Atlas Air Worldwide Holdings

Ladies and gentlemen, thank you for standing by. And welcome to the Atlas Air Worldwide Holdings second quarter 2021 result conference call. At this time, all participants are on a listen-only mode. After the speaker's presentation, there will be a question and answer session. So as a question during the session, you will need to press the star, then the one key on your touch-tone telephone. Please be advised, this conference may be recorded. If you recall operating systems, please press star, then zero. I would now like to hand the conference over To the Atlas Air Management team, please go ahead.

Thank you, Olivia, and good morning, everyone. I'm Ed McGarvey, Treasurer for Atlas Air Worldwide. Welcome to our second quarter 2021 results conference call. Today's call will be hosted by John Dietrich, our Chief Executive Officer, and Spencer Schwartz, our Chief Financial Officer. Today's call is complemented by a slide presentation that can be viewed at atlasairworldwide.com under Presentations in the Investor Information section. As indicated on slide two, I'd like to remind you that our discussion about the company's performance today includes some forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements relate to future events and expectations, and they involve risks and uncertainties. Our actual results or actions may differ materially from those projected in any forward-looking statements. For information about risk factors related to our business, please refer to our 2020 Form 10-K as amended or supplemented by our subsequently filed SEC reports. Any references to non-GAAP measures are meant to provide meaningful insights and are reconciled with GAAP in today's press release and in the appendix that is attached to today's slides. During our question and answer period today, we'd like to ask participants to limit themselves and one follow-up question, so that we can accommodate as many participants as possible. After we've gone through the queue, we'd be happy to answer any additional questions as time permits. At this point, I'd like to draw your attention to slide three and turn the call over to John Dietrich.

