Interactive Buyside Equity Research

March 4, 2014

ATLAS AIR WORLDWIDE Thesis Overview

Atlas Air Worldwide (AAWW) is an outsourced global provider of aircraft and aviation operating services for airlines, express delivery providers, freight forwarders, the United States military and charter brokers. The Company derives a substantial portion of its business from air freight and is in the midst of a transformative fleet exercise to augment its dry leasing business in a move that should offset the impact of military drawdown and reinvigorate its earnings profile. The air freight industry has had a tenuous period since the Great Recession and recovery has heretofore been slow, with new capacity sustaining pressure on load factors. There are, however, signs of optimism for 2014 as business confidence should sustain backhalf 2013 trade recovery and there remain no obvious signs of global inventory overhang. Ultimately, I believe that investors are painting too punitive a picture against tangible books value for a Company with 81% of direct contribution from wet/dry leasing business that is insulated from first-order fuel, demand or yield risk. Capital allocation is the name of the game and, while I acknowledge that the fleet is not of the most attractive mix, I agree with managements view that there is still life to be had in some of the older generations (e.g. 747-400s). I believe that the asset-light CMI business a compelling growth channel over the next 1-2 years and a means to de-risk some of the current asset intensity. I are targeting a base case of $53/share (+56% to current) with limited downside as the Company already trades at tangible book value with $1.8BN of cash on its books and an investment grade credit rating. At its 3-year low, the equity was still worth $29/share (-14% to current).

Stock Rating Catalyst Category Price Target Price (3/4/14): $30.95 Upside: 41% Ticker: AAWW Exchange: NASDAQ Industry: Air Freight Trading Stats ($USD millions) Market Cap: $775 Enterprise Value: $2,634 Price / Tangible Book: 0.6x Dividend Yield: 0% Price / 2014E EPS: 9.9x Price / 2015E EPS: 9.2x EV / 2014E EBITDA: 8.2x EV / 2015E EBITDA: 7.8x
Source: Company filings, Wall Street Consensus

BUY Value $43.50

Price Performance 52 Week range: $29.81 - $50.98 Analyst Details IB Username: Stilian Morrison Employer: Independent Analyst Job Title: Analyst Analyst Disclosure AAWW Position Held: Yes

Interactive Buyside Equity Research

March 4, 2014

Company Overview
Atlas Air Worldwide (Atlas) is an outsourced global provider of aircraft and aviation operating services for airlines, express delivery providers, freight forwarders, the United States military and charter brokers. The Companys primary focus is on ACMI/CMI wet/damp leasing services in which Atlas charges customers p er block hour1 for some combination of aircraft and crew/maintenance/insurance (under CMI, the lessee provides the aircraft). As its military business experiences rapid drawdown from the withdrawal of overseas troops, Atlas has been repositioning itself to grow its dry leasing2 business as a stable complement to its core ACMI revenue stream. The Company owns a fleet of 33 aircraft and leases another 13, the majority of which in total are cargo freighters. There is a high concentration of 3rd and 4th generation 747s, which comprises four-engine wide-body aircraft geared toward serving extended and longer range flights. Atlas also has a subset of twin-engine widebodies that it primarily uses to serve its dry leasing customers. Given the fleet composition, the Company focuses on long-haul air freight routes (e.g. Asia-North America) and has operations throughout every continent (except Antarctica).

Recent Trading Levels

Trading Price: 52 Week High 52 Week Low Diluted Shares Outstanding: Market Cap Long-Term Debt (1) Operating Leases Commitments Cash and investments (1) Lease-Adjusted Enterprise Value: $ 30.95 $ 50.98 $ 29.81 25.039 $ 775 2,160 1,266 (301) $ 3,900
Historical 4-Year Trading
$75 $70 4.50 4.00

$65
$60

3.50
3.00

$55
$50

2.50
2.00

$45
$40

1.50
1.00

Adj. EBITDAR
$ Mult

$35
$30 2/19/2010

0.50
2/19/2014

2013A $ 453 2014P $ 475 2015P $ 501

8.6x 8.2x 7.8x

2/19/2011

2/19/2012

2/19/2013

Market Overview
Airfreight
Airfreight is something of a niche/boutique business in which cargo traffic (demand) primarily fluctuates based on pricing vs. larger-sized competitive substitutes (sea, land), and terms of trade (FX, relative prices). In Boeings 2012 -2013 (last) biennial presentation on world air cargo, the containership freight market (which is only dry cargo) was sized at over 50x (and growing) vs. the revenue-ton-kilometers (FTKs) of world air cargo. Ground cargo is not a direct substitute for most air freight, but this World Bank indicator shows that some 4.4 trillion ton-km were transported in China alone in 2010. For comparison, the entire air and containership cargo markets were 0.2 trillion and 10 trillion ton-km, respectively, in 2011. It is no secret that there has been a long-standing secular shift to other modes of freight transport (airfreight is 1-2% of global volume), but conversely there has been a critical value shift. Airfreight accounts for 35% of global freight value (some $6.4 trillion) due to small, high-value categories of inventory and justin-time processes inherent in parts of the supply chain. Atlas CEO Bill Flynn estimates some 15% of the Companys serviced cargo to be just-in-time, while 20% (not necessarily mutually exclusive) is small, high-value material. The latter has in the past been impacted by miniaturization (via smartphones and tablets), but I tend to agree with his view that this trend has largely worked its way through airfreight as smartphones begin to increase screen size and tablet sales stall. In any event, Atlas is not overtly leveraged to that sort of cargo.

