ATLAS AIR WORLDWIDE HOLDINGS, INC. The following discussion and analysis should be read in conjunction with our Financial Statements appearing in this report and our audited consolidated financial statements and related notes included in our 2019 Annual Report on Form 10-K. Background Certain Terms - Glossary
The following represents terms and statistics specific to our business and industry. They are used by management to evaluate and measure operations, results, productivity and efficiency.
Block Hour The time interval between when an aircraft departs the terminal
until it arrives at the destination terminal.
C Check "Heavy" airframe maintenance checks, which are more intensive in
scope than Line Maintenance and are generally performed between
18 and 24 months depending on aircraft type.
D Check "Heavy" airframe maintenance checks, which are the most extensive
in scope and are generally performed every six and eight years
depending on aircraft type.
Heavy Maintenance Scheduled maintenance activities that are extensive in scope and
are primarily based on time or usage intervals, which include,
but are not limited to, C Checks, D Checks and engine
overhauls. In addition, unscheduled engine repairs involving the
removal of the engine from the aircraft are considered to be
Heavy Maintenance.
Line Maintenance Maintenance events occurring during normal day-to-day operations.
Non-heavy Discrete maintenance activities for the overhaul and repair of
Maintenance specific aircraft components, including landing gear, auxiliary
power units and engine thrust reversers.
Utilization The average number of Block Hours operated per day per aircraft.
Yield The average amount a customer pays to fly one tonne of cargo one
mile.
Business Overview
We are a leading global provider of outsourced aircraft and aviation operating
services. We operate the world's largest fleet of 747 freighters and provide
customers a broad array of 747, 777, 767 and 737 aircraft for domestic, regional
and international cargo and passenger operations. We provide unique value to our
customers by giving them access to highly reliable new production freighters
that deliver the lowest unit cost in the marketplace combined with outsourced
aircraft operating services that we believe lead the industry in terms of
quality and global scale. Our customers include express delivery providers,
e-commerce retailers, airlines, freight forwarders, the U.S. military and
charter brokers. We provide global services with operations in Africa , Asia ,
Australia , Europe , the Middle East , North America and South America .
Our primary service offerings include the following:
• ACMI, whereby we provide outsourced cargo and passenger aircraft
operating solutions, including the provision of an aircraft, crew,
maintenance and insurance, while customers assume fuel, demand and
price risk. In addition, customers are generally responsible for
landing, navigation and most other operational fees and costs;
• CMI, which is part of our ACMI business segment, whereby we provide
outsourced cargo and passenger aircraft operating solutions, generally
including the provision of crew, Line Maintenance and insurance, but
not the aircraft. Customers assume fuel, demand and price risk, and
are responsible for providing the aircraft (which they may lease from
us) and generally responsible for Heavy and Non-Heavy Maintenance,
landing, navigation and most other operational fees and costs;
• Charter, whereby we provide cargo and passenger aircraft charter
services to customers, including the AMC, brokers, freight forwarders,
direct shippers, airlines, sports teams and fans, and private charter
customers. The customer generally pays a fixed charter fee that
includes fuel, insurance, landing fees, navigation fees and most other
operational fees and costs; and
• Dry Leasing , whereby we provide cargo and passenger aircraft and
engine leasing solutions. The customer operates, and isresponsible
for insuring and maintaining, the flight equipment.
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We look to achieve our growth plans and enhance shareholder value by:
• Delivering superior service quality to our valued customers; • Focusing on securing long-term customer contracts; • Managing our fleet with a focus on leading-edge aircraft; • Leveraging our flexible business model to maximize utilization; • Driving significant and ongoing productivity improvements;
• Selectively pursuing and evaluating future acquisitions and alliances; while
• Appropriately managing capital allocation and delivering value to
shareholders.
See "Business Overview" and "Business Strategy" in our 2019 Annual Report on Form 10-K for additional information.
Business Developments
InDecember 2019 , COVID-19 was first reported inChina and has since spread to many other regions of the world. InMarch 2020 , COVID-19 was determined to be a global pandemic by theWorld Health Organization . During the first six months of 2020, this public health crisis disrupted global manufacturing, supply chains, passenger travel and consumer spending, resulting in flight cancellations by our ACMI customers and lower AMC passenger flying as the military took precautionary measures to limit the movement of personnel, as well as increased operating costs. Our Charter results for the first half of 2020, compared with 2019 were significantly impacted by the reduction of available cargo capacity in the market and the disruption of global supply chains due to the COVID-19 pandemic resulting in significantly higher commercial charter cargo Yields, net of fuel. Due to this strong demand, we reactivated three 747-400BCF aircraft that had been temporarily parked and began Charter operations for a 777-200 freighter aircraft in ourDry Leasing business. During the second quarter of 2020, we entered into several long-term charter programs with customers seeking to secure committed cargo capacity utilizing aircraft redeployed from our ACMI segment. These long-term charter programs provide us with guaranteed revenue and include indexed fuel price adjustments to mitigate our exposure to fuel price volatility. Safety is our top priority. We are closely monitoring the COVID-19 pandemic and taking numerous precautions to ensure the safety of our operations around the world, including: • implementing frequent deep cleaning of all aircraft and facilities; • providing full safety kits for each crewmember and all aircraft;
• adjusting routes to limit exposure to regions significantly impacted
by the COVID-19 pandemic;
• implementing significant workforce social distancing and protection
measures at all Company facilities; and
• having employees
InMarch 2020 , theDepartment of Homeland Security stated that transportation is an essential critical infrastructure sector, which includes all aviation workers. We play an important role in facilitating the movement of essential goods around the world during this challenging time, including the delivery of pharmaceuticals, medical equipment, education supplies, food and other daily necessities. Given the dynamic nature of this pandemic, the duration of business disruption, the extent of customer cancellations and the related financial impact cannot be reasonably estimated at this time. We have incurred and expect to incur significant additional costs, including premium pay; other operational costs, including costs for continuing to provide a safe working environment for our employees; and higher crew costs related to increased pay rates resulting from our recent interim agreement with our pilots. In addition, the availability of hotels and restaurants; evolving COVID-19-related travel restrictions and health screenings; and cancellations of passenger flights by other airlines globally or airport closures have impacted and could further impact our ability to position employees to operate our aircraft. In response to these challenging times, we have: • significantly reduced nonessential employee travel; • reduced the use of contractors; • limited ground staff hiring;
• secured vendor pricing discounts for engine overhauls and other maintenance;
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• implemented a number of other cost reduction initiatives; • taken other actions, such as the sale of certain nonessential assets;
• entered into a Payroll Support Program Agreement with the
• begun to defer payment of the employer portion of social security
taxes as provided for under the CARES Act through the end of 2020.
