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Atlas Air Worldwide Holdings Inc (NASDAQ:AAWW)
Q3 2020 Earnings Call
Nov 5, 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 third Quarter 2020 Earnings Call for Atlas Air Worldwide. [Operator Instructions]

I would now like to turn the call over to Atlas Air. Please go ahead.

Ed McGarvey -- Senior Vice President and Treasurer

Thank you, Michelle, and good morning, everyone. I'm Ed McGarvey, Treasurer for Atlas Air Worldwide. Welcome to our third 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 2, 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 slides. [Operator Instructions]

At this point, I'd like to draw your attention to Slide three and turn the call over to John Dietrich.

John W. Dietrich -- President and Chief Executive Officer

Thanks, Ed, and hello, everyone. Welcome to our third quarter earnings call. Thanks for joining us. I'd like to start by thanking all our employees and frontline workers around the world for their unwavering efforts during this COVID-19 battle in what continues to be a complex, challenging and evolving environment. On behalf of everyone at Atlas, I want to express my sincere hope that you, your families and friends continue to stay safe during this pandemic. I'm very proud of the important role Atlas is playing in responding to COVID-19 globally. Air cargo has always been a vital component in the global supply chain as it provides speed, security and reliability that is unmatched by other modes of transportation. We at Atlas, remain committed to moving the goods the world needs most, including medical equipment, pharmaceuticals, personal protective equipment, e-commerce and other manufacturing and consumer products. Over the last several years, we've strengthened and diversified our business and our fleet with a focus on serving express, e-commerce and the fastest-growing global markets. This pandemic is driving acceleration in e-commerce as people increasingly turn to online shopping to support their everyday needs. The size and diversity of our fleet, positions us well to continue to serve our customers both regionally and internationally.

Our 747 and 777 freighters are in great demand for long-haul international flying, and our 767 and 737 freighters are actively serving regional and domestic markets. We're also preparing for our expected role in the timely distribution of vaccines, once they become available. The steps we've taken enable us to maximize the opportunities we're seeing today as well as those in the years ahead. As Spencer and I will share further with you today, the structural change in airfreight capacity caused by COVID-19 has presented meaningful opportunities for our company. But those opportunities also have come with significant operational hurdles as well as additional costs. The performance we're delivering this year doesn't just happen on its own. It's been made possible by our team coming together and tirelessly managing through a complex environment to provide safe operations for our employees and high-quality service for our customers. Safety always comes first at Atlas, and we're continuing to take wide-ranging precautions to ensure our employees remain safe while delivering goods the world needs during this difficult time. And with that mindset, we're navigating through an evolving operating and regulatory environment that includes ever-changing travel restrictions, border restrictions, increased testing and quarantine mandates, remote working and additional surges in COVID-19 cases globally. Now turning to our third quarter results on slide four.

And as our results reflect, the positive momentum of our business continued in the third quarter. We're seeing substantial demand for our long-haul wide-body services, both near and long-term at attractive yields. And we're leveraging the agility of our business model and the scale of our fleet and global operations to serve this increased demand. We've also continued to broaden our customer base and grow with existing customers to maximize market opportunities. We further increased our roster of long-term Charter customers, including the recent addition of China, the logistics arm of Alibaba as well as expanding with HP and several large global freight forwarders. It's important to highlight that these long-term Charter agreements provide secure and attractive revenue streams. We've also expanded operations for Amazon, where we began flying three additional 737 freighter since September. We're now operating 8, 737s for Amazon, complementing the large fleet of 767s that we have with them. These expanded businesses, deepen our strategic position in the fast growing e-commerce sector, as well as in important global markets like China and South America. And as mentioned in our press release today, we're also excited about a significant development in our joint venture between our Titan dry-leasing subsidiary and Bain Capital Credit.

The joint venture has arranged $500 million in financing facilities. This important step will enable it to serve the strong market demand for freighters. In addition, our third quarter results benefited from strong demand and higher yields, the significant and ongoing reduction of passenger belly capacity in the market, lower aircraft rent and depreciation and lower fuel prices. These benefits were partially offset by higher maintenance expense related to additional engine overhauls, we performed to take advantage of attractive vendor pricing and slot availability. As well as higher pilot costs related to the premium pay, we've been providing our pilots for operating into certain areas outside the U.S. that have been significantly impacted by COVID-19, and as well as the 10% pay increase, we provided to our pilots in May, pending the completion of our joint collective bargaining agreement. As I've mentioned, we're operating in a very favorable airfreight market, but we also recognize the uncertainty in front of us. And because of that, we're taking steps today that will position our company for continued success as we move forward. This begins with aggressively managing our costs in every aspect of our business and being prudent stewards of our balance sheet. And we remain focused on ensuring that our assets and resources are allocated to opportunities that generate the best returns. Now moving on to Slide five and our outlook.

