there every day looking to recruit and importantly retain.

And we'll be focused on that so.

In summary, I would say, it's an issue, but it's something we're continuing to manage it and we will need to manage as everyone else does going forward.

Okay, Great and then you touched on this but maybe an update on the dash eight deliveries as it relates to customer interest remaining payments for the PDP.

And then also.

As it relates to future contracts that youre going to sign obviously, having the collective bargaining agreement.

Signed helps but any other benefits from having disagreements on for future contracts.

Yeah, Thanks, Bob well look we feel really good about the dash eights coming.

Frankly, they can't come soon enough.

It's a great airplane and one we're really excited about.

Coming to us.

No.

In terms of placement.

We're in a really strong environment, we're not worried about placing the aircraft. We're focused on where is the best placement of the aircraft and there as we talked about theres tremendous customer interest.

It's the best freight around the market really and.

What it does.

That's not to disparage other aircrafts, a triple sevens, a great airplane to but the dash eight is really a great airplane.

So we feel good about that of course, our ability to staff and crew it is important to our customers.

And as I just talked about.

We're going to continue to manage that but the dash eight will be put to work for sure and we're excited about bringing them online.

Super Thanks very much.

Thank you.

Thank you and our next question comes from Chris <unk> with Susquehanna.

International Your line is open.

Hey, good morning, Thanks for taking my question and John Spencer and team Congrats on finally, tying up this labor deal.

Thanks, Chris.

Could hear not to rain on anyone's parade, but curious so it looks like.

In your prepared remarks, you said September the deal was reflected in.

September so as we think about the exit rate for the fourth quarter here for <unk> and any other adjustments that you need to make that relate to that.

That relate to that new contract.

What gives you the confidence that you can offset.

Some of these.

Higher wages into 2022.

Particularly when it looks like at.

At least.

Summer in the back half of next year, a lot of wide body capacity is coming back online and then part b of that last spring.

When you move to more a CMI like contracts and charter some of those deals I remember you, saying were three to six months or one to two years in duration and how much of those at this point.

Have already come up for renewal and how much are.

About two.

Come up.

About to expire.

<unk>.

Sure Ed.

I'll start Spencer then turn it over to you for some further thoughts, but first of all Chris we're not going to let you rein on our parade.

And.

Youre right the rates went into effect.

September one and.

And Youre also right capacity is starting to come back online.

But certainly not at a at a at a rate that causes me any immediate concerns I think what youre going to see first of all as as borders start to open up we expect the trans Atlantic and already seeing some of that.

That's the only capacity will come back, but you also need to remember that the demand for airfreight is.

Beyond pre pandemic levels, and we're not expecting the capacity to come back.

First of all to the levels that it was at pre pandemic and also not at the pace.

That capacity is coming back into the market.

Other words, the demand is exceeding that.

That pace at least for the foreseeable future.

There's another there's a number of considerations that go into that question as well is where is that capacity coming back and what kind of capacity is coming back.

Will that be will that capacity the international.

Singer belly capacity, particularly we'll have Dion typical cargo trade lanes or will it be more point to point.

Some of the newer aircraft coming online like the 787.

As designed for point to point it can certainly serve hub and spoke but we're watching that closely.

How much capacity will be coming.

In the Trans Pacific, which is a really important trade lane for us and we see that coming back one more slowly, but as well on the backend.

The recovery.

So.

For the amount of capacity, that's coming back and the rate is coming back.

The demand is going to continue.

To exceed that supply.

Another factor to consider as well as.

The some of the changes the the.

The growth of E Commerce and express.

That are going to continue to.

To grow as we pointed out.

As well as some of the new customers, we've been able to create theres been a tremendous demand from customers that are that are new to us manufacturers as I said some of the freight forwarders and seeing the value of.

Fixed capacity and controlled capacity.

And we think that's going to sustain.

Beyond the passenger Recut.

Recovery on the international sector. So there are a number of considerations.

I'm, not suggesting things arent going to moderate.

We'll eventually.

From where we are today, but we feel good about the long term prospects and to tie in to the second part of your question in terms of the duration.

I don't think we've said that three to six months duration of the deals we've been signing and amending.

Go well beyond that incurred including more recent contract extensions.

The people that are favoring our assets and the service we provide so we see this as a longer term play and our ability to pass on those costs.

We feel better about than then.

What your question suggests Spencer.

Spencer over to you.

Yeah.