The continuation or worsening of the aforementioned and other factors, including
restrictions on travel and transportation, could materially affect our results
for the duration of the crisis. We also continually assess our aircraft
requirements and will make adjustments to our capacity as necessary. Some of
these actions may involve grounding or disposing of aircraft or engines, which
could result in asset impairments or other charges in future periods.
Our ACMI results for the first half of 2020, compared with 2019, were also impacted by increased flying from the following:
• In
incremental 747-400 freighters for
routes. The first two aircraft entered service in April and
and the third is expected to enter service during the second half of
2020.
• In
operation of five 737-800 freighter aircraft and up to 15 additional
aircraft by May 2021 . Between May and December 2019 , we placed five
aircraft into service.
• In
777-200 freighter aircraft on key global routes, both of which entered
service near the end of the second quarter of 2019.
• In
on transpacific routes following its return from DHL.
• In January 2020 , we entered into an ACMI agreement with EL AL Israel
its freight network. The aircraft entered service in January 2020 .
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Results of Operations
The following discussion should be read in conjunction with our Financial Statements and other financial information appearing and referred to elsewhere in this report.
Three Months Ended
Operating Statistics
The following tables compare our Segment Operating Fleet (average aircraft equivalents during the period) and totalBlock Hours operated for the three months endedJune 30 : Segment Operating Fleet 2020 2019 Inc/(Dec) ACMI* 747-8F Cargo 8.8 8.2 0.6 747-400 Cargo 13.1 18.4 (5.3 ) 747-400 Dreamlifter 1.8 3.6 (1.8 ) 777-200 Cargo 8.1 6.4 1.7 767-300 Cargo 23.7 25.0 (1.3 ) 767-200 Cargo 9.0 9.0 - 767-200 Passenger 1.0 1.0 - 737-800 Cargo 5.0 1.8 3.2 737-400 Cargo 4.6 5.0 (0.4 ) Total 75.1 78.4 (3.3 ) Charter 747-8F Cargo 1.1 1.6 (0.5 ) 747-400 Cargo 19.4 15.2 4.2 747-400 Passenger 5.0 4.0 1.0 777-200 Cargo 0.6 - 0.6 767-300 Cargo 0.3 - 0.3 767-300 Passenger 4.8 4.9 (0.1 ) Total 31.2 25.7 5.5 Dry Leasing 777-200 Cargo 7.0 7.0 - 767-300 Cargo 21.0 21.0 - 757-200 Cargo - 1.0 (1.0 ) 737-300 Cargo 1.0 1.0 - 737-800 Passenger - 1.0 (1.0 ) Total 29.0 31.0 (2.0 )
Less: Aircraft Dry Leased to CMI customers (21.0 ) (23.0 )
(2.0 )
Total Operating Average Aircraft Equivalents 114.3 112.1 2.2
Out-of-service** 1.7 1.0 0.7
* ACMI average fleet excludes spare aircraft provided by CMI customers.
** Out-of-service includes aircraft that are either temporarily parked or
held for sale.
Block Hours 2020 2019 Inc/(Dec) % Change
Total Block Hours*** 84,966 80,282 4,684 5.8 %
*** Includes ACMI, Charter and other
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Operating Revenue
The following table compares our Operating Revenue for the three months endedJune 30 (in thousands): 2020 2019 Inc/(Dec) % Change Operating Revenue ACMI$ 291,951 $ 307,278 $ (15,327 ) (5.0 )% Charter 497,547 315,679 181,868 57.6 % Dry Leasing 40,906 43,535 (2,629 ) (6.0 )% Customer incentive asset amortization (9,534 ) (6,936 ) 2,598 37.5 % Other 4,383 4,362 21 0.5 % Total Operating Revenue$ 825,253 $ 663,918 ACMI 2020 2019 Inc/(Dec) % Change ACMI Block Hours 59,531 61,942 (2,411 ) (3.9 )% ACMI Revenue Per Block Hour$ 4,904 $ 4,961 $ (57 ) (1.1 )% ACMI revenue decreased$15.3 million , or 5.0%, primarily due to decreased flying. The decrease inBlock Hours flown was primarily driven by the redeployment of 747-400 aircraft to Charter to support long-term charter programs with customers seeking to secure committed cargo capacity, partially offset by an increase in CMI flying. Revenue per Block Hour was relatively unchanged. Charter 2020 2019 Inc/(Dec) % ChangeCharter Block Hours : Cargo 20,876 12,888 7,988 62.0 % Passenger 3,108 4,773 (1,665 ) (34.9 )% Total 23,984 17,661 6,323 35.8 % Charter Revenue Per Block Hour: Cargo$ 21,260 $ 17,473 $ 3,787 21.7 % Passenger$ 17,285 $ 18,957 $ (1,672 ) (8.8 )% Charter$ 20,745 $ 17,874 $ 2,871 16.1 % Charter revenue increased$181.9 million , or 57.6%, primarily due to increased flying and an increase in Revenue per Block Hour. The increase inCharter Block Hours flown was primarily driven by increased demand for freighter aircraft reflecting a reduction of available cargo capacity in the market, the disruption of global supply chains due to the COVID-19 pandemic and our ability to increase utilization. Due to this increased demand and in support of long-term charter programs with customers seeking to secure committed cargo capacity, we redeployed 747-400 aircraft from ACMI and began operating a 777-200 freighter aircraft in ourDry Leasing business. Partially offsetting these improvements was lower AMC passenger flying for 747-400 aircraft as theU.S. military took precautionary measures to limit the movement of military personnel. Revenue per Block Hour increased primarily due to higher commercial cargo Yields driven by the factors impacting commercial cargo demand noted above, partially offset by a reduction in passenger charter Revenue per Block Hour related to a decrease in higher-yielding 747-400 flying for the AMC.
