(Updated Friday, Feb. 10, 2023, 4:20 p.m. ET, with comments from Amazon.)
Amazon is reducing the number of aircraft and flights supplied by Air Transport Services Group to fly packages within its air network in response to weaker e-commerce demand and a shift in business to new partner Hawaiian Airlines.
ATSG, which provides aircraft leasing and outsourced transportation services for cargo customers, on Monday issued an outlook for slower growth in 2023, saying Amazon and DHL Express are reducing flight schedules for their contracted fleets but that demand for leased aircraft remains strong. The lower levels of aircraft utilization will moderate profit growth, according to the company.
Amazon pushed back on ATSG’s characterization, saying air cargo volumes have remained consistent and that flight schedules are typically lighter in the first part of the year to allow for regular aircraft maintenance.
“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,” said ATSG President and CEO Rich Corrado. The consensus estimate on Wall Street was for 9% growth in adjusted operating profit.
The holding company plans to issue fourth-quarter earnings results in late February. Third-quarter revenues grew 11% year over year to $517 million. Through the first nine months of 2022, ATSG’s adjusted operating profit grew 24% to $478 million compared to the same period in ’21 and was on track to reach $640 million for the year.
ATSG (NASDAQ: ATSG) said Amazon (NASDAQ: AMZN) is unlikely to renew leases for eight of 12 Boeing 767-200 converted freighters due to expire between May and September. ATSG informed Amazon it will deactivate three of the 767 freighters because the airframes are hitting age limitations. It plans to salvage the engines as replacements on other aircraft. The other five planes will be leased to other customers or sold if Amazon declines to extend the leases.
ATSG charter airlines ABX Air and Air Transport International currently operate 49 767 freighters in Amazon’s network — 42 leased by Amazon and seven provided by the online retailer. Most of them are 767-300s.
Amazon is ATSG’s largest customer, representing about one third of its revenue, and owns just under 20% of its stock. The second-largest customer is the U.S. Department of Defense, which charters ATSG cargo and passenger jets. DHL accounts for 13% of ATSG’s annual revenue.
The announcement didn’t mention Amazon’s October agreement for Hawaiian Airlines (NASDAQ: HA) to operate 10 Airbus A330-300 converted freighters on its behalf, two of which are expected to enter service in the second half of the year. An Amazon official said at the time that the A330s are replacement aircraft for older Boeing 767s that will exit the fleet in the next two years as their leases expire.
ATSG could recoup the loss to Hawaiian by winning business from Atlas Air because Amazon has no equity incentive to maintain long-term charters since Atlas Air is going private this quarter, eliminating Amazon’s stake, Stifel analyst Frank Galanti said in a client note.
ATSG also said Amazon and DHL will reduce utilization of their dedicated 767 freighters across the United States during the first half of 2023 as they adjust their distribution and fulfillment networks to align with declining consumer spending levels amid persistent inflation and slower economic growth.
“The assertion that we’re scaling back Amazon Air flights due to lower demand overall and slow economic growth is false. As part of our annual planning, we routinely reduce our flight schedules at this time of year to account for the typical post-holiday fluctuations and for aircraft maintenance,” Amazon said in a statement.
S&P Global economists forecast U.S. real gross domestic product to contract 0.1% in 2023 and global economic growth to moderate to 2.5% from 3.5% last year.
ATSG’s guidance comes after Sun Country Airlines (NASDAQ: SNCY), a passenger airline with a cargo division that operates standard Boeing 737-800 cargo jets for Amazon, last week said cargo revenue growth was muted in the fourth quarter because Amazon dialed back aircraft utilization.
The online retailer last summer took a more cautious approach toward rapid expansion at its air logistics unit, adding fewer flights than in previous quarters as e-commerce demand waned from pandemic highs. Now it is cutting capacity to reduce costs, which is impacting revenue for its transport providers.
Leasing business flourishes
The aviation conglomerate also said the number of aircraft it expects to lease over the next couple of years hasn’t changed from last year’s forecast. It remains bullish on the air cargo market, especially as e-commerce grows in emerging markets.
The e-commerce boom of the past two years is over and sales have stabilized, but projected growth remains a key driver for freighter demand, especially on short- and medium-haul routes where aircraft help shorten delivery times. Global e-commerce sales topped $5 trillion last year for the first time and are projected to reach $7.4 trillion in 2025, according to eMarketer. Annual online sales growth is back down to 11% from 26.4% in 2020, but that is faster growth than in the overall retail sector. By 2025, e-commerce is expected to represent nearly 24% of total retail sales, up from 17.9% in ’20.
ATSG’s leasing arm will deliver 14 767-300 freighters converted by Israel Aircraft Industries and Boeing this year and 16 in 2024 — most of which will be leased to customers outside the U.S.
Another six Airbus A321-200 narrowbody aircraft are planned for delivery this year to customers in Europe and Asia, pending certification of the company’s passenger-to-freighter structural redesign by the European Union Aviation Safety Agency. Management said it expects EASA to approve the design by midyear and to deliver a similar number of the planes in 2024.
ATSG will make money on the A321 conversions in three ways: as a partner in Florida-based 321 Precision Conversions, the designer and license holder for the conversion design; by converting some of the aircraft through its Pemco Conversions airframe modification company; and by leasing the aircraft. The ability to make money in different manners and offer bundled services helps maintain revenue streams if one sector — such as contract flying — experiences a drop-off.
Work on ATSG’s first Airbus A330-300 freighters is expected to begin late this year, with the first customer deliveries following in 2024. ATSG is purchasing 30 used A330 passenger jets and sending them to Airbus joint venture Elbe Flugzeugwerke GmbH to be converted. It has already received customer commitments to lease more than two-thirds of the A330 medium widebody freighters, which have a greater payload and range than Boeing 767-300s.
ATSG doesn’t currently operate A330s on behalf of customers.
Last year, ATSG completed delivery of eight Boeing 767-300 freighter leases and flew seven more customer-provided freighters.
The move into the Airbus platform and increased leasing deliveries will increase capital expenditures above 2022 levels.
Investment bank Cowen estimates ATSG’s 2023 adjusted earnings before interest, tax and depreciation at $677 million.
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