e10vk
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,
2010
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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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Commission file number
001-16545
Atlas Air Worldwide Holdings,
Inc.
(Exact name of
registrant as specified in its charter)
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Delaware
(State or other jurisdiction
of incorporation or organization)
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13-4146982
(IRS Employer Identification
No.)
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2000 Westchester Avenue,
Purchase, New York
(Address of principal
executive offices)
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10577
(Zip Code)
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(914) 701-8000
Registrants telephone
number, including area code:
SECURITIES
REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
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Title of Each Class
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Name of Each Exchange on Which Registered
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Common Stock, $0.01 Par Value
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The NASDAQ Global Select Market
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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 þ No o
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 whether the registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such
files). Yes o 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. Yes o No þ
Indicate by check mark if the registrant is a large accelerated
filer, an accelerated filer, a non-accelerated filer or a
smaller reporting company. See 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 o
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(Do not check if a smaller
reporting company)
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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 price of Common
Stock as reported on The NASDAQ Global Select Market as of
June 30, 2010 was approximately $1,201,820,728. In
determining this figure, the 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, 2011, there were
25,938,301 shares of the registrants Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Certain portions of the registrants Proxy Statement
relating to the 2011 Annual Meeting of Stockholders, to be
filed with the Securities and Exchange Commission, are
incorporated by reference into Part III.
FORWARD-LOOKING
STATEMENTS
This Annual Report on
Form 10-K
(this Report), as well as other reports, releases
and written and oral communications issued or made from time to
time by or on behalf of Atlas Air Worldwide Holdings, Inc.
(AAWW), contain statements that may constitute
forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. Those
statements are based on managements beliefs, plans,
expectations and assumptions, and on information currently
available to management. Generally, 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. Readers are
therefore cautioned not to place undue reliance on
forward-looking statements. AAWW 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, except as required by
law.
PART I
Glossary
The following represents terms and statistics specific to the
airline and cargo industries. They are used by management to
evaluate and measure operations, results, productivity and
efficiency.
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A Check
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Low-level maintenance checks performed on aircraft at an
interval of approximately 750 flight hours for a 747-200
aircraft and 1,000 flight hours for a 747-400 aircraft.
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ACMI
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A service arrangement whereby an airline provides an aircraft,
crew, maintenance and insurance to a customer for compensation
that is typically based on hours operated.
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AMC Charter
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The provision of full planeload charter flights to the U.S.
Military Airlift Mobility Command (the AMC). The AMC
pays a fixed charter fee that includes fuel, insurance, landing
fees, overfly and all other operational fees and costs.
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Block Hour
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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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C Check
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High-level or heavy airframe maintenance checks,
which are more intensive in scope than A Checks and are
generally performed between 18 and 24 months depending on
aircraft type.
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CMI
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A service arrangement whereby an airline provides crew,
maintenance and insurance to a customer for compensation that is
typically based on hours operated, with the customer providing
the aircraft.
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Commercial Charter
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The provision of full planeload capacity to a customer for one
or more flights based on a specific origin and destination. The
customer pays a fixed charter fee that includes fuel, insurance,
landing fees, overfly and all other operational fees and costs.
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D Check
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High-level or heavy airframe maintenance checks,
which are the most extensive in scope and are generally
performed every six to nine years depending on aircraft type.
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Dry Lease
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A leasing arrangement whereby an entity (lessor) provides a
specific aircraft and/or engine without crew, maintenance or
insurance to another entity (lessee) for compensation that is
typically based on a fixed monthly amount.
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Load Factor
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The average amount of weight flown divided by the maximum
available capacity.
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Revenue Per Block Hour
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An amount calculated by dividing operating revenues by Block
Hours.
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Yield
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The average amount a customer pays to fly one ton of cargo one
mile.
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1
Overview
AAWW is a holding company with a principal operating subsidiary,
Atlas Air, Inc. (Atlas), which is wholly-owned, and
also maintains a 49% interest in Global Supply Systems Limited
(GSS). AAWW has a 51% economic interest and 75%
voting interest in Polar Air Cargo Worldwide, Inc.
(Polar). In addition, AAWW formed wholly owned
subsidiaries, Titan Aviation Leasing Ltd., Titan Aviation
Leasing Limited Americas, Inc. and Titan Aviation
(Hong Kong) Limited (collectively referred to as
Titan), to Dry Lease aircraft and engines. When used
in this Report, the terms we, us,
our, and the Company refer to AAWW and
all entities in our consolidated financial statements.
We are a leading global provider of air cargo assets and
outsourced aircraft operating services and solutions. As such,
we manage and operate the worlds largest fleet of 747
freighters. We provide unique value to our customers by giving
them access to highly reliable new production freighters that
deliver the lowest unit cost in the marketplace combined with
outsourced aircraft operating services that we believe lead the
industry in terms of quality and global scale. Our customers
include airlines, express delivery providers, freight
forwarders, the U.S. military and charter brokers. We
provide global services with operations in Asia, the Middle
East, Australia, Europe, South America, Africa and North America.
Global airfreight demand is highly correlated with global gross
domestic product. The slowdown in global economic activity in
2008 and 2009 resulted in an unprecedented decline in airfreight
volumes during the second half of 2008 that continued into the
first half of 2009. In contrast, improving economic conditions,
inventory restocking and new product demand in the fourth
quarter of 2009 and throughout 2010 generated encouraging trends
for airfreight demand and yields, which was consistent with the
tight supply prevailing during those periods. Since the first
quarter of 2010, airfreight demand has exceeded pre-recession
levels. In early 2011, with strong airfreight demand and tight
supply, we leased two
747-400
converted freighters for an average of approximately three and a
half years and will place them in service during the second
quarter of 2011.
We believe that our fleet of 24 modern,
747-400
freighter aircraft represents one of the most efficient
freighter fleets in the market. Our primary placement for these
aircraft will continue to be long-term ACMI outsourcing
contracts with high-credit-quality customers.
Our growth plans are focused on the further enhancement of our
ACMI market position with our order of 12 new,
state-of-the-art
747-8F
aircraft. We expect The Boeing Company (Boeing) to
begin delivery of these
747-8F
aircraft to us during the second half of 2011. We are currently
the only operator offering these aircraft to the ACMI market. In
addition to our order, we also hold rights to purchase an
additional 14
747-8F
aircraft, providing us with flexibility to further expand our
fleet in response to market conditions. Our growth plans also
include the continued expansion of our CMI business. We launched
CMI service in 2010 for two new customers using a fleet of six
customer provided aircraft and will continue to pursue
additional growth opportunities to expand this service.
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
2
their anticipated superior fuel efficiency, range, capacity and
loading capabilities, create a compelling value proposition for
our customers and position us well for future growth.
Our primary service offerings encompass the following:
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ACMI, whereby we provide outsourced aircraft operating
solutions, including the provision of an aircraft crew,
maintenance and insurance, while customers assume fuel, demand
and yield risk. ACMI contracts typically range from three to
five years. Also included within ACMI is the provision of
express network ACMI, whereby we provide
747-400
aircraft to Polar that service the requirements of DHL Network
Operations (USA), Inc.s (DHL) global express
operations and meet the needs of other Polar customers.
Beginning on April 8, 2009, we consolidated GSS, and the
aircraft that are Dry Leased from Atlas to GSS are now included
within ACMI;
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CMI, which is part of our ACMI business segment, whereby we
provide outsourced aircraft operating solutions including the
provision of crew, maintenance and insurance, while customers
provide the aircraft and assume fuel, demand and yield risk. We
began performing CMI services during 2010;
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Dry Leasing, whereby we provide aircraft
and/or
engine leasing solutions to third parties;
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AMC Charter services, whereby we provide air cargo services for
the AMC; and
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Commercial Charter, whereby we provide aircraft charters to
customers, including brokers, freight forwarders, direct
shippers and airlines.
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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.
Operations
Introduction. We currently operate our service
offerings through the following reportable segments: ACMI, AMC
Charter, Commercial Charter and Dry Leasing. All reportable
business segments are directly or indirectly engaged in the
business of air transportation services but have different
commercial and economic characteristics, which are separately
reviewed by management. Financial information regarding our
reportable segments can be found in Note 13 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 providing aircraft outsourcing services to
customers on an ACMI basis. Under an ACMI agreement, customers
typically contract for the use of an aircraft type that is
operated, crewed, maintained and insured by Atlas in exchange
for guaranteed minimum revenues at predetermined levels of
operation for defined periods of time. During 2010, we began to
offer CMI service to customers. CMI is similar to ACMI flying,
except that the customer provides the aircraft. Under that
arrangement, we are paid a Block Hour rate for hours operated
above a guaranteed minimum level of flying. 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.
ACMI provides a predictable annual revenue and cost base by
minimizing the risk of fluctuations such as Yield, fuel and
traffic demand risk in the air cargo business. Our ACMI revenues
and most of our costs under ACMI contracts are denominated in
U.S. dollars, minimizing currency risks associated with
international business.
Beginning on October 27, 2008, we started to report revenue
generated by providing express network ACMI services to Polar
for air cargo capacity to DHL (Express Network) as
ACMI.
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.
3
As a percentage of our operating revenue, ACMI revenue
represented 40.7% in 2010, 45.4% in 2009 and 22.3% in 2008. As a
percentage of our operated Block Hours, ACMI represented 71.2%
in 2010, 70.5% in 2009 and 48.7% in 2008. We recognize ACMI and
CMI revenue as the actual Block Hours operated on behalf of a
customer are incurred or according to the guaranteed minimum
Block Hours defined in a contract.
We currently have 20 aircraft under ACMI contracts expiring at
various times from 2011 to 2028, which includes renewals and two
additional aircraft under an agreement with DHL signed in
January 2011. The original length of these contracts generally
ranged from three to twenty years, although we do offer
contracts of shorter duration. In addition, we have also
operated short-term, seasonal ACMI contracts and we expect to
continue to provide such services in the future.
AMC Charter. The AMC Charter business provides
full-planeload charter flights to the U.S. Military. We
participate in the U.S. Civil Reserve Air Fleet
(CRAF) Program under contracts with the AMC, which
typically cover a one-year period. We have made available a
substantial number of our aircraft to be used by the
U.S. Military in support of their operations and we operate
such flights pursuant to cost-plus contracts. Atlas bears all
direct operating costs of the aircraft, which include fuel,
insurance, overfly and landing fees and ground handling
expenses. However, the price of fuel used during AMC flights is
fixed by the U.S. Military. The contracted charter rates
(per mile) and fuel prices (per gallon) are fixed by the AMC
generally for twelve-month periods. 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.
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 Corporation (FedEx).
We pay a commission to the FedEx team, based on the revenues we
receive under our AMC contracts. The AMC buys cargo capacity on
two bases: a fixed basis, which is awarded annually, and
expansion flying, 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 is expansion flying. We also earn
commissions on subcontracting certain flying of oversized cargo,
or in connection with flying cargo into areas of military
conflict where we cannot perform these services ourselves.
As a percentage of our operating revenue, AMC Charter revenue
represented 29.1% in 2010, 31.0% in 2009 and 26.5% in 2008. As a
percentage of our operated Block Hours, AMC Charter represented
14.6% in 2010, 17.5% in 2009 and 14.8% in 2008.
Commercial Charter. Our Commercial Charter
business segment provides full planeload capacity to customers
for one or more flights based on a specific origin and
destination. Customers include charter brokers, freight
forwarders, direct shippers and airlines. Charter customers pay
a fixed charter fee that includes fuel, insurance, landing fees,
overfly and all other operational fees and costs. The Commercial
Charter business is generally booked on a short-term, as-needed,
basis. In addition, Atlas provides limited
airport-to-airport
cargo services to a few select markets. The Commercial Charter
business is similar to AMC Charter business in that we are
responsible for all direct operating costs as well as the
commercial revenue, Load Factor and Yield risk. Distribution
costs are also borne by Atlas and consist of direct sales costs
incurred through our own sales force and through commissions
paid to general sales agents.
As a percentage of our operating revenue, Commercial Charter
revenue represented 28.7% in 2010, 20.3% in 2009 and 7.9% in
2008. As a percentage of our operated Block Hours, Commercial
Charter represented 13.7% in 2010, 11.6% in 2009 and 5.5% in
2008.
Dry Leasing. Our Dry Leasing segment provides
for the leasing of aircraft
and/or
engines to customers primarily through Titan. As a percentage of
our operating revenue, Dry Leasing revenue represented 0.5% in
2010, 1.2% in 2009 and 3.0% in 2008.
4
Global
Supply Systems
We hold a 49% interest in GSS, a private company. Atlas Dry
Leases three owned
747-400s to
GSS, which pays for rent and a provision for maintenance costs
associated with the aircraft. GSS, in turn, provides ACMI
services for these aircraft to British Airways Plc
(British Airways).
On April 8, 2009, certain members of management of GSS,
through an employee benefit trust, purchased shares of GSS from
a former stockholder. These shares, which were not and have
never been owned by us, represent a 51% controlling interest in
GSS. Following this transaction, we determined that GSS is a
variable interest entity and that we are the primary beneficiary
of GSS for financial reporting purposes. Accordingly, GSS became
a consolidated subsidiary of AAWW upon the closing of the
transaction. Therefore, intercompany transactions with GSS are
eliminated and the revenue and results of operations for GSS are
reflected in the ACMI segment. Prior to this transaction, we
accounted for GSS under the equity method and reported the
revenue from GSS as Dry Leasing revenue in the consolidated
statements of operations (see Note 4 to our Financial
Statements).
SonAir
In 2009, we entered into an agreement with SonAir
Serviço Aéreo, S.A. (SonAir), a wholly
owned subsidiary of the Sonangol Group, the multinational energy
company of Angola and member of the United States-Africa Energy
Association (USAEA), to operate an outsourced
premium passenger charter service with two newly customized
747-400
aircraft reconfigured into largely business and executive class
configuration. The aircraft are being provided by SonAirs
parent company. In 2010, we began the service, known as the
Houston Express, which operates three weekly nonstop
roundtrip flights between Houston, Texas and Luanda, Angola.
Under our CMI agreement with SonAir, we receive contractually
determined revenues for the operation of the aircraft without
assuming responsibility for passenger revenue and certain direct
costs, including fuel.
While the private charter is not open to the public, it provides
USAEA members, which include many of the leading
U.S. energy companies, with a premium non-stop
transportation link to support long-term projects in the West
African energy sector.
Boeing
In 2010, we signed a nine-year CMI agreement with Boeing to
operate their Dreamlifter fleet of four modified
747-400
freighter aircraft. These aircraft are used to transport major
assemblies for the 787 Dreamliner from suppliers around the
world to Boeing production facilities in the United States. In
July 2010, we began operating this service for Boeing.
DHL
Investment and Polar
In 2007, DHL acquired a 49% equity interest and a 25% voting
interest in Polar (see Note 3 to our Financial Statements).
AAWW continues to own the remaining 51% equity interest in Polar
with a 75% voting interest. Concurrent with the investment, DHL
and Polar entered into a
20-year
blocked space agreement that was subsequently amended (the
Amended BSA), whereby Polar provides air cargo
capacity to DHL through Polars Scheduled Service network
for Express Network, which began on October 27, 2008, (the
DHL Commencement Date). In addition, Atlas entered
into a flight services agreement, whereby 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. Under the flight services agreement, Atlas provides
Polar with flight crew administration, maintenance and insurance
for the aircraft, with flight crewing also to be furnished once
the merger of the Polar and Atlas crew forces has been
completed. Under separate agreements, Atlas and Polar supply
administrative, sales and ground support services to one
another. Deutsche Post AG (DP) has guaranteed
DHLs (and Polars) obligations under the various
transaction agreements described above. AAWW has agreed to
indemnify DHL for and against various obligations of Polar and
its affiliates. Collectively, these agreements are referred to
in this Report as the DHL Agreements. The DHL
Agreements provide us with a
5
minimum guaranteed annual revenue stream from
747-400
aircraft that have been dedicated to Polar for Express Network
ACMI and other customers freight over the life of the
agreements.
On the DHL Commencement Date, Polar began full flying for
DHLs trans-Pacific express network and DHL began to
provide financial support and also assumed the risks and rewards
of the operations of Polar. In addition to its trans-Pacific
routes, Polar has also flown between the Asia Pacific regions,
the Middle East and Europe on behalf of DHL and other customers.
Based upon changes to the various agreements entered into
following DHLs investment in Polar and subsequent changes
made to Polars operations during 2008, we reviewed our
investment in Polar and determined that a reconsideration event
had occurred under accounting guidance for variable interest
entities. We determined that DHL was the primary beneficiary of
the variable interest entity on the DHL Commencement Date and,
as a result of that determination, we deconsolidated Polar from
our financial statements as of October 27, 2008 and began
reporting Polar under the equity method of accounting.
Long-Term
Revenue Commitments
The following table sets forth the guaranteed minimum revenues
expected to be received from our existing ACMI (including
CMI) and Dry Leasing customers for the years indicated (in
thousands):
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2011
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$
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497,418
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2012
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420,019
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2013
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290,789
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2014
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215,889
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2015
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167,572
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Thereafter
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1,411,099
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Total
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$
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3,002,786
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Sales and
Marketing
We have regional sales offices in the United States, England and
Hong Kong, which cover the Americas, Europe, Africa, the Middle
East and the Asia Pacific regions. These offices market our ACMI
(including CMI), Dry Leasing and Commercial Charter services
directly to other airlines and indirect air carriers, as well as
to charter brokers and freight forwarders. Additionally, we have
a dedicated charter business unit that directly manages the AMC
Charter business, and also manages our Commercial Charter
business, either directly or indirectly, through our sales
organizations.
Maintenance
Maintenance represented our third-largest operating expense for
the year ended December 31, 2010. 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 U.S. Federal Aviation Administration
(FAA). The costs necessary to adhere to these
maintenance programs may increase over time, based on the age of
the aircraft
and/or
engines or due to FAA airworthiness directives (ADs).
Scheduled airframe maintenance includes lower-level activities
consisting of daily and weekly checks, as well as heavy
maintenance checks, involving more complex activities that can
generally take from one to four weeks to complete. Unscheduled
maintenance, known as line-maintenance, rectifies events
occurring during normal
day-to-day
operations. Scheduled maintenance activities are progressively
higher in scope and duration, and are considered
heavy airframe maintenance checks.
747-200
heavy checks are generally more involved than those performed on
our 747-400
aircraft, primarily due to the age of the aircraft, its earlier
evolution maintenance program and directives prescribed by the
FAA. All lettered checks are currently performed by third-party
service providers on a
time-and-material
basis as we believe they provide the most efficient means of
maintaining our aircraft fleet and the most reliable way to meet
our maintenance requirements.
6
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.
Under the FAA ADs issued pursuant to its Aging Aircraft Program,
we are subject to extensive aircraft examinations and may 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. Other ADs have been issued that require
inspections and minor modifications to
747-200
aircraft. The
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. The FAA is also considering a rule that would
increase the inspection and maintenance burden on aging aircraft.
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, including
passengers; damage to our property and that of others; loss of,
or damage to, flight equipment, whether on the ground or in
flight.
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 U.S. government. The
FAA is currently providing war-risk coverage for hull,
passenger, cargo loss, crew and third-party liability insurance
through September 30, 2011. If the U.S. government
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 U.S. Department of Transportation
(DOT) and the FAA, among other U.S. and foreign
government agencies. The DOT primarily regulates economic issues
affecting air service, such as certification, fitness and
citizenship, competitive practices, insurance and consumer
protection. The DOT has the authority to investigate and
institute proceedings to enforce its economic regulations and
may assess civil penalties, revoke operating authority or seek
criminal sanctions. Atlas and Polar each holds DOT-issued
certificates of public convenience and necessity plus exemption
authority to engage in scheduled air transportation of property
and mail in domestic, as well as enumerated international
markets, and charter air transportation of property and mail on
a worldwide basis.
The DOT conducts periodic evaluations of each air carriers
fitness and citizenship. In the area of fitness, the DOT seeks
to ensure that a carrier has the managerial competence,
compliance disposition and financial resources needed to conduct
the operations for which it has been 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 to 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. We believe the DOT will continue to find Atlas
and Polars fitness and citizenship favorable and conclude
that Atlas and Polar are in material compliance with the DOT
requirements described above.
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 is subject to
extensive FAA regulation
7
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 ADs 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.
We believe Atlas and Polar are in material compliance with
applicable FAA rules and regulations and maintain all
documentation required by the FAA.
In 2009, following expressions of concern about pilot fatigue on
certain long-range flights, the FAA convened an Aviation
Rulemaking Committee (ARC) comprised of various
aviation stakeholders to recommend changes to the flight and
duty time rules applicable to pilots. In 2010, the FAA issued a
proposed rule to enhance flight and duty time regulations with
the stated goal of reducing pilot fatigue. Adoption of the
proposed rule would result in increased crew costs for air
carriers (such as Atlas and Polar) that predominately fly
nighttime and long-haul flights. The statutory deadline for
adopting this new rule is August 1, 2011. If adopted, the
specific rule proposed by the FAA could have a material impact
on our business, results of operations and financial condition
by limiting crew scheduling flexibility and increasing operating
costs, especially with respect to long-range flights.
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 (in the case of Europe, the
European Union (the EU)) or, in the absence of such
an agreement, by principles of 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
government 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 is not guaranteed and may be
conditional. In addition, approval during one time period does
not guarantee approval in future periods.
A foreign governments regulation of its own air carriers
can also affect our business. For instance, the EU modified the
licensing requirements of air carriers of its member states in
2008 to place new limits on the ability of EU carriers to use
ACMI aircraft from airlines of non-EU member states. The revised
regulations have a negative impact on ACMI business
opportunities. Similarly, the European Aviation Safety Agency
(EASA) has proposed new rules that would prohibit EU
airlines from providing ACMI services from non-EU airlines
without first satisfying their regulators that the aircraft to
be used satisfy both international and EASA-imposed
requirements. Finalization of the proposed regulations could
increase costs and inhibit business opportunities.
8
Airport Access. The ability of Atlas, Polar
and Atlas other ACMI customers 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 in cities such as
Chicago and a variety of foreign locations (e.g., Tokyo,
Shanghai and Incheon). The availability of slots is not assured
and the inability of Polar or Atlas other ACMI customers
to obtain additional slots could inhibit 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 imposes hourly caps on JFK operations
of those carriers offering scheduled services. Additionally, the
FAA adopted and then withdrew a rule to impose slot limitations
on scheduled operations at JFK and Newark Liberty International
(EWR) airports and to establish a slot auction
process that would include the involuntary withdrawal of slots
from current holders. The rule also would have placed severe
hourly limitations on unscheduled operations at JFK and EWR. If
a new rule with similar constraints on unscheduled operations
were to be adopted in the future, our business operations could
be adversely affected.
As a further means to address congestion, the FAA has issued a
rule allowing U.S. airports to raise landing fees to defray
the costs of airfield facilities under construction or
reconstruction. The rule is being challenged in court. Any
landing fee increases implemented pursuant to the rule would
have an impact on airlines generally. A similar proposal is
under consideration in the EU.
Security. Following the terrorist attacks on
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
which are designed to prevent unauthorized access to freighter
aircraft and the introduction of weapons and explosives onto
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 material adverse effect on
our operations. To mitigate any such increase, we are working
closely with the Department of Homeland Security and other
government agencies to ensure that a threat-based risk
management approach is utilized to target specific
at-risk cargo. This approach could limit any
exposure to regulation that would require 100% screening of all
cargo at an excessive cost. 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, there has been legislation
introduced in the U.S. House of Representatives that, if
enacted, could substantially increase the security burden on
all-cargo air carriers.
Environmental. We 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, local and federal agencies. For
instance, the DOT and the FAA have authority under the Aviation
Safety and Noise Abatement Act of 1979 and under the Airport
Noise and Capacity Act of 1990 to monitor and regulate aircraft
engine noise. We believe that all aircraft in our fleet
materially comply with current DOT, FAA and international noise
standards.
We are also subject to the regulations of the
U.S. Environmental Protection Agency (the EPA)
regarding air quality in the United States. All of our aircraft
meet or exceed applicable EPA fuel venting requirements and
smoke emissions standards.
There is significant U.S. and international government
interest in implementing measures to respond to the problem of
climate change and greenhouse gas emissions. Previously, both
houses of the U.S. Congress passed legislation to impose a
carbon-related tax on fuel sold to airlines and other entities.
However, a bill has not been signed into law. Since a new
session of U.S. Congress began in January 2011, legislation
of that type cannot become law without first having been
reintroduced and voted upon. In September 2009, the EPA
9
proposed regulations that would impose controls on greenhouse
gas emissions. The proposed regulations would not directly
control greenhouse gas emissions by air carriers. However, a
number of states and environmental organizations have asked the
EPA to regulate greenhouse gas emissions from aircraft. In
addition, the EU has enacted legislation that will extend its
emissions trading scheme to aviation commencing in 2012, and
airlines serving the EU have had to submit compliance plans for
review and approval. Under the EU mechanism, airlines will only
be able to exceed specified carbon emissions levels by acquiring
carbon emissions rights from other entities. The U.S. and
other governments have objected to the EUs unilateral
implementation and are seeking to have the matter addressed,
instead, by the International Civil Aviation Organization. Some
airlines and organizations are also challenging the EU mechanism
in court. Regardless of the outcome of these activities, it is
possible that some type of climate change measures ultimately
will be imposed in a manner adversely affecting airlines.
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, we are subject to U.S. and foreign antitrust
requirements and international trade restrictions imposed by
U.S. Presidential determination and U.S. government
agency regulation, including the Office of Foreign Assets
Control of the U.S. Department of the Treasury. We endeavor
to comply with such requirements at all times. We are also
subject to state and local laws and regulations at locations
where we operate and at airports that we serve. Our operations
may become subject to additional international,
U.S. federal, state and local requirements in the future.
We believe that we are in material compliance with all currently
applicable laws and regulations.
Civil Reserve Air Fleet. Atlas and Polar both
participate in the 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 government 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, our operations,
ownership and profitability. 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
and solutions provided. Atlas, Air Atlanta Icelandic, World
Airways and Evergreen International Aviation are the primary
providers presently in the
747-400F and
747-400
BCF/SF ACMI markets. Competition is more significant in the ACMI
market for the older, less-efficient
747-200
aircraft. We have withdrawn from that market and redeployed our
747-200 ACMI
assets into the AMC and Commercial Charter segments, where our
operating returns for operating the aircraft are comparatively
higher. Operators remaining in the
747-200 ACMI
segment include Air Atlanta Icelandic, Evergreen International
Aviation, Kalitta Air, LLC and Southern Air, Inc. World Airways
also operates MD11s in cargo ACMI services, which compete
directly in some markets with 747 freighters. In addition,
competition may intensify with the utilization of the 777F
aircraft, in certain markets in lieu of a 747.
