Atlas Air Worldwide Holdings, Inc. (AAWW) on Q4 2021 Results - Earnings Call Transcript
Operator: Good day, ladies and gentlemen, thank you for sending by. And welcome to the Atlas Air Worldwide Holdings, Inc. Fourth Quarter 2021 Results Conference call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. Please be advised that today's conference may be recorded. I would now like to turn the conference over to our Atlas Air speakers. Please go ahead.
Ed McGarvey: Thank you, Olivia, and good morning, everyone. I'm Ed McGarvey, Treasurer for Atlas Air Worldwide. Welcome to our fourth quarter 2021 results conference call. Today's call will be hosted by John Dietrich, our Chief Executive Officer; and Spencer Schwartz, our Chief Financial Officer. Today's call is complemented by a slide presentation that can be viewed at atlasairworldwide.com under Presentations in the Investor Information section. As indicated on Slide 2, I'd like to remind you that our discussion about the company's performance today includes some forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements relate to future events and expectations and they involve risks and uncertainties. Our actual results or actions may differ materially from those projected in any forward-looking statements. For information about risk factors related to our business, please refer to our 2020 Form 10-K as amended or supplemented by our subsequently filed SEC reports. Any references to non-GAAP measures are meant to provide meaningful insights and are reconciled with GAAP in today's press release and in the appendix that is attached to today's slides. During our question-and-answer period today, we would like to ask participants to limit themselves to one principle question and one follow-up question, so that we can accommodate as many participants as possible. After we have gone through the queue, we would be happy to answer any additional questions as time permits. At this point, I would like to draw your attention to Slide 3 and turn the call over to John Dietrich.
John Dietrich: Thank you, Ed, and hello, everyone. Thanks for joining our fourth quarter earnings call. I'd like to start by thanking the entire Atlas team for their tremendous efforts in keeping our business moving forward, both in the air and on the ground, especially in this pandemic environment. 2021 was another outstanding year with excellent financial and operating performance. At Atlas, our greatest strength is our people and without their professionalism and hard work, we wouldn't have been able to deliver these very strong results. With that in mind, we're very pleased to have achieved a long-term labor agreement with our pilots that recognizes their significant contributions to our company. Throughout 2021, we leveraged our world-class fleet and global operating capabilities to increase aircraft utilization and capitalize on strong demand for our services and aircraft to achieve higher airfreight yields. And we continue to do so. As reported in our press release this morning, we've now placed all four of our new and incoming 747-8 freighters under long-term agreements. We've also enhanced numerous long-term contracts with our strategic and diversified customer base. We've deepened our relationships with valued customers, including Cainiao, CEVA Logistics, DB Schenker, DHL, DSV, FedEx, Flexport, Geodis, HP, Icelandair, Inditex, JAS, Kuehne+Nagel, SF Group and UPS. Quite an impressive list Consistent with our strategy, we not only secured these long-term agreements, but also reserved and allocated capacity to take advantage of very high yielding opportunities in the global spot charter market. This all contributed to Atlas delivering record block hours, record revenue and record earnings in 2021. Before we review our fourth quarter results, I'd like to first share several milestones from our full year record performance, we flew more than 360,000 block hours exceeded the $4 billion revenue mark delivered more than $1 billion of adjusted EBITDA and generated over $550 million of adjusted net income. In addition to this strong financial performance. And as I mentioned, we reached a new joint collective bargaining agreement with our pilots in connection with Atlas Air's merger with Southern Air. We're very pleased to now have this long-term pilot agreement in place. It provides even more reasons for pilots to choose Atlas as their career destination. We've now effectively completed the merger with Southern and we're operating under the single brand of Atlas and the Atlas operating certificate. With the strength, flexibility, and resiliency of our global business model, we delivered high quality service to our customers. Despite a very challenging operating environment with persistent pandemic related obstacles. The safety of our team and operations remains our top priority. And we're proud of the role we're playing in supporting the global supply chain and transporting essential goods around the world. I'd like to note that 2022 marks a significant milestone for Atlas as it's our 30th year in business. Over these 30 years, we've built an industry leading fleet, a broader array of service offerings, a diversified base of marquee customers and the best team in the business. From a growth perspective and as I noted, we're excited that we've placed all four of our new and incoming 747-8 freighters under long-term contracts. We'll operate one for Cainiao, one for Inditex and two for Kuehne+Nagel. As a reminder, we expect delivery of these aircraft between May and October of this year. We also look forward to the deliveries and placements of