10-K 1 d450612d10k.htm FORM 10-K Form 10-K
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-K

 

 

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2012

OR

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 001-16545

LOGO

Atlas Air Worldwide Holdings, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware   13-4146982
(State or other jurisdiction of incorporation or organization)   (IRS Employer Identification No.)

2000 Westchester Avenue,

Purchase, New York

 

10577

(Zip Code)

(Address of principal executive offices)  

Registrant’s telephone number, including area code: (914) 701-8000

 

 

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

 

Title of Each Class

 

Name of Each Exchange on Which Registered

Common Stock, $0.01 Par Value   The NASDAQ Global Select Market

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

None

 

 

Indicate by check mark if the registrant is a well known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  x    No  ¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.    Yes  ¨    No  x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for at least the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form l0-K or any amendment to this Form 10-K.    ¨

Indicate by check mark if the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer  x             Accelerated filer  ¨            Non-accelerated filer  ¨             Smaller reporting company  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

The aggregate market value of the registrant’s Common Stock held by non-affiliates based upon the closing price of Common Stock as reported on The NASDAQ Global Select Market as of June 30, 2012 was approximately $1,126,494,350. In determining this figure, the registrant has assumed that all directors, executive officers and persons known to it to beneficially own ten percent or more of such Common Stock are affiliates. This assumption shall not be deemed conclusive for any other purpose. As of February 1, 2013, there were 26,443,441 shares of the registrant’s Common Stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE:

Certain portions of the registrant’s Proxy Statement relating to the 2013 Annual Meeting of Stockholders, to be filed with the Securities and Exchange Commission, are incorporated by reference into Part III.

 

 

 


Table of Contents

TABLE OF CONTENTS

 

            Page  
  

PART I.

    

Item 1.

  

Business

       1   

Item 1A.

  

Risk Factors

       11   

Item 1B.

  

Unresolved Staff Comments

       21   

Item 2.

  

Properties

       22   

Item 3.

  

Legal Proceedings

       23   

Item 4.

  

Mine Safety Disclosures

       23   
  

PART II.

    

Item 5.

   Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities        24   

Item 6.

  

Selected Financial Data

       25   

Item 7.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations        26   

Item 7A.

  

Quantitative and Qualitative Disclosures about Market Risk

       46   

Item 8.

  

Financial Statements and Supplementary Data

       47   

Item 9.

  

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

       79   

Item 9A.

  

Controls and Procedures

       79   

Item 9B.

  

Other Information

       80   
  

PART III.

    

Item 10.

  

Directors, Executive Officers and Corporate Governance

       80   

Item 11.

  

Executive Compensation

       81   

Item 12.

   Security Ownership of Certain Beneficial Owners and Management and Related Stockholders Matters        82   

Item 13.

  

Certain Relationships and Related Transactions, and Director Independence

       82   

Item 14.

  

Principal Accounting Fees and Services

       82   
  

PART IV.

    

Item 15.

  

Exhibits, Financial Statement Schedules

       83   


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FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K (this “Report”), as well as other reports, releases and written and oral communications issued or made from time to time by or on behalf of Atlas Air Worldwide Holdings, Inc. (“AAWW”), contain statements that may constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Those statements are based on management’s beliefs, plans, expectations and assumptions, and on information currently available to management. Generally, the words “will,” “may,” “should,” “expect,” “anticipate,” “intend,” “plan,” “continue,” “believe,” “seek,” “project,” “estimate” and similar expressions used in this Report that do not relate to historical facts are intended to identify forward-looking statements.

The forward-looking statements in this Report are not representations or guarantees of future performance and involve certain risks, uncertainties and assumptions. Such risks, uncertainties and assumptions include, but are not limited to, those described in Item 1A, “Risk Factors.” Many of such factors are beyond AAWW’s control and are difficult to predict. As a result, AAWW’s future actions, financial position, results of operations and the market price for shares of AAWW’s common stock could differ materially from those expressed in any forward-looking statements. Readers are therefore cautioned not to place undue reliance on forward-looking statements. AAWW does not intend to publicly update any forward-looking statements that may be made from time to time by, or on behalf of, AAWW, whether as a result of new information, future events or otherwise, except as required by law.


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PART I

 

ITEM 1. BUSINESS

Glossary

The following represents terms and statistics specific to our business and industry. They are used by management to evaluate and measure operations, results, productivity and efficiency.

 

Block Hour

The time interval between when an aircraft departs the terminal until it arrives at the destination terminal.

 

C Check

High-level or “heavy” airframe maintenance checks, which are more intensive in scope than A Checks and are generally performed between 18 and 24 months depending on aircraft type.

 

D Check

High-level or “heavy” airframe maintenance checks, which are the most extensive in scope and are generally performed every six to nine years depending on aircraft type.

 

Heavy Maintenance

Scheduled maintenance activities, which are the most extensive in scope and are primarily based on time intervals, including but not limited to C Checks, D Checks and engine overhauls.

 

Line Maintenance

Unscheduled maintenance to rectify events occurring during normal day-to-day operations.

 

Load Factor

The average amount of weight flown divided by the maximum available capacity.

 

Non-heavy

Discrete maintenance activities for the overhaul and repair of specific aircraft components.

Maintenance

 

Revenue Per

An amount calculated by dividing Operating revenues by Block Hours.

Block Hour

 

Yield

The average amount a customer pays to fly one tonne of cargo one mile.

 

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Overview

AAWW is a holding company with a principal operating subsidiary, Atlas Air, Inc. (“Atlas”), which is wholly-owned. It also maintains a 49% interest in Global Supply Systems Limited (“GSS”) and has a 51% economic interest and 75% voting interest in Polar Air Cargo Worldwide, Inc. (“Polar”). AAWW is also the parent company of several wholly-owned subsidiaries related to our dry leasing services (collectively referred to as “Titan”). When used in this Report, the terms “we,” “us,” “our,” and the “Company” refer to AAWW and all entities in our consolidated financial statements.

 

LOGO

We are a leading global provider of outsourced aircraft and aviation operating services. As such, we manage and operate the world’s largest fleet of 747 freighters. We provide unique value to our customers by giving them access to highly reliable new production freighters that deliver the lowest unit cost in the marketplace combined with outsourced aircraft operating services that we believe lead the industry in terms of quality and global scale. Our customers include airlines, express delivery providers, freight forwarders, the U.S. military and charter brokers. We provide global services with operations in Africa, Asia, Australia, Europe, the Middle East, North America and South America.

Our primary service offerings include the following:

 

   

ACMI, whereby we provide outsourced cargo aircraft operating solutions, including the provision of an aircraft, crew, maintenance and insurance, while customers assume fuel, demand and Yield risk;

 

   

CMI, which is part of our ACMI business segment, whereby we provide outsourced cargo and passenger aircraft operating solutions including the provision of crew, maintenance and insurance, while customers provide the aircraft and assume fuel, demand and Yield risk;

 

   

AMC Charter services, whereby we provide cargo and passenger aircraft charter services for the U.S. Military Air Mobility Command (“AMC”). The AMC pays a fixed charter fee that includes fuel, insurance, landing fees, overfly and all other operational fees and costs;

 

   

Commercial Charter, whereby we provide cargo and passenger aircraft charters to customers, including brokers, cruise-ship operators, freight forwarders, direct shippers and airlines. The customer pays a fixed charter fee that includes fuel, insurance, landing fees, overfly and all other operational fees and costs; and

 

   

Dry Leasing, whereby we provide aircraft and/or engine leasing solutions.

We believe that the scale, scope and quality of our outsourced services are unparalleled in our industry. The relative operating cost efficiency of our current 747-8F and 747-400F aircraft, including their superior fuel efficiency, range, capacity and loading capabilities, create a compelling value proposition for our customers and position us well for future growth.

Our growth plans are focused on the further enhancement of our ACMI market position with our new 747-8F aircraft. The Boeing Company (“Boeing”) delivered seven of these 747-8F aircraft to us through December 2012 and we expect to take two additional deliveries during 2013. We are currently the only operator

 

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offering these aircraft to the ACMI market. We also hold rights to purchase an additional 13 747-8F aircraft, providing us with flexibility to further expand our fleet in response to market conditions. Our growth plans also include the continued expansion of our CMI business, which we launched in 2010. In 2011, we began flying passenger charters for the AMC. In 2011 and 2012, we expanded our fleet with the purchase of two 747-400 and three 767-300ER passenger aircraft. We also use these aircraft to fly passengers for private charter customers, charter brokers and other airlines.

We believe that our current fleet represents one of the most efficient freighter fleets in the market. Our primary placement for these aircraft will continue to be long-term ACMI outsourcing contracts with high credit quality customers.

AAWW was incorporated in Delaware in 2000. Our principal executive offices are located at 2000 Westchester Avenue, Purchase, New York 10577, and our telephone number is (914) 701-8000.

Operations

Introduction.   We currently operate our service offerings through the following reportable segments: ACMI, AMC Charter, Commercial Charter and Dry Leasing. All reportable business segments are directly or indirectly engaged in the business of air transportation services but have different commercial and economic characteristics, which are separately reviewed by management. Financial information regarding our reportable segments can be found in Note 11 to our consolidated financial statements included in Item 8 of Part II of this Report (the “Financial Statements”).

ACMI.   Historically, the core of our business has been providing cargo aircraft outsourcing services to customers on an ACMI basis in exchange for guaranteed minimum revenues at predetermined levels of operation for defined periods of time. ACMI provides a predictable annual revenue and cost base by minimizing the risk of fluctuations such as Yield, fuel and demand risk in the air cargo business. Our ACMI revenues and most of our costs under ACMI and CMI contracts are denominated in U.S. dollars, minimizing currency risks associated with international business.

During 2010, we also began to offer CMI cargo and passenger services to customers, which is similar to ACMI flying except that the customer provides the aircraft. The aircraft are generally operated under the traffic rights of the customer. Certain direct operating expenses, such as fuel, overfly and landing fees and ground handling, are generally borne by the customer, who also bears the commercial revenue risk of Load Factor and Yield.

All of our ACMI and CMI contracts provide that the aircraft remain under our exclusive operating control, possession and direction at all times. The ACMI contracts further provide that both the contracts and the routes to be operated may be subject to prior and/or periodic approvals of the U.S. or foreign governments.

As a percentage of our operating revenue, ACMI revenue represented 41.4% in 2012, 45.2% in 2011 and 40.7% in 2010. As a percentage of our operated Block Hours, ACMI represented 70.2% in 2012, 74.9% in 2011 and 71.2% in 2010. We recognize ACMI revenue, which includes CMI, as we operate the actual Block Hours on behalf of a customer or according to the guaranteed minimum Block Hours defined in contracts. The original length of these contracts generally ranges from three to twenty years, although we do offer contracts of shorter duration. In addition, we have also operated short-term, seasonal ACMI contracts and we expect to continue to provide such services.

AMC Charter. Our AMC Charter business primarily provides full planeload passenger and cargo aircraft to the AMC. We participate in the U.S. Civil Reserve Air Fleet (“CRAF”) Program under contracts with the AMC, which typically cover a one-year period. We have made a substantial number of our aircraft available for use by the U.S. Military in support of their operations and we operate such flights pursuant to cost-plus contracts. Atlas bears all direct operating costs for both passenger and cargo aircraft, which include fuel, insurance, overfly,

 

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landing and ground handling expenses. However, the price of fuel used during AMC flights is fixed by the U.S. Military. The contracted charter rates (per mile) and fuel prices (per gallon) are fixed by the AMC generally for twelve-month periods. We receive reimbursements from the AMC each month if the price of fuel paid by us to vendors for the AMC Charter flights exceeds the fixed price. If the price of fuel paid by us is less than the fixed price, then we pay the difference to the AMC.

Airlines may participate in the CRAF Program either alone or through a teaming arrangement. There are currently four major groups of carriers (or teams), several smaller teams and independent carriers (that are not part of any team) that compete for AMC business. We are a member of the team led by FedEx Corporation (“FedEx”). We pay a commission to the FedEx team, based on the revenues we receive under our AMC contracts. The AMC buys cargo capacity on two bases: a fixed basis, which is awarded both annually and quarterly, and expansion flying, which is awarded on an as-needed basis throughout the contract term. While the fixed business is predictable, Block Hour levels for expansion flying are difficult to predict and thus are subject to fluctuation. The majority of our AMC business is expansion flying. We also earn commissions on subcontracting certain flying of oversized cargo and less than full planeload missions, or in connection with flying cargo into areas of military conflict where we cannot perform these services ourselves.

As a percentage of our operating revenue, AMC Charter revenue represented 29.7% in 2012, 31.7% in 2011 and 29.1% in 2010. As a percentage of our operated Block Hours, AMC Charter represented 14.7% in 2012, 14.0% in 2011 and 14.6% in 2010.

Commercial Charter.   Our Commercial Charter business segment provides full planeload cargo and passenger capacity to customers for one or more flights based on a specific origin and destination. The Commercial Charter business is generally booked on a short-term, as-needed, basis. In addition, Atlas provides limited airport-to-airport cargo services to select markets, including several cities in South America. The Commercial Charter business is similar to the AMC Charter business in that we are responsible for all direct operating costs as well as the commercial revenue risk. Atlas also bears direct sales costs incurred through our own sales force and through commissions paid to general sales agents.

As a percentage of our operating revenue, Commercial Charter revenue represented 27.4% in 2012, 21.4% in 2011 and 28.7% in 2010. As a percentage of our operated Block Hours, Commercial Charter represented 14.4% in 2012, 10.1% in 2011 and 13.7% in 2010.

Dry Leasing.   Our Dry Leasing business provides a specific aircraft and/or engine without crew, maintenance or insurance to a customer for compensation that is typically based on a fixed monthly amount. This business is primarily operated by Titan, which is principally a cargo aircraft dry lessor, but also owns and manages aviation assets such as passenger narrow-body aircraft, engines and related equipment. Titan also markets its expertise in asset management, passenger-to-freighter conversion and other aviation-related technical services. As a percentage of our operating revenue, Dry Leasing revenue represented 0.7% in 2012, 0.7% in 2011 and 0.5% in 2010.

Global Supply Systems

AAWW holds a 49% interest in GSS, a private company, which became a consolidated subsidiary of AAWW in 2009 (see Note 2 to our Financial Statements). During the fourth quarter of 2011, Atlas Dry Leased three of our new 747-8F aircraft to GSS, which pays for rent and a provision for maintenance costs associated with the aircraft. GSS, in turn, provides ACMI services for these aircraft to British Airways Plc (“British Airways”). Atlas previously Dry Leased three owned 747-400s to GSS.

DHL Investment and Polar

DHL Network Operations (USA), Inc. (“DHL”) holds a 49% equity interest and a 25% voting interest in Polar (see Note 3 to our Financial Statements). AAWW owns the remaining 51% equity interest in Polar and a 75% voting interest. Concurrent with the investment, under a 20-year blocked space agreement that was subsequently amended (the “BSA”), Polar provides air cargo capacity to DHL through Polar’s express network.

 

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In addition, Atlas and Polar have a flight services agreement, whereby Atlas is compensated by Polar on a per Block Hour basis, subject to a monthly minimum Block Hour guarantee, at a predetermined rate that escalates annually. Under the flight services agreement, Atlas provides Polar with crew, maintenance and insurance for the aircraft. Under separate agreements, Atlas and Polar supply administrative, sales and ground support services to one another. Deutsche Post AG (“DP”) has guaranteed DHL’s (and Polar’s) obligations under the various agreements described above. AAWW has agreed to indemnify DHL for and against various obligations of Polar and its affiliates. Collectively, these agreements are referred to in this Report as the “DHL Agreements”. The DHL Agreements provide us with a minimum guaranteed annual revenue stream from 747-400 aircraft that have been dedicated to Polar for DHL and other customers’ freight over the life of the agreements.

Polar provides full flying for DHL’s trans-Pacific express network and DHL provides financial support and also assumes the risks and rewards of the operations of Polar. In addition to its trans-Pacific routes, Polar has also flown between the Asia Pacific regions, the Middle East and Europe on behalf of DHL and other customers.

Polar operates six 747-400 freighter aircraft that are subleased from us. Atlas operates two additional 747-8F aircraft and one 747-400 aircraft to support the Polar network and DHL through an alliance agreement whereby Atlas provides ACMI services to Polar. We also provide incremental charter capacity to Polar on an as-needed basis.

In 2011, we signed a CMI agreement with DHL to operate five 767 freighters in DHL’s North American network. All five of these aircraft were placed in service during 2012.

In December 2012, we signed a CMI agreement with DHL to operate two new 767-300ERF aircraft owned by them. The aircraft were placed into service in their network during the first quarter of 2013.

Long-Term Revenue Commitments

The following table sets forth the guaranteed minimum revenues expected to be received from our existing ACMI (including CMI) and Dry Leasing customers for the years indicated (in thousands):

 

2013

   $ 550,557  

2014

     480,237  

2015

     406,666  

2016

     266,742  

2017

     208,911  

Thereafter

     1,080,873  
  

 

 

 

Total

   $ 2,993,986  
  

 

 

 

Sales and Marketing

We have regional sales offices in the United States, England and Hong Kong, which cover the Americas, Europe, Africa, the Middle East and the Asia Pacific regions. These offices market our ACMI (including CMI) and Dry Leasing services directly to other airlines and logistic companies. They also market our cargo and passenger Commercial Charter services to charter brokers, cruise-ship operators, freight forwarders, direct shippers and airlines. Additionally, we have a dedicated Government and Defense Group that directly manages our military cargo and passenger operations.

Maintenance

Maintenance represented our fourth-largest operating expense for the year ended December 31, 2012. Primary maintenance activities include scheduled and unscheduled work on airframes and engines. Scheduled maintenance activities encompass those activities specified in a carrier’s maintenance program approved by the

 

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U.S. Federal Aviation Administration (“FAA”). The costs necessary to adhere to these maintenance programs may increase over time, based on the age of the equipment or due to FAA airworthiness directives (“ADs”).

Scheduled airframe maintenance includes daily and weekly checks, as well as heavy maintenance checks, involving more complex activities that can generally take from one to four weeks to complete. Unscheduled maintenance, known as Line Maintenance, rectifies events occurring during normal day-to-day operations. Scheduled maintenance activities such as C and D Checks, are progressively higher in scope and duration than Line Maintenance, and are considered “heavy” airframe maintenance checks. All lettered checks are currently performed by third-party service providers that are compensated on a time-and-material basis as we believe they provide the most reliable and efficient means of maintaining our aircraft fleet.

Our FAA-approved maintenance programs allow our engines to be maintained on an “on condition” basis. Under this arrangement, engines are sent to third-party maintenance providers for repair based on life-limited parts and/or performance deterioration.

Under the ADs issued pursuant to its Aging Aircraft Program, we are subject to extensive aircraft examinations and may be required to undertake structural modifications to our fleet from time to time to address any problems of corrosion and structural fatigue. As part of the FAA’s overall Aging Aircraft Program, it has issued increased inspection and maintenance requirements depending on aircraft type and ADs requiring certain additional aircraft modifications. We believe all aircraft in our fleet are in compliance with all existing ADs. It is possible, however, that additional ADs applicable to the types of aircraft or engines included in our fleet could be issued in the future and that the cost of complying with such ADs could be substantial.

Insurance

We maintain insurance of the types and in amounts deemed adequate and consistent with current industry standards. Principal coverage includes: liability for injury to members of the public, including passengers; damage to our property and that of others; and loss of, or damage to, flight equipment, whether on the ground or in flight.

Since the terrorist attacks of September 11, 2001, we and other airlines have been unable to obtain coverage for claims resulting from acts of terrorism, war or similar events (war-risk coverage) at reasonable rates from the commercial insurance market. We have, as have most other U.S. airlines, purchased our war-risk coverage through a special program administered by the U.S. government. The FAA is currently providing war-risk coverage for hull, passenger, cargo loss, crew and third-party liability insurance through September 30, 2013. If the U.S. government insurance program were to be terminated, we would likely face a material increase in the cost of war-risk coverage, and because of competitive pressures in the industry, our ability to pass this additional cost on to customers may be limited.

