ATSG’s Adjusted Pre-Tax Earnings Up 34 Percent

Air Transport Services Group, Inc. (NASDAQ:ATSG) today reported sharply improved third quarter financial results after excluding non-cash impairment charges. Highlights of the quarter compared to the prior year period included:

Pre-tax losses from continuing operations were $6.7 million while net losses from continuing operations totaled $4.8 million, or $0.08 per share diluted. Third-quarter 2011 earnings included $27.1 million in impairment charges related to reductions in business with DB Schenker that began in September, and $1.9 million in unrealized losses on derivative instruments related to the company’s new credit facilities adopted in May.

Excluding impairment and derivative charges, pre-tax and net earnings from continuing operations increased by 34 percent and 22 percent, respectively, versus the third quarter 2010 results. Adjusted pre-tax earnings were $22.4 million excluding the impairment and derivative charges, up from $16.7 million in the third quarter of 2010, principally because of increased earnings from ATSG’s freighter leasing business. Net earnings from continuing operations excluding those charges and their related tax effects were $13.9 million, up from $11.4 million in the third quarter of 2010. Net interest expense under the new credit agreement reached in May 2011 decreased $1.3 million for the third quarter compared to a year ago. Pre-tax losses for the quarter generated an income tax benefit of $1.8 million.

Third-quarter EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization), adjusted for non-cash impairment and derivative losses, totaled $48.3 million, up 10 percent from $44.0 million in the third quarter of 2010. Adjusted EBITDA is a non-GAAP measure of financial performance. The definition and reconciliation of ATSG’s third-quarter Adjusted EBITDA to GAAP net income is provided at the end of this release.

Revenues increased 17 percent to $195.5 million, including customer-reimbursed costs, with increases evident from each of the company’s reported segments and other business units. Excluding reimbursements, ATSG’s revenues increased 19 percent to $151.4 million.

“Our business model, which emphasizes balanced, market-sensitive assignments of converted freighter aircraft between long-term dry leases and shorter-term wet lease or ACMI agreements, continues to generate strong cash flows even in uncertain economic conditions,” Joe Hete, President and CEO of ATSG, said. “During the third quarter, our operating and cash flow returns remained strong despite the previously announced decision by our customer, DB Schenker, to phase out its dedicated air cargo network in favor of an outsourcing relationship with DHL. We are responding to those changes by reducing our costs, removing DC-8 and 727 freighter aircraft from service, and offering DHL access to additional 767 and 757 aircraft to meet their requirements related to their outsourcing relationship with DB Schenker.”

Operating Results

CAM Leasing

Cargo Aircraft Management (CAM) recorded pre-tax earnings of $16.2 million, excluding impairment charges, up 35 percent from $12.0 million in the third quarter of 2010. At the end of September, CAM had 58 freighter aircraft under lease, including 34 Boeing 767-200 and two 767-300 freighters. Of those thirty-six 767 freighters, 21 are under long-term lease to external parties, including two 767-200s leased to RIO Airlines of Brazil that entered service during the third quarter. CAM’s second 767-300 freighter was deployed with an ATSG airline under an ACMI agreement in September, and another 767-200 was similarly deployed through an ATSG airline in October.

At this time, one Boeing 767-200 and one 767-300 are being converted to standard freighters. Another 767-300 passenger aircraft purchased in the second quarter, and a fifth 767-300 purchased in October will be converted to freighters and are expected to enter service in 2012.

CAM also purchased a 757-200 aircraft during the third quarter which is expected to complete its conversion to standard freighter by year-end. Another 757-200 aircraft purchased earlier this year entered prototype conversion into a combination passenger/freighter aircraft (combi) for intended deployment with the U.S. military in the second half of 2012. Additionally, in October, CAM purchased another Boeing 757-200 passenger aircraft for its second combi conversion.

Upon the completion of these aircraft conversions, CAM will own thirty-six 767-200 freighters, five 767-300 freighters, three 757-200 freighters and two 757-200 combi aircraft in its fleet. CAM continues to pursue selective opportunities for adding mid-size aircraft to its fleet.

