ATLAS AIR WORLDWIDE HOLDINGS INC - Quarter Report: 2020 June (Form 10-Q)

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 June 30, 2020

☐	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)

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 July 30, 2020, there were 26,136,036 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 June 30, 2020 and December 31, 2019 (unaudited)	3

	Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2020 and 2019 (unaudited)	4

	Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2020 and 2019 (unaudited)	5

	Consolidated Statements of Cash Flows for the Six Months ended June 30, 2020 and 2019 (unaudited)	6

	Consolidated Statements of Stockholders’ Equity as of and for the Three and Six Months ended June 30, 2020 and 2019 (unaudited)	7

	Notes to Unaudited Consolidated Financial Statements	8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	37

Item 4.	Controls and Procedures	37

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	39

Item 1A.	Risk Factors	39

Item 6.	Exhibits	39

	Exhibit Index	40

	Signatures	41

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Atlas Air Worldwide Holdings, Inc.

Consolidated Balance Sheets

(in thousands, except share data)

(Unaudited)

	June 30, 2020			December 31, 2019
Assets
Current Assets
Cash and cash equivalents	$	726,402		$	103,029
Restricted cash		12,776			10,401
Short-term investments		-			879
Accounts receivable, net of allowance of $886 and $1,822, respectively		239,051			290,119
Prepaid expenses, assets held for sale and other current assets		177,978			228,103
Total current assets		1,156,207			632,531
Property and Equipment
Flight equipment		4,962,987			4,880,424
Ground equipment		86,341			83,584
Less: accumulated depreciation		(1,068,347	)		(977,883	)
Flight equipment modifications in progress		26,960			67,101
Property and equipment, net		4,007,941			4,053,226
Other Assets
Operating lease right-of-use assets		200,194			231,133
Deferred costs and other assets		378,567			391,895
Intangible assets, net and goodwill		73,841			76,856
Total Assets	$	5,816,750		$	5,385,641

Liabilities and Equity
Current Liabilities
Accounts payable	$	73,812		$	79,683
Accrued liabilities		653,253			481,725
Current portion of long-term debt and finance leases		275,017			395,781
Current portion of long-term operating leases		143,225			141,973
Total current liabilities		1,145,307			1,099,162
Other Liabilities
Long-term debt and finance leases		2,238,664			1,984,902
Long-term operating leases		322,450			392,832
Deferred taxes		111,802			74,040
Financial instruments and other liabilities		68,160			42,526
Total other liabilities		2,741,076			2,494,300
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; 31,493,328 and 31,048,842 shares issued, 26,135,945 and 25,870,876 shares outstanding (net of treasury stock), as of June 30, 2020 and December 31, 2019, respectively		315			310
Additional paid-in-capital		801,002			761,715
Treasury stock, at cost; 5,357,383 and 5,177,966 shares, respectively		(217,711	)		(213,871	)
Accumulated other comprehensive loss		(2,347	)		(2,818	)
Retained earnings		1,349,108			1,246,843
Total stockholders’ equity		1,930,367			1,792,179
Total Liabilities and Equity	$	5,816,750		$	5,385,641

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 Six Months Ended
	June 30, 2020			June 30, 2019			June 30, 2020			June 30, 2019

Operating Revenue	$	825,253		$	663,918		$	1,468,755		$	1,343,601

Operating Expenses
Salaries, wages and benefits		192,591			141,450			340,335			286,924
Maintenance, materials and repairs		168,300			113,471			262,452			217,091
Aircraft fuel		83,242			122,158			191,560			228,479
Depreciation and amortization		65,826			63,689			123,410			128,170
Travel		34,627			46,374			77,018			91,403
Navigation fees, landing fees and other rent		35,638			37,982			67,039			78,198
Passenger and ground handling services		30,130			30,525			62,089			62,685
Aircraft rent		24,316			40,335			48,283			82,223
Loss (gain) on disposal of aircraft		2			-			(6,715	)		-
Special charge		15,934			3,269			15,934			3,269
Transaction-related expenses		1,275			734			1,796			3,261
Other		52,710			54,961			103,822			106,054
Total Operating Expenses		704,591			654,948			1,287,023			1,287,757

Operating Income		120,662			8,970			181,732			55,844

Non-operating Expenses (Income)
Interest income		(224	)		(1,278	)		(704	)		(3,322	)
Interest expense		28,950			30,045			58,225			60,398
Capitalized interest		(132	)		(627	)		(325	)		(1,090	)
Loss on early extinguishment of debt		74			-			74			245
Unrealized loss (gain) on financial instruments		30,671			(42,300	)		29,747			4,275
Other (income) expense, net		(50,598	)		945			(49,392	)		(2,030	)
Total Non-operating Expenses (Income)		8,741			(13,215	)		37,625			58,476

Income (loss) before income taxes		111,921			22,185			144,107			(2,632	)
Income tax expense (benefit)		33,009			(64,683	)		41,842			(59,790	)
Net Income	$	78,912		$	86,868		$	102,265		$	57,158

Earnings per share:
Basic	$	3.02		$	3.36		$	3.93		$	2.22
Diluted	$	3.01		$	1.61		$	3.92		$	2.21
Weighted average shares:
Basic		26,129			25,851			26,048			25,794
Diluted		26,182			26,953			26,074			25,921

See accompanying Notes to Unaudited Consolidated Financial Statements

Atlas Air Worldwide Holdings, Inc.

Consolidated Statements of Comprehensive Income

(in thousands)

(Unaudited)

	For the Three Months Ended						For the Six Months Ended
	June 30, 2020			June 30, 2019			June 30, 2020			June 30, 2019
Net Income	$	78,912		$	86,868		$	102,265		$	57,158
Other comprehensive income:
Reclassification to interest expense		296			337			604			681
Income tax benefit		(70	)		(80	)		(133	)		(161	)
Other comprehensive income		226			257			471			520
Comprehensive Income	$	79,138		$	87,125		$	102,736		$	57,678

See accompanying Notes to Unaudited Consolidated Financial Statements

Atlas Air Worldwide Holdings, Inc.

Consolidated Statements of Cash Flows

(in thousands)

(Unaudited)

	For the Six Months Ended
	June 30, 2020			June 30, 2019

Operating Activities:
Net Income	$	102,265		$	57,158

Adjustments to reconcile Net Income to net cash provided by operating activities:
Depreciation and amortization		157,509			157,820
Amortization (accretion) of debt securities discount		(2	)		208
Provision for (reversal of) expected credit losses		(6	)		4
Loss on early extinguishment of debt		74			245
Special charge, net of cash payments		15,934			3,269
Unrealized loss (gain) on financial instruments		29,747			4,275
Loss (gain) on disposal of aircraft		(6,715	)		-
Deferred taxes		39,518			(60,122	)
Stock-based compensation		10,506			10,025
Changes in:
Accounts receivable		51,781			26
Prepaid expenses, current assets and other assets		(19,115	)		(23,835	)
Accounts payable, accrued liabilities and other liabilities		178,894			(40,076	)
Net cash provided by operating activities		560,390			108,997
Investing Activities:
Capital expenditures		(25,095	)		(76,754	)
Payments for flight equipment and modifications		(59,919	)		(99,161	)
Proceeds from insurance		-			38,133
Proceeds from investments		881			9,313
Proceeds from disposal of aircraft		44,110			-
Net cash used for investing activities		(40,023	)		(128,469	)
Financing Activities:
Proceeds from debt issuance		321,518			19,723
Payment of debt issuance costs		(3,910	)		(955	)
Payments of debt and finance lease obligations		(274,960	)		(160,091	)
Proceeds from revolving credit facility		75,000			50,000
Customer maintenance reserves and deposits received		6,010			8,039
Customer maintenance reserves paid		(14,437	)		-
Treasury shares withheld for payment of taxes		(3,840	)		(9,227	)
Net cash provided by (used for) financing activities		105,381			(92,511	)
Net increase (decrease) in cash, cash equivalents and restricted cash		625,748			(111,983	)
Cash, cash equivalents and restricted cash at the beginning of period		113,430			232,741
Cash, cash equivalents and restricted cash at the end of period	$	739,178		$	120,758

Noncash Investing and Financing Activities:

Acquisition of flight equipment included in Accounts payable and accrued liabilities	$	13,613		$	51,996
Acquisition of property and equipment acquired under operating leases	$	1,918		$	-
Customer maintenance reserves settled with sale of aircraft	$	6,497		$	-

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 June 30, 2020
						Additional								Total
	Common		Treasury			Paid-In			Accumulated Other			Retained		Stockholders'
	Stock		Stock			Capital			Comprehensive Loss			Earnings		Equity
Balance at March 31, 2020	$	315	$	(217,705	)	$	782,517		$	(2,573	)	$	1,270,196	$	1,832,750
Net Income		-		-			-			-			78,912		78,912
Other comprehensive income		-		-			-			226			-		226
Stock-based compensation		-		-			6,646			-			-		6,646
Issuance of warrants		-		-			11,840			-			-		11,840
Treasury shares of 206 withheld for payment of taxes		-		(6	)		-			-			-		(6	)
Issuance of 9,919 shares of restricted stock				-			(1	)		-			-		(1	)
Balance at June 30, 2020	$	315	$	(217,711	)	$	801,002		$	(2,347	)	$	1,349,108	$	1,930,367

	As of and for the Three Months Ended June 30, 2019
						Additional							Total
	Common		Treasury			Paid-In		Accumulated Other			Retained		Stockholders'
	Stock		Stock			Capital		Comprehensive Loss			Earnings		Equity
Balance at March 31, 2019	$	310	$	(213,690	)	$	741,652	$	(3,569	)	$	1,510,246	$	2,034,949
Net Income		-		-			-		-			86,868		86,868
Other comprehensive income		-		-			-		257			-		257
Stock-based compensation		-		-			4,404		-			-		4,404
Issuance of warrant		-		-			669		-			-		669
Treasury shares of 743 withheld for payment of taxes		-		(38	)		-		-			-		(38	)
Issuance of 4,385 shares of restricted stock		-		-			-		-			-		-
Balance at June 30, 2019	$	310	$	(213,728	)	$	746,725	$	(3,312	)	$	1,597,114	$	2,127,109

	As of and for the Six Months Ended June 30, 2020
						Additional								Total
	Common		Treasury			Paid-In			Accumulated Other			Retained		Stockholders'
	Stock		Stock			Capital			Comprehensive Loss			Earnings		Equity
Balance at December 31, 2019	$	310	$	(213,871	)	$	761,715		$	(2,818	)	$	1,246,843	$	1,792,179
Net Income		-		-			-			-			102,265		102,265
Other comprehensive income		-		-			-			471			-		471
Stock-based compensation		-		-			10,506			-			-		10,506
Issuance of warrants		-		-			28,786			-			-		28,786
Treasury shares of 179,417 withheld for payment of taxes		-		(3,840	)		-			-			-		(3,840	)
Issuance of 444,486 shares of restricted stock		5		-			(5	)		-			-		-
Balance at June 30, 2020	$	315	$	(217,711	)	$	801,002		$	(2,347	)	$	1,349,108	$	1,930,367

	As of and for the Six Months Ended June 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		-		-			-			-			57,158		57,158
Other comprehensive income		-		-			-			520			-		520
Stock-based compensation		-		-			10,025			-			-		10,025
Issuance of warrant		-		-			669			-			-		669
Treasury shares of 180,082 withheld for payment of taxes		-		(9,227	)		-			-			-		(9,227	)
Issuance of 443,929 shares of restricted stock		4		-			(4	)		-			-		-
Balance at June 30, 2019	$	310	$	(213,728	)	$	746,725		$	(3,312	)	$	1,597,114	$	2,127,109

See accompanying Notes to Unaudited Consolidated Financial Statements

Atlas Air Worldwide Holdings, Inc.

