ATLAS AIR WORLDWIDE HOLDINGS INC - Quarter Report: 2019 September (Form 10-Q)

For the Nine Months Ended

September 30, 2019

Cash paid for amounts included in the measurement of lease liabilities:

Operating cash flows for operating leases

Operating cash flows for finance lease

Financing cash flows for finance lease

cover

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2019

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

For the transition period from to

Commission File Number: 001-16545

Atlas Air Worldwide Holdings, Inc.

(Exact name of registrant as specified in its charter)

Delaware		13-4146982
(State or other jurisdiction of incorporation)		(IRS Employer Identification No.)

2000 Westchester Avenue, Purchase, New York		10577
(Address of principal executive offices)		(Zip Code)

(914) 701-8000

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading

Symbol(s)

Name of each exchange on which registered

Common Stock, $0.01 Par Value

AAWW

The NASDAQ Global Select Market

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 such files).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 ☒

As of October 25, 2019, there were 25,870,876 shares of the registrant’s Common Stock outstanding.

TABLE OF CONTENTS

		Page

Part I. FINANCIAL INFORMATION

Item 1.	Financial Statements	3

	Consolidated Balance Sheets as of September 30, 2019 and December 31, 2018 (unaudited)	3

	Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2019 and 2018 (unaudited)	4

	Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 2019 and 2018 (unaudited)	5

	Consolidated Statements of Cash Flows for the Nine Months ended September 30, 2019 and 2018 (unaudited)	6

	Consolidated Statements of Stockholders’ Equity as of and for the Three and Nine Months ended September 30, 2019 and 2018 (unaudited)	7

	Notes to Unaudited Consolidated Financial Statements	8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	22

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	36

Item 4.	Controls and Procedures	36

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	37

Item 1A.	Risk Factors	37

Item 6.	Exhibits	37

	Exhibit Index	38

	Signatures	39

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Atlas Air Worldwide Holdings, Inc.

Consolidated Balance Sheets

(in thousands, except share data)

(Unaudited)

	September 30, 2019			December 31, 2018
Assets
Current Assets
Cash and cash equivalents	$	70,327		$	221,501
Short-term investments		2,129			15,624
Restricted cash		10,376			11,240
Accounts receivable, net of allowance of $1,521 and $1,563, respectively		264,752			269,320
Prepaid expenses and other current assets		82,505			112,146
Total current assets		430,089			629,831
Property and Equipment
Flight equipment		5,377,985			5,213,734
Ground equipment		87,282			75,939
Less: accumulated depreciation		(1,020,278	)		(860,354	)
Flight equipment modifications in progress		88,632			32,916
Property and equipment, net		4,533,621			4,462,235
Other Assets
Operating lease right-of-use assets		520,063			-
Deferred costs and other assets		403,871			345,037
Intangible assets, net and goodwill		81,590			97,689
Total Assets	$	5,969,234		$	5,534,792

Liabilities and Equity
Current Liabilities
Accounts payable	$	90,850		$	87,229
Accrued liabilities		522,694			465,669
Current portion of long-term debt and finance lease		341,807			264,835
Current portion of long-term operating leases		141,362			-
Total current liabilities		1,096,713			817,733
Other Liabilities
Long-term debt and finance lease		2,031,642			2,205,005
Long-term operating leases		427,459			-
Deferred taxes		186,599			256,970
Financial instruments and other liabilities		33,529			187,120
Total other liabilities		2,679,229			2,649,095
Commitments and contingencies
Equity
Stockholders’ Equity
Preferred stock, $1 par value; 10,000,000 shares authorized; no shares issued		-			-
Common stock, $0.01 par value; 100,000,000 shares authorized; 31,043,847 and 30,582,571 shares issued, 25,867,423 and 25,590,293 shares outstanding (net of treasury stock), as of September 30, 2019 and December 31, 2018, respectively		310			306
Additional paid-in-capital		752,790			736,035
Treasury stock, at cost; 5,176,424 and 4,992,278 shares, respectively		(213,837	)		(204,501	)
Accumulated other comprehensive loss		(3,059	)		(3,832	)
Retained earnings		1,657,088			1,539,956
Total stockholders’ equity		2,193,292			2,067,964
Total Liabilities and Equity	$	5,969,234		$	5,534,792

See accompanying Notes to Unaudited Consolidated Financial Statements

Atlas Air Worldwide Holdings, Inc.

Consolidated Statements of Operations

(in thousands, except per share data)

(Unaudited)

	For the Three Months Ended						For the Nine Months Ended
	September 30, 2019			September 30, 2018			September 30, 2019			September 30, 2018

Operating Revenue	$	648,539		$	656,607		$	1,992,140		$	1,912,766

Operating Expenses
Salaries, wages and benefits		145,987			138,345			432,911			392,603
Aircraft fuel		123,132			119,604			351,611			345,613
Maintenance, materials and repairs		88,240			88,136			305,331			261,251
Depreciation and amortization		62,499			55,417			190,669			155,881
Travel		49,110			41,605			140,513			123,810
Aircraft rent		40,048			39,973			122,271			119,778
Navigation fees, landing fees and other rent		32,270			43,258			110,468			116,553
Passenger and ground handling services		34,453			28,716			97,138			86,980
Special charge, net		18,861			-			22,130			9,374
Transaction-related expenses		324			765			3,585			1,275
Other		54,494			46,318			160,548			143,663
Total Operating Expenses		649,418			602,137			1,937,175			1,756,781

Operating (Loss) Income		(879	)		54,470			54,965			155,985

Non-operating Expenses (Income)
Interest income		(653	)		(1,592	)		(3,975	)		(4,704	)
Interest expense		30,117			31,115			90,515			87,639
Capitalized interest		(853	)		(1,120	)		(1,943	)		(4,335	)
Loss on early extinguishment of debt		559			-			804			-
Unrealized (gain) loss on financial instruments		(83,175	)		(46,080	)		(78,900	)		11,691
Other (income) expense, net		1,434			975			(596	)		(10,777	)
Total Non-operating Expenses (Income)		(52,571	)		(16,702	)		5,905			79,514

Income from continuing operations before income taxes		51,692			71,172			49,060			76,471
Income tax (benefit) expense		(8,282	)		34			(68,072	)		16,828

Income from continuing operations, net of taxes		59,974			71,138			117,132			59,643

Loss from discontinued operations, net of taxes		-			(7	)		-			(50	)

Net Income	$	59,974		$	71,131		$	117,132		$	59,593

Earnings per share from continuing operations:
Basic	$	2.32		$	2.78		$	4.54		$	2.34
Diluted	$	2.32		$	0.84		$	1.34		$	2.27
Loss per share from discontinued operations:
Basic	$	-		$	(0.00	)	$	-		$	(0.00	)
Diluted	$	-		$	(0.00	)	$	-		$	(0.00	)
Earnings per share:
Basic	$	2.32		$	2.78		$	4.54		$	2.33
Diluted	$	2.32		$	0.84		$	1.34		$	2.27
Weighted average shares:
Basic		25,854			25,575			25,814			25,526
Diluted		25,854			28,747			26,909			26,274

See accompanying Notes to Unaudited Consolidated Financial Statements

Atlas Air Worldwide Holdings, Inc.

Consolidated Statements of Comprehensive Income (Loss)

(in thousands)

(Unaudited)

	For the Three Months Ended						For the Nine Months Ended
	September 30, 2019			September 30, 2018			September 30, 2019			September 30, 2018
Net Income	$	59,974		$	71,131		$	117,132		$	59,593
Other comprehensive income:
Reclassification to interest expense		331			370			1,012			1,120
Income tax expense		(78	)		(88	)		(239	)		(265	)
Other comprehensive income		253			282			773			855
Comprehensive Income	$	60,227		$	71,413		$	117,905		$	60,448

See accompanying Notes to Unaudited Consolidated Financial Statements

Atlas Air Worldwide Holdings, Inc.

Consolidated Statements of Cash Flows

(in thousands)

(Unaudited)

	For the Nine Months Ended
	September 30, 2019			September 30, 2018

Operating Activities:
Income from continuing operations, net of taxes	$	117,132		$	59,643
Less: Loss from discontinued operations, net of taxes		-			(50	)
Net Income		117,132			59,593

Adjustments to reconcile Net Income to net cash provided by operating activities:
Depreciation and amortization		241,284			189,682
Accretion of debt securities discount		(237	)		(719	)
Provision for allowance for doubtful accounts		(83	)		40
Loss on early extinguishment of debt		804			-
Special charge, net of cash payments		22,130			9,374
Unrealized loss (gain) on financial instruments		(78,900	)		11,691
Deferred taxes		(68,552	)		16,453
Stock-based compensation		16,553			15,376
Changes in:
Accounts receivable		1,397			(59,058	)
Prepaid expenses, current assets and other assets		(69,254	)		(34,483	)
Accounts payable and accrued liabilities		11,016			56,174
Net cash provided by operating activities		193,290			264,123
Investing Activities:
Capital expenditures		(107,594	)		(84,819	)
Payments for flight equipment and modifications		(153,706	)		(543,342	)
Proceeds from insurance		38,133			-
Proceeds from investments		14,367			9,461
Net cash used for investing activities		(208,800	)		(618,700	)
Financing Activities:
Proceeds from debt issuance		93,723			400,471
Payment of debt issuance costs		(1,316	)		(6,632	)
Payments of debt and finance lease obligations		(273,142	)		(180,722	)
Proceeds from revolving credit facility		50,000			135,000
Payment of revolving credit facility		-			(60,000	)
Customer maintenance reserves and deposits received		11,717			11,520
Customer maintenance reserves paid		(8,174	)		-
Purchase of treasury stock		(9,336	)		(10,769	)
Net cash provided by (used for) financing activities		(136,528	)		288,868
Net decrease in cash, cash equivalents and restricted cash		(152,038	)		(65,709	)
Cash, cash equivalents and restricted cash at the beginning of period		232,741			291,864
Cash, cash equivalents and restricted cash at the end of period	$	80,703		$	226,155

Noncash Investing and Financing Activities:

Acquisition of flight equipment included in Accounts payable and accrued liabilities	$	55,610		$	42,826
Acquisition of property and equipment acquired under operating leases	$	21,969		$	-
Acquisition of flight equipment under capital lease	$	10,825		$	-

See accompanying Notes to Unaudited Consolidated Financial Statements

Atlas Air Worldwide Holdings, Inc.

