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.

Thank you, John, and hello, everyone. Our strong second quarter results are highlighted on slide six. On an adjusted basis, EBITDA totaled $243.7 million, with adjusted net income totaling $121.8 million. On a reported basis, net income totaled $107.1 million. Our adjusted earnings included an effective income tax rate of 22.4 percent. Moving to the top of slide seven, revenue totaled $990.4 million in the quarter. Higher airline operations segment revenue was primarily driven by an increase in flying and the average rate per block hour. Block hour volume growth primarily reflected our ability to increase aircraft utilization to serve strong customer demand, the strength of the international air freight markets, the ongoing reduction of available cargo capacity, and the disruption of global supply chains due to the pandemic. In addition, segment revenue benefited from the operation of the five freighters we reactivated throughout 2020, the four 747s and one 777, as well as improved charter flying for the U.S. military. Revenue in our dry leasing segment was relatively unchanged. Looking now at the bottom of the slide, segment contribution totaled $242.6 million in the second quarter. Airline operations segment performance improved significantly compared with the prior year that included exceptionally high commercial charter yields in April and May last year. Higher airline operations contribution during the period was primarily driven by the positive factors benefiting segment revenue I just noted, as well as lower heavy maintenance expense. In dry leasing, higher segment contribution was primarily due to lower interest expense related to the scheduled repayment of debt. Now turning to slide eight, our net leverage ratio declined another tick, finishing the quarter at 2.0 times, down a full turn from 3.0 times at the end of the second quarter of 2020. We ended the second quarter with cash, including cash equivalents, and restricted cash totaling $760.5 million. Our cash position at June 30th reflected cash used for investing and financing activities, partially offset by cash provided by operating activities. Net cash used for investing activities in the first half of 2021 was primarily for core capital expenditures, payments for flight equipment and modifications, including pre-delivery payments for 747-8 aircraft that we'll take next year, as well as spare engines, engine overhauls, and upgrade kits. Net cash used for financing activities during the six-month period primarily reflected debt payments, partially offset by proceeds from debt issuance. We continue to apply a disciplined approach to financing. As we've indicated before, this has resulted in the low weighted average coupon interest rate, which now stands at 2.95 percent. And the majority is secured by our aircraft assets, which have a value in excess of the related debt. We remain committed to a strong balance sheet, and we're taking actions to mitigate the impact of any continuation or worsening of the pandemic. as well as to position our company for continued success by managing costs, enhancing liquidity, and strategically allocating resources. Now I'd like to turn it back to John.

Thank you, Spencer. And moving to slide nine. We have great business momentum, delivered a very strong second quarter, and we feel very good about the third quarter. Our team continues to execute on our strategy and capitalize on the current air freight environment, while also positioning us well for the future. We're closer to completing a new joint collective bargaining agreement with our pilots, and we'll continue to take every precaution to protect our world-class team of employees and our operations to ensure that we can continue to serve our customers and transport essential goods around the world. At this point, operator, may we have the first question, please?

Thank you. Ladies and gentlemen, as a reminder to ask a question, you will need to press the start and the one key on your touch-tone telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. Now, first question coming from the line of Stephanie Moore with Truist. Your line is open.

Hi. Good morning. Thank you for the question, and congrats on a nice order.

Thank you, Stephanie.

I wanted to touch a bit on some of the locked-in charter agreements that have been put in place really over the last year and would love to get a sense of maybe what you're hearing from some of those customers that switched to a more dedicated offering. I think you've called out HP, for example, in the past. Maybe just some – I guess just really what you're hearing is their feedback. I mean, is this something where – You know, they're really understanding the benefits of working with a dedicated carrier. Have you been able to kind of sign on more of these longer-term charter agreements? We'd love to just get an update on that. Thank you.

Sure. Thanks, Stephanie. And I'll start. The feedback has been overwhelmingly positive. You know, I think customers appreciate the ability to take advantage of this committed capacity. They have assurances that their goods are going to get to where they need to be. In fact, if you reflect on some of our comments, not only are we entering into new agreements, but we're also extending existing agreements, which is indicative of their pleasure with the agreements and the fact that they're looking to renew. And so we feel really good about it. It's also important to note we're creating a new customer base here, too, with the likes of HP and others, where they typically had not committed to dedicated freighters and we see that as a trend that's renewing and hopefully expanding over time.

