String of deals in 4Q18 set ATSG up for growth in 2019

Yesterday, we considered how an application to the Department of Transportation revealed Air Transport Services Group’s (ATSG) desire to get into 777F operations through its subsidiary, Omni Air LLC.

Today, we turn to ATSG’s 4Q18 results, which on the surface look disappointing, but actually position ATSG for significant growth in 2019 and 2020. The company reported a loss of $4.3 million in the fourth quarter of 2018 as revenues jumped 27.8% to $336.9 million. Operating income for the quarter fell 3.5% to $32.7 million. Adjusting for the impact of non-cash expenses related to warrants associated with ATSG’s agreement with Amazon, net earnings for the quarter looked much better, down just 9.1% to $29.8 million. For the year, adjusted net income was up 8.4%, to $104.6 million.

Although revenues were up across the company’s core ACMI, CAM, and MRO segments, the termination of five contracts to operate U.S. Postal Service sort facilities led to a 26.3% drop in revenues reported in the “Other Activities” segment.

Despite the less-than-stellar appearance of the 4Q results, ATSG inked a number of monumental agreements during the quarter that will drive growth during the years to come. As we mentioned yesterday, ATSG completed its acquisition of Omni Air LLC in November, which not only creates a steady pipeline of 767 conversion feedstock but also acquaints ATSG with the 777 platform.

As for the backbone of ATSG’s operations, the 767, even in what is currently a fiercely competitive market, the company has secured adequate feedstock to support at least twenty-five freighter-converted 767Fs over the next three years. In December, ATSG announced it had secured rights for twenty ex-American 767s, adding to the five 767-300s that were already in conversion at year-end 2018. Shortly after the deal for the American jets, Cargo Aircraft Management (CAM) revealed a deal to lease ten additional freighter-converted 767-300Fs to Amazon, with five to be delivered per year in 2019 and 2020. Leases will last ten years and include an option for a three-year extension. Amazon also extended leasing agreements for the twelve 767-200BDSFs and eight 767-300BDSFs it currently leases from CAM by two and three years, respectively.

Discussing 767 feedstock issues in an earnings call with analysts, ATSG executives expressed little concern over the availability of 767s suitable for conversion with twenty-five units in the pipeline. Company Chief Commercial Officer, Rich Corrado, said, “As far as what’s out there today, there’s nothing large like the American batch, which is what we prefer.” Still, there are odds and ends becoming available with several bidders going after each lot, he added.

ATSG’s projected capital expenditures reveal the premium ATSG paid to secure the prized American 767s. Responding to an analyst question, company CFO Quint Turner said the cost of acquiring and converting a 767 “may have ticked up a bit.” While last year the price tag of a freighter-converted 767-300F may have been around $25 million, the American units will come in at around $28 million.

Overall, ATSG expects to place between eight and ten incoming 767-300Fs through its leasing subsidiary, Cargo Aircraft Management, Inc., five of which will go to Amazon, with between three and five going to other customers. In addition to the 767-300Fs, CAM will also be remarketing two 767-200Fs coming off lease from DHL.

Those interested in learning more about demand for widebody freighters s are invited to join us at Cargo Facts Asia 2019, to be held 15-17 April at the Langham Shanghai. For more information, or to register, visit www.cargofactsasia.com. Discounted early-bird registration ends 1 March.