Table of Contents

 

 

 

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

**FORM 10-Q**

 

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

 

**For the quarterly period ended September 30, 2010**

 

**or**

 

**o****         TRANSITION REPORTPURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934**

 

**For the transition period from               to               **

 

**Commission File No. 000-52605**

 

**GLOBALAVIATION 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, includingarea code)

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days. YES o   NO x

 

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

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated 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 theExchange Act.

 

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

 

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

 

Indicatethe number of shares outstanding of each of the issuer’s classes of commonstock, as of the latest practicable date. As of November 15, 2010 the number of shares of $0.0001 par valuecommon stock outstanding was 26,802,200.

 

 

 

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GLOBAL AVIATION HOLDINGS INC.

 

INDEX

 
| ** **                                                                                                                  | ** ** | **Page No.** |
|-----------------------------------------------------------------------------------------------------------------------------|------------|-------------------|
|                                                                                                                        |       |              |
| PART I.  FINANCIAL INFORMATION                                                                                         |       | 2                 |
|                                                                                                                        |       |              |
| Item 1.  Financial Statements.                                                                                              |       | 2                 |
|                                                                                                                        |       |              |
| Condensed Consolidated Balance Sheets –  September 30, 2010 (unaudited) and December 31, 2009                |       | 2                 |
|                                                                                                                        |       |              |
| Condensed Consolidated Statements of Operations -  Three and Nine months ended September 30, 2010 and 2009 (unaudited) |       | 4                 |
|                                                                                                                        |       |              |
| Condensed Consolidated Statements of Cash Flows - Nine  months ended September 30, 2010 and 2009 (unaudited)           |       | 5                 |
|                                                                                                                        |       |              |
| Notes to Condensed Consolidated Financial Statements  (unaudited)                                                           |       | 6                 |
|                                                                                                                        |       |              |
| Item 2. Management’s Discussion and Analysis of  Financial Condition and Results of Operations.                        |       | 18                |
|                                                                                                                        |       |              |
| Item 3. Quantitative and Qualitative Disclosures About  Market Risk.                                                        |       | 44                |
|                                                                                                                        |       |              |
| Item 4. Controls and Procedures.                                                                                            |       | 44                |
|                                                                                                                        |       |              |
| PART II.  OTHER INFORMATION                                                                                            |       | 46                |
|                                                                                                                        |       |              |
| Item  1. Legal Proceedings.                                                                                                 |       | 46                |
|                                                                                                                        |       |              |
| Item  1A. Risk Factors.                                                                                                     |       | 46                |
|                                                                                                                        |       |              |
| Item  5. Other Information.                                                                                                 |       | 47                |
|                                                                                                                        |       |              |
| Item 6.  Exhibits.                                                                                                          |       | 47                |
|                                                                                                                        |       |              |
| SIGNATURES                                                                                                                  |       | 48                |

 

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Table ofContents

 

**PART I. FINANCIAL INFORMATION**

 

**Item 1. Financial Statements**

 

**GlobalAviation Holdings Inc. and Subsidiaries**

CondensedConsolidated Balance Sheets

*(In Thousands, Except Share Data)*

 
| ** **                                                                                               | ** ** | **September 30,  2010** | ** **  | **December 31,  2009** | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|------------------------------|-------------|-----------------------------|------------|
| ** **                                                                                               | ** ** | **(Unaudited)**              | ** **  | ** **                  | ** ** |
| **Assets**                                                                                               |       |                         |        |                        |       |
| Current assets:                                                                                          |       |                         |        |                        |       |
| Cash and cash  equivalents                                                                               | ** ** | **$**                        | **88,211**  |                        | $          | 73,077 |   |
| Accounts receivables,  net of allowance for doubtful accounts of: 2010—$555; and 2009—$654     | ** ** | **32,193**                   |        | 42,037                      |       |
| Inventories, net                                                                                         | ** ** | **16,218**                   |        | 19,762                      |       |
| Maintenance reserve  deposits                                                                            | ** ** | **53,611**                   |        | 45,514                      |       |
| Deferred tax assets,  net                                                                                | ** ** | **8,453**                    |        | 8,136                       |       |
| Prepaid expenses and  other current assets                                                               | ** ** | **60,377**                   |        | 43,050                      |       |
| Total current assets                                                                                     | ** ** | **259,063**                  |        | 231,576                     |       |
| Property and equipment:                                                                                  |       |                         |        |                        |       |
| Flight equipment                                                                                         | ** ** | **216,405**                  |        | 165,998                     |       |
| Facilities and ground  equipment                                                                         | ** ** | **22,037**                   |        | 18,571                      |       |
| Gross property and  equipment                                                                            | ** ** | **238,442**                  |        | 184,569                     |       |
| Accumulated  depreciation                                                                                | ** ** | **(92,275**                  | **)**       | (58,043                     | )          |
| Net property and  equipment                                                                              | ** ** | **146,167**                  |        | 126,526                     |       |
| Intangible assets:                                                                                       |       |                         |        |                        |       |
| Military contract  intangibles, net of accumulated amortization of: 2010—$78,808; 2009—$59,894 | ** ** | **173,374**                  |        | 192,288                     |       |
| Other intangible assets                                                                                  | ** ** | **4,000**                    |        | 4,000                       |       |
| Total intangible assets                                                                                  | ** ** | **177,374**                  |        | 196,288                     |       |
| Restricted cash                                                                                          | ** ** | **6,281**                    |        | 8,135                       |       |
| Maintenance reserve  deposits                                                                            | ** ** | **53,637**                   |        | 59,861                      |       |
| Deposits and other  assets                                                                               | ** ** | **49,231**                   |        | 57,139                      |       |
| Total assets                                                                                             | ** ** | **$**                        | **691,753** |                        | $          | 679,525 |   |

 

*Seeaccompanying notes.*

 

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**GlobalAviation Holdings Inc. and Subsidiaries**

Condensed Consolidated Balance Sheets(continued)

*(In Thousands, Except Share Data)*

 
| ** **                                                                                                                                                     | ** ** | **September 30,  2010** | ** **  | **December 31,  2009** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|-------------|-----------------------------|------------|
| ** **                                                                                                                                                     | ** ** | **(Unaudited)**              | ** **  | ** **                  | ** ** |
| **Liabilities and stockholders’  equity**                                                                                                                 |       |                         |        |                        |       |
| Current liabilities:                                                                                                                                           |       |                         |        |                        |       |
| Current maturities of long-term debt                                                                                                                           | ** ** | **$**                        | **23,824**  |                        | $          | 24,400 |   |
| Accounts payable                                                                                                                                               | ** ** | **26,474**                   |        | 11,338                      |       |
| Air traffic liabilities                                                                                                                                        | ** ** | **12,274**                   |        | 5,504                       |       |
| Accrued compensation and benefits                                                                                                                              | ** ** | **27,520**                   |        | 25,225                      |       |
| Accrued flight expenses                                                                                                                                        | ** ** | **16,591**                   |        | 20,534                      |       |
| Other accrued expenses and current liabilities                                                                                                                 | ** ** | **98,941**                   |        | 92,226                      |       |
| Total current liabilities                                                                                                                                      | ** ** | **205,624**                  |        | 179,227                     |       |
| Long-term debt, less current maturities                                                                                                                        | ** ** | **198,826**                  |        | 211,128                     |       |
| Deferred tax liabilities, net                                                                                                                                  | ** ** | **70,128**                   |        | 72,544                      |       |
| Other liabilities                                                                                                                                              | ** ** | **28,716**                   |        | 25,257                      |       |
| Stockholders’ equity:                                                                                                                                     | ** ** | ** **                   |        |                        |       |
| Common stock, $.0001 par value; authorized 2010  and 2009—400,000,000; issued and outstanding 2010 and 2009—26,802,200 and  25,906,300, respectively | ** ** | **3**                        |        | 3                           |       |
| Warrants                                                                                                                                                       | ** ** | **1,479**                    |        | 1,479                       |       |
| Additional paid-in capital                                                                                                                                     | ** ** | **340,843**                  |        | 336,904                     |       |
| Accumulated deficit                                                                                                                                            | ** ** | **(154,265**                 | **)**       | (147,414                    | )          |
| Accumulated other comprehensive income                                                                                                                         | ** ** | **399**                      |        | 397                         |       |
| Total stockholders’ equity                                                                                                                                | ** ** | **188,459**                  |        | 191,369                     |       |
| Total liabilities and stockholders’ equity                                                                                                                | ** ** | **$**                        | **691,753** |                        | $          | 679,525 |   |

 

*Seeaccompanying notes.*

 

3

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**GlobalAviation Holdings Inc. and Subsidiaries**

CondensedConsolidated Statements of Operations

*(DollarAmounts in Thousands, Except Income per Share Data)*

 
| ** **                                                         | ** ** | **Three Months  Ended September 30,** | ** **  | **Nine Months  Ended September 30,** | ** ** |
|--------------------------------------------------------------------|------------|------------------------------------------------------|-------------|-----------------------------------------------------|------------|
| ** **                                                         | ** ** | **2010**                                             | ** **  | **2009**                                            | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                                                         | ** ** | **(Unaudited)**                                      | ** **  | **(Unaudited)**                                     | ** ** |
| Operating revenues:                                                |       |                                                 |        |                                                |       |   |   |   |   |
| Military passenger                                                 | ** ** | **$**                                                | **204,499** |                                                | $          | 188,200 | ** ** | **$** | **624,500** |   | $ | 570,830 |   |
| Military cargo                                                     | ** ** | **29,511**                                           |        | 11,862                                              | ** ** | **115,496** |   | 56,529 |   |
| Commercial cargo                                                   | ** ** | **41,559**                                           |        | 25,596                                              | ** ** | **101,492** |   | 80,529 |   |
| Commercial passenger                                               | ** ** | **10,054**                                           |        | 19,844                                              | ** ** | **31,620** |   | 44,079 |   |
| Scheduled service                                                  | ** ** | **—**                                           |        | —                                              | ** ** | **—** |   | 298 |   |
| Other                                                              | ** ** | **840**                                              |        | 1,582                                               | ** ** | **3,898** |   | 10,114 |   |
| Total operating revenues                                           | ** ** | **286,463**                                          |        | 247,084                                             | ** ** | **877,006** |   | 762,379 |   |
| Operating expenses:                                                | ** ** | ** **                                           |        |                                                | ** ** | ** ** |   |   |   |
| Aircraft fuel                                                      | ** ** | **71,082**                                           |        | 57,066                                              | ** ** | **224,162** |   | 159,522 |   |
| Aircraft rentals                                                   | ** ** | **36,534**                                           |        | 41,450                                              | ** ** | **114,943** |   | 123,877 |   |
| Maintenance, materials and repairs                                 | ** ** | **42,223**                                           |        | 31,631                                              | ** ** | **108,942** |   | 99,496 |   |
| Flight operations                                                  | ** ** | **26,958**                                           |        | 25,556                                              | ** ** | **79,722** |   | 77,320 |   |
| Aircraft and traffic servicing                                     | ** ** | **21,716**                                           |        | 21,399                                              | ** ** | **67,880** |   | 67,227 |   |
| Passenger services                                                 | ** ** | **18,349**                                           |        | 20,125                                              | ** ** | **57,591** |   | 58,347 |   |
| Crew positioning                                                   | ** ** | **14,361**                                           |        | 14,550                                              | ** ** | **43,505** |   | 41,566 |   |
| Selling and marketing                                              | ** ** | **13,193**                                           |        | 11,566                                              | ** ** | **43,962** |   | 37,910 |   |
| Depreciation and amortization                                      | ** ** | **21,583**                                           |        | 17,053                                              | ** ** | **59,276** |   | 53,394 |   |
| General and administrative                                         | ** ** | **13,309**                                           |        | 7,342                                               | ** ** | **40,806** |   | 32,001 |   |
| Asset impairment and aircraft retirements                          | ** ** | **—**                                           |        | 3,530                                               | ** ** | **—** |   | 4,215 |   |
| Other expenses                                                     | ** ** | **3,320**                                            |        | 412                                                 | ** ** | **8,052** |   | 3,531 |   |
| Total operating expenses                                           | ** ** | **282,628**                                          |        | 251,680                                             | ** ** | **848,841** |   | 758,406 |   |
| Operating income (loss)                                            | ** ** | **3,835**                                            |        | (4,596                                              | )          | **28,165** |   | 3,973 |   |
| Other income (expense):                                            | ** ** | ** **                                           |        |                                                | ** ** | ** ** |   |   |   |
| Interest income                                                    | ** ** | **650**                                              |        | 1,796                                               | ** ** | **2,325** |   | 3,841 |   |
| Interest expense                                                   | ** ** | **(11,484**                                          | **)**       | (19,234                                             | )          | **(35,104** | **)** | (46,580 | ) |
| Gain (loss) on investment                                          | ** ** | **(882**                                             | **)**       | 9,500                                               | ** ** | **(2,188** | **)** | 51,000 |   |
| Gain (loss) on debt extinguishment                                 | ** ** | **—**                                           |        | —                                              | ** ** | **(1,239** | **)** | 85,305 |   |
| Other, net                                                         | ** ** | **(1,358**                                           | **)**       | (711                                                | )          | **(748** | **)** | (1,349 | ) |
| Total other income (expense)                                       | ** ** | **(13,074**                                          | **)**       | (8,649                                              | )          | **(36,954** | **)** | 92,217 |   |
| Income (loss) before income tax benefit                            | ** ** | **(9,239**                                           | **)**       | (13,245                                             | )          | **(8,789** | **)** | 96,190 |   |
| Income tax benefit                                                 | ** ** | **2,205**                                            |        | 65,445                                              | ** ** | **1,938** |   | 36,472 |   |
| Net income (loss)                                                  | ** ** | **(7,034**                                           | **)**       | 52,200                                              | ** ** | **(6,851** | **)** | 132,662 |   |
| Preferred stock dividends                                          | ** ** | **—**                                           |        | —                                              | ** ** | **—** |   | (9,483 | ) |
| Income (loss) available to common stockholders                     | ** ** | **$**                                                | **(7,034**  | **)**                                               | $          | 52,200 | ** ** | **$** | **(6,851** | **)** | $ | 123,179 |   |
| Basic income (loss) available to common  stockholders per share:   | ** ** | ** **                                           |        |                                                | ** ** | ** ** |   |   |   |
| Weighted-average shares outstanding                                | ** ** | **25,906,300**                                       |        | 25,074,936                                          | ** ** | **25,906,300** |   | 16,697,942 |   |
| Income (loss) available to common stockholders per  share          | ** ** | **$**                                                | **(0.27**   | **)**                                               | $          | 2.08 | ** ** | **$** | **(0.26** | **)** | $ | 7.38 |   |
| Diluted income (loss) available to common  stockholders per share: | ** ** | ** **                                           |        |                                                | ** ** | ** ** |   |   |   |
| Weighted-average shares outstanding                                | ** ** | **25,906,300**                                       |        | 25,143,267                                          | ** ** | **25,906,300** |   | 35,987,091 |   |
| Income (loss) available to common stockholders per  share          | ** ** | **$**                                                | **(0.27**   | **)**                                               | $          | 2.08 | ** ** | **$** | **(0.26** | **)** | $ | 3.69 |   |

 

*Seeaccompanying notes.*

 

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**GlobalAviation Holdings Inc. and Subsidiaries**

CondensedConsolidated Statements of Cash Flows

*(In Thousands)*

 
| ** **                                                                                | ** ** | **Nine Months Ended  September 30** | ** ** |
|-------------------------------------------------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                                                                | ** ** | **2010**                                           | ** ** | **2009** | ** ** |
| ** **                                                                                | ** ** | **(Unaudited)**                                    | ** ** |
| **Operating activities**                                                                  |       |                                               |       |   |   |
| Net income (loss)                                                                         | ** ** | **$**                                              | **(6,851** | **)** | $ | 132,662 |   |
| Adjustments to reconcile net income (loss) to net  cash provided by operating activities: | ** ** | ** **                                         |       |   |   |
| Depreciation and amortization                                                             | ** ** | **59,276**                                         |       | 53,394 |   |
| Amortization of loan costs                                                                | ** ** | **3,212**                                          |       | 6,614 |   |
| Amortization of debt discount                                                             | ** ** | **4,052**                                          |       | 7,136 |   |
| Asset impairment and aircraft retirements                                                 | ** ** | **—**                                         |       | 4,215 |   |
| (Gain) loss on debt extinguishment                                                        | ** ** | **1,239**                                          |       | (85,305 | ) |
| (Gain) loss on investment                                                                 | ** ** | **2,188**                                          |       | (51,000 | ) |
| Stock-based compensation expense                                                          | ** ** | **3,939**                                          |       | 1,755 |   |
| Deferred income taxes                                                                     | ** ** | **(2,733**                                         | **)**      | (33,224 | ) |
| Non-cash interest                                                                         | ** ** | **3,354**                                          |       | 27,782 |   |
| Loss on sale of equipment                                                                 | ** ** | **1,934**                                          |       | 894 |   |
| Changes in operating assets and liabilities:                                              | ** ** | ** **                                         |       |   |   |
| Accounts receivable, net                                                                  | ** ** | **9,844**                                          |       | 38,377 |   |
| Inventories, net                                                                          | ** ** | **—**                                         |       | (21 | ) |
| Maintenance reserve deposits                                                              | ** ** | **(1,873**                                         | **)**      | (5,368 | ) |
| Other current assets                                                                      | ** ** | **(17,327**                                        | **)**      | 7,434 |   |
| Accounts payable                                                                          | ** ** | **15,136**                                         |       | (3,132 | ) |
| Air traffic liabilities and accrued flight  expenses                                      | ** ** | **2,827**                                          |       | 677 |   |
| Accrued compensation and benefits                                                         | ** ** | **2,295**                                          |       | (5,917 | ) |
| Other accrued expenses and current liabilities                                            | ** ** | **(9,413**                                         | **)**      | (54,161 | ) |
| Other liabilities and other assets                                                        | ** ** | **10,109**                                         |       | 1,809 |   |
| Net cash provided by operating activities                                                 | ** ** | **81,208**                                         |       | 44,621 |   |
| **Investing activities**                                                                  | ** ** | ** **                                         |       |   |   |
| Capital expenditures                                                                      | ** ** | **(42,930**                                        | **)**      | (26,781 | ) |
| Insurance proceeds from asset impairment and  aircraft retirements                        | ** ** | **—**                                         |       | 1,000 |   |
| Proceeds from sale of equipment                                                           | ** ** | **665**                                            |       | 19 |   |
| Net cash used in investing activities                                                     | ** ** | **(42,265**                                        | **)**      | (25,762 | ) |
| **Financing activities**                                                                  | ** ** | ** **                                         |       |   |   |
| Proceeds from issuance of preferred stock                                                 | ** ** | **—**                                         |       | 20,000 |   |
| Proceeds from issuance of long-term debt                                                  | ** ** | **—**                                         |       | 247,603 |   |
| Payment of costs related to issuance and  repurchase of debt                              | ** ** | **(3,149**                                         | **)**      | (21,098 | ) |
| Payments on long-term debt                                                                | ** ** | **(20,660**                                        | **)**      | (284,115 | ) |
| Repurchase of common stock                                                                | ** ** | **—**                                         |       | (122 | ) |
| Net cash used in financing activities                                                     | ** ** | **(23,809**                                        | **)**      | (37,732 | ) |
|                                                                                      |       |                                               |       |   |   |
| Net increase (decrease) in cash and cash  equivalents                                     | ** ** | **15,134**                                         |       | (18,873 | ) |
| Cash and cash equivalents at beginning of period                                          | ** ** | **73,077**                                         |       | 87,424 |   |
| Cash and cash equivalents at end of period                                                | ** ** | **$**                                              | **88,211** |   | $ | 68,551 |   |
| **Supplemental disclosure of  non-cash investing activities**                             | ** ** | ** **                                         |       |   |   |
| Property and equipment expenditure included in  other current liabilities                 | ** ** | **$**                                              | **25,009** |   | $ | 5,895 |   |

 

*Seeaccompanying notes*

 

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Notesto Condensed Consolidated Financial Statements (unaudited)

 

**1. Organization and Basis of Presentation**

 

GlobalAviation Holdings Inc. (Global, and collectively with its wholly-ownedsubsidiaries, the Company) is a global provider of customized air transportpassenger and cargo services, offering a broad range of aircraft types andpayloads. The Company offers military, cargo and commercial charter services throughits two operating airlines: World Airways, Inc. (World) and North AmericanAirlines, Inc. (North American). World provides long-range passenger andcargo charter and ACMI (Aircraft, Crew, Maintenance and Insurance) airtransportation serving the U.S. Government, international freight andpassenger airlines, tour operators, and customers requiring specializedaircraft services. North American provides passenger charter and ACMI airtransportation serving the U.S. Government, tour operators and other airlines.The Company’s combined fleet consists of the following aircraft types: Boeing757-200 passenger (B757), Boeing 767-300 passenger (B767), Boeing 747-400freighter (B747), McDonnell Douglas DC10-30 passenger (DC-10), andMcDonnell Douglas MD-11 (MD-11) passenger and freighter. All activeaircraft as of September 30, 2010 are leased.

