UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 001-16545

Atlas Air Worldwide Holdings, Inc.

(Exact name of registrant as specified in its charter)

Delaware (State or other jurisdiction of incorporation)		13-4146982 (IRS Employer Identification No.)
2000 Westchester Avenue, Purchase, New York (Address of principal executive offices)		10577 (Zip Code)

(914) 701-8000
(Registrant’s telephone number, including area code)

Not Applicable
(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “accelerated filer,” “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ		Accelerated filer o		Non-accelerated filer o		Smaller reporting company o
				(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

As of September 30, 2011, there were 26,302,167 shares of the registrant’s Common Stock outstanding.

 

 

TABLE OF CONTENTS

		Page
Part I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (unaudited)
Consolidated Balance Sheets at September 30, 2011 and December 31, 2010 (unaudited)			1
Consolidated Statements of Operations for the Three and Nine Months ended September 30, 2011 and 2010 (unaudited)			2
Consolidated Statements of Cash Flows for the Nine Months ended September 30, 2011 and 2010 (unaudited)			3
Consolidated Statements of Stockholders’ Equity as of and for the Nine Months ended September 30, 2011 and 2010 (unaudited)			4
Notes to Unaudited Consolidated Financial Statements			5
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			14
Item 3. Quantitative and Qualitative Disclosures About Market Risk			27
Item 4. Controls and Procedures			28
PART II. OTHER INFORMATION
Item 1. Legal Proceedings			29
Item 1A. Risk Factors			29
Item 6. Exhibits			29
Signatures			30
Exhibit Index			31
EX-10.1
EX-10.2
EX-10.3
EX-10.4
EX-31.1
EX-31.2
EX-32.1
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Atlas Air Worldwide Holdings, Inc.

Consolidated Balance Sheets
(in thousands, except share data)
(Unaudited)

		September 30, 2011				December 31, 2010
Assets
Current Assets
Cash and cash equivalents		$	417,352			$	588,852
Short-term investments			7,913				6,211
Restricted cash			120,252				—
Accounts receivable, net of allowance of $1,644 and $1,900, respectively			84,802				78,334
Prepaid maintenance			38,154				26,102
Deferred taxes			3,288				3,721
Prepaid expenses and other current assets			27,775				24,212
Total current assets			699,536				727,432
Property and Equipment
Flight equipment			897,216				766,681
Ground equipment			32,338				29,124
Less: accumulated depreciation			(154,930	)			(138,851	)
Purchase deposits for flight equipment			396,030				336,969
Property and equipment, net			1,170,654				993,923
Other Assets
Long-term investments and accrued interest			133,200				127,094
Deposits and other assets			58,934				45,026
Intangible assets, net			41,157				42,627
Total Assets		$	2,103,481			$	1,936,102
Liabilities and Equity
Current Liabilities
Accounts payable		$	37,571			$	22,954
Accrued liabilities			196,128				149,892
Current portion of long-term debt			57,819				96,197
Total current liabilities			291,518				269,043
Other Liabilities
Long-term debt			466,174				391,036
Deferred taxes			109,246				103,150
Other liabilities			129,938				122,783
Total other liabilities			705,358				616,969
Commitments and contingencies
Equity
Stockholders’ Equity
Preferred stock, $1 par value; 10,000,000 shares authorized; no shares issued			—				—
Common stock, $0.01 par value; 50,000,000 shares authorized; 27,458,043 and 26,955,923 shares issued, 26,302,167 and 25,937,014, shares outstanding (net of treasury stock), at September 30, 2011 and December 31, 2010, respectively			275				270
Additional paid-in-capital			522,650				505,297
Treasury stock, at cost; 1,155,876 and 1,018,909 shares, respectively			(41,446	)			(32,248	)
Accumulated other comprehensive income (loss)			(14,471	)			458
Retained earnings			635,236				572,666
Total stockholders’ equity			1,102,244				1,046,443
Noncontrolling interest			4,361				3,647
Total equity		$	1,106,605			$	1,050,090
Total Liabilities and Equity		$	2,103,481			$	1,936,102

See accompanying Notes to Unaudited Consolidated Financial Statements

Atlas Air Worldwide Holdings, Inc.

Consolidated Statements of Operations
(in thousands, except per share data)
(Unaudited)

		For the Three Months Ended								For the Nine Months Ended
		September 30, 2011				September 30, 2010				September 30, 2011				September 30, 2010
Operating Revenue
ACMI		$	163,406			$	144,685			$	469,883			$	383,917
AMC charter			122,581				72,506				316,230				303,314
Commercial charter			70,353				104,044				206,956				275,525
Dry leasing			3,065				2,157				6,742				5,384
Other			3,471				3,275				10,246				9,940
Total Operating Revenue		$	362,876			$	326,667			$	1,010,057			$	978,080
Operating Expenses
Aircraft fuel			103,663				74,221				278,188				222,336
Salaries, wages and benefits			61,911				56,244				185,173				177,677
Maintenance, materials and repairs			47,770				44,747				144,699				115,967
Aircraft rent			41,055				38,764				120,976				115,097
Landing fees and other rent			12,813				11,487				36,756				35,974
Travel			11,284				8,941				30,328				24,354
Depreciation and amortization			9,964				8,403				27,069				26,049
Ground handling and airport fees			6,036				6,423				17,141				17,645
Gain on disposal of aircraft			(163	)			(161	)			(464	)			(3,541	)
Other			25,043				22,702				72,580				80,177
Total Operating Expenses			319,376				271,771				912,446				811,735
Operating Income			43,500				54,896				97,611				166,345
Non-operating Expenses / (Income)
Interest income			(5,004	)			(5,490	)			(15,200	)			(14,620	)
Interest expense			9,801				10,176				30,009				30,396
Capitalized interest			(6,982	)			(4,401	)			(18,584	)			(11,007	)
Other (income) expense, net			(121	)			(614	)			(485	)			(9,236	)
Total Non-operating Income			(2,306	)			(329	)			(4,260	)			(4,467	)
Income before income taxes			45,806				55,225				101,871				170,812
Income tax expense			17,464				21,186				38,595				70,386
Net Income			28,342				34,039				63,276				100,426
Less: Net income attributable to noncontrolling interests			136				235				706				176
Net Income Attributable to Common Stockholders		$	28,206			$	33,804			$	62,570			$	100,250
Earnings per share:
Basic		$	1.07			$	1.31			$	2.39			$	3.90
Diluted		$	1.07			$	1.29			$	2.37			$	3.85
Weighted average shares:
Basic			26,291				25,855				26,201				25,736
Diluted			26,452				26,143				26,416				26,038

See accompanying Notes to Unaudited Consolidated Financial Statements

Consolidated Statements of Cash Flows
(in thousands)

(Unaudited)

