FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[ x ] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended September 30, 1998
[ ] Transition Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Commission File Number
0-25732
ATLAS AIR, INC.
(Exact name of registrant as specified in its charter)
Delaware 84-1207329
(State of other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
538 Commons Drive, Golden, Colorado 80401
(Address of principal executive offices) (Zip Code)
(303) 526-5050
(Registrant's telephone number, including area code)
Indicated 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 the past 90 days.
[ x ] Yes [ ] No
As of November 2, 1998 the Registrant had 22,410,841 shares of
$.01 par value Common Stock outstanding.
ATLAS AIR, INC. AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets-
September 30, 1998 and December 31, 1997
Consolidated Statements of Operations-
Nine Months Ended September 30, 1998 and 1997
Consolidated Statements of Cash Flows-
Nine Months Ended September 30, 1998 and 1997
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
Exhibit 27 - Financial Data Schedule
Signatures
ATLAS AIR, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
(Unaudited)
ASSETS
Current assets:
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 153,351 $ 41,334
Short-term investments 100,000 111,635
Accounts receivable and other, net 65,108 55,702
Total current assets 318,459 208,671
Property and equipment:
Flight equipment 1,429,915 1,154,562
Other 8,978 7,607
1,438,893 1,162,169
Less accumulated depreciation (128,112) (98,959)
Net property and equipment 1,310,781 1,063,210
Other assets:
Debt issuance costs, net of
accumulated amortization 23,871 21,705
Deposits and other 3,219 3,829
27,090 25,534
Total assets $1,656,330 $1,297,415
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 56,261 $ 40,049
Accounts payable and accrued 82,860 88,105
expenses
Income tax payable 8,424 154
Total current liabilities 147,545 128,308
Long-term debt, net of current portion 935,690 736,026
Other liabilities 269,206 163,167
Deferred income tax payable 39,002 31,085
Commitments and contingencies
Stockholders' equity:
Preferred Stock, $1 par value;
10,000,000 shares authorized; -- --
no shares issued
Common Stock, $0.01 par value;
50,000,000 shares authorized;
22,521,659 and 22,450,229 shares
issued, respectively 225 225
Additional paid-in capital 177,448 176,253
Retained earnings 90,942 62,803
Treasury Stock, at cost; 115,218
and 19,073 shares, respectively (3,728) (452)
Total stockholders' equity 264,887 238,829
Total liabilities and
stockholders' equity $1,656,330 $1,297,415
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
ATLAS AIR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
Revenues:
<S> <C> <C> <C> <C>
Contract services $ 98,027 $101,136 $261,205 $264,930
Scheduled services 245 339 441 7,020
Charters and other 10,917 2,722 15,127 8,198
Total operating revenues 109,189 104,197 276,773 280,148
Operating expenses:
Flight crew salaries and 9,661 7,491 24,110 21,437
benefits
Other flight-related 9,116 6,825 21,093 20,546
expenses
Maintenance 23,869 33,458 65,385 88,470
Aircraft and engine 3,977 7,794 6,163 23,279
rentals
Fuel and ground handling 2,570 1,909 6,317 9,024
Depreciation and 15,600 11,010 40,837 30,183
amortization
Other 8,680 13,977 24,091 31,888
Write-off of capital -- -- -- 27,100
investment and other
Total operating expenses 73,473 82,464 187,996 251,927
Operating income 35,716 21,733 88,777 28,221
Other income (expense):
Interest income 3,229 1,669 7,821 5,161
Interest expense (18,707) (13,599) (51,892) (37,246)
(15,478) (11,930) (44,071) (32,085)
Income (loss) before income 20,238 44,706 (3,864)
taxes 9,803
(Provision for) benefit from (7,493) (3,578) (16,546) 1,411
income taxes
Income (loss) before 12,745 28,160 (2,453)
extraordinary item 6,225
Extraordinary item:
Gain from extinguishment
of debt, net of applicable
taxes of $9,622 -- -- -- 16,740
Net income $ 12,745 $ 6,225 $ 28,160 $ 14,287
Basic earnings per share:
Income (loss) before
extraordinary item $ 0.57 $ 0.28 $ 1.25 $ (0.11)
Extraordinary item -- -- -- 0.75
Net income $ 0.57 $ 0.28 $ 1.25 $ 0.64
Weighted average common
shares outstanding 22,431 22,450 22,460 22,450
Diluted earnings per share:
Income (loss) before
extraordinary item $ 0.57 $ 0.28 $ 1.25 $ (0.11)
Extraordinary item -- -- -- 0.75
Net income $ 0.57 $ 0.28 $ 1.25 $ 0.64
Weighted average common
shares outstanding 22,534 22,530 22,562 22,538
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
ATLAS AIR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1998 1997
Operating activities:
<S> <C> <C> <C> <C>
Net income $ 28,160 $ 14,287
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization 40,984 31,283
Amortization of debt issuance and
lease financing costs 3,739 2,418
Gain on sale of property and
equipment -- (1,090)
Write-off of capital investment and
other -- 27,100
Change in deferred income tax
payable 7,917 9,007
Extraordinary gain -- (26,362)
Changes in operating assets and
liabilities:
Accounts receivable and other (9,406) (15,310)
Deposits and other 610 (520)
Accounts payable and accrued
expenses (5,245) 44,065
Income tax payable 8,270 (6,209)
Net cash provided by operating
activities 75,029 78,669
Investment activities:
Purchase of property and equipment (260,627) (335,526)
Sale of property and equipment -- 3,750
Purchase of short-term investments (206,029) (1,270,707)
Maturity of short-term investments 217,664 1,270,890
Net cash used in investing
activities (248,992) (331,593)
Financing activities:
Issuance of Common Stock 1,195 --
Purchase of Treasury Stock (3,894) (802)
Issuance of Treasury Stock 597 493
Net proceeds from debt issuance and
lease financing 361,091 769,719
Principal payments on notes payable (66,871) (479,185)
Debt issuance costs (6,138) (16,365)
Net cash provided by financing
activities 285,980 273,860
Net increase in cash 112,017 20,936
Cash and cash equivalents at beginning
of period 41,334 9,793
Cash and cash equivalents at end of
period $ 153,351 $ 30,729
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
ATLAS AIR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Unaudited Consolidated Financial Statements
In the opinion of management, the accompanying unaudited
consolidated financial statements contain all adjustments
(consisting only of normal recurring items) necessary to present
fairly the financial position of Atlas Air, Inc. and its wholly-
owned subsidiaries (collectively, the Company) as of September
30, 1998 and the results of operations and cash flows for the
periods presented. Certain information and footnote disclosures
normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed
or omitted pursuant to the Securities and Exchange Commission's
rules and regulations. The results of operations for the periods
presented are not necessarily indicative of the results to be
expected for the full year. Management believes the disclosures
made are adequate to ensure that the information is not
misleading, and suggests that these financial statements be read
in conjunction with the Company's December 31, 1997 audited
financial statements included in its Annual Report on Form 10-K.
