Air Transport Services Group - Q4 2019

Transcript

Speaker 0

Welcome to the Q4 2019 Air Transport Services Group Incorporated Earnings Conference Call. My name is Vanessa, and I will be your operator for today's call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session. Please note this conference is being recorded.

I will now turn the call over to Joe Hete, CEO.

Speaker 1

Thank you, Vanessa. Good morning, and welcome to our Q4 2019 earnings conference call. With me today are Quint Turner, our Chief Financial Officer and Rich Corrado, our President and as we announced last week, our CEO-elect. We issued our earnings release and our Form 10 ks yesterday after the market closed. They are on our website, atsginc.com.

I'm very happy to report to you that in 2019, we beat the annual adjusted EBITDA goal we set for ourselves as well as the market's expectations for our adjusted EPS. This is the 3rd year in a row we have exceeded our adjusted EBITDA goal and the 4th quarter was the 5th in a row that our adjusted EPS has exceeded the consensus of the analysts who follow us. In 2019, we substantially outperformed our 2018 results. Revenues rose 63% to 1,450,000,000 dollars a record since we became a public company in 2003, excluding the reimbursements we used to include in revenue. Our adjusted earnings grew 32 percent to a record $105,000,000 or $1.51 per share.

And our adjusted EBITDA rose 45 percent to $452,000,000 both a record and $2,000,000 above our $450,000,000 guidance. That was despite significant unbudgeted investments in pilot training costs during the year due to flying schedules that expanded when Amazon adopted one day delivery service. We are growing and generating strong returns for 2 main reasons. Our leased aircraft fleet is growing and we acquired Omni Air in November 2018. We're leasing more 767 freighters because e commerce is driving delivery speeds.

And we bought Omni because its principal customers, the Department of Defense and other government units are largely immune from the business cycle like our aircraft lease investments. Because we're confident that we can continue to grow and generate superior returns, we're setting a 2020 goal of $487,000,000 to $492,000,000 in adjusted EBITDA. That includes completing our current 767 freighter lease commitments to Amazon and UPS, leasing other 767s to new and existing customers, and growing our airline and other businesses. I'll say more about those goals shortly. First, Quint is ready to review our consolidated results for 2019 and Rich will cover our businesses.

Quint?

Speaker 2

Thanks, Joe. Good morning to all of you on the call right now and to those who will listen later on replay. As always, I'll start by saying that during the course of this call, we will make projections or other forward looking statements that involve risks and uncertainties. Our actual results and other future events may differ materially from those we and Air Transport Services Group undertakes no obligation to update any forward looking statements to reflect changes in underlying assumptions, factors, new information or other changes. These factors include, but are not limited to, changes in the market demand for our assets and services, including potential reduced flight operations arising from the outbreak of COVID-nineteen our operating airlines' ability to maintain on time service and control costs the cost and timing with respect to which we are able to purchase and modify aircraft to a cargo configuration.

The fluctuations in ATSG's traded share price and in interest rates, which may result in mark to market charges on certain financial instruments the number, timing and scheduled routes of our aircraft deployments to customers our ability to remain in compliance with our agreements with key customers and lenders changes in general economic and or industry specific conditions and other factors that are contained from time to time in ATSG's filings with the U. S. Securities and Exchange Commission, including the Form 10 ks we filed yesterday. We will also refer to non GAAP financial measures from continuing operations, including adjusted earnings, adjusted earnings per share, adjusted pretax earnings and adjusted EBITDA. Management believes these metrics are useful to investors in assessing ATSG's financial position and results.

These non GAAP measures are not meant to be a substitute for our GAAP financials. We advise you to refer to reconciliations to GAAP measures, which are included in our earnings release and on our website. As Joe said, 2019 was another record year for ATSG, with both 4th quarter and annual results well above our results from a year ago. We also took several steps to secure continued access to growth capital at today's very attractive long term rates. I'll say more about that in a moment.

Our revenues again rose sharply, this time by 44% for the quarter and by 63% to $1,450,000,000 for the year. Our work for the U. S. Department of Defense and other government units by all three of our airlines, Omni, AVX and ATI, was again the biggest source of our gains last year. The U.

S. DoD is ATSG's largest customer and represented 34% of our revenues for the year. 23% of our 2019 revenues came from Amazon and 14% from DHL. That's a lot different from just 5 years ago when DHL represented more than half of our 2014 revenues. Our GAAP earnings from continuing operations were $60,000,000 for the year and a loss of $41,000,000 for the 4th quarter.

For several years, our GAAP numbers have included large unrealized effects of quarterly revaluations of several financial instruments. These are mainly the effects of revaluing interest rate hedges on our bank debt and the non cash effects of changes in the projected value and number of the warrants we have already issued to Amazon or those we anticipate issuing in the future. Another significant item this quarter that favorably affected both our GAAP and non GAAP earnings is a reduction in our projected state tax rate. A greater portion of our flight operations during 2019, including omni's, were outside of state tax jurisdictions. That resulted in a one time 4th quarter state tax benefit of $4,900,000 or $0.07 per share.

