AAWW (2019 - Q3)

Ladies and gentlemen, thank you for standing by and welcome to the Third Quarter 2019 Earnings Call for Atlas Air Worldwide. [Operator Instructions]. I would now like to hand the conference over to the host of today's call, Atlas Air. Please go ahead. Edward M

Thank you, Shelby and good morning everyone. I'm Ed McGarvey, Treasurer for Atlas Air Worldwide. Welcome to our Third Quarter 2019 Results Conference Call. On our call today are Bill Flynn, our Chairman and Chief Executive Officer; John Dietrich, our President and Chief Operating Officer and Spencer Schwartz, our Chief Financial Officer.Today's call is complemented by a slide presentation that can be viewed at atlasairworldwide.com under Presentations in the Investor Information section.As indicated on Slide 2, we'd like to remind you that our discussion about the Company's [Technical Difficulty] includes some forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements relate to future events and expectations and involve risks and uncertainties.Our actual results or actions may differ materially from those projected in any forward-looking statements. For information about risk factors related to our business, please refer to our 2018 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 you'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 3 and turn the call over to Bill Flynn.

Thank you, Ed and good morning everyone. Our third quarter performance was affected by the uncertain global macro environment, driven by ongoing tariff and trade tensions, in addition to lower yields and volumes that we anticipated, labor-related service disruptions had a significant impact on our performance during the quarter.We have recently received favorable arbitration rulings that confirm the contractual process for a new agreement to our pilots. We value the contributions of our pilots and we look forward to reaching a competitive contract that recognizes their efforts supporting our customers and our company.Airfreight is a long-term growth industry. Over the last 10 years, we have built and diversified our company. We know what we have to do to confront current headwinds and to continue to grow our business. Despite macroeconomic issues, the global middle class continues to expand and supply chains continue to grow and develop to meet demand. And as consumption increases and supply chains evolved, airfreight is vital and transporting the good to materials required safely, reliably, and efficiently.With this, the scale and scope of our operations and our focus on express, e-commerce and faster-growing markets, we are positioned well to serve the demand for airfreight today and in the future.Moving to Slide 4. We began flying one additional 737 freighter for Amazon on a CMI basis during the quarter, increasing the current number to four. And we expect to add our fifth 737 for Amazon before year-end, in line with the schedule we outlined in March of this year.We also added a fourth 747 CMI freighter for NCA during the quarter and expect to bring on a fifth 747 four NCA in 2020. In Charter, we began flying an additional passenger 747 aircraft during the quarter, in response to demand from the military and the NFL.As noted, our third quarter financial results reflect a continued softness in commercial airfreight yields and volumes as well as labor-related service disruptions. In addition, in military Charter, passenger hours were significantly higher than in the third quarter of 2018, while military cargo flying was relatively in line with the prior year.Slide 5 highlights our updated framework for 2019. We expect to benefit from peak season volumes and yields, including the seasonal flying we do for express and e-commerce customers.In addition, our outlook anticipates increased passenger flying for the military and lower levels of maintenance expense compared with the fourth quarter of 2018. As well as a refund of aircraft rent paid in previous years. Based on global economic conditions in our current expectations, we expect to fly approximately 325,000 block hours this year with about 75% of the hours in ACMI and the balance in Charter. We also anticipate revenue of about $2.75 billion, adjusted EBITDA of approximately $500 million and adjusted net income to be about 60% to 65% of our 2018 adjusted net income.In addition, maintenance expense for the year is expected to total approximately $380 million. With depreciation and amortization of about $260 million and core capital expenditures of about $140 million, which is mainly for parts and components for our fleet. This is a good point to ask John to provide some perspectives about our business and the actions we are taking to drive our performance. After John, Spencer will provide further detail about our third quarter results, I'll provide a few additional comments and then we'll be happy to take your questions. John?

Thank you, Bill and hello everyone. Turning to Slide number 6. As Bill noted, we are well positioned to serve our customers and the demand for airfreight. We have the right platform in place for the future. And it begins with our talented team of employees and our strong portfolio of assets and service offerings.As we announced yesterday, I am pleased to confirm that Jim Forbes will become the new Chief Operating Officer of Atlas Air Worldwide effective on January 1, when I transitioned into the CEO role. Jim is currently Senior Vice President and Chief Operating Officer at Southern Air. He has over 30 years of aviation operating experience and has been with Atlas since 1997 in various management roles. Jim has been a trusted colleague for the last 20 years. He is an outstanding leader and has a proven track record of success. He has played a key role in our Polar Air Cargo joint venture with DHL, our largest customer. And he has also played a lead role in the integration between Southern Air and Atlas Air as well as overseeing the day-to-day operations at Southern. I look forward to welcoming Jim to the senior leadership team.In addition to our employees and our assets and services, we also have a strong core of long-term customers and we play a key role in their operating networks. With that as our foundation, we are also taking steps to navigate through the current headwinds. We continually assess the market to best balance our capacity with the demand for our aircraft and services. And as Bill stated, we know what we have to do and we are adjusting our business to adapt to the changing market environment with a focus on growth customers and those opportunities that generate the highest returns.We are very focused on aggressively managing those issues that are within our control, particularly during a softer market environment. This includes a relentless focus on reducing costs, enhancing productivity, improving profitability and generating cash. I will also be particularly focused on completing our new joint collective bargaining agreement. I've been in regular contact with union leaders toward that goal. We also continue to make progress and our negotiating teams have been meeting regularly. Looking ahead, we expect to provide our 2020 earnings outlook, which will include the expected and collective impact of our actions during our next earnings call, which will be my first as CEO.Not only will these actions benefit Atlas in the near term, they will also contribute to the long-term success of our company. I'd now like to turn it over to Spencer for our financial review.