Notes to Unaudited Consolidated Financial Statements

June 30, 2020

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, 2019, which includes additional disclosures and a summary of our significant accounting policies. The December 31, 2019 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 June 30, 2020, the results of operations for the three and six months ended June 30, 2020 and 2019, comprehensive income for the three and six months ended June 30, 2020 and 2019, cash flows for the six months ended June 30, 2020 and 2019, and stockholders’ equity as of and for the three and six months ended June 30, 2020 and 2019.

Our quarterly results are subject to seasonal and other fluctuations, including fluctuations resulting from the global COVID-19 pandemic (see Note 3 for further discussion), 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 that are 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 5 for further discussion).

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 $10.3 million and $5.3 million for the three months ended June 30, 2020 and 2019, respectively, and was $18.2 million and $9.7 million for the six months ended June 30, 2020 and 2019, respectively.

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

Balance as of December 31, 2019	$	184,279
Deferred maintenance costs		24,307
Amortization of deferred maintenance		(18,237	)
Balance as of June 30, 2020	$	190,349

Recent Accounting Pronouncements Adopted in 2020

In November 2019, the Financial Accounting Standards Board (“FASB”) amended its accounting guidance for share-based payment awards issued to a customer. The amended guidance requires share-based payment awards issued to a customer to be recorded as a reduction of the transaction price in revenue based on the fair value at grant date and to be classified on the balance sheet using accounting guidance for stock-based compensation. The amended guidance was effective for fiscal years beginning after December 15, 2019. Effective January 1, 2020, we adopted the amended guidance and applied the modified retrospective approach to the most current period presented. As a result, $14.6 million, or approximately 60% of our customer warrant liability of $24.3 million related to revenue contracts, which was included in Financial instruments and other liabilities as of December 31, 2019, was reclassified as Additional paid-in-capital within Total stockholders’ equity on January 1, 2020. As a result, these customer warrants are no longer marked-to-market at the end of each reporting period with changes in fair value recorded as an unrealized (gain) loss on financial instruments. The amended guidance did not impact the accounting for the remaining portion of our customer warrant liability related to Dry Lease contracts, which was approximately $9.7 million or approximately 40% of the total customer warrant liability as of December 31, 2019. The new guidance did not impact how we account for the amortization of the customer incentive asset (see Note 5 for further discussion).

In June 2016, the FASB amended its accounting guidance for the measurement of credit losses on financial instruments. The guidance requires entities to utilize an expected credit loss model for certain financial instruments, including most trade receivables, which replaces the incurred credit loss model previously used. Under this new model, we are required to recognize estimated credit losses expected to occur over time using a broad range of information including historical information, current conditions and reasonable and supportable forecasts. Receivables related to lease contracts are not within the scope of this amended guidance. Effective January 1, 2020, we adopted the amended guidance under the modified retrospective approach and it did not have a material impact on our consolidated financial statements and related disclosures (see Note 6).

3. COVID-19 Pandemic

COVID-19

In December 2019, COVID-19 was first reported in China and has since spread to most other regions of the world. In March 2020, COVID-19 was determined to be a global pandemic by the World Health Organization. During the first six months of 2020, this public health crisis disrupted global manufacturing, supply chains, passenger travel and consumer spending, resulting in flight cancellations by our ACMI customers and lower U.S. Military Air Mobility Command (“AMC”) passenger flying as the military took precautionary measures to limit the movement of personnel. A reduction of available cargo capacity in the market and increased demand for transporting goods due to the COVID-19 pandemic also resulted in increased commercial charter cargo yields, net of fuel, during the first six months of 2020. We have incurred and expect to incur significant additional costs, including premium pay; other operational costs, including costs for continuing to provide a safe working environment for our employees; and higher crew costs related to increased pay rates resulting from our recent interim agreement with our pilots. In addition, the availability of hotels and restaurants; evolving COVID-19-related travel restrictions and health screenings; and cancellations of passenger flights by other airlines globally or airport closures have impacted and could further impact our ability to position employees to operate our aircraft.

Our ability to continue to service our debt and meet our lease and other obligations as they come due is dependent on our continued ability to generate earnings and cash flows. To mitigate the impact of any continuation or worsening of the COVID-19 pandemic disruptions, we have:

•

significantly reduced nonessential employee travel;

•

reduced the use of contractors;

•

limited ground staff hiring;

•

secured vendor pricing discounts for engine overhauls and other maintenance;

•

implemented a number of other cost reduction initiatives;

•

taken other actions, such as the sale of certain nonessential assets;

•

entered into a Payroll Support Program Agreement (the “PSP Agreement”) with the U.S. Department of the Treasury (the “U.S. Treasury”), with respect to payroll support funding (the “Payroll Support Program”) available to cargo air carriers under the CARES Act (see discussion below); and

•

begun to defer payment of the employer portion of social security taxes as provided for under the CARES Act through the end of 2020.

If we are unable to implement these or additional initiatives, or comply with the requirements under the PSP Agreement, it could have a material adverse effect on our financial position, results of operations, and cash flows. We believe the Company will generate sufficient liquidity to satisfy its obligations over the next twelve months.

Payroll Support Program under the CARES Act

As of May 29, 2020 (the “PSP Closing Date”), Atlas and Southern Air (the “PSP Recipients”) entered into a PSP Agreement with the U.S. Treasury. As of the PSP Closing Date, AAWW also entered into a Warrant Agreement (the “Warrant Agreement”) with the U.S. Treasury, and AAWW issued a senior unsecured promissory note to the U.S. Treasury (the “Promissory Note”), with Atlas and Southern Air as guarantors.

In connection with the Payroll Support Program, we are required to comply with the relevant provisions of the CARES Act, including the requirement that funds provided pursuant to the PSP Agreement be used exclusively for the payment of certain employee wages, salaries and benefits of the PSP Recipients. The Payroll Support Program subjects the PSP Recipients and certain of their affiliates to a number of restrictions, including prohibitions against reductions in certain employee salaries, wages and benefits, and certain involuntary terminations and furloughs of employees until September 30, 2020, prohibitions of repurchasing shares in the open market of, or making dividend payments with respect to, our common stock through September 30, 2021, as well as certain limitations on executive compensation until March 24, 2022. Under the PSP Agreement, we must also maintain certain internal controls and records relating to the payroll support funding and we are subject to additional reporting obligations.

Pursuant to the PSP Agreement, the U.S. Treasury provided us with payroll support funding in three installments totaling $406.8 million. The first installment of $203.4 million was received on June 1, 2020, the second installment of $101.7 million was received on June 29, 2020 and the third installment of $101.7 million was received on July 30, 2020.

As compensation for payroll support funding under the PSP Agreement, we issued the Promissory Note to the U.S. Treasury, which provides for our unconditional promise to pay to the U.S. Treasury a total of $142.9 million as of June 30, 2020 and a total of $199.8 million as of July 30, 2020, after all installments were received from the U.S. Treasury.

The Promissory Note bears interest on the outstanding principal amount at a rate of 1.00% per annum until the fifth anniversary of the PSP Closing Date and the applicable Secured Overnight Financing Rate (“SOFR”) plus 2.00% per annum thereafter, and interest accrued thereon will be payable in arrears on the last business day of March and September of each year, beginning on September 30, 2020. The aggregate principal amount outstanding under the Promissory Note, together with all accrued and unpaid interest thereon and all other amounts payable under the Promissory Note, will be due and payable in May 2030. The Promissory Note contains customary representations and warranties, covenants and events of default provisions. Interest expense is recognized using the effective interest method over the term of the Promissory Note.

We may, at any time and from time to time, voluntarily prepay amounts outstanding under the Promissory Note, in whole or in part, without penalty or premium. If certain change of control triggering events occur, we would be required to prepay the aggregate outstanding principal amount of the Promissory Note within 30 days, together with any accrued interest or other amounts owing under the Promissory Note.

As compensation for payroll support funding under the PSP Agreement, we also entered into a Warrant Agreement pursuant to which we granted the U.S. Treasury warrants to acquire shares of our common stock. In connection with the first and second payroll support funding installments from the U.S. Treasury, we issued warrants to acquire up to 447,180 shares of our common stock as of June 30, 2020. As of July 30, 2020, the warrants issued to the U.S. Treasury, after all installments were received, were for up to 625,452 shares of our common stock.

The Warrant Agreement provides the U.S Treasury certain registration rights with respect to each warrant and the underlying common stock. Each warrant is exercisable at an exercise price of $31.95 per share of common stock (which was the closing price of our common stock on the Nasdaq Global Select Market on May 1, 2020) and will expire on the fifth anniversary of the issue date of such warrant. Each warrant may be settled through net share settlement or net cash settlement, at our option. Each warrant includes customary antidilution provisions and is freely transferable with registration rights. The U.S. Treasury is not permitted to vote any shares it acquires upon exercise of each warrant. The grant date fair value, as determined using the Black-Scholes model, of each warrant is recognized as Additional paid-in-capital and was $9.2 million as of June 30, 2020. Each warrant will not be remeasured as long as it continues to meet the conditions for equity classification. As of June 30, 2020, no portion of the warrants has been exercised.

We recognized deferred grant income within Accrued liabilities for the difference between the PSP proceeds received and the amounts recognized for the Promissory Note and the Warrant Agreement for each installment. Grant income is subsequently recognized within Other (income) expense, net in the consolidated statement of operations on a pro-rata basis over the periods that the

qualifying employee wages, salaries and benefits are paid. For the three and six months ended June 30, 2020, we recognized grant income of $20.2 million. We expect to recognize the remainder of the grant income through the first quarter of 2021.

