ATLAS AIR WORLDWIDE HOLDINGS, INC. The following discussion and analysis should be read in conjunction with the Financial Statements included in Item 8 of this report.
Business Overview
We are a leading global provider of 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 modern 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, theU.S. military, charter brokers, freight forwarders, direct shippers, airlines, manufacturers, sports teams and fans, and private charter customers. We provide global services with operations inAfrica ,Asia ,Australia ,Europe , theMiddle East ,North America andSouth America .
We believe that the following competitive strengths will allow us to capitalize on opportunities that exist in the global airfreight industry:
Market leader with leading-edge technology and differentiated, value-creating solutions
The 747-8F and 777-200LRF aircraft are two of the most efficient long-haul wide-body commercial freighters available and we are currently the only operator offering both of these aircraft under ACMI and CMI agreements. Our operating model deploys our aircraft to drive maximum utilization and value from our fleet. The scale of our fleet enables us to have aircraft available globally to respond to our customers' needs, both on a planned and ad hoc basis. We believe this provides us with a commercial advantage over our competitors that operate smaller and less flexible fleets. OurDry Leasing business is primarily focused on a portfolio of 777-200LRF aircraft, and our fleet of 767-300 freighter aircraft for regional and domestic applications. These aircraft are Dry Leased to customers on a long-term basis, which further diversifies our business mix and enhances our predictable, long-term revenue and earnings streams.
Stable base of contractual revenue and reduced operational risk
Our focus on providing long-term contracted aircraft and operating solutions to customers stabilizes our revenues and reduces our operational risk. ACMI and CMI contracts with customers generally range from two to seven years, although some contracts have shorter or longer durations. Our long-term Charter programs provide customers with dedicated Charter capacity generally ranging from one to three years.Dry Leasing contracts with customers generally range from five to twelve years. Under these types of contracts, our customers assume fuel, demand and price risk resulting in reduced operational risk for AAWW, while typically providing us with a guaranteed minimum level of revenue and target level of profitability.
Focus on asset optimization
By managing the largest fleet of outsourced freighter aircraft, we achieve significant economies of scale in areas such as aircraft maintenance, crew efficiency, crew training, inventory management and purchasing.
Our mix of aircraft is closely aligned with our customer needs. By providing the broadest array of 747, 777, 767 and 737 aircraft for domestic, regional and international applications, we believe that we are well-suited to meet the current and anticipated requirements of our customers.
We continually evaluate our fleet to ensure that we offer the most efficient and
effective mix of aircraft to meet our customers' needs. Our service model is
unique in that we offer a portfolio of operating solutions that complement our
freighter aircraft businesses. We believe this allows us to improve the returns
we generate from our asset base by allowing us to flexibly redeploy aircraft to
meet changing market conditions, ensuring the maximum
34
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utilization of our fleet. Our Charter services complement our ACMI services by
allowing us to increase aircraft utilization during open time and to react to
changes in demand and Yield in these segments. We have employees situated around
the globe who closely monitor demand for commercial charter services in each
region, enabling us to redeploy available aircraft quickly. We also endeavor to
manage our portfolio to stagger contract terms, which mitigates our remarketing
risks and aircraft down time.
Long-term strategic customer relationships and unique innovative service offerings
We combine the global scope and scale of our efficient aircraft fleet with high-quality, cost-effective operations and premium customer service to provide unique, fully integrated and reliable solutions for our customers. We believe this approach results in customers that are motivated to seek long-term relationships with us. This has historically allowed us to command higher prices than our competitors in several key areas. These long-term relationships help us to build resilience into our business model. Our customers have access to our innovative solutions, such as inter-operable crews, flight scheduling, fuel-efficiency planning, and maintenance spare coverage, which, we believe, set us apart from other participants in the outsourced aircraft and aviation operating services market. Furthermore, we have access to valuable operating rights to restricted markets such asBrazil ,Japan andChina . We believe our freighter services allow our customers to effectively expand their capacity and operate dedicated freighter aircraft without simultaneously taking on exposure to fluctuations in the value of owned aircraft and, in the case of our ACMI and long-term Charter contracts, long-term expenses relating to crews and maintenance. Dedicated freighter aircraft enable schedules to be driven by cargo rather than passenger demand (for those customers that typically handle portions of their cargo operations via belly capacity on passenger aircraft), which we believe allows our customers to drive higher contribution from cargo operations. We are focused on providing safe, secure and reliable services. Atlas, Polar andSouthern Air all have successfully completed theInternational Air Transport Association's Operational Safety Audit (IOSA), a globally recognized safety and quality standard. We provide outsourced aircraft and aviation services to some of the world's premier express delivery providers, e-commerce retailers, airlines and freight forwarders. We will take advantage of opportunities to maintain and expand our relationships with our existing customers, while seeking new customers and new geographic markets. Experienced management team Our management team has extensive operating and leadership experience in the airfreight, airline, aircraft leasing and logistics industries at companies such as United Airlines,US Airways , Lufthansa Cargo, GE Capital Aviation Services,GE , Air Canada,Canadian Airlines ,American Airlines , JetBlue Airways, ICF International, ASTAR Air Cargo, DHL, KLM Cargo, Spirit Airlines, Spirit AeroSystems,Singapore Airlines Cargo andChina Cargo Airlines , as well as theUnited States Army ,Navy ,Air Force and Federal Air Marshal Service. In addition, our management team has a diversity of experience from other industries at companies such as Mastercard, PepsiCo, Moody's,Ralph Lauren ,Kate Spade , Avon Products, New York Life Insurance,Hess and Unisys, as well as nationally recognized accounting and law firms. Our management team is led byJohn W. Dietrich , who has more than 30 years of experience in all facets of aviation and airline management. 35 --------------------------------------------------------------------------------
Business Strategy
Our strategy includes the following:
Focus on securing long-term customer contracts
We will continue to focus on securing long-term contracts with fast-growing customers, including those in express, e-commerce and the fastest-growing regional markets, which provide us with relatively stable revenue streams and margins. In addition, these agreements limit our direct exposure to fuel and other costs and mitigate the risk of fluctuations in both Yield and demand in the airfreight business, while also improving the overall utilization of our fleet.
