UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For Quarter Ended September 30, 2004March 31, 2005

Commission File Number 000-50368

ABX AIR, INC.

(Exact name of registrant as specified in its charter)

145 Hunter Drive

Wilmington, Ohio 45177

(Address of Principal Executive Office)

(937) 382-5591

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes:  x    No:  ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).    Yes:  x    No:  ¨    No  x.

As of November 15, 2004,May 10, 2005, ABX Air, Inc. had outstanding 58,270,400 shares of common stock, par value $.01.

ABX AIR, INC. AND SUBSIDIARIES

Form 10-Q

Table of Contents

FORWARD LOOKING STATEMENTS

Statements contained in this quarterly report on Form 10-Q that are not historical facts are considered forward-looking statements (as that term is defined in the Private Securities Litigation Reform Act of 1995). Words such as “projects,” “believes,” “anticipates,” “will,” “estimates,” “plans,” “expects,” “intends” and similar words and expressions are intended to identify forward-looking statements. These forward-looking statements are based on expectations, estimates and projections as of the date of this filing, and involve risks and uncertainties that are inherently difficult to predict. Actual results may differ materially from those expressed in the forward-looking statements for any number of reasons, including those described in this report or in “Risk Factors” contained in our Registration Statement on Form S-4, as amended, and in our 20032004 Annual Report filed on Form 10-K with the Securities and Exchange Commission.

Filings with the Securities and Exchange Commission

Our filings with the Securities and Exchange Commission, including annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, are available free of charge from our website at www.ABXAir.com.

PART 1. FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTSFinancial Statements

ABX AIR, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

See notes to consolidated financial statements.

ABX AIR, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

See notes to consolidated financial statements.

ABX AIR, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

See notes to consolidated financial statements.

ABX AIR, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2004March 31, 2005

NOTE A—SUMMARY OF FINANCIAL STATEMENT PREPARATION AND SIGNIFICANT ACCOUNTING POLICIES

The consolidated financial statements of ABX Air, Inc. and its subsidiaries (“ABX” or the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America and rules and regulations of the Securities and Exchange Commission for interim financial information. Accordingly, they do not include all of the information, footnotes and disclosures required by generally accepted accounting principles for complete financial statements. The results of operations and cash flows for any interim periods are not necessarily indicative of results that may be reported for the full year. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. Intercompany balances and transactions between the Company and its subsidiaries are eliminated upon consolidation.

Prior to August 16, 2003, the Company operated as a wholly-owned subsidiary of Airborne, Inc. (“Airborne”). In conjunction with the separation of ABX from Airborne, the Company entered into an aircraft, crew, maintenance and insurance agreement (“ACMI agreement”) and a hub and line-haul agreement (“Hub Services agreement”) with Airborne. The Company’s operating results prior to separation from Airborne do not reflect the effects of the pricing structure under the ACMI agreement and Hub Services agreement, the new capital structure of the business, the current tax status, the cost of new corporate functions and other changes resulting from the separation from Airborne.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect amounts reported in the consolidated financial statements. Estimates and assumptions are used to record the allowance for uncollectible amounts, self-insurance reserves, spare parts inventory reserve, depreciation and impairments of property and equipment, labor contract settlements, postretirement obligations, income taxes, and reserves for contingencies and litigation. Changes in these estimates and assumptions may have a material impact on the consolidated financial statements.

Restricted CashRevenue Recognition

RestrictedThe Company derives approximately 98% of its revenues from the commercial agreements with DHL Express (USA), Inc. (“DHL”). Revenues from DHL are determined based on the expenses incurred during a reporting period for an aircraft, crew, maintenance and insurance agreement (“ACMI agreement”) and a hub and line-haul agreement (“Hub Services agreement.”). Expenses incurred under these agreements are generally subject to a base mark-up of 1.75%, which is recognized in the period the expenses are incurred. Certain costs, the most significant of which include fuel, interest on a promissory note due to DHL, certain ramp and facility rent and landing fees incurred under the two commercial agreements are reimbursed and included in revenues without mark-up.

Both agreements also allow the Company to earn incremental mark-up above the base 1.75% mark-up (up to 1.60% under the ACMI agreement, and 2.10% under the Hub Services agreement) as determined from the achievement of cost and service goals outlined in the two commercial agreements. The agreements stipulate the setting of quarterly and annual cost goals and annual service goals specified in each of the two agreements. At the end of each fiscal year, the Company measures the achievement of annual goals and records any incremental revenues earned by achieving the annual goals in the fourth quarter. In a similar way, the Company measures quarterly goals and records incremental revenues in the quarter in which earned.

The Company derives a portion of its revenues from customers other than 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.

During 2004, interest earned on cash consistedand cash equivalents reduced interest expense when calculating revenue under the DHL agreements. Beginning in 2005, interest earned on cash and cash equivalents is not included in the DHL revenue calculation.

Income Taxes

Income taxes are computed using the asset and liability method, under which deferred income taxes are provided for the temporary differences between the financial reporting basis and the tax basis of the Company’s assets and liabilities. Deferred taxes are measured using provisions of currently enacted tax laws. A valuation allowance against deferred tax assets is recorded when it is likely that such assets will not be fully realized. Tax credits are accounted for as a reduction of income taxes in the year in which the credit originates.

The Company did not record an income tax provision for the quarters ended March 31, 2005 and 2004 due to its net operating loss carryforwards. The deferred tax assets remain fully reserved at March 31, 2005.

Cash and Cash Equivalents

The Company classifies short term, highly liquid investments with original maturities of three months or less as cash held in designated accounts that collateralized certain lettersand cash equivalents. These investments are recorded at cost, which approximates fair value.

Spare Parts Inventory

The Company values aircraft spare parts inventory at weighted-average cost and maintains a related obsolescence reserve. A provision for spare parts obsolescence is recorded over the estimated useful life of credit held primarily for insurerseach aircraft fleet type (i.e., McDonnell Douglas DC-8, DC-9 and Boeing 767), which considers the spare parts expected to be on hand on the date the aircraft fleet type is anticipated to be removed from service. Should changes occur regarding expected spare parts to be on hand or anticipated useful lives of workers’ compensation benefits.our aircraft, revisions to the estimated obsolescence reserve may be required.

Property and Equipment

Property and equipment are stated at cost, net of any impairment recorded, in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-livedLong-Lived Assets.” The cost and accumulated depreciation of disposed property and equipment are removed from the accounts with any related gain or loss reflected in earnings from operations.

The Company periodically evaluates, when events or circumstances require, the useful lives, salvage values and fair values of property and equipment. Acceleration of depreciation expense or the recording of significant impairment losses could result from changes in the estimated useful lives of assets due to a number of reasons, such as an assessment is done quarterly to determine if excess capacity exists in the air or ground networks, or changes in regulations governing the use of aircraft.

Long-lived assets are reviewed for impairment when circumstances indicate the carrying value of an asset may not be recoverable. For assets that are to be held and used, impairment is recognized when the estimated undiscounted cash flows associated with the asset or group of assets is less than their carrying value. If impairment exists, an adjustment is made to write the asset down to its fair value, and a loss is recorded as the difference between the carrying value and fair value. Fair values are determined based on quoted market values, discounted cash flows or internal and external appraisals, as applicable. Assets held for sale or disposition are carried at the lower of carrying value or fair value less the cost to sell.

