ATLAS AIR WORLDWIDE HOLDINGS INC - 10-K Annual Report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 10-K

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2004

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

Atlas Air Worldwide Holdings, Inc.
(Exact name of registrant as specified in its charter)


Delaware	0-25732	13-4146982
(State or other jurisdiction of incorporation)	(Commission File Number)	(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)

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

Common Stock, $0.01 Par Value
(Title of Class)

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 o No þ

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form l0-K or any amendment to this Form 10-K. þ

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2) Yes o No þ

The aggregate market value of the registrant’s Common Stock, par value $.01 per share, held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of June 30, 2004: $1,726,988.¹As of June 1, 2005, there were 3,650,149 shares of the registrant’s Common Stock, par value $.01 per share, outstanding.

APPLICABLE TO REGISTRANTS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes o No þ

DOCUMENTS INCORPORATED BY REFERENCE:

None


¹	The registrant emerged from Chapter 11 bankruptcy proceedings on July 27, 2004. The shares of common stock traded prior thereto had nominal value and were cancelled and extinguished at the time of the registrant’s emergence from bankruptcy.

EXPLANATORY NOTE

Atlas Air Worldwide Holdings, Inc., after having filed a voluntary bankruptcy petition for relief under Chapter 11 of the United States Bankruptcy Code on January 30, 2004 and emerging from bankruptcy on July 27, 2004, did not timely file its Annual Report on Form 10-K for the fiscal year ended December 31, 2004. The information reported herein is as of December 31, 2004 unless otherwise noted.

TABLE OF CONTENTS


			Page


PART I

	Item 1.	Business	1

	Item 2.	Properties	21

	Item 3.	Legal Proceedings	21

	Item 4.	Submission of Matters to a Vote of Security Holders	25

PART II

	Item 5.	Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	26


	Item 6.	Selected Financial Data	28

	Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operation	29

	Item 7A.	Quantitative and Qualitative Disclosures about Market Risk	47

	Item 8.	Financial Statements and Supplementary Data	48

	Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure	92

	Item 9A.	Controls and Procedures	92

	Item 9B.	Other Information	94

PART III

	Item 10.	Directors and Executive Officers of the Registrant	95

	Item 11.	Executive Compensation	100

	Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	105

	Item 13.	Certain Relationships and Related Transactions	106

	Item 14.	Principal Accountant Fees and Services	107

PART IV

	Item 15.	Exhibits and Financial Statement Schedule	108

FORWARD LOOKING STATEMENTS AND INFORMATION

This Annual Report on Form 10-K (the “Report”) and other statements issued or made from time to time by or on behalf of Atlas Air Worldwide Holdings, Inc. (“AAWW” or “Holdings”) or its management contain statements that may constitute “Forward-Looking Statements” within the meaning of the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended by the Private Securities Litigation Reform Act of 1995. Those statements and information are based on management’s beliefs, plans, expectations, and assumptions and on information currently available to AAWW. The words “may,” “should,” “expect,” “anticipate,” “intend,” “plan,” “continue,” “believe,” “seek,” “project,” “estimate” and similar expressions used in the Report that do not relate to historical facts are intended to identify forward-looking statements.

The forward-looking statements in the Report are not representations or guarantees of future performance and involve certain risks, uncertainties and assumptions. Such risks, uncertainties and assumptions include, but are not limited to, those described in Item 1, “Risk Factors.” Many of such factors are beyond AAWW’s control and are difficult to predict. As a result, AAWW’s future actions, financial position, results of operations and the market price for AAWW’s common stock could differ materially from those expressed in any forward-looking statements made by AAWW. Readers are therefore cautioned not to place undue reliance on forward-looking statements. AAWW also does not intend to publicly update any forward-looking statements that may be made from time to time by, or on behalf of, AAWW, whether as a result of new information, future events or otherwise.

PART I

ITEM 1. BUSINESS

Overview

AAWW, is a holding company with two principal wholly owned operating subsidiaries—Atlas Air, Inc. (“Atlas”) and Polar Air Cargo, Inc. (“Polar”). Collectively, these entities (along with AAWW’s other subsidiaries) are referred to herein as the “Company,” “we,” “us,” or “our.” We provide air cargo and related services throughout the world, serving Asia, Australia, the Middle East, Africa, Europe, South America and the United States through two principal means: (1) contractual lease arrangements in which we provide the Aircraft, Crew, Maintenance And Insurance (“ACMI,” “ACMI Contracts” or, in certain circumstances, “wet leases”); and (2) airport-to-airport scheduled air-cargo service (“Scheduled Service”). We also provide military charter services (the “AMC Charter” business), as well as commercial charter services. We operate exclusively Boeing 747 freighter aircraft. Our operating fleet totaled 43 aircraft at December 31, 2004 and 42 aircraft as of June 1, 2005. The reduction in fleet size was due to the retirement of a Boeing 747-200 aircraft, which was damaged in a runway excursion in January 2005 and which we decided not to repair.

AAWW was incorporated in Delaware in 2000. Our principal executive offices are located at 2000 Westchester Avenue, Purchase, New York 10577, and our telephone number is (914) 701-8000.

During the 1990’s, the increased demand for air cargo services, the decrease in passenger airline cargo capacity, and the continuing pressure on the passenger airline industry to reduce operating costs provided air cargo companies with opportunities to expand their air cargo outsourcing services. Most commercial airlines focused their business on transportation of passengers and not air cargo. Nevertheless, most passenger airlines have air cargo customers that require timely and dependable air cargo service. Airlines have serviced such cargo demand through use of “belly” cargo capacity on their scheduled passenger aircraft. Passenger flights are generally scheduled for the convenience of passengers rather than the needs of air cargo customers. Consequently, many airlines outsource to meet their additional air cargo needs, rather than allocating significant resources and expanding their fleet of freighter aircraft to service effectively their air cargo customers. Outsourcing provides a cost-effective and efficient alternative for passenger airlines to maintain and expand the air cargo portion of their business.

In the early 1990’s, Michael A. Chowdry, the founder of Atlas, observed that passenger airlines were losing money and parking aircraft, while a limited number of high gross weight long-haul cargo aircraft were being more fully utilized. Mr. Chowdry saw an opportunity, secured financing and founded Atlas.

Atlas began operations in early 1993 with one aircraft. By February 1994, only one year after Atlas received its certification from the Federal Aviation Administration (the “FAA”), Atlas had grown from a single aircraft and 23 employees to four aircraft with over 150 employees.

From its initial FAA certification in 1993 through 2000, Atlas experienced substantial growth in its fleet and its operating revenues. Though Atlas’ fleet initially grew through the purchase or lease of older Boeing 747 aircraft, most of which were reconfigured from passenger to cargo use, in mid-1997 Atlas placed an order for ten new and higher performance Boeing 747-400 freighters, with an option to purchase up to ten more. By 1998, demand for its services was so strong that Atlas exercised options beyond its initial order of ten Boeing 747-400 aircraft and instead purchased twelve aircraft. In 2000, Atlas’ fleet grew to a total of 36 Boeing 747-200 and 747-400 aircraft. The Company adopted its holding company structure in February 2001, whereby Atlas Air Worldwide Holdings, Inc. became the parent holding company of Atlas. Late in November 2001, the Company expanded its product line by acquiring Polar from General Electric Capital Aviation Services. The acquisition added Polar’s B747 fleet and global Scheduled Service operations to the Company’s existing portfolio of products (See “Strategy”, below). Subsequent to the acquisition of Polar, Atlas and Polar took delivery of four additional 747-400 aircraft in the second half of 2002.

