Atlas Air Worldwide Holdings, Inc. Reports record annual earnings

Atlas Air Worldwide Holdings, Inc. announced record annual earnings in 2007, reflecting ongoing improvement in aircraft utilization due to proactive asset management, sustained operational execution, the positive impact of Continuous Improvement initiatives, and increased military and commercial charter demand. These positive measures more than offset the negative impact of record fuel prices on the Scheduled Service segment in the second half of the year. 2007 results also reflect significant reductions in AAWW’s net interest expense and effective income tax rate.

“2007 was a very strong year for Atlas Air Worldwide Holdings, and our future is bright,” said William J. Flynn, President and Chief Executive Officer of AAWW.

“Through bold strategic steps, we are transforming the Company and building from strength. We have a solid financial platform, and are implementing strategies that deliver improved revenue and earnings visibility and continued growth, while mitigating commercial and operational risk.

“In the face of current economic uncertainty, we expect to increase pretax earnings in 2008 and to grow them dramatically in 2009. We look forward to additional earnings growth with the introduction of our 747-8 freighters in 2010 and 2011.”

For the full year ended December 31, 2007, AAWW posted net income of USD 132.4 million, or USD 6.17 per diluted share, more than double 2006 levels, on revenues of USD 1.563 billion. Operating income of USD 154.8 million and pretax income of USD 132.7 million included a nonrecurring gain of USD 3.5 million on the disposal of aircraft and engines.

For the quarter ended December 31, 2007, AAWW reported net income of USD 50.7 million, or USD 2.35 per diluted share, on revenues of USD 442.8 million. Operating income of USD 70.7 million and pretax income of USD 66.7 million included a nonrecurring gain of USD 2.5 million on the disposal of surplus aircraft engines.

Mr. Flynn added: “We expect pretax earnings in 2008 to exceed 2007 levels, and to accelerate sharply to the USD 165.0 to USD 175.0 million level in 2009. Importantly, we expect to achieve this level of earnings in 2009 with a conservative assumption of revenue from our military charter business of about USD 200.0 million, nearly 47pct below 2007 AMC revenues of USD 376.6 million. Using the midpoint of our 2009 outlook, we expect our pretax earnings to grow from 2006 to 2009 at a compound annual rate of nearly 22.0pct.

“In line with our plan to grow earnings, we are pleased to announce today an expansion of our relationship with DHL Express that will enable us to place two 747-400Fs in service with them on an ACMI basis for a three-year term beginning March 29, 2008. This service will be incremental to the six 747-400Fs that will provide express network ACMI service to DHL starting on October 27, 2008. The agreement is subject to final documentation

“We will meet the additional demand from DHL with one 747-400F that we are acquiring from another operator and a second -400F that is transitioning as planned from a previous contract. To facilitate growth with other customers, we have also agreed to acquire a 747-400BCF (Boeing converted freighter) that is scheduled to enter our fleet in the fourth quarter of 2008.

“We are leveraging significant strategic catalysts to drive revenues and earnings this year and in the near future, and we are well positioned to deliver on our initiatives. The first half of 2008 will be challenging, however, given exceptionally high fuel prices and reduced military charter activity. Fuel will continue to impact our Scheduled Service business until we fully commence express network ACMI business for DHL with the six core 747-400 units in late October.”

Mr. Flynn continued: “Upon full startup of our express network ACMI service for DHL Express, we will transform expected pretax margins on aircraft assets in our Scheduled Service business to the percentages consistent with our core ACMI business. We will realize the first full-year benefits from this service in 2009. Significantly, once it begins, we will no longer be exposed to the commercial risk of filling the aircraft, the yield risk of pricing the freight that is on the aircraft, or the related risk of fuel and fuel-price escalation.

“In 2009, about 84pct of our expected block-hour capacity will be under predictable, long-term, take-or-pay contracts. Including our military charter business, about 92pct of our volumes will be tied to fixed-price contracts.”

