Good morning, and welcome to our first quarter 2012 conference call. I'm Joe Hete, President and Chief Executive Officer.

With me today are Quint Turner, our Chief Financial Officer; Joe Payne, our Senior Vice President and Corporate General Counsel; and Rich Corrado, our Chief Commercial Officer.

We released our first quarter results and filed our 10-Q on Thursday in advance of our annual stockholders meeting last Friday here in Wilmington. Both our quarterly results and a separate release announcing the results of our meeting are on our website, atsginc.com.

I hope you remembered your mom this weekend and had a chance to review our results for the quarter. With 3 days to review them, I'm sure that your questions will be more insightful than ever.

When we last spoke in March, we advised you that this year's first quarter results would be below par including a loss in our ACMI business. Our quarterly earnings more than doubled on a GAAP basis, but that's because we absorbed $6.8 million in aggregate pre-tax charges a year ago to replace our former credit facility with a new one.

That position is already paying off in lower aggregate interest expense and greater access to the long-term capital we need to grow. Minus that factor, our first quarter pre-tax earnings were 9.6% lower this year than in 2011 for a number of reasons that Quint will detail in a moment.

While these numbers are disappointing, I'm still optimistic that we will pick up the pace and have another good year in 2012, especially at the air cargo industry in general and our ACMI portion of it keep improving.

While we can't control the general market, I can assure you that our ACMI earnings will improve. The number of potential new aircraft deployments for the future is encouraging.

The only challenge is converting customer interest into contracts and in getting the approvals required to launch revenue service over new routes. We have a very strong position in the mid -- medium-wide body greater market and it's an advantage we tend to keep exploiting by continuing to grow within that space.

That means we will continue to expand our fleet in 2012 and further develop the capabilities we need to support and operate it in a most efficient way possible. I'll follow Quint's review of our first quarter with several important developments that can make us a much stronger performer over the rest of the year.

Quint?

Thanks, Joe, and good morning, everybody. As I always do, I need to start by advising everyone that during the course of the call, we will make projections or other forward-looking statements that involve risks and uncertainties.

Our actual results and other future events may differ materially from those we may describe here. These forward-looking statements are based on information, plans and estimates as of the date of this call, and Air Transport Services Group undertakes no obligation to update any forward-looking statements to reflect changes in the underlying assumptions, factors, new information or future or other changes.

These factors include, but are not limited to, changes in market demand for assets and services; timely completion of additional Boeing 767 and 757 aircraft modifications scheduled during 2012; our continuing ability to place completed aircraft into commercial service; the availability and cost to acquire used passenger aircraft for freighter conversion and redeploy or sell surplus aircraft; our operating airline's ability to maintain on-time service and control cost; and our ability to restructure our airline operations impacted by Schenker's reduction of its air cargo operations in 2011.

There are also other factors contained from time to time in our filings with the SEC, including our 2012 first quarter Form 10-Q. I'll also refer to non-GAAP financial measures from continuing operations, including EBITDA and adjusted EBITDA as well as adjusted pre-tax earnings, which management believes are useful to investors in assessing ATSG's financial position and results.

These non-GAAP measures are not meant to substitute for the GAAP financials, and we advise you to refer to the reconciliation to the GAAP measures, which we have included in our first quarter news release, which can also be found on our website.

As Joe said, our first quarter results were in line with what we projected during our fourth quarter conference call in March. But along with a higher pension and ACMI restructuring costs we talked about then, we also incurred higher maintenance expenses and faced the waves in placing aircraft under new ACMI agreements.

Let me quickly cover the highlights, and then I'll mention a couple of items on our balance sheet and cash flow statement that we want to call your attention.

Revenues for the quarter were $145.5 million compared to $175.1 million last year. Direct reimbursement revenue, which is mostly for fuel, was $27 million of that $30 million decline primarily related to the BAX/Schenker business that ended last year.

Despite losing $25 million in airline services revenue we booked in the first quarter of 2011 from Schenker, our airline services revenue, which excludes reimbursables, only declined by $6 million. We achieved that by adding approximately $19 million in revenue from other ACMI customers.

Net earnings from continuing operations were $6.7 million for the quarter versus $2.9 million in the first quarter of 2011. Net earnings from 2011 includes $6.8 million in non-cash pretax charges for early termination of our former credit facility, which we replaced a year ago with a new 5-year credit agreement under more favorable terms.

First quarter 2012 results include $500,000 in unrealized gains on derivative instruments and a $200,000 loss in discontinued operations.

Our adjusted EBITDA was $34.1 million, down from $37.8 million a year ago after the 2011 non-cash credit facility charges are added back, and the interest rate swap effects are excluded. There's a table defining and reconciling our adjusted results to comparable GAAP measures at the end of our earnings release.