The company expects its effective tax rate for this year to be 24% after excluding the impact of warrant remeasurements and related amortizations of aircraft lease incentives. ATSG did not pay cash federal income taxes in 2019, and we don't expect to pay significant federal taxes until 2024 or later. Diluted GAAP earnings per share from continuing operations were a positive $0.78 for the year and a negative $0.70 for the quarter. GAAP earnings exclude the per share effects of mark to market changes in warrant liabilities when they are accretive. The adjusted earnings, adjusted EPS and adjusted EBITDA we reported this quarter amortization of warrant lease incentives for Amazon from CAM, affiliate losses from Airbus A321 development costs and the non service related costs of our retiree benefit plans.

Speaker 1

You can see how each

Speaker 2

of those items affected our results in the tables included in our earnings release. Netting those effects, our adjusted earnings for the 4th quarter were $39,000,000 or $0.56 per share, up from $23,000,000 or $0.33 a year ago. Annual adjusted earnings were 105,000,000 dollars or $1.51 per share in 2019, up 32% versus $79,000,000 or $1.16 per share in 2018. 4th quarter adjusted EBITDA increased by 29% to $124,000,000 which pushed our total for the year 45 percent higher to $452,000,000 or $140,000,000 better than a year ago. Operating income for 2019 rose 59% to 177,000,000 dollars Our revenue growth offset significant increases in fuel, depreciation and amortization, and salaries and benefit expenses.

Almost all of the increases stem from aircraft and headcount additions, including those related to Omni and from expanded flight operations for Amazon. Interest expense, including $9,000,000 that was non cash, increased 18% to $66,000,000 in 20 19. Higher borrowings for the Omni acquisition and aircraft investments were the principal factors. Cash flow from operations in 2019 increased nearly 100,000,000 dollars to $397,000,000 and capital spending rose $161,000,000 to $454,000,000 The bulk of that spending, dollars 328,000,000 was to acquire 11 Boeing 767-300 passenger aircraft and for passenger to freighter modification costs. 1 of those acquired aircraft was deployed in passenger service for Omni's customers.

When we announced our Q3 results in November, we also announced another amendment to our secured credit facility, which reduced our rate markups over LIBOR for our revolver and term debt, expanded our capacity and extended the use of the senior secured credit agreement into late 2024. It also paved the way for our initial publicly rated debt offering in January, a $500,000,000 private offering of 8 year unsecured notes. Response to the offering was so favorable that we were able to raise its size to $500,000,000 from the anticipated $400,000,000 and it priced at an attractive 4.75 percent fixed rate. Proceeds were used to pay down the balances on our revolver debt, which will provide us great flexibility in accessing capital going forward. The addition of the unsecured bond

Speaker 3

in our debt capital structure lengthens our remaining debt duration and along with the favorable bank amendment in November also reduces our annual interest expense. That completes our financial highlights for the quarter year. Rich is ready to cover our operations. Rich? Thanks, Quint, and good morning, everybody.

Our ATSG business has stepped up to the challenge of integrating Omni and its people and assets into our operation as they continue to deliver superior service for all of their customers. CAM, our foundational aircraft leasing business, grew revenues, net of warrant related lease incentives, by 18% for the quarter and 25% for the year. CAM had a full year of results from the 11 passenger aircraft that are acquired from Omni and leased back to them in 2018, plus revenues from 7 more newly converted 767 freighters added during the year. External customer revenues increased 8% for both the quarter the year. CAM's pretax earnings for the 4th quarter were $18,000,000 up 17 percent $69,000,000 up 5% for the year.

CAM's allocated interest and depreciation expense each increased by 16% for the 4th quarter. Interest expense rose 76% and depreciation rose 25% for the year due to both organic and acquired fleet growth. The 2019 highlight for CAM was lease commitments for 5767 freighters for UPS, 2 of which were delivered in 2019, a third was delivered in January, and the remaining 2 will be ready later this year. While we have a long history of peak season ACMI flying for UPS, this was the first time they have leased aircraft from us. Our airlines had a strong quarter year, thanks to the addition of Omni and more CMI flying for Amazon.

Total block hours increased 47% for the 4th quarter and 40% for 2019, which included an expanded flight schedule for us in support of Amazon's one day delivery commitment and stepped up ACMI operations for UPS. ACMI services revenues increased 51% in the 4th quarter and nearly doubled for the year, topping $1,000,000,000 for the first time. The 4th quarter included a full 3 months of omni contributions, compared with less than 2 months' worth in 2018. Pretax earnings from ACMI Services increased 83% for the quarter and nearly tripled for the year over 2018. Good margins on airline operations by Omni Year were the principal factor.

Our air and ground operations employees, including mechanics, flight crews and ground and logistics employees, did a great job during peak, and that continues into this year. ABX Air Management continues to negotiate with union representatives of its flight crews an amended agreement and has made progress on some fronts. Their next meeting is scheduled for later this month. Our overall 767 fleet expansion plan includes 2 leased in passenger 300s that Omni agreed to take before we acquired them. That will bring Omni's overall fleet to 16, including 10 passenger 767-300s, 3 767-200s and 3 777s.

