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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): January 26, 1999
Atlas Air, Inc.
(Exact name of registrant as specified in its charter)
Delaware 0-25732 84-1207329
(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
538 Commons Drive, Golden, CO 80401
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:(303) 526-5050
(Former name or former address, if changed since last report)
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ITEM 5. OTHER EVENTS.
On January 26, 1999, Atlas Air, Inc. ("we", "us", the "Company" or
"Atlas Air", as appropriate) reported preliminary unaudited net income for the
three months ended December 31, 1998 of $18.1 million, or $.53 per fully diluted
share, adjusted for the 3-for-2 stock split previously announced by Atlas Air
for shareholders of record on January 25, 1999. This was equivalent to $.80 per
fully diluted share before consideration of the stock split. Operating income
for the three months ended December 31, 1998 was $47.1 million and revenues were
$145.5 million.
Net income for the fourth quarter of 1997 was $9.1 million, or $.27
per fully diluted share, adjusted for the stock split. Operating income for the
three months ended December 31, 1997 was $27.8 million, and revenues were $120.9
million. Fourth quarter revenue, operating income and pre-tax income for 1998
each improved by approximately 20%, 69% and 100%, respectively, compared to the
same period in 1997. The Company operated 25,134 block hours for the three
months ended December 31, 1998 compared to 22,333 for the same period in 1997,
an increase of approximately 12%.
Atlas Air reported that preliminary unaudited net income for the
full year 1998 was $46.2 million, or $1.37 per fully diluted share, adjusted for
the stock split. This was equivalent to $2.05 per fully diluted share before
consideration of the stock split. In 1997 net income was $23.4 million, or $.69
per fully diluted share, adjusted for the stock split. Operating income for
full-year 1998 was $135.8 million as compared to $83.1 million in operating
income for full-year 1997, excluding non-recurring charges and extraordinary
items. Revenues for full-year 1998 increased approximately 5%, to $422.2
million from $401.0 million for the prior year. Atlas Air's 1998 year-end
results reflected an approximately 63% increase in operating income and
approximately 97% increase in net income compared to 1997's results. The
Company operated 76,276 block hours for the year ended December 31, 1998
compared to 75,254 for the same period in 1997.
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On February 4, 1999, Atlas Air intends to file with the Securities
and Exchange Commission (the "SEC") a universal shelf registration statement on
Form S-3 (the "Shelf Registration") to allow for it to offer up to $650,000,000
in debt, pass through certificate and/or equity securities at various times.
Proceeds from offerings under the Shelf Registration will be primarily for
general corporate purposes, which may include financing the acquisition of
747-400 aircraft. The debt, pass through certificate and/or equity securities
registered under the Shelf Registration may be offered and sold by us on a
continuous or delayed basis. The amount and timing of the sales will depend on
market conditions. This does not constitute an offering to sell securities,
which can be made only by means of a prospectus.
This filing is being made for the purpose of updating the
description of the Company's business and the risk factors, which information
will be incorporated by reference in our Shelf Registration. This information
should be read in conjunction with the other information set forth and
incorporated by reference in our Shelf Registration, the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 1997, the Company's
Quarterly Reports on Form 10-Q for the quarters ended March 31, 1998, June 30,
1998 and September 30, 1998, and other documents subsequently filed by the
Company pursuant to Sections 13 or 14(d) of the Exchange Act.
Some of the information contained herein may include
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Exchange Act of 1934. Such
statements can be identified by the use of forward-looking words such as "may,"
"will," "expect," "anticipate," "estimate," "continue" or other similar words.
These statements discuss future expectations, contain projections of results of
operations or financial condition or state other "forward-looking" information.
The risk factors noted herein could cause our actual results to differ
materially from those contained in any forward-looking statement.
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RISK FACTORS
SUBSTANTIAL LEVERAGE; ABILITY TO SERVICE DEBT
We are highly leveraged. Our high degree of leverage could have important
consequences to prospective investors, including the following:
- our ability to obtain additional financing for working capital, capital
expenditures, acquisitions or general corporate purposes may be
diminished in the future;
- a substantial portion of our cash flow from operations will be required
for the payment of principal and interest on our indebtedness, thereby
reducing the funds available to us for our operations and other purposes;
- we may be substantially more leveraged than some of our competitors,
which may place us at a competitive disadvantage; and
- our substantial degree of leverage may hinder our ability to adjust
rapidly to changing market conditions and could make us more vulnerable
in the event of a downturn in our business or general economic
conditions.
Our ability to make scheduled payments of the principal of, or to pay
interest on, or to refinance, our indebtedness and to make scheduled payments
under our lease obligations depends on our future performance, which to a
certain extent is subject to economic, financial, competitive and other factors
beyond our control. There can be no assurance, however, that our business will
continue to generate sufficient cash flow from operations in the future to
service our debt. If unable to do so, we may be required to refinance all or a
portion of our existing debt to sell assets or to obtain additional financing.
There can be no assurance that any such refinancing or that any such sale of
assets or additional financing would be possible on reasonably favorable terms.
