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Atlas Air Worldwide Holdings Inc (NASDAQ:AAWW)
Q1 2020 Earnings Call
May 7, 2020, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by and welcome to the First Quarter 2020 Earnings Call for Atlas Air Worldwide. [Operator Instructions] Thank you.

I will now turn the call over to Atlas Air to begin.

Ed McGarvey -- Senior Vice President and Treasurer

Thank you, Laura, and good morning everyone. I'm Ed McGarvey, Treasurer for Atlas Air Worldwide. Welcome to our first quarter 2020 results conference call. Today's call will be hosted by John Dietrich, 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 atlasairworldwide.com under Presentations in the Investor Information section.

As indicated on slide two, we'd 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 2019 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 slide s.

During our question and answer period today, we'd 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'll be happy to answer any additional questions as time permits.

At this point, I'd like to call turn the call over to John Dietrich.

John W. Dietrich -- President and Chief Executive Officer

Thank you, Ed, and hello everyone and thank you for joining. Before I discuss our first quarter performance, I want to take a moment to acknowledge the extraordinary times we've all been living through. I want to extend our best wishes to all who have been so adversely affected by this pandemic. I would also like to thank all of our employees and the frontline responders around the world for their tremendous efforts to combat this crisis. Their life saving efforts are truly appreciated. Turning to our presentation at slide three, as always, safety is our top priority and we're focused on supporting our pilots, ground staff and our customers through this challenging time. This includes taking extensive precautions to safeguard all of our employees and support workers and working in close partnership with our pilots and their union leadership to ensure that our operations continue to run safely so that we can continue to carry the goods that the world needs. We're deep cleaning our aircraft in our facilities on a frequent basis, providing safety kits for our ground staff and crew members and implementing other safety procedures to protect our team, our customers and our service providers.

We're also adjusting routes and schedules to limit exposure to regions that have been more significantly impacted by the pandemic and we have put in place significant social distancing and other precautionary measures in our offices, including having all employees who can work remotely from home do so. Over the years, we've made significant investments in our technology and business resiliency capabilities to ensure that our employees have the tools they need to do their jobs effectively even if they are away from their primary place of business. I'm pleased to say that those investments are paying off and that our transition to working remotely during this crisis has been seamless and I'm confident that we have the right controls in place to continue managing our business remotely until it is safe for all employees to return to our facilities.

With respect to the business, Atlas plays a vital role in supporting the global economy and our customers by keeping goods moving. Airfreight offers unrivaled delivery speed which is particularly important in times of need; from parts and components used in manufacturing processes to finished goods, food, pharmaceuticals and other cargo, businesses and individuals count on Atlas to deliver every day. And we're grateful to be able to provide relief to businesses and communities in the fight against COVID-19. In addition to our commercial operations, we have donated services to transport critical personal protective equipment and other necessary relief supplies to affected areas. We've also made several charitable contributions to organizations that help those in need and we're in close contact with our customers and governments around the world to ensure that airfreight continues to move to support relief efforts globally.

Now turning to our first quarter results on slide four. After a slow start and despite the continual and varying operational challenges and uncertainties related to COVID-19, we ended the quarter with results that exceeded our expectations. Traditionally, the first quarter is the slowest part of the year for airfreight and this year started out that way with the usual drop off in global manufacturing associated with the Lunar New Year holiday in China. But this year COVID-19 extended the Lunar New Year holiday which delayed the resumption of manufacturing and that drove significant flight cancellations in January and February as our customers adjusted their schedules, due to the impact of the pandemic on their businesses. As we moved into March however, cargo demand and yields improve significantly reflecting the demand for goods and needed supplies, coupled with the reduction of belly capacity of the commercial passenger airlines and the disruption of global supply chains, due to the COVID-19 pandemic. In addition to the increased demand and higher airfreight yields in March, our first quarter results also benefited from flying the CMI aircraft, added to our fleet in 2019, including five incremental 737s for Amazon, two incremental 777s for DHL and two incremental 747-400s for Nippon Cargo Airlines. The results also benefited from lower to lower aircraft rent and depreciation.

Our overall strong ACMI and commercial charter cargo performance was partially offset by lower military passenger demand due to the Department of Defense's precautionary limit on military travel, lower 747 Dreamlifter flying reflecting Boeing's temporary suspension of its 787 Dreamliner production and higher cost related to the pandemic including premium pay for our crews and the protection and cleaning measures, I noted earlier, as well as other operational workarounds. Strong demand for airfreight, though, has carried into the second quarter. To meet that demand, we've reactivated three of our 747-400 converted freighters that had been previously part. And we began operating a 777 freighter that was previously in our Dry Leasing business. At the same time, we're mindful of the evolving and uncertain environment and the importance of prudent financial management. We're taking actions to reduce cost and enhance liquidity, including significantly reducing discretionary spending, limiting our hiring for certain positions and selling non-essential assets. That being said, we continue to hire pilots to support demand and further growth. And we're seeing strong interest from pilots who are excited to join our company.

As mentioned in our press release earlier today, I'm pleased to report that working together with our pilots and their union leadership, we've taken a very important step during this critical time and increased our pilots pay rates by 10%, effective May 1. We're happy to be able to acknowledge and recognize the outstanding efforts that our crews provide every day and especially in this challenging operating environment. We're providing this pay increase as an interim step, as we continue to negotiate a new joint collective bargaining agreement in connection with our merger between Atlas Air and Southern Air. With an exceptionally talented team of employees, a strong balance sheet and a diversified portfolio of assets and services, Atlas is well positioned to continue to adjust to market conditions, to navigate through the current pandemic and leverage the scale of our global operations to further capitalize on business opportunities. Turning to slide five, we expect the positive trends that we're currently experiencing to continue throughout the remainder of the year and we expect the majority of our earnings to occur in the second half of the year. However, the evolving an uncertain environment related to COVID-19 makes it difficult to accurately predict the future impact on our results. As such, we're providing an outlook for the second quarter of 2020, but our full-year 2020 earnings guidance provided on February 28 of this year no longer applies and we'll provide updates as the year progresses.