4. 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 Six Months Ended
Revenue and Expenses:	June 30, 2020		June 30, 2019		June 30, 2020		June 30, 2019
Revenue from Polar	$	82,858	$	99,889	$	159,092	$	198,356
Ground handling and airport fees to Polar		1,067		545		1,593		1,063

Accounts receivable/payable as of:	June 30, 2020		December 31, 2019
Receivables from Polar	$	26,370	$	10,855
Payables to Polar		1,841		2,161

Aggregate Carrying Value of Polar Investment as of:	June 30, 2020		December 31, 2019
Aggregate Carrying Value of Polar Investment	$	4,870	$	4,870

In addition to the amounts in the table above, Atlas recognized revenue of $83.1 million and $23.1 million for the three months ended June 30, 2020 and 2019, respectively, and $110.5 million and $46.4 million for the six months ended June 30, 2020 and 2019, respectively, from flying on behalf of Polar.

Dry Leasing Joint Venture

We hold a 10% interest in a joint venture with an unrelated third party, which we entered into in December 2019, to develop a diversified freighter aircraft dry leasing portfolio. Through Titan, we provide aircraft and lease management services to the joint venture for fees based upon aircraft assets under management, among other things. Our investment in the joint venture is accounted for under the equity method of accounting. Under the joint venture, we have a commitment to provide up to $40.0 million of capital contributions before December 2022. Our investment in the joint venture was $0.5 million and $1.5 million as of June 30, 2020 and December 31, 2019, respectively, and our maximum exposure to losses from the entity is limited to our investment. The joint venture does not currently have any third-party debt obligations and no capital contributions have been made as of June 30, 2020. We had Accounts receivable from the joint venture of $1.3 million as of June 30, 2020 related to the reimbursement of certain expenses by the joint venture. We have recognized no service fee income for the three and six months ended June 30, 2020.

Parts Joint Venture

We hold a 50% interest in a joint venture with an unrelated third party to purchase rotable parts and provide repair services for those parts, primarily for 747-8F aircraft. Our investment in the joint venture is accounted for under the equity method of accounting. As of June 30, 2020 and December 31, 2019, our investment in the joint venture was $18.9 million and $20.0 million, respectively. We had Accounts payable to the joint venture of $1.1 million as of June 30, 2020 and $0.5 million as of December 31, 2019.

5. 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, which remain under dry lease.

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 $37.34 per share, as adjusted (“Warrant A”). As of December 31, 2018, this warrant to purchase 7.5 million shares, as adjusted, had vested in full. Warrant A is exercisable in accordance with its terms through May 2021. As of June 30, 2020, 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 $37.34 per share, as adjusted (“Warrant B”). This warrant to purchase 3.77 million shares, as adjusted, will vest in increments of 37,660 shares, as adjusted, 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 June 30, 2020, 225,690 shares, as adjusted, of Warrant B have vested. Upon vesting, Warrant B becomes exercisable in accordance with its terms through May 2023. As of June 30, 2020, 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 began providing CMI services using Boeing 737-800 freighter aircraft provided by Amazon. The 737-800 CMI operations are 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 June 30, 2020, five 737-800 freighter aircraft entered CMI service. 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 $52.67 per share, as adjusted (“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 6.66 million shares, as adjusted, would vest in increments of 45,623 shares, as adjusted, 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 June 30, 2020, no portion of Warrant C has vested. Upon vesting, Warrant C would become exercisable in accordance with its terms through March 2026.

In May 2020, the warrants issued to the U.S. Treasury (see Note 3 for further discussion) triggered an antidilution adjustment to certain terms of the Amazon warrants as reflected above.

Upon the vesting of Warrant A in previous years, the fair value of the warrant 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. The fair value of Warrant A was also initially recorded as a warrant liability within Financial instruments and other liabilities (the “Amazon Warrant”). 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.

As described in Note 2, we adopted the new accounting guidance for share-based payment awards issued to a customer as of January 1, 2020. Under the amended guidance, approximately 60% of the Amazon Warrant liability related to the CMI agreements as of January 1, 2020 was reclassified to Additional paid-in-capital and will no longer be marked-to-market at the end of each reporting period. The amended guidance does not impact the accounting for the remaining portion of the Amazon Warrant liability related to Dry Lease contracts. We recognized net unrealized losses of $30.7 million and $29.7 million on the Amazon Warrant liability during the three and six months ended June 30, 2020, respectively. We recognized a net unrealized gain of $42.3 million and a net unrealized loss of $4.3 million on the Amazon Warrant during the three and six months ended June 30, 2019, respectively. The fair value of the Amazon Warrant liability was $39.5 million as of June 30, 2020 and $24.3 million as of December 31, 2019.

When it becomes probable that an increment of either Warrant B or C will vest and the related revenue begins to be recognized, the grant date fair value of such portion is 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. The grant date fair value of such increment is also recorded as Additional paid-in-capital. At the time of vesting, any amounts recorded in Additional paid-in-capital related to Dry Lease contracts would be reclassified to the Amazon Warrant liability.

We amortized $9.5 million and $6.9 million of the customer incentive asset as a reduction of Operating Revenue for the three months ended June 30, 2020 and 2019, respectively. We amortized $18.6 million and $13.2 million of the customer incentive asset for the six months ended June 30, 2020 and 2019, respectively

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

Balance at December 31, 2019	$	152,534
Initial value for estimate of vested or expected to vest warrants		5,186
Amortization of customer incentive asset		(18,556	)
Balance at June 30, 2020	$	139,164

6. Supplemental Financial Information

Accounts Receivable

Accounts receivable, net of allowance for expected credit losses related to customer contracts, excluding Dry Leasing contracts, was $189.5 million as of June 30, 2020 and $247.5 million as of December 31, 2019.

Allowance for expected credit losses, included within Accounts receivable, is as follows:

Balance as of December 31, 2019	$	1,822
Bad debt recovery		(6	)
Amounts written off, net of recoveries		(930	)
Balance as of June 30, 2020	$	886

Accrued Liabilities

Accrued liabilities consisted of the following as of:

	June 30, 2020		December 31, 2019
Maintenance	$	161,975	$	136,315
Deferred grant income		132,877		-
Customer maintenance reserves		96,131		110,355
Salaries, wages and benefits		88,180		75,719
Deferred revenue		38,437		26,357
Aircraft fuel		34,726		28,821
Other		100,927		104,158
Accrued liabilities	$	653,253	$	481,725

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 six months ended June 30, 2020 were as follows:


	Deferred Revenue
Balance as of December 31, 2019	$	19,234
Revenue recognized		(95,027	)
Amounts collected or invoiced		108,556
Balance as of June 30, 2020	$	32,763

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:

	June 30, 2020		December 31, 2019
Cash and cash equivalents	$	726,402	$	103,029
Restricted cash		12,776		10,401
Total Cash, cash equivalents and restricted cash shown in Consolidated Statements of Cash Flows	$	739,178	$	113,430

7. Assets Held For Sale and Other Income

As of December 31, 2019, we had two 737-400 passenger aircraft previously used for training purposes, certain spare CF6-80 engines and three aircraft in our Dry Leasing portfolio classified as held for sale. During the six months ended June 30, 2020, we received net proceeds of $44.1 million from the completion of the sales of some of the spare CF6-80 engines and two aircraft in our Dry Leasing portfolio, and recognized a net gain of $6.7 million. During the three and six months ended June 30, 2020, we recognized an impairment loss of $15.9 million related to fair value adjustments for assets held for sale, within Special charge in the consolidated statement of operations. The carrying value of the assets held for sale as of June 30, 2020 and December 31, 2019 was $99.0 million and $155.9 million, respectively, which was included within Prepaid expense, held for sale and other current assets in the consolidated balance sheets. Sales of the remaining aircraft and engines held for sale are expected to be completed in 2020.

During the three and six months ended June 30, 2020, we recognized refunds of $31.5 million and $32.9 million, respectively, related to aircraft rent paid in previous years within Other (income) expense, net.

8. Debt

Term Loans

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

In April 2020, we borrowed $14.6 million at a fixed interest rate of 1.15% under an unsecured five-year term loan due in April 2025 for GEnx engine performance upgrade kits and overhauls (the “Third 2020 Term Loan”). The Third 2020 Term Loan is subject to customary fees, covenants and events of default, with principal and interest payable quarterly.

Promissory Note

See Note 3 for a discussion of the Promissory Note we issued to the U.S. Treasury during the three months ended June 30, 2020.

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 June 30, 2020:

	2017 Convertible Notes			2015 Convertible Notes
Remaining life in months		47			23
Liability component:
Gross proceeds	$	289,000		$	224,500
Less: debt discount, net of amortization		(42,795	)		(16,934	)
Less: debt issuance cost, net of amortization		(3,318	)		(1,569	)
Net carrying amount	$	242,887		$	205,997

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

(1)

Included in Additional paid-in-capital on the consolidated balance sheet as of June 30, 2020.

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

	For the Three Months Ended				For the Six Months Ended
	June 30, 2020		June 30, 2019		June 30, 2020		June 30, 2019
Contractual interest coupon	$	2,618	$	2,618	$	5,235	$	5,235
Amortization of debt discount		4,457		4,186		8,845		8,308
Amortization of debt issuance costs		391		375		777		747
Total interest expense recognized	$	7,466	$	7,179	$	14,857	$	14,290

Revolving Credit Facility

We have a $200.0 million secured revolving credit facility that matures in December 2022 (the “Revolver”). As of June 30, 2020, there was $175.0 million outstanding and we had $16.2 million of unused availability, based on the collateral borrowing base. In July 2020, our unused availability, based on the collateral borrowing base, increased to $25.0 million. [In August 2020, we repaid $175.0 million and had $200.0 million of unused availability.]

9. Income Taxes

The effective income tax expense for the three and six months ended June 30, 2020 differed from tax at the U.S. statutory rate primarily due to $6.7 million and $6.5 million of nondeductible changes in the fair value of a customer warrant liability, respectively (see Note 5 for further discussion).

The effective income tax benefit for the three and six months ended June 30, 2019 differed from tax at the U.S. statutory rate primarily due to $59.8 million of tax benefits related to the favorable completion of an IRS examination of our 2015 income tax return and, for the three months ended June 30, 2019, $9.3 million of nontaxable changes in the fair value of a customer warrant liability (see Note 5 for further discussion). For interim accounting purposes, we recognize income taxes using an estimated annual effective tax rate. When finalized, the complete operational merger of Atlas and Southern Air (see Note 12 for further discussion) would result in a material increase to our deferred tax liability.

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.