 

TheCompany’s wholly-owned subsidiaries are as follows: NewATA Acquisition Inc. (New ATA), New ATAInvestment 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 and GlobalAviation Ventures SPV LLC. ATA Airlines, Inc. (ATA) was awholly-owned subsidiary until March 31, 2009. The Company acquired WorldAir Holdings and its wholly-owned subsidiaries, World, North American, WorldRisk Solutions, and World Airways Parts Company, LLC on August 14,2007 (the Acquisition Date). On April 2, 2008, ATA filed a voluntarypetition for relief under Chapter 11 of the U.S. Bankruptcy Code andATA subsequently discontinued all business operations. As of April 3,2008, Global ceased consolidating the results of operations and financialposition of ATA in its consolidated financial statements (See Note 2).

 

Managementbelieves that all adjustments necessary to present fairly the financialposition of Global have been included in the accompanying unaudited condensedconsolidated financial statements for the periods presented. Such adjustmentsare of a normal recurring nature. The results for the three and nine monthsended September 30, 2010 are not necessarily indicative of the results tobe expected for the full year. These statements should be read in conjunctionwith the Company’s audited consolidated financial statements and accompanyingnotes for the year ended December 31, 2009.

 

Duringthe year ended December 31, 2009, the Company recorded a liability for aleased engine that was deemed to be beyond economic repair (BER). Theamount recorded was equal to the engine value specified in the lease agreementless the estimated recoverable engine maintenance reserve deposits. During thenine months ended September 30, 2010, the Company entered into anagreement to purchase a disassembled engine for $3.0 million from whichthe Company intends to use the parts to refurbish the BER engine. As a resultof the purchase, the Company reduced maintenance, materials, and repairsexpense by $4.5 million during the nine months ended September 30,2010.

 

**Principles of Consolidation**

 

Thecondensed consolidated financial statements included herein have been presentedin accordance with accounting principles generally accepted in the UnitedStates. The accompanying condensed consolidated financial statements includethe accounts of the Company. All significant intercompany balances andtransactions have been eliminated in consolidation.

 

**Use of Estimates**

 

Thepreparation of financial statements in conformity with accounting principlesgenerally accepted in the United States requires management to make estimatesand assumptions that affect the amounts reported in the financial statementsand accompanying notes. Actual results could differ from those estimates.Significant estimates include fixed asset and intangible asset useful lives, valuationallowances (including but not limited to, those related to

 

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**1. Organization and Basis of Presentation (continued)**

 

receivables,inventories, and deferred taxes), other income tax accounting, self-insuredemployee benefits, and legal liabilities.

 

**Reclassification**

 

TheCompany reclassified its statement of operations for the three and nine monthsended September 30, 2009 to reflect revenues and expenses by function andto conform to the presentation for the comparable periods in 2010.

 

**2. ATA Bankruptcy**

 

OnApril 2, 2008, ATA filed a voluntary petition for relief underChapter 11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court forthe Southern District of Indiana. On April 3, 2008, ATA discontinued allbusiness operations, terminated the majority of its employees and beganconducting an orderly liquidation of its assets. Management believes the primaryfactor contributing to ATA’s decision to commence the ATA Chapter 11proceeding was the termination by FedEx Corporation (FedEx) of the Company’scontract with FedEx that directly supported the Air Mobility Command’s (AMC)U.S. military personnel transportation requirements. Management believes thecontract cancellation made it impossible for ATA to obtain additional capitalto sustain its operations or restructure its business. On December 12,2008, ATA filed its Chapter 11 Plan and Disclosure Statement in support ofits Chapter 11 plan. The plan was approved on March 25, 2009, with aneffective date of March 31, 2009. All aircraft previously leased by ATAand used in connection with ATA’s business have been returned to the respectivelessors of the aircraft. As of September 30, 2010, ATA had wound down themajority of its existing estate.

 

Asa result of the bankruptcy filing, beginning on April 3, 2008, Globalceased consolidating the results of operations and financial position of ATA inits consolidated financial statements. As of that date, Global adopted the costmethod of accounting for ATA. As of April 3, 2008, Global’s net investmentin ATA under the cost method was $17.8 million which Global determined wasfully impaired and wrote-off.

 

Duringthe year ended December 31, 2009, the Company restructured its seniorsecured debt and became the primary beneficiary of the ATA bankruptcy estatetrust. As a result, during the third quarter of 2009, the Company beganconsolidating its interest in the ATA bankruptcy estate. As ofSeptember 30, 2010, and December 31, 2009, the net assets of the ATAbankruptcy estate were $2.4 million and $5.6 million, respectively. Duringthe three and nine months ended September 30, 2010, an $0.9 million and$2.2 million, respectively, loss on investment was recorded predominatelydue to legal expenses associated with the bankruptcy estate’s suit filedagainst FedEx Corporation seeking damages of $94.0 million. During thethree and nine months ended September 30, 2009, the Company recorded again on investment in ATA of $9.5 million and $51.0 million,respectively, for cash received from the ATA estate, which was used to pay downthe Company’s outstanding debt.  SeeNote 10 regarding a federal jury verdict against FedEx and awarded to the ATAbankruptcy estate in the amount of $66.0 million, which is subject to appeal.

 

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**3. Long-Term Debt**

 

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

 
| ** **                                                                                                                                              | ** ** | **September 30,  2010** | ** **  | **December 31,  2009** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|-------------|-----------------------------|------------|
|                                                                                                                                                    |       |                         |        |                        |       |
| First Lien Notes, 14% interest, net of discount of  $6.9 million and $9.1 million, respectively                                               | ** ** | **$**                        | **152,571** |                        | $          | 165,873 |   |
| New Second Lien Loan, 12% interest plus 6%  payment-in-kind (PIK) interest, net of discount of $11.7 million and  $13.8 million, respectively | ** ** | **65,290**                   |        | 59,741                      |       |
| Promissory Notes with certain lessors, 8% interest                                                                                                      | ** ** | **4,274**                    |        | 9,314                       |       |
| Capital lease, 6% interest                                                                                                                              | ** ** | **515**                      |        | 600                         |       |
| Total debt                                                                                                                                              | ** ** | **222,650**                  |        | 235,528                     |       |
| Less current maturities of long-term debt                                                                                                               | ** ** | **(23,824**                  | **)**       | (24,400                     | )          |
| Total long-term debt                                                                                                                                    | ** ** | **$**                        | **198,826** |                        | $          | 211,128 |   |

 

InJune 2009, the Company entered into a series of transactions to refinanceits debt. The Company purchased a portion of its debt at a discount to par. Asa result, during the nine months ended September 30, 2009, the Companyrecorded a net gain of $85.3 million, comprised of a $121.7 millionreduction of principal and accrued interest offset by a $9.1 milliontrading fee, $7.9 million of existing deferred financing costs and$19.4 million of existing debt issuance discount.

 

OnAugust 13, 2009, the Company issued $175.0 million of 14% SeniorSecured First Lien Notes due 2013 (First Lien Notes). The First Lien Notesinclude the following key provisions: an August 15, 2013 final maturitydate, a 14% annual cash interest rate payable semiannually, a semiannualrequirement to offer to the noteholders to prepay $10.0 million of theprincipal amount outstanding, and a minimum consolidated net cash flowcovenant. The First Lien Notes are secured by a first priority lien onsubstantially all of the Company’s tangible and intangible assets. In February 2010,and pursuant to the terms of the First Lien Notes, Global repurchased $6.0 millionof First Lien Notes at par plus accrued interest. Concurrently, the Companyalso made an offer and repurchased $1.5 million of First Lien Notes at parplus accrued interest related to a cash distribution from the ATA estate in thesame amount. Pursuant to the terms of the First Lien Notes, on June 30,2010, Global made a semiannual offer to repurchase $10.0 million of FirstLien Notes at par plus accrued interest. Concurrently, Global also made anoffer to repurchase $1.0 million of First Lien Notes at par plus accruedinterest related to a cash distribution from the ATA estate in the same amount.A total of $34,000 in principal of First Lien Notes was purchased by Global onAugust 3, 2010 pursuant to these offers.

 

InJune 2010, the Company purchased $8.0 million face value of its FirstLien Notes in the open market. In connection with this repurchase, the Companyrecorded a $1.2 million loss on debt extinguishment for the write-off of apro-rata share of deferred loan costs and discount on the First Lien Notes.

 

OnSeptember 29, 2009, the Company entered into a $72.5 million NewSecond Lien Loan that matures in September 2014 and contains a 12% cashinterest rate and a 6% PIK interest component. The New Second Lien Loan wasrecorded net of a $7.5 million discount. In addition, the Company issuedwarrants 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 wererecorded as a $7.1 million discount against the New Second Lien Loan, fora total discount recorded of $14.6 million. The $7.1 million discountwas calculated based on the relative fair value of the warrants to the fairvalue of the debt issued.

 

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**3.Long-Term Debt (continued)**

 

OnFebruary 6, 2009, the Company entered into settlements with certainlessors in connection with the guarantee of certain ATA aircraft leases. Inaddition to the cash settlements on such date, the Company entered into$15.5 million in Promissory Notes for the remaining balance.

 

TheCompany classifies as short-term debt the portion of its debt which it expectsto pay down within the following 12 months. Future debt principal paymentson long-term debt are estimated to be $23.8 million for the next12 months subsequent to the September 30, 2010 balance sheet date. Asof September 30, 2010, the Company is in compliance with its debtcovenants.

 

**4. Income Taxes**

 

Inassessing whether deferred tax assets are realizable, the Company considerswhether it is more-likely than not that some portion or all of the deferred taxassets will not be realized. The Company considers its historical income andloss position, the scheduled reversal of deferred tax liabilities (includingthe impact of available carry-back and carry-forward periods), projected futureincome, and tax planning strategies in making this assessment.

 

Duringthe three and nine months ended September 30, 2010, the amount ofprojected nondeductible expenses such as meals and entertainment weredisproportionate in comparison to projected pre-tax book loss and, as a resultsignificantly affected the Company’s effective tax rate. Additionally, certainstate deferred tax assets are subject to a valuation allowance. As a result,the Company recorded income tax benefit of $2.2 million and $1.9 million,respectively, for the three and nine months ended September 30, 2010,respectively, resulting in effective tax rates of 23.8% and 22.1%,respectively. Included in these amounts are accruals for additional interestfor uncertain tax positions of $0.2 million and $0.8 million,respectively, for the three and nine months ended September 30, 2010.There were no other changes to the Company’s uncertain tax positions during thethree and nine months ended September 30, 2010.

 

OnApril 2, 2008, ATA filed a voluntary petition for bankruptcy protectionand as a result, the Company changed its financial accounting for ATA from aconsolidating subsidiary to a cost method investment and recorded a$17.8 million impairment charge for its full investment in ATA. Therealization of the tax benefit related to the impairment charge was uncertainat the time. Thus, a valuation allowance was established against this deferredtax asset.

 

ATA’sbankruptcy became effective on March 31, 2009, resulting in the transferof ATA’s remaining assets into two grantor trusts established for the benefitof ATA’s creditors. As of June 30, 2009, the Company was unable to fullycomplete the tax analysis of the bankruptcy because there were still aspectsthat were not fixed and determinable. Accordingly, the Company did not recordany benefit for the potential worthless stock loss in ATA, any bad debtrealization, or cancellation of indebtedness income at that time. During thethree months ended September 30, 2009, the Company completed the taxanalysis and determined it would be entitled to a worthless stock loss andbooked a benefit of $50.8 million. Additionally, during the three and ninemonths ended September 30, 2009, the Company recorded a gain on investmentof $9.5 million and $51.0 million, respectively, related to a paymentmade from ATA’s bankruptcy trust to its creditor that did not result in a gainfor tax purposes. During the three months ended September 30, 2009, theCompany reversed $2.4 million in uncertain tax positions due to the expirationof the statute of limitations on assessment. The Company also received $5.3million for an NOL claim refund during the three months ended September 30,2009. These items and other nondeductible expenses, such as meals andentertainment, affected the Company’s effective tax rate for the three and ninemonths ended September 30, 2009. As a result, the Company recorded anincome tax benefit of $65.4 million and $36.5 million, respectively,resulting in an effective tax rate of 494.1% and (37.9)%, respectively, for thethree and nine months ended September 30, 2009.

 

Asignificant portion of the tax expense related to the Company’s debtrestructuring in June 2009, for which the Company realized$85.3 million in cancellation of indebtedness income. Under the provisionsof the American

 

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**4. Income Taxes (continued)**

 

Recoveryand Reinvestment Act of 2009, the Company is eligible to make an election todefer this income until 2014 and include it ratably over the ensuing fouryears. As of September 30, 2009, the Company had not determined if theelection would be made to defer the income, therefore, the tax impact of theelection had not been considered. During the fourth quarter of 2009, theCompany completed its analysis, elected to defer this income, and consequentlyrecorded a $29.9 million deferred tax liability.

 

**5. Stockholders’ Equity**

 

**Common Stock**

 

InJune 2009, the Company implemented a 1,000 to 1 reverse stock split forall issued and outstanding common stock. In connection with the reverse stocksplit, the Company purchased 12,198 of fractional shares outstanding. On October 1,2010, the Company effected a 100-for-1 stock split of the Company’s outstandingcommon stock. The accompanying financial statements and notes to the financialstatements give retroactive effect to the stock split for all periodspresented.

 

**Preferred Stock**

 

In2007, the Company issued and sold 11,507,142 shares of Series AConvertible Cumulative Preferred Stock (Series A Preferred Stock) to itsmajority stockholder at a price of $14.00 per share, for a total of$158.6 million, net of $2.5 million in direct issuance costs. TheCompany evaluated the Series A Preferred Stock and concluded that theinstrument should be recorded as equity. The holder of the Series APreferred Stock was entitled to cumulative dividends at an annual rate of 16.0%on the liquidation amount of the Series A Preferred Stock.

 

OnFebruary 6, 2009, New ATA Investment and MatlinPatterson completed theconversion of a $7.0 million Note with MatlinPatterson plus PIK interestinto 548,558 shares of Series A Preferred Stock issued by the Company at$14.00 per share. In addition, the Company’s majority stockholder invested$20.0 million of cash in the Company in exchange for 1,428,571 shares ofthe Company’s Series A Preferred Stock.

 

OnApril 6, 2009, the Company’s majority stockholder, the sole holder of theoutstanding Series A Preferred Stock, converted the Series APreferred Stock into common stock. The accumulated dividend at the time of theconversion was $49.5 million. Prior to the conversion, 13,484,271 sharesof Series A Preferred Stock were outstanding at a value of$186.3 million, net of issuance costs of $2.5 million. OnApril 7, 2009, as a result of the Rights Offering and conversion of theSeries A Preferred Stock and the related accumulated dividend, the Companyissued 23,825,900 shares of common stock at an aggregate par value of $2,383.The $235.8 million in excess value of the common stock issued over the parvalue, net of issuance costs, was recorded to additional paid-in capital.

 

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

 

Thefollowing is a reconciliation of the numerators and denominators of the basicand diluted income (loss) available to common stockholders per sharecomputations for the three and nine months ended September 30, 2010 and2009:

 
| ** **                                                               | ** ** | **Three Months  Ended September 30,** | ** ** | **Nine Months  Ended September 30,** | ** ** |
|--------------------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| **(in thousands, except for share data)**       | ** ** | **2010**                                             | ** ** | **2009**                                            | ** ** | **2010** | ** ** | **2009** | ** ** |
| Basic:                                                                   |       |                                                 |       |                                                |       |   |   |   |   |
| Income (loss) available to common stockholders                           | ** ** | **$**                                                | **(7,034** | **)**                                               | $          | 52,200 | ** ** | **$** | **(6,851** | **)** | $ | 123,179 |   |
| Weighted-average common shares outstanding                               | ** ** | **25,906,300**                                       |       | 25,074,936                                          | ** ** | **25,906,300** |   | 16,697,942 |   |
| Income (loss) available to common stockholders per  share, basic         | ** ** | **$**                                                | **(0.27**  | **)**                                               | $          | 2.08 | ** ** | **$** | **(0.26** | **)** | $ | 7.38 |   |
| Diluted:                                                                 | ** ** | ** **                                           |       |                                                | ** ** | ** ** |   |   |   |
| Income (loss) available to common stockholders  plus assured conversions | ** ** | **$**                                                | **(7,034** | **)**                                               | $          | 52,200 | ** ** | **$** | **(6,851** | **)** | $ | 132,662 |   |
| Weighted-average common shares outstanding                               | ** ** | **25,906,300**                                       |       | 25,074,936                                          | ** ** | **25,906,300** |   | 16,697,942 |   |
| Effect of dilutive securities:                                           | ** ** | ** **                                           |       |                                                | ** ** | ** ** |   |   |   |
| Common stock equivalents                                                 | ** ** | **—**                                           |       | 68,331                                              | ** ** | **—** |   | 19,289,149 |   |
| Diluted weighted-average common shares outstanding                       | ** ** | **25,906,300**                                       |       | 25,143,267                                          | ** ** | **25,906,300** |   | 35,987,091 |   |
| Income (loss) available to common stockholders per  share, diluted       | ** ** | **$**                                                | **(0.27**  | **)**                                               | $          | 2.08 | ** ** | **$** | **(0.26** | **)** | $ | 3.69 |   |

 

Basicincome (loss) available to common stockholders per share is calculated usingthe weighted-average common shares outstanding during the period. Commonequivalent shares from stock options, restricted stock awards and warrants,using the treasury stock method, are included in the diluted per sharecalculations unless their effect of inclusion would be antidilutive. Income(loss) available to common stockholders plus assured conversions is calculatedas the basic income (loss) available to common stockholders plus dividends paidon Series A convertible cumulative preferred stock. Potentially dilutivesecurities were not included for the three and nine months ended September 30,2010, as to do so would have been antidilutive.

