Table of Contents

 

 

 

**UNITED STATES SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

**FORM 10-Q**

 

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

 

**For the quarterly period ended June 30, 2011**

 

**or**

 

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

 

**For the transition period from                  to                **

 

**Commission File No. 333-167913**

 

**GLOBAL AVIATION HOLDINGS INC.**

(Exact name of registrant as specified in its charter)

 

| **Delaware**                    | ** ** | **20-4222196**      |
|---------------------------------|------------|---------------------|
| (State or other jurisdiction of |       | (I.R.S. Employer    |
| incorporation or organization)  |       | Identification No.) |

 

| **101 World Drive**                      | ** ** |       |
|------------------------------------------|------------|------------|
| **Peachtree City, Georgia**              |       | **30269**  |
| (Address of principal executive offices) |       | (Zip Code) |

 

**(770) 632-8000**

(Registrant’s telephone number, including area code)

 

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 x  NO o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES o  NO o

 

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

 

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

 

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

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

As of July 31, 2011 the number of shares of $0.0001 par value common stock outstanding was 26,836,923.

 

 

 

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GLOBAL AVIATION HOLDINGS INC.

 

INDEX

 
| ** **                                                                                                             | **Page No.** |
|------------------------------------------------------------------------------------------------------------------------|-------------------|
|                                                                                                                   |              |
| PART I.   FINANCIAL INFORMATION                                                                                   | 1                 |
|                                                                                                                   |              |
| Item   1. Financial Statements.                                                                                        | 1                 |
|                                                                                                                   |              |
| Condensed Consolidated Balance Sheets — June 30,   2011 (unaudited) and December 31, 2010               | 1                 |
|                                                                                                                   |              |
| Condensed Consolidated Statements of Operations -   Three and six months ended June 30, 2011 and 2010 (unaudited) | 3                 |
|                                                                                                                   |              |
| Condensed Consolidated Statements of Cash Flows - Six   months ended June 30, 2011 and 2010 (unaudited)           | 4                 |
|                                                                                                                   |              |
| Notes to Condensed Consolidated Financial Statements   (unaudited)                                                     | 5                 |
|                                                                                                                   |              |
| Item 2. Management’s Discussion and Analysis of   Financial Condition and Results of Operations.                  | 14                |
|                                                                                                                   |              |
| Item 3. Quantitative and Qualitative Disclosures About   Market Risk.                                                  | 38                |
|                                                                                                                   |              |
| Item 4. Controls and Procedures.                                                                                       | 39                |
|                                                                                                                   |              |
| PART II.   OTHER INFORMATION                                                                                      | 40                |
|                                                                                                                   |              |
| Item   1. Legal Proceedings.                                                                                           | 40                |
|                                                                                                                   |              |
| Item 1A.   Risk Factors.                                                                                               | 41                |
|                                                                                                                   |              |
| Item 6. Exhibits.                                                                                                      | 42                |
|                                                                                                                   |              |
| SIGNATURES                                                                                                             | 43                |

 

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**PART I. FINANCIAL INFORMATION**

 

**Item 1. Financial Statements**

 

**Global Aviation Holdings Inc. and Subsidiaries**

 

Condensed Consolidated Balance Sheets

*(In Thousands, Except Share Data)*

 
| ** **                                                                                                | ** ** | **June 30,   2011** | ** **  | **December 31,   2010** | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|--------------------------|-------------|------------------------------|------------|
| ** **                                                                                                | ** ** | **(Unaudited)**          | ** **  | ** **                   | ** ** |
| **Assets**                                                                                                |       |                     |        |                         |       |
| Current assets:                                                                                           |       |                     |        |                         |       |
| Cash and cash equivalents                                                                                 | ** ** | **$**                    | **50,726**  |                         | $          | 74,543 |   |
| Accounts receivables, net of allowance for   doubtful accounts of: 2011—$169; and 2010—$442     | ** ** | **50,920**               |        | 30,162                       |       |
| Inventories, net                                                                                          | ** ** | **13,384**               |        | 15,645                       |       |
| Maintenance reserve deposits                                                                              | ** ** | **46,728**               |        | 60,217                       |       |
| Deferred tax assets, net                                                                                  | ** ** | **18,528**               |        | 18,362                       |       |
| Prepaid expenses and other current assets                                                                 | ** ** | **70,164**               |        | 81,599                       |       |
| Total current assets                                                                                      | ** ** | **250,450**              |        | 280,528                      |       |
| Property and equipment:                                                                                   | ** ** | ** **               |        |                         |       |
| Flight equipment                                                                                          | ** ** | **245,236**              |        | 228,613                      |       |
| Facilities and ground equipment                                                                           | ** ** | **19,301**               |        | 18,726                       |       |
| Gross property and equipment                                                                              | ** ** | **264,537**              |        | 247,339                      |       |
| Accumulated depreciation                                                                                  | ** ** | **(127,738**             | **)**       | (105,190                     | )          |
| Net property and equipment                                                                                | ** ** | **136,799**              |        | 142,149                      |       |
| Intangible assets:                                                                                        | ** ** | ** **               |        |                         |       |
| Military contract intangibles, net of accumulated   amortization of: 2011—$97,721; 2010—$85,112 | ** ** | **154,461**              |        | 167,070                      |       |
| Other intangible assets, net of accumulated   amortization of 2011 and 2010 - $8,122                      | ** ** | **4,000**                |        | 4,000                        |       |
| Total intangible assets                                                                                   | ** ** | **158,461**              |        | 171,070                      |       |
| Restricted cash                                                                                           | ** ** | **6,356**                |        | 6,326                        |       |
| Maintenance reserve deposits                                                                              | ** ** | **68,481**               |        | 45,342                       |       |
| Deposits and other assets                                                                                 | ** ** | **44,456**               |        | 44,889                       |       |
| Total assets                                                                                              | ** ** | **$**                    | **665,003** |                         | $          | 690,304 |   |

 

*See accompanying notes.*

 

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**Global Aviation Holdings Inc. and Subsidiaries**

 

Condensed Consolidated Balance Sheets (continued)

*(In Thousands, Except Share Data)*

 
| ** **                                                                                                                                                       | ** ** | **June 30,   2011** | ** **  | **December 31,   2010** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|-------------|------------------------------|------------|
| ** **                                                                                                                                                       | ** ** | **(Unaudited)**          | ** **  | ** **                   | ** ** |
| **Liabilities and stockholders’   equity**                                                                                                                  |       |                     |        |                         |       |
| Current liabilities:                                                                                                                                             |       |                     |        |                         |       |
| Current maturities of long-term debt                                                                                                                             | ** ** | **$**                    | **21,415**  |                         | $          | 12,673 |   |
| Long-term debt                                                                                                                                                   | ** ** | **205,600**              | ** **  | **—**                   | ** ** |
| Accounts payable                                                                                                                                                 | ** ** | **53,797**               |        | 15,854                       |       |
| Air traffic liabilities                                                                                                                                          | ** ** | **10,420**               |        | 7,174                        |       |
| Accrued compensation and benefits                                                                                                                                | ** ** | **23,100**               |        | 31,470                       |       |
| Accrued flight expenses                                                                                                                                          | ** ** | **14,698**               |        | 17,954                       |       |
| Other accrued expenses and current liabilities                                                                                                                   | ** ** | **105,505**              |        | 111,955                      |       |
| Total current liabilities                                                                                                                                        | ** ** | **434,535**              |        | 197,080                      |       |
| Long-term debt, less current maturities and   portion classified as current                                                                                      | ** ** | **116**                  |        | 210,785                      |       |
| Deferred tax liabilities, net                                                                                                                                    | ** ** | **57,506**               |        | 78,995                       |       |
| Other liabilities                                                                                                                                                | ** ** | **38,306**               |        | 33,357                       |       |
| Stockholders’ equity:                                                                                                                                       | ** ** | ** **               |        |                         |       |
| Preferred stock, 15,000,000 shares authorized; no   shares issued and outstanding                                                                                | ** ** | ** **               |        |                         |       |
| Common stock, $.0001 par value; authorized 2011   and 2010—400,000,000; issued and outstanding 2011 and 2010—26,836,923 and   26,802,900, respectively | ** ** | **3**                    |        | 3                            |       |
| Warrants                                                                                                                                                         | ** ** | **45**                   |        | 1,479                        |       |
| Additional paid-in capital                                                                                                                                       | ** ** | **346,896**              |        | 342,161                      |       |
| Accumulated deficit                                                                                                                                              | ** ** | **(212,373**             | **)**       | (173,563                     | )          |
| Accumulated other comprehensive income (loss)                                                                                                                    | ** ** | **(31**                  | **)**       | 7                            |       |
| Total stockholders’ equity                                                                                                                                  | ** ** | **134,540**              |        | 170,087                      |       |
| Total liabilities and stockholders’ equity                                                                                                                  | ** ** | **$**                    | **665,003** |                         | $          | 690,304 |   |

 

*See accompanying notes.*

 

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**Global Aviation Holdings Inc. and Subsidiaries**

 

Condensed Consolidated Statements of Operations

*(Dollar Amounts in Thousands, Except Income per Share Data)*

 
| ** **                                                          | ** ** | **Three Months   Ended June 30,** | ** **  | **Six Months   Ended June 30,** | ** ** |
|---------------------------------------------------------------------|------------|--------------------------------------------------|-------------|------------------------------------------------|------------|
| ** **                                                          | ** ** | **2011**                                         | ** **  | **2010**                                       | ** ** | **2011** | ** ** | **2010** | ** ** |
| ** **                                                          | ** ** | **(Unaudited)**                                  | ** **  | **(Unaudited)**                                | ** ** |
| Operating revenues:                                                 |       |                                             |        |                                           |       |   |   |   |   |
| Military passenger                                                  | ** ** | **$**                                            | **185,307** |                                           | $          | 209,640 | ** ** | **$** | **358,802** |   | $ | 420,001 |   |
| Military cargo                                                      | ** ** | **17,316**                                       |        | 35,971                                         | ** ** | **39,858** |   | 85,985 |   |
| Commercial cargo                                                    | ** ** | **48,302**                                       |        | 33,919                                         | ** ** | **89,837** |   | 59,933 |   |
| Commercial passenger                                                | ** ** | **8,547**                                        |        | 11,010                                         | ** ** | **17,420** |   | 21,566 |   |
| Other                                                               | ** ** | **2,968**                                        |        | 1,460                                          | ** ** | **4,157** |   | 3,058 |   |
| Total operating revenues                                            | ** ** | **262,440**                                      |        | 292,000                                        | ** ** | **510,074** |   | 590,543 |   |
| Operating expenses:                                                 | ** ** | ** **                                       |        |                                           | ** ** | ** ** |   |   |   |
| Aircraft fuel                                                       | ** ** | **78,666**                                       |        | 76,152                                         | ** ** | **149,118** |   | 153,080 |   |
| Aircraft rentals                                                    | ** ** | **37,622**                                       |        | 39,324                                         | ** ** | **74,846** |   | 78,409 |   |
| Maintenance, materials and repairs                                  | ** ** | **39,146**                                       |        | 31,446                                         | ** ** | **72,791** |   | 66,719 |   |
| Flight operations                                                   | ** ** | **28,961**                                       |        | 25,957                                         | ** ** | **56,282** |   | 52,764 |   |
| Aircraft and traffic servicing                                      | ** ** | **18,538**                                       |        | 21,873                                         | ** ** | **38,845** |   | 46,164 |   |
| Passenger services                                                  | ** ** | **16,263**                                       |        | 18,820                                         | ** ** | **32,376** |   | 39,242 |   |
| Crew positioning                                                    | ** ** | **14,863**                                       |        | 14,751                                         | ** ** | **28,356** |   | 29,144 |   |
| Selling and marketing                                               | ** ** | **6,771**                                        |        | 14,833                                         | ** ** | **13,368** |   | 30,769 |   |
| Depreciation and amortization                                       | ** ** | **22,636**                                       |        | 19,101                                         | ** ** | **50,174** |   | 37,693 |   |
| General and administrative                                          | ** ** | **7,923**                                        |        | 14,739                                         | ** ** | **24,884** |   | 27,497 |   |
| Asset impairment and aircraft retirements                           | ** ** | **113**                                          | ** **  | **—**                                     | ** ** | **294** | ** ** | **—** | ** ** |
| Other expenses                                                      | ** ** | **3,193**                                        |        | 1,946                                          | ** ** | **5,212** |   | 4,732 |   |
| Total operating expenses                                            | ** ** | **274,695**                                      |        | 278,942                                        | ** ** | **546,546** |   | 566,213 |   |
| Operating income (loss)                                             | ** ** | **(12,255**                                      | **)**       | 13,058                                         | ** ** | **(36,472** | **)** | 24,330 |   |
| Other income (expense):                                             | ** ** | ** **                                       |        |                                           | ** ** | ** ** |   |   |   |
| Interest income                                                     | ** ** | **412**                                          |        | 646                                            | ** ** | **959** |   | 1,675 |   |
| Interest expense                                                    | ** ** | **(12,265**                                      | **)**       | (11,823                                        | )          | **(23,909** | **)** | (23,620 | ) |
| Loss on investment                                                  | ** ** | **(1**                                           | **)**       | (89                                            | )          | **(99** | **)** | (1,306 | ) |
| Loss on debt extinguishment                                         | ** ** | **—**                                       |        | (1,239                                         | )          | **—** |   | (1,239 | ) |
| Other, net                                                          | ** ** | **(207**                                         | **)**       | 391                                            | ** ** | **(453** | **)** | 610 |   |
| Total other expense                                                 | ** ** | **(12,061**                                      | **)**       | (12,114                                        | )          | **(23,502** | **)** | (23,880 | ) |
| Income (loss) before income tax benefit                             | ** ** | **(24,316**                                      | **)**       | 944                                            | ** ** | **(59,974** | **)** | 450 |   |
| Income tax (benefit) expense                                        | ** ** | **(9,526**                                       | **)**       | 314                                            | ** ** | **(21,164** | **)** | 267 |   |
| Income (loss) available to common stockholders                      | ** ** | **$**                                            | **(14,790** | **)**                                          | $          | 630 | ** ** | **$** | **(38,810** | **)** | $ | 183 |   |
| Basic income (loss) available to common   stockholders per share:   | ** ** | ** **                                       |        |                                           | ** ** | ** ** |   |   |   |
| Weighted-average shares outstanding                                 | ** ** | **25,984,947**                                   |        | 25,906,300                                     | ** ** | **25,983,498** |   | 25,906,300 |   |
| Income (loss) available to common stockholders per   share          | ** ** | **$**                                            | **(0.57**   | **)**                                          | $          | 0.02 | ** ** | **$** | **(1.49** | **)** | $ | 0.01 |   |
| Diluted income (loss) available to common   stockholders per share: | ** ** | ** **                                       |        |                                           | ** ** | ** ** |   |   |   |
| Weighted-average shares outstanding                                 | ** ** | **25,984,947**                                   |        | 26,200,900                                     | ** ** | **25,983,498** |   | 26,163,800 |   |
| Income (loss) available to common stockholders per   share          | ** ** | **$**                                            | **(0.57**   | **)**                                          | $          | 0.02 | ** ** | **$** | **(1.49** | **)** | $ | 0.01 |   |

 

*See accompanying notes.*

 

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**Global Aviation Holdings Inc. and Subsidiaries**

 

Condensed Consolidated Statements of Cash Flows

*(In Thousands)*

 
| ** **                                                                                          | ** ** | **Six Months Ended June 30,** | ** **  |
|-----------------------------------------------------------------------------------------------------|------------|---------------------------------------------------|-------------|
| ** **                                                                                          | ** ** | **2011**                                          | ** **  | **2010** | ** ** |
| **Operating activities**                                                                            |       |                                              |        |   |   |
| Net income (loss)                                                                                   | ** ** | **$**                                             | **(38,810** | **)** | $ | 183 |   |
| Adjustments to reconcile net income to net cash   provided by operating activities:                 | ** ** | ** **                                        |        |   |   |
| Depreciation and amortization                                                                       | ** ** | **50,174**                                        |        | 37,693 |   |
| Amortization of loan costs                                                                          | ** ** | **2,857**                                         |        | 2,169 |   |
| Amortization of debt discount                                                                       | ** ** | **2,661**                                         |        | 2,721 |   |
| Asset impairment and aircraft retirements                                                           | ** ** | **294**                                           | ** **  | **—** | ** ** |
| Loss on debt extinguishment                                                                         | ** ** | **—**                                        |        | 1,239 |   |
| Loss on investment                                                                                  | ** ** | **99**                                            |        | 1,306 |   |
| Stock-based compensation expense                                                                    | ** ** | **3,301**                                         |        | 2,535 |   |
| Deferred income taxes                                                                               | ** ** | **(21,655**                                       | **)**       | (308 | ) |
| Non-cash interest                                                                                   | ** ** | **2,361**                                         |        | 2,221 |   |
| Loss on sale of equipment                                                                           | ** ** | **200**                                           |        | 488 |   |
| Changes in operating assets and liabilities:                                                        | ** ** | ** **                                        |        |   |   |
| Accounts receivable, net                                                                            | ** ** | **(20,758**                                       | **)**       | (21,469 | ) |
| Inventories, net                                                                                    | ** ** | **(794**                                          | **)**       | **—** | ** ** |
| Maintenance reserve deposits                                                                        | ** ** | **(9,593**                                        | **)**       | (6,247 | ) |
| Other current assets                                                                                | ** ** | **11,435**                                        |        | (4,016 | ) |
| Accounts payable                                                                                    | ** ** | **35,867**                                        |        | 10,238 |   |
| Air traffic liabilities and accrued flight   expenses                                               | ** ** | **(10**                                           | **)**       | (3,373 | ) |
| Accrued compensation and benefits                                                                   | ** ** | **(8,370**                                        | **)**       | (2,534 | ) |
| Other accrued expenses and current liabilities                                                      | ** ** | **(3,075**                                        | **)**       | 16,260 |   |
| Other liabilities and other assets                                                                  | ** ** | **6,144**                                         |        | 8,444 |   |
| Net cash provided by operating activities                                                           | ** ** | **12,328**                                        |        | 47,550 |   |
|                                                                                                |       |                                              |        |   |   |
| **Investing activities**                                                                            | ** ** | ** **                                        |        |   |   |
| Capital expenditures                                                                                | ** ** | **(31,149**                                       | **)**       | (26,390 | ) |
| Proceeds from sale of equipment                                                                     | ** ** | **139**                                           |        | 26 |   |
| Net cash used in investing activities                                                               | ** ** | **(31,010**                                       | **)**       | (26,364 | ) |
|                                                                                                |       |                                              |        |   |   |
| **Financing activities**                                                                            |       |                                              |        |   |   |
| Payment of costs related to issuance and   repurchase of debt                                       | ** ** | **(3,786**                                        | **)**       | (1,235 | ) |
| Payments on long-term debt                                                                          | ** ** | **(1,349**                                        | **)**       | (18,847 | ) |
| Net cash used in financing activities                                                               | ** ** | **(5,135**                                        | **)**       | (20,082 | ) |
| Net increase (decrease) in cash and cash   equivalents                                              | ** ** | **(23,817**                                       | **)**       | 1,104 |   |
| Cash and cash equivalents at beginning of period                                                    | ** ** | **74,543**                                        |        | 73,077 |   |
| Cash and cash equivalents at end of period                                                          | ** ** | **$**                                             | **50,726**  |   | $ | 74,181 |   |
|                                                                                                |       |                                              |        |   |   |
| Supplemental disclosure of non-cash investing   activities:                                         | ** ** | ** **                                        |        |   |   |
| Property and equipment expenditure included in   other current liabilities or accounts payable | ** ** | **$**                                             | **32,809**  |   | $ | 6,656 |   |

 

*See accompanying notes.*

 

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**Notes to Condensed Consolidated Financial Statements (unaudited)**

 

**1. Organization and Basis of Presentation**

 

Global Aviation Holdings Inc. (Global, and collectively with its wholly-owned subsidiaries, the Company) is a global provider of customized air transport passenger and cargo services, offering a broad range of aircraft types and payloads. The Company offers military, cargo and commercial charter services through its two operating airlines: World Airways, Inc. (World) and North American Airlines, Inc. (North American). World provides long-range passenger and cargo charter and ACMI (Aircraft, Crew, Maintenance and Insurance) air transportation serving the U.S. Government, international freight and passenger airlines, tour operators, and customers requiring specialized aircraft services. North American provides passenger charter and ACMI air transportation serving the U.S. Government, tour operators and other airlines. The Company’s combined fleet consists of the following aircraft types: Boeing 757-200 passenger (B757), Boeing 767-300 passenger (B767), Boeing 747-400 freighter (B747), and McDonnell Douglas MD-11 (MD-11) passenger and freighter. The McDonnell Douglas DC10-30 passenger (DC-10) fleet was retired in January 2011. All active operating aircraft as of June 30, 2011 are leased.