Term loans and notes consist of term loans, notes guaranteed by the Export-Import Bank of the United States, the Promissory Note issued to the U.S. Treasury and equipment enhanced trust certificates. The fair values of these debt instruments and the Revolver 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:

	June 30, 2020
	Carrying Value		Fair Value		Level 1		Level 2		Level 3
Assets
Cash and cash equivalents	$	726,402	$	726,402	$	726,402	$	-	$	-
Restricted cash		12,776		12,776		12,776		-		-
	$	739,178	$	739,178	$	739,178	$	-	$	-

Liabilities
Term loans and notes	$	1,850,350	$	1,886,041	$	-	$	-	$	1,886,041
Revolver		175,000		170,057		-		-		170,057
Convertible notes (1)		448,883		479,134		479,134		-		-
Customer warrant		39,539		39,539		-		39,539		-
	$	2,513,772	$	2,574,771	$	479,134	$	39,539	$	2,056,098

	December 31, 2019
	Carrying Value		Fair Value		Level 1		Level 2		Level 3
Assets
Cash and cash equivalents	$	103,029	$	103,029	$	103,029	$	-	$	-
Short-term investments		879		879		-		-		879
Restricted cash		10,401		10,401		10,401		-		-
	$	114,309	$	114,309	$	113,430	$	-	$	879

Liabilities
Term loans and notes	$	1,800,911	$	1,885,750	$	-	$	-	$	1,885,750
Revolver		100,000		103,575		-		-		103,575
Convertible notes (1)		439,261		450,668		450,668		-		-
Customer warrant		24,345		24,345		-		24,345		-
	$	2,364,517	$	2,464,338	$	450,668	$	24,345	$	1,989,325

(1) Carrying value is net of debt discounts and debt issuance costs (see Note 8).

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 called Direct Contribution, which shows the profitability of each segment after allocation of direct operating and ownership costs. Direct Contribution includes Income (loss) from continuing operations before income taxes and excludes the following: Special charges, Transaction-related expenses, nonrecurring items, Gain (losses) on the disposal of aircraft, Losses on early extinguishment of debt, Unrealized losses (gains) on financial instruments, Gains on investments and Unallocated income and expenses, 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, other non-operating costs and Payroll Support Program grant income.

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

	For the Three Months Ended						For the Six Months Ended
	June 30, 2020			June 30, 2019			June 30, 2020			June 30, 2019
Operating Revenue:
ACMI	$	291,951		$	307,278		$	570,695		$	613,845
Charter		497,547			315,679			825,176			620,793
Dry Leasing		40,906			43,535			82,832			113,481
Customer incentive asset amortization		(9,534	)		(6,936	)		(18,556	)		(13,222	)
Other		4,383			4,362			8,608			8,704
Total Operating Revenue	$	825,253		$	663,918		$	1,468,755		$	1,343,601

Direct Contribution:
ACMI	$	14,495		$	40,640		$	66,802		$	80,647
Charter		185,969			14,084			236,750			43,217
Dry Leasing		9,721			11,091			20,420			46,618
Total Direct Contribution for Reportable Segments		210,185			65,815			323,972			170,482

Unallocated expenses and (income), net		(50,308	)		(81,927	)		(139,029	)		(162,064	)
Loss on early extinguishment of debt		(74	)		-			(74	)		(245	)
Unrealized gain (loss) on financial instruments		(30,671	)		42,300			(29,747	)		(4,275	)
Special charge		(15,934	)		(3,269	)		(15,934	)		(3,269	)
Transaction-related expenses		(1,275	)		(734	)		(1,796	)		(3,261	)
Gain (loss) on disposal of aircraft		(2	)		-			6,715			-
Income (loss) before income taxes		111,921			22,185			144,107			(2,632	)

Add back (subtract):
Interest income		(224	)		(1,278	)		(704	)		(3,322	)
Interest expense		28,950			30,045			58,225			60,398
Capitalized interest		(132	)		(627	)		(325	)		(1,090	)
Loss on early extinguishment of debt		74			-			74			245
Unrealized (gain) loss on financial instruments		30,671			(42,300	)		29,747			4,275
Other (income) expense, net		(50,598	)		945			(49,392	)		(2,030	)
Operating Income	$	120,662		$	8,970		$	181,732		$	55,844

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

	For the Three Months Ended
	June 30, 2020							June 30, 2019
		Cargo		Passenger		Total		Cargo		Passenger		Total
Commercial customers		$	394,062	$	17	$	394,079	$	133,178	$	3,054	$	136,232
AMC			49,762		53,706		103,468		92,017		87,430		179,447
Total Charter Revenue		$	443,824	$	53,723	$	497,547	$	225,195	$	90,484	$	315,679

	For the Six Months Ended
		June 30, 2020						June 30, 2019
		Cargo		Passenger		Total		Cargo		Passenger		Total
Commercial customers		$	568,551	$	3,122	$	571,673	$	282,082	$	10,661	$	292,743
AMC			112,236		141,267		253,503		149,463		178,587		328,050
Total Charter Revenue		$	680,787	$	144,389	$	825,176	$	431,545	$	189,248	$	620,793

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 AMC, Polar and DHL (see above and Note 4 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 $151.9 million for the three months ended June 30, 2020 and $87.4 million for the three months ended June 30, 2019. Revenue from DHL was $250.2 million for the six months ended June 30, 2020 and $177.1 million for the six months ended June 30, 2019. 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 U.S. District Court for the Southern District 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, and on November 21, 2019, the U.S. Court of Appeals for the Second Circuit Court issued its decision in the Company’s favor affirming the NY District Court’s decision.

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. On March 31, 2020, the DC District Court ruled in the Company’s favor, enforcing the arbitration decisions and directing the IBT to produce the ISL by May 15, 2020.

The IBT subsequently requested additional time from the Company to complete the ISL and the parties agreed to a joint stipulation. As a result, on April 24, 2020, the DC District Court issued an order modifying its March 31st order, providing that the nine-month timeframe to bargain for a new JCBA will be triggered on May 15, 2020 and that the IBT must produce the ISL by March 31, 2021. Any remaining open issues will then be determined by binding interest arbitration pursuant to the merger provisions in the CBAs. On April 28, 2020, the IBT and Local 2750 filed a Notice of Appeal of the DC District Court’s March 31st order, which remains in place pending appeal.

In connection with its opposition to application of the merger provisions, the IBT commenced lawsuits in the DC District Court seeking to vacate both arbitration awards. On January 28, 2020, the DC District Court ruled in the Company’s favor, granting its motions to dismiss both of the IBT’s lawsuits. On April 28, 2020, the IBT and Local 2750 filed a Notice of Appeal of the DC District Court’s January 28th orders, which remains in place pending appeal.

The Company and the IBT continue to meet virtually to move the process forward and bargain in good faith for a new JCBA. Substantive progress has been made with tentative agreements for more than half 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 Atlas pilots represented by the IBT formed a new local union, IBT Local 2750 to represent them. The Southern Air pilots continue to be represented by IBT Local 1224. The Company continues to work with both Local 2750 and Local 1224 leadership groups.

On May 7, 2020, the Company announced that Atlas and Southern Air reached an agreement with IBT Locals 2750 and 1224, which provides for a ten percent pay increase for all pilots, effective as of May 1, 2020. This pay increase provides interim additional compensation to our pilots until a new JCBA is reached.

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.

On May 22,^,2020, the IBT filed a motion to dismiss the Company’s action for a preliminary injunction, asserting the Company’s claim for injunctive relief was mooted by the DC District Court’s March 31, 2020 decision in a separate case enforcing the management grievance arbitration awards in the Company’s favor. The Company filed an opposition to the IBT’s motion on June 22, 2020, and the IBT’s reply was filed on July 3, 2020. The preliminary injunction remains in full force and effect pending the court’s decision.

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 seeking recovery for damages purportedly arising from allegedly unlawful pricing practices of such defendants. In response, British Airways, KLM, Martinair, Air France and Lufthansa 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 British Airways, KLM, Martinair, Air France and Lufthansa, among others, but not Old Polar or Polar. 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 $3.8 million in aggregate based on June 30, 2020 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 $3.1 million as of June 30, 2020 and $4.1 million as of December 31, 2019, 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 Six Months Ended
Numerator:	June 30, 2020		June 30, 2019			June 30, 2020		June 30, 2019
Net Income	$	78,912	$	86,868		$	102,265	$	57,158
Less: Unrealized gain on financial instruments, net of tax		-		(43,379	)		-		-
Diluted Net income	$	78,912	$	43,489		$	102,265	$	57,158

Denominator:
Basic EPS weighted average shares outstanding		26,129		25,851			26,048		25,794
Effect of dilutive warrants		9		1,089			4		-
Effect of dilutive restricted stock		44		13			22		127
Diluted EPS weighted average shares outstanding		26,182		26,953			26,074		25,921

Earnings per share:
Basic	$	3.02	$	3.36		$	3.93	$	2.22
Diluted	$	3.01	$	1.61		$	3.92	$	2.21

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 15.5 million for the three and six months ended June 30, 2020, respectively and 7.8 million for the three and six months ended June 30, 2019. 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 10.5 million for the three and six months ended June 30, 2020 and 10.6 million for the three and six months ended June 30, 2019.

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, 2018	$	(3,841	)	$	9	$	(3,832	)
Reclassification to interest expense		681			-		681
Tax effect		(161	)		-		(161	)
Balance as of June 30, 2019	$	(3,321	)	$	9	$	(3,312	)

Balance as of December 31, 2019	$	(2,827	)	$	9	$	(2,818	)
Reclassification to interest expense		604			-		604
Tax effect		(133	)		-		(133	)
Balance as of June 30, 2020	$	(2,356	)	$	9	$	(2,347	)

Interest Rate Derivatives

As of June 30, 2020, there was $3.1 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 both $0.3 million for the three months ended June 30, 2020 and 2019. Net realized losses reclassified into earnings were $0.6 million and $0.7 million for the six months ended June 30, 2020 and 2019, respectively. Net realized losses expected to be reclassified into earnings within the next 12 months are $1.1 million as of June 30, 2020.

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 2019 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.

Utilization		The average number of Block Hours operated per day per aircraft.

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

Our primary service offerings include the following:

•

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

•

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

•

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

•

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

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

•

Delivering superior service quality to our valued customers;

•

Focusing on securing long-term customer contracts;

•

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

•

Leveraging our flexible business model to maximize utilization;

•

Driving significant and ongoing productivity improvements;

•

Selectively pursuing and evaluating future acquisitions and alliances; while

•

Appropriately managing capital allocation and delivering value to shareholders.

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

Business Developments

In December 2019, COVID-19 was first reported in China and has since spread to many other regions of the world. In March 2020, COVID-19 was determined to be a global pandemic by the World Health Organization. During the first six months of 2020, this public health crisis disrupted global manufacturing, supply chains, passenger travel and consumer spending, resulting in flight cancellations by our ACMI customers and lower AMC passenger flying as the military took precautionary measures to limit the movement of personnel, as well as increased operating costs.

