10-K 1 d303331d10k.htm FORM 10-K Form 10-K
Table of Contents

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-K

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
  For the fiscal year ended December 31, 2016

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  ☒    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  ☒

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  ☒    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  ☒    No  ☐

Indicate by check mark whether 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  ☒             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  ☒

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, 2016 was approximately $1,053.1 million. 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 10, 2017, there were 25,126,608 shares of the registrant’s Common Stock outstanding.

 

 

DOCUMENTS INCORPORATED BY REFERENCE:

Certain portions of the registrant’s Proxy Statement relating to the 2017 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

     12  

Item 1B.

  

Unresolved Staff Comments

     24  

Item 2.

  

Properties

     25  

Item 3.

  

Legal Proceedings

     26  

Item 4.

  

Mine Safety Disclosures

     26  
   PART II.   

Item 5.

   Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities      27  

Item 6.

   Selected Financial Data      28  

Item 7.

  

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

     29  

Item 7A.

  

Quantitative and Qualitative Disclosures about Market Risk

     50  

Item 8.

   Financial Statements and Supplementary Data      52  

Item 9.

   Changes in and Disagreements with Accountants on Accounting and Financial Disclosure      93  

Item 9A.

  

Controls and Procedures

     93  

Item 9B.

  

Other Information

     93  
   PART III.   

Item 10.

  

Directors, Executive Officers and Corporate Governance

     94  

Item 11.

   Executive Compensation      95  

Item 12.

   Security Ownership of Certain Beneficial Owners and Management and Related Stockholders Matters      95  

Item 13.

  

Certain Relationships and Related Transactions, and Director Independence

     96  

Item 14.

  

Principal Accounting Fees and Services

     96  
   PART IV.   

Item 15.

  

Exhibits, Financial Statement Schedules

     97  

Item 16.

  

Form 10-K Summary

     97  


Table of Contents

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.


Table of Contents

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 Line Maintenance 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 and eight years depending on aircraft type.

 

Heavy Maintenance

Scheduled maintenance activities, which are the most extensive in scope and are primarily based on time or usage intervals, including, but not limited to, C Checks, D Checks and engine overhauls. In addition, unscheduled engine repairs involving the removal of the engine from the aircraft are considered to be Heavy Maintenance.

 

Line Maintenance

Maintenance events occurring during normal day-to-day operations.

 

Non-heavy Maintenance

Discrete maintenance activities for the overhaul and repair of specific aircraft components, including landing gear, auxiliary power units and engine thrust reversers.

 

Yield

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

 

1


Table of Contents

Overview

AAWW is a holding company with two wholly owned operating subsidiaries, Atlas Air, Inc. (“Atlas”) and, as of April 7, 2016, Southern Air, Inc. (“Southern Air”). It also has a 51% economic interest and 75% voting interest in Polar Air Cargo Worldwide, Inc. (“Polar”). In addition, AAWW is 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. We operate the world’s largest fleet of 747 freighters and provide customers a broad array of 747, 777, 767, 757 and 737 aircraft for domestic, regional and international cargo and passenger applications. We provide unique value to our customers by giving them access to highly reliable new production freighters that deliver the lowest unit cost in the marketplace combined with outsourced aircraft operating services that we believe lead the industry in terms of quality and global scale. Our customers include express delivery providers, e-commerce retailers, airlines, freight forwarders, the U.S. military and charter brokers. We provide global services with operations in Africa, Asia, Australia, Europe, the Middle East, North America and South America.

Our primary service offerings include the following:

 

   

ACMI, whereby we provide outsourced cargo and passenger aircraft operating solutions, including the provision of an aircraft, crew, maintenance and insurance, while customers assume fuel, demand and price risk. In addition, customers are responsible for landing, navigation and most other operational fees and costs;

 

   

CMI, which is part of our ACMI business segment, whereby we provide outsourced cargo and passenger aircraft operating solutions, including the provision of crew, Line Maintenance and insurance, but not the aircraft. Customers assume fuel, demand and price risk, and are responsible for providing the aircraft (which they may lease from us) and for Heavy and Non-Heavy Maintenance, landing, navigation and most other operational fees and costs;

 

   

Charter, whereby we provide cargo and passenger aircraft charter services to customers, including the U.S. Military Air Mobility Command (“AMC”), brokers, freight forwarders, direct shippers, airlines, sports teams and fans, and private charter customers. The customer pays a fixed charter fee that includes fuel, insurance, landing fees, navigation fees and most other operational fees and costs; and

 

   

Dry Leasing, whereby we provide cargo and passenger aircraft and engine leasing solutions. The customer operates, and is responsible for insuring and maintaining, the flight equipment.

 

2


Table of Contents

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, 747-400F and 777-200LRF aircraft, including their superior fuel efficiency, range, capacity and loading capabilities, creates a compelling value proposition for our customers and positions us well in the markets we operate. Our growing fleet of 767-300 and 737-400 freighter aircraft are well-suited for regional and domestic applications.

We are focused on the further enhancement of our market-leading ACMI and CMI services. We are currently the only operator offering 747-8F and 777 aircraft under ACMI and CMI agreements, and we have the flexibility to expand our fleet in response to market conditions. We believe that our current fleet, which also includes our 747-400F aircraft, represents one of the most efficient, reliable freighter fleets in the market. Our primary placement for the 747-8F and 747-400F aircraft will continue to be long-term ACMI outsourcing contracts with high-credit-quality customers.

During 2016, we significantly expanded our CMI and Dry Leasing services. In April 2016, the acquisition of Southern Air provided us with immediate entry into the 777 and 737 aircraft operating platforms, with ten aircraft and the potential for developing additional business with existing and new customers. In May 2016, we entered into agreements with Amazon.com, Inc. and its subsidiary, Amazon Fulfillment Services, Inc., (collectively “Amazon”), which involve, among other things, the leasing and operation of 20 Boeing 767-300 freighter aircraft. The first two aircraft were placed in service in August 2016 and February 2017, and the remainder are expected to be placed in service by the end of 2018. In addition to the contracts above, our Dry Leasing business includes six 777 freighters that are Dry Leased to customers on a long-term basis. Our Dry Leasing portfolio diversifies our business mix and enhances our predictable, long-term revenue and earnings streams.

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.  Our business is organized into three operating segments based on our service offerings: ACMI, Charter and Dry Leasing. All segments are directly or indirectly engaged in the business of air transportation services but have different commercial and economic characteristics. Each operating segment is separately reviewed by our chief operating decision maker to assess operating results and make resource allocation decisions. Additional information regarding our reportable segments can be found in Note 13 to our consolidated financial statements included in Item 8 of Part II of this Report (the “Financial Statements”).

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

All of our ACMI and CMI contracts provide that the aircraft remain under our exclusive operating control, possession and direction at all times. These contracts further provide that both the contracts and the routes to be operated may be subject to prior and periodic approvals of the U.S. or foreign governments. Revenue from ACMI and CMI contracts is typically recognized as the Block Hours are operated on behalf of a customer during a given month, as defined contractually. If a customer flies below a minimum contracted Block Hour guarantee, the contracted minimum revenue amounts are recognized as revenue. The original length of these contracts generally ranges from two to seven years, although we do offer contracts of shorter or longer duration. In addition, we have also operated short-term ACMI cargo and passenger services and we expect to continue to provide such services.

 

3


Table of Contents

As a percentage of our operating revenue, ACMI segment revenue represented 45.4% in 2016, 43.4% in 2015 and 43.2% in 2014. As a percentage of our operated Block Hours, ACMI represented 72.2% in 2016, 70.9% in 2015 and 71.4% in 2014.

Charter.  Our Charter business primarily provides full planeload cargo and passenger aircraft to customers, including the AMC, brokers, freight forwarders, direct shippers, airlines, sports teams and fans, and private charter customers. Charters are for one or more flights based on a specific origin and destination. Atlas also provides limited airport-to-airport cargo services to select markets, including several cities in South America. In addition, we occasionally earn revenue on subcontracted Charter flights. Atlas typically bears all direct operating costs for both cargo and passenger charters, which include fuel, insurance, landing and navigation fees, and most other operational fees and costs.

As a percentage of our operating revenue, Charter segment revenue, which includes fuel and other operational costs, represented 47.9% in 2016, 49.9% in 2015 and 50.4% in 2014. As a percentage of our operated Block Hours, Charter represented 27.0% in 2016, 28.2% in 2015 and 27.7% in 2014.

Dry Leasing.  Our Dry Leasing business provides aircraft and engines to customers, including some CMI customers, for compensation that is typically based on a fixed monthly amount (a “Dry Lease”). 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 segment revenue represented 5.8% in 2016, 5.9% in 2015 and 5.6% in 2014.

Other Revenue.  As a percentage of our operating revenue, Other revenue, which includes administrative and management support services and flight simulator training, represented 0.9% in 2016, 0.8% in 2015 and 0.8% in 2014.

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 and 75% voting interest. Under a 20-year blocked space agreement that expires in 2027 (the “BSA”), Polar provides air cargo capacity to DHL. Atlas and Polar also 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 with the opportunity for performance premiums that escalate 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 aircraft that have been dedicated to Polar for DHL and other customers’ freight over the life of the agreements. DHL provides financial support and also assumes the risks and rewards of the operations of Polar.

 

4


Table of Contents

Combined with Polar, we provide ACMI, CMI, Charter and Dry Leasing services to support DHL’s transpacific express, North American and intra-Asian networks. In addition, we fly between the Asia Pacific region, the Middle East and Europe on behalf of DHL and other customers. Atlas also provides incremental charter capacity to Polar and DHL on an ad hoc basis. The following table summarizes the aircraft types and services provided to DHL as of December 31, 2016:

 

Aircraft Type

   Service      Total  

747-8F

     ACMI        6  

747-400F

     ACMI        7  

777-200LRF

     CMI        5  

767-300

     CMI and Dry Leasing        4  

767-200

     CMI        9  

737-400F

     CMI        5  

757-200F

     Dry Leasing        1  
     

 

 

 

Total

        37  
     

 

 

 

Amazon

In May 2016, we entered into certain agreements with Amazon, which involve, among other things, CMI operation of 20 Boeing 767-300 freighter aircraft for Amazon by Atlas, as well as Dry Leasing by Titan. The Dry Leases will have a term of ten years, while the CMI operations will be for seven years (with an option for Amazon to extend the term to ten years). The first two aircraft were placed in service in August 2016 and February 2017, and the remainder are expected to be placed in service by the end of 2018.

In conjunction with these agreements, we granted Amazon a warrant providing the right to acquire up to 20% of our outstanding common shares, after giving effect to the issuance of shares pursuant to the warrants, at an exercise price of $37.50 per share. A portion of the warrant, representing the right to purchase 3.75 million shares, vested immediately upon issuance of the warrant and the remainder of the warrant, representing the right to purchase 3.75 million shares, will vest in increments of 375,000 as the lease and operation of each of the 11th through 20th aircraft commences. The warrant will be exercisable in accordance with its terms through 2021. As of December 31, 2016, no warrants have been exercised.

The agreements also provide incentives for future growth of the relationship as Amazon may increase its business with us. In that regard, we granted Amazon a warrant to acquire up to an additional 10% of our outstanding common shares, after giving effect to the issuance of shares pursuant to the warrants, for an exercise price of $37.50 per share. This warrant to purchase 3.75 million shares will vest in conjunction with payments by Amazon for additional business with us. The warrant will be exercisable in accordance with its terms through 2023.

Sales and Marketing

We have regional sales offices in various locations around the world that cover the Americas, Asia Pacific, Europe, Africa and Middle East regions. These offices market our ACMI, CMI and Dry Leasing services to express delivery providers, e-commerce retailers, airlines and freight forwarders. They also market our cargo and passenger Charter services to charter brokers, the U.S. military, freight forwarders, direct shippers and airlines.

Fuel

Historically, aircraft fuel is one of the most significant expenses for us. During 2016, 2015 and 2014, fuel costs represented 16.5%, 19.6%, and 24.9%, respectively, of our total operating expenses. Fuel prices and

 

5


Table of Contents

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:

 

     2016      2015      2014  

Gallons consumed (in thousands)

     163,862        147,081        131,787  

Average price per gallon, including tax

   $ 1.68      $ 2.27      $ 3.07  

Cost (in thousands)

   $ 275,113      $ 333,390      $ 404,263  

Our exposure to fluctuations in fuel price is limited to the commercial portion of our Charter business only. 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 for AMC charters because the price is set under our contract with the AMC, and we receive or make payments to adjust for price increases and decreases from the contractual rate.

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 25.4% in 2016, 20.7% in 2015 and 19.2% in 2014. As of December 31, 2016, we had 2,646 employees, 1,581 of whom were pilots. We maintain a comprehensive training program for our pilots in compliance with U.S. Federal Aviation Administration (“FAA”) requirements, in which each pilot regularly attends recurrent training programs.

Pilots of Atlas and Southern Air, and flight dispatchers of Atlas and Polar are represented by the International Brotherhood of Teamsters (the “IBT”). These employees represented approximately 60.5% of our workforce as of December 31, 2016. We have a five-year collective bargaining agreement (“CBA”) with our Atlas pilots, which became amendable in September 2016; and a four-year CBA with the Southern Air pilots, which became amendable in November 2016. We also have a five-year CBA with our Atlas and Polar dispatchers, which becomes amendable in November 2017.

After we completed the acquisition of Southern Air in April 2016, we informed the IBT of our intention to pursue (and we have been pursuing) a complete operational merger of Atlas and Southern Air. Pursuant to the merger provisions in both the Atlas and Southern Air CBAs, joint negotiations for a single CBA for Atlas and Southern Air should commence promptly. Once a seniority list is presented to us by the unions, it triggers an agreed-upon time frame to negotiate a new joint CBA with any unresolved issues submitted to binding arbitration. After the merger process began, the IBT filed an application for mediation with the National Mediation Board (“NMB”) on behalf of the Atlas pilots. We have opposed the mediation application as it is not in accordance with the merger provisions in the parties’ existing CBAs, which have a defined and streamlined process for negotiating a joint CBA when a merger occurs, as in the case with the Atlas and Southern Air merger. The NMB conducted a pre-mediation investigation in June 2016, which is currently pending. Due to a lack of meaningful progress in such discussions, in February 2017, we filed a lawsuit against the IBT to compel arbitration on the issue of whether the merger provisions in Atlas and Southern Air’s CBAs apply to the bargaining process.

We are subject to risks of work interruption or stoppage as permitted by the Railway Labor Act of 1926 (the “Railway Labor Act”) and incur additional administrative expenses associated with union representation of our employees.

