Atlas Air Worldwide Holdings

Good day, ladies and gentlemen. Thank you for standing by, and welcome to the Atlas Air Worldwide Holding Inc. Fourth Quarter 2021 Results Conference Call. At this time, all participants are on the listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press the star, then the one key on your touch-tone telephone. Please be advised that today's conference may be recorded. If you require offer assistance, you may press star, then zero. I would like to turn the conference over to our Atlas Air speakers. Please go ahead.

Thank you, Livia, and good morning, everyone. I'm Ed McGarvey, Treasurer for Atlas Air Worldwide. Welcome to our fourth 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, we'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 to one principal question and one follow-up question so that we can accommodate as many participants as possible. After we've gone through the queue, we'll 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.

Thank you, Ed, and hello, everyone. Thanks for joining our fourth quarter earnings call. I'd like to start by thanking the entire Atlas team for their tremendous efforts in keeping our business moving forward, both in the air and on the ground, especially in this pandemic environment. 2021 was another outstanding year with excellent financial and operating performance. At Atlas, our greatest strength is our people, and without their professionalism and hard work, we wouldn't have been able to deliver these very strong results. With that in mind, we're very pleased to have achieved a long-term labor agreement with our pilots that recognizes their significant contributions to our company. Throughout 2021, we leveraged our world-class fleet and global operating capabilities to increase aircraft utilization and capitalize on strong demand for our services and aircraft to achieve higher air freight yields, and we continue to do so. As reported in our press release this morning, we've now placed all four of our new and incoming 747-8 freighters under long-term agreements. We've also enhanced numerous long-term contracts with our strategic and diversified customer base. We've deepened our relationships with valued customers, including Chinao, Siva Logistics, DV Shanker, DHL, DSV, FedEx, Flexport, Geotis, HP, Iceland Air, Inditex, Jazz, Kuninago, SF Group, and UPS, quite an impressive list. Consistent with our strategy, we not only secured these long-term agreements, but also reserved and allocated capacity to take advantage of very high yielding opportunities in the global spot charter market. This all contributed to Atlas delivering record block hours, record revenue, and record earnings in 2021. Before we review our fourth quarter results, I'd like to first share several milestones from our full-year record performance. We flew more than 360,000 block hours, exceeded the $4 billion revenue mark, delivered more than $1 billion of adjusted EBITDA, and generated over $550 million of adjusted net income. In addition to this strong financial performance, And as I mentioned, we reached a new joint collective bargaining agreement with our pilots in connection with Atlas Air's merger with Southern Air. We're very pleased to now have this long-term pilot agreement in place. It provides even more reasons for pilots to choose Atlas as their career destination. We've now effectively completed the merger with Southern, and we're operating under the single brand of Atlas and the Atlas Operating Certificate. With the strength, flexibility, and resiliency of our global business model, we delivered high-quality service to our customers despite a very challenging operating environment with persistent pandemic-related obstacles. The safety of our team and operations remains our top priority, and we're proud of the role we're playing in supporting the global supply chain and transporting essential goods around the world. I'd like to note that 2022 marks a significant milestone for Atlas, as it's our 30th year in business. Over these 30 years, we've built an industry-leading fleet, a broad array of service offerings, a diversified base of marquee customers, and the best team in the business. From a growth perspective, and as I noted, we're excited that we've placed all four of our new and incoming 747-8 freighters under long-term contracts. We'll operate one for Chinao, one for Inditex, and two for Kuninagel. As a reminder, we expect delivery of these aircraft between May and October of this year. We also look forward to the deliveries and placements of the four new 777 freighters we recently announced, for which there is very strong customer demand. We expect the first of these 777s to be delivered late in the fourth quarter of this year and three more throughout 2023. As previously announced, we also purchased six of our existing 747-400 freighters during 2021 that were formerly on lease to us. And we're purchasing another five of our other 747-400 freighters at the end of their existing leases during the course of this year. Acquiring these wide-body freighters underscores our confidence in the long-term demand for dedicated international air freight capacity, particularly in e-commerce and fast-growing global markets. such as Asia and South America. These investments are consistent with our long-term strategic growth plan and will provide customers with modern, environmentally efficient aircraft, especially from a fuel burn and noise perspective, which will drive strong returns for Atlas in the years ahead. Now turning to our outstanding fourth quarter results on slide four. Our revenue and adjusted earnings grew to new records. Our fourth quarter results reflected higher yields and increased aircraft utilization. They also reflected the impact of numerous new and extended long-term customer contracts and the full-year operation of 1747 freighter that we reactivated during the fourth quarter of 2020. Our fourth quarter performance also benefited from lower heavy maintenance expense. These benefits were partially offset by higher pilot costs driven by our new pilot agreement. Now moving on to slide five. While the pandemic continues to make the operating environment a very challenging one, we're seeing solid momentum in the first quarter. We continue to expect industry conditions and customer demand to remain favorable. Global air freight volumes are exceeding pre-pandemic levels. Capacity continues to be constrained as there are a limited number of new freighters entering the market, while older, less efficient aircraft will be retired. Passenger belly capacity, particularly on key international cargo trade lanes, remains subdued, and backlogs at ocean ports worldwide and other supply chain bottlenecks are driving demand for air cargo capacity as businesses look to address very low inventory levels. The pandemic has also spurred what we see as a sustaining step change in express and e-commerce growth. And it's also highlighted the value of speed and reliability that air freight provides to the global supply chain, which bodes well for air cargo today and beyond. As a result, we expect strong performance in the first quarter of 2022 with our adjusted EBITDA and adjusted net income, similar to that of the first quarter of 2021. We also anticipate revenue of about $1 billion from flying approximately 85,000 block hours. This outlook reflects higher yields, including the contribution from numerous new or enhanced long-term customer contracts, along with a higher pilot cost from our new JCBA. We also expect ongoing expenses driven by the pandemic, including additional pay for employees flying into locations significantly impacted by COVID, as well as other operational costs, including for regulatory compliance, and continuing to provide a safe working environment for all employees. For the full year, we expect aircraft maintenance expense to be similar to 2021, and we expect depreciation and amortization to be around $300 million. Core capital expenditures, which exclude aircraft and engine purchases, are projected to total approximately $135 to $145 million, mainly for parts and components for our fleet, including for the 747-8s and the 777 that we're adding this year. We also have commitments related to aircraft purchases and spare engines, including pre-delivery payments related to our 777 order and delivery payments related to 747-8 and 777 aircraft, all of which we expect to debt finance. Due to the uncertainty related to the pandemic, ongoing supply chain disruptions, and other factors, We are not providing additional guidance at this time. Before I turn the call over to Spencer to provide more detail on our fourth quarter results, I'd like to discuss our capital allocation strategy and the share repurchase program we announced in our press release this morning. As we've consistently stated, we take a disciplined and balanced approach to allocating capital. Our focus is on maintaining a strong balance sheet while continuing to grow the business and returning capital to shareholders. Over the last number of years, we've made significant investments in the business, including aircraft acquisitions and the purchase of Southern Air. Most recently, we've also made further growth investments with our 747-J and 777 orders and the 747-400s we're buying off lease. These modern, efficient aircraft remain in high demand and will be an important investment for our future. We're also always looking for ways to grow through mergers, acquisitions, or strategic partnerships, like our very successful acquisitions of Polar and Southern and our tight and dry leasing joint venture with Bain Capital Credit. Consistent with our balanced approach, we're now pleased to announce the establishment of a new $200 million share repurchase program, which includes $100 million in accelerated share repurchases that we expect to complete by the end of the second quarter. Our capital allocation strategy demonstrates our commitment to creating, enhancing, and delivering value for our shareholders. I'd like to now pass the call over to Spencer, and after Spencer's remarks, I'll have some additional comments, and then we'll be happy to take your questions. Spencer.

