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  • ANALYSIS: ATSG profits rise as 767F fleet balloons

ANALYSIS: ATSG profits rise as 767F fleet balloons

Air Transport Services Group (ATSG) continues to acquire more Boeing 767s, riding a wave of demand for package shipments that pushed the company to a $69.3 million 2018 net profit, up nearly four times from 2017.

The Wilmington, Ohio-based air cargo company intends to operate another 10 767 Freighters this year, including several former American Airlines aircraft, it says.

"We ended 2018 with substantial increases in revenues and earnings," ATSG chief executive Joe Hete says during the company's 2018 earnings call on 28 February.

"Markets today are very hot… We've got demand all over the globe," he adds.

Demand remains particularly strong, he says, for regional air transport of small packages such as e-commerce shipments – a segment less affected by global trade, which has shown recent slowing.

"We are very bullish on the growth in the segment we are in," Hete says.

ATSG earned a 2018 operating profit of $111 million, up 12% year-over-year.

Revenue in 2018 declined 16% in one year to $892 million, while expenses declined 19% to $781 million. Those declines reflect changes to how the company accounts for revenue from costs reimbursed by customers, such as for fuel, ATSG says.

Compared equally, ATSG's 2018 revenue increased 15% from 2017, says chief financial officer Quint Turner.

ATSG's results come the week after prime competitor Atlas Air Worldwide Holdings reported strong financials. Atlas' 2018 operating profit jumped 17% year-over-year to $284 million.

ATSG's strong financial performance last year reflects the acquisition of more leased aircraft, the expansion of an agreement with online retailer Amazon and the November 2018 purchase of passenger charter airline Omni Air International, which brought ten 767s and three 777-200ERs into ATSG's fold.

The company closed 2018 with 96 aircraft, up from 77 aircraft one year earlier. Of those, 90 aircraft (77 767s, three 777s, eight 757s and two 737-400Fs) were in service, while five 767-300s were awaiting conversion to freighters and one 767-200 was being prepared for lease.

The company's prime businesses include leasing aircraft through its Cargo Aircraft Management division and operating aircraft under aircraft, crew, maintenance and insurance (ACMI) agreements. ATSG's two airlines – Air Transport International and ABX Air – provide ACMI services.

Cargo Aircraft Management's 2018 pre-tax profit increased 6% year-over-year to $65.6 million, reflecting fleet growth. At year-end, the unit had 88 aircraft, up from 70 aircraft one year earlier.

The ACMI unit's pre-tax profit more than doubled to $17.7 million.

The company also posted a net profit of $14.5 million from providing MRO services, down 26% from the previous year.

ATSG intends to acquire another nine 767s this year and to end 2019 with 105 total aircraft, including five in the freighter-conversion process and 100 in-service aircraft – 10 more than at the end of 2017.

Those 10 aircraft will be 767Fs, of which ATSG intends to deploy five with Amazon and three with an unnamed "major global integrator", says Hete.

"There are two more in play that we think we can secure contracts for in the not too distant future," he says.

ATSG is getting many of its incoming 767s from American. In December 2018, ATSG signed a deal to acquire 20 767s powered by GE Aviation CF6 engines from the carrier between 2019 and 2021.

ATSG expects to acquire six of the American aircraft in 2019, with most arriving in the second half of the year, says Turner. Another nine will arrive in 2020 and the remainder in 2021, ATSG has said.

The company needs more 767s partly thanks to a new agreement with Amazon reached last December. That deal calls for ATSG to bring another 10 767Fs to service with Amazon – including five this year and five in 2020 – for a total of 30 aircraft. ATSG already operates 20 767Fs for Amazon.

Under the agreement, ATSG subsidiary Cargo Aircraft Management leases the 767Fs to an Amazon subsidiary while ATSG divisions Air Transport International and ABX Air operate them.

The new deal also gives Amazon the option to add another 17 ATSG aircraft by 2025, which would increase the fleet to 47 aircraft. ATSG's deal with Amazon specifies those aircraft would include 737-800Fs or, possibly, Airbus A321Fs, a new model ATSG is helping to develop.

ATSG is also working to extend a similarly-structured contract with DHL Network Operations that covers 16 767Fs and expires at the end of March.

Hete expresses optimism that ATSG will land a "multi-year extension" with DHL, though he says DHL might return two aircraft, bringing the fleet to 14 767Fs. "We are very confident we can get those two [aircraft] redeployed," he says.

ATSG's executives say demand from air cargo companies for 767s remains strong as supply tightens.

"Several bidders [are] going after each lot that comes available," Turner says, estimating about 200 passenger 767s will become available over the next 10 years.

The looming shortage is why ATSG partnered with Oregon-based conversion company Precision Aircraft Solutions to develop and certify an Airbus A321 Freighter, Turner notes.

The company hopes that aircraft will be available by the first quarter of 2020.

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