Aggressively manage our fleet with a focus on leading-edge aircraft
We continue to actively manage our fleet of leading-edge wide-body freighter aircraft to meet customer demands. Our 747-8F and 777-200LRF freighter aircraft are primarily utilized in our ACMI business, while our 747-400s are utilized in our ACMI and Charter business. We aggressively manage our fleet to ensure that we provide our customers with the most efficient aircraft to meet their needs. OurDry Leasing business is primarily focused on a portfolio of modern, efficient 777-200LRF aircraft and our fleet of 767-300 freighter aircraft for regional and domestic applications. We will continue to explore opportunities to invest in additional aircraft.
Drive significant and ongoing productivity improvements
We continue to enhance our organization through a cost saving and productivity enhancing initiative called "Continuous Improvement." We created a separate department to drive the process and to involve all areas of the organization in the effort to reexamine, redesign and improve the way we do business.
Selectively pursue and evaluate future acquisitions and alliances
From time to time, we explore business combinations, joint ventures and alliances with express delivery providers, e-commerce retailers, airlines, freight forwarders and other companies to enhance our competitive position, geographic reach and service portfolio.
Appropriately managing capital allocation and delivering value to shareholders
Our commitment to creating, enhancing and delivering value to our shareholders reflects a disciplined and balanced capital allocation strategy. Our focus is on growing our business while generating returns above our cost of capital and maintaining a strong balance sheet.
Business Developments
InDecember 2019 , COVID-19 was first reported inChina and has since spread to many other regions of the world. InMarch 2020 , it was determined to be a global pandemic by theWorld Health Organization . During 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. Our Charter results for 2020, compared with 2019 were significantly impacted by the reduction of available cargo capacity in the market provided by passenger airlines 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 four 747-400BCF aircraft that had been temporarily parked and began Charter operations using a 777-200 freighter aircraft that was previously in ourDry Leasing business. During 2020, we entered into numerous long-term Charter programs with customers seeking to secure committed cargo capacity. 36 --------------------------------------------------------------------------------
These long-term Charter programs provide us with guaranteed revenue and include indexed fuel price adjustments to mitigate our exposure to fuel price volatility.
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 for pilots operating in certain areas significantly impacted by COVID-19; 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 we provided to our pilots inMay 2020 . 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;
• 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
• deferred 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 could materially affect our results for the duration of the COVID-19 pandemic.
OnFebruary 15, 2021 , the Company and IBT completed the contractually mandated nine-month period for negotiations for a joint CBA. All remaining open issues not resolved in negotiations will be determined in binding interest arbitration scheduled to begin inmid-March 2021 . A new joint CBA could be completed during 2021 and we expect that the labor costs arising from the new joint CBA will be materially greater than the costs under our current CBAs with Atlas pilots andSouthern Air pilots (see Note 14 to our Financial Statements for further discussion). We 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 2020, compared with 2019, were 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 aircraft entered service in
• 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. Two additional 737-800 freighter aircraft entered
service in September 2020 , and another aircraft entered service in
October 2020 .
• 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. For a discussion of our results of operations for the year endedDecember 31, 2019 as compared to the year endedDecember 31, 2018 , see Item 7 of our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2019 , filed with theSecurities and Exchange Commission onFebruary 24, 2020 .