ACMI Services

Third-quarter revenues from ACMI Services were $118.9 million, excluding fuel and other reimbursed expenses, up 16 percent from the third quarter of 2010. Third-quarter pre-tax earnings from ACMI Services were $2.8 million, excluding impairment charges, compared with $3.4 million in the third quarter of 2010. Third-quarter results were impacted by training costs to transition DC-8 crews into the Boeing 767 aircraft due to DB Schenker’s restructuring and lower revenues from the U.S. military as a result of maintenance related cancellations and contractual rate reductions.

Revenue-generating block hours for this segment increased by 6 percent compared with the third quarter of 2010. Block hours increased due to additional CAM-owned and ATSG-operated 767 freighters added in the last 12 months, plus hours generated by four DHL-owned 767 freighters leased and operated by ABX Air under its Crew, Maintenance and Insurance (CMI) agreement with DHL, and one 767-300 freighter leased from a third party for ACMI service. These increases were offset in part by block hour reductions related to the DB Schenker restructuring.

Other Activities

Revenues from other businesses rose 14 percent to $26.3 million before elimination of inter-company results. These businesses had an aggregate pre-tax profit of $3.7 million in the third quarter of 2011, compared with $3.1 million a year earlier. Results reflect improved earnings from Airborne Maintenance and Engineering Services, ATSG’s MRO business, compared with the prior year.

Impairment Charges

In late July, DB Schenker announced its plan to adopt a new business model in September leading to the phase-out of its North American dedicated air cargo network operated by ATSG. As a result, sixteen ATSG aircraft – eight DC-8 and eight Boeing 727 freighters – operated by Air Transport International (ATI) and Capital Cargo International Airlines (CCIA) in DB Schenker’s North American network were reduced to five DC-8 and four Boeing 727 aircraft effective September 2. On October 23, DB Schenker canceled scheduled operations for the remaining DC-8 aircraft, but retained two DC-8s as spare aircraft and the four scheduled Boeing 727 aircraft.

ATSG’s impairment testing during the third quarter examined the expected cash flows from its Boeing 727 and DC-8 aircraft, and the value of goodwill and customer relationships of its associated entities. With the support of independent advisers, ATSG determined that the carrying value of its 727 and DC-8 assets, recorded goodwill and customer relationship intangible assets was overstated, resulting in third quarter pre-tax charges totaling $27.1 million.

Outlook

DB Schenker Relationship

Since September, DHL has provided DB Schenker with a portion of its air-cargo services via DHL’s hub at the Cincinnati/Northern Kentucky International Airport. It’s ATSG’s understanding that DHL and DB Schenker are discussing a potential long-term outsourced air cargo agreement beginning in 2012. We expect that ABX Air, as an operator of DHL’s U.S. air cargo network, and potentially other ATSG airlines, would continue to provide airlift and route coverage that DHL requires to serve DB Schenker’s customers. Regardless of the outcome of those discussions, however, ATSG is marketing for sale its DC-8 and 727 freighter fleets and associated parts, excluding four DC-8 combi aircraft serving the U.S. military, and is reducing its workforce and operating expenses as appropriate.

“We are managing ATSG for maximum cash flow even under uncertain economic conditions,” Hete said, “emphasizing long-term leases of freighter aircraft as opportunities arise, but also capitalizing on our unique aircraft, crew, maintenance and insurance (ACMI) capabilities in the mid-sized freighter category, and our ability to offer related incremental heavy maintenance, cargo handling and logistics services to meet continuing and seasonal market requirements. We are managing expenses very carefully while pursuing our growth goals through continued investment in more modern, mid-sized aircraft. As we retire our DC-8 and Boeing 727 freighter fleets, we expect to reduce our annual capitalized maintenance expenditures by $15-20 million starting in 2012. Further, we continue to project annual Adjusted EBITDA to exceed $200 million in 2012.”

Source: Air Transport Services Group