Consolidated Statements of Stockholders’ Equity

(in thousands, except share data)

(Unaudited)

	As of and for the Three Months Ended September 30, 2019
						Additional								Total
	Common		Treasury			Paid-In			Accumulated Other			Retained		Stockholders'
	Stock		Stock			Capital			Comprehensive Loss			Earnings		Equity
Balance at June 30, 2019	$	310	$	(213,728	)	$	746,725		$	(3,312	)	$	1,597,114	$	2,127,109
Net Income		-		-			-			-			59,974		59,974
Other comprehensive income		-		-			-			253			-		253
Stock-based compensation		-		-			6,527			-			-		6,527
Customer warrant		-		-			(462	)		-			-		(462	)
Purchase of 4,064 shares of treasury stock		-		(109	)		-			-			-		(109	)
Issuance of 17,347 shares of restricted stock		-		-			-			-			-		-
Balance at September 30, 2019	$	310	$	(213,837	)	$	752,790		$	(3,059	)	$	1,657,088	$	2,193,292

	As of and for the Three Months Ended September 30, 2018
						Additional							Total
	Common		Treasury			Paid-In		Accumulated Other			Retained		Stockholders'
	Stock		Stock			Capital		Comprehensive Loss			Earnings		Equity
Balance at June 30, 2018	$	306	$	(204,051	)	$	726,357	$	(4,390	)	$	1,257,851	$	1,776,073
Net Income		-		-			-		-			71,131		71,131
Other comprehensive income		-		-			-		282			-		282
Stock-based compensation		-		-			4,749		-			-		4,749
Purchase of 7,082 shares of treasury stock		-		(450	)		-		-			-		(450	)
Balance at September 30, 2018	$	306	$	(204,501	)	$	731,106	$	(4,108	)	$	1,328,982	$	1,851,785

	As of and for the Nine Months Ended September 30, 2019
						Additional								Total
	Common		Treasury			Paid-In			Accumulated Other			Retained		Stockholders'
	Stock		Stock			Capital			Comprehensive Loss			Earnings		Equity
Balance at December 31, 2018	$	306	$	(204,501	)	$	736,035		$	(3,832	)	$	1,539,956	$	2,067,964
Net Income		-		-			-			-			117,132		117,132
Other comprehensive income		-		-			-			773			-		773
Stock-based compensation		-		-			16,553			-			-		16,553
Customer warrant		-		-			206			-			-		206
Purchase of 184,146 shares of treasury stock		-		(9,336	)		-			-			-		(9,336	)
Issuance of 461,276 shares of restricted stock		4		-			(4	)		-			-		-
Balance at September 30, 2019	$	310	$	(213,837	)	$	752,790		$	(3,059	)	$	1,657,088	$	2,193,292

	As of and for the Nine Months Ended September 30, 2018
						Additional									Total
	Common		Treasury			Paid-In			Accumulated Other			Retained			Stockholders'
	Stock		Stock			Capital			Comprehensive Loss			Earnings			Equity
Balance at December 31, 2017	$	301	$	(193,732	)	$	715,735		$	(3,993	)	$	1,271,545		$	1,789,856
Net Income		-		-			-			-			59,593			59,593
Other comprehensive income		-		-			-			855			-			855
Cumulative effect of change in accounting principle		-		-			-			-			(3,126	)		(3,126	)
Stock-based compensation		-		-			15,376			-			-			15,376
Purchase of 180,084 shares of treasury stock		-		(10,769	)		-			-			-			(10,769	)
Issuance of 477,923 shares of restricted stock		5		-			(5	)		-			-			-
Reclassification of tax effect on other comprehensive loss		-		-			-			(970	)		970			-
Balance at September 30, 2018	$	306	$	(204,501	)	$	731,106		$	(4,108	)	$	1,328,982		$	1,851,785

See accompanying Notes to Unaudited Consolidated Financial Statements

Atlas Air Worldwide Holdings, Inc.

Notes to Unaudited Consolidated Financial Statements

September 30, 2019

1. Basis of Presentation

Our consolidated financial statements include the accounts of the holding company, Atlas Air Worldwide Holdings, Inc. (“AAWW”), and its consolidated subsidiaries. AAWW is the parent company of Atlas Air, Inc. (“Atlas”) and Southern Air Holdings, Inc. (“Southern Air”). AAWW is also the parent company of several subsidiaries related to our dry leasing services (collectively referred to as “Titan”). AAWW has a 51% equity interest and 75% voting interest in Polar Air Cargo Worldwide, Inc. (“Polar”). We record our share of Polar’s results under the equity method of accounting.

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

We provide outsourced aircraft and aviation operating services throughout the world, serving Africa, Asia, Australia, Europe, the Middle East, North America and South America through: (i) contractual service arrangements, including those through which we provide aircraft to customers and value-added services, including crew, maintenance and insurance (“ACMI”), as well as those through which we provide crew, maintenance and insurance, but not the aircraft (“CMI”); (ii) cargo and passenger charter services (“Charter”); and (iii) dry leasing aircraft and engines (“Dry Leasing” or “Dry Lease”).

The accompanying unaudited consolidated financial statements and related notes (the “Financial Statements”) have been prepared in accordance with the U.S. Securities and Exchange Commission (the “SEC”) requirements for quarterly reports on Form 10-Q, and consequently exclude certain disclosures normally included in audited consolidated financial statements prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). Intercompany accounts and transactions have been eliminated. The Financial Statements should be read in conjunction with the audited consolidated financial statements and the notes included in the AAWW Annual Report on Form 10-K for the year ended December 31, 2018, which includes additional disclosures and a summary of our significant accounting policies. The December 31, 2018 balance sheet data was derived from that Annual Report. In our opinion, the Financial Statements contain all adjustments, consisting of normal recurring items, necessary to fairly state the financial position of AAWW and its consolidated subsidiaries as of September 30, 2019, the results of operations for the three and nine months ended September 30, 2019 and 2018, comprehensive income (loss) for the three and nine months ended September 30, 2019 and 2018, cash flows for the nine months ended September 30, 2019 and 2018, and shareholders’ equity as of and for the three and nine months ended September 30, 2019 and 2018.

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

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

2. Summary of Significant Accounting Policies

Warrant Liability

Common stock warrants classified as a liability are marked-to-market at the end of each reporting period with changes in fair value recorded in Unrealized (gain) loss on financial instruments. We utilize a Monte Carlo simulation approach to estimate the fair value of the warrant liability, which requires inputs such as our common stock price, the warrant strike price, estimated common stock price volatility and risk-free interest rate, among others. Our earnings are affected by changes in our common stock price due to the impact those changes have on the fair value of our warrant liability (see Note 4 to our Financial Statements).

Heavy Maintenance

Except for engines used on our 747-8F aircraft, we account for heavy maintenance costs for airframes and engines used in our ACMI and Charter segments using the direct expense method. Under this method, heavy maintenance costs are charged to expense upon induction, based on our best estimate of the costs.

We account for heavy maintenance costs for airframes and engines used in our Dry Leasing segment and engines used on our 747-8F aircraft using the deferral method. Under this method, we defer the expense recognition of scheduled heavy maintenance events, which are amortized over the estimated period until the next scheduled heavy maintenance event is required. Amortization of deferred maintenance expense included in Depreciation and amortization was $5.5 million and $3.3 million for the three months ended September 30, 2019 and 2018, respectively and was $15.2 million and $8.6 million for the nine months ended September 30, 2019 and 2018, respectively.

Deferred maintenance included within Deferred costs and other assets is as follows:

	Deferred
	Maintenance
Balance as of December 31, 2018	$	103,647
Deferred maintenance costs		106,299
Disposals		(1,551	)
Amortization of deferred maintenance		(15,188	)
Balance as of September 30, 2019	$	193,207

Recent Accounting Pronouncements Adopted in 2019

In February 2016, the Financial Accounting Standards Board (“FASB”) amended its accounting guidance for leases. Subsequently, the FASB issued several clarifications and updates. The guidance requires a lessee to recognize assets and liabilities on the balance sheet arising from leases with terms greater than 12 months. While lessor accounting guidance is relatively unchanged, certain amendments were made to conform with changes made to lessee accounting and the amended revenue recognition guidance. The new guidance continues to classify leases as either finance or operating, with classification affecting the presentation and pattern of expense and income recognition, in the statement of operations. It also requires additional quantitative and qualitative disclosures about leasing arrangements. We adopted the new guidance on January 1, 2019 using the modified retrospective approach, which was applied beginning on the adoption date. Comparative information has not been restated and continues to be reported under the accounting guidance in effect for those periods. The adoption did not have a material effect on our consolidated statements of operations or cash flows. We recognized operating lease right-of-use assets, net of pre-existing deferred rent and operating lease intangibles, and operating lease liabilities on our consolidated balance sheets of approximately $596.9 million and $650.0 million, respectively, on the adoption date (see Note 8 to our Financial Statements).

3. Related Parties

Polar

AAWW has a 51% equity interest and 75% voting interest in Polar. DHL Network Operations (USA), Inc. (“DHL”), a subsidiary of Deutsche Post AG, holds a 49% equity interest and a 25% voting interest in Polar. Polar is a variable interest entity that we do not consolidate because we are not the primary beneficiary as the risks associated with the direct costs of operation are with DHL. Under a 20-year blocked space agreement, which began in 2008, Polar provides air cargo capacity to DHL. Atlas has several agreements with Polar to provide ACMI, CMI, Dry Leasing, administrative, sales and ground support services to one another. We do not have any financial exposure to fund debt obligations or operating losses of Polar, except for any liquidated damages that we could incur under these agreements.

The following table summarizes our transactions with Polar:

	For the Three Months Ended				For the Nine Months Ended
Revenue and Expenses:	September 30, 2019		September 30, 2018		September 30, 2019		September 30, 2018
Revenue from Polar	$	84,957	$	99,671	$	283,313	$	305,401
Ground handling and airport fees to Polar		568		841		1,631		2,219

Accounts receivable/payable as of:	September 30, 2019		December 31, 2018
Receivables from Polar	$	1,145	$	16,349
Payables to Polar		7,277		2,527

Aggregate Carrying Value of Polar Investment as of:	September 30, 2019		December 31, 2018
Aggregate Carrying Value of Polar Investment	$	4,870	$	4,870

In addition to the amounts in the table above, Atlas recognized revenue of $23.8 million and $34.3 million for the three months ended September 30, 2019 and 2018, respectively, and $70.2 million and $70.9 million for the nine months ended September 30, 2019 and 2018, respectively, from flying on behalf of Polar.

GATS

We hold a 50% interest in GATS GP (BVI) Ltd. (“GATS”), a joint venture with an unrelated third party. As of September 30, 2019 and December 31, 2018, our investment in GATS was $20.7 million and $22.3 million, respectively. We had Accounts payable to GATS of $1.1 million as of September 30, 2019 and $0.5 million as of December 31, 2018.

4. Amazon

In May 2016, we entered into certain agreements with Amazon.com, Inc. and its subsidiary, Amazon Fulfillment Services, Inc., (collectively “Amazon”), which involves, among other things, CMI operation of up to 20 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). Between August 2016 and November 2018, we placed all 20 767-300 freighter aircraft into service for Amazon. In February 2019, the number of 767-300 freighters in CMI and Dry Lease service for Amazon was reduced to 19 with the loss of an aircraft. In September 2019, the number of 767-300 freighters in CMI service for Amazon was reduced to 17 with the early termination of CMI services for two aircraft.

In conjunction with the agreements entered into in May 2016, we granted Amazon a warrant providing the right to acquire up to 20% of our outstanding common shares, after giving effect to the issuance of shares pursuant to the warrants, at an exercise price of $37.50 per share (“Warrant A”). As of December 31, 2018, this warrant to purchase 7.5 million shares had vested in full. Warrant A is exercisable in accordance with its terms through 2021. As of September 30, 2019, no portion of Warrant A has been exercised.

The agreements entered into in May 2016 also provided incentives for future growth of the relationship as Amazon may increase its business with us. In that regard, we granted Amazon a warrant to acquire up to an additional 10% of our outstanding common shares, after giving effect to the issuance of shares pursuant to the warrants, for an exercise price of $37.50 per share (“Warrant B”). This warrant to purchase 3.75 million shares will vest in increments of 37,500 shares each time Amazon has paid $4.2 million of revenue to us, up to a total of $420.0 million, for incremental business beyond the original 20 767-300 freighters. As of September 30, 2019, 37,500 shares of Warrant B have vested. Upon vesting, Warrant B becomes exercisable in accordance with its terms through May 2023. As of September 30, 2019, no portion of Warrant B has been exercised.

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). As of September 30, 2019, the first four of five 737-800 freighter aircraft entered CMI service and the fifth aircraft is expected to enter service during the fourth quarter of 2019. Amazon may, in its sole discretion, place up to 15 additional 737-800 freighter aircraft into service with us by May 31, 2021.

In connection with the amended agreements, we granted Amazon a warrant to acquire up to an additional 9.9% of our outstanding common shares, after giving effect to the issuance of shares pursuant to the warrants, for an exercise price of $52.90 per share (“Warrant C”). When combined with Warrant A and Warrant B, this would allow Amazon to acquire up to a total of 39.9% (after the issuance) of our outstanding common shares and Amazon would be entitled to vote the shares it owns up to 14.9% of our outstanding common shares, in its discretion. Amazon would be required to vote any shares it owns in excess of 14.9% of our outstanding common shares in accordance with the recommendation of our board of directors. After Warrant B has vested in full, this warrant to purchase 6.6 million shares would vest in increments of 45,428 shares each time Amazon has paid $6.9 million of revenue to us, up to a total of $1.0 billion, for incremental business beyond Warrant A and Warrant B. As of September 30, 2019, no portion of Warrant C has vested. Upon vesting, Warrant C would become exercisable in accordance with its terms through March 2026.