Thank you Jonathan Chris I'll, just make a couple of points, but then more specifically comment on the duration just a couple of points to add to what.

What John said.

You know inventory levels are at.

Record record lows and there are a number of widely reported shortages.

Goods, which means that.

When these things come back and when chips are available and when these goods are available and when people start to if they go back to malls and things like that.

All of that bodes really well for airfreight, because goods, we will need to move very very quickly.

And then just one other point and then I'll talk about the duration is that.

Manufacturing.

We used to move away from cities that have large passenger hubs. So that drives airfreight two airports that are more cargo focused and so the belly capacity is not as available and it's less of an issue in those important trade lanes.

But then to get to the.

The duration of these long term charter contracts.

The vast majority of them go into 2022 and 2023.

Some of them go into 2024 and 25 during the.

Quarter.

We added an aircraft with a customer.

For a term.

Three six years and so it goes through April.

<unk> 2025 at a really good rate we also extended.

Term with another customer that goes to October 2024, with a higher rate and so on a fairly regular basis customers are extending these agreements.

At higher rates. So we feel good about the long term charter business.

Okay, and as a follow up to that so yeah.

You mentioned earlier I think there was a question around capital.

Allocation here and the restrictions on the buybacks have listed under the cares Act admittedly, it's probably not a good time for airlines to be buying back stock. So all things considered but with respect to M&A. So you did the southern deal.

I think it was in 2015 to get into the Triple Sevens.

As we look at other potential.

Carriers or perhaps something upstream.

Youre long 7677, and $4 77, Triple seven should we assume which had fair to perhaps.

Perhaps moving into the Airbus platform might be something that you could do or would it be something as.

As in MRO or something.

Kind of further upstream.

<unk>.

Yes, Chris that's a great question.

I think from our perspective, all options are on the table.

We're not certainly not ruling out an Airbus product.

It's a great product in.

Our view has been we would want to be sure we have sufficient scale.

Two to go into any new aircraft type I feel very confident we have the organizational capability to do that many of our technical.

Technical people in flight ops people have flown and maintain the Airbus product in their careers.

So we're not concerned about that we just would want to be sure that it's the right asset.

Of sufficient scale for our business.

So I wouldn't rule out an Airbus product at all.

With regard to and Spencer alluded to this other options.

There are fewer and fewer M&A opportunities.

Presently at times, so do we look to adjacent space MRO or something else I'm sure you know.

I think all options are on the table, so I wouldn't rule anything out at this point.

Okay. Thank you.

Thank you.

Question comes from Helane Becker with Cowen Your line is open.

Thanks, very much operator, hi, everybody and thank you very much for the time.

Thank you.

The first question the first question.

Half is.

Your pilots.

Average tenure.

So if.

If I look at the <unk>.

The contract.

And compared to the old contract I would see the starting salaries didn't go up significantly but there's four.

People with longer tenures went up significantly so so like how should we think about.

Junior pilots versus senior pilots and what.

And the average tenure I guess, just the best way to ask it.

Yes, so I'll speak.

The average tenure.

It's coming down the weighted average is coming down we saw is as you know helane over the past four years or so we've had a tremendous amount of growth.

We've grown to really all of the platforms.

The triple seven for sure the 767% in large numbers, so when you're hiring office.

When youre hiring.

New pilots.

Your average tenure goes down I don't have the specific number other than to say.

We've had a significant increase in younger pilots.

And what I will say when I say younger I mean shorter tenured pilots because we put so much and then you know.

65 rule has kicked in and scheduled retirements.

<unk> is also contributing to that average coming down.

I'd be guessing if I don't have the exact number at my fingertips, but.

It's probably north of five years, but I'd be guessing there.

In the aggregate.

Okay. So.

That piece of it.

Yes.

I think it would be coming down.

I'm just thinking if it's like an.

Eight to 10 year range versus you know over 12.

But I don't think it's over 12 at this point, but again I don't have the exact I don't have the exact number.

And look it's an exciting opportunity for us to have the 737 gauge.

I don't see it as an entry level aircraft, but it's a smaller gauge aircraft that we're able to hire into and pilots generally graduate up to larger equipment. So when I mentioned our fleet, we have the ability for pilots to really enjoy a variety of fleet types.

Smaller gauge large largest gauge as well as different types of operation. So we feel we have a really attractive value proposition for pilots to come work for us.

Now on the risk I'm sorry, yes.

Yes, sorry second part of your question was on rates.