Looking to the fourth quarter, and subject to any material COVID-19 developments, we anticipate solid volumes and yields driven by continued e-commerce growth and year-end freight -- airfreight demand, coupled with the ongoing reduction of passenger belly capacity in the market. To meet customer demand, we're reactivating our fourth 747 freighter that had been previously part. This will add to the 3, 747 freighters and the 777 we placed back into service during the second quarter. As a result, we anticipate fourth quarter adjusted net income to grow approximately 25% compared with adjusted net income of $82.7 million in the third quarter of this year. We're also expecting to fly approximately 95,000 block hours in the fourth quarter with about 65% of those in ACMI and the remainder in Charter. We anticipate fourth quarter revenue of about $850 million and adjusted EBITDA of approximately $215 million. Maintenance expense for the fourth quarter is expected to total approximately $116 million, with depreciation and amortization totaling about $65 million. And core capital expenditures, which exclude aircraft and engine purchases, are projected to be approximately $25 million to $35 million, mainly for parts and components for our fleet. On a full year basis, we now expect revenue of approximately $3.1 billion and adjusted EBITDA of about $780 million. We also expect our full year 2020 adjusted effective income tax rate to be approximately 23%. This is a good time for me to ask Spencer to provide our third quarter results.

And after Spencer makes his remarks, I look forward to providing 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 third quarter results are highlighted on Slide 6. On an adjusted basis, EBITDA totaled $196.3 million with adjusted net income of $82.7 million. On a reported basis, net income was $74.1 million. Our adjusted effective income tax rate was 22.8%. Moving to the top of Slide 7. Operating revenue totaled $809.9 million in the quarter. ACMI revenue primarily reflected an increase in the average revenue per block hour and increased flying. Block hour volume grew due to increased aircraft utilization, which was driven by strong demand for freighter aircraft. Reflecting the reduction of available cargo capacity and the disruption of global supply chains due to COVID-19. That was partially offset by the redeployment of 747-400 aircraft to Charter. Higher Charter revenue during the period was primarily driven by increased flying, partially offset by a lower average rate per block hour due to lower fuel costs. Block hour volume growth primarily reflected strong demand for freighter aircraft, driven by the reduction of available cargo capacity in the market, the disruption of global supply chains, the redeployment of 747-400 aircraft from CMI and a 777 aircraft from Dry Leasing and our ability to increase aircraft utilization. And Dry Leasing rate primarily related to changes in leases and the disposition of certain nonessential aircraft during the first quarter of this year. Looking now at the bottom of the slide. Segment contribution totaled $189.1 million in the third quarter. ACMI earnings primarily reflected increased utilization and a reduction in aircraft rent and depreciation.

These benefits were partially offset by higher pilot costs, including premium pay for operating in certain areas and the 10% pay increase resulting from our recent interim agreement. Higher heavy maintenance expense, including additional engine overhauls to take advantage of availability and pricing discounts and the redeployment of 747-400 aircraft to Charter that I just noted. Higher Charter contribution during the period was driven by an increase in commercial cargo yields, excluding fuel, strong demand for freighters and our ability to increase aircraft utilization. Charter contribution also benefited from lower aircraft rent depreciation and the redeployment of aircraft from ACMI and Dry Leasing. These benefits were partially offset by higher heavy maintenance expense and higher pilot costs. In Dry Leasing, lower segment contribution during the quarter was primarily due to changes in leases and the disposition of certain nonessential aircraft during the first quarter. Before we move to the next slide, I'd like to comment on another recent development that we shared in our press release this morning. On October 9, Amazon elected a cashless exercise with respect to approximately 3.6 million shares vested under our warrant issued in 2016. As a result, Amazon acquired approximately 1.3 million shares, which represented approximately 4.99% of our outstanding common stock after the exercise. Now turning to Slide 8. As the slide shows, our net debt and net leverage ratio continued to improve during the third quarter.

Our net leverage ratio decreased another 0.5 turn from 3.0 times at the end of the second quarter to 2.5 times at the end of the third quarter, and we expect further improvement at year-end as we benefit from increased EBITDA levels, a strong cash balance and maintaining debt payments of approximately $70 million per quarter. We ended the third quarter of 2020 with cash, including cash equivalents, restricted cash and short-term investments, totaling $729.3 million compared with $114.3 million at the end of 2019. Our improved cash balance at September 30, primarily reflected cash provided by operating activities and also included the funds we received through the Cares Act. Net cash used for financing activities primarily related to payments on debt obligations, including our revolving credit facility, partially offset by debt issuances. Net cash used for investing activities primarily related to core capital expenditures, spare engines and upgrade kits, partially offset by proceeds from the disposition of certain nonessential aircraft and engines. As a reminder, our debt has a low weighted average coupon rate of 3%, and the vast majority is secured by our aircraft assets, which have a value in excess of the related debt. We remain committed to a strong balance sheet, and we are taking actions to mitigate the impact of any continuation or worsening of the pandemic by reducing costs, enhancing liquidity and strategically allocating our resources.

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 9. 2020 certainly has been an unprecedented year, and the third quarter was no different. Our team continues to step up and execute in a complex and challenging operating environment. We expect volumes and yields in the fourth quarter to be driven by continued e-commerce growth and year-end airfreight demand, coupled with the ongoing reduction of passenger belly capacity in the market. We'll continue to take every precaution to protect our employees and operations to ensure we're ready to respond to customer demand and deliver the goods the world needs most. With our talented team world-class fleet, strong balance sheet and agile business model, we'll continue to deliver high-quality service for our customers and solid results for our investors in these uncertain times and beyond.

So with that, operator, I'd like to take the first question, please.

Questions and Answers:

Operator

[Operator Instructions] Our first question comes from Bob Labick of CJS Securities.

Bob Labick -- CJS Securities -- Analyst

Good morning. Congratulations on another strong quarter.

