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Cargo plane leases lift ATSG in first quarter

Freighter aircraft deployments and additional business handled for the U.S. Department of Defense helped raise first quarter earnings and revenue by double-digits for cargo aircraft leasing company Air Transport Services Group (NASDAQ: ATSG).

Wilmington, Ohio-based ATSG reported earnings from continuing operations of $26 million in the first quarter of 2019, up 26 percent over the same period in 2018, with adjusted earnings per share coming in ahead of analyst expectations at $0.37 cents per share. Customer revenues surged 71 percent in the first quarter of 2019 to $348.2 million, due primarily to $135.8 million contributed by the company’s $845 million purchase of Omni Air in October 2018.

Speaking to investors after publishing its earnings on May 7, ATSG President and CEO Joe Hete said Omni had a solid start to 2019, performing better than anticipated. Demand from the U.S. military was also strong, he said, with Omni flying about 49 percent of the total long-range passenger portion of the business.

The acquisition of Omni, along with recent agreements with our largest commercial customers, Amazon and DHL, “add years of contracted revenue streams from aircraft leasing and from operations by our airlines and related service businesses,” Hete said.

“Our customers are focused on transport options that offer optimal combinations of reliability, flexibility and cost-efficiency, with a particular emphasis on speed. In response, we continue to add aircraft options, including the Boeing 777 via Omni, and a converted freighter variant of the Airbus A321-200 aircraft we are developing through our joint venture with Precision.”

Pretax earnings in the first quarter increased to $12.3 million from $3.4 million in the first quarter of 2018 due to increased “block” hours – the industry-standard measure for aircraft utilization – flown for the Department of Defense.

Total block hours increased 24 percent from the first quarter of 2018, the company said, due principally to the addition of and growth in Omni’s aircraft, crew, maintenance and insurance (ACMI) leasing and charter operations.

ATSG’s earnings were negatively affected by $3 million in unscheduled engine maintenance expense, the company stated, and segment costs for scheduled airframe maintenance checks came in lower than a year ago.

The company’s Cargo Aircraft Management (CAM) segment’s owned in-service fleet comprised 78 cargo aircraft and 11 passenger aircraft as of March 31, with 59 leased to external customers, seven more than the prior year’s quarter. Eight 767s were awaiting or undergoing conversion to freighters, including four acquired during the first quarter of 2019.

Hete said the grounding of Boeing’s 737-MAX earlier this year is resulting in requests for additional lift from multiple carriers. “How long that will go on we don’t know, but we expect as we transition into the later part of the year the demand will still be there from a commercial perspective.”

When asked about the potential effects of the renewed tariff threats by the U.S. against China, ATSG Chief Financial Officer Quint Turner commented that the company’s book of business doesn’t leave it exposed. “Our assets are deployed almost entirely within the time-definite regional integrator networks, and we deploy our aircraft on long-term leases, which give us that long-term visibility of our cash flows,” he said.

Looking ahead to the rest of the year, ATSG Chief Operating Officer Rich Corrado was “far more bullish” than ATSG’s competitors, who fear fuel costs or trade disputes will affect their near-term markets. “Our markets, both commercial and government, have much more visibility, and customers we talk to are worried more about having too little capacity than too much.”

Through its leasing and airline subsidiaries, ATSG is the largest owner and operator of converted Boeing 767 freighter aircraft. Along with Atlas Air Worldwide Holdings (NASDAQ: AAWW), ATSG is the principal flying partner of Amazon (NASDAQ: AMZN), and could potentially benefit from Amazon’s recently announced one-day delivery service.

Note: This story has been updated.

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John Gallagher, Washington Correspondent

Based in Washington, D.C., John specializes in regulation and legislation affecting all sectors of freight transportation. He has covered rail, trucking and maritime issues since 1993 for a variety of publications based in the U.S. and the U.K. John began business reporting in 1993 at Broadcasting & Cable Magazine. He graduated from Florida State University majoring in English and business.

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