 

6


Table of Contents

Maintenance

Maintenance represented our third-largest operating expense for the year ended December 31, 2016. Primary maintenance activities include scheduled and unscheduled work on airframes and engines. Scheduled maintenance activities encompass those activities specified in our maintenance program approved by the 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”).

Under the ADs issued pursuant to the FAA’s 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. The FAA 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.

Under our FAA-approved maintenance programs, all Heavy Maintenance is 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.

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; injury to crewmembers and ground staff; damage to our property and that of others; and loss of, or damage to, flight equipment, whether on the ground or in flight.

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. 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 participate in an insurance pooling arrangement with DHL and its partners. This allows us to obtain aviation hull and liability, war-risk hull and cargo loss, crew, third-party liability insurance and hull deductible coverage at reduced rates from the commercial insurance providers. If we are no longer included in this arrangement for any reason or if pool members have coverage incidents, we may incur higher insurance costs.

Governmental Regulation

General.  Atlas, Polar and Southern Air (the “Airlines”) are subject to regulation by the U.S. Department of Transportation (the “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. The Airlines 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. Atlas additionally holds worldwide passenger charter authority.

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 possession thereof; (ii) requiring its president and at least two-thirds of its directors and other managing officers

 

7


Table of Contents

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 the Airlines’ fitness and citizenship favorable.

In addition, the Airlines are required to hold valid FAA-issued air carrier certificates and FAA-approved operations specifications authorizing operation in specific regions with specified equipment under specific conditions and are 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.

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 took effect on January 14, 2014. The rule applies to Atlas’ passenger operations but not to the Airlines’ all-cargo operations. The Independent Pilots Association, representing the pilots of United Parcel Service, Inc. (“UPS”), filed a judicial appeal in the U.S. Court of Appeals for the District of Columbia Circuit challenging the FAA decision not to include all-cargo operations in the rule. On March 24, 2016, the Court issued an order denying the appeal. Should the FAA decide either on its own initiative or pursuant to Congressional directive to change the final rule to include all-cargo operations, it could result in a material increase in crew costs for the Airlines. 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 the Airlines operate) is subject to extensive additional regulation. The ability of the Airlines 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, aviation agreements restrict the number of Airlines 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 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.

 

8


Table of Contents

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 operated by airlines of non-EU member states. The regulations have a negative impact on our ACMI business opportunities.

Airport Access.  The ability of the Airlines to operate suitable schedules 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, the Airlines 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 the Airlines’ or their ACMI carrier 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 and potentially could place limits on Charter flights.

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 utilize the TSA, the intelligence community and the private sector as sources for our aggressive threat-based risk-management program. There can be no assurance, however, that we will remain in compliance with existing or 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. We have successfully implemented all European Commission security programs allowing us unimpeded access to European markets.

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.

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.

 

9


Table of Contents

In October 2013, the International Civil Aviation Organization (“ICAO”) reached a nonbinding agreement to address climate change by developing global market-based measures to assist in achieving a carbon-neutral growth from 2020 onward. In October 2016, ICAO approved a resolution to adopt a global market-based measure known as the Carbon Offsetting and Reduction Scheme for International Aviation (“CORSIA”), which is designed to offset any annual increases in total carbon emissions from international civil aviation above a baseline level determined by the average of 2019 and 2020 emissions. Although various details regarding the implementation of CORSIA still need to be finalized, a pilot phase will run from 2021 to 2023 and, starting in 2019, the airlines of participating countries will begin monitoring and reporting fuel burn during international flights. As a result, for each year starting in 2021, covered airlines may need to purchase allowances to offset their assigned share of emissions overages.

Additionally, the EU continues to pursue a parallel track to address climate change through its Emissions Trading Scheme (“ETS”). Following the end of every year, to the extent the ETS applies, each airline must tender the number of carbon emissions allowances (“Allowances”) corresponding to carbon emissions generated by its covered flight activity during the year. If the airline’s flight activity during the year has produced carbon emissions exceeding the number of Allowances that it has been awarded, the airline must acquire Allowances from other airlines in the open market. In recognition of ICAO’s recent adoption of CORSIA, the ETS was suspended with respect to international aviation through December 31, 2016; however, measures continue to remain applicable to intra-EU aviation. Although certain EU political leaders have stated that the EU is likely to extend the suspension applicable to flights to and from the EU beyond December 31, 2016, we cannot be certain whether or for how long the EU will do so.

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, on August 15, 2016, the U.S. Environmental Protection Agency (“EPA”) issued a final rule finding that greenhouse gas emissions from aircraft cause or contribute to air pollution that may reasonably be anticipated to endanger public health and welfare. That finding could lead to EPA regulation of 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.  As part of our Charter business, Atlas and Polar both participate in the U.S. Civil Reserve Air Fleet (“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. Under the CRAF Program, contracts with the AMC 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-based contracts. Atlas bears all direct operating costs for both passenger and cargo aircraft, which include fuel, insurance, overfly, landing and ground handling expenses. The contracted charter rates (per mile) and fuel prices (per gallon) are fixed by the AMC periodically. 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.

 

10


Table of Contents

Airlines may participate in the CRAF Program either alone or through a teaming arrangement. 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.

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.

Competition

The market for ACMI and CMI services is competitive. We believe that the most important basis for competition in this 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 and CMI services with the modern 747-8F and 777 aircraft. The primary ACMI and CMI providers for 747-400 and 767 aircraft include the following: Atlas; Air Atlanta Icelandic; Air Transport Services Group, Inc.; Kalitta Air, LLC; and Western Global Airlines.

The Charter market is competitive, with a number of cargo operators that include AirBridge Cargo Airlines; Cargolux; Kalitta Air, LLC; National Air Cargo; and passenger airlines providing similar services utilizing 747-8Fs, 747-400s and 747-200s. We believe that we offer a superior long-haul aircraft in the 747-8F and 747-400, and we will continue to develop new opportunities in the Charter market for aircraft not otherwise deployed in our ACMI business.

The Dry Leasing business is also 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. Our primary competitors in the aircraft leasing market include GE Capital Aviation Services; AWAS; Guggenheim Aviation Partners, LLC; Aviation Capital Group Corp.; Aircastle Ltd.; AerCap Holdings N.V.; Air Transport Services Group, Inc.; and Fly Leasing, among many others.

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.

 

11


Table of Contents
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.

RISKS RELATED TO OUR BUSINESS

Risks Related to Our Business Generally

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

Airfreight demand has historically been highly dependent on global economic conditions. If demand for our services, Yields or lease rates deteriorate, it could have a material adverse effect on our business, results of operations and financial condition.

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 capital availability deteriorates, we may be unable to raise the capital necessary to finance business growth or other initiatives or to repay our debt when it matures. 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 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 the aircraft in our fleet and maintain high utilization of our aircraft at favorable rates. If we have underutilized aircraft, we would seek to redeploy those aircraft in our other lines of business or sell them. If we are unable to successfully redeploy our existing aircraft at favorable rates or sell them on favorable terms, 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 and potentially 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.

Our financial condition may suffer if we experience unanticipated costs as a result of ongoing lawsuits, claims and investigations related to alleged pricing practices or other legal and regulatory matters.

In the United Kingdom, several groups of named claimants have brought suit against British Airways Plc (“British Airways”) in connection with alleged improper matters related to the use of fuel surcharges and other rate components for air cargo services and are seeking damages allegedly arising from that conduct. British Airways has filed claims in the lawsuit against Polar Air Cargo LLC (“Old Polar”), formerly Polar Air Cargo, Inc., a consolidated subsidiary, and other carriers for contribution should British Airways be found liable to claimants.

In the Netherlands, Stichting Cartel Compensation, successor in interest to claims of various shippers, has filed suit in the district court in Amsterdam against British Airways, KLM, Martinair, Air France, Lufthansa and Singapore Airlines seeking recovery for damages purportedly arising from the same pricing practices at issue in the proceeding described above. In response, British Airways, KLM, Martinair, Air France and Lufthansa filed third-party indemnification lawsuits against Old Polar and Polar seeking indemnification in the event the defendants are found to be liable in the main proceedings.

 

12


Table of Contents

If Old Polar, Polar or the Company were to incur an unfavorable outcome in the litigation described above or in similar litigation or a related investigation, 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 14 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, including our ACMI customers’ business, experiences seasonal variations.

Global trade flows are typically seasonal in nature, with peak activity occurring during the retail holiday season, which generally begins in September/October and lasts through most of December. Our ACMI and CMI contracts generally 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 and CMI 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 debt service, 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.

We may fail to realize the anticipated benefits of or fully integrate the acquisition of Southern Air, which could adversely affect our business, results of operations and financial condition, including the market price of our common stock.

Completing the integration of Southern Air with our other existing operations is subject to DOT approvals and authorizations, which may not be granted on a timely basis or at all. In addition, the Southern Air integration may expose us to operational challenges and risks, which could cause actual results to differ materially from anticipated results, including but not limited to: the diversion of management’s attention from our existing business; the assumption of unknown liabilities of the acquired business; the potential impairment of acquired identifiable intangible assets, including goodwill; the ability to effectively operate the 777 and 737 platforms or grow our business; the ability of the companies to maintain contracts that are important to our operations; the ability of the companies to fund and execute our business plans; our ability to attract, motivate and retain key employees; and our ability to attract and retain customers. If we do not receive the approvals and authorizations from the DOT on a timely basis or at all, or we otherwise fail to realize the anticipated benefits or fully integrate the acquisition of Southern Air, it could adversely affect our business, results of operations and financial condition, including the market price of our common stock.

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 from small businesses;

 

   

require disclosure of all cost and pricing data in connection with contract negotiations;

 

13


Table of Contents
   

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, add costs to 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.

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

The price of aircraft fuel is unpredictable and can be volatile. While we have been able to reduce our exposure to fuel risk significantly, we do bear some risk of fuel exposure for our Charter operations. Our ACMI and CMI 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.

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. 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 collective bargaining agreements covering pilots of Atlas and Southern Air and a collective bargaining agreement covering our Atlas and Polar flight dispatchers. This could result in higher labor costs and/or result in a work interruption or stoppage.

Pilots of Atlas and Southern Air and flight dispatchers of Atlas and Polar are represented by the IBT. We have a five-year CBA with our Atlas pilots, which became amendable in September 2016 and a four-year CBA with the Southern Air pilots, which became amendable in November 2016. We also have a five-year CBA with our Atlas and Polar flight dispatchers, which becomes amendable in November 2017. 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, which could negatively impact our ability to conduct business. We cannot provide assurance that disputes, including disputes with certified collective bargaining representatives of our employees, will not arise in the future or that any outcome of such disputes will result in an agreement on terms satisfactory to us.

Insurance coverage may become more expensive and difficult to obtain and may not be adequate to insure all of our risks. In addition, if our Dry Lease customers have inadequate insurance coverage or fail to fulfill their indemnification obligations, it could have a material adverse impact on our business, results of operations and financial condition.

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. Adverse events involving aircraft could result in increased insurance costs and could affect the price and availability of such coverage.

 

14


Table of Contents

We participate in an insurance pooling arrangement with DHL and its partners. This allows us to obtain aviation hull and liability, war-risk hull and cargo loss, crew, third-party liability and hull deductible coverage at reduced rates from the commercial insurance providers. If we are no longer included in this arrangement for any reason or if pool members have coverage incidents, we may 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 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, including coverage for weapons of mass destruction.

Lessees are required under our Dry Leases to indemnify us for, and insure against, liabilities arising out of the use and operation of the aircraft, including third-party claims for death or injury to persons and damage to property for which we may be deemed liable. Lessees are also required to maintain public liability, property damage and all-risk hull and war-risk hull insurance on the aircraft at agreed-upon levels. If our lessees’ insurance is not sufficient to cover all types of claims that may be asserted against us or if our lessees fail to fulfill their indemnification obligations, we would be required to pay any amounts in excess of our insurance coverage, which could have a material adverse impact on our business, results of operations and financial condition.

We rely on third parties to provide certain essential services. 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 quality 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 business interruption or 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. 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, business interruption 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 may be 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 available 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 information technology systems.

We are heavily and increasingly dependent on technology to operate our business. The information technology systems on which we rely could be disrupted due to various events, some of which are beyond our

 

15


Table of Contents

control, including natural disasters, power failures, terrorist attacks, equipment failures, software failures, computer viruses, security breaches and cyber attacks. We have taken numerous steps to implement business resiliency and cybersecurity 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 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, results of operations and financial condition.

Our ability to utilize net operating loss carryforwards for U.S. income tax purposes may be limited. In addition, we operate in multiple jurisdictions and may become subject to a wide range of income and other taxes.

As of December 31, 2016, we had $991.0 million of federal net operating loss carryforwards for U.S. income tax purposes, net of unrecognized tax benefits and valuation allowance, which will expire through 2036, if not utilized. Section 382 of the Internal Revenue Code (“Section 382”) imposes an annual limitation on the amount of a corporation’s U.S. federal taxable income that can be offset by net operating loss carryforwards (“NOLs”) if it experiences an “ownership change”, as defined by Section 382. We experienced ownership changes, as defined by Section 382, in 2004 and 2009. Accordingly, the use of our NOLs generated prior to these ownership changes is subject to an annual limitation. In addition, the acquisition of Southern Air constituted an ownership change for that entity and resulted in a limitation on the use of its NOLs. If certain changes in our ownership occur prospectively, there could be an additional annual limitation on the amount of utilizable NOLs, which could have a material adverse impact on our business, results of operations and financial condition.

We operate in multiple jurisdictions and may become subject to a wide range of income and other taxes. If our operations become subject to significant income and other taxes, this could have a material adverse impact on our business, results of operations and financial condition.

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 six and eight. We typically enter into long-term ACMI and CMI 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 or CMI customers may not renew their 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 because they decide to exit the dedicated cargo business or 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 notice to allow for remarketing of the aircraft.

Entering into ACMI and CMI contracts with new customers generally requires a long sales cycle, and as a result, if our contracts are not renewed, and there is a resulting delay in entering into new contracts, it could have a material adverse impact on our business, results of operations and financial condition.

Our agreements with several ACMI and CMI 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 and CMI customers depends substantially on our ability to successfully meet strict performance standards and deadlines

 

16


Table of Contents

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 agreements with Amazon and the BSA with DHL in the most extreme of circumstances, as described below.

Risks Related to the Agreements with Amazon

We may fail to realize the anticipated strategic and financial benefits of our relationship with Amazon.