2. Reclassifications
Certain prior year amounts have been reclassified to conform
to current year presentation.
3. Recently Issued Accounting Standards
In March 1998, the Accounting Standards Executive Committee
("AcSEC") of the American Institute of Certified Public
Accountants ("AICPA") issued Statement of Position ("SOP") 98-1
"Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use." SOP 98-1 provides guidance on
accounting for the costs of computer software developed or
obtained for internal use. SOP 98-1 is effective for financial
statements for fiscal years beginning after December 15, 1998.
The Company believes that the application of SOP 98-1 will not
have a material impact on its financial statements.
In April 1998, the AcSEC issued SOP 98-5 "Reporting on the
Costs of Start-up Activities." SOP 98-5 provides guidance on the
financial reporting of start-up costs and organization costs and
requires such costs to be expensed as incurred. Generally,
initial application of SOP 98-5 should be reported as the
cumulative effect of a change in accounting principle. SOP 98-5
is effective for financial statements for fiscal years beginning
after December 15, 1998. Presently, the Company is deferring
certain start-up costs related to the introduction of new Boeing
747-400 freighter aircraft into the Company's fleet. The Company
expects that the net of tax effect of the application of SOP 98-5
in the first quarter of 1999 will be in the range of $1 million
to $2 million.
In June 1998, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 133 "Accounting for Derivative Instruments and
Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards requiring that every derivative instrument
(including certain derivative instruments embedded in other
contracts) be recorded in the balance sheet as either an asset or
liability measured at its fair value. SFAS No. 133 requires that
changes in the derivative's fair value be recognized currently in
earnings unless specific hedge accounting criteria are met.
Special accounting for qualifying hedges allows a derivative's
gains and losses to offset related results on the hedged item in
the income statement, and requires that a company must formally
document, designate, and assess the effectiveness of transactions
that receive hedge accounting. SFAS No. 133 is effective for
years beginning after June 15, 1999 and may be implemented as of
the beginning of any fiscal quarter after June 15, 1998. The
Company has not yet quantified the impact, if any, of adopting
SFAS No. 133 on its financial statements and has not determined
the timing of or method of its adoption of SFAS No. 133.
However, SFAS No. 133 could increase volatility in earnings and
other comprehensive income.
4. Short-Term Investments
Proceeds from the secondary public offering of the Company's
Common Stock in May 1996, plus additional funds, were invested in
various held-to-maturity securities, as defined in SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity
Securities," which requires investments in debt securities to be
classified as held-to-maturity and measured at amortized cost in
the statement of financial position only if the reporting
enterprise has the positive intent and ability to hold those
securities to maturity. The following table sets forth the
aggregate fair value, gross unrealized holding gains, gross
unrealized holding losses, and amortized/accreted cost basis by
major security type as of September 30, 1998 (in thousands):
<TABLE>
<CAPTION>
Gross Gross (Amorti-
Aggregate Unrealized Unrealized zation)
Security Type Fair Holding Holding Accretion
Value Gains Losses
<S> <C> <C> <C> <C>
Commercial Paper $ 18,966 $2 $ -- $148
Medium Term Notes 5,004 5 -- 1
U.S. Government Agencies 20,019 19 -- --
Foreign Debt 2,302 1 -- (1)
Market Auction Preferreds 53,300 -- -- --
Totals $ 99,591 $27 $ -- $148
</TABLE>
In addition, there was approximately $436,000 of accrued interest
on Short-Term Investments at September 30, 1998. Interest earned
on these investments and maturities of these investments are
reinvested in similar securities and cash equivalents. In April
1998, the Company invested approximately $169.5 million of
proceeds from the sale of its 9 1/4% Senior Notes in similar
securities (see Note 5).
5. Commitments and Contingencies
In June 1997, the Company entered into an agreement with The
Boeing Company ("Boeing") to purchase 10 new 747-400 freighter
aircraft to be powered by engines acquired from General Electric
("GE"), with options to purchase up to 10 additional 747-400
aircraft (the "Boeing Purchase Agreement"). The Company has
arranged leveraged lease financing for the first three of the 747-
400 freighter aircraft that were delivered in July, August and
October 1998 (see EETCs discussed below). The Boeing Purchase
Agreement requires that the Company pay pre-delivery deposits to
Boeing prior to the delivery date of each 747-400 freighter
aircraft in order to secure delivery of the 747-400 freighter
aircraft and to defray a portion of the manufacturing costs.
Based on the current expected firm aircraft delivery schedule,
the Company expects the maximum total amount of pre-delivery
deposits at any time outstanding will be approximately $162.3
million, which was paid as of June 30, 1998. There were
approximately $143.1 million of pre-delivery deposits outstanding
at September 30, 1998 which were included in flight equipment.
For the remainder of 1998 and for the year 1999, the Company
expects to pay $16.7 million and $11.8 million, respectively, in
pre-delivery deposits in accordance with the firm order pre-
delivery deposits schedule. Upon each delivery, Boeing will
refund to the Company the pre-delivery deposits associated with
the delivered 747-400 freighter aircraft. Boeing delivered the
first three aircraft at the end of July 1998, in August 1998 and
in October 1998, respectively, and refunded the pre-delivery
deposits associated with these aircraft. These three aircraft
were placed into service under long-term contracts, the first
aircraft with British Airways World Cargo ("British Airways") and
the second and third aircraft with Cargolux Airlines
International, S.A. ("Cargolux"). In addition, the Boeing
Purchase Agreement provides for a deferral of a portion of the
pre-delivery deposits (deferred aircraft obligations) for which
the Company accrues and pays interest quarterly at 6-month LIBOR,
plus 2.0%. As of September 30, 1998, there was $235.6 million of
deferred aircraft obligations included in other liabilities, and
the combined interest rate was approximately 7.8%.