 

The Company’s wholly-owned subsidiaries are as follows: New ATA Acquisition Inc. (New ATA), New ATA Investment Inc. (New ATA Investment), World Air Holdings Inc. (World Air Holdings), World, North American, World Risk Solutions, Ltd. (World Risk Solutions), World Airways Parts Company, LLC, Global Shared Services, Inc. and Global Aviation Ventures SPV LLC.

 

ATA Airlines, Inc. (ATA) was a wholly-owned subsidiary until March 3, 2009. In April 2008, ATA filed a voluntary petition for relief under Chapter 11 of the U.S. Bankruptcy Code and subsequently discontinued all business operations, terminated the majority of its employees and began conducting an orderly liquidation of its assets. During the year ended December 31, 2009, the Company restructured its senior secured debt and became the primary beneficiary of the ATA bankruptcy estate trust. As a result, during the third quarter of 2009, the Company began consolidating its interest in the ATA bankruptcy estate. The creditors of the ATA bankruptcy estate trust have no recourse to the Company. As of June 30, 2011, and December 31, 2010, the net assets of the ATA bankruptcy estate were $0.4 million and $0.6 million, respectively. As of June 30, 2011 ATA had wound down the majority of its estate. During the three and six months ended June 30, 2010, an $89,000 and $1.3 million, respectively, loss on investment was recorded, as well as during the three and six months ended June 30, 2011, a $1,000 and $99,000, respectively, loss on investment was recorded, predominately due to legal expenses associated with the bankruptcy estate’s suit filed against FedEx Corporation seeking damages of $94.0 million. See Note 9 regarding a federal jury verdict against FedEx and the award to the ATA bankruptcy estate in the amount of $66.0 million, which is subject to appeal.

 

Management believes that all adjustments necessary to present fairly the financial position of Global have been included in the accompanying unaudited condensed consolidated financial statements for the periods presented. Such adjustments are of a normal recurring nature. The results for the three and six months ended June 30, 2011 are not necessarily indicative of the results to be expected for the full year. These statements should be read in conjunction with the Company’s audited consolidated financial statements and accompanying notes for the year ended December 31, 2010 included in its Form 10-K filed with the Securities and Exchange Commission. During the quarter ended June 30, 2011, the Company reversed a $1.2 million accrual for aircraft overfly which related to prior periods.

 

**Principles of Consolidation**

 

The condensed consolidated financial statements included herein have been presented in accordance with accounting principles generally accepted in the United States. The accompanying condensed consolidated financial statements include the accounts of the Company. All significant intercompany balances and transactions have been eliminated in consolidation.

 

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**Use of Estimates**

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Significant estimates include fixed asset and intangible asset useful lives, valuation allowances (including but not limited to, those related to receivables, inventories, and deferred taxes), other income tax accounting, self-insured employee benefits, and legal liabilities.

 

**2. Long-Term Debt**

 

The Company’s long-term debt consisted of the following (in thousands):

 
| ** **                                                                                                                                               | ** ** | **June 30,   2011** | ** **  | **December 31,   2010** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|-------------|------------------------------|------------|
|                                                                                                                                                     |       |                     |        |                         |       |
| First Lien Notes, 14% interest, net of discount of   $5.1 million and $6.3 million, respectively                                               | ** ** | **$**                    | **154,369** |                         | $          | 153,171 |   |
| New Second Lien Loan, 12% interest plus 6%   payment-in-kind (PIK) interest, net of discount of $9.5 million and   $11.0 million, respectively | ** ** | **71,231**               |        | 67,215                       |       |
| Promissory Notes with certain lessors, 8% interest                                                                                                       | ** ** | **1,186**                |        | 2,593                        |       |
| Capital lease, 6% interest                                                                                                                               | ** ** | **345**                  |        | 479                          |       |
| Total debt                                                                                                                                               | ** ** | **227,131**              |        | 223,458                      |       |
| Less current maturities of long-term debt                                                                                                                | ** ** | **(21,415**              | **)**       | (12,673                      | )          |
| Less long-term debt classified as current                                                                                                                | ** ** | **(205,600**             | **)**       | —                       |       |
| Total long-term debt                                                                                                                                     | ** ** | **$**                    | **116**     |                         | $          | 210,785 |   |

 

The Company classifies as current maturities of long-term debt the portion of its debt which it expects to pay down within the following 12 months. Future debt principal payments on long-term debt are estimated to be $21.4 million for the next 12 months subsequent to the June 30, 2011 balance sheet date. As of June 30, 2011, the Company is in compliance with its debt covenants.

 

The fair market value of the First Lien Notes and the New Second Lien Loan was approximately $156.7 million, and $77.9 million, respectively as of June 30, 2011. The fair market values of both debt instruments were determined based on recent trading activity.

 

On August 13, 2009, the Company issued $175.0 million of 14% Senior Secured First Lien Notes due 2013 (First Lien Notes). The First Lien Notes were recorded net of a $10.1 million discount, and include the following key provisions: an August 15, 2013 final maturity date, a 14% annual cash interest rate payable semiannually, a semiannual requirement to offer to the noteholders to prepay $10.0 million of the principal amount outstanding, and a minimum consolidated net cash flow covenant. The First Lien Notes are secured by a first priority lien on substantially all of the Company’s tangible and intangible assets.

 

On September 29, 2009, the Company entered into a $72.5 million New Second Lien Loan that matures in September 2014 and contains a 12% cash interest rate and a 6% PIK interest component. The New Second Lien Loan was recorded net of a $7.5 million discount. In addition, the Company issued warrants that were immediately converted into 838,000 shares of common stock. These warrants were issued to the holder of the New Second Lien Loan and were recorded as a $7.1 million discount against the New Second Lien Loan, for a total discount recorded of $14.6 million. The $7.1 million discount was calculated based on the relative fair value of the warrants to the fair value of the debt issued.

 

Pursuant to the terms of the First Lien Notes, on June 30, 2011, Global made a semiannual offer to repurchase $10.0 million of First Lien Notes at par plus accrued interest.  On August 3, 2011, Global repurchased $10.0 million in principal of First Lien Notes at par plus accrued interest of $0.7 million pursuant to this offer.

 

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The agreements governing the First Lien Notes and New Second Lien Loan require the Company to meet a minimum consolidated net cash flow covenant on a quarterly basis. In March 2011, the Company entered into a Second Supplemental Indenture related to the First Lien Notes and a Second Amendment and Waiver related to the Second Lien Term Loan Credit Agreement, primarily to amend the definition related to the minimum consolidated net cash flow covenant. The Company was in compliance with this amended covenant as of June 30, 2011; however would have been in violation under the original calculation. Given a decline in AMC rates and entitlement for 2011, capital expenditure requirements, and a decline in anticipated commercial cargo block hours, management anticipates that it will likely not be in compliance with this covenant when it finalizes its third quarter of 2011 covenant calculation unless it reaches agreement on an amendment or obtains a waiver of this financial covenant. Accordingly, the Company has classified the First Lien Notes and New Second Lien Loan as a current liability in the accompanying unaudited condensed balance sheet as of June 30, 2011. Management has a business plan to achieve compliance with the minimum consolidated net cash flow covenant in 2012. However, to meet this business plan, the Company must accomplish the following in the near-term, including but not limited to: (i) reach an agreement with, or obtain a waiver from, our first and second lien holders providing near-term covenant relief, (ii) reduce annual aircraft lease expense by restructuring above-market leases to near-market rates, and (iii) reduce other internal costs through overhead and operating cost-cutting initiatives. Management estimates total annualized cost reductions of approximately $30 million.  Management is currently in negotiations with its aircraft lessors, is finalizing internal cost-cutting initiatives, and believes it will be successful in obtaining covenant relief from the Company’s first and second lien holders. However, the Company cannot provide any assurances that it will be successful in accomplishing any of these plans at terms acceptable to the Company, or at all.

 

The indenture governing the First Lien Notes provides a 30-day grace period for the payment of interest before the holders have the right to accelerate the First Lien Notes or exercise other remedies in accordance with the indenture. The Company expects to use this grace period and defer the interest payment on the First Lien Notes scheduled for August 15, 2011 while it seeks covenant relief from the holders of the First Lien Notes.

 

Management has been successful in the past amending the minimum consolidated net cash flow covenant under the Company’s First Lien Notes and New Second Lien Loan to remain in compliance. However, failure by the Company to comply with its minimum consolidated net cash flow covenant, obtain covenant relief, pay interest within the 30-day grace period, or to comply with certain other terms of its First Lien Notes and New Second Lien Loan would result in an event of default causing its debt obligations, and any other obligations to the extent linked to it by reason of cross-default or cross-acceleration provisions, to potentially become immediately due and payable. If the Company is unable to cure any such default, or obtain a waiver or a replacement financing, and those lenders accelerate the payment of such indebtedness, the holders of the indebtedness under its secured debt obligations would be entitled to initiate foreclosure actions designed to acquire control of substantially all of the Company’s assets, including the stock of our operating subsidiaries. Any such actions would have a material adverse impact on the Company’s financial condition, results of operations and cash flows.

 

On February 6, 2009, the Company entered into settlements with certain lessors in connection with the guarantee of certain ATA aircraft leases. In addition to the cash settlements on such date, the Company entered into $15.5 million in Promissory Notes for the remaining balance. The balance as of June 30, 2011 is approximately $1.2 million.

 

**3. Income Taxes**

 

During the three and six months ended June 30, 2011, the Company recorded an income tax benefit of $9.5 million and $21.2 million, respectively, which resulted in an effective tax rate of 39.2% and 35.3%, respectively. The effective rates differed from the Company’s statutory tax rate primarily due to projected nondeductible expenses such as crewmember meals and per diems. In addition, during the three months ended June 30, 2011, the Company realized a $0.9 million non-recurring tax benefit for a deduction of previously capitalized costs. Also included in the tax benefit recorded for the three and six months ended June 30, 2011, is an accrual for additional interest for uncertain tax positions of $0.1 million and $0.3 million, respectively. There were no other changes to the Company’s uncertain tax positions during the three and six months ended June 30, 2011.

 

During the three and six months ended June 30, 2010, the Company recorded income tax expense of $0.3 million, which resulted in an effective tax rate of 33.3% and 59.3%, respectively. The effective tax rates were significantly impacted by projected nondeductible expenses, such as crewmember meals and per diems, which were disproportionate in comparison to projected pre-tax income. Also included in the tax benefit recorded for the three and six months ended June 30, 2010, is an accrual for additional interest for uncertain tax positions of $0.3 million and $0.4 million, respectively. There were no other changes to the Company’s uncertain tax positions during the three and six months ended June 30, 2010.

 

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**4. Stockholders’ Equity**

 

**Common Stock**

 

On October 1, 2010, the Company effected a 100-for-1 stock split of the Company’s outstanding common stock. The accompanying financial statements and notes to the financial statements give retroactive effect to the stock split for all periods presented.

 

**Warrants**

 

On February 28, 2006, the Company issued warrants that were immediately exercisable for an aggregate 44,740 shares of common stock, with an exercise price of $100 per share. The warrants were valued at $1.4 million and are recorded as equity on the Company’s consolidated balance sheet. These warrants expired during the first quarter of 2011.

 

**5. Income (Loss) Per Share**

 

The following is a reconciliation of the numerators and denominators of the basic and diluted income (loss) available to common stockholders per share computations for the three and six months ended June 30, 2011 and 2010:

 
| ** **                                                            | ** ** | **Three Months Ended   June 30** | ** **  | **Six Months********Ended June 30** | ** ** |
|-----------------------------------------------------------------------|------------|-------------------------------------------------|-------------|----------------------------------------------------|------------|
| **(in thousands, except per share amounts)** | ** ** | **2011**                                        | ** **  | **2010**                                           | ** ** | **2011** | ** ** | **2010** | ** ** |
|                                                                  |       |                                            |        |                                               |       |   |   |   |   |
| Basic:                                                                | ** ** | ** **                                      | ** **  | ** **                                         | ** ** | ** ** |   |   |   |
| Net income (loss) available to common stockholders                    | ** ** | **$**                                           | **(14,790** | **)**                                              | $          | 630 | ** ** | **$** | **(38,810** | **)** | $ | 183 |   |
| Weighted-average common shares outstanding                            | ** ** | **25,984,947**                                  |        | 25,906,300                                         | ** ** | **25,983,498** |   | 25,906,300 |   |
| Income (loss) available to common stockholders per   share, basic     | ** ** | **$**                                           | **(0.57**   | **)**                                              | $          | 0.02 | ** ** | **$** | **(1.49** | **)** | $ | 0.01 |   |
| Diluted:                                                              | ** ** | ** **                                      |        |                                               | ** ** | ** ** |   |   |   |
| Weighted-average common shares outstanding                            | ** ** | **25,984,947**                                  |        | 25,906,300                                         | ** ** | **25,983,498** |   | 25,906,300 |   |
| Effect of dilutive securities:                                        | ** ** | ** **                                      |        |                                               | ** ** | ** ** |   |   |   |
| Common stock equivalents                                              | ** ** | **—**                                      |        | 294,600                                            | ** ** | **—** |   | 257,500 |   |
| Diluted weighted-average common shares outstanding                    | ** ** | **25,984,947**                                  |        | 26,200,900                                         | ** ** | **25,983,498** |   | 26,163,800 |   |
| Income (loss) available to common stockholders per   share, diluted   | ** ** | **$**                                           | **(0.57**   | **)**                                              | $          | 0.02 | ** ** | **$** | **(1.49** | **)** | $ | 0.01 |   |

 

Basic and diluted income (loss) available to common stockholders per share is calculated using the weighted-average common shares outstanding during the period. Common equivalent shares from stock options, restricted stock awards and warrants, using the treasury stock method, are not included in the diluted per share calculations as their effect is antidilutive.

 

The common stock equivalents not included in the computation of diluted loss available to common stockholders per share, because to do so would have been antidilutive, are shown below:

 
| ** **                | ** ** | **Three Months   Ended June 30,** | ** ** | **Six Months   Ended June 30,** | ** ** |
|---------------------------|------------|--------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                | ** ** | **2011**                                         | ** ** | **2010**                                       | ** ** | **2011** | ** ** | **2010** | ** ** |
| Common stock equivalents: | ** ** | ** **                                       | ** ** | ** **                                     | ** ** | ** ** |   |   |   |
| Stock options             | ** ** | **4,722,575**                                    |       | 4,909,300                                      | ** ** | **4,722,575** |   | 4,877,800 |   |
| Restricted stock awards   | ** ** | **930,622**                                      |       | 639,700                                        | ** ** | **930,622** |   | 667,500 |   |
| Warrants                  | ** ** | **45,300**                                       |       | 45,300                                         | ** ** | **45,300** |   | 45,300 |   |

 

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**6. Segment Reporting**

 

The Company has two reportable segments: World and North American. World provides long-range passenger and cargo charter and ACMI air transportation serving the U.S. Government, international freight and passenger airlines, tour operators, and customers requiring specialized aircraft services. North American provides passenger charter and ACMI air transportation serving the U.S. Government, tour operators, and other airlines. The Company operates and manages World and North American as distinct operating segments, and prepares separate financial statements for each that are reviewed by senior management at the Company, as well as the chief operating officer and other management at the relevant operating company level.