We participate through our AMC Charter business segment in the
CRAF Program. While our AMC Charter business has been profitable
each year since 2004, 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, the withdrawal of
any of the current team members, especially FedEx, or a
reduction of the number of aircraft pledged to the CRAF program
by our team, and the uncertainty of future demand for commercial
airlift by the U.S. Military, could adversely affect the
amount of AMC business awarded to us in the future. To the
extent that we receive a reduction in our awards or
10
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 Southern Air, Inc.; Evergreen
International Aviation; Kalitta Air, LLC; Lufthansa Group and
other passenger airlines providing similar services. 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 or the Middle East. We
continue to develop new opportunities in the Commercial Charter
market as alternative deployments for the
747-200
aircraft remaining in our fleet or
747-400
aircraft not otherwise deployed in our ACMI or AMC business.
Titans primary focus in the Dry Leasing business is
freighter aircraft and engine leasing. While there is
competition among operating lessors in this market, we believe
that we are uniquely positioned in this business due to our
depth and understanding of the demand drivers and operator base.
The primary competitors in the freighter leasing business are GE
Capital Aviation Services; Guggenheim Aviation Partners, LLC;
Air Castle Ltd. and AerCap Holdings, N.V. Titan may also compete
in the passenger aircraft leasing market to develop key customer
relationships, enter strategic geographic markets,
and/or
acquire feedstock aircraft for future freighter conversion. The
primary competitors in the passenger leasing market are GE
Capital Aviation Services, International Lease Finance Corp.,
Ansett Worldwide Aviation Services, CIT Aerospace, Aviation
Capital Group Corp., Air Castle Ltd., AerCap Holdings N.V., and
RBS Aviation Capital.
Fuel
Historically, aircraft fuel is one of the most significant
expenses for us. During 2010, 2009 and 2008, fuel costs
represented 27.1%, 22.1%, and 41.8%, 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:
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2010
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2009
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2008
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Gallons consumed (in thousands)
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119,176
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|
|
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101,451
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|
|
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201,002
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Average price per gallon, including tax
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$
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2.52
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$
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1.98
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$
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3.37
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Cost (in thousands)
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$
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300,229
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$
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201,207
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$
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677,544
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Fuel burn gallons per Block Hour (excluding ACMI)
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3,221
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3,159
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|
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3,231
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Subsequent to the DHL Commencement Date, our exposure to
fluctuations in fuel price is now limited to a portion of our
Commercial Charter business only. For this business, we shift a
portion of the burden of price increases to customers by
imposing a surcharge. While we believe that fuel price
volatility in 2010, 2009 and 2008 was partly reduced as a result
of increased fuel surcharges, these surcharges did not
completely offset the underlying increases in fuel prices. The
ACMI segment, including Express Network, has no direct fuel
price exposure because ACMI contracts require our customers to
pay for aircraft fuel. Similarly, we generally have no fuel
price risk in the AMC business because the price is set under
our contract, and we receive or make subsequent payments to
adjust for price increases and decreases from the contractual
rate. AMC fuel expense was $155.5 million in 2010,
$118.4 million in 2009 and $199.9 million in 2008.
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
aircraft fuel, a number of factors, such as geopolitical
uncertainties in oil-producing nations and shortages of and
disruptions to refining capacity or transportation of aircraft
fuel from refining facilities, 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. Any inability to obtain
aircraft fuel at competitive prices would materially and
adversely affect our results of operation and financial
condition.
11
Employees
Our business depends on highly qualified management and flight
crew personnel. As a percentage of our consolidated operating
expenses, salaries, wages and benefits accounted for
approximately 21.5% in 2010, 23.7% in 2009 and 13.7% in 2008. As
of December 31, 2010, we had 1,532 employees, 877 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.
Crewmembers of Atlas and Polar are represented by the
International Brotherhood of Teamsters (the IBT).
These employees represented approximately 51.5% of our workforce
as of December 31, 2010. We are subject to risks of work
interruption or stoppage as permitted by the Railway Labor Act
of 1926 (the Railway Labor Act), and may incur
additional administrative expenses associated with union
representation of our employees.
The Atlas collective bargaining agreement became amendable in
February 2006. The Polar collective bargaining agreement became
amendable in April 2007. While both units 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. In
November 2004, we initiated steps to merge the represented
crewmember bargaining units of Atlas and Polar. The respective
collective bargaining agreements provide for a seniority
integration process and the negotiation of a single collective
bargaining agreement (SCBA). This seniority list
integration process was completed in November 2006.
We received the integrated seniority lists and the parties are
in negotiations for a SCBA. In accordance with both the Atlas
and Polar contracts, if any open contract issues remain after
nine months of bargaining from the date the integrated seniority
lists were tendered to us, those issues are to be resolved by
final and binding interest arbitration. This period of
bargaining was extended by mutual agreement of the parties. We
continued to negotiate with the IBT, reached a tentative
agreement on many outstanding issues and an arbitrator was
assigned for the remaining unresolved sections. The arbitration
hearings concluded in December 2010. A decision is expected
during 2011.
In 2009, the IBT was certified as the collective bargaining
representative of the dispatchers employed by Atlas and Polar.
Later in 2009, we began formal negotiations with the IBT
regarding the first collective bargaining agreement for the
dispatchers. Other than the crewmembers and dispatchers, there
are no other Atlas or Polar employees represented by a union.
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 public may read and copy any materials that we file with the
SEC at the SECs Public Reference Room at 100 F
Street, N.E., Washington, D.C. 20549. Information on the
operation of the Public Reference Room may be obtained by
calling the SEC at
1-800-SEC-0330.
In addition, the SEC maintains an Internet site that contains
reports, proxy and information statements, and other information
regarding issuers that file electronically with the SEC at
www.sec.gov.
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.
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.
12
RISKS
RELATED TO OUR BUSINESS
Risks
Related to Our Business Generally
A
deterioration in global economic conditions could adversely
affect our business, results of operations, financial condition,
liquidity and ability to access capital markets.
Global economies experienced a downturn in 2008. The conditions
experienced by our customers during that time made it difficult
for them and for us to accurately forecast and plan future
business activities. The slowdown also caused our customers to
curb their use of our services. During the second half of 2009
and into 2010, the downturn subsided and conditions began to
improve. If demand for our services or Yields significantly
deteriorate due to macroeconomic effects, it could have a
material adverse effect on our business, results of operations
and financial condition. We cannot accurately predict the effect
or duration of any economic slowdown or the timing or strength
of a subsequent economic recovery.
In addition, we may face significant challenges if conditions in
the financial markets deteriorate. Our business is capital
intensive and growth depends on the availability of capital for
new aircraft, among other things. If todays capital
availability deteriorates, we may be unable to raise the capital
necessary to finance the
747-8F
aircraft we have ordered from Boeing, finance Titans
growth or other business initiatives. Our ability to access the
capital markets may be restricted at a time when we would like,
or need, to do so, which could have an impact on our flexibility
to react to changing economic and business conditions.
If any
of our existing aircraft or our new order of
747-8F
aircraft are underutilized, failure to re-deploy or deploy these
aircraft with customers at favorable rates 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 generally allocate our existing and on-order aircraft among
our business segments according to projected demand. If demand
weakens and, as a result, we have underutilized aircraft, we
will seek to re-deploy those aircraft in our other lines of
business. If we are unable to successfully deploy our existing
aircraft or our new order of
747-8F
aircraft, when delivered, at favorable rates or achieve a
successful and timely disposal of such aircraft, our results of
operations could be materially and adversely affected.
We
have significant contractual obligations, including progress
payments, associated with our order of 12
747-8F
aircraft. If we are unable to obtain financing for these
aircraft and/or make the required progress payments, our growth
strategy would be disrupted and our business, results of
operations and financial condition could be adversely
affected.
In 2006, we placed an order for 12 new
747-8F
aircraft with Boeing. As part of this transaction, we also hold
rights to purchase up to an additional 14
747-8F
aircraft. We are required to pay significant pre-delivery
deposits to Boeing for these aircraft. As of December 31,
2010, we had remaining commitments of approximately
$1.7 billion associated with this aircraft order (including
spare engines, estimated contractual escalations and purchase
credits).
We expect to finance these aircraft through either secured debt
or lease financing. Although we have received committed
financing for one of these aircraft and standby financing
commitments to finance an additional four of the remaining
aircraft deliveries, we cannot provide assurance 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, we may be required to incur financing costs that are
substantially higher than what we currently anticipate and our
business, results of operations and financial condition could be
adversely affected. If we are unable to obtain financing (even
at a higher cost) and we are unable to meet our contractual
obligations to Boeing, our financial condition could be impacted
as we could be in default under the Boeing contract.
13
We
could be adversely affected if the delivery of our new
747-8F
aircraft are delayed further or if such aircraft do not meet
expected performance specifications.
In 2006, we placed an order for 12 new
747-8F
aircraft that were originally scheduled to be delivered in 2010
and 2011. As part of this transaction, we also hold rights to
purchase up to an additional 14
747-8F
aircraft. The addition of these new aircraft is a material
component of our growth and fleet renewal strategy. Although the
747-8F
aircraft shares some of the same parts used in our
747-400
fleet, it is a new aircraft model and Boeing has not yet
received the necessary regulatory approvals and certifications.
Although Boeing has provided us with certain 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
expected rates. In September 2010, Boeing announced a further
delay in the first
747-8F
delivery to the second half of 2011. Accordingly, we expect a
corresponding delay in the delivery of our first
747-8F
aircraft and subsequent deliveries. The estimated payment
schedule for pre-delivery deposits will be adjusted accordingly.
Any further delay in Boeings production or delivery
schedule could delay the deployment of these aircraft and could
cause pre-delivery deposit borrowings to become payable before
delivery of the aircraft.
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, 2010, we had total debt obligations of
approximately $544.2 million and total aircraft operating
leases and other lease obligations of $1.7 billion. These
obligations are expected to increase significantly over the next
several years as we begin to accept delivery of, and continue to
enter into financing arrangements for, our new
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 aircraft fuel and other costs,
including labor and insurance. Accordingly, we cannot provide
assurance that we will be able to meet our debt service, lease
and other obligations as they become due and our business,
results of operations and financial condition could be adversely
affected under these circumstances.
Certain
of our debt 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;
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expand significantly into lines of businesses beyond existing
business activities or those which are cargo-related
and/or
aviation-related and similar businesses; and/or
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modify the terms of debt or lease financing arrangements.
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14
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.
Demand
for older
747-200
aircraft may affect our decision to retire aircraft
early.
The market for
747-200
aircraft is volatile and can be negatively affected by excess
capacity due to factors such as global economic conditions and
reduced customer demand. In 2009 and 2008, we accelerated the
scheduled retirements of some of our
747-200
aircraft due to a lack of projected demand. We incurred certain
expenses related to the retirement of these aircraft (see
Note 5 to our Financial Statements). If the current
operating environment for
747-200s
deteriorates, we may need to retire some or all of our remaining
747-200
aircraft, which would result in additional expenses being
recorded.
While
our revenues may vary significantly over time, a substantial
portion of our operating expenses are fixed. These fixed costs
may 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 may 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 of the aircraft in our fleet and maintain high
utilization of these aircraft at favorable rates. If one or more
of our aircraft are out of service for an extended period of
time, our operating revenues would 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.
Our
financial condition may suffer if we experience unanticipated
costs as a result of ongoing lawsuits, claims and investigations
related to alleged improper matters related to use of fuel
surcharges and other rate components for air cargo
services.
The Company and Polar LLC (Old Polar), formerly
Polar Air Cargo, Inc., have been named defendants, along with a
number of other cargo carriers, in several class actions in the
United States arising from allegations about the pricing
practices of a number of air cargo carriers that have now been
consolidated for pre-trial purposes in the United States
District Court for the Eastern District of New York. The
consolidated complaint alleges, among other things, that the
defendants, including the Company and Old Polar, manipulated the
market price for air cargo services sold domestically and abroad
through the use of fuel and other surcharges, in violation of
U.S. Federal, state and EU antitrust laws. The suit seeks
treble damages and injunctive relief.
The Company and Old Polar, along with a number of other cargo
carriers, have also been named in two civil class action suits
in the provinces of Ontario and Quebec, Canada, which are
substantially similar to the U.S. class action suits
described above. Moreover, we have submitted relevant
information and documentation to regulators in Australia, New
Zealand and Switzerland, among others, in connection with
investigations
15
initiated by such authorities into pricing practices of certain
international air cargo carriers. These proceedings are
continuing, and additional investigations and proceedings may be
commenced and charges may be brought in these and other
jurisdictions. Other parties may be added to these proceedings,
and authorities may request additional information from us. If
Old Polar or the Company were to incur an unfavorable outcome in
connection with one or more of the related investigations or the
litigation described above, it could have a material adverse
effect on our business, results of operations and financial
condition.
In addition to the litigation and investigations described
above, we are party to a number of other claims, lawsuits and
pending actions, which we consider to be routine and incidental
to our business (see Note 14 to our Financial Statements).
However, if we were to receive an adverse ruling or decision, it
could have an adverse effect on our business, results of
operations and financial condition.
Global
trade flows are typically seasonal, and our business segments,
including our ACMI customers business, experience seasonal
revenue variation.
Global trade flows are typically seasonal in nature, with peak
activity typically occurring during the retail holiday season,
which traditionally begins in September and lasts through
mid-December. Our ACMI contracts have contractual utilization
minimums that typically allow our customers to cancel an
agreed-upon
percentage of the guaranteed hours of aircraft utilization over
the course of a year. Our ACMI customers often exercise those
cancellation options early in the first quarter of the year,
when the demand for air cargo capacity is historically low
following the seasonal holiday peak in the fourth quarter of the
previous year. While our revenues typically fluctuate seasonally
as described above, a significant proportion of the costs
associated with our business, such as aircraft rent,
depreciation and facilities costs, are fixed and cannot easily
be reduced to match the seasonal drop in demand. As a result,
our net operating results are typically subject to a high degree
of seasonality.
Fuel
price volatility and fuel availability could adversely affect
our business and operations in our Commercial Charter
business.
The price of aircraft fuel is unpredictable and has been
increasingly volatile over the past few years. With the
commencement of the Amended BSA, we have been able to reduce our
exposure to fuel risk significantly. However, we continue to
bear the risk of fuel exposure for our Commercial Charter
operations.
In addition, while our ACMI contracts require our customers to
pay for aircraft fuel, if fuel costs increase significantly, our
customers may reduce the volume and frequency of cargo shipments
or find less costly alternatives for cargo delivery, such as
land and sea carriers. Such instances could have a material
adverse impact on our business, results of operations and
financial condition.
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
aircraft 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. Any inability to obtain
aircraft fuel at competitive prices could have a material
adverse impact on our business, results of operations and
financial condition.
We are
party to collective bargaining agreements covering our U.S.
crewmembers and are obligated to negotiate collective bargaining
agreements covering our U.S. dispatchers, both of which could
result in higher labor costs than those faced by some of our
non-unionized competitors. This could put us at a competitive
disadvantage, and/or 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, and each is represented by the IBT. There are
separate collective bargaining agreements for Atlas and Polar,
both of which are currently
16
subject to binding arbitration. As a percentage of our workforce
as of December 31, these employees represented
approximately 51.5% in 2010, 49.4% in 2009 and 56.7% in 2008. 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 provide
assurance 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. The costs associated with a resolution,
including a potential increase in costs of labor resulting from
binding arbitration, could have a material adverse effect on our
business, results of operations and financial condition.
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.
To do business with government agencies, including the AMC, we
must comply with, and are affected by, many rules and
regulations, including those related to the formation,
administration and performance of U.S. government
contracts. These rules and regulations, among other things:
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require, in some cases, procurement with small businesses 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 rules and regulations affect how we do business with our
customers and, in some instances, impose added costs on our
business. A violation of these rules 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 rules 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 of our
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 U.S. federal
government. The FAA is currently providing war-risk hull and
cargo loss, crew and third-party liability insurance through
September 30, 2011. If the federal war-risk coverage
program terminates or provides significantly less coverage in
the future, we could face a significant 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.
We participate in an insurance pooling arrangement with DHL and
their affiliates. This allows us to obtain aviation hull and
liability and hull deductible coverage at reduced rates. If we
were to withdraw from this arrangement for any reason or if
other pool members have higher incidents, we could incur higher
insurance costs.
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 revenue 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
17
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 provide
assurance 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, financial condition and operations.
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 harm our
customer relationships and 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.
Some
of our aircraft are periodically deployed in potentially
dangerous situations, which may result in damage to our
aircraft/cargo and/or harm to our employees.
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
and/or its
cargo, or death or injury to our personnel. While we maintain
insurance to cover the loss/damage of aircraft/cargo
and/or
injury to our employees, 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. Any loss/damage of
aircraft/cargo or injury to employees could have a material
adverse impact on our business, results of operations and
financial condition.
We
could be adversely affected by a failure or disruption of our
computer, communications or other technology
systems.
We are heavily and increasingly dependent on technology to
operate our business. The computer and communications systems on
which we rely could be disrupted due to various events, some of
which are beyond our control, including natural disasters, power
failures, terrorist attacks, equipment failures, software
failures and computer viruses and hackers. We have taken certain
steps to implement business resiliency to help reduce the risk
of some of these potential disruptions. There can be no
assurance, however, that the measures we have taken are adequate
to prevent or remedy disruptions or failures of these systems.
Any substantial or repeated failure of these systems could
impact our operations and customer service, result in the loss
of important data, loss of revenues, and increased costs, and
generally harm our business. Moreover, a failure of certain of
our vital systems could limit our ability to operate our flights
for an extended period of time, which would have a material
adverse impact on our business and operations.
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 other currencies.
Any significant devaluation in such currencies relative to the
U.S. dollar could have a material adverse effect on such
customers ability to pay us or on their level of demand
for our services, which could have a material adverse effect on
our business, results of operations and financial condition. If
there is a significant decline in the value of the
U.S. dollar against other 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.
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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.
Our ACMI business depends on a limited number of customers,
which has typically averaged between five and six. In addition,
as a percentage of our total operating revenue, the
International Airline of United Arab Emirates
(Emirates) accounted for 8.2% in 2010, 10.4% in 2009
and 7.8% in 2008 and Polar accounted for 14.7% in 2010, 18.5% in
2009 and 3.2% in 2008. We typically enter into long-term ACMI
contracts with our customers on
747-400s.
The terms of our existing contracts are scheduled to expire on a
staggered basis. 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, perhaps due to reasons beyond our
control. For example, certain of our airline ACMI customers may
not renew their ACMI contracts with us as they take delivery of
new aircraft in their own fleet. Select customers have the
opportunity to terminate their long-term agreements in advance
of the expiration date, following a significant amount of notice
to allow for remarketing of the aircraft. Such agreements
generally contain a significant early termination fee paid by
the customer. 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
747-400
factory freighter or
passenger-to-freighter
converted aircraft enter the ACMI market and cause ACMI rates to
decrease. In addition, new entrants or different equipment types
introduced into the ACMI market could adversely affect our
business, results of operations and financial
condition.
As passenger airlines begin to retire
747-400
aircraft from passenger service, a number of these aircraft are
undergoing conversion to freighters. Although inferior in
operating performance to the
747-400
specialty built freighters that we primarily 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. Additionally, the introduction of new
equipment types into the ACMI market could cause ACMI rates to
fall and/or
could negatively affect our customer base. If either
circumstance were to occur, our business, results of operations
and financial condition could be materially and adversely
affected.
Our
agreements with several ACMI and CMI customers require us to
meet certain performance targets, 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 certain ACMI and CMI customers depends
substantially on our ability to successfully meet strict
performance standards and deadlines for aircraft and ground
operations, which become increasingly stringent over time. If we
do not meet these requirements, we may not be able to achieve
the projected revenues and profitability from these contracts,
and we could be exposed to certain remedies, including
termination of the Amended BSA in the most extreme of
circumstances, as described below.
Risks
Related to the DHL Investment
The
DHL Agreements confer certain termination rights to DHL which,
if exercised or triggered, may result in us being unable to
realize the full benefits of this transaction.
The Amended BSA gives DHL the option to terminate the agreement
for convenience by giving notice to us at least one year before
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
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 a creditworthy subsidiary. Further, DHL has a right to
terminate the Amended BSA for cause following a specified
management resolution process if we default on our
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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 AMC Charter Business
We
derive a significant portion of our revenues from our AMC
Charter business, and a substantial portion of these revenues
have been 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.
As a percentage of our operating revenue, revenue derived from
our AMC Charter business was approximately 29.1% in 2010, 31.0%
in 2009 and 26.5% in 2008. In each of these years, the revenues
derived from expansion flights for the AMC significantly
exceeded the value of the fixed flight component of our AMC
contract.
Historically, our AMC Charter business, especially expansion
flights, has generated a significant amount of revenue. Future
revenues from this business may decline from historic levels as
a result of reduced U.S. military heavy lift requirements.
Revenues from our AMC Charter business are derived from one-year
contracts that the AMC is not required to renew. Our current AMC
contract runs from January 1, 2011 through
December 31, 2011. 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 AMC also holds all carriers to certain on-time performance
requirements, which in 2011 was changed from a departure-based
standard to a more stringent on-time arrival requirement. 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 AMC, a greater reliance by the AMC on its own
freighter fleet or a reduction in our allocation of expansion
flying. Any reduction in our AMC flying could also negatively
impact our Commercial Charter revenue from the return trips of
one-way AMC missions. 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 sensitive to teaming arrangements,
affecting our relative share of AMC flying and the profitability
associated with it. If one of our team members reduces its
commitments or withdraws from the program, or if other carriers
on other teams commit additional aircraft to this program, our
share of AMC flying may decline. In addition, any changes made
to the commissions that we either pay / receive for AMC flying
or changes to the CRAF contracting mechanism could impact the
profitability of this business. Any of these changes could have
a material adverse effect on our results of operations and
financial condition.
Each year, the AMC 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 that each 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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changes in the CRAF contracting mechanism;
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the formation of new competing teaming arrangements;
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the withdrawal of any 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 on other teams in the
CRAF program.
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Any reduction in our share of or profitability from AMC flying
could have a material adverse effect on our business, results of
operations and financial condition.
RISKS
RELATED TO OUR INDUSTRY
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
non-U.S. air
cargo companies. If we were to lose any major customers
and/or fail
to attract customers, it could have an adverse effect on our
business, results of operations and financial condition.
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, 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 U.S. Treasury Departments
Office of Foreign Assets Control and the U.S. 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 accounting standards,
taxation requirements, 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 requirements
imposed or proposed by foreign governments. This is especially
true in the areas of transportation security, aircraft noise and
emissions control, and greenhouse gas emissions. These may be
duplicative of, or incompatible with U.S. government
requirements, resulting in increased compliance efforts and
expense. Even standing alone, foreign government requirements
can be burdensome.
Foreign governments also place temporal and other restrictions
on the ability of their own airlines to use aircraft operated by
other airlines. For example, as a result of EU regulations
finalized in 2008, EU airlines generally secure aircraft
capacity from U.S. and other non-EU airlines for a maximum
of two seven-month periods. This restriction could negatively
impact our revenue and profitability. Additionally, the EASA is
considering a proposal to require EU airlines to establish to
the satisfaction of their regulatory agencies that the aircraft
capacity secured from and operated by U.S. and other non-EU
airlines meet internationally set
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standards and additional EASA requirements. These and other
similar regulatory developments could have a material adverse
effect on our business, results of operations and financial
condition.
Initiatives
to address global climate change may adversely affect our
business and increase our costs.
U.S. or international legislative or regulatory action to
address concerns about climate change and greenhouse gas
emissions could result in substantial costs for us. Previously,
both houses of the U.S. Congress passed legislation to
impose a carbon-related tax on fuel sold to airlines and other
entities. However, a bill has not been signed into law. Also, in
September 2009, the EPA proposed regulations that would impose
controls on greenhouse gas emissions. While the proposed
regulations would not directly control greenhouse gas emissions
by air carriers, a number of states and environmental
organizations have asked the EPA to regulate greenhouse gas
emissions from aircraft.
Internationally, the EU has enacted legislation that will extend
its emissions trading scheme to aviation commencing in 2012, and
airlines serving the EU have had to submit compliance plans for
review and approval. Under the EU mechanism, airlines will only
be able to exceed specified carbon emissions levels by acquiring
carbon emissions rights from other entities. The U.S. and
other governments have objected to the EUs unilateral
implementation and are seeking to have the matter addressed,
instead, by the International Civil Aviation Organization. Some
airlines and organizations are also challenging the EU mechanism
in court. Regardless of the outcome of these activities, it is
possible that some type of climate change measures ultimately
will be imposed in a manner adversely affecting airlines. The
costs of complying with potential new environmental laws or
regulations could have a material adverse effect on our
business, results of operations and financial condition.
The
airline industry is subject to numerous security regulations and
rules that increase costs. Imposition of more stringent
regulations and rules than those that currently exist could
materially increase our costs and have a material adverse effect
on our business, results of operations and financial
condition.
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.
Our
future operations might be constrained by new FAA flight and
duty time rules.
In 2009, following expressions of concern about pilot fatigue on
certain long-range flights, the FAA convened an ARC comprised of
various aviation stakeholders to recommend changes to the flight
and duty time rules applicable to pilots. In 2010, the FAA
issued a proposed rule to impose new flight and duty time
regulations with the stated goal of reducing pilot fatigue.
Adoption of the proposed rule would result in material increased
crew costs for Atlas and Polar, as well as air carriers that
predominately fly nighttime and long-haul flights. The statutory
deadline for adopting this new rule is August 1, 2011. If
adopted, the specific rule proposed by the FAA could have a
material impact on our business, results of operations and
financial condition by limiting crew scheduling flexibility and
increasing operating costs, especially with respect to
long-range flights.
RISKS
RELATED TO OWNERSHIP OF OUR COMMON STOCK
U.S.
citizenship requirements may limit common stock voting
rights.
Under U.S. federal law and DOT requirements, we must be
owned and actually controlled by citizens of the United
States, a statutorily defined term requiring, among other
things, that not more than 25% of our issued and outstanding
voting stock be owned and controlled, directly or indirectly, by
non-U.S. citizens.
DOT
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periodically conducts airline citizenship reviews and, if it
finds that this requirement is not met, may require adjustment
of the rights attendant to the airlines issued shares.