Omni is already lining up customers for its two additions. This year, our airlines are scheduled to fly 6 767 aircraft that CAM does not own, up from 2 at the end of 2018. That includes 4 Omni Passenger 767s and 2 767 freighters Amazon leases from another owner, but opted to shift to ATI for CMI operations last fall. Revenues from other activities increased by 10% for both the Q4 and full year. Both maintenance and ground services for external customers increased.

Our ground operations for Amazon continued to evolve as we added gateways for them in Charlotte, Tampa and our support services here in Wilmington, offsetting the loss of gateways we manage for them through mid-twenty 19. Pre tax earnings from other businesses more than tripled during the 4th quarter and rose 20% for the year. 4th quarter gains came mostly from more ground support for Amazon. That's a summary of our operations for the quarter 2019. I'll turn it back to Joe for his outlook comments.

Speaker 1

Thanks, Rich. ATSG's results for 2019 were remarkable for more than just the records we posted against our own prior results. They also speak to the sustained cash flow that our business strategy yields and the e commerce and other growth drivers spurring demand for our aircraft and support services. Nearly 5 years into our Amazon relationship and after a year in the charter and ACMI passenger business via Omni, we are executing on all cylinders. I usually begin any presentation about ATSG with the comment that our business starts with the lease.

The nearly 100 aircraft we have in service today, including 63 freighters which are leased externally, make us far different from most of our peers and others in the air cargo and passenger charter space. Our contracted cash flow from a growing share of these aircraft extends to the end of this decade and soon more will extend beyond it. Also, that external lease cash flow continues regardless of changes in customer payload, fuel price volatility, health risks or other events beyond our control. Even with Omni in the fold as an ACMI and charter operator, we are still freighter lease driven today. 8 to 10 additional 767s are due to emerge from Mod this year.

7 of them have lease contract commitments from Amazon and UPS and we have LOIs for the others. Our order book, as indicated by our CapEx appetite of $420,000,000 for 2020, is nearly full for the next 2 years. We continue to look forward to FAA approval later this year of our Airbus A321 freighter certificate. Once approved, we may acquire 321 feedstock aircraft later in 2021 if values indicate a good potential return. Our CapEx budget for 2020, however, does not assume any 3.21 feedstock purchases.

In the leasing business, deployments are not the entire story. Lease terminations and returns are a normal part of it as well. This year, we expect returns of 3 currently leased 767-200s and all 4 of our 757 freighters as their wet lease arrangements with DHL expire. We have factored transitioning time for those aircraft into our 2020 plan and it's reflected in our adjusted EBITDA goal for 2020 of $487,000,000 to $492,000,000 what we know and can commit to today. As always, we'll update you on our outlook as the year progresses.

At that level, our adjusted EBITDA will have increased nearly 60% in the last 2 years. The business we have built is a strong producer of sustainable cash flow. Our maintenance CapEx requirements are approximately $100,000,000 per year. That means we have significant discretionary cash flow to produce shareholder value. At today's share price, our discretionary cash flow yield after maintenance CapEx and interest expense is more than 25%.

We expect our debt to adjusted EBITDA leverage ratio to come down from 3.3 times today to around 3 times by the end of the year and to decline further in 2021 as our CapEx spend drops. Like you, we are watching what appears to be an extreme response from Wall Street to the coronavirus threat. We are particularly concerned about what we see as investors' inability to differentiate ATSG from other companies that are far more vulnerable to its near term effects. Our operations are primarily domestic and mostly time definite express package related. Apart from that, however, our business model also has built in flexibility.

We can reallocate discretionary capital quickly towards opportunities that promise better returns than freighter investments. That could include, subject to lender approval, redeploying some of our cash toward our share repurchase program if our current stock price persists. As always, our focus is on maximizing long term returns from the businesses we operate and the investments we select. Our track record for delivering on that commitment is hard to beat and much better than investments tied to the major market indexes. The job of this management team and those who execute their plans is to keep outperforming and show investors the value we're creating.

That concludes our prepared remarks, Vanessa. We're ready for the first question.

Speaker 0

Thank you. We will now begin our question and answer And we have our first question from Jack Atkins with Stephens.

Speaker 4

Hey guys, good morning. Great quarter.

Speaker 5

Thanks Jack. Thanks Jack.

Speaker 4

Joe, congratulations on your semi retirement, I guess. And Rich, congratulations on your new role.

Speaker 5

Thank you, Jack.

Speaker 4

So let me kind of start out with a question just around when you look at the feedstock available to you guys this year and next year, could you kind of update us in terms of where you think you'll be in terms of those 20 aircraft that you secured the rights for? I guess it was at the end of 2018. How many of those will be through conversion or at least will be in service at the end of 2020? Is there a way to kind of think about that?

