ATLAS AIR WORLDWIDE HOLDINGS INC

Brexit. On March 29, 2019, the United Kingdom (“U.K.”) is expected to leave the EU.  As U.S. airlines, the Airlines will remain covered by the U.S.-EU air services agreement, which broadly accords traffic rights between the U.S. and the EU, via intermediate points and beyond.  In December 2018, the U.S. and U.K. governments reached agreement on the terms of an open skies agreement governing U.S. and U.K. airlines after the U.S.-EU agreement ceases to apply to the U.K.  Nevertheless, practical difficulties could arise with respect to operations in the post-Brexit environment. These issues are not expected to have a material adverse effect on our operations.

We are heavily and increasingly dependent on technology to operate our business.  Our information technology systems or those of third parties on which we rely could be disrupted due to various events, some of which are beyond our control, including natural disasters, power failures, terrorist attacks, equipment failures, software failures, computer viruses, security breaches and cyber attacks.  In addition, there are numerous and evolving risks to cybersecurity and privacy, including criminal hackers, hactivists, state-sponsored intrusions, industrial espionage, employee malfeasance and human or technological error.  A significant disruption could result in a range of potentially material negative consequences for us, including unauthorized access to, disclosure, modification, misuse, loss or destruction of company systems or data; theft of sensitive, regulated or confidential data; the loss of functionality of critical systems through ransomware, denial of service or other attacks; and business delays, service or system disruptions, damage to equipment and injury to persons or property.

We have taken numerous steps to implement business resiliency and cybersecurity, as well as, obtained cyber business interruption insurance to help reduce the risk and impact of some of the potential disruptions discussed above.   There can be no assurance, however, that the measures we have taken are adequate to prevent or remedy disruptions or failures of our systems.  

In 2013, as earlier directed in Public Law 111-216, the FAA issued a final rule increasing the stringency of pilot and cockpit crew qualification and training requirements.  As a result of that rule, all airline pilots, including new hires, must have a minimum of 1,500 hours of operational experience. The FAA rule also has increased the required training time for new commercial pilots.  These regulatory changes and other factors, including reductions in the number of military pilots being trained by the U.S. armed forces, have led to increased demand for pilots.  If we are unable to hire, train and retain qualified pilots, it could have an adverse effect on our ability to maintain or expand our business operations.

Income taxes.  Our effective income tax rates were an expense of 12.5% for 2018 and a benefit of 56.5% for 2017.  The effective income tax expense rate for 2018 differed from the U.S. statutory rate primarily due to nondeductible and nontaxable changes in the fair value of a customer warrant liability (see Note 8 to our Financial Statements) and, to a lesser extent, the remeasurement of our deferred income tax liability for Singapore (See Note 12 to our Financial Statements).  The effective income tax expense rate for 2018 also reflects the reduced U.S. federal corporate income tax rate of 21.0% as result of the enactment of the U.S. Tax Cuts and Jobs Act of 2017.  In 2017, the effective income tax rate benefit differed from the U.S. statutory rate primarily due to the revaluation of our U.S. net deferred tax liability as a result of the U.S. Tax Cuts and Jobs Act.  To a lesser extent, the 2017 effective tax rate was impacted by nondeductible and nontaxable changes in the fair value of a customer warrant liability (see Note 8 to our Financial Statements).

Performance share awards, which have been granted in units, and performance cash awards granted are expensed over three years, which generally is the requisite service period.  Awards generally become vested if (1) we achieve certain specified performance levels compared with predetermined performance thresholds during a three-year period starting in the grant year and ending on December 31 three years later, and (2) the employee remains employed by us through the determination date which can be no later than four months following the end of the Performance Period.  Full or partial vesting may occur for certain employee terminations.  For performance share and performance cash awards granted in 2018, the Company included a relative total shareholder return (“TSR”) modifier which may impact the number of shares or cash earned at the end of the performance period.  For these awards, the number of shares or cash earned based on the achievement of the predefined performance criteria will be reduced or increased if the Company's TSR over the performance period relative to a predefined comparator group of companies falls within defined ranges.  The fair value of performance share units that include the TSR modifier is determined using a Monte Carlo valuation model on the date of grant.  For the remaining awards that do not include a TSR modifier, the fair value of the performance share units is the quoted market value of the Company's stock on the date of grant and the fair value of performance cash awards is the value of the cash award on the date of grant.