(UPDATED 12:30 P.M. ET, Aug. 5, 2022 with details from earnings call.)
Air Transport Services Group, a provider of leased cargo aircraft and outsourced airline operating services, on Thursday reported adjusted pretax income increased 80% in the second quarter to $67 million as express delivery customers continued to demand more aircraft for time-sensitive e-commerce deliveries.
The results came hours after main competitor Atlas Air disclosed a $5.2 billion take-private buyout by three investment funds led by Apollo Global Management.
ATSG (NASDAQ: ATSG), based in Wilmington, Ohio, generated $510 million in revenue, up 24% from the same period last year. Adjusted earnings before interest, taxes, depreciation and amortization increased 23% to $158 million. Adjusted earnings of 59 cents per share came in ahead of Wall Street estimates and 24 cents more than a year ago.
The earnings adjustment discounts one-time gains last year of $38 million in federal COVID-19 relief for its passenger airline and $30 million from revaluation of stock options.
The leasing and airline operations businesses each had revenue growth exceeding 20%.
The company said it is leasing nine more Boeing 767 freighters to customers than a year ago and that flying hours for subsidiaries ABX Air and Air Transport International increased. Its top three customers are the Department of Defense, Amazon (NASDAQ: AMZN) and DHL Express.
Inflation is increasing costs for employees, contracted labor, and moving crews on passenger airlines to get to new assignments, according to management. Crew travel expenses were up 50% and primarily relates to overseas passenger flying for the military.
“Despite persistent inflation, we expect to reach our financial targets for 2022, as demand for our express package network assets and flight operations remains high,” said CEO Rich Corrado. “E-commerce shopping habits, now well ingrained and reinforced by often lower online prices, will continue to drive express-package delivery networks that assure rapid, reliable delivery. That trend, in turn, will drive growth in ATSG’s cash flow through the current economic cycle and beyond.”
ATSG’s leasing arm has 89 aircraft under contract and expects to lease six more in the second half — four 767-300s and two Airbus A321-200 narrowbody freighters once they are retrofitted to carry heavy containers on the main deck. In total, it plans to deploy 10 leased aircraft this year, one fewer than its previous target due to parts and supply chain challenges.
By the end of this year ATSG will operate 49 767 freighters in Amazon’s network – 42 leased by Amazon and seven provided by Amazon.
DHL is slated in the second half to provide four freighters that ATSG will fly in its network.
Cargo Aircraft Management (CAM) purchased five used 767-300 and four A321-200 passenger aircraft during the first half for conversion to freighters, the company said. One 767 aircraft removed from charter passenger airline Omni Air’s fleet will also be sent out for conversion.
A total of 19 CAM-owned aircraft were in, or awaiting, conversion to freighters, including five A321s.
ATSG earlier this year said the first two A321s will go to Dublin-based ASL Aviation Holdings, a contract airline for express delivery companies and Amazon Air.
The A321 is a new airframe for ATSG, which until now has exclusively operated widebody Boeing aircraft. It also plans to convert 29 Airbus A330-300s to access more aircraft as the pool of used, slightly smaller 767s begins to dwindle and conversion facilities face production backlogs. The A321s also provide entry into the hot regional package market, especially daily shuttles between secondary cities and large network hubs.
ATSG has a multi-pronged money-making strategy for the A321 freighters, which will compete against the Boeing 737-800 converted freighters and older 757s. It is also a joint venture partner in 321 Precision Conversions, which designed the conversion kit — wider cargo door, reinforced floor and wing box, rigid cockpit barrier and container conveyor system — and received approval from U.S. aviation regulators. Meanwhile, in-house maintenance and repair organization Pemco is performing many of the installations for the joint venture.
The company said it expects to lease a record 18 freighters in 2023, including 14 767s and four A321s. Twenty-five conversions are scheduled in 2024.
“The majority of those orders are backed by customer deposits, and nearly all are from existing customers, giving us great confidence about growth in our core leasing returns over the next 18 months,” Corrado said.
ATSG previously disclosed it has orders for 20 of the A330 converted freighters. The first remodels will begin next year with deliveries starting in 2024.
CAM, the largest lessor of freighter aircraft, currently owns 130 aircraft. The fleet expansion is being done without increasing debt.
Management is pulling forward capital expenditures by $35 million to acquire aircraft for conversion this year rather than in 2023. Total investments this year, mostly funded by free cash flow, are projected to be $625 million, including $420 million for growth.
Executives said they will purchase two more passenger aircraft and place more deposits on 2023 aircraft acquisitions than were in the original 2022 growth budget.
In April the air transport conglomerate acquired a 40% ownership interest in the joint-venture company GA Telesis Engine Services to provide engine tear-down services to harvest and sell engine parts.
Transport services
ATSG’s dedicated transport segment achieved a 27% increase in revenues. Sharply higher passenger flying and the use of eight more freighters — four from CAM and four provided by customers to operate — were big reasons for the jump.
The company’s turnkey product provides aircraft, crew, maintenance and insurance under long-term contracts, while customers assume responsibility for fuel, operating fees and generating shipments.
ATSG said revenue operating hours for cargo aircraft increased 7%.
The company maintained full-year guidance of $640 million for adjusted EBITDA, $100 million more than last year.
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