Interest cost incurred during the constructionmodification period of facilities and on aircraft purchase and modification costs is capitalized until the date the asset is placed in service as an additional cost of the asset.

service. The costs of major airframe and engine overhauls, as well as routine maintenance and repairs, are charged to expense as incurred.

Spare Parts Inventory

The Company values aircraft spare parts inventory at weighted-average cost and maintains a related obsolescence reserve. A provision for spare parts obsolescence is recorded over the estimated useful life of each aircraft fleet type (i.e., McDonnell Douglas DC-8, DC-9 and Boeing 767), which considers the spare parts expected to be on hand on the date the aircraft fleet type is anticipated to be removed from service. Should changes occur regarding expected spare parts to be on hand or anticipated useful lives of our aircraft, revisions to the estimated obsolescence reserve may be required.

Income Taxes

Income taxes have been computed using the asset and liability method, under which deferred income taxes are provided for the temporary differences between the financial reporting basis and the tax basis of the Company’s assets and liabilities. Deferred taxes are measured using provisions of currently enacted tax laws. A valuation allowance against deferred tax assets is recorded when it is likely that such assets will not be fully realized. Tax credits are accounted for as a reduction of income taxes in the year in which the credit originates. The Company’s tax provisions were calculated on a stand-alone basis. Through August 15, 2003, the Company was included in Airborne’s consolidated tax return.

Revenue Recognition

Revenues from Airborne are determined based on expenses incurred during a period and recognized when the related services are performed. Prior to August 16, 2003, revenues from Airborne were calculated as the sum of pretax net expenses incurred plus 2.00%. Prior to August 16, 2003, net expenses included all operating and interest expenses, including allocated expenses from Airborne, less revenues recorded from customers other than Airborne. Since August 16, 2003, revenues from Airborne are determined based on the expenses incurred during a reporting period under the ACMI and Hub Services agreements. Expenses incurred under these agreements are generally subject to a base mark-up of 1.75%, which is recognized in the period the expenses are incurred. Certain costs, the most significant of which include fuel, interest on a promissory note due to DHL Holdings, certain ramp and facility rent and landing fees incurred under the two commercial agreements are reimbursed and included in revenues without mark-up.

Both agreements also allow the Company to earn incremental mark-up above the base 1.75% mark-up (up to 1.60% under the ACMI agreement, and 2.10% under the Hub Services agreement) as determined from the achievement of cost and service goals outlined in the two commercial agreements. The agreements stipulate the setting of quarterly and annual cost goals and annual service goals expressly specified in each of the two agreements. At the end of each fiscal year, the Company measures the achievement of annual goals and records any incremental revenues earned by achieving the annual goals in the fourth quarter. In a similar way, the Company measures quarterly goals and records incremental revenues in the quarter in which earned.

The Company derives a portion of its revenues from customers other than Airborne. 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.

Unearned Revenue

As specified in the two commercial agreements with Airborne,DHL, the Company is advanced funds on each Monday for the costs budgeted to be incurred for the upcoming week. Unearned revenue reflects those customer funds that the Company has received in advance of incurring the associated cost to perform under the commercial agreements.

Reclassifications

Certain amounts previously reported have been reclassified to conform to the 20042005 presentation.

NOTE B—SEPARATION FROM AIRBORNE ANDTRANSACTIONS WITH DHL INTEGRATION

Separation Agreement

On August 15, 2003, the Company was separated from its former parent, Airborne Inc., (“Airborne”) and became an independent, publicly-owned company. Separation of the Company from Airborne was a condition of the merger agreement between Airborne and DHL Worldwide Express B. V. (“DHL”). The merger agreement required Airborne to separate its air operations from its ground operations with air operations being retained by ABX. Immediately prior to the separation, certain assets and liabilities related to Airborne’s ground operations were transferred out of the Company to Airborne. The separation of the Company from Airborne occurred according to the terms and conditions of the separation agreement, which was included in ABX’s amended registration statement filed on July 11, 2003. After the separation of the Company, Airborne was reorganized as a subsidiary of DHL, Holdings (USA), Inc. (“DHL Holdings”), a subsidiary of DHL.

Transfer of Assets and Liabilities

Immediately prior to the separation from Airborne, the net assets and liabilities of the ground operations of the Company (including its central and regional sort facilities, runways, taxiways, aprons, buildings serving as aircraft and equipment maintenance facilities, storage facilities, a training center and operations and administrative offices) were transferred to Airborne. Additionally, ABX transferred the membership interests of Wilmington Air Park, Inc. which owned Wilmington Air Park airport, to Airborne. The carrying amount of the assets and liabilities transferred was $199.2 million and $43.8 million, respectively.

Capitalization of ABX

At the time of separation, the Company split its stock and issued 52,106,129 additional shares of ABX common stock, with a par value of $0.01 per share to the Airborne stockholders under terms of the merger agreement. The advances from Airborne of $457.3 million were cancelled. The Company issued an unsecured promissory note to DHL Holdings in the amount of $89.0 million and transferred $29.0 million to Airborne, leaving ABX with a cash balance of $60.0 million. The note was subsequently increased to $92.9 million to true up certain separation adjustments and leave total stockholders’ equity of $50.0 million after recording the impairment charge discussed below. The principal of the note is due in 2028 and the note bears interest at 5.00% per annum, payable semi-annually. The interest expense on the promissory note is reimbursable, as discussed below, without mark-up.

Commercial Agreements

In connection with the separation, the Company entered into the ACMI and Hub Services agreements with Airborne. Under the ACMI and Hub Services agreements, the Company provides air cargo transportation, package sorting and handling services, line-haul logistics services and airport, equipment and facilities maintenance services to Airborne and receives compensation generally as determined by cost, plus a base mark-up percentage of 1.75%. Both agreements also allow the Company to earn incremental mark-up above the base 1.75% mark-up (up to 1.60% under the ACMI agreement, and 2.10% under the Hub Services agreement) as determined from achievement of cost and service goals outlined in the two commercial agreements. Certain costs, including jet fuel expense, landing and ramp rental charges, facility rent, and interest expense on the note payable to DHL Holdings are reimbursable without mark-up. Income tax expense incurred by the Company, as well as direct expenses incurred to secure revenue from customers other than Airborne are not reimbursed under the terms of the two commercial agreements.Worldwide Express B.V.

The ACMI agreement has a term of seven years, with an automatic renewal for an additional three years, unless a one year advance notice is given, or if ABX is not in compliance with applicable performance standards specified in the agreement. Airborne can make changes in the air routes that would reduce the scopeCompany’s revenues, cash flows and liquidity resources are highly dependent on DHL. Substantially all of the Company’s revenues are derived through contracted services provided by ABX underto DHL. Revenues from contracted services performed for DHL were $340.2 million and $273.3 million for the ACMI agreement, including the termination of specific ACMI aircraft.quarters ended March 31, 2005 and 2004, respectively.