He added: “We see continuing strong demand for attractive assets like our 747-400 freighters, and we are moving ahead towards the launch of our 747-8 freighter service in 2010 and 2011. We will benefit from the scarcity value of both of these asset types, with their high payload and fuel efficiency, and our first-to-market ACMI capability with the 747-8.

“We have a solid platform of additional growth opportunities. These range from further potential opportunities with DHL and with other customers, to fleet expansion, and to growing our dry leasing business, which we see as a logical fit with our current business profile. In February, we established a wholly owned subsidiary of AAWW based in Ireland that will focus on the acquisition, sale, dry leasing, marketing and servicing of aircraft and related equipment. Still in its nascent phase, this Irish company has already dry leased one 747-200 to a third party in the first quarter of 2008.”

Full-Year 2007 Recap

Record 2007 net income of USD 132.4 million, or USD 6.17 per diluted share, reflected operating revenues of USD 1.563 billion, operating income of USD 154.8 million, and pretax income of USD 132.7 million. Operating income and pretax income each included a nonrecurring gain of USD 3.5 million on the disposal of aircraft and engines.

Net interest expense of USD 22.5 million in 2007 was USD 24.3 million lower than in 2006, reflecting a lower level of outstanding debt, including the prepayment of USD 140.8 million of debt in July 2006, an increase in interest income on higher average cash balances, and an increase in capitalized interest related to pre-delivery deposits on the Company’s Boeing 747-8F aircraft order.

Income tax expense of USD 0.3 million in 2007 was driven by net tax benefits in connection with DHL Express’ investment in Polar Air Cargo Worldwide and by a deduction for extraterritorial income related to 2004, 2005 and 2006, which resulted in a permanent income tax benefit. The combined impact of these items totaled USD 49.9 million, or the equivalent of USD 2.33 per diluted share.

Average utilization of operated aircraft on a block-hours-per-day basis increased 9.9pct in 2007 compared with 2006. Including the Company’s dry leasing activities, operating income per aircraft on a total fleet basis increased 10.6pct to USD 4.2 million, with EBITDA per aircraft rising 12.7pct to USD 5.1 million and EBITDAR per aircraft rising 11.7pct to USD 9.3 million. Adjusting for gains on asset sales in both years, operating income per aircraft increased 15.6pct.

Continuous Improvement initiatives contributed approximately USD 61.5 million of cost savings to the Company’s 2007 results. As of year-end 2007, AAWW has realized USD 68.4 million in annualized savings against an addressable 2005 cost base of approximately USD 800 million. The Company is on track to exceed its goal of USD 100 million of annualized savings in 2008, and continues to identify and expects to achieve additional cost-savings opportunities.

4Q07 Performance Factors Versus 4Q06

Total block hours in the fourth quarter of 2007 were little changed compared with the fourth quarter of 2006 (35,585 block hours versus 35,551), with stronger demand and flying activity in the Scheduled Service and Commercial Charter businesses offsetting declines in ACMI and AMC Charter. Average utilization of operating aircraft totaled 12.1 block hours per aircraft per day during the quarter compared with 12.3 in the fourth quarter of 2006. Fourth-quarter 2007 block hours and average aircraft utilization were adversely affected by aircraft damage that resulted in limited flying activity by two aircraft during the period.

Operating revenue in fourth quarter 2007 rose 6.3pct , or USD 26.1 million, compared with the year-earlier period, primarily due to stronger demand and improved unit revenues in Scheduled Service and Commercial Charter.

In ACMI, demand for AAWW’s 747-400 aircraft remained strong during the quarter, with all available 747-400 ACMI capacity committed through 2008. Lower average block-hour rates (USD 5,989 versus USD 6,308) reflected a decrease in supplemental pre-Christmas, peak-flying activity compared with the year-ago period. The decline in ACMI block hours (16,108 versus 17,827) resulted largely from prior proactive management actions to sell or dry lease 747-200 ACMI aircraft.