 

The Company evaluates performance and allocates resources based on profit or loss by segment performance and by operations. Intersegment sales are recorded at the Company’s cost; there is no intercompany profit or loss on intersegment sales. Selected financial data by segment is set forth below (in thousands):

 
| ** **                       | ** ** | **Three Months Ended June 30, 2011** | ** **  |
|----------------------------------|------------|---------------------------------------------------------------|-------------|
| ** **                       | ** ** | **World**                                                     | ** **  | **North American** | ** ** | **All Other** | ** ** | **Consolidated   Total** | ** ** |
|                             |       |                                                          |        |   |   |   |   |   |   |
| Revenues from external customers | ** ** | **$**                                                         | **191,651** | ** ** | **$** | **70,789** | ** ** | **$** | — | ** ** | **$** | **262,440** | ** ** |
| Intersegment revenues            | ** ** | **193**                                                       |        | — | ** ** | **7,851** | ** ** | **8,044** | ** ** |
| Depreciation and amortization    | ** ** | **14,366**                                                    | ** **  | **8,270** |   | — | ** ** | **22,636** | ** ** |
| Total operating expenses         | ** ** | **196,956**                                                   | ** **  | **78,369** | ** ** | **(630** | **)** | **274,695** | ** ** |
| Operating income (loss)          | ** ** | **(5,305**                                                    | **)**       | **(7,580** | **)** | **630** | ** ** | **(12,255** | **)** |
| Interest income                  | ** ** | **291**                                                       | ** **  | **86** | ** ** | **35** | ** ** | **412** | ** ** |
| Interest expense                 | ** ** | **(9,615**                                                    | **)**       | **(2,571** | **)** | **(79** | **)** | **(12,265** | **)** |
| Loss on investment               |       | —                                                        |        | — | ** ** | **(1** | **)** | **(1** | **)** |
| Income tax benefit               | ** ** | **(4,962**                                                    | **)**       | **(3,599** | **)** | **(965** | **)** | **(9,526** | **)** |
|                                  |            |                                                               |             |  |  |  |  |  |  |  |  |  |  |

 
| ** **                       | ** ** | **Six Months Ended June 30, 2011** | ** **  |
|----------------------------------|------------|-------------------------------------------------------------|-------------|
| ** **                       | ** ** | **World**                                                   | ** **  | **North American** | ** ** | **All Other** | ** ** | **Consolidated   Total** | ** ** |
|                             |       |                                                        |        |   |   |   |   |   |   |
| Revenues from external customers | ** ** | **$**                                                       | **364,176** | ** ** | **$** | **145,898** | ** ** | **$** | — | ** ** | **$** | **510,074** | ** ** |
| Intersegment revenues            | ** ** | **696**                                                     | ** **  | **27** | ** ** | **20,793** | ** ** | **21,516** | ** ** |
| Depreciation and amortization    | ** ** | **31,922**                                                  | ** **  | **18,252** |   | — | ** ** | **50,174** | ** ** |
| Total operating expenses         | ** ** | **383,810**                                                 | ** **  | **163,299** | ** ** | **(563** | **)** | **546,546** | ** ** |
| Operating income (loss)          | ** ** | **(19,634**                                                 | **)**       | **(17,401** | **)** | **563** | ** ** | **(36,472** | **)** |
| Interest income                  | ** ** | **741**                                                     | ** **  | **183** | ** ** | **35** | ** ** | **959** | ** ** |
| Interest expense                 | ** ** | **(18,420**                                                 | **)**       | **(5,410** | **)** | **(79** | **)** | **(23,909** | **)** |
| Loss on investment               |       | —                                                      |        | — | ** ** | **(99** | **)** | **(99** | **)** |
| Income tax benefit               | ** ** | **(12,805**                                                 | **)**       | **(8,154** | **)** | **(205** | **)** | **(21,164** | **)** |
|                                  |            |                                                             |             |  |  |  |  |  |  |  |  |  |  |

 
| ** **                       | ** ** | **Three Months Ended June 30, 2010** | ** ** |
|----------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                       | ** ** | **World**                                                     | ** ** | **North American** | ** ** | **All Other** | ** ** | **Consolidated   Total** | ** ** |
|                             |       |                                                          |       |   |   |   |   |   |   |
| Revenues from external customers |       | $                                                             | 204,448    |   | $ | 87,552 |   | $ | — |   | $ | 292,000 |   |
| Intersegment revenues            |       | 207                                                           |       | — |   | 6,296 |   | 6,503 |   |
| Depreciation and amortization    |       | 12,466                                                        |       | 6,458 |   | 177 |   | 19,101 |   |
| Total operating expenses         |       | 194,871                                                       |       | 83,010 |   | 1,061 |   | 278,942 |   |
| Operating income (loss)          |       | 9,577                                                         |       | 4,542 |   | (1,061 | ) | 13,058 |   |
| Interest income                  |       | 502                                                           |       | 143 |   | 1 |   | 646 |   |
| Interest expense                 |       | (7,892                                                        | )          | (3,676 | ) | (255 | ) | (11,823 | ) |
| Loss on debt extinguishment      |       | —                                                        |       | — |   | (1,239 | ) | (1,239 | ) |
| Loss on investment               |       | —                                                        |       | — |   | (89 | ) | (89 | ) |
| Income tax (benefit) expense     |       | 1,504                                                         |       | 624 |   | (1,814 | ) | 314 |   |
|                                  |            |                                                               |            |  |  |  |  |  |  |  |  |  |  |

 

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| ** **                       | ** ** | **Six Months Ended June 30, 2010** | ** ** |
|----------------------------------|------------|-------------------------------------------------------------|------------|
| ** **                       | ** ** | **World**                                                   | ** ** | **North American** | ** ** | **All Other** | ** ** | **Consolidated   Total** | ** ** |
|                             |       |                                                        |       |   |   |   |   |   |   |
| Revenues from external customers |       | $                                                           | 417,725    |   | $ | 172,818 |   | $ | — |   | $ | 590,543 |   |
| Intersegment revenues            |       | 296                                                         |       | — |   | 14,290 |   | 14,586 |   |
| Depreciation and amortization    |       | 24,730                                                      |       | 12,612 |   | 351 |   | 37,693 |   |
| Total operating expenses         |       | 398,219                                                     |       | 167,431 |   | 563 |   | 566,213 |   |
| Operating income (loss)          |       | 19,506                                                      |       | 5,387 |   | (563 | ) | 24,330 |   |
| Interest income                  |       | 1,025                                                       |       | 648 |   | 2 |   | 1,675 |   |
| Interest expense                 |       | (15,969                                                     | )          | (7,483 | ) | (168 | ) | (23,620 | ) |
| Loss on debt extinguishment      |       | —                                                      |       | — |   | (1,239 | ) | (1,239 | ) |
| Loss on investment               |       | —                                                      |       | — |   | (1,306 | ) | (1,306 | ) |
| Income tax (benefit) expense     |       | 2,495                                                       |       | (349 | ) | (1,879 | ) | 267 |   |
|                                  |            |                                                             |            |  |  |  |  |  |  |  |  |  |  |

 

One customer comprised 10% or more of the Company’s total operating revenues as follows (in millions):

 
| ** **                                  | ** ** | **Three Months Ended   June 30** | ** ** | **Six Months********Ended June 30** | ** ** |
|---------------------------------------------|------------|-------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                  | ** ** | **2011**                                        | ** ** | **2010**                                           | ** ** | **2011** | ** ** | **2010** | ** ** |
| U.S. Air Force (USAF) Air Mobility Command: | ** ** | ** **                                      | ** ** | ** **                                         | ** ** | ** ** | ** ** | ** ** | ** ** |
| World                                       | ** ** | **$**                                           | **137.8**  |                                               | $          | 163.0 | ** ** | **$** | **266.9** |   | $ | 340.3 |   |
| North American                              | ** ** | **64.8**                                        |       | 82.6                                               | ** ** | **131.8** |   | 165.7 |   |
|                                             |            |                                                 |            |                                                    |            |  |  |  |  |  |  |  |  |

 

**7. Accounting for Stock-Based Compensation**

 

The Company has stock-based compensation plans for officers and key employees of the Company, including the Company’s Board of Directors (Management Plans). The Company measures the cost of employee services received in exchange for an award of equity instruments based on the grant date fair value of the award. During the six months ended June 30, 2011 and 2010, $3.3 million and $2.5 million, respectively, of stock-based compensation expense were charged to operations.

 

On March 31, 2011, the Company granted 147,622 restricted stock awards which vest over a three-year period. In addition, the Company granted 168,863 stock options and 147,822 performance-based share awards.

 

**8. Fair Value Measurements**

 

The fair values of cash equivalents and restricted cash are classified within Level 1 of the fair value hierarchy because they are valued using quoted market prices in active markets. Cash equivalents and restricted cash are comprised primarily of money market funds.

 

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**9. Commitments and Contingencies**

 

***World’s Cockpit Crewmembers:*** The cockpit crewmembers, who account for approximately 36% of the total workforce at World, are represented by the International Brotherhood of Teamsters (the IBT), and are subject to a collective bargaining agreement which became amendable on March 1, 2009. Negotiations between World and the IBT began in 2009 and are ongoing.

 

***World’s Flight Attendants:*** World’s flight attendants, representing approximately 37% of World’s employees, are subject to a collective bargaining agreement which will become amendable in September 2012.

 

The flight attendants employed by World participate in a multiemployer defined benefit pension plan affiliated with the International Brotherhood of Teamsters. The plan’s actuary has certified that the plan is in critical status, determined in accordance with current pension plan funding rules. This means that the multiemployer plan has funding or liquidity problems, or both. As a result, the Company’s obligations to the multiemployer plan have increased in the form of a 5% surcharge on its contributions and may be subject to further increases in the future. In addition, in the event of our partial or complete withdrawal from this multiemployer plan at a time when it is underfunded, the Company would be liable for a proportionate share of such plan’s unfunded vested benefits. In the event that any other contributing employer withdraws from the multiemployer plan at a time when it is underfunded, and such employer (or any member in its controlled group) cannot satisfy its obligations under the plan at the time of withdrawal, then the Company, along with the other remaining contributing employers, would be liable for its proportionate share of such plan’s unfunded vested benefits.

 

***North American’s Cockpit Crewmembers:*** On April 25, 2008, North American announced that its pilots, who are represented by the IBT Local 747 and account for approximately 26% of the total workforce of North American, ratified a 54-month contract, which took effect on May 1, 2008. Since then, after submitting an application on September 22, 2009 to the United States National Mediation Board (NMB) disputing their representation by the IBT, a vote was cast and the majority of the North American Cockpit Crewmembers voted in favor of being represented by ALPA. The decision was certified and ALPA became the official labor representative of the North American Cockpit Crew Members effective the end of the fourth quarter of 2009.

 

***North American’s Flight Attendants:*** On July 26, 2005, the NMB authorized a union election among North American’s flight attendants. Flight attendants comprise approximately 39% of employees at North American. On August 31, 2005, a majority of flight attendants voted for IBT representation. Negotiations between North American and the IBT began in 2006 and are ongoing.

 

***Guarantees:*** Global guaranteed ATA’s obligations as lessee in connection with a number of ATA’s aircraft leases. The Company has settled all but one of the lessor claims. The remaining outstanding lessor has filed a lawsuit in New York State court on February 9, 2009 claiming damages including stipulated return condition requirements in the lease, loss of rental income and other damages. The plaintiff is seeking damages of approximately $35.0 million less either (i) the present discounted value of the aggregate fair market rental value for the remainder of the lease term or (ii) the fair market sale value of the aircraft. On April 15, 2011, the Court ruled on the plaintiff’s summary judgment motion (i) finding the liquidated damages provision in the lease to be unreasonable and unenforceable, (ii) finding Global liable under the guarantee and dismissing Global’s affirmative defenses to liability under the guarantee, and (iii) ordering the parties to proceed to a damages trial to be calculated in accordance with New York law. The damages trial began on July 18, 2011 and is expected to conclude in mid-August 2011. The final outcome of the litigation is pending and cannot be predicted and is dependent upon many factors beyond the Company’s control. The Company anticipates a ruling from the court during the fourth quarter of 2011.

 

As of June 30, 2011, the Company has accrued its best estimate of liability of this lawsuit. This estimate is based on a combination of factors including an evaluation of defenses available to the Company, advice from outside counsel, and a damages analysis prepared by a third party expert. If the Court awards damages materially higher than our accrued estimate, it could have a material negative impact on our financial condition or results of operations.

 

***Litigation:*** In the ordinary course of business, the Company is party to various legal proceedings and claims which management believes are incidental to the operation of Global’s businesses. Global believes that the outcome of its

 

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outstanding litigation will not have a materially adverse effect on the Company’s results of operations, cash flows or financial position.

 

On June 11, 2008, the ATA bankruptcy estate filed suit in the Federal District Court of Indiana against FedEx. On February 17, 2010, ATA served its Second Amended Statement of Special Damages estimating its total damages to be $94.0 million. This estimate was based on lost military profits of $66.0 million arising from the FedEx contract, and $28.0 million in losses associated with ATA’s acquisition of DC-10 aircraft in order to fulfill its obligations under the FedEx contract. On September 16, 2010, the court preliminarily granted FedEx’s motion *in limine* to exclude ATA’s DC-10 claim.

 

On October 19, 2010, a federal jury returned a verdict against FedEx and awarded the ATA bankruptcy estate 100% of its $66.0 million claim for breach of contract and denied FedEx’s counterclaim in its entirety. The court, on October 22, 2010, thereafter entered a judgment against FedEx without specifying the amount of damages. On November 1, 2010, ATA filed a post trial motion seeking to have the court enter a final judgment against FedEx for $66.0 million plus pre-judgment interest (under Tennessee law at a maximum rate of 10%) together with post-judgment interest. On November 18, 2010, FedEx filed post trial motions seeking, among other things, to set aside the jury’s verdict, to disallow any pre-judgment interest under Tennessee law (or, in the alternative, to calculate any pre-judgment interest at the federal post-judgment interest rate), to reduce the actual amount of damages awarded or, in the alternative, to order a new trial. The trial court denied FedEx’s motions on January 19, 2011. On January 25, 2011, the trial court entered a judgment in the amount of $71.3 million. On February 16, 2011, FedEx filed its Notice of Appeal. ATA filed a notice of cross-appeal (seeking to overturn the court’s decision disallowing ATA’s DC-10 claim for $28.0 million and increasing the prejudgment interest). The parties are currently briefing their respective appeals with the Seventh Circuit Court of Appeals. The ATA bankruptcy estate anticipates the Seventh Circuit to render its decision in the first or second quarter of 2012.

 

Pursuant to ATA’s Chapter 11 Plan approved by the U.S. Bankruptcy Court, 85% of any damages recovered by ATA from FedEx in the FedEx litigation will be retained by the ATA estate and subsequently distributed to the Company, and 15% must be used to pay former ATA employees and creditor beneficiaries of ATA. FedEx has filed a counterclaim against ATA for breach of contract and seeks damages in excess of $75,000.

 

If we receive ATA distributions totaling more than $5.0 million, we are obligated pursuant to the terms of the indenture governing the First Lien Notes to use all such distributions to offer to purchase at par plus accrued interest any outstanding First Lien Notes, and then, if remaining distributions total more than $1.3 million, we must offer to prepay, without premium, indebtedness outstanding under the Second Lien Loan equal to the entire amount of such remaining distribution. Any funds not so used would be available to us for general corporate purposes.

 

***Fuel Purchase Agreements:*** From time to time, in the normal course of business, the Company enters into fuel contracts. These contracts may include a fixed spread to a base fuel rate and a minimum purchase requirement. The Company has determined that certain fuel contracts meet the “Normal Purchases and Sales” requirements of ASC 815, *Derivatives and Hedging* and therefore are not accounted for as derivative instruments.

 

***War-Risk Insurance Contingency:*** As a result of the terrorist attacks on September 11, 2001, aviation insurers significantly reduced the maximum amount of insurance coverage available to commercial air carriers for liability to persons (other than employees or passengers) for claims resulting from acts of terrorism, war or similar events. At the same time, aviation insurers significantly increased the premiums for such coverage and for aviation insurance in general.

 

Since September 24, 2001, the U.S. Government has been providing U.S. airlines with war-risk insurance to cover losses, including those resulting from terrorism, to passengers, third parties (ground damage) and the aircraft hull. The coverage currently extends through September 30, 2011. The withdrawal of government support of airline war-risk insurance would require the Company to obtain war-risk insurance coverage commercially, if available. Such commercial insurance could have substantially less desirable coverage than currently provided by the U.S. Government, may not be adequate to protect the Company’s risk of loss from future acts of terrorism, may result in a material increase to our operating expense or may not be obtainable at all, resulting in an interruption to the Company’s operations.

 

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***Other:*** World Risk Solutions was formed in November 2004, with the objective of providing certain insurance cost savings, enhanced risk management programs and better loss control practices for the Company. World Risk Solutions underwrites certain risks associated with the Company’s aircraft.

 

**10. Related Parties**

 

As of June 30, 2011, MatlinPatterson owned approximately 92% of the outstanding shares of the Company’s common stock. Four of Global’s directors serve in various executive capacities at MatlinPatterson or one of its affiliates. In addition, World had an ACMI contract with Arrow, Inc. (Arrow), an airline which was indirectly majority owned by other investment partnerships for which MatlinPatterson Global Advisers LLC acts as investment manager. The contract expired on May 4, 2010. For the six months ended June 30, 2011 and 2010, the Company reported $0 and $6.1 million, respectively, in revenue from Arrow.

 

Certain affiliates of GSO Capital Solutions (GSO) hold approximately $80.7 million of the Company’s Second Lien Loan as of June 30, 2011, which represents the largest aggregate principal amount outstanding. The Second Lien Loan bears interest at an annual rate of 18%, consisting of interest payable in cash at an annual rate of 12% and interest payable in kind at an annual rate of 6%, and was incurred in September 2009 to refinance then-existing debt. As part of the replacement of our prior second lien debt with the Second Lien Loan from certain affiliates of GSO, we issued warrants to certain affiliates of GSO which were immediately converted into 838,000 shares of common stock. Pursuant to a letter agreement between GSO, MatlinPatterson and us, certain affiliates of GSO have the right to designate one member of our board of directors until the completion of an initial public offering of common stock, GSO holds less than a majority of the outstanding Second Lien Loan, or less than 25% of such holder’s original loan commitment remains outstanding.

 

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**Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations**

 

*You should read the following discussion and analysis of our financial condition and results of operations together with the consolidated financial statements and related notes. We also suggest that management’s discussion and analysis appearing in this report be read in conjunction with management’s discussion and analysis and consolidated financial statements appearing in our annual report on Form 10-K for the year ended December 31, 2010, filed with the Securities and Exchange Commission, and other filings. This discussion contains forward looking statements based upon current expectations that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors.*

 

**Overview**

 

We are a provider of customized, non-scheduled passenger and cargo air transport services, offering our customers a wide range of aircraft types, configurations, payloads and capabilities. We provide our services through our two operating air carriers, World and North American, which represent our two business segments. As of June 30, 2011, our combined fleet consisted of 29 wide-body and narrow-body leased aircraft, which support our two primary business lines: (1) military, which includes both passenger and cargo services, and (2) commercial cargo air transport service. We also offer passenger charter services to customers in specialty markets, such as providing supplemental peak capacity for other air carriers, political campaigns, professional sports teams, tour operators and concert tours. Our two primary lines of business combine the recurring revenue base of our established military business with the growth opportunities provided by our commercial cargo services.

 

We are the largest provider of military transport services in the AMC international program and have been flying for the military since 1952. Our contracts with the military contain cost-plus pricing and are not bid based on price but rather are awarded based on team entitlement and are priced using the average cost of all participating air carriers, weighted by flights flown in the AMC international program, plus a fixed operating margin. We are compensated on a per mission basis based on the mission’s route and the aircraft type employed, at a fixed rate, regardless of the number of passengers or tons of freight actually flown.

 

Our business model generally insulates our profitability from fluctuations in jet fuel prices, which are typically the largest and most volatile expenses for an air carrier. Under our military contracts and most of our commercial passenger and cargo charter arrangements, our customers are responsible for the cost of jet fuel. For the six months ended June 30, 2011 and the fiscal year ended December 31, 2010, approximately 96% of our block hours were flown under either military or ACMI arrangements, in which the customer assumed the risk of fuel price volatility.

