ATLAS AIR WORLDWIDE HOLDINGS INC - Annual Report: 2019 (Form 10-K)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-K

For the fiscal year ended December 31, 2019

OR

Commission file number 001-16545

Atlas Air Worldwide Holdings, Inc.

(Exact name of registrant as specified in its charter)

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

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

None

Indicate by check mark if the registrant is a well known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes   ☒ No   ☐

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes    ☐ No   ☒

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    ☒ No   ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit).  Yes   ☒ No   ☐

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

Large accelerated filer ☒     Accelerated filer ☐     Non-accelerated filer ☐      Smaller reporting company ☐      Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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

The aggregate market value of the registrant’s Common Stock held by non-affiliates based upon the closing price of Common Stock as reported on The NASDAQ Global Select Market as of June 30, 2019 was approximately $850.7 million.  As of February 17, 2020, there were 25,956,509 shares of the registrant’s Common Stock outstanding.

Documents Incorporated by Reference:

Certain portions of the registrant’s Proxy Statement relating to the 2020 Annual Meeting of Stockholders, to be filed with the Securities and Exchange Commission, are incorporated by reference into Part III.

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TABLE OF CONTENTS

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FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K (this “Report”), as well as other reports, releases and written and oral communications issued or made from time to time by or on behalf of Atlas Air Worldwide Holdings, Inc. (“AAWW”), contain statements that may constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995.  Those statements are based on management’s beliefs, plans, expectations and assumptions, and on information currently available to management.  Generally, the words “will,” “may,” “should,” “expect,” “anticipate,” “intend,” “plan,” “continue,” “believe,” “seek,” “project,” “estimate” and similar expressions used in this Report that do not relate to historical facts are intended to identify forward-looking statements.

The forward-looking statements in this Report are not representations or guarantees of future performance and involve certain risks, uncertainties and assumptions. Such risks, uncertainties and assumptions include, but are not limited to, those described in Item 1A, “Risk Factors.”  Many of such factors are beyond AAWW’s control and are difficult to predict.  As a result, AAWW’s future actions, financial position, results of operations and the market price for shares of AAWW’s common stock could differ materially from those expressed in any forward-looking statements. Readers are therefore cautioned not to place undue reliance on forward-looking statements.  Such forward-looking statements speak only as of the date of this report.  AAWW does not intend to publicly update any forward-looking statements that may be made from time to time by, or on behalf of, AAWW, whether as a result of new information, future events or otherwise, except as required by law and expressly disclaims any obligation to revise or update publicly any forward-looking statement to reflect future events or circumstances.

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PART I

ITEM 1. BUSINESS

Glossary

The following represents terms and statistics specific to our business and industry. They are used by management to evaluate and measure operations, results, productivity and efficiency.

Overview

AAWW is a holding company with two wholly owned operating subsidiaries, Atlas Air, Inc. (“Atlas”) and Southern Air, Inc. (“Southern Air”).  It also has a 51% economic interest and 75% voting interest in Polar Air Cargo Worldwide, Inc. (“Polar”).  In addition, AAWW is the parent company of several wholly owned subsidiaries related to our dry leasing services (collectively referred to as “Titan”).  When used in this Report, the terms “we,” “us,” “our” and the “Company” refer to AAWW and all entities in our consolidated financial statements.  

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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:

We believe that the scale, scope and quality of our outsourced services are unparalleled in our industry.  The relative operating cost efficiency of our current 747-8F, 747-400F and 777-200LRF aircraft, including their superior fuel efficiency, range, capacity and loading capabilities, creates a compelling value proposition for our customers and positions us well in the markets we operate.  Our fleet of 767-300 freighter aircraft, in addition to our 737 freighter aircraft, are well-suited for regional and domestic operations.

We are focused on the further enhancement of our market-leading ACMI and CMI services.  We are currently the only operator offering 747-8 freighter aircraft under ACMI and CMI agreements, and we have the flexibility to expand our fleet in response to market conditions.  We believe that our current fleet represents one of the most efficient, reliable freighter fleets in the market.  Our primary placement for our 747-8F, 747-400F and 777-200LRF aircraft continues to be long-term outsourcing contracts with high-credit-quality customers in our ACMI segment.

During 2019, we continued to expand our relationship with Amazon.com, Inc. and its subsidiary, Amazon Fulfillment Services, Inc., (collectively “Amazon”), with the placement into CMI service of five Boeing 737-800 freighter aircraft.  Amazon may, in its sole discretion, place up to 15 additional 737-800 freighter aircraft into CMI service with us by May 31, 2021.

In December 2019, we entered into an agreement with investment funds managed by Bain Capital Credit, LP (collectively “Bain Capital”) to form a joint venture to develop a diversified freighter aircraft Dry Leasing portfolio with an anticipated value of approximately $1.0 billion.  This long-term joint venture aims to capitalize on demand for cargo aircraft, underpinned by robust e-commerce and express market growth.  Under the joint venture, Bain Capital and Titan have committed to provide $360.0 million and $40.0 million of equity capital, respectively, which may be supplemented with additional commitments over time, to acquire aircraft over the next several years. Titan will also provide aircraft- and lease-management services to the venture.

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Currently, our Dry Leasing business primarily includes 767-300 freighter aircraft and 777 freighters that are Dry Leased to customers on a long-term basis.  Our Dry Leasing portfolio diversifies our business mix and enhances our predictable, long-term revenue and earnings streams.

AAWW was incorporated in Delaware in 2000. Our principal executive offices are located at 2000 Westchester Avenue, Purchase, New York 10577, and our telephone number is (914) 701-8000.

Operations

Introduction.  Our business is organized into three operating segments based on our service offerings: ACMI, Charter and Dry Leasing.  All segments are directly or indirectly engaged in the business of air transportation services but have different commercial and economic characteristics.  Each operating segment is separately reviewed by our chief operating decision maker to assess operating results and make resource allocation decisions.  Additional information regarding our reportable segments can be found in Note 12 to the Financial Statements.

ACMI. The core of our business is generally providing cargo aircraft outsourcing services to customers on an ACMI and CMI basis, in exchange for guaranteed minimum revenues at predetermined levels of operation for defined periods of time.  ACMI and CMI contracts generally provide a predictable annual revenue and cost base by minimizing the risk of fluctuations such as price, fuel and demand risk in the air cargo business.  Our revenues and most of our costs under ACMI and CMI contracts are denominated in U.S. dollars, minimizing currency risks associated with international business.  

All of our ACMI and CMI contracts provide that the aircraft remain under our exclusive operating control, possession and direction at all times.  These contracts further provide that both the contracts and the routes to be operated may be subject to prior and periodic approvals of the U.S. or foreign governments.  The original length of these contracts generally ranges from two to seven years, although we do offer contracts of shorter or longer duration.  In addition, we have also operated short-term ACMI cargo and passenger services and we expect to continue to provide such services.

Charter. Our Charter business primarily provides full planeload cargo and passenger aircraft to customers, including the AMC, brokers, freight forwarders, direct shippers, airlines, sports teams and fans, and private charter customers.  Charters are for one or more flights based on a specific origin and destination.  Atlas also provides limited airport-to-airport cargo services to select markets, including several cities in South America.  In addition, we occasionally earn revenue on subcontracted Charter flights.  Atlas typically bears all direct operating costs for both cargo and passenger charters, which include fuel, insurance, landing and navigation fees, and most other operational fees and costs.

Dry Leasing. Our Dry Leasing business provides aircraft and engines to customers, including some CMI customers, for compensation that is typically based on a fixed monthly amount (a “Dry Lease”).  This business is primarily operated by Titan, which is principally a cargo aircraft dry lessor, but also owns and manages aviation assets such as engines and related equipment.  In addition to providing aircraft and lease-management services to our new joint venture with Bain Capital, Titan also markets its expertise in passenger-to-freighter conversion and other aviation-related technical services.  

Other Revenue.  Other revenue includes administrative and management support services and flight simulator training.

DHL Investment and Polar

DHL Network Operations (USA), Inc. (“DHL”) holds a 49% equity interest and a 25% voting interest in Polar (see Note 3 to our Financial Statements).  AAWW owns the remaining 51% equity interest and 75% voting interest.  Under a 20-year blocked space agreement that expires in 2027 (the “BSA”), Polar provides air cargo capacity to DHL. Atlas and Polar also have a flight services agreement, whereby Atlas is compensated by Polar on a per Block Hour basis, subject to a monthly minimum Block Hour guarantee, at a predetermined rate with the opportunity for performance premiums that escalate annually.  Under the flight services agreement, Atlas provides Polar with crew,

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maintenance and insurance for the aircraft.  Under separate agreements, Atlas and Polar supply administrative, sales and ground support services to one another. Deutsche Post AG ("DP") has guaranteed DHL’s (and Polar’s) obligations under the various agreements described above.  AAWW has agreed to indemnify DHL for and against various obligations of Polar and its affiliates.  Collectively, these agreements are referred to in this Report as the “DHL Agreements”. The DHL Agreements provide us with a minimum guaranteed annual revenue stream from aircraft that have been placed in service with Polar for DHL and other customers’ freight over the life of the agreements.  DHL provides financial support and also assumes the risks and rewards of the operations of Polar.

Combined with Polar, we provide ACMI, CMI, Charter and Dry Leasing services to support DHL’s transpacific-express, North American, intra-Asian, and global networks.  In addition, we fly between the Asia Pacific region, the Middle East and Europe on behalf of DHL and other customers.  Atlas also provides incremental charter capacity to Polar and DHL from time to time.  See Note 3 to our Financial Statements for a further discussion of our relationship with Polar.

The following table summarizes the aircraft types and services provided to Polar and DHL as of December 31, 2019:

Amazon

In May 2016, we entered into certain agreements with Amazon, which involve, among other things, CMI operation of Boeing 767-300 freighter aircraft for Amazon by Atlas, as well as Dry Leasing by Titan.  The Dry Leases have a term of ten years from the commencement of each agreement, while the CMI operations are for seven years from the commencement of each agreement (with an option for Amazon to extend the term to ten years).

In March 2019, we amended the agreements entered into in 2016 with Amazon, pursuant to which we will provide CMI services using Boeing 737-800 freighter aircraft provided by Amazon.  The 737-800 CMI operations will be for a term of seven years from the commencement of each agreement (with an option for Amazon to extend the term to ten years).

In conjunction with these agreements, we granted Amazon warrants providing the right to acquire shares of our common stock. See Note 7 to our Financial Statements for a discussion of these agreements with Amazon.

The following table summarizes the freighter aircraft types and services provided to Amazon as of December 31, 2019:

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Sales and Marketing

We have regional sales offices in various locations around the world that cover the Americas, Asia Pacific, Europe, Africa and Middle East regions.  These offices market our ACMI, CMI and Dry Leasing services to express delivery providers, e-commerce retailers, airlines and freight forwarders.  They also market our cargo and passenger Charter services to charter brokers, the U.S. military, freight forwarders, direct shippers and airlines.  

Fuel

Historically, aircraft fuel is one of the most significant expenses for us.  During 2019, 2018 and 2017, fuel costs represented 15.1%, 19.5%, and 17.4%, respectively, of our total operating expenses.  Fuel prices and availability are subject to wide price fluctuations based on geopolitical issues, supply and demand, which we can neither control nor accurately predict.

Our exposure to fluctuations in fuel price is limited to the commercial portion of our Charter business only, but this risk is partially mitigated by using indexed fuel price adjustments for certain commercial charter contracts.  The ACMI and Dry Leasing segments have no direct fuel price exposure because our customers are required to pay for aircraft fuel.  Similarly, we generally have no fuel price risk for AMC charters because the price is set under our contract with the AMC, and we receive or make payments to adjust for price increases and decreases from the contractual rate.

In the past, we have not experienced significant difficulties with respect to fuel availability.  Although we do not currently anticipate a significant reduction in the availability of aircraft fuel, a number of factors, such as geopolitical uncertainties in oil-producing nations and shortages of and disruptions to refining capacity or transportation of aircraft fuel from refining facilities, make accurate predictions unreliable.  For example, hostilities and political turmoil in oil-producing nations could lead to disruptions in oil production and or to substantially increased oil prices.  Any inability to obtain aircraft fuel at competitive prices would materially and adversely affect our results of operation and financial condition.

