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

The following Management’s Discussion and Analysis has been prepared with reference to the historical financial condition and results of operations of ABX Air, Inc. and its subsidiaries (“ABX”). The following discussion and analysis describes the principal factors affecting the results of operations, financial condition, cash flows, liquidity and capital resources. It should be read in conjunction with the accompanying unaudited financial statements and the related notes contained in this report and our Annual Report on Form 10-K for the year ended December 31, 2005.

BACKGROUND

ABX is an independent airline that operates an in-service fleet of nearly 100 aircraft as of September 30, 2006. We provide cargo transportation, package sorting and handling primarily within the United States. We operate a network of nineteen domestic hubs for DHL Network Operations (USA), Inc. (“DHL”). DHL is our largest customer, constituting approximately all of our revenues.

ABX operates in two reportable segments:

DHL: ABX provides services to DHL under two commercial agreements: an aircraft, crew, maintenance and insurance agreement (“ACMI agreement”) and a hub services agreement (“Hub Services agreement”). Under the ACMI agreement, ABX provides air cargo transportation to DHL on a cost-plus pricing structure. Under the Hub Services agreement, ABX provides staff to conduct package handling, package sorting, warehousing, and logistics services, as well as airport facilities and equipment maintenance services for DHL, also on a cost-plus pricing structure. Costs incurred under these agreements are generally marked up by 1.75% and included in revenues. Both agreements also allow ABX to earn incremental mark-up above the base 1.75% mark-up from the achievement of certain cost-related and service goals specified in the two agreements. Fuel, rent, interest on the promissory note to DHL, and ramp and landing fees incurred under the ACMI agreement are the most significant cost items reimbursed without mark-up. The ACMI agreement and the Hub Services agreement have initial terms of seven and four years, expiring in August 2010 and August 2007, respectively. However, DHL can terminate specific ACMI aircraft, add to, delete or modify the air routes we operate under the ACMI agreement and increase or reduce the scope of services we provide under the Hub Services agreement. Additionally, DHL can terminate the agreements if ABX does not comply with certain performance standards specified in the agreements.

Charter/ACMI : We also offer ACMI (aircraft, crew, maintenance and insurance) and on-demand charter services to freight forwarders and other shippers. We usually charge customers based on the number of block hours flown, and typical agreements specify a minimum number of block hours to be charged monthly.

Our other activities, which include contracts with the U.S. Postal Service (“USPS”) and aircraft parts sales and maintenance services, do not constitute reportable segments.

2006 Developments

DHL

We reported in November 2004 that DHL intended to remove aircraft that ABX operated under the ACMI agreement. In conjunction with its network plan, DHL notified us in July 2006 that 21 specific aircraft (eleven DC-9s and ten DC-8s) would be released from dedicated service for DHL in August 2006. Several of these aircraft had previously been placed in back-up status since September of 2005, when DHL consolidated its air hub operations from Cincinnati into its main, ABX-managed hub in Wilmington, Ohio, eliminating redundant air routes. The August 2006 reduction of 21 aircraft brings the total number of aircraft released from service under the ACMI agreement since November 2004 to 28 (fourteen DC-8s and fourteen DC-9s). DHL will continue to fully fund depreciation for eight of the DC-9s that were removed through their remaining depreciable lives in August 2010. The net book value of these eight aircraft is approximately $4.1 million. We will use the engines on these eight DC-9 aircraft to support the remaining 59 DC-9 aircraft that ABX has in service to DHL. In conjunction with DHL’s November 2004 network plan, we deployed two additional standard freighter Boeing 767 aircraft under the ACMI agreement in 2006, one in 2005 and one in 2004.

Under the ACMI agreement, ABX had the option to put each of the other ten DC-8s and three DC-9s to DHL at the lower of their fair value or net book value. After having the aircraft appraised, ABX management believes it can realize a higher value by selling the aircraft to part dealers or, in some cases, operating the aircraft for other customers. As of September 30, 2006, eleven aircraft, previously in service to DHL, are held for sale, while five aircraft formerly under contract to DHL are available for non-DHL charter/ACMI operations.