Speaker 3

Yes. I think if you look at we've already started deploying some of those. 1, the first one went to Omni in a passenger configuration. We have got some lined up this year to go and fulfill our Amazon commitment and some other commitments that we've got for this year. At the end of the year, we'll have an additional 3 that will actually be converted for 2021 deployment and then about 5 airplanes of that tranche left for conversion in 2021.

So it's kind of that's the way the flow has gone.

Speaker 4

So that's about 8, Rich, if I'm hearing you right?

Speaker 3

Yes. It's about 8%. There are some of that tranche is in conversion now. And so those will be the help us fulfill the Amazon commitment for the 2nd part of this year.

Speaker 4

Okay, got you. Got you. That makes sense. And I guess as you're looking out through this year, you sort of have your 2020 plan fairly well committed to from your customers at this point. You mentioned in the press release you're seeing very strong customer demand for 2021 already.

Can you talk about sort of the types of customers or the types of sort of missions that those planes will be going into service for? Maybe a geographic comment as well in terms of where that demand is coming from?

Speaker 3

Sure. Obviously, we specialize in the 767 freighter. That's what we're talking about. And if you look globally, about 90% of those 767 freighters on a global basis are deployed in express networks. You're talking FedEx, UPS, DHL, Amazon, the UPS network in Europe, some of the aircraft we have deployed with West Atlantic flying for multiple express carriers over there.

And so and that's pretty much where our aircraft are targeted. We lease our aircraft currently to either the express carriers or carriers that fly for them. Cargojet is a good example. We have 4 aircraft with them up in Canada and they fly for the Canada Post, for UPS, for Amazon. So that's where those aircraft are going.

If you look at the global demand for airfreight right now, 2019 was a very poor year, the worst year in a decade for global air cargo. And that's your intercontinental moves, the ones that were impacted by trade and tariff disruption that we saw in 2019. But if you look at the other side of the coin, which is the Express business, it's growing very well. UPS had over 25% growth in 2019 in their overnight product. You saw Amazon still going through some great growth.

DHL in several parts of the world was up between 6% 8%. So the Express business powered by the e commerce is growing very well and that's where the 767s are deployed in those types of networks. Now for what we are looking at, it's the U. S, Far East. We have got a couple of opportunities in the Far East.

We have got a signed agreement for 1 airplane already. And then we've got another deployment. We're looking at 2 more down in South America, so or I should say Mexico and South America. So it's the Americas, the Far East. We don't see much growth out of Europe right now on the Express side, but keep in mind, they have a very strong road network in Europe and so aircraft are not as prevalent as they are over here given the size of the U.

S.

Speaker 4

Okay. That's very helpful. Thank you for that, Rich. And I guess last question for me and I'll turn it over. But Rich, you've been in a senior leadership role at this company for a long time.

So you've had a very clear role in the direction ATSG has taken for quite some time. But I guess now as you assume the role of CEO here in a few months, How are you thinking about your priorities for the organization as you look out over the next several years?

Speaker 3

Yes, great question, Jack. We built a great Joe has built a great company. We have a great culture here. We have a great team. We have one of the strengths of the company has been our conservative approach to our balance sheet to ensure that we've got capital to invest in the market when it's growing.

We look at ourselves as a very efficient user of capital. So if the market is growing like it has been for the past 5 years, then we'll take our cash flow and invest that in airplanes and growth. We'd rather get the growth and advocate it to somebody else. But if you look, if the market slows, then we'll have that cash available to do other things. And that could include returning some cash to shareholders.

So on one level, we're going to continue that conservative view of our balance sheet and continue investing to get the best returns for our shareholders. I believe that the most important thing that this company can do is to maintain its service leadership. If you look at the way we both meet our commitments to customers from a leasing basis and the way that we deliver when we fly for them on an Express basis, our heritage is as an Express airline. And so quality service at the I believe is going to win the day. And so we're investing now in a lot of things internally to maintain that service leadership.

That includes updating a lot of our IT systems. We're developing a much more robust continuous improvement program. So we're going to maintain our quality service approach, and that we feel will be our best ticket to maintain our growth on the flying side. So leasing and flying, the other thing is we've got a real solid culture here in terms of the way we approach our customers. We strongly believe in the commitments that we make and that will always be a hallmark of who ATSG is.

So I hope that answers your question, Jack.

Speaker 4

It does. Thanks, Rich. Really appreciate it.

Speaker 5

Thanks, Jack.

Speaker 0

And we have our next question from Kevin Sterling with The Benchmark Company.

Speaker 5

Thank you. Good morning, gentlemen. Good morning, Kevin. Good morning, Kevin. First of all, Rich, let me say congratulations.

And Joe, I just want to tell you how much I've enjoyed working with you over the many years. I do hope you I know you're not completely fully retired, but I do hope you enjoy some semi retirement and hope you don't drive your wife too crazy if you're home more often.

Speaker 1

Might be the other way around, Kevin.

Speaker 5

Well, congratulations. I've certainly enjoyed working with you for many years.

Speaker 1

Same here.