Dry Leasing revenue decreased$2.6 million , or 6.0%, primarily due to changes in leases and the disposition of certain nonessential Dry Leased aircraft during the first quarter of 2020. 25
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Operating Expenses
The following table compares our Operating Expenses for the three months endedJune 30 (in thousands): 2020 2019 Inc/(Dec) % Change Operating Expenses Salaries, wages and benefits$ 192,591 $ 141,450 $ 51,141 36.2 % Maintenance, materials and repairs 168,300 113,471 54,829 48.3 % Aircraft fuel 83,242 122,158 (38,916 ) (31.9 )% Depreciation and amortization 65,826 63,689 2,137 3.4 % Travel 34,627 46,374 (11,747 ) (25.3 )% Navigation fees, landing fees and other rent 35,638 37,982 (2,344 ) (6.2 )% Passenger and ground handling services 30,130 30,525 (395 ) (1.3 )% Aircraft rent 24,316 40,335 (16,019 ) (39.7 )% Loss on disposal of aircraft 2 - (2 ) NM Special charge 15,934 3,269 12,665 NM Transaction-related expenses 1,275 734 541 73.7 % Other 52,710 54,961 (2,251 ) (4.1 )% Total Operating Expenses$ 704,591 $ 654,948
NM represents year-over-year changes that are not meaningful.
Salaries, wages and benefits increased$51.1 million , or 36.2%, primarily due to higher pilot costs related to premium pay for pilots operating in certain areas significantly impacted by COVID-19, increased pay rates from our recent interim agreement with our pilots, and increased flying. Maintenance, materials and repairs increased$54.8 million , or 48.3%, primarily reflecting$52.2 million of increased Heavy Maintenance expense. Heavy Maintenance expense on 747-400 aircraft increased$42.8 million primarily due to an increase in the number of engine overhauls, C Checks and other maintenance to take advantage of availability and opportunities for vendor pricing discounts. Heavy Maintenance expense on 747-8F aircraft increased$7.2 million primarily due to an increase in the number of D Checks. In addition, Line Maintenance expense increased$1.5 million reflecting an increase of$3.7 million related to increased cargo flying, partially offset by a$2.2 million decrease related to reduced passenger flying. Heavy airframe maintenance checks and engine overhauls impacting Maintenance, materials and repairs for the three months endedJune 30 were: Heavy Maintenance Events 2020 2019 Inc/(Dec) 747-400 C Checks 7 6 1 767 C Checks 3 1 2 747-8F D Checks 3 1 2 747-400 D Checks 1 1 - CF6-80 engine overhauls 12 4 8 PW4000 engine overhauls 1 - 1 Aircraft fuel decreased$38.9 million , or 31.9%, primarily due to a decrease in the average fuel cost per gallon, partially offset by an increase in consumption related to increased Charter flying. We do not incur fuel expense in our ACMI orDry Leasing businesses as the cost of fuel is borne by the customer. Average fuel cost per gallon and fuel consumption for the three months endedJune 30 were: 2020 2019 Inc/(Dec) % Change
Average fuel cost per gallon
(53.6 )% Fuel gallons consumed (000s) 75,769 51,596 24,173 46.9 % Depreciation and amortization increased$2.1 million , or 3.4%, primarily due to an increase in the amortization of deferred maintenance costs related to 747-8F engine overhauls (see Note 2 to our Financial Statements) and an increase in the scrapping of rotable parts. Partially offsetting these increases was a reduction in depreciation related to the 747-400 freighter asset group that was written down during the fourth quarter of 2019, and certain spare CF6-80 engines and aircraft that were classified as held for sale during the fourth quarter of 2019. Travel decreased$11.7 million , or 25.3%, primarily due to decreased rates and travel related to the impact of the COVID-19 pandemic, partially offset by an increase in flying. 26
-------------------------------------------------------------------------------- Navigation fees, landing fees and other rent decreased$2.3 million , or 6.2%, primarily due to a decrease in purchased capacity, which is a component of other rent, partially offset by increased flying. Aircraft rent decreased$16.0 million , or 39.7%, primarily due to a reduction in the amortization of operating lease right-of-use assets related to the 747-400 freighter asset group that was written down during the fourth quarter of 2019. Special charge in 2020 primarily represented a$15.9 million impairment charge related to fair value adjustments for assets held for sale including spare engines and 737-400 passenger aircraft for training purposes. Special charge in 2019 primarily represented a$2.5 million impairment loss on an engine trade-in as part of our engine acquisition program. See Note 7 to our Financial Statements for additional discussion. We may sell additional flight equipment, which could result in additional charges in future periods. Transaction-related expenses in 2020 primarily related to professional fees in support of the Payroll Support Program under the CARES Act (see Note 3 to our Financial Statements). Transaction-related expenses in 2019 primarily related to professional fees for a customer transaction with warrants (see Note 5 to our Financial Statements).
Other decreased
Non-operating Expenses (Income)
The following table compares our Non-operating Expenses (Income) for the three
months ended
2020 2019 Inc/(Dec) % Change
Non-operating Expenses (Income)
Interest income $ (224 ) $ (1,278 ) $ (1,054 ) (82.5 )%
Interest expense 28,950 30,045 (1,095 ) (3.6 )%
Capitalized interest (132 ) (627 ) (495 ) (78.9 )%
Loss on early extinguishment of debt 74 - 74 NM
Unrealized loss (gain) on financial
instruments 30,671 (42,300 ) (72,971 ) (172.5 )%
Other (income) expense, net (50,598 ) 945 51,543 NM
Unrealized loss (gain) on financial instruments represents the change in fair
value of a customer warrant liability (see Note 5 to our Financial Statements)
primarily due to changes in our common stock price.