Thank you, John, and hello, everyone. Our excellent fourth quarter results are highlighted on slide six. On an adjusted basis, EBITDA was $361.8 million, and adjusted net income was $211.6 million. On a reported basis, net income was $176.7 million. Our adjusted earnings included an effective income tax rate of 21.7 percent. Moving to the top of slide seven, revenue rose to $1.2 billion in the quarter. Higher airline operations segment revenue was primarily driven by an increase in the average rate per block hour, which was mainly due to an increased proportion of higher yielding flying, including the impact of new and extended long-term contracts, the ongoing reduction of available cargo capacity in the market, the disruption of global supply chains, as well as higher fuel costs. Volumes during the period reflected a reduction in less profitable, smaller-gauge CMI flying, which was partially offset by our ability to increase the utilization of our current fleet to meet strong customer demand. As John shared, volumes also benefited from operating the 747-400 that we reactivated during the fourth quarter of 2020. Revenue in our dry leasing segment was relatively unchanged. Looking now at the bottom of the slide, segment contribution was $365.5 million in the fourth quarter. Significantly higher airline operations contribution was primarily driven by the positive factors benefiting segment revenue I just noted, as well as lower heavy maintenance expense. These improvements were partially offset by higher pilot costs related to our new joint collective bargaining agreement. and in dry leasing, segment contribution was relatively unchanged. Now turning to slide eight, our net leverage ratio lowered further and finished the year at 1.5 times. We ended 2021 with cash, including cash equivalents and restricted cash, totaling $921 million. The increase primarily reflected cash provided by operating activities partially offset by cash used for investing and financing activities. Net cash used for investing activities was primarily for payments for flight equipment and modifications, including all of the pre-delivery payments for our four 747-8 freighters, core capital expenditures, as well as spare engines and engine upgrade kits. Net cash used for financing activities primarily reflected debt payments, partially offset by proceeds from debt issuance. We continue to apply a disciplined approach to financing. All of our debt is at a fixed rate with a very low weighted average coupon rate, which is now at 2.84%. And the majority is secured by our aircraft assets, which have a value in excess of the related debt. As John said earlier, we remain committed to a strong balance sheet and cash balance, which allows us to opportunistically deploy capital to strengthen our business, navigate unexpected events, and return capital to shareholders. Now, I'd like to turn it back to John.

