ATLAS AIR WORLDWIDE HOLDINGS INC - Annual Report: 2021 (Form 10-K)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

For the fiscal year ended December 31, 2021

OR

Commission file number 001-16545

Atlas Air Worldwide Holdings, Inc.

(Exact name of registrant as specified in its Charter)

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

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

None

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

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

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

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

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

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

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

Indicate by check mark whether the registrant has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report ☒

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

The aggregate market value of the registrant’s Common Stock held by non-affiliates based upon the closing price of Common Stock as reported on The NASDAQ Global Select Market as of June 30, 2021 was approximately $1,479.5 million.  As of February 11, 2022, there were 29,215,702 shares of the registrant’s Common Stock outstanding.

Documents Incorporated by Reference:

Certain portions of the registrant’s Proxy Statement relating to the 2022 Annual Meeting of Stockholders, to be filed with the Securities and Exchange Commission, are incorporated by reference into Part III.

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TABLE OF CONTENTS

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FORWARD-LOOKING STATEMENTS

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

The forward-looking statements in this Report are not representations or guarantees of future performance and involve certain risks, uncertainties and assumptions. Such risks, uncertainties and assumptions include, but are not limited to, those described in Item 1A, “Risk Factors” and Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”  Many of such factors are beyond AAWW’s control and are difficult to predict.  As a result, AAWW’s future actions, financial position, results of operations and the market price for shares of AAWW’s common stock could differ materially from those expressed in any forward-looking statements. Readers are therefore cautioned not to place undue reliance on forward-looking statements.  Such forward-looking statements speak only as of the date of this report.  AAWW does not intend to publicly update any forward-looking statements that may be made from time to time by, or on behalf of, AAWW, whether as a result of new information, future events or otherwise, except as required by law and expressly disclaims any obligation to revise or update publicly any forward-looking statement to reflect future events or circumstances.

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PART I

ITEM 1. BUSINESS

Glossary

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

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Overview

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

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, the U.S. Military Air Mobility Command (“AMC”), charter brokers, freight forwarders, direct shippers, airlines, manufacturers, sports teams and fans, and private charter customers.  We provide global services with operations in Africa, Asia, Australia, Europe, the Middle East, North America and South America.

Operations

Introduction.  During the first quarter of 2021, we changed our operating and reportable segments, reflecting changes in our business. We currently have the following two operating and reportable segments: Airline Operations and Dry Leasing.  Previously, our operating and reportable segments were ACMI, Charter and Dry Leasing.  As ACMI and Charter services have become more similar, our chief operating decision maker began assessing operating results and making resource allocation decisions for Airline Operations.  Additional information regarding our reportable segments can be found in Note 13 to our Financial Statements.

Airline Operations. The core of our business is generally providing cargo aircraft outsourcing services to customers on an ACMI, CMI and Charter basis.  Most arrangements provide us with guaranteed minimum revenues at predetermined rates, levels of operation and defined periods of time. ACMI, CMI and long-term Charter contracts generally provide a predictable annual revenue and cost base by minimizing the risk of fluctuations such as price, fuel and demand risk in the air cargo business.  ACMI and CMI flying is typically based on guaranteed minimum Block Hours operated for a customer, while long-term Charter flying is for specific flight rotations between locations based on a guaranteed number of weekly or monthly flights.  During 2021 and 2020, we expanded our long-term Charter programs, which include indexed fuel price adjustments to mitigate our exposure to fuel price volatility. Our revenues and most of our costs under our contracts are denominated in U.S. dollars, minimizing currency risks associated with international business.  

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All of our contracts provide that the aircraft remain under our exclusive operating control, possession and direction at all times.  These contracts further provide that the routes to be operated may be subject to prior and periodic approvals of the U.S. or foreign governments. The original length of ACMI and CMI contracts generally ranges from two to seven years.  The original length of long-term Charter program contracts generally ranges from one to three years.  We also provide certain of these services on a short-term basis.  In addition, Atlas provides limited airport-to-airport cargo Charter services to select markets, including several cities in Asia and South America, and occasionally earns revenue on subcontracted Charter flights.

Dry Leasing. Our Dry Leasing business provides aircraft and engines to customers, including some CMI customers, for compensation that is typically based on a fixed monthly amount.  This business is operated by Titan, which is principally a cargo aircraft dry lessor, but also owns and manages aviation assets such as engines and related equipment.  In addition, Titan also markets its expertise in passenger-to-freighter conversions and other aviation-related technical services.  Our Dry Leasing portfolio diversifies our business mix and enhances our predictable, long-term revenue and earnings streams.

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

We believe that the scale, scope and quality of our outsourced services are unparalleled in our industry.  The relative operating cost efficiency of our current 747-8F, 747-400F and 777-200LRF aircraft, including their superior fuel efficiency, range, capacity and loading capabilities, creates a compelling value proposition for our customers and positions us well in the markets we operate.  Our fleet of 767-300 and 737-800 freighter aircraft are well suited for regional and domestic operations.

We are focused on the further enhancement of all our services and we have the flexibility to expand our fleet in response to market conditions.  In December 2021, we signed an agreement with The Boeing Company (“Boeing”) for the purchase of four new 777-200LRF aircraft.  The first of the four new 777-200LRFs is expected to be delivered in November 2022, with the other three expected to be delivered throughout 2023.  In January 2021, we signed an agreement with Boeing for the purchase of four new 747-8F aircraft.  The aircraft are expected to be delivered from May 2022 through October 2022.  We believe that our current fleet represents one of the most efficient, reliable freighter fleets in the market.  Our primary placement for our aircraft continues to be long-term contracts with high-credit-quality customers.

COVID-19 Pandemic

In December 2019, COVID-19 was first reported in China and has since spread throughout the world.  In March 2020, it was determined to be a global pandemic by the World Health Organization.  The U.S. 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 vaccines and other pharmaceuticals, medical equipment, personal protective equipment (“PPE”), education supplies, food and other daily necessities.  Since this public health crisis began, airfreight volumes have increased from pre-pandemic levels driven by the ongoing reduction of available cargo capacity provided by passenger airlines in the market and the continued disruption of global supply chains due to the COVID-19 pandemic. Due to this strong demand in 2020, we reactivated four 747-400BCF aircraft that had been temporarily parked and began Charter operations using a 777-200 freighter aircraft that was previously in our Dry Leasing business.  During 2021 and 2020, we entered into numerous ACMI and long-term Charter agreements and extensions with customers seeking to secure committed cargo capacity.  These long-term contracts provide us with guaranteed revenue and include indexed fuel price adjustments to mitigate our exposure to fuel price volatility.  

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Safety is our top priority.  We are closely monitoring the evolving COVID-19 pandemic and have taken numerous precautions to ensure the safety of our operations around the world, and to mitigate the impact of any pandemic disruptions, we have:

For more information about the COVID-19 pandemic and its effect on our business, results of operations and financial condition, see Item 1A, (“Risk Factors”) and Item 7 (“Management’s Discussion and Analysis of Financial Condition and Results of Operations”) of this Report.

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

Dry Leasing Joint Venture

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

Titan provides management services to the joint venture, including aircraft acquisitions, lease-management, passenger-to-freighter aircraft conversion oversight, technical expertise and disposal of aircraft.  Titan’s expertise includes a wide range of freighters, as well as passenger aircraft that could be converted to freighters.

In 2021, TAI increased its $300.0 million warehouse financing facility to $450.0 million and retained a separate $200.0 million bridge financing facility entered into in 2020. The warehouse facility provides debt capital to finance the acquisition of freighter aircraft for Dry Lease and the bridge facility provides debt capital to finance passenger-to-freighter aircraft conversions.

DHL Investment and Polar

DHL Network Operations (USA), Inc. (“DHL”) holds a 49% equity interest and a 25% voting interest in Polar (see Note 4 to our Financial Statements).  AAWW owns the remaining 51% equity interest and 75% voting interest.  Under a 20-year blocked space agreement that expires in 2028 (the “BSA”), Polar provides air cargo capacity to DHL. Atlas and Polar also have a flight services agreement, whereby Atlas is compensated by Polar on a per Block Hour basis, subject to a monthly minimum Block Hour guarantee, at a predetermined rate with the opportunity for performance premiums that escalate annually.  Under the flight services agreement, Atlas provides Polar with crew, maintenance and insurance for the aircraft.  Under separate agreements, Atlas and Polar supply administrative, sales and ground support services to one another. AAWW has agreed to indemnify DHL for and against various obligations of Polar and its affiliates.  Collectively, these agreements are referred to in this Report as the “DHL Agreements”. The DHL Agreements provide us with a minimum guaranteed annual revenue stream from aircraft that have been placed in service with Polar for DHL and other customers’ freight over the life of the agreements.  DHL provides financial support and also assumes the risks and rewards of the operations of Polar.