 

We were incorporated on January 26, 2006 under the name New ATA Holdings, Inc. and acquired a controlling interest in ATA on February 28, 2006, the effective date of ATA’s reorganization. On August 14, 2007, we acquired World Air Holdings, Inc., the parent company of World and North American. The acquisition of World Air Holdings, Inc. was accounted for using the purchase method of accounting and the results of World Air Holdings, Inc. have been included in our consolidated financial statements since August 14, 2007. Immediately following the 2007 acquisition, we had three major subsidiaries, ATA, World and North American, that each specialized in military passenger or cargo transport. In addition, ATA and North American historically operated in various scheduled service and charter passenger service markets, while World operated in passenger charter and ACMI cargo markets.

 

On April 2, 2008, ATA filed a voluntary petition for relief under Chapter 11 of the U.S. Bankruptcy Code. On April 3, 2008, ATA discontinued all business operations and terminated the majority of its employees and began conducting an orderly liquidation of its assets and has now wound down the majority of its existing bankruptcy estate. The ATA bankruptcy estate trust is consolidated in our consolidated financial statements since August 2009 due to our determination that we have a primary beneficial interest in the estate.

 

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**Operating Revenue**

 

***Military Passenger and Cargo Revenue.***Our military revenues are derived from mission awards from the Air Mobility Command, or AMC. World operates both passenger and cargo missions for the AMC international program while North American operates only passenger missions. Revenue earned from each mission award is primarily based on the product of:

 

·                  the relevant rate paid per seat mile or ton mile per aircraft category, or Effective Rate (formerly known as the Line Haul Rate), multiplied by

 

·                  the number of seats or tons contracted for purchase by the AMC for each aircraft type, or Allowable Cabin Load, multiplied by

 

·                  mission miles, which are calculated flight miles based on awarded routing.

 

Because our revenues are based on the Allowable Cabin Load, the revenue we earn is not affected by the number of troops or tons of freight we transport. Under our contract with DOD, we are paid on a cost-plus basis in which we receive a fixed rate per mission based on the route and aircraft type. The fixed rate is calculated using the average costs of all participating air carriers, weighted by flights flown in the AMC international program. The AMC sets the fixed rate for each fiscal year using cost data for a 12-month period ending 15 months prior to the start of such fiscal year as adjusted following consultation with the air carrier, multiplied by a weighted composite price index to account for cost increases or decreases in the industry. As a result, the actual operating costs of our military business may exceed the fixed rate, although those higher actual operating costs will provide the basis for the fixed rate used for missions flown in the next two contract years.

 

Our contracts for passenger and cargo missions under the AMC international program are one-year contracts. The governmental fiscal year 2011 AMC rates are down approximately 5.2% for large category passenger aircraft, 5.5% for medium category aircraft, and 2.0% for our large category freighter aircraft as compared to the fiscal year 2010 rates. This is mainly due to a combination of lower costs from the carriers, changes in the AMC’s allowable carrier costs, and a low inflation rate from industry and trade association cost indices used in the process.  Based on 2010 flights flown in the large and medium category passenger and large category freighter aircraft, total AMC revenue would be $46.0 million lower utilizing 2011 AMC rates.  We have a number of initiatives currently underway to streamline our operations and reduce our unit costs to minimize margin erosion from reduced AMC rates. The fiscal year 2011 rates became effective January 1, 2011. For additional information please see our risk factor entitled “We are highly dependent on revenues from our participation in the AMC international program, which are derived from one-year contracts that the DOD is not obligated to renew. If our revenues from this business decline from current levels, whether due to decreased demand, termination, non-renewal, modification or otherwise, it could have a material adverse effect on our business, financial condition and results of operations.”, as discussed in our Annual Report on Form 10-K filed March 29, 2011.

 

The AMC also reimburses us for our fuel costs. Fuel costs are included in the calculation of the relevant Effective Rate through the inclusion of a Fuel Peg Rate mechanism, which is determined based on a weighted average forecast of commercial and Department of Defense (DOD) fuel prices, including into-plane fees and taxes. The weighted average forecast for fuel prices varies between our military passenger and military cargo operations due to the relative mix of sources of fuel accessed to service each of the respective operations. While the price we pay for fuel may affect our revenue from award to award, changes in fuel prices do not materially affect our results of operations due to the military’s monthly fuel price reconciliation process. Each month, the military compares the actual fuel prices we paid for missions during the previous month with the Fuel Peg Rate used in the calculation of the relevant Effective Rate. In instances where we overpaid, the military reimburses us the difference, and in instances where we underpaid, we reimburse the military for the difference. Operating income may be incrementally affected, positively or negatively, by a change in the Fuel Peg Rate due to the cost-plus nature of the Effective Rate calculation. Effective May 1, 2011, the AMC announced that the Fuel Peg Rate would increase to $3.90 and $3.98 for military passenger and cargo flying, respectively. This increase in the Fuel Peg Rate was necessary due to the rising cost of jet fuel AMC’s air carriers were experiencing in the world market.

 

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Our AMC contracts contain various operational performance requirements.  These include on-time performance, availability of aircraft and crews to meet committed missions, and successful completion of inspections. Under our fiscal year 2011 AMC contract, on-time performance requirements, as measured on a rolling three-month period, were increased from an 85% to a 95% schedule reliability rate for passenger operations.  The penalties for failing to meet the new requirements were expanded to include:  contract default and potential termination for failure to meet an 87% passenger schedule reliability rate; a potential loss of rights to fly expansion missions (additional missions beyond the fixed buy contract requirements) and a 2% penalty on revenue on all newly awarded passenger missions performed during a subsequent 30-day period for achieving an 87% to 89% passenger schedule reliability rate; a penalty of 2% of revenue on all newly awarded passenger missions performed during a subsequent 30-day period for achieving a 90% to 91% passenger schedule reliability rate; and a penalty of 1% of revenue on all newly awarded passenger missions performed during a subsequent 30-day period for achieving a 92% to 94% passenger schedule reliability rate. In addition, the fiscal year 2011 AMC contract was expanded to include performance bonuses:  a bonus of 1% of revenue on the previous month’s revenues for achieving a 98% or greater passenger schedule reliability rate; and, a bonus of 1⁄2% of revenue on the previous month’s revenues for achieving a 96% to 97% passenger schedule reliability rate.  For cargo missions, the new requirements were expanded to include: contract and default and potential termination for failure to meet an 84% cargo schedule reliability rate; a loss of rights to fly expansion missions and a 2% penalty on revenue on all cargo missions performed during the subsequent 30-day period for achieving an 85% to 86% schedule reliability rate; a penalty of 2% of revenue on all newly awarded cargo missions during a subsequent 30-day period for achieving an 87% to 88% reliability rate; and a penalty of 1% of revenue on all newly awarded passenger missions performed during a subsequent 30-day period for achieving an 89% to 91% reliability rate.

 

***Commercial Cargo and Passenger Revenue***. Our commercial revenues are principally driven by overall macroeconomic trends that affect cargo and passenger demand, capacity available in the markets in which we compete and general pricing dynamics. World operates both commercial cargo and passenger services while North American operates only passenger services.

 

We provide our services through two contract structures: ACMI contracts and full service contracts. ACMI contracts, also known as wet leases, are aircraft operational arrangements whereby we provide the aircraft, crew, maintenance and insurance to a customer for a fee that is generally based on the expected block hours multiplied by a block hour rate. An ACMI contract typically includes a minimum block hour commitment per month over the term of the contract. In contrast, a full service contract is an aircraft operational arrangement whereby we provide the aircraft, crew, maintenance, insurance, fuel, landing, ground handling and other necessary operating services to a customer for a single fee that is either based on a fixed fee or a fee based on block hours multiplied by a block hour rate. Full service contracts generally involve higher rates per block hour than ACMI contracts because of the full array of services paid for by us for the customer, such as fuel. Due to this price differential per block hour, the mix of full service and ACMI block hours flown in any period can affect our period-over-period commercial revenue results. For example, a relative increase in full service block hours flown will generate higher commercial revenue, all else equal. A relative decrease in full service block hours flown will have the opposite effect. The mix of full service and ACMI block hours will not have a similar effect on operating income, however, because of the greater operating expenses we incur with respect to full service contracts.

 

Since our ACMI customers are responsible for fuel costs, our commercial ACMI revenues are not directly affected by fuel price changes. However, a significant increase in fuel prices could have an adverse effect on demand for the use of our aircraft. Our commercial full service revenues are fuel price sensitive (although operating income is much less so), as we generally increase or decrease full service block hour rates to reflect the fuel costs in our pricing model. Our full service contracts generally will have a block hour rate adjustment provision to mitigate losses created by differences between the fuel prices stated in the contract and the actual fuel price paid by us.

 

***Other Revenue.***Other revenue primarily consists of revenue generated from the rebill to our customers of operating costs incurred by us under ACMI contracts. We refer to this as “ACMI rebill revenue.” We promptly rebill our ACMI customers when we purchase certain products or services on behalf of our ACMI customers, such as fuel, crew positioning, and ground handling or catering, as necessary in certain circumstances or to expedite operations. In fiscal year 2010, ACMI rebill revenue was less than 3% of our total ACMI revenue. We also record subservice revenue in other revenue, which relates to flights where we are paid by our customer, but we have contracted the

 

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operation of the flight to another air carrier due to capacity constraints, aircraft maintenance events, or scheduling conflicts.

 

***Operating Expenses***

 

***Aircraft Fuel.***Aircraft fuel expense includes all fuel costs incurred by us under our military and full service commercial contracts. In addition, in certain circumstances, we purchase fuel for our ACMI commercial customers and subsequently rebill them. Aircraft fuel expense is a variable cost; however, our fuel price volatility exposure is limited to our full service commercial contracts. At times, we have experienced temporary favorable and unfavorable fluctuations in working capital due to the timing of significant fuel price changes and reimbursement for these costs. For the six months ended June 30, 2011 and the year ended December 31, 2010, 96%, respectively, of our block hours were flown under military or ACMI commercial contracts providing for our actual fuel costs to be paid or reimbursed by our customers.

 

***Aircraft Rentals.***Aircraft rentals include aircraft and engine rent expense under our various operating leases for aircraft and spare engines. These costs are generally fixed for the duration of the leases. Aircraft rentals can also include certain supplemental rents paid to fund future maintenance events, commonly referred to as maintenance reserves. In circumstances where we determine a maintenance reserve will not be refundable to us, or paid to us to fund scheduled maintenance events or meet aircraft redelivery requirements, we record those payments to the lessor as aircraft rentals.

 

***Maintenance, Materials and Repairs.***Maintenance, materials and repairs expense includes the cost of repairing our aircraft, which includes the repair or replacement of parts as appropriate, certain scheduled airframe maintenance events, company and contract labor for maintenance activities, line maintenance and other non-capitalized direct costs related to fleet maintenance, including short-term spare engine leases, loan and exchange fees for spare parts, and shipping costs. It also includes the engine usage costs incurred under hourly engine maintenance agreements, which we have for certain of our aircraft. These agreements require us to pay monthly fees to the vendor based on a specified rate per engine flight hour, in exchange for the vendor’s performance of overhauls and maintenance as required. Also included in maintenance, materials and repairs expense is the cost of our maintenance employees including their benefits. We generally view a large portion of our maintenance, materials and repairs expense as a variable cost.

 

***Flight Operations.***Flight operations expense includes the wages and benefits paid to our pilots, training costs for our personnel, flight operations management functions and our hull insurance expense. We generally view the non-salary portion of flight operations expense as a variable cost. Our pilots are represented by collective bargaining agreements, and as such, their wages and benefits are generally fixed, although we have some flexibility to adjust staffing levels.

 

***Aircraft and Traffic Servicing.***Aircraft and traffic servicing expense includes the costs incurred at airports to land and service our aircraft and to handle passenger check-in, security, cargo, and baggage. It also includes navigation fees, which are incurred when our aircraft fly through certain foreign air space and are paid to the relevant foreign authorities, and all aircraft and traffic servicing employee costs and benefits for line and management functions such as ground operations. The non-salary portions of aircraft and traffic servicing expenses are variable costs. We typically do not incur aircraft and traffic servicing expenses under ACMI contracts.

 

***Passenger Services.***Passenger services expense includes the wages and benefits paid to our flight attendants, training costs for our personnel, on-board costs of meal and beverage catering for our non-ACMI commercial departures, passenger liability insurance and passenger services management functions, such as flight attendant management. In addition, these expenses include passenger fees and costs incurred for mishandled baggage and costs related to compensation for passengers who have been inconvenienced due to flight delays or cancellations. We generally view the non-salary portion of passenger services expense as a variable cost based on the number of aircraft we operate and block hours flown by us. Our flight attendant groups are represented by collective bargaining agreements, and as such, their wages and benefits are generally fixed, although we have some flexibility to adjust staffing levels.

 

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***Crew Positioning.***Crew positioning expenses are primarily the cost of air and ground transportation and hotels incurred to position crewmembers in locations around the world from which they can operate their flights and then return to their home bases. World’s crews are home-based throughout the United States, while North American’s crews are based at John F. Kennedy (JFK) International Airport in New York. These are variable costs.

 

***Selling and Marketing.***Selling and marketing expenses primarily include the commissions we pay to Alliance team members as compensation for military missions we operate that were awarded to our team based on their AMC entitlement points. These commissions are negotiated as a percentage of the revenue we earn from those military missions. We pay these commissions monthly. We consider commissions as a variable cost. Selling and marketing expenses also include salaries, wages and benefits and professional fees related to our selling and marketing functions and advertising and product marketing activity. These are mainly variable costs.

 

***Depreciation and Amortization.***Depreciation reflects the periodic expensing of the recorded cost of owned airframe and engines, capitalized engine overhauls and related life limited parts, referred to as LLPs, and certain scheduled airframe and landing gear maintenance events, leasehold improvements, and rotable parts for all fleet types, together with our property and equipment. Amortization reflects the periodic expensing of the recorded value of our definite-lived intangible assets. These are fixed costs.

 

***General and Administrative.***General and administrative expenses principally include corporate and management’s salaries, wages and benefits, professional fees, including legal and accounting, the cost of general insurance policies, such as workers’ compensation insurance, and rent and facility costs. Also included in general and administrative expense is the cost of certain contingent liability provisions, including our guarantees of ATA leasing obligations. These are fixed costs.

 

***Asset Impairment and Aircraft Retirements.***Asset impairment and aircraft retirements include all identifiable costs relating to impaired assets, both tangible and intangible, as well as costs associated with the retirement of aircraft and engines. For discussion regarding impairment testing, see “Critical Accounting Policies and Estimates” below.

 

***Other Expenses.***Other expenses primarily include the expense related to subservice events and customer reimbursement for damaged cargo. Other expenses are generally variable in nature.

 

**Critical Accounting Policies and Estimates**

 

The preparation of financial statements in conformity with GAAP requires us to make judgments and estimates that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosures of contingent assets and liabilities.

 

Certain significant accounting policies used in the preparation of the financial statements require us to make difficult, subjective or complex judgments and thus we consider these critical accounting policies. We have identified the following as critical accounting policies.

 

***Accounting for Long-Lived Assets.***As of June 30, 2011, we had $136.8 million of net property and equipment and $154.5 million of definite-lived net intangible assets on our balance sheet. Generally, our property and equipment is depreciated to residual values over their estimated useful service lives using the straight-line method. Leasehold improvements and rotable parts related to our aircraft are depreciated over the period of benefit or the terms of the related leases, whichever is less. Our facilities and ground equipment are generally depreciated over three to seven years. Definite-lived intangible assets are amortized on a straight-line basis over the estimated lives of the related assets.

 

We evaluate our long-lived assets by segment, including definite-lived intangible assets, for impairment when events or changes in circumstances indicate that the book value of the asset may not be recoverable. In testing for impairment, we compare the undiscounted estimated future cash flows from the expected use of those assets to their net book value to determine if impairment is indicated. Assets deemed impaired are written down to their estimated fair value through a charge to earnings. Fair values may be estimated using discounted cash flow analysis or quoted

 

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market prices, together with other available information. This requires the exercise of significant judgment and the preparation of numerous significant estimates.

 

We record asset impairments and aircraft retirement (or return) charges based on operational needs and specific, non-recurring events. To date these non-routine impairments have not been required on a regular basis but rather on an infrequent basis under unusual circumstances.

 

In accordance with ASC 360, Property, Plant and Equipment and the AICPA Audit and Accounting Guide: Airlines, when impairment indicators are present, we assess the aircraft and aircraft-related assets for recoverability and record impairment charges as appropriate. Such impairment indicators have included management’s commitment to permanently ground an aircraft and damage caused to an aircraft.

 

When impairment indicators are present and aircraft or aircraft-related assets are tested for recoverability, an assessment is also made to determine if it is necessary to adjust the remaining useful lives and salvage values of such assets, regardless of whether an impairment charge is recorded.

 

The actual aircraft asset impairment charges recorded in the periods presented resulted in the assets being written down to zero or to their salvage values, and management determined no adjustments to useful lives of other aircraft within its fleet were required.

 

***Indefinite-Lived Intangible Assets.***We do not amortize our indefinite-lived intangible assets. We test the book value of our intangible assets for impairment on an annual basis and, if certain events or circumstances indicate that an impairment loss may have incurred, on an interim basis. This requires the exercise of significant judgment and the preparation of numerous estimates.

 

***Airframe and Engine Maintenance and Lease Requirements.***The cost of major engine overhauls for fleet types not covered under a maintenance agreement, and the cost of certain overhauls related to heavy airframe, engine, LLPs, landing gear and auxiliary power units, which we refer to as APUs, for all fleet types, are capitalized when performed and amortized over estimated useful lives based upon usage, or to earlier fleet or aircraft calendar limits, for all aircraft. Depreciation expense related to overhauls of heavy airframe, engine, LLPs, landing gear and APUs totaled $27.3 million and $15.4 million for the six months ended June 30, 2011 and 2010, respectively.  In the six months ended June 30, 2011, depreciation expense associated with the retirement of our DC-10 fleet, was $1.7 million. We have maintenance agreements for certain items, such as engines, which require us to pay a monthly fee per engine flight hour in exchange for major overhaul, spares, and maintenance of those engines. We expense the cost per flight hour under these agreements as incurred. Under certain of our aircraft and engine leases, we are required to make periodic maintenance reserve payments to lessors for certain future maintenance work such as airframe, engine, LLP, landing gear and APU overhauls. In addition, under our aircraft and engine leases, we are required to return the airframes, engines, LLP, landing gear, and APUs to the lessors in a specified maintenance condition at the end of the lease (return condition). If the return condition is not met, the leases generally require us to provide financial compensation to the lessor. Under certain leases, the maintenance reserve deposits are not refundable to us. Consequently, we periodically review the balances of the maintenance reserve deposits and write off any amounts that are no longer probable of being used for maintenance. We have adopted the provisions of EITF 08-3, “Accounting by Lessees for Non-Refundable Maintenance Deposits,” included in Accounting Standards Codification (ASC 840-10), which became effective on January 1, 2009. In determining whether it is probable that maintenance deposits will be used to offset the liability for future maintenance costs, we consider the condition of the aircraft, including but not limited to the airframe and engines, and the projected future usage of the aircraft based on our business and fleet plans. For the six months ended June 30, 2011 and 2010, we expensed $4.5 million, and $3.9 million, respectively, of maintenance reserve payments on certain aircraft leases where we determined that it was not probable that payments would be used to offset the liability for future maintenance costs.

