Business Overview

We are a leading global provider of outsourced aircraft and aviation operating 
services. We operate the world’s largest fleet of 747 freighters and provide 
customers a broad array of 747, 777, 767 and 737 aircraft for domestic, 
regional and international cargo and passenger operations. We provide unique 
value to our customers by giving them access to highly reliable new production 
freighters that deliver the lowest unit cost in the marketplace combined with 
outsourced aircraft operating services that we believe lead the industry in 
terms of quality and global scale. Our customers include express delivery 
providers, e-commerce retailers, airlines, freight forwarders, the U.S. 
military and charter brokers. We provide global services with operations in 
Africa, Asia, Australia, Europe, the Middle East, North America and South 
America.

Our primary service offerings include the following:

•


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

•


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

•


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

•


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


We look to achieve our growth plans and enhance shareholder value by:


•


Delivering superior service quality to our valued customers;


•


Focusing on securing long-term customer contracts;


•


Managing our fleet with a focus on leading-edge aircraft;


•


Driving significant and ongoing productivity improvements;


•


Selectively pursuing and evaluating future acquisitions and alliances; while


•


Appropriately managing capital allocation and delivering value to shareholders.

See “Business Overview” and “Business Strategy” in our 2019 Annual Report on 
Form 10-K for additional information.

Business Developments



In December 2019, COVID-19 was first reported in China and has since spread to 
many other regions of the world. In March 2020, COVID-19 was determined to be a 
global pandemic by the World Health Organization. During the first quarter of 
2020, this public health crisis disrupted global manufacturing, supply chains, 
passenger travel and consumer spending, resulting in flight cancellations by 
our ACMI customers and lower AMC passenger flying as the military took 
precautionary measures to limit the movement of personnel, as well as increased 
operating costs. A reduction of available cargo capacity in the market and 
increased demand for transporting goods due to the COVID-19 pandemic also 
resulted in increased commercial cargo charter Yields, net of fuel, and demand 
during the quarter.

Safety is our top priority. We are closely monitoring the COVID-19 pandemic and 
taking numerous precautions to ensure the safety of our operations around the 
world, including:


•


implementing frequent deep cleaning of all aircraft and facilities;


•


providing full safety kits for each crewmember and all aircraft;


•


adjusting routes to limit exposure to regions significantly impacted by the 
COVID-19 pandemic;


•


implementing significant workforce social distancing and protection measures at 
all Company facilities; and


•


having all employees who can work remotely do so.



In March 2020, the Department of Homeland Security stated that transportation 
is an essential critical infrastructure sector, which includes all aviation 
workers. As such, we play an important role in facilitating the movement of 
essential goods around the world during this challenging time, including the 
delivery of pharmaceuticals, medical equipment, education supplies, food and 
other daily necessities.



Given the dynamic nature of these circumstances, the duration of business 
disruption, the extent of customer cancellations and the related financial 
impact cannot be reasonably estimated at this time. We have incurred and expect 
to incur significant additional costs, including premium pay; other operational 
costs, including costs for continuing to provide a safe working environment for 
our employees; and higher crew costs related to increased pay rates resulting 
from our recent interim agreement with the pilots. In addition, the 
availability of hotels and restaurants; evolving COVID-19-related travel 
restrictions and health screenings; and cancellations of passenger flights by 
other airlines globally or airport closures have impacted and could further 
impact our ability to position crewmembers for operating our aircraft. In 
response to these challenging times, we have significantly reduced nonessential 
employee travel, reduced the use of contractors, limited ground staff hiring, 
implemented a number of other cost reduction initiatives and taken actions to 
increase liquidity and strengthen our financial position. The continuation or 
worsening of the aforementioned and other factors, including restrictions on 
travel and transportation, could materially affect our ACMI and Charter segment 
results for the duration of the crisis.



In April 2020, we reactivated three 747-400BCF aircraft that had been 
temporarily parked and began operating a 777-200 freighter aircraft that was 
previously in our Dry Leasing segment to meet the increased cargo demand. We 
continually assess our aircraft requirements and will make adjustments to our 
capacity as necessary. Some of these actions may involve grounding or disposing 
of aircraft or engines, which could result in asset impairments or other 
charges in future periods.


Our ACMI results for the first quarter of 2020, compared with 2019, were also 
impacted by increased flying from the following:


•


In January 2019, we entered into an agreement to operate three incremental 
747-400 freighters for Nippon Cargo Airlines on transpacific routes. The first 
two aircraft entered service in April and August 2019, and the third is 
expected to enter service in 2020.


•


In March 2019, we entered into agreements with Amazon, which include CMI 
operation of five 737-800 freighter aircraft and up to 15 additional aircraft 
by May 2021. Between May and December 2019, we placed five aircraft into 
service.