In January and February 1998, pursuant to an early lease
termination agreement negotiated in November 1997 with Philippine
Airlines ("PAL"), the Company delivered to Boeing for
modification to cargo configuration the aircraft acquired from
Marine Midland Bank in December 1996 and the aircraft acquired
from Citicorp Investor Lease, Inc. in May 1997. The first
aircraft was re-delivered to the Company at the end of April 1998
and the second aircraft was re-delivered to the Company in July
1998. The financing for the modification to cargo configuration
was provided under the Aircraft Acquisition Credit Facility (as
defined in the Company's Form 10-K for 1997), under which the
Company borrowed a total of $3.3 million during the first quarter
of 1998 with respect to these aircraft. In April 1998 and July
1998, the Company borrowed an additional $13.8 million and $17.2
million, respectively, to pay for the final costs of conversion
for these two aircraft.
In February 1998, the Company completed an offering of
$538.9 million of Pass Through Certificates, also known as
enhanced equipment trust certificates (the "EETCs"). The EETCs
are not direct obligations of, or guaranteed by, the Company and
therefore are not included in the Company's consolidated
financial statements. In November and December 1997, the Company
entered into three Treasury Note hedges, approximating $300
million of principal, for the purpose of minimizing the risk
associated with the fluctuations in interest rates, which are the
basis for the pricing of the EETCs which were priced in January
1998. The effect of the hedge resulted in a deferred cost of
$6.3 million, which will be amortized over the expected twenty-
year life associated with this financing. The cash proceeds from
the EETCs were deposited with an escrow agent and have been used,
and will be used, to finance (through either leveraged leases or
secured debt financings) the acquisition of the first five of the
10 new 747-400 freighter aircraft from Boeing scheduled to be
delivered to the Company during the period July 1998 through
December 1998. There can be no assurance that the Company will
be able to obtain sufficient financing to fund the purchase of
the remaining five 747-400 freighter aircraft, or if such
financing is available, that it will be available on a
commercially reasonable basis. If it is unable to do so, the
Company could be required to modify its expansion plans or to
incur higher than anticipated financing costs, which could have a
material adverse effect on the Company. In connection with the
EETCs, the Company intends to seek certain owner participants who
will commit lease equity financing to be used in leveraged leases
of such aircraft. The Company has arranged for equity
participation for the first three 747-400 freighter aircraft
deliveries, each of which occurred at the end of July 1998, in
August 1998 and in October 1998. The Company has determined that
these leveraged leases are operating leases as defined under SFAS
No. 13 "Accounting for Leases" and lease credits are being
amortized over the lives of the respective leases, with
unamortized credits included in other liabilities.
In March 1998, the Company entered into a 10-year agreement
with GE to provide all repair and overhaul work on the engines
related to both the 10 firm and 10 option 747-400 freighter
aircraft. This agreement is based on a fixed cost per flight
hour, similar to the Company's engine maintenance agreement with
GE for its 747-200 fleet.
In April 1998, the Company completed the offering of $175
million of unsecured 9 1/4% Senior Notes at 99.867% due 2008 (the
"9 1/4% Senior Notes"). The proceeds of the offering will be
used to repay $80 million of the Aircraft Acquisition Credit
Facility and for general corporate purposes, which may include
the partial funding of the redemption of the Company's
outstanding 12 1/4% Pass Through Certificates due 2002 (the
"Equipment Notes"), which are subject to redemption at the option
of the Company on or after December 1, 1998. Interest on the 9
1/4% Senior Notes is payable semi-annually on April 15 and
October 15 of each year, commencing October 15, 1998. The 9 1/4%
Senior Notes are redeemable at the option of the Company, in
whole or in part, at any time on or after April 15, 2003,
pursuant to a defined schedule. The 9 1/4% Senior Notes are
senior indebtedness of the Company, ranking pari passu in right
of payment with all existing and future senior indebtedness of
the Company and senior in right of payment to all subordinated
indebtedness of the Company. The 9 1/4% Senior Notes are
effectively subordinated, however, to all secured indebtedness of
the Company and all existing and future liabilities of the
Company's subsidiaries.
In April 1998, the Company entered into a sublease and ramp
use agreement with American Airlines, Inc. for 145,000 square
feet of hangar, office and parking space at Miami International
Airport in support of the Company's increased operations. The
lease is for a period in excess of four years and commenced July
1, 1998, at a monthly rate of approximately $105,000, subject to
an annual escalation factor. Additionally, in the third quarter
of 1998, the Company leased an additional 8,000 square feet at
its existing facility located at John F. Kennedy International
Airport ("JFK") with a monthly rate increase to approximately
$88,000.
In May 1998, the Company agreed to purchase a Boeing
Business Jet ("BBJ") from Boeing for approximately $30 million.
As of September 30, 1998, the Company had paid approximately $9.0
million in pre-delivery deposits and there was approximately $7.0
million of deferred aircraft obligations included in other
liabilities for which the interest rate was approximately 7.8%.
This aircraft will be used to transport Company executives on
business trips throughout the world. The Company intends to sell
its current corporate aircraft (currently owned by a subsidiary
of the Company), upon delivery of the BBJ, and the Company's
Chief Executive Officer has agreed to share in the ownership and
operating costs of the BBJ.
In June 1998, the Company entered into an agreement with
Lufthansa Technik Aktiengesellschaft ("Lufthansa Technik")
pursuant to which Lufthansa Technik will provide all required
airframe maintenance for the Company's initial order of 10 747-
400 freighter aircraft, plus any additional 747-400 freighter
aircraft the Company purchases pursuant to its option in the
Boeing Purchase Agreement, on a fixed cost per flight hour basis
for 10 years, with a provision for the Company to terminate the
agreement as of June 2003.
In July 1998, the Company secured permanent financing in the
amount of $38.9 million from Banc One Leasing Corporation for one
of the aircraft originally financed under the Aircraft
Acquisition Credit Facility. The new financing carries a term of
10 years at an annual interest rate of approximately 7.5% with
quarterly debt service payments.
In July 1998, the Company purchased a 747-200 freighter
aircraft from Air France Partnairs Leasing N.V. for which the
Company financed approximately $31.3 million through the Aircraft
Acquisition Credit Facility. This aircraft is currently being
leased to a third-party with a scheduled lease termination at the
end of January 1999, at which time the aircraft will be returned
to the Company's fleet.
In September 1998, the commitment for the Aircraft
Acquisition Credit Facility was decreased from $250.0 million to
$200.0 million in connection with a revision of terms that are
more favorable to the Company, including a decrease in the
interest rate from LIBOR, plus 2.5%, to LIBOR, plus 2.0%.
In September 1998, the Company entered into an agreement to
acquire three 747-200 freighter aircraft from Cargolux for
scheduled deliveries in the fourth quarter of 1998. In addition,
one of these aircraft will be leased back to Cargolux,
immediately upon delivery to the Company.