John W. Dietrich -- President and Chief Executive Officer

Thank you, Bob.

Bob Labick -- CJS Securities -- Analyst

I wanted to start -- maybe we've talked about it a little bit in the past on kind of new long-term Charter agreements. Maybe we can dig in a little further. Can you give us a sense, are you locking up more capacity for the long term? Are you simply shifting kind of ACMI into Charter? Because they're kind of blending? How does this position Atlas for the next few years in terms of your capacity under longer term agreements, your ability to move planes around, your total utilization, how does it impact your future earnings power by going into these long-term Charter agreements?

John W. Dietrich -- President and Chief Executive Officer

So, I'll start, Bob, and thank you. What we're trying to do is strike the right balance. The long-term Charter agreements do provide us long term benefit, as we said, at attractive rates. And ACMI is at the core of our business model. But we also want to ensure that we preserve enough capacity to take advantage of the market and the extraordinary market that we're seeing right now. So, it's striking that delicate balance with secure, attractive long-term customers, and we're seeing a blend, prior aircraft that have been in ACMI are being used for the long-term Charters, and we're also drawing from the Charter pool as well. Again, looking at the market and longer term, while we'll always be attracted to the ACMI part of the business, it's an exceptional Charter market right now as well. So, we're going to be very judicious about with whom we lock in with over what period of time and what rates to be able to enjoy the strength of both, and that's really where we're at.

Spencer Schwartz -- Executive Vice President and Chief Financial Officer

And Bob, it's Spencer. I'll just add that as we talked about in the release, and earlier, we added several more of these long-term commercial Charter agreements. We added them throughout the second and third quarters. They're now up to three years in length, and they go through the end of 2023. And there are a lot of similarities between these long-term Charters and our ACMI segment. There are differences in that -- it's priced differently. So, it's priced on a per Charter basis rather than per hour or on a monthly basis like ACMI would be. And Atlas pays for fuel and then fuel is included in the Charter price. So, there are fairly minor differences between the 2. But -- so, they're similar and as John said, these provide predictable, reliable revenue and earnings streams. So we're really pleased with them.

Bob Labick -- CJS Securities -- Analyst

Okay. That sounds great. And then for my last question. I just wanted to ask about CMI growth. Obviously, nice to hear three more planes with Amazon under CMI contracts. Can you talk about the availability of planes or freighters out there right now and of pilots and your ability to grow CMI going forward given the market dynamics?

John W. Dietrich -- President and Chief Executive Officer

Sure. With regard to the availability of pilots, we're in a very good position there. The available pool of pilots is actually quite strong. Unfortunately, on the passenger side of the business, certain carriers have closed their doors and others, as you've seen, have gone through significant reductions and furloughs. And so, we're quite well positioned to bring on pilots. With regard to planes, we'll continue to monitor the market. As you've seen, we've brought capacity back in for ourselves. And to the extent, there are opportunities elsewhere in the market, which we expect there will be. You have, again, some of the passenger carriers putting their aircraft down. Are there conversion candidates out there, the 767 is a great airplane, the 737-800 is a great airplane. So, between availability of aircraft for ourselves and for our customers, we expect there to be CMI opportunities as we go forward.

Spencer Schwartz -- Executive Vice President and Chief Financial Officer

And Atlas has -- I'll just add briefly to that. Atlas has advantages. We have route rights, traffic rights, overfly, landing, parking. We have various abilities that perhaps other carriers do not. We have those abilities for all types of aircraft. And we have know-how, and we have scale advantage that perhaps other operators don't. And so, those are all benefits of the CMI service that we offer.

Bob Labick -- CJS Securities -- Analyst

Great. Thank you very much.

Spencer Schwartz -- Executive Vice President and Chief Financial Officer

Thanks, Bob.

Operator

Our next question comes from David Ross from Stifel. Your line is open.

David Ross -- Stifel -- Analyst

Yes. Good morning, gentlemen.

Spencer Schwartz -- Executive Vice President and Chief Financial Officer

Hi, David.

David Ross -- Stifel -- Analyst

I have a question, wanted to talk about the military line. Typically, that's, say, 50% of Charter, what is it now? And what's your best guess for 2021? What's the military telling you on the demand coming back?

John W. Dietrich -- President and Chief Executive Officer

So, thanks, David. Yes, the military flying, particularly on the passenger side, has been lighter than we anticipated coming into 2020 and COVID, certainly with the SOP movement order, the government had -- the DoD had put in place had considerably impacted the passenger business. That is starting to come back. And frankly, as you may recall, we mentioned in a prior call that while the passenger military business had slowed, it was actually an opportunity for us to take those crews that we would otherwise serve with the military and deploy them to our cargo operations, which was seeing a significant increase in demand. So, we're able to take advantage of that and get higher utilization while hiring up in the meantime to prepare for the return of the military business, which we're now starting to see. It's not back to where we expected and where the prior levels were, but we expect by next year. And certainly, a vaccine will have an impact on that, but it's gradually coming back.

David Ross -- Stifel -- Analyst

So, would you say military move down from 50% of the business to 1/3 of the business in Charter?

John W. Dietrich -- President and Chief Executive Officer

Roughly. That's a fair estimate.