As one means to effect compliance, our certificate of
incorporation and by-laws provide that the failure of
non-U.S. citizens
to register their shares on a separate stock record, which we
refer to as the Foreign Stock Record, results in a
suspension of their voting rights. Our by-laws further limit the
number of shares of our capital stock that may be registered on
the Foreign Stock Record to 25% of our issued and outstanding
shares. Registration on the Foreign Stock Record is made in
chronological order based on the date we receive a written
request for registration. As a result, if a
non-U.S. citizen
acquires shares of our common stock and does not or is not able
to register those shares on our Foreign Stock Record, they may
lose their ability to vote those shares.
Provisions
in our restated certificate of incorporation and by-laws and
Delaware law might discourage, delay or prevent a change in
control of the Company and, therefore, depress the trading price
of our common stock.
Provisions of our restated certificate of incorporation, by-laws
and Delaware law may render more difficult or discourage any
attempt to acquire our company, even if such acquisition may be
believed to be favorable to the interests of our stockholders.
These provisions may also discourage bids for our common stock
at a premium over market price or adversely affect the market
price of our common stock.
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.
|
|
ITEM 1B.
|
UNRESOLVED
STAFF COMMENTS
|
None.
23
Aircraft
The following tables provide information about the owned
aircraft, leased aircraft and the type of financing for each,
not including retired or parked aircraft, as of
December 31, 2010:
|
|
|
|
|
|
|
Aircraft Type
|
|
Tail #
|
|
Ownership
|
|
Financing Type
|
|
757-200
|
|
B-2808
|
|
Owned
|
|
Term Loan
|
747-200
|
|
N540MC
|
|
Owned
|
|
None
|
747-200
|
|
N517MC
|
|
Owned
|
|
None
|
747-200
|
|
N522MC
|
|
Owned
|
|
None
|
747-200
|
|
N523MC
|
|
Owned
|
|
None
|
747-200
|
|
N524MC
|
|
Owned
|
|
None
|
747-300
|
|
N355MC
|
|
Owned
|
|
None
|
747-400
|
|
N409MC
|
|
Owned
|
|
Enhanced Equipment Trust Certificates
|
747-400
|
|
N491MC
|
|
Owned
|
|
Enhanced Equipment Trust Certificates
|
747-400
|
|
N493MC
|
|
Owned
|
|
Enhanced Equipment Trust Certificates
|
747-400
|
|
N494MC
|
|
Owned
|
|
Enhanced Equipment Trust Certificates
|
747-400
|
|
N495MC
|
|
Owned
|
|
Enhanced Equipment Trust Certificates
|
747-400
|
|
N496MC
|
|
Owned
|
|
Enhanced Equipment Trust Certificates
|
747-400
|
|
N499MC
|
|
Owned
|
|
Enhanced Equipment Trust Certificates
|
747-400
|
|
N408MC
|
|
Leased
|
|
Enhanced Equipment Trust Certificates
|
747-400
|
|
N412MC
|
|
Leased
|
|
Enhanced Equipment Trust Certificates
|
747-400
|
|
N492MC
|
|
Leased
|
|
Enhanced Equipment Trust Certificates
|
747-400
|
|
N497MC
|
|
Leased
|
|
Enhanced Equipment Trust Certificates
|
747-400
|
|
N498MC
|
|
Leased
|
|
Enhanced Equipment Trust Certificates
|
747-400
|
|
N429MC
|
|
Owned
|
|
Term Loan
|
747-400
|
|
N419MC
|
|
Owned
|
|
Term Loan
|
747-400
|
|
N415MC
|
|
Leased
|
|
Operating Lease
|
747-400
|
|
N416MC
|
|
Leased
|
|
Operating Lease
|
747-400
|
|
N418MC
|
|
Leased
|
|
Operating Lease
|
747-400
|
|
N450PA
|
|
Leased
|
|
Operating Lease
|
747-400
|
|
N451PA
|
|
Leased
|
|
Operating Lease
|
747-400
|
|
N452PA
|
|
Leased
|
|
Operating Lease
|
747-400
|
|
N453PA
|
|
Leased
|
|
Operating Lease
|
747-400
|
|
N454PA
|
|
Leased
|
|
Operating Lease
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
|
|
|
|
|
|
Average
|
|
Aircraft Type
|
|
Owned
|
|
|
Leased
|
|
|
Total
|
|
|
Age Years
|
|
|
757-200
|
|
|
1
|
|
|
|
|
|
|
|
1
|
|
|
|
21.2
|
|
747-200
|
|
|
5
|
|
|
|
|
|
|
|
5
|
|
|
|
29.8
|
|
747-300
|
|
|
1
|
|
|
|
|
|
|
|
1
|
|
|
|
25.1
|
|
747-400
|
|
|
9
|
|
|
|
13
|
|
|
|
22
|
|
|
|
11.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
16
|
|
|
|
13
|
|
|
|
29
|
|
|
|
15.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease expirations for our operating leased aircraft included in
the above tables range from February 2020 to February 2025.
24
Ground
Facilities
Our principal office is located in Purchase, New York, where we
lease 120,000 square feet under a long-term lease that
expires in 2012. This office includes both operational and
administrative support functions, including flight and crew
operations, maintenance and engineering, material management,
human resources, legal, sales and marketing, finance and
information technology. In addition, we lease a variety of
smaller offices and ramp space at various station and regional
locations on a short-term basis.
|
|
ITEM 3.
|
LEGAL
PROCEEDINGS
|
The information required in response to this Item is set forth
in Note 14 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.
|
[REMOVED
AND RESERVED]
|
25
PART II
|
|
ITEM 5.
|
MARKET
FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
|
Market
Information
Since 2006, our common stock has been traded on The NASDAQ
Global Select Market under the symbol AAWW.
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
|
|
2010 Quarter Ended
|
|
|
|
|
|
|
|
|
December 31
|
|
$
|
61.19
|
|
|
$
|
49.38
|
|
September 30
|
|
$
|
60.00
|
|
|
$
|
43.34
|
|
June 30
|
|
$
|
58.87
|
|
|
$
|
46.85
|
|
March 31
|
|
$
|
53.23
|
|
|
$
|
36.47
|
|
2009 Quarter Ended
|
|
|
|
|
|
|
|
|
December 31
|
|
$
|
38.18
|
|
|
$
|
25.08
|
|
September 30
|
|
$
|
33.89
|
|
|
$
|
20.62
|
|
June 30
|
|
$
|
32.68
|
|
|
$
|
17.54
|
|
March 31
|
|
$
|
24.05
|
|
|
$
|
10.03
|
|
The last reported sale price of our common stock on The NASDAQ
National Market on February 11, 2011 was $56.45 per share.
As of February 8, 2011, there were approximately
25.9 million shares of our common stock issued and
outstanding, and 81 holders of record of our common stock.
During 2008, we announced a stock repurchase program, which
authorized the repurchase of up to $100 million of our
common stock. Purchases may be made at our discretion from time
to time on the open market, through negotiated transactions,
block purchases or exchange or non-exchange transactions. As of
February 14, 2011, we have repurchased a total of
700,243 shares of our common stock for approximately
$18.9 million, at an average cost of $26.99 per share under
this program. We have not repurchased any shares under this
program since 2008.
Equity
Compensation Plans
See Item 12. Security Ownership of Certain Beneficial
Owners and Management and Related Stockholder Matters for
information regarding our equity compensation plans as of
December 31, 2010.
Dividends
We have never paid a cash dividend with respect to our common
stock and we do not 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.
Foreign
Ownership Restrictions
Under our by-laws, U.S. 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 of directors and
officers must be U.S. citizens and not more than 25% of our
outstanding voting common stock may be held by
non-U.S. citizens.
We believe that, during the period covered by this Report, we
were in compliance with these requirements.
26
Performance
Graph
The following graph compares the performance of AAWW common
stock to the Standard & Poors 500 Stock Index,
the Russell 2000 Index and the AMEX Airline Index for the period
beginning December 31, 2005 and ending on December 31,
2010. The comparison assumes $100 invested in each of our common
stock, the Standard & Poors 500 Stock Index, the
Russell 2000 Index and the AMEX Airline Index and reinvestment
of all dividends.
Total
Return Between
12/31/05 and
12/31/10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share Price
|
|
|
12/31/05
|
|
|
12/31/06
|
|
|
12/31/07
|
|
|
12/31/08
|
|
|
12/31/09
|
|
|
12/31/10
|
AAWW
|
|
|
$
|
100.00
|
|
|
|
$
|
98.89
|
|
|
|
$
|
120.49
|
|
|
|
$
|
42.00
|
|
|
|
$
|
82.78
|
|
|
|
$
|
124.07
|
|
Russell 2000 Index
|
|
|
$
|
100.00
|
|
|
|
$
|
117.00
|
|
|
|
$
|
113.79
|
|
|
|
$
|
74.19
|
|
|
|
$
|
92.90
|
|
|
|
$
|
116.40
|
|
S&P 500
|
|
|
$
|
100.00
|
|
|
|
$
|
113.62
|
|
|
|
$
|
117.63
|
|
|
|
$
|
72.36
|
|
|
|
$
|
89.33
|
|
|
|
$
|
100.75
|
|
AMEX Airline Index
|
|
|
$
|
100.00
|
|
|
|
$
|
107.09
|
|
|
|
$
|
63.02
|
|
|
|
$
|
44.57
|
|
|
|
$
|
62.10
|
|
|
|
$
|
86.39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ITEM 6.
|
SELECTED
FINANCIAL DATA
|
The selected balance sheet data as of December 31, 2010 and
2009 and the selected statements of operations data for the
years ended December 31, 2010, 2009 and 2008 have been
derived from our audited Financial Statements included elsewhere
in this Report. The selected balance sheet data as of
December 31, 2008, 2007 and 2006, and selected statements
of operations data for the years ended December 31, 2007
and 2006 have been derived from our audited Financial Statements
not included in this Report.
27
Effective October 27, 2008, we began reporting Polar under
the equity method of accounting. Previously, we accounted for
Polar on a consolidated basis (see Note 3 to our Financial
Statements). The resulting impact from this change reduces
revenue, operating expenses, total assets, liabilities and
equity related to Polar. In addition, effective April 8,
2009, we began reporting GSS on a consolidated basis (see
Note 4 to our Financial Statements). Our Operating
Statistics, Operating Revenue and Operating Expenses reflect the
consolidation of GSS as of that date. Previously, GSS was
accounted for under the equity method. In the following table,
all amounts are in thousands, except for per share data.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues
|
|
$
|
1,337,774
|
|
|
$
|
1,061,546
|
|
|
$
|
1,607,482
|
|
|
$
|
1,575,105
|
|
|
$
|
1,480,734
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
1,109,888
|
|
|
|
911,539
|
|
|
|
1,619,629
|
|
|
|
1,420,330
|
|
|
|
1,328,434
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income / (loss)
|
|
|
227,886
|
|
|
|
150,007
|
|
|
|
(12,147
|
)
|
|
|
154,775
|
|
|
|
152,300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
142,956
|
|
|
|
76,156
|
|
|
|
60,021
|
|
|
|
132,415
|
|
|
|
59,781
|
|
Less: Net income / (loss) Attributable to noncontrolling
interests
|
|
|
1,146
|
|
|
|
(1,620
|
)
|
|
|
(3,675
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income Attributable to Common Stockholders
|
|
$
|
141,810
|
|
|
$
|
77,776
|
|
|
$
|
63,696
|
|
|
$
|
132,415
|
|
|
$
|
59,781
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share (Basic)
|
|
$
|
5.50
|
|
|
$
|
3.59
|
|
|
$
|
2.98
|
|
|
$
|
6.24
|
|
|
$
|
2.89
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share (Diluted)
|
|
$
|
5.44
|
|
|
$
|
3.56
|
|
|
$
|
2.97
|
|
|
$
|
6.17
|
|
|
$
|
2.83
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Position Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,936,102
|
|
|
$
|
1,740,873
|
|
|
$
|
1,600,745
|
|
|
$
|
1,417,190
|
|
|
$
|
1,119,780
|
|
Long-term debt (less current portion)
|
|
$
|
391,036
|
|
|
$
|
526,680
|
|
|
$
|
635,628
|
|
|
$
|
365,619
|
|
|
$
|
398,885
|
|
Total equity
|
|
$
|
1,050,090
|
|
|
$
|
888,757
|
|
|
$
|
681,739
|
|
|
$
|
562,702
|
|
|
$
|
473,844
|
|
|
|
ITEM 7.
|
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
The following discussion should be read in conjunction with the
Financial Statements included in Item 8 of this report.
Business
Overview
We are a leading global provider of air cargo assets and
outsourced aircraft operating services and solutions. As such,
we manage and operate the worlds largest fleet of 747
freighters. We provide unique value to our customers by giving
them access to highly reliable new production freighters that
deliver the lowest unit cost in the marketplace combined with
outsourced aircraft operating services that we believe lead the
industry in terms of quality and global scale. Our customers
include airlines, express delivery providers, freight
forwarders, the U.S. military and charter brokers. We
provide global services with operations in Asia, the Middle
East, Australia, Europe, South America, Africa and North America.
We believe that the following competitive strengths will allow
us to capitalize on opportunities that exist in the global
airfreight industry:
Market
leader with leading-edge technology and innovative,
value-creating solutions:
We manage the worlds largest fleet of
747-400
freighters, the largest and most cost effective long-haul
commercial freighter currently available. Our fleet consists of
twenty-two
747-400, one
747-300, and
five 747-200
freighters, representing roughly 10% of the heavy freighter
capacity operating in the world today. In addition, we have one
757-200SF
that we dry lease to a customer. Our CMI customers provide us
with two
747-400
passenger aircraft and four Boeing modified
747-400
freighters (Dreamlifters), which are included
28
in our operating fleet statistics. This highlights our position
as the preeminent provider of these highly desirable and scarce
assets, in the case of the current
747-400
freighter. Our operating model deploys our aircraft to drive
maximum utilization and value from our fleet. The scale of our
fleet enables us to have aircraft available globally to respond
to our customers needs, both on a planned and ad hoc
basis. We believe that this provides us with a commercial
advantage over our competitors that operate with smaller and
less flexible fleets.
The 747-400,
which is the core of our ACMI segment, 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
747-200s. In
September 2006, we placed an order for 12 new,
state-of-the-art
747-8F
aircraft, which are expected to have improved operating
performance relative to the
747-400 and
create additional operating leverage to drive growth and to help
us maintain our industry leading position for the foreseeable
future.
Stable
base of contractual revenue and reduced operational
risk:
Our focus on providing long-term contracted aircraft and
operating solutions to customers contributes to increased
stability of our revenues and reduces our operational risk.
Typically, ACMI contracts with customers range from three to
five years, although we will offer contracts of shorter
duration. Under ACMI, CMI and Dry Leasing, our customers assume
fuel, Yield and demand risk resulting in reduced operational
risk for AAWW. ACMI and CMI contracts typically provide us with
a guaranteed minimum level of revenue and target level of
profitability.
Our Express Network contract with DHL includes the allocation of
blocked space capacity on a long-term basis for up to
20 years. This arrangement eliminates Yield and demand
risks, similar to the rest of our ACMI business, for a minimum
of six
747-400
aircraft, which was increased to eight in January 2011. DHL is
subject to a monthly minimum Block Hour guarantee.
Our AMC Charter services are operated under an annual contract
with the U.S. military, whereby the military assumes fuel
price risk, mitigating the risk of this business.
Focus
on asset optimization:
By managing the largest fleet of 747 freighter aircraft, we
achieve significant economies of scale in areas such as aircraft
maintenance, crew training, crew efficiency, inventory
management, and purchasing. We believe the addition of the
747-8F
aircraft will further enhance our efficiencies as these new
aircraft are expected to have a high degree of operational,
maintenance and spare parts commonality with our existing fleet
of 747-400s,
as well as a common pilot-type rating.
Our mix of aircraft is closely aligned with our customer needs.
We believe that our existing
747-400
fleet and our ordered
747-8F
aircraft are well-suited to meet the current and anticipated
requirements of our ACMI customers. Our
747-200
freighters are utilized for high contribution AMC flying and for
Commercial Charter business on an opportunistic basis.
We continually evaluate our fleet to ensure that we offer the
most efficient and effective mix of aircraft. Our service model
is unique in that we offer a portfolio of operating solutions
that complement our freighter aircraft businesses. We believe
this allows us to improve the returns we generate from our asset
base by allowing us to flexibly redeploy aircraft to meet
changing market conditions, ensuring the maximum utilization of
our fleet. Our charter services complement our freighter
aircraft services by allowing us to increase aircraft
utilization during open time and to react to changes in demand
and Yield in these segments. We have employees situated around
the globe who closely monitor demand for commercial charter
services in each region, enabling us to redeploy available
aircraft quickly. Our
747-200
aircraft are unencumbered and have allowed us to adjust the size
of our fleet to react quickly to changes in market demand. We
also endeavor to manage our portfolio to stagger contract terms
to mitigate our remarketing risks and aircraft down time.
29
Long-term
strategic customer relationships and unique service
offerings:
We combine the global scope and scale of our efficient aircraft
fleet with high quality, cost-effective operations and premium
customer service to provide unique, fully integrated and
reliable solutions for our customers. We believe this approach
results in customers that are motivated to seek long-term
relationships with us. This has historically allowed us to
command higher prices than our competitors in several key areas.
These long-term relationships help us to build resilience into
our business model.
Our customers have access to our solutions, such as
inter-operable crews, flight scheduling, fuel efficiency
planning, and maintenance spare coverage, which, we believe, set
us apart from other participants in the aircraft operating
solutions market. Furthermore, we have access to valuable
operating rights to restricted markets such as Brazil, Japan and
China. We believe our freighter services allow our customers to
effectively expand their capacity and operate dedicated
freighter aircraft without simultaneously taking on exposure to
fluctuations in the value of owned aircraft and, in the case of
our ACMI and CMI contracts, long-term expenses relating to crews
and maintenance. Dedicated freighter aircraft enable schedules
to be driven by cargo rather than passenger demand (for those
customers that typically handle portions of their cargo
operations via belly capacity on passenger aircraft), which we
believe allows our customers to drive higher contribution from
cargo operations. Both Atlas and Polar successfully completed
the International Air Transport Associations Operational
Safety Audit (IOSA), a globally recognized safety and quality
standard.
We provide outsourced aviation services and solutions to some of
the worlds premier airlines and largest freight
forwarders. We will take advantage of opportunities to maintain
and expand our relationships with our existing customers, while
seeking new customers and new geographic markets.
Experienced
management team:
Our management team has extensive operating and leadership
experience in the airfreight, airline, aircraft leasing and
logistics industries at companies such as United Airlines, US
Airways, Lufthansa Cargo, GE Capital Aviation Services, Air
Canada, Ansett Worldwide Aviation Services, Canadian Airlines,
Continental Airlines, SH&E Air Transport Consultancy, ASTAR
Air Cargo and KLM Cargo, as well as the United States Navy, Air
Force and Federal Air Marshal Service. Our management team is
led by William J. Flynn, who has over 30 years of
experience in freight and transportation and has held senior
management positions with several transportation companies.
Prior to joining AAWW, Mr. Flynn was President and CEO of
GeoLogistics, a global transportation and logistics enterprise.
Business
Strategy
Our strategy includes the following:
Actively
manage our fleet with a focus on leading-edge
aircraft:
We continue to actively manage our fleet of leading-edge
wide-body freighter aircraft to meet customer demands. Our
747-400s are
utilized primarily in our ACMI business and in the AMC and
Commercial Charter market during any remarketing periods. We
will deploy our remaining
747-200
fleet and related assets in the AMC Charter, Commercial Charter
and Dry Leasing markets, while evaluating sale and other
opportunities for these assets as market conditions warrant. We
continue to update our fleet with new aircraft to ensure that we
provide our customers with the most efficient aircraft to meet
their needs. We will also continue to manage our older aircraft
in an opportunistic way to maximize returns.
Focus
on securing long-term contracts:
We will continue to focus on securing long-term service and
aircraft operating solution contracts, which provide us with
stable revenue streams and predictable margins. In addition,
these agreements limit our direct exposure to fuel and other
costs and mitigate the risk of fluctuations in both Yield and
demand in the airfreight business, while also improving the
overall utilization of our fleet.
30
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 to drive the process and to involve all
areas of the organization in the effort to reexamine, redesign
and improve the way we do business. Our initial goal was to
generate $100 million in cost savings, on an annualized
basis. We have met and exceeded this initial goal and our
efforts to realize additional savings will continue.
Our efforts thus far have resulted in initiatives in six
principal areas: fuel, maintenance, crew and related costs,
other aircraft operations, procurement and general and
administrative costs.
Specific initiatives include:
|
|
|
|
|
New processes to improve the fuel efficiency of our aircraft
operations;
|
|
|
|
Further 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 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.
Financial
Overview and Business Developments
Our Results of Operations and Operating Statistics for the year
ended December 31, 2010, compared to the same period in
2009, reflect the consolidation of GSS in our ACMI operating
results since April 2009. From January 1, 2009 through
April 8, 2009, GSS was accounted for under the equity
method and the revenue generated by the three aircraft dry
leased to GSS was reflected in Dry Leasing (see Note 4 to
our Financial Statements).
The positive supply and demand trends that developed in late
2009 continued in 2010, which led to a record year for
airfreight industry volumes. Our ACMI customers flew above their
minimum contractual Block Hour guarantees during 2010, compared
to most of 2009 when they flew below their minimum guaranteed
levels.
In February 2010, we signed a nine-year CMI agreement with
Boeing to operate their Dreamlifter fleet of four modified
747-400
aircraft. These aircraft transport major
sub-assemblies
for the Boeing 787 Dreamliner from suppliers around the world to
Boeing production facilities in the United States. On
July 20, 2010, we began to provide CMI service for Boeing
with these aircraft.
In March 2010, Titan purchased a Boeing
757-200SF,
its first aircraft acquisition that is being Dry Leased.
In May 2010, we began to fly on a CMI basis for SonAir, an agent
of the United States-Africa Energy Association. This service,
known as the Houston Express, operates three weekly
nonstop roundtrip flights between Houston, Texas and Luanda,
Angola on two newly customized
747-400
aircraft provided by SonAir. Since it began operations, the
Houston Express has flown above its minimum guarantee. In
addition, we seek to expand the utilization of the aircraft by
flying commercial passenger charters.
In July 2010, we signed an ACMI agreement with British Airways
to operate three
747-8F
aircraft through GSS. The contract is scheduled to begin when we
take delivery of the
747-8F
aircraft from Boeing in 2011.
31
In September 2010, we began ACMI flying for TNT Airways
(TNT). Under the ACMI agreement, we provide service
for TNTs international express air network, which will be
based at TNTs European hub in Liege, Belgium.
In October 2010, we began ACMI flying for a second
747-400
aircraft for Panalpina Air & Ocean Ltd
(Panalpina). This second aircraft is based at
Panalpinas European hub in Luxembourg.
In January 2011, we signed an ACMI agreement with DHL for two
additional
747-400
aircraft to operate in their Express Network under the Amended
BSA. This increases the size of the Express Network from six to
eight aircraft.
In January and February 2011, we leased two
747-400
converted freighters for an average of approximately three and a
half years and will place them in service during the second
quarter of 2011.
AMC demand was exceptionally strong through the first five
months of 2010 primarily due to the surge in U.S. Military
activity in Afghanistan. During that period, we flew a
significant number of missions in support of the
U.S. Militarys deployment of mine resistant,
ambush-protected, all-terrain vehicles (M-ATV) from
the U.S. to Afghanistan and averaged just over 1,800 Block
Hours a month. We also realized an improvement in Yields due to
higher rates on mission-specified
747-400
aircraft flights and an increase in one-way AMC missions to meet
this demand. In June 2010, we completed our last scheduled M-ATV
mission. For the remainder of 2010, we have averaged just under
1,400 Block Hours a month.
Commercial Charter Yields and volumes also were robust compared
to 2009. The strength in Commercial Charter Yields and demand is
the continuation of a trend that developed in the fourth quarter
of 2009, although Yields were seasonally lower in the first
three quarters of 2010 when compared to the peak rates
experienced in the fourth quarter of 2009. In addition, we have
been able to increase Commercial Charter Yields by utilizing the
return flights from one-way AMC missions during 2010.
Results
of Operations
The following discussion should be read in conjunction with our
Financial Statements.
Years
Ended December 31, 2010 and 2009
Operating
Statistics
As noted above, the
year-over-year
comparison of operating statistics was impacted by the
consolidation of GSS in 2009. Block Hours flown by GSS are
reflected as ACMI Block Hours beginning in 2009. The following
discussion should be read in conjunction with our Financial
Statements and notes thereto and other financial information
appearing and referred to elsewhere in this Report.