Events Leading to Our Chapter 11 Filing

Beginning in 2001, the Company was negatively impacted by a number of developments that affected the Company’s operations and its ability to service its debt and lease obligations. In the years leading up to the filing of a voluntary petition under Chapter 11 (“Chapter 11”) of title 11 of the United States Code, 11 U.S.C. 101 et seq. (the “Bankruptcy Code”) on January 30, 2004, the Company’s debt and lease obligations increased substantially in connection with the refinancing of aircraft and the acquisition of additional aircraft as described above.

During the period from 2001 to 2004, the Company and air cargo carriers generally, suffered from (i) a challenging economic environment, especially in the technology and telecom sectors, which historically had been large users of air cargo capacity, (ii) reduced demand for air cargo services, and (iii) the events of September 11, 2001. While prior industry projections anticipated continued growth in the air cargo market, the air cargo industry experienced a 9.7 % decline in demand (measured as revenue ton miles) in 2001, representing the worst year-over-year decline on record.

In October 2002, the Company announced that it would need to restate its financial statements for the 2000 and 2001 fiscal years. The decision to restate was based chiefly on a determination by the Company that certain expenses had been understated in prior years. At that time, the Company anticipated that the restatement would be completed in early 2003.

The Company was unable to file its Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2002 because the restatement had not been completed by the due date of the report. As a result, Deutsche Bank, the agent under two credit facilities maintained by two subsidiaries of the Company, notified these subsidiaries that failure to provide financial statements for the third quarter of 2002 created a default under such facilities. In early January 2003, the Company entered into an amendment and waiver with Deutsche Bank under these two credit facilities to amend the loan agreements maintained by the subsidiaries and to waive certain events of default under the loan agreements and related aircraft leases.

In response to the challenging operating environment, in early 2003, the Company also embarked on a comprehensive program that included a change in senior management and the initiation of an aggressive operational and financial restructuring plan. Throughout the course of 2003, management implemented significant cost saving initiatives and negotiated with various lessors and secured aircraft creditors to reduce and or defer rents and payments on the Company’s aircraft. By the end of 2003, the Company was able to negotiate binding term sheets and restructuring agreements with a majority of its significant aircraft lenders and lessors.

A number of the restructuring agreements that the Company entered into prior to filing for bankruptcy required, as part of their implementation, a Chapter 11 filing by the Company. In addition, it was believed that a Chapter 11 filing would help facilitate the restructuring program by establishing one forum for the resolution of claims and implementation of a wide range of restructuring agreements. The Chapter 11 filing was also intended to help facilitate the issuance of the new equity securities required by certain of the restructuring agreements. See Note 3 in the Notes to Consolidated Financial Statements included in Item 8 of Part II of the Report for additional information concerning our restructuring.

Chapter 11 Bankruptcy Proceedings

On January 30, 2004 (the “Bankruptcy Petition Date”), AAWW, Atlas, Polar and two other of AAWW’s subsidiaries, Airline Acquisition Corp I and Atlas Worldwide Aviation Logistics, Inc. (“Logistics,” and together with AAWW, Atlas, Polar and Acquisition collectively, the “Debtors”) each filed voluntary bankruptcy petitions for relief under Chapter 11, in the United States Bankruptcy Court for the Southern District of Florida (the “Bankruptcy Court”). The Bankruptcy Court jointly administered these cases as In re: Atlas Air Worldwide Holdings, Inc., Atlas Air, Inc., Polar Air Cargo, Inc., Airline Acquisition Corp I, and Atlas Worldwide Aviation Logistics, Inc., Case No. 04-10792 (collectively, the “Chapter 11 Cases”). During the course of the Chapter 11 Cases, the Debtors operated their respective businesses as debtors-in-possession (“DIPs”) under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code, the Federal Rules of Bankruptcy Procedure and the orders of the Bankruptcy Court. The Consolidated Financial Statements appearing in Item 8 of Part II of this Report include data for all of our subsidiaries, including those that did not file for relief under Chapter 11.

The Debtors emerged from bankruptcy protection under the Second Amended Joint Plan of Reorganization (the “Plan of Reorganization”), which (i) was confirmed by the Bankruptcy Court on July 16, 2004 and (ii) after each of the conditions precedent to consummation was satisfied or waived, became effective July 27, 2004 (the “Effective Date”). In accordance with AICPA Statement of Position 90-7, “Financial Reporting by Entities in Reorganization Under the Bankruptcy Code,” the Company adopted fresh-start accounting as of the Effective Date. Reference is made to Item 8 of Part II of the Report for additional information concerning the Company’s reorganization. References to “Predecessor Company” refer to the Company prior to July 28, 2004. References to “Successor Company” refer to the Company after July 27, 2004, following the adoption of fresh-start accounting. As a result of fresh-start accounting, the Successor Company’s Consolidated Financial Statements are not comparable with the Predecessor Company’s Consolidated Financial Statements.

Strategy

With the completion of our restructuring and our emergence from Chapter 11, our primary objectives are to maintain a safe and efficient operation, streamline our operations, restore and sustain profitability and rebuild stockholder value. We are undertaking a number of significant strategic measures designed to achieve these objectives. These measures include the following:

•

Optimizing our Scheduled Service network so that this business segment can ultimately attain profitability. The elimination of certain unprofitable markets and an increased presence in China are two factors that are expected to help this business segment in its attempt to achieve positive financial results;

•

Continuing our efforts to reduce our overhead and operating costs and to maximize productivity.

Examples of these measures include (i) reductions in crew travel costs and improvements in crew scheduling and efficiencies, (ii) rationalizing station overhead in connection with our ground operations, and (iii) optimizing efficiencies in our maintenance program and at our maintenance facilities to lower unit maintenance costs;

•

Improving the flexibility and efficiency of our operations by overhauling our procedures in several key facets of flight operations, ground operations and maintenance. In November 2004, we initiated steps to combine the Atlas and Polar pilot-union bargaining units, both of which are represented by the Air Line Pilots Association. We expect this merger to be completed in 2006. We have also begun the process of merging the Atlas and Polar operating certificates into a single certificate. Doing so is expected to eliminate duplicative efforts in the operations and compliance areas. Merger of the operating certificates is expected to occur by the end of the first quarter of 2006. While operations are expected to be consolidated under the Polar certificate, we will continue to do business as two brands—Atlas in the wet leasing or ACMI market, Polar in the Scheduled Service freight market, with each continuing its participation in the charter market. Both brands will maintain their separate identities, but they will derive their lift capacity from a shared operation;

•

Actively managing our asset base by optimizing capacity allocations among our various service types and by selectively disposing of unproductive assets, including our aging 747-200 aircraft, and replacing them with newer more modern aircraft. Systematic implementation of this initiative will enable us to offer our customers new services and fleet types that complement their needs for additional, more modern, lift capacity. Our recent agreement with Israel Aircraft Industries to acquire slots for the potential conversion of four Boeing 747 passenger aircraft to freighter configuration between late 2007 and mid-2008 is an example of our fleet renewal efforts;

•

Pursuing growth opportunities, which may include offering customers new services and fleet types, which may include entry into passenger ACMI business;

•

Continuing our efforts to maximize our financial flexibility, which may include refinancing our debt and issuing new debt and/or equity securities.

While we still face a number of significant challenges, several of which are beyond our control (see “Risk Factors” in Item 1 of Part I below), we believe that implementing these and certain other strategic measures represent important moves toward restoring and sustaining profitability and enhancing long-term stockholder value.