David Ross -- Stifel -- Analyst

And then quickly on the Titan JV, how does that -- I guess, how do you see that progressing over the next several years. How does it impact the earnings of Atlas? And does it change the business model at all, whereby maybe the JV owns the plane and rather than Atlas? Or is that not how it's structured?

John W. Dietrich -- President and Chief Executive Officer

Yes. I think it's -- the way I'm looking at it is very complementary to our business. In terms of changing the business model, I'm not sure it will result in significant change. It will allow us to grow in the Dry Leasing space, and we also have the operating leverage that Atlas actually could be a customer of the JV. And that's an opportunity to continue to grow. So, we'll be getting revenue streams, not only from the Dry Leasing, but also from managing the fleet of the JV. That's one of the areas of expertise that Atlas and Titan bring to the table. Certainly, Bain will enjoy the benefits of the Dry Leasing business, and we feel good about the timing of entering the market, and our ability to take advantage of freighter centric opportunities as they go for. So,I think there's multiple benefits to us. The management fees, the participation on the equity side of the aircraft ownership and leasing as well as the leverage to operate certain assets for the venture. So we're excited about it.

David Ross -- Stifel -- Analyst

Thank you.

John W. Dietrich -- President and Chief Executive Officer

Sure.

Operator

Our next question comes from Scott Group of Wolfe Research. Your line is open.

Scott Group -- Wolfe Research -- Analyst

Thanks. Good morning, guys.

John W. Dietrich -- President and Chief Executive Officer

Hi, Scott.

Scott Group -- Wolfe Research -- Analyst

So, when I look at the fourth quarter guidance, I think it's -- sorry, if there's background noise, I don't know if that's me. When I look at the fourth quarter guidance, I think it's the smallest sequential increase in earnings we've seen in like 10 years. And maybe just talk through some of the assumptions there. It feels like airfreight pricing is really picking up. What are you assuming on rates? And then can I just lump into that on the maintenance side, you raised the maintenance expense guidance again, how should we think about maintenance next year?

Spencer Schwartz -- Executive Vice President and Chief Financial Officer

Sure, Scott, this is Spencer. So, let's look at the fourth quarter first, and then we'll talk about maintenance. So, for the fourth quarter of this year compared to the fourth quarter of last year, certainly, Commercial Charter yields and volumes are -- we expect will be higher, but they are partially offset by higher heavy maintenance costs. We expect heavy maintenance costs to be about $27 million higher. And then last year, in the fourth quarter, we had a really large refund of excess rent payments, it was $27.6 million. So, two pretty big items there. And then in addition to that, this year, we have premiums that we're paying our crew for flying into certain areas heavily impacted by COVID-19, and then there's the pay increase, the 10% crew pay increase that we provided. And as John just talked about, lower military cargo volumes. And certainly, passenger volumes are down this year versus the prior year. So all that being said, still it's growth over the prior year, but there are clearly some big offsets.

Now, I'll talk about yields, and then I'll answer your maintenance question. We expect the fourth quarter Charter yields to remain above sort of normal historical fourth quarter level, reflecting the strength of the market. As well as continued capacity constraints and just overall demand for Atlas as services. We don't expect rates to reach where they were, the levels we saw in the second quarter. Especially, April and early May. But it's important to note that we talked about the long-term charters. Much of our fourth quarter capacity has been committed to those long-term Charter contracts. We still have capacity available to serve the ad hoc spot market, and we could take advantage of yield increases, so if there are yield increases that aren't contemplated in our forecast, then we'll talk about those next quarter. As far as heavy maintenance goes, with regard to heavy maintenance, I think looking forward, I just wanted to point out that we expect next year, 2021 heavy maintenance cost to be at least probably a little bit more than $60 million lower than this year.

And we previously expected 2021 was going to be a very heavy year in terms of, especially engine overhauls, but also some airframe check requirements. And we have the opportunity to accelerate some of the engine inductions into this year. And we got -- we've talked about the availability of maintenance slots. Because the passenger carriers are not operating as much. And then we received pricing discounts from our vendors as a result. So, should bring 2021 heavy maintenance closer to a sort of normal run rate, although it still may be a little higher than 2018 or 2019 average. So hopefully, that answered both your questions, Scott.

Scott Group -- Wolfe Research -- Analyst

Yes, all very helpful. I was asking about the third quarter to fourth quarter progression. Any thoughts there? That's -- It's typically up more third to fourth. That was more of my question. I understand some of the year ago headwinds for fourth.

John W. Dietrich -- President and Chief Executive Officer

Yes. Scott, it's John. Thanks. And I'll let Spencer provide any further color. But I think it's important to note that this third quarter was an extraordinary third quarter given where we are in the pandemic, and we have been experiencing what I'll describe as peak level, levels of utilization as well as rates, which contributed to a very strong, if not record, third quarter. So, that the incremental leap into a typical fourth quarter may not be as great because of that factor alone. It speaks to just the overall market. And as Spencer pointed out, there will be some upside on rates for sure. But we've been operating at pretty high levels throughout the third quarter, which makes that comparison a little bit narrower.

Spencer Schwartz -- Executive Vice President and Chief Financial Officer

Yes. I'll -- so talking sequentially, third quarter this year versus fourth quarter this year. So, we'll have higher Commercial Charter earnings. We will have lower heavy maintenance costs. Those will be partially offset by non heavy maintenance. We have one more landing gear event, and we have some higher APUs, auxiliary power unit maintenance events. So, a little bit higher there. And then military earnings, both cargo impact should be lower. Cargo and passenger should be lower in the fourth quarter, as John noted. But then we expect that to be better next year.

