(Correction: An earlier version of this story said Amazon will lease the freighters from ATSG. Amazon is providing the aircraft in this service agreement.)
Amazon is providing 10 additional freighter aircraft to Air Transport Services Group to operate on its behalf over five years as part of a deal that deepens relations between the companies and underscores how the retailer is gaining in the U.S. parcel market.
ATSG (NASDAQ: ATSG) announced late Monday that it will begin flying the Boeing 767-300 cargo jets for Amazon’s logistics network this summer, with the potential to add another 10 aircraft, under a five-year contract. ATSG did not say where Amazon is obtaining the aircraft.
The agreement also extends the existing flying contract, which runs until March 2026, for three more years and includes the award to Amazon (NASDAQ: AMZN) of an additional 2.9 million warrants to purchase ATSG shares.
By the end of the year, ATSG said it expects to operate 50 of the medium widebody freighters on Amazon’s behalf.
Amazon already owns 19.5% of the Wilmington, Ohio-based aircraft leasing and aviation services company after exercising warrants in 2021. ATSG has been one of Amazon’s primary air transportation providers ever since the e-commerce giant launched its in-house cargo airline in 2016. ATSG said it also agreed to give Amazon more time to exercise vested warrants for 21.8 million shares previously issued to Amazon, as well as for unvested warrants for 2.9 million shares.
The new Amazon deal boosted ATSG’s full-year outlook for adjusted core operating activities by $10 million, to $516 million, from the figure presented in February. The projection includes costs associated with bringing the converted freighters into service.
Amazon’s decision is a boon for airline subsidiary ABX Air, which will hire more than 50 pilots to support the contract after several years in Amazon’s doghouse because the pilots union conducted an unannounced strike on the eve of Black Friday and essentially shut down Amazon’s delivery network for more than a day. The Airline Professionals Association, which is under the Teamsters umbrella, has recently taken great pains to promote ATSG and the company’s service quality in an effort to drum up business and, in due course, a strong contract for the pilots.
ABX Air currently operates 24 B767 aircraft but only about four freighters within Amazon’s air network.
ATSG provides and flies 30 Boeing 767 freighters for Amazon. Amazon provides 10 more aircraft that ATSG operates on its behalf. Amazon owns eight of those planes and leases two of them from the leasing arm of Atlas Air Worldwide Holdings, which also has a cargo airline in business with Amazon. Amazon relies on outsourced airlift because it technically isn’t a true airline with pilots of its own and an operator’s certificate. The amended transportation services agreement brings to 50 the total number of aircraft operated within Amazon’s air network.
The arrangement essentially reverses Amazon’s decision to return 12 Boeing 767-200 converted freighters when their leases expired – seven last month and five last year. The difference, however, is that ATSG won’t receive leasing revenue. It will be paid for providing crews, maintenance and insurance. The 767-200s are older and smaller than the 767-300s.
A year ago it was unclear whether Amazon planned to reduce business with ATSG after not immediately replacing the relinquished 767-200s as e-commerce demand softened and Amazon added Hawaiian Airlines as a partner carrier to operate large Airbus A330 freighters.
Although online shopping demand has decreased since exploding to record heights during the pandemic, Amazon has gained parcel volume and taken market share from FedEx and UPS in the U.S. market, according to recent research from Pitney Bowes. Amazon shipped 5.9 billion packages last year, up 16% y/y and second only to the U.S. Postal Service.
Related: ABX Air pilots choose cooperation over confrontation
ATSG’s revenue for the first quarter was $486 million, down 3% year over year. It reported adjusted operating income of $15.2 million, down $22.6 million from the same period in 2023. Results were better than analysts expected.
Leasing revenue decreased 7% in the quarter, reflecting the return of 16 widebody freighters since March 2023 and reduced flight tempo by network customers like Amazon and DHL Express. ATSG’s transportation services contracts include maintenance. When aircraft fly fewer hours, the company generates less revenue from an engine maintenance program that is based on the number of cycles put on the engines. In the past year, ATSG also leased 15 freighters, including three Airbus A321 narrowbody freighters.
During the first quarter, ATSG deployed four newly converted 767-300 freighters to external customers. In March, Uzbekistan-based My Freighter received a 767 from ATSG.
ATSG, which released earnings after the market closed, said revenue from its cargo airlines, ABX Air and Air Transport International, dipped 3.3% with three fewer aircraft in service than a year ago. Cargo flight hours decreased 3% during the first quarter, primarily due to greater deployment on shorter domestic routes and less international flying.
ATSG has 114 converted cargo jets in service, two more than at the end of 2023, with 46 leased to other airlines. It also operates 19 passenger charter jets through a company called Omni Air International. An additional 24 passenger aircraft acquired by ATSG are in, or awaiting, cargo modification at airframe overhaul facilities. There are 17 planes available for lease this year, but it may be difficult to find a home for the three A321 cargo jets because of the glut in the narrowbody freighter market. 767-200s being returned are being held for sale or released to other customers.
Investors have beaten down ATSG’s stock over the past 18 months over concerns management was continuing to acquire aircraft for freighter conversions while the global air cargo market was in a major slump. Management insisted its long-term strategy would pay off as the market recovered, but it responded to the pressure by reducing growth investment. It is forecasting capital expenditures of $410 million this year, $380 million less than in 2023.
ATSG said it generated $15 million in free cash flow during the first quarter, a function of the reduction in capital expenditures.
ATSG’s stock price increased 6.4% to $14.10 per share in after hours trading.
Click here for more FreightWaves stories by Eric Kulisch.
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