Thank you, Spencer. And moving on to slide nine, 2021 was certainly an excellent year, and we finished it on a very strong note. Market conditions remain strong. our team continues to deliver and leverage our competitive advantages. We have a strong balance sheet, a formidable fleet of aircraft, an unparalleled network of customers, and unrivaled global operating capabilities. And we'll continue to take every precaution to protect our employees and our operation to keep the business moving forward. To sum it all up, Atlas is very well positioned to serve the evolving needs of our customers, the air freight market, and the global supply chain today and in the future. At this point, operator, may we have the first question, please?

Ladies and gentlemen, to ask a question, you will need to press the star then the one key on your touch-tone telephone. To withdraw your question, you may press the pound key. Now, first question coming from the line of Bob Labick with CJS Securities. Your line is open.

Hi. It's actually Lee Jagoda for Bob this morning. Good morning.

Good morning. Hi, Lee.

So just starting with the fleet additions you announced, obviously the 4-8s and then the 4777s next year, can you kind of help us understand the relative profitability of each of those aircraft types compared to your fleet averages and how we should think about impacting the model going forward?

Surely. So the – The Dash 8s and the 777s, these are outstanding aircraft with superior payload. They are so valued in the market where capacity is so constrained. As we announced today, we've signed up long-term agreements with customers. These aircraft will deliver returns, I would say, that are similar to what you're seeing elsewhere in our business. but they also have the benefit of having what we've called a maintenance honeymoon. So in the first few years, the aircraft don't require any maintenance, and anything that could potentially go wrong with the aircraft is typically covered by warranty. So their performance is even better in the early years. They don't need to de-check for about six to eight years, and so very strong performance.

Got it. And then just as a follow-up, buying the additional 747s off lease as they expire sounds like the right thing to do in this environment. Are there any fleet deletions that we should think about either this year or over the next several years that just impact the net number going forward?

Lee, it's John. We're not anticipating any fleet deletions, but one of the advantages of of our approach here is, as we talked about, several of our aircraft are coming off lease, some of which we're buying, some are coming off lease even later in time. So we have what I'll describe as a built-in hedge to manage our capacity. If the demand remains strong as we expect, we're going to continue to operate those airplanes, but it's kind of a built-in hedge to allow some capacity to run off if the market changes on us, which we're hoping and expecting it won't. But that's kind of a scenario where we would see fewer airplanes, but nothing other than that.

Great. Thanks very much. I will hop back in the queue.

Thank you.

Our next question coming from the line of Chris with Susquehanna. Your line is open.

Good morning, everyone. Thanks for taking my question. So with these travel restrictions easing and passenger wide-body flights coming back, what are you seeing in terms of the mix of freighters versus belly capacity? And are there lanes, whether that's, for example, transatlantic, trans-Pacific, where that mix is moving back towards more typical levels?