 

If an operating lease has return conditions, our policy is to accrue and expense ratably the return condition costs once they are estimable and probable. During the six months ended June 30, 2011 and 2010, respectively, we recorded $1.7 million and $1.4 million of return condition expense as part of maintenance, materials and repairs expense.

 

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***Income Taxes.***We account for income taxes under the asset and liability method. Under this method, we recognize deferred income taxes based upon the tax effects of temporary differences between the financial statement and tax basis of assets and liabilities, as measured through the application of current enacted tax rates. When necessary, deferred income tax assets are reduced by a valuation allowance to an amount that is determined to be more likely than not recoverable. We make significant estimates and assumptions about future taxable income and future tax consequences when determining the amount of a valuation allowance.

 

Our income tax provisions are based on calculations, estimates, and assumptions that are subject to potential examination by the Internal Revenue Service (IRS) and other taxing authorities. Although we believe the positions taken on previously filed tax returns are reasonable, we have established tax and interest reserves in recognition that taxing authorities may challenge the positions we have taken, which could result in additional liabilities of both taxes and interest. We review and adjust these reserves as circumstances warrant or as events occur that affect our potential liability, such as the lapsing of applicable statutes of limitation, conclusion of audits, a change based upon current calculations, identification of new issues, releases of administrative guidance or the rendering of a court decision affecting a particular issue. Any adjustment to the tax provision would be made in the period in which the facts that gave rise to the change become known.

 

***Stock-based Compensation.***On June 29, 2009, we approved certain new equity awards to certain employees under a 2009 Long-Term Incentive Plan that replaced awards granted under previous plans adopted in 2006 and 2007. This Plan allows us to grant incentives to employees in the form of incentive stock options, nonqualified stock options, restricted stock awards and various other performance awards. We accounted for the cancelled and replaced awards as modifications of existing awards with the new incremental fair value recognized over the vesting period beginning in the third quarter of 2009. In November 2010, the board of directors and a majority of our stockholders adopted the Amended and Restated 2009 Long-Term Incentive Plan, which among other things, increased the number of shares authorized for issuance under the plan. On March 31, 2011, we granted 147,622 restricted stock awards and 168,863 stock options which vest over a three-year period. In addition, we granted 147,822 performance-based share awards which vest over a three-year period upon the satisfaction of the performance criteria.

 

We measure the cost of employee services received in exchange for awards of equity instruments based on the grant date fair value of the awards. Options under each plan were granted with an exercise price not less that the market price at the grant date. None of our grants include market-based vesting conditions. We estimate the fair value of stock option awards on the date of grant using a modified Black-Scholes option-pricing model, which requires us to make assumptions, some of which are subjective, including risk-free interest rate, stock price volatility and expected life of the options.

 

Our assumption of the risk-free interest rate is based on the U.S. Treasury yield curve in effect for the expected term of the option at the time of grant. We base our stock price volatility assumptions on historical volatilities of comparable air carriers whose shares are traded using monthly stock price returns equivalent to the contracts term of the option. The expected life of the options is determined based upon an assumption that the options will be exercised evenly from vesting to expiration. As of June 30, 2011, we had $8.6 million of total unrecognized compensation costs related to stock-based compensation arrangements. We expect to recognize this expense over a weighted-average period of 2.36 years.

 

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**Key Factors Affecting Results for the Three Months Ended June 30, 2011**

 

Several factors influenced our results for the three months ended June 30, 2011 and the comparison to the corresponding period in 2010:

 

***Decreased Team Entitlement Share Offset Increased Global Entitlement Share. ***Under the AMC contract for its fiscal year 2011, the Alliance Team, for which World and North American are the primary flyers, is entitled to 43% of long-range international expenditures.  In the AMC’s fiscal year 2010, the Alliance Team’s entitlement was 56%.  As a result, our AMC volume, measured in block hours, was lower during the comparative periods. Global’s entitlement share increased from approximately 7% during the three months ended June 30, 2010 to approximately 18% in the same period for 2011, primarily as a result of reforms made to the calculation of entitlement in the fiscal year 2011 AMC contract, that give entitlement to carriers based on the number of missions they have operated in previous years. As a result of these changes, we have more AMC entitlement than any other air carrier in the program. Because our own share of the Alliance Team’s entitlement increased, our AMC commission expense decreased approximately $7.3 million or 55%, during the three months ended June 30, 2011 compared to the same period in 2010.

 

***Change in Mix of Flying. *** In the second quarter 2010, the AMC required very high levels of B747 freighter capacity in order to transport M-ATV’s to support operations in Afghanistan. The capacity of the primary B747 operator in the Alliance Team was insufficient to meet this demand, and as a result, World was able to operate several of these missions. This military demand has not recurred in 2011. By the end of the second quarter of 2011, World ultimately had placed all of its available B747 commercial capacity with various European, Middle Eastern and Far Eastern cargo airlines.

 

***Schedule Reliability Penalties. *** The AMC fiscal year 2011 contract included new and increased requirements for on-time performance. North American did not meet these increased requirements for the three months ended March 31, 2011, and was in last-use status for flights scheduled during a portion of April and May 2011. As a result, we estimate North American lost missions that would have accounted for $9.3 million of revenue.

 

***Fleet Changes. *** World grew its B747-400 freighter fleet to four aircraft in the second quarter of 2011 compared with two aircraft in the second quarter of 2010. By the end of the second quarter of 2011, the capacity of these aircraft ultimately was sold under ACMI contracts to commercial customers. World also retired its fleet of DC-10’s, and added one MD-11 during the first quarter of 2011 to partially offset the reduced passenger aircraft capacity.

 

***Military Rates per Block Hour. *** The AMC reduced the non-fuel rates it pays its operators per mile in its fiscal year 2011.  This change was based on its determination that the weighted average costs of its operators had declined.  We estimate the effect of these rate reductions on revenue in the second quarter 2011 to be approximately $13 million, compared to the revenue we would have received if the AMC fiscal year 2010 rates were still in effect.

 

***Fuel Price Increase.***On a consolidated basis, our average price per gallon paid for fuel was approximately 34% higher for the three months ended June 30, 2011. The majority of our fuel expenses is driven by military flights, both passenger and cargo. Our operating results were not materially affected by this increase as the military reimburses us for our fuel costs. The increase in the price of fuel for our military flights is reflected as revenue in both our passenger and cargo military revenue and generally offset in our aircraft fuel expense line item.

 

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**Comparison of the Three Months Ended June 30, 2011 and 2010**

 

**Segment and Key Operating Data**

 

We have two reporting segments: World and North American. Selected financial data for the three months ended June 30, 2011 and 2010 are set forth below (in thousands):

 
| ** **                       | ** ** | **Three Months Ended June 30, 2011** | ** **  |
|----------------------------------|------------|---------------------------------------------------------------|-------------|
| ** **                       | ** ** | **World**                                                     | ** **  | **North********American** | ** ** | **All Other** | ** ** | **Consolidated********Total** | ** ** |
|                             |       |                                                          |        |   |   |   |   |   |   |
| Revenues from external customers | ** ** | **$**                                                         | **191,651** | ** ** | **$** | **70,789** | ** ** | **$** | — | ** ** | **$** | **262,440** | ** ** |
| Intersegment revenues            | ** ** | **193**                                                       |        | — | ** ** | **7,851** | ** ** | **8,044** | ** ** |
| Depreciation and amortization    | ** ** | **14,366**                                                    | ** **  | **8,270** |   | — | ** ** | **22,636** | ** ** |
| Total operating expenses         | ** ** | **196,956**                                                   | ** **  | **78,369** | ** ** | **(630** | **)** | **274,695** | ** ** |
| Operating income (loss)          | ** ** | **(5,305**                                                    | **)**       | **(7,580** | **)** | **630** | ** ** | **(12,255** | **)** |
| Interest income                  | ** ** | **291**                                                       | ** **  | **86** | ** ** | **35** | ** ** | **412** | ** ** |
| Interest expense                 | ** ** | **(9,615**                                                    | **)**       | **(2,571** | **)** | **(79** | **)** | **(12,265** | **)** |
| Loss on investment               |       | —                                                        |        | — | ** ** | **(1** | **)** | **(1** | **)** |
| Income tax benefit               | ** ** | **(4,962**                                                    | **)**       | **(3,599** | **)** | **(965** | **)** | **(9,526** | **)** |
|                                  |            |                                                               |             |  |  |  |  |  |  |  |  |  |  |

 
| ** **                       | ** ** | **Three Months Ended June 30, 2010** | ** ** |
|----------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                       | ** ** | **World**                                                     | ** ** | **North   American** | ** ** | **All Other** | ** ** | **Consolidated   Total** | ** ** |
|                             |       |                                                          |       |   |   |   |   |   |   |
| Revenues from external customers |       | $                                                             | 204,448    |   | $ | 87,552 |   | $ | — |   | $ | 292,000 |   |
| Intersegment revenues            |       | 207                                                           |       | — |   | 6,296 |   | 6,503 |   |
| Depreciation and amortization    |       | 12,466                                                        |       | 6,458 |   | 177 |   | 19,101 |   |
| Total operating expenses         |       | 194,871                                                       |       | 83,010 |   | 1,061 |   | 278,942 |   |
| Operating income                 |       | 9,577                                                         |       | 4,542 |   | (1,061 | ) | 13,058 |   |
| Interest income                  |       | 502                                                           |       | 143 |   | 1 |   | 646 |   |
| Interest expense                 |       | (7,892                                                        | )          | (3,676 | ) | (255 | ) | (11,823 | ) |
| Loss on debt extinguishment      |       | —                                                        |       | — |   | (1,239 | ) | (1,239 | ) |
| Loss on investment               |       | —                                                        |       | — |   | (89 | ) | (89 | ) |
| Income tax expense (benefit)     |       | 1,504                                                         |       | 624 |   | (1,814 | ) | 314 |   |
|                                  |            |                                                               |            |  |  |  |  |  |  |  |  |  |  |

 

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The following table sets forth selected key metrics by segment:

 
| ** **                                                                                               | ** ** | **Three Months Ended   June 30** | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                                                                               | ** ** | **2011**                                        | ** ** | **2010** | ** ** |
| **World**                                                                                                |       |                                            |       |   |   |
| Military passenger block hours                                                                           | ** ** | **5,300**                                       |       | 6,402 |   |
| Military cargo block hours                                                                               | ** ** | **924**                                         |       | 1,873 |   |
| Commercial cargo block hours                                                                             | ** ** | **8,319**                                       |       | 6,202 |   |
| Commercial passenger block hours                                                                         | ** ** | **106**                                         |       | 790 |   |
| Non-revenue block hours                                                                                  | ** ** | **206**                                         |       | 187 |   |
| Total block hours                                                                                        | ** ** | **14,855**                                      |       | 15,454 |   |
| Non-ACMI block hours(1)                                                                                  | ** ** | **6,916**                                       |       | 8,878 |   |
| Non-ACMI departures(2)                                                                                   | ** ** | **1,246**                                       |       | 1,614 |   |
| Total departures                                                                                         | ** ** | **2,739**                                       |       | 2,679 |   |
| Weighted average fuel price per gallon                                                                   | ** ** | **$**                                           | **3.37**   |   | $ | 2.49 |   |
| Number of aircraft in fleet, end of period                                                               | ** ** | **20.0**                                        |       | 20.0 |   |
| Average aircraft in revenue service                                                                      | ** ** | **18.3**                                        |       | 17.9 |   |
| Average daily aircraft utilization (block hours   flown per day per average aircraft in revenue service) | ** ** | **8.9**                                         |       | 9.5 |   |
|                                                                                                     |       |                                            |       |   |   |
| **North American**                                                                                       | ** ** | ** **                                      |       |   |   |
| Military passenger block hours                                                                           | ** ** | **4,354**                                       |       | 5,463 |   |
| Commercial passenger block hours                                                                         | ** ** | **1,218**                                       |       | 634 |   |
| Non-revenue block hours                                                                                  | ** ** | **106**                                         |       | 33 |   |
| Total block hours                                                                                        | ** ** | **5,678**                                       |       | 6,130 |   |
| Non-ACMI block hours(1)                                                                                  | ** ** | **4,576**                                       |       | 5,711 |   |
| Non-ACMI departures(2)                                                                                   | ** ** | **899**                                         |       | 1,035 |   |
| Total departures                                                                                         | ** ** | **1,251**                                       |       | 1,163 |   |
| Weighted average fuel price per gallon                                                                   | ** ** | **$**                                           | **3.33**   |   | 2.50 |   |
| Number of aircraft in fleet, end of period                                                               | ** ** | **9.0**                                         |       | 10.0 |   |
| Average aircraft in revenue service                                                                      | ** ** | **7.5**                                         |       | 8.2 |   |
| Average daily aircraft utilization (block hours   flown per day per average aircraft in revenue service) | ** ** | **8.4**                                         |       | 8.2 |   |
|                                                                                                          |            |                                                 |            |  |  |  |  |

 

----

(1)             Non-ACMI block hours refer to total block hours minus ACMI cargo block hours minus ACMI passenger block hours.

 

(2)             Non-ACMI departures refer to total departures minus ACMI cargo departures minus ACMI passenger departures.

 

**Financial Overview for the Three Months Ended June 30, 2011 and 2010**

 

**Operating Revenues**

 

Total operating revenues for the three months ended June 30, 2011 decreased $29.6 million, or 10%, to $262.4 million, compared to $292.0 million for the three months ended June 30, 2010.

 

***Military Passenger Revenue.*** Military passenger revenue for the three months ended June 30, 2011 decreased $24.3 million, or 12%, to $185.3 million, compared to $209.6 million for the three months ended June 30, 2010.

 

World declined $6.5 million, or 5%, primarily due to a 17% decrease in AMC passenger block hours flown during the comparative periods due to lower military demand for large wide-body passenger aircraft and the greater requirement for the medium wide-body aircraft. This was partially offset by a 15% increase in the revenue per block hour paid by the AMC. This increase was mainly due to a 34% increase in the average price of fuel per gallon,

 

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which is recorded as revenue as the AMC reimburses us for fuel costs, during the comparable periods.  This increase was partially offset by the lower contracted non-fuel rate paid by the AMC.

 

North American declined $17.8 million, or 27%, primarily due to a 20% decrease in AMC passenger block hours flown during the comparative periods. The decrease was principally due to the reduction in entitlement and partially as a result of penalties imposed during a portion of the second quarter of 2011 due to not meeting certain operational performance metrics, and the lack of available medium wide-body capacity at North American available to operate our entitled missions. The decline in AMC passenger block hours was partially offset by a 33% increase in the average price of fuel per gallon, which is recorded as revenue as the AMC reimburses us for fuel costs, during the comparable periods.

 

***Military Cargo Revenue.***Military cargo revenue for the three months ended June 30, 2011 decreased $18.7 million, or 52%, to $17.3 million, compared to $36.0 million for the three months ended June 30, 2010.

 

World accounted for all of the decrease as North American does not operate freighter aircraft.  World experienced a 51% decrease in military cargo block hours flown during the comparable periods due to strong demand for our B747 freighters for transportation of M-ATV’s to Afghanistan during the quarter ended June 30, 2010 which did not recur during the quarter ended June 30, 2011. The decline in AMC cargo block hours was partially offset by a 35% increase in the average price of fuel per gallon, which is recorded as revenue as the AMC reimburses us for fuel costs.  A decrease in the AMC non-fuel contracted rate paid per block hour also negatively impacted World.

 

***Commercial Cargo Revenue.***Commercial cargo revenue for the three months ended June 30, 2011 increased $14.4 million, or 42%, to $48.3 million, compared to $33.9 million for the three months ended June 30, 2010.

 

World accounted for all of the increase as North American does not operate freighter aircraft. World increased  primarily due to a 34% increase in commercial cargo block hours flown during the comparable periods. This increase in block hours reflects the addition of two B747-400 aircraft during the first quarter of 2011, that were available for revenue service during the entire second quarter of 2011. However, we continue to underutilize our larger commercial cargo fleet. The average revenue per block hour paid increased 6% due to the increased mix of B747-400 flying.

 

***Commercial Passenger Revenue.***Commercial passenger revenue for the three months ended June 30, 2011 decreased $2.5 million, or 23%, to $8.5 million, compared to $11.0 million for the three months ended June 30, 2010.

 

World commercial passenger revenue decreased $3.3 million, or 53%, primarily due to an 87% decrease in the commercial passenger block hours flown during the comparative periods. This decrease was mainly due to a significant ACMI contract that ended in May 2010. The decrease in block hours was partially offset by an improvement in the rate paid per block hour due to the increase in mix of full service flying versus ACMI passenger.

 

The decrease at World was partially offset by an increase in North American’s commercial passenger revenue which increased by $0.8 million, or 16%, during the comparable periods, primarily due to a 92% increase in block hours flown during the comparative periods, substantially offset by a lower rate per block hour paid due to an increase in ACMI block hours.

 

***Other Revenue.***Other revenue for the three months ended June 30, 2011 increased $1.5 million, or 100%, to $3.0 million, compared to $1.5 million for the three months ended June 30, 2010. World accounted for the majority of the increase primarily due to an increase in rebill revenue from ACMI flights during the comparative quarterly periods.

 

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**Operating Expenses**

 

Total operating expenses for the three months ended June 30, 2011 decreased $4.2 million, or 2%, to $274.7 million, compared to $278.9 million for the three months ended June 30, 2010.

 

***Aircraft Fuel.***Aircraft fuel expense for the three months ended June 30, 2011 increased $2.5 million, or 3%, to $78.7 million, as compared to $76.2 million for the three months ended June 30, 2010. Fuel expense increased at both airlines due to an overall 34% increase in the average price of fuel per gallon, partially offset by an overall 5% decrease in block hours flown. Under our military and ACMI contracts, World and North American have limited exposure to fuel price volatility, as the military and the majority of our commercial customers reimburse us for our fuel costs.

 

***Aircraft Rentals.***Aircraft rentals expense for the three months ended June 30, 2011 decreased $1.7 million, or 4%, to $37.6 million, compared to $39.3 million for the three months ended June 30, 2010. The decrease was mainly driven by a decline in supplemental rent deposits paid. This was partially offset by an increase at World mainly due to the increase in B747 aircraft operated from two to four, offset by the reduction of three DC-10 aircraft and one B757 aircraft operated at North American.

