FORM 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, 2007
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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 þ
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 þ
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 þ 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. þ
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act. (Check one):
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Large
accelerated
filer þ
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Accelerated
filer o
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Non-accelerated
filer o
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Smaller reporting company
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(Do
not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
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 29, 2007 was approximately
$758,516,424. 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 February 1, 2008, there were
21,644,277 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 þ 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 21, 2008.
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 when an aircraft departs the terminal
until it arrives at the destination terminal. |
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RATM |
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Revenue per ATM, 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 divided by 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 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 Checks and are
generally performed on 18 to 24 month intervals. |
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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 six to ten years or 25,000 to 28,000
flight hours, whichever comes first for Boeing
747-200s and
six years for Boeing
747-400s. |
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FAC |
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Fully Allocated Contribution consists of income (loss) before
taxes, excluding post-emergence costs and related professional
fees, gains on the sale of aircraft, dry leasing 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 operating
subsidiaries: Atlas Air, Inc. (Atlas), which is
wholly-owned, and Polar Air Cargo Worldwide, Inc.
(Polar), in which Holdings has a 51% economic
1
interest and 75% voting interest. On June 28, 2007, Polar
issued shares representing a 49% economic interest and a 25%
voting interest to DHL Network Operations (USA), Inc.
(DHL), a subsidiary of Deutsche Post AG
(DP). Prior to that date, Polar was wholly owned by
Holdings and was the parent company of Polar Air Cargo, Inc.,
the entity through which Holdings had principally conducted its
scheduled service business and was converted to a limited
liability company in June 2007 (Polar LLC), Polar
LLC is now wholly owned by AAWW. Holdings, Atlas, Polar and
Polar LLC are referred to collectively as the
Company we, us or
our. We are the leading provider of leased freighter
aircraft, furnishing outsourced air cargo operating services and
solutions to the global air freight industry. We manage and
operate the worlds largest fleet of 747 freighters. We
provide a unique value proposition to our customers by giving
them access to new production freighters that deliver the
highest reliability and lowest unit cost in the marketplace
combined with outsourced aircraft operating services that lead
the industry in terms of quality and global scale. Our customers
include airlines, freight forwarders, the U.S. military and
charter brokers. We provide global services with operations in
Asia, the Middle East, Australia, Europe, South America, Africa
and North America.
We believe that demand for efficient, wide-body freighter
aircraft and related outsourced aircraft operating solutions
will increase due to growing international trade, in particular,
growth in developing markets in Asia, India and South America.
According to industry studies, global cargo traffic, measured in
revenue tonne-kilometers is expected to triple over the next two
decades. As demand continues to increase, we believe that the
supply of suitable freighter aircraft will not keep pace with
this increase in demand as a result of limited production
capacity for new freighters, limited
passenger-to-freight
conversion capacity and the anticipated retirement of aging
aircraft currently operating in the world fleet.
As of December 31, 2007, our existing fleet of 37
wide-body, freighter aircraft, including 20 modern,
high-efficiency, Boeing
747-400
aircraft, and our complementary operating solutions, uniquely
positions us to benefit from the forecasted growth and
increasing demand for efficient wide-body freighter airplanes in
the global air freight market. Our market position is further
enhanced by our order of 12 new
state-of-the-art
Boeing
747-8F
aircraft, scheduled to be delivered in 2010 and 2011. We are the
only current provider of these aircraft to the outsourced
freighter market. In addition to our firm order, we also hold
rights to purchase up to an additional 14 Boeing
747-8F
aircraft, providing us with flexibility to further expand our
fleet in response to market conditions.
We believe that the scale, scope and quality of our outsourced
services are unparalleled in our industry. The relative
operating cost efficiency of our current
747-400F
aircraft and future
747-8F
aircraft, including their superior fuel efficiency, create a
compelling value proposition for our customers and position us
well for growth in both the wet and dry lease areas of our
business.
Our primary service offerings are:
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Freighter aircraft leasing services which encompasses the
following:
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Fully outsourced aircraft operating solutions of aircraft, crew,
maintenance and insurance known as wet leasing or
(ACMI). An ACMI lease is a contract for the use of
one or more dedicated aircraft together with complementary
operating services. We typically contract these services for
three to six year periods using Boeing
747-400s and
for shorter periods using Boeing
747-200s.
Our outsourced operating solutions include crew, maintenance and
insurance for the aircraft, while customers assume fuel, yield
and demand risk;
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Express network ACMI, where Polar will provide outsourced
airport-to-airport
wide-body cargo aircraft solutions to DHL. Upon the commencement
of this service, which will be no later than October of 2008,
AAWW will operate a minimum of six dedicated Boeing
747-400
aircraft servicing the requirements of DHLs trans-Pacific
express operations. Polar has historically provided and will
continue to provide scheduled air-cargo service on these
aircraft to our freight forwarder and other shipping customers
with scheduled
airport-to-airport
cargo services (Scheduled Service). Once the express
network ACMI services commence, however, DHL will assume the
commercial risk of the operation;
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Aircraft and engine leasing solutions known as dry leasing
(Dry Leasing). We typically dry lease to third
parties for one or more dedicated aircraft for three to five
year periods. Dry Leasing usually involves the leasing of
aircraft to customers who are responsible for crew, maintenance
and insurance and who assume fuel, yield and demand risk. In
February 2008, Holdings formed a wholly owned subsidiary, based
in Ireland, to further its dry leasing efforts.
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Charter services, which encompasses the following:
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Military charter services (AMC Charter), where we
provide air cargo services for the Air Mobility Command (the
AMC).
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Commercial charters, where we provide all-inclusive cargo
aircraft charters to brokers, freight forwarders, direct
shippers and airlines (Commercial Charter).
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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.
DHL
Investment
On June 28, 2007, DHL acquired from Polar a 49% equity
interest, representing a 25% voting interest, in Polar in
exchange for $150.0 million in cash, of which
$75.0 million was paid at closing. AAWW also received
approximately $22.9 million in working capital from DHL as
additional proceeds in November 2007. The remaining
$75.0 million is scheduled to be paid in 2008 in two equal
installments (plus interest). In January 2008, AAWW received the
first installment of the purchase payment of $38.6 million,
including interest of $1.1 million, and the final purchase
payment of $37.5 million (plus interest) is scheduled to be
paid by DHL on November 17, 2008, subject to potential
acceleration. AAWW continues to own the remaining 51% of Polar
with a 75% voting interest. In addition to the other amounts
paid by DHL, in July 2007, Polar received a $30.0 million
non-interest bearing refundable deposit from DHL, to be repaid
by Polar on the earlier of 90 days subsequent to the
blocked space agreement (the BSA) Commencement Date
(as defined below) or January 31, 2009.
Concurrently with the investment transaction, DHL and Polar
entered into a
20-year BSA,
whereby Polar will provide air cargo capacity to DHL in
Polars Scheduled Service network for DHL Express services
(the DHL Express Network). On or before
October 27, 2008, (the Commencement Date),
Polar will commence flying DHL Express trans-Pacific
express network. As part of the transaction to issue shares in
Polar to DHL, Polar LLCs ground employees, crew, ground
equipment, airline operating certificate and flight authorities,
among other things, were transferred to Polar and Polars
interest in Polar LLC was transferred directly to AAWW.
Polar, which historically bore all direct costs of operation,
regardless of customer utilization, will transfer the financial
risk and costs associated with the Scheduled Service business to
DHL upon the Commencement Date. Also, until the Commencement
Date of the DHL Express Network, AAWW will provide both
financial support and assume all risk and rewards of the
operations of Polar, with DHL maintaining support and assuming
risk of operating losses thereafter.
The express network service will provide contracted
airport-to-airport
wide-body aircraft solutions to DHL and other freight customers
and shippers. The BSA and related agreements will provide the
Company with a guaranteed revenue stream from the six Boeing
747-400
aircraft that have been dedicated to this venture. Over the term
of the BSA, DHL will be subject to a monthly minimum Block Hour
guarantee that is expected to provide the Company with a target
level of profitability. Polar will provide DHL with guaranteed
access to air cargo capacity, and the aircraft will be operated
on a basis similar to Atlas ACMI arrangements with other
customers, by employing a long-term contract that allocates
capacity and mitigates yield and demand risks.
As part of this transaction, Polar will operate six Boeing
747-400
freighter aircraft, which are being subleased from Atlas and
Polar LLC, from closing until ten years from the commencement of
the DHL Express Network flying. In addition, Polar is operating
a Boeing
747-200
freighter aircraft, also subleased
3
from Atlas, and may continue to do so to support the DHL Express
Network. Polar and Atlas also have entered into a flight
services agreement under which Atlas will provide Polar with
maintenance and insurance for the seven freighters, with flight
crewing also to be furnished once the merger of the Polar and
Atlas crew forces (described below) has been completed. Polar
will have access to additional capacity through wet leasing of
available Atlas aircraft. Under other separate agreements, Atlas
and Polar will supply administrative, sales and ground support
services to one another.
The BSA establishes DHL capacity purchase commitments on Polar
flights. Under the flight services agreement, Atlas is
compensated by Polar on a per Block Hour basis, subject to a
monthly minimum Block Hour guarantee, at a predetermined rate
that escalates annually. DHL has the right to terminate the
20-year BSA
at the fifth, tenth and fifteenth anniversaries of commencement
of DHL Express Network flying. However, in the event of such a
termination at the fifth anniversary, DHL or Polar will be
required to assume all six Boeing
747-400
freighter head leases for the entire remaining term of each such
aircraft lease, each as guaranteed by DP or a creditworthy
subsidiary. Either party may terminate for cause (as defined) at
any time. With respect to DHL, cause includes
Polars inability to meet certain departure and arrival
criteria for an extended period of time and upon certain
change-of-control
events, in which case DHL may be entitled to liquidated damages
from Polar. Under such circumstances, DHL is further entitled to
have an affiliate assume any or all of the six Boeing
747-400
freighter subleases for the remainder of the ten-year term under
each such sublease, with Polar liable up to an agreed amount of
such lease obligations. In the event of any termination during
the ten-year sublease term, DHL is required to pay the lease
obligations for the remainder of the head lease and guarantee
Polars performance under the leases.
In other agreements, DP guaranteed DHLs (and Polars)
obligations under the various transaction documents. AAWW has
agreed to indemnify DHL for and against various obligations of
Polar and its affiliates.
Operations
Introduction. We operate our service offerings
through four reportable segments: ACMI, Scheduled Service, AMC
Charter and Commercial Charter. All reportable business segments
are directly or indirectly engaged in the business of air cargo
transportation but have different commercial and 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 guaranteed
levels 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 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. or 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 23.1%, 27.6% and 28.8% of our operating
revenue and 45.1%, 50.8% and 53.2% of our operated block hours
for the years ended December 31, 2007, 2006 and 2005,
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
2007, our principal ACMI
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customers included The International Airline of United Arab
Emirates (Emirates), British Airways, Qantas, Air
New Zealand, Panalpina Airfreight Management and Instone Air
Services, Inc.
As of December 31, 2007, we had 17 ACMI and Dry Leasing
contracts expiring at various times from 2008 to 2015, including
renewals. The original length of these contracts ranged from
three months to five years. Emirates, currently our most
significant ACMI customer, accounted for approximately 46.7%,
43.3% and 33.9% of ACMI revenue and 10.8%, 11.9% and 9.8% of our
total operating revenue for the years ended December 31,
2007, 2006 and 2005, respectively. In addition, we have also
operated short-term, seasonal ACMI contracts with companies such
as FedEx Corporation (FedEx) and Lufthansa, among
others, and we expect to continue to provide such services in
the future.
Scheduled Service. Both Polar and Atlas
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
our 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
Viracopos Airport near Sao Paulo. Our Scheduled Service
operation 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 ground
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 42.1%, 41.4% and 34.4% of
our total operating revenue and 32.1%, 29.6% and 23.6% of our
operated block hours for the years ended December 31, 2007,
2006 and 2005, respectively. The majority of our Scheduled
Service business is conducted with large multi-national freight
forwarders, which include, among others, DGF (DHL/Global
Forwarding), Expeditors International, CEVA Logistics, Hellmann
Worldwide, Kuehne and Nagel, Nippon Express, Panalpina, Schenker
AG and UPS Supply Chain Solutions. No single Scheduled Service
customer accounted for 10% or more of our total revenue for 2007.
The Asian market accounts for approximately 54.5%, 57.7% and
60.8% of our Scheduled Service revenue for the years ended
December 31, 2007, 2006 and 2005, 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
U.S. Department of Transportation (DOT) to
serve China on a Scheduled Service basis. We currently have
rights to 16 weekly flights to China, serving both the
Shanghai and Beijing markets.
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 than the fixed price, then we pay the
difference to AMC. AMC buys cargo capacity on two bases: a fixed
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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 2007 and 2006 was expansion flying.
Revenue derived from the AMC Charter business represented 24.1%,
22.1% and 27.2% of operating revenue and 16.7%, 15.0% and 18.6%
of our operated block hours for the years ended
December 31, 2007, 2006 and 2005, 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 7.5%, 5.6% and 6.7% of our operating revenue and 5.6%, 4.1%
and 4.0% of our operated block hours for the years ended
December 31, 2007, 2006 and 2005, respectively.
Long-term
Revenue Commitments
The following table sets forth the contractual minimum revenues
expected to be received from our existing ACMI customers, Dry
Leasing customers and DHL for the years indicated as of
December 31, 2007 (in thousands):
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2008
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$
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362,577
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2009
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358,979
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2010
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264,288
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2011
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211,032
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2012
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204,948
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Thereafter
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2,008,273
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Total
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$
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3,410,097
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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 unaffiliated 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
Maintenance represented our fourth-largest operating expense for
the year ended December 31, 2007. 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 Federal Aviation Administration
(FAA). The costs necessary to adhere to these
maintenance programs will increase over time, based on the age
of the aircraft
and/or
engines or due to FAA airworthiness directives (ADs).
Scheduled airframe maintenance is based upon letter
checks performed at progressively higher repetitive
intervals beginning with lower order daily checks (48 elapsed
hours), A Checks (750 flight hours for Boeing
747-200s,
650 flight hours for Boeing
747-400), C
Checks (18 months) and D Checks (nine year/
6
25,000 flight hours for Boeing
747-200s,
six years for Boeing
747-400s).
These checks are also progressively higher in scope and
duration, with C and D Checks considered heavy
airframe maintenance checks. Boeing
747-200
heavy checks are generally more involved than those performed on
our Boeing
747-400
aircraft, chiefly due to the age of the aircraft, its earlier
evolution maintenance program and directives prescribed by the
FAA. Our employees and contractors at our maintenance facility
in Prestwick, Scotland perform C Checks on our Boeing
747-400
aircraft. All lettered checks are performed by our maintenance
staff or by third-party vendors. Unscheduled maintenance, known
also as line-maintenance, rectifies defects occurring during
normal
day-to-day
revenue operations.
Our FAA-approved maintenance programs allow our engines to be
maintained on an on condition basis. Under this
arrangement, engines are sent for repair based on life-limited
parts and/or
performance deterioration.
We believe that a balance between in-house and power
by the hour contracts provides the most efficient means of
maintaining our aircraft fleet and the most reliable way to
forecast our maintenance costs. A certain portion of our
lower-level maintenance activities (primarily, daily checks and
A 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 March 30, 2008 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 and
Presidential Memorandum of December 27, 2007. With the
approval of the President, the Secretary of Transportation may
extend the coverage through year-end 2008. However, the FAA has
indicated that it intends to gradually withdraw war-risk
coverage for all U.S. airlines in upcoming renewal periods
to allow for an orderly transition back to commercial markets.
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 U.S. and
foreign 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
7
resources needed to conduct the operations for which it has been
certificated. 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 airworthiness
and 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
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, the European Union
is in the process of modifying the licensing requirements of air
carriers of its Member States. Among the provisions under
consideration are those to place new limits on the ability of
European Union carriers to use aircraft wet leased from airlines
of non-European Union Member States. The revised regulations
8
are currently working their way through the EU legislative
process and may be finalized in 2008. If finalized, they 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.
Access to the New York airspace presents an additional
challenge. Because of congestion in the New York area,
especially at John F. Kennedy International Airport
(JFK), the FAA has issued an order imposing hourly
caps on JFK operations of those carriers offering Scheduled
Services, effective March 30, 2008. The order allocates
slots for those operations, limits their transferability and
imposes an 80% utilization requirement. While neither Atlas nor
Polar is explicitly covered by the order because of the
unpredictability of its JFK flights, the order is likely to make
the JFK operating environment more difficult. Additionally, the
FAA plans to initiate a rulemaking proceeding to place limits on
unscheduled JFK operations, which is likely to impact Atlas and
Polar. Continuing congestion in New York airspace, and
potentially new FAA flight restrictions, also could have an
adverse impact.
As a further means to address congestion, the FAA has proposed
to allow U.S. airports to raise landing fees to incorporate
the costs of airfield facilities under construction or
reconstruction. Any landing fee increases implemented pursuant
to the FAA proposal, if finalized, would have an impact on
airlines generally. A similar proposal is under consideration in
the European Union.
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 process of revising its
all-cargo security standards and requirements, which are
designed to prevent unauthorized access to freighter aircraft
and the introduction of 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 all-cargo
air 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 FAA 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
9
747-200
fleet have already undergone the major portion of such
modifications. We anticipate no aircraft will undergo such
modifications during 2008. 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.
To respond to the problem of climate change and global warming,
Senators Warner and Lieberman introduced comprehensive
legislation to, among other things, impose a carbon tax on fuel
sold to airlines and other entities. A variety of other
legislative solutions are being proposed. If enacted, the
legislation could have the effect of increasing the cost of jet
fuel. The European Union is considering, and other proposals
have been made, to address the problem by imposing carbon
dioxide emissions caps and establishing emissions trading
regimes. Future regulation in the climate change area could have
a significant operational and financial impact.
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
government agency regulation, including 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 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 ACMI services is competitive. We believe that the
most important basis for competition in the ACMI market is the
efficiency and cost effectiveness of the aircraft assets and,
the scale, scope and quality of the outsourced operating
services. We and TNT N.V. are the only two service providers in
the Boeing
747-400F
ACMI market. Competition is more significant in the ACMI market
for the older, less-efficient Boeing
747-200
aircraft. We have substantially withdrawn from the
747-200 ACMI
market and redeployed the assets in the attractive AMC and
Charter markets due to the reduced value proposition that ACMI
leasing of these older assets represents to the customer and to
AAWW. Competition in the
747-200 ACMI
segment includes Air Atlanta Icelandic, Evergreen, Focus Air,
Kalitta Air, Southern Air and Tradewinds. Kalitta Air and Gemini
Air Cargo operate MD11s in cargo ACMI services, which
compete indirectly in some markets with the Boeing 747
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
10
capacity over the next several years and to replace older
aircraft principally with our order for Boeing
747-8F
aircraft.