The Hub Services agreement has a term of three years, with one-year automatic renewals, unless ninety-days advance notice is given. Airborne can increase or reduceCompany’s balance sheets include the scope of services or terminate specific services at one or more hub facilities with at least sixty days noticefollowing balances related to ABX.operations for DHL (in thousands):

Impairment

The separation of the Company from Airborne, and the execution of the related commercial agreements collectively constituted an event requiring the Company to evaluate the recoverability of the carrying value of its long-term assets as required by SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” Under SFAS No. 144, ABX is required to record an impairment charge for the excess of the carrying value of the long-lived asset group over its fair value.

The fair value of the Company’s aircraft was derived using a market approach by comparing recent sales of similar assets and adjusting these comparables for factors such as age and condition. The fair value of aircraft-related parts and equipment was derived from a cost approach in which replacement costs were adjusted downward for reduction in value due to physical depreciation and functional obsolescence. As a result of the fair value analysis, the Company recorded a pre-tax charge of $600.9 million to write down aircraft, aircraft-related parts and equipment to their fair values on August 16, 2003. The impairment charge resulted in a net deferred tax asset, which under provisions of SFAS No. 109, “Accounting for Income Taxes,” was fully offset by a valuation allowance.

In conjunction with the fair value evaluation of its assets, the Company reassessed the useful lives and residual values of its aircraft. As a result, the Company changed the useful lives used to amortize its Boeing 767, DC-9 and DC-8 aircraft to 15, 7 and 5 years, respectively, beginning August 16, 2003. Prior to the separation from Airborne, the Company depreciated its Boeing 767, DC-9 and DC-8 aircraft over 18, 10 and 7 years, respectively. Had the Company not changed the estimated useful lives of the aircraft, 2004 depreciation expense would have been approximately $1.2 million and $3.7 million less than reported for the three and nine month periods ended September 30.

DHL Integration Plans

On November 3, 2004, DHL notified ABXthe Company of its plans to remove twenty-six specific aircraft from service during 2005. The information provided by DHL indicates that seven of the twenty-six aircraft (three DC-9s and four DC-8s) are to be removed in January 2005, with the remaining nineteen aircraft to be removed by the end of 2005. The removal affects twenty-two scheduled air routes. DHL further indicated that the number of affected aircraft, the air routes and the timing of planned reductions arewould be subject to change. Through March 31, 2005, five aircraft have been removed from the ACMI agreement since ABX received the November notification. These five aircraft are being used for spare parts, as service backups, or in furtherance of the Company’s non-DHL ACMI/charter operations.

The impact of DHL’s future airlift planplans on ABXthe Company’s operating results, cash flows and financial condition will depend upon several factors that are uncertain. These factors include the number and timing of aircraft removals, the air routes that will be affected, the fair market value of the aircraft, the demand for cargo airlift and the future level of ABXthe Company’s stockholders’ equity.

After The removal of aircraft from the twenty-sixACMI agreement could result in losses if the fair market value of removed aircraft reduction is fully implemented, ABX projects that the associated annual reduction in cash flows from operations will be in a range of $3.2 million to $4.2 million and will reduce annual net earnings by $0.8 million to $1.5 million.are less than their carrying value.

Pursuant to the terms of the ACMI agreement, ABXthe Company has certain rights to put to DHL any aircraft that is removed from service. ABX can sell such aircraft to DHL at the lesser of fair market value or net book value. The decision to sellput aircraft to DHL will depend on a number of factors including the anticipated number of aircraft to be removed, the type of aircraft removed, demand for cargo airlift and the market value for our aircraft. Management is currently assessingwill assess the number and type of aircraft that it may want to put to DHL and has yet to determine their current fair market values. Accordingly,as the amount of cash flow that might be generated from the exercise of the put provisions cannot be projected at this time.

The removal of aircraft could result in non-cash losses. Losses would depend on several factors, including the number of aircraftare removed from service, fair value of the aircraft and the amount of ABX equity at the time that an aircraft is sold to Airborne.service. Provisions of the ACMI Agreementagreement stipulate that if ABX’sthe Company’s equity is less than or equal to $100 million at the time of sale,put to DHL, any amount by which fair market value is less than net book value would be applied to athe promissory note owed to DHL. However, if equity is greater than $100 million, any amount by which the fair market value is less than net book value would be recorded as an operating charge. For purposes of applying the $100 million stockholders’ equity threshold, ABX’s stockholders’ equity will be calculated after including the effect of any charges caused by the removal of aircraft.

SFAS 144, “AccountingDuring the quarter ended March 31, 2005, the Company and DHL reached an agreement to settle ABX’s put rights on two DC-8 aircraft that DHL removed from the ACMI agreement. The net book value of these two aircraft exceeded the appraised fair market value by $0.4 million. In lieu of selling the aircraft to DHL for net book value as permitted by the Impairment or Disposal of Long-lived Assets,” requires that ABX perform an impairment analysis in considerationput provisions of the ACMI reductions. At this time, the expected future cash flows associated with the Company’sagreement, ABX elected to retain ownership of these aircraft, support the carrying value reflected inand the balance sheet. When and if equity reaches $100of the promissory note due to DHL was reduced by $0.4 million the recognition of an impairment charge could be required to the extent the fair value ofwith a corresponding reduction in aircraft is less than the carryingnet book value.

NOTE C—AIRBORNE TRANSACTIONS AND PRE-SEPARATION ALLOCATIONS

The Company’s revenues, cash flows and liquidity resources are highly dependent on Airborne. Substantially all of the Company’s revenues are derived through contracted services provided to Airborne. Revenues from contracted services performed for Airborne were $283.0 million and $276.5 million for the quarter ended September 30, 2004 and 2003, respectively and $827.1 million and $878.8 million for the nine month periods ended September 30, 2004 and 2003, respectively.

Prior to August 16, 2003, Airborne performed various corporate functions in support of the activities of its consolidated subsidiaries, which included activities of ABX. Airborne provided the Company with certain insurance coverage; information technology support; accounting, audit, tax, cash management and treasury administration; employee benefit plan administration; governmental affairs; and other services. Included in other expenses in the consolidated statements of operations are allocations for these services of $0.5 million and $3.3 million for the three and nine month periods ended September 30, 2003.

Prior to August 16, 2003, interest expense included allocations to the Company of interest costs incurred by Airborne in addition to interest expense incurred on obligations of the Company. The Company was allocated interest expense based upon its proportionate share of stockholders’ equity, inclusive of advances from its parent, in comparison to the consolidated totals of Airborne. Allocations of $2.2 million and $8.6 million were made for the three and nine month periods ended September 30, 2003.

NOTE D—EARNINGS (LOSS) PER SHARE

The outstanding share count reflects a stock split at the ratio necessary to provide an ABX common share for each share of Airborne common stock outstanding at the time of the Company’s separation from Airborne. Basic and diluted earnings per share have been restated to reflect the stock split for all periods presented. The calculation of basic and diluted earnings (loss) per common share follows (in thousands, except per share amounts):

In December 2003, the Company issued approximately 6.2 million shares to note holders of Airborne’s 5.75% Convertible Senior Notes, due on April 1, 2007. According to the terms of those notes, after Airborne completed the merger with DHL, the note holders became entitled to receive, upon a voluntary conversion of the notes, the merger consideration paid in connection with the merger, which included ABX common stock deliverable by the Company. In November and December 2003, Airborne issued tender offers to the note holders to encourage the conversion of the notes, and by December 31, 2003, all outstanding Airborne notes had been converted. The Company did not receive any proceeds from the issuance of shares of common stock to the note holders.

