10-K
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC
20549
Form 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
December 31, 2006
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OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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Atlas Air Worldwide Holdings,
Inc.
(Exact name of registrant as
specified in its charter)
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Delaware
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0-25732
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13-4146982
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(State or other jurisdiction of
incorporation)
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(Commission File
Number)
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(IRS Employer Identification
No.)
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2000 Westchester
Avenue,
Purchase, New York
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10577
(Zip Code)
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(Address of principal executive
offices)
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(914) 701-8000
(Registrants
telephone number, including area code)
SECURITIES
REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Common
Stock, $0.01 Par Value
(Title
of Class)
SECURITIES
REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None
Indicate by check mark if the registrant is a well known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No x
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Exchange
Act. Yes o No x
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for at least the past
90 days. Yes x No
o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this Form
l0-K or any
amendment to this
Form 10-K. x
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer, per
Rule 12b-2
of the Exchange Act.
Large accelerated
filer o Accelerated
filer x Non-accelerated
filer o
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No x
The aggregate market value of the registrants Common Stock
held by non-affiliates based upon the closing sale price
reported on NASDAQ as of June 30, 2006 was approximately
$592,695,037. In determining this figure, registrant has assumed
that all directors, executive officers and persons known to it
to beneficially own ten percent or more of such Common Stock are
affiliates. This assumption shall not be deemed conclusive for
any other purpose. As of March 1, 2007, there were
21,186,037 shares of the registrants Common Stock
outstanding.
APPLICABLE TO REGISTRANTS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all
documents and reports required to be filed by Section 12,
13 or 15(d) of the Securities Exchange Act of 1934 subsequent to
the distribution of securities under a plan confirmed by a
court. Yes x No o
DOCUMENTS
INCORPORATED BY REFERENCE:
Part III of this
Form 10-K
incorporates by reference certain information from the Proxy
Statement for the Annual Meeting of Stockholders scheduled to be
held May 23, 2007.
FORWARD
LOOKING STATEMENTS AND INFORMATION
This Annual Report on
Form 10-K
(this Report) and other statements issued or made
from time to time by or on behalf of Atlas Air Worldwide
Holdings, Inc. (AAWW or Holdings)
contain statements that may constitute Forward-Looking
Statements within the meaning of the Securities Act of
1933, as amended (the Securities Act), and the
Securities Exchange Act of 1934, as amended by the Private
Securities Litigation Reform Act of 1995 (the Exchange
Act). Those statements and information are based on
managements beliefs, plans, expectations and assumptions,
and on information currently available to AAWW. The words
may, should, expect,
anticipate, intend, plan,
continue, believe, seek,
project, estimate and similar
expressions used in this Report that do not relate to historical
facts are intended to identify forward-looking statements.
The forward-looking statements in this Report are not
representations or guarantees of future performance and involve
certain risks, uncertainties and assumptions. Such risks,
uncertainties and assumptions include, but are not limited to,
those described in Item 1A, Risk Factors. Many
of such factors are beyond AAWWs control and are difficult
to predict. As a result, AAWWs future actions, financial
position, results of operations and the market price for shares
of AAWWs common stock could differ materially from those
expressed in any forward-looking statements made by AAWW.
Readers are therefore cautioned not to place undue reliance on
forward-looking statements. AAWW also does not intend to
publicly update any forward-looking statements that may be made
from time to time by, or on behalf of, AAWW, whether as a result
of new information, future events or otherwise.
PART I
Certain
Terms
The following terms represent industry-related items and
statistics specific to the airline and cargo industry sectors.
They are used by management for statistical analysis purposes to
evaluate and measure operating levels, results, productivity and
efficiency.
Glossary
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ATM |
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Available Ton Miles, which represent the maximum available tons
(capacity) per actual miles flown. It is calculated by
multiplying the available capacity (tonnage) of the aircraft by
the miles flown by the aircraft. |
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Block Hours |
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The time interval between aircraft departure from the terminal
until it arrives at the destination terminal. |
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RATM |
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Revenue per Available Ton Mile, which represents the average
revenue received per available ton mile flown. It is calculated
by dividing operating revenues by ATMs. |
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Revenue Per Block Hour |
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Calculated by dividing operating revenues by Block Hours. |
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RTM |
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Revenue Ton Mile, which is calculated by multiplying actual
revenue tons carried by miles flown. |
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Load Factor |
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The average amount of weight flown per the maximum available
capacity. It is calculated by dividing RTMs by ATMs. |
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Yield |
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The average amount a customer pays to fly one ton of cargo one
mile. It is calculated by dividing operating revenues by RTMs. |
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A/B Checks |
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Low level maintenance checks performed on aircraft at an
interval of approximately 400 to 1,100 flight hours. |
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C Checks |
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High level or heavy airframe maintenance checks
which are more intensive in scope than an A/B Checks and are
generally performed on an 18 to 24 month interval. |
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D Checks |
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High level or heavy airframe maintenance checks
which are the most extensive in scope and are generally
performed on an interval of 6 to 10 years or 25,000 to
28,000 flight hours, whichever comes first. |
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FAC |
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Income (loss) before taxes, excluding pre-petition and
post-emergence costs and related professional fees, unallocated
corporate and other items. We evaluate performance and allocate
resources to our segments based upon this measure. |
Overview
AAWW is a holding company with two principal wholly-owned
operating subsidiaries: Atlas Air, Inc. (Atlas) and
Polar Air Cargo, Inc. (Polar). Atlas, Polar and AAWW
(along with AAWWs other subsidiaries) are collectively
referred to herein as the Company, we,
us or our. We are the leading provider
of outsourced aircraft operations and related services, serving
the global air freight industry by operating aircraft on behalf
of the worlds major international airlines, freight
forwarders and the U.S. Military, as well as for our own
account. Our geographic operating regions include Asia, Europe,
the Middle East,
1
South America and the United States. We are the worlds
largest operator of Boeing 747 freighter aircraft with an
operating fleet totaling 38 aircraft at December 31, 2006.
We will be adding to our operating fleet, having placed a firm
order for 12 new Boeing
747-8
freighter aircraft in September 2006. All 12 aircraft are
expected to be delivered in 2010 and 2011. We will also reduce
our operating fleet from time to time upon the retirement, sale
or dry lease of our aging Boeing
747-200F
aircraft.
Our four primary business segments are:
(i) Aircraft operations outsourcing, where we provide major
airline customers around the world with aircraft, crew,
maintenance, insurance and related operations through long-term
contracts (ACMI);
(ii) Scheduled air-cargo, where we provide freight
forwarders and other shippers with scheduled
airport-to-airport
cargo services (Scheduled Service);
(iii) Military charter services, where we provide air cargo
services for the Air Mobility Command or the AMC (AMC
Charter); and
(iv) Commercial charters, where we provide all-inclusive
cargo aircraft charters to brokers, freight forwarders, direct
shippers and airlines (Commercial Charter).
In addition to these primary services, we also lease aircraft to
other commercial cargo airlines without other support services
(Dry Leasing).
AAWW was incorporated in Delaware in 2000. Our principal
executive offices are located at 2000 Westchester Avenue,
Purchase, New York 10577, and our telephone number is
(914) 701-8000.
Significant
Developments
On November 28, 2006, Polar Air Cargo Worldwide, Inc.
(PACW), a Delaware corporation that is a
wholly-owned, direct subsidiary of AAWW and the holding company
for Polar, entered into a stock purchase agreement (the
Purchase Agreement) with DHL Network Operations
(USA), Inc. (DHL), an Ohio corporation and a
wholly-owned indirect subsidiary of Deutsche Post AG
(DP), for DHL to acquire a 49% equity interest,
representing a 25% voting interest, in PACW, in exchange for
$150 million in cash to be paid to PACW, (the
Purchase Price).
The Purchase Agreement also contemplates the parties entering
into a blocked space agreement for a 20 year term (subject
to early termination at five year intervals), whereby PACW, upon
acquiring Polars air carrier authority and operating under
the Polar Air Cargo brand, will provide guaranteed
access to air cargo capacity on its Scheduled Service network to
DHL through six Boeing
747-400
freighter aircraft (the DHL Express Network
Service). DP will guarantee DHLs (or its
affiliates) obligations under various transaction
agreements, including the blocked space agreement.
Under the Purchase Agreement, $75 million of the Purchase
Price will be paid by DHL to PACW at closing, with the remaining
$75 million being paid to PACW in two equal installments
(plus interest) on January 15, 2008 and November 17,
2008, subject to acceleration based upon commencement of the DHL
Express Network Service prior to October 31, 2008. In
addition, DHL will make a payment to PACW for any positive net
working capital balance of PACW as of closing. DP has executed a
separate agreement guaranteeing certain indemnity and other
payment and performance obligations of DHL under the Purchase
Agreement and other related agreements. AAWW will enter into an
indemnity agreement indemnifying DHL for and against certain
obligations of PACW to DHL. Holdings will provide financial
support for the operation of PACW until the DHL Express Network
Service commences.
At the closing of the transactions contemplated by the Purchase
Agreement, PACW also will enter into a number of commercial
arrangements with its affiliates. Under these arrangements, it
is contemplated that, among other things, PACW will have six
leased Boeing
747-400
aircraft in its fleet and the AAWW entities will provide to PACW
maintenance, insurance and other related services.
The Purchase Agreement also provides DHL with the right to
request that PACW accelerate commencement of the DHL Express
Network Service, and PACW has agreed to take all commercially
reasonable steps
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to facilitate such acceleration. PACW will continue to operate
its regular Scheduled Service business until such commencement,
which is to occur no later than October 31, 2008.
The closing, which is expected to occur in the second quarter of
2007, will be contingent upon receipt of regulatory and other
third party approvals, including that of the
U.S. Department of Transportation (the DOT) the
Federal Aviation Administration (the FAA) and
certain foreign aviation authorities.
Operations
Introduction. As noted above, we operate our
business through four reportable segments: ACMI, Scheduled
Service, AMC Charter for the U.S. Military and Commercial
Charter. All reportable business segments are directly or
indirectly engaged in the business of air cargo transportation
but have different economic characteristics, which are
separately reviewed by management. Financial information
regarding our reportable segments may be found in Note 11
to our consolidated financial statements included in Item 8
of Part II of this Report (the Financial
Statements).
ACMI. Historically, the core of Atlas
business has been leasing aircraft to other airlines on an ACMI
wet lease basis. Under an ACMI lease, customers contract for the
use of a dedicated aircraft type that is operated by, crewed,
maintained and insured by Atlas in exchange for, in most cases,
a guaranteed monthly level of operation at a predetermined rate
for defined periods of time. We are paid a block hour rate for
the time the aircraft is operated. The aircraft are generally
operated under the traffic rights of the customer. All other
direct operating expenses, such as fuel, overfly and landing
fees and aircraft and cargo ground handling, are generally borne
by the customer, who also bears the commercial revenue risk of
Load Factor and Yield.
All of our ACMI contracts provide that the aircraft remain under
our exclusive operating control, possession and direction at all
times. The ACMI contracts further provide that both the
contracts and the routes to be operated may be subject to prior
and/or
periodic approvals of the U.S. and foreign governments.
ACMI minimizes the risk of fluctuations in both Yield and
traffic demand risk in the air cargo business and provides a
more predictable annual revenue and cost base. Our ACMI revenues
and most of our costs under ACMI contracts are denominated in
U.S. dollars, minimizing currency risks associated with
international business.
ACMI revenue represented 27.6%, 28.8% and 26.6% of our operating
revenue for the years ended December 31, 2006, 2005 and
2004, respectively. ACMI revenue is recognized as the actual
Block Hours operated on behalf of a customer are incurred or
according to the minimum revenue guarantee defined in a
contract. During 2006, our principal ACMI customers included The
International Airline of United Arab Emirates
(Emirates), British Airways, Qantas, Air New
Zealand, Panalpina Airfreight Management, Lan Cargo and Instone
Air Services, Inc.
As of December 31, 2006, we had 17 ACMI and Dry Leasing
contracts expiring at various times from 2007 to 2011. The
original length of these contracts ranged from three months to
five years. Emirates Airlines, currently our most significant
customer, accounted for approximately 43.3%, 33.9% and 34.3% of
ACMI revenue and 11.9%, 9.8% and 9.1% of our total operating
revenue for the years ended December 31, 2006, 2005 and
2004, respectively. In addition, we have also operated
short-term, seasonal ACMI contracts with companies such as UPS,
FedEx Corporation (FedEx) and Lufthansa, among
others, and we expect to continue to provide such services in
the future.
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Based upon ACMI and dry lease contracts in place as of
December 31, 2006, the following table sets forth the
contractual minimum revenues expected to be contracted with our
existing ACMI and Dry Leasing customers for the years indicated
(in millions):
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2007
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$
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331,360
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2008
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221,450
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2009
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143,584
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2010
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54,230
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2011
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7,812
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Total
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$
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758,436
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Scheduled Service. We provide scheduled air
cargo services to most of the worlds largest international
freight forwarders and agents. We operate
airport-to-airport
routes on a specific schedule, and customers pay to have their
freight carried on that route and schedule. Our scheduled
all-cargo network serves four principal economic regions: North
America, South America, Asia and Europe. We offer access through
its limited-entry operating rights to Japan at Tokyos
Narita Airport, to China at Shanghais Pudong Airport and
Beijings Capital International Airport, and to Brazil at
Veracopas Airport near Sao Paulo. Beginning as a small,
trans-Pacific operator over 10 years ago, our Scheduled
Service operation now provides 18 daily departures to 15
different cities in ten countries across four continents. Our
customer relationships are supported by the flight frequency and
dependability of our global network.
Scheduled Service is designed to provide prime-time arrivals and
departures on key days of consolidation for freight forwarders
and shippers, to coordinate the various departure and arrival
combination points necessary to offset directional imbalances of
traffic and to arrange a global connecting or through-service
network between economic regions to achieve higher overall
Yields and Load Factors. Scheduled Service imposes both Load
Factor and Yield risk on us since it generally provides the
service regardless of traffic. Unlike our ACMI operations, our
Scheduled Service business bears all direct costs of operation,
including fuel, insurance, overfly and landing fees and aircraft
and cargo handling. Distribution costs include direct sales
costs through our own sales force and through commissions paid
to general sales agents. Commission rates are typically between
2.5% and 5.0% of commissionable revenue sold.
The Scheduled Service business is seasonal, with peak demand
coinciding with the retail holiday season, which traditionally
begins in September and lasts through mid-December.
Scheduled Service revenue represented 41.4.%, 34.4% and 45.3% of
our total operating revenue for the years ended
December 31, 2006, 2005 and 2004, respectively. The
majority of our Scheduled Service business is conducted with
large multi-national freight forwarders, which include, among
others, DGF (DHL/Global Forwarding), EXEL Global Logistics,
Expeditors International, EGL Global Logistics, Hellmann
Worldwide, Kuehne and Nagel, Nippon Express, Panalpina, Schenker
AG and UPS Supply Chain Solutions. No single customer accounted
for 10% or more of our total revenue for 2006.
The Asian market accounts for approximately 57.7%, 60.8% and
50.8% of our Scheduled Service revenue for the years ended
December 31, 2006, 2005 and 2004, respectively. In late
2004, we increased our presence in the China market by becoming
one of only four U.S. freight operators permitted by the
DOT to serve China on a Scheduled Service basis. We currently
make 12 weekly flights to China, serving both the Shanghai
and Beijing markets. We have been awarded an additional four
weekly flights to China by the DOT, with these additional
services expected to begin when additional commercially viable
slots can be obtained in Beijing.
AMC Charter. The AMC Charter business provides
full planeload charter flights to the U.S. Military. The
AMC Charter business is similar to the Commercial Charter
business (described below) in that we are responsible for the
direct operating costs of the aircraft. However, in the case of
AMC operations, the price of fuel used during AMC flights is
fixed by the military. The contracted charter rates (per mile)
and fuel prices (per gallon) are established and fixed by the
AMC generally for twelve-month periods running from October to
September of the next year. We receive reimbursements from the
AMC each month if the price of fuel paid by us to vendors for
the AMC Charter flights exceeds the fixed price; if the price of
fuel paid by us is less
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than the fixed price, then we pay the difference to AMC. AMC
buys cargo capacity on two bases: a fixed basis, which is
awarded annually, and expansion flying on an ad hoc basis, which
is awarded on an as needed basis throughout the contract term.
While the fixed business is predictable, Block Hour levels for
expansion flying are difficult to predict and thus are subject
to fluctuation. The majority of our AMC business in 2006 and
2005 was expansion flying.
Revenue derived from the AMC Charter business represented 22.1%,
27.2% and 20.0% of operating revenue for the years ended
December 31, 2006, 2005 and 2004, respectively.
Commercial Charter. Our Commercial Charter
business segment involves providing a full planeload of capacity
to a customer for one or more flights based on a specific origin
and destination. Customers include charter brokers, freight
forwarders, direct shippers and airlines. Unlike ACMI flying,
charter customers pay a fixed charter fee that includes fuel,
insurance, landing fees, overfly and all other operational fees
and costs. Revenue from the Commercial Charter business is
generally booked on a short-term basis.
Revenue derived from our Commercial Charter business accounted
for 5.6%, 6.7% and 4.9% of our operating revenue for the years
ended December 31, 2006, 2005 and 2004, respectively.
Sales and
Marketing
We have regional offices covering the Americas, Asia and EMEIA
(Europe, Middle East, India and Africa). These offices market
our ACMI services and charter services directly to other
airlines and indirect air carriers, as well as to charter
brokers and agents. The Scheduled Service sales organization
markets its Scheduled Service and Commercial Charter services
directly, or through a network of offline general sales agents
to freight forwarders. Additionally, we have a separate,
dedicated charter business unit that directly manages the AMC
Charter business and capacity, and also manages our Commercial
Charter business and capacity either directly or indirectly
through our sales organizations.
Maintenance
The maintenance programs for our aircraft vary according to
fleet type. Maintenance represented our fourth-largest operating
expense for the year ended December 31, 2006. Primary
maintenance activities include scheduled and unscheduled work on
airframes and engines. Scheduled maintenance activities
encompass those activities specified in a carriers
maintenance program approved by the FAA. The costs necessary to
adhere to this maintenance program will increase over time,
based on the age of the aircraft
and/or its
engines or due to FAA airworthiness
directives (ADs).
Scheduled airframe maintenance includes low-level, daily checks
that are made at regular intervals (usually within
24-to-48 hours
of completion of a flight) by our maintenance staff or
third-party vendors. A/B Checks are normally performed on the
aircraft (usually between 400 and 1100 hours) by our
maintenance staff or third-party vendors and are fairly limited
in nature. C Checks are higher level heavy airframe
maintenance checks that are more extensive in scope and duration
than A/B Checks and are generally performed every 18 to
24 months. C Checks, with respect to our Boeing
747-200
aircraft (performed by third-party vendors), are generally more
involved than those performed on our Boeing
747-400
aircraft, chiefly due to the differences in the fleet types,
including the age of the aircraft, and in the maintenance
programs and procedures that are prescribed by the FAA. Our
employees and contractors at our maintenance facility in
Prestwick, Scotland perform C Checks on many of our Boeing
747-400
aircraft. D Checks are the heaviest and most extensive of all
the airframe maintenance checks and are generally performed at
the earlier of
25,000-to-28,000
flight hours or a
six-to-ten
year interval.
Our FAA-approved maintenance program allows our engines to be
maintained on an on condition basis. Under this
arrangement, engines are sent for overhaul based on life-limited
parts and/or
performance deterioration.
We believe that a balance between in-house and
fixed, firm-priced contracts provides the most efficient means
of maintaining our aircraft fleet and the most reliable way to
forecast our maintenance costs. A certain
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portion of our lower-level maintenance activities (primarily,
daily checks and A/B Checks) are performed on a time and
material basis.
Insurance
We maintain insurance of the types and in amounts deemed
adequate to protect ourselves and our property, consistent with
current industry standards. Principal coverage includes:
liability for injury to members of the public; damage to our
property and that of others; loss of, or damage to, flight
equipment, whether on the ground or in flight; fire and extended
coverage; directors and officers insurance; fiduciary; and
workers compensation and employers liability. In
addition to customary deductibles, we self-insure for all or a
portion of our losses from claims related to medical insurance
for employees.
Since the terrorist attacks of September 11, 2001, we and
other airlines have been unable to obtain coverage for claims
resulting from acts of terrorism, war or similar events
(war-risk coverage) at reasonable rates from the commercial
insurance market. We have, as have most other
U.S. airlines, purchased our war-risk coverage through a
special program administered by the federal government. The FAA
is currently providing war-risk hull and cargo loss, crew and
third-party liability insurance through August 31, 2007 as
required by the Homeland Security Act of 2002, as amended by the
Consolidated Appropriations Act of 2005, the Transportation Act
of 2006, the Continuing Appropriations Resolution of 2007 and by
the Transportation et al Appropriations Act of 2007. With
the Presidents approval, the Secretary of Transportation
may extend the coverage through year-end 2007. If the federal
insurance program were to be terminated, we would likely face a
material increase in the cost of war-risk coverage, and because
of competitive pressures in the industry, our ability to pass
this additional cost on to customers may be limited.
Governmental
Regulation
General. Atlas and Polar are subject to
regulation by the DOT and the FAA, among other governmental
agencies. The DOT primarily regulates economic issues affecting
air service, such as certification, fitness and citizenship,
competitive practices, insurance and consumer protection. The
DOT has the authority to investigate and institute proceedings
to enforce its economic regulations and may assess civil
penalties, revoke operating authority or seek criminal
sanctions. Atlas and Polar each holds DOT-issued certificates of
public convenience and necessity plus exemption authority to
engage in scheduled air transportation of property and mail, in
domestic as well as enumerated international markets, and
charter air transportation of property and mail on a worldwide
basis.
The DOT conducts periodic evaluations of each air carriers
fitness and citizenship. In the area of fitness, the DOT seeks
to ensure that a carrier has the managerial competence,
compliance disposition and financial resources needed to conduct
the operations for which it has been certified. Additionally,
each U.S. air carrier must remain a U.S. citizen by
(i) being organized under the laws of the United States or
a state, territory or possession thereof; (ii) requiring
its president and at least two-thirds of its directors and other
managing officers to be U.S. citizens; (iii) allowing
no more than 25% of its voting stock be owned or controlled,
directly or indirectly, by foreign nationals and (iv) not
being otherwise subject to foreign control. The DOT broadly
interprets control to exist when an individual or
entity has the potential to exert substantial influence over
airline decisions through affirmative action or the threatened
withholding of consents
and/or
approvals.
In addition to holding the DOT-issued certificate and exemption
authority, each U.S. air carrier must hold a valid
FAA-issued air carrier certificate and FAA-approved operations
specifications authorizing operation in specific regions with
specified equipment under specific conditions and are subject to
extensive FAA regulation and oversight. The FAA is the
U.S. government agency primarily responsible for regulation
of flight operations and, in particular, matters affecting air
safety, such as airworthiness requirements for aircraft,
operating procedures, mandatory equipment and the licensing of
pilots, mechanics and dispatchers. The FAA monitors compliance
with maintenance, flight operations and safety regulations and
performs frequent spot inspections of aircraft, employees and
records. The FAA also has the authority to issue maintenance
directives and other mandatory orders relating to, among other
things, inspection of aircraft and engines, fire retardant and
smoke detection devices, increased security precautions,
collision and windshear avoidance systems, noise
6
abatement and the mandatory removal and replacement of aircraft
parts that have failed or may fail in the future. In addition,
the FAA mandates certain record-keeping procedures. The FAA has
the authority to modify, temporarily suspend or permanently
revoke an air carriers authority to provide air
transportation or that of its licensed personnel, after
providing notice and a hearing, for failure to comply with FAA
rules, regulations and directives. The FAA is empowered to
assess civil penalties for such failures or institute
proceedings for the imposition and collection of monetary fines
for the violation of certain FAA regulations and directives. The
FAA is also empowered to modify, suspend or revoke an air
carriers authority on an emergency basis, without
providing notice and a hearing, where significant safety issues
are involved.
Each U.S. air carrier must hold a valid FAA-issued air
carrier certificate and FAA-approved operations specifications
authorizing operation in specific regions with specified
equipment under specific conditions. We believe Atlas and Polar
are in material compliance with applicable FAA rules and
regulations and maintain all documentation required by the FAA.
International. Air transportation in
international markets (the vast majority of markets in which
Atlas and Polar operate) is subject to extensive additional
regulation. The ability of Atlas and Polar to operate in other
countries is governed by aviation agreements between the United
States and the respective countries or, in the absence of such
an agreement, by principles of comity and reciprocity.
Sometimes, such as with Japan and China, aviation agreements
restrict the number of carriers that may operate, their
frequency of operation, or the routes over which they may fly.
This makes it necessary for the DOT to award route and operating
rights to U.S. air carrier applicants through competitive
route proceedings. International aviation agreements are
periodically subject to renegotiation, and changes in
U.S. or foreign governments could result in the alteration
or termination of such agreements, diminish the value of
existing route authorities or otherwise affect Atlas and
Polars international operations. Foreign governmental
authorities also impose substantial licensing and business
registration requirements and, in some cases, require the
advance filing
and/or
approval of schedules or rates. Moreover, the DOT and foreign
government agencies typically regulate alliances and other
commercial arrangements between U.S. and foreign air carriers,
such as the ACMI arrangements that Atlas maintains. Approval of
these arrangements may be conditional, and approval during one
time period does not guarantee approval in future periods. Nor
is there a guarantee that an arrangement will be approved in the
first instance.
A foreign governments regulation of its own air carriers
can also affect our business. For instance, in July 2006, as
part of a broad plan to modify the licensing requirements of air
carriers of Member States of the European Union, the European
Commission announced a proposal to limit European Union carriers
use of wet leased aircraft from airlines of non-European Union
Member States to two non-consecutive six month periods and to
require reciprocity by the wet lessors government. The
proposal is expected to be considered during the European Union
legislative process over the next several years. If enacted by
the European Parliament and the Council of Ministers, the
proposal could reduce ACMI business opportunities and adversely
impact our business.
Airport Access. The ability of Atlas and Polar
to operate is dependent on their ability to gain access to
airports of their choice at commercially desirable times and on
acceptable terms. In some cases, this is constrained by the need
for the assignment of takeoff and landing slots or
comparable operational rights. Like other air carriers, Atlas
and Polar are subject to such constraints at slot-restricted
airports such as Chicago and a variety of foreign locations
(e.g., Tokyo, Incheon and Amsterdam). The availability of
slots is not assured and the inability of Atlas and Polar to
obtain additional slots could therefore inhibit their efforts to
provide expanded services in certain international markets. In
addition, nighttime restrictions of certain airports could, if
expanded, have an adverse operational impact.
Security. Following the terrorist attacks of
September 11, 2001, the aviation security functions
previously performed by the FAA were transferred to the
U.S. Transportation Security Administration
(TSA). The TSA extensively regulates aviation
security through rules, regulations and security directives.
Currently, at the insistence of key U.S. Congressional
leaders, the TSA is devoting significant resources and attention
to the air cargo area. TSA is in the final stages of issuing a
rule to establish uniform standards and impose requirements
designed to prevent unauthorized access to freighter aircraft
and the introduction of
7
weapons to such aircraft. Atlas and Polar currently operate
pursuant to a TSA-approved security program that, we believe,
maintains the security of all aircraft in the fleet. There can
be no assurance, however, that we will remain in compliance with
the existing and any additional TSA requirements without
incurring substantial costs which may have a materially adverse
effect on our operations. Additionally, foreign governments and
regulatory bodies (such as the European Commission) impose their
own aviation security requirements and have increasingly
tightened such requirements. This may have an adverse impact on
our operations, especially to the extent the new requirements
may necessitate redundant or costly measures or be in conflict
with TSA requirements. Additionally, the U.S. Congress is
considering legislation which, if enacted, could substantially
increase the security burden on air cargo carriers.
Environmental. Atlas and Polar are subject to
various federal, state and local laws relating to the protection
of the environment, including the discharge or disposal of
materials and chemicals and the regulation of aircraft noise,
which are administered by numerous state and federal agencies.
For instance, the DOT and the FAA have authority under the
Aviation Safety and Noise Abatement Act of 1979 (as amended and
recodified) and under the Airport Noise and Capacity Act of 1990
to monitor and regulate aircraft engine noise. We believe all
aircraft in the Atlas/Polar fleet materially comply with current
DOT, FAA and international noise standards.
Under the FAAs ADs issued pursuant to its aging aircraft
program, we are subject to extensive aircraft examinations and
will be required to undertake structural modifications to our
fleet from time to time to address the problems of corrosion and
structural fatigue. As part of the FAAs overall Aging
Aircraft program, it has issued ADs requiring certain additional
aircraft modifications to be accomplished. We estimate that the
modification costs per aircraft will range between
$2 million and $3 million. Two aircraft in our Boeing
747-200
fleet have already undergone the major portion of such
modifications. We anticipate no aircraft will undergo such
modifications during 2007. The remaining 13 Boeing
747-200
aircraft in service will require modification prior to
115,000 hours total aircraft time. Other ADs have been
issued that require inspections and minor modifications to
Boeing
747-200
aircraft. The Boeing
747-400
freighter aircraft were delivered in compliance with all
existing FAA ADs at their respective delivery dates. It is
possible, however, that additional ADs applicable to the types
of aircraft or engines included in our fleet could be issued in
the future and that the cost of complying with such ADs could be
substantial. Also, the FAA is considering a rule that would
increase the inspection and maintenance burden on aging aircraft.
Atlas and Polar are also subject to the regulations of the
U.S. Environmental Protection Agency
(the EPA) regarding air quality in the United
States. All aircraft in the Atlas/Polar fleet meet or exceed
applicable EPA fuel venting requirements and smoke emissions
standards.