And going through this arbitration process and the negotiations with the Union, we looked at all of the rates both entry level as well as top of scale.

And strive to be competitive.

With.

Our competitors in the marketplace and we feel good about where we landed there.

So.

I wouldn't say, we're on the low end.

Generally say across the board on rates were on the higher end of our comparator. That's certainly true with the top of scale people, which gives our younger pilots something strive for.

Gotcha Okay.

Thank you very much for all that detail I really appreciate it.

And then I don't know I think this might be a question for John as you think about the growth and I. Appreciate all the comments that you made in answer to all the other questions about it.

And then new aircraft and so on how do you think about somebody like Maersk ordering to chip.

Triple seven freighters.

You wouldn't normally for their star Air subsidiary right you wouldn't normally see a shipping company.

Wanting to own aircrafts. So how are you thinking about like nontraditional folks getting into the airfreight market and how that would impact.

Yeah any rates that you might think about or euro.

Your own marketing position and in the next year or so.

Sure. That's a great question I personally have mixed feelings about it.

I'm always a little cautious when a new potential competitor comes into the marketplace and get very competitive there.

And so.

You want to keep that to a minimum but on the other hand, if you look at it.

It ties in with the comments I was making earlier about the value of airfreight and sustainability. It says that some very sophisticated.

Players in the in the freight market see the value of airfreight. So much so that they are willing to invest in it. So I think that bodes well for the long term future of air freight in and ties in with some of the comments of new customers being created.

Spencer.

Extent theres modal shift it doesn't take a great deal of modal shift from sea to air to make a meaningful impact on airfreight.

So I think.

You have to view that as a.

As a favorable sign for airfreight, what it also means of Atlas, we need to continue to compete and be the best of what we do to make sure we get our share of the business.

Thanks, John that's very helpful. Thank you very much.

Thank you.

Thank you. Our next question comes from Scott Group with Wolfe Research. Your line is open.

Hey, Thanks, Good morning, guys. So I wanted to ask.

One of Chris's questions a little differently.

With the longer term charter business.

The rough percentage of your business next year that will get repriced in one way or another.

How does that compare with a typical year I'm guessing it's less but.

Any thoughts there.

Hi, Scott.

<unk>.

We have a number of these long term charter agreements and as I said.

We are in regular conversations with all of these customers they need this capacity.

And so they are entering into conversations with us on a very regular basis about extending those.

And those are happening all the time, there's interest in extending means for up to five years theres demand curve for five year terms.

Out in the marketplace, so as far as our CMI agreement.

I would say less than typical because those are.

Fairly long term in nature as far as these charter agreements.

As I said most of them go into 2022, and 'twenty three and some go into 'twenty four and.

25.

Again.

They're all looking to ensure that they have this capacity. So we feel good about it.

But like meaning the rails will say hey, 50% of our business re prices in a given year the truckers might say, it's 80% or whatever it is is there a rough.

Ballpark, just so we can understand it.

Perhaps our customers.

That might be the case for our customers Scott who.

Our freight forwarders or.

Charter brokers and so forth in their dealings with their customers.

But for us it's a little different because we have we don't have that many of these right. We have a finite number of HDMI contracts, we have a finite number of these long term charter contracts.

So we're managing them all very closely it's not.

Sort of law of large numbers kind of thing.

Okay got it I don't think I'd like to add.

I'd like to add a little additional perspective as well because we've been balancing the long term charter agreements.

With the short term swing capacity that has very high yielding.

So.

When we commit to a long term charter agreements.

Particularly in the environment we're in.

It's generally a little bit longer out in that Titan with my comment that Chris.

But I also don't want to.

Undervalue the significance of the flex capacity in the AD hoc.

Capacity is that at times, we maintained by design.

Other than committing to lower yielding.

Long term charters.

And that has contributed that that.

Fairly complex balance to the very strong results, so while we heavily favor.

The long term charter in the CMI, we're also wanting to.

Capitalized on the near term.

Very very favorable conditions as well.

That makes sense can I just ask one more so.

Probably at this time a year ago, there's almost nobody thought you'd grow earnings this year and earnings would be up $35, 40%. This year any thoughts on next year and the ability to grow earnings and anything you can share on either maintenance or military now that the calendars reset hum on those two items.

Yeah.

Yes, Scott.

<unk> you know as John has talked about the environment is.

Incredibly strong and we expect that that will continue the acceleration of express and the adoption of E Commerce.

Record low inventory levels.

All of these things bode really well.