AVAILABILITY OF 747-400 AIRCRAFT FINANCING; DELIVERY DELAYS
On June 9, 1997, we entered into an agreement with Boeing to purchase 10
new 747-400 freighter aircraft to be powered by engines acquired from GE, with
options to purchase up to 10 additional 747-400 aircraft. The aggregate value of
the 10 747-400 aircraft, four installed engines per aircraft and five spare
engines, based on list prices, is approximately $1.7 billion. In February 1998,
we completed an offering of $538.9 million of enhanced equipment trust
certificates (the "EETCs"), the proceeds of which were used to finance a portion
of the acquisition cost of the first five 747-400 aircraft which were delivered
during the period July 1998 through December 1998. While we currently anticipate
that we will be able to obtain the necessary financing on a timely basis to pay
the total purchase price for the remaining 747-400 freighter aircraft to be
acquired, there can be no assurance that we will be able to obtain sufficient
financing or, if such financing is available, that it will be available on
commercially reasonable terms. A recent decision of the United States District
Court for the District of Colorado (the state in which our headquarters are
located) raises questions concerning the ability of lenders and lessors under
certain types of aircraft equipment financing arrangements to exercise special
remedies under bankruptcy law against a bankrupt air carrier, which decision if
not reversed or modified could increase the cost of our future aircraft
financing arrangements. If we are unable to obtain sufficient financing, we
could be required to modify our expansion plans, incur higher than anticipated
financing costs or incur various penalty payments under the Boeing Purchase
Agreement, which could have a material adverse effect on the Company.
Due to production problems at Boeing, some of the 1998 delivery positions
of the 747-400 aircraft were delayed. We were compensated for these delays. In
addition, Boeing has agreed to compensate us for future delays, if any, in
deliveries of the 747-400 aircraft pursuant to the Boeing Purchase Agreement.
Any delays in future deliveries of the 747-400 aircraft could adversely impact
our ability to initiate service with existing and prospective customers in a
timely fashion.
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RESTRICTIONS IMPOSED BY TERMS OF THE COMPANY'S INDEBTEDNESS
Certain of our debt instruments limit our ability to undertake certain
transactions. These debt instruments restrict our ability to:
- incur additional indebtedness;
- incur liens, pay dividends or make other restricted payments;
- consummate asset sales;
- enter into certain transactions with affiliates;
- impose restrictions on the ability of a subsidiary to pay dividends or
make certain payments to us;
- merge or consolidate with any other person; or
- sell, assign, transfer, lease, convey or otherwise dispose of all or
substantially all of our assets.
In addition, certain of our other debt instruments contain other more
restrictive financial and operating covenants. Our ability to meet such
financial ratios and tests may be affected by events beyond our control. There
can be no assurance that we will meet such tests. A breach of any of these
covenants could result in a default under certain debt instruments. Upon the
occurrence of an event of default under the various debt instruments, the
lenders thereunder could elect to declare all amounts outstanding thereunder,
together with accrued interest, to be immediately due and payable. If we are
unable to repay those amounts, such lenders could proceed against the collateral
granted to them to secure that indebtedness. If such lenders accelerate the
payment of such indebtedness, there can be no assurance that our assets would be
sufficient to repay in full such indebtedness and our other indebtedness.
COMPETITION
The market for air cargo services is highly competitive. A number of
airlines, including Lufthansa Cargo AG, currently provide services for
themselves and for others, similar to the services we offer and new airlines may
be formed that would also compete with us. Such airlines may have substantially
greater financial resources than we do. In addition, certain retail air freight
companies, such as Evergreen International and Kitty Hawk, compete with us on a
limited, indirect basis, generally outside of the ACMI Contract operating
structure. We believe that the most important elements for competition in the
air cargo business are the range, payload and cubic capacities of the aircraft
and the price, flexibility, quality and reliability of the cargo transportation
service. Our ability to achieve our strategic plan depends upon our success in
convincing major international airlines that outsourcing some portion of their
air cargo business remains more cost-effective than undertaking cargo operations
with their own incremental capacity and resources and upon our ability to
continue to obtain higher ACMI Contract rates in connection with the 747-400
aircraft compared to those currently obtained in connection with existing
747-200 aircraft.
DEPENDENCE ON SIGNIFICANT CUSTOMERS; GEOGRAPHIC CONCENTRATION
In 1998, China Airlines, LAS and Fast Air accounted for approximately 33%,
10% and 9%, respectively, of our total operating revenues. We believe that our
relationships with our customers are mutually satisfactory, as evidenced by the
fact that we have renewed and, in certain cases, added a significant number of
ACMI Contracts with our existing customers. However, there can be no assurance
that any of our ACMI Contracts will be renewed upon their expiration. The
scheduled termination dates for the current ACMI Contracts range from 1999 to
2003. See "Business -- ACMI Contracts." The failure to renew any of our ACMI
Contracts, or the renewal of any of our ACMI Contracts on less favorable terms,
could have a material adverse effect on the Company. Additionally, we have
concentrated a significant percentage of our resources in routes between the
United States and Asia and the Pacific Rim and between Europe and Asia and the
Pacific Rim. Any economic decline or any military or political disturbance in
these areas of the world might prevent or interfere with our ability to provide
service to our Asian and Pacific Rim destinations and could have a material
adverse effect on the Company. We have not experienced any adverse impact on our
business as a result of the current
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economic and political turmoil in Asia; however, there can be no assurance that
continuation of the economic and political turmoil in Asia will not have an
adverse impact on air cargo market growth generally, which could adversely
affect our ability to obtain new ACMI Contracts or to renew existing ACMI
Contracts.
