ATSG keeps growing freighter fleet with e-commerce profits

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 $524 million in revenue, up 24% from the same period last year. Adjusted earnings before interest, taxes, depreciation and amortization increased 23% to $158 million.

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 company 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.

Management said inflation is increasing costs for employees, contracted labor, crew travel and other airline expenses. 

“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. 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 A330-300 equivalents to the 767 to access more aircraft as the pool of used 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 360-degree 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. In-house maintenance and repair organization Pemco is performing many of the installations for the joint venture. Eventually, ATSG also could offer crews to fly the standard jets for customers.

The company said it expects to lease a record 18 freighters in 2023, including 14 767s and four A321s.

“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.

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.

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. 

Click here for more FreightWaves/American Shipper stories by Eric Kulisch.

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