Analysis: a bruised and battered FedEx is dead; long live FedEx!
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ATSG yesterday announced a revenue increase of 19% to $176.5m for the second quarter, but the ‘Amazon effect’ hit costs. Net earnings in the second quarter grew 7% to $11.5m – but they fell slightly to $19.7m in the first half.
“Ramp up” costs for Amazon amounted to $2.6m for crew training and additional personnel. First half capital expenditure was $125m, up from $76m a year earlier, after it bought seven 767-300s, and paid out on modification, maintenance and ground equipment.
It expects CapEx to reach $315m for the year, of which $235m will be spent on fleet expansion. Amazon, meanwhile, has warrants to buy 19.9% of ATSG’s shares.
“We had revenue growth in each of our principle segments and across our other businesses,” said chief financial officer Quint Turner.
“The gains stem largely from leases, flight operation and maintenance and logistic services for six more Boeing 767 cargo aircraft than we had in service a year ago.”
ATSG has reached the halfway point in its commitment to lease Amazon 20 767s by mid-2017, and it expects margin improvement in the busy fourth quarter. By then, it will have 54 767s in service, 43 dry leased and 10 in ACMI.
Aside from its major customers, ATSG leased a 767-300F to Amerijet last month under an eight-year term, with another expected to go to DHL in September, also for eight years. Raya Airways will take a 767-200F.
Demand from Amazon appears to have tightened the market, putting ATSG in a better lease term position with other customers, it said.
Answering an analyst’s question in yesterday’s earnings call, chief executive Joe Hete explained: “I think [Amazon] is one of the key reasons why you see a much higher demand for dry leasing over prior or ACMI requirements, where customers before would access us for shorter term lift…
“When customers saw the Amazon announcements, I think they looked at the market going forward, and thought between conversion slots and feedstock there would definitely be a shortage in the market going into the 2017, 2018 time period.
“And that has increased significantly, folks being more serious about tying aircraft up now for the future. We’ve got cash deposits on some of these aircraft that aren’t going to deliver until 2017.”
At the end of June, ATSG owned eight 767-300s that were in or awaiting conversion. It is buying new aircraft and will convert six more in the rest of this year, and 12 more next year.
Revenues have become more diversified, although DHL remains ATSG’s biggest customer, accounting for more than one third of revenues – as opposed to about 50% a year ago. Amazon comprised 20% and the US Military accounted for 15%.
Next year, its JV airline, based in Tianjin, will start operating, with start-up capital of $63m.
External customer revenues increased by $58.6m to $353.9m for the first half. This was driven, said the company, by more external aircraft leases and operations for Amazon, and partially offset lower airline services revenues for DHL.
In its SEC filing, ATSG noted: “During 2016, we expect ACMI Services to be negatively impacted by higher expenses for start-up costs related to the AFS [Amazon] network, pension … and aircraft maintenance expenses due to the schedule of heavy maintenance checks. Achieving profitability in ACMI Services will depend on a number of factors, including revenue levels for airline services, crew training costs, crew productivity, employee benefits, aircraft maintenance schedules and the number of aircraft we operate.”
The filing also outlined executive compensation – capped in all circumstances at $1m for an individual. But cash bonuses, based on performance measured by growth across various sectors including revenue and volumes, will range from between 4.8% and 160% of salary.
Mr Hete said: “Our operating performance across the board in the second quarter was strong, and yielded financial results that met or exceeded our targets. Last week, we leased and began operating the tenth of 20 767 freighters we will fly for Amazon.
“We expect margins to improve substantially in the second half as we approach our year-end 2016 target of 43 dry-leased 767Fs, and increase from 22 to 30 the number of those we operate for customers under multi-year CMI agreements. We have increased acquisitions of 767-300 airframes, and have secured the conversion slots to satisfy strong customer demand,” he added.
You can see the full results here.