For the second quarter of 2020, we expect to fly approximately 80,000 block hours with revenue of approximately $770 million and adjusted EBITDA of about $165 million. Excluding the second quarter refund of excess aircraft rent paid in previous years of approximately $25 million after tax, we anticipate second quarter adjusted net income to grow approximately 40% to 50% compared with adjusted net income of $29.9 million in the first quarter of 2020. Including the benefit from the refund of excess aircraft rent paid in previous years, we anticipate second quarter adjusted net income to more than double compared with the first quarter of 2020. In addition to the excess rent refund, earnings in the second quarter are expected to benefit from continued charter demand including several long-term charter programs at higher yields flying the incremental CMI aircraft added to our fleet during 2019 and improved operating efficiencies and cost savings. We expect these benefits to be partially offset by higher heavy maintenance expense, lower military demand driven by the military stop moving order related to COVID-19, additional cost driven by COVID-19 including premium pay for our pilots, cost for continuing to provide a safe working environment for all our employees as well as higher costs from our recent interim pay agreement with our pilots.

In addition, the availability of hotels and restaurants evolving pandemic related travel restrictions and health screenings, cancellations of passenger flights by other airlines or airport closures could further impact our ability to position pilots to operate our aircraft. Our second quarter outlook also reflects the reactivation of three of our 747-400 converted freighters that had been part in our operation of a 777 that was previously in our Dry Leasing business driven by continued strong demand for airfreight. While we're not providing an outlook for the full year of 2020 at this time, we expect the majority of our earnings to occur in the second half of the year. Aircraft maintenance expense in 2020 is expected to total approximately $390 million with depreciation and amortization totaling about $250 million. In addition, core capital expenditures which exclude aircraft and engine purchases are projected to total approximately $85 million to $95 million mainly for parts and components for our fleet. We also expect our full-year 2020 adjusted effective income tax rate to be approximately 22%.

This is a good time for me to ask Spencer to provide some more details on our first quarter 2020 results, and after Spencer's remarks, I'll provide a few additional comments and then we'll be happy to take your questions. Spencer?

Spencer Schwartz -- Executive Vice President and Chief Financial Officer

Thank you, John and hello everyone. Our first quarter results are highlighted on slide six. On an adjusted basis, EBITDA totaled $121.2 million with adjusted net income of $29.9 million. On a reported basis, net income was $23.4 million. Our adjusted earnings in the first quarter included an effective income tax rate of 24.2%. Looking at slide seven, operating revenue totaled $643.5 million in the first quarter of 2020. ACMI segment revenue was lower in the first quarter, primarily from a decrease in flying driven by the redeployment of 747-400 aircraft to Charter as well as the customer flight cancellations that John noted earlier, partially offset by an increase in 777, 737 and 747-400 CMI flying. Charter segment revenue during the period was higher, primarily driven by increased flying, partially offset by a decrease in the average rate per block hour. Block hour volume growth primarily reflected strong demand for commercial cargo driven by the reduction of available capacity in the market, the disruption of global supply chains and the redeployment of 747-400 aircraft from ACMI. This was partially offset by lower AMC passenger flying as the military took precautionary measures to limit the movement of personnel. The lower average rate per block hour was primarily related to a reduction in Charter capacity purchase from ACMI customers that had no associated Charter block hours as well as lower fuel prices. This was partially offset by an increase in commercial cargo yields excluding fuel.

A lower Dry Leasing segment revenue primarily reflected $22.3 million dollars of revenue in 2019 for maintenance payments related to the scheduled return of a 777 freighter. And that's the why we're operating now in Charter. Moving to slide eight. Segment contribution totaled $113.8 million in the first quarter. ACMI earnings primarily reflected increases in CMI flying and a reduction in aircraft rent and depreciation, partially offset by the redeployment of 747 aircraft to Charter. ACMI segment contribution was also impacted by flight cancellations and increased operating costs including premium pay for crews operating in certain areas, significantly impacted by the virus. Higher Charter segment contribution during the period was driven by an increase in commercial cargo yields excluding fuel, which reflected the reduction of available capacity in the market and the disruption of global supply chains. Charter contribution also benefited from lower aircraft rent and depreciation and the redeployment of 747 aircraft from ACMI. This was partially offset by lower military demand and the increased operating cost that we discussed earlier. In Dry Leasing, lower segment contribution during the quarter was primarily due to the 2019 maintenance revenue payment.

Turning to slide nine, our net leverage ratio ended the quarter at 4.4 times which is consistent with yearend 2019. We expect a nice improvement as the year progresses as we benefit from increased EBITDA levels, further improve our cash balance and continue to make debt payments of approximately $70 million per quarter. We ended the first quarter of 2020 with cash including cash equivalents, restricted cash and short-term investments totaling $235.6 million compared with $114.3 million at the end of 2019. Our improved cash position reflected cash provided by operating, investing and financing activities. Net cash provided by investing activities during the quarter, primarily related to proceeds from the disposal of nonessential assets, partially offset by core capital expenditures, spare engines and upgrade kits. Net cash provided by financing activities, primarily reflected proceeds from debt refinancing and from our revolving credit facility, partially offset by payments on debt obligations. In March, as a precautionary measure due to the uncertainty from the pandemic, we drew $75 million under the revolving credit facility and had $19.8 million of unused availability as of March 31.