And maybe, Stephanie, Spencer, I'll just add a couple things there. As John said, you know, customers are enjoying the dedicated capacity that they now have. The vast majority of these agreements, you know, go into 2022 and 23. Several now go into 2024, and many of them are on some of the fastest-growing trade lanes that likely will not be operated by returning passenger aircraft. So it really gives the customer this dedicated capacity that they can count on. And then just lastly on this topic, during the second quarter, we extended two agreements with two of the big forwarders. One, we extended one year into 2023. and one we extended three years into 2024 now. We also, during the quarter, entered into two new arrangements with two big forwarders there as well. One goes to the end of this year, and one is for a couple of years going into 2023, all at very good rates.

Great. Well, I will leave it at that, and thank you for the color.

Thank you.

Our next question coming from the lineup, Bob Lavek with CJS Securities.

Good morning, and congratulations again on just excellent execution and a great quarter. Thanks, Bob. Sure. So, With Q2 and then guidance for Q3 EBITDA in excess of several prior peaks, probably all but last year, how has the business seasonality changed with your new contract? How should we think about seasonality going forward and how should we think about kind of the earnings power of the business going forward?

Yeah, you can see it's a great question. You can see that the seasonality is not as varied as it once was. Of course, there's still some seasonality. And the fourth quarter, you would expect, is always going to be the highest quarter given the holiday period. But you can see that the seasonality this year, looking at the second quarter of this year versus the third quarter, the outlook that we've provided, you can look and see there's not nearly as much variability. These long-term contracts are much more reliable and predictable than Of course, we still have about 5% of our business in the ad hoc charter spot market. And so, you know, that is somewhat dependent on what yields are doing. But the vast majority of the business now is much more locked in and there's less seasonality, less variability.

Got it. Okay, that's great. And then I guess as my follow-up, just wanted to ask also about what's the P&L impact of acquiring the planes that are coming off lease? It's pretty exciting, and it seems like it could be a pretty good use of capital for you, particularly given the strong cash flow that you have. So maybe just help us give us a sense of the P&L impact, and how many more after the eight do you have this opportunity to buy after the lease ends in your current fleet?

Sure, Bob. Spencer, so I guess I'll start by saying acquiring these aircraft really underscores our confidence in the global air freight market. We'll ensure that we have these committed aircraft to be able to serve customer needs, and it delivers very strong returns for Atlas in the years ahead. So what I can say there is that looking at the eight aircraft, The IRRs there are very strong for many years ahead. The payback period on these aircraft is only about two to three years, and we avoided having to incur some maintenance return conditions that we otherwise would have paid when returning the aircraft that would have been due to the lessors. So it is a... Again, very good IRR. It will be very good for our P&L going forward. And your other question was how many aircraft we still have remaining on lease, I think, right?

Yeah, with the opportunity to potentially buy them in, you know, as well, like you just did with these.

There are still about approximately, I think it's 11 aircraft that remain on lease, and those will be through 2025. So we still have opportunities there to either release, not release, acquire those aircraft. So we still have those opportunities coming up. Super.

All right. Thanks so much.

Thank you, Bob.

And our next question, coming from the lineup, Christopher Napolis with Toscana. Your line is open.

Hey, good morning, everyone, and thanks for taking my question. So, John or Spencer, could you give some more detail on what you're seeing with respect to the freighter supply demand balance as a whole, and then perhaps if there are any lanes that stick out? Just looking at some of the wide-body passenger schedules this morning that for, you know, flights originating in North America. It looks like for the second half, they're down around 12% versus the comparable period for 2019. So curious if you've seen any meaningful change in that dynamic versus when we last spoke in May. And then perhaps curious if you have any thoughts on Biden's plans to require flights vaccinations for all inbound international passenger travelers, which could probably help that greater dynamic for the second half as well. Thanks.

Sorry, John, you're on mute.

