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Atlas Air Worldwide Holdings Inc  (NASDAQ:AAWW)
Q3 2018 Earnings Conference Call
Nov. 01, 2018, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, and welcome to the Third Quarter 2018 Earnings Call for Atlas Air Worldwide. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions) It is now my pleasure to hand the conference over to Atlas' IR.

Edward J. McGarvey -- Treasurer

Thank you, Nicole, and good morning, everyone. I'm Ed McGarvey, Treasurer for Atlas Air Worldwide. Welcome to our third quarter 2018 results conference call.

Today's call will be hosted by Bill Flynn, our Chief Executive Officer; and Spencer Schwartz, our Chief Financial Officer. Today's call is complemented by a slide presentation that can be viewed at atlasair.com under Presentations in the Investor Information section.

As indicated on slide two, we would like to remind you that our discussion about the Company's performance today includes some forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements relate to future events and expectations and they involve risks and uncertainties. Our actual results or actions may differ materially from those projected in any forward-looking statements. For information about risk factors related to our business please refer to our 2017 Form 10-K as amended or supplemented by our subsequently filed SEC reports. Any references to non-GAAP measures are meant to provide meaningful insights and are reconciled with GAAP in today's press release and in the appendix that is attached to today's slides.

During our question-and-answer period today, we would like to ask participants to limit themselves to one principal question and one follow-up question so that we can accommodate as many participants as possible. After we've gone through the queue, we will be happy to answer any additional questions as time permits.

At this point, I'd like to draw your attention to slide three and turn the call over to Bill Flynn.

William J. Flynn -- Chief Executive Officer

Thank you, Ed, and good morning, everyone.

We're very pleased to have you join us. Building on our achievements and performance in the first two quarters of 2018, we announced strong third quarter earnings growth today and we raised our outlook for the full year. Our results and our outlook are driven by ongoing market strength, customer demand and business development and our expectations for a record-peak season for Atlas.

We continue to leverage the scale and scope of our enterprise and our leadership in global aviation outsourcing thanks to the dedication and hard work of all of our employees. Our focus is on express, e-commerce and fast-growing markets, markets where efficient time-definite freighter networks are essential to meeting the growing secular demands of businesses and consumers.

And we're in a very good place to deliver quality results today and in the future. We have the aircraft and provide the services that customers want; we're focused on the right market; and we are executing on strategic initiatives to grow and diversify our fleet, expand our customer base and enhance our business mix.

Moving to slide four. Our third quarter adjusted earnings reflected a 14% increase in block hours and 23% increase in revenue. They also included a 25% increase in EBITDA and 48% increase in net income.

During the quarter, we began operating three additional 767-300 aircraft for Amazon, raising the current number to 18. In addition, Titan, our Dry Leasing subsidiary, renewed its participation in Singapore's aircraft leasing incentive, as we outlined to you on our second quarter call. As a result, we recorded an income tax benefit of approximately $8.7 million in the third quarter and will enjoy reduced rate going forward.

Also in the third quarter, we concluded an interim agreement to enhance the employment terms and conditions of our Southern Air pilots. We continue on the path toward a merger of Atlas Air and Southern Air. The contribution of our pilots is key to serving our customers and growing our business. And we remain committed to completing the bargaining process for a joint contract covering all of our pilots in a timely manner and in the best interest of all parties.

Slide five highlights our enhanced growth framework for 2018. Our full year outlook reflects our expectations for another great fourth quarter. We see solid peak season yields in volumes, including the additional flying we do for express and e-commerce operators. And we anticipate record fourth quarter block hours, revenue, adjusted EBITDA and adjusted net income. The fourth quarter will also benefit from our second 747-400 freighter for Asiana Cargo, and our first 747-400 freighter for SF Express, China's leading express operator. In addition, we expect to add two more 767 freighters for Amazon before Thanksgiving. That will bring us to 20, in line with the schedule we announced in May 2016.

For the full year, we expect volumes to rise approximately 17% to around 297,000 block hours and revenues to grow more than 20% to over $2.6 billion. We also expect adjusted EBITDA to increase more than 20% to over $525 million and adjusted net income to grow near or over 50% compared with 2017. Our outlook also anticipates maintenance expense of approximately $335 million, depreciation and amortization of about $215 million and core capital expenditures, which exclude aircraft and engine purchases, between $105 million to $115 million, mainly for parts and components for our fleet.

This is a good point to turn to Spencer. But before I do, I'd like to make a few comments about tariffs. Tariffs and trade are important topics these days. However, neither we nor our customers have seen a material impact on air freight demand. Airfreight tonnage is growing from record levels. Airfreight demand is growing in line with its longer term 4% rate. And express and e-commerce are growing much more than that. IATA expects about 64 million tonnes of goods to move by air in 2018. But only about 750,000 tonnes or 1% of these goods are exposed to potential price increases related to the tariffs that have been implemented or proposed.