 

Thecommon stock equivalents not included in the computation of diluted incomeavailable to common stockholders per share, because to do so would have beenantidilutive, are shown below:

 
| ** **                | ** ** | **Three Months  Ended September 30,** | ** ** | **Nine Months  Ended September 30,** | ** ** |
|---------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                | ** ** | **2010**                                             | ** ** | **2009**                                            | ** ** | **2010** | ** ** | **2009** | ** ** |
| Common stock equivalents: |       |                                                 |       |                                                |       |   |   |   |   |
| Stock options             | ** ** | **4,659,010**                                        |       | 4,663,215                                           | ** ** | **4,873,022** |   | 1,762,718 |   |
| Restricted stock awards   | ** ** | **579,362**                                          |       | 814,859                                             | ** ** | **642,771** |   | 84,877 |   |
| Warrants                  | ** ** | **45,127**                                           |       | 45,255                                              | ** ** | **45,169** |   | 45,373 |   |

 

**7. Segment Reporting**

 

TheCompany has two reportable segments: World and North American. World provideslong-range passenger and cargo charter and ACMI air transportation serving theU.S. Government, international freight and passenger airlines, tour operators,and customers requiring specialized aircraft services. North American providespassenger charter and ACMI air transportation serving the U.S. Government, touroperators, and other airlines. The Company operates and manages World and NorthAmerican as distinct operating segments, and prepares separate financialstatements for each that are reviewed by senior management at the Company, as wellas the chief operating officer and other management at the relevant operatingcompany level.

 

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**7. Segment Reporting (continued)**

 

TheCompany evaluates performance and allocates resources based on profit or lossby segment performance and by operations. Intersegment sales are recorded atthe 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 September 30, 2010** | ** **  |
|----------------------------------|------------|--------------------------------------------------------------------|-------------|
| ** **                       | ** ** | **World**                                                          | ** **  | **North  American** | ** ** | **All Other** | ** ** | **Consolidated  Total** | ** ** |
|                             |       |                                                               |        |   |   |   |   |   |   |
| Revenues from external customers | ** ** | **$**                                                              | **204,006** | ** ** | **$** | **82,457** | ** ** | **$** | **—** | ** ** | **$** | **286,463** | ** ** |
| Intersegment revenues            | ** ** | **169**                                                            | ** **  | **—** | ** ** | **7,502** | ** ** | **7,671** | ** ** |
| Depreciation and amortization    | ** ** | **13,996**                                                         | ** **  | **7,386** | ** ** | **201** | ** ** | **21,583** | ** ** |
| Total operating expenses         | ** ** | **207,257**                                                        | ** **  | **75,768** | ** ** | **(397** | **)** | **282,628** | ** ** |
| Operating income (loss)          | ** ** | **(3,251**                                                         | **)**       | **6,689** | ** ** | **397** | ** ** | **3,835** | ** ** |
| Interest income                  | ** ** | **499**                                                            | ** **  | **150** | ** ** | **1** | ** ** | **650** | ** ** |
| Interest expense                 | ** ** | **(8,653**                                                         | **)**       | **(4,267** | **)** | **1,436** | ** ** | **(11,484** | **)** |
| Loss on investment               | ** ** | **—**                                                         | ** **  | **—** | ** ** | **(882** | **)** | **(882** | **)** |
| Income tax (benefit) expense     | ** ** | **(4,225**                                                         | **)**       | **1,063** | ** ** | **957** | ** ** | **(2,205** | **)** |
|                                  |            |                                                                    |             |  |  |  |  |  |  |  |  |  |  |

 
| ** **                       | ** ** | **Nine Months Ended September 30, 2010** | ** **  |
|----------------------------------|------------|-------------------------------------------------------------------|-------------|
| ** **                       | ** ** | **World**                                                         | ** **  | **North  American** | ** ** | **All Other** | ** ** | **Consolidated  Total** | ** ** |
|                             |       |                                                              |        |   |   |   |   |   |   |
| Revenues from external customers | ** ** | **$**                                                             | **621,731** | ** ** | **$** | **255,275** | ** ** | **$** | **—** | ** ** | **$** | **877,006** | ** ** |
| Intersegment revenues            | ** ** | **465**                                                           | ** **  | **—** | ** ** | **21,792** | ** ** | **22,257** | ** ** |
| Depreciation and amortization    | ** ** | **38,726**                                                        | ** **  | **19,998** | ** ** | **552** | ** ** | **59,276** | ** ** |
| Total operating expenses         | ** ** | **605,476**                                                       | ** **  | **243,199** | ** ** | **166** | ** ** | **848,841** | ** ** |
| Operating income (loss)          | ** ** | **16,255**                                                        | ** **  | **12,076** | ** ** | **(166** | **)** | **28,165** | ** ** |
| Interest income                  | ** ** | **1,524**                                                         | ** **  | **798** | ** ** | **3** | ** ** | **2,325** | ** ** |
| Interest expense                 | ** ** | **(24,622**                                                       | **)**       | **(11,750** | **)** | **1,268** | ** ** | **(35,104** | **)** |
| Loss on investment               | ** ** | **—**                                                        | ** **  | **—** | ** ** | **(2,188** | **)** | **(2,188** | **)** |
| Loss on debt extinguishment      | ** ** | **—**                                                        | ** **  | **—** | ** ** | **(1,239** | **)** | **(1,239** | **)** |
| Income tax (benefit) expense     | ** ** | **(1,730**                                                        | **)**       | **714** | ** ** | **(922** | **)** | **(1,938** | **)** |
|                                  |            |                                                                   |             |  |  |  |  |  |  |  |  |  |  |

 

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**7. Segment Reporting (continued)**

 
| ** **                                | ** ** | **Three Months Ended September 30, 2009** | ** ** |
|-------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                | ** ** | **World**                                                          | ** ** | **North  American** | ** ** | **All Other** | ** ** | **Consolidated  Total** | ** ** |
|                                      |       |                                                               |       |   |   |   |   |   |   |
| Revenues from external customers          |       | $                                                                  | 148,227    |   | $ | 98,857 |   | $ | — |   | $ | 247,084 |   |
| Intersegment revenues                     |       | 26                                                                 |       | 65 |   | 4,942 |   | 5,033 |   |
| Depreciation and amortization             |       | 11,492                                                             |       | 5,537 |   | 24 |   | 17,053 |   |
| Asset impairment and aircraft retirements |       | 3,530                                                              |       | — |   | — |   | 3,530 |   |
| Total operating expenses                  |       | 164,097                                                            |       | 88,468 |   | (885 | ) | 251,680 |   |
| Operating income (loss)                   |       | (15,870                                                            | )          | 10,389 |   | 885 |   | (4,596 | ) |
| Interest income                           |       | 1,575                                                              |       | 219 |   | 2 |   | 1,796 |   |
| Interest expense                          |       | (8,682                                                             | )          | (4,308 | ) | (6,244 | ) | (19,234 | ) |
| Gain on investment                        |       | —                                                             |       | — |   | 9,500 |   | 9,500 |   |
| Income tax (benefit) expense              |       | (16,727                                                            | )          | 3,460 |   | (52,178 | ) | (65,445 | ) |
|                                           |            |                                                                    |            |  |  |  |  |  |  |  |  |  |  |

 
| ** **                                | ** ** | **Nine Months Ended September 30, 2009** | ** ** |
|-------------------------------------------|------------|-------------------------------------------------------------------|------------|
| ** **                                | ** ** | **World**                                                         | ** ** | **North  American** | ** ** | **All Other** | ** ** | **Consolidated  Total** | ** ** |
|                                      |       |                                                              |       |   |   |   |   |   |   |
| Revenues from external customers          |       | $                                                                 | 470,472    |   | $ | 291,907 |   | $ | — |   | $ | 762,379 |   |
| Intersegment revenues                     |       | 98                                                                |       | 546 |   | 16,781 |   | 17,425 |   |
| Depreciation and amortization             |       | 37,798                                                            |       | 15,524 |   | 72 |   | 53,394 |   |
| Asset impairment and aircraft retirements |       | 4,215                                                             |       | — |   | — |   | 4,215 |   |
| Total operating expenses                  |       | 509,447                                                           |       | 249,744 |   | (785 | ) | 758,406 |   |
| Operating income (loss)                   |       | (38,975                                                           | )          | 42,163 |   | 785 |   | 3,973 |   |
| Interest income                           |       | 2,952                                                             |       | 873 |   | 16 |   | 3,841 |   |
| Interest expense                          |       | (26,704                                                           | )          | (13,788 | ) | (6,088 | ) | (46,580 | ) |
| Gain on investment                        |       | —                                                            |       | — |   | 51,000 |   | 51,000 |   |
| Gain on debt extinguishment               |       | —                                                            |       | — |   | 85,305 |   | 85,305 |   |
| Income tax (benefit) expense              |       | (30,183                                                           | )          | 11,891 |   | (18,180 | ) | (36,472 | ) |
|                                           |            |                                                                   |            |  |  |  |  |  |  |  |  |  |  |

 

Onecustomer comprised 10% or more of the Company’s total operating revenues asfollows (in millions):

 
| ** **                                  | ** ** | **Three Months  Ended September 30,** | ** ** | **Nine Months  Ended September 30,** | ** ** |
|---------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                  | ** ** | **2010**                                             | ** ** | **2009**                                            | ** ** | **2010** | ** ** | **2009** | ** ** |
| U.S. Air Force (USAF) Air Mobility Command: |       |                                                 |       |                                                |       |   |   |   |   |
| World                                       | ** ** | **$**                                                | **160.6**  |                                                | $          | 106.0 | ** ** | **$** | **500.8** |   | $ | 346.7 |   |
| North American                              | ** ** | **73.4**                                             |       | 94.1                                                | ** ** | **239.2** |   | 280.6 |   |
|                                             |            |                                                      |            |                                                     |            |  |  |  |  |  |  |  |  |

 

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

 

TheCompany has stock-based compensation plans for officers and key employees ofthe Company, including the Company’s Board of Directors (Management Plans). TheCompany measures the cost of employee services received in exchange for anaward of equity instruments based on the grant date fair value of the award.During the nine months ended September 30, 2010 and September 30,2009, $3.9 million and $1.8 million, respectively, of stock-basedcompensation expense were charged to operations. In June 2010, thecompensation committee of the Board of Directors approved a plan to acceleratethe vesting of certain of the Company’s equity awards in the event that aninitial public offering of common stock is consummated on or beforeSeptember 30, 2011, so that two-thirds of such awards will be vested uponconsummation of the initial public offering and the remaining one-third will veston the first anniversary of the consummation of the initial public offering. Ifthe initial public offering is consummated after September 30, 2011, thevesting of the equity awards will be accelerated so that the remaining unvestedportion of such awards vest upon consummation of the initial public offering.

 

**9. Fair Value Measurements**

 

Theestimated fair values of cash and cash equivalents and restricted cashapproximate their carrying values due to their short-term nature. The fairvalues of the Company’s debt instruments approximate their carrying value as ofDecember 31, 2009 and September 30, 2010.

 

**10. Commitments and Contingencies**

 

***World’s Cockpit Crewmembers:*** The cockpitcrewmembers, who account for approximately 36% of the total workforce at World,are represented by the International Brotherhood of Teamsters (the IBT), andare subject to a collective bargaining agreement which became amendable onMarch 1, 2009. On November 3, 2008, World received a “Section 6”Notice under the Railway Labor Act which is used to initiate negotiations.

 

***World’s Flight Attendants:*** World’s flightattendants, representing approximately 36% of World’s employees, are subject toa collective bargaining agreement which will become amendable in September 2012.

 

Theflight attendants employed by World participate in a multiemployer definedbenefit pension plan affiliated with the International Brotherhood ofTeamsters. The plan’s actuary has certified that the plan is in criticalstatus, determined in accordance with current pension plan funding rules. Thismeans that the multiemployer plan has funding or liquidity problems, or both.As a result, the Company’s obligations to the multiemployer plan have increasedin the form of a 5% surcharge on its contributions and may be subject tofurther increases in the future. In addition, in the event of our partial orcomplete withdrawal from this multiemployer plan at a time when it isunderfunded, the Company would be liable for a proportionate share of such plan’sunfunded vested benefits. In the event that any other contributing employerwithdraws from the multiemployer plan at a time when it is underfunded, andsuch employer (or any member in its controlled group) cannot satisfy itsobligations under the plan at the time of withdrawal, then the Company, alongwith the other remaining contributing employers, would be liable for itsproportionate share of such plan’s unfunded vested benefits.

 

***North American’s Cockpit Crewmembers:*** OnApril 25, 2008, North American announced that its pilots, who arerepresented by the IBT Local 747 and account for approximately 24% of the totalworkforce of North American, ratified a 54-month contract, which took effect onMay 1, 2008. Since then, after submitting an application on September 22,2009 to the United States National Mediation Board (NMB) disputing theirrepresentation by the IBT, a vote was cast and the majority of the NorthAmerican Cockpit Crewmembers voted in favor of being represented by ALPA. Thedecision was certified and ALPA became the official labor representative of theNorth American Cockpit Crew Members effective the end of the fourth quarterof 2009.

 

***North American’s Flight Attendants:*** OnJuly 26, 2005, the NMB authorized a union election among North American’sflight attendants. Flight attendants comprise approximately 39% of employees atNorth American. On

 

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**10.Commitments and Contingencies (continued)**

 

August 31,2005, a majority of flight attendants voted for IBT representation.Negotiations between North American and the IBT began in 2006 andare ongoing.

 

***Guarantees:*** Globalguaranteed ATA’s obligations as lessee in connection with a number of ATA’saircraft leases. The Company has settled all but one of the lessor claims. Theremaining outstanding lessor has filed a lawsuit in New York State court onFebruary 9, 2009 claiming damages including stipulated return conditionrequirements in the lease, loss of rental income and other damages. Theplaintiff is seeking damages of approximately $0.3 million plus intereston the lease and up to $35.0 million less either (i) the presentdiscounted value of the aggregate fair market rental value for the remainder ofthe lease term or (ii) the fair market sale value of the aircraft. Theoutcome of the litigation is pending and cannot be predicted and is dependentupon many factors beyond the Company’s control. The Company and the lessor continueto negotiate the terms of a settlement notwithstanding the lawsuit. Based onthis negotiation, the Company believes that a cash settlement is possible withthis lessor related to stipulated return condition requirements in the lease,loss of rental income and other damages incurred by the lessor.

 

Asof September 30, 2010, the Company has accrued its best estimate for thisunsettled claim. This estimate is based on a combination of factors includingexperience in settling similar claims, settlement negotiations with theplaintiff, an evaluation of defenses available to the Company, mitigationobligations of the plaintiff, advice from outside counsel with respect to theprobability of loss, and any range of possible loss, and a damages analysisprepared by a third party expert. With respect to interest on recoverabledamages, the lease provides a range of annual interest rates of 8.25% to 9.64%applicable to the various amounts owed under the lease. The Company hasevaluated alternative methods of calculating interest which may be recoverableunder the provisions of the lease and under applicable law. The appropriaterate of interest to be applied, and the methodology used to determine interest,are also in dispute in the litigation.

 

***Litigation:*** In the ordinarycourse of business, the Company is party to various legal proceedings andclaims which management believes are incidental to the operation of Global’sbusinesses. Global believes that the outcome of its outstanding litigation willnot have a materially adverse effect on the Company’s results of operations,cash flows or financial position.

 

OnJune 11, 2008, the ATA bankruptcy estate (“ATA”) filed suit in the UnitedStates District Court for the Southern District of Indiana, IndianapolisDivision, against FedEx for breach of a three-year contract with ATA formilitary flying (the “FedEx Team Contract”). FedEx thereafter filed a countersuit for damages in excess of $75,000for ATA’s failure to perform (after cessation of operations) the FedEx Team Contract.  The counterclaim is solely posed against ATAand does not affect us or our operating subsidiaries.  On February 17, 2010, ATA served itsSecond 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 FY2009) under the FedEx Team Contract and $28.0 million in damages ATA incurredin 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.

 

OnOctober 19, 2010, following a six day trial, a federal jury returned averdict against FedEx and awarded ATA 100% of its $66.0 million claim forbreach of contract and dismissed FedEx’s counterclaim in its entirety.  The court, on October 22, 2010,thereafter entered a judgment against FedEx without specifying the amount ofdamages.  On November 1, 2010, ATAfiled a post trial motion seeking to have the court enter a final judgmentagainst FedEx for $66.0 million plus pre-judgment interest (under Tennessee lawat a maximum rate of 10%) together with post-judgment interest.  On November 18, 2010, FedEx filed threepost trial motions seeking, among other things, to set aside the jury’sverdict, to disallow any pre-judgment interest under Tennessee law (or, in thealternative to calculate any pre-judgment interest at the federal post-judgmentinterest rate), to reduce the actual amount of damages awarded or, in thealternative, to order a new trial.  Thefiling of post trial motions extends FedEx’s time in which to file an appeal(for 30 days after the court’s entry of an order disposing all motions).  ATA is expected to file a notice ofcross-appeal (seeking to overturn the court’s decision disallowing ATA’s DC-10Claim for $28.0 million).

 

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**10.Commitments and Contingencies (continued)**

 

Pursuantto ATA’s Chapter 11 Plan approved by the U.S. Bankruptcy Court, 85% of anydamages 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 tocertain ATA unsecured creditors.

 

FedExfiled a counterclaim against ATA for breach of contract seeking damages inexcess of $75,000. No amounts, receivable or payable, have been accrued withinthe Company’s accompanying consolidated financial statements for any potentialdamages.

 

***Fuel Purchase Agreements:*** From time totime, 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 minimumpurchase requirement. The Company has determined that certain fuel contractsmeet the “Normal Purchases and Sales” requirements of ASC 815, *Derivatives and Hedging* and therefore arenot accounted for as derivative instruments.

 

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

 

SinceSeptember 24, 2001, the U.S. government has been providing U.S. airlineswith war-risk insurance to cover losses, including those resulting fromterrorism, to passengers, third parties (ground damage) and the aircraft hull.The coverage currently extends through December 31, 2010.

 

Thewithdrawal of government support of airline war-risk insurance would require usto obtain war-risk insurance coverage commercially, if available. Suchcommercial insurance could have substantially less desirable coverage thancurrently provided by the U.S. government, may not be adequate to protect ourrisk of loss from future acts of terrorism, may result in a material increaseto the Company’s operating expense or may not be obtainable at all, resultingin an interruption to its operations.

 

***Other:*** World Risk Solutions wasformed in November 2004, with the objective of providing certain insurancecost savings, enhanced risk management programs and better loss controlpractices for the Company. World Risk Solutions underwrites certain risksmainly associated with the Company’s aircraft.

 

**11. Related Parties**

 

Asof September 30, 2010, MatlinPatterson owned approximately 92% of theoutstanding shares of the Company’s common stock. Four of Global’s directorsserve in various executive capacities at MatlinPatterson or one of itsaffiliates.

 

Worldhad an ACMI contract with Arrow, Inc. (Arrow), an airline which isindirectly majority owned by other investment partnerships for whichMatlinPatterson Global Advisers LLC acts as investment manager. Thecontract expired on May 4, 2010. For the nine months endedSeptember 30, 2010, the Company reported $6.1 million in revenuesfrom Arrow.

 

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TheCompany paid $3.0 million to Gleacher & Company, Inc.(formerly Broadpoint Gleacher Securities Group Inc.) through itssubsidiary Broadpoint Capital, Inc. for investment, advisory and placementagent services in connection with the restructuring of its debt during the yearended December 31, 2009. The same person or entity that ultimatelycontrols MatlinPatterson Global Advisers LLC, which is the investmentmanager of the entities that indirectly control the Company’s majoritystockholder, indirectly controls an investment partnership that indirectly ownsa significant interest in Gleacher.