NOTE E—D—PROPERTY AND EQUIPMENT

At September 30, 2004,March 31, 2005, the Company’s operating fleet consisted of 116 in-service114 aircraft, including 2527 Boeing 767, 7472 McDonnell Douglas DC-9 and 1715 McDonnell Douglas DC-8 aircraft.

Property and equipment consists of the following (in thousands):

Aircraft and flight equipment included $35.4 million for aircraft held under capitalized lease assetsleases as of September 30, 2004March 31, 2005 and December 31, 2003.2004. Accumulated depreciation included $2.7$4.0 million as of September 30, 2004March 31, 2005 and $0.8$3.4 million as of December 31, 20032004 for capital leases.

NOTE F—E—LONG TERM DEBT AND CREDIT FACILITY

Long-term debt consisted of the following (in thousands):

The unsecured promissory note is due in 2028 and bears interest at 5.00% per annum payable semi-annually. Interest on the promissory note is reimbursable under the ACMI agreement without mark-up. The capital lease obligations are for five Boeing 767 aircraft, and consist of two different leases, both expiring in 2011 with options to renew for six additional years. The capital lease terms for three of the five aircraft include quarterly principal payments and variable interest of LIBOR plus 2.50% (3.813%(5.375% at September 30, 2004)March 31, 2005). The capital lease for the other two Boeing 767 aircraft is at an imputed interest rate of 8.55%. The interest expense related to the capitalized aircraft lease obligations is reimbursable with mark-up under the ACMI agreement with Airborne.DHL.

The Company has a $45.0 million credit facility through a syndicated Credit Agreement that expires in March 2007. Borrowings under the agreement are collateralized by substantially all of the Company’s assets, and bear interest equal to the prime rate or a short term LIBOR (a one, two or three month LIBOR at the Company’s discretion) plus 2.25%. 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, 2004,March 31, 2005, the unused credit facility totaled $35.0 million, net of outstanding letters of credit of $10.0 million. There were no borrowings outstanding under the Credit Agreement as of September 30, 2004.March 31,2005.

Under the Credit Agreement, the Company is subject to other expenses, covenants and warranties that are usual and customary. The agreement stipulates events of default and contains covenants including, among other things, limitations on certain additional indebtedness, guarantees of indebtedness, level of cash dividends, and certain other transactions as defined in the agreement. The Company wasis in compliance with all debt covenants and there were no eventsthe terms of default as of September 30, 2004.the credit agreement.

NOTE G—F—COMMITMENTS AND CONTINGENCIES

Leases

The Company leases aircraft, airport facilities, and certain operating equipment under various long-term operating lease agreements. In conjunction with the separation from Airborne, the Company entered into a sublease agreement with AirborneDHL for portions of the Wilmington Air Park. The term of the sublease expires at the end of the transition period that follows termination of the ACMI agreement. The annual rent payable by the Company under the lease is $2.0 million, and is reimbursable by AirborneDHL without mark-up.

Commitments

The Company has commitmentsa commitment to acquire one used Boeing 767 in 2005. This aircraft is committed to be converted to a standard freighter configuration from its original passenger configuration. Payments for the aircraft and conversion of thisit and other recently purchased aircraft will approximate $15.0$35.0 million and $43.0 million forduring the remainder of 2004 and 2005, respectively.2005. There are currently no commitments for aircraft acquisitions or modifications extending beyond 2005.

Guarantees and Indemnifications

The Company adopted FIN 45 “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others,” effective January 1, 2003. The initial recognition and measurement provisions of FIN 45 apply prospectively to guarantees and indemnifications issued or modified after December 31, 2002. The Company’s adoption of FIN 45 did not have any effect on its financial position or results of operations. No amounts have been recognized in its financial statements for the underlying fair value of guarantees and indemnifications.

Certain operating leases and agreements of the Company contain indemnification obligations to the lessor, service provider or vendor that are considered ordinary and customary (e.g. use, tax, environmental and environmentalemployee indemnifications), the terms of which range in duration and are often limited. Such indemnification obligations may continue after expiration of the respective lease or agreement. In conjunction with certain transactions, the Company sometimes provides routine indemnifications (e.g. environmental, tax and employee liabilities), the terms of which range in duration and are often limited.

The Company has fully and unconditionally guaranteed a senior note of Airborne.DHL. The senior note, having a remaining amount outstanding of $6.9 million, bears interest at a rate of 7.35% and matures in September 2005.

Legal Proceedings

(a) Department of Transportation (“DOT”) Continuing Fitness Review

The Company filed a notice of substantial change with the DOT arising from its separation from Airborne. In connection with the filing, which was made in mid-July of 2003, the DOT will determine whether the Company continues to be fit, willing and able to engage in air transportation of cargo and a U.S. citizen.

Under U.S. laws and DOT precedents, non-U.S. citizens may not own more than 25% of, or have actual control of, a U.S. certificated air carrier. The DOT may determine that AirborneDHL actually controls the Company as a result of its commercial arrangements (in particular, the ACMI agreement and Hub Services agreement) with Airborne.DHL. If the DOT determines that the Company is controlled by Airborne,DHL, the DOT could require amendments or modifications of the ACMI and/or other agreements between the Company and Airborne.DHL. If the Company were unable to modify such agreements to the satisfaction of the DOT, the DOT could seek to suspend, modify or revoke the Company’s air carrier certificates and/or authorities, and this would materially and adversely affect the business.

Certain of Airborne’sDHL’s competitors, including Federal Express Corporation (“FedEx”) and United Parcel Service Inc. (“UPS”) challenged the citizenship status of Astar Air Cargo, Inc. (“Astar”), formerly DHL Airways. DHL has entered into an ACMI agreement with Astar which accounts for a substantial portion of the business of Astar. FedEx and UPS alleged this relationship, among others, constituted control by DHL of Astar in violation of United States law. An Administrative Law Judge (“ALJ”) for the DOT reviewed the citizenship of Astar and issued a decision recommending to the DOT that it find that Astar is a citizen. On May 13, 2004, the DOT issued its decision finding that Astar is a U.S. citizen and making the ALJ’s recommended decision the DOT’s final decision. Neither FedEx nor UPS appealed the DOT’s final decision.

The DOT has issued a notice requesting comments on the procedures to be used in processing the Company’s filing, and several parties have provided comments. The DOT has yet to specify the procedures it intends to use. In order to facilitate the

DOT’s review, we filed supplemental information with the DOT on April 22, 2005, for the purpose of updating our initial filing. While Astar and ABX are different, and their respective relationships with DHL and Airborne are distinguishable, the DOT’s decision regarding Astar will likely serve as a precedent for the DOT’s review of the Company’s filing.

Management believes the DOT should find that the Company continues to be fit, willing and able to engage in air transportation of cargo and a U.S. citizen.