Other Regulations. Air carriers are also
subject to certain provisions of the Communications Act of 1934
because of their extensive use of radio and other communication
facilities and are required to obtain an aeronautical radio
license from the Federal Communications Commission.
Additionally, Atlas and Polar are subject to international trade
restrictions imposed by Presidential determination and the
Office of Foreign Assets Control of the U.S. Department of
the Treasury. Atlas and Polar endeavor to comply with such
requirements at all times. Our operations may become subject to
additional federal requirements in the future under certain
circumstances. We are also subject to state and local laws and
regulations at locations where we operate and the regulations of
various local authorities that operate the airports we serve. We
believe Atlas and Polar are in material compliance with all of
such currently applicable laws and regulations.
Civil Reserve Air Fleet. Atlas and Polar both
participate in the Civil Reserve Air Fleet (CRAF)
Program, which permits the U.S. Department of Defense to
utilize participants aircraft during national emergencies
when the need for military airlift exceeds the capability of
military aircraft. Participation in the CRAF Program could
adversely restrict our commercial business in times of national
emergency.
Future Regulation. The U.S. Congress, the
DOT, the FAA and other governmental agencies are currently
considering and in the future may consider and adopt new laws,
regulations and policies regarding a wide variety of matters
that could affect, directly or indirectly, the operations,
ownership and profitability of Atlas
8
and Polar. It is impossible to predict what other matters might
be considered in the future and to judge what impact, if any,
the implementation of any future proposals or changes might have
on our businesses.
Competition
The market for outsourcing cargo ACMI services is highly
competitive. We believe that the most important basis for
competition in the ACMI business are the age of the aircraft
fleet, the payload and cubic capacities of the aircraft and the
price, flexibility, quality and reliability of the air
transportation services provided. We and TNT N.V. are the only
two service providers in the Boeing
747-400F
ACMI market. Competition with respect to the Boeing
747-200 ACMI
market, however, is more significant, and our principal
competitors include Air Atlanta Icelandic, Focus Air, Southern
Air, Tradewinds, Evergreen and Kalitta Air. World Airways, Inc.
and Gemini are also ACMI competitors, operating MD11s in
cargo ACMI services, which services also provide indirect
competition in some markets to the B747 freighters. In keeping
with our strategy of actively managing our asset base by
selectively disposing of less productive assets, we intend to
reduce our Boeing
747-200
capacity over the next several years and to replace older
aircraft with our order for Boeing
747-8F
aircraft. We believe that our ability to grow the ACMI business
depends upon economic conditions, the level of commercial
activity and our continuing ability to convince major
international airlines that outsourcing their air cargo needs is
more effective and efficient than undertaking cargo operations
with their own incremental capacity and with other resources.
We offer fully dedicated freighter capacity to our
freight-forwarder customers, transporting goods primarily on
aircraft pallets. We compete for cargo volume principally with
other all-cargo and combination carriers, including Cathay
Pacific, Northwest, Japan Air Lines, Nippon Cargo Airlines,
Korean, KLM and Lufthansa and with major passenger airlines that
have substantial belly cargo capacity. The primary competitive
factors in the Scheduled Service market are price, geographic
coverage, flight frequency, reliability and capacity. While we
do not have a major share of the global Scheduled Service
market, we believe that we can compete effectively by offering
reliable flight schedules to key limited-entry markets
(including China, Japan and intra-Asia) and in smaller, niche
markets (including Brazil, Chile and specific trans-Atlantic
trade lanes such as Amsterdam to Chicago and Amsterdam to
Atlanta).
We participate through our AMC Charter business segment in the
CRAF Program under one-year contracts with the AMC, where we
have made available a substantial number of our aircraft to be
used by the U.S. Military in support of their operations
and operate such flights pursuant to entitlement based,
full-cost contracts. Airlines may participate in the CRAF
Program either alone or through a teaming arrangement. There are
currently three groups of carriers (or teams) and several
independent carriers that are not part of any team that compete
for AMC business. We are a member of a team led by FedEx. We pay
a commission to the FedEx team, based on the revenues we receive
under our AMC contracts. Our AMC Charter business, while
profitable, has limited visibility into long-term demand. The
formation of additional competing teaming arrangements,
increased participation of other independent carriers, an
increase by other air carriers in their commitment of aircraft
to the CRAF program, or the withdrawal of any of the current
team members, especially FedEx, or a reduction of the number of
planes pledged to the CRAF program by our team, and the
uncertainty of future military airlift demand from commercial
providers, could adversely affect the amount of AMC business
awarded to the Company in the future. To the extent that we
receive a reduction in our awards or expansion business, we will
re-deploy the available aircraft to our other business segments
or remove the capacity from our fleet.
The Commercial Charter market is highly competitive, with a
number of operators, including Evergreen International, FedEx,
Kalitta, Lufthansa Charter and other passenger airlines
providing similar services. Our Commercial Charter business is
our smallest business segment in terms of revenue. Many of our
ad hoc charter flights are one-way return flights from Asia or
Europe, positioned by one-way AMC flights that originate from
the United States and terminate in Europe and the Middle East.
Over the last two years, most of our ad hoc charter capacity has
been allocated to the AMC Charter business, and this allocation
is expected to continue into the foreseeable future.
9
Fuel
Aviation fuel is one of the most significant expenses for an
aircraft operator. During the years ended December 31,
2006, 2005 and 2004, fuel costs represented 34.3%, 30.4% and
25.6%, respectively, of our total operating expenses. Fuel
prices and availability are subject to wide price fluctuations
based on geopolitical issues and supply and demand, which we can
neither control nor accurately predict. The following table
summarizes our total fuel consumption and costs for the years
ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Gallons consumed (in thousands)
|
|
|
214,808
|
|
|
|
246,619
|
|
|
|
280,304
|
|
Average price per gallon,
including tax
|
|
$
|
2.12
|
|
|
$
|
1.75
|
|
|
$
|
1.25
|
|
Cost (in thousands)
|
|
$
|
454,675
|
|
|
$
|
432,367
|
|
|
$
|
351,112
|
|
Fuel burn-gallons per Block Hour
(excluding ACMI)
|
|
|
3,275
|
|
|
|
3,352
|
|
|
|
3,351
|
|
Our exposure to fluctuations in fuel price directly impacts only
our Scheduled Service and Commercial Charter businesses. We
shift a portion of the burden of price increases to customers by
imposing a surcharge. While we believe that both the 2006 and
2005 periods were affected by increases in fuel surcharges, the
fuel surcharge does not completely limit our exposure to
increases in fuel prices. The ACMI segment has no fuel price
exposure because ACMI contracts require our customers to pay for
aviation fuel. Similarly, we generally have no fuel price risk
in the AMC business because the price is set under our annual
contract, and we receive or make subsequent payments to adjust
for price increases and decreases from the contractual rate. AMC
fuel expense for the years ended December 31, 2006, 2005
and 2004 was $143.9 million, $160.4 million and
$85.6 million, respectively.
In the past, we have not experienced significant difficulties
with respect to fuel availability. Although we currently do not
anticipate a significant reduction in the availability of jet
fuel, a number of factors, such as geopolitical uncertainties in
oil-producing nations and shortages in and disruptions to
refining capacity, make accurate predictions impossible. For
example, hostilities and political turmoil in oil-producing
nations could lead to disruptions in oil production
and/or to
substantially increased oil prices. The inability to obtain jet
fuel at competitive prices would materially and adversely affect
our results of operation and financial condition.
Although we have not regularly entered into hedging arrangements
in the past, we have recently entered into fixed forward fuel
purchases for use in 2007. We have committed to purchase
approximately 21.9 million gallons of jet fuel at an
average cost of $1.98 per gallon for a total commitment of
$43.3 million which represents approximately 17% of our
projected 2007 Scheduled Service fuel uplift. These contracts
expire in December 2007.
Employees
Our business is labor intensive, with salaries, wages and
benefits accounting for approximately 18.4%, 17.2% and 15.6% of
our consolidated operating expenses for 2006, 2005 and 2004,
respectively. As of December 31, 2006, we had 1,840
employees, 930 of whom were crewmembers. We maintain a
comprehensive training program for our crewmembers in compliance
with FAA requirements, in which each pilot and flight engineer
regularly attends recurrent training programs. All crewmembers
in the direct employment of Atlas and Polar are represented by
the Air Line Pilots Association (ALPA). Those
crewmembers hired directly by our former subsidiary, Atlas Air
Crew Services, in Stansted, England and now employed by an Atlas
Air Branch Office (AABO), are not represented by any
union.
Our relations with ALPA are governed by the Railway Labor Act of
1926. Under this statute, a collective bargaining agreement
between a company and the labor union generally does not expire
but becomes amendable as of a stated date. If either party
wishes to modify the terms of such agreement, it must notify the
other in the manner prescribed in the agreement. We are subject
to risks of work interruption or stoppage and may incur
additional administrative expenses associated with union
representation of its employees.
The Atlas collective bargaining agreement became amendable in
February 2006. Negotiations pursuant to Section 6 of the
Railway Labor Act to amend this agreement have been placed on
hold by mutual agreement
10
of the parties in favor of completion of the merger between the
Atlas and Polar crew forces, including the negotiation of a
single collective bargaining agreement covering both crew forces.
In November 2004, in order to increase efficiency and assist in
controlling certain costs, we initiated steps to combine the
U.S. crewmember bargaining units of Atlas and Polar. These
actions are in accordance with the terms and conditions of
Atlas and Polars collective bargaining agreements,
which provide for a seniority integration process and the
negotiation of a single collective bargaining agreement. ALPA
has set a Policy Initiation Date (PID)
triggering the provisions of its merger policy. ALPA and the
Company are currently in discussions regarding a Merger
Protocol Letter of Agreement addressing the negotiations
for a single collective bargaining agreement that will cover the
integrated crew forces. If these discussions are not successful,
there is no guarantee that ALPA will ultimately agree to
complete the merger. If ALPA does not agree to complete the
merger, the Company has the right to file a grievance to compel,
but there is no guarantee that an arbitrator will uphold the
Companys position. Additionally, if the parties do enter
into negotiations for a single collective bargaining agreement,
in the event that we are unsuccessful in reaching a
comprehensive final agreement, any unresolved issues will be
submitted to binding arbitration. While we cannot give assurance
as to the outcome of such arbitration, an adverse decision by
the arbitrator could materially increase our crew costs. We may
not be able to quickly or fully recover these increased costs by
increasing our rates, which could have a material adverse effect
on our business, results of operations and financial condition.
Following a brief strike in the fall of 2005, Polar entered into
a new labor agreement for a term of 18 months beginning
October 5, 2005. Polars collective bargaining
agreement becomes amendable in April 2007. Negotiations to amend
this agreement have been placed on hold, pending the planned
merger of the Atlas and Polar crew forces.
Chapter 11
Reorganization
In early 2003, we embarked on a comprehensive program that
included a change in our senior management and the initiation of
an aggressive operational and financial restructuring plan.
Throughout the course of 2003, management implemented
significant cost saving initiatives and negotiated with various
lessors and secured aircraft creditors to reduce and or defer
rents and payments on our aircraft. By the end of 2003, we were
able to negotiate binding term sheets and restructuring
agreements with a majority of our significant aircraft lenders
and lessors, including Deutsche Bank Trust Company
(Deutsche Bank), the agent under two credit
facilities formerly maintained by two subsidiaries of Holdings.
On January 30, 2004, (the Bankruptcy Petition
Date), AAWW, Atlas, Polar and two other of AAWWs
subsidiaries, Airline Acquisition Corp I
(Acquisition) and Atlas Worldwide Aviation
Logistics, Inc. (Logistics, and together with AAWW,
Atlas, Polar and Acquisition collectively, the
Debtors) each filed for relief under chapter 11
(Chapter 11) of title 11 of the United
States Code, 11 U.S.C. 101 et seq. (the Bankruptcy
Code), in the United States Bankruptcy Court for the
Southern District of Florida (the Bankruptcy Court).
The Bankruptcy Court jointly administered these cases as In
re: Atlas Air Worldwide Holdings, Inc., Atlas Air, Inc., Polar
Air Cargo, Inc., Airline Acquisition Corp I, and Atlas
Worldwide Aviation Logistics, Inc., Case
No. 04-10792
(collectively, the Chapter 11 Cases or the
Chapter 11 Proceedings). Throughout the
Chapter 11 Proceedings, the Debtors operated their
respective businesses as
debtors-in-possession
(DIP) under the jurisdiction of the Bankruptcy Court
and in accordance with the applicable provisions of the
Bankruptcy Code, the Federal Rules of Bankruptcy Procedure and
the orders of the Bankruptcy Court. The Financial Statements
appearing in Item 8 of Part II of this Report include
data for all of our subsidiaries, including those that did not
file for relief under Chapter 11.
A number of the restructuring agreements that we entered into
prior to filing for bankruptcy required a Chapter 11 filing
as part of their implementation. In addition, the
Chapter 11 filing helped facilitate the restructuring
program by establishing one forum for the resolution of claims
and implementation of a wide range of restructuring agreements.
The Chapter 11 filing had also helped facilitate the
issuance of the new equity securities required by certain of the
restructuring agreements (see Note 2 to our Financial
Statements for additional information concerning our
reorganization).
11
The Debtors emerged from bankruptcy protection under the Second
Amended Joint Plan of Reorganization (the Plan of
Reorganization) which (i) was confirmed by the
Bankruptcy Court on July 16, 2004 and (ii) after each
of the conditions precedent to consummation was satisfied or
waived, became effective as of July 27, 2004 (the
Effective Date). In accordance with American
Institute of Certified Public Accountants (AICPA)
Statement of Position
90-7,
Financial Reporting by Entities in Reorganization Under the
Bankruptcy Code
(SOP 90-7),
we adopted fresh-start accounting as of the Effective Date (see
Note 2 to our Financial Statements for additional
information concerning our reorganization). References to
Predecessor Company or Predecessor refer
to us prior to the Effective Date. References to Successor
Company or Successor refer to us after the
Effective Date, following the adoption of fresh-start
accounting. As a result of fresh-start accounting, the Successor
Companys Consolidated Financial Statements are not
comparable with the Predecessor Companys Consolidated
Financial Statements.
Available
Information
All of our Annual Reports on
Form 10-K,
Quarterly Reports on
Form 10-Q
and Current Reports on
Form 8-K,
and all amendments to those reports, filed with or furnished to
the Securities and Exchange Commission (the SEC),
are available free of charge through our corporate Internet
Website, www.atlasair.com, as soon as reasonably
practicable after we have electronically filed such material
with, or furnished it to, the SEC. Certain information
concerning our restructuring and our filing under
Chapter 11 of the Bankruptcy Code may be found at
www.atlasreorg.com.
The information on these Websites is not, and shall not be
deemed to be, part of this Report or incorporated into any other
filings we make with the SEC.
You should carefully consider each of the following Risk Factors
and all other information in this Report. These Risk Factors are
not the only ones facing us. Our operations could also be
impaired by additional risks and uncertainties. If any of the
following risks and uncertainties develops into actual events,
our business, financial condition and results of operations
could be materially and adversely affected.
RISKS
RELATED TO OUR BUSINESS
Risks
Related to Our ACMI Business
We
depend on a limited number of significant customers for our ACMI
business, and the loss of one or more of such customers could
materially adversely affect our business, results of operation
and financial condition.
During the years ended December 31, 2006, 2005 and 2004,
our ACMI business accounted for approximately 27.6%, 28.8% and
26.6%, respectively, of our operating revenues. We depend on a
limited number of significant customers for our ACMI business
which numbered between 7 and 12 during that period. In addition,
Emirates accounted for 11.9%, 9.8% and 9.1% of our total
operating revenues for the years ended December 31, 2006,
2005 and 2004, respectively. We typically enter into ACMI
contracts with terms of 3 months up to 5 years with
our customers and the terms of these contracts expire on a
staggered basis over the next 4.3 years. There is a risk
that our customers, including Emirates, may not renew their ACMI
contracts with us on favorable terms or at all. Entering into
ACMI contracts with new customers generally requires a long
sales cycle, and as a result, if our ACMI contracts are not
renewed, our business, results of operations and financial
condition could be materially adversely affected.
Our
ACMI growth strategy could be adversely affected by a
significant delay in the delivery of our new Boeing
747-8F
freighter aircraft, or if such aircraft do not meet their
performance specifications.
In September 2006, we placed an order for 12 new Boeing
747-8F
freighter aircraft that are scheduled to be delivered in 2010
and 2011. As part of this transaction, we also hold rights to
purchase up to an additional 14 Boeing
747-8F
aircraft at fixed prices, of which one is being held under
option. The addition of these new
12
aircraft is a material component of our ACMI growth strategy.
Although the Boeing
747-8F
aircraft shares many of the same components used in other Boeing
747 models, it is a new aircraft model and has not yet received
the necessary regulatory approvals and certifications. Any
significant delay in Boeings production or delivery
schedule, including because of delay in receiving the necessary
approvals and certifications, could delay the delivery and
deployment of these aircraft. Although Boeing has provided us
with performance guarantees, there is a risk that the new
aircraft may not meet the performance specifications that are
important to our customers, which could adversely affect our
ability to deploy these aircraft in a timely manner or at
favorable rates.
Risks
Related to Our AMC Charter Business
We
derive a significant portion of our revenues from our AMC
Charter business, and a substantial portion of these revenues
were generated pursuant to expansion flying, as opposed to fixed
contract arrangements with the AMC. In the longer term, we
expect that the revenues from our AMC Charter business may
decline from 2006 levels, which could have a material adverse
effect on our business, results of operations and financial
condition.
During the years ended December 31, 2006, 2005 and 2004,
approximately 22.1%, 27.2% and 20.0%, respectively, of our
operating revenues were derived from our AMC Charter business.
In each of these years, the revenues derived from expansion
flights for the Air Mobility Command significantly exceeded the
value of the fixed flight component of our AMC contract.
While we expect that our AMC Charter business, especially
expansion flights, will generate a significant amount of our
revenue for the foreseeable future, future revenues from this
business may decline from fiscal year 2006 levels as a result of
reduced military heavy lift requirements. Revenues from our AMC
Charter business are derived from one-year contracts that the
Air Mobility Command is not required to renew. Changes in
national and international political priorities can
significantly affect the volume of our AMC Charter business,
especially the volume of expansion flying. Any decrease in
U.S. military activity could reduce our AMC Charter
business. In addition, our share of the total AMC Charter
business depends on several factors, including the total fleet
size we commit to the CRAF program and the total number of
aircraft deployed by our partners and competitors in the
program. The Air Mobility Command also holds all carriers to
certain on-time performance requirements. To the extent that we
fail to meet those performance requirements, or if we fail to
perform or to pass semi-annual inspections, our revenues from
our AMC Charter business could decline through a suspension or
termination of our AMC contract. Our revenues could also decline
due to a reduction in the revenue rate we are paid by the Air
Mobility Command, a greater reliance by the AMC on its own
freighter fleet or a reduction in our allocation of expansion
flying. If our AMC Charter business declines significantly and
we are unable to effectively deploy the resultant capacity, it
could have a material adverse effect on our business, results of
operations and financial condition.
Our
AMC Charter business is dependent on our participation in a team
accredited to participate in the CRAF program. If one of our
team members withdraws from the program, or if our competitors
commit additional aircraft to this program, our share of AMC
flying may decline, which could have a material adverse effect
on our results of operations and financial
condition.
Each year, the Air Mobility Command grants a certain portion of
its AMC Charter business to different airlines based on a point
system that is determined by the amount and type of aircraft
pledged to the CRAF program. We participate in the CRAF program
through a teaming arrangement with other airlines, led by FedEx.
Our team is one of three major teams participating in the CRAF
program. The formation of competing teaming arrangements, an
increase by other air carriers in their commitment of aircraft
to the program, the withdrawal of our teams current
partners, especially FedEx, or a reduction of the number of
planes pledged to the CRAF program by our team could adversely
affect the volume of and our revenues from our AMC Charter
business, which could have a material adverse effect on our
business, results of operations and financial condition. Our AMC
Charter business could also be adversely impacted by increased
participation of independent carriers in the CRAF program.
13
Risks
Related to Our Scheduled Service Business
Operating
results in our Scheduled Service business may vary significantly
from period to period, which could cause us to fail to meet
operating targets.
During the years ended December 31, 2006, 2005 and 2004,
approximately 41.4% 34.4% and 45.3% of our operating revenues
were derived from our Scheduled Service business. Our Scheduled
Service business operates according to fixed flight schedules
regardless of the amount of cargo transported. Consequently, a
significant portion of our Scheduled Services costs are fixed,
such as crew, fuel, capital costs, maintenance, and facilities
expenses. The revenues generated from our Scheduled Services
business vary significantly from period to period depending on a
number of factors outside our control, including global
airfreight demand, competition, global economic conditions and
increases in fuel costs. As a result, if revenue for a
particular period is below expectations, we will be unable to
proportionately reduce our operating expenses for that period.
Any revenue shortfall during a quarterly or annual period may
cause our profitability for that period to fall. Accordingly,
you should not rely on
period-to-period
comparisons of operating results in our Scheduled Service
business as an indicator of future performance.
Under the proposed terms of our blocked space agreement with
DHL, DHL has committed to certain guaranteed capacity
utilization, which we expect will account for a material portion
of our Scheduled Service capacity. While we expect that our
proposed venture with DHL will provide increased revenue
stability in our Scheduled Service business, we cannot assure
you that we will achieve the level of expected revenue from this
transaction in accordance with our timetable, or at all.
We
could lose our rights to fly into limited-entry markets
primarily in Asia if we fail to fully utilize them which could
materially adversely affect our Scheduled Service business. If
additional route rights in the limited entry markets where we
currently have a presence are awarded to other carriers, the
value of our existing rights may be diminished.
A significant amount of our business, primarily in the Scheduled
Service business, is conducted in limited-entry international
markets with
U.S.-negotiated
rights that have been awarded in competitive carrier selection
proceedings. This includes our Japan rights, China rights and
our rights to carry local traffic between Hong Kong and other
countries. Limited-entry rights are typically subject to loss
for underutilization and there is a risk that some of our
limited-entry rights may lapse if economic conditions and
reduced demand from our customers preclude us from using them in
full. The inability to obtain additional limited-entry routes
might adversely affect our ability to quickly respond to any
increased demand for Scheduled Service and thus limit our growth
opportunities. If additional carriers are awarded route rights
in the limited entry markets where we currently operate, we will
face increased competition which could have an adverse effect on
the rates we are able to charge for our service and the value of
our limited entry rights may be diminished.
We may
be unable to complete, or may be delayed in completing, our
contemplated transaction with DHL. An inability to complete the
transaction would impact our business strategy.
On November 28, 2006, one of our wholly owned subsidiaries,
PACW, entered into a purchase agreement with DHL for DHL to
acquire a 49% equity interest including a 25% voting interest,
in PACW in exchange for $150 million in cash. It is also
contemplated that DHL will enter into a commercial arrangement
through which PACW will provide express network services to DHL.
In accordance with the purchase agreement, PACW also will enter
into various commercial intercompany arrangements with one or
more of its affiliates. The completion of these proposed
transactions is an important part of enhancing the performance
of our Scheduled Service business. While we are currently in the
process of finalizing the commercial agreements, there can be no
assurance that we will be able to enter into those agreements on
acceptable terms or at all. The completion of the contemplated
transaction is subject to some closing conditions that are
outside of our control, such as review and approval by
regulatory authorities and third party consents. As a result, we
can provide no assurance that this transaction will be
completed. Our inability to complete this transaction, or delays
in completing this transaction, may adversely impact our ability
to execute our business strategy which could have a material
adverse effect on our business, results of operations and
financial condition.
14
Our
proposed agreements with DHL will require us to meet certain
performance targets in our Scheduled Service operations,
including higher departure/arrival reliability and accelerated
processing schedules. Failure to meet these performance targets
could lead to penalties under these agreements, or termination
of the agreements.
Our ability to derive the expected economic benefits from our
proposed transactions with DHL depends substantially on our
ability to successfully meet strict performance standards and
deadlines for processing cargo as part of an express cargo and
freight network. These performance standards will impose more
stringent time schedules on our Scheduled Service business than
we currently operate under, and we will be required to commence
operating under these tighter time schedules by October 31,
2008 or an earlier date if requested by DHL. If we are not able
to successfully transition our Scheduled Service to these
accelerated schedules in a timely manner, we may not be able to
achieve the projected revenues and profitability from this
contract and DHL has the right to terminate the agreement in
certain such circumstances.
Our
blocked space agreement with DHL will confer certain termination
rights to DHL which, if exercised or triggered, may result in us
being unable to realize the full benefits of this
transaction.
The proposed terms of our blocked space agreement with DHL give
DHL the option to terminate the agreement, for convenience, on
one years notice to us, at the fifth, tenth or fifteenth
anniversary of the agreements commencement date. Further,
DHL has a right to terminate for cause in the event that we
default on our performance or we are unable to perform for
reasons beyond our control. If DHL exercises these termination
rights, we will not be able to achieve the projected revenues
and profitability from this contract.
Risks
Related to Our Business Generally
While
our revenues may vary significantly over time, a substantial
portion of our operating expenses are fixed. These fixed costs
limit our ability to quickly change our cost structure to
respond to any declines in our revenues, which could reduce
Company profitability.
To maintain our level of operations, a substantial portion of
our costs are fixed, such as capital costs and debt service,
crew and facility costs. Operating revenues from our business
are directly affected by our ability to maintain high
utilization of our aircraft and services at favorable rates. The
utilization of our aircraft and our ability to obtain favorable
rates are, in turn, affected by many factors, including global
demand for airfreight, global economic conditions, fuel costs,
and the deployment by our current and potential customers of
their own aircraft, among others, causing our revenues to vary
significantly over time. As a result, if our revenues for a
particular period are below expectations, we will be unable to
proportionately reduce our operating expenses for that period.
Any revenue shortfall during a quarterly or annual period may
cause our profitability for that period to fall.
We
have a limited number of revenue producing assets. The loss of
one or more of our aircraft for an extended period of time could
have a material adverse effect on our business, results of
operations and financial condition.
Our operating revenues depend on our ability to effectively
deploy all the aircraft in our fleet and maintain high
utilization of these aircraft at favorable rates. In the event
that one or more of our aircraft are out of service for an
extended period of time, our operating revenues will
significantly decrease and we may have difficulty fulfilling our
obligations under one or more of our existing contracts. Many of
our aircraft are deployed in potentially dangerous locations and
carry hazardous cargo incidental to the services we provide in
support of U.S. military activities, particularly in
shipments to the Middle East. Other areas through which our
flight routes pass are subject to geopolitical instability,
which increases the risk of a loss of, or damage to, our
aircraft, or death or injury to our personnel. While we maintain
insurance to cover the loss of an aircraft, except for limited
situations, we do not have insurance against the loss arising
from business interruption. It is difficult to replace lost or
substantially damaged aircraft due to the high capital
requirements and long delivery lead times for new aircraft or to
locate appropriate in-service aircraft for lease or sale. The
loss of revenue resulting from any such business interruption,
and the cost, long lead time and difficulties in sourcing a
15
replacement aircraft, could have a material adverse effect on
our business, results of operations and financial condition.
Should
any of our existing aircraft or our new order of
747-8F
freighter aircraft become underutilized in our ACMI or AMC
Charter business, failure to re-deploy these aircraft at
favorable rates in our other lines of business or to
successfully and timely dispose of such aircraft could have a
material adverse effect on our business, results of operations
and financial condition.
We provisionally allocate our existing and on-order aircraft
among our business segments according to projected demand. If
demand in our ACMI or AMC Charter businesses weakens so that we
have underutilized aircraft, we will seek to re-deploy these
aircraft in our other lines of business. If we are unable to
successfully deploy our existing aircraft or our new order of
Boeing
747-8F
freighter aircraft, when delivered, at favorable rates or
achieve a timely disposal of such aircraft, our long term
results of operations could be materially affected.
Our
substantial lease and debt obligations, including aircraft lease
and other obligations, could impair our financial condition and
adversely affect our ability to raise additional capital to fund
our operations or capital requirements, all of which could limit
our financial resources and ability to compete, and may make us
more vulnerable to adverse economic events.
As of December 31, 2006, we had total obligations of
approximately $2.8 billion related to aircraft operating
leases, debt and other lease obligations. These obligations are
expected to increase significantly over the next several years
as we begin to accept delivery and finance all or a portion of
our new Boeing
747-8F
freighter aircraft. Our outstanding financial obligations could
have negative consequences, including:
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making it more difficult to pay principal and interest with
respect to our debt and lease obligations;
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requiring us to dedicate a substantial portion of our cash flow
from operations for interest, principal and lease payments and
reducing our ability to use our cash flow to fund working
capital and other general corporate requirements;
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increasing our vulnerability to general adverse economic and
industry conditions; and
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limiting our flexibility in planning for, or reacting to,
changes in business and in our industry.
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Our ability to service our debt and meet our lease and other
obligations as they come due is dependent on our future
financial and operating performance. This performance is subject
to various factors, including factors beyond our control, such
as changes in global and regional economic conditions, changes
in our industry, changes in interest or currency exchange rates,
the price and availability of aviation fuel and other costs,
including labor and insurance. Accordingly, we cannot assure you
that we will be able to meet our debt service, lease and other
obligations as they become due or otherwise.
Certain
of our debt and lease obligations contain a number of
restrictive covenants. In addition, many of our debt and lease
obligations have certain cross default and cross acceleration
provisions.
Restrictive covenants in certain of our debt and lease
obligations, under certain circumstances, could impact our
ability to:
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pay dividends or repurchase stock;
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consolidate or merge with or into other companies or sell all of
our assets; and/or
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expand in a material way into lines of businesses beyond
existing business activities or those which are cargo-related
and/or
aviation-related and similar businesses.