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The removal of aircraft from service to DHL constituted an event requiring ABX to evaluate the recoverability of the carrying value of those aircraft removed from the ACMI agreement. In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” ABX recorded an impairment charge of $0.3 million during the three months ended September 30, 2006 for the excess of the carrying value of the aircraft over their fair value less cost to sell. The charge is reflected under the ACMI expenses but is not reimbursed by DHL.

As previously reported in May 2006, DHL took over responsibility for the over-the-road truck line-haul network we previously managed for DHL. Effective April 1, 2006, ABX did not earn any mark-up on line-haul expenses during the second quarter 2006 transitional period, and effective May 1, 2006, ABX no longer recorded revenues or expenses associated with over-the-road trucks. As a result, line-haul services revenue declined approximately $74.7 million and $158.8 million during the third quarter and first nine months of 2006 compared to 2005. ABX did not have any earnings from line-haul services in the second or third quarters of 2006 and earned $1.3 million during the first quarter of 2006. Earnings from line-haul services were $1.3 million and $3.6 million during the third quarter and first nine months of 2005.

Effective January 1, 2007, we will not operate or manage DHL’s Allentown hub facility. A new Allentown facility is expected to open in the first quarter of 2007 and will replace the existing facility we currently operate. The Allentown hub is the largest of DHL’s eighteen regional hubs in the United States. The Allentown hub comprised approximately $3.7 million of ABX’s revenues and less than $0.1 million of net earnings during the third quarter of 2006 and $12.0 million of ABX’s revenues and $0.3 million of net earnings during the first nine months of 2006.

In March 2006, we agreed to discuss with DHL modifications to our Hub Services agreement and our ACMI agreement to create greater risk/reward metrics for our performance under these agreements. The modifications would focus on service quality, process and performance improvements, and cost reductions. Those discussions have not yet yielded any modifications to either agreement. Additionally, DHL and ABX agreed to cost budgets for 2006 under the Hub Services agreement and the ACMI agreement. DHL agreed to additional performance incentives for 2006 beyond the existing contractual incentives in the event we achieve very significant cost reductions under our commercial agreements. Management believes achieving these additional incentives is unlikely.

Non-DHL

In 2005, we reached an agreement with Delta Air Lines, Inc. (“Delta”), committing ABX to purchase twelve additional Boeing 767 aircraft from Delta through December 2008. We contracted with an aircraft maintenance provider to modify these aircraft from passenger to freighter configurations. We believe the fuel efficiency, cubic capacity, payload and operating cost of the Boeing 767 make it a desirable freighter aircraft in the domestic, Atlantic and other medium-range international air cargo markets (less than 3,000 nautical miles). While some of these former Delta aircraft may be contracted to DHL after the modifications are complete, interest from non-DHL customers is currently strong.

Of these twelve Boeing 767 aircraft, three were deployed in our non-DHL charter operations through September of 2006, replacing two freighter aircraft that were subsequently redeployed into the DHL network. Based on the most current projections, we are planning to deploy one more former Delta aircraft late in the last quarter of 2006 and eight additional aircraft during the next two years. In addition to these Boeing 767 aircraft, we have two DC-8 aircraft in standard cargo configuration, one DC-8 aircraft in non-standard cargo configuration and two DC-9 aircraft in non-standard cargo configuration that are available for service.

During the third quarter of 2006, ABX was awarded contracts to manage USPS mail sort centers in Dallas, Texas and Memphis, Tennessee. Each of these facilities began operations in September 2006. ABX was also awarded a renewal of a USPS sort center in Indianapolis, Indiana that we have operated since 2004. Under each of these contracts, we are compensated at a firm price for fixed costs and an additional amount based on the volume of mail handled at each sort center. Each of the contracts has a four-year term with extensions at the discretion of the USPS.

RESULTS OF OPERATIONS

For the third quarter of 2006, net earnings were $6.6 million compared to net earnings of $7.4 million for the third quarter of 2005. The decline in earnings for the third quarter of 2006 was primarily a result of transitioning line-haul operations to DHL during the second quarter of 2006. Additionally, the third quarter results of 2006 included a non-reimbursable impairment charge of $0.3 million as a result of removing aircraft from the ACMI agreement with DHL. The decline of earnings in the third quarter of 2006 was partially offset by improved results from our non-DHL charter operations and increased interest income.