In our Scheduled Service segment, we offer 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 flight frequency,
reliability, geographic coverage, capacity and price. While we
do not have a major share of the global Scheduled Service
market, we do have competitive scale in the markets we compete
in. 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, markets
(including Europe to South America and Europe to North America).
After the commencement of our blocked space flying for DHL,
which will commence no later that October of 2008, we will no
longer assume the retail commercial risk of the Scheduled
Service operation.
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 measured by 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.
We continue to develop new commercial opportunities in the
Charter market as alternative deployments for Boeing
747-200
aircraft.
Fuel
Aviation fuel is one of the most significant expenses for us.
During the years ended December 31, 2007, 2006 and 2005,
fuel costs represented 37.8%, 34.3% and 30.4%, 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Gallons consumed (in thousands)
|
|
|
237,332
|
|
|
|
214,808
|
|
|
|
246,619
|
|
Average price per gallon, including tax
|
|
$
|
2.24
|
|
|
$
|
2.12
|
|
|
$
|
1.75
|
|
Cost (in thousands)
|
|
$
|
531,755
|
|
|
$
|
454,675
|
|
|
$
|
432,367
|
|
Fuel burn gallons per Block Hour (excluding ACMI)
|
|
|
3,238
|
|
|
|
3,275
|
|
|
|
3,352
|
|
Our exposure to fluctuations in fuel price directly impacts our
Scheduled Service and Commercial Charter businesses only. For
these businesses, we shift a portion of the burden of price
increases to customers by imposing a surcharge. While we believe
that fuel price volatility in the 2007, 2006 and 2005 periods
was
11
partly reduced as a result of increases in fuel surcharges,
these surcharges do 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, 2007, 2006
and 2005 was $161.6 million, $144.2 million and
$160.4 million, respectively.
In the past, we have not experienced significant difficulties
with respect to fuel availability. Although we do not currently
anticipate a significant reduction in the availability of jet
fuel, a number of factors, such as geopolitical uncertainties in
oil-producing nations and shortages of and disruptions to
refining capacity, make accurate predictions unreliable. 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.
Employees
Our business depends on highly qualified management and flight
crew personnel. Salaries, wages and benefits accounted for
approximately 17.7%, 18.4% and 17.2% of our consolidated
operating expenses for 2007, 2006 and 2005, respectively. As of
December 31, 2007, we had 1,725 employees, 860 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 a union.
Our relations with ALPA are governed by the Railway Labor Act of
1926 (the Act). 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 as permitted by the Act and may incur additional
administrative expenses associated with union representation of
our employees.
The Atlas collective bargaining agreement became amendable in
February 2006. Polars collective bargaining agreement with
ALPA became amendable in April 2007. While both units have filed
Railway Labor Act Section 6 notices to begin
negotiations for amended agreements, those negotiations have
been placed on hold in favor of completing the merger of the two
crew forces as more fully described below.
In November 2004, in order to increase efficiency and assist in
controlling costs, the Company initiated steps to merge the ALPA
represented crewmember bargaining units of Atlas and Polar. The
processes for completing this merger are set forth in both the
Atlas and Polar collective bargaining agreements. The agreements
both provide for a seniority integration process and the
negotiation of a single collective bargaining agreement
(SCBA). On October 26, 2005 ALPA set a policy
initiation date triggering the provisions of its merger policy
and thus initiated the crewmember seniority list integration
process. This seniority list integration process was completed
on November 21, 2006. However, the integrated lists cannot
be implemented until a SCBA covering the merged crew force has
been reached.
Both the current Atlas and Polar collective bargaining
agreements set forth protocols for reaching a SCBA. Those
protocols include nine months of direct bargaining, followed by
final and binding arbitration, if required, to resolve any
remaining open issues. ALPA and the Company have also discussed
a merger protocol letter of agreement a (Merger Protocol
Letter of Agreement) to enhance the existing contractual
protocols for reaching an SCBA.
On July 11, 2007, the Company filed grievances under both
the Atlas and Polar collective bargaining agreements to compel
the commencement of SCBA negotiations. In response, ALPA, on
behalf of the Atlas crew force, conceded the Companys
grievance. They also executed a Merger Protocol Letter of
Agreement. However, ALPA, on behalf of the Polar crew force,
rejected the Companys grievance and disputed whether it
12
could be required to combine SCBA negotiations and whether the
dispute could be scheduled for immediate arbitration. This
preliminary scheduling issue was submitted to the selected
arbitrator who ruled in favor of the Company and has directed
that the Companys grievance be heard March 25 through
March 27, 2008, his first available dates. The Company
cannot guarantee how the arbitrator will rule on our grievance.
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 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.
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).
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
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.
The information on our website is not, and shall not be deemed
to be, part of this Report or incorporated into any other
filings we make with the SEC.
13
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 operations
and financial condition.
For the years ended December 31, 2007, 2006 and 2005, our
ACMI business accounted for approximately 23.1%, 27.6% and
28.8%, respectively, of our operating revenues. Our ACMI
business depends on a limited number of significant customers,
which customers numbered between seven and 12 during these
periods. In addition, Emirates accounted for 10.8%, 11.9% and
9.8% of our total operating revenues for the years ended
December 31, 2007, 2006 and 2005, respectively. We
typically enter into ACMI contracts with our customers for terms
ranging from three to six years on Boeing
747-400s.
The terms of our existing contracts are scheduled to expire on a
staggered basis over the next six years. There is a risk that
any one of our significant ACMI customers 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, and there is a resulting delay in entering into new
contracts, our business, results of operations and financial
condition could be materially and adversely affected.
We
could be adversely affected if a large number of Boeing
747-400
passenger-to-freighter
converted aircraft enter the ACMI market and could cause ACMI
rates to decrease.
As passenger airlines begin to retire Boeing
747-400
aircraft from passenger service, many of these aircraft are
undergoing conversion to freighters. Although inferior in
operating performance to the Boeing
747-400
specialty built freighter that we operate, if a significant
number of these
747-400
converted freighter aircraft become available to our
competitors, it could cause ACMI rates and underlying aircraft
values to decrease. If that was to occur our business, results
of operations and financial condition could be materially and
adversely affected.
We
could be adversely affected if our new Boeing
747-8F
aircraft are not delivered on schedule or if such aircraft do
not meet expected performance specifications.
In September 2006, we placed an order for 12 new Boeing
747-8F
aircraft that are currently 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. The addition of these new aircraft is a material
component of our growth and fleet renewal strategy. Although the
Boeing
747-8F
aircraft shares many of the same components used in our other
Boeing 747 models, it is a new aircraft model and has not yet
received the necessary regulatory approvals and certifications.
A significant delay in Boeings production or delivery
schedule, including delay in receiving necessary approvals and
certifications, could delay the delivery and deployment of these
aircraft. Although Boeing has provided us with performance
guarantees, the new aircraft may not meet the expected
performance specifications, which could make it more difficult
for us to deploy these aircraft in a timely manner or at
favorable rates.
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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 current levels, which could have a material adverse
effect on our business, results of operations and financial
condition.
During the years ended December 31, 2007, 2006 and 2005,
approximately 24.1%, 22.1% and 27.2%, 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 current levels as a result of reduced
US 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. Our current AMC
contract runs from October 1, 2007 through
September 30, 2008. 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 AMC 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 otherwise 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 other carriers
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 allocates its air cargo
capacity needs to different teams of airlines based on a point
system that is determined by the amount and types of aircraft
such team of airlines pledges 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. Several factors
could adversely affect the amount of AMC flying that is
allocated to us, including:
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the formation of competing teaming arrangements;
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an increase by other air carriers in their commitment of
aircraft to the CRAF program;
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the withdrawal of our teams current partners, especially
FedEx;
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a reduction of the number of aircraft pledged to the CRAF
program by us or other members of our team; or
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increased participation of other carriers in the CRAF program.
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A reduction in our share of AMC flying could have a material
adverse effect on our business, results of operations and
financial condition.
15
Risks
Related to Our Scheduled Service Business and the DHL
Transaction
Operating
results in our Scheduled Service business may vary significantly
from period to period until the commencement of the blocked
space agreement with DHL.
During the years ended December 31, 2007, 2006 and 2005,
approximately 42.1%, 41.4% and 34.4% 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 Service costs are fixed,
such as crew, fuel, capital costs, maintenance, and facilities
expenses. The contribution generated from our Scheduled Services
business varies significantly from period to period depending on
a number of factors outside of our control, including global
airfreight demand, global economic conditions, competition and
increases in fuel costs.
Our
agreements with DHL require us to meet certain performance
targets in our Scheduled Service operations, including certain
departure/arrival reliability standards. Failure to meet these
performance targets could adversely affect our financial
results.
Our ability to derive the expected economic benefits from our
transactions with DHL depends substantially on our ability to
successfully meet strict performance standards and deadlines for
aircraft and ground operations. As an express network provider,
we will be required to operate under these tighter time
schedules by the BSA Commencement Date. If we do not meet these
requirements, we may not be able to achieve the projected
revenues and profitability from this contract, and we could be
exposed to certain DHL remedies, including termination of the
arrangements in the most extreme of circumstances, as described
below.
Our
blocked space agreement with DHL confers certain termination
rights to DHL which, if exercised or triggered, may result in us
being unable to realize the full benefits of this
transaction.
Our blocked space agreement with DHL gives DHL the option to
terminate the agreement for convenience by giving notice to us
at least one year prior to the fifth, tenth or fifteenth
anniversary of the agreements commencement date. If DHL
terminates for convenience on the fifth anniversary, Polar or
DHL will be required to assume all six Boeing
747-400
freighter head leases for the entire remaining term of each such
aircraft lease. Each assumed lease has a guarantee by DHLs
parent or its creditworthy subsidiary. Further, DHL has a right
to terminate the blocked space agreement for cause following a
specified management resolution process in the event that we
default on our performance or we are unable to perform for
reasons beyond our control. If DHL exercises any of these
termination rights, we will not be able to achieve the projected
revenues and profitability from this contract.
Risks
Related to Our Business Generally
Should
any of our existing aircraft or our new order of Boeing
747-8F
aircraft become underutilized by our businesses, 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 and as a
result 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
aircraft, when delivered, at favorable rates or achieve a timely
disposal of such aircraft, our long term results of operations
could be materially and adversely affected.
16
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 our
profitability.
To maintain our level of operations, a substantial portion of
our costs, such as aircraft ownership, crew maintenance and
facility costs, are fixed. 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 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, which may cause our revenues to vary
significantly over time. If our revenues for a particular period
fall below expectations, we would 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. The
loss of revenue resulting from any such business interruption,
and the cost, long lead time and difficulties in sourcing a
replacement aircraft, could have a material adverse effect on
our business, results of operations and financial condition.
We
have a number of contractual obligations, including progress
payments, associated with our order of 12 Boeing
747-8F
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
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. We are required to pay significant pre-delivery
deposits to Boeing for these aircraft. As of December 31,
2007, 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 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 on
terms attractive to us or at all. If we are unable to secure
financing on acceptable terms, including financing of our
progress payments, we may be required to incur financing costs
that are substantially higher than what we currently anticipate.
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, 2007, we had total debt obligations of
approximately $469.6 million and total aircraft operating
leases and other lease obligations of $2,203.2 million.
These obligations are expected to increase significantly over
the next several years as we begin to accept delivery of, and
enter into financing arrangements for, our new Boeing
747-8F
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.
Certain
of our debt and lease obligations contain a number of
restrictive covenants. In addition, many of our debt and lease
obligations have 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
substantially 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 of our
debt instruments could cause us to be in default of other
obligations as well. Any unremedied defaults could lead to an
acceleration of the amounts owed, and potentially could cause us
to lose possession or control of certain aircraft.
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, 2007, 2006 and 2005, fuel costs were
approximately 37.8%, 34.3% and 30.0%, 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 company determined
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.
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
financial condition could suffer if we experience unanticipated
costs or enforcement action as a result of the Department of
Justice fuel surcharge investigation and other lawsuits and
claims.
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 formal
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, Quebec and British Columbia, Canada, which are
substantially similar to the U.S. class action suits.
Moreover, we have submitted relevant information and
documentation to regulators in Australia and New Zealand in
connection with
18
investigations initiated by such authorities into pricing
practices of certain international air cargo carriers. We have
also received notification from authorities in Switzerland,
Australia, New Zealand and the EU that they are investigating
the freight pricing practices of several carriers, including 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).
We are
party to collective bargaining agreements with our U.S.
crewmembers that could result in higher labor costs than those
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 (approximately 60 in total) who are
employed by AABO in Stansted, England. There is a separate
collective bargaining agreement at each of Atlas and Polar.
Collectively, these employees represented approximately 49.9%,
50.5% and 49.0% of our workforce at December 31, 2007, 2006
and 2005, 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. 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.
The
Exposure Draft of the AICPA Industry Audit Guide Audits
and Accounting Guide-Airlines proposes changes to
accounting requirements that may, when released in final form,
cause us to revisit our accounting for prepaid
maintenance.
The Exposure Draft of the AICPA Industry Audit Guide entitled
Audits and Accounting Guide-Airlines proposes
guidance on accounting requirements relating to, among other
matters, accounting for prepaid maintenance. We believe that our
accounting treatment with respect to prepaid maintenance is in
conformity with U.S. generally accepted accounting principles
(GAAP). However, if the guidance with respect to
prepaid maintenance expense is unchanged upon issuance of the
final guide, the SEC may disagree with the accounting treatment
of our current maintenance arrangements. In such event, and if
our maintenance arrangements remain the same as currently in
effect and we are unable to convince the SEC that our accounting
is in accordance with GAAP, we may be required to revise
disclosures in future filings, amend disclosures in our previous
Annual Reports on
Form 10-K
and Quarterly Reports on
Form 10-Q
and subsequent periodic reports, or depending on the transition
guidance, if any, related to the adoption of the new guide,
restate prior period financial statements.
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, including the
AMC, 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, procurement with small businesses
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
insurance coverage may become more expensive and difficult to
obtain and may not be adequate to insure all
risks.
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 March 30, 2008.
With the approval of the President, the Secretary of
Transportation is empowered to extend coverage through
December 31, 2008. However, the FAA has indicated that it
intends to gradually withdraw war-risk coverage for all
U.S. airlines in upcoming renewal periods to allow for an
orderly transition back to commercial markets. If the federal
war-risk coverage program terminates or provides significantly
less coverage in the future, we could 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 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.
Some
of our aircraft are periodically deployed in potentially
dangerous situations, which may result in damaged to our
aircraft.
Some 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. Some 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.
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 year. Additionally, while
our ACMI contracts have contractual utilization minimums, they
typically allow our customers to cancel an agreed upon
percentage 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
20
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 continued 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, results of operations and
financial condition.
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
revenue.
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 sources, or 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 our services and the
services offered by our ACMI customers. Additionally, a
prolonged economic slowdown may increase the likelihood that our
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, including quality,
price and availability of assets and services. 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.
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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 FAA 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 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.
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.
The imposition of potential new restrictions in the
environmental area, to control greenhouse gas emissions, is a
distinct possibility. Such restrictions may have an adverse
impact on our industry. Finalization of European Union
legislations to limit the ability of European Union carriers to
wet lease (through ACMI arrangements) aircraft from non-European
Union carriers also could have an adverse impact. These and
other similar regulatory developments could increase business
uncertainty for commercial air-freight carriers.
The
airline industry 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
The
sale of shares by our principal stockholders could affect the
price of our common stock.
HMC Atlas Air, L.L.C. and Harbinger Capital Partners Special
Situations Fund, L.P. (our principal stockholders) collectively
own approximately 8,389,690 shares or 38.8%, of our common
stock as of December 31, 2007. On April 16, 2007, we
filed a shelf registration with the SEC on behalf of our
principal stockholders covering all of the common shares owned
by these entities. We may also be required to file up to two
additional registration statements on behalf of our principal
stockholders in certain circumstances. Our principal
stockholders also have piggyback registration rights in
connection with certain offerings of our common stock. Filing
additional shelf registration statements for our principal
stockholders 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 period
of effectiveness of the registration statement up to a
three-year period.
22
The
concentration of our capital stock ownership could discourage a
takeover that stockholders may consider favorable and make it
more difficult for you to elect directors of your
choosing.
Our principal stockholders beneficially own shares of our common
stock, representing 38.8% of the voting power of our common
stock. This concentration likely will limit other
stockholders ability to influence corporate matters. If
our principal stockholders were to act in concert with any of
our other major stockholders, such holders could be in a
position to control the outcome of actions requiring stockholder
approval, such as an amendment to our certificate of
incorporation, the authorization of additional shares of capital
stock, and any merger, consolidation, or sale of all or
substantially all of our assets, and could prevent or cause a
change in control of us.
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 stockholders might otherwise receive a premium for their
shares of common stock. These provisions 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.
|
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.
Our
common stock share price has been subject to fluctuation in
value.
The trading price of our common shares is subject to material
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.
23
|
|
ITEM 1B.
|
UNRESOLVED
STAFF COMMENTS
|
None.
Aircraft
Owned and leased aircraft at December 31, 2007 include the
following:
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|
|
|
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|
|
|
|
|
|
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|
|
|
|
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|
Capital
|
|
|
Operating
|
|
|
|
|
|
Average
|
|
Aircraft Type
|
|
Owned
|
|
|
Leased
|
|
|
Leased
|
|
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Total
|
|
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Age Years
|
|
|
747-200
|
|
|
12
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|
|
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3
|
|
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|
1
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|
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16
|
|
|
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28.0
|
|
747-300
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
22.1
|
|
747-400
|
|
|
6
|
|
|
|
|
|
|
|
14
|
|
|
|
20
|
|
|
|
7.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Total
|
|
|
19
|
|
|
|
3
|
|
|
|
15
|
|
|
|
37
|
|
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|
16.9
|
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|
|
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|
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Lease expirations for our operating leased aircraft included in
the above table range from October 2010 to February 2025. Three
of the owned Boeing
747-400
aircraft are dry leased to a 49% owned affiliate and two of the
Boeing
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 120,000 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 LLC 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, 2007.
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 54,
has been our President and Chief Executive Officer since June
2006 and has been a member of our Board since May 2006.
Mr. Flynn has had a 30 year career in international
supply chain management and freight transportation. Prior to
joining us, Mr. Flynn served as President and Chief
Executive Officer of GeoLogistics Corporation since 2002.
