August 16, 2023

Malaysian cargo airline Raya leases ATSG’s 1st Airbus freighters


Air Transport Services Group, a diversified lessor and operator of cargo aircraft, has rented out its first Airbus freighters to an airline in Malaysia and is raising debt to help fund more aircraft investment and buy back shares from Amazon even as it slows capital expenditures to please investors.

The Ohio-based company on Monday announced that it delivered a record six converted freighters under lease in one month to customers around the world in July, including its first two Airbus A321 converted freighter aircraft to Raya Airways, a scheduled all-cargo carrier based in Kuala Lumpur. All the leases are for seven years.

The Airbus aircraft were retrofitted by 321 Precision Conversions, a joint venture between ATSG and an overhaul specialist that designs and markets conversion kits. Two authorized specialty shops in Florida, one of which is an ATSG subsidiary, installed the conversions.

Raya has seven other aircraft in its fleet, including three midsize Boeing 767-200 converted freighters from ATSG and one A321 converted freighter that arrived in May after being converted by an Airbus-affiliated aerospace engineering firm. Last year the airline added more flights to Nanning, China; Singapore; Jakarta, Indonesia; and Vietnam to meet demand for e-commerce and time-definite delivery in Southeast Asia.

Meanwhile, Georgian Airlines, Cargojet in Canada, Miami-based Amerijet International and SkyTaxi in Poland each received one 767-300 freighter. Georgian Airlines, headquartered in Tibilisi, is a new customer. Cargojet, which reported second-quarter earnings on Monday and said it has reduced flight activity because of lower express volumes, now has four 767s from ATSG. Amerijet leases a total of 10 767-300s, while SkyTaxi also flies two 767-200s from ATSG.

The new leases underscore ATSG’s growing customer base in global markets, where demand for freighters remains strong to support express delivery of e-commerce shipments. E-commerce is growing faster in many regions of the world than in established economies like the United States, and consumers are ordering goods that require more cross-border transportation.

“The assets that we deploy are targeted to these global e-commerce markets and integrated networks. And you’re seeing that these networks are projecting double-digit growth outside the United States,” said Chief Commercial Officer Paul Chase in an Aug. 4 earnings call with analysts. “When you look at our [new] freighter deployments, roughly 80% of those aircraft are going outside the United States.”

A deal with Vietnam Airlines appears to have fallen through. Two sources outside ATSG say Vietnam Airlines no longer intends to sign a sale-leaseback agreement with ATSG for two of its A321 jets to serve as the foundation for a new freighter division. The Asia cargo market has weakened considerably since last summer, prompting a wealthy investor in November to scuttle plans for Vietnam’s first all-cargo airline. Last August, Chief Strategy Officer Mike Berger told investors that the converted planes could be delivered this year, but the company has not mentioned Vietnam Airlines in any earnings presentations since then and another company official declined to comment about customer discussions outside of public disclosure periods.

ATSG (NASDAQ: ATSG) for decades has built its business around used 767s converted from passenger configuration for carrying heavy containers. The process involves teardown of the passenger compartment and installation of new features, such as a wide cargo door, heavy-duty floor beams and a loading system.

Several years ago, the holding company took a 49% stake in 321 Precision Conversions to tap into the narrowbody freighter market with an Airbus product that competes with conversions of the standard-size Boeing 737-800. And in 2021, it announced plans to procure Airbus A330 passenger jets and convert them into freighters in an effort to reach more international customers that favor Airbus and reduce supply risk as the available pool of 767s shrinks and conversion houses face lengthy production backlogs.

During the quarterly briefing, management said it expects to deliver three more A321 converted freighters this year and in October send the first A330 to Airbus’ Elbe Flugzeugwerke for cargo overhaul. In total, ATSG plans to lease a record 19 aircraft this year, including 14 B767-300s, including four 767-300s that were placed with customers in July for seven years. Three A330s are being acquired this year for lease to customers in 2024. The plan is to have a fleet of 119 freighters in the fleet by year-end, up from 113 today.

That type of investment takes money. 

ATSG said it heard the message last spring from investors concerned about the level of planned capital expenditures during a prolonged airfreight recession, and is dialing back projected spending by $65 million, from $850 million to $785 million in 2023. A third of the amount is for heavy maintenance and the rest for fleet growth. The decrease resulted from postponing purchases of two A321 aircraft for lease in 2024 and fewer planned overhauls of engines for aging 767-200s, six of which have been removed from the fleet and will be stripped for usable parts and engines.

Company officials say they will time future investments in new aircraft closer to when production slots for conversions open up, which should increase liquidity without impacting planned delivery schedules. But they aren’t retreating from their investment strategy despite the current freight transport recession, pointing to e-commerce growth and increasing need for replacements as a large tranche of aging cargo jets start being deactivated.

Last Wednesday, ATSG announced plans to sell $350 million in senior debt that gives investors the option of converting notes into shares of the company. Analysts say they expect the offering to be upsized to $400 million. About half of the money will go to pay off an existing convertible bond due for repayment in 2024 and $118 million will be used to buy back 5.4 million shares, including 1.17 million owned by Amazon – its largest customer. That leaves up to $80 million in debt left over for capital expenditures. The company indicated it will pay down loans from its credit line and then borrow again when it’s time to buy more planes and conversion jobs.