Years ended
Operating Statistics
The following tables compare our Segment Operating Fleet (average aircraft
equivalents during the period) and total
Segment Operating Fleet 2020 2019 Inc/(Dec) ACMI* 747-8F Cargo 8.5 8.5 - 747-400 Cargo 13.4 17.9 (4.5 ) 747-400 Dreamlifter 2.4 3.5 (1.1 ) 777-200 Cargo 8.0 7.1 0.9 767-300 Cargo 23.4 24.9 (1.5 ) 767-200 Cargo 8.7 9.0 (0.3 ) 767-200 Passenger 1.0 1.0 - 737-800 Cargo 5.8 2.4 3.4 737-400 Cargo 2.6 5.0 (2.4 ) Total 73.8 79.3 (5.5 ) Charter 747-8F Cargo 1.5 1.5 - 747-400 Cargo 19.2 16.0 3.2 747-400 Passenger 5.0 4.3 0.7 777-200 Cargo 0.7 - 0.7 767-300 Cargo 0.6 - 0.6 767-300 Passenger 4.8 4.9 (0.1 ) Total 31.8 26.7 5.1 Dry Leasing 777-200 Cargo 7.0 7.3 (0.3 ) 767-300 Cargo 21.0 21.1 (0.1 ) 757-200 Cargo 0.1 1.0 (0.9 ) 737-300 Cargo 1.0 1.0 - 737-800 Passenger 0.2 1.0 (0.8 ) Total 29.3 31.4 (2.1 )
Less: Aircraft Dry Leased to CMI customers (21.0 ) (22.6 )
(1.6 )
Total Operating Average Aircraft Equivalents 113.9 114.8 (0.9 )
Out-of-service** 2.2 0.8 1.4
* 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*** 344,821 321,140 23,681 7.4 %
*** Includes ACMI, Charter and other Block Hours .
38
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The following table compares our Operating Revenue (in thousands):
2020 2019 Inc/(Dec) % Change
Operating Revenue
ACMI $ 1,211,169 $ 1,247,770 $ (36,601 ) (2.9 )%
Charter 1,855,230 1,305,860 549,370 42.1 %
Dry Leasing 165,181 200,781 (35,600 ) (17.7 )%
Customer incentive asset amortization (39,090 ) (33,135 ) 5,955 18.0 %
Other 18,626 17,913 713 4.0 %
Total Operating Revenue $ 3,211,116 $ 2,739,189
ACMI
2020 2019 Inc/(Dec) % Change
ACMI Block Hours 239,056 245,706 (6,650 ) (2.7 )%
ACMI Revenue Per Block Hour $ 5,066 $ 5,078 $ (12 ) (0.2 )%
ACMI revenue decreased $36.6 million , or 2.9%, primarily due to decreased
flying. The decrease in Block Hours flown was 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 and aircraft utilization. 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) % Change
Charter Block Hours :
Cargo 84,461 51,982 32,479 62.5 %
Passenger 16,777 20,565 (3,788 ) (18.4 )%
Total 101,238 72,547 28,691 39.5 %
Charter Revenue Per Block Hour:
Cargo $ 18,303 $ 17,164 $ 1,139 6.6 %
Passenger $ 18,440 $ 20,113 $ (1,673 ) (8.3 )%
Charter $ 18,325 $ 18,000 $ 325 1.8 %
Charter revenue increased $549.4 million , or 42.1%, primarily due to increased
flying and an increase in Revenue per Block Hour. The increase in Charter Block
Hours flown was primarily driven by increased demand for our services reflecting
a reduction of available cargo capacity provided by passenger airlines in the
market, the disruption of global supply chains due to the COVID-19 pandemic and
our ability to increase aircraft 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 that was previously in our Dry Leasing
business. Partially offsetting these improvements was lower AMC passenger flying
for 747-400 aircraft as the U.S. military took precautionary measures to limit
the movement of military personnel during the first half of 2020 and fewer
charters for sports teams and fans as sports leagues cancelled games during
2020. 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 lower fuel costs.
39
--------------------------------------------------------------------------------Dry Leasing revenue decreased$35.6 million , or 17.7%, primarily due to$22.3 million of revenue during the first quarter of 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.
Operating Expenses
The following table compares our Operating Expenses (in thousands):
2020 2019 Inc/(Dec) % Change
Operating Expenses
Salaries, wages and benefits $ 737,963 $ 599,811 $ 138,152 23.0 %
Maintenance, materials and repairs 506,297 381,701 124,596 32.6 %
Aircraft fuel 440,649 483,827 (43,178 ) (8.9 )%
Depreciation and amortization 257,672 251,097 6,575 2.6 %
Navigation fees, landing fees and other rent 155,107 144,809
10,298 7.1 %
Travel 154,792 189,211 (34,419 ) (18.2 )%
Passenger and ground handling services 138,822 130,698 8,124 6.2 %
Aircraft rent 96,865 155,639 (58,774 ) (37.8 )%
Loss (gain) on disposal of aircraft (7,248 ) 5,309 (12,557 ) NM
Special charge 16,265 638,373 (622,108 ) (97.5 )%
Transaction-related expenses 2,780 4,164 (1,384 ) (33.2 )%
Other 216,384 215,521 863 0.4 %
Total Operating Expenses $ 2,716,348 $ 3,200,160 NM represents year-over-year changes that are not meaningful.