My apologies. Occupational hazard these days. Sorry about that. So I'll start, and then Spencer can provide some additional color. Well, we expect, and as I've been saying all along, the passenger carriers are going to have a tremendous appetite to bring as much capacity back into the market as soon as possible, and I applaud them on that. But what we're seeing here is it's much more gradual, and even at the end of you know, the period where we return back to pre-COVID levels of volume, we're anticipating, and some of the studies we see are anticipating that in terms of capacity, even when the volumes come back, the capacity will likely be 20% less than what it is today. So that's a factor to keep in mind and plays into, you know, air freight. In terms of available new capacity coming into the market, I'll say it's somewhat, gradual and slower. There are really no available production slots for wide-body freighters until late fourth quarter 2023, other than those that are already on the books, and many of those are going to some of the express operators that are more customers than competitors of ours. Some of the other available aircraft through conversions are longer lead times, so over the next couple of years at least you know we see the supply not keeping past with this significant demand I talked about some of the factors where the demand is coming back and once COVID subsides which we all hope is sooner than later there's just my view going to be tremendous appetite for manufacturing movement of goods raw materials and finished product to get moving again businesses are really interested in getting going again And we think that all favors air freight, particularly when you look at some of the other supply chain challenges of ocean that we mentioned. You know, so that dynamic is in play. Capacity is going to be tight. And we expect continued growth in air cargo, putting aside COVID demand, just, you know, general economic return of air freight to be 3% to 4% annually fueled by a strong global economy. once things get rolling again. With regard to your question on Biden's plans, you know, to require, you know, inbound immunization, yeah, I think that's another burden for the international passenger carriers. It is going to further subdue demand because I know there are strong feelings on people getting the vaccination or not or needing to cross those hurdles. In fact, what we're seeing, if you follow the news and some of the reports, Countries are reversing course and getting more restrictive now. Points in China, I read this morning, some pressure in Germany. It's almost taking two steps forward, one step back, or describe it how you will. So, yeah, we think that will contribute to international passenger travel being a bit slower than people forecasted, say, this time last year, for example.

Okay, and my follow-up. So it looks like yesterday the U.S. DOD reinstated some travel restrictions, but, you know, still around 89% of their installations have had their restrictions lifted. So if you could just give us an update on utilization trends for the U.S. DOD into third quarter. And then as a part B, I'm curious, I realize you're not a passenger airline, but you do have some commercial activities. I'm curious if you're seeing any slowdown in bookings related to the COVID cases and the Delta variant. Thanks.

So I'll start with the DOD and say that as we said in our remarks, we're seeing the U.S. military passenger movements to return to kind of pre-COVID and higher. We're still evaluating while the demand is still strong on the cargo side. You know, with the withdrawal of Afghanistan, we expect there to be continued movement and returning to pre-COVID levels, but just different kinds of flying. But cargo has not yet returned to the pre-COVID levels, but we expect it will moderate. I can't really comment on the passenger side. Our business, as you point out, is so different on the passenger side. that much of what we do is for the military, which I said is increasing, which leaves somewhat less capacity for other passenger travel other than pre-booked things like sports teams that we move. We're proud to move five of the NFL teams to their away games and things that are already under contract. So I can't really comment on the impact of this Delta variant and its impact.

It was just curious because there was something about Garth Brooks potentially canceling some concerts in the second half. And in the past, I think you have moved some kind of music and entertainment. So curious if anyone has locked in charter space and is now perhaps looking to move that into 2022.

Nothing of consequence, Chris.

Okay, great. Thank you.

Thank you.

And as a reminder, ladies and gentlemen, to ask a question, please press star one. Our next question coming from the line of Scott Group with Wolf Research, the line is open.

Hi, this is Jake on for Scott. Thanks for taking my question.

Hi, Jake. Hi, Jake.

So one more on guidance. It looks like it includes a $33 million sequential decline in maintenance expense from 2Q to 3Q, but earnings implied are pretty flat sequentially. So I understand there isn't as much seasonality as a tailwind right now, given the long-term chart contracts, but what are the offsets to the lower maintenance expense?