Other (income) expense, net increased
Income taxes. The effective income tax expense for the three months endedJune 30, 2020 differed from tax at theU.S. statutory rate primarily due to$6.7 million of nondeductible changes in the fair value of a customer warrant liability (see Note 5 to our Financial Statements). The effective income tax benefit for the three months endedJune 30, 2019 differed from tax at theU.S. statutory rate primarily due to$59.8 million of tax benefits related to the favorable completion of anIRS examination of our 2015 income tax return and$9.3 million of nontaxable changes in the fair value of a customer warrant liability.
Segments
The following table compares the Direct Contribution for our reportable segments for the three months endedJune 30 (see Note 11 to our Financial Statements for the reconciliation to Operating income) (in thousands): 2020 2019 Inc/(Dec) % Change Direct Contribution: ACMI$ 14,495 $ 40,640 $ (26,145 ) (64.3 )% Charter 185,969 14,084 171,885 NM Dry Leasing 9,721 11,091 (1,370 ) (12.4 )% Total Direct Contribution$ 210,185 $ 65,815 $ 144,370 219.4 %
Unallocated expenses and (income), net
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ACMI Segment
ACMI Direct Contribution decreased$26.1 million , or 64.3%, primarily due to higher heavy maintenance, including additional engine overhauls and other maintenance to take advantage of availability and opportunities for vendor pricing discounts. In addition, ACMI Direct Contribution reflected higher pilot costs related to increased pay rates resulting from our recent interim agreement with our pilots and premium pay for pilots operating in certain areas significantly impacted by COVID-19. We also redeployed 747-400 aircraft to Charter to support long-term charter programs with customers seeking to secure committed cargo capacity. Partially offsetting these items was an increase in CMI flying and a reduction in aircraft rent and depreciation.
Charter Segment
Charter Direct Contribution increased$171.9 million , primarily due to an increase in commercial cargo Yields, net of fuel, and demand reflecting a reduction of available capacity in the market, the disruption of global supply chains due to the COVID-19 pandemic and our ability to increase utilization. Charter Direct Contribution also benefited from a reduction in aircraft rent and depreciation, and the redeployment of 747-400 aircraft from ACMI and the operation of a 777-200 freighter aircraft in ourDry Leasing business. Partially offsetting these improvements were higher heavy maintenance, including additional engine overhauls and other maintenance to take advantage of availability and opportunities for vendor pricing discounts, and lower passenger demand from the AMC as the COVID-19 pandemic disrupted the movement of military personnel. In addition, Charter Direct Contribution reflected higher pilot costs related to increased pay rates resulting from our recent interim agreement with our pilots and premium pay for pilots operating in certain areas significantly impacted by COVID-19. Dry Leasing Segment Dry Leasing Direct Contribution decreased$1.4 million , or 12.4%, primarily due to a reduction in revenue related to changes in leases and the disposition of certain nonessential Dry Leased aircraft during the first quarter of 2020.
Unallocated expenses and (income), net
Unallocated expenses and (income), net decreased
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Six Months Ended
Operating Statistics
The following tables compare our Segment Operating Fleet (average aircraft equivalents during the period) and totalBlock Hours operated for the six months endedJune 30 : Segment Operating Fleet 2020 2019 Inc/(Dec) ACMI* 747-8F Cargo 8.9 8.6 0.3 747-400 Cargo 13.0 18.0 (5.0 ) 747-400 Dreamlifter 2.7 3.6 (0.9 ) 777-200 Cargo 8.1 6.2 1.9 767-300 Cargo 23.8 25.3 (1.5 ) 767-200 Cargo 9.0 9.0 - 767-200 Passenger 1.0 1.0 - 737-800 Cargo 5.0 0.9 4.1 737-400 Cargo 4.8 5.0 (0.2 ) Total 76.3 77.6 (1.3 ) Charter 747-8F Cargo 1.1 1.3 (0.2 ) 747-400 Cargo 18.8 15.1 3.7 747-400 Passenger 5.0 4.0 1.0 777-200 Cargo 0.3 - 0.3 767-300 Cargo 0.2 - 0.2 767-300 Passenger 4.8 4.9 (0.1 ) Total 30.2 25.3 4.9 Dry Leasing 777-200 Cargo 7.0 7.5 (0.5 ) 767-300 Cargo 21.0 21.3 (0.3 ) 757-200 Cargo 0.2 1.0 (0.8 ) 737-300 Cargo 1.0 1.0 - 737-800 Passenger 0.3 1.0 (0.7 ) Total 29.5 31.8 (2.3 )
Less: Aircraft Dry Leased to CMI customers (21.0 ) (23.3 )
(2.3 )
Total Operating Average Aircraft Equivalents 115.0 111.4 3.6
Out-of-service** 3.5 0.5 3.0
* ACMI average fleet excludes spare aircraft provided by CMI customers.
** Out-of-service includes aircraft that are either temporarily parked or
held for sale.