Governmental Regulation

General.   Atlas and Polar are subject to regulation by the U.S. Department of Transportation (“DOT”) and the FAA, among other U.S. and foreign government agencies. The DOT primarily regulates economic issues affecting air service, such as certification, fitness and citizenship, competitive practices, insurance and consumer protection. The DOT has the authority to investigate and institute proceedings to enforce its economic regulations and may assess civil penalties, revoke operating authority or seek criminal sanctions. Atlas and Polar each hold DOT-issued certificates of public convenience and necessity plus exemption authority to engage in scheduled air transportation of property and mail in domestic, as well as enumerated international markets, and charter air transportation of property and mail on a worldwide basis.

The DOT conducts periodic evaluations of each air carrier’s fitness and citizenship. In the area of fitness, the DOT seeks to ensure that a carrier has the managerial competence, compliance disposition and financial resources needed to conduct the operations for which it has been certificated. Additionally, each U.S. air carrier must remain a U.S. citizen by (i) being organized under the laws of the United States or a state, territory or

 

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possession thereof; (ii) requiring its president and at least two-thirds of its directors and other managing officers to be U.S. citizens; (iii) allowing no more than 25% of its voting stock to be owned or controlled, directly or indirectly, by foreign nationals and (iv) not being otherwise subject to foreign control. The DOT broadly interprets “control” to exist when an individual or entity has the potential to exert substantial influence over airline decisions through affirmative action or the threatened withholding of consents and/or approvals. We believe the DOT will continue to find Atlas’ and Polar’s fitness and citizenship favorable and conclude that Atlas and Polar are in material compliance with the DOT requirements described above.

In addition to holding the DOT-issued certificate and exemption authority, each U.S. air carrier must hold a valid FAA-issued air carrier certificate and FAA-approved operations specifications authorizing operation in specific regions with specified equipment under specific conditions and is subject to extensive FAA regulation and oversight. The FAA is the U.S. government agency primarily responsible for regulation of flight operations and, in particular, matters affecting air safety, such as airworthiness requirements for aircraft, operating procedures, mandatory equipment and the licensing of pilots, mechanics and dispatchers. The FAA monitors compliance with maintenance, flight operations and safety regulations and performs frequent spot inspections of aircraft, employees and records. The FAA also has the authority to issue ADs and maintenance directives and other mandatory orders relating to, among other things, inspection of aircraft and engines, fire retardant and smoke detection devices, increased security precautions, collision and windshear avoidance systems, noise abatement and the mandatory removal and replacement of aircraft parts that have failed or may fail in the future. In addition, the FAA mandates certain record-keeping procedures. The FAA has the authority to modify, temporarily suspend or permanently revoke an air carrier’s authority to provide air transportation or that of its licensed personnel, after providing notice and a hearing, for failure to comply with FAA rules, regulations and directives. The FAA is empowered to assess civil penalties for such failures or institute proceedings for the imposition and collection of monetary fines for the violation of certain FAA regulations and directives. The FAA is also empowered to modify, suspend or revoke an air carrier’s authority on an emergency basis, without providing notice and a hearing, where significant safety issues are involved. We believe Atlas and Polar are in material compliance with applicable FAA rules and regulations and maintain all documentation required by the FAA.

In December 2011, the FAA adopted a rule to impose new flight and duty time requirements with the stated goal of reducing pilot fatigue. The rule’s effective date is January 14, 2014, resulting in a two year ramp-up period. The rule applies to our passenger operations but not to our all-cargo operations. Carriers with all-cargo operations have the option to conduct such operations under the new rules. The Independent Pilots Association, representing United Parcel Service, Inc. (“UPS”) pilots, have filed a judicial appeal, in which they are challenging the FAA decision not to include all-cargo operations in the rule. Should the appeal be successful or the FAA decide on its own initiative to change the final rule to include all-cargo operations, that would result in material increased crew costs for Atlas and Polar, as well as air carriers that predominately fly nighttime and long-haul flights. It could also have a material impact on our business, results of operations and financial condition by limiting crew scheduling flexibility and increasing operating costs, especially with respect to long-range flights.

International.   Air transportation in international markets (the vast majority of markets in which Atlas, Polar and GSS operate) is subject to extensive additional regulation. The ability of Atlas, Polar and GSS to operate in other countries is governed by aviation agreements between the United States and the respective countries (in the case of Europe, the European Union (the “EU”)) or, in the absence of such an agreement, by principles of reciprocity. Sometimes, as in the case of Japan and China, aviation agreements restrict the number of carriers that may operate, their frequency of operation, or the routes over which they may fly. This makes it necessary for the DOT to award route and operating rights to U.S. air carrier applicants through competitive route proceedings. International aviation agreements are periodically subject to renegotiation, and changes in U.S. or foreign governments could result in the alteration or termination of such agreements, diminish the value of existing route authorities or otherwise affect Atlas’ and Polar’s international operations. Foreign government authorities also impose substantial licensing and business registration requirements and, in some cases, require the advance filing and/or approval of schedules or rates. Moreover, the DOT and foreign government agencies typically regulate

 

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alliances and other commercial arrangements between U.S. and foreign air carriers, such as the ACMI and CMI arrangements that Atlas maintains. Approval of these arrangements is not guaranteed and may be conditional. In addition, approval during one time period does not guarantee approval in future periods.

A foreign government’s regulation of its own air carriers can also affect our business. For instance, the EU places limits on the ability of EU carriers to use ACMI aircraft from airlines of non-EU member states. The regulations have a negative impact on our ACMI business opportunities. Similarly, the European Aviation Safety Agency (“EASA”) has proposed new rules that would prohibit EU airlines from providing ACMI and CMI services through non-EU airlines without first satisfying their regulators that the aircraft to be used adhere to both international and EASA-imposed requirements. Finalization of the proposed regulations could increase costs and inhibit business opportunities.

Airport Access.   The ability of Atlas, Polar and our ACMI and CMI customers to operate is dependent on their ability to gain access to airports of their choice at commercially desirable times and on acceptable terms. In some cases, this is constrained by the need for the assignment of takeoff and landing “slots” or comparable operational rights. Like other air carriers, Atlas and Polar are subject to such constraints at slot-restricted airports in cities such as Chicago and a variety of foreign locations (e.g., Tokyo, Shanghai and Incheon). The availability of slots is not assured and the inability of Polar or Atlas’ other ACMI customers to obtain additional slots could inhibit efforts to provide expanded services in certain international markets. In addition, nighttime flight restrictions have been imposed or proposed by various airports in Europe, Canada and the U. S. Depending on their severity, these could have an adverse operational impact.

Access to the New York airspace presents an additional challenge. Because of congestion in the New York area, especially at John F. Kennedy International Airport (“JFK”), the FAA imposes hourly limits on JFK operations of those carriers offering scheduled services.

As a further means to address congestion, the FAA allows U.S. airports to raise landing fees to defray the costs of airfield facilities under construction or reconstruction. Any landing fee increases implemented would have an impact on airlines generally.

Security.   The U.S. Transportation Security Administration (“TSA”) extensively regulates aviation security through rules, regulations and security directives that are designed to prevent unauthorized access to passenger and freighter aircraft and the introduction of prohibited items including firearms and explosives onto an aircraft. Atlas and Polar currently operate pursuant to a TSA-approved risk-based security program that, we believe, adequately maintains the security of all aircraft in the fleet. We work closely with the TSA to ensure that we have available security research and intelligence information to assist us. There can be no assurance, however, that we will remain in compliance with the existing and any additional security requirements imposed by TSA or by U.S. Congress without incurring substantial costs, which may have a material adverse effect on our operations. To mitigate any such increase, we are working closely with the Department of Homeland Security and other government agencies to ensure that a risk-based management approach is utilized to target specific “at-risk” cargo. This approach will limit any exposure to regulation that would require 100% screening of all cargo at an excessive cost. Additionally, foreign governments and regulatory bodies (such as the European Commission) impose their own aviation security requirements and have increasingly tightened such requirements. This may have an adverse impact on our operations, especially to the extent the new requirements may necessitate redundant or costly measures or be in conflict with TSA requirements.

Environmental.   We are subject to various federal, state and local laws relating to the protection of the environment, including the discharge or disposal of materials and chemicals and the regulation of aircraft noise, which are administered by numerous state, local and federal agencies. For instance, the DOT and the FAA have authority under the Aviation Safety and Noise Abatement Act of 1979 and under the Airport Noise and Capacity Act of 1990 to monitor and regulate aircraft engine noise. We believe that all aircraft in our fleet materially comply with current DOT, FAA and international noise standards.

 

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We are also subject to the regulations of the U.S. Environmental Protection Agency (the “EPA”) regarding air quality in the United States. All of our aircraft meet or exceed applicable EPA fuel venting requirements and smoke emissions standards.

There is significant U.S. and international government interest in implementing measures to respond to the problem of climate change and greenhouse gas emissions. Various governments, including the United States, are pursuing measures to regulate climate change and greenhouse gas emissions.

The EU enacted legislation to extend its emissions trading scheme (“ETS”) to aviation commencing January 1, 2012. Under the EU mechanism, airlines serving the EU must report flight activity on an ongoing basis. Following the end of every year, the legislation requires each airline to tender the number of “carbon emissions allowances” corresponding to the carbon emissions generated by its flight activity during the year. If the airline’s flight activity during the year has produced carbon emissions exceeding the number of carbon emissions allowances that it has been awarded, the airline must acquire carbon emissions allowances from other airlines in the open market. In November 2012, following strong objections from the U.S. and other governments to the EU’s unilateral implementation of the ETS, the European Commission announced that it would recommend that the European Council and the European Parliament suspend applicability of the emissions allowance requirements to flights to and from the EU during calendar year 2012, to allow time for multilateral action by the International Civil Aviation Organization (“ICAO”). The proposed ETS suspension is not intended to apply to intra-EU flights. Although the suspension appears likely to go into effect, there can be no assurance of that fact, or that the suspension legislation will take the form proposed by the European Commission.

ICAO also has begun to address the issue of controlling carbon emissions from civil aviation and is likely to reach agreement on some measures at some point in the future. Some of the measures under consideration, such as voluntary emissions targets, offer alternatives to an emissions trading mechanism.

In the United States, various constituencies have continued to advocate for controls on greenhouse gas emissions. Previously, both houses of the U.S. Congress passed legislation to impose a carbon-related tax on fuel sold to airlines and other entities. However, a bill has not been signed into law. Also, in September 2009, the EPA proposed regulations that would impose controls on greenhouse gas emissions. While the proposed regulations would not directly control greenhouse gas emissions by air carriers, a number of states and environmental organizations have asked the EPA to regulate greenhouse gas emissions from aircraft.

Other Regulations.   Air carriers are also subject to certain provisions of the Communications Act of 1934 because of their extensive use of radio and other communication facilities and are required to obtain an aeronautical radio license from the Federal Communications Commission. Additionally, we are subject to U.S. and foreign antitrust requirements and international trade restrictions imposed by U.S. presidential determination and U.S. government agency regulation, including the Office of Foreign Assets Control of the U.S. Department of the Treasury. We endeavor to comply with such requirements at all times. We are also subject to state and local laws and regulations at locations where we operate and at airports that we serve. Our operations may become subject to additional international, U.S. federal, state and local requirements in the future. We believe that we are in material compliance with all currently applicable laws and regulations.

Civil Reserve Air Fleet.   Atlas and Polar both participate in the CRAF Program, which permits the U.S. Department of Defense to utilize participants’ aircraft during national emergencies when the need for military airlift exceeds the capability of military aircraft. Participation in the CRAF Program could adversely restrict our commercial business in times of national emergency.

Future Regulation.   The U.S. Congress, the DOT, the FAA, the TSA and other government agencies are currently considering, and in the future may consider, adopting new laws, regulations and policies regarding a wide variety of matters that could affect, directly or indirectly, our operations, ownership and profitability. It is impossible to predict what other matters might be considered in the future and to judge what impact, if any, the implementation of any future proposals or changes might have on our businesses.

 

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Competition

The market for ACMI services is competitive. We believe that the most important basis for competition in the ACMI market is the efficiency and cost effectiveness of the aircraft assets and the scale, scope and quality of the outsourced operating services provided. Atlas is currently the only provider of ACMI services with the new 747-8F aircraft. The primary providers presently in the 747-400F and 747-400 BCF/SF ACMI markets include the following: Atlas; Air Atlanta Icelandic; Evergreen International Aviation; Kalitta Air, LLC; Southern Air, Inc.; and Global Aviation Holdings, Inc. (World Airways, Inc. and North American Airlines, Inc.). In addition, Southern Air, Inc. provides 777 aircraft in the ACMI market.

While our AMC Charter business has been profitable each year since 2004, the formation of additional competing teaming arrangements, increased participation of other independent carriers, an increase by other air carriers in their commitment of aircraft to the CRAF program, the withdrawal of any of the current team members, or a reduction of the number of aircraft pledged to the CRAF program by our team, and the uncertainty of future demand for commercial airlift by the U.S. Military, could adversely affect the amount of AMC business awarded to us in the future. To the extent that we receive a reduction in our awards or expansion business, we intend to redeploy the available aircraft to our other business segments.

The Commercial Charter market is highly competitive, with a number of operators that include Evergreen International Aviation; Kalitta Air, LLC; Southern Air, Inc.; and passenger airlines providing similar services utilizing both 747-400s and 747-200s. We believe that we offer a superior aircraft in the 747-400, and we will continue to develop new opportunities in the Commercial Charter market for 747-400 aircraft not otherwise deployed in our ACMI or AMC business. Many of our ad hoc charter flights are one-way return flights from Asia or Europe, positioned by one-way AMC flights that originate from the United States and terminate in Europe or the Middle East.

The Dry Leasing business is competitive. We believe that we have an advantage over other cargo aircraft lessors in this business as a result of our relationships in the cargo market and our insights and expertise as an operator of aircraft. Titan also competes in the passenger aircraft leasing market to develop key customer relationships, enter strategic geographic markets, and/or acquire feedstock aircraft for future freighter conversion. The primary competitors in the aircraft leasing market include GE Capital Aviation Services; International Lease Finance Corp.; AWAS; Guggenheim Aviation Partners, LLC, CIT Aerospace; Aviation Capital Group Corp.; Air Castle Ltd.; AerCap Holdings N.V.; and RBS Aviation Capital, among many others.

Fuel

Historically, aircraft fuel is one of the most significant expenses for us. During 2012, 2011 and 2010, fuel costs represented 30.8%, 31.2%, and 27.1%, respectively, of our total operating expenses. Fuel prices and availability are subject to wide price fluctuations based on geopolitical issues, supply and demand, which we can neither control nor accurately predict. The following table summarizes our total fuel consumption and costs:

 

     2012      2011      2010  

Gallons consumed (in thousands)

     131,012        111,848        119,176  

Average price per gallon, including tax

   $ 3.33      $ 3.47      $ 2.52  

Cost (in thousands)

   $ 436,618      $ 388,579      $ 300,229  

Fuel burn — gallons per Block Hour (excluding ACMI)

     2,875        3,255        3,221  

Our exposure to fluctuations in fuel price is limited to a portion of our Commercial Charter business only. For this business, we shift a portion of the burden of price increases to customers by imposing a surcharge. While we believe that fuel price volatility in 2012, 2011 and 2010 was partly reduced as a result of increased fuel surcharges, these surcharges did not completely offset the impact of the underlying increases in fuel prices on our Commercial Charter business. The ACMI segment has no direct fuel price exposure because ACMI and CMI contracts require our customers to pay for aircraft fuel. Similarly, we generally have no fuel price risk in the

 

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AMC business because the price is set under our contract, and we receive or make subsequent payments to adjust for price increases and decreases from the contractual rate. AMC fuel expense was $194.9 million in 2012, $221.3 million in 2011 and $155.5 million in 2010.

In the past, we have not experienced significant difficulties with respect to fuel availability. Although we do not currently anticipate a significant reduction in the availability of aircraft fuel, a number of factors, such as geopolitical uncertainties in oil-producing nations and shortages of and disruptions to refining capacity or transportation of aircraft fuel from refining facilities, make accurate predictions unreliable. For example, hostilities and political turmoil in oil-producing nations could lead to disruptions in oil production and/or to substantially increased oil prices. Any inability to obtain aircraft fuel at competitive prices would materially and adversely affect our results of operation and financial condition.

Employees

Our business depends on highly qualified management, operations and flight personnel. As a percentage of our consolidated operating expenses, salaries, wages and benefits accounted for approximately 20.7% in 2012, 21.0% in 2011 and 21.5% in 2010. As of December 31, 2012, we had 1,744 employees, 912 of whom were pilots. We maintain a comprehensive training program for our pilots in compliance with FAA requirements, in which each pilot regularly attends recurrent training programs.

Pilots and flight dispatchers of Atlas and Polar are represented by the International Brotherhood of Teamsters (the “IBT”). These employees represented approximately 52.3% of our workforce as of December 31, 2012. We are subject to risks of work interruption or stoppage as permitted by the Railway Labor Act of 1926 (the “Railway Labor Act”), and may incur additional administrative expenses associated with union representation of our employees.

In September 2011, we completed, and have since implemented, a five-year collective bargaining agreement (“CBA”), which will not become amendable until September 2016. The terms of the CBA result in a single workforce that serves both Atlas and Polar.

In November 2012, we completed, and have since implemented, a five-year collective bargaining agreement with the Atlas and Polar dispatchers. These dispatchers have been represented by the IBT since 2009.

Available Information

Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, and all amendments to those reports, filed with or furnished to the Securities and Exchange Commission (the “SEC”), are available free of charge through our corporate internet website, www.atlasair.com, as soon as reasonably practicable after we have electronically filed such material with, or furnished it to, the SEC.

The public may read and copy any materials that we file with SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at www.sec.gov.

The information on our website is not, and shall not be deemed to be, part of this Report or incorporated into any other filings we make with the SEC.

 

ITEM 1A.   RISK FACTORS

You should carefully consider each of the following Risk Factors and all other information in this Report. These Risk Factors are not the only ones facing us. Our operations could also be impaired by additional risks and uncertainties. If any of the following risks and uncertainties develops into actual events, our business, financial condition and results of operations could be materially and adversely affected.

 

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RISKS RELATED TO OUR BUSINESS

Risks Related to Our Business Generally

Deterioration in global economic conditions could adversely affect our business, results of operations, financial condition, liquidity and ability to access capital markets.

Airfreight demand is highly dependent on global economic conditions, such as the recent global economic downturn, foreign currency fluctuations and the European debt crisis. If demand for our services or Yields significantly deteriorate due to macroeconomic effects, it could have a material adverse effect on our business, results of operations and financial condition. We cannot accurately predict the effect or duration of any economic slowdown or the timing or strength of a subsequent economic recovery.

In addition, we may face significant challenges if conditions in the financial markets deteriorate. Our business is capital intensive and growth depends on the availability of capital for new aircraft, among other things. If today’s capital availability deteriorates, we may be unable to raise the capital necessary to finance the remaining two 747-8F aircraft on order from Boeing, finance Titan’s growth or other business initiatives. Our ability to access the capital markets may be restricted at a time when we would like, or need, to do so, which could have an impact on our flexibility to react to changing economic and business conditions.

We could be adversely affected if any of our existing aircraft or our new 747-8F aircraft are underutilized or we fail to redeploy or deploy aircraft with customers at favorable rates. We could also be adversely affected from the loss of one or more of our aircraft for an extended period of time.

Our operating revenues depend on our ability to effectively deploy all of the aircraft in our fleet and maintain high utilization of our aircraft at favorable rates. If demand weakens and, as a result, we have underutilized aircraft, we would seek to redeploy those aircraft in our other lines of business. If we are unable to successfully deploy our existing aircraft or our new 747-8F aircraft, when delivered, at favorable rates, it could have a material adverse effect on our business, results of operations and financial condition. In addition, if one or more of our aircraft are out of service for an extended period of time, our operating revenues would decrease and we may have difficulty fulfilling our obligations under one or more of our existing contracts. The loss of revenue resulting from any such business interruption, and the cost, long lead time and difficulties in sourcing a replacement aircraft, could have a material adverse effect on our business, results of operations and financial condition.