Realization of the anticipated benefits from the agreements with Amazon is subject to a number of challenges and uncertainties, such as the timing of aircraft deliveries and unforeseen costs. If we fail to realize the expected benefits, it could adversely impact our business, results of operations and financial condition.

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

The agreements give Amazon the option to terminate in certain circumstances and upon the occurrence of certain events of default, including a change of control or our failure to meet certain performance requirements. In particular, Amazon will have the right to terminate without cause the agreement providing for CMI operations, with an effective termination date not earlier than January 1, 2018, upon providing us at least 180 days’ prior written notice of termination.

Upon termination, Amazon will generally, subject to certain exceptions, retain the warrants that have vested prior to the time of termination and, depending on the circumstances giving rise to the termination, may have the right to accelerated vesting of the remaining warrants upon a change of control of our company. Upon termination, Amazon or we may also have the right to receive a termination fee from the other party depending on the circumstances giving rise to the right of termination.

If Amazon exercises any of these termination rights, it could adversely impact our business, results of operations and financial condition.

Our future earnings and earnings per share, as reported under generally accepted accounting principles, could be adversely impacted by the warrants granted to Amazon.

The warrants granted to Amazon increase the number of diluted shares reported, which has an effect on our fully diluted earnings per share. Further, the warrants are presented as liabilities in our consolidated balance sheets and are subject to fair value measurement adjustments during the periods that they are outstanding. Accordingly, future fluctuations in the fair value of the warrants could adversely impact our results of operations.

If Amazon exercises its right to acquire shares of our common stock pursuant to the warrants, it will dilute the ownership interests of our then-existing stockholders and could adversely affect the market price of our common stock.

If Amazon exercises its right to acquire shares of our common stock pursuant to the warrants, it will dilute the ownership interests of our then-existing stockholders and reduce our earnings per share. In addition, any sales in the public market of any common stock issuable upon the exercise of the warrants by Amazon could adversely affect prevailing market prices of our common stock.

If Amazon exercises its right to acquire shares of our common stock pursuant to the warrants, Amazon may become a significant stockholder and may be entitled to appoint a director to our board of directors.

The warrants issued by us to Amazon grant Amazon the right to purchase up to 30%, in the aggregate, of our common stock on a post-issuance basis. If the warrants granted to Amazon are exercised, Amazon may

 

17


Table of Contents

become a significant stockholder of our company. We have entered into a stockholders agreement with Amazon, pursuant to which Amazon’s ability to vote in its discretion will generally be capped at 14.9% with the remainder to be voted in accordance with our board of directors’ recommendation. In addition, under the stockholders agreement, Amazon will be entitled to appoint one director to our board of directors when Amazon owns 10% or more of our common stock. Until such time, Amazon will be entitled to designate a non-voting observer to our board of directors.

Risk 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 twelfth or fifteenth anniversary of the agreement’s commencement date, which was October 27, 2008. 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, it could adversely impact our business, results of operations and financial condition.

Risks Related to Our Charter Business

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

As a percentage of our total operating revenue, revenue derived from the AMC was approximately 23.7% in 2016, 23.0% in 2015 and 18.7% in 2014. Historically, the revenues derived from expansion flights for the AMC significantly exceeded the value of the fixed flight component of our AMC contract.

Revenues from the AMC are typically derived from one-year contracts. Our AMC contract generally runs from October 1 through September 30 of the following year. Changes in national and international political priorities can significantly affect the volume of business from the AMC. Any decrease in U.S. military activity could reduce revenue from the AMC. In addition, our share of the total business from the AMC 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 as a percentage of flights flown and, as a result of AMC demand volatility, it has become more difficult to comply with those requirements. To the extent that we fail to meet those performance requirements or if we fail to pass biannual AMC audits, revenues from our business with the AMC could decline through a suspension or termination of our AMC contract. Our revenues 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 Charter revenue from commercial customers for trips related to one-way AMC missions. We expect revenues and profitability from our business with the AMC to continue to remain volatile as the U.S. military continues to move troops and cargo to and from areas of conflict around the world. If we are unable to effectively deploy any resultant capacity during periods of reduced flying, it could have a material adverse effect on our business, results of operations and financial condition.

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

Each year, the AMC allocates its air capacity requirements to different teams of participating airlines based on a mobilization value point system that is determined by the amount and types of aircraft that each team of

 

18


Table of Contents

airlines pledges to the program. We participate in the program through a teaming arrangement with other airlines, led by FedEx. Our team is one of two major teams participating in the 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 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 by us or other members of our team; or

 

   

increased participation of other carriers on other teams.

Any changes 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.

Risk Related to Our Dry Leasing Business

Any default by our Dry Lease customers, including (but not limited to) failure to make timely payments, failure to maintain insurance or failure to properly maintain our aircraft, could adversely affect our financial results

Our Dry Leasing business depends on the ability of our customers to satisfy their obligations under our leases, which may be affected by factors outside our control, including but not limited to: supply and demand of aircraft; competition; economic conditions; the price and availability of aircraft fuel; government regulations; the availability and cost of financing; failure to maintain insurance; and their overall financial condition and cash flow. Any default by our customers can result in reduced cash flow, termination of the lease and repossession of the related aircraft, any of which could have a material adverse effect on our business, results of operations and financial condition.

Dry Leasing customers are primarily responsible for maintaining our aircraft. Although we require many of our customers to pay us supplemental maintenance revenue, failure of a customer to perform required maintenance during the lease term could result in higher maintenance costs, a decrease in the value of our aircraft, the inability to re-lease aircraft at favorable rates, if at all, or impairment charges, which 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 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 in which we participate is 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 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. 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 a material 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.

 

19


Table of Contents

We are subject to extensive governmental regulations and 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 and our customers’ 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 and our customers’ 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, maintenance 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, amend or interpret accounting standards, tax laws, regulations or treaties 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.

Foreign governments also place temporal and other restrictions on the ability of their own airlines to use aircraft operated by other airlines. For example, the European Aviation Safety Agency (“EASA”) requires that the aircraft capacity secured from and operated by 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.

To address climate change, governments continue to pursue various means to reduce aviation-related greenhouse gas emissions. Compliance with these or other measures that are ultimately adopted could result in substantial costs for us. For example, in October 2013, the ICAO reached a nonbinding agreement to develop global market-based measures to assist in achieving carbon-neutral growth from 2020 onward. In October 2016, the ICAO approved the CORSIA, which is designed to offset any annual increases in total carbon emissions from international civil aviation above a baseline level determined by the average of 2019 and 2020 emissions. Although various details regarding the implementation of CORSIA still need to be finalized, a pilot phase will run from 2021 to 2023 and, starting in 2019, the airlines of participating countries will begin monitoring and reporting fuel burn during international flights. As a result, for each year starting in 2021, covered airlines may need to purchase allowances to offset their assigned share of emissions overages.

Additionally, the EU continues to pursue a parallel track to address climate change through the EU ETS. Following the end of every year, to the extent the ETS applies, each airline must tender the number of allowances corresponding to carbon emissions generated by its covered 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 additional allowances from other airlines in the open market. In recognition of ICAO’s recent adoption of CORSIA, the ETS was suspended with respect to international aviation

 

20


Table of Contents

through December 31, 2016; however, measures continue to remain applicable to intra-EU aviation. Although certain EU political leaders have stated that the EU is likely to extend this suspension beyond December 31, 2016, we cannot be certain whether or for how long the EU will do so.

In the U.S., 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 yet been signed into law. On August 15, 2016, the EPA issued a final rule finding that greenhouse gas emissions from aircraft cause or contribute to air pollution that may reasonably be anticipated to endanger public health and welfare. This finding could lead to EPA regulation of greenhouse gas emissions from aircraft.

It is possible that these or similar climate change measures 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 if FAA flight and duty time rules are expanded to apply to all-cargo operations.

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 took effect on January 14, 2014 and applies to our passenger operations but not to our all-cargo operations. Should the FAA decide either on its own initiative or pursuant to Congressional directive to change the final rule to include all-cargo operations, it could result in a material increase in our crew costs. It could also have a material adverse 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.

RISKS RELATED TO OUR LEASE AND DEBT OBLIGATIONS

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

As of December 31, 2016, we had total debt obligations of approximately $1.9 billion and total aircraft operating leases and other lease obligations of $0.9 billion. These obligations have increased and are expected to increase further as we enter into financing arrangements for 767-300 aircraft purchases and passenger-to-freighter conversions, GEnx engine upgrades and other capital requirements. We cannot provide assurance that we will be able to obtain such financing arrangements or on terms attractive to us. Our outstanding financial obligations could have negative consequences, including:

 

   

making it more difficult to satisfy 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 flows to fund working capital and other general corporate requirements;

 

21


Table of Contents
   

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

 

   

limiting our flexibility in planning for, or reacting to, changes in our 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:

 

   

borrow under certain financing arrangements;

 

   

consolidate or merge with or into other companies or sell substantially all 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, either of which could have a material adverse effect on our business, results of operations and financial condition.

We may not have the ability to raise the funds necessary to settle conversions of our convertible notes or to repurchase the convertible notes upon either a fundamental change or a make-whole fundamental change, and our future debt may contain limitations on our ability to pay cash upon conversion or repurchase of the convertible notes.

We issued convertible senior notes in June 2015 (the “Convertible Notes”), which contain conditional conversion features that allow the holders of the Convertible Notes the option to convert if certain trading conditions are met or upon the occurrence of specified corporate events. In the event a conditional conversion feature of the Convertible Notes is triggered, holders of Convertible Notes will be entitled to convert the Convertible Notes at any time during specified periods at their option. If one or more holders elect to convert their Convertible Notes, unless we elect to satisfy our conversion obligation by delivering solely shares of our common stock, we would be required to settle a portion or all of our conversion obligation through the payment of cash, which could adversely affect our liquidity. In addition, even if holders do not elect to convert their Convertible Notes, we could be required under applicable accounting rules to reclassify all or a portion of the outstanding principal of the Convertible Notes as current on the balance sheet instead of as noncurrent, which could result in a material reduction of our net working capital.

The holders of the Convertible Notes also may require us to repurchase their Convertible Notes upon the occurrence of a fundamental change (as defined in the indenture governing the Convertible Notes) at a price equal to 100% of the principal amount of the Convertible Notes to be repurchased, plus accrued and unpaid interest, if any. However, we may not have enough available cash to fund these obligations or be able to obtain financing on favorable terms, or at all, at the time we are required to make repurchases of Convertible Notes surrendered or Convertible Notes being converted. Our failure to repurchase Convertible Notes at a time when

 

22


Table of Contents

the repurchase is required by the indenture or to pay any cash payable on future conversions of the Convertible Notes as required by the indenture would constitute a default under the indenture, which could result in acceleration of the principal amount of the notes and additional funding obligations by us.

In addition, if a make-whole fundamental change (as defined in the indenture governing the Convertible Notes), including specified corporate transactions, occurs prior to the maturity date, under certain circumstances, it would increase the conversion rate. The increase in the conversion rate would be determined based on the date on which the specified corporate transaction becomes effective and the price paid (or deemed to be paid) per share of our common stock in such transaction, but in no event would increase to greater than 17.8922 shares of common stock per $1,000 of principal, subject to adjustment in the same manner as the conversion rate. The increase in the conversion rate for Convertible Notes converted in connection with a make-whole fundamental change may result in us having to pay out additional cash in respect of the Convertible Notes upon conversion, or result in additional dilution to our shareholders if the conversion is settled, at our election, in shares of our common stock.

The Convertible Note hedge and warrant transactions may affect the value of our common stock.

In connection with the Convertible Notes offering, we entered into Convertible Note hedge transactions with option counterparties. The Convertible Note hedge transactions are expected generally to reduce the potential dilution to our common stock upon any conversion of notes and/or offset any cash payments we are required to make in excess of the principal amount of converted notes, as the case may be. We also entered into warrant transactions with the option counterparties. However, the warrant transactions could separately have a dilutive effect on our earnings per share to the extent that the market price per share of our common stock exceeds the applicable strike price of the warrants. Accordingly, when the Convertible Note hedge transactions and the warrant transactions are taken together, the extent to which the Convertible Note hedge transactions reduce the potential dilution to our common stock (or the cash payments in excess of the principal amount of the notes) upon conversion of the notes is effectively capped by the warrant transaction at the strike price of the warrant.

The option counterparties or their respective affiliates may modify their hedge positions by entering into or unwinding various hedging transactions, including (without limitation) derivatives, with respect to our common stock and/or purchasing or selling our common stock or other securities of ours in secondary market transactions prior to the maturity of the notes (and are likely to do so during any observation period related to a conversion of notes). This activity could cause or avoid an increase or a decrease in the market price of our common stock.

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 voting rights of 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.

 

23


Table of Contents

Provisions in our restated certificate of incorporation and by-laws and Delaware law, and our issuance of warrants to Amazon, 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. In addition, the vesting of warrants issued by us to Amazon will generally, subject to certain exceptions, be accelerated upon a change of control of our company, which may discourage attempts to acquire our company.

Our common stock share price is 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 airfreight 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.

 

24


Table of Contents
ITEM 2. PROPERTIES

Aircraft

The following tables provide information about AAWW’s aircraft and customer-provided aircraft as of December 31, 2016:

AAWW Aircraft

The following table summarizes AAWW’s aircraft as of December 31, 2016:

 

Aircraft Type

  

Configuration

   Owned*    Leased**    Total      Average
Age Years
 

ACMI and Charter Segments

     

747-8F

   Freighter    10    —        10        4.1  

747-400

   Freighter    8    13      21        16.9  

747-400BCF

   Converted Freighter    1    1      2        24.7  

747-400

   Passenger    2    —        2        25.7  

767-300ER

   Passenger    4    1      5        22.7  
     

 

  

 

  

 

 

    

 

 

 

Total

      25    15      40        15.3  

Dry Leasing Segment

           

777-200LRF

   Freighter    6    —        6        6.1  

767-300

   Converted Freighter***    12    —        12        21.0  

757-200

   Freighter    1    —        1        27.4  

737-800

   Passenger    1    —        1        8.9  

737-300

   Freighter    1    —        1        24.1  
     

 

  

 

  

 

 

    

 

 

 

Total

      21    —        21        16.6  
     

 

  

 

  

 

 

    

 

 

 

Total Fleet

      46    15      61        15.7  
     

 

  

 

  

 

 

    

 

 

 

 

* See Note 9 to our Financial Statements for a description of our financing facilities.
** See Note 10 to our Financial Statements for a description of our lease obligations.
*** Some aircraft are undergoing passenger-to-freighter conversion as of December 31, 2016.