So I'll start with that, Chris, and thanks for your question. Yeah. We expect that the passenger wide-body capacity will come back gradually. We've shared that before. Frankly, I think it's been slower than most people expect, and Omicron has settled that down even further. But when it does come back, what we're seeing is the likelihood of transatlantic flying, which has less of an impact on us, frankly, than the transpacific. And with many of the Asia countries, China particularly, tightening up, we don't see substantial belly capacity coming back into Trans-Pacific for quite some time. And certainly not at pre-COVID levels. And, you know, I guess a further point I would make is even if and when it comes back to pre-COVID levels, where is that capacity going to come back to? Is it going to be in typical cargo trade lanes? or other point-to-point flying, and what's the demand outlook going to be for manufactured goods and e-commerce, which, frankly, volumes right now, air freight volumes are exceeding, as I mentioned in my remarks, are exceeding pre-COVID levels, and there's still a tremendous tightening of capacity in the marketplace. I think that coupled with some other variables that we see in the marketplace, that more and more customers like the security and the value of dedicated freighter capacity, maybe not as a complete substitute for passenger belly, but kind of under the theory of once bitten, twice shy. You know, the security that air freight has continued, the dedicated freighters have really continued uninterrupted through COVID and takes out the vulnerability of passenger belly capacity going forward. So there are a number of reasons why I think the mix of freighters is going to increase even when the passenger wide bodies come back.

If that's a number you have handy or if you had to guess what you think the mix of freighter versus belly capacity is now... I think last time I looked or the numbers I've seen out there was around 70-30 on the back half of last year.

Yeah, you know, look, pre-pandemic it was basically a 50-50 split, give or take a few percentage points. I think it will favor air freight more, as I said, whether it will sustain at 70%. I can't say that, but, you know, we certainly expect a better than 50% as we go forward.

Okay. If I could get in one more here. So it seems that with each quarter since I think it was February or March of 2020, you've become increasingly less payload or spot sensitive. So if you could remind us, and I know you get this question every quarter now, but how much of your block hours today are spot or ad hoc flying? And then as we think about duration, what's the next shortest lease term? meaning beyond what would be a month, so say three, six months, et cetera, and then how much of your block hours does that make up? Thanks.

Sure, Chris and Spencer. So the first part of your question was how much is in SPOT. I'll give the overall percentages of block hours. It hasn't changed a whole lot. Approximately 60% to 65% of our block hours are in ACMI. Around 20% are in long-term charters. About 6% is with the U.S. military. About 5% is in South America. And that leaves about 5% for ad hoc spot charter flying. And then the second question I didn't completely understand, but I think you were asking about terms and expirations. Our long-term charter contracts, we just extended a few more of them during the fourth quarter, increased price, added additional flying. The contracts now, I would say the majority of them go through 2024, but we have contracts that go through 2025, 26, and even 2017. And it's also, as John pointed out, it's really important to note that if and when belly capacity does come back, it's really important, as John said, that most of the flying that we're doing for this long-term charter is not in the traditional trade lanes that passenger flying operates in. And so when that aircraft comes back, it probably won't impact a lot of this flying because freight keeps moving further and further away from traditional passenger airports. Okay, thank you.

Our next question coming from the line of Stephanie Moore with Truth Security. Great.

This is actually Joe Hafling on for Stephanie. Congrats on the record fourth quarter record 2021 and what's shaping up to be a basically record 1Q22. Thank you, Joe. Maybe just a quick follow-up on that question about managing the sort of spot versus contract. You know, how do you guys think about that sort of relationship or managing that sort of seesaw? You know, do you feel that you are essentially giving up some profit, you know, by not taking more advantage of the spot market right now with where air freight rates are? Or do you think that the sustainability and visibility of you know, given by the long-term contract is where you kind of want to continue to grow the business going forward?

Yeah, Joe, thanks. My answer is yes. It's a little bit of all of the above. Anytime, you know, you're dedicating capacity on the long-term charter, it's drawing from your ability to play the spot market. But there's a number of things that we do. We have an integrated network. And we're able to, when we talk about increasing our utilization, you know, we piece together the network that allows us, we can flex up the opportunity from time to time to do a one-off charter, spot market charter, a return to Asia if it presents itself. So even though we're fixing that capacity, that doesn't necessarily mean we're excluded from flexing up, which we do quite well. and taking advantage of one-off charters. Similarly, our customers do the same. They have their fixed networks and if they see an opportunity within their network to take a charter, a one-off charter, they do that as well. But look, there are trade-offs. We really value these customers, especially some of our newer customers that is frankly creating a whole new business for us at strong yields and For that, we have a bias towards the fixed capacity. Do you leave something on the table with the spot market? Sure, but we think that's the right trade for us as long as we continue to manage the capacity in the spot market that we do retain.