(b) ALPA Lawsuit

On August 25, 2003, the Company intervened in a lawsuit filed in the United StatesU.S. District Court for the Southern District of New York by DHL Holdings (USA), Inc. (“DHL Holdings”) and DHL Worldwide Express, Inc. (“DHL Worldwide”) against the Air Line Pilots Association (“ALPA”), seeking a declaratory judgment that neither DHL entity is required to arbitrate a grievance filed by ALPA. ALPA represents the pilot group at Astar. The grievance seeks to require DHL Holdings to direct its subsidiary, Airborne, now DHL Express (USA), Inc., to cease implementing its ACMI agreement with ABX on the grounds that DHL Worldwide is a legal successor to Astar. ALPA similarly filed a counterclaim requesting injunctive relief that includes having Airborne’sDHL’s freight currently being flown by ABX transferred to Astar. The proceedings were stayed on September 5, 2003, pending the National Labor Relations Board’s (“NLRB”) processing of several unfair labor practice charges the Company filed against ALPA on the grounds that ALPA’s grievance and counterclaim to compel arbitration violates the National Labor Relations Act. In March 2004, the NLRB prosecuted ALPA on the unfair labor practice charges. On July 2, 2004, an ALJ for the NLRB issued a decision finding that ALPA’s grievance and counterclaim violated the secondary boycott provisions of the National Labor Relations Act, and recommended that the NLRB order ALPA to withdraw both actions. ALPA has appealed the ALJ’s finding to the full NLRB, which has yet to issue a decision. In the event the full NLRB were to sustain the decision of the ALJ, ALPA has the right to appeal the decision in federal court.

Management believes that the ALJ’s decision will be sustained on appeal and that, regardless thereof, ALPA’s claim to the work being performed by the Company is without merit and its grievance and counterclaim will be denied.

NOTE H—G—COMPONENTS OF NET PERIODIC BENEFIT COST

The Company sponsors a qualified defined benefit pension plan for its flight crewmembers and a qualified defined benefit pension plan for its other employees that meet minimum eligibility requirements. The Company also sponsors non-qualified defined benefit pension plans for certain employees. These non–qualifiednon-qualified plans are unfunded. The Company sponsors a postretirement healthcare plan which is unfunded. Prior to the Company’s separation from Airborne, the Company participated in similar plans sponsored by Airborne. In conjunction with the separation, the Company established its own plans with provisions identical to the Airborne plans. For funded plans, assets were transferred from the trust of the Airborne sponsored plans to a separate trust for the Company sponsored plans. The separation was based on specific obligations related to the Company’s employees and the proportionate share of the plan assets.

The accounting and valuation for these postretirement 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 postretirement costs.

The Company’s net periodic benefit cost for its qualified defined benefit pensions and post-retirementpostretirement healthcare plans are as follows (in thousands):

During the three and nine month periodsquarter ended September 30, 2004,March 31, 2005, the Company paid $10.7 million and $23.1$6.2 million of contributions to its defined benefit pension plans, respectively.plans. The Company presently anticipates contributing an additional $6.2$33.4 million to fund its pension plans in 2004during the remainder of 2005 for a total of $29.3 million.

On May 19, 2004, the Financial Accounting Standards Board (“FASB”) issued a FASB Staff Position (“FSP”) addressing the appropriate accounting and disclosure requirements for companies sponsoring a postretirement health care plan that provides prescription drug benefits. The new guidance from the FASB was necessary as a result of the 2003 Medicare prescription law which includes a federal subsidy for qualifying companies. FSP SFAS 106-2, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003,” requires (a) that the effects of the federal subsidy be considered an actuarial gain and treated like similar gains and losses, and (b) certain disclosures for employers that sponsor postretirement health care plans that provide prescription drug benefits. The Company adopted the new FSP effective April 1, 2004.

The Company’s actuary has advised management that the prescription drug benefits provided by the Company sponsored postretirement health care plan qualifies for a subsidy under the 2003 Medicare prescription law. In connection with the Company’s adoption of FSP SFAS 106-2, on April 1, 2004, the accumulated benefit obligation was remeasured to include the effects of the subsidy related to benefits attributed to past service. As a result of the subsidy, the accumulated benefit obligation decreased by $0.9$39.6 million.

NOTE I—COMPREHENSIVE INCOME (LOSS)

The following is a reconciliation between net earnings (loss) and comprehensive income (loss), (in thousands):

NOTE J—H—SEGMENT INFORMATION

The Company operates a single reportable segment that provides air cargo transport, line-haul logistics and package handling services to AirborneDHL under the ACMI and Hub Services agreements which are aggregated below as “DHL” (see Note A).The Company’s other activities, which include ACMI/charter services, parts sales, and aircraft maintenance services, do not constitute a reportable segment and are combined in “all other” below.below (in thousands):

For the purposes of internal reporting, the Company does not allocate overhead cost to its other (non-DHL) activities. The provisions of the commercial agreements with Airborne/DHL do not require an allocation of overhead until such time as ABX derives more than 10% of its total revenue from non-Airborne/DHLnon-DHL business activities.

Assets in the All Other category include a 767 aircraft, cargo containers and material handling equipment currently being utilized in our non-DHL activities. The Company reached an agreement with DHL to temporarily defer one 767 freighter aircraft from DHL service beginning in March 2005 and instead deploy the aircraft in its non-DHL ACMI/charter operations for a 12 month period. During the 12 months, the depreciation, maintenance and other operating cost associated with the aircraft will be borne by the Company and not reimbursed by DHL under the ACMI agreement. After the 12 month deferral, which is expected to end during the second quarter or 2006, the aircraft will be placed back into service for DHL and reimbursed under the ACMI agreement. Similarly, a second 767 freighter is scheduled to be deferred in the second quarter of 2005 for a 12 month period, after which, it will service DHL under the ACMI agreement.

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, 2003.2004.

BACKGROUND

On August 15, 2003, ABX was separated from ourits former parent, Airborne Inc., (“Airborne”), and became an independent, publicly-owned company. The separation of ABX from Airborne was a condition of the merger agreement between Airborne and DHL Worldwide Express, B.V. (“DHL”), an integrated, global cargo carrier. The merger agreement required Airborne to separate its air operations from its ground operations with the air operations being retained by ABX. Immediately prior to the separation, $199.2 millionOn January 1, 2005, Airborne was merged into DHL Express (USA), Inc., a wholly owned subsidiary of assets and $43.8 million of liabilities related to Airborne’s ground operations and airport were transferred out of ABX to Airborne. ABX was capitalized with $60.0 million in cash and a $92.9 million promissory note payable to DHL Holdings (USA), Inc. (“DHL Holdings”). All inter-company payables, totaling $457.3 million, were cancelled.(Hereinafter, DHL Holdings, DHL Express (USA), Inc. and Airborne will sometimes be referred to individually and collectively as “DHL”.)

At the time of the separation, ABX and AirborneDHL entered into an aircraft, crew, maintenance and insurance agreement (“ACMI agreement”), and a hub and line-haul services agreement (“Hub Services agreement”). Under the ACMI agreement, ABX provides air cargo transportation to AirborneDHL on a cost plus pricing structure. Under the Hub Services agreement, ABX provides staff to conduct package handling, package sorting, warehousing, line-haul logistics services, as well as airport facilities and equipment maintenance services for Airborne,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 the Company to earn incremental mark-up above the base 1.75% mark-up (up to an additional 1.60% under the ACMI agreement, and an additional 2.10% under the Hub Services agreement) from the achievement of costcertain cost-related and service goals specified in the two agreements. Fuel, cost, rent, interest on the promissory note to DHL, Holdings, 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 three years, respectively. However, AirborneDHL 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 servicesServices agreement. Additionally, AirborneDHL can terminate the agreements if ABX does not comply with certain performance standards specified in the agreements.