As a reminder, our debt has a low weighted average coupon rate, which is now 3.2% and the vast majority is secured by our aircraft assets which have a value in excess of the related debt. To mitigate the impact of any continuation or worsening of the pandemic, we have significantly reduced nonessential employee travel, limited ground staff hiring and the use of contractors, implemented a number of other cost-reduction initiatives across the company and taken other actions, such as the sale of the nonessential assets. We don't have any firm aircraft purchase commitments and we remain committed to a strong balance sheet.

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

John W. Dietrich -- President and Chief Executive Officer

Thank you, Spencer and moving to slide 10 and as I said earlier, safety is our top priority. We're focused on continuing to support our pilots, our ground staff and customers through this challenging time and we're taking extensive precautions to safeguard all our employees. Our first quarter results exceeded our expectations which was the result of our team's executing tirelessly in a challenging operating environment and I'm humbled by their dedication. We're seeing strong demand for airfreight into the second quarter, but we also remain mindful of the evolving and uncertain environment and the importance of financial management. Atlas plays a vital role in supporting the global economy and our customers by keeping goods moving and we're very grateful to do our part to continue to provide relief to communities and businesses in the fight against COVID-19. With our exceptionally talented team of employees and sound financial structure along with the diversified portfolio, Atlas continues to be well positioned to take advantage of market conditions, navigate through this pandemic and leverage the scale of our global operations to further capitalize on business opportunities.

With that, we're happy to take your questions. And operator, may we have the first question please.

Questions and Answers:

Operator

Thank you. [Operator Instructions] Your first question comes from the line of Bob Labick of CJS Securities.

Bob Labick -- CJS Securities -- Analyst

Good morning, thanks for taking the questions.

John W. Dietrich -- President and Chief Executive Officer

Good morning, Bob.

Spencer Schwartz -- Executive Vice President and Chief Financial Officer

Hi, Bob.

Bob Labick -- CJS Securities -- Analyst

Hi. So while I just start, could you talk a little bit about your ACMI customers and how they're utilizing the aircraft if it's differently now versus a normal first half, if they're benefiting from the tight market and then how does that translate to direct contribution from ACMI for Atlas, if it does?

John W. Dietrich -- President and Chief Executive Officer

So I'll start, Bob on the first part of your question. For our ACMI customers, for the most part, it's more normalized operations. Many of them, including our larger customers, serve some of the markets where there are some surge out of China, particularly. As we mentioned in our remarks, there was a fairly dramatic decline during that initial period on the tail end of Lunar New Year, but now it's return to more normalized levels. There have been a couple of our ACMI customers who have redeployed into the China market that weren't previously serving it to take advantage and help in the effort of the COVID- 19 demand surge. But for the most part, they maintained their networks because they do depend on their network flying as part of their underlying business. So from a contribution standpoint Spencer, I don't know if you want to add anything to that.

Spencer Schwartz -- Executive Vice President and Chief Financial Officer

Sure. And Bob, I'll just add, the way that ACMI works. As you know, it's a long-term contract with an agreed-upon rate structure and at the beginning of the quarter, when things were a little slower, manufacturing wasn't as strong in China, the ACMI customer has a guaranteed minimum and now the things are so much stronger. The ACMI customer has a huge benefit because they've locked in that rate over a long period of time. And so our ACMI customers have the benefit of that long-term contract with us if they were going out into the marketplace looking for capacity now, they would be paying so much more. So ACMI customers really benefit overall from that relationship. And as I said during the first couple of months, there were cancellations and then in March and certainly in April and what we're seeing now volumes have really, really picked up.

From a from a direct contribution standpoint overall ACMI saw an increase from the CMI flying that John talked about five additional aircraft for Amazon, two Triple-sevens for DHL, two for NCA. So we really benefited from that. The segment benefited from having lower cost of aircraft rent and depreciation and overall, the segment performed well even given the softness at the beginning of the period.

Ed McGarvey -- Senior Vice President and Treasurer

Yeah. And I think if I could, Spencer. The other thing I'd add, for our customers, they really enjoyed the low fuel price as well. I mean, it's been a substantial benefit for them. So with our modern efficient aircraft coupled with the low fuel price in the high demand during the most recent period, I would expect they enjoyed really good returns.

Bob Labick -- CJS Securities -- Analyst

Okay, super. And then just for my follow up, I guess kind of thinking ahead 2021 or beyond. We've obviously been seeing a lot of, on a press reports about potential capacity coming out of commercial airlines in the future. How does that influence the value of freighters going forward and your potential operations next year and beyond.

John W. Dietrich -- President and Chief Executive Officer

Sure. So yeah, certainly the significant decline in passenger capacity in the marketplace has had an impact on freight and the one of the big questions is, when will that passenger capacity come back into market and reasonable minds can differ on that, but we do know it's going to be a while before that happens and we also expect it will be more gradual. We're watching that closely. And from a capacity standpoint it also ties in with where that capacity is going to be redeployed once it starts coming into the market. Will it focus on Europe first or Asia. Most of the production is coming out of Asia. And I think it's going to be a while before that capacity has a significant impact on the cargo demand which ties into your question on the value of freighters that speaks to the freighters having significant value and high-demand as Spencer mentioned that certain certainly the case now and time will tell how long that continues on into the future, but we expect for the foreseeable future. People aren't talking about days and weeks, they are talking about months and years before the passenger capacity materially rebounds.

Spencer Schwartz -- Executive Vice President and Chief Financial Officer

And Bob, it's Spencer. I'll just add a couple of small point to that. As you know about 50% of air freight has moved in the belly space of passenger planes and so that has really had an impact. And as John said, we're looking at months to years for when that's going to come back. So it's really going to benefit, it seems airfreight for quite some time. And so, the value of freighters should improve from sort of scarcity value standpoint for sure. The other benefit we have is that we also have a dry leasing business and our dry leasing business because the passenger aircraft values have dropped and most likely will continue to drop due to the large fleet reductions and parked aircraft. So our dry leasing business should see some great investment opportunities and there should be attractive aircraft that can be freighter conversions like 767300 and 737800 possibly A33300 or A321200. So, some good opportunities out there overall, Bob.

