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AAWW > SEC Filings for AAWW > Form 10-K on 13-Feb-2014All Recent SEC Filings

Show all filings for ATLAS AIR WORLDWIDE HOLDINGS INC

Form 10-K for ATLAS AIR WORLDWIDE HOLDINGS INC


13-Feb-2014

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the Financial Statements included in Item 8 of this report.

Business Overview

We are a leading global provider of outsourced aircraft and aviation operating services. As such, we manage and operate the world's largest fleet of Boeing 747 freighters. We provide unique value to our customers by giving them access to highly reliable new production freighters that deliver the lowest unit cost in the marketplace combined with outsourced aircraft operating services that we believe lead the industry in terms of quality and global scale. Our customers include airlines, express delivery providers, freight forwarders, the U.S. military and charter brokers. We provide global services with operations in Africa, Asia, Australia, Europe, the Middle East, North America and South America.

We believe that the following competitive strengths will allow us to capitalize on opportunities that exist in the global airfreight industry:

Market leader with leading-edge technology and innovative, value-creating solutions:

We manage the world's largest fleet of 747 freighters. The new 747-8F is the largest and most efficient long-haul commercial freighter currently available and we are currently the only operator offering these aircraft


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to the ACMI market. Our current cargo fleet includes nine 747-8F aircraft, twenty-two 747-400 freighter aircraft and our CMI customers provide us with two 747-400 passenger aircraft, five 767-200 cargo aircraft, two 767-300 cargo aircraft, four Dreamlifters and one VIP-configured 767-200 passenger aircraft, which are included in our operating fleet statistics. In addition, we also have two 747-400 and three 767-300ER passenger aircraft. Our operating model deploys our aircraft to drive maximum utilization and value from our fleet. The scale of our fleet enables us to have aircraft available globally to respond to our customers' needs, both on a planned and ad hoc basis. We believe that this provides us with a commercial advantage over our competitors that operate with smaller and less flexible fleets.

Since November of 2011, we have taken delivery of nine new 747-8F aircraft, which have improved operating performance relative to the 747-400. The new aircraft create additional operating leverage to drive growth and to help us maintain our industry leading position for the foreseeable future. Both the 747-8F and 747-400, the current core of our ACMI segment, are industry leaders for operating performance in the intercontinental air freighter market due to cost and capacity advantages over other freighters.

During 2013, we significantly expanded our Dry Leasing business with the acquisition of three 777-200LRF aircraft. We also acquired an additional three 777-200LRF aircraft in January 2014. All six aircraft are Dry Leased to customers on a long-term basis. The addition of the 777 freighters further diversifies our business mix with leading-edge technology.

Stable base of contractual revenue and reduced operational risk:

Our focus on providing long-term contracted aircraft and operating solutions to customers stabilizes our revenues and reduces our operational risk. Typically, ACMI and CMI contracts with customers generally range from two to five years, although some contracts have shorter or longer durations. Under ACMI, CMI and Dry Leasing, our customers assume fuel, Yield and demand risk resulting in reduced operational risk for AAWW. ACMI, CMI and Dry Leasing contracts typically provide us with a guaranteed minimum level of revenue and target level of profitability.

Our contract with DHL includes the allocation of blocked space capacity on a long-term basis for up to 20 years. This arrangement eliminates Yield and demand risks, similar to the rest of our ACMI business, for a minimum of six 747-400 aircraft, with an additional two 747-8F aircraft and one 747-400 aircraft under separate ACMI agreements.

Our AMC Charter services are typically operated under an annual contract with the U.S. military, whereby the military assumes Yield and fuel price risk.

Focus on asset optimization:

By managing the largest fleet of 747 freighter aircraft, we achieve significant economies of scale in areas such as aircraft maintenance, crew efficiency, crew training, inventory management and purchasing. We believe the addition of the 747-8F aircraft further enhances our efficiencies as these new aircraft have operational, maintenance and spare parts commonality with our existing fleet of 747-400s, as well as a common pilot-type rating.

Our mix of aircraft is closely aligned with our customer needs. We believe that our new 747-8F aircraft and our existing 747-400 fleet are well-suited to meet the current and anticipated requirements of our customers.