Scott Group -- Wolfe Research -- Analyst

That's all fair about the higher starting point. All right. Thank you, guys.

John W. Dietrich -- President and Chief Executive Officer

All right. Thanks, Scott.

Operator

Our next question comes from Chris Stathoulopoulos of Susquehana. Your line is open.

Chris Stathoulopoulos -- Susquehana -- Analyst

Good morning and thanks for taking my question.

Spencer Schwartz -- Executive Vice President and Chief Financial Officer

Hi, Christopher.

Chris Stathoulopoulos -- Susquehana -- Analyst

John or Spencer, just, if you could, what is the weighted average duration of your contract business? And then what percent of your Charter does it move on contract now? Or is closer to the spot market?

Spencer Schwartz -- Executive Vice President and Chief Financial Officer

So, our typical ACMI contract is somewhere between two and five years. But then obviously, we have much longer duration contracts with DHL and with Amazon, for example. So they vary. And the long-term Charter contracts, I mentioned the duration there, they go up to three years in length. And so, we're starting to use a lot of our capacity with these longer-term arrangements, which is great from a predictable, reliable nature of our revenue and our earnings streams, and they're really good contracts. So, there's some left. I don't know the exact percentage because it's not quite that simple because it's not always an aircraft. It can be a portion of an aircraft or one flight a week or that kind of thing. So, it's a smaller portion that is currently available in the ad hoc sort of spot Charter market. But there's still some available.

Chris Stathoulopoulos -- Susquehana -- Analyst

Okay. And that smaller portion as a percent of Charter or your overall book of business, is that low single digits?

Spencer Schwartz -- Executive Vice President and Chief Financial Officer

Yes. We'll have to get back to you on that. I don't have the exact percentage, but it's definitely a smaller portion with these longer-term Charter contracts that we've entered into. Again, it's not simple. Might think it's just this aircraft divided by total number of aircraft, but it really doesn't work that way. It may be a rotation or maybe a portion of rotation. So it's calculation is a bit more complex.

John W. Dietrich -- President and Chief Executive Officer

Yes. And if I could, Chris, so it's a bit fluid as well. To the extent in this current environment, we have ACMI agreements that are rolling off. We mentioned some of the long-term charters. But there are a number of ACMI opportunities that we may want to time to a later date because the Charter market is so robust right now. And so, that ties in with my comment on the balancing act that we're doing. Our focus is on the opportunities we have in front of us right now, near and long term. So, may be a situation where there's an ACMI customer that typically we would sign for on a longer-term basis, but maybe we'll forgo for a period of time due to the very robust market, and we're going to -- we're watching all those dynamics closely but right now, it's very favorable market conditions for the Charter business, both near and on these long-term Charters.

Spencer Schwartz -- Executive Vice President and Chief Financial Officer

And Chris, just to provide just a sort of a ballpark. It's really, as John said, quite fluid and not an exact science, but it's approximately 5% of total Atlas capacity.

Chris Stathoulopoulos -- Susquehana -- Analyst

Okay. So, second question, and I realize you probably want to wait until January to talk about 2021 guidance. But given where we are with COVID, this is obviously a very unique opportunity here for freighter operators. You have around half of the capacity that you typically compete with effectively on the sideline. The rollout of the vaccine looks like a multiyear event. Ample feedstock and e-commerce demand, that looks like it's been pulled forward a few years. So if we look at what you guided for an EBITDA for 4Q and that would put up your implied 2020 in the double digits. Is it reasonable to assume that you could realize positive EBITDA growth next year. Assuming we have a vaccine in the first half and the DoD lifts its travel restriction orders?

Spencer Schwartz -- Executive Vice President and Chief Financial Officer

Yes. So, it's the right question, a good question. We'll provide our next year guidance, early next year, in February. But I'll point out some things and you did as well. Certainly, we do not expect that yields will be like they were in the second quarter of this year. We wouldn't expect to see that again next year. Of course, that could change, but we wouldn't expect something like that. Of course, with COVID, things are changing constantly. So it's all subject to change. But the key things, I think, or some of the key things, I think, to keep in mind, and some of them, you mentioned, of course, we should expect to have lower maintenance expense, as I talked about, over $60 million lower. The vaccine distribution certainly seems like it's going to go on, as you said, Chris, for quite some time. And that's going to have quite an impact in airfreight.

There are continued capacity constraints, and we really don't see those changing for quite some time. The utilization that we get on our aircraft has been increasing, and we expect that to continue to be the case. We have a very modern, efficient fleet. We don't have like the fleeting needs, things like that. These long-term Charter contracts with really attractive yields are terrific. All of our customers are looking to add capacity right now. And airfreight has -- it's always vital to the global economy. But especially now. And then I would just say that, again, there's really not much production coming out from the major manufacturers. And so, we expect the supply demand imbalance to still have stronger demand than supply. And the growth of Express and e-commerce, I mean, that is not going away anytime soon. The diversity of our business and our fleet that John talked about, and just the capabilities and relationships that we have developed and continue to service. Those things will serve us well next year and beyond.