Salaries, wages and benefits increased$138.2 million , or 23.0%, primarily due to higher pilot costs related to premium pay for pilots operating in certain areas significantly impacted by COVID-19, increased flying and increased pay rates we provided to our pilots inMay 2020 . Maintenance, materials and repairs increased by$124.6 million , or 32.6%, primarily reflecting$115.3 million of increased Heavy Maintenance expense and$10.9 million of increased Line Maintenance expense driven by increased flying. Heavy Maintenance expense on 747-400 aircraft increased$104.5 million , primarily due to an increase in the number of engine overhauls performed to take advantage of availability and opportunities for vendor pricing discounts, and an increase in the number of D Checks. Heavy Maintenance expense on 747-8F aircraft increased$7.4 million primarily due to an increase in the number of D Checks, partially offset by a reduction in the number of C Checks. Heavy airframe maintenance checks and engine overhauls impacting Maintenance, materials and repairs for 2020 and 2019 were: Heavy Maintenance Events 2020 2019 Inc/(Dec) 747-8F C Checks - 3 (3 ) 747-400 C Checks 14 15 (1 ) 767 C Checks 6 3 3 747-8F D Checks 4 3 1 747-400 D Checks 6 1 5 CF6-80 engine overhauls 28 10 18 PW4000 engine overhauls 3 - 3 Aircraft fuel decreased$43.2 million , or 8.9%, primarily due to a decrease in the average fuel cost per gallon, partially offset by higher 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 2020 and 2019 were: 40 --------------------------------------------------------------------------------
2020 2019 Inc/(Dec) % Change
Average fuel cost per gallon $ 1.41 $ 2.27 $ (0.86 ) (37.9 )%
Fuel gallons consumed (000s) 313,428 213,253 100,175 47.0 %
Depreciation and amortization increased$6.6 million , or 2.6%, 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 related to the increase in the number of engine overhauls. 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. Navigation fees, landing fees and other rent increased$10.3 million , or 7.1%, primarily due to increased flying, partially offset by a decrease in purchased capacity, which is a component of other rent. Travel decreased$34.4 million , or 18.2%, primarily due to decreased rates and travel related to the impact of the COVID-19 pandemic, partially offset by an increase in flying.
Passenger and ground handling services increased
Aircraft rent decreased$58.8 million , or 37.8%, 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. Loss (gain) on disposal of aircraft in 2020 represented a net gain of$7.2 million from the sale of certain nonessential assets that were classified as assets held for sale during the fourth quarter of 2019 (see Note 6 to our Financial Statements). 2019 primarily represents a loss on the trade in of a GEnx engine as part of an exchange transaction. Special charge in 2020 represented a$16.3 million impairment charge related to fair value adjustments for spare engines classified as assets held for sale. 2019 primarily represented a$580.3 million impairment charge related to the write-down of the 747-400 freighter fleet and a$58.1 million impairment charge related to assets sold and held for sale, including certain aircraft in ourDry Leasing portfolio, spare CF6-80 engines and 737-400 passenger aircraft previously used for training purposes. See Note 6 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). 2019 primarily related to professional fees for a customer transaction with warrants (see Note 8 to our Financial Statements).
Non-operating Expenses (Income)
The following table compares our Non-operating Expenses (Income) (in thousands):
2020 2019 Inc/(Dec) % Change
Non-operating (Income) Expenses
Interest income $ (1,076 ) $ (4,296 ) $ (3,220 ) (75.0 )%
Interest expense 114,635 120,330 (5,695 ) (4.7 )%
Capitalized interest (925 ) (2,274 ) (1,349 ) (59.3 )%
Loss on early extinguishment of debt 81 804 (723 ) (89.9 )%
Unrealized loss (gain) on financial
instruments 71,053 (75,109 ) 146,162 (194.6 )%
Other income, net (185,742 ) (27,668 ) 158,074 NM
Unrealized loss (gain) on financial instruments represents the change in fair
value of a customer warrant liability (see Note 8 to our Financial Statements)
primarily due to changes in our common stock price.
41
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Other income, net increased
Income taxes. Our effective income tax rates were an expense rate of 27.5% for 2020 and a benefit rate of 38.0% for 2019. The rate for 2020 differed from tax at theU.S. statutory rate primarily due to nondeductible changes in the fair value of a customer warrant liability (see Note 8 to our Financial Statements). The rate for 2019 differed from tax at theU.S. statutory rate primarily due to a tax benefit related to the favorable completion of anIRS examination of our 2015 income tax return and, to a lesser extent, a tax benefit due to nontaxable changes in the fair value of a customer warrant liability.