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Combined with Polar, we provide ACMI, CMI, Charter and Dry Leasing services to support DHL’s transpacific-express, North American, intra-Asian, and global networks.  In addition, we fly between the Asia Pacific region, the Middle East and Europe on behalf of DHL and other customers.  Atlas also provides incremental charter capacity to Polar and DHL from time to time.  See Note 4 to our Financial Statements for a further discussion of our relationship with Polar.

The following table summarizes the aircraft types and services provided to Polar and DHL as of December 31, 2021:

Amazon

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

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

In conjunction with these agreements, we granted Amazon warrants providing the right to acquire shares of our common stock. See Note 8 to our Financial Statements for a discussion of these agreements with Amazon.

The following table summarizes the freighter aircraft types and services provided to Amazon as of December 31, 2021:

Sales and Marketing

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

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Fuel

Historically, aircraft fuel is one of the most significant expenses for us.  During 2021, 2020 and 2019, fuel costs represented 24.9%, 16.2%, and 15.1%, respectively, of our total operating expenses.  Fuel prices and availability are subject to wide price fluctuations based on geopolitical issues, supply and demand, which we can neither control nor accurately predict.

Our exposure to fluctuations in fuel price is limited to the shorter-term commercial portion of our Charter services only, as fuel risk is largely mitigated by price adjustments, including those based on indexed fuel prices for longer-term commercial charter contracts.  We do not incur fuel expense in providing ACMI and CMI services or in our Dry Leasing business as the cost of fuel is borne by the customer.  Similarly, we generally have no fuel price risk for AMC charters because the price is set under our contract with the AMC, and we receive or make payments to adjust for price increases and decreases from the contractual rate.

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

Human Capital  

Our People

Our business depends on our team of highly qualified flight and ground employees.  As of December 31, 2021, we had 4,056 employees, 2,337 of whom were pilots.  We maintain a comprehensive training program for our pilots in compliance with U.S. Federal Aviation Administration (“FAA”) requirements, in which each pilot regularly attends recurrent training programs. In addition to the training programs provided to pilots, we also maintain comprehensive training programs for other safety-sensitive positions.

Pilots of Atlas and flight dispatchers of Atlas and Polar, are represented by the International Brotherhood of Teamsters (the “IBT”).  These employees represented approximately 59.0% of our workforce as of December 31, 2021.  

We have achieved a new five-year collective bargaining agreement (“CBA”) with our pilots (“JCBA”). This long-term CBA was reached through a binding arbitration process, with the arbitrator’s decision being issued on September 10, 2021.  The new pay rates became effective as of September 1, 2021, and we’re working closely together with the union’s new leadership on the implementation of other provisions of the agreement. Under this industry competitive agreement, all of our pilots will receive significantly higher pay, quality of life improvements and enhanced benefits. There are a few remaining open items from the arbitration decision that the parties are working together to resolve.  See Note 14 to our Financial Statements for further discussion of our labor matters.

We 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.  On September 15, 2021, the IBT, representing the flight dispatchers of Atlas and Polar, provided the Company with the requisite notice of its intent to commence negotiations for a new CBA pursuant to Section 6 of the Railway Labor Act.  The Company and the IBT commenced bargaining with good faith discussions and are making progress towards an amended CBA.  

Diversity, Equity and Inclusion (“DEI”)

As an organization that carries the world, we care for the world we carry.  Atlas seeks to foster a culture of inclusive diversity that is fundamental to attracting, retaining and developing the talent we need to fuel ongoing success.  We value the individual differences represented by members of our workforce, and seek to ensure that our decision-making and strategic direction is informed by their unique perspectives.  Underlying our DEI philosophy

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are five pillars of focus that serve as guiding principles for our DEI commitments: employee empowerment, learning and development, external advocacy, communication, and accountability and achievement.  Our Employee and Executive Councils lead these important efforts.

Our board of directors endorse the concept of board and committee refreshment, which has resulted in the election of several new board members and the rotation of the chairman of the board and the chairs of our three standing committees over the last two years.  In 2021, we added two new gender-diverse board members.  With these additions, our board is 60% diverse (40% gender diverse and 30% ethnically diverse).  We believe that diversity with respect to gender, ethnicity, background, professional experiences and perspectives is an important element in the board selection process.

Health and Wellness

In addition to comprehensive health and retirement benefits provided to eligible employees, our core benefits are supplemented with specific programs to encourage preventative care, improve common health conditions, and manage more advanced issues for improved outcomes.  In addition, we offer a variety of voluntary benefits and paid time away from work programs. We also provide a number of wellness resources designed to promote physical, emotional and financial well-being that transitioned to virtual programs to provide increased accessibility.

Safety is our top priority.  Our employees are essential workers who we rely on to deliver PPE and other essential resources related to the COVID-19 pandemic.  To ensure the highest level of safety for our employees, we established a Coronavirus Task Force (“CTF”) responsible for policies and procedures related to COVID-19.  Through the CTF, we are closely monitoring the COVID-19 pandemic and taking numerous precautions to ensure the safety of our operations around the world, including:

We have designated our employees as either on-site critical, fully remote or hybrid (a mix of on-site and remote).  By reducing the number of employees who are working on site, we have maximized the safety of the work environment for those employees whose work must be done within the Atlas environment.  We will continue to leverage a flexible working environment and all of our physical facilities, as necessary, including key locations in New York, Kentucky and Florida.  In addition to capturing operational efficiencies, hybrid and remote work allows us to create even more inclusive ways of working, and enables us to attract a broader and more diverse employee population.  At the same time, our physical work locations reinforce our Company culture and remain a fundamental ingredient to networking, development, brainstorming and team-building.

Aircraft Maintenance

Primary maintenance activities include scheduled and unscheduled work on airframes and engines.  Scheduled maintenance activities encompass those activities specified in our maintenance program approved by the FAA.  The costs necessary to adhere to these maintenance programs may increase over time, based on the age of the equipment or due to FAA airworthiness directives (“ADs”).

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

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

Insurance

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

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

Environmental, Social and Governance

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

Governmental Regulation

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

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

In addition, the Airlines are required to hold valid FAA-issued air carrier certificates and FAA-approved operations specifications authorizing operation in specific regions with specified equipment under specific conditions and are subject to extensive FAA regulation and oversight.  The FAA is the U.S. government agency primarily responsible for regulation of flight operations and, in particular, matters affecting air safety, such as airworthiness requirements for aircraft, operating procedures, mandatory equipment and the licensing of pilots, mechanics and dispatchers.  The FAA monitors compliance with maintenance, flight operations and safety regulations and performs frequent spot inspections of aircraft, employees and records.  For example, the deployment by wireless communications service providers of certain 5G C-band service at or near airports may cause

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interference with radio altimeters and certain related aircraft avionics.  In response, the FAA could impose flight restrictions until the agency believes any safety concerns are addressed.  

The FAA also has the authority to issue ADs and maintenance directives and other mandatory orders relating to, among other things, inspection of aircraft and engines, fire retardant and smoke detection devices, increased security precautions, collision and windshear avoidance systems, noise abatement and the mandatory removal and replacement of aircraft parts that have failed or may fail in the future.  In addition, the FAA mandates certain record-keeping procedures.  The FAA has the authority to modify, temporarily suspend or permanently revoke an air carrier’s authority to provide air transportation or that of its licensed personnel, after providing notice and a hearing, for failure to comply with FAA rules, regulations and directives.  The FAA is empowered to assess civil penalties for such failures or institute proceedings for the imposition and collection of monetary fines for the violation of certain FAA regulations and directives.  The FAA is also empowered to modify, suspend or revoke an air carrier’s authority on an emergency basis, without providing notice and a hearing, where significant safety issues are involved.  