We continually evaluate our fleet to ensure that we offer the most efficient and effective mix of aircraft. Our service model is unique in that we offer a portfolio of operating solutions that complement our freighter aircraft businesses. We believe this allows us to improve the returns we generate from our asset base by allowing us to flexibly redeploy aircraft to meet changing market conditions, ensuring the maximum utilization of our fleet. Our


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AMC and Commercial Charter services complement our ACMI services by allowing us to increase aircraft utilization during open time and to react to changes in demand and Yield in these segments. We have employees situated around the globe who closely monitor demand for commercial charter services in each region, enabling us to redeploy available aircraft quickly. We also endeavor to manage our portfolio to stagger contract terms to mitigate our remarketing risks and aircraft down time.

Long-term strategic customer relationships and unique service offerings:

We combine the global scope and scale of our efficient aircraft fleet with high quality, cost-effective operations and premium customer service to provide unique, fully integrated and reliable solutions for our customers. We believe this approach results in customers that are motivated to seek long-term relationships with us. This has historically allowed us to command higher prices than our competitors in several key areas. These long-term relationships help us to build resilience into our business model.

Our customers have access to our solutions, such as inter-operable crews, flight scheduling, fuel efficiency planning, and maintenance spare coverage, which, we believe, set us apart from other participants in the aircraft operating solutions market. Furthermore, we have access to valuable operating rights to restricted markets such as Brazil, Japan and China. We believe our freighter services allow our customers to effectively expand their capacity and operate dedicated freighter aircraft without simultaneously taking on exposure to fluctuations in the value of owned aircraft and, in the case of our ACMI and CMI contracts, long-term expenses relating to crews and maintenance. Dedicated freighter aircraft enable schedules to be driven by cargo rather than passenger demand (for those customers that typically handle portions of their cargo operations via belly capacity on passenger aircraft), which we believe allows our customers to drive higher contribution from cargo operations.

We are focused on providing safe, secure and reliable services. Both Atlas and Polar successfully completed the International Air Transport Association's Operational Safety Audit (IOSA), a globally recognized safety and quality standard.

We provide outsourced aviation services and solutions to some of the world's premier airlines and largest freight forwarders. We will take advantage of opportunities to maintain and expand our relationships with our existing customers, while seeking new customers and new geographic markets.

Experienced management team:

Our management team has extensive operating and leadership experience in the airfreight, airline, aircraft leasing and logistics industries at companies such as United Airlines, US Airways, Lufthansa Cargo, GE Capital Aviation Services, Air Canada, Ansett Worldwide Aviation Services, Canadian Airlines, Continental Airlines, SH&E Air Transport Consultancy, ASTAR Air Cargo and KLM Cargo, as well as the United States Navy, Air Force and Federal Air Marshal Service. Our management team is led by William J. Flynn, who has over 30 years of experience in freight and transportation and has held senior management positions with several transportation companies. Prior to joining AAWW, Mr. Flynn was President and CEO of GeoLogistics, a global transportation and logistics enterprise.

Business Strategy

Our strategy includes the following:

Aggressively manage our fleet with a focus on leading-edge aircraft:

We continue to actively manage our fleet of leading-edge wide-body freighter aircraft to meet customer demands. The 747-8F aircraft are primarily utilized in our ACMI business while our 747-400s are utilized in our


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ACMI, AMC and Commercial Charter business. We aggressively manage our fleet and will evaluate potential opportunities for adding incremental aircraft to ensure that we provide our customers with the most efficient aircraft to meet their needs.

We have expanded our Dry Leasing business with the recent addition of six modern, efficient 777-200LRF aircraft and will continue to explore opportunities to invest in additional aircraft.

Focus on securing long-term contracts:

We will continue to focus on securing long-term contracts with customers, which provide us with stable revenue streams and predictable margins. In addition, these agreements limit our direct exposure to fuel and other costs and mitigate the risk of fluctuations in both Yield and demand in the airfreight business, while also improving the overall utilization of our fleet.

Drive significant and ongoing efficiencies and productivity improvements:

We continue to enhance our organization through an initiative called "Continuous Improvement." We created a separate department to drive the process and to involve all areas of the organization in the effort to reexamine, redesign and improve the way we do business.

Our Continuous Improvements efforts during 2013 have reduced costs, compared to 2012, in the following areas: Maintenance, from our engine and spare part purchase programs rather than incurring more expensive repairs for existing parts; Passenger and ground handling, from reduced catering rates; Travel, from reduced rates negotiated with vendors; and rate reductions on various other operating expenses through procurement initiatives.

Selectively pursue and evaluate future acquisitions and alliances:

From time to time, we explore business combinations and alliances with other cargo airlines, services providers, dry leasing and other companies to enhance our competitive position, geographic reach and service portfolio.