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Total revenues decreased $88.6 million, or 23.9%, to $281.3 million for the third quarter of 2006 compared to the third quarter of 2005. The decline was primarily due to the loss of revenues beginning in May 2006 associated with the DHL over-the-road truck line-haul network, which declined $74.7 million compared to the third quarter of 2005. Revenues associated with the ACMI agreement declined approximately $10.6 million in the third quarter of 2006 compared to 2005. The decline reflects the contracted air charters that were transitioned to DHL’s management during the third quarter of 2005 and lower expenses due to fewer hours flown since the implementation of an integrated flight schedule in conjunction with the DHL hub consolidation in September 2005. Revenues during the third quarter of 2006 were positively impacted compared to 2005 by increased non-DHL charter flight hours.

For the first nine months of 2006, we had net earnings of $21.1 million compared to net earnings of $21.2 million for the first nine months of 2005. Decreased earnings, primarily due to the transition of line-haul services to DHL, were nearly offset by increased non-DHL ACMI/charters and improved interest income. Total revenues decreased 10.6% to $954.1 million compared to the first nine months of 2005. Lower revenues from DHL, which declined 11.5%, were partially offset by increased non-DHL charter revenues, which grew 68.2% compared to the first nine months of 2005.

Under the ACMI and Hub Services agreements with DHL, we have the potential to earn additional revenues from an incremental mark-up each quarter based on achieving certain cost-related goals. We earned $0.8 million and $1.2 million of incremental mark-up under the two DHL agreements during the third quarter of 2006 and 2005, respectively. The decrease is primarily due to the lower level of cost subject to mark-up compared to the third quarter of 2005. We earned $3.0 million and $2.4 million of incremental mark-up under the two DHL agreements during the first nine months of 2006 and 2005, respectively. The improved incremental mark-up for the first nine months of 2006 under the ACMI agreement resulted from flying greater than budgeted aircraft hours during the periods, while incurring lower than budgeted aircraft maintenance expenses. The higher incremental mark-up under the Hub Services agreement was a result of processing more pieces than budgeted while minimizing additional cost during the first quarter of 2006.

The two commercial agreements with DHL allow us to earn additional cost-related and service mark-up revenues based on our performance against annual goals, in addition to quarterly cost-related mark-up. No incremental mark-up contribution from the annual cost and service goals specified in the two agreements was included in our revenue for the third quarter or first nine months of 2006 and 2005. Any revenue earned through the achievement of annual goals is recorded in the fourth quarter. Based on cost-related performance through September 30, 2006, we are on pace to achieve 100% of the additional mark-up which is approximately 0.81% of the ACMI expenses subject to mark-up. Based on service-related performance through September 30, 2006 we are on pace to achieve an additional annual mark-up of 0.20% of ACMI expenses and 0.47% of hub services expenses subject to mark-up. We would not earn an additional annual mark-up under the Hub Services agreement for cost-related performance based on results through September 30, 2006. By comparison, in the fourth quarter of 2005, we earned 100% of the annual cost-related mark-up from the ACMI agreement, and we earned an annual mark-up for service performance equal to 0.15% of ACMI expense subject to mark-up. We did not earn any annual incremental mark-up under the Hub Services agreement in 2005. Actual cost savings and service performance for the first nine months of 2006 are not necessarily indicative of full-year performance, and results during the last three months of 2006 may improve upon, or detract from, performance through September 30, 2006.

During the third quarter and first nine months of 2006, our expenses for the DHL segment included approximately $0.6 million and $2.1 million, respectively, for costs, allocations and administrative expenses that are not reimbursable under the two DHL agreements. Our expenses for DHL that are reimbursed without mark-up decreased $6.4 million for the third quarter compared to the same 2005 period due primarily to the transition of line-haul to DHL in the second quarter of 2006. For the first nine months of 2006, our expenses for DHL that are reimbursed without mark-up increased by $14.5 million compared to the same 2005 period. This increase in expenses and corresponding increase in reimbursable-only revenues was primarily a result of having no mark-up on line-haul expenses in the second quarter of 2006 and increased aviation fuel prices in 2006 compared to 2005.

