ATSG 2017 revenue and earnings boost, adding more converted B767Fs

28 / 02 / 2018

US-based aircraft lessor Air Transport Services Group (ATSG) saw 2017 full year revenues up 39% to $1.1bn and announced that its Cargo Aircraft Management (CAM) leasing subsidiary will add two more Boeing 767-300 converted freighters to the fleet this year and a third in 2019.

ATSG, which has a long-term B767F lease agreement with e-tailer giant Amazon and express operator DHL, ended the 2017 financial year with fourth quarter revenues up by 46% to $323m.

Fourth quarter 2017 adjusted EBITDA increased 43% to $80.8m, and full year 2017 Adjusted EBITDA up 27% to $267.9m.

Joe Hete, ATSG president and chief executive, said: “Our 2017 results reflect substantial gains in the operational effectiveness and expanded flight schedules of our airlines during peak season, strong contributions from our other businesses, and growth in our leased freighter fleet, including external leases covering fifty of our sixty-one Boeing 767s.

“We also assured our access to low-cost capital with a $120m increase in our credit facility and a $259m offering of convertible senior notes.

“With our attractive asset mix expanding into the narrow-body sector, strong cash-flow generation, and lower federal tax rates, we are well positioned for continued growth in the future.”

Hete added: “Our outlook for 2018 is very positive. We have firm customer commitments for all six of the 767 freighters we expect to deploy in the first half, and strong interest from customers for the others.

“We expect that as e-commerce retailers come to rely even more on air express networks to satisfy their customers’ need for speed, demand for the unique blend of aircraft assets and services that ATSG provides will remain strong."

CAM has secured purchase commitments for three more 767-300 aircraft this year for freighter conversion. These are in addition to the eight already slated for conversion and deployment during 2018.

Based on ATSG's rights to conversion slots, the company expects to complete modification of two of the three additional B767s by year-end 2018.

Hete added: “We continue to see robust global demand for our expanding fleet of B767 freighters, and are confident we will have customers waiting for these as they emerge from our pipeline. 87% of our B767 fleet will be under multi-year dry leases by the end of 2018.

“We expect strong returns from these fleet investments, thanks to our experience in acquiring, converting, and deploying midsize freighters, our unique array of support services, and e-commerce trends driving worldwide investments in regional express networks.”

CAM's fourth quarter revenues, which increased by 8% to $53.6m, were reduced by $4.2m of non-cash amortization of warrant-related Amazon lease incentives, approximately twice as much as during the year-earlier quarter.

CAM’s full-year 2017 revenues increased 7%, and 12% excluding warrant-related lease incentives. CAM was leasing 50 B767s to external customers by the end of December 2017, nine more than a year earlier, and one B737-400 freighter. Three B767s and one B737 were deployed during the fourth quarter.

CAM’s pre-tax earnings declined for the fourth quarter and full year 2017 from year-ago levels.

ATSG stated of CAM pre-tax earnings: “Higher earnings from additional leased aircraft in service were offset by an increase in warrant-related lease incentives, higher interest expense that included non-cash amortization related to ATSG's September 2017 convertible offering, and increased depreciation from its larger fleet.”

CAM expects to deliver ten B767s and one B737 to lease customers by the end of 2018. The first of the 767s was delivered to Northern Aviation Services in January under a multi-year lease commitment.

One other B767 and the remaining B737 in modification are expected to be delivered to customers before the end of the first quarter of 2018.

ATSG’s Air Transport International (ATI) subsidiary in the aircraft, crew, maintenance and insurance (ACMI) leasing sector this month (February) reached a tentative agreement with the union representing its pilot group for amendments to their collective bargaining agreement that would extend the agreement for four years.

The tentative agreement is subject to ratification by the pilots, the voting for which is to be held by the end of March.

Meanwhile, negotiations with unions over an agreement covering ATSG's ABX business are still ongoing, with pilots warning the airline may struggle to continue to grow.

Richard Ziebarth, ABX Air pilot and executive council chairman at Teamsters Local 1224, said: "Many of our veteran pilots – the bedrock of our operation – are nearing the end of their careers.

"Unfortunately, years of stalled, fractious contract negotiations have prevented ABX Air from achieving an updated, industry standard contract which greatly inhibits our Company’s ability to retain the new generation of pilots needed to build on our success.

"We urge ATSG executives to show leadership and work with pilots on a path forward.”

ATSG will continue to invest in the design and certification of new narrow-body freighter variants of the Next Gen Boeing 737-700, and via a joint venture, the Airbus 321-200. The first converted A321 is targeted to be re-delivered to its launch customer in 2019.

Speaking shortly after announcing its 2017 full-year results, the aircraft lessor outlined where it believed the A321-200 freighter would fit into the market.

Joe Hete explained that the Boeing 757 currently in use are reaching an age where they would need to be replaced.

 “If you look at the 321, if that's a great spot in the cargo business because as we've said, it's got the operating cost characteristics of 737 but the cubic capacity of B757,” he said.

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