Lease expirations for our operating leased aircraft included in the above tables range from July 2017 to February 2025.

Customer-provided Aircraft for CMI Service

The following table summarizes customer-provided aircraft as of December 31, 2016:

 

Aircraft Type

   Configuration   

Provided by

   Total  

777-200

   Freighter    DHL      5  

747-400

   Freighter    NCA*      1  

747-400

   Dreamlifter    Boeing**      4  

747-400

   Passenger    Sonangol***      2  

767-300

   Freighter    DHL      2  

767-200

   Freighter    DHL      9  

767-200

   Passenger    MLW****      1  

737-400

   Freighter    DHL      5  
        

 

 

 

Total

           29  
        

 

 

 

 

25


Table of Contents

 

* Aircraft owned by Nippon Cargo Airlines Co., Ltd. (“NCA”)
** Aircraft owned by The Boeing Company (“Boeing”)
*** Aircraft owned by the Sonangol Group, the multinational energy company of Angola.
**** Aircraft owned by MLW Air, LLC (“MLW Air”)

Ground Facilities

Our principal office is located in Purchase, New York, where we lease approximately 120,000 square feet under a long-term lease, for which the current term expires in 2022 with certain renewal options. 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. We also lease approximately 37,000 square feet of office space in Florence, Kentucky under a long-term lease, for which the current term expires in 2021. This office includes operational support functions, primarily for Southern Air, including flight and crew operations, maintenance and engineering, and material management. In addition, we lease a variety of smaller offices and ramp space at various airport and regional locations generally on a short-term basis.

 

ITEM 3. LEGAL PROCEEDINGS

The information required in response to this Item is set forth in Note 14 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.

 

26


Table of Contents

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  
2016 Quarter Ended      

December 31

   $ 53.45      $ 41.15  

September 30

   $ 43.56      $ 34.62  

June 30

   $ 48.66      $ 38.32  

March 31

   $ 42.96      $ 33.37  
2015 Quarter Ended      

December 31

   $ 43.77      $ 34.98  

September 30

   $ 54.88      $ 34.22  

June 30

   $ 59.42      $ 42.26  

March 31

   $ 49.97      $ 43.02  

The last reported sale price of our common stock on The NASDAQ National Market on February 10, 2017 was $51.90 per share. As of February 10, 2017, there were approximately 25.1 million shares of our common stock issued and outstanding, and 45 holders of record of our common stock.

See Note 17 to our Financial Statements for a discussion of our stock repurchase program.

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, 2016.

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.

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.

 

27


Table of Contents

Performance Graph

The following graph compares the performance of AAWW common stock to the Russell 2000 Index and the Dow Jones Transportation Average for the period beginning December 31, 2011 and ending on December 31, 2016. The comparison assumes $100 invested in each of our common stock, the Russell 2000 Index and the Dow Jones Transportation Average and reinvestment of all dividends.

 

 

LOGO

Total Return between 12/31/11 and 12/31/16

 

  Cumulative Return    12/31/11    12/31/12    12/31/13    12/31/14    12/31/15    12/31/16

  AAWW

   $100.00    $115.33    $107.08    $128.29    $107.57    $135.70

  Russell 2000 Index

   $100.00    $114.63    $157.05    $162.60    $153.31    $183.17

  Dow Jones Transportation Average

   $100.00    $105.72    $147.43    $182.08    $149.57    $180.17

 

ITEM 6. SELECTED FINANCIAL DATA

The selected statements of operations data for the years ended December 31, 2016, 2015 and 2014 and the selected balance sheet data as of December 31, 2016 and 2015 have been derived from our audited Financial Statements included elsewhere in this Report. The selected balance sheet data as of December 31, 2014, 2013 and 2012, and selected statements of operations data for the years ended December 31, 2013 and 2012 have been derived from our audited Financial Statements not included in this Report.

 

28


Table of Contents

In the following table, all amounts are in thousands, except for per share data.

 

     2016     2015      2014     2013      2012  

Statement of Operations Data:

            

Total operating revenues

   $ 1,839,627     $ 1,822,659      $ 1,799,198     $ 1,656,900      $ 1,646,032  
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total operating expenses

     1,671,316       1,699,154        1,623,226       1,470,110        1,419,541  
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Operating income

     168,311       123,505        175,972       186,790        226,491  
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Income from continuing operations, net of taxes

     42,625       7,286        102,227       93,989        129,714  

Loss from discontinued operations, net of taxes (a)

     (1,109                          
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Net income

     41,516       7,286        102,227       93,989        129,714  

Less: Net income (loss) attributable to noncontrolling interests

                  (4,530     152        (213
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Net income attributable to Common Stockholders

   $ 41,516     $ 7,286      $ 106,757     $ 93,837      $ 129,927  
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Earnings per share from continuing operations:

            

Basic

   $ 1.72     $ 0.29      $ 4.08     $ 3.68      $ 4.91  
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Diluted

   $ 1.70     $ 0.29      $ 4.07     $ 3.67      $ 4.89  
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Loss per share from discontinued operations:

            

Basic

   $ (0.04   $      $     $      $  
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Diluted

   $ (0.04   $      $     $      $  
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Earnings per share:

            

Basic

   $ 1.67     $ 0.29      $ 4.08     $ 3.68      $ 4.91  
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Diluted

   $ 1.65     $ 0.29      $ 4.07     $ 3.67      $ 4.89  
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Balance Sheet Data:

            

Total assets

   $ 4,247,379     $ 4,164,403      $ 4,007,277     $ 3,617,371      $ 3,086,239  

Long-term debt (less current portion)

   $ 1,666,663     $ 1,739,496      $ 1,736,747     $ 1,499,607      $ 1,115,274  

Total equity

   $ 1,517,338     $ 1,454,183      $ 1,417,795     $ 1,322,125      $ 1,288,104  

 

(a) See Note 4 to our Financial Statements for the presentation of Florida West International Airways, Inc. as a discontinued operation.

 

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. We operate the world’s largest fleet of 747 freighters and provide customers a broad array of 747, 777, 767, 757 and 737 aircraft

 

29


Table of Contents

for domestic, regional and international cargo and passenger applications. We provide unique value to our customers by giving them access to highly reliable new production freighters that deliver the lowest unit cost in the marketplace combined with outsourced aircraft operating services that we believe lead the industry in terms of quality and global scale. Our customers include express delivery providers, e-commerce retailers, airlines, freight forwarders, the U.S. military and charter brokers. We provide global services with operations in Africa, Asia, Australia, Europe, the Middle East, North America and South America.

We believe that the following competitive strengths will allow us to capitalize on opportunities that exist in the global airfreight industry:

Market leader with leading-edge technology and differentiated, value-creating solutions

The 747-8F and 777-200LRF aircraft are two of the most efficient long-haul wide-body commercial freighters available and we are currently the only operator offering these aircraft under ACMI and CMI agreements. Our operating model deploys our aircraft to drive maximum utilization and value from our fleet. The scale of our fleet enables us to have aircraft available globally to respond to our customers’ needs, both on a planned and ad hoc basis. We believe this provides us with a commercial advantage over our competitors that operate smaller and less flexible fleets.

Our Dry Leasing business is primarily focused on a portfolio of six 777-200LRF aircraft and our growing fleet of 767-300 freighter aircraft for regional and domestic applications. These aircraft are dry leased to customers on a long-term basis, which further diversifies our business mix and enhances our predictable, long-term revenue and earnings streams.

Stable base of contractual revenue and reduced operational risk

Our focus on providing long-term contracted aircraft and operating solutions to customers stabilizes our revenues and reduces our operational risk. ACMI and CMI contracts with customers generally range from two to seven years, although some contracts have shorter or longer durations. Dry Leasing contracts with customers generally range from five to twelve years. Under ACMI, CMI and Dry Leasing, our customers assume fuel, demand and price risk resulting in reduced operational risk for AAWW. ACMI, CMI and Dry Leasing contracts typically provide us with a guaranteed minimum level of revenue and target level of profitability.

Focus on asset optimization

By managing the largest fleet of outsourced freighter aircraft, we achieve significant economies of scale in areas such as aircraft maintenance, crew efficiency, crew training, inventory management and purchasing.

Our mix of aircraft is closely aligned with our customer needs. By providing the broadest array of 747, 777, 767, 757 and 737 aircraft for domestic, regional and international applications, we believe that we are well-suited to meet the current and anticipated requirements of our customers.

We continually evaluate our fleet to ensure that we offer the most efficient and effective mix of aircraft to meet our customers’ needs. Our service model is unique in that we offer a portfolio of operating solutions that complement our freighter aircraft businesses. We believe this allows us to improve the returns we generate from our asset base by allowing us to flexibly redeploy aircraft to meet changing market conditions, ensuring the maximum utilization of our fleet. Our Charter services complement our ACMI services by allowing us to increase aircraft utilization during open time and to react to changes in demand and Yield in these segments. We have employees situated around the globe who closely monitor demand for commercial charter services in each region, enabling us to redeploy available aircraft quickly. We also endeavor to manage our portfolio to stagger contract terms, which mitigates our remarketing risks and aircraft down time.

 

30


Table of Contents

Long-term strategic customer relationships and unique innovative service offerings

We combine the global scope and scale of our efficient aircraft fleet with high-quality, cost-effective operations and premium customer service to provide unique, fully integrated and reliable solutions for our customers. We believe this approach results in customers that are motivated to seek long-term relationships with us. This has historically allowed us to command higher prices than our competitors in several key areas. These long-term relationships help us to build resilience into our business model.

Our customers have access to our innovative solutions, such as inter-operable crews, flight scheduling, fuel-efficiency planning, and maintenance spare coverage, which, we believe, set us apart from other participants in the outsourced aircraft and aviation operating services market. Furthermore, we have access to valuable operating rights to restricted markets such 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. Atlas, Polar and Southern Air all have successfully completed the International Air Transport Association’s Operational Safety Audit (IOSA), a globally recognized safety and quality standard.

We provide outsourced aircraft and aviation services to some of the world’s premier express delivery providers, e-commerce retailers, airlines and freight forwarders. We will take advantage of opportunities to maintain and expand our relationships with our existing customers, while seeking new customers and new geographic markets.

During 2016, we significantly expanded our CMI and Dry Leasing services with long-term contracts with DHL and Amazon. In April 2016, we expanded our relationship with DHL through the acquisition of Southern Air which provided us with immediate entry into the 777 and 737 aircraft operating platforms, with ten aircraft and the potential for developing additional business with existing and new customers. In May 2016, we entered into agreements with Amazon, which involve, among other things, the lease and operation of 20 Boeing 767-300 freighter aircraft. The first two aircraft were placed in service in August 2016 and February 2017, while the remainder are expected to be placed in service by the end of 2018.

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, Cathay Pacific, Continental Airlines, ICF International, Seabury Group LLC, ASTAR Air Cargo and KLM Cargo, as well as the United States Army, Navy, Air Force and Federal Air Marshal Service. Our management team is led by William J. Flynn, who has over 40 years of experience in freight and transportation and has held senior management positions with several transportation companies. Prior to joining AAWW ten years ago, Mr. Flynn was President and CEO of GeoLogistics, a global transportation and logistics enterprise.

 

31


Table of Contents

Business Strategy

Our strategy includes the following:

Focus on securing long-term customer contracts

We will continue to focus on securing long-term contracts with 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.

Aggressively manage our fleet with a focus on leading-edge aircraft

We continue to actively manage our fleet of leading-edge wide-body freighter aircraft to meet customer demands. Our 747-8F and 777-200LRF freighter aircraft are primarily utilized in our ACMI business, while our 747-400s are utilized in our ACMI and Charter business. We aggressively manage our fleet to ensure that we provide our customers with the most efficient aircraft to meet their needs.

Our Dry Leasing business is primarily focused on a portfolio of six modern, efficient 777-200LRF aircraft and our growing fleet of 767-300 freighter aircraft for regional and domestic applications. We will continue to explore opportunities to invest in additional aircraft, such as the 20 767-300 freighter aircraft committed to Amazon.

Drive significant and ongoing productivity improvements

We continue to enhance our organization through a cost saving and productivity enhancing initiative called “Continuous Improvement.” We created a separate department to drive the process and to involve all areas of the organization in the effort to reexamine, redesign and improve the way we do business.

Selectively pursue and evaluate future acquisitions and alliances

From time to time, we explore business combinations, such as our acquisition of Southern Air, and alliances with e-commerce providers, such as our agreements with Amazon, other cargo airlines, services providers, dry leasing and other companies to enhance our competitive position, geographic reach and service portfolio.

Appropriately managing capital allocation and returning capital to shareholders

Our commitment to creating, enhancing and returning value to our shareholders reflects a disciplined and balanced capital allocation strategy. Our focus is on maintaining a strong balance sheet, investing in modern efficient assets, and returning capital to shareholders.

Business Developments

Our ACMI results for 2016, compared with 2015, were impacted by the following events:

 

   

In March 2015, we began ACMI flying one additional 747-8F aircraft for DHL.

 

   

In January, February, March and April of 2015, we began CMI flying four additional 767-200 freighters owned by DHL in its North American network.

 

   

In July 2015, we began ACMI flying one additional 747-400F aircraft for DHL, increasing the number of 747 freighter aircraft in ACMI service for DHL to thirteen.

 

   

In December 2015 and February 2016, we began CMI flying for DHL two 767-300 freighter aircraft, Dry Leased from Titan, in DHL’s North American network, increasing the number of freighter aircraft in CMI service for DHL to twelve.

 

32


Table of Contents
   

In April 2016, we acquired Southern Air, which currently operates five 777-200LRF and five 737-400F aircraft under CMI agreements for DHL.

 

   

In August 2016, we began CMI flying for Amazon the first of 20 Boeing 767-300 freighter aircraft Dry Leased from Titan. In February 2017, we placed the second 767-300 freighter aircraft into service. The remaining aircraft are expected to be placed in service by the end of 2018.

In November 2016, we entered into an agreement with Nippon Cargo Airlines to operate a 747-400 freighter aircraft on its transpacific routes. We began flying during the first quarter of 2017.

In August 2016, we entered into a long-term ACMI agreement with FedEx to provide five 747-400 freighter aircraft for peak flying seasons beginning in 2017.

In February 2017, we entered into an agreement with Asiana Cargo to provide a 747-400 freighter aircraft for its transpacific routes. We began flying during the first quarter of 2017.

Charter results for 2016 were impacted, compared with 2015, when Yields benefited from the U.S. West Coast port disruption. This impact was partially offset by an increase in Block Hours during 2016, primarily reflecting increased cargo and passenger demand from the AMC.