Great. Thanks for that. And then maybe just as a follow-up question, more of a longer-term outlook question. I know maybe not necessarily your trade lane expertise, but just in thinking about air freight markets, generally as the alternative to ocean capacity and, you know, with the supply chain disruptions going on, what would sort of be your take on how supply chain through 2022 ease and that, you know, sort of the velocity of that easing or not, you know, how quickly, you know, can ocean freight kind of get back to normal and sort of what that impact might be to both volumes and rates for air freight markets generally?

Sure. Look, there are a number of variables that are contributing to some of the ocean port disruptions. It's kind of the backlog of ships anywhere. While we hear some news that it's moderating a little bit, it's still at very high levels, and on certain days can be between 70 and 100 ships waiting to be offloaded. But from an air freight standpoint, there are other variables in play that we think increase the demand for air freight, including what I made in my comments is kind of the step change of customers utilizing artificial intelligence and big data to rationalize their inventories. And yes, air freight may be a little bit more expensive, but if they can cut down on their production costs in exchange, There's tradeoffs that we're seeing customers make, that they can rely on the speed and reliability of air freight getting their goods to market and maybe not have to produce as much. So there are a number of very sophisticated customer of ours who are doing that. And I think the more the ocean ports are backlogged and the longer that continues, you know, it speaks favorably for air freight. In the long run, I think there will be some good lessons learned as well to make a permanent shift, not completely, but a permanent shift for some of the capacity to go air, and we're seeing that. Now, will the ports get their act together? Yes, I think things will improve over time, but there are labor shortages, a shortage of truckers, and it's not just the port congestion. It's all what happens when the freight arrives that's backlogging, and I think that's going to take time. In the meantime, air freight is a great solution.

Greg certainly paints a pretty good picture for air freight here continuing into 2022. That's everything I had. Thanks so much for the color.

Sure. And one last point I'll make is, you know, their labor disruption, putting aside labor availability, it's a highly unionized, the ports are highly unionized, and I understand their labor contracts are coming up for negotiation this year. So, you know, there's challenges everywhere.

Thank you, operator. Any other questions, comments? Our next question coming from the line of Helene Becker with Colin.

Thanks very much, operator. Hi, everybody. And thank you very much for the time. Just a couple of questions. So, you know, the Chinese government isn't honoring the bilateral agreement with the passenger airlines. And I seriously doubt there's, given everything in the pandemic, there's going to be a big increase in passengers. capacity on the Pacific, to your point, John. Are you having any issues with respect to getting your crews in and out of China like you were having last year? Can you just give us an update on what's going on there?

Yeah, no material disruptions there, Helene. You know, we've been rejiggering our network. There are some quarantine and testing requirements in certain of those countries. Hong Kong's one where we've adjusted our network to avoid laying over in Hong Kong, where previously pre-pandemic Hong Kong was a key layover hub for us, but we're transiting through Hong Kong and working through Korea and other points in the region to lay our crews over. So not a material problem there. We've been able to keep moving. Sometimes it puts a little pressure on crew availability because it's not as efficient as the prior network. But I think the team's been doing a great job. Pilots are picking up, you know, lucrative overtime flying. So, you know, that's not been an issue for us really. We're watching the regulatory environment. You know, international trade and movement of cargo is so critical that to all the economies, the U.S. economy and the economy in China. So we haven't seen any disruptions there like you referenced on the passenger side, but it's something we keep an eye on.

Okay. And then early in the quarter, did you have issues with crews calling out sick because of the virus at all?

Sure. I think we weren't immune to that. Omicron was so prevalent and so widespread. every industry, we were no different. But we managed through it. And, you know, again, my thanks to our workforce, our pilots, everyone pushed through. But, you know, during that period, particularly from mid-December until into January, there was pressure there both for flight crew, frankly all employees, because Omicron was so prevalent and not necessarily just infections but contact tracing. You know, there are pretty strict rules on contact tracing that we abide by that that put pressure on us and, frankly, everyone else.

Gotcha. And then if I could just squish in one more with respect to aircraft financing, maybe for Spencer. How are you financing the aircraft that are coming this year? You talked about PDPs, but have you already decided on how those are going to be financed?