At the time of vesting, the fair value of the vested portion of the warrants issued to Amazon is recorded as a warrant liability within Financial instruments and other liabilities (the “Amazon Warrant”). The initial fair value of the vested portion of Warrant A was recognized as a customer incentive asset within Deferred costs and other assets, net and is amortized as a reduction of Operating Revenue in proportion to the amount of revenue recognized over the terms of the Dry Leases and CMI agreements. Determining the amount of amortization related to the CMI agreements requires significant judgment to estimate the total number of Block Hours expected over the terms of those agreements.

When it becomes probable that an increment of either Warrant B or C will vest and the related revenue begins to be recognized, the fair value of such portion is recorded as Additional paid-in-capital. The initial fair value of such increment is also recognized as a customer incentive asset within Deferred costs and other assets, net and is amortized as a reduction of Operating Revenue in proportion to the amount of related revenue recognized. At the time of vesting, the amount recorded in Additional paid-in-capital would be reclassified to the Amazon Warrant liability.

We amortized $12.8 million and $4.1 million of the customer incentive asset for the three months ended September 30, 2019 and 2018, respectively. We amortized $26.0 million and $10.0 million of the customer incentive asset for the nine months ended September 30, 2019 and 2018, respectively. Amortization of the customer incentive asset for the three and nine months ended September 30, 2019 included $6.4 million of accelerated amortization related to a 767-300 aircraft that is no longer in CMI service.

Customer incentive asset included within Deferred costs and other assets is as follows:

Balance at December 31, 2018	$	184,720
Initial value for estimate of vested or expected to vest warrants		413
Amortization of customer incentive asset		(26,018	)
Balance at September 30, 2019	$	159,115

The Amazon Warrant liability is marked-to-market at the end of each reporting period with changes in fair value recorded in Unrealized (gain) loss on financial instruments. We recognized net unrealized gains of $83.2 million and $78.9 million on the Amazon Warrant during the three and nine months ended September 30, 2019, respectively. We recognized a net unrealized gain of $46.1 million and a net unrealized loss of $11.7 million on the Amazon Warrant during the three and nine months ended September 30, 2018, respectively. The fair value of the Amazon Warrant liability was $20.3 million as of September 30, 2019 and $99.0 million as of December 31, 2018.

5. Supplemental Balance Sheet and Cash Flow Information

Accounts Receivable

Accounts receivable, net of allowance related to customer contracts, excluding Dry Leasing contracts, was $216.3 million as of September 30, 2019 and $227.1 million as of December 31, 2018.

Accrued Liabilities

Accrued liabilities consisted of the following as of:

	September 30, 2019		December 31, 2018
Maintenance	$	186,946	$	133,337
Customer maintenance reserves		107,790		104,454
Salaries, wages and benefits		52,517		82,809
Aircraft fuel		35,636		32,641
Deferred revenue		41,808		26,584
Other		97,997		85,844
Accrued liabilities	$	522,694	$	465,669

Revenue Contract Liability

Deferred revenue for customer contracts, excluding Dry Leasing contracts, represents amounts collected from, or invoiced to, customers in advance of revenue recognition. The balance of Deferred revenue will increase or decrease based on the timing of invoices and recognition of revenue.

Significant changes in our Revenue contract liability balances during the nine months ended September 30, 2019 were as follows:

Balance as of December 31, 2018	$	13,007
Revenue recognized		(105,359	)
Amounts collected or invoiced		122,474
Balance as of September 30, 2019	$	30,122

Supplemental Cash Flow Information

The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the consolidated balance sheets that sum to the total shown in the consolidated statements of cash flows:

	September 30, 2019		December 31, 2018
Cash and cash equivalents	$	70,327	$	221,501
Restricted cash		10,376		11,240
Total Cash, cash equivalents and restricted cash shown in Consolidated Statements of Cash Flows	$	80,703	$	232,741

6. Special Charge

During the three months ended September 30, 2019, we recognized a Special charge, net primarily related to $19.6 million of impairment losses for four CF6-80 engines being disposed of and the permanent parking of two 737-400 passenger aircraft used for training purposes. During the nine months ended September 30, 2018, we recognized $9.4 million of impairment losses for five CF6-80 engines traded in as part of our engine acquisition program.

7. Debt

Term Loans

In August 2019, we refinanced a higher-rate secured term loan with a new $74.0 million lower-rate secured five-year term loan with a final payment of $32.0 million due in August 2024 (the “Second 2019 Term Loan”) for spare GEnx engines. The Second 2019 Term Loan contains customary covenants, events of default and accrues interest at a fixed rate of 2.98%, with principal and interest payable quarterly. In connection with the refinancing, we recognized a $0.6 million loss on early extinguishment of debt.

In March 2019, we borrowed $19.7 million under an unsecured five-year term loan due in March 2024 (the “First 2019 Term Loan”) for GEnx engine performance upgrade kits and overhauls. The First 2019 Term Loan contains customary covenants, events of default and accrues interest at a fixed rate of 2.73%, with principal and interest payable quarterly.

In March 2019, we received $41.1 million in proceeds from insurance related to the loss of a 767-300 freighter aircraft and used $20.7 million of the proceeds to repay two term loans related to the aircraft. In connection with the repayment, we recognized a $0.2 million loss on early of extinguishment of debt. During the nine months ended September 30, 2019, we also recognized a net insurance recovery of $3.6 million resulting from the excess of insurance proceeds over the carrying amount of the aircraft and other related costs within Other income, net.

Convertible Notes

In May 2017, we issued $289.0 million aggregate principal amount of 1.875% convertible senior notes that mature on June 1, 2024 (the “2017 Convertible Notes”) in an underwritten public offering. In June 2015, we issued $224.5 million aggregate principal amount of 2.25% convertible senior notes that mature on June 1, 2022 (the “2015 Convertible Notes”) in an underwritten public offering. The 2017 Convertible Notes and the 2015 Convertible Notes (collectively, the “Convertible Notes”) are senior unsecured obligations and accrue interest payable semiannually on June 1 and December 1 of each year. The Convertible Notes are due on their respective maturity dates, unless earlier converted or repurchased pursuant to their respective terms.

The Convertible Notes consisted of the following as of September 30, 2019:

	2017 Convertible Notes			2015 Convertible Notes
Remaining life in months		56			32
Liability component:
Gross proceeds	$	289,000		$	224,500
Less: debt discount, net of amortization		(49,883	)		(23,013	)
Less: debt issuance cost, net of amortization		(3,896	)		(2,151	)
Net carrying amount	$	235,221		$	199,336

Equity component ⁽¹⁾	$	70,140		$	52,903

(1)

Included in Additional paid-in capital on the consolidated balance sheet as of September 30, 2019.

The following table presents the amount of interest expense recognized related to the Convertible Notes:

	For the Three Months Ended				For the Nine Months Ended
	September 30, 2019		September 30, 2018		September 30, 2019		September 30, 2018
Contractual interest coupon	$	2,618	$	2,618	$	7,853	$	7,853
Amortization of debt discount		4,253		3,994		12,560		11,798
Amortization of debt issuance costs		379		397		1,126		1,119
Total interest expense recognized	$	7,250	$	7,009	$	21,539	$	20,770

Revolving Credit Facility

In December 2018, we amended and extended our previous three-year $150.0 million secured revolving credit facility into a new four-year $200.0 million secured revolving credit facility (the “Revolver”). As of September 30, 2019, there was $50.0 million outstanding and we had $136.8 million of unused availability under the Revolver, based on the collateral borrowing base. In October 2019, we drew an additional $25.0 million under the Revolver.

8. Leases and Guarantees

Adoption

We adopted the new lease accounting guidance using the modified retrospective method and applied it to all leases based on the contract terms in effect as of January 1, 2019. For existing contracts, we carried forward our historical assessments of (1) whether contracts are or contain leases, (2) lease classification and (3) initial direct costs.

Although our performance obligations under ACMI contracts include the provision of aircraft to customers, we do not separate any potential aircraft lease components from the nonlease components of these contracts as the provision of the crew, maintenance and insurance components are, in the aggregate, the predominant components. Such contracts are accounted for in their entirety under the amended guidance for revenue recognition.

Lessee

As of September 30, 2019, we lease 21 aircraft, of which 19 are operating leases. Lease expirations for our leased aircraft range from March 2020 to June 2032. In addition, we lease a variety of office space, airport station locations, warehouse space, vehicles and equipment, with lease expirations ranging from November 2019 to May 2027. We also incur variable rental costs for aircraft, engines, ground equipment and storage space based on usage of the underlying equipment or property. For leases with terms greater than 12 months, including renewal options when appropriate, we record the related right-of-use asset and lease liability as the present value of fixed lease payments over the lease term. Since our leases do not typically provide a readily determinable discount rate, we use our incremental borrowing rate to discount lease payments to present value.

The following table presents the lease-related assets and liabilities recorded on the consolidated balance sheet:

	Classification on the Consolidated Balance Sheets	September 30, 2019
Assets
Operating lease right-of-use assets	Operating lease right-of-use assets	$	520,063
Finance lease assets	Property and equipment, net		41,245
Less: Accumulated amortization on finance lease assets	Property and equipment, net		(5,144	)
Total lease assets		$	556,164

Liabilities
Current
Operating lease liabilities	Current portion of long-term operating leases	$	141,362
Finance lease liabilities	Current portion of long-term debt and finance lease		11,399
Noncurrent
Operating lease liabilities	Long-term operating leases		427,459
Finance lease liabilities	Long-term debt and finance lease		29,816
Total lease liabilities		$	610,036


Weighted Average Remaining Lease Term in years
Operating Leases	4.15
Finance Leases	9.68
Weighted Average Discount Rate
Operating Leases	4.53	%
Finance Leases	15.73	%

The following table presents information related to lease costs for finance and operating leases:

	For the Three Months Ended		For the Nine Months Ended
	September 30, 2019		September 30, 2019
Fixed operating lease costs ⁽¹⁾	$	39,976	$	120,056
Variable operating lease costs ⁽¹⁾		4,083		13,381
Finance lease costs:
Amortization of leased assets		636		1,633
Interest on lease liabilities		1,380		4,052
Total lease cost	$	46,075	$	139,122

(1)

Expenses are classified within Aircraft rent and Navigation fees, landing fees and other rent on the consolidated statement of operations. Short-term lease contracts are not material.

The table below presents supplemental cash flow information related to leases as follows:

As of September 30, 2019, maturities of lease liabilities for the periods indicated were as follows:


	Operating		Finance
	Leases		Lease		Total
2019	$	43,103	$	2,007	$	45,110
2020		160,068		16,522		176,590
2021		167,623		6,000		173,623
2022		118,998		6,000		124,998
2023		66,502		6,000		72,502
Thereafter		67,155		50,500		117,655
Total minimum rental payments		623,449		87,029		710,478
Less: imputed interest		54,628		45,814		100,442
Total	$	568,821	$	41,215	$	610,036

As of September 30, 2019, the Company’s obligations for operating leases that have not yet commenced are immaterial. In October 2019, we entered into a long-term lease for a building with an expected operating lease liability of approximately $19.7 million that is expected to commence during the second half of 2020.

As of December 31, 2018, our minimum annual rental commitments for the periods indicated under operating leases with initial or remaining terms of more than one year were as follows:

	Operating
	Leases
2019	$	166,516
2020		159,383
2021		166,056
2022		115,591
2023		61,755
Thereafter		53,430
Total	$	722,731

Lessor

Our performance obligations under Dry Lease contracts involve the provision of aircraft and engines to customers for compensation that is typically based on a fixed monthly amount and all are accounted for as operating leases. We record Dry Lease

rental income on a straight-line basis over the term of the operating lease. Dry Lease rental income subject to adjustment based on an index is recognized on a straight-line basis over each adjustment period. Our Dry Leases do not contain purchase options, renewal options or residual guarantees. In addition, our Dry Leases typically do not contain early termination options. If they do, there are typically substantial termination penalties. Rentals received but unearned under the lease agreements are recorded in deferred revenue and included in Accrued liabilities until earned.

To manage our residual value risk, we require lessees to perform maintenance on the Dry Leased asset and they may also be required to make maintenance payments to us during or at the end of the lease term. When an aircraft is returned at the end of lease, if we choose not to re-lease or sell the returned aircraft, we typically have the ability to operate the aircraft in our ACMI and Charter segments.