 

***Maintenance, Materials and Repairs.***Maintenance, materials and repairs expense for the three months ended June 30, 2011 increased $7.7 million, or 25%, to $39.1 million, compared to $31.4 million for the three months ended June 30, 2010. World’s maintenance, materials and repairs expense increased primarily due to the reversal of $4.6 million in maintenance expense due to a revised engine overhaul strategy during the second quarter of 2010, which did not recur during the second quarter of 2011. In addition, World experienced an increase in component repairs, parts, power-by-the-hour agreements, and freight for maintenance during the comparative periods. North American maintenance, materials and repairs expense increased $2.8 million, or 28%, primarily due to an increase in non-capitalized c-checks during the comparative periods.

 

***Flight Operations.***Flight operations expense increased $3.0 million, or 12%, to $29.0 million during the three months ended June 30, 2011 as compared to $26.0 million for the corresponding period in 2010 as a result of increased pilot headcount, related pilot pay per the collective bargaining agreement, higher benefit costs and pilot training at World associated with the growth of its MD-11 and B747 fleets. This was partially offset by a 4% decrease in total block hours flown. North American’s flight operations expense increased 4% due to higher pilot pay per the collective bargaining agreement and higher benefit costs, partially offset by a 7% decrease in total block hours flown.

 

***Aircraft and Traffic Servicing.***Aircraft and traffic servicing expense for the three months ended June 30, 2011 decreased $3.4 million, or 16%, to $18.5 million, compared to $21.9 million for the three months ended June 30, 2010. This decrease was primarily due to a 19% reduction in non-ACMI departures.

 

***Passenger Services.***Passenger services expense for the three months ended June 30, 2011 decreased $2.5 million, or 13%, to $16.3 million, compared to $18.8 million for the three months ended June 30, 2010. This decrease was primarily due to 19% reduction in non-ACMI departures and a related reduction in flight attendant expense due to lower headcount associated with the reduction in military passenger block hours.

 

***Crew Positioning.***Crew positioning expense for the three months ended June 30, 2011 remained consistent at $14.9 million, compared to $14.8 million for the three months ended June 30, 2010. World and North American’s crew positioning expense increased marginally, mainly due to an increase in travel costs per non-ACMI departure and increased travel costs incurred by World and North American associated with commercial passenger and cargo contracts, mostly offset by a 19% decline in non-ACMI departures.

 

***Selling and Marketing.***Selling and marketing expense for the three months ended June 30, 2011 decreased $8.0 million, or 54%, to $6.8 million, compared to $14.8 million for the three months ended June 30, 2010. Selling and marketing expense decreased due to decreased commissions paid to our Alliance team as a result of an overall 18% decrease in military revenue recorded by World and North American as well as a reduction in commission rates paid during the comparative periods.

 

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***Depreciation and Amortization.***Depreciation and amortization expense for the three months ended June 30, 2011 increased $3.5 million, or 18%, to $22.6 million compared to $19.1 million for the three months ended June 30, 2010.

 

World and North American depreciation and amortization expense increased $1.8 million and $1.7 million, respectively, due primarily to a cumulative increase in the engine overhauls, certain scheduled airframe heavy maintenance events and rotable part purchases that qualify for capitalization that are being depreciated over their respective useful lives during the comparative periods. World had 25 capitalized engine overhauls in 2011 compared to 23 in 2010. North American had three capitalized heavy c-checks in 2011 compared to two in the second quarter of 2010.  In addition, the average cost of the maintenance event at North American increased.

 

***General and Administrative.***General and administrative expense for the three months ended June 30, 2011 decreased $6.8 million, or 46%, to $7.9 million, compared to $14.7 million for the three months ended June 30, 2010. The decrease is primarily due to lower expected incentive payout obligations, litigation reserves, and legal and professional services during the comparative quarters.

 

***Asset Impairment and Aircraft Retirements.***We recorded $0.1 million of asset impairment and aircraft retirement expense for the three months ended June 30, 2011 related to the retirement of our World DC-10 fleet. There were no asset impairment and aircraft retirements recorded for the three months ended June 30, 2010.

 

***Other Expenses.***Other expenses for the three months ended June 30, 2011 increased $1.3 million, or 68%, to $3.2 million, compared to $1.9 million for the three months ended June 30, 2010. This increase was primarily due to increased subservice events and related costs.

 

**Operating Income (Loss)**

 

Operating income (loss) for the three months ended June 30, 2011 decreased $25.4 million to an operating loss of $12.3 million, compared to a $13.1 million operating profit for the three months ended June 30, 2010. Total operating revenue was down $29.6 million, or 10%. At the same time, total operating expense decreased by $4.2 million, or 2%. Total operating margin declined from 4.5% operating margin for the three months ended June 30, 2010 to a 4.7% operating deficit for the three months ended June 30, 2011. This is primarily due to lower non-fuel AMC rates and block hours operated and underutilized available ACMI cargo capacity in the second quarter of 2011 as compared to the corresponding period in 2010.

 

**Other Income (Expense)**

 

***Interest Expense.***Interest expense for the three months ended June 30, 2011 increased slightly to $12.3 million for the three months ended June 30, 2011 as compared to $11.8 million for the corresponding period in 2010.

 

**Income Taxes**

 

During the three months ended June 30, 2011, we recorded an income tax benefit of $9.5 million which resulted in an effective tax rate of 39.2%. Our effective tax rate differed from the expected tax rate primarily due to projected nondeductible expenses, such as crewmember meals and per diems. In addition, during the three months ended June 30, 2011, we realized a $0.9 million non-recurring tax benefit for a deduction of previously capitalized costs. Also included in this amount is an accrual for additional interest for uncertain tax positions of $0.1 million. There were no other changes to our uncertain tax positions during the three months ended June 30, 2011.

 

During the three months ended June 30, 2010, the amount of nondeductible expenses, such as meals and entertainment, were disproportionate in comparison to pre-tax book income and, as a result, significantly affected our effective tax rate. Additionally, certain state deferred tax assets are subject to a valuation allowance. As a result, we recorded income tax expense of $0.3 million for the three months ended June 30, 2010, resulting in an effective tax rate of 33.3%. Included in this amount is an accrual for additional interest for uncertain tax positions of $0.3 million. There were no other changes to our uncertain tax positions during the three months ended June 30, 2010.

 

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**Net Loss**

 

Net loss for the three months ended June 30, 2011 was $14.8 million, compared to net income of $0.6 million for the three months ended June 30, 2010, a decrease of $15.4 million primarily due to lower non-fuel AMC rates and block hours operated and underutilized available ACMI cargo capacity in the second quarter of 2011 as compared to the corresponding period in 2010.

 

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**Key Factors Affecting Results for the Six Months Ended June 30, 2011**

 

Several factors influenced our results for the six months ended June 30, 2011 and the comparison to the corresponding period in 2010:

 

***Decreased Team Entitlement Share Offset Global Entitlement Share. ***Under the AMC contract for its fiscal year 2011, the Alliance Team, for which World and North American are the primary flyers, is entitled to 43% of long-range international expenditures.  During the AMC’s fiscal year 2010, the Alliance Team’s entitlement was 56%.  As a result, our AMC volume, measured in block hours, was lower in the first six months of 2011 compared to the first six months of 2010. Global’s entitlement share increased from approximately 7% during the six months ended June 30, 2010 to approximately 18% in the same period for 2011, primarily as a result of reforms made to the calculation of entitlement in the fiscal year 2011 AMC contract, that give entitlement to carriers based on the number of missions they have operated in previous years. As a result of these changes, we have more AMC entitlement than any other air carrier in the program. Because our own share of the Alliance Team’s entitlement increased, our AMC commission expense decreased approximately $16.7 million or 59%, during the six months ended June 30, 2011 compared to the same period in 2010.

 

***Change in Mix of Flying. ***In the first six months of 2010 the AMC required very high levels of Boeing 747 freighter capacity in order to transport M-ATV’s to support operations in Afghanistan.  The capacity of the primary Boeing 747 operator in the Alliance Team was insufficient to meet this demand, and as a result, World was able to operate several of these missions.  This military demand has not recurred in 2011. By the end of the second quarter of 2011, World ultimately had placed all of its available B747 commercial capacity with various European, Middle Eastern and Far Eastern cargo airlines.

 

***Schedule Reliability Penalties. *** The AMC fiscal year 2011 contract included new and increased requirements for on-time performance.  North American did not meet the increased requirements for the three months ended March 31, 2011, and was in last-use status for flights scheduled during a portion of April and May 2011.  As a result, North American is estimated to have lost missions that would have accounted for $9.3 million of revenue.

 

***Fleet Changes. ***During the first six months of 2011, World grew its Boeing 747-400 freighter fleet to 4 aircraft compared with 2 aircraft in 2010.  The aircraft were delivered in January and March 2011.  These aircraft were ultimately sold under ACMI contracts to commercial customers by the end of the second quarter in 2011.  World also retired its fleet of McDonnell Douglas DC-10’s, and added one McDonnell Douglas MD-11 to partially offset the reduced passenger aircraft capacity.

 

***Military Rates per Block Hour. ***The AMC reduced the non-fuel rates it pays its operators per mile during its fiscal year 2011.  This change was based on its determination that the weighted-average costs of its operators had declined.  We estimate the effect of these rate reductions on revenue in the first six months of 2011 to be $26 million, compared to the revenue we would have received if the AMC’s fiscal year 2010 rates were still in effect.

 

***Fuel Price Increase.***On a consolidated basis, our average price per gallon paid for fuel was approximately 30% higher during the comparative periods. The majority of our fuel expense is driven by military flights, both passenger and cargo. Our operating results were not materially affected by this increase as the military reimburses us for our fuel costs. The increase in the price of fuel for our military flights is reflected as revenue in both our passenger and cargo military revenue and generally offset in our aircraft fuel expense line item.

 

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**Comparison of the Six Months Ended June 30, 2011 and 2010**

 

**Segment and Key Operating Data**

 

We have two reporting segments: World and North American. Selected financial data for the six months ended June 30, 2011 and 2010 are set forth below (in thousands):

 
| ** **                       | ** ** | **Six Months Ended June 30, 2011** | ** **  |
|----------------------------------|------------|-------------------------------------------------------------|-------------|
| ** **                       | ** ** | **World**                                                   | ** **  | **North American** | ** ** | **All Other** | ** ** | **Consolidated   Total** | ** ** |
|                             |       |                                                        |        |   |   |   |   |   |   |
| Revenues from external customers | ** ** | **$**                                                       | **364,176** | ** ** | **$** | **145,898** | ** ** | **$** | — | ** ** | **$** | **510,074** | ** ** |
| Intersegment revenues            | ** ** | **696**                                                     | ** **  | **27** | ** ** | **20,793** | ** ** | **21,516** | ** ** |
| Depreciation and amortization    | ** ** | **31,922**                                                  | ** **  | **18,252** |   | — | ** ** | **50,174** | ** ** |
| Total operating expenses         | ** ** | **383,810**                                                 | ** **  | **163,299** | ** ** | **(563** | **)** | **546,546** | ** ** |
| Operating income (loss)          | ** ** | **(19,634**                                                 | **)**       | **(17,401** | **)** | **563** | ** ** | **(36,472** | **)** |
| Interest income                  | ** ** | **741**                                                     | ** **  | **183** | ** ** | **35** | ** ** | **959** | ** ** |
| Interest expense                 | ** ** | **(18,420**                                                 | **)**       | **(5,410** | **)** | **(79** | **)** | **(23,909** | **)** |
| Loss on investment               |       | —                                                      |        | — | ** ** | **(99** | **)** | **(99** | **)** |
| Income tax benefit               | ** ** | **(12,805**                                                 | **)**       | **(8,154** | **)** | **(205** | **)** | **(21,164** | **)** |
|                                  |            |                                                             |             |  |  |  |  |  |  |  |  |  |  |

 
| ** **                       | ** ** | **Six Months Ended June 30, 2010** | ** ** |
|----------------------------------|------------|-------------------------------------------------------------|------------|
| ** **                       | ** ** | **World**                                                   | ** ** | **North   American** | ** ** | **All Other** | ** ** | **Consolidated   Total** | ** ** |
|                             |       |                                                        |       |   |   |   |   |   |   |
| Revenues from external customers |       | $                                                           | 417,725    |   | $ | 172,818 | ** ** | **$** | — |   | $ | 590,543 |   |
| Intersegment revenues            |       | 296                                                         |       | — |   | 14,290 |   | 14,586 |   |
| Depreciation and amortization    |       | 24,730                                                      |       | 12,612 |   | 351 |   | 37,693 |   |
| Total operating expenses         |       | 398,219                                                     |       | 167,431 |   | 563 |   | 566,213 |   |
| Operating income                 |       | 19,506                                                      |       | 5,387 |   | (563 | ) | 24,330 |   |
| Interest income                  |       | 1,025                                                       |       | 648 |   | 2 |   | 1,675 |   |
| Interest expense                 |       | (15,969                                                     | )          | (7,483 | ) | (168 | ) | (23,620 | ) |
| Loss on investment               |       | —                                                      |       | — |   | (1,306 | ) | (1,306 | ) |
| Loss on debt extinguishment      |       | —                                                      |       | — |   | (1,239 | ) | (1,239 | ) |
| Income tax expense (benefit)     |       | 2,495                                                       |       | (349 | ) | (1,879 | ) | 267 |   |
|                                  |            |                                                             |            |  |  |  |  |  |  |  |  |  |  |

 

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The following table sets forth selected key metrics by segment:

 
| ** **                                                                                               | ** ** | **Six Months Ended   June 30** | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                                               | ** ** | **2011**                                      | ** ** | **2010** | ** ** |
| **World**                                                                                                |       |                                          |       |   |   |
| Military passenger block hours                                                                           | ** ** | **10,509**                                    |       | 13,015 |   |
| Military cargo block hours                                                                               | ** ** | **2,302**                                     |       | 4,653 |   |
| Commercial cargo block hours                                                                             | ** ** | **15,204**                                    |       | 11,222 |   |
| Commercial passenger block hours                                                                         | ** ** | **186**                                       |       | 1,965 |   |
| Non-revenue block hours                                                                                  | ** ** | **340**                                       |       | 309 |   |
| Total block hours                                                                                        | ** ** | **28,541**                                    |       | 31,164 |   |
| Non-ACMI block hours(1)                                                                                  | ** ** | **13,947**                                    |       | 18,648 |   |
| Non-ACMI departures(2)                                                                                   | ** ** | **2,545**                                     |       | 3,328 |   |
| Total departures                                                                                         | ** ** | **5,288**                                     |       | 5,399 |   |
| Weighted average fuel price per gallon                                                                   | ** ** | **$**                                         | **3.17**   |   | $ | 2.43 |   |
| Number of aircraft in fleet, end of period                                                               | ** ** | **20.0**                                      |       | 20.0 |   |
| Average aircraft in revenue service                                                                      | ** ** | **18.0**                                      |       | 18.1 |   |
| Average daily aircraft utilization (block hours   flown per day per average aircraft in revenue service) | ** ** | **8.8**                                       |       | 9.5 |   |
|                                                                                                     |       |                                          |       |   |   |
| **North American**                                                                                       | ** ** | ** **                                    |       |   |   |
| Military passenger block hours                                                                           | ** ** | **9,104**                                     |       | 11,437 |   |
| Commercial passenger block hours                                                                         | ** ** | **2,984**                                     |       | 995 |   |
| Non-revenue block hours                                                                                  | ** ** | **198**                                       |       | 178 |   |
| Total block hours                                                                                        | ** ** | **12,286**                                    |       | 12,610 |   |
| Non-ACMI block hours(1)                                                                                  | ** ** | **9,572**                                     |       | 11,915 |   |
| Non-ACMI departures(2)                                                                                   | ** ** | **1,802**                                     |       | 2,178 |   |
| Total departures                                                                                         | ** ** | **2,518**                                     |       | 2,346 |   |
| Weighted average fuel price per gallon                                                                   | ** ** | **$**                                         | **3.15**   |   | $ | 2.43 |   |
| Number of aircraft in fleet, end of period                                                               | ** ** | **9.0**                                       |       | 10.0 |   |
| Average aircraft in revenue service                                                                      | ** ** | **7.8**                                       |       | 8.1 |   |
| Average daily aircraft utilization (block hours   flown per day per average aircraft in revenue service) | ** ** | **8.7**                                       |       | 8.6 |   |

 

----

(1)             Non-ACMI block hours refer to total block hours minus ACMI cargo block hours minus ACMI passenger block hours.

 

(2)             Non-ACMI departures refer to total departures minus ACMI cargo departures minus ACMI passenger departures.

 

**Financial Overview for the Six Months Ended June 30, 2011 and 2010**

 

**Operating Revenues**

 

Total operating revenues for the six months ended June 30, 2011 decreased $80.4 million, or 14%, to $510.1 million, compared to $590.5 million for the six months ended June 30, 2010.

 

***Military Passenger Revenue.*** Military passenger revenue for the six months ended June 30, 2011 decreased $61.2 million, or 15%, to $358.8 million, compared to $420.0 million for the six months ended June 30, 2010.

 

World declined $27.3 million, or 11%, primarily due to a 19% decrease in AMC passenger block hours flown during the comparable periods due to lower military demand for large wide-body passenger aircraft and the greater requirement for the medium wide-body aircraft. Also affecting AMC block hours was reduced troop movements particularly into Iraq during the comparative periods. This was partially offset by an 11% increase in the revenue per

 

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block hour paid by the AMC. This increase was primarily due to a 30% increase in the average price of fuel per gallon, which is recorded as revenue as the AMC reimburses us for fuel costs, during the comparative periods. Partially offsetting the fuel increase was a decline in the non-fuel contracted rate paid by the AMC.

 

North American declined $33.9 million, or 20%, primarily due to a 20% decrease in AMC passenger block hours flown during the comparable periods. The decrease was principally due to the reduction in entitlement and partially as a result of penalties imposed due to not meeting certain operational performance metrics, and the lack of available medium wide-body capacity at North American available to operate our entitled missions. The decline in AMC passenger block hours was partially offset by a 30% increase in the average price of fuel per gallon, which is recorded as revenue as the AMC reimburses us for fuel costs, during the comparative periods.

 

***Military Cargo Revenue.***Military cargo revenue for the six months ended June 30, 2011 decreased $46.1 million, or 54%, to $39.9 million, compared to $86.0 million for the six months ended June 30, 2010.

 

World accounted for all of the decrease as North American does not operate freighter aircraft. Military cargo block hours flown decreased 51% during the comparative periods. The decrease in block hours was mainly due to the strong demand for our B747 freighters during the quarter ended June 30, 2010 for the transportation of M-ATV’s to Afghanistan which did not recur during the corresponding period in 2011. In addition, there was a decline in the non-fuel AMC contracted rate paid per block hour. These decreases were partially offset by a 30% increase in the average price of fuel per gallon, which as recorded as revenue as the AMC reimburses us for fuel costs, during the comparative periods.

