ATSG ups guidance – where does Amazon fit in?

US-based Air Transport Services Group issued guidance for stronger fourth-quarter and full-year 2015 results than it had earlier predicted. At the beginning of this week, the company said it now expected that 2015 EBITDA would be “in a range of $196 – $200 million.” This is up 2.5% over its earlier guidance of $190 – $195 million, and up about 10% over 2014’s EBITDA of $180 million.

The main driver of the strong fourth quarter (which in turn is the main driver of the strong year) is both quite well known and also top secret. As ATSG itself has said, in September it set up, on an ACMI basis, at trial express network for a US customer. That trial began with two 767 freighters operating out of ATSG’s Wilmington hub, and quickly expanded to five 767s operating seven days per week.

The increase in revenue from suddenly adding a hub-and-spoke network, including a sortation facility, is obvious. And ATSG is a well-run company, so having the revenue increase carry through to EBITDA is also no surprise. The “Top Secret” part, of course, was the identity of the customer. We put “Top Secret” in quotes because, while no one from either company will confirm or deny it, the customer was widely known to be e-commerce giant Amazon, which finally went public about the trial in its fourth-quarter results call last week.

That call, and a presentation by ATSG’s top brass at an investor event hosted by BB&T Capital Markets this week, have raised some interesting questions and possibilities.
First, when asked during the Amazon earnings call whether the company was planning to set up its own express network, CFO Brian Olsavsky said: “What we’ve found is in order to serve – properly serve – our customers at peak, we’ve needed to add more of our own logistics to supplement our existing partners. That’s not meant to replace them. And those carriers are just not – no longer able to handle all of our capacity that we need at peak. They have been and continue to be great partners. And we look forward to working with them in the future.” The implication here is clearly that the trial was a short-term thing, designed to see if an Amazon-controlled network could be used to supplement outsourced delivery capacity during peak season.

But during a question-and-answer session after ATSG’s presentation at the BB&T event, CEO Joe Hete said of the trial: “The agreement itself runs through March.” That is, the e implication here is that the trial is aimed at something more than just the Christmas shopping rush. Neither Mr. Hete, nor ATSG’s CFO Quint Turner would be drawn on the question of what were the opportunities for growth with the unnamed customer, but one of the slides they used in their presentation was focused on the trial, and on it were the words: “Trial objectives achieved; seeking extended customer relationship.”

Of course, “seeking extended customer relationship” could mean many things, and you can read into it whatever you wish. What we read into it is that the trial went very well, and ATSG believes there is grounds for hope that Amazon will become a long-term and significant customer.

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