Amazon (NASDAQ: AMZN) owns nearly 20% of ATSG and has warrants allowing it to increase its holding to 40% but appears to be deliberately trying to stay below the 20% ownership threshold for some unknown regulatory reason, said Stifel equity analyst Frank Galanti in a client note.

As ATSG goes through its growth phase and starts receiving lease revenue from new aircraft, it will have plenty of free cash flow to use for reducing debt, management says. 

Positive leasing, airline results

Analysts gave ATSG good grades for its second-quarter performance considering the prolonged downturn in air shipping that has seen global rates tumble 40% to 50% year over year. Revenue increased 4% to $393.4 million (reported as CA$529 million) year over year thanks to a rebound in passenger charter business, 13 more 767-300 freighters deployed to customers, and annual price escalators kicking in for Amazon and DHL Express contracts. Adjusted earnings before tax and accounting measures of $116.7 million were comparable to the prior year and better than in the first quarter.

ATSG’s stock is up more than 12% to $22.59 per share since releasing earnings on Aug. 3.

Leasing subsidiary Cargo Aircraft Management posted a 2% gain in revenue because of higher lease rates and more 767-300s under contract, offset by the scheduled return of 10 767-200s since last summer, including seven in the second quarter. Most of the 767-200s are coming off expiring leases with Amazon’s in-house airline, which relinquished four during the quarter and could return up to eight aircraft this year. Amazon has a new contract with Hawaiian Airlines to fly 10 Airbus A330-300 converted freighters, the first of which is scheduled to enter service in October, and has said the planes are for replacing aging 767-200s.

CEO Rich Corrado said the company’s cargo airlines will operate seven 767-200s for Amazon at least through the peak holiday season. ATSG flies a total of 47 aircraft for Amazon — 38 leased from ATSG and nine provided by Amazon.

Six of the eight airframes returned in the first half have been removed from service. Their parts and engines will be used to support the existing fleet or possibly sold. Overall, ATSG had a net gain of four aircraft on lease over the past year. 

Revenue flight hours ticked up 1% at cargo airlines ABX Air and Air Transport International, which operated three more freighters than in the prior-year period. Flight hours were impacted by certain customers ending contracts for bundled aircraft and transportation service between the U.S. and Europe.

The amount of flight activity compares favorably with competitors, many of which are cutting back operations to better match the prolonged decline in e-commerce and general shipping demand. Canadian carrier Cargojet, which operates a domestic overnight network for Amazon and other express delivery companies, said on Monday that billable flight hours decreased 5.9% during the second quarter as it consolidated some flights to increase efficiency.

ATSG benefited from being a major operator for Amazon Air, which has slowed the pace of expansion but continued to add flights this year while DHL, FedEx and UPS have reduced the number of flights and temporarily parked some aircraft. Amazon Air’s flight utilization actually is up 16% year over year through July, according to Morgan Stanley transportation analyst Ravi Shanker, who tracks the parcel carriers. Domestic flight hours at FedEx and UPS are down 14% and 13% year over year.

Amazon’s North American retail sales increased 11% year over year during the second quarter, and the retailer generated record sales for Prime Day last month, which normally serves as a springboard for a strong peak shipping season for upcoming shopping events and holidays.

Amazon CEO Andrew Jassey said on a call with analysts that customers are interested in faster delivery, which favors providers like ATSG. 

“We’ve been encouraged by the block hours that we’re going to be doing in the fourth quarter. It’s really going to be flat over last year, but when you compare that to what’s going on in the general cargo market, which has been fairly weak, we look to be holding our own,” said Corrado during an earnings briefing for analysts. “Our ACMI (bundled lease with aircraft, crew, maintenance and insurance) operations on the cargo side are targeted at specific network flying that’s geared towards e-commerce and integrated packages, and that has reacted differently to the downturn than general air cargo.”

The federal government is mediating stalled contract talks between subsidiary Air Transport International and its pilots’ union. Talks have broken down over work rules, retirement and compensation. The Air Line Pilots Association said members have not seen any raises since March 2021 while inflation erodes paychecks and claims 152 pilots, representing 28% of the workforce, have left for greener pastures as other passenger and cargo airlines implement new contracts with standard-setting pay rates and retirement packages.

“Our goal always is to get the right contract where we can attract and retain the pilots that we have, and then also have the cost structure from which we’re able to compete for business,” Corrado said, adding he doesn’t expect a settlement before next year.

Click here for more FreightWaves stories by Eric Kulisch.

Contact Reporter: [email protected] 

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The second annual F3: Future of Freight Festival will be held in Chattanooga, “The Scenic City,” this November. F3 combines innovation and entertainment — featuring live demos, industry experts discussing freight market trends for 2024, afternoon networking events, and Grammy Award-winning musicians performing in the evenings amidst the cool Appalachian fall weather.

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