Thank you, John and hello everyone. Our third quarter earnings are summarized on Slide 7.On an adjusted basis, EBITDA totaled $95.6 million and income from continuing operations, net of taxes totaled $9.5 million. On a reported basis, net income was $60 million which included a non-cash, unrealized gain of $83.2 million on outstanding warrants.Our adjusted earnings in the third quarter included an effective income tax rate of 5.7%. And as a result of proactive tax planning to maximize income tax benefits, we now expect our adjusted income tax rate for the full year of 2019 to be approximately 12%.Slide 8 provides an overview of our third quarter segment revenues. Since many of the factors driving segment revenues and contribution during the third quarter are similar, I'll focus my comments, on segment contribution.Moving to Slide 9. Segment contribution totaled $81.8 million in the third quarter. ACMI earnings primarily reflected an increase in CMI flying that was offset by a decrease in ACMI flying related to the impact of tariffs and global trade tensions and labor-related service disruptions.In addition, ACMI segment contribution was impacted by additional heavy maintenance, startup costs for customer growth initiatives, and the short-term redeployment of two 747-8 to the Charter segment, prior to their subsequent placement within ACMI customer after that customer obtain necessary regulatory approvals.Lower charter segment contribution during the period was driven by a decrease in commercial cargo yields and volumes related to tariffs and global trade tensions as well as labor-related service disruptions. These were partially offset by earnings from the redeployment of 747-8 aircraft from ACMI, increased passenger demand from the military and lower heavy maintenance expense. In Dry Leasing, lower segment contribution during the quarter was primarily due to the schedule return of a 777 freighter earlier this year, partially offset by the placement of additional aircraft.Turning to Slide 10. Our net leverage ratio increased modestly in the third quarter as a result of softer than expected earnings and its impact on trailing 12 months EBITDA. We do not have any firm aircraft purchase commitments and we remain committed to a strong balance sheet and to reducing our net leverage ratio.We look for a gradual improvement as we benefit from increased EBITDA levels and as we continue to lower debt levels by maintaining debt repayments of approximately $70 million per quarter.Now I'd like to turn it back to Bill.

Thank you, Spencer. Moving to Slide 11. Airfreight is a long-term growth industry, we have the right platform to serve our customers and future airfreight demand. We have a strong core of long-term customers and we play a key role in their operating networks. We continually assess the market to best balance our capacity with the demand for our aircraft and services. We are adjusting our business to the changing market environment. We know what we have to do. And these actions will not only benefit Atlas in the near term they will contribute to the long-term success of our company.Shelby, may we have the first question, please.

[Operator Instructions]. Your first question comes from Bob Labick of CJS Securities.

Hi. I wanted to start -- wanted to try to ask this is a hypothetical question versus company's specific and hopefully we can talk about it, in this regard. When a plane is reassigned mid-contract, what has to happen for that to occur and we saw some news articles stating that has happened in the past quarter. So whatever did happen has it stopped? Or can you just talk around what generally happens for that event to occur?

Well, Bob, are you talking about the process of actually transferring an aircraft if --

I'm talking about. Yes. If you had a CMI contract with a certain customer and it was assigned -- and it was reassigned to another carrier.

Well, there is a -- the aircraft -- an aircraft has to come off of Carrier A's operating's specifications and go onto Carrier B's operating specification. So there is a transfer of records and information, there's also what's called a conformance check, where a certain maintenance activities need to be performed on the air before the aircraft transfers to the other carrier's operation and conforms to the maintenance program at that other operating certificate.

Got it. I'm just trying to get at what would cause it to go off of carrier A? What would have happened for that to change in the middle of a contract? What could happen?

Well, that's a customer decision. And customers look at a variety of factors when they consider to make a decision to move an asset from one operator to another. And so it really depends on a number of factors but certainly on the customer's assessment of what's going to best suit their network and meet their customer needs. So being more specific, over the years, we've had aircraft come to us from other operators and we would operate on CMI. That's not unusual. We've done that several times that I can think of. In the specific incident that I think you're referring to it's important to point out that the dry lease -- long term dry lease contracts that we have in place on the assets that have moved off of our off-spec remain in place for the term.

Got it, okay. Thank you. And then one kind of I guess longer term question. Obviously, you've talked about the ACMI. Direct contribution margins have been impacted by trade and tariff and then labor disruptions. Historically, they have been in the mid to low 20% range. We've talked about on prior calls, there has been some changes over the last few years with incremental pass-through expenses which modestly impact margins. So my question is, once we get past the labor and the trade and tariff, once all that normalizes, what's the appropriate range for direct contribution for ACMI margins on an annual basis?

Bob, it's Spencer. You have that right. The increase in the smaller gauge 737 and 767 flying, as well as the increase in reimbursed cost to customers, has really had quite an impact. The increase in CMI block hours, that's had a big impact. If you back out the smaller gauge aircraft, and the reimbursed expenses the margin -- the ACMI margin for the third quarter would have been obviously much higher and then the difference between the prior year and the current year would really be due to the impact of the tariffs and global trade tension impact as well as the labor-related service disruptions. So to answer your question, if you assume all else being equal, then you can look at a prior period as a good representative but we hope to continue to add CMI aircrafts. So it depends whether those aircraft are smaller gauge or larger gauge. And then based on that, it could have an impact, obviously, on the margins. We generally make more flying a bigger plane across a big body of water, than we do flying a smaller gauge domestically in the U.S.