Our Charter results for the first half of 2020, compared with 2019 were significantly impacted by the reduction of available cargo capacity in the market and the disruption of global supply chains due to the COVID-19 pandemic resulting in significantly higher commercial charter cargo Yields, net of fuel. Due to this strong demand, we reactivated three 747-400BCF aircraft that had been temporarily parked and began Charter operations for a 777-200 freighter aircraft in our Dry Leasing business. During the second quarter of 2020, we entered into several long-term charter programs with customers seeking to secure committed cargo capacity utilizing aircraft redeployed from our ACMI segment. These long-term charter programs provide us with guaranteed revenue and include indexed fuel price adjustments to mitigate our exposure to fuel price volatility.

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

•

implementing frequent deep cleaning of all aircraft and facilities;

•

providing full safety kits for each crewmember and all aircraft;

•

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

•

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

•

having employees who can work remotely do so based on local conditions.

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

Given the dynamic nature of this pandemic, the duration of business disruption, the extent of customer cancellations and the related financial impact cannot be reasonably estimated at this time. We have incurred and expect to incur significant additional costs, including premium pay; other operational costs, including costs for continuing to provide a safe working environment for our employees; and higher crew costs related to increased pay rates resulting from our recent interim agreement with our pilots. In addition, the availability of hotels and restaurants; evolving COVID-19-related travel restrictions and health screenings; and cancellations of passenger flights by other airlines globally or airport closures have impacted and could further impact our ability to position employees to operate our aircraft. In response to these challenging times, we have:

•

significantly reduced nonessential employee travel;

•

reduced the use of contractors;

•

limited ground staff hiring;

•

secured vendor pricing discounts for engine overhauls and other maintenance;

•

implemented a number of other cost reduction initiatives;

•

taken other actions, such as the sale of certain nonessential assets;

•

entered into a Payroll Support Program Agreement with the U.S. Treasury; and

•

begun to defer payment of the employer portion of social security taxes as provided for under the CARES Act through the end of 2020.

The continuation or worsening of the aforementioned and other factors, including restrictions on travel and transportation, could materially affect our results for the duration of the crisis. We also 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 half of 2020, compared with 2019, were also impacted by increased flying from the following:

•

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

•

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

•

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

•

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

•

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

Results of Operations

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

Three Months Ended June 30, 2020 and 2019

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 June 30:

Segment Operating Fleet	2020			2019			Inc/(Dec)
ACMI*
747-8F Cargo		8.8			8.2			0.6
747-400 Cargo		13.1			18.4			(5.3	)
747-400 Dreamlifter		1.8			3.6			(1.8	)
777-200 Cargo		8.1			6.4			1.7
767-300 Cargo		23.7			25.0			(1.3	)
767-200 Cargo		9.0			9.0			-
767-200 Passenger		1.0			1.0			-
737-800 Cargo		5.0			1.8			3.2
737-400 Cargo		4.6			5.0			(0.4	)
Total		75.1			78.4			(3.3	)

Charter
747-8F Cargo		1.1			1.6			(0.5	)
747-400 Cargo		19.4			15.2			4.2
747-400 Passenger		5.0			4.0			1.0
777-200 Cargo		0.6			-			0.6
767-300 Cargo		0.3			-			0.3
767-300 Passenger		4.8			4.9			(0.1	)
Total		31.2			25.7			5.5

Dry Leasing
777-200 Cargo		7.0			7.0			-
767-300 Cargo		21.0			21.0			-
757-200 Cargo		-			1.0			(1.0	)
737-300 Cargo		1.0			1.0			-
737-800 Passenger		-			1.0			(1.0	)
Total		29.0			31.0			(2.0	)

Less: Aircraft Dry Leased to CMI customers		(21.0	)		(23.0	)		(2.0	)
Total Operating Average Aircraft Equivalents		114.3			112.1			2.2

Out-of-service**		1.7			1.0			0.7

ACMI average fleet excludes spare aircraft provided by CMI customers.

Out-of-service includes aircraft that are either temporarily parked or held for sale.

Block Hours		2020				2019				Inc/(Dec)				% Change
Total Block Hours***			84,966				80,282				4,684				5.8	%

***

Includes ACMI, Charter and other Block Hours.

Operating Revenue

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

	2020			2019			Inc/(Dec)			% Change
Operating Revenue
ACMI	$	291,951		$	307,278		$	(15,327	)		(5.0	)%
Charter		497,547			315,679			181,868			57.6	%
Dry Leasing		40,906			43,535			(2,629	)		(6.0	)%
Customer incentive asset amortization		(9,534	)		(6,936	)		2,598			37.5	%
Other		4,383			4,362			21			0.5	%
Total Operating Revenue	$	825,253		$	663,918

ACMI

	2020		2019		Inc/(Dec)			% Change
ACMI Block Hours		59,531		61,942		(2,411	)		(3.9	)%
ACMI Revenue Per Block Hour	$	4,904	$	4,961	$	(57	)		(1.1	)%

ACMI revenue decreased $15.3 million, or 5.0%, primarily due to decreased flying. The decrease in Block Hours flown was primarily driven by the redeployment of 747-400 aircraft to Charter to support long-term charter programs with customers seeking to secure committed cargo capacity, partially offset by an increase in CMI flying. Revenue per Block Hour was relatively unchanged.

Charter

	2020		2019		Inc/(Dec)			% Change
Charter Block Hours:
Cargo		20,876		12,888		7,988			62.0	%
Passenger		3,108		4,773		(1,665	)		(34.9	)%
Total		23,984		17,661		6,323			35.8	%

Charter Revenue Per Block Hour:
Cargo	$	21,260	$	17,473	$	3,787			21.7	%
Passenger	$	17,285	$	18,957	$	(1,672	)		(8.8	)%
Charter	$	20,745	$	17,874	$	2,871			16.1	%

Charter revenue increased $181.9 million, or 57.6%, primarily due to increased flying and an increase in Revenue per Block Hour. The increase in Charter Block Hours flown was primarily driven by increased demand for freighter aircraft reflecting a reduction of available cargo capacity in the market, the disruption of global supply chains due to the COVID-19 pandemic and our ability to increase utilization. Due to this increased demand and in support of long-term charter programs with customers seeking to secure committed cargo capacity, we redeployed 747-400 aircraft from ACMI and began operating a 777-200 freighter aircraft in our Dry Leasing business. Partially offsetting these improvements was lower AMC passenger flying for 747-400 aircraft as the U.S. military took precautionary measures to limit the movement of military personnel. Revenue per Block Hour increased primarily due to higher commercial cargo Yields driven by the factors impacting commercial cargo demand noted above, partially offset by a reduction in passenger charter Revenue per Block Hour related to a decrease in higher-yielding 747-400 flying for the AMC.

Dry Leasing

Dry Leasing revenue decreased $2.6 million, or 6.0%, primarily due to changes in leases and the disposition of certain nonessential Dry Leased aircraft during the first quarter of 2020.

Operating Expenses

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

	2020		2019		Inc/(Dec)			% Change
Operating Expenses
Salaries, wages and benefits	$	192,591	$	141,450	$	51,141			36.2	%
Maintenance, materials and repairs		168,300		113,471		54,829			48.3	%
Aircraft fuel		83,242		122,158		(38,916	)		(31.9	)%
Depreciation and amortization		65,826		63,689		2,137			3.4	%
Travel		34,627		46,374		(11,747	)		(25.3	)%
Navigation fees, landing fees and other rent		35,638		37,982		(2,344	)		(6.2	)%
Passenger and ground handling services		30,130		30,525		(395	)		(1.3	)%
Aircraft rent		24,316		40,335		(16,019	)		(39.7	)%
Loss on disposal of aircraft		2		-		(2	)	NM
Special charge		15,934		3,269		12,665		NM
Transaction-related expenses		1,275		734		541			73.7	%
Other		52,710		54,961		(2,251	)		(4.1	)%
Total Operating Expenses	$	704,591	$	654,948

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

Salaries, wages and benefits increased $51.1 million, or 36.2%, primarily due to higher pilot costs related to premium pay for pilots operating in certain areas significantly impacted by COVID-19, increased pay rates from our recent interim agreement with our pilots, and increased flying.

Maintenance, materials and repairs increased $54.8 million, or 48.3%, primarily reflecting $52.2 million of increased Heavy Maintenance expense. Heavy Maintenance expense on 747-400 aircraft increased $42.8 million primarily due to an increase in the number of engine overhauls, C Checks and other maintenance to take advantage of availability and opportunities for vendor pricing discounts. Heavy Maintenance expense on 747-8F aircraft increased $7.2 million primarily due to an increase in the number of D Checks. In addition, Line Maintenance expense increased $1.5 million reflecting an increase of $3.7 million related to increased cargo flying, partially offset by a $2.2 million decrease related to reduced passenger flying. Heavy airframe maintenance checks and engine overhauls impacting Maintenance, materials and repairs for the three months ended June 30 were:

Heavy Maintenance Events	2020		2019		Inc/(Dec)
747-400 C Checks		7		6		1
767 C Checks		3		1		2
747-8F D Checks		3		1		2
747-400 D Checks		1		1		-
CF6-80 engine overhauls		12		4		8
PW4000 engine overhauls		1		-		1

Aircraft fuel decreased $38.9 million, or 31.9%, primarily due to a decrease in the average fuel cost per gallon, partially offset by an increase in consumption related to increased Charter flying. 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 June 30 were:

	2020		2019		Inc/(Dec)			% Change
Average fuel cost per gallon	$	1.10	$	2.37	$	(1.27	)		(53.6	)%
Fuel gallons consumed (000s)		75,769		51,596		24,173			46.9	%

Depreciation and amortization increased $2.1 million, or 3.4%, 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 an increase in the scrapping of rotable parts. Partially offsetting these increases was a reduction in depreciation related to the 747-400 freighter asset group that was written down during the fourth quarter of 2019, and certain spare CF6-80 engines and aircraft that were classified as held for sale during the fourth quarter of 2019.

Travel decreased $11.7 million, or 25.3%, primarily due to decreased rates and travel related to the impact of the COVID-19 pandemic, partially offset by an increase in flying.

Navigation fees, landing fees and other rent decreased $2.3 million, or 6.2%, primarily due to a decrease in purchased capacity, which is a component of other rent, partially offset by increased flying.

Aircraft rent decreased $16.0 million, or 39.7%, primarily due to a reduction in the amortization of operating lease right-of-use assets related to the 747-400 freighter asset group that was written down during the fourth quarter of 2019.