Customer maintenance reserves are amounts received during the lease term that are subject to reimbursement to the lessee upon the completion of qualifying maintenance work on the specific Dry Leased asset and are included in Accrued liabilities. We defer revenue recognition for customer maintenance reserves until the end of the lease, when we are able to finalize the amount, if any, to be reimbursed to the lessee.

End of lease maintenance payments are amounts received upon return of the Dry Leased asset based on the utilization of the asset during the lease term. Such payments made to us are recognized as revenue at the end of the lease.

As of September 30, 2019, our contractual amount of minimum receipts, excluding taxes, for the periods indicated under Dry Leases reflecting the terms that were in effect were as follows:

2019	$	41,752
2020		166,985
2021		145,288
2022		137,604
2023		104,139
Thereafter		246,466
Total minimum lease receipts	$	842,234

As of December 31, 2018, our contractual amount of minimum receipts, excluding taxes, for the periods indicated under Dry Leases reflecting the terms that were in effect were as follows:

	Dry Lease
	Income
2019	$	180,366
2020		169,202
2021		148,413
2022		140,876
2023		107,248
Thereafter		257,248
Total minimum lease receipts	$	1,003,353

The net book value of flight equipment on Dry Lease to customers was $1,636.6 million as of September 30, 2019 and $1,717.5 million as of December 31, 2018. The accumulated depreciation for flight equipment on Dry Lease to customers was $288.2 million as of September 30, 2019 and $232.4 million as of December 31, 2018. See Note 11 to our Financial Statements for disclosure of our Dry Leasing segment revenue.

Guarantees and Indemnifications

In the ordinary course of business, we enter into numerous leasing and financing arrangements for real estate, equipment, aircraft and engines that have various guarantees included in the contracts. These guarantees are primarily in the form of indemnities. In both leasing and financing transactions, we typically indemnify the lessors and any financing parties against tort liabilities that arise out of the use, occupancy, manufacture, design, operation or maintenance of the leased premises or financed aircraft, regardless of whether these liabilities relate to the negligence of the indemnified parties. Currently, we believe that any future payments required under many of these guarantees or indemnities would be immaterial, as most tort liabilities and related indemnities are covered by insurance (subject to deductibles). However, payments under certain tax indemnities related to certain of our financing arrangements, if applicable, could be material, and would not be covered by insurance, although we believe that these payments are not probable. Certain leased premises, such as maintenance and storage facilities, typically include indemnities of such parties for any

environmental liability that may arise out of or relate to the use of the leased premises. We also provide standard indemnification agreements to officers and directors in the ordinary course of business.

Financings and Guarantees

Our financing arrangements typically contain a withholding tax provision that requires us to pay additional amounts to the applicable lender or other financing party, if withholding taxes are imposed on such lender or other financing party as a result of a change in the applicable tax law. These increased costs and withholding tax provisions continue for the entire term of the applicable transaction and there is no limitation on the maximum additional amount we could be required to pay under such provisions. Any failure to pay amounts due under such provisions generally would trigger an event of default and, in a secured financing transaction, would entitle the lender to foreclose upon the collateral to realize the amount due.

9. Income Taxes

The income tax benefit for the three months ended September 30, 2019 differed from tax at the U.S. statutory rate primarily due to $18.2 million of tax benefit from nontaxable changes in the fair value of the customer warrant liability (see Note 4 to our Financial Statements). The income tax benefit for the nine months ended September 30, 2019 differed from tax at the U.S. statutory rate primarily due to $59.8 million of tax benefit related to the favorable completion of the IRS’s examination of our 2015 income tax return, and to a lesser extent, $17.3 million of tax benefit from nontaxable changes in the fair value of the customer warrant liability.

The income tax expense for the three and nine months ended September 30, 2018 differed from tax at the U.S. statutory rate due to $8.7 million of tax benefit from the remeasurement of our deferred income tax liability for Singapore. In addition, the income tax expense for the three and nine months ended September 30, 2018 differed from tax at the U.S. statutory rate due to changes in the fair value of the customer warrant liability (see Note 4 to our Financial Statements). This change resulted in $6.1 million of tax benefit for the three months ended September 30, 2018, and $11.8 million of tax expense for the nine months ended September 30, 2018.

10. Financial Instruments

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

Level 1

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

Level 2

Other inputs that are observable directly or indirectly, such as quoted prices in active markets for similar assets or liabilities, or inactive quoted prices for identical assets or liabilities in inactive markets;

Level 3

Unobservable inputs reflecting assumptions about the inputs used in pricing the asset or liability.

We endeavor to utilize the best available information to measure fair value.

The carrying value of Cash and cash equivalents, Short-term investments and Restricted cash is based on cost, which approximates fair value.

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

Term loans and notes consist of term loans, notes guaranteed by the Export-Import Bank of the United States (“Ex-Im Bank”), the Revolver and EETCs. The fair values of these debt instruments are based on a discounted cash flow analysis using current borrowing rates for instruments with similar terms.

The fair value of our Convertible Notes is based on unadjusted quoted market prices for these securities.

The fair value of a customer warrant liability and certain long-term performance-based restricted shares are based on a Monte Carlo simulation which requires inputs such as our common stock price, the warrant strike price, estimated common stock price volatility, and risk-free interest rate, among others.

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

	September 30, 2019
	Carrying Value		Fair Value		Level 1		Level 2		Level 3
Assets
Cash and cash equivalents	$	70,327	$	70,327	$	70,327	$	-	$	-
Short-term investments		2,129		2,129		-		-		2,129
Restricted cash		10,376		10,376		10,376		-		-
	$	82,832	$	82,832	$	80,703	$	-	$	2,129

Liabilities
Term loans and notes	$	1,888,893	$	2,016,272	$	-	$	-	$	2,016,272
Revolver		50,000		51,208		-		-		51,208
Convertible notes (1)		434,555		444,235		444,235		-		-
Customer warrant		20,306		20,306		-		20,306		-
	$	2,393,754	$	2,532,021	$	444,235	$	20,306	$	2,067,480

	December 31, 2018
	Carrying Value		Fair Value		Level 1		Level 2		Level 3
Assets
Cash and cash equivalents	$	221,501	$	221,501	$	221,501	$	-	$	-
Short-term investments		15,624		15,624		-		-		15,624
Restricted cash		11,240		11,240		11,240		-		-
Long-term investments and accrued interest		635		1,138		-		-		1,138
	$	249,000	$	249,503	$	232,741	$	-	$	16,762

Liabilities
Term loans and notes	$	2,048,972	$	1,976,373	$	-	$	-	$	1,976,373
Convertible notes (1)		420,868		490,070		490,070		-		-
Customer warrant		99,000		99,000		-		99,000		-
	$	2,568,840	$	2,565,443	$	490,070	$	99,000	$	1,976,373

(1) Carrying value is net of debt discounts and debt issuance costs (see Note 7 to our Financial Statements).

Gross unrealized gains on our long-term investments and accrued interest were $0.5 million at December 31, 2018.

11. Segment Reporting

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. We do not aggregate our operating segments and, therefore, our operating segments are our reportable segments.

We use an economic performance metric (“Direct Contribution”) that shows the profitability of each segment after allocation of direct operating and ownership costs. Direct Contribution represents Income (loss) from continuing operations before income taxes excluding the following: Special charge, Transaction-related expenses, nonrecurring items, Losses (gains) on the disposal of aircraft, Losses on early extinguishment of debt, Unrealized (gain) loss on financial instruments, and Unallocated expenses and (income), net. Direct operating and ownership costs include crew costs, maintenance, fuel, ground operations, sales costs, aircraft rent, interest expense on the portion of debt used for financing aircraft, interest income on debt securities and aircraft depreciation. Unallocated income and expenses, net include corporate overhead, nonaircraft depreciation, noncash expenses and income, interest expense on the portion of debt used for general corporate purposes, interest income on nondebt securities, capitalized interest, foreign exchange gains and losses, other revenue and other non-operating costs, including certain contract start-up costs.

The following table sets forth Operating Revenue and Direct Contribution for our reportable segments reconciled to Operating Income (Loss) and Income from continuing operations before income taxes:

	For the Three Months Ended						For the Nine Months Ended
	September 30, 2019			September 30, 2018			September 30, 2019			September 30, 2018
Operating Revenue:
ACMI	$	289,024		$	288,602		$	902,869		$	832,777
Charter		324,046			322,750			944,839			954,725
Dry Leasing		43,847			44,487			157,328			120,837
Customer incentive asset amortization		(12,796	)		(4,124	)		(26,018	)		(10,010	)
Other		4,418			4,892			13,122			14,437
Total Operating Revenue	$	648,539		$	656,607		$	1,992,140		$	1,912,766

Direct Contribution:
ACMI	$	33,401		$	51,672		$	114,048		$	145,251
Charter		36,339			44,370			79,554			129,738
Dry Leasing		12,028			12,645			58,646			36,195
Total Direct Contribution for Reportable Segments		81,768			108,687			252,248			311,184

Unallocated expenses and (income), net		(93,507	)		(82,830	)		(255,569	)		(212,373	)
Loss on early extinguishment of debt		(559	)		-			(804	)		-
Unrealized gain (loss) on financial instruments		83,175			46,080			78,900			(11,691	)
Special charge, net		(18,861	)		-			(22,130	)		(9,374	)
Transaction-related expenses		(324	)		(765	)		(3,585	)		(1,275	)
Income from continuing operations before income taxes		51,692			71,172			49,060			76,471

Add back (subtract):
Interest income		(653	)		(1,592	)		(3,975	)		(4,704	)
Interest expense		30,117			31,115			90,515			87,639
Capitalized interest		(853	)		(1,120	)		(1,943	)		(4,335	)
Loss on early extinguishment of debt		559			-			804			-
Unrealized (gain) loss on financial instruments		(83,175	)		(46,080	)		(78,900	)		11,691
Other (income) expense, net		1,434			975			(596	)		(10,777	)
Operating (Loss) Income	$	(879	)	$	54,470		$	54,965		$	155,985

The following table disaggregates our Charter segment revenue by customer and service type:

	For the Three Months Ended
	September 30, 2019							September 30, 2018
		Cargo		Passenger		Total			Cargo		Passenger		Total
Commercial customers		$	127,558	$	17,075	$	144,633		$	158,129	$	11,651	$	169,780
AMC			85,382		94,031		179,413			85,267		67,703		152,970
Total Charter Revenue		$	212,940	$	111,106	$	324,046		$	243,396	$	79,354	$	322,750

	For the Nine Months Ended
	September 30, 2019							September 30, 2018
		Cargo		Passenger		Total			Cargo		Passenger		Total
Commercial customers		$	409,640	$	27,736	$	437,376		$	440,881	$	14,241	$	455,122
AMC			234,845		272,618		507,463			264,142		235,461		499,603
Total Charter Revenue		$	644,485	$	300,354	$	944,839		$	705,023	$	249,702	$	954,725

Given the nature of our business and international flying, geographic information for revenue, long-lived assets and total assets is not presented because it is impracticable to do so.

We are exposed to a concentration of revenue from the U.S. Military Air Mobility Command (“AMC”), Polar and DHL (see above and Note 3 to our Financial Statements for further discussion regarding Polar). No other customer accounted for more than 10.0% of our Total Operating Revenue. Revenue from DHL was $91.4 million for the three months ended September 30, 2019 and $90.9 million for the three months ended September 30, 2018. Revenue from DHL was $267.8 million for the nine months ended September 30, 2019 and $242.8 million for the nine months ended September 30, 2018. We have not experienced any credit issues with these customers.

12. Labor and Legal Proceedings

Labor

Pilots of Atlas and Southern Air, and flight dispatchers of Atlas and Polar are represented by the International Brotherhood of Teamsters (the “IBT”). 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.

