UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

001-16545
(Commission File Number)

Atlas Air Worldwide Holdings, Inc.

(Exact name of registrant as specified in its charter)

Delaware		13-4146982
(State or other jurisdiction of incorporation)		(IRS Employer Identification No.)
2000 Westchester Avenue, Purchase, New York		10577
(Address of principal executive offices)		(Zip Code)

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

Not Applicable
(Former name, former address and former fiscal year, if changed since last report)

 

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

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

Large accelerated filer o		Accelerated filer þ		Non-accelerated filer o		Smaller reporting company o
				(Do not check if a smaller reporting company)

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

As of September 30, 2010, there were 25,887,367 shares of the registrant’s Common Stock outstanding.

 

 

TABLE OF CONTENTS

		Page
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (unaudited)
Consolidated Balance Sheets at September 30, 2010 and December 31, 2009 (unaudited)			1
Consolidated Statements of Operations for the Three and Nine Months ended September 30, 2010 and 2009 (unaudited)			2
Consolidated Statements of Cash Flows for the Three and Nine Months ended September 30, 2010 and 2009 (unaudited)			3
Consolidated Statements of Stockholders’ Equity as of and for the Nine Months ended September 30, 2010 and 2009 (unaudited)			4
Notes to Unaudited Consolidated Financial Statements			5
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			16
Item 3. Quantitative and Qualitative Disclosures About Market Risk			32
Item 4. Controls and Procedures			32
PART II. OTHER INFORMATION
Item 1. Legal Proceedings			33
Item 1A. Risk Factors			33
Item 6. Exhibits			34
Signatures			35
Exhibit Index			36
ex-10.1
EX-31.1
EX-31.2
EX-32.1

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Atlas Air Worldwide Holdings, Inc.

		September 30, 2010				December 31, 2009
Assets
Current Assets
Cash and cash equivalents		$	545,288			$	613,740
Short-term investments			24,689				22,598
Accounts receivable, net of allowance of $1,781 and $2,412, respectively			65,282				58,530
Prepaid maintenance			30,660				30,848
Deferred taxes			3,059				6,689
Prepaid expenses and other current assets			24,277				24,608
Total current assets			693,255				757,013
Property and Equipment
Flight equipment			692,905				677,006
Ground equipment			28,619				26,107
Less: accumulated depreciation			(130,455	)			(110,001	)
Purchase deposits for flight equipment			331,572				296,658
Property and equipment, net			922,641				889,770
Other Assets
Long-term investments			124,507				18,980
Deposits and other assets			39,839				38,460
Lease contracts and intangible assets, net			34,680				36,650
Total Assets		$	1,814,922			$	1,740,873
Liabilities and Equity
Current Liabilities
Accounts payable		$	22,480			$	20,810
Accrued liabilities			136,839				107,907
Current portion of long-term debt			90,200				38,830
Total current liabilities			249,519				167,547
Other Liabilities
Long-term debt			347,642				526,680
Deferred taxes			88,942				74,501
Other liabilities			129,608				83,388
Total Other Liabilities			566,192				684,569
Commitments and contingencies (Note 6)
Equity
Stockholders’ Equity
Preferred stock, $1 par value; 10,000,000 shares authorized; no shares issued			—				—
Common stock, $0.01 par value; 50,000,000 shares authorized; 26,904,907 and 26,593,450 shares issued, 25,887,367 and 25,700,765, shares outstanding (net of treasury stock), at September 30, 2010 and December 31, 2009, respectively			269				266
Additional paid-in-capital			496,759				481,074
Treasury stock, at cost; 1,017,540 and 892,685 shares, respectively			(32,171	)			(26,394	)
Accumulated other comprehensive income			522				471
Retained earnings			531,106				430,856
Total stockholders’ equity			996,485				886,273
Noncontrolling interest			2,726				2,484
Total equity		$	999,211			$	888,757
Total Liabilities and Equity		$	1,814,922			$	1,740,873

See accompanying Notes to Unaudited Consolidated Financial Statements

Atlas Air Worldwide Holdings, Inc.

		For the Three Months Ended								For the Nine Months Ended
		September 30, 2010				September 30, 2009				September 30, 2010				September 30, 2009
Operating Revenue
ACMI		$	144,685			$	121,473			$	383,917			$	358,943
AMC charter			72,506				78,613				303,314				237,224
Commercial charter			104,044				52,286				275,525				112,901
Dry leasing			2,157				335				5,384				12,146
Other			3,275				2,771				9,940				18,772
Total Operating Revenue		$	326,667			$	255,478			$	978,080			$	739,986
Operating Expenses
Aircraft fuel			74,221				47,486				222,336				128,922
Salaries, wages and benefits			56,244				52,271				177,677				157,288
Maintenance, materials and repairs			44,747				37,533				115,967				108,356
Aircraft rent			38,764				38,058				115,097				113,152
Landing fees and other rent			11,487				10,434				35,974				28,226
Depreciation and amortization			8,403				9,039				26,049				24,555
Travel			8,941				5,970				24,354				17,998
Ground handling and airport fees			6,423				4,941				17,645				10,710
Gain on disposal of aircraft			(161	)			—				(3,541	)			(957	)
Other			22,702				21,118				80,177				53,898
Total Operating Expenses			271,771				226,850				811,735				642,148
Operating Income			54,896				28,628				166,345				97,838
Non-operating Expenses / (Income)
Interest income			(5,490	)			(346	)			(14,620	)			(1,816	)
Interest expense			10,176				11,063				30,396				34,074
Capitalized interest			(4,401	)			(3,069	)			(11,007	)			(9,189	)
Gain on early extinguishment of debt			—				—				—				(2,713	)
Gain on consolidation of subsidiary			—				—				—				(113	)
Other (income) expense, net			(614	)			(699	)			(9,236	)			(380	)
Total Non-operating Expenses / (Income)			(329	)			6,949				(4,467	)			19,863
Income before income taxes			55,225				21,679				170,812				77,975
Income tax expense			21,186				7,606				70,386				29,954
Net Income			34,039				14,073				100,426				48,021
Less: Net income / (loss) attributable to noncontrolling interests			235				(649	)			176				(1,416	)
Net Income Attributable to Common Stockholders		$	33,804			$	14,722			$	100,250			$	49,437
Earnings per share:
Basic		$	1.31			$	0.70			$	3.90			$	2.37
Diluted		$	1.29			$	0.70			$	3.85			$	2.35
Weighted average shares:
Basic			25,855				20,924				25,736				20,903
Diluted			26,143				21,131				26,038				21,026

See accompanying Notes to Unaudited Consolidated Financial Statements

Atlas Air Worldwide Holdings, Inc.

		For the Nine Months Ended
		September 30, 2010				September 30, 2009
Cash Flows from Operating Activities:
Net Income Attributable to Common Stockholders		$	100,250			$	49,437
Net income / (loss) attributable to noncontrolling interests			176				(1,416	)
Net Income			100,426				48,021
Adjustments to reconcile Net Income to net cash provided by operating activities:
Depreciation and amortization			26,049				24,555
Amortization of debt discount			4,011				4,744
Amortization of operating lease discount			1,750				1,754
Amortization of debt issuance costs			219				220
Accretion of debt securities discount			(5,979	)			—
Provision for allowance for doubtful accounts			75				215
Gain on short-term investments			—				(283	)
Gain on early extinguishment of debt			—				(2,713	)
Gain on consolidation of subsidiary			—				(113	)
Gain on disposal of aircraft			(3,541	)			(957	)
Deferred taxes			18,071				30,548
Stock-based compensation expense			10,489				7,348
Changes in Operating Assets and Liabilities
Accounts receivable			(5,539	)			4,768
Prepaids and other current assets			(6,576	)			12,846
Deposits and other assets			(2,200	)			(2,337	)
Accounts payable and accrued liabilities			76,838				(2,979	)
Net cash provided by operating activities			214,093				125,637
Cash Flows from Investing Activities:
Capital expenditures			(59,590	)			(27,083	)
Consolidation of subsidiary			—				11,612
Redesignation between short-term investments and cash			—				6,513
Investment in debt securities			(100,090	)			—
Proceeds from short-term investments			4,374				—
Proceeds from sale of aircraft			5,018				3,525
Net cash used for investing activities			(150,288	)			(5,433	)
Cash Flows from Financing Activities:
Proceeds from stock option exercises			3,522				178
Proceeds from Harbinger stock sale			—				208
Purchase of treasury stock			(5,777	)			(342	)
Excess tax benefit (expense) from share-based compensation expense			1,677				(896	)
Proceeds from loan			20,637				—
Payment of debt issuance costs			—				(4	)
Payments on debt			(152,316	)			(36,589	)
Net cash used for financing activities			(132,257	)			(37,445	)
Net increase (decrease) in cash and cash equivalents			(68,452	)			82,759
Cash and cash equivalents at the beginning of period			613,740				397,385
Cash and cash equivalents at the end of period		$	545,288			$	480,144

See accompanying Notes to Unaudited Consolidated Financial Statements

Atlas Air Worldwide Holdings, Inc.