		For the Nine Months Ended
		September 30, 2011				September 30, 2010
Operating Activities:
Net Income Attributable to Common Stockholders		$	62,570			$	100,250
Net income attributable to noncontrolling interests			706				176
Net Income			63,276				100,426
Adjustments to reconcile Net Income to net cash provided by operating activities:
Depreciation and amortization			27,069				26,049
Amortization of debt discount			3,753				4,011
Amortization of operating lease discount			1,789				1,750
Amortization of debt issuance costs			300				219
Accretion of debt securities discount			(6,208	)			(5,979	)
Provision for (release of) allowance for doubtful accounts			(17	)			75
Gain on disposal of aircraft			(464	)			(3,541	)
Deferred taxes			14,882				18,071
Stock-based compensation expense			9,497				10,489
Changes in:
Accounts receivable			(4,573	)			(5,539	)
Prepaid expenses and other current assets			(21,801	)			(6,576	)
Deposits and other assets			(12,622	)			(2,200	)
Accounts payable and accrued liabilities			43,757				76,838
Net cash provided by operating activities			118,638				214,093
Investing Activities:
Capital expenditures			(205,359	)			(59,590	)
Changes in restricted cash			(120,252	)			—
Investment in debt securities			—				(100,090	)
Proceeds from short-term investments			4,662				4,374
Proceeds from disposal of aircraft			1,165				5,018
Net cash used for investing activities			(319,784	)			(150,288	)
Financing Activities:
Proceeds from stock option exercises			4,733				3,522
Purchase of treasury stock			(9,198	)			(5,777	)
Excess tax benefit from stock-based compensation expense			3,128				1,677
Proceeds from loan			120,250				20,637
Payment of debt issuance costs			(2,024	)			—
Payments of debt			(87,243	)			(152,316	)
Net cash provided by (used for) financing activities			29,646				(132,257	)
Net decrease in cash and cash equivalents			(171,500	)			(68,452	)
Cash and cash equivalents at the beginning of period			588,852				613,740
Cash and cash equivalents at the end of period		$	417,352			$	545,288

See accompanying Notes to Unaudited Consolidated Financial Statements

Atlas Air Worldwide Holdings, Inc.

Consolidated Statements of Stockholders’ Equity
(in thousands, except per share data)
(Unaudited)

														Accumulated
										Additional				Other								Total
		Common				Treasury				Paid-In				Comprehensive				Retained				Stockholders’				Noncontrolling				Total
		Stock				Stock				Capital				Income (Loss)				Earnings				Equity				Interest				Equity
Balance at December 31, 2009		$	266			$	(26,394	)		$	481,074			$	471			$	430,856			$	886,273			$	2,484			$	888,757
Net Income Attributable to Common Stockholders			—				—				—				—				100,250				100,250				176				100,426
Other comprehensive income (loss)			—				—				—				51				—				51				66				117
Comprehensive income			—				—				—				—				—				100,301				—				100,543
Stock option and restricted stock compensation			—				—				10,489				—				—				10,489				—				10,489
Purchase of 124,855 shares of treasury stock			—				(5,777	)			—				—				—				(5,777	)			—				(5,777	)
Exercise of 111,320 employee stock options			—				—				3,522				—				—				3,522				—				3,522
Issuance of 200,137 shares of restricted stock			3				—				(3	)			—				—				—				—				—
Tax benefit on restricted stock and stock options			—				—				1,677				—				—				1,677				—				1,677
Balance at September 30, 2010		$	269			$	(32,171	)		$	496,759			$	522			$	531,106			$	996,485			$	2,726			$	999,211

														Accumulated
										Additional				Other								Total
		Common				Treasury				Paid-In				Comprehensive				Retained				Stockholders’				Noncontrolling				Total
		Stock				Stock				Capital				Income (Loss)				Earnings				Equity				Interest				Equity
Balance at December 31, 2010		$	270			$	(32,248	)		$	505,297			$	458			$	572,666			$	1,046,443			$	3,647			$	1,050,090
Net Income Attributable to Common Stockholders			—				—				—				—				62,570				62,570				706				63,276
Other comprehensive income (loss)			—				—				—				(14,929	)			—				(14,929	)			8				(14,921	)
Comprehensive income			—				—				—				—				—				47,641				—				48,355
Stock option and restricted stock compensation			—				—				9,497				—				—				9,497				—				9,497
Purchase of 136,967 shares of treasury stock			—				(9,198	)			—				—				—				(9,198	)			—				(9,198	)
Exercise of 122,354 employee stock options			1				—				4,732				—				—				4,733				—				4,733
Issuance of 379,766 shares of restricted stock			4				—				(4	)			—				—				—				—				—
Tax benefit on restricted stock and stock options			—				—				3,128				—				—				3,128				—				3,128
Balance at September 30, 2011		$	275			$	(41,446	)		$	522,650			$	(14,471	)		$	635,236			$	1,102,244			$	4,361			$	1,106,605

See accompanying Notes to Unaudited Consolidated Financial Statements

Atlas Air Worldwide Holdings, Inc.

1. Basis of Presentation

     Our consolidated financial statements include the accounts of the holding company, Atlas Air Worldwide Holdings, Inc. (“AAWW”) and its consolidated subsidiaries. AAWW is the parent company of its principal operating subsidiary, Atlas Air, Inc. (“Atlas”), and of Polar Air Cargo LLC (“Old Polar”). AAWW is also the parent company of several subsidiaries related to our dry leasing services (collectively referred to as “Titan”). In addition, we are the primary beneficiary of Global Supply Systems Limited (“GSS”), a consolidated subsidiary. AAWW has a 51% equity interest and 75% voting interest in Polar Air Cargo Worldwide, Inc. (“Polar”). We record our share of Polar’s results under the equity method of accounting.

     The terms “we,” “us,” “our,” and the “Company” mean AAWW and all entities included in its consolidated financial statements.

     We provide outsourced aircraft and aviation operating services throughout the world, serving Africa, Asia, Australia, Europe, the Middle East, North America and South America through: (i) contractual service arrangements, including contracts through which we provide aircraft to customers and value-added services, including crew, maintenance and insurance (“ACMI”), as well as contracts through which we provide crew, maintenance and insurance, with the customer providing the aircraft (“CMI”); (ii) military charter services (“AMC Charter”); (iii) seasonal, commercial and ad-hoc charter services (“Commercial Charter”); and (iv) dry leasing or sub-leasing of aircraft and engines (“Dry Leasing” or “Dry Lease”).

     The accompanying unaudited consolidated financial statements and related notes (the “Financial Statements”) have been prepared in accordance with the U.S. Securities and Exchange Commission (the “SEC”) requirements for quarterly reports on Form 10-Q, and consequently, exclude certain disclosures normally included in audited consolidated financial statements prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). All significant intercompany accounts and transactions have been eliminated. The Financial Statements should be read in conjunction with the audited consolidated financial statements and the notes included in the AAWW Annual Report on Form 10-K for the year ended December 31, 2010, which included additional disclosures and a summary of our significant accounting policies. In our opinion, the Financial Statements contain all adjustments, consisting of normal recurring items, necessary to fairly state the financial position of AAWW and its consolidated subsidiaries as of September 30, 2011, the results of operations for the three and nine months ended September 30, 2011 and 2010, cash flows for the nine months ended September 30, 2011 and 2010, and shareholders’ equity as of and for the nine months ended September 30, 2011 and 2010.

