Amazon’s investment in ATSG reflects ‘lead operator’ status

Amazon took industry observers by surprise this week when it elected to exercise cash warrants for 13.6 million shares of ATSG stock valued at $132 million. Only 866,000 shares were converted in a cashless exchange, the method which had been expected for the bulk of Amazon’s warrants with ATSG. [caption id="attachment_16267" align="alignright" width="476"] This CAM-leased 767 freighter operates in the Amazon Air network. Photo/Cargo Facts[/caption] The transaction, subject to regulatory approval, will increase Amazon’s stake in ATSG from 4.99% to 19.5%, making the company eligible to appoint a member to ATSG’s board. According to equity analysts, this signals the relative importance Amazon places on its relationship with ATSG, compared to its other air logistics subcontractors. ATSG has issued Amazon three tranches of warrants for the acquisition of up to 35.2 million shares since its original 2016 agreement with the e-tailer , which was widely expected to exercise these warrants as they mature — but on a cashless basis, where the shares are acquired and then immediately sold. Unlike warrants recently exercised on a cashless basis with Atlas Air Worldwide Holdings, however, Amazon is investing its own cash in ATSG. Amazon’s cash transaction “stands in contrast to a number of its other service partners who it has utilized to build out its global logistics network,” said Jack Atkins, managing director of transportation at financial services firm Stephens, in a note to its clients. As warrants with Atlas Air Worldwide mature under a similar arrangement, Amazon has been selling shares as it exercises vested warrants, keeping its stake in Atlas at under 5% and foregoing the right to appoint a board member. Amazon’s willingness to hold ATSG shares reflects a more prominent role for the company in its domestic air cargo operation. “Our sense is that Amazon views ATSG as its lead operator in the United States,” Christopher Stathoulopoulos, an analyst at global trading firm Susquehanna, told Cargo Facts. From a fleet perspective, ATSG’s affiliates Cargo Aircraft Management (CAM) and operators ABX Air and ATI lease and operate more aircraft for Amazon than its other partners. ATSG airlines are on track to operate at least forty-two 767 freighters on behalf of Amazon by the end of 2021, with all but two leased to Amazon by CAM. The number of aircraft ATSG operates on a CMI basis for Amazon could grow further if its airlines are awarded contracts to operate Amazon’s owned-freighters, which is not unexpected. “We might have a shot to fly a couple of the Amazon-owned planes,” said Quint Turner, CFO of ATSG, during a recent earnings call. Atlas, in comparison, leases nineteen 767Fs to Amazon, and operates seventeen on a CMI basis. Atlas affiliate Southern Air also operates eight 737-800BCFs on a CMI basis. While Amazon has gradually funneled additional 767s to ATSG, Amazon transferred two 767Fs previously operated by Atlas to ATI , and has since kept the Atlas-operated 767 fleet stable. Amazon’s stake in ATSG “speaks to the strong service that ATSG has been providing,” said Atkins. ATSG’s core business is built around leasing and operating 767 freighters, whereas Atlas Air Worldwide has a more diversified fleet and is the largest operator of larger 747 freighters. Sun Country Airlines, Amazon’s newest CMI operator, traces its roots to low-cost passenger travel utilizing the 737-800 and currently operates twelve 737-800BCFs on Amazon’s behalf. Amazon’s gravitation toward ATSG will not immediately impact its other service partners. The majority of Amazon’s CMI contracts do not begin to expire until 2027. Amazon leases twelve 767-200BDSFs from CAM that are operated by ATSG affiliate carriers under a deal set to expire in 2023, if a three-year option is not exercised. Whether Amazon will further increase its stake in ATSG also remains to be seen. The majority of Amazon’s remaining 21.8 million warrants with ATSG are vested, and don’t begin to expire until 2025, so an immediate decision is not required. If exercised, Amazon’s stake in ATSG could grow to between 38% and 39.9%, analysts estimate. “It’s unclear to us whether a full-scale acquisition of ATSG makes sense while competing lessors AAWW and Sun Country remain independent,” said Stathoulopoulos. “We view this as a positive for ATSG as it shows Amazon’s commitment to their partnership and highlights just how strategic it is for Amazon, both currently and over the long term,” said Atkins. 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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