•


In June 2019, we entered into a CMI agreement with DHL to operate two 777-200 
freighter aircraft on key global routes, both of which entered service near the 
end of the second quarter of 2019.

•


In June 2019, we began flying a third 747-400 freighter for Asiana Cargo on 
transpacific routes following its return from DHL.

•


In January 2020, we entered into an ACMI agreement with EL AL Israel Airline 
Ltd. for a 747-400 freighter to provide additional capacity for its freight 
network. The aircraft entered service in January 2020.

Results of Operations

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

Three Months Ended March 31, 2020 and 2019


Segment Operating Fleet

Operating Revenue


ACMI revenue decreased $27.8 million or 9.1%, primarily due to decreased 
flying. The decrease in Block Hours flown was primarily driven by the 
redeployment of 747-400 aircraft to Charter following their return from 
customers and flight cancellations by our ACMI customers caused by the COVID-19 
pandemic, partially offset by an increase in CMI flying. Revenue per Block Hour 
was relatively unchanged.

Charter revenue increased $22.5 million, or 7.4%, primarily due to increased 
flying, partially offset by a decrease in Revenue per Block Hour. The increase 
in Charter Block Hours flown was primarily driven by the redeployment of 
747-400 aircraft from ACMI and the strong demand for commercial cargo driven by 
a reduction of available capacity in the market, the increased demand for 
transporting goods and the disruption of global supply chains due to the 
COVID-19 pandemic. Partially offsetting these improvements was lower AMC 
passenger flying as the military took precautionary measures to limit the 
movement of personnel. Revenue per Block Hour decreased primarily due to a 
reduction in Charter capacity purchased from ACMI customers that had no 
associated Charter Block Hours and lower average fuel cost per gallon, 
partially offset by an increase in commercial cargo Yields. The increase in 
commercial cargo Yields was primarily driven by the factors impacting 
commercial cargo demand noted above.



Dry Leasing

Dry Leasing revenue decreased $28.0 million, or 40.1%, primarily due to $22.3 
million of revenue in 2019 from maintenance payments related to the scheduled 
return of a 777-200 freighter aircraft and a reduction in revenue during the 
first quarter of 2020 related to certain nonessential Dry Leased aircraft sold 
or held for sale.


Operating Expenses

Salaries, wages and benefits increased $2.3 million, or 1.6%, primarily due to 
higher crew costs, including premium pay for crew operating in certain areas 
significantly impacted by COVID-19, partially offset by decreased flying.

Aircraft fuel increased $2.0 million, or 1.9%, primarily due to an increase in 
consumption related to increased Charter flying, partially offset by a decrease 
in the average fuel cost per gallon. We do not incur fuel expense in our ACMI 
or Dry Leasing businesses as the cost of fuel is borne by the customer. Average 
fuel cost per gallon and fuel consumption for the three months ended March 31 
were:

Maintenance, materials and repairs decreased $9.5 million, or 9.1%, reflecting 
$6.2 million of decreased Line Maintenance expense due to decreased flying, 
$1.7 million of decreased Non-heavy Maintenance expense and $1.6 million of 
decreased Heavy Maintenance expense. The lower Line Maintenance primarily 
reflected decreases of $5.3 million for 747-400 aircraft and $2.7 million for 
767 aircraft, partially offset by a $1.0 million increase for 747-8F aircraft. 
Heavy Maintenance expense on 747-400 aircraft decreased $1.9 million primarily 
due to a decrease in the number of engine overhauls and C Checks, partially 
offset by an increase in the number of D Checks.


Depreciation and amortization decreased $6.9 million, or 10.7%, primarily due 
to a reduction in depreciation related to the 747-400 freighter asset group 
that was written down during the fourth quarter of 2019, and certain spare 
CF6-80 engines and aircraft that were classified as held for sale during the 
fourth quarter of 2019. Partially offsetting these decreases was an increase in 
the amortization of deferred maintenance costs related to 747-8F engine 
overhauls.

Travel decreased $2.6 million, or 5.9%, primarily due to decreased flying 
related to the impact of the COVID-19 pandemic.

Navigation fees, landing fees and other rent decreased $8.8 million, or 21.9%, 
primarily due to a decrease in purchased capacity, which is a component of 
other rent.

Aircraft rent decreased $17.9 million, or 42.8%, primarily due to a reduction 
in the amortization of operating lease right-of-use assets related to the 
747-400 freighter asset group that were written down during the fourth quarter 
of 2019 and lower usage-based rental costs from reduced flying.

Gain on disposal of aircraft in 2020 represents a net gain of $6.7 million from 
the sale of certain nonessential assets that were classified as held for sale 
during the fourth quarter of 2019 (see Note 6 to our Financial Statements).

Non-operating Expenses (Income)

Unrealized (gain) loss on financial instruments represents the change in fair 
value of a customer warrant liability (see Note 4 to our Financial Statements) 
primarily due to changes in our common stock price.