the four new 777 freighters we recently announced for which there is very strong customer demand. We expect the first of these triple 777s to be delivered late in the fourth quarter of this year and three more throughout 2023. As previously announced, we also purchased six of our existing 747-400 freighters during 2021 that were formally on lease to us. And we’re purchasing another five of our other 747-400 freighters at the end of their leases during the course of this year. Acquiring these widebody freighters underscores our confidence in the long-term demand for dedicated international air freight capacity, particularly in e-commerce and fast growing global markets, such as Asia and South America. These investments are consistent with our long-term strategic growth plan and will provide customers with modern, environmentally efficient aircraft, especially from a fuel burn and noise perspective, which will drive strong returns for Atlas in the years ahead. Now turning to our outstanding fourth quarter results on Slide 4. Our revenue and adjusted earnings grew to new records. Our fourth results reflected higher yields and increased aircraft utilization. They also reflected the impact of numerous new and extended long-term customer contracts and the full year operation of one 747 freighter that we reactivated during the fourth quarter of 2020. Our fourth quarter performance also benefited from lower heavy maintenance expense. These benefits were partially offset by higher pilot costs driven by our new pilot agreement. Now moving on to Slide 5, while the pandemic continues to make the operating environment a very challenging one, we're seeing solid momentum in the first quarter. We continue to expect industry conditions and customer demand to remain favorable. Global air freight volumes are exceeding pre-pandemic levels. Capacity continues to be constrained as there are a limited number of new freighters entering the market while older less efficient aircraft will be retired. Passenger belly capacity, particularly on key international cargo trade lanes remain subdued and backlogs at ocean ports worldwide and other supply chain bottlenecks are driving demand for air cargo capacity. As businesses look to address very low inventory levels. The pandemic has also spurred what we see as a sustaining step change in express and e-commerce growth. And it’s also highlighted the value of speed and reliability that air freight provides to the global supply chain, which bodes well for Air Cargo today and beyond. As a result, we expect strong performance in the first quarter of 2022 with our adjusted EBITDA and adjusted net income similar to that of the first quarter of 2021. We also anticipate revenue of about $1 billion from flying approximately 85,000 block hours. This outlook reflects higher yields, including the contribution from numerous new or enhanced long-term customer contracts, along with a higher pilot cost from our new JCBA. We also expect ongoing expenses driven by the pandemic, including additional pay for employees flying into locations significantly impacted by COVID as well as other operational costs, including for regulatory compliance and continuing to provide a safe working environment for all employees. For the full year, we expect aircraft maintenance expense to be similar to 2021 and we expect depreciation and amortization to be around $300 million. For capital expenditures, which exclude aircraft and engine purchases are projected to total approximately $135 million to $145 million, mainly for parts and components for our fleet, including for the 747-8s and the 777 that we’re adding this year. We also have commitments related to aircraft purchases and spare engines, including pre-delivery payments related to our 777 order and delivery payments related to 747-8 and 777 aircraft, all of which we expect to debt finance. Due to the uncertainty related to the pandemic, ongoing supply chain disruptions and other factors, we are not providing additional guidance at this time. Before I turn the call over to Spencer to provide more detail on our fourth quarter results, I’d like to discuss our capital allocation strategy and the share repurchase program we announced in our press release this morning. As we’ve consistently stated, we take a disciplined and balanced approach to allocating capital. Our focus is on maintaining a strong balance sheet, while continuing to grow the business and returning capital to shareholders. Over the last number of years, we’ve made significant investments in the business, including aircraft acquisitions and the purchase of Southern Air. Most recently, we’ve also made further growth investments with our 747-8 and 777 orders and the 747-400s we’re buying off lease. These modern efficient aircraft remain in high demand and will be an important investment for our future. We’re also always looking for ways to grow through mergers acquisitions or strategic partnerships, like our very successful acquisitions of Polar and Southern and our Titan dry leasing joint venture with Bain Capital Credit. Consistent with our balanced approach, we’re now pleased to announce the establishment of a new $200 million share repurchase program, which includes $100 million in accelerated share repurchases that we expect to complete by the end of the second quarter. Our capital allocation strategy demonstrates our commitment to creating, enhancing and delivering value for our shareholders. I’d like to now pass the call over to Spencer. And after Spencer’s remarks, I’ll have some additional comments and then we’ll be happy to take your questions. Spencer?
