To no one’s surprise, Amazon.com, Inc. and one of its aircraft operating partners, Air Transport Services Group (NYSE:ATSG), said today that ATSG will lease to Amazon 10 of the 20 Boeing 767-300 extended-range passenger planes that ATSG said yesterday it would acquire and convert into freighter equipment.
At the same time, Amazon (NASDAQ:AMZN) and ATSG have agreed to solidify their existing financial and operational ties. ATSG said in a statement it will issue warrants to Amazon that, if fully exercised, would increase the Seattle-based e-tailer’s stake in ATSG to 33.2 percent. The warrants, which have an exercise price of $21.53 a share, would expire sometime in 2026, ATSG said. Amazon would also receive “warrant rights” potentially boosting its ATSG ownership to 39.9 percent should it lease 17 additional cargo planes, beyond the 10 announced today, before January 2026, ATSG said.
Amazon already holds warrants that if fully exercised before March 2021 would represent a 19.9 percent ownership stake in Wilmington, Ohio-based ATSG. ATSG will require shareholder approval to increase the number of common shares required to fulfill the warranty obligations. It plans to submit a proposal at its annual meeting on May 19.
In addition, ATSG and Amazon, which already leases 20 767s from ATSG, will extend the duration of the lease agreement on 12 of the planes by two years to March 2023. The agreement covering the remaining 8 aircraft will be extended until 2026 and 2027, which would be 10-year extensions depending on when the original agreements were signed, ATSG said. Both lease extensions have options to extend an additional 3 years beyond that, ATSG said.
The deal for the 10 additional planes, half of which will be delivered next year and the remainder in 2020, was locked and loaded before ATSG made before ATSG made its announcement yesterday, according to Kevin Sterling, transport analyst at Seaport Global Securities. ATSG will spend about $28 million per plane in acquisition and retrofitting costs, Sterling said. In freighter form, each plane can fly 3,100 nautical miles with a full payload of 125,900 pounds. The plane is classified as a mid-range, mid-size model.
Amazon uses the aircraft to fly packages around the country in support of its Amazon Prime ordering and delivery service, which carries a 2-day delivery commitment of virtually every product ordered on Amazon’s website. Amazon has more than 101 million Prime subscribers, and studies have shown that Prime members order twice as much per year than those who don’t use the service. ATSG and Purchase, N.Y.-based carrier Atlas Air Worldwide Holdings (NASDAQ:AAWW) each operate 20 B-767s for Amazon.
Amazon struck an arrangement with Atlas in May 2016 to lease the 767s and receive warrants to buy up to 20 percent of Atlas’ outstanding shares at $37.50 a share. In a note today, Seldon Clarke, an analyst at Deutsche Bank, said an announcement involving Amazon and Atlas could be forthcoming given Amazon’s voracious appetite for planes to manage its network expansion, and the events of the past 24 hours or so.
Clarke said any such news would be bullish for Atlas’ shares as the investment firm has not priced in the possibility of Amazon acquiring an increased financial stake in Atlas, or in additional aircraft entering Atlas’ ACMI segment, where it provides the aircraft, crew, maintenance, and insurance for the customer. Atlas did not respond to a request for comment.
At about 3:30 PM ET, ATSG shares were trading at $20.08 a share, up about $1.65 a share. Atlas and Amazon shares were each down by more than 4 percent.