We have significant contractual obligations associated with the two remaining 747-8F aircraft on order from Boeing. If we are unable to draw upon the financing obtained for these aircraft and/or make the required delivery payments, our growth strategy could be disrupted.

We currently have two remaining 747-8F aircraft on order from Boeing. We also hold rights to purchase up to an additional 13 747-8F aircraft. As of December 31, 2012, we had estimated remaining commitments of approximately $212.5 million associated with this aircraft order (including spare engines, estimated contractual escalations and purchase credits).

We expect to finance these aircraft through secured debt financing. We have obtained a term loan facility for the two remaining 747-8F aircraft and have standby commitments to finance those two aircraft deliveries in the event we are unable to draw upon the term loan facility. We cannot provide assurance that we will be able to meet the financing conditions contained in these commitments or to secure alternative financing on terms attractive to us or at all. If we are unable to obtain financing (even at a higher cost) and we are unable to meet our contractual obligations to Boeing, our financial condition could be impacted as we could be in default under the Boeing contract.

 

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We could be adversely affected if the deliveries of our remaining 747-8F aircraft are delayed further or if such aircraft do not meet expected performance specifications.

We currently have seven 747-8F aircraft in our fleet and two remaining 747-8F aircraft on order from Boeing. The addition of these new 747-8F aircraft is a material component of our growth and fleet renewal strategy. Since the initial date of our order, Boeing has announced several delays in the delivery schedule of the 747-8F aircraft. While Boeing has provided us with certain performance guarantees, the new aircraft may not meet the expected performance specifications, making it more difficult for us to deploy those aircraft in a timely manner or at expected rates. Any delay in Boeing’s production or delivery schedule could further delay the deployment of those aircraft or if such aircraft do not meet expected performance specifications, it could have an adverse effect on our business, results of operations and financial condition.

Our substantial lease and debt obligations, including aircraft lease and other obligations, could impair our financial condition and adversely affect our ability to raise additional capital to fund our operations or capital requirements, all of which could limit our financial resources and ability to compete, and may make us more vulnerable to adverse economic events.

As of December 31, 2012, we had total debt obligations of approximately $1.4 billion and total aircraft operating leases and other lease obligations of $1.4 billion. These obligations have increased significantly and will increase further as we accept delivery of the remaining two 747-8F aircraft in 2013, and if we enter into financing arrangements for other aircraft. Our outstanding financial obligations could have negative consequences, including:

 

   

making it more difficult to pay principal and interest with respect to our debt and lease obligations;

 

   

requiring us to dedicate a substantial portion of our cash flows from operations for interest, principal and lease payments and reducing our ability to use our cash flow to fund working capital and other general corporate requirements;

 

   

increasing our vulnerability to general adverse economic and industry conditions; and

 

   

limiting our flexibility in planning for, or reacting to, changes in business and in our industry.

Our ability to service our debt and meet our lease and other obligations as they come due is dependent on our future financial and operating performance. This performance is subject to various factors, including factors beyond our control, such as changes in global and regional economic conditions, changes in our industry, changes in interest or currency exchange rates, the price and availability of aircraft fuel and other costs, including labor and insurance. Accordingly, we cannot provide assurance that we will be able to meet our debt service, lease and other obligations as they become due and our business, results of operations and financial condition could be adversely affected under these circumstances.

Certain of our debt obligations contain a number of restrictive covenants. In addition, many of our debt and lease obligations have cross default and cross acceleration provisions.

Restrictive covenants in certain of our debt and lease obligations, under certain circumstances, could impact our ability to:

 

   

pay certain dividends or repurchase stock;

 

   

consolidate or merge with or into other companies or sell substantially all of our assets;

 

   

expand significantly into lines of businesses beyond existing business activities or those which are cargo-related and/or aviation-related and similar businesses; and/or

 

   

modify the terms of debt or lease financing arrangements.

In certain circumstances, a covenant default under one of our debt instruments could cause us to be in default of other obligations as well. Any unremedied defaults could lead to an acceleration of the amounts owed and potentially could cause us to lose possession or control of certain aircraft.

 

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Our financial condition may suffer if we experience unanticipated costs as a result of ongoing lawsuits, claims and investigations related to alleged improper matters related to use of fuel surcharges and other rate components for air cargo services.

The Company, Polar and Polar LLC (“Old Polar”), formerly Polar Air Cargo, Inc., have been named defendants, along with a number of other cargo carriers, in several class actions in the United States arising from allegations about the pricing practices of a number of air cargo carriers that have now been consolidated for pre-trial purposes in the United States District Court for the Eastern District of New York. The consolidated complaint alleges, among other things, that the defendants, including the Company, Polar and Old Polar, manipulated the market price for air cargo services sold domestically and abroad through the use of fuel and other surcharges, in violation of U.S. Federal, state and EU antitrust laws. The suit seeks treble damages and injunctive relief.

The Company and Old Polar, along with a number of other cargo carriers, have also been named in two civil class action suits in the provinces of Ontario and Quebec, Canada, which are substantially similar to the U.S. class action suits described above. Moreover, we have submitted relevant information and documentation to certain foreign regulators in connection with investigations initiated by such authorities into pricing practices of certain international air cargo carriers. These proceedings are continuing, and additional investigations and proceedings may be commenced and charges may be brought in these and other jurisdictions. Other parties may be added to these proceedings, and authorities may request additional information from us. If Old Polar or the Company were to incur an unfavorable outcome in connection with one or more of the related investigations or the litigation described above, it could have a material adverse effect on our business, results of operations and financial condition.

In addition to the litigation and investigations described above, we are subject to a number of Brazilian customs claims, as well as other claims, lawsuits and pending actions which we consider to be routine and incidental to our business (see Note 12 to our Financial Statements). If we were to receive an adverse ruling or decision on any such claims, it could have an adverse effect on our business, results of operations and financial condition.

Global trade flows are typically seasonal, and our business segments, including our ACMI customers’ business, experience seasonal variations.

Global trade flows are typically seasonal in nature, with peak activity occurring during the retail holiday season, which begins in September and lasts through mid-December. Our ACMI contracts have contractual utilization minimums that typically allow our customers to cancel an agreed-upon percentage of the guaranteed hours of aircraft utilization over the course of a year. Our ACMI customers often exercise those cancellation options early in the first quarter of the year, when the demand for air cargo capacity is historically low following the seasonal holiday peak in the fourth quarter of the previous year. While our revenues typically fluctuate seasonally as described above, a significant proportion of the costs associated with our business, such as aircraft rent, depreciation and facilities costs, are fixed and cannot easily be reduced to match the seasonal drop in demand. As a result, our net operating results are typically subject to a high degree of seasonality.

Fuel price volatility and fuel availability could adversely affect our business and operations.

The price of aircraft fuel is unpredictable and has been increasingly volatile over the past few years. While we have been able to reduce our exposure to fuel risk significantly, we continue to bear the risk of fuel exposure for our Commercial Charter operations.

In addition, while our ACMI contracts require our customers to pay for aircraft fuel, if fuel costs increase significantly, our customers may reduce the volume and frequency of cargo shipments or find less costly alternatives for cargo delivery, such as land and sea carriers. Such instances could have a material adverse impact on our business, results of operations and financial condition.

 

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In the past, we have not experienced significant difficulties with respect to fuel availability. Although we do not currently anticipate a significant reduction in the availability of aircraft fuel, a number of factors, such as geopolitical uncertainties in oil-producing nations and shortages of and disruptions to refining capacity, make accurate predictions unreliable. For example, hostilities and political turmoil in oil-producing nations could lead to disruptions in oil production and/or to substantially increased oil prices. Any inability to obtain aircraft fuel at competitive prices could have a material adverse impact on our business, results of operations and financial condition.

We are party to a collective bargaining agreement covering our U.S. pilots and a collective bargaining agreement covering our U.S. dispatchers, which could result in higher labor costs than those faced by some of our non-unionized competitors. This could put us at a competitive disadvantage, and/or result in a work interruption or stoppage.

Atlas pilots are represented by the IBT under a five-year collective bargaining agreement signed in 2011. In November 2012, we completed, and have since implemented, a five-year collective bargaining agreement with the Atlas and Polar dispatchers. These dispatchers have been represented by the IBT since 2009. We are subject to risks of increased labor costs associated with having a partially unionized workforce, as well as a greater risk of work interruption or stoppage. We cannot provide assurance that disputes, including disputes with certified collective bargaining representatives of our employees, will not arise in the future or will result in an agreement on terms satisfactory to us.

As a U.S. government contractor, we are subject to a number of procurement and other rules and regulations that affect our business. A violation of these rules and regulations could lead to termination or suspension of our government contracts and could prevent us from entering into contracts with government agencies in the future.

To do business with government agencies, including the AMC, we must comply with, and are affected by, many rules and regulations, including those related to the formation, administration and performance of U.S. government contracts. These rules and regulations, among other things:

 

   

require, in some cases, procurement with small businesses and disclosure of all cost and pricing data in connection with contract negotiations, and may give rise to U.S. government audit rights;

 

   

impose accounting rules that dictate how we define certain accounts, define allowable costs and otherwise govern our right to reimbursement under certain cost-based U.S. government contracts;

 

   

establish specific health, safety and doing-business standards; and

 

   

restrict the use and dissemination of information classified for national security purposes and the exportation of certain products and technical data.

These rules and regulations affect how we do business with our customers and, in some instances, impose added costs on our business. A violation of these rules and regulations could result in the imposition of fines and penalties or the termination of our contracts. In addition, the violation of certain other generally applicable rules and regulations could result in our suspension or debarment as a government contractor.

Our insurance coverage may become more expensive and difficult to obtain and may not be adequate to insure all of our risks.

Aviation insurance premiums historically have fluctuated based on factors that include the loss history of the industry in general, and the insured carrier in particular. Future terrorist attacks and other adverse events involving aircraft could result in increases in insurance costs and could affect the price and availability of such coverage. We have, as have most other U.S. airlines, purchased our war-risk coverage through a special program administered by the U.S. federal government. The FAA is currently providing war-risk hull and cargo loss, crew and third-party liability insurance through September 30, 2013. If the federal war-risk coverage program

 

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terminates or provides significantly less coverage in the future, we could face a significant increase in the cost of war-risk coverage, and because of competitive pressures in the industry, our ability to pass this additional cost on to customers may be limited.

We participate in an insurance pooling arrangement with DHL and their affiliates. This allows us to obtain aviation hull and liability and hull deductible coverage at reduced rates. If we were to withdraw from this arrangement for any reason or if other pool members have higher incidents, we could incur higher insurance costs.

There can be no assurance that we will be able to maintain our existing coverage on terms favorable to us, that the premiums for such coverage will not increase substantially or that we will not bear substantial losses and lost revenue from accidents or other adverse events. Substantial claims resulting from an accident in excess of related insurance coverage or a significant increase in our current insurance expense could have a material adverse effect on our business, results of operations and financial condition. Additionally, while we carry insurance against the risks inherent to our operations, which we believe are consistent with the insurance arrangements of other participants in our industry, we cannot provide assurance that we are adequately insured against all risks. If our liability exceeds the amounts of our insurance coverage, we would be required to pay the excess amount, which could be material to our business, financial condition and operations.

We rely on third party service providers. If these service providers do not deliver the high level of service and support required in our business, we may lose customers and revenue.

We rely on third parties to provide certain essential services on our behalf, including maintenance, ground handling and flight attendants. In certain locations, there may be very few sources, or sometimes only a single source, of supply for these services. If we are unable to effectively manage these third parties, they may provide inadequate levels of support which could harm our customer relationships and have an adverse impact on our operations and the results thereof. Any material problems with the efficiency and timeliness of our contracted services, or an unexpected termination of those services, could have a material adverse effect on our business, results of operations and financial condition.

Some of our aircraft are periodically deployed in potentially dangerous situations, which may result in harm to our passengers, employees or contractors and/or damage to our aircraft/cargo.

Some of our aircraft are deployed in potentially dangerous locations and carry hazardous cargo incidental to the services we provide in support of our customers’ activities, particularly in shipments to the Middle East. Some areas through which our flight routes pass are subject to geopolitical instability, which increases the risk of death or injury to our passengers, employees or contractors or a loss of, or damage to, our aircraft and/or its cargo. While we maintain insurance to cover injury to our passengers, employees and contractors as well as the loss/damage of aircraft/cargo, except for limited situations, we do not have insurance against the loss arising from business interruption. It is difficult to replace lost or substantially damaged aircraft due to the high capital requirements and long delivery lead times for new aircraft or to locate appropriate in-service aircraft for lease or sale. Any injury to passengers, employees or contractors or loss/damage of aircraft/cargo could have a material adverse impact on our business, results of operations and financial condition.

We could be adversely affected by a failure or disruption of our computer, communications or other technology systems.

We are heavily and increasingly dependent on technology to operate our business. The computer and communications systems on which we rely could be disrupted due to various events, some of which are beyond our control, including natural disasters, power failures, terrorist attacks, equipment failures, software failures and computer viruses and hackers. We have taken certain steps to implement business resiliency to help reduce the risk of some of these potential disruptions. There can be no assurance, however, that the measures we have taken are adequate to prevent or remedy disruptions or failures of these systems. Any substantial or repeated failure of these systems could impact our operations and customer service, result in the loss of important data, loss of

 

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revenues, and increased costs, and generally harm our business. Moreover, a failure of certain of our vital systems could limit our ability to operate our flights for an extended period of time, which would have a material adverse impact on our business and operations.

Risks Related to Our ACMI Business

We depend on a limited number of significant customers for our ACMI business, and the loss of one or more of such customers could materially adversely affect our business, results of operations and financial condition.

Our ACMI business depends on a limited number of customers, which has typically averaged between five and six. In addition, as a percentage of our total operating revenue, Polar accounted for 16.5% in 2012, 17.2% in 2011 and 14.7% in 2010. We typically enter into long-term ACMI contracts with our customers. The terms of our existing contracts are scheduled to expire on a staggered basis. There is a risk that any one of our significant ACMI customers may not renew their ACMI contracts with us on favorable terms or at all, perhaps due to reasons beyond our control. For example, certain of our airline ACMI customers may not renew their ACMI contracts with us as they take delivery of new aircraft in their own fleet. Select customers have the opportunity to terminate their long-term agreements in advance of the expiration date, following a significant amount of notice to allow for remarketing of the aircraft. Such agreements generally contain a significant early termination fee paid by the customer. Entering into ACMI contracts with new customers generally requires a long sales cycle, and as a result, if our ACMI contracts are not renewed, and there is a resulting delay in entering into new contracts, our business, results of operations and financial condition could be materially and adversely affected.

Our agreements with several ACMI customers require us to meet certain performance targets, including certain departure/arrival reliability standards. Failure to meet these performance targets could adversely affect our financial results.

Our ability to derive the expected economic benefits from our transactions with certain ACMI customers depends substantially on our ability to successfully meet strict performance standards and deadlines for aircraft and ground operations, which become increasingly stringent over time. If we do not meet these requirements, we may not be able to achieve the projected revenues and profitability from these contracts, and we could be exposed to certain remedies, including termination of the BSA in the most extreme of circumstances, as described below.

Risks Related to the BSA with DHL

Our agreements with DHL confer certain termination rights to them which, if exercised or triggered, may result in our inability to realize the full benefits of the BSA with DHL.

The BSA gives DHL the option to terminate the agreements for convenience by giving notice to us before the tenth or fifteenth anniversary of the agreement’s commencement date. Further, DHL has a right to terminate the BSA for cause following a specified management resolution process if we default on our performance or we are unable to perform for reasons beyond our control. If DHL exercises any of these termination rights, we would not be able to achieve the projected revenues and profitability from these contracts.

Risks Related to Our AMC Charter Business

We derive a significant portion of our revenues from our AMC Charter business, and a substantial portion of these revenues have been generated pursuant to expansion flying, as opposed to fixed contract arrangements with the AMC. We expect the revenues from our AMC Charter business to decline from current levels.

As a percentage of our operating revenue, revenue derived from our AMC Charter business was approximately 29.7% in 2012, 31.7% in 2011 and 29.1% in 2010. In each of these years, the revenues derived from expansion flights for the AMC significantly exceeded the value of the fixed flight component of our AMC contract.

 

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Historically, our AMC Charter business, especially expansion flights, has generated a significant amount of revenue. Future revenues and profitability from this business are expected to decline from historic levels as a result of reduced AMC demand. Revenues and profitability from our AMC Charter business are derived from one-year contracts that the AMC is not required to renew. Our current AMC contract runs from October 1, 2012 through September 30, 2013. Changes in national and international political priorities can significantly affect the volume of our AMC Charter business. Any decrease in U.S. military activity could reduce our AMC Charter business. In addition, our share of the total AMC Charter business depends on several factors, including the total fleet size we commit to the CRAF program and the total number of aircraft deployed by our teaming arrangement partners and competitors in the program.

The AMC also holds all carriers to certain on-time performance requirements, which in 2011 were changed from departure-based standards to arrival-based standards with more stringent on-time requirements. To the extent that we fail to meet those performance requirements or if we fail to pass bi-annual AMC audits, revenues and profitability from our AMC Charter business could decline through a suspension or termination of our AMC contract. Our revenues and profitability could also decline due to a reduction in the revenue rate we are paid by the AMC, a greater reliance by the AMC on its own fleet or a reduction in our allocation of AMC flying. Any reduction in our AMC flying could also negatively impact our Commercial Charter revenue from the return trips of one-way AMC missions. We expect revenues and profitability from our AMC Charter business to decline from current levels as the U.S. Military continues to withdraw troops from areas of conflict around the world. If our AMC Charter business declines significantly and we are otherwise unable to effectively deploy the resultant capacity, it could have a material adverse effect on our business, results of operations and financial condition.

Our AMC Charter business is sensitive to teaming arrangements, affecting our relative share of AMC flying and the profitability associated with it. If one of our team members reduces its commitments or withdraws from the program, and/or if other carriers on other teams commit additional aircraft to this program, our share of AMC flying may decline. In addition, any changes made to the commissions that we pay and/or receive for AMC flying or changes to the CRAF contracting mechanism could impact the revenues and/or profitability of this business.

Each year, the AMC allocates its air capacity requirements to different teams of CRAF participating airlines based on a mobilization value point system that is determined by the amount and types of aircraft that each team of airlines pledges to the CRAF program. We participate in the CRAF program through a teaming arrangement with other airlines, led by FedEx. Our team is one of four major teams participating in the CRAF program during our current contract year. Several factors could adversely affect the amount of AMC flying that is allocated to us, including:

 

   

changes in the CRAF contracting mechanism;

 

   

the formation of new competing teaming arrangements;

 

   

the withdrawal of any of our team’s current partners, especially FedEx;

 

   

a reduction of the number of aircraft pledged to the CRAF program by us or other members of our team; or

 

   

increased participation of other carriers on other teams in the CRAF program.

Any changes to the CRAF program that would result in a reduction in our share of or profitability from AMC flying could have a material adverse effect on our business, results of operations and financial condition.

RISKS RELATED TO OUR INDUSTRY

The market for air cargo services is highly competitive and if we are unable to compete effectively, we may lose current customers or fail to attract new customers. We could also be adversely affected if a large number of long-haul freighter aircraft or freighter aircraft of different equipment types are introduced into the market.

Each of the markets we participate in is highly competitive and fragmented. We offer a broad range of aviation services and our competitors vary by geographic market and type of service and include other

 

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international and domestic contract carriers, regional and national ground handling and logistics companies, internal cargo units of major airlines and third party cargo providers. Competition in the air cargo and transportation market is influenced by several key factors, including quality, price and availability of assets and services. Both Southern Air, Inc. and Global Aviation Holdings, Inc. have filed for bankruptcy protection under Chapter 11 and could emerge from bankruptcy in a stronger, more competitive position. Regulatory requirements to operate in the U.S. domestic air cargo market have been reduced, facilitating the entry into domestic markets by non-U.S. air cargo companies. If we were to lose any major customers and/or fail to attract customers, it could have an adverse effect on our business, results of operations and financial condition.

Additionally, an increase in the number of aircraft in the freight market could cause Yields and rates to fall and/or could negatively affect our customer base. If either circumstance were to occur, our business, results of operations and financial condition could be materially and adversely affected.