Operations

Introduction. We operate our business through four reportable segments: ACMI Contracts, Scheduled Service, Air Mobility Command (“AMC”) Charter for the U.S. military and Commercial Charter. All reportable segments are directly or indirectly engaged in the business of air cargo transportation but have different economic characteristics, which are separately reviewed by management. Financial information regarding our operating segments may be found in Note 15 “Segment Reporting” in the Notes to the Consolidated Financial Statements included in Item 8 of Part II of the Report.

ACMI Contracts. Historically, the core of our business has been leasing aircraft to other airlines on an ACMI basis. Under an ACMI contract, customers receive a dedicated aircraft that is crewed, maintained and insured by Atlas in exchange for an agreed level of operation. We are paid a fixed hourly rate for the time the aircraft is operated. All other direct operating expenses, such as fuel, landing fees and ground handling, are generally absorbed by the customer, who also bears the commercial risk of load and yield.

All of our ACMI contracts provide that the aircraft remain under our exclusive operating control, possession and direction at all times. The ACMI contracts further provide that both the contracts and the routes to be operated may be subject to prior and/or periodic approvals of the United States and foreign governments.

ACMI contracts reduce the short-term volatility of our operating revenue. They minimize yield and traffic demand risk traditionally associated with the air cargo business and provide a more predictable annual revenue and cost base. All of our revenues, and most of our costs, under ACMI contracts are denominated in U.S. dollars, thus avoiding currency risks associated with international business.

Our principal ACMI customers include Emirates, Qantas, Air New Zealand, Cargolux, Korean Air, British Airways and Lan Cargo. ACMI contract revenue represented 26.6 % of our operating revenues for the year ended December 31, 2004, as compared to 22.1% and 30.4% for 2003 and 2002, respectively. ACMI contract revenue is recognized as the actual Block Hours operated on behalf of a customer are incurred or according to the minimum revenue guarantee defined in a contract.

Our ACMI contracts have had terms ranging from two months to five years. At December 31, 2004, we had 21 ACMI contracts covering 21 aircraft, expiring at various times from 2005 to 2009. The original length of these contracts ranged from two months to five years. Emirates Airlines currently our most significant customer, accounted for approximately 34.3% of ACMI revenue and 9.1% of our total operating revenue during 2004. In addition, we have also operated short-term, seasonal ACMI contracts with companies such as UPS, FedEx Corporation (“FedEx”), Lufthansa and El Al, among others, and we anticipate doing so in the future.

The following table sets forth revenues expected to be derived from our existing ACMI customers having contracts with at least a one-year term as of December 31, for the years indicated (in millions):


2005	$	449
2006		219
2007		77
2008		38
2009		8

	$	791

Scheduled Service. Polar provides scheduled air cargo services. Its primary customers are the world’s largest international freight forwarders and agents. Polar operates airport-to-airport routes on a specific schedule, and customers pay to have their freight carried on that route and schedule. Polar’s scheduled all-cargo network serves four principal economic regions: North America, South America, Asia and Europe. Polar offers access through its limited-entry operating rights to Japan at Tokyo’s Narita Airport and to China at Shanghai’s Pudong Airport. Beginning as a small, trans-Pacific operator over 10 years ago, Polar’s Scheduled Service operation (“Scheduled Service”) now provides approximately 18 daily departures to 14 different cities in eight countries across four continents. Polar’s customer relationships are supported by the flight frequency and dependability of Polar’s global network support.

Scheduled Service is designed to achieve several key objectives: to provide prime-time arrivals and departures on key days of consolidation for freight forwarders and shippers; to coordinate the various departure and arrival combination points necessary to offset directional imbalances of traffic; and to arrange a global connecting or through-service network between economic regions to achieve higher overall yields and load factors. Scheduled Service imposes both load and yield risk on Polar since it generally provides the service regardless of traffic. Unlike Atlas’ ACMI operations, Polar’s Scheduled Service business bears all direct costs of operation, including fuel, insurance, overfly and landing fees, and aircraft and cargo handling. Distribution costs include direct sales costs through our own sales force and through commissions paid to general sales agents. Commission rates are typically between 2.5% and 5.0% of commissionable revenue sold. The Scheduled Service business is highly seasonal, with peak demand coinciding with the retail holiday season, which traditionally begins in September and lasts through mid-December.

Scheduled Service revenue represented 45.3% of our total operating revenues for the year ended December 31, 2004, as compared to 37.9% and 29.6% for 2003 and 2002, respectively. The majority of Polar’s business is conducted with large multi-national forwarders, which include DHL, Danzas Air and Ocean, EXEL Global Logistics, Expeditors International, EGL Global Logistics, Menlo Logistics and Nippon Express, among others. No single customer accounted for 10% or more of our Scheduled Service revenues for the year ended December 31, 2004.

In late 2004, we undertook several initiatives to optimize our Scheduled Service business. These included eliminating service to certain unprofitable markets (primarily in India, North America and Asia) and reallocating excess fleet capacity primarily to our ACMI Contract business segment.

The Asian market is extremely important to Polar, accounting for approximately 50.8%, 47.6% and 47.3% of Polar’s Scheduled Service revenue for the years ended December 31, 2004, 2003 and 2002, respectively. In 2004, we increased our presence in the China market by becoming one of only four U.S. freight operators permitted by the U.S. Department of Transportation (the “DOT”) to serve China on a Scheduled Service basis. Polar began Scheduled Service at Shanghai’s Pudong Airport in December 2004 with six weekly flights. In March 2005, Polar increased this level of service to nine flights. Three additional frequencies were recently awarded by the DOT, for a total of 12 flights per week beginning in March 2006. The DOT’s grant of additional rights next spring will allow Polar to offer twice-daily service to Shanghai on six days each week and to introduce service to Beijing on three of those flights.

AMC Charter. The AMC Charter business entails providing full planeload charter flights to the U.S. military through the AMC. The AMC Charter business is similar to the Commercial Charter business described below in that we are responsible for the direct operating costs of the aircraft. However, in the case of AMC operations, the price of fuel used during AMC flights is fixed by the military. The contracted charter rates (per ton mile) and fuel prices (per gallon) are established and fixed by the AMC for 12-month periods running from October through September each year. The AMC purchases capacity on a fixed basis annually and on an ad hoc basis continuously. While the fixed business is predictable, Block Hour levels for the ad hoc business are difficult to predict and are subject to fluctuation. The majority of our AMC business in 2004 was conducted on an ad hoc basis.

We compete for AMC Charter business through a teaming arrangement devised for the allocation of AMC flying among competing carriers. There are currently two groups of carriers, or teams, that compete for AMC business. We are a member of the team led by FedEx. We pay a commission, based on the revenues we receive under such contracts. The AMC Charter business, while profitable, is also our most unpredictable business. Revenues derived from the AMC Charter business represented 20.0% of operating revenues for the year ended December 31, 2004, and 31.1% and 19.6% for 2003 and 2002, respectively.

Commercial Charter. Our Commercial Charter business segment involves providing a full planeload of capacity to a customer for one or more flights based on a specific origin and destination. Customers include charter brokers, freight forwarders, direct shippers and airlines. Unlike ACMI flying, charter customers pay a fixed charter fee that includes fuel, insurance, landing fees, overfly and all other operational fees and costs. Revenue from the Commercial Charter business is short-term and unpredictable, as are the costs associated therewith.