Business Developments

Our ACMI results for 2013, compared to 2012, were positively impacted by the following events:

Between March and November 2012, we began CMI flying five 767-200 freighters owned by DHL.

In May and July 2012, we took delivery of two 747-8F aircraft that we placed in service with Panalpina Air & Ocean Ltd ("Panalpina") under an ACMI agreement, which replaced two 747-400F aircraft.

In June 2012, we began ACMI flying a 747-400F aircraft for Etihad Airways ("Etihad"), which was the first 747-400F aircraft in its global network.

In July 2012, we began ACMI flying an additional 747-400F aircraft for Polar and DHL, which increased the size of our fleet flying for DHL from eight to nine aircraft.

In October and December 2012, we took delivery of two 747-8F aircraft that we placed into ACMI service with Polar and DHL, replacing two 747-400 aircraft.

In January and February 2013, we began CMI flying two new 767-300ERF aircraft owned by DHL.

In April 2013, we began ACMI flying a 747-400F aircraft for Chapman Freeborn Airchartering Ltd. ("Chapman Freeborn"), which was the first dedicated 747-400F aircraft in its network.

In May 2013, we took delivery of a 747-8F aircraft that we placed into ACMI service with Etihad, which was the first 747-8F aircraft in its global network.


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In July 2013, we began CMI flying a VIP-configured 767-200 passenger aircraft owned by MLW Air. MLW Air's 767-200 is the only all-first class 767 commercial charter aircraft with worldwide operations registered with the FAA.

In September 2013, we began ACMI flying a 747-400F for Astral Aviation Limited ("Astral Aviation"), which was the first 747-400F aircraft in its global network.

In December 2013, we signed an ACMI agreement for a 747-8F aircraft with BST Logistics (Hong Kong) Company Limited, a business partner of Navitrans International Freight Forwarding Co., Ltd. Service is expected to begin in February 2014.

In January 2014, British Airways notified us that they would be terminating our ACMI agreement and returning three 747-8F aircraft in April 2014. As a result, British Airways is required to pay early termination fees. We expect to deploy these aircraft in profitable revenue operations once redelivered to us.

AMC Charter Cargo and Passenger Block Hours have been negatively impacted by reduced demand from the AMC, which continued to decline during 2013 and is expected to decline further in 2014.

Commercial Charter Block Hours increased significantly during 2013, reflecting our redeployment of 747-400 aircraft from ACMI during remarketing periods and the deployment of a 747-8F aircraft until its placement with an ACMI customer. However, Commercial Charter Yields have been negatively impacted by softer demand and excess capacity in the air cargo market for most of 2013. In addition, Commercial Charter has been negatively impacted by a reduction in the number of one-way AMC missions and a change in the proportion of those missions from outbound U.S. to inbound U.S. These changes reduced the opportunity to use return legs for Commercial Charters.

As a result of changes in AMC and Commercial Charter demand, we continually assess opportunities for our 747-400 freighter aircraft and will make adjustments to our capacity as necessary. Some of these actions may involve grounding or disposing of aircraft, which could result in asset impairments or other charges in future periods. In December 2013, we permanently parked two 747-400BCF aircraft that we leased due to 747-8F aircraft delivery delays. With the completed deliveries of our 747-8F aircraft and the reduction in AMC and Commercial Charter demand, these two aircraft are no longer needed. As a result, we recorded a special charge of $17.8 million related to the early termination of the operating leases.

In March and July 2013, Titan purchased three recently-manufactured Boeing 777-200LRF aircraft that are Dry Leased to customers on a long-term basis.

In January 2014, Titan purchased three additional recently-manufactured Boeing 777-200LRF aircraft that are Dry Leased to a customer on a long-term basis.


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Results of Operations

Years Ended December 31, 2013 and 2012

Operating Statistics

The following discussion should be read in conjunction with our Financial
Statements and notes thereto and other financial information appearing and
referred to elsewhere in this report.