The separation of ABX from Airborne, and the execution of the related commercial agreements collectively constituted an event which required us to evaluate the recoverability of the carrying value of long-term assets under Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” Under SFAS No. 144, ABX was required to record an impairment charge for the excess of the carrying value of the long-lived asset group over its fair value. The fair value of ABX’s aircraft was derived using a market approach by comparing recent sales of similar assets and adjusting these comparables for factors such as age and condition. The fair value of aircraft, aircraft-related spare parts inventory, maintenance tooling and equipment, and other ABX fixed assets was derived utilizing a cost approach in which replacement cost was adjusted downward to reflect a reduction in value due to physical depreciation and functional obsolescence. As a result of the fair value analysis, we recorded a pre-tax, non–cash charge to write down assets and inventory by $600.9 million. The impairment charge resulted in a net deferred tax asset, which under the provisions of SFAS No. 109, “Accounting for Income Taxes,” was fully offset by a valuation allowance which was established due to the likelihood that future taxable earnings generated would not allow for the asset’s full utilization.

DHL INTEGRATION PLANS

As a result of its merger with Airborne in 2003, DHL is in the process of integrating product offerings, sales, marketing, administrative andits operating resources to eliminate duplicative costs, including the cost of overlapping air routes among its airlift suppliers. At the same time, DHL is expanding its ground network and adding regional sorting hubs.

ACMI

On November 3, 2004, DHL notified ABX of its plans to remove twenty-six specificof ABX’s aircraft from service during 2005. The information provided by DHL indicates that seven of the twenty-six aircraft (three DC-9s and four DC-8s) are to be removed in January 2005, with the remaining nineteen aircraft to be removed by the end of 2005. The removal affectsaffecting twenty-two scheduled air routes. DHL further indicated that the number of affected aircraft, the air routes and the timing of planned reductions are subject to change. Additionally, DHL is consolidating operations from its Northern Kentucky hub into a central U.S. hub at its Wilmington, Ohio facilities which we operate under the Hub Services agreement. The transition is expected to be completed by the end of 2005. Since the merger, DHL has expanded its ground network and added seven regional sorting hubs in 2004, which we also operate under the Hub Services agreement.

Through March 31, 2005, five aircraft have been removed from the ACMI agreement since November 3, 2004. These five aircraft are being used for spare parts, as service backups, or in furtherance of our non-DHL ACMI/charter operations. The impact of DHL’s future airlift planplans on ourABX’s operating results, cash flows and financial condition will depend upon several factors that are uncertain. These factors include the number and timing of aircraft removals, the air routes that will be affected, the fair market value of the aircraft, the demand for cargo airlift and the future level of ABXABX’s stockholders’ equity. The potential impacts of DHL airlift plans on our future financial statements are described below.

Operating cash flows

The removal of aircraft from the Airborne ACMI agreement will reduce our cash flows from depreciation expense that is reimbursed by Airborne. The current annual depreciation expense on the twenty-six aircraft planned for removal is approximately $2.7 million. In addition to the reduction in depreciation expense, the removal of aircraft will alsocould result in lower flight crew, maintenance, and other expenses thatnon-reimbursable write downs if the fair market value of removed aircraft are subject to mark-up under the ACMI agreement. The impact on cash flows for flight crew and maintenance expenses will be limited to the mark-up on such expenses (from a minimum of 1.75% to a maximum of 3.35%). When the twenty-six aircraft reduction is fully implemented, we project that the associated annual reduction in cash flows from operations will be in a range of $3.5 million to $4.2 million. While we expect to incur some severance costs that are not reimbursable by Airborne, at this time we anticipate that those costs will not be significant.

We anticipate placing four additional Boeing 767 freighter aircraft into service under the ACMI agreement with DHL by the end of 2005. When all four are placed into service, they are projected to generate approximately $7.4 million annually in depreciation expense, which will moreless than offset the cash flow from depreciation associated with the twenty-six aircraft reduction.

Operating Results

When the twenty-six aircraft reduction is fully implemented, we project that their removal will reduce our annual net earnings by $0.8 million to $1.5 million and our annual gross revenues by $86.0 million to $96.0 million. We project that depreciation, flight crew, maintenance, and other ACMI expenses that are subject to mark-up under the ACMI agreement will decline approximately $48.9 million with a corresponding decline in revenue of approximately $50.1 million. Our estimate of expenses and revenues also includes a decline for reductions in jet fuel and other expenses that are reimbursed without mark-up under the ACMI agreement. The annual gross revenue reduction includes approximately $45.5 million of revenues associated with jet fuel and other expenses that are reimbursed without mark-up under the ACMI agreement. Fuel amounts will depend on the future price of jet fuel.

Cash flows from aircraft dispositionscarrying value.

Pursuant to the terms of the ACMI agreement we haveABX has certain rights to put to DHL any aircraft that is removed from service. WeABX can sell such aircraft to DHL at the lesser of fair market value or net book value. We can foresee situations in which we may not sell an aircraft to DHL and instead deploy the aircraft in other market opportunities. The decision to put aircraft to DHL will depend on a number of factors including the anticipated number of aircraft to be removed, the type of aircraft removed, demand for cargo airlift and the market value for our aircraft. Management is currently assessingwill assess the number and type of aircraft that it may want to put to DHL and has yet to determine their current fair market values. Accordingly,as the amount of cash flow that might be generated from the exercise of the put provisions cannot be projected at this time.

The removal and sale of aircraft could reduce the borrowing base of our line of credit agreement, however, Boeing 767’s anticipated to enter service during 2005 would more than offset the reduction.

Recoverability of aircraft carrying value

The removal of aircraft could result in non-cash losses. Losses would depend on several factors, including the number of aircraftare removed from service, fair value of our aircraft and the amount of ABX equity at the time that an aircraft is sold to Airborne.service. Provisions of the ACMI Agreementagreement stipulate that if ABX’s stockholders’ equity is less than or equal to $100 million at the time of sale,put to DHL, any amount by which fair market value is less than net book value would be applied to athe promissory note that we oweowed to DHL. However, if our equity is greater than $100 million, any amount by which the fair market value is less than net book value would be recorded as an operating charge. For purposes of applying the $100 million stockholders’ equity threshold, ABX’s stockholders’ equity will be calculated after including the effect of any charges caused by the removal of aircraft.

SFAS 144, “Accounting for the Impairment or Disposal of Long-lived Assets,” requires that we perform an impairment analysis in consideration of the ACMI reductions. At this time, the expected future cash flows associated with our aircraft support the carrying value reflected in our balance sheet. When and if our equity reaches $100 million, the recognition of an impairment charge could be required to the extent the fair value of aircraft is less than our carrying value.