Mr. Flynn was initially recruited by the private equity
sponsors of the company in 2002 to lead that companys
turnaround to profitability and the exit strategy for the
investors. The company was acquired in September 2005 by PWC
Logistics Corporation of Kuwait. 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
24
operating unit serving the traditional railcar traffic of CSX
Transportation, Inc, one of the largest Class 1 railroads
operating in the U.S. Mr. Flynn spent over
20 years with
Sea-Land
Service Inc. a global provider of container shipping services.
He served in roles of increasing responsibility in the US, Latin
America and Asia. Mr. Flynn was ultimately responsible for
the
Sea-Lands
consolidated operations in Asia. 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 43, 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. He was also responsible for our Human Resources and
Corporate Communications functions from 2003 to October 2007. 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.
Jason Grant. Mr. Grant, age 35, was
elected Senior Vice President and Chief Financial Officer in
September 2007. Prior to September 2007, Mr. Grant was
Senior Vice President Network Planning and Business
Development from March 2007 and Vice President
Continuous Improvement from August 2006. He was named Vice
President Financial Planning and Analysis in May
2006, after having been elected Staff Vice President responsible
for our consolidated budget, forecasting, capital planning and
financial analysis in December 2004. Mr. Grant joined us in
2002 and held various finance and treasury positions before
being named a Staff Vice President. Prior to joining us, he was
a manager of 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 in Business Administration
from Simon Fraser University in Canada.
Adam R. Kokas. Mr. Kokas, age 36,
has been our Senior Vice President, General Counsel and
Secretary since October 2006 and our Chief Human Resources
Officer since November 2007. Mr. Kokas joined us from
Ropes & Gray LLP, where he was a partner in their
Corporate Department, focusing on merger and acquisition and
capital markets transactions, and general corporate, securities
and business law issues. Prior to joining Ropes &
Gray, Mr. Kokas was a partner at Kelley Drye &
Warren LLP, where he joined as an associate in 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.
Michael T. Steen. Mr. Steen, age 41,
was elected Senior Vice President and Chief Marketing Officer in
April 2007. He is responsible for all aspects of the
Companys global sales and marketing activities, including
strategy, new products and services, brand positioning and
marketing communications. He assumed responsibility for our
Corporate Communications function in November 2007. Prior to
joining Atlas, Mr. Steen served as Senior Vice President of
Sales and Marketing at Exel PLc and Vice President for the
Americas for KLM Cargo. Mr. Steen led the sales and
marketing activities for Exel Freights management and
technology sector. Following Exels acquisition by Deutsche
Post World Net, he held senior-level positions with the merged
company in global supply chain logistics. Prior to joining Exel,
he had served in a variety of roles with KLM Cargo over
11 years, including Vice President of the Americas, Head of
Global Sales and Marketing for the Logistics Unit and Director
of Sales for EMEA. Mr. Steen has also been a member of the
Board of Directors of TIACA since November 2007. Mr. Steen
earned a degree in economic science from Katrinelund in
Gothenburg, Sweden, and is an alumnus of the Advanced Executive
Program at the Kellogg School of Management at Northwestern
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,
25
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. Prior to Viacom,
Mr. Bradley spent five years in commercial banking at the
Bank of New York, and two years with the U.S. International
Trade Administration. 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.
James R. Cato. Mr. Cato, age 53, is
Vice President of Flight Operations and Labor Relations for both
Atlas and Polar. 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. In 2003, Mr. Cato assumed the additional
responsibilities of Vice President of Flight Operations for
Atlas and Vice President of Labor Relations for Polar. In May
2004, Mr. Cato also assumed the duties of Vice President of
Flight Operations 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 49, has been Vice President and Controller since 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 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. 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.
26
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.
|
|
|
|
|
|
|
|
|
|
|
High
|
|
|
Low
|
|
|
2007 Quarter Ended
|
|
|
|
|
|
|
|
|
December 31
|
|
$
|
58.59
|
|
|
$
|
52.02
|
|
September 30
|
|
$
|
60.83
|
|
|
$
|
48.94
|
|
June 30
|
|
$
|
59.82
|
|
|
$
|
53.69
|
|
March 31
|
|
$
|
54.29
|
|
|
$
|
44.00
|
|
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
|
|
The last reported sale price of our Common Stock on the NASDAQ
National Market on February 26, 2008 was $49.25 per share.
As of February 15, 2008, there were approximately
21.6 million shares of our Common Stock issued and
outstanding, and 147 holders of record of our Common Stock.
No repurchases of our Common Stock were made during the quarter
ended December 31, 2007.
Dividends
We have never paid a dividend with respect to our Common Stock,
nor do we anticipate paying a dividend in the foreseeable
future. Moreover, certain of our financing arrangements contain
financial covenants that could 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 approximately
20,200,000 shares of Common Stock to creditors. As of
December 31, 2007, a total of 20,199,997 of such shares
have been distributed and the three remaining shares held in
reserve for this purpose have been cancelled.
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). The 2004 LTIP plan was replaced by shareholder vote
in May 2007 with the 2007 Long Term Incentive Plan (the
2007 Plan), and no new awards have been granted under the
2004 LTIP since that time. Awards outstanding under the 2004
LTIP will continue to be governed by the terms of that plan and
the agreements under which they were granted. The 2007 Plan
limits the terms of awards to ten years and prohibits the
granting of awards more than ten years after the effective date
of the 2007 Plan. An aggregate of 628,331 shares of common
stock was reserved for issuance to participants under the 2007
Plan.
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.
These requirements apply to Atlas and Polar individually, as
well as to AAWW. We believe that during the period covered by
this Report we were in compliance with these requirements.
27
|
|
ITEM 6.
|
SELECTED
FINANCIAL DATA
|
The selected balance sheet data as of December 31, 2007 and
2006 (Successor Company) and the selected statement of
operations data for the years ended December 31, 2007, 2006
and 2005 have been derived from our audited Financial Statements
included elsewhere herein. The selected balance sheet data as of
December 31, 2005 and 2004 (Successor) and 2003 and 2002
(Predecessor), and selected statement of operations data for the
period July 28, 2004 through December 31, 2004
(Successor Company) and the period January 1, 2004 through
July 27, 2004, and 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.
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.
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
Predecessor
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Period
|
|
|
For the Period
|
|
|
|
|
|
|
For the Year
|
|
|
For the Year
|
|
|
For the Year
|
|
|
July 28, 2004
|
|
|
January 1, 2004
|
|
|
For the Year
|
|
|
|
Ended
|
|
|
Ended
|
|
|
Ended
|
|
|
through
|
|
|
through
|
|
|
Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
July 27,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2004
|
|
|
2003
|
|
|
Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues
|
|
$
|
1,562,706
|
|
|
$
|
1,476,330
|
|
|
$
|
1,617,897
|
|
|
$
|
679,294
|
|
|
$
|
735,367
|
|
|
$
|
1,383,651
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
1,407,931
|
|
|
|
1,324,030
|
|
|
|
1,424,597
|
|
|
|
612,319
|
|
|
|
758,066
|
|
|
|
1,389,580
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
154,775
|
|
|
|
152,300
|
|
|
|
193,300
|
|
|
|
66,975
|
|
|
|
(22,699
|
)
|
|
|
(5,929
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
132,415
|
|
|
$
|
59,781
|
|
|
$
|
73,861
|
|
|
$
|
22,710
|
|
|
$
|
28,246
|
|
|
$
|
(100,990
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per Share Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
6.24
|
|
|
$
|
2.89
|
|
|
$
|
3.64
|
|
|
$
|
1.12
|
|
|
$
|
0.74
|
|
|
$
|
(2.63
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding during the period
|
|
|
21,221
|
|
|
|
20,672
|
|
|
|
20,280
|
|
|
|
20,210
|
|
|
|
38,378
|
|
|
|
38,360
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
6.17
|
|
|
$
|
2.83
|
|
|
$
|
3.56
|
|
|
$
|
1.11
|
|
|
$
|
0.74
|
|
|
$
|
(2.63
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares and equivalents outstanding
during the period
|
|
|
21,453
|
|
|
|
21,100
|
|
|
|
20,738
|
|
|
|
20,405
|
|
|
|
38,378
|
|
|
|
38,360
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
Predecessor
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Period
|
|
|
For the Period
|
|
|
|
|
|
|
For the Year
|
|
|
For the Year
|
|
|
For the Year
|
|
|
July 28, 2004
|
|
|
January 1, 2004
|
|
|
For the Year
|
|
|
|
Ended
|
|
|
Ended
|
|
|
Ended
|
|
|
through
|
|
|
through
|
|
|
Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
July 27,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2004
|
|
|
2003
|
|
|
Financial Position
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,412,714
|
|
|
$
|
1,119,780
|
|
|
$
|
1,180,810
|
|
|
$
|
1,142,196
|
|
|
|
|
|
|
$
|
1,400,607
|
|
Long-term debt (less current portion)
|
|
$
|
365,619
|
|
|
$
|
398,885
|
|
|
$
|
529,742
|
|
|
$
|
602,985
|
|
|
|
|
|
|
$
|
|
*
|
Stockholders equity (deficit)
|
|
$
|
549,225
|
|
|
$
|
473,844
|
|
|
$
|
357,905
|
|
|
$
|
277,962
|
|
|
|
|
|
|
$
|
(28,282
|
)
|
Cash dividends declared per common share
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
* |
|
For the year ended 2003, long term debt of $909.1 million
was 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
We are the leading provider of aircraft and outsourced aircraft
operating solutions to the global air freight industry. We
manage and operate the worlds largest fleet of 747
freighters. We provide a unique and compelling value proposition
to our customers by giving them access to new production
freighters that deliver the highest reliability and lowest unit
cost in the marketplace combined with outsourced aircraft
operating services that lead the industry in terms of quality
and global scale. Our customers include airlines, freight
forwarders, the U.S. military and charter brokers. We
provide global services with operations in Asia, the
Middle-East, Australia, Europe, South America, Africa and North
America.
We believe that demand for high-efficiency, wide-body freighter
aircraft and related outsourced aircraft operating solutions
will increase due to growing international trade, in particular,
growth in developing markets in Asia and South America.
According to industry studies, global cargo traffic, measured in
revenue tonne-kilometers is expected to triple over the next two
decades. As demand continues to increase, we believe that the
supply of suitable freighter aircraft will not keep pace with
this increase in demand as a result of limited production
capacity, limited
passenger-to-freight
conversion capacity and the anticipated retirement of aging
aircraft currently operating in the world fleet.
As of December 31, 2007, our existing fleet of 37
wide-body, freighter aircraft, including 20 modern,
high-efficiency, Boeing
747-400
aircraft, and our complementary operating solutions, uniquely
position us to benefit from the forecasted growth and increasing
demand for wide-body freighter airplanes in the global air
freight market. Our market position is further enhanced by our
order of 12 new
state-of-the-art
Boeing
747-8F
aircraft, scheduled to be delivered in 2010 and 2011. We are the
only current provider of these aircraft to the outsourced
freighter market. In addition to these 12 aircraft, we also hold
rights to purchase up to an additional 14 Boeing
747-8F
aircraft, providing us with flexibility to expand our fleet in
response to market conditions.
We believe that the scale, scope and quality of our outsourced
services are unparalleled in our industry. The relative
operating cost efficiency of our current
747-400F
aircraft and future
747-8F
aircraft, including their superior fuel efficiency, create a
compelling value proposition for our customers and position us
well for growth in both the wet and dry lease areas of our
business.
29
Our primary services are:
|
|
|
|
|
Freighter aircraft leasing services which encompasses the
following:
|
|
|
|
|
|
Fully outsourced aircraft operating solutions of aircraft, crew,
maintenance and insurance known as wet leasing or ACMI. An ACMI
lease is a contract for the use of one or more dedicated
aircraft together with complementary operating services. We
typically contract these services for three to six year periods
on Boeing
747-400s and
for shorter periods on Boeing
747-200s.
Our outsourced operating solutions include crew, maintenance and
insurance for the aircraft, while customers assume fuel, yield
and demand risk;
|
|
|
|
Express network ACMI, where Polar will provide outsourced
airport-to-airport
wide-body cargo aircraft solutions to DHL. AAWW will operate a
minimum of six dedicated Boeing
747-400
aircraft servicing the requirements of DHLs trans-Pacific
express operations. Polar has historically provided and will
continue to provide scheduled air-cargo service on these
aircraft to our Scheduled Service air-cargo service to our
freight forwarder and other shipping customers, but post
commencement, DHL will assume the commercial risk of the
operation;
|
|
|
|
Aircraft and engine leasing solutions known as Dry Leasing. We
typically Dry Lease to third parties for one or more dedicated
aircraft for three to five year periods. Dry Leasing usually
involves the leasing of aircraft to customers who are
responsible for crew, maintenance and insurance and who assume
fuel, yield and demand risk. In February 2008, Holdings formed a
wholly owned subsidiary based in Ireland, to further its dry
leasing efforts.
|
|
|
|
|
|
Charter services, which encompasses the following:
|
|
|
|
|
|
AMC Charter services, where we provide air cargo services for
the Air Mobility Command or the AMC;
|
|
|
|
Commercial Charters, where we provide all-inclusive cargo
aircraft charters to brokers, freight forwarders, direct
shippers and airlines.
|
We believe that the following competitive strengths will allow
us to capitalize on the compelling growth opportunities that
exist in the global air freight industry:
Market
leader for freighter aircraft leasing and outsourced aircraft
solutions to the global air freight industry:
We manage the worlds largest fleet of Boeing 747
freighters, the largest and most cost effective long-haul
commercial freighter available. Our fleet consists of 20 Boeing
747-400, 16
Boeing
747-200 and
one Boeing
747-300
freighters representing roughly 10% of the heavy freighters
operating in the world today. This highlights our position as
the preeminent provider of these highly desirable and scarce
assets in the case of the current Boeing
747-400F and
the future Boeing
747-8F. Our
operating model is unique in that we deploy our aircraft across
a range of freighter aircraft leasing and charter services in
order to drive maximum utilization and value from our fleet. The
scale of our fleet enables us to have aircraft available
globally to respond to our customers needs, both on a
planned and ad hoc basis. This provides us with a commercial
advantage over our competitors with smaller inflexible fleets.
The Boeing
747-400,
which is the core of our ACMI and express network ACMI segments,
is the industry leader for operating performance in the
intercontinental air freighter market due to its cost and
capacity advantage over other freighters. According to the
manufacturer, these aircraft burn
10-16% less
fuel and have 26 tons and 1,200 nautical miles of incremental
capacity and range compared to Boeing
747-200s. In
September 2006, we placed an order for 12 new,
state-of-the-art
Boeing 747-8
aircraft, which have even better operating performance relative
to the Boeing 747 400 and will allow us to grow and maintain our
industry leading position for the foreseeable future.
30
Stable
base of contractual revenue and reduced operational
risk:
Our focus on providing contracted aircraft and operating
solutions to customers contributes to increased stability of our
revenues and reduces our operational risk. Typically, ACMI and
dry leasing contracts with customers for Boeing
747-400
aircraft range from three to five years. Under the ACMI and dry
leasing structure, our customers assume fuel, yield or demand
risk resulting in reduced operational risk for AAWW. Most ACMI
contracts typically provide us with a guaranteed minimum level
of revenue and target level of profitability. If levels of
operations exceed the guaranteed monthly minimum, we can achieve
profitability in excess of our targets.
Our Express Network ACMI contract with DHL will include the
allocation of blocked space capacity on a long-term basis of up
to 20 years. This arrangement will eliminate yield and
demand risks, much like our ACMI business, for a minimum of six
Boeing
747-400
aircraft that currently fly in the Scheduled Service network.
DHL will be subject to a monthly minimum Block Hour guarantee
and take retail commercial risk on both DHL and non-DHL freight.
Our AMC Charter services are operated under an annual contract
with the military, where the military reimburses us for fuel
costs, mitigating the operational risk of this business.
Focus
on Asset Optimization:
By managing the largest fleet of Boeing 747 freighter aircraft,
we achieve significant economies of scale in areas such as
aircraft maintenance, crew training, crew efficiency, inventory
management, and purchasing. The addition of the Boeing
747-8
aircraft will further enhance efficiencies as these new aircraft
will have an operational, maintenance and spare parts
commonality of approximately 70% with our existing fleet of
Boeing
747-400s, as
well as a common pilot-type rating.
Our mix of aircraft is closely aligned with our customer needs.
We believe our freighter aircraft leasing businesses are well
suited to our existing Boeing
747-400s and
our recently ordered Boeing
747-8Fs. Our
commercial charter service operates profitably with our Boeing
747-200
freighters in the substantial commercial cargo charter market
and continues to be an attractive and flexible aircraft for
deployment to the US military charter market. We continually
evaluate our fleet to ensure that we offer the most efficient
and relevant mix of aircraft across our various businesses.
Our leasing model is unique in that we offer a portfolio of
operating solutions that complement our freighter aircraft
leasing businesses. We believe this allows us to improve the
returns we generate from our asset base by allowing us to
flexibly redeploy aircraft to meet changing market conditions,
ensuring the maximum utilization of the fleet. Our charter
services complement our freighter aircraft leasing services by
allowing us to increase aircraft utilization during open time
and to react to changes in demand in these segments. We have
employees situated around the globe who closely monitor demand
for commercial charter services in each region, enabling us
quickly to redeploy available aircraft. The majority of our
Boeing
747-200
aircraft are unencumbered, which allows us to quickly adjust the
size of our fleet in reaction to changes in market demand. We
also manage our leasing contract portfolio to stagger contract
terms to mitigate our remarketing risks and aircraft down time.
As a result of our fleet management and our efficient deployment
of aircraft, we have been able to improve the Block Hour
utilization of our fleet by 9.9% during 2007.
Long-term
strategic customer relationships and unique service
offerings:
We combine the global scope and scale of our efficient aircraft
fleet with high quality, cost-effective operations and premium
customer service to provide unique, fully integrated and
reliable solutions for our customers. We believe the outcome is
customers who are motivated to seek long-term relationships with
us. We are therefore able to command higher prices than our
competitors in several key areas. These long-term relationships
build resilience into our business model.
31
Our customers have access to solutions, such as inter-operable
crews, flight scheduling, fuel efficiency planning, and
maintenance spare coverage, which set us apart from other
participants in the freighter aircraft leasing market.
Furthermore, we have access to valuable operating rights to
restricted markets such as Brazil, Japan and China. We believe
our freighter leasing services allow our customers to
effectively expand their capacity, operate dedicated freighter
aircraft and capitalize on the growing air freight market
without simultaneously taking on exposure to fluctuations in the
value of owned aircraft and, in the case of our ACMI leases,
long-term expenses relating to crews and maintenance. Dedicated
freighter aircraft enable schedules to be driven by cargo rather
than passenger demand (for those who typically handle portions
of their cargo operations via belly capacity on passenger
aircraft) which we believe allows our customers to better meet
their global supply chain needs.