Chris Stathoulopoulos -- Susquehana -- Analyst

Okay. Good color. If I could get one more in. With respect to capital allocation, I believe you can't do buybacks here under the terms of the PSP and correct me if I'm wrong, I don't think you took anything under the LP under Cares, but should we think that you're throwing off a lot of cash here. Should we expect that you're going to start to grow the fleet or continue to deliver?

John W. Dietrich -- President and Chief Executive Officer

Thanks, Chris. Yes, it's all of the above. We're looking at everything. We're in a position where if there's aircraft available that fit with our needs and our growth needs. We'll be in a position to look at that. Of course, in terms of continuing to pay down debt, that's going to be hugely important, as we -- Spencer talked about, ensuring we maintain our balance sheet. We need to be cautious to a degree. I mean, with what lies beyond, while we're very confident and optimistic on 2021. I can't stress enough the tremendous effort all our employees are putting forward and managing through this COVID environment. I mean we look in Europe, for example, I mentioned border restrictions. And almost overnight, we're seeing changes and the ability to adapt and what's going to happen with the overall economy. We feel really good of it for -- based on all the comments that we talked about as we look forward to 2021. But we're also going to be mindful of what lies beyond and be assured that we can weather anything that may come our way.

Chris Stathoulopoulos -- Susquehana -- Analyst

Okay. Thanks for the time.

John W. Dietrich -- President and Chief Executive Officer

Thank you.

Operator

Our next question comes from Helane Becker of Cowen. Your line is now open.

Helane Becker -- Cowen -- Analyst

Sorry, I mute. Hi, everybody. Thanks for your time. I just have a couple of questions. So the first question was, did you respond to representative of Clyburn's letter asking you to return the CARES Act funds that you did take? I think the response was to see by Monday.

John W. Dietrich -- President and Chief Executive Officer

Yes. Yes, we did, Helane.

Helane Becker -- Cowen -- Analyst

And how are you thinking about that?

John W. Dietrich -- President and Chief Executive Officer

So, look, we put a lot of thought into even applying for the CARES Act funds. I'll start by saying we were fully qualified and are in full compliance with the CARES Act in receiving the funds. It was with a lot of deliberation because there's no question our circumstances are somewhat different than the passenger side, obviously, with what we're talking about. But what we evaluated was kind of the totality of our circumstances, including some of the challenges that presented itself immediately when COVID hit. There was a tremendous amount of uncertainty. China effectively shut down not only during Lunar New Year, but for weeks thereafter, for which we experienced a significant impact on our business.

I also talked -- just now I'm talking with Chris about what lies beyond, so all those factors went into our contemplation to apply for and ensure that we're using the funds for the purposes in which they're intended, and that was for payroll support. And then we're in full compliance. And we shared that with the Chairman in response to our letters. So, based on the totality, not only do we apply for when we're eligible for -- in this program, which I should add is not a needs-based program. It was not something that we had to demonstrate our need to be able to pay on payroll. But for all those reasons, we not only applied for received, but we are not intending to return the funds, and we responded accordingly and have been in full compliance, not only with the committee's request, but sharing the documents and so forth that they've asked for, and we'll continue to fully cooperate.

Helane Becker -- Cowen -- Analyst

That's very helpful. Thank you for that detailed answer. I really appreciate it. And then the other question I had is, why do you think Amazon exercised the warrants, aside from the fact that they were in the money. So I guess, it made sense for them to do that. But I mean, have they talked to you about, I don't know, increasing their position about -- I think their board seat is an observer, not an official board seat. Have they talked to you about getting more active in the company. I mean what do you think is behind that?

John W. Dietrich -- President and Chief Executive Officer

So, I have a bias because I think it's just a great investment and a great company. But I don't speak for Amazon. I can't speak for them. They -- we have not talked to them about the reasons, and I'm not going to speculate as to that. So we just think it's a great -- I just think it's a great investment.

Helane Becker -- Cowen -- Analyst

Okay. That's very helpful. Thank you very much.

John W. Dietrich -- President and Chief Executive Officer

Thank you, Helane.

Helane Becker -- Cowen -- Analyst

Of course.

Operator

Our next question comes from Barry Haimes of Sage Asset Management. Your line is open.

Barry Haimes -- Sage Asset Management -- Analyst

Thank you so much for taking my question. You mentioned that you were looking at possibly adding to the fleet and that there could be conversion opportunities. Could you give us a feel for sort of minimum hurdle rates, ROIC, however you choose to look at it, that would make sense for you to go forward with situations like that? Thanks.

Spencer Schwartz -- Executive Vice President and Chief Financial Officer

Sure, Barry. It's Spencer. We take a really disciplined approach to deploying our capital. And we set really aggressive return targets. So, as John talked about, balance sheet strength and leverage reduction remain our top priority. But we are looking at a number of potential investments and the expected returns. So, we target low to mid-teens after tax IRRs for our Dry Leasing portfolio. For other projects, including operating aircraft, which is I think what you're asking about, return targets are really set based on the individual sort of risk profile depending upon the particular situation. But in all cases, we target double-digit percentage returns. Our 747-8, for those who remember when we brought those in. They generated an IRR north of 20%. When we got into starting to fly passengers. Our passenger fleet investment generated pretty similar returns north of 20%. Those types of returns are not always achievable, but our targets remain really aggressive. And we make sure we achieve those.

Barry Haimes -- Sage Asset Management -- Analyst

Great. I appreciate your colors. Thank you.