Time from the moment the aircraft door closes at departure of a revenue flight until the moment the aircraft door opens at the arrival gate following its landing. Block hours are the industry standard measure of aircraft utilization. Wiktionary 2 In dry leasing, only the aircraft are leased (i.e. no CMI) on longer terms via monthly or annual rates.

Interactive Buyside Equity Research

March 4, 2014

Outsourced airfreight operators, both asset-heavy and asset-light, typically serve both airlines and freight forwarders. The latter tend to be more critical to Atlas type of business since they will often outsource some aspect of the airfreight process to free up capital for managing other logistical business (e.g. warehousing). Second-party logistics providers (2PL) own the planes themselves while 3PLs outsource the aircraft need to a firm like Atlas. DHL, though owning more than 250 aircraft, has the leading global 3PL airfreight business and also represents Atlas largest customer as well as a JV partner. In general, 3PL revenues have grown at an outsized clip (+14% in 2011, +11% in 2012) despite airs anemic trend. Critically, 3PL firms can pay out some 50% of their revenues to transportation carriers. Jet fuel is airfreights dominant input cost and prices have remained within the range of 3-year highs, conferring a meaningful cost on non-charter lessees, who must foot the bill when scheduling for ACMI/CMI and dry leasing. This has exacerbated the adverse impact of competitive substitution on cargo demand. However, the outlook suggests a favorable macro trend; Brent futures are guiding down below 3-year support levels.
Jet Fuel and Crude Oil Prices ($/barrel)
$180
$160 $140 $120 $100 $80

$60
$40 $20 $Apr-90 Apr-92 Apr-93 Apr-95 Apr-96 Apr-98 Apr-99 Apr-01 Apr-02 Apr-04 Apr-05 Apr-07 Apr-08 Apr-10 Apr-11 Apr-14 Apr-17
Apr-91 Apr-94 Apr-97 Apr-00 Apr-03 Apr-06 Apr-09 Apr-12 Apr-13 Apr-15 Apr-16

Brent
Source: EIA

Gulf Coast jet fuel

Global airfreight costs also include a regulatory component: customs procedures and various landing and port costs. This can be an under-stated input cost, but protectionism and a tapering of world trade relative to industrial production have forced a re-evaluation. The recent WTO meeting in Bali appeared to be successful at promulgating trade facilitation measures to boost trade volume to the tune of $400 billion a year, but there is still much work to be done to improve airfreight relative value vs. sea and land. Moreover, it is as yet unclear what proportion of the cost reduction in red tape will accrue to air modes vs. sea or land. Business confidence, a leading indicator of trade activity and (by proxy) air cargo demand (FTKs), began to improve in Q4 after a fairly unimpressive 2013. Notwithstanding adverse weather impacts in January 2014 and the seasonal lull around the Chinese New Year, there appears more optimism on the balance of the year to drive at least moderate growth in world trade. Any wins for globalization, via expansion of the trade / industrial production ratio, would be upside and are unlikely to manifest near-term.
Ratio of world trade to domestic industrial production

Purchasing Managers confidence survey and Air Freight demand

There are no obvious signs of inventory overhang, a major impediment to just-in-time cargo. The level of sensitivity is high enough that even moderate levels of stocking can have a meaningful impact, particularly when there is excess capacity. AFTKs (available FTKs) have increased in lieu of new belly/freighter capacity and kept load factors depressed near early 2008 levels. Freight load factors have arguably bottomed within the current cycle; the 2013 highs were observed at the end of the year on positive recent momentum. Nonetheless, there is a secular component that limits major upside: deadhead.

Interactive Buyside Equity Research

March 4, 2014

There is considerable imbalance (read: one-sidedness) in trade flows, particularly in the long-haul Asia-North America routes, such that a freighter often spends one leg carrying none or considerably less freight. Operators concentrate their efforts on yield stacking to reduce deadhead by logistically positioning trip routes through airports where freight can be dropped off and picked up at each stop. Airfreight servicers generally keep their load factors and yield economics close to the chest, but one can infer the impact of routes, efficiency, and fleet by reviewing block hour utilization. Atlas is focused on long-haul Asia-North America routes with 25% of ACMI fleet being new-gen 747-8 freighters. By comparison, Luxembourgs Cargolux has 45% of its fleet in the newer model and considerable exposure to Europe-EMEA trade routes that are more suited to yield stacking (more available stops in between). In 2013, Atlas averaged ACMI daily utilization of 10.2 hours for an implied load factor of 42% (on a 24-hour day) vs. 16 hours (67%) for Cargolux.
Freight Load Factor on Total Market
Total Business inventories to sales ratio and FTKs