We provide freighter aircraft leasing solutions to some of the
worlds premier airlines (such as Qantas Airways, Emirates,
and Air New Zealand) and some of the worlds largest
freight forwarders (including DHL, the largest buyer of aircraft
capacity, Expeditors, Nippon Express, Panalpina and Kuhne and
Nagel).
Experienced
management team:
Our senior management team has extensive operating and
leadership experience in the air freight, airline and logistics
industries at companies such as United Airlines, US Airways,
ASTAR Air Cargo, American Airlines, Canadian Airlines,
Continental Airlines, SH&E Air Transport Consultancy,
Lufthansa Cargo and KLM Cargo, as well as the United States
Navy, Air Force and Federal Air Marshal Service. Our management
team is led by William J. Flynn, who has held senior management
positions with leading transportation companies. Prior to
joining AAWW, Mr. Flynn was President and CEO of
GeoLogistics, a global transportation and logistics enterprise,
where he led the turnaround to profitability and successfully
completed the sale of the company to PWC Logistics.
Business
Strategy
Our strategy includes the following:
Actively
manage our fleet with a focus on leading-edge
aircraft
We will continue to actively manage our fleet of leading-edge
wide-body freighter aircraft across our two primary business
services to meet customer demands. Our Boeing
747-400s and
Boeing
747-8Fs will
be utilized primarily in our freighter aircraft leasing segment
(dry leasing, ACMI and Express Network ACMI). We will deploy our
Boeing
747-200
fleet in the charter and dry leasing markets, while evaluating
sale opportunities as market conditions warrant. We continue to
work with aircraft manufacturers to update our fleet with new
aircraft to ensure that we provide our customers with the most
efficient aircraft to meet the substantial anticipated growth in
global air cargo demand over the next two decades. We will also
continue managing our older aircraft in an opportunistic way to
maximize returns.
Accelerate
fleet growth and expand our leasing business
The favorable supply and demand trends in the global freighter
aircraft segment and the continuing shift in aircraft ownership
from airlines to lessors creates a significant opportunity to
expand our leasing opportunities for Boeing 747 and other
freighter fleet types. We anticipate significant growth in our
fleet chiefly as a result of our Boeing
747-8F order
and expect to increase our capacity by at least 17% over the
next several years as we take delivery of these aircraft. We
believe that a further growth opportunity exists in our dry
leasing segment. Through our deep understanding of the freighter
aircraft market and our high quality customer base, we believe
that we are well positioned to take advantage of this
opportunity. Dry leasing arrangements are complementary to our
ACMI leasing segment, offering customers a broad range of
leasing solutions to meet their individual air freight
requirements. Dry leasing also provides additional, stable
contractual revenue and predictable margins. As we evaluate
other fleet types we will consider these new aircraft for both
our ACMI and dry leasing service offerings.
32
We will take advantage of opportunities to expand our
relationships with our existing customers, while seeking new
customers and new geographic markets.
Focus
on securing long-term contracts
We will continue to focus on securing long-term leasing
contracts, which provide us with stable revenue streams and
predictable margins. In addition, these agreements limit our
exposure to fuel and other costs and mitigate the risk of
fluctuations in both yield and demand in the air freight
business, while also improving the overall utilization of our
fleet.
Drive
significant and ongoing efficiencies and productivity
improvements
In 2006, we began to enhance our organization through an
initiative called Continuous Improvement. We created a separate
department and officer position to drive the process and to
involve all areas of the organization in the effort to
re-examine, re-design and improve the way we do business. Our
initial goal is to generate $100 million in cost savings,
on an annualized basis, by the end of 2008, however, our efforts
to realize additional savings will continue through 2009 and
beyond.
Our efforts thus far have resulted in initiatives in five
principal areas: fuel, maintenance, crew and related costs,
other aircraft operations and general and administrative costs.
As of December 31, 2007, we have implemented projects that
have produced approximately $68.4 million in annualized
savings. We are on track to achieve our initial goal of
$100 million in annualized savings in 2008.
Specific initiatives include:
|
|
|
|
|
New processes to improve the fuel efficiency of our aircraft
operations;
|
|
|
|
Outsourcing our maintenance and back-office support functions to
reduce costs;
|
|
|
|
Improving our processes for managing aircraft maintenance, with
the goal of reducing turn-times and eliminating costs;
|
|
|
|
Application of new technology and processes to optimize our crew
scheduling to maximize crew efficiency;
|
|
|
|
Consolidating and eliminating facility and space
requirements; and
|
|
|
|
Increasing the efficiency of our procurement capabilities to
drive lower costs for purchased goods and services, including
crew travel and outsourced ground and maintenance services.
|
Selectively
pursue and evaluate future acquisitions and
alliances
From time to time, we expect to explore business combinations
and alliances with other cargo airlines, air cargo services
providers, dry leasing companies and other companies to enhance
our competitive position, geographic reach and service portfolio.
Results
of Operations
The following discussion should be read in conjunction with our
Financial Statements and the Notes thereto included elsewhere
herein.
33
Years
Ended December 31, 2007 and 2006
Operating
Statistics
The table below sets forth selected operating data for the years
ended December 31 (in thousands unless otherwise indicated):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase /
|
|
|
Percent
|
|
|
|
2007
|
|
|
2006
|
|
|
(Decrease)
|
|
|
Change
|
|
|
Block Hours
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ACMI
|
|
|
60,230
|
|
|
|
67,666
|
|
|
|
(7,436
|
)
|
|
|
(11.0
|
)%
|
Scheduled service
|
|
|
42,798
|
|
|
|
39,446
|
|
|
|
3,352
|
|
|
|
8.5
|
%
|
AMC charter
|
|
|
22,292
|
|
|
|
19,954
|
|
|
|
2,338
|
|
|
|
11.7
|
%
|
Commercial charter
|
|
|
7,442
|
|
|
|
5,450
|
|
|
|
1,992
|
|
|
|
36.6
|
%
|
Non revenue / other
|
|
|
728
|
|
|
|
745
|
|
|
|
(17
|
)
|
|
|
(2.3
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Block Hours
|
|
|
133,490
|
|
|
|
133,261
|
|
|
|
229
|
|
|
|
0.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue Per Block Hour
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ACMI
|
|
$
|
5,992
|
|
|
$
|
6,016
|
|
|
$
|
(24
|
)
|
|
|
(0.4
|
)%
|
AMC charter
|
|
|
16,893
|
|
|
|
16,376
|
|
|
|
517
|
|
|
|
3.2
|
%
|
Commercial charter
|
|
|
15,741
|
|
|
|
15,194
|
|
|
|
547
|
|
|
|
3.6
|
%
|
Scheduled Service Traffic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RTMs
|
|
|
1,607,309
|
|
|
|
1,475,353
|
|
|
|
131,956
|
|
|
|
8.9
|
%
|
ATMs
|
|
|
2,491,306
|
|
|
|
2,322,024
|
|
|
|
169,282
|
|
|
|
7.3
|
%
|
Load Factor
|
|
|
64.5
|
%
|
|
|
63.5
|
%
|
|
|
1.0
|
pts
|
|
|
1.6
|
%
|
RATM
|
|
$
|
0.264
|
|
|
$
|
0.263
|
|
|
|
0.001
|
|
|
|
0.4
|
%
|
Yield
|
|
$
|
0.409
|
|
|
$
|
0.414
|
|
|
|
(0.005
|
)
|
|
|
(1.2
|
)%
|
Fuel
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Scheduled Service and Commercial Charter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average fuel cost per gallon**
|
|
$
|
2.24
|
|
|
$
|
2.07
|
|
|
$
|
0.17
|
|
|
|
8.2
|
%
|
Fuel gallons consumed (000s)
|
|
|
165,157
|
|
|
|
149,674
|
|
|
|
15,483
|
|
|
|
10.3
|
%
|
AMC
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average fuel cost per gallon
|
|
$
|
2.24
|
|
|
$
|
2.21
|
|
|
$
|
0.03
|
|
|
|
1.4
|
%
|
Fuel gallons consumed (000s)
|
|
|
72,175
|
|
|
|
65,134
|
|
|
|
7,041
|
|
|
|
10.8
|
%
|
Fleet (average during the period)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aircraft count
|
|
|
32.0
|
|
|
|
35.1
|
|
|
|
(3.1
|
)
|
|
|
(8.8
|
)%
|
Out of service*
|
|
|
0.2
|
|
|
|
2.0
|
|
|
|
(1.8
|
)
|
|
|
(90.0
|
)%
|
Dry leased*
|
|
|
5.0
|
|
|
|
3.4
|
|
|
|
1.6
|
|
|
|
47.1
|
%
|
|
|
|
* |
|
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. |
34
Operating
Revenues
The following table compares our operating revenues for the
years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
Percent
|
|
|
|
2007
|
|
|
2006
|
|
|
(Decrease)
|
|
|
Change
|
|
|
Operating Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ACMI
|
|
$
|
360,909
|
|
|
$
|
407,046
|
|
|
$
|
(46,137
|
)
|
|
|
(11.3
|
)%
|
Scheduled service
|
|
|
657,576
|
|
|
|
610,783
|
|
|
|
46,793
|
|
|
|
7.7
|
%
|
AMC charter
|
|
|
376,567
|
|
|
|
326,773
|
|
|
|
49,794
|
|
|
|
15.2
|
%
|
Commercial charter
|
|
|
117,142
|
|
|
|
82,808
|
|
|
|
34,334
|
|
|
|
41.5
|
%
|
Other revenue
|
|
|
50,512
|
|
|
|
48,920
|
|
|
|
1,592
|
|
|
|
3.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues
|
|
$
|
1,562,706
|
|
|
$
|
1,476,330
|
|
|
$
|
86,376
|
|
|
|
5.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ACMI revenue decreased due to two fewer
747-200 units
deployed in ACMI and a slight reduction in the average Revenue
Per Block Hour. In 2007, we had an average of 2.4 Boeing
747-200
aircraft in ACMI compared with an average of 4.5 in 2006. In
2007, we redeployed aircraft to AMC and Commercial Charter based
on attractive market conditions in those segments. The number of
Boeing
747-400
aircraft under ACMI during 2007 was ten, which was unchanged
from the prior year. The Revenue Per Block Hour decreased
slightly in the period reflecting a reduction in peak season
ACMI charter activity which was partially off-set by the shift
from Boeing
747-200s to
the higher-yielding Boeing
747-400.
ACMI Block Hours were 60,230 for 2007, compared with 67,666 for
2006, a decrease of 7,436 Block Hours, or 11.0%, reflecting the
reduction in
747-200
flying. Total aircraft contractually supporting ACMI, excluding
dry leased aircraft as of December 31, 2007, was one Boeing
747-200
aircraft and ten Boeing
747-400
aircraft, compared with two Boeing
747-200
aircraft and ten Boeing
747-400
aircraft supporting ACMI at December 31, 2006. Revenue Per
Block Hour was $5,992 for 2007, compared with $6,016 for 2006, a
decrease of $24 per Block Hour, or 0.4%
Scheduled Service revenue reflected a challenging Yield
environment on certain routes in the trans-Pacific market during
the first half of 2007, which improved during the second half of
the year. The decrease in Yield during 2007 was driven by the
weak demand out of Asia in the first half of the year and a
change in our mix of flying from Asia and South America. We
proactively deployed capacity early in the year to take
advantage of steady demand from the South American and
trans-Atlantic markets which contributed to and 8.5% increase in
Block Hours and a 7.7% increase in revenue compared to 2006.
RTMs in the Scheduled Service segment were 1,607.3 million
on a total capacity of 2,491.3 million ATMs during 2007,
compared with RTMs of 1,475.4 million on a total capacity
of 2,322.0 million ATMs during 2006. Block Hours were
42,798 in 2007, compared with 39,446 for 2006, an increase of
3,352, or 8.5%. Load Factor was 64.5% with a Yield of $0.409
during 2007, compared with a Load Factor of 63.5% and a Yield of
$0.414 during 2006. RATM in our Scheduled Service segment was
$0.264 during 2007, compared with $0.263 during 2006,
representing an increase of 0.4%.
AMC Charter revenue benefited from an increase in demand
related to overseas deployment of U.S. forces and
equipment. AMC continued to satisfy the bulk of its demand
through short-notice expansion flying and we were able to
capture much of this flying because of our ability to respond
quickly to AMC requirements. AMC Charter Block Hours were 22,292
for 2007, compared with 19,954 for 2006, an increase of 2,338
Block Hours, or 11.7%. Revenue Per Block Hour was $16,893 for
2007, compared with $16,376 for 2006, an increase of $517 per
Block Hour, or 3.2%. The increase in rate was primarily due to
an increase in the AMCs charter rate per ton mile flown,
which is calculated on a cost plus basis and is adjusted
annually on October 1. In early 2007, we continued our
strategy of reducing capacity in the Boeing
747-200 ACMI
business and shifted that capacity to the AMC Charter business
to maximize contribution. In the fourth quarter of 2007, as AMC
demand moderated, we successfully shifted capacity from AMC to
the Commercial Charter market.
Commercial Charter revenue increased significantly year
over year. The increase in Block Hours for Commercial Charter in
2007 compared with 2006 was the result of a focused development
of charter market opportunities including increased demand from
perishable markets, entertainment events management and
35
high-tech segments, among others. Our ability to flexibly deploy
additional assets from other segments to respond to such
opportunities increased overall asset utilization. Commercial
Charter Block Hours were 7,442 for 2007, compared with 5,450 for
2006, an increase of 1,992, or 36.6%. Revenue Per Block Hour was
$15,741 for 2007, compared with $15,194 for 2006, an increase of
$547 per Block Hour, or 3.6%.
Other revenue increased slightly to $50.5 million
from $48.9 million or 3.3%. An increase in revenue from two
additional Boeing
747-200 dry
leases to third parties was offset by a reduction in lease rates
on three Boeing
747-400
leases to our 49% owned affiliate.
Total Operating Revenue increased 5.9% in 2007 compared
with 2006, despite an 8.8% (3.1 equivalent aircraft) reduction
in our average operating fleet during 2007. The increased
revenue was primarily the result of an increase in AMC,
Commercial Charter and Scheduled Service Block Hours as well as
increased Revenue Per Block Hour partially offset by a planned
reduction in
747-200 ACMI
Block Hours. Throughout 2007 we optimized revenue through active
allocation of capacity between our service segments depending on
market conditions and opportunities. We deployed aircraft into
Scheduled Service and AMC to capitalize on opportunities early
in 2007 and as conditions changed, we successfully redeployed
capacity to the Commercial Charter segment later in the year.
Improved asset management drove a 0.2% increase in block hours
on an 8.8% reduction in operated aircraft versus the prior year.
Operating
Expenses
The following table compares our operating expenses for the
years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
Percent
|
|
|
|
2007
|
|
|
2006
|
|
|
(Decrease)
|
|
|
Change
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aircraft fuel
|
|
$
|
531,755
|
|
|
$
|
454,675
|
|
|
$
|
77,080
|
|
|
|
17.0
|
%
|
Salaries, wages and benefits
|
|
|
249,517
|
|
|
|
243,724
|
|
|
|
5,793
|
|
|
|
2.4
|
%
|
Maintenance, materials and repairs
|
|
|
149,306
|
|
|
|
144,132
|
|
|
|
5,174
|
|
|
|
3.6
|
%
|
Aircraft rent
|
|
|
155,575
|
|
|
|
153,259
|
|
|
|
2,316
|
|
|
|
1.5
|
%
|
Ground handling and airport fees
|
|
|
78,038
|
|
|
|
75,088
|
|
|
|
2,950
|
|
|
|
3.9
|
%
|
Landing fees and other rent
|
|
|
76,208
|
|
|
|
68,174
|
|
|
|
8,034
|
|
|
|
11.8
|
%
|
Depreciation and amortization
|
|
|
40,012
|
|
|
|
42,341
|
|
|
|
(2,329
|
)
|
|
|
(5.5
|
)%
|
Gain on disposal of aircraft
|
|
|
(3,475
|
)
|
|
|
(10,038
|
)
|
|
|
(6,563
|
)
|
|
|
(65.4
|
)%
|
Travel
|
|
|
50,814
|
|
|
|
49,910
|
|
|
|
904
|
|
|
|
1.8
|
%
|
Post-emergence costs and related professional fees
|
|
|
110
|
|
|
|
353
|
|
|
|
(243
|
)
|
|
|
(68.8
|
)%
|
Other
|
|
|
80,071
|
|
|
|
102,412
|
|
|
|
(22,341
|
)
|
|
|
(21.8
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
$
|
1,407,931
|
|
|
$
|
1,324,030
|
|
|
$
|
83,901
|
|
|
|
6.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aircraft fuel expense increased as a result of an
increase in fuel consumption and by an increase in effective
fuel prices. The average fuel price per gallon for the Scheduled
Service and Commercial Charter businesses was approximately 224
cents (including the effect of hedges) for 2007, compared with
approximately 207 cents for 2006, an increase of 17 cents, or
8.2%. Fuel consumption in these segments increased
15.5 million gallons, or 10.3%, to 165.2 million
gallons for 2007 from 149.7 million gallons for 2006. Our
fuel burn per Block Hour for the Scheduled Service and the
Commercial Charter business segments improved by 1.2% as a
result of our Fuelwise conservation program. During 2007, we
hedged approximately 15.9% of our Scheduled Service fuel
consumption. We realized a benefit of $5.6 million related
to fuel hedges in 2007 compared to $0.6 million loss in
2006. The Pegged fuel price per gallon for the AMC business was
approximately 224 cents for 2007 on average, compared with
approximately 221 cents for 2006, an increase of 3 cents, or
1.4%. We are compensated by the AMC if our actual fuel cost per
gallon for AMC service is above the Pegged price to offset the
difference. Similarly, if fuel cost per gallon is below the
Pegged price, we reimburse the AMC to the extent of the
difference. AMC fuel consumption increased by 7.0 million
gallons or
36
10.8% for 2007 to 72.2 million gallons from
65.1 million gallons for 2006. The increase in our AMC fuel
consumption was driven by an 11.7% increase in AMC Block Hours.
Fuel efficiency as measured by fuel gallons per Block Hour for
AMC service improved by approximately 1.0% as a result of our
company-wide Fuelwise conservation initiatives. We do not incur
fuel expense in our ACMI service as the cost of fuel is borne by
the customer.
Salaries, wages and benefits increased primarily as a
result of an increase in performance-based incentive
compensation, profit sharing and equity compensation for 2007
compared with 2006, offset by savings resulting from reductions
in the work force that took place in the third quarter of 2006.
