Fewer flight hours by airline units and the scheduled return of Boeing 767-200 freighters from expiring leases pushed down second-quarter revenue by 15.3% at Air Transport Services Group. Those factors caused a 17% drop in adjusted earnings, the company reported after the market’s close on Thursday, but results exceeded analysts expectations.
The diversified lessor and operator of freighter aircraft said adjusted earnings before interest, taxes, depreciation and amortization fell 17% year over year to $130.4 million on revenue of $448.4 million. Many of the 767-200s were returned by primary customer Amazon.
Wilmington, Ohio-based Air Transport Services Group (NASDAQ: ATSG) said the disappointing results were better than internal projections. It raised full-year guidance on expectations of improved performance in the second half of the year, when freight volumes are typically higher. Initial market sentiment seems to agree with that assessment, with the company’s stock trading 5% higher at $13.95 per share in aftermarket trading. Adjusted earnings per share of 19 cents was 3 cents above the consensus on Wall Street, primarily due to better margins in leasing.
The second half also promises to be better because Amazon is providing 10 Boeing 767-300 freighters between June and December for subsidiary ABX Air to operate for five years, under a recent agreement. Amazon is pulling the aircraft from Atlas Air Worldwide’s cargo airline for ABX to operate on its behalf but continues to lease the aircraft from Atlas’ Titan Aviation Leasing. Two aircraft have already been delivered to ABX. The agreement means ATSG will operate 50 medium widebody freighters for Amazon by the end of the year.
The company now expects adjusted EBITDA to be about $526 million in 2024, up $10 million from the previous outlook issued in May because of four aircraft leases that commenced in the third quarter and increased flying for Amazon.
“We expect contracted pricing increases and seasonal charter opportunities in the fourth quarter, which should drive improved sequential results in our [lease-plus flight services] segment,” said CEO Mike Berger. “This expected improvement, combined with momentum in our core leasing business, positions us well to drive earnings growth in 2025. We are ahead of our target for positive free cash flow for the year, with $107 million generated in the first half and an expectation to add to that total in the second half.”
ATSG announced Thursday it has leased a Boeing 767-300 freighter to SLG Worldwide, an air charter service provider in New York that will sublease the aircraft to Euroavia Airlines. The Larnaca, Cyprus-based airline said the new capacity will help it meet growing demand in Eurasia and the Middle East.
Late last month, ATSG’s leasing arm Cargo Aircraft Management (CAM) delivered two Boeing 767-300 aircraft to Georgian Airways – a passenger aircraft and a freighter that recently was converted from passenger configuration. Georgian Airways leased its first 767 freighter from ATSG last year. Georgian Airways home base in Tbilisi, Georgia, is a natural refueling and transfer location for goods moving out of China to Europe, the Middle East and Southeast Asia.
On Wednesday, ATSG promoted Todd France to chief commercial officer after serving since December 2022 as president of the company’s aircraft leasing subsidiary, Cargo Aircraft Management. Prior to that he was president of ATSG’s maintenance unit, Airborne Maintenance & Engineering Services.
ATSG has gone through a series of leadership changes since early November, when Rich Corrado was terminated for weak earnings and a deflated stock price during a pronounced downturn in freight markets. He was replaced by then- Executive Chairman and former CEO Joe Hete, who turned over the company’s day-to-day management to Mike Berger and returned to his board role in June. Berger had been upgraded from chief strategy officer to president in October. Berger was replaced as president by board member Jeffrey Dominick.
“ATSG’s fleet of predominantly mid-sized freighters is well-suited to the requirements of the express and e-commerce sectors. Despite near-term headwinds, the worst should be behind the stock. We expect that as the company starts outperforming low expectations, valuation should grind higher,” said Stifel equity analyst Frank Galanti in a client note.
Q2 details
Leasing unit revenues declined 7% for the second quarter behind the return of nine 767-200 and four 767-300s, more than offsetting the gain from 14 new freighter leases since last summer. The returned aircraft also cut into revenue generated from engine maintenance prices based on the number of hours utilized. ATSG has 87 aircraft on lease to external customers, one more than a year ago. Another 23 aircraft are in, or awaiting, conversion to freighters – six fewer than the end of the second quarter in 2023. Two Airbus A330 aircraft are expected to complete conversion and be leased to an external customer in the fourth quarter, the company said.
ATSG operates three airlines – two cargo and one passenger – that provide outsourced airlift under contract with Amazon, DHL Express and the U.S. military. The transportation side of the business suffered a pretax loss of $7 million compared to earnings of $24 million in the prior year. Cargo flight hours decreased 11% year over year, reflecting the removal from service of certain 767-200s that customers leased and hired ATSG to fly on their behalf.
The diversified aviation company also lowered its outlook for capital spending to $390 million from the $410 million estimated in May – and down $400 million from 2023 actual spending. The company has dialed back investments in aircraft purchases and conversion over the past year as the market cooled off and investors got upset about not receiving higher returns.
Management said it expects adjusted EBITDA this quarter to be similar to the second quarter as ramp-up costs for adding the 10 Amazon-supplied 767 freighters continue, but that costs will be higher in the fourth quarter when the last few planes enter service and other peak-season operations occur.
ATSG has 134 aircraft in service, including 20 passenger planes. There are seven more freighters than a year ago. The total includes straight leases to other airlines, leased aircraft bundled with a service agreement that includes crews, maintenance and insurance, and aircraft provided by customers like Amazon.
Amazon owns 19.5% of ATSG after exercising warrants in 2021.
Pilots’ contract
Meanwhile, pilots at ATSG cargo airline Air Transport International complained about the company’s “unwillingness” to agree to a market-based contract, which they said will likely damage its reputation for reliable service as more experienced pilots continue to leave.
“ATI and ATSG owe it to their largest customer, Amazon, to restore ATI as a strong, growing airline ready to support Amazon Air’s current and future needs,” the pilots, represented by the Air Line Pilots Association, said in a statement this week.
The lack of a pay raise in three years is contributing to pilot resignations and forced the airline to upgrade first officers to captains sooner than normal, the statement continued. Similar union pressure tactics around previous financial results have not met with success as talks, which have been underway for years, remain under federal mediation.
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Twitter: @ericreports / LinkedIn: Eric Kulisch / ekulisch@freightwaves.com
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