														Accumulated
										Additional				Other								Total
		Common				Treasury				Paid-In				Comprehensive				Retained				Stockholders’				Noncontrolling				Total
		Stock				Stock				Capital				Income				Earnings				Equity				Interest				Equity
Balance at December 31, 2008		$	219			$	(26,009	)		$	355,185			$	(736	)		$	353,080			$	681,739			$	—			$	681,739
Net Income Attributable to Common Stockholders			—				—				—				—				49,437				49,437				(1,416	)			48,021
Other comprehensive income			—				—				—				1,229				—				1,229				140				1,369
Comprehensive income			—				—				—				—				—				50,666				—				49,390
Consolidation of subsidiary			—				—				—				—				—				—				3,953				3,953
Stock option and restricted stock compensation			—				—				7,348				—				—				7,348				—				7,348
Purchase of 20,313 shares of treasury stock			—				(342	)			—				—				—				(342	)			—				(342	)
Exercise of 10,398 employee stock options			—				—				178				—				—				178				—				178
Issuance of 51,028 shares of restricted stock			1				—				(1	)			—				—				—				—				—
Reversal of prior year deferred tax			—				—				1,607				—				—				1,607				—				1,607
Tax expense on restricted stock and stock options			—				—				(896	)			—				—				(896	)			—				(896	)
Proceeds from Harbinger stock sale			—				—				208				—				—				208				—				208
Balance at September 30, 2009		$	220			$	(26,351	)		$	363,629			$	493			$	402,517			$	740,508			$	2,677			$	743,185
														Accumulated
										Additional				Other								Total
		Common				Treasury				Paid-In				Comprehensive				Retained				Stockholders’				Noncontrolling				Total
		Stock				Stock				Capital				Income				Earnings				Equity				Interest				Equity
Balance at December 31, 2009		$	266			$	(26,394	)		$	481,074			$	471			$	430,856			$	886,273			$	2,484			$	888,757
Net Income Attributable to Common Stockholders			—				—				—				—				100,250				100,250				176				100,426
Other comprehensive loss			—				—				—				51				—				51				66				117
Comprehensive income			—				—				—				—				—				100,301				—				100,543
Stock option and restricted stock compensation			—				—				10,489				—				—				10,489				—				10,489
Purchase of 124,855 shares of treasury stock			—				(5,777	)			—				—				—				(5,777	)			—				(5,777	)
Exercise of 111,320 employee stock options			—				—				3,522				—				—				3,522				—				3,522
Issuance of 200,137 shares of restricted stock			3				—				(3	)			—				—				—				—				—
Tax benefit on restricted stock and stock options			—				—				1,677				—				—				1,677				—				1,677
Balance at September 30, 2010		$	269			$	(32,171	)		$	496,759			$	522			$	531,106			$	996,485			$	2,726			$	999,211

See accompanying Notes to Unaudited Consolidated Financial Statements

Atlas Air Worldwide Holdings, Inc.

1. Basis of Presentation

     Atlas Air Worldwide Holdings, Inc. (“AAWW”) is a holding company with a wholly-owned principal operating subsidiary, Atlas Air, Inc. (“Atlas”). AAWW also has wholly-owned subsidiaries to dry lease aircraft and engines (collectively referred to as “Titan”). AAWW has a 51% equity interest and 75% voting interest in Polar Air Cargo Worldwide, Inc. (“Polar”). In addition, Atlas dry leases aircraft to Global Supply Systems Limited (“GSS”), of which AAWW has a 49% ownership interest. GSS became a consolidated subsidiary on April 8, 2009. Previously, GSS was accounted for under the equity method. AAWW, Atlas, Titan and GSS are referred to collectively as the “Company”.

     The Company provides air cargo and outsourced aircraft operating solutions throughout the world, serving Asia, the Middle East, Australia, Europe, South America, Africa and North America through: (i) contractual lease arrangements, including contracts through which the Company provides aircraft to customers and value-added services, including crew, maintenance and insurance (“ACMI”) as well as contracts through which the Company provides crew, maintenance and insurance, with the customer providing the aircraft (“CMI”); (ii) military charter services (“AMC Charter”); (iii) seasonal, commercial and ad-hoc charter services (“Commercial Charter”); and (iv) dry leasing or sub-leasing of aircraft and engines (“Dry Leasing” or “Dry Lease”).

     The accompanying unaudited consolidated financial statements (the “Financial Statements”) have been prepared in accordance with the U.S. Securities and Exchange Commission (the “SEC”) requirements for quarterly reports on Form 10-Q, and consequently, exclude certain disclosures normally included in audited consolidated financial statements prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). The Financial Statements include the accounts of AAWW and its consolidated subsidiaries. All significant inter-company accounts and transactions have been eliminated. The year-end balance sheet data was derived from audited financial statements but does not include all disclosures required by GAAP. The Financial Statements should be read in conjunction with the audited consolidated financial statements and the notes thereto for the year ended December 31, 2009, included in the AAWW Annual Report on Form 10-K, which included additional disclosures and a summary of the Company’s significant accounting policies. In the opinion of management, the Financial Statements contain all adjustments, consisting of normal recurring items, necessary to fairly state the financial position of AAWW and its consolidated subsidiaries as of September 30, 2010, the results of operations for the three and nine months ended September 30, 2010 and 2009, cash flows for the nine months ended September 30, 2010 and 2009 and shareholders’ equity as of and for the nine months ended September 30, 2010 and 2009.

     The Company’s quarterly results are subject to seasonal and other fluctuations, and the operating results for any quarter are therefore not necessarily indicative of results that may be otherwise expected for the entire year.

     Except for per share data, all dollar amounts are in thousands unless otherwise noted.

2. Summary of Significant Accounting Policies

Assets Held for Sale

          In December 2009, three spare engines that were recently overhauled were listed for sale by the Company and were accounted for as assets held for sale. Depreciation on these engines ceased as of December 31, 2009. In January 2010, the Company sold one of the engines for $1.3 million and recorded a gain of $0.9 million. In May 2010, the Company sold the remaining two engines for $2.8 million and recorded a gain of $2.2 million. The aggregate carrying value of spare engines held for sale at September 30, 2010 and December 31, 2009 was zero and $1.0 million, respectively, which was included within Prepaid expenses and other current assets in the consolidated balance sheets.

Property and Equipment, net

     Included in purchase deposits for flight equipment was capitalized interest of $39.6 million and $28.6 million at September 30, 2010 and December 31, 2009, respectively.

Escrow Deposits and Letters of Credit

     At September 30, 2010 and December 31, 2009, the Company had $6.5 million and $6.2 million, respectively, for certain deposits required in the normal course of business for items including, but not limited to, surety and customs bonds, airfield privileges, judicial deposits, insurance and cash pledged under standby letters of credit related to collateral. These amounts are included in Deposits and other assets in the consolidated balance sheets.