Speaker 5

So, real quick, can you guys, I guess, talk a little bit about the coronavirus and kind of maybe some customer conversations you're having. I know your business, it's regional, it does seem isolated, but maybe a little bit about some of conversations you're having with some of your Express customers and how they're viewing the world today?

Speaker 1

Hey, Kevin. The reality is, is just since most of our operations are domestic, we haven't seen any impact per se, but I'm sure you've seen some of the announcements where a customer like Amazon, for example, is restricting travel, etcetera. And some people are pulling back from conferences and things of that nature. But where we have the greatest potential disruption from our revenue stream would be in the things we do for the military because of the number of foreign countries that we fly through. Some you can come through, but then you've got crews that would be quarantined on the other end.

So far, we haven't had any disruptions in our service levels, but you just don't know how that thing's going to play out over time. So, that's probably where we're most exposed would be on the international portion of our business, which is the military side.

Speaker 5

I got you. But on the flip side though, the military starts moving troops around in and out of some of these affected countries that could help you as well. Am I thinking about that right, possibly?

Speaker 1

Yes. I mean there is that potential, but like I said, it's a very fluid situation. There's calls almost on a daily basis with folks at DoD, so that everybody's up to speed on how things are changing.

Speaker 5

Okay. Also you guys you talked about returning capital to shareholders. I know you mentioned a buyback and things like that. Would you consider possibly looking at buying back some of the converts that are in the open market possibly? Is everything on the table as you think about returning some capital to shareholders?

Speaker 2

Hi, Kevin, it's Clint. Yes, I mean, we don't nothing would be off the table per se, but I think at the yes, I think our references were more with regard to the current share price being where it's at. And we certainly think that the reaction to the coronavirus has been extreme with respect to our stock. As Joe said, we really haven't seen disruption to this point. And so I think that was more there's about I think we have about a little over $60,000,000 left on the authorization the Board put in place.

As we've mentioned on previous calls, we have a bank covenant that requires you to be under 3 times after giving effect, and we're currently around 3.3 times. But certainly, there's based upon the allocation alternatives that are in front of us and that the stock price persists there, that's something we're going to take a very hard look at. It becomes a more attractive option to do that certainly when you're talking about a share price that's been, in our view, unjustly punched.

Speaker 5

Yes. No, I agree with you. I think sometimes they throw the baby out with the bathwater. Lastly, and I know this I know we're just in 2020 and you guys have given 2020 guidance. As I look at your CapEx, I think for 2020 is down roughly $30,000,000 from 2019.

I believe you briefly referenced 2021. You said it might be even a little bit lower in 2021. And I mean, are we talking significantly lower or kind of that $400,000,000 plus level possibly just to kind of maintain growth maintenance CapEx for 2021? Is it as we think about that, is it that $400,000,000 range? I guess my question is we don't see it going materially lower, but also it's probably not going to go higher, but maybe that $400,000,000 range give or take for 20 21, right way to think about a combination of growth CapEx plus maintenance?

Speaker 2

Yes. Kevin, if you think about it, of course, we are down versus last year. I think we had guided to $460,000,000 for 2019. So we came in, I think $7,000,000 below that. So part of what you're seeing in the $420,000,000 we're projecting for 2020 is just the spillover of that.

And then, we talked about the 8 to 10 aircraft in service. We've said that maintenance CapEx for us is about $100,000,000 So that kind of gets you in that $420,000,000 zip code. But as Rich said, at the end of the year, we'll have projections are to have 8 76300s in mod. About 3 of those, the investment is pretty much in as of the end of the year. So in some respects, we're prepaying on 21 deployments a little bit.

That has to do with the timing of the mod slots. And so that really has the effect of reducing the requirement we'll have in 2021. So I think that the 400 you're referring to could be quite a bit less than $400,000,000 And that's what we mentioned when we talk about the improving picture for free cash flow. We expect to delever this year, but most of that comes from the growth in our EBITDA. And then as you look at 2021, certainly there is significant opportunity for free cash flow.

I mean our maintenance CapEx is about $100,000,000 We have got cash interest of about $55,000,000 We probably put in $7,000,000 in a pension plan. So if you're thinking about EBITDA of $490,000,000 that's about roughly $328,000,000 of discretionary cash flow, call it, that can go towards what we view as the best alternative to create value for the shareholders. Now that's been growth of late because as Rich said, you don't want to abdicate growth when those good opportunities are there. But when we're looking at 'twenty one, I think you could see a lot of that cash flow making it being available as free cash flow. So it could be significantly less than the 400

Speaker 5

Okay. Now that's great. So I mean if I hear you, your goal right now is you're going to delever, maybe get down about 3 times by year end. And then 2021 could really be a massive, massive free cash flow year for you guys, give you a lot of optionality. Is that a fair statement?

Speaker 2

Yes. I mean, the company, when you look at it on a per share basis, if you've got that much discretionary cash flow, that's like $4.5 to $5 per share of discretionary cash flow that you've got available. On our current share price, that's over a 25% yield. So, I mean, we're going to have a lot of opportunities. Certainly, we don't want to disappoint our customers who are waiting on aircraft.

