Atlas Air expects earnings growth in 2020 after grim Q4FY19

Feb 21, 2020: Atlas Air Worldwide Holdings’ fourth-quarter and full-year 2019 results reflected a peak season with a pickup in customer demand and improved yields compared with the middle of the year.

In addition, the results reflected an impairment charge as well as actions taken to improve operating efficiencies and align resources with the company’s strategic priorities. The impairment resulted in lower aircraft rent and depreciation expense, which added to already higher than anticipated fourth-quarter and full-year 2019 adjusted results. The impact of lower aircraft rent and depreciation expense, coupled with actions to improve our business, are expected to benefit earnings in 2020 and beyond.

Reported results in the fourth quarter and full year of 2019 primarily reflected a noncash special charge associated with the write-down of the company’s 747-400 freighter fleet due to global airfreight and macroeconomic conditions resulting in lower 747-400 commercial cargo yields and utilization, as well as the disposition of certain nonessential dry leasing aircraft and engines.

“Our fourth-quarter reported results were certainly impacted by the one-time impairment. However, our solid adjusted results were driven by our team coming together to deliver the high-quality service that our customers appreciate,” said president and chief executive officer John Dietrich.

As expected, reported and adjusted fourth-quarter results benefited from a refund of excess aircraft rent paid in previous years, lower heavy maintenance expense and aircraft ownership costs, an increase in military passenger and cargo flying, and the peak-season flying we do for express customers. Results were also impacted by the global airfreight environment and macroeconomic conditions, which reflected the effects of tariffs, global trade tensions and geopolitical unrest in certain countries in South America, and certain labor-related service disruptions.

Dietrich continued, “The airfreight industry, like most others, is experiencing the impacts of the unfortunate Coronavirus outbreak. The effects are yet to be fully determined, and therefore our visibility into the full year ahead is evolving.

“In these unprecedented circumstances, we are playing a key role in our customers’ operating networks as they navigate this challenging time. We are also currently accommodating special charter demand, and we are well-prepared for the anticipated surge of volumes once manufacturing resumes in full force.”

He concluded: “Our focus remains on express, e-commerce, the U.S. military and faster-growing markets, where the demand for our aircraft and services is solid. As the global supply chain rebalances, we will continue to leverage our significant commercial charter business to capitalize on customer demand. Looking ahead, we anticipate that our financial performance in 2020 will be an improvement over 2019.”

The company’s 2020 outlook includes benefits from lower aircraft rent and depreciation, as well as a further refund in 2020 of excess aircraft rent paid in previous years. It also includes the impact in 2020 from an increase in the amortization of deferred maintenance; the absence in 2020 of return conditions income realized in the first quarter of 2019; and improved operating efficiencies and cost savings.

As a result, adjusted EBITDA is anticipated to grow by a mid-teens percentage in 2020, and adjusted net income is expected to increase by a high-30 percent to low-40 percent level compared with 2019.

Fourth-Quarter Results

Volumes in the fourth quarter of 2019 totaled 84,488 block hours compared with 83,437 in the fourth quarter of 2018, with operating revenue of $747.0 million versus $765.0 million in 2018.

Reported results for the three months ended December 31, 2019, reflected a loss from continuing operations, net of taxes, of $410.2 million, or $15.86 per diluted share, which included a noncash special charge of $616.2 million ($485.2 million after tax) and an unrealized loss on financial instruments of $3.8 million. For the three months ended December 31, 2018, our reported income from continuing operations, net of taxes, totaled $211.0 million, or $2.73 per diluted share, which included an unrealized gain on financial instruments of $134.8 million.

On an adjusted basis, EBITDA totaled $204.7 million in the fourth quarter of 2019 compared with $196.4 million in the fourth quarter of 2018. Also on an adjusted basis, income from continuing operations, net of taxes, totaled $98.2 million, or $3.80 per diluted share, in the fourth quarter of 2019 compared with $87.0 million, or $3.12 per diluted share, in the fourth quarter of 2018. Adjusted net income in the fourth quarter of 2019 included $7.6 million (after tax) of lower aircraft rent and $2.9 million (after tax) of lower depreciation as a result of the impairment.

Lower operating revenue in the fourth quarter of 2019 compared with the fourth quarter of 2018 was primarily due to the impact of tariffs and global trade tensions on average Charter segment revenue per block hour and on ACMI segment volumes, and certain labor-related service disruptions, partially offset by an increase in Charter segment volumes.

Lower ACMI segment revenue during the period reflected a decline in 747-400 ACMI flying due to the impact of tariffs and global trade tensions on customer demand, partially offset by growth in 747-400, 777 and 737 CMI cargo flying.