Spencer Schwartz: Thank you, John and hello everyone. Our excellent fourth quarter results are highlighted on Slide 6. On an adjusted basis EBITDA was $361.8 million and adjusted net income was $211.6 million. On a reported basis net income was $176.7 million. Our adjusted earnings included an effective income tax rate of 21.7%. Moving to the top of Slide 7. Revenue rose to $1.2 billion in the quarter. Higher Airline Operations segment revenue was primarily driven by an increase in the average rate per block hour, which was mainly due to an increased proportion of higher yielding flying, including the impact of new and extended long-term contracts, the ongoing reduction of available cargo capacity in the market, the disruption of global supply chains, as well as higher fuel costs. Volumes during the period reflected reduction and less profitable smaller gauge CMI flying, which was partially offset by our ability to increase the utilization of our current fleet to meet strong customer demand. As John shared, volumes also benefited from operating the 747-400 that we reactivated during the fourth quarter of 2020. Revenue in our Dry Leasing segment was relatively unchanged. Looking now at the bottom of the slide. Segment contribution was $365.5 million in the fourth quarter. Significantly higher airline operations contribution was primarily driven by the positive factors benefit segment revenue I just noted, as well as lower heavy maintenance expense. These improvements were partially offset by higher pilot costs related to our new joint collective bargaining agreement. And in Dry Leasing segment contribution was relatively unchanged. Now turning to Slide 8. Our net leverage ratio lowered further and finished the year at 1.5x. We ended 2021 with cash, including cash equivalents and restricted cash totalling $921 million. The increase primarily reflected cash provided by operating activities, partially offset by cash use for investing and financing activities. Net cash used for investing activities was primarily for payments, for flight equipment and modifications, including all of the pre-delivery payments for our four 747-8 freighters, core capital expenditures, as well as spare engines and engine upgrade kits. Net cash used for financing activities primarily reflect the debt payments, partially offset by proceeds from debt issuance. We continue to apply a disciplined approach to financing. All of our debt is at a fixed rate with a very low weighted average coupon rate, which is now at 2.84%. And the majority is secured by our aircraft assets, which have a value in excess of the related debt. As John said earlier, we remain committed to a strong balance sheet and cash balance, which allows us to opportunistically deploy capital to strengthen our business, navigate unexpected events and return capital to shareholders. Now, I’d like to turn it back to John.
John Dietrich: Thank you, Spencer. And moving on to Slide 9. 2021 was certainly an excellent year and we finished it on a very strong note. Market conditions remain strong. Our team continues to deliver and leverage our competitive advantages. We have a strong balance sheet, a formidable fleet of aircraft and unparalleled network of customers and unrivaled global operating capabilities. And we’ll continue to take every precaution to protect our employees and our operation to keep the business moving forward. To sum it all up, Atlas is very well positioned to serve the evolving needs of our customers, the air freight market and the global supply chain today and in the future. At this point operator, may we have the first question, please?
Operator: And our first question coming from the line of Bob Labick with CJS Securities. Your line is open.
Lee Jagoda: Hi, it’s actually Lee Jagoda for Bob this morning. Good morning.
John Dietrich: Good morning.
Spencer Schwartz: Hi, Lee.
Lee Jagoda: So just starting with the fleet additions, you announced obviously the four 747-8s and then the four 777s next year. Can you kind of help us understand the relative profitability of each of those aircraft types compared to your fleet averages? And how we should think about impacting that the model going forward?
Spencer Schwartz: Sure, Lee. So the 747-8s and the 777s, these are outstanding aircraft with superior payload. They are so valued in the market where capacity is so constrained. As we announced today, we’ve signed up long-term agreements with customers. These aircraft will deliver returns, I would say that are similar to what you’re seeing elsewhere in our business. But they also have the benefit of having what we’ve called a maintenance honeymoon. So in the first few years, the aircraft don’t require any maintenance and anything that could potentially go wrong with the aircraft is typically covered by warranty. So their performance is even better in the early years. They don’t need to decheck for about six to eight years and so very strong performance.
Lee Jagoda: Got it. And then just as a follow-up buying the additional 747s off lease as they expire sounds like the right thing to do in this environment. Are there any fleet deletions that we should think about either this year or over the next several years that just impact the net number going forward?
John Dietrich: Lee, it’s John. We’re not anticipating any fleet deletions. But one of the advantages of our approach here is, as we talked about several of our aircraft are coming off lease, some of which we’re buying, some are coming off lease even later in time. So we have what I’ll describe as a built in hedge to manage our capacity. If the demand remains strong as we expect, we’re going to continue to operate those airplanes. But it’s kind of a built in hedge to allow some capacity to run off if the market changes on us, which we’re hoping and expecting it won’t. But that’s kind of a scenario where we would see fewer airplanes, but nothing other than that.
Lee Jagoda: Great. Thanks very much. I will hop back in the queue.
John Dietrich: Thank you.
Operator: Our next question, coming from the line of Chris Stathoulopoulos with Susquehanna. Your line is open.
Chris Stathoulopoulos: Good morning, everyone. Thanks for taking my question. So with these travel restrictions easing and passenger wide body flights coming back, what are you seeing in terms of the mix of freighters versus belly capacity? And are there lanes whether that’s, for example, transatlantic, transpacific where that mix is moving back towards more typical levels.
