Fool.com: Atlas Air Q3 (Conference Call) October 21, 1998

Atlas Air Q3 Conference Call
A Fool Conference Call Synopsis^*
By Gregory Markus (TMF Boring)

Atlas Air Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CGO)") else Response.Write("(NYSE: CGO)") end if %>
538 Commons Dr.
Golden, CO 80401
(303) 526-5050
http://www.atlasair.com

ANN ARBOR, Mich. (Oct. 21, 1998) /FOOLWIRE/ -- Atlas Air is a U.S. certificated air carrier that operates the world's largest fleet of 747 freighters under long-term ACMI (Aircraft, Crew, Maintenance and Insurance) contracts. Atlas Air's customers include Alitalia, British Airways <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BAB)") else Response.Write("(NYSE: BAB)") end if %>, Cargolux, China Airlines, Emirates, Fast Air, Iberia Airlines, KLM <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: KLM)") else Response.Write("(NYSE: KLM)") end if %>, LAS, SAS, and Thai International Airways, serving a total of 62 cities in 37 countries.

Third quarter highlights. Net income for the quarter ended Sept. 30, 1998 was $12.7 million, or $0.57 per diluted share, as compared with net income of $6.2 million, or $0.28 per diluted share, for the year-ago period. Revenues increased 5% to $109.2 million and increased 24% sequentially relative to Q2 1998. Operating income increased 64% over the year-ago period and 13% sequentially to $35.7 million, the best quarterly performance in the company's history. Operating margin was 33%.

The company achieved these results despite having a slightly smaller average fleet size of 19.9 aircraft in Q3 1998 versus 20.4 aircraft in the year-earlier period and flying approximately 1000 fewer block hours: 18,926 versus 19,937. Revenues per block-hour flown increased 10% over both Q3 1997 and Q2 1998 to $5759.

Nine-month results. Net income for the first nine months of 1998 was $28.1 million, or $1.25 per diluted share, as compared to $14.3 million, or $0.64 per diluted share, for the year-earlier period. Operating income was $88.8 million, compared to $55.3 million for the same period in 1997, excluding non-recurring items. Year-to-date total block hours were 51,142 as compared with 52,921 in the first nine months of 1997.

Balance sheet. Atlas ended the quarter with approximately $253 million in cash, an increase of $46 million over Q2 1998. Shareholder equity was $255 million as compared with $253 million in Q2 1998. Further details will be provided when Atlas files its 10-Q with the SEC.

Asian situation. In the past, Atlas maintained that the economic dislocations in Asia and the accompanying currency devaluations would increase exports from that region and therefore be, if anything, a net plus for Atlas. That is exactly what is occurring. Atlas's Asian customers, China Air and Thai Airways, continue to fly well above their minimum contract levels, and Atlas expects further increases in demand in the peak fourth-quarter season. Atlas customers flying to/from Asia are experiencing essentially 100% capacity out of Asia and around 70%-80% capacity inbound. Profitability is high for those customers, particularly in light of record low fuel prices.

Stage 3 noise regulations. Other aircraft operators will soon be reducing capacity because of the implementation of Stage 3 noise regulations in 1999. Industry analysts project that around 115 cargo aircraft out of a total worldwide fleet of around 500 aircraft will be permanently retired when the regulations go into effect, and many other aircraft will be required to fly with greatly reduced payloads. Atlas will be meeting the worldwide demand for air cargo capacity with its efficient 747-200 and 747-400 freighter fleet.

Aircraft Acquisition and Placement

During the quarter, Atlas acquired under a long-term leverage lease structure its first two B747-400F aircraft and placed them under long-term ACMI contracts with British Airways and Cargolux. Atlas subsequently announced a second 747-400 contract with Cargolux.