Investments

     GSS

     The Company holds a 49% interest in GSS, a private company. Atlas dry leases three owned aircraft to GSS, which provide for payment of rent and a provision for maintenance costs associated with the aircraft. GSS provides ACMI services for three 747-400 freighter aircraft to British Airways Plc (“British Airways”).

     Prior to April 8, 2009, the Company accounted for GSS under the equity method and reported the revenue from GSS as Dry leasing revenue in the consolidated statements of operations. Total Dry leasing revenue for these aircraft included in the consolidated statements of operations was zero for the three months ended September 30, 2010 and 2009, respectively. Total Dry leasing revenue for these aircraft was zero and $11.8 million for the nine months ended September 30, 2010 and 2009, respectively.

     Polar

     AAWW holds a 51% equity interest and a 75% voting interest in Polar. Polar provides air cargo capacity to its customers, including DHL Network Operations (USA), Inc. (“DHL”), through a blocked-space agreement which began on October 27, 2008 (“the Commencement Date”). The aggregate carrying value of the Polar investment at September 30, 2010 and December 31, 2009 was $5.3 million and $5.4 million, respectively, and was included within Deposits and other assets in the consolidated balance sheets.

     Polar currently operates six 747-400 freighter aircraft that are subleased from the Company’s subsidiaries. In addition, Atlas provides incremental charter capacity to Polar. Atlas and Polar have entered into various agreements under which Atlas provides Polar with crew, maintenance and insurance. Collectively, these agreements and the subleases are referred to as “Express Network ACMI”. Atlas also provides Polar with certain management and administrative services under a shared services agreement. In addition, Polar and Atlas provide each other with sales and ground support services under a general sales and services agreement.

     In March 2009, the Company received $10.0 million for the termination of an ACMI agreement for two 747-400 aircraft. This was recorded as Other revenue in the consolidated statements of operations for the three months ended March 31, 2009.

     Total revenue from Express Network ACMI with Polar was $47.2 million and $42.9 million for the three months ended September 30, 2010 and 2009, respectively, and $139.0 million and $140.2 million for the nine months ended September 30, 2010 and 2009, respectively, which was included in ACMI revenue in the consolidated statements of operations. Total revenue from shared services as well as sales and ground support services was $2.8 million and $2.6 million for the three months ended September 30, 2010 and 2009, respectively, and $8.5 million and $8.2 million for the nine months ended September 30, 2010 and 2009, respectively, which was included in Other revenue in the consolidated statements of operations. At September 30, 2010 and December 31, 2009, the Company had receivables from Polar of $3.5 million and $2.9 million, respectively, which were included in Accounts receivable in the consolidated balance sheets. Accounts payable to Polar were $2.8 million and $5.1 million at September 30, 2010 and December 31, 2009, respectively, and were included in Accounts payable in the consolidated balance sheets. The Company incurred expense under the general sales and service agreement of $0.5 million and $0.4 million for the three months ended September 30, 2010 and 2009, respectively, and $1.6 million and $0.8 million for the nine months ended September 30, 2010 and 2009, respectively, which was included in Ground handling and airport fees in the consolidated statements of operations.

Concentration of Credit Risk and Significant Customers

     Polar accounted for 32.6% and 35.3% of the Company’s ACMI revenue and 15.3% and 17.8% of the Company’s total revenue for the three months ended September 30, 2010 and 2009, respectively. Polar accounted for 36.2% and 39.1% of the Company’s ACMI revenue and 15.1% and 20.1% of the Company’s total revenue for the nine months ended September 30, 2010 and 2009, respectively. United States Military Airlift Mobility Command (“AMC”) charters accounted for 22.2% and 30.8% of the Company’s total revenue for the three months ended September 30, 2010 and 2009, respectively, and 31.0% and 32.1% for the nine months ended September 30, 2010 and 2009, respectively. Accounts receivable from AMC were $10.6 million and $13.0 million at September 30, 2010 and December 31, 2009, respectively. The International Airline of United Arab Emirates (“Emirates”) accounted for 9.7% and 11.4% of the Company’s total revenue for the three months ended September 30, 2010 and 2009, respectively and 8.3% and 11.3% of the Company’s total revenue for the nine months ended September 30, 2010 and 2009, respectively. Emirates accounted for 21.9% and 23.9% of the Company’s ACMI revenue for the three months ended September 30, 2010 and 2009, respectively and 21.0% and 23.2% of the Company’s ACMI revenue for the nine months ended September 30, 2010 and 2009, respectively. Accounts receivable from Emirates were $9.0 million and $13.0 million at September 30, 2010 and December 31, 2009, respectively. No other customer accounted for 10% or more of the Company’s total operating revenue or accounts receivable during these periods.

Reclassifications

     Certain reclassifications have been made to prior period amounts to conform to the current period’s presentation.

Rights Plan

     On May 17, 2010, the Board of Directors of the Company approved an amendment to the Company’s stockholder rights plan providing for a change in the expiration date of the rights agreement from May 25, 2012 to May 17, 2010, effectively terminating the rights plan. See Note 17 to the audited consolidated financial statements in the AAWW 2009 Annual Report on Form 10-K for a description of the rights plan.

Recent Accounting Pronouncements

     On January 1, 2010, the Company adopted the amendments to Accounting Standards Codification (“ASC”) 820, Fair Value Measures and Disclosures (“ASC 820”). These amendments require additional disclosures for amounts transferred in and out of Level 1 and 2 fair value measurements, as well as requiring fair value measurement disclosures for each class of assets and liabilities. The adoption of the amended provisions of ASC 820 did not have any impact on the Company’s financial condition or results of operations. Additional disclosure requirements in Level 3 fair value measurements, including purchases, sales, issuances and settlements on a gross basis, will be effective for interim and annual reporting periods beginning after December 15, 2010 and will be adopted as of January 1, 2011. The adoption of the amended provisions of ASC 820 is not expected to have any impact on the Company’s financial condition or results of operations.

     On January 1, 2010, the Company adopted the amendments to ASC 810, Consolidation (“ASC 810”). These amendments primarily included: (i) amending the guidance for determining whether an entity is a variable interest entity (“VIE”); and (ii) amending the criteria for identification of the primary beneficiary of a VIE. ASC 810 also requires the Company to continually reassess whether it is the primary beneficiary of a VIE and requires certain enhanced disclosures in the financial statements about the Company’s relationships with VIEs. The adoption of the amended provisions of ASC 810 did not have any impact on the Company’s financial condition or results of operations.

3. Long-term Investments

     Long-term investments consist of debt securities for which the Company has both the ability and the intent to hold until maturity. These investments are classified as held-to-maturity and reported at amortized cost. Such debt securities represent investments in Pass-through Trust Certificates related to Enhanced Equipment Trust Certificates (“EETCs”) issued by Atlas in 1998, 1999 and 2000. Interest on debt securities and accretion of discounts using the effective interest method are included in Interest income in the consolidated statements of operations.

The following table presents the carrying value, gross unrealized gains and fair value of long-term investments by contractual maturity as of:

		September 30, 2010												December 31, 2009
						Gross												Gross
		Carrying				Unrealized								Carrying				Unrealized
		Value				Gains				Fair Value				Value				Gains				Fair Value
Debt securities
Due after five but within ten years		$	55,956			$	12,391			$	68,347			$	2,659			$	2,128			$	4,787
Due after ten years			68,551				21,639				90,190				16,321				8,918				25,239
Total		$	124,507			$	34,030			$	158,537			$	18,980			$	11,046			$	30,026

     The Company has estimated the fair value for these debt securities utilizing a discounted cash flow analysis based on the contractual cash flows of the investments and a discount rate derived from unadjusted quoted interest rates for debt securities with a comparable life and credit risk.