Source: U.S. Cens us Burea u, IATA

~40% of air freight is transported as belly cargo, i.e. via the baggage holds of passenger aircraft (pax). Fortunately, for dedicated freighters, this share has continued to hold steady for over a decade even as belly capacity has risen to 55% of available supply. Atlas recent announcement that British Airways was prematurely terminating its ACMI leases raised investor con cern about freighter displacement from belly capacity. The reality is that freighters are necessary because of their unique efficiency and sizing benefits; certain types of machinery and large cargo can only be loaded through the nose doors of large freighters. ACMI (Atlas core long-term business) is just 6% of the air freight market, but has similarly withstood share losses to belly and other freighter services. Last Junes Loadstar profile on Atlas mentioned an interesting belly statistic: the transpacific market, for example, would need 50 incremental 777 passenger equivalents to take an extra 10% of the total market away from freighters. It seems highly unlikely that there is such incremental passenger seating demand to warrant such an exhaustive capital allocation in the name of a second-order revenue stream for pax.

Air Mobility Command

Several carriers carved out a substantial profit center during the 2000s from cargo and passenger transportation of U.S. military deployments. Annual market revenues peaked at $3 billion in 2010; for Atlas, military business had historically hovered around 30% of consolidated revenues until 2013 (22%). The U.S. Air Forces Air Mobility Command (AMC) currently enrolls 26 carriers in its carrier program to bid on RFPs, but there has been substantial drawdown as the U.S. withdraws from Afghanistan. The accelerated loss of business also produced a second-order impact: a reduction in yield stacking. Carriers like Atlas have been used to leveraging AMC contracts to stack yield on their long-haul trips by dropping cargo and troops in Afghanistan before continuing onto picking up commercial cargo in the rest of the Asia/Pacific. While the military drawdown has not been a secret, the recent announcement of an accelerated reduction seemed to catch the market unawares and has forced operators like Atlas to fast-track diversifying or offsetting streams of revenue. Also, the spillover of slack capacity comes at a time when (as already noted) commercial airfreight remains fairly tepid and load factors challenging.

Charter Services
Typically, an ACMI and AMC (i.e. scheduled) cargo carrier like Atlas will try to opportunistically shift slack capacity from slowdowns in scheduled business into charter passenger and freight services. Indeed, Atlas continues to derive a steady 30% of revenues from commercial charters for only 10% of utilized block hours. Chartered air freight accounts for 7 to 10% of global FTKs and typically covers just-in-time as well as other special needs categories (e.g. outsize cargo) in the supply chain.

Interactive Buyside Equity Research

March 4, 2014

Atlas has Remained a Very Capable Operator in a Difficult Freight Economy

Fleet EBITDAR Contribution is Below 2008 Recession Levels
$14.5 $13.5 $12.5 $11.5 $10.5

Atlas management team has no doubt made a major capital bet over the last few years. Their flagship 747-8 fleet, notwithstanding obvious merits to long-haul airfreight, has encountered resistance from loose capacity and several years of flat trade volume growth. Some airliners like British Airways seem to be exiting ACMI and pure freight business in favor of belly capacity. However, through all this relative adversity, I want to highlight a few reasons why I believe the Atlas shares are a potential bargain, not a value trap.

$9.5
$8.5 $7.5 2008A 2009A 2010A 2011A 2012A 2013A 2014P 2015P LTM EBITDAR / Fleet Aircraft(1)
(1) Fl eet a i rcra ft = Opera ting + Dry Lea s e + Out-of-Servi ce