Yeah, thanks, Elaine. So we've paid all of the PDPs now. And so we're working with lenders. We've already signed LOIs. We expect high LTVs and attractive rates. The market is really strong, and it's a good environment for us to be financing these aircrafts. So we will certainly have that in place as we take delivery.

Thank you. Thanks very much.

Thank you. Thank you, Helene.

Now our next question coming from the line of Scott Group with Wolf Research. Your line is open.

Hey, thanks. Good morning, guys. Thanks, Scott. You've guided to flattish earnings in the first quarter. I was wondering if you can at least share some directional perspective on the year. The pilot costs will lap in the back half. The comps on rates get tough. More aircraft coming in. Directionally, do you think you can – Can you grow earnings this year? Is it flat? How are you thinking about it?

We've only provided guidance for the first quarter, but I'll give a couple of thoughts. One is that we continue to have increased utilization. Our utilization is extremely strong. It was up 14% last year. We have, of course, the four new 747-8s that will be coming in throughout the course of the year. We'll have one 777, but really that's at the end of the year, so not a whole lot coming from that. We've entered into all of the long-term contracts, and we have renewed those, and so we'll enjoy a full year in 2022 of all of those contracts. We've said that we expect maintenance to be fairly similar. Offsetting some of those things, of course, is we'll have the higher pilot costs because of the new pilot agreement. And then yields remain the big question, what that's going to be like right now. As John talked about, the yield environment is so strong. Yields continue to be elevated. Yields in the first quarter this year compared to the first quarter of last year are so much stronger. and there's tremendous demand for charter at solid yields. But as the year progresses, you know, that is a bit of a wild card. So those are some thoughts without providing any sort of bottom line information. Okay.

I mean, that's fair. I mean, I guess maybe the follow-up is if you're saying that the Ad hoc business is only 5% of the hours, but it sounds like it's a big swing factor. So maybe can you talk about if it's 5% of the hours, what percentage of the revenue maybe that might be helpful is in this ad hoc? And then the longer-term charter that you're talking about, the 20% of the hours, is the pricing there fixed? If spot rates start to fall and the market starts to loosen, does the pricing on that sort of long-term charter – Does that reset or is it fixed?

I'll start there, Spencer. Scott, that pricing on the long-term agreements is fixed. I would analogize it to ACMI-like agreements. And with, you know, we provide on a number of these agreements fuel, but there's adjustments for fuel. If fuel goes up or down, that we can make adjustments there. But the underlying fee for service is fixed. comparable to ACMI.

Scott, the only thing I would add to that is that the long-term charter programs, as I said, we have contracts that are going through 2027. With regard to revenue, because yields don't have any, there's no offsetting expense to those, so The flight's already going to happen. The yield's sort of a swing factor when it comes to the ad hoc spot charter market. So the increase or decrease in yields can go right to the bottom line. So it can have an outsized effect. So, again, we've done a lot to really minimize the potential volatility of in our business, and we've done a lot to put in place these long-term contracts. But still, when yields go up or down, it certainly can have an impact on our bottom line.

I mean, I guess what we're trying to figure out and what I think everybody's trying to figure out is, right, at some point these rates will normalize. Now you've done stuff and you're going to grow the fleet a lot. You've maybe changed the mix a little bit, but, like, why? What do you think about normalized margins, normalized earnings whenever these rates ultimately start to come down? Who knows when that is, but how do you think about that?

So let me start, Spencer, in terms of, yeah, I would say it slightly differently. I would say what's the new normal going to be? And I don't see... Anytime soon, when you're talking about normalizing yields or rates, going back to pre-COVID levels anytime soon. As I mentioned, you're going to have the continuation of significant growth in express and e-commerce. That's creating demand that's going to continue to grow. You have lessons learned from COVID, as I mentioned. You have a whole new customer base that is willing to take on dedicated capacity and And we're going to see, in my view, manufacturing come roaring back as companies look to fill inventories and so forth. And all those dynamics in play is not an overnight. And for air freight, I think it's pricing power. So for all those factors, what will the new normal be? Yes, I think particularly in the spot rates, things will normalize and moderate a little bit. We're watching that closely, but on the long-term charters and ACMI agreements, there's been a step change. So we look forward to keeping you posted on what the new normal will be.

Okay. All right. Thank you, guys. Appreciate it.

Thank you. Thank you.

Our next question coming from the line of Barry Himes with Safe Asset Management. Your line is open.