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In certain circumstances, a covenant default under one
instrument could cause us to be in default of other obligations
as well. Any such unremedied defaults could lead to an
acceleration of repayment in full of any amounts owed, and in
certain circumstances, potentially could cause us to lose
possession or control of certain aircraft.
16
We
have a number of contractual obligations, including progress
payments, associated with our order of 12 Boeing
747-8F
freighter aircraft. If we are unable to obtain financing for
these aircraft
and/or make
the required progress payments, our growth strategy will be
disrupted and our business, results of operations and financial
condition could be materially adversely affected.
In September 2006, we placed an order for 12 new Boeing
747-8F
freighter aircraft that are scheduled to be delivered in 2010
and 2011. As part of this transaction, we also hold options and
rights to purchase up to an additional 14
747-8F
aircraft at fixed prices. We are required to pay significant
pre-delivery deposits to Boeing for these aircraft. We commenced
making these pre-delivery payments in the third quarter of 2006.
As of December 31, 2006, we had commitments of
approximately $2.1 billion associated with this aircraft
order (including estimated contractual escalations and applying
purchase credits). We typically finance our aircraft, including
the required progress payments, through either mortgage debt or
lease financing. Although we have received standby financing
commitments to finance four of these aircraft, we cannot assure
you that we will be able to meet the financing conditions
contained in these commitments or to secure other financing at
all or on terms attractive to us. If we are unable to secure
such financing on acceptable terms, we may be required to incur
financing costs that are substantially higher than what we
currently anticipate.
Fuel
price volatility could adversely affect our business and
operations, especially in our Scheduled Service and Commercial
Charter businesses.
The price of aircraft fuel is unpredictable and has been
increasingly volatile over the past few years. Fuel is one of
the most significant expenses in our Scheduled Service and
Commercial Charter businesses. For the years ended
December 31, 2006, 2005 and 2004, fuel costs were
approximately 34.3% 30.0% and 25.6%, respectively, of our total
operating expenses. Although we attempt to pass on increases in
the price of aircraft fuel to our Scheduled Service and
Commercial Charter customers by imposing a surcharge, we
ultimately bear a portion of any price increases. There can be
no assurance that we will be able to continue to impose such
surcharges in the future. Prior to September 2006 we did not
enter into fuel hedging arrangements. With respect to the fourth
quarter of 2006, we hedged approximately 15.3 million
gallons of our Scheduled Service fuel requirements in the fourth
quarter through a combination of physical fixed fuel purchases
and jet fuel swaps. We have recently entered into fixed forward
fuel purchases for use in 2007. Through March, 2007, we have
committed to purchase approximately 21.9 million gallons at
an average cost of $1.98 per gallon for a total commitment
of $43.3 million which represents approximately 17% of our
projected 2007 Scheduled Service fuel uplift. The contracts are
for monthly uplift at various stations and all expire in
December 2007.
In addition, while our ACMI contracts require our customers to
pay for aviation fuel, if fuel costs increase significantly,
their customers may reduce the volume and frequency of cargo
shipments or find less costly alternatives for cargo delivery,
such as land and sea carriers.
Our
insurance coverage may become more expensive and difficult to
obtain.
Aviation insurance premiums historically have fluctuated based
on factors that include the loss history of the industry in
general, and the insured carrier in particular. Future terrorist
attacks and other adverse events involving aircraft could result
in increases in insurance costs and could affect the price and
availability of such coverage. We have, as have most other
U.S. airlines, purchased our war-risk coverage through a
special program administered by the federal government. The FAA
is currently providing war-risk hull and cargo loss, crew and
third-party liability insurance through August 31, 2007 as
required by the Homeland Security Act of 2002, as amended by the
Consolidated Appropriations Act of 2005 and by the
Transportation Appropriations Act of 2006 and as further
extended by the U.S. Secretary of Transportation. If the
federal war-risk coverage program terminates or provides
significantly less coverage in the future, we would likely face
a material increase in the cost of war-risk coverage, and
because of competitive pressures in the industry, our ability to
pass this additional cost on to customers may be limited.
There can be no assurance that we will be able to maintain our
existing coverage on terms favorable to us, that the premiums
for such coverage will not increase substantially or that we
will not bear substantial losses and lost revenues from
accidents or other adverse events. Substantial claims resulting
from an accident
17
in excess of related insurance coverage or a significant
increase in our current insurance expense could have a material
adverse effect on our business, results of operations and
financial condition. Additionally, while we carry insurance
against the risks inherent to our operations, which we believe
are consistent with the insurance arrangements of other
participants in our industry, we cannot assure you that we are
adequately insured against all risks. If our liability exceeds
the amounts of our insurance coverage, we would be required to
pay the excess amount, which could be material to our business
and operations.
As a
U.S. government contractor, we are subject to a number of
procurement and other rules and regulations that add costs to
our business. A violation of these rules and regulations could
lead to termination or suspension of our government contracts
and could prevent us from entering into contracts with
government agencies in the future.
In order to do business with government agencies, we must comply
with, and are affected by, many laws and regulations, including
those related to the formation, administration and performance
of U.S. government contracts. These laws and regulations,
among other things:
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require, in some cases, certification and disclosure of all cost
and pricing data in connection with contract negotiations, and
may give rise to U.S. government audit rights;
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impose accounting rules that dictate how we define certain
accounts, define allowable costs and otherwise govern our right
to reimbursement under certain cost-based U.S. government
contracts;
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establish specific health, safety and doing-business standards;
and
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restrict the use and dissemination of information classified for
national security purposes and the exportation of certain
products and technical data.
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These laws and regulations affect how we do business with our
customers and, in some instances, impose added costs on our
business. A violation of these laws and regulations could result
in the imposition of fines and penalties or the termination of
our contracts. In addition, the violation of certain other
generally applicable laws and regulations could result in our
suspension or debarment as a government contractor.
Our
financial condition could suffer if we experience unanticipated
costs or enforcement action as a result of the SEC
investigation, the Department of Justice fuel surcharge
investigation and other lawsuits and claims.
On October 28, 2004, the SEC issued a Wells notice to us
indicating that the SEC is considering bringing a civil action
against us alleging that we violated certain financial reporting
provisions of the federal securities laws from 1999 to 2002. In
addition, on February 14, 2006, the Department of Justice
served us with a subpoena in connection with its investigation
into the fuel surcharge pricing practices of approximately 20
air cargo carriers. Other than the subpoena, there has been no
complaint or demand of us by the Department of Justice, and we
are fully cooperating with this investigation. As a result of
the investigation, we and a number of other cargo carriers have
been named co-defendants in a number of class action suits filed
in multiple jurisdictions of the U.S. Federal District
Court, and have been named in two civil class action suits in
Ontario and British Columbia, Canada, which are substantially
similar to the U.S. class action suits. We have also
received notification from Swiss authorities that they are
investigating the freight pricing practices of several carriers,
including us, on routes between Switzerland and the
U.S. The Swiss authorities have not communicated any
specific complaint or demand to us. We are also party to a
number of other claims, lawsuits and pending actions, which we
consider to be routine and incidental to our business (see
Note 12 to our Financial Statements).
While we are currently engaged in discussions with the SEC
regarding the Wells notice and continue to cooperate fully with
the SEC and the Department of Justice, we cannot assure you that
we will be able to resolve these or the other matters discussed
above on terms favorable to us or that they will not have a
material adverse effect on our business, results of operations
or financial condition.
18
We
have had material weaknesses in our internal controls over
financial reporting.
In the past, we have had material weaknesses identified by our
independent registered public accounting firm. These weaknesses
have been remediated. As we continue to evaluate the operating
effectiveness of our internal controls, it is possible that
management may identify new deficiencies that come within the
definition of a material weakness. There can be no assurance
that all such material weaknesses, if identified, could be
remediated in a timely manner. If we are unsuccessful in our
efforts to permanently and effectively remediate future
identified material weaknesses, or otherwise fail to maintain
adequate internal controls over financial reporting, our ability
to accurately and timely report on our financial condition may
be adversely impacted, which could, among other things, limit
our access to the capital markets.
We are
party to collective bargaining agreements with our
U.S. crewmembers that could result in higher labor costs
than faced by some of our non-unionized competitors putting us
at a competitive disadvantage, and could result in a work
interruption or stoppage, which could materially adversely
affect our business, results of operations and financial
condition.
We have two separate crewmember forces, one for each of Atlas
and Polar. Each is represented by ALPA, except for a limited
number of crewmembers (64 in total) who are employed by AABO in
Stansted, England. There is a separate collective bargaining
agreement (CBA) at Atlas and Polar. Collectively,
these employees represented approximately 50.5%, 49.0% and 54.0%
of our workforce at December 31, 2006, 2005 and 2004,
respectively. We are subject to risks of increased labor costs
associated with having a partially unionized workforce, as well
as a greater risk of work interruption or stoppage. During 2005,
a strike by our Polar crewmembers was resolved after a
20-day work
stoppage. However, we cannot assure you that disputes, including
disputes with certified collective bargaining representatives of
our employees, will not arise in the future or will result in an
agreement on terms satisfactory to us. Such disputes and the
inherent costs associated with their resolution could have a
material adverse effect on our business, results of operations
and financial condition.
As noted above, we initiated steps to combine the
U.S. crewmember bargaining units of Atlas and Polar. For
additional information concerning the proposed merger of the
Atlas and Polar crew forces, see Item 1.
Business Employees.
Global
trade flows are seasonal, hence all of our business segments,
including our ACMI customers business, experience seasonal
revenue variation.
Global trade flows are seasonal in nature, with peak activity
occurring during the retail holiday season, which traditionally
begins in September and lasts through mid-December. This
typically results in a significant decline in demand for these
services in the first quarter of the fiscal year. While our ACMI
contracts have contractual utilization minimums, they typically
allow our customers to cancel a maximum of 5% of the guaranteed
hours of aircraft utilization over the course of a year. Our
customers often exercise those cancellation options early in the
first quarter of the year, when the demand for air cargo
capacity has been historically low following the seasonal
holiday peak in the fourth quarter. While our revenues fluctuate
seasonally as described above, a significant proportion of the
costs associated with our business, such as aircraft rent,
depreciation and facilities costs, are fixed and cannot easily
be reduced to match the seasonal drop in demand. As a result,
our net operating results are subject to a high degree of
seasonality.
Volatility
in international currency markets may adversely affect demand
for our services.
Although we price the majority of our services and receive the
majority of our payments in U.S. dollars, many of our
customers revenues are denominated in foreign currencies.
Any significant devaluation in such currencies relative to the
U.S. dollar could have a material adverse effect on such
customers ability to pay us or on their level of demand
for our services, which could have a material adverse effect on
our business, results of operations and financial condition. If
there is a significant decline in the value of the
U.S. dollar against foreign currencies, the demand for some
of the products that we transport could decline. Such a decline
could reduce demand for our services and thereby have a material
adverse effect on our business,
19
results of operations and financial condition. Our ACMI
contracts typically call for payment of contractual minimums in
advance on the
15th and
30th of
the month.
We
rely on third party service providers. If these service
providers do not deliver the high level of service and support
required in our business, we may lose customers and our revenue
will suffer.
We rely on third parties to provide certain essential services
on our behalf, including maintenance and ground handling. In
certain locations, there may be very few, sometimes only a
single source of supply for these services. If we are unable to
effectively manage these third parties, they may provide
inadequate levels of support which could have an adverse impact
on our operations and the results thereof. Any material problems
with the efficiency and timeliness of our contracted services,
or an unexpected termination of those services, could have a
material adverse effect on our business, results of operations
and financial condition.
RISKS
RELATED TO OUR INDUSTRY
We
depend on certain levels of worldwide economic activity to
operate our business successfully. Any significant decrease in
demand for air cargo transport could adversely affect our
business and operations.
Our success is highly dependent upon the level of business
activity and overall global economic conditions, including
import and export demand in our key markets and levels of
international U.S. military activity. Any economic downturn
in the U.S. or in our key markets overseas, or any business
shift towards using less time sensitive modes of freight
transportation, such as land or sea based cargo services, is
likely to adversely affect demand for the delivery services
offered by our businesses, and that of our ACMI customers.
Additionally, a prolonged economic slowdown may increase the
likelihood that our ACMI customers would reduce the scope of
services we provide to them which could adversely affect our
business and operations.
The
market for air cargo services is highly competitive and if we
are unable to compete effectively, we may lose current customers
or fail to attract new customers.
Each of the markets we participate in is highly competitive and
fragmented. We offer a broad range of aviation services and our
competitors vary by geographic market and type of service and
include other international and domestic contract carriers,
regional and national ground handling and logistics companies,
internal cargo units of major airlines and third party cargo
providers. Competition in the air cargo and transportation
market is influenced by several key factors. Regulatory
requirements to operate in the U.S. domestic air cargo
market have been reduced, facilitating the entry into domestic
markets by foreign air cargo companies. In addition, we expect
that new freighter aircraft, including passenger aircraft that
have been converted into freighter aircraft that enter the
market are likely to add to the supply of available cargo
aircraft.
We are
subject to extensive governmental regulations and our failure to
comply with these regulations in the U.S. and abroad, or the
adoption of any new laws, policies or regulations or changes to
such regulations may have an adverse effect on our
business.
Our operations are subject to complex aviation and
transportation laws and regulations, including Title 49 of
the U.S. Code (formerly the Federal Aviation Act 1958, as
amended), under which the DOT and the U.S. Federal Aviation
Administration exercise regulatory authority over air carriers.
In addition, our business activities fall within the
jurisdiction of various other federal, state, local and foreign
authorities, including the U.S. Department of Defense, the
TSA, U.S. Customs and Border Protection, the Treasury
Departments Office of Foreign Assets Control and the EPA.
In addition, other countries in which we operate have similar
regulatory regimes to which we are subjected. These laws and
regulations may require us to maintain and comply with the terms
of a wide variety of certificates, permits, licenses, noise
abatement standards and other requirements and our failure to do
so could result in substantial fines or other sanctions. These
U.S. and foreign aviation regulatory agencies have the authority
to modify, amend, suspend or revoke the authority and licenses
issued to us for failure to comply with provisions of law or
applicable regulations and may impose civil or criminal
penalties for violations of applicable rules and regulations.
Such fines or sanctions, if imposed, could have a material
adverse effect on our mode of conducting business, results of
operations and
20
financial condition. In addition, U.S. and foreign governmental
authorities may adopt new regulations, directives or orders that
could require us to take additional and potentially costly
compliance steps or result in the grounding of some of our
aircraft, which could increase our operating costs or result in
a loss of revenues, which could have a material adverse effect
on our business, results of operations and financial condition.
International aviation is increasingly subject to conflicting
requirements imposed or proposed by the U.S. and foreign
governments. This is especially true in the areas of
transportation security, aircraft noise and emissions control
and, potentially, the regulation of greenhouse gas emissions.
Recently, the European Commission proposed that the European
Union adopt, through its legislative process, limitations on the
ability of European Union carriers to wet lease (through ACMI
arrangements) aircraft from non-European Union carriers. These
and other similar regulatory developments could increase
business uncertainty for commercial air-freight carriers.
The
airline industry, which encompasses both the travel and air
freight industries, is subject to numerous security regulations
and rules which increase costs. Imposition of more stringent
regulations and rules than currently exist could materially
increase our costs and have a material adverse effect on our
results of operations.
The TSA has increased security requirements in response to
increased levels of terrorist activity, and has adopted
comprehensive new regulations governing air cargo
transportation, including all-cargo services, in such areas as
cargo screening and security clearances for individuals with
access to cargo. Additional measures, including a requirement to
screen cargo, have been proposed, which if adopted, may have an
adverse impact on our ability to efficiently process cargo and
would increase our costs. The cost of compliance with
increasingly stringent regulations could have a material adverse
effect on our business, results of operations and financial
condition.
RISKS
RELATED TO OWNERSHIP OF OUR COMMON STOCK
Our
common stock share price has been, and is likely to continue to
be, volatile.
The trading price of our common shares is subject to wide
fluctuations in response to a variety of factors, including
quarterly variations in our operating results, economic
conditions of the airline industry generally or airline cargo
carriers specifically, general economic conditions or other
events and factors that are beyond our control.
In the past, following periods of significant volatility in the
overall market and in the market price of a companys
securities, securities class action litigation has been
instituted against these companies in some circumstances. If
this type of litigation were instituted against us following a
period of volatility in the market price for our common stock,
it could result in substantial costs and a diversion of our
managements attention and resources, which could have a
material adverse effect on our business, results of operations
and financial condition.
The
volatility of our stock could increase if or when a registration
statement is filed and becomes effective on behalf of our
largest stockholder.
HMC Atlas Air, L.L.C. and Harbinger Capital Partners Special
Situations Fund, L.P., (the Principal Holders) own
approximately 37.8% of our common stock as of March 1,
2007. We are required to file a shelf registration, using our
best efforts, with the SEC on behalf of the Principal Holders
covering all of the common shares owned by these entities in
mid-April 2007. We may also be required to file up to two
additional registration statements on behalf of the Principal
Holders in certain circumstances. The Principal Holders also
have piggyback registration rights in connection with certain
offerings of our common stock. Filing a shelf registration
statement for the Principal Holders could have an adverse impact
on the price of our common stock due to the large number of
shares required to be registered and the possible sale of these
shares over the effectiveness of the registration statement (up
to a three-year period).
21
We
have not paid cash dividends and do not expect to pay dividends
in the future, which means that our stockholders may not be able
to realize the value of our common stock except through sale. In
addition, certain of our financing arrangements contain
financial covenants that limit our ability to pay
dividends.
We have never declared or paid cash dividends. We expect to
retain earnings for our business and do not anticipate paying
dividends on our common stock at any time in the foreseeable
future. Because we do not anticipate paying dividends in the
future, a sale of shares likely is the only opportunity our
stockholders will have to realize the value of their investment
in our common stock. In addition, certain of our financing
arrangements contain financial covenants that limit our ability
to pay dividends.
Provisions
in our restated certificate of incorporation and by-laws and
Delaware law might discourage, delay or prevent a change in
control of our company and, therefore, depress the trading price
of our common stock.
Provisions of our restated certificate of incorporation and
by-laws and Delaware law may discourage, delay or prevent a
merger, acquisition or other change in control, which
stockholders may consider favorable, including transactions in
which a shareholder might otherwise receive a premium for your
shares of common stock. These include the following:
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the ability of our board of directors to designate the terms of,
and issue new series of, preferred stock without stockholder
approval;
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the ability of our board of directors to make, alter or repeal
our by-laws;
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the inability of stockholders to act by written consent or to
call special meetings of stockholders; and
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advance notice requirements for stockholder proposals and
director nominations.
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Except for the provision dealing with the issuance of new series
of preferred stock, the affirmative vote of at least two thirds
of our shares of capital stock entitled to vote is necessary to
amend or repeal the above provisions. In addition, absent
approval of our board of directors, our by-laws may only be
amended or repealed by the affirmative vote of at least two
thirds of our shares entitled to vote.
In addition, Section 203 of the Delaware General
Corporation Law prohibits a publicly-traded Delaware corporation
from engaging in a business combination with an interested
stockholder, generally a person which together with its
affiliates owns, or within the last three years had owned, 15%
of our voting stock, for a period of three years after the date
of the transaction in which the person became an interested
stockholder, unless the business combination is approved in a
prescribed manner.
The existence of the above provisions could limit the price that
investors might be willing to pay in the future for shares of
our common stock. They could also deter potential acquirers of
us, thereby reducing the likelihood that a shareholder could
receive a premium for owned common stock in an acquisition.
|
|
ITEM 1B.
|
UNRESOLVED
STAFF COMMENTS
|
None.
Aircraft
Owned and leased aircraft at December 31, 2006 include the
following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
|
|
|
Operating
|
|
|
|
|
|
Average
|
|
Aircraft Type
|
|
Owned
|
|
|
Leased
|
|
|
Leased
|
|
|
Total
|
|
|
Age Years
|
|
|
747-200
|
|
|
13
|
|
|
|
3
|
|
|
|
1
|
|
|
|
17
|
|
|
|
27.1
|
|
747-300
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
21.1
|
|
747-400
|
|
|
6
|
|
|
|
|
|
|
|
14
|
|
|
|
20
|
|
|
|
6.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
20
|
|
|
|
3
|
|
|
|
15
|
|
|
|
38
|
|
|
|
16.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22
Lease expirations for our operating leased aircraft included in
the above table range from October 2010 to February 2025. Three
of the owned
747-400
aircraft are dry leased to a 49% owned affiliate and two of the
747-200s
under capital lease are dry-leased to unaffiliated third parties.
Ground
Facilities
Our principal office is located at 2000 Westchester Avenue,
Purchase, New York, where we lease 140,000 square feet
under a long-term lease that expires in 2012. Polar leases
6,878 square feet of office space in Long Beach,
California, pursuant to a lease that is set to expire in
November 2009. These offices include both operational and
administrative support functions, including flight and crew
operations, maintenance and engineering, material management,
human resources, legal, sales and marketing, financial,
accounting and information technology.
Polar rents 170,000 square feet in Prestwick, Scotland
under a long-term lease that expires in July 2010 for our
maintenance activities. Atlas also leases 40,000 square
feet at the Amsterdam Airport for maintenance and storage
purposes. In October 2006, Atlas began leasing
25,000 square feet of space off airport at JFK Airport in
Queens, New York for aircraft spare part storage.
|
|
ITEM 3.
|
LEGAL
PROCEEDINGS
|
The information required in response to this Item is set forth
in Note 12 to our Financial Statements, and such
information is incorporated herein by reference. Such
description contains all of the information required with
respect hereto.
|
|
ITEM 4.
|
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
|
No matters were submitted to a vote of the Companys
security holders during the last quarter of its fiscal year
ended December 31, 2006.
Executive
Officers of the Registrant
The following is a list of the names, ages and background of our
current executive officers:
William J. Flynn. Mr. Flynn, age 53, has been
our President and Chief Executive Officer since June 22,
2006 and has been a member of our Board since May 2006. Prior to
joining us, Mr. Flynn served as President and Chief
Executive Officer of GeoLogistics Corporation since 2002.
Mr. Flynn was initially recruited in 2002 to lead that
companys turnaround to profitability and was asked to
remain as President and Chief Executive Officer when PWC
Logistics acquired GeoLogistics Corporation in 2005.
Mr. Flynn also joined the Executive Management Committee of
PWC Logistics in 2005. Prior to his tenure at GeoLogistics
Corporation, from 2000 until 2002, Mr. Flynn served as
Senior Vice President to the Merchandise Service Group of CSX
Transportation, Inc., the operating unit serving the traditional
rail shippers of CSX Transportation, Inc, one of the largest
Class 1 railroads operating in the U.S. Mr. Flynn
is also a director of Allied Waste Industries, Inc. and Horizon
Lines, Inc. Mr. Flynn holds a Bachelors degree, summa
cum laude, in Latin American studies from the University of
Rhode Island and a Masters degree in the same field from the
University of Arizona.
John W. Dietrich. Mr. Dietrich,
age 42, was elected Executive Vice President and Chief
Operating Officer in September 2006. Prior thereto,
Mr. Dietrich was a Senior Vice President from February
2004, and in 2003, he was named Vice President and General
Counsel and also assumed overall responsibility for our Human
Resources and Corporate Communications functions. In 1999,
Mr. Dietrich joined Atlas as Associate General Counsel.
From 1992 to 1999, Mr. Dietrich was a litigation attorney
at United Airlines, providing legal counsel to all levels of
management, particularly on employment and commercial litigation
issues. Mr. Dietrich attended Southern Illinois University
and received his Juris Doctorate, cum laude, from John
Marshall Law School. He is a member of the New York, Illinois
and Colorado Bars.
Michael L. Barna. Mr. Barna, age 46,
was elected Senior Vice President and Chief Financial Officer in
April 2005. Prior to joining us, Mr. Barna served as
Partner, Managing Director and member of the Executive Committee
of Trafin Corporation, a finance company specializing in
receivables financing and securitization,
23
since August 2004. Prior to his tenure at Trafin Corporation,
Mr. Barna was employed at GE Capital Corporation for
15 years. From 2000 to December 2003, Mr. Barna served
as Executive Vice President of GE Capital Aviation
Services, where he led global strategic planning, operational
re-engineering and
e-commerce
planning. From 1997 to 2000, he was Managing Director of GE
Capital Markets Services, developing and managing the execution
of global capital markets strategies for GE Capital businesses.
From 1988 to 1996, Mr. Barna was employed by GE Capital
Structured Finance Group, rising to the position of Vice
President and Manager, where he executed leveraged transactions
for industrial entities. Mr. Barna holds a Bachelor of
Science degree in chemical engineering from the Pennsylvania
State University and an MBA from Columbia University.
Adam R. Kokas. Mr. Kokas, age 35,
was elected Senior Vice President, General Counsel and Secretary
in October 2006. Mr. Kokas joined us from Ropes &
Gray LLP, where he was a partner in their Corporate Department,
focusing on general corporate, securities and business law
issues. Prior to joining Ropes & Gray, Mr. Kokas
was a partner at Kelley Drye & Warren LLP, where he was
an associate since 2001. At both Kelley Drye and
Ropes & Gray, Mr. Kokas has represented us in a
variety of matters, including corporate finance transactions,
corporate governance matters, strategic alliances, securities
matters, and other general corporate issues. Mr. Kokas
earned his bachelors degree from Rutgers University, and
is a cum laude graduate of the Boston University School
of Law, where he was an Edward M. Hennessey scholar.
Mr. Kokas is a member of the New York and New Jersey Bars.
Ronald A. Lane. Mr. Lane, age 57,
was elected Senior Vice President and Chief Marketing Officer in
April 2003. He is responsible for all global sales and marketing
efforts at Atlas and Polar. From 2000 to 2003, Mr. Lane
served as Chief Marketing Officer of Polar. From 1973 to 2000,
Mr. Lane was employed with Evergreen International Aviation
and its subsidiaries, rising to the position of Vice Chairman.
Mr. Lane received his bachelors degree in Business
from Oregon State University.
William C. Bradley. Mr. Bradley,
age 46, has been Vice President and Treasurer since July
2002. He is responsible for capital market and corporate finance
activities and banking, cash management, insurance, hedging and
investor-relations activities. From 1993 to 2002,
Mr. Bradley served as Vice President and Assistant
Treasurer and head of the Financial Planning and Business
Analysis Department at Viacom Inc. Mr. Bradley received a
bachelors degree in International Affairs from Lafayette
College and a masters degree in International Affairs,
with a specialization in International Business, from Columbia
University.
Jason Grant. Mr. Grant, age 35, was
elected Vice President Financial Planning and
Analysis in May 2006 and was named Vice President
Continuous Improvements in August 2006. Prior to May 2006,
Mr. Grant was a Staff Vice President responsible for our
consolidated budget, forecasting, capital planning and financial
analysis from December 2004. He joined us in 2002 and held
various finance and treasury positions before being named a
Staff Vice President. Prior to joining us, Mr. Grant was a
manager of the Financial Planning and Financial Analysis Groups
for American Airlines. Mr. Grant holds a bachelors
degree in business administration from Wilfrid Laurier
University and a masters degree from Simon Fraser
University in Canada.
James R. Cato. Mr. Cato, age 52, has
been Vice President of Flight Operations and Labor Relations for
both Atlas and Polar since May 2004. Mr. Cato joined us in
1999 as a consultant, serving as Atlas chief spokesperson
for the negotiations that led to its first collective bargaining
agreement with the Air Line Pilots Association. Mr. Cato
was named Vice President of Labor Relations for Atlas in
November 2000 and in 2003, assumed the additional
responsibilities of Vice President of Flight Operations for
Atlas and Vice President of Labor Relations for Polar.
Mr. Cato has more than two decades experience in the
airline industry, including positions at Continental Airlines
(during that carriers turnaround in the early
1990s), TWA and as a consultant for a number of airlines,
including Reno Air. Mr. Cato received his bachelors
degree and Juris Doctorate from the University of Kansas.
Gordon L. Hutchinson. Mr. Hutchinson,
age 48, was elected Vice President and Controller in May
2005. Mr. Hutchinson, a certified public accountant, served
as Corporate Controller and a member of the Pension Plan and
401(k) Committees of National Railroad Passenger Corporation, a
transportation and engineering construction company, from 2003
to 2005. From 2001 to 2003, he served as Chief Financial Officer
and
24
Corporate Secretary of MHI Communications, an advertising and
marketing communications agency, where he was responsible for
all financial operations. From 1999 to 2001, Mr. Hutchinson
was Vice President of Finance for Teligent, Inc., a domestic and
international wireless communication company, where he was
responsible for all reporting and analysis of financial results.
Mr. Hutchinson holds a bachelor of commerce degree from the
University of British Columbia and studied executive management
at the Richard Ivey School of Business at the University of
Western Ontario.
Executive Officers are elected by our Board of Directors, and
their terms of office continue until the next annual meeting of
the Board or until their successors are elected and have
qualified. There are no family relationships among our executive
officers.
PART II
|
|
ITEM 5.
|
MARKET
FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
|
Market
Information
Since May 31, 2006, our Common Stock has been traded on the
NASDAQ National Market under the symbol AAWW. Our
shares of common stock issued and outstanding prior to our
emergence from bankruptcy on July 27, 2004 (Old
Common Stock) had traded on the Pink Sheets under the
symbol AAWHQ.
On July 27, 2004, all then-outstanding shares of Old Common
Stock were cancelled and extinguished in accordance with the
Plan of Reorganization. Holders of Old Common Stock received no
distributions or other consideration for such shares. On or
about July 28, 2004, our Common Stock commenced trading on
the Pink Sheets on a when issued basis under the
symbol AAWWV.PK. On July 14, 2005, the
when issued designation (the V in the
trading symbol) was removed from the symbol, and our Common
Stock traded on the Pink Sheets (under the symbol
AAWW.PK) until our NASDAQ listing.