Under the FAA's Directives issued under its "Aging Aircraft"
program, the Company is subject to extensive aircraft
examinations and may be required to undertake structural
modifications to its fleet to address the problem of corrosion
and structural fatigue. In November 1994, Boeing issued Nacelle
Strut Modification Service Bulletins which have been converted
into Directives by the FAA. Eight of the Company's Boeing 747-
200 aircraft will have to be brought into compliance with such
Directives by March 2000 at an estimated total cost of
approximately $4.0 million. As part of the FAA's overall aging
aircraft program, it has issued Directives requiring certain
additional aircraft modifications to be accomplished. The Company
estimates that the modification costs per 747-200 aircraft will
range between $2 million and $3 million. Thirteen aircraft in
the Company's 747-200 fleet have already undergone the major
portion of such modifications. The remaining eight 747-200
aircraft will require modification prior to the year 2009. Other
Directives have been issued that require inspections and minor
modifications to Boeing 747-200 aircraft. The newly manufactured
747-400 freighter aircraft were delivered to the Company in
compliance with all existing FAA Directives. It is possible that
additional Directives applicable to the types of aircraft or
engines included in the Company's fleet could be issued in the
future, the cost of which could be substantial.
On February 24, 1997, the Company filed a complaint for
declaratory judgment in the Colorado District Court, Jefferson
County against Israel Aircraft Industries Ltd. ("IAI") for
mechanical problems the Company experienced with respect to an
aircraft the Company sub-leased from IAI. The Company is seeking
approximately $4 million in damages against IAI to be offset by
the amount, if any, the Company owes IAI pursuant to the sub-
lease. IAI had the case removed to the U.S. District Court,
District of Colorado on April 21, 1997 and has filed
counterclaims alleging damages of approximately $9 million based
on claims arising from the sub-lease. The Company intends to
vigorously defend against all of IAI's claims.
In March 1997, Air Support International, Inc. ("ASI") filed
a complaint against the Company in the U.S. District Court,
Eastern District of New York alleging actual and punitive damages
of approximately $13.5 million arising from the Company's refusal
to pay commissions which ASI claims it is owed for allegedly
arranging certain contracts between the Company and its
customers. The Company intends to vigorously defend against all
of ASI's claims.
6. Subsequent Events
In October 1998, the Company purchased a 747-200 freighter
aircraft from Cargolux (see Note 5) and immediately placed this
aircraft into service with Cargolux. The Company financed this
aircraft through the Aircraft Acquisition Credit Facility for
approximately $31.0 million.
In October 1998, the Company entered into separate long-term
contracts with Iberia Airlines of Spain and with El Al Israel
Airlines Ltd. for utilization of 747-200 freighter aircraft.
These contracts represent an expansion of the Company's customer
base for long-term contracts. In addition, the third 747-400
freighter aircraft delivered to the Company was placed into
service under a long-term contract with Cargolux (see Note 5).
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
The Company provides airport-to-airport cargo transportation
services throughout the world to major international air carriers
generally under three- to five-year fixed-rate contracts which
typically require that the Company supply aircraft, crew,
maintenance and insurance (the "ACMI Contracts"). The cargo
operations of the Company's airline customers are seasonal in
nature, with peak activity occurring traditionally in the second
half of the year, and with a significant decline occurring in the
first quarter. This decline in cargo activity is largely due to
the decrease in shipping that occurs following the December and
first quarter holiday seasons associated with the celebration of
Christmas and the Chinese New Year. Certain of the Company's
customers have, in the past, elected to use that period of the
year to exercise their contractual options to cancel a limited
number (generally not more than 5% per year) of guaranteed hours
with the Company, and are expected to continue to do so in the
future. As a result, the Company's revenues typically decline in
the first quarter of the year as its contractual aircraft
utilization level temporarily decreases. The Company seeks to
schedule, to the extent possible, its major aircraft maintenance
activities during this period to take advantage of any unutilized
aircraft time.
The aircraft acquisitions, lease arrangements and
modification schedule are described in Note 6 of the Company's
December 31, 1997 consolidated financial statements. The timing
of when an aircraft enters the Company's fleet can affect not
only annual performance, but can make quarterly results vary,
thereby affecting the comparability of operations from period to
period. In addition, the number of aircraft utilized from period
to period as spare maintenance back-up aircraft may also cause
quarterly results to vary.
The table below sets forth selected financial and operating
data for the first, second and third quarters of 1998 and 1997
(dollars in thousands).
<TABLE>
<CAPTION>
1998
Cumu- 3rd 2nd 1st
lative Quarter Quarter Quarter
<S> <C> <C> <C> <C>
Total operating revenues $276,773 $109,189 $87,950 $79,634
Operating expenses 187,996 73,473 56,432 58,091
Operating income 88,777 35,716 31,518 21,543
Other income (expense) (44,071) (15,478) (15,479) (13,114)
Net income 28,160 12,745 10,105 5,310
Block hours 51,142 18,926 16,828 15,388
Average aircraft operated 18.2 19.9 17.7 17.0
Operating margin 32.1% 32.7% 35.8% 27.1%
</TABLE>
<TABLE>
<CAPTION>
1997
Cumu- 3rd 2nd 1st
lative Quarter Quarter Quarter
<S> <C> <C> <C> <C>
Total operating revenues $280,148 $104,197 $93,902 $82,049
Operating expenses 251,927 82,464 104,556 64,907
Operating income (loss) 28,221 21,733 (10,654) 17,142
Other income (expense) (32,085) (11,930) (10,908) (9,248)
Net income 14,287 6,225 3,048 5,013
Block hours 52,921 19,937 17,541 15,443
Average aircraft operated 19.1 20.4 19.5 17.2
Operating margin (deficit) 10.1% 20.9% (11.4)% 20.9%
</TABLE>
Operating Revenues and Results of Operations
Total operating revenues for the quarter ended September 30,
1998 increased to $109.2 million from $104.2 million for the same
period in 1997, or approximately 5%. There was a decline in the
average number of aircraft in the Company's fleet during the
third quarter of 1998, to 19.9 aircraft compared to 20.4 during
the same period in 1997, or a decrease of approximately 2%.