Got it. Okay, that's very helpful. Thank you.

Your next question comes from Helane Becker of Cowen.

Thanks, operator. Hi, everybody. Thanks for the time. I don't know if Spencer if you can answer this, but of the $80 million reduction in EBITDA from the start of the year, can you say how much is the pilot disruption?

Helane, we really -- we're reluctant to negotiate with the union through an earnings call. And so I know that's not what you're asking us to do, but we really don't want to do that too much during an earnings call. But the impact from both the labor disruptions as well as the impact from the global trade tensions and tariffs are by far the 2 biggest issues that have impacted us. If you look at the third quarter and I know you're asking about the full year. But if you look at the third quarter on its own versus our previous guidance, it's more than -- the variance is more than made up by the labor disruptions and then the impact from the tariffs and trade tensions. Those two things together make up more than the variance versus what we had expected for the quarter.

Okay. So if you had been able to reach an agreement with your pilots a year ago this time, is there any way you can say how much with the difference between what you actually earned and what you would have earned is? I mean what I'm trying to figure out is how much of the decline is really trade-related because as you know and I know this came up on the last call, you guys always said that you weren't as impacted by out of freight data and that's an e-commerce focused company. You shouldn't be as impacted by IATA data going forward, but yet you are by the China-U.S. trade dispute. I'm just trying to figure out how much is macro and how much is company-specific, I guess. I don't know. Is there any way to help with that?

So, I think -- Helane, Bill speaking. That's certainly the position that we described and we discussed. I think what's going on right now with IATA trade data however or said another way, with the market is something exceptional that we haven't seen in 10 years. I think IATA commented something to the effect that revenues may be down 10% for the International Air Freight industry on a year-over-year basis. A third of that due to volume and two-thirds of that due to yield. So the impact here I think of a higher order of magnitude than we have typically seen and in markets where you have a couple of percentage points one versus the other. And just overall, we're seeing that impact in air freight. So I get your point. We're really not going to provide a line between labor and market. Spencer, I think described them accurately. Those are the two big areas. That's really probably as much more as I could say, without getting into a level of detail. We're not going to do.

Okay, that's fair. I'll let you off the hook on that one. Can you say now -- just my follow-up question is now that we're here in late October, beginning of November, can you just say how the peak is shaping up? How are you thinking about the next 5 or 6 weeks in terms of the peak? I know you're doing a lot of flying for FedEx and others. Maybe you could just talk about that a little bit and then those are my questions. Thank you.

Thanks. That's a great question. So you know the peak -- what we're generally -- we're all reading and hearing is that there is a peak, certainly a peak for 2019 but it's not what the industry experienced in 2018 and 2017. We're seeing volumes and demands begin to exhibit those peak characteristics. In discussions with our marketing organization and charter teams, we're starting to see yields come up as we move into the peak. And you made an important point about express operations. So as we think about Atlas's peak going forward, there are a couple of components that are important to underscore. So we'll be fly a greater number of freighters dedicated to the U.S. express operators during this peak. Those are at negotiated rates that reflect the kind of the value of providing supplemental lift for a short period of time during the peak. And we've been doing this for many years and so we feel very good about that and glad that we're able to put several more units into that operation. I commented that the military passenger hours are going to be up on a year-over-year basis. That's an important component of our fourth quarter guide or framework, shall I say. Military cargo hours are in there as well. Overall ACMI flying will be up. And so our view of that remaining commercial charter market is what's reflected in the guidance framework -- the updated framework that we've provided here in the call a little while ago. So there are several components to our outlook on peak.

Your next question comes from Jack Atkins of Stephens.

Hey guys, good morning. I appreciate you taking my questions. So I guess first Bill, congratulations on your retirement and John, congratulations on your new role. But I guess stepping back for a second when we think about the company as it is today and I know there are definitely some puts and takes going on this year. Bill, your comment earlier that this is -- the Airfreight is a growth industry. When I look at your results in 2019, the midpoint of your guidance range, that would imply something from a net income level similar to what we saw in 2015 and we still have a reset to come on the labor front. So I'm trying to understand revenue is up significantly over the last 4 or 5 years. Pre-tax income is flat and there is definitely some concern about potential risk going forward. What can you guys do to improve the cost structure of this business because it really seems like it's been under quite a bit of pressure and there perhaps is more to go?

So, Jack, it's John and thank you for your comments and congratulations. We're looking at every aspect of the business aggressively, particularly in this environment. Clearly where we're under some pressure. We're looking at every line item, minimizing discretionary spending, certainly controlling headcount. There is a lot of headway we can get tightening our relationships with our vendors that we rely on quite a bit for our high-cost items like heavy checks and engine overhauls. Working with our customers for network efficiencies so that we ensure optimal scheduling so we get the best yield out of our resources both aircraft and crew. Further leveraging technology wherever we can on things like crew scheduling, just to make us more efficient. Flight planning, what are the routes we can fly that are the most efficient with the least amount of fuel burn spend. Inventories, which just really, Jack looking at the whole gamut of our cost structure. As well as if there are some routes that are not profitable or not as profitable potentially shedding some of those routes and redeploying those assets as elsewhere to more profitable flying. So we're looking at every aspect of it as we go forward here.