Let's see, Jake. Your question is with regard to maintenance expense Yes, maintenance expense we expect to be lower certainly than the second quarter. So you see that sequential benefit there. What are the offsets you are asking? I think charter yields may be a slight offset there as charter yields We're a bit higher on a sequential basis, but we'll see how that plays out. So that's a potential offset there.

And then we do have this fuel, Spencer, fuel in that equation.

Very little exposure on a net basis, I think, to fuel there. I think it's probably more of a yield story, Jake. Hopefully we're being conservative. Hopefully we're being conservative there. I think it's more of a yield story on the small portion of our business that has the ad hoc charter flying. Got it.

Yep, that makes sense. And then we all saw the release from the pilot union today. Can you give some thoughts around labor availability broadly? And Directionally, how should we be thinking about labor costs in 4Q following the arbitration?

Jake, I'll start. I'll be honest. We've been preparing for this earnings call, so I hadn't seen the labor press release. But, you know, as we said in our remarks, we're excited to get to the point where we're going to get our next JCBA. And, you know, as we said, there will be And a pilot increase, what we've described as a material pilot increase coming sooner than later. We're in the home stretch here. It's all up to the arbitrator in timing, which is right around the corner. And we believe we have just a tremendous value proposition for any pilot to come work for us. You see the diversity of our fleet, the type of flying we do, where we do it. Pilots can choose among different aircraft types and different networks, both domestically and internationally. and an increase in the current agreement is going to enhance our ability to recruit and retain. Now, having said all that, there's no question that pilot availability is an industry issue. It's not an Atlas issue. It's an industry issue. And when you had some of the majors and the legacy carriers and integrators say, Putting programs in place like early retirements when they were under significant financial pressure to cut costs and avoid furloughs. You had a lot of pilots come out of the market because of that. Coupled with now the return of starting with the domestic passenger travel and the expansion, significant expansion of what, you know, our colleagues in the industry of FedEx and UPS, you know, are growing and they're hiring. You know, all that places pressure on pilot availability, particularly near term when pilots elect to make a change, to go from an Atlas to another carrier or from another carrier to Atlas. All those dynamics are in play. What I've said before, it's not uncommon when larger airlines that have bigger contracts than ours are hiring that we lose pilots. That's, you know, just a fact of life. But when it's happening in an environment with big numbers, sure, that has an impact on us. But we believe we have a tremendous value proposition, and we will be a carrier of choice, especially with our new contract, and we're looking forward to doing that and having our pilots have this as a career destination. So to the extent the press release you're referencing said otherwise, I don't agree with it. To the extent it's consistent, I agree with it, and I'll look forward to reading it.

Thanks, everyone. Really appreciate the time here.

Thank you. Thanks, Jake.

Our next question coming from the line of Frank Galante with CFO Yolanda Salfin.

Great. Thank you very much for taking my questions. I wanted to ask a high-level question about capital allocation. between growth, return to capital, the shareholders, paying down debt, what are the priorities for the cash flows coming in? I'm particularly interested in walking through the thought process on that decision.

Sure. As we've said all along, we have a variety of priorities. Spencer mentioned paying down debt. is certainly one of them, and I think we've done a really solid job of doing that. We went down a full tick, as was reported. We're going to continue to do that, strengthen our balance sheet, make sure that we're able to endure any potential downturn. I'm not anticipating that's going to happen, but as we've been talking about, we're not through this pandemic yet, and we need to be sure we have the wherewithal to weather through the entire pandemic and then be positioned to grow the business. And for now, with regard to, you know, any kind of share buyback or anything like that, we're currently still under the restrictions of the CARES Act. But that's certainly on the list of options available to us when we get to that point that we're able to have that as a serious consideration. So we're focused on honestly making as much money as we can during this unprecedented period, keeping our head down in doing that, strengthening the balance sheet, continuing to manage through this pandemic, support our employees, and invest in the business and seek to maximize our shareholder value in the multiple forms that that may take.