Market
Price of Common Stock
The following table sets forth the closing high and low sales
prices per share of our Common Stock for the periods indicated.
|
|
|
|
|
|
|
|
|
Successor
|
|
High
|
|
|
Low
|
|
|
2006 Quarter Ended
|
|
|
|
|
|
|
|
|
December 31
|
|
$
|
47.98
|
|
|
$
|
37.28
|
|
September 30
|
|
$
|
49.95
|
|
|
$
|
35.93
|
|
June 30
|
|
$
|
52.00
|
|
|
$
|
44.50
|
|
March 31
|
|
$
|
48.75
|
|
|
$
|
43.75
|
|
2005 Quarter Ended
|
|
|
|
|
|
|
|
|
December 31
|
|
$
|
45.00
|
|
|
$
|
30.00
|
|
September 30
|
|
$
|
35.75
|
|
|
$
|
30.00
|
|
June 30
|
|
$
|
35.50
|
|
|
$
|
24.00
|
|
March 31
|
|
$
|
32.50
|
|
|
$
|
26.25
|
|
The last reported sale price of our Common Stock on the NASDAQ
National Market on March 9, 2007 was $49.10 per share.
As of March 1, 2007, there were approximately
21.2 million shares of our Common Stock issued and
outstanding, and 247 holders of record of our Common Stock.
No repurchases of our Common Stock were made during the quarter
ended December 31, 2006.
25
Dividends
We have never paid a dividend with respect to our Common Stock,
nor do we expect to pay a dividend in the foreseeable future.
Moreover, certain of our financing arrangements contain
financial covenants that limit our ability to pay cash dividends.
Equity
Distribution pursuant to the Plan of Reorganization
The Plan of Reorganization along with a subsequent Bankruptcy
Court order authorized AAWW to distribute 20,200,000 shares
of Common Stock to creditors. As of December 31, 2006, a
total of 19,578,992 of such shares have been distributed and
621,008 shares are remaining to be issued. Remaining share
distributions to holders of general unsecured claims will take
place on a periodic basis, subject to court approval.
Additionally, pursuant to the Plan of Reorganization
2,772,559 shares of Common Stock have been reserved for
equity-based awards. As of December 31, 2006, a total of
2,163,648 shares have been awarded to our directors, senior
management and other employees under the Amended and Restated
2004 Long Term Incentive and Share Award Plan (the 2004
LTIP), comprised of 766,590 shares of restricted
stock and non-qualified stock options to purchase
1,397,058 shares of Common Stock.
Foreign
Ownership Restrictions
Under our by-laws, federal law and DOT regulations, we must be
controlled by U.S. citizens. In this regard, our President
and at least two-thirds of our Board and officers must be
U.S. citizens and not more than 25% of our outstanding
voting Common Stock may be held by
non-U.S. citizens.
We believe that during the period covered by this Report we were
in compliance with these requirements.
|
|
ITEM 6.
|
SELECTED
FINANCIAL DATA
|
The selected balance sheet data as of December 31, 2006 and
2005 (Successor Company) and the selected statement of
operations data for the years ended December 31, 2006 and
2005, and period July 28, 2004 through December 31,
2004 (Successor Company) and the period January 1, 2004
through July 27, 2004 have been derived from our audited
Financial Statements included elsewhere herein. The selected
balance sheet data as of December 31, 2004 (Successor) and
2003 and 2002 (Predecessor), and selected statement of
operations data for the years ended December 31, 2003 and
2002 (Predecessor Company), have been derived from our audited
Financial Statements not included herein.
The information provided below in operating expenses with
respect to aircraft rent, depreciation, interest expense and net
income for periods after July 27, 2004 were affected
materially by several factors which did not affect such items
for comparable periods during the first seven months of 2004 and
all of 2003 and 2002. In conjunction with our emergence from
bankruptcy, we applied the provisions of fresh-start accounting
effective as of July 27, 2004, at which time a new
reporting entity was deemed to have been created.
26
Fresh-start accounting required us to revalue our assets and
liabilities to estimated fair values at July 27, 2004 in a
manner similar to purchase accounting. Significant adjustments
included a downward revaluation of our owned aircraft fleet and
the recording of additional intangible assets (principally
related to our ACMI contracts). In addition, fair value
adjustments were recorded with respect to our debt and lease
agreements. In the following table, except for per share data,
all amounts are in thousands.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
Predecessor
|
|
|
|
|
|
|
|
|
|
For the Period
|
|
|
For the Period
|
|
|
|
|
|
|
|
|
|
For the Year
|
|
|
For the Year
|
|
|
July 28, 2004
|
|
|
January 1, 2004
|
|
|
For the Year
|
|
|
For the Year
|
|
|
|
Ended
|
|
|
Ended
|
|
|
through
|
|
|
through
|
|
|
Ended
|
|
|
Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
July 27,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues
|
|
$
|
1,476,330
|
|
|
$
|
1,617,897
|
|
|
$
|
679,294
|
|
|
$
|
735,367
|
|
|
$
|
1,383,651
|
|
|
$
|
1,178,095
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
1,324,030
|
|
|
|
1,424,597
|
|
|
|
612,319
|
|
|
|
758,066
|
|
|
|
1,389,580
|
|
|
|
1,202,249
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
152,300
|
|
|
|
193,300
|
|
|
|
66,975
|
|
|
|
(22,699
|
)
|
|
|
(5,929
|
)
|
|
|
(24,154
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before cumulative
effect of accounting change
|
|
$
|
59,781
|
|
|
$
|
73,861
|
|
|
$
|
22,710
|
|
|
$
|
28,246
|
|
|
$
|
(100,990
|
)
|
|
$
|
(98,369
|
)
|
Cumulative effect of accounting
change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
44,556
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
59,781
|
|
|
$
|
73,861
|
|
|
$
|
22,710
|
|
|
$
|
28,246
|
|
|
$
|
(100,990
|
)
|
|
$
|
(53,813
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per Share Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before cumulative
effect of accounting change
|
|
$
|
2.89
|
|
|
$
|
3.64
|
|
|
$
|
1.12
|
|
|
$
|
0.74
|
|
|
$
|
(2.63
|
)
|
|
$
|
(2.57
|
)
|
Cumulative effect of accounting
change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
2.89
|
|
|
$
|
3.64
|
|
|
$
|
1.12
|
|
|
$
|
0.74
|
|
|
$
|
(2.63
|
)
|
|
$
|
(1.41
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares
outstanding during the period
|
|
|
20,672
|
|
|
|
20,280
|
|
|
|
20,210
|
|
|
|
38,378
|
|
|
|
38,360
|
|
|
|
38,210
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before cumulative
effect of accounting change
|
|
$
|
2.83
|
|
|
$
|
3.56
|
|
|
$
|
1.11
|
|
|
$
|
0.74
|
|
|
$
|
(2.63
|
)
|
|
$
|
(2.57
|
)
|
Cumulative effect of accounting
change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
2.83
|
|
|
$
|
3.56
|
|
|
$
|
1.11
|
|
|
$
|
0.74
|
|
|
$
|
(2.63
|
)
|
|
$
|
(1.41
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares and
equivalents outstanding during the period
|
|
|
21,100
|
|
|
|
20,738
|
|
|
|
20,405
|
|
|
|
38,378
|
|
|
|
38,360
|
|
|
|
38,210
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
Predecessor
|
|
|
|
|
|
|
|
|
|
For the Period
|
|
|
For the Period
|
|
|
|
|
|
|
|
|
|
For the Year
|
|
|
For the Year
|
|
|
July 28, 2004
|
|
|
January 1, 2004
|
|
|
For the Year
|
|
|
For the Year
|
|
|
|
Ended
|
|
|
Ended
|
|
|
through
|
|
|
through
|
|
|
Ended
|
|
|
Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
July 27,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
Financial Position
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,119,780
|
|
|
$
|
1,180,810
|
|
|
$
|
1,142,196
|
|
|
|
|
|
|
$
|
1,400,607
|
|
|
$
|
1,530,839
|
|
Long-term debt (less current
portion)
|
|
$
|
398,885
|
|
|
$
|
529,742
|
|
|
$
|
602,985
|
|
|
|
|
|
|
$
|
*
|
|
|
$
|
*
|
|
Stockholders equity (deficit)
|
|
$
|
472,843
|
|
|
$
|
357,905
|
|
|
$
|
277,962
|
|
|
|
|
|
|
$
|
(28,282
|
)
|
|
$
|
71,483
|
|
Cash dividends declared per common
share
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
* |
|
For the years ended 2003 and 2002, long term debt of
$909.1 million and $812.0 million were reclassified to
current liabilities as a result of our defaults on our debt. |
|
|
ITEM 7.
|
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION
|
The following discussion relates to AAWW and its wholly owned
subsidiaries, including Atlas and Polar. In this Report,
references to we, our and us
are references to AAWW and its subsidiaries, as applicable.
Business
Overview
Our principal business is aircraft operations outsourcing, with
a focus in wide-body freighter operations. We operate aircraft
on behalf of airlines, freight forwarders and the
U.S. Military, as well as for our own account. Our primary
services are:
|
|
|
|
|
ACMI, where we provide our customers aircraft operations
outsourcing including aircraft, crew, maintenance and insurance;
|
|
|
|
Scheduled Service, where we provide freight forwarders and other
shippers with outsourced scheduled
airport-to-airport
cargo services;
|
|
|
|
AMC Charters, where we provide air cargo services to the
U.S. Military; and
|
|
|
|
Commercial Charters, where we provide all-inclusive cargo
aircraft charters;
|
|
|
|
Dry Leasing aircraft to aircraft operators with or without any
other support services.
|
In our ACMI business, we are paid a fixed hourly rate for the
time the aircraft is operated or a minimum contractual rate when
hour activity falls below minimum guaranteed levels. All other
direct operating expenses, such as aviation fuel, landing fees
and ground handling costs, are absorbed by the customer, who
also bears the commercial risk of Load Factor and Yield. Our
ACMI contracts typically have terms ranging from several months
to five years. At December 31, 2006, the terms of our
existing ACMI contracts ranged from 3 months to
4.3 years, and the average remaining length of our ACMI
contracts is 20.3 months. We measure the performance of our
ACMI business in terms of revenue per Block Hour and FAC. FAC is
also used to analyze the profitability and contribution to net
income or loss of our other business segments.
We operate
airport-to-airport
specific routes on a specific schedule, and customers pay to
have their freight carried on that route and schedule. Our
scheduled all-cargo network serves four principal economic
regions: North America, South America, Asia and Europe. We offer
access to Japan through route and operating rights at
Tokyos Narita Airport and, as of December 2, 2004, to
the Peoples Republic of China through route and operating
rights at Shanghais Pudong Airport. The DOT awarded us an
additional four frequencies (for service between the United
States and China) effective in March 2007 (bringing the total
frequencies to 16). We intend to operate these incremental
frequencies in the future. As of December 31,
28
2006, our Scheduled Services operation provides 18 daily
departures to 15 different cities in 10 countries across four
continents. Our Scheduled Service business is designed to
provide:
|
|
|
|
|
prime time arrivals and departures on key days of consolidation
for freight forwarders and shippers; and
|
|
|
|
connection or through-service between economic regions to
achieve higher overall unit revenues.
|
The Scheduled Service business is complementary with the AMC and
Commercial Charter operations as we are able to coordinate the
operations to minimize the impact of directional demand
imbalance, especially on trans-Pacific flight segments.
Our Scheduled Service business experiences both Load Factor and
Yield risk. We measure performance of our Scheduled Service
business in terms of Yield, RATM and FAC.
Our AMC Charter business continues to be profitable but we have
limited visibility into long-term demand. AMC Charter revenues
are driven by the rate per flown mile. The AMC Charter rate is
set by the U.S. Government in October of each year, based
on an audit of AMC carriers and an assumed fuel price. Block
Hours are difficult to predict and are subject to certain
minimum levels set by the U.S. Government. We bear the
direct operating costs of AMC Charter flights, but the price of
fuel consumed in AMC operations is fixed at the annual agreed
upon rate. We measure performance of our AMC Charter business in
terms of revenue per Block Hour and FAC.
Our Commercial Charter business provides full-planeload
airfreight capacity on one or multiple flights to freight
forwarders, airlines and other air cargo customers. The revenue
associated with our Commercial Charter business is contracted in
advance of the flight, and, as with Scheduled Service, we bear
the direct operating costs (except as otherwise agreed in the
applicable contracts).
Our Commercial Charter business complements our ACMI and
Scheduled Service businesses by:
|
|
|
|
|
providing dedicated aircraft to meet the global demands of our
freight customers;
|
|
|
|
enabling the performance of extra flights to respond to peak
season demand; and
|
|
|
|
diversifying revenue streams.
|
We measure performance of our Commercial Charter businesses in
terms of revenue per Block Hour and FAC.
Business
Strategy and Outlook
We are the leading global provider of outsourced aircraft
operations and related services, with operations in Asia, the
South Pacific, the Middle East, Africa, Europe, South America
and North America. Our strategy is to create exceptional value
by providing our customers a combination of highly reliable and
proven aircraft, a large fleet and scale and scope of our
network and operations. We provide flexibility to meet customer
aircraft requirements, high-quality operations, and a track
record for handling valuable cargo in a safe and timely manner.
We achieve this through:
|
|
|
|
|
Continuous improvement which improves our service quality and
reduces our cost of service;
|
|
|
|
Proactive asset management to maximize returns and minimize the
risk of our asset portfolio; and
|
|
|
|
Development of new and enhanced service offerings to provide
value to our customers.
|
After studying several different types of aircraft that would
serve as the anchor of the Companys fleet over the next
two decades, on September 8, 2006, Atlas and Boeing
announced that they entered into an agreement providing for the
purchase by Atlas of 12 Boeing
747-8F
freighter aircraft. The agreement provides for deliveries of the
aircraft to begin in 2010, with all 12 aircraft expected to be
in service by the end of 2011. In addition, the Agreement
provides Atlas with rights to purchase up to an additional 14
Boeing aircraft at fixed prices, of which one is being held
under option. The purchase of the
747-8F
freighter aircraft
29
complements our position as the leading provider of
747-400F
freighter aircraft serving the ACMI market. The
747-8F
freighter has an improved wing design and the new General
Electric GENX engines allows the aircraft to have 16% more cargo
capacity and 16% lower fuel costs per ton, resulting in a 14%
lower
ton-mile
cost compared to the
747-400F.
The 747-8F
also has 16% more payload capacity compared to the
747-400F.
Its larger airframe increases standard pallet capacity, while
maintaining customer preferred nose-door loading capability.
Cost efficiencies are expected to be achieved through the
extended maintenance time intervals on the
747-8F,
common pilot-type and 70% parts commonality with the
747-400F. As
a launch customer, we believe this aircraft is an ideal fit for
executing our long-term strategy that is focused on our ACMI and
ACMI-like businesses. Because its increased capacity and
anticipated reduced operating expenses surpass those of the
industry standard, the
747-400F, we
feel the
747-8F
represents an attractive value proposition to our existing and
prospective customers. We believe that the positive attributes
of the
747-8F will
provide a price premium in the market. We also believe that the
747-400F
will continue to experience strong demand in the market.
After our emergence from bankruptcy, we began to implement key
initiatives of our strategy and in late 2005, we announced a
Continuous Improvement program that, if successfully
implemented, could benefit our operating performance by more
than $100 million. Our 2006 performance included
approximately $22.5 million in benefits from these cost-
saving initiatives, primarily in the fourth quarter. The
majority of the benefits are likely to be realized in 2007 and
the balance in 2008.
Benefits are expected to be generated from increased service
reliability and cost savings, including: enhanced employee and
operating efficiency to achieve lower per-Block Hour crew costs;
strengthened fuel management practices; enhanced processes for
managing aircraft maintenance and improved procurement policies
and procedures.
Also, effective March 2006, Atlas received approval from the FAA
to operate its fleet of Boeing
747-400Fs
under a revised maintenance program, which is expected to lower
future maintenance expense.
Our fleet asset management strategy is currently focused on
phasing out the older aircraft in our fleet and replacing them
with new, cost-effective, leading-edge aircraft. We have sold
three Boeing
747-200 and
one Boeing
747-100
aircraft and we have entered into
sub-leases
for two classic aircraft that had ceased flying as of
June 30, 2006. In response to this fleet reduction, we have
made corresponding reductions in our crew and ground staffing
levels.
Our Scheduled Service business is seasonal. Our FAC for the 2006
commercial peak season, which generally runs from September
through mid-December, was stronger compared to the peak season
in 2005. Aviation fuel is a significant operating cost in our
Scheduled Service business. During the twelve months ended
December 31, 2006, the average price per gallon for
non-AMC
aviation fuel was 207 cents, an increase of 11.3% over the
average price of 186 cents per gallon during the same period in
2005.
As noted above, PACW and DHL have entered into a stock purchase
agreement, whereby DHL will acquire a 49% equity interest
(including a 25% voting interest) in PACW for $150 million
in cash. The stock purchase agreement also contemplates the
parties entering into a
20-year
blocked space agreement (subject to early termination at five
year intervals) under which DHL will become a long-term anchor
customer of Holdings. The stock purchase and related agreements
combine DHLs leading position in Asia with Polars
cargo capacity and unique access to
US-to-Asia
routes. The contemplated business arrangements between the
parties helps to mitigate the commercial risks associated with
our Scheduled Service business and will provide a
$3.5 billion contractual revenue stream to Atlas entities
over a
20-year
period.
AMC flying operated at reduced levels in 2006. While AMC was a
significant contributor to our 2006 business activity, AMC Block
Hours in 2006 did not equal 2005 levels. Beginning
October 1, 2006, for the AMC contract year, which runs to
September 30, 2007, our base rate per Block Hour, excluding
fuel costs, increased in excess of 5.0% and the pegged price for
fuel increased to 225 cents.
We believe we are well-positioned to take advantage of potential
earnings growth opportunities that may arise in 2007 and beyond.
This will be achieved through international trade growth,
especially in Asian origin trade lanes where we operate;
focusing on Continuous Improvement initiatives, a majority of
which are
30
expected to be realized by year-end 2007 and which are expected
to generate approximately $70 million in annualized cost
savings in 2007; the landmark strategic partnership with DHL,
with commercial agreements expected to begin no later than
October 2008 or sooner; and our
747-8F
aircraft, which are expected to become part of our operating
fleet in 2010 and 2011. We may pursue other growth opportunities
over the next several years, including, but not limited to,
strategic acquisitions; expanding into emerging markets with new
customers and emerging North-South routes; possible utilization
of different freighter aircraft types to service niche markets;
and possible expansion of current dry leasing activities.
Results
of Operations
The following discussion should be read in conjunction with our
Financial Statements and the Notes thereto included elsewhere
herein.
Years
Ended December 31, 2006 and 2005
Operating
Statistics
The table below sets forth selected operating data for the years
ended December 31, (in thousands unless otherwise
indicated):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase/
|
|
|
Percent
|
|
|
|
2006
|
|
|
2005
|
|
|
(Decrease)
|
|
|
Change
|
|
|
Block Hours
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ACMI
|
|
|
67,666
|
|
|
|
83,682
|
|
|
|
(16,016
|
)
|
|
|
(19.1
|
)%
|
Scheduled service
|
|
|
39,446
|
|
|
|
37,175
|
|
|
|
2,271
|
|
|
|
6.1
|
%
|
AMC charter
|
|
|
19,954
|
|
|
|
29,306
|
|
|
|
(9,352
|
)
|
|
|
(31.9
|
)%
|
Commercial charter
|
|
|
5,450
|
|
|
|
6,257
|
|
|
|
(807
|
)
|
|
|
(12.9
|
)%
|
Non revenue / other
|
|
|
745
|
|
|
|
839
|
|
|
|
(94
|
)
|
|
|
(11.2
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Block Hours
|
|
|
133,261
|
|
|
|
157,259
|
|
|
|
(23,998
|
)
|
|
|
(15.3
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue Per Block
Hour
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ACMI
|
|
$
|
6,016
|
|
|
$
|
5,569
|
|
|
$
|
447
|
|
|
|
8.0
|
%
|
AMC charter
|
|
|
16,376
|
|
|
|
15,036
|
|
|
|
1,340
|
|
|
|
8.9
|
%
|
Commercial charter
|
|
|
15,194
|
|
|
|
17,235
|
|
|
|
(2,041
|
)
|
|
|
(11.8
|
)%
|
Scheduled Service
Traffic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RTMs
|
|
|
1,475,353
|
|
|
|
1,414,865
|
|
|
|
60,488
|
|
|
|
4.3
|
%
|
ATMs
|
|
|
2,322,024
|
|
|
|
2,155,127
|
|
|
|
166,897
|
|
|
|
7.7
|
%
|
Load Factor
|
|
|
63.5
|
%
|
|
|
65.7
|
%
|
|
|
(2.2
|
) pts
|
|
|
(3.2
|
)%
|
RATM
|
|
$
|
0.263
|
|
|
$
|
0.258
|
|
|
$
|
0.005
|
|
|
|
1.9
|
%
|
Yield
|
|
$
|
0.414
|
|
|
$
|
0.393
|
|
|
$
|
0.021
|
|
|
|
5.3
|
%
|
Fuel
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Scheduled Service and
Commercial Charter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average fuel cost per gallon***
|
|
$
|
2.07
|
|
|
$
|
1.86
|
|
|
$
|
0.21
|
|
|
|
11.3
|
%
|
Fuel gallons consumed (000s)
|
|
|
149,674
|
|
|
|
147,518
|
|
|
|
2,156
|
|
|
|
1.5
|
%
|
AMC
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average fuel cost per gallon
|
|
$
|
2.21
|
|
|
$
|
1.59
|
|
|
$
|
0.62
|
|
|
|
39.0
|
%
|
Fuel gallons consumed (000s)
|
|
|
65,134
|
|
|
|
99,101
|
|
|
|
(33,967
|
)
|
|
|
(34.3
|
)%
|
Fleet
(average during the
period)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aircraft count*
|
|
|
35.1
|
|
|
|
39.0
|
|
|
|
(3.9
|
)
|
|
|
(10.0
|
)%
|
Out of service**
|
|
|
2.0
|
|
|
|
0.4
|
|
|
|
1.6
|
|
|
|
400.0
|
%
|
Dry leased**
|
|
|
3.4
|
|
|
|
3.0
|
|
|
|
0.4
|
|
|
|
13.3
|
%
|
31
|
|
|
* |
|
Includes tail number N92IFT which was not part of the operating
fleet at December 31, 2005 and was sold in early 2006. |
|
** |
|
Dry leased and
out-of-service
(including held for sale) aircraft are not included in the
operating fleet average aircraft count. |
|
*** |
|
Includes all into plane costs. |
Operating
Revenues
The following table compares our operating revenues for the
years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
Percent
|
|
|
|
2006
|
|
|
2005
|
|
|
(Decrease)
|
|
|
Change
|
|
|
Operating Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ACMI
|
|
$
|
407,046
|
|
|
$
|
466,018
|
|
|
$
|
(58,972
|
)
|
|
|
(12.7
|
)%
|
Scheduled service
|
|
|
610,783
|
|
|
|
555,814
|
|
|
|
54,969
|
|
|
|
9.9
|
%
|
AMC charter
|
|
|
326,773
|
|
|
|
440,642
|
|
|
|
(113,869
|
)
|
|
|
(25.8
|
)%
|
Commercial charter
|
|
|
82,808
|
|
|
|
107,840
|
|
|
|
(25,032
|
)
|
|
|
(23.2
|
)%
|
Other revenue
|
|
|
48,920
|
|
|
|
47,583
|
|
|
|
1,337
|
|
|
|
2.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues
|
|
$
|
1,476,330
|
|
|
$
|
1,617,897
|
|
|
$
|
(141,567
|
)
|
|
|
(8.8
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ACMI revenue decreased primarily due to lower Block
Hours, partially offset by an increase in Revenue per Block
Hour. ACMI Block Hours were 67,666 for 2006, compared with
83,682 for 2005, a decrease of 16,016, or 19.1%. Revenue per
Block Hour was $6,016 for 2006, compared with $5,569 for 2005,
an increase of $447 per Block Hour, or 8.0%. The increase
in rate per Block Hour reflects higher proportional Boeing
747-400
usage in this segment as well as contractual rate increases and
higher renewal rates on ACMI leases. The reduction in Block
Hours is the result of our sale or dry lease of aircraft that
had previously operated in the Boeing
747-200 ACMI
market. Total aircraft supporting ACMI, excluding aircraft dry
leased to our joint venture, as of December 31, 2006 were
two Boeing
747-200
aircraft and ten Boeing
747-400
aircraft, compared with seven Boeing
747-200
aircraft and ten Boeing
747-400
aircraft supporting the ACMI business at December 31, 2005.
Scheduled service revenue increased primarily due to
higher Yields, and Block Hours offset by a slight decrease in
Load Factor. The increase in Yield is partially attributable to
the increase in rates reflecting higher fuel prices. The
increase in capacity is the result of the additional weekly
frequencies to China that were granted in 2005 and began flying
in March of 2006. The decrease in Load Factor was partially the
result of an increase in the percentage of flights operated on a
round-trip basis across the Pacific in 2006. We had a reduction
in one-way AMC positioning flights in 2006 which caused an
increase in the number of west-bound Scheduled Service
positioning flights across the Pacific. Average Load Factor on
west-bound flights into Asia is much lower than east-bound
flights out of Asia. RTMs in the Scheduled Service segment were
1,475 million on a total capacity of 2,322 million
ATMs in 2006, compared with RTMs of 1,415 million on a
total capacity of 2,155 million ATMs in 2005. Load Factor
was 63.5% with a Yield of $0.414 in 2006, compared with a Load
Factor of 65.7% and a Yield of $0.393 in 2005. RATM in our
Scheduled Service segment was $0.263 in 2006, compared with
$0.258 in 2005, representing an improvement of 1.9%. The
increase in ATMs and RTMs largely reflects the impact of a labor
disruption that ended in early October 2005, as well as an
increase in weekly frequencies to China (12 versus 9), Europe
and South America. While we believe that both the 2006 and 2005
periods were affected by increases in fuel surcharges, we cannot
quantify these increases due to system limitations.
AMC charter revenue decreased primarily due to lower
volume of AMC Charter flights offset by an increase in AMC
Charter rates. AMC Charter Block Hours were 19,954 for 2006,
compared with 29,306 for 2005, a decrease of 9,352, or 31.9%.
Revenue per Block Hour was $16,376 for 2006, compared with
$15,036 for 2005, an increase of $1,340 per Block Hour, or
8.9%. The decrease in AMC Charter activity was the result of an
overall reduction in the U.S. Militarys heavy lift
requirements and a reduction in the amount of
32
expansion business received due to increased capacity from
competing teams. The increase in rate was in part a function of
an increase in the pegged rate for AMC fuel, which was 220 cents
for the first three quarters of 2006 and 225 cents for the
fourth quarter of 2006 compared with 140 cents for the first
three quarters of 2005 and 220 cents for the fourth quarter of
2005.
Commercial charter revenue decreased primarily as a
result of a decrease in Revenue per Block Hour and lower Block
Hours. Commercial Charter Block Hours were 5,450 for 2006,
compared with 6,257 for 2005, a decrease of 807, or 12.9%.
Revenue per Block Hour was $15,194 for 2006, compared with
$17,235 for 2005, a decrease of $2,041 per Block Hour, or
11.8%. The decrease in Revenue per Block Hour during the year is
partly the result of fewer return trips from one-way AMC
missions and more westbound Asia-Pacific flights which generally
have a lower rate per Block Hour.
Total operating revenue decreased as a result of lower ACMI and
AMC Block Hours offset by an increase in Scheduled Service Block
Hours and Yield.
Operating
Expenses
The following table compares our operating expenses for the
years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
Percent
|
|
|
|
2006
|
|
|
2005
|
|
|
(Decrease)
|
|
|
Change
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aircraft fuel
|
|
$
|
454,675
|
|
|
$
|
432,367
|
|
|
$
|
22,308
|
|
|
|
5.2
|
%
|
Salaries, wages and benefits
|
|
|
243,724
|
|
|
|
244,509
|
|
|
|
(785
|
)
|
|
|
(0.3
|
)%
|
Maintenance, materials and repairs
|
|
|
144,132
|
|
|
|
233,614
|
|
|
|
(89,482
|
)
|
|
|
(38.3
|
)%
|
Aircraft rent
|
|
|
153,259
|
|
|
|
150,879
|
|
|
|
2,380
|
|
|
|
1.6
|
%
|
Ground handling and airport fees
|
|
|
75,088
|
|
|
|
71,735
|
|
|
|
3,353
|
|
|
|
4.7
|
%
|
Landing fees and other rent
|
|
|
68,174
|
|
|
|
80,054
|
|
|
|
(11,880
|
)
|
|
|
(14.8
|
)%
|
Depreciation and amortization
|
|
|
42,341
|
|
|
|
46,336
|
|
|
|
(3,995
|
)
|
|
|
(8.6
|
)%
|
Gain on disposal of aircraft
|
|
|
(10,038
|
)
|
|
|
(7,820
|
)
|
|
|
2,218
|
|
|
|
28.4
|
%
|
Travel
|
|
|
49,910
|
|
|
|
60,089
|
|
|
|
(10,179
|
)
|
|
|
(16.9
|
)%
|
Pre-petition and post-emergence
costs and related professional fees
|
|
|
353
|
|
|
|
3,706
|
|
|
|
(3,353
|
)
|
|
|
(90.5
|
)%
|
Other
|
|
|
102,412
|
|
|
|
109,128
|
|
|
|
(6,716
|
)
|
|
|
(6.2
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
$
|
1,324,030
|
|
|
$
|
1,424,597
|
|
|
$
|
(100,567
|
)
|
|
|
(7.1
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aircraft fuel expense increased as a result of the
increase in fuel prices offset in part by a decrease in fuel
consumption in the AMC business due to lower Block Hours. The
average fuel price per gallon for the Scheduled Service and
Commercial Charter businesses was approximately 207 cents for
2006, compared with approximately 186 cents for 2005, an
increase of 21 cents, or 11.3% and a 2.2 million gallon, or
1.5% increase in fuel consumption to 149.7 million gallons
for 2006 from 147.5 million gallons for 2005 as a result of
increased Block Hours. The average fuel price per gallon for the
AMC business was approximately 221 cents for 2006, compared with
approximately 159 cents for 2005, an increase of 62 cents, or
39.0%, partially offset by a 34.0 million gallon, or 34.3%
decrease in fuel consumption to 65.1 million gallons for
2006 from 99.1 million gallons for 2005. The decrease in
our AMC fuel consumption corresponds to the decrease of 9,352
Block Hours from 29,306 in 2005 to 19,954 in 2006. We do not
incur fuel expense in our ACMI service as the cost of fuel is
borne by the customer.