We are subject to extensive governmental regulations and our failure to comply with these regulations in the U.S. and abroad, or the adoption of any new laws, policies or regulations or changes to such regulations may have an adverse effect on our business.

Our operations are subject to complex aviation and transportation laws and regulations, including Title 49 of the U.S. Code, under which the DOT and the FAA exercise regulatory authority over air carriers. In addition, our business activities fall within the jurisdiction of various other federal, state, local and foreign authorities, including the U.S. Department of Defense, the TSA, U.S. Customs and Border Protection, the U.S. Treasury Department’s Office of Foreign Assets Control and the U.S. EPA. In addition, other countries in which we operate have similar regulatory regimes to which we are subjected. These laws and regulations may require us to maintain and comply with the terms of a wide variety of certificates, permits, licenses, noise abatement standards and other requirements and our failure to do so could result in substantial fines or other sanctions. These U.S. and foreign aviation regulatory agencies have the authority to modify, amend, suspend or revoke the authority and licenses issued to us for failure to comply with provisions of law or applicable regulations and may impose civil or criminal penalties for violations of applicable rules and regulations. Such fines or sanctions, if imposed, could have a material adverse effect on our mode of conducting business, results of operations and financial condition. In addition, U.S. and foreign governmental authorities may adopt accounting standards, taxation requirements, new regulations, directives or orders that could require us to take additional and potentially costly compliance steps or result in the grounding of some of our aircraft, which could increase our operating costs or result in a loss of revenues.

International aviation is increasingly subject to requirements imposed or proposed by foreign governments. This is especially true in the areas of transportation security, aircraft noise and emissions control, and greenhouse gas emissions. These may be duplicative of, or incompatible with U.S. government requirements, resulting in increased compliance efforts and expense. Even standing alone, foreign government requirements can be burdensome.

Foreign governments also place temporal and other restrictions on the ability of their own airlines to use aircraft operated by other airlines. For example, as a result of EU regulations finalized in 2008, EU airlines generally secure aircraft capacity from U.S. and other non-EU airlines for a maximum of two seven-month periods. This restriction could negatively impact our revenue and profitability. Additionally, the EASA is considering a proposal to require EU airlines to establish to the satisfaction of their regulatory agencies that the aircraft capacity secured from and operated by U.S. and other non-EU airlines meet internationally set standards and additional EASA requirements. These and other similar regulatory developments could have a material adverse effect on our business, results of operations and financial condition.

Initiatives to address global climate change may adversely affect our business and increase our costs.

Various governments, including the United States, are pursuing measures to regulate climate change and greenhouse gas emissions. These could result in substantial costs for us.

 

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The most advanced are those in legislation enacted by the EU to extend its emissions trading scheme to aviation that commenced on January 1, 2012. Under the EU mechanism, airlines serving the EU must report flight activity on an ongoing basis. Following the end of 2012 and subsequent years, each airline must tender the number of “carbon emissions allowances” corresponding to the carbon emissions generated by its flight activity during the year. If the airline’s flight activity during the year has produced carbon emissions exceeding the number of carbon emissions allowances that it has been awarded, the airline must acquire carbon emissions allowances from other airlines in the open market. Some airlines and organizations challenged the EU mechanism in court, but the European Court of Justice upheld its validity. In November 2012, following strong objections from the U.S. and other governments to the EU’s unilateral implementation of the ETS, the European Commission announced that it would recommend that the European Council and the European Parliament suspend applicability of the emissions allowance requirements to flights to and from the EU during calendar year 2012, in order to allow time for multilateral action by the ICAO. The proposed ETS suspension is not intended to apply to intra-EU flights. Although the suspension appears likely to go into effect, there can be no assurance of that fact, or that the suspension legislation will take the form proposed by the European Commission.

In the United States, various constituencies have continued to advocate for controls on greenhouse gas emissions. Previously, both houses of the U.S. Congress passed legislation to impose a carbon-related tax on fuel sold to airlines and other entities. However, a bill has not been signed into law. Also, in September 2009, the EPA proposed regulations that would impose controls on greenhouse gas emissions. While the proposed regulations would not directly control greenhouse gas emissions by air carriers, a number of states and environmental organizations have asked the EPA to regulate greenhouse gas emissions from aircraft.

Regardless of the outcome of these activities, it is possible that some type of climate change measures ultimately will be imposed in a manner adversely affecting airlines. The costs of complying with potential new environmental laws or regulations could have a material adverse effect on our business, results of operations and financial condition.

The airline industry is subject to numerous security regulations and rules that increase costs. Imposition of more stringent regulations and rules than those that currently exist could materially increase our costs.

The TSA has increased security requirements in response to increased levels of terrorist activity, and has adopted comprehensive new regulations governing air cargo transportation, including all-cargo services, in such areas as cargo screening and security clearances for individuals with access to cargo. Additional measures, including a requirement to screen cargo, have been proposed, which, if adopted, may have an adverse impact on our ability to efficiently process cargo and would increase our costs and those of our customers. The cost of compliance with increasingly stringent regulations could have a material adverse effect on our business, results of operations and financial condition.

Our future operations might be constrained by new FAA flight and duty time rules.

In 2009, following expressions of concern about pilot fatigue on certain long-range flights, the FAA convened an Aviation Rulemaking Committee (“ARC”) comprised of various aviation stakeholders to recommend changes to the flight and duty time rules applicable to pilots. This was followed in 2010 by FAA issuance of a notice of proposed rulemaking containing new proposed flight and duty time rules. In December 2011, following the completion of a lengthy rulemaking process intended to reduce pilot fatigue, the FAA adopted a final rule containing new flight and duty time limitations and rest requirements. The rule will go into effect January 14, 2014, resulting in more stringent scheduling requirements for pilots operating our passenger flights.

Finding that the costs of applying the new rule to all-cargo flights would greatly exceed the benefits, the FAA decided not to apply the rule to all-cargo operations. The Independent Pilots Association, representing UPS pilots, have filed a judicial appeal of the FAA decision to exclude all-cargo operations from the rule. The appeal

 

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remains pending. Separately, the FAA has issued a new economic analysis (finding an even greater disparity between the costs and benefits of including all-cargo operations) and invited supplemental comments about the new analysis and the legal question of whether it is permissible for the FAA to take the rule’s costs and benefits into account. Legislation to require the FAA to apply the rule to all-cargo operations has also been introduced in Congress. Application of the new flight and duty time rule to all-cargo operations pursuant to a court, FAA or Congressional directive would result in materially increased crew costs for Atlas and Polar, as well as air carriers that predominantly fly nighttime and long-haul flights, and could have a material impact on our business, results of operations and financial condition by limiting crew scheduling flexibility and increasing operating costs, especially with respect to long-haul flights.

RISKS RELATED TO OWNERSHIP OF OUR COMMON STOCK

U.S. citizenship requirements may limit common stock voting rights.

Under U.S. federal law and DOT requirements, we must be owned and actually controlled by “citizens of the United States,” a statutorily defined term requiring, among other things, that not more than 25% of our issued and outstanding voting stock be owned and controlled, directly or indirectly, by non-U.S. citizens. The DOT periodically conducts airline citizenship reviews and, if it finds that this requirement is not met, may require adjustment of the rights attendant to the airline’s issued shares.

As one means to effect compliance, our certificate of incorporation and by-laws provide that the failure of non-U.S. citizens to register their shares on a separate stock record, which we refer to as the “Foreign Stock Record,” results in a suspension of their voting rights. Our by-laws further limit the number of shares of our capital stock that may be registered on the Foreign Stock Record to 25% of our issued and outstanding shares. Registration on the Foreign Stock Record is made in chronological order based on the date we receive a written request for registration. As a result, if a non-U.S. citizen acquires shares of our common stock and does not or is not able to register those shares on our Foreign Stock Record, they may lose their ability to vote those shares.

Provisions in our restated certificate of incorporation and by-laws and Delaware law might discourage, delay or prevent a change in control of the Company and, therefore, depress the trading price of our common stock.

Provisions of our restated certificate of incorporation, by-laws and Delaware law may render more difficult or discourage any attempt to acquire our company, even if such acquisition may be believed to be favorable to the interests of our stockholders. These provisions may also discourage bids for our common stock at a premium over market price or adversely affect the market price of our common stock.

Our common stock share price has been subject to fluctuations in value.

The trading price of our common shares is subject to material fluctuations in response to a variety of factors, including quarterly variations in our operating results, conditions of the air freight market and global economic conditions or other events and factors that are beyond our control.

In the past, following periods of significant volatility in the overall market and in the market price of a company’s securities, securities class action litigation has been instituted against these companies in some circumstances. If this type of litigation were instituted against us following a period of volatility in the market price for our common stock, it could result in substantial costs and a diversion of our management’s attention and resources, which could have a material adverse effect on our business, results of operations and financial condition.

 

ITEM 1B.   UNRESOLVED STAFF COMMENTS

None.

 

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ITEM 2. PROPERTIES

Aircraft

The following tables provide information about AAWW’s aircraft and customer-provided aircraft, not including retired or parked aircraft, as of December 31, 2012:

AAWW Aircraft

 

Aircraft Type

  

Tail #

   Configuration    Ownership    Financing Type
747-8F    N850GT    Freighter    Owned    Notes
747-8F    N851GT    Freighter    Owned    Notes
747-8F    N852GT    Freighter    Owned    Notes
747-8F    N853GT    Freighter    Owned    Notes
747-8F    G-GSSD    Freighter    Owned    Term Loan
747-8F    G-GSSE    Freighter    Owned    Term Loan
747-8F    G-GSSF    Freighter    Owned    Term Loan
747-400    N409MC    Freighter    Owned    Enhanced Equipment Trust Certificates
747-400    N475GT    Freighter    Owned    Enhanced Equipment Trust Certificates
747-400    N493MC    Freighter    Owned    Enhanced Equipment Trust Certificates
747-400    N477GT    Freighter    Owned    Enhanced Equipment Trust Certificates
747-400    N476GT    Freighter    Owned    Enhanced Equipment Trust Certificates
747-400    N496MC    Freighter    Owned    Enhanced Equipment Trust Certificates
747-400    N499MC    Freighter    Owned    Enhanced Equipment Trust Certificates
747-400    N408MC    Freighter    Leased    Enhanced Equipment Trust Certificates
747-400    N412MC    Freighter    Leased    Enhanced Equipment Trust Certificates
747-400    N492MC    Freighter    Leased    Enhanced Equipment Trust Certificates
747-400    N497MC    Freighter    Leased    Enhanced Equipment Trust Certificates
747-400    N498MC    Freighter    Leased    Enhanced Equipment Trust Certificates
747-400    N415MC    Freighter    Leased    Operating Lease
747-400    N416MC    Freighter    Leased    Operating Lease
747-400    N418MC    Freighter    Leased    Operating Lease
747-400    N450PA    Freighter    Leased    Operating Lease
747-400    N451PA    Freighter    Leased    Operating Lease
747-400    N452PA    Freighter    Leased    Operating Lease
747-400    N453PA    Freighter    Leased    Operating Lease
747-400    N454PA    Freighter    Leased    Operating Lease
747-400    N419MC    Freighter    Owned    Term Loan
747-400    N429MC    Converted Freighter    Owned    Term Loan
747-400    N458MC    Converted Freighter    Leased    Operating Lease
747-400    N459MC    Converted Freighter    Leased    Operating Lease
747-400    N464MC    Passenger    Owned    Term Loan
747-400    N465MC    Passenger    Owned    Term Loan
737-300    26284    Cargo    Owned    None
767-300ER    N640GT    Passenger    Owned    Term Loan
767-300ER    N641GT    Passenger    Owned    Term Loan
767-300ER    N642GT    Passenger    Owned    Term Loan
757-200    B-2808    Freighter    Owned    Term Loan
737-800    29681    Passenger    Owned    Term Loan
737-800    35071    Passenger    Owned    None

 

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Customer-provided Aircraft for our CMI Business

 

Aircraft Type

   Tail #      Configuration    Ownership

747-400

     263       Passenger    Sonangol*

747-400

     322       Passenger    Sonangol*

747-400

     718       Dreamlifter    Boeing

747-400

     747       Dreamlifter    Boeing

747-400

     249       Dreamlifter    Boeing

747-400

     780       Dreamlifter    Boeing

767-200

     650       Freighter    DHL

767-200

     651       Freighter    DHL

767-200

     652       Freighter    DHL

767-200

     653       Freighter    DHL

767-200

     655       Freighter    DHL

 

* Aircraft owned by the Sonangol Group, the multinational energy company of Angola.

The following table summarizes AAWW’s aircraft as of December 31, 2012:

 

Aircraft Type

  Configuration    Owned    Operating
Leased
   Total    Average
Age Years
747-8F   Freighter    7       7    0.7
747-400   Freighter    8    13    21    12.9
747-400   Converted Freighter    1    2    3    20.5
747-400   Passenger    2       2    21.7
737-300   Freighter    1       1    20.1
767-300ER   Passenger    3       3    20.6
757-200   Freighter    1       1    23.4
737-800   Passenger    2       2    5.5
    

 

  

 

  

 

  

 

Total      25    15    40    12.4
    

 

  

 

  

 

  

 

Lease expirations for our operating leased aircraft included in the above tables range from January 2014 to February 2025.

Ground Facilities

Our principal office is located in Purchase, New York, where we lease approximately 120,000 square feet under a long-term lease which current term expires in 2017. This office includes both operational and administrative support functions, including flight and crew operations, maintenance and engineering, material management, human resources, legal, sales and marketing, finance and information technology. In addition, we lease a variety of smaller offices and ramp space at various station and regional locations on a short-term basis.

 

ITEM 3. LEGAL PROCEEDINGS

The information required in response to this Item is set forth in Note 12 to our Financial Statements, and such information is incorporated herein by reference. Such description contains all of the information required with respect hereto.

 

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

 

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PART II

 

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information

Since 2006, our common stock has been traded on The NASDAQ Global Select Market under the symbol “AAWW”.

Market Price of Common Stock

The following table sets forth the closing high and low sales prices per share of our common stock for the periods indicated.

 

     High      Low  

2012 Quarter Ended

     

December 31

   $  54.99       $  40.23   

September 30

   $ 56.98       $ 42.07   

June 30

   $ 52.26       $ 40.68   

March 31

   $ 52.11       $ 38.70   

2011 Quarter Ended

     

December 31

   $ 42.73       $ 30.90   

September 30

   $ 63.71       $ 33.29   

June 30

   $ 68.91       $ 56.30   

March 31

   $ 72.26       $ 50.07   

The last reported sale price of our common stock on The NASDAQ National Market on February 12, 2013 was $46.13 per share. As of February 6, 2013, there were approximately 26.4 million shares of our common stock issued and outstanding, and 63 holders of record of our common stock.

In January 2013, we announced that we intend to begin actively purchasing shares of our stock in the first quarter of 2013 under an existing stock repurchase program. The program, which was established in 2008, authorizes the repurchase of up to $100 million of our common stock. Purchases may be made at our discretion from time to time on the open market, through negotiated transactions, block purchases, accelerated share repurchase programs or exchange or non-exchange transactions. As of February 12, 2013, we have repurchased a total of 700,243 shares of our common stock for approximately $18.9 million, at an average cost of $26.99 per share under this program. We have not repurchased any shares under this program since 2008.

Equity Compensation Plans

See Item 12, “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” for information regarding our equity compensation plans as of December 31, 2012.

Dividends

We have never paid a cash dividend with respect to our common stock and we do not anticipate paying a dividend in the foreseeable future. Moreover, certain of our financing arrangements contain financial covenants that could limit our ability to pay cash dividends.

 

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Foreign Ownership Restrictions

Under our by-laws, U.S. federal law and DOT regulations, we must be controlled by U.S. citizens. In this regard, our President and at least two-thirds of our board of directors and officers must be U.S. citizens and not more than 25% of our outstanding voting common stock may be held by non-U.S. citizens. We believe that, during the period covered by this Report, we were in compliance with these requirements.

Performance Graph

The following graph compares the performance of AAWW common stock to the Standard & Poor’s 500 Stock Index, the Russell 2000 Index and the AMEX Airline Index for the period beginning December 31, 2007 and ending on December 31, 2012. The comparison assumes $100 invested in each of our common stock, the Standard & Poor’s 500 Stock Index, the Russell 2000 Index and the AMEX Airline Index and reinvestment of all dividends.

 

LOGO

Total Return Between 12/31/07 and 12/31/12

 

Cumulative Return    12/31/07    12/31/08    12/31/09    12/31/10    12/31/11    12/31/12

AAWW

   $100.00    $34.86    $68.70    $102.97    $70.88    $81.74

Russell 2000 Index

   $100.00    $65.20    $81.64    $102.30    $96.72    $110.88

S&P 500

   $100.00    $61.51    $75.94    $85.65    $85.65    $97.13

AMEX Airline Index

   $100.00    $70.73    $98.54    $137.08    $94.58    $129.01

 

ITEM 6. SELECTED FINANCIAL DATA

The selected balance sheet data as of December 31, 2012 and 2011 and the selected statements of operations data for the years ended December 31, 2012, 2011 and 2010 have been derived from our audited Financial Statements included elsewhere in this Report. The selected balance sheet data as of December 31, 2010, 2009 and 2008, and selected statements of operations data for the years ended December 31, 2009 and 2008 have been derived from our audited Financial Statements not included in this Report.

 

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Effective October 27, 2008, we began reporting Polar under the equity method of accounting. Previously, we accounted for Polar on a consolidated basis. This change reduces revenue, operating expenses, total assets, liabilities and equity related to Polar. Effective April 8, 2009, we began reporting GSS on a consolidated basis. Our Operating Statistics, Operating Revenue and Operating Expenses reflect the consolidation of GSS as of that date. Previously, GSS was accounted for under the equity method. In the following table, all amounts are in thousands, except for per share data.

 

     2012     2011      2010      2009     2008  

Statement of Operations Data:

            

Total operating revenues

   $ 1,646,032     $ 1,398,216      $ 1,337,774      $ 1,061,546     $ 1,607,482  
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total operating expenses

     1,419,541       1,247,116        1,109,888        911,539       1,619,629  
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Operating income / (loss)

     226,491       151,100        227,886        150,007       (12,147
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Net income

     129,714       96,309        142,956        76,156       60,021  

Less: Net income / (loss) Attributable to noncontrolling interests

     (213     226        1,146        (1,620     (3,675
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Net income Attributable to Common Stockholders

   $ 129,927     $ 96,083      $ 141,810      $ 77,776     $ 63,696  
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Earnings per share (Basic)

   $ 4.92     $ 3.66      $ 5.50      $ 3.59     $ 2.98  
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Earnings per share (Diluted)

   $ 4.89     $ 3.64      $ 5.44      $ 3.56     $ 2.97  
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Balance Sheet Data:

            

Total assets

   $ 3,152,685     $ 2,390,998      $ 1,936,102      $ 1,740,873     $ 1,600,745  

Long-term debt (less current portion)*

   $ 1,149,282     $ 680,009      $ 391,036      $ 526,680     $ 635,628  

Total equity

   $ 1,288,104     $ 1,141,375      $ 1,050,090      $ 888,757     $ 681,739  

 

* See Note 7 to our Financial Statements for further discussion.

 

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion 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. As such, we manage and operate the world’s largest fleet of 747 freighters. We provide unique value to our customers by giving them access to highly reliable new production freighters that deliver the lowest unit cost in the marketplace combined with outsourced aircraft operating services that we believe lead the industry in terms of quality and global scale. Our customers include airlines, express delivery providers, freight forwarders, the U.S. military and charter brokers. We provide global services with operations in Africa, Asia, Australia, Europe, the Middle East, North America and South America.

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 innovative, value-creating solutions:

We manage the world’s largest fleet of 747 freighters. The new 747-8F is the largest and most efficient long-haul commercial freighter currently available and we are currently the only operator offering these aircraft to the ACMI market. Our current cargo fleet includes seven 747-8F aircraft, twenty-four 747-400 freighters and

 

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our CMI customers provide us with two 747-400 passenger aircraft, five 767-200 aircraft and four Dreamlifters, which are included in our operating fleet statistics. This highlights our position as the preeminent provider of these highly desirable and scarce assets. In addition, we also have two 747-400 and three 767-300ER passenger aircraft. 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 that this provides us with a commercial advantage over our competitors that operate with smaller and less flexible fleets.