Eleven aircraft (ten 747-400s and one 747-200) were operated in the Company’s long-term ACMI operations at December 31, 2007, compared with 12 aircraft (ten 747-400s and two 747-200s) at December 31, 2006.

In Scheduled Service, traffic (as measured by revenue ton miles, or RTMs) increased 15.0pct during the fourth quarter, while capacity (as measured by available ton miles, or ATMs) increased 13.2pct . As a result, load factor improved to 65.8pct from 64.8pct in the prior-year period.

Scheduled Service benefited from an improvement in the trans-Pacific market during the fourth quarter as well as from the proactive reallocation of capacity earlier in the year to favorable South American and trans-Atlantic trade routes. Overall, unit revenues (RATM) increased 7.5pct (USD 0.300 versus USD 0.279), while yield increased 5.9pct (USD 0.456 versus USD 0.431).

AMC Charter business decreased 17.1pct (4,710 block hours versus 5,682) during the quarter as U.S. military demand returned to more normalized levels and the Company capitalized on its ability to flexibly allocate available capacity to meet an increase in Commercial Charter demand. Block-hour rates (USD 17,071 versus USD 17,093) during the quarter were comparable to block-hour rates in the fourth quarter of 2006.

In Commercial Charter, the Company has implemented a strategic focus on developing solutions for customers in a range of key global businesses, including the oil and gas, heavy industry, and high-tech sectors, among others, to further maximize utilization of available capacity. In the fourth quarter, strong demand contributed to a near doubling of block-hour volumes (2,639 versus 1,346) and a 2.3pct increase in revenue per block hour (USD 17,126 versus USD 16,745).

Operating Expenses

Operating expenses in the quarter were USD 37.2 million, or 11.1pct , higher than the comparable 2006 period, primarily due to an increase in fuel expense and increases in ground handling and landing fees related to greater Scheduled Service and Commercial Charter flying.

Total aircraft fuel expense rose 35.7pct , or USD 41.3 million, during the quarter. Aggregate spending on fuel was mitigated by a USD 3.2 million benefit from fuel-hedging activities related to fuel requirements for the Company’s Scheduled Service business.

Increased flying in Scheduled Service, which is the only business segment where the Company is directly exposed to fuel-price volatility risk, and Commercial Charter resulted in a 24.5pct increase in fuel gallons consumed (48,222 versus 38,737) during the quarter. The impact of increased fuel consumption was heightened by a 32.6pct increase in the average price per gallon, including the effect of hedges (USD 2.56 versus USD 1.93). In the AMC segment, where the U.S. military reimburses the Company for fuel-price increases that exceed an agreed upon fuel price, fuel expense reflected the decline in AMC activity and a 2.2pct decrease in the AMC fuel rate (USD 2.20 versus USD 2.25).

In line with the increased levels of flying in Scheduled Service and Commercial Charter, aggregate ground handling and landing fees during the quarter rose USD 4.3 million, or 11.0pct , compared with the same quarter in 2006.

Maintenance expense during the quarter increased USD 0.7 million, or 2.5pct . There were seven engine overhaul events in the latest quarter compared with six in the fourth quarter of 2006. There were no heavy maintenance events during the quarter, compared with one 747-200 C Check in the year-ago quarter.

Depreciation and amortization decreased USD 3.8 million, or 31.8pct , primarily due to a decline in expenses related to the scrapping of rotable parts.

Other operating expenses decreased USD 8.3 million, or 32.2pct , versus the fourth quarter of 2006, primarily due to the Company’s Continuous Improvement initiative. Other operating expenses in the quarter include a USD 4.8 million reduction in AMC commissions, a USD 1.1 million decrease in legal and professional fees, and a USD 1.0 million decrease in freight and postage expense.

