Consultant Insight: ATSG faces a transition year as its largest customer reduces air service

Despite a subdued outlook for the air cargo market, Air Transport Services Group remains fairly upbeat as it issued an outlook guidance for changes in its operating fleet of cargo aircraft. The lessor plans to deliver at least six Airbus A321-200 cargo aircraft in 2023 to fulfill lease orders from customers based in Europe and Asia. A similar number of Airbus A321-200 cargo deliveries are anticipated in 2024. [caption id="attachment_80821" align="alignright" width="400"] ATSG's largest customer has plans to reduced its schedule. (photo/Amazon)[/caption] ATSG subsidiary Cargo Aircraft Management plans to begin leasing A330 freighters in 2024 and continue into 2028. It already has received customer commitments to lease more than two-thirds of the A330 freighters. However, ATSG does plan to operate on a reduced schedule and fewer block hours per aircraft for its customers Amazon and DHL during the first half of 2023 compared to the corresponding period in 2022. Both companies are adjusting their ground and air distribution and fulfillment networks in the U.S. to conform to reduced U.S. economic growth and consumer spending levels. In related news, ATSG noted that Amazon may not extend leases on five Boeing 767-200 freighters that are due to expire between May and September. “Despite the macroeconomic headwinds, we expect moderate adjusted EBITDA growth for ATSG in 2023, reflecting the resilience of our business model,” Rich Corrado, president and CEO of ATSG, said in a statement. “Demand to lease the newly converted freighter types we offer remains as strong as ever. “The entry into new Airbus platforms along with the significant increase in leasing deliveries will increase our capital expenditures above 2022 levels. But clearly, 2023 will be a transition year for us, due to both a changing mix of leased freighters in service, and changes in flight schedules from customers of our U.S. airlines.” Looking ahead This year will certainly be interesting for ATSG. The express market is an important one for the company, which is 19.25% owned by Amazon and is also closely tied to DHL. ATSG also flies for UPS during peak season. The company noted during its third-quarter earnings call in November that “the express network is powered by e-commerce and that's the growth engine for that business.” “If you look at the statistics globally about e-commerce growth in several of the areas, it's in the 20%, 30% growth,” ATSG’s Corrado told analysts. “When we talk to our customers in the U.S., you've seen a slowdown in growth in those areas, but there's still growth. “Now it's adjusting that you went from 2019 to 2022. It's about a 28% increase in express volume. Prior to that, it was in the 5% to 6% range. And according to Boeing, it will settle in around the 5% or 6% range going forward. So we're in an adjustment year, but folks are still looking at getting aircraft.” Chief Operating Officer Mike Berger shared a positive outlok, saying,“80% of cross-border e-commerce sales are transported by air. … One hundred thirty-one billion parcels are delivered every year from e-commerce. That's expected to double by 2026. … The engine is still there — it's still there and it's going to fuel our market for some time.” While e-commerce sales are higher than before the pandemic period, they have slowed as consumers worry about the economy and retailers continue to carry high levels of inventory.

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