Employees  

Our business depends on highly qualified management, operations and flight personnel.  As a percentage of our consolidated operating expenses, salaries, wages and benefits accounted for approximately 18.7% in 2019, 22.4% in 2018 and 23.8% in 2017.  As of December 31, 2019, we had 3,587 employees, 2,036 of whom were pilots.  We maintain a comprehensive training program for our pilots in compliance with U.S. Federal Aviation Administration (“FAA”) requirements, in which each pilot regularly attends recurrent training programs.

Pilots of Atlas and Southern Air, and flight dispatchers of Atlas and Polar, are represented by the International Brotherhood of Teamsters (the “IBT”).  These employees represented approximately 58.0% of our workforce as of December 31, 2019.  We have a five-year collective bargaining agreement (“CBA”) with our Atlas pilots, which became amendable in September 2016 and a four-year CBA with the Southern Air pilots, which became amendable in November 2016. We also have a five-year CBA with our Atlas and Polar dispatchers, which was extended in April 2017 for an additional four years, making the CBA amendable in November 2021. See Note 13 to our Financial Statements for a discussion of our labor matters.

Maintenance

Maintenance represented our third-largest operating expense for the year ended December 31, 2019.  Primary maintenance activities include scheduled and unscheduled work on airframes and engines.  Scheduled maintenance activities encompass those activities specified in our maintenance program approved by the FAA.  The costs necessary to adhere to these maintenance programs may increase over time, based on the age of the equipment or due to FAA airworthiness directives (“ADs”).

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Under the ADs issued pursuant to the FAA’s Aging Aircraft Program, we are subject to extensive aircraft examinations and may be required to undertake structural modifications to our fleet from time to time to address any problems of corrosion and structural fatigue.  The FAA has issued increased inspection and maintenance requirements depending on aircraft type and ADs requiring certain additional aircraft modifications.  We believe all aircraft in our fleet are in compliance with all existing ADs.  It is possible, however, that additional ADs applicable to the types of aircraft or engines included in our fleet could be issued in the future and that the cost of complying with such ADs could be substantial.

Under our FAA-approved maintenance programs, all Heavy Maintenance is currently performed by third-party service providers that are compensated on a time-and-material or power by the hour basis as we believe they provide the most reliable and efficient means of maintaining our aircraft fleet.

Insurance

We maintain insurance of the types and in amounts deemed adequate and consistent with current industry standards. Principal coverage includes: liability for injury to members of the public, including passengers; injury to crewmembers and ground staff; damage to our property and that of others; and loss of, or damage to, flight equipment, whether on the ground or in flight; and cyber business interruption.

Aviation insurance premiums historically have fluctuated based on factors that include the loss history of the industry in general and the insured carrier in particular.  We participate in an insurance pooling arrangement with DHL and its partners.  This allows us to obtain aviation hull and liability, war-risk hull and cargo loss, crew, third-party liability insurance and hull deductible coverage at reduced rates from the commercial insurance providers.

Environmental, Social and Governance

As a leading global provider of outsourced aviation operating services, we encounter and manage a broad range of environmental, social and governance (“ESG”) issues.  We have established an ESG policy and identified our efforts in our ESG report, which can be viewed on our website, www.atlasairworldwide.com, under the “About Us” section.

Governmental Regulation

General. Atlas, Polar and Southern Air (the “Airlines”) are subject to regulation by the U.S. Department of Transportation (the “DOT”) and the FAA, among other U.S. and foreign government agencies.  The DOT primarily regulates economic issues affecting air service, such as certification, fitness and citizenship, competitive practices, insurance and consumer protection.  The DOT has the authority to investigate and institute proceedings to enforce its economic regulations and may assess civil penalties, revoke operating authority or seek criminal sanctions.  The Airlines hold DOT-issued certificates of public convenience and necessity plus exemption authority to engage in scheduled air transportation of property and mail in domestic, as well as enumerated international markets, and charter air transportation of property and mail on a worldwide basis.  Atlas additionally holds worldwide passenger charter authority.

The DOT conducts periodic evaluations of each air carrier’s fitness and citizenship.  In the area of fitness, the DOT seeks to ensure that a carrier has the managerial competence, compliance disposition and financial resources needed to conduct the operations for which it has been certificated.  Additionally, each U.S. air carrier must remain a U.S. citizen by (i) being organized under the laws of the United States or a state, territory or possession thereof; (ii) requiring its president and at least two-thirds of its directors and other managing officers to be U.S. citizens; (iii) allowing no more than 25% of its voting stock to be owned or controlled, directly or indirectly, by foreign nationals; and (iv) not being otherwise subject to foreign control.  The DOT broadly interprets “control” to exist when an individual or entity has the potential to exert substantial influence over airline decisions through affirmative action or the threatened withholding of consents and or approvals.  We believe the DOT will continue to find the Airlines’ fitness and citizenship favorable.

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In addition, the Airlines are required to hold valid FAA-issued air carrier certificates and FAA-approved operations specifications authorizing operation in specific regions with specified equipment under specific conditions and are subject to extensive FAA regulation and oversight.  The FAA is the U.S. government agency primarily responsible for regulation of flight operations and, in particular, matters affecting air safety, such as airworthiness requirements for aircraft, operating procedures, mandatory equipment and the licensing of pilots, mechanics and dispatchers.  The FAA monitors compliance with maintenance, flight operations and safety regulations and performs frequent spot inspections of aircraft, employees and records.  The FAA also has the authority to issue ADs and maintenance directives and other mandatory orders relating to, among other things, inspection of aircraft and engines, fire retardant and smoke detection devices, increased security precautions, collision and windshear avoidance systems, noise abatement and the mandatory removal and replacement of aircraft parts that have failed or may fail in the future.  In addition, the FAA mandates certain record-keeping procedures.  The FAA has the authority to modify, temporarily suspend or permanently revoke an air carrier’s authority to provide air transportation or that of its licensed personnel, after providing notice and a hearing, for failure to comply with FAA rules, regulations and directives.  The FAA is empowered to assess civil penalties for such failures or institute proceedings for the imposition and collection of monetary fines for the violation of certain FAA regulations and directives.  The FAA is also empowered to modify, suspend or revoke an air carrier’s authority on an emergency basis, without providing notice and a hearing, where significant safety issues are involved.  

International. Air transportation in international markets (the vast majority of markets in which the Airlines operate) is subject to extensive additional regulation.  The ability of the Airlines to operate in other countries is governed by aviation agreements between the United States and the respective countries (in the case of Europe, the European Union (the “EU”)) or, in the absence of such an agreement, by principles of reciprocity.  Sometimes, aviation agreements restrict the number of airlines that may operate, their frequency of operation, or the routes over which they may fly.  This makes it necessary for the DOT to award route and operating rights to U.S. air carrier applicants through competitive route proceedings.  International aviation agreements are periodically subject to renegotiation, and changes in U.S. or foreign governments could result in the alteration or termination of such agreements, diminish the value of existing route authorities or otherwise affect the Airlines’ international operations.  Foreign government authorities also impose substantial licensing and business registration requirements and, in some cases, require the advance filing and or approval of schedules or rates.  Moreover, the DOT and foreign government agencies typically regulate alliances and other commercial arrangements between U.S. and foreign air carriers, such as the ACMI and CMI arrangements that Atlas maintains.  Approval of these arrangements is not guaranteed and may be conditional.  In addition, approval during one time period does not guarantee approval in future periods.

A foreign government’s regulation of its own air carriers can also affect our business.  For instance, the EU places limits on the ability of EU carriers to use ACMI aircraft operated by airlines of non-EU member states.  The regulations have a negative impact on our ACMI business opportunities.  

Brexit. Following parliamentary elections in December 2019, the United Kingdom (“U.K.”) left the EU on January 31, 2020.  Trade agreements between the UK and the EU are under consideration.  As U.S. airlines, the Airlines will remain covered by the U.S.-EU air services agreement, which broadly accords traffic rights between the U.S. and the EU, via intermediate points and beyond.  In December 2018, the U.S. and U.K. governments reached agreement on the terms of an open skies agreement governing U.S. and U.K. airlines after the U.S.-EU agreement ceases to apply to the U.K.  Nevertheless, practical difficulties could arise with respect to operations in the post-Brexit environment.  These issues are not expected to have a material adverse effect on our operations.

Airport Access. The ability of the Airlines to operate suitable schedules is dependent on their ability to gain access to airports of their choice at commercially desirable times and on acceptable terms.  In some cases, this is constrained by the need for the assignment of takeoff and landing “slots” or comparable operational rights.  Like other air carriers, the Airlines are subject to such constraints at slot-restricted airports in cities such as Chicago and a variety of foreign locations (e.g., Amsterdam, Incheon, Hong Kong, Shanghai and Tokyo).  The availability of slots is not assured and the inability of the Airlines or their ACMI carrier customers to obtain additional slots could inhibit efforts to provide expanded services in certain international markets.  In addition, nighttime flight restrictions have been imposed or proposed by Hong Kong and various airports in Europe, Canada and the U.S.  These could have an adverse operational and or economic impact.

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Access to the New York airspace presents an additional challenge.  Because of congestion in the New York area, especially at John F. Kennedy International Airport (“JFK”), the FAA imposes hourly limits on JFK operations of those carriers offering scheduled services and potentially could place limits on Charter flights.  

As a further means to address congestion, the FAA allows U.S. airports to raise landing fees to defray the costs of airfield facilities under construction or reconstruction.  Any landing fee increases implemented would have an impact on airlines generally.

Security. The U.S. Transportation Security Administration (“TSA”) and international regulatory bodies extensively regulate aviation security through rules, regulations and security directives that are designed to prevent unauthorized access to passenger and freighter aircraft and the introduction of prohibited items including firearms and explosives onto an aircraft.  Atlas and Polar currently operate pursuant to a TSA-approved risk-based security program that, we believe, adequately maintains the security of all aircraft in the fleet.  We utilize the TSA, the intelligence community and the private sector as resources for our aggressive threat-based risk-management program.  There can be no assurance, however, that we will remain in compliance with existing or any additional security requirements imposed by TSA or by U.S. Congress without incurring substantial costs, which may have a material adverse effect on our operations.  To mitigate any such increase, we are working closely with the Department of Homeland Security and other government agencies to ensure that a risk-based management approach is utilized to target specific “at-risk” cargo.  Additionally, foreign governments and regulatory bodies (such as the European Commission) impose their own aviation security requirements and have increasingly tightened such requirements.  This may have an adverse impact on our operations, especially to the extent the new requirements may necessitate redundant or costly measures or be in conflict with TSA requirements.  We have successfully implemented all European Commission security programs allowing us unimpeded access to European markets.

Environmental. We are subject to various federal, state and local laws relating to the protection of the environment and health and safety matters, including the discharge of pollution, the disposal of materials and chemical wastes, the cleanup of contamination and the regulation of aircraft noise, which are administered by numerous state, local, federal and foreign agencies.  For instance, the DOT and the FAA have authority under the Aviation Safety and Noise Abatement Act of 1979 and under the Airport Noise and Capacity Act of 1990 to monitor and regulate aircraft engine noise.  We believe that all aircraft in our fleet materially comply with current DOT, FAA and international noise standards.

We are also subject to the regulations in the U.S., by the U.S. Environmental Protection Agency (the “EPA”), and the international jurisdictions in which we operate regarding air quality.  We believe that all of our aircraft meet or exceed applicable fuel venting requirements and other air emissions standards.

Various jurisdictions, including the EU, U.S. and other international governments and bodies, have implemented or are considering measures to respond to climate change and greenhouse gas emissions.  

For instance, in October 2013, the International Civil Aviation Organization (“ICAO”) reached a nonbinding agreement to address climate change by developing global market-based measures to assist in achieving carbon-neutral growth.  In October 2016, ICAO approved a resolution to adopt a global market-based measure known as the Carbon Offsetting and Reduction Scheme for International Aviation (“CORSIA”), which is designed to offset any annual increases in total carbon emissions from international civil aviation above a baseline level determined by the average of 2019 and 2020 emissions.  Although various details regarding the implementation of CORSIA still need to be finalized, a pilot phase will run from 2021 to 2023.  Starting in 2019, the Airlines have voluntarily begun tracking and have begun reporting emissions in accordance with CORSIA methodology in 2020, even though it is not yet mandatory in ICAO member countries. As a result, starting in 2024, the Airlines may need to purchase allowances to offset their assigned share of emissions overages based on the reporting for the 2021 to 2023 compliance period.  For subsequent compliance periods, a similar procedure will apply.