Okay, got you, John. Thank you for that color. I guess on the fourth quarter guidance, when I think about sort of what your full year implies, there is really not a big change to your fourth quarter outlook relative to 3 months ago. Are you assuming that some of these trade issues abate and some of these labor issues abate because it seems like those would carry forward and be a headwind to the fourth quarter more so than what you're guiding to?

Right. That's the right question, Jack. Thank you. It's Spencer. So in the fourth quarter, there are a number of positives that's offset by one big negative. So the positives are that we expect to receive a return of excess rent that we paid in previous years. We have much lower, heavy maintenance expense in the fourth quarter of this year versus the fourth quarter of last year. We have higher military passenger volumes and we have higher NFL flying because we added an additional team this year. So those are all the positives for the fourth quarter. And then the big offset to your point is that charter yields, we expect to be much lower than the prior year. And so when you offset the decline based on the charter yields with the positives that I mentioned, they offset each other. And so our outlook for the fourth quarter is very similar to the fourth quarter of last year after all those puts and takes.

Okay, thank you, Spencer. Last question for Bill or for John. But I guess as you are looking out at the global Airfreight market, are you seeing anything in terms of leading indicators that will lead you to believe that maybe things are stabilizing or you starting to see some green shoots out there? I know it's been a tough year, but just curious if you're seeing anything that would give you some more confidence as we head into 2020?

So there is, as you point out, Jack, there is a fair amount of uncertainty out there. When we look just across different markets, South America, as you know is important to us. And in spite of the disruption that we saw in Chile recently and some of the similar activity in Ecuador, that markets holding fairly strong for us. We reference military a couple of times here today. It's 12.5% of our business. We expect very stable military volumes in this fiscal year and trailing into the next fiscal year, trailing or leading into the next fiscal year as leadership -- military leadership has told us and the other carriers that operate for them. What we do is essential to many of our customers and we're integrated into their core operating networks. Airfreight itself is essential. Yet another big question is what does -- do we get a Phase 1 agreement with China and when do we get that and what does that lead to? We're looking for some uptick really at this point absent any other a better information kind of continuing situation as we move into 2020 with some improvements as we get into the second half of the year, but we've really all of us here and all of you on the call, we really need to sharpen our focus on what the second half of next year looks like.

Okay, thank you again for the time.

Your next question comes from Scott Group of Wolfe Research.

Hey, thanks, good morning guys. So Spencer, can you tell us how much is this refund -- customer refund in the fourth quarter? And then just directionally do you think maintenance cost is higher or lower in 2020 versus 2019?

Sure. So with regard to the quantification for the fourth quarter, I tried to give that in the response to Jack's question. We have a number of significant positives in the fourth quarter that are offset by a significant negative. So we're not going to quantify each particular item. Although heavy maintenance, we do provide the detail on that. So you have that -- our estimate of what that would be is in our slide deck and you can certainly compare that to the prior year. So you have that and then the other items are offset or an offset to charter yields. And then -- sorry, Scott, your question about maintenance was 2018 versus 2019 or was it 2019 versus 2020?

I had to think about it for 2020.

So for 2020, as John said, we will certainly talk about that during our next earnings call. We are in the process now of trying to determine what exactly that will be. And as John talked about, we are going through a really appropriate process of trying to ensure that we have the cost that we need and we eliminate those costs that we do not need.

Okay. I think the military business sort of resets each year in fourth quarter so can you just give us an update on the share. And then I've heard a lot about passenger today, but should we think about -- how should we think about cargo military going forward? Growing? Shrinking? Any help there?

Sure. Scott, it's John. In terms of entitlement, our share of the business is somewhere in the neighborhood of about 53% to 54%. It's right in between there. We'll continue to enjoy that through 2020. In terms of the demand, I think Bill said it well. We expect it to be steady and stable both on passenger and cargo and that's consistent with what we're hearing from the military as well.

Okay. And then just last question, if I can. So tough Airfreight environment, we know, where are customer -- this is an ACMI question. Where are customers flying relative to block hour minimums? And as you look out to next year, do you think it's more likely that we grow our ACMI fleet or shrink our ACMI fleet? And then maybe with that just is next year normal, heavy or light year from our contract placement standpoint?

Okay. Three parts to that one. So the first part is, flying above or below minimum guarantees. Our ACMI customers during the third quarter flew just a little over 10% above their minimums. So on one hand, that's good. On the other hand, they flew about 18% above in the third quarter of last year. So for the first 3 quarters of this year, customers have been flying below -- well, sorry, not in the first quarter. The first quarter of this year was stronger than the first quarter of last year from that perspective. The second quarter was pretty similar. The third quarter of this year was much, much below. So for the full year customers typically fly somewhere 5% to 7% above. This year we expect it will be above that but below 2018 levels. And then another part of your question was, next year do we expect to have more or fewer aircraft operating in ACMI? Today we have 75 aircraft in ACMI. You asked -- another part of your question was, how many contracts are up for renewal? We always have a handful or so that are up for renewal at any given time. We try to kind of space them out, so we don't have too many coming due at any one time. And so that is fairly normal. With regard to next year, we have to see how it all plays out. We are, as John pointed out, looking to make some changes and ensure that we're earning the highest returns that we can, but we also continue to focus on growing our CMI business, which we have been doing.

Next question comes from Kevin Sterling of Seaport Global Securities.

John, you talked to kind of follow up on Scott's question a little bit about the military. Obviously, the passenger flying was better than expected this quarter. If I'm not mistaken when at last quarter it lagged a little bit to what we saw this quarter. Is that some carryover from last quarter or is it just strong and like you said, it's going to be strong heading into 2020?