Our Leasing business, CAM, had pre-tax earnings of $16.8 million, a 25% increase from 2011. CAM added 9 more 767 and 757 aircraft over the last 12 months.

It has leased 4 more freighters to external customers since the end of the first quarter 2011, generating more than $3 million in incremental pre-tax income this quarter versus a year ago. But principally, because of Schenker, CAM had 8 fewer legacy DC-8s freighters and 9 fewer 727s under lease than a year ago.

Two DC-8 freighters and 3 727s remained in CAM's fleet at the end of the quarter. CAM expects to add 5 more 767-300 freighters this year.

Five is purchased for passenger freighter modification, and ABX Air will lease an additional 767-300 freighter from a third-party starting this month. We had announced in March that we expected our ACMI Services business to record a loss during the first quarter as we began to restructure our 2 airlines impacted by the loss of the Schenker business to leverage the overhead.

The ACMI Services' loss for the quarter was $8.2 million pretax due mainly to the discontinuation of Schenker's North American air network.

Revenues, excluding reimbursables, were $96.3 million, down $6.1 million, or 6%, as first quarter aircraft block hours decreased 15% overall. Nonetheless, aircraft block hours flown for customers other than Schenker were up 15% in the quarter.

A few items were principal factors in our first quarter loss in ACMI Services. One was the increase in pension expense of $1.4 million due primarily to lower discount rates at the end of 2011.

Another was an increase in maintenance expense related to an engine repair and a 767 airframe check. We also had higher costs for retraining Boeing 727 and DC-8 flight crew members, and restructuring costs for ATI and CCIA after the loss of the Schenker business.

And finally, start-up delays on new contracts cost us revenue we had projected for the quarter.

Re-checks, which are our routine heavy airframe maintenance procedures will be a continuing maintenance expense factor as we expand our fleet, and we are in discussions with Delta about the impact of higher spare parts pricing for the GE engines on our 767-200s and anticipate increased costs for 767 engine support going forward.

External customer revenues from all Other Activities, which includes our aircraft maintenance provider, AMES, were $12.9 million, down from $14.6 million during the first quarter of 2011. The decrease was primarily the result of fewer aircraft maintenance projects for external customers compared to a year ago.

Pre-tax earnings from Other Activities were $2 million, up from $1.7 million last year. We will continue to grow our newer fleet of Boeing 767s and 757s in 2012, modifying 5 more Boeing 767-300s and 3 more Boeing 757s this year.

As a result, we estimate our total capital expenditures for 2012 will be between $180 million and $200 million. We spent approximately $47 million in the first quarter, most of which was for our purchase and modification of 2 767-300s.

Through March 31, we have drawn $131 million against our $175 million revolving credit facility, and we'll seek approval from our lenders to add the $50 million accordion to our existing $175 million revolver capacity. Our debt-to-EBITDA ratio at the beginning of the quarter was below 2x adjusted EBITDA, which qualified us for continued low interest cost throughout the period.

Those of you that model our performance may have noticed that we have adjusted our income statement to combine landing and ramp fees, rent and insurance into a single-expense item. We don't think there is sufficient volatility in those components to justify reporting them separately, although if there are any significant swings in the future, we will note them in our MD&A discussions.

In conclusion, I want to make it clear that we certainly are mindful of the markets we serve, and we are convinced that demand for our aircraft types over the longer term remains strong, both from overall air cargo growth and from the replacement of older aircraft types with our more modern freighters. We're rapidly adjusting our workforce and operations to mirror the fleet and customer base we have today and expect to have in the future as Joe will describe in more detail.

Joe?

Thanks, Quint. Even as Quint and I acknowledge the work that remains ahead of us, it's also appropriate to discuss the progress we're making.

The loss of the Schenker business has made us a more focused business, not just in our fleet where we are the leading source of fuel and coefficient mid-sized airlift but also in the way we manage and run our businesses. Schenker was the largest customer of CHI, the company we acquired in 2007.

While we improved the Schenker cargo network we inherited, we also intended to make it as efficient as our 767 based network for DHL.

Now, we're laser-focused on driving out cost and improving operations at ATI and CCIA as quickly as possible without compromising safety or customer service. To that end, we have decided to bring about a merger of those 2 airlines through a process that I intend to have completed by the end of this year.

The critical step [ph] for the acceptance of our plan by the unions are represented by ATI and CCIA pilots. I'm pleased to say that we have reached a tentative agreement with them that will pave the way for what we plan to accomplish.

Many details about the merger remain to be worked out, so I can't project the final synergies and other cost savings we will achieve, but we have reduced non-pilot staffing levels by 111 positions in those 2 organizations since September and also have reduced our pilot workforce by 96 crew members. In addition to those savings, we have identified $4.5 million in additional staff overhead that we will be able to eliminate through the merger.