 

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

 

*Youshould read the following discussion and analysis of our financial conditionand results of operations together with the consolidated financial statementsand related notes. This discussion contains forward looking statements basedupon current expectations that involve risks and uncertainties. Our actualresults may differ materially from those anticipated in these forward-lookingstatements as a result of various factors.*

 

**Overview**

 

Weare a provider of customized, non-scheduled passenger and cargo air transportservices, offering our customers a wide range of aircraft types,configurations, payloads and capabilities. We provide our services through ourtwo operating air carriers, World and North American, which represent our twobusiness segments. As of September 30, 2010, our combined fleet consistedof 29 wide-body and narrow-body leased aircraft, which support our two primarybusiness lines: (1) military, which includes both passenger and cargoservices, and (2) commercial cargo air transport service. We also offerpassenger charter services to customers in specialty markets, such as providingsupplemental peak capacity for other air carriers, political campaigns,professional sports teams, tour operators and concert tours. Our two primarylines of business combine the recurring revenue base of our establishedmilitary business with the growth opportunities provided by our commercialcargo services.

 

Weare the largest provider of military transport services in the AMC internationalprogram and have been flying for the military since 1952. Our contracts withthe military contain cost-plus pricing and are not bid based on price butrather are awarded based on team entitlement and are priced using the averagecost of all participating air carriers, weighted by flights flown in the AMCinternational program, plus a fixed operating margin. We are compensated on aper 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 freightactually flown.

 

Ourbusiness model generally insulates our profitability from fluctuations in jetfuel prices, which are typically the largest and most volatile expenses for anair carrier. Under our military contracts and most of our commercial passengerand cargo charter arrangements, our customers are responsible for the cost ofjet fuel. For both the nine months ended September 30, 2010 and the fiscalyear ended December 31, 2009, approximately 96% of our block hours wereflown under either military or ACMI arrangements, in which the customer assumedthe risk of fuel price volatility.

 

Wewere incorporated on January 26, 2006 under the name New ATAHoldings, Inc. and acquired a controlling interest in ATA on February 28,2006, the effective date of ATA’s reorganization. On August 14, 2007, weacquired World Air Holdings, Inc., the parent company of World and NorthAmerican. The acquisition of World Air Holdings, Inc. was accounted forusing the purchase method of accounting and the results of World AirHoldings, Inc. have been included in our consolidated financial statementssince August 14, 2007. Immediately following the 2007 acquisition, we hadthree major subsidiaries, ATA, World and North American, that each specializedin military passenger or cargo transport. In addition, ATA and North Americanhistorically operated in various scheduled service and charter passengerservice markets, while World operated in passenger charter and ACMI cargomarkets.

 

OnApril 2, 2008, ATA filed a voluntary petition for relief underChapter 11 of the U.S. Bankruptcy Code. On April 3, 2008, ATAdiscontinued all business operations and terminated the majority of itsemployees and began conducting an orderly liquidation of its assets and has nowwound down the majority of its existing bankruptcy estate. As a result of thebankruptcy filing, beginning on April 3, 2008, we ceased consolidating theresults of operations and financial position of ATA in our consolidatedfinancial statements. As of this date, we adopted the cost method of accountingfor ATA. We determined that our net investment in ATA under the cost method was$17.8 million as of April 3, 2008, and that this investment was fullyimpaired. The ATA bankruptcy estate trust has been consolidated in ourconsolidated financial statements since August 2009 due to our primarybeneficial interest in the estate. On June 11, 2008, the ATA bankruptcyestate filed suit in the Federal District Court of Indiana against FedEx. OnFebruary 17, 2010, ATA served its Second Amended Statement of SpecialDamages estimating its total damages to be $94.0 million. The estimate wasbased on lost military profits of $66.0 million arising from the FedEx 

 

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contract,and $28.0 million in losses associated with ATA’s acquisition of DC-10 aircraftin order to fulfill its obligations under the FedEx contract.

 

OnSeptember 16, 2010, FedEx’s motion to exclude the ATA bankruptcy estate’sclaim for approximately $28.0 million in damages for the DC-10 aircraftpurchase was granted. On October 19, 2010, a federal jury returned averdict against FedEx and awarded the ATA bankruptcy estate $66.0 million indamages. On FedEx’s counterclaim, the jury found against FedEx. The Companyanticipates FedEx will file a post-trial motion during the fourth quarter of2010, to set aside the verdict and if unsuccessful in its post-trial motion,thereafter will file a notice of appeal. The ATA bankruptcy estate is alsoentitled to file an appeal (or a cross-appeal as applicable) seeking to reversethe court’s ruling disallowing the ATA bankruptcy estate’s DC-10 damages claimfor approximately $28.0 million. Pursuant to ATA’s Chapter 11 Planapproved by the U.S. Bankruptcy Court, 85% of any damages recovered by ATA fromFedEx in the FedEx litigation will be retained by the ATA estate andsubsequently distributed to the Company, and 15% must be used to pay former ATAemployees and creditor beneficiaries of ATA. FedEx filed a counterclaim againstATA for breach of contract seeking damages in excess of $75,000. No amounts,receivable or payable, have been accrued within the Company’s accompanyingconsolidated financial statements for any potential damages.

 

InMay 2008, North American ceased scheduled service operations and movedcapacity to its military business line to take advantage of increased demand inthe military passenger business.

 

**Operating Revenue**

 

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

 

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

 

·                  thenumber of seats or tons contracted for purchase by the AMC for each aircrafttype, or Allowable Cabin Load, multiplied by

 

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

 

Becauseour revenues are based on the Allowable Cabin Load, the revenue we earn is notaffected by the number of troops or tons of freight we transport. Under ourcontract with DOD, we are paid on a cost-plus basis in which we receive a fixedrate per mission based on the route and aircraft type. The fixed rate iscalculated using the average costs of all participating air carriers, weightedby flights flown in the AMC international program. The AMC sets the fixed ratefor each fiscal year using cost data for a 12-month period ending15 months prior to the start of such fiscal year as adjusted followingconsultation with the air carrier, multiplied by a weighted composite priceindex 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 fixedrate used for missions flown in the following contract year.

 

Ourcontracts for passenger and cargo missions under the AMC international programare one-year contracts with rates based on the average costs of allparticipating air carriers, weighted by flights flown in the AMC internationalprogram, plus a fixed operating margin that the AMC sets annually. The fiscalyear 2011 AMC rates will be down by 6.8% for large category passenger aircraft,7.1% for medium category aircraft, and 3.0% for our large category freighteraircraft as compared to the fiscal year 2010 rates.   This is mainlydue to a combination of lower costs from the carriers, changes in the AMC’sallowable carrier costs, and negative inflation from industry and tradeassociation cost indices used in the process.  We have just begun theprocess of evaluating the effect of the new rates on our 2011 business plan;however, we expect that our AMC operating margins will be reduced.  Wehave a number of initiatives currently underway to streamline our operationsand reduce our unit costs, which we would seek to accelerate to minimize marginerosion from reduced AMC rates. The fiscal year 2011 rates become effective

 

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January 1,2011. For additional information please see our risk factor entitled “We arehighly dependent on revenues from our participation in the AMC internationalprogram, which are derived from one-year contracts that the DOD is notobligated to renew. If our revenues from this business decline from currentlevels, whether due to decreased demand, termination, non-renewal, modificationor otherwise, it could have a material adverse effect on our business,financial condition and results of operations” appearing on page 23 of ourRegistration Statement on Form S-4 filed November 8, 2010.

 

TheAMC also reimburses us for our fuel costs. Fuel costs are included in thecalculation of the relevant Effective Rate through the inclusion of a Fuel PegRate mechanism, which is determined based on a weighted average forecast ofcommercial and Department of Defense (DOD) fuel prices, including into-planefees and taxes. The weighted average forecast for fuel prices varies betweenour military passenger and military cargo operations due to the relative mix ofsources of fuel accessed to service each of the respective operations. Whilethe price we pay for fuel may affect our revenue from award to award, changesin fuel prices do not materially affect our results of operations due to themilitary’s monthly fuel price reconciliation process. Each month, the militarycompares the actual fuel prices we paid for missions during the previous monthwith the Fuel Peg Rate used in the calculation of the relevant Effective Rate.In instances where we overpaid, the military reimburses us the difference, andin instances where we underpaid, we reimburse the military for the difference.Operating income may be incrementally affected, positively or negatively, by achange in the Fuel Peg Rate due to the cost-plus nature of the Effective Ratecalculation.

 

Weanalyze the performance of our military business based on block hours flown andblock hour rates earned. A block hour is the time interval from an aircraft’sdeparture from one terminal to its arrival at another. We calculate the blockhour rate by dividing total operating revenue by the total block hours flownfor a period.

 

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

 

Weprovide our services through two contract structures: ACMI contracts and fullservice contracts. ACMI contracts are aircraft operational arrangements wherebywe provide the aircraft, crew, maintenance and insurance to a customer for afee that is generally based on the expected block hours multiplied by a blockhour rate. An ACMI contract includes a minimum block hour commitment per monthover the term of the contract, which is typically one year. In contrast, a fullservice contract is an aircraft operational arrangement whereby we provide theaircraft, crew, maintenance, insurance, fuel, landing, ground handling andother necessary operating services to a customer for a single fee that iseither based on a fixed fee or a fee based on block hours multiplied by a blockhour rate. Full service contracts generally involve higher rates than ACMIcontracts because of the full array of services paid for by us, such as fuel,and in turn provided to the customers. Due to this price differential per blockhour, the mix of full service and ACMI block hours flown in any period canaffect our period-over-period commercial revenue results. An increase inrelative full service block hours flown will generate higher commercialrevenue, all else equal. A decrease in relative full service block hours flownwill have the converse effect. The mix of full service and ACMI block hourswill not have a similar effect on operating income, however, because of thegreater operating expenses we incur with respect to full service contracts.

 

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

 

Wealso analyze the performance of our commercial cargo and passenger businessesbased on block hours flown and the block hour rate earned.

 

***Scheduled Service Revenue.***Scheduledservice revenue historically included revenue derived from scheduled servicesoperated by ATA, which ceased business operations on April 3, 2008, and byNorth American, which

 

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discontinuedscheduled service in May 2008. Through 2009, North American continued torecognize some scheduled service revenue related to expired tickets, whichtypically expire 12 months after purchase if unused. At expiration, thevalue of the tickets is recorded as earned revenue.

 

***Other Revenue.***Other revenueprimarily consists of revenue generated from the rebill to our customers ofoperating costs incurred by us under ACMI contracts. We refer to this as “ACMIrebill revenue.” We promptly rebill our ACMI customers when we purchase certainproducts or services on behalf of our ACMI customers, such as fuel, groundhandling or catering, as necessary in certain circumstances or to expediteoperations. In 2009, ACMI rebill revenue was less than 7% of our total ACMIrevenue. Subservice events refer to flights where we are paid by our customer,but classify the amounts payable as other revenue because we have contractedthe operation of the flight to another air carrier due to capacity constraints,aircraft maintenance events, or scheduling conflicts.

 

***Operating Expenses***

 

***Aircraft Fuel.***Aircraft fuelexpense includes all fuel costs incurred by us under our military and fullservice commercial contracts. In addition, in certain circumstances, wepurchase fuel for our ACMI commercial customers and subsequently rebill them.Aircraft fuel expense is a variable cost; however, our fuel price volatilityexposure is limited to our full service commercial contracts. At times, we haveexperienced temporary favorable and unfavorable fluctuations in working capitaldue to the timing of significant fuel price changes and reimbursement for thesecosts. For the nine months ended September 30, 2010 and the year endedDecember 31, 2009, 96% and 96%, respectively, of our block hours wereflown under military or ACMI commercial contracts providing for our actual fuelcosts to be paid or reimbursed by our customers.

 

***Aircraft Rentals.***Aircraftrentals include aircraft and engine rent expense under our various operatingleases for aircraft and spare engines. These costs are generally fixed for theduration of the leases. Aircraft rentals can also include certain supplementalrents paid to fund future maintenance events, commonly referred to asmaintenance reserves. In circumstances where we determine a maintenance reservewill not be refundable to us, or paid to us to fund scheduled maintenanceevents or meet aircraft redelivery requirements, we record those payments tothe 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, certainscheduled airframe maintenance events, company and contract labor formaintenance activities, line maintenance and other non-capitalized direct costsrelated to fleet maintenance, including short-term spare engine leases, loanand exchange fees for spare parts, and shipping costs. It also includes theengine usage costs incurred under hourly engine maintenance agreements, which wehave for certain of our aircraft. These agreements require us to pay monthlyfees to the vendor based on a specified rate per engine flight hour, inexchange for the vendor’s performance of overhauls and maintenance as required.Also included in maintenance, materials and repairs expense is the cost of ourmaintenance employees including their benefits. We generally view a largeportion of our maintenance, materials and repairs expense as a variable cost.

 

***Flight Operations.***Flightoperations expense includes the wages and benefits paid to our pilots, trainingcosts for our personnel, flight operations management functions and our hullinsurance expense. We generally view the non-salary portion of flightoperations expense as a variable cost. Our pilots are represented by collectivebargaining agreements, and as such, their wages and benefits are generallyfixed, although we have some flexibility to adjust staffing levels.

 

***Aircraft and Traffic Servicing.***Aircraft andtraffic servicing expense includes the costs incurred at airports to land andservice our aircraft and to handle passenger check-in, security, cargo, andbaggage. It also includes navigation fees, which are incurred when our aircraftfly through certain foreign air space and are paid to the relevant foreignauthorities, and all aircraft and traffic servicing employee costs and benefitsfor line and management functions such as ground operations. The non-salaryportions of aircraft and traffic servicing expenses are variable costs. Wetypically do not incur aircraft and traffic servicing expenses under ACMIcontracts.

 

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

 

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

 

***Selling and Marketing.***Selling andmarketing expenses primarily include the commissions we pay to Alliance teammembers as compensation for military missions we operate that were awarded toour team based on their AMC entitlement points. These commissions arenegotiated 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 andprofessional fees related to our selling and marketing functions andadvertising and product marketing activity. These are mainly variable costs.

 

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

 

***General and Administrative.***General andadministrative expenses principally include corporate and management’ssalaries, wages and benefits, professional fees, including legal andaccounting, the cost of general insurance policies, such as workers’compensation insurance, and rent and facility costs. Also included in generaland administrative expense is the cost of certain contingent liabilityprovisions, including our guarantees of ATA leasing obligations. These arefixed costs.

 

***Asset Impairment and Aircraft Retirements.***Assetimpairment and aircraft retirements include all identifiable costs relating toimpaired assets, both tangible and intangible, as well as costs associated withthe retirement of aircraft and engines. For discussion regarding impairmenttesting, see “Critical Accounting Policies and Estimates” below.

 

***Other Expenses.***Other expensesprimarily include the expense related to subservice events and customerreimbursement for damaged cargo. Other expenses are generally variable innature.

 

**Critical Accounting Policies and Estimates**

 

Thepreparation of financial statements in conformity with GAAP requires us to makejudgments and estimates that affect the reported amounts of assets,liabilities, revenues and expenses and the disclosures of contingent assets andliabilities.

 

Certainsignificant accounting policies used in the preparation of the financialstatements require us to make difficult, subjective or complex judgments andthus we consider these critical accounting policies. We have identified thefollowing as critical accounting policies.

 

***Accounting for Long-Lived Assets.***As ofSeptember 30, 2010, we had $146.2 million of net property andequipment and $173.4 million of definite-lived net intangible assets onour balance sheet. Generally, our property and equipment is depreciated toresidual values over their estimated useful service lives using thestraight-line 

 

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method.Leasehold improvements and rotable parts related to our aircraft aredepreciated over the period of benefit or the terms of the related leases,whichever is less. Our facilities and ground equipment are generallydepreciated over three to seven years. Definite-lived intangible assets areamortized on a straight-line basis over the estimated lives of the relatedassets.

 

Weevaluate our long-lived assets by segment, including definite-lived intangibleassets, for impairment when events or changes in circumstances indicate thatthe book value of the asset may not be recoverable. In testing for impairment,we compare the undiscounted estimated future cash flows from the expected useof those assets to their net book value to determine if impairment isindicated. Assets deemed impaired are written down to their estimated fairvalue through a charge to earnings. Fair values may be estimated usingdiscounted cash flow analysis or quoted market prices, together with otheravailable information. This requires the exercise of significant judgment andthe preparation of numerous significant estimates.

 

Werecord asset impairments and aircraft retirement (or return) charges based onoperational needs and specific, non-recurring events. To date these non-routineimpairments have not been required on a regular basis but rather on aninfrequent basis under unusual circumstances. In 2009, impairment charges wererecorded related to damage caused by a hard landing of an aircraft and by theearly return of two DC-10 freighters due to a decline in air cargo demandassociated with the increase in fuel prices and economic recession in 2008 and2009.

 

Inaccordance with ASC 360, Property, Plant and Equipment and the AICPA Audit andAccounting Guide: Airlines, when impairment indicators are present, we assessthe aircraft and aircraft-related assets for recoverability and recordimpairment charges as appropriate. Such impairment indicators have includedmanagement’s commitment to permanently ground an aircraft and damage caused toan aircraft.

 

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

 

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

 

Aspart of our business strategy, we have an on-going initiative to simplify ourfleet. In 2009, we began to replace and retire DC-10 passenger and freighteraircraft. Currently, we are evaluating the retirement of our remaining DC-10aircraft subject to passenger requirements from the military and theavailability of more efficient replacement aircraft. To date, our evaluationhas included commercial discussions with our DC-10 lessor to determine thefinancial impact associated with the early termination of our DC-10 aircraftleases. As of September 30, 2010, the net book value of our DC-10 aircraftand related rotables and parts inventory was approximately $17.9 million.In addition, we are obligated to make minimum payments for engine support overthe life of such aircraft leases. As of September 30, 2010, the netpresent value of the DC-10 related lease payments was $12.0 million. Inthe event we elect to retire our DC-10 aircraft prior to the expiration oftheir respective leases, we expect to reduce the net book value of the assetsto salvage value and to expense the net present value of the DC-10 relatedlease payments. The net present value of the DC-10 related leased payments maybe offset by revenue generated by subleasing or selling the engines. As of thedate hereof, no indicators of impairment have been noted which would cause usto believe that the carrying value of these aircraft is unrecoverable.

 

***Indefinite-Lived Intangible Assets.***We do notamortize our indefinite-lived intangible assets. We test the book value of ourintangible assets for impairment on an annual basis and, if certain events orcircumstances indicate that an impairment loss may have incurred, on an interimbasis. This requires the exercise of significant judgment and the preparationof numerous estimates.

 

***Airframe and Engine Maintenance and LeaseRequirements.***The cost of major engine overhauls for fleet typesnot covered under a maintenance agreement, and the cost of certain overhaulsrelated to heavy airframe, engine, LLPs, landing gear and auxiliary powerunits, which we refer to as APUs, for all fleet types, are capitalized whenperformed and amortized over estimated useful lives based upon usage, or toearlier fleet or aircraft calendar limits,

 

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forboth owned and leased aircraft. We have maintenance agreements for certainitems, such as engines, which require us to pay a monthly fee per engine flighthour in exchange for major overhaul, spares, and maintenance of those engines.We expense the cost per flight hour under these agreements as incurred. Undercertain of our aircraft and engine leases, we are required to make periodicmaintenance reserve payments to lessors for certain future maintenance worksuch 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 maintenancecondition at the end of the lease (return condition). If the return conditionis not met, the leases generally require us to provide financial compensationto the lessor. Under certain leases, the maintenance reserve deposits are notrefundable to us. Consequently, we periodically review the balances of themaintenance reserve deposits and write off any amounts that are no longerprobable of being used for maintenance. We have adopted the provisions ofEITF 08-3, “Accounting by Lessees for Non-Refundable Maintenance Deposits,”which became effective on January 1, 2009. In determining whether it isprobable that maintenance deposits will be used to offset the liability forfuture maintenance costs, we consider the condition of the aircraft, includingbut not limited to the airframe and engines, and the projected future usage ofthe aircraft based on our business and fleet plans. For the nine months ended September 30,2010 and 2009, we expensed $2.6 million, and $7.8 million, respectively,of non-refundable maintenance reserve payments on certain aircraft leases wherewe determined that it was not probable that payments would be used to offsetthe liability for future maintenance costs.