The table below sets forth selected Operating Statistics in:



                                                                             Increase /         Percent
                                            2013              2012           (Decrease)          Change
Block Hours
ACMI                                         115,358          107,130              8,228             7.7 %
AMC Charter:
Cargo                                          6,331           10,423             (4,092 )         (39.3 )%
Passenger                                     10,718           12,024             (1,306 )         (10.9 )%
Commercial Charter                            25,480           21,965              3,515            16.0 %
Other                                          1,050            1,165               (115 )          (9.9 )%

Total Block Hours                            158,937          152,707              6,230             4.1 %

Revenue Per Block Hour
ACMI                                    $      6,545        $   6,368       $        177             2.8 %
AMC Charter                             $     20,901        $  21,743       $       (842 )          (3.9 )%
Cargo                                   $     22,299        $  23,677       $     (1,378 )          (5.8 )%
Passenger                               $     20,075        $  20,066       $          9              NM
Commercial Charter                      $     19,471        $  20,500       $     (1,029 )          (5.0 )%
Fuel
AMC
Average fuel cost per gallon            $       3.57        $    3.35       $       0.22             6.6 %
Fuel gallons consumed (000s)                  42,164           58,178            (16,014 )         (27.5 )%
Commercial Charter
Average fuel cost per gallon            $       3.14        $    3.32       $      (0.18 )          (5.4 )%
Fuel gallons consumed (000s)                  82,785           72,834              9,951            13.7 %
Segment Operating Fleet (average aircraft equivalents during the period)
ACMI*
747-8F Cargo                                     7.8              4.3                3.5            81.4 %
747-400 Cargo                                   14.4             16.4               (2.0 )         (12.2 )%
767-300 Cargo                                    1.8                -                1.8              NM
767-200 Cargo                                    5.0              2.5                2.5           100.0 %
747-400 Passenger                                1.3              1.1                0.2            18.2 %
767-300 Passenger                                0.2              0.1                0.1           100.0 %
767-200 Passenger                                0.5                -                0.5              NM

Total                                           31.0             24.4                6.6            27.0 %
AMC Charter
747-400 Cargo                                    2.5              2.9               (0.4 )         (13.8 )%
747-200 Cargo                                      -              0.2               (0.2 )        (100.0 )%
747-400 Passenger                                1.5              1.7               (0.2 )         (11.8 )%
767-300 Passenger                                2.6              2.3                0.3            13.0 %

Total                                            6.6              7.1               (0.5 )          (7.0 )%


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                                                          Increase /       Percent
                                     2013       2012      (Decrease)        Change
         Commercial Charter
         747-8F Cargo                  0.6          -             0.6            NM
         747-200 Cargo                   -        0.2            (0.2 )      (100.0 )%
         747-400 Cargo                 7.8        5.8             2.0          34.5 %
         747-400 Passenger             0.2        0.2               -            NM
         767-300 Passenger             0.2        0.2               -            NM

         Total                         8.8        6.4             2.4          37.5 %
         Dry Leasing
         777-200 Cargo                 1.7          -             1.7            NM
         757-200 Cargo                 1.0        1.0               -            NM
         737-300 Cargo                 1.0        0.4             0.6         150.0 %
         737-800 Passenger             2.0        2.0               -            NM

         Total                         5.7        3.4             2.3          67.6 %
                                         -

         Total Operating Aircraft     52.1       41.3            10.8          26.2 %

         Out-of-service**              0.9          -             0.9            NM

* ACMI average fleet excludes spare aircraft provided by CMI customers.

** All of our out-of-service aircraft are completely unencumbered.

NM represents year-over-year changes are not meaningful.

Operating Revenue

The following table compares our Operating Revenue (in thousands):

                                                              Increase /       Percent
                                 2013            2012         (Decrease)        Change
    Operating Revenue
    ACMI                      $   755,008     $   682,189     $    72,819          10.7 %
    AMC Charter                   356,340         488,063        (131,723 )       (27.0 )%
    Commercial Charter            496,112         450,277          45,835          10.2 %
    Dry Leasing                    35,168          11,843          23,325         197.0 %
    Other                          14,272          13,660             612           4.5 %

    Total Operating Revenue   $ 1,656,900     $ 1,646,032     $    10,868           0.7 %

ACMI revenue increased $72.8 million, or 10.7%, primarily due to the entry of 747-8F aircraft into service and increased CMI flying, partially offset by the redeployment of 747-400 aircraft into other segments. ACMI Block Hours were 115,358 in 2013, compared to 107,130 in 2012, an increase of 8,228 Block Hours, or 7.7%. The increase in Block Hours was primarily driven by the start-up of ACMI 747-8F flying for DHL in October 2012 and Etihad in May 2013, as well as the start-up of ACMI 747-400 flying for Chapman Freeborn in April 2013 and Etihad in June 2012. The increase in Block Hours was also driven by the start-up of CMI flying of two 767-300 cargo aircraft for DHL in the first quarter of 2013, five 767-200 cargo aircraft for DHL during 2012 and one 767-200 passenger aircraft for MLW Air in July 2013, as well as an increase in CMI flying for Boeing. In addition, we utilized our passenger aircraft to provide short-term ACMI flying for other airlines. Partially offsetting these increases was the deployment of certain 747-400 cargo aircraft to other segments. ACMI Revenue per Block Hour was $6,545 for 2013, compared to $6,368 in 2012, an increase of $177 per Block Hour,


