Weekly Wrap: A mega-merger and Amazon’s stake in ATSG

Amid the disarray in the aviation market, a merger deal between AerCap and GECAS will see the two largest lessors combine to form one mega-lessor. In this Cargo Facts Weekly Wrap for the week of March 5, Charles Kauffman and Jeff Lee look at some of the implications of the deal on the freighter market . They then discuss Amazon’s decision to up its stake in ATSG to around 19.5% , before ending with a few of the week’s top freighter aircraft transactions. A transcript is available below. This transcript has been generated by software and is being presented as is. Some transcription errors may remain. Charles Kauffman Hi everyone and welcome to this episode of cocofax connects the newsletter of record for the air cargo in freighter aircraft industries for over 40 years. I'm Charles Kauffman, your host. And this is our weekly wrap for what's happening in the industry this week. Before we begin, I'd like to thank our sponsors and advertisers anchor international AI, C cubed aerospace, Fw and IPR conversions are pleased to be joined today by Jeff Lee, our associate editor, it is March 12 2021. And here are the biggest news items from our editorial team this week, starting with a mega merger, a $30 billion deal to combine less worse air cap and G cast surface this week. Jeff, can you put this into context? Who are these less orders and how is the industry reacting to their new alliance? Jeff Lee these are actually the two largest aircraft vessels in the market. And this deal caught some of our sources by by surprise, some by the nature of the parties involved and others by the fact that it was going forward you know, in times like these, but I suppose given the crazy year it's been nothing really should come as a huge surprise. Charles Kauffman Yeah, that's that's definitely true. Our story This week focused on on how the merger could be an opportunity for aercap to get back into the freighter game. g Cass, as we've reported extensively has been heavily involved with the 737 800 program with both BCF conversions from Boeing and SF conversions from AI. And G. CASS is also a launch customer and his co marketing Israel Aerospace Industries, upcoming triple seven 300 vrsf program. What about air cap? What is their exposure to faders? And conversions looked like at the moment? And how might this change post merger? Jeff Lee exposure isn't huge, they currently don't have that many freighters in their portfolio. One source says estimates it's around 2%. One another estimates it's even lower than that. And we haven't seen any public announcements from aercap you know, on free to conversions and conversion orders. But in the past, they've actually they had been, you know, more heavily involved in conversions and they will launch customer for for the first iteration of RNA 320 and a 321 conversion program. On the other hand, g Cass, of course, was the launch customer for the for Boeing's 737 800 PSF. program, APIs 737 800. sf, and as you said that already a partner in the launch and the development of the of Israel Aerospace Industries, triple seven 300 yard conversion program. But on the feedstock aspect, both of these vessels have large portfolios of passenger aircraft obviously, with and gks has up to around 70 737 800 conversion slots with Boeing. So this deal might represent some sort of an easier pathway for aircraft to move back into the freighter market. And as the aircraft itself, its portfolio as of the end of 2020 had about had more than 250 owned and managed 737. And Geez, we don't know the split between the 700 809 hundreds. But as you know, and seeing with a 320 family aircraft, they've got more than 300 of those. And not all of these will be destined for conversion, obviously. But we know that around 100 of the energies, and about 180 of the 320 family friends are scheduled to come off this between now and 2025. So I think it's likely we'll see some things heading to conversion, particularly given the weakness in the passenger market. What's interesting is the E 321. Conversion program because neither of these two vessels have announced orders or commitments. And with the long backlog on the eighth returns to one conversion already. We if they do want to get into that market, you know, we would expect them to announce or to place orders pretty soon. Charles Kauffman Of course, this is the first narrowbody single aisle freighter conversion available in an Airbus variant. At the moment are there are there any less words who have opted for for you know, mixed portfolios of 737 NGS and the H 320. Family conversions. Obviously, it's early days for for for ca 321 programs. Jeff Lee It is early days, but interestingly B them is as far as we know the only less sore to to have 737 mg and easily turns one conversions. So we'll see one when that changes. Charles Kauffman Probably in as we move into 2022 and as precision three to one precision conversion certifies its program, you will use a 321 program gets off the ground. I would agree there. You know and looking at this deal. Post in his post pandemic situation, Jeff, do you think we're gonna see more such mega deals? Jeff Lee Oh, we'll see. But I mean, right now capital is relatively cheap. And I think across the board, we can expect more consolidation whether it's on the airlines side or logistics companies or handlers. And that applies to vessels as well. But when we see another similarly large deal, possibly not because there was super the largest players in the game, but some other medium sized vessels have relatively healthy balance sheets and the sources we talked to think that we might see some of the smaller players being being picked up by these medium sized firms. So it's, we'll see what happens. But speaking of mega deals, another kind of surprise announcement, Amazon exercised its warrants for shares in atsg, and some on a cash basis, which is different from what they've done with Atlas. What does this suggest about what they think about ATSG? Charles Kauffman You're right to point out the similarity of the warrants that Amazon held with both atsg and Atlas, which have had matured in recent months or