Block Hours 2020 2019 Inc/(Dec) % Change
Total Block Hours*** 158,213 157,342 871 0.6 %
*** Includes ACMI, Charter and other Block Hours .
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Operating Revenue
The following table compares our Operating Revenue for the six months endedJune 30 (in thousands): 2020 2019 Inc/(Dec) % Change Operating Revenue ACMI$ 570,695 $ 613,845 $ (43,150 ) (7.0 )% Charter 825,176 620,793 204,383 32.9 % Dry Leasing 82,832 113,481 (30,649 ) (27.0 )% Customer incentive asset amortization (18,556 ) (13,222 ) 5,334 40.3 % Other 8,608 8,704 (96 ) (1.1 )% Total Operating Revenue$ 1,468,755 $ 1,343,601 ACMI 2020 2019 Inc/(Dec) % Change ACMI Block Hours 113,910 121,722 (7,812 ) (6.4 )% ACMI Revenue Per Block Hour$ 5,010 $ 5,043 $ (33 ) (0.7 )% ACMI revenue decreased$43.2 million , or 7.0%, primarily due to decreased flying. The decrease inBlock Hours flown was primarily driven by the redeployment of 747-400 aircraft to Charter to support long-term charter programs with customers seeking to secure committed cargo capacity, partially offset by an increase in CMI flying. In addition,Block Hours were negatively impacted from flight cancellations by certain of our ACMI customers caused by the COVID-19 pandemic. Revenue per Block Hour was relatively unchanged. Charter 2020 2019 Inc/(Dec) % ChangeCharter Block Hours : Cargo 34,416 24,367 10,049 41.2 % Passenger 7,834 9,954 (2,120 ) (21.3 )% Total 42,250 34,321 7,929 23.1 % Charter Revenue Per Block Hour: Cargo$ 19,781 $ 17,710 $ 2,071 11.7 % Passenger$ 18,431 $ 19,012 $ (581 ) (3.1 )% Charter$ 19,531 $ 18,088 $ 1,443 8.0 % Charter revenue increased$204.4 million , or 32.9%, primarily due to increased flying and an increase in Revenue per Block Hour. The increase inCharter Block Hours flown was primarily driven by increased demand for freighter aircraft reflecting a reduction of available cargo capacity in the market, the disruption of global supply chains due to the COVID-19 pandemic and our ability to increase utilization. Due to this increased demand and to support long-term charter programs with customers seeking to secure committed cargo capacity, we redeployed 747-400 aircraft from ACMI and began operation of a 777-200 freighter aircraft in ourDry Leasing business. Partially offsetting these improvements was lower AMC passenger flying for 747-400 aircraft as theU.S. military took precautionary measures to limit the movement of military personnel. Revenue per Block Hour increased primarily due to higher commercial cargo Yields driven by the factors impacting commercial cargo demand noted above, partially offset by a reduction in passenger charter Revenue per Block Hour related to a decrease in higher-yielding 747-400 flying for the AMC.
Dry Leasing revenue decreased$30.6 million , or 27.0%, primarily due to$22.3 million of revenue in 2019 from maintenance payments related to the scheduled return of a 777-200 freighter aircraft, changes in leases and the disposition of certain nonessential Dry Leased aircraft during the first quarter of 2020. 30
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Operating Expenses
The following table compares our Operating Expenses for the six months endedJune 30 (in thousands): 2020 2019 Inc/(Dec) % Change Operating Expenses Salaries, wages and benefits$ 340,335 $ 286,924 $ 53,411 18.6 % Maintenance, materials and repairs 262,452 217,091 45,361 20.9 % Aircraft fuel 191,560 228,479 (36,919 ) (16.2 )% Depreciation and amortization 123,410 128,170 (4,760 ) (3.7 )% Travel 77,018 91,403 (14,385 ) (15.7 )% Navigation fees, landing fees and other rent 67,039 78,198 (11,159 ) (14.3 )% Passenger and ground handling services 62,089 62,685 (596 ) (1.0 )% Aircraft rent 48,283 82,223 (33,940 ) (41.3 )% Gain on disposal of aircraft (6,715 ) - (6,715 ) NM Special charge 15,934 3,269 12,665 NM Transaction-related expenses 1,796 3,261 (1,465 ) (44.9 )% Other 103,822 106,054 (2,232 ) (2.1 )% Total Operating Expenses$ 1,287,023 $ 1,287,757 Salaries, wages and benefits increased$53.4 million , or 18.6%, primarily due to higher pilot costs related to premium pay for pilots operating in certain areas significantly impacted by COVID-19, increased pay rates from our recent interim agreement with our pilots and increased flying. Maintenance, materials and repairs increased by$45.4 million , or 20.9%, primarily reflecting$50.6 million of increased Heavy Maintenance expense, partially offset by$4.6 million of decreased Line Maintenance expense due to decreased passenger flying. Heavy Maintenance expense on 747-400 aircraft increased$40.9 million primarily due to an increase in the number of engine overhauls and other maintenance to take advantage of availability and opportunities for vendor pricing discounts. Heavy Maintenance expense on 747-8F aircraft increased$7.2 million primarily due to an increase in the number of D Checks, partially offset by a reduction in the number of C Checks. The lower Line Maintenance expense primarily reflected a decrease of$9.4 million related to reduced passenger flying, partially offset by$4.8 million of increased Line Maintenance expense related to increased cargo flying. Heavy airframe maintenance checks and engine overhauls impacting Maintenance, materials and repairs for the six months endedJune 30 were: Heavy Maintenance Events 2020 2019 Inc/(Dec) 747-8F C Checks - 2 (2 ) 747-400 C Checks 11 11 - 767 C Checks 6 2 4 747-8F D Checks 3 1 2 747-400 D Checks 4 1 3 CF6-80 engine overhauls 13 9 4 PW4000 engine overhauls 1 - 1 Aircraft fuel decreased$36.9 million , or 16.2%, primarily due to a decrease in the average fuel cost per gallon, partially offset by an increase in consumption related to increased Charter flying. We do not incur fuel expense in our ACMI orDry Leasing businesses as the cost of fuel is borne by the customer. Average fuel cost per gallon and fuel consumption for the six months endedJune 30 were: 2020 2019 Inc/(Dec) % Change Average fuel cost per gallon$ 1.47 $ 2.30 $ (0.83 ) (36.1 )% Fuel gallons consumed (000s) 130,047 99,468 30,579 30.7 % Depreciation and amortization decreased$4.8 million , or 3.7%, primarily due to a reduction in depreciation related to the 747-400 freighter asset group that was written down during the fourth quarter of 2019, and certain spare CF6-80 engines and aircraft that were classified as held for sale during the fourth quarter of 2019. Partially offsetting these decreases was an increase in the amortization of deferred maintenance costs related to 747-8F engine overhauls (see Note 2 to our Financial Statements). 31 -------------------------------------------------------------------------------- Travel decreased$14.4 million , or 15.7%, primarily due to decreased rates and travel related to the impact of the COVID-19 pandemic, partially offset by an increase in flying. Navigation fees, landing fees and other rent decreased$11.2 million , or 14.3%, primarily due to a decrease in purchased capacity, which is a component of other rent, partially offset by increased flying. Aircraft rent decreased$33.9 million , or 41.3%, primarily due to a reduction in the amortization of operating lease right-of-use assets related to the 747-400 freighter asset group that was written down during the fourth quarter of 2019. Gain on disposal of aircraft in 2020 represented a net gain of$6.7 million from the sale of certain nonessential assets that were classified as held for sale during the fourth quarter of 2019 (see Note 7 to our Financial Statements). Special charge in 2020 primarily represented a$15.9 million impairment charge related to fair value adjustments for assets held for sale, including spare engines and 737-400 passenger aircraft for training purposes. Special charge in 2019 primarily represented a$2.5 million impairment loss on an engine trade in as part of our engine acquisition program. See Note 7 to our Financial Statements for additional discussion. We may sell additional flight equipment, which could result in additional charges in future periods. Transaction-related expenses in 2020 primarily related to professional fees in support of the Payroll Support Program under the CARES Act (see Note 3 to our Financial Statements). Transaction-related expenses in 2019 primarily related to professional fees for a customer transaction with warrants (see Note 5 to our Financial Statements).