4. Accrued Liabilities

     Accrued liabilities consisted of the following at:

		September 30, 2010				December 31, 2009
Maintenance		$	37,136			$	34,029
Salaries, wages and benefits			31,959				30,877
Aircraft fuel			19,200				12,656
Other			48,544				30,345
Total accrued liabilities		$	136,839			$	107,907

5. Segment Reporting

     The Company uses an economic performance metric (“Direct Contribution”) that shows the profitability of each segment after allocation of direct ownership costs. The Company has the following reportable segments: ACMI, AMC Charter, Commercial Charter and Dry Leasing. Direct Contribution consists of Income before income taxes and excludes: special charges, nonrecurring items, gains on the disposal of equipment, unallocated revenue and unallocated fixed costs. Direct ownership costs include crew costs, maintenance, fuel, ground operations, sales costs, aircraft rent, interest expense related to aircraft debt, interest income on debt securities and aircraft depreciation. Unallocated income and expenses include corporate overhead, non-aircraft depreciation, interest income, foreign exchange gains and losses, other revenue and other non-operating costs, including one-time items. Management uses Direct Contribution to measure segment profitability as it shows each segment’s contribution to unallocated fixed costs. Each segment has different operating and economic characteristics that are separately reviewed by the Company’s senior management.

     Management allocates the costs attributable to aircraft operation and ownership among the various segments based on the aircraft type and activity levels in each segment. In addition, certain ownership costs are directly apportioned to the ACMI segment. Other allocation methods are standard activity-based methods that are commonly used in the industry.

     Since April 8, 2009, GSS’ results of operations have been included in the ACMI segment and Dry Lease revenue from GSS has been eliminated upon consolidation. Prior to that date, revenue from the Dry Leases to GSS was shown in the Dry Leasing segment.

     The ACMI segment provides aircraft, crew, maintenance and insurance services to customers. Also included in the ACMI segment are the results of operations for CMI, which began in the second quarter of 2010. CMI provides crew, maintenance and insurance services, with the customer providing the aircraft. Under both services, the customers utilize an insured and maintained aircraft with crew in exchange for a guaranteed monthly level of operation at a predetermined rate for a defined period of time. The customer bears the commercial revenue risk and the obligation for other direct operating costs, including fuel. The Direct Contribution from Express Network ACMI flying is reflected as ACMI.

     The AMC Charter segment provides full-planeload charter flights to the U.S. Military. In addition, the Company also earns commissions on subcontracting certain flying of oversized cargo, or in connection with flying cargo into areas of military conflict where the Company cannot perform these services on its own. Revenue from the AMC Charter business is typically derived from one-year contracts on a cost-plus basis with the AMC. The Company’s current AMC contract was initially scheduled to run from October 1, 2009 through September 30, 2010. However, the U.S. Military has extended the current fiscal year contract through December 31, 2010. The AMC Charter business is similar to the Commercial Charter business in that the Company is responsible for the direct operating costs of the aircraft. However, in the case of AMC operations, the price paid for fuel consumed during AMC flights is fixed by the U.S. Military. The Company receives reimbursement from the AMC each month if the price of fuel paid by the Company to vendors for AMC missions exceeds the fixed price. Alternatively, if the price of fuel paid by the Company is less than the fixed price, the Company pays the difference to the AMC each month.

     The Commercial Charter segment provides aircraft charters to freight forwarders, airlines and other air cargo customers. Charters are often paid in advance and the Company typically bears the direct operating costs.

     The Dry Leasing segment provides for the leasing of aircraft and engines to customers.

     Other represents revenue for services that are not allocated to any segment, which includes administrative and management support services, flight simulator training and the one-time termination fee from DHL in March 2009 (see Note 2).

     The following table sets forth revenue and Direct Contribution for the Company’s reportable business segments reconciled to Operating Income and Income before Income Taxes:

		For the Three Months Ended								For the Nine Months Ended
		September 30, 2010				September 30, 2009				September 30, 2010				September 30, 2009
Operating Revenue:
ACMI		$	144,685			$	121,473			$	383,917			$	358,943
AMC Charter			72,506				78,613				303,314				237,224
Commercial Charter			104,044				52,286				275,525				112,901
Dry Leasing			2,157				335				5,384				12,146
Other			3,275				2,771				9,940				18,772
Total Operating Revenue		$	326,667			$	255,478			$	978,080			$	739,986
Direct Contribution:
ACMI		$	34,809			$	21,092			$	87,097			$	64,814
AMC Charter			18,819				27,340				95,096				69,679
Commercial Charter			26,205				2,837				78,372				5,213
Dry Leasing			1,565				(1,046	)			3,692				1,014
Total Direct Contribution for Reportable Segments			81,398				50,223				264,257				140,720
Add back (subtract):
Unallocated income and expenses			(26,334	)			(28,544	)			(96,986	)			(66,528	)
Gain on early extinguishment of debt			—				—				—				2,713
Gain on consolidation of subsidiary			—				—				—				113
Gain on disposal of aircraft			161				—				3,541				957
Income before Income Taxes			55,225				21,679				170,812				77,975
Add back (subtract):
Interest income			(5,490	)			(346	)			(14,620	)			(1,816	)
Interest expense			10,176				11,063				30,396				34,074
Capitalized interest			(4,401	)			(3,069	)			(11,007	)			(9,189	)
Gain on early extinguishment of debt			—				—				—				(2,713	)
Gain on consolidation of subsidiary			—				—				—				(113	)
Other, net			(614	)			(699	)			(9,236	)			(380	)
Operating Income		$	54,896			$	28,628			$	166,345			$	97,838

6. Commitments and Contingencies

     In September 2006, Atlas and The Boeing Company (“Boeing”) entered into an agreement for the purchase by Atlas of 12 747-8F aircraft (the “Boeing 747-8F Agreement”). The Boeing 747-8F Agreement provides for deliveries of the aircraft to begin in 2010, with all 12 deliveries originally contractually scheduled for delivery by the end of 2011. In addition, the Boeing 747-8F Agreement provides Atlas with rights to purchase up to an additional 14 747-8F aircraft, of which one is being held under option with a designated delivery month. In October 2009, Boeing announced a delay and proposed a new delivery schedule for Atlas’ deliveries.

     On March 1, 2010, the Company entered into an agreement with Boeing to reschedule the delivery of its 747-8F aircraft and option aircraft under the Boeing 747-8F Agreement with the first delivery occurring in early 2011. Expenditures, as well as estimated amounts for contractual price escalations and advance payments, are $99.8 million for the remainder of 2010, $805.7 million in 2011, $546.0 million in 2012 and $196.9 million in 2013.

     In September 2010, Boeing announced a further delay and proposed a new delivery schedule for certain of Atlas’ deliveries. Boeing and the Company have agreed to suspend payments for the delayed aircraft under the above agreement until a revised delivery and payment schedule has been agreed upon.

7. Labor and Legal Proceedings

Labor

     Crewmembers of Atlas and Polar are represented by the International Brotherhood of Teamsters (“IBT”). These employees represented approximately 51.6% of the Company’s workforce as of September 30, 2010. The Company is subject to risks of work interruption or stoppage as permitted by the Railway Labor Act of 1926 (the “Railway Labor Act”), and may incur additional administrative expenses associated with union representation of its employees.

     The Atlas collective bargaining agreement became amendable in February 2006. The Polar collective bargaining agreement became amendable in April 2007. While both units have filed Railway Labor Act “Section 6” notices to begin negotiations for amended agreements, those negotiations have been placed on hold in favor of completing the merger of the two crew forces. In November 2004, the Company initiated steps to merge the represented crewmember bargaining units of Atlas and Polar. The respective collective bargaining agreements provide for a seniority integration process and the negotiation of a single collective bargaining agreement (“SCBA”). This seniority list integration process was completed on November 21, 2006.

     The Company received the integrated seniority lists and the parties are in negotiations for a SCBA. In accordance with the provisions of both the Atlas and Polar contracts, if any open contract issues remain after nine months of bargaining from the date the integrated seniority lists were tendered to the Company, those issues are to be resolved by final and binding interest arbitration. This period of bargaining has been extended by mutual agreement of the parties. Although the Company and the IBT have continued to negotiate and have reached a tentative agreement on many outstanding issues, an arbitrator has been assigned. The arbitration hearings are scheduled to begin in December 2010 and are expected to last through the end of 2010.