Maintenance, materials and repair increased primarily as
a result of increased line maintenance, heavy airframe checks
and engine overhaul activity the impact of which was partially
offset by improvements in outside repair expenses and reductions
in borrowed parts expense. There were eleven C Checks on Boeing
747-200
aircraft during 2007, as compared with seven C Checks on Boeing
747-200
aircraft during 2006. There was one Boeing
747-200 D
Check and one Boeing
747-400 D
Check in 2007 compared with three Boeing
747-200 D
Checks and no Boeing
747-400 D
Checks during 2006. There were 39 engine overhauls in 2007
compared with 35 during 2006.
Aircraft rent increased slightly due to the increase in
re-accommodated air transportation on other freight carriers in
our Scheduled Service segment. Re-accommodated air costs are
incurred in situations where we utilize other airlines to
transport freight from our Scheduled Service network to airports
that we do not serve directly. Aircraft rent expenses other than
re-accommodated air cost were comparable to the prior year.
Ground handling and airport fees increased corresponding
to the increase in Scheduled Service flight activity partially
offset by improvements in the efficiency of ground handling
services. The volume increase in Scheduled Service and
commercial charter drove an increase of $8.3 million,
offset by a rate improvement of $4.1 million on procurement
efficiencies. A further improvement of $1.3 million is
attributable to improvements in trucking and beyond gateway
handling charges, offset partially by higher costs for cargo
pallets and nets.
Landing fees and other rent increased by
$8.0 million or 11.8% primarily due to an increase in AMC,
Commercial Charter and Scheduled Service Block Hours. Landings
for these segments increased 15.5% compared with the prior year,
which drove significant increases in landing and parking fees.
Overfly fees also increased due to increased flight activity.
Scheduled Service, Commercial Charter and AMC are the only
segments where we incur landing, overfly and parking fees and
the combined Block Hours in these segments increased by 11.9%
compared with the prior year. The efficiency improvement in
landing fees and other rent is due in part to a reduction in
building and equipment rent expense of $2.0 million
primarily as a result of consolidating and reducing our rented
facility space.
Depreciation and amortization decreased primarily due to
a $2.0 million decrease in depreciation on aircraft and
engines as a result of the sale and disposal of aircraft,
engines and ground equipment.
Gain on disposal of aircraft was the result of the sale
of one Boeing
747-200 and
one CF6-50 engine in 2007 compared with three Boeing
747-200s and
one Boeing
747-100
aircraft sold in 2006.
Travel was up slightly corresponding to a slight increase
in total Block Hours during the comparable periods.
Post-emergence costs and related professional fees
decreased due to the winding down of the claims
reconciliation process related to our bankruptcy proceedings.
Other operating expenses decreased significantly due to
the ongoing Continuous Improvement cost control program. Other
expenses improved $22.3 million which includes a decrease
in professional fees of $5.0 million associated with the
redesign of internal controls that occurred in 2006, a
$7.1 million decrease in legal fees and professional fees,
a $2.3 million reduction in insurance, a $2.6 million
reduction in contractor fees, and an $11.4 million decrease
in other miscellaneous expenses. These improvements were offset
by an increase of $1.4 million in bad debt expense, an
increase of $1.4 million in tax advisory fees, and
$3.3 million in other miscellaneous expense increases.
Included in the miscellaneous improvements above is a
$1.1 million
37
benefit from reduced accrued interest and penalties from a
settlement reached with the IRS in the second quarter of 2006.
Total operating expense increased 6.3% in 2007 compared
with 2006, primarily as a result of increased fuel costs, offset
significantly by Continuous Improvement cost savings. There are
two reasons for the fuel expense increase: first, the cost per
gallon of fuel increase during the period, and second, we had a
relative increase in the amount of flying performed in segments
where we pay the cost of fuel.
Non-operating
Expenses
The following table compares our non-operating expenses for the
years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase /
|
|
|
Percent
|
|
|
|
2007
|
|
|
2006
|
|
|
(Decrease)
|
|
|
Change
|
|
|
Non-operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
(17,775
|
)
|
|
$
|
(12,780
|
)
|
|
$
|
4,995
|
|
|
|
39.1
|
%
|
Interest expense
|
|
|
44,732
|
|
|
|
60,298
|
|
|
|
(15,566
|
)
|
|
|
(25.8
|
)%
|
Capitalized interest
|
|
|
(4,489
|
)
|
|
|
(726
|
)
|
|
|
3,763
|
|
|
|
518.3
|
%
|
Loss on early extinguishment of debt
|
|
|
|
|
|
|
12,518
|
|
|
|
(12,518
|
)
|
|
|
(100.0
|
)%
|
Other, net
|
|
|
(428
|
)
|
|
|
(811
|
)
|
|
|
(383
|
)
|
|
|
(47.2
|
%)
|
Interest income increased due to an increase in our
average available cash balances during the period, augmented by
a general increase in interest rates.
Interest expense decreased significantly as a result of
repayment of debt, including the prepayment of
$140.8 million of floating rate debt on July 31, 2006
(see Note 6 to our Financial Statements for further
discussion of this matter).
Capitalized interest increased primarily due to the
pre-delivery deposits on the Boeing
747-8F
aircraft order we placed in September 2006 (See Note 5 to
our Financial Statements for further discussion of this matter).
Loss on extinguishment of debt was the result of the
prepayment of $140.8 million of floating rate debt on
July 31, 2006 (see Note 6 to our Financial Statements
for further discussion of this matter).
Other (income) expense, net decreased due to realized
gains on the exchange of foreign denominated currencies into
U.S. dollars. The U.S. dollar strengthened against
most foreign currencies during the 2007 period compared with the
same period in 2006 when the U.S. dollar had weakened
against most foreign currencies.
Income taxes. The effective tax rate for 2007
resulted in a charge of 0.4% compared with an effective tax rate
of 36.3% for 2006. Our rates for 2007 reflect the recognition of
a tax benefit of $21.3 million for extraterritorial income,
recognition of a deferred tax asset of $38.1 million offset
by a tax reserve of $9.5 million related to the transaction
with DHL, state income tax expense, and the non-deductibility of
certain items for income tax purposes. The effective tax rate
for 2006 reflects the final settlement of an income tax
examination during the third quarter of 2006, state income tax
expense, and the non-deductibility of certain items for tax
purposes.
Segments
Management allocates the cost of operating aircraft among the
various segments on an average cost per aircraft type. The ACMI
business segment is allocated the costs of operating aircraft
dedicated to ACMI customers. To the extent that we have
under-utilized aircraft, the costs of the under-utilized
aircraft are allocated to Scheduled Service, AMC and the
Commercial Charter business segments because non-ACMI aircraft
are used interchangeably among these segments. Current and prior
period segment FAC comparisons were significantly affected by
the existence of excess Boeing
747-200
capacity in the first half of 2006. This excess capacity in 2006
resulted in additional fixed costs allocated to the segments
that utilize Boeing
747-200
38
aircraft, primarily AMC and Commercial Charter. The elimination
of excess capacity through sale or dry lease of Boeing
747-200
aircraft in the second half of 2006 shifted fixed costs from the
Boeing
747-200
fleet to the Boeing
747-400
fleet during 2007 compared with 2006. Also, the prepayment of
$140.8 million in floating rate debt early in the third
quarter of 2006 reduced ownership costs of the Boeing
747-200
aircraft which are principally deployed in the AMC and
Commercial Charter 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
|
|
|
|
2007
|
|
|
2006
|
|
|
(Decrease)
|
|
|
Change
|
|
|
FAC:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ACMI
|
|
$
|
40,038
|
|
|
$
|
51,757
|
|
|
$
|
(11,719
|
)
|
|
|
(22.6
|
)%
|
Scheduled Service
|
|
|
1,618
|
|
|
|
2,341
|
|
|
|
(723
|
)
|
|
|
(30.9
|
)%
|
AMC Charter
|
|
|
68,977
|
|
|
|
30,130
|
|
|
|
38,847
|
|
|
|
128.9
|
%
|
Commercial Charter
|
|
|
2,097
|
|
|
|
(844
|
)
|
|
|
2,941
|
|
|
|
348.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total FAC
|
|
$
|
112,730
|
|
|
$
|
83,384
|
|
|
$
|
29,346
|
|
|
|
35.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ACMI
Segment
The FAC for the ACMI segment was reduced in 2007 due to a lower
contribution from
747-200 ACMI
flying and increased heavy maintenance activity and crew costs
in the
747-400 ACMI
operation. Boeing
747-400 ACMI
crew cost increases were driven by increased transition training
associated with classic fleet reductions that occurred in 2006
as well as higher profit sharing expense and seniority-based pay
increases. Higher maintenance costs were driven by increased
heavy maintenance check activity. At December 31, 2007, one
Boeing
747-200
aircraft and ten Boeing
747-400
aircraft were dedicated to ACMI compared with two Boeing
747-200
aircraft and ten Boeing
747-400
aircraft at December 31, 2006.
Scheduled
Service Segment
Scheduled Service segment FAC decreased year over year primarily
as a result of higher fuel costs, higher crew costs and higher
landing and related fees, offset by lower ownership costs and
reductions to overhead expenses. Scheduled Service revenue
reflected a challenging Yield environment on certain routes in
the trans-Pacific market during the first half of 2007 but
recovered during the latter part of the third quarter and
performed well in the fourth quarter of 2007. The increase in
revenue in this segment reflects an increase in RTMs of 8.9%.
Ownership costs declined as a result of our prepayment of
high-cost debt on July 31, 2006 and the ratable allocation
of those improvements to this segment. Overhead improved due to
the Continuous Improvement program.
AMC
Charter Segment
FAC relating to the AMC Charter segment increased significantly
as a result of increased Block Hours, an increase in the rate
per Block Hour and an improvement in allocated operating costs,
driven primarily by the reallocation of fixed costs associated
with the elimination of excess Boeing
747-200
capacity in the second half of 2006. AMC Charter revenue
benefited from increased demand from the AMC and our ability to
deploy additional assets to respond to this opportunity.
Revenues in this segment increased $49.8 million or 15.2%
on 11.7% more Block Hours, reflecting strong AMC demand in 2007
and an increase in the AMC yield. This segment also benefited
from the retirement of high cost debt on July 31, 2006.
Commercial
Charter Segment
FAC for the Commercial Charter segment increased as a result of
higher Block Hours and an increase in Revenue Per Block Hour
combined with the slight reduction in allocated operating costs.
Operating cost improvements on a Block Hour basis were driven
principally by the elimination of excess Boeing
747-200
39
capacity in the second half of 2006. Increased revenue rates and
the impact of the improvement in
747-200
aircraft utilization more than offset a 15.8% increase in the
cost of fuel on a per Block Hour basis.
We grew the Commercial Charter segment Block Hours by 36.6%
while simultaneously increasing revenues per Block Hour by 3.6%.
The increase in Block Hours for Commercial Charter in 2007
compared with 2006 was the result of increased demand from
perishable markets, entertainment events management and
high-tech segments, among others, as well as our ability to
flexibly deploy additional assets from other segments to respond
to such opportunities. Our continuing strategic focus on these
opportunities resulted in a significantly higher volume of
Commercial Charter flights.
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
|
%
|
|
|
|
* |
|
Includes tail number N92IFT which was not part of the operating
fleet at December 31, 2005 and was sold in early 2006. |
40
|
|
|
** |
|
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 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
41
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.
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
42
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 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
|
%
|
Interest income increased primarily due to an increase in
our average available cash balances, augmented by a general
increase in interest rates.
43
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.
Scheduled
Service Segment
FAC relating to the Scheduled Service segment increased slightly
due to 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
44
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.
Liquidity
and Capital Resources
At December 31, 2007, we had cash and cash equivalents of
$477.3 million, compared with $231.8 million at
December 31, 2006, an increase of $245.5 million, or
105.9%. On January 30, 2008, Atlas entered into a
$270.0 million pre-delivery deposit (PDP)
financing facility with Norddeutsche Landesbank, in connection
with five new Boeing
747-8F
wide-body freighters scheduled for delivery between February and
July 2010. We consider cash on hand, the PDP financing facility
and cash generated from operations to be sufficient to meet our
debt and lease obligations and to fund expected capital
expenditures (including Boeing
747-8F
aircraft pre-delivery deposits) of approximately
$295.3 million for 2008.
We did not pay significant cash income taxes in 2006 or 2007 and
we expect to utilize tax loss carryforwards to offset most
taxable income generated during 2008. We may pay significant
U.S. cash income taxes in 2009. Management is considering
certain income tax planning opportunities that may reduce our
effective tax rate and cash tax liability in 2008 and beyond.
However, these planning opportunities are not yet fully
developed, and the potential tax rate reduction and cash tax
savings, if any, are not yet quantifiable. The Company expects
to pay foreign income taxes in Hong Kong starting in 2008. These
taxes could be offset in the U.S. by a foreign tax credit.
The Company expects to pay no significant foreign income taxes
in jurisdictions other than Hong Kong. Two of the Companys
foreign branch operations are subject to income tax in Hong Kong.
Operating Activities. Net cash provided by
operating activities in 2007 was $196.7 million, compared
with net cash provided by operating activities of
$146.7 million for 2006. The increase in cash provided by
operating activities is primarily the result of improved
operating results and the recognition of a deferred tax asset
related to the transaction with DHL.
Investing Activities. Net cash used by
investing activities was $54.5 million for 2007, consisting
primarily of capital expenditures of $63.1 million, which
includes pre-delivery deposits and related costs on our Boeing
aircraft order of $35.6 million offset by proceeds from the
sale of aircraft of $8.6 million. 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.
Financing Activities. Net cash provided by
financing activities was $103.3 million for 2007, which
reflects proceeds from the DHL investment of $97.9 million,
$30.0 million in proceeds from a refundable deposit from
DHL, $6.7 million in proceeds from stock option exercises
and $3.6 million in tax benefits on
45
restricted stock and stock options, offset by $32.0 million
of payments on long-term debt and capital lease obligations and
a $2.1 million purchase of treasury stock. 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.
Contractual
Obligations
The table below provides details of our future cash contractual
obligations as of December 31, 2007 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 -
|
|
|
2011 -
|
|
|
|
|
|
|
Total
|
|
|
2008
|
|
|
2010
|
|
|
2012
|
|
|
Thereafter
|
|
|
Debt and capital lease obligations(1)
|
|
$
|
469.6
|
|
|
$
|
35.7
|
|
|
$
|
68.8
|
|
|
$
|
71.4
|
|
|
$
|
293.7
|
|
Interest on debt(2)
|
|
|
239.8
|
|
|
|
34.9
|
|
|
|
61.9
|
|
|
|
51.9
|
|
|
|
91.1
|
|
Aircraft operating leases
|
|
|
2,182.9
|
|
|
|
143.3
|
|
|
|
288.5
|
|
|
|
282.5
|
|
|
|
1,468.6
|
|
Other operating leases
|
|
|
20.3
|
|
|
|
5.7
|
|
|
|
9.3
|
|
|
|
5.3
|
|
|
|
|
|
Aircraft purchase commitments(3)
|
|
|
2,111.1
|
|
|
|
246.7
|
|
|
|
1,174.0
|
|
|
|
690.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
5,023.7
|
|
|
$
|
466.3
|
|
|
$
|
1,602.5
|
|
|
$
|
1,101.5
|
|
|
$
|
1,853.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 and capital leases
at December 31, 2007. |
|
(3) |
|
Includes estimated contractual escalations and required option
payments net of purchase credits in respect to the aircraft
purchase commitments. |
The Company maintains a non-current liability for unrecognized
income tax benefits. To date, the Company has not resolved the
ultimate cash settlement of this liability. As a result, the
Company is not in a position to estimate with reasonable
certainty the date upon which this liability would be payable.
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, 2007 and 2006.
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
46
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 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 37 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 Financial
Accounting Standards Boards (the FASB) 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 2 to our
Financial Statements included in Item 8 of Part II of
this Report. The following describes our most critical
accounting policies:
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
47
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 Statement of Financial Accounting Standards
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.
Stock-Based
Compensation Expense
Effective January 1, 2006, we account for stock-based
compensation costs in accordance with Statement of Financial
Accounting Standards No. 123 (revised
2004) Share-Based Payment
(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
48
assumptions, stock-based compensation expense may differ
significantly from what we have recorded in the past.
New
Accounting Pronouncements
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. The adoption of SFAS 157
is not expected to have a material impact on our consolidated
financial statements.
In February 2007, the FASB issued SFAS No. 159, The
Fair Value Option for Financial Assets and Financial
Liabilities Including an Amendment of FASB Statement
No. 115, (SFAS 159). This statement
permits, but does not require, entities to measure certain
financial instruments and other assets and liabilities at fair
value on an
instrument-by-instrument
basis. Unrealized gains and losses on items for which the fair
value option has been elected should be recognized in earnings
at each subsequent reporting date. The provisions of
SFAS 159 are effective on January 1, 2008 and early
adoption is permitted, provided that SFAS 157 is adopted
concurrently. The adoption of SFAS 159 is not expected to
have a material impact on our consolidated financial statements.
In December 2007, the FASB issued SFAS 160,
Non-controlling Interests in Consolidated Financial
Statements an amendment of ARB No. 51
(SFAS 160). SFAS 160 establishes
accounting and reporting standards for the non-controlling
interest in a subsidiary and for the deconsolidation of a
subsidiary. It clarifies that a non-controlling interest in a
subsidiary is an ownership interest in the consolidated entity
that should be reported as equity in the consolidated financial
statements. SFAS 160 requires retroactive adoption of the
presentation and disclosure requirements for existing minority
interests. All other requirements of SFAS 160 shall be
applied prospectively. We are currently evaluating the potential
impact of the adoption of SFAS 160 on our consolidated
financial statements.
In December 2007, the FASB issued SFAS No. 141
(revised 2007) (SFAS 141(R)), Business
Combinations, which is a revision of SFAS 141,
Business Combinations The primary
requirements of SFAS 141(R) are as follows: (I.) Upon
initially obtaining control, the acquiring entity in a business
combination must recognize 100% of the fair values of the
acquired assets, including goodwill, and assumed liabilities,
with only limited exceptions even if the acquirer has not
acquired 100% of its target. As a consequence, the current step
acquisition model will be eliminated. (II.) Contingent
consideration arrangements will be fair valued at the
acquisition date and included on that basis in the purchase
price consideration. The concept of recognizing contingent
consideration at a later date when the amount of that
consideration is determinable beyond a reasonable doubt, will no
longer be applicable. (III.) All transaction costs will be
expensed as incurred. SFAS 141(R) is effective as of the
beginning of an entitys first fiscal year beginning after
December 15, 2008. Adoption is prospective and early
adoption is not permitted. We are currently evaluating the
impact that the adoption of SFAS 141(R) will have on our
consolidated financial statements.