So you're right, it is stronger than last quarter. A little bit of it maybe carry over, but mostly what we're seeing is stabilizing the demand and we expect that in the weeks and months to come.

Okay, thanks. My last question here. Instead of looking back on the labor disruptions and things, if we can maybe look forward if you don't mind. The last time peak season was just compressed like we're going to see in 2019 was 2013. As you know, Thanksgiving is late this year. Essentially, got a three-week period between Thanksgiving and Christmas, whereas compressed. So service levels and domestic Airfreight is going to be relied upon. In 2013 we had weather and obviously UPS and FedEx got overwhelmed and that's when -- after that Amazon decided to develop their own air network. And so they need you guys this time around. Amazon has broken up with FedEx. UPS is obviously filled with their own e-commerce growth. So looking forward to the peak season this year, what are some of the things you're doing on the labor front to ensure that labor disruptions are mitigated because it seems like the past couple of quarters we've had those? And your pilots they work hard, they're very, very good people and they're lifeblood of your organization and kind of lockstep. What are some of the things that you're doing to ensure I think a smooth peak season, given that it's going to be challenging because it is so compressed? Does that question make sense kind of maybe looking forward to some of the positives and things that can be done to mitigate any disruptions?

Yes, that's a great question, Kevin, and there's 2 parts to it. So let me just talk about the market and then John will talk about what we're doing with our -- what we're doing within the organization and to ensure we meet our customers' expectations. Thanksgiving is late. There is no doubt about it, but that doesn't mean that the flying that supports the Express operations in e-commerce for Christmas waits until the 28th of November or whenever it is this year. And so what we've seen on a year-over-year basis is more capacity moving into express holiday season flying earlier and in what we've seen on a year-over-year basis is more capacity moving into Express holiday season flying earlier and in advance of Thanksgiving, and then because of the nature of e-commerce, flying that continues after Christmas Eve and even into January, because of returns and exchanges. Just from the overall market, the nature of that market is changing as well. And it's not so compressed into the Black Friday to Christmas Eve that, that we would have observed even 10 years ago. So, it's a broader window. And as I mentioned earlier, we have more assets this year flying for those express operators. John?

Sure. And you're absolutely right, our crew members are the lifeblood of the organization. They're a great group of professionals, and we look forward to continuing to provide them with a career environment where they can continue to grow their careers here at Atlas.A number of things we're doing, as I mentioned in my comments, we are meeting regularly with the Union as you may have seen from our queue, the Atlas pilot group has created a new local, so that they now have their own local. We've been in direct contact with the new local leadership. I believe there is a genuine interest on the new local's part to continue to make progress.We've continued to meet at the table with the spirit of progress, there are some things we do need however. There is a comprehensive economic proposal that we've been waiting for from the Union, which is important for us to assess the cost of the total deal. So, that will be an important piece.We've also have behind us now a lot of, I won't say it's completely done, but most of the dispute resolution processes to determine whether or not the merger provisions of our collective bargaining agreement apply and is, as you're aware, we were successful in both of those, for both the Atlas and Southern groups, where the arbitrators concluded that the merger provisions which provide for an orderly process to get to our next deal, that those provisions apply. So, we stayed true to that approach to follow the contract, while concurrently meeting and trying to make further progress.Operationally, there is also a number of things that we're doing, in terms of having more crew availability out in the network to protect our peak season. By design, we try and have our crew members take as much vacation time as they can in the first half of the year, do as much training as we can in the first half of the year, so that they're available to our customers during the important peak season.There are some qualified training instructors as well that we release into the field to provide some added buffer. And then importantly, it's a shared responsibility and not only do we rely on our crew members. But here back at headquarters, for our control center making sure that we do the basic blocking and tackling, that there is transportation ready for the crew members. The hotels are reservations are there to make sure the schedules are in line with not being fatiguing for example. We work closely with the Union on our bid schedules. So, all those things go into being best positioned to deliver the best quality for our customers in the peak.

Okay, John. Thank you, Bill. Thank you. Best of luck to you and I appreciate your time this morning.

Your next question comes from Seldon Clarke of Deutsche Bank.

Hey, thanks for the question. It looks like you removed the slide in your quarterly presentation about the relationship between Atlas's book value and market cap and just given everything that's happened this year with the labor situation, general weakness in airfreight, military lumpiness, and the CMI business moving away, or the ACMI moving away. Do you see any risk that you might have to take impairment on any of your aircraft at some point?

Hi, Seldon, it's Spencer. That's something that we look at with regard to the accounting rules and when there are triggers that happen and then we take a look at the expected cash flows from particular aircraft types and we compare that with our book value. So, that's something we look at all the time and this quarter we impaired two 737-400 training aircrafts, so that happened during the third quarter.And then, if there is other impairment that may or may not happen, we would look at that in the future. Thus far, when we compare our cash flows, and you do that on an undiscounted basis first, as the first step from the accounting standpoint. When we look at our cash flows compared to book value, that has not been an issue. If, however, those cash flows are then under book value, then you perform calculation using the discounted cash flows and then record any necessary impairment.So, we will continue to look at that as we always do and if there is, then we would record that in the future. But thus far, we have not needed to do that.

Okay. Is there a sense of where you are in terms of breakeven with those cash flows? I mean, is there a precedent for how long, if we see another year of weakness like this, how much buffer do you have right now?