     On February 3, 2009, the IBT was certified as the collective bargaining representative of the dispatchers employed by Atlas and Polar. The Company and the IBT began formal negotiations in August 2009 regarding the first collective bargaining agreement for the dispatchers. Other than the crewmembers and dispatchers, there are no other Atlas or Polar employees represented by a union.

Legal Proceedings

Department of Justice Investigation and Related Litigation

     On September 2, 2010, Polar Air Cargo LLC (“Old Polar”) entered into a plea agreement with the United States Department of Justice (the “DOJ”) relating to the previously disclosed DOJ investigation concerning alleged manipulation by cargo carriers of fuel surcharges and other rate components for air cargo services (the “DOJ Investigation”). Under the terms of the agreement, Old Polar will pay a fine of $17.4 million, payable in five annual instalments. The plea agreement is subject to court approval and the fine relates to an alleged agreement by Old Polar with respect to fuel surcharges on cargo shipped from the United States to Australia during the time period from January 2000 through April 2003. During the

second quarter of 2010, the Company recorded a $17.4 million provision for this matter. The hearing on the plea agreement before the United States District Court for the District of Columbia is scheduled to resume on November 15, 2010.

     As a result of the DOJ Investigation, the Company and Old Polar have been named defendants, along with a number of other cargo carriers, in several class actions in the United States arising from allegations about the pricing practices of a number of air cargo carriers that have now been consolidated for pre-trial purposes in the United States District Court for the Eastern District of New York. The consolidated complaint alleges, among other things, that the defendants, including the Company and Old Polar, manipulated the market price for air cargo services sold domestically and abroad through the use of surcharges, in violation of United States, state, and European Union antitrust laws. The suit seeks treble damages and injunctive relief. The defendants moved to dismiss the consolidated complaint, and on September 26, 2008, the Magistrate Judge who heard the motion to dismiss issued a decision recommending that the Federal District Court Judge grant the defendants’ motion to dismiss. The Magistrate Judge recommended that plaintiffs’ claims based on the United States antitrust laws be dismissed without prejudice so that plaintiffs have an opportunity to cure the defects in their complaint by pleading more specific facts, if they have any, relevant to their federal claims. The Magistrate Judge recommended that the plaintiffs’ claims based on state and European Union laws be dismissed with prejudice. Both plaintiffs and defendants objected to portions of the Magistrate Judge’s Report and Recommendation. On August 21, 2009, the Federal District Court Judge issued an opinion and order, accepting the Magistrate Judge’s Report and Recommendation, except for the Magistrate Judge’s recommendation that the complaint be dismissed in its entirety, instead maintaining the claims under the United States antitrust laws on the grounds that the consolidated complaint was sufficiently detailed to withstand a motion to dismiss. Old Polar and the other defendants moved for reconsideration of that portion of the Federal District Court Judge’s decision which motion was denied on March 22, 2010. Pre-trial discovery is currently in progress, although the DOJ has recently moved to intervene and stay much of the pre-trial discovery for five months while it concludes its investigation.

     On May 30, 2007, the Company and Old Polar commenced an adversary proceeding in bankruptcy court against each of the plaintiffs in this class action litigation seeking to enjoin the plaintiffs from prosecuting claims against the Company and Old Polar that arose prior to July 27, 2004, the date on which the Company and Old Polar emerged from bankruptcy. On August 6, 2007, the plaintiffs consented to the injunctive relief requested, and on September 17, 2007, the bankruptcy court entered an order enjoining plaintiffs from prosecuting Company claims arising prior to July 27, 2004.

     The Company, Old Polar and a number of other cargo carriers have also been named as defendants in civil class action suits in the provinces of Ontario and Quebec, Canada that are substantially similar to the class action suits in the United States. The Company is unable to reasonably predict the outcome of this litigation. If Old Polar was to incur an unfavorable outcome in connection with one or more of the matters described above, such outcome is not expected to materially affect the Company’s business, financial condition, results of operations, and/or cash flows.

Korean Fair Trade Commission Inquiry

     On August 26, 2008, both Polar and Old Polar received a written inquiry from the Korean Fair Trade Commission (the “KFTC”) seeking data and other information in support of a broad investigation it is conducting into possible anti-competitive behavior relating to international airfreight transportation services for which Korea is either the freight origin or destination.

     On October 29, 2009, following a lengthy internal investigation, the KFTC issued a complaint against 26 airlines alleging anti-competitive behavior relating to international air freight transportation services to and from Korea from January 1, 2000 through June 24, 2007. Old Polar was among those entities named in the complaint. As it pertains to Old Polar, the complaint alleges that carrier cooperation in setting Hong Kong-Korea fuel and security surcharges at the direction of the Hong Kong Civil Aviation Department and pursuant to the Hong Kong-Korea air transport agreement violated Korean competition law. The KFTC accepted responsive submissions and held an oral hearing on May 18, 2010. Thereafter, on May 28, 2010, the KFTC announced its decision to impose civil penalties on most of the respondents, including one in the amount of 850 million Korean Won on Old Polar, which is equivalent to approximately $0.7 million at current exchange rates.

     The KFTC is in the process of drafting a formal written decision. Following release of its decision, Old Polar will have the opportunity to appeal. The ultimate outcome of this matter is not expected to materially affect the Company’s financial condition, results of operations or cash flows.

Brazilian Customs Claim

     Old Polar was cited for two alleged customs violations in Sao Paulo, Brazil, relating to shipments of goods dating back to 1999 and 2000. Each claim asserts that goods listed on the flight manifest of two separate Old Polar scheduled service flights were not on board the aircraft upon arrival and therefore were improperly brought into Brazil. The two claims, which also seek unpaid customs duties, taxes and penalties from the date of the alleged infraction, currently are for approximately $11.7 million and $6.4 million, respectively, plus interest based on September 30, 2010 exchange rates.

     In both cases, the Company believes that the amounts claimed are substantially overstated due to a calculation error when considering the type and amount of goods allegedly missing, among other things. Furthermore, the Company may seek appropriate indemnity from the shipper in each claim as necessary.

     The Company is currently defending these and other Brazilian customs claims and the ultimate disposition of these claims, either individually or in the aggregate, is not expected to materially affect the Company’s financial condition, results of operations or cash flows.

Trademark Matters

     Since 2005, the Company has been involved in ongoing litigation in Europe against Atlas Transport, an unrelated and unaffiliated entity, over the use of the name “Atlas”. Following application by the Company to register the mark “ATLAS AIR” in the European Union (“EU”), opposition from Atlas Transport and follow-up filings by the Company, the Office for Harmonization in the Internal Market (“OHIM”), which handles trademark matters in the EU, declared Atlas Transport’s own trademark “ATLAS” partially invalid because of the prior existence of the Company’s Benelux trademark registration. On January 24, 2008, OHIM’s First Board of Appeal upheld the lower panel’s decision, and Atlas Transport appealed that decision to the EU General Court (formally the Court of First Instance), where it remains pending.

     On October 29, 2007, Atlas Transport also filed a lawsuit in the Netherlands challenging the validity of the Company’s Benelux trademark. On November 18, 2009, following completion of its proceedings, the court issued a judgment in favor of the Company. Atlas Transport has appealed that decision to the Dutch Court of Appeal, but the judgment took effect immediately upon entry.

     On September 21, 2009, Atlas Transport instituted a trademark infringement lawsuit against the Company in the regional court in Hamburg, Germany. The amended complaint alleges that Atlas Air has been unlawfully using Atlas Transport’s trademark in Germany without permission and should be required to render information on the scope of use and pay compensation. In a supplementary motion, Atlas Transport asserts a cease and desist claim against Atlas Air, to be considered in the event that the court denies the claim for compensation. The next court hearing is scheduled for December 14, 2010. The Company has contested Atlas Transport’s allegations and intends to defend itself vigorously in that lawsuit to protect its own, longstanding trademark rights.

     The Company believes that the ultimate disposition of these claims, either individually or in the aggregate, is not expected to materially affect the Company’s financial condition, results of operations or cash flows.

Other

     In March 2010, the Company reached a final settlement in a lawsuit whereby the Company received a one-time payment of $8.8 million, which was included in Other, net in the consolidated statement of operations.