In December 2015 and February 2016, we began Dry Leasing two 767-300 converted freighter aircraft to DHL on a long-term basis. In March 2016, we also Dry Leased a 737-800 passenger aircraft on a long-term basis to a customer following its scheduled return. In August 2016 and February 2017, we began Dry Leasing two 767-300 converted freighter aircraft to Amazon on a long-term basis.

 

33


Table of Contents

Results of Operations

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

Years Ended December 31, 2016 and 2015

Operating Statistics

The following tables compare our Segment Operating Fleet (average aircraft equivalents during the period) and total Block Hours operated:

 

     2016      2015      Inc/(Dec)  

Segment Operating Fleet

        

ACMI*

        

747-8F Cargo

     8.1        8.9        (0.8

747-400 Cargo

     13.1        12.6        0.5  

747-400 Dreamlifter

     2.8        3.0        (0.2

777-200 Cargo

     3.7               3.7  

767-300 Cargo

     4.3        2.1        2.2  

767-200 Cargo

     9.0        8.3        0.7  

737-400 Cargo

     3.7               3.7  

747-400 Passenger

     1.0        1.2        (0.2

767-200 Passenger

     1.0        1.0         
  

 

 

    

 

 

    

 

 

 

Total

     46.7        37.1        9.6  

Charter

        

747-8F Cargo

     1.9        0.2        1.7  

747-400 Cargo

     9.6        9.4        0.2  

747-400 Passenger

     2.0        1.8        0.2  

767-300 Passenger

     3.6        2.9        0.7  
  

 

 

    

 

 

    

 

 

 

Total

     17.1        14.3        2.8  

Dry Leasing

        

777-200 Cargo

     6.0        6.0         

767-300 Cargo

     2.3               2.3  

757-200 Cargo

     1.0        1.0         

737-300 Cargo

     1.0        1.0         

737-800 Passenger

     1.0        1.2        (0.2
  

 

 

    

 

 

    

 

 

 

Total

     11.3        9.2        2.1  

Less: Aircraft Dry Leased to CMI customers

     (2.3             (2.3
  

 

 

    

 

 

    

 

 

 

Total Operating Average Aircraft Equivalents

     72.8        60.6        12.2  
  

 

 

    

 

 

    

 

 

 

Out-of-service

            0.4        (0.4

 

* ACMI average fleet excludes spare aircraft provided by CMI customers.

 

     2016      2015      Inc/(Dec)      % Change  

Block Hours

           

Total Block Hours**

     210,444        178,060        32,384        18.2

 

** Includes ACMI, Charter and other Block Hours.

 

34


Table of Contents

Operating Revenue

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

 

     2016      2015      Inc/(Dec)      % Change  

Operating Revenue

           

ACMI

   $ 834,997      $ 791,442      $ 43,555        5.5

Charter

     881,991        908,753        (26,762      (2.9 )% 

Dry Leasing

     105,795        107,218        (1,423      (1.3 )% 

Customer incentive asset amortization

     (537             (537      NM  

Other

     17,381        15,246        2,135        14.0
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Operating Revenue

   $ 1,839,627      $ 1,822,659      $ 16,968        0.9
  

 

 

    

 

 

    

 

 

    

 

 

 

NM represents year-over-year changes that are not meaningful.

ACMI

 

     2016      2015      Inc/(Dec)      % Change  

ACMI Block Hours

     151,919        126,206        25,713        20.4

ACMI Revenue Per Block Hour

   $ 5,496      $ 6,271      $ (775      (12.4 )% 

ACMI revenue increased $43.6 million, or 5.5%, primarily due to increased flying, partially offset by reduced Revenue per Block Hour. The increase in Block Hours reflects the impact from the Southern Air Acquisition and increased 767 CMI flying, partially offset by the temporary redeployment of 747-8F aircraft to the Charter segment. The decrease in Revenue per Block Hour primarily reflects the 777-200 and 737-400 CMI flying from the Southern Air Acquisition, increased 767 CMI flying and the temporary redeployment of 747-8F aircraft to Charter in 2016.

Charter

 

     2016      2015      Inc/(Dec)      % Change  

Charter Block Hours:

           

Cargo

     40,376        35,463        4,913        13.9

Passenger

     16,403        14,776        1,627        11.0
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     56,779        50,239        6,540        13.0
  

 

 

    

 

 

    

 

 

    

 

 

 

Charter Revenue Per Block Hour:

           

Cargo

   $ 14,861      $ 17,655      $ (2,794      (15.8 )% 

Passenger

   $ 17,191      $ 19,130      $ (1,939      (10.1 )% 

Total

   $ 15,534      $ 18,089      $ (2,555      (14.1 )% 

Charter revenue decreased $26.8 million, or 2.9%, primarily due to a decrease in Revenue per Block Hour, partially offset by an increase in Block Hours. The decrease in Revenue per Block Hour was primarily driven by a reduction in fuel prices in 2016 and the impact of higher rates resulting from the U.S. West Coast port disruption in 2015, partially offset by the temporary redeployment of 747-8F aircraft from the ACMI segment. The increase in Charter Block Hours was primarily driven by an increase in cargo and passenger demand from the AMC.

Dry Leasing

Dry Leasing revenue decreased $1.4 million, or 1.3%, primarily due to lower revenue from maintenance payments received in 2016 related to the scheduled return of aircraft. Revenue from maintenance payments is based on the maintenance condition of the aircraft at the end of the lease. Partially offsetting this decrease was revenue from the placement of two 767-300 converted freighter aircraft with DHL in December 2015 and February 2016, and one 767-300 converted freighter aircraft with Amazon in August 2016.

 

35


Table of Contents

Operating Expenses

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

 

     2016      2015      Inc/(Dec)      % Change  

Operating Expenses

           

Salaries, wages and benefits

   $ 424,332      $ 351,372      $ 72,960        20.8

Aircraft fuel

     275,113        333,390        (58,277      (17.5 )% 

Maintenance, materials and repairs

     206,106        202,337        3,769        1.9

Depreciation and amortization

     148,876        128,740        20,136        15.6

Aircraft rent

     146,110        145,031        1,079        0.7

Travel

     127,748        102,755        24,993        24.3

Passenger and ground handling services

     89,657        83,185        6,472        7.8

Navigation fees, landing fees and other rent

     78,441        99,345        (20,904      (21.0 )% 

Loss (gain) on disposal of aircraft

     (11      1,538        (1,549      NM  

Special charge

     10,140        17,388        (7,248      (41.7 )% 

Transaction-related expenses

     22,071               22,071        NM  

Other

     142,733        234,073        (91,340      (39.0 )% 
  

 

 

    

 

 

       

Total Operating Expenses

   $ 1,671,316      $ 1,699,154        
  

 

 

    

 

 

       

Salaries, wages and benefits increased $73.0 million, or 20.8%, primarily driven by $23.5 million of expense for a change in control, as defined under certain benefit plans, related to the Amazon transaction (see Note 7 to our Financial Statements), the impact of the Southern Air Acquisition, increased flying and increased crewmember costs related to Amazon and other fleet growth initiatives.

Aircraft fuel decreased $58.3 million, or 17.5%, primarily due to fuel price decreases, partially offset by increased fuel consumption. Fuel consumption increased primarily reflecting the increase in Charter 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. Average fuel cost per gallon and fuel consumption for 2016 and 2015 were:

 

     2016      2015      Inc/(Dec)      % Change  

Average fuel cost per gallon

   $ 1.68      $ 2.27      $ (0.59      (26.0 )% 

Fuel gallons consumed (000s)

     163,862        147,081        16,781        11.4

Maintenance, materials and repairs increased by $3.8 million, or 1.9%, primarily reflecting increases of $7.1 million for 777-200 aircraft, $5.1 million for 767 aircraft and $2.3 million for 747-8F aircraft, partially offset by a decrease of $12.6 million for 747-400 aircraft. Heavy Maintenance expense on 747-400 aircraft decreased $10.2 million primarily due to a decrease in the number of engine overhauls, partially offset by an increase in the number of C Checks. Heavy Maintenance expense on 747-8F aircraft decreased $5.9 million primarily due to a decrease in unscheduled engine repairs. Line Maintenance increased by $7.7 million on 747-8F aircraft, $5.0 million on 767 aircraft and $4.1 million on 747-400 aircraft due to increased flying and additional repairs performed. Line maintenance also increased $4.6 million on 777-200 aircraft related to the Southern Air Acquisition. Non-heavy Maintenance on 747-400 aircraft decreased $6.4 million as a result of fewer events. Heavy airframe maintenance checks and engine overhauls impacting Maintenance, materials and repairs for 2016 and 2015 were:

 

Heavy Maintenance Events

   2016      2015      Inc/(Dec)  

747-8F C Checks

     4        4         

747-400 C Checks

     9        5        4  

747-400 D Checks

     4        4         

767 C Checks

     1        1         

CF6-80 engine overhauls

     3        10        (7

 

36


Table of Contents

Depreciation and amortization increased $20.1 million, or 15.6%, primarily due to additional aircraft operating in 2016.

Travel increased $25.0 million, or 24.3%, primarily due to the impact of the Southern Air Acquisition, increased flying and higher rates related to crewmember travel.

Passenger and ground handling services increased $6.5 million, or 7.8%, primarily due to increased flying.

Navigation fees, landing fees and other rent decreased $20.9 million, or 21.0%, primarily due to a reduction in purchased capacity from the subcontracting of certain Charter flights.

Special charge in 2016 represents a $10.1 million impairment loss on engines held for sale (see Note 5 to our Financial Statements). We may sell additional flight equipment, which could result in additional charges in future periods. Special charge in 2015 resulted from an $8.3 million impairment loss on engines held for sale and a $7.7 million charge for the early termination of high-rate operating leases for two engines.

Transaction-related expenses in 2016 relate to the Southern Air Acquisition and Amazon transaction, which primarily include: certain compensation costs, including employee termination benefits; professional fees; and integration costs (see Notes 4 and 7 to our Financial Statements).

Other decreased $91.3 million, or 39.0%, primarily due to the settlement of the U.S. class action litigation and related legal fees in 2015 (see Note 14 to our Financial Statements), partially offset by an accrual for legal matters and the Southern Air Acquisition in 2016.

Non-operating Expenses (Income)

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

 

     2016      2015      Inc/(Dec)      % Change  

Non-operating Expenses (Income)

           

Interest income

   $ (5,532    $ (12,554    $ (7,022      (55.9 )% 

Interest expense

     84,650        96,756        (12,106      (12.5 )% 

Capitalized interest

     (3,313      (1,027      2,286        NM  

Loss on early extinguishment of debt

     132        69,728        (69,596      NM  

Unrealized loss on financial instruments

     2,888               (2,888      NM  

Gain on investments

            (13,439      (13,439      NM  

Other expense

     70        1,261        (1,191      NM  

Interest income decreased $7.0 million, or 55.9%, primarily due to a decrease in PTCs.

Interest expense decreased $12.1 million, or 12.5%, primarily due to a decrease in interest rates resulting from the refinancing of higher-rate EETCs with lower-rate Convertible Notes in 2015 and a reduction in our average debt balances, reflecting payments of debt.

Loss on early extinguishment of debt was related to the refinancing of five EETCs with lower-rate Convertible Notes during the third quarter of 2015.

Unrealized loss on financial instruments represents the change in fair value of the Amazon Warrant during 2016 (see Note 7 to our Financial Statements).

Gain on investments was related to the early redemption of certain PTC investments resulting from the refinancing of five EETCs with lower-rate Convertible Notes during the third quarter of 2015.

 

37


Table of Contents

Income taxes.    Our effective income tax rates were an expense of 52.3% in 2016 and a benefit of 142.3% for 2015. The effective income tax rate for 2016 differed from the U.S. statutory rate primarily due to a nondeductible customer incentive and to nondeductible compensation expenses resulting from a change in control, as defined under certain of the Company’s benefits plans, both related to the Amazon transaction (see Note 7 to our Financial Statements). The effective income tax rate for 2015 differed from the U.S. federal statutory rate primarily due to income tax benefits related to ETI. The effective rates for both periods were impacted by our assertion to indefinitely reinvest the net earnings of foreign subsidiaries outside the U.S. (see Note 11 to our Financial Statements).

Segments

We use an economic performance metric (“Direct Contribution”) representing Income (loss) from continuing operations before income taxes excluding the following: Special charges, Transaction-related expenses, nonrecurring items, Losses (gains) on the disposal of aircraft, Losses on early extinguishment of debt, Unrealized losses (gains) on financial instruments, Gains on investments and Unallocated income and expenses, net. Direct Contribution shows the profitability of each segment after allocation of direct operating and ownership costs. We operate our service offerings through the following reportable segments: ACMI, Charter and Dry Leasing. The following table compares the Direct Contribution for our reportable segments (see Note 13 to our Financial Statements for the reconciliation to Operating income) (in thousands):

 

     2016      2015      Inc/(Dec)      % Change  

Direct Contribution:

           

ACMI

   $ 200,563      $ 185,615      $ 14,948        8.1

Charter

     133,727        124,808        8,919        7.1

Dry Leasing

     33,114        42,023        (8,909      (21.2 )% 
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Direct Contribution

   $ 367,404      $ 352,446      $ 14,958        4.2
  

 

 

    

 

 

    

 

 

    

 

 

 

Unallocated income and expenses, net

   $ 242,768      $ 294,451      $ (51,683      (17.6 )% 
  

 

 

    

 

 

    

 

 

    

 

 

 

ACMI Segment

ACMI Direct Contribution increased $14.9 million, or 8.1%, primarily due to the Southern Air Acquisition and lower Heavy Maintenance expense. Partially offsetting these items were the temporary redeployment of 747-8F aircraft to the Charter segment, increases in crewmember costs related to Amazon and other fleet growth initiatives, and higher rates related to crewmember travel.

Charter Segment

Charter Direct Contribution increased $8.9 million or 7.1%, primarily due to an increase in passenger and cargo demand from the AMC and the temporary redeployment of 747-8F aircraft from the ACMI segment. Partially offsetting these increases was the impact of the U.S. West Coast port disruption in 2015.

Dry Leasing Segment

Dry Leasing Direct Contribution decreased $8.9 million, or 21.2%, primarily due to lower revenue from maintenance payments to us in 2016 related to the scheduled return of aircraft. Partially offsetting this decrease was contribution related to the placement of two 767-300 converted freighter aircraft with DHL in December 2015 and February 2016, and one 767-300 converted freighter aircraft with Amazon in August 2016.