Thanks, Ed, and hello, everyone. Welcome to our second quarter earnings call. I'd like to start by thanking all our employees and all the frontline responders for their continuing and tremendous efforts throughout this pandemic. At Atlas, safety is a core value and is always a top priority. With that commitment in mind, we continue to take extensive precautions to safeguard our employees and our operations to support our customers and safely transport the goods the world needs. This pandemic has really underscored the important role that Atlas plays in the global supply chain and in our customers' networks. It also highlights the significance of global air freight, which brings goods to market with unmatched speed and reliability. We've seen an acceleration of express and e-commerce growth, and in today's global economy, manufacturers and merchants are needing to quickly replenish inventories to meet growing consumer demand. That said, COVID-19 continues to cause disruptions to manufacturing. We're also seeing congestion and delays at many ocean ports worldwide. This congestion and the related delays are leading to ocean freight rates that are extremely elevated, and shippers are therefore increasingly choosing air freight to mitigate bottlenecks in their supply chains, and that's driving even more air freight demand. This all bodes well for global air freight volumes which are now exceeding pre-pandemic levels. Atlas' fleet and our global operating capabilities are unmatched in the industry. We're continuing to leverage the strength and flexibility of our business model to capitalize on current market conditions. And importantly, we're positioning the company well for the future. We're actively managing our fleet to profitably serve our customers with modern, efficient aircraft, And we take a very disciplined approach when making aircraft investment decisions. As announced in our press release today, between May and August, we acquired three of our existing 747-400 freighters that were previously on lease to us. In addition, we reached agreements with our lessors to purchase five of our other existing 747-400 freighters at the end of their lease terms in 2022. Acquiring these eight freighters underscores our confidence in these assets as well as in the global air freight market. By keeping these aircraft in our fleet, we're ensuring these capable freighters will be available to provide committed capacity to our customers with strong returns for Atlas in the years ahead. As the world's largest 747 freighter operator, the 747-400 is core to our business, and it complements our diverse fleet of 747-8s, triple sevens, seven six sevens, and seven three sevens, each of which plays a unique role in our customers' networks. Now turning to our second quarter results on slide four. We entered the second quarter with very high expectations, all of which were exceeded. On an adjusted basis, our earnings were among the best in our company's history. These positive results could only have been achieved by our entire team coming together to execute on our strategy. Our diverse and experienced team is second to none, and they pulled together to increase utilization on our aircraft and to deliver safe, high-quality service for our customers, despite a very challenging operating environment due to COVID. Our performance continued to benefit from operating the four 747 freighters and the 777 freighter we reintroduced to our fleet in 2020. This capacity, along with a tremendous team effort, contributed to our ability to enter into and extend long-term agreements with strategic customers, as well as capitalize on lucrative short-term opportunities in this strong global air freight market. As I mentioned earlier, our second quarter results reflected global air freight volumes that now exceed pre-pandemic levels and ongoing disruption of global supply chains due to the pandemic. In addition, the second quarter reflected improved passenger charter flying for the U.S. military and the continued reduction of international passenger belly cargo capacity. Partially offsetting these benefits were lower yields net of fuel compared with the exceptionally high yields we saw in April and May of 2020 during the early months of the pandemic. Equally important to the results we delivered is how we've delivered them. One of our core values at Atlas is corporate responsibility. And in June, we issued our second Environmental, Social, and Governance, or ESG report. This report is themed, Carrying for the World We Carry. And it captures our commitments to our people, communities, and the planet. And it also outlines our ESG strategy and goals. We invite you to read more about our ESG program and our progress in the report, which is available in the corporate responsibility section of our website. Turning for a moment to our pilot labor negotiations, we're pleased to report we've moved even closer to completing the new joint collective bargaining agreement with our pilots at Atlas Air and Southern Air. The union has now provided the company with their integrated seniority list. The scheduled arbitration on the open issues concluded in April, and both parties submitted their post-hearing briefs in early June. The arbitrator is now considering all the information presented, and we expect to receive his final and binding decision late in the third quarter. Now moving on to slide five. As I've been discussing, economic and supply chain conditions remain favorable for air cargo and for our dedicated freighters. Inventory levels remain low, the Purchasing Manager's Index, or PMI, readings have been positive, and congestion, long lead times, and elevated pricing continue to impact ocean freight, helping to further favor air freight. Demand also continues to exceed available supply, particularly on the international routes, as international travel stays subdued and related belly capacity remains out of the market. Despite some of the well-publicized improvement in domestic passenger traffic, the recovery of international passenger travel continues to be hampered by border closures and other travel restrictions due to continued COVID-19 challenges, especially with the rapidly spreading Delta variant. While the operating environment remains challenging due to the pandemic, the market dynamics we're seeing in the third quarter remain strong. As a result, We expect revenue of nearly $1 billion and adjusted EBITDA of approximately $250 million from flying more than 90,000 block hours in the third quarter. In addition, we expect adjusted net income to grow by approximately 50% with adjusted net income of $82.7 million in the third quarter of last year. Our third quarter outlook reflects the contribution of our long-term customer agreements that have favorable rates and guaranteed levels of flying, continued high levels of aircraft utilization driven by strong demand, and commercial charter yields that we expect to remain above typical seasonal levels. We also expect ongoing expenses driven by the pandemic, including premium pay for our pilots, as well as costs for continuing to provide a safe working environment for all our employees, and maintenance expense in the third quarter of approximately $100 million. For the full year, we expect aircraft maintenance expense to be lower than 2020, and we expect appreciation and amortization to be about $275 million. Core capital expenditures, which exclude aircraft and engine purchases, are projected to total approximately $105 to $115 million, mainly for parts and components for our fleet. Given the ongoing economic and market-related uncertainties, including COVID-19 and the unfortunate spread of the Delta variant, as well as various travel restrictions, low international passenger travel, and other factors, we are providing a third quarter outlook, but not providing a further outlook at this time. We will, however, look forward to keeping you updated as the year progresses. This is a good point for Spencer to provide more details on our second quarter results, and after Spencer's remarks, I'll have some additional comments, and then we'll be happy to take your questions.