As one organization, CCIA and ATI will become much more efficient and more cost competitive. The benefits are already beginning to develop and we will have more to say about them in the months ahead.

As Quint described, we continue to pursue our growth strategy during the quarter, moving closer to becoming an exclusive operator of mid-sized, wide-body Boeing 767s and narrow-body 757s.

In the first quarter, CAM completed modification of what may be our last additional Boeing 767-200 aircraft and leased it to one of our airlines. That was the 9th mid-sized freighter CAM has added since March 31, 2011, 6 767-200s, 2 300s and 1 757.

We also purchased 2 additional 767-300 passenger aircraft in the quarter and retired 1 more 727 and 1 DC-8, leaving us with just 5 of those legacy freighter types not including our 4 DC-8 combis. Speaking of the combis, we're on track to complete the mod of our first 757-200 combi in the second half and deploy it with the U.S.

Military under solicitation process that will soon get started. Last week, ATI got the word that the military has awarded us a contract for combi service for another 3 months through September.

Another one of our 757s is due out of combi mod before the end of the year, and we will invest in others if we're awarded all of the combi business for fiscal 2013 and 2014 starting this October.

You probably noticed in our earnings release that we expect to launch ACMI service along other international routes with 2 of our 767-300s starting in the next several weeks. We also have a tentative agreement with DHL to deploy 3 of our 767-200s in the Middle East starting in the next few weeks as well, replacing older Airbus aircraft in the Middle Eastern network.

We have been supporting that network with one of our 767-200s since last year. Here in the U.S., DHL will replace one of the 727s that we redeployed to them from the Schenker network with another 757 freighter that we will provide them towards the end of the year.

And finally, we are in active discussions for deployment of more of our 767-300s by year-end. We expect to have commitments for each of them before they are ready to enter revenue service.

I mentioned to you in March that while the airfreight market is somewhat soft overall, the tone of our mid-sized aircraft market remains more positive. That continues to be true.

The economic uncertainty in Europe and the potential consolidations of major carriers operating there had some operators more hesitant about making aircraft commitments. But our customers remain interested in what we can offer them.

The question is only when, not if, we can complete agreements and get the planes in the air. In the meantime, we will continue to earn more cash flow returns from our existing assets while maximizing the efficiency of the resources that stand behind them.

Thank you, and now, we are ready to handle some questions.

Just a couple of questions. One, with respect to the aircraft acquisitions this year, Quint, I noticed that by year-end, you've got 57 owned and 6 leased aircraft.

How should we think about owned versus leased aircraft going forward?

Well, Helane, in terms of the leased aircraft, 4 of the 6 leased aircraft are leased from DHL. DHL owns those 767s, and we operate them in the CMI agreement with them.

So those leases are, sort of, more or less pass-throughs, and we executed leases just to, I guess, formalize that, that operation of their owned aircraft. So the other 2 are 767-300s and the second of which we just executed the lease on.

And those were, of course, the first one, you will recall was back in, I think, November of 2010 that regarded that and that was because we didn't have our own 767-300s ready as yet, and we required one for transatlantic service at that time for DHL. And the second one is similarly is based on the demand that we see for the 767-300.

I think in the longer term, I -- we are more of, I guess, a leasing company and an ACMI operator than a lessee of other owned aircraft. So I don't expect, as we sit here now, to see us leasing, doing operating leases on many more aircraft, if any, in the near term.

It's Joe. And keep in mind that you would have in that case since we don't own the aircraft, basically the earnings potential in the EBITDA are going to be the same when you're talking about a single-digit margin against what the cost of doing the business would be.

And then with respect to DHL, what percent of your revenues are they now and where do you want it to be by the end of the year?

Well, I guess in terms of where we want it to be, I don't know that we'll turn revenue away from any source. I believe it's in the neighborhood of 50% this quarter, and I know it's in, I believe, footnote B in the Q.

You can get the exact percent but if my memory serves me correct, it's 50%. And that's up from roughly 30%, low 30s prior to the loss of BAX/Schenker.

Obviously, that changed the mix for us when BAX went away.

Yes. As I think, keep in mind too, if you go back historically, obviously, when we first went public, they were 99% of the business.

We did the CHI acquisition. We got them down to about 72%.

So even with the loss of Schenker, which was CHI's largest customer, to have them in that 50% range is still pretty good balance overall. But, obviously, we'd like to continue to diversify the customer base as much as we possibly can.

But at the same time, you always got to remember you got to take care of your #1 customer.

And then I just have a balance sheet question. The goodwill, what is that related to?

Is it related to the spin-out from when DHL acquired Airborne or is it related to acquisitions? And if it's related to acquisitions, then how come you didn't have to adjust it after the Schenker's business went away?

Well, that's a good question, Helane. As a matter of fact, we did make adjustments as a result of the BAX/Schenker situation.