     The Company has certain other contingencies resulting from labor grievances and contract administration, litigation, and claims incident to the ordinary course of business. Management believes that the ultimate disposition of such other contingencies is not expected to materially affect the Company’s financial condition, results of operations or cash flows.

8. Financial Instruments

     ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). ASC 820 classifies the inputs used to measure fair value into the following hierarchy:

Level 1		Unadjusted quoted prices in active markets for identical assets or liabilities

Level 2		Unadjusted quoted prices in active markets for similar assets or liabilities, or
		Unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or
		Inputs other than quoted prices that are observable for the asset or liability
Level 3		Unobservable inputs for the asset or liability

     The Company endeavors to utilize the best available information in measuring fair value.

     The Company maintains Cash and cash equivalents and Short-term investments, which include certificates of deposit with various high-quality financial institutions. The carrying value for Cash and cash equivalents and Short-term investments approximates fair value, except for the current portion of the Company’s investment in the Reserve Primary Fund, which was based on the methodology described below.

     The Company adjusted its Level 1 fair value measurement of the Reserve Primary Fund at December 31, 2009 by reducing the value of the fund by an estimate of the losses incurred by the Reserve Primary Fund related to its holdings in Lehman Brothers Holdings, Inc. The Company collected its outstanding investment in the Primary Fund in August 2010.

     The fair value of the Company’s Long-term investments, which are debt securities that are held-to-maturity, were estimated based on Level 3 inputs. The Company utilized a discounted cash flow analysis based on the contractual cash flows of the investments and a discount rate derived from unadjusted quoted interest rates for debt securities of comparable life and credit risk.

     The fair value of the Company’s EETCs was estimated based on Level 3 inputs. The Company obtained Level 2 inputs of quoted market prices of the Company’s equipment notes and used them as a basis for valuing the EETCs.

     The fair value of the Company’s pre-delivery deposit (“PDP”) financing facility and term loans were estimated based on Level 3 inputs using a discounted cash flow analysis and current borrowing rates for instruments with similar terms.

     The following table summarizes the carrying amount and estimated fair value of the Company’s financial instruments at September 30, 2010 and December 31, 2009:

		September 30, 2010
		Carrying
		Value				Fair Value				Level 1				Level 2				Level 3
Assets
Cash and cash equivalents		$	545,288			$	545,288			$	545,288			$	—			$	—
Short-term investments			24,689				24,689				20,000				—				4,689
Long-term investments			124,507				158,537				—				—				158,537
		$	694,484			$	728,514			$	565,288			$	—			$	163,226
Liabilities
1998 EETCs		$	148,723			$	166,957			$	—			$	—			$	166,957
1999 EETCs			101,244				114,612				—				—				114,612
2000 EETCs			59,216				64,461				—				—				64,461
PDP financing facility			46,871				46,862				—				—				46,862
Term loans			81,788				83,298				—				—				83,298
		$	437,842			$	476,190			$	—			$	—			$	476,190

		December 31, 2009
		Carrying
		Value				Fair Value				Level 1				Level 2				Level 3
Assets
Cash and cash equivalents		$	613,740			$	613,740			$	613,740			$	—			$	—
Short-term investments			22,598				22,598				20,000				—				2,598
Long-term investments			18,980				30,026				—				—				30,026
		$	655,318			$	666,364			$	633,740			$	—			$	32,624
Liabilities
1998 EETCs		$	159,215			$	155,555			$	—			$	—			$	155,555
1999 EETCs			107,245				109,197				—				—				109,197
2000 EETCs			61,341				60,651				—				—				60,651
PDP financing facility			153,799				153,882				—				—				153,882
Term loans			83,910				86,028				—				—				86,028
		$	565,510			$	565,313			$	—			$	—			$	565,313

9. Earnings Per Share

     Basic earnings per share (“EPS”) represent net income divided by the weighted average number of common shares outstanding during the measurement period. Diluted EPS represents net income divided by the weighted average number of common shares outstanding during the measurement period while also giving effect to all potentially dilutive common shares that were outstanding during the period. Anti-dilutive restricted shares and options that were out of the money and excluded for the three and nine months ended September 30, 2010 and 2009, were zero and 0.1 million, respectively.

     The calculations of basic and diluted EPS for the periods described below were as follows:

		For the Three Months Ended								For the Nine Months Ended
		September 30, 2010				September 30, 2009				September 30, 2010				September 30, 2009
Numerator:
Net Income Attributable to Common Stockholders		$	33,804			$	14,722			$	100,250			$	49,437
Denominator:
Basic EPS weighted average shares outstanding			25,855				20,924				25,736				20,903
Effect of dilutive stock options and restricted stock			288				207				302				123
Diluted EPS weighted average shares outstanding			26,143				21,131				26,038				21,026
EPS:
Basic		$	1.31			$	0.70			$	3.90			$	2.37
Diluted		$	1.29			$	0.70			$	3.85			$	2.35

     Diluted shares are calculated per ASC 260, Earnings per Share, and reflect the potential dilution that could occur from stock options and restricted shares using the treasury stock method. The calculation does not include 0.2 million and 0.3 million restricted shares and units in which performance or market conditions were not satisfied for the three and nine months ended September 30, 2010, respectively, and 0.3 million for both the three and nine months ended September 30, 2009.

10. Income Taxes

     The Company’s effective income tax rates were 38.4% and 35.1% for the three months ended September 30, 2010 and 2009, respectively, and were 41.2% and 38.4% for the nine months ended September 30, 2010 and 2009, respectively. The effective rates differ from the U.S. Federal statutory rate due to non-U.S. subsidiaries tax matters, U.S. state income taxes, the non-deductibility of certain expenses for tax purposes, and the relationship of these items to the Company’s projected operating results for the year. The increase in the effective tax rates for the three month period ended September 30, 2010 was primarily attributable to a one-time benefit recorded in 2009 related to the recovery of the Company’s investment in a foreign subsidiary. The increase in the effective tax rates for the nine month period ended September 30, 2010 was primarily attributable to a one-time benefit recorded in 2009 related to the recovery of the Company’s investment in a foreign subsidiary and the accrual of a nondeductible expense in 2010 related to legal settlements (see Note 7).

     The Company is subject to ASC 805, Business Combinations, effective in the first quarter of 2009. As a result, any release of income tax contingencies or valuation allowance that is subject to this standard would reduce income tax expense. The Company maintains approximately $36.9 million of income tax contingencies and $52.5 million of valuation allowance that, if released, would reduce income tax expense, based on the application of the standard.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     The following discussion and analysis should be read in conjunction with our unaudited Financial Statements and notes thereto appearing in this report and our audited consolidated financial statements and notes thereto for the fiscal year ended December 31, 2009, included in our 2009 Annual Report on Form 10-K.

     In this report, references to “we,” “our” and “us” are references to AAWW and its subsidiaries, as applicable.

Background

Certain Terms — Glossary

     The following represents terms and statistics specific to the airline and cargo industries. They are used by management for statistical analyses to evaluate and measure operations, results, productivity and efficiency.

A Check		Low-level maintenance checks performed on aircraft at an interval of approximately 750 flight hours for a 747-200 aircraft and 1,000 flight hours for a 747-400 aircraft.
Block Hour		The time interval between when an aircraft departs the terminal until it arrives at the destination terminal.
C Check		High-level or “heavy” airframe maintenance checks, which are more intensive in scope than A Checks and are generally performed on 18-month intervals.
D Check		High-level or “heavy” airframe maintenance checks, which are the most extensive in scope and are generally performed on an interval of nine years or 25,000 flight hours, whichever occurs sooner for 747-200s, and six years for 747-400s.
Revenue per Block Hour		Calculated by dividing Operating Revenue by Block Hours.