Since November of 2011, we have taken delivery of the first seven of our nine new 747-8F aircraft, which have improved operating performance relative to the 747-400. The new aircraft create additional operating leverage to drive growth and to help us maintain our industry leading position for the foreseeable future. Both the 747-8F and 747-400, the current core of our ACMI segment, are industry leaders for operating performance in the intercontinental air freighter market due to cost and capacity advantages over other freighters.

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. Typically, ACMI contracts with customers generally range from three to five years, although some contracts have a shorter duration. Under ACMI, CMI and Dry Leasing, our customers assume fuel, Yield and demand risk resulting in reduced operational risk for AAWW. ACMI and CMI contracts typically provide us with a guaranteed minimum level of revenue and target level of profitability.

Our contract with DHL includes the allocation of blocked space capacity on a long-term basis for up to 20 years. This arrangement eliminates Yield and demand risks, similar to the rest of our ACMI business, for a minimum of six 747-400 aircraft, with an additional two 747-8F aircraft and one 747-400 aircraft under separate ACMI agreements.

Our AMC Charter services are typically operated under an annual contract with the U.S. military, whereby the military assumes Yield and fuel price risk.

Focus on asset optimization:

By managing the largest fleet of 747 freighter aircraft, we achieve significant economies of scale in areas such as aircraft maintenance, crew efficiency, crew training, inventory management and purchasing. We believe the addition of the 747-8F aircraft further enhances our efficiencies as these new aircraft have operational, maintenance and spare parts commonality with our existing fleet of 747-400s, as well as a common pilot-type rating.

Our mix of aircraft is closely aligned with our customer needs. We believe that our new 747-8F aircraft and our existing 747-400 fleet are well-suited to meet the current and anticipated requirements of our ACMI customers.

We continually evaluate our fleet to ensure that we offer the most efficient and effective mix of aircraft. 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 utilization of our fleet. Our AMC and Commercial 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 to mitigate our remarketing risks and aircraft down time.

 

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Long-term strategic customer relationships and unique 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 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 aircraft operating solutions market. Furthermore, we have access to valuable operating rights to restricted markets such as Brazil, Japan and China. 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 CMI 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. Both Atlas and Polar successfully completed the International Air Transport Association’s Operational Safety Audit (IOSA), a globally recognized safety and quality standard.

We provide outsourced aviation services and solutions to some of the world’s premier airlines and largest 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, Air Canada, Ansett Worldwide Aviation Services, Canadian Airlines, Continental Airlines, SH&E Air Transport Consultancy, ASTAR Air Cargo and KLM Cargo, as well as the United States Navy, Air Force and Federal Air Marshal Service. Our management team is led by William J. Flynn, who has over 30 years of experience in freight and transportation and has held senior management positions with several transportation companies. Prior to joining AAWW, Mr. Flynn was President and CEO of GeoLogistics, a global transportation and logistics enterprise.

Business Strategy

Our strategy includes the following:

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. The 747-8F aircraft are primarily utilized in our ACMI business while our 747-400s are utilized in our ACMI, AMC and Commercial Charter business. We aggressively manage our fleet and will evaluate potential opportunities for adding incremental aircraft to ensure that we provide our customers with the most efficient aircraft to meet their needs. We will also explore opportunities to invest in aircraft to expand our dry-leasing platform.

Focus on securing long-term contracts:

We will continue to focus on securing long-term contracts with customers, which provide us with stable revenue streams and predictable 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.

 

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Drive significant and ongoing efficiencies and productivity improvements:

We continue to enhance our organization through an 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. Our initial goal was to generate $100 million in cost savings on an annualized basis. We have met and exceeded this initial goal and our efforts to realize additional savings continue.

Our efforts thus far have resulted in initiatives in six principal areas: fuel, maintenance, crew and related costs, other aircraft operations, procurement and general and administrative costs.

Specific initiatives include:

 

   

Further enhancements to improve the fuel efficiency of our aircraft operations;

 

   

Optimization of our maintenance and back-office support functions to reduce costs;

 

   

Improving our processes for managing aircraft maintenance, with the goal of reducing turn-times and costs;

 

   

Assessing our processes (e.g., crew scheduling and travel) and technologies to improve efficiencies;

 

   

Consolidating and eliminating facility and space requirements; and

 

   

Intensifying our procurement efforts to drive lower costs for purchased goods and services, including travel, airport costs and outsourced ground and maintenance services.

Selectively pursue and evaluate future acquisitions and alliances:

From time to time, we explore business combinations and alliances with other cargo airlines, services providers, dry leasing and other companies to enhance our competitive position, geographic reach and service portfolio.

Business Developments

Our ACMI results for 2012, compared to 2011, were positively impacted by the following events:

 

   

In March 2011, we began ACMI flying two additional 747-400F aircraft for Polar and DHL. This increased the size of our fleet flying for DHL from six to eight aircraft.

 

   

In November and December 2011, we took delivery of three 747-8F aircraft that we placed in service with British Airways under an ACMI agreement through GSS, which replaced three 747-400F aircraft.

 

   

Between March and June 2012, we began CMI flying the first three of five 767 freighters owned by DHL in its North American network. In July 2012, we began flying the fourth and placed the fifth in service during November of 2012.

 

   

In May and July 2012, we took delivery of two 747-8F aircraft that we placed in service with Panalpina Air & Ocean Ltd (“Panalpina”) under an ACMI agreement, which replaced two 747-400F aircraft.

 

   

In June 2012, we began ACMI flying a 747-400F aircraft for Etihad Airways (“Etihad”). Under the ACMI agreement, we provided Etihad with the first 747-400F aircraft in its global network.

 

   

In July 2012, we began ACMI flying an additional 747-400F aircraft for Polar and DHL. This increased the size of our fleet flying for DHL from eight to nine aircraft.

In October and December 2012, we took delivery of our sixth and seventh 747-8F aircraft and placed them into ACMI service with Polar and DHL, replacing two 747-400 aircraft.

In December 2012, we signed a CMI agreement with DHL to operate two new 767-300ERF aircraft owned by them. The aircraft were placed in service in their network during the first quarter of 2013.

 

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In February 2013, we signed an ACMI agreement with Chapman Freeborn Airchartering Ltd. for a 747-400F, with network service expected to begin in April 2013. This will be the first dedicated 747-400F in their network.

In May 2011, we began flying passenger charters for the U.S. Military. These charters are generally similar to our AMC cargo charters in that the AMC pays a fixed charter fee that includes fuel, insurance, landing fees, overfly and all other operational fees and costs. In May 2012, we placed in service a third 767-300ER passenger aircraft. This increased the size of our passenger service for the AMC to two 747-400 and three 767-300ER passenger aircraft. The increase in AMC passenger Block Hours was due to flying more domestic and international AMC missions, which more than offset the decrease in demand for AMC cargo Block Hours during 2012.

Commercial Charter Block Hours have increased significantly during 2012, reflecting our redeployment of 747-400 aircraft from ACMI during remarketing periods and our deployment of an additional 747-400 cargo aircraft into South America. However, Commercial Charter Yields have been negatively impacted by increased air cargo capacity and softer demand. In addition to providing passenger charters to the AMC, we are utilizing our new passenger aircraft for both public and private Commercial Charter passenger flights.

In July 2012, Titan purchased a Boeing 737-300 cargo aircraft that is being dry leased to a customer on a long-term basis.

Results of Operations

Years Ended December 31, 2012 and 2011

Operating Statistics

The following discussion should be read in conjunction with our Financial Statements and notes thereto and other financial information appearing and referred to elsewhere in this report.

The table below sets forth selected Operating Statistics in:

 

     2012      2011      Increase /
(Decrease)
    Percent
Change
 

Block Hours

          
ACMI      107,130        102,695        4,435       4.3
AMC Charter:           

Cargo

     10,423        17,840        (7,417     (41.6 )% 

Passenger

     12,024        1,368        10,656       NM   
Commercial Charter      21,965        13,879        8,086       58.3
Other      1,165        1,273        (108     (8.5 )% 
  

 

 

    

 

 

    

 

 

   

 

 

 

Total Block Hours

     152,707        137,055        15,652       11.4
  

 

 

    

 

 

    

 

 

   

 

 

 

Revenue Per Block Hour

          
ACMI    $ 6,368      $ 6,159      $ 209       3.4
AMC Charter    $ 21,743      $ 23,049      $ (1,306     (5.7 )% 

Cargo

   $ 23,677      $ 22,739      $ 938       4.1

Passenger

   $ 20,066      $ 27,086      $ (7,020     (25.9 )% 
Commercial Charter    $ 20,500      $ 21,581      $ (1,081     (5.0 )% 

Fuel

          
AMC           

Average fuel cost per gallon

   $ 3.35      $ 3.63      $ (0.28     (7.7 )% 

Fuel gallons consumed (000s)

     58,178        60,976        (2,798     (4.6 )% 
Commercial Charter           

Average fuel cost per gallon

   $ 3.32      $ 3.29      $ 0.03       0.9

Fuel gallons consumed (000s)

     72,834        50,872        21,962       43.2

 

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     2012      2011      Increase /
(Decrease)
    Percent
Change
 

Segment Operating Fleet (average aircraft equivalents during the period)

  

 

ACMI*

          

747-8F Cargo

     4.3        0.2        4.1       NM   

747-400 Cargo

     16.4        20.3        (3.9     (19.2 )% 

747-200 Cargo

            0.2        (0.2     NM   

767-200 Cargo

     2.5               2.5       NM   

747-400 Passenger

     1.1        1.0        0.1       10.0

767-300 Passenger

     0.1               0.1       NM   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

     24.4        21.7        2.7       12.4

AMC Charter

          

747-400 Cargo

     2.9        1.6        1.3       81.3

747-200 Cargo

     0.2        3.5        (3.3     (94.3 )% 

747-400 Passenger

     1.7        0.8        0.9       112.5

767-300 Passenger

     2.3               2.3       NM   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

     7.1        5.9        1.2       20.3

Commercial Charter

          

747-400 Cargo

     5.8        2.0        3.8       190.0

747-200 Cargo

     0.2        1.7        (1.5     (88.2 )% 

747-400 Passenger

     0.2               0.2       NM   

767-300 Passenger

     0.2               0.2       NM   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

     6.4        3.7        2.7       73.0

Dry Leasing

          

757-200 Cargo

     1.0        1.0              NM   

737-300 Cargo

     0.4               0.4       NM   

737-800 Passenger

     2.0        1.2        0.8       66.7
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

     3.4        2.2        1.2       54.5
  

 

 

    

 

 

    

 

 

   

 

 

 

Total Operating Aircraft

     41.3        33.5        7.8       23.3
  

 

 

    

 

 

    

 

 

   

 

 

 

Out-of-service**

            0.4        (0.4     NM   

 

* ACMI average fleet excludes spare aircraft provided by CMI customers.
** All of our out-of-service aircraft are completely unencumbered. Permanently parked aircraft, all of which are also completely unencumbered, are not included in the operating statistics above.

Operating Revenue

The following table compares our Operating Revenue (in thousands):

 

     2012      2011      Increase /
(Decrease)
    Percent
Change
 

Operating Revenue

          

ACMI

   $ 682,189      $ 632,509      $ 49,680       7.9

AMC Charter

     488,063        442,725        45,338       10.2

Commercial Charter

     450,277        299,528        150,749       50.3

Dry Leasing

     11,843        9,695        2,148       22.2

Other

     13,660        13,759        (99     (0.7 )% 
  

 

 

    

 

 

    

 

 

   

 

 

 

Total Operating Revenue

   $ 1,646,032      $ 1,398,216      $ 247,816       17.7
  

 

 

    

 

 

    

 

 

   

 

 

 

 

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ACMI revenue increased $49.7 million, or 7.9%, primarily due to the entry of our 747-8F aircraft into service and increased CMI flying, partially offset by the redeployment of 747-400 aircraft into other segments. ACMI Block Hours were 107,130 in 2012, compared to 102,695 in 2011, an increase of 4,435 Block Hours, or 4.3%. The increase in Block Hours was primarily driven by the start-up of CMI flying of five 767 cargo aircraft for DHL during 2012 and an increase in CMI flying for Boeing. Partially offsetting these increases were the return of 747-400 cargo aircraft during 2012, which were temporarily redeployed to other segments. Two of these aircraft were subsequently redeployed in ACMI to Etihad in June 2012 and DHL in July 2012. ACMI Revenue per Block Hour was $6,368 in 2012, compared to $6,159 in 2011, an increase of $209 per Block Hour, or 3.4%. The increase in Revenue per Block Hour primarily reflects the impact of higher rates for 747-8F aircraft, which began flying during the fourth quarter of 2011, with additional aircraft beginning to fly in the second, third and fourth quarters of 2012. Partially offsetting this increase was the impact of lower rates for CMI flying in 2012.

AMC Charter revenue increased $45.3 million, or 10.2%, driven by increased AMC Charter Passenger flying that began in May 2011, partially offset by a reduction in AMC Charter Cargo revenue. AMC Charter Block Hours were 22,447 in 2012 compared to 19,208 in 2011, an increase of 3,239 Block Hours, or 16.9%. The increase in AMC Charter Block Hours was due to 10,656 incremental AMC Charter Passenger Block Hours from flying four additional passenger aircraft in 2012 resulting in $204.2 million of increased revenue, partially offset by a decrease of 7,417 AMC Charter Cargo Block Hours driven by reduced cargo demand from the AMC. AMC Charter Revenue per Block Hour was $21,743 in 2012 compared to $23,049 in 2011, a decrease of $1,306 per Block Hour, or 5.7%, due to a higher volume of passenger flying on smaller 767 aircraft, a decrease in the average “pegged” fuel price and a reduction in the number of one-way AMC missions. Partially offsetting these items were premiums earned on flying additional, more efficient 747-400 cargo aircraft during 2012 in place of less efficient 747-200 aircraft in 2011. During 2012, the AMC average “pegged” fuel price was $3.35 per gallon compared to $3.63 in 2011. The “pegged” fuel price is set by the AMC and the impact to revenue from changes in the “pegged” fuel price is generally offset by a corresponding impact to fuel expense.

Commercial Charter revenue increased $150.7 million, or 50.3%, due to an increase in Block Hours, partially offset by a decrease in Revenue per Block Hour. Commercial Charter Block Hours were 21,965 in 2012, compared to 13,879 in 2011, representing an increase of 8,086 Block Hours, or 58.3%. The increase in Block Hours was primarily due to the redeployment of 747-400 aircraft from ACMI during remarketing periods and the deployment of an additional 747-400 cargo aircraft in South America. In addition, we were able to utilize our passenger aircraft for sporting event, concert tour, VIP and other private charters. Revenue per Block Hour was $20,500 in 2012, compared to $21,581 in 2011, a decrease of $1,081 per Block Hour, or 5.0%, which reflects the impact of lower Yields on increased air cargo capacity and softer demand during 2012 compared to 2011 and the impact of a reduction in Commercial Charter return legs due to fewer AMC one-way missions.

Dry Leasing revenue was relatively unchanged.

 

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Operating Expenses

The following table compares our Operating Expenses (in thousands):

 

     2012     2011     Increase /
(Decrease)
    Percent
Change
 

Operating Expenses

        

Aircraft fuel

   $ 436,618     $ 388,579     $ 48,039       12.4

Salaries, wages and benefits

     293,881       261,844       32,037       12.2

Aircraft rent

     166,142       164,089       2,053       1.3

Maintenance, materials and repairs

     165,069       167,749       (2,680     (1.6 )% 

Passenger and ground handling services

     69,886       31,460       38,426       122.1

Depreciation and amortization

     62,475       39,345       23,130       58.8

Navigation fees, landing fees and other rent

     60,524       50,059       10,465       20.9

Travel

     56,461       44,037       12,424       28.2

Gain on disposal of aircraft

     (2,417     (364     2,053       NM   

Special charge

           5,441       (5,441     NM   

Other

     110,902       94,877       16,025       16.9
  

 

 

   

 

 

     

Total Operating Expenses

   $ 1,419,541     $ 1,247,116      
  

 

 

   

 

 

     

Aircraft fuel increased $48.0 million, or 12.4%, due to approximately $66.5 million in increased consumption, partially offset by $18.5 million from lower fuel prices. Commercial Charter fuel consumption increased by 22.0 million gallons, or 43.2%, primarily driven by the increase in Block Hours operated, partially offset by the use of more efficient 747-400 aircraft during 2012 in comparison to less efficient 747-200 aircraft used in 2011. The average fuel price per gallon for the Commercial Charter business was $3.32 in 2012, compared to $3.29 in 2011, an increase of 0.9%. AMC fuel consumption decreased by 2.8 million gallons, or 4.6%, reflecting the use of more efficient, twin-engine 767 passenger aircraft and 747-400 cargo aircraft during 2012 in place of less efficient 747-200 cargo aircraft in 2011, partially offset by the increase in Block Hours operated. The average fuel price per gallon for the AMC Charter business was $3.35 in 2012, compared to $3.63 in 2011, a decrease of 7.7%. We do not incur fuel expense in our ACMI or Dry Leasing businesses as the cost of fuel is borne by the customer.

Salaries, wages and benefits increased $32.0 million, or 12.2%, primarily driven by higher Block Hours, increased wages for crew and hiring additional employees to support our new aircraft.

Aircraft rent increased $2.1 million, or 1.3%, primarily due to subcontracting certain Commercial Charter and AMC flights with our ACMI customers during the second and third quarters of 2012, partially offset by the purchase of engines in 2012 that were previously leased.

Maintenance, materials and repairs decreased by $2.7 million, or 1.6%, driven by a reduction in maintenance expense of $27.8 million for 747-200 aircraft, partially offset by increases of $11.0 million for 747-400 aircraft and $14.1 million for other aircraft. Heavy Maintenance expense on 747-400 aircraft increased approximately $3.5 million due to an increase in the number of C Checks and additional maintenance expense on engines, partially offset by a reduction in D Checks compared to 2011. Heavy Maintenance expense on 747-200 aircraft decreased approximately $16.5 million due to the retirement of this fleet during the first quarter of 2012. Non-heavy Maintenance expense on 747-400 aircraft decreased $1.2 million. Line Maintenance expense increased $8.7 million for 747-400 aircraft and $14.1 million for 747-8F and 767 aircraft. Line Maintenance

 

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expense decreased $11.3 million on 747-200 aircraft due to the retirement of this fleet during the first quarter of 2012. The following table compares our heavy maintenance events and engine overhauls for 2012 and 2011:

 

Heavy Maintenance Events

   2012    2011    Increase /
(Decrease)

747-400 C Checks

   11    6    5

747-400 D Checks

   3    5    (2)

747-200 C Checks

      4    (4)

CF6-80 engine overhauls

   14    12    2

CF6-50 engine overhauls

      2    (2)

Passenger and ground handling services increased $38.4 million, or 122.1%, primarily due to increased AMC passenger catering and contract services for flight attendants related to increased passenger flying, which began in May 2011. We reclassified passenger catering and contract services for flight attendants from Other operating expenses to Passenger and ground handling services and reclassified previously reported amounts to conform to the current period’s presentation.

Depreciation and amortization increased $23.1, or 58.8%, primarily due to additional operating aircraft in 2012.

Navigation fees, landing fees and other rent increased $10.5 million, or 20.9%, primarily due to increased flying during 2012.

Travel increased $12.4 million, or 28.2%, primarily due to increased travel for flight attendants and pilots related to increased flying during 2012.

Gain on disposal of aircraft resulted from the sale of retired 747-200 airframes and engines during 2012.

Special charge in 2011 represents a fleet retirement charge of $5.4 million, related to employee termination benefits and the write-down of the 747-200 fleet, including related engines, rotable inventory, expendable parts and other equipment to their estimated fair value or scrap value, as appropriate. See Note 4 to our Financial Statements.

Other increased $16.0 million, or 16.9%, primarily due to increases in commissions for higher AMC Charter Revenue, taxes on domestic passenger flights and increased insurance due to additional operating aircraft.