Research into the prospective impact of tariffs provides some additional perspectives. For example, tariffs may lead manufacturers to shift production to neighboring countries such as Vietnam to continue to supply customers without increasing prices. Given our global scale and scope in over 100 countries and our network operating capabilities, we are well positioned for any shifts in manufacturing and route networks. And in the event of manufacturers look to pass on tariffs in the form of price increases, the research indicates that the impact is expected to be modest and likely wouldn't materially change consumer behaviors. Whatever impact tariffs may have, we believe that what needs to move by air will continue to move by air.

And now I'll ask Spencer to provide some additional detail about our third quarter results. After Spencer's remarks, I'll have a few additional comments and then we'll be happy to take your questions. Spencer?

Spencer Schwartz -- Chief Financial Officer

Thank you, Bill, and hello, everyone.

Our strong third quarter results are highlighted on slide six. On an adjusted basis, income from continuing operations, net of taxes, totaled $43.8 million, which was an increase of 48% over the third quarter of 2017. As Bill noted, our results reflected robust increases in block hours, revenue, adjusted EBITDA and adjusted net income. Our segments also generated substantially higher total direct contribution.

On a reported basis, income from continuing operations net of taxes totaled $71.1 million, which included an unrealized gain of $46.1 million on outstanding warrants. Both our adjusted and our reported earnings in the third quarter included an effective income tax rate of 0%. And that was principally due to the Singapore income tax benefit that Bill mentioned.

With respect to 2018, we expect our full year adjusted effective income tax rate to be approximately 15%. Based on our current tax framework and the aircraft investments we've made, we continue to expect that we will not be a significant US federal income tax payer.

Looking at slide seven. Higher ACMI segment revenues in the third quarter were primarily driven by a 13% increase in block hour volumes, which reflected increased flying for Amazon and the start-up of new or incremental flying for several customers, including Asiana Cargo, DHL and Inditex.

In Charter, higher segment revenues reflected an increase in volumes and an increase in the average rate per block hour. In Dry Leasing, higher segment revenues were primarily driven by an increase in the number of 767-300 aircraft throughout the second half of 2017 and the first three quarters of 2018 as well as the placement of one 777 freighter in February of this year and the second one in July.

Moving to slide eight. Segment contribution totaled $108.7 million in the third quarter, a 13% increase over the prior year. ACMI earnings primarily reflected a significant increase in flying, partially offset by the impact of unscheduled maintenance and higher crew costs, including enhanced wages and work rules from our interim agreement with our Southern Air pilots. In addition, ACMI contribution reflected the redeployment of 747-400 VIP passenger aircraft to Charter, following our acquisition from a former CMI customer.

The improvement in Charter contribution during the period was primarily driven by increases in military and commercial cargo demand and higher yields, excluding fuel, partially offset by an increase in heavy maintenance. In Dry Leasing, higher segment contribution during the quarter primarily reflected the placement of additional aircraft.

Turning to slide nine. We ended the third quarter of 2018 with cash, including cash equivalents, restricted cash and short-term investments totaling $244.7 million. Our cash position at September 30th reflected cash used for investing activities, partially offset by cash provided by operating and financing activities. Net cash used for investing activities during the first nine months of the year primarily related to payments for the acquisition of 777 and 767 aircraft, 767 conversions to freighter configuration, spare engines and upgrade kits and core capital expenditures. Net cash provided by financing activities during the period primarily reflected proceeds from our financings of 777 and 767 aircraft, partially offset by payments on debt obligations.

We are committed to maintaining a strong balance sheet. As the slide shows, we have grown our fleet to take advantage of great opportunities. In doing so, we have applied a disciplined approach to financing. As a result, our debt has a low weighted average interest rate of 3.3%, almost all of which is at a fixed rate. In addition, the vast majority is secured by our aircraft assets, which have a value in excess of the related debt.

As you can also see, our net leverage ratio, which remained fairly consistent while we increased our fleet significantly, began to move lower in the third quarter. We ended the quarter at 4.6 times, down 3 tcs (ph) and we expect that to be even lower at year-end, partly reflecting a pick-up in debt payments to $65 million to $70 million per quarter.

As we ramp up our flying for Amazon, have more aircraft in service and continue to generate strong EBITDAR, we expect our net leverage ratio to continue to improve gradually over the next year.

Now I'd like to turn it back to Bill.

William J. Flynn -- Chief Executive Officer

Thank you, Spencer.

Moving to slide 10. This is an exciting time to be at Atlas. We continue to leverage the scale and scope of our enterprise and we continue to capitalize on our leadership in global aviation outsourcing. Our strong results and our outlook for significant earnings growth are driven by ongoing market strength, customer demand and business development at our expectations for a record peak season for Atlas.

Our focus is on express, e-commerce and fast-growing markets, markets where efficient time-definite freighter networks are essential to meeting the growing demands of businesses and consumers. We're in a very good place to deliver quality results today and in the future. We have the aircraft and provide the services that customers want. We're focused on the right markets. And we are executing on the right strategies.

With that Nicole, may we have the first question, please?

Questions and Answers:

Operator

Certainly. (Operator Instructions) Your first question comes from the line of Bob Labick with CJS Securities.