Revenues derived from our Commercial Charter business represented just 4.9% of our total operating revenues for 2004. However, when coupled with our AMC Charter operations, the Commercial Charter business

complements our ACMI and Scheduled Service operations by increasing aircraft utilization during low seasons, positioning flights for scheduled operations in directionally weak markets, enabling performance of extra flights to respond to peak season Scheduled Service demand, diversifying our revenue streams and reducing ferries.

Sales and Marketing

Atlas and Polar each has its own brand-specific sales and marketing organization. Each has regional offices covering the Americas, Asia and EMEIA (Europe, Middle East, India and Africa). Atlas’s sales organization markets its ACMI services and charter services directly to other airlines and indirect air carriers, as well as to charter brokers and agents. Polar’s sales organization markets its scheduled services and charter services directly, or through a network of offline general sales agents to freight forwarders. Additionally, we have a separate, dedicated Charter Business Unit that manages the AMC Charter business either directly, or indirectly through the Atlas and Polar sales organizations and manages our Commercial Charter business and capacity.

Maintenance

As noted above, as of June 1, 2005 we operate a fleet of 42 Boeing 747-400 and 747-200 aircraft. The maintenance programs for these aircraft vary according to fleet type. After fuel, maintenance is our second-largest operating expense. Primary maintenance activities include scheduled and unscheduled work on airframes and engines. Scheduled maintenance activities encompass those activities specified in a carrier’s FAA-approved maintenance program. The costs necessary to adhere to this maintenance program will increase over time, based on the age of the aircraft and/or its engines or due to FAA airworthiness directives.

Scheduled airframe maintenance includes low-level, daily checks that are effected at regular intervals (usually within 24-to-48 hours of completion of a flight) by our maintenance staff or third-party vendors. A/B checks are normally performed on the aircraft (usually at intervals ranging from 400 to 1,100 flight hours) by our maintenance staff or third-party vendors and are generally low-level in nature (see “Glossary” in Item 7 of Part II of the Report). C checks are higher level “heavy” airframe maintenance checks that are more extensive in scope and duration than A/B checks and are generally performed at 15-to-24 month intervals. C checks in respect of our 747-200 aircraft (performed by third-party vendors) are generally more involved than those performed on our 747-400 aircraft, chiefly due to the differences in the fleet types, including the age of the aircraft and in the maintenance programs and procedures that are prescribed by the FAA. Our employees and contractors at our maintenance facility in Prestwick, Scotland perform C checks on many of our 747-400 aircraft. D checks are the heaviest and most extensive of all the airframe maintenance checks and are generally performed at the earlier of 25,000-to-28,000 flight hours or a five-to-ten year interval. D checks for both our 747-200 and 747-400 aircraft are outsourced to third party vendors.

Our FAA-approved maintenance program allows our engines to be maintained on an “on condition” basis. Under this arrangement, engines are sent for overhaul based on life-limited parts and/or performance deterioration.

We believe that a balance between “in-house” and fixed, firm-priced contracts provides the most efficient means of maintaining our aircraft fleet and the most reliable way to forecast our maintenance costs. A certain portion of our lower-level maintenance activities (primarily daily and “A” checks) are performed on a time and material basis.

Insurance

The Company maintains insurance of the types and in amounts deemed adequate to protect itself and its property, consistent with current industry standards. Principal coverage includes: liability for injury to members of the public; damage to property of the Company and of others; loss of, or damage to, flight equipment, whether on the ground or in flight; fire and extended coverage; directors and officers insurance; fiduciary; and workers’ compensation and employer’s liability. In addition to customary deductibles, the Company self-insures for all or a portion of its losses from claims related to medical insurance for employees.

Since September 11, 2001, the Company and other airlines have been unable to obtain coverage for claims resulting from acts of terrorism, war or similar events (war-risk coverage) at reasonable rates from the commer-

cial insurance market. The Company has, as have most other U.S. airlines, therefore purchased its war-risk coverage through a special program administered by the federal government. The Emergency Wartime Supplemental Appropriations Act extended this insurance protection until August 2005. The Secretary of Transportation may extend this policy until December 31, 2005. If the federal insurance program terminates, the Company would likely face a material increase in the cost of war-risk coverage, and because of competitive pressures in the industry, the Company’s ability to pass this additional cost on to customers may be limited.

Governmental Regulation

General. Atlas and Polar are subject to regulation by the DOT and the FAA, among other governmental agencies. The DOT primarily regulates economic issues affecting air service, such as certification, fitness and citizenship, competitive practices, insurance and consumer protection. The DOT has the authority to investigate and institute proceedings to enforce its economic regulations and may assess civil penalties, revoke operating authority or seek criminal sanctions. Atlas and Polar each hold DOT-issued certificates of public convenience and necessity plus exemption authority to engage in scheduled air transportation of property and mail, domestically and in enumerated international markets, and charter air transportation of property and mail on a worldwide basis. Atlas and Polar have determined that Atlas’ operating certificate will be consolidated into Polar’s. Atlas and Polar have commenced the process for obtaining the regulatory approvals required to consummate such consolidation. We expect this consolidation to occur in the first quarter of 2006, with the surviving air carrier henceforth doing business under both the Atlas and Polar brands.

The DOT conducts periodic evaluations of each air carrier’s fitness and citizenship. In the area of fitness, the DOT seeks to ensure that the carrier has the managerial competence, compliance disposition and financial resources needed to conduct the operations for which it has been certificated. Additionally, each air carrier must remain a United States citizen, which requires that it be organized under the laws of the United States or a state, territory or possession thereof; that its president and at least two-thirds of its directors and other managing officers be United States citizens; that not more than 25% of its voting stock be owned or controlled, directly or indirectly, by foreign nationals; and that it not otherwise be subject to foreign control. The DOT broadly interprets “control” to exist when an individual or entity has the potential to exert substantial influence over airline decisions through affirmative action or the threatened withholding of consents and/or approvals.

After an airline emerges from bankruptcy, the DOT normally re-examines that airline’s fitness and citizenship to ensure that it retains its “U.S. citizen” status and that it meets all relevant U.S. ownership and control rules and regulations. Late last year, following our emergence from Chapter 11, the DOT notified us that it would conduct such a re-examination of Atlas and Polar. We have assisted the DOT in its review and have responded promptly to several DOT information requests. We have not issued and will not issue any shares of our new common stock to holders of allowed general unsecured claims under the Plan of Reorganization pending completion of the DOT’s review. While we do not currently anticipate any problems with the DOT’s citizenship review, we cannot predict with any degree of certainty when such review will be complete.

The FAA is the U.S. government agency with primary responsibility for regulation of flight operations and, in particular, matters affecting air safety, such as airworthiness requirements for aircraft, operating procedures, mandatory equipment and the licensing of pilots, mechanics and dispatchers. Each U.S. air carrier must hold a valid FAA-issued air carrier certificate and FAA-approved operations specifications authorizing operation in specific regions with specified equipment under specific conditions. We believe Atlas and Polar are in material compliance with applicable FAA rules and regulations and maintain all documentation required by the FAA.

Like all U.S. air carriers, Atlas and Polar are subject to extensive FAA regulation and oversight. The FAA monitors compliance with maintenance, flight operations and safety regulations and performs frequent spot inspections of aircraft, employees and records. Also, the FAA has the authority to issue maintenance directives and other mandatory orders relating to, among other things, inspection of aircraft and engines, fire retardant and smoke detection devices, increased security precautions, collision and windshear avoidance systems, noise abatement and the mandatory removal and replacement of aircraft parts that have failed or may fail in the future. In addition, the FAA mandates certain record-keeping procedures. The FAA has the authority to modify, temporarily suspend or permanently revoke an air carrier’s authority to provide air transportation or that of its licensed personnel, after providing notice and a hearing, for failure to comply with FAA rules, regulations and directives. The

FAA is empowered to assess civil penalties for such failures or institute proceedings for the imposition and collection of monetary fines for the violation of certain FAA regulations and directives. The FAA also is empowered to revoke an air carrier’s authority on an emergency basis, without providing notice and a hearing, where significant safety issues are involved.