Segments
The following table compares the Direct Contribution for our reportable segments
(see Note 13 to our Financial Statements for the reconciliation to Operating
income) (in thousands):
2020 2019 Inc/(Dec) % Change
Direct Contribution:
ACMI $ 179,946 $ 218,459 $ (38,513 ) (17.6 )%
Charter 559,673 149,372 410,301 274.7 %
Dry Leasing 41,070 70,386 (29,316 ) (41.7 )%
Total Direct Contribution $ 780,689 $ 438,217 $ 342,472 78.2 %
Unallocated expenses and (income), net
ACMI Segment ACMI Direct Contribution decreased$38.5 million , or 17.6%, primarily due to higher pilot costs related to premium pay for pilots operating in certain areas significantly impacted by COVID-19 and increased pay rates we provided to our pilots inMay 2020 . In addition, ACMI Direct Contribution reflected higher heavy maintenance, including additional engine overhauls performed to take advantage of availability and opportunities for vendor pricing discounts. 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, a reduction in aircraft rent and depreciation and an increase in aircraft utilization.
Charter Segment
Charter Direct Contribution increased$410.3 million primarily due to an increase in commercial cargo Yields, net of fuel, and demand for our services 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 aircraft utilization. Charter Direct Contribution also benefited from a reduction in aircraft rent and depreciation, the redeployment of 747-400 aircraft from ACMI and the operation of a 777-200 freighter aircraft that was previously in ourDry Leasing business. Partially offsetting these improvements were higher heavy maintenance, including additional engine overhauls performed to take advantage of availability and opportunities for vendor pricing discounts, fewer passenger charters for sports teams and fans as sports leagues cancelled games during 2020 and lower AMC passenger flying for 747-400 aircraft as theU.S. military took precautionary measures to limit the movement of military personnel during the first half of 2020. 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 we provided to our pilots inMay 2020 .
Dry Leasing Segment
Dry Leasing Direct Contribution decreased$29.3 million , or 41.7%, primarily due to$22.3 million of revenue during the first quarter of 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. 42 --------------------------------------------------------------------------------
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 income
from continuing operations, net of taxes, Adjusted Diluted EPS from continuing
operations, net of taxes 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.
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 determined, in
part, by using Adjusted income from continuing operations, net of taxes 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 Income (loss) from continuing operations,
net of taxes and Diluted EPS from continuing operations, net of taxes to the
corresponding non-GAAP financial measures (in thousands, except per share data):
For the Years Ended December 31,
2020 2019 Percent Change
Income (loss) from continuing operations,
net of taxes $ 360,286 $ (293,113 ) 222.9 %
Impact from:
CARES Act grant income (a) (151,590 ) -
Customer incentive asset amortization 39,090 33,135 Special charge 16,265 638,373 Leadership transition costs 6,061 6,736 Noncash expenses and income, net (b) 17,971
18,267
Unrealized loss (gain) on financial instruments 71,053 (75,109 ) Other, net (c) (3,679 )
10,830
Income tax effect of reconciling items 23,580 (145,295 ) Special tax item (d) - (54,272 ) Adjusted income from continuing operations, net of taxes$ 379,037 $ 139,552 171.6 % Weighted average diluted shares outstanding 26,690 25,828 Add: dilutive warrant (e) 1,040 758 dilutive restricted stock - 64 Adjusted weighted average diluted shares outstanding 27,730
26,650
Adjusted Diluted EPS from continuing operations, net of taxes$ 13.67 $ 5.24 160.9 % 43
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For the Years Ended December 31,
2019 2018 Percent Change
Income (loss) from continuing operations,
net of taxes $ (293,113 ) $ 270,647 (208.3 )%
Impact from:
Customer incentive asset amortization 33,135 16,176
Special charge 638,373 9,374
Leadership transition costs 6,736 -
Noncash expenses and income, net (b) 18,267 16,852
Unrealized gain on financial instruments (75,109 ) (123,114 ) Other, net (c) 10,830
12,288
Income tax effect of reconciling items (145,295 )
2,103
Special tax item (d) (54,272 )
-
Adjusted income from continuing operations, net of taxes$ 139,552 $ 204,326 (31.7 )% Weighted average diluted shares outstanding 25,828
28,281
Add: dilutive warrant (e) 758
-
dilutive restricted stock 64 -
effect of convertible notes hedges
(f) - (180 )
Adjusted weighted average diluted shares
outstanding 26,650 28,101
Adjusted Diluted EPS from continuing operations, net of taxes$ 5.24 $ 7.27 (27.9 )%
The following is a reconciliation of Income (loss) from continuing operations, net of taxes to Adjusted EBITDA (in thousands):
For the Years Ended December 31,
2020 2019 Percent Change
Income (loss) from continuing operations,
222.9 %
net of taxes
Interest expense, net 112,634 113,760
Depreciation and amortization 257,672
251,097
Income tax expense (benefit) 136,456 (179,645 ) EBITDA 867,048 (107,901 ) CARES Act grant income (a) (151,590 ) - Customer incentive asset amortization 39,090 33,135 Special charge 16,265 638,373 Leadership transition costs 6,061 6,736 Unrealized loss (gain) on financial 71,053 (75,109 ) instruments Other, net (c) (3,679 ) 9,542 Adjusted EBITDA$ 844,248 $ 504,776 67.3 % For the Years Ended December 31, 2019 2018 Percent Change Income (loss) from continuing operations,$ (293,113 ) $ 270,647 net of taxes (208.3 )% Interest expense, net 113,760 107,941 Depreciation and amortization 251,097
217,340
Income tax (benefit) expense (179,645 )
38,727
EBITDA (107,901 )
634,655
Customer incentive asset amortization 33,135 16,176 Special charge 638,373 9,374 Leadership transition costs 6,736 - Unrealized gain on financial instruments (75,109 ) (123,114 ) Other, net (c) 9,542 14,180 Adjusted EBITDA$ 504,776 $ 551,271 (8.4 )% 44
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(a) CARES Act grant income in 2020 related to income associated with the
Payroll Support Program (see Note 3 to our Financial Statements).