     For interim accounting purposes, we recognize income taxes using an estimated annual effective tax rate.

     Our quarterly results are subject to seasonal and other fluctuations, and the operating results for any quarter are therefore not necessarily indicative of results that may be otherwise expected for the entire year.

     Except for per share data, all dollar amounts are in thousands unless otherwise noted.

2. Recent Accounting Pronouncements

     In June 2011, the Financial Accounting Standards Board amended its guidance on the presentation of comprehensive income to increase the prominence of items reported in other comprehensive income. The new guidance requires that all components of comprehensive income in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The new guidance is effective as of the beginning of 2012 and its adoption will not have any impact on our financial condition, results of operations or cash flows.

3. DHL Investment and Polar

     Polar provides air cargo capacity to its customers, including DHL Network Operations (USA), Inc. (“DHL”), through a blocked-space agreement that began on October 27, 2008. The aggregate carrying value of our Polar investment, included within Deposits and other assets, was $4.9 million at September 30, 2011 and $5.3 million at December 31, 2010.

     Polar currently operates six 747-400 freighter aircraft that are subleased from us. An additional two aircraft are operated by Atlas to support the Polar network and DHL through an alliance agreement whereby Atlas provides ACMI

services to Polar. We also provide incremental charter capacity to Polar on an as-needed basis. Atlas and Polar have entered into various agreements under which we provide Polar with crew, maintenance and insurance for the subleased aircraft. Collectively, these service agreements and the subleases are referred to as “Express Network ACMI”. We provide Polar with certain management and administrative services under a shared services agreement. In addition, Polar and Atlas provide each other with sales and ground support services under a general sales and services agreement. The following table summarizes our transactions with Polar:

		For the Three Months Ended								For the Nine Months Ended
Revenue and Expenses:		September 30, 2011				September 30, 2010				September 30, 2011				September 30, 2010
ACMI revenue from Polar		$	61,089			$	47,212			$	167,739			$	138,952
Other revenue from Polar		$	2,837			$	2,837			$	8,512			$	8,512
Ground handling and airport fees to Polar		$	280			$	519			$	840			$	1,645

Accounts receivable/payable as of:		September 30, 2011				December 31, 2010
Receivables from Polar		$	3,116			$	8,009
Payables to Polar		$	4,329			$	2,945

4. Concentration of Credit Risk and Significant Customers

     We are exposed to concentration of credit risk by our customers. The following table summarizes our significant exposure to Polar and the U.S. Military Air Mobility Command (“AMC”). We have not experienced credit issues with either of these customers. No other customer accounted for 10.0% or more of our Total Operating Revenue.

		For the Three Months Ended								For the Nine Months Ended
Revenue as a % of Total Operating Revenue:		September 30, 2011				September 30, 2010				September 30, 2011				September 30, 2010
AMC			33.8	%			22.2	%			31.3	%			31.0	%
Polar			17.6	%			15.3	%			17.4	%			15.1	%

		For the Three Months Ended								For the Nine Months Ended
Revenue as a % of Total ACMI Revenue:		September 30, 2011				September 30, 2010				September 30, 2011				September 30, 2010
Polar			37.4	%			32.6	%			35.7	%			36.2	%

Accounts receivable as a % of Total Accounts
receivable, net of allowance, as of:		September 30, 2011				December 31, 2010
AMC			24.9	%			10.5	%
Polar			3.7	%			10.2	%

5. Debt

     On September 30, 2011, we borrowed $120.3 million for the pending purchase of our first 747-8F aircraft under a twelve-year term loan with a final payment of $32.6 million due in September 2023 (the “September 2011 Term Loan”). The proceeds from the September 2011 Term Loan were pledged as collateral to the lender and classified as Restricted cash at September 30, 2011. The proceeds were subsequently released upon delivery of our first 747-8F aircraft on November 2, 2011. The September 2011 Term Loan, which is secured by a mortgage against aircraft tail number N853GT, contains customary covenants and events of default and accrues interest at a fixed rate of 6.16%, payable quarterly. In addition, upon the occurrence and during the continuance of an event of default, the September 2011 Term Loan is cross-defaulted to our aircraft pre-delivery deposit (“PDP”) financing facility.

6. Financial Instruments

     Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). Inputs used to measure fair value are classified in the following hierarchy:

     Level 1     Unadjusted quoted prices in active markets for identical assets or liabilities;

		Level 2     Other inputs that are observable directly or indirectly, such as quoted prices in active markets for similar assets or liabilities, or inactive quoted prices for identical assets or liabilities in inactive markets;
		Level 3     Unobservable inputs reflecting assumptions about the inputs used in pricing the asset or liability.

     We endeavor to utilize the best available information in measuring fair value.

     We maintain Cash and cash equivalents, Short-term investments and Restricted cash, which include cash on hand, demand deposits, other cash investments that are highly liquid in nature and have original maturities of three months or less at acquisition, certificates of deposit, current portion of debt securities and money market funds. The carrying value for Cash and cash equivalents, Short-term investments, and Restricted cash is based on cost, which approximates fair value.

     Long-term investments consist of debt securities for which we have both the ability and the intent to hold until maturity. These investments are classified as held-to-maturity and reported at amortized cost. The fair value of our Long-term investments was based on a discounted cash flow analysis using the contractual cash flows of the investments and a discount rate derived from unadjusted quoted interest rates for debt securities of comparable risk. Such debt securities represent investments in Pass-Through Trust Certificates related to enchanced equipment trust certificates (“EETCs”) issued by Atlas in 1998, 1999 and 2000. Interest on debt securities and accretion of discounts using the effective interest method are included in Interest income.

     The fair value of our EETCs was estimated based on Level 3 inputs. We obtained Level 2 inputs of quoted market prices of our equipment notes and used them as a basis for valuing the EETCs.

     The fair value of our PDP financing facility and term loans was based on a discounted cash flow analysis using current borrowing rates for instruments with similar terms.

     The fair value of our interest rate derivatives was based on Level 2 inputs utilized in expected cash flow models. The incorporated market inputs include the implied forward London InterBank Offered Rate (“LIBOR”) yield curve for the same period as the future interest swap settlements. These derivatives are designated as hedging instruments.