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

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

Brexit. Following parliamentary elections in December 2019, the United Kingdom (“U.K.”) left the EU on January 31, 2020 with a transition period that ended in December 2020.   In December 2018, the U.S. and U.K. governments reached agreement on the terms of an open skies agreement governing U.S. and U.K. airlines in anticipation of the U.K. leaving the EU.  This new agreement was signed on November 17, 2020 and became effective on January 1, 2021.  It allows new “7th Freedom” rights for all-cargo services and may result in new opportunities for us.  Specifically, U.S. all-cargo flights will be able to operate between the U.K. and certain other countries without ultimately connecting to the U.S.

Airport Access. The ability of the Airlines to operate suitable schedules is dependent on their ability to gain access to airports of their choice at commercially desirable times and on acceptable terms.  In some cases, access is constrained by the need for the assignment of takeoff and landing “slots” or comparable operational rights. Like other air carriers, the Airlines are subject to such constraints at slot-restricted airports in cities such as Chicago and a variety of foreign locations (e.g., Amsterdam, Incheon, Hong Kong, Shanghai and Tokyo).  The availability of slots is not assured and the inability of the Airlines or their ACMI and CMI carrier customers to obtain additional slots could inhibit efforts to provide expanded services in certain international markets. The reduction in global air traffic resulting from the COVID-19 pandemic has alleviated near-term access concerns at most congested airports. Airport access issues may increase as passenger aviation recovers from the impact of the COVID-19 pandemic. In addition, nighttime flight restrictions have been imposed or proposed by Hong Kong and various airports in Europe, Canada and the U.S.  These could have an adverse operational or economic impact.

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Access to the New York airspace had presented an additional challenge in recent years even prior to the COVID-19 pandemic.  Because of congestion in the New York area, especially at John F. Kennedy International Airport (“JFK”), the FAA imposes hourly limits on JFK operations of those carriers offering scheduled services and potentially could place limits on Charter flights once traffic levels reach their pre-pandemic levels.  

As a further means to address congestion, the FAA allows U.S. airports to raise landing fees to defray the costs of airfield facilities under construction or reconstruction.  It is unclear whether airports may raise landing fees to recoup losses from the reduction in global air traffic due to the COVID-19 pandemic.  Any landing fee increases implemented would have an impact on airlines generally.

Security. The U.S. Transportation Security Administration (“TSA”) and international regulatory bodies extensively regulate aviation security through rules, regulations and security directives that are designed to prevent unauthorized access to passenger and freighter aircraft and the introduction of prohibited items including firearms and explosives onto an aircraft.  Atlas and Polar currently operate pursuant to a TSA-approved risk-based security program that, we believe, adequately maintains the security of all aircraft in the fleet.  We utilize the TSA, the intelligence community and the private sector as resources for our aggressive global threat-based risk-management program.  There can be no assurance, however, that we will remain in compliance with existing or any additional security requirements imposed by TSA or by U.S. Congress without incurring substantial costs, which may have a material adverse effect on our operations.  To mitigate any such increase, we are working closely with the Department of Homeland Security and other government agencies to ensure that a risk-based management approach is utilized to target specific “at-risk” cargo.  Additionally, foreign governments and regulatory bodies (such as the European Commission) impose their own aviation security requirements and have increasingly tightened such requirements.  This may have an adverse impact on our operations, especially to the extent these requirements may necessitate redundant or costly measures or be in conflict with TSA requirements.  We have successfully implemented all European Commission security programs allowing us unimpeded access to European markets. In July 2021, we increased security should the domestic threat environment change, and we have commenced screening all export cargo from the U. S. ensuring TSA regulatory compliance.

Environmental. We are subject to various international, federal, state and local laws relating to the protection of the environment and health and safety matters, including the discharge of pollution, the disposal of materials and chemical wastes, the cleanup of contamination and the regulation of aircraft noise, which are administered by numerous state, local, federal and foreign agencies.  For instance, the DOT and the FAA have authority under the Aviation Safety and Noise Abatement Act of 1979 and under the Airport Noise and Capacity Act of 1990 to monitor and regulate aircraft engine noise.  We subscribe to the International Civil Aviation Organization (“ICAO”) Balanced Approach for addressing aircraft noise, which was codified in 2001 and updated as recently as 2018. We believe that all aircraft in our fleet materially comply with current DOT, FAA and international noise standards.

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

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

For instance, in October 2013, the ICAO reached a nonbinding agreement to address climate change by developing global market-based measures to assist in achieving carbon-neutral growth.  In October 2016, ICAO approved and subsequently amended a resolution to adopt a global market-based measure known as the Carbon Offsetting and Reduction Scheme for International Aviation (“CORSIA”), which is designed to offset any annual increases in total carbon emissions from international civil aviation above a baseline level determined by 2019 emissions.  Although various details regarding the implementation of CORSIA still need to be finalized and have been impacted by the COVID-19 pandemic, a pilot phase began in 2021 and will run through 2023.  Starting in 2019, the Airlines have voluntarily begun tracking and reporting emissions in accordance with the CORSIA methodology in 2020, even though it is not yet mandatory in ICAO member countries. As a result, starting in 2024, the Airlines may need to purchase allowances to offset their share of emissions overages based on the reporting for the 2021 to 2023 compliance period.  For subsequent compliance periods, a similar procedure will apply.

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The EU continues to address climate change through its Emissions Trading Scheme (“ETS”). Following the end of every year, to the extent the ETS applies, each airline must tender the number of carbon emissions allowances (“Allowances”) corresponding to carbon emissions generated by its covered flight activity during the year.  If the airline’s flight activity during the year has produced carbon emissions exceeding the number of Allowances that it has been awarded, the airline must acquire Allowances from other airlines in the open market.  In recognition of ICAO’s adoption of CORSIA, the ETS has been suspended with respect to flights to and from non-European countries continues through December 31, 2023.  However, the ETS remains applicable to intra-European flights. Additionally, various European constituencies have begun to advocate for supplemental controls on aviation greenhouse gas emissions through additional taxation and similar measures.

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

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

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

Civil Reserve Air Fleet. As part of our Charter business, Atlas and Polar both participate in the U.S. Civil Reserve Air Fleet (“CRAF”) Program, which permits the U.S. Department of Defense to utilize participants’ aircraft during national emergencies when the need for military airlift exceeds the capability of military aircraft.  Participation in the CRAF Program could adversely restrict our commercial business in times of national emergency. In August 2021, the U.S. Department of Defense activated the CRAF for the first time since 2002 to augment support to the U.S. Department of State in the evacuation of U.S. citizens and personnel, special immigrant visa applicants, and other at-risk individuals from Afghanistan.  We provided three 747-400 passenger aircraft to support the CRAF activation, which ended in mid-September, and also provided additional 767 passenger aircraft in support of these evacuations for the AMC.

Under the CRAF Program, contracts with the AMC are for two-years with an option for the AMC to extend the contract for two additional two-year periods.  We have made a substantial number of our aircraft available for use by the U.S. military in support of their operations and we operate such flights pursuant to cost-based contracts.  Atlas bears all direct operating costs for both passenger and cargo aircraft, which include fuel, insurance, overfly, landing and ground handling expenses.  The contracted charter rates (per mile) and fuel prices (per gallon) are fixed by the AMC periodically.  We receive reimbursements from the AMC each month if the price of fuel paid by us to vendors for the AMC Charter flights exceeds the fixed price.  If the price of fuel paid by us is less than the fixed price, then we pay the difference to the AMC.

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

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

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Competition

The market for ACMI and Charter services, including long-term charter programs, is competitive.  We believe that the most important basis for competition in this market is access to capacity, the efficiency and cost-effectiveness of the aircraft assets and the scale, scope and quality of the outsourced operating services provided.  Atlas is the market-leading provider of ACMI and Charter services utilizing the superior long-haul aircraft in the 747-8, 747-400 and 777 freighters.  We will continue to develop new opportunities, including long-term charter programs, for aircraft not otherwise deployed in our ACMI business.  Our primary competitors providing ACMI and Charter services for 777, 747, 767 and 737 freighter aircraft include the following: 21Air, LLC; Air Atlanta Icelandic; AirBridge Cargo Airlines; Air Transport Services Group, Inc.; Cargolux; Kalitta Air; National Air Cargo; Western Global Airlines; and other freighter operators. Since the beginning of the COVID-19 pandemic, there has been increased Charter competition from passenger airlines using passenger aircraft for international freight-only operations.

Similar to the ACMI and Charter markets, the CMI market is also competitive. The most important basis for competition in this market is access to pilots, the efficiency and cost-effectiveness of the CMI solution and the scale, scope and quality of the outsourced operating services provided.  We believe that we are the leading provider of such services to the market.  Our primary competitors are operators that include Aerologic, Air Transport Services Group, Inc., Cargolux, Kalitta Air, Mesa Airlines, National Air Cargo, Sun Country Airlines and other airlines providing similar services.  