International. Air transportation in international markets (the vast majority of markets in which Atlas and Polar operate) are subject to extensive additional regulation. The ability of Atlas and Polar to operate to other countries is governed by aviation agreements between the United States and the respective countries or in the absence of such an agreement, by principles of comity and reciprocity. Sometimes, as in the case of Japan and China, aviation agreements restrict the number of carriers that may operate, their frequency of operation or the routes over which they may fly. This makes it necessary for the DOT to award route and operations rights to U.S. air carrier applicants through competitive route proceedings. International aviation agreements are periodically subject to renegotiation, and changes in U.S. or foreign governments could result in the alteration or termination of such agreements, diminish the value of existing route authorities or otherwise affect Atlas’ and Polar’s international operations. Foreign governmental authorities also impose substantial licensing and business registration requirements, and in some cases, require the advance filing and/or approval of schedules or rates. Moreover, the DOT and foreign government agencies typically regulate alliances and other commercial arrangements between U.S. and foreign air carriers, such as the ACMI arrangements that Atlas maintains from time to time. Approval of these agreements may be conditional, and approval during one time period does not guarantee approval in future periods. Nor is there a guarantee that an arrangement will be approved in the first instance.

Airport Access. The ability of Atlas and Polar to operate is dependent on their ability to gain access to airports of their choice at commercially desirable times and on acceptable terms. In some cases this is constrained by the need for the assignment of takeoff and landing “slots” or comparable operational rights. Like other air carriers, Atlas and Polar are subject to such constraints at slot-restricted airports such as Chicago and a variety of foreign locations (e.g., Tokyo, Incheon and Amsterdam). The availability of slots is not assured and the inability of Atlas and Polar to obtain and retain needed slots could therefore inhibit their efforts to provide services in certain international markets. In addition, nighttime restrictions of certain airports could, if expanded, have an adverse operational impact.

Security. Following the September 11 terrorist attacks, the aviation security functions previously performed by the FAA were transferred to the U.S. Transportation Security Administration (“TSA”). The TSA extensively regulates aviation security through rules, regulations and security directives. Currently, at the insistence of key Congressional leaders, the TSA is devoting significant resources and attention to the air cargo area. It is in the final stages of issuing a rule to establish uniform standards and impose requirements designed to prevent unauthorized access to freighter aircraft and the introduction of weapons to such aircraft. Atlas and Polar today operate pursuant to a TSA-approved security program that, we believe, maintains the security of all aircraft in the fleet. There can be no assurance, however, that we will remain free from onerous new TSA requirements. Additionally, foreign governments and regulatory bodies (such as the European Commission) impose their own aviation security requirements. The trend is toward a tightening of such requirements. This may have an adverse impact on our operations, especially to the extent the new requirements may necessitate redundant or costly measures or be in conflict with TSA requirements. Additionally, the U.S. Congress is considering legislation which, if enacted, could substantially increase the burden on air cargo carriers.

Environmental. Atlas and Polar are subject to various federal, state and local laws relating to the protection of the environment, including the discharge or disposal of materials and chemicals and the regulation of aircraft noise, which are administered by numerous state and federal agencies. For instance, the DOT and the FAA have authority under the Aviation Safety and Noise Abatement Act of 1979, as amended and recodified, and under the Airport Noise and Capacity Act of 1990, to monitor and regulate aircraft engine noise. We believe all aircraft in the Atlas/Polar fleet materially comply with current DOT, FAA and international noise standards.

Under the FAA’s Directives issued pursuant to its “Aging Aircraft” program, we are subject to extensive aircraft examinations and will be required to undertake structural modifications to our fleet from time to time to address the problems of corrosion and structural fatigue. As part of the FAA’s overall Aging Aircraft program, it has issued Directives requiring certain additional aircraft modifications to be accomplished. We estimate that the modification costs per aircraft will range between $2 million and $3 million. Fifteen aircraft in our fleet have

already undergone the major portion of such modifications. The remaining aircraft in service will require modification prior to 2009. Other directives have been issued that require inspections and minor modifications to Boeing 747-200 aircraft. The newly manufactured Boeing 747-400 freighter aircraft were delivered in compliance with all existing FAA Directives at their respective delivery dates. It is possible, however, that additional Directives applicable to the types of aircraft or engines; included in our fleet could be issued in the future, and that the cost of complying with such Directives could be substantial.

Atlas and Polar also are subject to the regulations of’ the Environmental Protection Agency (“EPA”) regarding air quality in the United States. All aircraft in the Atlas/Polar fleet meet or exceed applicable EPA fuel venting requirements and smoke emissions standards.

Other Regulations. Air carriers are also subject to certain provisions of the Communications Act of 1934 because of their extensive use of radio and other communication facilities, and are required to obtain an aeronautical radio license from the Federal Communications Commission (“FCC”). Additionally, Atlas and Polar also are subject to international trade restrictions imposed by Presidential determination and the Office of Foreign Assets Control of the U.S. Department of Commerce. Atlas and Polar endeavor to comply with such requirements at all times. Our operations may become subject to additional federal requirements in the future under certain circumstances. We are also subject to state and local laws and regulations at locations where we operate and the regulations of various local authorities that operate the airports we serve. We believe Atlas and Polar are in material compliance with all of such currently applicable laws and regulations.

Civil Reserve Air Fleet. Atlas and Polar both participate in the Civil Reserve Air Fleet (“CRAF”) Program which permits the U.S. Department of Defense to utilize their aircraft during national emergencies when the need for military airlift exceeds the capability of military aircraft. This Program could adversely restrict our commercial business in times of national emergency.

Future Regulation. Congress, the DOT, the FAA and other governmental agencies are currently considering, and in the future may consider and adopt, new laws, regulations and policies regarding a wide variety of matters that could affect, directly or indirectly, the operations, ownership and profitability of Atlas and Polar. It is neither possible to predict what other matters might be considered in the future nor to judge what impact, if any, the implementation of any future proposals or changes might have on the Atlas and Polar businesses.

Competition

A substantial majority of our ACMI business is conducted by Atlas. The market for outsourcing cargo ACMI services is highly competitive. We believe that the most important bases for competition in the ACMI business are the age of the aircraft fleet, the payload and cubic capacities of the aircraft, and the price, flexibility, quality and reliability of the air transportation services provided. We maintain a major share of the 747-400 ACMI market, where there are no significant direct competitors at present. Competition with respect to the 747-200 ACMI market, however, is more significant where our principal competitors include Air Atlanta, Icelandic, MK Airlines and Southern Air and Tradewinds. In keeping with our strategy of actively managing our asset base by selectively disposing of unproductive assets, we intend to reduce our 747-200 capacity over the next several years and to replace these older aircraft with newer, more modern aircraft. We believe that our ability to grow the ACMI business depends upon economic conditions, the level of commercial activity and our continuing ability to convince major international airlines that outsourcing some portion of their air cargo needs is more effective and efficient than undertaking cargo operations with their own incremental capacity and resources.