Other decreased
Non-operating Expenses (Income)
The following table compares our Non-operating Expenses (Income) for the six
months ended
2020 2019 Inc/(Dec) % Change
Non-operating (Income) Expenses
Interest income $ (704 ) $ (3,322 ) $ (2,618 ) (78.8 )%
Interest expense 58,225 60,398 (2,173 ) (3.6 )%
Capitalized interest (325 ) (1,090 ) (765 ) (70.2 )%
Loss on early extinguishment of debt 74 245 (171 ) (69.8 )%
Unrealized loss (gain) on financial
instruments 29,747 4,275 25,472 NM
Other (income) expense, net (49,392 ) (2,030 ) 47,362 NM
Unrealized loss (gain) on financial instruments represents the change in fair
value of a customer warrant liability (see Note 5 to our Financial Statements)
primarily due to changes in our common stock price.
Other (income) expense, net increased
Income taxes. The effective income tax expense for the six months endedJune 30, 2020 differed from tax at theU.S. statutory rate primarily due to$6.5 million of nondeductible changes in the fair value of a customer warrant liability (see Note 5 to our Financial Statements). The income tax benefit for the six months endedJune 30, 2019 differed from tax at theU.S. statutory rate primarily due to$59.8 million of tax benefits related to the favorable completion of anIRS examination of our 2015 income tax return. 32
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Segments
The following table compares the Direct Contribution for our reportable segments for the six months endedJune 30 (see Note 11 to our Financial Statements for the reconciliation to Operating income) (in thousands): 2020 2019 Inc/(Dec) % Change Direct Contribution: ACMI$ 66,802 $ 80,647 $ (13,845 ) (17.2 )% Charter 236,750 43,217 193,533 NM Dry Leasing 20,420 46,618 (26,198 ) (56.2 )% Total Direct Contribution$ 323,972 $ 170,482 $ 153,490 90.0 %
Unallocated expenses and (income), net
ACMI Segment ACMI Direct Contribution decreased$13.8 million , or 17.2%, primarily due to higher heavy maintenance, including additional engine overhauls and other maintenance to take advantage of availability and opportunities for vendor pricing discounts. In addition, ACMI Direct Contribution reflected higher pilot costs related to premium pay for pilots operating in certain areas significantly impacted by COVID-19 and increased pay rates from our recent interim agreement with our pilots. We also redeployed 747-400 aircraft to Charter to support long-term Charter programs with customers seeking to secure committed cargo capacity. Partially offsetting these items was an increase in CMI flying and a reduction in aircraft rent and depreciation.
Charter Segment
Charter Direct Contribution increased$193.5 million primarily due to an increase in commercial cargo Yields, net of fuel, and demand reflecting a reduction of available capacity in the market, the disruption of global supply chains due to the COVID-19 pandemic and our ability to increase utilization. Charter Direct Contribution also benefited from a reduction in aircraft rent and depreciation, and the redeployment of 747-400 aircraft from ACMI and the operation of a 777-200 freighter aircraft in ourDry Leasing business. Partially offsetting these improvements were higher heavy maintenance, including additional engine overhauls and other maintenance to take advantage of availability and opportunities for vendor pricing discounts, and lower passenger demand from the AMC as the COVID-19 pandemic disrupted the movement of military personnel. In addition, Charter Direct Contribution reflected higher pilot costs related to premium pay for pilots operating in certain areas significantly impacted by COVID-19 and increased pay rates resulting from our recent interim agreement with our pilots. Dry Leasing Segment Dry Leasing Direct Contribution decreased$26.2 million , or 56.2%, primarily due to$22.3 million of revenue in 2019 from maintenance payments related to the scheduled return of a 777-200 freighter aircraft, changes in leases and the disposition of certain nonessential Dry Leased aircraft during the first quarter of 2020.
Unallocated expenses and (income), net
Unallocated expenses and (income), net decreased
Reconciliation of GAAP to non-GAAP Financial Measures
To supplement our Financial Statements presented in accordance with GAAP, we
present certain non-GAAP financial measures to assist in the evaluation of our
business performance. These non-GAAP financial measures include Adjusted Net
Income, Adjusted Diluted EPS and Adjusted earnings before interest, taxes,
depreciation and amortization ("Adjusted EBITDA"), which exclude certain noncash
income and expenses, and items impacting year-over-year comparisons of our
results. These non-GAAP financial measures may not be comparable to similarly
titled measures used by other companies and should not be considered in
isolation or as a substitute for Income from continuing operations, net of taxes
and Diluted EPS from continuing operations, net of taxes which are the most
directly comparable measures of performance prepared in accordance with GAAP.
Effective during the three months ended September 30, 2019 , we changed our
method of calculating Adjusted EBITDA to include Other non-operating expenses
(income) to enhance the usefulness for investors and analysts, and the
comparability of the calculation to that of other companies. Prior period
amounts have been adjusted for comparability.
We use these non-GAAP financial measures in assessing the performance of our
ongoing operations and in planning and forecasting future periods. These
adjusted measures provide a more comparable basis to analyze operating results
and earnings and are measures commonly used by shareholders to measure our
performance. In addition, management's incentive compensation is
33
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determined, in part, by using Adjusted Net Income and Adjusted EBITDA. We
believe that these adjusted measures, when considered together with the
corresponding GAAP financial measures and the reconciliations to those measures,
provide meaningful supplemental information to assist investors and analysts in
understanding our business results and assessing our prospects for future
performance.