The EU continues to address climate change through its Emissions Trading Scheme (“ETS”). Following the end of every year, to the extent the ETS applies, each airline must tender the number of carbon emissions allowances (“Allowances”) corresponding to carbon emissions generated by its covered flight activity during the year.  If the airline’s flight activity during the year has produced carbon emissions exceeding the number of Allowances that it has been awarded, the airline must acquire Allowances from other airlines in the open market.  In recognition of

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ICAO’s adoption of CORSIA, the ETS has been suspended with respect to flights to and from non-European countries continues through December 31, 2023.  However, the ETS remains applicable to intra-European flights. Additionally, various European constituencies have begun to advocate for supplemental controls on aviation greenhouse gas emissions through additional taxation and similar measures.

In the United States, various constituencies have continued to advocate for controls on greenhouse gas emissions.  On August 15, 2016, the EPA issued a final rule finding that greenhouse gas emissions from aircraft cause or contribute to air pollution that may reasonably be anticipated to endanger public health and welfare.  It is possible that these or other developments could lead to the future regulation of greenhouse gas emissions from aircraft in the U.S. 

Other Regulations. Air carriers are also subject to certain provisions of the Communications Act of 1934 because of their extensive use of radio and other communication facilities and are required to obtain an aeronautical radio license from the Federal Communications Commission.  Additionally, we are subject to U.S. and foreign antitrust requirements and international trade restrictions imposed by U.S. presidential determination and U.S. government agency regulation, including the Office of Foreign Assets Control of the U.S. Department of the Treasury. We endeavor to comply with such requirements at all times.  We are also subject to state and local laws and regulations at locations where we operate and at airports that we serve.  Our operations may become subject to additional international, U.S. federal, state and local requirements in the future.  

We believe that we are in material compliance with all currently applicable laws and regulations.

Civil Reserve Air Fleet. As part of our Charter business, Atlas and Polar both participate in the U.S. Civil Reserve Air Fleet (“CRAF”) Program, which permits the U.S. Department of Defense to utilize participants’ aircraft during national emergencies when the need for military airlift exceeds the capability of military aircraft.  Participation in the CRAF Program could adversely restrict our commercial business in times of national emergency. Under the CRAF Program, contracts with the AMC are for two-years with an option for the AMC to extend the contract for two additional two-year periods.  We have made a substantial number of our aircraft available for use by the U.S. military in support of their operations and we operate such flights pursuant to cost-based contracts.  Atlas bears all direct operating costs for both passenger and cargo aircraft, which include fuel, insurance, overfly, landing and ground handling expenses.  The contracted charter rates (per mile) and fuel prices (per gallon) are fixed by the AMC periodically.  We receive reimbursements from the AMC each month if the price of fuel paid by us to vendors for the AMC Charter flights exceeds the fixed price.  If the price of fuel paid by us is less than the fixed price, then we pay the difference to the AMC.

Airlines may participate in the CRAF Program either alone or through a teaming arrangement.  We are a member of the team led by FedEx Corporation (“FedEx”).  We pay a commission to the FedEx team, based on the revenues we receive under our AMC contracts.  The AMC buys cargo capacity on two bases: a fixed basis, which is awarded both annually and quarterly, and expansion flying, which is awarded on an as-needed basis throughout the contract term.  While the fixed business is predictable, Block Hour levels for expansion flying are difficult to predict and thus are subject to fluctuation.    

Future Regulation. The U.S. Congress, the DOT, the FAA, the TSA and other government agencies are currently considering, and in the future may consider, adopting new laws, regulations and policies regarding a wide variety of matters that could affect, directly or indirectly, our operations, ownership and profitability.  It is impossible to predict what other matters might be considered in the future and to judge what impact, if any, the implementation of any future proposals or changes might have on our businesses.

Competition

The market for ACMI and CMI services is competitive.  We believe that the most important basis for competition in this market is the efficiency and cost-effectiveness of the aircraft assets and the scale, scope and quality of the outsourced operating services provided.  Atlas is the market-leading provider of ACMI and CMI services with the modern 747-8 and 777 freighter aircraft.  Our primary competitors providing ACMI and CMI services for 777, 747-400 and 767 freighter aircraft include the following: Air Atlanta Icelandic; Air Transport Services Group, Inc.; Kalitta Air; and Western Global Airlines.

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The Charter market is competitive, with a number of cargo operators that include AirBridge Cargo Airlines; Cargolux; Kalitta Air; National Air Cargo; and passenger airlines providing similar services utilizing 747-8Fs and 747-400s.  We believe that we offer a superior long-haul aircraft in the 747-8F and 747-400, and we will continue to develop new opportunities in the Charter market for aircraft not otherwise deployed in our ACMI business.

The Dry Leasing business is also competitive with a large number of companies offering operating lease solutions globally. We believe that we have an advantage over other aircraft lessors in the freighter aircraft Dry Leasing space as a result of our extensive relationships in the air freight market, and our insights and expertise as an operator of aircraft. Titan also competes in the passenger aircraft leasing market to develop key customer relationships, enter strategic geographic markets, and or acquire feedstock aircraft for future freighter conversion.  Our primary competitors in the aircraft leasing market include GE Capital Aviation Services, Altavair Air Finance, Air Transport Services Group, Inc., BBAM Aircraft and Leasing Management and Vx Capital Partners.

Available Information

Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, and all amendments to those reports, filed with or furnished to the Securities and Exchange Commission (the “SEC”), are available free of charge through our corporate internet website, www.atlasairworldwide.com, as soon as reasonably practicable after we have electronically filed such material with, or furnished it to, the SEC. In addition, the SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at www.sec.gov.

The information on our website is not, and shall not be deemed to be, part of this Report or incorporated into any other filings we make with the SEC.

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ITEM 1A. RISK FACTORS

You should carefully consider each of the following Risk Factors and all other information in this Report.  These Risk Factors are not the only ones facing us.  Our operations could also be impaired by additional risks and uncertainties.  If any of the following risks and uncertainties develops into actual events, our business, financial condition and results of operations could be materially and adversely affected.

RISKS RELATED TO OUR BUSINESS

Risks Related to Our Business Generally

Deterioration in the airfreight market, global economic conditions, financial markets or global supply chains could adversely affect our business, results of operations, financial condition, liquidity and ability to access capital markets.

Airfreight demand has historically been highly dependent on global economic conditions, which could be negatively impacted by changes in U.S. and foreign government trade policies, changes in economies throughout the world and limited access to certain markets, among other things.  The impact of the global airfreight environment and macroeconomic conditions, including tariffs, global trade tensions and geopolitical unrest in certain countries in South America, especially during the fourth quarter of 2019, resulted in lower 747-400 commercial cargo Yields and aircraft Utilization.  If demand for our services, Yields or lease rates deteriorate, it could have a material adverse effect on our business, results of operations and financial condition.

We also could be negatively impacted by supply chain disruption caused by geopolitical events or health epidemics.  In December 2019, a novel strain of coronavirus was reported in China and has since been reported in other countries.  This outbreak has disrupted the global supply chains involving China and Asia, resulting in certain cancellations of cargo flights.  Cancellations of passenger flights by other airlines to and from that region have also impacted our ability to position crewmembers for operating our aircraft.  Although we expect the disruption from the virus to be temporary, 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 but could materially affect our business, results of operations and financial condition.

In addition, we may face significant challenges if conditions in the financial markets deteriorate.  Our business is capital intensive and growth depends on the availability of capital for new aircraft, among other things.  If capital availability deteriorates, we may be unable to raise the capital necessary to finance business growth or other initiatives or to repay our debt when it matures.  Our ability to access the capital markets may be restricted at a time when we would like, or need, to do so, which could have an impact on our flexibility to react to changing economic and business conditions.

We could be adversely affected if any of our existing aircraft are underutilized, if we fail to deploy or redeploy aircraft with customers at favorable rates, or if any of our aircraft are impaired.  We could also be adversely affected from the loss of one or more of our aircraft for an extended period of time.

Our operating revenues depend on our ability to effectively deploy the aircraft in our fleet and maintain high utilization of our aircraft at favorable rates.  If we have underutilized aircraft, we would seek to redeploy those aircraft in our other lines of business or sell them.  If we are unable to successfully redeploy our existing aircraft at favorable rates or sell them on favorable terms, it could have a material adverse effect on our business, results of operations and financial condition.  In addition, if one or more of our aircraft is out of service for an extended period of time, our operating revenues would decrease and we may have difficulty fulfilling our obligations under one or more of our existing contracts.  The loss of revenue resulting from any such business interruption, and the cost and potentially long lead time and difficulties in sourcing a replacement aircraft, could have a material adverse effect on our business, results of operations and financial condition.

We record impairment charges on long-lived assets when events and circumstances indicate that the assets may be impaired, the undiscounted cash flows estimated to be generated by those assets are less than their carrying amount and the net book value of the assets exceeds their estimated fair value.  The airfreight market and Yields can

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be volatile and negatively affected by excess capacity due to factors such as global economic conditions and reduced customer demand.  Asset impairments or other charges related to capacity could have a material adverse effect on our business, results of operations and financial condition.

Global trade flows are typically seasonal, and our business, including our ACMI customers’ business, experiences seasonal variations.

Global trade flows are typically seasonal in nature, with peak activity occurring during the retail holiday season, which generally begins in September/October and lasts through most of December.  Our ACMI and CMI contracts generally have contractual utilization minimums that typically allow our customers to cancel an agreed-upon percentage of the guaranteed hours of aircraft utilization over the course of a year.  Our ACMI and CMI customers often exercise those cancellation options early in the first quarter of the year, when the demand for air cargo capacity is historically low following the seasonal holiday peak in the fourth quarter of the previous year.  While our revenues typically fluctuate seasonally as described above, a significant proportion of the costs associated with our business, such as debt service, aircraft rent, depreciation and facilities costs, are fixed and cannot easily be reduced to match the seasonal drop in demand.  In addition, we typically incur a higher proportion of Heavy Maintenance during the first half of the year.  As a result, our net operating results are typically lower in the first quarter and increase as the year progresses.

Insurance coverage may become more expensive and difficult to obtain and may not be adequate to insure all of our risks.  In addition, if our Dry Lease customers have inadequate insurance coverage or fail to fulfill their indemnification obligations, it could have a material adverse effect on our business, results of operations and financial condition.

Aviation insurance premiums historically have fluctuated based on factors that include the loss history of the industry in general, and the insured carrier in particular.  Adverse events involving aircraft could result in increased insurance costs and could affect the price and availability of such coverage.  

We participate in an insurance pooling arrangement with DHL and its partners.  This allows us to obtain aviation hull and liability, war-risk hull and cargo loss, crew, third-party liability and hull deductible coverage at reduced rates from the commercial insurance providers.  If we are no longer included in this arrangement for any reason or if pool members have coverage incidents, we may incur higher insurance costs. There can be no assurance that we will be able to maintain our existing coverage on terms favorable to us or that the premiums for such coverage will not increase substantially, which could have a material adverse effect on our business, results of operations and financial condition.

Some of our aircraft are deployed in potentially dangerous locations and carry hazardous cargo incidental to the services we provide in support of our customers’ activities.  In addition, some areas through which our flight routes pass are subject to geopolitical instability, which increases the risk of death or injury to our passengers, employees or contractors, business interruption or a loss of, or damage to, our aircraft and or its cargo.  While we carry insurance against the risks inherent to our operations, which we believe are consistent with the insurance arrangements of other participants in our industry, we cannot provide assurance that we are adequately insured against all risks, including coverage for weapons of mass destruction. We do not have insurance against the loss arising from business interruption. Any injury to passengers, employees or contractors or loss/damage of aircraft/cargo incidents resulting in claims in excess of related insurance coverage could have a material adverse effect on our business, results of operations and financial condition.