For for Airfreight overall.

With regard to 'twenty two.

We will look to provide some more information during our next earnings call.

Hey.

It's an interesting environment, obviously in the midst of a pandemic and so we've only been providing.

Nearly guidance. This year, we will see next quarter, whether we provide one quarter guidance or whether we get back to the kind of more normal providing guidance for a longer term.

So we'll talk more about that during our next.

Earnings call, but there are a number of.

Really positive factors and of course, one big variable is.

As yields.

We do expect that they will normally moderate at some point.

So we'll just have to see when that is and we'll do a lot of modeling around that.

And I'd just add one additional point, if I could add to that.

Because in my prior remarks, I mentioned, we may see some <unk>.

Lower flying on military and Scott you mentioned military.

I don't necessarily view that in the near term as a bad thing.

Those resources will be gainfully employed.

The strong commercial market and its more efficient flying generally speaking the commercial market.

Versus the more AD hoc charter flying for the military.

Not in any way to disparage the military flying is just we.

We have other current uses so the timing isn't all that bad if theres going to be a softening of the AMC cargo business for us right now.

Makes sense. Thank you guys I appreciate it.

Thanks Scott.

Thank you and our next.

Question comes from Frank Galanti with Stifel. Your line is open.

Great. Thank you very much.

I wanted to ask about the supply dynamics for the wide body freighter market.

From what I understand history, historically dedicated freighters moved about 40% of transoceanic freight I mean kind of a normalized environment.

As passenger belly.

Space took up made up the difference can you talk to what that current rate is.

And what you expect kind of moving forward, it's international capacity returns to more normalized levels.

Sure.

Frankly, we work from the operating premises, it's more it's closer to 50 50 in terms of what was pre pandemic belly versus.

Main deck freighters.

Yeah.

Clearly for the foreseeable future, it's going to be more heavily weighted in favor of main deck freighters.

There will be new freighters coming into the market.

But for us.

Not as directly competitive most of the triple seven.

We talked about we're taking the last 740 sevens.

And that leads to the triple seven and the 767, mainly for new production. The Triple Sevens are largely not exclusively but largely going to the integrators.

The Fedex ups and DHL.

The integrators, so not competitive to us.

As is true for many of the 760 sevens.

But offsetting that there's also a lot of older equipment that may be retiring and theres going be a lot of questions on the MD elevens future right.

While they are gainfully employed now when they come up for heavy checks, which is a very expensive investment.

There's going to need to be a lot of thought so some of that.

The older equipment will retire out.

And then the question will be how much of the international passenger belly capacity will come back.

Nobody knows for sure.

But I think the general consensus is given all of the passenger aircraft retirements that it will be less.

Then what was pre pandemic for a while and reasonable minds can differ what is that 80% or 70% of pre pandemic levels Nobody knows for sure and then the last factor in that equation is okay. How much how many aircraft are going to be converted.

The Triple seven conversions are a couple of years out the <unk> hundred 30 conversions.

And for the large wide body those are the real.

Factors that would play into that which again speaks that it will be more heavily weighted towards.

Main deck freighters versus belly. So I don't have an exact percentage I don't know that but I just would say, it's more than 50% will be main deck for the foreseeable future.

Okay, that's really helpful and I guess as my follow up.

Just trying to get a sense of what.

Normal supply growth looks like from what I understand is about 600 wide body planes flying today. After obviously 2020 product a bunch of them back from being parked.

In your prepared remarks, you had said that deliveries for dedicated freighters were lower than usual.

Talk through what's happened.

With deliveries in them in the last couple of years relative to more normalized times, and then kind of what the outlook is from your guys' perspective on the.

Going out.

And then I guess secondarily, how many freighters are retired each year.

Normalized world.

Oh.

Yes, there is.

Really no fixed number of how many retirements in a normalized world.

I don't know what a normalized world is any more to be honest and I think it comes down to what are the market conditions at the time. Some of these aircrafts come up for retirement or parking decision and Theres a lot of fluidity to that and it's really.

It's more market driven than asset driven generally speaking.

Willing to invest in the the heavy maintenance you can prolong the life of those assets.

With regard to the.

<unk> production.

I'll just comment on what I said before you've got one line Thats retiring an entirely net 747.

The Triple Sevens.

Our predominantly my understanding will be freighters.

And I don't want to speak for Boeing, but I think the production rate is something like.

One or two a month too.

<unk> on the high end of month of Triple Sevens, 760 sevens might be a little higher than that.