After we completed the acquisition of Southern Air in April 2016, we informed the IBT of our intention to pursue (and we have been pursuing) a complete operational merger of Atlas and Southern Air. The Atlas and Southern Air CBAs both have a defined and streamlined process for negotiating a joint CBA (“JCBA”) when a merger occurs, as in the case with the Atlas and Southern Air merger. Pursuant to the merger provisions in both CBAs, joint negotiations for a single CBA for Atlas and Southern Air should commence promptly. Further, once an integrated seniority list (“ISL”) of Atlas and Southern Air pilots is presented to the Company by the union, it triggers a nine month agreed-upon timeframe to negotiate a new JCBA with any unresolved issues promptly submitted to binding arbitration.

The IBT has refused to follow the merger provisions in the Atlas and Southern Air CBAs. This has resulted in significant litigation, arbitrations and delay. As more fully stated below, the Company has prevailed in all of the merger related proceedings.

After the merger process began, the IBT also filed an application for mediation with the National Mediation Board (“NMB”) on behalf of the Atlas pilots, and subsequently the IBT filed a similar application on behalf of Southern Air pilots. We have opposed both mediation applications as they are not in accordance with the merger provisions in the parties’ existing CBAs. The NMB conducted a premediation investigation on the IBT’s Atlas application in June 2016, which has remained pending (along with the IBT’s Southern Air application) since 2016.

Due to the IBT’s refusal to adhere to the merger provisions of the respective CBAs, in February 2017, the Company filed a lawsuit against the IBT to compel arbitration on the issue of whether the merger provisions in Atlas and Southern Air's CBAs apply to the bargaining process. On March 13, 2018, the Southern District Court of New York (“NY District Court”) ruled in the Company’s favor and ordered arbitration of this issue. The IBT appealed the NY District Court’s decision, which is currently pending.

The Company and the IBT conducted the Atlas and Southern Air arbitrations for this issue in October 2018. The Company prevailed in both the Atlas and Southern Air management grievance arbitrations against the IBT, with decisions rendered on June 12, 2019 and August 26, 2019, respectively. Both arbitrators ruled that the IBT violated the CBAs by refusing to follow merger provisions in the parties’ respective CBAs, which require formulation of a JCBA covering the combined pilot group. The arbitrators each ordered the IBT to promptly comply with the CBAs by submitting an ISL to the Company within 45 days of each arbitration decision, respectively. The IBT failed to comply with both deadlines for submitting the ISL, which passed on July 27, 2019 for Southern Air, and on October 10, 2019 for Atlas. As a result, on October 25, 2019, the Company filed an action in the U.S. District Court for the District of Columbia (“DC District Court”) to enforce the Atlas and Southern Air arbitration decisions.

In connection with its opposition to the merger provisions, the IBT commenced lawsuits in the DC District Court seeking to vacate both arbitration awards. The Company has filed motions to dismiss both lawsuits and these actions are currently pending.

Notwithstanding these pending proceedings, the Company and the IBT continue to meet to move the process forward and bargain in good faith for a new JCBA. Substantive progress has been made with tentative agreements for a number of the articles in a new JCBA. Despite repeated requests from the Company, the IBT has yet to provide the Company with a comprehensive economic proposal.

In late September 2019, the IBT notified the Company that Atlas pilots represented by the IBT were departing from IBT Local 1224 and forming a new local union, IBT Local 2750 to represent them. The Company has been informed the Southern Air pilots will continue to be represented by IBT Local 1224. The Company continues to work with both Local 2750 and Local 1224 leadership groups.

In August 2018, the Southern Air pilots ratified an agreement between Southern Air and the IBT for interim enhancements to the Southern Air pilots’ CBA. The agreement enhances the wages and work rules of the Southern Air pilots and provides similar terms and conditions of employment to those provided to Atlas pilots in the Atlas CBA. The Southern Air pilot agreement became effective in September 2018.

In late November 2017, the DC District Court granted the Company’s request to issue a preliminary injunction to stop an illegal work slowdown and require the IBT to meet its obligations under the Railway Labor Act. Specifically, the DC District Court ordered the IBT to stop “authorizing, encouraging, permitting, calling, engaging in, or continuing” any illegal pilot slowdown activities, which were intended to gain leverage in pilot contract negotiations with the Company. In addition, the Court ordered the IBT to take affirmative action to prevent and to refrain from continuing any form of interference with the Company’s operations or any other concerted refusal to perform normal pilot operations consistent with its status quo obligations under the Railway Labor Act. In December 2017, the IBT appealed the District Court’s decision to the U.S. Court of Appeals for the District of Columbia Circuit (“Court of Appeals”). On July 5, 2019, the Court of Appeals, in a unanimous three judge panel, affirmed the DC District Court’s ruling and denied the IBT’s appeal. Therefore, the preliminary injunction remains in full force and effect.

We are subject to risks of work interruption or stoppage as permitted by the Railway Labor Act and may incur additional administrative expenses associated with union representation of our employees.

Matters Related to Alleged Pricing Practices

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 European Commission in March 2017, finding EU competition law violations by Defendants, among others, but not Old Polar or Polar. We are unable to reasonably predict the outcome of the litigation. If the Company, Old Polar or Polar were to incur an unfavorable outcome, such outcome may have a material adverse impact on our business, financial condition, results of operations or cash flows. We are unable to reasonably estimate a range of possible loss for this matter at this time.

Brazilian Customs Claim

Old Polar was cited for two alleged customs violations in Sao Paulo, Brazil, relating to shipments of goods dating back to 1999 and 2000. Each claim asserts that goods listed on the flight manifest of two separate Old Polar scheduled service flights were not on board the aircraft upon arrival and therefore were improperly brought into Brazil. The two claims, which also seek unpaid customs duties, taxes and penalties from the date of the alleged infraction, are approximately $4.9 million in aggregate based on September 30, 2019 exchange rates.

In both cases, we believe that the amounts claimed are substantially overstated due to a calculation error when considering the type and amount of goods allegedly missing, among other things. In the pending claim for one of the cases, we have received an administrative decision dismissing the claim in its entirety, which remains subject to a mandatory appeal by the Brazil customs authorities. In the other case, we received an administrative decision in favor of the Brazil customs authorities and we are in the process of appealing this decision to the Brazil courts. As required to defend such claims, we have made deposits pending resolution of these matters. The balance was $4.0 million as of September 30, 2019 and $4.1 million as of December 31, 2018, and is included in Deferred costs and other assets.

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

Other

In addition to the matters described in this note, we have certain other contingencies incident to the ordinary course of business. Unless disclosed otherwise, management does not expect that the ultimate disposition of such other contingencies or matters will materially affect our financial condition, results of operations or cash flows.

13. Earnings Per Share

Basic earnings per share (“EPS”) represents income (loss) divided by the weighted average number of common shares outstanding during the measurement period. Diluted EPS represents income (loss) divided by the weighted average number of common shares outstanding during the measurement period while also giving effect to all potentially dilutive common shares that were outstanding during the period using the treasury stock method. The calculations of basic and diluted EPS were as follows:

	For the Three Months Ended					For the Nine Months Ended
Numerator:	September 30, 2019		September 30, 2018			September 30, 2019			September 30, 2018
Income from continuing operations, net of taxes	$	59,974	$	71,138		$	117,132		$	59,643
Less: Unrealized gain on financial instruments, net of tax		-		(46,897	)		(81,139	)		-
Diluted income from continuing operations, net of tax	$	59,974	$	24,241		$	35,993		$	59,643

Denominator:
Basic EPS weighted average shares outstanding		25,854		25,575			25,814			25,526
Effect of dilutive warrant		-		2,471			1,010			-
Effect of dilutive convertible notes		-		269			-			240
Effect of dilutive restricted stock		-		432			85			508
Diluted EPS weighted average shares outstanding		25,854		28,747			26,909			26,274

Earnings per share from continuing operations:
Basic	$	2.32	$	2.78		$	4.54		$	2.34
Diluted	$	2.32	$	0.84		$	1.34		$	2.27
Loss per share from discontinued operations:
Basic	$	-	$	(0.00	)	$	-		$	(0.00	)
Diluted	$	-	$	(0.00	)	$	-		$	(0.00	)
Earnings per share:
Basic	$	2.32	$	2.78		$	4.54		$	2.33
Diluted	$	2.32	$	0.84		$	1.34		$	2.27

Antidilutive shares related to warrants issued in connection with our Convertible Notes and warrants issued to a customer that were out of the money and excluded from the calculation of diluted EPS were 15.3 million and 7.8 million for the three and nine months ended September 30, 2019, respectively and 3.0 million for the three and nine months ended September 30, 2018. Diluted shares reflect the potential dilution that could occur from restricted shares using the treasury stock method. The calculation of EPS does not include restricted share units and customer warrants in which performance or market conditions were not satisfied of 10.6 million for the three and nine months ended September 30, 2019 and 4.7 million for the three and nine months ended September 30, 2018.

14. Accumulated Other Comprehensive Income (Loss)

The following table summarizes the components of Accumulated other comprehensive income (loss):

	Interest Rate			Foreign Currency
	Derivatives			Translation		Total
Balance as of December 31, 2017	$	(4,002	)	$	9	$	(3,993	)
Reclassification to interest expense		1,120			-		1,120
Tax effect		(265	)		-		(265	)
Reclassification of taxes		(970	)		-		(970	)
Balance as of September 30, 2018	$	(4,117	)	$	9	$	(4,108	)

Balance as of December 31, 2018	$	(3,841	)	$	9	$	(3,832	)
Reclassification to interest expense		1,012			-		1,012
Tax effect		(239	)		-		(239	)
Balance as of September 30, 2019	$	(3,068	)	$	9	$	(3,059	)

Interest Rate Derivatives

As of September 30, 2019, there was $4.0 million of unamortized net realized loss before taxes remaining in Accumulated other comprehensive income (loss) related to terminated forward-starting interest rate swaps, which had been designated as cash flow hedges to effectively fix the interest rates on two 747-8F financings in 2011 and three 777-200LRF financings in 2014. The net loss is amortized and reclassified into Interest expense over the remaining life of the related debt. Net realized losses reclassified into earnings were $0.3 million and $0.4 million for the three months ended September 30, 2019 and 2018, respectively. Net realized losses reclassified into earnings were $1.0 million and $1.1 million for the nine months ended September 30, 2019 and 2018, respectively. Net realized losses expected to be reclassified into earnings within the next 12 months are $1.2 million as of September 30, 2019.

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

The following discussion and analysis should be read in conjunction with our Financial Statements appearing in this report and our audited consolidated financial statements and related notes included in our 2018 Annual Report on Form 10-K.

Background

Certain Terms - 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.

Block Hour		The time interval between when an aircraft departs the terminal until it arrives at the destination terminal.

C Check		“Heavy” airframe maintenance checks, which are more intensive in scope than Line Maintenance and are generally performed between 18 and 24 months depending on aircraft type.

D Check		“Heavy” airframe maintenance checks, which are the most extensive in scope and are generally performed every six and eight years depending on aircraft type.

Heavy Maintenance		Scheduled maintenance activities that are extensive in scope and are primarily based on time or usage intervals, which include, but are not limited to, C Checks, D Checks and engine overhauls. In addition, unscheduled engine repairs involving the removal of the engine from the aircraft are considered to be Heavy Maintenance.

Line Maintenance		Maintenance events occurring during normal day-to-day operations.

Non-heavy Maintenance		Discrete maintenance activities for the overhaul and repair of specific aircraft components, including landing gear, auxiliary power units and engine thrust reversers.

Yield		The average amount a customer pays to fly one tonne of cargo one mile.

Business Overview

We are a leading global provider of outsourced aircraft and aviation operating services. We operate the world’s largest fleet of 747 freighters and provide customers a broad array of 747, 777, 767, 757 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.

Our primary service offerings include the following:

•

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

•

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

•

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

•

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

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

•

Delivering superior service quality to our valued customers;

•

Focusing on securing attractive long-term customer contracts;

•

Managing our fleet with a focus on modern, efficient aircraft;

•

Driving significant ongoing productivity improvements;

•

Selectively pursuing and evaluating future acquisitions and alliances; while

•

Appropriately managing capital allocation and delivering value to shareholders.

See “Business Overview” and “Business Strategy” in our 2018 Annual Report on Form 10-K for additional information.

Business Developments

ACMI and Charter results for the first three quarters of 2019, compared with 2018, were negatively impacted by tariffs and global trade tensions, and labor-related service disruptions (see Note 12 to our Financial Statements).