Lessees are required under our Dry Leases to indemnify us for, and insure against, liabilities arising out of the use and operation of the aircraft, including third-party claims for death or injury to persons and damage to property for which we may be deemed liable.  Lessees are also required to maintain public liability, property damage and all-risk hull and war-risk hull insurance on the aircraft at agreed-upon levels.  If our lessees’ insurance is not sufficient to cover all types of claims that may be asserted against us or if our lessees fail to fulfill their indemnification obligations, we would be required to pay any amounts in excess of our insurance coverage, which could have a material adverse effect on our business, results of operations and financial condition.

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We are party to collective bargaining agreements covering pilots of Atlas and Southern Air and a collective bargaining agreement covering our Atlas and Polar flight dispatchers.  This could result in higher labor costs and or result in a work interruption or stoppage.

Pilots of Atlas (who operate Atlas and Polar flights) and Southern Air and flight dispatchers of Atlas and Polar are represented by the IBT.  We have a five-year CBA with our Atlas pilots, which became amendable in September 2016 and a four-year CBA with our Southern Air pilots, which became amendable in November 2016.  Initial negotiations commenced in January of 2016, nine months prior to the amendable date.  Negotiations have continued as governed by a July 6, 2017 framework agreement, which was established to accommodate a joint CBA, and the parties have continued to meet regularly since then.  We also have a five-year CBA with our Atlas and Polar dispatchers, which was extended in April 2017 for an additional four years, making the CBA amendable in November 2021.  We are subject to risks of increased labor costs associated with having a partially unionized workforce, as well as a greater risk of work interruption or stoppage, which could negatively impact our business, including a reduction in our revenue and an increase in our operating costs.  We cannot provide assurance that disputes, including disputes with certified collective bargaining representatives of our employees, will not arise in the future or will result in an agreement on terms satisfactory to us.  In addition, the costs associated with resolving such disputes could have a material adverse effect on our business, results of operations and financial condition.

As a U.S. government contractor, we are subject to a number of procurement and other rules and regulations that affect our business.  A violation of these rules and regulations could lead to termination or suspension of our government contracts and could prevent us from entering into contracts with government agencies in the future.

To do business with government agencies, including the AMC, we must comply with, and are affected by, many rules and regulations, including those related to the formation, administration and performance of U.S. government contracts. These rules and regulations, among other things:

These rules and regulations affect how we do business with our customers and, in some instances, add costs to our business.  A violation of these rules and regulations could result in the imposition of fines and penalties or the termination of our contracts.  In addition, the violation of certain other generally applicable rules and regulations could result in our suspension or debarment as a government contractor.

Our financial condition may suffer if we experience unanticipated costs as a result of ongoing lawsuits and claims related to alleged pricing practices or other legal and regulatory matters.

In the Netherlands, Stichting Cartel Compensation, successor in interest to claims of various shippers, has filed suit in the district court in Amsterdam against British Airways, KLM, Martinair, Air France, Lufthansa and Singapore Airlines (“Defendants”) seeking recovery for damages purportedly arising from allegedly unlawful pricing practices of such Defendants.  In response, Defendants filed third-party indemnification lawsuits against Polar Air Cargo, LLC (“Old Polar”), a consolidated subsidiary of the Company, and Polar, seeking indemnification in the event the Defendants are found to be liable in the main proceedings.  Another defendant, Thai Airways, filed a similar indemnification claim.  Activities in the case have focused on various procedural issues, some of which are awaiting court determination.  The Netherlands proceedings are likely to be affected by a decision readopted by the

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European Commission in March 2017, finding EU competition law violations by Defendants, among others, but not Old Polar or Polar.

If Old Polar, Polar or the Company were to incur an unfavorable outcome in the litigation described above or in similar litigation, it could have a material adverse effect on our business, results of operations and financial condition.

In addition to the litigation described above, we are subject to a number of Brazilian customs claims, as well as other claims, lawsuits and pending actions which we consider to be routine and incidental to our business (see Note 13 to our Financial Statements).  If we were to receive an adverse ruling or decision on any such claims, it could have an adverse effect on our business, results of operations and financial condition.

Fuel availability and price volatility could adversely affect our business and operations.

The price of aircraft fuel is unpredictable and can be volatile.  Our exposure to fluctuations in fuel price is limited to the commercial portion of our Charter business only, and while this risk is partially mitigated by using indexed fuel price adjustments for certain commercial charter contracts, it has not been completely eliminated.  Our ACMI and CMI contracts require our customers to pay for aircraft fuel.  Regardless, if fuel costs increase significantly, our customers may reduce the volume and frequency of cargo shipments or find less costly alternatives for cargo delivery, such as land and sea carriers.  Such actions could have a material adverse effect on our business, results of operations and financial condition.

In the past, we have not experienced significant difficulties with respect to fuel availability.  Although we do not currently anticipate a significant reduction in the availability of aircraft fuel, a number of factors, such as geopolitical uncertainties in oil-producing nations and shortages of and disruptions to refining capacity, make accurate predictions unreliable.  Any inability to obtain aircraft fuel at competitive prices could have a material adverse effect on our business, results of operations and financial condition.

We rely on third parties to provide certain essential services.  If these service providers do not deliver the high level of service and support required in our business at commercially reasonable terms, it could have a material adverse effect on our business, results of operations and financial condition.

We rely on third parties to provide certain essential services on our behalf, including maintenance, ground handling and flight attendants.  In certain locations, there may be very few sources, or sometimes only a single source, of supply for these services.  If we are unable to effectively manage these third parties, they may provide inadequate levels of support or charge commercially unreasonable amounts for their services, which could harm our customer relationships and ability to remain competitive.  Any material problems with the quality, timeliness and cost of our contracted services, or an unexpected termination of those services, could have a material adverse effect on our business, results of operations and financial condition.

We could be adversely affected by a significant data breach or disruption of our information technology systems.  

We are heavily and increasingly dependent on technology to operate our business.  Our information technology systems or those of third parties on which we rely, as well as our business more broadly, could be disrupted due to various events, some of which are beyond our control, including natural disasters, power failures, terrorist attacks, equipment failures, software failures, computer viruses, security breaches and cyber attacks.  In addition, there are numerous and evolving risks to cybersecurity and privacy, including criminal hackers, hacktivists, state-sponsored intrusions, industrial espionage, employee malfeasance and human or technological error.  A significant disruption could result in a range of potentially material negative consequences for us, including unauthorized access to, disclosure, modification, misuse, loss or destruction of company systems or data; theft of sensitive, regulated or confidential data, intellectual property; the loss of functionality of critical systems through ransomware, denial of service or other attacks; and business delays, service or system disruptions, damage to equipment and injury to persons or property.

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We have taken numerous steps to implement business resiliency and cybersecurity, as well as, obtained cyber business interruption insurance to help reduce the risk and impact of some of the potential disruptions discussed above.   There can be no assurance, however, that the measures we have taken are adequate to prevent or remedy disruptions or failures of our systems.  

A cybersecurity incident could also impact our brand, harm our reputation and adversely impact our relationships with our customers, employees and stockholders.  In addition, a failure of certain of our vital systems could limit our ability to operate our flights for an extended period of time.  Failure to appropriately address these issues could have a material adverse effect on our business, results of operations and financial condition.

Our ability to utilize net operating loss carryforwards for U.S. income tax purposes may be limited. In addition, we operate in multiple jurisdictions and may become subject to a wide range of income and other taxes.

As of December 31, 2019, we had $2.2 billion of federal net operating loss carryforwards (“NOLs”) for U.S. income tax purposes, net of unrecognized tax benefits and valuation allowance, most of which will expire through 2037, if not utilized.  Section 382 of the Internal Revenue Code (“Section 382”) imposes an annual limitation on the amount of a corporation’s U.S. federal taxable income that can be offset by NOLs if it experiences an “ownership change,” as defined by Section 382.  We experienced ownership changes, as defined by Section 382, in 2004 and 2009.  In addition, the acquisition of Southern Air in 2016 constituted an ownership change for that entity.  Accordingly, the use of our NOLs generated prior to these ownership changes is subject to an annual limitation.  If certain changes in our ownership occur prospectively, there could be an additional annual limitation on the amount of utilizable NOLs, which could have a material adverse effect on our business, results of operations and financial condition.

We operate in multiple jurisdictions and may become subject to a wide range of income and other taxes.  If our operations become subject to significant income and other taxes, this could have a material adverse effect on our business, results of operations and financial condition. In addition, certain of our companies participate in an aircraft leasing incentive program in Singapore and qualify for a related concessionary income tax rate. If these companies do not remain in the program or the related concessionary rate increases in the future, we could be subject to additional Singapore income tax, which could have a material adverse effect on our business, results of operations and financial condition.

Risks Related to Our ACMI Business

We depend on a limited number of significant customers for our ACMI business and the loss of one or more of such customers could materially adversely affect our business, results of operations and financial condition.

Our ACMI business depends on a limited number of customers.  We typically enter into long-term ACMI and CMI contracts with our customers.  The terms of our existing contracts are generally scheduled to expire on a staggered basis.  There is a risk that any one of our significant ACMI or CMI customers may not renew their contracts with us on favorable terms or at all, perhaps due to reasons beyond our control.  For example, certain of our airline ACMI customers may not renew their ACMI contracts with us because they decide to exit the dedicated cargo business or as they take delivery of new aircraft in their own fleet.  Select customers have the opportunity to terminate their long-term agreements in advance of the expiration date, following notice to allow for remarketing of the aircraft.  

Entering into ACMI and CMI contracts with new customers sometimes requires a long sales cycle, and as a result, if our contracts are not renewed, and there is a resulting delay in entering into new contracts, it could have a material adverse effect on our business, results of operations and financial condition.

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Our agreements with several ACMI and CMI customers require us to meet certain performance targets, including certain departure/arrival reliability standards.  Failure to meet these performance targets could adversely affect our business and financial results.  

Our ability to derive the expected economic benefits from our transactions with certain ACMI and CMI customers depends substantially on our ability to successfully meet strict performance standards and deadlines for aircraft and ground operations.  If we do not meet these requirements, we may not be able to achieve the projected revenues and profitability from these contracts, and we could be exposed to certain remedies, including termination of the agreements with Amazon and the BSA with DHL in the most extreme of circumstances, as described below.

Risks Related to the Agreements with Amazon

Our agreements with Amazon confer certain termination rights which, if exercised or triggered, may result in our inability to realize the full benefits of the agreements.

The agreements give Amazon the option to terminate in certain circumstances and upon the occurrence of certain events of default, including a change of control or our failure to meet certain performance requirements.  In particular, Amazon will have the right to terminate without cause the agreement providing for CMI operations upon providing us at least 180 days’ prior written notice of termination.

Upon termination, Amazon will generally, subject to certain exceptions, retain the warrants that have vested prior to the time of termination and, depending on the circumstances giving rise to the termination, may have the right to accelerated vesting of the remaining warrants upon a change of control of our company.  Upon termination, Amazon or we may also have the right to receive a termination fee from the other party depending on the circumstances giving rise to the right of termination.

If Amazon exercises any of these termination rights, it could have a material adverse effect on our business, results of operations and financial condition.

Our future earnings and earnings per share, as reported under generally accepted accounting principles, could be adversely impacted by the warrants granted to Amazon.

The warrants granted to Amazon increase the number of diluted shares reported, which has a negative effect on our fully diluted earnings per share.  Further, some of the warrants are presented as liabilities in our consolidated balance sheets and are subject to fair value measurement adjustments during the periods that they are outstanding.  Accordingly, future fluctuations in the fair value of the warrants could have a material adverse effect on our results of operations.

If Amazon exercises its right to acquire shares of our common stock pursuant to the warrants, it will dilute the ownership interests of our then-existing stockholders and could adversely affect the market price of our common stock.

If Amazon exercises its right to acquire shares of our common stock pursuant to the warrants, it will dilute the ownership interests of our then-existing stockholders and reduce our earnings per share.  In addition, any sales in the public market of any common stock issuable upon the exercise of the warrants by Amazon could adversely affect prevailing market prices of our common stock.

If Amazon exercises its right to acquire shares of our common stock pursuant to the warrants, Amazon may become a significant stockholder and may be entitled to appoint a director to our board of directors.