The table below compares selected Operating Statistics in:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase/
|
|
|
Percent
|
|
|
|
2010
|
|
|
2009
|
|
|
(Decrease)
|
|
|
Change
|
|
|
Block Hours
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ACMI
|
|
|
91,357
|
|
|
|
76,859
|
|
|
|
14,498
|
|
|
|
18.9
|
%
|
AMC Charter
|
|
|
18,679
|
|
|
|
19,088
|
|
|
|
(409
|
)
|
|
|
(2.1
|
)%
|
Commercial Charter
|
|
|
17,572
|
|
|
|
12,694
|
|
|
|
4,878
|
|
|
|
38.4
|
%
|
Other
|
|
|
750
|
|
|
|
328
|
|
|
|
422
|
|
|
|
128.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Block Hours
|
|
|
128,358
|
|
|
|
108,969
|
|
|
|
19,389
|
|
|
|
17.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue Per Block Hour
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ACMI
|
|
$
|
5,953
|
|
|
$
|
6,274
|
|
|
$
|
(321
|
)
|
|
|
(5.1
|
)%
|
AMC Charter
|
|
|
20,825
|
|
|
|
17,235
|
|
|
|
3,590
|
|
|
|
20.8
|
%
|
Commercial Charter
|
|
|
21,878
|
|
|
|
16,947
|
|
|
|
4,931
|
|
|
|
29.1
|
%
|
32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase/
|
|
|
Percent
|
|
|
|
2010
|
|
|
2009
|
|
|
(Decrease)
|
|
|
Change
|
|
|
Fuel
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AMC
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average fuel cost per gallon
|
|
$
|
2.68
|
|
|
$
|
2.02
|
|
|
$
|
0.66
|
|
|
|
32.7
|
%
|
Fuel gallons consumed (000s)
|
|
|
58,022
|
|
|
|
58,709
|
|
|
|
(687
|
)
|
|
|
(1.2
|
)%
|
Commercial Charter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average fuel cost per gallon
|
|
$
|
2.37
|
|
|
$
|
1.93
|
|
|
$
|
0.44
|
|
|
|
22.8
|
%
|
Fuel gallons consumed (000s)
|
|
|
61,154
|
|
|
|
42,742
|
|
|
|
18,412
|
|
|
|
43.1
|
%
|
Fleet (average during the period)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ACMI*
|
|
|
18.4
|
|
|
|
17.1
|
|
|
|
1.3
|
|
|
|
7.6
|
%
|
AMC Charter
|
|
|
5.5
|
|
|
|
6.8
|
|
|
|
(1.3
|
)
|
|
|
(19.1
|
)%
|
Commercial Charter
|
|
|
4.7
|
|
|
|
3.5
|
|
|
|
1.2
|
|
|
|
34.3
|
%
|
Dry Leasing
|
|
|
0.8
|
|
|
|
0.8
|
|
|
|
|
|
|
|
NM
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Aircraft
|
|
|
29.4
|
|
|
|
28.2
|
|
|
|
1.2
|
|
|
|
4.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Out-of-service**
|
|
|
0.1
|
|
|
|
2.5
|
|
|
|
(2.4
|
)
|
|
|
(96.0
|
)%
|
|
|
|
* |
|
ACMI average fleet excludes spare aircraft provided by CMI
customers. |
|
** |
|
All of our
out-of-service
aircraft are completely unencumbered. Permanently parked
aircraft, all of which are also completely unencumbered, are not
included in the operating statistics above. |
Operating
Revenue
The following table compares our Operating Revenue (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase/
|
|
|
Percent
|
|
|
|
2010
|
|
|
2009
|
|
|
(Decrease)
|
|
|
Change
|
|
|
Operating Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ACMI
|
|
$
|
543,853
|
|
|
$
|
482,231
|
|
|
$
|
61,622
|
|
|
|
12.8
|
%
|
AMC Charter
|
|
|
388,994
|
|
|
|
328,990
|
|
|
|
60,004
|
|
|
|
18.2
|
%
|
Commercial Charter
|
|
|
384,440
|
|
|
|
215,127
|
|
|
|
169,313
|
|
|
|
78.7
|
%
|
Dry Leasing
|
|
|
7,178
|
|
|
|
12,799
|
|
|
|
(5,621
|
)
|
|
|
(43.9
|
)%
|
Other
|
|
|
13,309
|
|
|
|
22,399
|
|
|
|
(9,090
|
)
|
|
|
(40.6
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Operating Revenue
|
|
$
|
1,337,774
|
|
|
$
|
1,061,546
|
|
|
$
|
276,228
|
|
|
|
26.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ACMI revenue increased by $61.6 million, or 12.8%,
in 2010 compared to 2009, primarily due to a significant
increase in Block Hours partially offset by a decrease in
Revenue per Block Hour. ACMI Block Hours were 91,357 in 2010,
compared to 76,859 in 2009, representing an increase of 14,498
Block Hours, or 18.9%. The increase in Block Hours was driven by
ACMI customers flying above their minimum guarantees during 2010
compared to 2009, when customers flew below their minimum
guarantees. Included in the increase in Block Hours was the
startup of ACMI flying for TNT from September 2010, CMI
passenger flights for SonAir from May 2010 and CMI Dreamlifter
flights for Boeing from July 2010. In 2010, there was an average
of 18.3
747-400
aircraft and 0.1
747-200
aircraft supporting ACMI compared to an average of 16.9
747-400
aircraft and 0.2
747-200
aircraft in 2009. Revenue per Block Hour was $5,953 for 2010,
compared to $6,274 in 2009, a decrease of $321 per Block Hour,
or 5.1%. The decrease in Revenue per Block Hour primarily
reflects our ACMI customers recovery from flying unusually
low levels in the prior year, which were below minimum
guarantees, to flying above minimum guarantees during 2010.
During 2009, ACMI customers that flew below their contractual
Block Hours were contractually required to pay us for those
unflown hours, thus increasing our 2009 Revenue per Block Hour.
In addition, average Revenue per Block Hour for 2010 was lower
due to the introduction of CMI service, which does not include a
component for providing aircraft.
33
AMC Charter revenue increased $60.0 million, or
18.2%, primarily due to an increase in Revenue per Block Hour
partially offset by a slight decrease in Block Hours. The
increase in the pegged fuel price, the premium
earned on M-ATV missions flown on our
747-400
aircraft and an increase in one-way AMC missions were the
primary drivers of the increase in AMC Charter Revenue per Block
Hour from $17,235 in 2009 to $20,825 in 2010, an increase of
$3,590 per Block Hour, or 20.8%. In 2010, the AMC average
pegged fuel price was $2.68 per gallon compared to
an average pegged fuel price of $2.02 in 2009. AMC
Charter Block Hours were 18,679 in 2010 compared to 19,088 in
2009, a decrease of 409 Block Hours, or 2.1%. The decrease in
AMC Block Hours was primarily due to the reduction in AMC demand
to support U.S. Military activity in Afghanistan during the
second half of 2010. AMC demand was exceptionally strong through
the first five months of 2010 primarily due to the surge in AMC
demand to support U.S. Military activity in Afghanistan.
During that period, we flew a significant number of missions in
support of the U.S. Militarys deployment of M-ATVs
from the U.S. to Afghanistan and averaged just over 1,800
Block Hours a month. In early June, we completed our last
scheduled M-ATV mission and had no additional M-ATV missions for
the remainder of 2010. AMC demand has moderated from early 2010
levels and during the remainder of 2010, we averaged just under
1,400 Block Hours per month. In 2010, there was an average of
1.6 747-400
aircraft and 3.9
747-200
aircraft supporting AMC Charter compared to an average of 1.8
747-400
aircraft and 5.0
747-200
aircraft for the comparable period in 2009. We continued to
optimize aircraft utilization between the AMC and Commercial
Charter segments as AMC demand moderated during the second half
of 2010 from the levels experienced during the first half of
2010.
Commercial Charter revenue increased $169.3 million,
or 78.7%, due to an increase in Revenue per Block Hour and an
increase in flying. Revenue per Block Hour was $21,878 in 2010,
compared to $16,947 in 2009, an increase of $4,931 per Block
Hour, or 29.1%. This increase was primarily due to strong
Commercial Charter yields out of Asia as a continuing trend that
developed in the fourth quarter of 2009, although the seasonal
yields in 2010 were not as high as they were during the peak
period in 2009. Commercial Charter Block Hours were 17,572 in
2010, compared to 12,694 in the same period of 2009,
representing an increase of 4,878 Block Hours, or 38.4% as a
result of optimizing aircraft utilization from AMC to meet the
increased demand in Commercial Charter and an increase in the
flying of charters to and from South America and out of Asia. We
were able to utilize the return trips from one-way AMC missions
to meet this demand out of Asia. The deployment of
747-400
aircraft in Commercial Charter gives us a competitive advantage
over other cargo airlines that primarily offer smaller and less
efficient aircraft. In 2010, there was an average of 2.9
747-400
aircraft and 1.8
747-200
aircraft supporting Commercial Charter, compared to an average
of 2.3
747-400
aircraft and 1.2
747-200
aircraft in 2009.
Dry Leasing revenue decreased $5.6 million, or
43.9%, primarily due to a reduction in revenue related to the
consolidation of GSS partially offset by an increase in revenue
from the
757-200SF
that we acquired in 2010 and spare engine leases outstanding
during 2010. On April 8, 2009, upon the consolidation of
GSS, three
747-400
aircraft that GSS utilizes to provide ACMI services to a
customer and the associated revenue are now included in ACMI.
The Dry Lease revenue for those aircraft that was previously
reported in Dry Leasing was eliminated in consolidation after
that date. During 2010, we had no
747-400
aircraft on Dry Lease to third parties compared to 0.8
747-400
aircraft Dry Leased to GSS during 2009.
Other revenue decreased $9.1 million primarily due
to a $10.0 million termination penalty received from DHL in
2009 (see Note 3 to our Financial Statements).
34
Operating
Expenses
The following table compares our Operating Expenses (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase/
|
|
|
Percent
|
|
|
|
2010
|
|
|
2009
|
|
|
(Decrease)
|
|
|
Change
|
|
|
Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aircraft fuel
|
|
$
|
300,229
|
|
|
$
|
201,207
|
|
|
$
|
99,022
|
|
|
|
49.2
|
%
|
Salaries, wages and benefits
|
|
|
238,169
|
|
|
|
215,660
|
|
|
|
22,509
|
|
|
|
10.4
|
%
|
Maintenance, materials and repairs
|
|
|
174,029
|
|
|
|
147,758
|
|
|
|
26,271
|
|
|
|
17.8
|
%
|
Aircraft rent
|
|
|
154,646
|
|
|
|
151,080
|
|
|
|
3,566
|
|
|
|
2.4
|
%
|
Landing fees and other rent
|
|
|
48,700
|
|
|
|
39,552
|
|
|
|
9,148
|
|
|
|
23.1
|
%
|
Depreciation and amortization
|
|
|
34,353
|
|
|
|
33,074
|
|
|
|
1,279
|
|
|
|
3.9
|
%
|
Travel
|
|
|
34,338
|
|
|
|
25,235
|
|
|
|
9,103
|
|
|
|
36.1
|
%
|
Ground handling and airport fees
|
|
|
25,115
|
|
|
|
16,212
|
|
|
|
8,903
|
|
|
|
54.9
|
%
|
Gain on disposal of aircraft
|
|
|
(3,601
|
)
|
|
|
(953
|
)
|
|
|
2,648
|
|
|
|
(277.9
|
)%
|
Special charge
|
|
|
|
|
|
|
8,216
|
|
|
|
(8,216
|
)
|
|
|
NM
|
|
Other
|
|
|
103,910
|
|
|
|
74,498
|
|
|
|
29,412
|
|
|
|
39.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Operating Expenses
|
|
$
|
1,109,888
|
|
|
$
|
911,539
|
|
|
$
|
198,349
|
|
|
|
21.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aircraft fuel increased $99.0 million, or 49.2%, as
a result of approximately $63.9 million in fuel price
increases and $35.2 million of increased consumption. The
average fuel price per gallon for the Commercial Charter
business was approximately $2.37 in 2010, compared to
approximately $1.93 in 2009, an increase of 22.8%. Fuel
consumption for this business increased by 18.4 million
gallons, or 43.1%, commensurate with the increase in Block Hours
operated. The average fuel price per gallon for the AMC Charter
business was approximately $2.68 in 2010, compared to
approximately $2.02 in 2009, an increase of 32.7%. AMC fuel
consumption decreased by 0.7 million gallons, or 1.2%. We
do not incur fuel expense in our ACMI business as the cost of
fuel is borne by the customer.
Salaries, wages and benefits increased
$22.5 million, or 10.4%, due to a net increase in crew
costs of $13.4 million driven by higher Block Hours and
non-crew costs of $9.1 million. These increases included
higher profit sharing and incentive compensation of
$10.5 million, as a result of better performance against
the Companys objectives and $3.5 million related to
the consolidation of GSS.
Maintenance, materials and repairs increased
$26.3 million, or 17.8%, due to increased line and other
non-heavy maintenance expense of approximately
$17.8 million, increased engine overhauls of
$4.0 million and increased heavy airframe check expense of
approximately $4.5 million. Of this total increase,
$4.8 million related to the consolidation of GSS. The
increase in line and other non-heavy maintenance expense was due
to higher rates and increased Block Hours in 2010 compared to
2009. Heavy maintenance events and engine overhauls for 2010 and
2009 are listed in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase/
|
Events
|
|
2010
|
|
2009
|
|
(Decrease)
|
|
747-200 C
Checks
|
|
|
2
|
|
|
|
4
|
|
|
|
(2
|
)
|
747-400 C
Checks
|
|
|
7
|
|
|
|
13
|
|
|
|
(6
|
)
|
747-200 D
Checks
|
|
|
1
|
|
|
|
|
|
|
|
1
|
|
747-400 D
Checks
|
|
|
5
|
|
|
|
4
|
|
|
|
1
|
|
CF6-50 engine overhauls
|
|
|
9
|
|
|
|
|
|
|
|
9
|
|
CF6-80 engine overhauls
|
|
|
17
|
|
|
|
24
|
|
|
|
(7
|
)
|
Aircraft rent increased $3.6 million, or 2.4%, due
to a $2.5 million increase in re-accommodated air service
and $1.3 million in short-term engine rentals.
Re-accommodated air costs are incurred in situations whereby we
utilize other airlines to transport freight to airports that we
do not serve directly.
35
Landing fees and other rent increased $9.1 million,
or 23.1%, primarily due to a $10.5 million increase in
landing fees related to flying to more costly locations and from
higher Commercial Charter Block Hours. We generally do not incur
landing fees for our ACMI business as the cost is borne by the
customer.
Depreciation and amortization increased
$1.3 million, or 3.9%, primarily due to increased
depreciation on
747-200
aircraft engines partially offset by spare parts.
Travel increased $9.1 million, or 36.1%, primarily
due to a $6.4 million increase in crew travel related to
the higher volume of Block Hours and higher rates in 2010. In
addition, travel expense increased by $0.5 million related
to the consolidation of GSS and $2.7 million in ground
staff travel primarily related to the startup of CMI for both
SonAir and Boeing.
Ground handling and airport fees increased
$8.9 million, or 54.9%, primarily due to $5.7 million
related to higher rates for ground handling from flying to more
costly locations, $1.5 million related to increased
Commercial Charter activity and $0.4 million related to the
consolidation of GSS.
Gain on disposal of aircraft resulted from the sale of
three spare engines, that were previously held for sale, and
retired engines during 2010. The sale of aircraft tail number
N920FT and retired engines resulted in a gain recorded during
2009.
Special charge in 2009 represents an impairment charge of
$8.2 million, related to the write-down of the
747-200
fleet, including related engines, rotable inventory, expendable
parts and other equipment to their estimated fair values. See
Note 5 to our Financial Statements.
Other operating expenses increased $29.4 million, or
39.5%, primarily related to $17.4 million in legal
settlements (see Note 14 to our Financial Statements), a
$2.9 million increase in commissions primarily related to
increased AMC Charter revenue, a $3.8 million increase in
outside services, a $1.9 million increase in hull insurance
and $0.7 million related to the consolidation of GSS. We
also experienced a $2.3 million increase in freight related
to the movement of spare
747-200
parts and engines to be utilized on aircraft in lieu of
incurring more costly repairs.
Non-operating
Expenses / (Income)
The following table compares our Non-operating
Expenses / (Income) (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase/
|
|
Percent
|
|
|
2010
|
|
2009
|
|
(Decrease)
|
|
Change
|
|
Non-operating Expenses / (Income)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
(19,663
|
)
|
|
$
|
(3,014
|
)
|
|
$
|
16,649
|
|
|
|
552.4
|
%
|
Interest expense
|
|
|
40,034
|
|
|
|
44,731
|
|
|
|
(4,697
|
)
|
|
|
(10.5
|
)%
|
Capitalized interest
|
|
|
(16,373
|
)
|
|
|
(12,215
|
)
|
|
|
4,158
|
|
|
|
34.0
|
%
|
Gain on early extinguishment of debt
|
|
|
|
|
|
|
(2,713
|
)
|
|
|
(2,713
|
)
|
|
|
NM
|
|
Gain on consolidation of subsidiary
|
|
|
|
|
|
|
(113
|
)
|
|
|
(113
|
)
|
|
|
NM
|
|
Other expense (income), net
|
|
|
(9,222
|
)
|
|
|
(765
|
)
|
|
|
(8,457
|
)
|
|
|
NM
|
|
Interest income increased $16.6 million, primarily
due to the income generated from an increase in Long-term
investments in debt securities (see Note 12 to our
Financial Statements).
Interest expense decreased $4.7 million, or 10.5%,
due to reductions in debt balances of higher-rate debt through
principal payments. Long- and short-term debt averaged
approximately $518.6 million in 2010 compared to
approximately $635.1 million in 2009.
Capitalized interest increased $4.2 million, or
34.0%, primarily due to higher pre-delivery deposit balances
outstanding during the period.
Gain on early extinguishment of debt of $2.7 million
resulted from the prepayment of two term loans at a discount in
2009.
36
Gain on consolidation of subsidiary of $0.1 million
represents the gain recorded on the conversion of GSS from the
equity method of accounting to consolidation in April 2009 (see
Note 4 to our Financial Statements).
Other expense (income), net improved by
$8.5 million, primarily due to an $8.8 million
litigation settlement received during 2010 (see Note 14 to
our Financial Statements).
Income taxes. Our effective income tax rates
were 38.7% in 2010 and 38.6% in 2009. The change in the
effective tax rate during this period was primarily due to
non-deductible litigation settlements partially offset by
certain tax items related to our foreign subsidiaries during
2010.
Segments
We use an economic performance metric (Direct
Contribution) consisting of income (loss) before taxes
excluding special charges, non-recurring items, gains on the
disposal of equipment, unallocated revenue and unallocated fixed
costs, which shows the profitability of each segment after
allocation of direct ownership costs. The following table
compares the Direct Contribution for our reportable segments
(see Note 13 to our Financial Statements for the
reconciliation to Operating income) (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase/
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
(Decrease)
|
|
|
Percent Change
|
|
|
Direct Contribution:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ACMI
|
|
$
|
127,679
|
|
|
$
|
90,686
|
|
|
$
|
36,993
|
|
|
|
40.8
|
%
|
AMC Charter
|
|
|
111,091
|
|
|
|
93,884
|
|
|
|
17,207
|
|
|
|
18.3
|
%
|
Commercial Charter
|
|
|
111,717
|
|
|
|
39,790
|
|
|
|
71,927
|
|
|
|
180.8
|
%
|
Dry Leasing
|
|
|
4,643
|
|
|
|
1,051
|
|
|
|
3,592
|
|
|
|
341.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Direct Contribution
|
|
$
|
355,130
|
|
|
$
|
225,411
|
|
|
$
|
129,719
|
|
|
|
57.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unallocated income and expenses
|
|
$
|
125,621
|
|
|
$
|
96,878
|
|
|
$
|
28,743
|
|
|
|
29.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ACMI
Segment
Direct Contribution related to the ACMI segment increased
$37.0 million, or 40.8%, primarily due to increased Block
Hours. During 2010, there was an average of 18.3
747-400
aircraft and 0.1
747-200
aircraft supporting ACMI compared to an average of 16.9
747-400
aircraft and 0.2
747-200
aircraft supporting ACMI in 2009. The increase in average
747-400
aircraft is related to the startup of ACMI flying for TNT from
September 2010, CMI flying for SonAir from May 2010 and CMI
flying for Boeing from July 2010. ACMI Direct Contribution also
increased due to improvements in ownership costs and heavy
maintenance expense on
747-400
aircraft, which is the primary aircraft of our ACMI segment. The
improvement in ownership costs in the ACMI segment was driven by
the increase in contribution from our investment in debt
securities related to Atlas EETCs, which had the effect of
reducing our ownership costs for
747-400s
(see Note 12 to our Financial Statements). Higher aircraft
utilization in the ACMI segment resulted in an improvement in
unit performance for ownership and heavy maintenance costs. Also
impacting the ACMI segment were the results of operations for
three
747-400
aircraft from the consolidation of GSS (beginning April 8,
2009), which were previously reported in the Dry Leasing segment.
AMC
Charter Segment
Direct Contribution related to the AMC Charter segment increased
$17.2 million, or 18.3%, primarily due to increased Revenue
per Block Hour. The increase in the pegged fuel
price, the premium earned on M-ATV missions flown on our
747-400
aircraft and an increase in one-way AMC missions were the
primary drivers of the increase in AMC Charter Revenue per Block
Hour. Partially offsetting these increases in AMC revenue were
higher heavy maintenance expenses on
747-200s and
AMC commissions. During 2010, there was an average of 1.6
747-400
aircraft and 3.9
747-200
aircraft supporting AMC Charter compared to an average of 1.8
747-400
aircraft and 5.0
747-200
aircraft supporting AMC Charter in 2009.
37
Commercial
Charter Segment
Direct Contribution related to the Commercial Charter segment
increased $71.9 million, or 180.8%, primarily due to an
increase in Commercial Charter Block Hours and yields. During
2010, we experienced increased Commercial Charter demand to and
from South America and out of Asia, as well as higher yields
compared to 2009. Partially offsetting the increase in revenue
was an increase in aircraft fuel expense, reflecting higher fuel
prices. The Commercial Charter segment also had increases in
landing, overfly, parking and ground handling fees related to
the increased activity and the relatively more expensive profile
of the destinations we served in 2010. We also experienced
higher ownership costs from the incremental deployment of
747-400
aircraft to the Commercial Charter segment in 2010. However, the
increase in Commercial Charter aircraft utilization in 2010
reduced unit ownership costs compared with 2009. During 2010,
there was an average of 2.9
747-400
aircraft and 1.8
747-200
aircraft supporting Commercial Charter compared to an average of
2.3 747-400
aircraft and 1.2
747-200
aircraft supporting Commercial Charter in 2009.
Dry
Leasing Segment
Direct Contribution related to the Dry Leasing segment increased
$3.6 million, or 341.8%, primarily due to an increase in
revenue from spare engine leases outstanding during 2010 and the
Dry Lease of a
757-200SF
that we acquired in the first quarter of 2010, partially offset
by the consolidation of GSS. Beginning April 8, 2009, upon
the consolidation of GSS, three
747-400
aircraft that GSS utilizes to provide ACMI services to a
customer and the associated Direct Contribution that were
previously reported in Dry Leasing are now included in ACMI.
During 2010, we had no
747-400
aircraft on Dry Lease compared to an average of 0.8
747-400
aircraft on Dry Lease to GSS during 2009.
Unallocated
income and expenses
Unallocated income and expenses increased $28.7 million, or
29.7%, primarily due to $17.4 million in legal settlements
(see Note 14 to our Financial Statements) and the receipt
of a $10.0 million termination penalty from DHL in 2009. In
addition, we incurred $5.8 million of increased incentive
compensation accruals in 2010 as a result of better performance
against the Companys objectives. Partially offsetting
these items was an $8.8 million litigation settlement
received during 2010 (see Note 14 to our Financial
Statements).
38
Years
Ended December 31, 2009 and 2008
Operating
Statistics
As noted above, our 2009 Operating Statistics were impacted by
the deconsolidation of Polar following the Commencement Date and
the consolidation of GSS in 2009. All Express Network ACMI Block
Hours for the aircraft flown by Polar after the DHL Commencement
Date are reflected as ACMI Block Hours, and there was no
Scheduled Service activity during 2009. Before the DHL
Commencement Date in 2008, all Express Network ACMI Block Hours
were reflected as Scheduled Service. Block Hours flown by GSS
are reflected as ACMI Block Hours beginning in 2009. The
following discussion should be read in conjunction with our
Financial Statements and notes thereto and other financial
information appearing and referred to elsewhere in this report.
The table below sets forth selected Operating Statistics in:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase/
|
|
|
Percent
|
|
|
|
2009
|
|
|
2008
|
|
|
(Decrease)
|
|
|
Change
|
|
|
Block Hours
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ACMI
|
|
|
76,859
|
|
|
|
59,161
|
|
|
|
17,698
|
|
|
|
29.9
|
%
|
AMC Charter
|
|
|
19,088
|
|
|
|
18,022
|
|
|
|
1,066
|
|
|
|
5.9
|
%
|
Commercial Charter
|
|
|
12,694
|
|
|
|
6,713
|
|
|
|
5,981
|
|
|
|
89.1
|
%
|
Scheduled Service
|
|
|
|
|
|
|
36,731
|
|
|
|
(36,731
|
)
|
|
|
(100.0
|
)%
|
Other
|
|
|
328
|
|
|
|
740
|
|
|
|
(412
|
)
|
|
|
(55.7
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Block Hours
|
|
|
108,969
|
|
|
|
121,367
|
|
|
|
(12,398
|
)
|
|
|
(10.2
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue Per Block Hour
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ACMI
|
|
$
|
6,274
|
|
|
$
|
6,055
|
|
|
$
|
219
|
|
|
|
3.6
|
%
|
AMC Charter
|
|
|
17,235
|
|
|
|
23,627
|
|
|
|
(6,392
|
)
|
|
|
(27.1
|
)%
|
Commercial Charter
|
|
|
16,947
|
|
|
|
18,967
|
|
|
|
(2,020
|
)
|
|
|
(10.6
|
)%
|
Fuel
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AMC
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average fuel cost per gallon
|
|
$
|
2.02
|
|
|
$
|
3.41
|
|
|
$
|
(1.39
|
)
|
|
|
(40.8
|
)%
|
Fuel gallons consumed (000s)
|
|
|
58,709
|
|
|
|
58,621
|
|
|
|
88
|
|
|
|
0.2
|
%
|
Commercial Charter and Scheduled Service
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average fuel cost per gallon
|
|
$
|
1.93
|
|
|
$
|
3.35
|
|
|
$
|
(1.42
|
)
|
|
|
(42.4
|
)%
|
Fuel gallons consumed (000s)
|
|
|
42,742
|
|
|
|
142,381
|
|
|
|
(99,639
|
)
|
|
|
(70.0
|
)%
|
Fleet (average during the period)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aircraft count*
|
|
|
27.6
|
|
|
|
30.9
|
|
|
|
(3.3
|
)
|
|
|
(10.7
|
)%
|
Out-of-service
|
|
|
2.5
|
|
|
|
0.8
|
|
|
|
1.7
|
|
|
|
212.5
|
%
|
Dry leased
|
|
|
0.8
|
|
|
|
4.1
|
|
|
|
(3.3
|
)
|
|
|
(80.5
|
)%
|
|
|
|
* |
|
Dry Leased and
Out-of-service
aircraft are not included in the operating fleet average
aircraft count. |
39
Operating
Revenue
Our 2009 Operating Revenue reflects the deconsolidation of Polar
following the Commencement Date and the consolidation of GSS
beginning in 2009. As noted above, we did not have any Scheduled
Service revenue during 2009. The following table compares our
Operating Revenue in (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase/
|
|
|
Percent
|
|
|
|
2009
|
|
|
2008
|
|
|
(Decrease)
|
|
|
Change
|
|
|
Operating Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ACMI
|
|
$
|
482,231
|
|
|
$
|
358,234
|
|
|
$
|
123,997
|
|
|
|
34.6
|
%
|
AMC Charter
|
|
|
328,990
|
|
|
|
425,814
|
|
|
|
(96,824
|
)
|
|
|
(22.7
|
)%
|
Commercial Charter
|
|
|
215,127
|
|
|
|
127,325
|
|
|
|
87,802
|
|
|
|
69.0
|
%
|
Dry Leasing
|
|
|
12,799
|
|
|
|
48,770
|
|
|
|
(35,971
|
)
|
|
|
(73.8
|
)%
|
Scheduled Service
|
|
|
|
|
|
|
645,283
|
|
|
|
(645,283
|
)
|
|
|
(100.0
|
)%
|
Other
|
|
|
22,399
|
|
|
|
2,056
|
|
|
|
20,343
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Operating Revenue
|
|
$
|
1,061,546
|
|
|
$
|
1,607,482
|
|
|
$
|
(545,936
|
)
|
|
|
(34.0
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ACMI revenue increased $124.0 million, or 34.6%,
primarily due to $155.2 million of Express Network ACMI
flying in 2009 (which began October 27, 2008) and
$58.9 million from the consolidation of GSS (beginning
April 8, 2009), which was partially offset by a reduction
in other ACMI flying of approximately $90.1 million. ACMI
Block Hours were 76,859 in 2009, compared to 59,161 in 2008, an
increase of 17,698 Block Hours, or 29.9%. The increase in Block
Hours was driven by additional aircraft supporting Express
Network ACMI flying, which increased by eight aircraft on the
Commencement Date in 2008 and then reduced to six, with the
return of two aircraft, at the beginning of the second quarter
of 2009. In addition, beginning on April 8, 2009, three
747-400
aircraft flown by GSS that were previously reported in Dry
Leasing are now reported as ACMI. One
747-400 that
was returned by a customer at the end of its ACMI contract in
March 2009 was redeployed to AMC and Commercial Charter. In
2009, there was an average of 16.9
747-400
aircraft and 0.2
747-200
aircraft supporting ACMI compared to an average of 12.0
747-400
aircraft and 2.2
747-200
aircraft for the comparable period in 2008. Revenue per Block
Hour was $6,274 in 2009, compared to $6,055 in 2008, an increase
of $219 per Block Hour, or 3.6%. The increase in Revenue per
Block Hour was primarily driven by an increase in ACMI customers
that flew below their minimum guaranteed Block Hours but were
nonetheless contractually required to pay us for those unflown
hours during the first three quarters of 2009. However, in the
fourth quarter of 2009 all of our ACMI customers flew above
their minimum guarantees to meet strong fourth quarter freight
demands.