The Company is ramping up its dry leasing business following the purchase of 3 777-200 freighters from Guggenheim. They are inheriting the lessee (a European airline) under attractive 2011 terms and I believe the mix shift should meaningfully improve the quality of earnings profile. Back in 2009, 41% of direct contribution was from stable ACMI and dry leasing business. In 2013, mix was 81%. By 2015, I expect it to be over 90% with dry leasing representing some 20%. Said another way, over 90% of Atlas profitability will NOT be (directly) exposed to fuel, demand or yield risk. ACMI/CMI is still volume-driven, albeit subject to a minimum block hour requirement, but dry leasing is a pure annuity stream with standard breakage costs structured in to mitigate early termination. Furthermore, the expansion of this business line is likely to offset much of the aforementioned AMC loss. While some investors shun the current asset picture as too capital-intensive, I am encouraged by managements progress in expanding the asset-light CMI business. Of the Companys 55 aircraft-equivalent fleet in use as of 12/31/13, CMI-provided aircraft accounted for an equivalent of ~12 (22%). CMI segment financials are not publicly disclosed, but I estimate as a general rule of thumb that revenue and direct contribution mix are 14% and 19%, respectively, of 2013 consolidated. I further expect that CMI direct contribution margins would be lower than ACMI at around 24-25% due to the lack of beneficial operating leverage on the aircraft lease rate (A) component (for more detail, please see the appendix). The CMI business is cargo-heavy and leveraged to DHL domestic/intra-Asia business and Boeings manufacturing logistics. In the latter case, there has been meaningful acceleration of late as Boeing increases its CMI Dreamlifter business with Atlas and other carriers to transport parts for producing its 787 Dreamliner. Management is aware that they cant count on charter volume to backfill all slack capacity in this tepid cargo market and they have consequently de-leveraged where they felt appropriate. They grounded one of their converted freighters last year and mentioned on the conference call that they would consider the option of a sale at appropriate economics. They also executed early termination of leases on two other 747-400 converted freighters for a one-time charge of ~$18MM. Net-net, the lease putback reduced cumulative commitments by $135MM. The remaining operating lease burden comprises $1.3BN committed against long duration (2020 2025) expirations on 13 747-400 freighters. Assuming early termination costs are 12% of commitments, a full put-back would theoretically move the Company from 6.6x lease-adjusted leverage to 5.9x corporate leverage on a depressed 2014 level. In general, as older generation fleet is being wound down in lieu of soft cargo trends and general age, there is palpable concern that freighter owners like Atlas might be running a largely defunct fleet of nominal value (e.g. twin-aisle 747s). A 2013 Boeing white paper concluded that economic life of aircraft tends to be cyclically resistant and that freighters tend to be over 30 years old by the time they leave service, which is typically before scrapping in soft markets. Atlas oldest freight category of fleet is one 757-200 cargo plane at 24.4 years. On average, their owned fleet of 33 planes are 10 years old, of which 15 are young (< 5 y/o) current-gen units (747-8F and 777-200LRF) and which I estimate to represent some 95% of replacement value. My cursory impression of management is that they seem to know their business fairly well and command respect among their vendors (Boeing) and customers/partners (DHL). The feedback that I received from Boeing was that CEO Flynn and CCO Steen bring strong backgrounds from freight forwarding and are well-adjusted to managing the increasingly pertinent logistics of deadhead. Insider selling has been nominal at 0.1% of float, but still prevalent of late with small lots sold around the Q4 release. This suggests that there may be a bit more heartburn as the business finds its bottom during the course of the year.

Interactive Buyside Equity Research

March 4, 2014

Valuation
Overview
My intimation of the investment story and underlying steps to re-rating value assume the recovery takes some time, on the order of 1-2 years. I value the business on DCF, sum-of-the-parts and replacement value bases consistent with current market and industry comparable data. I was unable to dig up many pure-play or close fit ACMI public comps, with the exception perhaps of ATSG. In general, the comp set mainly comprises dry lessors and freight forwarders, the former of which are still a smaller component of business and the latter of which are Atlas primary customer base. I used my best judgment in taking applying discounts to these multiples for developing a sum-of-the-parts analysis. One further caveat is that the business is trading at 0.6x tangible book value, which by all accounts, seems rather punitive even for current leverage levels (liquidity is robust and there is no immediate risk to the underlying credit).
Discounted Cash Flow Analysis
AT Cost of Debt Cost of equity ($ in millions) UFCF Terminal Equity Value Discount Factor (Equity) PV UFCF $ PV Terminal Equity Value Implied Equity $ 1,215 $ Implied Price Current Price % Premium/Disc $ 48.54 $ 30.95 56.8% 2.0% 11.4% Perpetuity Implied TV Mult. (EBITDA) 2.5% 8.3x

Sum of the Parts

Segment EBITDA ($ in millions) ACMI/CMI AMC Commercial Dry Leasing Corporate Consolidated (-) Net Corporate Debt Implied Equity Implied Price Current Price % Premium/Disc 2014 319 47 21 77 (124) 339 2015 355 23 18 101 (130) 366 Multiple 6.5x 6.0x 5.5x 9.5x 5.0x 7.8x Valuation 2014 2,075 280 113 731 (621) 2,578 (1,859) 719 2015 2,305 136 100 956 (652) 2,844 (1,859) 985 $ 39.36 $ 30.95 27.2%

3/5/14 12/31/14 12/31/15 12/31/16 12/31/17 12/31/18 $ (176) $ 50 $ 80 $ 114 $ 161 1,858 0.9150 (161) $ (161) $ 0.8216 41 $ 41 $ 0.7375 59 $ 59 $ 0.6622 0.5946