Hub Services

On June 25, 2004, DHL announced plans to consolidate operations from its Northern Kentucky hub into a central U.S. hub at its Wilmington, Ohio facilities whichIn 2005, we operate under the Hub Services agreement. The plan involves an estimated investment of approximately $300 millionwere notified by DHL that it intends to expand facilitiesassume administration of those charter aircraft that are currently contracted by ABX from other airlines to operate in Wilmington, including an additional 1.2 million square feettertiary markets for which the volumes do not justify the use of sort space and 1.5 million square feetlarger aircraft operated by ABX. This transition of ramp space. Additional automation and information technology infrastructure improvements are also likely.such contracted aircraft to DHL began construction in August 2004 and plansis expected to consolidate byoccur during the fourththird quarter of 2005. The transition is expected to be completed in lateexpenses associated with such contracted aircraft totaled $5.5 million during the first quarter of 2005. We expect to retain operationOn an annualized basis, these expenses are projected at $22.0 million. The annualized impact of the expanded Wilmington hub for DHL, however,loss of this business volume from the ACMI agreement is projected at this time we cannot reasonably estimatebetween $0.4 million and $0.7 million in net earnings and cash flow. For fiscal 2005, the impact thaton net earnings and cash flows is projected in a range of between $0.2 million and $0.4 million, as the consolidation and DHL’s investmentreduction in business volume will have on our operating revenues.be limited to the last half of the year.

DHL selected ABX to staff seven new regional sorting hubs across the United States. These are additional to the Wilmington hub and 11 regional hubs that we currently operate for Airborne/DHL. Three of the new hubs began operations in September 2004, and all seven are currently operating. We estimate that we could earn base revenues of approximately $12 to $15 million annually by staffing the seven new regional hubs, with an additional potential to earn incremental markup.

RESULTS OF OPERATIONS

For the thirdfirst quarter of 2004,2005, we had net earnings of $7.1 million compared to net earnings for the third quarter of 2003 of $4.4 million, excluding the 2003 impairment charge. For the first nine months of 2004, net earnings were $18.9 million compared to $11.7 million in the first nine months of 2003, excluding the 2003 impairment charge. Our net earnings increased compared to 2003 primarily because of lower income taxes and higher earnings from non-Airborne revenues, partially offset by lower pre-tax profits on the Airborne business. The reduction in pre-tax profits on the Airborne business is a result of the lower contractual mark-up and changes to our cost structure since the separation. Prior to the August 15, 2003 separation, revenues from Airborne were calculated as the sum of pretax net expenses incurred plus 2.00%. Net expenses included all operating and interest expenses reduced by revenues recorded from our non-Airborne customers. Since the separation, our Airborne revenues are generally based on cost plus a base mark-up of 1.75%, except for certain costs, including fuel, rent, interest on the promissory note to DHL Holdings and ramp and landing fees, that are recorded in revenue without mark-up. Our expenses, and accordingly our revenues for 2003, included depreciation expense related to the ground equipment that was transferred to Airborne in the separation. Additionally, depreciation expense and our revenues were lower in 2004 due to the effects of the impairment charge, which we recorded immediately after separation from Airborne. Also, our expenses and revenues for 2003 included Airborne packaging and labeling supplies, interest allocations and administrative cost allocations which we no longer record after the separation.

Our earnings for the third quarter of 2004 consisted of $4.7 million from the Airborne agreements and $2.4 million from customers other than Airborne. During the third quarter of 2003, excluding the 2003 impairment charge and related tax effect, our pre-tax earnings consisted of $5.5 million from Airborne and $0.4 million from other customers. During 2004, the income tax provision has been entirely offset by tax benefits associated with a net deferred tax asset. The net deferred tax asset resulted from the impairment charge recorded after the separation from Airborne (see Note B), and is fully offset by a valuation allowance recorded due to the likelihood that the asset will not be fully utilized. For the first nine months of 2004, our earnings from Airborne were $14.2 million compared to pretax earnings for the first nine months of 2003 of $16.3 million from Airborne, excluding the impairment charge. Earnings from our non-Airborne business activities grew to $4.7$6.0 million for the first nine monthsquarter of 2004,2004. Revenues increased 25.3% to $346.6 million compared to the first quarter of 2004. Revenues from DHL increased 24.5% compared to the first quarter of 2004. The increase in DHL revenues was driven by increased cost under the Hub Services agreement and increased fuel prices as compared to pretax earningsthe first quarter of $1.42004. During 2005, the average cost of aviation fuel increased 37.5% and our costs subject to mark-up under the Hub Services agreement increased 41.5% compared to the first quarter of 2004; accordingly, base revenues increased. Our hub services cost increased primarily due to the expansion of DHL’s ground network since the first quarter of 2004. In the fourth quarter of 2004, DHL added seven new regional sort centers that we operate under the Hub Services agreement. Earnings on our base revenues increased $0.7 million excludingto $4.5 million during the 2003 impairment charge, infirst quarter of 2005 compared to the corresponding 2003 period.2004 quarter, due primarily to the higher cost level of providing hub services.

Our earningsUnder the two agreements with DHL, we have the potential to earn additional revenues from Airborne included revenue froman incremental mark-up each quarter based on achieving certain cost-related goals. We earned $0.6 million and $1.0 million of $0.9incremental mark-up under the two agreements during the first quarter of 2005 and 2004, respectively. Incremental mark-up from the ACMI agreement was $0.5 million forwhile incremental mark-up from the third quarter and $2.9Hub Services agreement totaled $0.1 million for the first nine monthsquarter of 2005. During the first quarter of 2004, respectively,incremental mark-up from the ACMI agreement totaled $0.5 million and incremental mark-up from the Hub Services agreement totaled $0.5 million. The incremental mark-up for cost goals we achievedthe first quarter of 2005 under the ACMI agreement resulted from flying greater than anticipated aircraft hours during the quarter, while incurring lower than budgeted maintenance expenses. The factors contributing to the reduction in incremental mark-up under the Hub Services agreement as compared to 2004 included a more severe winter at the main sort hub in Ohio and first nine monthsin the Northeast. Additionally, during January 2005, we replaced a large number of contract workers supplied by an employment agency at DHL’s main sort hub in Ohio and one of its regional hubs upon becoming concerned with the year. immigration status of some of those workers. These sort operations were negatively impacted until we were able to replace the contract workers.

No incremental mark-up contribution from the annual cost and service goals specified in the two agreements was included in our revenue for the first nine monthsquarter of 2004.2005. Any revenue earned through the achievement of annual goals will be recorded in the fourth quarter of 2004.2005. The maximum incremental mark-up available from the annual cost goals is approximately 0.81% of eligible, annual costs under both commercial agreements. If ABX’s actual performance for the first nine months of 2004 is sustained for the fourth quarter, incremental mark-up from the annual cost incentives would be equivalent to 65.8% of the maximum available under the ACMI agreement and 100% of the maximum available under the Hub Services agreement.

The maximum incremental mark-up available from the annual service goals is 0.25% of costs subject to mark-up under the ACMI agreement and 0.75% of costs eligible forsubject to mark-up under the Hub Services agreement. If ABX’s actual service performance for the first ninethree months of 2004 is2005 were sustained for the fourth quarter,year, incremental mark-up from the annual service incentives would be equivalent to 80%40.0% of the maximum available under the ACMI agreement and 100%36.7% of the maximum available under the Hub

Services agreement.