AMC Charter revenue decreased $96.8 million, or
22.7%, primarily due to a lower fuel component in AMC Charter
Revenue per Block Hour, partially offset by an increase in
flying. AMC Charter Block Hours were 19,088 in 2009 compared to
18,022 in 2008, an increase of 1,066 Block Hours, or 5.9%. The
average fuel price per gallon for the AMC Charter business was
approximately $2.02 in 2009, compared to approximately $3.41 in
2008, a decrease of $1.39. The decrease in the
pegged fuel price was the primary driver of the
reduction in AMC Charter Revenue per Block Hour from $23,627 in
2008 to $17,235 in 2009, a decrease of $6,392 or 27.1%.
Commercial Charter revenue increased $87.8 million,
or 69.0%, due to an increase in Block Hours flown, which was
partially offset by a decrease in Revenue per Block Hour.
Revenue per Block Hour was $16,947 in 2009, compared to $18,967
in 2008, a decline of $2,020 per Block Hour or 10.6%. The
decline in Revenue per Block Hour was caused by pricing
decreases related to the reduction in the cost of fuel and more
aggressive charter pricing during the first three quarters of
2009 compared to 2008. During the fourth quarter of 2009, the
increase in demand for freight out of Asia coupled with lower
global freighter capacity drove Commercial Charter rates higher.
Commercial Charter Block Hours were 12,694 in the year ended
December 31, 2009, compared to 6,713 in the same period of
2008, an increase of 5,981 or 89.1%. The increase in Block Hours
was the result of the redeployment of
747-400
aircraft returned from ACMI, increased utilization and the
flying of charters to and from South America. During 2009, the
deployment of
747-400
aircraft in Commercial Charter gave us a competitive advantage
over other cargo airlines that primarily offer smaller
40
aircraft. Accordingly, we have been able to increase the number
of Commercial Charters from Asia to the U.S. as the return
legs of one-way AMC missions and in the fourth quarter of 2009
we were also able to increase the yields on that flying. The
increase in Block Hours operated by
747-400
aircraft was partially offset by a reduction of
747-200
Block Hours due to the retirement of certain of our older
747-200
aircraft at the end of 2008 and during 2009.
Dry Leasing revenue decreased $36.0 million, or
73.8%, primarily due to a $31.4 million reduction related
to the consolidation of GSS and a $5.6 million decrease
from three
747-200
aircraft that were Dry Leased in the first half of 2008,
partially offset by a $1.0 million increase in revenue from
the Dry Leasing of six engines in 2009. During 2009, we have
been able to lease spare engines that were used on retired
747-200
aircraft. On April 8, 2009, upon the consolidation of GSS,
the three
747-400
aircraft that GSS Wet Leases to a customer and the associated
revenue are now included in ACMI. The Dry Lease revenue for
those aircraft that was previously reported in Dry Leasing was
eliminated in consolidation after that date. During 2009, we had
an average of 0.8
747-400
aircraft and no
747-200
aircraft on Dry Lease compared to an average of 3.0
747-400
aircraft and 1.1
747-200
aircraft on Dry Lease during 2008. The average of 0.8
747-400
aircraft that were Dry Leased during December 31, 2009
represents the period from January 1st through
April 7th, when GSS was accounted for under the equity
method (see Note 4 to our Financial Statements). We
experienced customer defaults on three Dry Leased
747-200
aircraft in the first half of 2008 as the two customers leasing
those aircraft filed for protection under local insolvency laws.
The returned aircraft have been either parked or sold.
Scheduled Service revenue was eliminated as we ceased to
provide this type of service following the Commencement Date in
2008 and the revenue related to the aircraft supporting Polar is
now reflected in ACMI.
Other revenue increased $20.3 million due to the
receipt of a $10.0 million one-time fee for the effective
early termination of an ACMI contract for two aircraft provided
to DHL. In addition, we recorded $11.5 million in revenue
related to management and administrative support services
provided to Polar. See Note 3 to our Financial Statements.
Operating
Expenses
Our 2009 Operating Expenses reflect the deconsolidation of Polar
following the Commencement Date in 2008 and the consolidation of
GSS since April 8, 2009. The expense line items impacted
are discussed below. The following table compares our operating
expenses in (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase/
|
|
|
Percent
|
|
|
|
2009
|
|
|
2008
|
|
|
(Decrease)
|
|
|
Change
|
|
|
Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aircraft fuel
|
|
$
|
201,207
|
|
|
$
|
677,544
|
|
|
$
|
(476,337
|
)
|
|
|
(70.3
|
)%
|
Salaries, wages and benefits
|
|
|
215,660
|
|
|
|
221,765
|
|
|
|
(6,105
|
)
|
|
|
(2.8
|
)%
|
Maintenance, materials and repairs
|
|
|
147,758
|
|
|
|
171,396
|
|
|
|
(23,638
|
)
|
|
|
(13.8
|
)%
|
Aircraft rent
|
|
|
151,080
|
|
|
|
157,063
|
|
|
|
(5,983
|
)
|
|
|
(3.8
|
)%
|
Landing fees and other rent
|
|
|
39,552
|
|
|
|
65,033
|
|
|
|
(25,481
|
)
|
|
|
(39.2
|
)%
|
Depreciation
|
|
|
33,074
|
|
|
|
38,946
|
|
|
|
(5,872
|
)
|
|
|
(15.1
|
)%
|
Travel
|
|
|
25,235
|
|
|
|
45,842
|
|
|
|
(20,607
|
)
|
|
|
(45.0
|
)%
|
Ground handling and airport fees
|
|
|
16,212
|
|
|
|
61,927
|
|
|
|
(45,715
|
)
|
|
|
(73.8
|
)%
|
Gain on disposal of aircraft
|
|
|
(953
|
)
|
|
|
(2,726
|
)
|
|
|
(1,773
|
)
|
|
|
(65.0
|
)%
|
Special charge
|
|
|
8,216
|
|
|
|
91,167
|
|
|
|
(82,951
|
)
|
|
|
(91.0
|
)%
|
Other
|
|
|
74,498
|
|
|
|
91,672
|
|
|
|
(17,174
|
)
|
|
|
(18.7
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Operating Expense
|
|
$
|
911,539
|
|
|
$
|
1,619,619
|
|
|
$
|
(708,090
|
)
|
|
|
(43.7
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aircraft fuel expense decreased $476.3 million, or
70.3%, as a result of $335.6 million of reduced consumption
and approximately $140.8 million in fuel price decreases.
The decrease in fuel consumption was
41
due to the deconsolidation of Polar that was partially offset by
$20.0 million of increased AMC and Commercial Charter
consumption. The average fuel price per gallon for the
Commercial Charter business was approximately $1.93 in 2009,
compared to approximately $3.35 for the Commercial Charter and
Scheduled Service businesses in 2008, a decrease of $1.42. A
105.4 million gallon decrease was due to the
deconsolidation of Polar that was partially offset by
5.8 million gallons of increased AMC and Commercial Charter
consumption. The average fuel price per gallon for the AMC
Charter business was approximately $2.02 in 2009, compared to
approximately $3.41 in 2008, a decrease of $1.39. The slight
decrease in AMC fuel consumption was related to the increased
flying of more efficient
747-400
aircraft. We do not incur fuel expense in our ACMI business as
the cost of fuel is borne by the customer.
Salaries, wages and benefits decreased $6.1 million,
or 2.8%, primarily due to a $15.7 million reduction
attributable to the deconsolidation of Polar and a net reduction
in crew and ground staff costs of $3.9 million, partially
offset by a $10.8 million increase related to the
consolidation of GSS. In 2008, we released employment tax
reserves related to the successful resolution of an examination
with the IRS resulting in a $2.7 million non-recurring
benefit.
Maintenance, materials and repairs decreased
$23.6 million, or 13.8%, primarily due to decreased engine
overhauls of approximately $22.6 million as well as
reductions in line and other non-heavy maintenance expense of
approximately $18.9 million. Partially offsetting these
decreases was a $15.1 million increase related to the
consolidation of GSS and an increase in heavy airframe check
expense of approximately $2.8 million, primarily related to
an increase in the number of third party C Checks performed on
747-400
aircraft. The overall decrease in maintenance expense is the
result of fewer CF6-50 engine overhauls and reduced Block Hours
in 2009 compared to 2008. Managements cost reduction
initiatives, such as the use of spare parts from retired
747-200
aircraft rather than incurring line maintenance expenses also
reduced 2009 expenses. Heavy maintenance events and engine
overhauls in 2009 and 2008 are listed in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase/
|
Events
|
|
2009
|
|
2008
|
|
(Decrease)
|
|
747-200 C
Checks
|
|
|
4
|
|
|
|
7
|
|
|
|
(3
|
)
|
747-400 C
Checks
|
|
|
13
|
|
|
|
4
|
|
|
|
9
|
|
747-400 D
Checks
|
|
|
4
|
|
|
|
4
|
|
|
|
|
|
CF6-50 engine overhauls
|
|
|
|
|
|
|
21
|
|
|
|
(21
|
)
|
CF6-80 engine overhauls
|
|
|
24
|
|
|
|
24
|
|
|
|
|
|
During 2009, we experienced an increase in the unit cost of
heavy maintenance checks and engine overhauls supporting our
747-400
aircraft compared to the same period in 2008.
Aircraft rent decreased $6.0 million, or 3.8%,
primarily due to a $2.9 million decrease in re-accommodated
air costs, a $1.5 million decrease in spare engine rent
expense due to fewer engines on lease as a result of lower
flying activity and a $1.6 million decrease related to the
termination of a
747-200
operating lease in December 2008. Re-accommodated air costs are
incurred in situations whereby we utilize other airlines to
transport freight to airports that we do not serve directly.
Landing fees and other rent decreased $25.5 million,
or 39.2%, primarily due to the deconsolidation of Polar. We
generally do not incur landing fees for our ACMI business as the
cost is borne by the customer.
Depreciation decreased $5.9 million, or 15.1%,
primarily due to the retirement of certain of our older
747-200
aircraft in 2008.
Travel decreased $20.6 million, or 45.0%, primarily
due to a $13.1 million improvement related to
managements cost reduction initiatives, travel
reimbursements from ACMI customers and a $3.0 million
reduction related to lower Block Hours and a smaller
747-200
fleet. The
747-200
aircraft requires a three-person crew compared to a two-person
crew on
747-400
aircraft, resulting in lower crew travel costs. In addition,
travel improved by approximately $6.3 million due to the
deconsolidation of Polar, partially offset by a
$1.8 million increase related to the consolidation of GSS.
42
Ground handling and airport fees decreased
$45.7 million, or 73.8%, most of which was due to the
reduction in Scheduled Service Block Hours. A $47.3 million
reduction was due to the deconsolidation of Polar that was
partially offset by a $1.4 million increase related to the
consolidation of GSS.
Gain on disposal of aircraft resulted from the sale of
aircraft tail number N920FT and the sale of seven retired
engines in 2009. Gain on disposal of aircraft in 2008 was the
result of the disposal of aircraft tail number N527FT, which was
damaged and subsequently scrapped (except for engines and other
valuable rotable parts) after we reached a settlement with our
insurer.
Special charge in 2009 represents an impairment charge of
$8.2 million, related to the write-down of the
747-200
fleet, including related engines, rotable inventory, expendable
parts and other equipment to their estimated fair values during
the fourth quarter. Special charge in 2008 represents an
impairment charge of $91.2 million, related to the
write-down of the
747-200
fleet, including related engines, rotable inventory, expendable
parts and other equipment to their estimated fair values during
the fourth quarter. In addition, during the fourth quarter of
2008, we incurred a special charge related to the termination of
one 747-200
aircraft operating lease of $2.0 million, a write-down of
excess expendable
747-200
inventory of $4.7 million, employee termination costs of
$0.8 million and the termination of two maintenance
contracts for
747-200
engines of $14.5 million. See Note 5 to our Financial
Statements for further information.
Other operating expenses decreased $17.2 million, or
18.7%, primarily related to a $6.3 million reduction in AMC
commission expenses related to reduced AMC Charter revenue, a
$5.5 million reduction in the use of contractors and a
$3.6 million reduction in freight costs. These expense
reductions, among others, are the result of executing our cost
reduction initiatives. Partially offsetting these decreases was
a non-recurring $1.8 million benefit from reduced interest
regarding a settlement with the IRS on an employment tax
examination in 2008. In addition, $5.8 million of the
decrease was due to the deconsolidation of Polar, which was
offset by a $1.3 million increase related to the
consolidation of GSS.
Non-operating
Expenses / (Income)
Our 2009 Non-operating Expenses / (Income) reflect the
deconsolidation of Polar following the Commencement Date in 2008
and the consolidation of GSS since April 8, 2009. The
Non-operating Expenses / (Income) line items impacted
are discussed below. The following table compares our
non-operating expenses in (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase/
|
|
Percent
|
|
|
|
|
2009
|
|
2008
|
|
(Decrease)
|
|
Change
|
|
|
|
Non-operating Expenses / (Income)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
(3,014
|
)
|
|
$
|
(12,778
|
)
|
|
$
|
(9,764
|
)
|
|
|
(76.4
|
)%
|
|
|
|
|
Interest expense
|
|
|
44,731
|
|
|
|
49,986
|
|
|
|
(5,255
|
)
|
|
|
(10.5
|
)%
|
|
|
|
|
Capitalized interest
|
|
|
(12,215
|
)
|
|
|
(11,282
|
)
|
|
|
933
|
|
|
|
8.3
|
%
|
|
|
|
|
Gain on early extinguishment of debt
|
|
|
(2,713
|
)
|
|
|
|
|
|
|
2,713
|
|
|
|
|
|
|
|
|
|
Gain on consolidation of subsidiary
|
|
|
(113
|
)
|
|
|
|
|
|
|
113
|
|
|
|
|
|
|
|
|
|
Gain on issuance of stock
|
|
|
|
|
|
|
(153,579
|
)
|
|
|
(153,579
|
)
|
|
|
|
|
|
|
|
|
Other expense (income), net
|
|
|
(765
|
)
|
|
|
5,285
|
|
|
|
(6,050
|
)
|
|
|
(114.5
|
)%
|
|
|
|
|
Interest income decreased $9.8 million, or 76.4%,
primarily due to a reduction in the effective yield on cash and
cash equivalents as global interest rates dropped in 2009.
Interest expense decreased $5.3 million, or 10.5%,
due to reductions in debt balances of higher-rate debt through
principal payments, partially offset by additional borrowings
under our pre-delivery deposit financing facility on five of our
twelve
747-8F
orders. In November 2009, the pre-delivery deposit financing
facility was reduced from five aircraft to three and the amount
outstanding for two aircraft was repaid (see Note 9 to our
Financial Statements). Both the pre-delivery deposit financing
facility and term loans used to finance two of our
747-400
aircraft have variable interest rates that are currently lower
than the rates prevailing in 2008. Long- and short-term debt and
capital leases averaged approximately $635.1 million in
2009 compared to approximately $527.5 million in 2008.
43
Capitalized interest increased $0.9 million, or
8.3%, primarily due to the offsetting effects of net additional
borrowings under our pre-delivery deposit financing facility on
our 747-8F
aircraft order and lower variable interest rates during 2009.
Gain on early extinguishment of debt of $2.7 million
resulted from the prepayment of two term loans at a discount in
March 2009.
Gain on consolidation of subsidiary of $0.1 million
represents the gain recorded on the conversion of GSS from the
equity method of accounting to consolidation (see Note 4 to
our Financial Statements).
Gain on issuance of subsidiary stock in 2008 was the
recognition of a $153.6 million gain on the Commencement
Date due to the issuance of shares to DHL when they acquired a
49% equity interest and a 25% voting interest in Polar in
exchange for proceeds of $176.9 million (see Note 3 to
our Financial Statements for further information).
Other expense (income), net changed by $6.1 million,
primarily due to a 2009 improvement in realized and unrealized
gains / losses on foreign currency transactions versus
2008. This was due to the prevalence of a stronger
U.S. dollar in the most recent year compared to less
favorable exchange rates that prevailed in 2008. The 2009
improvement also benefited from a gain of $0.5 million from
The Primary Reserve Fund (see Note 12 to our Financial
Statements) and the receipt of a $0.4 million non-recurring
insurance recovery. We do not hedge our foreign currency
exposure.
Income taxes. Our effective income tax rates
were 38.6% in 2009 and 45.5% in 2008. Our effective rates differ
from the statutory rate primarily due to the non-deductibility
of certain items for tax purposes. The 2008 rate exceeded the
U.S. federal rate primarily due to a valuation allowance of
6.7% related to losses incurred primarily by Polar prior to its
deconsolidation.
Segments
The following table compares the Direct Contribution for our
reportable segments (see Note 13 to our Financial
Statements for the reconciliation to Operating income) in (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase/
|
|
|
Percent
|
|
|
|
2009
|
|
|
2008
|
|
|
(Decrease)
|
|
|
Change
|
|
|
Direct Contribution:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ACMI
|
|
$
|
90,686
|
|
|
$
|
75,072
|
|
|
$
|
15,614
|
|
|
|
20.8
|
%
|
AMC Charter
|
|
|
93,884
|
|
|
|
106,772
|
|
|
|
(12,888
|
)
|
|
|
(12.1
|
)%
|
Commercial Charter
|
|
|
39,790
|
|
|
|
9,727
|
|
|
|
30,063
|
|
|
|
309.1
|
%
|
Dry Leasing
|
|
|
1,051
|
|
|
|
14,167
|
|
|
|
(13,116
|
)
|
|
|
(92.6
|
)%
|
Scheduled Service
|
|
|
|
|
|
|
(49,627
|
)
|
|
|
49,627
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Direct Contribution
|
|
$
|
225,411
|
|
|
$
|
156,111
|
|
|
$
|
69,300
|
|
|
|
44.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unallocated income and expenses
|
|
$
|
96,878
|
|
|
$
|
102,842
|
|
|
$
|
(5,964
|
)
|
|
|
(5.8
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ACMI
Segment
Direct Contribution relating to the ACMI segment increased
$15.6 million, or 20.8%. During 2009, there was an average
of 16.9
747-400
aircraft and 0.2
747-200
aircraft supporting ACMI compared to an average of 12.0
747-400
aircraft and 2.2
747-200
aircraft supporting ACMI in 2008. ACMI segment Direct
Contribution increased due to additional
747-400
aircraft supporting Express Network ACMI after the Commencement
Date in 2008 and an increase in unflown Block Hours, which
improved our ACMI Revenue per Block Hour, partially offset by
increased heavy maintenance expense on
747-400
aircraft during 2009. Also impacting the ACMI segment were the
results of operations for three
747-400
aircraft from the consolidation of GSS (beginning in 2009),
which were previously reported in the Dry Leasing segment.
44
AMC
Charter Segment
Direct Contribution relating to the AMC Charter segment
decreased $12.9 million, or 12.1%, primarily due to
decreases in revenue driven by reductions in the
pegged price for fuel, an increase in ownership
costs from the deployment of
747-400
aircraft into this segment as well as an increase in crew costs
as we reduced the
747-200
fleet size and retrained our crew. Partially offsetting these
items was an increase in Block Hours during 2009. The decrease
in AMC revenue was partially offset by an improvement in
maintenance expense on the
747-200
aircraft allocated to the AMC segment and a reduction in
aircraft fuel expense as fuel prices decreased.
Commercial
Charter Segment
Direct Contribution relating to the Commercial Charter segment
increased $30.1 million, or 309.1%, primarily due to an
increase in Commercial Charter activity and strong Yields in the
fourth quarter of 2009, an improvement in maintenance expense on
the 747-200
aircraft allocated to this segment and a reduction in aircraft
fuel expense as fuel price decreases outpaced reductions in
Revenue per Block Hour. Offsetting these improvements was an
increase in crew costs as we reduced the
747-200
fleet size and retrained our crew. Commercial Charter pricing
had weakened during the first three quarters of 2009 compared
with 2008. However, during the fourth quarter of 2009, the
increase in demand for freight out of Asia coupled with lower
global freighter capacity drove Commercial Charter rates higher.
We were also able to maximize our Yields with the deployment of
747-400
aircraft in place of
747-200
aircraft, which gave us a competitive advantage over other cargo
airlines. In addition, we began regular
747-400
Commercial Charter service to and from South America in the
fourth quarter of 2008, which contributed to our 2009 results.
Dry
Leasing Segment
Direct Contribution relating to the Dry Leasing segment
decreased $13.1 million, or 92.6%, primarily due to the
consolidation of GSS and decreases in our
747-200 Dry
Leases. Beginning in 2009, upon the consolidation of GSS, three
747-400
aircraft that GSS Wet Leases to a customer and the associated
Direct Contribution that was previously reported in Dry Leasing
are now included in ACMI. In 2009, we leased six spare engines
that previously were used on retired
747-200
aircraft. During 2009, we had an average of 0.8
747-400
aircraft and no
747-200
aircraft on Dry Lease compared to an average of 3.0
747-400
aircraft and 1.1
747-200
aircraft on Dry Lease to third parties during 2008. We
experienced customer defaults on three Dry Leased
747-200
aircraft in the first half of 2008 as the two customers leasing
these aircraft filed for protection under local insolvency laws.
The returned aircraft have been either parked or sold.
Scheduled
Service Segment
Direct Contribution relating to the Scheduled Service segment
ceased after the Commencement Date in 2008 and the Direct
Contribution related to the aircraft supporting Polar is now
reflected in ACMI.
Unallocated
income and expenses
Unallocated income and expenses decreased $6.0 million, or
5.8%, primarily due to the receipt of a $10.0 million
one-time fee for the effective early termination of an ACMI
contract for two aircraft provided to DHL.
Liquidity
and Capital Resources
As of December 31, 2010, we had cash and cash equivalents
of $588.9 million, compared to $613.7 million as of
December 31, 2009, a decrease of $24.8 million, or
4.0%. The decrease was driven by net cash used for investing
activities of $162.0 million and net cash used for
financing activities of $143.4 million, partially offset by
cash provided by operating activities of $280.5 million.
45
Significant liquidity events during 2010 were as follows:
Long-term investments. In February, we
purchased $100.1 million of debt securities as a long-term
investment classified as
held-to-maturity
securities based on our estimate of the long-term returns of
buying these securities at a discount. It is our intention to
hold these securities to maturity. The debt securities represent
investments in Pass-Through Trust Certificates related to
EETCs issued by Atlas in 1998, 1999 and 2000 (see Note 12
to our Financial Statements).
Pre-delivery deposits. In April, we entered
into a second pre-delivery deposit financing facility, which
provides us with $125.6 million of additional financing on
a revolving basis for nine of the twelve
747-8F
aircraft we have on order. In addition, in September, we repaid
$119.5 million of pre-delivery deposit borrowings
outstanding under our initial pre-delivery deposit financing
facility, by utilizing our strong short-term cash position to
realize a net cash savings over the remaining six-month term of
the borrowings.
Aircraft financings. In July, we entered into
a term loan commitment that provides us with $120.3 million
of long-term financing for the first
747-8F
aircraft that will be delivered in 2011 (the 2010 Term
Loan). The proceeds of the term loan will be used to make
the final payments on the aircraft and to pay the amounts
outstanding under our pre-delivery deposit financing facility
related to that aircraft.
In August, we borrowed $8.1 million under a term loan
facility secured by a mortgage on the
757-200SF we
purchased in March.
In December, we purchased the ownership participant interest in
a leveraged lease for aircraft N499MC, which we had classified
as an operating lease, for $21.5 million. As a result of
the purchase, we consolidated the trust related to the leveraged
lease and recorded the fair value of the aircraft and the
related debt on our Financial Statements (see Note 6 to our
Financial Statements for further discussion).
Operating Activities. Net cash provided by
operating activities in 2010 was $280.5 million, compared
to $214.6 million in 2009. The increase was primarily due
to an increase in net income, excluding non-cash items and
accrued liabilities.
Investing Activities. Net cash used for
investing activities was $162.0 million in 2010, consisting
primarily of capital expenditures of $70.0 million, which
included capitalized interest on our
747-8F
aircraft order of $16.4 million, $100.1 million of
investments in debt and equity securities and $21.5 million
for the purchase of the owner participant interest in aircraft
tail number N499MC, offset by the proceeds from the sale of
engines of $5.2 million and proceeds from short-term
investments of $24.4 million. Our capital expenditures
during 2010 were funded through working capital, although we
financed $8.1 million of the acquisition cost for the
757-200SF
purchased in March 2010 and $12.5 million of pre-delivery
deposits made during the period. Net cash used for investing
activities was $0.7 million in 2009, consisting primarily
of capital expenditures of $30.2 million, which included
capitalized interest on our Boeing
747-8F
aircraft order of $21.2 million, partially offset by
$11.6 million related to the consolidation of GSS, the
redesignation of short-term investments to cash of
$13.3 million and proceeds from the sale of aircraft of
$3.5 million. All of our capital expenditures in 2009 were
funded through working capital.
