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ATSG adds four leases to UPS amid Q2 loss

Air Transport Services Group (ATSG) reports a loss of $26 million for the second quarter, while reinforcing that new aircraft leases to UPS underscore that its core business remains ripe for growth.

The loss reported by the Ohio-based aircraft leasing company contrasted with a net profit of $24 million during the same quarter in 2018 amid higher operating expenses. The company plans to increase its leases looking ahead to 2020 and will lease four Boeing 767 freighters to UPS starting in September, ATSG chief executive Joe Hete says during an earnings call on 6 August.

"We are bullish on the market" for leasing cargo aircraft, Hete says, expecting a rise in leasing revenues during the second half of 2019.

The company maintained its full 2019 forecast of $450 million in earnings before interest, tax, depreciation and amortization, compared with $312 million for 2018. Costs to prepare for heavier flight schedules are expected to impact expenses during the third quarter as they did during the second.

ATSG also plans to accelerate its placements of freighter-converted 767s to Amazon from five to six before the end of 2019. The company updated its agreement with Amazon to deliver 10 767s by the end of 2020 and will deliver the remaining four next year.

Expenses and revenues rose following the company's 2018 acquisition of Tulsa-based charter carrier Omni Air International. Total revenues increased 64% year-on-year to $334 million, while operating expenses offset these gains, rising 65% year-on-year to $297 million.

Government entities comprise "more than 40%" of the company's revenues as of the second quarter. As a result, Hete says "we do not face any significant exposure from tariffs" or global trade uncertainty.

The US Department of Defense became ATSG's largest customer following its acquisition of Omni, which operates a fleet including Boeing 777s and 767s for customers like the US government and military. The company's second quarter revenue from its top customers includes 37% from the Department of Defense, 20% from Amazon and 15% from DHL International, Hete says.

"Compared with air carriers with more payload-sensitive business models, the outlook for the e-commerce-driven regional air networks that drive our cash flow remains very bright," Hete says.

Global air cargo capacity grew faster than demand in 2018, rising 5.2%, while freight load factors fell by nearly 1%, according to an annual industry report published on 31 July by the International Air Transport Association. Freight and mail tonne kilometers expanded by 3.4% during 2018, slower than a 9.7% expansion for the full year of 2017.

During the second half of 2019 ATSG plans to acquire six passenger 767s and convert them to freight aircraft. Its all-Boeing fleet is forecast to have 100 aircraft in service by the end of the 2019.

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