And when those opportunities look good, they generally are going to be the first option for us. But I think that a very good chance 'twenty one has a lot of CapEx reduction and cash flow.

Speaker 0

And we have our next question from Chris Stathoulopoulos with Susquehanna.

Speaker 6

Good morning, everyone.

Speaker 1

Good morning, Chris.

Speaker 3

So

Speaker 6

continuing along the line of the coronavirus, so your stock has been trading like a payload sensitive airline stock. And let's say that the virus accelerates. And how are you thinking about the various risks to your businesses perhaps with a look towards these various subsidiaries? And I'm guessing CAM, which is one of the largest contributors to your pre tax earnings is fairly immune. But what about the other segments such as LGST, airborne or maintenance?

Speaker 1

Well, Chris, a lot of it's going to be dependent upon how widespread the virus is. In terms of their customers, I think customers are still going to be there. LGST X, for example, is servicing the Amazon business. And of course, on the Ames piece or the MRO side, people have to get their airplanes fixed. So it's really a matter of, is it going to get severe enough that you would end up with a significant number of people being quarantined at home for lack of a better definition to where they can't come to work and produce the revenue side of the equation.

But as you pointed out from a CAMS perspective, I mean, the leases the lease payments come in regardless of whether the airplane is flying 1 hour or 100 hours or whether it's carrying 1 pound or £1,000 on board. So that cash flow stream still comes in over time. But as I said earlier, the biggest exposure we have from a revenue perspective would be in the military side of the equation. But since most of the time we're flying into military bases, the bet is that they will still continue to have those troop movements. And I think as Kevin even pointed out, there is potential that you may even have an acceleration of the number of troop movements going on around the globe.

Speaker 6

Okay. So along those lines, I know you have a relatively small commercial cargo charter business, so there's less opportunity to participate in any demand surges once China production is back online. Aside, perhaps with the flying with DHL? Side perhaps with the flying with DHL?

Speaker 3

Yes. We've got limited resources for extra flying and it's 767 flying, so it's regional based, right? So we're not going to fly a 767 from China into the U. S. It's not an efficient use of the aircraft.

So there's a little bit of opportunity there, but not a lot. It's not like we have 4 or 5 airplanes sitting around waiting for work. It's not really we don't do much charter, pure charter work anymore. We have aircraft that are available. Some of our aircraft are available like every other week because they fly a military route 1 week and then they're available to back up the network.

So it's not a big part of our business today. If there are opportunities, it would probably be in the Q4 where we do have a lot of aircraft available and we tend to use those to fly during peak.

Speaker 6

Okay. And then with all the pressure on the passenger airlines, particularly in China and of course their aircraft values, are there any opportunities you're seeing in the market with perhaps opportunistic P2F freight passenger to freighter conversions? And then also are any concerns around credit profiles with any of your customers at this point? Thank you.

Speaker 3

We haven't seen any kind of flood to the market of feedstock. We track the 767 fleet out there and there's still over 300 of them left in the world. And there are some large some airlines that have large fleets to them and we keep a very good view of those. And the ones that we know will come available in 2021 2022, as an example, they have not made any decisions to release those aircraft early. The 7 37 MAX is still having an impact on the way airlines view their fleet and the way they view their what they're going to be releasing and what they need to hang on to.

So at this point in time, we haven't seen any impact as it relates to feedstock availability.

Speaker 6

Okay. Thanks for the time.

Speaker 5

Thanks, Chris.

Speaker 0

We have our next question from Steve O'Hara with Sidoti and Company.

Speaker 7

Hi, good morning.

Speaker 1

Good morning, Steve. First,

Speaker 7

just like to echo the comments regarding Joe and the new team. Congrats on everything and I'm sure you guys seem to have a deep bench. That's a good

Speaker 1

Thanks, Dave. Thanks, Steve.

Speaker 7

You're welcome. And then just I guess on looking at the 767-200s, and I mean you have I think or had 33 at the end of the year, you expect to go down to 32 by year end 2020. Mean, is there a potential for that to speed up in terms of these aircraft coming back? Are they what's the possibility of those coming back sooner? And as they come back, do you expect those to be replaced by 767-300s?

Speaker 3

So a couple of things. One is the aircraft is the 767-200 is still in demand. It's still an efficient aircraft. And it's still a very reliable aircraft. It's just as reliable as the 767-300s.

We met with DHL late last week on a to the quarterly review meeting and they commented we have 67200s flying that they fly in the Middle East network and they commented on how great their reliability is for the airplane. We're taking aircraft out of service when there's several maintenance events that occur. There's a 50,000 cycle limit that requires you to significantly step up your maintenance program. There's an out pressure bulkhead that's about $1,500,000 to $1,300,000 event. And there's a large S4C check that you have to do every 4 checks that and when those when 2 or 3 of those things come together, it doesn't make sense to invest that much money in the aircraft depending on how many cycles are left till 50,000.