(b) Noncash expenses and income, net in 2020, 2019 and 2018 primarily relatedto amortization of debt discount on the convertible notes (see Note 9 to
our Financial Statements).
(c) Other, net in 2020 primarily related to a
sale of aircraft, costs associated with the Payroll Support Program (see
Note 3 to our Financial Statements), costs associated with the
refinancing of debt, costs associated with our acquisition of Southern
Air and accrual for legal matters and professional fees. Other, net in
2019 primarily related to a loss on the sale of a GEnx engine, a netinsurance recovery, loss on early extinguishment of debt, unique training
aircraft costs required for a customer contract, costs associated with a
customer transaction with warrants (see Note 8 to our Financial
Statements), costs associated with our acquisition of
accrual for legal matters and professional fees. Other, net in 2018
primarily relates to $11.3 million in costs associated with our
acquisition of Southern Air and an accrual for legal matters and
professional fees.
(d) Special tax item in 2019 represents the income tax benefit from the
completion of the 2015
operations (see Note 11 to our Financial Statements).
(e) Dilutive warrants represent potentially dilutive common shares related to
warrants issued to a customer (see Note 8 to our Financial
Statements). These warrants are excluded from Diluted EPS from continuing
operations, net of taxes prepared in accordance with GAAP when they would
have been antidilutive.
(f) Represents the economic benefit from our convertible notes hedges in
offsetting dilution from our convertible notes as we concluded in no
event would economic dilution result from conversion of each of the
convertible notes when our stock price is below the exercise price of the
respective convertible note warrants (see Note 9 to our Financial
Statements).
Liquidity and Capital Resources
The most significant liquidity events during 2020 were as follows:
InFebruary 2020 , we refinanced two secured term loans that were originally due later in 2020, with two new secured 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 inJuly 2030 . The other term loan is for 130 months in the amount of$82.0 million at a fixed interest rate of 3.28% with a final payment of$12.5 million due inNovember 2030 .
In
InMay 2020 , we entered into the PSP Agreement with theU.S. Treasury that provided us with payroll support funding in three installments throughJuly 2020 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. 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). InAugust 2020 , we borrowed$22.9 million related to GEnx engine performance upgrade kits and overhauls under an unsecured five-year term loan at a fixed interest rate of 0.95%. InOctober 2020 , we borrowed$16.3 million related to GEnx engine performance upgrade kits and overhauls under an unsecured five-year term loan at a fixed interest rate of 0.90%. 45
-------------------------------------------------------------------------------- Operating Activities. For 2020, Net cash provided by operating activities was$1,009.5 million , which primarily reflected Net income of$360.3 million , noncash adjustments of$328.1 million for Depreciation and amortization,$133.6 million for deferred taxes and$71.1 million for Unrealized loss on financial instruments, a$115.5 million increase in Accounts payable and accrued liabilities, and a$26.1 million decrease in Accounts receivable. Partially offsetting these items was a$56.7 million increase in Prepaid expenses, current assets, and other assets. For 2019, Net cash provided by operating activities was$300.3 million , which primarily reflected noncash adjustments of$638.4 million for a Special charge,$316.8 million for Depreciation and amortization, and$25.2 million for Stock-based compensation. Partially offsetting these items was a$293.1 million Net Loss, noncash adjustments of$180.6 million for deferred taxes and$75.1 million for Unrealized gain on financial instruments, and a$66.8 million increase in Prepaid expenses, current assets, and other assets, a$47.8 million decrease in Accounts payable and accrued liabilities, and a$22.5 million increase in Accounts receivable. Investing Activities. For 2020, Net cash used for investing activities was$145.3 million , consisting primarily of$184.3 million of payments for flight equipment and modifications, and$78.9 million of core capital expenditures, excluding flight equipment, partially offset by$126.3 million of proceeds from the disposal of aircraft. Payments for flight equipment and modifications during 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. For 2019, Net cash used for investing activities was$285.8 million , consisting primarily of$214.2 million of payments for flight equipment and modifications, and$133.6 million of core capital expenditures, excluding flight equipment and insurance proceeds of$38.1 million . Payments for flight equipment and modifications during 2019 were primarily related to 767-300 passenger aircraft and related freighter conversion costs, spare engines and GEnx engine performance upgrade kits. Financing Activities. For 2020, Net cash used for financing activities was$121.4 million , which primarily reflected$429.7 million of payments on debt obligations,$175.0 million of payments on our revolving credit facility and$14.4 million in payments of maintenance reserves, partially offset by proceeds from debt issuance of$417.7 million , proceeds from our revolver credit facility of$75.0 million , and$15.2 million of customer maintenance reserves and deposits received. For 2019, Net cash used for financing activities was$133.9 million , which primarily reflected$344.7 million of payments on debt obligations, partially offset by proceeds from debt issuance of$116.0 million , proceeds from our revolver credit facility of$100.0 million , and$14.7 million of customer maintenance reserves and deposits received. 