As a result of the impact of tariffs and global trade tensions on the global airfreight environment, we continually assess our aircraft requirements and will make adjustments to our capacity as necessary. Some of these actions may involve grounding or disposing of aircraft or engines, which could result in asset impairments or other charges in future periods.

Our ACMI results for the first three quarters of 2019, compared with 2018, were positively impacted by increased flying from the following:

•

Between August 2016 and November 2018, we began CMI flying Boeing 767-300 freighter aircraft for Amazon that are Dry Leased from Titan. During the first three quarters of 2019, there were an average of 19.1 aircraft equivalents operating for Amazon compared to an average of 13.8 aircraft equivalents operating in 2018.

•

In September 2018, we began flying a second 747-400 freighter for Asiana Cargo on transpacific routes.

•

In May 2018, we began flying a second 747-400 freighter for DHL Global Forwarding on routes between the United States, Europe, and Asia.

•

In February 2018, we signed long-term CMI and Dry Lease contracts with DHL for two 777-200 freighter aircraft. The first of the two aircraft was previously in CMI service with us and the second aircraft began CMI and Dry Lease service in July of 2018.

•

In July 2018, we began ACMI flying a 747-400 freighter for Industria de Diseño Textil, S.A. (“Inditex”) on routes between the United States, Europe, and Asia.

•

In October 2018, we began flying a 747-400 freighter for SF Express on transpacific routes.

•

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

•

In March 2019, we entered into agreements with Amazon, which include CMI operation of five 737-800 freighter aircraft in 2019 and up to 15 additional aircraft by May 2021. Between May and September 2019, the first four aircraft entered service and the fifth aircraft is expected to enter service during the fourth quarter of 2019.

•

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

•

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

In 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 described above, during the first three quarters of 2019, there were an average of 19.3 aircraft equivalents Dry Leased to Amazon compared to an average of 13.8 aircraft equivalents in 2018.

Results of Operations

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

Three Months Ended September 30, 2019 and 2018

Operating Statistics

The following tables compare our Segment Operating Fleet (average aircraft equivalents during the period) and total Block Hours operated for the three months ended September 30:

Segment Operating Fleet*	2019			2018			Inc/(Dec)
ACMI
747-8F Cargo		7.7			8.9			(1.2	)
747-400 Cargo		18.3			16.8			1.5
747-400 Dreamlifter		3.5			3.0			0.5
777-200 Cargo		8.0			5.9			2.1
767-300 Cargo		25.0			23.3			1.7
767-200 Cargo		9.0			9.0			-
767-200 Passenger		1.0			1.0			-
737-800 Cargo		3.7			-			3.7
737-400 Cargo		5.0			5.0			-
Total		81.2			72.9			8.3

Charter
747-8F Cargo		2.2			1.1			1.1
747-400 Cargo		15.7			13.0			2.7
747-400 Passenger		4.1			3.5			0.6
767-300 Passenger		4.8			4.0			0.8
Total		26.8			21.6			5.2

Dry Leasing
777-200 Cargo		7.0			7.9			(0.9	)
767-300 Cargo		21.0			17.7			3.3
757-200 Cargo		1.0			1.0			-
737-300 Cargo		1.0			1.0			-
737-800 Passenger		1.0			1.0			-
Total		31.0			28.6			2.4

Less: Aircraft Dry Leased to CMI customers		(22.7	)		(19.6	)		(3.1	)
Total Operating Average Aircraft Equivalents		116.3			103.5			12.8

ACMI average fleet excludes spare aircraft provided by CMI customers and Dry Leasing average fleet excludes aircraft awaiting placement.

Block Hours		2019				2018				Inc/(Dec)				% Change
Total Block Hours**			79,310				73,672				5,638				7.7	%

Includes ACMI, Charter and other Block Hours.

Operating Revenue

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

	2019			2018			Inc/(Dec)			% Change
Operating Revenue
ACMI	$	289,024		$	288,602		$	422			0.1	%
Charter		324,046			322,750			1,296			0.4	%
Dry Leasing		43,847			44,487			(640	)		(1.4	)%
Customer incentive asset amortization		(12,796	)		(4,124	)		8,672		NM
Other		4,418			4,892			(474	)		(9.7	)%
Total Operating Revenue	$	648,539		$	656,607

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

ACMI

	2019		2018		Inc/(Dec)			% Change
ACMI Block Hours		60,337		56,571		3,766			6.7	%
ACMI Revenue Per Block Hour	$	4,790	$	5,102	$	(312	)		(6.1	)%

ACMI revenue increased slightly, 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 customers. Partially offsetting this increase were decreases in ACMI flying by our customers related to the impact of tariffs and global trade tensions, and 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. 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

	2019		2018		Inc/(Dec)			% Change
Charter Block Hours:
Cargo		12,717		12,690		27			0.2	%
Passenger		5,425		3,952		1,473			37.3	%
Total		18,142		16,642		1,500			9.0	%

Charter Revenue Per Block Hour:
Cargo	$	16,745	$	19,180	$	(2,435	)		(12.7	)%
Passenger	$	20,480	$	20,079	$	401			2.0	%
Charter	$	17,862	$	19,394	$	(1,532	)		(7.9	)%

Charter revenue increased $1.3 million, or 0.4%, primarily due to increased flying, partially offset by a decrease in Revenue per Block Hour. The increase in Charter Block Hours was primarily driven by increased passenger demand from the AMC and the two-month redeployment of two 747-8F aircraft from the ACMI segment, partially offset by lower cargo demand from commercial customers. Revenue per Block Hour decreased primarily due to lower commercial cargo Yields (excluding fuel), partially offset by an increase in rates for the AMC. The lower commercial cargo Yields and demand reflected the impact of tariffs and global trade tensions. In addition, Charter revenue was negatively impacted by labor-related service disruptions.

Dry Leasing

Dry Leasing revenue decreased slightly, primarily due to the scheduled return of a 777-200 freighter aircraft that is awaiting placement with a customer, partially offset by the placement of 767-300 converted freighter aircraft during the second half of 2018.

Operating Expenses

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

	2019		2018		Inc/(Dec)			% Change
Operating Expenses
Salaries, wages and benefits	$	145,987	$	138,345	$	7,642			5.5	%
Aircraft fuel		123,132		119,604		3,528			2.9	%
Maintenance, materials and repairs		88,240		88,136		104			0.1	%
Depreciation and amortization		62,499		55,417		7,082			12.8	%
Travel		49,110		41,605		7,505			18.0	%
Aircraft rent		40,048		39,973		75			0.2	%
Navigation fees, landing fees and other rent		32,270		43,258		(10,988	)		(25.4	)%
Passenger and ground handling services		34,453		28,716		5,737			20.0	%
Special charge, net		18,861		-		18,861		NM
Transaction-related expenses		324		765		(441	)	NM
Other		54,494		46,318		8,176			17.7	%
Total Operating Expenses	$	649,418	$	602,137

Salaries, wages and benefits increased $7.6 million, or 5.5%, primarily due to increased flying and higher crew costs, including enhanced wages and work rules resulting from our interim agreement with the Southern Air pilots (see Note 12 to our Financial Statements) and fleet growth initiatives. 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 $3.5 million, or 2.9%, primarily due to an increase in consumption related to increased Charter flying, partially offset by a decrease in the average fuel cost per gallon. We do not incur fuel expense in our ACMI or Dry Leasing businesses as the cost of fuel is borne by the customer. Average fuel cost per gallon and fuel consumption for the three months ended September 30 were:

	2019		2018		Inc/(Dec)			% Change
Average fuel cost per gallon	$	2.27	$	2.43	$	(0.16	)		(6.6	)%
Fuel gallons consumed (000s)		54,296		49,206		5,090			10.3	%

Maintenance, materials and repairs was relatively unchanged. Heavy Maintenance expense on 747-8F aircraft increased $5.9 million primarily due to an increase in the number of D Checks. Heavy Maintenance expense on 747-400 aircraft decreased $5.1 million primarily due to a decrease in the number of engine overhauls, partially offset by an increase in the number of C Checks. Heavy airframe maintenance checks and engine overhauls impacting Maintenance, materials and repairs for the three months ended September 30 were:

Heavy Maintenance Events	2019		2018		Inc/(Dec)
747-8F C Checks		1		1		-
747-400 C Checks		4		2		2
767 C Checks		1		1		-
747-8F D Checks		2		-		2
CF6-80 engine overhauls		1		4		(3	)

Depreciation and amortization increased $7.1 million, or 12.8%, primarily due to an increase in the amortization of deferred maintenance costs related to 747-8F engine overhauls (see Note 2 to our Financial Statements) and additional aircraft that began operating in 2018.

Travel increased $7.5 million, or 18.0%, primarily due to higher costs incurred as a result of labor-related service disruptions and increased flying.

Navigation fees, landing fees and other rent decreased $11.0 million, or 25.4%, 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 $5.7 million, or 20.0%, primarily due to increased passenger flying and higher costs incurred as a result of labor-related service disruptions.

Other increased $8.2 million, or 17.7%, 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 Expenses (Income)

The following table compares our Non-operating Expenses (Income) for the three months ended September 30 (in thousands):

	2019			2018			Inc/(Dec)			% Change
Non-operating Expenses (Income)
Interest income	$	(653	)	$	(1,592	)	$	(939	)		(59.0	)%
Interest expense		30,117			31,115			(998	)		(3.2	)%
Capitalized interest		(853	)		(1,120	)		(267	)		(23.8	)%
Loss on early extinguishment of debt		559			-			559		NM
Unrealized (gain) loss on financial instruments		(83,175	)		(46,080	)		37,095			80.5	%
Other (income) expense, net		1,434			975			(459	)		47.1	%

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

Income taxes. The income tax benefit for the three months ended September 30, 2019 differed from tax at the U.S. statutory rate primarily due to $18.2 million of tax benefit from nontaxable changes in the fair value of the customer warrant liability (see Note 4 to our Financial Statements). The income tax expense for the three months ended September 30, 2018 differed from tax at the U.S. statutory rate primarily due to $6.1 million of tax benefit from nontaxable changes in the fair value of the customer warrant liability and $8.7 million of tax benefit from the remeasurement of our deferred income tax liability for Singapore.

Segments

The following table compares the Direct Contribution for our reportable segments for the three months ended September 30 (see Note 11 to our Financial Statements for the reconciliation to Operating income) (in thousands):

	2019		2018		Inc/(Dec)			% Change
Direct Contribution:
ACMI	$	33,401	$	51,672	$	(18,271	)		(35.4	)%
Charter		36,339		44,370		(8,031	)		(18.1	)%
Dry Leasing		12,028		12,645		(617	)		(4.9	)%
Total Direct Contribution	$	81,768	$	108,687	$	(26,919	)		(24.8	)%

Unallocated expenses and (income), net	$	93,507	$	82,830	$	10,677			12.9	%

ACMI Segment

ACMI Direct Contribution decreased $18.3 million, or 35.4%, primarily due to the impact of tariffs and global trade tensions on demand by our customers, labor-related service disruptions, additional Heavy Maintenance expense, increased amortization of deferred maintenance costs and the two-month redeployment of two 747-8F aircraft to the Charter segment. In addition, ACMI Direct Contribution was impacted by start-up costs for customer growth initiatives and higher crew costs, including enhanced wages and work rules resulting from our interim agreement with the Southern Air pilots (see Note 12 to our Financial Statements). Partially offsetting these items was an increase in contribution from additional flying.

Charter Segment

Charter Direct Contribution decreased $8.0 million, or 18.1%, primarily due to a decrease in commercial cargo Yields and volumes related to the impact of tariffs and global trade tensions, and labor-related service disruptions. Partially offsetting these

decreases were earnings from two 747-8F aircraft during a two-month redeployment from the ACMI segment, an increase in AMC passenger flying and a decrease in Heavy Maintenance.

Dry Leasing Segment

Dry Leasing Direct Contribution decreased slightly, primarily due to the scheduled return of a 777-200 freighter aircraft that is awaiting placement with a customer, partially offset by the placement of additional aircraft.

