As fleet surpasses 100, ATSG may slow acquisitions

[caption id="attachment_16166" align="alignright" width="439"] An ABX Air-operated 767-200BDSF. (Photo/ATSG)[/caption] Air Transport Services Group’s in-service fleet increased by 63% from 60 units to 98, during the three-year period between Dec. 31, 2016, and Dec. 2019. Indefinite growth at this tempo is not, however, guaranteed. During the company’s 4Q19 earnings call, the company's President Rich Corrado told analysts that if the market slows, ATSG could prioritize share buybacks over aircraft acquisitions in a move that would lower capital expenditures and return cash to shareholders. ATSG estimates 2020 capital expenditures of approximately $420 million, $30 million less than in 2019 on fewer 767 acquisitions. Last year, ATSG acquired eleven aircraft and next year plans to acquire eight. Regardless, the company’s long-term position on 767 feedstock will keep its pipeline of 767 conversions humming well into 2022. ATSG expects total aircraft in service to reach 106 units by yearend 2020, with between eight and ten freighter-converted 767-300BDSFs expected to be redelivered this year. One aircraft has already been placed with UPS, and the carrier is committed to two more. Amazon is also committed to a total of four 767-300BDSFS in 2020, and ATSG’s leasing affiliate CAM has LOI’s for the remaining aircraft, according to Corrado. A further eight freighter-converted 767-300Fs are projected to be redelivered in 2021, according to ATSG’s 4Q earnings release. Much of the 767 conversion feedstock for modifications scheduled later this year and into 2021 is derived from ATSG’s December 2018 commitment to twenty 767-300ERs slated to come out of American Airlines’ passenger fleet . ATSG confirmed to Cargo Facts that it expects disposition of its American purchases by the end of 2021. That would not require aircraft to be in conversion by 2021, and suggests additional redeliveries into 2022 related to this batch of aircraft. Apart from its focus on medium widebodies, CAM will consider acquiring A321-200s for modification with 321 Precision Conversions , a JV between Precision Aircraft Solutions and ATSG. FAA certification for the program is expected this year, and CAM may acquire A321 feedstock for conversion, if prices justify doing so. Estimates for capital expenditures do not currently include any A321-200 acquisitions. As for the four 757-200PCFs currently owned by CAM and operated by ATI for DHL, the German express company does not intend to renew ACMI agreements for the aircraft, which expire this month. DHL may choose to introduce its incoming 737-800BDSFs on these routes. ATSG said it expects to deploy at least two of the 757-200PCFs by yearend, and is considering options for the other two. The Pratt-powered engines are currently in high demand, and could be leased independently of the airframes, said Corrado. Returning to ATSG’s 4Q19 earnings, the company reported adjusted EBITDA up 25% YoY to $124.2 million after accounting for warrant effects, acquisition-related expenses, and other GAAP elements. Net revenue from customers was up 44% YoY to $403.4 million. On a GAAP basis, the company reported a net loss of $40.2 million for the quarter, but this was mostly a reflection of outstanding warrants to Amazon. As part of ATSG’s commercial agreements with Amazon, the company has issued multiple tranches of warrants that upon maturity, will give Amazon the option to purchase up to a 33.2% stake in the company. If Amazon leases 17 additional freighters from ATSG by 2026, it can earn additional warrants for up to a 39.9% stake in ATSG . Warrants get marked to market each quarter based on the trading price of ATSG stock and influence the company’s GAAP earnings even though the impact on the company’s operations is minimal. Looking at quarterly results on a segment-by-segment basis: Cargo Aircraft Management, or CAM: Revenue at the company’s leasing arm net of warrant-related lease incentives rose 18% YoY to $79 million, on full year results from eleven passenger 767-300ERs CAM acquired and leased back to Omni Air in November 2018, and from the addition of seven 767Fs. Pretax earnings for the unit rose 17%, to $18.4 million. ACMI Services: Revenue for ACMI services provided by ATSG carriers ATI International, ABX Air and Omni Air rose 51% YoY to $293 million. Block hours were up 47% YoY for the quarter on expanded flying for Amazon, and from Omni Air’s contributions. Other Activities: Total revenues from other activities increased by 10% YoY to $87.8 million, primarily on growth from the company’s MRO and ground services operations. Pretax earnings jumped to $4.57 million, up from $1.36 million in 2019. For the year, ATSG’s revenues rose 63% YoY to $1.45 billion. Net earnings were 11.6% lower YoY at $61.2 million. Accounting for the warrant effect, adjusted EBITDA rose 45% YoY to $452 million.

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