49
|
|
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 2007 average cost per gallon of fuel. Based on
actual 2007 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
$37.0 million in 2007. 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.
Interest. Market risk for fixed-rate long-term
debt is estimated as the potential increase in fair value
resulting from a hypothetical 20% decrease in interest rates and
amounts to approximately $32.9 million as of
December 31, 2007. The fair value of our fixed rate debt
was $522.6 million at December 31, 2007 (see
Note 10 to our Financial Statements). The fair values of
our long-term debt were estimated using discounted future cash
flows. At December 31, 2007, we did not have any floating
rate debt.
50
|
|
ITEM 8.
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
|
51
Report Of
Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Atlas Air Worldwide Holdings, Inc.
In our opinion, the consolidated financial statements listed in
the index appearing under Item 15(a)(1) present fairly, in
all material respects, the financial position of Atlas Air
Worldwide Holdings, Inc. and its subsidiaries at
December 31, 2007, and the results of its operations and
its cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States of
America. In addition, in our opinion, the financial statement
schedule listed in the index appearing under Item 15(b)(2)
presents fairly, in all material respects, the information set
forth therein when read in conjunction with the related
consolidated financial statements. Also in our opinion, the
Company maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2007,
based on criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). The
Companys management is responsible for these financial
statements and financial statement schedule, for maintaining
effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over
financial reporting, included in Managements Report on
Internal Control over Financial Reporting appearing under
Item 9A. Our responsibility is to express opinions on these
financial statements, on the financial statement schedule, and
on the Companys internal control over financial reporting
based on our integrated audit. We conducted our audit 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 and whether effective internal control over
financial reporting was maintained in all material respects. Our
audit of the financial statements included examining, on a test
basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used
and significant estimates made by management, and evaluating the
overall financial statement presentation. Our audit of internal
control over financial reporting included obtaining an
understanding of internal control over financial reporting,
assessing the risk that a material weakness exists, and testing
and evaluating the design and operating effectiveness of
internal control based on the assessed risk. Our audit also
included performing such other procedures as we considered
necessary in the circumstances. We believe that our audit
provides a reasonable basis for our opinions.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (i) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of
management and directors of the company; and (iii) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers
LLP
New York, New York
February 27, 2008
52
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 sheet of
Atlas Air Worldwide Holdings, Inc. as of December 31, 2006
and the related consolidated statements of operations,
stockholders equity and cash flows for the years ended
December 31, 2006 and 2005. Our audits also included the
financial statement schedule listed in the Index at
Item 15(a)2. 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 the consolidated results of its
operations and its cash flows for the years ended
December 31, 2006 and 2005, 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 its method of accounting
for share-based compensation.
New York, New York
March 12, 2007
53
ATLAS AIR
WORLDWIDE HOLDINGS, INC.
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands, except share data)
|
|
|
ASSETS
|
Current Assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
477,309
|
|
|
$
|
231,807
|
|
Accounts receivable, net of allowance of $3,481 and $1,811,
respectively
|
|
|
129,538
|
|
|
|
134,520
|
|
Prepaid maintenance
|
|
|
72,250
|
|
|
|
64,678
|
|
Deferred taxes
|
|
|
35,053
|
|
|
|
8,540
|
|
Prepaid expenses and other current assets
|
|
|
24,693
|
|
|
|
24,334
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
738,843
|
|
|
|
463,879
|
|
Property and equipment
|
|
|
|
|
|
|
|
|
Flight equipment
|
|
|
583,468
|
|
|
|
583,599
|
|
Ground equipment
|
|
|
23,040
|
|
|
|
18,298
|
|
Purchase deposits for flight equipment
|
|
|
75,026
|
|
|
|
39,464
|
|
Less: accumulated depreciation
|
|
|
(86,662
|
)
|
|
|
(60,287
|
)
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
594,872
|
|
|
|
581,074
|
|
Other Assets
|
|
|
|
|
|
|
|
|
Deposits and other assets
|
|
|
41,038
|
|
|
|
35,029
|
|
Lease contracts and intangible assets, net
|
|
|
37,961
|
|
|
|
39,798
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
1,412,714
|
|
|
$
|
1,119,780
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Current Liabilities
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
29,600
|
|
|
$
|
36,052
|
|
Accrued liabilities
|
|
|
159,355
|
|
|
|
153,063
|
|
Deferred gain
|
|
|
151,742
|
|
|
|
|
|
Current portion of long-term debt and capital leases
|
|
|
28,444
|
|
|
|
19,756
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
369,141
|
|
|
|
208,871
|
|
Other Liabilities
|
|
|
|
|
|
|
|
|
Long-term debt and capital leases
|
|
|
365,619
|
|
|
|
398,885
|
|
Deferred taxes
|
|
|
21,570
|
|
|
|
4,322
|
|
Other liabilities
|
|
|
93,682
|
|
|
|
33,858
|
|
|
|
|
|
|
|
|
|
|
Total other liabilities
|
|
|
480,871
|
|
|
|
437,065
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 12)
|
|
|
|
|
|
|
|
|
Minority interest
|
|
|
13,477
|
|
|
|
|
|
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; 21,796,484 and 20,730,719 shares issued,
21,636,250 and 20,609,317 shares outstanding (net of
treasury stock), respectively
|
|
|
218
|
|
|
|
207
|
|
Additional
paid-in-capital
|
|
|
341,537
|
|
|
|
312,690
|
|
Receivable from issuance of subsidiary stock
|
|
|
(77,065
|
)
|
|
|
|
|
Common stock to be issued to creditors
|
|
|
|
|
|
|
7,800
|
|
Treasury stock, at cost; 160,234 and 121,402 shares,
respectively
|
|
|
(6,599
|
)
|
|
|
(4,524
|
)
|
Accumulated other comprehensive income
|
|
|
1,750
|
|
|
|
1,319
|
|
Retained earnings
|
|
|
289,384
|
|
|
|
156,352
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
549,225
|
|
|
|
473,844
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders Equity
|
|
$
|
1,412,714
|
|
|
$
|
1,119,780
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Consolidated Financial Statements.
54
ATLAS AIR
WORLDWIDE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands, except per share data)
|
|
|
Operating Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
ACMI
|
|
$
|
360,909
|
|
|
$
|
407,046
|
|
|
$
|
466,018
|
|
Scheduled service
|
|
|
657,576
|
|
|
|
610,783
|
|
|
|
555,814
|
|
AMC charter
|
|
|
376,567
|
|
|
|
326,773
|
|
|
|
440,642
|
|
Commercial charter
|
|
|
117,142
|
|
|
|
82,808
|
|
|
|
107,840
|
|
Other revenue
|
|
|
50,512
|
|
|
|
48,920
|
|
|
|
47,583
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues
|
|
|
1,562,706
|
|
|
|
1,476,330
|
|
|
|
1,617,897
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Aircraft fuel
|
|
|
531,755
|
|
|
|
454,675
|
|
|
|
432,367
|
|
Salaries, wages and benefits
|
|
|
249,517
|
|
|
|
243,724
|
|
|
|
244,509
|
|
Maintenance, materials and repairs
|
|
|
149,306
|
|
|
|
144,132
|
|
|
|
233,614
|
|
Aircraft rent
|
|
|
155,575
|
|
|
|
153,259
|
|
|
|
150,879
|
|
Ground handling and airport fees
|
|
|
78,038
|
|
|
|
75,088
|
|
|
|
71,735
|
|
Landing fees and other rent
|
|
|
76,208
|
|
|
|
68,174
|
|
|
|
80,054
|
|
Depreciation and amortization
|
|
|
40,012
|
|
|
|
42,341
|
|
|
|
46,336
|
|
Gain on disposal of aircraft and engines
|
|
|
(3,475
|
)
|
|
|
(10,038
|
)
|
|
|
(7,820
|
)
|
Travel
|
|
|
50,814
|
|
|
|
49,910
|
|
|
|
60,089
|
|
Post-emergence costs and
|
|
|
|
|
|
|
|
|
|
|
|
|
related professional fees
|
|
|
110
|
|
|
|
353
|
|
|
|
3,706
|
|
Other
|
|
|
80,071
|
|
|
|
102,412
|
|
|
|
109,128
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
1,407,931
|
|
|
|
1,324,030
|
|
|
|
1,424,597
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
154,775
|
|
|
|
152,300
|
|
|
|
193,300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
(17,775
|
)
|
|
|
(12,780
|
)
|
|
|
(6,828
|
)
|
Interest expense
|
|
|
44,732
|
|
|
|
60,298
|
|
|
|
74,512
|
|
Capitalized interest
|
|
|
(4,489
|
)
|
|
|
(726
|
)
|
|
|
(123
|
)
|
Loss on early extinguishment of debt
|
|
|
|
|
|
|
12,518
|
|
|
|
|
|
Other, net
|
|
|
(428
|
)
|
|
|
(811
|
)
|
|
|
1,976
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-operating expenses
|
|
|
22,040
|
|
|
|
58,499
|
|
|
|
69,537
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
132,735
|
|
|
|
93,801
|
|
|
|
123,763
|
|
Income taxes
|
|
|
320
|
|
|
|
34,020
|
|
|
|
49,902
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
132,415
|
|
|
$
|
59,781
|
|
|
$
|
73,861
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
6.24
|
|
|
$
|
2.89
|
|
|
$
|
3.64
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
6.17
|
|
|
$
|
2.83
|
|
|
$
|
3.56
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
21,221
|
|
|
|
20,672
|
|
|
|
20,280
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
21,453
|
|
|
|
21,100
|
|
|
|
20,738
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Consolidated Financial Statements.
55
ATLAS AIR
WORLDWIDE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Cash Flows from Operating Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
132,415
|
|
|
$
|
59,781
|
|
|
$
|
73,861
|
|
Adjustments to reconcile net income to
|
|
|
|
|
|
|
|
|
|
|
|
|
net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
40,012
|
|
|
|
42,341
|
|
|
|
46,336
|
|
Accretion of debt discount
|
|
|
7,461
|
|
|
|
11,359
|
|
|
|
16,591
|
|
Loss on early extinguishment of debt
|
|
|
|
|
|
|
12,518
|
|
|
|
|
|
Amortization of operating lease discount
|
|
|
1,836
|
|
|
|
1,840
|
|
|
|
1,833
|
|
Provision (release of allowance) for doubtful accounts
|
|
|
1,115
|
|
|
|
(91
|
)
|
|
|
(2,665
|
)
|
Gain on disposal of aircraft and engines
|
|
|
(3,475
|
)
|
|
|
(10,038
|
)
|
|
|
(7,820
|
)
|
Deferred income taxes
|
|
|
(874
|
)
|
|
|
26,735
|
|
|
|
48,167
|
|
Amortization of debt issuance cost and lease
|
|
|
|
|
|
|
|
|
|
|
|
|
financing deferred gains
|
|
|
|
|
|
|
1,011
|
|
|
|
337
|
|
Stock based compensation
|
|
|
7,084
|
|
|
|
7,156
|
|
|
|
3,943
|
|
Other, net
|
|
|
185
|
|
|
|
6,027
|
|
|
|
2,084
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
5,662
|
|
|
|
(691
|
)
|
|
|
12,433
|
|
Prepaids and other current assets
|
|
|
(5,958
|
)
|
|
|
(14,016
|
)
|
|
|
14,129
|
|
Deposits and other assets
|
|
|
(9,534
|
)
|
|
|
(12,194
|
)
|
|
|
4,007
|
|
Accounts payable and accrued liabilities
|
|
|
20,781
|
|
|
|
14,921
|
|
|
|
28,834
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
196,710
|
|
|
|
146,659
|
|
|
|
242,070
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(63,072
|
)
|
|
|
(69,889
|
)
|
|
|
(29,071
|
)
|
Proceeds from sale of aircraft and engines
|
|
|
8,550
|
|
|
|
27,264
|
|
|
|
|
|
Insurance proceeds
|
|
|
|
|
|
|
|
|
|
|
12,550
|
|
Decrease in restricted funds held in trust
|
|
|
|
|
|
|
1,077
|
|
|
|
19,812
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used) provided by investing activities
|
|
|
(54,522
|
)
|
|
|
(41,548
|
)
|
|
|
3,291
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from loan
|
|
|
|
|
|
|
|
|
|
|
10,000
|
|
Proceeds from issuance of subsidiary stock
|
|
|
97,917
|
|
|
|
|
|
|
|
|
|
Proceeds from refundable deposit
|
|
|
30,000
|
|
|
|
|
|
|
|
|
|
Proceeds from stock option exercises
|
|
|
6,677
|
|
|
|
7,856
|
|
|
|
2,028
|
|
Purchase of treasury stock
|
|
|
(2,075
|
)
|
|
|
(2,267
|
)
|
|
|
(2,257
|
)
|
Excess tax benefit on stock options and restricted stock
|
|
|
3,584
|
|
|
|
4,466
|
|
|
|
|
|
Payment of debt issuance costs
|
|
|
(750
|
)
|
|
|
(250
|
)
|
|
|
(92
|
)
|
Payment on debt and capital lease obligations
|
|
|
(32,039
|
)
|
|
|
(188,999
|
)
|
|
|
(83,067
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used) provided by financing activities
|
|
|
103,314
|
|
|
|
(179,194
|
)
|
|
|
(73,388
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
245,502
|
|
|
|
(74,083
|
)
|
|
|
171,973
|
|
Cash and cash equivalents at the beginning of period
|
|
|
231,807
|
|
|
|
305,890
|
|
|
|
133,917
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
477,309
|
|
|
$
|
231,807
|
|
|
$
|
305,890
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Consolidated Financial Statements.
56
ATLAS AIR
WORLDWIDE HOLDINGS, INC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Stock
|
|
|
Deferred
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
|
|
|
Treasury
|
|
|
Paid-In
|
|
|
to be issued
|
|
|
Compen-
|
|
|
Comprehensive
|
|
|
Subscription
|
|
|
Retained
|
|
|
|
|
|
|
Stock
|
|
|
Stock
|
|
|
Capital
|
|
|
to Creditors
|
|
|
sation
|
|
|
Income
|
|
|
Receivable
|
|
|
Earnings
|
|
|
Total
|
|
|
|
(In thousands, except share amounts)
|
|
|
Balance at December 31, 2004
|
|
$
|
36
|
|
|
$
|
|
|
|
$
|
48,337
|
|
|
$
|
216,069
|
|
|
$
|
(9,190
|
)
|
|
$
|
845
|
|
|
$
|
|
|
|
$
|
22,710
|
|
|
$
|
278,807
|
|
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
|
|
Other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(906
|
)
|
|
|
|
|
|
|
|
|
|
|
(906
|
)
|
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
|
)
|
|
$
|
(61
|
)
|
|
$
|
|
|
|
$
|
96,571
|
|
|
$
|
357,844
|
|
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 comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,030
|
|
|
|
|
|
|
|
|
|
|
|
1,030
|
|
Cumulative effect of change in accounting FAS 158
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
350
|
|
|
|
|
|
|
|
|
|
|
|
350
|
|
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
|
)
|
|
$
|
312,690
|
|
|
$
|
7,800
|
|
|
$
|
|
|
|
$
|
1,319
|
|
|
$
|
|
|
|
$
|
156,352
|
|
|
$
|
473,844
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
132,415
|
|
|
|
132,415
|
|
Purchase of 38,832 shares of treasury stock
|
|
|
|
|
|
|
(2,075
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,075
|
)
|
Cumulative effect of change in accounting principle Fin 48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
617
|
|
|
|
617
|
|
Issuance of 621,002 shares of common stock to creditors
|
|
|
6
|
|
|
|
|
|
|
|
7,794
|
|
|
|
(7,800
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of 301,574 employee stock options
|
|
|
3
|
|
|
|
|
|
|
|
6,674
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,677
|
|
Stock option and restricted stock compensation
|
|
|
|
|
|
|
|
|
|
|
7,084
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,084
|
|
Issuance of 169,573 shares and forfeiture of
26,384 shares of restricted stock
|
|
|
2
|
|
|
|
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivable from issuance of subsidiary stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(77,065
|
)
|
|
|
|
|
|
|
(77,065
|
)
|
Other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
431
|
|
|
|
|
|
|
|
|
|
|
|
431
|
|
Tax benefit on restricted stock and stock options
|
|
|
|
|
|
|
|
|
|
|
3,584
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,584
|
|
Tax valuation allowance and reserve reversal
|
|
|
|
|
|
|
|
|
|
|
3,713
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,713
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
$
|
218
|
|
|
$
|
(6,599
|
)
|
|
$
|
341,537
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,750
|
|
|
$
|
(77,065
|
)
|
|
$
|
289,384
|
|
|
$
|
549,225
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Consolidated Financial Statements.
57
ATLAS AIR
WORLDWIDE HOLDINGS, INC.
December 31, 2007
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), which is
wholly owned, and Polar Air Cargo Worldwide, Inc.
(Polar), of which Holdings has a 51% economic
interest and 75% voting interest. On June 28, 2007, Polar
issued shares representing a 49% economic interest and a 25%
voting interest to DHL Network Operations (USA), Inc.
(DHL), a subsidiary of Deutsche Post AG
(DP), (see Note 3 for additional discussion of
the transaction). Prior to that date, Polar was wholly owned by
Holdings and was the parent company of Polar Air Cargo, Inc.
(Polar LLC). Holdings, Atlas, Polar and Polar LLC
are referred to 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, the Middle East, Australia,
Europe, South America, Africa and North America through:
(i) contractual lease arrangements including contracts
through which the Company leases an aircraft to a customer and
provides value added services including, crew, maintenance and
insurance (ACMI);
(ii) airport-to-airport
scheduled air cargo service (Scheduled Service);
(iii) military charter (AMC Charter); and
(iv) seasonal, commercial and ad-hoc charter services
(Commercial Charter). The Company operates only
Boeing 747 freighter aircraft.
Except for per share data, all dollar amounts are in thousands
unless otherwise stated.
|
|
2.
|
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.
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 month defined in
a contract. Minimum revenue guarantee amounts recognized as
revenues for which no service was provided were de minimis.
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.
Issuance
of stock by subsidiaries
We record gains or losses on issuances of shares by subsidiaries
as other income in the consolidated statement of operations. For
purposes of the DHL investment, it is expected to occur in
October, 2008.
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
58
ATLAS AIR
WORLDWIDE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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
The aggregate carrying value of aircraft, spare engines and
equipment held for sale at December 31, 2007 and 2006 was
zero and $0.5 million, respectively, which is included
within Prepaid expenses and other current assets in the
consolidated balance sheets.