The Dry Leasing business is also competitive with a large number of companies offering operating lease solutions globally.  We believe that we have a competitive advantage as a leading lessor of freighter aircraft based on our extensive customer relationships in the airfreight market, our insights and expertise in aircraft types we operate, as well as access to capital, through our joint venture with Bain Capital, for funding the acquisition of incremental aircraft for conversion and leasing. Our primary competitors in the aircraft leasing market include AerCap Holdings N.V., Aero Capital Solutions, Altavair Air Finance, Air Transport Services Group, Inc., Avia AM, BBAM Aircraft and Leasing Management and Dubai Aerospace.

Available Information

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

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

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ITEM 1A. RISK FACTORS

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

RISKS RELATED TO OUR BUSINESS

Risks Related to Our Business Generally

Deterioration or disruption in the airfreight market, global economic conditions, financial markets or global supply chains, including the impact of geopolitical events, severe weather, natural disasters or health epidemics, could adversely affect our business, results of operations, financial condition, liquidity and ability to access capital markets.

Airfreight demand has historically been highly dependent on global economic conditions, which could be negatively impacted by changes in U.S. and foreign government trade policies, changes in economies throughout the world and limited access to certain markets, among other things.  If demand for our services, Yields or lease rates deteriorate, it could have a material adverse effect on our business, results of operations and financial condition.

We also could be negatively impacted by disruptions caused by geopolitical events, severe weather, natural disasters or health epidemics.  In December 2019, COVID-19 was first reported in China and has since spread throughout the world.  In March 2020, it was determined to be a global pandemic by the World Health Organization. The subsequent emergence of several variants of COVID-19 has compounded these disruptions.  The ongoing public health crisis has disrupted global manufacturing, supply chains, passenger travel and consumer spending, resulting in flight cancellations of certain cargo and passenger flights.  We have incurred and expect to incur significant additional costs, including premium pay for employees operating in certain areas significantly impacted by COVID-19, and other operational costs, including costs for continuing to provide a safe working environment for our employees. The availability of hotels and restaurants, evolving COVID-19-related travel restrictions and health screenings; and reductions in passenger flights by other airlines globally could further impact our ability to position employees to operate our aircraft. In addition, COVID-19-related airport closures, employees who are unable to work, vaccine mandates or disruption of operations by our third-party service providers could impact our contractual service requirements for customers resulting in financial penalties.  Although we have implemented various initiatives to mitigate disruptions, given the dynamic nature of these circumstances, the duration of business disruption and the extent of customer cancellations, the related financial impact cannot be reasonably estimated at this time.  If we are unable to implement existing or additional initiatives to mitigate disruptions, it could materially affect our business, results of operations and financial condition.

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

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

Our operating revenues depend on our ability to effectively deploy the aircraft in our fleet and maintain high utilization of our aircraft at favorable rates.  We typically enter into long-term ACMI and Charter contracts with our customers for our aircraft.  The terms of our existing contracts are generally scheduled to expire on a staggered basis.  There is a risk that any of our ACMI or Charter customers may not renew their contracts with us on favorable terms or at all, perhaps due to reasons beyond our control.  Also, certain customers have the opportunity to terminate their long-term agreements in advance of the expiration date, following notice to allow for remarketing of the

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

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

We record impairment charges on long-lived assets when events and circumstances indicate that the assets may be impaired, the undiscounted cash flows estimated to be generated by those assets are less than their carrying amount and the net book value of the assets exceeds their estimated fair value.  The airfreight market and Yields can be volatile and negatively affected by excess capacity due to factors such as global economic conditions and reduced customer demand.  Asset impairments or other charges related to capacity could have a material adverse effect on our business, results of operations and financial condition.

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

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

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

The FAA requires that all airline pilots, including new hires, must have a minimum of 1,500 hours of operational experience.  This requirement and other factors, including retirements and reductions in the number of military pilots being trained by the U.S. armed forces, have led to increased demand for pilots.  

In addition, competition for all qualified personnel is increasingly intense and there can be no assurance that we will be successful in hiring, training, and retaining such personnel in the future.  The extent and duration of the impact of labor market challenges are subject to numerous factors, including the continuing impact of the COVID-19 pandemic, availability of qualified personnel and competition from other service providers within the markets we serve.

If we are unable to hire, train and retain qualified pilots and other personnel, it could have an adverse effect on our ability to maintain or expand our business operations or result in increased costs, which could have a material adverse effect on our business, results of operations and financial condition.

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

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

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

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

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

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

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

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

Lessees are required under our Dry Leases to indemnify us for, and insure against, liabilities arising out of the use and operation of the aircraft, including third-party claims for death or injury to persons and damage to property for which we may be deemed liable.  Lessees are also required to maintain public liability, property damage and all-

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risk hull and war-risk hull insurance on the aircraft at agreed-upon levels.  If our lessees’ insurance is not sufficient to cover all types of claims that may be asserted against us or if our lessees fail to fulfill their indemnification obligations, we would be required to pay any amounts in excess of our insurance coverage, which could have a material adverse effect on our business, results of operations and financial condition.

We are party to a collective bargaining agreement covering our pilots and a collective bargaining agreement covering our Atlas and Polar flight dispatchers, which could result in higher labor costs than those faced by some of our non-unionized competitors.  This could also result in a work interruption or stoppage.

Pilots of Atlas (who operate Atlas and Polar flights) and flight dispatchers of Atlas and Polar are represented by the IBT.  We had a five-year CBA with our Atlas pilots, which became amendable in September 2016 and a four-year CBA with our Southern Air, Inc. pilots, which became amendable in November 2016.

We have achieved a new five-year CBA with our pilots.  This long-term CBA was reached through a binding arbitration process, with the arbitrator’s decision being issued on September 10, 2021.  The new pay rates became effective as of September 1, 2021, and we’re working closely together with the union’s new leadership on the implementation of other provisions of the agreement.  Under this industry competitive agreement, all of our pilots will receive significantly higher pay, quality of life improvements and enhanced benefits.  There are a few remaining open items from the arbitration decision that the parties are working together to resolve.  See Note 14 to our Financial Statements for further discussion of our labor matters.

We 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.  On September 15, 2021, the IBT, representing the flight dispatchers of Atlas and Polar, provided the Company with the requisite notice of its intent to commence negotiations for a new CBA pursuant to Section 6 of the Railway Labor Act.  The Company and the IBT commenced bargaining with good faith discussions and are making progress towards an amended CBA.  

We are subject to risks of increased labor costs associated with having a partially unionized workforce, as well as a greater risk of work interruption or stoppage, which could negatively impact our business, results of operations and financial condition, including a reduction in our revenue and an increase in our operating costs. We cannot provide assurance that disputes, including disputes with certified collective bargaining representatives of our employees, will not arise in the future or will result in an agreement on terms satisfactory to us.  

In addition, the costs associated with resolving such disputes could have a material adverse effect on our business, results of operations and financial condition, and any disruption in our business could negatively affect our reputation and relationship with our customers.

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

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

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

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

In the Netherlands, Stichting Cartel Compensation, successor in interest to claims of various shippers, has filed suit in the district court in Amsterdam against British Airways, KLM, Martinair, Air France, Lufthansa and Singapore Airlines 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 and rulings, some of which are awaiting court decisions on appeal.  The ultimate outcome of the lawsuit is 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 Old Polar, Polar or the Company were to incur an unfavorable outcome in the litigation described above or in similar litigation, it could have a material adverse effect on our business, results of operations and financial condition.

In addition to the litigation described above, we are subject to a number of Brazilian customs claims, as well as other claims, lawsuits and pending actions which we consider to be routine and incidental to our business (see Note 14 to our Financial Statements).  If we were to receive an adverse ruling or decision on any such claims, it could have an adverse effect on our business, results of operations and financial condition.