Our Scheduled Service business is conducted through Polar. We offer fully dedicated freighter capacity to our freight-forwarder customers, transporting goods primarily on aircraft pallets. We compete for cargo volume principally with other all-cargo and combination carriers, including Cathay Pacific, Northwest, JAL, NCA, Korean, KLM, and Lufthansa, and with major passenger airlines that have substantial belly cargo capacity. The primary competitive factors in the Scheduled Service market are price, geographic coverage, flight frequency, reliability and capacity. We believe that we can compete effectively in the Scheduled Service business due to our position as a low-cost operator offering reliable flight schedules to key limited-entry markets (including China, Japan and intra-Asia).

We participate through our AMC Charter business segment in the CRAF Program under one-year contracts with the AMC, where we have made available a substantial number of our aircraft to be used by the U.S. military in support of their operations, and operate such flights pursuant to entitlement based, full-cost contracts. Airlines may participate in the CRAF Program either alone or through a teaming arrangement. At present, two teams have been formed. We participate in the CRAF Program through a teaming arrangement led by FedEx. A third team has been formed and is expected to participate in the CRAF Program beginning October 1, 2006. The formation of competing teaming arrangements, an increase by other air carriers in their commitment of aircraft to the CRAF Program, or the withdrawal of any of our current team members, could adversely affect the amount of AMC business awarded to us in the future. Depending upon market conditions existing at the time of any reduction in our current level of CRAF Program participation, we would deploy any surplus aircraft into one or more of our other business segments to obtain the highest available rate of return on these assets.

The ad hoc charter market is highly competitive, with a number of operators, including Evergreen International, FedEx charters, Kalitta, Lufthansa Charter, and other passenger airlines providing competition. Our Commercial Charter business is our smallest business segment in terms of revenue. Many of our ad hoc charter flights are one-way return flights from Asia or Europe, positioned by one-way AMC flights that originate from the U.S. and terminate in Europe and the Middle East. Over the last two years, most of our ad hoc charter capacity has been allocated to the AMC charter business, and this allocation is expected to continue into the foreseeable future.

Fuel

Aviation fuel is one of the most significant expenses for an airline. During the years ended December 31, 2004, 2003 and 2002 fuel costs represented 25.6%, 23.5% and 18.4%, respectively, of our total operating expenses. Fuel prices and availability are subject to wide price fluctuations based on geopolitical issues and supply and demand, which we can neither control nor accurately predict. The following table summarizes our fuel consumption and costs for the years ended December 31.


	2004		2003		2002

Gallons consumed (in thousands)		280,304		333,747		242,755
Average price per gallon, including tax	$	1.25	$	0.98	$	0.91
Cost (in thousands)	$	351,112	$	326,022	$	221,632

Our exposure to fluctuations in fuel price exists only with regard to our Scheduled Service and Commercial Charter businesses, where we attempt to pass on price increases to customers through the imposition of a surcharge. ACMI contracts require our customers to pay for aviation fuel. We are not exposed to risk with respect to the AMC fuel expense as the price is set under the annual contract and we receive adjustments for price increases and reductions for price decreases.

In the past, we have not experienced significant difficulties with respect to fuel availability. Although we currently do not anticipate a significant reduction in the availability of jet fuel, a number of factors make accurate predictions impossible, including geopolitical uncertainties in oil-producing nations and shortages in and disruptions to refining capacity. For example, hostilities and political turmoil in Iraq and other oil-producing nations could lead to disruptions in oil production and/or to substantially increased oil prices. The inability to obtain jet fuel at competitive prices would materially and adversely affect our results of operation and financial condition.

Although we have not regularly entered into hedging arrangements in the past, we are currently reviewing various hedging strategies and may engage, on a going forward basis, in certain fuel hedging activities or fuel purchase commitments to help us manage the price and availability of fuel and limit our exposure to significant fluctuations.

Employees

The airline business is labor intensive. Salaries, wages and benefits accounted for approximately 15.5% of our consolidated operating expenses for 2004. As of December 31, 2004, we had 1,962 employees, 1,056 of whom were air crewmembers. We maintain a comprehensive training program for our crewmembers in compliance with FAA requirements in which each pilot regularly attends recurrent training programs. Of our employees, approximately 641 Atlas employees and approximately 340 Polar employees are represented by the Airline Pilots

Association (“ALPA”). Our relations with ALPA are governed by the Railway Labor Act. Under this statute, a collective bargaining agreement between a company and the labor union generally does not expire but becomes amendable as of a stated date. If either party wishes to modify the terms of such agreement, it must notify the other in the manner prescribed in the agreement.

Polar’s collective bargaining agreement with ALPA became amendable in May 2003, and we cannot accurately predict the outcome of any current or future negotiations with ALPA. Since July 2003, negotiations have been under the direction of a mediator appointed by the National Mediation Board (the “NMB”). On May 20, 2005, in a letter to the NMB, ALPA requested a proffer of arbitration, the last step before the parties may be released into a 30 day cooling off period, which must take place before the parties can engage in self-help. The Company has responded to the NMB seeking a denial of ALPA’s request. Although we have never had a work interruption or stoppage and believe our relations with our Polar crewmembers are generally good, we are subject to risks of work interruption or stoppage and may incur additional administrative expenses associated with union representation of our employees. If we are unable to reach agreement with our Polar crewmembers on the terms of Polar’s collective bargaining agreement, we may be subject to work interruptions or stoppages, which, if sustained, could materially and adversely affect our financial condition, results of operations and liquidity.

Atlas’ collective bargaining agreement with ALPA became effective on August 1, 2002. By letter dated May 6, 2005, ALPA filed a notice of desire to amend the current collective bargaining agreement between Atlas and ALPA pursuant to Section 6 of the Railway Labor Act. The current agreement becomes amendable on February 1, 2006. We are subject to risks of work interruption or stoppage and may incur additional administrative expenses associated with union representation of our employees. If we are unable to reach agreement with our Atlas crewmembers on the terms of Atlas’ collective bargaining agreement, or if Atlas were unable to negotiate future contracts with its crewmembers, we may be subject to work interruptions and stoppages, which, if sustained, could materially and adversely affect our financial condition, results of operations and liquidity.

In November 2004, in order to increase efficiency and assist in controlling certain costs, we initiated steps to combine the ALPA represented bargaining units of Atlas and Polar, a process that is expected to be completed in 2006. Any such combination will be in accordance with the terms and conditions of Atlas’s and Polar’s collective bargaining agreements, which agreements provide for a seniority integration process and the negotiation of a single collective bargaining agreement.

Available Information

All of our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, and all amendments to those reports, filed with or furnished to the SEC, are available free of charge through our corporate Internet Website, www.atlasair.com, as soon as reasonably practicable after we have electronically filed such material with, or furnished it to, the SEC. Certain information concerning our restructuring and our filing under Chapter 11 of the Bankruptcy Code may be found at www.atlasreorg.com.

The information on these Websites is not, and shall not be deemed to be, part of this Report or incorporated into any other filings we make with the SEC.

Risk Factors

You should carefully consider each of the following risk factors and all other information in the Report. These risk factors are not the only ones facing us. Our operations could also be impaired by additional risks and uncertainties. If any of the following risks and uncertainties develop into actual events, our business, financial condition and results of operations could be materially and adversely affected.

Risks Related to Our Business

We are highly leveraged and our substantial debt and other obligations could limit our financial resources and ability to compete and may make us more vulnerable to adverse economic events.