Financing Activities. Net cash used for
financing activities was $143.4 million in 2010, which
primarily reflects $164.1 million of payments on long-term
debt obligations, which included the $119.5 million
repayment of our pre-delivery deposit financing facilities and
$5.9 million in purchases of treasury stock to settle
employment taxes on the vesting of restricted stock for
management partially offset by $20.6 million in proceeds
from loans and proceeds from stock option exercises of
$5.2 million. Net cash used for financing activities was
$2.5 million in 2009, which primarily reflects
$112.6 million in proceeds from the issuance of stock
partially offset by $110.0 million of payments on long-term
debt obligations.
We consider cash on hand and short-term investments, our
pre-delivery deposit financing facility and net cash generated
from operations to be sufficient to meet our debt and lease
obligations and to fund expected capital expenditures during
2011. Capital expenditures in 2011 are expected to be
approximately $73.1 million, which excludes
pre-delivery
deposits and capitalized interest. Our
747-8F
aircraft pre-delivery deposit requirements have currently been
suspended until we agree on a new schedule with Boeing.
46
We may access external sources of capital from time to time
depending on our cash requirements, assessments of current and
anticipated market conditions, and the after-tax cost of
capital. To that end, we filed a shelf registration statement
with the SEC in 2009 that will enable us to sell up to
$500 million of debt
and/or
equity securities over the subsequent three years, depending on
market conditions, our capital needs and other factors.
Approximately $112.6 million of net proceeds from our stock
offering in the fourth quarter of 2009 has been drawn down from
this shelf registration statement. Our access to capital markets
can be adversely impacted by prevailing economic conditions and
by financial, business and other factors, some of which are
beyond our control. Additionally, our borrowing costs are
affected by market conditions and may be adversely impacted by a
tightening in credit markets.
Our U.S. cash income tax payments in 2011 will be
commensurate with our earnings and limitations on the
utilization of net operating losses. As a result of recently
enacted tax legislation, we can deduct 100% of the cost of
qualified assets placed in service during 2011 and 50% of the
cost of qualified assets placed in service during 2012. Based
upon a delivery schedule proposed by Boeing, we expect a
substantial portion of our order for new
747-8F
aircraft will qualify for this bonus tax depreciation, which
would reduce or eliminate our U.S. federal income tax
payments in 2011 and 2012. Furthermore, two of our foreign
branch operations and one subsidiary are subject to income tax
in Hong Kong, but we believe that these branches will have
sufficient tax loss carryforwards to offset projected taxable
income in 2010. We expect to pay no significant foreign income
taxes in any other jurisdictions.
Contractual
Obligations
The table below provides details of our balances available under
credit agreements and future cash contractual obligations as of
December 31, 2010 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available
|
|
|
Total
|
|
|
Payments Due by Period
|
|
|
|
Credit
|
|
|
Obligations
|
|
|
2011
|
|
|
2012 - 2013
|
|
|
2014 - 2015
|
|
|
Thereafter
|
|
|
Debt(1)
|
|
$
|
245.9
|
|
|
$
|
544.2
|
|
|
$
|
101.3
|
|
|
$
|
145.3
|
|
|
$
|
95.0
|
|
|
$
|
202.6
|
|
Interest on debt(2)
|
|
|
|
|
|
|
168.1
|
|
|
|
33.5
|
|
|
|
56.0
|
|
|
|
40.0
|
|
|
|
38.6
|
|
Aircraft operating leases
|
|
|
|
|
|
|
1,651.9
|
|
|
|
133.5
|
|
|
|
266.3
|
|
|
|
262.6
|
|
|
|
989.5
|
|
Other operating leases
|
|
|
|
|
|
|
8.7
|
|
|
|
5.4
|
|
|
|
2.8
|
|
|
|
0.5
|
|
|
|
|
|
Aircraft purchase commitments(3)
|
|
|
|
|
|
|
1,710.2
|
|
|
|
950.7
|
|
|
|
759.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Contractual Obligations
|
|
$
|
245.9
|
|
|
$
|
4,083.1
|
|
|
$
|
1,224.4
|
|
|
$
|
1,229.9
|
|
|
$
|
398.1
|
|
|
$
|
1,230.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Debt reflects gross amounts (see Note 9 to our Financial
Statements for a discussion of the related unamortized discount). |
|
(2) |
|
Amount represents interest on fixed rate and floating debt at
December 31, 2010. |
|
(3) |
|
Includes estimated contractual escalations and required option
payments net of purchase credits with respect to aircraft and
spare engine commitments. |
We maintain a non-current liability for unrecognized income tax
benefits. To date, we have not resolved the ultimate cash
settlement of this liability. As a result, we are 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 Transactions
In three separate transactions in 1998, 1999 and 2000, we issued
enhanced equipment trust certificates, also known as EETCs.
These securities were issued to finance the acquisition of a
total of twelve
747-400F
aircraft. In the 1998 EETC transaction, $538.9 million of
EETCs were issued to finance five aircraft, one of which we then
owned, with the remaining four being leased by us pursuant to
leveraged leases. In the 1999 EETC transaction,
$543.6 million of EETCs were issued to finance five
aircraft, one of which we then owned,
47
with the remaining four being leased by us 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
sheets because such obligations previously constituted operating
leases. However, through the restructuring in 2004, we 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, 2009 and
2008.
Leveraged
Lease Structure
In a leveraged lease, the owner trustee is the owner of record
for the aircraft. Wells Fargo Bank Northwest, National
Association (Wells Fargo) serves as the owner
trustee with respect to the leveraged leases in each of our EETC
transactions. As the owner trustee of the aircraft, Wells Fargo
also serves as the lessor of the aircraft under the EETC lease
between the owner trustee and us. 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 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 seven EETC financed aircraft beneficially
owned by us, there is no leveraged lease structure or EETC
lease. We are 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 us.
Debt
In 2008, we entered into a $270.3 million pre-delivery
deposit financing facility with (the 2008 PDP
Facility), which is intended to fund a portion of our
pre-delivery deposit obligations in respect of the first five
aircraft to be delivered to us under our
747-8F
purchase agreement with Boeing. In 2009, concurrent with a
change in the
747-8F
aircraft delivery schedule, Boeing returned $62.9 million
representing the financed portion of the pre-delivery deposits
for two of our ordered
747-8F
aircraft and the proceeds were used to pay down the 2008 PDP
Facility. The size and availability under the 2008 PDP Facility
was reduced to reflect the removal of these two aircraft from
the facility and repayment of the monies advanced against these
two aircraft.
The facility is now comprised of three separate tranches and is
secured by certain of our rights in, and to, the purchase
agreement, but only to the extent related to the first three
aircraft scheduled to be delivered thereunder. In the case of a
continuing event of default by us, the lenders will have certain
rights to assume our position and accept delivery of the related
aircraft. Each tranche relating to each aircraft will become due
on the earlier of (a) the date the aircraft is delivered or
(b) up to nine months following the last day of the
scheduled delivery month, depending on the cause of the delivery
delay.
Funds available under the facility are subject to certain
up-front and commitment fees, and funds drawn under the facility
bear interest at LIBOR plus a margin. The facility is guaranteed
by AAWW and is subject to typical and customary events of
default.
In 2008, we entered into $58.4 million and
$41.6 million five-year term loan agreements, secured by
aircraft tail numbers N419MC and N429MC, both of which were
acquired on May 6, 2008. Funds available under the loan
agreements are subject to certain up-front and commitment fees,
and funds drawn under the
48
loan agreements will bear interest at LIBOR, plus a margin. The
loans are guaranteed by AAWW and are subject to typical and
customary events of default.
In 2010, we entered into a $125.6 million revolving
pre-delivery deposit financing facility (the 2010 PDP
Facility). The 2010 PDP Facility is intended to fund a
portion of our obligations to make pre-delivery deposits for the
latter nine of the
747-8F
aircraft currently on firm order and having delivery positions
in 2011 through 2013 (the PDP Aircraft). With this
transaction and the 2008 PDP Facility, we have arranged
pre-delivery deposit financing for all twelve of the aircraft
for which we are required to make pre-delivery deposits pursuant
to the Boeing
747-8F
Agreement. The obligations under both of the pre-delivery
deposit facilities are guaranteed by AAWW.
The 2010 PDP Facility is comprised of nine separate tranches,
each corresponding to one of the PDP Aircraft. It is structured
as a revolving credit facility under which we may have
outstanding a maximum of $125.6 million. It is secured by
certain of our rights in and to the Boeing
747-8F
Agreement and four General Electric CF6-80 engines owned by us.
In connection with entering into the 2010 PDP Facility, we have
agreed to pay customary commitment and other fees. Drawings made
under the 2010 PDP Facility will accrue interest, payable
monthly, at one-month LIBOR plus a fixed rate per annum. The
2010 PDP Facility contains customary covenants and events of
default. Upon the occurrence and during the continuance of an
event of default, the outstanding obligations under the 2010 PDP
Facility may be accelerated and become due and payable
immediately. In connection with the 2010 PDP Facility, the 2008
PDP Facility was amended such that both facilities are
cross-defaulted to and cross-collateralized with each other.
The aggregate availability under the 2010 PDP Facility will be
reduced to the lesser of $125.6 million and the sum of the
remaining scheduled draw downs. Each tranche of the 2010 PDP
Facility will mature on the earlier to occur of: (a) the
delivery date of the related PDP Aircraft and (b) up to
nine months after the last day of the scheduled delivery month
for the related PDP Aircraft. At maturity of each tranche, we
are required to pay principal in an amount equal to the drawings
made for the pre-delivery deposits for the related PDP Aircraft,
in addition to any accrued and unpaid interest thereon.
In 2010, we entered into the 2010 Term Loan in the amount of
$120.3 million for a period of twelve years. The 2010 Term
Loan, when drawn, will be secured by a mortgage on a future
747-8F
aircraft delivery. In connection with entering into the 2010
Term Loan, we have agreed to pay usual and customary commitment
and other fees. Drawings made under the 2010 Term Loan will
accrue interest at a fixed rate, payable quarterly. The 2010
Term Loan contains customary covenants and events of default.
Upon the occurrence and during the continuance of an event of
default, the 2010 Term Loan is cross-defaulted to our
pre-delivery deposit financing facilities.
In 2010, we entered into a term loan in the amount of
$8.1 million for a period of 50 months secured by a
mortgage on a
757-200SF
(aircraft tail number B-2808). In connection with entering into
the term loan, we have agreed to pay usual and customary
commitment and other fees. The balance outstanding under the
term loan will accrue interest at a fixed interest rate of 4.3%,
with principal and interest payable quarterly. The term loan
contains customary covenants and events of default. The term
loan is not cross-defaulted to any of our other debt facilities.
Off-Balance
Sheet Arrangements
Thirteen of our twenty-nine operating aircraft are under
operating leases (this excludes aircraft provided by CMI
customers). Five are 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 would
obligate us to absorb decreases in value or entitle 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 accounting for consolidations, because we
are not the primary beneficiary based on the fact that all fixed
price options were restructured to reflect a fair market value
49
purchase option. In addition, we reviewed the other eight Atlas
aircraft that are under operating leases but not financed
through a trust and determined that none of them would be
consolidated upon the application of accounting for
consolidations. Our maximum exposure under all operating leases
is the remaining lease payments, which amounts are reflected in
future lease commitments described in Note 10 to our
Financial Statements.
There were no changes in our off-balance sheet arrangements
during the fiscal year ended December 31, 2010.
Critical
Accounting Policies and Estimates
General
Discussion of Critical Accounting Policies and
Estimates
An appreciation of our critical accounting policies and
estimates is important to understand our financial results. Our
Financial Statements are prepared in conformity with accounting
principles generally accepted in the United States of America
(GAAP). Our critical policies require management to
make estimates and judgments that affect the amounts reported.
Actual results may significantly differ from those estimates.
The following is a brief description of our current critical
accounting policies involving significant management judgment:
Accounting
for Long-Lived Assets
We record our property and equipment at cost, and once assets
are placed in service, we depreciate them on a straight-line
basis over their estimated useful lives to their estimated
residual values over periods not to exceed forty years for
flight equipment (from date of original manufacture) and three
to five years for ground equipment.
Property under capital leases and related obligations are
recorded at the lesser of an amount equal to (a) the
present value of future minimum lease payments computed on the
basis of our incremental borrowing rate or, when known, the
interest rate implicit in the lease, or (b) the fair value
of the asset. Amortization of property under capital leases is
calculated on a straight-line basis over the lease term.
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 their carrying amount
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, revenue
generated, associated costs, 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 upon induction, based on our best estimate of the costs.
This method can result in expense volatility between quarterly
and annual periods, depending on the number of heavy maintenance
events performed. If we had chosen a different method, such as
the deferral method for heavy maintenance, maintenance and
repair expense would be capitalized and then amortized over the
lesser of Block Hours flown or time period before the next heavy
maintenance event resulting in a less variable expense between
reporting periods.
Income
Taxes
Deferred income taxes are recognized for the tax consequences of
reporting items in our income tax returns at different times
than the items are reflected in our financial statements. These
timing differences result in deferred tax assets and liabilities
that are calculated 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
50
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, if any, of the valuation allowance.
In addition, we establish tax reserves when we believe that
certain tax positions are subject to challenge and may not be
sustained on audit. These reserves are based on subjective
estimates and assumptions involving the relative filing
positions and the potential exposure from audits and litigation.
Business
Combinations and Intangible Assets
We account for business combinations using the purchase method.
Under the purchase method, we record net assets acquired and
liabilities assumed at their estimated fair value on the date of
acquisition. The determination of the fair value of the assets
acquired and liabilities assumed requires us to make estimates
and assumptions that affect our financial statements. Intangible
assets acquired in connection with business combinations that
have finite lives are amortized over their estimated useful
lives. The estimated useful lives are based on estimates of the
period during which the assets are expected to generate revenue.
Intangible assets with finite lives are tested for impairment
whenever events or changes in circumstances indicate that the
carrying amount of the assets may no longer be recoverable. If
an evaluation of the undiscounted future cash flows indicates
impairment, the asset is written down to its estimated fair
value, which is based on either its appraised value or its
discounted future cash flows.
Allowance
for Doubtful Accounts
Trade accounts receivable are recorded at the invoiced amount
and do not bear interest. We record an allowance for doubtful
accounts as our best estimate of the amount of probable credit
losses resulting from the inability or unwillingness of our
customers to make required payments. We review the allowance at
least monthly and charge off account balances when we determine
that it is probable that the receivable will not be recovered.
Legal and
Regulatory Matters
We are party to legal and regulatory proceedings with respect to
a variety of matters. We evaluate the likelihood of an
unfavorable outcome of these proceedings each quarter. Our
judgments are subjective and are based on the status of the
legal or regulatory proceedings, the merits of our defenses and
consultation with in-house and outside legal counsel. Due to the
inherent uncertainties of the legal and regulatory proceedings
in the multiple jurisdictions in which we operate, our judgments
may be different from the actual outcomes.
Recent
Accounting Pronouncements
In June 2009, the Financial Accounting Standards Board
(FASB) amended its accounting guidance on the
consolidation of variable interest entities (VIE).
Among other things, the new guidance requires a qualitative
rather than a quantitative assessment to determine the primary
beneficiary of a VIE based on whether the entity (1) has
the power to direct matters that most significantly impact the
activities of the VIE and (2) has the obligation to absorb
losses or the right to receive benefits of the VIE that could
potentially be significant to the VIE. In addition, the amended
guidance requires an ongoing reconsideration of the primary
beneficiary. The provisions of this new guidance were effective
as of the beginning of our 2010 fiscal year, and the adoption
did not have a material impact on our financial statements.
|
|
ITEM 7A.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
We currently do not hedge against foreign currency fluctuations,
aircraft fuel or 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 aircraft 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
51
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 and the Korean won.
Aircraft Fuel. Our results of operations are
affected by changes in the price and availability of aircraft
fuel. Market risk is estimated at a hypothetical 20% increase or
decrease in the 2010 average cost per gallon of fuel. Based on
actual 2010 fuel consumption for the Commercial Charter business
segment, such an increase would have resulted in an increase to
aircraft fuel expense of approximately $29.0 million in
2010. Our exposure to fuel risk decreased significantly, as a
result of DHL assuming the fuel risk for Polar beginning in late
2008. We will continue to have limited fuel risk on a portion of
our Commercial Charter business. In the AMC Charter Segment, the
contracted charter rates and fuel prices are established and
fixed by the AMC 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 the AMC. Therefore, we have limited
exposure to changes in fuel prices in the AMC Charter Segment.
ACMI does not create an aircraft fuel market risk, as the cost
of fuel is borne by the customer.
Variable Interest Rates. Our earnings are
affected by changes in interest rates due to the impact those
changes have on interest expense from variable rate debt
instruments and on interest income generated from our cash and
investment balances. As of December 31, 2010, approximately
$117.0 million of our debt at face value had variable
interest rates. If interest rates would have increased or
decreased by a hypothetical 20% in the underlying rate as of
December 31, 2010, our annual interest expense would have
changed in 2010 by approximately $0.8 million.
Fixed Rate Debt. On December 31, 2010, we
had approximately $370.2 million of fixed rate long-term
debt. If interest rates were 20% lower than the stated rate, the
fair value of this debt would have been $20.5 million
higher as of December 31, 2010.
52
|
|
ITEM 8.
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
|
53
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 accompanying index present fairly, in all material respects,
the financial position of Atlas Air Worldwide Holdings, Inc. and
its subsidiaries at December 31, 2010 and 2009, and the
results of their operations and their cash flows for each of the
three years in the period ended December 31, 2010 in
conformity with accounting principles generally accepted in the
United States of America. In addition, in our opinion, the
financial statement schedule appearing under Item 15(a) 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, 2010,
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 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 audits 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
audits 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 audits also
included performing such other procedures as we considered
necessary in the circumstances. We believe that our audits
provide a reasonable basis for our opinions.
As discussed in the notes to the consolidated financial
statements, the Company changed the manner in which it accounts
for business combinations in 2009.
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 14, 2011
54
ATLAS AIR
WORLDWIDE HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands, except share data)
|
|
|
ASSETS
|
Current Assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
588,852
|
|
|
$
|
613,740
|
|
Short-term investments
|
|
|
6,211
|
|
|
|
22,598
|
|
Accounts receivable, net of allowance of $1,900 and $2,412,
respectively
|
|
|
78,334
|
|
|
|
58,530
|
|
Prepaid maintenance
|
|
|
26,102
|
|
|
|
30,848
|
|
Deferred taxes
|
|
|
3,721
|
|
|
|
6,689
|
|
Prepaid expenses and other current assets
|
|
|
24,212
|
|
|
|
24,608
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
727,432
|
|
|
|
757,013
|
|
Property and Equipment
|
|
|
|
|
|
|
|
|
Flight equipment
|
|
|
766,681
|
|
|
|
677,006
|
|
Ground equipment
|
|
|
29,124
|
|
|
|
26,107
|
|
Less: accumulated depreciation
|
|
|
(138,851
|
)
|
|
|
(110,001
|
)
|
Purchase deposits for flight equipment
|
|
|
336,969
|
|
|
|
296,658
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
993,923
|
|
|
|
889,770
|
|
Other Assets
|
|
|
|
|
|
|
|
|
Long-term investments and accrued interest
|
|
|
127,094
|
|
|
|
18,980
|
|
Deposits and other assets
|
|
|
45,026
|
|
|
|
38,460
|
|
Intangible assets, net
|
|
|
42,627
|
|
|
|
36,650
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
1,936,102
|
|
|
$
|
1,740,873
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND EQUITY
|
Current Liabilities
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
22,954
|
|
|
$
|
20,810
|
|
Accrued liabilities
|
|
|
149,892
|
|
|
|
107,907
|
|
Current portion of long-term debt
|
|
|
96,197
|
|
|
|
38,830
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
269,043
|
|
|
|
167,547
|
|
Other Liabilities
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
391,036
|
|
|
|
526,680
|
|
Deferred taxes
|
|
|
103,150
|
|
|
|
74,501
|
|
Other liabilities
|
|
|
122,783
|
|
|
|
83,388
|
|
|
|
|
|
|
|
|
|
|
Total other liabilities
|
|
|
616,969
|
|
|
|
684,569
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
Equity
|
|
|
|
|
|
|
|
|
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; 26,955,923 and 26,593,450 shares issued,
25,937,014 and 25,700,765, shares outstanding (net of treasury
stock), at December 31, 2010 and 2009, respectively
|
|
|
270
|
|
|
|
266
|
|
Additional
paid-in-capital
|
|
|
505,297
|
|
|
|
481,074
|
|
Treasury stock, at cost; 1,018,909 and 892,685 shares,
respectively
|
|
|
(32,248
|
)
|
|
|
(26,394
|
)
|
Accumulated other comprehensive income
|
|
|
458
|
|
|
|
471
|
|
Retained earnings
|
|
|
572,666
|
|
|
|
430,856
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
1,046,443
|
|
|
|
886,273
|
|
Noncontrolling interest
|
|
|
3,647
|
|
|
|
2,484
|
|
|
|
|
|
|
|
|
|
|
Total equity
|
|
$
|
1,050,090
|
|
|
$
|
888,757
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Equity
|
|
$
|
1,936,102
|
|
|
$
|
1,740,873
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Consolidated Financial Statements
55
ATLAS AIR
WORLDWIDE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For The Years Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands, except per share data)
|
|
|
Operating Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
ACMI
|
|
$
|
543,853
|
|
|
$
|
482,231
|
|
|
$
|
358,234
|
|
AMC charter
|
|
|
388,994
|
|
|
|
328,990
|
|
|
|
425,814
|
|
Commercial charter
|
|
|
384,440
|
|
|
|
215,127
|
|
|
|
127,325
|
|
Dry leasing
|
|
|
7,178
|
|
|
|
12,799
|
|
|
|
48,770
|
|
Scheduled service
|
|
|
|
|
|
|
|
|
|
|
645,283
|
|
Other
|
|
|
13,309
|
|
|
|
22,399
|
|
|
|
2,056
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Operating Revenue
|
|
$
|
1,337,774
|
|
|
$
|
1,061,546
|
|
|
$
|
1,607,482
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Aircraft fuel
|
|
|
300,229
|
|
|
|
201,207
|
|
|
|
677,544
|
|
Salaries, wages and benefits
|
|
|
238,169
|
|
|
|
215,660
|
|
|
|
221,765
|
|
Maintenance, materials and repairs
|
|
|
174,029
|
|
|
|
147,758
|
|
|
|
171,396
|
|
Aircraft rent
|
|
|
154,646
|
|
|
|
151,080
|
|
|
|
157,063
|
|
Landing fees and other rent
|
|
|
48,700
|
|
|
|
39,552
|
|
|
|
65,033
|
|
Depreciation and amortization
|
|
|
34,353
|
|
|
|
33,074
|
|
|
|
38,946
|
|
Travel
|
|
|
34,338
|
|
|
|
25,235
|
|
|
|
45,842
|
|
Ground handling and airport fees
|
|
|
25,115
|
|
|
|
16,212
|
|
|
|
61,927
|
|
Gain on disposal of aircraft
|
|
|
(3,601
|
)
|
|
|
(953
|
)
|
|
|
(2,726
|
)
|
Special charge
|
|
|
|
|
|
|
8,216
|
|
|
|
91,167
|
|
Other
|
|
|
103,910
|
|
|
|
74,498
|
|
|
|
91,672
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Operating Expenses
|
|
|
1,109,888
|
|
|
|
911,539
|
|
|
|
1,619,629
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income / (Loss)
|
|
|
227,886
|
|
|
|
150,007
|
|
|
|
(12,147
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-operating Expenses / (Income)
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
(19,663
|
)
|
|
|
(3,014
|
)
|
|
|
(12,778
|
)
|
Interest expense
|
|
|
40,034
|
|
|
|
44,731
|
|
|
|
49,986
|
|
Capitalized interest
|
|
|
(16,373
|
)
|
|
|
(12,215
|
)
|
|
|
(11,282
|
)
|
Gain on early extinguishment of debt
|
|
|
|
|
|
|
(2,713
|
)
|
|
|
|
|
Gain on consolidation of subsidiary
|
|
|
|
|
|
|
(113
|
)
|
|
|
|
|
Gain on issuance of stock
|
|
|
|
|
|
|
|
|
|
|
(153,579
|
)
|
Other (income) expense, net
|
|
|
(9,222
|
)
|
|
|
(765
|
)
|
|
|
5,285
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Non-operating Expenses / (Income)
|
|
|
(5,224
|
)
|
|
|
25,911
|
|
|
|
(122,368
|
)
|
Income before income taxes
|
|
|
233,110
|
|
|
|
124,096
|
|
|
|
110,221
|
|
Income tax expense
|
|
|
90,154
|
|
|
|
47,940
|
|
|
|
50,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
|
142,956
|
|
|
|
76,156
|
|
|
|
60,021
|
|
Less: Net income / (loss) attributable to noncontrolling
interests
|
|
|
1,146
|
|
|
|
(1,620
|
)
|
|
|
(3,675
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income Attributable to Common Stockholders
|
|
$
|
141,810
|
|
|
$
|
77,776
|
|
|
$
|
63,696
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
5.50
|
|
|
$
|
3.59
|
|
|
$
|
2.98
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
5.44
|
|
|
$
|
3.56
|
|
|
$
|
2.97
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
25,781
|
|
|
|
21,652
|
|
|
|
21,361
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
26,088
|
|
|
|
21,818
|
|
|
|
21,431
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Consolidated Financial Statements
56
ATLAS AIR