Salaries, wages and benefits decreased as a result of a
reduction in crew salaries related to the reduction in the
operating fleet and Block Hours offset by a one time severance
package related to the departure of the former CEO, search costs
related to hiring our new CEO and the expensing of stock options
of $2.8 million for management, crew and other employees
under Statement of Financial Accounting Standards
(SFAS) No. 123 (revised 2004), Share Based
Payment, (SFAS 123R) for 2006.
33
Maintenance materials and repairs decreased primarily as
a result of fewer C and D Checks and engine overhauls. There
were seven C Checks on Boeing
747-200
aircraft in 2006, compared with 12 C Checks on Boeing
747-200
aircraft during 2005. There were three D Checks on Boeing
747-200
aircraft for 2006 compared with five D Checks on Boeing
747-400
aircraft and three D Checks on Boeing
747-200
aircraft for 2005. There were 35 engine overhauls for 2006,
compared with 67 events for 2005. In addition, the reduction in
maintenance costs results from lower Block Hours during 2006 and
the absence of A/B Checks related to aircraft that we are
parking or have sold. We have also had improvements in the
average cost of heavy airframe checks as a result of our cost
savings initiatives.
Aircraft rent increased slightly due to the increase in
re-accommodated air transportation on other freight carriers.
Ground handling and airport fees increased primarily due
to an increase in the Scheduled Service business, the primary
user of such services.
Landing fees and other rent decreased primarily due to a
reduction in AMC Block Hours.
Depreciation and amortization decreased primarily due to
a $6.6 million decrease in amortization of intangibles as a
result of the substantial reduction in the related intangibles
due to the utilization of pre-emergence tax loss carryforwards
(see Note 9 to our Financial Statements). The decrease in
amortization is partially offset by an increase of
$3.7 million related to the scrapping of rotable parts that
are beyond economic repair.
Gain on disposal of aircraft was the result of the sale
of aircraft tail numbers N858FT, N921FT, N509MC, and N534MC in
2006 (see Note 3 to our Financial Statements) compared with
the insurance gain on the disposition of aircraft tail number
N808MC in 2005 (see Note 4 to our Financial Statements).
Travel decreased primarily due to a reduction in crew
travel related to the decrease in total Block Hours and improved
efficiency in crew scheduling becoming effective for the second
half of 2006.
Pre-petition and post-emergence costs and related
professional fees decreased due to the winding down of the
claims reconciliation process related to the bankruptcy
proceedings.
Other operating expenses decreased slightly primarily due
to a decrease in professional fees of $7.0 million
associated with the redesign of internal controls, a
$1.7 million decrease in audit fees, a $6.8 million
decrease in freight and various expenses and a $2.0 million
benefit for a reduction in interest and penalties from the
settlement with the IRS in 2006 offset by an increase in legal
and consulting fees of $8.4 million. 2005 also benefited
from a $2.7 million reversal of an allowance for doubtful
accounts compared with a benefit of $0.3 million in 2006.
Total operating expenses decreased in 2006 compared with
2005, primarily as a result of a decrease in maintenance
expense, landing fees, travel, depreciation and amortization,
partially offset by increased fuel costs.
Non-operating
Expenses
The following table compares our non-operating expenses for the
years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase/
|
|
|
Percent
|
|
|
|
2006
|
|
|
2005
|
|
|
(Decrease)
|
|
|
Change
|
|
|
Non-operating
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
(12,780
|
)
|
|
$
|
(6,828
|
)
|
|
$
|
5,952
|
|
|
|
87.2
|
%
|
Interest expense
|
|
|
60,298
|
|
|
|
74,512
|
|
|
|
(14,214
|
)
|
|
|
(19.1
|
)%
|
Capitalized interest
|
|
|
(726
|
)
|
|
|
(123
|
)
|
|
|
603
|
|
|
|
490.2
|
%
|
Loss on early extinguishment of
debt
|
|
|
12,518
|
|
|
|
|
|
|
|
12,518
|
|
|
|
|
|
Other, net
|
|
|
(811
|
)
|
|
|
1,976
|
|
|
|
2,787
|
|
|
|
141.0
|
%
|
34
Interest income increased primarily due to an increase in
our average available cash balances, augmented by a general
increase in interest rates.
Interest expense decreased primarily as a result of
repayment of debt including the prepayment of
$140.8 million of the Deutsche Bank Facilities floating
rate debt on July 31, 2006 (see Note 6 to our
Financial Statements for further discussion).
Capitalized interest increased primarily due to the
pre-delivery deposit on the Boeing
747-8
aircraft order we placed in September 2006 (See Note 4 to
our Financial Statements for further discussion) versus
capitalized interest on slot conversions in 2005.
Loss on early extinguishment of debt is the result of the
prepayment of the Deutsche Bank Facilities on July 31,
2006. In connection with the repayment, the Company incurred a
one-time, non-cash pre-tax expense of approximately
$12.5 million related to the write-off of the remaining
unamortized discount costs associated with such debt.
Other, net improved primarily due to realized and
unrealized gains on the revaluation of foreign denominated
receivables into U.S. dollars. The U.S. dollar had
weakened against most foreign currencies during the period
compared with the prior year when the U.S. dollar had
strengthened against most foreign currencies.
Income taxes. The effective tax rate for 2006
was 36.3% compared with an effective tax rate of 40.3% for 2005.
The rates differ from the statutory rate primarily due to the
final settlement of an income tax examination during 2006 and
also to the non-deductibility of certain items for tax purposes
and the relationship of these items to our operating results for
the year. The settlement of the income tax examination reduced
our income tax expense in 2006 by approximately
$2.0 million.
Segments
Management allocates the cost of operating aircraft among the
various segments on an average cost per aircraft type. ACMI is
only allocated costs of operating aircraft based on the number
of aircraft dedicated to ACMI customers. Under-utilized aircraft
costs are allocated to segments based on Block Hours flown for
Scheduled Service, AMC and Commercial Charter as these aircraft
are used interchangeably among these segments.
The following table compares our FAC for segments (see
Note 11 to our Financial Statements for the reconciliation
to operating income (loss) and our reasons for using FAC) for
the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase/
|
|
|
Percent
|
|
|
|
2006
|
|
|
2005
|
|
|
(Decrease)
|
|
|
Change
|
|
|
FAC:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ACMI
|
|
$
|
51,757
|
|
|
$
|
31,233
|
|
|
$
|
20,524
|
|
|
|
65.7
|
%
|
Scheduled Service
|
|
|
2,341
|
|
|
|
1,986
|
|
|
|
355
|
|
|
|
17.9
|
%
|
AMC Charter
|
|
|
30,130
|
|
|
|
56,416
|
|
|
|
(26,286
|
)
|
|
|
(46.6
|
)%
|
Commercial Charter
|
|
|
(844
|
)
|
|
|
16,457
|
|
|
|
(17,301
|
)
|
|
|
(105.1
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total FAC
|
|
$
|
83,384
|
|
|
$
|
106,092
|
|
|
|
(22,708
|
)
|
|
|
(21.4
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ACMI
Segment
FAC relating to the ACMI segment increased as a result of the
reduction of Block Hours of the less profitable Boeing
747-200 ACMI
leases offset by an increase in rate per Block Hour reflecting
higher proportional Boeing
747-400
usage in this segment. We receive a higher margin on the Boeing
747-400
aircraft compared to the Boeing
747-200
aircraft resulting in significantly improved FAC.
35
Scheduled
Service Segment
FAC relating to the Scheduled Service segment increased slightly
by the improvement in revenue driven by an increase in Yield and
Block Hours. The improvements in revenue were offset by higher
fuel costs, the decrease in the return flights of one-way AMC
missions and the impact of excess, under-utilized Boeing
747-200
capacity during the first three quarters of 2006. Capacity was
reduced late in the third quarter with the sale of three Boeing
747-200
aircraft and
sub-lease of
two Boeing
747-200
aircraft (see Note 3 to our Financial Statements).
AMC
Charter Segment
FAC relating to the AMC Charter segment decreased significantly
despite an increase in revenue per Block Hour. The most
significant factor impacting the AMC Charter segment was the
reduction in Block Hours and the increased fixed cost allocation
related to the excess, under-utilized Boeing
747-200
capacity during the first three quarters of 2006. Capacity was
reduced late in the third quarter with the sale of three Boeing
747-200
aircraft and
sub-lease of
two Boeing
747-200
aircraft.
Commercial
Charter Segment
FAC relating to the Commercial Charter segment decreased
primarily due to higher fuel costs, the decrease in the return
flights of one-way AMC missions, the reduction in Block Hours
and the increased fixed cost allocation related to the excess,
under-utilized Boeing
747-200
capacity during the first three quarters of 2006. Capacity was
reduced late in the third quarter with the sale of three Boeing
747-200
aircraft and
sub-lease of
two Boeing
747-200
aircraft.
36
Years
Ended December 31, 2005 and 2004
Operating
Statistics
The table below sets forth selected operating data for the years
ended December 31, 2005 and 2004 (in thousands unless
otherwise indicated):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase/
|
|
|
Percent
|
|
|
|
2005
|
|
|
2004
|
|
|
(Decrease)
|
|
|
Change
|
|
|
Block Hours
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ACMI
|
|
|
83,682
|
|
|
|
70,343
|
|
|
|
13,339
|
|
|
|
19.0
|
%
|
Scheduled service
|
|
|
37,175
|
|
|
|
55,111
|
|
|
|
(17,936
|
)
|
|
|
(32.5
|
)%
|
AMC charter
|
|
|
29,306
|
|
|
|
22,376
|
|
|
|
6,930
|
|
|
|
31.0
|
%
|
Commercial charter
|
|
|
6,257
|
|
|
|
4,973
|
|
|
|
1,284
|
|
|
|
25.8
|
%
|
Non revenue/other
|
|
|
839
|
|
|
|
1,176
|
|
|
|
(337
|
)
|
|
|
(28.7
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Block Hours
|
|
|
157,259
|
|
|
|
153,979
|
|
|
|
3,280
|
|
|
|
2.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue Per Block
Hour
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ACMI
|
|
$
|
5,569
|
|
|
$
|
5,355
|
|
|
$
|
214
|
|
|
|
4.0
|
%
|
AMC charter
|
|
|
15,036
|
|
|
|
12,625
|
|
|
|
2,411
|
|
|
|
19.1
|
%
|
Commercial charter
|
|
|
17,235
|
|
|
|
13,902
|
|
|
|
3,333
|
|
|
|
24.0
|
%
|
Scheduled Service
Traffic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RTMs
|
|
|
1,414,865
|
|
|
|
2,021,903
|
|
|
|
(607,038
|
)
|
|
|
(30.0
|
)%
|
ATMs
|
|
|
2,155,127
|
|
|
|
3,222,942
|
|
|
|
(1,067,815
|
)
|
|
|
(33.1
|
)%
|
Load Factor
|
|
|
65.7
|
%
|
|
|
62.7
|
%
|
|
|
3.0 pts
|
|
|
|
4.7
|
%
|
RATM
|
|
$
|
0.258
|
|
|
$
|
0.198
|
|
|
$
|
0.06
|
|
|
|
30.3
|
%
|
Yield
|
|
$
|
0.393
|
|
|
$
|
0.316
|
|
|
$
|
0.08
|
|
|
|
24.4
|
%
|
Average fuel cost per gallon
|
|
$
|
1.75
|
|
|
$
|
1.25
|
|
|
$
|
0.50
|
|
|
|
40.0
|
%
|
Fuel gallons consumed
|
|
|
246,619
|
|
|
|
280,304
|
|
|
|
(33,685
|
)
|
|
|
(12.0
|
)%
|
Operating fleet (average during
the period)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aircraft count*
|
|
|
39.0
|
|
|
|
37.7
|
|
|
|
1.3
|
|
|
|
3.4
|
%
|
Out of service**
|
|
|
0.4
|
|
|
|
3.3
|
|
|
|
(2.9
|
)
|
|
|
(87.9
|
)%
|
Dry leased**
|
|
|
3.0
|
|
|
|
4.0
|
|
|
|
(1.0
|
)
|
|
|
(25.0
|
%)
|
|
|
|
* |
|
Includes tail number N92IFT which was not part of the operating
fleet at December 31, 2005 and was sold in early 2006. |
|
** |
|
Dry leased and
out-of-service
aircraft are not included in the operating fleet average
aircraft count. |
For 2005 compared with 2004, our operating fleet increased 3.4%,
to 39.0 average aircraft from 37.7. The increase in our
operating fleet is the result of one aircraft coming off dry
lease in January 2005 and one aircraft parked in late 2004 being
utilized, less the retirement of aircraft tail number N808MC in
January 2005.
The discussion below provides comparative information on our
historical consolidated results of operations. The information
provided below with respect to aircraft rent, depreciation and
interest expense for periods after July 27, 2004, was
materially affected by several factors, which did not affect
such items for comparable periods during the first seven months
of 2004. In conjunction with our emergence from bankruptcy, we
applied the provisions of fresh-start accounting effective as of
July 27, 2004, at which time a new reporting entity was
deemed to be created.
Fresh-start accounting requires us to revalue our assets and
liabilities to estimated fair values at July 27, 2004 in a
manner similar to that of purchase accounting. Significant
adjustments included a downward revaluation of our owned
aircraft fleet and the recording of intangible assets
(principally related to Atlas
37
ACMI contracts and route rights). In addition, fair-value
adjustments were recorded with respect to our debt and lease
agreements.
Notwithstanding the lack of comparability, we have prepared the
following analysis to facilitate the 2005 and
2004 year-over-year
discussion of operating results. The numbers provided in the
successor and predecessor periods have been prepared in
accordance with U.S. generally accepted accounting
principles (GAAP). However, the combined results for
the year ended December 31, 2004 provided below are not
presented in accordance with GAAP and, as noted, results after
July 27, 2004 are not on the same basis as results prior to
that date.
Operating
Revenues
The following table compares our operating revenues for the
periods shown:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
Predecessor
|
|
|
Combined
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
For the Period
|
|
|
For the Period
|
|
|
Results for
|
|
|
|
|
|
|
|
|
|
For the Year
|
|
|
July 28, 2004
|
|
|
January 1, 2004
|
|
|
the Year
|
|
|
|
|
|
|
|
|
|
Ended
|
|
|
through
|
|
|
through
|
|
|
Ended
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
July 27,
|
|
|
December 31,
|
|
|
Increase
|
|
|
Percent
|
|
|
|
2005
|
|
|
2004
|
|
|
2004
|
|
|
2004
|
|
|
(Decrease)
|
|
|
Change
|
|
|
Operating Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ACMI
|
|
$
|
466,018
|
|
|
$
|
182,322
|
|
|
$
|
194,332
|
|
|
$
|
376,654
|
|
|
$
|
89,364
|
|
|
|
23.7
|
%
|
Scheduled service
|
|
|
555,814
|
|
|
|
296,823
|
|
|
|
343,605
|
|
|
|
640,428
|
|
|
|
(84,614
|
)
|
|
|
(13.2
|
)%
|
AMC charter
|
|
|
440,642
|
|
|
|
126,235
|
|
|
|
156,260
|
|
|
|
282,495
|
|
|
|
158,147
|
|
|
|
56.0
|
%
|
Commercial charter
|
|
|
107,840
|
|
|
|
53,325
|
|
|
|
15,812
|
|
|
|
69,137
|
|
|
|
38,703
|
|
|
|
56.0
|
%
|
Other revenue
|
|
|
47,583
|
|
|
|
20,589
|
|
|
|
25,358
|
|
|
|
45,947
|
|
|
|
1,636
|
|
|
|
3.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues
|
|
$
|
1,617,897
|
|
|
$
|
679,294
|
|
|
$
|
735,367
|
|
|
$
|
1,414,661
|
|
|
$
|
203,236
|
|
|
|
14.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ACMI revenue increased primarily due to both an increase
in rate and volume. ACMI Block Hours were 83,682 for 2005,
compared with 70,343 for 2004, an increase of 13,339, or 19.0%.
Revenue per Block Hour was $5,569 for 2005, compared with $5,355
for 2004, an increase of $214 per Block Hour, or 4.0%.
Total aircraft supporting ACMI, excluding aircraft dry leased to
our joint venture, as of December 31, 2005 were seven
Boeing
747-200
aircraft and ten Boeing
747-400F
aircraft, compared with seven Boeing
747-200
aircraft and 11 Boeing
747-400F
aircraft supporting the ACMI business at December 31, 2004.
Scheduled service revenue decreased primarily due to
lower capacity offset by higher Yields and higher Load Factors.
RTMs in the Scheduled Service segment were 1,415 million on
a total capacity of 2,155 million ATMs in 2005, compared
with RTMs of 2,022 million on a total capacity of
3,223 million ATMs in 2004. Load Factor was 65.7% with a
Yield of $0.393 in 2005, compared with a Load Factor of 62.7%
and a Yield of $0.316 in 2004. RATM in our Scheduled Service
segment was $0.258 in 2005, compared with $0.198 in 2004,
representing an improvement of 30.3%.
The decrease in Scheduled Service revenue was the result of our
reallocation of aircraft to our ACMI and AMC Charter operations
and the reduction in Scheduled Service business during the Polar
strike, which, when combined, reduced ATMs by approximately
1,068 million. The Polar employee strike started on
September 16, 2005 and was settled on October 5, 2005
following the ratification of a new labor agreement. The revenue
impact of the significant reduction in capacity was partially
offset by an increase in unit revenue and Load Factor, which
continued to improve due to a number of factors, including the
impact of our continued optimization of the scheduled network
and the utilization of return legs of AMC Charter flights. While
we believe that both the 2005 and 2004 periods were affected by
increases in fuel surcharges, we cannot quantify these increases
due to system limitations.
AMC charter revenue increased primarily due to a higher
volume of AMC Charter flights and higher AMC rates. AMC Charter
Block Hours were 29,306 for 2005, compared with 22,376 for 2004,
an increase of 6,930, or 31.0%. Revenue per Block Hour was
$15,036 for 2005, compared with $12,625 for 2004, an increase
38
of $2,411 per Block Hour, or 19.1%. The increase in AMC
Charter activity was primarily the result of the
U.S. Militarys continued involvement with the
conflict in the Middle East. The increase in rate was primarily
a function of an increase in the agreed upon rate for AMC fuel,
which was 101 cents for the first three quarters of 2004 and 140
cents for the fourth quarter of 2004 compared with 140 cents for
the first three quarters of 2005 and 220 cents for the fourth
quarter of 2005.
Commercial charter revenue increased primarily as a
result of a higher volume of Commercial Charter flights and by
an increase in rates. Commercial Charter Block Hours were 6,257
for 2005, compared with 4,973 for 2004, an increase of 1,284, or
25.8%. Revenue per Block Hour was $17,235 for 2005, compared
with $13,902 for 2004, an increase of $3,333 per Block
Hour, or 24.0%. The increase in Commercial Charter revenue was
primarily due to the increase in charter activity, driven in
part by one-way charter flights on the return legs of AMC
flights and the increases in rates reflecting higher fuel prices.
Total operating revenue increased primarily as a result
of increased ACMI and AMC Block Hours offset by a decrease in
Scheduled Service Block Hours.
Operating
Expenses
The following table compares our operating expenses for the
periods shown:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
Predecessor
|
|
|
Combined
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
For the Period
|
|
|
For the Period
|
|
|
Results for
|
|
|
|
|
|
|
|
|
|
For the Year
|
|
|
July 28, 2004
|
|
|
January 1, 2004
|
|
|
the Year
|
|
|
|
|
|
|
|
|
|
Ended
|
|
|
through
|
|
|
through
|
|
|
Ended
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
July 27,
|
|
|
December 31,
|
|
|
Increase
|
|
|
Percent
|
|
|
|
2005
|
|
|
2004
|
|
|
2004
|
|
|
2004
|
|
|
(Decrease)
|
|
|
Change
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aircraft fuel
|
|
$
|
432,367
|
|
|
$
|
176,009
|
|
|
$
|
175,103
|
|
|
$
|
351,112
|
|
|
$
|
81,255
|
|
|
|
23.1
|
%
|
Salaries, wages and benefits
|
|
|
244,509
|
|
|
|
91,463
|
|
|
|
122,715
|
|
|
|
214,178
|
|
|
|
30,331
|
|
|
|
14.2
|
%
|
Maintenance, materials and repairs
|
|
|
233,614
|
|
|
|
102,682
|
|
|
|
133,336
|
|
|
|
236,018
|
|
|
|
(2,404
|
)
|
|
|
(1.0
|
)%
|
Aircraft rent
|
|
|
150,879
|
|
|
|
60,151
|
|
|
|
81,886
|
|
|
|
142,037
|
|
|
|
8,842
|
|
|
|
6.2
|
%
|
Ground handling and airport fees
|
|
|
71,735
|
|
|
|
40,815
|
|
|
|
53,558
|
|
|
|
94,373
|
|
|
|
(22,638
|
)
|
|
|
(24.0
|
)%
|
Landing fees and other rent
|
|
|
80,054
|
|
|
|
37,960
|
|
|
|
53,039
|
|
|
|
90,999
|
|
|
|
(10,945
|
)
|
|
|
(12.0
|
)%
|
Depreciation and amortization
|
|
|
46,336
|
|
|
|
25,457
|
|
|
|
33,510
|
|
|
|
58,967
|
|
|
|
(12,631
|
)
|
|
|
(21.4
|
)%
|
Insurance gain
|
|
|
(7,820
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,820
|
|
|
|
|
|
Travel
|
|
|
60,089
|
|
|
|
25,741
|
|
|
|
29,549
|
|
|
|
55,290
|
|
|
|
4,799
|
|
|
|
8.7
|
%
|
Pre-petition and post-emergence
costs and related professional fees
|
|
|
3,706
|
|
|
|
4,106
|
|
|
|
9,439
|
|
|
|
13,545
|
|
|
|
(9,839
|
)
|
|
|
(72.6
|
)%
|
Other
|
|
|
109,128
|
|
|
|
47,935
|
|
|
|
65,931
|
|
|
|
113,866
|
|
|
|
(4,738
|
)
|
|
|
(4.2
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
$
|
1,424,597
|
|
|
$
|
612,319
|
|
|
$
|
758,066
|
|
|
$
|
1,370,385
|
|
|
$
|
54,212
|
|
|
|
4.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aircraft fuel expense increased primarily as a result of
increased fuel prices. Average fuel price per gallon was 175
cents for 2005, compared with 125 cents for 2004, an increase of
50 cents or 40.0%, partially offset by 33.7 million
gallons, or a 12.0% decrease in fuel consumption to
246.6 million gallons for 2005 from 280.3 million
gallons during 2004. The decrease in our overall fuel
consumption corresponds to the decrease of 17,936 Scheduled
Service Block Hours, partially offset by a 6,930 increase in AMC
Block Hours and a 1,284 increase in Commercial Charter Block
Hours.
39
Salaries, wages and benefits increased $14.5 million
in 2005 due to an increase in Block Hours, contractual pay rate
increases and a $1.7 million charge for crew salary for the
retroactive items included in the new Polar crew labor agreement
ratified on October 5, 2005.
Other increases of $15.8 million included restricted stock
expense, such restricted stock having first been granted late in
the third quarter of 2004, as well as profit sharing and
incentive compensation expense, which were not accrued in 2004
due to losses incurred.
Maintenance materials and repairs decreased primarily as
a result of a decrease in D Checks being substantially offset by
more engine overhauls. There were five D Checks on Boeing
747-400
aircraft and three D Checks on Boeing
747-200
aircraft for 2005 compared with five D Checks on Boeing
747-400
aircraft and seven D Checks on Boeing
747-200
aircraft for 2004. There were 67 engine overhauls for 2005,
compared with 51 events for 2004.
Ground handling and airport fees decreased as a result of
the reduction in Scheduled Service flying which is the primary
segment that incurs these costs.
Insurance gain for 2005 relates to the insurance claim on
aircraft tail number N808MC. The gain represents the amount by
which insurance proceeds exceeded the net book value of the
aircraft (see Note 4 to our Financial Statements).
Landing fees and other rent decreased as a result of the
reduction in Scheduled Service flying offset by an increase in
AMC Charter flying.
Pre-petition and post emergence costs and related
professional fees decreased as the result of our emergence
from bankruptcy on the July 27, 2004. We incurred expenses
(primarily professional fees) in the successor period related to
the winding down of the bankruptcy proceedings. These expenses
are recorded as incurred.
Other operating expenses decreased primarily due to fines
accrued in 2004 that did not recur in 2005, a reduction in legal
and audit fees, outside services, insurance and bad debt
expense, partially offset by an increase in consulting fees
related to our initiatives to document and improve internal
controls.
Total operating expenses increased primarily as a result
of higher fuel and salary costs offset in part by lower ground
handling and landing fees.
Reorganization items, net. Expenses, realized
gains and losses and provisions for losses resulting from our
reorganization for the period January 31 through July 27,
2004, was comprised of the following:
|
|
|
|
|
Legal and professional fees
|
|
$
|
44,209
|
|
Rejection of CF6-80
power-by-the-hour
engine agreement
|
|
|
(59,552
|
)
|
Claims related to rejection of
owned and leased aircraft
|
|
|
126,649
|
|
Other
|
|
|
7,782
|
|
Fresh-start adjustments
|
|
|
173,598
|
|
Gain on cancellation of
pre-petition debt
|
|
|
(405,199
|
)
|
|
|
|
|
|
Total
|
|
$
|
(112,513
|
)
|
|
|
|
|
|
The costs included in reorganization items reflect the cash and
non-cash expenses recognized by us in connection with our
reorganization and are separately reported as required by
SOP 90-7
(see Note 2 to our Financial Statements).
Income taxes. Our effective tax rate for 2005
differs from the U.S. statutory rate due to nondeductible
professional fees related to the reorganization and the effect
of incremental tax reserves. For the period January 1 through
July 27, 2004, we recorded income related primarily to the
cancellation of debt in the bankruptcy. While no cash tax was
levied against this income, it reduced the net operating loss
carryforwards. Exclusive of this item, our effective tax rate
for the predecessor period January 1 through July 27, 2004
differs from the U.S. statutory rate due to losses for
which no net tax benefit was provided and the effect of
40
incremental tax reserves. Our effective tax rate for the
successor period July 28 through December 31, 2004 differs
from the U.S. statutory rate due to nondeductible professional
fees related to the reorganization and the effect of incremental
tax reserves.
Segments
(Three Months Ended December 31, 2005 Compared with Three
Months Ended
December 31, 2004)
As discussed above, the application of fresh-start accounting
following our emergence from bankruptcy, among other things,
reduced rent expense and depreciation expense and increased
amortization expense due to recognition of additional intangible
assets. As a result, segment operating income and loss for 2005
are not comparable with prior periods. We have not included a
comparative discussion of the segments as it would be misleading
or overly confusing. In lieu of a comparative segment discussion
for 2005 compared with 2004, we are presenting a separate
segment discussion for the fourth quarter of 2005 compared with
the fourth quarter of 2004.
ACMI
Segment
FAC relating to the ACMI segment was income of
$14.4 million based on revenue of $118.0 million for
the fourth quarter of 2005, compared with income of
$20.3 million based upon revenue of $119.2 million for
the fourth quarter of 2004. The decrease in FAC for the ACMI
segment was primarily due to a decrease in Block Hours partially
offset by an increase in our average ACMI contract rates. ACMI
Block Hours were 19,781 for the fourth quarter of 2005, compared
with 21,823 for the fourth quarter of 2004, a decrease of 2,042
Block Hours, or 9.4%. Revenue per Block Hour was $5,958 for the
fourth quarter of 2005, compared with $5,463 for the fourth
quarter of 2004, an increase of $495 per Block Hour, or
9.1%.
Scheduled
Service Segment
FAC relating to the Scheduled Service segment was income of
$2.6 million based on revenue of $155.2 million for
the fourth quarter of 2005, compared with income of
$7.0 million based upon revenue of $179.4 million for
the fourth quarter of 2004. The decline in FAC was primarily due
to a reduction in capacity partially offset by higher Yields,
RATM and Load Factors. RTMs in the Scheduled Service segment
were 349 million on a total capacity of 526 million
ATMs in the fourth quarter of 2005, compared with RTMs of
480 million on a total capacity of 753 million ATMs in
the fourth quarter of 2004. Block Hours were 9,185 in the fourth
quarter of 2005, compared with 13,063 for the fourth quarter of
2004, a decrease of 3,878, or 29.7%. Load Factor was 66.3% with
a Yield of $0.445 in the fourth quarter of 2005, compared with a
Load Factor of 63.7% and a Yield of $0.374 in the fourth quarter
of 2004. RATM in our Scheduled Service segment was $0.295 in the
fourth quarter of 2005, compared with $0.238 in the fourth
quarter of 2004, representing an increase of 23.9%.