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or 2.8%. The increase in Revenue per Block Hour primarily reflects the impact of higher rates on an increased number of 747-8F aircraft, partially offset by lower rates on increased CMI flying.

AMC Charter revenue decreased $131.7 million, or 27.0%, primarily driven by a reduction in both AMC Charter Cargo and Passenger flying. AMC Charter Block Hours were 17,049 in 2013 compared to 22,447 in 2012, a decrease of 5,398 Block Hours, or 24.0%. The decrease in AMC Charter Block Hours was primarily driven by reduced cargo and passenger demand from the AMC. AMC Charter Revenue per Block Hour was $20,901 in 2013 compared to $21,743 in 2012, a decrease of $842 per Block Hour, or 3.9%, primarily due to a higher proportion of Block Hours flown on passenger aircraft and a change in the number and direction of one-way AMC missions. Partially offsetting these decreases was an increase in the average "pegged" fuel price during 2013. For 2013, the AMC average "pegged" fuel price was $3.57 per gallon compared to $3.35 in 2012. The "pegged" fuel price is set by the AMC and the impact to revenue from changes in the "pegged" fuel price is generally offset by a corresponding impact to fuel expense.

Commercial Charter revenue increased $45.8 million, or 10.2%, due to an increase in Block Hours, partially offset by a decrease in Revenue per Block Hour. Commercial Charter Block Hours were 25,480 in 2013, compared to 21,965 in 2012, representing an increase of 3,515 Block Hours, or 16.0%. The increase in Block Hours was primarily due to the deployment of 747-400 and a 747-8F cargo aircraft during ACMI marketing periods and a change in the number and direction of one-way AMC missions. Revenue per Block Hour was $19,471 for 2013, compared to $20,500 in 2012, a decrease of $1,029 per Block Hour, or 5.0%. This reflects the impact of lower Yields from softer demand and excess capacity in the air cargo market, lower fuel prices and the impact of a reduction in Commercial Charter return legs of one-way AMC missions. Partially offsetting these decreases were higher rates on 747-8F aircraft and passenger charters for sporting events, concert tours, VIP and other private charters.

Dry Leasing revenue increased $23.3 million, or 197.0%, primarily due to the acquisition of one 777-200LRF aircraft in March 2013 and two 777-200LRF aircraft in July 2013 that are leased to customers on a long-term basis.

Operating Expenses

The following table compares our Operating Expenses (in thousands):



                                                                            Increase /        Percent
                                          2013              2012            (Decrease)         Change
Operating Expenses
Aircraft fuel                          $   410,353       $   436,618       $    (26,265 )         (6.0 )%
Salaries, wages and benefits               299,136           293,881              5,255            1.8 %
Maintenance, materials and repairs         162,972           165,069             (2,097 )         (1.3 )%
Aircraft rent                              160,415           154,968              5,447            3.5 %
Navigation fees, landing fees and
other rent                                  90,733            71,698             19,035           26.5 %
Depreciation and amortization               86,389            62,475             23,914           38.3 %
Passenger and ground handling
services                                    72,503            69,886              2,617            3.7 %
Travel                                      61,420            56,461              4,959            8.8 %
Loss (gain) on disposal of
aircraft                                       351            (2,417 )           (2,768 )       (114.5 )%
Special charge                              18,642                 -             18,642             NM
Other                                      107,196           110,902             (3,706 )         (3.3 )%

Total Operating Expenses               $ 1,470,110       $ 1,419,541

Aircraft fuel decreased $26.3 million, or 6.0%, primarily due to reduced AMC fuel consumption and fuel price decreases in Commercial Charter, partially offset by increases in Commercial Charter fuel consumption and AMC fuel prices. AMC fuel consumption decreased by 16.0 million gallons, or 27.5%, reflecting the decrease in


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Block Hours operated and a higher proportion of Block Hours flown on smaller 767 passenger aircraft. The average fuel price per gallon for the AMC Charter . . .

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