OPERATIONS DEPENDENT UPON LIMITED FLEET
Each of our aircraft is typically dedicated to the service of one or more
ACMI Contracts. Although we typically utilize spare aircraft, in the event one
or more of our aircraft were to be lost or out of service for an extended period
of time, we may have difficulty fulfilling our obligations under one or more of
our ACMI Contracts. While we believe that our insurance coverage is sufficient
to cover the replacement cost of an aircraft, there can be no assurance that
suitable replacement aircraft could be located or that, if located, we could
contract for the services of such an aircraft without undertaking substantial
costs. While we carry aircraft hull physical damage and third party liability
insurance, any extended interruption of our operations due to the loss of an
aircraft could have a material adverse effect on the Company.
UTILIZATION OF FUTURE AIRCRAFT
We have not yet obtained long-term ACMI Contracts to be serviced by the
five 747-400 aircraft scheduled to be delivered in 1999 and 2000. See
"-- Availability of 747-400 Aircraft Financing; Delivery Delays." The failure to
generate adequate revenue from new aircraft pending the entering into of ACMI
Contracts, or the failure to secure ACMI Contracts for such aircraft as well as
the aircraft currently in service in our fleet, could have a material adverse
effect on the Company. See "Business -- Aircraft."
AGING AIRCRAFT
Our fleet currently includes 23 Boeing 747-200 aircraft in service, all of
which were manufactured between 1974 and 1986. Manufacturer Service Bulletins
and the Federal Aviation Administration's ("FAA") Airworthiness Directives
issued under its "Aging Aircraft" program cause Boeing 747-200 aircraft
operators to be subject to extensive aircraft examinations and require Boeing
747-200 aircraft to undergo structural inspections and modifications to address
problems of corrosion and structural fatigue at specified times. For instance,
in November 1994, Boeing issued Nacelle Strut Modification Service Bulletins
which have been converted into Directives by the FAA. Nine of our Boeing 747-200
aircraft will have to be brought into compliance with such Directives by March
2000 at an estimated aggregate cost of approximately $4.5 million. Other
Directives have been issued that require inspections and minor modifications to
Boeing 747-200 aircraft. It is possible that additional Service Bulletins or
Directives applicable to the types of aircraft or engines included in our fleet
could be issued in the future. The cost of compliance with Directives and of
following Service Bulletins cannot currently be estimated, but could be
substantial.
EMPLOYEE RELATIONS
We believe we operate with lower incremental personnel costs than many
established international airlines and cargo carriers, principally due to the
flexibility and high productivity of our workforce, arising in part as a result
of our emphasis on providing financial incentives to our personnel that are
focused on our financial performance rather than on base wages. Our employees
are not currently subject to a collective bargaining agreement; however, many
airline industry employees are subject to such agreements and our employees have
been solicited from time to time by union representatives seeking to organize
them. The most recent solicitation having resulted in our pilots rejecting
representation by the Air Line Pilots Association ("ALPA") on January 27, 1998.
On February 2, 1999, we were notified by the National Mediation Board ("NMB")
that an application has been filed by the International Brotherhood of Teamsters
("IBT") and ALPA requesting authority to ballot Atlas' crew members to determine
if they wish to be represented by a third party. The filing of this application
requires the NMB to verify the authenticity of the union authorization cards
presented by both IBT and ALPA to determine if a representation election should
take place. There can be no assurance that our employees will not become subject
to a collective bargaining agreement and the extent to which, if any, such
collective bargaining agreement may adversely impact our operations or cost
structure.
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REGULATORY MATTERS
Under the Federal Aviation Act of 1958, as amended and recodified at 49
U.S.C. Subtitle VII (the "Aviation Act"), the Department of Transportation
("DOT") and the FAA exercise regulatory authority over the Company. We have
obtained the necessary authority to conduct flight operations, including a
Certificate of Public Convenience and Necessity (a "CPCN") from the DOT and an
Air Carrier Operating Certificate from the FAA; however, the continuation of
such authority is subject to our continued compliance with applicable statutes,
rules and regulations pertaining to the airline industry, including any new
rules and regulations that may be adopted in the future. All air carriers are
subject to the strict scrutiny and inspection by FAA officials and to the
imposition of new regulatory requirements that can negatively affect their
operations. FAA approval is required for each of our long-term ACMI Contracts
and DOT approval is required for each of our long-term ACMI Contracts with
foreign air carriers. In addition, FAA approval is required for each of our
short-term seasonal ACMI Contracts. In order to provide service to foreign
points, we must also obtain permission for such operations from the applicable
foreign governments and certain airport authorities. See "Business --
Governmental Regulation." In addition, DOT regulates the transportation of
hazardous materials by air cargo carriers. Although customers are required to
label shipments that contain hazardous materials, customers may not inform us
when their cargo includes hazardous materials. Although we have never had such
an incident, the transportation of unmanifested hazardous materials could result
in fines, penalties, banning hazardous materials from our aircraft for a period
of time, possible damage to our aircraft or other liability. On December 3,
1998, the FAA issued a Directive ordering Boeing 747 operators to change fuel
pump procedures immediately to prevent dry operation that could result in
ignition of the center fuel or horizontal stabilizer tanks. Compliance with this
Directive may adversely impact our customers' operating costs and schedules.
CONTROL BY PRINCIPAL STOCKHOLDER
As of December 31, 1998 Michael A. Chowdry, the founder, Chief Executive
Officer, President and Chairman of the Board of Directors of the Company,
beneficially owned approximately 59.2% of our outstanding common stock. As a
result, Mr. Chowdry is able to direct and control our policies, including the
election of directors, mergers, sales of assets and other such transactions.