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

The price of aircraft fuel is unpredictable and can be volatile.  Our exposure to fluctuations in fuel price is limited to the shorter-term commercial portion of our Charter services only, as fuel risk is largely mitigated by price adjustments, including those based on indexed fuel prices for longer-term commercial charter contracts.  We do not incur fuel expense in providing ACMI and CMI services or in our Dry Leasing business as the cost of fuel is borne by customers.  Similarly, we generally have no fuel price risk for AMC charters because the price is set under our contract with the AMC, and we receive or make payments to adjust for fuel price increases and decreases from the contractual rate.  Regardless, if fuel costs increase significantly, our customers may reduce the volume and frequency of cargo shipments or find less costly alternatives for cargo delivery, such as land and sea carriers.  Such actions by customers or fuel price volatility for our short-term charters could have a material adverse effect on our business, results of operations and financial condition.

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

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

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

We have contractual obligations, including progress payments, associated with our aircraft orders.  If we are unable to make the remaining required payments or obtain financing for these aircraft, it could have a material adverse effect on our business, results of operations and financial condition.

In January and December 2021, we placed orders with Boeing for four new 747-8F aircraft and four new 777-200LRF aircraft, respectively.  We have paid the required pre-delivery payments for the 747-8F aircraft and are required to pay pre-delivery deposits to Boeing for the 777-200LRF aircraft in 2022. We expect to finance the 747-8F and 777-200LRF aircraft delivery payments through secured debt financing.  If we are unable to make the remaining required progress payments to Boeing or secure financing on acceptable terms, we may incur financing costs that are substantially higher than what we currently anticipate, which could have a material adverse effect on our business, results of operations and financial condition.

Our agreements with the U.S. Treasury under a 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 agreements entered into with the U.S. Treasury (the “PSP Agreement”), with respect to payroll support funding (the “Payroll Support Program”) available to cargo air carriers under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), we are required to comply with the relevant requirements of the CARES Act.  These requirements include that funds provided pursuant to the PSP Agreement were to be used exclusively for the payment of certain employee wages, salaries and benefits of Atlas (the “PSP Recipients”).  The Payroll Support Program subjects the PSP Recipients and certain of their affiliates to a number of restrictions, including certain limitations on executive compensation through March 24, 2022 and prohibitions of repurchasing shares in the open market of, or making dividend payments with respect to, our common stock that expired on September 30, 2021.  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 do not 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.

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

As of December 31, 2021, we had $1.6 billion of federal net operating loss carryforwards (“NOLs”) for U.S. income tax purposes, net of unrecognized tax benefits and valuation allowance, most of which will expire through 2037, if not utilized.  Section 382 of the Internal Revenue Code (“Section 382”) imposes an annual limitation on the amount of a corporation’s U.S. federal taxable income that can be offset by NOLs if it experiences an “ownership change,” as defined by Section 382.  We experienced ownership changes as defined by Section 382 and, accordingly, the use of our NOLs generated prior to these ownership changes is subject to an annual limitation.  If certain changes in our ownership occur prospectively, there could be additional annual limitations on the amount of utilizable NOLs, which could have a material adverse effect on our business, results of operations and financial condition.

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

Risks Related to Our Airline Operations Business

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

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

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

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

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

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

Our future earnings per share could be adversely impacted by the warrants granted to Amazon and, if Amazon exercises its right to acquire additional shares of common stock pursuant to the warrants, it will dilute the ownership interests and could adversely affect the market price of our common stock.

The warrants granted to Amazon increase the number of diluted shares reported, which has a negative effect on our fully diluted earnings per share.  If Amazon exercises its right to acquire additional shares of our common stock pursuant to the warrants, it will dilute the ownership interests of our then-existing stockholders.  In addition, any sales in the public market of any common stock issuable upon the exercise of the warrants by Amazon could adversely affect prevailing market prices of our common stock.

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

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

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

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

As a percentage of our total operating revenue, revenue derived from the AMC was approximately 10.5% in 2021, 15.9% in 2020 and 24.6% in 2019.  Historically, the revenues derived from expansion (or ad-hoc) flights for the AMC significantly exceeded the value of the fixed flight component of our AMC contract.

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

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

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

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

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

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Risk Related to Our Dry Leasing Business

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

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

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

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

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

RISKS RELATED TO OUR INDUSTRY

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

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

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

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

Our operations and our customers’ operations are subject to complex aviation and transportation laws and regulations, including Title 49 of the U.S. Code, under which the DOT and the FAA exercise regulatory authority over air carriers.  In addition, our business activities and our customers’ business activities fall within the jurisdiction of various other federal, state, local and foreign authorities, including the U.S. Department of Defense, the TSA, U.S. Customs and Border Protection, the U.S. Treasury Department’s Office of Foreign Assets Control

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and the U.S. EPA and similar state agencies.  In addition, other jurisdictions in which we operate have similar regulatory regimes to which we are subjected.  These laws and regulations may require us to maintain and comply with the terms of a wide variety of certificates, permits, licenses, noise abatement standards, maintenance and other requirements and our failure to do so could result in substantial fines or other sanctions.  These U.S. and foreign aviation regulatory agencies have the authority to modify, amend, suspend or revoke the authority and licenses issued to us for failure to comply with provisions of law or applicable regulations and may impose civil or criminal penalties for violations of applicable rules and regulations.  Such fines, sanctions or penalties, if imposed, could have a material adverse effect on our mode of conducting business, results of operations and financial condition.  There can also be no assurance that laws and regulations will not be changed in ways that will decrease demand for our services or subject us to escalating costs.  In addition, U.S. and foreign governmental authorities may adopt, amend or interpret accounting standards, tax laws, regulations or treaties that could require us to take additional and potentially costly compliance steps or result in our inability to operate some of our aircraft in certain countries, which could have a material adverse effect on our business, results of operations and financial condition.  

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

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

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

To address climate change, governments have implemented and continue to pursue various means to reduce aviation-related greenhouse gas emissions.  Compliance with these or other measures that are ultimately adopted could result in substantial costs for us.  For instance, in October 2013, the ICAO reached a nonbinding agreement to develop global market-based measures to assist in achieving carbon-neutral growth.  In October 2016, the ICAO approved and subsequently amended the CORSIA, which is designed to offset any annual increases in total carbon emissions from international civil aviation above a baseline level determined by 2019 and 2020 emissions.  Although various details regarding the implementation of CORSIA still need to be finalized and have been impacted by the COVID-19 pandemic, a pilot phase began in 2021 and will run through 2023.  Starting in 2019, the Airlines have voluntarily begun tracking and reporting emissions in accordance with the CORSIA methodology, even though it is not yet mandatory in ICAO member countries.  As a result, starting in 2024, the Airlines may need to purchase allowances to offset their share of emissions overages based on the reporting for the 2021 to 2023 compliance period.  For subsequent compliance periods, a similar procedure will apply. There is uncertainty with respect to the future supply, demand and price of sustainable or lower carbon aircraft fuel, carbon offset credits and technologies that could allow us to reduce our emissions of carbon dioxide.

Additionally, the EU continues to pursue a parallel track to address climate change through the EU ETS.  Following the end of every year, to the extent the ETS applies, each airline must tender the number of Allowances corresponding to carbon emissions generated by its covered flight activity during the year.  If the airline’s flight activity during the year has produced carbon emissions exceeding the number of carbon emissions allowances that it has been awarded, the airline must acquire additional allowances from other airlines in the open market.  In recognition of ICAO’s adoption of CORSIA, the ETS has been suspended with respect to flights to and from non-European countries through December 31, 2023.  However, the ETS remains applicable to intra-European flights. Additionally, various European constituencies have begun to advocate for supplemental controls on aviation greenhouse gas emissions through additional taxation and similar measures.

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

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airports have also adopted, and others could in the future adopt, greenhouse gas emission or climate-related goals and requirements that could impact our operations or require us to make changes or investments in our infrastructure.

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

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

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

RISKS RELATED TO OUR LEASE AND DEBT OBLIGATIONS

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

As of December 31, 2021, we had total debt obligations of approximately $2.4 billion and total aircraft operating leases and other lease obligations of $0.2 billion.  We cannot provide assurance that we will be able to obtain future financing arrangements or on terms attractive to us.  Our outstanding financial obligations could have negative consequences, including:

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

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

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

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

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

We issued convertible senior notes (the “Convertible Notes”) in June 2015 and May 2017, which contain conditional conversion features that allow the holders of the Convertible Notes the option to convert if certain trading conditions are met or upon the occurrence of specified corporate events.  In the event a conditional conversion feature of the Convertible Notes is triggered, holders of Convertible Notes will be entitled to convert the Convertible Notes at any time during specified periods at their option.  All conversions of the Convertible Notes issued in 2015 are required to be settled in cash for the principal amount.  If one or more holders elect to convert their Convertible Notes issued in 2017, unless we elect to satisfy our conversion obligation by delivering solely shares of our common stock, we would be required to settle a portion or all of our conversion obligation through the payment of cash, which could adversely affect our liquidity.  