Non-operating Expenses (Income)

The following table compares our Non-operating Expenses (Income) (in thousands):

 

     2012     2011     Increase /
(Decrease)
    Percent
Change
 

Non-operating Expenses (Income)

        

Interest income

   $ (19,636   $ (20,193   $ (557     (2.8 )% 

Interest expense

     64,532       42,120       22,412       53.2

Capitalized interest

     (18,727     (27,636     (8,909     (32.2 )% 

Loss on early extinguishment of debt

     576             576       NM   

Other income, net

     (5,529     (180     5,349       NM   

Interest expense increased $22.4 million, or 53.2%, primarily due to an increase in our average debt balances related to the financing of three 747-8F aircraft during the fourth quarter of 2011 and four 747-8F aircraft throughout 2012.

 

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Capitalized interest decreased $8.9 million, or 32.2%, resulting from 747-8F aircraft that entered service.

Other income, net increased $5.3 million, primarily due to an insurance gain of $6.3 million related to flood damage at a warehouse in 2012, partially offset by an unrealized loss on a foreign currency denominated deposit in Brazil (see Note 12 to our Financial Statements for further discussion).

Income taxes. Our effective income tax rates were 36.8% in 2012 and 38.6% in 2011. During 2012, we resolved income tax examinations in Hong Kong for the periods 2001 through 2010. In addition, the statute of limitations expired for certain income tax benefits claimed on our U.S. federal income tax returns for prior periods. Both of these items favorably impacted the effective income tax rate for 2012.

Segments

We use an economic performance metric (“Direct Contribution”) consisting of income (loss) before taxes excluding special charges, pre-operating expenses, non-recurring items, gains on the disposal of aircraft, unallocated revenue and unallocated fixed costs, which shows the profitability of each segment after allocation of direct ownership costs. The following table compares the Direct Contribution for our reportable segments (see Note 11 to our Financial Statements for the reconciliation to Operating income) (in thousands):

 

     2012      2011      Increase /
(Decrease)
    Percent
Change
 

Direct Contribution:

          

ACMI

   $ 191,497      $ 148,320      $ 43,177       29.1

AMC Charter

     99,591        86,962        12,629       14.5

Commercial Charter

     32,079        40,200        (8,121     (20.2 )% 

Dry Leasing

     4,598        4,631        (33     (0.7 )% 
  

 

 

    

 

 

    

 

 

   

 

 

 

Total Direct Contribution

   $ 327,765      $ 280,113      $ 47,652       17.0
  

 

 

    

 

 

    

 

 

   

 

 

 

Unallocated income and expenses

   $ 124,331      $ 118,047      $ 6,284       5.3
  

 

 

    

 

 

    

 

 

   

 

 

 

ACMI Segment

Direct Contribution related to the ACMI segment increased $43.2 million, or 29.1%, primarily due to higher profitability on our new 747-8F aircraft and increased CMI flying for Boeing and DHL during 2012. Partially offsetting these improvements was an increase in crew costs.

AMC Charter Segment

Direct Contribution related to the AMC Charter segment increased $12.6 million, or 14.5%, primarily due to increased passenger Block Hours, as well as lower Heavy Maintenance from the deployment of 747-400 aircraft into this segment in place of 747-200 aircraft flown during 2011. Partially offsetting these items was a decrease in cargo Block Hours resulting from lower AMC cargo demand, a reduction in the number of one-way AMC missions and increases in crew costs and volume-driven operating expenses. In addition, AMC Charter Direct Contribution was negatively impacted by increases in aircraft ownership costs from the deployment of 747-400 aircraft into this segment in place of 747-200 aircraft.

Commercial Charter Segment

Direct Contribution related to the Commercial Charter segment decreased $8.1 million, or 20.2%, primarily due to a reduction in Revenue per Block Hour driven by an increase in global air cargo capacity combined with softer demand, a reduction in Commercial Charter return legs due to fewer AMC one-way missions and the higher cost of operating an inefficient 747-200 fleet size during the first quarter of 2012. Partially offsetting these

 

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items was an increase in Block Hours, primarily due to the redeployment of 747-400 aircraft from ACMI during remarketing periods and deployment of an additional 747-400 cargo aircraft in South America. In addition, Commercial Charter Direct Contribution was negatively impacted by increases in aircraft ownership costs (from the deployment of 747-400 aircraft into this segment in place of 747-200 aircraft) and higher crew costs.

Dry Leasing Segment

Direct Contribution related to the Dry Leasing segment was relatively unchanged.

Unallocated income and expenses

Unallocated income and expenses increased $6.3 million, or 5.3%, primarily due to a reduction in capitalized interest on 747-8F aircraft that entered service, an increase in ground staff costs to support the expansion of our aircraft operating fleet and incremental employee costs related to the retirement of our 747-200 fleet, partially offset by a reduction in pre-operating expense related to the introduction of new aircraft types in 2011 and an insurance gain related to flood damage at a warehouse in 2012.

Years Ended December 31, 2011 and 2010

Operating Statistics

The following discussion should be read in conjunction with our Financial Statements and notes thereto and other financial information appearing and referred to elsewhere in this report.

The table below sets forth selected Operating Statistics in:

 

     2011      2010      Increase /
(Decrease)
    Percent
Change
 

Block Hours

          

ACMI

     102,695         91,357         11,338        12.4

AMC Charter

     19,208         18,679         529        2.8

Commercial Charter

     13,879         17,572         (3,693     (21.0 )% 

Other

     1,273         750         523        69.7
  

 

 

    

 

 

    

 

 

   

 

 

 

Total Block Hours

     137,055         128,358         8,697        6.8
  

 

 

    

 

 

    

 

 

   

 

 

 

Revenue Per Block Hour

          

ACMI

   $ 6,159      $ 5,953      $ 206       3.5

AMC Charter

     23,049        20,825        2,224       10.7

Charter

     22,739        20,825        1,914       9.2

Passenger

     27,086               27,086       NM   

Commercial Charter

     21,581        21,878        (297     (1.4 )% 

Fuel

          

AMC

          

Average fuel cost per gallon

   $ 3.63      $ 2.68      $ 0.95       35.4

Fuel gallons consumed (000s)

     60,976        58,022        2,954       5.1

Commercial Charter

          

Average fuel cost per gallon

   $ 3.29      $ 2.37      $ 0.92       38.8

Fuel gallons consumed (000s)

     50,872        61,154        (10,282     (16.8 )% 

 

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     2011      2010      Increase /
(Decrease)
    Percent
Change
 

Segment Operating Fleet (average aircraft equivalents during the period)

  

ACMI*

          

747-8F Cargo

     0.2                 0.2        NM   

747-400 Cargo

     20.3         18.3         2.0        10.9

747-200 Cargo

     0.2         0.1         0.1        100.0

747-400 Passenger

     1.0                 1.0        NM   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

     21.7         18.4         3.3        17.9

AMC Charter

          

747-400 Cargo

     1.6         1.6                NM   

747-200 Cargo

     3.5         3.9         (0.4     (10.3 )% 

747-400 Passenger

     0.8                 0.8        NM   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

     5.9         5.5         0.4        7.3

Commercial Charter

          

747-400 Cargo

     2.0         2.9         (0.9     (31.0 )% 

747-200 Cargo

     1.7         1.8         (0.1     (5.6 )% 
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

     3.7         4.7         (1.0     (21.3 )% 

Dry Leasing

          

757-200 Cargo

     1.0         0.8         0.2        25.0

737-800 Passenger

     1.2                 1.2        NM   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

     2.2         0.8         1.4        175.0
  

 

 

    

 

 

    

 

 

   

 

 

 

Total Operating Aircraft

     33.5         29.4         4.1        13.9
  

 

 

    

 

 

    

 

 

   

 

 

 

Out-of-service**

     0.4         0.1         0.3        NM   

 

* ACMI average fleet excludes spare aircraft provided by CMI customers.
** All of our out-of-service aircraft are completely unencumbered. Permanently parked aircraft, all of which are also completely unencumbered, are not included in the operating statistics above.

Operating Revenue

The following table compares our Operating Revenue (in thousands):

 

     2011      2010      Increase /
(Decrease)
    Percent
Change
 

Operating Revenue

          

ACMI

   $ 632,509       $ 543,853       $ 88,656        16.3

AMC Charter

     442,725         388,994         53,731        13.8

Commercial Charter

     299,528         384,440         (84,912     (22.1 )% 

Dry Leasing

     9,695         7,178         2,517        35.1

Other

     13,759         13,309         450        3.4
  

 

 

    

 

 

    

 

 

   

 

 

 

Total Operating Revenue

   $ 1,398,216       $ 1,337,774       $ 60,442        4.5
  

 

 

    

 

 

    

 

 

   

 

 

 

ACMI revenue increased $88.7 million, or 16.3%, due to an increase in Block Hours and Revenue per Block Hour. ACMI Block Hours were 102,695 in 2011, compared to 91,357 in 2010, an increase of 11,338 Block Hours, or 12.4%. The increase in Block Hours was primarily driven by flying a second aircraft for Panalpina beginning in October 2010 and two incremental aircraft for DHL beginning in March 2011. In addition, we

 

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started providing CMI passenger flights in May 2010 and CMI flights for Boeing in July 2010. In November and December 2011, we launched three of our new 747-8F aircraft into ACMI service with British Airways and two 747-400s were returned. ACMI Revenue per Block was $6,159 in 2011, compared to $5,953 in 2010, an increase of $206 per Block Hour, or 3.5%. The increase in Revenue per Block Hour primarily reflects contractual rate increases in existing customer contracts and higher rates on new customer contracts.

AMC Charter revenue increased $53.7 million, or 13.8%, due to an increase in Block Hours and Revenue per Block Hour. AMC Charter Revenue per Block Hour was $23,049 in 2011 compared to $20,825 in 2010, an increase of $2,224 per Block Hour, or 10.7%, primarily due to an increase in the “pegged” fuel price in 2011. For 2011, the AMC average “pegged” fuel price was $3.63 per gallon compared to an average “pegged” fuel price of $2.68 in 2010. Partially offsetting this increase was a decrease in the premiums earned on M-ATV missions flown on our 747-400 aircraft in 2010. AMC Charter Block Hours were 19,208 in 2011 compared to 18,679 in 2010, an increase of 529 Block Hours, or 2.8%. This increase was primarily due to the addition of 1,368 Block Hours for AMC passenger missions, which we began flying in May 2011. AMC demand was exceptionally strong through the first five months of 2010 primarily due to a surge in AMC demand to support U.S. Military activity in Afghanistan. During that period, we flew a significant number of missions to support the U.S. Military’s deployment of M-ATVs from the U.S. to Afghanistan.

Commercial Charter revenue decreased $84.9 million, or 22.1%, primarily due to a decrease in Block Hours. Commercial Charter Block Hours were 13,879 in 2011, compared to 17,572 in 2010, representing a decrease of 3,693 Block Hours, or 21.0%. A reduction in the number of one-way AMC missions and softer demand out of Asia in 2011 resulted in a reduction in return legs of AMC one-way missions used for Commercial Charters compared to 2010. In addition, Commercial Charter Block Hours were impacted by our redeployment of 747-400 aircraft to support increased ACMI flying in 2011. Commercial Charter Revenue per Block Hour was relatively unchanged when compared to 2010.

Dry Leasing revenue increased $2.5 million, or 35.1%, primarily due to an increase in revenue from the two Boeing 737-800 passenger aircraft that we acquired and began leasing to customers in 2011.

Operating Expenses

The following table compares our Operating Expenses (in thousands):

 

     2011     2010     Increase /
(Decrease)
    Percent
Change
 

Operating Expenses

        

Aircraft fuel

   $ 388,579      $ 300,229      $ 88,350        29.4

Salaries, wages and benefits

     261,844        238,169        23,675        9.9

Aircraft rent

     164,089        154,646        9,443        6.1

Maintenance, materials and repairs

     167,749        174,029        (6,280     (3.6 )% 

Passenger and ground handling services

     31,460        26,780        4,680        (17.5 )% 

Depreciation and amortization

     39,345        34,353        4,992        14.5

Navigation fees, landing fees and other rent

     50,059        48,700        1,359        2.8

Travel

     44,037        34,338        9,699        28.2

Gain on disposal of aircraft

     (364     (3,601     (3,237     (89.9 )% 

Special charge

     5,441               5,441        NM   

Other

     94,877        102,245        (7,368     (7.2 )% 
  

 

 

   

 

 

     

Total Operating Expenses

   $ 1,247,116      $ 1,109,888       
  

 

 

   

 

 

     

Aircraft fuel increased $88.4 million, or 29.4%, as a result of approximately $106.8 million in fuel price increases partially offset by $18.5 million from decreased consumption. The average fuel price per gallon for the AMC Charter business was $3.63 in 2011, compared to $2.68 in 2010, an increase of 35.4%. AMC fuel consumption increased by 3.0 million gallons, or 5.1%, commensurate with the increase in Block Hours

 

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operated. The average fuel price per gallon for the Commercial Charter business was $3.29 for 2011, compared to $2.37 in 2010, an increase of 38.8%. Fuel consumption for this business decreased by 10.3 million gallons, or 16.8%, commensurate with the decrease in Block Hours operated. We do not incur fuel expense in our ACMI or Dry Leasing businesses as the cost of fuel is borne by the customer.

Salaries, wages and benefits increased $23.7 million, or 9.9%, primarily driven by increased wages for crewmembers under the CBA, higher Block Hours and the hiring of additional employees to support new aircraft.

Aircraft rent increased $9.4 million, or 6.1%, primarily due to the leasing of additional aircraft and spare engines in 2011.

Maintenance, materials and repairs decreased by $6.3 million, or 3.6%, primarily due to approximately $15.8 million of decreased engine overhaul expense and approximately $1.9 million of decreased heavy airframe check expense, partially offset by increased line maintenance expense and other non-heavy maintenance expense of approximately $11.4 million. The following table compares our heavy maintenance events and engine overhauls for 2011 and 2010:

Events

   2011      2010      Increase /
(Decrease)
 

747-200 C Checks

     4        2        2  

747-400 C Checks

     6        7        (1

747-200 D Checks

            1        (1

747-400 D Checks

     5        5         

CF6-50 engine overhauls

     2        9        (7

CF6-80 engine overhauls

     12        17        (5

Travel increased $9.7 million, or 28.2%, primarily due to the increased cost of international crew travel resulting from higher airfares and increased flying. Ground staff travel also increased related to the on-boarding of new aircraft, maintenance activities and the increased cost of international travel.

Depreciation and amortization increased $5.0 million, or 14.5%, primarily due to additional aircraft in 2011.

Gain on disposal of aircraft resulted from the sale of retired airframes and engines during 2011 compared to the sale of three previously held-for-sale spare engines and retired engines in 2010.

Special charge in 2011 represents a fleet retirement charge of $5.4 million, related to employee termination benefits and the write-down of the 747-200 fleet, including related engines, rotable inventory, expendable parts and other equipment to their estimated fair value or scrap value, as appropriate. See Note 4 to our Financial Statements.

Other operating expenses decreased $2.0 million, or 2.0%, primarily related to a net accrual for legal settlements of $16.2 million in 2010, as well as a reduction in legal fees in 2011. Partially offsetting these decreases was an increase in contract services for flight attendants and passenger catering, commissions related to increased AMC Charter revenue, freight related to the movement of spare parts and engines and increased crew training on new aircraft types.

Non-operating Expenses (Income)

The following table compares our Non-operating Expenses (Income) (in thousands):

 

     2011     2010     Increase /
(Decrease)
    Percent
Change
 

Non-operating Expenses (Income)

        

Interest income

   $ (20,193   $ (19,663   $ 530        2.7

Interest expense

     42,120        40,034        2,086        5.2

Capitalized interest

     (27,636     (16,373     11,263        68.8

Other income, net

     (180     (9,222     (9,042     (98.0 )% 

 

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Interest expense increased $2.1 million, or 5.2%, primarily from an increase in our average debt balances related to the financing of three 747-8F aircraft during 2011.

Capitalized interest increased $11.3 million, or 68.8%, primarily due to higher interest rates applied to higher pre-delivery deposit balances outstanding during the period.

Other income, net decreased $9.0 million, or 98.0%, due to an $8.8 million litigation settlement received in 2010.

Income taxes. Our effective income tax rates were 38.6% and 38.7% for the years ended December 31, 2011 and 2010, respectively.

Segments

The following table compares the Direct Contribution for our reportable segments (see Note 11 to our Financial Statements for the reconciliation to Operating income) (in thousands):

 

     2011      2010      Increase /
(Decrease)
    Percent
Change
 

Direct Contribution:

          

ACMI

   $ 148,320       $ 127,679       $ 20,641        16.2

AMC Charter

     86,962         111,091         (24,129     (21.7 )% 

Commercial Charter

     40,200         111,717         (71,517     (64.0 )% 

Dry Leasing

     4,631         4,643         (12     (0.3 )% 
  

 

 

    

 

 

    

 

 

   

 

 

 

Total Direct Contribution

   $ 280,113       $ 355,130       $ (75,017     (21.1 )% 
  

 

 

    

 

 

    

 

 

   

 

 

 

Unallocated income and expenses

   $ 118,047       $ 125,621       $ (7,574     (6.0 )% 
  

 

 

    

 

 

    

 

 

   

 

 

 

ACMI Segment

Direct Contribution related to the ACMI segment increased $20.6 million, or 16.2%, primarily due to increases in Block Hours and ACMI Yields. The increase in Block Hours was primarily driven by flying a second aircraft for Panalpina beginning in October 2010 and two incremental aircraft for DHL beginning in March 2011. In addition, we started providing CMI passenger flights in May 2010 and CMI flights for Boeing in July 2010. In November and December 2011, we launched three of our new 747-8F aircraft into ACMI service with British Airways and two 747-400s were returned. The increase in ACMI Yields primarily reflects contractual rate increases in existing customer contracts and higher rates on new customer contracts. ACMI Direct Contribution was also impacted by crew and line maintenance expenses driven by the increased flying and higher wages for our crewmembers under the CBA, and increased aircraft ownership costs.

AMC Charter Segment

Direct Contribution related to the AMC Charter segment decreased $24.1 million, or 21.7%, primarily due to the reduction in premiums earned on M-ATV missions flown on our 747-400 aircraft during 2010.

Commercial Charter Segment

Direct Contribution related to the Commercial Charter segment decreased $71.5 million, or 64.0%, primarily due to a decrease in Block Hours and lower Commercial Charter Yields that were negatively impacted by an increase in capacity when air cargo carriers allocated more of their aircraft to the Asian markets and softer demand. Direct Contribution was also impacted by the higher cost of fuel, which was partially offset by lower fuel consumption in Commercial Charter during 2011. Partially offsetting the decrease in revenue was an improvement in volume-driven operating costs due to the reduction in Commercial Charter Block Hours flown. We also experienced lower ownership costs from the redeployment of 747-400 aircraft to the ACMI segment in 2011.

 

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Dry Leasing Segment

Direct Contribution related to the Dry Leasing segment was relatively unchanged.

Unallocated income and expenses

Unallocated income and expenses decreased $7.6 million, or 6.0%, primarily due to a net accrual for legal settlements of $16.2 million in 2010 and $11.3 million of increased capitalized interest on our PDPs in 2011. Partially offsetting these items was an $8.8 million litigation settlement received in 2010.

Reconciliation of GAAP to non-GAAP Financial Measures

To supplement our Financial Statements presented in accordance with accounting principles generally accepted in the United States of America (“GAAP”), we present certain non-GAAP financial measures to assist in the evaluation of our business performance. These non-GAAP measures include Adjusted Net Income Attributable to Common Stockholders and adjusted diluted earnings per share (“Adjusted Diluted EPS”), which exclude certain items that impact year-over-year comparisons of our results. These non-GAAP 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 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. We believe that these adjusted measures provide meaningful information to assist investors and analysts in understanding our business results and assessing our prospects for future performance.

