ATSG forecasts “solid growth into the next decade”

Air Transport Services Group (ATSG) reported first-quarter net income up 21.5% y-o-y to $10.0 million as net revenue jumped 34.1% to $238 million. Operating income for the quarter was up 15.6% to $17.7 million. Adjusting for the impact of non-cash expenses related to warrants associated with ATSG’s agreement with Amazon, net earnings were up 33% to $11.2 million.

In a conference call discussing the first-quarter results, ATSG’s senior management stressed that, with the major expenses required by the Amazon agreement now mostly out of the way, and with the acquisition of PEMCO World Air Services beginning to make a strong contribution, things would only get better. They said the ACMI segment would return to profitability this year, and that earnings from the CAM leasing segment would strengthen. In the words of CEO Joe Hete, not only are things good now, but ATSG is looking ahead to “solid growth into the next decade.”

Segment and overall results are shown in the chart above, but much interesting fleet- and customer-related information arose in ATSG’s discussion of the results on the call, and we now turn our attention to that.

Regarding the fleet, ATSG said it now had eighteen 767s operating in the Amazon Prime Air fleet, with the remaining two to be in service by July. In addition to generating more revenue (both dry-lease and CMI), this means lower costs for pilot training and recruitment.

At the end of the quarter, the company had sixty-one aircraft in its operating fleet, all but one of which were in revenue service. During the first quarter, ATSG purchased three 767-300s in passenger configuration, and at quarter-end, had nine 767-300s in or awaiting conversion at Bedek Aviation Group’s Tel Aviv facility. In addition, ATSG’s Ireland-based leasing subsidiary ATSG West acquired a 737-400 in 1Q, plus a second in April, and these two are now in conversion to freighter configuration by PEMCO and will be redelivered to China-based Okay Airways.

Okay is ATSG’s partner in a planned joint-venture airline in China, and, once that carrier – BrightStar Express Airlines – receives its operating certificate, Okay will transfer the two freighters, plus one already in its fleet, to BrightStar.

At year-end (i.e. after the Amazon fleet is complete) ATSG will have six 767-300s in or awaiting conversion. Of these, the company has customer commitments for four, and “significant interest” in the other two.

While ATSG’s focus has long been on 767 freighter operation, the company said that, as a result of increasing interest in 737 operation by carriers worldwide (and particularly in China) it was broadening its focus to include acquisition, conversion, and leasing of 737s. Including not just -300 and -400 Classics, but also the 737-700, for which subsidiary PEMCO launched P-to-F and P-to-combi conversion programs in late April.

Interestingly, ATSG also said it foresaw increasing demand for freighter-converted A321s, and could eventually include this type in its leasing portfolio. However, this, and the interest in 737s, does not mean a shift away from 767s. the company said it saw continuing long-term market interest in the 767-300 freighter. Feedstock and conversion slots are scarce at the moment, but ATSG said it had already acquired what it needed for this year and into 2018, and that it foresaw increased availability of both feedstock aircraft and conversion slots by mid-to-late 2018.

Beyond the aircraft that will be acquired in 2017, ATSG has not committed to any further acquisitions, so expenses at CAM and ATSG West will fall and earnings rise. Likewise, with pilot training expense vastly reduced, the ACMI business segment will also see expenses fall and earnings turn positive, probably in the third quarter of this year.

Another subject that came up in the discussion was the unexpected way the acquisition of PEMCO has played out. While PEMCO was acquired for its MRO business, its conversion business has turned out to be more valuable than expected. Demand for 737 Classic conversions has strengthened, particularly in China where PEMCO has a 70% market share, and PEMCO now has a backlog of ten conversions, including three for YTO Express Airlines and the two mentioned above for Okay Airways.

And finally, regarding Amazon, at the beginning of May, the Prime Air fleet shifted its hub from ATSG’s Wilmington facility (ILN) to Cincinnati/Northern Kentucky Airport (CVG), where it will use DHL’s big hub for its sortation needs. This means that ATSG is no longer providing that service, but the company said that the loss of revenue was relatively small, and that the PEMCO acquisition was already making up for much of what was lost.