Total block hours for the third quarter of 1998 were 18,926
compared to 19,937 for the same period in 1997, a decrease of
approximately 5%, reflecting a slightly lower utilization per
average aircraft period over period as a result of a greater
requirement for spare maintenance back-up aircraft, and the
reduction in average aircraft operated. Revenue per block hour
increased by approximately 10% to $5,769 for the third quarter of
1998 compared to $5,226 for the third quarter of 1997. This was
substantially due to (1) the increase in the volume of charter
operations period over period, due partially to the operation of
the first two 747-400 deliveries under non-scheduled service
during the period of their FAA-required proving runs prior to
their entry into scheduled service, for which the rate per block
hour is higher due to additional operating costs borne by the
Company under such arrangements, (2) the introduction into
service of the first two 747-400 freighter aircraft, which
operate on a higher block hour rate than the 747-200 freighter
aircraft, and (3) delayed delivery credits provided to the
Company with respect to the late delivery of the first and second
747-400 freighter aircraft, pursuant to the Boeing Purchase
Agreement. Charter operations are performed on an ad hoc basis
and are generally dependent upon excess availability of the
Company's aircraft and customer demand.
The Company's operating results improved by 64% from a $21.7
million operating profit for the third quarter of 1997 to an
operating profit of $35.7 million for the third quarter of 1998.
Results of operations were favorably impacted by lower
maintenance costs due to the return upon lease termination at the
beginning of 1998 of the five aircraft which the Company had
leased from Federal Express Corporation (the "FedEx Aircraft").
The FedEx Aircraft experienced significantly higher maintenance
costs and were less reliable compared to the other aircraft in
the Company's fleet. In addition, operating results improved due
to the increase in the percentage of owned aircraft compared to
leased aircraft in the Company's fleet period over period. Net
income of $6.2 million for the third quarter of 1997 increased by
105% to a net income of $12.7 million for the third quarter of
1998.
Total operating revenues for the nine months ended September
30, 1998 decreased to $276.8 million from $280.1 million for the
same period in 1997, or approximately 1%. There was a decline in
the average number of aircraft in the Company's fleet during the
first nine months of 1998, to 18.2 aircraft compared to 19.1
during the same period in 1997, a decrease of approximately 5%.
Total block hours for the first nine months of 1998 were 51,142
compared to 52,921 for the same period in 1997, a decrease of
approximately 3%, reflecting a slightly higher utilization per
average aircraft period over period. Revenue per block hour
increased by approximately 2% to $5,412 for the first nine months
of 1998 compared to $5,294 for the same period in 1997. This was
substantially due to the increase in the volume of charter
operations period over period, the introduction of the 747-400
freighter aircraft and the delayed delivery credits, as discussed
above.
The Company's operating results improved by approximately
215% from a $28.2 million operating profit for the first nine
months of 1997 to an operating profit of $88.8 million for the
first nine months of 1998. Results of operations were favorably
impacted by lower maintenance costs and the increase in the
percentage of owned aircraft, as discussed above. Net income of
$14.3 million for the first nine months of 1997 increased by 97%
to a net income of $28.2 million for the first nine months of
1998.
Operating Expenses
The Company's principal operating expenses include flight
crew salaries and benefits; other flight-related expenses;
maintenance; aircraft and engine rentals; fuel costs and ground
handling; depreciation and amortization; and other expenses.
Flight crew salaries and benefits include all such expenses
for the Company's pilot work force. Flight crew salaries and
benefits increased to $9.7 million in the third quarter of 1998
compared to $7.5 million in the same period of 1997, or
approximately 29%, due primarily to increased staffing associated
with overall operational requirements and the introduction of the
747-400 freighter aircraft into the Company's fleet in the second
half of 1998. The expense increased approximately 12% from $21.4
million to $24.1 million during the first nine months of 1998
compared to the year-earlier period. Expense in both the third
quarter of 1998 and the first nine months of 1998 was partially
offset by a reduction in block hours period over period. On a
block hour basis, expense increased by approximately 36% to $511
per hour for the third quarter of 1998 from $376 per hour for the
same period in 1997, and by approximately 16% to $471 per hour
for the first nine months of 1998 from $405 per hour for the year-
earlier period.
Other flight-related expenses include hull and liability
insurance on the Company's fleet of Boeing 747 aircraft, crew
travel and meal expenses, initial and recurring crew training
costs and other expenses necessary to conduct its flight
operations.
Other flight-related expenses increased to $9.1 million in
the third quarter of 1998 compared to $6.8 million for the same
period of 1997, and to $21.1 million for the first nine months of
1998 compared to $20.5 million for the year-earlier period, or
approximately 34% and 3%, respectively. These increases were
primarily due to the quarter over quarter increase in crew travel
costs associated with operational requirements and with the
introduction of the 747-400 freighter aircraft into the Company's
fleet, partially offset by the decrease in block hours. On a
block hour basis, other flight-related expenses increased by
approximately 41% to $482 per hour for the third quarter of 1998
compared to $342 per hour for the same period in 1997, and by
approximately 6% to $412 per hour for the first nine months of
1998 compared to $388 per hour for the same period in 1997.
Maintenance expenses include all expenses related to the
upkeep of the aircraft, including maintenance, labor, parts,
supplies and maintenance reserves. The costs of C Checks, D
Checks and engine overhauls not otherwise covered by maintenance
reserves are capitalized as they are incurred and amortized over
the life of the maintenance event. In addition, in January 1995
the Company contracted with KLM Royal Dutch Airlines ("KLM") for
a significant part of its regular maintenance operations and
support on a fixed cost per flight hour basis. Effective October
1996, certain additional aircraft engines were accepted into the
GE engine maintenance program, also on a fixed cost per flight
hour basis, pursuant to a 10 year maintenance agreement. In the
first half of 1998, the Company entered into separate long-term
contracts with Lufthansa Technik Aktiengesellschaft ("Lufthansa
Technik") for the airframe maintenance and with GE for the engine
maintenance of the 747-400 freighter aircraft, in conjunction
with the introduction of the 747-400 freighter aircraft into the
Company's fleet in the second half of 1998.
Maintenance expense decreased to $23.9 million in the third
quarter of 1998 from $33.5 million in the same period of 1997,
and to $65.4 million in the nine months ended September 30, 1998
from $88.5 million in the nine months ended September 30, 1997,
or approximately 29% and 26%, respectively. These decreases were
primarily due to the return of the FedEx Aircraft upon lease
termination at the beginning of the first quarter of 1998. On a
block hour basis, maintenance expense decreased by approximately
25% and 24%, respectively, primarily due to higher maintenance
costs associated with the FedEx Aircraft in the 1997 periods
compared to the other aircraft in the Company's fleet.
Aircraft and engine rentals include the cost of leasing
aircraft and spare engines, as well as the cost of short-term
engine leases required to replace engines removed from the
Company's aircraft for either scheduled or unscheduled
maintenance and any related short-term replacement aircraft lease
costs.