Unallocated expenses and (income), net

Unallocated expenses and (income), net increased $10.7 million, or 12.9%, primarily due to fleet growth initiatives and increased amortization of a customer incentive asset, partially offset by a ratification bonus in 2018 related to the interim agreement with the Southern Air pilots.

Nine Months Ended September 30, 2019 and 2018

Operating Statistics

The following tables compare our Segment Operating Fleet (average aircraft equivalents during the period) and total Block Hours operated for the nine months ended September 30:

Segment Operating Fleet*	2019			2018			Inc/(Dec)
ACMI
747-8F Cargo		8.3			9.0			(0.7	)
747-400 Cargo		18.1			16.2			1.9
747-400 Dreamlifter		3.6			3.1			0.5
777-200 Cargo		6.8			5.3			1.5
767-300 Cargo		25.2			20.0			5.2
767-200 Cargo		9.0			9.0			-
767-200 Passenger		1.0			1.0			-
737-800 Cargo		1.8			-			1.8
737-400 Cargo		5.0			5.0			-
747-400 Passenger		-			0.3			(0.3	)
Total		78.8			68.9			9.9

Charter
747-8F Cargo		1.6			1.0			0.6
747-400 Cargo		15.3			12.4			2.9
747-400 Passenger		4.0			2.5			1.5
767-300 Cargo		-			0.3			(0.3	)
767-300 Passenger		4.9			4.0			0.9
Total		25.8			20.2			5.6

Dry Leasing
777-200 Cargo		7.3			7.1			0.2
767-300 Cargo		21.2			15.8			5.4
757-200 Cargo		1.0			1.0			-
737-300 Cargo		1.0			1.0			-
737-800 Passenger		1.0			1.0			-
Total		31.5			25.9			5.6

Less: Aircraft Dry Leased to CMI customers		(23.1	)		(16.9	)		(6.2	)
Total Operating Average Aircraft Equivalents		113.0			98.1			14.9

ACMI average fleet excludes spare aircraft provided by CMI customers and Dry Leasing average fleet excludes aircraft awaiting placement.

Block Hours		2019				2018				Inc/(Dec)				% Change
Total Block Hours**			236,651				212,827				23,824				11.2	%

Includes ACMI, Charter and other Block Hours.

Operating Revenue

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

	2019			2018			Inc/(Dec)			% Change
Operating Revenue
ACMI	$	902,869		$	832,777		$	70,092			8.4	%
Charter		944,839			954,725			(9,886	)		(1.0	)%
Dry Leasing		157,328			120,837			36,491			30.2	%
Customer incentive asset amortization		(26,018	)		(10,010	)		16,008		NM
Other		13,122			14,437			(1,315	)		(9.1	)%
Total Operating Revenue	$	1,992,140		$	1,912,766

ACMI

	2019		2018		Inc/(Dec)			% Change
ACMI Block Hours		182,060		159,662		22,398			14.0	%
ACMI Revenue Per Block Hour	$	4,959	$	5,216	$	(257	)		(4.9	)%

ACMI revenue increased $70.1 million, or 8.4%, 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 customers. Partially offsetting this increase were decreases in ACMI flying by our customers related to the impact of tariffs and global trade tensions, and 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. 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

	2019		2018		Inc/(Dec)			% Change
Charter Block Hours:
Cargo		37,084		37,968		(884	)		(2.3	)%
Passenger		15,379		13,717		1,662			12.1	%
Total		52,463		51,685		778			1.5	%

Charter Revenue Per Block Hour:
Cargo	$	17,379	$	18,569	$	(1,190	)		(6.4	)%
Passenger	$	19,530	$	18,204	$	1,326			7.3	%
Charter	$	18,010	$	18,472	$	(462	)		(2.5	)%

Charter revenue decreased $9.9 million, or 1.0%, 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 impact of tariffs and global trade tensions. 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 passenger demand from the AMC and the two-month redeployment of two 747-8F aircraft from the ACMI segment, partially offset by lower cargo demand from commercial customers. Charter Block Hours were also negatively impacted by decreased cargo demand from the AMC. In addition, Charter revenue was negatively impacted by labor-related service disruptions.

Dry Leasing

Dry Leasing revenue increased $36.5 million, or 30.2%, 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 for the nine months ended September 30 (in thousands):

	2019		2018		Inc/(Dec)			% Change
Operating Expenses
Salaries, wages and benefits	$	432,911	$	392,603	$	40,308			10.3	%
Aircraft fuel		351,611		345,613		5,998			1.7	%
Maintenance, materials and repairs		305,331		261,251		44,080			16.9	%
Depreciation and amortization		190,669		155,881		34,788			22.3	%
Travel		140,513		123,810		16,703			13.5	%
Aircraft rent		122,271		119,778		2,493			2.1	%
Navigation fees, landing fees and other rent		110,468		116,553		(6,085	)		(5.2	)%
Passenger and ground handling services		97,138		86,980		10,158			11.7	%
Special charge, net		22,130		9,374		12,756		NM
Transaction-related expenses		3,585		1,275		2,310		NM
Other		160,548		143,663		16,885			11.8	%
Total Operating Expenses	$	1,937,175	$	1,756,781

Salaries, wages and benefits increased $40.3 million, or 10.3%, 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 12 to our Financial Statements) and fleet growth initiatives. 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 $6.0 million, or 1.7%, 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 the nine months ended September 30 were:

	2019		2018		Inc/(Dec)			% Change
Average fuel cost per gallon	$	2.29	$	2.34	$	(0.05	)		(2.1	)%
Fuel gallons consumed (000s)		153,764		147,664		6,100			4.1	%

Maintenance, materials and repairs increased by $44.1 million, or 16.9%, primarily reflecting $22.5 million of increased Line Maintenance expense due to increased flying and additional repairs performed, $14.0 million of increased Heavy Maintenance expense and $7.6 million of increased Non-heavy Maintenance expense. The higher Line Maintenance primarily reflected increases of $14.9 million for 767 aircraft and $8.9 million for 747-400 aircraft. Heavy Maintenance expense on 747-8F aircraft increased $5.8 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 increased $4.9 million primarily due to an increase in the number of C Checks and additional repairs performed, partially offset by a decrease in the number of engine overhauls and D Checks. Heavy Maintenance expense on 767 aircraft increased $2.8 million primarily due to 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 the nine months ended September 30 were:

Heavy Maintenance Events	2019		2018		Inc/(Dec)
747-8F C Checks		3		4		(1	)
747-400 C Checks		15		9		6
767 C Checks		3		2		1
747-8F D Checks		3		-		3
747-400 D Checks		1		2		(1	)
CF6-80 engine overhauls		10		13		(3	)

Depreciation and amortization increased $34.8 million, or 22.3%, 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 $16.7 million, or 13.5%, primarily due to increased flying and higher costs incurred as a result of labor-related service disruptions.

Aircraft rent increased $2.5 million, or 2.1%, primarily due to additional operating leases for 747-400 freighter aircraft that began during the second half of 2018 to meet increased customer demand.

Navigation fees, landing fees and other rent decreased $6.1 million, or 5.2%, 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 $10.2 million, or 11.7%, primarily due to increased passenger flying and higher costs incurred as a result of labor-related service disruptions.

Special charge, net in 2019 primarily represents a $19.6 million impairment loss for four CF6-80 engines to be disposed of and the permanent parking of two 737-400 passenger aircraft used for training purposes. Special charge, net in 2018 represents a $9.4 million impairment loss on engines held for sale (see Note 6 to our Financial Statements). 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 4 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 $16.9 million, or 11.8%, 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 Expenses (Income)

The following table compares our Non-operating Expenses (Income) for the nine months ended September 30 (in thousands):

	2019			2018			Inc/(Dec)			% Change
Non-operating (Income) Expenses
Interest income	$	(3,975	)	$	(4,704	)	$	(729	)		(15.5	)%
Interest expense		90,515			87,639			2,876			3.3	%
Capitalized interest		(1,943	)		(4,335	)		(2,392	)		(55.2	)%
Loss on early extinguishment of debt		804			-			804		NM
Unrealized (gain) loss on financial instruments		(78,900	)		11,691			(90,591	)	NM
Other (income) expense, net		(596	)		(10,777	)		(10,181	)		(94.5	)%

Interest expense increased $2.9 million, or 3.3%, primarily due to the 2018 financing of 767-300 aircraft purchases and conversions and purchases of two 777-200 aircraft in 2018.

Other (income) expense, net decreased primarily due to a refund of $12.4 million in 2018 for aircraft rent paid in previous years, partially offset by a net insurance recovery.

Income taxes. The income tax benefit for the nine months ended September 30, 2019 differed from tax at the U.S. statutory rate primarily due to $59.8 million of tax benefit related to the favorable completion of the IRS’s examination of our 2015 income tax return, and to a lesser extent, $17.3 million of tax benefit from nontaxable changes in the fair value of the customer warrant liability (see Note 4 to our Financial Statements). The income tax expense for the nine months ended September 30, 2018 differed from tax at the U.S. statutory rate primarily due to $11.8 million of tax expense from nondeductible changes in the fair value of the customer warrant liability and $8.7 million of tax benefit from the remeasurement of our deferred income tax liability for Singapore.

Segments

The following table compares the Direct Contribution for our reportable segments for the nine months ended September 30 (see Note 11 to our Financial Statements for the reconciliation to Operating income) (in thousands):

	2019		2018		Inc/(Dec)			% Change
Direct Contribution:
ACMI	$	114,048	$	145,251	$	(31,203	)		(21.5	)%
Charter		79,554		129,738		(50,184	)		(38.7	)%
Dry Leasing		58,646		36,195		22,451			62.0	%
Total Direct Contribution	$	252,248	$	311,184	$	(58,936	)		(18.9	)%

Unallocated expenses and (income), net	$	255,569	$	212,373	$	43,196			20.3	%

ACMI Segment

ACMI Direct Contribution decreased $31.2 million, or 21.5%, primarily due to higher crew costs, including enhanced wages and work rules resulting from our interim agreement with the Southern Air pilots (see Note 12 to our Financial Statements), the impact of tariffs and global trade tensions on demand by our customers, additional Heavy Maintenance expense, increased amortization of deferred maintenance costs and the two-month redeployment of two 747-8F aircraft to the Charter segment. In addition, ACMI Direct Contribution was impacted by start-up costs to meet customer growth initiatives and by labor-related service disruptions. Partially offsetting these items was an increase in contribution from additional flying.

Charter Segment

Charter Direct Contribution decreased $50.2 million, or 38.7%, primarily due to a decrease in commercial cargo Yields related to the impact of tariffs and global trade tensions, a decrease in AMC cargo flying and additional Heavy Maintenance expense. In addition, Charter Direct Contribution was negatively impacted by labor-related service disruptions. Partially offsetting these decreases were an increase in AMC passenger flying and earnings from two 747-8F aircraft during a two-month redeployment from the ACMI segment.

Dry Leasing Segment

Dry Leasing Direct Contribution increased $22.5 million, or 62.0%, 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 $43.2 million, or 20.3%, primarily due to a refund of aircraft rent paid in previous years recognized during the second quarter of 2018, fleet growth initiatives and increased amortization of a customer incentive asset, partially offset by a ratification bonus in 2018 related to the interim agreement with the Southern Air pilots.

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.