as various commercial conditions have been met. Following multiple deals between Amazon and its its heir partners, with with Atlas. So far, we've seen Amazon exchange warrants on on mostly in a non cash basis. Though Amazon has kept its stake at both in Atlas below 5% foregoing the opportunity to appoint a formal board member failing and with atsg, as you mentioned, these these warrants were were on a cash basis, there were some exchange traded on cash basis as well, which indicates that Amazon isn't, isn't against doing that for for some of these warrants with ATSG as well. There's there's consensus among the the the analysts and then some of the other financial analysts and some of the other sources we spoke to, I know that Amazon's willingness to hold atsg shares reflects the company's more prominent role for the company for Amazon's domestic their operation. And if we look at the fleet atsg is Amazon's main partner for the 767 platform in the United States, with atsg Airlines on track to operate at least 40 276 sevens on behalf of Amazon by the end of the year. And it's atsg leasing affiliate cam leases all but two of those to Amazon. And this, this is from a starting point of five that emerged and that evolved into you know, deal for 20 and additional aircraft have been added since 2016. But atsg has been able to scale up its operation for Amazon without major issues. The other 767 operator in the United States at risk in comparison, leases 19 767 to Amazon and operates 17 of those on our CMI basis. Two of those those aircrafts that are not currently in the Atlas fleet were originally in the fleet and were transferred to air transport international following a February 2019 crash involving an atmosphere operated 767 300. And while Amazon never came out and said that, you know, this is the reason for for transferring the aircraft is indicative of service issues and perhaps the continuation of labor disputes between Alice and its labor unions. We have heard from sources that Atlas has made progress, you know, in in improving its quality, delivery and fulfilling its obligations to to Amazon. We have not seen any additional transfers. The southern air fleet has also continued to add 737 800 on a semi basis for Amazon, though not as many as its newest CMI partner for the center seven 800 platforms and country air. Jeff Lee So I mean, what happens next and what what are we going to be looking forward? Charles Kauffman Yeah, there's there's quite a lot to monitor. Moving forward. I guess. I'm quite probably curious. See if Amazon does move forward in appointing a board member? And if so, who? You know, to what extent does Amazon introduce its DNA into the atsg? boardroom? I'm also curious to see Amazon acquired 11 7673 hundreds and is in the process of having them converted? I I'm, I'm curious to see where those those end up. atsg has mentioned that they definitely have a possibility to add those to its it's a OCS We'll see, we'll see pretty soon, you know, how that plays out? You know, long, long term. Does does Amazon continue to increase its stake in atsg? Or they could own up to upwards of 38%? You know, and if so, what is what is the endgame here? Does this change their relationship with with other partners in the United States? You know, and if this is the case, we probably won't see much of a change for at least a few years. Because most of the the aircraft that are on on CMI with with other operators are, you know, linked to deals that aren't aren't supposed to expire for at least four to five more years. So the Atlas Seven, six sevens, for example, don't expire until 2026. The 7378, hundreds that g Cass is leasing to Amazon don't begin to expire until 2029. And, as we've seen with some of Amazon's early leases, you know, the company has not been opposed to extending leases. And in some cases there there do exist options to to further extend those leases. So it's, yeah, they're moving into a long term view and in planning their their domestic operation. So apart from those two major deals, what were some of the top freighter aircraft transactions that we saw this week, Jeff, Jeff Lee we did see and actually, interestingly enough, these also involved Seven, six sevens and PTSD and Atlas, because yto cargo airlines in China has now acquired two of its first 767 300 years and they will soon be sending them to conversion with AI. And meanwhile, Air Canada for what will be the first 767 feet of Air Canada is now in Tel Aviv, and will be also be converted by AI. That, of course will be is being acquired by a TSG who is sending these back after conversion. And a similar kind of deal we saw with Iceland this week, which is selling two of its Seven, six sevens to Atlas there and then leasing them back after conversion. So by by the end of this year, we'll see two new 767 freight operators and later on a third one in Iceland there too. So it's definitely an interesting time for 767. Charles Kauffman Yeah, not only for the Express industry, but there's interest from combination carriers as well. I remember previously, Latin was really one of the only major combination carriers operating the type of Air Canada and Iceland there are on the way. Looking ahead to next week what's on tap? Jeff Lee We're continuing to look at some interesting widebody freighter transactions and we'll have a better look at what happened to traffic in February. So Charles Kauffman yeah, quite a lot. All right. Well, thank you for joining us today, Jeff, and those of you watching thank you for joining us for the weekly wrap on cargo facts. For more multimedia content like this, check out cargo FX comm and search cargo facts connects on iTunes, Spotify or wherever you find your podcasts. Subscribe to Cargo Facts Connect on iTunes or Spotify , or download the episode on Transistor . Cargo Facts Asia, taking place April 20-21 as a virtual experience, is the event for exploring opportunity in the Asia-Pacific region. The event continues to bring together the best, brightest, and most innovative executives in the global air cargo industry. Learn more and register at www.cargofactsasia.com .

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