Spencer Schwartz -- Executive Vice President and Chief Financial Officer

Thank you.

Operator

Our next question comes from David Campbell of Thompson Davison Company. Your line is open.

David Campbell -- Thompson Davison Company -- Analyst

Hello, thanks for taking my question. You've talked a lot about this, but I just wanted to clarify it a little bit. There's new contract Charter agreements, long-term agreements. And apparently, it looks like based on the third quarter results, have resulted in no increase in your cargo Charter yields per block hour, which were flat in the third quarter, and I guess, will be even lower than that in the fourth quarter, as you have more of these agreements in effect. So I don't see how a flat or down yield picture in terms of the revenue per block hour, how that's helpful? I realize in the long term, you got -- you guys source of stable revenue. But how does it get you to increase earnings?

Spencer Schwartz -- Executive Vice President and Chief Financial Officer

Sure, David, it's spencer. Let me just -- the issue, I think you're looking at on a revenue per block hour. And the issue is fuel is included in that and fuel dropped 40% on a year-over-year basis. Fuel in the third quarter of last year was $2.27 a gallon. This year, $1.35. So that's really, I think, clouding the picture that you're looking at. If you were to exclude fuel, what you'd see is our revenue per block hour would have been up to $2,000 to $3,000 a block hour. And these new long-term Charter agreements, if you take a look at the segment contribution, the profitability of our Charter segment improved over 1,200% on a year-over-year basis. So, I think fuel, decrease in fuel, I think, is quietly what you're looking at.

David Campbell -- Thompson Davison Company -- Analyst

Yes. I see fuel has something to do with that. I wasn't sure how much so, you obviously clarified that. The second question I had was do you -- obviously, it doesn't sound like you see any slowdown in demand relative to the third quarter, but I've heard that there's been some slowdown in demand. And I just wondered whether you've seen any change in your overall picture for demand for cargo space?

John W. Dietrich -- President and Chief Executive Officer

Yes, David, thanks. We do not see any slowdown in demand and particularly for the fourth quarter, we see an increase in demand and what we're looking at -- what we talked about for 2021, we expect these favorable market conditions to continue into the future based on some of the dynamics that are in play, and which we don't expect to change for some time.

David Campbell -- Thompson Davison Company -- Analyst

Thank you very much. I appreciate it.

John W. Dietrich -- President and Chief Executive Officer

Thank you.

Operator

Our next question comes from Scott Group with Wolfe Research. Your line is open.

Scott Group -- Wolfe Research -- Analyst

Hey, guys Thanks for the follow ups. How should we think about the tightening and long-term impact on capex? Does this lower the long-term capex that we should expect Atlas to spend?

Spencer Schwartz -- Executive Vice President and Chief Financial Officer

Well, Scott, we'll be sharing in that. So, Atlas' responsibility is 10%. Bain's responsibility is 90%, and that is of the equity portion, that part that's not going to be covered by debt. So, I guess, if you look at it that way, yes, Bain is now very important, very large joint venture partner with Atlas to grow the Dry Lease part of our freighter leasing business.

John W. Dietrich -- President and Chief Executive Officer

Yes. And I think, if I could, spencer in that, this venture is not the only entity through which we may invest. There may be assets that don't fit the profile of the purpose of the joint venture that we may be interested in. So, I think part of the answer is we'll see. We're going to be very judicious on where we spend our capital, but it's not the only vehicle.

Scott Group -- Wolfe Research -- Analyst

Right. But I'm looking at this right, right? You've gone from, I don't know, less than 10 planes to 30 planes in Charter in the last five years. So that's been a big part of your capex.

Spencer Schwartz -- Executive Vice President and Chief Financial Officer

Some of those planes moved from ACMI, and they're, again, very similar to ACMI. They have slight differences, which moved them into the Charter segment. But they're very similar. So some of those just moved over from one segment to the other based on the nature of how the customer is charged and who pays for fuel and things like that.

Scott Group -- Wolfe Research -- Analyst

Okay. And then just lastly, do you think that you'll directly participate in vaccine distribution? And can you give us the new share on the military business that just reset in the fourth quarter?

John W. Dietrich -- President and Chief Executive Officer

I'm sorry, you broke up a little bit on the first part of that question.

Spencer Schwartz -- Executive Vice President and Chief Financial Officer

Second part was entitlement. I'll take that. And I think the first part...

Scott Group -- Wolfe Research -- Analyst

Do you think you'll directly participate in the vaccine?

John W. Dietrich -- President and Chief Executive Officer

Yes, I'll answer that. Yes, we do. In one form or another. I mean, there's been a lot of discussion as to whether or not some of that will be done by the government. Some of it will be done by the manufacturers. You have the administration saying the military is going to be responsible. But we believe whatever form it takes, that our capacity is going to be a part of that, and we'll continue to work with our customers, both government and commercial, in being available and prioritizing our assets to help as soon as we can.

Spencer Schwartz -- Executive Vice President and Chief Financial Officer

And then, Scott, the second part of your question, I think, was share or what the military calls entitlement. We continue to be the largest outsourced provider to the U.S. military with regard to large wide-body aircraft. Our entitlement on both the passenger as well as cargo side is between 53% and 54%.

Scott Group -- Wolfe Research -- Analyst

Thank you.