Non-DHL charter revenues grew 62.2% over the third quarter of 2005 to $6.6 million. For the first nine months of 2006, charter revenues grew 68.2% to $15.8 million compared to the first nine months of 2005. The growth of our non-DHL charter revenues reflects a larger customer base and improved utilization of our Boeing 767 freighter aircraft since the aircraft were placed in charter service during the second quarter of 2005. Our earnings included $0.8 million from non-DHL charter operations for the third quarter of 2006 compared to $0.5 million for the third quarter of 2005. For the first nine months of 2006 and 2005, earnings from non-DHL charter operations were $1.8 million and $0.6 million, respectively. Our non-DHL charter earnings in the first half of 2005 were hampered by low utilization and higher fixed costs while we transitioned the 767 freighters into non-DHL service.

Other non-DHL revenues increased to $5.0 million in the third quarter of 2006 compared to $4.9 million in the third quarter of 2005. For the first nine months of 2006 and 2005, other non-DHL revenues decreased to $12.8 million compared to $13.0 million. Declines in other non-DHL revenues reflect the volatility associated with aircraft modification and heavy maintenance orders.

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Earnings from all other non-DHL activities declined $0.1 million during the third quarter and $0.3 million during the first nine months of 2006 compared to the corresponding periods in 2005. During the third quarter, the two new postal facilities negatively impacted our earnings by approximately $0.2 million dollars due to start-up costs.

A summary of our earnings is shown below (in thousands).

Our earnings from customers other than DHL do not include an allocation of overhead expenses that are reimbursed by DHL. Our agreements with DHL require that after our non-DHL earnings reach 10% of our revenues, we must allocate a portion of our overhead expenses to the non-DHL business. At that time, the allocated expenses would not be subject to reimbursement under the DHL commercial agreements.

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Our expenses are driven by operational variables including the volume and size of packages handled for DHL, the services that DHL requests (such as electronic package scanning) and the number of instances in which a package is handled during the sort and transportation process. Generally, we do not influence or control these factors.

Salaries, wages and benefits expense decreased 3.4% and increased 5.8% during the third quarter and first nine months of 2006, respectively, as compared to the corresponding periods of 2005. During the third quarter of 2006, we were able to reduce the higher level of sort labor that was added to consolidate DHL’s Cincinnati hub with its central hub in Wilmington and to operate DHL’s expanded ground network since the hub integration project in September 2005.

Purchased line-haul expense decreased 97.6% and 62.5% during the three and nine month periods ended September 30, 2006, respectively, compared to the corresponding periods in 2005. The decline is a result of transferring the over-the-road truck line-haul network to DHL in May 2006. Additionally, for the third quarter and first nine months of 2005, this expense category included $3.9 million and $15.0 million for charter aircraft contracted by ABX for DHL. The administration of these flights and their related costs were transitioned to DHL during the third quarter of 2005.

Fuel expense increased 3.2% and 5.8% during the three and nine month periods ended September 30, 2006, respectively, compared to the corresponding periods in 2005. The increase was driven by higher market prices for aviation fuel. The average aviation fuel price was $2.30 and $1.95 per gallon in the third quarter of 2006 and 2005, respectively. Our consumption of aviation fuel during the third quarter and first nine months of 2006 declined compared to 2005 in conjunction with the removal of aircraft and flight reductions implemented by DHL since the implementation of an integrated flight schedule in September 2005.

Maintenance, materials and repairs decreased 23.8% and 5.4% during the three and nine month periods ended September 30, 2006, compared to the corresponding periods in 2005. Our aircraft engine maintenance expenses have declined in conjunction with the lower level of flight hours for DHL since the September 2005 hub consolidation. Our aircraft maintenance expenses fluctuate due to the timing of scheduled heavy maintenance work for aircraft. Our policy is to expense these costs as we incur them. During the third quarter of 2006, we processed eight heavy maintenance checks compared to sixteen checks in the third quarter of 2005. During the first nine months of 2006, 46 heavy maintenance checks were performed, compared to 51 checks in the first nine months of 2005.

Depreciation and amortization expense increased 11.3% and 12.0% during the three and nine month periods ended September 30, 2006, respectively, compared to the corresponding periods in 2005. The increase is primarily a result of four additional Boeing 767 aircraft that we placed in service since September of 2005.