76 $ 96 1,105 76 $ 1,200

Replacement Value
Fleet ($ in millions) 747-8F Cargo 777-200LRF Cargo (1) 747-400 Cargo 737-800 Passenger 747-400 Passenger 747-400 Cargo Converted 767-300 Passenger 757-200 Cargo 737-300 Cargo Estimated Fleet Value (-) Net Corporate Debt Implied Equity Implied Price Current Price % Premium/Disc $ $ $ $ $ $ Estimated Sale Price for 747-8F 175 $ 225 $ 275 $ 325 6.32 $ 19.79 $ 33.27 $ 46.75 10.81 $ 24.29 $ 37.77 $ 51.25 15.30 $ 28.78 $ 42.26 $ 55.74 19.79 $ 33.27 $ 46.75 $ 60.23 24.29 $ 37.77 $ 51.25 $ 64.73 $ $ $ $ $ $ 350 53.49 57.99 62.48 66.97 71.47 Count 9 $ 6 8 2 2 1 3 1 1 33 Age Adj. Estimated Average Price 275 200 15 20 15 5 4 4 5 Value $ 2,475 1,200 120 40 30 5 11 4 5 Age 1.4 3.5 13.9 6.5 21.7 20.5 20.6 24.4 21.1 10.0 Recovery % 75.0% 75.0% 75.0% 75.0% 75.0% 75.0% 75.0% 75.0% 75.0% $ $ 1,856 900 90 30 23 4 8 3 4 $ 2,917 (1,859) $ 1,058 $ 42.26 $ 30.95 36.5%

(1) Pro forma for 3 a i rcra ft purcha s ed i n Ja nua ry wi th pa rtia l proceeds from $432MM i n term l oa ns Source: Boeing, GlobalPlaneSearch.com

Estimated sale price for 777-200LRF

150 175 200 225 250

Interactive Buyside Equity Research

March 4, 2014

Base Case Annual Financial Projections

FYE 12/31 ($MM, except as noted) Operating Statistics Block Hours ACMI AMC Commercial Other Total Block Hours ('000s) Utilization (BH/Day) ACMI AMC Commercial Avg Utilization Revenue per BH ACMI AMC Commercial Other Avg. Rev $/BH Dry Lease Rate ($ '000/month) Fleet ACMI AMC Commercial Dry Leasing Total Operating Aircraft Out-of-service Financials Revenue ACMI AMC Commercial Charter Dry Leasing Other Total Revenue Operating Expenses Aircraft fuel Salaries, wages, benefits Maintenance Aircraft rent Depreciation and amort Passenger, ground handling Navigation/landing fees, other Travel Gain on disposal Special charge Other Total operating expenses (+) Pre-operating expenses (+) Fleet retirement costs (-) Insurance gain Other Adj. EBITDAR LTM EBITDAR / Fleet Aircraft(1) Adj. EBITDA Stock comp Non-recurring cash Other, net Base Capex Cash interest Mandatory debt amort Cash taxes Change in NWC Insurance proceeds Asset disposal FCF excl. fleet acquisitions 2008A 2009A 2010A 2011A 2012A 2013A 2014P 2015P 2016P 2017P 2018P

59 18 7 1 85

77 19 13 0 109 12.3 7.7 9.9 10.9

91 19 18 1 128 13.6 9.3 10.2 12.3

103 19 14 1 137 13.0 8.9 10.3 12.0 $ 6,159 $ 23,049 $ 21,581 $ 10,808 $ 10,131

107 22 22 1 153 12.0 8.6 9.4 11.0 $ 6,368 $ 21,743 $ 20,500 $ 11,725 $ 10,701

115 17 25 1 159 10.2 7.0 8.0 9.4

110 11 26 2 148 7.8 8.5 11.6 8.4

124 5 24 2 155 8.3 15.9 12.0 8.8

131 5 25 2 162 8.8 14.4 12.5 9.2

137 4 26 2 169 9.2 13.1 13.0 9.6

144 4 27 2 176 9.7 11.9 13.5 10.0

7.5

$ 6,055 $ 6,274 $ 5,953 $ 23,627 $ 17,235 $ 20,825 $ 18,967 $ 16,947 $ 21,878 $ 2,778 $ 68,290 $ 17,745 $ 10,792 $ 9,624 $ 10,366 $ 1,333 $ 17.1 6.8 3.5 0.8 28.2 2.5

$ 6,545 $ 6,500 $ 6,500 $ 6,500 $ 6,500 $ 6,500 $ 20,899 $ 21,000 $ 21,000 $ 22,000 $ 22,000 $ 22,000 $ 19,471 $ 19,500 $ 19,500 $ 19,500 $ 19,500 $ 19,500 $ 13,592 $ 14,000 $ 14,000 $ 14,000 $ 14,000 $ 14,000 $ 10,203 $ 9,933 $ 9,061 $ 9,022 $ 8,956 $ 8,896 511 $ 31.0 6.6 8.7 5.7 52.1 0.9 720 $ 38.5 3.6 6.1 9.8 57.9 1.0 975 40.8 2.0 5.4 10.0 58.2 1.0 $ 1,000 40.8 2.0 5.4 10.0 58.2 1.0 $ 1,000 40.8 2.0 5.4 10.0 58.2 1.0 $ 1,000 40.8 2.0 5.4 10.0 58.2 1.0