The warrants issued by us to Amazon grant Amazon the right to purchase up to 39.9%, in the aggregate, of our common stock on a post-issuance basis.  If the warrants granted to Amazon are exercised, Amazon may become a significant stockholder of our company.  We have entered into a stockholders agreement with Amazon, pursuant to which Amazon’s ability to vote in its discretion will generally be capped at 14.9% with the remainder to be voted in accordance with our board of directors’ recommendation. In addition, under the stockholders agreement, Amazon

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will be entitled to appoint one director to our board of directors when Amazon owns 10% or more of our common stock.  Until such time, Amazon is entitled to designate a non-voting observer to our board of directors.

Risk Related to the BSA with DHL

Our agreements with DHL confer certain termination rights to them which, if exercised or triggered, may result in our inability to realize the full benefits of the BSA with DHL.

The BSA gives DHL the option to terminate the agreements for convenience by giving us a one-year notice on or before October 27, 2022, which would be effective on October 23, 2023.  Further, DHL has a right to terminate the BSA for cause following a specified management resolution process if we default on our performance or we are unable to perform for reasons beyond our control.  If DHL exercises any of these termination rights, it could have a material adverse effect on our business, results of operations and financial condition.

Risks Related to Our Charter Business  

We derive a significant portion of our revenues from the AMC, and a substantial portion of these revenues have been generated pursuant to expansion flying, as opposed to fixed contract arrangements with the AMC.  Revenues from the AMC are volatile and may decline from current levels.

As a percentage of our total operating revenue, revenue derived from the AMC was approximately 24.6% in 2019, 23.7% in 2018 and 23.0% in 2017.  Historically, the revenues derived from expansion (or ad-hoc) flights for the AMC significantly exceeded the value of the fixed flight component of our AMC contract.

Revenues from the AMC are derived from two-year contracts with an option for the AMC to extend the contract for two additional two-year periods.  Changes in national and international political priorities can significantly affect the volume of business from the AMC.  Any decrease in U.S. military activity could reduce revenue from the AMC.  In addition, our share of the total business from the AMC depends on several factors, including the total fleet size we commit to the CRAF program and the total number of aircraft deployed by our teaming arrangement partners and competitors in the program.

The AMC also holds all carriers to certain on-time performance requirements as a percentage of flights flown and, as a result of AMC demand volatility, it has become more difficult to comply with those requirements.  To the extent that we fail to meet those performance requirements or if we fail to pass biennial AMC audits, revenues from our business with the AMC could decline through a suspension or termination of our AMC contract.  Our revenues could also decline due to a reduction in the revenue rate we are paid by the AMC, a greater reliance by the AMC on its own fleet or a reduction in our allocation of AMC flying.  Any reduction in our AMC flying could also negatively impact our Charter revenue from commercial customers for trips related to one-way AMC missions.  We expect revenues and profitability from our business with the AMC to continue to remain volatile as the U.S. military continues to move troops and cargo to and from areas of conflict around the world.  If we are unable to effectively deploy any resultant capacity during periods of reduced flying, it could have a material adverse effect on our business, results of operations and financial condition.

Our business with the AMC is sensitive to teaming arrangements which affect our relative share of AMC flying and the associated revenue.  If one of our team members reduces its commitments or withdraws from the program, or if other carriers on other teams commit additional aircraft, our share of AMC flying may decline.  In addition, any changes made to the commissions that we pay or receive for AMC flying or changes to the contracting mechanism could impact the revenues or profitability of this business.

Each year, the AMC allocates its air capacity requirements to different teams of participating airlines based on a mobilization value point system that is determined by the amount and types of aircraft that each team of airlines pledges to the program.  We participate in the program through a teaming arrangement with other airlines, led by FedEx.  Our team is one of two major teams participating in the program during our current contract year.  Several factors could adversely affect the amount of AMC flying that is allocated to us, including:

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Any changes that would result in a reduction in our share of, or profitability from, AMC flying could have a material adverse effect on our business, results of operations and financial condition.

Risk Related to Our Dry Leasing Business

Any default by our Dry Lease customers, including (but not limited to) failure to make timely payments, failure to maintain insurance or failure to properly maintain our aircraft, could adversely affect our financial results.

Our Dry Leasing business depends on the ability of our customers to satisfy their obligations under our leases, which may be affected by factors outside our control, including but not limited to: supply and demand of aircraft; competition; economic conditions; the price and availability of aircraft fuel; government regulations; the availability and cost of financing; failure to maintain insurance; and their overall financial condition and cash flow.  Any default by our customers can result in reduced cash flow, termination of the lease and repossession of the related aircraft, any of which could have a material adverse effect on our business, results of operations and financial condition.

Dry Leasing customers are primarily responsible for maintaining our aircraft.  Although we require many of our customers to pay us amounts for supplemental maintenance, failure of a customer to perform required maintenance during the lease term could result in higher maintenance costs, a decrease in the value of our aircraft, the inability to re-lease aircraft at favorable rates, if at all, or impairment charges, which could have a material adverse effect on our business, results of operations and financial condition.

We may fail to realize the anticipated strategic and financial benefits of our Dry Leasing joint venture with Bain Capital.

Realization of the anticipated benefits from our Dry Leasing joint venture with Bain Capital is subject to a number of challenges and uncertainties, including: realization of satisfactory returns on investment, having investment goals that are consistent with our partner, partners each funding their share of required capital contributions and reaching agreement to hold and sell aircraft.  If we fail to realize the expected benefits, it could have a material adverse effect on our business, results of operations and financial condition.

RISKS RELATED TO OUR INDUSTRY

The market for air cargo services is competitive and if we are unable to compete effectively, we may lose current customers or fail to attract new customers.  We could also be adversely affected if a large number of long-haul freighter aircraft or freighter aircraft of different equipment types are introduced into the market.

Each of the markets in which we participate is competitive and fragmented.  We offer a broad range of aviation services and our competitors vary by geographic market and type of service and include other international and domestic contract carriers, regional and national ground handling and logistics companies, internal cargo units of major airlines and third-party cargo providers.  Competition in the air cargo and transportation market is influenced by several key factors, including quality, price and availability of assets and services.  Regulatory requirements to operate in the U.S. domestic air cargo market have been reduced, facilitating the entry into domestic markets by foreign air cargo companies.  If we were to lose any major customers and or fail to attract customers, it could have a material adverse effect on our business, results of operations and financial condition.  

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Additionally, an increase in the number of aircraft in the freight market could cause Yields and rates to fall and or could negatively affect our customer base.  If either circumstance were to occur, our business, results of operations and financial condition could be materially and adversely affected.

We are subject to extensive governmental laws and regulations and failure to comply with these laws and regulations in the U.S. and abroad, or the adoption of any new laws, policies or regulations or changes to such regulations, may have an adverse effect on our business.

Our operations and our customers’ operations are subject to complex aviation and transportation laws and regulations, including Title 49 of the U.S. Code, under which the DOT and the FAA exercise regulatory authority over air carriers.  In addition, our business activities and our customers’ business activities fall within the jurisdiction of various other federal, state, local and foreign authorities, including the U.S. Department of Defense, the TSA, U.S. Customs and Border Protection, the U.S. Treasury Department’s Office of Foreign Assets Control and the U.S. EPA and similar state agencies.  In addition, other jurisdictions in which we operate have similar regulatory regimes to which we are subjected.  These laws and regulations may require us to maintain and comply with the terms of a wide variety of certificates, permits, licenses, noise abatement standards, maintenance and other requirements and our failure to do so could result in substantial fines or other sanctions.  These U.S. and foreign aviation regulatory agencies have the authority to modify, amend, suspend or revoke the authority and licenses issued to us for failure to comply with provisions of law or applicable regulations and may impose civil or criminal penalties for violations of applicable rules and regulations.  Such fines, sanctions or penalties, if imposed, could have a material adverse effect on our mode of conducting business, results of operations and financial condition.  There can also be no assurance that laws and regulations will not be changed in ways that will decrease demand for our services or subject us to escalating costs.  In addition, U.S. and foreign governmental authorities may adopt, amend or interpret accounting standards, tax laws, regulations or treaties that could require us to take additional and potentially costly compliance steps or result in our inability to operate some of our aircraft in certain countries, which could have a material adverse effect on our business, results of operations and financial condition.  

International aviation is increasingly subject to requirements imposed or proposed by foreign governments.  This is especially true in the areas of transportation security, aircraft noise and emissions control, and greenhouse gas emissions.  These may be duplicative of, or incompatible with U.S. government requirements, resulting in increased compliance efforts and expense.

Foreign governments also place temporal and other restrictions on the ability of their own airlines to use aircraft operated by other airlines.  For example, the European Aviation Safety Agency (“EASA”) requires that the aircraft capacity secured from and operated by non-EU airlines meet internationally set standards and additional EASA requirements.  These and other similar regulatory developments could have a material adverse effect on our business, results of operations and financial condition.

Initiatives to address global climate change may adversely affect our business and increase our costs.

To address climate change, governments have implemented and continue to pursue various means to reduce aviation-related greenhouse gas emissions.  Compliance with these or other measures that are ultimately adopted could result in substantial costs for us.  For instance, in October 2013, the ICAO reached a nonbinding agreement to develop global market-based measures to assist in achieving carbon-neutral growth.  In October 2016, the ICAO approved the CORSIA, which is designed to offset any annual increases in total carbon emissions from international civil aviation above a baseline level determined by the average of 2019 and 2020 emissions.  Although various details regarding the implementation of CORSIA still need to be finalized, a pilot phase will run from 2021 to 2023.  Starting in 2019, the Airlines have voluntarily begun tracking and have begun reporting emissions in accordance with CORSIA in 2020, even though it is not yet mandatory in ICAO member countries.  As a result, starting in 2024, the Airlines may need to purchase allowances to offset their assigned share of emissions overages based on the reporting for the 2021 to 2023 compliance period.  For subsequent compliance periods, a similar procedure will apply.

Additionally, the EU continues to pursue a parallel track to address climate change through the EU ETS.  Following the end of every year, to the extent the ETS applies, each airline must tender the number of allowances corresponding to carbon emissions generated by its covered flight activity during the year.  If the airline’s flight

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activity during the year has produced carbon emissions exceeding the number of carbon emissions allowances that it has been awarded, the airline must acquire additional allowances from other airlines in the open market.  In recognition of ICAO’s recent adoption of CORSIA, the ETS suspension with respect to flights to and from non-European countries continues through December 31, 2023.  However, the ETS remains applicable to intra-European flights.

In the U.S., various constituencies have continued to advocate for controls on greenhouse gas emissions.  On August 15, 2016, the EPA issued a final rule finding that greenhouse gas emissions from aircraft cause or contribute to air pollution that may reasonably be anticipated to endanger public health and welfare.  It is possible that these or other developments could lead to the future regulation of greenhouse gas emissions from aircraft in the U.S.

It is possible that these or similar climate change measures will be imposed in a manner adversely affecting airlines.  The costs of complying with potential new environmental laws or regulations could have a material adverse effect on our business, results of operations and financial condition.

The airline industry is subject to numerous security regulations and rules that increase costs.  Imposition of more stringent regulations and rules than those that currently exist could materially increase our costs.

The TSA has increased security requirements in response to increased levels of terrorist activity, and has adopted comprehensive new regulations governing air cargo transportation, including all-cargo services, in such areas as cargo screening and security clearances for individuals with access to cargo.  Additional measures, including a requirement to screen cargo, have been proposed, which, if adopted, may have an adverse impact on our ability to efficiently process cargo and would increase our costs and those of our customers.  The cost of compliance with increasingly stringent regulations could have a material adverse effect on our business, results of operations and financial condition.  

If we are unable to attract and retain qualified pilots, it could have an adverse effect on our ability to maintain or expand our business operations.

In 2013, as earlier directed in Public Law 111-216, the FAA issued a final rule increasing the stringency of pilot and cockpit crew qualification and training requirements.  As a result of that rule, all airline pilots, including new hires, must have a minimum of 1,500 hours of operational experience. The FAA rule also has increased the required training time for new commercial pilots.  These regulatory changes and other factors, including reductions in the number of military pilots being trained by the U.S. armed forces, have led to increased demand for pilots.  If we are unable to hire, train and retain qualified pilots, it could have an adverse effect on our ability to maintain or expand our business operations.