Bob Labick -- CJS Securities -- Analyst

So, I will get back in queue as you asked. Thank you very much.

Spencer Schwartz -- Executive Vice President and Chief Financial Officer

Thank you.

Operator

Your next question comes from the line of Scott Group of Wolfe Research.

Scott Group -- Wolfe Research -- Analyst

Hey, thanks, good morning guys.

Spencer Schwartz -- Executive Vice President and Chief Financial Officer

Hi, Scott.

Ed McGarvey -- Senior Vice President and Treasurer

Good morning.

Scott Group -- Wolfe Research -- Analyst

I wanted to start on the charter side. So, charter rates were down for the quarter. But maybe can you talk about that trend that you saw throughout the quarter and what you're seeing right now and then. I understand not giving full year guidance. But maybe can you share what were in the initial guidance. What were you assuming for charter rates and what are you actually seeing right now?

Spencer Schwartz -- Executive Vice President and Chief Financial Officer

Sure, Scott. It's Spencer. So overall charter rates rate per block hour was down on a first quarter this year versus first quarter last year, which is not what you would expect. And so, it's made of a few different pieces. So, I'll try to explain that. The overall yields were down a few hundred dollars a block hour, the biggest piece of that, well, let me start with the increase. So just from overall market rates driven by what we're seeing in the market yields were up significantly. So that's what you would have expected to see. But then, there were a couple of offsets. One is of course fuel and so fuel is a component that's in Charter and in our ACMI business fuel is not a factor. In our Charter business, it's part of the overall rate and so since fuel with so much lower that had a pretty significant impact on the rate per block hour.

And then the second piece that had a pretty big impact is something we call purchase capacity. We've talked about this a little bit in the past, from time to time, we will buy back space from our ACMI customers on those planes and then we will sell that in the charter market and so the charter revenue shows up in the Charter segment because it was sold in the Charter market, but the actual flying took place on an ACMI aircraft. So, the block hours are in ACMI. So that was the situation we had last year. So last year, the rate per block hour had a very big benefit from that. This year that was not the case. And so, on a comparison year-over-year basis, you would see that, and so we were able to operate those hours directly in Charter and not through not using ACMI. So, had it not been for fuel, had it not been for this reduction in purchased capacity, what you would have seen was a sharp increase in commercial market yields. Overall, to the second part of your question, yields were certainly higher in March and continue to be higher than we had anticipated sharply higher than what we had anticipated. Now in January and February things were very different. But in March and certainly April yields are much, much higher than we had anticipated in our plan at the beginning of the year.

Scott Group -- Wolfe Research -- Analyst

And just so I understand that this purchased capacity, is this a sort of a headwind to reported Charter yields all year. Is this a first-quarter phenomenon. And then what are you doing if anything to sort of are you doing anything to lock in these charter rates for longer than normal? How are you approaching the market, right now?

Spencer Schwartz -- Executive Vice President and Chief Financial Officer

Sure, I can talk about both of those So it's a, it's an issue and the purchase capacity that will be an issue on a comparison basis probably just the first couple of quarters of the year. And then the question you're asking about longer-term charters. So we are, I said this on a previous call, the difference between ACMI and Charter is starting to get a lot more blurry than it used to be used to be ACMI was ACMI and Charter was Charter they're starting to blend a lot more together as charters are getting longer term and the nature of the Charter relationship is starting to look more and more like ACMI. So what we're seeing on the, in the Charter space is that charter customers want to enter into much longer agreements so they used to be very short term occasionally we had certainly program charters. But now, what we're seeing is request for more long-term charter relationships at higher yields and so we are now entering into those. And so we expect the Charter demand to be strong for quite some time.

John W. Dietrich -- President and Chief Executive Officer

Yeah. And if I could add to that, Spencer. Scott from my perspective, we're focused on both, of course, we want to take advantage of the near-term surge in the yields. But we're also focused on the long term as well. And there are customers who see the value in the freighters going forward. They see the dynamics that we've talked about with the significant reduction in capacity in the market. A coupled with what they see as their needs. So that has opened the door for us to engage in the discussion and get some longer-term charter contracts at very favourable rates.

Scott Group -- Wolfe Research -- Analyst

One more quickly, if I can. Can you just give us a Cares Act update? Did you guys participate in the in the dollars for cargo companies? Was there anything in that in first quarter, second quarter guidance?

Ed McGarvey -- Senior Vice President and Treasurer

So, there is not in the guidance and as many of you know the Cares Act sets aside specific funds for cargo airlines. We have been in discussions with Treasury to evaluate whether Atlas will participate in the program. But no decisions have been made on that and we'll let you know how that develops.

Scott Group -- Wolfe Research -- Analyst

Okay. I'll get back in queue. Thank you, guys.

John W. Dietrich -- President and Chief Executive Officer

Thanks, Scott.

Operator

Your next question comes from the line of Helane Becker of Cowen.

Helane Becker -- Cowen -- Analyst

Thanks very much, operator. I appreciate the time gentlemen. So, here is my one question, well, two questions. One is, I know for a while there were issues flying into China for your pilots because the government wanted to quarantine them and that's just ridiculous. So, I'm kind of wondering if that worked out and how that worked out and then how I should think about the contract pay rates. So is the 10% like a down payment on a potential increase later on that might be as much as 30% or does the 10% have [Indecipherable] limit to it. And then you would renegotiate this away and negotiated new contracts?