It's a calculation that we look at all the time and it depends on every particular aircraft type. In the past it has not been issue, we look at it and we will see.

Okay. I appreciate it. And then, just on free cash flow. Where do you guys expect that to shakeout this year? Given what's happened with the stock price recently, have you considered any changes to your capital allocation strategy?

Sure. By the way, we took that slide out because we just felt that we made the point last quarter, but at the same situation is still applies. We didn't take it out for any other reason. With regard to free cash flows. We expect free cash flows in the fourth quarter to be stronger than they were in the fourth quarter of last year. Again, for the reasons that I talked about before, we have some positives that are offset by lower yields. But all in all, we have very similar earnings in the fourth quarter of this year versus the fourth quarter of last year and cash flows, we think will be a little bit stronger in the fourth quarter.With regard to capital allocation. Nothing has really changed there. It's something the Board looks at on a regular basis and considers. Our capital allocation strategy remains pretty disciplined and balanced. We're focused on maintaining a strong balance sheet, investing in aircraft when it's appropriate and we have customer demand, and we're focused on trying to lower our net leverage ratio and continue to be focused in that regard.We bought back over 10% of the company a few years ago. We have not done that since, because we were really ramping up for Amazon and we have the Southern acquisition and so, we did not do that. It's something that the Board considers. And I'm sure they will continue to consider that. But right now, that's what our focus has been on.

Okay, got it. And then just last one from me. Was that refund of aircraft rent in your guidance previously, or is this a new development?

No, it has been in there. It's not new. So, it's been in there and we always expected that it would be in the fourth quarter. And we had in the past too, we had about $12.4 million, if memory serves, last year, 2018.

Okay. I appreciate it, thanks.

Your next question comes from David Ross of Stifel.

Yes, good morning gentlemen. First question is just on labor timing. I assume you got the merged seniority rosters recently and I know you're still waiting on the comprehensive economic proposal, but what are the provisions for the orderly process? And is the clock started once you've got the seniority rosters and when does a clock end?

Sure. So, David, I'll say that, we do not yet have the integrated seniority list. That is another item that we're waiting on and that receipt of the seniority list is what starts to clock ticking on a period of nine months of bargaining, after which any unresolved issues would go to prompt arbitration, binding arbitration. So, that's what the contract provides. Frankly, the Union failed to meet the deadlines that the arbitrators laid out. In tendering the seniority list, in lieu of that, they had filed a motion to vacate, the respective arbitration awards and where we in-turn filed motions to dismiss those, which we have a degree of confidence we're going to be successful on.But it's one of the things, we filed a recent action on last week, frankly, as to compel production of the seniority list, now that the arbitrators in both cases have ordered that that be done. So, once we have that seniority list, then the contract requires that nine months.I'll just add one additional bit of color, because as we've reported, we've made a lot of progress already. And many of the sections of the joint collective bargaining agreement are agreed, what they call TAs - tentative agreements. One of the things that we've agreed with the Union on is that once those TAs are reached, we will not revisit those and those are done, whether we go to arbitration on the back end of this or not, those are done.What that says is, there is opportunity for the parties to not necessarily need that full nine months, if we can accelerate the process. We are willing to consider that, but right now, we are still in dispute on the tendering the seniority list and that's our next order of business.

And is the comprehensive economic proposal separate from the seniority lists or is that part of the same submission?

It is, it's separate and it's a part of bargaining, as I mentioned, a lot of what we've achieved up to this point I will describe as non-economic, more administrative matters in the CBA. We're at the point now where the remaining open sections, each of them have economic consequences. We've been urging the Union to tender us a proposal because as we sit here today, we have not received a comprehensive economic proposal. You can't really get to the total deal because without that, it's difficult to agree to sections that have economic implications if you don't know what the total ask is, so we have repeatedly asked for that and continue to wait for it.

And then, Spencer, on the core CapEx, you said it's going to be about $140 million this year. Any reason for that to change next year?

Yes, Dave. We have invested a lot in parts inventory for the 744 that were leased in 2018, as well as the Amazon 767, 737s and just general fleet requirements. Since we have no remaining aircraft purchase commitments, core CapEx should go down in 2020 due to all the parts that we've added in recent years.

And then, just a follow up on one of the last questions regarding a share buyback. Is there a current buyback authorization in place or would you have to go to the Board to get approval for one?

We still have remaining about, I think, it's $25 million and then anything above that would need to go to the Board.

Your next question comes from David Campbell of Davis & Co.

Yes, thank you very much. Bill, congratulations on your retirement from the company, but you're not old enough to retire, so I know you're going to be doing something--

I am not, David.

Right, you're going to be doing something, what are you going to be doing?

Well, thanks, David. Well, as you know, I'm going to continue as Chairman of the Board. I look forward to that transition and believe I will be generally pretty busy otherwise.

Okay, you're still going to be involved with Atlas for the time being, as on the Board?

Yes, in a role on the Board. Yes, that's correct.

Okay, that's great. Glad to hear you're not retiring.

Thank you. Transitioning, David.

Well, the disruptions that you mentioned a lot of that today, labor disruptions, any impact on results in the third quarter? Did those disruptions caused revenue losses or they made primarily an expense costs, increased expenses? Or it was a combination of both or just one of them?

Yes, David, it's Spencer. It's really a combination. We've had penalties that we had to pay to customers, when normally we enjoy bonuses and that obviously had an impact. We had certain canceled missions, few, but certain cancel admissions, we had certain passenger displacement costs and then, we had higher crew costs for various things. But, generally, higher crew travel and higher crew costs, and higher crew training and things like that. So, yes, they all had an impact on the bottom line.