So that's why we've been taking aircraft out of service. They're still very much in demand. And so we're pretty bullish on the aircraft going forward. We do we don't think we're going to have a lot coming back. We are having some returns this year, but we're also having some deployments.

And so the softness is that time between the transitioning, when you get the aircraft back, you have to see check and repaint it for the new customer, etcetera, etcetera, then you lose lease months. And so, although we're getting some aircraft back, we're also redeploying some of those aircraft and just having to go through the transition, which is normal for a lessor of aircraft.

Speaker 7

Right. Okay. Thank you. And then maybe just looking at the improvement within the other business segment. I mean, is that something that you think is sustainable going forward?

And is there a further improvement maybe to come? I mean, it looks like revenue in the 4th quarter was up very significantly. Just wondering about maybe the trajectory there. I mean, it seemed like pretty steep growth in 2019 for the most part, back end loaded, but I'm just curious maybe going forward. Thank you.

Speaker 1

Yes. Steve, on the maintenance side, the AIMS, which is a big part of that, obviously, we have a limited amount of hangar space. So, the additional growth potential there is somewhat limited in light of the facility space as well as the continuing challenge of trying to find qualified maintenance technicians. So, it's a very nominal growth rate that we would expect in the maintenance side of the equation. On the logistics side of the business, if you recall last year, about mid year, we lost the management that we had over a number of locations for the Amazon Gateways where we manage 3rd party providers.

We backfilled some of that with the opening of up 2 of our own managed gateways, one of them in Tampa, Florida and the other one in Charlotte. We continue to have both of those in place this year, albeit the Tampa one will scale down about mid year when Amazon opens up own facility over in Lakeland, which is 20 or 30 miles away from Tampa. We still expect to have an operation in Tampa, although it'd be a lot less than what it was last year. So, when you look at the guidance that we gave, one of the things that was factored in there was a fact that part of the business would show lower returns than what we saw in 2019 in 2020, at least based on what we know today. We are chasing another number of other opportunities with Amazon, with DHL, with UPS on the logistics side of the business.

So, we're fortunate enough based on our track record of how we manage with our Express heritage, how we can manage those facilities better than your normal third party providers. We hope to be able to recoup some of that business as well.

Speaker 7

Okay. And then maybe finally on the, I guess, the loss from non consolidated affiliates, I assume that's all of kind of the A321 conversion process. Can you just talk about maybe what you expect the total investment to be there? And if there's any if you have any customers lined up or how that process is going? Thank you.

Speaker 1

Yes. From the 321 perspective, Steve, that's really where those numbers are coming from. And essentially we're still targeting having the STC approved call it mid year of this year. The prototype aircraft already has an end user customer, as well as the second aircraft, which will be inducted shortly for to begin its modification process. At the end of the day, we'll have probably $25,000,000 $30,000,000 invested on our piece of that for the development of that STC.

But as you noticed in our remarks, one of the things we pointed to was that the DHLs, no longer wanted to utilize the 757s, in their network. And as we've said on previous calls, one of the reasons we jumped into the 321 is because it gives you essentially the same cubic capacity as a 757 for significantly lower operating costs. And I guess that probably bears it out more than anything else is that, the DHL says they need to reduce the number 75s in their network. So that bodes well for the 321 as it's the most likely of replacements. The only thing that comes through with an equivalent amount of cubic capacity and it is significant lower operating costs.

So that's why we believe it's going to be in the long pole, a significant portion of our fleet complement.

Speaker 7

Okay. And maybe just a follow-up

Speaker 3

to that. I know

Speaker 7

the 7/3 Amazon has been taking 737s. And I'm just wondering, is the A321 a decent comp for that? Or is it more for larger aircraft like 757? Thanks for the question.

Speaker 3

Sure. This is Rich. The A321 is a larger aircraft. It's got about 95% of the cube of a 757. So if you look at the 757 today, it's got 15 upper deck positions.

The 737-800 has 11. So it's about 30% larger cube, if you will. But it flies with the same engines. And so if you look at this if you're carrying the same weight in A321 and the 730seven-eight 100, it's about 8% higher operating costs than an A321, but you've got that much more cube capability to carry another 3 pallets, 3 to 4 pallets worth of cubes. So it can compete with the 730seven-eight 100, a little bit higher cost.

But if you look at if you're an express carrier, you can fly an A321 in place of a 730seven-eight 100, but then during peak, you get an automatic lift to 30% of queue to fill those lanes when the seasonal market warrants. It's a great airplane. And obviously, the investment we make, we're really high on it. But it isn't necessarily a direct replacement for the 730seven-eight 100. It's a direct replacement for the 757-two 200.

Speaker 7

Okay. Thank you very much.

Speaker 0

We have our next question from Travis Paskovis with HIMCO.

Speaker 6

Hi, everyone. Thanks for taking my question. Part of it was just answered, but maybe if you could just take a step back and describe the relationship with DHL and anything we should reach into in terms of the change? It doesn't sound like you've given the last question, but just thought I would ask it direct.