So there will be capacity coming into the market, but again I go back to to what extent will that be replacement capacity or are truly incremental and I think.

That's an open question, which will be.

Market driven on how much.

Willing to carriers are willing to invest in the heavy heavy maintenance, especially I don't know if you have any.

More detailed numbers you want to put behind that answer.

The only thing I can really add is in the.

The long haul wide body space, where we primarily operate.

We have the last for $7 seven day shapes, there won't be any more after that with regard to the triple Sevens I think there are something like 38 announced.

Aircrafts going two announced customers from Boeing and most of those are integrators, so DHL and Fedex are getting most of those.

There are also some.

The Asian and.

Europe and middle Eastern.

Airlines as well, but there's just there's just not that much capacity coming into the space.

So.

That's a really important consideration Craig.

Okay got it thank you very much guys.

Yes, I'll just I'll just add typically.

Demand grows.

John said, there's no such thing as typical anymore.

Historically.

Demand in airfreight grows 3% to 4% per year, and so if you take 3% to 4% times. The number of aircrafts that are out there that means a number of incremental aircraft need to be need to be added every year plus you have the older aircraft and retiring as John talked about and so it's just further need for more aircraft, but they are.

Really aren't that many orders out there.

Got it I appreciate it thank you.

Thank you and I have a follow up with Chris Stephanopoulos with Susquehanna. Your line is open.

Thanks for taking my follow ups so Spencer.

I'm going to ask even though you answered this just about every quarter now or at least certainly since last year.

But I think it's important to act because they've got a lot of questions around how payload sensitive Atlas is today.

And that's certainly changed versus where you were in 2019 2018, but.

And what percent of your block hours are currently on spot I believe that number is five and do you anticipate that mix to.

To remain at five through the next stages of the recovery and it sounds like John feels based on your comments that this is going to play out perhaps.

Longer than some do it sounds like at least through 2023, but that 5% is that the sort of new level of spot sensitivity for lack of a better word we should think about with respect to.

Block hours and of course contribution dollars. Thanks.

Sure. Thank you, Chris So overall I'll give the kind of the run down.

Our block hours and traditional <unk> are somewhere between 60 and 65% of all decline that we do.

These long term charters are somewhere around 20%.

I'm flying that we do for the military.

Now somewhere around 6%.

Flying we do in South America is about 5%.

That leaves.

Sort of Ad hoc.

Space at somewhere around 5% to 6%.

So hopefully I haven't the other part of your question was do we expect this to kind of continue.

Yes, I think we do Chris.

This is becoming perhaps the new normal at least for the foreseeable future our expectations are that these levels.

A little bit as John said military came down a little bit which allowed us to operate more in the long term charter space. So these percentages change slightly but you can tell if you look back there they're fairly consistent.

Okay, if I could squeeze one last in here there was an article out there in the press over the last two weeks or so about Amazon.

Looking around for some triple Sevens and I think some for Airbus freighters on the Triple seven side is that something and this is for outbound flights.

From China is that something that you would be able to.

To fly.

Without knowing anything else about how that would work in point to point hub and spoke but in terms of if it is an outbound flight from China could you even.

Participate in something like that thank you.

So I'll comment on that and I'll start by saying.

We don't speak I can't speak for Amazon, What I can say is and this ties in with my prepared remarks that we have global.

Operating capabilities in the asset types, we're talking about here.

So.

We'd obviously have to look at what the route rights would be involved and whether we could get the right traffic rates, but we are a global player in the <unk> 47 in the Triple seven.

Thank you and I'm showing no further questions in the queue at this time I'd like to hand, the conference back over to Atlas Air.

Well like for closing comments.

Great. Thank you operator, and thanks to all of you for your great questions Spencer and I really appreciate.

The opportunity to engage.

As I said, we're really excited about.

About our results and where we are.

And where we're going and you know our focus is on on the future and the long term.

We really appreciate you taking the time with US today, we hope you and your family stay safe and we look forward to speaking with you all again soon thanks so much.

Thank you operator.

Thank you. This concludes today's conference call. Thank you for your participation you may now disconnect everyone have a wonderful day.

[music].

Yes.

[music] anymore.

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Good day, and thank you for standing by and welcome to the Atlas Air World Wide Holdings incorporated third quarter 'twenty 'twenty. One results conference call. At this time, all participants are in a listen only mode.

After the Speakers' presentation, there'll be a question and answer session.

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