Well, in terms of lost revenue, was it actually some business that you lost?

The payments that we make to customers for -- if we fall below certain service level agreement on time reliability metrics, if we fall below those, we make a payment back to the customer, that is a sort of contract revenue. So, yes, that does reduce revenue and there were a few canceled missions, canceled flights or flights that weren't awarded that were going to be. And so, those impacted revenue as well.

David, it's John. I think it's fair to say, as Spencer said, in both categories there was some opportunity cost there as well.

Well, do you expect, is not built into your fourth quarter estimates, will you have any of this in the fourth quarter?

Our fourth quarter estimates, the framework that we provided today, reflect the business as we see it today. The market that we've talked quite a bit about, the several components of that revenue, which is Commercial Charter, the ACMI, the military charter, pax and cargo that we've operated and then, the operating costs, or the level of operating costs that we're experiencing today, which would include those disruption cost. Or, some of those disruption costs.

Hopefully, the contracts get signed and delivered, you won't have that disruption next year, that's a headwind you won't have next year. Right?

So what John said earlier, in his comments is that, we are focused on resolving the dispute and getting to a new joint collective bargaining agreement with our pilots, an agreement that recognizes the essential contribution they make to the company and they make to our customers. And that's clearly what we're focused on and we look forward to making progress.

Right, well, it's certainly nothing you needed to have on top of everything else, because the assumptions you gave us for the fourth quarter are less than you had previously saw, but reasonable, given the downturn and yields. Yields are the big problem, cargo yields, that's the biggest single problem. Is that correct?

Yes. And IATA put some analysis out on that as well. Just generally about Airfreight, again is why when you think about our quarter, yes, we're certainly exposed to Commercial Charter yield in the fourth quarter. That's the strongest quarter, but that is offset with the certainty we have around the express operations and the military.

Right. Okay, thank you very much.

Your next question comes from Barry Haimes of Sage Asset Management.

Yes, thanks very much. Two quick follow-ups. One is on the labor disruption issue, has there been any improvement since you won the arbitration regarding that? And then, my second question is, you talked a little bit about CapEx for next year versus the 140 maybe coming down, but the D&A 260 for this year as we go into next year, would that number be similar or would there be much change in that number? Thanks.

Barry, it's John. I'll start on the labor piece and, as I mentioned, we've been focused on a number of areas for which to continue to improve the working environment for our pilots. I mentioned some of them, that we can help control and the basic blocking and tackling for operational efficiency.And when we have had behaviors that we call into question, we've informed the Union of that, it's important to remember that we do have a preliminary injunction in place for an illegal work slowdown, that was entered back in 2017 and that remains in place.We take that court order very seriously and want to be sure the Union does as well. So, based on all those factors, in direct communication with the Union we have seen some improvement and we expect that to continue.All the while we are focused on making progress, as I said, it's important for our crew members and their families to know that we're moving forward here. So, those are some of the things that we expect to continue to improve. We're focused on it and I believe the Union is as well.

And then our comment, Barry, on the depreciation, amortization. So depreciation expense should be fairly steady, amortization should increase as we have some deferred maintenance amortization. So those are the two big movers there.

Your next question comes from Howard Rosencrans of VA.

Yes, hi guys. Thank you for taking the question. Following on a couple of the prior questions regarding the book value, and I guess really just taking a longer-term perspective, as investors were first and foremost focused on making money on the stock. I don't mean to overstate the obvious, I've been doing this for 30-35 years, but that hasn't been a successful venture. Is it because of a continuity in the conversations with labor that you are reticent about bringing on outsiders, I mean, were the promotions that you're making are of the people who have been in place in a non-successful investment? For this is not transitory this is something that has subsisted now for 12-15 years, your entire tenure bill. So, you're now moving to Chairman of the Board, what is the reticence with making moves to really assess what's going on and to give the analytical community and investors in general, a better understanding of how things will develop in the future and whether or not there are prospects for a meaningful improvement? I could say profitability, but again, at the end of the day its share price. The only resonating factor to us, the shareholders is the -- that will take away that sort of amplifies, our hurt is the compensation to management, which runs significantly north of -- into the hundreds of millions of dollars.

So let me take that Howard, a just a couple of points. So, I too am a fairly substantial shareholder of the company and I absolutely understand what, when shares don't perform and price doesn't appreciate, what that means. In terms of our management team and choices we're making now relative to succession, if you allow me to look at some of the recent senior management team choices and decisions we've made, we certainly have brought people in from outside the organization as well as promoted people within and we look for that balance. And when we do that each time, I won't talk about each individual choice here or selection here, but this is a technical industry. We are an operating company. We fly complex aircraft operating time-definite networks on a global scale with everything else that goes along with that operation. From flight ops, tech ops, network ops, regulatory compliance focused on safety and security operating at over 100 countries, performing key core services for our customers. And so when we build out that management team, it's a balance of promoting folks with the expertise that know how to do it and how to run the business and comply with bringing in new talent and perspective. And so, we brought in senior executives including retail from GE, from Pepsi and other companies rather than naming each person. So I think we have a very good mix of talent, new talent and promoted talent within and that's the balance that we seek.

So is there an issue with -- So is this management team imperative to resolving the labor issues? Is the continuity of the management team imperative to resolving the labor of the senior management, who is all staying in place and/or being promoted?

I believe that the continuity of the senior management is imperative for the company, of which solving and resolving the labor -- the new labor contract is just a part of that.