Landing and ramp expense decreased 19.1% and 16.0% during the three and nine month periods ended September 30, 2006, compared to the corresponding periods in 2005. The reduction reflects lower deicing costs due to a milder winter in 2006 and a lower level of landing fees as a result of scheduled flight reductions in conjunction with the DHL hub consolidation in September 2005.

Rent expense remained the same for the three month period ended September 30, 2006 and increased $0.7 million during the nine month period ended September 30, 2006, compared to the corresponding periods in 2005, primarily due to equipment rentals in support of the consolidated Wilmington hub and expanded regional hubs since September 2005.

Other operating expenses include the impairment charge, travel, professional fees, insurance, utilities and cost of parts sold to non-DHL customers. Other operating expenses decreased by $1.2 million and $2.0 million in the third quarter and first nine months of 2006 compared to the corresponding periods in 2005. During the third quarter of 2005, our expenses included significant costs associated with DHL’s hub integration project and bad debt expenses associated with airline bankruptcy filings. Additionally, the expense decrease reflects the reduction in non-DHL aircraft maintenance orders during the first half of 2006 compared to 2005.

Our interest expense for the third quarter of 2006 remained the same at $2.8 million compared to the third quarter of 2005. Our interest expense for the first nine months of 2006 increased $0.4 million to $8.4 million compared to the first nine months of 2005. The increase in interest expense in 2006 is a result of lower capitalized interest cost during the first nine months of 2006 compared to the first nine months of 2005.

Interest income increased by $0.5 million and $2.0 million during the third quarter and first nine months of 2006, respectively, compared to the corresponding periods of 2005, due to holding a higher level of cash and cash equivalent balances compared to 2005 and by achieving higher yields.

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ABX did not record an income tax expense in 2006 or 2005 because the tax provision was offset by the tax benefit from the reduction in the deferred tax asset valuation allowance.

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

Cash requirements

In 2005, we reached an agreement with Delta, committing ABX to purchase twelve additional Boeing 767 aircraft from Delta through December 2008. We contracted with an aircraft maintenance provider to modify these aircraft from passenger to standard freighter configurations. Of these twelve aircraft, three were deployed in our non-DHL charter operations through September of 2006. Two of these aircraft were funded with our cash and one was financed with an aircraft loan. Based on the most current projections, we are planning to deploy one more former Delta aircraft late in the fourth quarter of 2006 and eight additional aircraft during the next two years. The estimated costs of the remaining aircraft purchase commitments and the anticipated modification costs approximate $139.6 million as of September 30, 2006. Payments by period are estimated below (in thousands):

We plan to finance the cost of modifying the aircraft with existing cash and contractor-provided financing during the modification period. Upon completion of the modification, we anticipate seven more aircraft will be financed through a syndication process being arranged by our lead bank. The estimates above do not reflect anticipated cash flows from financing transactions. Our future operating results will be affected by the interest rates and other terms and conditions of the new borrowings or leases.

We estimate that contributions to our qualified defined benefit pension plans will be $9.1 million for the remainder of 2006 and total $53.6 million for the year. We estimate our total pension expense, which is reimbursable under the two DHL agreements, will be $14.4 million for the remainder of 2006 for all pension plans, totaling $57.7 million for the year.

Cash flows

Operating cash flows were $26.7 million and $76.7 million in the first nine months of 2006 and 2005, respectively. Net operating cash flows declined primarily to pay vendors for accrued charges from 2005. The decline in operating cash flows reflects the lower level of line-haul and contracted labor expenses during 2006 compared to 2005. Additionally, during the first half of 2005, ABX collected a large receivable from DHL associated with 2004 revenues.

Capital spending levels are primarily a result of aircraft acquisitions and related freighter modification costs. Cash payments for capital expenditures were $67.1 million in the first nine months of 2006 compared to $47.2 million in the first nine months of 2005. Our capital expenditures in the first nine months of 2006 included the acquisitions of five Boeing 767 aircraft from Delta and cargo modification costs for a sixth aircraft purchased in 2005. In the first nine months of 2005, our capital expenditures were primarily for two Boeing 767 aircraft that were undergoing freighter modification at that time. The level of capital spending for all of 2006 is anticipated to be approximately $115.0 million compared to $60.7 million in 2005. We plan additional borrowings of approximately $17.0 million in late 2006 to finance one more of the former Delta aircraft.