Special charge in 2020 primarily represented a $15.9 million impairment charge related to fair value adjustments for assets held for sale including spare engines and 737-400 passenger aircraft for training purposes. Special charge in 2019 primarily represented a $2.5 million impairment loss on an engine trade-in as part of our engine acquisition program. See Note 7 to our Financial Statements for additional discussion. We may sell additional flight equipment, which could result in additional charges in future periods.

Transaction-related expenses in 2020 primarily related to professional fees in support of the Payroll Support Program under the CARES Act (see Note 3 to our Financial Statements). Transaction-related expenses in 2019 primarily related to professional fees for a customer transaction with warrants (see Note 5 to our Financial Statements).

Other decreased $2.3 million, or 4.1%, primarily due to a reduction in commission expense related to decreased revenue from the AMC.

Non-operating Expenses (Income)

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

	2020			2019			Inc/(Dec)			% Change
Non-operating Expenses (Income)
Interest income	$	(224	)	$	(1,278	)	$	(1,054	)		(82.5	)%
Interest expense		28,950			30,045			(1,095	)		(3.6	)%
Capitalized interest		(132	)		(627	)		(495	)		(78.9	)%
Loss on early extinguishment of debt		74			-			74		NM
Unrealized loss (gain) on financial instruments		30,671			(42,300	)		(72,971	)		(172.5	)%
Other (income) expense, net		(50,598	)		945			51,543		NM

Unrealized loss (gain) on financial instruments represents the change in fair value of a customer warrant liability (see Note 5 to our Financial Statements) primarily due to changes in our common stock price.

Other (income) expense, net increased $51.5 million primarily due to a $31.5 million refund of aircraft rent paid in previous years and CARES Act grant income of $20.2 million (see Note 3 to our Financial Statements).

Income taxes. The effective income tax expense for the three months ended June 30, 2020 differed from tax at the U.S. statutory rate primarily due to $6.7 million of nondeductible changes in the fair value of a customer warrant liability (see Note 5 to our Financial Statements). The effective income tax benefit for the three months ended June 30, 2019 differed from tax at the U.S. statutory rate primarily due to $59.8 million of tax benefits related to the favorable completion of an IRS examination of our 2015 income tax return and $9.3 million of nontaxable changes in the fair value of a customer warrant liability.

Segments

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

	2020		2019		Inc/(Dec)			% Change
Direct Contribution:
ACMI	$	14,495	$	40,640	$	(26,145	)		(64.3	)%
Charter		185,969		14,084		171,885		NM
Dry Leasing		9,721		11,091		(1,370	)		(12.4	)%
Total Direct Contribution	$	210,185	$	65,815	$	144,370			219.4	%

Unallocated expenses and (income), net	$	50,308	$	81,927	$	(31,619	)		(38.6	)%

ACMI Segment

ACMI Direct Contribution decreased $26.1 million, or 64.3%, primarily due to higher heavy maintenance, including additional engine overhauls and other maintenance to take advantage of availability and opportunities for vendor pricing discounts. In addition, ACMI Direct Contribution reflected higher pilot costs related to increased pay rates resulting from our recent interim agreement with our pilots and premium pay for pilots operating in certain areas significantly impacted by COVID-19. We also redeployed 747-400 aircraft to Charter to support long-term charter programs with customers seeking to secure committed cargo capacity. Partially offsetting these items was an increase in CMI flying and a reduction in aircraft rent and depreciation.

Charter Segment

Charter Direct Contribution increased $171.9 million, primarily due to an increase in commercial cargo Yields, net of fuel, and demand reflecting a reduction of available capacity in the market, the disruption of global supply chains due to the COVID-19 pandemic and our ability to increase utilization. Charter Direct Contribution also benefited from a reduction in aircraft rent and depreciation, and the redeployment of 747-400 aircraft from ACMI and the operation of a 777-200 freighter aircraft in our Dry Leasing business. Partially offsetting these improvements were higher heavy maintenance, including additional engine overhauls and other maintenance to take advantage of availability and opportunities for vendor pricing discounts, and lower passenger demand from the AMC as the COVID-19 pandemic disrupted the movement of military personnel. In addition, Charter Direct Contribution reflected higher pilot costs related to increased pay rates resulting from our recent interim agreement with our pilots and premium pay for pilots operating in certain areas significantly impacted by COVID-19.

Dry Leasing Segment

Dry Leasing Direct Contribution decreased $1.4 million, or 12.4%, primarily due to a reduction in revenue related to changes in leases and the disposition of certain nonessential Dry Leased aircraft during the first quarter of 2020.

Unallocated expenses and (income), net

Unallocated expenses and (income), net decreased $31.6 million, or 38.6%, primarily due to a refund of aircraft rent paid in previous years.

Six Months Ended June 30, 2020 and 2019

Operating Statistics

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

Segment Operating Fleet	2020			2019			Inc/(Dec)
ACMI*
747-8F Cargo		8.9			8.6			0.3
747-400 Cargo		13.0			18.0			(5.0	)
747-400 Dreamlifter		2.7			3.6			(0.9	)
777-200 Cargo		8.1			6.2			1.9
767-300 Cargo		23.8			25.3			(1.5	)
767-200 Cargo		9.0			9.0			-
767-200 Passenger		1.0			1.0			-
737-800 Cargo		5.0			0.9			4.1
737-400 Cargo		4.8			5.0			(0.2	)
Total		76.3			77.6			(1.3	)

Charter
747-8F Cargo		1.1			1.3			(0.2	)
747-400 Cargo		18.8			15.1			3.7
747-400 Passenger		5.0			4.0			1.0
777-200 Cargo		0.3			-			0.3
767-300 Cargo		0.2			-			0.2
767-300 Passenger		4.8			4.9			(0.1	)
Total		30.2			25.3			4.9

Dry Leasing
777-200 Cargo		7.0			7.5			(0.5	)
767-300 Cargo		21.0			21.3			(0.3	)
757-200 Cargo		0.2			1.0			(0.8	)
737-300 Cargo		1.0			1.0			-
737-800 Passenger		0.3			1.0			(0.7	)
Total		29.5			31.8			(2.3	)

Less: Aircraft Dry Leased to CMI customers		(21.0	)		(23.3	)		(2.3	)
Total Operating Average Aircraft Equivalents		115.0			111.4			3.6

Out-of-service**		3.5			0.5			3.0

ACMI average fleet excludes spare aircraft provided by CMI customers.

Out-of-service includes aircraft that are either temporarily parked or held for sale.

Block Hours		2020				2019				Inc/(Dec)				% Change
Total Block Hours***			158,213				157,342				871				0.6	%

***

Includes ACMI, Charter and other Block Hours.

Operating Revenue

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

	2020			2019			Inc/(Dec)			% Change
Operating Revenue
ACMI	$	570,695		$	613,845		$	(43,150	)		(7.0	)%
Charter		825,176			620,793			204,383			32.9	%
Dry Leasing		82,832			113,481			(30,649	)		(27.0	)%
Customer incentive asset amortization		(18,556	)		(13,222	)		5,334			40.3	%
Other		8,608			8,704			(96	)		(1.1	)%
Total Operating Revenue	$	1,468,755		$	1,343,601

ACMI

	2020		2019		Inc/(Dec)			% Change
ACMI Block Hours		113,910		121,722		(7,812	)		(6.4	)%
ACMI Revenue Per Block Hour	$	5,010	$	5,043	$	(33	)		(0.7	)%

ACMI revenue decreased $43.2 million, or 7.0%, primarily due to decreased flying. The decrease in Block Hours flown was primarily driven by the redeployment of 747-400 aircraft to Charter to support long-term charter programs with customers seeking to secure committed cargo capacity, partially offset by an increase in CMI flying. In addition, Block Hours were negatively impacted from flight cancellations by certain of our ACMI customers caused by the COVID-19 pandemic. Revenue per Block Hour was relatively unchanged.

Charter

	2020		2019		Inc/(Dec)			% Change
Charter Block Hours:
Cargo		34,416		24,367		10,049			41.2	%
Passenger		7,834		9,954		(2,120	)		(21.3	)%
Total		42,250		34,321		7,929			23.1	%

Charter Revenue Per Block Hour:
Cargo	$	19,781	$	17,710	$	2,071			11.7	%
Passenger	$	18,431	$	19,012	$	(581	)		(3.1	)%
Charter	$	19,531	$	18,088	$	1,443			8.0	%

Charter revenue increased $204.4 million, or 32.9%, primarily due to increased flying and an increase in Revenue per Block Hour. The increase in Charter Block Hours flown was primarily driven by increased demand for freighter aircraft reflecting a reduction of available cargo capacity in the market, the disruption of global supply chains due to the COVID-19 pandemic and our ability to increase utilization. Due to this increased demand and to support long-term charter programs with customers seeking to secure committed cargo capacity, we redeployed 747-400 aircraft from ACMI and began operation of a 777-200 freighter aircraft in our Dry Leasing business. Partially offsetting these improvements was lower AMC passenger flying for 747-400 aircraft as the U.S. military took precautionary measures to limit the movement of military personnel. Revenue per Block Hour increased primarily due to higher commercial cargo Yields driven by the factors impacting commercial cargo demand noted above, partially offset by a reduction in passenger charter Revenue per Block Hour related to a decrease in higher-yielding 747-400 flying for the AMC.

Dry Leasing

Dry Leasing revenue decreased $30.6 million, or 27.0%, primarily due to $22.3 million of revenue in 2019 from maintenance payments related to the scheduled return of a 777-200 freighter aircraft, changes in leases and the disposition of certain nonessential Dry Leased aircraft during the first quarter of 2020.

Operating Expenses

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

	2020			2019		Inc/(Dec)			% Change
Operating Expenses
Salaries, wages and benefits	$	340,335		$	286,924	$	53,411			18.6	%
Maintenance, materials and repairs		262,452			217,091		45,361			20.9	%
Aircraft fuel		191,560			228,479		(36,919	)		(16.2	)%
Depreciation and amortization		123,410			128,170		(4,760	)		(3.7	)%
Travel		77,018			91,403		(14,385	)		(15.7	)%
Navigation fees, landing fees and other rent		67,039			78,198		(11,159	)		(14.3	)%
Passenger and ground handling services		62,089			62,685		(596	)		(1.0	)%
Aircraft rent		48,283			82,223		(33,940	)		(41.3	)%
Gain on disposal of aircraft		(6,715	)		-		(6,715	)	NM
Special charge		15,934			3,269		12,665		NM
Transaction-related expenses		1,796			3,261		(1,465	)		(44.9	)%
Other		103,822			106,054		(2,232	)		(2.1	)%
Total Operating Expenses	$	1,287,023		$	1,287,757

Salaries, wages and benefits increased $53.4 million, or 18.6%, primarily due to higher pilot costs related to premium pay for pilots operating in certain areas significantly impacted by COVID-19, increased pay rates from our recent interim agreement with our pilots and increased flying.