While we obtained significant relief as a result of our restructuring efforts, we remain highly leveraged and have substantial debt, lease and other obligations, which could have negative consequences, including:


	•	making it more difficult to pay principal and interest with respect to our debt;


	•	requiring us to dedicate a substantial portion of our cash flow from operations for interest, principal and lease payments and reducing our ability to use our cash flow to fund working capital and other general corporate requirements;

	•	increasing our vulnerability to general adverse economic and industry conditions;

	•	limiting our flexibility in planning for, or reacting to, changes in business and our industry;

	•	placing us at a disadvantage to many of our competitors who have less debt; and

	•	exposing us to fluctuations in interest rates with respect to that portion of our debt, including our bank loans, which is at a variable rate of interest.

Our ability to service our debt and meet our other obligations depends on certain factors beyond our control.

Our ability to service our debt and meet our lease and other obligations as they come due is dependent on our future financial and operating performance. This performance is subject to various factors, including factors beyond our control such as changes in global and regional economic conditions, changes in our industry, changes in interest or currency exchange rates, the price and availability of aviation fuel and other costs, including labor and insurance.

If our cash flow and capital resources are insufficient to enable us to service our debt and leases and meet these obligations as they become due, we could be forced to:


	•	restructure or refinance our debt;

	•	obtain additional debt or equity financing;

	•	reduce or delay capital expenditures;

	•	limit or discontinue, temporarily or permanently, business plans or operations; or

	•	sell assets or businesses.

We cannot assure you as to the timing of such actions or the amount of proceeds that could be realized from such actions. Accordingly, we cannot assure you that we will be able to meet our debt service and other obligations as they become due or otherwise.

We are subject to restrictive covenants under our debt instruments and aircraft lease agreements. These covenants could significantly affect the way in which we conduct our business. Our failure to comply with these covenants could lead to an acceleration of our debt and termination of our aircraft leases.

Certain of our debt instruments and lease agreements contain a number of covenants that, among other things, significantly restrict our ability to:


	•	incur additional debt or issue new lease obligations above threshold amounts;

	•	invest in new capital assets above certain limitations;

	•	pay dividends or make other restricted payments;

	•	create or permit certain liens;

	•	sell assets; and

	•	consolidate or merge with or into other companies or sell all or substantially all of our assets.

These restrictions could limit our ability to finance our future operations or capital needs, to make acquisitions or to pursue future business opportunities. In addition, our Revolving Credit Facility with Congress Financial Corporation (“Congress”) (the “Revolving Credit Facility”), a certain loan that was made to Atlas Freighter Leasing III, Inc. (“AFL III”) (the “AFL III Credit Facility”), another loan made to Atlas (the “Aircraft Credit Facility” or “ACF”), and certain leases require us to maintain specified financial ratios and/or satisfy certain financial covenants. We may be required to take action to reduce our debt or to act in a manner contrary to our business objectives to meet these ratios and to satisfy these covenants. Events beyond our control, including changes in the economic and business conditions in the markets in which we operate, may affect our ability to do

so. While we are currently in compliance with these ratios and covenants, we cannot assure you that we will continue to meet these ratios or satisfy these covenants or that the lenders or lessors will waive any failure to do so. A breach of any of the covenants in, or our inability to maintain the required financial ratios under, our debt instruments, including the Revolving Credit Facility, and certain of our leases would prevent us from borrowing under the Revolving Credit Facility and could result in a default under it and the leases. Moreover, if the lenders under a facility or other agreement in default were to accelerate the debt outstanding under that facility, it could result in a cross default under other debt facilities or leases. If all or any part of our debt were to be accelerated, we may not have, or be able to obtain, sufficient funds to repay such debt. A default under the leases could result in a reversion to the original lease terms without regard to the restructuring of the lease payments and an acceleration of any amounts owed under the leases.

Our financial condition could suffer if we experience unanticipated costs as a result of the SEC investigation and other lawsuits and claims.

On October 28, 2004, the SEC issued a Wells Notice to us indicating that the SEC staff is considering recommending to the SEC that it bring a civil action against us alleging that we violated certain financial reporting provisions of the federal securities laws from 1999 to 2002. In addition, the SEC has filed one or more proofs of claim in the Chapter 11 Cases. We are currently engaged in discussions with the SEC regarding the Wells Notice and the possible resolution of this matter, and continue to cooperate fully with the SEC in respect of its investigation. However, we cannot assure you as to the outcome of this investigation or that we will be able to resolve this matter on terms favorable to us.

See Item 3 of Part I of the Report for information regarding other legal proceedings that could have a material adverse effect on our financial condition and results of operations. We are also party to a number of other claims, lawsuits and pending actions, which we consider to be routine and incidental to our business.

Volatility of aircraft values may affect our ability to obtain financing secured by our aircraft.

We have historically relied upon the market value of our aircraft as a source of additional capital. The market for used aircraft, however, is volatile, and can be negatively affected by excess capacity due to factors such as a slow down in global economic conditions. As a result, the value of aircraft reflected on our consolidated balance sheet may not reflect the current fair market value or appraised value of these aircraft.

Our access to capital may be limited.

Our operations are capital intensive. They are financed from operating cash flow, and if required from borrowings pursuant to the Revolving Credit Facility. Many airlines, including us, have defaulted on debt securities and bank loans in recent years and have had their equity eliminated in bankruptcy reorganizations. This history has led to limited access to the capital markets by companies in our industry. Our access to the capital markets may also be limited for the foreseeable future due to the lack of current SEC periodic reporting and limited liquidity in our securities. Restrictions on our ability to access capital and obtain sufficient financing to fund our operations may diminish our financial and operational flexibility, and could curtail our operations and adversely affect our ability to take advantage of opportunities for expansion of our business. We cannot assure you, however, that any additional replacement financing will be available on terms that are favorable or acceptable to us.

We have material weaknesses in our internal controls over financial reporting.

In connection with our initial procedures to comply with Section 404 of the Sarbanes-Oxley Act of 2002, we have identified a substantial number of significant deficiencies and material weaknesses in our internal controls over financial reporting. We are committed to addressing these deficiencies and material weaknesses, which have required us to hire additional personnel and outside advisory services and have resulted and will continue to result over at least the next twelve months in additional accounting and legal expenses. If we are unsuccessful in our focused effort to permanently and effectively remediate these deficiencies and material weaknesses, or otherwise fail to maintain adequate internal controls over financial reporting, our ability to accurately and timely report our financial condition may be adversely impacted, which could, among other things, result in a default under our Revolving Credit Facility and limit our access to the capital markets. In addition, if we do not remediate these weaknesses, we will not be able to conclude, pursuant to Section 404 of Sarbanes-Oxley and Item 308 of Regulation S-K, that our internal controls over financial reporting are effective. We cannot assure you as to what

conclusions our management or independent registered public accounting firm might reach with respect to the effectiveness of our internal controls over financial reporting at the compliance deadline. In the event of non-compliance, we may lose the trust of our customers, suppliers and security holders, and our stock price could be adversely impacted. For more information, see Controls and Procedures in Item 9A of Part II of the Report.

Labor disputes with union employees could result in a work interruption or stoppage, which could materially adversely impact our results of operations.

All of our U.S. crewmembers are represented by unions. Collectively, these employees represent approximately 54% of our workforce as of December 31, 2004. Although we have never had a work interruption or stoppage, we are subject to risks of work interruption or stoppage and may incur additional expenses associated with the union representation of our employees. Moreover, we cannot assure you that disputes, including disputes with any certified collective bargaining representatives of our employees, will not arise in the future or will result in agreement on terms satisfactory to us. Such disputes and the inherent costs associated with their resolution could have a material adverse effect on our results of operations and financial condition.