DEPENDENCE UPON KEY MANAGEMENT PERSONNEL
We believe that our success in acquiring ACMI Contracts and managing our
operations will depend substantially upon the continued services of many of our
present executive officers. The loss of the services of any of such persons
could have a material adverse effect on the Company. We have employment
agreements with such officers, which are generally terminable at any time by
either party.
SEASONALITY OF CUSTOMERS' CARGO OPERATIONS
The cargo operations of our airline customers are seasonal in nature, with
peak activity traditionally in the second half of the year, and with a
significant decline occurring in the first quarter. As a result, our revenues
typically decline in the first quarter of the year as our minimum contractual
aircraft utilization level temporarily decreases. Our ACMI Contracts typically
allow our customers to cancel a maximum of 5% of the guaranteed hours of
aircraft utilization over the course of a year. Our customers most often
exercise such cancellation options early in the first quarter of the year, when
the demand for air cargo capacity has been historically low or following the
seasonal holiday peak in the latter part of the fourth quarter.
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BUSINESS
OVERVIEW
We are the world's largest air cargo outsourcer, with an all Boeing fleet
of 747 freighter aircraft that comply with Stage 3 FAA noise regulations. We
provide reliable airport-to-airport cargo transportation services throughout the
world to major international air carriers generally under three- to five-year
fixed-rate U.S. dollar denominated contracts which typically require that we
supply aircraft, crew, maintenance and insurance. Our customers currently
include China Airlines, British Airways, SAS, Emirates, Thai Airways, Fast Air,
LAS, Cargolux, Alitalia, Iberia, El Al and FedEx. We provide efficient, cost
effective service to our customers primarily as a result of our productive work
force, the outsourcing of a significant part of our regular maintenance work on
a long-term, fixed-cost contractual basis and the advantageous cost economies
realized in the operation of our fleet, comprised solely of Boeing 747 aircraft
which are configured for service in long-haul cargo operations.
747-400 AIRCRAFT ACQUISITION
In June 1997, we entered into the Boeing Purchase Agreement to purchase 10
new 747-400 freighter aircraft to be powered by GE engines. We acquired and
placed into service five of the 747-400 aircraft in the second half of 1998. Due
to production problems at Boeing, some of the 1998 delivery positions of the
747-400 aircraft were delayed. We were compensated for these delays. In
addition, Boeing has agreed to compensate us for future delays, if any, in
deliveries of the 747-400 aircraft pursuant to the Boeing Purchase Agreement.
Any delays in future deliveries of the 747-400 aircraft could adversely impact
our ability to initiate service with existing and prospective customers in a
timely fashion. The Boeing Purchase Agreement also provides us with options to
purchase up to 10 additional 747-400 freighter aircraft for delivery from 2000
through 2002. As a result of our being the largest purchaser of 747-400
freighter aircraft to date, we were able to negotiate from Boeing and GE a
significant discount off the aggregate list price of $1.7 billion for the 10
747-400 freighter aircraft, four installed engines per aircraft and five spare
engines. In addition, we obtained certain ancillary products and services at
advantageous prices.
ACMI CONTRACTS
The Company's ACMI Contracts, which accounted for approximately 94% of our
total operating revenues in 1998, typically allow our customers to guarantee
monthly minimum aircraft utilization levels at fixed hourly rates and are
typically in force for periods of three to five years, subject in certain
limited cases to early termination provisions. These contracts typically require
us to supply aircraft, crew, maintenance and insurance, while customers bear all
other operating expenses, including:
- fuel and fuel servicing;
- marketing costs associated with obtaining cargo;
- airport cargo handling;
- landing fees;
- ground handling, aircraft push-back and de-icing services; and
- specific cargo and mail insurance.
These contracts, therefore, minimize the load factor and yield risk
traditionally associated with the air cargo business. The ACMI Contracts
typically require minimum air freight capacity to be provided to our customers.
All of our revenues, and most of our costs, are in U.S. dollars, thus avoiding
currency risks normally associated with doing business primarily overseas.
At December 31, 1998, the Company operated under twenty-seven ACMI
Contracts with twelve customers. In most cases, one aircraft is dedicated under
each contract. China Airlines, LAS and Fast Air accounted for approximately 33%,
10% and 9% of the our total revenues, respectively, for the year ended December
31, 1998. In addition, we have also operated short-term, seasonal ACMI Contracts
with Kitty Hawk and anticipate doing so in the future.
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Some of our ACMI Contracts allow our customers to cancel up to a maximum of
approximately 5% of the guaranteed hours of aircraft utilization over the course
of a year. Our customers most often exercise such cancellation options early in
the first quarter or late in the fourth quarter of the year, when the demand for
air cargo capacity has been historically lower. We have found that such
cancellations provide a timely opportunity for the scheduling of maintenance on
our aircraft, to the extent possible. See "-- Maintenance." We believe that our
relationships with our customers are mutually satisfactory, as evidenced by the
fact that we have renewed and, in certain cases, added a significant number of
ACMI Contracts with our existing customers, although there can be no assurance
that in the future such contracts will not be canceled in accordance with their
terms.
All of the ACMI Contracts provide that each of our aircraft be deemed to be
at all times under our exclusive operating control, possession and direction.
They also provide that, in order to service the routes designated by the
contract, we obtain the authority from the governments having jurisdiction over
the route. See "-- Governmental Regulation." Additionally, if we are required to
use the customer's "call sign" in identifying ourself throughout our route, the
customer must also have obtained underlying authority from the governments
having jurisdiction over the route. Therefore, our route structure is limited to
areas in which we can gain access from the appropriate governments.