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

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

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

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

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prices of the warrants.  Accordingly, when the Convertible Note hedge transactions and the warrant transactions are taken together, the extent to which the Convertible Note hedge transactions reduce the potential dilution to our common stock (or the cash payments in excess of the principal amount of the notes) upon conversion of the notes is effectively capped by the warrant transactions at the strike price of the warrants.

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

RISKS RELATED TO OWNERSHIP OF OUR COMMON STOCK

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

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

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

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

Provisions of our restated certificate of incorporation, by-laws and Delaware law may render more difficult or discourage any attempt to acquire our company, even if such acquisition may be believed to be favorable to the interests of our stockholders.  These provisions may also discourage bids for our common stock at a premium over market price or adversely affect the market price of our common stock. In addition, the vesting of warrants issued by us to Amazon will generally, subject to certain exceptions, be accelerated upon a change of control of our company, which may discourage attempts to acquire our company.

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

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

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

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ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 2. PROPERTIES

Aircraft

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

AAWW Aircraft

The following table summarizes AAWW’s aircraft as of December 31, 2021:

Lease expirations for our leased aircraft included in the above tables range from March 2022 to June 2032.

Customer-provided Aircraft for CMI Service

The following table summarizes customer-provided aircraft as of December 31, 2021:

Ground Facilities

Our principal office is located in Purchase, New York, where we lease approximately 120,000 square feet of office space under a long-term lease, which expires in 2023.  This office includes both operational and administrative support functions.  We lease a building with approximately 100,000 square feet of office space in Erlanger, Kentucky for operational functions, which expires in 2036.  We also lease approximately 16,600 square

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feet of office space in Hong Kong for sales and administrative support, which expires in 2025.  In addition, we lease a variety of smaller offices and ramp space at various airport and regional locations generally on a short-term basis.

ITEM 3. LEGAL PROCEEDINGS

The information required in response to this Item is set forth in Note 14 to our Financial Statements, and such information is incorporated herein by reference.  Such description contains all of the information required with respect hereto.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

INFORMATION ABOUT OUR EXECUTIVE OFFICERS

John W. Dietrich. Mr. Dietrich, age 57, has been our President and Chief Executive Officer and a member of our Board of Directors since January 2020. Prior to January 2020, he served as our President and Chief Operating Officer from July 2019 and our Executive Vice President and Chief Operating Officer from September 2006.  In addition, he was President and Chief Operating Officer of Atlas Air, Inc. from October 2014 to December 2019.  During the period from March 2003 to September 2006, Mr. Dietrich held a number of senior executive positions in the Company, including Senior Vice President, General Counsel, Chief Human Resources Officer, Corporate Secretary and head of the IT and Corporate Communications functions. Mr. Dietrich joined Atlas in 1999 as Associate General Counsel. Prior to joining us, he was a litigation attorney at United Airlines from 1992 to 1999, where he provided legal counsel to all levels of management, particularly on employment and commercial litigation issues.  He also serves as Chairman of the National Defense Transportation Association and a director of the National Air Carrier Association.  Mr. Dietrich earned a Bachelor’s of Science degree from Southern Illinois University and received his Juris Doctorate, cum laude, from the University of Illinois at Chicago John Marshall Law School.  He is a member of the New York, Illinois and Colorado Bars.

James A. Forbes. Mr. Forbes, age 64, has been our Executive Vice President and Chief Operating Officer since January 2020. He also serves as Executive Vice president and Chief Operating Officer of Atlas Air, Inc. Prior to January 2020, he was Senior Vice President and Chief Operating Officer of Southern Air, Inc. since April 2016. Mr. Forbes has over 40 years of aviation operating experience, including more than 20 years with the Company. He joined us in 1997 as Senior Director of Ground Operations, where he helped construct the global infrastructure upon which we have grown. He became Vice President, Worldwide Ground Operations in 2001, overseeing station operations for all of Atlas Air, Inc. and Polar Air Cargo, Inc.  In 2008, Mr. Forbes was named Senior Vice President for System Performance and Quality for Polar, where he led the transformation of an all-cargo network into a leading on-time express operation that supports DHL’s worldwide air network.  He held that position until April 2016, when he was promoted to lead Southern Air, Inc. operations.

Adam R. Kokas.  Mr. Kokas, age 50, has been our General Counsel and Secretary since October 2006, and Executive Vice President since January 2014.  Mr. Kokas is responsible for directing all of the Company’s legal and regulatory affairs, as well as overseeing government affairs and public policy matters.  In November 2007, Mr. Kokas assumed responsibility for the Company’s Human Resources Department.  He served as our Chief Human Resources Officer until March 2018.  Mr. Kokas joined us from Ropes & Gray LLP, where he was a partner in their Corporate Department, focusing on general corporate, securities, transactions and business law matters.  Mr. Kokas also serves as a Vice Chair of the International Air Transport Association’s Legal Advisory Council and is a member of the board of directors and Audit and Finance Committee of the Society of Corporate Governance.  He also served as the Chairman of the Board of the Cargo Airlines Association from 2011 to 2019.  Mr. Kokas earned a Bachelor of Arts degree from Rutgers University and is a cum laude graduate of the Boston University School of Law, where he was an Edward M. Hennessey scholar. Mr. Kokas is a member of the New York and New Jersey Bars.

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Michael T. Steen. Mr. Steen, age 55, has been Executive Vice President and Chief Commercial Officer since November 2010.  In addition, he was named President and Chief Executive Officer of Titan Aviation Holdings, Inc. effective October 2014.  Prior to November 2010, he was our Senior Vice President and Chief Marketing Officer from April 2007.  Mr. Steen joined us from Exel plc where he served as Senior Vice President of Sales and Marketing.  Mr. Steen led the sales and marketing activities for Exel Freight’s management and technology sector.  Following Exel’s acquisition by Deutsche Post World Net, he held senior-level positions with the merged company in global supply chain logistics.  Prior to joining Exel, he served in a variety of roles with KLM Cargo over 11 years, including Vice President of the Americas, Head of Global Sales and Marketing for the Logistics Unit and Director of Sales for EMEA.  Mr. Steen has been a Director for CHC Helicopter since May 2017 and is the Chairman of IATA’s Cargo Committee.  Mr. Steen earned a degree in economic science from Katrinelund in Gothenburg, Sweden, and is an alumnus of the Advanced Executive Program at the Kellogg School of Management at Northwestern University.

Spencer Schwartz. Mr. Schwartz, age 55, has been Executive Vice President since January 2014 and Chief Financial Officer since June 2010.  Prior to January 2014, he was Senior Vice President from June 2010.  Prior to June 2010, he was our Vice President and Corporate Controller from November 2008.  Mr. Schwartz joined us from Mastercard, where he was employed for over 12 years and served as Group Head of Global Risk Management; Senior Vice President and Business Financial Officer; Senior Vice President, Corporate Controller and Chief Accounting Officer; and Vice President of Taxation.  Prior to joining Mastercard, Mr. Schwartz held financial positions of increasing responsibility with Price Waterhouse LLP (now PricewaterhouseCoopers LLP) and Carl Zeiss, Inc.  Mr. Schwartz earned a Bachelor’s degree in Accounting from The Pennsylvania State University and a Master’s degree in Business Administration, with a concentration in management, with honors, from New York University’s Leonard N. Stern School of Business.  He is a certified public accountant.

Keith H. Mayer. Mr. Mayer, age 56, has been Senior Vice President and Chief Accounting Officer since January 2018 and Corporate Controller since November 2010.  Prior to January 2018, he was Vice President since November 2010.  Mr. Mayer joined us from PepsiCo, Inc.  In his most recent role at PepsiCo, he served as Chief Financial Officer of an international coffee partnership between PepsiCo and Starbucks Corporation.  Mr. Mayer also served PepsiCo in a variety of roles since 1999, including Director of External Reporting, Assistant Controller for PepsiCo International, Senior Group Manager of Financial Accounting for Frito-Lay North America, and Group Manager of Technical Accounting.  Prior to joining PepsiCo, Mr. Mayer held financial positions of increasing responsibility with Coopers & Lybrand LLP (now PricewaterhouseCoopers LLP).  Mr. Mayer earned a Bachelor’s degree in Accounting from the University of Bridgeport where he graduated magna cum laude.  He is a certified public accountant.