 

InJune 2008, the Financial Accounting Standards Board (FASB) Emerging IssuesTask Force (EITF) reached a consensus in Issue No. 08-3 (EITF 08-3),included in Accounting Standards Codification (ASC 840-10), pertaining tomaintenance deposits under certain equipment lease agreements, whereby a lesseeis legally or contractually responsible for repair and maintenance of theleased asset throughout the lease term. Additionally, certain lease agreementsinclude provisions requiring the lessee to make deposits to the lessor tofinancially protect the lessor in the event the lessee does not properlymaintain the leased asset. This issue applies to the lessee’s accounting formaintenance deposits paid by a lessee under an arrangement accounted for as alease that are refunded only if the lessee performs specified maintenanceactivities. The accounting by lessees for maintenance deposits was effectivefor fiscal years beginning after December 15, 2008, and interim periodswithin those fiscal years. We adopted the provisions of ASC 840-10effective January 1, 2009. The cumulative effect of the change inaccounting for nonrefundable maintenance deposits as of January 1, 2009increased our maintenance deposits by $7.3 million, increased ourlong-term deferred tax liabilities by $2.7 million and decreased ouraccumulated deficit by $4.6 million, net of tax.

 

Ifan operating lease has return conditions, our policy is to accrue and expenseratably the return condition costs once they are estimable and probable. Werecognized $1.4 million, and $0.6 million of return condition expenseas part of maintenance, materials and repairs expense in our consolidatedstatement of operations for the nine months ended September 30, 2010, and2009, respectively.

 

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

 

Ourincome tax provisions are based on calculations, estimates, and assumptionsthat are subject to potential examination by the Internal Revenue Service (IRS)and other taxing authorities. Although we believe the positions taken onpreviously filed tax returns are reasonable, we have established tax andinterest reserves in recognition that taxing authorities may challenge thepositions we have taken, which could result in additional liabilities of bothtaxes and interest. We review and adjust these reserves as circumstanceswarrant or as events occur that affect our potential liability, such as thelapsing of applicable statutes of limitation, conclusion of audits, a changebased upon current calculations, identification of new issues, releases ofadministrative guidance or the rendering of a court decision affecting aparticular issue. Any adjustment to the tax provision would be made in theperiod in which the facts that gave rise to the change become known.

 

Weadopted the provisions of ASC 450, Contingencies, on January 1, 2007. Wedeveloped and implemented a process, consistent with ASC 450 and ASC 740, IncomeTaxes, to ensure that uncertain tax positions are properly 

 

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identified,recognized, and measured in our financial statements. We adopted ASC 805,Business Combinations, effective January 1, 2009. As such, the totalunrecognized income tax benefits as of December 31, 2008, if recognized infuture periods, will be recorded through income tax expense and will impact oureffective tax rate.

 

***Stock-based Compensation.***OnJune 29, 2009, we approved certain new equity awards to certain employeesunder a 2009 Long-Term Incentive Plan that replaced awards granted underprevious plans adopted in 2006 and 2007. This Plan allows us to grantincentives to employees in the form of incentive stock options, nonqualified stockoptions, restricted stock awards and various other performance awards. Weaccounted for the cancelled and replaced awards as modifications of existingawards with the new incremental fair value recognized over the vesting periodbeginning in the third quarter of 2009. In June 2010, the compensationcommittee of the board of directors approved a plan to accelerate the vestingof all awards currently outstanding under the 2009 Long-Term Incentive Plan,which we refer to as LTIP, in the event that our initial public offering ofcommon stock is consummated on or before September 30, 2011 so thattwo-thirds of the total shares subject to each award will be vested uponconsummation of the initial public offering and the remaining one-third willvest on the first anniversary of the consummation of the initial publicoffering. We will recognize stock-based compensation expense upon theacceleration of vesting of these awards. If the offering were completed in December 2010,we estimate we would recognize approximately $9.5 million of expenserelated to the acceleration of the unamortized compensation on these awards inthe first quarter of 2011.

 

Wemeasure the cost of employee services received in exchange for awards of equityinstruments based on the grant date fair value of the awards. Options undereach plan were granted with an exercise price not less that the market price atthe grant date. None of our grants include performance-based or market-basedvesting conditions. We estimate the fair value of stock option awards on thedate of grant using a modified Black-Scholes option-pricing model, whichrequires us to make assumptions, some of which are subjective, includingrisk-free interest rate, stock price volatility and expected life of theoptions.

 

Ourassumption of the risk-free interest rate is based on the U.S. Treasury yieldcurve in effect for the expected term of the option at the time of grant. Webase our stock price volatility assumptions on historical volatilities ofcomparable air carriers whose shares are traded using monthly stock pricereturns equivalent to the contracts term of the option. The expected life ofthe options is determined based upon an assumption that the options will beexercised evenly from vesting to expiration. As of September 30, 2010, wehad $12.4 million of total unrecognized compensation costs related tostock-based compensation arrangements. We expect to recognize this expense overa weighted-average period of 2.81 years.

 

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**Key Factors Affecting Results for the Three and Nine Months Ended September 30,2010**

 

Severalfactors influenced our results for the three and nine months ended September 30,2010 and the comparison to the corresponding periods in 2009:

 

***Shift in Military Passenger Demand.***During thethird quarter of 2010, the military continued to request higher capacityaircraft to accommodate troop movements. As a result, our larger DC-10 andMD-11 aircraft, at World, operated more passenger block hours and our smallerB767 and B757 aircraft, at North American, operated fewer passenger block hoursfor the military compared to the third quarter of 2009. Overall, our consolidatedrevenue was positively affected for the three and nine months ended September 30,2010 due to the higher per block rates paid by the military for the largeraircraft.

 

***Strong Military Cargo Demand.***During thethird quarter of 2010, we continued to experience strong demand for our MD11and B747-400 freighter aircraft from AMC. During the nine months ended 2010,this positive trend was driven primarily by a larger AMC market and during thethird quarter ended September 30, 2010, it was driven primarily by a largermarket share compared to 2009.

 

***Improvement in Commercial Cargo Demand.***In the thirdquarter of 2010, we experienced a continued improvement in commercial cargodemand compared to 2009. Improvement in revenue was driven by both higher blockhours and higher yields.

 

***Weak Commercial Passenger Demand.***During thethird quarter of 2010, we continued to experience weak demand for commercialpassenger service compared to 2009. The expiration of the SonAir ACMI programat the end of May was the primary reason for lower hours in the thirdquarter of 2010 compared to 2009.

 

***Fuel Price Increase.***On aconsolidated basis, our average price per gallon paid for fuel wasapproximately 17% and 35% higher for the three and nine months ended September 30,2010, respectively. The majority of our fuel expenses is driven by militaryflights, both passenger and cargo. Our operating results were not materiallyaffected by this increase as the military reimburses us for our fuel costs. Theincrease in the price of fuel for our military flights is reflected as revenuein both our passenger and cargo military revenue and generally offset in ouraircraft fuel expense line item.

 

***Changes to Our Fleet.***In 2009, wecompleted the early return of two DC-10 freighter aircraft to the lessor. Withthe addition of the three MD-11 freighter aircraft in 2008 along with theeconomic downturn, we no longer needed these less efficient, older aircraft tomeet demand from the military. We also rendered inactive and retired our oneowned DC-10 passenger aircraft as continued operation would have requiredsignificant maintenance expense. We returned one other DC-10 passenger aircraftto its lessor due to damage sustained in a hard landing during 2009. Finally,we added one additional MD-11 passenger aircraft to replace the lost DC-10capacity in our military business. During the third quarter of 2010, we signedan agreement to lease two additional B747 freighter aircraft. The aircraft areundergoing conversion from a passenger to cargo configuration now and we expectboth to enter revenue service during the first quarter of 2011. In addition,during the third quarter of 2010, we returned one of our MD11 freighteraircraft to revenue service from temporary storage.

 

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**Comparison of the Three and Nine Months Ended September 30,2010 and 2009**

 

**Segment and Key Operating Data**

 

Wehave two reporting segments: World and North American. Selected financial datafor the three months ended September 30, 2010 and 2009 are set forth below(in thousands):

 
| ** **                       | ** ** | **Three Months Ended September 30, 2010** | ** **  |
|----------------------------------|------------|--------------------------------------------------------------------|-------------|
| ** **                       | ** ** | **World**                                                          | ** **  | **North  American** | ** ** | **All Other** | ** ** | **Consolidated  Total** | ** ** |
|                             |       |                                                               |        |   |   |   |   |   |   |
| Revenues from external customers | ** ** | **$**                                                              | **204,006** | ** ** | **$** | **82,457** | ** ** | **$** | **—** | ** ** | **$** | **286,463** | ** ** |
| Intersegment revenues            | ** ** | **169**                                                            | ** **  | **—** | ** ** | **7,502** | ** ** | **7,671** | ** ** |
| Depreciation and amortization    | ** ** | **13,996**                                                         | ** **  | **7,386** | ** ** | **201** | ** ** | **21,583** | ** ** |
| Total operating expenses         | ** ** | **207,257**                                                        | ** **  | **75,768** | ** ** | **(397** | **)** | **282,628** | ** ** |
| Operating income (loss)          | ** ** | **(3,251**                                                         | **)**       | **6,689** | ** ** | **397** | ** ** | **3,835** | ** ** |
| Interest income                  | ** ** | **499**                                                            | ** **  | **150** | ** ** | **1** | ** ** | **650** | ** ** |
| Interest expense                 | ** ** | **(8,653**                                                         | **)**       | **(4,267** | **)** | **1,436** | ** ** | **(11,484** | **)** |
| Loss on investment               | ** ** | **—**                                                         | ** **  | **—** | ** ** | **(882** | **)** | **(882** | **)** |
| Income tax expense (benefit)     | ** ** | **(4,225**                                                         | **)**       | **1,063** | ** ** | **957** | ** ** | **(2,205** | **)** |
|                                  |            |                                                                    |             |  |  |  |  |  |  |  |  |  |  |

 
| ** **                                | ** ** | **Three Months Ended September 30, 2009** | ** ** |
|-------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                | ** ** | **World**                                                          | ** ** | **North  American** | ** ** | **All Other** | ** ** | **Consolidated  Total** | ** ** |
|                                      |       |                                                               |       |   |   |   |   |   |   |
| Revenues from external customers          |       | $                                                                  | 148,227    |   | $ | 98,857 |   | $ | — |   | $ | 247,084 |   |
| Intersegment revenues                     |       | 26                                                                 |       | 65 |   | 4,942 |   | 5,033 |   |
| Depreciation and amortization             |       | 11,492                                                             |       | 5,537 |   | 24 |   | 17,053 |   |
| Asset impairment and aircraft retirements |       | 3,530                                                              |       | — |   | — |   | 3,530 |   |
| Total operating expenses                  |       | 164,097                                                            |       | 88,468 |   | (885 | ) | 251,680 |   |
| Operating income (loss)                   |       | (15,870                                                            | )          | 10,389 |   | 885 |   | (4,596 | ) |
| Interest income                           |       | 1,575                                                              |       | 219 |   | 2 |   | 1,796 |   |
| Interest expense                          |       | (8,682                                                             | )          | (4,308 | ) | (6,244 | ) | (19,234 | ) |
| Gain on investment                        |       | —                                                             |       | — |   | 9,500 |   | 9,500 |   |
| Income tax expense (benefit)              |       | (16,727                                                            | )          | 3,460 |   | (52,178 | ) | (65,445 | ) |
|                                           |            |                                                                    |            |  |  |  |  |  |  |  |  |  |  |

 

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Thefollowing table sets forth selected key metrics by segment:

 
| ** **                                                                                              | ** ** | **Three Months Ended  September 30** | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                                              | ** ** | **2010**                                            | ** ** | **2009** | ** ** |
| **World**                                                                                               |       |                                                |       |   |   |
| Military passenger block hours                                                                          | ** ** | **6,580**                                           |       | 5,599 |   |
| Military cargo block hours                                                                              | ** ** | **1,601**                                           |       | 910 |   |
| Commercial cargo block hours                                                                            | ** ** | **6,949**                                           |       | 4,631 |   |
| Commercial passenger block hours                                                                        | ** ** | **66**                                              |       | 1,496 |   |
| Non-revenue block hours                                                                                 | ** ** | **223**                                             |       | 162 |   |
| Total block hours                                                                                       | ** ** | **15,419**                                          |       | 12,798 |   |
| Non-ACMI block hours(1)                                                                                 | ** ** | **9,054**                                           |       | 7,345 |   |
| Non-ACMI departures(2)                                                                                  | ** ** | **1,677**                                           |       | 1,359 |   |
| Total departures                                                                                        | ** ** | **2,781**                                           |       | 2,298 |   |
| Weighted average fuel price per gallon                                                                  | ** ** | **$**                                               | **2.31**   |   | $ | 1.98 |   |
| Number of aircraft in fleet, end of period                                                              | ** ** | **19.0**                                            |       | 20.0 |   |
| Average aircraft in revenue service                                                                     | ** ** | **17.7**                                            |       | 18.3 |   |
| Average daily aircraft utilization (block hours  flown per day per average aircraft in revenue service) | ** ** | **9.5**                                             |       | 7.6 |   |
|                                                                                                    |       |                                                |       |   |   |
| **North American**                                                                                      | ** ** | ** **                                          |       |   |   |
| Military passenger block hours                                                                          | ** ** | **4,938**                                           |       | 6,451 |   |
| Commercial passenger block hours                                                                        | ** ** | **1,613**                                           |       | 925 |   |
| Non-revenue block hours                                                                                 | ** ** | **59**                                              |       | 94 |   |
| Total block hours                                                                                       | ** ** | **6,610**                                           |       | 7,470 |   |
| Non-ACMI block hours(1)                                                                                 | ** ** | **5,138**                                           |       | 7,005 |   |
| Non-ACMI departures(2)                                                                                  | ** ** | **982**                                             |       | 1,264 |   |
| Total departures                                                                                        | ** ** | **1,335**                                           |       | 1,378 |   |
| Weighted average fuel price per gallon                                                                  | ** ** | **$**                                               | **2.38**   |   | $ | 2.06 |   |
| Number of aircraft in fleet, end of period                                                              | ** ** | **10.0**                                            |       | 11.0 |   |
| Average aircraft in revenue service                                                                     | ** ** | **8.8**                                             |       | 10.7 |   |
| Average daily aircraft utilization (block hours  flown per day per average aircraft in revenue service) | ** ** | **8.2**                                             |       | 7.6 |   |

 

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

 

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

 

**Financial Overview for the Three Months Ended September 30, 2010and 2009**

 

**Operating Revenues**

 

Totaloperating revenues for the three months ended September 30, 2010 increased$39.4 million, or 16%, to $286.5 million, compared to$247.1 million for the three months ended September 30, 2009.

 

***Military Passenger Revenue.*** Militarypassenger revenue for the three months ended September 30, 2010 increased$16.3 million, or 9%, to $204.5 million, compared to$188.2 million for the three months ended September 30, 2009.

 

Worldaccounted for $36.9 million of the increase, primarily due to a 17%increase in the price of fuel per gallon, which increased to $2.31 per gallonin 2010 from $1.98 per gallon in 2009. The increase in military passengerrevenue was also partially due to an increase in AMC passenger block hoursflown, which increased by 981, or 18%, 

 

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to6,580 in the third quarter of 2010 compared to 5,599 in the third quarter of2009 due to higher military demand for wide-body passenger aircraft.

 

Theincrease in military passenger revenue at World was partially offset by adecline in North American’s military passenger revenue, which decreased by$20.6 million in the third quarter of 2010 compared to the same period in2009, primarily as a result of a 23% decline in AMC passenger block hours flownprincipally due to the shift in military demand toward the larger wide-bodyaircraft and away from smaller aircraft, such as those in North American’sfleet. Third quarter 2010 military passenger block hours were 4,938 compared to6,451 in the third quarter of 2009. The decline in AMC passenger block hourswas partially offset by a 16% increase in the price of fuel per gallon, whichincreased to $2.38 per gallon in 2010 from $2.06 per gallon in 2009.

 

***Military Cargo Revenue.***Military cargorevenue for the three months ended September 30, 2010 increased$17.6 million, or 148%, to $29.5 million, compared to$11.9 million for the three months ended September 30, 2009.

 

Worldaccounted for all of the increase as North American does not operate freighteraircraft. Military cargo block hours flown during the three months endedSeptember 30, 2010 increased 76% to 1,601 compared to 910 in the sameperiod in 2009. Strong AMC demand drove both MD-11 freighter and B747 freighterhours up approximately 300 hours over the period. In addition, the block hourrate paid on military cargo block hours increased 41%, primarily due to a 16%increase in the price of fuel per gallon, which increased to $2.31 per gallonin 2010 from $1.98 per gallon in 2009 and a mix of higher yield B747 hours overMD-11 hours.

 

***Commercial Cargo Revenue.***Commercialcargo revenue for the three months ended September 30, 2010 increased$16.0 million, or 63%, to $41.6 million, compared to$25.6 million for the three months ended September 30, 2009.

 

Theincrease in revenue, all at World because North American does not operatefreighter aircraft, reflects a 50% increase in block hours flown to 6,949 inthe third quarter of 2010 from 4,631 in the third quarter of 2009. Thisincrease in block hours reflects the overall improvement in commercial cargodemand in the third quarter of 2010 as compared to the third quarter of 2009due to our existing customers flying in excess of their contractual minimumsfor the nine months ended September 30, 2010 compared to the same periodin 2009. Also, World has increased its revenue flying commercial back-haulsfrom the Far East to the U.S. off one-way AMC missions. In addition, the blockhour rate paid by our commercial cargo customers was up 8% in the third quarterof 2010 versus the third quarter of 2009 mainly due to an increase in the mixof B747-400 flying and the positive impact of more commercial back-hauls offone-way AMC missions.

 

***Commercial Passenger Revenue.***Commercialpassenger revenue for the three months ended September 30, 2010 decreased$9.7 million, or 49%, to $10.1 million, compared to$19.8 million for the three months ended September 30, 2009.

 

Worldcommercial passenger revenue decreased $14.0 million, primarily due to a96% decrease in the commercial passenger block hours flown during the thirdquarter of 2010 compared to the third quarter of 2009. This decrease was mainlydue to a significant ACMI contract that ended in May of 2010 and ourdecision to shift our capacity from the commercial to military passenger segmentto meet increased AMC demand.

 

NorthAmerican’s commercial passenger revenue increased by $4.3 million in thethird quarter of 2010 compared to the same period in 2009, primarily due to anincrease in block hours from 925 in 2009 to 1,613 in 2010.

 

***Other Revenue.***Other revenuefor the three months ended September 30, 2010 decreased $0.8 million,or 50%, to $0.8 million, compared to $1.6 million for the threemonths ended September 30, 2009. World accounted for the majority of thedecrease primarily due to a decline in rebill revenue from ACMI flights duringthe comparative quarterly periods.

 

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**Operating Expenses**

 

Totaloperating expenses for the three months ended September 30, 2010 increased$30.9 million, or 12%, to $282.6 million, compared to$251.7 million for the three months ended September 30, 2009.