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 the remaining 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 2021. Core capital expenditures for 2021 are expected to range from$110.0 to$120.0 million , which excludes flight equipment and capitalized interest. Committed capital expenditures for flight equipment for 2021 are expected to be$264.7 million . These expenditures include pre-delivery payments for ourJanuary 2021 agreement to purchase four 747-8F aircraft from Boeing that are expected to be delivered fromMay 2022 throughOctober 2022 , spare engines, and 747-400 passenger aircraft (to be used for both replacement of older passenger aircraft in service as well as spare engines and parts). We may access external sources of capital from time to time depending on our cash requirements, assessments of current and anticipated market conditions, and the after-tax cost of capital. To that end, we filed a shelf registration statement with theSEC inApril 2020 that enables us to sell debt and/or equity securities on a registered basis over the subsequent three years, depending on market conditions, our capital needs and other factors. Our access to capital markets can be adversely impacted by prevailing economic conditions and by financial, business and other factors, some of which are beyond our control. Additionally, our borrowing costs are affected by market 46 --------------------------------------------------------------------------------
conditions and may be adversely impacted by a tightening in credit markets.
We do not expect to pay any significant
Contractual Obligations
The table below provides details of our balances outstanding under credit agreements and future cash contractual obligations as ofDecember 31, 2020 (in millions): Total Payments Due by Period Obligations 2021 2022 2023 2024 2025 Thereafter Debt(1)$ 2,348.2 $ 288.6 $ 514.7 $ 470.2 $ 505.4 $ 102.8 $ 466.5 Interest on debt (2) 240.4 66.5 54.5 40.5 22.4 15.9 40.6 Finance leases (3) 89.7 26.9 6.2 6.1 6.0 6.0 38.5 Interest on finance leases 38.9 5.2 4.9 4.7 4.5 4.2 15.4 Operating leases (3) 518.7 174.1 130.9 78.3 65.3 20.3 49.8
Total Contractual Obligations
(1) Debt reflects gross amounts (see Note 9 to our Financial Statements for a
discussion of the related unamortized discount).
(2) Amount represents interest on fixed and floating rate debt at
2020.
(3) See Note 10 to our Financial Statements for a discussion of our operating
and finance lease liabilities.
In addition to the amounts in the table above, we have a remaining cash
commitment of up to
See Note 2 to our Financial Statements for a description of our committed expenditures.
Description of Our Debt Obligations
See Note 9 to our Financial Statements for a description of our debt obligations.
Off-Balance Sheet Arrangements
See Note 10 to our Financial Statements for a discussion of aircraft-leasing trusts that meet the criteria for variable interest entities. We have not consolidated any of the aircraft-leasing trusts in which we are not the primary beneficiary. We hold equity interests in two joint venture arrangements to help develop a diversified freighter aircraftDry Leasing portfolio and to purchase rotable parts and repair services for those parts, primarily for our 747-8F aircraft. Neither of these joint ventures qualifies for consolidated accounting treatment. The assets and liabilities of these entities are not included in our Consolidated Balance Sheets and we record our net investment under the equity method of accounting. See Note 2 to our Financial Statements for further discussion.
Critical Accounting Policies and Estimates
General Discussion of Critical Accounting Policies and Estimates
An appreciation of our critical accounting policies and estimates is important to understand our financial results. Our Financial Statements are prepared in conformity with GAAP. Our critical policies require management to make estimates and judgments that affect the amounts reported. Actual results may differ significantly from those estimates. The following is a brief description of our current critical accounting policies involving significant management judgment:
Accounting for Long-Lived Assets
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We record our property and equipment at cost, and once assets are placed in
service, we depreciate them on a straight-line basis over their estimated useful
lives to their estimated residual values over periods not to exceed forty years
for flight equipment (from date of original manufacture) and three to five years
for ground equipment.
We record right-of-use assets for operating leases with terms greater than 12
months, including renewal options when appropriate, as the present value of
fixed lease payments over the lease term. Since our leases do not typically
provide a readily determinable discount rate, we use our incremental borrowing
rate to discount lease payments to present value. Operating lease right-of-use
assets are amortized over each lease term.
We record finite-lived intangible assets acquired at fair value and amortize
them over their estimated useful lives. The estimated useful lives are based on
estimates of the period during which the assets are expected to generate
revenue.