 

***Commercial Cargo Revenue.***Commercial cargo revenue for the six months ended June 30, 2011 increased $29.9 million, or 50%, to $89.8 million, compared to $59.9 million for the six months ended June 30, 2010.

 

The increase in revenue, all at World because North American does not operate freighter aircraft, reflects a 34% increase in block hours flown during the comparative periods, reflecting overall improvement in commercial cargo demand in the second quarter of 2011 as compared to the second quarter of 2010. In addition, we had two additional B747 and one additional MD-11 aircraft in revenue service, as well as a more favorable average yield, which led to increased revenue during the six months ended June 30, 2011 compared to the six months ended June 30, 2010. However, we continue to underutilize our larger commercial cargo fleet.

 

***Commercial Passenger Revenue.***Commercial passenger revenue for the six months ended June 30, 2011 decreased $4.2 million, or 19%, to $17.4 million, compared to $21.6 million for the six months ended June 30, 2010.

 

World commercial passenger revenue decreased $10.7 million, or 74%, primarily due to a 91% decrease in the commercial passenger block hours flown during the comparable periods. This decrease was mainly due to a significant ACMI contract that ended in May 2010. The decrease in block hours was partially offset by an improvement in the rate paid per block hour due to an increase in the mix of full service flying versus ACMI passenger.

 

The decrease at World was offset by a $6.5 million, or 93%, increase in North American’s commercial passenger revenue during the comparable periods primarily due to an increase in block hours from 995 to 2,984 as a result of increased ACMI flying with scheduled service passenger operators.

 

***Other Revenue.***Other revenue for the six months ended June 30, 2011 increased $1.1 million, or 35%, to $4.2 million, compared to $3.1 million for the six months ended June 30, 2010. World accounted for the majority of the increase primarily due to an increase in rebill revenue from ACMI flights during the comparative six month periods.

 

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**Operating Expenses**

 

Total operating expenses for the six months ended June 30, 2011 decreased $19.7 million, or 3%, to $546.5 million, compared to $566.2 million for the six months ended June 30, 2010.

 

***Aircraft Fuel.***Aircraft fuel expense for the six months ended June 30, 2011 decreased $4.0 million, or 3%, to $149.1 million, as compared to $153.1 million for the six months ended June 30, 2010.

 

World aircraft fuel expense decreased $4.9 million, or 4%, mainly as a result of a fewer gallons consumed due to a 25% decrease in non-ACMI block hours flown during the comparable periods. Partially offsetting this decrease was a 30% increase in the price of fuel per gallon.

 

The decrease at World was partially offset by a $0.9 million, or 2%, increase in North American’s aircraft fuel expense, mainly as a result of a 30% increase in the price of fuel per gallon during the comparative periods, partially offset by a decrease in fuel gallons consumed driven by a 20% decrease in non-ACMI block hours flown.

 

Under our military and ACMI contracts, World and North American have limited exposure to fuel price volatility, as the military and the majority of our commercial customers reimburses us for our fuel costs.

 

***Aircraft Rentals.***Aircraft rentals expense for the six months ended June 30, 2011 decreased $3.6 million, or 5%, to $74.8 million, compared to $78.4 million for the six months ended June 30, 2010. Both World and North American experienced a decline in supplemental rent deposits paid.  Partially offsetting this is an increase at World mainly due to the increase in B747 aircraft operated from two to four, offset by the reduction of three DC-10 aircraft and one B757 aircraft operated at North American.

 

***Maintenance, Materials and Repairs.***Maintenance, materials and repairs expense for the six months ended June 30, 2011 increased $6.1 million, or 9%, to $72.8 million, compared to $66.7 million for the six months ended June 30, 2010.

 

World’s maintenance, materials and repairs expense increased $1.3 million. World’s maintenance, materials and repairs expense increased primarily due to the reversal of $4.6 million in maintenance expense due to a revised engine overhaul strategy during the second quarter of 2010, which did not recur during the second quarter of 2011. In addition, World experienced an increase in component repairs, parts, and freight associated with maintenance events.

 

North American maintenance, materials and repairs expense increased $4.8 million, primarily due to an increase in time-driven maintenance expense such as component repairs, parts and power-by-the-hour agreements. Also, North American experienced an increase in their overtime maintenance labor.

 

***Flight Operations.***Flight operations expense increased $3.5 million, or 7%, to $56.3 million, during the six months ended June 30, 2011 as compared to $52.8 million for the corresponding period in 2010 as a result of increased pilot pay per the collective bargaining agreement, higher benefit costs and pilot training at World associated with the growth of its MD-11 and B747 fleets.

 

***Aircraft and Traffic Servicing.***Aircraft and traffic servicing expense for the six months ended June 30, 2011 decreased $7.4 million, or 16%, to $38.8 million, compared to $46.2 million for the six months ended June 30, 2010.

 

The decrease in aircraft and traffic servicing expense was primarily attributable to World which decreased $5.1 million mainly as a result of its 24% decrease in non-ACMI departures partially offset by an increase in our average ground operations expense per non-ACMI departure due to an increase in the departure costs from the mix of higher cost cities operated into during the comparative periods. North American also declined due to a 17% decrease in non-ACMI departures.

 

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***Passenger Services.***Passenger services expense for the six months ended June 30, 2011 decreased $6.8 million, or 17%, to $32.4 million, compared to $39.2 million for the six months ended June 30, 2010. World and North American’s passenger services expense decreased predominately due to an 18% decrease in non-ACMI departures and the related reduction in flight attendant expense associated with lower headcount associated with the reduction in military passenger block hours.

 

***Crew Positioning.***Crew positioning expense for the six months ended June 30, 2011 decreased $0.7 million, or 2%, to $28.4 million, compared to $29.1 million for the six months ended June 30, 2010. World and North American’s crew positioning expense decreased marginally, mainly due to a 21% decline in non-ACMI departures substantially offset by higher travel costs per non-ACMI departure and travel costs incurred by World and North American associated with commercial passenger and cargo contracts.

 

***Selling and Marketing.***Selling and marketing expense for the six months ended June 30, 2011 decreased $17.4 million, or 56%, to $13.4 million, compared to $30.8 million for the six months ended June 30, 2010. This decrease was due to a 21% decline in military revenue as well as a reduction in commission rates paid during the comparative periods.

 

***Depreciation and Amortization.***Depreciation and amortization expense for the six months ended June 30, 2011 increased $12.5 million, or 33%, to $50.2 million compared to $37.7 million for the six months ended June 30, 2010.

 

World and North American depreciation and amortization expense increased $7.2 million and $5.7 million, respectively, due primarily to accelerated depreciation and amortization associated with the retirement of World’s DC-10 fleet, a cumulative increase in the engine overhauls, certain scheduled airframe heavy maintenance events and rotable part purchases that qualify for capitalization that are being depreciated over their respective useful lives during the comparative periods. At North American, at the end of the 2011 period, there were three capitalized heavy c-checks compared to two in 2010.  At World, there were capitalized engine overhauls increased from 23 to 25 during the comparative periods.

 

***General and Administrative.***General and administrative expense for the six months ended June 30, 2011 decreased $2.6 million, or 9%, to $24.9 million, compared to $27.5 million for the six months ended June 30, 2010. The increase is primarily due to a decrease in incentive payout obligations, legal and accounting fees, and non-cash stock-based compensation, partially offset by an increase in litigation reserves.

 

***Asset Impairment and Aircraft Retirements.***We recorded $0.3 million of asset impairment and aircraft retirement expense for the six months ended June 30, 2011 related to the retirement of our World DC-10 fleet. There were no asset impairment and aircraft retirements recorded for the six months ended June 30, 2010.

 

***Other Expenses.***Other expenses for the six months ended June 30, 2011 increased $0.5 million, or 11%, to $5.2 million, compared to $4.7 million for the six months ended June 30, 2010. This increase was primarily due to increased subservice events and related costs.

 

**Operating Income (Loss)**

 

Operating income (loss) for the six months ended June 30, 2011 decreased $60.8 million to an operating loss of $36.5 million, compared to a $24.3 million operating profit for the six months ended June 30, 2010. Total operating revenue was down $80.4 million, or 14%. At the same time, total operating expense decreased by $19.7 million, or 3%. Total operating margin decreased from a 4.1% operating margin for the six months ended June 30, 2010 to a 7.2% operating deficit for the six months ended June 30, 2011. This was primarily due to lower non-fuel AMC rates and block hours operated and underutilized available ACMI cargo capacity during the comparative periods.

 

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**Other Income (Expense)**

 

***Interest Expense.***Interest expense for the six months ended June 30, 2011 remained fairly flat at $23.9 million for the six months ended June 30, 2011 as compared to $23.6 million for the corresponding period in 2010.

 

***Loss on Debt Extinguishment***.  We recorded a loss on debt extinguishment of $1.2 million during the six months ended June 30, 2010.  There was no debt extinguishment during the six months ended June 30, 2011.

 

***Loss on Investment.***We recorded a loss on investment of $0.1 million and $1.3 million, for the six months ended June 30, 2011 and 2010, respectively, primarily related to legal fees in connection with the consolidation of our primary beneficial interest in the ATA bankruptcy estate trust.

 

**Income Taxes**

 

During the six months ended June 30, 2011, we recorded an income tax benefit of $21.2 million which resulted in an effective tax rate of 35.3%. Our effective tax rate differed from the expected tax rate primarily due to projected nondeductible expenses, such as crewmember meals and per diems. In addition, during the six months ended June 30, 2011, we realized a $0.9 million non-recurring tax benefit for a deduction of previously capitalized costs. Also included in this amount is an accrual for additional interest for uncertain tax positions of $0.3 million. There were no other changes to our uncertain tax positions during the six months ended June 30, 2011.

 

During the six months ended June 30, 2010, we recorded income tax expense of $0.3 million, which resulted in an effective tax rate of 59.3%. Our effective tax rate was significantly impacted by nondeductible expenses, such as crewmember meals and per diems, which were disproportionate in comparison to our pre-tax book loss. Also included in this amount is an accrual for additional interest for uncertain tax positions of $0.4 million. There were no other changes to our uncertain tax positions during the quarter ended June 30, 2010.

 

**Net Loss**

 

Net loss for the six months ended June 30, 2011 was $38.8 million, compared to net income of $0.2 million for the six months ended June 30, 2010, a decrease of $39.0 million primarily due to lower non-fuel AMC rates and block hours operated and underutilized available ACMI cargo capacity in the first six months of 2011 as compared to the corresponding period in 2010.

 

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**Liquidity and Capital Resources**

 

***Liquidity***

 

***Sources of Liquidity.***As of June 30, 2011, we had unrestricted cash and cash equivalents of $50.7 million. We do not have a revolving credit facility and there are no funds available through other unused financing options. During the first six months of 2011 a decline in non-fuel AMC rates and entitlement for 2011, our capital expenditure requirements and a decline in anticipated commercial cargo block hours had a negative impact on our liquidity and financial position.  We are evaluating our capital structure options, have negotiated extended payment terms with certain key vendors, and are implementing a series of cost-reduction programs in order to improve our cash position. These are more fully described below. We may also seek additional sources of liquidity including, but not limited to, asset sales, public or private issuances of debt, equity or equity-linked securities, debt for equity swaps, or any combination of these. However, we cannot provide any assurances that we will be successful in accomplishing any of these plans on terms acceptable to us, or at all.

 

The agreements governing our First Lien Notes and New Second Lien Loan require us to meet a minimum consolidated net cash flow covenant on a quarterly basis. In March 2011, we entered into a Second Supplemental Indenture related to the First Lien Notes and a Second Amendment and Waiver related to the Second Lien Term Loan Credit Agreement, primarily to amend the definition related to the minimum consolidated net cash flow covenant. We are in compliance with this amended covenant as of June 30, 2011; however, would have been in violation under the original calculation. Given the decline in AMC rates and entitlement for 2011, capital expenditure requirements, and a decline in anticipated commercial cargo block hours, we anticipate that we will likely not be in compliance with this covenant when we finalize our third quarter of 2011 covenant calculation unless we reach agreement on an amendment or obtain a waiver of this financial covenant. Accordingly, we have classified the First Lien Notes and New Second Lien Loan as a current liability in the accompanying unaudited condensed balance sheet as of June 30, 2011. Management has a business plan to achieve compliance with the minimum consolidated net cash flow covenant in 2012. However, to meet this business plan, we must accomplish the following in the near-term, including but not limited to: (i) reach an agreement with, or obtain a waiver from, our first and second lien holders providing us near-term covenant relief, (ii) reduce annual aircraft lease expense by restructuring our above-market leases to near-market rates, and (iii) reduce other internal costs through overhead and operating cost-cutting initiatives. We estimate total annualized cost reductions of approximately $30 million. We are currently in negotiations with our aircraft lessors, are finalizing internal cost-cutting initiatives, and believe we will be successful in obtaining covenant relief. If we are able to achieve the aforementioned goals, we believe cash generated from operations, or through the timing of cash outflows, and existing cash balances will be sufficient to meet our operating requirements and other obligations over the next 12 months based on our current operating plan. However, we cannot provide any assurances that we will be successful in accomplishing any of these plans at terms acceptable to us or at all.

 

***Cash Flow from Operating Activities.*** During the six months ended June 30, 2011, net cash provided by operating activities was $12.3 million. The following non-cash items were positive adjustments to reconcile net loss of $38.8 million to net cash provided by operating activities: $50.2 million in depreciation and amortization, $5.5 million in amortization of loan costs and debt discount, $3.3 million in stock-based compensation, $2.4 million in non-cash interest, $0.3 million in aircraft retirement, $0.2 million in loss on sale of equipment and $0.1 million in loss on investment. Non-cash deferred income taxes of $21.7 million negatively adjusted the net loss. Changes in operating assets and liabilities also provided net cash of $10.8 million. Sources of cash due to changes in operating assets and liabilities were: $35.9 million in accounts payable, $11.4 million in other current assets, $4.9 million in other liabilities, and $1.3 million in other assets. Uses of cash due to changes in operating assets and liabilities were: $20.8 million in accounts receivable, net, $9.6 million in maintenance reserve deposits, $8.4 million in accrued compensation and benefits, $3.1 million in accrued expenses and $0.8 million in inventories.

 

Despite lower operating revenue, accounts receivable increased due to an increase in days’ sales outstanding for AMC missions operated. Prepaid and other current assets decreased due to receipt of maintenance reserve reimbursements from the aircraft lessors. Other current liabilities decreased primarily due to lower accrued maintenance costs and timing of interest expense accrual. Accounts payable increased due to an increase in days’

 

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payables outstanding and the receipt of fuel and engine overhaul invoices previously accrued for. The increase in accounts payable is mainly as a result of extended payment terms negotiated with certain key vendors.

 

During the six months ended June 30, 2010, net cash provided by operating activities was $47.6 million. The following non-cash items were positive adjustments to reconcile net income of $0.2 million to net cash provided by operating activities: $37.7 million in depreciation and amortization, $4.9 million in amortization of loan costs and debt discount, $2.5 million in stock-based compensation, $1.3 million in loss on investment, $1.2 million in loss on debt extinguishment, $2.2 million in non-cash interest, and $0.5 million in loss on sale of equipment. Non-cash deferred income taxes of $0.3 million negatively adjusted net income.  Changes in operating assets and liabilities also used net cash of $2.7 million. Sources of cash due to changes in operating assets and liabilities were: $10.2 million in accounts payable, $16.3 million in other accrued expenses and current liabilities, and $8.4 million in other liabilities and other assets. Uses of cash due to changes in operating assets and liabilities were: $21.5 million in accounts receivable, net, $6.2 million in maintenance reserve deposits, $4.0 million in other current assets, $3.4 million in air traffic liabilities and accrued flight expense, and $2.5 million in accrued compensation and benefits. The continued strong AMC demand and improved utilization of the Company’s aircraft and yields contracted in commercial contracts resulted in an increase in cash provided by operating activities.

 

***Cash Flow from Investing Activities.***Net cash used in investing activities for the six months ended June 30, 2011 and 2010 were $31.0 million and $26.4 million, respectively, consisting primarily of capitalized engine maintenance events and the purchase of rotable parts. The increase in capital expenditures is mainly the result of the timing of scheduled engine maintenance events during the six months ended June 30, 2011 compared to the same period in 2010.

 

***Cash Flow from Financing Activities.***Net cash used in financing activities for the six months ended June 30, 2011, was $5.1 million, consisting of $1.3 million in payments on long-term debt and $3.8 million in payment of costs related to amending our First Lien Notes and New Second Lien Loan Agreements.

 

Net cash used in financing activities for the six months ended June 30, 2010, was $20.1 million, consisting of $18.8 million in principal payments on long-term debt and $1.2 million in payment of costs related to issuance and repurchase of debt.

 

***Capital Resources***

 

To meet increased cargo demand, World entered into contracts in July 2010 to lease two Boeing 747-400 freighter aircraft, each for a period of 72 months. One lease commenced and the aircraft was delivered during January 2011 and the other commenced and was delivered during March 2011. World returned an MD-11 freighter to revenue service in late 2010.  It was previously parked due to the downturn in the air cargo demand during 2008 and 2009. In addition, World entered into an agreement to lease an MD-11 passenger aircraft, which was delivered in the fourth quarter of 2010. The addition of the three newly leased aircraft will increase our aircraft rentals expense, and long-term deposits on our balance sheet. All four aircraft listed that entered revenue service will generate additional flight crew costs due to increased pilot training costs and headcount, in addition to higher maintenance costs associated with an increased number of aircraft.

 

We anticipate incurring an increase in capital expenditures during the year ended December 31, 2011, as compared to the same period in 2010 as the result of the timing of schedule maintenance events, mainly engine overhauls at World.  We anticipate capital expenditures to be approximately $64 million during fiscal year 2011 of which approximately $41 million will be funded from maintenance deposits previously paid to aircraft lessors.

 

***Debt.***On August 13, 2009, we issued $175.0 million of 14% Senior Secured First Lien Notes due August 2013 (First Lien Notes). The First Lien Notes were recorded net of a $10 million discount. The First Lien Notes include the following key provisions: a maturity date of August 15, 2013, a 14% annual cash interest rate payable semiannually, a semiannual offer to the noteholders to prepay $10.0 million, and a minimum consolidated net cash flow covenant. The First Lien Notes are secured by a first priority lien on substantially all of our tangible and intangible assets.

 

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On September 29, 2009, we entered into a $72.5 million Second Lien Loan that matures in September 2014 and provides for 12% cash interest plus 6% additional interest payable in kind as an increase to the loan balance. The Second Lien Loan was recorded net of a $7.5 million discount. In addition, we issued warrants that were immediately converted into 838,000 shares of common stock. These warrants were issued to the holder of the Second Lien Loan and were recorded as a $7.1 million discount against the Second Lien Loan, for a total discount recorded of $14.6 million. We incurred approximately $5.5 million in capitalized transaction fees.