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

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PART II

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

Market Information

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

As of February 11, 2022, there were approximately 29.2 million shares of our common stock issued and outstanding, and 28 holders of record of our common stock.

See Note 17 to our Financial Statements for a discussion of our stock repurchase program.

Equity Compensation Plans

See Item 12, “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” for information regarding our equity compensation plans as of December 31, 2021.

Dividends

We have never paid a cash dividend with respect to our common stock and we do not anticipate paying a dividend in the foreseeable future.  Moreover, certain of our financing arrangements contain financial covenants that could limit our ability to pay cash dividends.  In connection with our participation in the Payroll Support Program, we agreed not to make dividend payments with respect to our common stock through September 30, 2021.

Foreign Ownership Restrictions

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

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Performance Graph

The following graph compares the performance of AAWW common stock to the Russell 2000 Index and the Dow Jones Transportation Average for the period beginning December 31, 2016 and ending on December 31, 2021.  The comparison assumes $100 invested in each of our common stock, the Russell 2000 Index and the Dow Jones Transportation Average and reinvestment of all dividends.

Total Return between 12/31/16 and 12/31/21

ITEM 6. [RESERVED]

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

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

Business Overview

We are a leading global provider of outsourced aircraft and aviation operating services.  We operate the world’s largest fleet of 747 freighters and provide customers a broad array of 747, 777, 767 and 737 aircraft for domestic, regional and international cargo and passenger operations.  We provide unique value to our customers by giving them access to highly reliable modern production freighters that deliver the lowest unit cost in the marketplace combined with outsourced aircraft operating services that we believe lead the industry in terms of quality and global scale.  Our customers include express delivery providers, e-commerce retailers, the U.S. military, charter brokers, freight forwarders, direct shippers, airlines, manufacturers, sports teams and fans, and private charter customers.  We provide global services with operations in Africa, Asia, Australia, Europe, the Middle East, North America and South America.

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

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

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

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

Stable base of contractual revenue and reduced operational risk

Our focus on providing long-term contracted aircraft and operating solutions to customers stabilizes our revenues and reduces our operational risk.  ACMI and CMI contracts with customers generally range from two to seven years.  Long-term Charter programs provide customers with dedicated Charter capacity generally ranging from one to three years. We also provide certain of these services on a short-term basis.  Dry Leasing contracts with customers generally range from five to nine years.  Under these types of contracts, our customers assume fuel, demand and price risk resulting in reduced operational risk for AAWW, while typically providing us with a guaranteed minimum level of revenue and target level of profitability.

Focus on asset optimization

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

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

We continually evaluate our fleet to ensure that we offer the most efficient and effective mix of aircraft to meet our customers’ needs.  Our service model is unique in that we offer a portfolio of operating solutions that complement our freighter aircraft businesses.  We believe this allows us to improve the returns we generate from our asset base by allowing us to flexibly redeploy aircraft to meet changing market conditions, ensuring the maximum

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utilization of our fleet.  Our Charter services complement our ACMI services by allowing us to increase aircraft utilization during open time and to react to changes in demand and Yield in these businesses.  We have employees situated around the globe who closely monitor demand for commercial charter services in each region, enabling us to redeploy available aircraft quickly.  We also endeavor to manage our portfolio to stagger contract terms, which mitigates our remarketing risks and aircraft down time.  

Long-term strategic customer relationships and unique innovative service offerings

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

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

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

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

Experienced management team

Our management team has extensive operating and leadership experience in the airfreight, airline, aircraft leasing and logistics industries at companies such as United Airlines, US Airways, Lufthansa Cargo, GE Capital Aviation Services, GE, Air Canada, Canadian Airlines, American Airlines, JetBlue Airways, ICF International, ASTAR Air Cargo, FPG Amentum, KLM Cargo, SMBC Aviation Capital, Spirit Airlines, Spirit AeroSystems, Singapore Airlines Cargo and China Cargo Airlines, as well as the United States Army, Navy, Air Force and Federal Air Marshal Service.  In addition, our management team has a diversity of experience from other industries at companies such as Mastercard, PepsiCo, Moody’s, Ralph Lauren, Kate Spade, Avon Products, New York Life Insurance, Hess and Unisys, as well as nationally recognized accounting and law firms.  Our management team is led by John W. Dietrich, who has more than 30 years of experience in all facets of aviation and airline management.  

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Business Strategy

Our strategy includes the following:

Focus on securing long-term customer contracts

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

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

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

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

Drive significant and ongoing productivity improvements

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

Selectively pursue and evaluate future acquisitions and alliances

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

Appropriately managing capital allocation and delivering value to shareholders

Our commitment to creating, enhancing and delivering value to our shareholders reflects a disciplined and balanced capital allocation strategy.  Our focus is on growing our business while generating returns above our cost of capital, maintaining a strong balance sheet and returning capital to shareholders.

Business Developments

Our Airline Operations results for 2021, compared with 2020, were positively impacted by our ability to enhance our long-term strategic customers, manage our fleet and increase aircraft utilization to meet strong customer demand. During 2020 and 2021, we entered into numerous ACMI and long-term Charter agreements and extensions with key customers seeking to secure committed cargo capacity.  These long-term contracts provide us with guaranteed revenue and include indexed fuel price adjustments to mitigate our exposure to fuel price volatility.  In 2020, we reactivated four 747-400BCF aircraft that had been temporarily parked and began long-term Charter operations using a 777-200 freighter aircraft that was previously in our Dry Leasing business.  

Strong customer demand in fast-growing trade lanes was further enhanced by the continued reduction of available cargo capacity in the market provided by passenger airlines and the disruption of global supply chains due to the COVID-19 pandemic, resulting in significantly higher commercial charter cargo Yields, net of fuel.

COVID-19 has disrupted global manufacturing, supply chains, passenger travel and consumer spending, resulting in flight cancellations, in 2020, by certain of our ACMI customers and lower AMC passenger flying as the military took precautionary measures to limit the movement of personnel through June 2021.  

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Given the dynamic nature of this pandemic, the financial impact cannot be reasonably estimated at this time.  We have incurred and expect to incur significant additional costs, including premium pay for pilots operating in certain areas significantly impacted by the COVID-19 pandemic and other operational costs, including costs for continuing to provide a safe working environment for our employees.  In addition, the availability of hotels and restaurants, evolving COVID-19-related travel restrictions and health screenings, employees who are unable to work, and reductions in 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:

The continuation or worsening of the aforementioned and other factors could materially affect our results for the duration of the COVID-19 pandemic.  

In August 2021, the Department of Defense activated the CRAF for the first time since 2002 to augment support to the U.S. Department of State in the evacuation of U.S. citizens and personnel, special immigrant visa applicants, and other at-risk individuals from Afghanistan.  We provided three 747-400 passenger aircraft to support the CRAF activation, which ended in mid-September, and also provided additional 767 passenger aircraft in support of these evacuations for the AMC.

We have achieved a new five-year CBA with our pilots.  This long-term CBA was reached through a binding arbitration process, with the arbitrator’s decision being issued on September 10, 2021.  The new pay rates became effective as of September 1, 2021, and we’re working closely together with the union’s new leadership on the implementation of other provisions of the agreement.  Under this industry competitive agreement, all of our pilots will receive significantly higher pay, quality of life improvements and enhanced benefits.  There are a few remaining open items from the arbitration decision that the parties are working together to resolve.  Labor costs arising from the new CBA are materially greater than the costs under our previous CBAs (see Note 14 to our Financial Statements for further discussion).

We continually assess our aircraft requirements and will make adjustments to our capacity as necessary.  Some of these actions may involve grounding or disposing of aircraft or engines, which could result in asset impairments or other charges in future periods.

We manage our fleet to profitably serve our customers with modern, efficient aircraft.  In December 2021, we signed an agreement with The Boeing Company (“Boeing”) for the purchase of four new 777-200LRF aircraft.  The first of the four new 777-200LRFs is expected to be delivered in November 2022, with the other three expected to be delivered throughout 2023.  In January 2021, we signed an agreement with Boeing for the purchase of four new 747-8F aircraft.  The aircraft are expected to be delivered from May through October 2022.  Between May and October 2021, we acquired six of our existing 747-400 freighter aircraft that were previously on lease to us.  In May and June of 2021, we reached agreement with several of our lessors to purchase five of our other 747-400 freighters at the end of their existing lease terms, which range from March to December 2022.  Acquiring these eleven 747-400 freighter aircraft keeps them in our fleet and ensures committed capacity to our customers.