Spencer Schwartz -- Executive Vice President and Chief Financial Officer

Okay, thanks Helane. I'll take those. In terms of flying into China, you're right, there have been a number of regulatory and operational hurdles, we've had to overcome. It was frustrated by inconsistent rules and regulations in different cities within China.

So, and so there has been a tremendous effort to have more centralized rules that accommodated the need for a central freight to keep moving and there was also different testing requirements and as you say, different quarantine requirements for the most part, we were able to transition our crews and go through China without lay over, without too much problem there were some testing that would take place, some of it was more invasive than others, and that was concerning for a while, if not disruptive for a while, but working together with the industry and with the government, we were able to get more reasonable and rational ways in which to operate in and out of China, including migrating to a point where we can actually do more efficient and less risky layovers within China in places like Shanghai. So we're in a much better place now than we were several weeks ago. On that so it's working as well as can be expected and there were some pretty harsh approaches earlier on for example if someone were to be tested positive that they would somehow be stuck in China, when I think it was in everyone's interest for U.S. based pilots and citizens to get them out of China and back home again and we've worked through those issues as well.

So you're right, it was a serious concern and continues to be a concern, but it's mitigated over time due to some great work in the government's dealing with each other's in the industry, dealing with the governments. So that's that part of it. With regard to the pilot contract, there is no limit on it. This is a 10% increase that will remain in effect until we reach our next contract. I think it's fair to say that our contract is long since amendable, so the rates have been somewhat below market for an extended period of time. Quite frankly no one expected, I certainly didn't expect the merger negotiations for the joint collective bargaining agreement to take this long. Unfortunately, we had a number of procedural disputes to enforce the contract in the merger provisions within the contract. Fortunately, we were successful in many, many court decisions in arbitrations to define what procedures apply. But given where we are in that cycle and given frankly had we follow those merger procedures, the new joint collective barting agreement would already be in place by now and we just thought it was a prudent time to recognize our pilots and give them this interim pay bumped, it will not have an expiration date. I view it as kind of a bridge to the next contract. So that's where we're at with regard to the 10%.

Helane Becker -- Cowen -- Analyst

That's great, thank you very much. And just one last follow-up question, as the passenger airlines since you due do some passenger flying can you apply for PSP funds. I know I think Scott asked about the cargo. But you could also ask for passenger funds too, no?

John W. Dietrich -- President and Chief Executive Officer

Yeah, no, that's not the case and the government did contemplate there were carriers who did a little bit of both. And they set some definitions, if you were predominantly a cargo carrier and did some passenger you fell under the cargo bucket, if you were predominantly a passenger and did some cargo you fell under the passenger bucket. So, we would, to the extent that we proceeded, we would be in the cargo in the cargo bucket.

Helane Becker -- Cowen -- Analyst

Got you. Thanks, have a nice day.

Ed McGarvey -- Senior Vice President and Treasurer

Thanks.

John W. Dietrich -- President and Chief Executive Officer

Thanks.

Operator

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

David Ross -- Stifel -- Analyst

Hey, good morning gentlemen.

John W. Dietrich -- President and Chief Executive Officer

Hi, Dave.

David Ross -- Stifel -- Analyst

As follow up on one of the earlier questioning lines when you talked about the charter segment having more longer-term charters say multi-month agreement rather than multi-week agreements. What percentage of your charter planes are now flying under those longer-term contracts versus really running free in the spot market.

John W. Dietrich -- President and Chief Executive Officer

David Spencer, I don't really have a percentage, but one of the things in the premise of your question was months versus days. We now have charter contracts that are several years in length. And that's why I was saying they start to look more and more like an ACMI contract. They have some different elements, but they're starting to look similar, so we have now charter contracts that will go into the years. On a percentage basis, I don't think we know that it's not really the way we operate, but not really sure, I don't want to speculate. Not really sure, on a percentage basis. We still have some that are very much in the in the spot market. And then we have others that are tied to longer-term arrangements.

David Ross -- Stifel -- Analyst

May be if you got 14-15 planes in Charter or half of them tied up under long-term deals.

John W. Dietrich -- President and Chief Executive Officer

I would not say half, is something less than half. But beyond that, would just speculating.

David Ross -- Stifel -- Analyst

And then how do you think about fuel working into longer-term charter rates because typically fuels a part of that all in Charter rate, as you mentioned with the revenue per block hour headwind with fuel dropping. But as you extended out, the fuel get separated out from that to spread the risk or is fuel in there and then you're taking some element of fuel risk where you could benefit if fuel falls or you could get hurt a fuel rises?

Spencer Schwartz -- Executive Vice President and Chief Financial Officer

We have some adjusters in the agreements that call for the extremes in either direction, right? So, as we talked about on a long-term basis. No one can predict what's going to happen with fuel, although we don't expect any dramatic changes in the near term, but there are protections for both for both parties in this longer-term charter to make adjustments for fuel in either direction.

Ed McGarvey -- Senior Vice President and Treasurer

David Spencer. I'll just add to that, we always talk about one of the great benefits of our business is that we really don't have much fuel exposure, a little bit, but not really much. In ACMI, we really don't have fuel exposure with the military we really don't have fuel exposure, in Charter is the only area where there's a little bit and where we're entering into a short-term charter arrangement for something that's going to happen over the next several days. We have a pretty good idea of what the rates are, if we're entering into a longer-term arrangement. The fuel is typically pegged to some sort of a fuel index. And so, there is just a very small amount of risk there as fuel is moving up or down if it's volatile, but otherwise it's tied to an index. And really the customer will mostly enjoy the benefit of lowered fuel or suffer the consequence of rising fuel, but at the moment, certainly the benefit of lower fuel.

David Ross -- Stifel -- Analyst

Okay, thank you very much.

Ed McGarvey -- Senior Vice President and Treasurer

Thank you.