     The following table summarizes the carrying amount, estimated fair value and classification of our financial instruments as of:

		September 30, 2011
		Carrying Value				Fair Value				Level 1				Level 2				Level 3
Assets
Cash and cash equivalents		$	417,352			$	417,352			$	417,352			$	—			$	—
Short-term investments			7,913				7,913				—				—				7,913
Restricted cash			120,252				120,252				120,252				—				—
Long-term investments and accrued interest			133,200				162,313				—				—				162,313
		$	678,717			$	707,830			$	537,604			$	—			$	170,226
Liabilities
Interest rate derivatives		$	23,011			$	23,011			$	—			$	23,011			$	—
1998 EETCs			133,121				142,071				—				—				142,071
1999 EETCs			148,942				150,889				—				—				150,889
2000 EETCs			56,035				58,476				—				—				58,476
Term loans			185,895				185,895				—				—				185,895
		$	547,004			$	560,342			$	—			$	23,011			$	537,331

		December 31, 2010
		Carrying Value				Fair Value				Level 1				Level 2				Level 3
Assets
Cash and cash equivalents		$	588,852			$	588,852			$	588,852			$	—			$	—
Short-term investments			6,211				6,211				—				—				6,211
Long-term investments and accrued interest			127,094				157,787				—				—				157,787
		$	722,157			$	752,850			$	588,852			$	—			$	163,998
Liabilities
1998 EETCs		$	145,012			$	164,379			$	—			$	—			$	164,379
1999 EETCs			159,043				171,478				—				—				171,478
2000 EETCs			58,485				65,230				—				—				65,230
PDP financing facility			46,871				46,861				—				—				46,861
Term loans			77,822				79,198				—				—				79,198
		$	487,233			$	527,146			$	—			$	—			$	527,146

     The following table presents the carrying value, gross unrealized gains and fair value of our long-term investments by contractual maturity as of:

		September 30, 2011												December 31, 2010
						Gross Unrealized												Gross Unrealized
		Carrying Value				Gains				Fair Value				Carrying Value				Gains				Fair Value
Debt securities
Due after five but within ten years		$	133,200			$	29,113			$	162,313			$	73,356			$	18,363			$	91,719
Due after ten years			—				—				—				53,738				12,330				66,068
Total		$	133,200			$	29,113			$	162,313			$	127,094			$	30,693			$	157,787

Interest Rate Derivatives

     We are exposed to changes in interest rates for projected issuances of debt related to the future financing of the Boeing 747-8F aircraft that we have on order. We use forward-starting interest rate swaps to effectively fix the interest rate for anticipated 747-8F financings in 2011. The use of forward-starting interest rate swaps effectively converts our floating-rate forecasted debt issuance to a fixed rate basis. When entering into forward-starting interest rate swaps, we become exposed to both credit risk and market risk. We are subject to counterparty credit risk when the value of the forward-starting interest rate swaps are a gain and the risk exists that the counterparty will fail to perform under the terms of the contract. We are subject to market risk with respect to changes in the underlying benchmark interest rate that impacts the fair value of the forward-starting interest rate swaps. We manage our counterparty credit risk by only entering into forward-starting interest rate swaps with major financial institutions with investment-grade credit ratings. We manage our market risk by matching the terms of each forward-starting interest rate swap with a specified expected debt issuance. We do not use derivative instruments for trading or speculative purposes.

     We formally document all relationships between hedging instruments and hedged items, as well as our risk management objectives and strategies for undertaking the hedge. This process includes specific identification of the hedging instrument and the hedged transaction, the nature of the risk being hedged and how the hedging instrument’s effectiveness will be assessed. Both at the inception of the hedge and on an ongoing basis, we assess whether the derivatives used in a projected transaction are highly effective in offsetting changes in cash flows or the fair value of hedged items.

     In May 2011, we entered into two forward-starting interest rate swaps with a total notional value of $237.5 million to hedge the risk of changes in quarterly interest payments due to fluctuations in the forward 90-day LIBOR swap rate for anticipated fixed-rate debt issuances in 2011. We designated these forward-starting interest rate swaps as cash flow hedges. Changes in the fair value of the effective portion of the forward-starting interest rate swaps are recorded as a gain or loss in other comprehensive income (loss) until the underlying hedged item is recognized in net income. We classify both the net earnings and cash flow impact from these forward-starting interest rate swaps consistent with the underlying hedged item. In the event the debt is not issued and the forward-starting interest rate swaps are terminated, any gain or loss from the termination would be recorded in net income immediately. Hedging ineffectiveness and a net earnings impact would occur if the change in the value of the hedge did not offset the change in the value of the underlying hedged item.

     The forward-starting interest rate swaps outstanding as of September 30, 2011 relate to anticipated debt issuances in the fourth quarter of 2011. As of September 30, 2011, the fair value of these forward-starting interest rate swaps was $23.0 million, offset by cash collateral of $15.6 million, resulting in a net carrying value of $7.4 million included within Accrued liabilities.

     We recorded unrealized pre-tax and after-tax losses of $22.2 million and $14.1 million in Other comprehensive loss for changes in the fair value of our forward-starting interest rate swaps for the three months ended September 30, 2011 and $23.0 million and $14.7 million for the nine months ended September 30, 2011. There was no ineffectiveness associated with these hedges during the three and nine months ended September 30, 2011.

7. Accrued Liabilities

     Accrued liabilities consisted of the following as of:

		September 30, 2011				December 31, 2010
Maintenance		$	75,359			$	57,552
Salaries, wages and benefits			41,252				33,542
Aircraft fuel			26,360				17,710
Other			53,157				41,088
Accrued liabilities		$	196,128			$	149,892

8. Segment Reporting

     We have the following reportable segments: ACMI, AMC Charter, Commercial Charter and Dry Leasing. We use an economic performance metric (“Direct Contribution”) that shows the profitability of each segment after allocation of direct ownership costs. Direct Contribution consists of Income before income taxes and excludes the following: special charges, nonrecurring items, gains on the disposal of aircraft, unallocated revenue and unallocated fixed costs. Direct ownership costs include crew costs, maintenance, fuel, ground operations, sales costs, aircraft rent, interest expense related to aircraft debt, interest income on debt securities and aircraft depreciation. Unallocated income and expenses include corporate overhead, non-aircraft depreciation, interest income, foreign exchange gains and losses, other revenue and other non-operating costs, including special items. Management uses Direct Contribution to measure segment profitability as it shows each segment’s contribution to unallocated fixed costs. Each segment has different operating and economic characteristics that are separately reviewed by our senior management.

     Management allocates the costs attributable to aircraft operation and ownership among the various segments based on the aircraft type and activity levels in each segment. Depreciation and amortization expense, aircraft rent, maintenance expense, and other aircraft related expenses are allocated to segments based upon aircraft utilization because individual aircraft are utilized across segments interchangeably. In addition, certain ownership costs are directly apportioned to the ACMI segment. Other allocation methods are standard activity-based methods that are commonly used in the industry.

     The ACMI segment provides aircraft, crew, maintenance and insurance services to customers. Also included in the ACMI segment are the results of operations for CMI, which we began providing in the second quarter of 2010. CMI provides crew, maintenance and insurance services, with the customer providing the aircraft. Under both services, the customers utilize an insured and maintained aircraft with crew in exchange for a guaranteed monthly level of operation at a predetermined rate for a defined period of time. The customer bears the commercial revenue risk and the obligation for other direct operating costs, including fuel. The Direct Contribution from Express Network ACMI flying is reflected as ACMI.