Okay. With all due respect, I'll have to agree to disagree. I'm certainly not belittling the challenges of running the aircraft and the company and the complexities thereof. But we will have to agree to disagree on the execution and success thereof, you seem to be very confident that this team has done very well in that regard, and I would say that the barometer is, I would say that the evidence, the barometer that is important to shareholders and/or the barometer that is important to labor because you're certainly not the only company that faces labor challenges, I mean even somebody as complex in a much worse industry as GM has been able to successfully resolve labor issues more expeditiously. So I just beg to differ with your view, and I hope there will be changes for the positive. Thank you for your time, and I appreciate your courtesy.

Yeah. Well, Howard, thank you. And I'm pretty sure I understand your point of view, we will disagree. I think just a couple of things on labor, we are in the process of working to realize a new collective bargaining agreement following the terms of the contract. It's clearly unfortunate that we had to go to court to obtain a preliminary injunction to address illegal behavior, that's something we simply had to do. We continue to grow and diversify the company, diversify the customer relationships, and the array of service that we offer to our customers. It's clear the shares haven't responded but if you're asking, fundamentally if the question is, do we have a platform ultimately for success, platform to move through both the headwinds in the market because they exist, and the challenges of getting to a new labor agreement? I believe we do.

I would say, at a bare minimum, a reset of expectations is duly in order. But I guess we'll see with time as you introduce 2020 where that -- assuming you can -- the labor thing has been going on for many, many, many years. So this is not new one, the horizon. I believe it should have been dealt with. We shouldn't have allowed it to coincide with the difficult macro environment, we should have been ahead of the curve in my opinion, but anyway. Thank you for the time and looking forward to a reset.

Yeah, well -- I understand that Howard. I -- just as part of what the whole RLA framework is, for a number of reasons, these agreements take time to ultimately arrive at the next agreement. I'm not defending it by any means, I would argue that, in our specific instance had the union leadership simply filed the contract, it would have had a deal two years ago, but they chose not to, for whatever reason, and I'm not going to say more about that. That's just a fact. In the industry, perhaps there's a new regulatory framework at some point that's beyond this conversation, but it's taken years over at several of very large passenger airlines to get through to their new agreements. It's not misery loving company, I'm simply saying that's just a feature of the industrial labor structure that exists under RLA and aviation. And so John has talked about, he will be providing full year results and the 2020 framework when we have our next earnings call. Thank you.

Your final question comes from Chris Stathoulopoulos at Susquehanna Financial Services.

Thanks for getting me in here. So, two-part question, but sort of the same question or idea here at heart. This is for John or Bill. As we look towards 2020 and beyond, curious what's the next chapter here for Atlas? A few years ago, it was about pivoting to e-commerce, which you did, but the stock today is below where it was, the first deal at Amazon. So should we think about Atlas as a cost story now and are there additional opportunities in e-commerce beyond Amazon and DHL? In other vertical sales and MRO?And then as we look forward again 2020 you have no aircraft commitments, weak macro backdrop and the potential for a labor deal, given that and the cost and the productivity focus would you talk about, is it reasonable to say that the business can do around 10% EBITDA growth? Thank you.

So, Chris, it's John. From my perspective, we absolutely are focused on 2020 and beyond. If you look at some of the fastest growing markets and segments, we're a key player in each of them. E-commerce Express and some of the other growing markets. We've got the right assets and we've got the right team together to execute on that, and I think we've demonstrated that over the last 10 years of growth and diversification and we've been able to adapt to the changing market and capitalize on these opportunities and we expect to continue to do so.

Okay.

Chris it's Spencer. I would just add that, this has obviously been a challenging year for the company. And if you were to back out the impact of the tariffs and trade tensions and back out the impact from the labor-related service disruptions that we've had, you would have seen nice EBITDA growth. And so, when those things are behind with the other initiatives that John is talking about, that's where our focus is.

And just more broadly, Bill, just to round it out. We believe that air freight, whether it's heavy, e-commerce or Express is ultimately growth industry. The diversification in the fleet types that we have, the operational capabilities on the different types of networks that we operate long haul intercontinental, domestic, more time-definite e-commerce and express, our skills and capabilities that position the company for growth. And so, we believe in that growth opportunity and that we'll execute on it.

So if I understand if you're saying, if we take out, the impact of the tariffs and the labor that this business as a whole, between the dry lease and the other subsidiaries that this is a business that later cycle can do around 8% to 10% adjusted EBITDA growth?

We're not quantifying the future. I was simply pointing out that this year has been a challenging year. If you back those items out, it would have been a very, very different year. Even with those items we're still delivering EBITDA of approximately $500 million. So, just pointing out that without those things and with the initiatives that John talked about and the growth that we see in Airfreight, overall, and our place in it, should lead to a good opportunity for the company in the future.

Okay, thanks for the time.

That concludes the Q&A portion of today's call. I would like to turn it back over to management for any closing remarks.

Okay. Well, thank you Shelby. And as we talked about on the call today, I am transitioning from CEO of Atlas Air Worldwide at the end of the year and will continue as Chairman of the Board. I personally, just wanted to say to everybody on the call that it's been a privilege to work with you, all through my -- during my tenure here and I've appreciated your engagement over the years. Spencer, John, and I want to thank you for sharing your time with us today and we look forward to your continued interest in Atlas Air Worldwide. Thank you, everyone.

This concludes today's conference call. Thank you for your participation, you may now disconnect.