John W. Dietrich -- President and Chief Executive Officer

Thank you.

Operator

Your next question comes from the line of Chris Stathoulopoulos of SIG.

Chris Stathoulopoulos -- SIG -- Analyst

Good morning, thanks for taking my question. So Spencer, starting with the balance sheet. Could you just tell us exiting the quarter with respect to unencumbered assets, whether it's aircraft slots or any other substance of economic value, and then also with the military weakness view of the stop order movement but offset here with what's going on in the Charter market for main deck freighters, how should we think about your debt into the end of the quarter and assuming the stop order movement remains in place and we have a similar level of demand in Charter what that might look like at the end of the year. Thanks.

Spencer Schwartz -- Executive Vice President and Chief Financial Officer

Okay. Hi Chris, it's Spencer. So with regard to other forms of collateral or unencumbered assets, we certainly have some under-levered assets on our balance sheet such as our 747-8. In addition, we certainly have assets that could potentially be disposed if we were to do that in addition to the ones that we already have. But we have no plans to do that on any large-scale basis. Let's see. The other part of your question was about the military and there's a short term stop movement order for non-essential movements.

The military is still moving. They're moving essential movements, but they're not moving nonessential movements. And we expect that will be lifted probably June or July. And we expect that business will come back just fine. I'm not sure I completely understood your question. You were suggesting that perhaps if the military wasn't flying would have some impact on our balance sheet and I didn't quite follow that. If we're not flying for the military, the charter market is so strong right now that we would be able to utilize those aircraft in the charter market.

Chris Stathoulopoulos -- SIG -- Analyst

And if I could add to that [Multiple Speakers].

John W. Dietrich -- President and Chief Executive Officer

I'm sorry, Chris, go ahead.

Chris Stathoulopoulos -- SIG -- Analyst

What I was looking for is really given where we are with the military and the charter. If there's a leverage target that we should think about exiting 2-Q or perhaps into the second half, assuming things remain where they are now.

Spencer Schwartz -- Executive Vice President and Chief Financial Officer

Oh, sure. Sure. Sorry, I didn't realize that's what you were asking, Chris. From a net leverage ratio standpoint, we really expect that it's going to reduce fairly significantly throughout the rest of the year. And again, we didn't provide we're not applying the full year guidance, but our goal has been for our net leverage ratio to somewhere between three and four times. And we expect that it will be there over the remainder of this year.

Chris Stathoulopoulos -- SIG -- Analyst

Okay. And then also with what's going on in terms of spot rates struggling looking at the tech index. Should we interpret this as this is perhaps an opportunity for ACMI rates to reset higher when those leases are rolled over?

John W. Dietrich -- President and Chief Executive Officer

Yes. I think that's a fair, fair conclusion. As we talked about earlier, these are very valuable assets and particularly for the foreseeable future and that's taken into account as we renegotiate our ACMI rates.

Spencer Schwartz -- Executive Vice President and Chief Financial Officer

Yes. And as I said earlier to someone else, Chris, that's the great benefit that an ACMI customer gets is that they have this kind of locked in fixed pricing over a longer period of time. And so in times like this where the spot market is so high the ACMI customer gets that benefit.

Chris Stathoulopoulos -- SIG -- Analyst

Okay. Last question. Okay, if you answered this before I was on another call, but I believe exiting 4Q, you had, I think it was four aircraft in storage and just where that is today. And then also the costs that are involved putting aircraft in storage and taking those out. Thanks.

John W. Dietrich -- President and Chief Executive Officer

Yes, Chris. Thank you. Yes, there was four that we've parked. We brought three of them back into service already and it was really nominal cost. They are put into temporary. There are different forms of storage, temporary storage and long-term storage. And the cost associated with that very higher cost with the longer term you're storing them for.

And then there are some costs that are involved in getting them back up and running on the line. So the three that we brought back the trip 747 were brought back quite efficiently and quickly and in a cost-efficient way. Now the longer you keep them in service, there will be other costs like engine maintenance and heavy checks that you'll incur. But just bringing them back online was not difficult. It didn't take a lot of time and it was not costly.

Chris Stathoulopoulos -- SIG -- Analyst

Thank you.

Operator

[Operator Instructions] Your next question comes from the line of David Campbell of Thompson Davis & Company.

David Campbell -- Thompson Davis & Company -- Analyst

Yes. Thank you for taking my question. Since March, there've been a lot of passenger airlines converting their aircraft to fly cargo. So the capacity to carry cargo is up in April compared to what it was in March. But you don't seem to be concerned at all about it. Is that because you the demand is also up or some other reason?

John W. Dietrich -- President and Chief Executive Officer

Yes, David. Thank you. Not overly concerned. It does have an impact of course. Any additional capacity has an impact. And I want to be careful with the use of the term converting. They're utilizing their aircraft and maybe doing some taking out of seats and using aisles and things like that, but not in the form of full-blown cargo conversions, but sure it has an impact. But over time as rates settle which they will, there's a price point below which that will no longer be feasible as well. And we're not too concerned. And there's also an efficiency factor.

One of the things that we've observed is that the market is accustomed to using freighters and certainly belly. But when you get into loading and unloading main deck passenger aircraft, it becomes quite inefficient and costly and causing more and more downtime. So there are a number of reasons why that's not optimal. It does tell you how high the rates are that it could still be economically feasible for passenger carriers to do that. It shows you where the market is right now. And look, there are other factors as well. The passenger carriers have an interest in keeping their pilots current and flying. Because if they're not flying they lose currency, which adds additional cost and time if and when they ramp back up again. So there are a number of factors in play and sure it does have some capacity impact, but we're not overly concerned about it at this time as a long-term impact.