Speaker 3

Yes. Thanks for the question, Travis. We have a very good relationship with DHL. Like I said, we had our quarterly meeting with them. It was a great meeting.

The service we provide to them is best in class in terms of the flying that we do for them in the U. S. And again, we lease other aircraft to them in other parts of the world. They're very happy with that as well. 757 decision by them was more directed at kind of optimizing and rightsizing their fleet.

As they grow, 757 as an example, we had some lanes that hopped through a couple of markets. So they'll take some 7 37-800s that they're taking and put them on direct routes to some of those markets, just as an example. And so it's not reflective at all of the relationship that we have with them. We're looking for more opportunities going forward, both on a leasing and flying basis. This happened to be ATI, our airline that flies the 757 is the only 757 airline, cargo airline in the country other than UPS and FedEx.

And there's a reason for that. It's not an efficient aircraft. It works okay in an express environment if you've only got enough freight to fly the lanes that it flies, but it really is a higher cost aircraft. And that's why you haven't seen us grow the airframe. We've always tried to push our customers towards the 767 200 rather than the 757.

And I think DHL has looked at the 7.5 and looked at the alternatives that they have and they recognize as much as anybody that aircraft is there are other opportunities to right size your network and be more efficient.

Speaker 1

Do you expect those to

Speaker 6

be released then or will those be retiring? I missed that part.

Speaker 3

So we're looking for different opportunities for those aircraft. The one thing about the aircraft, they're Pratt powered 2,030 7 engines and those are very much in demand right now. And so we may make more money leasing the engines than we did leasing having the lease revenue on the airplane through the ACMI operation. But we are looking for other opportunities. We have got a company interested in taking 2 of them right now.

Of course, we have still got we are still flying 1 of them right now, 2 of them right now for DHL and we'll fly 1 into April. But and 2 of them are on the deck But we believe we'll be able to get more revenue out of those aircraft by the end of the year and we'll be able to deploy at least 2 of them and then maybe some of the engines. But we believe we'll get some more value out of those aircraft. Great.

Speaker 6

Thanks a lot for the question.

Speaker 3

Thanks, Travis.

Speaker 0

And we have a follow-up question from Chris Stathoulopoulos with Susquehanna. Hey, thanks for the follow-up. I was wondering if

Speaker 6

you could give us an update on labor and where you are with the CBA on ABX and whether this year's EBITDA guide includes any new labor deals?

Speaker 1

Yes, Chris. Right now, I think last we mentioned to a number of investors when we were at the Stifel Conference, for example, is that we met in February at the National Mediation Board headquarters in Washington DC. We're scheduled to go back to the table the week of 23rd for 3 days, I believe it is of negotiations. We actually have one of the board members involved in the negotiations at this point in time to try to move them along in a more rapid pace than what we've seen in the past. We have not factored any of those cost potential cost increases into our guidance for 2020.

So anything that we would commit to would be a reduction of our overall guidance for a labor settlement. But as I've said on a number of occasions, the cautiously optimistic that we will get a deal done this year. It's just a matter of what the end amount looks like. From our perspective, as I've said on many occasions, we already have 1 airline calling the cargo for Amazon at ATI. And we know what the cost is for that particular agreement and there's no rational reason for us to have any higher cost structure, with the ABX folks, assuming we get a deal done.

So that's kind of our guideline, going through the negotiation process, but cautiously optimistic we'll get something done this year.

Speaker 6

Okay. And then as a follow-up to that, how should we think about headcount growth for this year's mid teens or similar to the 12%, 14% we saw in 2019 a good place to start?

Speaker 1

Now headcount will probably be less, I mean, in terms of the number of flight crews we had to add last year, but combination of the additional aircraft for Amazon plus the fact they went to the one day service. We added on the ATI side for example like 118 pilots overall, with the just the additional 5 aircraft, 4 aircraft that we owe them this year, that number will come down significantly. Another driver in the overall headcount was the 2 gateways I mentioned earlier in Charlotte and Tampa. As Tampa spools down from the current volume of freight going through there to something less by the end of the year that headcount will come down as well. So I wouldn't anticipate anywhere near as many as much of a headcount increase in 2020 as we saw in 2019.

Speaker 6

Okay. All right. Thanks for the time. Thanks, Linda.

Speaker 0

Thank you. We have no further questions at this time. I will now turn the call back over to Joe Hete for closing remarks.

Speaker 1

Thanks Vanessa. As it has been mentioned by a couple of people here and I'm sure most people are aware by now that I announced it will be retiring after the conclusion of the shareholder meeting on May 7th. I do have to say that it was an honor and a privilege and most times pleasurable working with you folks over the years. I think I'm leaving you in very capable hands with Rich and Joe Payne, our General Counsel Quint, of course, who most of you know and the newest addition to our senior team here, at Coherick and of course Mike Berger, our Chief Commercial Officer. So, I think you're in good hands.

Appreciate all the support over the years and have a quality day.

Speaker 0

And thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.