ATSG’s appetite for 767Fs to persist beyond 2019

Concurrently with the reporting of its 2Q18 financial results, during a call with financial analysts, Air Transport Services Group (ATSG) doubled-down on its commitment to the 767 platform through 2019 and beyond, signaling that it will add between six and ten of the type in 2019, and is likely to add more in 2020 and 2021.

This year, ATSG, through its Cargo Aircraft Management (CAM) leasing subsidiary, plans to convert and deliver a total of nine 767F-300Fs and one 737-400F. Four 767-300Fs were added to CAM’s portfolio during the first half of the year, two aircraft currently undergoing conversion are slated for redelivery this quarter, and four additional units are due in 4Q18. Looking ahead to next year, ATSG says it has already secured feedstock and conversion slots for five 767Fs, and ultimately expects to convert somewhere between six and ten aircraft in 2019.

Turning now, to the company’s 2Q18 results, net revenue from customers rose 6% year-over-year to $203.6 million driven by higher earnings from ATSG’s (CAM) leasing subsidiary. Net income swung from a loss of $48.4 million the year prior, to earnings of $22.8 million.

And now to consider ATSG results by business segment:

ACMI Services: Despite deriving nearly half of its revenue from ACMI Services, margins are thinner compared to ATSG’s other segments, with earnings from ACMI Services comprising just 5.2% of ATSG’s overall earnings in 2Q. Despite a drop in seasonal CMI activity following peak season, revenue for the division rose 6.9% y-o-y to $119.6 million.

Rather than pure ACMI deals, most of CAM’s assets are dry leased, and then complemented with supplemental maintenance or CMI services. ATSG estimates that 85% of its fleet will be dry leased by year-end, with its own airline providing CMI services for about two-thirds of the dry-leased fleet.

Cargo Aircraft Management: Revenue at the company’s leasing arm rose 11% y-o-y to $58.6 million, and earnings were up 20.3% to $15.4 million. As mentioned above, the boost is primarily a result of the company’s growing 767 fleet and customer base. For the second half of the year, CAM expects to dry lease a total of nine additional aircraft.

MRO Services: MRO services saw revenues drop 31.1% y-o-y to $45.8 million, in part due to changes in how ATSG records revenue for large projects by now tallying revenue as large projects are completed, and on lower conversion activity at its PEMCO subsidiary.

Other Activities: Revenues from the companies “Other Activities,” which includes ground handling services, fell 9.2% to $19.7 million, while earnings nearly doubled from 2Q17 to $2.7 million. Of note was a new contract awarded to the company’s LGSTX Services group to perform gateway services at Amazon’s Tampa location. LGSTX previously managed contractors for Amazon in Tampa under a cost-plus model but is now taking control of the facility under a direct contract.