The following is a reconciliation of Net Income and Diluted EPS to the
corresponding non-GAAP financial measures (see Note 13 to our Financial
Statements for the calculation of Diluted EPS) (in thousands, except per share
data):
For the Three Months Ended
June 30, 2020 June 30, 2019 Percent Change
Net Income $ 78,912 $ 86,868 (9.2 )%
Impact from:
CARES Act grant income (a) (20,167 ) -
Customer incentive asset amortization 9,534
6,936
Special charge 15,934
3,269
Costs associated with transactions (b) 1,275
734
Leadership transition costs 3,156
541
Noncash expenses and income, net (c) 4,458
4,579
Unrealized loss (gain) on financial instruments 30,671 (42,300 ) Other, net (d) 279
1,815
Income tax effect of reconciling items (863 ) (3,652 ) Special tax item (e) - (54,272 ) Adjusted Net Income$ 123,189 $ 4,518 NM Adjusted weighted average diluted shares outstanding 26,182 26,953 Adjusted Diluted EPS $ 4.71 $ 0.17 NM For the Six Months ended June 30, 2020 June 30, 2019 Percent Change Net Income$ 102,265 $ 57,158 78.9 % Impact from: CARES Act grant income (a) (20,167 )
-
Customer incentive asset amortization 18,556
13,222
Special charge 15,934
3,269
Costs associated with transactions (b) 1,796
3,261
Leadership transition costs 3,757
541
Noncash expenses and income, net (c) 8,844
9,047
Unrealized loss on financial instruments 29,747
4,275
Other, net (d) (6,103 ) (979 ) Income tax effect of reconciling items (1,559 ) (3,681 ) Special tax item (e) - (54,272 ) Adjusted Net Income$ 153,070 $ 31,841 NM Adjusted weighted average diluted shares outstanding 26,074 27,437 Adjusted Diluted EPS $ 5.87 $ 1.16 NM 34
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For the Three Months Ended
June 30, 2020 June 30, 2019 Percent Change
Net Income $ 78,912 $ 86,868 (9.2 )%Interest expense, net 28,594 28,140 Depreciation and amortization 65,826 63,689 Income tax expense (benefit) 33,009 (64,683 ) EBITDA 206,341 114,014 CARES Act grant income (a) (20,167 ) - Customer incentive asset amortization 9,534
6,936
Special charge 15,934
3,269
Costs associated with transactions (b) 1,275
734
Leadership transition costs 3,156
541
Unrealized loss (gain) on financial 30,671 (42,300 ) instruments Other, net (d) 279 954 Adjusted EBITDA$ 247,023 $ 84,148 193.6 % For the Six Months ended June 30, 2020 June 30, 2019 Percent Change Net Income$ 102,265 $ 57,158 78.9 % Interest expense, net 57,196
55,986
Depreciation and amortization 123,410
128,170
Income tax expense (benefit) 41,842 (59,790 ) EBITDA 324,713 181,524 CARES Act grant income (a) (20,167 ) - Customer incentive asset amortization 18,556
13,222
Special charge 15,934
3,269
Costs associated with transactions (b) 1,796
3,261
Leadership transition costs 3,757
541
Unrealized loss on financial instruments 29,747 4,275 Other, net (d) (6,103 ) (1,580 ) Adjusted EBITDA$ 368,233 $ 204,512 80.1 % (a) CARES Act grant income in 2020 related to income associated with the Payroll Support Program (see Note 3 to our Financial Statements).
(b) Costs associated with transactions in 2020 primarily related to costs
associated with the Payroll Support Program (see Note 3 to our Financial
Statements) and our acquisition of Southern Air . Costs associated with
transactions in 2019 primarily related to a customer transaction with
warrants (see Note 5 to our Financial Statements) and other costs
associated with our acquisition of Southern Air .
(c) Noncash expenses and income, net in 2020 and 2019 primarily related to
amortization of debt discount on the convertible notes (see Note 8 to our
Financial Statements).
(d) Other, net in 2020 primarily related to a
of aircraft, costs associated with the refinancing of debt and accrual for
legal matters and professional fees. Other, net in 2019 primarily related
to a net insurance recovery, loss on early extinguishment of debt, unique
training aircraft costs required for a customer contract (see Note 5 to our
Financial Statements) and accrual for legal matters and professional fees.
(e) Special tax item in 2019 represented income tax benefits from the
completion of the 2015
operations (see Note 9 to our Financial Statements).
(f) Dilutive warrants in 2019 represented potentially dilutive common shares
related to warrants issued to a customer (see Note 5 to our Financial
Statements). These warrants are excluded from Diluted EPS prepared in
accordance with GAAP when they would have been antidilutive.
Liquidity and Capital Resources
The most significant liquidity events during the first half of 2020 were as follows:
InFebruary 2020 , we refinanced two secured term loans that were originally due later in 2020, with two new term loans. One term loan is for 126 months in the amount of$82.0 million at a fixed interest rate of 3.27% with a final payment of$12.5 million due 35
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in
InMarch 2020 , as a precautionary measure due to uncertainty arising from the COVID-19 pandemic, we drew$75.0 million under our revolving credit facility. As ofJune 30, 2020 , there was$175.0 million outstanding and we had$16.2 million of unused availability, based on the collateral borrowing base. InJuly 2020 , we increased our unused availability, based on the collateral borrowing base, to$25.0 million . [InAugust 2020 , we repaid$175.0 million and had$200.0 million of unused availability.]