Robert James Labick -- CJS Securities -- Analyst

Good morning. Congratulations on a nice quarter and outlook.

Spencer Schwartz -- Chief Financial Officer

Thank you, Bob.

Robert James Labick -- CJS Securities -- Analyst

Wanted to start in Charter. You touched on this briefly, but maybe we can expand. The revenue per block hour ex fuel was the highest in Q3 that I think we've ever seen. I certainly went back a bunch of years and didn't see anything this strong. Some of the drivers, obviously, are the mix and then the yields. Can you talk about the outlook for each of those -- kind of mix going forward and how you see yields trending and what's going on out there?

Spencer Schwartz -- Chief Financial Officer

Sure, Bob. It's Spencer. As you said, excluding fuel, commercial charter yields for the first nine to 10 months of 2018 were consistently above 2017. Looking at the current period, if I just go back to yesterday, South Korea to the US, we're looking at yields of about $4 a kilo, with rates and volumes up from the week before, from last week. Looking at Hong Kong to the US, yields of about $4.50 per kilo. Market demand is high. Rates are continuing to increase. Shipping lanes are full. We've seen 10-plus percent increases over the prior year for this time of the year. And then looking at mainland China to the US, yields are about $5.20 a kilo. So again, rates and volumes are up over the prior period. Space is tight. So hopefully that gives you a flavor of what we're seeing, what we're dealing with. Demand is strong and we don't see any slowdown in that. We're looking for a record peak season.

Robert James Labick -- CJS Securities -- Analyst

Got it. Okay. Great. And then on the ACMI side, you discussed this a little bit as well, but the -- we've talked about it before. There's been some new services customers taken, which have impacted margins a little bit. And then you had some maintenance and higher crew costs. Can you talk about margin trends in ACMI going forward? And maybe if there is an opportunity, a little bit to talk about the Amazon start-up expenses now that the Amazon fleet will be fully built out this year versus maybe next year?

Spencer Schwartz -- Chief Financial Officer

Sure, Bob. With regard to margins, so we've been adding a lot of CMI flying as you know. And that CMI flying generally has a lower margin. So as we've been growing, and we've been adding smaller gauge aircraft, which also has generally a lower margin. So as we grow that, it has that impact on margin. Still terrific business; very nice for the bottom line, but does have that impact when comparing to prior periods. The other thing, as you mentioned, some of our newer customers, Asiana, Inditex, DGF, Amazon, some of our newer customers, we have certain costs that come through as revenue and also expenses. Customers essentially reimburse us for certain costs that other ACMI customers would bear on their own. And so we handle that for some of those customers, and it comes through as expense and then a reimbursement of those expenses as revenue, and it impacts margins but doesn't impact the bottom line. So we see that impact happening in ACMI as well.

Robert James Labick -- CJS Securities -- Analyst

Okay. Super. I'll get back in queue to follow your instructions. Thank you.

Spencer Schwartz -- Chief Financial Officer

Thank you.

Operator

Your next question comes from the line of Seldon Clarke with Deutsche Bank.

Seldon Clarke -- Deutsche Bank -- Analyst

Hey, thanks for the question. Could you just talk a little bit about your capital deployment strategy over the next couple of years as we kind of wind down on this investment -- investment cycle that you've undertaken over the last couple of years?

Spencer Schwartz -- Chief Financial Officer

Sure, Seldon. It's Spencer. When it comes to capital allocation, we have three main priorities. We want to ensure that we have a strong balance sheet, that we have the right amount of cash to meet the needs of a growing business. We want to lower our leverage. So we want to maintain a strong balance sheet. We want to invest in assets that our customers want, modern efficient assets. And then we want to repurchase the Company's stock. And those are generally the three priorities kind of in that order. And that's how we look at it. And we've, I think, done pretty well in each of those. You can see that we -- as we've talked about, we kept our net leverage pretty flat while we increased our assets significantly. And now that most of those assets are placed into service, you see our leverage coming down, which is -- which is great. We have invested in modern, efficient assets that customers want. And a few years ago we bought back over 10% of the Company through share repurchases. So I think we've been doing that in a really balanced approach.

Seldon Clarke -- Deutsche Bank -- Analyst

Okay. That's helpful. And then just a little bit of a more specific question. In your ACMI segment, you saw a decent step-down year-over-year in your block hours per day and a little bit of a step-down sequentially. Is that primarily related to the aircraft mix or is there something else underlying there that's impacting utilization?

Spencer Schwartz -- Chief Financial Officer

Yes, a good question. When you look at it on an aircraft-by-aircraft basis our 747-8s or our 747-400s are essentially flat, and so utilization is just as strong as it was before. It's really just the mix. And so we've been adding smaller gauge 767 that generally are flying domestically and so they fly fewer hours. And so when you look at it the way you're looking at it, it's just a -- it's a mix effect. But on an aircraft-by-aircraft basis, utilization is good.

Seldon Clarke -- Deutsche Bank -- Analyst

Okay. And same thing with the, I guess, just the Charter segment in your passenger business. Is a similar mix there as well or something else?