John Dietrich: So I’ll start with that Chris, and thanks for your question. Yes, we expect that the passenger wide body capacity will come back gradually. We’ve shared that before. Frankly, I think it’s been slower than most people expect. And Omicron has settled that down even further. But when it does come back, what we’re seeing is the likelihood of transatlantic flying, which has less of an impact on us, frankly, than the transpacific. And with many of the Asia countries, China, particularly tightening up, we don’t see substantial belly capacity coming back into transpacific for quite some time and certainly not at pre-COVID levels. And I guess, further point I would make is even if and when it comes back to pre-COVID levels, where is that capacity going to come back to? Is it going to be in typical cargo trade lanes or other point to point flying? And what’s the demand outlook going to be for manufactured goods and e-commerce, which frankly volumes right now, air freight volumes are exceeding, as I mentioned in my remarks, are exceeding pre-COVID levels. And they’re still a tremendous tightening of capacity in the marketplace. So I think that coupled with some other variables that we see in the marketplace, that more and more customers like the security and the value of dedicated freighter capacity, maybe not as a complete substitute for passenger belly, but kind of under the theory of once bitten and twice shy. Security that air freighters continued to dedicated freighters have really continued uninterrupted through COVID takes out the vulnerability of passenger of belly capacity going forward. So there are a number of reasons why I think the mix of freighters is going to increase even when the passenger wide bodies come back.
Chris Stathoulopoulos: And is that’s a number you have handy, or if you had to guess what you think the mix of freighter versus belly capacity is now? I think last time I looked or the numbers I’ve seen out there was around 70-30 in the back half of last year.
John Dietrich: Yes. Look, pre-pandemic it was basically a 50-50 split give or take a few percentage points. I think it will favor air freight more, as I said, whether it will sustain at 70%, I can’t say that. But we certainly expect a better than 50% as we go forward.
Chris Stathoulopoulos: Okay. If I could get in one more here. So it seems that with each quarter, since I think it was February or March of 2020, you’ve become increasing less payload or spot sensitive. So if you could remind us, and I know you get this question every quarter now. But how much of your block hours today are spot or ad-hoc lying? And then as we think about duration, what’s the next shortest lease term meaning beyond what would be a month? So say, three, six months, et cetera. And then, how much of your block hours does that make up? Thanks.
Spencer Schwartz: Sure. Chris, it’s Spencer. So the first of your question was how much is in spot. I’ll give the overall percentages of block hours. It hasn’t changed a whole lot, approximately 60% to 65% of our block hours are in ACMI, around 20% are in long-term charters, about 6% is with the U.S. Military, about 5% is in South America and that leaves about 5% for ad-hoc spot charter flying. And then your second question, I didn’t completely understand, but I think you’re asking about terms and expirations. Our long-term charter contracts, we just extended a few more of them during the fourth quarter, increased price, added additional flying. The contracts now I would say the majority of them go through 2024, but we have contracts that go through 2025, 2026 and even 2027. And it’s also as John pointed out, it’s really important to note that if and when belly capacity does come back it’s really important as John said that most of the flying that we’re doing for this long-term charter is not in the traditional trade lanes that passenger flying operates in. And so when that aircraft comes back, it probably won’t impact a lot of this flying because freight keeps moving further and further away from traditional passenger airports.
Chris Stathoulopoulos: Okay. Thank you.
Operator: Our next question coming from the line of Stephanie Moore with Truist Securities. Your line is open.
Joe Hafling: Great. This is actually Joe Hafling on for Stephanie. Congrats on the record fourth quarter, record 2021 and what’s shaping up to be a basically record 1Q 2022.
John Dietrich: Thank you, Joe.
Joe Hafling: Maybe just a quick follow-up on that question about managing the sort of spot versus contract. How do you guys think about that sort of relationship or managing that sort of seesaw? Do you feel that you are essentially giving up some profit by not taking more advantage of the spot market right now with where air freights rates are? Or do you think that the sustainability and visibility given by the long-term contract is where you just kind of want to continue to grow the business going forward?
John Dietrich: Yes. Joe, thanks. My answer is yes. It’s a little bit of all of the above. Anytime, you’re dedicating capacity on the long-term charter it’s drawing from your ability to play the spot market. But there’s a number of things that we do. We have an integrated network and we’re able to – when we talk about increasing our utilization, we piece together the network that allows as we can flex up the opportunity from time to time to do a one-off charter and spot market charter, a return to Asia if it presents itself. So even though we’re fixing that capacity, that doesn’t necessarily mean we’re excluded from flexing up, which we do quite well and taking advantage of one-off charters. Similarly, our customers do the same. They have their fixed networks, and if they see an opportunity within their network to take a charter – a one-off charter, they do that as well. But look, they’re trade-offs. We really value these customers especially some of our newer customers that is frankly creating a whole new business for us and strong yields. And for that, we have a bias towards the fixed capacity. Do you leave something on the table with the spot market? Sure. But we think that’s the right trade for us, as long as we continue to manage the capacity in the spot market that we do retain.
