March 1, 2024

Amazon’s return of leased cargo jets hurts ATSG profit


Less leasing demand for freighter aircraft significantly contributed to a 12% reduction in adjusted core operating profit at Air Transport Services Group during 2023, including a 20% decline in the fourth quarter, and to management’s decision to further slash the budget for investment in new equipment. 

Lower revenue and higher costs for ATSG’s transportation segment, especially passenger airline Omni International, also weighed on earnings.

The cargo-oriented aviation company gave a sober outlook, saying in Monday’s results that adjusted earnings are expected to fall an additional 10% this year, from $562 million to $506 million, absent potential new lease signings, with capital spending lowered to $410 million.

ATSG (NASDAQ: ATSG) last year responded to investor concerns about overspending in the midst of a down cycle for airfreight by cutting $65 million from planned capital expenditures, mostly involving purchases of used widebody jets and having them modified to carry main-deck cargo. In November, ATSG shrank the 2024 capital budget to $505 million. The capital spending plan is now $380 million less than the company spent last year. Most of the reduction ($330 million) reflects fewer aircraft being purchased and sent to airframe repair shops to become freighters, as well as fewer expected engine overhauls.

The biggest drag on financial returns was the acceleration in lease returns of Boeing 767-200 freighters by primary customer Amazon (NASDAQ: AMZN) which reduced adjusted earnings, excluding taxes, loans and capital expenses, in the leasing subsidiary by $33 million last year. ATSG removed 10 of the cargo jets from service and sold five of them, as well as three 767-300s. 

The return by Amazon in April of an additional seven 767-200s and lower engine utilization will drive down 2024 earnings by $55 million, to $506 million. 

Management said three 767-300 leases will also expire this year but didn’t quantify the financial impact. The returned aircraft will offset the benefit from any new lease placements.

Amazon didn’t renew expiring leases for the 767-200s, and ATSG hasn’t been able to place the aircraft with different clients because the aircraft are nearing the end of their useful life. Fourteen of the medium widebody freighters will remain in service, and the rate of removal will slow to two or three over the next few years. 

“These aircraft were in high demand as Amazon built its own air express network starting in 2015 and even more so during the pandemic when customers kept the aircraft in service longer than originally planned. While we always envision the market transitioning to the 767-300s from the -200s, the market softness has accelerated that process,” said Joe Hete, who returned as CEO in November when the board lost confidence in Rich Corrado, during a Tuesday conference call with analysts. “In addition to the lower lease revenue, we also lose power-by-cycle engine revenue as the -200s are removed from service and the aircraft remaining in service fly fewer cycles.”

Adjusted earnings per share of 18 cents was 10 cents below analysts’ consensus expectation.

Total revenue in the fourth quarter slipped 3% year over year to $517 million. ATSG’s full-year revenue ticked up 1% to $2.1 billion, due primarily to a full year of contributions from six new leases of 767-300s made in 2022, as well as partial-year contributions from 13 leased aircraft in 2023, including the company’s first three Airbus A321 narrowbody freighters. 

President Mike Berger said ATSG recently received European Union approval for its A321 freighter conversion design and is now able to lease those aircraft into the European market. Passenger-to-freighter reconfiguration is a new line of business for ATSG. It outsources conversions for its widebody fleet but has partnered with an aerospace engineering company to modify aircraft for itself and other parties.

Pretax losses for the leasing segment were $11 million. Revenue for the year increased 6%, but it wasn’t enough to offset increased expenses for interest and depreciation.

At the end of 2023, ATSG had 90 owned aircraft out on lease, one fewer than in 2022. 

Twenty-three aircraft were in, or awaiting, conversion to freighters at the end of 2023, including 14 767s, six A321s and three Airbus A330s — a new widebody aircraft for the company. It plans to acquire four 767-300s and five Airbus 330 aircraft this year as feedstock for cargo conversions.

Airline flight hours decrease

Omni’s reduced passenger activity and lower cargo margins were behind a fourth-quarter pretax loss of $2 million in contract transportation versus a $26 million gain in 2022. Full-year pretax earnings were $32 million for 2023 and $95 million in 2022.

Omni experienced a 12% decline in flying for the U.S. Department of Defense, primarily because of conflicts in the Middle East. 

Flight hours for the two cargo airlines, which mostly operate under contracts with express delivery carriers to provide aircraft, crews, maintenance and insurance, decreased 2% in the normally busier fourth quarter and were flat for the year. Both customers also provide a handful of planes for the all-cargo carriers to fly on their behalf. Management attributed the decrease to ABX Air, where short-term contracts to operate some international routes for DHL Express during the pandemic boom came to an end in the first quarter of 2923, said Hete.

Flight activity at Air Transport International (ATI), which focuses on hauling packages for Amazon, was flat for 2023 but increased in the fourth quarter. The relative strength of the Amazon business comes against a backdrop of slower consumer shopping online and Amazon’s transformation to a more regional fulfillment network that can be more easily served by truck.

No movement on pilot contract

Hete declared that collective bargaining with the ATI pilots on a new contract is unlikely to be completed this year, saying the two sides are far apart on terms. ATI spent about $70 million on pilot salaries in 2023. 

Talks, which have been underway for more than three and a half years, have broken down over pay, retirement benefits and work rules. ATI pilots, represented by the Air Line Pilots Association, last month asked the National Mediation Board to declare an impasse in contract negotiations and move the process to binding arbitration. In a Jan. 31 interview with FreightWaves, Capt. Mike Sterling, chair of the ATI Master Executive Council, accused ATSG of dragging its feet until 2026, when the Amazon transportation contract expires and can be renegotiated.

The pilots union on Thursday reiterated that experienced pilots continue to leave ATSG, which is replacing them with individuals who meet the lowest minimum qualifications. In 2023, 45% of the airline’s 600 pilots quit the airline. So far in 2024, more than 30 pilots have left the carrier. The situation could eventually erode ATI’s operational reliability and jeopardize relations with Amazon, the union claims.

“The pilots of ATI have invested heavily in growing the airline since Amazon operations began in 2015. We delivered record reliability during the 2023 holiday season despite demanding schedules that deteriorate our quality of life — in an overwhelming demonstration of our commitment to Amazon. ATI pilots help generate more than $500 million in revenue for ATSG, yet management continues to ignore their responsibility to deliver the market-rate pilot agreement we have earned,” Sterling said in a statement.

ATSG’s 2024 outlook is for lower flight hours at its airline operations.

The airline’s story is similar to Canadian counterpart Cargojet, which this week reported a fourth-quarter loss and also backpedaled on planned investments in new freighters. The main difference is that ATSG also leases out aircraft and is slowing fleet expansion rather than stopping altogether. Cargojet said, however, that  shipping volumes have been strong so far this year after ending 2023 on a high note.

With less money devoted to aircraft investments, ATSG is expected to generate positive free cash flow this year.

Wall Street has punished ATSG’s stock in the past year. It closed Wednesday trading at $12.19 per share, down from $22.97 on Aug. 4.

“We’re well positioned going forward with the assets that we have, the investments we’ve already made to be able to react quickly if, and when, the market finally turns around, whether that’s 2024 or 2025. … But the other [key] is execution on our part in terms of better performance overall. That’s been a focus of mine since I came back in November, to have better execution on the part of all the operating units and a more conservative approach in terms of the capital spending,” said Hete. “So I think all those things combined, a more balanced capital allocation strategy going forward after generating some free cash flow puts us in a better position to start moving the stock back up where it should be.”

Click here for more FreightWaves/American Shipper stories by Eric Kulisch.

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