Air Transport Services Group (ATSG) reported its third-quarter results, but the real news is what is coming next.
The company reported third-quarter net income down 33.8% to $6.5 million, as net revenue from customers rose 2.8% to $142 million. At first glance, a one-third drop in net income might seem like either a poor performance, or the kind of result that is explained by the much-abused phrase “but on an adjusted basis…” However, in this case the drop in income was neither a poor result, nor due to one-time items, but rather the result of ATSG’s previously announced transitioning of several aircraft coming off existing leases and into maintenance, for onward to placement with new customers in the fourth quarter. Given that ATSG says it has new commitments for all the aircraft coming off lease, and that two 767-300s currently in conversion and a third about to enter conversion have also already been placed, the loss of revenue during the transition period will have little impact on full-year results, and will in fact be a benefit in 2016 and onward.
As shown in the chart above, ATSG’s dry-leasing subsidiary Cargo Aircraft Management (CAM) was the main source of operating earnings during the quarter. ACMI/CMI activities continue to incur pre-tax losses, but the company said it expects this segment to become profitable in 2016. In the meantime, ACMI leases have served well as a bridge in ATSG’s “Wet-to-Dry” program of bringing new customers into the dry-leasing fold.
The real news, however, is not the results from the third quarter, but rather ATSG’s plans for the fourth quarter and beyond – particularly beyond.
- ATSG said it had twenty-seven freighters under lease to customers at the end of the third quarter. This is three more than at the end of 3Q14, but nowhere near what is coming, as the company said it expects to add five additional 767 freighter dry leases during the fourth quarter, bringing the total to thirty-two by year end. Two of these, as well as another in the first quarter of 2016 will be for eight year terms – much longer than usual.
- As we have recently reported, ATSG launched a new joint-venture all-cargo airline in China. With an investment of $16 million, ATSG will take a 25% stake (the maximum allowed under Chinese law) in United Star Express. Other partners include Chinese carrier Okay Airways, e-commerce retailer Vipshop, Tianjin Dongjiang Investment Company and Bridgewater Developments Ltd.
Regarding the new carrier, ATSG said: “as the venture grows with operating support from Okay Airways, our role will be to offer advice and technical support and to source additional freighters to build out its fleet. That would likely include dry leases of both small and midsized types that fit the market that United Star intends to service.” That market is the increasing demand for express lift to support Asia’s exploding e-commerce business. Initially, United Star will operate in China and nearby Asian countries, providing “third-party express and charter aircraft services to domestic and international express companies.”
The jv partners have said that in its first year of operation, United Star Express “expects to have six small and midsize freighter aircraft, including Boeing 737, Boeing 757 and Boeing 767 aircraft.” ATSG confirmed this, and said the initial plan “is to have three to four 737s flying by the end of 2016 and then look to 2017 to begin to push the market on the 767.”
The first 737 will likely be the freighter currently operated by Okay, but after that? Will ATSG add 737s to its portfolio? The answer appears to be yes, as ATSG CEO Joe Hete said of the 737: “it’s an aircraft that we would add to our lease portfolio if the right opportunity would come by, and of course this would be a good place to start.”
- Speaking of China, ATSG said it had “a number of conversations with SF Express about their strategy going forward.” No further explanation was provided, but Cargo Facts believes the implication is that SF is a likely customer for the new United Star Express venture.
- Finally, and perhaps most interesting of all the new developments, during a conference call following publication of ATSG’s third-quarter results CEO Joe Hete expanded on the subject of managing express networks, saying: “The trial ACMI express network that we launched in September for a US customer has been performing well. It started with two of our 767s and a sort operation here in Wilmington and will grow to five aircraft next week.”
Think about this for a minute. ATSG is conducting a trial for a customer, a trial now involving five 767 freighters and a US sortation hub. What kind of customer considers five widebody freighters and a sortation hub “a trial”? If this is just the trial, what will the full project look like if it goes ahead? How many customers are there that could even begin to think about setting up their own full-scale US express network?
Much food for thought here, and definitely interesting times ahead for ATSG!