Spencer Schwartz -- Executive Vice President and Chief Financial Officer

And David, it's Spencer. I'll just add to that, that about 90% of the passenger aircraft have been parked or not operating and that's about 21,000 aircraft. So 90% of them. And normally 50% of the world's air freight flies in a in a passenger aircraft. So the fact that some passenger aircraft are starting to carry freight is having a very small very little impact. A dedicated freighter is just so much different, right? A passenger aircraft does not have a cargo door. It can handle pallets above the wing. It can't handle palletized cargo. So you can put a box on a seat or take a seat out and stack boxes. But it's not the same as being able to move palletized containers and so forth. And so we're really not seeing that much of an impact on our business.

David Campbell -- Thompson Davis & Company -- Analyst

And my second question is, you've mentioned and we see the growth recovery in China and in cargo demand, particularly in March and April. But in Europe, have you seen any comparable increases in cargo demand in Europe or are they still flat?

John W. Dietrich -- President and Chief Executive Officer

Not appreciable other than China, Europe, I think is still has similar dynamics to the U.S. in needing a lot of the PPE. And I think that'll be a big question we're watching closely. Commercial general freight is coming back, but PPE is still a big part of it in both markets. So that's something we're watching closely and we expect I expect they will be the ones PPE softens. There's going to be a strong demand for manufacturing to get back in full business. So we'll be watching that very closely.

And Spencer, I'll just add that as the quarter progressed or now that first four months of this year have progressed. Originally things were really slow. Manufacturing was not taking place in Asia as we talked about. And then what started to move was really sort of intra-Asia, goods to be used within the manufacturing process. Like raw materials we're really moving to help get the factories ready. And so that's what was moving first. And then the factory started to produce. And so now the types of things that we're moving include high tech, automotive, retail, components, machinery, parts used in manufacturing. So all of that has started to move in a very strong way. And as John said at some point the PPE movement will slow. And then there's really going to be a big push to get all of these goods back to retail.

David Campbell -- Thompson Davis & Company -- Analyst

All right. Thanks for your answers. Thank you very much.

John W. Dietrich -- President and Chief Executive Officer

Thank you. David.

Operator

Your next question is a follow-up from Scott Group of Wolf research.

Scott Group -- Wolf research -- Analyst

Hey, thanks, for the follow-up. So is there any way you could share from the initial guidance that you gave us a few months ago, what the, what the 2-Q originally was supposed to be in your mind. And then is there any way to quantify the military headwind on the passenger side?

Spencer Schwartz -- Executive Vice President and Chief Financial Officer

Let's see. So with regard to the second quarter, certainly charter is much, much stronger. We now, as John said, we're bringing several aircraft back that we're operating and we've now operate operationalize the triple seven. So those aircraft were not expected to be in our numbers. And so now that's four large aircraft that are in charter earning very high yields. So huge benefit to our second quarter earnings. From those, we've also because of what's going on we've been significantly reducing our costs and working very, very hard at doing that.

And your second part of your question was about the military. So the military has canceled or not ordered a significant amount of passenger flying. So we haven't really quantified that for you, Scott. But it was a significant reduction in the first quarter. We expect it will be significant reduction in the second quarter. Fortunately it is much more than offset with the strength of the overall charter market.

John W. Dietrich -- President and Chief Executive Officer

Yeah. And if I could add to that, Spencer. There is an offsetting factor as well. The fact that the military demand was down as much as it was, allowed us to redeploy some of our crews to bring back the three 477s as quickly as we did. Because crewing is an important feature. It doesn't make up for the full gap of that, but without if there wasn't that softness, if the military was at these higher levels, we may not have been able to capitalize as much on the charter 747. So it also allowed us to get some pilots through training that gives us a better opportunity to be positioned when the military ramps up to full strength, which I expect will be by the end of June. So overall, not the worst-case scenario, frankly, and a good opportunity for us to position to further leverage our scale when it ramps up again.

Scott Group -- Wolf research -- Analyst

Okay. And then my last question. So I understand your view of why this is good for ACMI. Maybe can you just offer some perspective on why you think one of the planes was returned to you and if you see risk of any other planes getting returned?

Spencer Schwartz -- Executive Vice President and Chief Financial Officer

I assume, Scott, you're talking about the 777 that was returned a year ago.

Scott Group -- Wolf research -- Analyst

Oh, that was a year ago. Okay. So that was not.

Spencer Schwartz -- Executive Vice President and Chief Financial Officer

That was in 2000 early 2019.

Scott Group -- Wolf research -- Analyst

Okay.

John W. Dietrich -- President and Chief Executive Officer

Yes, yes. And that's when we put back in service.

Scott Group -- Wolf research -- Analyst

Okay. So I guess, OK, then that question does not apply. Okay. Thank you guys.

John W. Dietrich -- President and Chief Executive Officer

Thank you.

Spencer Schwartz -- Executive Vice President and Chief Financial Officer

Thank you.

Operator

Your next question comes from the line of Chris Stathoulopoulos of SIG.

Chris Stathoulopoulos -- SIG -- Analyst

Hey, thanks for taking my follow-up. So just an add on to Scott's question on the military side. And again, apologies if you address this in your prepared remarks. But if with respect to utilization, if zero being none of the planes are moving, they're on the ground and five on all cylinders, could you just sort of are we at a three there and is there an opportunity to repurpose those planes for other missions? And then the second question, I realize you have the 10% interim pay rate here and a few other moving pieces here on the P&L. But we're right now in a pretty favorable environment for freighter demand.

And I think that will probably persist as belly capacity is going to come on slower and on an absolute basis, I think a lot smaller as the passenger airlines are now saddled with higher debt here. So why isn't there an opportunity here to work toward how do we get toward this perhaps 3 times with respect to leverage or even lower here. Assuming that you have enough aircraft in the fleet to meet demand and if you don't want to acquire aircraft. Perhaps go out and rent some. I'm guessing right now with there's probably opportunities in the wide or even medium wide bodies with respect to favorable rates as given all the pressure on the ecosystem right now aviation. Thank you.