OTHER FLIGHT OPERATIONS
To the extent we have available excess aircraft capacity at any time, we
will seek to obtain ad hoc charter service contracts, which we believe are
generally readily available. In addition, in the past we have provided service
to Kitty Hawk pursuant to short-term, seasonal ACMI Contracts during periods of
excess aircraft capacity.
AIRCRAFT
Our utilization of Boeing 747 aircraft provides significant marketing
advantages because these aircraft, relative to most other cargo aircraft that
are commercially available, have higher maximum payload and cubic capacities,
and longer range. The uniformity of our current Boeing 747-200 aircraft fleet
allows for standardization in maintenance and crew training, resulting in
substantial cost savings in these areas. The new 747-400 aircraft have greater
operational capabilities than the 747-200 aircraft and will allow us to maintain
our low cost structure despite their higher acquisition cost. The new aircraft's
limited maintenance requirements will provide a higher level of operational
reliability with lower maintenance costs during the early years of operation,
typically for at least five years. In addition, the acquisition of 10 747-400
freighter aircraft will make Atlas the largest operator of this aircraft type to
date and will enable us to capitalize on economies of scale from the
standardization in maintenance and crew training.
The following table describes, as of January 15, 1999, our existing fleet
and the 747-400 aircraft subject to the Boeing Purchase Agreement.
FLEET PROFILE
<TABLE>
<CAPTION>
NUMBER AIRCRAFT YEAR OF
OF AIRCRAFT TYPE OWNED/LEASED MANUFACTURE
----------- -------- ------------ -----------
<S> <C> <C> <C> <C>
Existing fleet:............................. 22 747-200 Owned(1) 1974-1986(2)
1 747-200 Leased(3) 1976
1 747-400 Owned 1998
4 747-400 Leased(4) 1998
747-400 aircraft on order:(5)............... 4 747-400 1999
1 747-400 2000
</TABLE>
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(1) Two aircraft are powered by Pratt & Whitney engines and 20 are powered by GE
engines. See "-- Maintenance."
(2) The years of manufacture for these 22 aircraft are as follows: six aircraft
in 1979, four aircraft in 1980, two aircraft each in 1976, 1978 and 1981 and
one aircraft each in 1974, 1975, 1977, 1984, 1985 and 1986.
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(3) The aircraft is leased from a third party under a lease expiring in March
2010 and is powered by GE engines.
(4) These aircraft are leased from third parties under three leases expiring in
2019, and one lease expiring in 2020.
(5) We have agreed to purchase 10 new Boeing 747-400 freighter aircraft, with
options to purchase an additional 10 aircraft. The first five aircraft were
delivered in July, August, October and December 1998. The remaining five
aircraft are scheduled to be delivered as follows: four in 1999 and one in
2000. See "-- 747-400 Aircraft Acquisition." These aircraft will be powered
by GE engines. A portion of the financing for the first five aircraft has
been secured through the EETCs and lease equity.
We have been successful in obtaining new customers, or establishing
additional arrangements with existing customers, coincident with the delivery of
aircraft into the fleet or soon thereafter. However, from time to time, we
accept delivery of aircraft that have not been committed to a particular ACMI
Contract. These aircraft have been utilized temporarily as replacement aircraft
during scheduled and unscheduled maintenance of other aircraft, as well as for
ad hoc charter arrangements. Although we intend to have new ACMI Contracts in
place upon delivery of aircraft, including the 747-400 aircraft, there can be no
assurance that such arrangements will have been made.
From time to time, we engage in discussions with third parties regarding
possible acquisitions of aircraft that could expand our operations. We are in
discussions with third parties for the possible acquisition of additional
aircraft for delivery in 1999 and beyond.
SALES AND MARKETING
From our offices in Colorado, New York and Miami, we service our air cargo
customers and solicit ACMI Contract business. Our efforts to obtain new ACMI
Contract business focus principally on international airlines with established
air cargo customers, high operating costs and hub and spoke systems which gather
cargo at a particular location and which have the need for long-distance
capacity to move such cargo to another distribution point. On occasion, we may
utilize independent cargo brokers to obtain new ACMI Contracts. We market our
services by guaranteeing our customers a reliable, low-cost dedicated aircraft
with the capacity to ensure the efficient linkage of such customers'
distribution points without the customers having to purchase and maintain
additional aircraft, schedule additional flights and add other resources. We
have placed the first five 747-400 aircraft into service and expect to
place the remaining 747-400 aircraft into service with both existing and
prospective customers whom we believe could benefit from the unique performance
capabilities of the 747-400 aircraft such as its longer range, greater payload
and increased fuel efficiency.
MAINTENANCE
Due to the average age of our Boeing 747-200 fleet, it is likely that the
aircraft will require greater maintenance than newer aircraft such as the
747-400 aircraft. See "-- Aircraft." Aircraft maintenance includes, among other
things, routine daily maintenance, maintenance every six weeks (an "A Check"),
significant maintenance work every 18 months (a "C Check") and major maintenance
events every five years or 25,000 flight hours, whichever comes later if the
aircraft is over the age of 18 years, or every six years or 25,000 flight hours,
whichever comes later for aircraft under the age of 18 years, with a maximum
interval in either case of nine years (a "D Check"). We attempt to schedule
major maintenance on our aircraft in the first quarter of the calendar year,
when the demand for air cargo capacity has historically been lower, taking
advantage of cancellations of flights by our customers that generally occur most
frequently during this period.