The following is a reconciliation of Net Income Attributable to Common Stockholders and Diluted EPS to the corresponding non-GAAP measures (in thousands, except per share data):

 

     2012     2011     Percent
Change
 

Net Income Attributable to Common Stockholders

   $ 129,927     $ 96,083       35.2

After-tax impact from:

      

Fleet retirement costs (a)

     2,252          

Pre-operating expenses (b)

           9,455    

Special charge (c)

           3,466    

Loss on early extinguishment of debt

     367          

Insurance gain (d)

     (4,032        

Gain on disposal of aircraft

     (1,540     (232  
  

 

 

   

 

 

   

 

 

 

Adjusted Net Income Attributable to Common Stockholders

   $ 126,974     $ 108,772       16.7
  

 

 

   

 

 

   

 

 

 

Diluted EPS

   $ 4.89     $ 3.64    

After-tax impact from:

      

Fleet retirement costs (a)

     0.08          

Pre-operating expenses (b)

           0.36    

Special charge (c)

           0.13    

Loss on early extinguishment of debt

     0.01          

Insurance gain (d)

     (0.15        

Gain on disposal of aircraft

     (0.06     (0.01  
  

 

 

   

 

 

   

 

 

 

Adjusted Diluted EPS

   $ 4.78   $ 4.12       16.0
  

 

 

   

 

 

   

 

 

 

 

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Table of Contents
     2011     2010     Percent
Change
 

Net Income Attributable to Common Stockholders

   $ 96,083     $ 141,810       (32.2 %) 

After-tax impact from:

      

Pre-operating expenses (b)

     9,455       397    

Net accrual for legal settlements

           16,068    

Litigation settlement received

           (5,574  

Special charge (c)

     3,466          

Gain on disposal of aircraft

     (232     (2,294  
  

 

 

   

 

 

   

 

 

 

Adjusted Net Income Attributable to Common Stockholders

   $ 108,772     $ 150,407       (27.7 %) 
  

 

 

   

 

 

   

 

 

 

Diluted EPS

   $ 3.64     $ 5.44       (33.1 %) 

After-tax impact from:

      

Pre-operating expenses (b)

     0.36       0.02    

Net accrual for legal settlements

           0.61    

Litigation settlement received

           (0.21  

Special charge (c)

     0.13          

Gain on disposal of aircraft

     (0.01     (0.09  
  

 

 

   

 

 

   

 

 

 

Adjusted Diluted EPS

   $ 4.12     $ 5.77       (28.6 %) 
  

 

 

   

 

 

   

 

 

 

 

Items do not sum due to rounding.

 

a) Fleet retirement costs in 2012 included incremental employee costs related to the retirement of our 747-200 fleet.

 

b) Pre-operating expenses in 2011 and 2010 were related to the introduction of new aircraft types and include incremental costs incurred as a result of aircraft delivery delays.

 

c) Included in Special charge in 2011 are asset impairment and employee termination charges related to the retirement of the 747-200 fleet.

 

d) Insurance gain in 2012 related to flood damage at a warehouse.

Liquidity and Capital Resources

Significant liquidity events in 2012 were as follows:

In January 2012, we entered into a term loan facility for up to $864.8 million with Apple Bank for Savings, guaranteed by Export-Import Bank of the United States (“Ex-Im Bank”) to finance up to six 747-8F aircraft deliveries (the “Ex-Im Bank Facility”). The Ex-Im Bank Facility, if fully drawn, will consist of up to six separate term loans each secured by a mortgage on a 747-8F aircraft. In May, July, October and December 2012, we borrowed an aggregate of $570.7 million through four separate loans under the Ex-Im Bank Facility to finance the delivery of 747-8F aircraft. Under the Ex-Im Bank Facility, each of the above aircraft were initially financed as floating-rate loans and subsequently refinanced by the issuance of four separate twelve-year, fixed-rate Ex-Im Bank guaranteed notes.

In March 2012, we entered into a five-year term loan facility with CIT Bank in the aggregate amount of $35.7 million to finance two 747-400 and two 767-300ER passenger aircraft that we purchased in 2011. In May 2012, we entered into a five-year term loan with CIT Bank for $8.5 million to finance a third 767-300ER passenger aircraft that we purchased in 2011.

In September 2012, we entered into a seven-year term loan with Landesbank Hessen-Thuringen Girozentrale in the aggregate amount of $26.0 million to finance a 737-800 passenger aircraft that we purchased in 2011.

 

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Operating Activities. Net cash provided by operating activities for 2012 was $258.5 million, compared to $143.0 million for 2011. The increase primarily reflects higher earnings and a $27.6 million refund of cash taxes paid in 2011 and 2010.

Investing Activities. Net cash used for investing activities was $547.8 million for 2012, consisting primarily of $520.8 million of purchase deposit and delivery payments for flight equipment, which included $18.7 million of capitalized interest on our 747-8F aircraft order, $31.3 million of capital expenditures and $6.7 million from investments in debt securities, partially offset by $4.3 million of proceeds from short-term investments, $3.3 million of proceeds from insurance and $3.2 million of proceeds from disposal of aircraft. During 2012, we purchased four 747-8F cargo aircraft, one 737-300 cargo aircraft and one 767-300ER passenger aircraft. Capital expenditures for 2012 were funded through working capital, except for the ten aircraft financed as discussed above. Net cash used for investing activities was $794.0 million for 2011, consisting primarily of $764.3 million of purchase deposit and delivery payments for flight equipment, which included $27.6 million of capitalized interest on our 747-8F aircraft order and $37.4 million of capital expenditures, partially offset by $6.2 million of proceeds from short-term investments.

Financing Activities. Net cash provided by financing activities was $512.0 million for 2012, which primarily reflected the proceeds from debt issuance of $1,211.6 million, partially offset by $662.6 million of payments on debt obligations and $34.1 million of debt issuance costs. The proceeds from debt issuance and payments of debt obligations reflect the refinancing of $570.7 million in term loans under the Ex-Im Bank Facility with four Ex-Im Bank guaranteed notes. Net cash provided by financing activities was $249.3 million for 2011, which primarily reflected the proceeds from debt issuance of $360.3 million, partially offset by $102.6 million of payments on debt obligations.

We consider Cash and cash equivalents, Short-term investments and Net cash provided by operating activities to be sufficient to meet our debt and lease obligations, to fund capital expenditures for 2013 and to purchase shares of our stock under our stock repurchase program (see Item 5 of Part II of this Report for further discussion of the program). Capital expenditures for 2013 are expected to be approximately $98.7 million, which excludes aircraft and capitalized interest. Our estimated 747-8F aircraft delivery payment requirements in 2013 are approximately $212.5 million. We expect our Cash and cash equivalents, and the Ex-Im Bank Facility to be sufficient to fund our 747-8F aircraft delivery payment requirements for 2013. On October 1, 2012, we elected to terminate our $125.6 million pre-delivery payment financing facility since it is no longer needed to finance our pre-delivery payments. In addition, we prepaid the amounts outstanding under two term loans of $40.2 million in January 2013.

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 the SEC in June 2012 that enables us to sell a yet to be determined amount of debt and/or equity securities 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 conditions and may be adversely impacted by a tightening in credit markets.

We can claim bonus tax depreciation equal to 100% of the cost of qualified assets placed in service during 2011 or 2012 and 50% of the cost of qualified assets placed in service during 2013 or 2014. Two 747-8F aircraft delivered to us in 2011 and four delivered in 2012 qualify for 100% bonus tax deprecation. In addition, we expect that two 747-8F aircraft to be delivered in 2013 will qualify for 50% bonus tax depreciation. As a result, we do not expect to pay any significant U.S. federal income tax until 2017 or later. Furthermore, our business operations are subject to income tax in several non-U.S. jurisdictions. We expect GSS to pay U.K. cash income taxes commensurate with its earnings. We do not expect to pay cash income taxes in any other jurisdiction for at least several years.

 

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Contractual Obligations

The table below provides details of our balances available under credit agreements and future cash contractual obligations as of December 31, 2012 (in millions):

 

     Available
Credit
     Total
Obligations
     Payments Due by Period  
           2013      2014 - 2015      2016 - 2017      Thereafter  

Debt (1)

   $ 294.1      $ 1,350.8      $ 160.2      $ 246.5      $ 246.0      $ 698.1  

Interest on debt (2)

            310.8        57.2        94.2        70.4        89.0  

Aircraft operating leases

            1,407.9        146.9        271.7        259.1        730.2  

Other operating leases

            14.6        5.1        8.9        0.2        0.4  

Aircraft purchase commitments (3)

            217.5        217.5                       
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Contractual Obligations

   $ 294.1      $ 3,301.6      $ 586.9      $ 621.3      $ 575.7      $ 1,517.7  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Debt reflects gross amounts (see Note 7 to our Financial Statements for a discussion of the related unamortized discount).

 

(2) Amount represents interest on fixed rate and floating debt at December 31, 2012.

 

(3) Includes estimated contractual escalations and required option payments net of purchase credits with respect to aircraft and spare engine commitments.

We maintain a non-current liability for unrecognized income tax benefits. To date, we have not resolved the ultimate cash settlement of this liability. As a result, we are not in a position to estimate with reasonable certainty the date upon which this liability would be payable.

Description of Our Debt Obligations

See Note 7 to our Financial Statements for a description of our debt obligations.

Off-Balance Sheet Arrangements

Fifteen of our forty operating aircraft are under operating leases (this excludes aircraft provided by CMI customers). Five are leased through trusts established specifically to purchase, finance and lease aircraft to us. These leasing entities meet the criteria for variable interest entities. All fixed price options reflect a fair market value purchase option, and as such, we are not the primary beneficiary of the leasing entities. We are generally not the primary beneficiary of the leasing entities if the lease terms are consistent with market terms at the inception of the lease and the leases do not include a residual value guarantee, fixed-price purchase option or similar feature that would obligate us to absorb decreases in value or entitle us to participate in increases in the value of the aircraft. We have not consolidated any of the aircraft-leasing trusts because we are not the primary beneficiary. In addition, we reviewed the other ten Atlas aircraft that are under operating leases but not financed through a trust and determined that none of them would be consolidated upon the application of accounting for consolidations. Our maximum exposure under all operating leases is the remaining lease payments, which amounts are reflected in the future lease commitments above and described in Note 8 to our Financial Statements.

There were no changes in our off-balance sheet arrangements during the fiscal year ended December 31, 2012.

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 significantly differ from those estimates. The following is a brief description of our current critical accounting policies involving significant management judgment:

 

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Accounting for Long-Lived Assets

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.

Property held under capital leases and the related obligations are recorded at the lesser of an amount equal to (a) the present value of future minimum lease payments computed on the basis of our incremental borrowing rate or, when known, the interest rate implicit in the lease, or (b) the fair value of the asset. Amortization of property under capital leases is calculated on a straight-line basis over the lease term.

We record impairment charges on long-lived assets used in operations 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 at the operating fleet level, 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 salvage values.

Aircraft Maintenance and Repair

We account for maintenance and repair costs for both owned and leased airframes and engines under the direct expense method. Under this method, maintenance and repairs are charged to expense upon induction, based on our best estimate of the costs. This method can result in expense volatility between quarterly and annual periods, depending on the number and type of heavy maintenance events performed.

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 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.

In addition, we establish tax reserves when we believe that certain tax positions are subject to challenge and may not be sustained on audit. These reserves are based on subjective estimates and assumptions involving the relative filing positions and the potential exposure from audits and litigation.

Business Combinations and Intangible Assets

We account for business combinations using the purchase method. Under the purchase method, we record net assets acquired and liabilities assumed at their estimated fair value on the date of acquisition. The determination of the fair value of the assets acquired and liabilities assumed requires us to make estimates and assumptions that affect our financial statements. Intangible assets acquired in connection with business combinations that have finite lives are amortized 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. Intangible assets with finite lives are tested for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may no longer be recoverable. If an evaluation of the undiscounted future cash flows indicates impairment, the asset is written down to its estimated fair value, which is based on either its appraised value or its discounted future cash flows.

Allowance for Doubtful Accounts

Trade accounts receivable are recorded at the invoiced amount and do not bear interest. We record an allowance for doubtful accounts as our best estimate of the amount of probable credit losses resulting from the

 

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inability or unwillingness of our customers to make required payments. We review the allowance at least monthly and charge off account balances when we determine that it is probable that the receivable will not be recovered.

Legal and Regulatory Matters

We are party to legal and regulatory proceedings with respect to a variety of matters. 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 outside legal counsel. Due to the inherent uncertainties of the legal and regulatory proceedings in the multiple jurisdictions in which we operate, our judgments may be different from the actual outcomes.

Recent Accounting Pronouncements

See Note 2 to our Financial Statements for a discussion of recent accounting pronouncements.

 

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We currently do not hedge against foreign currency fluctuations or aircraft fuel. The potential loss arising from adverse changes to the price and availability of aircraft fuel and interest rates is discussed below. The sensitivity analyses presented herein do not consider the effects that such adverse changes might have on our overall financial performance, nor do they consider additional actions we may take to mitigate our exposure to such changes. Variable rate leases are not considered market-sensitive financial instruments and, therefore, are not included in the interest rate sensitivity analysis below.

Aircraft Fuel.   Our results of operations are affected by changes in the price and availability of aircraft fuel. Market risk is estimated at a hypothetical 20% increase or decrease in the 2012 average cost per gallon of fuel. Based on actual 2012 fuel consumption for the Commercial Charter business segment, such an increase would have resulted in an increase to aircraft fuel expense of approximately $45.1 million in 2012. We have limited fuel risk on our Commercial Charter business. In the AMC Charter Segment, the contracted fuel prices are established and fixed by the AMC. We receive reimbursements from the AMC each month if the price of fuel paid by us to vendors for the AMC Charter flights exceeds the fixed price; if the price of fuel paid by us is less than the fixed price, then we pay the difference to the AMC. Therefore, we have limited exposure to changes in fuel prices in the AMC Charter Segment. ACMI and Dry Leasing do not create an aircraft fuel market risk, as the cost of fuel is borne by the customer.

Variable Interest Rates.   Our earnings are affected by changes in interest rates due to the impact those changes have on interest expense from variable rate debt instruments and on interest income generated from our cash and investment balances. As of December 31, 2012, approximately $40.2 million of our debt at face value had variable interest rates. If interest rates would have increased or decreased by a hypothetical 20% in the underlying rate as of December 31, 2012, our annual interest expense would have changed in 2012 by approximately $0.3 million.

Fixed Rate Debt.   On December 31, 2012, we had approximately $1.3 billion of fixed rate long-term debt. If interest rates were 20% lower than the stated rate, the fair value of this debt would have been $64.6 million higher as of December 31, 2012.

Foreign Currency.   We are exposed to market risk from changes in foreign currency exchange rates, interest rates and equity prices that could affect our results of operations and financial condition. Our largest exposure comes from the Brazilian real, the British pound and the Euro.

 

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

Report of Independent Registered Public Accounting Firm

       48   

Consolidated Balance Sheets as of December 31, 2012 and 2011

       49   

Consolidated Statements of Operations for the years ended December 31, 2012, 2011 and 2010

       50   

Consolidated Statements of Comprehensive Income for the years ended December 31, 2012, 2011 and  2010

       51   

Consolidated Statements of Cash Flows for the years ended December 31, 2012, 2011 and 2010

       52   

Consolidated Statements of Stockholders’ Equity for the years ended December  31, 2012, 2011 and 2010

       53   

Notes to Consolidated Financial Statements

       54   

 

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Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders

Atlas Air Worldwide Holdings, Inc.

In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Atlas Air Worldwide Holdings, Inc. and its subsidiaries at December 31, 2012 and 2011, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2012 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule appearing under Item 15(a) (2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2012, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements and financial statement schedule, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on these financial statements, on the financial statement schedule, and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/    PricewaterhouseCoopers LLP

Florham Park, New Jersey

February 13, 2013

 

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Atlas Air Worldwide Holdings, Inc.

Consolidated Balance Sheets

(in thousands, except share data)

 

     December 31,
2012
    December 31,
2011
 

Assets

    

Current Assets

    

Cash and cash equivalents

   $ 409,763     $ 187,111  

Short-term investments

     10,119       8,097  

Accounts receivable, net of allowance of $3,172 and $1,931, respectively

     127,704       93,213  

Prepaid maintenance

     22,293       35,902  

Deferred taxes

     26,390       10,580  

Prepaid expenses and other current assets

     36,726       58,934  
  

 

 

   

 

 

 

Total current assets

     632,995       393,837  

Property and Equipment

    

Flight equipment

     2,209,782       1,466,384  

Ground equipment

     39,230       33,788  

Less: accumulated depreciation

     (185,419     (159,123

Purchase deposits for flight equipment

     147,946       407,184  
  

 

 

   

 

 

 

Property and equipment, net

     2,211,539       1,748,233  

Other Assets

    

Long-term investments and accrued interest

     140,498       135,735  

Deposits and other assets

     132,120       73,232  

Intangible assets, net

     35,533       39,961  
  

 

 

   

 

 

 

Total Assets

   $ 3,152,685     $ 2,390,998  
  

 

 

   

 

 

 

Liabilities and Equity

    

Current Liabilities

    

Accounts payable

   $ 20,789     $ 27,352  

Accrued liabilities

     152,467       175,298  

Current portion of long-term debt

     154,760       70,007  
  

 

 

   

 

 

 

Total current liabilities

     328,016       272,657  

Other Liabilities

    

Long-term debt

     1,149,282       680,009  

Deferred taxes

     265,384       178,069  

Other liabilities

     121,899       118,888  
  

 

 

   

 

 

 

Total other liabilities

     1,536,565       976,966  

Commitments and contingencies

    

Equity

    

Stockholders’ Equity

    

Preferred stock, $1 par value; 10,000,000 shares authorized; no shares issued

              

Common stock, $0.01 par value; 50,000,000 shares authorized; 27,672,924 and 27,462,116 shares issued, 26,443,441 and 26,304,764, shares outstanding (net of treasury stock), as of December 31, 2012 and 2011, respectively

     277       275  

Additional paid-in-capital

     544,421       525,670  

Treasury stock, at cost; 1,229,483 and 1,157,352 shares, respectively

     (44,850     (41,499

Accumulated other comprehensive loss

     (14,263     (15,683

Retained earnings

     798,676       668,749  
  

 

 

   

 

 

 

Total stockholders’ equity

     1,284,261       1,137,512  

Noncontrolling interest

     3,843       3,863  
  

 

 

   

 

 

 

Total equity

     1,288,104       1,141,375  
  

 

 

   

 

 

 

Total Liabilities and Equity

   $ 3,152,685     $ 2,390,998  
  

 

 

   

 

 

 

See accompanying Notes to Consolidated Financial Statements

 

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Atlas Air Worldwide Holdings, Inc.

Consolidated Statements of Operations

(in thousands, except per share data)

 

                                            
     For the Years Ended December 31,  
     2012     2011     2010  

Operating Revenue

      

ACMI

   $ 682,189     $ 632,509     $ 543,853  

AMC charter

     488,063       442,725       388,994  

Commercial charter

     450,277       299,528       384,440  

Dry leasing

     11,843       9,695       7,178  

Other

     13,660       13,759       13,309  
  

 

 

   

 

 

   

 

 

 

Total Operating Revenue

     1,646,032       1,398,216       1,337,774  
  

 

 

   

 

 

   

 

 

 

Operating Expenses

      

Aircraft fuel

     436,618       388,579       300,229  

Salaries, wages and benefits

     293,881       261,844       238,169  

Aircraft rent

     166,142       164,089       154,646  

Maintenance, materials and repairs

     165,069       167,749       174,029  

Passenger and ground handling services

     69,886       31,460       26,780  

Depreciation and amortization

     62,475       39,345       34,353  

Navigation fees, landing fees and other rent

     60,524       50,059       48,700  

Travel

     56,461       44,037       34,338  

Gain on disposal of aircraft

     (2,417     (364     (3,601

Special charge

     —         5,441       —    

Other

     110,902       94,877       102,245  
  

 

 

   

 

 

   

 

 

 

Total Operating Expenses

     1,419,541       1,247,116       1,109,888  
  

 

 

   

 

 

   

 

 

 

Operating Income

     226,491       151,100       227,886  
  

 

 

   

 

 

   

 

 

 

Non-operating Expenses (Income)

      

Interest income

     (19,636     (20,193     (19,663

Interest expense

     64,532       42,120       40,034  

Capitalized interest

     (18,727     (27,636     (16,373

Loss on early extinguishment of debt

     576       —         —    

Other income, net

     (5,529     (180     (9,222
  

 

 

   

 

 

   

 

 

 

Total Non-operating Expenses (Income)

     21,216       (5,889     (5,224

Income before income taxes

     205,275       156,989       233,110  

Income tax expense

     75,561       60,680       90,154  
  

 

 

   

 

 

   

 

 

 

Net Income

     129,714       96,309       142,956  

Less: Net income (loss) attributable to noncontrolling interests

     (213     226       1,146  
  

 

 

   

 

 

   

 

 

 

Net Income Attributable to Common Stockholders

   $ 129,927     $ 96,083     $ 141,810  
  

 

 

   

 

 

   

 

 

 

Earnings per share:

      

Basic

   $ 4.92     $ 3.66     $ 5.50  
  

 

 

   

 

 

   

 

 

 

Diluted

   $ 4.89     $ 3.64     $ 5.44  
  

 

 

   

 

 

   

 

 

 

Weighted average shares:

      

Basic

     26,419       26,227       25,781  
  

 

 

   

 

 

   

 

 

 

Diluted

     26,549       26,422       26,088  
  

 

 

   

 

 

   

 

 

 

See accompanying Notes to Consolidated Financial Statements

 

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Atlas Air Worldwide Holdings, Inc.