RISKS RELATED TO OUR LEASE AND DEBT OBLIGATIONS

Our substantial lease and debt obligations, including aircraft leases and other obligations, could impair our financial condition and adversely affect our ability to raise additional capital to fund our aircraft purchases, operations or other capital requirements, all of which could limit our financial resources and ability to compete, and may make us vulnerable to adverse economic events.

As of December 31, 2019, we had total debt obligations of approximately $2.4 billion and total aircraft operating leases and other lease obligations of $0.6 billion.  We cannot provide assurance that we will be able to obtain future financing arrangements or on terms attractive to us.  Our outstanding financial obligations could have negative consequences, including:

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Our ability to service our debt and meet our lease and other obligations as they come due is dependent on our future financial and operating performance, as well as our continued access to the capital markets.  All such matters are subject to various factors, including factors beyond our control, such as changes in global and regional economic conditions, changes in our industry, changes in interest or currency exchange rates, the price and availability of aircraft fuel and other costs, including labor and insurance.  Accordingly, we cannot provide assurance that we will be able to meet our debt service, lease and other obligations as they become due and our business, results of operations and financial condition could be adversely affected under these circumstances.  

Certain of our debt and lease obligations contain a number of restrictive covenants.  In addition, many of our debt and lease obligations have cross-default and cross-acceleration provisions.

Restrictive covenants in certain of our debt and lease obligations, under certain circumstances, could impact our ability to:

In certain circumstances, a covenant default under one of our debt instruments could cause us to be in default of other obligations as well.  Any unremedied defaults could lead to an acceleration of the amounts owed and potentially could cause us to lose possession or control of certain aircraft, either of which could have a material adverse effect on our business, results of operations and financial condition.

We may not have the ability to raise the funds necessary to settle conversions of our convertible notes or to repurchase the convertible notes upon either a fundamental change or a make-whole fundamental change, and our future debt may contain limitations on our ability to pay cash upon conversion or repurchase of the convertible notes.

We issued convertible senior notes in May 2017 and June 2015 (the “Convertible Notes”), which contain conditional conversion features that allow the holders of the Convertible Notes the option to convert if certain trading conditions are met or upon the occurrence of specified corporate events.  In the event a conditional conversion feature of the Convertible Notes is triggered, holders of Convertible Notes will be entitled to convert the Convertible Notes at any time during specified periods at their option. If one or more holders elect to convert their Convertible Notes, unless we elect to satisfy our conversion obligation by delivering solely shares of our common stock, we would be required to settle a portion or all of our conversion obligation through the payment of cash, which could adversely affect our liquidity.  In addition, even if holders do not elect to convert their Convertible Notes, we could be required under applicable accounting rules to reclassify all or a portion of the outstanding principal of the Convertible Notes as current on the balance sheet instead of as noncurrent, which could result in a material reduction of our net working capital.

The holders of the Convertible Notes also may require us to repurchase their Convertible Notes upon the occurrence of a fundamental change (as defined in the indenture governing the Convertible Notes) at a price equal to 100% of the principal amount of the Convertible Notes to be repurchased, plus accrued and unpaid interest, if any.  However, we may not have enough available cash to fund these obligations or be able to obtain financing on favorable terms, or at all, at the time we are required to make repurchases of Convertible Notes surrendered or Convertible Notes being converted. Our failure to repurchase Convertible Notes at a time when the repurchase is required by the applicable indenture or to pay any cash payable on future conversions of the Convertible Notes as required by the applicable indenture would constitute a default under such indenture, which could result in acceleration of the principal amount of the notes and additional funding obligations by us.  

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In addition, if a make-whole fundamental change (as defined in the applicable indenture), including specified corporate transactions, occurs prior to the maturity date, under certain circumstances, it would increase the conversion rate.  The increase in the conversion rate would be determined based on the date on which the specified corporate transaction becomes effective and the price paid (or deemed to be paid) per share of our common stock in such transaction, but in no event would increase to greater than 16.3713 shares of our common stock for our convertible notes issued in 2017 and 13.5036 shares of common stock for our convertible notes issued in 2015 per $1,000 of principal, subject to adjustment in the same manner as the conversion rates.  The increase in the conversion rate for Convertible Notes converted in connection with a make-whole fundamental change may result in us having to pay out additional cash in respect of the Convertible Notes upon conversion, or result in additional dilution to our shareholders if the conversion is settled, at our election, in shares of our common stock.

The Convertible Note hedge and warrant transactions may affect the value of our common stock.

In connection with the Convertible Notes offerings, we entered into Convertible Note hedge transactions with option counterparties. The Convertible Note hedge transactions are expected generally to reduce the potential dilution to our common stock upon any conversion of notes and or offset any cash payments we are required to make in excess of the principal amount of converted notes, as the case may be. We also entered into warrant transactions with the option counterparties.  However, the warrant transactions could separately have a dilutive effect on our earnings per share to the extent that the market price per share of our common stock exceeds the applicable strike prices of the warrants.  Accordingly, when the Convertible Note hedge transactions and the warrant transactions are taken together, the extent to which the Convertible Note hedge transactions reduce the potential dilution to our common stock (or the cash payments in excess of the principal amount of the notes) upon conversion of the notes is effectively capped by the warrant transactions at the strike price of the warrants.

The option counterparties or their respective affiliates may modify their hedge positions by entering into or unwinding various hedging transactions, including (without limitation) derivatives, with respect to our common stock and or purchasing or selling our common stock or other securities of ours in secondary market transactions prior to the maturity of the notes (and are likely to do so during any observation period related to a conversion of notes). This activity could cause or avoid an increase or a decrease in the market price of our common stock.

RISKS RELATED TO OWNERSHIP OF OUR COMMON STOCK

U.S. citizenship requirements may limit common stock voting rights.

Under U.S. federal law and DOT requirements, we must be owned and actually controlled by “citizens of the United States,” a statutorily defined term requiring, among other things, that not more than 25% of our issued and outstanding voting stock be owned and controlled, directly or indirectly, by non-U.S. citizens.  The DOT periodically conducts airline citizenship reviews and, if it finds that this requirement is not met, may require adjustment of the voting rights of the airline’s issued shares.

As one means to effect compliance, our certificate of incorporation and by-laws provide that the failure of non-U.S. citizens to register their shares on a separate stock record, which we refer to as the “Foreign Stock Record,” results in a suspension of their voting rights.  Our by-laws further limit the number of shares of our capital stock that may be registered on the Foreign Stock Record to 25% of our issued and outstanding shares.  Registration on the Foreign Stock Record is made in chronological order based on the date we receive a written request for registration.  As a result, if a non-U.S. citizen acquires shares of our common stock and does not or is not able to register those shares on our Foreign Stock Record, they may lose their ability to vote those shares.

Provisions in our restated certificate of incorporation and by-laws and Delaware law, and our issuance of warrants to Amazon, might discourage, delay or prevent a change in control of AAWW and, therefore, depress the trading price of our common stock.

Provisions of our restated certificate of incorporation, by-laws and Delaware law may render more difficult or discourage any attempt to acquire our company, even if such acquisition may be believed to be favorable to the interests of our stockholders.  These provisions may also discourage bids for our common stock at a premium over

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market price or adversely affect the market price of our common stock. In addition, the vesting of warrants issued by us to Amazon will generally, subject to certain exceptions, be accelerated upon a change of control of our company, which may discourage attempts to acquire our company.

Our common stock share price is subject to fluctuations in value.  

The trading price of our common shares is subject to material fluctuations in response to a variety of factors, including quarterly variations in our operating results, conditions of the airfreight market and global economic conditions or other events and factors that are beyond our control.

In the past, following periods of significant volatility in the overall market and in the market price of a company's securities, securities class action litigation has been instituted against these companies in some circumstances.  If this type of litigation were instituted against us following a period of volatility in the market price for our common stock, it could result in substantial costs and a diversion of our management's attention and resources, which could have a material adverse effect on our business, results of operations and financial condition.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

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ITEM 2. PROPERTIES

Aircraft

The following tables provide information about AAWW’s aircraft and customer-provided aircraft:

AAWW Aircraft

The following table summarizes AAWW’s aircraft as of December 31, 2019:

Lease expirations for our leased aircraft included in the above tables range from March 2020 to June 2032.

Customer-provided Aircraft for CMI Service

The following table summarizes customer-provided aircraft as of December 31, 2019:

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Ground Facilities

Our principal office is located in Purchase, New York, where we lease approximately 120,000 square feet of office space under a long-term lease, which expires in 2027.  This office includes both operational and administrative support functions.  We also lease approximately 44,000 square feet of office space in Florence, Kentucky for operational support functions which expires in 2021 and approximately 16,600 square feet of office space in Hong Kong for sales and administrative support which expires in 2025.  In October 2019, we entered into a long-term lease for a building with approximately 100,000 square feet of office space in Erlanger, Kentucky for operational support functions commencing in the first half of 2021.  This property is expected to replace the office space in Florence, Kentucky when that lease expires.  In addition, we lease a variety of smaller offices and ramp space at various airport and regional locations generally on a short-term basis.

ITEM 3. LEGAL PROCEEDINGS

The information required in response to this Item is set forth in Note 13 to our Financial Statements, and such information is incorporated herein by reference.  Such description contains all of the information required with respect hereto.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

INFORMATION ABOUT OUR EXECUTIVE OFFICERS

John W. Dietrich. Mr. Dietrich, age 55, became our President and Chief Executive Officer in January 2020. He was also elected to our Board of Directors at such time.  Prior to January 2020, he served as our President and Chief Operating Officer from July 2019 and our Executive Vice President and Chief Operating Officer from September 2006.  In addition, he was President and Chief Operating Officer of Atlas Air, Inc. from October 2014 to December 2019.  During the period from March 2003 to September 2006, Mr. Dietrich held a number of senior executive positions in the Company, including Senior Vice President, General Counsel, Chief Human Resources Officer, Corporate Secretary and head of the Corporate Communications function. Mr. Dietrich joined Atlas in 1999 as Associate General Counsel. Prior to joining us, he was a litigation attorney at United Airlines from 1992 to 1999, where he provided legal counsel to all levels of management, particularly on employment and commercial litigation issues.  He also serves as Chairman of the National Defense Transportation Association and a director of the National Air Courier Association.  Mr. Dietrich earned a Bachelor’s of Science degree from Southern Illinois University and received his Juris Doctorate, cum laude, from the University of Illinois at Chicago John Marshall Law School.  He is a member of the New York, Illinois and Colorado Bars.

James Forbes. Mr. Forbes, age 62, was elected our Executive Vice President and Chief Operating Officer in January 2020. He also serves as Executive Vice president and Chief Operating Officer of Atlas Air, Inc. and Southern Air, Inc. Prior to January 2020, he was Senior Vice President and Chief Operating Officer of Southern Air, Inc. since April 2016. Mr. Forbes has over 40 years of aviation operating experience, including more than 20 years with the Company. He joined us in 1997 as Senior Director of Ground Operations, where he helped construct the global infrastructure upon which we have grown. He became Vice President, Worldwide Ground Operations in 2001, overseeing station operations for all of Atlas Air, Inc. and Polar Air Cargo, Inc.  In 2008, Mr. Forbes was named Senior Vice President for System Performance and Quality for Polar, where he led the transformation of an all-cargo network into a leading on-time express operation that supports DHL’s worldwide air network.  He held that position until April 2016, when he was promoted to lead Southern Air operations.

Adam R. Kokas.  Mr. Kokas, age 48, has been Executive Vice President since January 2014 and General Counsel and Secretary since October 2006.  He also served as our Chief Human Resources Officer from November 2007 to March 2018.  Prior to January 2014, he was Senior Vice President from October 2006.  Mr. Kokas joined us from Ropes & Gray LLP, where he was a partner in their Corporate Department, focusing on general corporate, securities, transactions and business law matters. Prior to joining Ropes & Gray, Mr. Kokas was a partner at Kelley Drye & Warren LLP, where he joined as an associate in 2001. At both Kelley Drye and Ropes & Gray, Mr. Kokas represented us in a variety of matters, including corporate finance and merger and acquisition transactions, corporate

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governance matters, securities matters, and other general corporate issues.  Mr. Kokas serves as a Vice Chair of the International Air Transport Association’s Legal Advisory Council and is a director of the Society of Corporate Governance.  He also served as the Chairman of the Board of the Cargo Airlines Association from 2011 to 2019.  Mr. Kokas earned a Bachelor of Arts degree from Rutgers University and is a cum laude graduate of the Boston University School of Law, where he was an Edward M. Hennessey scholar. Mr. Kokas is a member of the New York and New Jersey Bars.