Spencer Schwartz -- Chief Financial Officer

Charter utilization, it's typical fluctuations. In Charter, we saw AMC Charter, we saw that flying was down a little bit on a comparison basis. It's just driven by typical fluctuation of how the AMC awards their flying, so it's nothing more than that. We also added some NFL flying. And so we took two planes. They're VIP configured passenger planes. So they're 747s, but they are configured in upper class basically throughout the entire cabin. And we fly for five NFL teams. It's a really great relationship and we're thrilled about it. But because they're NFL teams, the flying is generally around the weekends. And so you don't see that same level of utilization. But the customer pays for that. Because the aircraft are going to be utilized in that way the customer pays for it accordingly. So when you look at it on an hours basis in Charter, you'd notice that. But the bottom line is doing nicely.

Seldon Clarke -- Deutsche Bank -- Analyst

Got it. That's very helpful. Appreciate the time.

Spencer Schwartz -- Chief Financial Officer

Thank you.

Operator

Your next question comes from the line of David Ross with Stifel.

David Ross -- Stifel, Nicolaus & Company, Inc -- Analyst

Yes. Good morning, gentlemen.

Spencer Schwartz -- Chief Financial Officer

Hi, Dave.

William J. Flynn -- Chief Executive Officer

Good morning, Dave.

David Ross -- Stifel, Nicolaus & Company, Inc -- Analyst

So when we think about moving into 2019, is there any significant number of ACMI contracts coming up for renewal next year?

William J. Flynn -- Chief Executive Officer

No, David, there isn't. We think we've got great momentum coming into 2019. We're sitting here talking with our customers as they think about first quarter schedules and beyond. And from what we're hearing from them that momentum continues. We'll always have some number of renewals in any year -- in any year. So I don't see any significant number of renewals going forward at any one time.

David Ross -- Stifel, Nicolaus & Company, Inc -- Analyst

Yes. And then aside from the ongoing negotiations with Southern Air, so there is likely some wage cost pressures that gets resolved at some point. Are there other cost pressures as you look out to 2019 that you need to offset with higher revenues?

Spencer Schwartz -- Chief Financial Officer

Dave, we will come out with -- we'll come out with our estimate for 2019 during our next earnings call. We'll certainly talk about that. I think the positives going into 2019, and this was a question that I think did not answer that Bob asked earlier. But going into 2019, we should see higher accretion from Amazon as we won't have those start-up costs going forward. I think that was Bob's question. We have new customers that we added throughout this year and we'll enjoy the full year of that flying next year. Commercial charter yields look like they will continue to be strong. AMC is stable to growing so that looks good as an overall strong air freight environment. The --

William J. Flynn -- Chief Executive Officer

Our business mix, overall.

Spencer Schwartz -- Chief Financial Officer

Yes, our business mix, overall. So your question was, are there potential sort of headwinds or issues. We'll have to talk about maintenance, and so we're going through that process now and firming that up. So we'll talk about that more during our next call. And then as you mentioned and as we talked about earlier, the changes in crew costs for the Southern Air interim agreement. So those are really -- I think those are the big items.

David Ross -- Stifel, Nicolaus & Company, Inc -- Analyst

And then last question. Bill, maybe you could describe the airfreight market out of Asia right now. How tight is it and are you seeing, I guess, the center of export movement shift away from Hong Kong into other cities and how does Atlas play into that?

William J. Flynn -- Chief Executive Officer

Yes. Thank you. So in a prior question, Spencer provided some fairly granular detail on pricing -- spot market pricing on a per kilo basis. And what we've seen is, we're up about 10% over last year net of fuel. So I think net of fuel is an important point to make as well. The market is very strong. Hong Kong continues to be a major market. But certainly we have growth in other markets in mainland beyond Shanghai and Shenzhen and into interior markets. The market is up overall. We're designated carrier under the bilateral agreement. We have a good array of route rights and operating authorities. And that's why we've spoken, I think, both Spencer and I, about this record peak in 2018, which was a record peak last year. So it's just continuing to develop very nicely, and we're well positioned there. And -- well, you asked about Asia. It's worth, I think, mentioning about several of the other markets. So we've grown in the express. We've got the deployment where we will have completed on our e-commerce the 20 767s here shortly. But some of our other charter markets like South America are exceptionally strong as well. So I'm sure you can tell we feel pretty strong about fourth quarter and the trajectory into next year.

Spencer Schwartz -- Chief Financial Officer

And most people think about the peak season from a Trans-Pac basis, goods moving ex Asia. But it's also peak season for South America for perishables, and so that is also a really high point for us.

David Ross -- Stifel, Nicolaus & Company, Inc -- Analyst

Great. Thank you.

Operator

Your next question comes from the line of Jack Atkins with Stephens.

Jack Atkins -- Stephens Inc. -- Analyst

Hey guys, good morning and thank you for the time. So I guess let's start on the labor front for a moment, kind of going back to that. I mean, can you guys give us an update? Obviously, I know you don't want to negotiate on a public call and I wouldn't ask you to do that. But just sort of curious from a timing perspective, I guess where are we? So what's the process from here in terms of getting something announced in terms of a new tentative agreement?