Aircraft and engine rentals were $4.0 million in the third
quarter of 1998 compared to $7.8 million in the same period of
1997, and were $6.2 million in the first nine months of 1998
compared to $23.3 million in the first nine months of 1997, or a
decrease of approximately 49% and 74%, respectively. The
reductions in quarter and nine months expense in 1998 were
attributed to the reduction in leased aircraft in the 1998
periods compared to the 1997 periods. The cost of engine rentals
in the 1998 and 1997 quarterly and nine month periods was
insignificant, due to the use of owned spare engines.
Because of the nature of the Company's ACMI Contracts with
its airline customers, under which the Company is responsible for
the ownership cost and maintenance of the aircraft and for
supplying aircraft crews and insurance, the Company's airline
customers bear all other operating expenses. As a result, the
Company incurs fuel and ground handling expenses only when it
operates on its own behalf, either in scheduled services, for ad
hoc charters or for ferry flights. Fuel expenses for the
Company's non-ACMI contract services include both the direct cost
of aircraft fuel as well as the cost of delivering fuel into the
aircraft. Ground handling expenses for non-ACMI contract service
include the costs associated with servicing the Company's
aircraft at the various airports to which it operates.
Fuel and ground handling costs increased by approximately
35% to $2.6 million for the third quarter of 1998 from $1.9
million for the third quarter of 1997, and decreased by
approximately 30% to $6.3 million for the first nine months of
1998 from $9.0 million for the first nine months of 1997. The
increase quarter over quarter was primarily due to the increased
charter operations and the nine month decrease was primarily due
to a reduction in scheduled service compared to the same period
in 1997.
Depreciation and amortization expense includes depreciation
on aircraft, spare parts and ground equipment, and the
amortization of capitalized major aircraft maintenance and engine
overhauls.
Depreciation and amortization expense increased to $15.6
million in the third quarter of 1998 from $11.0 million in the
same period of 1997, and to $40.8 million in the first nine
months of 1998 from $30.2 million in the year-earlier period, or
approximately 42% and 35%, respectively. These increases reflect
the additional owned aircraft, engines and spare parts for the
third quarter and nine months of 1998 over the same periods in
1997.
Other operating expenses include salaries, wages, benefits,
travel and meal expenses for non-crewmembers and other
miscellaneous operating costs.
Other operating expenses decreased to $8.7 million in the
third quarter of 1998 from $14.0 million in the same period of
1997, and to $24.1 million for the first nine months of 1998 from
$31.9 million for the same period of 1997, or approximately 38%
and 24%, respectively. The reduced expense in cost from the prior
year quarter and nine month periods was due primarily to the
capitalization of start-up costs in the second and third quarters
of 1998 associated with the introduction of the 747-400 aircraft
and manufacturer credits, partially offset by increased staffing
and other resources associated with the expansion of the
Company's operations.
Other Income (Expense)
Other income (expense) consists of interest income and
interest expense. Interest income increased to $3.2 million in
the third quarter of 1998 from $1.7 million in the same period of
1997, and to $7.8 million for the first nine months of 1998 from
$5.2 million for the first nine months of 1997, primarily due to
the investment of proceeds from the Company's issuance of the 9
1/4% Senior Notes (as defined) in April 1998 and the return of
deposits and proceeds from financing the delivery of the first
two 747-400 freighter aircraft in the third quarter of 1998.
Interest expense increased to $18.7 million in the third quarter
of 1998 from $13.6 million in the same period of 1997, and to
$51.9 million in the first nine months of 1998 from $37.2 million
in the year-earlier period, or approximately 38% and 39%,
respectively. These increases resulted from the financing
associated with the acquisition of additional 747-200 aircraft,
the cost of freighter conversions between these periods and the
issuance of $175 million of the 9 1/4% Senior Notes in April
1998.
Income Taxes
Pursuant to the provisions of SFAS No. 109 "Accounting for
Income Taxes," the Company has recorded a tax provision based on
tax rates in effect during the period. Accordingly, the Company
accrued taxes at the rate of 37.0% during the third quarter and
first nine months of 1998 and 36.5% during the third quarter and
first nine months of 1997. Due to the amount of owned assets,
which are depreciated at an accelerated rate for tax purposes, a
significant portion of the Company's tax provision for the 1998
and 1997 periods is deferred.
Liquidity and Capital Resources
At September 30, 1998, the Company had cash and cash
equivalents of approximately $153.4 million, short-term
investments of approximately $100.0 million and working capital
of approximately $170.9 million. During the first nine months of
1998, cash and cash equivalents increased approximately $112.0
million, principally reflecting cash provided by operations of
$75.0 million, net proceeds from debt issuance and lease
financing of $361.1 million, net proceeds from the maturity and
purchase of short-term investments of $11.6 million and proceeds
from the exercise of stock options of $1.2 million, partially
offset by investments in flight and other equipment of $260.6
million, principal reductions of indebtedness of $66.9 million,
debt issuance costs of $6.1 million and net treasury stock
purchases of $3.3 million. The Company's overall borrowing level
increased to $992.0 million at September 30, 1998 from $776.1
million at December 31, 1997.
In June 1997, the Company entered into an agreement with The
Boeing Company ("Boeing") to purchase 10 new 747-400 freighter
aircraft to be powered by engines acquired from General Electric
("GE"), with options to purchase up to 10 additional 747-400
aircraft (the "Boeing Purchase Agreement"). The Company has
arranged leveraged lease financing for the first three of the 747-
400 freighter aircraft that were delivered in July, August and
October 1998 (see EETCs discussed below). The Boeing Purchase
Agreement requires that the Company pay pre-delivery deposits to
Boeing prior to the delivery date of each 747-400 freighter
aircraft in order to secure delivery of the 747-400 freighter
aircraft and to defray a portion of the manufacturing costs.
Based on the current expected firm aircraft delivery schedule,
the Company expects the maximum total amount of pre-delivery
deposits at any time outstanding will be approximately $162.3
million, which was paid as of June 30, 1998. There were
approximately $143.1 million of pre-delivery deposits outstanding
at September 30, 1998 which were included in flight equipment.
For the remainder of 1998 and for the year 1999, the Company
expects to pay $16.7 million and $11.8 million, respectively, in
pre-delivery deposits in accordance with the firm order pre-
delivery deposits schedule. Upon each delivery, Boeing will
refund to the Company the pre-delivery deposits associated with
the delivered 747-400 freighter aircraft. Boeing delivered the
first three aircraft at the end of July 1998, in August 1998 and
in October 1998, respectively, and refunded the pre-delivery
deposits associated with these aircraft. These three aircraft
were placed into service under long-term contracts, the first
aircraft with British Airways World Cargo ("British Airways") and
the second and third aircraft with Cargolux Airlines
International, S.A. ("Cargolux"). In addition, the Boeing
Purchase Agreement provides for a deferral of a portion of the
pre-delivery deposits (deferred aircraft obligations) for which
the Company accrues and pays interest quarterly at 6-month LIBOR,
plus 2.0%. As of September 30, 1998, there was $235.6 million of
deferred aircraft obligations included in other liabilities, and
the combined interest rate was approximately 7.8%.