 

38


Table of Contents

Unallocated income and expenses, net

Unallocated income and expenses, net decreased $51.7 million, or 17.6%, primarily due to the settlement of the U.S. class action litigation and related legal fees in 2015. Partially offsetting these items were $23.5 million of compensation expenses for a change in control, as defined under certain benefit plans, related to the Amazon transaction (see Note 7 to our Financial Statements) and the impact of the Southern Air Acquisition in 2016.

Results of Operations

Years Ended December 31, 2015 and 2014

Segment Operating Fleet

The following tables compare our Segment Operating Fleet (average aircraft equivalents during the period) and total Block Hours operated:

 

      2015      2014      Inc/(Dec)  

Segment Operating Fleet

        

ACMI*

        

747-8F Cargo

     8.9        8.5        0.4  

747-400 Cargo

     12.6        12.0        0.6  

747-400 Dreamlifter

     3.0        3.1        (0.1

767-300 Cargo

     2.1        2.0        0.1  

767-200 Cargo

     8.3        5.0        3.3  

747-400 Passenger

     1.2        1.2         

767-200 Passenger

     1.0        1.0         
  

 

 

    

 

 

    

 

 

 

Total

     37.1        32.8        4.3  

Charter

        

747-8F Cargo

     0.2        0.5        (0.3

747-400 Cargo

     9.4        9.0        0.4  

747-400 Passenger

     1.8        1.7        0.1  

767-300 Passenger

     2.9        2.9         
  

 

 

    

 

 

    

 

 

 

Total

     14.3        14.1        0.2  

Dry Leasing

        

777-200 Cargo

     6.0        6.0         

757-200 Cargo

     1.0        1.0         

737-300 Cargo

     1.0        1.0         

737-800 Passenger

     1.2        2.0        (0.8
  

 

 

    

 

 

    

 

 

 

Total

     9.2        10.0        (0.8
  

 

 

    

 

 

    

 

 

 

Total Operating Average Aircraft Equivalents

     60.6        56.9        3.7  
  

 

 

    

 

 

    

 

 

 

Out-of-service

     0.4        1.0        (0.6

 

* ACMI average fleet excludes spare aircraft provided by CMI customers.

 

      2015      2014      Inc/(Dec)      % Change  

Block Hours

           

Total Block Hours**

     178,060        161,090        16,970        10.5

 

** Includes ACMI, Charter and other Block Hours.

 

39


Table of Contents

Operating Revenue

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

 

     2015      2014      Inc/(Dec)      % Change  

Operating Revenue

           

ACMI

   $ 791,442      $ 778,091      $ 13,351        1.7

Charter

     908,753        906,676        2,077        0.2

Dry Leasing

     107,218        100,059        7,159        7.2

Other

     15,246        14,372        874        6.1
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Operating Revenue

   $ 1,822,659      $ 1,799,198      $ 23,461        1.3
  

 

 

    

 

 

    

 

 

    

 

 

 

ACMI

 

     2015      2014      Inc/(Dec)      % Change  

ACMI Block Hours

     126,206        115,042        11,164        9.7

ACMI Revenue Per Block Hour

   $ 6,271      $ 6,764      $ (493      (7.3 )% 

ACMI revenue increased $13.4 million, or 1.7%, primarily due to increased flying, partially offset by reduced Revenue per Block Hour. The increase in Block Hours was primarily driven by one incremental 747-8F aircraft and one incremental 747-400F aircraft entering ACMI service, four incremental 767-200F aircraft entering CMI service and improvements in ACMI aircraft utilization. The decrease in Revenue per Block Hour reflects the impact of higher Revenue per Block Hour in 2014 resulting from customers that flew below their contractual minimums, payments received in 2014 related to a customer’s return of aircraft, and the impact of increased CMI flying in 2015.

Charter

 

     2015      2014      Inc/(Dec)      % Change  

Charter Block Hours:

           

Cargo

     35,463        31,612        3,851        12.2

Passenger

     14,776        13,085        1,691        12.9
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     50,239        44,697        5,542        12.4
  

 

 

    

 

 

    

 

 

    

 

 

 

Charter Revenue Per Block Hour:

           

Cargo

   $ 17,655      $ 20,217      $ (2,562      (12.7 )% 

Passenger

   $ 19,130      $ 20,449      $ (1,319      (6.5 )% 

Charter

   $ 18,089      $ 20,285      $ (2,196      (10.8 )% 

Charter revenue increased $2.1 million, or 0.2%, primarily driven by an increase in both cargo and passenger flying, partially offset by a decrease in Revenue per Block Hour. The increase in Charter Block Hours was primarily driven by increased cargo and passenger demand from the AMC and increased commercial cargo demand, which was enhanced by the U.S. West Coast port disruption in early 2015. The decrease in Charter Revenue per Block Hours was primarily driven by the impact of lower fuel prices, partially offset by higher Yields, excluding fuel.

 

40


Table of Contents

Dry Leasing

Dry Leasing revenue increased $7.2 million, or 7.2%, primarily due to revenue from maintenance payments related to the scheduled returns of a 737-800 passenger aircraft in February 2015 and a 757-200 cargo aircraft in April 2015, partially offset by a reduction in the number of Dry Leased aircraft following the sale of the returned 737-800 passenger aircraft during the first quarter of 2015.

Operating Expenses

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

 

     2015      2014      Inc/(Dec)      % Change  

Operating Expenses

           

Salaries, wages and benefits

   $ 351,372      $ 311,143      $ 40,229        12.9

Aircraft fuel

     333,390        404,263        (70,873      (17.5 )% 

Maintenance, materials and repairs

     202,337        203,567        (1,230      (0.6 )% 

Aircraft rent

     145,031        140,390        4,641        3.3

Depreciation and amortization

     128,740        120,793        7,947        6.6

Travel

     102,755        79,199        23,556        29.7

Navigation fees, landing fees and other rent

     99,345        131,138        (31,793      (24.2 )% 

Passenger and ground handling services

     83,185        86,820        (3,635      (4.2 )% 

Loss on disposal of aircraft

     1,538        14,679        (13,141      (89.5 )% 

Special charge

     17,388        15,114        2,274        15.0

Other

     234,073        116,120        117,953        101.6
  

 

 

    

 

 

       

Total Operating Expenses

   $ 1,699,154      $ 1,623,226        
  

 

 

    

 

 

       

Salaries, wages and benefits increased $40.2 million, or 12.9%, primarily driven by increases to crewmember and ground staff costs due to higher Block Hours, crew training related to our investment in fleet growth and key initiatives.

Aircraft fuel decreased $70.9 million, or 17.5%, primarily due to fuel price decreases, partially offset by increased fuel consumption reflecting the increase in Charter 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. Average fuel cost per gallon and fuel consumption for 2015 and 2014 were:

 

     2015      2014      Inc/(Dec)      % Change  

Average fuel cost per gallon

   $ 2.27      $ 3.07      $ (0.80      (26.1 )% 

Fuel gallons consumed (000s)

     147,081        131,787        15,294        11.6

 

41


Table of Contents

Maintenance, materials and repairs decreased by $1.2 million, or 0.6%, reflecting a decrease of $12.6 million for 747-400 aircraft, partially offset by an increase of $7.5 million for 747-8F aircraft and $3.9 million for 767 aircraft. Heavy Maintenance expense on 747-400 aircraft decreased approximately $22.5 million due to a decrease in the number of C and D Checks, and the number of engine overhauls, partially offset by an increase of $6.1 million in Non-heavy Maintenance. Heavy Maintenance expense on 747-8F aircraft increased $5.1 million primarily due to an increase in unscheduled engine repairs, partially offset by a decrease in the number of C Checks. Heavy Maintenance expense on 767 aircraft decreased $1.6 million primarily due to a decrease in the number of C Checks. Line Maintenance increased by $5.5 million on 767 aircraft, $3.9 million on 747-400 aircraft and $2.4 million on 747-8F aircraft due to increased flying. Heavy airframe maintenance checks and engine overhauls impacting Maintenance, materials and repairs for 2015 and 2014 were:

 

Heavy Maintenance Events

   2015      2014      Inc/(Dec)  

747-8F C Checks

     4        5        (1)  

747-400 C Checks

     5        11        (6)  

747-400 D Checks

     4        6        (2)  

767 C Checks

     1        3        (2)  

CF6-80 engine overhauls

     10        14        (4)  

Aircraft rent increased $4.6 million, or 3.3%, primarily due to a leased 747-400BCF aircraft that entered service in June 2015.

Depreciation and amortization increased $7.9 million, or 6.6%, primarily due to increased scrapping of rotable parts related to our engine and spare parts purchase program, which avoids more expensive repairs, and additional aircraft operating in 2015.

Travel increased $23.6 million, or 29.7%, primarily due to higher rates related to crewmember travel to higher cost locations and increased flying.

Navigation fees, landing fees and other rent decreased $31.8 million, or 24.2%, primarily due to a reduction in purchased capacity from the subcontracting of certain Charter flights.

Passenger and ground handling services decreased $3.6 million, or 4.2%, primarily due to lower rates related to ground handling for Charters, partially offset by increased flying.

Loss on disposal of aircraft in 2014 resulted from the trade-in of used spare engines for new engines as part of our engine acquisition program.

Special charge in 2015 primarily represents an $8.3 million impairment loss on engines held for sale and a $7.7 million charge for the early termination of high-rate operating leases for two engines. Special charge in 2014 represents a $6.2 million impairment loss on an aircraft held for sale, a $4.7 million loss related to a consolidated subsidiary’s receivable for a loan made to its then 51% U.K. shareholder and a $3.8 million expense recorded for termination benefits for certain employees (see Note 4 to our Financial Statements).

Other increased $118.0 million, or 101.6%, primarily due to the settlement of the U.S. class action litigation and related legal fees (see Note 14 to our Financial Statements), increased commission expense on higher revenue from the AMC and increased professional fees to support key initiatives.

 

42


Table of Contents

Non-operating Expenses (Income)

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

 

     2015      2014      Inc/(Dec)      % Change  

Non-operating Expenses (Income)

           

Interest income

   $ (12,554    $ (18,480    $ (5,926      (32.1 )% 

Interest expense

     96,756        104,252        (7,496      (7.2 )% 

Capitalized interest

     (1,027      (453      574        126.7

Loss on early extinguishment of debt

     69,728               69,728        NM  

Gain on investments

     (13,439             13,439        NM  

Other expense (income), net

     1,261        1,104        157        14.2

Interest income decreased $5.9 million, or 32.1%, primarily due to a decrease in our investments in Pass-Through Trust Certificates (“PTCs”). See Note 12 to our Financial Statements for further discussion.

Interest expense decreased $7.5 million, or 7.2%, primarily due to a decrease in interest rates resulting from the refinancing of higher-rate enhanced equipment trust certificates (“EETCs”) with lower-rate Convertible Notes (see Note 9 to our Financial Statements for further discussion) and a reduction in our average debt balances, reflecting payments of debt.

Loss on early extinguishment of debt was related to the refinancing of five EETCs with lower-rate Convertible Notes and the refinancing of two 747-8F term loans during 2015. See Note 9 to our Financial Statements for further discussion.

Gain on investments was related to the early redemption of certain PTC investments resulting from the refinancing of five EETCs with lower-rate Convertible Notes during 2015. See Notes 9 and 12 to our Financial Statements for further discussion.

Income taxes. Our effective income tax rates were benefits of 142.3% for 2015 and 14.2% for 2014. The effective income tax rate for 2015 differed from the U.S. federal statutory rate primarily due to an increase in income from our Dry Leasing business taxed at lower rates and income tax benefits related ETI. The effective income tax rate for 2014 differed from the U.S. federal statutory rate primarily due to an income tax benefit of $34.8 million, net of reserves, related to ETI. The effective income tax rates for both periods benefit from our intention to indefinitely reinvest the net earnings of certain foreign subsidiaries outside the U.S.

Segments

The following table compares the Direct Contribution for our reportable segments (see Note 13 to our Financial Statements for the reconciliation to Operating income) (in thousands):

 

     2015      2014      Inc/(Dec)      % Change  

Direct Contribution:

           

ACMI

   $ 185,615      $ 200,489      $ (14,874      (7.4 )% 

Charter

     124,808        47,245        77,563        164.2

Dry Leasing

     42,023        33,224        8,799        26.5
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Direct Contribution

   $ 352,446      $ 280,958      $ 71,488        25.4
  

 

 

    

 

 

    

 

 

    

 

 

 

Unallocated income and expenses, net

   $ 294,451      $ 161,616      $ 132,835        82.2
  

 

 

    

 

 

    

 

 

    

 

 

 

 

43


Table of Contents

ACMI Segment

ACMI Direct Contribution decreased $14.9 million, or 7.4%, primarily due to increases in crew costs due to crew training related to our investment in fleet growth, the impact of customers that flew below their contractual minimums in 2014 and payments received in 2014 related to a customer’s return of aircraft. Partially offsetting these decreases was a reduction in Heavy Maintenance expense and lower aircraft ownership costs from the refinancing of EETCs with lower-rate Convertible Notes.

Charter Segment

Charter Direct Contribution increased $77.6 million or 164.2%, primarily due to higher Yields, excluding fuel, increased cargo and passenger flying, as well as higher aircraft utilization, which was enhanced by the U.S. West Coast port disruption in early 2015. In addition, Charter Direct Contribution benefited from a reduction in Heavy Maintenance expense and lower aircraft ownership costs from the refinancing of EETCs with lower-rate Convertible Notes. Partially offsetting these improvements was an increase in crew costs due to crew training related to our investment in fleet growth.

Dry Leasing Segment

Dry Leasing Direct Contribution increased $8.8 million, or 26.5%, primarily due to revenue from maintenance payments related to the scheduled returns of a 737-800 passenger aircraft in February 2015 and a 757-200 cargo aircraft in April 2015, partially offset by a reduction in the number of Dry Leased aircraft following the sale of the returned 737-800 passenger aircraft during the first quarter of 2015.

Unallocated income and expenses, net

Unallocated income and expenses, net increased $132.8 million, or 82.2%, primarily due to the settlement of the U.S. class action litigation and related legal fees, increases in noncash expenses related to our Convertible Notes and the refinancing of debt and professional fees to support key initiatives.

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 financial measures include Adjusted Income from continuing operations, net of taxes and Adjusted Diluted EPS from continuing operations, which exclude certain noncash income and expenses, and items impacting year-over-year comparisons of our results. These non-GAAP financial measures may not be comparable to similarly titled measures used by other companies and should not be considered in isolation or as a substitute for Income from continuing operations, net of taxes and Diluted EPS from continuing operations, which are the most directly comparable measures of performance prepared in accordance with GAAP.