William J. Flynn -- Chief Executive Officer

So what we talked about in our last call and referred back to again today is the interim agreement, which we've reached with our Southern Air pilots so we could bring their wages or other terms and conditions in the contract essentially up to parity with our Atlas pilots. We talked about that last call, and the impact of that change we factored into the framework we provided for the third quarter and the full year. And that continues as we talk about where we are -- our results are today and what we're looking at for fourth quarter.

Jack Atkins -- Stephens Inc. -- Analyst

Right. I guess, Bill, I was really referring to the broader agreement with all of your pilots.

William J. Flynn -- Chief Executive Officer

I was getting there, Jack. I mean, we're --

Jack Atkins -- Stephens Inc. -- Analyst

Sorry.

William J. Flynn -- Chief Executive Officer

It's OK. But look, these are negotiations and the process by which we get to a new agreement are guided by the law, the regulation coming out of the Railway Labor Act, and that's a process that (technical difficulty) parties and takes its time to get to a new comprehensive contract. And so we continue in discussions with our pilots, with their union, and as I mentioned earlier, it's our goal to get to a new joint collective bargaining agreement that really works for both parties, and we are in that process now.

Jack Atkins -- Stephens Inc. -- Analyst

Okay. Got you. Are you seeing any issues recruiting pilots? Because I think when we look at your wage scales they're a good bit below the rest of the industry and I'm just sort of curious if you guys are having issues, just given broader pilot shortages, finding applicants.

William J. Flynn -- Chief Executive Officer

So our process -- just one kind of final point on what we talked about. Our process to get to a new agreement while there is the overarching architecture of the RLA, the terms and conditions that exists in our own specific Atlas and Southern collective bargaining agreements, that also talk about this path forward to reach a new joint collective bargaining agreement. Question of hiring pilots, if -- in 2015 we flew about 178,000 block hours and this year we're going to fly, as I talked about, approximately 297,000 block hours. And you can see the growth in fleet as well. And we wouldn't be able to deliver that kind of growth, to service our customers and provide the services that they expect from us if we weren't able to recruit a dedicated force of pilots who want to come and work at Atlas and Southern and serve our customers.

Jack Atkins -- Stephens Inc. -- Analyst

Okay. Thank you both for that. One last question if I could. Looking at the ACMI segment, the last couple of quarters your direct contribution is flat on a year-over-year basis. But we've seen a pretty material step-up in both block hours and plane count. Is that due to start-up costs related to the -- not just Amazon, but I know you brought on a number of other customers as well over the last several quarters. At what point should we expect to see that ACMI profitability to accelerate or sort of keep up with what's going on from a block hour perspective?

Spencer Schwartz -- Chief Financial Officer

Sure. Good question, Jack. It's Spencer. This quarter we had some unscheduled repairs that impacted ACMI contribution. And so there was a downtime as a result of those repairs, and that impacted segment profitability. We think that issue is resolved and we don't expect that to continue in the fourth quarter. I think when you see fourth quarter ACMI direct contribution you'll be, and we will be, quite pleased.

Jack Atkins -- Stephens Inc. -- Analyst

Okay. That's great. Thank you, Spencer. I'll jump back into queue.

William J. Flynn -- Chief Executive Officer

Thank you, Jack.

Operator

Your next question comes from the line of Kevin Sterling with Seaport Global.

Kevin Sterling -- Seaport Global -- Analyst

Thanks. Good morning, Bill and Spencer. How are you?

Spencer Schwartz -- Chief Financial Officer

Hi, Kevin.

William J. Flynn -- Chief Executive Officer

Good morning, Kevin.

Kevin Sterling -- Seaport Global -- Analyst

Hey, good morning. Spencer, can I ask you a quick housekeeping question? I'm not looking for guidance for 2019, but given your tax rate is kind of moving around, can you maybe help us think about what we should model for your tax rate for 2019?

Spencer Schwartz -- Chief Financial Officer

Yes, good question. It is moving around, especially because we've reached this great agreement with Singapore for our Dry Leasing business and so we got an even lower rate there. So you're right. Going forward, we think our adjusted effective income tax rate will be about 20% if you -- because we won't have that sort of one-time Singapore type issue. So 20%, low 20%, something like that.

Kevin Sterling -- Seaport Global -- Analyst

Thank you. That helps. Appreciate that. And Bill, now that we've reached, I guess, kind of the new fiscal year for the government and particularly your military flying, can you share with us your, kind of -- your outlook for military flyings under the -- I guess, with the new fiscal year? Is it going be, I guess, maybe similar or maybe a little bit better than what we saw in 2018?

William J. Flynn -- Chief Executive Officer

Yes. I think what we're expecting, Kevin, is kind of similar levels of flying in both cargo and passenger continuing. We entered into the new contract with the fiscal year, as you rightly point out, starting October 1st, and beyond just from a contractual point of view, from that perspective, our ongoing discussions with the military and military planners confirm that perspective to us.