 

Pursuant to the terms of the First Lien Notes, on June 30, 2011, we made a semiannual offer to repurchase $10.0 million of First Lien Notes at par plus accrued interest.  We purchased a total of $10.0 million in principal of First Lien Notes in addition to $0.7 million in interest on August 3, 2011 pursuant to this offer.

 

The agreements governing the First Lien Notes and New Second Lien Loan require we meet a minimum consolidated net cash flow covenant on a quarterly basis. In March 2011, the Company entered into a Second Supplemental Indenture related to the First Lien Notes and a Second Amendment and Waiver related to the Second Lien Term Loan Credit Agreement, primarily to amend the definition related to the minimum consolidated net cash flow covenant. As of June 30, 2011, we are in compliance with this amended covenant.  Given the decline in AMC rates and entitlement for 2011, capital expenditure requirements, and a decline in anticipated commercial cargo block hours, we anticipate that we will likely not be in compliance with this covenant when we finalize our third quarter of 2011 covenant calculation unless we reach agreement on an amendment or obtain a waiver of this financial covenant. Accordingly, we have classified the First Lien Notes and New Second Lien Loan as a current liability in the accompanying unaudited condensed balance sheet. As mentioned above, we have developed a business plan based on near-term covenant relief from our first and second lien holders that includes approximately $30 million in annual cost reductions by lowering aircraft rental expense, and reducing other internal costs. We are currently in negotiations with our aircraft lessors, are finalizing internal cost-cutting initiatives, and believe we will be successful in obtaining covenant relief. However, we cannot provide any assurances that we will be successful in accomplishing any of these plans at terms acceptable to us, or at all.

 

The indenture governing the First Lien Notes provides a 30-day grace period for the payment of interest before the holders have the right to accelerate the First Lien Notes or exercise other remedies in accordance with the indenture. We expect to use this grace period and defer the interest payment on the First Lien Notes scheduled for August 15, 2011 while we seek covenant relief from the holders of the First Lien Notes. As of the date of this filing, we currently have sufficient cash and cash equivalents on hand to fund the interest payment scheduled for August 15, 2011.

 

**Commitments and Contractual Obligations**

 

***Debt and Operating Lease Cash Payment Obligations.***We acquire our aircraft with operating leases and consequently do not include assets and liabilities (other than maintenance reserves) associated with operating leases in our consolidated balance sheets. The following table summarizes our material contractual obligations and commitments and their currently scheduled impact on liquidity and cash flows as of June 30, 2011. The following information is shown in thousands.

 
| ** **                                             | ** ** | **Cash Payments Currently Scheduled** | ** ** |
|--------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                             | ** ** | **2011**                                             | ** ** | **2012** | ** ** | **2013** | ** ** | **2014** | ** ** | **2015** | ** ** | **After   2015** | ** ** |
|                                                   |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |
| Current and long-term debt                             |       | $                                                    | 11,140     |   | $ | 20,416 |   | $ | 129,464 |   | $ | 73,052 |   | $ | — |   | $ | — |   |
| Cash interest payments on current and long-term   debt |       | 16,001                                               |       | 30,310 |   | 28,095 |   | 14,268 |   | — |   | — |   |
| Payment-in-kind interest                               |       | —                                               |       | — |   | — |   | 22,143 |   | — |   | — |   |
| Total debt payments                                    |       | 27,141                                               |       | 50,726 |   | 157,559 |   | 109,463 |   | — |   | — |   |
| Operating leases(1)                                    |       | 74,313                                               |       | 128,761 |   | 107,203 |   | 57,552 |   | 40,980 |   | 68,538 |   |
| Accrued post-retirement benefits(2)                    |       | 195                                                  |       | 439 |   | 585 |   | 714 |   | 790 |   | 4,943 |   |
|                                                   |       | $                                                    | 101,649    |   | $ | 179,926 |   | $ | 265,347 |   | $ | 167,729 |   | $ | 41,770 |   | $ | 73,481 |   |

 

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(1)             Amounts reflect fixed lease payments and do not include potential additional contingent aircraft lease payments based on the net income of World pursuant to a lease expiring in 2012.

 

(2)             Amounts reflect our expected contributions to the post-retirement health care benefit plan for certain World employees.

 

The above table does not include the potential acceleration of any long-term debt classified as current as of June 30, 2011. Amounts include scheduled interest payments. Interest on our Second Lien Loan is payable in cash at an annual rate

 

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of 12% and additional interest is payable in kind as additional Second Lien Loan amount at an annual rate of 6%. The interest payable in kind is reflected in the table above at maturity, with cash interest on the additional loan amount reflected when due.

 

**Forward Looking and Cautionary Statements**

 

This quarterly report contains forward-looking statements relating to analyses and other information that are based on forecasts of future results and estimates of amounts not yet determinable. These statements also relate to our future prospects, developments and business strategies. The statements contained in this quarterly report that are not statements of historical fact may include forward-looking statements that involve a number of risks and uncertainties. We have used the words ‘‘anticipate,’’ ‘‘believe,’’ ‘‘could,’’ ‘‘estimate,’’ ‘‘expect,’’ ‘‘intend,’’ ‘‘may,’’ ‘‘plan,’’ ‘‘predict,’’ ‘‘project,’’ ‘‘should,’’ ‘‘will’’ and similar terms and phrases, including references to assumptions, in this quarterly report to identify forward-looking statements. These forward-looking statements are made based on our management’s expectations and beliefs concerning future events affecting us and are subject to uncertainties and factors relating to our operations and business environment, all of which are difficult to predict and many of which are beyond our control, that could cause our actual results to differ materially from those matters expressed in or implied by these forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements. A number of important factors could cause actual results to differ materially from those indicated by our forward-looking statements, including but not limited to the factors described in ‘‘Risk Factors’’ and ‘‘Management’s Discussion and Analysis of Financial Conditions and Results of Operations.’’ These factors include without limitation:

 

· levels of military spending for the transportation of military personnel and cargo;

· our level of entitlement to the military’s spending;

· our fixed obligations;

· our competitive environment;

· our ability to secure and maintain any necessary financing for aircraft acquisitions and other purposes;

· economic and other conditions in regions in which we operate;

· governmental regulation of our operations;

· the outcome of various legal proceedings;

· relations with unionized employees generally and the effect and outcome of future labor negotiations;

· problems with our aircraft;

· increases in maintenance, security costs and insurance premiums;

· cyclical and seasonal fluctuations in our operating results;

· our ability to establish and maintain effective internal control over financial reporting;

· risks related to our divestiture and acquisition strategies, including the risks related to the integration of acquired businesses;

· terrorist attacks, political instability, and acts of war;

· significant disruptions in the supply of aircraft fuel;

· risks inherent in our industry, such as demand for military and commercial cargo air services; and

· other risks that we have described in ‘‘Risk Factors.’’

 

These factors are not exhaustive, and new factors may emerge or changes to the foregoing factors may occur that could impact our business. You should review carefully the sections captioned ‘‘Risk Factors,’’ and ‘‘Management’s Discussion and Analysis of Financial Condition and Results of Operations’’ in this quarterly report for a more complete discussion of these and other factors that may affect our business, financial condition and results of operations.

 

The forward-looking statements contained in this quarterly report reflect our views and assumptions only as of the date of this prospectus. We undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events.

 

**Item 3. Quantitative and Qualitative Disclosures About Market Risk**

 

We are subject to certain market risks, principally related to foreign currency exchange rate risk.  Although some of our revenues are derived from foreign customers, all revenues and substantially all expenses are denominated in 

 

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U.S. dollars. We maintain minimal balances in foreign bank accounts to facilitate the payment of expenses. With respect to these balances, we do not view the exposure of currency exchange rate risk to be material.

 

**Item 4.** **Controls and Procedures**

 

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended.  Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of June 30, 2011, the end of the period covered by this report.

 

We did not identify any material weaknesses as of June 30, 2011. A material weakness is defined as a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis by our internal controls.

 

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**PART II. OTHER INFORMATION**

 

**Item 1. Legal Proceedings**

 

On February 9, 2009, Wilmington Trust Company, in its capacity as the trustee lessor to a 15-year lease agreement entered into by ATA on February 28, 2006, brought an action in the New York Supreme Court Commercial Division to enforce the guaranty provided by us of the performance of ATA under that lease. The plaintiff is seeking (a) approximately $333,000 plus interest on the lease; (b) the greater of (i) $35 million (the liquidated damage provision in the lease) or (ii) the current market value of the aircraft; and (c) interest, attorneys’ fees and costs. On April 15, 2011, the Court ruled on the plaintiff’s summary judgment motion (i) finding the liquidated damages provision in the lease to be unreasonable and unenforceable, (ii) finding Global liable under the guarantee and dismissing Global’s affirmative defenses to liability under the guarantee, and (iii) ordering the parties to proceed to a damages trial to be calculated in accordance with New York law. Given the Court’s ruling on the liquidated damage provision in the lease, plaintiff is seeking to recover damages for (a) the failure to satisfy aircraft return conditions in the lease, (b) accrued and unpaid rent as of the date of the breach, (c) the present value of the total rent remaining on the lease less the present value as of the same date of the market rent of the aircraft, (d) incidental damages and (e) prejudgment interest. The damages trial began on July 18, 2011 and is expected to conclude in mid-August 2011. The final outcome of the litigation cannot be predicted and is dependent upon many factors beyond our control. We anticipate a ruling from the court during the fourth quarter of 2011. The Company has accrued its best estimate of liability of this lawsuit. If the Court awards damages materially higher than our accrued estimate, it could have a material negative impact on our financial condition or results of operations. See Note 9 to our condensed consolidated financial statements included in this report.

 

On June 11, 2008, the ATA bankruptcy estate (ATA) filed suit in the United States District Court for the Southern District of Indiana, Indianapolis Division, against FedEx for breach of a three-year contract with ATA for military flying (the FedEx Team Contract). FedEx thereafter filed a countersuit for damages in excess of $75,000 for ATA’s failure to perform (after cessation of operations) the FedEx Team Contract. The counterclaim is solely posed against ATA and does not affect us or our operating subsidiaries. On February 17, 2010, ATA served its Second Amended Statement of Special Damages estimating its total damages at $94.0 million. This estimate included $66.0 million in lost military profits (for a portion of 2008 and all of FY 2009) under the FedEx Team Contract and $28.0 million in damages ATA incurred in acquiring a number of DC-10 aircraft to support the FedEx Team Contract (the DC-10 Claim). On September 16, 2010, the court preliminarily granted FedEx’s motion *in limine* to exclude ATA’s DC-10 Claim.

 

On October 19, 2010, a federal jury returned a verdict against FedEx and awarded ATA 100% of its $66.0 million claim for breach of contract and denied FedEx’s counterclaim in its entirety. The court, on October 22, 2010, thereafter entered a judgment against FedEx without specifying the amount of damages. On November 1, 2010, ATA filed a post trial motion seeking to have the court enter a final judgment against FedEx for $66.0 million plus pre-judgment interest (under Tennessee law at a maximum rate of 10%) together with post-judgment interest. On November 18, 2010, FedEx filed post trial motions seeking, among other things, to set aside the jury’s verdict, to disallow any pre-judgment interest under Tennessee law (or, in the alternative to calculate any pre-judgment interest at the federal post-judgment interest rate), to reduce the actual amount of damages awarded or, in the alternative, to order a new trial. The trial court denied FedEx’s motions on January 19, 2011.  On January 25, 2011, the trial court entered a judgment in the amount of $71.3 million.  On February 16, 2011, FedEx filed its Notice of Appeal.  ATA has filed a notice of cross-appeal (seeking to overturn the court’s decision disallowing ATA’s DC-10 Claim for $28.0 million and increasing the prejudgment interest). The parties are currently briefing their respective appeals with the Seventh Circuit Court of Appeals. The ATA bankruptcy estate trust anticipates the Seventh Circuit to render its decision in the first or second quarter of 2012.

 

Pursuant to ATA’s Chapter 11 Plan approved by the U.S. Bankruptcy Court, 85% of any damages recovered by ATA from FedEx will be distributed to the Company, 7.5% will be distributed to former ATA employees and 7.5% will be distributed to certain ATA unsecured creditors.

 

If we receive ATA distributions totaling more than $5.0 million, we are obligated pursuant to the terms of the indenture governing the First Lien Notes to use all such distributions to offer to purchase at par plus accrued interest any outstanding First Lien Notes, and then, if remaining distributions total more than $1.3 million, we must offer to

 

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prepay, without premium, indebtedness outstanding under the New Second Lien Loan equal to the entire amount of such remaining distribution. Any funds not so used would be available to us for general corporate purposes.

 

In addition, from time to time we may be a party to claims that arise in the ordinary course of business, none of which, in our view, is expected to have a material adverse effect on our financial position or results of operations.

 

**Item 1A. Risk Factors**

 

In addition to the other information set forth in this report, the factors discussed in “Risk Factors — Risks Related to Our Business” in our Annual Report on Form 10-K filed on March 29, 2011, which could materially affect our business, financial condition or future results, should be carefully considered. There have not been any material changes during the six months ended June 30, 2011 from the Risk Factors disclosed in the aforementioned Form 10-K other than as set forth below.

 

***Our revenues from our AMC business are sensitive to teaming arrangements both with respect to our team and competing teams. If one of our team members reduces its commitments or withdraws from the team, or if carriers on other teams commit additional aircraft to this program, our share of AMC flying may decline. Any of these changes could have a material adverse effect on our business, financial condition and results of operations.***

 

Each year, the AMC grants a certain portion of its business to different air carriers based on a point system. The number of points that an air carrier can accrue is determined by the number and type of aircraft pledged to the CRAF. Our operating subsidiaries along with the other air carriers in our team currently participate in the CRAF program and generate entitlement points for AMC business. Points from team members that do not fly AMC missions are used to increase the flights awarded to other team members that do fly AMC missions, such as World and North American, in return for a commission on the revenue derived from those points.

 

Continued participation by World and North American on the Alliance team is subject to significant risks. The formation of competing teaming arrangements, an increase by carriers from other teams in their commitment of aircraft to the CRAF program and the withdrawal of, or failure to renew a future teaming agreement with, any of the Alliance team’s current partners could materially and adversely affect the amount of our AMC business. There has been and continues to be significant consolidation in the air carrier industry. As a result of consolidation, we expect some air carriers may choose to join other teams. As a result of these changes, the Alliance team’s total share of entitlement points under the AMC international program will decrease for government fiscal year 2011 and 2012. In addition, if any Alliance team member were to cease or restructure its operations or dispose of aircraft previously pledged to the CRAF program, the number of aircraft pledged to the CRAF program by the Alliance team could be reduced. Any of these developments could reduce the number of points allocated to the Alliance team and the Alliance team’s allocation of AMC business to us would likely decrease. If the military substantially reduces the amount of business it awards the Alliance team or if the Alliance team reduces the military missions it awards to us, we may not be able to replace the lost business and our business, financial condition and results of operations could be materially and adversely affected.

 

***The terms of our indebtedness contain various covenants that limit our financial and operating flexibility and in some cases require us to meet certain financial ratios and maintenance tests. The failure to comply with such ratios, tests and covenants could have a material adverse effect on our business, financial condition and results of operations.***

 

The terms of our indebtedness contain restrictive covenants that impose significant operating and financial restrictions on us, including those that restrict our ability to:

 

·                  incur additional indebtedness, including indebtedness secured by any lien;

 

·                  create liens on assets, including leasehold interests;

 

·                  sell or otherwise dispose of assets;

 

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·                  serve as guarantors of additional obligations;

 

·                  change lines of business;

 

·                  pay dividends and distributions or repurchase common stock;

 

·                  make investments, loans or advances;

 

·                  engage in certain transactions with affiliates, including certain payments to MatlinPatterson Global Advisers LLC and its affiliates;

 

·*                 *enter into sale and leaseback transactions;

 

·*                 *permit our consolidated cash flow, less capital expenditures, to fall below (i) $45 million for the period from September 30, 2009 through June 30, 2010 and (ii) $50 million thereafter, in each case, calculated quarterly on a trailing l2-month basis;

 

·                  engage in a merger, consolidation or sale or transfer of substantially all of our assets; and

 

·                  fail to hold any permit or authorization required to conduct business.

 

In addition, on June 30 and December 31 of each year, we are required to offer to purchase up to $10.0 million aggregate principal amount of the First Lien Notes at a purchase price in cash equal to 100% of the principal amount, plus accrued and unpaid interest thereon. The terms of our indebtedness also require mandatory prepayments regardless of whether there is excess cash flow.

 

Given the decline in AMC rates and entitlement for 2011, capital expenditure requirements, and a decline in anticipated commercial cargo block hours, we anticipate we will likely not be in compliance with the minimum consolidated net cash flow covenant under our First Lien Notes and New Second Lien Loan when we finalize our third quarter of 2011 covenant calculation unless we obtain covenant relief. We plan to seek near-term covenant relief from the holders of our First Lien Notes and New Second Lien Loan. The terms of covenant relief, if available, may place additional restrictions on us or otherwise be unfavorable. We cannot assure you that we will be able to obtain the requested or any additional covenant relief, if required, in the future.  In addition, any failure to comply with the restrictions in any agreement governing our indebtedness may result in an event of default under those agreements. Such default may allow our creditors to accelerate our obligations under such indebtedness and such acceleration may trigger cross-acceleration or cross-default provisions in other debt or leases. Our assets and cash flow may not be sufficient to fully repay amounts outstanding under our debt instruments, either upon maturity or, if accelerated, upon an event of default.

 

**I****tem 6. Exhibits**

 
| **Exhibit No.** | ** ** | **Title**                                                                                                                                                  |
|----------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                 |       |                                                                                                                                                       |
| 31.1                 |       | Certification   of Chief Executive Officer pursuant to Rule 13a-14(a) and   Rule 15d-14(a) of the Securities Exchange Act, as amended. |
|                 |       |                                                                                                                                                       |
| 31.2                 |       | Certification   of Chief Financial Officer pursuant to Rule 13a-14(a) and   Rule 15d-14(a) of the Securities Exchange Act, as amended. |
|                 |       |                                                                                                                                                       |
| 32.1                 |       | Certification   of Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to   Section 906 of the Sarbanes-Oxley Act of 2002.        |
|                 |       |                                                                                                                                                       |
| 32.2                 |       | Certification   of Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to   Section 906 of the Sarbanes-Oxley Act of 2002.        |

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 
|                              |                                          |
|-----------------------------------|-----------------------------------------------|
|                              | GLOBAL   AVIATION HOLDINGS INC.

(REGISTRANT) |
|                              |                                          |
| Date: August 15,   2011 | By:                                           | /s/ Robert   R. Binns |
|                              |                                          | Robert   R. Binns

Chief   Executive Officer |
|                              |                                          |   |
| Date: August 15,   2011 | By:                                           | /s/ William   A. Garrett |
|                              |                                          | William   A. Garrett

Executive   Vice President and Chief Financial Officer |

 

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