Business Strategy

     We are the leading provider of leased wide-body freighter aircraft, furnishing outsourced aircraft operating services and solutions. As such, we manage and operate the world’s largest fleet of 747 freighters. We provide unique value to our customers by giving them access to highly reliable new production freighters that deliver the lowest unit cost in the marketplace combined with outsourced aircraft operating services that lead the industry in terms of quality and global scale. Our customers include airlines, express delivery providers, freight forwarders, the U.S. military and charter brokers. We provide global services with operations in Asia, the Middle East, Australia, Europe, South America, Africa and North America.

     Global airfreight demand is highly correlated with global gross domestic product. The slowdown in global economic activity in 2008 and 2009 resulted in an unprecedented decline in airfreight volumes during the second half of 2008 that continued into the first half of 2009. In contrast, improving economic conditions, inventory restocking and new product demand in the fourth quarter of 2009 and the first three quarters of 2010 have generated encouraging trends for airfreight demand and yields, which was consistent with a tight supply during those periods. During the second and third quarters of 2010, airfreight demand exceeded pre-recession levels.

     We believe that our existing fleet of 22 modern, high-efficiency 747-400 aircraft represents one of the most efficient freighter fleets in the market. Our primary placement for these aircraft will continue to be long-term ACMI outsourcing contracts with high-credit-quality customers, as evidenced recently by the two new ACMI contracts we entered into during the third quarter of 2010. We will opportunistically displace further 747-200 AMC and Commercial Charter flying to the extent we do not have demand for these aircraft.

     Our growth plans are focused on the further enhancement of our ACMI market position with our order of 12 new, state-of-the-art 747-8F aircraft. We expect Boeing to begin delivery of these aircraft to us in the middle of 2011. We are currently the only operator offering these aircraft to the ACMI leasing market. In addition to our order, we also hold rights

to purchase up to an additional 14 747-8F aircraft, providing us with flexibility to further expand our fleet in response to market conditions.

     We believe that the scale, scope and quality of our outsourced services are unparalleled in our industry. The relative operating cost efficiency of our current 747-400F aircraft and future 747-8F aircraft, including their superior fuel efficiency, capacity and loading capabilities, create a compelling value proposition for our customers and position us well to manage market conditions and for future growth.

     Our primary service offerings are:

     Aircraft leasing and related services, which encompass the following:

•

ACMI, whereby we provide outsourced aircraft operating solutions including the provision of crew, maintenance and insurance for the aircraft, while customers assume fuel, demand and yield risk. ACMI contracts typically range from three to five years for 747-400s. Also included within ACMI is the provision of Express Network ACMI, whereby we provide dedicated 747-400 aircraft to Polar that service the requirements of DHL’s global express operations and meet the needs of other Polar customers. Beginning on April 8, 2009, we consolidated GSS, and the aircraft that are Dry Leased to GSS are now included within ACMI;

•

CMI, which is part of our ACMI business segment, whereby we provide outsourced operating solutions including the provision of crew, maintenance and insurance, while customers provide the aircraft and assume fuel, demand and yield risk. We began performing CMI services during the second quarter of 2010; and

•

Dry Leasing, whereby we provide aircraft and/or engine leasing solutions to third parties for one or more dedicated aircraft or engines.

     Charter services, which encompass the following:

•

AMC Charter services, whereby we provide air cargo services for the AMC; and

•

Commercial Charter, whereby we provide aircraft charters to customers, including brokers, freight forwarders, direct shippers and airlines.

     We look to achieve our strategy through:

•

Delivering superior service quality to our valued customers;

•

Actively managing our fleet with a focus on leading-edge aircraft;

•

Focusing on securing long-term contracts with attractive terms;

•

Driving significant ongoing efficiencies and productivity improvements;

•

Selectively pursuing and evaluating future aircraft acquisitions and alliances; and

•

Building our brand and increasing market share.

     See “Business Overview” and “Business Strategy” in our 2009 Annual Report on Form 10-K for additional information.

Financial Overview and Business Developments

     Our Results of Operations for the nine months ended September 30, 2010, compared to the same period in 2009, reflect the consolidation of GSS in our operating results since April 2009. Our 2010 Operating Statistics, Operating Revenue and Operating Expenses reflect the consolidation of GSS in ACMI. From January 1, 2009 through April 8, 2009, GSS was accounted for under the equity method and the revenue generated by the three aircraft dry leased to GSS was reflected in Dry Leasing (see Note 2 to our Financial Statements).

     The positive trends that developed in late 2009 continued in the first three quarters of 2010. ACMI customers continued to fly above their minimum contractual Block Hour guarantees during the first three quarters of 2010, compared to the first three quarters of 2009 when ACMI customers flew below their minimum guarantees.

     On May 31, 2010, we began to fly on a CMI basis for SonAir — Serviço Aéreo, S.A. (“SonAir”), an agent of the United States-Africa Energy Association. SonAir is a wholly owned subsidiary of the Sonangol Group, the multinational energy company of Angola. This service, known as the “Houston Express”, operates three weekly nonstop roundtrip flights between Houston, Texas and Luanda, Angola on two newly customized 747-400 aircraft provided by SonAir. Since it began operations, the Houston Express has flown above its contractual minimum guarantee. In addition, we seek to expand the utilization of the aircraft by flying commercial passenger charters.

     In February 2010, we signed a nine-year CMI agreement with Boeing to operate their Dreamlifter fleet of four 747-400 aircraft. These aircraft have been modified to transport major assemblies for the 787 Dreamliner from suppliers around the world to Boeing production facilities in the United States. On July 20, 2010, we took delivery of the first of four Dreamlifters from Boeing and began CMI service for them. As of October 15, 2010, we have taken delivery of all four Dreamlifters and have begun to place them into service. As production of the 787 Dreamliner ramps up, all four will be utilized to their contractual levels.

     On July 23, 2010, we signed an ACMI agreement with British Airways Plc to operate three 747-8F aircraft through GSS. The contract is scheduled to begin in 2011 when we take delivery of the 747-8F aircraft from Boeing.

     On September 15, 2010, we began ACMI flying for TNT Airways (“TNT”), the Belgium-based aviation division of TNT, N.V. Under the ACMI agreement, we provide service for TNT’s international express air network, which will be based at TNT’s European hub in Liege, Belgium.

     On October 14, 2010, we began ACMI flying for a second 747-400 freighter for Panalpina Air & Ocean Ltd (“Panalpina”). This second aircraft is based at Panalpina’s European hub in Luxembourg.

     AMC demand was exceptionally strong through the first five months of 2010 primarily due to the surge in U.S. Military activity in Afghanistan. During that period, we flew a significant number of missions in support of the U.S. Military’s deployment of mine resistant all-terrain vehicles (“M-ATV”) from the U.S. to Afghanistan and averaged just over 1,800 Block Hours a month. We also realized an improvement in yields due to higher rates on mission-specified 747-400 aircraft flights and an increase in one-way AMC missions to meet this demand. In early June, we completed our last scheduled M-ATV mission and do not expect any additional M-ATV missions for the remainder of 2010. In the third quarter of 2010, we have averaged just over 1,200 Block Hours a month.

     Commercial Charter yields and volumes have also been robust compared to the first three quarters of 2009. The strength in Commercial Charter yields and demand is the continuation of a trend that developed in the fourth quarter of 2009, although yields were seasonally lower in the first three quarters of 2010 when compared to the peak rates experienced in the fourth quarter of 2009. In addition, we have been able to increase Commercial Charter yields by utilizing the return flights from one-way AMC missions during 2010.

     In March 2010, Titan purchased a Boeing 757-200SF, its first such acquisition, that is being Dry Leased.