WORLDWIDE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Operating Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income Attributable to Common Stockholders
|
|
$
|
141,810
|
|
|
$
|
77,776
|
|
|
$
|
63,696
|
|
Net income / (loss) attributable to noncontrolling interests
|
|
|
1,146
|
|
|
|
(1,620
|
)
|
|
|
(3,675
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
|
142,956
|
|
|
|
76,156
|
|
|
|
60,021
|
|
Adjustments to reconcile Net Income
|
|
|
|
|
|
|
|
|
|
|
|
|
to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization of intangible assets
|
|
|
34,353
|
|
|
|
33,074
|
|
|
|
38,946
|
|
Amortization of debt discount
|
|
|
5,372
|
|
|
|
6,375
|
|
|
|
7,266
|
|
Amortization of operating lease discount
|
|
|
2,337
|
|
|
|
2,339
|
|
|
|
1,838
|
|
Amortization of debt issuance costs
|
|
|
294
|
|
|
|
293
|
|
|
|
122
|
|
Accretion of debt securities discount
|
|
|
(7,998
|
)
|
|
|
(513
|
)
|
|
|
|
|
Provision for allowance for doubtful accounts
|
|
|
201
|
|
|
|
1,071
|
|
|
|
238
|
|
Loss (gain) on short-term investments
|
|
|
|
|
|
|
(535
|
)
|
|
|
1,547
|
|
Special charge
|
|
|
|
|
|
|
8,216
|
|
|
|
85,144
|
|
Gain on early extinguishment of debt
|
|
|
|
|
|
|
(2,713
|
)
|
|
|
|
|
Gain on consolidation of subsidiary
|
|
|
|
|
|
|
(113
|
)
|
|
|
|
|
Gain on issuance of subsidiary stock
|
|
|
|
|
|
|
|
|
|
|
(153,579
|
)
|
Gain on disposal of aircraft
|
|
|
(3,601
|
)
|
|
|
(953
|
)
|
|
|
(2,726
|
)
|
Deferred taxes
|
|
|
62,962
|
|
|
|
47,670
|
|
|
|
50,390
|
|
Stock-based compensation expense
|
|
|
14,065
|
|
|
|
11,390
|
|
|
|
7,952
|
|
Changes in:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(18,072
|
)
|
|
|
13,343
|
|
|
|
(15,196
|
)
|
Prepaids and other current assets
|
|
|
(4,182
|
)
|
|
|
13,208
|
|
|
|
10,319
|
|
Deposits and other assets
|
|
|
(8,176
|
)
|
|
|
(1,132
|
)
|
|
|
10,807
|
|
Accounts payable and accrued liabilities
|
|
|
60,032
|
|
|
|
7,397
|
|
|
|
22,229
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
280,543
|
|
|
|
214,573
|
|
|
|
125,318
|
|
Investing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(29,612
|
)
|
|
|
(30,188
|
)
|
|
|
(227,931
|
)
|
Purchase deposits for flight equipment
|
|
|
(40,390
|
)
|
|
|
(21,160
|
)
|
|
|
(257,287
|
)
|
Refund of pre-delivery deposits
|
|
|
|
|
|
|
62,858
|
|
|
|
|
|
Cash divested from deconsolidation of subsidiary
|
|
|
|
|
|
|
|
|
|
|
(52,060
|
)
|
Cash acquired from consolidation of subsidiary
|
|
|
|
|
|
|
11,612
|
|
|
|
|
|
Redesignation between short-term investments and cash
|
|
|
|
|
|
|
13,301
|
|
|
|
(14,685
|
)
|
Investment in debt securities
|
|
|
(100,090
|
)
|
|
|
(20,693
|
)
|
|
|
|
|
Purchase of owner participant interest
|
|
|
(21,475
|
)
|
|
|
|
|
|
|
|
|
Investment in short-term investments
|
|
|
|
|
|
|
(20,000
|
)
|
|
|
|
|
Proceeds from short-term investments
|
|
|
24,374
|
|
|
|
|
|
|
|
5,900
|
|
Proceeds from sale of aircraft
|
|
|
5,183
|
|
|
|
3,525
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used for investing activities
|
|
|
(162,010
|
)
|
|
|
(745
|
)
|
|
|
(546,063
|
)
|
Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from debt
|
|
|
20,636
|
|
|
|
|
|
|
|
316,658
|
|
Proceeds from common stock offering
|
|
|
|
|
|
|
112,623
|
|
|
|
|
|
Proceeds from refundable deposit
|
|
|
|
|
|
|
|
|
|
|
3,428
|
|
Proceeds from stock option exercises
|
|
|
5,197
|
|
|
|
215
|
|
|
|
|
|
Proceeds from investor stock sale
|
|
|
|
|
|
|
208
|
|
|
|
|
|
Purchase of treasury stock
|
|
|
(5,854
|
)
|
|
|
(385
|
)
|
|
|
(19,410
|
)
|
Excess tax benefit (expense) from stock-based compensation
expense
|
|
|
1,155
|
|
|
|
(107
|
)
|
|
|
1,269
|
|
Proceeds from issuance of subsidiary stock
|
|
|
|
|
|
|
|
|
|
|
78,902
|
|
Payment of debt issuance costs
|
|
|
(445
|
)
|
|
|
(4
|
)
|
|
|
(1,660
|
)
|
Payments of debt
|
|
|
(164,110
|
)
|
|
|
(110,023
|
)
|
|
|
(38,366
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by / (used) for financing activities
|
|
|
(143,421
|
)
|
|
|
2,527
|
|
|
|
340,821
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
(24,888
|
)
|
|
|
216,355
|
|
|
|
(79,924
|
)
|
Cash and cash equivalents at the beginning of period
|
|
|
613,740
|
|
|
|
397,385
|
|
|
|
477,309
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at the end of period
|
|
$
|
588,852
|
|
|
$
|
613,740
|
|
|
$
|
397,385
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Consolidated Financial Statements
57
ATLAS AIR
WORLDWIDE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Other
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
Common
|
|
|
Treasury
|
|
|
Paid-In
|
|
|
Comprehensive
|
|
|
Subscription
|
|
|
Retained
|
|
|
Stockholders
|
|
|
Noncontrolling
|
|
|
Total
|
|
|
|
Stock
|
|
|
Stock
|
|
|
Capital
|
|
|
Income
|
|
|
Receivable
|
|
|
Earnings
|
|
|
Equity
|
|
|
Interest
|
|
|
Equity
|
|
|
|
(In thousands, except share data)
|
|
|
Balance as of December 31, 2007
|
|
$
|
218
|
|
|
$
|
(6,599
|
)
|
|
$
|
341,537
|
|
|
$
|
1,750
|
|
|
$
|
(77,065
|
)
|
|
$
|
289,384
|
|
|
$
|
549,225
|
|
|
$
|
13,477
|
|
|
$
|
562,702
|
|
Net Income Attributable to Common Stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
63,696
|
|
|
|
63,696
|
|
|
|
(3,675
|
)
|
|
|
60,021
|
|
Other comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,486
|
)
|
|
|
|
|
|
|
|
|
|
|
(2,486
|
)
|
|
|
|
|
|
|
(2,486
|
)
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
61,210
|
|
|
|
|
|
|
|
57,535
|
|
Stock option and restricted stock compensation
|
|
|
|
|
|
|
|
|
|
|
7,952
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,952
|
|
|
|
|
|
|
|
7,952
|
|
Purchase of 710,645 shares of treasury stock
|
|
|
|
|
|
|
(19,410
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(19,410
|
)
|
|
|
|
|
|
|
(19,410
|
)
|
Exercise of 136,204 employee stock options
|
|
|
1
|
|
|
|
|
|
|
|
3,427
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,428
|
|
|
|
|
|
|
|
3,428
|
|
Issuance of 8,407 shares of restricted stock
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
1
|
|
Forfeiture of 8,375 shares of restricted stock
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
(1
|
)
|
Receivable from issuance of subsidiary stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
77,065
|
|
|
|
|
|
|
|
77,065
|
|
|
|
|
|
|
|
77,065
|
|
Deconsolidation of subsidiary
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,802
|
)
|
|
|
(9,802
|
)
|
Tax benefit on restricted stock and stock options
|
|
|
|
|
|
|
|
|
|
|
1,269
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,269
|
|
|
|
|
|
|
|
1,269
|
|
Tax valuation allowance and reserve reversal
|
|
|
|
|
|
|
|
|
|
|
1,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,000
|
|
|
|
|
|
|
|
1,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2008
|
|
$
|
219
|
|
|
$
|
(26,009
|
)
|
|
$
|
355,185
|
|
|
$
|
(736
|
)
|
|
$
|
|
|
|
$
|
353,080
|
|
|
$
|
681,739
|
|
|
$
|
|
|
|
$
|
681,739
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income Attributable to Common Stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
77,776
|
|
|
|
77,776
|
|
|
|
(1,620
|
)
|
|
|
76,156
|
|
Other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,207
|
|
|
|
|
|
|
|
|
|
|
|
1,207
|
|
|
|
276
|
|
|
|
1,483
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
78,983
|
|
|
|
|
|
|
|
77,639
|
|
Consolidation of subsidiary
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,828
|
|
|
|
3,828
|
|
Stock option and restricted stock compensation
|
|
|
|
|
|
|
|
|
|
|
11,390
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,390
|
|
|
|
|
|
|
|
11,390
|
|
Purchase of 21,806 shares of treasury stock
|
|
|
|
|
|
|
(385
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(385
|
)
|
|
|
|
|
|
|
(385
|
)
|
Exercise of 12,304 employee stock options
|
|
|
|
|
|
|
|
|
|
|
215
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
215
|
|
|
|
|
|
|
|
215
|
|
Issuance of 53,326 shares of restricted stock
|
|
|
1
|
|
|
|
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New stock issuance of 4,600,000 shares
|
|
|
46
|
|
|
|
|
|
|
|
112,577
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
112,623
|
|
|
|
|
|
|
|
112,623
|
|
Forfeiture of 4,900 shares of restricted stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reversal of prior year deferred tax
|
|
|
|
|
|
|
|
|
|
|
1,607
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,607
|
|
|
|
|
|
|
|
1,607
|
|
Tax expense on restricted stock and stock options
|
|
|
|
|
|
|
|
|
|
|
(107
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(107
|
)
|
|
|
|
|
|
|
(107
|
)
|
Proceeds from investor stock sale
|
|
|
|
|
|
|
|
|
|
|
208
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
208
|
|
|
|
|
|
|
|
208
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2009
|
|
$
|
266
|
|
|
$
|
(26,394
|
)
|
|
$
|
481,074
|
|
|
$
|
471
|
|
|
$
|
|
|
|
$
|
430,856
|
|
|
$
|
886,273
|
|
|
$
|
2,484
|
|
|
$
|
888,757
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income Attributable to Common Stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
141,810
|
|
|
|
141,810
|
|
|
|
1,146
|
|
|
|
142,956
|
|
Other comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13
|
)
|
|
|
|
|
|
|
|
|
|
|
(13
|
)
|
|
|
17
|
|
|
|
4
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
141,797
|
|
|
|
|
|
|
|
142,960
|
|
Stock option and restricted stock compensation
|
|
|
|
|
|
|
|
|
|
|
14,065
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,065
|
|
|
|
|
|
|
|
14,065
|
|
Purchase of 126,224 shares of treasury stock
|
|
|
|
|
|
|
(5,854
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,854
|
)
|
|
|
|
|
|
|
(5,854
|
)
|
Exercise of 160,037 employee stock options
|
|
|
2
|
|
|
|
|
|
|
|
5,195
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,197
|
|
|
|
|
|
|
|
5,197
|
|
Issuance of 202,436 shares of restricted stock
|
|
|
2
|
|
|
|
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reversal of prior year deferred tax
|
|
|
|
|
|
|
|
|
|
|
3,810
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,810
|
|
|
|
|
|
|
|
3,810
|
|
Tax benefit on restricted stock and stock options
|
|
|
|
|
|
|
|
|
|
|
1,155
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,155
|
|
|
|
|
|
|
|
1,155
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2010
|
|
$
|
270
|
|
|
$
|
(32,248
|
)
|
|
$
|
505,297
|
|
|
$
|
458
|
|
|
$
|
|
|
|
$
|
572,666
|
|
|
$
|
1,046,443
|
|
|
$
|
3,647
|
|
|
$
|
1,050,090
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Consolidated Financial Statements
58
ATLAS AIR
WORLDWIDE HOLDINGS, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
December 31,
2010
Our consolidated financial statements include the accounts of
the holding company Atlas Air Worldwide Holdings, Inc.
(AAWW) and its consolidated subsidiaries. AAWW is
the parent company of its principal operating subsidiary, Atlas
Air, Inc. (Atlas), and of Polar Air Cargo LLC
(Old Polar). In addition, AAWW is the parent company
of Titan Aviation Leasing Ltd., Titan Aviation Leasing
Limited Americas, Inc. and Titan Aviation (Hong
Kong) Limited (collectively referred to as Titan).
Prior to October 26, 2008, Polar Air Cargo Worldwide, Inc.
(Polar) was a consolidated subsidiary of AAWW. As a
result of the transactions described in Note 3, we
determined that AAWW was no longer the primary beneficiary of
Polar as of October 26, 2008 and we subsequently record our
share of Polars results under the equity method of
accounting. In addition, on April 8, 2009, we became the
primary beneficiary of Global Supply Systems Limited
(GSS) as further described in Note 4 and GSS
became a consolidated subsidiary. Prior to that date, we were
not the primary beneficiary, and we recorded our share of
GSSs results pursuant to the equity method of accounting.
Noncontrolling interest represents the interest not owned by us
and is recorded for consolidated entities in which we own less
than 100% of the interest. All significant intercompany accounts
and transactions have been eliminated. We account for
investments in entities under the equity method of accounting
when we hold between 20% and 50% ownership in the entity and
exercise significant influence or when we are not the primary
beneficiary of a variable interest entity. The terms
we, us, our, and the
Company mean AAWW and all entities included in its
consolidated financial statements.
We provide air cargo and outsourced aircraft operating solutions
throughout the world, serving Asia, the Middle East, Australia,
Europe, South America, Africa and North America through:
(i) contractual service arrangements, including contracts
through which we provide aircraft to customers and value-added
services, including crew, maintenance and insurance
(ACMI) as well as contracts through which we provide
crew, maintenance and insurance, with the customer providing the
aircraft (CMI); (ii) military charter services
(AMC Charter); (iii) seasonal, commercial and
ad-hoc charter services (Commercial Charter); and
(iv) dry leasing or
sub-leasing
of aircraft and engines (Dry Leasing or Dry
Lease). Prior to October 27, 2008, we offered
scheduled air cargo service (Scheduled Service).
Except for per share data, all dollar amounts are in thousands
unless otherwise noted.
|
|
2.
|
Summary
of Significant Accounting Policies
|
Use of
Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America (GAAP) requires us to make estimates and
judgments that affect the amounts reported in the Financial
Statements and the related disclosures. Actual results may
differ from those estimates. Important estimates include asset
lives, valuation allowances (including, but not limited to,
those related to receivables, expendable inventory and deferred
taxes), income tax accounting, self-insurance employee benefit
accruals and contingent liabilities.
Revenue
Recognition
We recognize revenue when an arrangement exists, services have
been rendered, the price is fixed and determinable and
collectibility is reasonably assured.
ACMI and CMI revenue are typically recognized as the actual
block hours are operated on behalf of a customer during a given
month, as defined contractually. The time interval between when
an aircraft departs the terminal until it arrives at the
destination terminal is defined as Block Hours. If a
customer flies below
59
ATLAS AIR
WORLDWIDE HOLDINGS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
the minimum contracted Block Hour guarantee, the contracted
minimum revenue amounts are recognized as revenue. We recognize
revenue for AMC and Commercial Charter upon flight departure. We
recognized revenue for Scheduled Service upon flight departure.
We lease flight equipment, which may include aircraft and
engines under operating leases, and record rental income on a
straight-line basis over the term of the lease. Rentals received
but unearned under the lease agreements are recorded in deferred
revenue and included in Accrued liabilities until earned. In
certain cases, leases provide for additional rentals based on
usage, which is recorded as revenue as it is earned under the
terms of the lease. The usage is calculated based on hourly
usage or cycles operated, depending on the lease agreement.
Usage is typically reported monthly by the lessee and the
resulting revenue is non-refundable.
The Company recognizes revenue for management and administrative
support services when the services are provided.
Concentration
of Credit Risk and Significant Customers
We are exposed to concentration of credit risk by our customers.
The following table summarizes our significant exposure to
Polar, the U.S. Military Airlift Mobility Command
(AMC) and the International Airline of United Arab
Emirates (Emirates). No other customer accounted for
10.0% or more of our Total Operating Revenues. We have not
experienced credit issues with any of these customers.
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue as a % of Total Operating Revenue
|
|
2010
|
|
2009
|
|
2008
|
|
AMC
|
|
|
29.1
|
%
|
|
|
31.0
|
%
|
|
|
26.5
|
%
|
Polar
|
|
|
14.7
|
%
|
|
|
18.5
|
%
|
|
|
3.2
|
%
|
Emirates
|
|
|
8.2
|
%
|
|
|
10.4
|
%
|
|
|
7.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue as a % of ACMI Revenue
|
|
2010
|
|
2009
|
|
2008
|
|
Polar
|
|
|
34.1
|
%
|
|
|
38.3
|
%
|
|
|
10.6
|
%
|
Emirates
|
|
|
20.2
|
%
|
|
|
30.9
|
%
|
|
|
34.9
|
%
|
|
|
|
|
|
|
|
|
|
Accounts Receivable as of December 31
|
|
2010
|
|
2009
|
|
AMC
|
|
$
|
8.2
|
|
|
$
|
13.5
|
|
Polar
|
|
$
|
8.0
|
|
|
$
|
2.9
|
|
Emirates
|
|
$
|
9.6
|
|
|
$
|
13.0
|
|
Issuance
of Stock by Subsidiaries
We record gains or losses on the issuance of shares of stock by
subsidiaries as Non-operating income.
Cash
and Cash Equivalents
Cash and cash equivalents include cash on hand, demand deposits
and other cash investments that are highly liquid in nature and
have original maturities of three months or less at acquisition.
Short-Term
Investments
Short-term investments are primarily comprised of certificates
of deposit, current portions of debt securities and money market
funds.
60
ATLAS AIR
WORLDWIDE HOLDINGS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Accounts
Receivable
We perform a monthly evaluation of our accounts receivable and
establish an allowance for doubtful accounts based on our best
estimate of probable credit losses resulting from the inability
or unwillingness of our customers to make required payments.
Account balances are charged off against the allowance when we
determine that it is probable that the receivable will not be
recovered.
Escrow
Deposits and Letters of Credit
We had $6.8 million at December 31, 2010 and
$6.2 million at December 31, 2009, for certain
deposits required in the normal course of business for various
items including, but not limited to, surety and customs bonds,
airfield privileges, judicial deposits, insurance and cash
pledged under standby letters of credit related to collateral.
These amounts are included in Deposits and other assets.
Long-term
Investments
Long-term investments consist of debt securities, including
accrued interest, for which management has the intent and
ability to hold to maturity which are classified as
held-to-maturity
and reported at amortized cost. Interest on debt securities and
accretion of discounts using the effective interest method are
included in Interest income in the consolidated statements of
operations.
Expendable
Parts
Expendable parts, materials and supplies for flight equipment
are carried at average acquisition costs and are included in
Prepaid expenses and other current assets. When used in
operations, they are charged to maintenance expense. Allowances
for excess and obsolescence for expendable 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. These allowances are based on management estimates,
which are subject to change as conditions in the business
evolve. The net book value of expendable parts inventory was
$22.0 million at December 31, 2010 and
$18.8 million at December 31, 2009. The reserve for
expendable obsolescence was $4.5 million at
December 31, 2010 and $2.8 million at
December 31, 2009.
Assets
Held for Sale
In 2009, three spare engines that were overhauled were listed
for sale by us and were accounted for as assets held for sale.
Depreciation on these engines ceased as of December 31,
2009. In 2010, we sold the three engines for
$4.1 million and recorded a gain of $3.1 million. The
aggregate carrying value of spare engines held for sale was zero
at December 31, 2010 and $1.0 million at
December 31, 2009, which was included within Prepaid
expenses and other current assets.
Property
and Equipment
We record property and equipment at cost and depreciate 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 747-200
aircraft range from 0.6 years to 1.5 years and for
747-400
aircraft, from 19.9 years to 29.4 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 our
incremental borrowing rate or, when known, the interest rate
implicit in the lease or (b) the fair value of the asset.
61
ATLAS AIR
WORLDWIDE HOLDINGS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Rotable parts are recorded in Property and equipment, net, and
are depreciated over the average remaining fleet lives and
written off when they are determined to be beyond economic
repair. The net book value of rotable parts inventory was
$55.9 million at December 31, 2010 and
$50.9 million at December 31, 2009.
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 if any modifications or improvements are
made to operating lease equipment. Substantially all property
and equipment is specifically pledged as collateral for our
indebtedness.
Capitalized
Interest on Pre-delivery Deposits
Interest on funds used to finance the acquisition of aircraft up
to the date the asset is ready for its intended use is
capitalized and included in the cost of the asset if the asset
is actively under construction. Included in capitalized interest
is the interest paid on the pre-delivery deposit borrowings
directly associated with the acquisition of aircraft. The
remainder of capitalized interest recorded on the acquisition of
aircraft is determined by taking the weighted average cost of
funds associated with our other debt and applying it against the
amounts paid as pre-delivery deposits. Pre-delivery deposits for
aircraft include capitalized interest of $45.0 million at
December 31, 2010 and $28.6 million at
December 31, 2009.
Measurement
of Impairment of Long-Lived Assets
We review long-lived assets for impairment when events or
changes in circumstances indicate that their carrying amount may
not be recoverable. When undiscounted cash flows estimated to be
generated for those assets are less than the carrying amount, we
record 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, we consider market trends, published values for similar
assets, recent transactions involving sales of similar assets
and/or
quotes from independent third party appraisers. In making these
determinations, we also use certain assumptions, including, but
not limited to, the estimated undiscounted future net cash flows
expected to be generated by the asset group, which are based on
management assumptions such as asset utilization, length of
service the asset will be used in our operations and estimated
residual values.
During 2009 and 2008, we recorded an impairment charge on
substantially all of our
747-200
aircraft, as well as the related engines, rotable inventory and
other equipment (see Note 5). We did not have an event that
would trigger an impairment analysis on our
747-400
fleet.
Off-Balance
Sheet Arrangements
A portion of our operating aircraft are owned or effectively
owned and leased through trusts established specifically to
purchase, finance and lease aircraft to us. We have not
consolidated any aircraft in the related trusts because we are
not the primary beneficiary. Our maximum exposure under these
operating leases is the remaining lease payments, which amounts
are reflected in future lease commitments more fully described
in Note 10.
Income
Taxes
Deferred income taxes are recognized for the tax consequences of
reporting items in our income tax returns at different times
than the items are reflected in our financial statements. These
timing differences result in deferred tax assets and liabilities
that are calculated 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
62
ATLAS AIR
WORLDWIDE HOLDINGS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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, if any, of the valuation allowance.
In addition, we establish tax reserves when we believe that
certain tax positions are subject to challenge and may not be
sustained on audit. These reserves are based on subjective
estimates and assumptions involving the relative filing
positions and the potential exposure from audits and litigation.
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 of amortization. Amortization of
debt issuance costs was $0.3 million in 2010,
$0.3 million in 2009 and $0.1 million in 2008, and was
included as a component of Interest expense.
Aircraft
Maintenance and Repair
Maintenance and repair costs for both owned and leased aircraft
are charged to expense upon induction.
Prepaid
Maintenance Deposits
Certain of our aircraft financing agreements require security
deposits to our finance providers to ensure that we perform
major maintenance as required. These are substantially
refundable to us and are, therefore, accounted for as deposits
and included in Prepaid maintenance and in Deposits and other
assets. Such amounts, including the long-term portion, were
$38.3 million at December 31, 2010 and
$37.2 million at December 31, 2009.
Foreign
Currency
Our 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.
Our largest exposure comes from the British pound and the Korean
won. We do not currently have a foreign currency hedging program
related to our foreign currency-denominated transactions. Gains
or losses resulting from foreign currency transactions are
included in Non-operating expenses.
Included in the consolidated statements of stockholders
equity was Other comprehensive income of zero, in 2010, Other
comprehensive income of $1.2 million, net of taxes of zero,
in 2009 and Other comprehensive loss of $2.5 million, net
of taxes of zero, in 2008. These items primarily relate to the
translation of foreign subsidiary financial statements into
U.S. dollars.
Stock-Based
Compensation
We have various stock-based compensation plans for certain
employees and outside directors, which are described more fully
in Note 15. We recognize compensation expense, net of
estimated forfeitures, on a straight-line basis over the vesting
period for each award based on the fair value on grant date. We
estimate grant date fair value for all option grants using the
Black-Scholes-Merton option pricing model. We estimate option
and restricted stock/unit forfeitures at the time of grant and
periodically revise those estimates in subsequent periods if
actual forfeitures differ from those estimates. As a result, we
record stock-based compensation expense only for those awards
that are expected to vest.
63
ATLAS AIR
WORLDWIDE HOLDINGS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Litigation
Accruals
We are party to certain legal and regulatory proceedings with
respect to a variety of matters. We evaluate the likelihood of
an unfavorable outcome of these proceedings under accounting
guidance for contingencies. These judgments are subjective based
on the status of the legal or regulatory proceedings, the merits
of our defenses and consultation with in-house and external
legal counsel. The actual outcomes of these proceedings may
differ materially from our judgments. Legal costs are accrued as
incurred and recorded in Other operating expenses.
Supplemental
Cash Flow Information
Cash interest paid to lenders is calculated on the face amount
of our various debt instruments based on the contractual
interest rates in effect during each payment period.
The amortization of debt discount shown as a reconciling item in
cash flows from operating activities is the difference between
interest expense and cash interest owed to lenders. This amount
arises from the amortization of the difference between the fair
value of our debt recorded on the balance sheet and the face
amount of debt payable to lenders when we applied fresh-start
accounting on July 27, 2004.
The following table summarizes interest and income taxes paid:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
2009
|
|
2008
|
|
Interest paid
|
|
$
|
34,200
|
|
|
$
|
39,395
|
|
|
$
|
41,091
|
|
Income taxes paid
|
|
$
|
29,075
|
|
|
$
|
143
|
|
|
$
|
1,300
|
|
|
|
3.
|
DHL
Investment and Polar
|
In 2007, DHL Network Operations (USA), Inc. (DHL), a
subsidiary of Deutsche Post AG (DP), acquired a 49%
equity interest and 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 2007. The remaining $75.0 million of the
purchase price was paid in 2008 in two equal installments (plus
interest). In 2008, AAWW received the first installment of the
purchase payment of $38.6 million, including interest of
$1.1 million. The final purchase payment of
$40.3 million, including interest of $2.8 million, was
also received in 2008. AAWW continues to hold the remaining 51%
equity interest in Polar with a 75% voting interest. In 2007,
DHL also provided Polar with a $30.0 million non-interest
bearing refundable deposit that was repaid by Polar in 2009. As
part of the transaction to issue shares in Polar to DHL, Old
Polar ground employees, crew, ground equipment, airline
operating certificate and flight authorities, among other
things, were transferred to Polar and Polars interest in
Old Polar was transferred to AAWW.