Net Interest and Other Non-Operating Expenses

Net interest expense decreased USD 3.7 million, or 45.6pct , compared with the fourth quarter of 2006, reflecting a lower level of outstanding debt, an increase in interest income on higher average cash balances, and an increase in capitalized interest related to pre-delivery deposits on the Company’s Boeing 747-8F aircraft order.

Income Taxes

Fourth-quarter results included an income tax expense of USD 16.1 million compared with an income tax expense of USD 28.3 million in the fourth quarter of 2006, resulting in an effective tax expense rate of 24.1pct versus 38.3pct .

Rates for the fourth quarter of 2007 principally reflect AAWW’s ability to claim a deduction on its federal income tax returns for extraterritorial income (ETI) for the years 2004 through 2006. The ETI deduction resulted in a permanent income tax benefit of USD 5.9 million recorded during the fourth quarter. Management is reviewing potential additional ETI deductions for 2007, but cannot estimate at this time the additional benefit that may be recorded.

During 2007, the Company also modified certain tax accounting methods on its 2006 consolidated federal income tax return, resulting in a deferral of taxable income that eliminated the Company’s federal cash income tax liability for 2006 and also generated additional net operating loss (NOL) carryovers that can be applied to 2007 and future years.

The Company did not pay significant cash income taxes in 2007, and it expects to utilize tax loss carryforwards to offset most taxable income generated during 2008. Other income tax planning opportunities may reduce the Company’s effective income tax rate and cash tax liability in future years. These planning opportunities are not yet fully developed, however, and the potential tax rate reduction and cash tax savings cannot be accurately quantified at this time.

Cash and Cash Equivalents

At December 31, 2007, AAWW’s cash and cash equivalents totaled USD 477.3 million compared with USD 231.8 million at year-end 2006.

The year-end 2007 total reflects initial proceeds of USD 75.0 million from DHL Express’ investment in Polar Air Cargo Worldwide, USD 22.9 million from DHL as additional proceeds for working capital, and a USD 30.0 million refundable deposit from DHL.

An additional USD 75.0 million due from DHL Express in 2008 is being paid in two equal installments, with interest. On January 15, 2008, AAWW received the first installment of USD 38.6 million, including interest of USD 1.1 million. The final payment of USD 37.5 million, plus interest, is scheduled to be paid on November 17, 2008.

Outstanding Debt

At December 31, 2007, AAWW’s balance sheet debt and capital lease obligations totaled USD 394.1 million, including the impact of USD 75.4 million of unamortized discount related to fair market value adjustments recorded against its debt as a result of the application of fresh-start accounting.

The face value of AAWW’s debt and capital lease obligations at December 31, 2007 totaled USD 469.5 million, compared with USD 501.5 million on December 31, 2006.

On January 30, 2008, AAWW’s subsidiary, Atlas Air, Inc. (Atlas), entered into a USD 270.0 million pre-delivery deposit financing facility in connection with five new Boeing 747-8 wide-body freighters scheduled for delivery between February and July 2010. As of February 1, 2008, Atlas had borrowed USD 62.6 million under the facility.

Non-GAAP Financial Measures: EBITDAR and EBITDA

EBITDAR totaled USD 115.7 million, USD 3.1 million per aircraft on a total fleet basis, in the fourth quarter of 2007 compared with USD 131.6 million, USD 3.4 million per aircraft, in the fourth quarter of 2006. For the full year, EBITDAR totaled USD 347.0 million, USD 9.3 million per aircraft, compared with USD 338.2 million, USD 8.4 million per aircraft, in 2006.

EBITDA totaled USD 76.5 million, USD 2.1 million per aircraft, in the latest reporting period compared with USD 92.8 million, USD 2.4 million per aircraft on a total fleet basis, in the fourth quarter of 2006. EBITDA for the full year was USD 191.4 million, USD 5.1 million per aircraft, compared with USD 185.0 million, USD 4.6 million per aircraft, for the previous year.