ATSG adds UPS as new dry lease customer, reports strong 1Q19

Air Transport Services Group (ATSG) today released its first-quarter results for the period ending 31 March, reporting customer revenues up 71% y-o-y for the quarter to $348.2 million on increased ACMI flying. Net earnings, meanwhile, were up a solid 35% to $22.7 million. Robust demand from existing customers such as Amazon and DHL, as well as the Department of Defense via Omni Air, drove ACMI revenues higher. ATSG also announced that it had secured a new agreement with UPS to dry lease at least four 767-300BDSFs to the Atlanta-based integrator. Cargo Aircraft Management, the company’s leasing affiliate, will deploy four freighter-converted 767-300Fs to UPS during the second half of 2019. Last year, ATSG secured rights to twenty 767-300s coming out of the American Airlines fleet as the carrier gradually swaps out its 767s for 787s. Many, if not most of the American planes are expected to go into service for Amazon Air . During an investor call with analysts, ATSG confirmed it has already secured rights to additional feedstock for the UPS conversions, in addition to feedstock that it already has lined up for conversions over the next few years. Without going into specifics, Rich Corrado, COO, ATSG, implied the American feedstock did not fit UPS’ requirements. “The demand from some of our newer customers required a specific variant of the 767 that we didn’t have in the American feedstock. So we needed to acquire aircraft that were specific to their needs.” UPS’ current 767 fleet numbers sixty-two units, all but three of which are production freighters. The three 767-300BCFs in UPS’ fleet are of newer vintage, aged between 15-16 years. Cargo Facts would not be surprised therefore if the 767-300s CAM ends up leasing to UPS are younger than the American Airlines retirements. The first three 767-300s UPS added to its fleet were ex-Japan Airlines units. JAL continues to operate twenty-two 767-300s, but with more 787s on order, could soon retire additional units. Besides the four aircraft ATSG will convert for UPS this year, ATSG plans to convert five for Amazon but may end up converting even more, if feedstock and conversion slots align. At the end of March, the company had eight 767-300s in conversion or awaiting conversion. Despite a slow start to the year for redeliveries, Corrado said he expects between nine and eleven deliveries this year. Next year will be busier, with between twelve and fourteen deliveries. Returning to ATSG's 1Q19 results on a segment-by-segment basis: ACMI Services : Following the Omni Air acquisition, nearly two-thirds of ATSG’s revenue is derived from its ACMI Services. Omni contributed revenues of $135.8 million, which nearly doubled revenues for the unit, to $258.0 million. Pre-tax earnings for the segment were up 261.8% to $12.3 million. Cargo Aircraft Management : Revenue at the company’s leasing arm jumped 31.8% y-o-y during 1Q19 to $74.6 million, while unit earnings rose 4.5%, to $16.2 million. The company currently leases fifty-nine aircraft, up by eight units from last year. Other Activities : ATSG no longer reports MRO Services as a standalone unit and now accounts for it in its “other activities.” Revenues for the segment dropped 6.4% to $67.3 million while earnings fell to $1.9 million. The unit sagged as a result of “lower quality results from ATSG’s minority interest in Sweden-based West Atlantic,” and the loss of a contract to operate postal sort facilities.

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