ATSG Reports Strong Third Quarter 2014 Results

WILMINGTON, Ohio—(BUSINESS WIRE)—Air Transport Services Group, Inc. (Nasdaq: ATSG), the leading provider of medium wide-body aircraft leasing, air cargo transportation and related services, today reported consolidated financial results for the quarter ended September 30, 2014.

For the third quarter of 2014:

Pre-tax earnings from continuing operations increased 25 percent to $15.6 million driven by a $7.0 million improvement in airline profitability compared with a year ago.
Net earnings from continuing operations increased 23 percent to $9.6 million, or 15 cents per share, from $7.8 million, or 12 cents per share in the third quarter of 2013. Operating loss carryforwards for U.S. federal income tax purposes offset much of the company’s federal tax liabilities. ATSG does not expect to pay significant federal income taxes until 2016 or later.
Revenues were $138.4 million, 2 percent lower than a year ago. Excluding revenues from reimbursable expenses, revenues decreased $4.8 million, or 4 percent. Loss of revenues from Mideast operations offset additional revenues from aircraft dry leases.
Adjusted EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization, also adjusted for the effect of derivative transactions) increased by 11 percent to $44.6 million. Adjusted EBITDA is a non-GAAP financial measure, defined and reconciled to comparable GAAP results in separate tables at the end of this release.
ATSG also said it has reached an agreement in principle with DHL, setting a framework for multi-year commercial agreements covering 767 freighter leases and operating services that ATSG’s businesses currently provide in support of DHL’s U.S. network.

The framework anticipates that DHL will extend the leases for 13 Boeing 767 freighters, and execute new leases for at least two more freighters that currently support DHL under short-term arrangements. The new leases will commence next year on or before March 31, 2015, and all of the freighter leases with DHL will run through March 2019. Also, ATSG’s businesses will operate and maintain those aircraft through March 2019 under an amendment to the current CMI (Crew, Maintenance and Insurance) Agreement that would otherwise expire in March 2015. Management expects to execute definitive agreements before the end of 2014.

Joe Hete, President and Chief Executive Officer of ATSG, said, “After many months of discussions, I’m pleased to say that both we and DHL have completed the outline for a relationship that preserves our role as DHL’s principal source of airlift in North America for another four years. Overall, our work for DHL will continue much as it does today, with 767 freighters leased from our Cargo Aircraft Management subsidiary, operated by ABX Air crews and maintained by AMES technicians, supporting the majority of the air freight that moves through DHL’s North American network each day. We look forward to providing more details on this important extension of our eleven-year relationship with DHL when final agreements are completed.”

Hete also said that ATSG’s third-quarter results show early returns from deploying more midsize cargo aircraft with dry-lease customers, and continued progress in restoring the profitability of ATSG’s airlines.

“We have entered the fourth quarter with positive momentum, both from deployments under dry lease agreements we completed in May, and contracts for expanded ad-hoc operations during the holiday season in the fourth quarter. We expect all of our available freighter aircraft to be deployed with key customers during the holiday shipping peak. Looking out into 2015, we find our customers and prospects are now more confident about addressing their needs for additional freighter capacity next year, both for multi-year dry leases as well as shorter-term ACMI arrangements.”

For the first nine months of 2014, ATSG earned $25.4 million, or $0.39 per share diluted from continuing operations, up 9 percent from the first nine months of 2013. Revenues increased 2 percent to $431.7 million. Adjusted EBITDA for the first nine months of 2014 was $128.7 million, up 14 percent from the same period in 2013.

Capital spending for the first nine months of 2014 was $90.9 million, including $57.8 million to acquire and modify aircraft. ATSG purchased two 767-300 freighters in September that it had previously leased from a third party. Capital spending for the full year of 2014 is projected to be approximately $95 million.

Segment Results

CAM (Aircraft Leasing)

Significant Developments:

CAM’s third-quarter revenues from external customers increased $2.9 million versus a year ago. Pre-tax earnings reflect the benefit of those additional revenues, offset by a $3.0 million increase in depreciation from additional and newer aircraft placed in service since the end of the third quarter last year and by costs to prepare aircraft for redeployment to lessees.
At September 30, 2014, CAM owned 53 Boeing cargo aircraft in serviceable condition, including two 767-300 freighters purchased at the end of the quarter. One CAM-owned 757 combi and one other 767-300 freighter were added in the first quarter. A table reflecting cargo aircraft in service is included at the end of this release.
CAM delivered three 767 freighters to dry-lease customers Amerijet and Cargojet during the third quarter under agreements signed with each company in May. The three are in addition to one 767 freighter delivered to Cargojet in June. One other 767 freighter now operating in Europe is expected to be converted to a dry lease in 2015.

ACMI Services
Significant Developments:

2013 revenues from airline services included revenues for operating three 767 aircraft and related crews in DHL’s network in the Mideast. That assignment ended in February 2014. Third-quarter revenues from combi operations for the U.S. Military exceeded year-ago levels.
Pre-tax profitability improved sharply because third-quarter airline operating expenses, excluding reimbursable expense, declined $15.9 million. Principal factors were reductions in employee wages and benefit costs due to workforce reductions and lower pension expense, lower employee travel costs and aircraft landing fees, and lower costs for newer 757 combi aircraft, plus lower unreimbursed maintenance expense.
Since May, DHL has ended short-term lease agreements with ABX Air for three CAM-owned 767s that ABX Air had been operating in DHL’s U.S. market. Two other DHL-owned 767s that ABX Air has leased and operated for DHL in the U.S. will be returned to DHL near the end of the year. An additional two DHL-owned 767s will be returned during the first quarter of 2015.
Third-quarter ACMI block hours were flat with a year ago, excluding those from Mideast operations in the prior-year period.
Two CAM freighters leased to ATSG’s airlines are underutilized, compared with four a year ago and five at the end of the first quarter this year. All available aircraft are expected to be in operation for customers during the fourth-quarter peak holiday season, which is expected to yield a pre-tax profit for the segment for the 2014 fourth quarter and second half.

Other Activities

Significant Developments:

Revenues from external customers were $15.4 million, up 9 percent. Pre-tax earnings declined primarily because of higher personnel costs, including more ramp-up costs for the expanded Wilmington hangar facilities and higher post-retirement benefits.
Outlook

ATSG now projects that its Adjusted EBITDA from Continuing Operations for 2014 will be approximately $175 million. Final results for the year will reflect ATSG’s ability to deploy and operate all of its available aircraft efficiently during peak season, and to support customers with additional logistical and technical services.

President and CEO Joe Hete also noted that the agreement in principle with DHL is non-binding, and is subject to the negotiation and execution of definitive agreements. In current form, the framework will slightly reduce monthly lease rates per aircraft to ATSG while expanding the number of 767 freighters that DHL leases from CAM and extending all lease terms through March 2019.

Hete added that the proposed changes to the DHL leases and CMI agreement beginning in April 2015 would negatively impact Adjusted EBITDA from Continuing Operations by $5 million to $10 million on an annualized basis. ATSG’s preliminary projections for 2015, however, indicate that its Adjusted EBITDA from Continuing Operations will increase versus 2014.

Hete said, “This new framework with DHL would provide us with a four-year customer commitment for more than a third of our 767 fleet, while providing us with opportunities to improve our ACMI Services margins through greater efficiency and even better performance. It also would preserve and extend our position as DHL’s principal air network provider in the United States, and could open more opportunities to support DHL’s networks elsewhere in the world.”