Atlas also forward-purchased its 20th used B747-200F aircraft, currently being operated by Air France, and expects to place it into ACMI service by the second quarter of 1999. Atlas also announced the acquisition of three used 747-200s from Cargolux, to enter service for Atlas by year-end. One of them will immediately go back into service for Cargolux, and one will become a back-up aircraft, to be used when other aircraft are undergoing their "C" checks, which occur every 18 months. Finally, Atlas announced new long-term ACMI contracts with Iberia Airlines of Spain for two 747-200s.

Atlas seeks geographical diversification in its contracts so as to insulate the company from risks in any one region of the world. Currently, 35-40% of Atlas's business is in Asia, about the same amount in Europe, with the placement of Atlas's first three 747-400s there, and the remaining 25-30% in South America.

Atlas anticipates announcing soon the signing of a contract for the fourth 747-400, scheduled for delivery in early December. That aircraft is expected to be placed with a new customer, one not located in Europe. Pending final contract approval, the third of the 747-200s acquired from Cargolux will also be placed with a new Atlas customer.

In sum, all but the fifth 747-400, expected to be delivered right at year-end, have been placed with customers, and profitably so. As a result, Atlas is already planning the placement of four new 747-400s scheduled for delivery in 1999.

Guidance

Management said the company is on track with its plan for the balance of 1998 and for 1999. Total block hours are projected to be 24,000 plus or minus 500 for Q4. Tentative projected block hours for 1999 is 113,000, broken down as follows: 22,000 for Q1; 26,000 for Q2; 30,000 for Q3, and 35,000 for Q4. That would constitute a 50% increase over the projected total for 1998.

The final figures will depend upon the timing of deliveries in 1999 of the four 747-400s ordered from Boeing <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BA)") else Response.Write("(NYSE: BA)") end if %>. The current plan is for one in Q2, two in Q3, and one in Q4. The expectation is that the placement of the four new -400s in 1999 will involve at most only one swap of a -400 for a -200 with a current customer.

The tax rate is anticipated to increase to 39% in 1999, versus the 37% figure that Atlas has used thus far in 1998. The fourth quarter of 1998 may also use a 39% tax rate, although that is not final.

Replies to Questions

The 747-400s command a significantly higher block-hour rate than the -200s do. As Atlas's mix of aircraft changes, average block-hour rates are expected to increase.

Aircraft utilization averaged around 950 hours per aircraft in Q3, more or less in line with Atlas's historical standard.

Operating expenses were below what some analysts had anticipated. That was attributable to the low maintenance costs associated with the new aircraft. Maintenance expense was approximately $1250 per block hour in Q3 1998, as compared with $1628 in 1997's Q3.

Atlas is leasing, on 20-year leases, the three 747-400s delivered to date, rather than purchasing them. The financial advantage of leasing over purchasing is primarily tax-related.

Atlas is mindful of its leveraged balance sheet. It should be kept in mind, however, that Atlas's debt is backed up by hard assets, in the form of the aircraft. Fairly high leverage is not unusual in the airline industry. That said, at some stock price level, the company would consider replacing some of the debt with equity.

Crew expenses have increased somewhat for Atlas as the company has brought in additional crews ahead of delivery of aircraft and trained crews for the -400s.

Company feedback indicates that crew members' satisfaction has improved over last year, when pilots voted down a proposal to unionize. Nevertheless, Atlas expects to see unions continue to try to organize the company's pilots.

The three used 747-200s that Atlas acquired from Cargolux during the quarter were the only ones on the market that had General Electric <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GE)") else Response.Write("(NYSE: GE)") end if %> engines. As additional aircraft become available, Atlas will actively consider them -- provided they meet the company's needs. Atlas does not intend to repeat the problems it encountered in 1997 with older, non-GE-powered -200s.

Atlas has four contracts up for renewal in 1999 and none in 2000.

The South American market continues to be very strong for Atlas's customers. Atlas is the #1 cargo carrier in South America. The company has made application to permit it to fly into Brazil and, indeed, pretty much all of the continent.