The decrease in Scheduled Service revenue and capacity is the
result of shifting our Scheduled Service business out of
unprofitable markets and reallocating flights to AMC operations.
We have been utilizing the return legs of AMC flights as
positioning flights for Scheduled Service out of Asia. This
reduces the number of lower capacity flights from the
U.S. to Asia, thereby increasing RATM, Load Factor and
Yield on an overall basis.
AMC
Charter Segment
FAC relating to the AMC Charter segment was income of
$10.4 million based on revenue of $131.9 million for
the fourth quarter of 2005, compared with income of
$10.7 million based upon revenue of $73.8 million for
the fourth quarter of 2004. AMC Charter Block Hours were 7,374
for the fourth quarter of 2005, compared with 5,404 for the
fourth quarter of 2004, an increase of 1,970 Block Hours, or
36.5%. Revenue per Block Hour was $17,882 for the fourth quarter
of 2005, compared with $13,661 for the fourth quarter of 2004,
an increase of $4,221 per Block Hour, or 30.9%. The
improvement in FAC for the AMC Charter segment was primarily due
to a higher volume of AMC Charter flights as a result of the
U.S. Militarys continued involvement in the conflict
in the Middle East. The increase in revenue per Block Hour is
primarily
41
the result of an increase in the agreed upon rate for fuel from
140 cents per gallon for the fourth quarter of 2004 to 220 cents
per gallon for the fourth quarter of 2005. The increase in
revenue is offset by the corresponding increase in fuel expense
by the same rates discussed above.
Commercial
Charter Segment
FAC relating to the Commercial Charter segment was income of
$13.1 million based on revenue of $53.9 million for
the fourth quarter of 2005, compared with income of
$10.0 million based upon revenue of $44.1 million for
the fourth quarter of 2004. The improvement in FAC for the
Commercial Charter segment was primarily as a result of higher
revenue per Block Hour partially offset by a lower volume of
Commercial Charter flights and higher fuel costs. Commercial
Charter Block Hours were 2,662 for the fourth quarter of 2005,
compared with 2,815 for the fourth quarter of 2004, a decrease
of 153, or 5.4%. Revenue per Block Hour was $20,252 for the
fourth quarter of 2005, compared with $15,664 for the fourth
quarter of 2004, an increase of $4,588 per Block Hour, or
29.3%. The increase in Commercial Charter revenue per Block Hour
was primarily due to the increase in fuel prices.
Liquidity
and Capital Resources
At December 31, 2006, we had cash and cash equivalents of
$231.8 million, compared with $305.9 million at
December 31, 2005, a decrease of $74.1 million, or
24.2%. In 2006, we used approximately $140.8 million of
available cash to prepay our two credit facilities with Deutsche
Bank and we terminated our Revolving Credit Facility. Despite
the reduction in our cash balance as a result of these
transactions, we still consider cash on hand and cash generated
from operations to be more than sufficient to meet our debt and
lease obligations and to finance expected capital expenditures
of approximately $99.0 million, which includes pre-delivery
deposits on our Boeing aircraft order, for 2007.
Operating Activities. Net cash provided by
operating activities in 2006 was $146.7 million, compared
with net cash provided by operating activities of
$242.1 million for 2005. The decrease in cash provided by
operating activities is primarily related to a decrease in
operating results and an increase in prepaid maintenance
deposits in 2006 compared with 2005.
Investing Activities. Net cash used by
investing activities was $41.5 million for 2006, consisting
primarily of capital expenditures of $69.9 million, which
includes pre-delivery deposits and related costs on our Boeing
aircraft order of $40.8 million offset by proceeds from the
sale of aircraft of $27.3 million and a decrease in
restricted funds held in trust of $1.1 million. Net cash
provided by investing activities was $3.3 million for 2005,
which reflects insurance proceeds of $12.6 million and a
decrease in restricted funds held in trust of
$19.8 million, offset by capital expenditures of
$29.1 million.
Financing Activities. Net cash used by
financing activities was $179.2 million for 2006, which
consisted primarily of $189.0 million of payments on
long-term debt, including the $140 million prepayment of
the Deutsche Bank facilities in July 2006, and capital lease
obligations and a $2.3 million purchase of treasury stock
offset by $7.9 million in proceeds from the exercise of
stock options and a $4.5 million tax benefit on restricted
stock and stock options. Net cash used by financing activities
was $73.4 million for 2005, which consisted primarily of
$83.1 million of payments on long-term debt and capital
lease obligations and $2.3 million of purchases of treasury
stock, offset by $10.0 million in loan proceeds from the
Revolving Credit Facility that was subsequently repaid and
$2.0 million in proceeds from the exercise of stock options.
42
Contractual
Obligations
The table below provides details of our future cash contractual
obligations as of December 31, 2006 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008-
|
|
|
2010-
|
|
|
|
|
|
|
Total
|
|
|
2007
|
|
|
2009
|
|
|
2011
|
|
|
Thereafter
|
|
|
Debt and capital lease
obligations(1)
|
|
$
|
503.9
|
|
|
$
|
28.5
|
|
|
$
|
76.3
|
|
|
$
|
68.5
|
|
|
$
|
330.6
|
|
Interest on debt(2)
|
|
|
276.3
|
|
|
|
36.4
|
|
|
|
66.9
|
|
|
|
57.2
|
|
|
|
115.8
|
|
Aircraft operating leases
|
|
|
2,311.0
|
|
|
|
128.1
|
|
|
|
288.8
|
|
|
|
284.3
|
|
|
|
1,609.8
|
|
Other operating leases
|
|
|
24.6
|
|
|
|
5.4
|
|
|
|
9.5
|
|
|
|
8.1
|
|
|
|
1.6
|
|
Aircraft and fuel purchase
commitments(3)
|
|
|
2,160.2
|
|
|
|
45.5
|
|
|
|
430.8
|
|
|
|
1,683.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
5,276.0
|
|
|
$
|
243.9
|
|
|
$
|
872.3
|
|
|
$
|
2,102.0
|
|
|
$
|
2,057.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Debt and capital lease obligations reflect gross amounts (see
Note 6 to our Financial Statements for a discussion of the
related unamortized discount). |
|
(2) |
|
Amount represents interest on fixed rate debt at
December 31, 2006. |
|
(3) |
|
Includes estimated contractual escalations and required option
payments net of purchase credits in respect to the aircraft
purchase commitments. |
Description
of Our Debt Obligations
Enhanced
Equipment Trust Certificate Transactions
Overview
of EETC Transactions
In three separate transactions in 1998, 1999 and 2000, we issued
pass-through certificates, also known as Enhanced Equipment
Trust Certificates (EETCs). These securities
were issued for the purposes of financing the acquisition of a
total of 12 Boeing
747-400F
aircraft. In the 1998 EETC transaction, $538.9 million of
EETCs were issued to finance five aircraft, one of which Atlas
then owned, with the remaining four being leased by Atlas
pursuant to leveraged leases. In the 1999 EETC transaction,
$543.6 million of EETCs were issued to finance five
aircraft, one of which Atlas then owned, with the remaining four
being leased by Atlas pursuant to leveraged leases. In the 2000
EETC transaction, $217.3 million of EETCs were issued to
finance the remaining two aircraft, both pursuant to leveraged
leases. Historically, the debt obligations relating solely to
owned EETC aircraft have been reflected on our balance sheet,
while the debt obligations related to the leased EETC aircraft
have not been reflected on our balance sheet because such
obligations previously constituted operating leases. Through the
restructuring in 2004 however, Atlas became the beneficial owner
of four of the previously leased aircraft, resulting in a total
of six EETC aircraft being currently reflected on our balance
sheets as of December 31, 2006 and 2005.
Leveraged
Lease Structure
In a leveraged lease, the owner trustee is the owner of record
for the aircraft. Wells Fargo Bank Northwest, National
Association (Wells Fargo) serves as the owner
trustee with respect to the leveraged leases in each of
Atlas EETC transactions. As the owner trustee of the
aircraft, the owner trustee also serves as the lessor of the
aircraft under the EETC lease between Atlas and the owner
trustee. The owner trustee also serves as trustee for the
beneficial owner of the aircraft, the owner participant. The
original owner participant for each aircraft invested (on an
equity basis) approximately 20% of the original cost of the
aircraft. The remaining approximately 80% of the aircraft cost
was financed with debt issued by the owner trustee on a
non-recourse basis in the form of equipment notes.
The equipment notes were generally issued in three series, or
tranches, for each aircraft, designated as
Series A, B and C equipment notes. The loans evidenced by
the equipment notes were funded by the public offering of EETCs.
Like the equipment notes, the EETCs were issued in three series
for each EETC
43
transaction designated as Series A, B and C EETCs. Each
class of EETCs was issued by the trustee for separate Atlas
pass-through trusts with the same designation as the class of
EETCs issued. Each of these pass-through trustees is also the
holder and beneficial owner of the equipment notes bearing the
same class designation.
With respect to the six EETC financed aircraft currently owned
by Atlas, there is no leveraged lease structure or EETC lease.
Atlas is the beneficial owner of the aircraft and the issuer of
the equipment notes with respect thereto. The equipment notes
issued with respect to the owned aircraft are with full recourse
to Atlas.
Off-Balance
Sheet Arrangements
A portion of our 38 operating aircraft are owned and leased
through trusts established specifically to purchase, finance and
lease aircraft to us. These leasing entities meet the criteria
for variable interest entities. All fixed price options were
restructured to reflect a fair market value purchase option, and
as such, we are not the primary beneficiary of the leasing
entities. We are generally not the primary beneficiary of the
leasing entities if the lease terms are consistent with market
terms at the inception of the lease and the leases do not
include a residual value guarantee, fixed-price purchase option
or similar feature that obligates us to absorb decreases in
value or entitles us to participate in increases in the value of
the aircraft. We have not consolidated any additional aircraft
in the related trusts upon application of the FASBs
revised Interpretation No. 46, Consolidation of Variable
Interest Entities, an Interpretation of ARB No. 51 ,
because we are not the primary beneficiary based on the option
price restructurings. Our maximum exposure under these operating
leases is the remaining lease payments, which amounts are
reflected in future lease commitments described in Note 7
to our Financial Statements.
Other
Critical
Accounting Policies and Estimates
General
Discussion of Critical Accounting Policies and
Estimates
Our Financial Statements are prepared in conformity with GAAP,
which requires management to make estimates and judgments that
affect the amounts reported. Actual results may differ from
those estimates. Important estimates include asset lives,
valuation allowances (including, but not limited to, those
related to inventory and deferred taxes), stock-based
compensation and income tax accounting. Our significant
accounting policies are described in Note 3 to our
Financial Statements included in Item 8 of Part II of
this Report. The following describes our most critical
accounting policies:
Fresh-Start
Accounting
Our emergence from bankruptcy on the Effective Date resulted in
a new reporting entity and adoption of fresh-start accounting as
of the Effective Date in accordance with
SOP 90-7.
Accordingly, our assets, liabilities and equity were adjusted to
fair value. These adjustments were based upon the work of us and
our financial consultants.
We valued our aircraft and leases using appraisals, which were
obtained from independent third parties that referenced market
conditions. We valued our debt at fair market value based on
available market quotes
and/or the
trading prices of our debt instruments, or if these measurements
were not available, then by comparison to traded debt
instruments with similar interest rates and collateral.
Our enterprise value was calculated using a weighted average of
two principal methods: the discounted cash flow growth method
and multiples of comparable public companies. The discounted
cash flow growth method included a term of four years, a
weighted average cost of capital of 16.0% to 17.0%, an average
cost of debt of 7.8%, an average cost of leases of 7.7%, a range
of growth rates of 2.0% to 4.0% and an assumed tax rate of
37.0%. For the multiple method, the valuation consultants we
retained used a multiple of actual and forecasted earnings
before interest, taxes, depreciation and amortization
(EBITDA) for the fiscal years 2003, 2004 and 2005.
The range of EBITDA multiples for the comparable companies used
in the valuation were 5.8 to 6.8 for 2003, 5.3 to 6.3 for 2004
and 5.0 to 6.0 for 2005.
44
Uncertainties and contingencies that could affect the
assumptions include changes in interest rates used for debt and
lease calculations, a change in the growth rates based on the
cyclical nature of the industry and changes in geopolitical
policies. If different assumptions were used, the fair values of
our assets and liabilities could have been materially increased
or decreased.
The adoption of fresh-start accounting has had a material effect
on our Consolidated Financial Statements (see Note 2 to our
Financial Statements for further detail related to the
fresh-start value adjustments).
Accounting
for Long-Lived Assets
We record our property and equipment at cost, and once assets
are placed in service we depreciate them on a straight-line
basis over their estimated useful lives to their estimated
residual values over periods not to exceed forty years for
flight equipment (from date of original manufacture) and three
to five years for ground equipment.
Property under capital leases and related obligations are
recorded at the lesser of an amount equal to (a) the
present value of future minimum lease payments computed on the
basis of our incremental borrowing rate or, when known, the
interest rate implicit in the lease, or (b) the fair value
of the asset. Amortization of property under capital leases is
on a straight-line basis over the lease term and is included in
depreciation expense.
In accordance with SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, we record
impairment charges on long-lived assets used in operations when
events and circumstances indicate that the assets may be
impaired, the undiscounted cash flows estimated to be generated
by those assets are less than the carrying amount of those
assets and the net book value of the assets exceeds their
estimated fair value. In making these determinations, we use
certain assumptions, including, but not limited to:
(i) estimated fair value of the assets and
(ii) estimated future cash flows expected to be generated
by these assets, which are based on additional assumptions such
as asset utilization, length of service and estimated salvage
values.
Aircraft
Maintenance and Repair
We account for maintenance and repair costs for both owned and
leased airframes and engines under the direct expense method.
Under this method, maintenance and repairs are charged to
expense as incurred, which can result in expense volatility
between quarterly and annual periods, depending on the number of
D Checks or engine overhauls performed. If we had chosen a
different method, such as the deferral method for D Checks and
engine overhauls, maintenance and repair expense would be
capitalized and then amortized over the lesser of Block Hours
flown or time period before the next D Check or overhaul event
resulting in a less variable expense between reporting periods.
Income
Taxes
We provide for income taxes using the asset and liability
method. Under this method, deferred income taxes are recognized
for the tax consequences of temporary differences by applying
enacted statutory tax rates applicable to future years to
differences between the financial statement carrying amounts and
the tax bases of existing assets and liabilities. If necessary,
deferred income tax assets are reduced by a valuation allowance
to an amount that is determined to be more likely than not
recoverable. We must make significant estimates and assumptions
about future taxable income and future tax consequences when
determining the amount of the valuation allowance. In addition,
tax reserves are based on significant estimates and assumptions
as to the relative filing positions and potential audit and
litigation exposures thereto. The effect on deferred taxes of a
change in tax laws or tax rates is recognized in the results of
operations in the period that includes the enactment date.
Due to the emergence from bankruptcy and pursuant to
SOP 90-7
pre-emergence tax contingencies, including valuation allowances
on our tax assets, are reversed first to intangible assets and
then to additional
paid-in-capital.
45
Stock-Based
Compensation Expense
Effective January 1, 2006, we account for stock-based
compensation costs in accordance with SFAS 123R, which
requires the measurement and recognition of compensation expense
for all stock-based payment awards made to our employees and
directors. Under the fair value recognition provisions of
SFAS 123R, stock-based compensation cost is measured at the
grant date based on the value of the award and is recognized as
expense over the vesting period. Determining the fair value of
stock-based awards at the grant date requires considerable
judgment, including estimating expected volatility and expected
term. Our expected volatility through July 2006 was calculated
based on the average of the historical volatility of a peer
group of several similar entities, due to the limited trading
history of our stock. Thereafter, we used the observed
volatility of our own common stock. The expected term of the
stock options is based on the expectation of employee exercise
behavior in the future giving consideration to the contractual
terms of the stock-based awards. The risk-free interest rate
assumption is based on the Yield of U.S. Treasury constant
maturities (nominal) with a term equal to the expected life
assumed at the date of grant. If factors change and we employ
different assumptions, stock-based compensation expense may
differ significantly from what we have recorded in the past.
New
Accounting Pronouncements
In June 2006, the Financial Accounting Standards Board
(FASB) issued FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes an
interpretation of FASB Statement No. 109
(FIN 48), which clarifies the accounting
and disclosure for uncertainty in tax positions. FIN 48
seeks to reduce the diversity in practice associated with
certain aspects of the recognition and measurement related to
accounting for income tax uncertainties. This interpretation is
effective January 1, 2007 for us. We have not yet finally
determined the impact that this interpretation will have on our
results of operations or financial position.
In September 2006, the FASB issued SFAS No. 157
Fair Value Measurements (SFAS 157).
SFAS No. 157 provides guidance for using fair value to
measure assets and liabilities and is intended to respond to
investors requests for expanded information about the
extent to which companies measure assets and liabilities
at fair value, the information used to measure fair value and
the effect of fair value measurements on income. SFAS 157
applies whenever other standards require (or permit) assets or
liabilities to be measured at fair value but does not expand the
use of fair value in any new circumstances. SFAS 157 also
requires expanded disclosure of the effect on income for items
measured using unobservable data, establishes a fair value
hierarchy that prioritizes the information used to develop those
assumptions and requires separate disclosure by level within the
fair value hierarchy. The provisions of SFAS 157 are
effective on January 1, 2008. We have not yet determined
the impact of SFAS 157 on our consolidated financial statements.
|
|
ITEM 7A.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
We currently do not hedge against foreign currency fluctuations
and interest rate movements. The risk inherent in our
market-sensitive instruments and positions is the potential loss
arising from adverse changes to the price and availability of
aviation fuel and interest rates as discussed below. The
sensitivity analyses presented herein do not consider the
effects that such adverse changes might have on our overall
financial performance, nor do they consider additional actions
we may take to mitigate our exposure to such changes.
Variable-rate leases are not considered market-sensitive
financial instruments and, therefore, are not included in the
interest rate sensitivity analysis below. Actual results may
differ.
Foreign Currency. We are exposed to market
risk from changes in foreign currency exchange rates, interest
rates and equity prices that could affect our results of
operations and financial condition. Our largest exposure comes
from the British pound, the Euro, the Brazilian Real, the Korean
Won, the Japanese Yen, the Chinese Renminbi and various Asian
currencies.
Aviation fuel. Our results of operations are
affected by changes in the price and availability of aviation
fuel. Market risk is estimated at a hypothetical 10% increase or
decrease in the 2006 average cost per gallon of fuel. Based on
actual 2006 fuel consumption for the Scheduled Service and
Commercial Charter business segments, such an increase would
result in an increase to aviation fuel expense of approximately
$31.0 million
46
in 2006. The contracted charter rates (per mile) and fuel prices
(per gallon) are established and fixed by the AMC for
twelve-month periods running from October to September of the
next year. ACMI does not present an aviation fuel market risk,
as the cost of fuel is borne by the customer.
Prior to September 2006, we did not enter into any contracts to
hedge fluctuations in fuel prices. With respect to the fourth
quarter of 2006, we hedged approximately 15.3 million
gallons of our Scheduled Service fuel uplift through a
combination of physical fixed fuel purchases and jet fuel swaps.
Through March, 2007, we have committed to purchasing
approximately 21.9 million gallons of jet fuel in 2007 at
an average cost of $1.98 per gallon for a total commitment
of $43.3 million. This amount represents approximately 17%
of our projected 2007 Scheduled Service fuel uplift. The
contracts are for monthly uplift at various stations and all
expire in December 2007.
Interest. Our earnings are subject to market
risk from exposure to changes in interest rates on our
variable-rate debt instruments and on interest income generated
from our cash and investment balances. At December 31,
2006, approximately $6.1 million of our debt at face value
had floating interest rates. If interest rates increase by a
hypothetical 20% in the underlying rate as of December 31,
2006, our annual interest expense would increase for 2007 by
approximately $0.1 million.
Market risk for fixed-rate long-term debt is estimated as the
potential decrease in fair value resulting from a hypothetical
20% increase in interest rates and amounts to approximately
$16.5 million as of December 31, 2006. The fair value
of our fixed rate debt was $463.6 million at
December 31, 2006 (see Note 10 to our Financial
Statements). The fair values of our long-term debt were
estimated using quoted market prices and discounted future cash
flows.
47
|
|
ITEM 8.
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
|
48
Report Of
Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Atlas Air Worldwide Holdings, Inc.
We have audited the accompanying consolidated balance sheets of
Atlas Air Worldwide Holdings, Inc. as of December 31, 2006
and 2005 and the related consolidated statements of operations,
stockholders equity (deficit) and cash flows for the years
ended December 31, 2006 and 2005, for the period
July 28, 2004 through December 31, 2004 (Successor)
and the period January 1, 2004 through July 27, 2004
(Predecessor). Our audits also included the financial statement
schedule listed in the Index at Item 15(a). These financial
statements and schedule are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these financial statements and schedule based on our
audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of Atlas Air Worldwide Holdings, Inc. at
December 31, 2006 and 2005 and the consolidated results of
its operations and its cash flows for the years ended
December 31, 2006 and 2005, for the period July 28,
2004 through December 31, 2004 (Successor) and the period
January 1, 2004 through July 27, 2004 (Predecessor),
in conformity with U.S. generally accepted accounting
principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
As discussed in Note 13 to the consolidated financial
statements, in 2006 the Company changed it method of accounting
for share-based compensation.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
effectiveness of Atlas Air Worldwide Holdings, Inc.s
internal controls over financial reporting as of
December 31, 2006 based on criteria established in Internal
Control-Integrated Framework issued by the Committee of
Sponsoring Organization of the Treadway Commission and our
report dated March 12, 2007 expressed an unqualified
opinion thereon.
New York, New York
March 12, 2007
49
ATLAS AIR
WORLDWIDE HOLDINGS, INC.
CONSOLIDATED
BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands, except share data)
|
|
|
ASSETS
|
Current Assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
231,807
|
|
|
$
|
305,890
|
|
Restricted funds held in trust
|
|
|
|
|
|
|
1,077
|
|
Accounts receivable, net of
allowance of $1,811 and $4,898, respectively
|
|
|
134,520
|
|
|
|
131,244
|
|
Prepaid maintenance
|
|
|
64,678
|
|
|
|
49,619
|
|
Deferred taxes
|
|
|
8,540
|
|
|
|
10,094
|
|
Prepaid expenses and other current
assets
|
|
|
24,334
|
|
|
|
31,298
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
463,879
|
|
|
|
529,222
|
|
Other Assets
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
583,271
|
|
|
|
573,870
|
|
Deposits and other assets
|
|
|
32,832
|
|
|
|
22,147
|
|
Lease contracts and intangible
assets, net
|
|
|
39,798
|
|
|
|
55,571
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
1,119,780
|
|
|
$
|
1,180,810
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
STOCKHOLDERS EQUITY
|
Current Liabilities
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
37,053
|
|
|
$
|
27,588
|
|
Accrued liabilities
|
|
|
153,063
|
|
|
|
178,741
|
|
Current portion of long-term debt
and capital leases
|
|
|
19,756
|
|
|
|
53,380
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
209,872
|
|
|
|
259,709
|
|
|
|
|
|
|
|
|
|
|
Other Liabilities
|
|
|
|
|
|
|
|
|
Long-term debt and capital leases
|
|
|
398,885
|
|
|
|
529,742
|
|
Deferred tax liability
|
|
|
4,322
|
|
|
|
18,540
|
|
Other liabilities
|
|
|
33,858
|
|
|
|
14,914
|
|
|
|
|
|
|
|
|
|
|
Total other liabilities
|
|
|
437,065
|
|
|
|
563,196
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
(Note 12)
|
|
|
|
|
|
|
|
|
Stockholders
Equity
|
|
|
|
|
|
|
|
|
Preferred stock, $1 par
value; 10,000,000 shares authorized; no shares issued
|
|
|
|
|
|
|
|
|
Common stock, $0.01 par
value; 50,000,000 shares authorized; 20,730,719 and
19,881,907 shares issued, 20,609,317 and
19,815,338 shares outstanding (net of treasury stock),
respectively
|
|
|
207
|
|
|
|
199
|
|
Additional
paid-in-capital
|
|
|
313,008
|
|
|
|
256,046
|
|
Common stock to be issued to
creditors
|
|
|
7,800
|
|
|
|
13,389
|
|
Treasury stock, at cost; 121,402
and 66,569 shares, respectively
|
|
|
(4,524
|
)
|
|
|
(2,257
|
)
|
Deferred compensation
|
|
|
|
|
|
|
(6,043
|
)
|
Retained earnings
|
|
|
156,352
|
|
|
|
96,571
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
472,843
|
|
|
|
357,905
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and
Stockholders Equity
|
|
$
|
1,119,780
|
|
|
$
|
1,180,810
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Consolidated Financial Statements.
50
ATLAS AIR
WORLDWIDE HOLDINGS, INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
|
Predecessor
|
|
|
|
|
|
|
|
|
|
For the Period
|
|
|
|
For the Period
|
|
|
|
For the
|
|
|
For the
|
|
|
July 28, 2004
|
|
|
|
January 1, 2004
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
through
|
|
|
|
through
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
July 27,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
2004
|
|
|
|
(In thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ACMI
|
|
$
|
407,046
|
|
|
$
|
466,018
|
|
|
$
|
182,322
|
|
|
|
$
|
194,332
|
|
Scheduled service
|
|
|
610,783
|
|
|
|
555,814
|
|
|
|
296,823
|
|
|
|
|
343,605
|
|
AMC charter
|
|
|
326,773
|
|
|
|
440,642
|
|
|
|
126,235
|
|
|
|
|
156,260
|
|
Commercial charter
|
|
|
82,808
|
|
|
|
107,840
|
|
|
|
53,325
|
|
|
|
|
15,812
|
|
Other revenue
|
|
|
48,920
|
|
|
|
47,583
|
|
|
|
20,589
|
|
|
|
|
25,358
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues
|
|
|
1,476,330
|
|
|
|
1,617,897
|
|
|
|
679,294
|
|
|
|
|
735,367
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aircraft fuel
|
|
|
454,675
|
|
|
|
432,367
|
|
|
|
176,009
|
|
|
|
|
175,103
|
|
Salaries, wages and benefits
|
|
|
243,724
|
|
|
|
244,509
|
|
|
|
91,463
|
|
|
|
|
122,715
|
|
Maintenance, materials and repairs
|
|
|
144,132
|
|
|
|
233,614
|
|
|
|
102,682
|
|
|
|
|
133,336
|
|
Aircraft rent
|
|
|
153,259
|
|
|
|
150,879
|
|
|
|
60,151
|
|
|
|
|
81,886
|
|
Ground handling and airport fees
|
|
|
75,088
|
|
|
|
71,735
|
|
|
|
40,815
|
|
|
|
|
53,558
|
|
Landing fees and other rent
|
|
|
68,174
|
|
|
|
80,054
|
|
|
|
37,960
|
|
|
|
|
53,039
|
|
Depreciation and amortization
|
|
|
42,341
|
|
|
|
46,336
|
|
|
|
25,457
|
|
|
|
|
33,510
|
|
Gain on disposal of aircraft
|
|
|
(10,038
|
)
|
|
|
(7,820
|
)
|
|
|
|
|
|
|
|
|
|
Travel
|
|
|
49,910
|
|
|
|
60,089
|
|
|
|
25,741
|
|
|
|
|
29,549
|
|
Pre-petition and post-emergence
costs and related professional fees
|
|
|
353
|
|
|
|
3,706
|
|
|
|
4,106
|
|
|
|
|
9,439
|
|
Other
|
|
|
102,412
|
|
|
|
109,128
|
|
|
|
47,935
|
|
|
|
|
65,931
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
1,324,030
|
|
|
|
1,424,597
|
|
|
|
612,319
|
|
|
|
|
758,066
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
152,300
|
|
|
|
193,300
|
|
|
|
66,975
|
|
|
|
|
(22,699
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-operating Expenses
(Income)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
(12,780
|
)
|
|
|
(6,828
|
)
|
|
|
(917
|
)
|
|
|
|
(572
|
)
|
Interest expense (excluding
post-petition contractual interest of $20,956 for the period
January 31, 2004 through July 27, 2004)
|
|
|
60,298
|
|
|
|
74,512
|
|
|
|
30,582
|
|
|
|
|
50,222
|
|
Capitalized interest
|
|
|
(726
|
)
|
|
|
(123
|
)
|
|
|
|
|
|
|
|
|
|
Loss on early extinguishment of
debt
|
|
|
12,518
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other, net
|
|
|
(811
|
)
|
|
|
1,976
|
|
|
|
(3,504
|
)
|
|
|
|
1,434
|
|
Reorganization items, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(112,513
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-operating expenses
(income)
|
|
|
58,499
|
|
|
|
69,537
|
|
|
|
26,161
|
|
|
|
|
(61,429
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
93,801
|
|
|
|
123,763
|
|
|
|
40,814
|
|
|
|
|
38,730
|
|
Income taxes
|
|
|
34,020
|
|
|
|
49,902
|
|
|
|
18,104
|
|
|
|
|
10,484
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
59,781
|
|
|
$
|
73,861
|
|
|
$
|
22,710
|
|
|
|
$
|
28,246
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
2.89
|
|
|
$
|
3.64
|
|
|
$
|
1.12
|
|
|
|
$
|
0.74
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
2.83
|
|
|
$
|
3.56
|
|
|
$
|
1.11
|
|
|
|
$
|
0.74
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Consolidated Financial Statements.