We record impairment charges for long-lived assets when events and circumstances
indicate that the assets may be impaired, the undiscounted cash flows estimated
to be generated by those assets are less than their carrying amount and the net
book value of the assets exceeds their estimated fair value. In making these
determinations, we use certain assumptions and estimates, including, but not
limited to: (i) estimated fair value of the assets, and (ii) estimated future
cash flows expected to be generated by these assets, which are based on
additional assumptions such as asset utilization, revenue generated, associated
costs, length of service and estimated residual values. In developing these
estimates for flight equipment and operating lease right-of-use assets, we use
external appraisals, adjusted for maintenance condition, as necessary; bids
received from independent third parties; and industry data. To estimate the
fair value of operating lease right-of-use assets, we determine the present
value of current market fixed lease rates utilizing our incremental borrowing
rate for the remaining term of each lease. To conduct impairment testing, we
group assets and liabilities at the lowest level for which identifiable cash
flows are largely independent of cash flows of other assets and liabilities. For
flight equipment, operating lease right-of-use assets and finite-lived
intangible assets used in our ACMI and Charter segments, assets are grouped at
the operating fleet level. For flight equipment and finite-lived intangible
assets used in our Dry Leasing segment, assets are assessed at the individual
aircraft or engine level. Our long-lived asset groups evaluated for impairment
can include flight equipment such as the aircraft, engines, rotable parts,
leasehold improvements, operating lease right-of-use assets, as well as
associated finite-lived intangible assets and deferred maintenance costs.
For assets classified as held for sale, an impairment charge is recognized when the estimated fair value less the cost to sell the asset is less than its carrying amount. Fair value is determined using external appraisals or bids received from independent third parties.
Heavy Maintenance
Except as described in the paragraph below, we account for heavy maintenance costs for airframes and engines using the direct expense method. Under this method, heavy maintenance costs are charged to expense upon induction, based on our best estimate of the costs. When estimating the expected cost for each Heavy Maintenance event, management considers multiple factors, including historical costs and experience, and information provided by third-party maintenance providers. These estimates may be subsequently adjusted for changes and the final determination of actual costs incurred. This method can result in expense volatility between quarterly and annual periods, depending on the number and type of Heavy Maintenance events performed. We account for Heavy Maintenance costs for airframes and engines used in ourDry Leasing segment and engines used on our 747-8F aircraft using the deferral method. Under this method, we defer the expense recognition of scheduled Heavy Maintenance events, which are amortized over the estimated period until the next scheduled Heavy Maintenance event is required.
Income Taxes
Deferred income taxes are recognized for the tax consequences of reporting items
in our income tax returns at different times than the items are reflected in our
financial statements. These temporary differences result in deferred tax assets
and liabilities that are calculated by applying enacted statutory tax rates
applicable to future years to differences between the financial statement
carrying amounts and the tax bases of existing assets and liabilities. If
necessary, deferred income tax assets are reduced by a valuation allowance to an
amount that is determined to be
48
--------------------------------------------------------------------------------more likely than not recoverable. We must make significant estimates and assumptions about future taxable income and future tax consequences when determining the amount, if any, of the valuation allowance.
We have recorded reserves for income taxes that may become payable in future years. Although management believes that its positions taken on income tax matters are reasonable, we have nevertheless established tax reserves in recognition that various taxing authorities may challenge certain of the positions taken by us, potentially resulting in additional liabilities for taxes.
Goodwill represents the excess of an acquisition's purchase price over the fair value of the identifiable net assets acquired and liabilities assumed.Goodwill is not amortized, but tested for impairment annually during the fourth quarter of each year, or more frequently if certain events or circumstances indicate that an impairment loss may have been incurred. We may elect to perform a qualitative analysis on the reporting unit that has goodwill to determine whether it is more likely than not that fair value of the reporting unit is less than its carrying value. Under the qualitative approach, we consider various market factors to determine whether events and circumstances have affected the fair value of the reporting unit. If we determine that it is more likely than not that the reporting unit's fair value is less than its carrying amount, or if we elect not to perform a qualitative analysis, we perform a quantitative analysis to determine whether any goodwill impairment exists.
Fair value is determined using a discounted cash flow analysis based on key assumptions including, but not limited to, (i) a projection of revenues, expenses and other cash flows; (ii) terminal period earnings; and (iii) an assumed discount rate. If the fair value of the reporting unit is less than the carrying amount, the difference is written off as an impairment up to the carrying amount of goodwill.
Legal and Regulatory Matters
We are party to legal and regulatory proceedings with respect to a variety of matters in multiple jurisdictions. We evaluate the likelihood of an unfavorable outcome of these proceedings each quarter. Our judgments are subjective and are based on the status of the legal or regulatory proceedings, the merits of our defenses and consultation with legal counsel.
Recent Accounting Pronouncements
See Note 2 to our Financial Statements for a discussion of recent accounting pronouncements.
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