Results of Operations

Three Months Ended September 30, 2010 and 2009

Operating Statistics

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

     The table below sets forth selected Operating Statistics for the three months ended September 30:

										Increase /				Percent
		2010				2009				(Decrease)				Change
Block Hours
ACMI			24,251				19,812				4,439				22.4	%
AMC Charter			3,729				5,023				(1,294	)			(25.8	)%
Commercial Charter			5,090				3,361				1,729				51.4	%
Other			207				77				130				168.8	%
Total Block Hours			33,277				28,273				5,004				17.7	%
Revenue Per Block Hour
ACMI		$	5,966			$	6,131			$	(165	)			(2.7	)%
AMC Charter			19,444				15,651				3,793				24.2	%
Commercial Charter			20,441				15,557				4,884				31.4	%
AMC
Average fuel cost per gallon		$	2.68			$	1.55			$	1.13				72.9	%
Fuel gallons consumed (000s)			12,280				15,520				(3,240	)			(20.9	)%
Commercial Charter
Average fuel cost per gallon		$	2.32			$	2.05			$	0.27				13.2	%
Fuel gallons consumed (000s)			17,786				11,406				6,380				55.9	%
Fleet (average during the period)
ACMI*			19.0				17.4				1.6				9.2	%
AMC Charter			4.3				6.6				(2.3	)			(34.8	)%
Commercial Charter			5.9				3.8				2.1				55.3	%
Dry Leasing			1.0				—				1.0				100.0	%
Operating Aircraft			30.2				27.8				2.4				8.6	%
Out-of-service**			—				3.2				(3.2	)			(100.0	)%

Operating Revenue

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

										Increase /				Percent
		2010				2009				(Decrease)				Change
Operating Revenue
ACMI		$	144,685			$	121,473			$	23,212				19.1	%
AMC Charter			72,506				78,613				(6,107	)			(7.8	)%
Commercial Charter			104,044				52,286				51,758				99.0	%
Dry Leasing			2,157				335				1,822				543.9	%
Other			3,275				2,771				504				18.2	%
Total Operating Revenue		$	326,667			$	255,478			$	71,189				27.9	%

     ACMI revenue increased by $23.2 million, or 19.1%, in the third quarter of 2010 compared to 2009. ACMI Block Hours were 24,251 in the third quarter of 2010, compared to 19,812 in 2009, representing an increase of 4,439 Block Hours, or 22.4%. The increase in Block Hours was driven by ACMI customers flying above their minimum guarantees during the third quarter of 2010 compared to 2009, when customers flew below their minimum guarantees. Included in the increase in Block Hours was the startup of ACMI flying for TNT, CMI passenger flights for SonAir and CMI Dreamlifter flights for Boeing. In the third quarter of 2010, there was an average of 19.0 747-400 aircraft and no 747-200 aircraft supporting ACMI compared to an average of 17.3 747-400 aircraft and 0.1 747-200 aircraft for the comparable period in 2009. Revenue per Block Hour was $5,966 for the third quarter of 2010, compared to $6,131 for the third quarter of 2009, a decrease of $165 per Block Hour, or 2.7%. The decrease in Revenue per Block Hour primarily reflects our ACMI customers’ recovery from flying unusually low levels in the prior year, which were below minimum guarantees, to flying above minimum guarantees during 2010. During the third quarter of 2009, ACMI customers that flew below their contractual Block Hours were billed for those unflown hours, thus increasing 2009 Revenue per Block Hour. In addition, CMI average Revenue per Block Hour will typically be lower as it does not include a component for aircraft ownership cost.

     AMC Charter revenue decreased $6.1 million, or 7.8%, due to a decrease in Block Hours. AMC Charter Block Hours were 3,729 in the third quarter of 2010 compared to 5,023 in 2009, a decrease of 1,294 Block Hours, or 25.8%. The decrease in AMC Block Hours was primarily due to the reduction in AMC demand to support U.S. Military activity in Afghanistan during the third quarter of 2010. For the third quarter of 2010, the AMC average “pegged” fuel price was $2.68 per gallon compared to an average “pegged” fuel price of $1.55 for the third quarter of 2009. The increase in the “pegged” fuel price was the primary driver of the increase in AMC Charter Revenue per Block Hour from $15,651 for the third quarter of 2009 to $19,444 for 2010, an increase of $3,793 per Block Hour, or 24.2%. In the third quarter of 2010, there was an average of 0.6 747-400 aircraft and 3.7 747-200 aircraft supporting AMC Charter compared to an average of 2.1 747-400 aircraft and 4.5 747-200 aircraft for the comparable period in 2009. We continued to optimize aircraft utilization between the AMC and Commercial Charter segments as AMC demand moderated during the third quarter of 2010 from the levels experienced during the first half of 2010.

     Commercial Charter revenue increased $51.8 million, or 99.0%, due to an increase in flying and an increase in Revenue per Block Hour. Revenue per Block Hour was $20,441 in the third quarter of 2010, compared to $15,557 in 2009, an increase of $4,884 per Block Hour, or 31.4%. This increase was primarily due to strength in the Commercial Charter yields out of Asia as a continuing trend that developed in the fourth quarter of 2009, although the seasonal yields in 2010 were not as high as they were during the peak period in 2009. Commercial Charter Block Hours were 5,090 in the third quarter of 2010, compared to 3,361 in the same period of 2009, representing an increase of 1,729 Block Hours, or 51.4%. In the third quarter of 2010, there was an average of 3.7 747-400 aircraft and 2.2 747-200 aircraft supporting Commercial Charter, compared to an average of 2.6 747-400 aircraft and 1.2 747-200 aircraft for the comparable period in 2009. The increase in Block Hours was the result of optimizing aircraft utilization from AMC to meet the increased demand in Commercial Charter and an increase in the flying of charters to and from South America. The deployment of 747-400 aircraft in Commercial Charter gives us a competitive advantage over other cargo airlines that primarily offer smaller and less efficient aircraft.

     Dry Leasing revenue increased $1.8 million, or 543.9%, primarily due to an increase in revenue from the 757-200SF that Titan acquired in the first quarter of 2010 and nine spare engine leases outstanding during the third quarter of 2010.

     Other revenue was relatively unchanged when compared to the same period in 2009.

Operating Expenses

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

										Increase /				Percent
		2010				2009				(Decrease)				Change
Operating Expenses
Aircraft fuel		$	74,221			$	47,486			$	26,735				56.3	%
Salaries, wages and benefits			56,244				52,271				3,973				7.6	%
Maintenance, materials and repairs			44,747				37,533				7,214				19.2	%
Aircraft rent			38,764				38,058				706				1.9	%
Landing fees and other rent			11,487				10,434				1,053				10.1	%
Depreciation and amortization			8,403				9,039				(636	)			(7.0	)%
Travel			8,941				5,970				2,971				49.8	%
Ground handling and airport fees			6,423				4,941				1,482				30.0	%
Gain on disposal of aircraft			(161	)			—				161			NM
Other			22,702				21,118				1,584				7.5	%
Total Operating Expenses		$	271,771			$	226,850			$	44,921				19.8	%

     Aircraft fuel increased $26.7 million, or 56.3%, as a result of $5.5 million of increased consumption and approximately $21.2 million in fuel price increases. The average fuel price per gallon for the Commercial Charter business was approximately $2.32 for the third quarter of 2010, compared to approximately $2.05 in the third quarter of 2009, an increase of 13.2%. Fuel consumption for this business increased by 6.4 million gallons, or 55.9%, commensurate with the increase in Block Hours operated. The average fuel price per gallon for the AMC Charter business was approximately $2.68 in the third quarter of 2010, compared to approximately $1.55 in the third quarter of 2009, an increase of 72.9%. AMC fuel consumption decreased by 3.2 million gallons, or 20.9%. We do not incur fuel expense in our ACMI business as the cost of fuel is borne by the customer.

     Salaries, wages and benefits increased $4.0 million, or 7.6%, primarily driven by higher Block Hours as well as increases in profit sharing expenses, for the benefit of our crewmembers, as a result of better performance against the Company’s objectives.

     Maintenance, materials and repairs increased $7.2 million, or 19.2%, primarily due to increased line and other non-heavy maintenance expense of approximately $5.5 million driven by higher rates and increased Block Hours and by an increase in heavy airframe check expense of approximately $2.5 million. Heavy maintenance events and engine overhauls for the three months ended September 30, 2010 and 2009 are listed in the following table:

										Increase /
Events		2010				2009				(Decrease)
747-400 C Checks			1				3				(2	)
747-400 D Checks			2				1				1
CF6-50 engine overhauls			1				—				1
CF6-80 engine overhauls			5				7				(2	)