Maintenance, materials and repairs increased by $45.4 million, or 20.9%, primarily reflecting $50.6 million of increased Heavy Maintenance expense, partially offset by $4.6 million of decreased Line Maintenance expense due to decreased passenger flying. Heavy Maintenance expense on 747-400 aircraft increased $40.9 million primarily due to an increase in the number of engine overhauls and other maintenance to take advantage of availability and opportunities for vendor pricing discounts. Heavy Maintenance expense on 747-8F aircraft increased $7.2 million primarily due to an increase in the number of D Checks, partially offset by a reduction in the number of C Checks. The lower Line Maintenance expense primarily reflected a decrease of $9.4 million related to reduced passenger flying, partially offset by $4.8 million of increased Line Maintenance expense related to increased cargo flying. Heavy airframe maintenance checks and engine overhauls impacting Maintenance, materials and repairs for the six months ended June 30 were:

Heavy Maintenance Events	2020		2019		Inc/(Dec)
747-8F C Checks		-		2		(2	)
747-400 C Checks		11		11		-
767 C Checks		6		2		4
747-8F D Checks		3		1		2
747-400 D Checks		4		1		3
CF6-80 engine overhauls		13		9		4
PW4000 engine overhauls		1		-		1

Aircraft fuel decreased $36.9 million, or 16.2%, primarily due to a decrease in the average fuel cost per gallon, partially offset by an increase in consumption related to increased Charter flying. 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 six months ended June 30 were:

	2020		2019		Inc/(Dec)			% Change
Average fuel cost per gallon	$	1.47	$	2.30	$	(0.83	)		(36.1	)%
Fuel gallons consumed (000s)		130,047		99,468		30,579			30.7	%

Depreciation and amortization decreased $4.8 million, or 3.7%, primarily due to a reduction in depreciation related to the 747-400 freighter asset group that was written down during the fourth quarter of 2019, and certain spare CF6-80 engines and aircraft that were classified as held for sale during the fourth quarter of 2019. Partially offsetting these decreases was an increase in the amortization of deferred maintenance costs related to 747-8F engine overhauls (see Note 2 to our Financial Statements).

Travel decreased $14.4 million, or 15.7%, primarily due to decreased rates and travel related to the impact of the COVID-19 pandemic, partially offset by an increase in flying.

Navigation fees, landing fees and other rent decreased $11.2 million, or 14.3%, primarily due to a decrease in purchased capacity, which is a component of other rent, partially offset by increased flying.

Aircraft rent decreased $33.9 million, or 41.3%, primarily due to a reduction in the amortization of operating lease right-of-use assets related to the 747-400 freighter asset group that was written down during the fourth quarter of 2019.

Gain on disposal of aircraft in 2020 represented a net gain of $6.7 million from the sale of certain nonessential assets that were classified as held for sale during the fourth quarter of 2019 (see Note 7 to our Financial Statements).

Special charge in 2020 primarily represented a $15.9 million impairment charge related to fair value adjustments for assets held for sale, including spare engines and 737-400 passenger aircraft for training purposes. Special charge in 2019 primarily represented a $2.5 million impairment loss on an engine trade in as part of our engine acquisition program. See Note 7 to our Financial Statements for additional discussion. We may sell additional flight equipment, which could result in additional charges in future periods.

Other decreased $2.2 million or 2.1%, primarily due to a reduction in commission expense related to decreased revenue from the AMC.

Non-operating Expenses (Income)

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

	2020			2019			Inc/(Dec)			% Change
Non-operating (Income) Expenses
Interest income	$	(704	)	$	(3,322	)	$	(2,618	)		(78.8	)%
Interest expense		58,225			60,398			(2,173	)		(3.6	)%
Capitalized interest		(325	)		(1,090	)		(765	)		(70.2	)%
Loss on early extinguishment of debt		74			245			(171	)		(69.8	)%
Unrealized loss (gain) on financial instruments		29,747			4,275			25,472		NM
Other (income) expense, net		(49,392	)		(2,030	)		47,362		NM

Other (income) expense, net increased $47.4 million primarily due to a $32.9 million refund of aircraft rent paid in previous years and CARES Act grant income of $20.2 million (see Note 3 to our Financial Statements).

Income taxes. The effective income tax expense for the six months ended June 30, 2020 differed from tax at the U.S. statutory rate primarily due to $6.5 million of nondeductible changes in the fair value of a customer warrant liability (see Note 5 to our Financial Statements). The income tax benefit for the six months ended June 30, 2019 differed from tax at the U.S. statutory rate primarily due to $59.8 million of tax benefits related to the favorable completion of an IRS examination of our 2015 income tax return.

Segments

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

	2020		2019		Inc/(Dec)			% Change
Direct Contribution:
ACMI	$	66,802	$	80,647	$	(13,845	)		(17.2	)%
Charter		236,750		43,217		193,533		NM
Dry Leasing		20,420		46,618		(26,198	)		(56.2	)%
Total Direct Contribution	$	323,972	$	170,482	$	153,490			90.0	%

Unallocated expenses and (income), net	$	139,029	$	162,064	$	(23,035	)		(14.2	)%

ACMI Segment

ACMI Direct Contribution decreased $13.8 million, or 17.2%, primarily due to higher heavy maintenance, including additional engine overhauls and other maintenance to take advantage of availability and opportunities for vendor pricing discounts. In addition, ACMI Direct Contribution reflected higher pilot costs related to premium pay for pilots operating in certain areas significantly impacted by COVID-19 and increased pay rates from our recent interim agreement with our pilots. We also redeployed 747-400 aircraft to Charter to support long-term Charter programs with customers seeking to secure committed cargo capacity. Partially offsetting these items was an increase in CMI flying and a reduction in aircraft rent and depreciation.

Charter Segment

Charter Direct Contribution increased $193.5 million primarily due to an increase in commercial cargo Yields, net of fuel, and demand reflecting a reduction of available capacity in the market, the disruption of global supply chains due to the COVID-19 pandemic and our ability to increase utilization. Charter Direct Contribution also benefited from a reduction in aircraft rent and depreciation, and the redeployment of 747-400 aircraft from ACMI and the operation of a 777-200 freighter aircraft in our Dry Leasing business. Partially offsetting these improvements were higher heavy maintenance, including additional engine overhauls and other maintenance to take advantage of availability and opportunities for vendor pricing discounts, and lower passenger demand from the AMC as the COVID-19 pandemic disrupted the movement of military personnel. In addition, Charter Direct Contribution reflected higher pilot costs related to premium pay for pilots operating in certain areas significantly impacted by COVID-19 and increased pay rates resulting from our recent interim agreement with our pilots.

Dry Leasing Segment

Dry Leasing Direct Contribution decreased $26.2 million, or 56.2%, primarily due to $22.3 million of revenue in 2019 from maintenance payments related to the scheduled return of a 777-200 freighter aircraft, changes in leases and the disposition of certain nonessential Dry Leased aircraft during the first quarter of 2020.

Unallocated expenses and (income), net

Unallocated expenses and (income), net decreased $23.0 million, or 14.2%, primarily due to a refund of aircraft rent paid in previous years.

Reconciliation of GAAP to non-GAAP Financial Measures

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

We use these non-GAAP financial measures in assessing the performance of our ongoing operations and in planning and forecasting future periods. These adjusted measures provide a more comparable basis to analyze operating results and earnings and are measures commonly used by shareholders to measure our performance. In addition, management’s incentive compensation is

determined, in part, by using Adjusted Net Income and Adjusted EBITDA. We believe that these adjusted measures, when considered together with the corresponding GAAP financial measures and the reconciliations to those measures, provide meaningful supplemental information to assist investors and analysts in understanding our business results and assessing our prospects for future performance.

The following is a reconciliation of Net Income and Diluted EPS to the corresponding non-GAAP financial measures (see Note 13 to our Financial Statements for the calculation of Diluted EPS) (in thousands, except per share data):

	For the Three Months Ended
	June 30, 2020			June 30, 2019			Percent Change

Net Income	$	78,912		$	86,868			(9.2	)%
Impact from:
CARES Act grant income (a)		(20,167	)		-
Customer incentive asset amortization		9,534			6,936
Special charge		15,934			3,269
Costs associated with transactions (b)		1,275			734
Leadership transition costs		3,156			541
Noncash expenses and income, net (c)		4,458			4,579
Unrealized loss (gain) on financial instruments		30,671			(42,300	)
Other, net (d)		279			1,815
Income tax effect of reconciling items		(863	)		(3,652	)
Special tax item (e)		-			(54,272	)
Adjusted Net Income	$	123,189		$	4,518		NM

Adjusted weighted average diluted shares outstanding		26,182			26,953

Adjusted Diluted EPS	$	4.71		$	0.17		NM

	For the Six Months ended
	June 30, 2020			June 30, 2019			Percent Change

Net Income	$	102,265		$	57,158			78.9	%
Impact from:
CARES Act grant income (a)		(20,167	)		-
Customer incentive asset amortization		18,556			13,222
Special charge		15,934			3,269
Costs associated with transactions (b)		1,796			3,261
Leadership transition costs		3,757			541
Noncash expenses and income, net (c)		8,844			9,047
Unrealized loss on financial instruments		29,747			4,275
Other, net (d)		(6,103	)		(979	)
Income tax effect of reconciling items		(1,559	)		(3,681	)
Special tax item (e)		-			(54,272	)
Adjusted Net Income	$	153,070		$	31,841		NM

Adjusted weighted average diluted shares outstanding		26,074			27,437
Adjusted Diluted EPS	$	5.87		$	1.16		NM

	For the Three Months Ended
	June 30, 2020			June 30, 2019			Percent Change

Net Income	$	78,912		$	86,868			(9.2	)%
Interest expense, net		28,594			28,140
Depreciation and amortization		65,826			63,689
Income tax expense (benefit)		33,009			(64,683	)
EBITDA		206,341			114,014
CARES Act grant income (a)		(20,167	)		-
Customer incentive asset amortization		9,534			6,936
Special charge		15,934			3,269
Costs associated with transactions (b)		1,275			734
Leadership transition costs		3,156			541
Unrealized loss (gain) on financial instruments		30,671			(42,300	)
Other, net (d)		279			954
Adjusted EBITDA	$	247,023		$	84,148			193.6	%

	For the Six Months ended
	June 30, 2020			June 30, 2019			Percent Change

Net Income	$	102,265		$	57,158			78.9	%
Interest expense, net		57,196			55,986
Depreciation and amortization		123,410			128,170
Income tax expense (benefit)		41,842			(59,790	)
EBITDA		324,713			181,524
CARES Act grant income (a)		(20,167	)		-
Customer incentive asset amortization		18,556			13,222
Special charge		15,934			3,269
Costs associated with transactions (b)		1,796			3,261
Leadership transition costs		3,757			541
Unrealized loss on financial instruments		29,747			4,275
Other, net (d)		(6,103	)		(1,580	)
Adjusted EBITDA	$	368,233		$	204,512			80.1	%

(a)

CARES Act grant income in 2020 related to income associated with the Payroll Support Program (see Note 3 to our Financial Statements).