748 $ 18.4 5.5 4.7 0.8 29.4 0.1

367 $ 21.7 5.9 3.7 2.2 33.5 0.4

290 $ 24.4 7.1 6.4 3.4 41.3 -

30.9 0.8

358 $ 482 $ 544 $ 633 $ 682 $ 755 $ 713 $ 808 $ 851 $ 891 $ 935 426 329 389 443 488 356 232 110 107 98 90 127 215 384 300 450 496 505 463 483 501 521 49 13 7 10 12 35 84 117 120 120 120 2 22 13 14 14 14 22 22 22 22 22 962 $ 1,062 $ 1,338 $ 1,398 $ 1,646 $ 1,657 $ 1,556 $ 1,520 $ 1,582 $ 1,631 $ 1,688

201 $ 300 $ 389 $ 437 $ 410 $ 346 $ 264 $ 260 $ 254 $ 250 216 238 262 294 299 281 294 308 321 335 151 174 168 165 163 170 174 194 195 203 148 155 159 155 160 136 136 134 130 131 25 34 39 62 86 94 94 94 94 94 40 27 31 70 73 64 58 59 60 62 33 49 55 72 86 59 62 65 68 71 16 34 44 56 61 56 58 61 63 66 (1) (4) (0) (2) 0 8 5 19 74 102 95 111 107 104 108 113 118 123 912 $ 1,110 $ 1,247 $ 1,420 $ 1,466 $ 1,311 $ 1,249 $ 1,288 $ 1,302 $ 1,335 330 $ 10.8 $ 183 $ 11 (1) (30) (39) n/a (0) 33 4 160 $ 413 $ 14.0 $ 259 $ 14 9 (30) (34) n/a (29) 30 5 224 $ 17 372 $ 11.0 $ 213 $ 13 (17) 0 (37) (38) (38) (4) (92) 1 0 $ 4 445 $ 10.8 $ 290 $ 18 (4) 6 (31) (55) (70) 27 (27) 3 3 161 $ (4) 453 $ 8.5 $ 292 $ 17 4 (2) (30) (68) (123) (0) 54 9 5 159 $ 475 $ 8.1 $ 501 $ 8.5 $ 522 $ 8.8 $ 553 $ 9.3 $ 423 $ 18 (54) (59) (215) 0 114 $ 578 9.8 447 18 (56) (49) (200) 0 161

284 $ 9.0 $ $

339 $ 366 $ 388 $ 18 18 18 (18) (47) (50) (52) (82) (78) (68) (190) (205) (207) (29) (0) 1 (8) $ 50 $ 80 $

Interactive Buyside Equity Research

March 4, 2014
FYE 12/31 ($MM, except as noted) Key Operating/Financial Metrics Utilization growth ACMI AMC Cargo AMC Passenger AMC total Commercial Total Block Hour Growth ACMI AMC Cargo AMC Passenger AMC total Commercial Total Block Hour Mix ACMI AMC Cargo AMC Passenger AMC total Commercial Total Revenue per BH ACMI AMC Cargo AMC Passenger AMC total Commercial Fuel $/gallon growth AMC Commercial Total Lease Rev vs. Gtd. Min Revenue Growth ACMI AMC Commercial Dry leasing Other Total Revenue Mix ACMI AMC Commercial Dry leasing Direct Contribution ACMI AMC Commercial Dry leasing Direct Contribution Mix ACMI AMC Commercial Dry leasing Corp OH/BH growth Aircraft rent Adj. EBITDAR margin Adj. EBITDA margin 29.5% 31.1% 17.2% 12.3% 2008A 2009A 2010A 2011A 2012A 2013A 2014P 2015P 2016P 2017P 2018P

Thr

10.5%

(4.7%)

21.0% 3.1% 12.9%

(4.1%) 0.3% (2.4%)

(7.5%) (4.1%) 75.3% (3.2%) (8.8%) (8.2%)

(15.1%) (24.4%) (13.8%) (18.6%) (14.5%) (14.7%)

(23.4%) 38.4% 10.6% 21.2% 44.4% (10.2%)

7.0% (10.0%) (8.0%) 86.1% 4.0% 4.5%

5.0% (10.0%) (8.0%) (9.1%) 4.0% 4.4%

5.0% (10.0%) (8.0%) (9.1%) 4.0% 4.4%

5.0% (10.0%) (8.0%) (9.1%) 4.0% 4.5%

29.9% n/a n/a 5.9% 89.1% 28.8%

18.9% n/a n/a (2.1%) 38.4% 17.8%

12.4% n/a n/a 2.8% (21.0%) 6.8%

4.3% (41.6%) 778.9% 16.9% 58.3% 11.4%

7.7% (39.2%) (10.9%) (24.0%) 16.0% 4.1%

(5.0%) 13.4% (23.6%) (100.0%) (42.1%) (15.4%) (35.2%) (52.4%) 1.6% (8.3%) (6.8%) 4.6%