In January and February 1998, pursuant to an early lease
termination agreement negotiated in November 1997 with Philippine
Airlines ("PAL"), the Company delivered to Boeing for
modification to cargo configuration the aircraft acquired from
Marine Midland Bank in December 1996 and the aircraft acquired
from Citicorp Investor Lease, Inc. in May 1997. The first
aircraft was re-delivered to the Company at the end of April 1998
and the second aircraft was re-delivered to the Company in July
1998. The financing for the modification to cargo configuration
was provided under the Aircraft Acquisition Credit Facility (as
defined in the Company's Form 10-K for 1997), under which the
Company borrowed a total of $3.3 million during the first quarter
of 1998 with respect to these aircraft. In April 1998 and July
1998, the Company borrowed an additional $13.8 million and $17.2
million, respectively, to pay for the final costs of conversion
for these two aircraft.
In February 1998, the Company completed an offering of
$538.9 million of Pass Through Certificates, also known as
enhanced equipment trust certificates (the "EETCs"). The EETCs
are not direct obligations of, or guaranteed by, the Company and
therefore are not included in the Company's consolidated
financial statements. In November and December 1997, the Company
entered into three Treasury Note hedges, approximating $300
million of principal, for the purpose of minimizing the risk
associated with the fluctuations in interest rates, which are the
basis for the pricing of the EETCs which were priced in January
1998. The effect of the hedge resulted in a deferred cost of
$6.3 million, which will be amortized over the expected twenty-
year life associated with this financing. The cash proceeds from
the EETCs were deposited with an escrow agent and have been used,
and will be used, to finance (through either leveraged leases or
secured debt financings) the acquisition of the first five of the
10 new 747-400 freighter aircraft from Boeing scheduled to be
delivered to the Company during the period July 1998 through
December 1998. There can be no assurance that the Company will
be able to obtain sufficient financing to fund the purchase of
the remaining five 747-400 freighter aircraft, or if such
financing is available, that it will be available on a
commercially reasonable basis. If it is unable to do so, the
Company could be required to modify its expansion plans or to
incur higher than anticipated financing costs, which could have a
material adverse effect on the Company. In connection with the
EETCs, the Company intends to seek certain owner participants who
will commit lease equity financing to be used in leveraged leases
of such aircraft. The Company has arranged for equity
participation for the first three 747-400 freighter aircraft
deliveries, each of which occurred at the end of July 1998, in
August 1998 and in October 1998. The Company has determined that
these leveraged leases are operating leases as defined under SFAS
No. 13 "Accounting for Leases" and lease credits are being
amortized over the lives of the respective leases, with
unamortized credits included in other liabilities.
In March 1998, the Company entered into a 10-year agreement
with GE to provide all repair and overhaul work on the engines
related to both the 10 firm and 10 option 747-400 freighter
aircraft. This agreement is based on a fixed cost per flight
hour, similar to the Company's engine agreement with GE for its
747-200 fleet.
In April 1998, the Company completed the offering of $175
million of unsecured 9 1/4% Senior Notes at 99.867% due 2008 (the
"9 1/4% Senior Notes"). The proceeds of the offering will be
used to repay $80 million of the Aircraft Acquisition Credit
Facility and for general corporate purposes, which may include
the partial funding of the redemption of the Company's
outstanding 12 1/4% Pass Through Certificates due 2002 (the
"Equipment Notes"), which are subject to redemption at the option
of the Company on or after December 1, 1998. Interest on the 9
1/4% Senior Notes is payable semi-annually on April 15 and
October 15 of each year, commencing October 15, 1998. The 9 1/4%
Senior Notes are redeemable at the option of the Company, in
whole or in part, at any time on or after April 15, 2003,
pursuant to a defined schedule. The 9 1/4% Senior Notes are
senior indebtedness of the Company, ranking pari passu in right
of payment with all existing and future senior indebtedness of
the Company and senior in right of payment to all subordinated
indebtedness of the Company. The 9 1/4% Senior Notes are
effectively subordinated, however, to all secured indebtedness of
the Company and all existing and future liabilities of the
Company's subsidiaries.
In April 1998, the Company entered into a sublease and ramp
use agreement with American Airlines, Inc. for 145,000 square
feet of hangar, office and parking space at Miami International
Airport in support of the Company's increased operations. The
lease is for a period in excess of four years and commenced July
1, 1998, at a monthly rate of approximately $105,000, subject to
an annual escalation factor. Additionally, in the third quarter
of 1998, the Company leased an additional 8,000 square feet at
its existing facility located at John F. Kennedy International
Airport ("JFK") with a monthly rate increase to approximately
$88,000.
In May 1998, the Company agreed to purchase a Boeing
Business Jet ("BBJ") from Boeing for approximately $30 million.
As of September 30, 1998, the Company had paid approximately $9.0
million in pre-delivery deposits and there was approximately $7.0
million of deferred aircraft obligations included in other
liabilities for which the interest rate was approximately 7.8%.
This aircraft will be used to transport Company executives on
business trips throughout the world. The Company intends to sell
its current corporate aircraft (currently owned by a subsidiary
of the Company), upon delivery of the BBJ, and the Company's
Chief Executive Officer has agreed to share in the ownership and
operating costs of the BBJ.
In June 1998, the Company entered into an agreement with
Lufthansa Technik pursuant to which Lufthansa Technik will provide
all required airframe maintenance for the Company's initial order of
10 747-400 freighter aircraft, plus any additional 747-400
freighter aircraft the Company purchases pursuant to its option
in the Boeing Purchase Agreement, on a fixed cost per flight hour
basis for 10 years, with a provision for the Company to terminate
the agreement as of June 2003.
In July 1998, the Company secured permanent financing in the
amount of $38.9 million from Banc One Leasing Corporation for one
of the aircraft originally financed under the Aircraft
Acquisition Credit Facility. The new financing carries a term of
10 years at an annual interest rate of approximately 7.5% with
quarterly debt service payments.