Spencer Schwartz -- Chief Financial Officer

And I'll just add, Kevin, that our entitlement -- what the military calls entitlement or our share of the outsourced flying on the cargo side has now reached 54.2%, on the passenger side, 54.7%. So we are the largest provider of outsourced airlift for the military.

Kevin Sterling -- Seaport Global -- Analyst

Great. Thank you for that color. It's good to hear. And last question. Bill, obviously in your prepared remarks you touched base on the tariffs and indicated you're not really seeing any impact from the tariffs, or your customers. Are you hearing any conversations of customers? Are they having any conversations with you as they think about next year or even beyond like, hey, I'm really worried about tariffs or changing trade patterns, so I'm going to turn these planes back to you? I assume you're not, but just maybe customer conversations -- customers are, I guess, it's quote unquote business as usual as we think about that, if that make sense?

William J. Flynn -- Chief Executive Officer

Yes, thank you, Kevin. We're not having those kinds of conversations and in fact, as you've seen, we've announced several new ACMI customers in the 747-700 fleet that principally fly trans-Pacific routes, like SF Express, for example, and Asiana Cargo, which is a Korean operator, as well. So there's obviously a lot of discussion and concern about uncertainty as to what the tariffs may mean. We haven't seen that impact. We've not seen that in this quarter. And our customers would say the same thing, look, we're concerned about it, but we haven't seen that impact and we're seeing a number of customers, in fact, stepping into capacity, like Asiana and SF did, in a fundamentally a trans-Pac market going forward. I made some reference in my remarks to that, perhaps. Origin may shift. Maybe we'll see something moving down to -- from China into perhaps a Vietnam or elsewhere in Southeast Asia. We operate in Vietnam today. For example, there is an open skies agreement between Vietnam and the United States with full kind of operating rights and authorities. So we haven't seen a lot of that shift either. But should shift occur over a period of time from a network and operating -- operating authorities perspective, we're well positioned to do that.

Kevin Sterling -- Seaport Global -- Analyst

Got you. Okay, thanks. And just sounds like you're seeing at the end of the day, you're still seeing customers step into the capacity like you said; not step out of capacity. Is that right?

William J. Flynn -- Chief Executive Officer

That's correct.

Kevin Sterling -- Seaport Global -- Analyst

Okay. Thanks a lot. Take care. I appreciate your time today.

William J. Flynn -- Chief Executive Officer

Thank you.

Spencer Schwartz -- Chief Financial Officer

Thanks, Kevin.

Operator

Your next question comes from the line of Stuart Shikiar with Shikiar Asset Management.

Stuart A. Shikiar -- Shikiar Asset Management -- Analyst

Thank you. Good morning, Bill and Spencer. Thanks for taking the question. In reviewing the results year-to-date, the third quarter was obviously a record quarter. The outlook for the fourth quarter block hours, revenue, EBITDA, net income, also looks very promising. Some observations and then a question. Observation one is, you just indicated that you have great momentum going into 2019. Secondly, the stock is trading below tangible book value. Three, free cash flow year-to-date is $175 million. Four, net leverage is going lower. Five, as Spencer pointed out, the cost of debt has got a free handle on it. So I'd like your view -- here's the question. I'd like your view as to what you perceive to be the disconnect between these apparent very solid fundamentals and the share price. And along that line, might you kind of reconsider the stacking of the order, the redeployment of the excess cash flow and tilt it perhaps toward share repurchases as you've done in the past when the stock was at advantageous levels? Thank you.

Spencer Schwartz -- Chief Financial Officer

Sure, Stewart. All good points. I would certainly agree that stock is trading below where we believe it should be. Free cash flows are strong. Our net leverage is decreasing. The business is doing unbelievably well. Great momentum. So we certainly agree with all of those things. What we've been doing with our cash is that we've been investing it in assets that our customers want. We've been really, really focused on lowering our leverage. We've heard from some investors that they, because of the leverage levels, it was -- they were otherwise extremely interested in investing in the Company but couldn't do so because of where the leverage was. So we've been very, very focused on bringing that down, and that's where the focus is. You saw that this quarter for really the first time and you'll see it more next quarter and throughout next year. And our focus is really on ensuring that we bring that leverage down. We want to ensure that we have the financial strength, financial flexibility for the Company going forward. We do agree that repurchases can, under the right circumstances, create value for shareholders. It's something that our Board considers very seriously and on a regular basis. So we'll continue to look at that and we'll also continue to make sure that we have the strong balance sheet and the right assets.

Stuart A. Shikiar -- Shikiar Asset Management -- Analyst

Okay. Well, thank you very much.

William J. Flynn -- Chief Executive Officer

Thank you.

Operator

Your next question comes from the line of Chris Stathoulopoulos with Susquehanna.

Christopher Stathoulopoulos -- Susquehanna Financial -- Analyst

Good morning. Thanks for taking my question. With regards to the guidance, so this is the fourth, I think, raise for the year. You took up your adjusted EBITDA by around 1%, but the block hours on a absolute basis fall by about 1% as well. So I just want to understand, is -- and you alluded to this before -- is the slight change in the block hour guide due to some shift in fleet mix or anything else?