Pursuant to a maintenance contract with KLM (the "Maintenance Contract") in
effect until January 2005, a significant part of the regular maintenance
(principally C Checks and engine overhauls, excluding D Checks) of certain of
our aircraft and their GE engines is undertaken by KLM, primarily at its
maintenance base located at Schiphol International Airport in Amsterdam, The
Netherlands. KLM supplies engineering and diagnostic testing for each aircraft
and its components in compliance with the FAA and other applicable regulations.
The Maintenance Contract provides that KLM, subject to certain terms and
conditions, will perform repairs and maintenance of our aircraft on the same
basis and order of priority as repairs to its own fleet. Such service is
provided to us at a cost, for which a large part is a fixed rate per flight
hour, subject to a
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3.5% annual escalation factor for the first five years. P&W engines are serviced
elsewhere, each at a cost based upon the actual time and material necessary for
such service. We have entered into a contract with Boeing to re-engine two
aircraft in the Company's fleet from Pratt & Whitney engines to GE engines, in
order to improve the standardization of our fleet. We have contracted with a
third-party to acquire, among other things, the GE engines and parts required
for such re-engineing. In addition, we believe that the recent sale of Pratt &
Whitney engines coupled with the expected sale of the unused parts associated
with the acquisition of the GE engines will not result in any material financial
impact as a result of these re-engineing efforts. On a going forward basis, we
expect to incur lower maintenance costs related to these two aircraft compared
to the costs we have experienced to date. Under the terms of the Maintenance
Contract, in the event that we wish to maintain more than 12 of our aircraft
under such contract, the terms of the contract are subject to adjustment by KLM.
More than twelve of our aircraft are currently subject to the Maintenance
Contract.
In June 1996, we entered into a ten year engine maintenance agreement with
GE for the engine maintenance of up to 15 aircraft powered by CF6-50E2 engines
at a fixed rate per flight hour, subject to an annual formula increase. The
agreement commenced in the third quarter of 1996 with the acceptance of engines
associated with aircraft acquired in the third and fourth quarter of 1996.
Effective in the year 2000, we have an option to add not less than 40 engines to
the program.
During the initial operating period, the 747-400 aircraft's airframe will
be covered under manufacturer's warranties. As a result, we do not expect to
incur significant maintenance expense in connection with the 747-400 airframe
during the warranty period. In addition, the 747-400 airframe limited
maintenance requirements will provide a higher operational reliability with
lower maintenance costs during the early years of operation, typically for at
least five years. We will incur expenses associated with routine daily
maintenance of both the airframe and the engines. In July 1998, we entered into
an agreement with Lufthansa Technik by which Lufthansa Technik will provide all
required maintenance for our initial order of ten 747-400 aircraft, plus any
additional 747-400 aircraft that we purchase pursuant to our option in the
Boeing Purchase Contract, on a fixed cost per flight hour basis for ten years,
with a provision for the Company to terminate the agreement as of June 2003. In
connection with the GE engine purchase agreement, we have also entered into two
agreements with GE to provide ongoing maintenance on the 747-400 aircraft
engines at a fixed cost per flight hour, subject to an annual formula increase.
We believe that fixed cost contracts provide the most efficient means of
ensuring the continued service of our aircraft fleet and the most reliable way
by which to predict our maintenance costs; however, we believe it is more cost
effective for routine line maintenance and A Checks to be performed on a time
and material basis due to the frequency of such maintenance.
GOVERNMENTAL REGULATION
Under the Aviation Act, the DOT and the FAA exercise regulatory authority
over the Company. The DOT's jurisdiction extends primarily to economic issues
related to the air transportation industry, including, among other things:
- air carrier certification and fitness;
- insurance;
- certain leasing arrangements;
- the authorization of proposed schedule and charter operations;
- tariffs;
- consumer protection;
- unfair methods of competition;
- unjust discrimination; and
- deceptive practices.
The FAA's regulatory authority relates primarily to air safety, including
aircraft certification and operations, crew licensing/training and maintenance
standards.
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To provide air cargo transportation services under long-term contracts with
major international airlines, we rely primarily on our worldwide charter
authorities. FAA approval is required for each of our long-term ACMI Contracts
and DOT approval is required for each of our long-term ACMI Contracts with
foreign air carriers. In addition, FAA approval is required for each of our
short-term, seasonal ACMI Contracts.
In order to engage in the air transportation business, we are required to
maintain a CPCN from the DOT. Prior to issuing a CPCN, the DOT examines a
company's managerial competence, financial resources and plans and compliance
disposition in order to determine whether a carrier is fit, willing and able to
engage in the transportation services it has proposed to undertake. The DOT also
examines whether a carrier conforms with the Aviation Act requirement that the
transportation services proposed are consistent with the public convenience and
necessity. Among other things, a company holding a CPCN must qualify as a United
States citizen, which requires that it be organized under the laws of the United
States or a State, Territory or Possession thereof; that its Chief Executive
Officer and at least two-thirds of its Board of Directors and other managing
officers be United States citizens; that not more than 25% of its voting stock
be owned or controlled, directly or indirectly, by foreign nationals; and that
it not otherwise be subject to foreign control. The DOT may impose conditions or
restrictions on such a CPCN.
The DOT has issued the Company a CPCN to engage in interstate and overseas
air transportation of property and mail, and a CPCN to engage in foreign air
transportation of property and mail between the U.S. and Taiwan. Both CPCNs are
subject to standard terms, conditions and limitations. By virtue of holding
those CPCNs, we possess worldwide charter authorities. We also hold limited-term
DOT exemption authority to engage in scheduled air transportation of property
and mail between certain points in the U.S., on the one hand, and Hong Kong,
Colombia and The Netherlands, on the other hand.