In July 1998, the Company purchased a 747-200 freighter
aircraft from Air France Partnairs Leasing N.V. for which the
Company financed approximately $31.3 million through the Aircraft
Acquisition Credit Facility. This aircraft is currently being
leased to a third-party with a scheduled lease termination at the
end of January 1999, at which time the aircraft will be returned
to the Company's fleet.
In September 1998, the commitment for the Aircraft
Acquisition Credit Facility was decreased from $250.0 million to
$200.0 million in connection with a revision of terms that are
more favorable to the Company, including a decrease in the
interest rate from LIBOR, plus 2.5%, to LIBOR, plus 2.0%.
In September 1998, the Company entered into an agreement to
acquire three 747-200 freighter aircraft from Cargolux for
scheduled deliveries in the fourth quarter of 1998, of which the
first delivery occurred in October 1998. Upon delivery, the
Company immediately placed this aircraft into service with
Cargolux. The Company financed this aircraft through the
Aircraft Acquisition Credit Facility for approximately $31.0
million.
In October 1998, the Company entered into separate long-term
contracts with Iberia Airlines of Spain and with El Al Israel
Airlines Ltd. for utilization of 747-200 freighter aircraft.
These contracts represent an expansion of the Company's customer
base for long-term contracts.
Due to the contractual nature of the Company's business, the
Company's management does not consider its operations to be
highly working capital-intensive in nature. Because most of the
non-ACMI costs normally associated with operations are borne by
and directly paid for by the Company's customers, the Company
does not incur significant costs in advance of the receipt of
corresponding revenues. Moreover, ACMI costs, which are the
responsibility of the Company, are generally incurred on a
regular, periodic basis ranging from flight hours to months.
These costs are largely matched by revenue receipts, as the
Company's contracts require regular payments from its customers,
based upon current flight activity, generally every two to four
weeks. As a result, the Company has not in the past had a
requirement for a working capital facility.
Under the FAA's Directives issued under its "Aging Aircraft"
program, the Company is subject to extensive aircraft
examinations and may be required to undertake structural
modifications to its fleet to address the problem of corrosion
and structural fatigue. In November 1994, Boeing issued Nacelle
Strut Modification Service Bulletins which have been converted
into Directives by the FAA. Eight of the Company's Boeing 747-
200 aircraft will have to be brought into compliance with such
Directives by March 2000 at an estimated total cost of
approximately $4.0 million. As part of the FAA's overall aging
aircraft program, it has issued Directives requiring certain
additional aircraft modifications to be accomplished. The Company
estimates that the modification costs per 747-200 aircraft will
range between $2 million and $3 million. Thirteen aircraft in
the Company's 747-200 fleet have already undergone the major
portion of such modifications. The remaining eight 747-200
aircraft will require modification prior to the year 2009. Other
Directives have been issued that require inspections and minor
modifications to Boeing 747-200 aircraft. The newly manufactured
747-400 freighter aircraft were delivered to the Company in
compliance with all existing FAA Directives. It is possible that
additional Directives applicable to the types of aircraft or
engines included in the Company's fleet could be issued in the
future, the cost of which could be substantial.
The Company has performed a review of its internal
information systems for Year 2000 ("Y2K") automation problems
through a company-wide effort, assisted by Y2K experienced
consultants, to address internal Y2K system issues and, jointly
with industry trade groups, issues related to key business
partners which are common to other air carriers. As a result,
the Company does not anticipate that Y2K compliance will have a
material financial impact. The Company has completed the first
phase of this project, which included an inventory of its
computer network environment and an assessment of the effort
involved to bring its internal computer system environment to
full Y2K compliance. Due to the Company's relatively young
systems, its advanced client server, development and data base
architecture, and its partial reliance on vendor representations
regarding Y2K compliant third-party systems, related remediation
efforts are minimal and achievable. Third-party hardware and
software used by the Company are, for the most part, Y2K
compliant; those that are not compliant have broad customer bases
and available software upgrades. A limited number of systems
remain to be reviewed for compliance, but are not of material
significance. Initial review of the Company's 747-200 and 747-
400 aircraft computer systems indicate that most all of the
systems are compliant, and those not compliant are being
addressed by Boeing sub-contractors. A limited number of systems
need further analysis.
The Company has begun an ongoing program to review the
status of key supplier/business partner Y2K compliance efforts.
While the Company believes it is taking all appropriate steps to
assure its Y2K compliance, it is dependent on key business
partner compliance to some extent. The Company plans to have all
company-controllable systems Y2K tested and compliant by the end
of 1998. The Company anticipates that third-party and
supplier/business partner systems will be fully addressed by mid-
1999 in the form of compliance remediation, plans for timely
remediation, or contingency plans. The Y2K problem is pervasive
and complex, as virtually every global computer operation will be
affected in some way. Consequently, no assurance can be given
that all company-used third-party systems and suppliers/business
partners can achieve Y2K compliance.
From time to time the Company engages in discussions with
third parties regarding possible acquisitions of aircraft that
could expand the Company's operations. The Company is currently
in discussions with third-parties for the possible acquisition of
additional aircraft for delivery in 1998 and beyond.
The Company believes that cash on hand and the cash flow
generated from its operations, combined with availability under
the Aircraft Acquisition Credit Facility and the proceeds of the
EETCs, will be sufficient to meet its normal ongoing liquidity
needs for the next twelve months.
Forward-looking Information
To the extent that any of the statements contained herein
relating to the Company's expectations, assumptions and other
Company matters are forward-looking, they are made in reliance
upon the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. Such statements are based on
current expectations that involve a number of uncertainties and
risks that could cause actual results to differ materially from
those projected in the forward-looking statements, including, but
not limited to, risks associated with: worldwide business and
economic conditions; product demand and the rate of growth in the
air cargo industry; the impact of competitors and competitive
aircraft and aircraft financing availability; the ability to
attract and retain new and existing customers; normalized
aircraft operating costs and reliability; management of growth;
the continued productivity of its workforce; dependence on key
personnel; and regulatory matters. For additional information
regarding these and other risk factors, reference is made to the
Company's Annual Report on Form 10-K for the year ended December
31, 1997.
ATLAS AIR, INC. AND SUBSIDIARIES
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
Exhibit 27 - Financial Data Schedule
b. Reports filed on Form 8-K
None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
ATLAS AIR, INC.
(Registrant)
Date: November 11, 1998 By: /s/ Stephen C. Nevin
Stephen C. Nevin
Vice President and
Chief Financial Officer
Principal Accounting Officer
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<CHANGES> 0
<NET-INCOME> 28,160
<EPS-PRIMARY> 1.25
<EPS-DILUTED> 1.25
</TABLE>