Okay, that's helpful. And I guess following up on the balance sheet, given that we aren't through this pandemic and there's a number of kind of already pre-committed CapEx decisions with the four new build planes and then these eight planes that was announced this quarter, kind of on a, I guess, a larger scale, picture, what does a normalized debt level look like for Atlas, either from a debt to EBITDA or debt to total cap kind of positioning?

Spencer, I'll turn it over to you. I'm just going to give a high level, and that's a tough one, what's normalized. I think it depends on the time and place and where we are. There may be times where we're prepared for the right opportunity to take on some more debt, This has been a period of, you know, paying that debt down. It wasn't all that long ago that we were well north of four, pushing five. And, you know, we did that for the right reasons. We took on debt when we bought the Amazon aircraft, for example. And now we're in an environment where we could do a little bit of both, invest in the business as well as bring down our debt. So at a high level, I don't know that we can – provide anything that's normalized, but in terms of the ratio, Spencer, maybe you want to comment on that further. What's a comfortable place?

Yeah, Frank, our target generally has been somewhere between three and four times. We're obviously well below that, and that's a good place to be for a capital-intensive business. As John said, it is pretty situational. You know, we had an opportunity to acquire the last four Dash 8s that Boeing is producing. They're tremendous, tremendous aircraft. And we had an opportunity to acquire these 400s coming off lease. The 400s are generally on average about, you know, midlife. So they had still a good long kind of runway ahead of them. So we had some good opportunities, and we've taken those opportunities. So overall, we're below kind of where our target is, but again, as a capital-intensive business, we feel good about it. We think it's the right place for us to be. We used to hear from investors sometimes that our leverage ratio was a little too high, and so we've really been focusing on bringing that down, and we're pretty proud of where we've gotten to.

Yeah, and so I guess Apologies for kind of following up again, but with that context, if historically normalized was kind of three to four times, investors didn't like that level. I guess the real question is how much of that is already pre-committed.

It was higher than that when they were not happy with the leverage level. It was higher than that, and so I think they'd be more comfortable in that sort of range or below it where we are now.

Okay. Sorry, the point I was really trying to get to was how much of that has already been spoken for, right? If you look at what CapEx needs to go out and the debt that's associated with that, how much CapEx do you have to work with outside of that, what's already been accounted for?

Well, there are two parts to the net leverage ratio equation, right? The earnings is a part of it as well. And so we need to deliver, you know, good, strong earnings to keep that level where we'd like it to be. So that's a really important part of it. And then your question about how much sort of CapEx is already spoken for and how much we have available, I'm not entirely sure. how to answer that, but we feel comfortable with our leverage and we feel comfortable where it is and where it's going to be. We haven't provided an outlook beyond that at this point, so to comment on our CapEx spending beyond our outlook period I don't think would be appropriate today.

I will say, though, that

Yeah, I'll just add, you know, we're in a really fortunate position. We were able to pay. So the 4747-8s that we're taking delivery of next year, they have a pretty significant pre-delivery payment schedule. And so we have to make those payments this year. And we've been in a position where we did not need to finance those. We've been able to pay those in cash. So we've been doing that. We've been acquiring the aircraft that we talked about today, and we're in a great position to be able to do that. And our balance sheet is quite strong, which allows us to do that.

And if I could, if I could add to that, as I said in my remarks, you know, we strive to be very disciplined in our investments, particularly on aircraft. So what Spencer has been talking about are the aircraft for our operations, But we also have our Titan business that is continuing to focus on the market for opportunities for further investment. We did announce the two sail leaseback aircraft, the 767s, that will ultimately be converted. So as the evolution of the passenger business kind of continues to shake out and continue there are other opportunities in the marketplace for, you know, investments for converted candidates, for example. We're going to be watching that closely as well.

Great. Thank you very much.

Thank you.

And we have a follow-up question from Christopher Nathalos with CISCO Canada. Your line is open.

Hey, thanks for taking my call. So, Spencer, just remind us when the restrictions around PSP-1 laps ended. Part B, did you take any funds on PSP-2 or 3? And also, so your order book here, you have the eight aircraft that you're going to buy out at the end of the lease. You have the four factory orders. You know, should we think about CAPEX, returning to a high teens, low, you know, 20 percent level of revenue for 2022 and 2023? Thanks.