(b)

Costs associated with transactions in 2020 primarily related to costs associated with the Payroll Support Program (see Note 3 to our Financial Statements) and our acquisition of Southern Air. Costs associated with transactions in 2019 primarily related to a customer transaction with warrants (see Note 5 to our Financial Statements) and other costs associated with our acquisition of Southern Air.

(c)

Noncash expenses and income, net in 2020 and 2019 primarily related to amortization of debt discount on the convertible notes (see Note 8 to our Financial Statements).

(d)

Other, net in 2020 primarily related to a $6.7 million net gain on the sale of aircraft, costs associated with the refinancing of debt and accrual for legal matters and professional fees. Other, net in 2019 primarily related to a net insurance recovery, loss on early extinguishment of debt, unique training aircraft costs required for a customer contract (see Note 5 to our Financial Statements) and accrual for legal matters and professional fees.

(e)

Special tax item in 2019 represented income tax benefits from the completion of the 2015 IRS examination that are not related to ongoing operations (see Note 9 to our Financial Statements).

(f)

Dilutive warrants in 2019 represented potentially dilutive common shares related to warrants issued to a customer (see Note 5 to our Financial Statements). These warrants are excluded from Diluted EPS prepared in accordance with GAAP when they would have been antidilutive.

Liquidity and Capital Resources

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

in July 2030. The other term loan is for 130 months in the amount of $82.0 million at a fixed interest rate of 3.28% with a final payment of $12.5 million due in November 2030.

In March 2020, as a precautionary measure due to uncertainty arising from the COVID-19 pandemic, we drew $75.0 million under our revolving credit facility. As of June 30, 2020, there was $175.0 million outstanding and we had $16.2 million of unused availability, based on the collateral borrowing base. In July 2020, we increased our unused availability, based on the collateral borrowing base, to $25.0 million. [In August 2020, we repaid $175.0 million and had $200.0 million of unused availability.]

In April 2020, we borrowed $14.6 million related to GEnx engine performance upgrade kits and overhauls under an unsecured five-year term loan at a fixed interest rate of 1.15%.

In May 2020, we entered into the PSP Agreement with the U.S. Treasury that provided us with payroll support funding in three installments totaling $406.8 million, of which $207.0 million is in the form of direct payroll support and $199.8 million is in the form of the Promissory Note. As of June 30, 2020, the first two installments totaling $305.1 million were received. The third installment of $101.7 million was received on July 30, 2020. The Promissory Note is due in May 2030 and bears interest on the outstanding principal amount at a rate equal to 1.00% per annum until the fifth anniversary of the PSP Closing Date and the applicable Secured Overnight Financing Rate (“SOFR”) plus 2.00% per annum thereafter (see Note 3 to our Financial Statements).

Operating Activities. Net cash provided by operating activities was $560.4 million for the first half of 2020, which primarily reflected Net Income of $102.3 million, noncash adjustments of $157.5 million for Depreciation and amortization, $39.5 million for Deferred taxes and $29.7 million for Unrealized loss on financial instruments, a $178.9 million increase in Accounts payable, accrued liabilities and other liabilities, and a $51.8 million decrease in Accounts receivable, partially offset by a $19.1 million increase in Prepaid expenses, current assets and other assets. Net cash provided by operating activities was $109.0 million for the first half of 2019, which primarily reflected Net Income of $57.2 million, noncash adjustments of $157.8 million for Depreciation and amortization, $60.0 million for Deferred taxes and $4.3 million for Unrealized loss on financial instruments, partially offset by a $40.1 million decrease in Accounts payable, accrued liabilities and other liabilities, and a $23.8 million increase in Prepaid expenses, current assets and other assets.

Investing Activities. Net cash used for investing activities was $40.0 million for the first half of 2020, consisting primarily of $59.9 million of payments for flight equipment and $25.1 million of payments for core capital expenditures, excluding flight equipment, partially offset by $44.1 million of proceeds from the disposal of aircraft. Payments for flight equipment and modifications during the first half of 2020 were primarily related to spare engines and GEnx engine performance upgrade kits. All capital expenditures for 2020 were funded through working capital and the financings discussed above. Net cash used for investing activities was $128.5 million for the first half of 2019, consisting primarily of $99.2 million of payments for flight equipment and modifications and $76.8 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 half of 2019 were primarily related to 767-300 passenger aircraft and related freighter conversion costs, spare engines and GEnx engine performance upgrade kits.

Financing Activities. Net cash provided by financing activities was $105.4 million for the first half of 2020, which primarily reflected $321.5 million from debt issuance and $75.0 million of proceeds from our revolving credit facility, partially offset by $275.0 million of payments on debt and $14.4 million in payments of maintenance reserves. Net cash used for financing activities was $92.5 million for the first half of 2019, which primarily reflected $160.1 million of payments on debt, including a $20.7 million repayment of two term loans, and $9.2 million related to the treasury shares withheld for payment of taxes, partially offset by $50.0 million of proceeds from our revolving credit facility and $19.7 million from debt issuance.

In response to the COVID-19 pandemic, we have significantly reduced nonessential employee travel, reduced the use of contractors, limited ground staff hiring, implemented a number of other cost reduction initiatives and taken actions to increase liquidity and strengthen our financial position, including participation in the Payroll Support Program and deferral of the payment of the employer portion of social security taxes as provided for under the CARES Act. In connection with our participation in the Payroll Support Program, we agreed not to repurchase shares in the open market of, or make dividend payments with respect to, our common stock through September 30, 2021. We consider Cash and cash equivalents (excluding Payroll Support Program proceeds to be used exclusively for the payment of certain employee wages, salaries and benefits of the PSP Recipients), Net cash provided by operating activities and availability under our revolving credit facility to be sufficient to meet our debt and lease obligations, and to fund committed and core capital expenditures for the remainder of 2020. Commitments to acquire engines are approximately $66.3 million. Core capital expenditures for the remainder of 2020 are expected to range between $55.0 to $65.0 million, which excludes flight equipment and capitalized interest.

We may access external sources of capital from time to time depending on our cash requirements, assessments of current and anticipated market conditions, and the after-tax cost of capital. To that end, we filed a shelf registration statement with the SEC in April 2020 that enables us to sell debt and/or equity securities on a registered basis over the subsequent three years, depending on

market conditions, our capital needs and other factors. Our access to capital markets can be adversely impacted by prevailing economic conditions and by financial, business and other factors, some of which are beyond our control. Additionally, our borrowing costs are affected by market conditions and may be adversely impacted by a tightening in credit markets.

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

Contractual Obligations and Debt Agreements

See Notes 3 and 8 to our Financial Statements for a description of our new debt. See our 2019 Annual Report on Form 10-K for a tabular disclosure of our contractual obligations as of December 31, 2019 and a description of our other debt obligations and amendments thereto.

Off-Balance Sheet Arrangements

There were no material changes in our off-balance sheet arrangements during the six months ended June 30, 2020.

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, 2019. 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 six months ended June 30, 2020. 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 2019 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 June 30, 2020. 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

In connection with entering into an agreement with the U.S. Treasury under the Payroll Support Program of the CARES Act, we implemented new processes and internal controls related to the payroll support funding received and compliance with the requirements of the agreement.

Except as described above, 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 June 30, 2020 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 June 30, 2020, 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

The following is an update of our risk factors that are set forth in Item 1A — Risk Factors of our 2019 Annual Report on Form 10-K. The update reflects an additional risk factor related to entering into an agreement with the U.S. Treasury under the Payroll Support Program of the CARES Act. For additional risk factors that may cause actual results to differ materially from those anticipated, please refer to our 2019 Annual Report on Form 10-K.

Our agreements with the U.S. Treasury under the Payroll Support Program contain certain requirements and restrictions. If we are unable to comply with these requirements and restrictions, it could have a material adverse effect on our business, results of operations and financial condition

In connection with the Payroll Support Program, we are required to comply with the relevant requirements of the CARES Act, including the requirement that funds provided pursuant to the PSP Agreement be used exclusively for the payment of certain employee wages, salaries and benefits of the PSP Recipients. The Payroll Support Program subjects the PSP Recipients and certain of their affiliates to a number of restrictions, including prohibitions against reductions in certain employee salaries, wages and benefits, and certain involuntary terminations and furloughs of employees until September 30, 2020, prohibitions of repurchasing shares in the open market of, or making dividend payments with respect to, our common stock through September 30, 2021, as well as certain limitations on executive compensation until March 24, 2022. Under the PSP Agreement, we must also maintain certain internal controls and records relating to the payroll support funding and we are subject to additional reporting obligations. If we are unable to comply with the requirements and restrictions within the Payroll Support Program, the U.S. Treasury could require repayment of amounts previously provided to us, among other actions, which could have a material adverse effect on our business, results of operations and financial condition.

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



4.1		Warrant Agreement, dated as of May 29, 2020, between Atlas Air Worldwide Holdings, Inc. and the United States Department of the Treasury.

4.2		Form of Warrant Agreement (incorporated by reference to Annex B to Exhibit 4.1).

10.1		Payroll Support Program Agreement, dated as of May 29, 2020, between Atlas Air, Inc. and the United States Department of the Treasury.

10.2		Promissory Note, dated as of May 29, 2020, issued by Atlas Air Worldwide Holdings, Inc. In the name of the United States Department of the Treasury.

10.3		Proposal No. 4 – Approval of Amendment to the Atlas Air Worldwide Holdings, Inc. 2018 Incentive Plan, effective as of June 9, 2020, included in the Company’s Definitive Proxy Statement on Schedule 14A filed with the SEC on May 8, 2020 and incorporated herein by reference.

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 June 30, 2020 and December 31, 2019, (ii) Consolidated Statements of Operations for the three and six months ended June 30, 2020 and 2019, (iii) Consolidated Statements of Comprehensive Income (Loss) for the three and six months ended June 30, 2020 and 2019, (iv) Consolidated Statements of Cash Flows for the six months ended June 30, 2020 and 2019, (v) Consolidated Statements of Stockholders’ Equity as of and for the three and six months ended June 30, 2020 and 2019 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: August 6, 2020		/s/ John W. Dietrich
		John W. Dietrich
		President and Chief Executive Officer

Dated: August 6, 2020		/s/ Spencer Schwartz
		Spencer Schwartz
		Executive Vice President and Chief Financial Officer