 

***Aircraft Fuel.***Aircraft fuelexpense for the three months ended September 30, 2010 increased$14.0 million, or 25%, to $71.1 million, as compared to$57.1 million for the three months ended September 30, 2009.

 

Worldaircraft fuel expense increased $16.6 million, mainly as a result of a 25%increase in fuel gallons consumed to approximately 23.1 million gallons inthe quarter ended September 30, 2010 compared to 18.4 million gallonsduring the quarter ended September 30, 2009. This increase in consumptionwas the result of a 23% increase in non-ACMI block hours. In addition, fuelprice per gallon increased 17% to $2.31 per gallon for the quarter ended September 30,2010 from $1.98 per gallon compared to the same period in 2009.

 

NorthAmerican aircraft fuel expense decreased $2.6 million, mainly as a resultof a 25% decrease in fuel gallons consumed to approximately 7.5 milliongallons in the quarter ended September 30, 2010 compared to10.0 million gallons during the same period in 2009. This decrease inconsumption was the result of a 27% decrease in non-ACMI block hours. Thisdecrease in gallons consumed was partially offset by a 16% increase in theprice of fuel, which increased to $2.38 per gallon in 2010 from $2.06 pergallon in 2009.

 

Underour military and ACMI contracts, World and North American have limited exposureto fuel price volatility, as the military reimburses us for our fuel costs andour commercial ACMI customers are responsible for fuel costs.

 

***Aircraft Rentals.***Aircraftrentals expense for the three months ended September 30, 2010 decreased$5.0 million, or 12%, to $36.5 million, compared to $41.5 million forthe three months ended September 30, 2009.

 

World’saircraft rentals expense decreased $0.1 million.

 

NorthAmerican’s aircraft rentals expense decreased $4.9 million due to thescheduled return of a B767, which was under a short-term lease and returned inthe fourth quarter of 2009, lower spare engine lease expense and a decline inexpensed supplemental rent deposits.

 

***Maintenance, Materials and Repairs.***Maintenance,materials and repairs expense for the three months ended September 30,2010 increased $10.6 million, or 34%, to $42.2 million, compared to$31.6 million for the three months ended September 30, 2009.

 

Worldmaintenance, materials and repairs expense increased $12.0 million, the majorityof which was due to four additional non-capitalized C-checks completed as wellas a 20% increase in total block hours flown in the quarter ended September 30,2010 compared to the quarter ended September 30, 2009. In addition,required maintenance was performed to return one MD11 freighter aircraft torevenue service during the third quarter 2010.

 

NorthAmerican maintenance, materials and repairs expense decreased$1.4 million, primarily due to a decrease in time driven expense relatedto the 12% decline in total block hours flown for the three months ended September 30,2010 compared to the three months ended September 30, 2009.

 

***Flight Operations.***Flightoperations expense for the three months ended September 30, 2010 increased$1.4 million, or 5%, to $27.0 million, compared to $25.6 millionfor the three months ended September 30, 2009.

 

World’sflight operations expense accounted for the increase. The increase was mainlydriven by an increase in pilots and associated training events. During the quarterended September 30, 2010, approximately 20 pilots were recalled as aresult of scheduled aircraft adds for the fourth quarter of 2010 and the firstquarter of 2011, which include two incremental B747 cargo aircraft and oneincremental MD11 passenger aircraft.

 

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***Aircraft and Traffic Servicing.***Aircraft andtraffic servicing expense for the three months ended September 30, 2010increased $0.3 million, or 1%, to $21.7 million, compared to$21.4 million for the three months ended September 30, 2009.

 

World’saircraft and traffic servicing expense increased $2.7 million mainly as aresult of its 23% increase in non-ACMI departures and an increase in ouraverage navigation fee and ground operations expense per non-ACMI departure dueto an increase in the departures from and the mix of higher cost citiesoperated into during the quarter ended September 30, 2010.

 

NorthAmerican’s aircraft and traffic servicing expense decreased $2.4 million,primarily due to a 22% decline in non-ACMI departures and related lowernavigation fees and ground operations expense for each non-ACMI departure.

 

***Passenger Services.***Passengerservices expense for the three months ended September 30, 2010 decreased$1.8 million, or 9%, to $18.3 million, compared to $20.1 millionfor the three months ended September 30, 2009.

 

World’spassenger services expense remained unchanged. North American’s passengerservices expense decreased $1.8 million, primarily due to a 22% decreasein non-ACMI departures and lower average catering cost per non-ACMI departure.

 

***Crew Positioning.***Crewpositioning expense for the three months ended September 30, 2010decreased $0.2 million, or 1%, to $14.4 million, compared to$14.6 million for the three months ended September 30, 2009.

 

World’screw positioning expense increased $0.8 million, mainly due to an 23%increase in non-ACMI departures partially offset by a 12% decrease in theaverage positioning cost per non-ACMI departure mainly due to lower negotiatedhotel room rates.

 

NorthAmerican’s crew positioning expense decreased $1.0 million, mainly due toa 22% decline in non-ACMI departures in the third quarter of 2010 compared tothe third quarter of 2009.

 

***Selling and Marketing.***Selling andmarketing expense for the three months ended September 30, 2010 increased$1.6 million, or 14%, to $13.2 million, compared to$11.6 million for the three months ended September 30, 2009.

 

Sellingand marketing expense at World increased $2.1 million, primarily due toincreased commissions paid to our Alliance team as a result of the 51% increasein military revenue recorded by World in the third quarter of 2010 compared tothe third quarter of 2009.

 

Sellingand marketing expense at North American decreased $0.5 million, primarilydue to a 22% decrease in military revenue recorded by North American during thethird quarter of 2010 compared to the same period in 2009.

 

***Depreciation and Amortization.***Depreciationand amortization expense for the three months ended September 30, 2010increased $4.5 million, or 26%, to $21.6 million compared to$17.1 million for the three months ended September 30, 2009.

 

Worldand North American depreciation and amortization expense increased$2.5 million and $1.8 million, respectively, due primarily to a cumulativeincrease in the engine overhauls, certain scheduled airframe heavy maintenanceevents and rotable part purchases that qualify for capitalization that arebeing depreciated over their respective useful lives in the third quarter of2010 compared to the third quarter of 2009.

 

Corporatedepreciation and amortization expense increased $0.2 million due to thecapitalization and subsequent depreciation of a new accounting systemimplemented during late 2009.

 

***General and Administrative.***General andadministrative expense for the three months ended September 30, 2010increased $6.0 million, or 82%, to $13.3 million, compared to$7.3 million for the three months ended September 

 

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30,2009. The increase is primarily due to an increase in non-cash stock-basedcompensation expense under our LTIP, a net increase in incentive payouts due toWorld’s stronger performance, as well as an increase in litigation reserves andprofessional fees. In addition a $2.5 million refund of insurance premiums wasrecorded during the third quarter of 2009 associated with our smaller aircraftfleet after the shutdown of ATA.

 

***Asset Impairment and Aircraft Retirements.***We had no assetimpairment and aircraft retirement expense for the three months ended September 30,2010. Asset impairments and aircraft retirements totaling $3.5 millionwere recorded for the three months ended September 30, 2009 due to theretirement of a damaged World DC-10 passenger aircraft.

 

***Other Expenses.***Other expensesfor the three months ended September 30, 2010 increased $2.9 million,or 725%, to $3.3 million, compared to $0.4 million for the threemonths ended September 30, 2009. This increase was primarily due toincreased subservice events and related costs of $2.4 million at World and$0.1 million at North American.

 

**Operating Income**

 

Operatingincome for the three months ended September 30, 2010 increased$8.4 million to $3.8 million, compared to a $4.6 millionoperating loss for the three months ended September 30, 2009. Totaloperating revenue was up $39.4 million, or 16%. At the same time, totaloperating expense increased by $30.9 million, or 12%. Total operatingrevenue and total operating expense both increased mainly due to an approximate17% increase in the price of fuel per gallon. The most significant reason forthe increase in operating margin (operating income divided by total operatingrevenue), which grew from a 1.9% operating deficit for the three months ended September 30,2009 to a 1.3% operating margin for the three months ended September 30,2010, was a 19% consolidated increase in aircraft utilization.

 

**Other Income (Expense)**

 

***Interest Expense.***Interestexpense for the three months ended September 30, 2010 decreased$7.7 million, or 40%, to $11.5 million, compared to$19.2 million for the three months ended September 30, 2009. Thisdecrease was mainly due to lower average outstanding debt in the third quarterof 2010 compared to the same period in 2009 due to the restructuring of ourdebt during the year ended December 31, 2009. This decrease was partiallyoffset by an increase in the average interest rate.

 

***Gain (Loss) on Investment.***We recorded aloss on investment of $0.9 million for the three months ended September 30,2010 primarily related to legal fees in connection with the consolidation ofour primary beneficial interest in the ATA bankruptcy estate trust. In thethree months ended September 30, 2009, we recorded a gain on investment of$9.5 million due to a cash distribution from the ATA bankruptcy estatetrust.

 

**Income Taxes**

 

Inassessing whether deferred tax assets are realizable, we consider whether it ismore likely than not that some portion or all of our deferred tax assets willnot be realized. We consider our historical income and loss position, thescheduled reversal of deferred tax liabilities (including the impact ofavailable carry-back and carry-forward periods), projected future income, andtax planning strategies in making this assessment.

 

Duringthe three months ended September 30, 2010, the amount of nondeductibleexpenses, such as meals and entertainment, were disproportionate in comparisonto pre-tax book loss and, as a result, significantly affected our effective taxrate. Additionally, certain state deferred tax assets are subject to avaluation allowance. As a result, we recorded income tax benefit of$2.2 million for the three months ended September 30, 2010, resultingin an effective tax rate of 23.8%. Included in this amount is an accrual foradditional interest for uncertain tax positions of $0.2 million. Therewere no other changes to our uncertain tax positions during the three monthsended September 30, 2010.

 

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OnApril 2, 2008, ATA filed a voluntary petition for bankruptcy protectionand as a result, we changed our financial accounting for ATA from aconsolidating subsidiary to a cost method investment and recorded a$17.8 million impairment charge for the full investment in ATA. Therealization of the tax benefit related to the impairment charge was uncertainat the time. Thus, a valuation allowance was established against this deferredtax asset.

 

ATA’sbankruptcy plan of reorganization became effective on March 31, 2009,resulting in the transfer of ATA’s remaining assets into two grantor trustsestablished for the benefit of ATA’s creditors. As of June 30, 2009, wewere unable to fully complete the tax analysis of the bankruptcy because therewere still aspects that were not fixed and determinable. Accordingly, we didnot record any benefit for the potential worthless stock loss in ATA, any baddebt realization, or any cancellation of indebtedness income at that time.During the three months ended September 30, 2009, we completed the taxanalysis and determined we would be entitled to a worthless stock loss andbooked a benefit of $50.8 million. Additionally, during the three months endedSeptember 30, 2009, we recorded a gain on investment of $9.5 millionrelated to a payment made from ATA’s bankruptcy trust to its creditor that didnot result in a gain for tax purposes. During the three months ended September 30,2009, we reversed $2.4 million in uncertain tax positions due to the expirationof the statute of limitations on assessment. We also received $5.3 million foran NOL claim refund during the three months ended September 30, 2009.These items and certain nondeductible expenses, such as meals andentertainment, affected our effective tax rate for the three months endedSeptember 30, 2009. As a result, we recorded an income tax benefit of$65.4 million resulting in an effective tax rate of 494.1% for the threemonths ended September 30, 2009.

 

Asignificant portion of the tax expense related to our debt restructuring in June 2009,for which we realized $85.3 million in cancellation of indebtednessincome. Under the provisions of the American Recovery and Reinvestment Act of2009, we are eligible to make an election to defer this income until 2014 andinclude it ratably over the ensuing four years. As of September 30, 2009,we had not determined if the election would be made to defer the income,therefore, the tax impact of the election had not been considered. During thefourth quarter of 2009, we completed this analysis, elected to defer thisincome, and, consequently, recorded a $29.9 million deferred taxliability.

 

**Net Income**

 

Netloss for the three months ended September 30, 2010 was $7.0 million,compared to net income of $52.2 million for the three months ended September 30,2009, a decline of $59.2 million primarily due to non-operating relateditems including taxes, our investment in the ATA bankruptcy estate trust, andlower interest expense. This was partially offset by the $8.4 millionimprovement in operating income described above.

 

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**Comparison of the Nine Months Ended September 30, 2010and 2009**

 

**Segment and Key Operating Data**

 

Selectedfinancial data for the nine months ended September 30, 2010 and 2009 areset forth below (in thousands):

 
| ** **                       | ** ** | **Nine Months Ended September 30, 2010** | ** **  |
|----------------------------------|------------|-------------------------------------------------------------------|-------------|
| ** **                       | ** ** | **World**                                                         | ** **  | **North  American** | ** ** | **All Other** | ** ** | **Consolidated  Total** | ** ** |
|                             |       |                                                              |        |   |   |   |   |   |   |
| Revenues from external customers | ** ** | **$**                                                             | **621,731** | ** ** | **$** | **255,275** | ** ** | **$** | **—** | ** ** | **$** | **877,006** | ** ** |
| Intersegment revenues            | ** ** | **465**                                                           | ** **  | **—** | ** ** | **21,792** | ** ** | **22,257** | ** ** |
| Depreciation and amortization    | ** ** | **38,726**                                                        | ** **  | **19,998** | ** ** | **552** | ** ** | **59,276** | ** ** |
| Total operating expenses         | ** ** | **605,476**                                                       | ** **  | **243,199** | ** ** | **166** | ** ** | **848,841** | ** ** |
| Operating income                 | ** ** | **16,255**                                                        | ** **  | **12,076** | ** ** | **(166** | **)** | **28,165** | ** ** |
| Interest income                  | ** ** | **1,524**                                                         | ** **  | **798** | ** ** | **3** | ** ** | **2,325** | ** ** |
| Interest expense                 | ** ** | **(24,622**                                                       | **)**       | **(11,750** | **)** | **1,268** | ** ** | **(35,104** | **)** |
| Loss on investment               | ** ** | **—**                                                        | ** **  | **—** | ** ** | **(2,188** | **)** | **(2,188** | **)** |
| Loss on debt extinguishment      | ** ** | **—**                                                        | ** **  | **—** | ** ** | **(1,239** | **)** | **(1,239** | **)** |
| Income tax expense (benefit)     | ** ** | **(1,730**                                                        | **)**       | **714** | ** ** | **(922** | **)** | **(1,938** | **)** |
|                                  |            |                                                                   |             |  |  |  |  |  |  |  |  |  |  |

 
| ** **                                | ** ** | **Nine Months Ended September 30, 2009** | ** ** |
|-------------------------------------------|------------|-------------------------------------------------------------------|------------|
| ** **                                | ** ** | **World**                                                         | ** ** | **North  American** | ** ** | **All Other** | ** ** | **Consolidated  Total** | ** ** |
|                                      |       |                                                              |       |   |   |   |   |   |   |
| Revenues from external customers          |       | $                                                                 | 470,472    |   | $ | 291,907 |   | $ | — |   | $ | 762,379 |   |
| Intersegment revenues                     |       | 98                                                                |       | 546 |   | 16,781 |   | 17,425 |   |
| Depreciation and amortization             |       | 37,798                                                            |       | 15,524 |   | 72 |   | 53,394 |   |
| Asset impairment and aircraft retirements |       | 4,215                                                             |       | — |   | — |   | 4,215 |   |
| Total operating expenses                  |       | 509,447                                                           |       | 249,744 |   | (785 | ) | 758,406 |   |
| Operating (loss) income                   |       | (38,975                                                           | )          | 42,163 |   | 785 |   | 3,973 |   |
| Interest income                           |       | 2,952                                                             |       | 873 |   | 16 |   | 3,841 |   |
| Interest expense                          |       | (26,704                                                           | )          | (13,788 | ) | (6,088 | ) | (46,580 | ) |
| Gain on investment                        |       | —                                                            |       | — |   | 51,000 |   | 51,000 |   |
| Gain on debt extinguishment               |       | —                                                            |       | — |   | 85,305 |   | 85,305 |   |
| Income tax expense (benefit)              |       | (30,183                                                           | )          | 11,891 |   | (18,180 | ) | (36,472 | ) |
|                                           |            |                                                                   |            |  |  |  |  |  |  |  |  |  |  |

 

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Thefollowing table sets forth selected key metrics by segment:

 
| ** **                                                                                              | ** ** | **Nine Months Ended  September 30** | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                                                                              | ** ** | **2010**                                           | ** ** | **2009** | ** ** |
| **World**                                                                                               |       |                                               |       |   |   |
| Military passenger block hours                                                                          | ** ** | **19,595**                                         |       | 17,662 |   |
| Military cargo block hours                                                                              | ** ** | **6,253**                                          |       | 4,211 |   |
| Commercial cargo block hours                                                                            | ** ** | **18,171**                                         |       | 15,427 |   |
| Commercial passenger block hours                                                                        | ** ** | **2,031**                                          |       | 3,955 |   |
| Non-revenue block hours                                                                                 | ** ** | **533**                                            |       | 599 |   |
| Total block hours                                                                                       | ** ** | **46,583**                                         |       | 41,854 |   |
| Non-ACMI block hours(1)                                                                                 | ** ** | **27,702**                                         |       | 23,319 |   |
| Non-ACMI departures(2)                                                                                  | ** ** | **5,005**                                          |       | 4,278 |   |
| Total departures                                                                                        | ** ** | **8,180**                                          |       | 7,460 |   |
| Weighted-average fuel price per gallon                                                                  | ** ** | **$**                                              | **2.39**   |   | $ | 1.75 |   |
| Number of aircraft in fleet, end of period                                                              | ** ** | **19.0**                                           |       | 20.0 |   |
| Average aircraft in revenue service                                                                     | ** ** | **18.0**                                           |       | 19.8 |   |
| Average daily aircraft utilization (block hours  flown per day per average aircraft in revenue service) | ** ** | **9.5**                                            |       | 7.7 |   |
|                                                                                                    |       |                                               |       |   |   |
| **North American**                                                                                      | ** ** | ** **                                         |       |   |   |
| Military passenger block hours                                                                          | ** ** | **16,375**                                         |       | 20,199 |   |
| Commercial passenger block hours                                                                        | ** ** | **2,608**                                          |       | 1,546 |   |
| Non-revenue block hours                                                                                 | ** ** | **237**                                            |       | 157 |   |
| Total block hours                                                                                       | ** ** | **19,220**                                         |       | 21,902 |   |
| Non-ACMI block hours(1)                                                                                 | ** ** | **17,053**                                         |       | 21,139 |   |
| Non-ACMI departures(2)                                                                                  | ** ** | **3,160**                                          |       | 3,681 |   |
| Total departures                                                                                        | ** ** | **3,681**                                          |       | 3,868 |   |
| Weighted-average fuel price per gallon                                                                  | ** ** | **$**                                              | **2.42**   |   | $ | 1.82 |   |
| Number of aircraft in fleet, end of period                                                              | ** ** | **10.0**                                           |       | 11.0 |   |
| Average aircraft in revenue service                                                                     | ** ** | **8.3**                                            |       | 10.6 |   |
| Average daily aircraft utilization (block hours  flown per day per average aircraft in revenue service) | ** ** | **8.5**                                            |       | 7.6 |   |

 

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

 

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

 

**Financial Overview for the Nine Months Ended September 30, 2010and 2009**

 

**Operating Revenues**

 

Totaloperating revenues for the nine months ended September 30, 2010 increased$114.6 million, or 15%, to $877.0 million, compared to$762.4 million for the nine months ended September 30, 2009.

 

***Military Passenger Revenue.***Militarypassenger revenue for the nine months ended September 30, 2010 increased$53.7 million, or 9%, to $624.5 million, compared to$570.8 million for the nine months ended September 30, 2009.