Joe Hafling: Great. Thanks for that. And then maybe just as a follow-up question, more of a longer-term outlook question. I know maybe not necessarily your trade lane expertise, but just in thinking about air freight generally as the alternative to ocean capacity and with supply chain disruptions going on. What would sort of be your take on how supply chain through 2022 ease? And that sort of the velocity of that easing or not, how quickly can ocean freight kind of get back to normal and sort of what that impact might be to both volumes and rates for air freight markets generally?
John Dietrich: Sure. Look, there are a number of variables that are contributing to some of the ocean port disruptions. It’s kind of the backlog of ships anywhere, while we hear some news that it’s moderating a little bit, it’s still at very high levels and on certain days can be between 70 and 100 ships waiting to be offloaded. But from an air freight standpoint, there are other variables in play that we think increase the demand for air freight. Including what I made in my comments is kind of the step change of customers utilizing artificial intelligence and big data to rationalize their inventories. And yes, air freight may be a little bit more expensive, but if they can cut down on their production costs in exchange there’s trade-offs that we’re seeing customers make that they can rely on the speed and reliability of air freight, getting their goods to market and maybe not have to produce as much. So there are a number of very sophisticated customers of ours who are doing that. And I think the more the ocean ports are backlogged and the longer that continues, it speaks favorably for air freight. In the long run, I think there will be some good lessons learned as well to make a permanent shift, not completely, but a permanent shift for some of the capacity to go air. And we’re seeing that. Now will the ports get their act together? Yes, I think things will improve over time. But there are labor shortages, shortage of truckers, and it’s not just the port congestion, it’s all the – what happens when the freight arrives that’s backlogging. And I think that’s going to take time. In the meantime, air freight is a great solution.
Joe Hafling: Great. Certainly you painted a pretty good picture for air freight here continuing to 2022. That’s everything I had. Thanks so much for the color.
John Dietrich: Sure. And one last point I’ll make is, their labor disruption, putting aside labor availability it’s a highly unionized – the ports are highly unionized and I understand their labor contracts are coming up for negotiation this year. So there’s challenges everywhere. Thank you, Operator.
Operator: Our next question coming from the line of Helane Becker with Cowen. Your line is open.
Helane Becker: Thanks very much operator. Hi everybody. And thank you very much for the time. Just a couple of questions. So the Chinese government isn’t honoring the bilateral agreement with the passenger airlines. And I seriously delve there’s given everything in the pandemic. There’s going to be a big increase in capacity on the Pacific to your point, John. Are you having any issues with respect to getting your crews in and out of China like you were having last year? Can you just give us an update on what’s going on there?
John Dietrich: Yes. No material disruptions there, Helane. We’ve been rejiggering our network. There are some quarantine and testing requirements in certain of those countries, Hong Kong’s one where we’ve adjusted our network to avoid laying over in Hong Kong where previously pre-pandemic Hong Kong was a key layover hub for us. But we’re transiting through Hong Kong and working through Korea and other points in the region to lay our crews over. So not a material problem there, we’ve been able to keep moving. Sometimes it puts a little pressure on crew availability, because it’s not as efficient as the prior network. But I think the team’s been doing a great job. Pilots are picking up, lucrative overtime flying. So that’s not been an issue for us really. We’re watching the regulatory environment, international trade and movement of cargo is so critical to all the economies, the U.S. economy and the economy in China. So we haven’t seen any disruptions there, like you referenced in the – on the passenger side. But it’s something we keep an eye on.
Helane Becker: Okay. And then early in the quarter, did you – you have issues with crews calling out sick because of the virus at all?
John Dietrich: Sure. I think we weren’t immune to that. Omicron was so prevalent and so widespread through every industry, we were no different. But we managed through it. And again, my thanks to our workforce, our pilots, everyone pushed through. But during that period, particularly from mid-December till into January there was pressure there both for flight crew, frankly, all employees because Omicron was so prevalent and not necessarily just infections, but contact tracing, there are pretty strict rules on contact tracing that we abide by that that put pressure on us and frankly, everyone else.
Helane Becker: Got you. And then if I could just squish in one more with respect to aircraft financing on maybe for Spencer. How are you financing the aircraft that are coming this year? Has that – already you talked about PDPs, but have you already decided on how those were going to be financed?
Spencer Schwartz: Yeah. Thanks, Helane. So we’ve paid all of the PDPs now. And so we’re working with lenders, we’ve already signed LOIs, we expect high LTVs and attractive rates. The market is really strong and it’s a good environment for us to be financing these aircrafts. So we will certainly have that in place as we take delivery.
