Cargo carrier Air Transport Services dinged by fewer jet leases, flights

November 11, 2024

Air Transport Services Group, the largest lessor of freighter aircraft in the world, on Friday said revenue fell 10% in the third quarter because a large number of aircraft with expiring leases were returned, cutting the number of outsourced cargo flights airline subsidiaries fly for large customers.

Financial results were released four days after ATSG (NASDAQ: ATSG) announced plans to go private in a $3.1 billion deal with investment firm Stonepeak. The company said adjusted earnings before interest, taxes, depreciation and amortization declined 5.2% to $129.5 million on revenue of $471 million.

Core profits were also lower because of startup costs associated with the addition of 10 Boeing 767-300 converted freighter aircraft supplied by Amazon, ATSG’s largest customer and a part owner. Amazon leases the aircraft from another provider and decided earlier this year to reassign the midsize cargo jets from rival Atlas Air to ATSG’s ABX Air. The transition began last summer and the 10th aircraft entered operations this week, CEO Mike Berger said in the earnings release.

ATSG now flies 51 aircraft in Amazon’s domestic air logistics network.

ATSG carriers operate 164 aircraft, including 20 passenger jets. Many customers place aircraft leased from ATSG with ABX or Air Transport International to fly on their behalf.

Freighter returns outnumbered new customer deliveries 15 to 11 since the end of September 2023, resulting in pretax earnings of $18 million – a 22% decline – for ATSG’s leasing arm. The company leased four 767-300s and sold four older 767 airframes last quarter. At the end of the third quarter, ATSG owned 89 aircraft leased to external customers, two fewer than a year ago.

The company’s airline business, which includes all-in charter services and scheduled dedicated transport for customers that are responsible for selling cargo space and loading and unloading aircraft, took a pretax loss of $14 million compared to a $12 million profit last year. Cargo flight hours decreased 7% in the third quarter, reflecting the removal of 767-200 aircraft from the fleet and less international flying. Charter passenger airline Omni International also experienced a reduction in flight utilization.

ATSG said it expects to lease its first Airbus A330 converted freighter in the fourth quarter. In total, 19 used passenger aircraft are in, or awaiting, conversion to freighters. Eight 767s are scheduled to be modified by Israel Aircraft Industries. Airbus affiliate Elbe Flugzeugwerke GmbH has five A330s in the conversion pipeline. And a U.S.-based conversion specialist, in which ATSG is a co-owner, has six A321s on its work list.

ATSG has diversified its customer base in the past three years. It once focused on the domestic market supporting a small number of large customers like Amazon and DHL Express. Many new customers now are smaller and based in 10 countries around the world, including Uzbekistan, Pakistan and Malaysia. Although the international airlines are small, ATSG considers them good leasing bets because they usually operate under contract to large express carriers like FedEx, UPS and DHL, with much of the freight they carry originating in China.

ATSG said it expects a strong improvement from the outsourced transportation segment during the fourth quarter as rate escalators in service agreements become effective and customers contract with the cargo airlines to operate three newly leased aircraft.

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