John W. Dietrich -- President and Chief Executive Officer

Sure. So I'll start on the first part with regard to the military demand. Even though there's a stop movement order there, that does not mean they're not moving anything. They're just being very cautious and limiting the amount of military movements. So in your question on a zero to five, it's not zero and it's not five. I would put it something in the 2.25 range of on your scale. And so it's not at a complete halt. With regard to incremental capacity going into the year, our planning was to have those four aircraft parked. So there was a little bit of a silver lining in some of that slower military businesses I just talked about. Because we were to redeploy the crews we expected in the military to ramp up on the very lucrative charter flying and backfill with additional crew hiring and training.

So yes, but as we look forward we are always interested in growth opportunities and we'll continue to be. We want to be very careful. We've ramped up quite quickly the four aircraft, which has talked about the three 777, excuse me, 374s and the 777 over a short period of time. We're also keeping an eye on the market so as to not over get too much capacity. As we're watching closely what happens on the, on the back end of this. We're very optimistic but cautiously so given the market conditions. We think manufacturing I think manufacturing is going to continue to surge on the back end of this. But you also have the fact that significant unemployment in the U.S. and what's the consumer market going to be? Those are the things we're looking at as well as concurrently looking at available aircraft on the market.

Chris Stathoulopoulos -- SIG -- Analyst

So if charter remains where it is now and the military [Indecipherable] movement is lifted in June or July here and ACMI rates reset higher. And again, I know you have the 10% pay raise and that hit to EBITDA. But is there a reason why we shouldn't think now if demand and we have let's say a seasonally in line or perhaps out-performance with respect to peak season. Why we can't see leverage go below four by the end of the year or even perhaps get to 3.5?

John W. Dietrich -- President and Chief Executive Officer

Yes, I think earlier Spenser talk about I think he did say we we're expecting it to go below four, but Spencer?

Spencer Schwartz -- Executive Vice President and Chief Financial Officer

Yes, that's exactly right. Our target has been to get between three and four. So certainly to get below four somewhere around the mid threes and we expect that we'll be in that area by the end of the year. We expect our net leverage ratio will decrease continue to decrease as the year progresses.

Chris Stathoulopoulos -- SIG -- Analyst

Okay. Thank you.

John W. Dietrich -- President and Chief Executive Officer

Thanks Chris.

Operator

Your final question comes from the line of David Ross at Stifel.

David Ross -- Stifel -- Analyst

And thanks for squeezing me back in. Spenser talked in the release about the core capex number for 2020. What additional capex might there be on top of that for the year? What would you think of as the total capex number?

Spencer Schwartz -- Executive Vice President and Chief Financial Officer

So in addition to core capex which is primarily parts used for our aircraft. In addition to that would really be some engines and we typically don't provide an estimate on that, but they it's in the I don't know, dozens of millions because we will need to capitalize overhaul so that counts as core capital expenditures. So we'll capitalize some overhauls. And we are also upgrading our GEnx which is the GEnx tubing, which is the engine on the dash eight. We continue to put those in for overhauls and upgrades and those are also capitalized. So again, so we'll have some GEnx to be engines, some 680, which is the engines for the 747s. Probably somewhat similar previous years.

David Ross -- Stifel -- Analyst

Okay. So 90 million of core capex, maybe it's somewhere from 120 to 140 total?

Spencer Schwartz -- Executive Vice President and Chief Financial Officer

A bit more than that. A bit more than that.

David Ross -- Stifel -- Analyst

Okay.

Spencer Schwartz -- Executive Vice President and Chief Financial Officer

Because we have capitalized overhauls. So it's normal maintenance, but they're capitalized for the GEnx engines.

David Ross -- Stifel -- Analyst

Okay. And then you talked earlier on the dry lease side about the value of passenger planes coming down and maybe an opportunity for increased freighter conversions. In addition to dry lease, how do you think about an opportunity to potentially trade up on the existing fleet, whether it's in charter or ACMI? You guys have a fairly young fleet as it is, but maybe there's a couple of planes that are a little bit older that you could replace it, a lower rate over the next year. How are you thinking about that?

John W. Dietrich -- President and Chief Executive Officer

Yes, well I think that's David, we'll, we'll be looking at that. And for example, there's potential with the 767s that were flying in our military business. Might be right for conversion and then to replace with some more modern and recent 767 passenger aircraft. Those are the kinds of things we're evaluating all the time and we got our eye on that.

David Ross -- Stifel -- Analyst

Great. Thank you very much.

John W. Dietrich -- President and Chief Executive Officer

Thank you Dave.

Operator

Thank you. At this time. There are no further questions. Gentlemen, are there any closing remarks?

John W. Dietrich -- President and Chief Executive Officer

Yes, please. So thank you, operator, and thank you all for your questions. On behalf of all our employees, Spencer, and I would like to thank you for your interest in Atlas Air Worldwide. We appreciate you sharing your time with us today and we look forward to speaking with you again soon. Thank you very much.

Operator

[Operator Closing Remarks].

Duration: 64 minutes

Call participants:

Ed McGarvey -- Senior Vice President and Treasurer

John W. Dietrich -- President and Chief Executive Officer

Spencer Schwartz -- Executive Vice President and Chief Financial Officer

Bob Labick -- CJS Securities -- Analyst

Scott Group -- Wolfe Research -- Analyst

Helane Becker -- Cowen -- Analyst

David Ross -- Stifel -- Analyst

Chris Stathoulopoulos -- SIG -- Analyst

David Campbell -- Thompson Davis & Company -- Analyst

Scott Group -- Wolf research -- Analyst

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