Helane Becker: Thank you. Thanks very much.
Spencer Schwartz: Thank you.
John Dietrich: Thank you, Helane.
Operator: And our next question coming from the line of Scott Group with Wolfe Research. Your line is open.
Scott Group: Thanks. Good morning, guys. So you’ve guided to flattish earnings in the first quarter. I was wondering if you can at least share some directional perspective on the year, like the pilot costs will lap in the back half, the comp on rates get tough, more aircraft coming in. Directionally, do you think you can you grow earnings this year? Is it flat? How are you thinking about it?
Spencer Schwartz: So Scott we’ve only provided guidance for the first quarter. But I’ll give a couple of thoughts. One is that we continue to have increased utilization. Our utilization is extremely strong. It was up 14% last year. We have of course the four new 747-8s that will be coming in throughout the course of the year. We’ll have one 777, but really that’s at the end of the year, so not a whole lot coming from that. We’ve entered into all of the long-term contracts and we have of renewed those. And so we’ll enjoy a full year in 2022 of all those contracts. We’ve said that we expect maintenance to be fairly similar. Offsetting some of those things, of course, is we’ll have the higher pilot costs because of the new pilot agreement. And then yields are – remain the big question, what that’s going to be like right now. As John talked about, the yield environment is so strong. Yields continue to be elevated. Yields in the first quarter this year compared to the first quarter of last year are so much stronger, and there’s tremendous demand for charter and solid yields. But as the year progresses, that is a bit of a wildcard. So those are some thoughts without providing any sort of bottom line information.
Scott Group: That’s fair. I mean, I guess maybe the follow-up is if you’re saying that the ad hoc business is only 5% of the hours, but it sounds like it’s a big swing factor. So maybe can you talk about if it’s 5% of the hours, what percentage of the revenue may be, that might be helpful, is in this ad hoc? And then the longer-term charter that you’re talking about, the 20% of the hours, how does – is the pricing there fixed? Is that – if spot rates start to fall and the market starts solutions the pricing on that sort of long-term charter? Does that reset or is it fixed?
John Dietrich: I’ll start there, Spencer. Scott, that pricing on the long-term agreements is fixed. I would analogize it to ACMI-like agreements. And we provide on the number these agreements fuel, but there’s adjustments for fuel if fuel goes up or down, that we can make adjustments there. But the underlying fee-for-service is fixed, comparable to ACMI.
Spencer Schwartz: Yes. And Scott, the only thing I would add to that is that the long-term charter programs, as I said, we have contracts that are going through 2027. With regard to revenue because yields don’t have any – there’s no offsetting expense to those. So the flight’s already going to happen. The yields sort of a swing factor when it comes to the ad hoc spot charter market. So the increase or decrease in yields can go right to the bottom line. So it can have an outsized effect. So again, we’ve done a lot to really minimize the potential volatility in our business, and we’ve done a lot to put in place these long-term contracts. But still, when yields go up or down, it certainly can have an impact on our bottom line.
Scott Group: I mean, I guess what we’re trying to figure out, what I think everybody’s trying to figure out is, right, at some point, these rates will normalize. Now you’ve done stuff and you’re going to grow the fleet a lot. You’ve maybe changed the mix a little bit, like what do you think – like if you – what do you think about normalized margins, normalized earnings whenever these rates ultimately start to come down. Who knows what that is, but how do you think about that?
John Dietrich: So let me start, Spencer. In terms of, yes, what I would say it slightly differently, I would say what’s the new normal going to be? And I don’t see any time soon when you’re talking about normalizing yields or rates going back to pre-COVID levels anytime soon. As I mentioned, you’re going to have the continuation of significant growth in express and e-commerce. That’s creating demand that’s going to continue to grow. You have lessons learned from COVID, as I mentioned. You have a whole new customer base that is willing to take on dedicated capacity. And we’re going to see, in my view, manufacturing come roaring back as companies look to fill inventories and so forth. And that’s not – all those dynamics in play is not an overnight and for air freight, I think, is pricing power. So for all those factors, what will the new normal be? Yes, I think particularly in the spot rates, things will normalize and moderate a little bit. We’re watching that closely. But on the long-term charters and ACMI agreements, there’s been a step change. So we look forward to keeping you posted on what the new normal will be.
Scott Group: Okay. All right. Thank you, guys. Appreciate it.
John Dietrich: Thank you.
Spencer Schwartz: Thank you.
Operator: Our next question coming from the line of Barry Haimes with Sage Asset Management. Your line is open.
