ATSG reports improved income in 3Q, looks to add more 767s

During an earnings call to discuss its third quarter financial results today, Ohio-based Air Transport Services Group reported that unexpected delays in deploying three 767 freighters through its leasing arm led to lower-than-expected revenue during the quarter. However, those aircraft are on track for deployment by the end of this year, and ATSG is on the lookout for more 767 feedstock to continue growing its fleet in 2019.

The company is increasingly well-positioned to acquire 767 passenger aircraft that previously would not have fit its price profile for conversion, thanks to its move last month to acquire Oklahoma-based Omni Air. The acquisition recently received anti-trust approval and approval from the US Department of Transportation is expected within a week, with the acquisition scheduled to close shortly thereafter. During today’s call, ATSG reiterated the value of the acquisition based on Omni’s operation of 767 aircraft, which will serve as conversion feedstock for ATSG’s freighter fleet. Based on the five 767 feedstock ATSG is in the process of acquiring for placement with lease customers next year, the company will need to secure an additional three-to-five feedstock aircraft in the near-term.

Turning to the company’s 3Q18 results, net revenue from customers fell 19.4% year-over-year to $204.9 million, with the decline based on revenue recognition standards adopted this year. Net income rebounded from 3Q17’s loss of $28.2 million to income of $32.9 million. Adjusted net income increased 40.5% y-o-y during the quarter, to $21.5 million.

To take a closer look at ATSG results by business segment…

ACMI Services: Nearly half of ATSG’s revenue comes from its ACMI Services, but the segment also offers the thinnest margins of ATSG’s operations. Pre-tax earnings for the segment were virtually flat with 3Q17 earnings, at just above break-even levels. Costs for the segment were higher than expected after Air Transport International pilots ratified an amendment to the pilots’ collective bargaining agreement in March. Revenue increased 3.6% for the quarter from year-ago levels, to $116.2 million.

Cargo Aircraft Management: Revenue at the company’s leasing arm rose by a narrow 0.5% y-o-y during 3Q18 to $58.8 million, while earnings contracted 2.1% to $19 million. As mentioned above, two 767-300Fs and one 767-200F that were scheduled to go on-lease during 3Q were delayed in conversion, with the lease dates now scheduled for the fourth quarter of this year.

Despite the negative impact from the delays during 3Q, ATSG is optimistic looking ahead and expects to place between eight and ten 767-300Fs in service during 2019. The company said during the call that it is close to securing agreements for five 767 aircraft already and is in the market for the remainder, although the market for feedstock at a suitable price point has become “pretty tight.”

MRO Services: MRO Services saw a substantial gain in revenues, which increased 17.5% to $46.9 million during the quarter to reflect a change in accounting standards. Under the new standards, ATSG tallies  revenue for large projects as they are completed. On the other hand, earnings declined 8% y-o-y for the quarter. Revenues from the MRO Services sector were from lower margin maintenance services and reflected longer completion times.

During today’s earnings call, ATSG also disclosed that its 321 Precision Conversions, LLC joint venture with Precision Aircraft Solutions has already “cut metal” on the first aircraft. The JV is in the midst of engineering work for its A321-200 passenger-to-freighter conversion program announced in August 2017. Currently, the program is still on track for certification of the first converted freighter by the end of 2019, with production scheduled to begin in 2020. ATSG gave a conservative estimate for annual production capacity under the JV of ten to fifteen conversions per year.

Other Activities: Revenues from ATSG’s “Other Activities,” which includes ground handling services, equipment maintenance, postal center sorting services, and other services, rose 32.2% to $22.6 million. Earnings more than doubled y-o-y to $3.1 million, making Other Activities the second highest-earning segment after CAM. Earnings were up thanks largely to ATSG’s minority interest in West Atlantic, as well as improvements in ATSG’s postal and gateway operations. However, this segment will likely face challenges in future quarters, as ATSG’s contract to manage five United States Postal Service facilities expired in September. Those contracts generated nearly half of the segment’s revenues for the first nine months of 2018.