ATSG reports another good quarter

Air Transport Services Group (ATSG) had another great quarter following strong results in 2017, with most of the improvements stemming from a dramatic 211.5% year-over-year increase in the group’s ACMI segment earnings.

After recording a US$3.5 million loss in ACMI segment earnings during the first quarter of 2017, 2018’s quarterly results of $3.9 million in earnings reflect the segment’s increased profitability thanks to ATSG operating six additional 767 freighters under ACMI services compared with 1Q 2017. Lower expenses from aircraft depreciation and pilot training on a year-over-year basis also improved the segment’s profitability.

From a forward-looking standpoint, the addition of the six aircraft is an important metric in evaluating what ATSG’s future financial results may look like. During the company’s earnings call today, CEO Joe Hete said ATSG’s appetite for feedstock on a per-year basis is likely to remain around that level, depending on feedstock availability. One potential headwind on that front is the engine problems facing the 787, as passenger and combination carriers have in some cases delayed phasing out 767s in their current fleets while those problems are addressed.

In the meantime, Hete said ATSG’s expected $300 million capex for the year puts them on track to deliver ten 767Fs during 2018, in addition to the 737F delivered during April. “We are also pressing ahead with our partner Precision to get the A321 conversion program going,” which will eventually add A321 converted freighters to ATSG’s roster around 2020.

In a more bearish end to today’s earnings call, ATSG also announced that it has suspended the joint-venture all-cargo airline it had planned to launch in China after facing “strong regulatory delays in late 2016 into 2017” and general headwinds in establishing an all-cargo airline there. However, through its acquisition of PEMCO, ATSG said it has gained new relationships with existing airlines in China that it will look to develop as “a gateway to leasing aircraft in China,” which it noted was the original purpose in launching the China jv.

And now to consider ATSG results by business segment:

ACMI Services: This segment had already returned to profitability during the last quarter of 2017 after ATSG finished ramping up its flying for Amazon. Maintenance costs were also lower during 1Q in another boost to the segment’s profitability. During the first quarter, the ACMI segment recorded a 10.5% increase in total revenue to $119.4 million.

Also during the quarter, pilots at subsidiary carrier Air Transport International ratified an amendment to the collective bargaining agreement through the Air Line Pilots Association. The agreement will result in increased costs for pilot labor and benefits later in 2018 – though ATSG still expects the segment to be profitable for the year – but did not impact first-quarter results.

Cargo Aircraft Management: Revenue at the company’s leasing arm rose 9.2% y-o-y to $52.4 million, and earnings were up 16% to $15.5 million. The increase is thanks primarily to the addition of nine more freighters leased to external customers compared with the same quarter in 2017, for a total of fifty-two leased cargo aircraft at the end of March 2018. ATSG has since delivered a 737 freighter to UK-based West Atlantic in April, and will deliver another 767F later this month on an eight-year lease.

In a testament to ATSG’s efforts at expanding out of North America, the group expects to have six aircraft leased to West Atlantic – which, as a bit of a side note, is not flying for Amazon in Europe, as far as ATSG is aware. However, ATSG is seeing substantial demand for aircraft leasing from several overseas or non-US airlines operating their own networks or supporting networks of the integrators. New lessee Air Incheon is taking two aircraft in 2018, and ATSG is growing its business in the Middle East, and in Canada with Cargojet, which Hete said is seeing “such strong growth they’re looking for more assets to branch out of Canada and do international routes.”

MRO Services: ATSG separated out its MRO services, which include aircraft maintenance and modification, beginning in January 2018 following increased demand for maintenance services. MRO revenues rose 31% y-o-y to $52.7 million, and earnings rose 40% to $4.5 million. The increase was supported by increased external customer revenues, which rose 22%.

Other Activities: In another notable change during the quarter, ATSG rolled its Ground Services segment into “Other Activities.” Revenues in the segment fell by 38.6% to $19.3 million with the elimination of ground service at Amazon’s former hub in Wilmington, Ohio. Segment earnings rose 4.8% to $2.6 million.

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