Wait… 6,000 percent???? ATSG has been doing well for some time, and its 2016 fourth quarter wasn’t bad, so how can it be 6,000% more profitable in 4Q17?
A big part of the answer is that ATSG, like many US-based companies at the end of 2017, gained a massive one-time benefit from changes in the US tax law. In ATSG’s case, the reported profit includes a $59.9 million benefit from the effects of the 2017 Tax Cuts and Jobs Act. In addition, the results include a $14.9 million net gain from warrants issued to Amazon in regard to the two companies’ agreement under which ATSG’s leasing arm now leases twenty 767 freighters to Amazon, with ATSG’s two airline subsidiaries now operating those freighters on a CMI basis in the Amazon Air network.
After making the adjustments for these one-time items, ATSG said fourth quarter net income was up 72.7% to $20.7 million as revenue rose 45.7% to $323.0 million. Operating income for the quarter was up 85.6% to $33.7 million. For the full year, ATSG’s adjusted net income was up 62.7% to $61.1 million.
These adjusted results paint a more accurate picture. CEO Joe Hete summed it up this way: “Our 2017 results reflect substantial gains in the operational effectiveness and expanded flight schedules of our airlines during peak season, strong contributions from our other businesses, and growth in our leased freighter fleet, including external leases covering fifty of our sixty-one Boeing 767s.”
A look at the results by business segment is below, but the big news is that, despite now having placed all twenty agreed-to freighters with Amazon, ATSG says it foresees continuing strong demand for more medium widebody lift, and is expanding its 767-300 fleet accordingly. In addition to the eight 767-300 aircraft it had already acquired and slated for conversion in 2018, ATSG has now secured purchase commitments for three more 767-300 aircraft for freighter conversion by Bedek. Of these, the company expects two to be converted and redelivered before the end of 2018. In addition, CAM will take redelivery of one 737-400 freighter, currently in conversion by PEMCO (which ATSG now owns)
That is an addition of ten more 767-300BDSFs and one 737-400F this year – a huge increase in ATSG’s fleet. However, the company says it expects to deliver all of them to lease customers “by the end of 2018.”
Now, looking at the results by business segment:
ACMI Services: Revenue generated by the company’s two airlines (ABX Air and Air Transport International) 21.1% to $127.2 million. This continues a pattern of increasing revenue, but the big news was that the ACMI Services division returned to profitability after posting losses in the period during which ATSG was ramping up its flying for Amazon. With that Amazon flying at full strength for much of the fourth quarter, billable block hours were up 26% over 4Q17, and full-year block hours were up 22%.
The combination of this increased CMI flying and an end to the cost of training new pilots resulted in a fourth-quarter divisional profit of $11.3 million, up from an operating loss of $5.0 million in 4Q17. The story was the same for the full year, with ACMI Services reporting an operating profit of $2.5 million, up from a 2016 loss of $32.1 million.
Cargo Aircraft Management: Fourth-quarter revenue at CAM, the company’s leasing arm, was up 8.1% y-o-y to $53.6 million. At the end of 2017, CAM was leasing fifty 767 freighters to external customers (i.e. excluding the company’s own subsidiary carriers), up from forty-one at the end of 2016. While this drove the revenue increase, divisional operating profit declined 4.9% to $15.9 million, as “higher earnings from additional leased aircraft in service were offset by an increase in warrant-related lease incentives, higher interest expense that included non-cash amortization related to ATSG’s September 2017 convertible offering, and increased depreciation from [CAM’s] larger fleet.”
Ground Services/Other Activities: ATSG reorganized its former Other Activities division, moving its gateway services, postal center management services, and maintenance of ground and material handling equipment into a new Ground Services segment, while aircraft maintenance and conversion operations remain in Other Activities.
Regarding Ground Services, external customer revenues increased by 63% y-o-y to $71.5 million in the fourth quarter, and up 78% to $204.2 million for the year. Material handling services provided at gateways for Amazon were the single largest contributor to revenue growth in Ground Services. Operating profit for the segment was up 20.8% to $2.1 million for the quarter, but down 11.6% for the full year to $9.4 million, “principally reflecting the termination of hub services for Amazon in Wilmington in May 2017.”
Regarding Other Activities, external customer revenues more than tripled y-o-y to $36.8 million in the fourth quarter, and were up 150% to $108.9 million for the year. However, this segment reported an operating loss of $371,000 for the quarter, as the increased revenue was more than offset by reduced aviation fuel sales, higher administrative expenses and ATSG’s share of losses from its minority investment in Sweden-based all-cargo carrier West Atlantic.