International air services are generally governed by a network of bilateral
civil air transport agreements in which rights are exchanged between
governments, which then select and designate air carriers authorized to exercise
such rights. These bilateral agreements may be open skies agreements which
contain no restrictions or limitations, or they may specify the city-pair
markets that may be served; restrict the number of carriers that may be
designated; provide for prior approval by one or both governments of the prices
the carriers may charge; limit frequencies or the amount of capacity to be
offered in the market; and, in various other ways, impose limitations on the
operations of air carriers. To obtain authority under a restrictive bilateral
agreement, it is often necessary to compete against other carriers in a DOT
proceeding. At the conclusion of the proceeding, the DOT awards all route
authorizations. The provisions of bilateral agreements pertaining to charter
services vary considerably from country to country. Some agreements limit the
number of charter flights that carriers of each country may operate. We are
subject to various international bilateral air services agreements between the
U.S. and the countries to which we provide service. We also operate on behalf of
foreign flag air carriers between various foreign points without serving the
U.S. These services are subject to the bilateral agreements of the respective
governments. Furthermore, these services require FAA approval but not DOT
approval. We must obtain permission from the applicable foreign governments to
provide service to foreign points.
We have obtained an operating certificate issued by the FAA pursuant to
Part 121 of the Federal Aviation Regulations. The FAA has jurisdiction over the
regulation of flight operations generally, including:
- the licensing of pilots and maintenance personnel;
- the establishment of minimum standards for training and retraining;
- maintenance of technical standards for flight, communications and ground
equipment;
- security programs; and
- other matters affecting air safety.
In addition, the FAA mandates certain recordkeeping procedures. We must obtain
and maintain FAA certificates of airworthiness for all of our aircraft. Our
aircraft, flight personnel and flight and emergency procedures are subject to
periodic inspections and tests by the FAA. All air carriers operating to, from
or
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within the United States are subject to the strict scrutiny of the FAA to ensure
proper compliance with FAA regulations.
The DOT and the FAA have authority under the Aviation Safety and Noise
Abatement Act of 1979, as amended and recodified, and under the Airport Noise
and Capacity Act of 1990, to monitor and regulate aircraft engine noise. All of
our existing fleet of aircraft comply with Stage 3 Standards -- the highest
standard issued by the FAA.
Under the FAA's Directives issued under its "Aging Aircraft" program, we
are subject to extensive aircraft examinations and will be required to undertake
structural modifications to our 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. Nine of
our Boeing 747-200 aircraft will have to be brought into compliance with such
Directives by March 2000 at an estimated total cost of approximately $4.5
million. As part of the FAA's overall aging aircraft program, it has issued
Directives requiring certain additional aircraft modifications to be
accomplished. We estimate that the modification costs per aircraft will range
between $2 million and $3 million. Twelve aircraft in our fleet have already
undergone the major portion of such modifications. The remaining eleven aircraft
in service 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 in compliance with all existing FAA Directives. On December 3, 1998,
the FAA issued a Directive ordering Boeing 747 operators to change fuel pump
procedures immediately to prevent dry operation that could result in ignition of
the center fuel or horizontal stabilizer tanks. Compliance with this Directive
may adversely impact our customers' operating costs and schedules. It is
possible that additional Directives applicable to the types of aircraft or
engines included in our fleet could be issued in the future, the cost of which
could be substantial.
We are also subject to the regulations of the Environmental Protection
Agency regarding air quality in the U.S. The aircraft that we operate meet the
fuel venting requirements and smoke emissions standards established by the
Environmental Protection Agency.
COMPETITION
The market for air cargo services is highly competitive. A number of
airlines, including Lufthansa, currently provide services for themselves and for
others similar to the services offered by us, and new airlines may be formed
that would also compete with us. Such airlines may have substantially greater
financial resources than we do. In addition, certain retail air freight
companies, such as Evergreen International and Kitty Hawk, compete with us on a
limited, indirect basis, generally outside of the ACMI operating structure. We
believe that the most important elements for competition in the air cargo
business are the range, payload and cubic capacities of the aircraft and the
price, flexibility, quality and reliability of the cargo transportation service.
Our ability to achieve our strategic plan depends in part upon our success in
convincing major international airlines that outsourcing some portion of their
air cargo business remains more cost-effective than undertaking cargo operations
with their own incremental capacity and resources and upon our ability to
continue to obtain higher ACMI Contract rates in connection with the 747-400
aircraft compared to those currently obtained in connection with existing Boeing
747-200 aircraft. We believe that such higher rates have been and will continue
to be obtainable as a result of the unique operating benefits associated with
the 747-400 aircraft. These operational benefits include a longer range, greater
payload capability and increased fuel efficiency relative to the Boeing 747-200
aircraft.
FUEL
Although fuel costs are typically the largest operating expense for
airlines, we have limited exposure to the fluctuation of fuel costs and
disruptions in supply as a result of our ACMI Contracts, which require the
customers to provide fuel for the aircraft. However, an increase in fuel costs
could reduce our cost advantages because of our older Boeing 747-200 aircraft
fleet, which are not as fuel-efficient as newer cargo aircraft such as the
747-400 aircraft. In addition, to the extent we operate scheduled cargo or ad
hoc charter services, or position our aircraft, we are responsible for fuel and
other costs that are normally borne by the customers
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under the ACMI Contracts. In 1998, approximately 3% of our block hours
represented scheduled cargo, ad hoc charter services or positioning our aircraft
for our own account. We may, at times, have excess capacity in which case we may
deploy such aircraft in scheduled cargo or ad hoc charter services.