Higher ACMI segment contribution during the quarter reflected a reduction in heavy maintenance expense, a decrease in aircraft rent and lower depreciation, and growth in 747-400, 777 and 737 CMI cargo flying.

Charter segment revenue in the fourth quarter of 2019 was relatively in line with the fourth quarter of 2018, driven by increases in cargo and passenger flying that were mainly offset by a decline in commercial cargo yields (excluding fuel) due to the impact of tariffs and global trade tensions, as well as geopolitical unrest in certain South American countries and certain labor-related service disruptions. Block-hour volume growth during the period primarily reflected increases in passenger and cargo demand by the military, as well as an increase in commercial cargo flying.

Lower Charter segment contribution was primarily driven by a decrease in commercial cargo yields and lower 747 freighter utilization. This impact was partially offset by increased military passenger and cargo flying, a reduction in heavy maintenance expense, and lower aircraft rent and depreciation.

In Dry Leasing, lower segment revenue and contribution during the quarter primarily reflected the scheduled return of a 777-200 freighter in 2019.

Lower unallocated income and expenses, net, during the quarter primarily reflected a $27.6 million refund of aircraft rent paid in previous years, partially offset by fleet-growth initiatives, leadership transition costs and increased amortization of a customer incentive asset.

Reported results in the fourth quarter of 2019 also included an effective income tax benefit rate of 21.4 percent, due mainly to nontaxable changes in the value of outstanding warrants. On an adjusted basis, our results reflected an effective income tax expense rate of 17.7 percent.

Full-Year Results

Volumes in 2019 totaled 321,140 block hours compared with 296,264 in 2018, with operating revenue increasing to $2.74 billion in 2019 from $2.68 billion in 2018.

Reported results for the twelve months ended December 31, 2019, reflected a loss from continuing operations, net of taxes, of $293.1 million, or $11.35 per diluted share, which included a noncash special charge of $638.4 million ($503.1 million after tax), partially offset by an unrealized gain on financial instruments of $75.1 million. For the twelve months ended December 31, 2018, our reported income from continuing operations totaled $270.6 million, or $5.22 per diluted share, which included an unrealized gain on financial instruments of $123.1 million.

On an adjusted basis, EBITDA totaled $504.8 million in 2019 compared with $551.3 million in 2018. For the twelve months ended December 31, 2019, adjusted income from continuing operations, net of taxes, totaled $139.6 million, or $5.24 per diluted share, compared with $204.3 million, or $7.27 per diluted share, in 2018. Adjusted net income in 2019 included $7.6 million (after tax) of lower aircraft rent and $2.9 million (after tax) of lower depreciation as a result of the impairment.

Outlook for 2020

Based on global economic conditions and subject to coronavirus developments, Atlas Air expects to fly approximately 325,000 block hours this year, with about 75 percent of the hours in ACMI and the balance in Charter. We also anticipate full-year 2020 revenue of approximately $2.8 billion.

Including the impact in 2019 and the expected impact in 2020 of lower aircraft rent and depreciation resulting from the impairment charge in 2019, adjusted EBITDA is expected to grow by a mid-teen percentage in 2020 compared with adjusted EBITDA of $504.8 million in 2019. The carrier also expects adjusted net income to increase by a high-30 percent to low-40 percent level in 2020 compared with adjusted net income of $139.6 million in 2019. Excluding the impact of lower aircraft rent and depreciation in both years, the adjusted EBITDA is seen growing and adjusted net income in 2020 will be comparable to or slightly higher than their 2019 levels.

“Our outlook reflects an expected refund in 2020 of excess aircraft rent paid in previous years; an increase in amortization of deferred maintenance compared with 2019; the absence in 2020 of return conditions income that we realized in 2019; and improved operating efficiencies and cost savings. It also reflects the parking of four less-efficient 747-400 converted freighters since the beginning of 2020. We also plan to return one 747-400 freighter to its lessor in the first half of this year. In addition, we have sold a 757 freighter and expect to sell a 777 freighter and a 737 passenger aircraft,” the company statement read.

The carrier anticipates that more than three-quarters of our adjusted net income in 2020 will occur in the second half of the year. Aircraft maintenance expense in 2020 is expected to total approximately $380 million. Depreciation and amortization is expected to total about $250 million. In addition, core capital expenditures, which exclude aircraft and engine purchases, are projected to total approximately $90 to $100 million, significantly lower than $134 million in 2019, mainly for parts and components for its fleet.

The full-year 2020 adjusted effective income tax rate will be approximately 21 percent. Depending on developments related to the coronavirus, the carrier expects to fly approximately 75,000 block hours (about 75 percent in ACMI) in the first quarter of 2020, with revenue of approximately $640 million. We also anticipate adjusted EBITDA of about $90 million, and adjusted net income ranging from approximately breakeven to a modest profit.