ATSG reports continued growth in Q3, revenues up by 10%
Air Transport Services Group (ATSG), the provider of medium wide-body aircraft leasing, contracted air transportation and related services, has reported consolidated financial results for the quarter and nine months ended September 30, 2020.
ATSG's third quarter 2020 results, as compared with the third quarter of 2019, indicate the customer revenues up 10 per cent to $404.1 million. ATSG's principal business segments, aircraft leasing and air transport, increased revenues by seven percent and 10 percent, respectively, before eliminations. Revenues from other businesses decreased six percent on the same basis.
Adjusted EBITDA from Continuing Operations (non-GAAP) increased 15 per cent to $125.5 million. Increased contributions from ATSG’s airlines, and from eleven more externally leased 767 freighters compared to a year ago, drove the majority of the increase in Adjusted EBITDA.
Rich Corrado, president and chief executive officer of ATSG, said, "In the third quarter, ATSG’s businesses continued to deliver better than expected results, aided by a quarterly record seven deployments of 767 freighter aircraft to its aircraft leasing customers, and by seizing opportunities for charter and cargo ACMI operations to supplement the capacity of our customers. These opportunities helped to offset pandemic-driven year-over-year declines in commercial passenger and Boeing 757 combi operations at two of our airlines. We will achieve our goal of delivering a record twelve 767-300 freighters in 2020 to external customers, including four in the fourth quarter, while also re-leasing three 767-200s to customers in Kenya, Malaysia and Mexico."
Cargo Aircraft Management (CAM)
The significant developments are CAM's third quarter revenues, net of warrant-related lease incentives, increased seven percent versus the prior year. Revenues increased primarily from eleven more converted 767-300 freighters in service, compared with September 30, 2019. The revenues from external customers increased 22 per cent for the third quarter versus the same prior-year period. ATSG’s total fleet consisted of 101 aircraft in service at the end of the third quarter, nine more than at the same point in 2019. The owned ninety-six of those aircraft; three were leased to ATSG airlines by third parties and two were customer-provided for ATSG to operate. Sixty-nine of those in-service, CAM-owned cargo aircraft were dry-leased to external customers on September 30, 2020, eleven more than a year ago. CAM owned nine 767-300 aircraft in or awaiting cargo conversion as of September 30, versus ten a year ago and eight at the end of 2019. CAM expects to lease at least fifteen 767-300 newly modified freighters during 2021, including eleven already under firm customer commitments with Amazon, and four for which CAM is finalizing lease arrangements.
Through nine months of 2020, CAM has purchased two 767 freighters, and six 767 passenger aircraft for freighter modification, all for lease deployment in 2020 and 2021. It expects to purchase three more feedstock 767s in the fourth quarter, and at least seven in 2021. One other CAM owned, in-service 767 passenger aircraft will be converted to a freighter for lease in 2021. CAM’s pretax segment earnings for the quarter were $19.8 million, $2.4 million more than the prior year's third quarter. Earnings reflected a $0.3 million increase in allocated interest and a $2.2 million increase in depreciation expense. Results for the third quarter also reflect reduced earnings from Boeing 757 freighters compared to a year ago. Three of four in service at the end of 2019 were removed from service during the first half of 2020; one will operate for the remainder of 2020.
The significant delevelopments in the third-quarter revenues for ACMI Services increased 10 per cent from the prior-year period, stemming from incremental charter assignments for Omni Air International from the federal government and expanded flying for package delivery networks. These revenues offset revenue reductions versus the prior-year period. Due to pandemic restrictions, Omni's block hours for commercial passenger operations were down over 80 percent while ATI’s Boeing 757 combi block hours were down nearly 50 percent. Additionally, Boeing 757 freighter revenues declined, reflecting the termination of three aircraft by DHL. ATSG's airlines operated seventy-one aircraft at September 30. Total block hours increased 13 percent for the third quarter versus a year ago, principally due to more aircraft in service and expanded route commitments from Amazon and DHL. Pretax segment earnings for the quarter were $18.6 million versus $4.4 million a year ago. Principal factors were lower than expected aircraft and engine maintenance expenses, reduced travel costs for positioning flight crews, lower ramp-up expenses versus those associated with last year's expansion of Amazon’s air network. In addition, interest expense allocated to ACMI Services for the third quarter decreased $1.7 million.
The significant developments in the total third-quarter external revenues from other activities were relatively flat compared to the previous year. The slight increase in external revenues reflect additional aviation fuel sales at the air park in Wilmington, Ohio beginning in mid 2019. The decline in pretax earnings compared to the prior year periods reflects a revenue mix of lower margin aircraft maintenance and ground services in 2020 compared to 2019, start up cost for new US post office sorting locations and additional unallocated corporate costs for consulting and marketing compared to 2019.
ATSG now expects Adjusted EBITDA for 2020 to be approximately $490 million, comparable to ATSG’s Adjusted EBITDA projection issued in February, before the full effects of the pandemic became clear. While ATSG’s aircraft leasing demand is exceptionally strong, the pandemic’s effects on the global economy and on commercial and military passenger operations remain difficult to predict. This new Adjusted EBITDA projection reflects ATSG’s current assumptions about the level and duration of pandemic impacts during the fourth quarter including opportunities to mitigate those effects, and the outlook for ad-hoc cargo aircraft operations during the holiday peak season.
Corrado said that ATSG’s long-term outlook remains very bright. He said, “We expect another record year for cargo aircraft leasing in 2021, given an order book that already calls for us to modify and dry-lease at least fifteen more 767 freighters, while redeploying others to new customers. We are also hopeful that demand from Omni’s commercial passenger charter customers resumes in early 2021.”
He added, "ATSG’s capital expenditures for 2021 are projected to be lower than in 2020, as we indicated last quarter. However, given the continued strong demand for our leased mid-size freighters, we now project purchasing at least seven feedstock 767s next year with continued opportunity for lease deployments at attractive long-term returns on capital extending into 2022. We now project that 2021 capital expenditures will be in the range of $425 million, down from the approximately $485 million we anticipate for 2020."
“The pandemic has demonstrated the value of dedicated cargo aircraft during a period when our customers are processing growing volumes of freight through their networks as e-commerce ordering accelerates. Rather than focus mainly on short-term charter opportunities, we are capitalizing on the opportunity to book long-term lease commitments to our fleet that will continue to generate strong cash returns long after the pandemic ends. As our leased aircraft portfolio expands, we look forward to allocating those ongoing earnings streams among a wide range of value-enhancing alternatives,” he concluded.