EMPLOYEES
As of December 31, 1998, we had 890 employees, 507 of whom were air crew
members. We have hired and expect to hire additional pilots in 1999 associated
with the delivery of additional aircraft, including the 747-400 aircraft. We
maintain a comprehensive training program for our pilots in compliance with FAA
requirements in which each pilot regularly attends update programs. We believe
that our current training program has been sufficiently modified to provide
training required for pilots for the 747-400 aircraft. In addition, as part of
the Boeing Purchase Agreement, to defray a portion of the costs, Boeing has
trained and will train a limited number of our pilots and crew assigned to the
747-400 aircraft. However, we have incurred and will incur incremental costs
associated with ongoing training with regard to the 747-400 aircraft.
We believe that our employees' participation in the growth and
profitability of our business is essential to maintain our productivity and low
cost structure, and we have therefore established programs for that purpose such
as a profit sharing plan, a stock purchase plan, and a Company percentage
contribution of the employee deferral contribution to a retirement plan
(Internal Revenue Code of 1986, as amended, Section 401(k) plan). Such programs
are designed to allow employees to share financially in our success and to
augment base salary levels and retirement income. We consider our relations with
our employees to be good.
Our labor relations are covered under Title II of the Railway Labor Act of
1926, as amended, and are subject to the jurisdiction of the NMB. None of our
employees is subject to a collective bargaining agreement; however, many airline
industry employees are subject to such agreements and our employees have been
and are routinely solicited by union representatives seeking to organize them.
In January 1998, our pilots rejected union representation by ALPA. On February
2, 1999, we were notified by the NMB that an application has been filed by the
IBT and ALPA requesting authority to ballot Atlas' crew members to determine if
they wish to be represented by a third party. The filing of this application
requires the NMB to verify the authenticity of the union authorization cards
presented by both IBT and ALPA to determine if a representation election should
take place.
INSURANCE
We may incur potential losses which could result in the event of an
aircraft accident. Any such accident could involve not only repair or
replacement of a damaged aircraft and its consequent temporary or permanent loss
from service, but also potential claims involving injury to persons or property.
We are required by the DOT to carry liability insurance on each of our aircraft,
and each of our aircraft leases and ACMI Contracts also require us to carry such
insurance. While we carry this insurance, any extended interruption of our
operations due to the loss of an aircraft could have a material adverse effect
on the Company. We currently maintain public liability and property damage
insurance and aircraft hull and liability insurance for each of the aircraft in
the fleet in amounts consistent with industry standards. We maintain baggage and
cargo liability insurance if not provided by our customers under ACMI Contracts.
Although we believe that our insurance coverage is adequate, there can be no
assurance that the amount of such coverage will not be changed upon renewal or
that we will not be forced to bear substantial losses from accidents.
Substantial claims resulting from an accident could have a material adverse
effect on our financial condition and could affect our ability to obtain
insurance in the future. We believe that we have good relations with our
insurance providers.
FACILITIES
Our principal executive offices are located in a 7,000 square foot office
building owned by the Company at 538 Commons Drive, Golden, Colorado. We also
rent 5,300 square feet of office space in two adjacent buildings.
We presently occupy a 22,000 square foot facility located at JFK. This
facility includes administrative offices, maintenance work areas and hangar and
parts storage facilities, as well as flight dispatch operations.
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We occupy this facility pursuant to a lease agreement with Japan Airlines
("JAL") for a five-year period with two five-year renewal rights from JAL, which
began on June 1, 1995, at a monthly rate of approximately $55,000. Additionally,
in the third quarter of 1998, we leased an additional 8,000 square feet with a
monthly rate increase to approximately $88,000. We believe the JAL facility is
adequate to support the near term growth in operations that will result from the
anticipated acquisition of additional aircraft. In addition, we lease 7,750
square feet of warehouse space at JFK for the storage of aircraft components,
tires and other aircraft related equipment at a monthly lease rate of $5,000.
The initial lease term expires at the end of August 1999 and provides for two
one-year renewal option periods beginning September 1, 1999.
Due to increased operations at MIA, we entered into a month-to-month office
lease and a month-to-month warehouse lease with Dade County, Florida in March
1997 that currently provide for a combined monthly lease rate of approximately
$19,000. The leased warehouse space is used to store aviation equipment and
aircraft components used to maintain aircraft operated by the Company. In the
third quarter of 1998, we entered into a sublease and ramp use agreement with
American Airlines, Inc. for 145,000 square feet of hangar, office and parking
space at MIA in support of our 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.
LEGAL PROCEEDINGS
In March 1997, Air Support International, Inc. ("ASI") filed a complaint
against us in the U.S. District Court, Eastern District of New York alleging
actual and punitive damages of approximately $13.5 million arising from our
refusal to pay commissions which ASI claims it is owed for allegedly arranging
certain ACMI Contracts. We intend to vigorously defend against all of ASI's
claims.
While we are from time to time involved in litigation in the ordinary
course of our business, there are no other material legal proceedings pending
against us or to which any of our property is subject.
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SIGNATURE
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 hereunto duly authorized.
ATLAS AIR, INC.
Dated: February 4, 1999 By: /s/ Richard H. Shuyler
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