We use these non-GAAP financial measures in assessing the performance of our ongoing operations and in planning and forecasting future periods. We believe that these adjusted measures, when considered together with the corresponding GAAP financial measures and the reconciliations to those measures, provide meaningful supplemental information to assist investors and analysts in understanding our business results and assessing our prospects for future performance.

 

44


Table of Contents

The following is a reconciliation of Income (loss) from continuing operations, net of taxes and Diluted EPS from continuing operations, net of taxes to the corresponding non-GAAP financial measures (in thousands, except per share data):

 

     2016     2015     Percent
Change
 

Income from continuing operations, net of taxes

   $ 42,625     $ 7,286       485.0

Impact from:

      

Charges associated with benefit plan change in control (a)

     23,527          

Loss on disposal of aircraft

     (11     1,538    

Special charge

     10,140       17,958    

Transaction-related expenses

     22,071          

Accrual for legal matters and professional fees

     6,465       104,380    

Noncash expenses and income, net (b)

     8,111       4,480    

Charges associated with refinancing debt

     132       73,411    

Gain on investments

           (13,439  

Unrealized loss on financial instruments (c)

     2,888          

Income tax effect of reconciling items (d)

     (1,651     (66,300  

ETI tax benefit

           (4,008  
  

 

 

   

 

 

   

 

 

 

Adjusted income from continuing operations, net of taxes

   $ 114,297     $ 125,306       (8.8 %) 
  

 

 

   

 

 

   

 

 

 

Weighted average diluted shares outstanding

     25,120       25,018    

Add: dilutive warrants

     299          
  

 

 

   

 

 

   

Adjusted weighted average diluted shares outstanding

     25,419       25,018    
  

 

 

   

 

 

   

Adjusted Diluted EPS from continuing operations, net of taxes

   $ 4.50     $ 5.01       (10.2 %) 
  

 

 

   

 

 

   

 

 

 

 

     2015     2014     Percent
Change
 

Income from continuing operations, net of taxes

   $ 7,286     $ 106,757       (93.2 %) 

Impact from:

      

Loss on disposal of aircraft

     1,538          

Special charge

     17,958          

Accrual for legal matters and professional fees

     104,380       1,798    

Noncash expenses and income, net (a)

     4,480       (105  

Charges associated with refinancing debt

     73,411       15,114    

Gain on investments

     (13,439        

Income tax effect of reconciling items (d)

     (66,300     4,594    

ETI tax benefit

     (4,008     (34,755  
  

 

 

   

 

 

   

 

 

 

Adjusted income from continuing operations, net of taxes

   $ 125,306     $ 93,403       34.2
  

 

 

   

 

 

   

 

 

 

Weighted average diluted shares outstanding

     25,018       25,127    

Add: dilutive warrants

              
  

 

 

   

 

 

   

Adjusted weighted average diluted shares outstanding

     25,018       25,127    
  

 

 

   

 

 

   

Adjusted Diluted EPS from continuing operations, net of taxes

   $ 5.01     $ 3.72       34.7
  

 

 

   

 

 

   

 

 

 

 

45


Table of Contents

 

(a) Compensation costs resulting from a change in control under certain benefit plans related to the Amazon transaction (see Note 7 to our Financial Statements).
(b) Noncash expenses and income, net in 2016 primarily related to amortization of debt discount on the Convertible Notes (see Note 9 to our Financial Statements) and amortization of customer incentive related to the Amazon Warrant (see Note 7 to our Financial Statements). Noncash expenses and income, net in 2015 primarily related to amortization and accretion of debt, lease and investment discounts.
(c) Unrealized loss on financial instruments related to the Amazon Warrant (see Note 7 to our Financial Statements).
(d) Income tax effect of reconciling items is primarily impacted by a nondeductible customer incentive and nondeductible compensation expenses resulting from a change in control, as defined under certain of the Company’s benefit plans, both related to the Amazon transaction.

Liquidity and Capital Resources

The most significant liquidity events in 2016 were as follows:

Acquisition Transaction

In April 2016, we completed the acquisition of Southern Air for cash consideration of $105.4 million, net of cash acquired and working capital adjustments.

Debt Transactions

In February 2016, we borrowed $14.8 million related to the conversion of a 767-300BDSF aircraft under a term loan at a fixed interest rate of 3.19%.

In June 2016, we borrowed $70.0 million under a term loan secured by a mortgage against six spare GEnx engines at a fixed rate of 3.12%.

In December 2016, we borrowed $18.7 million related to GEnx engine performance upgrade kits and overhauls under an unsecured term loan at a fixed interest rate of 2.13%.

In December 2016, we entered into a $150.0 million revolving credit facility secured by mortgages against a total of 14 747-400 and 767-300 aircraft. As of December 31, 2016, no borrowings were outstanding under the facility. In January 2017, we drew down $100.0 million under the facility.

Operating Activities.    Net cash provided by operating activities for 2016 was $232.2 million, compared with $372.9 million for 2015. The decrease primarily reflects changes in the timing of working capital, a payment related to the U.S. class action settlement, payments for Transaction-related expenses and deferred maintenance costs for engines on 747-8F aircraft in 2016 and the impact of the U.S. West Coast port disruption in 2015. Partially offsetting these items were the impact of the Southern Air Acquisition and an increase in passenger and cargo demand from the AMC in 2016.

Investing Activities.    Net cash used for investing activities was $457.4 million for 2016, consisting primarily of $317.0 million of payments for flight equipment and modifications, $105.4 million related to the Southern Acquisition and $46.7 million of core capital expenditures, excluding flight equipment. Payments for flight equipment and modifications in 2016 were primarily related to the purchase of 767-300 passenger aircraft and related freighter conversion costs and spare engines. Partially offsetting these investing activities were $11.7 million of proceeds from investments. All capital expenditures for 2016 were funded through working capital, except for the flight equipment financed as discussed above. Net cash used for investing activities was $166.3 million for 2015, consisting primarily of $227.0 million of payments for flight equipment and modifications, and $45.0 million of core capital expenditures, excluding flight equipment. Payments for flight equipment and modifications in 2015

 

46


Table of Contents

were primarily related to the purchase of a 747-8F aircraft, 767-300 passenger aircraft and related freighter conversion costs and spare engines. Partially offsetting these investing activities in 2015 were $80.3 million of proceeds from investments and $25.4 million of proceeds from disposal of aircraft.

Financing Activities.    Net cash used for financing activities was $75.5 million for 2016, which primarily reflected $179.2 million of payments on debt obligations, partially offset by $103.5 million of proceeds from debt issuance and $15.1 million of customer maintenance reserves received. Net cash used for financing activities was $80.5 million for 2015, which primarily reflected $568.9 million of payments on debt obligations, $52.9 million for the purchase of convertible note hedges, $36.1 million of payment of debt extinguishment costs, $26.5 million related to the purchase of treasury stock and $14.5 million of debt issuance costs partially offset by $568.0 million of proceeds from debt issuance, $36.3 million from the sale of warrants and $16.1 million of customer maintenance reserves received.

We consider Cash and cash equivalents, Short-term investments, Restricted cash and Net cash provided by operating activities to be sufficient to meet our debt and lease obligations, to fund core capital expenditures for 2017, and to pay amounts due related to the settlement of the U.S. class action litigation. Core capital expenditures for 2017 are expected to range between $55.0 to $65.0 million, which excludes flight equipment and capitalized interest. Our payments remaining for flight equipment purchase and conversion commitments are expected to be approximately $248.6 million, of which approximately $201.0 million is expected to be made during 2017. We expect to finance the acquisition and conversion of this flight equipment with our revolving credit facility prior to obtaining permanent financing for the converted aircraft.

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 May 2015 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 do not expect to pay any significant U.S. federal income tax until 2025 or later. Our business operations are subject to income tax in several foreign jurisdictions. We do not expect to pay any significant cash income taxes in foreign jurisdictions for at least several years. We currently do not intend to repatriate cash from certain foreign subsidiaries that is indefinitely reinvested outside the U.S. Any repatriation of cash from these subsidiaries or certain changes in U.S. tax laws could result in additional tax expense.

Contractual Obligations

The table below provides details of our balances available under credit agreements and future cash contractual obligations as of December 31, 2016 (in millions):

 

     Total
Obligations
     Payments Due by Period  
        2017      2018      2019      2020      2021      Thereafter  

Debt and capital lease (1)

   $ 1,943.4      $ 194.2      $ 190.5      $ 189.4      $ 297.4      $ 190.7      $ 881.2  

Interest on debt (2)

     291.2        62.3        55.9        49.5        42.8        32.3        48.4  

Aircraft and engine operating leases

     861.3        131.0        131.0        140.2        135.4        145.9        177.8  

Other operating leases

     27.2        5.5        5.5        5.1        4.9        4.4        1.8  

Flight equipment purchase and conversion commitments (3)

     248.6        201.0        47.6                              

Legal settlement obligation

     65.0        35.0        30.0                              
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Contractual Obligations

   $ 3,436.7      $ 629.0      $ 460.5      $ 384.2      $ 480.5      $ 373.3      $ 1,109.2  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

47


Table of Contents

 

(1) Debt reflects gross amounts (see Note 9 to our Financial Statements for a discussion of the related unamortized discount).
(2) Amount represents interest on fixed and floating rate debt at December 31, 2016.
(3) Amount represents estimated payments primarily related to 767-300 aircraft purchases and passenger-to-freighter conversions.

We maintain a noncurrent 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 9 to our Financial Statements for a description of our debt obligations.

Off-Balance Sheet Arrangements

Fifteen of our sixty-one operating and Dry Leased 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 nine 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 10 to our Financial Statements.

There were no changes in our off-balance sheet arrangements during the fiscal year ended December 31, 2016.

Critical Accounting Policies and Estimates

General Discussion of Critical Accounting Policies and Estimates

An appreciation of our critical accounting policies and estimates is important to understand our financial results. Our Financial Statements are prepared in conformity with GAAP. Our critical policies require management to make estimates and judgments that affect the amounts reported. Actual results may differ significantly from those estimates. The following is a brief description of our current critical accounting policies involving significant management judgment:

Accounting for Long-Lived Assets

We record our property and equipment at cost, and once assets are placed in service, we depreciate them on a straight-line basis over their estimated useful lives to their estimated residual values over periods not to exceed forty years for flight equipment (from date of original manufacture) and three to five years for ground equipment.

We record finite-lived intangible assets acquired at fair value and amortize them over their estimated useful lives. The estimated useful lives are based on estimates of the period during which the assets are expected to generate revenue.

 

48


Table of Contents

We record impairment charges on long-lived assets when events and circumstances indicate that the assets may be impaired, the undiscounted cash flows estimated to be generated by those assets are less than their carrying amount and the net book value of the assets exceeds their estimated fair value. In making these determinations, we use certain assumptions, including, but not limited to: (i) estimated fair value of the assets and (ii) estimated future cash flows expected to be generated by these assets, which are based on additional assumptions such as asset utilization, revenue generated, associated costs, length of service and estimated residual values. To conduct impairment testing, we group assets and liabilities at the lowest level for which identifiable cash flows are largely independent of cash flows of other assets and liabilities. For flight equipment used in our ACMI and Charter segments, assets are grouped at the operating fleet level. For flight equipment used in our Dry Leasing segment, assets are grouped on an individual basis.

For assets classified as held for sale, an impairment is recognized when the fair value less the cost to sell the asset is less than its carrying amount. Fair value is primarily determined using external appraisals.

In developing these estimates for flight equipment, we use industry data for the equipment types and our anticipated utilization of the assets.

Heavy Maintenance

Except for engines used on our 747-8F aircraft, we account for heavy maintenance costs for airframes and engines used in our ACMI and Charter segments using the direct expense method. Under this method, heavy maintenance costs are charged to expense upon induction, based on our best estimate of the costs. This method can result in expense volatility between quarterly and annual periods, depending on the number and type of heavy maintenance events performed.

We account for heavy maintenance costs for airframes and engines used in our Dry Leasing segment and engines used on our 747-8F aircraft using the deferral method. Under this method, we defer the expense recognition of scheduled heavy maintenance events, which are amortized over the estimated period until the next scheduled heavy maintenance event is required.

Income Taxes

Deferred income taxes are recognized for the tax consequences of reporting items in our income tax returns at different times than the items are reflected in our financial statements. These temporary differences result in deferred tax assets and liabilities that are calculated by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. If necessary, deferred income tax assets are reduced by a valuation allowance to an amount that is determined to be more likely than not recoverable. We must make significant estimates and assumptions about future taxable income and future tax consequences when determining the amount, if any, of the valuation allowance.

We have recorded reserves for income taxes that may become payable in future years. Although management believes that its positions taken on income tax matters are reasonable, we have nevertheless established tax reserves in recognition that various taxing authorities may challenge certain of the positions taken by us, potentially resulting in additional liabilities for taxes.

Goodwill

Goodwill represents the excess of an acquisition’s purchase price over the fair value of the identifiable net assets acquired and liabilities assumed. Goodwill is not amortized, but tested for impairment annually during the fourth quarter of each year, or more frequently if certain events or circumstances indicate that an impairment loss may have been incurred. We may elect to perform a qualitative analysis on the reporting unit that has goodwill to

 

49


Table of Contents

determine whether it is more likely than not that fair value of the reporting unit is less than its carrying value. Under the qualitative approach, we consider various market factors to determine whether events and circumstances have affected the fair value of the reporting unit. If we determine that it is more likely than not that the reporting unit’s fair value is less than its carrying amount, or if we elect not to perform a qualitative analysis, we perform a quantitative analysis to determine whether any goodwill impairment exists.

Fair value is determined using a discounted cash flow analysis based on key assumptions including, but not limited to, (i) a projection of revenues, expenses and other cash flows; (ii) terminal period revenue growth and cash flows; and (iii) an assumed discount rate. If the goodwill’s carrying value exceeds its fair value calculated using the quantitative approach, an impairment charge is recorded for the difference in fair value and carrying value.

Legal and Regulatory Matters

We are party to legal and regulatory proceedings with respect to a variety of matters in multiple jurisdictions. We evaluate the likelihood of an unfavorable outcome of these proceedings each quarter. Our judgments are subjective and are based on the status of the legal or regulatory proceedings, the merits of our defenses and consultation with legal counsel.

Recent Accounting Pronouncements

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

 

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.