Barry Haimes: Hi, thanks very much. Just wanted to follow up on the comment you made about freight moving away from traditional passenger airports. And when I think about Asia, it makes sense, we’ve seen a lot of manufacturing move to places like Vietnam and Thailand. But are there any numbers you can share on that? When we look at Asian freight in terms of that breakdown between China and then some of these delay areas where you wouldn’t have the same proclivity to have a lot of passenger flights. Thanks.
Spencer Schwartz: Yes, Barry, I think your question is freight moving out of the sort of more traditional trade lanes that are operated by passenger airlines. And that’s absolutely true. You’ve seen all of the chip shortages. Inventories are critically low in high-tech, automotive chip manufacturers, and there’s a huge shortage of chips and semiconductors, and we don’t expect things to improve until probably 2024 or 2025. But there are factories that are being built to try to offset those things. And the beauty of Atlas’ business, we don’t operate a typical sort of scheduled airline other than South America. But our business, we fly airplanes and we fly airplanes wherever our customers and demand is. And so wherever that demand is, we will go there and be able to take advantage of that. And so if it’s not in a traditional passenger operated trade lane, which is becoming more and more common, as long as the airport can fit our size aircraft, we’ll be there.
Barry Haimes: I was just going to do one quick follow-up. Maybe a way to ask it is, what’s the China percentage of Asia flying or freight rather now versus pre-pandemic? Just trying to get some sort of feel for how that’s moved around. Sorry, go ahead. Thanks.
John Dietrich: I don’t know that we have a specific number to put to that, Barry. I mean, obviously, that coming out of China and Asia is a significant part of this. So I don’t have a specific number to ascribe to that.
Barry Haimes: Okay, thanks. Congrats on the quarter. Thank you.
John Dietrich: Thank you.
Operator: And we have a follow-up question from Chris Stathoulopoulos with Susquehanna. Your line is open.
Chris Stathoulopoulos: Hi, thanks for taking my follow-up. So I want to go back to Scott’s question. I think it’s an important one. And certainly, I get from investors, but I’m going to try it in a different way here. So investors are keenly focused on spot rates. And I guess there’s a few ways we can look at that data. But with the ACMI and CMI and long-term charter lease rates, there are typically inputs like interest rates and residual values. So could you help us better understand how we should think about that relationship between spot rates and the longer-term rates? And I guess if someone were to start or a bottoms-up revenue build based on your net fleet, should we start with a spot assumption, which, again, there’s a few areas we can look at and then automatically give a haircut on what we think CMI and charter rates might look like? Thanks.
John Dietrich: So I’ll start from a higher level response and then Spencer, if you want to talk to the numbers. And Chris, I heard what you said that investors are keenly focused on spot rates. But we’re keenly focused not only on spot rates, but also on the long-term security at favorable long-term charter and ACMI rates. And there’s no doubt for a customer who’s willing to commit for a long period of time. And what typically includes minimum block hours for a long-lived asset, that’s very attractive to our business. And our focus on the spot rates is for that allocated charter capacity as well as the flex-up capability because should there be a downturn and you’re left overly dependent on the spot rates, then your business suffers. And we’ve always strived to strike a balance, and that’s heavily weighted toward the ACMI and long-term. Now in terms of the rest of your question, kind of what’s the differential there? Spencer, I don’t know if you want to add any comments to that.
Spencer Schwartz: Yes. I think, Chris, in thinking about your question about modeling, you can certainly look at the rate per block hour. Now you’ve got to back out the impact of fuel in that rate per block hour, which you can certainly do. After you back out the impact of fuel, then you can see the rate per block hour that we’re enjoying, and you can see the growth in that rate per block hour. About 5% of the flying in 2022 is going to be – we expect will be ex-Asia, ad hoc spot charter flying. And so all the rest of it is from longer-term flying. And again, you should be able to see that in the rate per block hour. And as John said, as we’ve talked about these long-term charter agreements, they have very, very significant rates because there is just tremendous, tremendous demand. We simply don’t have enough aircraft to provide for all the demand that’s out there.
Chris Stathoulopoulos: Okay. And John, so you’ve been in the – you’ve been CEO now for two years, and I’m sure you had very different plans going into that role before the occurrence of COVID-19. So as we hopefully move to an endemic state in this year, what are you looking to accomplish? And what are your, I guess, top three areas of focus? Thank you.