51
ATLAS AIR
WORLDWIDE HOLDINGS, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
|
Predecessor
|
|
|
|
|
|
|
|
|
|
For the Period
|
|
|
|
For the Period
|
|
|
|
For the
|
|
|
For the
|
|
|
July 28, 2004
|
|
|
|
January 1, 2004
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
through
|
|
|
|
through
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
July 27,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
2004
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Operating
Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
59,781
|
|
|
$
|
73,861
|
|
|
$
|
22,710
|
|
|
|
$
|
28,246
|
|
Adjustments to reconcile net income
to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reorganization items, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(156,722
|
)
|
Depreciation and amortization
|
|
|
42,341
|
|
|
|
46,336
|
|
|
|
25,457
|
|
|
|
|
33,510
|
|
Accretion of debt discount
|
|
|
11,359
|
|
|
|
16,591
|
|
|
|
6,948
|
|
|
|
|
|
|
Loss on early extinguishment of debt
|
|
|
12,518
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of operating lease
discount
|
|
|
1,840
|
|
|
|
1,833
|
|
|
|
764
|
|
|
|
|
|
|
Provision (release of allowance)
for doubtful accounts
|
|
|
(91
|
)
|
|
|
(2,665
|
)
|
|
|
3,409
|
|
|
|
|
(2,329
|
)
|
Gain on disposal of aircraft
|
|
|
(10,038
|
)
|
|
|
(7,820
|
)
|
|
|
|
|
|
|
|
|
|
Deferred income taxes
|
|
|
26,735
|
|
|
|
48,167
|
|
|
|
17,506
|
|
|
|
|
|
|
Amortization of debt issuance cost
and lease financing deferred gains
|
|
|
1,011
|
|
|
|
337
|
|
|
|
|
|
|
|
|
2,862
|
|
Stock based compensation
|
|
|
7,156
|
|
|
|
3,943
|
|
|
|
1,536
|
|
|
|
|
|
|
Other, net
|
|
|
6,027
|
|
|
|
2,084
|
|
|
|
44
|
|
|
|
|
239
|
|
Changes in operating assets and
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(691
|
)
|
|
|
12,433
|
|
|
|
(22,345
|
)
|
|
|
|
36,794
|
|
Prepaids and other current assets
|
|
|
(14,016
|
)
|
|
|
14,129
|
|
|
|
6,144
|
|
|
|
|
17,318
|
|
Deposits and other assets
|
|
|
(12,194
|
)
|
|
|
4,007
|
|
|
|
49
|
|
|
|
|
9,351
|
|
Accounts payable and accrued
liabilities
|
|
|
14,921
|
|
|
|
28,834
|
|
|
|
(33,685
|
)
|
|
|
|
100,148
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating
activities
|
|
|
146,659
|
|
|
|
242,070
|
|
|
|
28,537
|
|
|
|
|
69,417
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Investing
Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(69,889
|
)
|
|
|
(29,071
|
)
|
|
|
(11,755
|
)
|
|
|
|
(16,441
|
)
|
Proceeds from sale of aircraft
|
|
|
27,264
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance proceeds
|
|
|
|
|
|
|
12,550
|
|
|
|
|
|
|
|
|
|
|
Decrease (increase) in restricted
funds held in trust
|
|
|
1,077
|
|
|
|
19,812
|
|
|
|
19,388
|
|
|
|
|
(40,153
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used) provided by
investing activities
|
|
|
(41,548
|
)
|
|
|
3,291
|
|
|
|
7,633
|
|
|
|
|
(56,594
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Financing
Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from loan
|
|
|
|
|
|
|
10,000
|
|
|
|
|
|
|
|
|
18,000
|
|
Proceeds from sale of subscription
shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,153
|
|
Proceeds from stock option exercises
|
|
|
7,856
|
|
|
|
2,028
|
|
|
|
|
|
|
|
|
|
|
Purchase of treasury stock
|
|
|
(2,267
|
)
|
|
|
(2,257
|
)
|
|
|
|
|
|
|
|
|
|
Excess tax benefit on stock options
and restricted stock
|
|
|
4,466
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment of debt issuance costs
|
|
|
(250
|
)
|
|
|
(92
|
)
|
|
|
(1,256
|
)
|
|
|
|
(2,640
|
)
|
Payment on debt and capital lease
obligations
|
|
|
(188,999
|
)
|
|
|
(83,067
|
)
|
|
|
(11,226
|
)
|
|
|
|
(31,404
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used) provided by
financing activities
|
|
|
(179,194
|
)
|
|
|
(73,388
|
)
|
|
|
(12,482
|
)
|
|
|
|
4,109
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and
cash equivalents
|
|
|
(74,083
|
)
|
|
|
171,973
|
|
|
|
23,688
|
|
|
|
|
16,932
|
|
Cash and cash equivalents at the
beginning of period
|
|
|
305,890
|
|
|
|
133,917
|
|
|
|
110,229
|
|
|
|
|
93,297
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of
period
|
|
$
|
231,807
|
|
|
$
|
305,890
|
|
|
$
|
133,917
|
|
|
|
$
|
110,229
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Consolidated Financial Statements.
52
ATLAS AIR
WORLDWIDE HOLDINGS, INC.
CONSOLIDATED
STATEMENT OF STOCKHOLDERS EQUITY (DEFICIT)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
|
|
|
|
|
|
Retained
|
|
|
|
|
|
|
|
|
|
Old
|
|
|
|
|
|
Additional
|
|
|
Stock
|
|
|
Deferred
|
|
|
Earnings
|
|
|
|
|
|
|
Common
|
|
|
Common
|
|
|
Treasury
|
|
|
Paid-In
|
|
|
to be Issued
|
|
|
Compen-
|
|
|
(Accumulated
|
|
|
|
|
|
|
Stock
|
|
|
Stock
|
|
|
Stock
|
|
|
Capital
|
|
|
to Creditors
|
|
|
sation
|
|
|
Deficit)
|
|
|
Total
|
|
|
|
(In thousands, except share amounts)
|
|
|
Predecessor Company:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31,
2003
|
|
$
|
|
|
|
$
|
384
|
|
|
$
|
(4
|
)
|
|
$
|
306,303
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(334,965
|
)
|
|
$
|
(28,282
|
)
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28,246
|
|
|
|
28,246
|
|
Reorganization
adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity write off
|
|
|
|
|
|
|
(384
|
)
|
|
|
4
|
|
|
|
(306,303
|
)
|
|
|
|
|
|
|
|
|
|
|
306,719
|
|
|
|
36
|
|
Issuance of 2,997,334 shares
of common stock to creditors
|
|
|
30
|
|
|
|
|
|
|
|
|
|
|
|
37,617
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37,647
|
|
Common stock to be issued to
creditors 17,202,666
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
216,069
|
|
|
|
|
|
|
|
|
|
|
|
216,069
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Company:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at July 27,
2004
|
|
$
|
30
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
37,617
|
|
|
$
|
216,069
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
253,716
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,710
|
|
|
|
22,710
|
|
Issuance of 610,600 shares of
restricted stock
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
10,720
|
|
|
|
|
|
|
|
(10,726
|
)
|
|
|
|
|
|
|
|
|
Amortization of restricted stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,536
|
|
|
|
|
|
|
|
1,536
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31,
2004
|
|
$
|
36
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
48,337
|
|
|
$
|
216,069
|
|
|
$
|
(9,190
|
)
|
|
$
|
22,710
|
|
|
$
|
277,962
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
73,861
|
|
|
|
73,861
|
|
Purchase of 66,569 shares of
treasury stock
|
|
|
|
|
|
|
|
|
|
|
(2,257
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,257
|
)
|
Issuance of 16,136,716 shares
of common stock to creditors
|
|
|
161
|
|
|
|
|
|
|
|
|
|
|
|
202,519
|
|
|
|
(202,680
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of 118,991 employee stock
options
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
2,027
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,028
|
|
Issuance of 48,000 shares of
restricted stock
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
1,291
|
|
|
|
|
|
|
|
(1,292
|
)
|
|
|
|
|
|
|
|
|
Forfeiture of 29,734 shares of
restricted stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(496
|
)
|
|
|
|
|
|
|
496
|
|
|
|
|
|
|
|
|
|
Amortization of restricted stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,943
|
|
|
|
|
|
|
|
3,943
|
|
Tax benefit on restricted stock and
stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,368
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,368
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31,
2005
|
|
$
|
199
|
|
|
$
|
|
|
|
$
|
(2,257
|
)
|
|
$
|
256,046
|
|
|
$
|
13,389
|
|
|
$
|
(6,043
|
)
|
|
$
|
96,571
|
|
|
$
|
357,905
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
59,781
|
|
|
|
59,781
|
|
Reclassification of deferred
compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,043
|
)
|
|
|
|
|
|
|
6,043
|
|
|
|
|
|
|
|
|
|
Purchase of 54,833 shares of
treasury stock
|
|
|
|
|
|
|
|
|
|
|
(2,267
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,267
|
)
|
Issuance of 444,942 shares of
common stock to creditors
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
5,585
|
|
|
|
(5,589
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of 384,463 employee stock
options
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
7,852
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,856
|
|
Stock option and restricted stock
compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,156
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,156
|
|
Issuance of 107,990 shares of
restricted stock
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeiture of 88,583 shares of
restricted stock
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
318
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
318
|
|
Tax benefit on restricted stock and
stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,466
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,466
|
|
Tax valuation allowance and reserve
reversal
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37,628
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37,628
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31,
2006
|
|
$
|
207
|
|
|
$
|
|
|
|
$
|
(4,524
|
)
|
|
$
|
313,008
|
|
|
$
|
7,800
|
|
|
$
|
|
|
|
$
|
156,352
|
|
|
$
|
472,843
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Consolidated Financial Statements.
53
ATLAS AIR
WORLDWIDE HOLDINGS, INC.
December 31, 2006
The accompanying Consolidated Financial Statements (the
Financial Statements) include the accounts of Atlas
Air Worldwide Holdings, Inc. (AAWW or
Holdings) and its wholly owned subsidiaries.
Holdings is the parent company of two principal operating
subsidiaries, Atlas Air, Inc. (Atlas) and Polar Air
Cargo, Inc. (Polar). Holdings, Atlas, Polar and
Holdings other subsidiaries are referred to in this report
collectively as the Company. All significant
inter-company accounts and transactions have been eliminated.
The Company provides air cargo and related services throughout
the world, serving Asia, Europe, South America and the United
States through two principal means: (i) contractual lease
arrangements in which the Company provides the aircraft, crew,
maintenance and insurance (ACMI) and
(ii) airport-to-airport
scheduled air cargo service (Scheduled Service). The
Company also furnishes seasonal, commercial, military and ad-hoc
charter services (see Note 11). The Company operates only
Boeing 747 freighter aircraft.
Except for per share data, all dollar amounts are in thousands
unless otherwise stated.
The Predecessor (defined below) Financial Statements for the
period January 1, 2004 through July 27, 2004, have
been prepared in accordance with the American Institute of
Certified Public Accountants (AICPA) Statement of
Position
90-7,
Financial Reporting by Entities in Reorganization under the
Bankruptcy Code
(SOP 90-7).
Expenses (including professional fees), realized gains and
losses and provisions for losses resulting from the
reorganization are reported separately as Reorganization
Items, net. Also, interest expense was recorded only to
the extent that it was to be paid during the pending
Chapter 11 Cases (as defined in Note 2) or where
it was probable that it would be an allowed claim in the
Chapter 11 Cases. Cash used for reorganization items is
disclosed separately in the Consolidated Statements of Cash
Flows. References to Predecessor Company or
Predecessor refer to the Company through the
Effective Date. References to Successor Company or
Successor refer to the Company after the Effective
Date, after giving effect to the cancellation of the common
stock of the Predecessor (Old Common Stock) and the
issuance of new securities (Common Stock) in
accordance with the Plan of Reorganization (defined in
Note 2) and the application of fresh-start accounting.
As a result of the application of fresh-start accounting, the
Successor Companys Financial Statements are not presented
on a comparable basis with the Predecessor Companys
financial statements.
|
|
2.
|
Reorganization
and Fresh-Start Accounting
|
On January 30, 2004 (the Bankruptcy Petition
Date), Holdings, Atlas, Polar, Airline Acquisition Corp I
(Acquisition) and Atlas Worldwide Aviation
Logistics, Inc. (Logistics, and together with
Holdings, Atlas, Polar and Acquisition, the
Debtors), each filed voluntary bankruptcy petitions
for relief under Chapter 11 (Chapter 11)
of Title 11 of the United States Code, 11 U.S.C.
§§ 101 et seq. (the Bankruptcy Code),
in the United States Bankruptcy Court for the Southern District
of Florida (the Bankruptcy Court), together referred
to as the Chapter 11 Cases. The Bankruptcy
Court entered an order confirming the Final Modified Second
Amended Joint Plan of Reorganization of the Debtors dated
July 14, 2004 (the Plan of Reorganization) and,
pursuant to a Bankruptcy Court order, the Debtors emerged from
bankruptcy on July 28, 2004, (the Effective
Date). The Financial Statements include data for all
subsidiaries of the Company, including those that did not
participate in the Chapter 11 Cases.
54
ATLAS AIR
WORLDWIDE HOLDINGS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Reorganization
Items
In accordance with
SOP 90-7,
the Company has segregated and classified certain income and
expenses as reorganization items. The following reorganization
items were incurred for the period January 1 through
July 27, 2004:
|
|
|
|
|
Legal and professional fees
|
|
$
|
44,209
|
|
Rejection of CF6-80
power-by-the-hour
engine agreement(a)
|
|
|
(59,552
|
)
|
Claims related to rejection of
owned and capital leased aircraft ( b)
|
|
|
84,143
|
|
Claims related to rejection of
aircraft operating leases(c)
|
|
|
42,506
|
|
Other
|
|
|
7,782
|
|
Fresh-start adjustments
|
|
|
173,598
|
|
Gain on cancellation of
pre-petition debt
|
|
|
(405,199
|
)
|
|
|
|
|
|
Total
|
|
$
|
(112,513
|
)
|
|
|
|
|
|
|
|
|
(a) |
|
The Company rejected a CF6-80
power-by-the-hour
(PBH) engine maintenance agreement and wrote off the
associated accrued liability of $59.6 million. |
|
(b) |
|
The Company rejected two owned aircraft, tail numbers N354MC and
N535MC, which had been financed through debt, and wrote off the
assets and liabilities having net book value of
$40.0 million. The Company also rejected the capital leases
on aircraft tail numbers N924FT and N518MC and wrote off the
assets and liabilities having a net book value of
$44.1 million. |
|
(c) |
|
The Company rejected six leased aircraft, tail numbers N507MC,
N24837, N922FT, N858FT, N859FT and N923FT which resulted in
unsecured claims of $42.5 million. |
Also in accordance with
SOP 90-7,
interest expense of $21.0 million for the period January 31
through July 27, 2004, has not been recognized on
approximately $437.5 million of the Senior Notes because
such interest does not constitute an allowed claim and will not
otherwise be paid.
Fresh-Start
Accounting
In conjunction with its emergence from bankruptcy, the Company
applied the provisions of fresh-start accounting as of the
Effective Date, at which time a new reporting entity was deemed
to have been created.
Fresh-start accounting requires that the Company revalue its
assets and liabilities to estimated fair values at the Effective
Date in a manner similar to purchase accounting.
Significant reorganization adjustments in the balance sheets
result primarily from:
(i) a reduction in flight and ground equipment carrying
values;
(ii) a reduction in inventory carrying values;
(iii) an adjustment for net present value of future lease
payments;
(iv) an adjustment to record intangibles related to ACMI
contracts;
(v) forgiveness of the Companys pre-petition debt and
the other liabilities; and
(vi) issuance of Holdings Common Stock pursuant to
the Plan of Reorganization.
As a result of these fresh-start valuation adjustments, reported
historical financial statements of the Company for periods prior
to the Effective Date are not comparable with those for periods
after July 27, 2004. These adjustments were based upon the
work of the Company and its financial consultants.
55
ATLAS AIR
WORLDWIDE HOLDINGS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company valued its aircraft and leases using appraisals
which were obtained from independent third parties and that
referenced market conditions. The Company valued debt at fair
market value based on available market quotes
and/or the
trading prices of its debt instruments, or if these measurements
were not available, then by comparison to traded debt
instruments with similar interest rates and collateral.
The enterprise value of the Company was calculated by valuation
consultants retained by the Company using a weighted average of
two principal methods, the discounted cash flow growth method
and multiples of comparable public companies. The discounted
cash flow growth method included a term of four years, a
weighted average cost of capital of 16.0% to 17.0%, an average
cost of debt of 7.8%, an average cost of leases of 7.7%, a range
of growth rates of 2.0% to 4.0% and an assumed tax rate of
37.0%. For the multiple methods, the valuation consultants used
a multiple of actual and forecasted earnings before interest,
taxes, depreciation and amortization (EBITDA) for
the fiscal years 2003, 2004 and 2005. The range of EBITDA
multiples for the comparable companies used in the valuation are
5.8 to 6.8 for 2003, 5.3 to 6.3 for 2004 and 5.0 to 6.0 for 2005.
Uncertainties and contingencies that could affect the above
assumptions included (i) changes in interest rates used for
debt and lease calculations, (ii) changes in the growth
rates based on the cyclical nature of the industry and
(iii) changes in geopolitical policies. If different
assumptions were used, the fair values of the Companys
assets and liabilities could have been materially increased or
decreased.
The table below reflects reorganization adjustments for the
discharge of indebtedness, cancellation of Old Common Stock and
issuance of Common Stock, issuance of notes and fresh-start
adjustments as of July 27, 2004:
|
|
|
|
|
Stockholders (deficit) at
July 27, 2004
|
|
$
|
(231,637
|
)
|
Cancellation of Old Common Stock
and additional
paid-in-capital
|
|
|
(306,683
|
)
|
Elimination of accumulated deficit
|
|
|
306,719
|
|
Fresh-start valuation adjustments
|
|
|
(173,598
|
)
|
Gain on cancellation of
pre-petition liabilities
|
|
|
405,199
|
|
Issuance of Common Stock to
creditors
|
|
|
37,647
|
|
Common Stock to be issued to
creditors
|
|
|
216,069
|
|
|
|
|
|
|
Stockholders equity at
July 27, 2004
|
|
$
|
253,716
|
|
|
|
|
|
|
These adjustments are primarily related to the following:
|
|
|
|
|
Liabilities Subject to
Compromise: $405.2 million was recorded as
forgiveness of debt to record the discharge of pre-petition
accounts payable, accrued liabilities and short and long-term
debt.
|
|
|
|
Total Stockholders Equity (Deficit): Adopting
fresh-start accounting results in a new reporting entity with no
retained earnings or deficit. As a result, $306.7 million
of Old Common Stock and additional
paid-in-capital
and the prior $306.7 million of accumulated deficit were
eliminated. All shares of Old Common Stock were cancelled and
shares of Common Stock were issued to creditors pursuant to the
terms of the Plan of Reorganization totaling $253.7 million.
|
56
ATLAS AIR
WORLDWIDE HOLDINGS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The fresh-start valuation adjustments principally reflect the
following increases (decreases):
|
|
|
|
|
Current assets
|
|
$
|
(24,696
|
)
|
Fixed assets
|
|
|
(267,394
|
)
|
Prepaid maintenance
|
|
|
(9,126
|
)
|
Lease contracts and intangible
assets
|
|
|
78,213
|
|
Prepaid aircraft rent
|
|
|
(88,703
|
)
|
Deferred credits and other
liabilities
|
|
|
113,125
|
|
Long term debt
|
|
|
24,983
|
|
|
|
|
|
|
|
|
$
|
(173,598
|
)
|
|
|
|
|
|
These adjustments are the result of:
|
|
|
|
|
Current Assets: $7.3 million reduction
adjustment was made to revalue aircraft inventory based on
estimated fair market value as it relates to the relative fleet
type, a reduction of $15.1 million for debt issuance costs
and a $2.3 million reduction in other current assets.
|
|
|
|
Fixed Assets: A reduction to flight and ground
equipment, $346.8 million and $23.7 million
respectively, was made to reduce fixed assets to their estimated
fair market value, including a $103.1 million elimination
of previously recorded accumulated depreciation.
|
|
|
|
Prepaid Maintenance: Prepaid maintenance costs
were reduced by $9.1 million to their fair values at
July 27, 2004.
|
|
|
|
Lease Contracts and Intangible
Assets: $78.2 million was added as
intangibles to record the value of Atlas ACMI customer
contracts, an unconsolidated equity investees intangibles
and an asset representing the net present value of the revised
lease payments which were below market at July 27, 2004
(see Note 5).
|
|
|
|
Prepaid Aircraft Rent: $88.7 million was
eliminated as a result of the revaluation of operating leases on
aircraft to their fair values at July 27, 2004.
|
|
|
|
Deferred Credits and other Liabilities: An
adjustment of $101.9 million was made to record the impact
of fresh-start accounting, including the elimination of deferred
gains and deferred rent related to operating leases on aircraft
and an adjustment was made to other liabilities of
$11.2 million.
|
|
|
|
Long Term Debt: An adjustment of
$25.0 million was made to adjust the carrying value of
long-term debt to reflect fair market value at July 27,
2004.
|
|
|
|
Negative Goodwill: Included in the adjustments
above is $234.0 million to allocate negative goodwill
against fixed assets of $210.9 million and intangible
assets of $23.1 million. The negative goodwill results from
the excess fair value of assets over the fair value of the
remaining liabilities and reorganization value of
the new equity and primarily results from debt forgiven of
$405.2 million in excess of the $253.7 million value
of new equity received by those creditors.
|
|
|
3.
|
Summary
of Significant Accounting Policies
|
Use of
Estimates
The preparation of financial statements in conformity with
U.S. generally accepted accounting principles
(GAAP) requires management to make estimates and
judgments that affect the amounts reported in the Financial
Statements and footnotes thereto. Actual results may differ from
those estimates. Important estimates include asset lives,
valuation allowances (including, but not limited to, those
related to receivables, inventory and deferred taxes), income
tax accounting, self-insurance employee benefit accruals and
contingent liabilities.
57
ATLAS AIR
WORLDWIDE HOLDINGS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Revenue
Recognition
The Company recognizes revenue when an arrangement exists,
services have been rendered, the price is fixed and determinable
and collectibility is reasonably assured.
ACMI revenue is recognized as the actual Block Hours are
operated on behalf of a customer during a given calendar month.
Revenue for Scheduled Service, AMC and Commercial Charter is
recognized upon flight departure.
Other revenue includes rents from dry leases of owned aircraft
and is recognized in accordance with Statement of Financial
Accounting Standard (SFAS) No. 13,
Accounting for Leases.
Allowance
for Doubtful Accounts
The Company periodically performs an evaluation of its
composition of accounts receivable and expected credit trends
and establishes an allowance for doubtful accounts for specific
customers that are determined to have significant credit risk.
The Company generally does not require collateral but does
receive deposits in advance of certain Commercial Charters. Past
due status of accounts receivable is determined primarily based
upon contractual terms. The Company provides allowances for
estimated credit losses resulting from the inability or
unwillingness of our customers to make required payments and
charges off receivables when they are deemed uncollectible. If
market conditions decline, actual collection experience may not
meet expectations and may result in decreased cash flows and
increased bad debt expense.
Cash
and Cash Equivalents
Cash and cash equivalents include cash on hand, demand deposits
and short-term cash investments that are highly liquid in nature
and have original maturities of three months or less at
acquisition.
Restricted
Funds Held in Trust
Restricted funds held in trust represent cash designated for
unpaid amounts related to the Polar creditors.
Assets
Held for Sale
In August 2005, aircraft tail number N921FT and two related
spare engines were listed for sale by the Company and were sold
in April 2006 for a gain of $2.8 million, net of related
selling expenses.
In June 2006, three additional Boeing
747-200
aircraft, tail numbers N509MC, N355MC and N534MC, were listed
for sale and accounted for as assets held for sale. In addition,
two other Boeing
747-200
aircraft, tail numbers N508MC and N920FT, are under capital
lease and were made available for sublease. The Company
performed an impairment test on all the aircraft and spare
engines and determined that fair market value exceeded book
value.
In September 2006, aircraft tail numbers N509MC and N534MC were
sold for a total of approximately $18.0 million and the
Company recorded a gain on the sale of approximately
$6.3 million, net of related selling expenses.
During October 2006, the Company completed sublease agreements
of aircraft tail numbers N920FT and N508MC, respectively.
In December 2006 it was determined by the Company that aircraft
tail number N355MC should resume flying and was subsequently
returned to the operating fleet and no longer designated as held
for sale. The Company recorded $0.3 million of catch up
depreciation.
58
ATLAS AIR
WORLDWIDE HOLDINGS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The aggregate carrying value of aircraft, spare engines and
equipment held for sale at December 31, 2006 and 2005 was
$0.5 million and $5.7 million, respectively, which is
included within Prepaid expenses and other current assets in the
Consolidated balance sheets.
Investments
The Company holds a minority interest (49%) in a private
company, which is accounted for under the equity method.
The December 31, 2006 and 2005 aggregate carrying value of
the investment of $4.5 million and $15.6 million,
respectively, is included within Deposits and other assets on
the consolidated balance sheets.
The fair value assigned to the Companys 49% investment, as
a result of fresh-start accounting over the underlying equity in
the net assets of the business was allocated to intangible
assets. These assets relate to their airline operating
certificate and finite lived intangible assets related to
existing customer contracts. Fair value of this investment was
determined by an independent appraisal as of July 27, 2004.
The finite-lived intangible asset was being amortized on a
straight-line basis over the three year estimated life of the
contracts. As of December 31, 2006, all such intangible
assets have been eliminated as a result of either amortization
or elimination due to tax accounting (see Note 9 for
further discussion).
At December 2006 and 2005, the Company had net receivables
arising from activity with this entity of $1.6 million and
$1.4 million, respectively, which were included in Accounts
receivable in the consolidated balance sheets.
Inventories
Spare parts, materials and supplies for flight equipment are
carried at average acquisition costs, which are charged to
maintenance expense when used in operations and are included in
Prepaid expenses and other current assets in the consolidated
balance sheet. At December 31, 2006 and 2005, the reserve
for expendable obsolescence was zero as a result of fresh-start
accounting and write-offs of assets exceeding provisions.
Allowances for obsolescence for spare parts expected to be on
hand at the date aircraft are retired from service, are provided
over the estimated useful lives of the related aircraft and
engines. Allowances are also provided for spare parts currently
identified as excess or obsolete. These allowances are based on
management estimates, which are subject to change as conditions
in our business evolve. At December 31, 2006 and 2005, the
net book value of spare parts inventory was $16.2 million
and $13.6 million, respectively.
Rotable parts are recorded in Property and equipment, net on the
Consolidated balance sheets, and are depreciated over the
average remaining fleet lives and written off when beyond
economic repair. At December 31, 2006 and 2005, the net
book value of rotable inventory was $51.8 million and
$47.1 million, respectively and is recorded in Property and
equipment, net on the consolidated balance sheet.
Property
and Equipment
The Company records its property and equipment at cost and
depreciates these assets on a straight-line basis over their
estimated useful lives to their estimated residual values, over
periods not to exceed forty years for flight equipment (from
date of original manufacture) and three to five years for ground
equipment, from the date the asset is placed in service.
Property under capital leases and related obligations are
recorded at the lesser of an amount equal to (a) the
present value of future minimum lease payments computed on the
basis of the Companys incremental borrowing rate or, when
known, the interest rate implicit in the lease or (b) the
fair value of the asset. Amortization of property under capital
lease is on a straight-line basis over the lease term.
Expenditures for major additions, improvements and flight
equipment modifications are generally capitalized and
depreciated over the shorter of the estimated life of the
improvement or the modified assets
59
ATLAS AIR
WORLDWIDE HOLDINGS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
remaining lives or remaining lease term in the event that any
modifications or improvements are made to operating lease
equipment. Substantially all property and equipment is
specifically pledged as collateral for indebtedness of the
Company.
Measurement
of Impairment of Long-Lived Assets and Intangible Assets Subject
to Amortization
When events and circumstances indicate that assets might be
impaired and the undiscounted cash flows estimated to be
generated by those assets are less than the carrying amount of
those assets, the Company records impairment losses with respect
to those assets based upon the amount by which the net book
value of the assets exceeds their estimated fair value. In
determining the fair value of the assets, the Company considers
market trends, published values for similar assets, recent
transactions involving sales of similar assets or quotes from
third party appraisers. In making these determinations, the
Company also uses certain assumptions, including, but not
limited to, the estimated discounted future cash flows expected
to be generated by these assets, which are based on additional
assumptions such as asset utilization, length of service the
asset will be used in the Companys operations and
estimated residual values.
Intangible
Assets
Route acquisition costs primarily include operating rights
(takeoff and landing slots) at Narita Airport in Tokyo, Japan.
Airline operators certificates (AOCs) represent the
allocated value of existing licenses to operate aircraft in
commercial service. Flight Authorities represent the
allocated value of legal rights, regulatory permits and airport
landing slots required for a scheduled airline to serve
international markets. Since each of these operating rights is
considered to have an indefinite life, no amortization has been
recorded.
ACMI contracts represent the future profits expected from
customer contracts on hand as of the Effective Date.
During the year ended December 31, 2006 and 2005, the
Company recorded deferred tax provisions and released the
valuation allowance and reserves previously recorded against
deferred tax assets of approximately $13.3 million and
$8.0 million, respectively. Pursuant to
SOP 90-7,
the reduction in the valuation allowance was recorded as a
reduction in intangible assets (see Note 9 for further
discussion). At December 31, 2006 and 2005 the balance of
intangibles was zero and $13.9 million, respectively.