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Liquidity and Capital Resources

As of September 30, 2006, we had approximately $41.1 million of cash balances and $20.7 million of marketable securities. DHL guarantees our financing obligations for three in-service Boeing 767 aircraft. The Company has a $45.0 million credit facility through a syndicated Credit Agreement that expires in December 2008. Borrowings under the agreement are collateralized by substantially all of the Company’s assets. The agreement contains an accordion feature to increase the borrowings to a total of $50.0 million if the Company needs additional borrowing capacity. The agreement provides for the issuance of letters of credit on the Company’s behalf. As of September 30, 2006, the unused credit facility totaled $35.2 million, net of outstanding letters of credit of $9.8 million.

We believe that our current cash balances and forecasted cash flows provided by the commercial agreements with DHL, combined with our credit facility and anticipated financing for aircraft acquisitions, will be sufficient to fund our planned operations and capital expenditures for 2006.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

“Management’s Discussion and Analysis of Financial Condition and Results of Operations,” as well as certain disclosures included elsewhere in this report, are based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to select appropriate accounting policies and make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingencies. In certain cases, there are alternative policies or estimation techniques which could be selected. On an on-going basis, we evaluate our selection of policies and the estimation techniques we use, including those related to revenue recognition, post-retirement liabilities, bad debts, self-insurance reserves, accruals for labor contract settlements, valuation of spare parts inventory, useful lives, salvage values and impairment of property and equipment, income taxes, contingencies and litigation. We base our estimates on historical experience, current conditions and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources, as well as for identifying and assessing our accounting treatment with respect to commitments and contingencies. Actual results may differ from these estimates under different assumptions or conditions. We believe the following significant and critical accounting policies involve the more significant judgments and estimates used in the preparation of the condensed consolidated financial statements.

Revenue Recognition

Revenues from DHL are recognized when the related services are performed. Expenses incurred under the commercial agreements with DHL are generally subject to a base mark-up of 1.75%, which is recognized in the period during which the expenses are incurred. Certain costs, the most significant of which include fuel costs, interest on the promissory note to DHL, airport rent, ramp and landing fees incurred for performance under the ACMI agreement, are reimbursed and included in revenues without mark-up.

In addition to a base mark-up of 1.75%, both the ACMI and Hub Services agreements provide for an incremental mark-up potential above the base 1.75%, based on our achievement of specified cost and service goals. The ACMI agreement provides for a maximum potential incremental mark-up of 1.60%, with 1.35% based on cost performance and 0.25% based on service performance. The Hub Services agreement provides for a maximum potential incremental mark-up of 2.10%, with 1.35% based on cost performance and 0.75% on service performance. Both contracts call for 40% of any incremental mark-up earned from cost performance to be recognized based on quarterly results, with 60% measured against annual results. Accordingly, a maximum mark-up of approximately 0.54% may be achieved based on quarterly results and recognized in our quarterly revenues. Up to a maximum mark-up of approximately 0.81% based on annual cost performance could be recognized during the fourth quarter, when full year results are known. Incremental mark-up potential associated with the service goals (0.25% in the ACMI agreement and 0.75% in the Hub Services agreement) is measured annually and any revenues earned from their attainment would be recognized during the fourth quarter, when full year results are known. Management cannot predict to what degree the Company will be successful in achieving incremental mark-up.

In August 2005, the Hub Services agreement was amended to extend the initial term of the Hub Services agreement in exchange for temporarily placing more of the Company’s revenue potential under a cost-related incentive. The amendment temporarily reduced the base mark-up under the Hub Services agreement from 1.75% to 1.25% during the last six months of 2005. The maximum incremental mark-up that ABX could earn from cost incurred during the third and fourth quarters of 2005 from its quarterly cost-related incentives under the Hub Services agreement was temporarily increased from approximately 0.54% to 1.04%. In 2006, the base mark-up reverted to 1.75% and the maximum incremental mark-up from the quarterly cost-related incentive reverted to approximately 0.54%. The amendment did not change the annual cost and service-related incremental mark-up opportunities under the Hub Services agreement and did not affect the mark-up or the term of the ACMI agreement.