William J. Flynn -- Chief Executive Officer

Yes. Chris, this is Bill. As you said, it's a 1% change. So we were guiding to about 300,000 and now we're saying about 297,000 or about 3,000 hours less (ph). I think block hours is really a process of fine-tuning as you go through the year. It's is based on schedules, it's based on how our customers react to changes in their marketplace. We lost some hours with the typhoons, for example, so that's an art than a science and if we're starting out it around 300,000 and getting within 99% of that as we come to year-end, that's about as close as we are going to be. Maybe we gain a few more hours between now and the next seven or eight weeks. So I really think the hours there is just a process of fine-tuning as we go through the year. It might not be a material change, and what we're focused on, of course, is the earnings framework that we've provided for you and our other investors.

Christopher Stathoulopoulos -- Susquehanna Financial -- Analyst

And I'm not trying to nitpick. I just -- I think optically, you know there's some concern out there for investors about airfreight slowing and perhaps when they see the slight -- again, it's 1% here and I understand what you're saying about planning the block hours but they're seeing that as perhaps evidence that demand is slowing. On the other hand, you are -- everyone that's -- Kuehne + Nagel, UPS and everyone else that I think has reported is pointing to a good peak and you're not seeing any slowdown from tariffs. So I just want to be clear that this isn't anything that's sort of in what's happening in the marketplace and it's more kind of fine-tuning around internal forecasting.

William J. Flynn -- Chief Executive Officer

No, I think you raised a right point, Chris, and I agree. The investors are taking different views of certain data points. And that is a data point that shows 1% kind of back-off from where we were in the call. But that has to be viewed against what have delivered in third quarter. Our description of the record peak that we're seeing now for 2018, whether that's revenue and that's contribution and that's adjusted EBITDA and adjusted net income also up against, point I made earlier, two very strong and in one case substantially growing Asian carrier Pacific plus Asiana stepping into capacity. So I take your point and I'm glad you raised the question so we could address it.

Christopher Stathoulopoulos -- Susquehanna Financial -- Analyst

Okay. And along the lines of sort of investor perception and kind of addressing the giveback in the stock and the weak performance I guess from the second half is that -- there's been some concern out there about the news with DHL's 777 order a few months ago at Farnborough. And I think some of those freighters are expected to be put in service in 2019. So could you -- is there a sort of competitive offer out there in the market for those aircraft? And then I'm wondering how you view potential competitors such as (inaudible) or potentially Omni Air? Thanks.

William J. Flynn -- Chief Executive Officer

Well, I think there is always a competitive offer for DHL and for other customers as well. That's just the nature of the business. They've got relationships with other carriers, not only in North America as well. I think we're well positioned to offer and compete for DHL's 777 aircraft. There is no guarantees for us. There's no guarantees for anybody. But we provide a high quality service. We've had a long growing relationship. We will have to compete for incremental growth. But we've always had to compete for incremental growth. There was nothing that was kind of guaranteed or considered. Will other carriers compete for -- to operate 777 assets? Yes, they will. Again, that's not new news. That's always been the nature of the relationship. We've got to provide the service quality and deliver it within the context that works for them. I see them as growth assets and I see it as a growth opportunity for our combined companies.

Christopher Stathoulopoulos -- Susquehanna Financial -- Analyst

So we shouldn't view the sort of the exchange and their -- I guess their finance behavior, where I believe they're purchasing these purchasing these assets as anything that's perhaps structurally changed in the relationship with you or how they typically view the bid process with their aircraft?

William J. Flynn -- Chief Executive Officer

Right. So I can't really speak for them, but no, I don't believe it's a structural change. I think -- that's really a Deutsche Post DHL question. I think IFRS has it implemented, has it -- fixed (ph) their balance sheet might have teed up the opportunities for them to go in and make direct investments except through ACMI. They have invested in aircraft in the past. They'll invest in aircraft in the future. And I believe that they'll balance their services between a combination of ACMI and CMI and have a -- both a purchase and a dry leasing component to the very substantial global network that they operate.

Christopher Stathoulopoulos -- Susquehanna Financial -- Analyst

Okay. Thank you.

Operator

Your next question comes from the line of Jack Atkins with Stephens.

Jack Atkins -- Stephens Inc. -- Analyst

Great. Just one quick follow-up here. And Spencer, kind of going back to the 2019 framework, and I know you don't want to give specific 2019 guidance. But as we think about maintenance expense, was there any reason to think about it growing faster or slower than overall block hour growth in 2019? I'm just trying to think about -- as you guys look at your C Check, D Check schedules and things like that, is there anything that you're looking at that will make you think that it's going to be a lighter or more heavier than normal year from a maintenance perspective?

Spencer Schwartz -- Chief Financial Officer

Thanks, Jack. As we said before, we will come and talk about our full forecast during our next call and maintenance -- we always update maintenance every quarter and provide you the best information we have. Maintenance is conditions based. There are some maintenance, of course, that is calendar based and so that is certainly more predictable. There's other maintenance that is conditions based and so it depends on how many cycles our engines have and what we are seeing when we are performing line maintenance and so forth, and so there's a lot that goes into that and we will talk about that during our next call.