Amortization expense amounted to $0.6 million and
$7.1 million for the years ended December 31, 2006 and
2005, respectively and $2.5 million for the period July 28
through December 31, 2004.
Off-Balance
Sheet Arrangements
A portion of the Companys 38 operating aircraft are owned
or effectively owned and leased through trusts established
specifically to purchase, finance and lease aircraft to the
Company. The Company has not consolidated any aircraft in the
related trusts upon application of the FASBs revised
Interpretation No. 46, Consolidation of Variable
Interest Entities, an Interpretation of ARB No. 51 ,
because the Company is not the primary beneficiary based on the
option price restructurings. The Companys maximum exposure
under these operating leases is the remaining lease payments,
which amounts are reflected in future lease commitments
described in Note 7 to the Financial Statements.
Concentration
of Credit Risk and Significant Customers
The U.S. Military Airlift Mobility Command
(AMC) charters accounted for 22.1% and 27.2% of
revenue for the years ended December 31, 2006 and 2005,
respectively, 18.6% of the Companys total revenues for the
period July 28 through December 31, 2004 and 21.2% of total
revenues for the period January 1 through July 27, 2004.
Accounts receivable from the U.S. Military were
$23.6 million and $24.4 million at
60
ATLAS AIR
WORLDWIDE HOLDINGS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31, 2006 and 2005, respectively. Emirates
accounted for 11.9% and 9.8% of the Companys total
revenues for the years ended December 31, 2006 and 2005,
respectively, 9.2% of the Companys total revenues for the
period July 28 through December 31, 2004 and 9.0% of total
revenues for the period January 1 through July 27, 2004.
Accounts receivable from Emirates were $13.3 million and
$13.4 million at December 31, 2006 and 2005,
respectively. No other customer accounted for 10.0% or more of
the Companys total operating revenues during these periods.
Income
Taxes
The Company provides for income taxes using the asset and
liability method. Under this method, deferred income taxes are
recognized for the tax consequences of temporary differences by
applying enacted statutory tax rates applicable to future years
to differences between the financial statement carrying amounts
and the tax bases of existing assets and liabilities. If
necessary, deferred income tax assets are reduced by a valuation
allowance to an amount that is determined to be more likely than
not recoverable. The Company must make significant estimates and
assumptions about future taxable income and future tax
consequences when determining the amount of the valuation
allowance. In addition, tax reserves are based on significant
estimates and assumptions as to the relative filing positions
and potential audit and litigation exposures thereto. The effect
on deferred taxes of a change in tax laws or tax rates is
recognized in the results of operations in the period that
includes the enactment date.
Debt
Issuance Costs
Costs associated with the issuance of debt are capitalized and
amortized over the life of the respective debt obligation, using
the effective interest method for amortization. Amortization of
debt issuance costs was $1.0 million and $0.3 million
for the years ended December 31, 2006 and 2005,
respectively and was zero for the period July 28 through
December 31, 2004 and $5.2 million for the period
January 1 through July 27, 2004 and is included as a
component of interest expense on the consolidated statements of
operations.
Aircraft
Maintenance and Repair
Maintenance and repair cost for both owned and leased aircraft
are charged to expense as incurred, except Boeing
747-400
engine (GE CF6-80C2) overhaul costs through January 2004. These
were performed under a fully outsourced PBH maintenance
agreement. The costs thereunder were accrued based on the hours
flown. This contract was rejected in the Chapter 11 Cases.
Foreign
Currency Transactions
The Companys results of operations are exposed to the
effect of foreign exchange rate fluctuations on the
U.S. dollar value of foreign currency denominated operating
revenues and expenses. The Companys largest exposure comes
from the British pound, the Euro, the Brazilian Real, the Korean
Won, the Japanese Yen, the Chinese Renminbi and various
Asian currencies. The Company does not currently have a foreign
currency hedging program related to its foreign
currency-denominated sales. Gains or losses resulting from
foreign currency transactions are included in non-operating
expenses and have not been significant to the Companys
operating results for any period.
Stock-Based
Compensation
The Company has various stock-based compensation plans for
employees and outside directors, which are described more fully
in Note 13 Stock Compensation Plans. Effective
January 1, 2006, the Company accounted for these plans
under SFAS No. 123 (revised
2004) Share-Based Payment
(SFAS 123R).
61
ATLAS AIR
WORLDWIDE HOLDINGS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Supplemental
Cash Flow Information
The aggregate interest payments amounted to $47.7 and
$55.4 million for the years ended December 31, 2006
and 2005, respectively, $23.8 million for the period July
28 through December 31, 2004 and $24.1 million for the
period January 1 through July 27, 2004. The Company paid
reorganization costs of $44.2 million for the period
January 1 through July 27, 2004. The Company acquired
flight equipment through the utilization of debt in non-cash
transactions in the amount of $205.0 million for the period
January 1 through July 27, 2004. The Company had a non-cash
conversion of $405.2 million of debt to equity of
$233.5 million for the period January 1 through
July 27, 2004. During the year ended December 31,
2006, the Company recorded an increase in additional paid in
capital of $37.6 million as a result of the release of
income tax reserves and valuation reserves.
Reclassifications
Certain reclassifications have been made in the prior
years consolidated financial statement amounts and related
note disclosures to conform to the current years
presentation.
Recently
Issued Accounting Standards
In June 2006, the Financial Accounting Standards Board
(FASB) issued FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes an
interpretation of FASB Statement No. 109
(FIN 48), which clarifies the accounting
and disclosure for uncertainty in tax positions. FIN 48
seeks to reduce the diversity in practice associated with
certain aspects of the recognition and measurement related to
accounting for income tax uncertainties. This interpretation is
effective January 1, 2007 for the Company. The
Companys management has not yet finally determined the
impact that this interpretation will have on its results from
operations or financial position.
In September 2006, the FASB issued SFAS No. 157
Fair Value Measurements (SFAS 157).
SFAS 157 provides guidance for using fair value to measure
assets and liabilities and is intended to respond to
investors requests for expanded information about the
extent to which companies measure assets and liabilities
at fair value, the information used to measure fair value and
the effect of fair value measurements on income. SFAS 157
applies whenever other standards require (or permit) assets or
liabilities to be measured at fair value but does not expand the
use of fair value in any new circumstances. SFAS 157 also
requires expanded disclosure of the effect on income for items
measured using unobservable data, establishes a fair value
hierarchy that prioritizes the information used to develop those
assumptions and requires separate disclosure by level within the
fair value hierarchy. The provisions of SFAS 157 are
effective on January 1, 2008. The Company has not yet
determined the impact of SFAS 157 on its consolidated financial
statements.
4. Property
and Equipment, net
Property and equipment, net consisted of the following at
December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Useful Lives
|
|
|
2006
|
|
|
2005
|
|
|
Flight equipment
|
|
|
4.8-35.3 years
|
*
|
|
$
|
583,599
|
|
|
$
|
598,306
|
|
Ground equipment and buildings
|
|
|
0.2-18.0 years
|
|
|
|
18,298
|
|
|
|
16,155
|
|
Pre-delivery deposits for aircraft
|
|
|
|
|
|
|
41,661
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
643,558
|
|
|
|
614,461
|
|
Less accumulated depreciation
|
|
|
|
|
|
|
(60,287
|
)
|
|
|
(40,591
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment
net
|
|
|
|
|
|
$
|
583,271
|
|
|
$
|
573,870
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Useful lives for Boeing
747-200
aircraft range from 4.8 years to 20.3 years and for
Boeing
747-400
aircraft, from 33.5 years to 35.3 years. |
Pre-delivery deposits for aircraft include capitalized interest
of $0.7 million at December 31, 2006.
62
ATLAS AIR
WORLDWIDE HOLDINGS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
One of the Companys Boeing
747-200
aircraft (tail number N808MC) was damaged when it landed during
poor winter weather conditions at Duesseldorf Airport on
January 24, 2005. As a result of this incident, the
airframe and two of its engines were damaged beyond economic
repair. Atlas negotiated a $12.6 million
cash-in-lieu-of-repair
settlement with its insurance carriers and received the
insurance proceeds on July 22, 2005. On May 31, 2005,
Atlas paid $12.25 million to its secured lender in exchange
for release of its lien on this aircraft. Since the settlement
amount exceeded the net book value of the aircraft, the Company
recorded a gain of $7.8 million in 2005 upon receipt of the
insurance proceeds.
Depreciation expense, including the amortization of capital
leases, related to property and equipment amounted to
$42.3 million and $46.3 million for the years ended
December 31, 2006 and 2005, respectively,
$25.5 million for the period July 28 through
December 31, 2004 and $33.5 million for the period
January 1 through July 27, 2004. The Company had equipment
related to capital leases of $22.0 million and
$24.8 million at December 31, 2006 and 2005,
respectively and accumulated depreciation was $8.0 million
and $4.1 million, respectively.
The following tables present the Companys lease contracts
as of December 31:
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
Fair market value adjustment on
operating leases
|
|
$
|
44,132
|
|
|
$
|
44,132
|
|
Less accumulated amortization
|
|
|
(4,334
|
)
|
|
|
(2,496
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
39,798
|
|
|
$
|
41,636
|
|
|
|
|
|
|
|
|
|
|
Fair market value adjustment on operating leases represents the
capitalized discount recorded to adjust leases of the
Companys Boeing 747 aircraft to fair market value as of
the Effective Date. Amortization expense related to lease
contracts amounted to $1.8 million and $1.8 million
for the years ended December 31, 2006 and 2005,
respectively and $0.8 million for the period July 28
through December 31, 2004.
The estimated future amortization expense of operating lease
contracts as of December 31, 2006 is as follows:
|
|
|
|
|
Years Ending
|
|
|
|
December 31,
|
|
|
|
|
2007
|
|
$
|
1,837
|
|
2008
|
|
|
1,837
|
|
2009
|
|
|
1,837
|
|
2010
|
|
|
1,921
|
|
2011
|
|
|
2,337
|
|
Thereafter
|
|
|
30,029
|
|
|
|
|
|
|
|
|
$
|
39,798
|
|
|
|
|
|
|
63
ATLAS AIR
WORLDWIDE HOLDINGS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Companys debt obligations, including capital leases,
as of December 31, were as follows:
|
|
|
|
|
|
|
|
|
Debt Obligations
|
|
2006
|
|
|
2005
|
|
|
Aircraft Credit Facility
|
|
$
|
|
|
|
$
|
33,224
|
|
AFL III Credit Facility
|
|
|
|
|
|
|
113,543
|
|
2000 EETCs
|
|
|
67,320
|
|
|
|
68,319
|
|
1999 EETCs
|
|
|
124,677
|
|
|
|
127,854
|
|
1998 EETCs
|
|
|
186,141
|
|
|
|
190,552
|
|
Capital leases
|
|
|
23,227
|
|
|
|
30,448
|
|
Other debt
|
|
|
17,276
|
|
|
|
19,182
|
|
|
|
|
|
|
|
|
|
|
Total debt and capital leases
|
|
|
418,641
|
|
|
|
583,122
|
|
Less current portion of debt and
capital leases
|
|
|
(19,756
|
)
|
|
|
(53,380
|
)
|
|
|
|
|
|
|
|
|
|
Long-term debt and capital leases
|
|
$
|
398,885
|
|
|
$
|
529,742
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2006 and 2005, the Company had
$82.9 million and $106.8 million, respectively, of
unamortized discount related to the fair market value
adjustments recorded against debt upon application of
fresh-start accounting (see Note 2 above).
Description
of the Companys Debt Obligations
Many of the Companys financing instruments contain certain
limitations on Holdings and its subsidiaries ability
to, among other things; pay dividends or make certain other
restricted payments, consummate certain asset sales, merge or
consolidate with any other person or sell, assign, transfer,
lease, convey or otherwise dispose of all or substantially all
of their assets.
Deutsche
Bank Trust Company
Deutsche Bank Trust Company (Deutsche Bank) was the
administrative agent for two syndicated loans to Atlas and its
affiliates. One loan was made to AFL III (a wholly owned
subsidiary of Atlas) and the other loan was made through the
Aircraft Credit Facility. During 2006, the Company prepaid the
two loans for $140.8 million and wrote off approximately
$12.5 million in discounts. The obligations under these two
credit facilities were secured by 14 Boeing
747-200
aircraft, one Boeing
747-300
aircraft and several spare General Electric CF6-50E2 and CF6-80
engines. AFL III leased the collateral securing the
AFL III Credit Facility, including aircraft and related
equipment, to Atlas. AFL III had collaterally assigned
those leases and the proceeds thereof to Deutsche Bank as
security for the AFL III Credit Facility. Upon termination
of the AFL III Credit Facility, the aircraft and spare
engines were transferred to Atlas.
Aircraft
Credit Facility
The weighted average interest rate under the Aircraft Credit
Facility for the years ended December 31, 2006, 2005 and
2004 was 9.0%, 7.4% and 5.59%, respectively. The year-end rate
as of December 31, 2005 was 8.38%.
AFL III
Credit Facility
The weighted average interest rate for the years ended
December 31, 2006, 2005 and 2004 was 9.20%, 7.58% and
5.88%, respectively. The year-end rate as of December 31,
2005 was 8.58%.
64
ATLAS AIR
WORLDWIDE HOLDINGS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Overview
of EETC Transactions
In three separate transactions in 1998, 1999 and 2000, Atlas
issued EETCs for the purposes of financing the acquisition of a
total of 12 Boeing
747-400F
aircraft. In the 1998 EETC transaction, $538.9 million of
EETCs were issued to finance five of these aircraft, one of
which Atlas then owned, with the remaining four being leased by
Atlas pursuant to leveraged leases. In the 1999 EETC
transaction, $543.6 million of EETCs were issued to
finance five of these aircraft, one of which Atlas then owned,
with the remaining four being leased by Atlas pursuant to
leveraged leases. In the 2000 EETC transaction,
$217.3 million of EETCs were issued to finance the
remaining two of these aircraft, both pursuant to leveraged
leases.
Leverage
Lease Structure
In a leveraged lease, the owner trustee is the owner of record
for the aircraft. Wells Fargo Bank Northwest, National
Association (Wells Fargo) serves as the owner
trustee with respect to the leveraged leases in each of
Atlas EETC transactions. As the owner trustee of the
aircraft, Wells Fargo serves as the lessor of the aircraft under
the EETC lease between Atlas and the owner trustee. Wells Fargo
also serves as trustee for the beneficial owner of the aircraft,
the owner participant. The original owner participant for each
aircraft invested (on an equity basis) approximately 20% of the
original cost of the aircraft. The remaining approximately 80%
of the aircraft cost was financed with debt issued by the owner
trustee on a non-recourse basis in the form of equipment notes.
The equipment notes were generally issued in three series, or
tranches, for each aircraft, designated as
Series A, B and C equipment notes. The loans evidenced by
the equipment notes were funded by the public offering of EETCs.
Like the equipment notes, the EETCs were issued in three series
for each EETC transaction designated as Series A, B
and C EETCs. Each class of EETCs was issued by the trustee for
separate Atlas pass through trusts with the same designation as
the class of EETCs issued. Each of these pass through trustees
is also the holder and beneficial owner of the equipment notes
bearing the same class designation.
With respect to the six EETC financed aircraft currently owned
by Atlas, there is no leveraged lease structure or EETC lease.
Atlas is the beneficial owner of the aircraft and the issuer of
the equipment notes with respect thereto. The equipment notes
issued with respect to the owned aircraft are with full recourse
to Atlas.
Commencing in May 2008, the Company could be subject to
Additional Monthly Lease Rentals (AMLR), which could
require payment of up to an additional $0.1 million per
month in rent on each of the six leased EETC aircraft, subject
to an $11.0 million per aircraft limit over the remaining
term. The AMLR payments would be applied to the underlying
notes in the leveraged leases, and would only arise should the
Company exceed certain financial targets and if it is determined
that the then fair market monthly rental for the aircraft
exceeds $0.8 million.
2000
EETCs
In April 2000, Atlas completed an offering of
$217.3 million of EETCs (the 2000 EETCs). The
cash proceeds from the 2000 EETCs were used to finance (through
two leveraged lease transactions) two new Boeing
747-400F
freighter aircraft which were delivered to Atlas during the
second quarter of 2000. Subsequent to the financing, Atlas
completed a sale-leaseback transaction on both aircraft and
issued a guarantee to the owner participant of one of the
aircraft. In connection with this secured debt financing, Atlas
executed equipment notes with original interest rates ranging
from 8.71% to 9.70%, with a weighted average interest rate of
8.93% payable monthly.
The current balance relates to aircraft N409MC acquired in the
bankruptcy process. In connection with this aircraft debt and as
a result of fresh start accounting, the Company has a blended
effective interest rate of
65
ATLAS AIR
WORLDWIDE HOLDINGS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
11.31% payable monthly. According to the terms of the equipment
notes, principal payments vary and are payable through 2021.
1999
EETCs
In 1999, Atlas completed an offering of EETCs (1999
EETCs). As of December 31, 2006 and 2005, the
outstanding balance of the 1999 EETCs related to two owned
Boeing
747-400F
aircraft tail numbers N495MC and N496MC. In connection with this
secured debt financing, Atlas executed equipment notes with
original interest rates ranging from 6.88% to 8.77%, with a
weighted average interest rate of 7.52% payable monthly.
In connection with this aircraft debt and as a result of fresh
start accounting, the Company has a blended effective interest
rate of 13.94% as of December 31, 2006 and 2005. According
to the terms of the equipment notes, principal payments vary and
are payable monthly through 2020.
1998
EETCs
In 1998, Atlas completed an offering of Enhanced Equipment
Trust Certificates (the 1998 EETCs). As of
December 31, 2006 and 2005 the outstanding balance of the
1998 EETCs relates to three owned
B747-400F
aircraft tail numbers N491MC, N493MC and N494MC. In connection
with this secured debt financing, Atlas executed equipment notes
with original interest rates ranging from 7.38% to 8.01%, with a
weighted average interest rate of 7.54% payable monthly.
In connection with this aircraft debt, the Company acquired
aircraft N491MC and N493MC in the bankruptcy process. As a
result of fresh start accounting, the Company has a blended
effective interest rate of 13.89% for aircraft tail number
N491MC and 13.72% for aircraft tail number N493MC. Aircraft tail
number N494MC was acquired in 1998 and has a weighted average
interest rate of 7.54%. According to the terms of all three
aircraft for the equipment notes, principal payments vary and
are payable monthly through 2020.
Capital
Leases
Capital lease obligations with an aggregate net present value of
$23.2 million and $30.4 million were outstanding at
December 31, 2006 and 2005, respectively. The weighted
average interest rate as of December 31, 2006 and 2005 was
6.71% and 7.16%, respectively. Payments are due monthly through
2009. The underlying assets related to capital lease obligations
as of December 31, 2006 and 2005 were three aircraft. The
aircraft tail numbers are N508MC, N516MC and N920FT.
Other
Debt
Other debt consists of various term loans aggregating
$17.3 million and $19.2 million as of
December 31, 2006 and 2005, respectively. The weighted
average interest rate for the term loans as of December 31,
2006 and 2005 was 7.35% and 6.92%, respectively.
Revolving
Credit Facility
On November 30, 2004, the Company entered into a revolving
credit facility effective December 31, 2004. The revolving
credit facility initially provided the Company with revolving
loans of up to $60 million in the aggregate, including up
to $10 million of letters of credit accommodations. On
August 2, 2006, the revolving credit facility was
terminated by the Company.
66
ATLAS AIR
WORLDWIDE HOLDINGS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table summarizes the maturities of the
Companys debt obligations, including the amortization of
the discount of the fair market value adjustments, reflecting
the terms that were in effect as of December 31, 2006:
|
|
|
|
|
Years Ending
|
|
|
|
December 31,
|
|
|
|
|
2007
|
|
$
|
19,756
|
|
2008
|
|
|
29,730
|
|
2009
|
|
|
31,823
|
|
2010
|
|
|
27,834
|
|
2011
|
|
|
30,330
|
|
Thereafter
|
|
|
279,168
|
|
|
|
|
|
|
|
|
$
|
418,641
|
|
|
|
|
|
|
Aircraft/Real
Estate Capital and Operating Leases
The following table summarizes rental expenses for operating
leases in each of the periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
Predecessor
|
|
|
|
|
|
|
|
|
|
For the Period
|
|
|
For the Period
|
|
|
|
For the
|
|
|
For the
|
|
|
July 28, 2004
|
|
|
January 1, 2004
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
through
|
|
|
through
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
July 27
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2004
|
|
|
Aircraft rent
|
|
$
|
153,259
|
|
|
$
|
150,879
|
|
|
$
|
60,151
|
|
|
$
|
81,886
|
|
Office, vehicles and other
|
|
$
|
13,403
|
|
|
$
|
16,280
|
|
|
$
|
7,207
|
|
|
$
|
10,043
|
|
At December 31, 2006, 18 of the 38 operating aircraft of
the Company were leased, of which three were capital leases and
fifteen were operating leases with initial lease term expiration
dates ranging from 2010 to 2025, with an average lease term of
13.1 years as of December 31, 2006. Sublease income
for the leased aircraft included as a reduction to lease expense
was $1.5 million and $0.3 million for the years ended
December 31, 2006 and 2005, $4.4 million for the
period July 28 through December 31, 2004 and
$5.8 million for the period January 1, through
July 27, 2004.
67
ATLAS AIR
WORLDWIDE HOLDINGS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table summarizes the minimum annual rental
commitments as of the periods indicated under capital leases and
non-cancelable aircraft, real estate and other operating leases
with initial or remaining terms of more than one year,
reflecting the terms that were in effect as of December 31,
2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aircraft
|
|
|
Other
|
|
|
Less:
|
|
|
|
|
|
|
Capital
|
|
|
Operating
|
|
|
Operating
|
|
|
Sub-Lease
|
|
|
Net
|
|
|
|
Leases
|
|
|
Leases
|
|
|
Leases
|
|
|
Income
|
|
|
Leases
|
|
|
Years Ending December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
$
|
9,000
|
|
|
$
|
128,052
|
|
|
$
|
5,425
|
|
|
$
|
(6,240
|
)
|
|
$
|
136,237
|
|
2008
|
|
|
9,000
|
|
|
|
143,277
|
|
|
|
4,863
|
|
|
|
(6,240
|
)
|
|
|
150,900
|
|
2009
|
|
|
7,500
|
|
|
|
145,499
|
|
|
|
4,688
|
|
|
|
(5,430
|
)
|
|
|
152,257
|
|
2010
|
|
|
|
|
|
|
143,008
|
|
|
|
4,301
|
|
|
|
|
|
|
|
147,309
|
|
2011
|
|
|
|
|
|
|
141,269
|
|
|
|
3,730
|
|
|
|
|
|
|
|
144,999
|
|
Thereafter
|
|
|
|
|
|
|
1,609,814
|
|
|
|
1,546
|
|
|
|
|
|
|
|
1,611,360
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total minimum lease payments
|
|
|
25,500
|
|
|
$
|
2,310,919
|
|
|
$
|
24,553
|
|
|
$
|
(17,910
|
)
|
|
$
|
2,343,062
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: amounts representing interest
|
|
|
(2,273
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Present value of future minimum
capital lease payments
|
|
$
|
23,227
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of net gains on sale-leaseback transactions
recorded for the periods January 1, 2004 through
July 27, 2004 was $4.3 million. These gains had been
deferred and had been amortized over the term of the operating
leases. Such amounts were eliminated at July 27, 2004 as
part of the recording of assets and liabilities to fair value as
required by fresh-start accounting.
The weighted average effective interest rates on the capitalized
leases for aircraft tail numbers N508MC, N516MC and N920FT
were 6.71% and 7.16% at December 31, 2006 and 2005,
respectively. The rates were reset to fair value on the
Effective Date due to fresh-start accounting.
In addition to the above commitments, the Company leases engines
under short-term lease agreements on an as needed basis.
Certain leases described above contain renewal options and
escalations.
|
|
8.
|
Related
Party Transactions
|
The Company was party to two separate consulting agreements with
Joseph J. Steuert, a former director of the Company. Pursuant to
such consulting agreements, the former director agreed to
provide the Company with consulting services in connection with
the restructuring of its financial obligations. The Company
incurred consulting fees and expenses to this former director of
$0.8 million for the period January 1 through July 27,
2004. The agreement was rejected in Chapter 11 Cases and
the Company is no longer subject to the agreement or the
agreements automatic renewal.
Another former director of the Company, Stephen A. Greene, is a
partner in a law firm, Cahill Gordon & Reindel LLP
which previously acted as outside counsel to the Company. The
Company paid legal fees and expenses to this law firm of
$0.7 million and $1.2 million for the years ended
December 31, 2006 and 2005, respectively, $3.0 million
for the period July 28 through December 31, 2004 and
$1.9 million for the period January 1 through July 27,
2004.
On the Effective Date, the Company elected a new Board. The new
Board includes James S. Gilmore III, a non-employee
director of the Company, who is a partner at the law firm of
Kelley Drye & Warren LLP, previously outside counsel to
the Company, and Robert F. Agnew, also a non-employee director
of the
68
ATLAS AIR
WORLDWIDE HOLDINGS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Company, who is an executive officer of Morten Beyer &
Agnew, a consulting firm with which the Company previously
transacted business. The Company paid legal fees to the firm of
Kelley Drye & Warren LLP of $0.6 million and
$4.5 million for the years ended December 31, 2006 and
2005, respectively, $2.7 million for the period July 28
through December 31, 2004 and $1.2 million for the
period January 1 through July 27, 2004, and fees and
expenses to Morten Beyer & Agnew of zero and
$0.2 million for the years ended December 31, 2006 and
2005, respectively, and $0.1 million for the period July 28
through December 31, 2004. Neither Mr. Gilmore nor
Mr. Agnew served on the Audit and Governance Committee (now
known as the Audit Committee) during 2005. Since June 25,
2006, Mr. Agnew has served as Chairman of the Audit
Committee. The Company incurred directors fees and stock
compensation relating to these two directors in the combined
amount of $0.9 million and $0.6 million for the years
ended December 31, 2006 and 2005, respectively, and
$0.1 million for the period July 28 through
December 31, 2004.
The Company dry leased three owned aircraft as of
December 31, 2006 and 2005 to a company in which we own a
minority investment. The investment is accounted for under the
equity method. The leases have terms that mature at various
dates through July 2007 and contain options for renewal by the
lessee. The minimum future rentals at the December 31, 2006, on
these leases through July 2007 are $26.1 million. The carrying
value of these aircraft as of December 31, 2006 was $171.9
million and the accumulated depreciation as of December 31, 2006
was $12.8 million. The leases provide for payment of rent and a
provision for maintenance costs associated with the aircraft.
Total rental income for these aircraft was $45.4 million
and $44.8 million for the years ended December 31,
2006 and 2005, $19.0 million for the period July 28 through
December 31, 2004 and $24.8 million for the period
January 1 through July 27, 2004 and the revenue is included
in other revenue in the accompanying statement of operations.
The Company accounts for income taxes according to the
provisions of SFAS No. 109, Accounting for Income
Taxes. The significant components of the provision for
income taxes are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
Predecessor
|
|
|
|
|
|
|
|
|
|
For the Period
|
|
|
For the Period
|
|
|
|
For the
|
|
|
For the
|
|
|
July 28, 2004
|
|
|
January 1, 2004
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
through
|
|
|
through
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
July 27,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2004
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
5,617
|
|
|
$
|
1,018
|
|
|
$
|
336
|
|
|
$
|
9,368
|
|
State and local
|
|
|
1,501
|
|
|
|
711
|
|
|
|
262
|
|
|
|
1,116
|
|
Foreign
|
|
|
167
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current expense
|
|
|
7,285
|
|
|
|
1,735
|
|
|
|
598
|
|
|
|
10,484
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
25,332
|
|
|
|
44,706
|
|
|
|
16,087
|
|
|
|
|
|
State and local
|
|
|
1,403
|
|
|
|
3,275
|
|
|
|
1,419
|
|
|
|
|
|
Foreign
|
|
|
|
|
|
|
186
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred expense
|
|
|
26,735
|
|
|
|
48,167
|
|
|
|
17,506
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax expense
|
|
$
|
34,020
|
|
|
$
|
49,902
|
|
|
$
|
18,104
|
|
|
$
|
10,484
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
69
ATLAS AIR
WORLDWIDE HOLDINGS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
A reconciliation of differences between the U.S. federal
statutory income tax rate and the effective income tax rates for
the periods as defined below is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
Predecessor
|
|
|
|
|
|
|
|
|
|
For the Period
|
|
|
For the Period
|
|
|
|
For the
|
|
|
For the
|
|
|
July 28, 2004
|
|
|
January 1, 2004
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
through
|
|
|
through
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
July 27,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2004
|
|
|
U.S. federal statutory tax
expense rate
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
State and local taxes based on
income, net of federal benefit
|
|
|
2.0
|
%
|
|
|
2.2
|
%
|
|
|
2.8
|
%
|
|
|
7.4
|
%
|
Change in valuation allowance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(116.3
|
)%
|
Book expenses not deductible for
tax purposes
|
|
|
1.0
|
%
|
|
|
1.7
|
%
|
|
|
2.2
|
%
|
|
|
2.4
|
%
|
Income tax reserves
|
|
|
(2.0
|
)%
|
|
|
|
|
|
|
|
|
|
|
24.0
|
%
|
Reorganization items
|
|
|
0.1
|
%
|
|
|
0.5
|
%
|
|
|
3.5
|
%
|
|
|
74.4
|
%
|
Other
|
|
|
0.2
|
%
|
|
|
0.9
|
%
|
|
|
0.9
|
%
|
|
|
0.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate
|
|
|
36.3
|
%
|
|
|
40.3
|
%
|
|
|
|