Aircraft tail number N921FT and two related spare engines were
sold in April 2006 for a gain of $2.8 million, net of
related selling expenses.
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. Both
of these aircraft are under capital lease.
Investments
The Company holds a minority interest (49%) in a private
company, which is accounted for under the equity method.
The December 31, 2007 and 2006 aggregate carrying value of
the investment of $5.6 million and $4.5 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 as of July 27, 2004, the date of the
Companys emergence from bankruptcy. 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 2007 and 2006, the Company had net receivables
arising from activity with this entity of $1.2 million and
$1.6 million, respectively, which were included in Accounts
receivable in the consolidated balance sheets.
59
ATLAS AIR
WORLDWIDE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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, 2007 and 2006, the reserve
for expendable obsolescence was $0.8 million and zero,
respectively. 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, 2007 and 2006, the net book value of spare
parts inventory was $18.7 million and $16.2 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 they are
determined to be beyond economic repair. At December 31,
2007 and 2006, the net book value of rotable inventory was
$54.2 million and $51.8 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.
Remaining useful lives for Boeing
747-200
aircraft range from 0.6 years to 9.1 years and for
Boeing
747-400
aircraft, from 32.5 years to 34.3 years. 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 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.
The Company performed an impairment test on all the aircraft and
spare engines and determined that fair market value exceeded
book value in 2007.
60
ATLAS AIR
WORLDWIDE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 date of our emergence from
bankruptcy in July 2004.
During the year ended December 31, 2006, the Company
recorded deferred tax provisions and released the valuation
allowance and reserves previously recorded against deferred tax
assets of approximately $13.3 million. 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 the balance of
intangibles was zero. Amortization expense amounted to zero,
$0.6 million and $7.1 million for the years ended
December 31, 2007, 2006 and 2005, respectively.
Off-Balance
Sheet Arrangements
A portion of the Companys 37 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 Financial Accounting
Standards Boards (the FASB) 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 more fully 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 24.1%, 22.1% and 27.2%
of revenue for the years ended December 31, 2007, 2006 and
2005, respectively. Accounts receivable from the AMC were
$16.3 million and $23.6 million at December 31,
2007 and 2006, respectively. The International Airline of United
Arab Emirates (Emirates) accounted for 10.8%, 11.9%
and 9.8% of the Companys total revenues for the years
ended December 31, 2007, 2006 and 2005, respectively.
Accounts receivable from Emirates were $13.4 million and
$13.3 million at December 31, 2007 and 2006,
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 basis 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 related 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.
61
ATLAS AIR
WORLDWIDE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 zero, $1.0 million and
$0.3 million for the years ended December 31, 2007,
2006 and 2005, respectively 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.
Prepaid
Maintenance Deposits
Certain of the Companys aircraft financing agreements
require security deposits to its finance providers to ensure
that the Company performs major maintenance as required. These
are fully refundable to the Company and are, therefore,
accounted for as deposits and included in Prepaid Maintenance.
Such amounts were $46.0 million and $38.4 million at
December 31, 2007 and 2006, respectively. Prepaid
maintenance also includes payments made to service providers
under certain power by the hour engine maintenance contracts for
engine maintenance which is performed when engine overhauls are
required. Included in prepaid maintenance were
$26.2 million of payments made to such service providers at
December 31, 2007 and 2006, respectively. Airline industry
practice would have air carriers account for the maintenance
expense under such contracts as flight hours are incurred for
contracts that provide for a full transfer of risk. Transfer of
risk does not occur if the contract contains provisions for
true-ups,
contract adjustment provisions or termination provisions with
reconciliation requirements that require additional payments.
The Companys power by the hour engine maintenance
contracts generally provide that, in exchange for a payment of a
fixed amount per flight hour, the maintenance provider will
furnish specified maintenance activities on the engines for a
specified period of time. These contracts contain reconciliation
provisions for early termination of engines from the contract
which have caused the Company to make payments over and above
the contractual hourly payments made to the date of withdrawing
engines from these programs; therefore the Company does not
believe that a full transfer of risk occurs under these
contracts. Accordingly the Company accounts for the payments to
the service providers as deposits and the prepaid maintenance
balance is reduced when engine overhauls occur consistent with
the Companys policy to recognize maintenance expense under
the expense as incurred method.
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 other
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).
62
ATLAS AIR
WORLDWIDE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Supplemental
Cash Flow Information
The aggregate cash interest payments amounted to
$37.6 million, $47.7 million and $55.4 million
for the years ended December 31, 2007, 2006 and 2005,
respectively. The cash interest paid to lenders is calculated on
the face amount of the various debt instruments of the Company
based on the contractual interest rates in effect during each
payment period.
Principal payments to lenders reflected as payment on debt and
capital lease obligations in cash flows used by financing
activities in the consolidated statements of cash flows
represent amounts originally borrowed.
The accretion of debt discount shown as a reconciling item in
cash flows from operating activities in the consolidated
statements of cash flows is the difference between interest
expense recorded in the Consolidated Statement of Operations and
cash interest owed to lenders. This amount arises from the
amortization of the difference between the fair value of the
Companys debt recorded on the balance sheet and the face
amount of debt payable to lenders when we emerged from
bankruptcy on July 28, 2004 and applied fresh start
accounting.
During the years ended December 31, 2007 and 2006, the
Company recorded an increase in additional paid in capital of
$3.7 million and $37.6 million, respectively, as a
result of the release of income tax reserves and valuation
reserves.
During the years ended December 31, 2007, 2006 and 2005,
the Company did not pay any cash income taxes.
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, primarily related to the classification of
Accumulated other comprehensive income.
Recently
Issued Accounting Standards
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 adoption of SFAS 157
is not expected to have a material impact on the Companys
consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159, The
Fair Value Option for Financial Assets and Financial
Liabilities Including an Amendment of FASB Statement
No. 115, (SFAS 159). This statement
permits, but does not require, entities to measure certain
financial instruments and other assets and liabilities at fair
value on an
instrument-by-instrument
basis. Unrealized gains and losses on items for which the fair
value option has been elected should be recognized in earnings
at each subsequent reporting date. The provisions of
SFAS 159 are effective on January 1, 2008 and early
adoption is permitted, provided that SFAS 157 is adopted
concurrently. The adoption of SFAS 159 is not expected to
have a material impact on the Companys consolidated
financial statements.
63
ATLAS AIR
WORLDWIDE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In December 2007, the FASB issued SFAS 160,
Non-controlling Interests in Consolidated Financial
Statements an amendment of ARB No. 51
(SFAS 160). SFAS 160 establishes
accounting and reporting standards for the non-controlling
interest in a subsidiary and for the deconsolidation of a
subsidiary. It clarifies that a non-controlling interest in a
subsidiary is an ownership interest in the consolidated entity
that should be reported as equity in the consolidated financial
statements. SFAS 160 requires retroactive adoption of the
presentation and disclosure requirements for existing minority
interests. All other requirements of SFAS 160 shall be
applied prospectively. The Company is currently evaluating the
potential impact of the adoption of SFAS 160 on its
consolidated financial statements.
In December 2007, the FASB issued SFAS No. 141
(revised 2007) (SFAS 141(R)), Business
Combinations, which is a revision of SFAS 141,
Business Combinations The primary
requirements of SFAS 141(R) are as follows: (I.) Upon
initially obtaining control, the acquiring entity in a business
combination must recognize 100% of the fair values of the
acquired assets, including goodwill, and assumed liabilities,
with only limited exceptions even if the acquirer has not
acquired 100% of its target. As a consequence, the current step
acquisition model will be eliminated. (II.) Contingent
consideration arrangements will be fair valued at the
acquisition date and included on that basis in the purchase
price consideration. The concept of recognizing contingent
consideration at a later date when the amount of that
consideration is determinable beyond a reasonable doubt, will no
longer be applicable. (III.) All transaction costs will be
expensed as incurred. SFAS 141 (R) is effective as of the
beginning of an entitys first fiscal year beginning after
December 15, 2008. Adoption is prospective and early
adoption is not permitted. The Company is currently evaluating
the impact that the adoption of SFAS 141 (R) will have on
its consolidated financial statements.
On June 28, 2007, DHL acquired from Polar a 49% equity
interest, representing a 25% voting interest, in Polar in
exchange for $150.0 million in cash, of which
$75.0 million was paid at closing. AAWW also received
approximately $22.9 million in working capital from DHL as
additional proceeds in November 2007. The remaining
$75.0 million is scheduled to be paid in 2008 in two equal
installments (plus interest). In January 2008 AAWW received the
first installment of the purchase payment of $38.6 million,
including interest of $1.1 million, and the final purchase
payment of $37.5 million (plus interest) is scheduled to be
paid by DHL on November 17, 2008, subject to potential
acceleration. AAWW continues to own the remaining 51% of Polar
with a 75% voting interest. In addition to the other amounts
paid by DHL, in July 2007, Polar received a $30.0 million
non-interest bearing refundable deposit from DHL, to be repaid
by Polar on the earlier of 90 days subsequent to the
blocked space agreement (the BSA) Commencement Date
(as defined below) or January 31, 2009.
Concurrently with the investment, DHL and Polar entered into a
20-year BSA,
whereby Polar will provide air cargo capacity to DHL in
Polars Scheduled Service network for DHL Express services
(the DHL Express Network). On or before
October 27, 2008, (the Commencement Date),
Polar will commence flying DHL Express trans-Pacific
express network. As part of the transaction to issue shares in
Polar to DHL, Polar LLCs ground employees, crew, ground
equipment, airline operating certificate and flight authorities,
among other things, were transferred to Polar and Polars
interest in Polar LLC was transferred to AAWW as a direct
subsidiary.
As a result of this transaction, the Company recorded a deferred
gain of $151.7 million to be recognized as income upon the
Commencement Date. In addition, upon the Commencement Date, DHL
is obligated to provide Polar with working capital liquidity
support as needed. The remaining proceeds, including interest,
to be paid by DHL of $77.1 million at December 31,
2007 are recorded as Receivable from issuance of
64
ATLAS AIR
WORLDWIDE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
subsidiary stock as a contra equity account in the consolidated
balance sheets. The Company also recorded a minority interest
for DHL of $13.5 million. The deferred gain is calculated
as follows:
|
|
|
|
|
Gross proceeds
|
|
$
|
175.0
|
|
Less: book value of net assets sold
|
|
|
(13.5
|
)
|
closing costs and expenses
|
|
|
(9.8
|
)
|
|
|
|
|
|
Deferred Gain
|
|
$
|
151.7
|
|
|
|
|
|
|
Based on the various agreements entered into as a result of the
issuance of the investment to DHL, the Company reviewed the
structure and determined that a variable interest entity had
been created. Based upon an application of the FASBs
revised Interpretation No. 46, Consolidation of Variable
Interest Entities, an Interpretation of ARB No. 51, the
Company determined that it was the primary beneficiary of the
variable interest entity and, as a result, it would continue to
treat Polar as a consolidated subsidiary for financial reporting
purposes.
The Companys Scheduled Service business, which
historically bore all direct costs of operation, regardless of
customer utilization, will transfer the risk associated with
most of those costs to DHL upon the Commencement Date. Also,
until the Commencement Date of the DHL Express Network, AAWW
will provide both financial support and assume all risks and
rewards of the operations of Polar, with DHL thereafter
fulfilling that role.
Polar will continue to provide Scheduled Service to its freight
forwarder and other shipping customers both prior to and after
the Commencement Date of the DHL Express Network.
The express network service will provide contracted
airport-to-airport
wide-body aircraft solutions to DHL and other freight customers
and shippers. The BSA and related agreements will provide the
Company with a guaranteed revenue stream from the six Boeing
747-400
aircraft that have been dedicated to this venture. Over the term
of the BSA, DHL will be subject to a monthly minimum block hour
guarantee that is expected to provide the Company with a target
level of profitability. Polar will provide DHL with guaranteed
access to air cargo capacity, and the aircraft will be operated
on a basis similar to Atlas ACMI arrangements with other
customers, by employing a long-term contract that allocates
capacity and mitigates yield and demand risks.
Polar will operate six Boeing
747-400
freighter aircraft, which are being subleased from Atlas and
Polar LLC, for ten years commencing on the date DHL Express
Network flying begins but no later than October 27, 2008.
In addition, Polar is operating a Boeing
747-200
freighter aircraft, subleased from Atlas, and may continue to do
so to support the DHL Express Network. Polar and Atlas have
entered into a flight services agreement under which Atlas will
provide Polar with maintenance and insurance for the seven
freighters, with flight crewing also to be furnished once the
merger of the Polar and Atlas crew forces has been completed.
Polar will have access to additional capacity through wet
leasing of available Atlas aircraft. Under other separate
agreements, Atlas and Polar will supply administrative, sales
and ground support services to one another.
The BSA establishes DHL capacity purchase commitments on Polar
flights. Under the flight services agreement, Atlas is
compensated by Polar on a per block hour basis, subject to a
monthly minimum block hour guarantee, at a predetermined rate
that escalates annually. DHL has the right to terminate the
20-year BSA
with one year notice requirements at the fifth, tenth and
fifteenth anniversaries of commencement of DHL Express Network
flying. However, in the event of such a termination at the fifth
anniversary, DHL or Polar will be required to assume all six
Boeing
747-400
freighter head leases for the entire remaining term of each such
aircraft lease, each as guaranteed by DP or a creditworthy
subsidiary. Either party may terminate for cause at any time.
With respect to DHL, cause (as defined) includes Polars
inability to meet certain departure and arrival criteria for an
extended period of time and upon certain
change-of-control
events, in which case
65
ATLAS AIR
WORLDWIDE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
DHL may be entitled to liquidated damages from Polar. Under such
circumstances, DHL is further entitled to have an affiliate
assume any or all of the six Boeing
747-400
freighter subleases for the remainder of the ten-year term under
each such sublease, with Polar liable up to an agreed amount of
such lease obligations. In the event of any termination during
the ten-year sublease term, DHL is required to pay the lease
obligations for the remainder of the head lease and guarantee
Polars performance under the leases.
In other agreements, DP guaranteed DHLs (and Polars)
obligations under the various transaction documents. AAWW has
agreed to indemnify DHL for and against various obligations of
Polar and its affiliates.
|
|
4.
|
Property
and Equipment, net
|
Depreciation expense, including the amortization of capital
leases, related to property and equipment amounted to
$40.0 million, $42.3 million and $46.3 million
for the years ended December 31, 2007, 2006 and 2005,
respectively. The Company had equipment related to capital
leases of $22.0 million at both December 31, 2007 and
2006, and accumulated depreciation was $11.2 million and
$8.0 million, respectively.
Pre-delivery deposits for aircraft include capitalized interest
of $5.2 million and $0.8 million at December 31,
2007 and 2006, respectively.
In January, 2005 one of the Companys Boeing
747-200
aircraft (tail number N808MC) was damaged when it landed during
poor winter weather conditions at Duesseldorf Airport. 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 $12.3 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.
In March 2007, the Company sold aircraft tail number N536MC, a
Boeing
747-200, for
$6.0 million and recorded a gain of approximately
$1.0 million. In November, 2007, the Company sold an
aircraft engine for $2.6 million and recorded a gain of
$2.5 million.
The following tables present the Companys lease contracts
as of December 31:
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Fair market value adjustment on operating leases
|
|
$
|
44,132
|
|
|
$
|
44,132
|
|
Less accumulated amortization
|
|
|
(6,171
|
)
|
|
|
(4,334
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
37,961
|
|
|
$
|
39,798
|
|
|
|
|
|
|
|
|
|
|
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
July 27, 2004, the date of the Companys emergence
from bankruptcy. Amortization expense related to lease contracts
amounted to $1.8 million for each of the years ended
December 31, 2007, 2006 and 2005, respectively.
66
ATLAS AIR
WORLDWIDE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The estimated future amortization expense of operating lease
contracts as of December 31, 2007 is as follows:
|
|
|
|
|
Years Ending December 31,
|
|
|
|
|
2008
|
|
$
|
1,837
|
|
2009
|
|
|
1,837
|
|
2010
|
|
|
1,921
|
|
2011
|
|
|
2,337
|
|
2012
|
|
|
2,337
|
|
Thereafter
|
|
|
27,692
|
|
|
|
|
|
|
|
|
$
|
37,961
|
|
|
|
|
|
|
The Companys debt obligations, including capital leases,
as of December 31, were as follows:
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Debt Obligations
|
|
|
|
|
|
|
|
|
2000 EETCs
|
|
$
|
66,313
|
|
|
$
|
67,320
|
|
1999 EETCs
|
|
|
121,211
|
|
|
|
124,677
|
|
1998 EETCs
|
|
|
181,079
|
|
|
|
186,141
|
|
Capital leases
|
|
|
15,511
|
|
|
|
23,227
|
|
Other debt
|
|
|
9,949
|
|
|
|
17,276
|
|
|
|
|
|
|
|
|
|
|
Total debt and capital leases
|
|
|
394,063
|
|
|
|
418,641
|
|
Less current portion of debt and capital leases
|
|
|
(28,444
|
)
|
|
|
(19,756
|
)
|
|
|
|
|
|
|
|
|
|
Long-term debt and capital leases
|
|
$
|
365,619
|
|
|
$
|
398,885
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2007 and 2006, the Company had
$75.4 million and $82.9 million, respectively, of
unamortized discount related to the fair market value
adjustments recorded against debt upon application of
fresh-start accounting on July 27, 2004.
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 unamortized 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
67
ATLAS AIR
WORLDWIDE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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.
Overview
of EETC Transactions
In three separate transactions in 1998, 1999 and 2000, Atlas
issued Enhanced Equipment Trust Certificates
(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. The Company currently does not anticipate
making any AMLR payments in 2008 and will revisit on an annual
basis.
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
68
ATLAS AIR
WORLDWIDE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 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 (the 1999
EETCs). As of December 31, 2007 and 2006, 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, 2007 and 2006. 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, 2007 and 2006 the outstanding balance of the
1998 EETCs relates to three owned Boeing
747-400F
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 the equipment
notes relating to all three aircraft, principal payments vary
and are payable monthly through 2020.
Capital
Leases
Capital lease obligations with an aggregate net present value of
$15.5 million and $23.2 million were outstanding at
December 31, 2007 and 2006, respectively. The weighted
average interest rate as of December 31, 2007 and 2006 was
6.71% and 6.71%, respectively. Payments are due monthly through
2009. The underlying assets related to capital lease obligations
as of December 31, 2007 and 2006 were three aircraft. The
aircraft tail numbers are N508MC, N516MC and N920FT.