Actual cost savings and service performanceOur earnings for the first nine monthsquarter of 2005 included $2.0 million from customers other than DHL. Earnings from non-DHL business increased 55.6% as compared to the first quarter of 2004 is not necessarily indicativenon-DHL earnings of full year performance, and results$1.3 million. Non-DHL revenues grew to $6.4 million in the first quarter of 2005, an 87.2% increase over non-DHL revenues of $3.4 million during the lastfirst quarter of 2004. The increase in non-DHL revenues was primarily the result of an increased level of aircraft maintenance services and part sales, as well as, revenues associated with ABX’s operation of a U.S. postal hub, which we have operated since September of 2004. Revenues from these three monthssources increased by $2.4 million as compared to the first quarter of 2004, may improve on, or detractwhile the earnings from actual performance through September 30,these sources accounted for $0.6 million of the increase in non-DHL earnings as compared to 2004.

A summary of our 2004 earnings is shown below (in thousands).

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

Revenues

Total revenues increased 3.8% for the three months ended September 30, 2004 and declined 5.2% for nine months ended September 30, 2004, compared to the corresponding periods of 2003. Revenues from Airborne increased 2.4% during the quarter ended September 30, 2004, reflecting increased activity to support the growth of Airborne/DHL’s ground delivery services and the expansion of Airborne/DHL’s ground network compared to the same quarter last year. Revenues from Airborne declined 5.8% during the nine months ended September 30, 2004, compared to the same periods of 2003. The decrease is a result of lower actual operating expenses subject to mark-up and the exclusion of certain operating expenses when applying the mark-up to determine our revenue for 2004 compared to the first 227 days of 2003 prior to the separation. Revenues from Airborne accounted for approximately 99% of our revenues for 2004 and 2003.

Non-Airborne revenues grew $4.0 million to $6.8 million for the third quarter of 2004 compared to $2.8 million for the third quarter of 2003. Non-Airborne revenues increased $5.5 million to $14.0 million in the first nine months of 2004 compared to $8.5 million for the corresponding period of 2003. The growth was driven by cargo charter services and aircraft maintenance services. Non-Airborne charter service revenues grew $2.0 million and $3.8 million during the three and nine month periods ended September 30, 2004 compared to the corresponding 2003 periods. Hours flown for charters have increased 88.9% in the first nine months of 2004 compared to the corresponding 2003 period due to the addition of new customers. Revenues from maintenance and engineering services grew $2.0 million and $2.9 million during the three and nine month periods ended September 30, 2004 compared to the corresponding 2003 periods. Since our separation from Airborne, we have marketed our aircraft maintenance services to other airlines. As a result, we completed nine and thirteen major aircraft maintenance projects on customer DC-9’s during the three and nine months ended September 30, 2004, respectively. We expect that revenues and earnings from aircraft maintenance services will vary widely among quarters, due to the capacity of our facilities and customers’ demands for maintenance services.

Operating Expenses

The table below compares selected operating statistics for the three and nine months ended September 30,March 31, 2005 and 2004. Depreciation expenses have been excluded from operating cost ratios to provide a comparable expense basis among years.

Our operating expenses are impacted by the volume of packages handled for Airborne/DHL and by the type of service we provide, such as air or ground delivery. Generally, higher piece volumes increase our expenses and positively impact revenues and earnings. The increasesincrease in pieces handled and pounds processed were primarily a result of several factors, particularly the growth in Airborne/DHL’s ground delivery service and the expansion of Airborne/DHL’s ground network and the impact of one additional operating day in the first nine months of 2004.network. Pieces handled per labor hour improved 7.1% and 7.8%in 2005 declined slightly compared to the thirdfirst quarter and first nine months of 2003, respectively, reflecting additional inter-hub shipments to accommodate the expansion of Airborne/DHL’s ground network and growth in deferred delivery services. As a result, our operating costs excluding depreciation expense, measured on a per piece and per pound basis, decreased during the first nine months of 2004, as compared to 2003.reflecting a more severe winter at the main sort hub in Ohio and in the Northeast, and the replacement of a large number of contract workers at DHL’s main sort hub in Ohio and one of its regional hubs.

Salaries, wages and benefits expense increased 3.0% in the third quarter 2004 and 2.6% during the first nine months of 2004 compared to the corresponding periods in 2003. The increase includes the impact of one additional payroll day18.3% in the first quarter of 20042005 as compared to the 2003 period.first quarter of 2004. The increase reflects incentive compensationthe higher levels of staffing and salary inflation adjustments of 4.0% in our flight crew pay scale effective on August 1, 2003contracted labor necessary to operate seven additional hubs and a flight crew salary adjustment of 2.0% effective on August 1, 2004.process the increased piece volumes compared to the previous year. Total paid hours increased 4.2% for the third quarter of 2004 and 0.8%32.3% for the first nine months,quarter of 2005 compared to the corresponding 2003 periods. The increasequarter in the third quarter of 2004 was driven by additional labor at the regional hubs necessary to support the expanded Airborne/DHL ground network.2004.

Purchased line-haul expense increased $13.6 million or 32.5%54.0% in the thirdfirst quarter of 2004 and $32.5 million or 26.6% during the first nine months of 20042005 compared to the corresponding periodsquarter in 2003.2004. The increase reflects continued growth in Airborne/DHL’s deferred delivery products that are generally transported via truck, as well as additional line-haul to

accommodate more inter-hub shipments for Airborne/DHL’s expanded ground network. During 2004 we have added line-haulFor the first quarter of 2005, this category also includes $5.5 million for charter aircraft contracted by ABX for DHL. The administration of these charters and their related cost are expected to support the expansion of Airborne/DHL’s ground network. Additionally, expenses included $2.2 million inbe transitioned to DHL during the third quarter of 2004 and $6.4 million during the first nine months of 2004 for line-haul costs associated with moving DHL labeled shipments on routes which we did not operate in 2003.2005.

Fuel expense increased 37.9%38.6% in the thirdfirst quarter of 2004 and 19.8% during the first nine months of 20042005 compared to the corresponding periodsperiod in 2003.2004. The increases were driven by higher market prices for aviation fuel. The average aviation fuel price was $1.342$1.54 and $0.951$1.12 per gallon in the thirdfirst quarters of 2005 and 2004, respectively. Our consumption of aviation fuel during the first quarter of 2004 and 2003, respectively and $1.221 and $1.002 per gallon for2005 remained largely unchanged compared to the first nine monthsquarter of 2004 and 2003, respectively. Aviation fuel consumption decreased slightly compared to last year. We expect fuel expense to increase during the remainder of 2004 due to escalating market prices.2004. The risks of fuel price volatility are effectively assumed by AirborneDHL through our cost reimbursement arrangement with them.the ACMI agreement.

Maintenance, materials and repairs decreased 5.3%increased 1.1% in the thirdfirst quarter of 2004 and 5.9% during the first nine months of 20042005 compared to the corresponding periods in 2003, primarily due to reduced2004. Increased flight hours of Boeing 767 aircraft resulted in higher maintenance cost which were offset by lower maintenance cost for declining flight hours of expendable aircraft parts and lower contracted maintenance rates in 2004.our fleet of DC-8 aircraft.