     The AMC Charter segment provides full-planeload charter flights to the U.S. Military. In addition to cargo flights, the AMC Charter segment includes passenger flights, which we began providing in the second quarter of 2011. We also earn commissions on subcontracting certain flying of oversized cargo, or in connection with flying cargo into areas of military conflict where we cannot perform these services on our own. Revenue from the AMC Charter business is typically derived from one-year contracts on a cost-plus basis with the AMC. Our current AMC contract runs from January 1, 2011 through December 31, 2011. Although we are responsible for the direct operating costs of the aircraft, the price paid for fuel consumed during AMC flights is fixed by the U.S. Military. We receive reimbursement from the AMC each month if the price of fuel paid by us to vendors for AMC missions exceeds the fixed price. Alternatively, if the price of fuel paid by us is less than the fixed price, we pay the difference to the AMC each month.

     The Commercial Charter segment provides aircraft charters to freight forwarders, airlines and other air cargo customers. Charters are often paid in advance and we typically bear the direct operating costs.

     The Dry Leasing segment provides for the leasing of aircraft and engines to customers.

     Other represents revenue for services that are not allocated to any segment, including administrative and management support services and flight simulator training.

     The following table sets forth Operating Revenue and Direct Contribution for our reportable business segments reconciled to Operating Income and Income before Income Taxes:

		For the Three Months Ended								For the Nine Months Ended
		September 30, 2011				September 30, 2010				September 30, 2011				September 30, 2010
Operating Revenue:
ACMI		$	163,406			$	144,685			$	469,883			$	383,917
AMC Charter			122,581				72,506				316,230				303,314
Commercial Charter			70,353				104,044				206,956				275,525
Dry Leasing			3,065				2,157				6,742				5,384
Other			3,471				3,275				10,246				9,940
Total Operating Revenue		$	362,876			$	326,667			$	1,010,057			$	978,080
Direct Contribution:
ACMI		$	38,924			$	34,809			$	97,990			$	87,097
AMC Charter			21,709				18,819				55,651				95,096
Commercial Charter			7,142				26,205				24,772				78,372
Dry Leasing			1,387				1,565				3,400				3,692
Total Direct Contribution for Reportable Segments			69,162				81,398				181,813				264,257
Add back (subtract):
Unallocated income and expenses			(23,519	)			(26,334	)			(80,406	)			(96,986	)
Gain on disposal of aircraft			163				161				464				3,541
Income before Income Taxes			45,806				55,225				101,871				170,812
Add back (subtract):
Interest income			(5,004	)			(5,490	)			(15,200	)			(14,620	)
Interest expense			9,801				10,176				30,009				30,396
Capitalized interest			(6,982	)			(4,401	)			(18,584	)			(11,007	)
Other (income) expense, net			(121	)			(614	)			(485	)			(9,236	)
Operating Income		$	43,500			$	54,896			$	97,611			$	166,345

9. Commitments and Contingencies

     In 2006, we entered into an agreement with The Boeing Company (“Boeing”) providing for our purchase of 12 747-8F aircraft (the “Boeing 747-8F Agreement”). The Boeing 747-8F Agreement provided for deliveries of the aircraft to begin in 2010, with all 12 deliveries originally contractually scheduled for delivery by the end of 2011. In addition, the Boeing 747-8F Agreement provides us with rights to purchase up to an additional 14 747-8F aircraft, of which one is being held under option.

     Since the initial date of the Boeing 747-8F Agreement, Boeing has announced several delays in the delivery schedule of the 12 747-8F aircraft. In September 2011, after lengthy delays and performance considerations, we exercised our termination rights in connection with three early build 747-8F aircraft. We now have nine 747-8F aircraft on order.

     As a result of the announced delays, Boeing proposed a revised delivery and payment schedule in September 2011. Estimated expenditures under the proposed schedule as of September 30, 2011, including estimated amounts for contractual price escalations and advance payments, are $546.1 million for the remainder of 2011, $454.9 million in 2012 and $211.8 million in 2013. Although we do not agree with the payment schedule that Boeing has proposed, we made an advance payment of $210.4 million in October 2011, while reserving all rights with respect to such payment. The proposed delivery schedule provides that our first three 747-8F aircraft are to be delivered in the fourth quarter of 2011, one of which was

delivered on November 2, 2011. We accepted this delivery, subject to a reservation of rights regarding certain matters under the purchase agreement.

10. Labor and Legal Proceedings

Labor

     The pilots, flight engineers and dispatchers of Atlas and Polar are represented by the International Brotherhood of Teamsters (the “IBT”). These employees represented approximately 54.1% of our workforce as of September 30, 2011. We are subject to risks of work interruption or stoppage as permitted by the Railway Labor Act of 1926 (the “Railway Labor Act”) and may incur additional administrative expenses associated with union representation of our employees.

     The collective bargaining agreement for Atlas pilots and flight engineers became amendable in 2006. The collective bargaining agreement for Polar pilots and flight engineers became amendable in 2007. While both units have filed Railway Labor Act “Section 6” notices to begin negotiations for amended agreements, those negotiations were placed on hold in favor of completing the merger of the two crew forces. In 2004, we initiated steps to merge the represented crewmember bargaining units of Atlas and Polar. The respective collective bargaining agreements provide for a seniority integration process and the negotiation of a single collective bargaining agreement (“SCBA”). This seniority list integration process was completed in 2006.

     We received the integrated seniority lists and the parties have concluded negotiations for a five-year SCBA. In accordance with both the Atlas and Polar contracts, an arbitrator was assigned to resolve the few open contract issues that remained after we concluded negotiations. Those issues were submitted to the arbitrator in December 2010 for final and binding interest arbitration. The arbitrator issued a final ruling resulting in a new SCBA, with an effective date of September 8, 2011, which will not become amendable until September 2016. Under the terms of the new SCBA, the merger of the pilots and flight engineers of Atlas and Polar results in a single workforce that will serve both Atlas and Polar.

     In 2009, the IBT was certified as the collective bargaining representative of the dispatchers employed by Atlas and Polar. Formal negotiations began in 2009 between the IBT and us regarding the first collective bargaining agreement for these dispatchers. Other than the crewmembers and dispatchers, there are no other Atlas or Polar employees represented by a union.

Legal Proceedings

Department of Justice Investigation and Related Litigation

     In 2010, Old Polar entered into a plea agreement with the United States Department of Justice (the “DOJ”) relating to the previously disclosed DOJ investigation concerning alleged manipulation by cargo carriers of fuel surcharges and other rate components for air cargo services (the “DOJ Investigation”). Under the terms of the agreement, approved by the United States District Court for the District of Columbia, Old Polar will pay a fine of $17.4 million, payable in five annual installments, the first of which was made in November 2010. The fine relates to an alleged agreement by Old Polar with respect to fuel surcharges on cargo shipped from the United States to Australia during the time period from January 2000 through April 2003.

     As a result of the DOJ Investigation, the Company and Old Polar have been named defendants, along with a number of other cargo carriers, in several class actions in the United States arising from allegations about the pricing practices of a number of air cargo carriers that have now been consolidated for pre-trial purposes in the United States District Court for the Eastern District of New York. The consolidated complaint alleges, among other things, that the defendants, including the Company and Old Polar, manipulated the market price for air cargo services sold domestically and abroad through the use of surcharges, in violation of United States, state, and European Union antitrust laws. The suit seeks treble damages and injunctive relief.