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The Company derives a portion of its revenues from customers other than DHL. Non-DHL ACMI/charter service revenues are recognized on scheduled and non-scheduled flights when the specific flight has been completed. Aircraft parts and fuel sales are recognized when the parts and fuel are delivered. Revenues earned and expenses incurred in providing aircraft-related maintenance repair services or technical maintenance services are recognized in the period in which the services are completed and delivered to the customer. Revenues derived from transporting freight and sorting parcels are recognized upon delivery of shipments and completion of service.

Depreciation

Depreciation of property and equipment is provided on a straight-line basis over the lesser of the asset’s useful life or lease term. We periodically evaluate the estimated service lives and residual values used to depreciate our property and equipment. The acceleration of depreciation expense or the recording of significant impairment losses could result from changes in the estimated useful lives of our assets. We may change the estimated useful lives due to a number of reasons, such as the existence of excess capacity in our air system or ground networks or changes in regulations grounding or limiting the use of aircraft.

Self-Insurance

We self-insure certain claims relating to workers compensation, aircraft, automobile, general liability and employee healthcare. We record a liability for reported claims and an estimate for incurred claims that have not yet been reported. Accruals for these claims are estimated utilizing historical paid claims data, recent claims trends and, in the case of employee healthcare, an independent actuarial report. Changes in claim severity and frequency could result in actual claims being materially different than the amounts provided for in our results of operations.

Contingencies

We are involved in legal matters that have a degree of uncertainty associated with them. We continually assess the likely outcomes of these matters and the adequacy of amounts, if any, provided for these matters. There can be no assurance that the ultimate outcome of these matters will not differ materially from our assessment of them. There also can be no assurance that we know all matters that may be brought against us at any point in time.

Income Tax

We continue to fully reserve the net deferred tax assets as of September 30, 2006. The realization of deferred tax assets, including net operating loss carryforwards (“NOL CFs”), depends on the existence of sufficient taxable income within the applicable carryback or carryforward periods. After considering both positive and negative evidence of sources of future taxable income, ABX continues to maintain a full valuation allowance against its deferred tax assets, including NOL CFs, due to the likelihood that the deferred tax assets will not be realized. While ABX has had positive pre-tax income since its separation from Airborne, Inc., excluding the 2003 impairment charge, it also has accumulated significant taxable losses during the post-separation period, primarily due to temporary differences in depreciating its aircraft fleet. These historical taxable losses and near-term projected taxable losses weighed significantly in the overall assessment. Also, in considering possible sources of taxable income in assessing the realization of the deferred tax assets, ABX has not relied upon future taxable income from the DHL contracts beyond the contract termination dates. The results of operations might be favorably impacted in the future by reversals of the valuation allowances if ABX is able to demonstrate positive evidence, such as contract renewals or extensions, that indicate the deferred tax assets will be realized.

Post-retirement Obligations

We sponsor qualified defined benefit plans for our pilots and other eligible employees. We also sponsor unfunded post-retirement healthcare plans for our flight crewmembers and non-flight crewmember employees. We also sponsor unfunded excess plans for certain employees in a non-qualified plan which includes our executive management that provide benefits in addition to amounts permitted to be paid under provisions of the tax law to participants in our qualified plans.

The accounting and valuation for these post-retirement obligations are determined by prescribed accounting and actuarial methods that consider a number of assumptions and estimates. The selection of appropriate assumptions and estimates is significant due to the long time period over which benefits will be accrued and paid. The long-term nature of these benefit payouts increases the sensitivity of certain estimates on our post-retirement costs. In actuarially valuing our pension obligations and determining related expense amounts, assumptions we consider most sensitive are discount rates, expected long-term

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investment returns on plan assets and future salary increases. Additionally, other assumptions concerning retirement ages, mortality and employee turnover also affect the valuations. For our post-retirement healthcare plans, consideration of future medical cost trend rates is a critical assumption in valuing these obligations. Actual results and future changes in these assumptions could result in future costs significantly higher than those recorded in our results of operations.