4Q revenue up, profit down, but ATSG sees blue skies ahead

ATSG 4Q16Air Transport Services Group reported fourth-quarter net income of US$1.5 million, down 89.6% from 4Q15, as revenue rose 22.1% to $222 million. Operating income (EBIT) for the quarter was down 19.6% to $18 million.

However, both the net income and operating income figures come with significant asterisks, and mean very little on their own. As we have extensively reported over the past year, ATSG signed an agreement with Amazon in early 2016. Under the terms of that deal, ATSG agreed to add fifteen 767 freighters to the five it had been operating for Amazon in a trial network. Meeting this commitment meant acquiring 767-300 feedstock aircraft, having them converted to freighter configuration, and hiring and training pilots to fly them – all of which required considerable expense well in advance of any return.

But, an even larger negative impact to earnings came from the non-cash expenses ATSG had to book in regard to the warrants that Amazon receives which, as part of the agreement,  entitles it to own up to 19.9% of ATSG.

Adjusted for all of the above, net earnings were $37.5 million for the year and $12.0m for the fourth quarter.

Over the course of the year, ATSG added nine freighters to the Amazon operation. This brought in considerable additional revenue, but it will mid-to-late 2017 before the Amazon operation becomes accretive to ATSG’s bottom line. Also affecting both top and bottom lines in the fourth quarter was a work stoppage by pilots at ATSG’s airline subsidiary ABX Air. The stoppage lasted only two days (at which point a federal judge ruled it illegal), but the company said it decreased revenue and pre-tax earnings by about $7 million.

As a result of all of the above, ATSG’s aircraft leasing, maintenance, and logistics business segments all performed well in both the year and the quarter. But the ACMI Services segment (ACMI, CMI, and charter operations at subsidiary carriers ABX Air and ATI), did not do so well. In the company’s words: “Our airline operations, particularly those at ABX Air, incurred significant pilot training and premium pay related to expanded CMI operations, along with lower revenues due to a November ABX pilot work stoppage. Taken together, these factors reduced our second-half 2016 pre-tax earnings by approximately $20 million.”

However, looking ahead, ATSG CEO Joe Hete saw nothing but blue skies. “After first quarter 2017, we anticipate costs at our airlines to be normalized. That, along with minimal non-cash pension expense in 2017, is projected to result in a profitable year for our ACMI Services segment.”

Also adding to the upbeat outlook is ATSG’s acquisition at the beginning of 2017 of MRO and conversion specialist PEMCO World Air Services, which the company expects to be accretive before year-end.

2016 also saw considerable growth in the ATSG fleet. Cargo Aircraft Management (CAM, ATSG’s leasing arm) acquired ten more 767 aircraft during the year, and by year-end had converted three of them to freighter configuration, with the remaining seven either in, or awaiting, conversion.

In 2017, in addition to more 767 conversions (and possibly acquisitions), CAM will purchase two 737 aircraft for conversion to freighter configuration by PEMCO. Following conversion, CAM will lease them to China-based Okay Airways, one of ATSG’s joint-venture partners in a new Chinese all-cargo airline. Okay will operate them for express companies serving the domestic China market, and then, when the new jv airline receives its AOC (expected by the end of 2017), will transfer them to the new carrier, along with Okay’s existing 737-300F.

Those interested in learning more about ATSG’s plans  should join us at this year’s Cargo Facts Asia Symposium in Shanghai, April 25-26, where ATSG’s Chief Commercial Officer Rich Corrado will take part in a session titled “The Impact of E-commerce on Air Freight and Express.” For more information, or to register, go to CargoFactsAsia.com.

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