Income taxes. The effective income tax rates were 27.4% and 19.7% for the three 
months ended March 31, 2020 and 2019, respectively. The rate for the three 
months ended March 31, 2020 differed from the U.S. statutory rate primarily due 
to tax expense from the vesting of share-based compensation. The rate for the 
three months ended March 31, 2019 differed from the U.S. statutory rate 
primarily due to nondeductible changes in the fair value of a customer warrant 
liability (see Note 4 to our Financial Statements).

Segments

ACMI Segment

ACMI Direct Contribution increased $12.3 million, or 30.7%, primarily due to an 
increase in CMI flying and a reduction in aircraft rent and depreciation. 
Partially offsetting these improvements was a decrease in Direct Contribution 
related to the redeployment of 747-400 aircraft to Charter. In addition, Direct 
Contribution was negatively impacted by the COVID-19 pandemic resulting in 
flight cancellations by our ACMI customers and increased operating costs, 
including premium pay for crew operating in certain areas significantly 
impacted by the virus.

Charter Segment

Charter Direct Contribution increased $21.6 million, or 74.3%, primarily due to 
an increase in commercial cargo Yields, net of fuel, and demand reflecting a 
reduction of available capacity in the market, the increased demand for 
transporting goods and the disruption of global supply chains due to the 
COVID-19 pandemic. In addition, Direct Contribution benefited from a reduction 
in aircraft rent and depreciation, and the redeployment of 747-400 aircraft 
from ACMI. Partially offsetting these improvements was lower AMC passenger 
flying as the military took precautionary measures to limit the movement of 
personnel and increased COVID-19 pandemic related operating costs, including 
premium pay for crew operating in certain areas significantly impacted by the 
virus.


Dry Leasing Segment

Dry Leasing Direct Contribution decreased $24.8 million, or 69.9%, primarily 
due to $22.3 million of revenue in 2019 from maintenance payments related to 
the scheduled return of a 777-200 freighter aircraft and a reduction in revenue 
during the first quarter of 2020 related to certain nonessential Dry Leased 
aircraft sold or held for sale.

Unallocated expenses and (income), net

Unallocated expenses and (income), net increased $8.6 million, or 10.7%, 
primarily due to an insurance recovery in 2019 and increased amortization of a 
customer incentive asset in 2020, partially offset by a refund in 2020 of 
aircraft rent that was paid in previous years.



Reconciliation of GAAP to non-GAAP Financial Measures

To supplement our Financial Statements presented in accordance with GAAP, we 
present certain non-GAAP financial measures to assist in the evaluation of our 
business performance. These non-GAAP financial measures include Adjusted Net 
Income, Adjusted Diluted EPS and Adjusted earnings before interest, taxes, 
depreciation and amortization (“Adjusted EBITDA”), which exclude certain 
noncash income and expenses, and items impacting year-over-year comparisons of 
our results. These non-GAAP financial measures may not be comparable to 
similarly titled measures used by other companies and should not be considered 
in isolation or as a substitute for Income from continuing operations, net of 
taxes and Diluted EPS from continuing operations, net of taxes which are the 
most directly comparable measures of performance prepared in accordance with 
GAAP. Effective during the three months ended September 30, 2019, we changed 
our method of calculating Adjusted EBITDA to include Other non-operating 
expenses (income) to enhance the usefulness for investors and analysts, and the 
comparability of the calculation to that of other companies. Prior period 
amounts have been adjusted for comparability.

We use these non-GAAP financial measures in assessing the performance of our 
ongoing operations and in planning and forecasting future periods. These 
adjusted measures provide a more comparable basis to analyze operating results 
and earnings and are measures commonly used by shareholders to measure our 
performance. In addition, management’s incentive compensation is determined, in 
part, by using Adjusted Net Income and Adjusted EBITDA. We believe that these 
adjusted measures, when considered together with the corresponding GAAP 
financial measures and the reconciliations to those measures, provide 
meaningful supplemental information to assist investors and analysts in 
understanding our business results and assessing our prospects for future 
performance.

Dilutive warrants in 2019 represent potentially dilutive common shares related 
to warrants issued to a customer. These warrants are excluded from Diluted EPS 
prepared in accordance with GAAP when they would have been antidilutive.

Liquidity and Capital Resources

The most significant liquidity events during the first quarter of 2020 were as 
follows:

Debt Transactions



In February 2020, we refinanced two secured term loans, that were originally 
due later in 2020, with two new term loans. One term loan is for 126 months in 
the amount of $82.0 million at a fixed interest rate of 3.27% with a final 
payment of $12.5 million due in July 2030. The other term loan is for 130 
months in the amount of $82.0 million at a fixed interest rate of 3.28% with a 
final payment of $12.5 million due in November 2030. The new term loans are 
each secured by a mortgage against a 777-200LRF aircraft and contain customary 
covenants and events of default with principal and interest payable quarterly 
(see Note 7 to our Financial Statements).