Back at the end of 2007, 2008, we put goodwill on the balance sheet related to the purchase accounting acquisition of CHI. And the goodwill that remains there now and again, it's in a, I believe, a footnote in our Q we laid out specifically.

But what remains is related to CAM, the leasing entity as well as ATI, the airline. And as does everyone with goodwill, you make an assessment each quarter and usually, at least once a year, a very detailed review of the future cash flows from those entities that support that goodwill balance.

And we have adjusted our goodwill over a couple of times, most recently, I believe in the third quarter of last year as a result of BAX/Schenker's announcement that it was wanted to discontinue its network in the U.S.

And so we did the third quarter impairment on the assets of DC-8s and the 727s, we also took a couple of million dollar hit on the ATI goodwill.

And I think, it was $4 million or $5 million and there was like $22 million of asset impairment. So it was like a total of $27 million or $28 million.

But you can look at Footnote C in the Q and it will lay out specific makeup of the goodwill balance.

So first off, Joe, if we could kind of, go back to the tail-end of your prepared remarks and you talked about in the commentary on your press release and the commentary on the call so far today, it sounds like you guys are a little bit more incrementally cautious towards aircraft placements. Now, I'm just wondering if you could expound on that for a moment.

It doesn't sound like that's a function of a lack of demand for the asset but more maybe global economic uncertainty. I'm just curious to hear you talk a bit more about that.

I think a good example of that, Jack, is when you talk about the global economic uncertainty, obviously, a key place for the market is the presses in the European theater, and we had a number of assets deployed in Europe for both TNT and DHL. A couple of those assets are going to get redeployed for DHL in the Middle East if you look at the 3 that we talked about we're going to add there, 2 of those are redeployments and 1 of those is the last 767-200 that will complete the modifications in the first quarter.

But I think what's noteworthy is the fact that we -- originally, we were having the discussions with DHL, for example, we had anticipated that we would start placing those additional aircraft into the Middle East portion of the network in the February-March timeframe and as it now stands, they're not going to be deployed until the end of this month to beginning of June. So it just boils down to what we're seeing in the marketplace as customers are taking a bit longer before they're willing to pull the trigger and make the commitments for the additional assets than they have been in the past.

And that's why in our prepared remarks as well as our earnings release we talked about the delays in deployment as being the key factor that we're seeing. It's not a lack of overall demand for the assets that we have.

And then when we think about the outlook for 767-300 feedstock, and I think you have 4, 5 300s in modification now, could you maybe talk about the outlook for funding additional aircraft whether it's 1 or 2 off here or there or maybe even an entire fleet of 767s that have become available as the 787 rolls out?

Well, Jack, as you know, we target a certain vintage of aircraft and pricing in order to keep the full asset in the service cost, but we call it below that $30 million mark and I've got to say that what was a tight market last year has in reality gotten a bit tighter for us. I mean, normally we've got a couple of opportunities that we're looking at for potential acquisition in the way of the 767 that fits our criteria.

But right now, I got to tell you it's -- there's nothing that's on the radar screen at this point that we can point to that says, "All right, this is going to be our eighth 767-300 or our ninth." We do anticipate, however, that sometime later this year and into 2013, that we will see an easing in the availability of the 76-300 (sic) [ 767-300 ] as more and more of those 787s get deployed.

And if you were to find a large fleet of 767s that were to become available, say, 10 or 15 aircraft even, how would that work as far as -- would you want to buy all of those aircraft at the same time or just kind of help us walk through what the strategy will be if you found if a larger fleet for sale?

Every owners/operators, depending on who it is, is going to be in the position as to whether they just want to know that they have a buyer certain at the end or whether they need the cash flow, for example, up front in order to be able to do replacement acquisitions. If you go back to when we did the ANA acquisition back in 1995, we did not have to buy them up all up front, but we did have to put down deposits on the aircraft because those were delivered to us over quite an extensive period of time.

So each entity is going to be different in terms of how they like to approach it. Obviously, we'd like to hold onto our cash as long as possible so it gives us more flexibility against our current sources of funds.

But in reality is if somebody says I need you to buy these aircraft now and we can fit it within our wheelhouse in terms of our available credit, and can lease them back to them from -- to your passenger configuration and hit our return hurdles. As you know that's a minimum 10% return on invested capital if we can hit that and then some.

It's certainly something we would look at if we are in the leasing business.

And then shifting gears here and I'm just curious to get your thoughts on the TNT-UPS merger, could you remind us how many planes you currently fly for TNT? And do you think the pending merger between these 2 guys will have any impact on your company whether to put a positive or the negative?

From the standpoint of what we operate today for TNT, there's 2 aircraft that we operate within Europe. We did have a couple of 300s with them through the end of last year and into the early part of the first quarter, which they ultimately replaced with a 777 that they've had no work for so they took down the 2 767-300s.