In
InMay 2020 , we entered into the PSP Agreement with theU.S. Treasury that provided us with payroll support funding in three installments totaling$406.8 million , of which$207.0 million is in the form of direct payroll support and$199.8 million is in the form of the Promissory Note. As ofJune 30, 2020 , the first two installments totaling$305.1 million were received. The third installment of$101.7 million was received onJuly 30, 2020 . The Promissory Note is due inMay 2030 and bears interest on the outstanding principal amount at a rate equal to 1.00% per annum until the fifth anniversary of the PSP Closing Date and the applicable Secured Overnight Financing Rate ("SOFR") plus 2.00% per annum thereafter (see Note 3 to our Financial Statements). Operating Activities. Net cash provided by operating activities was$560.4 million for the first half of 2020, which primarily reflected Net Income of$102.3 million , noncash adjustments of$157.5 million for Depreciation and amortization,$39.5 million for Deferred taxes and$29.7 million for Unrealized loss on financial instruments, a$178.9 million increase in Accounts payable, accrued liabilities and other liabilities, and a$51.8 million decrease in Accounts receivable, partially offset by a$19.1 million increase in Prepaid expenses, current assets and other assets. Net cash provided by operating activities was$109.0 million for the first half of 2019, which primarily reflected Net Income of$57.2 million , noncash adjustments of$157.8 million for Depreciation and amortization,$60.0 million for Deferred taxes and$4.3 million for Unrealized loss on financial instruments, partially offset by a$40.1 million decrease in Accounts payable, accrued liabilities and other liabilities, and a$23.8 million increase in Prepaid expenses, current assets and other assets. Investing Activities. Net cash used for investing activities was$40.0 million for the first half of 2020, consisting primarily of$59.9 million of payments for flight equipment and$25.1 million of payments for core capital expenditures, excluding flight equipment, partially offset by$44.1 million of proceeds from the disposal of aircraft. Payments for flight equipment and modifications during the first half of 2020 were primarily related to spare engines and GEnx engine performance upgrade kits. All capital expenditures for 2020 were funded through working capital and the financings discussed above. Net cash used for investing activities was$128.5 million for the first half of 2019, consisting primarily of$99.2 million of payments for flight equipment and modifications and$76.8 million of core capital expenditures, excluding flight equipment, partially offset by$38.1 million of proceeds from insurance. Payments for flight equipment and modifications during the first half of 2019 were primarily related to 767-300 passenger aircraft and related freighter conversion costs, spare engines and GEnx engine performance upgrade kits. Financing Activities. Net cash provided by financing activities was$105.4 million for the first half of 2020, which primarily reflected$321.5 million from debt issuance and$75.0 million of proceeds from our revolving credit facility, partially offset by$275.0 million of payments on debt and$14.4 million in payments of maintenance reserves. Net cash used for financing activities was$92.5 million for the first half of 2019, which primarily reflected$160.1 million of payments on debt, including a$20.7 million repayment of two term loans, and$9.2 million related to the treasury shares withheld for payment of taxes, partially offset by$50.0 million of proceeds from our revolving credit facility and$19.7 million from debt issuance. In response to the COVID-19 pandemic, we have significantly reduced nonessential employee travel, reduced the use of contractors, limited ground staff hiring, implemented a number of other cost reduction initiatives and taken actions to increase liquidity and strengthen our financial position, including participation in the Payroll Support Program and deferral of the payment of the employer portion of social security taxes as provided for under the CARES Act. In connection with our participation in the Payroll Support Program, we agreed not to repurchase shares in the open market of, or make dividend payments with respect to, our common stock throughSeptember 30, 2021 . We consider Cash and cash equivalents (excluding Payroll Support Program proceeds to be used exclusively for the payment of certain employee wages, salaries and benefits of the PSP Recipients), Net cash provided by operating activities and availability under our revolving credit facility to be sufficient to meet our debt and lease obligations, and to fund committed and core capital expenditures for the remainder of 2020. Commitments to acquire engines are approximately$66.3 million . Core capital expenditures for the remainder of 2020 are expected to range between$55.0 to$65.0 million , which excludes flight equipment and capitalized interest. We may access external sources of capital from time to time depending on our cash requirements, assessments of current and anticipated market conditions, and the after-tax cost of capital. To that end, we filed a shelf registration statement with theSEC inApril 2020 that enables us to sell debt and/or equity securities on a registered basis over the subsequent three years, depending on 36 -------------------------------------------------------------------------------- market conditions, our capital needs and other factors. Our access to capital markets can be adversely impacted by prevailing economic conditions and by financial, business and other factors, some of which are beyond our control. Additionally, our borrowing costs are affected by market conditions and may be adversely impacted by a tightening in credit markets. We do not expect to pay any significantU.S. federal income tax in this decade. Our business operations are subject to income tax in several foreign jurisdictions and in many states. We do not expect to pay any significant cash income taxes for at least several years in these foreign jurisdictions and states. We may repatriate the unremitted earnings of our foreign subsidiaries to the extent taxes are insignificant.
Contractual Obligations and Debt Agreements
See Notes 3 and 8 to our Financial Statements for a description of our new debt. See our 2019 Annual Report on Form 10-K for a tabular disclosure of our contractual obligations as ofDecember 31, 2019 and a description of our other debt obligations and amendments thereto.
Off-Balance Sheet Arrangements
There were no material changes in our off-balance sheet arrangements during the
six months ended
Recent Accounting Pronouncements
See Note 2 to our Financial Statements for a discussion of recent accounting pronouncements.
Forward-Looking Statements
This Quarterly Report on Form 10-Q (this "Report"), as well as other reports, releases and written and oral communications issued or made from time to time by or on behalf of AAWW, contain statements that may constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Those statements are based on management's beliefs, plans, expectations and assumptions, and on information currently available to management. Generally, the words "will," "may," "should," "expect," "anticipate," "intend," "plan," "continue," "believe," "seek," "project," "estimate" and similar expressions used in this Report that do not relate to historical facts are intended to identify forward-looking statements. The forward-looking statements in this Report are not representations or guarantees of future performance and involve certain risks, uncertainties and assumptions. Such risks, uncertainties and assumptions include, but are not limited to, those described in our Annual Report on Form 10-K for the year endedDecember 31, 2019 . Many of such factors are beyond AAWW's control and are difficult to predict. As a result, AAWW's future actions, financial position, results of operations and the market price for shares of AAWW's common stock could differ materially from those expressed in any forward-looking statements. Readers are therefore cautioned not to place undue reliance on forward-looking statements. Such forward-looking statements speak only as of the date of this report. AAWW does not intend to publicly update any forward-looking statements that may be made from time to time by, or on behalf of, AAWW, whether as a result of new information, future events or otherwise, except as required by law and expressly disclaims any obligation to revise or update publicly any forward-looking statement to reflect future events or circumstances.
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