Aircraft Fuel.    Our results of operations are affected by changes in the price and availability of aircraft fuel. We have limited fuel risk for our Charter business. Market risk is estimated at a hypothetical 20% increase or decrease in the 2016 average cost per gallon of fuel. Based on actual 2016 fuel consumption for commercial customers in Charter, such an increase would have resulted in an increase to aircraft fuel expense of approximately $28.1 million in 2016. For our AMC-related Charter flights, 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 AMC-related 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. 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, 2016, approximately $91.0 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, 2016, our annual interest expense would have changed in 2016 by approximately $0.7 million.

Foreign Currency.    We have limited exposure 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.

 

50


Table of Contents

Stock Price.    Our earnings are affected by changes in our common stock price due to the impact those changes have on the fair value of our liability for warrants issued to Amazon (See Note 7 to our Financial Statements for a description of the warrants). As of December 31, 2016, our warrant liability was $95.8 million. If our stock price would have increased or decreased resulting in a hypothetical 20% change in the fair value of the warrant liability as of December 31, 2016, we would have recognized an additional unrealized loss or gain of approximately $19.2 million in 2016.

 

51


Table of Contents
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

Report of Independent Registered Public Accounting Firm

     53  

Consolidated Balance Sheets as of December 31, 2016 and 2015

     54  

Consolidated Statements of Operations for the years ended December 31, 2016, 2015 and 2014

     55  

Consolidated Statements of Comprehensive Income for the years ended December 31, 2016, 2015 and 2014

     56  

Consolidated Statements of Cash Flows for the years ended December 31, 2016, 2015 and 2014

     57  

Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2016, 2015 and 2014

     58  

Notes to Consolidated Financial Statements

     59  

 

52


Table of Contents

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of

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, 2016 and 2015, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2016 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index 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, 2016, based on criteria established in Internal Control — Integrated Framework (2013) 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

New York, New York

February 23, 2017

 

53


Table of Contents

Atlas Air Worldwide Holdings, Inc.

Consolidated Balance Sheets

(in thousands, except share data)

 

     December 31,
2016
    December 31,
2015
 

Assets

    

Current Assets

    

Cash and cash equivalents

   $ 123,890     $ 425,950  

Short-term investments

     4,313       5,098  

Restricted cash

     14,360       12,981  

Accounts receivable, net of allowance of $997 and $1,247, respectively

     166,486       164,308  

Prepaid maintenance

     4,418       6,052  

Prepaid expenses and other current assets

     44,603       37,548  
  

 

 

   

 

 

 

Total current assets

     358,070       651,937  

Property and Equipment

    

Flight equipment

     3,886,714       3,687,248  

Ground equipment

     68,688       58,487  

Less: accumulated depreciation

     (568,946     (450,217

Flight equipment modifications in progress

     154,226       39,678  
  

 

 

   

 

 

 

Property and equipment, net

     3,540,682       3,335,196  

Other Assets

    

Long-term investments and accrued interest

     27,951       37,604  

Deferred costs and other assets

     204,647       81,183  

Intangible assets, net and goodwill

     116,029       58,483  
  

 

 

   

 

 

 

Total Assets

   $ 4,247,379     $ 4,164,403  
  

 

 

   

 

 

 

Liabilities and Equity

    

Current Liabilities

    

Accounts payable

   $ 59,543     $ 93,278  

Accrued liabilities

     320,887       293,138  

Current portion of long-term debt and capital lease

     184,748       161,811  
  

 

 

   

 

 

 

Total current liabilities

     565,178       548,227  

Other Liabilities

    

Long-term debt

     1,666,663       1,739,496  

Deferred taxes

     298,165       286,928  

Financial instruments and other liabilities

     200,035       135,569  
  

 

 

   

 

 

 

Total other liabilities

     2,164,863       2,161,993  

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; 100,000,000 and 50,000,000 shares authorized; 29,633,605 and 28,955,445 shares issued, 25,017,242 and 24,636,651, shares outstanding (net of treasury stock), as of December 31, 2016 and December 31, 2015, respectively

     296       290  

Additional paid-in-capital

     657,082       625,244  

Treasury stock, at cost; 4,616,363 and 4,318,794 shares, respectively

     (183,119     (171,844

Accumulated other comprehensive loss

     (4,993     (6,063

Retained earnings

     1,048,072       1,006,556  
  

 

 

   

 

 

 

Total equity

     1,517,338       1,454,183  
  

 

 

   

 

 

 

Total Liabilities and Equity

   $ 4,247,379     $ 4,164,403  
  

 

 

   

 

 

 

See accompanying Notes to Consolidated Financial Statements

 

54


Table of Contents

Atlas Air Worldwide Holdings, Inc.

Consolidated Statements of Operations

(in thousands, except per share data)

 

     For the Years Ended December 31,  
     2016     2015     2014  

Operating Revenue

   $ 1,839,627     $ 1,822,659     $ 1,799,198  

Operating Expenses

      

Salaries, wages and benefits

     424,332       351,372       311,143  

Aircraft fuel

     275,113       333,390       404,263  

Maintenance, materials and repairs

     206,106       202,337       203,567  

Depreciation and amortization

     148,876       128,740       120,793  

Aircraft rent

     146,110       145,031       140,390  

Travel

     127,748       102,755       79,199  

Passenger and ground handling services

     89,657       83,185       86,820  

Navigation fees, landing fees and other rent

     78,441       99,345       131,138  

Loss (gain) on disposal of aircraft

     (11     1,538       14,679  

Special charge

     10,140       17,388       15,114  

Transaction-related expenses

     22,071              

Other

     142,733       234,073       116,120  
  

 

 

   

 

 

   

 

 

 

Total Operating Expenses

     1,671,316       1,699,154       1,623,226  
  

 

 

   

 

 

   

 

 

 

Operating Income

     168,311       123,505       175,972  
  

 

 

   

 

 

   

 

 

 

Non-operating Expenses (Income)

      

Interest income

     (5,532     (12,554     (18,480

Interest expense

     84,650       96,756       104,252  

Capitalized interest

     (3,313     (1,027     (453

Loss on early extinguishment of debt

     132       69,728        

Gain on investments

           (13,439      

Unrealized loss on financial instruments

     2,888              

Other expense

     70       1,261       1,104  
  

 

 

   

 

 

   

 

 

 

Total Non-operating Expenses (Income)

     78,895       140,725       86,423  
  

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations before income taxes

     89,416       (17,220     89,549  

Income tax expense (benefit)

     46,791       (24,506     (12,678
  

 

 

   

 

 

   

 

 

 

Income from continuing operations, net of taxes

     42,625       7,286       102,227  

Loss from discontinued operations, net of taxes

     (1,109            
  

 

 

   

 

 

   

 

 

 

Net Income

     41,516       7,286       102,227  

Less: Net loss attributable to noncontrolling interests

                 (4,530
  

 

 

   

 

 

   

 

 

 

Net Income Attributable to Common Stockholders

   $ 41,516     $ 7,286     $ 106,757  
  

 

 

   

 

 

   

 

 

 

Earnings per share from continuing operations:

      

Basic

   $ 1.72     $ 0.29     $ 4.08  
  

 

 

   

 

 

   

 

 

 

Diluted

   $ 1.70     $ 0.29     $ 4.07  
  

 

 

   

 

 

   

 

 

 

Loss per share from discontinued operations:

      

Basic

   $ (0.04   $     $  
  

 

 

   

 

 

   

 

 

 

Diluted

   $ (0.04   $     $  
  

 

 

   

 

 

   

 

 

 

Earnings per share:

      

Basic

   $ 1.67     $ 0.29     $ 4.08  
  

 

 

   

 

 

   

 

 

 

Diluted

   $ 1.65     $ 0.29     $ 4.07  
  

 

 

   

 

 

   

 

 

 

Weighted average shares:

      

Basic

     24,843       24,833       25,031  
  

 

 

   

 

 

   

 

 

 

Diluted

     25,120       25,018       25,127  
  

 

 

   

 

 

   

 

 

 

See accompanying Notes to Consolidated Financial Statements

 

55


Table of Contents

Atlas Air Worldwide Holdings, Inc.

Consolidated Statements of Comprehensive Income

(in thousands)

 

    For the Years Ended December 31,  
    2016     2015     2014  

Net Income

  $ 41,516     $ 7,286     $ 102,227  

Other comprehensive income (loss):

     

Interest rate derivatives:

     

Net change in fair value

                (251

Reclassification to interest expense

    1,770       6,129       2,724  

Income tax expense

    (700     (2,277     (1,022

Foreign currency translation:

     

Translation adjustment

          (343     (168
 

 

 

   

 

 

   

 

 

 

Other comprehensive income

    1,070       3,509       1,283  
 

 

 

   

 

 

   

 

 

 

Comprehensive Income

    42,586       10,795       103,510  

Less: Comprehensive loss attributable to noncontrolling interests

                (4,352
 

 

 

   

 

 

   

 

 

 

Comprehensive Income Attributable to Common Stockholders

  $ 42,586     $ 10,795     $ 107,862  
 

 

 

   

 

 

   

 

 

 

See accompanying Notes to Consolidated Financial Statements

 

56


Table of Contents

Atlas Air Worldwide Holdings, Inc.

Consolidated Statements of Cash Flows

(in thousands)

 

     For the Years Ended December 31,  
          2016               2015               2014       
Operating Activities:       

Income from continuing operations, net of taxes

   $ 42,625     $ 7,286     $ 102,227  

Less: Loss from discontinued operations, net of taxes

     (1,109            
  

 

 

   

 

 

   

 

 

 

Net Income

     41,516       7,286       102,227  

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

      

Depreciation and amortization

     168,721       147,604       138,324  

Accretion of debt securities discount

     (1,277     (4,651     (7,947

Provision for allowance for doubtful accounts

     508       171       643  

Special charge, net of cash payments

     10,140       16,351       12,013  

Loss on early extinguishment of debt

     132       69,728        

Unrealized loss on financial instruments

     2,888              

Loss (gain) on disposal of aircraft

     (11     1,538       14,679  

Deferred taxes

     47,381       (25,898     (12,714

Stock-based compensation expense

     32,724       16,181       13,606  

Changes in:

      

Accounts receivable

     22,974       2,016       (21,070

Prepaid expenses, current assets and other assets

     (29,455     23,171       23,605  

Accounts payable and accrued liabilities

     (64,059     119,390       9,779  
  

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities

     232,182       372,887       273,145  

Investing Activities:

      

Capital expenditures

     (46,717     (45,040     (24,920

Payments for flight equipment and modifications

     (316,993     (227,048     (519,399

Acquisition of business, net of cash acquired

     (105,392            

Proceeds from investments

     11,714       80,302       3,728  

Proceeds from disposal of aircraft

           25,441        
  

 

 

   

 

 

   

 

 

 

Net cash used for investing activities

     (457,388     (166,345     (540,591

Financing Activities:

      

Proceeds from debt issuance

     103,492       568,033       572,552  

Customer maintenance reserves received

     15,105       16,148       17,555  

Customer maintenance reserves paid

           (3,801      

Proceeds from sale of warrants

           36,290        

Payments for convertible note hedges

           (52,903      

Proceeds from stock option exercises

           1,193       69  

Purchase of treasury stock

     (11,275     (26,522     (19,496

Excess tax benefit from stock-based compensation expense

     390       555       8  

Payment of debt extinguishment costs

           (36,054      

Payment of debt issuance costs

     (4,034     (14,509     (17,117

Payments of debt

     (179,153     (568,923     (301,550
  

 

 

   

 

 

   

 

 

 

Net cash (used for) provided by financing activities

     (75,475     (80,493     252,021  

Net increase (decrease) in cash, cash equivalents and restricted cash

     (300,681     126,049       (15,425

Cash, cash equivalents and restricted cash at the beginning of period

     438,931       312,882       328,307  
  

 

 

   

 

 

   

 

 

 

Cash, cash equivalents and restricted cash at the end of period

   $ 138,250     $ 438,931     $ 312,882  
  

 

 

   

 

 

   

 

 

 

Noncash Investing and Financing Activities:

      

Acquisition of flight equipment included in Accounts payable and accrued liabilities

   $ 14,345     $ 33,294     $ 29,087  
  

 

 

   

 

 

   

 

 

 

Acquisition of flight equipment under capital lease

   $ 10,800     $     $  
  

 

 

   

 

 

   

 

 

 

Disposition of aircraft included in Accounts receivable

   $     $     $ 5,072  
  

 

 

   

 

 

   

 

 

 

See accompanying Notes to Consolidated Financial Statements

 

57


Table of Contents

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
Loss
    Retained
Earnings
    Total
Stockholders’
Equity
    Noncontrolling
Interest
    Total
Equity
 

Balance at December 31, 2013

  $ 282     $ (125,826   $ 561,481     $ (10,677   $ 892,513     $ 1,317,773     $ 4,352     $ 1,322,125  

Net Income (loss)

                            106,757       106,757       (4,530     102,227  

Other comprehensive income

                      1,105             1,105       178       1,283  

Stock option and restricted stock compensation

                13,606                   13,606             13,606  

Purchase of 591,858 shares of treasury stock

          (19,496                       (19,496           (19,496

Exercise of 2,500 employee stock options

                69                   69             69  

Issuance of 358,447 shares of restricted stock

    4             (4                              

Tax benefit (expense) on restricted stock and stock options

                (2,019                 (2,019           (2,019
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2014

  $ 286     $ (145,322   $ 573,133     $ (9,572   $ 999,270     $ 1,417,795     $     $ 1,417,795  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Income

                            7,286       7,286             7,286  

Other comprehensive income

                      3,509             3,509             3,509  

Stock option and restricted stock compensation

                16,181                   16,181             16,181  

Purchase of 565,352 shares of treasury stock

          (26,522                       (26,522           (26,522

Exercise of 25,373 employee stock options

                1,193                   1,193             1,193  

Issuance of 368,912 shares of restricted stock

    4             (4                              

Equity component of convertible notes, net of tax

                32,234                   32,234             32,234  

Purchase of convertible note hedges, net of tax

                (33,837                 (33,837           (33,837

Issuance of warrants

                36,290                   36,290             36,290  

Tax benefit (expense) on restricted stock and stock options

                54                   54             54  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2015

  $ 290     $ (171,844   $ 625,244     $ (6,063   $ 1,006,556     $ 1,454,183     $     $ 1,454,183  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Income

                            41,516       41,516             41,516  

Other comprehensive income

                      1,070             1,070             1,070  

Stock option and restricted stock compensation

                32,724                   32,724             32,724  

Purchase of 297,569 shares of treasury stock

          (11,275                       (11,275           (11,275

Issuance of 678,160 shares of restricted stock

    6             (6                              

Tax benefit (expense) on restricted stock and stock options