When you look at the potential acquisition by UPS, I guess, ultimately, it's going to be a matter of whether UPS decides to keep 2 separate hub operations going. Keep in mind, the largest portion of the TNT's business in the European side is in on a road network basis.

So conceivably, they could keep that separate. If they were to combine them -- if you look at UPS today in Europe, they utilize Star Air similar to how DHL utilizes us in the U.S.

for the European network and Star operates a fleet of 11 767-200s. So if that happens and they need to expand that fleet, certainly, that presents an opportunity for us to be able to place additional aircraft with them.

Last thing and I'll jump back in queue. With the SG&A run rate, I was pleasantly surprised that you guys were able to keep a relatively tight lid on that despite the fact that you were having the restructuring cost in the quarter.

Quint, could you maybe talk about how you expect SG&A to flow from -- probably, in the second quarter from the first quarter and then throughout the year now that you get the bulk of the BAX/Schenker restructuring behind you?

Well, if you look at the -- I assume, Jack, you're talking mostly about the salaries, wages and benefits line item on the P&L. There were some factors, if you're comparing Q4 to Q1, the pension, of course, that we've mentioned, that was probably on a quarter-over-quarter basis responsible for about $1.4 million of expense in the first quarter that we didn't have in the fourth quarter all by itself.

We also had some impact from sort of the medical accruals which we adjust from time to time. I think there was probably about $400,000 or so related to the medical accrual in the first quarter as compared to the fourth quarter run rate.

The other factor that, and we've talked about this on prior calls, that happens and will always will happen is there's a -- with payroll tax expense, as you know, there's a cap on the FICA. And particularly, with the higher salary folks, the pilots, and so forth, you don't -- you're not at that limit in the first quarter.

So you're getting a higher payroll tax expense run rate in Q1. And then you see that begin to fall off in Q2, 3 and 4.

So I guess Q1 versus Q4 on the payroll tax is probably a couple of hundred thousand or more, probably more like -- well, actually, it's probably more like about $700,000 or so that was related to the payroll taxes. The -- in terms of the efficiencies of the combination of CCIA and ATI as we mentioned, we think there's, I believe, $4.5 million of more cost, most of which would be in that line item that we would hope to garner over the following 2 to 3 quarters.

And some of that will be paced by the actual timing, in which we're able to accomplish the merger, which of course, we're going to try to expedite that to the extent we can. We also had an impact in the first quarter which is sort of a partial impact that you'll see the full impact of it in the second quarter.

And that was primarily at CCIA where we were able to reduce some significant headcount. Joe, I don't know if you want to...

Yes, I mean, if you look at overall, as I said in my remarks, since September, we reduced 111, we call them, staff positions, but to, Jack, to your point where we took a lot of the cost out in the first quarter, are they still quite a bit. As Quint mentioned, $4.5 million worth of just overhead staff and yet to come out.

Once we complete the merger process -- but now, I think the critical element was getting that first step done, which was getting an agreement between the 2 pilot unions so that we don't have to open a whole new set of contract negotiations. Essentially, they have agreed to adopt the ATI contract and with a few minor exceptions in there which -- that's always can be a big hurdle to get over in this coming to an agreement in terms of how you will operate on a go-forward basis.

And, Quint, would you expect salaries and wages to be down sequentially in the second quarter from the first quarter given all the cost you've taken out?

Yes, I mean, the other thing that -- certainly, borrowing the growth piece of it because we're bringing additional aircraft online. So to the extent we're expecting those -- some of those to be certainly ACMI related, we're going to have some additional cost as they move forward.

I do not expect Q2 to be higher than Q1. And it may be down slightly.

And then I think we'll be able to keep it pretty flat despite that growth that we expect with additional aircraft coming online. Because we'll be garnering those efficiencies from the combination of those airlines at the same time that we're growing our ACMI business.

Yes, and keep in mind, Jack, the other piece in there, it's not just the airlines we're talking about in that salaries wages and benefits line, it's also the sorting facilities we operate for the U.S. Postal Service.

It's got the maintenance operation in there. And right now, the hangars have been pretty full.

First quarter, a lot of it was affiliate work, but certainly the maintenance business is doing pretty well and that's going to drive salaries and most of what their revenue and expenses driven by is labor hours.

I got a couple of questions for you that she wanted me to ask you. So the first, the transitioning of accrued other aircraft, are you near the end of that program?

And how should we think about these costs going forward particularly for Q2?

Yes, if I look at the -- what's in training today yet, Kevin, at this point in time, I'd say that there's probably just slightly under 2 dozen folks yet that have to go through that training process in terms of winding down from the DC-8, 767. The CCIA side is pretty much done at this point, but the ATI piece in terms of going through the DC-8 to 767 and vice versa is like, say, less than 2 dozen left.

Quint, how should we think about maintenance for Q2 in the rest of the year?

