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Amazon air cargo supplier leases more package jets

Air Transport Services Group, the air cargo industry’s Swiss Army knife, revealed that a Dublin-based contract airline with customers such as Amazon Air and FedEx has ordered five Airbus converted freighters, building on the first-quarter profit contribution of its leasing arm. 

The provider of aircraft leasing and outsourced air transport reported revenue increased 29% to $486 million and adjusted pretax earnings of $64 million, more than triple the amount in 2021, on the strength of a larger Boeing 767 fleet and greater passenger flying for the military. Both line items beat analysts’ consensus expectations. 

The company boosted its full-year performance estimate to a record $640 million for adjusted earnings before noncore items, up almost $100 million from 2021, as demand for express package transport continues to grow.

“ATSG had a great first quarter, with strong growth across both our business segments and more customers ready to lease all the cargo aircraft that we can deliver,” CEO Rich Corrado told analysts during a briefing on Friday. 

ASL Aviation Holdings, a large provider of air transport in Europe for global express delivery companies, will lease ATSG’s first two A321-200 narrowbody freighters in the second half of the year, with a third aircraft scheduled for delivery in 2023. The airline will also receive two A330 retrofitted freighters in 2024.

Wilmington, Ohio-based ATSG (NASDAQ: ATSG) in early March began conversion of its first Airbus A321, a new freighter type positioned to compete against the Boeing 737-800 and older 757s. Leasing subsidiary Cargo Aircraft Management (CAM) purchased the used aircraft last year and is outsourcing the retrofit work to sister engineering company Pemco. The conversions are based on government-approved designs and installation kits developed by 321 Precision Conversions, an ATSG joint venture company.

Malaysia-based Raya Airways, which operates in the Asia-Pacific region, was originally scheduled for the first two conversion slots but swapped places with ASL because it wanted aircraft with a different engine, Chief Financial Officer Quint Turner said in an email.

In addition to five European airlines that provide service to express delivery logistics companies, postal services and online retailers, ASL has two associated cargo airlines in South Africa and Thailand. There are about 130 aircraft in its fleet, ranging from the Boeing 747-400 to the ATR42 turboprop.

ASL recently ordered an additional 10 737-800 converted freighters from Boeing, bringing the total commitment to 30 aircraft, with 10 options. 

Aircraft leasing expands

CAM produced $107 million in revenue, 26% more than in the first quarter of 2021 period thanks to a greater number of Boeing 767s leased to external customers and a new engine maintenance service, according to ATSG quarterly results. CAM’s first-quarter pretax earnings increased 63% to $35 million.  

The leasing arm has completed two of 11 aircraft deliveries planned for this year, nine of which are for Boeing 767-300 medium widebodies. ATSG said all the planes are committed and that it has customers signed for 19 deliveries in 2023, including 14 767-300s and five A321s. 

Last year CAM set a company record with 15 deployments of 767-300 freighters. The interconnectedness of the business units is demonstrated by the fact that those 15 freighter leases were accompanied by contracts to operate the aircraft, which generated a 63% hike in airline revenues. 

The company had placed 86 owned 767 freighters with external customers as of March 31, with many of them flown by ATSG airlines ABX Air and Air Transport International.

ATSG said it bought one used 767-300 and two A321-200s in the quarter for conversion to freighters, with four more A321 airframes on this year’s shopping list. Conversions involve many steps, including installation of a wide cargo door, reinforced deck beams and new floor panels, and a cargo loading system.

ATSG is embracing the Airbus airframes, after decades exclusively operating Boeing aircraft, to diversify its fleet as available stock of used 767s begins to decrease and to take advantage of the recent fall in values. A330-300s also offer a larger available payload than the 767.

In March, Latvia-based SmartLynx Airlines announced it will be ATSG’s first customer for the converted A330-300s with a deal to lease six units for six years. SmartLynx is a passenger charter operation that is aggressively building out a new freighter division to take advantage of growth opportunities in air cargo.

ATSG said it has customer orders for the first 20 of 29 A330s it will start to convert next year. The A330 conversions are being outsourced to Elbe Flugzeugwerke, an Airbus joint venture based in Dresden, Germany. 

ATSG projected 2022 capital spending of $590 million, including $390 million for growth, primarily funded by strong free cash flow generated this year. Debt restructuring last year gives the company plenty of room to fund a more aggressive investment program, Turner said on the earnings call.

The company controls more than 80 passenger-to-freighter conversion slots through deposits with vendors and its in-house program, and has customers for nearly two-thirds of the aircraft. Plans call for all three aircraft types to be modified, leased and delivered by the end of 2027.

“To my knowledge, no other potential lessor in the midsized converted freighter market has, or could easily acquire, anything close to the number of aircraft in our five-year lease and delivery schedule,” Corrado said. 

Cargo flying

First-quarter revenues from ATSG’s cargo and passenger airlines increased 34% to $330 million. Aircraft utilization for ABX Air and ATI increased 19% year-over-year. Billable operating hours reflected sharply higher passenger flying by subsidiary Omni Air and the benefit of 10 more freighters operated under crewing contracts.

In the past year, Amazon (NASDAQ: AMZN) and DHL Express (DXE: DPW) have placed seven of their leased or owned aircraft with ATSG to operate, up from two a year ago. Amazon has five planes under its aircraft operating certificate with ATSG. Management expects to have 13 owner-assigned aircraft in its fleet, including more from DHL, by the end of 2022.

ATSG operates 46 B767s for Amazon Air — 43 of its own aircraft plus three from Amazon. ATSG will fly 49 aircraft for the retail giant by the end of this year after Amazon hands over three more aircraft.

Corrado said the geographic footprint of this year’s aircraft deployment represents a dramatic shift toward international markets, with all but two of the nine 767-300s being operated under long-term rentals in Asia, Europe and Canada. 

“These customers are responding to demand throughout the world for dedicated midsized freighters, which play the same role in meeting e-commerce demand for rapid delivery of goods elsewhere as they do in the U.S.,” he said.

With the bulk of business tied to express networks that require nightly flights, extra-long leases and government charters not based on economic factors, ATSG is relatively protected from the volatility of the business cycle, said Corrado.

ATSG has 119 aircraft in service, including 19 passenger aircraft.

More FreightWaves/American Shipper stories by Eric Kulisch.

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