In March 2020, as a precautionary measure due to uncertainty arising from the 
COVID-19 pandemic, we drew $75.0 million under our revolving credit facility 
and had $19.8 million of unused availability as of March 31, 2020.



Operating Activities. Net cash provided by operating activities was $71.8 
million for the first quarter of 2020, which primarily reflected Net Income of 
$23.4 million, noncash adjustments of $74.4 million for Depreciation and 
amortization and $7.4 million for Deferred taxes and a $16.5 million decrease 
in Accounts receivable, partially offset by a $40.4 million decrease in 
Accounts payable and accrued liabilities, and a $5.5 million increase in 
Prepaid expenses, current assets and other assets. Net cash provided by 
operating activities was $53.8 million for the first quarter of 2019, which 
primarily reflected a Net Loss of $29.7 million, noncash adjustments of $79.0 
million for Depreciation and amortization and $46.6 million for Unrealized loss 
on financial instruments, and a $9.7 million decrease in receivable. Partially 
offsetting these items was a $42.3 million increase in Prepaid expenses, 
current assets and other assets and a $20.0 million decrease in Accounts 
payable and accrued liabilities.

Investing Activities. Net cash provided by investing activities was $10.7 
million for the first quarter of 2020, consisting primarily of $44.1 million of 
proceeds from disposal of aircraft, partially offset by $26.0 million of 
payments for flight equipment and $8.3 million of payments for core capital 
expenditures, excluding flight equipment. Payments for flight equipment and 
modifications during the first quarter of 2020 were primarily related to spare 
engines and GEnx engine performance upgrade kits. All capital expenditures for 
2020 were funded through working capital. Net cash used for investing 
activities was $44.8 million for the first quarter of 2019, consisting 
primarily of $57.3 million of payments for flight equipment and modifications 
and $30.6 million of core capital expenditures, excluding flight equipment, 
partially offset by $38.1 million of proceeds from insurance. Payments for 
flight equipment and modifications during the first quarter of 2019 were 
primarily related to 767-300 passenger aircraft and related freighter 
conversion costs, spare engines and GEnx engine performance upgrade kits.

Financing Activities. Net cash provided by financing activities was $39.6 
million for the first quarter of 2020, which primarily reflected $164.0 million 
from debt issuance and $75.0 million of proceeds from our revolving credit 
facility, partially offset by $193.6 million of payments on debt and $3.8 
million related to the purchase of treasury stock. Net cash used for financing 
activities was $77.2 million for the first quarter of 2019, which primarily 
reflected $90.9 million of payments on debt, including a $20.7 million 
repayment of two term loans, and $9.2 million related to the purchase of 
treasury stock, partially offset by $19.7 million of proceeds from debt 
issuance.

In response to the COVID-19 pandemic, we have significantly reduced 
nonessential employee travel, reduced the use of contractors, limited ground 
staff hiring, implemented a number of other cost reduction initiatives and 
taken actions to increase liquidity and strengthen our financial position. We 
consider Cash and cash equivalents, Restricted cash, Net cash provided by 
operating activities, availability under our revolving credit facility and the 
proceeds from the sale of nonessential assets to be sufficient to meet our debt 
and lease obligations, and to fund core capital expenditures for 2020. Core 
capital expenditures for the remainder of 2020 are expected to range between 
$75.0 to $85.0 million, which excludes flight equipment and capitalized 
interest.

We may access external sources of capital from time to time depending on our 
cash requirements, assessments of current and anticipated market conditions, 
and the after-tax cost of capital. To that end, we filed a shelf registration 
statement with the SEC in April 2020 that enables us to sell debt and/or equity 
securities on a registered basis over the subsequent three years, depending on 
market conditions, our capital needs and other factors. Our access to capital 
markets can be adversely impacted by prevailing economic conditions and by 
financial, business and other factors, some of which are beyond our control. 
Additionally, our borrowing costs are affected by market conditions and may be 
adversely impacted by a tightening in credit markets.

We do not expect to pay any significant U.S. federal income tax in this or the 
next decade. Our business operations are subject to income tax in several 
foreign jurisdictions. We do not expect to pay any significant cash income 
taxes in foreign jurisdictions for at least several years. We may repatriate 
the unremitted earnings of our foreign subsidiaries to the extent taxes are 
insignificant.

Contractual Obligations and Debt Agreements

See Note 7 to our Financial Statements for a description of our new debt. See 
our 2019 Annual Report on Form 10-K for a tabular disclosure of our contractual 
obligations as of December 31, 2019 and a description of our other debt 
obligations and amendments thereto.

Off-Balance Sheet Arrangements

There were no material changes in our off-balance sheet arrangements during the 
three months ended March 31, 2020.