Well, I mean, the difficulty with -- looking at our maintenance is to -- we're also doing maintenance on the aircraft that are leased by CAM to external -- many of the external customers that CAM has particularly, DHL. And so sometimes, when you see our maintenance P&L line item go up -- and that's covered in the revenue.

And so it's not necessarily bad for the bottom line per se. And so it depends upon the mix of our leased maintenance work versus the airplanes that our affiliates lease and operate in the ACMI Services segment.

As we said in the prepared remarks, I mean, we got a pretty steady -- we got enough aircraft out there now that generally speaking, it's going to be a pretty steady flow quarter-to-quarter. I mean, I know Atlas does more than maintenance, for example, in the early part of the year.

I mean, I don't think we're in that sort of a cyclical cycle. I mean, we're basically going to be pretty smooth throughout the year.

And then, I guess, kind of big picture as we think about the next couple of years, you're getting away, your fleet is getting younger but yet you may be adding more aircraft. But maybe maintenance per aircraft could be going down, is that the right way to think about it?

No. As you think about it, Kevin, in terms of the aircraft as they get older, I mean, if you look at the 767-200s, for example, they get older each time they go through a check window so you've got more age-related items to deal with as an aircraft gets older.

And now, the 767-300s coming in are going to be a younger vintage. So on average, it's probably going to come down some but the 767 -- the 727s and DC-8s, I think, we're pretty much out of doing any additional maintenance on the 727s and DC-8s at this point in time.

We don't anticipate anybody is going to want to step up to guarantee that we get a return if we did a heavy check on one of those aircraft types for example.

And speaking of the 727-200 and the DC-8, it looks like you sold one of each since the end of the year or maybe you scrapped it, how is the market for older aircraft or are you mainly -- you're just planning to scrap the rest of your older planes?

No, we just took them out of service and put them in the for-sale bucket in terms of what we had with the aircraft to sales. We've had a couple of conversations with folks we sold couple of airframes late last year and some of the engines and the 727s I'm talking about.

And now, of course, we've done some engine sales as well on the CFM56, which was the 70 series DC-8 engine. So we're going to continue to whittle away at that number and I think we're down to like $7 million, $8 million in terms of net book value between all those DC-8s and 727s at this point in time.

And touching on the combi service with the military, did the military primarily extend this contract for 3 months to get them through their fiscal year-end? Or do you think they extended the contract to maybe an additional 3 months for further testing of the combi program?

How should we think about that?

Well, what they -- when they put the solicitation out early this year -- because the fiscal '12 year was only a 9-month one for the military, they did their first quarter, our fourth quarter last year under the prior year's allotment. But essentially, what they were hoping to be able to do, Kevin, was to be able to take advantage of a newer generation combi for their fourth quarter, the July through September timeframe.

And that's why they did it on an expansion basis versus a fixed buy. But as it stands now, no one had a 757 ready to go to be able to do that and so consequently, we were the sole bidder for that business on an expansion basis for the -- for their fourth quarter.

Looking ahead to '13 and '14, everything we've heard about them is that the -- they still expect the combi to be -- the program to be there as it has been in the past. And as you know, we've been doing it for, I think, about 18 years through ATI.

But no indications that they're planning on reducing the scope of that. In fact, just quite frankly, they actually came up with an odd trip here coming up for the combi for the military, which is something that hasn't happened in years in terms of wanting an extra rotation that's not part of the normal schedule.

So it may be that we actually see some greater utilization out of the combi on a go-forward basis. But we're waiting for the fiscal '13 and '14 solicitations to come out.

We anticipate that it should be out hopefully this week or next maybe. That will give us a pretty good idea in terms of whether in fact the combi business is going to be there as it is today.

Just 2 questions. In terms of where DHL is in terms of your percentage of revenue and your fleet, what are your plans over the next, let's say, 3 to 4 years in terms of the size of the fleet and how do you manage some of the older aircraft, maybe 200s or other aircraft, that you have going forward as you continue to transition the 300?

And then where do you see DHL realistically over the next 2 to 3 years as well in terms of percentage?

I think when you look at DHL, I think, in terms of our conversations with them and of course they just put out their results, I think, it was with last week. Yes, their business is very strong.

And in talking to them, one of the key drivers for them is getting business back that they had lost to FedEx and UPS during the period of time when they wound down their domestic business. So while the overall global economy may be flat, they're actually growing at the expense of their competitors, which is a good place to be.

We still think the demand is going to be there. They are on rock-solid footing.

So I think they're going to be a significant portion of our revenue portfolio for the years to come. When you talk about the older aircraft, I mean, if you think about it in terms of -- and I'm not sure where you were going with that question, Stephen, but if it's pointed at the fact that maybe the 767-200s will have to be replaced in the near-term, nothing could be further from the truth.