 

Worldaccounted for $95.2 million of the increase, primarily due to a 37%increase in the price of fuel per gallon, which increased to $2.39 per gallonin 2010 from $1.75 per gallon in 2009. The increase in military passengerrevenue was also partially due to an increase in military passenger block hoursflown, which increased by 1,933, or 

 

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11%,to 19,595 for the nine months ended September 30, 2010 compared to 17,662for the nine months of 2009 due to higher military demand for wide-bodypassenger aircraft.

 

Theincrease in military passenger revenue at World was partially offset by adecline in North American’s military passenger revenue, which decreased by$41.5 million for the nine months ended September 30, 2010 comparedto the same period in 2009, primarily as a result of a 19% decline in AMCpassenger block hours flown primarily due to the shift in military demandtoward the larger wide-body aircraft and away from smaller aircraft, such asthose in North American’s fleet. In the nine months ended 2010, militarypassenger block hours were 16,375 compared to 20,199 in the same nine months of2009. The decline in AMC passenger block hours was partially offset by a 33%increase in the price of fuel per gallon, which increased to $2.42 pergallon in 2010 from $1.82 per gallon in 2009.

 

***Military Cargo Revenue.***Military cargorevenue for the nine months ended September 30, 2010 increased$59.0 million, or 104%, to $115.5 million, compared to$56.5 million for the nine months ended September 30, 2009.

 

Worldaccounted for all of the increase as North American does not operate freighteraircraft. The block hour rate paid on military cargo block hours increased 38%,primarily due to a 37% increase in the price of fuel per gallon, whichincreased to $2.39 per gallon in 2010 from $1.75 per gallon in 2009. Inaddition, military cargo block hours flown during the nine months ended September 30,2010 increased 48% to 6,253 compared to 4,211 for the same period in 2009. Thisincrease primarily resulted from the military’s strong demand for B747-400aircraft to transport M-ATVs to Afghanistan in the first half of the year, andcontinuing demand during the third quarter of 2010 for the movement of moretraditional military cargo on both of the freighter types we operate.

 

***Commercial Cargo Revenue.***Commercialcargo revenue for the nine months ended September 30, 2010 increased$21.0 million, or 26%, to $101.5 million, compared to$80.5 million for the nine months ended September 30, 2009.

 

Theincrease in revenue, all at World because North American does not operatefreighter aircraft, reflects an 18% increase in block hours flown to 18,171 forthe nine months ended September 30, 2010 from 15,427 for the nine monthsended September 30, 2009. This increase in block hours reflects theoverall improvement in commercial cargo demand. In addition, the block hourrate paid by our commercial cargo customers was up 7% for the nine months endedSeptember 30, 2010 compared to the same nine months of 2009 mainly due toan increase in the mix of B747-400 flying and the positive impact of morecommercial back-hauls off one-way AMC missions.

 

***Commercial Passenger Revenue.***Commercialpassenger revenue for the nine months ended September 30, 2010 decreased$12.5 million, or 28%, to $31.6 million, compared to$44.1 million for the nine months ended September 30, 2009.

 

Worldcommercial passenger revenue decreased $17.7 million, primarily due to a49% decrease in the commercial passenger block hours flown during the ninemonths ended September 30, 2010 compared to the same nine months of 2009.This decrease was mainly due to a significant ACMI contract that ended in May of2010 and our decision to shift our capacity from the commercial to AMCpassenger segment to meet increased AMC demand.

 

NorthAmerican’s commercial passenger revenue increased by $5.2 million in thenine months ended September 30, 2010 compared to the same period in 2009primarily due to an increase in block hours from 1,546 in 2009 to 2,608 in 2010,partially offset by a decline in the commercial passenger block hour rate dueto our mix of customers in each period.

 

***Scheduled Service Revenue.***We had noscheduled service revenue for the nine months ended September 30, 2010 and$0.3 million for the nine months ended September 30, 2009. We ceasedall scheduled service in 2008, and recorded $0.3 million in expired unusedscheduled service tickets during the nine months ended September 30, 2009.

 

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***Other Revenue.***Other revenuefor the nine months ended September 30, 2010 decreased $6.2 millionto $3.9 million, compared to $10.1 million for the nine months endedSeptember 30, 2009. World accounted for the decrease, primarily due to adecline in rebill revenue from ACMI flights during the comparative nine monthperiods.

 

**Operating Expenses**

 

Totaloperating expenses for the nine months ended September 30, 2010 increased$90.4 million, or 12%, to $848.8 million, compared to$758.4 million for the nine months ended September 30, 2009.

 

***Aircraft Fuel.***Aircraft fuelexpense for the nine months ended September 30, 2010 increased$64.7 million, or 41%, to $224.2 million, compared to$159.5 million for the nine months ended September 30, 2009.

 

Worldaccounted for $59.4 million of the increase, mainly as a result of a 37%increase in the price of fuel, which increased to $2.39 per gallon in 2010 from$1.75 per gallon in 2009. In addition, fuel gallons consumed increased 19% toapproximately 68.6 million gallons for the nine months ended September 30,2010 compared to 57.7 million gallons for the comparable period in 2009.This increase in consumption was the result of a 19% increase in non-ACMI blockhours.

 

NorthAmerican accounted for $5.3 million of the increase, mainly as a result ofa 33% increase in the price of fuel, which increased to $2.42 per gallon in2010 from $1.82 per gallon in 2009. This price increase was partially offset byan 18% decrease in fuel gallons consumed to approximately 24.7 milliongallons in the nine months ended September 30, 2010 compared to30.0 million gallons during the same period in 2009. This decrease inconsumption was the result of a 19% decrease in non-ACMI block hours. Also,during the quarter ended June 30, 2010, we recorded a liability ofapproximately $0.6 million to reimburse a customer for fuel primarilyrelated to flights flown by North American in 2008.

 

Underour military and ACMI contracts, World and North American have limited exposureto fuel price volatility, as the military reimburses us for our fuel costs andour commercial ACMI customers are responsible for fuel costs.

 

***Aircraft Rentals.***Aircraftrentals expense for the nine months ended September 30, 2010 decreased$9.0 million, or 7%, to $114.9 million, compared to$123.9 million for the nine months ended September 30, 2009.

 

World’saircraft rentals expense decreased $0.7 million primarily due to thereturn of two DC10 freighter aircraft in the third quarter of 2009, partiallyoffset by the addition of one MD11 passenger aircraft in the third quarter of2009.

 

NorthAmerican’s aircraft rentals expense decreased $8.3 million due to thescheduled return of a B767, which was under a short-term lease, lower spareengine rents and a decline in expensed supplemental rent deposits.

 

***Maintenance, Materials and Repairs.***Maintenance,materials and repairs expense for the nine months ended September 30, 2010increased $9.4 million, or 9%, to $108.9 million, compared to$99.5 million for the nine months ended September 30, 2009.

 

Worldmaintenance, materials and repairs expense increased $8.1 million, due tothe completion of five additional non-capitalized C-checks as well as an 11%increase in total block hours flown in the quarter ended September 30,2010 compared to the quarter ended September 30, 2009. In addition,required maintenance was performed to return one MD11 freighter aircraft torevenue service during the third quarter 2010. These expense increases werepartially offset by a $4.5 million credit recorded for the nine monthsended September 30, 2010 on the recovery of an MD-11 engine due to anupdated overhaul repair strategy. During the year ended December 31, 2009,we recorded a liability for a leased engine that was deemed to be beyondeconomic repair. The amount recorded was equal to the agreed-upon engine valuespecified in the lease agreement less the estimated recoverable enginemaintenance reserve deposits. During the three months ended June 30, 2010,we entered into an agreement to purchase a disassembled engine for$3.0 million. We intend to use the parts from this engine to refurbish theengine that was deemed to be beyond economic repair. Based on this overhaulstrategy, we recorded a credit to maintenance, materials and repair expense of$4.5 million during the nine months ended September 30, 2010.

 

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NorthAmerican maintenance, materials and repairs expense increased$1.3 million, primarily due to increased heavy scheduled maintenance forthe nine months ended September 30, 2010 compared to the nine months endedSeptember 30, 2009. These expenses were partially offset by less timedriven expenses due to the 12% decline in total block hours flown.

 

***Flight Operations.***Flightoperations expense for the nine months ended September 30, 2010 increased$2.4 million, or 3%, to $79.7 million, compared to $77.3 millionfor the nine months ended September 30, 2009.

 

World’sflight operations expense increased $1.7 million, primarily due to an 11%increase in total block hours flown. In addition, approximately 20 pilots wererecalled in the third quarter of 2010 as a result of the induction of aircraft,consequently increasing both compensation and related training as compared tothe comparable prior year.

 

NorthAmerican’s flight costs increased $0.7 million, primarily due to increasesin pilot salaries pursuant to the terms of their collective bargainingagreement.

 

***Aircraft and Traffic Servicing.***Aircraft andtraffic servicing expense for the nine months ended September 30, 2010increased $0.7 million, or 1%, to $67.9 million, compared to $67.2 millionfor the nine months ended September 30, 2009.

 

World’saircraft and traffic servicing expense increased $5.9 million mainly asresult of its 17% increase in non-ACMI departures and an increase in ouraverage navigation fee and ground operations expense per non-ACMI departure dueto an increase in the mix of higher cost cities operated into during the ninemonths ended September 30, 2010. These increases were partially offset byless cost incurred on behalf of our ACMI customers and subsequently rebilled.

 

NorthAmerican’s aircraft and traffic servicing expense decreased $5.2 million,primarily due to a 14% decline in non-ACMI departures and related lowernavigation fees and ground operations expense for each non-ACMI departure.

 

***Passenger Services.***Passengerservices expense for the nine months ended September 30, 2010 decreased$0.7 million, or 1%, to $57.6 million, compared to $58.3 millionfor the nine months ended September 30, 2009 and an increase in passengerinconvenience fees paid.

 

World’spassenger services expense increased $2.1 million, primarily due toincreases in cost of flight attendant group and workers compensation insurancein the nine months ended September 30, 2010 compared to the nine monthsended September 30, 2009 and an increase in flight attendant salariespursuant to the terms of the collective bargaining agreement. In addition,passenger inconvenience fees paid were higher in the nine months ended September 30,2010 compared to the nine months ended September 30, 2009.

 

NorthAmerican’s passenger services expense decreased $2.8 million, primarilydue to a 14% decrease in non-ACMI departures and an 8% decline in the averagecatering cost per non-ACMI departure.

 

***Crew Positioning.***Crewpositioning expense for the nine months ended September 30, 2010 increased$1.9 million, or 5%, to $43.5 million, compared to $41.6 millionfor the nine months ended September 30, 2009.

 

World’screw positioning expense increased $2.5 million, mainly due to a 17%increase in non-ACMI departures partially offset by an 18% decline in hotelcost per non-ACMI departure due to lower negotiated hotel room rates.

 

NorthAmerican’s crew positioning expense decreased $0.6 million. While NorthAmerican experienced a 14% decline in non-ACMI departures during the ninemonths ended September 30, 2010 compared to of the same period in 2009, italso recorded a 12% increase in the average positioning expense per non-ACMIdeparture mainly related to an increase in the average price of internationaltickets purchased and increased mix of international tickets relative todomestic tickets purchased.

 

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***Selling and Marketing.***Selling andmarketing expense for the nine months ended September 30, 2010 increased$6.1 million, or 16%, to $44.0 million, compared to $37.9 millionfor the nine months ended September 30, 2009.

 

Sellingand marketing expense at World increased $7.4 million, primarily due toincreased commissions paid to our Alliance team as a result of the 44% increasein military revenue recorded by World in the nine months ended September 30,2010 compared to the comparable period in 2009.

 

Sellingand marketing expense at North American decreased $1.3 million, primarilydue to a 15% decrease in military revenue recorded by North American during thenine months ended September 30, 2010 compared to the same period in 2009.

 

***Depreciation and Amortization.***Depreciationand amortization expense for the nine months ended September 30, 2010increased $5.9 million, or 11%, to $59.3 million compared to$53.4 million for the nine months ended September 30, 2009.

 

Worldand North American depreciation and amortization expense increased$0.9 million, and $4.5 million, respectively, primarily due to anincrease in the engine overhauls, certain scheduled heavy maintenance eventsand rotable part purchases that qualify for capitalization that are beingdepreciated over their respective useful lives in the nine months ended September 30,2010 compared to the comparable period in 2009. This increase was partiallyoffset by the amortization of a World cargo intangible asset no longernecessary to amortize in 2010.

 

Corporatedepreciation and amortization expense increased $0.5 million primarily dueto the capitalization and subsequent depreciation of a new accounting system implementedin late 2009.

 

***General and Administrative.***General andadministrative expense for the nine months ended September 30, 2010increased $8.8 million, or 28%, to $40.8 million, compared to$32.0 million for the nine months ended September 30, 2009. Theincrease is primarily due to an increase in non-cash stock-based compensationexpense under our LTIP, a net increase in incentive payouts due to World’sstronger performance as well as an increase in litigation reserves andprofessional fees. In addition a $2.5 million refund of insurance premiums wasrecorded during the third quarter of 2009 associated with our smaller aircraftfleet after the shutdown of ATA.

 

***Asset Impairment and Aircraft Retirements.***We had no assetimpairment and aircraft retirement expense for the nine months ended September 30,2010. Asset impairments and aircraft retirements totaling $4.2 million,net of $1.0 million of insurance proceeds, were recorded for the ninemonths ended September 30, 2009 due to the retirement of a damaged WorldDC-10 passenger aircraft and the early retirement and redelivery of two WorldDC-10 freighter aircraft to its lessor.

 

***Other Expenses.***Other expensesfor the nine months ended September 30, 2010 increased $4.6 million,or 131%, to $8.1 million, compared to $3.5 million for the ninemonths ended September 30, 2009. This increase was primarily due toincreased subservice events and related costs of 1.4 million at World and$0.5 million at North American.

 

**Operating Income**

 

Operatingincome for the nine months ended September 30, 2010 increased$24.2 million to $28.2 million, compared to $4.0 million for thenine months ended September 30, 2009. Total operating revenue was up$114.6 million, or 15%. At the same time, total operating expenseincreased by $90.4 million, or 12%. Total operating revenue and totaloperating expense both increased mainly due to a 35% increase in the price offuel per gallon. The most significant reason for the increase in operatingmargin (operating income divided by total operating revenue), which grew from0.5% for the nine months ended September 30, 2009 to 3.2% for the ninemonths ended September 30, 2010, was the 19% consolidated increase inaircraft utilization.

 

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**Other Income (Expense)**

 

***Interest Expense.***Interestexpense for the nine months ended September 30, 2010 decreased$11.5 million, or 25%, to $35.1 million, compared to$46.6 million for the nine months ended September 30, 2009. Thisdecrease was mainly due to lower average outstanding debt during the ninemonths ended September 30, 2010 compared to the same period in 2009 due tothe restructuring of our debt during the year ended December 31, 2009.This decrease was partially offset by an increase in the average interest rate.

 

***Gain (Loss) on Investment.***In the ninemonths ended September 30, 2010, we recorded a loss on investment of$2.2 million mainly resulting from legal fees related to the consolidationof our primary beneficial interest in the ATA bankruptcy estate trust. Werecorded a gain on investment of $51.0 million for the nine months ended September 30,2009 for cash received from the ATA bankruptcy estate, which we used to reduceour outstanding debt during 2009.

 

***Gain (Loss) on Debt Extinguishment.***We recorded a$1.2 million loss on extinguishment of debt during the nine months ended September 30,2010 as a result of an $8.0 million purchase of the First Lien Notes madein the open market. We recorded an $85.3 million gain on extinguishment ofdebt for the nine months ended September 30, 2009 related to therestructuring of our debt.

 

**Income Taxes**

 

Inassessing whether deferred tax assets are realizable, we consider whether it ismore likely than not that some portion or all of the deferred tax assets willnot be realized. We consider our historical income and loss position, thescheduled reversal of deferred tax liabilities (including the impact ofavailable carry-back and carry-forward periods), projected future income, andtax planning strategies in making this assessment.

 

Duringthe nine months ended September 30, 2010, the amount of nondeductibleexpenses, such as meals and entertainment, were disproportionate in comparisonto pre-tax book loss and, as a result, significantly affected our effective taxrate. Additionally, certain state deferred tax assets are subject to avaluation allowance. As a result, we recorded income tax benefit of$1.9 million for the nine months ended September 30, 2010, resultingin an effective tax rate of 22.1%. This amount includes an accrual foradditional interest for uncertain tax positions of $0.8 million. Therewere no other changes to our uncertain tax positions during the nine monthsended September 30, 2010.

 

OnApril 2, 2008, ATA filed a voluntary petition for bankruptcy protectionand as a result, we changed our financial accounting for ATA from aconsolidating subsidiary to a cost method investment and recorded a $17.8 millionimpairment charge for the full investment in ATA. The realization of the taxbenefit related to the impairment charge was uncertain at the time. Thus, avaluation allowance was established against this deferred tax asset.

 

ATA’sbankruptcy became effective on March 31, 2009, resulting in the transferof ATA’s remaining assets into two grantor trusts established for the benefitof ATA’s creditors. As of June 30, 2009, we were unable to fully completethe tax analysis of the bankruptcy because there were still aspects that werenot fixed and determinable. Accordingly, we did not record any benefit for thepotential worthless stock loss in ATA, any bad debt realization, or anycancellation of indebtedness income at that time. During the three months endedSeptember 30, 2009, we completed the tax analysis and determined that wewould be entitled to a worthless stock loss and booked a benefit of $50.8million. Additionally, during the nine months ended September 30, 2009, werecorded a gain on investment of $51.0 million related to a payment madefrom ATA’s bankruptcy trust to its creditor that did not result in a gain fortax purposes. During the nine months ended September 30, 2009, we reversed$2.4 million in uncertain tax positions due to the expiration of the statute oflimitations on assessment. The Company also received $5.3 million for an NOLclaim refund during the nine months ended September 30, 2009. These itemsand certain nondeductible expenses, such as meals and entertainment, affectedour effective tax rate for the nine months ended September 30, 2009. As aresult, we recorded an income tax benefit of $36.5 million resulting in aneffective tax rate of (37.9)% for the nine months ended September 30,2009.

 

Asignificant portion of the tax expense related to our debt restructuring in June 2009,for which we realized $85.3 million in cancellation of indebtednessincome. Under the provisions of the American Recovery and 

 

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ReinvestmentAct of 2009, we are eligible to make an election to defer this income until2014 and include it ratably over the ensuing four years. As ofSeptember 30, 2009, we had not determined if the election would be made todefer the income, therefore, the tax impact of the election had not beenconsidered. During the fourth quarter of 2009, we completed this analysis,elected to defer this income, and, consequently, recorded a $29.9 milliondeferred tax liability.

 

**Net Income**

 

Netloss for the nine months ended September 30, 2010 was $6.9 million,compared to net income of $132.7 million for the nine months ended September 30,2009, a decline of $139.6 million primarily due to a pre-tax$85.3 million non-recurring gain on extinguishment of debt recorded duringthe nine months ended September 30, 2009 related to the restructuring ofour debt and a non-recurring pretax gain on investment of $51.0 millionfor cash received from the ATA bankruptcy estate, which we used to reduce ouroutstanding debt during 2009 partially offset by our $24.2 millionincrease in operating income.

 

**Liquidity and Capital Resources**

 

***Liquidity***

 

***Sources of Liquidity.***As ofSeptember 30, 2010, we had unrestricted cash of $88.2 million. We donot have a revolving credit facility and there are no funds available throughother unused financing options.