Thanks very much. Just wanted to follow up on the comment you made about freight moving away from traditional passenger airports. When I think about Asia, that makes sense. We've seen a lot of it actually move to places like Vietnam and Thailand. Are there any numbers you can share on that? When we look at Asian freight in terms of that breakdown between China and then some of these areas where you wouldn't have the same proclivity to have a lot of passenger flights. Thanks.

Yeah, Barry, I think your question is freight moving out of the sort of more traditional freight lanes that are operated by passenger airlines. And that's absolutely true. You've seen all of the chip shortages. You know, inventories are critically low in high-tech, automotive, chip manufacturers, and there's a huge shortage of chips and semiconductors. And we don't expect things to improve until probably 2024, 2025. But there are factories that are being built to try to offset those things. And the beauty of Atlas's business, we don't operate a typical, you know, other than South America. Our business, you know, we fly airplanes, and we fly airplanes wherever our customers and demand is. And so, you know, wherever that demand is, we will go there and be able to take advantage of that. And so if it's not in a traditional passenger-operated trade lane, which is becoming more and more common, you know, as long as the airport can fit our size aircraft, we'll be there.

If I could just do one quick follow-up.

I'm sorry, Barry, go ahead.

Well, I was going to do one quick follow-up. Maybe a way to ask it is, what's the China percentage of Asia flying, of freight, rather, now versus pre-pandemic? Just trying to get some sort of feel for how that's moving around. Sorry, go ahead. Thanks.

I don't know that we have a specific number to put to that, Barry. I mean, obviously, that coming out of China and Asia is a significant part of this. So, you know, I don't have a specific number to ascribe to that. Okay, thanks.

Congrats on a great year. Thank you.

Thank you.

And we have a follow-up question from Chris Tatsopoulos with Susquehanna. Yolanda Feldman.

Hey, thanks for taking my follow-up. So I want to go back to Scott's question. I think it's an important one, and certainly I get from investors, but I'm going to try it in a different way here. You know, investors are keenly focused on spot rates, and I guess there's a few ways we can look at that data. But with the ACMI and the CMI and long-term charter lease rates, they're typically inputs like interest rates and residual values. So could you help us, you know, better understand how we should think about that relationship between the spot rates and the longer-term rates? And I guess... You know, if someone were to start a bottoms-up revenue build based on your net fleet, you know, should we start with a spot assumption, which, you know, again, there's a few areas we can look at, and then, you know, automatically give a haircut on what we think CMI and charter rates might look like? Thanks.

So I'll start from a higher-level response, and then, Spencer, if you want to talk to the numbers. And, Chris, I heard what you said, that investors are keenly focused on spot rates. But we're keenly focused not only on spot rates but also on the long-term security at favorable long-term charter and ACMI rates. And there's no doubt for a customer who's willing to commit to a long period of time and what typically includes minimum block hours for a long-lived asset, that's very attractive to our business. And our focus on the spot rates is for that allocated charter capacity as well as the flex-up capability because should there be a downturn and you're left overly dependent on the spot rates, then your business suffers. And we've always strived to strike a balance that's heavily weighted toward the ACMI and long-term. Now, in terms of the rest of your question, kind of what's the differential there? Spencer, I don't know if you want to add any comments to that.

Yeah, I think, you know, Chris, in thinking about your question about modeling, you can certainly look at the rate per block hour. Now you've got to back out the impact of fuel in that rate per block hour, which, you know, you can certainly do. After you back out the impact of fuel, then you can see the rate per block hour that we're enjoying, and you can see the growth in that rate per block hour. About 5% of the flying in 2022 is going to be, we expect, will be ex-Asia ad hoc spot charter flying. And so all the rest of it is from longer-term flying. And, again, you should be able to see that in the rate per block hour. And as John said, as we've talked about, these long-term charter agreements, they have very, very significant rates because there is just tremendous, tremendous demand. We simply don't have enough aircraft to provide for all the demand that's out there.

Okay. And, you know, John, so you've been CEO now for two years, and – I'm sure you had very different plans going into that role before the occurrence of COVID-19. So, you know, as we hopefully move to an endemic state in this year, you know, what are you looking to accomplish and what are your, I guess, top three areas of focus? Thank you.