Thanks, Chris. As far as the CARES Act restrictions, so the restrictions with regard to not being able to pay dividends or repurchasing shares, Those expire at the end of September. We still have restrictions on executive compensation that go into 2022. And then we still have a loan portion related to, there was a grant portion and a loan portion. And so the loan portion is long-term. So we still have that outstanding and we'll need to consider that as we move forward. We did not take any funds after the initial allocation for cargo air carriers. Let's see, with regard to capital allocation, yes, we've been, you know, we're fortunate enough to acquire the four aircraft, December 7-8 next year, and we're acquiring these eight, but We're really not going to talk about our outlook beyond those at this point. We have no commitments, you know, beyond those at this point. We've told you the commitments that we have.

And then, you know, I'm just curious, how many aircraft can you realistically, you know, grow your fleet or order book over the next few years? Is 8 to 10 sort of the limit? And then how should we think about maintenance? expense as you bring that aircraft on, are there any sort of front checks?

When we bring aircraft in, is there any maintenance required? I think that's what you were asking, Chris, at the end.

Just curious, how many planes I'm curious if 8 to 10 is the limit, and then also on and prep these aircraft. I realize the four are from the factory, but whether there's any upfront maintenance costs that we should expect as you get ready to place those aircraft in service. Thanks.

Yeah. So... Again, it kind of goes to time and place. As you may recall, as you identified, we brought up 24 airplanes in a matter of 24 months when we brought on the Amazon aircraft, and that included acquiring them as well as converting them and then bringing them online, so a lot more work involved in that. There definitely are lead times. When you're growing, you want to be able to crew it, which is also another reason why we're looking forward to getting into our next collective bargaining agreement to make us even that much more attractive candidate. They're generally with used airplanes, there's generally speaking a maintenance requirement. The aircraft go through what's called a seat check, generally speaking, to bridge onto from where it was operating before onto your certificate. And those seat checks can range, you know, from 21 to, you know, 31 days, roughly speaking, depending on the age of the aircraft and and the type of sea check that's required. So when you're talking about used aircraft, there's that lead time. For new aircraft like the Dash 8s, there would not be. It'd come right online.

Yeah, and I'll just add to that that for the eight aircraft that we're acquiring, they're already in our existing fleet, so there's no maintenance requirement there. In fact, it's the opposite. As I mentioned before, there would be if we were continuing, if the lease was ending, we would have a maintenance condition kind of payment that would be due to the lessors at the end of the lease period. And because we are acquiring the aircraft, those will not be. So it's a cost avoidance, which is terrific. On the four new 747-8s, those are, you know, brand-new aircraft. And just the opposite, again, those aircraft come with kind of a sort of a maintenance honeymoon, as we've referred to it as. because they will not need maintenance for quite some time. And, you know, most things that could possibly go wrong with the aircraft are under warranty for a good period of time.

Thanks. If I could just squeeze in one more, and I think this is important for investors to hear, just how, you know, could you remind us how payload-sensitive Atlas today overall is relative to last year? And I know you've moved a lot of the charter business to multi-month or multi-year contracts, but what's the sort of the mix of consolidated block hours that move on sort of spot versus that are on contract? Thanks.

Sure, Chris. So when you look at our overall flying, about 60% to 65% of that flying is in our traditional kind of ACMI business. About 20% of that is now in these long-term charter arrangements. About 8% to 10% is with the U.S. military. About 5% is flying that we do around South America. And that leaves right around 5%, 6% in the ad hoc sort of spot charter market.

Okay, thank you.

Thank you.

and I'm not showing any further questions at this time. I would now like to send a call back over to Mr. John Dietrich for any closing remarks.

Great. Thank you, Operator, and thanks to all of you for your great questions. On behalf of all of us at Atlas, Spencer and I would like to thank you for your interest in Atlas Air Worldwide. We really appreciate you taking the time to be with us today. Of course, we hope you and your families continue to stay safe, and we look forward to speaking with you all again soon. Thanks so much.

Ladies and gentlemen, that's our conference for today. Thank you for your participation. You may now disconnect.