ATSG Gains In Q4 On Strength Of E-Commerce, Military Customers

Air Transport Services Group ATSG reported fourth-quarter adjusted pretax earnings increased $28.1 million, or 29%, to $124.3 million, ahead of analysts' expectations, on the strength of its aircraft leasing and contract air transport divisions.

ATSG's fourth-quarter revenue topped $403 million, about $40 million above consensus estimates, driven by strong growth of 5.1% in turnkey business (aircraft, crew, maintenance and insurance), most of which is attributed to the increase in outsourced flying of Boeing 767 freighters for Amazon.com, peak season flying for UPS and the 2018 acquisition of Omni Air International, which provides passenger and government charters.

Full-year revenue reached a record $1.45 billion.

"2019 was very productive and profitable for ATSG and its family of companies, excluding warrant effects. … Demand for our cargo aircraft and flight operations was strong, due in large part to more aircraft and more flight operations for Amazon. We are optimistic that 2020 will be just as good … as we expect to deploy 8-10 more 767 converted freighters for customers," CEO Joe Hete, who announced a week ago that he is retiring on May 7, said in a statement.

Growth this year is expected to come from several sources, boosted by the rising demand in e-commerce. The company already has commitments for leases on nine 767 freighters, four of which will be operated on behalf of Amazon. UPS Inc. will directly lease three more, one of which was already delivered in January. Contract flying for Amazon, the U.S. military and other government customers is also expected to increase. New demand from existing and new customers in 2021 will result in all of ATSG's available 767-300s being placed into service by the end of next year.

Officials said they expect earnings before interest, taxes, depreciation and amortization in 2020 to increase to about $490 million from $452 million in 2019, roughly in line with Wall Street estimates. The outlook wasn't higher because ATSG plans to shift around some aircraft under new contracts, including three 767-200s being returned off lease. DHL, which represents 14% of ATSG's revenue, is also not renewing its ACMI agreement for four Boeing 757-200s that expires this month. Nonetheless, analysts said it was a positive message considering the ongoing effects of the coronavirus contagion.

Company officials said the only real business risk from coronavirus appears to be for military flights from affected countries and potential quarantines.

New investment in eight 767 passenger aircraft and modifying them into freighters is projected to be about $420 million — $30 million and three aircraft less than last year.

"We will be ready to meet their [customers'] expanding needs, even as we anticipate decreasing capital expenditures and debt leverage over the next several years," Hete said. 

Last year, the equipment-only leasing subsidiary added 11 aircraft through the Omni Air acquisition (the planes are leased back to Omni) and seven converted 767 freighters. Fourth-quarter revenue from external customers increased $44.5 million year-over-year. The subsidiary owned 104 aircraft at year-end, 10 more than in 2018.

Airline revenues, through operating companies Omni, ABX Air and Air Transport International, increased $100 million to $293 million in the fourth quarter.

Hete Retirement

Hete will be succeeded by Rich Corrado, 60, who was elevated to president in September. Hete is expected to be named chairman of the board at the company's annual meeting on May 7.

Hete has led the company since 2003, when it was first spun off from Airborne Express as required under airline ownership laws when German express carrier DHL acquired Airborne. He served 20 years in various management roles at ABX prior to that.

Hete is credited with growing the company and the stock's value. During the past decade, ATSG's common-share price increased more than four times as much as the Dow Jones Industrial, S&P 500 and Russell 2000 indexes.

"He led ATSG through an incredible transformation from a one-customer, express-package airline into the world's largest source of dedicated midsize freighter aircraft and related services, now including dedicated midsize passenger aircraft services as well," current Chairman Randy Rademacher said in a statement. "He is known throughout the air cargo industry as a pioneer who saw the potential of leasing midsize converted freighters to give integrated carriers more fleet flexibility, and give others a means to build air-cargo networks without a substantial capital commitment. He also built a solid leadership team and we are confident in their abilities to build on Joe's legacy."

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