Thank you, Chris. Appreciate it. And look, I, I'm really excited about where we've been, you know, the last couple of years and you're right. Some things were not entirely expected, but I think, you know, what we've been able to deliver shows the resiliency of our business model. You know, when you talk about some of my focus areas, one, continuing to leverage that with a focus on, you know, international global air freight transportation with strong customers. I mean, I intentionally rattled off some of those customers in my presentation because it's just really a powerful tool list of great customers who are long-term players in the market, sophisticated players. So I'm looking to continue to develop those relationships, the cross-border growth of e-commerce as we announced today with Chinao and the global operation like we announced for the placement of the Dash H with Kuninago. Those are hugely important. We want to continue to grow with all our customers and be their first choice. That's another goal of ours. We know they have choices, and now in this favorable air freight market, we have a number of carriers who have emerged who are showing that we have competition. We need to compete for the business, but we simply think we're the best at what we do and continue to develop our team. So that's another important focus. I was very pleased. to announce the labor agreement and, you know, continue to improve our labor relations and our kind of mending fences with our pilot group. We went through, as is not uncommon, you know, a protracted period of tension because, you know, the pilots wanted to be recognized and their contract was overdue, and I'm delighted to bring that to a head. And we're continuing to work closely with the new union leadership in terms all pulling in the same direction, which, frankly, we couldn't have delivered these results without that, unless they were all pulling in the right direction. And then from a financial standpoint, I think the third point would be a disciplined approach to capital allocation, keeping a strong balance sheet. I think Spencer's final paragraph and his final comments in his presentation were powerful. We need to keep a strong balance sheet, invest in our future, and also be prepared for what may get thrown at us because we are not out of the pandemic yet, you know, and things get thrown at us. You know, we're watching fuel prices. We're watching the markets. You know, Korea and Japan were just put back on, you know, a heightened COVID status, whereas they were not with the CDC just a few days ago. So things get thrown our way. We want to be prepared to endure and navigate those challenges and continue to provide value to our shareholders. Thank you.

Our last question coming from the line of Eric Gregg from Fortree Island Advisory. Your line is open.

This results in really great news about the Stocker Purchase Program. Three quick questions. The first one is about the Q1 guidance. Given that air freight indexes all indicate that air freight rates are up, you know, 30% plus so far in 2022 over 2021, the fact your capacity has increased as much as it has and, you know, the likelihood that all these contracts that you've been renewing are at much higher rates, it's just a little surprising that the guidance for Q1 profitability is consistent with last year. And any comments around that?

Sure. Thank you, Eric. So we entered into a new pilot agreement. We have a new joint collective bargaining agreement, and those rates took effect on September 1st. So you're absolutely right. Our yields, the impact from yields in the first quarter of this year versus the first quarter of last year are absolutely higher. Our ACMI rates absolutely are higher. We've acquired 747-400s, and so the ownership costs are lower related to that. And so those are all really nice benefits. Our volume should be improving. But offsetting those things is higher pilot costs. So I think that's the missing component in your algebra there.

The other two are on the stock repurchase. Is your thinking around that, that's kind of an annual guidance, or is there the possibility here that you get through the $200 million and reload in the latter part of the year?

No, we've announced this $200 million program. That's the program. As I mentioned, we're going to continue to take a disciplined approach of which returning capital to shareholders is a part of it. but investing in the business is a part of it. Making sure we keep our debt ratio in line is a part of it. So we're happy about this program. We're going to proceed with it, and then we'll keep you posted on further developments. Great.

And then the last one is about Amazon and the warrants, and how is that relationship progressing, and have there been any more exercises on their ownership in the business?

I'll turn to Spencer in a moment on the warrants, but Amazon's a great customer. They've entered the market with force in terms of the number of aircraft they've put. We're delighted to have them as a customer and work hard every day to meet their expectations. With regard to the warrants, I think they've done some transactions, and I think it's served them quite well given the where their pricing was on the warrants. Spencer, I don't know if you want to provide any further details on that.

In November, Amazon exercised some of their warrants, what we call Warrant B, and that led to the issuance of 187,411 shares during the fourth quarter. Thanks a ton. Tremendous results. Thank you.

Thank you, Ari.

I'm showing no 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 thank you all for your great questions. We're really excited about the future and frankly quite pleased with the results we've reported. I know the focus on the placements of the Dash 8s was hugely important for all our constituents, so Happy to announce that those are all placed now and look forward to taking on the 777s. So on behalf of all of our employees, Spencer and I would like to thank you for your interest in Atlas Air. We appreciate you taking the time to be with us today, and we hope you and your families all stay safe and look forward to speaking with you again soon. Thank you so much, and thank you, operator.

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