Michael T. Steen. Mr. Steen, age 53, has been Executive Vice President and Chief Commercial Officer since November 2010.  In addition, he was named President and Chief Executive Officer of Titan Aviation Holdings, Inc. effective October 2014.  Prior to November 2010, he was our Senior Vice President and Chief Marketing Officer from April 2007.  Mr. Steen joined us from Exel plc where he served as Senior Vice President of Sales and Marketing.  Mr. Steen led the sales and marketing activities for Exel Freight’s management and technology sector.  Following Exel’s acquisition by Deutsche Post World Net, he held senior-level positions with the merged company in global supply chain logistics.  Prior to joining Exel, he served in a variety of roles with KLM Cargo over 11 years, including Vice President of the Americas, Head of Global Sales and Marketing for the Logistics Unit and Director of Sales for EMEA.  Mr. Steen is a Director for CHC Helicopter since May 2017 and is the Vice Chairman for IATA’s Cargo Committee.  Mr. Steen earned a degree in economic science from Katrinelund in Gothenburg, Sweden, and is an alumnus of the Advanced Executive Program at the Kellogg School of Management at Northwestern University.

Spencer Schwartz. Mr. Schwartz, age 53, has been Executive Vice President since January 2014 and Chief Financial Officer since June 2010.  Prior to January 2014, he was Senior Vice President from June 2010.  Prior to June 2010, he was our Vice President and Corporate Controller from November 2008.  Mr. Schwartz joined us from Mastercard Incorporated, where he was employed for over 12 years and served as Group Head of Global Risk Management; Senior Vice President and Business Financial Officer; Senior Vice President, Corporate Controller and Chief Accounting Officer; and Vice President of Taxation.  Prior to joining Mastercard, Mr. Schwartz held financial positions of increasing responsibility with Price Waterhouse LLP (now PricewaterhouseCoopers LLP) and Carl Zeiss, Inc.  Mr. Schwartz earned a Bachelor’s degree in Accounting from The Pennsylvania State University and a Master’s degree in Business Administration, with a concentration in management, with honors, from New York University’s Leonard N. Stern School of Business.  He is a certified public accountant.

Keith H. Mayer. Mr. Mayer, age 54, has been Senior Vice President and Chief Accounting Officer since January 2018 and Corporate Controller since November 2010.  Prior to January 2018, he was Vice President since November 2010.  Mr. Mayer joined us from PepsiCo, Inc. (“PepsiCo”).  In his most recent role at PepsiCo, he served as Chief Financial Officer of an international coffee partnership between PepsiCo and Starbucks Corporation.  Mr. Mayer also served PepsiCo in a variety of roles since 1999, including Director of External Reporting, Assistant Controller for PepsiCo International, Senior Group Manager of Financial Accounting for Frito-Lay North America, and Group Manager of Technical Accounting.  Prior to joining PepsiCo, Mr. Mayer held financial positions of increasing responsibility with Coopers & Lybrand LLP (now PricewaterhouseCoopers LLP).  Mr. Mayer earned a Bachelor’s degree in Accounting from the University of Bridgeport where he graduated magna cum laude.  He is a certified public accountant.

Executive Officers are elected by our board of directors, and their terms of office continue until the next annual meeting of the board of directors or until their successors are elected and have qualified.  There are no family relationships among our executive officers.

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PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information

Since 2006, our common stock has been traded on The NASDAQ Global Select Market under the symbol “AAWW”.

As of February 17, 2020, there were approximately 26.0 million shares of our common stock issued and outstanding, and 37 holders of record of our common stock.

See Note 16 to our Financial Statements for a discussion of our stock repurchase program.

Equity Compensation Plans

See Item 12, “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” for information regarding our equity compensation plans as of December 31, 2019.

Dividends

We have never paid a cash dividend with respect to our common stock and we do not anticipate paying a dividend in the foreseeable future.  Moreover, certain of our financing arrangements contain financial covenants that could limit our ability to pay cash dividends.  

Foreign Ownership Restrictions

Under our by-laws, U.S. federal law and DOT regulations, we must be controlled by U.S. citizens. In this regard, our President and at least two-thirds of our board of directors and officers must be U.S. citizens and not more than 25% of our outstanding voting common stock may be held by non-U.S. citizens.  We believe that, during the period covered by this Report, we were in compliance with these requirements.

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Performance Graph

The following graph compares the performance of AAWW common stock to the Russell 2000 Index and the Dow Jones Transportation Average for the period beginning December 31, 2014 and ending on December 31, 2019.  The comparison assumes $100 invested in each of our common stock, the Russell 2000 Index and the Dow Jones Transportation Average and reinvestment of all dividends.

Total Return between 12/31/14 and 12/31/19

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ITEM 6. SELECTED FINANCIAL DATA

The selected statements of operations data for the years ended December 31, 2019, 2018 and 2017 and the selected balance sheet data as of December 31, 2019 and 2018 have been derived from our audited Financial Statements included elsewhere in this Report. The selected balance sheet data as of December 31, 2017, 2016 and 2015, and selected statements of operations data for the years ended December 31, 2016 and 2015 have been derived from our audited Financial Statements not included in this Report.

In the following table, all amounts are in thousands, except for per share data.

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with the Financial Statements included in Item 8 of this report.

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 modern 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.

We believe that the following competitive strengths will allow us to capitalize on opportunities that exist in the global airfreight industry:

Market leader with leading-edge technology and differentiated, value-creating solutions

The 747-8F and 777-200LRF aircraft are two of the most efficient long-haul wide-body commercial freighters available and we are currently the only operator offering both of these aircraft under ACMI and CMI agreements.  Our operating model deploys our aircraft to drive maximum utilization and value from our fleet.  The scale of our fleet enables us to have aircraft available globally to respond to our customers’ needs, both on a planned and ad hoc basis.  We believe this provides us with a commercial advantage over our competitors that operate smaller and less flexible fleets.

Our Dry Leasing business is primarily focused on a portfolio of 777-200LRF aircraft, and our fleet of 767-300 freighter aircraft for regional and domestic applications.  These aircraft are Dry Leased to customers on a long-term basis, which further diversifies our business mix and enhances our predictable, long-term revenue and earnings streams.  

Stable base of contractual revenue and reduced operational risk

Our focus on providing long-term contracted aircraft and operating solutions to customers stabilizes our revenues and reduces our operational risk.  ACMI and CMI contracts with customers generally range from two to seven years, although some contracts have shorter or longer durations.  Dry Leasing contracts with customers generally range from five to twelve years.  Under ACMI, CMI and Dry Leasing, our customers assume fuel, demand and price risk resulting in reduced operational risk for AAWW.  ACMI, CMI and Dry Leasing contracts typically provide us with a guaranteed minimum level of revenue and target level of profitability.

Focus on asset optimization

By managing the largest fleet of outsourced freighter aircraft, we achieve significant economies of scale in areas such as aircraft maintenance, crew efficiency, crew training, inventory management and purchasing.

Our mix of aircraft is closely aligned with our customer needs. By providing the broadest array of 747, 777, 767 and 737 aircraft for domestic, regional and international applications, we believe that we are well-suited to meet the current and anticipated requirements of our customers.  

We continually evaluate our fleet to ensure that we offer the most efficient and effective mix of aircraft to meet our customers’ needs.  Our service model is unique in that we offer a portfolio of operating solutions that complement our freighter aircraft businesses.  We believe this allows us to improve the returns we generate from our asset base by allowing us to flexibly redeploy aircraft to meet changing market conditions, ensuring the maximum utilization of our fleet.  Our Charter services complement our ACMI services by allowing us to increase aircraft utilization during open time and to react to changes in demand and Yield in these segments.  We have employees

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situated around the globe who closely monitor demand for commercial charter services in each region, enabling us to redeploy available aircraft quickly.  We also endeavor to manage our portfolio to stagger contract terms, which mitigates our remarketing risks and aircraft down time.  

Long-term strategic customer relationships and unique innovative service offerings

We combine the global scope and scale of our efficient aircraft fleet with high-quality, cost-effective operations and premium customer service to provide unique, fully integrated and reliable solutions for our customers.  We believe this approach results in customers that are motivated to seek long-term relationships with us.  This has historically allowed us to command higher prices than our competitors in several key areas.  These long-term relationships help us to build resilience into our business model.

Our customers have access to our innovative solutions, such as inter-operable crews, flight scheduling, fuel-efficiency planning, and maintenance spare coverage, which, we believe, set us apart from other participants in the outsourced aircraft and aviation operating services market.  Furthermore, we have access to valuable operating rights to restricted markets such as Brazil, Japan and China.  We believe our freighter services allow our customers to effectively expand their capacity and operate dedicated freighter aircraft without simultaneously taking on exposure to fluctuations in the value of owned aircraft and, in the case of our ACMI and CMI contracts, long-term expenses relating to crews and maintenance.  Dedicated freighter aircraft enable schedules to be driven by cargo rather than passenger demand (for those customers that typically handle portions of their cargo operations via belly capacity on passenger aircraft), which we believe allows our customers to drive higher contribution from cargo operations.  

We are focused on providing safe, secure and reliable services.  Atlas, Polar and Southern Air all have successfully completed the International Air Transport Association’s Operational Safety Audit (IOSA), a globally recognized safety and quality standard.

We provide outsourced aircraft and aviation services to some of the world’s premier express delivery providers, e-commerce retailers, airlines and freight forwarders.  We will take advantage of opportunities to maintain and expand our relationships with our existing customers, while seeking new customers and new geographic markets.

Experienced management team

Our management team has extensive operating and leadership experience in the airfreight, airline, aircraft leasing and logistics industries at companies such as United Airlines, US Airways, Lufthansa Cargo, GE Capital Aviation Services, Air Canada, Canadian Airlines, American Airlines, JetBlue Airways, ICF International, ASTAR Air Cargo, DHL, KLM Cargo, Spirit Airlines, Singapore Airlines Cargo and China Cargo Airlines, as well as the United States Army, Navy, Air Force and Federal Air Marshal Service.  In addition, our management team has a diversity of experience from other industries at companies such as Mastercard, PepsiCo, Moody’s, Ralph Lauren, Kate Spade, Avon Products, New York Life Insurance, Hess and Unisys, as well as nationally recognized accounting and law firms.  Our management team is led by John W. Dietrich, who has more than 30 years of experience in all facets of aviation and airline management.  Mr. Dietrich has been with AAWW for over 20 years, including the last 13 years as Executive Vice President and Chief Operating Officer, and General Counsel for 4 years prior to that.

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Business Strategy

Our strategy includes the following:

Focus on securing long-term customer contracts

We will continue to focus on securing long-term contracts with fast-growing customers, including those in express, e-commerce and the fastest-growing regional markets, which provide us with relatively stable revenue streams and margins.  In addition, these agreements limit our direct exposure to fuel and other costs and mitigate the risk of fluctuations in both Yield and demand in the airfreight business, while also improving the overall utilization of our fleet.

Aggressively manage our fleet with a focus on leading-edge aircraft

We continue to actively manage our fleet of leading-edge wide-body freighter aircraft to meet customer demands.  Our 747-8F and 777-200LRF freighter aircraft are primarily utilized in our ACMI business, while our 747-400s are utilized in our ACMI and Charter business.  We aggressively manage our fleet to ensure that we provide our customers with the most efficient aircraft to meet their needs.  

Our Dry Leasing business is primarily focused on a portfolio of modern, efficient 777-200LRF aircraft and our fleet of 767-300 freighter aircraft for regional and domestic applications.  We will continue to explore opportunities to invest in additional aircraft.

Drive significant and ongoing productivity improvements

We continue to enhance our organization through a cost saving and productivity enhancing initiative called “Continuous Improvement.”  We created a separate department to drive the process and to involve all areas of the organization in the effort to reexamine, redesign and improve the way we do business.