Other
Debt
Other debt consists of various term loans aggregating
$10.0 million and $17.3 million as of
December 31, 2007 and 2006, respectively. The weighted
average interest rate for the term loans as of December 31,
2007 and 2006 was 6.0% and 7.35%, respectively.
69
ATLAS AIR
WORLDWIDE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table summarizes the cash required to be paid by
year and the carrying value of the Companys debt and
capital lease obligations reflecting the terms that were in
effect as of December 31, 2007:
|
|
|
|
|
Years Ending December 31,
|
|
|
|
|
2008
|
|
$
|
35,710
|
|
2009
|
|
|
36,912
|
|
2010
|
|
|
31,917
|
|
2011
|
|
|
34,360
|
|
2012
|
|
|
36,968
|
|
Thereafter
|
|
|
293,673
|
|
|
|
|
|
|
Total debt and capital leases cash payments
|
|
|
469,540
|
|
Less: fair value debt discount
|
|
|
(75,477
|
)
|
|
|
|
|
|
Debt and capital leases
|
|
$
|
394,063
|
|
|
|
|
|
|
Aircraft/Real
Estate Capital and Operating Leases
The following table summarizes rental expenses for operating
leases for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Aircraft rent
|
|
$
|
155,575
|
|
|
$
|
153,259
|
|
|
$
|
150,879
|
|
Office, vehicles and other
|
|
$
|
11,394
|
|
|
$
|
13,403
|
|
|
$
|
16,280
|
|
At December 31, 2007, 18 of the 37 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
12.1 years as of December 31, 2007.
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,
2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aircraft
|
|
|
Other
|
|
|
Less:
|
|
|
|
|
|
|
Capital
|
|
|
Operating
|
|
|
Operating
|
|
|
Sub-Lease
|
|
|
Net
|
|
|
|
Leases
|
|
|
Leases
|
|
|
Leases
|
|
|
Income
|
|
|
Leases
|
|
|
Years Ending December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
$
|
9,000
|
|
|
$
|
143,277
|
|
|
$
|
5,735
|
|
|
$
|
(6,240
|
)
|
|
$
|
151,772
|
|
2009
|
|
|
7,500
|
|
|
|
145,499
|
|
|
|
4,866
|
|
|
|
(5,430
|
)
|
|
|
152,435
|
|
2010
|
|
|
|
|
|
|
143,008
|
|
|
|
4,440
|
|
|
|
|
|
|
|
147,448
|
|
2011
|
|
|
|
|
|
|
141,269
|
|
|
|
3,756
|
|
|
|
|
|
|
|
145,025
|
|
2012
|
|
|
|
|
|
|
141,269
|
|
|
|
1,546
|
|
|
|
|
|
|
|
142,815
|
|
Thereafter
|
|
|
|
|
|
|
1,468,545
|
|
|
|
|
|
|
|
|
|
|
|
1,468,545
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total minimum lease payments
|
|
|
16,500
|
|
|
$
|
2,182,867
|
|
|
$
|
20,343
|
|
|
$
|
(11,670
|
)
|
|
$
|
2,208,040
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: amounts representing interest
|
|
|
989
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Present value of future minimum capital lease payments
|
|
$
|
15,511
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
70
ATLAS AIR
WORLDWIDE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The weighted average effective interest rates on the capitalized
leases for aircraft tail numbers N508MC, N516MC and N920FT were
6.71% and 6.71% at December 31, 2007 and 2006, respectively.
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
|
James S. Gilmore III, a non-employee director of the Company, is
a partner at the law firm of Kelley Drye & Warren LLP,
previous outside counsel to the Company. The Company paid legal
fees to the firm of Kelley Drye & Warren LLP of less
than $0.1 million, $0.6 million and $4.5 million
for the years ended December 31, 2007, 2006 and 2005,
respectively. The Company incurred directors fees and
equity compensation expense relating to Mr. Gilmore in the
amount of $0.4 million, $0.3 million and
$0.3 million for the years ended December 31, 2007,
2006 and 2005, respectively.
The Company dry leased three owned aircraft as of
December 31, 2007 and 2006 to a company in which it owns a
minority investment. The investment is accounted for under the
equity method. The leases mature in July 2008. The minimum
future rentals at December 31, 2007 on these leases through
July 2008 are $25.2 million. The carrying value of these
aircraft as of December 31, 2007 and 2006 was
$168.1 million and $171.9 million, respectively and
the accumulated depreciation as of December 31, 2007 and
2006 was $16.5 million and $12.8 million,
respectively. The leases provide for payment of rent and a
provision for maintenance costs associated with the aircraft.
Total rental income for these aircraft was $43.9 million,
$45.4 million and $44.8 million for the years ended
December 31, 2007, 2006 and 2005, 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. (SFAS 109). The significant
components of the provision for income taxes are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
1,194
|
|
|
$
|
5,617
|
|
|
$
|
1,018
|
|
State and local
|
|
|
|
|
|
|
1,501
|
|
|
|
711
|
|
Foreign
|
|
|
|
|
|
|
167
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current expense
|
|
|
1,194
|
|
|
|
7,285
|
|
|
|
1,735
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(1,094
|
)
|
|
|
25,332
|
|
|
|
44,706
|
|
State and local
|
|
|
(96
|
)
|
|
|
1,403
|
|
|
|
3,275
|
|
Foreign
|
|
|
316
|
|
|
|
|
|
|
|
186
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred expense
|
|
|
(874
|
)
|
|
|
26,735
|
|
|
|
48,167
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax expense
|
|
$
|
320
|
|
|
$
|
34,020
|
|
|
$
|
49,902
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
71
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
U.S. federal statutory tax expense rate
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
State and local taxes based on income, net of federal benefit
|
|
|
2.0
|
%
|
|
|
2.0
|
%
|
|
|
2.2
|
%
|
Extraterritorial income tax benefits
|
|
|
(16.1
|
)%
|
|
|
|
|
|
|
|
|
Net tax asset for basis difference in investment in Polar
|
|
|
(21.6
|
)%
|
|
|
|
|
|
|
|
|
Book expenses not deductible for tax purposes
|
|
|
0.9
|
%
|
|
|
1.0
|
%
|
|
|
1.7
|
%
|
Income tax reserves
|
|
|
(0.2
|
)%
|
|
|
(2.0
|
)%
|
|
|
|
|
Reorganization items
|
|
|
|
|
|
|
0.1
|
%
|
|
|
0.5
|
%
|
Change in valuation allowance
|
|
|
2.2
|
%
|
|
|
|
|
|
|
|
|
Other
|
|
|
(2.0
|
)%
|
|
|
0.2
|
%
|
|
|
0.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate
|
|
|
0.2
|
%
|
|
|
36.3
|
%
|
|
|
40.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The tax effects of temporary differences that give rise to
significant portions of the deferred tax
assets / (liabilities) as of December 31, are as
follows:
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating loss carry forwards and alternative minimum tax
credits
|
|
$
|
107,219
|
|
|
$
|
112,158
|
|
Tax over book basis in Polar shares
|
|
|
38,134
|
|
|
|
|
|
Aircraft leases
|
|
|
10,618
|
|
|
|
33,373
|
|
Reserves on accounts receivable and inventory
|
|
|
249
|
|
|
|
670
|
|
Maintenance
|
|
|
|
|
|
|
6,564
|
|
Accrued expenses and liabilities
|
|
|
10,277
|
|
|
|
6,096
|
|
Equity-based compensation
|
|
|
2,787
|
|
|
|
1,490
|
|
Other
|
|
|
2,742
|
|
|
|
4,901
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
172,026
|
|
|
|
165,252
|
|
Less: Valuation allowance
|
|
|
(27,903
|
)
|
|
|
(31,670
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
|
144,123
|
|
|
|
133,582
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Fixed assets
|
|
|
(122,769
|
)
|
|
|
(126,056
|
)
|
Maintenance
|
|
|
(3,859
|
)
|
|
|
|
|
Fresh-start adjustments to indebtedness
|
|
|
(1,306
|
)
|
|
|
(661
|
)
|
Equity investments
|
|
|
(2,706
|
)
|
|
|
(2,647
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
(130,640
|
)
|
|
|
(129,364
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets (liabilities)
|
|
$
|
13,483
|
|
|
$
|
4,218
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2007, the Company has federal tax net
operating losses (NOLs) of approximately
$293 million, which will expire through 2026. The
reorganization of the Company on the date of its emergence from
bankruptcy constituted an ownership change under
Section 382 of the Internal Revenue Service
(IRS) Code (Code). Accordingly, the use
of the Companys NOLs generated prior to the
72
ATLAS AIR
WORLDWIDE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
ownership change is subject to an overall annual limitation.
Certain tax attributes, including NOLs, reflected on the
Companys federal income tax returns as filed differ
significantly from those reflected in the Financial Statements.
Such attributes are subject to future audit in the event the IRS
determines to examine any open tax years.
Management periodically assesses whether the Company is more
likely than not to realize some or all of its deferred tax
assets. As of December 31, 2007, management determined that
the Company is unlikely to realize approximately
$27.9 million of deferred tax assets and, therefore, has
provided a valuation allowance against the unrealizable portion
of the assets. During 2007, the Company wrote off
$19.5 million of deferred tax assets related to Polar NOLs,
and the Company also reduced its valuation allowance against
these assets by $19.5 million. The Company determined that
the Polar NOLs are not utilizable in the future due to tax law
limits resulting from the Companys transaction with DHL
and, therefore, should not be included in the Companys
deferred tax assets. The change in valuation allowance related
to the Polar NOLs was largely offset by tax benefits recorded in
2007 that are not more likely than not to be realized. The
Company recorded a net reduction in its valuation allowance of
approximately $3.8 million during 2007.
Management has determined that the Company can sustain a
deduction for extraterritorial income (ETI) of
approximately $61.0 million, net of applicable reserves and
valuation allowance, for the years 2004 through 2006. This
deduction is a special tax incentive for qualifying income
generated outside the U.S. that results in a permanent
income tax benefit of $21.4 million recorded during 2007.
Management currently is reviewing potential additional ETI
deductions for 2002 through 2003 and for 2007. However,
management has not yet completed its review for these other
periods and cannot estimate the amount of additional benefit at
this point. Management expects to complete its review in the
first half of 2008.
During the second quarter of 2007, DHL acquired a 49% equity
interest in Polar (see Note 3). Due to this transaction,
the Company recorded a deferred tax asset of $38.1 million
relating to the shares of stock in Polar. The deferred tax asset
was recorded under the principles of SFAS 109.
Specifically, due to the transaction with DHL, management
determined that the Company would recover its tax basis in Polar
in the foreseeable future. The tax basis was substantially
higher than the book basis, and the Company recorded a deferred
tax asset for the difference between the tax and book basis
multiplied by the Companys tax rate. The Company offset a
portion of the deferred tax asset with a tax reserve liability
of $9.5 million.
During 2007, the Company also reviewed its accounting methods
utilized for income tax reporting purposes. The Company modified
certain accounting methods on its consolidated federal income
tax return for 2006, resulting in a deferral of taxable income
of approximately $100.5 million. This deferral eliminated
the Companys cash income tax liability in 2006 and also
generated a $45.8 million NOL carryover to 2007.
Effective as of January 1, 2007, the Company adopted FASB
Interpretation No. 48, Accounting for Uncertainty in
Income Taxes, (FIN 48). As a result of the
adoption of FIN 48, the Company performed a comprehensive
review of its uncertain income tax positions. These positions
relate primarily to income tax benefits claimed on previously
filed income tax returns for open tax years.
As a result of the adoption of FIN 48, the Company recorded
$0.9 million of additional income tax benefits related to
uncertain tax positions. The company also recorded
$0.3 million of interest expense related to uncertain tax
positions, resulting in the recognition of a net asset of
$0.6 million. The Company recorded the asset through
retained earnings in accordance with the standards for the
adoption of FIN 48.
73
ATLAS AIR
WORLDWIDE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
A reconciliation of the beginning and ending gross amounts
related to unrecognized income tax benefits is as follows:
|
|
|
|
|
Balance at January 1, 2007
|
|
$
|
143.8
|
|
Additions for tax positions related to the current year
|
|
|
26.6
|
|
Additions for tax positions related to prior years
|
|
|
55.9
|
|
Reductions for tax positions related to prior years
|
|
|
(28.3
|
)
|
|
|
|
|
|
Balance at December 31, 2007
|
|
$
|
198.0
|
|
|
|
|
|
|
Of the gross amount related to unrecognized income tax benefits
of $198.0 million at December 31, 2007, a gross amount
of $31.1 million would impact the effective rate, and
$166.9 would impact paid-in capital. The Company will maintain a
liability for unrecognized income tax benefits until these
uncertain positions are reviewed and resolved or until the
expiration of the applicable statute of limitations, if earlier.
The Companys policy is to record interest expense and
penalties, if applicable, as a component of income tax expense.
The Company maintains a liability for interest expense regarding
its liability for unrecognized income tax benefits. At
December 31, 2007, this liability was $0.1 million.
The Company computed this interest expense based on applicable
interest rates for potential income tax underpayments. The
Company has not recorded any liability for penalties, and the
tax authorities historically have not assessed penalties against
the Company.
The Companys management does not anticipate that its
unrecognized income tax benefits will increase or decrease by a
material amount during the twelve-month period following
December 31, 2007. However, management continues to pursue
potential strategies to reduce its effective income tax rate on
a long-term basis. Should management implement one or more such
strategies during 2008, the Company may record additional income
tax benefits during 2008 as well as a FIN 48 liability
relating to a portion of these benefits. Management currently is
not in a position to quantify the amount of income tax benefits
or FIN 48 liability to record in 2008, if any.
In Hong Kong, the years 2001 through 2005 are subject to and
under examination for Atlas, and the years 2003 through 2005 are
subject to and under examination for Polar LLC. No assessment of
additional income taxes has been proposed or discussed with
respect to the on-going examinations in Hong Kong.
For federal income tax purposes, the years 2002, 2003 and 2005
through 2007 remain subject to examination. An amended income
tax return for 2001 is also subject to examination. During the
second quarter of 2007, the Company and the IRS resolved an
income tax examination for the year 2004. The IRS accepted the
Companys 2004 income tax return as filed. The IRS has not
commenced an income tax examination for any open years, and no
federal income tax examinations are in process. In addition, no
state income tax examinations are in process.
During 2006, the Company reached a final settlement of a federal
income tax examination for the year ended December 31,
2001. The settlement did not require any payment of cash income
taxes, interest, or penalties. The Company recorded net deferred
tax assets of $12.2 million upon settlement of the
examination, which increased available NOLs by
$127.5 million. In addition, as a result of the settlement,
the Company reduced its income tax reserves by approximately
$20.1 million relating to the years 2001 through 2003. The
Company had recorded approximately $18.1 million of these
reserves prior to its emergence from bankruptcy. In accordance
with applicable accounting standards, the Company released this
portion of the reserves as a reduction of intangible assets and
paid-in capital. The Company had recorded the remainder of the
reserves of approximately $2.0 million subsequent to its
emergence from bankruptcy and released this portion of the
reserves as a reduction of income tax expense.
74
ATLAS AIR
WORLDWIDE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
10.
|
Financial
Instruments and Risk Management
|
The Company maintains cash and cash equivalents with various
high-quality financial institutions. The carrying value for cash
and cash equivalents, trade receivables and payables
approximates their fair value.
The fair values of the Companys long-term debt were
estimated using quoted market prices where available. For
long-term debt which is not actively traded, fair values were
estimated by reference to the discount related to the traded
debt with consideration given to the fair value of the
underlying collateral and structure of the debt.
At December 31, the fair values of the Companys debt
instruments were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
Fair
|
|
|
Carrying
|
|
|
Fair
|
|
|
Carrying
|
|
|
|
Value
|
|
|
Value
|
|
|
Value
|
|
|
Value
|
|
|
2000 EETCs
|
|
$
|
90,655
|
|
|
$
|
66,313
|
|
|
$
|
81,678
|
|
|
$
|
67,320
|
|
1999 EETCs
|
|
|
176,386
|
|
|
|
121,211
|
|
|
|
159,252
|
|
|
|
124,677
|
|
1998 EETCs
|
|
|
245,562
|
|
|
|
181,079
|
|
|
|
222,710
|
|
|
|
186,141
|
|
Other
|
|
|
9,949
|
|
|
|
9,949
|
|
|
|
17,276
|
|
|
|
17,276
|
|
Airfreight operators are inherently dependent upon fuel to
operate and, therefore, are impacted by changes in jet fuel
prices. The Company endeavors to purchase jet fuel at the lowest
possible cost. In addition to physical purchases, the Company
from time to time has utilized financial derivative instruments
as hedges to decrease its exposure to jet fuel price volatility.
The Company does not purchase or hold any derivative financial
instruments for trading purposes.
The Company began using hedge accounting in the fourth quarter
of 2006. The Company accounts for its fuel hedge derivative
instruments as cash flow hedges, as defined in
SFAS No. 133, Accounting for Derivative Instruments
and Hedging Activities, as amended by
SFAS No. 138, Accounting for Certain Derivative
Instruments and Certain Hedging Activities and
SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities
(SFAS 133). Under SFAS 133, all
derivatives are recorded at fair value on the balance sheet.
Those derivatives designated as hedges that meet certain
requirements are granted hedge accounting treatment. Generally,
utilizing the hedge accounting, all periodic changes in fair
value of the derivatives designated as hedges that are
considered to be effective, as defined, are recorded within
equity until the underlying jet fuel is consumed. The Company is
exposed to the risk that periodic changes will not be effective,
as defined, or that the derivatives will no longer qualify for
hedge accounting. Ineffectiveness, as defined, results when the
change in the total fair value of the derivative instrument
exceeds the change in the value of the Companys expected
future cash outlay to purchase jet fuel. To the extent that the
periodic changes in the fair value of the derivatives are not
effective, that ineffectiveness is recorded to Other
non-operating expenses in the statement of operations.
Likewise, if a hedge ceases to qualify for hedge accounting,
those periodic changes in the fair value of derivative
instruments are recorded to Other non-operating
expenses in the statement of operations in the period of
the change.
Ineffectiveness is inherent in hedging jet fuel with derivative
transactions based in other refined petroleum products due to
the differences in commodities. For example, using heating oil
futures to hedge jet fuel will likely lead to some
ineffectiveness. Ineffectiveness may also occur due to a slight
difference in timing between the derivative delivery period and
the Companys irregular uplift of jet fuel. Due to the
volatility in markets for crude oil and related product and the
daily uplift amounts, the Company is unable to predict precisely
the amount of ineffectiveness each period. The Company will
follow the SFAS 133 requirements and report any expected
ineffectiveness. This may result in increased volatility in the
Companys results.