Jack Atkins -- Stephens Inc. -- Analyst

Okay. That's what I figured. I just thought I'd ask. Thanks, guys. Appreciate it.

Spencer Schwartz -- Chief Financial Officer

Thank you.

Operator

You have a follow-up question from Chris Stathoulopoulos with Susquehanna.

Christopher Stathoulopoulos -- Susquehanna Financial -- Analyst

Thanks for taking the follow-up. So with Amazon going to be fully deployed for the peak, I think the last two going into service for Thanksgiving, and so, you know from the perspective of Amazon, they have their 40 freighters, they're operating a good sort of peak season here. And so they have an idea of how this is all going to work. If they wanted to put additional planes into service by next year's peak season, and assuming you don't put spares or move something for charter into ACMI, what's the lead time that you would need to do this, assuming, let's say, three to four months in terms of acquiring, financing and prepping the aircraft? Is it -- let's -- I guess what's the cut-off time from -- if they wanted to have these planes in service by next October, November that you could kind of get this all together? Thanks.

William J. Flynn -- Chief Executive Officer

Thanks, Chris. I'll answer your question, but generally because we're not -- we don't speak about or get into detail about any individual customer, including Amazon. I think it's worth noting that over the past couple of years, we've added aircraft in addition to the 20 767s that we added for Amazon, we were able to go out and approach the lease market and bring in 747 aircraft into serving our customers and have grown our 747 fleet. Overall, we also acquired two 777 aircraft. So there is a lead time for any net or any new aircraft introduction for any customer, whosoever that maybe and depending on the fleet type and the accessibility of the fleet type. I believe that either on an ACMI or CMI basis, we would be able to grow our fleet for our customers if given the demand and given the request. There are several months of lead time for any new aircraft introduction, whether -- and particularly if it's an aircraft that would need to be converted. It's probably the best way I could answer that.

Spencer Schwartz -- Chief Financial Officer

And Chris, I'll just add, as Bill said, we added -- by the end of this year we'll have added 16 aircraft and eight of those are for Amazon, 767-300s for Amazon. Eight others, though, are not, and so we've been able to do that all throughout the year.

Christopher Stathoulopoulos -- Susquehanna Financial -- Analyst

Okay. And then last question. If for whatever reason you don't grow the fleet incrementally next year, and I realize that hasn't been the case since 2015 or so, but for whatever reason that you don't add additional planes, what's the type of organic block hour growth we can think about assuming that we have low to mid single digit in global airfreight or that I add a number? Thank you.

Spencer Schwartz -- Chief Financial Officer

Sure. What I would say to that is that we added, as I just said, 16 planes throughout the course of this year. And so next year, we'll have a full year of flying all of those aircraft. In addition, we've added a number of customers. Utilization continues to be very, very strong. As we talked about earlier, utilization of our 747-8s, 747-400s, very strong, utilization in our charter business continues to be strong. So from an -- go ahead.

William J. Flynn -- Chief Executive Officer

Yes, I would just add, Spencer, to the question. The question that you ask, Chris, is assuming 4% growth. It's something I've said consistently. But our customers aren't growing 4%. They're growing at some rate greater as you think about e-commerce, express, military strength and particularly the strength of the charter market. It is the first full year of the 20 aircraft that we've introduced, to have all 20 aircraft introduced in operating on the 767 fleet. We've had the other aircraft that we've also added in the 747, the full year of the six 777 that we've added over at Southern. So there is simply run rate growth, having the benefit of the full year effect. There are in some fleets opportunities for a bit higher utilization, although Spencer answered that question earlier. It will depend on the aircraft type. But we'll give more perspective on that when we're here back in -- or upcoming in February as we talk about the full year results and 2019.

Christopher Stathoulopoulos -- Susquehanna Financial -- Analyst

Okay. Thank you.

Operator

(Operator Instructions) We are showing no further audio questions. I hand it back to Atlas Air for closing remarks.

William J. Flynn -- Chief Executive Officer

Well, thank you, Nicole. And for everyone on the call, Spencer and I want to thank you again for your taking -- taking your interest in Atlas Air and taking the time to be with us on the call today. We certainly appreciate it, all the questions that you had for us. And we look forward to speaking with all of you again soon. Thank you very much. Thank you, operator.

Operator

This does conclude today's conference call. We thank you for your participation and ask that you please disconnect your line.

Duration: 54 minutes

Call participants:

Edward J. McGarvey -- Treasurer

William J. Flynn -- Chief Executive Officer

Spencer Schwartz -- Chief Financial Officer

Robert James Labick -- CJS Securities -- Analyst

Seldon Clarke -- Deutsche Bank -- Analyst

David Ross -- Stifel, Nicolaus & Company, Inc -- Analyst

Jack Atkins -- Stephens Inc. -- Analyst

Kevin Sterling -- Seaport Global -- Analyst

Stuart A. Shikiar -- Shikiar Asset Management -- Analyst

Christopher Stathoulopoulos -- Susquehanna Financial -- Analyst

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