 

***Cash Flow from Operating Activities.***During the ninemonths ended September 30, 2010, net cash provided by operating activitieswas $81.2 million. The following non-cash items were positive adjustmentsto reconcile net loss of $6.9 million to net cash provided by operatingactivities: $59.3 million in depreciation and amortization,$7.3 million in amortization of loan costs and debt discount,$3.9 million in stock-based compensation, $3.4 million in non-cashinterest, $2.2 million in loss on investment, $1.2 million in loss ondebt extinguishment and $1.9 million in loss on sale of equipment. Non-cashdeferred income taxes of $2.7 million negatively adjusted the net loss.Changes in operating assets and liabilities also provided net cash of$11.6 million. Sources of cash due to changes in operating assets andliabilities were: $15.1 million in accounts payable, $9.8 million inaccounts receivable, net, $4.8 million in other assets, $3.5 million inother liabilities, $2.8 million in air traffic liabilities and accrued flightexpense, $2.3 million in accrued compensation and benefits, and $1.9 million inrestricted cash. Uses of cash due to changes in operating assets andliabilities were: $17.3 in other current assets, $9.4 million in accruedexpenses and other current liabilities, and $1.9 million in maintenancereserve deposits.

 

Despitehigher operating revenue, accounts receivable declined due to a reduction indays sales outstanding for AMC missions operated. Prepaid and other currentassets increased due to maintenance events completed but for which we have notyet received maintenance reserve reimbursements from the aircraft lessor. Airtraffic liabilities increased due to the advance payment by our customers undercommercial revenue contracts for flying that will be operated at a future time.Other current liabilities increased primarily due to accrued maintenance costs includingengine overhauls and airframe checks, and a liability for deferred aircraftrent.

 

Duringthe nine months ended September 30, 2009, net cash provided by operatingactivities was $44.6 million. The following non-cash items were positiveadjustments to reconcile net income of $132.7 million to net cash providedby operating activities: $53.4 million in depreciation and amortization,$27.8 million in non-cash interest, $13.8 million in amortization ofloan costs and debt discount, $4.2 million in asset impairment andaircraft retirements, $1.8 million in stock-based compensation, and$0.9 million in loss on sale of equipment. The following non-cash itemswere negative adjustments to reconcile net income to net cash provided byoperating activities: $85.3 million in gain on debt extinguishment,$51.0 million in gain on investment and $33.2 million in deferredincome taxes. Changes in operating assets and liabilities utilized net cash of$20.3 million. Sources of cash due to changes in operating assets andliabilities were: $38.4 million in accounts receivable, net,$7.4 million in other current assets, $0.7 million in air trafficliabilities and accrued flight expense and $1.8 million in otherliabilities and other assets. Uses of cash due to changes in operating assetsand liabilities were: $54.2 million in other accrued expenses and currentliabilities, $5.9 million in accrued compensation and benefits,$5.4 million in maintenance reserve deposits, and $3.1 million inaccounts payable.

 

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Accountsreceivable declined due to a decrease in operating revenues. Other accruedexpenses and current liabilities decreased primarily due to the tax benefit ofthe worthless stock loss of ATA.

 

***Cash Flow from Investing Activities.***Net cash usedin investing activities for the nine months ended September 30, 2010 and2009 were $42.3 million and $25.8 million, respectively, consistingprimarily of capitalized maintenance events and the purchase of rotable parts.The increase in capital expenditures is the result of an increase in aircraftoperations and the timing of scheduled maintenance events during the ninemonths ended September 30, 2010 compared to the same period in 2009.

 

***Cash Flow from Financing Activities.***Net cash usedin financing activities for the nine months ended September 30, 2010, was$23.8 million, consisting of $20.7 million in payments on long-termdebt and $3.1 million in payment of costs related to the issuance andrepurchase of debt.

 

Netcash provided by financing activities during the nine months ended September 30,2009 was $37.7 million, consisting of $20.0 million in proceeds fromthe issuance of preferred stock, $247.6 million in proceeds from theissuance of long-term debt, which was offset by payments on long-term debt of$284.1 million. This issuance of long-term debt and payment on long-termdebt during this period were associated with restructuring our debt. Inaddition, we paid $21.1 million in payment of costs related to theissuance of debt and $0.1 million in the repurchase of common stock.

 

Webelieve cash generated from operations and existing cash balances will besufficient to meet our operating requirements and other obligations over thenext 12 months.

 

***Capital Resources***

 

Tomeet increased cargo demand, World entered into contracts in July 2010 tolease two Boeing 747-400 freighter aircraft, each for a period of72 months. One lease commences and the aircraft is scheduled to bedelivered during the fourth quarter of 2010 and the other commences and theaircraft is scheduled to be delivered during the first quarter of 2011. Inaddition, World entered into an agreement to lease an MD-11 passenger aircraft,which is scheduled to be delivered in the fourth quarter of 2010. The additionof these three aircraft will increase our aircraft rentals expense, long-termdeposits on our balance sheet, and flight crew costs due to increased pilottraining costs and headcount, in addition to higher maintenance costsassociated with an increased number of aircraft and the return of one MD-11freighter to revenue service.

 

***Debt.***On August 13, 2009, weissued $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 keyprovisions: a maturity date of August 15, 2013, a 14% annual cash interestrate payable semiannually, a semiannual offer to the noteholders to prepay$10.0 million, and a minimum consolidated net cash flow covenant. Duringthe nine months ended September 30, 2010, we purchased $7.5 millionprincipal amount of the First Lien Notes pursuant to the semi-annual offerdated December 31, 2009. On June 30, 2010 we offered to purchase$11.0 million principal amount of First Lien Notes on August 3, 2010.Holders of $34,000 principal amount of First Lien Notes accepted this offer,and we purchased such First Lien Notes on August 3, 2010. Finally, wepurchased $8.0 million of First Lien Notes in the open market during thesecond quarter of 2010. We used cash generated from operations to fund thesedebt purchases. The First Lien Notes are secured by a first priority lien onsubstantially all of our tangible and intangible assets.

 

OnSeptember 29, 2009, we entered into a $72.5 million Second Lien Loanthat matures in September 2014 and provides for 12% cash interest plus 6%additional interest payable in kind as an increase to the loan balance. TheSecond Lien Loan was recorded net of a $7.5 million discount. In addition,we issued warrants that were immediately converted into 8,380 shares ofcommon stock. These warrants were issued to the holder of the Second Lien Loanand 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.

 

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Asof September 30, 2010, we had received $53.5 million of proceeds fromthe ATA’s bankruptcy estate. We used $51.0 million and $1.5 millionto reduce our outstanding debt during the year ended December 31, 2009 andduring the nine months ended September 30, 2010, respectively, and$1.0 million was used for working capital purposes.

 

Wemay from time to time seek to retire or purchase our outstanding debt throughcash purchases, or exchanges for equity or other securities, in open marketpurchases, privately negotiated transactions or otherwise. Such repurchases orexchanges, if any, will depend on prevailing market conditions, our liquidityrequirements and cash from financing sources, contractual restrictions andother factors.

 

**Commitments and Contractual Obligations**

 

***Debt and Operating Lease Cash PaymentObligations.***We finance our aircraft with operating leases andconsequently do not include assets and liabilities (other than maintenancereserves) associated with operating leases in our consolidated balance sheets.The following table summarizes our material contractual obligations andcommitments and their currently scheduled impact on liquidity and cash flows asof September 30, 2010. The following information is shown in thousands.

 
| ** **                                            | ** ** | **Cash Payments Currently Scheduled** | ** ** |
|-------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                            | ** ** | **2010**                                             | ** ** | **2011** | ** ** | **2012** | ** ** | **2013** | ** ** | **2014** | ** ** | **After  2014** | ** ** |
|                                                  |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |
| Current and long-term debt                            |       | $                                                    | 1,742      |   | $ | 22,671 |   | $ | 20,416 |   | $ | 119,505 |   | $ | 72,500 |   | $ | — |   |
| Cash interest payments on current and long-term  debt |       | 74                                                   |       | 31,153 |   | 28,885 |   | 26,669 |   | 14,233 |   | — |   |
| Payment-in-kind interest                              |       | —                                               |       | — |   | — |   | — |   | 22,464 |   | — |   |
| Total debt payments                                   |       | 1,816                                                |       | 53,824 |   | 49,301 |   | 146,174 |   | 109,197 |   | — |   |
| Operating leases(1)                                   |       | 37,146                                               |       | 151,061 |   | 120,280 |   | 99,626 |   | 52,078 |   | 103,331 |   |
| Accrued post-retirement benefits(2)                   |       | 211                                                  |       | 449 |   | 493 |   | 585 |   | 667 |   | 4,220 |   |
|                                                  |       | $                                                    | 39,173     |   | $ | 205,334 |   | $ | 170,074 |   | $ | 246,385 |   | $ | 161,942 |   | $ | 107,551 |   |

 

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(1)   Amounts reflect fixed lease payments and do notinclude potential additional contingent aircraft lease payments based on thenet income of World pursuant to a lease expiring in 2012.

 

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

 

Amountsinclude scheduled interest payments. Interest on our Second Lien Loan ispayable in cash at an annual rate of 12% and additional interest is payable inkind as additional Second Lien Loan amount at an annual rate of 6%. Theinterest payable in kind is reflected in the table above at maturity, with cashinterest on the additional loan amount reflected when due.

 

**ForwardLooking and Cautionary Statements**

 

This quarterly reportcontains forward-looking statements relating to analyses and other informationthat are based on forecasts of future results and estimates of amounts not yetdeterminable. These statements also relate to our future prospects,developments and business strategies. The statements contained in thisquarterly report that are not statements of historical fact may include forward-lookingstatements that involve a number of risks and uncertainties. We have used thewords ‘‘anticipate,’’ ‘‘believe,’’ ‘‘could,’’ ‘‘estimate,’’ ‘‘expect,’’ ‘‘intend,’’‘‘may,’’ ‘‘plan,’’ ‘‘predict,’’ ‘‘project,’’ ‘‘should,’’ ‘‘will’’ and similarterms and phrases, including references to assumptions, in this quarterlyreport to identify forward-looking statements. These forward-looking statementsare made based on our management’s expectations and beliefs concerning futureevents affecting us and are subject to uncertainties and factors relating toour operations and business environment, all of which are difficult to predictand many of which are beyond our control, that could cause our actual resultsto differ materially from those matters expressed in or implied by theseforward-looking statements. Readers are cautioned not to place undue relianceon these forward-looking statements. A number of important factors could causeactual results to differ materially from those indicated by our forward-lookingstatements, including but not limited to the factors described in ‘‘Risk 

 

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Factors’’ and ‘‘Management’sDiscussion and Analysis of Financial Conditions and Results of Operations.’’These factors include without limitation:

 

· levels of military spendingfor the transportation of military personnel and cargo;

· our level of entitlement tothe military’s spending;

· our fixed obligations;

· our competitiveenvironment;

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

· economic and otherconditions in regions in which we operate;

· governmental regulation ofour operations;

· the outcome of variouslegal proceedings;

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

· problems with our aircraft;

· increases in maintenance,security costs and insurance premiums;

· cyclical and seasonalfluctuations in our operating results;

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

· risks related to ourdivestiture and acquisition strategies, including the risks related to theintegration of acquired businesses;

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

· significant disruptions inthe supply of aircraft fuel;

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

· other risks that we havedescribed in ‘‘Risk Factors.’’

 

These factors are notexhaustive, and new factors may emerge or changes to the foregoing factors mayoccur that could impact our business. You should review carefully the sectionscaptioned ‘‘Risk Factors,’’and ‘‘Management’s Discussion and Analysis ofFinancial Condition and Results of Operations’’ in this quarterly report for amore complete discussion of these and other factors that may affect ourbusiness, financial condition and results of operations.

 

The forward-lookingstatements contained in this quarterly report reflect our views and assumptionsonly as of the date of this prospectus. We undertake no obligation to updateany forward-looking statement to reflect events or circumstances after the dateon which the statement is made or to reflect the occurrence of unanticipatedevents.

 

**Item 3. Quantitative and Qualitative Disclosures AboutMarket Risk**

 

We are subject to certainmarket risks, principally related to foreign currency exchange rate risk.  Although some of our revenues are derivedfrom foreign customers, all revenues and substantially all expenses aredenominated in U.S. dollars. We maintain minimal balances in foreign bankaccounts 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 andProcedures**

 

Underthe supervision and with the participation of our management, including ourChief Executive Officer and Chief Financial Officer, we conducted an evaluationof the effectiveness of the design and operation of our disclosure controls andprocedures, as such term is defined under Rule 13a-15(e) promulgatedunder the Securities Exchange Act of 1934, as amended.  Based on this evaluation, the Chief ExecutiveOfficer and Chief Financial Officer concluded that our disclosure controls andprocedures were effective as of September 30, 2010, the end of the periodcovered by this report.

 

We identified a materialweakness in our internal control over financial reporting as of December 31,2009 primarily relating to the accounting for the non-routine transactionsrelated to the ATA bankruptcy. 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 ourannual or interim financial statements will not be prevented or detected on atimely basis by our internal controls. Deficiencies were identified inconnection with the consolidation of the bankruptcy trust and the taxconsequences of the bankrupt entity due to the lack of sufficient 

 

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technical resources relatedto these matters. We have hired additional tax and accounting management staffand have engaged professional services as necessary to remediate this weakness.While we believe we have taken the necessary steps to remediate this materialweakness, we cannot assure you that our remediation efforts will be fullysuccessful or that similar material weaknesses will not recur. See the riskfactor entitled “Risks related to our Business—Failure to establish andmaintain effective internal control over financial reporting may lead investorsto lose confidence in our financial data” in our Registration Statement on Form S-4filed November 8, 2010.

 

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**PART II.OTHER INFORMATION**

 

**Item 1. LegalProceedings**

 

On February 9, 2009,Wilmington Trust Company, in its capacity as the trustee lessor to a 15-yearlease agreement entered into by ATA on February 28, 2006, brought anaction in the New York Supreme Court Commercial Division to enforce theguaranty provided by us of the performance of ATA under that lease. Theplaintiff is seeking (a) approximately $333,000 plus interest on thelease; (b) the greater of (i) $35 million or (ii) the currentmarket value of the aircraft; and (c) attorneys’ fees and costs. Thecomplaint filed by the plaintiff does not seek a specified dollar amount ininterest claimed, but rather seeks interest as provided under the terms of thelease and under applicable New York law. The lease provides for interest ratesof between 8.25% to 9.64% with respect to various amounts owed under its terms.The appropriate rate of interest and methodology to be applied in calculatinginterest are in dispute. The outcome of the litigation cannot be predicted andis dependent upon many factors beyond our control. See Note 10 to our unauditedcondensed consolidated financial statements included in this quarterly report.

 

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

 

OnOctober 19, 2010, following a six day trial, a federal jury returned averdict against FedEx and awarded ATA 100% of its $66.0 million claim forbreach of contract and dismissed FedEx’s counterclaim in its entirety.  The court, on October 22, 2010,thereafter entered a judgment against FedEx without specifying the amount ofdamages.  On November 1, 2010, ATAfiled a post trial motion seeking to have the court enter a final judgmentagainst FedEx for $66.0 million plus pre-judgment interest (under Tennessee lawat a maximum rate of 10%) together with post-judgment interest.  On November 18, 2010, FedEx filed threepost trial motions seeking, among other things, to set aside the jury’sverdict, to disallow any pre-judgment interest under Tennessee law (or, in thealternative to calculate any pre-judgment interest at the federal post-judgmentinterest rate), to reduce the actual amount of damages awarded or, in thealternative, to order a new trial.  Thefiling of post trial motions extends FedEx’s time in which to file an appeal(for 30 days after the court’s entry of an order disposing all motions).  ATA is expected to file a notice ofcross-appeal (seeking to overturn the court’s decision disallowing ATA’s DC-10Claim for $28.0 million).

 

Pursuantto ATA’s Chapter 11 Plan approved by the U.S. Bankruptcy Court, 85% of anydamages 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 tocertain ATA unsecured creditors.

 

If we receive ATAdistributions totaling more than $5.0 million, we are obligated pursuant to theterms of the indenture governing the First Lien Notes to use all suchdistributions to offer to purchase at par any outstanding First Lien Notes, andthen, if remaining distributions total more than $1.3 million, we must offer toprepay, without premium, indebtedness outstanding under the Second Lien Loanequal to the entire amount of such remaining distribution.  Any funds not so used would be available tous for general corporate purposes.

 

In addition, from time totime 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 onour financial position or results of operations.

 

**Item 1A. Risk Factors**

 

In addition to the otherinformation set forth in this report, the factors discussed in “Risk Factors —Risks Related to Our Business” in our Registration Statement on Form S-4filed on November 8, 2010, which could materially affect our business,financial condition or future results, should be carefully considered.

 

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**Item 5.  Other Information**

 

On November 9, 2010, wecommenced an offer to exchange an aggregate principal amount of up to $159.5million of our new 14% Senior Secured First Lien Notes due 2013, which we referto as the exchange notes, for a like amount of our outstanding 14% SeniorSecured First Lien Notes due 2013, which we refer to as the original notes,that are validly tendered and not withdrawn prior to the expiration of theexchange offer.  The form and terms ofthe exchange notes are identical in all material respects to the form and termsof the original notes, except that (i) the exchange notes are registeredunder the Securities Act, (ii) the transfer restrictions and registrationrights applicable to the original notes do not apply to the exchange notes, and(iii) the exchange notes will not contain provisions relating toliquidated damages relating to our registration obligations.  The exchange offer will expire at 5:00 p.m.,New York City time on December 14, 2010 unless we extend the offer.

 

We have proposed an initialpublic offering of our common stock pursuant to a registration statement on Form S-1filed with the SEC on October 29, 2010. If consummated, we intend to use aportion of the net proceeds to us from the initial public offering to repay andretire all of our outstanding Second Lien Loan. This expected use of net proceeds from the initial public offeringrepresents our intentions based upon our current plans and business and marketconditions.

 

To the extent the netproceeds to us from our initial public offering exceed the outstandingprincipal and interest on the Second Lien Loan, we intend to use the balance ofthe net proceeds to us from the initial public offering for working capital andother general corporate purposes. We may elect to use a portion of the netproceeds from the offering to purchase or lease additional aircraft. We have nobinding commitments to purchase aircraft, and except for the leases describedin ‘‘Management’s Discussion and Analysis of Financial Condition and Results ofOperations—Capital Resources,’’ we have no binding commitments to leaseadditional aircraft. In addition, we may elect to use a portion of the netproceeds from the proposed initial public offering to redeem up to $54 millionin aggregate principal amount of the exchange notes. We may contribute some orall of the remaining proceeds after repaying the Second Lien Notes toUnrestricted Subsidiaries. To the extent we contribute proceeds to UnrestrictedSubsidiaries, such proceeds would be held and used by subsidiaries that are notguarantors of the exchange notes, and therefore may not be available to meetthe issuers’ obligations under the exchange notes.

 

There can be no assurancethat our initial public offering will be completed and further that ifcompleted, the net proceeds will be sufficient for the expected use of proceedsdescribed above.

 

**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

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the Registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 

 
|                               | GLOBAL  AVIATION HOLDINGS INC.   (REGISTRANT) |
|------------------------------------|-----------------------------------------------|
|                               |                                          |
| Date: November 24,  2010 | By:                                           | /s/ Robert  R. Binns |
|                               |                                          | Robert  R. Binns   Chief Executive Officer |
|                               |                                          |   |
| Date: November 24,  2010 | By:                                           | /s/ William  A. Garrett |
|                               |                                          | William  A. Garrett   Executive Vice President and Chief Financial Officer |

 

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