I mean, the -- if you look at the aircraft itself, there's really nothing out there that you would replace it with that would be a technological change or an efficiency change in terms of a bit lower fuel burns or less crews. The only negative that you're going to have as your aircraft get older, as we talked about a minute ago, is that the maintenance costs are going to go up somewhat but that's pretty much part of the normal life cycle of an aircraft.

But where we see the opportunity for the 300 is not to replace the 200s in terms of them being obsolete or too expensive to operate, it's more about growth opportunities and that is one of the key things that we have to balance today is a lot of our customers that have the 767-200 would like to upgrade to the 300s in many cases because of the greater range and capacity that the 300 brings to the table. But obviously, we're willing to entertain those.

But first, we've got to find a home for the 767-200 they'd like to swap it out for.

Okay, I mean, yes, I guess that's kind of my question. I mean, do -- so customer in terms of customer preference, I mean, obviously, do you see a strong preference in customers between the 200 than the 300?

And might that lead the similar to the older 200s to be replaced by 300s?

No, I don't think that's going to be a problem for us, Steve.

It really depends upon the mission of the airplane. [indiscernible] always says 300 is a great airplane, but you've got to fill it up, and your load has to match with the capacity is and the 200 is a great is airplane for networks in particular.

And I think it'll have a long life cycle in those type of missions.

And then could you just -- in terms of the, maybe the fleet growth over the next couple of years -- I mean, I'm sure you don't want to put a hard number out there, I mean, but how should we be thinking about it over the next 2 to 3 years?

I think -- as we've met with you, Stephen, and you -- of course, you've been on some investor business with us and what we've always talked about is that you can anticipate somewhere in the range of 4 to 6 767-300s being added to the fleet on an annual basis without us having to dip into the credit markets in a big way. Equally so, we're seeing some of the demand as we noted in our earnings release as well as in the call today that DHL is looking to replace some of the 727s that we have still operating for them with the 757.

They've come to an agreement, basically, on the terms for adding a fourth one into the equation. So we may see a little bit of growth in the 757 side of the marketplace as well.

Just a real quick -- could you give me a more of an update on how many modifications we have coming in for the rest of this year and how many are not contracted for yet, if any?

Well, if you look at the fleet in terms of the additions coming on, there's 2 767-300s that would complete modification in the second quarter, 2 in the third quarter and 1 in the fourth quarter. So it'd be 5 767-300s add to that is 4 757s that we talked about that would be pointed towards DHL.

So does that -- that means you're completely sold out, in other words?

Well, in terms of, as we've said, we don't have written contracts for every one of those aircraft coming on to 757. We've come to terms with DHL in terms of what their -- that one would entail.

But on the rest of them, we expect to have those firm commitments locked up before the aircraft completes modification.

And then after that, do we have anything coming in yet for 2013?

As we've mentioned earlier, the difficulty is we really don't have anything identified as a potential acquisition candidate that meets our criteria in terms of being under that $28 million to $30 million price range as the maximum. So right now, the pipeline is basically kind of dry for the latter part of this year and into 2013.

And does your guidance of $190 million to $200 million in EBITDA -- I guess that assumes you'd lease up in contracts for the rest of these many modifications?

That's predicated on the ones that we currently have under our control.

And I guess getting back to your cost savings, you mentioned that overhead eliminations are about $4.5 million and on top of that, I guess, you have the pilot and crew savings. Do you think is that a number that is a lot less or more than the overhead eliminations?

Can you give us any color on that?

I'm not sure I understand the question, Adam.

Well, you said you can reduce overhead to $4.5 million.

Right.

And then I guess there's crew savings, pilot and crew savings, that you're going to need less pilots for, is that correct?

Yes, as I mentioned earlier, we've got less than 2 dozen pilots that's still are going through that training cycle at this point in time. So it's not going to be the order of magnitude to that $4.5 million.

Of course, a lot of that is going to be driven by how many additional aircraft come online in terms of -- some of it's leaning back the other way but if you go back, basically, what we said was the reduction was about $800,000 a month in terms of our payroll since September for ATI and CCIA.

Yes, and so a lot of the crew reductions happen during the first quarter.

Okay, so it's a little bit...

Going forward, it's more about the overhead that you can pull out from combining the 2 alien entities.

So the overhead piece, what you discussed -- that's the majority of it I guess?

Yes, going forward.

And then I also noticed in your presentation to shareholders, you obviously highlight that you think the stock is attractive versus the competitors, et cetera. If you can't come up with more planes for 2013, is there a point that you guys say, "Hey, we can't find any more planes right now, let's use our free cash to increase shareholder value."

At what point would you become more aggressive on that?

Well, as we've said in the past, we -- our focus, while we can get the returns that we're achieving on reinvesting are always going to be to grow the company, continue to add in assets that we can get that ROIC return on. I have a lot of confidence in Joe that he will source some good feedstock.