Selectively pursue and evaluate future acquisitions and alliances

From time to time, we explore business combinations, joint ventures and alliances with express delivery providers, e-commerce retailers, airlines, freight forwarders and other companies to enhance our competitive position, geographic reach and service portfolio.

Appropriately managing capital allocation and delivering value to shareholders

Our commitment to creating, enhancing and delivering value to our shareholders reflects a disciplined and balanced capital allocation strategy.  Our focus is on maintaining a strong balance sheet, investing in modern efficient assets, and returning capital to shareholders.

Business Developments

ACMI and Charter results for 2019, compared with 2018, were impacted by the global airfreight environment and macroeconomic conditions, including the impact of tariffs, global trade tensions and geopolitical unrest in certain countries in South America. Those conditions, especially during the fourth quarter resulted in lower 747-400 commercial Charter Yields and Utilization.  

During the fourth quarter of 2019, we recorded an impairment charge related to our 747-400 freighter fleet (see Note 5 to our Financial Statements). We continually assess our aircraft requirements and will make adjustments to our capacity as necessary.  Some of these actions may include grounding or disposing of aircraft or engines, which could result in asset impairments or other charges in future periods.

During 2019, demand remained strong and often increased, compared to 2018, for our other freighter aircraft fleet types, which are primarily used to provide ACMI and CMI services for express and e-commerce customers.  

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In addition to the above factors, our results for 2019, compared with 2018, were impacted by labor-related service disruptions (see Note 13 to our Financial Statements).

Our ACMI results for 2019, compared with 2018, were also impacted by increased flying from the following:

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.

In December 2019, a novel strain of coronavirus was reported in China and has since been reported in other countries.  This outbreak has disrupted the global supply chains involving China and Asia, resulting in certain cancellations of cargo flights.  Cancellations of passenger flights by other airlines to and from that region have also impacted our ability to position crewmembers for operating our aircraft.  Although we expect the disruption from the virus to be temporary, 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 but could materially affect our ACMI and Charter segment results for the first quarter and full year of 2020.

In February 2018, we acquired a 777-200 freighter aircraft and Dry Leased it to DHL on a long-term basis, as described above.  We completed the acquisition of a second 777-200 freighter aircraft and placed it into service with DHL in July 2018.  As noted above, during 2019, there were an average of 19.1 aircraft equivalents Dry Leased to Amazon compared to an average of 15.1 aircraft equivalents in 2018.  

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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.  For a discussion of our results of operations for the year ended December 31, 2018 as compared to the year ended December 31, 2017, see Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2018, filed with the Securities and Exchange Commission on February 19, 2019.

Years Ended December 31, 2019 and 2018

Operating Statistics

The following tables compare our Segment Operating Fleet (average aircraft equivalents during the period) and total Block Hours operated:

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Operating Revenue

The following table compares our Operating Revenue (in thousands):

NM represents year-over-year changes that are not meaningful.

ACMI

ACMI revenue increased $55.1 million, or 4.6%, primarily due to increased flying, partially offset by a decrease in Revenue per Block Hour.  The increase in Block Hours was primarily driven by incremental CMI flying for our e-commerce and express customers.  Partially offsetting this increase was a decrease from the two-month redeployment of two 747-8F aircraft to the Charter segment until we received regulatory approval and subsequently placed the aircraft with an ACMI customer.  In addition, Block Hours were negatively impacted by lower utilization by our 747-400 ACMI customers related to the global airfreight environment and macroeconomic conditions.  Revenue per Block Hour decreased primarily due to increased smaller-gauge 767 and 737 CMI flying.  In addition, ACMI revenue was negatively impacted by labor-related service disruptions.

Charter

Charter revenue decreased $7.6 million, or 0.6%, primarily due to a decrease in Revenue per Block Hour, partially offset by an increase in flying.  Revenue per Block Hour decreased primarily due to a decrease in Yields for commercial customers reflecting the global airfreight environment and macroeconomic conditions.  Partially offsetting this decrease were higher Yields (excluding fuel) on passenger flying, primarily driven by an increase in rates for the AMC and the expansion of our flying for sports teams and other VIP charter customers.  The increase in Charter Block Hours was primarily driven by increased demand for passenger flying and the redeployment of 747-400 freighter aircraft from ACMI, partially offset by lower utilization primarily due to the global airfreight environment and political unrest in certain countries in South America.  In addition, Charter revenue was negatively impacted by labor-related service disruptions.    

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Dry Leasing

Dry Leasing revenue increased $32.3 million, or 19.2%, primarily due to $22.3 million of revenue from maintenance payments related to the scheduled return of a 777-200 freighter aircraft and the placement of incremental aircraft.  The additional aircraft included the placement of 767-300 converted freighter aircraft throughout 2018, as well as one 777-200 freighter aircraft in February 2018 and a second 777-200 freighter aircraft in July 2018.

Operating Expenses

The following table compares our Operating Expenses (in thousands):

Salaries, wages and benefits increased $63.7 million, or 11.9%, primarily due to increased flying, higher crew costs, including enhanced wages and work rules resulting from our interim agreement with the Southern Air pilots (see Note 13 to our Financial Statements), fleet growth initiatives and leadership transition costs.  These increases were partially offset by a ratification bonus in 2018 related to the interim agreement with the Southern Air pilots.  In addition, crew costs were negatively impacted by labor-related service disruptions.

Aircraft fuel increased $16.3 million, or 3.5%, due to an increase in consumption related to increased flying, partially offset by a decrease in 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 2019 and 2018 were:

Maintenance, materials and repairs increased by $22.4 million, or 6.2%, primarily reflecting $23.0 million of increased Line Maintenance expense due to increased flying and additional repairs performed, and $5.6 million of increased Non-heavy Maintenance expense, partially offset by $6.2 million of decreased Heavy Maintenance expense.  The higher Line Maintenance primarily reflected increases of $16.7 million for 767 aircraft and $4.7 million for 747-400 aircraft.  Heavy Maintenance expense on 747-8F aircraft increased $8.0 million primarily due to an increase in the number of D Checks, partially offset by a decrease in the number of C Checks.  Heavy Maintenance expense on 747-400 aircraft decreased $16.1 million primarily due to a decrease in the number of engine overhauls and D Checks, partially offset by an increase in the number of C Checks and additional repairs performed.  Heavy airframe maintenance checks and engine overhauls impacting Maintenance, materials and repairs for 2019 and 2018 were:

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Depreciation and amortization increased $33.8 million, or 15.5%, primarily due to additional aircraft that began operating in 2018, an increase in the amortization of deferred maintenance costs related to 747-8F engine overhauls (see Note 2 to our Financial Statements) and an increase in the scrapping of rotable parts.

Travel increased $22.7 million, or 13.6%, primarily due to increased flying and higher costs incurred as a result of labor-related service disruptions.

Aircraft rent decreased $6.8 million, or 4.2%, primarily due to a write-down of 747-400 freighter aircraft operating lease right-of-use assets during the fourth quarter of 2019 (see Note 5 to our Financial Statements) and a reduction in the number of spare engines leased in 2019, partially offset by additional operating leases for 747-400 freighter aircraft that began flying during the second half of 2018.

Navigation fees, landing fees and other rent decreased $14.1 million, or 8.9%, primarily due to a decrease in purchased capacity, which is a component of other rent, partially offset by increased flying.

Passenger and ground handling services increased $11.7 million, or 9.9%, primarily due to increased passenger flying and higher costs incurred as a result of labor-related service disruptions.

Loss on disposal of aircraft in 2019 primarily represents a loss on the trade in of a GEnx engine as part of an exchange transaction.

Special charge in 2019 primarily represents a $580.3 million impairment charge related to the write-down of the 747-400 freighter fleet and a $58.1 million impairment charge related to assets sold and held for sale including certain aircraft in our Dry Leasing portfolio, spare CF6-80 engines and 737-400 passenger aircraft for training purposes.  Special charge in 2018 represents a $9.4 million impairment loss on engines held for sale.  See Note 5 to our Financial Statements for additional discussion about the Special charge.  We may sell additional flight equipment, which could result in additional charges in future periods.  

Transaction-related expenses in 2019 primarily relate to professional fees for a customer transaction with warrants (see Note 7 to our Financial Statements).  Transaction-related expenses in 2018 were for the integration of Southern Air, which primarily included professional fees and integration costs.

Other increased $20.0 million, or 10.2%, primarily due to start-up and other costs to meet fleet growth initiatives, as well as higher passenger taxes and commission expense on increased revenue from the AMC.

Non-operating (Income) Expenses

The following table compares our Non-operating (Income) Expenses (in thousands):

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Unrealized gain on financial instruments represents the change in fair value of a customer warrant liability (see Note 7 to our Financial Statements) primarily due to changes in our common stock price.

Other (income) expense, net increased $17.0 million, or 159.6%, primarily due to a $27.6 million refund in 2019 of aircraft rent paid in previous years compared to a refund of $12.4 million in 2018.

Income taxes.  Our effective income tax rates were a benefit of 38.0% for 2019 and an expense of 12.5% for 2018.  The effective income tax benefit rate for 2019 differed from tax at the U.S. statutory rate primarily due to a tax benefit related to the favorable completion of the IRS’s examination of our 2015 income tax return, and to a lesser extent, a tax benefit from nontaxable changes in the fair value of a customer warrant liability (see Note 7 to our Financial Statements).  The effective income tax expense rate for 2018 differed from the U.S. statutory rate primarily due to nondeductible and nontaxable changes in the fair value of a customer warrant liability (see Note 7 to our Financial Statements) and, to a lesser extent, an income tax benefit from the remeasurement of our deferred income tax liability for Singapore (See Note 10 to our Financial Statements).

Segments

We use an economic performance metric called Direct Contribution, which shows the profitability of each segment after allocation of direct operating and ownership costs.  Direct Contribution includes Income (loss) from continuing operations before income taxes and excludes the following: Special charges, Transaction-related expenses, nonrecurring items, Losses (gains) on the disposal of aircraft, Losses on early extinguishment of debt, Unrealized (gains) losses on financial instruments, Gains on investments and Unallocated income and expenses, net.  We operate our service offerings through the following reportable segments: ACMI, Charter and Dry Leasing.  The following table compares the Direct Contribution for our reportable segments (see Note 12 to our Financial Statements for the reconciliation to Operating income) (in thousands):

ACMI Segment

ACMI Direct Contribution decreased $17.2 million, or 7.3%, primarily due to the global airfreight environment and macroeconomic conditions, higher crew costs, including enhanced wages and work rules resulting from our interim agreement with the Southern Air pilots (see Note 13 to our Financial Statements), and the two-month redeployment of two 747-8F aircraft to the Charter segment.  In addition, ACMI Direct Contribution was impacted by labor-related service disruptions and start-up costs to meet customer growth initiatives.  Partially offsetting these items was an increase in contribution from additional flying and a decrease in aircraft rent.

Charter Segment

Charter Direct Contribution decreased $62.3 million, or 29.4%, primarily due to a decrease in commercial cargo Yields related to the global airfreight environment and macroeconomic conditions. In addition, Charter Direct Contribution was negatively impacted by labor-related service disruptions.  Partially offsetting these decreases were an increase in passenger flying, earnings from two 747-8F aircraft during a two-month redeployment from the ACMI segment and a decrease in aircraft rent.

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Dry Leasing Segment

Dry Leasing Direct Contribution increased $21.5 million, or 43.9%, primarily due to revenue from maintenance payments related to the scheduled return of a 777-200 freighter aircraft and the placement of additional aircraft.

Unallocated expenses and (income), net

Unallocated expenses and (income), net increased $38.9 million, or 13.0%, primarily due to fleet growth initiatives, increased amortization of a customer incentive asset and leadership transition costs, partially offset by a higher refund of aircraft rent 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 income from continuing operations, net of taxes, Adjusted Diluted EPS from continuing operations, net of taxes 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 income from continuing operations, net of taxes 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.  

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The following is a reconciliation of Income (loss) from continuing operations, net of taxes and Diluted EPS from continuing operations, net of taxes to the corresponding non-GAAP financial measures (in thousands, except per share data):