     In 2007, the Company and Old Polar commenced an adversary proceeding in bankruptcy court against each of the plaintiffs in this class action litigation seeking to enjoin the plaintiffs from prosecuting claims against the Company and Old Polar that arose prior to 2004, the date on which the Company and Old Polar emerged from bankruptcy. In 2007, the plaintiffs consented to the injunctive relief requested and the bankruptcy court entered an order enjoining plaintiffs from prosecuting Company claims arising prior to 2004.

     The court in the antitrust class actions has heard and decided a number of procedural motions. Among those was the plaintiffs’ motion to join Polar Air Cargo Worldwide, Inc. as an additional defendant, which the court granted on April 13,

2011. The case is currently in the class certification discovery phase. There has been substantial pre-trial written discovery and document production, and a number of depositions have been taken. The plaintiffs’ motion for class certification was filed on October 28, 2011, and the Company intends to oppose the motion. We are unable to predict the court’s ruling on the motion or the ultimate outcome of the litigation.

     The Company, Old Polar and a number of other cargo carriers have also been named as defendants in civil class action suits in the provinces of British Columbia, Ontario and Quebec, Canada that are substantially similar to the class action suits in the United States. The plaintiffs in the British Columbia case have indicated they do not intend to pursue their lawsuit against the Company and Old Polar. We are unable to reasonably predict the outcome of the litigation in Ontario and Quebec.

     If the Company or Old Polar were to incur an unfavorable outcome in connection with one or more of the matters described above, such outcome is not expected to materially affect our business, financial condition, results of operations, and/or cash flows.

Brazilian Customs Claim

     Old Polar was cited for two alleged customs violations in Sao Paulo, Brazil, relating to shipments of goods dating back to 1999 and 2000. Each claim asserts that goods listed on the flight manifest of two separate Old Polar scheduled service flights were not on board the aircraft upon arrival and therefore were improperly brought into Brazil. The two claims, which also seek unpaid customs duties, taxes and penalties from the date of the alleged infraction, are approximately $10.8 million and $5.9 million, respectively, plus interest based on September 30, 2011 exchange rates.

     In both cases, we believe that the amounts claimed are substantially overstated due to a calculation error when considering the type and amount of goods allegedly missing, among other things. Furthermore, we may seek appropriate indemnity from the shipper in each claim as necessary. In the pending claim for $10.8 million, we received an administrative decision dismissing the claim in its entirety, which remains subject to a mandatory appeal by the Brazil customs authorities. As required to defend such claims, we have made deposits pending resolution of these matters. The balances were $6.6 million at September 30, 2011 and $6.8 million at December 31, 2010, and are included in Deposits and other assets.

     We are currently defending these and other Brazilian customs claims and the ultimate disposition of these claims, either individually or in the aggregate, is not expected to materially affect our financial condition, results of operations or cash flows.

Trademark Matters

     Since 2005, we have been involved in ongoing litigation in Europe against Atlas Transport, an unrelated and unaffiliated entity, over the use of the name “Atlas”. Following application by us to register the mark “ATLAS AIR” in the European Union (“EU”), opposition from Atlas Transport and follow-up filings by us, the Office for Harmonization in the Internal Market (“OHIM”), which handles trademark matters in the EU, declared Atlas Transport’s own trademark “ATLAS” partially invalid because of the prior existence of our Benelux trademark registration. In 2008, OHIM’s First Board of Appeal upheld the lower panel’s decision, and Atlas Transport appealed that decision to the EU General Court (formally the Court of First Instance), which upheld the court’s decision on May 18, 2011. Atlas Transport has recently appealed that ruling to the European Court of Justice.

     In 2007, Atlas Transport also filed a lawsuit in the Netherlands challenging the validity of our Benelux trademark. In 2009, following completion of its proceedings, the court issued a judgment in favor of us. Atlas Transport has appealed that decision to the Dutch Court of Appeal, but the judgment took effect immediately upon entry.

     In 2009, Atlas Transport instituted a trademark infringement lawsuit against us in the regional court in Hamburg, Germany. The amended complaint alleges that Atlas Air has been unlawfully using Atlas Transport’s trademark in Germany without permission and should be required to render information on the scope of use and pay compensation. In a supplementary motion, Atlas Transport asserts a cease and desist claim against Atlas Air, to be considered if the court denies the claim for compensation. On May 31, 2011, the court dismissed the case and Atlas Transport filed an appeal, which remains pending.

     We believe that the ultimate disposition of these claims, either individually or in the aggregate, will not materially affect our financial condition, results of operations or cash flows.

Other

     We have certain other contingencies incident to the ordinary course of business. Management believes that the ultimate disposition of such other contingencies is not expected to materially affect our financial condition, results of operations or cash flows.

11. Earnings Per Share

     Basic earnings per share (“EPS”) represents net income attributable to common shareholders divided by the weighted average number of common shares outstanding during the measurement period. Diluted EPS represents net income attributable to common shareholders divided by the weighted average number of common shares outstanding during the measurement period while also giving effect to all potentially dilutive common shares that were outstanding during the period. There were no anti-dilutive restricted shares and options that were out of the money and excluded for the three and nine months ended September 30, 2011 and 2010.

     The calculations of basic and diluted EPS were as follows:

		For the Three Months Ended								For the Nine Months Ended
		September 30, 2011				September 30, 2010				September 30, 2011				September 30, 2010
Numerator:
Net Income Attributable to Common Stockholders		$	28,206			$	33,804			$	62,570			$	100,250
Denominator:
Basic EPS weighted average shares outstanding			26,291				25,855				26,201				25,736
Effect of dilutive stock options and restricted stock			161				288				215				302
Diluted EPS weighted average shares outstanding			26,452				26,143				26,416				26,038
EPS:
Basic		$	1.07			$	1.31			$	2.39			$	3.90
Diluted		$	1.07			$	1.29			$	2.37			$	3.85

     Diluted shares reflect the potential dilution that could occur from stock options and restricted shares using the treasury stock method. The calculation does not include restricted shares and units in which performance or market conditions were not satisfied of 0.3 million for both the three and nine months ended September 30, 2011, and 0.2 million and 0.3 million for the three and nine months September 30, 2010, respectively.

12. Comprehensive Income

     Comprehensive income includes changes in the fair value of certain financial derivative instruments, which qualify for hedge accounting, and other items. The differences between net income attributable to common stockholders and comprehensive income were as follows:

		For the Three Months Ended								For the Nine Months Ended
		September 30, 2011				September 30, 2010				September 30, 2011				September 30, 2010
Net Income Attributable to Common Stockholders		$	28,206			$	33,804			$	62,570			$	100,250
Unrealized loss on interest rate derivatives			(22,203	)			—				(23,011	)			—
Other			(516	)			97				(439	)			68
Income taxes related to items of Other comprehensive income (loss)			8,238				(26	)			8,521				(17	)
Total other comprehensive income (loss)			(14,481	)			71				(14,929	)			51
Comprehensive income		$	13,725			$	33,875			$	47,641			$	100,301

13. Income Taxes

     Our effective income tax rates were 38.1% and 38.4% for the three months ended September 30, 2011 and 2010, respectively, and were 37.9% and 41.2% for the nine months ended September 30, 2011 and 2010, respectively. The changes in the effective rates from 2010 to 2011 were primarily due to non-deductible litigation settlements in 2010. The effective rates differ from the U.S. federal statutory rate due to the income tax impact of global operations, U.S. state income taxes, the non-deductibility of certain expenses for tax purposes, and the relationship of these items to our projected operating results for the year.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     The following discussion and analysis should be read in conjunction with our unaudited Financial Statements appearing in this report and our audited consolidated financial statements and related notes included in our 2010 Annual Report on Form 10-K.