So I'm not too worried about them, Adam. We've run into situations before where there was a little bit of low in the availability.

But as we've said, there's more and more on the Dreamliners that are coming out and I feel like we'll find that 4 to 6 type of feedstock opportunities that Joe referred to earlier.

So basically, you think you're going to find them and that's where the cash is going to go?

Right.

Quick question. On the cash, when you guys generated sort of the new planes you're getting, put in the Middle East, has the cash been resident in the Middle East or the work that you do in the Far East -- does the cash stay there?

Or does it all go repatriated back?

It all comes back.

Right, it comes back.

And then I'm just trying to kind of walk through from here from first quarter to kind of fourth quarter given the ramp in aircraft that you guys are having, the 75s coming on, the 76s coming on, you guys said that like the crew cost relatively flat, you're going to have overhead come out. So if EBITDA this quarter was $33 million, it will go up by $4.5 million, $5 million from the overhead savings right about $5 million or $6 million just from the new aircraft coming on, maybe a little bit more than that because you have ACMI that you put those aircraft on, so that gives me about $10 million or $12 million in additional EBITDA.

Is there additional that you expect to come from the military, from additional 75s to kind of get from $33 million to kind of like the $55 million run rate you'd exit the year, how do I bridge that $33 million to $55 million?

Yes, again, without kind of getting into a real fulsome discussion of what the quarter-by-quarter progression would be on EBITDA, I can tell you, Mike, that the big items that will help us elevate that EBITDA to what we think is a run rate by fourth quarter of sort of on a quarterly run rate of 220 to 230 type of run rate on an annualized basis. What kind of gets you to that level, it's more about the placement of the aircraft that we've got coming out.

As we mentioned, we've got 5 767-300s that we own as well as the 75, which DHL spoken for. And we also had, as we say, a little bit of a delay in the first quarter.

So to the -- and some of the placements. So we think that when you get the full impact, full impact of those additional aircraft, that's what's going to drive the EBITDA quarterly forward.

I mean, certainly, the cost reductions are a very important part of that because they tend to right to the, as you know, straight to the bottom line to some extent the elimination of overhead, et cetera. So we'll be focused on that.

But it's a revenue issue that will elevate the EBITDA going forward for the most part.

And I mean, that's assuming you're going to have ACMI on those planes? Because even if you just a 76-300 (sic) [ 767-300 ]in there, that's probably just on the leasing side $4 million to $5 million and it'd be another $1 million or so in ACMI or...

On an annualized basis.

So for 6 aircraft on a for a single accord, that's probably $6 million or $7 million in revenue that you get additionally from those or maybe slightly more than that, that you get run rate by the end of this year?

Right. Then you look at it from the -- just like you said, eliminating the loss in the ACMI segment alone just adds back $8 million right there on top of the $34 million.

So that puts you to $42 million if we just broke even on ACMI ops and you take additional aircraft coming online and start pushing that number up pretty quick.

Right, but that's why I was trying to figure out like -- in this quarter, there's a whole bunch of onetimes, which Quint has called out, so you had it slightly higher maintenance expenses that you had here. You had additional pension, which will be ongoing.

You had the increase in FICA. So this quarter I'm trying to figure out what the onetimers were that would not reoccur in the ACMI to get you back to breakeven.

I mean, was there -- because it seems like from what you guys said the crews are not really going to shrink, so right now you got a whole bunch of crew that you're paying because you're retraining them so that cost is not going to go down, it doesn't seem like going forward. But what you're going to have is big revenue jumps because you're finally going to have those crew put into revenue generating seats, so that they'll have some revenue to offset them.

And that's the number I was figuring that would come from those 5 300s plus the 1 75 coming in and I'm just trying to figure out if there are any other buckets and it doesn't sound like there are that accounts for the difference.

A little clearly as we said earlier, Michael, part of the impact on din the first quarter was just delays in the deployment of the assets which is pure revenue offsetting the cost that you have there. So it's a combination of both cost and revenue on a go-forward basis.

Thank you, Stacy. Over the course of this earnings cycle, you're hearing a lots of different views expressed on conference calls about the strength of the overall air cargo business and the relative strength of its various components.

The important thing to keep in mind about them, the demand for our services, however, is that it's not as volatile as the industry as a whole because decisions about an entire aircraft are much different than decisions about a particular piece of cargo. We understand the difficulty that our customers are facing in making aircraft commitments when their markets are in flux.

But many are keeping their focus on the long term. They recognize that as regional economies develop, accelerate and become more interconnected, the need for our assets inevitably increases.

That's how we invest and manage this business and also how you should view your investment in ATSG. We'll be seeing some of you as we go on the road this summer, and look forward to updating the rest of you on our progress in August.

Have a quality day.