Concurrently with the investment, DHL and Polar entered into a
20-year
blocked space agreement (BSA), whereby Polar
provides air cargo capacity to DHL through Polars
Scheduled Service network for DHL Express services
(Express Network). The BSA was subsequently amended
and restated (the Amended BSA) in 2008 to include
two supplemental aircraft, with full Express Network service on
eight Polar aircraft beginning in 2008, (the DHL
Commencement Date). In addition to the BSA, Atlas entered
into a flight services agreement, whereby 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. Under the flight services agreement, Atlas provides
Polar with maintenance and insurance for the aircraft, with
flight crewing also to be furnished once the merger of the Polar
and Atlas crew forces has been completed. Under other separate
agreements, Atlas and Polar supply administrative, sales and
ground support services to one another. DP has guaranteed
DHLs (and Polars) obligations under the various
transaction agreements described above. AAWW has agreed to
indemnify DHL for and against various obligations of Polar and
its affiliates. Collectively, these agreements are referred to
herein as the DHL Agreements. The DHL Agreements
provide us with a
64
ATLAS AIR
WORLDWIDE HOLDINGS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
guaranteed revenue stream from
747-400
aircraft that have been dedicated to Polar for outsourced
airport-to-airport
wide-body cargo aircraft solutions for the benefit of DHL
(Express Network ACMI) and other customers
freight due to monthly minimum Block Hour guarantees over the
life of the agreements.
In 2008, DHL notified us that it would exercise its contractual
right to terminate the ACMI and related agreements covering the
two supplemental
747-400
aircraft noted above, effective March 28, 2009. Under the
terms of the agreements covering the two
747-400
aircraft, DHL was able to terminate the use of these aircraft in
2009 upon providing six months advanced notice and making two
installment payments of an early termination penalty totaling
$5.0 million for each aircraft. We received the final
payment in 2009 and recorded a $10.0 million one-time
termination penalty as Other revenue in the consolidated
statements of operations.
On the DHL Commencement Date, Polar commenced full flying for
DHLs trans-Pacific express network and DHL began to
provide financial support and also assumed the risks and rewards
of the operations of Polar. In addition to its trans-Pacific
routes, Polar is also flying between the Asia Pacific regions,
Middle East and Europe on behalf of DHL and other customers.
The Amended BSA established DHLs capacity purchase
commitments on Polar flights. DHL has the right to terminate the
20 year Amended BSA at the fifth, tenth and fifteenth
anniversaries of commencement of Express Network flying.
However, in the event of such a termination at the fifth
anniversary, DHL or Polar would be required to assume all six
747-400
freighter head leases which are subleased from Atlas and Old
Polar 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
747-400
freighter subleases for the remainder of the 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
sublease term, DHL is required to pay the lease obligations for
the remainder of the head lease and guarantee Polars
performance under the leases.
Initially, based on the various agreements entered into as a
result of the issuance of the investment to DHL, we reviewed the
structure and determined that a variable interest entity had
been created. We determined that we were the primary beneficiary
of the variable interest entity and, as a result, we would
continue to treat Polar as a consolidated subsidiary for
financial reporting purposes. However, during 2008, changes were
made to the various agreements entered into following DHLs
investment in Polar and to Polars operations, which became
effective upon the DHL Commencement Date. We reviewed our
investment in Polar and determined that, for accounting
purposes, a reconsideration event had occurred. We used both
qualitative and quantitative factors to determine that DHL was
the primary beneficiary of the variable interest entity
beginning on the DHL Commencement Date. This was primarily based
on the fact that we, who historically bore all direct costs of
operation, transferred the risk associated with those costs to
DHL. As a result of that determination, we deconsolidated Polar
as of October 27, 2008 from our financial statements. From
that date forward, we are reporting Polar under the equity
method of accounting. On October 26, 2008, Polar had cash
of $52.0 million, accounts receivable of
$86.1 million, total assets of $146.5 million, total
liabilities of $132.6 million and net equity of
$13.9 million.
Except for any liquidated damages that we could incur as
described above, we do not have any continuing financial
exposure to fund debt obligations or operating losses of Polar.
65
ATLAS AIR
WORLDWIDE HOLDINGS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
As a result of this transaction, we recorded a Gain on the
issuance of subsidiary stock of $153.6 million as income
upon the DHL Commencement Date. The Gain on issuance of
subsidiary stock is recorded as Non-operating income and is
calculated as follows (in millions):
|
|
|
|
|
Gross proceeds
|
|
$
|
176.9
|
|
Less: book value of net assets sold on June 27, 2007
|
|
|
(13.5
|
)
|
closing costs and related expenses
|
|
|
(9.8
|
)
|
|
|
|
|
|
Gain on issuance of subsidiary stock
|
|
$
|
153.6
|
|
|
|
|
|
|
The aggregate carrying value of the investment in Polar was
$5.3 million as of December 31, 2010 and
$5.4 million as of December 31, 2009 and was included
within Deposits and other assets.
Total revenue from Express Network ACMI and the two supplemental
ACMI agreements with Polar was $185.5 million in 2010,
$184.7 million in 2009, and $38.1 million for the
period of October 28, 2008 through December 31, 2008,
which was included in ACMI revenue. Total revenue from the
shared services agreement was $11.3 million in 2010,
$11.5 million in 2009 and $2.0 million for the period
of October 28, 2008 through December 31, 2008, which
was included in Other revenue. Accounts payable to Polar was
$2.9 million as of December 31, 2010 and
$5.1 million as of December 31, 2009, which were
included in Accounts payable. We incurred expenses under the
general sales and service agreement of $2.3 million in
2010, $1.7 million in 2009 and $0.1 million for the
period of October 28, 2008 through December 31, 2008,
which was included in Ground handling and airport fees.
We hold a 49% interest in GSS, a private company. Atlas dry
leases three
747-400
owned aircraft to GSS. The leases provide for payment of rent
and a provision for maintenance costs associated with the
aircraft. GSS provides ACMI services to British Airways Plc
(British Airways) using these three aircraft.
On April 8, 2009, certain members of management of GSS,
through an employee benefit trust, purchased shares of GSS from
a former stockholder. These shares, which were not and have
never been owned by us, represent a 51% controlling interest in
GSS. Based on the various agreements related to the transaction,
we reviewed our investment in GSS and determined that, for
accounting purposes, a reconsideration event had occurred. We
determined that GSS is a variable interest entity and that we
are the primary beneficiary of GSS for financial reporting
purposes. As a result of that determination, GSS became a
consolidated subsidiary of AAWW upon the closing of the
transaction. There was no consideration transferred from us in
this transaction.
We accounted for the consolidation of GSS as a step acquisition.
We recorded a gain of $0.1 million on the conversion from
the equity method of accounting to consolidation. The gain
represents the difference between the fair market value of the
net assets acquired and liabilities assumed and the book value
of our equity investment in GSS in 2009. In addition, we
recorded a noncontrolling interest of $3.8 million,
representing the fair market value of the 51% ownership interest
in GSS that we do not own.
In determining fair value for GSS in 2009, we calculated the
business enterprise value of GSS and the fair value of the
underlying assets acquired and liabilities assumed. The business
enterprise value of GSS was calculated using a weighted average
of two principal methods: the income approach (commonly referred
to as the discounted cash flow method) and the market approach.
We considered the cost approach but ultimately did not use this
approach as GSS has very few fixed assets. Under the income
approach, management used financial projections for GSS and a
weighted average cost of capital calculated from a peer group of
companies to develop the discounted cash flows. The financial
projections considered changes in the aircraft dry lease rates,
changes in the ACMI rate and type of aircraft provided to
British Airways. The market approach utilized ratios and
statistics available from the same group of peer companies used
to develop the weighted average cost of capital in the income
approach. The appropriate ratios were then applied on a
66
ATLAS AIR
WORLDWIDE HOLDINGS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
weighted average basis against trailing one-year historical,
three-year historical and projected earnings before interest and
taxes to arrive at the market approach valuation. The average of
the two methods produced a $7.5 million business enterprise
value of GSS.
The differential between the business enterprise value of GSS
and the net book value of the assets acquired and liabilities
assumed was identified as an intangible asset. GSS has one
primary relationship with British Airways and, as such, the
intangible was assigned to that customer relationship. The value
of the customer relationship was determined using the excess
earnings method, which relied on the net income margin,
estimated remaining useful life and discount rate. The various
inputs were used in a probability weighted cash flow model to
arrive at a $2.2 million fair value of the customer
relationship.
The following table summarizes the fair values of the assets
acquired and liabilities assumed for GSS on the date of the
reconsideration event:
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
11,612
|
|
Accounts receivable, net
|
|
|
241
|
|
Other current assets
|
|
|
714
|
|
Property, plant and equipment
|
|
|
34
|
|
Customer relationship
|
|
|
2,164
|
|
Loan to 51% shareholder
|
|
|
4,157
|
|
|
|
|
|
|
Total assets acquired
|
|
|
18,922
|
|
|
|
|
|
|
Accounts payable
|
|
|
767
|
|
Other current liabilities
|
|
|
1,354
|
|
Deferred revenue
|
|
|
8,704
|
|
Deferred income taxes
|
|
|
591
|
|
|
|
|
|
|
Total liabilities assumed
|
|
|
11,416
|
|
|
|
|
|
|
Net assets acquired
|
|
$
|
7,506
|
|
|
|
|
|
|
Prior to April 8, 2009, we accounted for GSS under the
equity method and reported the revenue from GSS as Dry leasing
revenue. The carrying value of the dry leased aircraft as of
December 31, 2008 was $163.8 million and the related
accumulated depreciation was $20.9 million. Total Dry
leasing revenue for these aircraft was $11.8 million for
the period of January 1 through April 7, 2009 and
$43.2 million for the year ended December 31, 2008.
We record impairment charges on long-lived assets used in
operations when events and circumstances (Triggering
Events) 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.
We determined that Triggering Events occurred in both 2009 and
2008, performed separate impairment tests and concluded that the
carrying value of our
747-200
fleet was no longer recoverable as of December 31, 2009 and
2008.
In determining the asset recoverability, management estimated
the undiscounted future net cash flows utilizing models that are
consistently used by us in making fleet and scheduling
decisions. We view the
747-200
fleet, as well as the related engines, rotable inventory and
other equipment as one asset group in developing our cash flow
models. In determining fair value, we considered the effects of
the current market environment, age of the assets, marketability
and excess capacity. In addition, some of the specific items
that management took into consideration were the impact of
excess aircraft in the market, the effect on aircraft and
67
ATLAS AIR
WORLDWIDE HOLDINGS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
engine values and the failure of several competitors in the
747-200
market during 2008, thereby reducing demand for the aircraft
type. Our estimate of fair value was not based on distressed
sales or forced liquidations and represents a Level 3
input, as defined in Note 12. Instead, it appropriately
considered the current market conditions in conjunction with
other indicators. The fair value for each of the aircraft
remaining in service was adjusted based on estimates of
maintenance status. For engines and airframes that are being
permanently parked, fair value was determined to be scrap value.
2009
Impairment
Triggering Events in 2009 resulted from the substantial drop in
global freight demand during 2009, excess capacity in the
747-200
freighter market and a revision to the delivery schedule for our
747-8F
aircraft, as well as the continuing decline in value of the
747-200
aircraft. Based on these factors, we made a decision in 2009 to
permanently park one
747-200
aircraft in late 2009 and one additional aircraft in 2010. We
recorded an impairment charge of $8.2 million to write down
the 747-200
fleet, as well as the related engines, rotable inventory and
other equipment to their estimated fair values. The remaining
747-200
aircraft are being depreciated over their adjusted remaining
useful lives, which are estimated to be less than two years.
2008
Impairment
Triggering Events in 2008 resulted from the weak revenue
environment due to a lack of a 2008 holiday peak season, lower
future revenue projections and excess capacity in the
747-200
market. Based on these factors, we made a decision in the fourth
quarter of 2008 to permanently park nine
747-200s and
reduce capacity. We permanently parked seven
747-200
aircraft in 2008 with two more parked in early 2009. We recorded
an impairment charge of $69.1 million to write down the
747-200
fleet, as well as the related engines, rotable inventory and
other equipment to their estimated fair values.
As part of these capacity reductions in 2008, we terminated
three capital leases by purchasing the
747-200
aircraft and engines from the lessors, thereby terminating the
lease obligations and return condition liabilities. The
aggregate purchase price for the three aircraft was
approximately $21.2 million. We determined that purchasing
the aircraft was a more cost effective approach as opposed to
returning the aircraft and paying return conditions. The
acquired aircraft were subsequently written down to fair value
and have been used for spare parts to support the remaining
747-200
fleet.
In addition, we incurred special charges related to the
termination of a
747-200
aircraft operating lease, a write down of excess expendable
747-200
inventory, employee termination costs and the termination of two
maintenance contracts for
747-200
engines. The following table summarizes the Special charge in
2008:
|
|
|
|
|
Fleet and inventory impairment
|
|
$
|
69,124
|
|
Contract termination
|
|
|
14,544
|
|
Net realizable value adjustments and excess inventory
|
|
|
4,663
|
|
Lease termination
|
|
|
2,030
|
|
Employee terminations
|
|
|
806
|
|
|
|
|
|
|
Special charge
|
|
$
|
91,167
|
|
|
|
|
|
|
|
|
6.
|
Property
and Equipment, net
|
Depreciation expense, including the amortization of capital
leases, related to property and equipment was $34.1 million
in 2010, $33.1 million in 2009 and $38.9 million in
2008.
On December 23, 2010, we purchased the owner participant
interest in aircraft tail number N499MC for $21.5 million
and consolidated the trust, which is the beneficial owner of the
aircraft. Previously, we leased
68
ATLAS AIR
WORLDWIDE HOLDINGS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
the aircraft under an operating lease. As a result of the
consolidation, we recorded the aircraft at its fair value of
$69.7 million, the debt at fair value of $59.8 million
and an intangible of $8.2 million representing the
difference between the fair value of the assets acquired and the
liabilities assumed, which will be amortized using the effective
interest method over the remaining eight-year term of the debt.
In 2009, we sold aircraft tail number N920 FT and seven engines
for $3.5 million and recorded a gain of approximately
$1.0 million.
In 2008, one of our
747-200
aircraft (tail number N527MC) sustained hull damage due to
improper shipper packaging of a load while on a short-term ACMI
contract. The plane landed safely but, as a result of this
incident, the airframe was damaged beyond economic repair. We
received a $5.9 million insurance settlement. Since the
settlement proceeds exceeded the net book value of the airframe
after salvaging certain rotable parts, we recorded a gain of
$2.7 million in 2008.
|
|
7.
|
Intangibles
Assets, Net
|
The following table presents our intangible assets, net as of
December 31:
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Fair value adjustment on operating leases
|
|
$
|
45,531
|
|
|
$
|
45,048
|
|
Lease intangible
|
|
|
8,166
|
|
|
|
|
|
Customer relationship
|
|
|
2,164
|
|
|
|
2,164
|
|
Less: accumulated amortization
|
|
|
(13,234
|
)
|
|
|
(10,562
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
42,627
|
|
|
$
|
36,650
|
|
|
|
|
|
|
|
|
|
|
Fair value adjustment on operating leases represents the
capitalized discount recorded to adjust leases of our
747-400
aircraft to fair market value with the application of
fresh-start accounting in 2004. The lease intangible resulted
from the acquisition of the owner participant interest in
aircraft N499MC (see Note 6). The customer relationship
intangible asset resulted from the consolidation of GSS in 2009
(see Note 4).
Amortization expense related to intangible assets amounted to
$2.7 million in 2010, $2.6 million in 2009 and
$1.8 million in 2008.
The estimated future amortization expense of intangible assets
as of December 31, 2010 is as follows:
|
|
|
|
|
2011
|
|
$
|
3,749
|
|
2012
|
|
|
3,724
|
|
2013
|
|
|
3,532
|
|
2014
|
|
|
3,327
|
|
2015
|
|
|
3,106
|
|
Thereafter
|
|
|
25,189
|
|
|
|
|
|
|
Total
|
|
$
|
42,627
|
|
|
|
|
|
|
69
ATLAS AIR
WORLDWIDE HOLDINGS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Accrued liabilities consisted of the following as of December 31:
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Maintenance
|
|
$
|
57,552
|
|
|
$
|
34,029
|
|
Salaries, wages and benefits
|
|
|
33,542
|
|
|
|
30,877
|
|
Aircraft fuel
|
|
|
17,710
|
|
|
|
12,656
|
|
Other
|
|
|
41,088
|
|
|
|
30,345
|
|
|
|
|
|
|
|
|
|
|
Accrued liabilities
|
|
$
|
149,892
|
|
|
$
|
107,907
|
|
|
|
|
|
|
|
|
|
|
Our debt obligations, as of December 31, were:
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
1998 EETCs
|
|
$
|
145,012
|
|
|
$
|
159,215
|
|
1999 EETCs
|
|
|
159,043
|
|
|
|
107,245
|
|
2000 EETCs
|
|
|
58,485
|
|
|
|
61,341
|
|
PDP financing
|
|
|
46,871
|
|
|
|
153,799
|
|
Term loans
|
|
|
77,822
|
|
|
|
83,910
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
|
487,233
|
|
|
|
565,510
|
|
Less current portion of debt
|
|
|
(96,197
|
)
|
|
|
(38,830
|
)
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
$
|
391,036
|
|
|
$
|
526,680
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2010 and 2009, we had $57.0 million
and $61.8 million, respectively, of unamortized discount
related to the fair market value adjustments recorded against
debt upon application of fresh-start accounting in 2004.
Description
of our Debt Obligations
Many of our financing instruments contain certain limitations on
our 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 our assets.
Leveraged
Lease Structure
In three separate transactions in 1998, 1999 and 2000, we issued
enhanced equipment trust certificates (EETCs) to
finance the acquisition of twelve
747-400F
aircraft, five of which are financed as leveraged leases. 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 our EETC
transactions. As the owner trustee of the aircraft, Wells Fargo
serves as the lessor of the aircraft under the EETC lease
between us 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.
70
ATLAS AIR
WORLDWIDE HOLDINGS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The equipment notes were generally issued in three series 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 seven EETC-financed aircraft that are
currently owned by us, there is no leveraged lease structure or
EETC lease. We are 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 us.
We 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
five 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 if we exceed certain financial targets and if
it is determined that the then fair market monthly rental for
the aircraft exceeds $0.8 million. We have not made any
AMLR payments and do not anticipate making any AMLR payments in
2011. We perform this test annually in the second quarter.
2000
EETCs
In 2000, we 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
747-400F
freighter aircraft. After the financing, we completed a
sale-leaseback transaction on both aircraft and issued a
guarantee to the owner participant of one of the aircraft. In
connection with this secured debt financing, we 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. As a result of
fresh-start accounting, we have a blended effective interest
rate of 11.31%. According to the terms of the equipment notes,
principal payments vary and are payable through 2021.
1999
EETCs
In 1999, we completed an offering of $543.6 million of
EETCs (the 1999 EETCs). The cash proceeds from the
1999 EETCs were used to finance five
747-400F
aircraft, two of which are leased by us pursuant to leveraged
leases and three of which are owned. On December 23, 2010,
we purchased the owner participant interest in the leveraged
lease for aircraft tail number N499MC and consolidated the
trust, which is the beneficial owner of the aircraft. We
recorded $59.8 million as the fair value of the debt
acquired (see Note 6). As of December 31, 2010, the
outstanding balance of the 1999 EETCs related to three owned
747-400F
aircraft (tail numbers N495MC, N496MC and N499MC). As of
December 31, 2009, the outstanding balance of the 1999
EETCs related to two owned
747-400F
aircraft (tail numbers N495MC and N496MC). In connection with
this secured debt financing, we 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, we have a blended effective interest
rate of 13.94%. According to the terms of the equipment notes,
principal payments vary and are payable monthly through 2020.
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ATLAS AIR
WORLDWIDE HOLDINGS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
1998
EETCs
In 1998, we completed an offering of $538.9 million of
EETCs (the 1998 EETCs). The cash proceeds from the
1998 EETCs were used to finance five
747-400F
aircraft, two of which are leased by us pursuant to leveraged
leases and three of which are owned. As of December 31,
2010 and 2009, the outstanding balance of the 1998 EETCs related
to three owned
747-400F
aircraft (tail numbers N491MC, N493MC and N494MC). In connection
with this secured debt financing, we 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 the restructuring of this aircraft debt, we
acquired aircraft N491MC and N493MC. As a result of fresh-start
accounting, we have 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.
PDP
Financing
In 2008, we entered into a $270.3 million pre-delivery
deposit financing facility (the 2008 PDP Facility),
which was intended to fund a portion of Atlas pre-delivery
deposit obligations in respect of the first five aircraft to be
delivered to us under its purchase agreement with The Boeing
Company (Boeing) providing for the purchase by us of
12 747-8F
aircraft (the Boeing
747-8F
Agreement).
The 2008 PDP Facility was comprised of five separate tranches
and is secured by certain of our rights in, and to, the Boeing
747-8F
Agreement, but only to the extent related to the first five
aircraft scheduled to be delivered thereunder (aircraft tail
numbers 856, 857, 858, 859 and 861). In the case of a continuing
event of default by us, the lenders will have certain rights to
assume our position and accept delivery of the related aircraft.
Each tranche relating to each aircraft will become due on the
earlier of (a) the date the aircraft is delivered or
(b) up to nine months following the last day of the
scheduled delivery month, depending on the cause of the delivery
delay.
In 2009, concurrent with a change in the
747-8F
aircraft delivery schedule (see Note 10), Boeing returned
$62.9 million representing the financed portion of the
pre-delivery deposits for two of our ordered
747-8F
aircraft and the proceeds were used to pay down the PDP
Financing Facility. The size and availability under the PDP
Financing Facility were reduced to reflect the removal of these
two aircraft from the facility and repayment of the monies
advanced against these two aircraft.
Funds available under the 2008 PDP Facility are subject to
commitment fees, and funds drawn under the facility bear
interest at LIBOR plus a margin and are paid monthly. The
weighted average interest rate under the PDP Financing Facility
was 2.13% in 2010 and 1.82% in 2009. The rate as of
December 31, 2010 and 2009 was 1.96% and 1.51%,
respectively. The PDP Financing Facility is guaranteed by AAWW
and is subject to typical and customary events of default. As of
December 31, 2010, we had outstanding borrowings of
$46.9 million under the 2008 PDP Facility, which were fully
drawn.
In 2010, we entered into a $125.6 million revolving
pre-delivery deposit financing facility (the 2010 PDP
Facility). The 2010 PDP Facility is intended to fund a
portion of our obligations to make pre-delivery deposits for the
latter nine of our
747-8F
aircraft order (the PDP Aircraft). With this
transaction and the 2008 PDP Facility, we have arranged
pre-delivery deposit financing for all 12 of the aircraft for
which we are required to make pre-delivery deposits pursuant to
the Boeing
747-8F
Agreement.
The 2010 PDP Facility is comprised of nine separate tranches,
each corresponding to one of the PDP Aircraft. It is structured
as a revolving credit facility under which we may have
outstanding a maximum of $125.6 million. It is secured by
certain of our rights in and to the Boeing
747-8F
Agreement and four General Electric CF6-80 engines owned by us.
In connection with entering into the 2010 PDP Facility, we have
agreed
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ATLAS AIR
WORLDWIDE HOLDINGS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
to pay customary commitment and other fees. Drawings made under
the 2010 PDP Facility will accrue interest, at a variable rate
based on LIBOR plus a margin. The 2010 PDP Facility contains
customary covenants, events of default and is guaranteed by
AAWW. Upon the occurrence and during the continuance of an event
of default, the outstanding obligations under the 2010 PDP
Facility may be accelerated and become due and payable
immediately. In connection with the 2010 PDP Facility, the 2008
PDP Facility was amended such that both facilities are
cross-defaulted to and cross-collateralized with each other.
The aggregate availability under the 2010 PDP Facility will be
reduced to the lesser of $125.6 million and the sum of the
remaining scheduled drawings. Each tranche of the 2010 PDP
Facility will mature on the earlier to occur of: (a) the
delivery date of the related PDP Aircraft and (b) up to
nine months after the last day of the scheduled delivery month
for the related PDP Aircraft. At maturity of each tranche, we
are required to pay principal in an amount equal to the drawings
made for the pre-delivery deposits for the related PDP Aircraft,
in addition to any accrued and unpaid interest thereon. The 2010
PDP Facility has unused availability of $125.6 million.
Term
Loans
In 2008, we entered into a $58.4 million, five-year term
loan agreement secured by aircraft tail number N419MC and a
$41.6 million, five-year term loan agreement secured by
aircraft tail number N429MC. Funds available under the loan
agreements are subject to certain up-front and commitment fees,
and funds drawn under the loan agreements bear interest at
LIBOR, plus a margin. Payment of principal and interest are paid
quarterly in arrears. The facilities are guaranteed by us and
are subject to typical and customary events of default. The
weighted average interest rate under these loans was 2.64% in
2010 and 3.23% in 2009. The interest rate was 2.55% as of
December 31, 2010 and 2.52% as of December 31, 2009.
The interest rate is based on LIBOR plus a margin.
In 2010, we entered into a term loan commitment in the amount of
$120.3 million for a period of twelve years (the 2010
Term Loan). The 2010 Term Loan, when drawn, will be
secured by a mortgage on a future
747-8F
aircraft delivery. In connection with entering into the 2010
Term Loan, we have agreed to pay usual and customary commitment
and other fees. Drawings made under the 2010 Term Loan will
accrue interest at a fixed rate, payable quarterly. The 2010
Term Loan contains customary covenants and events of default.
Upon the occurrence and during the continuance of an event of
default, the 2010 Term Loan is cross-defaulted to our
pre-delivery deposit payment financing facilities.
In 2010, we entered into a term loan in the amount of
$8.1 million for a period of 50 months secured by a
mortgage on a
757-200SF
(aircraft tail number B-2808). In connection with entering into
the term loan, we have agreed to pay usual and customary
commitment and other fees. The balance outstanding under the
term loan will accrue interest at a fixed interest rate of
4.33%, with principal and interest payable quarterly. The term
loan contains customary covenants and events of default. The
term loan is not cross-defaulted to any of our other debt
facilities.
Other
Debt
Other debt consisted of various aircraft related term loans,
which we prepaid in 2009 at a discount. As a result of this
prepayment, we recorded a gain on early extinguishment of debt
of $2.7 million, which was included in Non-operating
Expenses / (Income).
73
ATLAS AIR
WORLDWIDE HOLDINGS, INC.
NOTES TO