Consolidated Statements of Comprehensive Income

(in thousands)

 

     For the Years Ended December 31,  
     2012     2011     2010  

Net Income

   $ 129,714     $ 96,309     $ 142,956  

Other comprehensive income (loss):

      

Interest rate derivatives:

      

Net change in fair value

     (713     (24,887      

Reclassification into earnings

     2,652              

Income tax benefit (expense)

     (704     9,034        

Foreign currency translation:

      

Translation adjustment

     256       (42     45  

Income tax benefit (expense)

     122       22       (12

Accumulated Postretirement Benefit Obligation:

      

Amortization

           (442     (46

Income tax benefit (expense)

           164       17  
  

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss)

     1,613       (16,151     4  
  

 

 

   

 

 

   

 

 

 

Comprehensive Income

     131,327       80,158       142,960  

Less: Comprehensive income (loss) attributable to noncontrolling interests

     (20     216       1,163  
  

 

 

   

 

 

   

 

 

 

Comprehensive Income Attributable to Common Stockholders

   $ 131,347     $ 79,942     $ 141,797  
  

 

 

   

 

 

   

 

 

 

See accompanying Notes to Consolidated Financial Statements

 

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Atlas Air Worldwide Holdings, Inc.

Consolidated Statements of Cash Flows

(in thousands)

 

     For the Years Ended December 31,  
     2012     2011     2010  

Operating Activities:

      

Net Income Attributable to Common Stockholders

   $ 129,927     $ 96,083     $ 141,810  

Net income (loss) attributable to noncontrolling interests

     (213     226       1,146  
  

 

 

   

 

 

   

 

 

 

Net Income

     129,714       96,309       142,956  

Adjustments to reconcile Net Income to net cash provided by operating activities:

      

Depreciation and amortization

     72,194       47,313       42,356  

Accretion of debt securities discount

     (8,560     (8,341     (7,998

Provision for allowance for doubtful accounts

     837       335       201  

Special charge

            5,441         

Loss on early extinguishment of debt

     576                

Gain on disposal of aircraft

     (2,417     (364     (3,601

Deferred taxes

     75,365       81,616       62,962  

Stock-based compensation expense

     18,202       12,528       14,065  

Changes in:

      

Accounts receivable

     (25,217     (12,914     (14,839

Prepaid expenses and other current assets

     48,213       (50,303     (7,415

Deposits and other assets

     (26,027     (21,854     (8,176

Accounts payable and accrued liabilities

     (24,383     (6,808     60,032  
  

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities

     258,497       142,958       280,543  

Investing Activities:

      

Capital expenditures

     (31,266     (37,374     (29,612

Purchase deposits and delivery payments for flight equipment

     (520,770     (764,268     (40,390

Investment in debt securities

     (6,658            (100,090

Investment in owner participant interest

                   (21,475

Proceeds from short-term investments

     4,342       6,165       24,374  

Proceeds from insurance

     3,300                

Proceeds from disposal of aircraft

     3,215       1,480       5,183  
  

 

 

   

 

 

   

 

 

 

Net cash used for investing activities

     (547,837     (793,997     (162,010

Financing Activities:

      

Proceeds from debt issuance

     1,211,560       360,250       20,636  

Proceeds from stock option exercises

            4,733       5,197  

Purchase of treasury stock

     (3,351     (9,251     (5,854

Excess tax benefit from stock-based compensation expense

     551       3,117       1,155  

Payment of debt issuance costs

     (34,141     (6,980     (445

Payments of debt

     (662,627     (102,571     (164,110
  

 

 

   

 

 

   

 

 

 

Net cash provided by (used for) financing activities

     511,992       249,298       (143,421

Net increase (decrease) in cash and cash equivalents

     222,652       (401,741     (24,888

Cash and cash equivalents at the beginning of period

     187,111       588,852       613,740  
  

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at the end of period

   $ 409,763     $ 187,111     $ 588,852  
  

 

 

   

 

 

   

 

 

 

See accompanying Notes to Consolidated Financial Statements

 

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Atlas Air Worldwide Holdings, Inc.

Consolidated Statements of Stockholders’ Equity

(in thousands, except share data)

 

    Common
Stock
    Treasury
Stock
    Additional
Paid-In
Capital
    Accumulated
Other
Comprehensive
Income (Loss)
    Retained
Earnings
    Total
Stockholders’
Equity
    Noncontrolling
Interest
    Total
Equity
 

Balance at December 31, 2009

  $ 266     $ (26,394   $ 481,074     $ 471     $ 430,856     $ 886,273     $ 2,484     $ 888,757  

Net Income

                            141,810       141,810       1,146       142,956  

Other comprehensive income (loss)

                      (13           (13     17       4  
           

 

 

   

 

 

   

 

 

 

Comprehensive Income (Loss)

                                  141,797       1,163       142,960  

Stock option and restricted stock compensation

                14,065                   14,065             14,065  

Purchase of 126,224 shares of treasury stock

          (5,854                       (5,854           (5,854

Exercise of 160,037 employee stock options

    2             5,195                   5,197             5,197  

Issuance of 202,436 shares of restricted stock

    2             (2                              

Reversal of prior year deferred tax

                3,810                   3,810             3,810  

Tax benefit on restricted stock and stock options

                1,155                   1,155             1,155  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2010

  $ 270     $ (32,248   $ 505,297     $ 458     $ 572,666     $ 1,046,443     $ 3,647     $ 1,050,090  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Income

                            96,083       96,083       226       96,309  

Other comprehensive income (loss)

                      (16,141           (16,141     (10     (16,151
           

 

 

   

 

 

   

 

 

 

Comprehensive Income (Loss)

                                  79,942       216       80,158  

Stock option and restricted stock compensation

                12,528                   12,528             12,528  

Purchase of 138,443 shares of treasury stock

          (9,251                       (9,251           (9,251

Exercise of 122,354 employee stock options

    1             4,732                   4,733             4,733  

Issuance of 383,839 shares of restricted stock

    4             (4                              

Tax benefit on restricted stock and stock options

                3,117                   3,117             3,117  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2011

  $ 275     $ (41,499   $ 525,670     $ (15,683   $ 668,749     $ 1,137,512     $ 3,863     $ 1,141,375  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Income

                                129,927       129,927       (213     129,714  

Other comprehensive income (loss)

                      1,420             1,420       193       1,613  
           

 

 

   

 

 

   

 

 

 

Comprehensive Income (Loss)

                                  131,347       (20     131,327  

Stock option and restricted stock compensation

                18,202                   18,202             18,202  

Purchase of 72,131 shares of treasury stock

          (3,351                       (3,351           (3,351

Issuance of 210,808 shares of restricted stock

    2             (2                              

Tax benefit on restricted stock and stock options

                551                   551             551  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2012

  $ 277     $ (44,850   $ 544,421     $ (14,263   $ 798,676     $ 1,284,261     $ 3,843     $ 1,288,104  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying Notes to Consolidated Financial Statements

 

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Atlas Air Worldwide Holdings, Inc.

Notes to Consolidated Financial Statements

December 31, 2012

1.     Basis of Presentation

Our consolidated financial statements include the accounts of the holding company, Atlas Air Worldwide Holdings, Inc. (“AAWW”) and its consolidated subsidiaries. AAWW is the parent company of its principal operating subsidiary, Atlas Air, Inc. (“Atlas”), and of Polar Air Cargo LLC (“Old Polar”). AAWW is also the parent company of several subsidiaries related to our dry leasing services (collectively referred to as “Titan”). In addition, we are the primary beneficiary of Global Supply Systems Limited (“GSS”), a consolidated subsidiary. AAWW has a 51% equity interest and 75% voting interest in Polar Air Cargo Worldwide, Inc. (“Polar”). We record our share of Polar’s results under the equity method of accounting.

Noncontrolling interest represents the interest not owned by us and is recorded for consolidated entities in which we own less than 100% of the interest. All significant intercompany accounts and transactions have been eliminated. We account for investments in entities under the equity method of accounting when we hold between 20% and 50% ownership in the entity and exercise significant influence or when we are not the primary beneficiary of a variable interest entity. The terms “we,” “us,” “our,” and the “Company” mean AAWW and all entities included in its consolidated financial statements.

We provide outsourced aircraft and aviation operating services throughout the world, serving Africa, Asia, Australia, Europe, the Middle East, North America and South America through: (i) contractual service arrangements, including those through which we provide aircraft to customers and value-added services, including crew, maintenance and insurance (“ACMI”), as well as those through which we provide crew, maintenance and insurance, with the customer providing the aircraft (“CMI”); (ii) military charter services provided to the U.S. Military Air Mobility Command (the “AMC”) (“AMC Charter”); (iii) seasonal, commercial and ad-hoc charter services (“Commercial Charter”); and (iv) dry leasing or sub-leasing of aircraft and engines (“Dry Leasing” or “Dry Lease”).

Except for per share data, all dollar amounts are in thousands unless otherwise noted.

2.     Summary of Significant Accounting Policies

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires us to make estimates and judgments that affect the amounts reported in the Financial Statements and the related disclosures. Actual results may differ from those estimates. Estimates are used in determining, among other items, asset lives, maintenance accruals, valuation allowances (including, but not limited to, those related to receivables, expendable inventory and deferred taxes), income tax accounting, business combinations and related intangible assets, self-insurance employee benefit accruals and contingent liabilities.

Revenue Recognition

ACMI and CMI revenue are typically recognized as the actual block hours are operated on behalf of a customer during a given month, as defined contractually. The time interval between when an aircraft departs the terminal until it arrives at the destination terminal is defined as “Block Hours”. If a customer flies below the minimum contracted Block Hour guarantee, the contracted minimum revenue amounts are recognized as revenue. We recognize revenue for AMC and Commercial Charter upon flight departure.

We lease flight equipment, which may include aircraft and engines under operating leases, and record rental income on a straight-line basis over the term of the lease. Rentals received but unearned under the lease agreements are recorded in deferred revenue and included in Accrued liabilities until earned. In certain cases,

 

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leases provide for additional rentals based on usage, which is recorded as revenue as it is earned under the terms of the lease. The usage is calculated based on hourly usage or cycles operated, depending on the lease agreement. Usage is typically reported monthly by the lessee and the resulting revenue is non-refundable.

The Company recognizes revenue for management and administrative support services when the services are provided.

Cash and Cash Equivalents

Cash and cash equivalents include cash on hand, demand deposits and other cash investments that are highly liquid in nature and have original maturities of three months or less at acquisition.

Short-Term Investments

Short-term investments are primarily comprised of certificates of deposit, current portions of debt securities and money market funds.

Accounts Receivable

We perform a monthly evaluation of our accounts receivable and establish an allowance for doubtful accounts based on our best estimate of probable credit losses resulting from the inability or unwillingness of our customers to make required payments. Account balances are charged off against the allowance when we determine that it is probable that the receivable will not be recovered.

Escrow Deposits and Letters of Credit

We had $6.3 million as of December 31, 2012 and $6.7 million as of December 31, 2011, for certain deposits required in the normal course of business for various items including, but not limited to, surety and customs bonds, airfield privileges, judicial deposits, insurance and cash pledged under standby letters of credit related to collateral. These amounts are included in Deposits and other assets.

Long-term Investments

Long-term investments consist of debt securities, including accrued interest, for which management has the intent and ability to hold to maturity. These investments are classified as held-to-maturity and are reported at amortized cost. Interest on debt securities and accretion of discounts using the effective interest method are included in Interest income.

Expendable Parts

Expendable parts, materials and supplies for flight equipment are carried at average acquisition costs and are included in Prepaid expenses and other current assets. When used in operations, they are charged to maintenance expense. Allowances for excess and obsolescence for expendable parts expected to be on hand at the date aircraft are retired from service are provided over the estimated useful lives of the related aircraft and engines. These allowances are based on management estimates, which are subject to change as conditions in the business evolve. The net book value of expendable parts inventory was $27.5 million as of December 31, 2012 and $26.1 million at December 31, 2011. The allowance for expendable obsolescence was $8.9 million as of December 31, 2012 and $6.3 million at December 31, 2011.

Property and Equipment

We record property and equipment at cost and depreciate these assets on a straight-line basis over their estimated useful lives to their estimated residual values. Expenditures for major additions, improvements and flight equipment modifications are generally capitalized and depreciated over the shorter of the estimated life of

 

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the improvement or the modified assets’ remaining lives or remaining lease term if any modifications or improvements are made to operating lease equipment. Substantially all property and equipment is specifically pledged as collateral for our indebtedness. Property under capital leases and related obligations are recorded at the lesser of an amount equal to (a) the present value of future minimum lease payments computed on the basis of our incremental borrowing rate or, when known, the interest rate implicit in the lease or (b) the fair value of the asset. The estimated useful lives of our property and equipment are as follows:

 

     Range

Flight equipment

   6 to 40 years

Computer software and equipment

   3 to 5 years

Ground handling equipment and other

   3 to 5 years

Depreciation expense, including the amortization of capital leases, related to property and equipment was $60.2 million in 2012, $37.0 million in 2011 and $34.1 million in 2010.

Rotable parts are recorded in Property and equipment, net, and are depreciated over the average remaining fleet lives and written off when they are determined to be beyond economic repair. The net book value of rotable parts inventory was $82.8 million as of December 31, 2012 and $76.7 million as of December 31, 2011.

Capitalized Interest on Pre-delivery Deposits

Interest on funds used to finance the acquisition of aircraft up to the date the asset is ready for its intended use is capitalized and included in the cost of the asset if the asset is actively under construction. Included in capitalized interest is the interest paid on the pre-delivery deposit borrowings directly associated with the acquisition of aircraft. The remainder of capitalized interest recorded on the acquisition of aircraft is determined by taking the weighted average cost of funds associated with our other debt and applying it against the amounts paid as pre-delivery deposits. Pre-delivery deposits for aircraft include capitalized interest of $23.3 million as of December 31, 2012 and $49.8 million as of December 31, 2011.

Measurement of Impairment of Long-Lived Assets

We review long-lived assets for impairment when events or changes in circumstances indicate that their carrying amount may not be recoverable. When undiscounted cash flows estimated to be generated for those assets are less than the carrying amount, we record impairment losses with respect to those assets based upon the amount by which the net book value of the assets exceeds their estimated fair value. In determining the fair value of the assets, we consider market trends, published values for similar assets, recent transactions involving sales of similar assets and/or quotes from independent third party appraisers. In making these determinations, we also use certain assumptions, including, but not limited to, the estimated undiscounted future net cash flows expected to be generated by the asset group, which are based on management assumptions such as asset utilization, length of service the asset will be used in our operations and estimated residual values.

During 2011, we recorded impairment charges on our 747-200 aircraft, as well as the related engines, rotable inventory and other equipment (see Note 4).

Variable Interest Entities and Off-Balance Sheet Arrangements

We hold a 49% interest in GSS, a private company. GSS is a variable interest entity and we are the primary beneficiary of GSS for financial reporting purposes. Atlas dry leases three 747-8F owned aircraft to GSS. The leases provide for payment of rent and a provision for maintenance costs associated with the aircraft. GSS provides ACMI services to British Airways Plc using these three aircraft. As of December 31, 2012, our investment in GSS was $2.9 million and our maximum exposure to losses from the entity is limited to our investment in GSS and any operating losses of GSS. GSS does not have any third-party debt obligations.

 

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We hold a 50% interest in Global Aviation Technical Solutions Co, Ltd. (“GATS”), a joint venture with an unrelated third party. The purpose of the joint venture is to purchase rotable parts and provide repair services for those parts, primarily for our 747-8F aircraft. The joint venture is a variable interest entity and we have not consolidated GATS because we are not the primary beneficiary as we do not exercise financial control. As of December 31, 2012, our investment in GATS was $12.3 million and our maximum exposure to losses from the entity is limited to our investment, which is composed primarily of rotable inventory parts. GATS does not have any third-party debt obligations.

A portion of our operating aircraft are owned or effectively owned and leased through trusts established specifically to purchase, finance and lease aircraft to us. We have not consolidated any aircraft in the related trusts because we are not the primary beneficiary. Our maximum exposure under these operating leases is the remaining lease payments, which amounts are reflected in the future lease commitments more fully described in Note 8.

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 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.

In addition, we establish tax reserves when we believe that certain tax positions are subject to challenge and may not be sustained on audit. These reserves are based on subjective estimates and assumptions involving the relative filing positions and the potential exposure from audits and litigation.

Debt Issuance Costs

Costs associated with the issuance of debt are capitalized and amortized over the life of the respective debt obligation, using the effective interest method of amortization. Amortization of debt issuance costs was $2.2 million in 2012, $0.5 million in 2011 and $0.3 million in 2010, and was included as a component of Interest expense.

Aircraft Maintenance and Repair

Maintenance and repair costs for both owned and leased aircraft are charged to expense upon induction.

Prepaid Maintenance Deposits

Certain of our aircraft financing agreements require security deposits to our finance providers to ensure that we perform major maintenance as required. These are substantially refundable to us and are, therefore, accounted for as deposits and included in Prepaid maintenance and in Deposits and other assets. Such amounts, including the long-term portion, were $58.2 million as of December 31, 2012 and $53.5 million at December 31, 2011.

Foreign Currency

While most of our revenues are denominated in U. S. dollars, our results of operations may be exposed to the effect of foreign exchange rate fluctuations on the U.S. dollar value of foreign currency-denominated operating revenues and expenses. Our largest exposure comes from the Brazilian real, British pound and the Euro. We do not currently have a foreign currency hedging program related to our foreign currency-denominated transactions. Gains or losses resulting from foreign currency transactions are included in Non-operating expenses (income).

 

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Stock-Based Compensation

We have various stock-based compensation plans for certain employees and outside directors, which are described more fully in Note 13. We recognize compensation expense, net of estimated forfeitures, on a straight-line basis over the vesting period for each award based on the fair value on grant date. We estimate grant date fair value for all option grants using the Black-Scholes-Merton option pricing model. We estimate option and restricted stock/unit forfeitures at the time of grant and periodically revise those estimates in subsequent periods if actual forfeitures differ from those estimates. As a result, we record stock-based compensation expense only for those awards that are expected to vest.

Litigation Accruals

We are party to certain legal and regulatory proceedings with respect to a variety of matters. We evaluate the likelihood of an unfavorable outcome of these proceedings under accounting guidance for contingencies. These judgments are subjective based on numerous factors, which may include the status of the legal or regulatory proceedings, the merits of our defenses and consultation with external legal counsel. The actual outcomes of these proceedings may differ materially from our judgments. Legal costs are accrued as incurred and recorded in Other operating expenses.

Supplemental Cash Flow Information

Cash interest paid to lenders is calculated on the face amount of our various debt instruments based on the contractual interest rates in effect during each payment period.

The amortization of debt discount shown as a reconciling item in cash flows from operating activities is the difference between interest expense and cash interest owed to lenders. This amount arises from the amortization of the difference between the fair