5.3% n/a (7.7%) (7.7%) 4.3% 4.6%

4.7% n/a (8.3%) (8.3%) 3.7% 4.1%

5.0% n/a (8.0%) (8.0%) 4.0% 4.5%

69.9%

70.5%

71.2%

21.3% 7.9% 100.0%

17.5% 11.6% 100.0%

14.6% 13.7% 100.0%

74.9% 13.0% 1.0% 14.0% 10.1% 100.0%

70.2% 6.8% 7.9% 14.7% 14.4% 100.0%

72.6% 4.0% 6.7% 10.7% 16.0% 100.0%

74.0% 3.3% 4.2% 7.5% 17.5% 100.0%

80.3% 3.4% 3.4% 15.3% 100.0%

80.8% 3.0% 3.0% 15.3% 100.0%

81.2% 2.6% 2.6% 15.2% 100.0%

81.6% 2.3% 2.3% 15.1% 100.0%

3.6%

(5.1%)

3.5%

3.4%

2.8%

(0.7%)

(27.1%) (10.6%)

20.8% 29.1%

10.7% (1.4%)

(5.7%) (5.0%)

(3.9%) (5.0%)

0.5% 0.2%

4.8%

(40.8%) n/a n/a 21.1%

32.7% 22.8% 27.0% 26.0%

35.4% 38.8% 37.9% 29.1%

(7.7%) 0.9% (4.1%) 25.7%

6.6% (5.5%) (1.5%) 43.5%

(3.6%) (3.4%) (4.6%) 49.3%

(4.0%) (4.0%) (5.3%) 128.9%

(4.0%) (4.0%) (4.2%) 208.1%

(4.0%) (4.0%) (4.2%) 305.7%

(4.0%) (4.0%) (4.2%) 434.9%

34.6% (73.8%) n/a 989.4% 10.3%

12.8% (43.9%) n/a (40.6%) 26.0%

16.3% 35.1% 23.0% 3.4% 4.5%

7.9% 22.2% (4.1%) (0.7%) 17.7%

45.4% 31.0% 20.3% 1.2%

40.7% 29.1% 28.7% 0.5%

45.2% 31.7% 21.4% 0.7%

41.4% 29.7% 27.4% 0.7%

45.6% 21.5% 29.9% 2.1%

45.8% 14.9% 32.4% 5.4%

53.1% 7.3% 30.4% 7.7%

53.8% 6.7% 30.5% 7.6%

54.6% 6.0% 30.7% 7.4%

55.4% 5.3% 30.8% 7.1%

21.0% 25.1% 7.6% 29.0%

18.8% 28.5% 18.5% 8.2%

23.5% 28.6% 29.1% 64.7%

23.4% 19.6% 13.4% 47.8%

28.1% 20.4% 7.1% 38.8%

30.2% 14.7% 0.0% 39.9%

40.2% 41.7% 17.7% 0.5%

36.0% 31.3% 31.5% 1.3% 16.3% 4.7% 30.9% 19.3%

53.0% 31.0% 14.4% 1.7% (23.9%) 3.0% 26.6% 15.2%

58.4% 30.4% 9.8% 1.4% 5.4% (2.8%) 27.0% 17.6%

77.4% 17.8% 0.0% 4.8% (11.4%) 3.5% 27.3% 17.6%

n/a n/a n/a n/a

(15.3%) 30.5% 21.8%

2.0% 33.0% 24.0%

2.0% 33.0% 24.5%

2.0% 33.9% 25.9%

2.0% 34.3% 26.5%

Interactive Buyside Equity Research

March 4, 2014

Public Equity Comps

Comparable Company Trading
Cap. Net Debt Dry Lessors Air Lease Aircastle FLY Leasing AerCap Median Freight Forwarders Deutsche Post DHL FedEx UPS UTi Worldwide Median Cargo Airlines Air Transport Services Group (1) $ 524 $ 259 $ 407 $ 1,190 6.5x 6.0x 1.7x 4.3x 578 156 184 31.8% (55) $ $ $ $ 5,257 3,201 1,969 5,941 $ $ $ $ Rent 22 11 456 $ $ $ $ Market Cap 3,732 1,602 1,237 4,851 Valuation Adj. TEV AEV/EBITDAR EV/EBITDA P / TBV Leverage Revenue $ 9,010 $ 4,813 $ 3,206 $ 11,249 11.8x 6.9x 8.5x 11.4x 9.9x 11.8x 6.9x 8.5x 11.5x 10.0x 1.5x 1.0x 1.7x 2.0x 1.6x 6.9x 4.6x 5.2x 6.5x 5.8x 806 693 415 1,050 LTM EBITDA EBITDAR Margin 760 694 376 942 762 94.6% 695 100.2% 376 90.7% 991 94.4% FCF n/a n/a n/a n/a

8,511 $ 3,641 $ 12,630 $ 289

1,294 $ 20,977 $ 5,763 $ 1,392

32,643 42,448 $ 43,408 $ 68,027 $ 90,031 $ 108,425 $ 1,633 $ 3,314

10.0x 9.1x 11.3x 13.7x 10.7x

10.0x 9.0x 11.5x 20.6x 10.8x

n/m 2.9x 25.5x 5.3x 5.3x

2.3x 3.3x 1.9x 6.9x 2.8x

55,168 4,108 4,247 44,815 5,220 7,473 55,438 8,940 9,559 1,527 93 243

7.7% 16.7% 17.2% 15.9%

(584) 1,456 5,339 (173)