John Dietrich: Thank you, Chris. Appreciate it. And look, I’m really excited about where we’ve been the last couple of years. And you’re right, some things were not entirely expected, but I think what we’ve been able to deliver shows the resiliency of our business model. When you talk about some of my focus areas, one, continuing to leverage that with a focus on international global air freight transportation with strong customers. I mean I intentionally rattled off some of those customers in my presentation because it’s just really a powerful list of great customers who are long-term players in the market, sophisticated players. So I’m looking to continue to develop those relationships, the cross-border growth of e-commerce, as we announced today with Cainiao and the global operation like we announced for the placement of the -8s with Kuehne+Nagel. Those are hugely important. We want to continue to grow and with all our customers and be their first choice. That’s another goal of ours. We know they have choices. And now in this favorable airfreight market, we have a number of carriers who have emerged who are showing that we have competition. We need to compete for the business. But we simply think we’re the best at what we do and continue to develop our team. So that’s another important focus. I was very pleased to have announced the labor agreement and continue to improve our labor relations and our kind of mending fences with our pilot group. We went through, as is not uncommon, a protracted period of tension because the pilots wanted to be recognized and their contract was overdue, and I’m delighted to bring that to a head. And we’re continuing to work closely with the new union leadership and all pulling in the same direction, which, frankly, we couldn’t have delivered these results without that unless they were all pulling in the right direction. And then from a financial standpoint, I think the third point would be a disciplined approach to capital allocation, keeping a strong balance sheet. I think Spencer’s final paragraph and his final comments in his presentation were powerful. We need to – strong balance sheet, invest in our future and also be prepared for what may get thrown at us because we are not out of the pandemic yet, and things get thrown at us. We’re watching fuel prices. We’re watching the markets, Korea and Japan, were just put back on heightened COVID status, whereas they were not with the CDC just a few days ago. So things get thrown our way, we want to be prepared to endure and navigate those challenges and continue to provide value to our shareholders.
Chris Stathoulopoulos: Thank you.
Operator: And our last question coming from the line of Eric Gregg from Four Tree Island Advisory. Your line is open.
Eric Gregg: Nice results and really great news about the stock repurchase program. Three quick questions. The first one is about the Q1 guidance. Given that airfreight indexes all indicate that air freight rates are up 30% plus so far in 2022 over 2021. The fact that your capacity has increased as much as it has and the likelihood that all these contracts that you’ve been renewing are at much higher rates it’s just a little surprising that the guidance for Q1 profitability is consistent with last year. Any comments around that?
Spencer Schwartz: Sure. Thank you, Eric. So we entered into a new pilot agreement. We have a new joint collective bargaining agreement and those rates took effect on September 1. So you’re absolutely right. Our yields, the impact from yields in the first quarter of this year versus the first quarter last year are absolutely higher. Our ACMI rates absolutely are higher. We’ve acquired 747-400s. And so the ownership costs are lower related to that. And so those are all really nice benefits. Our volume should be improving. But offsetting those things is a higher pilot cost. So that’s – I think that’s the missing component in your algebra there.
Eric Gregg: The other two are on the stock repurchase. Is your thinking around that, that’s kind of an annual guidance? Or is it – is there the possibility here that you get through the $200 million in reload in the latter part of the year?
John Dietrich: No, we have – we’ve announced this $200 million program. That’s the program. As I mentioned, we’re taking and continue to take a disciplined approach of which returning capital to shareholders is a part of it. But investing in the business is a part of it, making sure we keep our debt ratio in line as a part of it. So we’re happy about this program. We’re going to proceed with it, and then we’ll keep you posted on further developments.
Eric Gregg: Great. And then the last one is about Amazon and the warrants. And how is that relationship progressing? And have there been any more exercises on their ownership in the business?
John Dietrich: I’ll turn to Spencer in a moment on the warrants, but Amazon is a great customer. They’ve entered the market with force in terms of the number of aircraft they’ve put. We’re delighted to have them as a customer and work hard every day to meet their expectations. With regard to the warrants, I think they’ve done some transactions, and I think it served them quite well given where their pricing was on the warrants. And Spencer, I don’t know if you want to provide any further details on that.
Spencer Schwartz: Yes. There was – in November, Amazon exercised some of their warrants, warrant what we call warrant B, and that led to the issuance of 187,411 shares during the fourth quarter.
Eric Gregg: Thanks a ton, tremendous results.
John Dietrich: Thank you.
Spencer Schwartz: Thank you, Eric.
Operator: I’m showing no further questions at this time. I would now like to turn the call back over to Mr. John Dietrich for any closing remarks.
John Dietrich: Great. Thank you, operator, and thank you all for your great questions. We’re really excited about the future, and frankly, quite pleased with the results we’ve reported. I know the focus on the placements of the -8s was hugely important for all our constituents. So happy to announce that those are all placed now and look forward to taking on the 777s. So on behalf of all of our employees, Spencer and I would like to thank you for your interest in Atlas Air. We appreciate you taking the time to be with us today, and we hope you and your families all stay safe and look forward to speaking with you again soon. Thank you so much, and thank you, operator.
Operator: Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation. You may now disconnect.