Background

Certain Terms — Glossary

     The following represents terms and statistics specific to the airline and cargo industries. They are used by management to evaluate and measure operations, results, productivity and efficiency.

Block Hour		The time interval between when an aircraft departs the terminal until it arrives at the destination terminal.
C Check		High-level or “heavy” airframe maintenance checks, which are more intensive in scope than line maintenance, are generally performed between 18 and 24 months depending on aircraft type.
D Check		High-level or “heavy” airframe maintenance checks, which are the most extensive in scope and are generally performed every six to nine years depending on aircraft type.
Revenue Per Block Hour		An amount calculated by dividing operating revenues by Block Hours.
Yield		The average amount a customer pays to fly one tonne of cargo one mile.

Business Overview

     We are a leading global provider of outsourced aircraft and aviation operating services. As such, we manage and operate the world’s largest fleet of Boeing 747 freighters. 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 airlines, express delivery providers, 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 encompass the following:

	•		ACMI, whereby we provide outsourced aircraft operating solutions, including the provision of an aircraft, crew, maintenance and insurance, while customers assume fuel, demand and Yield risk. Included within ACMI is the provision of Express Network ACMI, whereby we provide 747-400 aircraft to Polar that service the requirements of DHL’s global express operations and meet the needs of other Polar customers;
	•		CMI, which is also part of our ACMI business segment, whereby we provide cargo and passenger outsourced aircraft operating solutions including the provision of crew, maintenance and insurance, while customers provide the aircraft and assume fuel, demand and Yield risk;
	•		Dry Leasing, whereby we provide aircraft and/or engine leasing solutions to third parties;
	•		AMC Charter services, whereby we provide cargo and passenger charter services for the AMC. The AMC pays a fixed charter fee that includes fuel, insurance, landing fees, overfly and all other operational fees and costs; and
	•		Commercial Charter, whereby we provide cargo and passenger aircraft charters to customers, including brokers, freight forwarders, direct shippers and airlines. The customer pays a fixed charter fee that includes fuel, insurance, landing fees, overfly and all other operational fees and costs.

     We look to achieve our growth plans to enhance stakeholder value through:

	•		Delivering superior service quality to our valued customers;
	•		Actively managing our fleet with a focus on leading-edge aircraft;
	•		Diversifying our service offerings;
	•		Focusing on securing long-term customer contracts with attractive terms;
	•		Driving significant ongoing efficiencies and productivity improvements;
	•		Selectively pursuing and evaluating future acquisitions and alliances; and
	•		Building our brand and increasing our market share.

     See “Business Overview” and “Business Strategy” in our 2010 Annual Report on Form 10-K for additional information.

Business Developments

     Our ACMI results for the first three quarters of 2011, compared to the same period in 2010, were positively impacted by the following events that occurred during 2010 and 2011:

	•		In May 2010, we began to fly on a CMI basis for SonAir — Serviço Aéreo, S.A. (“SonAir”), an agent of the United States-Africa Energy Association. SonAir is a wholly owned subsidiary of the Sonangol Group, the multinational energy company of Angola. This passenger service, known as the “Houston Express”, operates three weekly nonstop roundtrip flights between Houston, Texas and Luanda, Angola on two customized 747-400 passenger aircraft provided by SonAir.
	•		In July 2010, we began to fly CMI service for Boeing to operate their Dreamlifter fleet of four modified 747-400 aircraft. These aircraft transport major sub-assemblies for the Boeing 787 Dreamliner aircraft from suppliers around the world to Boeing production facilities in the United States.
	•		In October 2010, we began ACMI flying for a second 747-400 aircraft for Panalpina Air & Ocean Ltd (“Panalpina”). This aircraft is based at Panalpina’s European hub in Luxembourg.
	•		In March 2011, we began ACMI flying two additional 747-400 aircraft for Polar and DHL to operate in Express Network ACMI. This increases the size of our Express Network ACMI flying for DHL from six to eight aircraft.

     In September 2011, we signed an ACMI agreement with Panalpina for two of our new 747-8F aircraft. These aircraft will replace the two 747-400 aircraft currently in use by Panalpina when they are delivered during 2012.

     In September 2011, we signed a CMI agreement with DHL to operate five 767 freighters owned by DHL in its North American network. This service is expected to begin with one aircraft in the first quarter of 2012 and to expand to five aircraft by the third quarter of 2012.

     On November 2, 2011, we took delivery of the first of three 747-8F aircraft that we placed with British Airways Plc under an ACMI agreement through GSS. The remaining two aircraft are scheduled to enter service during the fourth quarter of 2011. The 747-8F aircraft are replacing 747-400 aircraft, which will be redeployed and placed into service with other customers.

     AMC demand was exceptionally strong during the first five months of 2010, primarily due to the surge in U.S. Military activity in Afghanistan. During that period, we flew a significant number of missions in support of the U.S. Military’s deployment of mine resistant, ambush-protected, all-terrain vehicles (“M-ATV”) from the U.S. to Afghanistan and averaged approximately 1,800 Block Hours a month. We also earned a premium rate for utilizing additional 747-400 aircraft to meet most of this demand. In the third quarter of 2011, we have had stronger demand for AMC Charters, averaging just under 1,700 Block Hours a month compared to the third quarter of 2010, when we averaged just over 1,200 Block Hours per month.

     In May 2011, we began flying passenger charters for the U.S. Military. These charters are similar to our existing AMC Charters in that the AMC pays a fixed charter fee that includes fuel, insurance, landing fees, overfly and all other operational fees and costs. This service utilizes the 747-400 passenger aircraft we leased in January 2011 under a one-year lease. During June and August 2011, we purchased two 767-300ER passenger aircraft for this operation. During August and September 2011, we purchased two 747-400 passenger aircraft, one of which will replace the leased 747-400 passenger aircraft when the lease expires. These aircraft will provide capacity to meet expected growth in this operation.

     Commercial Charter Yields and volumes have been impacted by the return of aircraft capacity in the Asian markets during the first three quarters of 2011. As a result, the Commercial Charter Yields were not able to fully absorb the rise in aviation fuel prices that occurred during 2011. However, we were able to mitigate most of the impact from this increase in the South American markets through Yields and fuel surcharges. Our Commercial Charter Block Hours were impacted by our redeployment of 747-400 aircraft to support increased ACMI flying in 2011. In addition, softer demand out of Asia resulted in fewer opportunities to utilize the return legs of one-way AMC missions for Commercial Charters during the third quarter of 2011.