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Results of Operations

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

Years ended December 31, 2021 and 2020

Operating Statistics

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

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Operating Revenue

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

Airline Operations

Airline Operations revenue increased $822.2 million, or 26.8%, primarily due to an increase in Revenue per Block Hour and increased flying. Revenue per Block Hour rose primarily due to an increased proportion of higher-yielding flying, including the impact of new and extended long-term contracts, the impact of the ongoing reduction of available cargo capacity provided by passenger airlines in the market and the continued disruption of global supply chains due to the COVID-19 pandemic, as well as higher fuel prices. The increase in Block Hours flown was primarily due to our ability to increase aircraft utilization to meet strong customer demand, reflecting growth in airfreight volumes. Due to strong demand for our services, we reactivated four 747-400BCF aircraft throughout 2020 that had been temporarily parked and began using a 777-200 freighter aircraft that was previously in our Dry Leasing business.

Dry Leasing

Dry Leasing revenue was relatively unchanged.

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Operating Expenses

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

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

Salaries, wages and benefits increased $186.5 million, or 25.3%, primarily due to higher pilot costs related to our new JCBA since the beginning of September 2021, including $29.2 million related to adjustments to paid time-off benefits in our new JCBA (see Note 14 to our Financial Statements). In addition, pilot costs reflected higher profit sharing driven by higher earnings, as well as increased flying.

Aircraft fuel increased $384.3 million, or 87.2%, primarily due to an increase in the average fuel cost per gallon and an increase in consumption related to increased Charter flying. Our exposure to fluctuations in fuel price is limited to the shorter-term commercial portion of our Charter services only, as fuel risk is largely mitigated by price adjustments, including those based on indexed fuel prices for longer-term commercial charter contracts. We do not incur fuel expense in providing ACMI and CMI services or in our Dry Leasing business as the cost of fuel is borne by the customer. Similarly, we generally have no fuel price risk for AMC charters because the price is set under our contract with the AMC, and we receive or make payments to adjust for price increases and decreases from the contractual rate.  Average fuel cost per gallon and fuel consumption for 2021 and 2020 were:

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Maintenance, materials and repairs decreased by $33.8 million, or 6.7%, primarily reflecting $68.4 million of decreased Heavy Maintenance expense, partially offset by $22.1 million of increased Line Maintenance expense and $12.6 million of increased Non-heavy Maintenance expense. Heavy Maintenance expense on 747-400 aircraft decreased $73.3 million primarily due to a decrease in the number of engine overhauls and a decrease in the number of D and C Checks.  Partially offsetting this decrease was an increase in Heavy Maintenance expense on 747-8F aircraft of $3.5 million primarily due to an increase in the number of C Checks, partially offset by a decrease in the number of D Checks. Line Maintenance expense increased primarily due to increased flying. Non-heavy Maintenance expense on 747-8F aircraft increased $9.0 million primarily due to an increase in landing gear overhauls.  Heavy airframe maintenance checks and engine overhauls impacting Maintenance, materials and repairs for 2021 and 2020 were:

Depreciation and amortization increased $23.5 million, or 9.1%, primarily due to the acquisition of flight equipment, changes in 747-400 freighter aircraft leases (see Note 10 to our Financial Statements) and an increase in the amortization of deferred maintenance costs related to 747-8F engine overhauls (see Note 2 to our Financial Statements).

Navigation fees, landing fees and other rent increased $29.0 million, or 18.7%, primarily due to increased Charter flying.

Travel increased $8.2 million, or 5.3%, primarily due to increased flying.

Passenger and ground handling services increased $18.1 million, or 13.1%, primarily due to increased Charter flying.

Aircraft rent decreased $29.1 million, or 30.1%, primarily due to changes in 747-400 freighter aircraft leases (see Note 10 to our Financial Statements) and the acquisition of 747-400 freighter aircraft that were previously on lease to us.

Gain on disposal of aircraft in 2021 and 2020 represented net gains from the sale of certain nonessential assets (see Note 6 to our Financial Statements).

Special charge in 2020 represented a $16.3 million charge related to fair value adjustments for spare engines classified as assets held for sale (See Note 6 to our Financial Statements).  

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).

Other increased $28.1 million, or 13.0%, primarily due to an increase in professional fees, which included costs associated with negotiations and arbitration for a new JCBA (see Note 14 to our Financial Statements), as well as costs for continuing to provide a safe working environment for our employees and costs associated with the movement of spare engines.

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Non-operating Expenses (Income)

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

Interest expense decreased $7.1 million, or 6.2%, primarily due to the scheduled repayment of debt.

Capitalized interest increased $7.4 million primarily due to pre-delivery deposits related to our January 2021 agreement to purchase four 747-8F aircraft from Boeing (see Note 2 to our Financial Statements).

Loss on early extinguishment of debt in 2021 was due to the repayment of two term loans (see Note 9 to our Financial Statements).

Unrealized loss on financial instruments represents the change in fair value of a customer warrant liability (see Note 8 to our Financial Statements) primarily due to changes in our common stock price until the exercise of certain warrants in October 2020 and January 2021.

Other (income) expense, net decreased $145.0 million primarily due to a $110.6 million decrease in CARES Act grant income (see Note 3 to our Financial Statements) and a $35.0 million reduction in refunds of aircraft rent paid in previous years (see Note 6 to our Financial Statements).

Income taxes.  Our effective income tax rates were 23.8% and 27.5% for 2021 and 2020, respectively. The effective income tax rate for 2021 differed from the U.S. statutory rate primarily due to state income taxes and certain expenses that are not deductible for tax purposes. The effective income tax rate for 2020 differed from the U.S. statutory rate primarily due to nondeductible changes in the fair value of a customer warrant liability (see Note 8 to our Financial Statements).  

Segments

The following table compares the Direct Contribution for our reportable segments (see Note 13 to our Financial Statements for the reconciliation to Operating income) (in thousands):

Airline Operations Segment

Airline Operations Direct Contribution increased $281.3 million, or 38.0%, primarily due to our ability to increase aircraft utilization to meet strong customer demand, increased Yields, net of fuel, including the impact of new and extended long-term contracts, and lower Heavy Maintenance expense. Direct Contribution also benefited from the operation of four 747-400 freighters reactivated throughout 2020 and a 777-200 freighter aircraft that was previously in our Dry Leasing business. Partially offsetting these improvements were higher pilot costs related to our new JCBA (see Note 14 to our Financial Statements) and higher pilot profit sharing driven by higher earnings.

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Dry Leasing Segment

Dry Leasing Direct Contribution increased $1.5 million, or 3.7%, primarily due to lower interest expense related to the scheduled repayment of debt.

Unallocated expenses and (income), net

Unallocated expenses and (income), net increased $208.7 million, or 103.8%, primarily due to a $110.6 million decrease in CARES Act grant income (see Note 3 to our Financial Statements), a $35.0 million reduction in refunds of aircraft rent paid in previous years and a $29.2 million increase related to adjustments to paid time-off benefits in our new JCBA (see Note 14 to our Financial Statements).

Years ended December 31, 2020 and 2019

Operating Statistics

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

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Operating Revenue

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

Airline Operations

Airline Operations revenue increased $512.8 million, or 20.1%, primarily due to an increase in Revenue per Block Hour and increased cargo flying.  The increase in Revenue per Block Hour was primarily due to an increased proportion of higher-yielding commercial cargo Charter flying, reflecting a reduction of available cargo capacity provided by passenger airlines in the market and the disruption of global supply chains due to the COVID-19 pandemic.  Partially offsetting these improvements were lower fuel prices and an increase in CMI flying.  Block Hours flown increased primarily due to increased demand for our Charter services driven by the factors impacting commercial cargo demand noted above and our ability to increase aircraft utilization.  Due to this increased demand, we began operation of a 777-200 freighter aircraft that was previously 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 during the first half of 2020 and fewer charters for sports teams and fans as sports leagues cancelled games during 2020.  In addition, Block Hours were negatively impacted from flight cancellations by certain of our customers caused by the COVID-19 pandemic.

Dry Leasing

Dry Leasing revenue decreased $35.6 million, or 17.7%, primarily due to $22.3 million of revenue during the first quarter of 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.

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Operating Expenses

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