The following is a reconciliation of Income 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):

	For the Three Months Ended
	September 30, 2019			September 30, 2018			Percent Change

Income from continuing operations, net of taxes	$	59,974		$	71,138			(15.7	)%
Impact from:
Customer incentive asset amortization		12,796			4,124
Special charge, net		18,861			-
Costs associated with transactions (a)		324			9,979
Leadership transition costs		2,852			-
Certain contract start-up costs (b)		1,400			-
Noncash expenses and income, net (c)		4,696			4,245
Unrealized (gain) loss on financial instruments		(83,175	)		(46,080	)
Other, net (d)		647			373
Income tax effect of reconciling items		(8,859	)		47
Adjusted income from continuing operations, net of taxes	$	9,516		$	43,826			(78.3	)%

Weighted average diluted shares outstanding		25,854			28,747
Add: effect of convertible notes hedges (f)		-			(269	)
Adjusted weighted average diluted shares outstanding		25,854			28,478

Adjusted Diluted EPS from continuing operations, net of taxes	$	0.37		$	1.54			(76.0	)%

	For the Nine Months Ended
	September 30, 2019			September 30, 2018			Percent Change

Income from continuing operations, net of taxes	$	117,132		$	59,643			96.4	%
Impact from:
Customer incentive asset amortization		26,018			10,010
Special charge, net		22,130			9,374
Costs associated with transactions (a)		3,585			10,489
Leadership transition costs		3,393			-
Certain contract start-up costs (b)		3,463			-
Noncash expenses and income, net (c)		13,743			12,489
Unrealized (gain) loss on financial instruments		(78,900	)		11,691
Other, net (d)		(2,395	)		936
Income tax effect of reconciling items		(12,540	)		2,699
Special tax item (e)		(54,272	)		-
Adjusted income from continuing operations, net of taxes	$	41,357		$	117,331			(64.8	)%

Weighted average diluted shares outstanding		26,909			26,274
Add: dilutive warrant (g)		-			2,129
Add: effect of convertible notes hedges (f)		-			(240	)
Adjusted weighted average diluted shares outstanding		26,909			28,163
Adjusted Diluted EPS from continuing operations, net of taxes	$	1.54		$	4.17			(63.1	)%

	For the Three Months Ended
	September 30, 2019			September 30, 2018			Percent Change

Income from continuing operations, net of taxes	$	59,974		$	71,138			(15.7	)%
Interest (income) expense, net		28,611			28,403
Depreciation and amortization		62,499			55,417
Income tax (benefit) expense		(8,282	)		34
EBITDA		142,802			154,992
Customer incentive asset amortization		12,796			4,124
Special charge, net		18,861			-
Costs associated with transactions (a)		324			9,979
Leadership transition costs		2,852			-
Unrealized (gain) loss on financial instruments		(83,175	)		(46,080	)
Other, net (d)		1,150			846
Adjusted EBITDA	$	95,610		$	123,861			(22.8	)%

	For the Nine Months Ended
	September 30, 2019			September 30, 2018			Percent Change

Income from continuing operations, net of taxes	$	117,132		$	59,643			96.4	%
Interest (income) expense, net		84,597			78,600
Depreciation and amortization		190,669			155,881
Income tax (benefit) expense		(68,072	)		16,828
EBITDA		324,326			310,952
Customer incentive asset amortization		26,018			10,010
Special charge, net		22,130			9,374
Costs associated with transactions (a)		3,585			10,489
Leadership transition costs		3,393			-
Unrealized (gain) loss on financial instruments		(78,900	)		11,691
Other, net (d)		(429	)		2,355
Adjusted EBITDA	$	300,123		$	354,871			(15.4	)%

(a)

Costs associated with transactions in 2019 primarily relate to a customer transaction with warrants (see Note 4 to our Financial Statements) and other costs associated with our acquisition of Southern Air. Costs associated with transactions in 2018 primarily related to costs associated with our acquisition of Southern Air.

(b)

Certain contract start-up costs represent unique training aircraft costs required for a new customer contract (see Note 4 to our Financial Statements).

(c)

Noncash expenses and income, net in 2019 and 2018 primarily related to amortization of debt discount on the convertible notes (see Note 7 to our Financial Statements).

(d)

Other, net in 2019 primarily relate to a net insurance recovery, loss on early extinguishment of debt and accrual for legal matters and professional fees. Other, net in 2018 primarily relate to loss on early extinguishment of debt and accrual for legal matters and professional fees.

(e)

Special tax item represents income tax benefit from the completion of the 2015 IRS examination that are not related to ongoing operations (see Note 9 to our Financial Statements).

(f)

Economic benefit from the convertible notes hedges in offsetting dilution from the convertible notes.

(g)

Dilutive warrants represent potentially dilutive common shares related to warrants issued to a customer (see Note 4 to our Financial Statements). These warrants are excluded from Diluted EPS from continuing operations, net of taxes prepared in accordance with GAAP when they would have been antidilutive.

Liquidity and Capital Resources

The most significant liquidity events during the first three quarters of 2019 were as follows:

Debt Transactions

In March 2019, we borrowed $19.7 million related to GEnx engine performance upgrade kits and overhauls under an unsecured five-year term loan at a fixed interest rate of 2.73%.

Operating Activities. Net cash provided by operating activities was $193.3 million for the first three quarters of 2019, which primarily reflected Net Income of $117.1 million, noncash adjustments of $241.3 million for Depreciation and amortization, $78.9 million for Unrealized gain on financial instruments, $68.6 million for Deferred taxes and a $11.0 million decrease in Accounts payable and accrued liabilities, and a $69.3 million increase in Prepaid expenses, current assets and other assets. Net cash provided by operating activities was $264.1 million for the first three quarters of 2018, which primarily reflected $59.6 million of Net Income (Loss), noncash adjustments of $189.7 million for Depreciation and amortization and $11.7 million for Unrealized loss on financial instruments, and a $56.2 million increase in Accounts payable and accrued liabilities. Partially offsetting these items was a $59.1 million increase in Accounts receivable and a $34.5 million increase in Prepaid expenses, current assets and other assets.

Investing Activities. Net cash used for investing activities was $208.8 million for the first three quarters of 2019, consisting primarily of $153.7 million of payments for flight equipment and modifications and $107.6 million of core capital expenditures, excluding flight equipment, partially offset by $38.1 million of proceeds from insurance. Payments for flight equipment and modifications during the first three quarters of 2019 were primarily related to 767-300 passenger aircraft and related freighter conversion costs, spare engines and GEnx engine performance upgrade kits. All capital expenditures for 2019 were funded through working capital and the financing discussed above. Net cash used for investing activities was $618.7 million for the first three quarters of 2018, consisting primarily of $543.3 million of payments for flight equipment and modifications and $84.8 million of core capital expenditures, excluding flight equipment. Payments for flight equipment and modifications during the first three quarters of 2018 were primarily related to the purchase of 777-200 aircraft, 767-300 passenger aircraft and related freighter conversion costs, spare engines and GEnx engine performance upgrade kits.

Financing Activities. Net cash used for financing activities was $136.5 million for the first three quarters of 2019, which primarily reflected $273.1 million of payments on debt, including a $66.2 million repayment of three term loans, and $9.3 million related to the purchase of treasury stock, partially offset by $93.7 million from debt issuance and $50.0 million of proceeds from our revolving credit facility. Net cash provided by financing activities was $288.9 million for the first three quarters of 2018, which primarily reflected $400.5 million of proceeds from debt issuance and $135.0 million of proceeds from revolving credit facility, partially offset by $180.7 million of payments on debt, $60.0 million of payment of revolving credit facility and $10.8 million related to the purchase of treasury stock.

We consider Cash and cash equivalents, Short-term investments, Restricted cash and Net cash provided by operating activities to be sufficient to meet our debt and lease obligations and to fund core capital expenditures for 2019. Core capital expenditures for the remainder of 2019 are expected to range between $25.0 to $35.0 million, which excludes flight equipment and capitalized interest.

We may access external sources of capital from time to time depending on our cash requirements, assessments of current and anticipated market conditions, and the after-tax cost of capital. To that end, we filed a shelf registration statement with the SEC in May 2017 that enables us to sell debt and/or equity securities on a registered basis over the subsequent three years, depending on market conditions, our capital needs and other factors. Our access to capital markets can be adversely impacted by prevailing economic conditions and by financial, business and other factors, some of which are beyond our control. Additionally, our borrowing costs are affected by market conditions and may be adversely impacted by a tightening in credit markets.

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

Contractual Obligations and Debt Agreements

See Notes 7 and 8 to our Financial Statements for a description of our new debt and lease obligations. See our 2018 Annual Report on Form 10-K for a tabular disclosure of our contractual obligations as of December 31, 2018 and a description of our other debt obligations and amendments thereto.

Off-Balance Sheet Arrangements

See Note 8 to our Financial Statements for a discussion of our adoption of the new leasing guidance.

Recent Accounting Pronouncements

See Note 2 to our Financial Statements for a discussion of recent accounting pronouncements.

Forward-Looking Statements

This Quarterly Report on Form 10-Q (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 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 our Annual Report on Form 10-K for the year ended December 31, 2018. 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.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no material changes to our market risk during the nine months ended September 30, 2019. For additional discussion of our exposure to market risk, refer to Part II, Item 7A “Quantitative and Qualitative Disclosures About Market Risk” included in our 2018 Annual Report on Form 10-K.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

An evaluation was performed under the supervision and with the participation of our management, including our Chief Executive Officer, or CEO, and Chief Financial Officer, or CFO, of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d - 15(e) under the Exchange Act) as of September 30, 2019. Based on that evaluation, our CEO and CFO concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and is accumulated and communicated to our management, including our CEO and CFO, to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting

There has been no change in our internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act) during the three months ended September 30, 2019 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II — OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

With respect to the fiscal quarter ended September 30, 2019, the information required in response to this Item is set forth in Note 12 to our Financial Statements and such information is incorporated herein by reference. Such description contains all of the information required with respect hereto.

ITEM 1A. RISK FACTORS

There have been no material changes in our risk factors from those disclosed in our 2018 Annual Report on Form 10-K.

ITEM 6. EXHIBITS

Exhibits

See accompanying Exhibit Index included before the signature page of this report for a list of exhibits filed or furnished with this report.

EXHIBIT INDEX

Exhibit Number		Description


10.1		Letter Agreement, dated as of June 28, 2019, by and among Atlas Air Worldwide Holdings, Inc., Atlas Air, Inc., and William J. Flynn.

10.2		Employment Agreement, dated as of July 1, 2019, by and between Atlas Air, Inc. and John W. Dietrich.

10.3		Form of Executive Officer Retention Agreement.

10.4		Atlas Air Worldwide Holdings, Inc. Benefit Program for Senior Executives (As Amended and Restated, Effective as of July 1, 2019).

10.5		Atlas Air Worldwide Holdings, Inc. Annual Incentive Plan for Senior Executives (As Amended and Restated, Effective as of July 1, 2019).

10.6		Form of Amendment to Restricted Stock Unit Agreements between Atlas Air Worldwide Holdings, Inc. and certain Executive Officers.

10.7		Form of Amendment to Performance Share Unit Agreements between Atlas Air Worldwide Holdings, Inc. and certain Executive Officers.

10.8		Form of Amendment to Long Term Incentive Performance Cash Award Letters between Atlas Air Worldwide Holdings, Inc. and certain Executive Officers.

31.1		Rule 13a-14(a)/15d-14(a) Certification of the Chief Executive Officer.

31.2		Rule 13a-14(a)/15d-14(a) Certification of the Chief Financial Officer.

32.1		Section 1350 Certifications.

101.INS		Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. *

101.SCH		Inline XBRL Taxonomy Extension Schema Document. *

101.CAL		Inline XBRL Taxonomy Extension Calculation Linkbase Document. *

101.DEF		Inline XBRL Taxonomy Extension Definition Linkbase Document. *

101.LAB		Inline XBRL Taxonomy Extension Labels Linkbase Document. *

101.PRE		Inline XBRL Taxonomy Extension Presentation Linkbase Document. *

104		Cover Page Interactive Data File – the cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document (included in Exhibit 101).

Attached as Exhibit 101 to this report are the following formatted in Inline XBRL (Extensible Business Reporting Language): (i) Consolidated Balance Sheets as of September 30, 2019 and December 31, 2018, (ii) Consolidated Statements of Operations for the three and nine months ended September 30, 2019 and 2018, (iii) Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended September 30, 2019 and 2018, (iv) Consolidated Statements of Cash Flows for the nine months ended September 30, 2019 and 2018, (v) Consolidated Statements of Stockholders’ Equity as of and for the three and nine months ended September 30, 2019 and 2018 and (vi) Notes to the Unaudited Consolidated Financial Statements.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

		Atlas Air Worldwide Holdings, Inc.

Dated: October 30, 2019		/s/ William J. Flynn
		William J. Flynn
		Chairman of the Board and Chief Executive Officer

Dated: October 30, 2019		/s/ Spencer Schwartz
		Spencer Schwartz
		Executive Vice President and Chief Financial Officer