Spencer Schwartz -- Executive Vice President and Chief Financial Officer

Thank you.

Operator

Our next question comes from Chris Stathoulopoulos of Susquehanna. Your line is open.

Chris Stathoulopoulos -- Susquehanna -- Analyst

So, just continuing with Scott's question on capex and Bain here, maybe looking at it from a different angle. But if you could, given what we're seeing on the passenger side of things, all the asset dislocation, retirements, the move toward fleet simplification. Could you comment on what you're seeing on asset prices on the medium to wide-body 767, 747s or the 777s. And then on the chain maybe would you be willing to look outside of Boeing and perhaps into some of the Airbus? Thanks.

John W. Dietrich -- President and Chief Executive Officer

So, I'll start with the last question and say that, sure, on the Airbus product, what our position has been is, for the most part, we're fleet agnostic. If the demand is there, we have the operating capabilities to operate them. We've got a depth of experience of people who have both on the maintenance and flight op side who have flown and maintained Airbus product. It's a great company, great airplanes. Generally speaking, though, Boeing has had the market on freighters. But I think that you're seeing some of that change. With the A330, for example, that's now in the market on a converted basis, some express carriers are flying those and the A320s that may be coming into the market. So, sure. If the demand is there, we would certainly entertain that.

Chris Stathoulopoulos -- Susquehanna -- Analyst

And then on the asset prices, have you seen rates come down for 18 or 20-year-old vintage 767, 747 I know delta is retiring a 767 fleet. There just seems to be a lot of opportunity on the passenger side, I guess, depending on where their fleet needs are and certainly where their balance sheet is.

Spencer Schwartz -- Executive Vice President and Chief Financial Officer

Yes. Really -- Chris, it really depends on an asset-by-asset basis. It really depends how good the engines are, how much life is left in the engines before its next overhaul. The particular aircraft, the vintage of the aircraft and so forth. It really depends if it's a passenger to be converted, then it's really the engines often that are being sought after, of course, as well as the airframe. If it's an aircraft that's on lease, what are the terms of the lease that's attached to it and so forth. So, it really is on a case-by-case basis. We've seen a lot of inconsistencies, let's just say that.

John W. Dietrich -- President and Chief Executive Officer

And if I could add to that, I think there's also the factor of what the market will be going forward. I think the CARES Act has provided some cushion and some of the other financings that the passenger carriers have done has provided some cushion for them before they have to take too drastic of measures on the fleet. I think all carriers, the industry is looking to how quickly they can bring back assets. And I think there's more to come on that, given how long the pandemic lasts. There may be some more pricing pressure if this lasts much further into the future.

Chris Stathoulopoulos -- Susquehanna -- Analyst

Okay. And then spencer balance sheet cash flow, two questions here. Working capital outside of high credit customers, Amazon and DHL. Any color on credit quality as we move down the spectrum of customers? Or is anyone asking for deferrals? And then also, what's left on your revolver and what maturities do you have due in 2021 and 2022?

Spencer Schwartz -- Executive Vice President and Chief Financial Officer

Okay. Thank you. Let's see, three questions there. So, the first, with regard to our receivables, we have outstanding, outstanding customers. On the ACMI front, they're all pretty much household names. Very, very strong credits, and we have no issues there. In the Charter space, these long-term Charters are obviously, all household names, but some of the spot -- ad hoc spot charters, they generally pay in advance. So, we really haven't had collectibility issues. So, we're very, very fortunate that way, we do a great job. Our team does a great job managing those risks. Your second question...

Chris Stathoulopoulos -- Susquehanna -- Analyst

Revolver.

Spencer Schwartz -- Executive Vice President and Chief Financial Officer

Revolver. That's right. Sorry. We have $200 million available under our revolver. And then with regard to maturities, maturities of ACMI contracts. So, we have had some maturities with our ACMI contracts. We typically have a handful of year generally, those that are being renewed are typically being renewed at higher rates in this environment.

Chris Stathoulopoulos -- Susquehanna -- Analyst

I was asking on the maturities on the debt side. If there's anything that is coming due?

Spencer Schwartz -- Executive Vice President and Chief Financial Officer

Yes. Okay. Thank you. Sorry. We have a convertible note that comes due in June of 2022, a $224.5 million. Nothing out of the ordinary just normal principal interest payments between now and then.

Chris Stathoulopoulos -- Susquehanna -- Analyst

Okay, thank you.

Spencer Schwartz -- Executive Vice President and Chief Financial Officer

Thank you.

Operator

There are no further questions. I'd like to turn the call back over to at Atlas Air for closing remarks.

John W. Dietrich -- President and Chief Executive Officer

Okay. Thank you, operator. And thanks to everyone. On behalf of all our employees, Spencer and I would like to thank you all for your interest in Atlas Air Worldwide. We appreciate you sharing your time with us today. Again, we hope your families stay safe, and we look forward to speaking with you again soon. Thanks so much.

Operator

[Operator Closing Remarks]

Duration: 61 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

David Ross -- Stifel -- Analyst

Scott Group -- Wolfe Research -- Analyst

Chris Stathoulopoulos -- Susquehana -- Analyst

Helane Becker -- Cowen -- Analyst

Barry Haimes -- Sage Asset Management -- Analyst

David Campbell -- Thompson Davison Company -- Analyst

Chris Stathoulopoulos -- Susquehanna -- Analyst

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