In November 2004, in order to increase efficiency and assist in controlling certain costs, we initiated preliminary steps to combine the U.S. crewmembers bargaining units of Atlas and Polar. These actions are in accordance with the terms and conditions of Atlas’ and Polar’s collective bargaining agreements, which agreements provide for a seniority integration process and the negotiation of a single collective bargaining agreement. In the event that we are unsuccessful in reaching agreement on a single collective bargaining agreement, any unresolved issues will be submitted to binding arbitration. While we cannot assure you as to the outcome of such arbitration, any decision by the arbitrator could materially impact our crew costs.

Our operating cash flows may be subject to fluctuations related to the seasonality of our business and our ability to promptly collect accounts receivable. A significant decline in operating cash flows may require us to seek additional financing sources to fund our working capital requirements.

Our Scheduled Service and Commercial Charter operations are seasonal in nature, with peak activity occurring during the retail holiday season, which traditionally begins in September and lasts through mid-December. This typically results in a significant decline in demand for these services in the first quarter. As a result, our revenues typically decline in the first quarter of the calendar year as our minimum contractual aircraft utilization level temporarily decreases. Our ACMI contracts typically allow our customers to cancel a maximum of 5% of the guaranteed hours of aircraft utilization over the course of a year. Our customers often exercise such cancellation options early in the first quarter of the year, when the demand for air cargo capacity has been historically low following the seasonal holiday peak in the latter part of the fourth quarter.

Historically, we have experienced fluctuations in our operating cash flows as the result of fluctuations in our collection of accounts receivable. These fluctuations have been due to various issues, including amendments and changes to existing contracts and the commencement of operations under new agreements. If we cannot successfully collect a significant portion of such accounts receivable over 90 days old, we may be required to set aside additional reserves or write off a portion of such receivables. If we are not able to maintain or reduce our aged receivables, our ability to borrow against the Revolving Credit Facility may be restricted because borrowings are limited to 85.0% of “eligible” domestic receivables, excluding receivables aged over 90 days old. If our operating cash flows significantly decline as a result of such fluctuations, we may be required to seek alternative financing sources, in addition to the Revolving Credit Facility, to fund our working capital requirements. We cannot assure you that we would be able to successfully obtain such alternative financing on terms favorable to us or at all.

We depend on continued business with certain customers in each of our business segments. If our business with any of these customers declines significantly, it could have a material adverse effect on our financial condition and results of operations.

During 2004 and 2003, AMC accounted for approximately 20.0% and 31.1%, respectively, of our total operating revenues. We expect that revenues from AMC will continue to be a significant source of our revenue for the foreseeable future. However, our revenues from AMC are derived from one-year contracts that AMC is not obligated to renew. In addition, AMC can typically terminate or modify its contract with us for convenience, if we fail to perform, or if we fail to pass biannual inspections. Any such termination would result in a loss of revenue, could also expose us to significant liability and could hinder our ability to compete for future contracts with the

federal government. If our AMC business declines significantly, it could have a material adverse effect on our results of operations and financial condition. Even if AMC continues to award business to us, we cannot assure you that we will continue to generate the same level of revenues we currently derive from our AMC Charter operations. The volume of AMC business is sensitive to changes in national and international political priorities and the U.S. federal budget.

During 2004 and 2003, ACMI contracts accounted for approximately 26.6% and 22.1%, respectively, of our consolidated operating revenues. No ACMI customer accounted for 10% or more of our total operating revenues. Our significant ACMI customers included Emirates, Qantas, Air New Zealand, Cargolux, Korean Air, British Airways and Lan Chile. While we believe that our relationships with these and our other customers are mutually satisfactory, our failure to renew any of our contracts with them, or the renewal of any of those contracts on less favorable terms, could have a material adverse effect on our results of operations and financial condition.

A significant decline in our AMC business transporting cargo for delivery to military locations could have a material adverse effect on our results of operations and financial condition.

During 2004 and 2003, approximately 20.0% and 31.1%, respectively, of our consolidated operating revenues were derived from AMC business, including expansion mission requests transporting cargo for delivery to military locations in Germany, Bahrain, Qatar and Kuwait or near Afghanistan, Iraq, and elsewhere in the Middle East. A material decline in such business, including one-way missions, could have a material adverse effect on our results of operations and financial condition.

Our revenues from AMC could decline as a result of the system AMC uses to allocate business to commercial airlines that participate in the Civil Reserve Air Fleet.

Each year, AMC grants a certain portion of its business to different airlines based on a point system. The number of points an airline can accrue is determined by the amount and type of aircraft pledged to the CRAF Program. We participate in CRAF through a teaming arrangement with other airlines, led by FedEx. Our team is currently entitled to 43% of all widebody 747 U.S. military business. The formation of competing teaming arrangements, an increase by other air carriers in their commitment of aircraft to the program, or the withdrawal of our team’s current partners, especially FedEx, could adversely affect the amount of our AMC business in future years. In addition, if any of our team members were to cease or restructure their operations, the number of planes pledged to CRAF by our team could be reduced. As a result, the number of points allocated to our team could be reduced and our allocation of AMC business would likely decrease, resulting in a material adverse effect on our results of operations and financial condition.

Many of our arrangements with customers are not long-term contracts. As a result, we cannot assure you that w


	•	Optimizing our Scheduled Service network so that this business segment can ultimately attain profitability. The elimination of certain unprofitable markets and an increased presence in China are two factors that are expected to help this business segment in its attempt to achieve positive financial results;

	•	Continuing our efforts to reduce our overhead and operating costs and to maximize productivity.
		Examples of these measures include (i) reductions in crew travel costs and improvements in crew scheduling and efficiencies, (ii) rationalizing station overhead in connection with our ground operations, and (iii) optimizing efficiencies in our maintenance program and at our maintenance facilities to lower unit maintenance costs;

	•	Improving the flexibility and efficiency of our operations by overhauling our procedures in several key facets of flight operations, ground operations and maintenance. In November 2004, we initiated steps to combine the Atlas and Polar pilot-union bargaining units, both of which are represented by the Air Line Pilots Association. We expect this merger to be completed in 2006. We have also begun the process of merging the Atlas and Polar operating certificates into a single certificate. Doing so is expected to eliminate duplicative efforts in the operations and compliance areas. Merger of the operating certificates is expected to occur by the end of the first quarter of 2006. While operations are expected to be consolidated under the Polar certificate, we will continue to do business as two brands—Atlas in the wet leasing or ACMI market, Polar in the Scheduled Service freight market, with each continuing its participation in the charter market. Both brands will maintain their separate identities, but they will derive their lift capacity from a shared operation;

	•	Actively managing our asset base by optimizing capacity allocations among our various service types and by selectively disposing of unproductive assets, including our aging 747-200 aircraft, and replacing them with newer more modern aircraft. Systematic implementation of this initiative will enable us to offer our customers new services and fleet types that complement their needs for additional, more modern, lift capacity. Our recent agreement with Israel Aircraft Industries to acquire slots for the potential conversion of four Boeing 747 passenger aircraft to freighter configuration between late 2007 and mid-2008 is an example of our fleet renewal efforts;

	•	Pursuing growth opportunities, which may include offering customers new services and fleet types, which may include entry into passenger ACMI business;

	•	Continuing our efforts to maximize our financial flexibility, which may include refinancing our debt and issuing new debt and/or equity securities.