One day after reporting excellent fourth-quarter results, Air Transport Services Group (ATSG) finally broke the news we have been expecting for some time: it has signed a deal with e-commerce giant Amazon to operate an express air network based on twenty ATSG-owned 767 freighters.
No huge surprise there, as it has been an open secret for some time that ATSG has been operating five 767 freighters in a trial network for Amazon, and Amazon itself recently hinted that it wanted to be able to count on some amount of own-controlled capacity to supplement the lift it buys from other providers (particularly UPS and FedEx).
What was surprising, though, was that as part of the deal, “ATSG also has agreed to grant Amazon warrants to acquire over a five-year period up to 19.9 percent of ATSG’s common shares at $9.73 per share, based on the closing price of ATSG common shares on February 9, 2016.”
If our back-of-the-envelope math is correct, this will allow Amazon to buy a 19.9% stake in ATSG for about $124 million. But not only has ATSG’s share price appreciated since the 9 February cut-off, this morning’s news bumped it another 19%. At the current share price of $13.96, Amazon’s 19.9% would be worth $178 million – already up $54 million!
Of course, Amazon has not yet acquired the stake, and ATSG’s share price will undoubtedly change over the five-year period of the purchase agreement, but it seems safe to say that both companies will come out of this deal rather well. Better than FedEx and UPS, which will lose some business (and which have seen their share prices fall 1.4% and 1.2%, respectively, since the news broke).
Turning from financial speculation to the operational aspects of the agreement, ATSG said the deal “will include the leasing of 20 Boeing 767 freighter aircraft to Amazon Fulfillment Services, Inc. by ATSG’s Cargo Aircraft Management (CAM), the operation of the aircraft by ATSG’s airlines, ABX Air and Air Transport International.” In addition, ATSG’s logistics subsidiary LGSTX Services will provide “gateway and logistics services” – presumably the operation of a sortation facility at ATSG’s Wilmington hub (ILN). The duration of the aircraft leases will be “five-to-seven years,” whereas the operating agreement will be for five years.
Where will these twenty freighters come from? Five of ATSG’s 767-200Fs are already operating in the Amazon network, and ATSG CEO Joe Hete said the company would add seven more 767-200Fs and three 767-300Fs to the network by the end of this year, plus five more 767-300Fs by mid-2017.
- The 767-200Fs to be added this year would be made up of four units coming off lease to other customers (Amerijet, Cargojet, and Star Air), and three not currently committed to customers.
- The three 767-300Fs to be added this year are aircraft recently purchased in passenger configuration and now in conversion to BDSF freighter configuration by Bedek Aviation Group.
- The five 767-300Fs to be added in 2017 are aircraft in passenger configuration which CAM has contracts to purchase. They will be converted to BDSF freighter configuration by Bedek.
The duration of the aircraft leases will be five years for the 767-200Fs and seven years for the 767-300Fs. The operating agreements will be for five years.
We will continue to report on the Amazon/ATSG deal in the coming days, but we encourage anyone interested in the impact of e-commerce on the air express industry to register now to join us at Cargo Facts Asia 2016, where ATSG’s Chief Commercial Officer Rich Corrado will be speaking on a panel devoted to that subject. Cargo Facts Asia will take place in Hong Kong, 19 – 20 April. To register, or for more information, go to www.cargofactsasia.com.