     In January and February 2011, we leased two 747-400 Boeing converted freighters for an average of approximately three and a half years, which were placed in service in April and May of 2011. These two aircraft provide us with increased capacity in both AMC Charter and Commercial Charter to replace aircraft that were reallocated to ACMI during 2011.

     In April and June 2011, Titan purchased two Boeing 737-800 passenger aircraft. Both aircraft are dry leased to customers on a long-term basis.

Results of Operations

Three Months Ended September 30, 2011 and 2010

Operating Statistics

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

     The table below sets forth selected Operating Statistics for the three months ended September 30:

										Increase /				Percent
		2011				2010				(Decrease)				Change
Block Hours
ACMI			26,426				24,251				2,175				9.0	%
AMC Charter			5,033				3,729				1,304				35.0	%
Commercial Charter			3,358				5,090				(1,732	)			(34.0	)%
Other			366				207				159				76.8	%
Total Block Hours			35,183				33,277				1,906				5.7	%
Revenue Per Block Hour
ACMI		$	6,184			$	5,966			$	218				3.7	%
AMC Charter			24,355				19,444				4,911				25.3	%
Commercial Charter			20,951				20,441				510				2.5	%
Fuel
AMC
Average fuel cost per gallon		$	3.97			$	2.68			$	1.29				48.1	%
Fuel gallons consumed (000s)			16,108				12,280				3,828				31.2	%
Commercial Charter
Average fuel cost per gallon		$	3.20			$	2.32			$	0.88				37.9	%
Fuel gallons consumed (000s)			12,414				17,786				(5,372	)			(30.2	)%

										Increase /				Percent
		2011				2010				(Decrease)				Change
Fleet (average during the period)
ACMI*			21.6				19.0				2.6				13.7	%
AMC Charter			6.3				4.3				2.0				46.5	%
Commercial Charter			3.5				5.9				(2.4	)			(40.7	)%
Dry Leasing			3.0				1.0				2.0				200.0	%
Operating Aircraft			34.4				30.2				4.2				13.9	%
Out-of-service**			0.5				—				0.5			NM

Operating Revenue

     The following table compares our Operating Revenue for the three months ended September 30 (in thousands):

										Increase /				Percent
		2011				2010				(Decrease)				Change
Operating Revenue
ACMI		$	163,406			$	144,685			$	18,721				12.9	%
AMC Charter			122,581				72,506				50,075				69.1	%
Commercial Charter			70,353				104,044				(33,691	)			(32.4	)%
Dry Leasing			3,065				2,157				908				42.1	%
Other			3,471				3,275				196				6.0	%
Total Operating Revenue		$	362,876			$	326,667			$	36,209				11.1	%

     ACMI revenue increased $18.7 million, or 12.9%, due to increases in Block Hours and Revenue per Block Hour. ACMI Block Hours were 26,426 in the third quarter of 2011, compared to 24,251 in 2010, representing an increase of 2,175 Block Hours, or 9.0%. The increase in Block Hours was primarily driven by flying a second aircraft for Panalpina beginning in October 2010 and two incremental aircraft for DHL beginning in March 2011. In addition, we started CMI Dreamlifter flights for Boeing in July 2010. In the third quarter of 2011, there was an average of 21.5 747-400 aircraft and 0.1 747-200 aircraft supporting ACMI compared to an average of 19.0 747-400 aircraft and no 747-200 aircraft in 2010. Revenue per Block Hour was $6,184 for the third quarter of 2011, compared to $5,966 for the third quarter of 2010, an increase of $218 per Block Hour, or 3.7%. The increase in Revenue per Block Hour primarily reflects contractual rate increases in existing customer contracts and higher rates on new contracts.

     AMC Charter revenue increased $50.1 million, or 69.1%, due to increases in Block Hours and Revenue per Block Hour. AMC Charter Block Hours were 5,033 in the third quarter of 2011 compared to 3,729 in 2010, an increase of 1,304 Block Hours, or 35.0%. The increase in AMC Block Hours was primarily due to an increase in AMC cargo demand to support U.S. Military activity and the addition of 467 Block Hours for AMC passenger missions, which we began flying in May 2011. In the third quarter of 2011, there was an average of 2.8 747-400 aircraft and 3.5 747-200 aircraft supporting AMC Charter compared to an average of 0.6 747-400 aircraft and 3.7 747-200 aircraft in 2010. AMC Charter Revenue per Block Hour increased from $19,444 for the third quarter of 2010 to $24,355 in 2011, an increase of $4,911 per Block Hour, or 25.3%, primarily due to an increase in the average “pegged” fuel price and higher rates per Block Hour on 747-400 aircraft utilized during the third quarter of 2011. For the third quarter of 2011, the AMC average “pegged” fuel price was $3.97 per gallon compared to an average “pegged” fuel price of $2.68 for the third quarter of 2010.

     Commercial Charter revenue decreased $33.7 million, or 32.4%, due to a decrease in Block Hours partially offset by an increase in Revenue per Block Hour. Commercial Charter Block Hours were 3,358 in the third quarter of 2011, compared to 5,090 in 2010, representing a decrease of 1,732 Block Hours, or 34.0%. The decrease in Block Hours was primarily due to our redeployment of 747-400 aircraft to support increased ACMI flying in 2011. In addition, softer demand out of Asia resulted in a reduction of the utilization of the return legs of AMC one-way missions for Commercial Charters compared to the third quarter of 2010. There was an average of 2.1 747-400 aircraft and 1.4 747-200 aircraft supporting Commercial Charter in the third quarter of 2011, compared to an average of 3.7 747-400 aircraft and 2.2 747-200 aircraft in

2010. Revenue per Block Hour was $20,951 in the third quarter of 2011, compared to $20,441 in 2010, an increase of $510 per Block Hour, or 2.5%. The increase in Revenue per Block Hour was primarily driven by the recovery of increased aircraft fuel costs in the South American markets during the third quarter of 2011, partially offset by lower Yields on Commercial Charters out of Asia.

Operating Expenses

     The following table compares our Operating Expenses for the three months ended September 30 (in thousands):

										Increase /				Percent
		2011				2010				(Decrease)				Change
Operating Expenses
Aircraft fuel		$	103,663			$	74,221			$	29,442				39.7	%
Salaries, wages and benefits			61,911				56,244				5,667				10.1	%
Maintenance, materials and repairs			47,770				44,747				3,023				6.8	%
Aircraft rent			41,055				38,764				2,291				5.9	%
Landing fees and other rent			12,813				11,487				1,326				11.5	%
Travel			11,284				8,941				2,343				26.2	%
Depreciation and amortization			9,964				8,403				1,561				18.6	%
Ground handling and airport fees			6,036				6,423				(387	)			(6.0	)%
Gain on disposal of aircraft			(163	)			(161	)			2				(1.2	)%
Other			25,043				22,702				2,341				10.3	%
Total Operating Expenses		$	319,376			$	271,771