Atlas Air

$ 1,859 $ 1,266 $

775 $

3,900

8.6x

8.9x

0.6x

6.9x

$ 1,639 $

296 $

453

27.7%

$ 154

(1) Cos t to a cqui re a nd convert ATSG's owned a nd i n-s ervi ce 767 frei ghter fl eet (20+ yea rs ol d) a t current ma rket pri ces i s ~$775MM. Impl i ed repl a cement va l ue of 5x EBITDA

Risk Factors
Leverage
The equity cushion is near historical lows as management anticipated they would have hit peak leverage and de-levered sooner than this. There are some levers that can be pulled in lieu of a few unencumbered aircraft and the relative value of putting back long-dated operating leases, even after eating breakage costs.

Cargo Trends
All eyes remain on performance of the transpacific trade routes as seasonal perturbations around U.S. weather and the Chinese New Year gradually subside. I am not bullish on the early 2014 picture, with Chinese PMI remaining depressed, but the second half is generally the real seasonal test as the Company rounds into the holiday season. My broad view is that freight will be sideways to slightly down in the near-term, but that Atlas should be able to manage through as it ramps dry leasing business.

Slack Capacity
Atlas has played the swing supplier game for a long time now and there have been both good and bad years for chartered business of late. Q4 provided a nice bounce back on that segment after a very rough 2013, but it is difficult to gauge visibility into this aspect of Atlas P&L given the short lead times.

Secular Sea/Land, Belly

My general impression is that the miniaturization theme has played out in this phase of the secular shifts to other modes of transport and that air will remain an eminent value proposition for niche aspects of cargo. Within freight, belly is somewhat capacity constrained by the relatively low attachment rates for cargo and the historical trend appears to support the bullish view that incremental mix shift is limited.

Conclusion
Atlas is not a straightforward recovery story, and will likely require some patience this year, but the underlying sector and company themes suggest the worst may be behind management. There appears a good deal of support to countervail impressions of a value trap. I think that the eminent first catalyst will be seeing how the ramp of dry leasing business impacts the quality of earnings in Q1 against the backdrop of the AMC drawdown. On a thematic basis, I believe that freight will begin to assert and support more assured recovery in the second half of the year. CMI is capably poised and I would fully expect management to try and push this business further in lieu of reducing asset intensity.

Interactive Buyside Equity Research

March 4, 2014

Appendix: CMI Estimated Financials

FYE 12/31 ($MM, except as noted) 2008A 2009A 2010A 2011A 2012A 2013A

Three Months Ende

Block Hours CMI ACMI ACMI/CMI Utilization (BH/Day) CMI ACMI ACMI/CMI Revenue per BH CMI ACMI ACMI/CMI Dry Lease Rate ($ '000s/month) Revenue CMI ACMI ACMI/CMI CMI revenue mix CMI Operating Expenses Aircraft fuel Salaries, wages, benefits Maintenance Aircraft rent Depreciation and amort Passenger, ground handling Navigation/landing fees, other Travel Gain on disposal Special charge Other CMI CMI Direct Contribution Direct Contribution Margin Direct Contribution Mix

59 59

77 77

2 90 91

8 95 103

20 87 107

37 78 115

12.3 12.3

13.6 13.6 13.6

12.2 13.0 13.0

11.3 12.2 12.0

9.7 10.4 10.2

n/a $ 6,055 $ 6,055

$ $ $ $

5,978 6,274 6,274 1,333

$ $ $ $

5,711 5,958 5,953 1,200

$ $ $ $

5,907 6,179 6,159 1,200

$ $ $ $

6,099 6,430 6,368 1,200

$ $ $ $

6,230 6,694 6,545 1,200

$ $

- $ 358 358 $

- $ 482 482 $ 0.0%

10 $ 534 544 $ 0.7%

45 $ 588 633 $ 3.2%

122 $ 231 560 524 682 $ 755 7.4% 14.0%

3 2 1 0 2 9 $

14 9 3 2 7 36 8 18.6% 3.0% $

39 21 9 7 21 97 25 20.6% 7.7% $

70 37 20 14 34 175 56 24.3% 19.1%

- $ 1 n/a 12.4% 0.3%

Fleet 747-8F Cargo 747-400 Cargo 767-300 Cargo 767-200 Cargo 747-400 Passenger 767-300 Passenger 767-200 Passenger 747-200 Cargo CMI % of total operating 747-8F Cargo 747-400 Cargo 767-300 Cargo 767-200 Cargo 747-400 Passenger 767-300 Passenger 767-200 Passenger 747-200 Cargo ACMI

0.4 0.4 1.2% 18.0 0.1 18.1

0.7 1.0 1.7 5.1% 0.2 19.6 0.2 20.0

1.2 2.5 1.1 4.8 11.7% 4.3 15.2 0.1 19.6

1.9 1.9 5.0 1.3 0.5 10.5 20.1% 7.8 12.6 0.2 20.6

17.1